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 CHICAGO

(Exact name of registrant as specified in its charter)

Commission File No. 000-51401

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

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

Securities to be registered pursuant to Section 12(b) of the Act: None

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

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FEDERAL HOME LOAN BANK OF CHICAGO

TABLE OF CONTENTS

Item 1.	Business	3
Item 2.	Financial Information	50
Item 3.	Properties	110
Item 4.	Security Ownership of Certain Beneficial Owners and Management	111
Item 5.	Directors and Executive Officers	113
Item 6.	Executive Compensation	118
Item 7.	Certain Relationships and Related Transactions	124
Item 8.	Legal Proceedings	126
Item 9.	Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters	127
Item 10.	Recent Sales of Unregistered Securities	129
Item 11.	Description of Registrant’s Securities to be Registered	130
Item 12.	Indemnification of Directors and Officers	132
Item 13.	Financial Statements and Supplementary Data	133
Item 14.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	134
Item 15.	Financial Statements and Exhibits	135

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Item 1. Business

1.1	Overview	4
1.2	Business Segments	6
1.3	Funding Services	38
1.4	Use of Interest Rate Derivatives	41
1.5	Regulations	42
1.6	Taxation	45
1.7	REFCORP and AHP Assessments	46
1.8	Competition	47
1.9	Employees	49

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1.1 Overview

Introduction

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

The mission of the Bank is to promote and support the growth and success of our members’ housing, community investment, and other financing activities by:

• Serving as a reliable source of liquidity.

• Providing secured financing and asset liability management capabilities, which create value and are designed to meet our members’ specific needs.

• Contributing direct support to affordable housing and community investment programs delivered through our members.

The principal sources of credit provided by the Bank are in the form of secured loans, called advances, to members and through the Mortgage Partnership Finance^® (MPF^®) Program¹ under which the Bank, in partnership with its members, provides funding for home mortgage loans. The Bank initiated the MPF Program in 1997. In 2003, the Bank initiated the MPF Shared Funding^® program, pursuant to which a member of the Bank forms a trust that issues privately-placed mortgage-backed securities (“MBS”) which are sold to the FHLBs and their members, thereby providing competition in the MBS market.

These programs help the Bank accomplish its mission of supporting housing finance throughout America. All federally-insured depository institutions, insurance companies engaged in residential housing finance, credit unions and community financial institutions (“CFIs”) located in Illinois and Wisconsin are eligible to apply for membership in the Bank. All members are required to purchase capital stock in the Bank as a condition of membership, and all capital stock is owned by the Bank’s members. The capital stock is not publicly-traded.

The Bank combines private capital and public sponsorship to provide its member financial institutions with a reliable flow of credit and other services for housing and community development. The Bank serves the public through member financial institutions by providing members with liquidity and capital markets based financing, thereby enhancing the availability of residential mortgage and community investment credit. The Bank also provides members with funding for home mortgage loans through the MPF Program.

The Bank is supervised and regulated by the Finance Board, which is an independent federal agency in the executive branch of the United States Government. See “Item 1.5—Regulations—Regulatory Oversight.”

A primary source of funds for the Bank is the proceeds from the sale to the public of FHLB debt instruments (“consolidated obligations”) which are, by Finance Board regulation, the joint and several obligations of all the FHLBs. Consolidated obligations are not obligations of the United States Government and the United States Government does not guarantee them. The Office of Finance is a joint office of the FHLBs established by the Finance Board to facilitate issuing and servicing of the consolidated obligations. Additional funds are provided by deposits, other borrowings and the issuance of capital stock. Deposits are received from both member and non-member financial institutions and federal instrumentalities. The Bank also provides members and non-members with correspondent services such as safekeeping, wire transfers, and cash management.

The Bank maintains a web site located at www.fhlbc.com through which it makes available its financial statements and other information regarding the Bank. Following the Bank’s registration under the Securities Exchange Act of 1934, the Bank will be required to file with the Securities and Exchange Commission an annual report on Form

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

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10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. The Securities and Exchange Commission maintains a website that contains these reports and other information regarding the Bank’s electronic filings located at www.sec.gov. These reports may also be read and copied at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Further information about the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Information on those websites, or that can be accessed through those websites, does not constitute a part of this registration statement.

Membership Trends

At September 30, 2005, membership in the Bank was 885 members, down eight from December 31, 2004. Although the Bank added 17 new members, 3 members voluntarily withdrew from membership and 22 members were acquired by other institutions (15 within the Bank’s district and 7 outside of the district.) Capital stock decreased $399 million or 9.3% from December 31, 2004 because of voluntary redemptions and members being acquired by out of district financial institutions.

Total membership in the Bank reached an all-time high of 893 members at December 31, 2004, up from 884 at December 31, 2003. Of those members, 79% were commercial banks, 16% thrift institutions, 4% credit unions, and 1% insurance companies. At the end of 2004, 42% of all members had less than $100 million in assets, 53% had assets between $100 million and $1 billion, and 5% had assets in excess of $1 billion.

Credit customers, defined as the number of members which have used advances, the MPF Program or other credit products at any point during the period, were 718 in 2004 compared to 681 during 2003. As a percentage of total membership, credit customer utilization was 80% in 2004 versus 77% in 2003. For the nine months ended September 30, 2005, the number of credit customers was 737, with a credit customer utilization ratio of 83% compared to 705 credit customers with a credit customer utilization ratio of 79% for the nine months ended September 30, 2004.

The table below shows the outstanding advances, capital stock holdings and the geographic locations of the Bank’s members by type:

(Dollars in thousands)	September 30, 2005
	Advances at Par			Percent of Total		Par Value of Capital Stock Held			Number of Institutions			Percent of Total
Type of Institutions									Illinois	Wisconsin	Total
Commercial Banks	$	14,842,853		61.3	%	$	2,300,003		474	227	701	79.2	%
Thrifts		7,484,295		30.9	%		996,418		100	36	136	15.4	%
Credit Unions		178,685		0.7	%		294,405		16	21	37	4.2	%
Insurance Companies		1,713,000		7.1	%		313,573		9	2	11	1.2	%
Total	$	24,218,833		100.0	%	$	3,904,399		599	286	885	100.0	%
Adjustments		14,182	1				(13,734	)2
Per Financial Statements	$	24,233,015				$	3,890,665

(Dollars in thousands)	December 31, 2004
	Advances at Par			Percent of Total		Par Value of Capital Stock Held			Number of Institutions			Percent of Total
Type of Institutions									Illinois	Wisconsin	Total
Commercial Banks	$	14,121,622		58.9	%	$	2,312,005		478	229	707	79.2	%
Thrifts		7,954,899		33.2	%		1,253,481		104	37	141	15.8	%
Credit Unions		174,083		0.7	%		303,138		16	19	35	3.9	%
Insurance Companies		1,718,000		7.2	%		434,801		8	2	10	1.1	%
Total	$	23,968,604		100.0	%	$	4,303,425		606	287	893	100.0	%
Adjustments		222,954	1				(11,259	) 2
Per Financial Statements	$	24,191,558				$	4,292,166

¹ Adjustments includes SFAS 133 basis adjustment for advances at par.

² Adjustments include SFAS 150 adjustment of mandatorily redeemable capital stock for the par value of capital stock held.

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1.2 Business Segments

The Bank manages its operations by grouping its products and services within two operating segments. The measure of profit or loss and total assets for each segment is contained in Note 9—Segment Information to the September 30, 2005 Financial Statements and Notes and in Note 17—Segment Information to the 2004 Annual Financial Statements and Notes. Management’s Discussion and Analysis on the operating results of the segments is contained in “Item 2.2—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Operating Segment Results.” These operating segments are:

• Traditional Member Finance: This segment includes traditional funding, liquidity and deposit products consisting of loans to members called advances, standby letters of credit, investments and deposit products; and

• the MPF Program.

The products and services provided reflect the manner in which financial information is evaluated by management including the chief operating decision makers.

Traditional Member Finance

Advances

The Bank extends advances (fixed or floating rate loans) to its members and eligible housing associates based on the security of mortgages and other collateral that the members and eligible housing associates pledge. Eligible housing associates are non-members that are approved mortgagees under Title II of the National Housing Act for which the Bank is permitted under the FHLB Act to make advances. These eligible housing associates must be chartered under law, be subject to inspection and supervision by some governmental agency, and lend their own funds as their principal activity in the mortgage field. Eligible housing associates are not subject to certain provisions of the FHLB Act that are applicable to members, such as the capital stock purchase requirements, but the same regulatory lending requirements that apply to members apply to them.

Advances generally support residential mortgages held in member portfolios, and may also be used for any valid business purpose in which a member is authorized to invest, including providing funds to any member CFI for secured loans to small businesses, small farms, and small agri-businesses. CFIs are defined as FDIC-insured depository institutions with total average year-end assets at or below a level prescribed by the Finance Board each year for the prior three years. This level was set at $567 million or less as of January 1, 2005 and $548 million or less as of January 1, 2004. Advances can serve as a funding source for a variety of conforming mortgage loans and nonconforming mortgages, including loans that members may be unable or unwilling to sell in the secondary mortgage market. Conforming mortgage loans are mortgage loans which meet Fannie Mae’s or Freddie Mac’s original loan amount limits and underwriting guides. Nonconforming mortgage loans are mortgage loans that do not meet these requirements. Thus, advances support important housing markets, including those focused on low- and moderate-income households. For those members that choose to sell or securitize their mortgages, advances can provide interim funding.

The Bank offers a variety of advances, including the following:

• Fixed-Rate Advances. Fixed-rate advances have maturities from two days to ten years. The Bank also offers putable fixed-rate advances in which the Bank has the right to put the advance after a specified lockout period, in whole or in part, at the par value with five business days notice. If the Bank has the right to put the advance, the member must pay off the advance with its existing liquidity or by obtaining funds under another advance product offered by the Bank at existing market prices for that member on the date the advance was put back to the member.

• Variable-Rate Advances. Variable-rate advances include advances with maturities from six months to seven years with the interest rates reset periodically at a fixed spread to LIBOR or some other index. Depending upon the variable-rate advance selected, the member can have an interest-rate cap on the advance which limits the amount of interest the member would have to pay, or the member can prepay the advance with or without a prepayment fee.

• Open-Line Advances. Open-line advances are designed to provide flexible funding to meet borrowers’ daily liquidity needs and can be drawn for one day. These advances are automatically payable on demand by the member. Rates are set daily at the end of business.

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• Fixed Amortizing Advances. Fixed amortizing advances have maturities that range from one year to 15 years, with the principal repaid over the term of the advances monthly, quarterly or semi-annually.

• Floating to Fixed Convertible Advances. Floating to fixed convertible advances have maturities that range from two years to ten years, with a defined lockout period where the interest rates adjust based on a spread to LIBOR. At the end of the lockout period, these advances convert to fixed-rate advances. The interest rates on the converted advances are set at origination.

The tables below set forth the outstanding amount of advances by type:

(Dollars in thousands)	September 30, 2005
Advance Type	Carrying Value			Percent of Total Advances Outstanding		Income for the Nine Months Ended			Percent of Advance Income
Fixed-Rate	$	19,459,375		80.34	%	$	516,191		81.53	%
Variable-Rate		3,627,600		14.98	%		82,435		13.02	%
Open-Line		899,803		3.72	%		25,392		4.01	%
Fixed Amortizing		177,055		0.73	%		6,891		1.09	%
Floating to Fixed Convertible		55,000		0.23	%		2,219		0.35	%
Total par value of advances		24,218,833		100.00	%		633,128		100.00	%
Other		(85	)				561
SFAS 133 hedging adjustments		14,267					(68,394	)
Total Advances	$	24,233,015				$	565,295
(Dollars in thousands)	September 30, 2004
Advance Type	Carrying Value			Percent of Total Advances Outstanding		Income for the Nine Months Ended			Percent of Advance Income
Fixed-Rate	$	19,995,527		80.70	%	$	556,936		88.03	%
Variable-Rate		3,165,200		12.78	%		52,173		8.25	%
Open-Line		1,329,381		5.37	%		11,106		1.76	%
Fixed Amortizing		230,801		0.93	%		8,406		1.33	%
Floating to Fixed Convertible		55,000		0.22	%		4,004		0.63	%
Total par value of advances		24,775,909		100.00	%		632,625		100.00	%
Other		(100	)				3,210
SFAS 133 hedging adjustments		349,091					(223,884	)
Total Advances	$	25,124,900				$	411,951

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(Dollars in thousands)	December 31, 2004
Advance Type	Carrying Value			Percent of Total Advances Outstanding		Income for the Year Ended			Percent of Advance Income
Fixed-Rate	$	19,398,370		80.93	%	$	730,263		87.83	%
Variable-Rate		3,207,400		13.38	%		68,423		8.23	%
Open-Line		1,085,281		4.53	%		16,953		2.04	%
Fixed Amortizing		222,553		0.93	%		11,049		1.33	%
Floating to Fixed Convertible		55,000		0.23	%		4,751		0.57	%
Total par value of advances		23,968,604		100.00	%		831,439		100.00	%
Other		(97	)				5,091
SFAS 133 hedging adjustments		223,051					(282,426	)
Total Advances	$	24,191,558				$	554,104
(Dollars in thousands)	December 31, 2003
Advance Type	Carrying Value			Percent of Total Advances Outstanding		Income for the Year Ended			Percent of Advance Income
Fixed-Rate	$	19,377,117		74.91	%	$	800,274		89.71	%
Variable-Rate		5,139,199		19.87	%		63,846		7.16	%
Open-Line		997,951		3.86	%		10,299		1.15	%
Fixed Amortizing		248,876		0.96	%		11,959		1.34	%
Floating to Fixed Convertible		105,000		0.40	%		5,733		0.64	%
Total par value of advances		25,868,143		100.00	%		892,111		100.00	%
Other		(144	)				4,042
SFAS 133 hedging adjustments		575,064					(340,958	)
Total Advances	$	26,443,063				$	555,195
(Dollars in thousands)	December 31, 2002
Advance Type	Carrying Value			Percent of Total Advances Outstanding		Income for the Year Ended			Percent of Advance Income
Fixed-Rate	$	18,805,122		78.27	%	$	888,744		88.40	%
Variable-Rate		4,529,598		18.85	%		88,144		8.77	%
Open-Line		412,022		1.71	%		11,087		1.10	%
Fixed Amortizing		279,130		1.16	%		11,617		1.16	%
Floating to Fixed Convertible		1,184		0.01	%		5,793		0.57	%
Total par value of advances		24,027,056		100.00	%		1,005,385		100.00	%
Other		(233	)				748
SFAS 133 hedging adjustments		918,289					(415,870	)
Total Advances	$	24,945,112				$	590,263

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The Bank’s credit products provide members with asset-liability management capabilities. The Bank offers advances that can be adjusted to help manage the maturity and prepayment characteristics of mortgage loans. These advances can reduce a member’s interest rate risk associated with holding long-term fixed-rate mortgages. Alternatively, members can enter into interest rate derivatives directly with the Bank to reduce their exposure to interest rate risk. In such cases, the Bank acts as an intermediary between the members and other non-member counterparties by entering into offsetting interest rate derivatives. This intermediation allows smaller members indirect access to the derivatives market. The derivatives used in intermediary activities do not qualify for SFAS 133 hedge accounting treatment and are separately recorded at fair value through earnings. At September 30, 2005 and December 31, 2004 and 2003, the Bank had $87.7 million, $127.4 million and $142.6 million in outstanding notional amounts of interest rate exchange agreements, respectively, between the Bank and its members. The fair value of these interest rate derivatives was ($5.0) million, $6.1 million and ($3.6) million at September 30, 2005 and December 31, 2004 and 2003, respectively.

To determine the maximum amount and term of the advances the Bank will lend to a member, the Bank assesses the member’s creditworthiness and financial condition. The Bank also values the collateral pledged to the Bank and conducts periodic collateral reviews to establish the amount it will lend against each collateral type. The Bank requires delivery of all securities collateral and may also require delivery of loan collateral under certain conditions (for example, when a member’s creditworthiness deteriorates).

The Bank is required to obtain and maintain a security interest in eligible collateral at the time it originates or renews an advance. Eligible collateral includes whole first mortgages on improved residential property, or securities representing a whole interest in such mortgages; securities issued, insured, or guaranteed by the U.S. Government or any of its agencies; without limitation mortgage-backed securities issued or guaranteed by the Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), or the Government National Mortgage Association (“Ginnie Mae”); FHLB consolidated obligations; cash or deposits in the Bank; and other real estate-related collateral acceptable to the Bank provided that the collateral has a readily ascertainable value and the Bank can perfect a security interest in the related property.

CFIs are subject to expanded statutory collateral provisions which allow them to pledge secured small business, small farm, or small agri-business loans. We refer to this type of collateral as “community financial institution collateral”. As additional security for a member’s indebtedness, the Bank has a statutory lien on a member’s capital stock in the Bank.

The FHLB Act affords any security interest granted to the Bank 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. The only two exceptions are claims and rights that would be entitled to priority under otherwise applicable law or are held by actual bona fide purchasers for value or by parties that are secured by actual perfected security interests. The Bank perfects the security interests granted to it by members by taking possession of securities collateral and filing UCC-1 forms on all other collateral.

Collateral arrangements will vary with member credit quality, borrowing capacity, collateral availability, and overall member credit exposure. The Bank manages collateral requirements and increases its monitoring of members when borrowings from all sources exceed 20% of their assets. At September 30, 2005, 14 of the Bank’s members had borrowings from the Bank that exceeded 20% of their assets, totaling $5.4 billion of advances at par value, which represented 22.5% of the Bank’s total advances outstanding at par.

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At December 31, 2004, 12 of the Bank’s members had borrowings that exceeded 20% of their assets, totaling $2.9 billion of advances at par value, which represented 12% of the Bank’s total advances outstanding at par. At December 31, 2003, the comparable amounts were 11 members that had advances totaling $2.6 billion of advances at par, which represented 10% of the Bank’s total advances outstanding at par. In particular, one member accounted for over $2 billion of the outstanding advances at par, which represented 24% of that member’s September 30, 2005 assets and 23% of that member’s 2004 and 2003 assets. The Bank may require the delivery of collateral from any member at any time. The following table illustrates member borrowing capacity based on underlying collateral type:

Types of Collateral	Borrowing Capacity
U.S. Treasury and other government agency securities 1	95 - 97%
Non-agency, rated mortgage-backed securities	85 - 90%
Eligible first-lien single or multi-family mortgage loans	60 - 85%
Community financial institution and other eligible collateral	50%

¹ Includes GSEs such as Fannie Mae, Freddie Mac, and FHLBs, as well as Governmental agencies such as Ginnie Mae, the Farm Services Agency, Small Business Administration, Bureau of Indian Affairs, and the United States Department of Agriculture.

During the third quarter of 2005, changes were made to the Bank’s Credit Policy. The collateral loan value available to members for 1-4 family first liens pledged under a blanket lien arrangement was increased to 75%, while the collateral loan value available to members for 1-4 family first liens pledged under a comprehensive listing arrangement was increased to 85%.

At September 30, 2005, CFIs had pledged $467.2 million of CFI collateral to the Bank, securing $48.5 million of advances. The CFI collateral amounts pledged in excess of the amounts required to cover existing advances is available (after application of the borrowing capacity percentage) for potential future advances. At December 31, 2004, CFIs had pledged $339.6 million of CFI collateral to the Bank, which secured $52.1 million of advances at December 31, 2004. At December 31, 2003, CFIs had pledged $244 million of CFI collateral to the Bank, securing $45 million of advances at December 31, 2003.

The Bank requires that members annually deliver copies of their audited financial statements or 10-K report filed with the Securities and Exchange Commission. Members that are not otherwise required to produce audited financial statements, are required to submit their year-end call report or thrift report. The Bank also accesses all member quarterly reports filed with their applicable regulators. The Bank regularly reviews this financial information and will make adjustments to a member’s borrowing capacity and collateral requirements as needed.

Members with outstanding advances are required to deliver to the Bank a third party collateral verification report based upon agreed upon procedures attesting to the eligibility and sufficiency of the member’s mortgage collateral. Members are normally required to deliver these reports every two years provided they meet satisfactory credit and collateral conditions. Members that average more than $100 million in outstanding advances each year secured by single family or multiple family mortgage loans are required to deliver a collateral verification report annually. Credit worthy members with average outstanding advances less than $5 million secured by single family or multiple family mortgage loans with an outstanding book value at least 3 times greater than the amount of average outstanding advances are only required to deliver a collateral verification report every three years. Members pledging small business, small farm or small agri-business loans are required to provide the Bank with quarterly collateral listings and the Bank conducts collateral field reviews annually. The Bank conducts field reviews in other circumstances as well in order to determine collateral eligibility and whether any adjustment to a member’s borrowing capacity is necessary.

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At September 30, 2005 and December 31, 2004 and 2003, the Bank had 611, 586 and 563 advance borrowers, respectively. The table below sets forth the outstanding par amount of advances by the largest advance borrowers:

	Top Ten Largest Advance Borrowers
	September 30, 2005				December 31, 2004				December 31, 2003
(Dollars in thousands)	Advances at Par		% of Total		Advances at Par		% of Total		Advances at Par		% of Total
LaSalle Bank, N.A.	$	3,151,428	13.0	%	$	3,151,471	13.2	%	$	3,801,525	14.7	%
Mid America Bank, FSB		2,358,000	9.7	%		2,188,125	9.1	%		2,104,375	8.1	%
One Mortgage Partners Corp./ Bank One, N.A. 1		1,615,000	6.7	%		1,615,000	6.7	%		4,865,000	18.8	%
M & I Marshall & Ilsley Bank		1,453,714	6.0	%		1,654,091	6.9	%		1,094,114	4.2	%
The Northern Trust Company		1,270,974	5.2	%		945,974	3.9	%		810,974	3.1	%
Associated Bank, N.A.		1,208,403	5.0	%		814,040	3.4	%		754,138	2.9	%
State Farm Bank, FSB		1,080,000	4.5	%		1,211,190	5.1	%		872,791	3.4	%
Bank Mutual		865,306	3.6	%		761,525	3.2	%		n/a	n/a
Anchor Bank, FSB		710,928	2.9	%		761,328	3.2	%		684,618	2.6	%
First Midwest Bank, FSB		522,900	2.2	%		512,900	2.1	%		452,000	1.7	%
Charter One Bank 2		n/a	n/a			n/a	n/a			662,154	2.6	%
All Other Members		9,982,180	41.2	%		10,352,960	43.2	%		9,766,454	37.8	%
Total	$	24,218,833	100.0	%	$	23,968,604	100.0	%	$	25,868,143	100.0	%

n/a = not applicable

¹ Bank One, N.A. was acquired by J.P. Morgan Chase, an out-of-district acquisition. The advance balances of Bank One, N.A. were transferred to its affiliate, One Mortgage Partners Corp., an in-district member.

² Charter One was acquired by an out-of-district institution during 2004, during which time all of Charter One’s advances were extinguished.

Standby Letters of Credit

The Bank also provides members with standby letters of credit to support certain obligations of the members to third parties. Members may use standby letters of credit to facilitate residential housing finance and community lending or for liquidity and asset-liability management purposes. The Bank’s underwriting and collateral requirements for standby letters of credit are the same as the underwriting and collateral requirements for advances. At September 30, 2005 and December 31, 2004 and 2003, the Bank had $554.4 million, $345.7 million and $395.8 million, respectively, in standby letters of credit outstanding.

Other Mission-Related Community Investment Cash Advance Programs

Direct and indirect support for housing and community economic development lending programs are designed to ensure that communities throughout the Bank’s district are safe and desirable places to work and live. Members are assisted in meeting their Community Reinvestment Act responsibilities through a variety of specialized programs. Through the Affordable Housing Program (AHP), Community Investment Program (CIP), and Community Economic Development Advance Program members have access to grants and below-market interest rate advances to help them provide affordable rental and home-ownership, small business, and other commercial and economic development opportunities that benefit low- and moderate-income individuals, households, and neighborhoods. In addition, the Bank purchases mortgages that are guaranteed by the U.S. Department of Housing and Urban Development (HUD) under the HUD Section 184 Native American Program. The Bank administers and funds the programs described below:

• Affordable Housing Program - AHP subsidies in the form of direct grants and below-market interest rate advances are offered to member financial institutions in partnership with community sponsors to stimulate affordable rental and homeownership opportunities for households with incomes at or below 80% of the area’s median income adjusted for family size. AHP subsidies can be used to fund housing acquisition, rehabilitation, new construction, or to cover down payment and closing costs. This program is funded with approximately 10% of the Bank’s pre-assessment net earnings each year. Since its inception in 1990, the Bank has awarded $203.1 million in AHP subsidies to facilitate the development of projects that provided affordable housing to 49,061 households.

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The Bank awarded AHP competitive subsidies totaling $14.5 million and $16.5 million during the nine months ended September 30, 2005 and 2004, respectively, for projects designed to provide housing to 2,859 and 2,917 households, respectively. The Bank awarded AHP competitive subsidies totaling $32.1 million and $22.2 million for the years ended December 31, 2004 and 2003, respectively, for projects designed to provide housing to 5,680 and 4,469 households, respectively. These subsidies are awarded semi-annually in the second and fourth quarters. Amounts accrued but not awarded are recorded as a liability on the Bank’s Statements of Condition.

DownPayment Plus^® is a sub-program of the AHP that, in partnership with the Bank’s members, assists primarily first-time home buyers with down payment and closing cost requirements. During the nine months ended September 30, 2005 and 2004, $4.8 million and $7.3 million, respectively, of the AHP was funded through DownPayment Plus^® to assist 995 and 1,613 low-and-moderate income homebuyers. During the years ended December 31, 2004 and 2003, $10.4 million and $6.0 million, respectively, of the AHP was allocated to DownPayment Plus^® for assistance to 2,278 and 1,648 low- and moderate-income homebuyers.

• Community Investment Program/Community Economic Development Advance Program - In addition to the AHP, the Bank offers two programs through which members may apply for advances to support affordable housing development or community economic development lending. These programs provide advance funding that has interest rates below regular advance rates, for terms typically up to 10 years. The Bank’s CIP and Community Economic Development Advance products have been used to finance affordable home ownership housing, multi-family rental projects, new roads and bridges, agriculture and farm activities, public facilities and infrastructure, and small businesses. As of September 30, 2005 and December 31, 2004 and 2003, the Bank had approximately $1.9 billion, $1.5 billion and $1.1 billion, respectively, in advances outstanding under the CIP and Community Economic Development Advance programs.

• Native American Mortgage Purchase Program - Since December 2003, the Bank has purchased mortgages provided by its Wisconsin members on Indian land. These mortgages are fully guaranteed by the U.S. Department of Housing and Urban Development (“HUD”), in the event of default by the homeowner. Since the inception of the program through September 30, 2005, the Bank had purchased 65 mortgages totaling approximately $5.2 million with no default occurrences.

Investments

The Bank maintains a portfolio of investments for liquidity purposes and to provide additional earnings. To ensure the availability of funds to meet member credit needs, the Bank maintains a portfolio of short-term investments made to highly rated institutions, principally overnight Federal funds. The longer-term investment portfolio includes securities issued by the U.S. Government, U.S. Government agencies, MPF Shared Funding^®, and MBS that are issued by government sponsored enterprises or that carry the highest ratings from Moody’s Investors Service (“Moody’s”), Standard and Poor’s Rating Service (“S&P”), or Fitch Ratings, Inc. (“Fitch”). The long-term investment portfolio provides the Bank with higher returns than those available in the short-term money markets. It is not our practice to purchase investment securities issued directly by our members or their affiliates. Investment securities issued by affiliates of our members may be purchased in the secondary market through a third party at arm’s length. See Note 20, “Transactions with Related Parties and Other FHLBs” in the Bank’s 2004 Annual Financial Statements and Notes for further details.

Under Finance Board regulations, the Bank is prohibited from trading securities for speculative purposes or market-making activities. Additionally, the Bank is prohibited from investing in certain types of securities or loans, including:

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

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

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

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• Whole mortgages or other whole loans, other than, (1) those acquired under the Bank’s MPF 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 (“NRSRO”), (4) MBS 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 FHLB Act; and

• Non-U.S. dollar denominated securities.

The Finance Board regulations further limit the Bank’s investment in MBS and asset-backed securities. This regulation requires that the total carrying value of MBS owned by the Bank not exceed 300% of the Bank’s previous month-end capital on the day it purchases the securities. At September 30, 2005 and December 31, 2004 and 2003, the Bank’s MBS securities to total capital ratio was 105%, 119% and 87%, respectively. In addition, the Bank is prohibited from purchasing:

• Interest-only or principal-only stripped MBS;

• Residual-interest or interest-accrual classes of collateralized mortgage obligations (“CMO”) and Real Estate Mortgage Investment Conduit (“REMIC”); and

• Fixed rate MBS or floating rate MBS that on the trade date are at rates equal to their contractual cap and that have average lives that vary by more than 6 years under an assumed instantaneous interest rate change of 300 basis points.

At September 30, 2005, the Bank held $34.1 million of consolidated obligations at fair market value ($33.0 million at par value) of other FHLBs that were purchased from 1995 to 1997. Of these consolidated obligations, $8.2 million (at par value) are scheduled to mature in the fourth quarter of 2005 with the remaining $24.8 million (at par value) scheduled to mature in 2008. These investments are classified as Trading on the statements of condition. The Bank was authorized to purchase these consolidated obligations in the secondary markets after their initial offering period because they qualified as authorized investments under the Finance Board’s Financial Management Policy. The Bank is the secondary obligor for consolidated obligations that it acquires and holds for investment purposes. Acquiring consolidated obligations of other FHLBs is not part of the Bank’s existing investment strategy. As a result, the Bank does not intend to purchase any additional consolidated obligations of other FHLBs.

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The Bank’s investment portfolio at fair value by type of investment and credit rating is shown in the following tables:

Investment Securities

September 30, 2005

(Dollars in thousands)			Long Term Rating				Short Term Rating
Total Portfolio	U.S.Government Agency and Government Sponsored Enterprises		AAA		AA		A-1 or Higher		Total
Commercial paper	$	—	$	—	$	—	$	449,405	$	449,405
Government-sponsored enterprises1		2,311,629		—		—		—		2,311,629
Other FHLB1		34,090		—		—		—		34,090
State or local housing agency obligations		—		21,445		60,872		—		82,317
SBA/SBIC		319,665		—		—		—		319,665
Mortgage-backed securities (MBS)		2,864,961		1,589,132		11,530		—		4,465,623
Total investment securities	$	5,530,345	$	1,610,577	$	72,402	$	449,405	$	7,662,729
Further Detail of MBS issued, Guaranteed or Fully insured By:
Pools of Mortgages
Government-sponsored enterprises1	$	1,577,165	$	—	$	—	$	—	$	1,577,165
Government-guaranteed		57,002		—		—		—		57,002
CMOs/REMICS
Government-sponsored enterprises1		1,216,626		—		—		—		1,216,626
Government-guaranteed		14,168		—		—		—		14,168
MPF Shared Funding		—		425,454		11,146		—		436,600
Privately issued MBS
Non-conforming MBS		—		62,567		—		—		62,567
CMOs/REMICS		—		40,486		384		—		40,870
Asset Backed Securities		—		312,725		—		—		312,725
Home Equity Loans		—		747,900		—		—		747,900
Total Mortgage Backed Securities	$	2,864,961	$	1,589,132	$	11,530	$	—	$	4,465,623

¹ Securities issued by government sponsored enterprises are not guaranteed by the U.S. federal government.

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Investment Securities

December 31, 2004

(Dollars in thousands)			Long Term Rating				Short Term Rating
Total Portfolio	U.S.Government Agency and Government Sponsored Enterprises		AAA		AA		A-1 or Higher		Total
Commercial paper	$	—	$	—	$	—	$	699,722	$	699,722
Government-sponsored enterprises1		1,731,387		—		—		—		1,731,387
Other FHLB1		71,731		—		—		—		71,731
State or local housing agency obligations		—		32,080		68,610		—		100,690
SBA/SBIC		743,193		—		—		—		743,193
Mortgage-backed securities (MBS)		3,198,200		2,294,138		11,845		—		5,504,183
Total investment securities	$	5,744,511	$	2,326,218	$	80,455	$	699,722	$	8,850,906
Further Detail of MBS issued, Guaranteed or Fully insured By:
Pools of Mortgages
Government-sponsored enterprises1	$	1,786,593	$	—	$	—	$	—	$	1,786,593
Government-guaranteed		74,984		—		—		—		74,984
CMOs/REMICS
Government-sponsored enterprises1		1,316,163		—		—		—		1,316,163
Government-guaranteed		20,460		—		—		—		20,460
MPF Shared Funding		—		501,697		11,285		—		512,982
Non-Federal Agency MBS
Non-conforming MBS		—		85,177		—		—		85,177
CMOs/REMICS		—		50,741		560		—		51,301
Asset Backed Securities		—		366,797		—		—		366,797
Home Equity Loans		—		1,289,726		—		—		1,289,726
Total Mortgage Backed Securities	$	3,198,200	$	2,294,138	$	11,845	$	—	$	5,504,183

¹ Securities issued by government sponsored enterprises are not guaranteed by the U.S. federal government.

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Investment Securities

December 31, 2003

(Dollars in thousands)			Long Term Rating				Short Term Rating
Total Portfolio	U.S. Government Agency and Government Sponsored Enterprises		AAA		AA		A-1 or Higher		Total
U.S. Treasury obligations	$	50,246	$	—	$	—	$	—	$	50,246
Commercial paper		—		—		—		99,991		99,991
Government-sponsored enterprises1		1,608,285		—		—		—		1,608,285
Other FHLB1		75,700		—		—		—		75,700
State or local housing agency obligations		—		43,795		88,593		—		132,388
SBA/SBIC		598,981		—		—		—		598,981
Mortgage-backed securities (MBS)		1,321,842		2,638,647		12,648		—		3,973,137
Total investment securities	$	3,655,054	$	2,682,442	$	101,241	$	99,991	$	6,538,728
Further Detail of MBS issued, Guaranteed or Fully insured By:
Pools of Mortgages
Government-sponsored enterprises1	$	1,001,887	$	—	$	—	$	—	$	1,001,887
Government-guaranteed		112,775		—		—		—		112,775
CMOs/REMICS
Government-sponsored enterprises1		183,947		—		—		—		183,947
Government-guaranteed		23,233		—		—		—		23,233
MPF Shared Funding		—		610,004		11,455		—		621,459
Non-Federal Agency MBS
Non-conforming MBS		—		165,941		—		—		165,941
CMOs/REMICS		—		134,252		1,193		—		135,445
Asset Backed Securities		—		397,514		—		—		397,514
Home Equity Loans		—		1,330,936		—		—		1,330,936
Total Mortgage Backed Securities	$	1,321,842	$	2,638,647	$	12,648	$	—	$	3,973,137

¹ Securities issued by government sponsored enterprises are not guaranteed by the U.S. federal government.

Deposits

Deposit programs provide a portion of the Banks’ funding resources. The Bank accepts deposits from its members, institutions eligible to become members, any institution for which it is providing correspondent services, other FHLBs, or other government instrumentalities. The Bank offers several types of deposit programs to its deposit customers including demand, overnight, and term deposits.

For a description of the Bank’s liquidity requirements with respect to deposits see “Item 2.2—Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Liquidity and Capital Resources—Liquidity.”

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The tables below present the maturities for term deposits in denominations of $100 thousand or more:

(Dollars in thousands)
By remaining maturity	September 30, 2005		December 31, 2004		December 31, 2003
3 months or less	$	39,000	$	28,000	$	472,250
Over 3 months but within 6 months		1,000		59,000		51,000
Over 6 months but within 12 months		1,000		2,000		15,150
Total	$	41,000	$	89,000	$	538,400

Mortgage Partnership Finance^® Program

Introduction

The MPF^® Program is a unique secondary mortgage market structure under which participating FHLBs (“MPF Banks”) serve as a source of liquidity to their participating financial institution members (“PFIs”) who originate mortgage loans. The MPF Banks do this by either purchasing mortgage loans after they have been originated by the PFIs or, alternatively, by funding the mortgage loans themselves. In this regard, the mortgage loans purchased or funded are held on the MPF Bank’s balance sheet.

Under the MPF 100 product, the MPF Bank table funds MPF Loans, which means that the MPF Bank provides the funds, through the PFI as its agent, to make the MPF Loan to the borrower. The PFI performs all the traditional retail loan origination functions under this and all MPF products. The MPF Bank is considered the originator of the MPF Loan for accounting purposes since the PFI is acting as its agent when originating the MPF Loan. This differs from other MPF products in which the MPF Bank purchases loans that have already been closed by the PFI with its own funds. See “– MPF Products” for a description of products offered under the MPF Program.

The current MPF Banks are the Federal Home Loan Banks of: Atlanta, Boston, Chicago, Dallas, Des Moines, New York, Pittsburgh, San Francisco and Topeka. The Federal Home Loan Bank of Chicago acts as “MPF Provider” and provides programmatic and operational support to the MPF Banks and their PFIs.

MPF Program assets are qualifying conventional conforming and Government (i.e., FHA insured and VA guaranteed) fixed-rate mortgage loans and participations in pools of such mortgage loans, secured by one-to-four family residential properties, with maturities ranging from 5 to 30 years (“MPF Loans”). The Finance Board’s Acquired Member Asset regulation (12 C.F.R. § 955) (“AMA Regulation”) requires MPF Loans to be funded or purchased by the MPF Banks through or from PFIs and to be credit enhanced in part by the PFIs. MPF Banks generally acquire whole loans from their respective PFIs but may also acquire them from a member of another MPF Bank with permission of the PFI’s respective MPF Bank or may acquire participations from another MPF Bank. The AMA Regulation authorizes MPF Banks to fund loans, which the Bank does through funding arrangements with PFIs. The acquisition of eligible Bank funded loans and closed loans is consistent with and authorized as a core mission activity under the Finance Board regulations.

The Bank, in its role as MPF Provider, establishes the eligibility standards under which an MPF Bank member may become a PFI, establishes the structure of MPF products and the eligibility rules for MPF Loans, manages the pricing and delivery mechanism for MPF Loans, and manages the back-office processing of MPF Loans in its role as master servicer. The Bank publishes and maintains the MPF Origination Guide and MPF Servicing Guide (together “MPF Guides”), which detail the rules PFIs must follow in originating or selling and servicing MPF Loans. When a PFI fails to comply with the requirements of the PFI Agreement, MPF Guides, applicable law or terms of mortgage documents, the PFI may be required to repurchase the MPF Loans which are impacted by such failure. Reasons for which a PFI could be required to repurchase an MPF Loan may include but are not limited to MPF Loan ineligibility, failure to perfect collateral with an approved custodian, a servicing breach, fraud, or other misrepresentation.

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For the nine months ended September 30, 2005 and 2004, respectively, the Bank’s PFIs were required to repurchase 0.03% and 0.02% of the average daily balance of conventional outstanding MPF Loans, respectively, for a total of $11.5 million and $9.4 million, respectively. Annually, in each of the three years ended December 31, 2004, 2003 and 2002, the Banks’ PFIs were required to repurchase less than 0.03% of the average daily balance of conventional MPF Loans outstanding for a total of $13.1 million, $9.8 million and $2.0 million, respectively. The Bank has not experienced any losses related to these conventional MPF Loan repurchases.

Without limiting or waiving the PFIs obligation as servicer to advance principal and interest under the scheduled/scheduled servicing option, the PFI may, under the terms of the MPF Servicing Guide, elect to repurchase any Government MPF Loan for an amount equal to 100 percent of the Government MPF Loan’s then current scheduled principal balance and accrued interest thereon provided there has been no payment made by the borrower for three consecutive months. This policy allows PFIs to comply with loss mitigation requirements of FHA, VA and HUD in order to preserve the insurance or guaranty coverage. In addition, just as for conventional MPF Loans, if a PFI fails to comply with the requirements of the PFI Agreement, MPF Guides, applicable law or terms of mortgage documents, the PFI may be required to repurchase the Government MPF Loans which are impacted by such failure. In the nine months ended September 30, 2005 and 2004, the Bank’s PFIs repurchased Government MPF Loans totaling $74.7 million and $8.7 million, respectively, which represents 1.13% and 0.13% of the average daily balance of Government MPF Loans outstanding during these respective periods. For the years ended December 31, 2004, 2003 and 2002, the Bank’s PFIs repurchased Government MPF Loans totaling $14.8 million, $75.8 million and $131.5 million, respectively, which represents 0.23%, 0.94% and 1.93% of the average daily balance of Government MPF Loans outstanding during these respective periods. The increase in Government MPF Loan repurchases during the nine months ended September 30, 2005 was the result of a change in repurchase policy by one of the Bank’s PFIs. In April 2005, one of the Bank’s PFIs changed its repurchase policy to seek approval to repurchase its Government MPF Loans immediately upon their becoming greater than ninety days past due, which is permitted within the Bank’s MPF Servicing Guide. Prior to the PFI’s internal change in policy, a majority of its repurchases occurred over a greater period of time after the MPF Loans became ninety days past due. The Bank has not experienced any losses related to the repurchase of Government MPF Loans.

PFIs are paid a credit enhancement fee as an incentive to minimize credit losses and share in the risk of loss on MPF Loans and to pay for Supplemental Mortgage Insurance (“SMI”), rather than paying a guaranty fee to other secondary market purchasers. These fees are paid monthly and are determined based on the remaining unpaid principal balance of the MPF Loans. The required credit enhancement obligation amount may vary depending on the MPF product alternatives selected. Credit enhancement fees, payable to a member as compensation for assuming credit risk, are recorded as an offset to mortgage loan interest income when paid by the Bank. The Bank also pays performance credit enhancement fees which are based on actual performance of the mortgage loans. In general, performance based fees are net of cumulative unrecovered losses paid by the Bank. To the extent that losses in the current month exceed performance credit enhancement fees accrued, the remaining losses are recovered from future performance credit enhancement fees payable to the member. The Bank recorded total credit enhancement fees of $35.4 million and $38.4 million for the nine months ended September 30, 2005 and 2004, respectively. The Bank recorded total credit enhancement fees of $51.0 million, $39.4 million and $18.1 million for the years ended December 31, 2004, 2003 and 2002, respectively.

The MPF Program has grown to $82.0 billion (at par) in outstanding assets for all MPF Banks at September 30, 2005, of which $43.4 billion (par value) were owned or participated in by the Bank and the remaining $38.6 billion (par value) were owned or participated in by the other MPF Banks. More than 930 commercial banks, thrifts, credit unions and insurance companies are approved PFIs that deliver MPF Loans into the MPF Program secured by homes in all 50 states, the District of Columbia and Puerto Rico.

At September 30, 2005 and December 31, 2004 and 2003, the Bank had $43.2 billion, $46.9 billion and $47.6 billion of MPF Loans outstanding, respectively. As of September 30, 2005, the Bank had 304 members that were approved as PFIs; 230 of those PFIs actively participated in the MPF Program during the nine months ended September 30, 2005. The Bank acquired $1.5 billion and $3.5 billion in MPF Loans from or through the Bank’s PFIs in the nine months ended September 30, 2005 and 2004, respectively; and acquired $4.1 billion, $15.9 billion and $5.8 billion in the three years ended December 31, 2004, 2003 and 2002, respectively, from or through the Bank’s PFIs. Of these purchases, the Bank participated out $878.9 million in participation interests to the FHLB of Topeka during the year ended December 31, 2004 under the MPF Program. The Bank did not transfer any participation interests to other FHLBs in the nine months ended September 30, 2005 and during the years ended December 31, 2003 and 2002. The Bank purchased participation interests from other FHLBs totaling $1.6 billion and $4.5 billion in the nine months ended September 30, 2005 and 2004, respectively. The Bank purchased participation interests from other FHLBs totaling $4.9 billion, $20.9 billion and $10.7 billion in the years ended December 31, 2004, 2003 and 2002, respectively.

The Bank has been acquiring fewer participation interests in the MPF Loans of other MPF Banks. Instead the Bank has been charging a fee for acting as MPF Provider. In December 2003, the Bank began purchasing MPF Loans directly from PFIs of the FHLB of Dallas. The FHLB of Dallas acts as marketing agent for the Bank and receives a fee for its services rather than purchasing MPF Loans from its PFIs. Direct acquisitions from another FHLB’s members are permitted under the AMA Regulation with the consent of that FHLB. The Bank elected to purchase whole MPF Loans instead of participations in this instance because whole loans are more liquid assets than participation interests. The Bank purchased MPF Loans from the FHLB of Dallas’ PFIs totaling $162.9 million and $336.0 million during the nine months ending September 30, 2005 and 2004, respectively. The Bank purchased MPF Loans from the FHLB of Dallas’ PFIs totaling $568.9 million and $1.2 billion for the periods ending December 31, 2004 and 2003, respectively.

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The MPF Program is designed to allocate the risks of MPF Loans among the MPF Banks and PFIs and to take advantage of their respective strengths. PFIs have direct knowledge of their mortgage markets and have developed expertise in underwriting and servicing residential mortgage loans. By allowing PFIs to originate MPF Loans, whether through retail or wholesale operations, and to retain or acquire servicing of MPF Loans, the MPF Program gives control of those functions that most impact credit quality to PFIs. The credit enhancement structure motivates PFIs to minimize MPF Loan losses. The MPF Banks are responsible for managing the interest rate risk, prepayment risk and liquidity risk associated with owning MPF Loans.

The MPF Program was established to help fulfill the FHLBs’ housing finance mission. The Finance Board’s regulations define the acquisition of AMA or “acquired member assets” as a core mission activity of the FHLBs. The MPF Program offers a structure in which the risk of loss associated with MPF Loans is shared with the PFIs while allowing the Bank to diversify its assets beyond its Traditional Member Finance.

Mortgage Standards

The MPF Guides set forth the eligibility standards for MPF Loans. PFIs are free to use an approved automated underwriting system or to underwrite MPF Loans manually when originating or acquiring loans though the loans must meet MPF Program underwriting and eligibility guidelines outlined in the MPF Origination Guide. In some circumstances, a PFI may be granted a waiver exempting it from complying with specified provisions of the MPF Guides.

The current underwriting and eligibility guidelines with respect to MPF Loans are broadly summarized as follows:

• Conforming loan size, which is established annually as required by the AMA Regulation and may not exceed the loan limits permitted to be set by the Office of Federal Housing Enterprise Oversight (“OFHEO”) each year;

• Fixed-rate, fully-amortizing loans with terms from 5 to 30 years;

• Secured by first liens on residential owner occupied primary residences and second homes; primary residences may be up to four units;

• Condominium, planned unit development and manufactured homes are acceptable property types as are mortgages on leasehold estates (though manufactured homes must be on land owned in fee simple by the borrower);

• 95% maximum loan-to-value ratio (“LTV”); except for FHLB AHP mortgage loans which may have LTVs up to 100% (but may not exceed 105% total LTV, which compares the property value to the total amount of all mortgages outstanding against a property) and Government MPF Loans which may not exceed the LTV limits set by FHA and VA;

• MPF Loans with LTVs greater than 80% require certain amounts of mortgage guaranty insurance (“MI”), called primary MI, from an MI company rated at least “AA” or “Aa” and acceptable to S&P;

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

• Credit reports and credit scores for each borrower; for borrowers with no credit score, alternative verification of credit is permitted;

• Analysis of debt ratios;

• Verification of income and sources of funds, if applicable;

• Property appraisal;

• Customary property or hazard insurance, and flood insurance, if applicable, from insurers acceptably rated as detailed in the MPF Guides;

• Title insurance or, in those areas where title insurance is not customary, an attorney’s opinion of title;

• The mortgage documents, mortgage transaction and mortgaged property must comply with all applicable laws and loans must be documented using standard Fannie Mae/Freddie Mac Uniform Instruments;

• Loans that are not ratable by a rating agency are not eligible for delivery under the MPF Program; and

• Loans that are classified as high cost, high rate, high risk, Home Ownership and Equity Protection Act (HOEPA) loans or loans in similar categories defined under predatory lending or abusive lending laws are not eligible for delivery under the MPF Program.

In addition to the underwriting guidelines, the MPF Guides contain MPF Program policies which include anti-predatory lending policies, eligibility requirements for PFIs such as insurance requirements and annual certification requirements, loan

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documentation and custodian requirements, as well as detailing the PFI’s servicing duties and responsibilities for reporting, remittances, default management and disposition of properties acquired by foreclosure or deed in lieu of foreclosure.

Upon any MPF Loan becoming 90 days or more delinquent, the master servicer monitors and reviews the PFI’s default management activities for that MPF Loan, including timeliness of notices to the mortgagor, forbearance proposals, property protection activities, and foreclosure referrals, all in accordance with the MPF Guides. Upon liquidation of any MPF Loan and submission of each realized loss calculation from the PFI, the master servicer reviews the realized loss calculation for conformity with the primary mortgage insurance requirements, if applicable, and conformity to the cost and timeliness standards of the MPF Guides, and disallows the reimbursement to the PFI of any servicing advances related to the PFI’s failure to perform in accordance with the MPF Guides standards.

Hurricanes Katrina and Rita (the “Hurricanes”) struck Louisiana, Mississippi, Alabama, Texas and surrounding areas during the third quarter of 2005. As of September 30, 2005, the Bank held approximately $500 million of conventional MPF Loans secured by properties located in the Individual Assistance and Public Assistance areas as designated by the Federal Emergency Management Agency (“FEMA”). During the third quarter of 2005, the Bank announced a special disaster relief initiative to lessen the hardship for victims of Hurricane Katrina.

The Bank, as the MPF Provider of the MPF Program, has authorized PFIs to provide special relief to borrowers of conventional MPF Loans affected by Hurricane Katrina. As part of this special relief, a new loan modification process has been authorized for qualifying MPF Loans in the major disaster areas as designated by FEMA. These relief provisions authorize PFIs to suspend mortgage payments for the months of September, October and November, 2005 on those MPF Bank-owned loans whose borrowers qualify for public and individual assistance from FEMA. During this three month period, PFIs are expected to complete an assessment of each delinquent mortgage loan in the affected areas to determine the appropriate action that best fits the borrower’s circumstances (borrowers whose loans were delinquent prior to Katrina are not eligible for a loan modification workout unless they qualify for public and individual assistance from FEMA). In addition to loss mitigation actions currently authorized in the MPF Servicing Guide, the Bank granted the following loan modification approval authority to all PFIs with loans in the qualified areas as stated above: (i) loan modification to capitalize delinquent interest over the remaining term of the loan, or (ii) loan modification to capitalize delinquent interest and extend the term of the loan. All other modification requests will be handled by the PFI on a case by case basis with approval required by the MPF Program Master Servicer, the MPF Provider and the MPF Bank.

Services Agreement

MPF Loans are delivered to each MPF Bank through the infrastructure maintained by the Bank, which includes both a telephonic delivery system and a web based delivery system accessed through the eMPF^® website. The Bank has entered into an agreement (“Services Agreement”) with each of the other MPF Banks to make the MPF Program available to their respective PFIs. The Services Agreement sets forth the terms and conditions of the MPF Bank’s participation in the MPF Program. The Services Agreement outlines the Bank’s agreement to provide transaction processing services to the MPF Banks, including acting as master servicer and master custodian for the MPF Banks with respect to the MPF Loans. The Bank has engaged Wells Fargo Bank N.A. as its vendor for master servicing and as the primary custodian for the MPF Program, and has also contracted with other custodians meeting MPF Program eligibility standards at the request of certain PFIs. Such other custodians are typically affiliates of PFIs and in some cases a PFI acts as self-custodian.

Historically, in order to compensate the Bank, as MPF Provider, for its transaction processing services, the Bank has required that each of the MPF Banks sell to it not less than a twenty-five percent (25%) participation interest in MPF Loans acquired by that MPF Bank. Currently, all but one of the MPF Banks compensate the MPF Provider for its transaction processing services by paying a transactions services fee instead of granting the MPF Provider the right to purchase a participation interest with respect to MPF Loans acquired after 2003. One MPF Bank continues to compensate the MPF Provider for its transaction processing services by selling to the Bank not less than twenty-five percent (25%) participation interests in its MPF Loans. The Bank recorded $2.2 million and $812.1 thousand as transaction services fees in the nine months ended September 30, 2005 and 2004, respectively. The Bank recorded $1.2 million in transaction service fees for the year ended December 31, 2004, which was the first year in which the Bank recorded such fees.

In addition to buying participation interests as compensation for providing transaction processing services, the Bank may purchase participation interests in MPF Loans through an agreement with the relevant MPF Bank, and may also sell participation interests to other MPF Banks at the time MPF Loans are acquired, although it is the Bank’s intent to hold all MPF Loans for

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investment. As such, the participation percentages in MPF Loans may vary by each pool of MPF Loans funded or purchased by the MPF Bank (“Master Commitment”), by agreement of the MPF Bank selling the participation interests (the “Owner Bank”), and the MPF Provider and other MPF Banks purchasing a participation interest. In order to detail the responsibilities and obligations for all participation interests sold by an Owner Bank to the MPF Provider or to other participating MPF Banks, each Owner Bank has entered into a participation agreement with the MPF Provider and, as applicable, any other participant MPF Banks. For an explanation of participation arrangements, see “Item 1.2—Business Segments—Mortgage Partnership Finance Program—MPF Bank Participations.”

MPF Loans are funded through or purchased directly from PFIs by MPF Banks through the transactional services provided by the Bank. Under the Services Agreement between the MPF Bank and the Bank, the Bank provides the necessary systems for PFIs to deliver MPF Loans to the MPF Bank, establishes daily pricing for MPF Loans, prepares reports for both the PFI and the MPF Bank, and provides quality control services on purchased MPF Loans.

The Bank calculates and publishes on its eMPF website pricing grids with the prices expiring at midnight the following day. The prices, rates and fees associated with the various MPF products are set by the Bank, in its role of MPF Provider, using observable third party pricing sources as inputs to its proprietary pricing model. If market prices move beyond preset ranges, the Bank will reset all or some of the prices at any time during a given business day. In limited circumstances, an MPF Bank may elect to apply alternative pricing to a specific pool of MPF Loans delivered by one of its PFIs.

Participating Financial Institution Agreement

A member (or eligible housing associate) of an MPF Bank must specifically apply to become a PFI. The MPF Bank reviews the general eligibility of the member while the Bank, as MPF Provider, reviews the member’s servicing qualifications and ability to supply documents, data and reports required to be delivered by PFIs under the MPF Program. The member and its MPF Bank sign an MPF Program Participating Financial Institution Agreement (“PFI Agreement”) that creates a relationship framework for the PFI to do business with its MPF Bank. The PFI Agreement provides the terms and conditions for the origination of the MPF Loans to be funded or purchased by the MPF Bank and establishes the terms and conditions for servicing MPF Loans for the MPF Bank. If a member is an affiliate of a holding company which has another affiliate that is an active PFI, the member is only eligible to become a PFI if it is a member of the same MPF Bank as the existing PFI. The eligibility requirements for holding company affiliates do not apply to the Mortgage Purchase Program but pertain solely to participation in the MPF Program. The Bank does not participate in the Mortgage Purchase Program, a competing program offered by other FHLBs, which may include member participants that are affiliates of PFIs participating in the MPF Program.

The PFI’s credit enhancement obligation (“CE Amount”) arises under its PFI Agreement while the amount and nature of the obligation are determined with respect to each Master Commitment. Under the AMA Regulation the PFI must “bear the economic consequences” of certain losses with respect to a Master Commitment based upon the MPF product and other criteria.

The PFI’s CE Amount for a Master Commitment covers the loan losses for that Master Commitment in excess of the first loss account (“FLA”), if any, up to an agreed upon amount. The final CE Amount is determined once the Master Commitment is closed (i.e., when the maximum amount of MPF Loans are delivered or the expiration date has occurred).

The table below summarizes the average CE Amount as a percentage of MPF Program Master Commitments participated in or held by the Bank:

MPF Program PFI CE Amount as % of

Master Commitments Participated in or Held by the Bank

	As of September 30,		As of December 31,
	2005		2004		2003		2002
Original MPF	1.73	%	1.64	%	1.53	%	1.97	%
MPF 100	0.49	%	0.44	%	0.39	%	0.46	%
MPF 125	0.82	%	0.71	%	0.59	%	0.76	%
MPF Plus *	1.34	%	1.35	%	1.37	%	1.77	%
Original MPF for FHA/VA	N/A		N/A		N/A		N/A

* CE Amount includes SMI policy coverage

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The risk characteristics of each MPF Loan (as provided by the PFI) are analyzed by the MPF Provider using S&P’s LEVELS^® model in order to determine the required CE Amount for a loan or group of loans to be funded or acquired by an MPF Bank (“MPF Program Methodology”) but which leaves the decision whether or not to deliver the loan or group of loans into the MPF Program with the PFI.

The AMA Regulation provides the authority for the Bank’s investment in residential mortgage loans. As required by the AMA Regulation, the MPF Program credit enhancement methodology has been confirmed by S&P, a NRSRO as providing an analysis of each Master Commitment that is “comparable to a methodology that the NRSRO would use in determining credit enhancement levels when conducting a rating review of the asset or pool of assets in a securitization transaction.” The AMA Regulation requires that MPF Loans be credit enhanced sufficient so that the risk of loss is limited to the losses of an investor in an “AA” rated mortgage backed security, unless additional retained earnings plus a general allowance for losses are maintained. The Bank is required to recalculate the estimated credit rating of a Master Commitment if there is evidence of a decline in credit quality of the related MPF Loans. The required amount of additional retained earnings is an amount equal to the outstanding balance of the MPF Loans under the related Master Commitment multiplied by the applicable factor listed below that is associated with the putative credit rating of the Master Commitment.

Putative rating of single-family mortgage assets	Percentage applicable to on-balance sheet equivalent value of AMA
Third highest investment grade	0.90	%
Fourth highest investment grade	1.50	%
If downgraded to below investment grade after acquisition by Bank:
Highest below investment grade	2.25	%
Second highest below investment grade	2.60	%
All other below investment grade	100.00	%

For purposes of determining the appropriate amount of additional retained earnings as described in the preceding paragraph, the Bank must determine the estimated rating of the pool of MPF Loans for each Master Commitment. This determination is made based upon the MPF Program Methodology under S&P’s LEVELS program and the product type of the related MPF Loans. For a description of the different MPF product types and the calculation of the PFI’s CE Amount by product type see “Item 1.2—Business Segments—Mortgage Partnership Finance Program—MPF Products.”

The estimated rating for each Master Commitment is based upon the size of the PFI’s CE Amount and the Bank’s effective FLA exposure (after consideration of the Bank’s ability to reduce a PFI’s performance based credit enhancement fees) so that the Bank is in a position equivalent to that of an investor in a “AA” mortgage backed security. However, in June of 2002, the Bank agreed with the Finance Board that in determining the estimated rating for Master Commitments with an FLA equal to 100 basis points (all MPF 100, MPF 125 and some MPF Plus Master Commitments), the Bank will only partially rely on its ability to reduce performance based credit enhancement fees when measuring the Bank’s effective FLA exposure. As a result, the Bank either holds additional retained earnings against the related Master Commitments in accordance with the AMA regulations or purchases SMI to upgrade the estimated rating of the Master Commitment to the equivalent of a “AA” rated mortgage backed security. As of September 30, 2005, the outstanding balance of MPF Loans for which the Bank has purchased SMI in order to increase the estimated credit rating of a Master Commitment is $4.1 billion.

Under the MPF Program, the PFI’s credit enhancement may take the form of a direct liability to pay losses incurred with respect to that Master Commitment, or may require the PFI to obtain and pay for an SMI policy insuring the MPF Bank for a portion of the losses arising from the Master Commitment, or the PFI may contract for a contingent performance based credit enhancement fee whereby such fees are reduced by losses up to a certain amount arising under the Master Commitment. Under the AMA Regulation, any portion of the CE Amount that is a PFI’s direct liability must be collateralized by the PFI in the same way that advances from the MPF Bank are collateralized. The PFI Agreement provides that the PFI’s obligations under the PFI

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Agreement are secured along with other obligations of the PFI under its regular advances agreement with the MPF Bank and further, that the MPF Bank may request additional collateral to secure the PFI’s obligations.

Typically, a PFI will sign one Master Commitment to cover all the conventional MPF Loans it intends to deliver to the MPF Bank in a year. However, a PFI may also sign a Master Commitment for Government MPF Loans, it may choose to deliver MPF Loans under more than one conventional product, or it may choose to use different servicing remittance options and thus have several Master Commitments opened at any one time. Master Commitments may be for shorter periods than one year and may be extended or increased by agreement of the MPF Bank and the PFI. The Master Commitment defines the pool of MPF Loans for which the CE Amount is set so that the risk associated with investing in such pool of MPF Loans is equivalent to investing in a “AA” rated asset without giving effect to the MPF Bank’s obligation to incur losses up to the amount of the initial FLA.

PFIs request funding or purchase commitments (“Delivery Commitments”) from their respective MPF Bank based on the Bank’s published daily pricing schedules. The PFI enters into a Delivery Commitment, which is a mandatory commitment of the PFI to sell or originate eligible mortgage loans.

PFIs deliver MPF Loans to the MPF Bank by complying with the Delivery Commitment. Each MPF Loan delivered must conform to specified ranges of interest rates and maturity terms detailed in the Delivery Commitment or it will be rejected by the MPF Provider. The MPF Loan under a Delivery Commitment is linked to a Master Commitment so that the cumulative credit enhancement level can be determined. Loans that exceed the maximum amount of a Master Commitment; exceed the PFI’s maximum CE Amount; or would be funded after the expiration of the Master Commitment, are rejected. The Delivery Commitment also specifies the number of business days the PFI has to deliver the MPF Loans, not to exceed 45 business days (unless extended for a fee).

The sum of MPF Loans delivered by the PFI under a specific Delivery Commitment cannot exceed the amount specified in the Delivery Commitment without the assessment of a price adjustment fee. Delivery Commitments that are not fully funded by their expiration dates are subject to pair-off fees (fees charged to a PFI for failing to deliver the amount of loans specified in a Delivery Commitment) or extension fees (fees charged to a PFI for extending the time deadline to deliver loans on a Delivery Commitment), which protect the MPF Bank against changes in market prices.

In connection with each sale to or funding by an MPF Bank, the PFI makes certain representations and warranties to the MPF Bank which are contained in the PFI Agreement and in the MPF Guides. The representations and warranties are similar to those required by Fannie Mae, Freddie Mac and for mortgage-backed securities and specifically include compliance with predatory lending laws and the integrity of the data transmitted to the MPF Program system.

Once an MPF Loan is funded or purchased, the PFI must deliver the promissory note and certain other relevant documents (“Collateral Package”) to the designated custodian. In some cases, a PFI or one of its affiliates may act as custodian. The custodian reports to the MPF Provider whether the Collateral Package matches the funding information in the MPF Program system and otherwise meets MPF Program requirements. If the PFI does not deliver a conforming Collateral Package within the time frames required under the MPF Guides it will be assessed a late fee and can be required to purchase or repurchase the MPF Loan.

Credit Risk Exposure Assumed by the Bank on MPF^® Loans

The credit risk of loss on MPF Loans is the potential for financial loss due to borrower default or depreciation in the value of the real estate collateral securing the MPF Loan, offset by the PFI’s CE Amount required under the AMA Regulation. The Bank also faces credit risk of loss on MPF Loans to the extent such losses are not recoverable from the PFI or an SMI Provider, as applicable, as a credit enhancement provider.

The outstanding balance of the Bank’s MPF Loan portfolio exposed to credit losses not recoverable from the FHA and VA (including servicer paid losses not covered by the FHA or VA), PFI CE Amount, PMI, FLA account or SMI coverage was

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$35.2 billion, $38.2 billion, $38.9 billion and $17.9 billion at September 30, 2005 and December 31, 2004, 2003 and 2002, respectively.

Hurricane Katrina struck Louisiana, Mississippi, Alabama and surrounding areas on August 29, 2005. As of September 30, 2005, the Bank held approximately $500 million of conventional MPF Loans with properties located in the Individual Assistance and Public Assistance categories as designated by FEMA. The Bank is in the process of assessing its potential loss exposure related to Hurricane Katrina, but the availability and integrity of data regarding the condition of affected properties remains problematic at this time. We are working with our master servicing vendor to obtain information from the MPF Loan servicers in order to develop reliable loss estimates.

The risk-sharing of credit losses between MPF Banks for participations is based on each MPF Banks’ percentage interest in the Master Commitment. Accordingly, the credit risk assumed by the Bank is driven by its percentage interest in each Master Commitment.

MPF^® Bank Participations

For a Master Commitment to be set up on the Bank’s MPF system, the MPF Bank that entered into the Master Commitment must specify the participation arrangement that will be applied to the MPF Loans to be acquired under that Master Commitment and in the related Delivery Commitments. That participation arrangement may range from 100% to be retained by the Owner Bank to 100% participated to another MPF Bank. Generally, the participation arrangement percentages will not change during the period that a Master Commitment is open. However, the participation arrangement could change as a result of an MPF Bank opting out of its share in the participation arrangement on a given day, or if the MPF Banks decide on a going forward basis to change their respective shares. If no changes are made, the risk-sharing of losses between MPF Banks is predetermined at the time the Master Commitment is signed. If the specified participation percentages in a Master Commitment never changes, then that percentage would automatically be applied to every Delivery Commitment that is issued under the Master Commitment.

For a Master Commitment with the same participation arrangement throughout the open period, the risk sharing and rights of the Owner Bank and participating MPF Bank(s) are as follows:

• each pays its respective pro rata shares of each MPF Loan acquired under the Master Commitment;

• each receives its respective pro rata share of principal and interest payments;

• each is responsible for its respective pro rata share of credit enhancement fees, FLA exposure and losses incurred with respect the Master Commitment; and

• each may hedge its share of the Delivery Commitments as they are issued during the open period.

The participation arrangement for a Master Commitment may be changed so that either specified future Delivery Commitments or all future Delivery Commitments after a specified date will be funded pro rata by the affected MPF Banks under a revised participation arrangement. An MPF Bank’s pro rata interest in each MPF Loan, if any, is based on the portion it funded or purchased of that MPF Loan whereas the MPF Bank’s pro rata interest in a Master Commitment is based on participant interest in the entire Master Commitment as compared to all the MPF Loans delivered by the PFI under the Master Commitment. The MPF Bank receives principal and interest payments based on its pro rata interest in individual MPF Loans. However, because the FLA and credit enhancement apply to all the MPF Loans in a Master Commitment regardless of participation arrangements, the MPF Bank’s share of losses is based on its respective participation interest in the entire Master Commitment. For example, assume a MPF Bank’s specified participation percentage was 25% under a $100 million Master Commitment and that no changes were made to the Master Commitment. The MPF Bank risk sharing percentage of losses would be 25%. In the case where an MPF Bank changes its initial percentage in the Master Commitment, the risk sharing percentage will also change. For example, if an MPF Bank were to acquire 25% of the first $50 million and 50% of the second $50 million of MPF Loans delivered under a Master Commitment, the MPF Bank would share in 37.5% of the losses in that $100 million Master Commitment, while it would receive principal and interest payments on the individual MPF Loans that remain outstanding in a given month, some in which it may own a 25% interest and the others in which it may own a 50% interest.

The Owner Bank is responsible for evaluating, monitoring, and certifying to any participant MPF Bank the creditworthiness of each relevant PFI initially, and at least annually thereafter. The Owner Bank is responsible for ensuring that

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adequate collateral is available from each of its PFIs to secure the credit enhancement obligations arising from the origination or sale of MPF Loans. The Owner Bank is also responsible for enforcing the PFI’s obligations under the PFI Agreement between the PFI and the Owner Bank (See “Item 1.2—Business Segments—Mortgage Partnership Finance Program—Participating Financial Institution Agreement”).

MPF^® Servicing

The PFI or its servicing affiliate generally retains the right and responsibility for servicing MPF Loans it delivers. However, certain PFIs may desire to sell the servicing rights under the MPF Program’s concurrent sale of servicing option. To date, the MPF Program has designated one servicing PFI which is eligible to acquire servicing rights under this option. An originating PFI may also negotiate with other PFIs to purchase servicing rights, however this type of arrangement would not include direct support from the MPF Program. The current limited options for selling MPF Loans to the MPF Bank on a servicing-released basis may reduce the attractiveness of the MPF Program to potential PFIs that do not want to retain servicing.

The PFI is responsible for collecting the borrower’s monthly payments and otherwise dealing with the borrower with respect to the MPF Loan and the mortgaged property. Monthly principal and interest payments are withdrawn from the PFI’s deposit account with the MPF Bank on the 18^th day of each month (or prior business day if the 18^th is not a business day) based on reports the PFI is required to provide to the master servicer. Based on these monthly reports, the MPF Program system makes the appropriate withdrawals from the PFI’s deposit account. Under the scheduled/scheduled remittance option, the PFI is required to make principal and interest payments to the MPF Bank on the due date whether or not the borrower has remitted any payments to the PFI provided that the collateral securing the MPF Loan is sufficient to reimburse the PFI for advanced amounts. The PFI recovers the scheduled payments made to the Bank either from future collections or upon the liquidation of the collateral securing the MPF Loan.

If an MPF Loan becomes delinquent, the PFI is required to contact the borrower to determine the cause of the delinquency and whether the borrower will be able to cure the default. The MPF Guides permit certain types of forbearance plans. If the PFI determines that an MPF Loan, which has become ninety (90) days delinquent, is not likely to be brought current, then the PFI is required to commence foreclosure activities or pursue an alternative to foreclosure in accordance with the servicing standards specified in the MPF Guides. The foreclosure process includes determining the current condition and a foreclosure sale bid value of the mortgaged property and the likelihood of loss upon disposition of the property after foreclosure or other approved alternatives to foreclosure such as a deed in lieu of foreclosure. The PFI is required to secure and insure the property after it acquires title through the date of disposition. After submitting its property disposition plan to the master servicer, the PFI provides monthly status reports regarding the progress of the disposition activities. Upon disposition a final report must be submitted to the master servicer detailing the outstanding loan balance, accrued and unpaid interest, the net proceeds of the disposition and the amounts advanced by the PFI, including any principal and interest advanced during the disposition period. If there is a loss on the conventional MPF Loan, the loss is allocated to the Master Commitment and shared in accordance with the risk sharing structure for that particular Master Commitment. Gains are the property of the MPF Bank but are available to a PFI as a credit against future economic losses related to future payouts of performance based credit enhancement fees under the Master Commitment.

Throughout the servicing process the MPF Provider’s vendor for master servicing monitors the PFI’s compliance with MPF Program requirements and makes periodic reports to the MPF Provider. The MPF Provider will bring any material concerns to the attention of the MPF Bank. Minor lapses in servicing are simply charged to the PFI rather than being included in determining a loss on an MPF Loan. Major lapses in servicing could result in a PFI’s servicing rights being terminated for cause and the servicing of the particular MPF Loans being transferred to a new, qualified servicing PFI. No PFI’s servicing rights have been terminated for cause in the history of the MPF Program. In addition, the MPF Guides require each PFI to maintain errors and omissions insurance and a fidelity bond and to provide an annual certification with respect to its insurance and its compliance with the MPF Program requirements.

During the third quarter of 2005, the Bank announced special disaster relief provisions to lessen the hardship for victims of the recent hurricanes in the Gulf States. The Bank authorized MPF servicers to suspend for three months loan payments from borrowers with MPF Loans whose property is located in disaster areas defined by FEMA. In addition, the Bank encouraged and authorized MPF servicers to suspend all collection and foreclosure proceedings on designated affected MPF Loans during the three-month period and to work out appropriate repayment plans on a case-by-case basis for continuation of the mortgage.

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Quality Assurance

The MPF Provider conducts an initial quality assurance review of a selected sample of MPF Loans from the PFI’s initial MPF Loan delivery. Thereafter periodic reviews of a sample of MPF Loans are performed to determine whether the reviewed MPF Loans complied with the MPF Program requirements at the time of acquisition. A quality assurance letter is sent to the PFI noting any critical or general compliance exception matters. The PFI is required to purchase or repurchase any MPF Loan or provide an indemnification covering related losses on any MPF Loan that is determined to be ineligible and for which the ineligibility cannot be cured. Any exception that indicates a negative trend is discussed with the PFI and can result in the suspension or termination of a PFI’s ability to deliver new MPF Loans if the concern is not adequately addressed. The Bank does not currently conduct any quality assurance reviews of Government MPF Loans.

A majority of the states, and some municipalities, have enacted laws against mortgage loans considered predatory or abusive. Some of these laws impose liability for violations not only on the originator, but also upon purchasers and assignees of mortgage loans. The Bank takes measures that it considers reasonable and appropriate to reduce its exposure to potential liability under these laws and is not aware of any claim, action or proceeding asserting that the Bank is liable under these laws. However, there can be no assurance that the Bank will never have any liability under predatory or abusive lending laws.

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Allocation of Losses

The MPF Bank and PFI share the risk of losses on MPF Loans by structuring potential losses on conventional MPF Loans into layers with respect to each Master Commitment. The general allocation of losses is described in the following table:

Allocation of Losses

The first layer of protection against loss is the borrower’s equity in the real property securing the MPF Loan. Second, as is customary for conventional mortgage loans with LTV’s greater than 80%, the next layer of protection comes from primary MI issued by qualified MI companies. •      Such coverage is required for MPF Loans with LTVs greater than 80%. •      Covered losses (all types of losses except those generally classified as special hazard losses) are reimbursed by the primary MI provider. Third, losses for each Master Commitment that are not paid by primary MI are incurred by the MPF Bank, up to an agreed upon amount, called a “First Loss Account” or “FLA.” •      The FLA is structured by the MPF Banks as a memo account to track losses not covered by the CE Amount provided by the PFI (or not yet recovered by the withholding of performance based fees). The FLA is not a cash collateral account, and does not give MPF Banks any right/obligation to receive/pay cash or any other collateral, but rather, it functions as a tracking mechanism for determining the point after which the PFI, in its role as credit enhancer, would be required to reimburse MPF Banks under the CE Amount for losses incurred. Fourth, losses for each Master Commitment in excess of the FLA, if any, up to an agreed upon amount (the “CE Amount”) are covered by the PFI’s credit enhancement. •      The PFI’s CE Amount is sized using the MPF Program Methodology to equal the amount of losses in excess of, or including, the FLA (depending on the MPF product) that would need to be paid so that any losses in excess of the CE Amount and initial FLA would be equivalent to losses experienced by an investor in an “AA” rated mortgage backed security. The PFI may procure SMI to cover losses equal to all or a portion of the CE Amount (except that losses generally classified as special hazard losses are covered by the MPF Bank, not by SMI). •      The PFI is paid a monthly credit enhancement fee for managing credit risk on the MPF Loans. In most cases, the credit enhancement fees are performance based which further motivates the PFI to minimize loan losses on MPF Loans. Fifth, any remaining unallocated losses are absorbed by the MPF Bank.

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With respect to participation interests, MPF Loan losses not covered by borrower’s equity or primary MI will be applied to the FLA and allocated amongst the participants pro ratably based upon their respective participation interests in the related Master Commitment. Next, losses will be applied to the PFI’s CE Amount which may include SMI, as indicated by the particular MPF product, and finally, further losses will be shared based on the participation interests of the Owner Bank and MPF Bank(s) in each Master Commitment. Under the Services Agreement, other than the obligation, (where applicable), to sell the MPF Provider a participation interest in MPF Loans funded by the Owner Bank, there are no minimum sales levels.

MPF^® Products

The “Allocation of Losses” chart describes the general mechanics for the allocation of losses under the MPF Program. The charts below describe how the FLA and the PFI CE Amounts are determined for each MPF product type. Each of the MPF products is described in the MPF Guides and in marketing materials. The PFI selects the MPF product that best suits its business requirements.

Original MPF^®

FLA •      The FLA starts out at zero on the day the first MPF Loan under a Master Commitment is purchased but increases monthly over the life of the Master Commitment at a rate that ranges from 0.03% to 0.05% (3 to 5 basis points) per annum based on the month end outstanding aggregate principal balance of the Master Commitment. •      Over time the FLA is expected to cover expected losses on a Master Commitment, though losses early in the life of the Master Commitment could exceed the FLA and be charged in part to the PFI’s CE Amount. PFI CE Amount •      The PFI’s CE Amount is sized using the MPF Program Methodology to equal the amount needed for the Master Commitment to have a rating equivalent to a “AA” rated mortgage backed security, as if there was not an FLA prior to the PFI’s obligation to cover losses equal to the CE Amount. •      The PFI is paid a monthly credit enhancement fee, typically 0.10% (10 basis points) per annum, based on the aggregate outstanding principal balance of the MPF Loans in the Master Commitment.

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MPF^® 100

FLA •      The FLA is equal to 1.00% (100 basis points) of the aggregate principal balance of the MPF Loans funded under the Master Commitment. •      Once the Master Commitment is fully funded, the FLA is expected to cover expected losses on that Master Commitment. The MPF Bank may economically recover a portion of losses incurred under the FLA by withholding performance based credit enhancement fees payable to the PFI. PFI CE Amount •      The PFI’s CE Amount is calculated using the MPF Program Methodology to equal the difference between the amount needed for the Master Commitment to have a rating equivalent to a “AA” rated mortgage backed security and the amount of the FLA. •      The credit enhancement fee is between 0.07% and 0.10% (7 and 10 basis points) per annum of the aggregate outstanding principal balance of the MPF Loans in the Master Commitment. •      In addition, the PFI’s monthly credit enhancement fee after the first two or three years becomes performance based in that it is reduced by losses charged to the FLA. Under the MPF 100 product, the MPF Bank table funds MPF Loans, which means that the MPF Bank provides the funds, through the PFI as its agent, to make the MPF Loan to the borrower. This differs from other MPF products in which the MPF Bank purchases loans that have already been closed by the PFI with its own funds.

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MPF^® 125

FLA •      The FLA is equal to 1.00% (100 basis points) of the aggregate principal balance of the MPF Loans funded under the Master Commitment. •      Once the Master Commitment is fully funded, the FLA is expected to cover expected losses on that Master Commitment. The MPF Bank may economically recover a portion of losses incurred under the FLA by withholding performance based credit enhancement fees payable to the PFI. PFI CE Amount •      The PFI’s CE Amount is calculated using the MPF Program Methodology to equal the difference between the amount needed for the Master Commitment to have a rating equivalent to a “AA” rated mortgage backed security and the amount of the FLA. •      The credit enhancement fee is between 0.07% and 0.10% (7 and 10 basis points) per annum of the aggregate outstanding principal balance of the MPF Loans in the Master Commitment and is performance based in that it is reduced by losses charged to the FLA.

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MPF^® Plus

FLA •      The FLA is equal to an agreed upon number of basis points of the aggregate principal balance of the MPF Loans funded under the Master Commitment that is not less than the amount of expected losses on the Master Commitment. •      Once the Master Commitment is fully funded, the FLA is expected to cover expected losses on that Master Commitment. The MPF Bank may economically recover a portion of losses incurred under the FLA by withholding performance based credit enhancement fees payable to the PFI. PFI CE Amount •      The PFI is required to provide an SMI policy covering the MPF Loans in the Master Commitment and having a deductible initially equal to the FLA. •      Depending upon the amount of the SMI policy, the PFI may or may not have a separate CE Amount obligation. •      The total amount of the PFI’s CE Amount (including the SMI policy) is calculated using the MPF Program Methodology to equal the difference between the amount needed for the Master Commitment to have a rating equivalent to a “AA” rated mortgage backed security and the amount of the FLA. •      The performance based portion of the credit enhancement fee is typically between 0.06% and 0.07% (6 and 7 basis points) per annum of the aggregate outstanding balance of the MPF Loans in the Master Commitment. The performance based fee is reduced by losses charged to the FLA and is delayed for one year from the date MPF Loans are sold to the MPF Bank. The fixed portion of the credit enhancement fee is typically 0.07% (7 basis points) per annum of the aggregate outstanding principal balance of the MPF Loans in the Master Commitment. The lower performance based credit enhancement fee is for Master Commitments without a direct PFI CE Amount obligation.

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Original MPF^® for FHA/VA

• Only Government MPF Loans are eligible for sale under this product.

• The PFI provides and maintains FHA insurance or a VA guaranty for the Government MPF Loans and 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 MPF Loans.

• The PFI’s servicing obligations are essentially identical to those undertaken for servicing loans in a Ginnie Mae security. Because the PFI servicing these MPF Loans assumes the risk with respect to amounts not reimbursed by either the FHA or VA, the structure results in the MPF Banks having assets that are expected to perform the same as Ginnie Mae securities.

• The PFI is paid a monthly government loan fee equal to 0.02% (2 basis points) per annum based on the month end outstanding aggregate principal balance of the Master Commitment in addition to the customary 0.44% (44 basis points) per annum servicing fee that is retained by the PFI on a monthly basis based on the outstanding aggregate principal balance of the MPF Loans.

• Only PFIs that are licensed or qualified to originate and service FHA and VA loans and that maintain a mortgage loan delinquency ratio that is acceptable to the MPF Provider and that is comparable to the national average and/or regional delinquency rates as published by the Mortgage Bankers Association are eligible to sell and service Government MPF Loans under the MPF Program.

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The following table provides a comparison of the MPF products:

Product Name	MPF Bank FLA 1	PFI Credit Enhancement Size Description	Average PFI CE Amount As % of Master Commitments 1	Credit Enhancement Fee to PFI	Credit Enhancement Fee Offset 2	Servicing Fee to PFI
Original MPF	3 to 5 basis points/added each year based on the unpaid balance	Equivalent to “AA”	1.73%	9 to 11 basis points/year – paid monthly	No	25 basis points/year
MPF 100	100 basis points fixed based on the size of the loan pool at closing	After FLA to “AA”	0.49%	7 to 10 basis points/year – paid monthly; performance based after 2 or 3 years	Yes – After first 2 to 3 years	25 basis points/year
MPF 125	100 basis points fixed based on the size of the loan pool at closing	After FLA to “AA”	0.82%	7 to 10 basis points/year – paid monthly; performance based	Yes	25 basis points/year
MPF Plus 4	Sized to equal expected losses	0-20 bps after FLA and SMI to “AA”	1.34%	7 basis points/year fixed plus 6 to 7 basis points/year performance based (delayed for 1 year); all fees paid monthly	Yes	25 basis points/year
Original MPF for FHA/VA	N/A	N/A (Unreimbursed Servicing Expenses)	N/A	N/A	N/A	44 basis points/year plus 2 basis points/year - paid monthly 3

¹ MPF Program Master Commitments participated in or held by the Bank as of September 30, 2005.

² Future payouts of performance based credit enhancement fees are reduced when losses are allocated to the FLA.

³ Government loan fee.

⁴ PFI CE Amount includes SMI policy coverage.

As of September 30, 2005, the net exposure of the Bank’s obligation to incur losses up to the amount of the FLA was $305.9 million, compared to $296.0 million and $258.5 million at December 31, 2004 and 2003, respectively. Except with respect to Original MPF, losses incurred by the Bank under the FLA can be recovered by the Bank by withholding future performance based credit enhancement fees otherwise paid to the Bank’s PFIs.

For the nine months ended September 30, 2005 and 2004, the Bank accrued $18.9 million and $20.2 million, respectively, in performance based credit enhancement fees as a reduction to interest income, from which the Bank withheld $422.8 thousand and $165.9 thousand, respectively, to cover losses against the FLA. Total losses against the FLA were $514.5 thousand and $280.5 thousand for the nine months ended September 30, 2005 and 2004, respectively. In the years ended

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December 31, 2004 and 2003 the Bank incurred $26.9 million and $19.6 million in performance based credit enhancement fees as a reduction to interest income, respectively, from which the Bank withheld approximately $304.7 thousand and $65.7 thousand, respectively, to cover losses against the FLA. Actual reductions against the FLA were $435.0 thousand, $143.0 thousand, and $99.0 thousand for the years ended December 31, 2004, 2003 and 2002, respectively.

The table below represents the total volume of MPF Loans purchased or funded by the Bank for each MPF product by period:

	For the Nine Months Ended September 30,				For the Years Ended December 31,
(Dollars in thousands)	2005		2004		2004		2003		2002
Original MPF	$	860,731	$	1,000,987	$	1,277,703	$	3,384,939	$	1,537,941
MPF 100		448,872		1,048,771		1,337,703		4,320,637		3,586,030
MPF 125		220,471		281,410		340,441		358,244		175,134
MPF Plus		715,113		4,073,889		4,277,045		26,558,020		7,363,647
Original MPF for FHA/VA		1,060,915		1,941,936		2,373,550		3,330,186		3,836,384
Total Purchases and Fundings	$	3,306,102	$	8,346,993	$	9,606,442	$	37,952,026	$	16,499,136

The MPF Plus program utilizes MI companies to provide SMI. Although the SMI policy in the MPF Plus Product is procured by the PFI, the MPF Bank(s) are named insureds and beneficiaries under the policy. In addition, the Bank has from time to time directly acquired SMI policies as described in “Item 1.2—Business Segment—Mortgage Partnership Finance Program— Participating Financial Institution Agreement.” The following table summarizes outstanding amounts of SMI for which the Bank is named insured and beneficiary:

	September 30,				December 31,
	2005				2004				2003
(Dollars in thousands)	Amounts Outstanding		Percent of Total		Amounts Outstanding		Percent of Total		Amounts Outstanding		Percent of Total
Mortgage Guaranty Insurance Company	$	427,298	68.4	%	$	425,506	68.8	%	$	413,939	72.8	%
GE Mortgage Insurance Corp.		77,392	12.4	%		73,676	11.9	%		60,435	10.7	%
PMI Mortgage Insurance Co.		42,409	6.8	%		42,409	6.9	%		42,296	7.4	%
United Guaranty Residential Insurance Co.		53,033	8.5	%		53,201	8.6	%		35,319	6.2	%
Republic Mortgage Insurance Co.		17,930	2.9	%		17,037	2.8	%		16,619	2.9	%
Radian Guaranty, Inc.		6,071	1.0	%		6,071	1.0	%		—	—
Total SMI	$	624,133	100.0	%	$	617,900	100.0	%	$	568,608	100.0	%

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MPF Loans that the Bank has acquired or funded are secured by real estate across all fifty states, the District of Columbia and Puerto Rico. No single zip code represents more than 1% of MPF Loans on the Bank’s statements of condition. The following table summarizes the outstanding balances of the Bank’s MPF Loans by state:

	Largest Ten MPF States
	As of September 30, 2005					As of December 31, 2004				As of December 31, 2003
(Dollars in thousands)	Outstanding Value			Percent of Total		Outstanding Value		Percent of Total		Outstanding Value		Percent of Total
Wisconsin	$	7,194,885		16.7	%	$	7,154,642	15.4	%	$	6,710,433	14.3	%
California		4,461,111		10.4	%		5,302,892	11.4	%		5,909,138	12.5	%
Illinois		4,090,264		9.5	%		4,095,064	8.8	%		3,894,264	8.3	%
Texas		2,887,009		6.7	%		2,988,555	6.4	%		2,824,223	6.0	%
Florida		1,688,299		3.9	%		1,929,208	4.1	%		1,963,765	4.2	%
Ohio		1,443,728		3.4	%		1,601,990	3.4	%		1,760,546	3.7	%
Pennsylvania		1,436,446		3.3	%		1,575,275	3.4	%		1,664,862	3.5	%
Virginia		1,321,650		3.1	%		1,525,845	3.3	%		1,610,143	3.4	%
Minnesota		1,223,193		2.8	%		1,375,141	3.0	%		1,466,824	3.1	%
New York		1,180,803		2.7	%		n/a	n/a			n/a	n/a
Maryland		n/a		n/a			1,336,696	2.9	%		1,462,218	3.1	%
All other states		16,050,241		37.5	%		17,690,044	37.9	%		17,873,998	37.9	%
Total MPF mortgages - par	$	42,977,629		100.0	%	$	46,575,352	100.0	%	$	47,140,414	100.0	%
Non MPF mortgages 1		5,129					2,433				156
Loan commitment basis adj.		286,445					343,962				416,455
SFAS 133 hedging adj.		(33,104	)				3,683				48,165
Total mortgage loans held in portfolio	$	43,236,099				$	46,925,430			$	47,605,190

n/a = not applicable as amount does not fall within the 10 largest states.

¹ Non-MPF mortgage loans include the Native American Mortgage Purchase Program HUD Section 184 loans. These loans are fully guaranteed by the U.S. Department of Housing and Urban Development, in the event of default by the homeowner.

As of September 30, 2005, the top five PFIs represent in total 67.6% of the Bank’s outstanding MPF Loans (at par). If one or more of these PFIs were unable or failed to meet their contractual obligations to cover losses under the CE Amount, the Bank may incur increased losses depending upon the performance of the related MPF Loans.

The following tables present MPF Loan concentrations by PFI for loan purchases and fundings by the Bank that exceed ten percent (10%):

MPF Loan Purchases and Funding Concentrations by PFI

	For the Nine Months Ended September 30,
(Dollars in thousands)	2005				2004
PFI	Amounts		% of Total		Amounts		% of Total
Balboa Reinsurance Company 1	$	1,265,380	38.3	%	$	3,189,539	38.2	%
LaSalle Bank, N.A.		n/a	n/a			1,417,766	17.0	%
All Other Institutions		2,040,722	61.7	%		3,739,688	44.8	%
Total	$	3,306,102	100.0	%	$	8,346,993	100.0	%

n/a = not applicable as amount is less than 10%.

¹ Balboa Reinsurance Company is an out-of-district PFI.

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MPF Loan Purchases and Funding Concentrations by PFI

	For the Years Ended December 31,
(Dollars in thousands)	2004				2003				2002
PFI	Amounts		% of Total		Amounts		% of Total		Amounts		% of Total
Balboa Reinsurance Company 1	$	3,603,059	37.5	%	$	6,424,429	16.9	%		n/a	n/a
LaSalle Bank, N. A.		1,446,722	15.1	%		8,863,627	23.4	%		n/a	n/a
National City Bank Pennsylvania 2		n/a	n/a			7,229,115	19.0	%		6,041,392	36.6	%
All Other Institutions		4,556,661	47.4	%		15,434,855	40.7	%		10,457,744	63.4	%
Total	$	9,606,442	100.0	%	$	37,952,026	100.0	%	$	16,499,136	100.0	%

n/a = not applicable as amount is less than 10%.

¹ Balboa Reinsurance Company is an out-of-district PFI.

² National City Bank Pennsylvania is an out-of-district PFI.

The following table summarizes the outstanding balances of MPF Loans by geographic area:

Geographic Concentration of MPF Loans^1,2

	September 30,		December 31,
	2005		2004		2003
Midwest	39	%	36	%	36	%
Northeast	12	%	13	%	13	%
Southeast	18	%	19	%	19	%
Southwest	16	%	16	%	15	%
West	15	%	16	%	17	%
Total	100	%	100	%	100	%

¹ Percentages calculated based on the unpaid principal balance at the end of each period.

² Midwest includes IA, IL, IN, MI, MN, ND, NE, OH, SD, and WI.

Northeast includes CT, DE, MA, ME, NH, NJ, NY, PA, PR, RI, VI, and VT.

Southeast includes AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA, and WV.

Southwest includes AR, AZ, CO, KS, LA, MO, NM, OK, TX, and UT.

West includes AK, CA, GU, HI, ID, MT, NV, OR, WA, and WY.

MPF Shared Funding^® Program

The MPF Shared Funding program permits a PFI (“MPF Shared Funding PFI”) to deliver MPF Loans (“MPF Shared Funding Loans”) in the form of a security through the use of a third party trust. Under this option, the MPF Shared Funding PFI sponsors a trust and transfers MPF Shared Funding Loans it originates or acquires to the trust. Upon transfer of the assets into the trust, the trust issues securities with tranches having credit risk characteristics consistent with the MPF Program policy and in compliance with the AMA Regulation. The tranches are backed by the MPF Shared Funding Loans and all or almost all of the tranches receive public credit ratings determined by an NRSRO. The senior tranches, collectively referred to as the “A Certificates” have a credit rating of “AA” or “AAA” and may have different interest rate risk profiles and durations. The A Certificates, which may be structured to provide various risk and investment characteristics, are sold to the Bank, either directly by the trust or by the MPF Shared Funding PFI. The lower-rated tranches, collectively referred to as the “B Certificates,” provide the credit enhancement for the A Certificates. The A Certificates are sold to the Bank, either directly by the trust or by the MPF Shared Funding PFI, and the B Certificates are sold to the MPF Shared Funding PFI. The Bank may subsequently sell some or all of its A Certificates to Bank members and to other FHLBs and their members. No residual interest is created or retained on the Bank’s balance sheet.

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The Bank completed two MPF Shared Funding transactions in March 2003 and June 2003. The outstanding principal balance of the A Certificates held by the Bank in connection with these transactions was $436.6 million as of September 30, 2005; these A Certificates are included in “Investment Securities—Held to Maturity.” In these two transactions, One Mortgage Partners Corp., the MPF Shared Funding PFI, acquired MPF Shared Funding Loans from National City Bank of Pennsylvania and Superior Guaranty Insurance Company (“Selling PFIs”), which are members of other MPF Banks. The Selling PFIs provided standard MPF Program representations and warranties to the MPF Shared Funding PFI which were in turn passed through to the trust for the benefit of the holders of the A Certificates and the B Certificates (“Certificateholders”). The Bank agreed to act as the agent for the MPF Shared Funding PFI so that the Selling PFIs could deliver their loans in much the same manner as they would if they were selling the loans to their respective MPF Banks under the MPF Program products. Aside from potential liquidity benefits on future transactions, there is not a material difference in the Bank’s risk profile or earnings between holding A Certificates and holding the MPF Loans backing the securities.

The Selling PFIs retained the servicing rights and obligations with respect to the MPF Shared Funding Loans which servicing obligations are performed through the MPF Program systems and processes supported by the Bank. The Bank is the master servicer for the trust for the benefit of the Certificateholders and Wells Fargo Bank N.A. is the Bank’s vendor for performing these master servicing functions.

In the two MPF Shared Funding transactions that have been completed to date, the Bank assumes the interest rate risk related to the A Certificates that it acquires as the certificates are structured to pass-through the weighted average of the net mortgage rate of the related MPF Shared Funding Loans (the interest rate on the MPF Shared Funding Loans less servicing, master servicing and trustee fees). The majority of the credit risk in the transaction is borne by the B Certificates. A Certificates will only experience credit losses to the extent that losses exceed the principal amount of B Certificates outstanding at the time that the loss is incurred. Losses above a certain threshold related to fraud, mortgagor bankruptcy and special hazard losses are allocated pro rata among all outstanding A certificates and B certificates. The majority of the prepayment risk in the transaction is borne by the “AAA” rated Class A Certificates as they receive a greater percentage of principal prepayments than the other Class A and Class B Certificates during specified periods.

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1.3 Funding Services

The primary source of funds for the Bank is the sale of debt securities, known as consolidated obligations, in the capital markets. Consolidated obligations, which consist of bonds and discount notes, are by regulation the joint and several obligations of the FHLBs, although the primary obligation is with an individual FHLB. Consolidated obligations are sold to the public through the Office of Finance using authorized securities dealers. Consolidated obligations are backed only by the financial resources of the 12 FHLBs and are not guaranteed by the U.S. government. As of September 30, 2005, Moody’s has rated the consolidated obligations “Aaa/P-1”, and Standard Poor’s has rated them “AAA/A-1+”. These ratings measure the likelihood of timely payment of principal and interest on consolidated obligations.

The Bank is primarily liable for its portion of consolidated obligations, which are issued on its behalf and for which it receives proceeds. The Bank is also jointly and severally liable with the other 11 FHLBs for the payment of principal and interest on consolidated obligations of all the FHLBs. If the principal or interest on any consolidated obligation issued on behalf of the Bank is not paid in full when due, the Bank may not pay dividends to, or redeem or repurchase shares of capital stock from any of its members. The Finance Board, in its discretion, may require the Bank to make principal or interest payments due on any FHLBs’ consolidated obligations. To the extent that the Bank makes a payment on a consolidated obligation on behalf of another FHLB, the Bank would be entitled to reimbursement from the non–complying FHLB. However, if the Finance Board determines that the non–complying FHLB is unable to satisfy its direct obligations (as primary obligor), then the Finance Board may allocate the outstanding liability among the remaining FHLBs on a pro rata basis in proportion to each FHLBs’ participation in all consolidated obligations outstanding, or on any other basis the Finance Board may determine, even in the absence of a default event by the primary obligor.

Finance Board regulations govern the issuance of debt on behalf of the Bank and related activities, and authorize the Bank to issue consolidated obligations, through the Office of Finance, under the authority of section 11(a) of the FHLB Act. By regulation, all of the FHLBs are jointly and severally liable for the consolidated obligations issued under section 11(a). No FHLB is permitted to issue individual debt under section 11(a) without the approval of the Finance Board.

Finance Board regulations also state that the Bank must maintain the following types of assets free from any lien or pledge in an amount at least equal to the amount of its consolidated obligations outstanding:

• Cash;

• Obligations of, or fully guaranteed by, the United States;

• Secured advances;

• Mortgages, which have any guaranty, insurance, or commitment from the United States or any agency of the United States;

• Investments described in Section 16(a) of the FHLB Act, which, among other items, includes securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLB is located; and

• Other securities that are rated “Aaa” by Moody’s or “AAA” by S&P.

The Office of Finance has responsibility for the issuance of consolidated obligations. It also services all outstanding debt, provides information to the Bank on capital market developments, manages the Bank’s relationship with ratings agencies with respect to consolidated obligations and prepares the FHLBs’ combined quarterly and annual financial statements. In addition, it administers payments to the Resolution Funding Corporation (“REFCORP”) and the Financing Corporation, two Corporations established by Congress in the 1980’s to provide funding for the resolution and disposition of insolvent savings institutions.

In connection with managing its debt, the Bank is permitted to transfer consolidated obligations to other FHLBs at fair value. The transfer is accounted for as an extinguishment of debt since the Bank is released from being the primary obligor under

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the consolidated obligation. The FHLB assuming the consolidated obligation becomes the primary obligor. An extinguishment gain or loss is recorded for the difference between the carrying values of the consolidated obligations transferred, including fair value hedge related gains or losses and related deferred concession fees, and the amount of cash paid to the FHLB to assume the Bank’s consolidated obligation.

Consolidated Obligation Bonds

Consolidated obligation bonds (“bonds”) satisfy term funding requirements and are issued under various programs. Typically, the maturities of these securities range from 1 to 30 years, but the maturities are not subject to any statutory or regulatory limit. The bonds can be fixed or adjustable rate and callable or non-callable. The Bank also offers fixed-rate, non-callable (bullet) bonds via the FHLBs’ Tap issue program. 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.

The Tap issue program aggregates the most common maturities issued (1-, 2-, 3-, 4-, 5-, 7-, 10-, 15-, 20-, and 30-year) over a three-month period rather than frequently bringing numerous small bond issues of similar maturities to market. Tap issues generally remain open for three months, after which they are closed and a new series of Tap Issuances is opened to replace them. The Tap has reduced the number of separate bullet bonds issued.

Although the Bank predominantly issues fixed-rate bullet and callable bonds, the Bank may issue floaters, step-ups/downs, zero-coupons and other types of bonds. Bonds are issued and distributed daily through negotiated or competitively bid transactions with approved underwriters or selling group members.

The Bank receives 100 percent of the proceeds of a bond issued via direct negotiation with underwriters of FHLB debt when it is the only FHLB involved in the negotiation; the Bank is the sole FHLB that is primary obligor on the bond in those cases. When the Bank and one or more other FHLBs jointly negotiate the issuance of a bond directly with underwriters, the Bank receives the portion of the proceeds of the bond agreed upon with the other FHLBs; in those cases, the Bank is primary obligor for the pro-rata portion of the bond based on proceeds received. The majority of the Bank’s bond issuance is conducted via direct negotiation with underwriters of the FHLB bonds, some with and some without participation by other FHLBs.

The Bank may also request specific bonds to be offered by the Office of Finance for sale via competitive auction conducted with underwriters in a bond selling group. One or more other FHLBs may request amounts of the same bonds to be offered for sale for their benefit via the same auction. The Bank may receive from zero percent to 100 percent of the proceeds of the bonds issued via competitive auction depending on: the amount and cost for the bonds bid by underwriters; the maximum cost the Bank or other FHLBs participating in the same issue, if any, are willing to pay for the bonds; and guidelines for allocation of the bond proceeds among multiple participating FHLBs administered by the Office of Finance.

The Bank also participates in the Global Issuances Program. The 5-year and 10-year Global Issuances Program commenced in 2002 through the Office of Finance with the objective of providing funding to FHLBs at lower interest costs than consolidated bonds issued through the Tap program or Medium Term Note program. Debt issued under the Global Issuances Program has resulted in lower interest costs than the Tap program or Medium Term Note program because issuances occur less frequently, are larger in size and are placed by dealers to investors via a syndication process.

The Bank has principally utilized the Global Issuances Program as a source of 5-year and 10-year funding for the MPF Program. The Bank also has obtained funding in excess of its MPF Program requirements to facilitate the program’s objective of obtaining lower interest costs. In particular, the Bank historically has been the primary obligor on any debt issued under this program for which another FHLB has not requested funding in order to facilitate larger sized offerings at lower interest rates. The Bank was able to obtain excess funding due to its level of capital during 2005, 2004, 2003 and 2002, while remaining within its leverage limit requirements. Excess funding at the time of issuance was used to purchase government agency investment securities classified as either available-for-sale when used to mitigate the risk of participating in the program by economically hedging the interest rate risk associated with the debt issued or trading when used for liquidity purposes to facilitate future funding of MPF Loans, advances or other investment securities. For the reporting period beginning 2001 through the current reporting period, all 12 of the FHLBs have participated in the Global Issuance Program.

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In 2005, 2004 and 2003 the Bank recognized gains on the extinguishment of consolidated obligations along with losses on the sale of available for sale securities. In effect, the Bank bought non-FHLB government agency securities to economically hedge consolidated obligations. The Bank sold such securities to fund the transfer of consolidated obligations. As a result, the Bank recognized losses that economically limited any gain on extinguishment. The majority of the gains were a result of extinguishments related to consolidated obligations issued under the Global Issuances Program that were transferred to other FHLBs. While debt transfers are done primarily with respect to global notes, any consolidated obligation on the balance sheet is a potential candidate for debt transfer and the Bank does transfer non-global issues. The Bank considers such transfers at the request of another FHLB and accommodates such requests on a case-by-case basis. The Bank also occasionally proposes debt transfers to other FHLBs as an alternative to Medium Term Note or Tap issuances. The Bank is not obligated to provide funding to other FHLBs. The transfer of the Bank’s consolidated obligations to other FHLBs is predicated on whether such transfers make economic sense to the Bank. All debt transfers, global or otherwise, must fit within the overall asset-liability management, income, and risk-management objectives of the Bank. As a result, any gains or losses related to debt transfer activity are not driven by the funding needs of other FHLBs. For the reporting period beginning 2001 through the current reporting period, 11 of the 12 FHLBs have assumed consolidated obligation liabilities from the Bank via debt transfers.

The gains from extinguishment resulted from increases in interest rates between the time the consolidated obligations were issued and the time they were subsequently extinguished. The losses from sales of available-for-sale securities resulted from increases in interest rates between the time the non-FHLB government agency securities were purchased and the time the securities were sold. Historically, approximately 30% of the debt issued under the Global Issuances Program was hedged economically with non-FHLB government agency securities, and approximately 45% of the debt was hedged with interest rate swaps that were accounted for under SFAS 133. This portion of debt was hedged at the same time the debt was issued. The hedge was terminated at the time of extinguishment and limited the amount of any gain recognized upon extinguishment.

Despite the fact that the Bank may recognize gains on the extinguishment of debt, assuming consolidated obligations from the Bank through the debt transfer process may be more economical and/or more flexible to other FHLBs than issuing bonds directly in the market. The Bank prices its consolidated obligations transferred to other FHLBs at rates that are competitive with, or lower in cost than the Tap program, or Medium Term Note program and may transfer consolidated obligations at fair value throughout the day and at smaller increments, unlike the Tap program. The Tap auction is only available once a day and at minimum funding increments of $5 million.

Consolidated Obligation Discount Notes

The FHLBs also sell consolidated obligation discount notes (“discount notes”) to provide short–term funds for advances to members for seasonal and cyclical fluctuations in savings flows and mortgage financing, short-term investments, and variable-rate and putable or convertible advance programs. These securities have maturities up to 360 days and are sold through a consolidated obligation discount-note selling group and through other authorized securities dealers. Discount notes are sold at a discount and mature at par.

On a daily basis, the Bank may request specific amounts of discount notes with specific maturity dates to be offered by the Office of Finance at a specific cost for sale to underwriters in the discount note selling group. One or more other FHLBs may also request amounts of discount notes with the same maturities to be offered for sale for their benefit the same day. The Office of Finance commits to issue discount notes on behalf of the participating FHLBs when underwriters in the selling group submit orders for the specific discount notes offered for sale. The Bank may receive from zero to 100% of the proceeds of the discount notes issued via this sale process depending on: the maximum costs the Bank or other FHLBs participating in the same discount notes, if any, are willing to pay for the discount notes; the amount of orders for the discount notes submitted by Underwriters; and guidelines for allocation of discount note proceeds among multiple participating FHLBs administered by the Office of Finance.

Twice weekly, the Bank may also request specific amounts of discount notes with fixed maturity dates ranging from four weeks to 26 weeks to be offered by the Office of Finance for sale via competitive auction conducted with underwriters in the discount note selling group. One or more FHLBs may also request amounts of those same discount notes to be offered for sale for their benefit via the same auction. The Bank may receive from zero to 100% of the proceeds of the discount notes issued via competitive auction depending on the amounts and costs for the discount notes bid by the underwriters and guidelines for allocation of discount note proceeds among multiple participating FHLBs administered by the Office of Finance. The majority of the Bank’s issuance of discount notes is conducted via the twice weekly auctions.

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1.4 Use of Interest Rate Derivatives

The Bank uses interest rate derivatives, as part of its interest rate risk management and funding strategies to reduce identified risks inherent in the normal course of business. Interest rate derivatives (herein “derivatives”) include interest rate swaps (including callable swaps and putable swaps), swaptions, interest rate cap and floor agreements, and futures and forward contracts.

The Finance Board’s regulations, its Financial Management Policy, and the Bank’s Asset/Liability Management Policy all establish guidelines for the Bank’s use of derivatives. These regulations and policies prohibit trading in derivatives for profit and any other speculative use of these instruments. They also limit the amount of credit risk allowable from derivatives.

The Bank primarily uses derivatives to manage its exposure to changes in interest rates. The goal of the Bank’s interest rate risk management strategy is not to eliminate interest rate risk, but to manage it within appropriate limits. One key way the Bank manages interest rate risk is to acquire and maintain a portfolio of assets and liabilities, which, together with their associated derivatives, are reasonably matched with respect to the expected maturities or repricings of the assets and liabilities.

The Bank may also use derivatives to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments (like advances and outstanding bonds) to achieve risk management objectives. From time to time, the Bank may also use derivatives to act as an intermediary between member institutions and a third-party counterparty for the members own risk management activities. At September 30, 2005 and December 31, 2004 and 2003, the total notional amount of the Bank’s outstanding derivatives was $47.2 billion, $46.2 billion and $53.7 billion, respectively. The contractual or notional amount of a derivative is not a measure of the amount of credit risk from that transaction. The notional amount serves as a basis for calculating periodic interest payments or cash flows.

The Bank is subject to credit risk in all derivatives transactions because of the potential nonperformance by the derivative counterparty. The Bank reduces this credit risk by executing derivatives transactions only with highly rated financial institutions. In addition, the legal agreements governing its derivatives transactions require the credit exposure of all derivative transactions with each counterparty to be netted and generally require each counterparty to deliver high quality collateral to the Bank once a specified unsecured net exposure is reached. At September 30, 2005 and December 31, 2004 and 2003, the maximum credit exposure of the Bank was approximately $192.3 million, $153.5 million and $454.3 million, respectively; after delivery of required collateral the unsecured net credit exposure was approximately $3.6 million, $2.9 million and $17.4 million, respectively.

The market risk of derivatives is measured on a portfolio basis, taking into account the entire balance sheet and all derivatives transactions. The market risk of the derivatives and the hedged items is included in the measurement of the Bank’s duration gap. The Bank’s duration gap was 1.28 months, 0.23 months and 1.49 months at September 30, 2005 and December 31, 2004 and 2003, respectively. See “Item 2.3—Risk Management—Quantitative and Qualitative Disclosures about Market Risk” for further discussion.

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1.5 Regulations

Capital, Capital Rules and Dividends

Current Capital Rules

The Gramm-Leach-Bliley Act of 1999 (“GLB Act”) requires the Bank to create a new capital structure. Until such time as the Bank fully implements a new capital plan, the pre-GLB Act capital rules remain in effect. In particular, the FHLB Act requires members to purchase capital stock equal to the greater of one percent of their mortgage-related assets at the most recent calendar year-end, or five percent of outstanding advances from the Bank. Members may hold capital stock in excess of the foregoing statutory requirement (“voluntary capital stock”). Although Finance Board regulations give the Bank discretion to redeem at par value any voluntary capital stock, on October 18, 2005, the Bank’s Board of Directors discontinued redemptions of voluntary stock for a period of time in order to ensure an adequate capital base for the Bank. See “Item 2.2—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Regulatory Agreement and Related Actions.” Members are permitted to sell capital stock to other members at par value with the Bank’s approval. Capital stock outstanding under the pre-GLB Act capital rules is redeemable at the option of a member on six months written notice of withdrawal from membership, provided that the Bank is in compliance with its regulatory capital requirements. For a further discussion of the Bank’s regulatory capital requirements and the Bank’s obligations under its Written Agreement with the Finance Board see, “Item 2.2—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Regulatory Agreement and Related Actions.”

GLB Act New Capital Structure

The GLB Act authorizes the Bank to have two classes of capital stock and each class may have sub-classes. Class A capital stock is conditionally redeemable on six months’ written notice from the member and Class B capital stock is conditionally redeemable on five years’ written notice from the member. The GLB Act made membership voluntary for all members. Members that withdraw from membership may not reapply for membership for five years.

The GLB Act and implementing Finance Board final rule define total capital for regulatory capital adequacy purposes for the Bank as the sum of the Bank’s permanent capital, plus the amounts paid-in by its members for Class A capital stock; any general loss allowance, if consistent with generally accepted accounting principles in the United States of America (“GAAP”) and not established for specific assets; and other amounts from sources determined by the Finance Board as available to absorb losses. The GLB Act defines permanent capital for the Bank as the amount paid-in for Class B capital stock, plus the amount of the Bank’s retained earnings, as determined in accordance with GAAP.

Under the GLB Act and the implementing final rule, the Bank is subject to risk-based capital rules under its capital plan when it is fully implemented. Only permanent capital, as previously defined, can satisfy the risk-based capital requirement. In addition, the GLB Act specifies a 5% minimum leverage ratio based on total capital, which includes a 1.5 weighting factor applicable to permanent capital, and a 4% minimum capital ratio that does not include the 1.5 weighting factor applicable to the permanent capital. Moreover, the members’ right to redeem is conditional on the member maintaining its minimum capital requirement and the Bank maintaining its leverage requirement. The Bank may not redeem or repurchase any of its capital stock without Finance Board approval if the Finance Board or the Bank’s Board of Directors determines 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, even if the Bank is in compliance with its minimum capital requirements.

The Finance Board’s final rule implementing a new capital structure for the Bank includes risk-based and leverage capital requirements, different classes of capital stock that the Bank may issue and the rights and preferences that may be associated with each class of capital stock. The Finance Board originally approved the capital plan of the Bank on June 12, 2002. However, the Bank is in the process of re-assessing its capital plan and may submit certain amendments to the capital plan to the Finance Board. Until such time as the Bank fully implements the new capital regulations, the current capital rules remain in effect.

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Dividends

Under Finance Board regulations, the Bank may pay dividends from current income or retained earnings. The Bank’s Board of Directors may declare and pay dividends in either cash or capital stock. The Bank may not pay dividends if it fails to satisfy certain liquidity requirements under applicable Finance Board regulations. The Finance Board’s regulations require that the Bank maintain eligible high quality assets in an amount equal to or greater than the deposits received from members. See “Item 1.2—Business Segments—Deposits” for a description of these assets. In addition, the Bank must hold contingency liquidity in an amount sufficient to meet its liquidity needs for at least five business days without access to the consolidated obligation debt markets.

As described in Note 14 of the December 31, 2004 Financial Statements and Notes, the Bank adopted a Business and Capital Management Plan for 2005-2007 as required under the terms of the Bank’s Written Agreement with the Finance Board. In accordance with the plan, on March 15, 2005, the Bank’s Board of Directors adopted a new dividend policy requiring the dividend payout ratio in a given quarter to not exceed 90% of adjusted core net income for that quarter. For these purposes, adjusted core net income is defined as the Bank’s GAAP net income, less

(i) fees for prepayment of advances and gains or losses on termination of associated derivative contracts and other hedge instruments; and

(ii) gains or losses on debt transfer transactions including gains or losses on termination of associated derivative contracts and other hedge instruments; and

(iii) significant non-recurring gains or losses related to restructuring of the Bank’s business

plus an amount equal to the sum of

(i) for each prepayment of advances after October 1, 2004, the net amount of prepayment fee and gain or loss on termination of associated derivative contracts and other hedge instruments divided by the number of quarters of remaining maturity of the prepaid advance if it had not been prepaid; and

(ii) for each debt transfer transaction after October 1, 2004, the net gain or loss on the transfer transaction including termination of associated derivative contracts and other hedge instruments divided by the number of quarters of remaining maturity of the transferred debt instrument if it had not been transferred.

The Bank entered into an amendment to its Written Agreement on October 18, 2005. Under the amendment, the Bank must submit a revised retained earnings and dividend policy and updated business plan strategies to the Finance Board for approval no later than December 15, 2005. Until the Bank’s registration of its equity securities under the Securities and Exchange Act of 1934 becomes effective and a revised retained earnings and dividend policy and updated business plan strategies have been approved by the Finance Board, the Bank’s Board of Directors may declare a dividend only following consultation with, and approval by, the Finance Board. See “Item 2.2—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Regulatory Agreement and Related Actions.”

Regulatory Oversight

The Bank is supervised and regulated by the Finance Board, which is an independent agency in the executive branch of the U.S. Government. Under the FHLB Act, the Finance Board is to ensure that the Bank 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 governing the operations of the Bank. The Finance Board is governed by a five-member board; four board members are appointed by the President of the United States, with the advice and consent of the Senate, to serve seven-year terms. The fifth member of the board is the Secretary of HUD or the Secretary’s designee. The Finance Board’s operating expenses are funded by assessments on the FHLBs; no tax dollars or other appropriations support the operations of the Finance Board or the Bank. To assess the safety and soundness of the Bank, the Finance Board conducts at least annual, on-site examinations of the Bank, as well as periodic on-site reviews. Additionally, the Bank is required to submit monthly financial information on the condition and results of operations of the Bank to the Finance Board.

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The Government Corporations Control Act, to which the Bank is subject, provides that before a government corporation issues and offers obligations to the public, the Secretary of the Treasury shall prescribe the form, denomination, maturity, interest rate, and conditions of the obligations; the way and time issued; and the selling price. The FHLB Act also authorizes the Secretary of the Treasury, at his or her discretion, to purchase consolidated obligations up to an aggregate principal amount of $4 billion. No borrowings under this authority have been outstanding since 1977. The U.S. Department of the Treasury receives a copy of the Finance Board’s annual report to the Congress, monthly reports reflecting securities transactions of the Bank, and other reports reflecting the operations of the Bank.

On June 23, 2004, the Finance Board unanimously adopted a rule requiring each of the FHLBs to voluntarily register a class of securities with the Securities and Exchange Commission (“SEC”) under section 12(g) of the Securities and Exchange Act of 1934. The Finance Board decision required an initial filing by each FHLB of a registration statement by June 30, 2005, and for each FHLB to ensure that the SEC declared the registration statement effective by August 29, 2005. The Finance Board issued an Advisory Bulletin requiring FHLBs that were unable to meet the August 29, 2005 deadline to make weekly progress reports to their Finance Board examiner. Once registered, the Bank will be required to file quarterly, annual and other periodic reports with the SEC as well as comply with the provisions of the Sarbanes-Oxley Act.

On June 30, 2004, the Bank entered into a Written Agreement with the Finance Board and subsequently amended the Written Agreement on October 18, 2005. For a description of the Written Agreement, see “Item 2.2—Management’s Discussion and Analysis of Financial Condition and Results of Operation—Overview—Regulatory Agreement and Related Actions.”

Regulatory Audits

The Bank has an internal audit department and the Bank’s Board of Directors has an audit committee. In addition, an independent public accounting firm audits the annual financial statements of the Bank. The independent public accounting firm conducts these audits following Generally Accepted Auditing Standards of the United States of America, Government Auditing Standards issued by the U.S. Comptroller General, and Auditing Standards No. 1 of the Public Company Accounting Oversight Board. The FHLBs, the Finance Board and the Congress all receive the audit reports. The Bank must submit annual management reports to the Congress, the President of the United States, the Office of Management and Budget, and the Comptroller General. These reports include a statement of financial condition, statement of operations, statement of cash flows, a statement of internal accounting and administrative control systems, and the report of the independent public auditors on the financial statements.

The Comptroller General has authority under the FHLB Act to audit or examine the Finance Board and the Bank and to decide the extent to which it fairly and effectively fulfills the purposes of the FHLB Act. Furthermore, the Government Corporations 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 the results and any recommendations must be reported to the Congress, the Office of Management and Budget, and the FHLBs in question. The Comptroller General may also conduct a separate audit of any financial statements of the Bank.

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1.6 Taxation

The Bank is exempt from all federal, state and local taxation except for real estate property taxes, which are a component of the Bank’s lease payments for space or on real estate owned by the Bank as a result of foreclosure on MPF Loans.

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1.7 REFCORP and AHP Assessments

The Bank is obligated to make payments to REFCORP and set aside funds for AHP as described in “Item 2.2— Management’s Discussion and Analysis of Financial Condition and Results of Operation—Expenses.” Combined assessments for REFCORP and AHP are the equivalent of approximately a 26.5% effective rate on Income before Assessments for the nine months ended September 30, 2005 and 2004 and for the years ended December 31, 2004, 2003 and 2002. The combined REFCORP and AHP assessments were $71.4 million and $108.3 million for the nine months ended September 30, 2005 and 2004 and $132.1 million, $157.7 million, and $73.9 million for the years ended December 31, 2004, 2003 and 2002, respectively.

The table below sets forth the Bank’s AHP and REFCORP assessments, cash disbursements and account balances for the specified periods:

	For the Nine Months Ended September 30,						For the Years Ended December 31,
(Dollars in thousands)	2005			2004			2004			2003			2002
AFFORDABLE HOUSING PROGRAM
Beginning balance	$	82,456		$	72,062		$	72,062		$	45,195		$	37,084
Period assessments		22,010			33,417			40,744			48,523			22,743
Cash disbursements		(20,441	)		(22,440	)		(30,350	)		(21,656	)		(14,632	)
Ending balance	$	84,025		$	83,039		$	82,456		$	72,062		$	45,195
REFCORP:
Beginning balance	$	42,487		$	33,218		$	33,218		$	11,674		$	18,655
Period assessments		49,388			74,910			91,395			109,164			51,175
Cash disbursements		(78,347	)		(60,065	)		(82,126	)		(87,620	)		(58,156	)
Ending balance	$	13,528		$	48,063		$	42,487		$	33,218		$	11,674

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1.8 Competition

Traditional Member Finance

The Bank competes with other suppliers of wholesale funding, both secured and unsecured. Demand for the Bank’s advances is primarily affected by the cost of other available sources of liquidity for its members, including customer deposits held by its members. Other suppliers of wholesale funding may include investment banks, commercial banks, and other FHLBs when our members’ affiliated institutions are members of other FHLBs. (Under the FHLB Act and Finance Board regulations, affiliated institutions may be members of different FHLBs.) Smaller members may have limited access to alternative funding sources, such as repurchase agreements, while larger members may have access to a wider range of funding sources such as repurchase agreements, brokered deposits, commercial paper and other funding sources. Larger members also may have independent access to the national and global financial markets. The availability of alternative funding sources to members can significantly influence the demand for the Bank’s advances and can vary as a result of a number of factors, including, among others, market conditions, members’ creditworthiness, and availability of collateral. The Bank competes for advances on the basis of the total cost of its products to its members, which includes the rates the Bank charges as well as the dividends it pays.

Mortgage Partnership Finance^® Program

The Bank competes for the purchase of mortgage loans with other secondary market participants, such as Fannie Mae and Freddie Mac. In addition, the Bank competes with other FHLBs that offer the Mortgage Purchase Program, a competing AMA program, to the extent that the Bank’s members have affiliates that are members of these other FHLBs. The Bank primarily competes on the basis of transaction structure, price, products, and services offered. The participation of FHLBs in the Mortgage Purchase Program may have implications on the MPF Program. Specifically, the competition for mortgage loans between the two programs may impact the amount of mortgage loans acquired and the purchase price for such loans. In this regard, the Bank faces pipeline and profit margin risk as a result of its competition with the Mortgage Purchase Program as well as other Acquired Member Asset programs. Because of the somewhat extensive infrastructure and processes required by the Bank’s members to participate in its MPF Program, the application approval process for this type of program can be relatively long. For example, the Bank requires an applicant to demonstrate ability and staff to originate and service industry accepted investment standards for mortgage loans. These infrastructure and process requirements can be disincentives to prospective participating members, as many of the Bank’s smaller members lack the resources to participate in more than one program.

Multi-district memberships are not currently permitted in the System so the Bank generally does not compete for MPF Loans from members of other MPF Banks. However, the Bank acquires participation interests in MPF Loans from non-district PFIs through other MPF Banks. Affiliated entities under a parent holding company are only permitted to access the MPF Program through one MPF Bank. However, it is possible that a PFI with an affiliate in another MPF Bank district could choose to terminate its participation in the MPF Program and then access the MPF Program through its affiliate. Other than to determine PFI eligibility, the Bank does not require members to report information concerning affiliates that may be members of other FHLBs. The eligibility requirements for holding company affiliates do not apply to the Mortgage Purchase Program but pertain solely to participation in the MPF Program. The Bank does not participate in the Mortgage Purchase Program, which may include member participants that are affiliates of PFIs participating in the MPF Program.

Debt Issuance

The Bank competes with Fannie Mae, Freddie Mac, and other GSEs, including other FHLBs, as well as corporate, sovereign and supranational entities, including the World Bank, 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 costs or lower amounts of debt issued at the same cost than otherwise would be the case. In addition, the availability and cost of funds raised through issuance of certain types of unsecured debt may be adversely affected by regulatory initiatives. Although the available supply of funds from the FHLBs’ debt issuances has kept pace with the funding requirements of the Bank’s members, there can be no assurance that this will continue to be the case. The sale of callable debt and the simultaneous execution of callable interest-rate swaps that mirror the debt has been an important source of competitive funding for the Bank. The Bank also relies heavily on the callable debt markets to reduce the interest rate exposure inherent in its mortgage-based assets. Consequently, the availability of markets for callable debt and interest-rate derivatives may be an important determinant of the Bank’s relative cost of funds and ability to manage interest rate risk. Due to the higher relative risk of this type of financial instrument, there is a more limited investor market relative to the supply generated from the FHLBs and

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other GSEs, including Fannie Mae or Freddie Mac. There is no assurance that the current breadth and depth of these markets will be sustained.

General Considerations

On June 30, 2004 the Bank entered into a Written Agreement with the Finance Board. In accordance with the agreement, the Bank has submitted to and received approval from the Finance Board of its Business and Capital Management Plan for 2005 - 2007. Under the Business and Capital Management Plan, the Bank plans to implement actions that are likely to result in changes from its historic growth pattern. There is no assurance as to what impacts the Bank’s Business and Capital Management Plan will have on the Bank’s products, debt issuance or its competitive position.

On October 18, 2005, the Bank’s Board of Directors discontinued the redemption of the Bank’s voluntary stock for a period of time in accordance with Finance Board regulations. Under an amendment to the Written Agreement also entered into on October 18, 2005, the Bank’s minimum regulatory capital ratio is reduced from 5.1% to 4.5%. The amendment also requires the Bank to maintain minimum total regulatory capital stock of $3.978 billion defined as the total amount of capital stock outstanding on October 18, 2005, including stock classified as mandatorily redeemable under SFAS 150, plus the amount of the stock dividend approved based on the results of the third quarter of 2005. In order to address the capital concerns that led to the discontinuance of voluntary stock redemptions, the Bank will update strategies to increase earnings and capital in its Business and Capital Management Plan, which will be submitted to the Finance Board no later than December 15, 2005.

For a further discussion of the Bank’s Business, Capital Management Plan and Written Agreement, see “Item 2.2—Management’s Discussion and Analysis of Financial Condition and Results of Operation—Overview—Regulatory Agreement and Related Actions.”

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1. 9 Employees

As of October 31, 2005, the Bank had 427 full-time equivalent employees.

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Item 2. Financial Information.

2.1	Selected Financial Data	51
2.2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	54
	Factors That May Affect Future Results	61
	Liquidity and Capital Resources	68
	Results of Operations	81
	Operating Segment Results	90
	Critical Accounting Policies and Estimates	95
2.3	Risk Management	98

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2.1 Selected Financial Data

	For the Nine Months Ended September 30,						For the Years Ended December 31,
(Dollars in thousands)	2005			2004			2004			2003			2002			2001		2000
Statements of Income
Net interest income before provision for credit losses on mortgage loans	$	386,809		$	548,265		$	704,343		$	793,826		$	522,893		$	223,664	$	212,243
Provision for credit losses on mortgage loans		—			—			—			—			2,217			1,810		906
Net interest income after provision for credit losses on mortgage loans		386,809			548,265			704,343			793,826			520,676			221,854		211,337
Total other income (loss)		(28,804	)		(98,792	)		(127,131	)		(113,179	)		(184,378	)		45,207		523
Total other expense		89,113			82,955			121,056			86,430			57,681			43,931		36,052
Income before assessments		268,892			366,518			456,156			594,217			278,617			223,130		175,808
AHP assessment		22,010			33,417			40,744			48,523			22,743			18,264		14,355
REFCORP assessment		49,388			74,910			91,395			109,164			51,175			41,080		32,299
Income before cumulative effect of change in accounting principle		197,494			258,191			324,017			436,530			204,699			163,786		129,154
Cumulative effect of change in accounting principle 1		—			41,441			41,441			—			—			573		—
Net income	$	197,494		$	299,632		$	365,458		$	436,530		$	204,699		$	164,359	$	129,154
Statements of Condition
Liquid assets 2	$	7,315,303		$	7,719,591		$	5,148,370		$	5,445,229		$	3,828,737		$	3,216,994	$	2,446,879
Investments		7,662,729			7,968,919			8,850,906			6,538,728			9,339,756			7,108,249		5,779,596
Advances		24,233,015			25,124,900			24,191,558			26,443,063			24,945,112			21,901,609		18,462,288
Mortgage loans held in portfolio, net of allowance for loan losses on mortgage loans		43,231,999			47,942,757			46,920,551			47,599,731			26,185,618			16,570,308		8,102,680
Total assets		83,054,343			89,478,326			85,708,637			86,941,987			65,045,907			49,194,194		35,394,574
Total deposits		1,307,516			1,638,147			1,223,752			2,348,071			3,047,540			1,760,216		2,010,132
Securities sold under agreements to repurchase		1,200,000			1,200,000			1,200,000			1,200,000			1,399,000			800,000		—
Total consolidated obligations, net 3		75,358,293			80,227,103			77,747,276			77,927,450			55,770,001			43,276,955		30,907,644
Accrued interest payable		630,120			615,323			513,993			502,327			400,931			446,532		664,059
AHP payable		84,025			83,039			82,456			72,062			45,195			37,084		31,979
REFCORP payable		13,528			48,063			42,487			33,218			11,674			18,655		8,696
Total liabilities		78,813,020			84,786,206			81,082,778			82,368,547			61,679,760			46,692,280		33,693,305
Total Capital		4,241,323			4,692,120			4,625,859			4,573,440			3,366,147			2,501,914		1,701,269

¹ Effective January 1, 2004, the Bank changed its method of accounting for premiums and discounts and other deferred loan origination fees under SFAS 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” As a result of implementing the change in accounting for amortization and accretion from the retrospective method to the contractual maturity method, the Bank recorded a cumulative effect of a change in accounting principle effective to January 1, 2004 which resulted in an increase to earnings excluding assessments of $41,441,000. The Bank adopted SFAS 133 as of January 2001 and recorded a net loss of $4.9 million on securities held at fair value and a $63 million net realized and unrealized gain on derivatives and hedging activities, including the transition adjustment of $573 thousand.

² Liquid assets include cash and due from banks, securities purchased under agreements to resell and Federal funds sold.

³ The Bank is jointly and severally liable for the consolidated obligations of all the FHLBs. The total consolidated obligations for all FHLBs (in billions) were $920.4, $869.2, $759.5, $680.7, $637.3, and $614.1 as of September 30, 2005 and December 31, 2004, 2003, 2002, 2001, and 2000 respectively. See “Note 13—Consolidated Obligations” to the Bank’s 2004 Annual Financial Statements and Notes for further discussion on the joint and several liability.

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Computation of Ratio of Earnings to Fixed Charges

	For the Nine Months Ended September 30,				For the Years Ended December 31,
(Dollars in thousands)	2005		2004		2004		2003		2002		2001		2000
Income before cumulative effect of change in accounting principle	$	197,494	$	258,191	$	324,017	$	436,530	$	204,699	$	163,786	$	129,154
Cumulative effect of change in accounting principle		—		41,441		41,441		—		—		573		—
Net Income	$	197,494	$	299,632	$	365,458	$	436,530	$	204,699	$	164,359	$	129,154
Total Assessments		71,398		108,327		132,139		157,687		73,918		59,344		46,654
Interest portion of rental expense 1		473		434		707		598		496		418		443
Interest expense on all indebtedness		2,228,805		1,823,133		2,506,181		1,939,283		1,757,406		1,823,143		1,902,783
Earnings, as adjusted	$	2,498,170	$	2,231,526	$	3,004,485	$	2,534,098	$	2,036,519	$	2,047,264	$	2,079,034
Fixed Charges:
Interest portion of rental expense 1	$	473	$	434	$	707	$	598	$	496	$	418	$	443
Interest expense on all indebtedness		2,228,805		1,823,133		2,506,181		1,939,283		1,757,406		1,823,143		1,902,783
Total Fixed Charges	$	2,229,278	$	1,823,567	$	2,506,888	$	1,939,881	$	1,757,902	$	1,823,561	$	1,903,226
Ratio of Earnings to Fixed Charges		1.12 : 1		1.22 : 1		1.20 : 1		1.31 : 1		1.16 : 1		1.12 : 1		1.09 : 1

¹ Interest component of rental expense is 20%, which approximates the imputed interest factor of the operating lease.

Key Ratios

	For the Nine Months Ended September 30,				For the Years Ended December 31,
	2005		2004 1		2004 1		2003		2002		2001 1		2000
Net income to average assets (annualized)	0.31	%	0.44	%	0.41	%	0.57	%	0.36	%	0.42	%	0.40	%
Return on equity (annualized)	5.88	%	8.41	%	7.70	%	10.65	%	6.92	%	8.13	%	8.52	%
Total average equity to average assets	5.27	%	5.24	%	5.26	%	5.33	%	5.24	%	5.15	%	4.72	%

¹ Net income for years 2004 and 2001 includes the cumulative effect of change in accounting principle, for SFAS 91 and SFAS 133, respectively.

Forward-Looking Information

Statements contained in this report, including statements describing the objectives, projections, estimates, or future predictions of the Bank may be “forward-looking statements.” These statements may use forward-looking terminology, such as “anticipates”, “believes”, “expects”, “could”, “estimates”, “may”, “should”, “will”, or their negatives or other variations of these terms. The Bank 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 or could affect the extent to which a particular objective, projection, estimate, or prediction is realized.

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

• changes in the level of interest rates, housing prices, employment rates and the general economy;

• the size and volatility of the residential mortgage market;

• demand for advances 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 the Bank’s members and counterparties to derivative financial instruments and similar agreements which could result from the effects of, and changes in, various monetary or fiscal policies and regulations including those determined by the Federal Reserve Board and the Federal Deposit Insurance Corporation;

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• the effect the Bank’s Written Agreement, as amended, with the Federal Housing Finance Board and the discontinuance of voluntary stock redemptions for a period of time, may have on its operations as more fully described in “Item 2—Financial Information—Management’s Discussion and Analysis of Financial Condition and Results of Operation—Overview—Regulatory Agreement and Related Actions”;

• political events, including legislative, regulatory, judicial, or other developments that affect the FHLBs, their members, counterparties, and/or investors in the consolidated obligations of the FHLBs such as changes in the Federal Home Loan Bank Act of 1932, as amended or Finance Board regulations that affect the Bank’s operations and regulatory oversight;

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

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

• loss of large members including through mergers and similar activities;

• changes in investor demand for consolidated obligations and/or the terms of derivative financial instruments and similar agreements, including without limitation, changes in the relative attractiveness of consolidated obligations as compared to other investment opportunities;

• the availability, from acceptable counterparties, of derivative financial instruments of the types and in the quantities needed for risk management purposes;

• volatility of reported results due to changes in fair value of certain instruments/assets;

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

• the Bank’s ability to identify, manage, mitigate and/or remedy internal control weaknesses and other operational risks;

• the Bank’s ability to implement business process improvements;

• risk of loss arising from litigation filed against one or more of the FHLBs;

• significant business disruptions resulting from natural or other disaster, acts of war or terrorism;

• the impact of new accounting standards, including the timely development of supporting systems; and

• inflation/deflation.

The Bank does not undertake to update any forward-looking statement in this document, whether as a result of new information, future events or changed circumstances.

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

Overview

Factors that impact the Bank’s business

Many factors impact the Bank’s business which include the mortgage spreads in the marketplace. As mortgage spreads widen, new assets can be added to the balance sheet at higher spreads. The Bank’s debt spreads also drive performance. As the Bank’s debt issuance costs compared to the LIBOR curve decline, the Bank is able to create higher spreads for the balance sheet.

The general level of interest rates also impacts net income. When yield curves steepen, the Bank’s net income tends to rise. The Bank’s business runs on lower spreads than other financial institutions so that a significant portion of the Bank’s net income comes from the investment of its capital stock and retained earnings. As the capital investment rate rises, net income rises.

Growth in the economy and the Bank’s members’ need for funding drives member demand for advances from the Bank. When the economy is growing, members tend to utilize Bank advances as a funding source. In general, a flattening U.S. Treasury yield curve and a tightening asset spread trend may place pressure on the Bank’s financial performance. This pressure may be mitigated somewhat through improved debt issuance levels on a spread basis and reduced hedge costs as a result of generally lower levels of interest rate volatility.

The Bank’s restrictions on growing the balance sheet, which are part of the Written Agreement with the Finance Board, may impact performance. If rates decline and the mortgage market expands, the Bank may be limited by the 10% annual growth limit on AMA assets on the Bank’s balance sheet. The reduction in the voluntary capital stock ratio may limit the amount of asset growth.

Regulatory Agreement and Related Actions

On June 30, 2004, the Bank entered into a Written Agreement with the Finance Board in order to address issues identified in the Finance Board’s 2004 examination of the Bank. Under the Written Agreement the Bank agreed to implement changes to enhance the Bank’s risk management, capital management, governance and internal control practices. On October 18, 2005, the Bank amended its Written Agreement.

Pursuant to the Written Agreement, as amended, the Bank is required to maintain a regulatory capital ratio of 4.5%. In addition, until amended or terminated, the amendment also requires the Bank to maintain minimum total regulatory capital stock of $3.978 billion, defined as the total amount of capital stock outstanding on October 18, 2005, including stock classified as mandatorily redeemable under SFAS 150, plus the amount of the stock dividend approved based on the results of the third quarter of 2005. Mandatorily redeemable capital stock under SFAS 150 and related dividends are considered capital stock for regulatory purposes. The Bank’s regulatory capital ratio on October 17, 2005, September 30, 2005 and December 31, 2004 was 5.1%, 5.3% and 5.6%, respectively, and the total regulatory capital stock outstanding as of October 31, 2005 was $3.979 billion. The Written Agreement also prohibits the Bank from increasing the aggregate net book value of its acquired member assets program (Mortgage Partnership Finance Program) greater than 10% per annum from the value on May 31, 2004. MPF assets declined since May 31, 2004 and the Bank remains in compliance with this restriction.

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Under the Written Agreement, the Bank also was required to engage independent outside consultants to report on the Bank’s (i) management and board oversight, (ii) risk management policies and practices, (iii) internal audit functions, and (iv) accounting, recordkeeping and reporting practices and controls. The initiatives resulting from the Written Agreement and consulting reviews are focused on (i) enhanced governance, including improved Board reporting, increased frequency and documentation of Board and Board-level committee meetings, and a restructuring of Board committees including the establishment of a Risk Management Committee; (ii) a substantial increase in risk management staff and enhanced infrastructure, the adoption of an enterprise risk management framework, improved market risk modeling, research and oversight capabilities and a materially enhanced risk assessment process; (iii) the recruitment of an experienced senior Internal Audit manager, the dedication of increased audit resources, and changes to audit methodology and practices; and (iv) adjustments to accounting policy, improvements in hedge accounting documentation and reporting, increased accounting staff and support and substantial enhancement of policies and procedures associated with the transfer of debt between the Bank and other FHLBs.

In accordance with the Written Agreement, the Bank adopted a Business and Capital Management Plan for 2005 – 2007 acceptable to the Finance Board. The plan sets forth commitments made by the Bank for the management of its operations, including the following:

• The Bank will continue complying with the terms of the Written Agreement until it is terminated.

• The Bank will manage a reduction of its voluntary capital stock ratio measured as a percent of regulatory capital (total capital stock plus retained earnings) to the following minimum targets:

December 31, 2005	53	%
December 31, 2006	48	%
December 31, 2007	43	%

• The Bank will delay implementation of a new capital structure until December 31, 2006, or until a time mutually agreed upon with the Finance Board. Also, the Bank will reevaluate the structure of its capital plan, originally approved by the Finance Board on June 12, 2002, and may propose amendments for approval by the Finance Board based on the review.

• As part of the continued development and evolution of the Mortgage Partnership Finance Program, the Bank will explore alternative methods of capitalizing and funding MPF assets including techniques to liquefy MPF assets, creating additional capacity for the Bank and other FHLBs.

• The Bank agreed to and adopted a new dividend policy effective March 15, 2005 requiring its dividend payout ratio in a given quarter not to exceed 90% of adjusted core net income for that quarter. See “Item 1.5—Regulations—Dividends.” Additional restrictions on dividends imposed under the amendment to the Written Agreement are described below.

On October 18, 2005, the Bank’s Board of Directors discontinued redemptions of voluntary stock for a period of time as permitted by the FHLB Act and Finance Board regulations. Although the Bank committed to a reduction of voluntary stock under its Business and Capital Management Plan for 2005—2007, year to date net redemptions through October 17, 2005 resulted in the Bank’s voluntary capital stock to regulatory capital ratio being reduced to 51%, which was 2% less than the amount called for by the end of 2005 under the plan. For the nine months ended September 30, 2005, voluntary capital stock decreased by $404.7 million and from October 1, 2005 through October 17, 2005 decreased by another $44.3 million. With the reduction in the dividend rate from an average of 6.125% paid in 2004 to 3.75% (annualized rate) to be paid in the fourth quarter 2005 (based upon third quarter 2005 results), the Bank expected the redemption rate to accelerate even more in the remaining months of 2005.

The discontinuance of voluntary stock redemptions may affect the Bank’s ongoing advance volumes as members will be unable to redeem capital stock in connection with the payoff of advances. When an institution pays off or pays down its outstanding advances, the capital stock in excess of the member’s required stock amount will be considered voluntary stock and will not be subject to redemption while the restriction on redemptions remains in place. Also, a stock redemption request in connection with a membership withdrawal is subject to the Bank’s regulatory capital requirements.

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The Bank’s dividends to members are subject to the Bank’s financial policies and the amendment to the Written Agreement requiring approval by the Finance Board’s Office of Supervision until the Bank completes the process of registering its capital stock under the Securities Exchange Act of 1934, and until a revised retained earnings and dividend policy has been approved by the Finance Board. When paid, stock dividends are voluntary stock and are not subject to redemption while the restriction on redemptions remains in place. Under the amendment to the Written Agreement, the Bank also agreed to submit by December 15, 2005, a revised retained earnings and dividend policy and updated business plan strategies to the Finance Board for approval.

The Bank is undertaking various actions to address the capital concerns that led to the discontinuance of voluntary capital stock redemptions and the amendment to the Written Agreement. In addition to the revised retained earnings and dividend policy and updated business plan strategies required by the amendment to the Written Agreement, the Bank is in the process of modifying its previously approved capital plan and will submit the revised plan to the Finance Board for approval.

The Bank’s Written Agreement has, and may continue to have, negative impacts on the Bank’s capital resources and results of operations, although the amendment of October 18, 2005 lowering the regulatory capital ratio from 5.1% to 4.5% may allow the Bank to reverse some but not all of the impact by allowing the Bank to make additional investments. Requirements to maintain higher ratios than the statutorily required 4.0% restricts the Bank’s ability to grow which may reduce the Bank’s earnings and returns on equity compared to what it would otherwise be able to earn in the absence of its Written Agreement. However, a lower regulatory capital ratio provides the Bank flexibility to grow its mortgage related assets and investment portfolios and fulfill funding and liquidity needs of members through offering advances. The Bank continues to experience increased operating expenses due to the increase in personnel as a result of infrastructure internal controls and process improvement initiatives resulting from the implementation of the Bank’s Written Agreement.

In accordance with the Bank’s Capital and Management Plan for 2005 – 2007, Bank management had preliminary discussions with the Finance Board, other FHLBs, external counsel and other third parties in order to explore risk transfer alternatives related to MPF Loans, including securitization. However, prior to entering into any new business activity, the Bank is required to file a notice with the Finance Board and receive the Finance Board’s approval to conduct that activity. The Bank has not submitted a new business activity notice to the Finance Board related to this issue.

The ability to securitize or sell MPF Loans would improve the Bank’s liquidity, while enhancing the Bank’s ability to assist PFIs in transferring mortgage loans. The Bank’s Written Agreement with the Finance Board restricts annual balance sheet growth of the Bank’s acquired member assets under the MPF Program to 10%, which could potentially restrict the Bank’s ability to meet PFI demand for the MPF Program. Accordingly, the ability to securitize or sell MPF Loans would provide the Bank with alternatives in meeting PFI demands.

The Bank has reviewed with the Finance Board staff the items under the Written Agreement completed by the Bank through June 1, 2005, which is the latest date of the Finance Board review. The Bank and the Finance Board staff have agreed upon the items remaining to be completed in order for the Bank to have completed the requirements of the Written Agreement. Although the Bank believes it is meeting its obligations under the terms of the Written Agreement, and the amendment thereto, the Bank expects the Finance Board to continue to monitor the Bank’s progress on completing open items and its ongoing execution of the Written Agreement, as amended.

Nine months Ended September 30, 2005 Highlights

Net income for the nine months ended September 30, 2005 decreased $102.1 million or 34.1% to $197.5 million from $299.6 million for the nine months ended September 30, 2004. This was primarily the result of increasing short term interest rates, which had the effect of decreasing the spreads between the interest rates the Bank earns on its assets, particularly advances, and the interest rates that the Bank pays on its debt; and the decline in average advances and mortgage loans outstanding. The nine months ended September 30, 2004 income included $41.4 million of a cumulative effect of change in accounting principle related to SFAS 91 when the Bank changed its method of accounting for deferred agent fees and premiums and discounts on mortgage loans to amortize such amounts on a constant effective yield over their contractual life.

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Average advances decreased $2.7 billion as compared to September 30, 2004 primarily because one member paid off more than $3 billion of its advances after it had merged with an out-of-district institution in 2004. The decrease in average advances volume was more than offset by an increase in yield and interest rates so that interest income from advances increased by $153.3 million for the nine months ended September 30, 2005 compared to the same period in 2004. Average mortgage loans held in portfolio decreased $2.9 billion, or 6.0%, compared to September 30, 2004, primarily due to a decline in fixed-rate mortgage loan activity as demand for adjustable rate mortgages increased. In addition, as the mortgage loan portfolio has paid down, the Bank used excess funds to increase its liquidity position to meet voluntary capital stock redemption requests and pay down consolidated obligations to maintain its regulatory capital ratio above the required minimum level. The decrease in average mortgage loans reduced mortgage interest income by $56.3 million, or 3.3%, for the nine months ended September 30, 2005 compared to the same period in 2004. Consequently, the Bank’s annualized return on capital was 5.88% for the nine months ended September 30, 2005, compared to 8.41% for the same period in 2004.

The Bank assesses impairment of the capitalized amount of internal-use computer software at least annually and sooner if a triggering event occurs. On October 18, 2005 the Bank amended its Written Agreement. As a result of this change in the regulatory environment, the Bank re-evaluated its business opportunities and strategies as it related to the MPF Program. The Bank determined that certain internal-use computer software had become impaired due to management’s decision to abandon software being developed to support a new line of business related to servicing. An impairment write-down of $10.4 million was identified and will be recognized in the fourth quarter of 2005.

Fiscal Year 2004 Highlights

Net income for the year ended December 31, 2004 (after a cumulative effect of change in accounting principle—see Note 2 in the December 31, 2004 Annual Financial Statements and Notes) decreased $71 million, or 16.3%, to $365.5 million from $436.5 million for the same period ended December 31, 2003. The decrease in net income was primarily attributable to:

• a $89.5 million decrease in net interest income to $704.3 million for the year ended December 31, 2004 from $793.8 million for the same period ended December 31, 2003, primarily due to a flattening of the yield curve between the fiscal years 2003 and 2004, reducing the Bank’s margins;

• a decrease of $60.4 million in net gain from early extinguishment of debt transferred to other FHLBs to $45.8 million for the year ended December 31, 2004 (offset by a loss of $25.2 million on associated sales of available-for-sale securities that hedged the transferred debt) from $106.3 million for the year ended December 31, 2003 (offset by a loss of $45.6 million on associated sales of available for sale securities that hedged the transferred debt, see “Liquidity and Capital Resources – Funding – Debt Transfer Activity” below);

• a $34.6 million increase in other expenses to $121.1 million for the year ended December 31, 2004 from $86.4 million for the same period ended December 31, 2003, primarily due to increased personnel (both employees and consultants) and systems (hardware and software) to support increased regulatory requirements for risk management, Sarbanes-Oxley compliance, and preparation for SEC registration by August 29, 2005.

These trends were partially offset by a decrease of $28.7 million in loss on trading securities to a loss of $27.9 million for the year ended December 31, 2004 from a loss of $56.6 million for the same year ended December 31, 2003. In addition, there was a cumulative effect of change in accounting principle of $41.4 million due to the change to a more preferable method of amortizing mortgage loan acquisition costs pursuant to SFAS 91.

Total assets were $85.7 billion at December 31, 2004, a decrease of $1.2 billion or 1.4%, from total assets of $86.9 billion at December 31, 2003. The decrease in total assets was primarily due to the Bank entering into a Written Agreement with the Finance Board, which restricted the annual on-balance sheet growth of its acquired member assets program (MPFProgram) to 10%. However, in connection with the Bank’s commitment to reduce the voluntary capital stock ratio under its Business and Capital Management Plan for 2005 – 2007, current market conditions and customer demand, the Bank expects total assets to remain flat or slightly decrease. Advances to members decreased by $2.3 billion or 8.5% to $24.2 billion at December 31, 2004 from $26.4 billion at December 31, 2003. A majority of the decline resulted from a $1.6 billion prepayable advance paydown by a member of the Bank in 2004. Mortgage loans held in portfolio, net of allowance for loan losses, decreased $0.7 billion or 1.4% to $46.9 billion at December 31, 2004 from $47.6 billion at December 31, 2003. These decreases were partially offset by an increase in investments of $2.3 billion or 35.4% to $8.9 billion at December 31, 2004 from $6.5 billion at December 31, 2003, primarily due to an increase in the purchases of available-for-sale and held-to-maturity securities, acquired in lieu of MPF Loans.

Liabilities totaled $81.1 billion at December 31, 2004, a decrease of $1.3 billion compared to total liabilities of $82.4 billion at December 31, 2003. The decrease was primarily due to reduced deposits from the FDIC, a result of its decreased need for more liquid assets and a switch to higher yielding securities.

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On July 1, 2004, S&P lowered its long-term counterparty credit rating on the Bank to AA+ from AAA and kept its outlook at negative in response to the announced Written Agreement with the Finance Board. At the same time, S&P affirmed the Bank’s A-1+ short-term counterparty credit rating. For most of the Bank’s derivatives counterparties, the collateralization threshold of the Bank changed to $5 million. As a result, the Bank was required to deliver $18.8 million and $25 million in additional collateral as of September 30, 2005 and December 31, 2004, respectively. This did not have any impact on earnings. The S&P rating for the consolidated obligations of the FHLBs is not affected by ratings actions pertaining to individual FHLBs and remains at AAA/A-1+ as of October 31, 2005.

On November 18, 2004, Moody’s Investor Service affirmed its “Aaa” long-term deposit rating and “Prime-1” short-term deposit rating on the Bank and is maintaining a stable outlook. The consolidated obligations credit ratings are unaffected by this action, and remain at “Aaa/Prime-1.”

Total Other Income (Loss)

Total other income (loss) was a net loss of $127.1 million in 2004, an increase of $13.9 million compared to a net loss of $113.2 million in 2003. The net loss in 2004 was primarily a result of fair value adjustments associated with derivatives and hedging activities under SFAS 133, where the Bank is required to record all of its derivatives on the balance sheet at fair value. If derivatives meet the hedging criteria specified in SFAS 133, the underlying hedged instruments may also be carried at fair value so that some or all of the unrealized gain or loss recognized on the derivative is offset by a corresponding unrealized loss or gain on the underlying hedged instrument.

The unrealized gain or loss on the ineffective portion of all hedges, which represents the amount by which the change in the fair value of the derivative differs from the change in fair value of the hedged item or the variability in the cash flows of floating rate assets, liabilities or forecasted transactions, is recognized in current period earnings. In addition, certain derivatives are associated with assets or liabilities or are economic hedges of interest rate risk that do not qualify as fair value or cash flow hedges under SFAS 133. Economic hedges are recorded on the balance sheet at fair value with the unrealized gain or loss recorded in earnings without any offsetting unrealized gain or loss from the associated asset or liability.

The table below shows the types of hedges and the categories of hedged items that contributed to the gains and losses on derivatives and hedging activities that were recorded in earnings in 2004 and 2003.

Sources of Gains / (Losses) on Derivatives and Hedging Activities Recorded in Earnings

2004 Compared to 2003

(Dollars in thousands)	2004												2003
Hedged Item	Fair Value Hedges			Cash Flow Hedges			Economic Hedges			Total			Fair Value Hedges			Cash Flow Hedges			Economic Hedges			Total
Advances	$	(731	)	$	44,661		$	—		$	43,930		$	436		$	38,251		$	—		$	38,687
Consolidated Obligations		2,638			(1,835	)		—			803			(16,382	)		(3,457	)		—			(19,839	)
Investments		—			—			(1,473	)		(1,473	)		—			857			1,879			2,736
MPF Program		(87,574	)		—			(88,191	)		(175,765	)		(111,417	)		—			(41	)		(111,458	)
Stand-alone derivatives		—			—			6,080			6,080			—			—			(49,293	)		(49,293	)
Total	$	(85,667	)	$	42,826		$	(83,584	)	$	(126,425	)	$	(127,363	)	$	35,651		$	(47,455	)	$	(139,167	)

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For the year ended December 31, 2004, the net loss on derivatives and hedging activities recorded in earnings was $126.4 million, a decrease of $12.7 million compared to a net loss of $139.2 million during 2003. The net loss in 2004 and 2003 was due principally to the Bank using stand-alone derivatives (i.e. interest rate swaps, swaptions, caps, floors and futures contracts) to manage its interest rate and prepayment risks associated with MPF Loans and duration of equity limits established by the Finance Board. For the years ended December 31, 2004 and 2003, the net loss associated with stand-alone derivatives was $93.1 million and $49.3 million, respectively. Ineffectiveness directly related to a specified portfolio of MPF Loans designated as fair value hedges under SFAS 133 was ($76.7) million and ($111.4) million for the years ended December 31, 2004 and 2003, respectively. In 2004, the MPF Loan portfolio being hedged decreased by $1.96 billion, as existing loans paid down. Further, the Bank hedged this portfolio to be neutral to changes in interest rate duration and volatility, and attempted to minimize the impact that significant interest rate movements had on the this portfolio. As interest rates increased during the year, the Bank incurred $76.7 million in losses due to derivatives and hedging activities related to this strategy.

The Bank hedged a specified portfolio of MPF Loans in 2003 to be neutral to both interest rate duration and interest rate volatility. As market rates decreased in 2003, the Bank recognized $111.4 million in losses due to derivatives and hedging activities associated with this strategy.

The Bank recognized $50.0 million and $38.3 million in earnings from cash flow hedges of floating rate advances for the year ended December 31, 2004. The gains were a result of floating rate advances being prepaid in both years by a member. As a result, gains previously deferred in Other Comprehensive Income (“OCI”) were recognized in earnings.

The Bank recognized $2.6 million and ($1.8) million in net gains/(losses) from fair value and cash flow hedges of consolidated obligations, respectively, in 2004. The Bank recognized ($16.4) million in losses on fair value hedges and ($3.5) million in losses from cash flow hedges of consolidated obligations in 2003.

Fiscal Year 2003 Highlights

Net income for the year ended December 31, 2003 increased $231.8 million, or 113.3%, to $436.5 million from $204.7 million for the year ended December 31, 2002. The increase in net income was primarily attributable to (i) a $452.8 million increase in interest income to $2.73 billion for the year ended December 31, 2003 from $2.28 billion for the same period ended December 31, 2002, primary due to the growth in the MPF Loan portfolio; and, (ii) an increase of $108.5 million in the gain from early extinguishment of debt to $106.3 million for the year ended December 31, 2003 from a loss of $2.3 million for the year ended December 31, 2002, due to the transfer of long-term consolidated obligations to other FHLBs and the extinguishment of the Bank’s consolidated obligations in the marketplace. These trends were partially offset by (i) a loss of $56.6 million in trading securities for the year ended December 31, 2003, compared to a $295.6 million gain for the year ended December 31, 2002; and (ii) a $28.7 million increase in other expenses to $86.4 million for the year ended December 31, 2003 from $57.7 million for the year ended December 31, 2002, primarily due to increased personnel (both employees and consultants) and systems (hardware and software) to support increased regulatory requirements for risk assessment and management.

The Bank’s MPF Loan portfolio continued to increase during 2003. The Bank had $47.6 billion in MPF Loans at the end of the year, compared to $26.2 billion at the end of 2002.

Advances to members increased to $26.4 billion, 6% above the prior year-end. The Bank continued to attract new member financial institutions. Total membership stood at 884 members on December 31, 2003, surpassing the prior year-end level of 874 members.

The Bank purchased its first MPF Shared Funding securities during 2003. The MPF Shared Funding program permits the transfer of MPF Program eligible loans by a member to the Bank in the form of a security through the use of a third-party sponsored trust. At December 31, 2003 the Bank had $621.5 million in held-to-maturity MPF Shared Funding securities.

In 2003, SFAS 133 resulted in net realized and unrealized losses in derivatives and hedging activities of $139.2 million. Beginning in 2003, the Bank recorded realized and unrealized gains and losses on stand alone derivatives used in economic hedges in “net realized and unrealized gain (loss) on derivatives and hedging activities” within “other income.” Previously, realized gains and losses on stand alone derivatives used in economic hedges were classified within “net interest income after mortgage loan loss provision” while unrealized gains (losses) on these derivatives were recorded in “net realized and unrealized gain (loss) on derivatives and hedging activities” within “other income.” The amount of unrealized gains and losses on stand alone derivatives for 2003 was $55.4 million.

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The Bank adopted SFAS No. 149 on July 1, 2003. The application of SFAS 149 resulted in the Bank recording as derivatives its commitments to purchase mortgage loans. At December 31, 2003, the Bank had recorded $863,000 in loan commitment derivatives. The Bank accounted for the commitments as cash flow hedges and recorded the offset to OCI.

The Bank opened new markets for its members by launching a program to buy mortgages made on Indian reservations. In December 2003, the Bank purchased two mortgages totaling $156,000 that were guaranteed by HUD under its Section 184 program, which provides a 100% guarantee on loans made for buying, building, or rehabilitating homes on reservations. This HUD program is designed to give Native American families the opportunity to own their own homes. The involvement of the Bank extends the initiative to FHLB member financial institutions in Illinois and Wisconsin.

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Factors That May Affect Future Results

Recent Bank and Finance Board actions have negatively impacted a member’s ability to redeem capital stock.

On October 18, 2005, the Bank’s Board of Directors discontinued redemptions of voluntary capital stock for a period of time and the Bank amended its Written Agreement with the Finance Board. See “–Regulatory Agreement and Related Actions.” As a result, members are currently unable to redeem voluntary capital stock, including capital stock which becomes voluntary capital stock in connection with the pay off or pay down of an advance. Also, a capital stock redemption in connection with a membership withdrawal is subject to the Bank meeting its regulatory capital requirements at the time of withdrawal which ordinarily occurs after expiration of a six month waiting period. The Bank is required to maintain a regulatory capital ratio of 4.5% and minimum total regulatory capital stock of $3.978 billion. Given the current level of regulatory capital stock of $3.979 billion as of October 31, 2005, the Bank’s present ability to honor capital stock redemptions in connection with a membership withdrawal is limited.

The Bank may experience losses and increased delinquencies related to Hurricanes Katrina and Rita.

Hurricanes Katrina and Rita (the “Hurricanes”) struck Louisiana, Mississippi, Alabama, Texas and surrounding areas during the third quarter of 2005. As of September 30, 2005, the Bank held approximately $500 million of conventional MPF Loans secured by properties located in the Individual Assistance and Public Assistance areas as designated by FEMA.

In connection with the sale or funding of MPF Loans and the PFI’s servicing responsibilities, the PFI makes representations to the Bank that hazard insurance and flood insurance (for those mortgaged properties located in a FEMA designated Special Flood Hazard Area) are in place. In the event that required insurance is not in place, the PFI is required to repurchase the related MPF Loan. If the required insurance does not fully cover the damage from the Hurricanes, including related flood damage, losses may be allocated to the Bank’s FLA after application of the PFI’s CE Amount. The Bank may also experience losses if the PFI fails to fulfill its repurchase obligation or pay the required CE Amount.

In addition, even if the mortgaged property is in good repair, property values in these states may be adversely affected by the Hurricanes. Mortgaged properties may have experienced environmental hazards related to mold and to gas and oil leaks. Mortgagors in areas affected by the hurricane may also be affected by any decline in the economic environment.

During the third quarter of 2005, the Bank announced a special disaster relief initiative to lessen the hardship for victims of Hurricane Katrina. See “Item 1.2—Business Segments—Mortgage Partnership Finance Program—Credit Risk Exposure Assumed by the Bank on MPF Loans.” The relief provisions may increase the Bank’s overall mortgage delinquency rates and losses.

The Bank is assessing its potential loss exposure related to the Hurricanes, but does not believe that there will be a material loss exposure. The Bank is working with its master servicing vendor to obtain information from PFIs in order to develop reasonable loss estimates.

Fluctuating interest rates or changing interest rate levels may adversely affect the amount of net interest income the Bank receives.

The Bank’s financial performance is affected by fiscal and monetary policies of the federal government and its agencies and in particular by the policies of the Federal Reserve Board. The Federal Reserve Board’s policies, which are difficult to predict, directly and indirectly influence the yield on the Bank’s interest-earning assets and the cost of the Bank’s interest-bearing liabilities.

Fluctuations in interest rates affect the Bank’s profitability in several ways, including but not limited to the following:

• decreases in interest rates typically cause mortgage prepayments to increase and may result in substandard performance in the Bank’s mortgage portfolio as the Bank experiences a return of principal that it must re-invest in a lower rate environment, adversely affecting the Bank’s net interest income over time; and

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• increases in interest rates may reduce overall demand for mortgage loans and advances, thereby reducing the origination of new mortgage loans or advances and volume of MPF Loans acquired by the Bank, which could have a material adverse effect on the Bank’s business, financial condition and results of operations, and which may increase the cost of funds.

The MPF Program has different risks than those related to the Bank’s traditional advances business, which could adversely impact the Bank’s results of operations.

The residential mortgage origination business historically has been a cyclical industry, enjoying periods of strong growth and profitability followed by periods of shrinking volumes and industry-wide losses. The Mortgage Bankers Association of America has predicted that residential mortgage originations will drop 10% in 2006. During periods of rising interest rates, rate and term refinancing originations decrease, as higher interest rates provide reduced economic incentives for borrowers to refinance their existing mortgages. Because the Bank has not experienced a downturn in the real estate market since the MPF Program’s inception, the MPF Program’s historical performance may not be indicative of results in a rising interest rate environment, and the Bank’s results of operations may be materially adversely affected if interest rates rise.

In addition, the MPF Program as compared to the Bank’s traditional advance business is more susceptible to credit losses, and also carries more interest rate risk and operational complexity. For a description of the MPF Program, the obligations of the Bank with respect to credit losses and the PFI’s obligation to provide credit enhancement, see “Item 1—Business—Business Segments—Mortgage Partnership Finance Program.”

The Bank hedges its interest rate risk associated with its consolidated obligations, advances and MPF Loans and any hedging strategy the Bank uses may not fully offset the related economic risk.

The Bank uses various cash and derivative financial instruments to provide a level of protection against interest rate risks, but no hedging strategy can protect the Bank completely. When interest rates change, the Bank expects the gain or loss on derivatives to be substantially offset by a related but inverse change in the value of the hedged item in hedging relationships where the Bank applies hedge accounting under the requirements of SFAS 133. Certain hedging strategies are designed to hedge the economic risks of the Bank, and may result in earnings volatility. Although the Finance Board’s regulations, its Financial Management Policy and the Bank’s Asset/Liability Management Policy establish guidelines with respect to the use of derivative financial instruments, there is no assurance that the Bank’s use of derivatives will fully offset the economic risks related to changes in interest rates. In addition, hedging strategies involve transaction and other costs. Any hedging strategy or derivatives the Bank uses may not adequately offset the risk of interest rate volatility and the Bank’s hedging transactions themselves may result in earnings volatility and losses.

If the prepayment rates for MPF Loans are higher or lower than expected, the Bank’s results of operations may be significantly impacted.

The rate and timing of unscheduled payments and collections of principal on MPF Loans are difficult to predict accurately and will be affected by a variety of factors, including, without limitation, the level of prevailing interest rates, restrictions on voluntary prepayments contained in the MPF Loans, the availability of lender credit and other economic, demographic, geographic, tax and legal factors. The Bank manages prepayment risk through a combination of debt issuance and derivatives. If the level of actual prepayments is higher or lower than expected, the Bank may be required to make a payment under a related derivative agreement or may experience a mismatch with a related debt issuance resulting in a loss or gain to the Bank. Also, increased prepayment levels will cause the amortization of deferred costs to increase, reducing net interest income.

If one or more of the PFIs that provide a substantial amount of the MPF Loan volume for the Bank were to discontinue or reduce their participation in the MPF Program, the Bank’s business, financial condition and results of operations may be adversely affected.

During 2004, Balboa Reinsurance Company and LaSalle Bank, National Association, accounted for 37.5% and 15.1%, respectively, of MPF Loan volume for the Bank. For the nine months ended September 30, 2005, Balboa Reinsurance Company accounted for 38.3% of MPF Loan volume for the Bank. If one or more of these PFIs end or substantially reduce their participation in the MPF Program, the Bank’s business, financial condition and results of operations may be adversely affected by the reduced volume of loans available for the MPF Program.

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The concentration of CE Amount coverage with a small number of PFIs increases the Bank’s risk exposure for losses.

At September 30, 2005, the top five PFIs represented in total 67.6% of the Bank’s outstanding MPF Loans (at par). If one or more of these PFIs were unable or failed to meet their contractual obligation to cover losses under the CE Amount, the Bank may incur increased losses depending upon the performance of the related MPF Loans.

The performance of the Bank’s MPF Loan portfolio depends in part upon the Bank’s vendors.

The Bank acts as master servicer for the MPF Program. In this regard, the Bank has engaged a vendor for master servicing, Wells Fargo Bank N.A., which monitors the PFIs’ compliance with the MPF Program requirements and issues periodic reports to the Bank. While the Bank manages MPF Program cash flows itself, if the vendor should refuse or be unable to provide the necessary service, the Bank may be required to engage another vendor which could result in delays in reconciling MPF Loan payments to be made to the Bank or increased expenses to retain a new master servicing vendor.

The Bank has contracted with S&P for the use of its modeling software, LEVELS, which calculates the PFI’s required CE Amount for MPF Loans. If S&P were to discontinue LEVELS or fail to honor the terms of its contract for the Bank’s use of LEVELS, the Bank would be required to engage another NRSRO or develop its own methodology (confirmed in writing by an NRSRO) to calculate the required level of credit enhancement for each MPF Loan Master Commitment as required under the AMA Regulation. Should either of these events occur, the Bank may experience a disruption in its ability to fund or purchase MPF Loans and may have a negative impact on the Bank’s business, results of operations and financial condition.

The concentration of the SMI providers providing SMI coverage for MPF Loans increases the Bank’s exposure to potential losses in the event of an SMI provider default.

As of September 30, 2005, Mortgage Guaranty Insurance Company and GE Mortgage Insurance Corp. provided 68.4% and 12.4%, respectively, of SMI coverage for MPF Loans. Although historically the Bank has not claimed any losses against an SMI insurer, if one or both of these SMI insurers were to default on their insurance obligations and loan level losses for MPF Loans were to increase, the Bank may experience increased losses.

The Bank faces significant competition.

In connection with the MPF Program, the Bank is subject to significant competition regarding the purchase of conventional, conforming fixed-rate mortgage loans. In this regard, the Bank faces competition in the areas of customer service, purchase prices for the MPF Loans and ancillary services such as automated underwriting. The Bank’s strongest competitors are large mortgage aggregators, other GSEs, such as Fannie Mae and Freddie Mac, other FHLBs participating in the Mortgage Purchase Program, and private investors. Some of these competitors have greater resources, larger volumes of business and longer operating histories. In addition, because the volume of conventional, conforming fixed-rate mortgages has been reduced due to the rise in interest rates, as well as increased popularity of competitive financing products, such as hybrid adjustable-rate mortgages (which the Bank does not purchase), the demand for MPF Program products could diminish. These competitive factors may result in a material adverse effect on the Bank’s business, results of operations and financial condition.

With regard to Traditional Member Finance, the Bank competes with other sources of wholesale financing, such as investment and commercial banks, and sometimes other FHLBs, on a secured and unsecured basis. Some members may also choose to access the capital markets directly rather than through the Bank. Significant competition with regard to these wholesale financing activities may adversely affect the Bank’s business, results of operations and financial condition.

Concentration of the Bank’s MPF Loans in certain geographic areas, such as Wisconsin and California, increases the Bank’s exposure to the economic and natural hazard risks associated with those areas and could have a material adverse effect on its business, results of operations and financial condition.

Although the Bank has MPF Loans in all 50 states, Washington, D.C. and Puerto Rico, as of September 30, 2005, approximately 16.7% and 10.4% of the principal amount of MPF Loans held by the Bank were MPF Loans secured by properties located in Wisconsin and California, respectively. An overall decline in the economy or the residential real estate market of, or the occurrence of a natural disaster in, Wisconsin or California, could adversely affect the value of the mortgaged properties in

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those states and increase the risk of delinquency, foreclosure, bankruptcy or loss on MPF Loans in the Bank’s investment portfolio, which could negatively affect the Bank’s business, results of operations and financial condition.

The Bank’s business is dependent upon its computer operating systems and an inability to implement technological changes or an interruption in the Bank’s information systems may result in lost business.

The Bank’s business is dependent upon its ability to interface effectively with other FHLBs, PFIs, members and other third parties, and its products and services require a complex and sophisticated operating environment supported by operating systems, both purchased and custom-developed. Maintaining the effectiveness and efficiency of the technology used in the Bank’s operations is dependent on the continued timely implementation of technology solutions and systems necessary to effectively manage the Bank and mitigate risk, and may require significant capital expenditures. If the Bank was unable to maintain these technological capabilities, it may not be able to remain competitive and its business, financial condition and results of operations may be significantly compromised.

The Bank relies heavily on communications and information systems furnished by third party service providers to conduct its business. Any failure, interruption or breach in security of these systems, or any disruption of service could result in failures or interruptions in the Bank’s ability to conduct business. There is no assurance that such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by the Bank or the third parties on which the Bank relies. The occurrence of any failures or interruptions could have a material adverse effect on the Bank’s financial condition, results of operations and cash flows.

The Bank is jointly and severally liable for the consolidated obligations of other FHLBs.

Under Finance Board rules, the Bank is jointly and severally liable with other FHLBs for consolidated obligations issued through the Office of Finance. If another FHLB defaults on its obligation to pay principal or interest on any consolidated obligation, the Finance Board has the ability to allocate the outstanding liability among one or more of the remaining FHLBs on a pro rata basis or on any other basis that the Finance Board may determine. Moreover, the Bank may not pay dividends to, or redeem or repurchase capital stock from any of its members until payment is made.

The Bank records a liability for consolidated obligations on its statements of condition in proportion to the proceeds it receives from the issuance of those consolidated obligations. No liability has been recorded for the joint and several obligations related to the other FHLBs’ share of the consolidated obligations due to the high credit quality of every other FHLB. As of October 31, 2005, the FHLBs are rated by Standard & Poor’s and Moody’s as shown in the following table.

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Federal Home Loan Banks

Long Term Credit Ratings

As of October 31, 2005

	Standard & Poor’s		Moody’s
	Rating	Outlook	Rating	Outlook
Atlanta	AAA	Stable	Aaa	Stable
Boston	AAA	Stable	Aaa	Stable
Chicago 1	AA+	Negative	Aaa	Stable
Cincinnati	AAA	Stable	Aaa	Stable
Dallas	AAA	Negative	Aaa	Stable
Des Moines	AAA	Negative	Aaa	Stable
Indianapolis	AAA	Negative	Aaa	Stable
New York 1	AA+	Stable	Aaa	Stable
Pittsburgh	AAA	Negative	Aaa	Stable
San Francisco	AAA	Stable	Aaa	Stable
Seattle 1	AA+	Negative	Aaa	Stable
Topeka	AAA	Stable	Aaa	Stable
FHLB Consolidated Obligation Bonds	AAA	Stable	Aaa	Stable

¹ S&P downgraded Chicago on July 1, 2004, New York on September 26, 2003 and Seattle on December 13, 2004.

In addition, Chicago and Seattle are operating under written agreements in which they were required to submit to the Finance Board a three-year business and capital management plan. For details on the Chicago agreement, see “Item 2.2—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Regulatory Agreement.”

Due to the high credit quality of each FHLB, management has concluded that the probability that a FHLB would be unable to repay its consolidated obligations is remote. Furthermore, Finance Board regulation requires all FHLBs to maintain not less than an AA rating.

The Bank is subject to regulation by the Finance Board, and it is likely to incur significant costs related to governmental regulation.

The Bank is closely supervised and regulated by the Finance Board. Under the FHLB Act, the Finance Board is responsible for overseeing FHLBs with regard to their housing finance mission, adequate capitalization and ability to raise funds in the capital markets, and operation in a safe and sound manner. In this regard, the Finance Board promulgates rules covering the operations of the FHLBs.

On June 30, 2004, the Bank entered into a Written Agreement with the Finance Board, which requires the Bank to maintain a regulatory capital level of no less than 5.1%, restricts the annual on-balance sheet growth of acquired member assets under the MPF Program to 10% and required a review of the Bank’s management and board oversight, risk management policies and practices, internal audit functions and accounting, recordkeeping and reporting practices and controls. On October 18, 2005, the Finance Board amended the Written Agreement with the Bank reducing the Bank’s required regulatory capital ratio to 4.5% from 5.1% and requiring the Bank to maintain a separate measure of minimum total regulatory capital stock of $3.978 billion. Under the amendment, the Bank committed to deliver no later than December 15, 2005, a retained earnings and dividend policy and updated business plan strategies to the Finance Board for approval. In addition, Bank dividends are subject to approval by the Finance Board’s Office of Supervision until the Bank completes the process of registering its capital stock under the

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Securities Exchange Act of 1934, and until a revised retained earnings and dividend policy has been approved by the Finance Board. The Bank will comply with the terms of the Written Agreement, as amended, until it is terminated. See “Item 2.2—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Regulatory Agreement.”

In accordance with the Written Agreement, the Bank adopted a Business and Capital Management Plan for 2005 – 2007, whereby it committed to, among other things, reducing the amount of the Bank’s voluntary stock and exploring alternative ways to liquefy MPF assets. In accordance with the amendment to the Written Agreement, the Bank is in the process of preparing updated business strategies for submission to the Finance Board for its approval.

Complying with the requirements of the Written Agreement may adversely affect the Bank’s ability to operate its business. Also, there is no assurance as to the effect any new business strategies may have on the Bank’s business and operations. As a consequence of the Written Agreement and in connection with the Bank’s reduction of its voluntary capital stock ratio, the Bank may be required to maintain MPF volume in portfolio at current levels or to slightly reduce those levels in order to maintain its required capital-to-assets ratios. Should other FHLBs limit or discontinue their participation in the MPF Program, the Bank could also see reduced volumes related to participations in MPF Loans and could receive lower revenues in connection with fees the Bank assesses for providing MPF transaction processing services.

In addition, as a result of the Bank’s Written Agreement to maintain a regulatory capital level of 4.5% instead of the statutorily required 4.0% and enhancements to the Bank’s market risk profiles relating to duration of equity, the Bank’s ability to generate higher earnings and a higher return on equity has been reduced. The Bank expects to incur increased operating expenses resulting from improvements to internal controls and the Bank’s infrastructure resulting from the implementation of the Bank’s Written Agreement. Also, the Bank’s liquidity position has been increased, which may have a negative impact on future earnings.

The Federal Home Loan Bank Act or Federal Housing Finance Board rules may be amended in a manner that changes the Bank’s statutory and regulatory requirements and affects its business, operations and/or financial condition.

Since enactment in 1932, the FHLB Act has been amended many times in ways that have significantly affected the rights and obligations of FHLBs and the manner in which they fulfill their housing finance mission. Future legislative changes to the FHLB Act and new or amended regulations or policies adopted by the Finance Board, such as the AMA Regulation, may significantly affect the Bank’s business, results of operations and financial condition.

Legislation is currently being considered in Congress to reform the regulatory structure of the three U.S. housing government sponsored enterprises: the FHLBs, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Similar legislation has been introduced and considered in each of the past several Congresses, though no legislation affecting the FHLBs has been enacted since the Gramm-Leach-Bliley Act of 1999. Earlier this year, a number of hearings were held in both the Senate and House committees of jurisdiction regarding legislation to create a new independent agency to oversee the safety and soundness and mission compliance of the housing GSEs. In May, the House Financial Services Committee approved H.R. 1461 on a 65-5 vote, and in October, the legislation was approved in amended form by the full House of Representatives by a margin of 331-90. In the Senate, S.190 was approved by the Senate Banking Committee in July on a vote of 11-9. The full Senate has yet to consider the bill.

In their current versions, the bills differ in several important respects, primarily in their treatment of the mortgage portfolios of Fannie Mae and Freddie Mac. However, the provisions affecting the FHLBs in both versions are very similar: both bills would abolish the FHLBs’ regulator, the Federal Housing Finance Board, replacing it with a new independent Federal agency with similar authority over the FHLBs. Also, director terms would be lengthened to 4 years from 3 years and the statutory caps on director compensation would be eliminated. Both bills would also allow voluntary mergers among the FHLBs, with the approval of the new regulator.

One difference between the House and Senate versions is the treatment of boards of directors at the individual FHLBs. The House version provides that at least two-fifths of the FHLB directors be independent (non-member) directors appointed by the new regulatory agency. By contrast, the Senate version requires at least one-third of the directors to be independent and allows a process for those directors to be elected by the financial institution members of the FHLB at large.

During legislative consideration, other provisions affecting the business of the FHLBs have been proposed, but have yet to be included in either of the committee-approved bills. Given the nature of the legislative process, it is impossible to predict

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with certainty the provisions of any final bill, whether such bill will ultimately be signed by the President and enacted into law, or if enacted, what effect such changes would have on the Bank’s business, results of operations or financial condition.

The Federal Reserve Bank Policy Statement on Payments System Risk may impact the Bank’s operations.

The Federal Reserve Board in September 2004 announced that it had revised its Policy Statement on Payment System Risk relating to interest and principal payments on securities issued by GSEs and certain international organizations. Reserve Banks are currently processing and posting these payments to depository institutions’ Federal Reserve accounts by 9:15am Eastern Time, which is the same posting time for U.S. Treasury securities’ interest and redemption payments, even if the issuer has not fully funded these payments. The revised Federal Reserve policy requires that, beginning July 20, 2006, Federal Reserve Banks release these interest and principal payments as directed by the issuer only if the issuer’s Federal Reserve account contains sufficient funds to cover the payments. While the issuer will determine the timing of these payments during the day, each issuer will be required to fund its interest and principal payments by 4pm Eastern Time in order for the payments to be processed that day. In addition, beginning July 20, 2006, the revised Federal Reserve policy will align the treatment of the general corporate account activity of GSEs and certain international organizations with the treatment of activity of other account holders that do not have regular access to the discount window and thus are not eligible for intraday credit. Such treatment will include applying a penalty fee to daylight overdrafts resulting from these entities’ general corporate payment activity.

The Bank is evaluating the impact of this proposed change on its operations, including the Bank’s cash management and related business practices. However, it is not possible to predict what, if any, changes will be made and what effect these changes will have on the Bank’s business and operations.

The loss of significant members of the Bank may have a negative impact on its capital stock outstanding and result in lower demand for its products and services.

As of September 30, 2005, the Bank had 22.7% of its advances outstanding to two members, LaSalle Bank N.A. and Mid America Bank, FSB, and 15.7% of its capital stock was owned by two members, One Mortgage Partners Corp and LaSalle Bank N.A. If either LaSalle Bank or Mid America paid off their outstanding advances or if LaSalle Bank, Mid America Bank or One Mortgage Partners withdrew from membership with the Bank, the Bank may experience a material adverse effect on its outstanding capital stock and lower demand for its products and services. It is not possible for the Bank to predict whether or not the Bank’s actions with respect to the discontinuance of voluntary stock redemptions will increase the number of membership withdrawals and related stock redemption requests. As of October 31, 2005, the Bank has received withdrawal requests from two members holding a total amount of capital stock of $201.6 million. Also, larger banks that are not domiciled in the Bank’s district and who acquire or merge with the Bank’s members may choose not to maintain membership with the Bank, resulting in lower demand for the Bank’s products and services and redemption of capital stock.

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Liquidity and Capital Resources

Liquidity

The Bank is required to maintain liquidity in accordance with certain Finance Board 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. 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, primarily overnight Fed funds and resale agreements, maturing advances and the issuance of new consolidated obligation bonds and discount notes. Other borrowings, such as securities sold under agreements to repurchase, also provide liquidity.

To support its member deposits, Finance Board regulations require the Bank to have an amount equal to the current deposits invested in obligations of the U.S. Government, deposits in eligible banks or trust companies, or advances with a maturity not exceeding five years. As of October 31, 2005, the Bank had excess liquidity of $28.5 billion to support member deposits.

In accordance with Finance Board regulations, the Bank is also required to maintain enough contingency liquidity to meet its liquidity needs for five business days without access to the debt market. Contingent liquidity is defined as (1) marketable assets with a maturity of one year or less; (2) self-liquidating assets with a maturity of seven days or less; (3) assets that are generally accepted as collateral in the repurchase agreement market; and (4) irrevocable lines of credit from financial institutions rated not lower than the second highest credit rating category by a nationally recognized statistical rating organization. The Bank’s Asset/Liability Management Policy defines the Bank’s liquidity needs for five business days as an amount equal to the total of all principal and interest payments on non-deposit liabilities coming due in the next five business days plus a reserve consisting of one-fourth of customer deposits and $1.0 billion.

Below is a tabular presentation that displays the Bank’s liquidity needs over a five business day period, the sources of liquidity that the Bank holds to cover the requirements, and the holdings in excess of the requirements as of October 31, 2005. Excess liquidity assumes a “scenario event”, that is, a localized credit crisis for all FHLBs where the FHLBs do not have the ability to issue any new consolidated obligations or borrow unsecured funds from other sources (e.g. Fed Funds purchased or member deposits).

Cumulative Five Business Days Liquidity Measurement

as of October 31, 2005

(Dollars in millions)	Cumulative Five Business Days
Liquidity Sources
Consolidated Obligations Traded but Not Settled	$	523
Contractual Maturities Cash, Fed Funds, Resales		7,502
Maturing Advances		1,421
Securities Eligible for Sale/Resale		3,974
Total Sources	$	13,420
Liquidity Uses and Reserves
Contractual Principal and Interest Payments	$	4,314
Deposit Outflows		950
Reserves1		1,158
Total Uses and Reserves	$	6,422
Excess Liquidity	$	6,998

¹ Reserves are equal to $1 billion plus 25% of member deposits.

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In addition, under the Bank’s Asset/Liability Management Policy, the Bank is required to maintain for each day, overnight liquidity assets at least equal to five percent of total assets, or a level approved by the Bank’s Market Risk Committee and reported to the Bank’s Asset Liability Committee. For this purpose, overnight liquidity includes: (1) money market assets, including federal funds, with one day to maturity and (2) inter-FHLB loans with one day maturity. As of October 31, 2005, the Bank had excess overnight liquidity of $3.3 billion.

In light of available liquidity described above, the Bank expects to be able to remain in compliance with its liquidity requirements.

Statements of Condition Overview

The major components of the Bank’s Statements of Condition are as follows:

(Dollars in thousands)	September 30, 2005		December 31, 2004		Increase / (Decrease)					December 31, 2004		December 31, 2003		Increase / (Decrease)
					Amount			Percent						Amount			Percent
Assets
Fed funds sold and securities purchased under agreement to resell	$	7,295,200	$	5,127,840	$	2,167,360		42.3	%	$	5,127,840	$	5,441,600		(313,760	)	-5.8	%
Investment securities		7,662,729		8,850,906		(1,188,177	)	-13.4	%		8,850,906		6,538,728		2,312,178		35.4	%
Advances		24,233,015		24,191,558		41,457		0.2	%		24,191,558		26,443,063		(2,251,505	)	-8.5	%
Mortgage loans held in portfolio, net of allowance		43,231,999		46,920,551		(3,688,552	)	-7.9	%		46,920,551		47,599,731		(679,180	)	-1.4	%
Other assets		631,400		617,782		13,618		2.2	%		617,782		918,865		(301,083	)	-32.8	%
Total Assets	$	83,054,343	$	85,708,637	$	(2,654,294	)	-3.1	%	$	85,708,637	$	86,941,987	$	(1,233,350	)	-1.4	%
Liabilities and Capital
Deposits	$	1,307,516	$	1,223,752	$	83,764		6.8	%	$	1,223,752	$	2,348,071	$	(1,124,319	)	-47.9	%
Discount notes		15,180,067		16,871,736		(1,691,669	)	-10.0	%		16,871,736		20,456,395		(3,584,659	)	-17.5	%
Bonds		60,178,226		60,875,540		(697,314	)	-1.1	%		60,875,540		57,471,055		3,404,485		5.9	%
Other liabilities		2,147,211		2,111,750		35,461		1.7	%		2,111,750		2,093,026		18,724		0.9	%
Total Liabilities		78,813,020		81,082,778		(2,269,758	)	-2.8	%		81,082,778		82,368,547		(1,285,769	)	-1.6	%
Capital		4,241,323		4,625,859		(384,536	)	-8.3	%		4,625,859		4,573,440		52,419		1.1	%
Total Liabilities and Capital	$	83,054,343	$	85,708,637	$	(2,654,294	)	-3.1	%	$	85,708,637	$	86,941,987	$	(1,233,350	)	-1.4	%

Total assets declined $2.7 billion to $83.1 billion at September 30, 2005 compared to $85.7 billion at December 31, 2004. Mortgage loans held in portfolio at September 30, 2005 decreased $3.7 billion from $46.9 billion at December 31, 2004 because of a decrease in fixed-rate mortgage demand. In addition, as the mortgage loan portfolio has paid down, the Bank used excess funds to increase its liquidity position to meet voluntary capital stock redemption requests and pay down consolidated obligations to maintain its regulatory capital ratio above the required minimum level.

The Bank’s investment portfolio decreased $1.2 billion to $7.7 billion at September 30, 2005 from $8.9 billion at December 31, 2004 due to maturities and pay-downs of held-to-maturity investments. The Bank’s mortgage-backed securities portfolio decreased by $1.0 billion, or 18.9%, to $4.5 billion at September 30, 2005 from $5.5 billion at December 31, 2004. The proceeds were reinvested in shorter term investments such as Fed funds sold and securities purchased for liquidity purposes.

Total liabilities were $78.8 billion at September 30, 2005, a decrease of $2.3 billion or 2.8% compared to December 31, 2004. Consolidated obligation bonds decreased $697.3 million or 1.1% to $60.2 billion at September 30, 2005 from $60.9 billion at December 31, 2004. Discount notes decreased $1.7 billion or 10.0% to $15.2 billion at September 30, 2005.

Total assets decreased 1.4% to $85.7 billion at December 31, 2004 as compared to $86.9 billion at December 31, 2003. Advances declined by $2.3 billion dollars primarily due to the acquisition of one of the Bank’s members by an out-of-district member. The member paid down outstanding advances and transferred remaining advances to an affiliate that is an in-district member. The proceeds from the advance paydown were reinvested in held-to-maturity and available-for-sale securities, which increased investment securities in total by $2.3 billion from December 31, 2003 to December 31, 2004.

The Bank experienced a decline in the balance of its Mortgage Loans Held in Portfolio, which declined $0.7 billion from December 31, 2003 to December 31, 2004. The decrease in total Mortgage Loans Held in Portfolio was primarily due to market

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conditions. In particular, customer demand for fixed rate mortgages (versus adjustable or interest rate only mortgages, which the Bank does not acquire) have declined since 2003. In addition, as interest rates have increased, fewer home owners are refinancing their mortgages, reducing new business for the Bank while existing loans are paid down.

Average assets increased to $90.2 billion for the year ended December 31, 2004, up from $76.9 billion from the year ended December 31, 2003, a growth rate of 17.3%. This growth in average assets occurred prior to the Written Agreement, primarily in housing finance-related assets including MPF Loans, advances to members, investments secured by mortgages and mortgage-backed instruments, and other mission-related investments. Total housing finance-related assets at year end decreased $1.9 billion, or 2.4% to $77.4 billion at December 31, 2004 from the year earlier. Total housing finance-related assets accounted for 89.8% of assets at December 31, 2004. In order to insure a mission-consistent balance sheet, the Bank maintains a ratio of housing finance-related assets to consolidated obligations of at least 85%. Housing finance-related assets were 126.4% of consolidated obligations at December 31, 2004.

The following table is a summary of the Bank’s assets:

	As of September 30,		As of December 31,
(In percentages)	2005		2004		2003		2002
Investments	9.2	%	10.3	%	7.5	%	14.4	%
Advances	29.2	%	28.2	%	30.4	%	38.4	%
Mortgage loans held in portfolio, net	52.1	%	54.7	%	54.8	%	40.2	%
All other assets	9.5	%	6.8	%	7.3	%	7.0	%
Total	100.0	%	100.0	%	100.0	%	100.0	%

Mortgage loans, net of premiums, discounts and fair value SFAS 133 basis adjustments declined $0.7 billion to $46.9 billion or 54% of total Bank assets due to the higher interest rate environment in 2004 compared to 2003. Mortgage loans are secured by real estate in all 50 states, the District of Columbia and Puerto Rico.

Advances to members, including SFAS 133 basis adjustments, were $24.2 billion at December 31, 2004, down 8.5% from December 31, 2003. Advances at par reached $24.0 billion at December 31, 2004, down 7.3% from December 31, 2003.

The MBS portfolio averaged $4.8 billion through December 31, 2004, 2.49% higher than the average portfolio through December 31, 2003. The average MBS-to-equity ratio was 101% at December 31, 2004 compared to 103% at December 31, 2003. MBS holdings equal to 300% of capital is the maximum allowed by Finance Board regulation.

Investments

The Bank maintains investments of varying maturities in instruments that are liquid and have an open market for their trading. The Bank’s primary objective is to have sufficient funds available in low risk instruments to meet potential member funding requirements, while earning a return commensurate with the risks taken in the portfolio as a whole.

Investments in available-for-sale (“AFS”) securities more than doubled in 2004 as the Bank maintained liquidity in light of lower growth in its mortgage portfolio. AFS investments were made in instruments of varying maturities and included mortgage-backed securities for the first time.

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The Bank’s investment portfolio by category of securities is shown in the following tables:

Trading Securities

Trading securities had the following yield characteristics:

	As of September 30,				As of December 31,
	2005				2004				2003				2002
(Dollars in thousands)	Carrying Value		Yield		Carrying Value		Yield		Carrying Value		Yield		Carrying Value		Yield
Government-sponsored enterprises 1	$	1,127,044	4.73	%	$	585,579	5.01	%	$	593,574	4.54	%	$	1,945,091	5.54	%
Consolidated obligations of other FHLBs		34,090	6.15	%		71,731	8.78	%		75,700	7.44	%		188,469	7.95	%
Mortgage-backed securities:
Government-sponsored enterprises 1		43,031	4.77	%		52,711	4.77	%		68,654	4.79	%		125,693	5.20	%
Government-guaranteed		8,854	4.33	%		11,367	4.50	%		16,468	5.52	%		27,422	6.55	%
Privately issued MBS		31,871	6.42	%		38,669	6.42	%		39,901	6.39	%		41,147	6.39	%
Total Trading Securities	$	1,244,890	4.81	%	$	760,057	5.39	%	$	794,297	4.90	%	$	2,327,822	5.73	%

¹ Securities issued by government sponsored enterprises are not guaranteed by the U.S. federal government.

Available-for-Sale Securities

Available-for-sale securities had the following yield characteristics:

	As of September 30,				As of December 31,
	2005				2004				2003				2002
(Dollars in thousands)	Carrying Value		Yield		Carrying Value		Yield		Carrying Value		Yield		Carrying Value		Yield
U.S. Treasury	$	—	—		$	—	—		$	50,246	4.27	%	$	—	—
Government-sponsored enterprises 1		1,034,799	3.19	%		896,238	2.58	%		555,118	2.61	%		1,383,242	3.80	%
Mortgage-backed securities:
Government-sponsored enterprises 1		80,989	4.67	%		91,372	4.67	%		—	—			—	—
Privately issued MBS		364,740	2.60	%		542,078	2.36	%		—	—			—	—
Total Available-for-Sale Securities	$	1,480,528	3.13	%	$	1,529,688	2.63	%	$	605,364	2.74	%	$	1,383,242	3.80	%

¹ Securities issued by government sponsored enterprises are not guaranteed by the U.S. federal government.

Held-to-Maturity Securities

Held-to-maturity securities had the following yield characteristics:

	As of September 30,				As of December 31,
	2005				2004				2003				2002
(Dollars in thousands)	Carrying Value		Yield		Carrying Value		Yield		Carrying Value		Yield		Carrying Value		Yield
Commercial Paper	$	449,405	3.67	%	$	699,722	2.26	%	$	99,991	1.07	%	$	—	—
Government-sponsored enterprises 1		149,786	3.05	%		249,570	2.09	%		459,593	1.55	%		152,070	1.91	%
State or local housing agency obligations		82,317	4.50	%		100,690	3.90	%		132,388	3.61	%		222,841	4.76	%
Other 2		319,665	4.18	%		743,193	2.76	%		598,981	2.00	%		612,230	2.59	%
Mortgage-backed securities:
Government-sponsored enterprises 1		2,669,771	4.85	%		2,958,672	4.84	%		1,089,597	5.22	%		1,316,210	3.32	%
Government-guaranteed		62,316	4.44	%		84,077	4.11	%		119,539	4.70	%		194,797	5.45	%
MPF Shared Funding®		436,600	4.74	%		512,983	4.81	%		621,459	4.94	%		—	—
Privately issued MBS		767,451	4.73	%		1,212,254	3.75	%		2,017,519	2.67	%		3,130,544	3.85	%
Total Held-to-Maturity Securities	$	4,937,311	4.60	%	$	6,561,161	4.00	%	$	5,139,067	3.35	%	$	5,628,692	3.81	%

¹ Securities issued by government sponsored enterprises are not guaranteed by the U.S. federal government.

² “Other” includes investment securities guaranteed and/or issued by the Small Business Administration, Small Business Investment Corporation and Low- and Moderate-Income Investment created by the Community Reinvestment Act of 1979.

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Funding

The Bank funds its assets principally through the issuance of consolidated obligations as well as through capital stock and deposits. Under the FHLB Act and Finance Board regulations, the Bank is jointly and severally liable with other FHLBs for consolidated obligations issued through the Office of Finance. The Bank records a liability for consolidated obligations on its statements of condition in proportion to the proceeds it receives from the issuance of those consolidated obligations. No liability has been recorded for the joint and several obligations related to the other FHLBs’ share of the consolidated obligations due to the high credit quality of every other FHLB. Refer to “Item 2.2—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors that May Affect Future Results” for further details.

The Bank issues consolidated obligations through the Office of Finance as its agent. Consolidated obligations constitute the largest portion of the Bank’s funding. As of October 31, 2005, the FHLB consolidated obligations are AAA/Aaa rated, and the Bank has access to short-term and long-term debt markets. Consolidated obligations decreased $2.4 billion to $75.4 billion at September 30, 2005 as compared with $77.7 billion at December 31, 2004. At September 30, 2005, consolidated obligation bonds represented 79.9% of the outstanding balance. At December 31, 2004, consolidated obligation bonds comprised 78.3% of the debt mix.

Proceeds from the issuance of discount notes and bonds decreased $98.2 billion and $6.3 billion, respectively, for the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004. The total reduction in proceeds was a result of lower MPF Loan purchases by the Bank during the nine months ended September 30, 2005. In addition, the Bank’s demand for additional funding has declined in the current period in light of the Bank’s Written Agreement with the Finance Board to reduce voluntary capital stock while maintaining required regulatory capital. Fulfilling member redemption requests has required the Bank to reduce its level of consolidated obligations outstanding. Member deposits increased $83.8 million in the first nine months of 2005, compared to the 2004 year end balance of $1.2 billion.

The Bank utilizes diverse funding sources and channels its need for funding from the capital markets changes. The Bank participated in $3.0 billion of the $90.7 billion, or 3.3%, of the long term global FHLB bond issuances during the nine months ended September 30, 2005. During the nine months ended September 30, 2004, the Bank participated in $6.3 billion of the $72.0 billion, or 8.8%, of the long term global FHLB bond issuances.

The Bank’s balance in shorter term discount notes decreased $1.7 billion as of September 30, 2005 compared to year end 2004. Discount notes are a significant funding source for the Bank. The Bank uses discount notes to fund short-term advances, longer-term advances with short repricing intervals, and money market investments. Discount notes comprised 21.7% of outstanding consolidated obligations at December 31, 2004, but accounted for 94.9% of the issuances of consolidated obligations during 2004.

In recent years, the FHLBs and other housing GSEs have faced a significant amount of negative publicity, which occasionally has adversely affected the Bank’s cost of funds temporarily, but the Bank believes that other factors, such as supply and demand of GSE debt obligations and other market conditions have had a much greater impact on the cost of funds. The Bank believes that investors have recognized the inherent strength of the FHLBs’ joint and several obligation to pay the principal of and interest on the consolidated obligations, and that the combined strength of the FHLBs has lessened investor reaction to the recent adverse publicity surrounding certain individual FHLBs. The Bank does not believe that the FHLBs have suffered a material adverse effect on their ability to issue consolidated obligations to the public as a result of the Bank’s restatement of its December 31, 2003 financial statements.

The Office of Finance has not yet published the FHLBs’ 2004 third quarter combined Financial Report, 2004 full year combined Financial Report, or any 2005 combined Financial Report. In addition, the Office of Finance has announced that its board of directors decided to restate the FHLBs’ combined financial statements for the years ended December 31, 2001, 2002 and 2003, and subsequent interim periods. The Office of Finance has stated that the delays in publication and intended restatements were the result of certain regulatory and accounting matters at some of the FHLBs, and that the Office of Finance board of directors may elect to delay publication of the FHLBs’ combined Financial Reports until all or substantially all of the FHLBs have completed their registration with the SEC. The Bank and a majority of the other FHLBs were unable to comply with the Finance Board’s August 29, 2005 deadline for registration of a class of their equity securities with the SEC. Some of the FHLBs have announced that they will restate prior period financial statements. It is uncertain at this time what effect, if any, the delays in

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publication, the delays in registration, or the intended restatements will have on the cost of FHLB debt, the timing of the issuance of new FHLB debt, or the demand for FHLB debt.

The Bank has emphasized diversification of funding sources and channels as the need for funding from the capital markets has grown. The Bank led an effort to issue the first FHLB syndicated global 10-year bond to help fund and economically hedge the growing mortgage loan asset base. The Bank led long-term global issues of $12 billion and $22 billion through December 31, 2004 and 2003 respectively. This initiative has established an important new funding option for the FHLBs. The Bank anticipates decreased demand for similar offerings. Future growth may be limited by the Bank’s Written Agreement with the Finance Board, which restricts the annual on-balance sheet growth of the MPF Program to 10%. The amendment to the Written Agreement reduces the Bank’s required minimum capital ratio from 5.1% to 4.5% effective October 18, 2005. As a result, the Bank has more flexibility to invest in mortgage related assets and investment portfolios, and fulfill funding and liquidity needs of members through offering advances. The Bank expects that MPF volume will remain flat or increase slightly during the fourth quarter of 2005. The Bank will also look to other investment strategies to reduce excess liquidity. As such, the Bank’s long term funding needs may increase slightly.

In the normal course of managing its balance sheet, the Bank may extinguish consolidated obligations through repurchases of the debt or the transfer of debt to other FHLBs for which it is the primary obligor. These extinguishments occur in the normal course of the Bank’s business. The Bank also uses a limited amount of repurchase agreements as a source of funding and identifies these transactions as long-term borrowings. The Bank is required to deliver additional collateral should the market value of the underlying securities decrease below the market value required as collateral.

Debt Transfer Activity

The Bank may use excess funding to fulfill funding requests from other FHLBs by transferring consolidated obligations, primarily those issued under the Global Issuances Program. See “Item 1.3—Funding Services—Consolidated Obligation Bonds” for a description of the Global Issuances Program. The timing of such transfers to other FHLBs typically occur from one day to six months after the issuance of debt. The Bank prices such consolidated obligations at rates that are competitive or lower in cost than the Tap program or Medium Term Note Program, and may transfer consolidated obligations at fair value throughout the day and at smaller increments than the Tap program. The Tap auction is only available once a day and at minimum funding increments of $5 million. FHLBs request funding through debt transfers in situations where it is more economical than the Tap program or Medium Term Note Program or in situations where debt transfers provide more flexibility than the Tap program.

Growth in other FHLBs’ mortgage loan programs and credit products resulted in an increase in the funding needs of other FHLBs during 2004 and 2003, and as a result, the Bank transferred $4.3 billion and $6.3 billion of consolidated obligations, respectively. For the nine months ended September 30, 2005, the Bank has transferred $975.2 million of consolidated obligations to other FHLBs. The Bank anticipates reduced debt transfer activity relative to prior years for several reasons. First, as the Global Issuances Program matured, more FHLBs have participated in issuances reducing the Bank’s need to facilitate larger sized offerings. Second, the Bank’s Written Agreement with the Finance Board contains annual limitations on the growth of MPF assets on the Bank’s balance sheet which might reduce the Bank’s funding needs. Third, current market conditions have slowed the growth of MPF purchases and fundings as well as other FHLBs’ mortgage programs, which thereby reduce the funding needs of other FHLBs.

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The table below summarizes the consolidated obligations of the FHLBs and the Bank when it is the primary obligor:

	As of September 30,			As of December 31,
(Dollars in thousands)	2005			2004			2003			2002
Total par value of FHLB consolidated obligation bonds	$	735,340,777		$	700,964,721		$	595,608,350		$	533,213,633
Consolidated obligation bonds for which the Bank is the primary obligor, at par		62,002,275			62,868,515			60,328,125			42,874,655
Percent of consolidated obligation bonds for which the Bank is the primary obligor		8.4	%		9.0	%		10.1	%		8.0	%
Total par value of FHLB consolidated obligation discount notes	$	185,028,425		$	168,276,869		$	163,920,498		$	147,481,425
Consolidated obligation discount notes for which the Bank is the primary obligor, at par		15,243,731			16,942,524			20,500,073			14,563,201
Percent of consolidated obligation discount notes for which the Bank is the primary obligor		8.2	%		10.1	%		12.5	%		9.9	%
Total par value of FHLB obligations	$	920,369,202		$	869,241,590		$	759,528,848		$	680,695,058
Consolidated obligations for which the Bank is the primary obligor, at par		77,246,006			79,811,039			80,828,198			57,437,856
Percent of consolidated obligations for which the Bank is the primary obligor		8.4	%		9.2	%		10.6	%		8.4	%

Borrowings

Borrowings with original maturities of one year or less are classified as short-term. The following is a summary of short-term borrowings:

	As of September 30,			As of December 31,
(Dollars in thousands)	2005			2004			2003			2002
Discount notes
Outstanding at period-end	$	15,180,067		$	16,871,736		$	20,456,395		$	14,526,323
Weighted average rate at period-end		3.47	%		2.08	%		1.05	%		1.42	%
Daily average outstanding for the period	$	17,071,617		$	20,550,414		$	17,423,431		$	11,331,137
Weighted average annualized rate for the period		2.99	%		1.39	%		2.17	%		2.01	%
Highest outstanding at any month-end	$	18,085,991		$	23,049,674		$	20,456,395		$	14,526,323
Federal funds purchased
Outstanding at period-end	$	—		$	—		$	—		$	—
Weighted average rate at period-end		—			—			—			—
Daily average outstanding for the period	$	341		$	1,123		$	—		$	1,233
Weighted average annualized rate for the period		3.54	%		1.32	%		—			1.11	%
Highest outstanding at any month-end	$	—		$	—		$	—		$	—
Total short-term borrowings
Outstanding at period-end	$	15,180,067		$	16,871,736		$	20,456,395		$	14,526,323
Weighted average annualized rate at period-end		3.47	%		2.08	%		1.05	%		1.42	%
Daily average outstanding for the period	$	17,071,958		$	20,550,414		$	17,423,431		$	11,331,137
Weighted average annualized rate for the period		2.99	%		1.39	%		2.17	%		2.01	%

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In general, changes in the total consolidated obligations are consistent with the changes in total Bank assets. The Bank maintains discount notes within a broad range that permits it to take advantage of interest rate spread across maturities. Daily average discount note balances increased until the fourth quarter of 2004 and have declined since September 30, 2005 as the Bank’s short-term funding needs have declined and short-term interest rates have risen. Funding through discount note and other short term instruments is not expected to increase in the near term as the yield curve has flattened. This pattern applies to the aggregate short term borrowings, as well.

Off-Balance-Sheet Arrangements

Standby letters of credit are executed with members for a fee. If the Bank is required to make a payment for a beneficiary’s draw, these amounts are converted into a collateralized advance to the member. Notional amounts of outstanding standby letters of credit were $554.4 million, $345.7 million, and $395.8 million at September 30, 2005, December 31, 2004, and December 31, 2003, respectively.

The Bank has entered into standby bond-purchase agreements with state-housing authorities, whereby the Bank, for a fee, agrees to purchase and hold the authority’s bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bonds according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the Bank to purchase the bonds. The bond purchase commitments entered into by the Bank expire after ten years, no later than 2015, though some are renewable at the option of the Bank. Total commitments for bond purchases were $272.8 million, $280.2 million, and $248.7 million at September 30, 2005, December 31, 2004, and December 31, 2003, respectively. The Bank was not required to purchase any bonds under these agreements through September 30, 2005.

The Bank only records a liability for consolidated obligations on its statements of condition for the proceeds it receives from the issuance of those consolidated obligations. However, each FHLB is jointly and severally obligated for the payment of all consolidated obligations of all of the FHLBs. This guarantee is not reflected on the Bank’s balance sheet. The par value of outstanding consolidated obligations for the FHLBs was $920.4 billion at September 30, 2005 and $869.2 billion at December 31, 2004. Accordingly, should one or more of the FHLBs be unable to repay their participation in the consolidated obligations, each of the other FHLBs could be called upon to repay all or part of such obligations, as determined or approved by the Finance Board. For additional information regarding the consolidated obligations, refer to Note 13 to the Bank’s 2004 Annual Financial Statements and Notes.

The Bank is required to pay 20 percent of its net earnings (after reduction of its AHP obligation) to REFCORP to support payment of part of the interest on bonds issued by REFCORP. The Bank must make these payments to REFCORP until the total amount of payments made by all FHLBs is equivalent to a $300 million annual annuity whose final maturity date is April 15, 2030. Additionally, the FHLBs must set aside annually for AHP the greater of $100 million or ten percent of the current year’s income before charges for AHP (but after expenses for REFCORP). See “Item 2.2—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Expenses.”

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Contractual Obligations and Commitments

The tables below present the Bank’s long term contractual obligations:

	As of September 30, 2005
(Dollars in thousands)	Contractual Payments Due By Period
Contractual Obligations	Less than 1 year		1-3 years		3-5 years		After 5 years		Total
Long-term debt (Bonds at par)	$	10,910,200	$	20,196,805	$	12,961,650	$	17,933,620	$	62,002,275
Operating leases		4,003		8,879		9,951		4,587		27,420
Other long-term obligations		—		—		—		1,200,000		1,200,000
Letters of credit		—		36,144		11,143		3,450		50,737
Mortgage loan commitments:
MPF 100		22,424		—		—		—		22,424
Other MPF		118,603		—		—		—		118,603
Total Contractual Cash Obligations	$	11,055,230	$	20,241,828	$	12,982,744	$	19,141,657	$	63,421,459

Capital Resources

Members are required to purchase capital stock in amounts based on the greater of 1% of the balance of mortgage assets held by the member institution, or 5% of their level of advances outstanding, with a minimum purchase of $500. Effective March 15, 2005, the Bank no longer accepts new voluntary investments in its capital stock, and effective October 18, 2005, the Bank discontinued redemptions of voluntary capital stock for a period of time and amended its Written Agreement with the Finance Board to, among other things, revise the Bank’s minimum regulatory capital requirements. See “Item 2.2—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Regulatory Agreement and Related Actions.”

Capital stock accounted for 91.7% of total equity as of September 30, 2005. Total capital (including retained earnings and OCI) includes an unrealized loss relating to hedging activities of $159.8 million and a $6.7 million net unrealized loss on available for sale securities (totaling $166.5 million) in OCI as of September 30, 2005. Retained earnings were $517.2 million, up from $489.4 million at December 31, 2004, primarily as a result of the Bank’s Written Agreement which restricts dividends to 90% of core earnings, as described in “Item 1.5—Regulations—Capital, Capital Rules, and Dividends—Dividends.” The value of capital stock decreased to $3.9 billion at the end of September 30, 2005 from $4.3 billion at the end of 2004 primarily due to the redemptions of voluntary capital stock and member withdrawals due to the acquisition of members by out-of-district institutions.

As of September 30, 2005 and December 31, 2004, voluntary capital stock was 53% and 57%, respectively, of the Bank’s regulatory capital. Regulatory capital consists of the Bank’s total capital stock (including the mandatorily redeemable capital stock) plus its retained earnings. At September 30, 2005, members held $2.3 billion of voluntary capital stock in the Bank. This is down $403.6 million from December 31, 2004 due to redemptions of voluntary capital stock by members and redemptions for member institutions that were acquired by out of district financial institutions.

Capital stock accounted for 92.8% of total equity as of December 31, 2004. Total capital included an unrealized loss relating to hedging activities of $148.5 million and a $7.2 million net unrealized loss on available for sale securities (totaling $155.7 million) in OCI as of December 31, 2004. Retained earnings were $489.4 million, up from $386.9 million at December 31, 2003. As a result of the growth in total membership, advance levels, capital stock dividends, and capital stock purchases by members for investment purposes, capital stock increased to $4.3 billion at the end of 2004 from $4.2 billion at the end of 2003.

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The following table shows the largest ten members by capital stock holdings:

Top Ten Capital Stock Outstanding by Member

	As of September 30, 2005					As of December 31, 2004					As of December 31, 2003
(Dollars in thousands)	Capital Stock			% of Total		Capital Stock			% of Total		Capital Stock		% of Total
LaSalle Bank N.A.	$	307,681		7.9	%	$	295,817		6.9	%	$	278,482	6.7	%
One Mortgage Partners Corp./ Bank One, NA 1		303,273		7.8	%		422,474		9.8	%		378,216	9.1	%
Associated Bank Green Bay		179,857		4.6	%		102,172		2.4	%		n/a	n/a
State Farm Financial		169,272		4.3	%		169,272		3.9	%		n/a	n/a
Mid America Bank, FSB		163,916		4.2	%		278,916		6.5	%		384,643	9.3	%
The PrivateBank & Trust Co. 2		147,000		3.7	%		207,000		4.8	%		208,536	5.0	%
M & I Marshall and Ilsley Bank		119,717		3.1	%		107,153		2.5	%		85,843	2.1	%
Citizens Equity Federal C U		70,257		1.8	%		67,548		1.6	%		n/a	n/a
The Northern Trust Company		64,778		1.7	%		72,011		1.7	%		115,000	2.8	%
Self-Reliance Ukrainian - FCU 2		64,568		1.6	%		n/a		n/a			n/a	n/a
First Federal Capital Bank 3		n/a		n/a			62,843		1.5	%		59,160	1.4	%
Associated Bank, N.A.		n/a		n/a			n/a		n/a			96,185	2.3	%
Anchor Bank, F.S.B.		n/a		n/a			n/a		n/a			85,924	2.1	%
Standard Bank & Trust		n/a		n/a			n/a		n/a			64,253	1.5	%
All Other Banks		2,314,080		59.3	%		2,518,219		58.4	%		2,398,976	57.7	%
Total 4	$	3,904,399		100	%	$	4,303,425		100	%	$	4,155,218	100	%
Less mandatorily redeemable stock		(13,734	)				(11,259	)				—
Total Capital Stock	$	3,890,665				$	4,292,166				$	4,155,218

n/a = Not applicable as amount does not fall within the 10 largest capital stockholders.

¹ Bank One, NA was acquired by JP Morgan Chase, an out-of-district financial institution, in 2004. The capital stock of Bank One, NA was transferred to its affiliate, One Mortgage Partners Corp., which remains an in-district member.

² Subsequent to October 18, 2005, the PrivateBank & Trust Co. and Self-Reliance Ukrainian - FCU have submitted requests to redeem all of their capital stock and withdraw from membership in the Bank. Their capital stock amounts have been subsequently reclassified as a liability (mandatorily redeemable capital stock) in accordance with SFAS 150. These redemption requests are subject to the Bank’s ability to meet its regulatory capital requirements at the expiration of the six month withdrawal notice period.

³ First Federal Capital Bank was acquired by the Associated Bank of Green Bay in February 2005.

⁴ Includes mandatorily redeemable capital stock of $13.7 million at September 30, 2005 and $11.3 million at December 31, 2004 which is recorded as a liability per SFAS 150 in the accompanying financial statements and is included in the calculation of the regulatory capital to asset ratio.

The Bank’s regulatory capital-to-assets ratios of 5.3%, 5.6% and 5.2% at September 30, 2005 and December 31, 2004 and 2003, respectively, were greater than the regulatory required level of 4.0% and greater than the current 4.5% capital level required by the Bank’s Written Agreement with the Finance Board, as amended on October 18, 2005. See “Item 9—Market Price and Dividends on the Registrant’s Common Equity Security and Related Stockholder Matters,” for a description of the Bank’s dividend policy. Also, as part of the amendment to the Written Agreement, the Bank has agreed to deliver by December 15, 2005, a revised retained earnings and dividend policy to the Finance Board for its approval.

Under the GLB Act, the Bank is required to implement a new capital plan. The Finance Board published a final rule implementing a new capital structure for the Bank, which includes risk-based and leverage capital requirements, different classes of stock that the Bank may issue and the rights and preferences that may be associated with each class of stock. The Finance Board originally approved the Bank’s capital plan on June 12, 2002. However, the Bank is in the process of re-assessing its capital plan and may propose amendments to its capital plan to the Finance Board. Until such time as the Bank fully implements its new capital plan, the current capital rules remain in effect.

The current capital rules require members to purchase capital stock equal to the greater of 1% of their mortgage-related assets at the most recent calendar year end or 5% of outstanding member advances with the Bank. At September 30, 2005 and December 31, 2004, Bank members held 23,381,000 and 27,428,000 shares of voluntary capital stock, respectively. These

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holdings represented 53% and 57% of the Bank’s regulatory capital, respectively, which is equal to the Bank’s total capital stock plus its retained earnings and mandatorily redeemable capital stock. Voluntary capital stock at December 31, 2003 was 24,201,000 shares above membership collateral requirements, or 53% of the Bank’s regulatory capital.

When the new capital plan has been implemented, the Bank will be subject to risk-based capital rules. Each FHLB may offer two classes of stock. Provided the FHLB is adequately capitalized, members can redeem Class A stock by giving six months notice, and members can redeem Class B stock by giving five years notice. Only “permanent” capital, defined as retained earnings and Class B stock, satisfies the risk-based capital requirement. In addition, the 1999 Act specifies a 5% minimum leverage ratio based on total capital including a 1.5 weighting factor applicable to Class B stock. It also specifies a 4% minimum capital ratio that does not include the 1.5 weighting factor applicable to Class B stock used in determining compliance with the 5% minimum leverage ratio.

The following table summarizes the Bank’s total capital and leverage requirements under both the current regulatory requirements and the proposed regulatory requirements.

(Dollars in thousands)	Regulatory Capital Ratio In Effect (1)		Regulatory Capital Requirement In Effect		Actual		Standard & Proposed Regulatory Capital Requirement (2)
Total Capital (1)
October 18, 2005	4.5	%	$	3,728,483	$	4,464,688	$	3,314,207
September 30, 2005	5.1	%		4,235,771		4,421,567		3,322,174
December 31, 2004	5.1	%		4,371,140		4,792,793		3,428,345
December 31, 2003	4.0	%		3,477,679		4,542,092		3,477,679
December 31, 2002	4.0	%		2,601,836		3,296,041		2,601,836
Leverage Capital (3)
October 18, 2005	n/a			n/a	$	6,697,032	$	4,142,759
September 30, 2005	n/a			n/a		6,632,351		4,152,718
December 31, 2004	n/a			n/a		7,189,190		4,285,432
December 31, 2003	n/a			n/a		6,813,138		4,347,099
December 31, 2002	n/a			n/a		4,944,062		3,252,295

¹ The regulatory capital ratio required by Finance Board regulations for all FHLBs is 4.0% for all periods presented. However, effective June 30, 2004, the Bank had been operating under a Written Agreement that required a 5.1% regulatory capital ratio. On October 18, 2005, the Written Agreement was amended to reduce the regulatory capital ratio to 4.5%. In addition, until amended or terminated, the amendment also requires the Bank to maintain another separate measure of minimum total regulatory capital stock of $3.978 billion. The minimum dollar requirement is currently more restrictive than the requirement in the table above and takes precedence until such time as the Bank’s assets increase to a point where the regulatory capital ratio would become more restrictive.

² The standard and proposed regulatory capital requirement was calculated assuming the regulatory capital ratio was 4.0%.

³ Actual leverage capital was calculated assuming all current capital stock will be converted into Class B capital stock.

n/a = not applicable

The Bank maintains a diversified membership base within the Bank’s geographical territory of Illinois and Wisconsin. Bank membership is reflective of all of the diverse areas and economies within the region. The Bank endeavors to serve all of its membership while not becoming dependent on any member or segment of members. The Bank had 885 members as of September 30, 2005, down 8 from 893 members as of December 31, 2004, but a net increase of 1 from the December 31, 2003 member count of 884. Mandatorily redeemable capital stock held by former members is redeemed as their advances mature provided that the Bank is able to meet its minimum regulatory capital requirements. There are no requirements for members who have sold MPF Loans to the Bank to maintain additional capital stock in the Bank. The largest ten stockholders control 40.7% of the Bank’s total capital stock as of September 30, 2005.

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As of September 30, 2005, six members had notified the Bank to voluntarily redeem their capital stock, five due to mergers and one due to withdrawal from membership. The Bank reclassified $13.7 million of capital stock to mandatorily redeemable capital stock on the statements of condition with payment subject to a six month waiting period and the Bank meeting its minimum regulatory capital requirements. The Bank anticipates these redemptions will occur beyond 2005 due to collateral borrowing requirements. As of December 31, 2004, two members had notified the Bank to voluntarily redeem their capital stock and withdraw from membership. The Bank reclassified $4.6 million of capital stock to mandatorily redeemable capital stock on the statements of condition with payment subject to a six month waiting period. During the nine months ended September 30, 2005, the Bank has completed the redemptions of both members.

In accordance with SFAS 150, the Bank reclassifies capital stock subject to redemption from equity to a liability once a member gives notice of intent to withdraw from membership or attains non-member status by merger or acquisition, charter termination, or involuntary termination from membership. In each case such shares of capital stock meet the definition of a mandatorily redeemable financial instrument. The restriction on paying out voluntary capital stock or other provisions that may delay or accelerate the timing of a mandatory redemption does not affect the classification of mandatorily redeemable capital stock as a liability. Capital stock is reclassified to a liability (mandatorily redeemable capital stock) 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 statements of income.

The following table is a summary of mandatorily redeemable capital stock:

	For the Nine Months Ended September 30, 2005				For the Year Ended December 31, 2004
(Dollars in thousands)	Amount			Number of Members	Amount			Number of Members
Mandatorily redeemable capital stock
- beginning balance	$	11,259		5	$	33,588		6
Redemption requests:
Acquisition related		148,348		7		55		—
Withdrawals		121		1		4,558		2
Redemption distributions:
Acquisition related		(140,557	)	(3)		(26,942	)	(3)
Withdrawals		(5,437	)	(4)		—		—
Mandatorily redeemable capital stock
- ending balance	$	13,734		6	$	11,259		5
Earnings impact from reclassification of dividends to interest expense	$	733			$	1,516

Subsequent to the Bank announcing its discontinuation of redeeming voluntary capital stock and through October 31, 2005 the Bank received membership withdrawal notices and related redemption requests from two members totaling $201.6 million. During the period from October 1, 2005 through October 31, 2005, no payments were made to redemption requests previously classified in mandatorily redeemable capital stock. Redemption requests are honored subject to the Bank maintaining its minimum regulatory capital requirements. The Bank also considers its liquidity requirements in conjunction with redemptions.

The following events involving members holding substantial amounts of the Bank’s capital stock would reduce the Bank’s capital-to-assets ratio provided the Bank would remain in compliance with its regulatory capital requirements.

• A mandatory redemption of capital stock in connection with a consolidation by a member with a financial institution outside of the Bank’s geographic district; or

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• A mandatory redemption of capital stock in connection with a voluntary withdrawal from membership.

The Bank does not currently have a risk-based capital requirement. However, the Bank uses the Office of Thrift Supervision defined regulatory requirement based on Title 12 Part 567 of the Code of Federal Regulations in order to compare to industry standards. Using this standard, the September 30, 2005 total risk-based capital was 22.1% of regulatory capital, compared to 22.8% at December 31, 2004, and 23.4% at December 31, 2003. The Bank’s debt-to-capital ratio was 17 times at September 30, 2005 and December 31, 2004 and 2003.

The Bank has paid dividends in the form of additional shares of capital stock since 2000 except for fractional amounts of less than one share which have been paid in cash until the fourth quarter of 2005 when fractional shares have begun to be paid in fractional shares of stock. While payment of a capital stock dividend does not affect total capital, it does affect the composition of capital as the dividend reduces retained earnings and increases capital stock. Redemption requests associated with capital stock dividend payments are considered to be voluntary stock redemptions. In connection with the redemptions of capital stock in cash due to regularly recurring redemption requests after capital stock dividends, the Bank is subject to liquidity requirements as described in “Item 1.5—Regulations—Capital, Capital Rules, and Dividends—Dividends.” As of September 30, 2005, all such redemption requests had been honored. However, beginning October 18, 2005, the Bank discontinued redemptions of voluntary stock, including redemptions of stock dividends.

In most cases, stock dividends are not linked to redemptions of voluntary capital stock. To the extent that former members own capital stock required to support remaining advances (former members cannot hold voluntary stock), their stock dividends are redeemed shortly after payment, subject to the Bank continuing to meet its minimum regulatory capital requirements. As of September 30, 2005, former members held 0.35% of the Bank’s capital stock, so expected capital stock redemptions in the near future from former members are immaterial.

An increasing minority of active members have established a pattern of requesting redemption of voluntary capital stock which corresponds to the amount of the stock dividend shortly after that dividend has been paid (“Dividend Redemptions”). The Bank does not give priority to Dividend Redemption requests and does not differentiate Dividend Redemptions from other redemptions. However, on October 18, 2005, the Bank’s Board of Director’s discontinued voluntary capital stock redemptions and therefore the Bank will be unable to honor Dividend Redemption requests while the discontinuance of voluntary stock redemptions remains in effect.

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Results of Operations

	For the Nine Months Ended September 30,									For the Years Ended December 31,
(Dollars in thousands)	2005			2004			Inc/(Decr) 2005/2004			2004			2003			Incr/(Decr) 2004/2003			2003			2002			Incr/(Decr) 2003/2002
Net interest income after provision for credit losses on mortgage loans	$	386,809		$	548,265		$	(161,456	)	$	704,343		$	793,826		$	(89,483	)	$	793,826		$	520,676		$	273,150
Other income (loss)		(28,804	)		(98,792	)		69,988			(127,131	)		(113,179	)		(13,952	)		(113,179	)		(184,378	)		71,199
Other expense		89,113			82,955			6,158			121,056			86,430			34,626			86,430			57,681			28,749
Income before assessments		268,892			366,518			(97,626	)		456,156			594,217			(138,061	)		594,217			278,617			315,600
Assessments		71,398			108,327			(36,929	)		132,139			157,687			(25,548	)		157,687			73,918			83,769
Cumulative effect of change in accounting principle		—			41,441			(41,441	)		41,441			—			41,441			—			—			—
Net income	$	197,494		$	299,632		$	(102,138	)	$	365,458		$	436,530		$	(71,072	)	$	436,530		$	204,699		$	231,831
Other operating expense to average assets (annualized)*		0.14	%		0.12	%		0.02	%		0.12	%		0.10	%		0.02	%		0.10	%		0.09	%		0.01	%
Interest spread between yields on interest earning assets and interest-bearing liabilities		0.43	%		0.68	%		-0.25	%		0.65	%		0.96	%		-0.31	%		0.96	%		0.79	%		0.17	%
Yield on average assets		4.13	%		3.53	%		0.60	%		3.61	%		3.64	%		-0.03	%		3.64	%		4.12	%		-0.48	%
Return on equity (annualized)		5.88	%		8.41	%		-2.53	%		7.70	%		10.65	%		-2.95	%		10.65	%		6.92	%		3.73	%

* Other operating expense includes salary and benefits, professional service fees, depreciation of premises and equipment, and other operating expenses.

Nine months ended September 30, 2005 compared to nine months ended September 30, 2004

Net income decreased $102.1 million, or 34.1%, to $197.5 million for the nine months ended September 30, 2005 from $299.6 million for the comparable period in 2004. The nine months ended September 30, 2004 net income included $41.4 million of a cumulative effect of change in accounting principle related to SFAS 91. The Bank changed its method of accounting for deferred agent fees and premiums and discounts on mortgage loans to amortize such amounts on a constant effective yield over their contractual life.

Net interest income decreased $161.5 million, or 29.4%, to $386.8 million from $548.3 million for the comparable period of 2004. This was primarily the result of an increase in short term interest rates, thus decreasing the spreads between the interest rates the Bank earns on its assets, particularly advances, and the interest rates that the Bank pays on its debt; and the decline in average advances and mortgage loans outstanding. The nine month weighted average interest rates on short term consolidated discount notes increased to 2.95% in 2005 from 1.17% in 2004. The net interest spread between yields on interest earning assets and interest bearing liabilities for the nine months ended September 30, 2005 was 43 basis points compared with a net interest spread of 68 basis points in the same period in 2004.

Average advances for the nine months ended September 30, 2005 decreased $2.7 billion, or 10.0%, from 2004 primarily because one member paid off more than $3 billion of its advances after it merged with an out-of-district institution. The decrease in average advances volume was more than offset by an increase in yield and interest rates so that interest income from advances increased by $153.3 million, or 37.2%, for the nine months ended September 30, 2005 compared to the same period in 2004. Average mortgage loans held in portfolio for the nine months ended September 30, 2005 decreased $2.9 billion, or 6.0%, compared to September 30, 2004 primarily due to paydowns of existing mortgages and a decline in fixed-rate mortgage loan activity as demand for adjustable rate mortgages increased. In addition, as the mortgage loan portfolio has paid down, the Bank used excess funds to increase its liquidity position to meet voluntary capital stock redemption requests and pay down consolidated obligations to maintain its regulatory capital ratio above the required minimum level. The decrease in average mortgage loans reduced interest income by $56.3 million, or 3.3%, for the nine months ended September 30, 2005 compared to the same period in 2004.

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Other income (loss) increased $70.0 million, or 70.8%, to a loss of $28.8 million from a loss of $98.8 million primarily due to the following reasons:

• Net realized gain (loss) from sale of available-for-sale securities improved $19.2 million, or 91.3%, to a loss of $1.8 million for the nine months ended September 30, 2005 from a loss of $21.1 million for the comparable period in 2004. The Bank had minimal sales of available for sale securities in the nine months ended September 30, 2005. In 2004, the Bank sold available for sale securities for a loss due to a rise in short term interest rates. These sales were primarily the result of a hedge against consolidated obligations transferred to other FHLBs.

• Net realized and unrealized gain (loss) on derivatives and hedging activities improved $88.3 million, or 83.7%, to a loss of $17.1 million for the nine months ended September 30, 2005 from a loss of $105.4 million for the comparable period in 2004, primarily a result of fair value adjustments associated with derivatives and hedging activities. Some or all of the unrealized gain or loss recognized on the derivative is offset by a corresponding unrealized loss or gain on the underlying hedged instrument. Below is a chart summarizing the sources of gains/(losses) on derivatives and hedging activities recorded in earnings.

Sources of Gains / (Losses) on Derivatives and Hedging Activities Recorded in Earnings

(Dollars in thousands)	For the Nine Months Ended September 30, 2005												For the Nine Months Ended September 30, 2004
Hedged Item	Fair Value Hedges			Cash Flow Hedges			Economic Hedges			Total			Fair Value Hedges			Cash Flow Hedges			Economic Hedges			Total
Advances	$	1,080		$	(3,754	)	$	1		$	(2,673	)	$	(1,018	)	$	44,532		$	—		$	43,514
Consolidated Obligations		1,802			3,750			(83	)		5,469			3,226			(3,427	)		—			(201	)
Investments		—			—			10,476			10,476			—			—			(4,487	)		(4,487	)
MPF Program		(18,967	)		4			(11,831	)		(30,794	)		(73,400	)		—			(71,166	)		(144,566	)
Stand-alone derivatives		—			—			395			395			—			—			363			363
Total	$	(16,085	)	$	—		$	(1,042	)	$	(17,127	)	$	(71,192	)	$	41,105		$	(75,290	)	$	(105,377	)

The above increases in other income (loss) were partially offset by the following decrease:

• Net realized gain from early extinguishment of debt transferred to other FHLBs decreased $41.9 million, or 90.1%, to $4.6 million for the nine months ended September 30, 2005 from $46.5 million for the comparable period in 2004 due to the minimal amount of consolidated obligations that were transferred to other FHLBs in 2005. The amount of transfers in 2004 were higher due to the Bank’s reduced need for funding pending the Written Agreement with the Finance Board and the rising interest rate environment, resulting in a gain when the debt was transferred to the other FHLBs at market rates. The gain on the consolidated obligations sold was offset by a loss of $2.4 million on associated sales of available-for-sale securities that hedged the transferred debt. The loss was recorded in the net realized gain (loss) from sale of available-for-sale securities line in the Statements of Income.

Other expenses increased $6.2 million, or 7.4%, to $89.1 million for the nine months ended September 30, 2005 from $82.9 million for the comparable period in 2004 primarily due to the following reason:

• Salary and benefits increased $8.5 million, or 25.7%, to $41.3 million for the nine months ended September 30, 2005 from $32.8 million for the comparable period in 2004. The number of employees at September 30, 2005 was 427 full-time equivalents, compared to 358 a year ago. The Bank has added employees to support the build out of new computer hardware and software in Information Systems and in control functions in Finance, Legal and Risk Management in response to requirements under Sarbanes-Oxley, including Section 404 compliance, SEC Registration and Written Agreement requirements.

The Bank is obligated to set aside funds for the Affordable Housing Program (AHP) and to make payments to Resolution Funding Corporation (REFCORP). Currently, combined assessments for AHP and REFCORP are the equivalent of an approximately 26.5% effective tax rate for the Bank, and accordingly the amount of such payments declined as the Bank’s

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income decreased. AHP and REFCORP accruals for the nine months ended September 30, 2005 were $22.0 million and $49.4 million compared to $33.4 million and $74.9 million, respectively, for the same period in 2004. Assessment amounts on the statements of income for the nine month period ended September 30, 2004 include the amounts for the cumulative effect of change in accounting principle in the amounts of $7.6 million and $3.4 million for REFCORP and AHP, respectively. The Bank is exempt from all federal, state, and local taxation except for real estate property taxes, which are a component of the Bank’s lease payments for space or on real estate owned by the Bank as a result of foreclosure on MPF Loans.

In 2004, the Bank recorded a $41.4 million cumulative effect adjustment (pre-assessment) as a result of a change in accounting principle for the amortization of mortgage loan premiums and discounts. The Bank changed its method of accounting for deferred agent fees and premiums and discounts on mortgage loans to amortize such amounts on a constant effective yield over their contractual life. For further details on this change in accounting principle, refer to Note 2 – Change in Accounting Principle and Recently Issued Accounting Standards and Interpretations to the Bank’s 2004 Annual Financial Statements and Notes.

Year ended December 31, 2004 compared to year ended December 31, 2003

Net income for the year ended December 31, 2004 decreased $71.0 million, or 16.3%, to $365.5 million from $436.5 million for the same period ended December 31, 2003. The Bank’s return on equity (“ROE”) was 7.70% for the year ended December 31, 2004, compared to 10.65% for the same period in 2003.

The Bank’s decline in net income was primarily due to the higher interest expense on consolidated obligations. For the year ended December 31, 2004, consolidated obligations interest expense increased $576.5 million or 30.8% compared with the same period in 2003. The higher interest expense reflects the growth in the Bank’s assets and an increase in weighted average interest rates on long-term consolidated obligation bonds from 3.59% to 3.68% and on short-term consolidated discount notes from 1.05% to 2.08%.

Net interest income after mortgage loan loss decreased $89.5 million or 11.3% for the year ended December 31, 2004 compared to the year ended December 31, 2003. The net interest spread between the yield on earning assets and the cost of interest-bearing liabilities for the year ended December 31, 2004 was 65 basis points compared with a net interest spread of 96 basis points during the same period in 2003. The yield on average assets was 3.61% for the year ended December 31, 2004, 3 basis points lower than the same period in 2003. The yield on average interest bearing liabilities was 2.96% for the year ended December 31, 2004, 28 basis points higher than the same period in 2003. This compression in spread and higher cost of funding is attributable to the flattening of the yield curve related to the Federal Reserve’s short term rate increases throughout the second half of 2004.

Although the Bank’s interest-rate spread declined for the year ended December 31, 2004, average balances in both MPF Loan products and advances increased from 2003 to partially offset the decline in net interest rates. For the year ended December 31, 2004 average daily advances outstanding increased 5.6% to $26.2 billion, while average daily MPF Loans outstanding increased 25.2% to $47.5 billion. Interest income on MPF Loans was $420.2 million or 22.7% higher than the year ended December 31, 2003 as a result of the Bank’s increased average daily mortgage loans balance.

In the other income (loss) section, net gains on derivatives of $89.3 million represented a $414.7 million decline from 2003 and were primarily related to economic hedges of mortgage loans. The decrease was offset by a corresponding $400.5 million increase in the SFAS 133 adjustments recognized primarily on consolidated obligation hedging instruments. The interest impact of non-effective hedges was lower in 2004 and comprised the $12.7 million residual difference in net realized and unrealized gain (loss) on derivatives and hedging activities. Reduced levels of debt extinguishment from the transfer of instruments to other FHLBs contributed to the lower net loss of ($127.1) million in other income (loss).

Other expenses increased $34.6 million or 40.0% to $121.1 million for the year ended December 31, 2004. Salaries and benefits increased $10.0 million or 28.1% for the year ended December 31, 2004 compared to the year ended December 31, 2003 primarily due to an increase in the number of employees to support increased regulatory requirements for risk management, compliance with the Sarbanes-Oxley Act of 2002, and preparation for SEC registration by August 2005. Other operating expenses increased $8.9 million or 51.1% and were related to the MPF Program, due to the continued national development of the program. The percentage of operating expenses (salary and benefits, professional service fees, depreciation of premises and equipment, and other operating expenses) to average assets for the year ended December 31, 2004 was 0.118%, compared with 0.096% for the year ended December 31, 2003.

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Year ended December 31, 2003 compared to year ended December 31, 2002

Net Income for the Bank increased to $436.5 million in 2003 from $204.7 million in 2002, an increase of $231.8 million or 113.3% over the previous year. The Bank’s return on equity (“ROE”) was 10.65% in 2003, compared to 6.92% in 2002. Net Interest Income (after provision for credit losses on mortgage loans) increased $273.1 million or 52.5% for the year. The spread between the yield on earning assets and the cost of interest-bearing liabilities in 2003 was 96 basis points, 17 basis points higher than in 2002. The yield on average assets was 3.64% in 2003, 48 basis points lower than in 2002. The yield on average liabilities was 2.68% for 2003, 65 basis points lower than 2002. This expansion in spread income and lower cost of funding as attributable to the benefits of sustained low short term interest rates in 2003 compared to the Federal Reserve’s short term rate decreases throughout 2002.

The Bank’s interest-rate spread increased for 2003, as volumes in both the advance and MPF Loan products increased from 2002. Average MPF Loans outstanding increased 86.0% to $38.0 billion for 2003. Average advances increased 4.7% to $24.8 billion. Interest income on MPF Loans was $609.7 million higher than 2002 as a result of the Bank’s increased mortgage loans balance.

Another contributor to the Bank’s $273.1 million or 52.5% increase in net interest income (after provision for credit losses on mortgage loans) for the year ended December 31, 2003 was the Bank’s ability to manage its market risk profile with a combination of cash and derivative transactions. Interest rates in May 2003 were the lowest in over 40 years, causing unprecedented activity in mortgage refinancing. The continued steep slope of the yield curve allowed the Bank to replace its higher-cost long-term debt with shorter-term lower-cost debt in anticipation of the higher refinancing activity. The asset mix of the Bank’s balance sheet continued to be shifted toward higher-yielding MPF assets. At year-end, MPF Loans represented 54.7% of the Bank’s assets compared to 40.3% at the end of 2002.

The Bank lowered the cost of its long-term borrowings through the continued development of syndicated global bond offerings, a program begun at the Bank in May 2002. Although the Bank lowered its yield on long-term borrowings from 3.97% in 2002 to 3.33% in 2003, the increased volume needed to fund the growing mortgage portfolio increased the 2003 total consolidated obligation interest expense $200.4 million over 2002.

Total premium/discount amortization related to the Bank’s mortgage loans for the year was $193.7 million. This was substantially higher than in 2002 due to the high level of mortgage refinance activity experienced during the year as well as higher average mortgage balances.

The yield on long-term investments also declined by 141 basis points for the year ended December 31, 2003 compared to December 31, 2002, as interest rates declined and prepayments from MBS were invested in lower yielding securities.

Total other income went from a loss of $184.4 million in 2002 to a loss of $113.2 million in 2003. The Bank transferred long-term bonds to other FHLBs, increasing the gain on extinguishment of debt by $108.5 million over 2002. This activity allowed participating FHLBs to generate funding at levels better than comparable FHLB Tap issues (a program for issuing bullet bonds with specified maturities that is reopened at competitive auction over a three-month period), thereby providing direct, tangible benefits to both the Bank and the FHLBs. All eleven other FHLBs participated in 2003.

Net gains on derivatives of $504.0 million were $689.8 million above the 2002 net loss of ($185.8) million, but this was partially offset by a net reduction of ($435.8) million in SFAS 133 adjustments in 2003, particularly in advance instruments. Reductions in the losses on futures contracts and on the interest impact of non-effective hedges also contributed to lower other income (loss) in 2003.

The Bank sold available-for-sale securities during 2003 at a loss of $35.8 million as a result of declining interest rates on adjustable rate securities. The Bank also reported a $56.6 million loss on trading securities in 2003, compared with a $295.6 million gain in 2002 that was primarily due to a $1.5 billion decrease in balance sheet position to realize the gains in market value.

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Other expense increased $28.7 million, to $86.4 million in 2003. Salaries and benefits increased $9.8 million primarily due to an increase in the number of employees, a direct result of the growth of the MPF Program and the MPF Shared Funding initiative. Increases in other operating expenses were related to the MPF Program, due to the continued national development of the program and the increase in MPF volume. The percentage of operating expenses to average assets for 2003 was 0.096%, compared with 0.088% for 2002.

Average Balances/Net Interest Margin/Rates

	For the Nine Months Ended September 30,
	2005							2004
(Dollars in thousands)	Average Balance			Interest		Yield /Rate		Average Balance			Interest		Yield /Rate
Assets
Federal funds sold and securities purchased under agreements to resell	$	6,922,730		$	155,061	2.95	%	$	6,300,706		$	52,866	1.10	%
Other short-term investments		952,183			23,108	3.20	%		1,071,148			10,275	1.26	%
Long-term investments (1)		7,213,345			232,235	4.29	%		7,261,799			200,121	3.67	%
Advances (1)		24,269,713			565,295	3.07	%		26,993,753			411,951	2.01	%
Mortgage loans held in portfolio (1)(2)(3)		44,798,135			1,639,915	4.88	%		47,659,308			1,696,185	4.75	%
Total earning assets		84,156,106		$	2,615,614	4.13	%		89,286,714		$	2,371,398	3.53	%
Allowance for loan losses on mortgage loans		(4,596	)						(5,199	)
Other assets		759,125							1,286,625
Total assets	$	84,910,635						$	90,568,140
Liabilities and Capital
Time Deposits	$	111,135		$	2,292	2.72	%	$	315,810		$	2,849	1.19	%
Other interest-bearing deposits		1,074,965			22,993	2.82	%		1,662,457			12,705	1.00	%
Short term borrowings		17,071,617			382,196	2.95	%		20,727,314			185,066	1.17	%
Long-term debt (1)		60,658,562			1,781,577	3.92	%		61,181,322			1,599,377	3.49	%
Other borrowings		1,216,706			39,747	4.31	%		1,229,912			23,136	2.47	%
Total interest-bearing liabilities		80,132,985		$	2,228,805	3.70	%		85,116,815		$	1,823,133	2.85	%
Non-interest-bearing deposits		69,915							58,139
Other liabilities		229,905							642,906
Total Capital		4,477,830							4,750,280
Total Liabilities and Capital	$	84,910,635						$	90,568,140
Net interest income and net yield oninterest-earning assets				$	386,809	0.61	%				$	548,265	0.82	%
Interest rate spread						0.43	%						0.68	%
Average interest earning assets to interest bearing liabilities						105.02	%						104.90	%

Notes:

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

⁽²⁾ Nonperforming loans, which include non-accrual and renegotiated loans, are included in average balances used to determine the yield.

⁽³⁾ Interest income includes amortization of net premiums of approximately $75.3 million and $105.7 million during the nine months ended September 30, 2005 and 2004, respectively.

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Average Balances/Net Interest Margin/Rates (cont’d)

	For the Years Ended December 31,
	2004							2003							2002
(Dollars in thousands)	Average Balance			Interest		Yield /Rate		Average Balance			Interest		Yield /Rate		Average Balance			Interest		Yield /Rate
Assets
Federal funds sold and securities purchased under agreements to resell	$	6,708,407		$	91,532	1.36	%	$	4,244,571		$	48,219	1.14	%	$	3,185,038		$	63,362	1.99	%
Other short-term investments		1,157,827			17,933	1.55	%		365,594			5,948	1.63	%		408,984			8,953	2.19	%
Long-term investments (1)		7,275,987			276,888	3.81	%		7,677,708			273,840	3.57	%		7,578,628			377,541	4.98	%
Advances (1)		26,229,269			554,103	2.11	%		24,837,901			555,196	2.24	%		23,733,666			590,264	2.49	%
Mortgage loans held in portfolio (1)(2)(3)		47,505,233			2,270,068	4.78	%		37,951,971			1,849,906	4.87	%		20,400,463			1,240,179	6.08	%
Total earning assets		88,876,723		$	3,210,524	3.61	%		75,077,745		$	2,733,109	3.64	%		55,306,779		$	2,280,299	4.12	%
Allowance for loan losses on mortgage loans		(5,080	)						(5,521	)						(4,621	)
Other assets		1,292,948							1,810,298							1,128,446
Total assets	$	90,164,591						$	76,882,522						$	56,430,604
Liabilities and Capital
Time Deposits	$	267,121			3,420	1.28	%	$	406,277			5,265	1.30	%	$	196,679			4,980	2.53	%
Other interest-bearing deposits		1,585,472			18,959	1.20	%		3,012,403			30,851	1.02	%		2,764,618			42,611	1.54	%
Short term borrowings		20,550,414			286,291	1.39	%		17,423,431			204,750	1.18	%		11,331,137			193,891	1.71	%
Long-term debt (1)		61,114,753			2,164,771	3.54	%		50,189,364			1,669,792	3.33	%		37,328,355			1,480,237	3.97	%
Other borrowings		1,231,120			32,740	2.66	%		1,242,383			28,625	2.30	%		1,196,923			35,687	2.98	%
Total interest-bearing liabilities		84,748,880		$	2,506,181	2.96	%		72,273,858		$	1,939,283	2.68	%		52,817,712		$	1,757,406	3.33	%
Non-interest-bearing deposits		60,714							53,060							3,794
Other liabilities		608,439							455,852							652,896
Total Capital		4,746,558							4,099,752							2,956,202
Total Liabilities and Capital	$	90,164,591						$	76,882,522						$	56,430,604
Net interest income and net yield on interest-earning assets				$	704,343	0.79	%				$	793,826	1.06	%				$	522,893	0.95	%
Interest rate spread						0.65	%						0.96	%						0.79	%
Average interest earning assets to interest bearing liabilities						104.87	%						103.88	%						104.71	%

Notes:

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

⁽²⁾ Nonperforming loans, which include non-accrual and renegotiated loans, are included in average balances used to determine the yield.

⁽³⁾ Interest income includes amortization of net premiums of approximately $133 million, $194 million and $58 million in 2004, 2003 and 2002, respectively.

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The table below shows the approximate effect on net interest income of volume and rate changes. For purposes of this table, changes that are not due solely to volume or rate changes are allocated to volume.

	For the Nine Months Ended September 30,									For the Years Ended December 31,
	2005 over 2004									2004 over 2003									2003 over 2002
(Dollars in thousands)	Volume			Rate			Increase/ (Decrease)			Volume			Rate			Increase/ (Decrease)			Volume			Rate			Increase/ (Decrease)
Increase (decrease) in interest income:
Federal funds sold and securities purchased under agreements to resell	$	5,200		$	96,995		$	102,195		$	28,555		$	14,758		$	43,313		$	20,936		$	(36,079	)	$	(15,143	)
Other short-term investments		(810	)		13,643			12,833			12,911			(926	)		11,985			(958	)		(2,047	)		(3,005	)
Long-term investments		(14,183	)		46,297			32,114			(14,414	)		17,462			3,048			4,555			(108,256	)		(103,701	)
Advances		(47,534	)		200,878			153,344			33,005			(34,098	)		(1,093	)		27,027			(62,095	)		(35,068	)
Mortgage loans held in portfolio		(70,468	)		14,198			(56,270	)		462,917			(42,755	)		420,162			1,068,946			(459,219	)		609,727
Total	$	(127,795	)	$	372,011		$	244,216		$	522,974		$	(45,559	)	$	477,415		$	1,120,506		$	(667,696	)	$	452,810
Increase (decrease) in interest expense:
Time deposits	$	(1,872	)	$	1,315		$	(557	)	$	(1,792	)	$	(53	)	$	(1,845	)	$	5,282		$	(4,997	)	$	285
Other interest-bearing deposits		(4,584	)		14,872			10,288			(14,746	)		2,854			(11,892	)		3,904			(15,664	)		(11,760	)
Short-term borrowings		(33,060	)		230,190			197,130			38,385			43,156			81,541			103,203			(92,344	)		10,859
Long-term debt		(12,350	)		194,550			182,200			366,638			128,341			494,979			510,767			(321,212	)		189,555
Other borrowings		(588	)		17,199			16,611			(317	)		4,432			4,115			1,386			(8,448	)		(7,062	)
Total	$	(52,454	)	$	458,126		$	405,672		$	388,168		$	178,730		$	566,898		$	624,542		$	(442,665	)	$	181,877
Increase (decrease) in net interest income	$	(75,341	)	$	(86,115	)	$	(161,456	)	$	134,806		$	(224,289	)	$	(89,483	)	$	495,964		$	(225,031	)	$	270,933

Expenses

Affordable Housing Program (“AHP”)

The Bank’s AHP expense was $22.0 million and $33.4 million for the nine months ended September 30, 2005 and 2004, respectively; and $40.7 million, $48.5 million, and $22.7 million for the years ended December 31, 2004, 2003, and 2002, respectively. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) contains provisions for the establishment of an Affordable Housing Program (AHP) by each FHLB. Each FHLB provides subsidies in the form of direct grants or below-market interest-rate advances for members which use the funds for qualifying affordable housing projects. Annually, the FHLBs individually and collectively must set aside for the AHP the greater of: (1) that FHLB’s pro-rata share of $100 million to be contributed in total by the FHLBs on the basis of net earnings (defined as net earnings before charges for AHP and interest expense on mandatorily redeemable capital stock but after the charge to REFCORP or “pre-assessment net earnings”); or (2) 10% of that Bank’s current year’s pre-assessment net earnings for the AHP Program, which is then charged to income and recognized as a liability of the Bank. As subsidies are provided, the AHP liability is relieved.

Other than where the FHLBs’ net income is insufficient to meet the annual $100 million AHP obligation, the AHP assessment is equal to regulatory net income times 10%. Regulatory net income for AHP assessment purposes is equal to net income reported in accordance with U.S. GAAP before mandatorily redeemable capital stock related interest expense, AHP assessment and REFCORP assessment. The exclusion of mandatorily redeemable capital stock related interest expense is a regulatory calculation determined by the Finance Board.

If the results of the aggregate 10% calculation described above is less than $100 million for all twelve FHLBs, the Finance Board, the Bank’s regulator, will allocate the shortfall among the FHLBs based on the ratio of each FHLB’s pre-assessment net earnings to the sum of the pre-assessment net earnings of the twelve FHLBs. There was no shortfall in either 2004 or 2003. If the Bank has a loss, a credit is recorded. This credit can be used to apply for a refund for previous amounts paid, reimbursed from other FHLBs that had income, or carried forward against future income. The Bank had outstanding AHP-related advances of $796.5 thousand, $1.2 million, and $2.1 million at September 30, 2005, December 31, 2004 and 2003, respectively. For the nine months ended September 30, 2005, and for the years ended December 31, 2004, 2003, and 2002, the Bank has not issued any new AHP advances, with all AHP subsidies having been provided in the form of outright grants.

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REFCORP Payment

The REFCORP assessment of the Bank was $49.4 million and $74.9 million for the nine months ended September 30, 2005 and 2004, and $91.4 million, $109.2 million and $51.2 million for the years ended December 31, 2004, 2003, and 2002, respectively. Although the Bank is exempt from ordinary federal, state and local taxation except for local real estate tax, it is required to make payments to REFCORP. Each FHLB is required to pay 20% of net earnings after AHP assessment to REFCORP. The REFCORP assessment amounts to U.S. GAAP net income before the AHP and REFCORP assessments minus the AHP assessment. The result is multiplied by 20%. The Resolution Funding Corporation has been designated as the calculation agent for AHP and REFCORP assessments. Each FHLB provides its net income before AHP and REFCORP to the Resolution Funding Corporation, which then performs the calculations for each quarter end.

The FHLBs will continue to expense these amounts until the aggregate amounts actually paid by all twelve FHLBs 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 FHLB to REFCORP will be fully satisfied. The Finance Board in consultation with the Secretary of the Treasury will select the appropriate discounting factors to be used in this annuity calculation. The FHLBs 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 FHLBs is not determinable at this time due to the interrelationships of all future FHLBs’ earnings and interest rates. If the Bank experienced a net loss during a quarter, but still had net income for the year, the Bank’s obligation to the REFCORP would be calculated based on the Bank’s year-to-date net income. The Bank would be entitled to a refund of amounts paid for the full year that were in excess of its calculated annual obligation. If the Bank had net income in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the Bank experienced a net loss for a full year, the Bank would have no obligation to the REFCORP for the year.

The Finance Board is required to extend the term of the Bank’s 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.

As a result of the REFCORP payments of $396.4 million made by the FHLBs in the first, second and third quarters of 2005, the overall period during which the FHLBs must continue to make quarterly payments was shortened to April 15, 2018.

Office of Finance Expenses

The Office of Finance assessment for the nine months ended September 30, 2005 was $1.3 million compared to $1.4 million for the same period in 2004. The FHLBs fund the costs of the Office of Finance as a joint office that facilitates issuing and servicing the consolidated obligations of the FHLBs, preparation of the FHLBs combined quarterly and annual financial reports, and certain other functions. For the years ended December 31, 2004, 2003 and 2002, the Office of Finance assessments were $1.9 million, $1.7 million and $1.3 million, respectively.

Finance Board Expenses

The FHLBs are assessed the costs of operating the Finance Board and have no control over these costs. The Finance Board assessed the Bank $2.4 million and $2.1 million for the nine months ended September 30, 2005 and 2004, respectively. The Bank was assessed $2.9 million during the year ended December 31, 2004, compared to $2.1 million and $1.6 million in 2003 and 2002, respectively. The Finance Board regulates the FHLBs, who are required to fund the cost of the regulation. These expenses have increased due to Finance Board concerns related to interest rate risk management within the FHLBs and congressional concerns over accounting irregularities at Freddie Mac and Fannie Mae. As a result, the Board increased their regulatory scrutiny over the FHLBs.

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Principal Accounting Fees and Services

The following table sets forth the aggregate fees billed to the Bank by its external accounting firm:

	As of December 31,
(Dollars in thousands)	2004		2003		2002
Audit fees	$	762	$	246	$	188
Audit related fees		191		132		32
All other fees		90		281		589
Total fees	$	1,043	$	659	$	809

Audit fees during the three years ended December 31, 2004 were for professional services rendered for the audits of the financial statements of the Bank. Audit related fees for the three years ended December 31, 2004 were for assurance and related services primarily related to accounting consultations and the Bank’s capital plan conversion.

The Bank is exempt from all federal, state, and local income taxation. Therefore, no tax related fees were paid during the three years ended December 31, 2004.

All other fees paid during the three years ended December 31, 2004 were for services rendered for information system related consulting on the Bank’s Hedge Accounting User System. No fees were paid to the external accounting firm for financial information system design and implementation.

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Operating Segment Results

The Bank manages its operations by grouping its products and services within two operating segments. The measure of profit or loss and total assets for each segment is contained in Note 17 to the December 31, 2004 Annual Financial Statements and Notes. These operating segments are:

• Traditional funding, liquidity and deposit products consisting of loans to members called advances, standby letters of credit, investments and deposit products; and

• the MPF Program.

The internal organization that is used by management for making operating decisions and assessing performance is the source of the Bank’s reportable segments.

The tables below summarize operating segment results:

	For the Nine Months Ended September 30,
	2005									2004
(Dollars in thousands)	Traditional Member Finance			Mortgage Partnership Finance			Total Bank			Traditional Member Finance		Mortgage Partnership Finance			Total Bank
Interest income	$	955,161		$	1,660,453		$	2,615,614		$	597,841	$	1,773,557		$	2,371,398
Interest expense		868,276			1,360,529			2,228,805			498,132		1,325,001			1,823,133
Net interest income		86,885			299,924			386,809			99,709		448,556			548,265
Provision for loan losses		—			—			—			—		—			—
Other income (loss)		(12,116	)		(16,688	)		(28,804	)		15,904		(114,696	)		(98,792	)
Other expense		37,648			51,465			89,113			31,162		51,793			82,955
Income before assessments		37,121			231,771			268,892			84,451		282,067			366,518
Assessments		9,856			61,542			71,398			22,393		85,934			108,327
Cumulative effect of change in accounting principle		—			—			—			—		41,441			41,441
Net income	$	27,265		$	170,229		$	197,494		$	62,058	$	237,574		$	299,632

	For the Years Ended December 31,
	2004								2003								2002
(Dollars in thousands)	Traditional Member Finance		Mortgage Partnership Finance			Total Bank			Traditional Member Finance		Mortgage Partnership Finance			Total Bank			Traditional Member Finance			Mortgage Partnership Finance			Total Bank
Interest income	$	851,607	$	2,358,917		$	3,210,524		$	761,796	$	1,971,313		$	2,733,109		$	1,030,745		$	1,249,554		$	2,280,299
Interest expense		721,771		1,784,410			2,506,181			609,988		1,329,295			1,939,283			697,175			1,060,231			1,757,406
Net interest income		129,836		574,507			704,343			151,808		642,018			793,826			333,570			189,323			522,893
Provision for loan losses		—		—			—			—		—			—			—			2,217			2,217
Other income (loss)		10,858		(137,989	)		(127,131	)		7,590		(120,769	)		(113,179	)		(146,034	)		(38,344	)		(184,378	)
Other expense		48,571		72,485			121,056			35,327		51,103			86,430			28,918			28,763			57,681
Income before assessments		92,123		364,033			456,156			124,071		470,146			594,217			158,618			119,999			278,617
Assessments		24,441		107,698			132,139			32,917		124,770			157,687			42,082			31,836			73,918
Cumulative effect of change in accounting principle		—		41,441			41,441			—		—			—			—			—			—
Net income	$	67,682	$	297,776		$	365,458		$	91,154	$	345,376		$	436,530		$	116,536		$	88,163		$	204,699

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Traditional Member Finance

The table below compares the results for Traditional Member Finance by period:

	For the Nine Months Ended September 30,										For the Years Ended December 31,									For the Years Ended December 31,
(Dollars in thousands)	2005			2004		Incr. / (Decr.)			% Change		2004		2003		Incr. / (Decr.)			% Change		2003		2002			Incr. / (Decr.)			% Change
Condensed Income Statement
Interest Income	$	955,161		$	597,841	$	357,320		59.8	%	$	851,607	$	761,796	$	89,811		11.8	%	$	761,796	$	1,030,745		$	(268,949	)	-26.1	%
Interest Expense		868,276			498,132		370,144		74.3	%		721,771		609,988		111,783		18.3	%		609,988		697,175			(87,187	)	-12.5	%
Net interest income		86,885			99,709		(12,824	)	-12.9	%		129,836		151,808		(21,972	)	-14.5	%		151,808		333,570			(181,762	)	-54.5	%
Provision for loan losses		—			—		—					—		—		—					—		—			—
Other income (loss)		(12,116	)		15,904		(28,020	)	-176.2	%		10,858		7,590		3,268		43.1	%		7,590		(146,034	)		153,624		105.2	%
Other expense		37,648			31,162		6,486		20.8	%		48,571		35,327		13,244		37.5	%		35,327		28,918			6,409		22.2	%
Income before assessments		37,121			84,451		(47,330	)	-56.0	%		92,123		124,071		(31,948	)	-25.7	%		124,071		158,618			(34,547	)	-21.8	%
Assessments		9,856			22,393		(12,537	)	-56.0	%		24,441		32,917		(8,476	)	-25.7	%		32,917		42,082			(9,165	)	-21.8	%
Net Income	$	27,265		$	62,058	$	(34,793	)	-56.1	%	$	67,682	$	91,154	$	(23,472	)	-25.7	%	$	91,154	$	116,536		$	(25,382	)	-21.8	%

Net income in the Traditional Member Finance operating segment declined over the past three years. The decrease in net income was primarily due to lower rates on advances to members and higher rates on the Bank’s sources of funding. In particular, the net balance sheet spread on interest earning assets and interest earning liabilities declined to 0.65% in 2004 from 0.79% in 2002 due in large part to the lowest short-term interest rates in 40 years and the resultant impact on the available yields on the balance sheet. Other operating expenses also increased over the period as noted in the following paragraphs.

Nine months ended September 30, 2005 compared to nine months ended September 30, 2004

For the nine months ended September 30, 2005, Traditional Member Finance net income decreased $34.8 million to $27.3 million from $62.1 million for the same period ended September 30, 2004. Total assets of this segment as of September 30, 2005 decreased $1.2 billion over the same period in 2004 because of advance repayments.

Net interest income decreased $12.8 million in the segment for the nine months ended September 30, 2005 as compared to the nine months ended September 30, 2004. Interest income increased $357.3 million, primarily on advances despite a $2.7 billion decrease in average advances outstanding. The average rate on advances (the largest component of interest income for this segment) increased 106 basis points over the prior year period. This was offset by a $370.1 million increase in interest expense, primarily on discount notes. The average rate on discount notes that primarily support this segment increased by 178 basis points.

Other income (loss) for the nine months ended September 30, 2005 decreased $28.0 million, to a loss of $12.1 million from a gain of $15.9 million, due to the following reasons:

• Gain (loss) on early extinguishment of debt decreased $40.5 million, or 97.4%, to a gain of $1.1 million from a gain of $41.6 million due to consolidated obligations that were transferred to other FHLBs. The transfers in 2004 were higher due to the Bank’s reduced need for funding pending the Written Agreement with the Finance Board and the rising interest rate environment. Net realized and unrealized gain (loss) on investments and derivatives decreased $9.7 million, or 63.8%, to a gain of $5.5 million from a gain of $15.2 million.

The above decreases were offset by the following increases:

• The gain on the consolidated obligations sold in 2004 was offset by a gain of $19.2 million on associated sales of available-for-sale securities that hedged the transferred debt. The 2004 loss was recorded in the net realized gain (loss) from sale of available-for-sale securities line in the Statements of Income.

• In addition to selling securities in 2004, the Bank also recorded unrealized gains on trading securities in 2005 versus losses in 2004 due to declining long-term rates.

Other operating expense increased $6.5 million for the nine months ended September 30, 2005 over September 30, 2004 due in large part to the increase in Bank staffing requirements. Bank-wide staffing at September 30, 2005 was 427 full-time

91

equivalent employees compared to 358 a year ago. The Bank has added employees to support the build out of new computer hardware and software in Information Systems and in control functions in Finance, Legal and Risk Management.

Year ended December 31, 2004 compared to year ended December 31, 2003

For the year ended December 31, 2004, the Traditional Member Finance operating segment’s net income decreased to $67.7 million from $91.2 million for the same period ended December 31, 2003, a decrease of 25.7%. The decrease in net income was primarily due to an increase in interest expense and other operating expenses, and partially offset by an increase in interest income.

For the year ended December 31, 2004, interest expense increased $111.8 million, or 18.3% compared to the same period ended December 31, 2003. A 21 basis points increase in yield on the Bank’s average long term and short term debt, in addition to a $14.1 billion increase in the average balance of consolidated obligations was the primary cause of this increase.

For the year ended December 31, 2004, other operating expenses increased to $48.6 million, or 37.5% compared to $35.3 million for the same period ended December 31, 2003. Salaries and benefit expense increased $3.1 million, or 17.2% as the Bank continued to expand its growth of full time employees in 2004.

For the year ended December 31, 2004, interest income increased $89.8 million, or 11.8% compared to the same period ended December 31, 2003. A 13 basis point decrease in yield on advances coupled with an increase of $1.0 billion in the average balance increased interest income by $36.4 million for the year ended December 31, 2004 as compared to the same period ended December 31, 2003. Increases in average balances of Federal Funds Sold of $2.4 billion, partially offset by a 13 basis point decline in yield, increased interest income by $43.9 million for the year ended December 31, 2004 as compared to the same period ending December 31, 2003.

Year ended December 31, 2003 compared to year ended December 31, 2002

Net interest income was $152 million for the year ended December 31, 2003, down $182 million or 54% from the year ended December 31, 2002. The decrease in net interest income was due to the lower level of interest rates on the types of assets over the course of the year.

Non-interest income was $8 million in 2003, a 105.2% increase from the negative $146 million for 2002, which had consisted primarily of losses on hedging activities. Non-interest expense was $35 million for the year ended December 31, 2003, up $6 million or 22% from the previous year end. The increase in non-interest expense was predominantly due to depreciation of the Bank’s increased investment in back office technology and infrastructure.

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Mortgage Partnership Finance^® Program

The table below compares the results for the MPF Program by period:

	For the Nine Months Ended September 30,											For the Years Ended December 31,											For the Years Ended December 31,
(Dollars in thousands)	2005			2004			Incr. / (Decr.)			% Change		2004			2003			Incr. / (Decr.)			% Change		2003			2002			Incr. / (Decr.)			% Change
Condensed income statement:
Interest income	$	1,660,453		$	1,773,557		$	(113,104	)	-6.4	%	$	2,358,917		$	1,971,313		$	387,604		19.7	%	$	1,971,313		$	1,249,554		$	721,759		57.8	%
Interest expense		1,360,529			1,325,001			35,528		2.7	%		1,784,410			1,329,295			455,115		34.2	%		1,329,295			1,060,231			269,064		25.4	%
Net interest income		299,924			448,556			(148,632	)	-33.1	%		574,507			642,018			(67,511	)	-10.5	%		642,018			189,323		$	452,695		239.1	%
Provision for loan losses		—			—			—		0.0	%		—			—			—		0.0	%		—			2,217			(2,217	)	-100.0	%
Other income (loss)		(16,688	)		(114,696	)		98,008		-85.5	%		(137,989	)		(120,769	)		(17,220	)	14.3	%		(120,769	)		(38,344	)		(82,425	)	215.0	%
Other expense		51,465			51,793			(328	)	-0.6	%		72,485			51,103			21,382		41.8	%		51,103			28,763			22,340		77.7	%
Income before assessments		231,771			282,067			(50,296	)	-17.8	%		364,033			470,146			(106,113	)	-22.6	%		470,146			119,999			350,147		291.8	%
Assessments		61,542			85,934			(24,392	)	-28.4	%		107,698			124,770			(17,072	)	-13.7	%		124,770			31,836			92,934		291.9	%
Cumulative effect of change in accounting principle		—			41,441			(41,441	)	0.0	%		41,441			—			41,441		0.0	%		—			—			—		0.0	%
Net Income	$	170,229		$	237,574		$	(67,345	)	-28.3	%	$	297,776		$	345,376			(47,600	)	-13.8	%	$	345,376		$	88,163			257,213		291.7	%

Nine months ended September 30, 2005 compared to nine months ended September 30, 2004

For the nine months ended September 30, 2005, the Mortgage Partnership Finance operating segment’s net income decreased $67.3 million, or 28.3%, to $170.2 million from $237.6 million for the same period ended September 30, 2004. Total assets attributable to this segment, primarily mortgages, decreased $5.2 billion over the year ago period due to paydowns of existing mortgages and a decline in fixed-rate mortgage loans purchased or funded by the Bank from or through its PFIs, a result of an increase in borrower demand for adjustable rate and interest only mortgages that the Bank does not purchase or fund.

Net interest income for the nine months ended September 30, 2005 decreased $148.6 million, or 33.1%, from September 30, 2004. Interest income on MPF products declined $113.1 million or 6.4% for the nine months ended September 30, 2005 as compared to the same period in 2004, primarily due to the decrease of $2.9 billion or 6.0%, in the average daily balance in mortgages held for portfolio. The decrease was partially offset by an increase in average yields on mortgage loans of 13 basis points, but this was insufficient to offset the decline in mortgage loans outstanding. Interest expense increased $35.5 million, or 2.7%, primarily due to the average rate on consolidated obligation bonds that primarily support this segment increasing 43 basis points over the year ago period. Average consolidated obligation bonds outstanding declined over the year ago period, but this was insufficient to offset the increase in rates.

Other income (loss) improved $98.0 million for the nine months ended September 30, 2005, to a loss of $16.7 million from a loss of $114.7 million, primarily due to a net realized and unrealized gain (loss) on derivatives improving $97.9 million to a loss of $22.6 million for the nine months ended September 30, 2005 from a loss of $120.6 million for the nine months ended September 30, 2004.

In 2004, the Mortgage Partnership Finance segment recorded a $41.4 million cumulative effect adjustment (pre- AHP and REFCORP assessments) as a result of a change in accounting principle for the amortization of mortgage loan premiums and discounts. The Bank changed its method of accounting for deferred agent fees and premiums and discounts on mortgage loans to amortize such amounts on a constant effective yield over their contractual life. For further details on this change in accounting principle see Note 2 – Change in Accounting Principle and Recently Issued Accounting Standards and Interpretations to the Bank’s 2004 Annual Financial Statements and Notes.

Year ended December 31, 2004 compared to year ended December 31, 2003.

For the year ended December 31, 2004, the Mortgage Partnership Finance operating segment’s net income decreased to $297.8 million from $345.4 million for the same period ended December 31, 2003, a decrease of 13.8%. The decrease in net income was primarily due to an increase in interest expense and other operating expenses, and a decline in other income, partially offset by an increase in interest income.

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For the year ended December 31, 2004, interest expense increased $455.1 million or 34.2% compared to the same period ended December 31, 2003. A 21 basis points increase in yield on the Bank’s average long term and short term debt, in addition to a $14.1 billion increase in the average balance of consolidated obligation bonds was the primary cause of this increase.

For the year ended December 31, 2004, other operating expenses increased to $72.5 million, or 41.8%, compared to $51.1 million for the same period ended December 31, 2003. Salaries and benefit expense increased $6.8 million, or 39.8% as the Bank continued to expand its growth in full time employees in 2004, as compared to the same period ended December 31, 2003. Finance Board and Office of Finance expenses increased to $3.3 million, or 84.7% for the period ended December 31, 2004, as compared to the same period ended December 31, 2003.

For the year ended December 31, 2004, other income declined $17.2 million, or 14.3% as compared to the same period ended December 31, 2003. The primary cause of this decline was a $43.1 million, or 90.1% decline in income generated from the early extinguishment of debt for the period ended December 31, 2004, as compared to the same period ended December 31, 2003. This was partially offset by a $27.1 million, or 15.7% decline in the net realized and unrealized loss on derivatives and hedging activities for the period ended December 31, 2004, as compared to the same period ended December 31, 2003.

For the year ended December 31, 2004, interest income increased $387.6 million, or 19.7% compared to the same period ended December 31, 2003. The increase in interest income from 2003 to 2004 was the result of a 25.0% increase in the average balance of MPF Loans held in portfolio, which was partially offset by a nine basis points decline in yield earned on those assets.

Year ended December 31, 2003 compared to year ended December 31, 2002.

Net interest income for the MPF segment was $642 million at December 31, 2003, up $453 million or 239% from 2002 despite a period of record mortgage refinance activity and historical low interest rates. The increase in net interest income was due to the Bank’s growth in mortgage volume and the spread for mortgage assets held on the Balance Sheet. Total mortgage loans for the segment increased by 82% in 2003 to reach $47.6 billion at December 31, 2003. The Bank purchased or funded $38.3 billion in MPF Loans and collected $16.7 billion of principal payments in 2003 to reach $47.6 billion at December 31, 2003.

The increase in the Bank’s non interest expense was due to depreciation for our increased investments in back office technology and infrastructure. Capital expenditures for the MPF Program were $29 million in 2003, up from $8 million in 2002.

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Critical Accounting Policies and Estimates

The accounting principles generally accepted in the United States of America, or “GAAP,” require the Bank’s management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expense in the Bank’s financial statements and accompanying notes. The Bank’s management believes that the judgments, estimates and assumptions used in the preparation of the Bank’s financial statements are appropriate given the factual circumstances as of September 30, 2005 and December 31, 2004. However, these critical accounting policies and the use of other judgments, estimates and assumptions might materially impact amounts reported in the financial statements.

Certain accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In addition, certain accounting principles require significant judgment in applying the complex accounting principles to individual transactions to determine the most appropriate treatment. The Bank identified policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Bank’s financial statements. The following is a brief discussion of these critical accounting policies.

Accounting for Derivatives

SFAS 133 requires that all derivative financial instruments be recorded on the statements of condition at their fair value. Changes in fair value of derivatives are recorded each period in current earnings or OCI, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction.

By regulation, derivative financial instruments are only permitted to be used by the Bank in order to mitigate identifiable risks. All of the Bank’s derivatives are positioned to offset some or all of the risk exposure inherent in its member lending, mortgage finance investment, and funding activities. The Bank utilizes the most cost-efficient hedging techniques available while, at the same time, reviewing the resulting accounting consequences as an important consideration.

The Bank formally documents all relationships between derivative hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions and its method of assessing hedge 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.

For a derivative qualifying as a cash flow hedge, the Bank reports changes in the fair value of the derivatives in a separate component of accumulated OCI to the extent the hedge is effective. The remaining ineffective portion is reported as net gain (loss) on derivative and hedging activities in the period of ineffectiveness.

The Bank recognizes the effective portion of the cumulative changes in fair value as income (expense) related to derivatives during the period(s) in which the hedged item affects earnings, unless (a) occurrence of the forecasted transaction is not probable, in which case the amount in accumulated OCI is reclassified to earnings immediately, (b) the Bank expects at any time that continued reporting of a net loss in accumulated OCI would lead to recognizing a net loss on the combination of a hedging instrument and hedged transaction (and related asset acquired or liability incurred) in one or more future periods, in which case a loss shall be reclassified immediately into earnings for the amount that is not expected to be recovered, or (c) the occurrence of the forecasted transaction was the issuance of long-term debt; in which case, the Bank recognizes the effective portion of the cumulative changes in fair value as long-term debt expense.

If a derivative no longer qualifies as a cash flow hedge, the Bank discontinues hedge accounting prospectively. The Bank continues to carry the derivative on the balance sheet at fair value and records further fair value gains (losses) in the statements of income as net gain (loss) on derivative and hedging activities until the derivative is terminated or re-designated.

The Bank monitors its sensitivity to changes in interest rates and uses derivative financial instruments to reduce exposure to adverse changes in interest rates. Accordingly, all derivatives are recorded in the financial statements at their respective fair value. Certain derivative financial instruments’ changes in fair value are reflected in current period earnings.

Fair Values

Certain of the Bank’s assets and liabilities including investments classified as available-for-sale and trading securities, and all derivatives are presented in the statements of condition at fair value. Under GAAP, the fair value of an asset or liability is

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the amount at which that asset could be bought or sold, or that liability could be incurred or settled in a current transaction between willing parties, other than in liquidation. 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. Pricing models and their underlying assumptions are based on Bank management’s best estimates for discount rates, prepayments, 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 assumptions as well as changes in market conditions could result in materially different net income and retained earnings.

Fair value amounts have been determined by the Bank: first, by using available market information and, second, if market values were not available, using the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank. Although the Bank 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 Bank’s financial instruments, in certain cases, fair values are not subject to precise quantification or verification and their values may change as economic and market factors, and the evaluation of those factors, change. Therefore, estimated fair values may not be necessarily indicative of the amounts that would be realized in current market transactions. The fair value tables do not represent an estimate of overall market value of the Bank as a going concern, which would take into account future business opportunities.

Consolidated Obligations

The Bank records a liability for consolidated obligations on its statements of condition in proportion to the proceeds it receives from the issuance of those consolidated obligations. Consolidated obligations are the joint and several obligations of the FHLBs and consist of consolidated obligation bonds and discount notes. Accordingly, should one or more of the FHLBs be unable to repay their consolidated obligations, the Bank could be called upon to repay all or part of such obligations, as determined or approved by the Finance Board. No liability has been recorded for the joint and several obligations related to the other FHLBs’ share of the consolidated obligations. Due to the high credit quality of each FHLB, management has concluded that the probability that a FHLB would be unable to repay its consolidated obligations is remote. Refer to “Item 2.2—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors that May Affect Future Results” for further details.

Premiums, Discounts, Nonrefundable Fees, and Costs

When the Bank buys MBS, mortgage loans, or mortgage-related securities, the Bank may not pay the seller the exact amount of the unpaid principal balance (“UPB”). If the Bank pays more that the UPB and purchases the mortgage assets at a premium, the premium reduces the yield the Bank recognizes on the assets below the coupon amount. If the Bank pays less than the UPB and purchases the mortgage assets at a discount, the discount increases the yield above the coupon amount.

In addition to premiums and discounts on mortgage assets, the Bank may pay/receive loan origination fees (“agent fee”) to/from PFIs for the origination of MPF Loans as agent for the Bank, and the Bank may pay concession fees to dealers in connection with the sale of consolidated obligation bonds (herein collectively referred to as “nonrefundable fees”).

Effective January 1, 2004, the Bank changed its methods of accounting for the amortization of mortgage loan premiums and discounts (agent fees) under SFAS 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases”. In accordance with SFAS 91, the Bank defers and amortizes agent fees 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 Bank believes that the use of the contractual method is preferable under GAAP due to a decreased reliance on the use of estimates inherent in calculating the weighted average lives that were used to determine the loan pool amortization periods.

Historically, the Bank deferred and amortized agent fees and premiums and discounts paid to and received by its members as interest income over the estimated lives of the related mortgage loans. Actual prepayment experience and estimates of future principal repayments were used in calculating the estimated lives of the mortgage loans.

As a result of implementing the change in accounting for amortization and accretion from the estimated life method to the contractual maturity method, the Bank recorded a cumulative change in accounting principle retroactively to January 1, 2004

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resulting in an increase to retained earnings of $41.4 million. As a result of implementing the change, the Bank reduced agent fee amortization expense by $16.8 million during 2004.

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of probable losses inherent in the Bank’s advances and MPF Loan portfolios. Loan losses deemed to be uncollectible are charged against the allowance for loan losses. Cash recovered on previously charged off amounts is credited to the allowance for loan losses.

The Bank performs periodic and systematic detailed reviews of its advances and MPF Loan portfolios to identify credit risks and to assess the overall collectibility of these loans. Since MPF Loans are homogeneous in nature, the allowance for loan losses related to these loans is based on the aggregated portfolio with the exception of MPF Loans that are viewed as collateral dependent loans under SFAS 114, “Accounting by Creditors for Impairment of a Loan.” The allowance for loan losses for MPF Loans that are deemed to be collateral dependent are assessed on an individual loan basis. A loss forecast model is utilized for the aggregate MPF Loan portfolio which considers a variety of factors including, but not limited to, historical loss experience, estimated defaults or foreclosures based on portfolio trends, delinquencies, and economic conditions. This MPF Loan loss forecast model is updated on a quarterly basis in order to incorporate information reflective of the current economic environment. The Bank also factors in the PFI’s CE Amount when determining the amount of the allowance for loans.

In addition, since the PMI and SMI as well as FHA/VA insurance/guarantees are not severable from the loans to which they relate, the cash flows associated with these components are inextricably tied to the loans’ cash flows. As such, the MPF Banks also consider these credit protections when determining the adequacy of the allowance for loan losses. Advances are reviewed on an individual basis to determine the creditworthiness of the member and to ensure that sufficient eligible collateral is available. On a quarterly basis (or more frequently as deemed necessary) the continued creditworthiness of the member as well as the level of eligible collateral is monitored in accordance with the Bank’s underwriting procedures.

The Bank has experienced no credit losses on advances since 1932 when the FHLBs were created, nor does the Bank’s management anticipate any credit losses on advances. The Bank has recorded no allowance for losses on its advances. The Bank is required by the FHLB Act to obtain sufficient collateral on advances to protect against losses, and to accept as collateral for advances only certain United States Government or government-agency securities, residential mortgage loans, deposits in the Bank, and other real estate-related and Community Financial Institutions’ assets. At September 30, 2005, December 31, 2004 and 2003, the Bank had perfected first liens on collateral, either loans or securities, on a member-by-member basis, with an estimated fair value in excess of outstanding advances.

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2.3 Risk Management

General

Lending, acquiring MPF Loans, investing funds, and engaging in derivative financial instruments have the potential to expose the Bank to a number of risks including, interest rate, credit and operational risk. To control and manage these risks the Bank has established policies and practices to evaluate and actively manage these risk positions. The Finance Board has established regulations governing the Bank’s risk management practices. The Bank must file periodic compliance reports with the Finance Board. The Finance Board also conducts an annual on-site examination of the Bank, quarterly on-site examination updates and off-site analysis.

The Bank is required to maintain liquidity in accordance with certain Finance Board regulations, with the Finance Board’s Financial Management Policy (“FMP”), and with policies established by the Bank’s Board of Directors. The Bank requires liquidity to satisfy member demand for short- and long-term funds, repay maturing consolidated obligations, and meet other obligations. Members may look to the Bank to provide standby liquidity in their asset/liability management planning. The Bank seeks to be in a position to meet its members’ credit and liquidity needs without being forced to incur unnecessarily high borrowing costs. The Bank’s primary sources of liquidity are high quality short-term investments and the issuance of new consolidated obligation bonds and discount notes. The Bank maintains liquidity to enable the Bank to meet its obligations and the needs of its members in the event of operational disruptions at the Bank, the Office of Finance, or the short-term capital markets.

With respect to interest rate risk, the Bank measures its exposure to changing interest rates in several ways. The one-year repricing gap at September 30, 2005, defined as the cumulative difference between assets and liabilities scheduled to reprice within one year, stood at -3.3% of assets. The Bank’s duration gap, which is calculated by aggregating the dollar duration of all assets, liabilities and derivatives, and dividing that amount by the total market value of assets, was 1.28 months at September 30, 2005. The Bank also simulates the sensitivity of the market value of its equity to changes in interest rates.

The Bank regularly uses interest rate derivatives in order to reduce exposure to changing interest rates. As of September 30, 2005, the Bank had interest rate derivatives totaling $47.2 billion in outstanding notional principal, which includes notional principal of interest rate swaps of $33.6 billion, $2.7 billion in outstanding interest rate caps, $0.6 billion in interest rate floors, $2.2 billion in futures and $8.1 billion in swaptions. These instruments are used to control and manage interest rate risk and minimize variations in income and the market value of financial instruments.

The Bank charges a prepayment fee on advances that allows the Bank to be economically indifferent as to whether the advance prepays or remains in place prior to its maturity. The Bank recorded $0.6 million in prepayment fees for the nine months ended September 30, 2005 and $5.1 million for the year ended December 31, 2004.

The Bank uses callable debt to mitigate interest rate risk. Excluding discount notes, 38.8% of the Bank’s debt at September 30, 2005 was callable by the Bank. Further, the Bank issues debt with complex coupon payment terms (structured debt). At September 30, 2005, 0.15% of the Bank’s issued debt was in the form of structured debt. In the case of certain issues of such debt, the Bank simultaneously enters into interest rate derivatives with cash flow features that offset the structured features of the bond, effectively converting the instrument into a conventional fixed rate or adjustable rate instrument with a coupon tied to a common index, such as LIBOR.

For financial instruments that have an active, liquid market with available market prices, the Bank determines fair value based on price quotations supplied from third party pricing services and broker-dealers or transaction data, if available. For financial instruments where such price information is not available, the Bank uses various industry standard analytical tools to estimate fair values. These tools estimate the present value of expected future cash flows using valuation models that incorporate observable market data obtained from third-party pricing services and broker-dealers. When requisite data is not obtainable from such sources, the Bank uses its best judgment about the appropriate valuation methods.

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The Bank has never experienced a credit loss on advances. Credit risk on advances is minimized by active monitoring of member credit quality and by requiring members to pledge sufficient collateral against the outstanding advance balance. Advances are collateralized primarily by single-family residential mortgages, securities and other high quality collateral. Based on the collateral pledged and the repayment history of advances, the Bank has no loan loss reserves for advances and believes no loan loss reserve is necessary. The Bank limits its investments and investment counterparties to those with the highest credit grades. The credit quality of borrowing members and the Bank’s unsecured credit exposures are regularly monitored by Bank management.

Currently, the Bank calculates its loan loss allowance based on the Bank’s loan portfolio performance history, adjusted for an analysis of current trends and conditions including the credit enhancement provided by members on MPF Loans. The allowance for loan losses on mortgage loans totaled $4.1 million at September 30, 2005. All MPF Master Commitments have credit enhancement coverage provided by one or more parties including the PFI, mortgage insurance companies or the federal government through the FHA and VA loan programs.

Loan Portfolio Analysis

The Bank’s nonperforming MPF Loans increased to 0.17% of the total MPF Loan portfolio at September 30, 2005, compared to 0.15% and 0.12% at December 31, 2004 and 2003. The increase resulted primarily from the ongoing aging of the Bank’s MPF Loan portfolio. The weighted average age of loans in the Bank’s MPF Loan portfolio was 2.18 years, 1.59 years and 0.88 years at September 30, 2005 and December 31, 2004 and 2003, respectively. As the Bank’s MPF Loan portfolio continues to age, the expectation is that non-performing loans will also continue to gradually increase and then stabilize.

The Bank’s outstanding MPF Loans, nonperforming loans and loans 90 days or more past due and accruing interest are as follows:

	September 30,			December 31,
(Dollars in thousands)	2005			2004			2003			2002			2001			2000
Mortgage loans	$	43,236,099		$	46,925,430		$	47,605,190		$	26,191,082		$	16,573,648		$	8,104,183
Nonperforming mortgage loans 1	$	75,061		$	71,159		$	57,347		$	25,295		$	4,734		$	1,304
Interest contractually due during the period	$	3,342		$	4,297		$	3,663		$	1,688		$	323		$	85
Interest actually received during the period		(3,251	)		(4,257	)		(3,636	)		(858	)		(165	)		(41	)
Difference 2	$	91		$	40		$	27		$	830		$	158		$	44
Mortgage loans past due 90 days or more and still accruing interest 3	$	72,255		$	100,134		$	123,544		$	118,906		$	99,899		$	—

¹ Nonperforming loans include non-accrual and renegotiated conventional MPF Loans.

² Represents interest contractually due less interest actually received on nonperforming conventional mortgage loans.

³ Contains government loans only (e.g., FHA, VA), which continue to accrue interest after 90 days or more delinquent.

The allowance for loan losses on mortgage loans is as follows:

	For the Nine Months Ended September 30,						For the Years Ended December 31,
(Dollars in thousands)	2005			2004			2004			2003			2002			2001			2000
Balance at beginning of period	$	4,879		$	5,459		$	5,459		$	5,464		$	3,340		$	1,503		$	687
Charge-offs		(1,074	)		(747	)		(1,094	)		(176	)		(138	)		(13	)		(90	)
Recoveries		295			215			514			171			45			40			—
Net (charge-offs) recoveries		(779	)		(532	)		(580	)		(5	)		(93	)		27			(90	)
Provision for credit losses		—			—			—			—			2,217			1,810			906
Balance at end of period	$	4,100		$	4,927		$	4,879		$	5,459		$	5,464		$	3,340		$	1,503
Average loan portfolio balance	$	44,798,135		$	47,659,308		$	47,505,233		$	37,951,971		$	20,400,463		$	10,454,673		$	4,864,189
Net (charge-off)/recovery percentage		-0.00174	%		-0.00112	%		-0.00122	%		-0.00001	%		-0.00046	%		0.00026	%		-0.00185	%

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Conventional Mortgage Loan Delinquencies

Bank PFI’s MPF Delinquency Summary

September 30, 2005

	Percent of Total Amount Outstanding	MBA Average2
30 Days	0.63%	1.31%
60 Days	0.11%	0.27%
90+ Days1	0.16%	0.62%
In Foreclosure	0.04%	0.41%

¹ Percentage 90 days or more includes loans in foreclosure.

² Data on 1-4 unit prime fixed-rate mortgages (not seasonally adjusted) from the Mortgage Bankers Association National Delinquency Survey as of June 30, 2005 (latest date available).

Quantitative and Qualitative Disclosures about Market Risk

Market Risk Management

Market risk is the potential for loss due to a change in the value of a financial instrument held by the Bank as a result of fluctuations in interest rates. The Bank is exposed to interest rate risk primarily from changes in the interest rates on its interest-earning assets and its funding sources which finance these assets. To mitigate the risk of loss, the Bank has established policies and procedures which include setting guidelines on the amount of balance sheet exposure to interest rate changes, and by monitoring the risk to the Bank’s revenue, net interest margin and average maturity of its interest-earning assets and funding sources.

Management controls interest rate exposure through the use of funding instruments and by employing cash and derivative hedging strategies. Hedge positions may be executed to reduce balance sheet exposure or the risk associated with a single transaction or group of transactions. The Bank’s hedge positions are evaluated daily and adjusted as deemed necessary by management.

Asset/Liability Management

Management oversight of market risk resides in the Bank’s Asset/Liability Management Committee through meetings and reports and through regular reports to the Board of Directors. Reports on compliance with interest rate risk limits are presented at every meeting of the Board of Directors. Market risk management policies and controls are incorporated in the Bank’s Asset/Liability Management Policy.

Impact of Changes in Interest Rates on the Net Value of the Bank’s Interest Rate-Sensitive Financial Instruments

The Bank performs various sensitivity analyses that quantify the net financial impact of changes in interest rates on interest rate-sensitive assets, liabilities and commitments. These analyses incorporate assumed changes in the interest rate environment, including selected hypothetical, instantaneous parallel shifts in the yield curve.

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The Bank employs various commonly used modeling techniques to value its financial instruments in connection with these sensitivity analyses. For mortgage loans, mortgage-backed-securities, and collateralized mortgage obligations, option-adjusted spread (“OAS”) models are used. The primary assumptions used in these models for purpose of these sensitivity analyses are the implied market volatility of interest rates and prepayment speeds. An option-pricing model is used for options. The primary assumption used in this model is implied market volatility of interest rates. Other key assumptions used in these models are prepayment rates and discount rates. All relevant cash flows associated with the financial instruments are incorporated in the various models.

Based upon this modeling, the following table summarizes the estimated change in fair value of the Bank’s equity including derivatives and commitments, given several hypothetical, instantaneous, parallel shifts in the yield curve.

	September 30, 2005	December 31, 2004	December 31, 2003	December 31, 2002
Interest Rate Change	Fair Value Change	Fair Value Change	Fair Value Change	Fair Value Change
+1.00%	-4.7%	-3.6%	-3.4%	-5.9%
+.50%	-2.1%	-1.3%	-1.5%	-2.5%
Base	0.0%	0.0%	0.0%	0.0%
-.50%	0.1%	-1.1%	1.0%	0.7%
-1.00%	-1.9%	-4.4%	0.8%	-0.6%

These sensitivity analyses are limited in that they (i) were performed at a particular point in time; (ii) only contemplate certain movements in interest rates; (iii) do not incorporate changes in interest rate volatility or changes in the relationship of one interest rate index to another; (iv) are subject to the accuracy of various assumptions used, including prepayment forecasts and discount rates; and (v) do not incorporate other factors that would impact the Bank’s overall financial performance in such scenarios. In addition, not all of the changes in fair value would impact current period earnings. Significant portions of the assets and liabilities on the statements of condition are not held at fair value.

Duration Gap

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

Presented below is the Bank’s estimated Portfolio Duration Gap:

Portfolio Duration Gap (in months)

12-Month Rolling Average

12 months ended September 30,	12 months ended December 31,
2005	2004	2003	2002
-0.11	1.02	0.69	1.70

The 12-month rolling average duration gap is calculated using twelve consecutive month-end observations of this measure. The lower average reported for September 30, 2005 was mainly the result of pay-downs of mortgage related assets. Funds were used to purchase more liquid and shorter-duration investments to allow for members’ voluntary stock redemptions. Voluntary capital stock decreased by $404.7 million during the first nine months of 2005.

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Duration of Equity

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

Finance Board policy requires that the Bank’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. The Bank must maintain its duration of equity, under an assumed instantaneous +/-200 basis points parallel shift in interest rates, within a range of +/-7 years.

The table below reflects the results of the Bank’s measurement of its exposure to interest rate risk in accordance with the Finance Board policy. The table summarizes the interest rate risk associated with all instruments entered into by the Bank.

Duration of Equity (In Years)

As of September 30,			As of December 31,
2005			2004			2003			2002
Up 200	Base	Down 200	Up 200	Base	Down 200	Up 200	Base	Down 200	Up 200	Base	Down 200
5.1	2.6	-1.8	4.1	0.4	2.0	4.6	2.6	0.3	5.4	3.3	-3.0

Relationship between Duration of Equity and Duration Gap

The duration gap is the duration of equity times the leverage ratio of the Bank. The leverage ratio, applied here, is market value of assets divided by the market value of equity.

Derivatives

The Bank enters into derivative financial instruments to manage its exposure to changes in interest rates. Derivatives are an integral part of the Bank’s risk management activities, and provide a means to adjust the Bank’s risk profile in response to changing market conditions. The Bank uses interest rate derivatives as part of its interest rate risk management and funding strategies to reduce identified risks inherent in the normal course of business. Interest rate derivatives include interest rate swaps (including callable swaps and putable swaps), swaptions, interest rate cap and floor agreements, and futures and forward contracts. At September 30, 2005 and December 31, 2004, the total notional amount of the Bank’s outstanding interest rate derivatives was $47.2 billion and $46.2 billion, respectively. Refer to Note 8 – Derivative Financial Instruments to the Bank’s September 30, 2005 Financial Statements and Notes (Unaudited) for further detail.

The Finance Board’s regulations, its Financial Management Policy, and the Bank’s Asset/Liability Management Policy all establish guidelines for the Bank’s use of interest rate derivatives. These regulations and policies prohibit trading in interest rate derivatives for profit and any other speculative use of these instruments. They also limit the amount of counterparty credit risk allowable.

The goal of the Bank’s interest rate risk management strategy is not to eliminate interest rate risk, but to manage it within appropriate limits. One way the Bank manages interest rate risk is to acquire and maintain a portfolio of assets and liabilities, which, together with their associated interest rate derivatives, are reasonably matched with respect to the expected maturities or repricings of the assets and liabilities.

The Bank may also use interest rate derivatives to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments (such as advances, mortgages and bonds) to achieve risk management objectives. The Bank may also use interest rate derivatives when acting as an intermediary for member institutions in their own risk management activities. Members can enter into interest rate derivatives directly with the Bank to reduce their exposure to interest rate risk. In such cases, the Bank acts as an intermediary between the members and other non-member counterparties by entering into offsetting interest rate derivatives. This intermediation allows smaller members indirect access to the derivatives market. The derivatives used in intermediary activities do not qualify for SFAS 133 hedge accounting treatment and are separately recorded at fair value through earnings.

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Interest rate swaps are contractual agreements that set out the periodic exchange of cash flows between two parties. For example, on the asset side, the Bank can reduce a positive duration exposure and maintain a positive spread income by swapping out coupon cash flows from long-term advances in return for receiving a spread relative to a floating rate index, LIBOR. On the liability side, the Bank can reduce a negative duration exposure by entering into an interest rate swap through which the Bank receives a fixed rate that matches its consolidated debt obligation interest expense, and pays a floating rate index (LIBOR).

The purchase of interest rate options can protect net interest income in volatile interest rate environments. By purchasing interest rate floors, the Bank will receive interest rate payments if the reference rate falls below a pre-determined level. This protects the Bank when floating rate assets reprice in a lower prevailing interest rate environment. By purchasing interest rate caps, the Bank will receive interest payments if the reference rate exceeds a pre-determined level. This protects the Bank when floating rate liabilities reprice in a higher prevailing interest rate environment.

Swaptions are contractual agreements that grant the owner the right but not the obligation to enter into an interest rate swap. Where the underlying swap is the right to pay a fixed rate and to receive a floating rate, the swaption is known as a payer swaption. Where the underlying swap is the right to receive a fixed rate and pay a floating rate, the swaption is known as a receiver swaption. By purchasing a payer swaption, the Bank is protected against the risk of a rate increase by having the option to receive a higher prevailing floating rate cash flow stream while paying a lower fixed rate cash flow stream. By purchasing a receiver swaption, the Bank is protected against a rate decrease by having the option to receive a higher fixed rate cash flow stream while paying a lower prevailing floating rate cash flow stream.

The use of interest rate options allows the Bank to manage its net interest income and manage its duration and convexity profile within limits established by the Finance Board and Bank policy. Bank policy and Finance Board regulations prohibits the speculative use of derivative financial instruments. The Bank uses derivatives solely for risk mitigation purposes.

The Bank enters into interest rate swaps, swaptions, interest rate cap and floor agreements, calls, puts and futures to manage its exposure to changes in interest rates. These derivatives are used by the Bank to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives. Derivative financial instruments are used in two ways:

• By designating them as a fair-value or cash-flow hedge in accordance with SFAS 133; or

• By acting as an intermediary or for asset-liability management purposes (economic hedge).

For example, the Bank uses derivative financial instruments in its overall interest rate risk management to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of assets (advances, investments and mortgage loans), and/or to adjust the interest rate sensitivity of advances, investments or mortgage loans to approximate more closely the interest rate sensitivity of liabilities. In addition to using derivative financial instruments to manage mismatches of interest rates between assets and liabilities, the Bank also uses derivative financial instruments to manage embedded options in assets and liabilities and to hedge the change in fair value of fixed funding costs.

Types of Derivatives

The Bank, consistent with Finance Board regulations, enters into derivative financial instruments to reduce the market risk exposure inherent in otherwise unhedged assets and funding positions. Bank management may utilize interest rate derivatives that do not necessarily qualify for hedge accounting under SFAS 133 accounting rules. As a result, the Bank recognizes only the change in fair value of these interest rate derivatives in other income as “net realized and unrealized gain (loss) on derivatives and hedging activities” with no offsetting fair value adjustments to the hedged item.

Swaps

A swap is an agreement between two entities to exchange cash flows in the future. The agreement defines the dates when the cash flows are to be paid and the way in which they will be calculated. A “plain vanilla” interest rate swap is when an entity agrees to pay cash flows equal to interest at a predetermined fixed rate on a notional principal for a number of years. In return, it receives interest at a floating rate on the same notional principal for the same period of time. The floating rate in most interest rate swap agreements used by the Bank is LIBOR.

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Options

Premiums paid to acquire options are included in the initial basis of the instrument and reported in derivative assets on the statements of condition. With respect to interest rate caps and floors designated in a cash flow hedging relationship, the initial basis of the instrument at the inception of the hedge is allocated to the respective caplets or floorlets comprising the cap or floor. All subsequent changes in fair value of the cap or floor, to the extent deemed effective, are recognized in OCI. The change in the allocated fair value of each respective caplet or floorlet is reclassified out of OCI when each of the corresponding hedged forecasted transactions impacts earnings.

A swaption is an option on a swap that gives the buyer the right to enter into a specified interest rate swap at a certain time in the future. When used as a hedge, a receiver swaption provides protection against interest rate decreases and a payer swaption provides protection against interest rate increases. The Bank purchases both payer swaptions (the option to pay fixed at a later date) and receiver swaptions (the option to receive fixed at a later date).

A cap is a contract or financial instrument that generates a cash flow if the price or rate of an underlying variable rises above some threshold “cap” price. A floor is a contract or financial instrument that generates a cash flow if the price or rate of an underlying variable falls below some threshold “floor” price. Caps are used in conjunction with interest bearing liabilities and floors with interest earning assets. Caps and floors are designed to provide insurance against the rate of interest on a floating rate asset or liability rising or falling above or below a certain level.

Futures

The Bank uses futures contracts in order to hedge interest rate risk. SFAS 133 states that the benchmark interest rate is the designated risk in a hedge of interest rate risk. The benchmark interest rate is derived from both U.S. Treasury rates and LIBOR. In order to hedge the benchmark interest rate risk the Bank enters into both Eurodollar futures contracts, which are based upon 3-month LIBOR, and Treasury futures contracts.

All futures contracts are standardized with specific value dates and fixed contract sizes and are traded through an exchange. Eurodollar futures contracts are traded through the Chicago Mercantile Exchange and include daily cash settlements to insure against the risk of counter-party defaults. Treasury futures contracts are traded through the Chicago Board of Trade and include daily cash settlements to insure against the risk of counterparty defaults.

Types of Assets and Liabilities Hedged

The Bank enters into the derivative financial instruments discussed above to manage its exposure to changes in interest rates for the following asset and liability accounts.

Consolidated Obligations

The Bank manages the risk arising from changing market prices and volatility of a consolidated obligation by matching the cash inflow on the derivative financial instruments with the cash outflow on the consolidated obligation. For instance, when fixed-rate consolidated obligations are issued for the Bank, the Bank may simultaneously enter into a matching derivative financial instrument in which the Bank receives fixed cash flows from a counterparty designed to offset in timing and amount the cash outflows the Bank pays on the consolidated obligations. Such transactions are treated as fair value hedges. Hedge effectiveness is assessed under the short-cut method provided all the conditions in SFAS 133, paragraph 68 are met. In cases where the conditions are not met, which occurs when terms of the derivative do not perfectly match the underlying terms of the consolidated obligations, the long-haul approach to assessing hedge effectiveness is applied. This intermediation between the capital and swap markets permits the Bank to raise funds at lower costs than would otherwise be available through the issuance of floating-rate consolidated obligations in the capital markets.

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Advances

With issuances of putable advances, the Bank may purchase from the member an embedded option that enables the Bank to put an advance back to the member to extinguish the advance. Depending on the liquidity needs of the member, the member may pay off the existing advance by using another advance product offered by the Bank at existing market prices on the date that the advance was put back. The Bank may hedge a putable advance by entering into a cancelable interest rate swap where the Bank pays fixed interest payments and receives variable interest payments. This type of hedge is accounted for as a fair value hedge. Hedge effectiveness is assessed under the short-cut method provided all the conditions in SFAS 133, paragraph 68 are met. In cases where the conditions are not met, which occurs when terms of the derivative do not perfectly match the underlying terms of the consolidated obligations, the long-haul approach to assessing hedge effectiveness is applied. The swap counterparty can cancel the derivative financial instrument on the same put date that the Bank can put the advance back to the member.

The optionality embedded in certain financial instruments held by the Bank can create interest rate risk. When a member prepays an advance, the Bank could suffer lower future income if the principal portion of the prepaid advance were invested 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 makes it financially indifferent to a borrower’s decision to prepay an advance. When the Bank offers advances (other than short-term advances) that a member may prepay without a prepayment fee, it usually finances such advances with callable debt or otherwise hedges this option.

Mortgage Assets

The Bank invests in mortgage assets including mortgage-backed securities and mortgage loans. The prepayment options embedded in mortgage assets can result in extensions or contractions in the expected maturities of these investments, primarily depending on changes in interest rates. The Finance Board’s regulation limits this source of interest rate risk by restricting the types of mortgage securities the Bank may own to those with limited average life changes under certain interest rate shock scenarios and establishing limitations on duration of equity and change in market value of equity. The Bank may manage against prepayment and duration risk by funding some mortgage assets with consolidated obligations that have call features. In addition, the Bank may use derivative financial instruments to manage the prepayment and duration variability of mortgage assets. Net income could be reduced if the Bank replaces the mortgages with lower-yielding assets and if the Bank’s higher funding costs are not reduced concomitantly.

The Bank manages the interest rate and prepayment risk associated with mortgage assets 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 mortgage assets. The Bank may also use derivatives to match the expected prepayment characteristics of the mortgage assets.

Mortgage Loans

A combination of swaps and options, including futures, is used as a portfolio of derivatives linked to a portfolio of mortgage loans. The portfolio of mortgage loans consists of one or more pools of similar assets, as designated by factors such as product type and coupon. As the portfolio of loans changes due to new loans, liquidations and paydowns, the derivatives portfolio is modified accordingly to hedge the interest rate and prepayment risks effectively. A new daily hedge relationship is created between a portfolio of derivatives linked to a portfolio of mortgage loans. The relationship is accounted for as a fair value hedge. The long-haul method is used to assess hedge ineffectiveness for this hedging relationship.

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. These options include interest rate caps, floors, calls, puts and swaptions. The Bank may also purchase callable swaps to minimize the prepayment risk embedded in the mortgage loans. Although these derivatives are economic hedges against the prepayment risk of the loans, they are not specifically identified to individual loans and, therefore, do not receive either fair value or cash flow hedge accounting. The derivatives are marked-to-market through earnings.

The Bank analyzes the risk of the mortgage portfolio on a regular basis and considers the interest rate environment under various rate scenarios and also performs analysis of the duration and convexity of the portfolio.

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Anticipated Streams of Future Cash Flows

The Bank 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 LIBOR advances and discount notes. The option will effectively cap or floor the variable cash stream at a predetermined target rate. Such hedge transactions are accounted for as a cash flow hedge. Hedge effectiveness is assessed using the hypothetical derivative method as described under DIG Issue G7 – “Measuring the ineffectiveness of a Cash Flow Hedge under Paragraph 30(b) When the Shortcut Method is Not Applied.” Such relationships are accounted for under the guidance in DIG Issue G20 – “Assessing and Measuring the Effectiveness of a Purchased Option Used in a Cash Flow Hedge.” Under such guidance, the Bank measures hedge effectiveness monthly. For effective hedges, the option premium is reclassified out of OCI using the caplet/floorlet method.

Firm Commitment Strategies

The Bank may enter into mandatory Delivery Commitments as a cash flow hedge of the anticipated purchase of mortgage loans made in the normal course of business. The portion of the change in value of the Delivery Commitment is recorded as a basis adjustment on the resulting mortgage loans with offsetting changes in accumulated OCI. Upon settlement of the Delivery Commitment, the basis adjustments on the resulting performing mortgage loans and the balance in accumulated OCI are then amortized into net interest income in offsetting amounts over the life of these mortgage loans, resulting in no impact on earnings. Hedge effectiveness is assessed pursuant to SFAS 133 and related DIG Issue G9 – “Assuming No Ineffectiveness When Critical Terms of the Hedging Instrument and the Hedged Transaction Match in a Cash Flow Hedge” and DIG Issue G7. The Bank assesses hedge effectiveness using the hypothetical derivative method as defined in DIG Issue G7.

The Bank may also hedge a firm commitment for a forward starting advance 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 advance. The basis movement associated with the firm commitment will be rolled into the basis of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment will then be amortized into interest income over the life of the advance.

Investments

The Bank invests in Government-Sponsored Enterprise (GSE) obligations, 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 against prepayment and duration risk by funding investment securities with consolidated obligations that have call features, by hedging the prepayment risk with caps or floors or by adjusting the duration of the securities by using derivative financial instruments to modify the cash flows of the securities. These securities may be classified as available-for-sale or trading securities on the statements of condition.

For available-for-sale securities that have been hedged and qualify as a fair value hedge, the Bank 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 financial instruments, and the remainder of the change in other comprehensive income as “net unrealized gain or (loss) on available-for-sale securities.” The long-haul method is used to assess hedge ineffectiveness for this hedging relationship.

The Bank may also manage the risk arising from changing market prices and volatility of investment securities classified as “trading securities” by entering into derivative financial instruments (economic hedges) that offset the changes in fair value of the securities. The market value changes of both the trading securities and the associated derivative financial instruments are included in other income in the statements of income.

Anticipated Debt Issuance

The Bank may enter into interest rate swap agreements as hedges of anticipated issuance of debt to effectively lock in a spread between the earning asset and the cost of funding. All amounts deemed effective, as defined in SFAS 133, are recorded in OCI while amounts deemed ineffective are recorded in current earnings. The swap is terminated upon issuance of the debt instrument, and amounts reported in accumulated OCI are reclassified into earnings over the periods in which earnings are

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affected by the variability of the cash flows of the debt that was issued. Hedge effectiveness is assessed using the hypothetical derivative methods as defined in DIG Issue G7.

Managing Credit Risk

Credit risk is the risk of loss due to default. The Bank faces credit risk on advances, investments, mortgage loans, derivative financial instruments and other financial instruments. The Bank protects against credit risk on advances through credit underwriting and collateralization of all advances. In addition, the Bank can call for additional or substitute collateral during the life of an advance to protect its security interest. The FHLB Act defines eligible collateral as certain investment securities, residential mortgage loans, deposits with the Bank, and other real estate related assets. All capital stock of the Bank owned by the borrower is also available as supplemental collateral. In addition, members that qualify as Community Financial Institutions – defined in the FHLB Act as FDIC-insured depository institutions with total average year-end assets for the prior three years of $567 million or less as of January 1, 2005 – may pledge secured small-business, small-farm, and small-agribusiness loans as collateral for advances. The Bank is also allowed to make advances to nonmember Housing Associates.

While the Bank faces minimal credit risk on advances, it is subject to credit risk on some investments and on derivative financial instruments. The Bank follows conservative guidelines established by its Board of Directors and the Finance Board on unsecured extensions of credit, whether on- or off-balance sheet, which limit the amounts and terms of unsecured credit exposure to highly rated counterparties, the U.S. Government and other FHLBs. 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 Bank.

Mortgage Loans Held in Portfolio

The MPF Program involves the acquisition of MPF Loans (PFI originated conforming residential mortgage loans and participations in such mortgage loans acquired by other FHLBs). Under the MPF Program, the PFI originating or selling MPF Loans assumes or retains a defined portion of the credit risk. Though these assets have credit risk, the PFI provides a credit enhancement (which is collateralized to the extent of the PFI’s obligation to pay losses) in a sufficient amount so that the risk associated with investing in MPF Loans is equivalent to investing in a “AA” rated assets, excluding the Bank’s first loss account (FLA) exposure. At September 30, 2005 and December 31, 2004, the Bank had outstanding balances of $43.2 billion and $46.9 billion, respectively, in MPF Loans classified as mortgage loans held in portfolio, net of allowance for credit losses. The Bank has established an appropriate loan loss allowance, and Management of the Bank believes that it has the policies and procedures in place to manage appropriately this credit risk.

Derivative Credit Risk

The contractual or notional amount of an interest rate derivative is not a measure of the amount of credit risk from that transaction. The notional amount serves as a basis for calculating periodic interest payments or cash flows.

The Bank is subject to credit risk in all derivatives transactions because of the potential nonperformance by the derivative counterparty. The Bank manages counterparty credit risk through credit analysis and collateral requirements and by following the requirements set forth in Finance Board regulations. In addition, the Bank reduces this credit risk by executing derivatives transactions only with highly rated financial institutions. In addition, the legal agreements governing its derivatives transactions require the credit exposure of all derivative transactions with each counterparty to be netted and generally require each counterparty to deliver high quality collateral to the Bank once a specified unsecured net exposure is reached. At September 30, 2005 and December 31, 2004, the credit exposure at fair value of the Bank was approximately $192.3 million and $153.5 million, respectively, which after the delivery of required collateral left an unsecured net credit exposure of $3.6 million and $2.9 million, respectively. The Bank values its net credit exposure with all counterparties each business day, exchanging collateral as required. Based on management’s credit analysis, collateral requirements and master netting arrangements, the Bank does not anticipate any losses on these agreements.

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The following charts detail the Bank’s derivative counterparty credit exposure:

Derivative Counterparty Credit Exposure

As of September 30, 2005

(Dollars in thousands)	Notional Amount		Exposure at Fair Value		Collateral Held		Net Exposure After Collateral2
Credit Rating
AAA	$	262,550	$	—	$	—	$	—
AA		24,047,557		109,365		107,693		1,911
A		15,893,809		52,279		54,109		1,540
BBB		11,100		—		—		—
Member Institutions (1)(3)		6,949,322		30,609		30,461		152
Total Derivatives	$	47,164,338	$	192,253	$	192,263	$	3,603
Derivative Counterparty Credit Exposure As of December 31, 2004
(Dollars in thousands)	Notional Amount		Exposure at Fair Value		Collateral Held		Net Exposure After Collateral2
Credit Rating
AAA	$	280,550	$	—	$	—	$	—
AA		19,209,671		81,872		87,681		2,914
A		19,075,646		47,365		49,099		—
BBB		17,100		—		—		—
Member Institutions (1)(3)		7,660,585		24,259		24,259		—
Total Derivatives	$	46,243,552	$	153,496	$	161,039	$	2,914
Derivative Counterparty Credit Exposure As of December 31, 2003
(Dollars in thousands)	Notional Amount		Exposure at Fair Value		Collateral Held		Net Exposure After Collateral2
Credit Rating
AAA	$	456,450	$	—	$	—	$	—
AA		28,286,336		289,068		277,330		13,714
A		18,274,036		163,149		167,217		3,728
BBB		6,140,200		—		—		—
Member Institutions (1) (3)		509,956		2,110		2,110		—
Total Derivatives	$	53,666,978	$	454,327	$	446,657	$	17,442
Derivative Counterparty Credit Exposure As of December 31, 2002
(Dollars in thousands)	Notional Amount		Exposure at Fair Value		Collateral Held		Net Exposure After Collateral2
Credit Rating
AAA	$	504,400	$	6,570	$	—	$	6,570
AA		32,517,518		201,460		183,995		17,465
A		18,850,331		176,045		176,045		—
BBB		1,760,855		—		—		—
Member Institutions (1) (3)		268,832		—		—		—
Total Derivatives	$	53,901,936	$	384,075	$	360,040	$	24,035

⁽¹⁾ Collateral held with respect to derivative financial instruments with member institutions represents either collateral physically held by or on behalf of the Bank or collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.

⁽²⁾ Net exposure after collateral is monitored and reported on an individual counterparty basis. Therefore, because some counterparties are over- collateralized, net exposure after collateral will generally not equal the difference between Exposure at Fair value and Collateral Held.

⁽³⁾ Member Institutions include derivative counterparties who are affiliated with members of the Bank.

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Operational and Business 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 systems of risk assessment along with financial and operating polices 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. In addition, the Bank has a disaster recovery plan that is designed to restore critical business processes and systems in the event of disasters.

Business risk is the risk of an adverse impact on the Bank’s profitability resulting from external factors that may occur in both the short and long term. Business risk includes political, strategic, reputation and/or regulatory events that are beyond the Bank’s control. The Bank mitigates these risks through long-term strategic planning and through continually monitoring economic indicators and the external environment.

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Item 3. Properties.

The Bank occupies approximately 135,500 square feet of leased office space on five floors of a thirty story building at 111 East Wacker Drive, Chicago, Illinois 60601. The Bank also maintains a leased off-site back-up facility approximately 15 miles northwest of the main facility which is on a separate electrical distribution grid.

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Item 4. Security Ownership of Certain Beneficial Owners and Management.

The Bank is cooperatively owned. Its members own all of the outstanding capital stock of the Bank, and a majority of the directors of the Bank are elected by and from the membership. The exclusive voting rights of members are for the election of ten of the Bank’s directors who represent the members. Each member is eligible to vote for the number of open director seats in the state in which its principal place of business is located. The number of votes that any member may cast for any one directorship is based on the level of Bank capital stock held, but shall not exceed the average number of shares of Bank capital stock that were required to be held by all the members in that state as of December 31 of the preceding calendar year. Membership is voluntary, and members must give notice of their intent to withdraw from membership. Members that withdraw from membership may not be readmitted to membership for five years.

The Bank does not offer any compensation plan under which capital stock of the Bank is authorized for issuance. Ownership of the Bank’s capital stock is concentrated entirely within the financial services industry, and is stratified across various institution types. No Bank officer, manager or employee is eligible to own capital stock in the Bank.

The majority of the Bank’s Board of Directors is elected from the membership of the Bank and these elected directors are officers of member institutions that own the Bank’s capital stock. These institutions are listed in the following table. The Bank’s directors do not own capital stock.

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Capital Stock outstanding as of October 31, 2005 for Member Institutions whose

Officers served as a Director of the Bank as of October 31, 2005.

(Dollars in thousands)

Institution Name and Address	Director Name	Capital Stock Par Value $100	Percent of Total Capital Stock
LaSalle Bank, N.A. 135 South LaSalle Street Ste 260 Chicago, IL 60603	Thomas M. Goldstein	307,681	7.8%
Mid America Bank, FSB 55th & Holmes Clarendon Hills, IL 60514	Allen H. Koranda	163,916	4.2
Guaranty Bank 400 West Brown Deer Rd Brown Deer, WI 53209	Gerald J. Levy	46,543	1.2
North Shore Bank, FSB 15700 West Bluemound Road Brookfield, WI 53005	James F. McKenna	11,732	n/a
Busey Bank 201 West Main Street Urbana, IL 61801	P. David Kuhl	8,799	n/a
Baylake Bank 217 N. 4th Avenue Sturgeon Bay, WI 54235	Thomas L. Herlache	8,006	n/a
First Citizens State Bank 207 West Main Street Whitewater, WI 53190	James K. Caldwell	5,022	n/a
McHenry Savings Bank 353 Bank Drive McHenry, IL 60050	Kathleen E. Marinangel	4,860	n/a
The Harvard State Bank 35 North Ayer Street Harvard, IL 60033	Roger L. Lehmann	692	n/a
Illinois National Bank 322 East Capitol Ave Springfield, IL 62701	Richard K. McCord	441	n/a

n/a = not meaningful as amount is less than 1%

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Item 5. Directors and Executive Officers.

Directors

The following table sets forth information regarding each of the Bank’s directors.

Name	Age	Company Director Since	Expiration of Term as Director
James K. Caldwell	62	1998	12-31-2006
Thomas M. Goldstein	46	2005	12-31-2005 1
Gerardo H. Gonzalez	43	2003	12-31-2005
Terry W. Grosenheider	49	2002	12-31-2006
Thomas L. Herlache	63	2005	12-31-2005 1
Allen H. Koranda	59	1997	12-31-2005
P. David Kuhl	56	2000	12-31-2007
Alex J. LaBelle	67	2004	12-31-2006
Roger L. Lehmann	64	2004	12-31-2006
Gerald J. Levy	73	2005	12-31-2007
Kathleen E. Marinangel	59	2002	12-31-2007
Richard K. McCord	61	2003	12-31-2005 1
James F. McKenna	61	2004	12-31-2006
William H. Ross	63	2003	12-31-2005

¹ The Bank has completed its annual election for the elected director positions expiring at year end 2005. Incumbent directors Thomas M. Goldstein, Thomas L. Herlache and Richard K. McCord were elected to serve new three-year terms beginning on January 1, 2006.

Mr. Caldwell has been President and Chief Executive Officer of the First Citizens State Bank of Whitewater, in Whitewater, Wisconsin, since 1979. Mr. Caldwell is the president of Whitewater Bancorp, Vice President of Palmyra State Bank, and a director of Weiler & Company. Mr. Caldwell served as the President of the Wisconsin Bankers Association from 1993 to 1994. Mr. Caldwell is past chairman of the University of Wisconsin, Whitewater Foundation and continues to serve as board member. Mr. Caldwell also chaired the Whitewater Community Development Authority and serves on the board and executive committee of the Fairhaven Corporation, a Senior Citizens Home, where he is currently Chairman of the Board of Directors.

Mr. Goldstein has been Senior Executive Vice President of the LaSalle Bank Corporation since 2003. Mr. Goldstein is also the Chairman, President and Chief Executive Officer of ABN AMRO Mortgage Group, Inc. Prior to joining LaSalle Bank Corporation in 1998, Mr. Goldstein worked for Morgan Stanley Dean Witter, Manufacturers Hanover, and Pfizer, Inc.

Mr. Gonzalez has served in a managing partner role with Gonzalez, Saggio & Harlan, LLP, a Midwest law firm, since 1989. Mr. Gonzalez is a board member of the Roundy’s Foundation and a member and corporate secretary for the Gonzalez Corporation, Gonzalez Properties, Gonzalez Development and GSH Consulting. Mr. Gonzalez served as a board member for the St. Charles Youth & Family Services and as board chair from 1997-2004. Mr. Gonzalez also serves as president of the Hispanic Heritage Council.

Mr. Grosenheider has been a private banking relationship manager with U.S. Bank, N.A. since 2002. Previously, he served as the Deputy Secretary of the Wisconsin Department of Financial Institutions from 2000 to 2002. Mr. Grosenheider serves on the Advisory Board for Saint Vincent DePaul which provides transitional housing and housing support for low and moderate income families and is an advisor to the Madison Community Reinvestment Associates. Mr. Grosenheider also held several positions within the Wisconsin Department of Commerce, including Administrator of the Division of Community Development, Administrator of the Division of Economic Development and the Administrator of Marketing, Advocacy and Technology Development, from 1992 until his 2000 appointment as Deputy Secretary.

Mr. Herlache has been President, CEO and Chairman of the Board for Baylake Bank and Baylake Corp., a one bank holding company, in Sturgeon Bay Wisconsin since 1996. Mr. Herlache has previously served on the Door County Board of Supervisors,

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Door County Chamber of Commerce Board, as well as served on the Sturgeon Bay Utility Commission from 1981-1986 and as its President for a part of that time.

Mr. Koranda has been Chairman and Chief Executive Officer of Mid America Bank, FSB, in Clarendon Hills, Illinois and Chairman and Chief Executive Officer of MAF Bancorp, the holding company for Mid America Bank, FSB, since 1990. Mr. Koranda is also a member of the Economic Club of Chicago. He is a Past Chairman of the Illinois League of Financial Institutions and Past Chairman of the Chicagoland Association of Financial Institutions.

Mr. Kuhl has served as Chairman of the Board and CEO of Busey Bank in Urbana, Illinois since 2003. Mr. Kuhl has been with the Busey Bank since 1979, serving previously as President and CEO. Mr. Kuhl also serves as a director of Busey Bank, First Busey Securities Inc. and First Busey Trust and Investment Company and First Busey Resources. Mr. Kuhl previously served as a director for First Busey Corporation and Busey Insurance Services. First Busey Corporation is the holding company for Busey Bank, First Busey Securities and First Busey Trust and Investment Company.

Mr. LaBelle has been a Broker-Associate with Smothers Realty Group in LaGrange, Illinois, since 1998, and a partner of Kensington Partners, a construction and rehab company since 2002. Mr. LaBelle is also the Secretary and Vice President of LaBelle Gourmet Ltd. During his career as a broker, he has been active in Realtor^® associations at the local, state and national levels, and was named Illinois Realtor of the Year for 2003. Mr. LaBelle has also served as a member of the Illinois Office of Banks and Real Estate Board and is a member and past president of the Illinois Real Estate Administration & Disciplinary Board. Mr. LaBelle also served as an Assistant Vice President of the Bank during the late 1960’s and early 1970’s.

Mr. Lehmann joined The Harvard State Bank in 1978 and currently serves as President, CEO and Chairman of the Board of The Harvard State Bank and its holding company Harvard Bancorp, Inc., in Harvard, Illinois. Mr. Lehmann is a past Chairman, and currently serves on the board, of the Community Bankers Association of Illinois. Mr. Lehmann has also served on the boards of several economic and community development organizations in Harvard and in McHenry County.

Mr. Levy joined Guaranty Bank in 1959 and has held a series of officer positions, including President and CEO since 1973 and Chairman of the Board and CEO since 1984 and Executive Chairman since 2003. He is a director of Fiserv, Republic Mortgage Insurance Company and Asset Management Fund. Mr. Levy is a member of the State Bar of Wisconsin. Mr. Levy previously served as Chairman of the Savings & Loan Review Board of Wisconsin from 1972-1980. He is a past president of the Wisconsin League of Financial Institutions and Past Chairman of the United States League of Savings Institutions. He served as a Director and Vice Chairman of the Federal Home Loan Bank of Chicago. Mr. Levy served as a member of the Advisory Committee of the Federal Home Loan Mortgage Corporation and Federal National Mortgage Corporation. He was a Director of the Federal Asset Disposition Association from its inception in 1986 until it was phased out in 1989. He was the Past Chairman of the Wisconsin Partnership for Housing Development and in 1990 chaired the Fair Lending Action Committee which was formed by the Mayor of Milwaukee and Governor of the State of Wisconsin. He is Past Chairman of the Real Estate Services Providers Council.

Ms. Marinangel has worked at McHenry Savings Bank since 1973 and has served as President of McHenry Bank since 1991, CEO of McHenry Savings Bank since 1990, and Chairman of the Board of the McHenry Savings bank since 1989. Ms. Marinangel has also been the Chairman of the Board, CEO and President of McHenry Bancorp, Inc. (MBI) since its inception in January of 2003. MBI is a holding company and the major stockholder of McHenry Savings Bank. Locally she serves on the McHenry County Public Building Commission, the City of McHenry’s Economic Development Commission and serves on the Board of Governors of Centegra Hospital. On a statewide basis she serves as a director of the Illinois League of Financial Institutions and was Past Chairman from 1996-1997. She currently is Chairman of the League’s Banking ERISA Medical Insurance Trust. She is Chairman of the Illinois Board of Savings Institutions. Nationally, she serves as a director of the banking trade group, America’s Community Bankers. She also served a two year term on the Federal Reserve Board’s Thrift Institutions Advisory Council.

Mr. McCord has served as the President and Chief Executive Officer and a director of Illinois National Bank in Springfield and of Illinois National Bancorp, Inc. since 1999. Prior to re-establishing Illinois National Bank in 1999, Mr. McCord was named in 1995 as President and Chief Operating Officer and a director for First of America Bank-Illinois, N.A. Mr. McCord retired from National City Bank, the successor to First of America Bank in 1998, and launched the second generation of Illinois National Bank in 1999. Mr. McCord served as a director of the Community Bank Council of the Federal Reserve Bank of Chicago.

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Mr. McKenna has served as President and Chief Executive Officer of North Shore Bank, Brookfield, Wisconsin, since 1970. Mr. McKenna serves on the Board of Directors for ACB Partners, a subsidiary of America’s Community Bankers. He is a member of the Greater Milwaukee Committee.

Mr. Ross serves as President and Treasurer of Ross Carbide & Supply Company, Inc., which was founded in 1966. Ross Carbide & Supply Company, Inc. designs, manufactures, sells and services a wide range of special tooling for the woodworking industries. Mr. Ross is the Commissioner for the Shawano Municipal Utilities and also serves as a director and President of the Badger Power Marketing Authority, a wholesale supplier of energy and electric transmission.

There is no family relationship among the above directors.

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Executive Officers

The following table sets forth certain information regarding the executive officers of the Bank.

Executive Officer	Age	Capacity in which Served	Employee of the Bank Since
J. Mikesell Thomas	54	President and Chief Executive Officer	2004
Kenneth L. Gould	61	Executive Vice President, Operations	1992
Michael W. Moore 1	52	Executive Vice President, Financial Markets	1992
Charles A. Huston	58	Executive Vice President, Membership Relationship Management; Acting President June 30, 2004 through August 30, 2004	1991
Peter E. Gutzmer	52	Executive Vice President, General Counsel and Corporate Secretary	1985
Roger D. Lundstrom	45	Executive Vice President, Financial Information	1984
Gnanesh Coomaraswamy 1	45	Senior Vice President, Co-Head, Financial Markets	1993
Eldridge Edgecombe	57	Senior Vice President, Community Investment	2001
Matthew R. Feldman	52	Senior Vice President, Risk Management	2003
Michael E. McFerrin 1	47	Senior Vice President, Co-Head, Financial Markets	1992
Thomas D. Sheehan	60	Senior Vice President, Corporate Services	1997

¹ On November 10, 2005, the Bank announced the resignation of Michael W. Moore as Executive Vice President of Financial Markets. Michael E. McFerrin and Gnanesh Coomaraswamy have replaced Mr. Moore as co-heads of the Financial Markets Group, with Mr. Moore continuing in an advisory capacity through December 31, 2005.

J. Mikesell Thomas became President and Chief Executive Officer of the Bank in August 2004. Prior to his employment with the Bank, Mr. Thomas served as an independent financial advisor to companies on a range of financial and strategic issues from April 2001 to August 2004. Mr. Thomas was a Managing Director of Lazard Freres & Company, where he was responsible for advising management and boards of client companies on strategic transactions from January 1995 to March 2001. He held positions of increasing responsibility at First Chicago Corporation, including Chief Financial Officer and later, Executive Vice President and Co-Head of Corporate and Institutional Banking, from 1973 to 1995. Mr. Thomas is trustee and chair of the Audit Committee for the following trusts: The UBS Funds, UBS Relationship Funds and SMA Relationship Trust. He is a trustee and a member of the Audit Committee of UBS Private Portfolios Trust and director and chair of the Audit Committee of Fort Dearborn Income Securities, Inc.

Kenneth L. Gould has been Executive Vice President-Operations of the Bank since 2003. Mr. Gould was Executive Vice President- Mortgage Partnership Finance from 1997 to 2003 and Executive Vice President- Operations from 1992 to 1997. Prior to his employment with the Bank, Mr. Gould was Vice President-Operations of M&I Data Services from 1991 to 1992, Executive Vice President-Operations & Retail Banking of Community Federal Savings and Loan from 1989 to 1990, Executive Vice President-Operations & Retail Banking of Altus Bank from 1985 to 1989, and held various positions of increasing responsibility at Continental Bank from 1967 to 1985.

Michael W. Moore has been Executive Vice President-Financial Markets of the Bank from 2003 to November 10, 2005. Mr. Moore was Executive Vice President-Treasury from 1992 to 2003. Prior to his employment with the Bank, Mr. Moore was Senior Vice President and Investment Division Manager of Farm and Home Savings and Loan Association from 1989 to 1992, Vice President-Portfolio Manager of Florida National Bank from 1987 to 1989, and Vice President-Portfolio Manager of Alabama Federal Savings and Loans from 1985 to 1987.

Charles A. Huston has been Executive Vice President-Member Relationship Management of the Bank since 2003. Mr. Huston was Executive Vice President-Banking from 1991 to 2003. Mr. Huston served as Acting President and Chairman of the Management Committee during the interim period from June 30, 2004 through August 30, 2004. Prior to his employment with the Bank, Mr. Huston was Vice President-Corporate Lending of Daiwa Bank Ltd. from 1989 to 1991, and Vice President-Corporate Finance of Continental Bank from 1988 to 1989. From 1971 to 1988 Mr. Huston held various positions of increasing responsibility at Continental Bank.

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Peter E. Gutzmer was promoted to Executive Vice President-General Counsel and Corporate Secretary of the Bank in 2003. Mr. Gutzmer was Senior Vice President-General Counsel and Corporate Secretary of the Bank from 1992 to 2003, and General Counsel of the Bank from 1985 to 1991. Prior to his employment with the Bank, Mr. Gutzmer was Assistant Secretary and Attorney of LaSalle Bank, NA from 1980 to 1985.

Roger D. Lundstrom was promoted to Executive Vice President-Financial Information of the Bank in 2003. Mr. Lundstrom was Senior Vice President-Financial Information of the Bank from 1997 to 2003, and Senior Vice President-Financial Reporting and Analysis of the Bank from 1992 to 1997. Mr. Lundstrom held various positions with the Bank in analysis and reporting functions with increasing levels of responsibility from 1984 to 1992.

Gnanesh Coomaraswamy became Senior Vice President, Co-Head-Financial Markets of the Bank in November 2005. Mr. Coomaraswamy was Senior Vice President-Balance Sheet Management from 2002 to 2005 and held various positions with the Bank in financial market functions with increasing levels of responsibility from 1993 through 2002. Prior to his employment with the Bank, Mr. Coomaraswamy was a Teaching and Research Associate of Northwestern University from 1986 to 1992, Consultant of International Telecommunication Satellite during 1989, Consultant of Plantronics Futurecomms Inc. during 1988 and Chief Engineer of Department of Telecom of Colombo, Sri Lanka from 1983 to 1986.

Eldridge Edgecombe has been Senior Vice President for the Bank’s Community Investment Group since 2001. Prior to his employment with the Bank, Mr. Edgecombe was Vice President and Chief Operating Officer, Housing and Community Investment, for the Federal Home Loan Bank of Cincinnati from 1999 to 2001. Previously, Mr. Edgecombe was Executive Director and Chief Executive Officer of the Columbus Housing Partnership from 1996 to 1999, Director of the Community Development Division/Deputy Director Ohio Department of Development from 1992 to 1996, Manager of the Office of Local Government Services for the Ohio Department of Development from 1991 to 1992, and Commissioner-Controller of the Department of Neighborhoods for the City of Toledo from 1983 to 1991.

Matthew R. Feldman has been Senior Vice President-Risk Management of the Bank since 2004. Mr. Feldman was Senior Vice President-Manager of Operations Analysis of the Bank from 2003 to 2004. Prior to his employment with the Bank, Mr. Feldman was founder and Chief Executive Officer of Learning Insights, Inc. from 1995 to 2003. Mr. Feldman conceived, established, financed and directed the operations of this privately held e-learning company of which he is still Non-Executive Chairman. Mr. Feldman was President of Continental Trust Company, a wholly-owned subsidiary of Continental Bank from 1992 to 1995 and Managing Director-Global Trading and Distribution of Continental Bank from 1988 to 1992.

Michael E. McFerrin became Senior Vice President, Co-Head-Financial Markets of the Bank in November 2005. Mr. McFerrin was Senior Vice President-Mortgage Finance from 2001 to 2005 and Vice President-Financial Markets from 1992 to 1994. Mr. McFerrin was also President/Principal of Benjamin Investments LLC from 1999 to 2001, Vice President of Nomura Securities International from 1994 to 1999, Vice President, Senior Investment Analyst and Portfolio Manager of Farm and Home Savings Association from 1991 to 1992 and held positions of increasing responsibility at First Federal Savings and Loan Association of Pittsburg from 1986 to 1991.

Thomas D. Sheehan has been Senior Vice President-Corporate Services of the Bank since 2003. Mr. Sheehan was Senior Vice President-Corporate Operations from 1997 to 2003. Prior to his employment with the Bank, Mr. Sheehan was Deputy Director-Office of Policy of the Federal Housing Finance Board from 1989 to 1997, Director-Policy Division of the Federal Home Loan Bank Board from 1985 to 1989 and Operations Officer of the American National Bank of Chicago from 1984 to 1985, and Operations Officer of Continental Bank of Chicago from 1978 to 1984.

There is no family relationship among the above officers.

The Bank has adopted a code of ethics for all of its employees and directors, including its President and CEO, principal financial officer, and those individuals who perform similar functions. A copy of the code of ethics will be provided without charge upon request to: Vice President of Human Resources, Federal Home Loan Bank of Chicago, 111 East Wacker Drive, Chicago, Illinois 60601.

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Item 6. Executive Compensation.

The following table sets forth all compensation received from the Bank for the year ended December 31, 2004, by the Bank’s President and Chief Executive Officer and the four most highly paid executive officers (other than the Chief Executive Officer) who were serving as executive officers at the end of 2004 (collectively, the “Named Executive Officers”). Annual compensation includes amounts deferred.

Summary Compensation Table

			Annual Compensation
Name	Principal Position	Year	Salary ($)		Bonus ($)		Total Annual Compensation ($)		All Other Compensation ($)		LTIP Payout 5 ($)
Thomas, J. Mikesell 1	President and Executive Officer	2004	$	213,141	$	234,455	$	447,596	$	—	$	—
Huston, Charles A. 2	Executive Vice President - Membership Relationship Management	2004		225,250		101,517		326,767		21,158		110,872
Pollock, Alex J. 3	President and Chief Executive Officer	2004		352,442		—		352,442		41,397		—
Moore, Michael W. 4	Executive Vice President - Financial Markets	2004		384,250		104,941		489,191		23,100		55,069
Gould, Kenneth L.	Executive Vice President - Operations	2004		315,000		80,967		395,967		28,374		159,332
Gutzmer, Peter E.	Executive Vice President - General Counsel and Corporate Secretary	2004		240,800		65,764		306,564		16,077		111,606
Lundstrom, Roger D.	Executive Vice President - Financial Information	2004		240,800		65,764		306,564		30,595		111,606

¹ Hired on August 30, 2004.

² Acting President from June 30, 2004 to August 30, 2004.

³ Resigned on June 29, 2004.

⁴ Resigned on November 10, 2005, continuing as an advisor through December 31, 2005.

⁵ Amount represents net of cost of performance units purchased in 2002. Amount was awarded on January 18, 2005 for the performance period ending December 31, 2004 and paid out in the first quarter of 2005.

Personnel and Compensation Committee

The Bank’s Board of Directors has established a Personnel and Compensation Committee to assist the Board of Directors in matters pertaining to the employment and compensation of the President and CEO and executive officers and Bank employment and benefits programs in general. The Personnel and Compensation Committee consists of not less than five directors.

The Personnel and Compensation Committee is responsible for making recommendations to the Board regarding the compensation of the President and CEO and approving compensation of the executive officers, including base salary, merit increases, incentive compensation and other compensation and benefits. Its responsibilities include seeing that the Bank’s compensation is reasonable and comparable with the compensation of executives at the other FHLBs and other similar financial institutions that involve similar duties and responsibilities. All major components of the Bank’s executive compensation program, other than base salary are linked to annual and long term performance measures.

The Bank’s executive compensation program has three components: base salary, an annual incentive award, and long term incentive award. The two incentive award programs tie executive officer total compensation to different time periods.

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Summary of Compensation Plans

Employment Agreement

In connection with Mr. Thomas joining the Bank on August 30, 2004, the Bank entered into an Employment Agreement with Mr. Thomas. The material terms of the agreement are as follows. Mr. Thomas’ period of employment is scheduled to end on December 31, 2007, subject to automatic one year extensions until such date as the Bank or Mr. Thomas gives notice of non-extension. Mr. Thomas is to receive an annual salary of not less than $625,000 (prorated) for 2004, $650,000 for 2005, $676,000 for 2006 and $703,040 for 2007. The Board of Directors may, in its discretion, increase the base salary from the minimum amount described above. Mr. Thomas is entitled to participate in the President’s Incentive Compensation Plan and Long Term Incentive Compensation Plan, with a minimum total incentive compensation during the period ending not later than December 31, 2007 equal to 100% of base salary for the calendar year (pro rated for any partial calendar years). The maximum total incentive compensation amount is 125% of base salary for the calendar year (pro rated for any partial calendar years). Beginning January 1, 2008, the total incentive compensation target for each calendar year will not be less than 74% of base salary.

Mr. Thomas is also entitled to reimbursement for all expenses and disbursements reasonably incurred in the performance of his employment. In addition, the Bank agreed to reimburse Mr. Thomas up to $10,000 for legal fees incurred in connection with the negotiation of his Employment Agreement. Mr. Thomas and his eligible family members are entitled to participate in any group and/or executive life, hospitalization or disability insurance plan, health program, vacation policy, pension, profit sharing, 401(k) and similar benefit plans or other fringe benefits of the Bank on terms generally applicable to the Bank’s senior executives. If Mr. Thomas chooses not to participate in the Bank’s health program, the Bank is required to pay Mr. Thomas an amount in cash equal to the premiums for the forgone health insurance coverage.

In the event the Employment Agreement is terminated by the Bank without cause or by Mr. Thomas with good reason, in lieu of any of any other severance benefits, Mr. Thomas is entitled to receive an amount equal to two (2) times his base salary as of the date of termination plus his minimum total incentive compensation as of such date. The base salary amounts are payable within ten (10) days of the date a release is executed. Fifty percent of the total incentive compensation amount is payable on each of the first two anniversaries of the termination date. No severance is payable in connection with a non-renewal of the Employment Agreement. The Employment Agreement also provides for certain obligations to which Mr. Thomas has agreed with regard to maintaining confidential information and nonsolicitation of protected employees.

Executive Base Salary

Each year, the base salary for the President and CEO, is determined by the Board of Directors following a recommendation from the Personnel & Compensation Committee and is based on the Committee’s review of the President and CEO’s performance, Bank performance and market data obtained from the other FHLBs and other similar financial institutions.

The Personnel and Compensation Committee also reviews the President and CEO’s recommendations of the base salaries for members of the Bank’s Management Committee. These recommendations are based on the individual performance of each Management Committee member and market data obtained from the other FHLBs and other similar financial institutions.

Annual Incentive Award

The President’s annual incentive compensation is based on the establishment of performance criteria and targets that are consistent with the Bank’s Business Plan as approved by the Board of Directors. Each year, in January, plan criteria, performance targets, and definitions of Plan Criteria are established by the Personnel and Compensation Committee and approved by the Board of Directors. Performance Criteria may include such factors as profitability, innovation and leadership, market share, and control. Following the Plan Year, the President’s performance is reviewed by the Personnel and Compensation Committee and measured against the Performance Targets. Following this review and approval by the Board of Directors, any award made to the President is paid in cash.

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The Management Incentive Compensation Plan, which covers the Bank’s Management Committee, is based on a series of performance criteria that are consistent with the Bank’s Business Plan for the year. Each year, in January, plan criteria, performance targets, and definitions of Plan Criteria are established and approved by the Personnel and Compensation Committee. Performance criteria may include such factors as: profitability, market share, control and System leadership. In addition, one or more key personal goals are established for each participant.

Following the Plan Year, both attainment of performance targets and the completion of individual performance goals are reviewed by the President and CEO and reported to the Personnel and Compensation Committee. The cash portion of any award is payable after the year-end results are reported to the Personnel and Compensation Committee and approved. Awards are paid as follows: 60% in cash and 40% is deferred and held in a Bank-maintained account.

Long Term Incentive Award

The Long Term Incentive Compensation Plan covers a three year performance period. A new Performance Period is established each year. As of the beginning of each performance period, the Personnel and Compensation Committee, with the approval of the Board of Directors, establishes one or more performance goals. The Personnel and Compensation Committee designates those officers who are eligible to participate in the Plan for the Performance Period.

A Participant may elect to purchase from twenty percent (20%) to one hundred percent (100%) of the allocated Performance Units awarded in the plan. The purchase price for a Performance Unit is determined by the Personnel and Compensation Committee. A Participant receives three additional Performance Units for each Performance Unit purchased and is not required to pay for these additional Performance Units. A Participant must be actively employed by the Bank at the end of the Performance Period to be vested in these three additional Performance Units.

At the end of the Performance Period, the Personnel and Compensation Committee determines the extent to which the Performance Goals were achieved and the value of the Performance Unit. Final awards are approved by the Board of Directors. Under this plan, if the Bank fails to meet a minimum threshold established by the Committee, the amount paid out will be less than the amount paid in by the officer, resulting in a negative net return. Payments due for the vested Performance Units generally are made within ninety (90) days of the end of the Performance Period. If a Participant owns at least three hundred (300) Performance Units at the end of the Performance Period, the Participant may elect to defer distribution of the Performance Units. A deferral is for a period of not less than two (2) years from the applicable time of payment. Interest accrues on deferred payments from the end of the applicable Performance Period to the date of payment at a rate equal to the 90 day FHLB note.

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Below is a table summarizing awards under the Plan for the Bank’s President and Chief Executive Officer and the four most highly paid executive officers:

Long-Term Incentive Plan Award *

						Estimated Future Payouts under Non-Stock Price-Based Plans
Name	Number of Units Purchased (#)	Total Number of Units (#)	Performance Period Until Maturation	Amount Purchased ($)		Threshold ($)		Target ($)		Maximum ($)
Thomas, J. Mikesell 1	—	—	-	$	—	$	—	$	—	$	—
Huston, Charles A. 2	207	828	January 1, 2004 - December 31, 2006		13,610		11,385		82,800		165,600
Pollock, Alex J. 3	717	2868	January 1, 2004 - December 31, 2006		47,143		—		—		—
Moore, Michael W. 4	340	1360	January 1, 2004 - December 31, 2006		22,355		18,700		136,000		272,000
Gould, Kenneth L.	262	1048	January 1, 2004 - December 31, 2006		17,227		14,410		104,800		209,600
Gutzmer, Peter E.	200	800	January 1, 2004 - December 31, 2006		13,150		11,000		80,000		160,000
Lundstrom, Roger D.	200	800	January 1, 2004 - December 31, 2006		13,150		11,000		80,000		160,000

¹ Mr. Thomas was hired as President and CEO on August 30, 2004, after the eligibility deadline to participate in this year’s program.

² Mr. Huston was Acting President from June 30, 2004 to August 30, 2004

³ Mr. Pollock resigned as President and CEO on June 29, 2004 and the price of his purchased units of $47,143 was refunded.

⁴ Mr. Moore resigned as Executive Vice President – Financial Markets on November 10, 2005 continuing as an adivsor through December 31, 2005.

* The table reflects the total number of Performance Units purchased in 2004 and estimated payouts to be made in the first quarter of 2007 for the performance period ending December 31, 2006, based on the attainment of Bank goals, at the end of the three year Performance Period. The Amount Purchased represents the number of Purchased Performance Units multiplied by $65.75 per unit. The Number of Total Units represents both the number of Purchased and Granted Performance Units at the end of the Performance Period.

At the end of the Performance Period the Personnel and Compensation Committee determines the extent to which Performance Goals were achieved and the value of each Purchased Performance Unit and each Granted Performance Unit. Purchased Performance Units have a maximum value of $200, a target value of $100 and a minimum threshold value of $55. Granted Performance Units have a maximum value of $200, a target value of $100 and a minimum threshold value of $0.

The Estimated Future Payout columns reflect the value for both the Purchased and Granted Performance Units at the end of the Performance Period at threshold, target and maximum performance.

Retention and Severance Agreements

The Bank’s executive officers and certain other key employees were participants in the Bank’s Employee Severance and Retention Plan which covers the period from June 30, 2004 to June 30, 2005. Under the plan, if any of Mr. Gutzmer, Mr. Lundstrom, Mr. Moore, Mr. Gould, or Mr. Huston were to be terminated for other than cause, including a constructive discharge, that officer would be entitled to receive the greater of: (1) four weeks’ base salary for each full year of calendar service, or (2) one year’s base salary. In addition, the Bank will make COBRA payments required to continue health insurance benefits for a time period equal to the number of weeks of pay such named executive officer is entitled to receive. Effective July 1, 2005, the Bank has adopted an Employee Severance Plan, covering all Bank employees, which also continues the previously described severance benefits for these named executive officers.

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Under the Bank’s Employee Severance and Retention Plan for the period from June 30, 2004 to June 30, 2005, Mr. Gutzmer, Mr. Lundstrom, Mr. Moore, Mr. Gould, and Mr. Huston were also entitled to receive a retention payment. In order to receive a retention payment, the named executive officer must have been employed continuously with the Bank during the plan period from June 30, 2004 to June 30, 2005 or the named executive officer must have been terminated other than for cause during the plan period. The retention payment was an amount equal to the named executive officer’s target award percentage payable under the Bank’s Management Incentive Compensation Plan. The retention payment was accrued on a pro-rata basis over the 12 month period and was paid out on June 30, 2005.

Retirement Plans

For a description of the Bank’s retirement plans, see Note 15 to the 2004 Annual Financial Statements.

The following table show estimated annual benefits payable from Financial Institutions Retirement Plan and Benefit Equalization Plan 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 the executive officers participating in both plans.

Pension Plan Table

	Years of Service
Remuneration	15	20	25	30	35
300,000	101,250	135,000	168,750	202,500	236,250
400,000	135,000	180,000	225,000	270,000	315,000
500,000	168,750	225,000	281,250	337,500	393,750
600,000	202,500	270,000	337,500	405,000	472,500
700,000	236,250	315,000	393,750	472,500	551,250
800,000	270,000	360,000	450,000	540,000	630,000
900,000	303,750	405,000	506,250	607,500	708,750

Compensation is the average annual salary (base and bonus) for the five consecutive years of highest salary during benefit service. The formula for determining normal retirement allowance is 2.25% times years and months of benefit service times high five-year average salary.

The covered executive officers have approximately the following years of credit service as of September 30, 2005:

	Years of Credit Service
Mr. Lundstrom	21.1
Mr. Gutzmer	19.9
Mr. Huston	13.2
Mr. Moore	13.2
Mr. Gould	13.1
Mr. Thomas	0.6

The regular form of retirement benefits is a straight-line annuity including a lump-sum retirement death benefit. Retirement benefits are not subject to any deductions for Social Security benefits or other offset amounts.

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Compensation Committee Interlocks and Insider Participation

None of the members of the Bank’s Personnel and Compensation Committee has at any time been an officer or employee of the Bank. None of the Bank’s Executive Officers serves as a member of the Board of Directors or the Personnel and Compensation Committee of the Bank.

Compensation of Directors

The Bank has established a policy governing the compensation and travel reimbursement provided its Board of Directors. The goal of the policy is to compensate members of the Board of Directors for work performed on behalf of the Bank. Under this policy, compensation is comprised of per-meeting fees which are subject to an annual cap established by the GLB Act. The fees compensate Directors for time spent reviewing materials sent to them on a periodic basis by the Bank, for preparing for meetings, for participating in any other activities for the Bank and for actual time spent attending the meetings of the Board or its committees. Directors are also reimbursed for reasonable Bank-related travel expenses. Total Directors’ fees paid by the Bank during 2004, 2003 and 2002 were $289,580, $274,586 and $250,901, respectively. Total Directors’ travel expenses paid by the Bank were $73,341, $46,441 and $47,940, respectively.

The following table sets forth the per-meeting fees and the annual caps established for 2005:

	Per Meeting Fee		Annual Cap
Chair	$	4,200	$	28,364
Vice-chair		3,400		22,692
Other members 1		2,600		17,019

¹ This fee is $2,800 for a member that is chairing one or more committee meetings.

The following table sets forth the per-meeting fees and the annual caps established for 2004:

	Per Meeting Fee		Annual Cap
Chair	$	4,100	$	27,405
Vice-chair		3,300		21,924
Other members 2		2,500		16,443

² This fee is $2,700 for a member that is chairing one or more committee meetings.

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Item 7. Certain Relationships and Related Transactions.

Transactions with Related Parties and other FHLBs

The Bank does not participate in activities with related parties which are not a part of the Bank’s ordinary course of business. All transactions with related parties are recorded within the Bank’s two operating segments; MPF Program and Traditional Member Finance. The following summarizes the Bank’s transactions with related parties and other FHLBs.

Related Parties: The Bank is a cooperative whose member institutions own the capital stock of the Bank 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 Bank capital stock until the transactions mature or are paid off. 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 Bank, those transactions are subject to the same eligibility and credit criteria, as well as the same terms and conditions, as all other transactions. The Bank defines related parties as those members with capital stock outstanding in excess of 10% of total capital stock outstanding. At September 30, 2005 and December 31, 2004 and 2003 the Bank had no member with capital stock outstanding in excess of 10% of the Bank’s total capital stock. Investment securities issued by affiliates of our members may be purchased in the secondary market through a third party at arm’s length.

Outlined below is the level of activity the Bank has with its members and their affiliates as reported in the statements of condition.

• Federal funds sold related to members and their affiliates reported in the Bank’s statements of condition at September 30, 2005 and December 31, 2004 and 2003 was $0 million, $0 and $350.0 million, respectively.

• The Bank acquired $1.5 billion and $3.5 billion in MPF Loans from or through member PFIs in the nine months ended September 30, 2005 and 2004, respectively. The Bank acquired $4.1 billion, $15.9 billion and $5.8 billion in MPF Loans from or through member PFIs during the three years ended December 31, 2004, 2003 and 2002, respectively.

• Held-to-maturity securities of members’ affiliates at September 30, 2005 and December 31, 2004 and 2003 were $12.8 million, $30.4 million and $45.0 million, respectively.

• Derivative assets of members and their affiliates at September 30, 2005 and December 31, 2004 and 2003 were $30.6 million, $24.3 million and $28.7 million, respectively. Derivative liabilities of members and their affiliates at September 30, 2005 and December 31, 2004 and 2003 were $72.6 million, $91.7 million and $4.7 million, respectively.

• Interest and non-interest bearing deposits from members of $838.8 million, $885.2 million and $1.3 billion at September 30, 2005 and December 31, 2004 and 2003 are maintained by the Bank for its members primarily to facilitate settlement activities that are directly related to advances and mortgage loan purchases.

Other FHLBs: The Office of Finance may issue consolidated obligations through the Global Issuances Program. Historically, the Bank has been the primary obligor on any consolidated obligation debt issued under this program that is not taken by another FHLB. If another FHLB needs liquidity or additional funding, then the FHLB could obtain funding by issuing new consolidated obligations through the Office of Finance, or the Bank could transfer its consolidated obligations at fair value to the other FHLB. Due to the fact that the Bank is no longer the primary obligor of the transferred consolidated obligations, the Bank records the transfer as an extinguishment of debt with a corresponding gain or loss recorded in the statements of income. The Bank transferred $975.2 million and $3.8 billion of consolidated obligations to other FHLBs for the nine months ended September 30, 2005 and 2004, respectively. In addition, the Bank recognized a net realized gain from early extinguishment of debt transferred to other FHLBs of $4.6 million and $46.5 million for the nine months ended September 30, 2005 and 2004, respectively. The Bank transferred $4.3 billion, $6.3 billion and $729.3 million of consolidated obligations to other FHLBs for the years ended December 31, 2004, 2003 and 2002, respectively. In addition, the Bank recognized a net realized gain (loss) from early extinguishment of debt transferred to other FHLBs of $45.8 million, $106.3 million and ($2.3 million) for the years

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ended December 31, 2004, 2003 and 2002, respectively. There were no such sales of available-for-sale securities being used to hedge the transferred debt for the year ended December 31, 2002.

As the MPF Provider, the Bank recorded $2.2 million and $812.1 thousand as transaction services fees in the nine months ended September 30, 2005 and 2004, respectively. The Bank recorded $1.2 million in transaction service fees for the year ended December 31, 2004, which was the first year in which the Bank recorded such fees. Prior to 2004 the Bank incurred these costs to promote the MPF Program. Transaction service fees are recorded in “Other, net” on the Bank’s statements of income.

In December 2002, the Bank agreed to begin purchasing MPF Loans directly from members of the FHLB of Dallas and pay the FHLB of Dallas as the Bank’s marketing agent. The FHLB of Dallas acts as marketing agent for the Bank and receives a marketing fee for its services rather than purchasing MPF Loans from its members. Direct acquisitions from another FHLB’s members are permitted under the AMA Regulation with the consent of that FHLB. The Bank incurred $305.5 thousand and $629.3 thousand in marketing fees paid to the FHLB of Dallas during the nine months ended September 30, 2005 and 2004, respectively. The Bank incurred $731.8 thousand and $1.7 million in marketing fees paid to the FHLB of Dallas during the years ended December 31, 2004 and 2003, respectively. The Bank did not incur any such fees in 2002. Marketing fees paid to Dallas are recorded in “Mortgage Loan Expense” on the Bank’s statements of income.

The Bank purchased $1.6 billion and $4.5 billion in participation interests from other FHLBs during the nine months ended September 30, 2005 and 2004, respectively. The Bank purchased $4.9 billion, $20.9 billion and $10.7 billion in participation interests from other FHLBs during the years ended December 31, 2004, 2003 and 2002, respectively. Participation interests purchased are recorded as a component of “Loans held in portfolio purchased from other FHLBs” on the statements of cash flows.

The Bank sold $878.9 million in participation interests to the FHLB of Topeka in 2004, and did not sell any participation interests to other FHLBs in 2003. The purchase and immediate sale to the FHLB of Topeka was recorded net in Operating Activities, and accordingly, there was no impact to the Bank’s statements of cash flows related to this transaction.

The Bank completed two MPF Shared Funding transactions in March 2003 and June 2003. The outstanding principal balance of the A Certificates held by the Bank in connection with these transactions was $436.6 million and $513.0 million as of September 30, 2005 and December 31, 2004, respectively.

The Bank paid participation fees of $225.0 thousand to the FHLB of Des Moines for the nine month periods ended September 30, 2005 and 2004. The Bank paid participation fees of $300.0 thousand to the FHLB of Des Moines during each of the three years ended December 31, 2004, 2003 and 2002. Participation fees paid to the FHLB of Des Moines are recorded in “Mortgage Loan Expense” on the Bank’s statements of income.

As of September 30, 2005 and December 31, 2004 and 2003, the Bank held investment securities classified as trading in the Bank’s statements of condition of $34.1 million, $71.7 million and $75.7 million of consolidated obligations of other FHLBs which were purchased from 1995 to 1997. The FHLB of Dallas was the primary obligor of $28.0 million of consolidated obligations at September 30, 2005 and $41.7 million and $43.6 million at December 31, 2004 and 2003, respectively. The FHLB of San Francisco was the primary obligor for $6.1 million of consolidated obligations held at September 30, 2005 and $30.0 million and $32.1 million held at December 31, 2004 and 2003, respectively. The respective changes in fair value are recorded within net (loss) gain on trading securities on the statements of income and within Operating Activities as a net (increase) decrease on trading securities in the Bank’s statement of cash flows.

The Bank has receivables with other FHLBs, which were $1.1 million, $1.0 million and $1.8 million at September 30, 2005 and December 31, 2004 and 2003, respectively. Receivables are classified in other assets on the Bank’s statements of condition. Other FHLBs have deposits with the Bank that are separately reported on the Bank’s statements of condition.

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Item 8. Legal Proceedings.

The Bank is not currently aware of any pending or threatened legal proceedings against it that could have a material adverse effect on the Bank’s financial condition or results of operations.

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Item 9. Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters.

Members own all the capital stock of the Bank and elect the majority of the directors of the Bank. The Bank conducts its business in mortgages and advances almost exclusively with its members. There is no established marketplace for the Bank’s capital stock and the capital stock is not publicly traded. By regulation, the Bank has the discretion to repurchase capital stock held by members in excess of their required capital stock holdings (“voluntary capital stock”) at any time. However, on October 18, 2005, the Bank discontinued voluntary stock redemptions and amended its Written Agreement with the Finance Board. Under the amendment, the Bank agreed to maintain new minimum capital requirements. See “Item 2.2—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Regulatory Agreement and Related Actions.” Par value of all capital stock is $100 per share. As of September 30, 2005, the Bank had approximately 38.9 million shares of capital stock outstanding and there were 885 stockholders of record. As of December 31, 2004, the Bank had approximately 43 million shares of capital stock outstanding and there were 893 stockholders of record.

The Bank’s dividend payments to members are principally in the form of capital stock rather than cash which has been acceptable to the Bank’s membership. Fractional shares of stock dividends were paid in cash until the fourth quarter of 2005 when fractional shares have begun to be paid in fractional shares of capital stock. Beginning in 2004, the Bank added 100 basis points above the quarterly 52 week average of the one-year LIBOR rate as its minimum dividend rate goal. With regard to dividends, in 2003, the Bank used a one-year LIBOR plus 75 basis points as its minimum dividend rate goal. Because LIBOR represents the rate at which banks can borrow and lend US dollars globally, it is widely used as a borrowing index on U.S. commercial and corporate loans.

The Bank uses one-year LIBOR in calculating its minimum dividend rate goal because management believes its average duration gap is close to zero and equity would be invested in shorter term assets with rates that approximate LIBOR. The dividend rate is dependent on the Bank’s return on equity, which is dependent on LIBOR. Further, the dividend rate is dependent on the interest spread between yields on interest earning assets and interest-bearing liabilities. As the Bank’s asset mix has shifted toward MPF Loans, the Bank’s net interest rate spread and return on equity has been higher than forecasted, resulting in higher dividends from the minimum dividend goal.

On December 20, 2004 the Bank’s Board of Directors announced that in an effort to achieve full implementation of its Written Agreement with the Finance Board, that the fourth quarter 2004 dividend would be limited to the lesser of 5.5% annualized or 100% of core earnings, as defined as net income less any material, non recurring items. In accordance with the Bank’s Business and Capital & Management Plan for 2005 – 2007, the Bank’s Board of Directors adopted a new dividend policy requiring its dividend payout ratio in a given quarter not to exceed 90% of adjusted core net income for that quarter. See “Item—1.5—Regulations—Capital, Capital Rules and Dividends—Dividends.” Also, the amendment to the Written Agreement requires that dividends receive approval by the Finance Board’s Office of Supervision until such time that the Bank completes the process of registering its capital stock under the Securities Exchange Act of 1934 and it submits and the Finance Board approves a revised retained earnings and dividend policy.

In the first quarter of 2005, the Bank’s dividend rate paid was 5.50%, totaling $60.3 million in dividends to stockholders after reclassifying $241 thousand to interest expense for the adoption of FAS 150. In the second quarter of 2005, the Bank’s dividend rate paid was 5.50% totaling $57.7 million in dividends to stockholders. In the third quarter of 2005, the Bank’s dividend rate paid was 5.0% totaling $51.7 million in dividends to stockholders. On October 18, 2005, the Board of Directors declared and approved a 3.75% (annualized rate) stock dividend based on third quarter 2005 results to be paid to members in the fourth quarter on November 15, 2005. This dividend was below the Bank’s minimum dividend rate goal of 4.33%, consisting of the actual one-year moving average LIBOR rate of 3.33% for the quarter plus 100 basis points.

In 2004, the Bank’s average annualized dividend rate was 6.125%, approximately 400 basis points over the minimum dividend goal of 2.12% (1-year LIBOR plus 100 basis points). The Bank declared and paid $147.6 million in dividends to stockholders during 2002, declared and paid $219.6 million in 2003 and declared and paid $263.0 million in 2004 after reclassifying $1.5 million to interest expense for the adoption of SFAS 150.

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The Bank declared quarterly dividends as outlined in the table below. Dividends are paid in the form of capital stock with the exception of fractional shares which are paid in cash until the fourth quarter of 2005 when fractional shares have begun to be paid in fractional shares of stock.

	For the Years Ended December 31,
(Dollars in thousands)	2005				2004				2003				2002
Quarter in which Declared 1	Amount		Annualized Percent		Amount		Annualized Percent		Amount		Annualized Percent		Amount		Annualized Percent
First	$	60,299	5.50	%	$	67,279	6.50	%	$	39,136	5.00	%	$	30,693	5.00	%
Second		57,676	5.50	%		63,564	6.00	%		52,951	6.50	%		33,540	5.00	%
Third		51,719	5.00	%		66,790	6.00	%		58,413	6.50	%		36,410	5.00	%
Fourth		—  3	—  3			65,332	6.00	%		69,089	7.00	%		46,963	6.00	%
Total	$	169,694			$	262,9652			$	219,589			$	147,606

¹ Quarterly earnings and dividends declared per share may not be additive, as per share amounts are computed independently for each quarter and the full year is based on respective weighted average common share outstanding. Prior to and during the fourth quarter 2002, dividends were declared and paid in the current quarter. After the fourth quarter 2002, dividends were declared and paid in the subsequent quarter. A special dividend was declared in the first quarter of 2003

² 2004 excludes $1,598,000 related to the application of SFAS 150.

³ On October 18, 2005, the Board of Directors declared and approved a 3.75% (annualized rate) stock dividend of $38.3 million based on the results of the third quarter of 2005 paid to members on November 15, 2005.

	For the Nine Months Ended September 30,			For the Years Ended December 31,
	2005			2004			2003			2002
Dividends 1
Dividends paid in capital stock (in thousands)	$	169,561		$	262,782		$	219,411		$	147,429
Dividends paid in cash (in thousands)		133			181			178			177
Average Annualized Dividend Rate		5.33	%		6.125	%		6.25	%		5.25	%

¹ Prior to and during the fourth quarter 2002, dividends were declared and paid in the current quarter. After the fourth quarter 2002, dividends are declared and paid in the subsequent quarter.

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Item 10. Recent Sales of Unregistered Securities.

Consolidated obligations issued by the Bank are exempt under Section 3(a)(2) of the Securities Act of 1933. The following table provides information regarding consolidated obligations sold by the Bank through the Office of Finance as agent for the Bank and equity securities sold directly to the Bank’s members. All securities were sold for cash and the Bank used the net cash proceeds from these sales for general corporate purposes.

(Dollars in thousands)	For the Nine Months Ended September 30,		For the Years Ended December 31,
Title of Securities	2005		2004		2003		2002
Consolidated Obligations:
Discount Notes	$	273,842,229	$	461,220,783	$	357,816,650	$	328,044,532
Bonds		13,565,477		24,766,023		46,345,417		23,672,974
Capital Stock		402,211		1,089,857		1,365,706		1,089,076

The Bank issues letters of credit in its ordinary course of business. From time-to-time the Bank provides standby letters of credit to support a member’s letter of credit issued to support unaffiliated, third-party offerings of notes, bonds or other securities to finance housing-related or economic development projects. The Bank provided $14.9 million, $3.4 million, $20.3 million and $18.7 million of such standby letters of credit during the first nine months of 2005 and during 2004, 2003 and 2002, respectively. To the extent that these standby letters of credit are securities for purposes of the Securities Act of 1933, the issuance of these standby letters of credit by the Bank is exempt from registration pursuant to section 3(a)(2) of the Securities Act of 1933.

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Item 11. Description of Registrant’s Securities to be Registered.

The Bank currently issues a single class of capital stock to its members in accordance with a formula set forth in the FHLB Act and regulations of the Finance Board. In accordance with that formula, each member must purchase capital stock in the Bank in an amount equal to the greater of (i) $500, (ii) one percent of the member’s aggregate unpaid loan principal on certain residential mortgage loans and mortgage-backed securities, or (iii) five percent of the advances outstanding to the member. The Finance Board may, from time to time, increase or decrease the amount of Bank capital stock that members are required to hold. Each member’s required minimum investment in the capital stock of the Bank is adjusted annually based on calendar year-end financial data provided by the member.

The rights associated with the capital stock of the Bank are prescribed by the FHLB Act and Finance Board regulations. These rights include the following:

• Par Value. The par value of the capital stock is $100. The capital stock is issued at par, unless the Finance Board has fixed a different price.

• Dividends. Holders of capital stock are entitled to non-cumulative dividends if, as and when declared by the Board of Directors of the Bank. Under Finance Board regulations, dividends may be paid out of current net earnings and retained earnings of the Bank. Dividends may not be paid if such payment would result in a projected impairment of the par value of the capital stock of the Bank. Dividends also may not be paid 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 the Bank becomes a non-complying FHLB under Finance Board regulations as a result of its inability to comply with regulatory liquidity requirements or to satisfy its current obligations or to provide certain required certifications to the Finance Board. For a description of the Bank’s dividend policy and the current restrictions on the payment of dividends, see “Item 9—Market Price and Dividends on the Registrant’s Common Equity Security and Related Stockholder Matters.”

• Redemption. Members of the Bank are entitled to redemption of their capital stock after a six-month notice period in the case of a member that is voluntarily withdrawing from membership in the Bank. Members are also entitled to redemption of their capital stock following other events that terminate their membership in the Bank, such as a merger of a member into a non-member institution. However, if a member has indebtedness outstanding at the time of its termination from membership, the Bank may determine not to redeem the member’s capital stock until such indebtedness is liquidated. All stock redemptions are subject to the Bank meeting its minimum regulatory capital requirements. Members may not currently redeem voluntary stock due to the Bank’s discontinuance of voluntary stock redemptions. See “Item 2.2—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Regulatory Agreement and Related Actions”.

• Voting Rights. Holders of capital stock of the Bank have the right to vote only with respect to the election of directors. These rights are set forth in the FHLB Act and regulations of the Finance Board.

In order to be eligible to vote, holders of capital stock must be members of the Bank as of December 31 of the year immediately preceding an election (the “record date”). For each directorship in a member’s state that is to be filled in an election, the member will 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 will 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. This voting “cap” limits the ability of large stockholders of the Bank to control the outcome of any election.

There are no voting preferences for any share of capital stock and members are not entitled to vote any shares of voluntary capital stock in the election of directors.

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• Liquidation Rights. The FHLB Act provides that, in accordance with rules, regulations and orders that may be prescribed by the Finance Board, the Bank may be liquidated and its capital stock paid off and retired, in whole or in part, after paying or making provision for the payment of its liabilities. The FHLB Act also provides that, following implementation by the Bank of the new capital structure mandated by the GLB Act, the holders of Class B capital stock would have an ownership interest in the retained earnings of the Bank. It has not been determined whether, prior to implementation of the Bank’s new capital structure, the holders of capital stock, upon a liquidation of the Bank, would be entitled to share in any residual assets following the payment of the Bank’s creditors and the redemption of the Bank’s capital stock.

• Ownership Limitations and Transferability. Only members of the Bank, or former members that have voluntarily withdrawn from membership or whose membership has otherwise been terminated, may own capital stock of the Bank. Subject to approval of the Bank and the Finance Board, a member may transfer its capital stock only to another member or to enable an institution to become a member.

• Modification of Rights. The Bank is subject to the FHLB Act and regulations adopted thereunder by the Finance Board. From time to time, Congress has amended the FHLB Act, and the Finance Board has amended its regulations, in ways that have significantly affected the rights and obligations of the Bank and its members. For example, the GLB Act mandated that the Bank implement a new capital structure which, among other things, significantly affects the ownership interests of the holders of the Bank’s capital stock. It is possible that legislative or regulatory changes in the future could further modify the rights of holders of Bank capital stock.

The GLB Act requires the Bank to create a new capital structure. Until the Bank implements its new capital plan, the pre-GLB Act capital rules remain in effect. The Finance Board’s final rule implementing a new capital structure for the Bank includes risk-based and leverage capital requirements, different classes of capital stock that the Bank may issue and the rights and preferences that may be associated with each class of capital stock. Under the Bank’s Business and Capital Management Plan for 2005—2007, the Bank will delay implementation of a new capital structure until December 31, 2006, or until a time mutually agreed upon with the Finance Board. Also, the Bank will reevaluate the structure of its capital plan, originally approved by the Finance Board on June 12, 2002 and may propose amendments for approval by the Finance Board based on such review.

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Item 12. Indemnification of Directors and Officers.

Section 10 of the Bank’s bylaws requires the Bank, subject to the limitations described below, to indemnify any person against whom an action is brought or threatened because that person is or was a director, officer or employee of the Bank for (i) any amount for which that person becomes liable under a judgment or settlement in such action and (ii) reasonable costs and expenses, including reasonable attorney’s fees, actually paid or incurred by that person in defending or settling such action, or in enforcing his rights under the bylaws if he attains a favorable judgment in such enforcement action. Each director, officer or employee of the Bank is also entitled to such indemnification rights in connection with any action brought or threatened against a director, officer, or employee of the Bank because of that person’s service to or on behalf of a Bank-related office, a System office or a System committee.

A Bank director, officer or employee will be entitled to indemnification only if: (i) such person has received a final judgment on the merits in his favor or (ii) in the case of settlement, judgment against such person or final judgment in his favor other than on the merits, a majority of a quorum of disinterested directors of the Bank duly adopts a resolution determining that such person was acting in good faith within the scope of his employment or authority as he could reasonably have perceived it under the circumstances and for a purpose he could reasonably have believed under the circumstances was in the best interest of the Bank or its members. In the event that the necessary resolution cannot be duly adopted by a majority of a quorum of the Bank’s disinterested directors, then the indemnification determination will be made by independent legal counsel pursuant to the standards set forth in the Bank’s bylaws.

A director, officer or employee of the Bank will have no liability for monetary damages directly or indirectly to any person other than the Bank or the Finance Board (including without limitation, any member, non-member borrower, stockholder, director, officer or agent of a member or a non-member borrower, director, officer, employee, or agent of the Bank or contractor with or supplier to the Bank) in respect of his acts or omissions in his capacity as a director, officer or employee of the Bank or otherwise because of his position as a director, officer or employee of the Bank except for liability which may exist (i) for acts or omissions which involve intentional misconduct or a knowing and culpable violation of criminal law, (ii) for acts or omissions which a director, officer or employee believes to be contrary to the best interests of the Bank, or which otherwise involve bad faith on the part of the director, officer or employee, or (iii) for any transaction from which a director, officer or employee derived an improper personal economic benefit, directors, officers and employees of the Bank will be entitled to receive advance payments of their expenses related to their indemnification amounts upon satisfaction of the conditions specified in the bylaws. The Bank also maintains insurance to protect it and its directors, officers, and employees from potential losses arising from claims against any of them for alleged wrongful acts committed in their capacity as directors, officers or employees.

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Item 13. Financial Statements and Supplementary Data.

Financial Statements

The December 31, 2004 Annual Financial Statements and Notes, including the Report of Independent Auditors and the unaudited September 30, 2005 Financial Statements and Notes, are set forth starting on page F-1 of this Form 10.

Supplementary Data

Supplemental financial data for the nine months ended September 30, 2005 and each full quarter within the two years ended December 31, 2004 are included in the table below.

(Dollars in thousands except per share)	3rd Quarter 2005			2nd Quarter 2005			1st Quarter 2005			4th Quarter 2004			3rd Quarter 2004			2nd Quarter 2004			1st Quarter 2004			4th Quarter 2003			3rd Quarter 2003			2nd Quarter 2003			1st Quarter 2003
Interest income	$	895,648		$	876,519		$	843,447		$	839,126		$	817,721		$	775,388		$	778,288		$	755,528		$	719,299		$	623,616		$	634,666
Interest expense		778,083			750,148			700,574			683,048			663,119			616,343			543,670			549,160			512,158			455,953			422,012
Provision for credit losses on mortgage loans		—			—			—			—			—			—			—			—			—			—			—
Net interest income after provision for credit losses on mortgage loans		117,565			126,371			142,873			156,078			154,602			159,045			234,618			206,368			207,141			167,663			212,654
Other income (loss)		(15,586	)		(2,615	)		(10,603	)		(28,338	)		(7,283	)		26,417			(117,926	)		(54,445	)		15,266			(10,440	)		(63,560	)
Other expense		28,538			29,259			31,316			38,101			30,682			29,791			22,482			29,957			21,083			18,648			16,742
Total assessments		19,504			25,096			26,798			23,813			30,974			41,341			36,011			32,358			52,746			37,444			35,139
Income before cumulative effect of change in accounting principle		53,937			69,401			74,156			65,826			85,663			114,330			58,199			89,608			148,578			101,131			97,213
Cumulative effect of change in accounting principle		—			—			—			—			—			—			41,441			—			—			—			—
Net income	$	53,937		$	69,401		$	74,156		$	65,826		$	85,663		$	114,330		$	99,640		$	89,608		$	148,578		$	101,131		$	97,213
Annualized dividend rate paid		3.75	%		5.5	%		5.5	%		6.0	%		6.0	%		6.0	%		6.5	%		7.0	%		6.5	%		6.5	%		5.0	%

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Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

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Item 15. Financial Statements.

(a) The Bank’s financial statements included as part of this Form 10 are identified in the Table of Contents to the 2004 Annual Financial Statements and Notes and in the September 30, 2005 Financial Statements and Notes, as set forth starting on page F-1 of this Form 10, and are incorporated in this Item 15 by reference.

(b) Exhibits

Exhibit No.	Description
3.1	Federal Home Loan Bank of Chicago Charter
3.2	Federal Home Loan Bank of Chicago Bylaws
10.1	Lease for Lincoln-Carlyle Illinois Center & FHLBC dated 12/30/97-7/31/11
10.1.1	First Amendment to Lease (12/15/2000)
10.1.2	Second Amendment to Lease (10/29/2003)
10.2	Advances, Collateral Pledge and Security Agreement
10.3	Written Agreement between the Federal Home Loan Bank of Chicago and the Federal Housing Finance Board dated June 30, 2004
10.3.1	Amendment No. 1 to Written Agreement between the Federal Home Loan Bank of Chicago and the Federal Housing Finance Board dated October 18, 2005.
10.4	Mortgage Partnership Finance Program Participating Financial Institution Agreement [Origination or Purchase]
10.4.1	Mortgage Partnership Finance Program Participating Financial Institution Agreement [Purchase Only]
10.5	MPF Services Agreement between FHLB Pittsburgh and FHLBC dated 4/30/99
10.5.1	First Amendment to Mortgage Partnership Finance Services Agreement
10.5.2	Second Amendment to Mortgage Partnership Finance Services Agreement
10.5.3	Third Amendment to Mortgage Partnership Finance Services Agreement
10.5.4	Fourth Amendment to Mortgage Partnership Finance Services Agreement
10.5.5	Fifth Amendment to Mortgage Partnership Finance Services Agreement
10.5.6	Sixth Amendment to Mortgage Partnership Finance Services Agreement
10.5.7	Seventh Amendment to Mortgage Partnership Finance Services Agreement
10.5.8	Pro Rata MPF Participation Agreement
10.6	MPF Investment & Services Agreement between FHLB Boston and FHLBC dated 4/20/00
10.6.1	First Amendment to Mortgage Partnership Finance Investment & Services Agreement
10.6.2	Second Amendment to Mortgage Partnership Finance Investment & Services Agreement
10.6.3	Third Amendment to Mortgage Partnership Finance Investment & Services Agreement
10.6.4	Fourth Amendment to Mortgage Partnership Finance Investment & Services Agreement
10.7	Mortgage Partnership Finance Program Liquidity Option and Master Participation Agreement
10.7.1	First Amendment to Liquidity Option and Master Participation Agreement
10.7.2	Second Amendment to Liquidity Option and Master Participation Agreement
10.8	Employment Agreement between the Chicago Federal Home Loan Bank and J. Mikesell Thomas dated August 30, 2004
10.8.1	Federal Home Loan Bank of Chicago President’s Incentive Compensation Plan
10.8.2	Federal Home Loan Bank of Chicago Management Incentive Compensation Plan
10.8.3	Federal Home Loan Bank of Chicago Long Term Incentive Compensation Plan
10.8.4	Federal Home Loan Bank of Chicago Benefit Equalization Plan
10.8.5	Federal Home Loan Bank of Chicago Employee Severance and Retention Plan
10.8.6	Federal Home Loan Bank of Chicago Employee Severance Plan
10.8.7	Federal Home Loan Bank of Chicago board of Directors 2004 Compensation Policy
10.8.8	Federal Home Loan Bank of Chicago Board of Directors 2005 Compensation Policy

135

Federal Home Loan Bank of Chicago

2004 Annual Financial Statements and Notes

Table of Contents

	Page
Financial Statements and Notes
Report of Independent Registered Public Accounting Firm	F-2
Statements of Condition	F-3
Statements of Income	F-4
Statements of Capital	F-5
Statements of Cash Flows	F-6
Notes to Financial Statements	F-8

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

the Federal Home Loan Bank of Chicago

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 Chicago (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 under SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, on 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, on January 1, 2004.

March 15, 2005, except for Notes 10, 14 and 20, as to which the date is June 27, 2005

Chicago, Illinois

F-2

Statements of Condition

(In thousands, except par value)

	December 31,
	2004			2003
Assets
Cash and due from banks	$	20,530		$	3,629
Securities purchased under agreements to resell		389,840			418,600
Federal funds sold		4,738,000			5,023,000
Investment securities:
Trading includes $477,416 and $505,510 pledged in 2004 and 2003		760,057			794,297
Available-for-sale includes $705,628 and $400,784 pledged in 2004 and 2003		1,529,688			605,364
Held-to-maturity includes $226,607 and $539,451 pledged in 2004 and 2003		6,561,161			5,139,067
Advances		24,191,558			26,443,063
Mortgage loans held in portfolio, net of allowance for loan losses on mortgage loans of $4,879 and $5,459 in 2004 and 2003		46,920,551			47,599,731
Accrued interest receivable		317,837			336,655
Derivative assets		153,496			454,327
Premises and equipment, net		62,664			61,283
Other assets		63,255			62,971
Total Assets	$	85,708,637		$	86,941,987
Liabilities and Capital
Liabilities
Deposits:
Interest-bearing
Demand and overnight	$	920,360		$	1,319,093
Term		89,000			538,400
Deposits from other FHLBanks for mortgage loan program		13,395			27,646
Other		146,031			428,928
Other non-interest bearing		54,966			34,004
Total deposits		1,223,752			2,348,071
Borrowings:
Securities sold under agreements to repurchase		1,200,000			1,200,000
Consolidated obligations, net:
Discount notes		16,871,736			20,456,395
Bonds		60,875,540			57,471,055
Total consolidated obligations, net		77,747,276			77,927,450
Mandatorily redeemable capital stock		11,259			—
Accrued interest payable		513,993			502,327
Derivative liabilities		199,250			223,540
Affordable Housing Program		82,456			72,062
Payable to Resolution Funding Corporation (REFCORP)		42,487			33,218
Other liabilities		62,305			61,879
Total Liabilities		81,082,778			82,368,547
Commitments and contingencies (Note 19)
Capital
Capital stock - Putable ($100 par value) issued and outstanding shares: 42,922 and 41,552 shares in 2004 and 2003		4,292,166			4,155,218
Retained earnings		489,368			386,874
Accumulated other comprehensive (loss) income:
Net unrealized (loss) gain on available-for-sale securities		(7,224	)		1,500
Net unrealized (loss) gain relating to hedging activities		(148,451	)		29,848
Total Capital		4,625,859			4,573,440
Total Liabilities and Capital	$	85,708,637		$	86,941,987

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

F-3

Statements of Income

(In thousands)

	For the Years Ended December 31,
	2004			2003			2002
Interest Income:
Mortgage loans held in portfolio	$	2,270,138		$	1,849,907		$	1,240,179
Advances		554,104			555,195			590,263
Securities purchased under agreements to resell		6,532			5,044			3,877
Federal funds sold		84,999			43,176			59,485
Investment securities:
Trading		54,492			69,230			154,423
Available-for-sale		33,389			31,765			5,535
Held-to-maturity		206,799			178,643			226,069
Loans to other FHLBanks		71			149			468
Total interest income		3,210,524			2,733,109			2,280,299
Interest Expense:
Consolidated obligations		2,451,062			1,874,542			1,674,128
Deposits		22,019			35,203			46,489
Deposits from other FHLBanks for mortgage loan program		360			913			1,102
Securities sold under agreements to repurchase		31,209			28,620			35,545
Mandatorily redeemable capital stock		1,516			—			—
Other		15			5			142
Total interest expense		2,506,181			1,939,283			1,757,406
Net Interest Income before provision for credit losses on mortgage loans		704,343			793,826			522,893
Provision for credit losses on mortgage loans		—			—			2,217
Net Interest Income after provision for credit losses on mortgage loans		704,343			793,826			520,676
Other Income (Loss):
Service fees		1,028			1,097			1,053
Net (loss) gain on trading securities		(27,914	)		(56,642	)		295,582
Net realized loss from sale of available-for-sale securities		(22,366	)		(35,796	)		—
Net realized gain from sale of held-to-maturity securities		—			399			—
Net realized and unrealized (loss) on derivatives and hedging activities		(126,425	)		(139,166	)		(489,670	)
Net realized gain (loss) from early extinguishment of debt transferred to other FHLBs		45,849			106,276			(2,252	)
Other, net		2,697			10,653			10,909
Total other income (loss)		(127,131	)		(113,179	)		(184,378	)
Other Expense:
Salary and benefits		45,473			35,497			25,727
Professional service fees		21,918			10,457			3,185
Depreciation of premises and equipment		13,025			10,455			7,190
Mortgage loan expense		9,625			8,860			4,930
Finance Board		2,852			2,113			1,600
Office of Finance		1,897			1,668			1,270
Other operating		26,266			17,380			13,779
Total other expense		121,056			86,430			57,681
Income before Assessments		456,156			594,217			278,617
Affordable Housing Program		40,744			48,523			22,743
Resolution Funding Corporation		91,395			109,164			51,175
Total assessments		132,139			157,687			73,918
Income before cumulative effect of change in accounting principle		324,017			436,530			204,699
Cumulative effect of change in accounting principle		41,441			—			—
Net Income	$	365,458		$	436,530		$	204,699

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

F-4

Statements of Capital

For the Years Ended December 31,

(In thousands)

	Capital Stock - Putable					Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total Capital
	Shares		Par Value
2002
Balance, December 31, 2001	23,943		$	2,394,334		$	112,839		$	(5,259	)	$	2,501,914
Proceeds from issuance of capital stock	10,891			1,089,076									1,089,076
Redemption of capital stock	(5,047	)		(504,730	)								(504,730	)
Comprehensive income:
Net Income							204,699						204,699
Other comprehensive income:
Net unrealized gain on available-for-sale securities										8,174			8,174
Net unrealized gain on hedging activities										164,409			164,409
Reclassification adjustment for gain on hedging activities included in net income										(97,218	)		(97,218	)
Total other comprehensive income										75,365			75,365
Total comprehensive income													280,064
Dividends on capital stock:
Cash							(177	)					(177	)
Stock	1,474			147,429			(147,429	)					—
2003
Balance, December 31, 2002	31,261		$	3,126,109		$	169,932		$	70,106		$	3,366,147
Proceeds from issuance of capital stock	13,657			1,365,706									1,365,706
Redemption of capital stock	(5,560	)		(556,007	)								(556,007	)
Comprehensive income:
Net Income							436,530						436,530
Other comprehensive income:
Net unrealized loss on available-for-sale securities										(49,665	)		(49,665	)
Net unrealized loss on hedging activities										(99,020	)		(99,020	)
Reclassification adjustment for loss on available-for-sale securities included in net income										42,991			42,991
Reclassification adjustment for loss on hedging activities included in net income										66,936			66,936
Total other comprehensive income										(38,758	)		(38,758	)
Total comprehensive income													397,772
Dividends on capital stock:
Cash							(178	)					(178	)
Stock	2,194			219,410			(219,410	)					—
2004
Balance, December 31, 2003	41,552		$	4,155,218		$	386,874		$	31,348		$	4,573,440
Proceeds from issuance of capital stock	10,899			1,089,857									1,089,857
Redemption of capital stock	(11,775	)		(1,177,491	)								(1,177,491	)
Reclassification of mandatorily redeemable capital stock	(382	)		(38,201	)								(38,201	)
Comprehensive income:
Earnings before cumulative effect of change in accounting principle							324,017						324,017
Other comprehensive income:
Net unrealized loss on available-for-sale securities										(31,090	)		(31,090	)
Net unrealized loss on hedging activities										(217,665	)		(217,665	)
Reclassification adjustment for loss on available-for-sale securities included in net income										22,367			22,367
Reclassification adjustment for loss on hedging activities included in net income										39,365			39,365
Total other comprehensive income										(187,023	)		(187,023	)
Total comprehensive income													136,994
Cumulative effect of change in accounting principle							41,441						41,441
Dividends on capital stock:
Cash							(181	)					(181	)
Stock	2,628			262,783			(262,783	)					—
Balance, December 31, 2004	42,922		$	4,292,166		$	489,368		$	(155,675	)	$	4,625,859

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

F-5

Statements of Cash Flows

(In thousands)

	For the Years Ended December 31,
	2004			2003			2002
Operating Activities:
Net Income	$	365,458		$	436,530		$	204,699
Cumulative effect of change in accounting principle		(41,441	)		—			—
Income before cumulative effect of change in accounting principle		324,017			436,530			204,699
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		(205,631	)		(132,719	)		18,697
Net premiums and discounts on mortgage loans		132,813			193,665			57,848
Concessions on consolidated obligation bonds		19,675			19,870			11,421
Net deferred losses on hedges		893			1,465			2,029
Premises and equipment		13,025			10,455			7,190
Provision for credit losses on mortgage loans held in portfolio		—			—			2,217
Non-cash interest on mandatorily redeemable capital stock		114			—			—
Net (increase) decrease on trading securities		(292	)		1,302,700			(215,241	)
Net realized losses on sale of available-for-sale securities		22,366			35,796			—
Net realized gains on sale of held-to-maturity securities		—			(399	)		—
Loss (gain) due to change in net fair value adjustment on derivatives and hedging activities		217,050			(234,927	)		(274,469	)
Net realized loss (gain) on early extinguishment of debt		1,317			(5,392	)		(416	)
Net realized (gain) loss on early extinguishment of debt transferred to other FHLBs		(45,849	)		(106,276	)		2,252
Net realized loss on disposal of premises and equipment		20			—			1,093
Decrease (increase) in accrued interest receivable		15,000			(40,572	)		(68,135	)
Decrease in derivative assets-net accrued interest		12,492			22,355			8,943
(Decrease) increase in derivative liabilities-net accrued interest		(2,356	)		(6,361	)		6,350
Increase in other assets		(93,478	)		(65,719	)		(35,958	)
Net increase in Affordable Housing Program (AHP) liability and discount on AHP advances		10,347			26,778			8,034
Increase (decrease) in accrued interest payable		11,551			101,396			(45,601	)
(Decrease) increase in payable to Resolution Funding Corporation		9,270			21,544			(6,981	)
Increase (decrease) in other liabilities		426			(506,475	)		546,022
Total adjustments		118,753			637,184			25,295
Net cash provided by operating activities		442,770			1,073,714			229,994
Investing activities:
Net decrease (increase) in securities purchased under agreements to resell		28,760			(14,640	)		(354,065	)
Net decrease (increase) in Federal funds sold		285,000			(1,602,000	)		(256,000	)
Net (increase) decrease in short-term held-to-maturity securities		(750,561	)		(94,553	)		273,657
Proceeds from sale of long-term held-to-maturity securities		—			97,441			—
Purchase of mortgage-backed securities		(2,950,814	)		(2,358,782	)		(3,502,119	)
Proceeds from maturities and sale of mortgage-backed securities		1,308,564			3,018,989			2,905,919
Purchases of long-term held-to-maturity securities		(258,460	)		(143,357	)		(239,763	)
Proceeds from maturities of long-term held-to-maturity securities		600,963			17,205			105,271
Purchase of available-for-sale securities		(2,648,995	)		(2,543,986	)		(1,344,687	)
Proceeds from sale of available-for-sale securities		2,342,734			2,956,642			—
Proceeds from sale of available-for-sale securities to other FHLBs		—			322,876			—
Principal collected on advances		25,813,692			24,399,215			18,059,815
Advances made		(23,914,154	)		(26,240,300	)		(20,668,510	)
Principal collected on mortgage loans held in portfolio		10,164,954			16,696,022			7,077,226
Mortgage loans held in portfolio originated or purchased		(4,698,072	)		(17,476,169	)		(6,005,574	)
Mortgage loans held in portfolio purchased from other FHLBs		(4,924,069	)		(20,850,023	)		(10,675,169	)
Recoveries on mortgage loans held in portfolio		514			171			45
Proceeds from sale of foreclosed assets		73,518			16,216			4,787
Purchase of premises and equipment		(14,425	)		(39,709	)		(20,856	)
Net cash provided by (used in) investing activities		459,149			(23,838,742	)		(14,640,023	)

(Continued on following page)

F-6

Statements of Cash Flows

(In thousands)

(Continued from previous page)

	For the Years Ended December 31,
	2004			2003			2002
Financing Activities:
Net (decrease) increase in deposits	$	(1,110,068	)	$	(657,469	)	$	1,238,488
Net (decrease) increase in deposits from other FHLBs for mortgage loan program		(14,252	)		(42,000	)		48,837
Net (decrease) increase in securities sold under agreement to repurchase		—			(199,000	)		599,000
Net proceeds from issuance of consolidated obligations:
Discount notes		461,220,783			357,816,650			328,044,532
Bonds		24,766,023			46,345,417			23,672,974
Payments for maturing and retiring consolidated obligations:
Discount notes		(464,528,907	)		(351,678,933	)		(322,519,155	)
Bonds		(16,787,861	)		(23,335,937	)		(16,527,865	)
Transfer of bonds to other FHLBs		(4,315,979	)		(6,293,369	)		(729,273	)
Proceeds from issuance of capital stock		1,089,857			1,365,706			1,089,076
Payments for redemption of capital stock		(1,177,491	)		(556,007	)		(504,730	)
Mandatorily redeemable shares		(26,942	)		—			—
Cash dividends paid		(181	)		(178	)		(177	)
Net cash (used in) provided by financing activities		(885,018	)		22,764,880			14,411,707
Net increase (decrease) in cash and due from banks		16,901			(148	)		1,678
Cash and due from banks at beginning of year		3,629			3,777			2,099
Cash and due from banks at end of year	$	20,530		$	3,629		$	3,777
Supplemental Disclosures:
Interest paid	$	2,493,113		$	2,010,054		$	1,637,068
REFCORP paid		82,126			87,620			58,156
AHP paid		30,350			21,656			14,632

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

F-7

Notes to Financial Statements

Background Information

The Federal Home Loan Bank of Chicago (the Bank), a federally chartered corporation, is one of twelve Federal Home Loan Banks (the FHLBs) which, with the Federal Housing Finance Board (the Finance Board), and the Office of Finance, comprise the Federal Home Loan Bank System (the System). The mission of the FHLBs and the System is to safely and soundly support residential mortgage finance through a variety of programs and services, primarily credit programs for their financial institution membership, so that their members can provide economical residential mortgage financing, in all phases of widely varying financial and economic cycles. The Bank provides credit to its members principally in the form of advances and through the Mortgage Partnership Finance^® (MPF^®)¹ Program, under which the Bank, in partnership with its members, provides funding for home mortgage loans. In addition, the Bank also invests in other Acquired Member Assets (AMA) such as MPF Shared Funding^® securities. AMA are assets acquired from or through System members or housing associates by means of either a purchase or a funding transaction, subject to Finance Board regulations. These instruments help the Bank accomplish its mission of supporting housing finance throughout the United States.

All regulated depository institutions and insurance companies engaged in residential housing finance are eligible to apply for membership in the FHLBs. Each FHLB has members in a specifically defined geographic district. The Bank’s defined geographic membership territory is the states of Illinois and Wisconsin. The Bank is a cooperative which means that current members own nearly all of the outstanding capital stock of the Bank and may receive dividends on their investment. Former members own the remaining capital stock to support business transactions still carried on the Bank’s statements of condition. All members must purchase stock in the Bank. Members must own capital stock in the Bank based on the amount of their total assets. As a result of these requirements, the Bank conducts business with related parties in the normal course of business. See Note 20 for more information.

The FHLBs and the Office of Finance are supervised and regulated by the Finance Board which is an independent federal agency in the executive branch of the United States Government. The Finance Board ensures that the FHLBs carry out their housing finance mission, remain adequately capitalized and are able to raise funds in the capital markets and operate in a safe and sound manner. Also, the Finance Board establishes policies and regulations covering certain operations of the FHLBs. Each FHLB operates as a separate entity with its own management, employees, and board of directors.

A primary source of funds for the Bank is the proceeds from the sale to the public of the System’s debt instruments (consolidated obligations) which are the joint and several obligations of all the FHLBs. Additional funds are provided by deposits, other borrowings and capital stock purchased by members. The Bank primarily uses these funds to provide advances to members and to fund or purchase loans from members through the MPF Program. Deposits are received from both member and non-member financial institutions and federal instrumentalities. The Bank also provides members and non-members with operating services such as safekeeping, collection, and settlement.

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

F-8

Note 1 – Summary of Significant Accounting Policies

Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses. Actual results could differ from those estimates.

Federal Funds Sold – The Bank utilizes federal funds sold as a means of investing excess funds on a short-term basis. Federal funds sold are reflected on the statements of condition at cost.

Investment Securities – The Bank carries investments at cost for which it has both the ability and the intent to hold to maturity. The carrying value is adjusted for the amortization of premiums and accretion of discounts.

Under Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS 115), certain circumstances may cause the Bank to change its intent to hold a certain security to maturity in the future. Thus, the sale or transfer of a held-to-maturity security due to certain changes in circumstances such as evidence of significant deterioration in the issuer’s creditworthiness or change in regulatory requirements modifying what constitutes permissible investments or the maximum level of investments, is not considered to be inconsistent with its original classification. Other events that are isolated, nonrecurring and unusual that could not have been reasonably anticipated may cause the Bank to sell or transfer a held-to-maturity security without necessarily calling into question its intent to hold other debt securities to maturity. In addition, sales of debt securities that meet either of the following two conditions may be considered as maturities for purposes of the classification of held-to-maturity:

1) The sale occurs near enough to the maturity date (or call date if exercise of the call is probable) that interest rate risk is substantially eliminated as a pricing factor and the changes in market interest rates would not have a significant effect on the security’s fair value, or

2) The sale of a security occurs after the Bank has already collected a substantial portion (at least 85 percent) of the principal outstanding at acquisition due either to prepayments on the debt security or to scheduled payments on a debt security paid in equal installments (both principal and interest) over its term.

The Bank 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 available-for-sale securities is recorded in other comprehensive income as a net unrealized gain or loss on available-for-sale securities. The Bank classifies certain investments as trading securities and carries them at fair value. The Bank records changes in the fair value of these investments in other income. Securities classified as trading are held for asset-liability management and liquidity purposes.

The Bank computes the amortization and accretion of premiums and discounts on mortgage-backed securities using the level-yield method over the estimated lives of the securities. This method requires a retrospective adjustment of the effective yield each time the Bank changes the estimated life as if the new estimate had been known since the original acquisition date of the securities. The Bank computes the amortization and accretion of premiums and discounts on other investments using the level-yield method to the contractual maturity of the securities.

Gains and losses on sales of investment securities are computed using the specific identification method and are included in other income. The Bank treats securities purchased under agreements to resell as collateralized financings.

The Bank regularly evaluates outstanding investments for impairment. Impairment is evaluated considering numerous factors and their relative significance will vary from case to case. Factors that are considered in this analysis include: the credit-worthiness of the issuer and underlying collateral; the length of time and extent to which market value has been less than cost; and the intent and ability to retain the security in order to allow for an anticipated recovery in market value. If, based on this analysis, it is determined that there is an other-than-temporary impairment in the value of a security, the security is written down and a loss is recognized in the statements of income as other expense.

Advances – Advances to members are presented net of discounts on advances for the Affordable Housing Program. The Bank amortizes premiums and accretes discounts on advances as a component of interest income using the level-yield method. Interest on advances is credited to income as earned. Following the requirements of the Federal Home Loan Bank Act of 1932 (the FHLB Act), as amended, the Bank obtains collateral on advances to protect it from losses. As Note 8 more fully describes, the FHLB Act limits eligible collateral to certain investment securities, residential mortgage loans, cash or deposits with the Bank, and other eligible real estate-related assets. However, “community financial institutions,” (FDIC-insured institutions with average assets of $548 million or less at the last three year ends (2003, 2002, and 2001)) are eligible to utilize expanded statutory

F-9

collateral rules that include small business and agricultural loans. The Bank also factors in the Participating Financial Institutions’ Credit Enhancement amount when determining the amount of the allowance for loan losses. The Bank has not incurred any credit losses on advances since its inception. Based upon the collateral held as security on the advances and prior repayment history, no allowance for credit losses on advances is deemed necessary by management.

Mortgage Loans Held in Portfolio – The Bank invests in Government loans (e.g. residential mortgage loans guaranteed by the Department of Veteran’s Affairs and insured by the Federal Housing Administration) and conventional residential mortgage loans which are either funded by the Bank through or purchased from its members or members of another FHLB or purchased as participations from other FHLB’s (“MPF^® Loans”). The Bank manages the liquidity, interest rate and prepayment risk of the MPF Loans, while the members manage the credit risk and retain the marketing and servicing activities. In the normal course of business, the Bank will participate with other FHLBs in the funding of MPF Loans under the MPF Program. Each participant will fund their agreed upon percentage of the total loan proceeds and the Bank’s share of the total funding is reflected on the statement of cash flows as “Mortgage loans held in portfolio originated or purchased.”

The Bank classifies MPF Loans as held for investment and reports them at their principal amount outstanding net of deferred loan fees and premiums and discounts in accordance with SFAS No. 65, “Accounting for Certain Mortgage Banking Activities”. MPF Loans that qualify for fair value hedge accounting under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, are recorded at their carrying amount, adjusted for changes in fair value due to the hedged risk.

As described in Note 2, effective January 1, 2004, the Bank changed its method of accounting for amortization of deferred loan origination fees and premiums and discounts paid to and received by the Bank’s members. The Bank defers and amortizes mortgage loan origination fees and premium and discounts paid to and received by the Bank members as interest income over the contractual life of the related mortgage loans based on a constant effective yield. Principal prepayments are not anticipated to shorten the term of the MPF Loans. In prior periods the Bank deferred and amortized such amounts to interest income on an effective yield basis, over the estimated life of the related mortgage loans. Actual prepayment experience and estimates of future principal prepayments were used in calculating the estimated lives of the MPF Loans. The Bank aggregated the MPF Loans by similar characteristics (type, maturity, note rate and acquisition date) in determining prepayment estimates.

The Bank records non-origination fees, such as delivery commitment extension fees and pair-off fees, in other income as they are 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 funded is less than or greater than a specified percentage of the delivery commitment amount.

The Bank and members share in the credit risk of the MPF Loans with the Bank assuming the first loss obligation not to exceed the amount of the First Loss Account (FLA), and the members assuming credit losses in excess of the FLA, “Second Loss Credit Enhancement,” up to the amount of the member’s credit enhancement obligation as specified in the master commitment. Under the MPF Plus product, members obtain supplemental mortgage insurance (SMI) and assume credit losses in excess of the FLA and SMI up to the amount of the required credit enhancement. The amount of the credit enhancement is determined such that any losses in excess of the enhancement (either excluding the FLA for Original MPF or including the FLA for other MPF products) are limited to those required for an equivalent instrument (e.g. mortgage-backed security) with a long term credit rating of “AA” by a nationally recognized statistical rating organization. Losses in excess of the FLA and the member’s credit enhancement, if any, are absorbed by the Bank.

The Bank pays the member a credit enhancement fee for assuming its portion of the credit risk in the MPF Loans. These fees are paid monthly and are determined based on the remaining unpaid principal balance of the MPF Loans. The required credit enhancement obligation amount may vary depending on the MPF product alternatives selected. Credit enhancement fees, payable to a member as compensation for assuming credit risk, are recorded as an offset to mortgage loan interest income when paid by the Bank. The Bank also pays performance credit enhancement fees which are based on actual performance of the mortgage loans. In general, performance based fees are net of cumulative unrecovered losses paid by the Bank. To the extent that losses in the current month exceed performance credit enhancement fees accrued, the remaining losses are recovered from future performance credit enhancement fees payable to the member. The Bank recorded total credit enhancement fees of $50,955,000, $39,419,000 and $18,075,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

MPF Loans are placed on non-accrual status when it is determined that the payment of interest or principal is doubtful of collection or when interest or principal is past due for 90 days or more, except when the loan is well secured and in the process of collection. When an MPF Loan is placed on non-accrual status, accrued but uncollected interest and the amortization of agent fees or premiums and discounts are reversed against interest income. The Bank records cash payments received on non-accrual MPF Loans as a reduction of principal with any remainder reported in interest income.

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The Bank bases its allowance for loan losses on management’s estimate of loan losses inherent in the Bank’s MPF Loan portfolio as of the balance sheet date. The Bank performs periodic reviews of its portfolio to identify losses inherent within the portfolio and to determine the likelihood of collection of the portfolio. The analysis includes consideration of various data observations such as past performance, current performance, loan portfolio characteristics, collateral valuations, industry data and prevailing economic conditions. The Bank also factors in the Participating Financial Institutions’ credit enhancement amount when determining the amount of the allowance for loan losses.

The Bank evaluates whether to record a charge-off on an MPF Loan upon the occurrence of a confirming event. The occurrence of a confirming event results in an MPF Loan being considered a collateral dependent loan. Confirming events include, but are not limited to, a debtor that has filed for bankruptcy, the occurrence of an in-substance foreclosure, the initiation of foreclosure proceedings, or the servicer discontinues advancing scheduled payments on behalf of the borrower because it has determined that the servicer’s advances would not be recoverable out of insurance proceeds, liquidation proceeds or otherwise based on the collateral value of the underlying property. A charge off is recorded if the fair value of the underlying collateral, less disposal costs, is less than the carrying value of the MPF Loan.

MPF Shared Funding^® Program – The Bank participates in the MPF Shared Funding program. Under this MPF product, mortgage loans otherwise eligible for the MPF Program are sold by a member to a third party sponsored trust and “pooled” into securities. The Bank purchases the Acquired Member Asset eligible securities, which are rated at least AA, and are either retained or pursuant to subscription agreements, partially sold to other FHLBs. The retained investment securities are classified as held-to-maturity and are not publicly traded or guaranteed by any of the FHLBs.

Affordable Housing Program – As more fully discussed in Note 9, the FHLB Act requires the Bank to establish and fund an Affordable Housing Program (AHP). The Bank provides AHP subsidies to members in the form of direct grants. The required AHP funding of direct subsidies is charged to earnings and an offsetting liability is established. Alternatively, the Bank may provide subsidies in the form of advances. Advances that qualify under the Bank’s AHP are made at interest rates below the customary interest rate for non-subsidized advances or contain other forms of subsidies to promote the use of AHP advances. When an AHP advance is made, the subsidy is determined to be the present value of the difference in the interest rates between the AHP advance rate and the System’s related cost of funds rate for a funding liability with a comparable maturity.

Prepayment Fees – The Bank charges its members a prepayment fee when they prepay certain advances before the original maturity. The Bank records prepayment fees net of SFAS 133 basis adjustments included in the book basis of the advance as a component of advance interest income on the statements of income. The Bank nets gains and losses on derivatives associated with prepaid advances with prepayment fees in net interest income. In cases where a new advance is issued concurrent with an advance terminating, the Bank evaluates whether the new advance meets the criteria to qualify as a modification of an existing advance. If the new advance qualifies as a modification, the net prepayment fee on the prepaid advance is deferred, recorded in the basis of the modified advance, and amortized over the life of the modified advance to advance interest income. If the modified advance is hedged under SFAS 133, it is recorded at fair value after the amortization of the basis adjustment. If the Bank determines that the advance should be treated as a new advance, it records the net fees as a component of advance interest income on the statements of income. Mortgage loans with prepayment fees are ineligible for delivery under the MPF Program, and the Bank does not receive any prepayment fees with respect to MPF Loans.

Derivatives and Hedging Activities – The Bank accounts for derivatives in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of FASB Statement No. 133”, SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities”, and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS 133). Accordingly, all derivatives are recognized on the balance sheet at their fair value and are designated as (1) a hedge of the fair value of (a) a recognized asset or liability or (b) an unrecognized firm commitment (a “fair value” hedge); (2) a hedge of (a) a forecasted transaction or (b) the variability of cash flows that are to be received or paid in connection with either a recognized asset or liability or stream of variable cash flows (a “cash flow” hedge); (3) a hedge of the foreign currency component of a hedged item in a fair value or cash flow hedge; or (4) a non-SFAS 133 hedge of an asset, liability or derivative (i.e. where the Bank acts as an intermediary) for asset-liability and risk management purposes (“economic hedge”).

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 other income as “net realized and unrealized gain (loss) on derivatives and hedging activities”. 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, until earnings are affected by the variability of cash flows of the hedged transaction (i.e., until the periodic recognition of interest on a variable-rate asset or liability is recorded in interest income

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or expense). Amounts recorded in other comprehensive income are reclassified to interest income or expense during the period in which the hedged transaction impacts earnings. Changes in the fair value of a derivative that is designated and qualifies as a foreign-currency hedge is recorded in either current-period earnings or other comprehensive income, depending on whether the hedging relationship satisfies the criteria for a fair value or cash flow hedge. Changes in the fair value and periodic settlements of a derivative designated as an economic hedge are recorded in current-period earnings in other income as “net realized and unrealized gain (loss) on derivative and hedging activities” with no fair value adjustment to an asset, liability or firm commitment.

The Bank formally 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 and measuring ineffectiveness. This process includes linking all derivatives that are designated as fair value, cash flow, or foreign-currency hedges to (1) assets and liabilities on the balance sheet, (2) firm commitments, or (3) forecasted transactions. Also, the Bank formally assesses (both at the hedge’s inception and at least quarterly) 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 Bank uses dollar value offset and regression analyses to assess the effectiveness of its hedges.

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 other income as “net realized and unrealized gain (loss) on derivatives and hedging activities”.

The Bank 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; (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; (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.

When hedge accounting is discontinued due to the Bank’s determination that the derivative no longer qualifies as an effective fair value hedge, the Bank will continue carrying the derivative on the balance sheet at its fair value, cease adjusting the hedged asset or liability for changes in fair value attributable to the hedged risk, and begin amortizing the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using the level-yield method. When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Bank will continue carrying 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 earnings.

The Bank discontinues hedge accounting when it is no longer probable that the forecasted transaction will occur in the originally expected period or within an additional two month period of time thereafter. The gain or loss that was accumulated in other comprehensive income will be recognized immediately in earnings. When hedge accounting is discontinued due to the Bank’s determination that the derivative no longer qualifies as an effective cash flow hedge of an existing hedged item, the Bank will continue carrying the derivative on the balance sheet at its fair value and begin amortizing the accumulated other comprehensive income adjustment to earnings when earnings are affected by the original forecasted transaction. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Bank will carry the derivative at its fair value on the balance sheet, recognizing changes in the fair value of the derivative in current period earnings.

Embedded Derivatives – The Bank may purchase financial instruments in which a derivative instrument is “embedded” in the financial instrument. Upon executing these transactions, the Bank assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument meets the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms qualifies as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as either (1) a hedging instrument in a fair value, cash flow, or foreign-currency hedge or (2) a derivative instrument pursuant to an economic hedge. However, if the entire contract (the host contract and the embedded derivative) were to be measured at fair value, with changes in fair value reported in current earnings (e.g., an investment security classified as “trading” under SFAS 115), or if the Bank could not reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract would be recorded at fair value.

Purchased Options – Premiums paid to acquire options are included in the initial basis of the instrument and reported in derivative assets on the statements of condition. With respect to interest rate caps and floors designated in a cash flow hedging relationship, the initial basis of the instrument at the inception of the hedge is allocated to the respective caplets or floorlets

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comprising the cap or floor. All subsequent changes in fair value of the cap or floor, to the extent deemed effective, are recognized in other comprehensive income. The change in the allocated fair value of each respective caplet or floorlet is reclassified out of other comprehensive income when each of the corresponding hedged forecasted transactions impacts earnings.

Premises and Equipment – The Bank records premises and equipment at cost, net of accumulated depreciation and amortization of $38,072,000 and $24,933,000 at December 31, 2004 and 2003, respectively. The Bank computes depreciation and amortization on the straight-line method over the estimated useful lives of the assets ranging from 3-10 years. Computer hardware and software are depreciated over 3 years and equipment over 5 years. Leasehold improvements are amortized on a straight-line basis over 10 years or the remaining term of the lease, whichever is shorter. Improvements and major renewals are capitalized; ordinary maintenance and repairs are expensed as incurred. The Bank includes gains and losses on disposal of premises and equipment in other income.

Cost of computer software developed or obtained for internal use is accounted for in accordance with Statement of Position No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (SOP 98-1). SOP 98-1 requires the cost of purchased software and certain costs incurred in developing computer software for internal use to be capitalized and amortized over future periods. As of December 31, 2004 and 2003, the Bank had $56,999,000 and $55,278,000, respectively, in unamortized computer software costs included in premises and equipment. Amortization of computer software costs charged to expense was $11,662,000, $9,401,000, and $6,056,000 for the years ended December 31, 2004, 2003, and 2002, respectively.

Real Estate Owned – Real estate owned includes assets that have been received in satisfaction of debt. Real estate owned is initially recorded and subsequently carried at the lower of cost or fair value less estimated selling costs as an other asset in the statements of financial condition. Fair value is defined as the amount that a willing seller could expect from a willing buyer in an arm’s-length transaction. Any valuation adjustments required at the date of transfer are charged to the allowance for loan losses. Realized gains and losses on sale are included in other expense. Operating results from real estate owned are recorded in other expense.

Concessions on Consolidated Obligations – The amounts paid to dealers in connection with the sale of consolidated obligation bonds are deferred and amortized using the level-yield method over the estimated life of the bond. The amount of the concession is allocated to the Bank from the Office of Finance based upon the percentage of the debt issued that is assumed by the Bank. Unamortized concessions were $31,742,000 and $32,137,000 at December 31, 2004 and 2003, respectively, and are included in other assets. Amortization of such concessions are included in consolidated obligation interest expense.

Discounts and Premiums on Consolidated Obligations – Discounts and premiums on consolidated obligation bonds are amortized to expense using the level-yield method over the estimated life of the bond. The discounts on consolidated obligation discount notes are amortized to expense using the straight-line method throughout the term of the related notes due to their short-term nature.

Assessments – Although the Bank is exempt from ordinary federal, state and local taxation except for local real estate tax, it is required to make payments to REFCORP. Each FHLB is required to pay 20 percent of net earnings after AHP assessments to REFCORP. The REFCORP assessment amounts are equal to U.S. GAAP income before assessments minus the AHP assessment. The result is multiplied by 20 percent. The Resolution Funding Corporation has been designated as the calculation agent for AHP and REFCORP assessments. Each FHLB provides its net income before AHP and REFCORP to the Resolution Funding Corporation, who then performs the calculations for each quarter end.

Other than in the situation where the combined FHLBs’ net income is not sufficient enough to meet the annual $100 million AHP obligation, the AHP assessment is equal to regulatory net income times 10 percent. Regulatory net income for AHP assessment purposes is equal to net income reported in accordance with U.S. GAAP before mandatorily redeemable capital stock related interest expense, AHP assessment and REFCORP assessment. The exclusion of mandatorily redeemable capital stock related interest expense is a regulatory calculation determined by the Finance Board.

The FHLBs will continue to expense these amounts until the aggregate amounts actually paid by all twelve FHLBs 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 FHLB to REFCORP will be fully satisfied. The Finance Board in consultation with the Secretary of the Treasury will select the appropriate discounting factors to be used in this annuity calculation. The FHLBs 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 FHLBs is not determinable at this time due to the interrelationships of all future FHLBs’ earnings and interest rates. If the Bank experienced a net loss during a quarter, but still had net income for the year, the Bank’s obligation to the REFCORP would be calculated based on the Bank’s year to date net income. The Bank would be entitled to a refund of amounts paid for the full year that were in excess of its calculated annual obligation. If the Bank had net income in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the Bank experienced a net loss for a full year, the Bank would have no obligation to the REFCORP for the year.

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The Finance Board is required to extend the term of the Banks’ 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 FHLBs’ aggregate payments through 2004 defease all future benchmark payments after the 3^rd quarter of 2019 and $45 million of the $75 million benchmark payment for the 1st quarter of 2019. 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 FHLBs 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 FHLBs exactly equals a $300 million annual annuity. Any payment beyond April 15, 2030 will be paid to the Department of Treasury.

Professional Service Fees – Professional service fees include fees paid to consultants for contractual services and fees for audit and legal services.

Mortgage Loan Expense – Mortgage loan expense includes master service fees paid to the Bank’s vendor for master servicing, MPF custody fees and losses/(gains) on loans repurchased by PFIs due to failure to meet MPF eligibility requirements.

Finance Board and Office of Finance Expenses – The Bank is assessed for its proportionate share of the costs of operating the Finance Board, the Bank’s primary regulator, and the Office of Finance, which manages the issuance, sale and servicing of consolidated obligations. The Finance Board allocates its operating and capital expenditures to the FHLBs based on each FHLB’s percentage of total capital. The Office of Finance allocates its operating and capital expenditures based on each FHLB’s percentage of capital stock, percentage of consolidated obligations issued and the percentage of consolidated obligations outstanding. Such assessments are expensed when incurred and charged to the Bank.

Estimated Fair Values – The fair value of publicly traded securities is based on independent market quotations. Some of the Bank’s financial instruments lack an available trading market characterized by transactions between a willing buyer and a willing seller engaging in an exchange transaction. Therefore, the Bank uses internal models employing significant estimates and present-value calculations when determining and disclosing estimated fair values.

Mandatorily Redeemable Capital Stock – In accordance with SFAS 150, the Bank reclassifies stock subject to redemption from equity to a liability once a member: exercises a written redemption right; gives notice of intent to withdraw from membership; or attains non-member status by merger or acquisition, charter termination, or involuntary termination from membership. In each case such shares of capital stock will meet the definition of a mandatorily redeemable financial instrument. Such shares of capital stock 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 statements of income. The repayment of these mandatorily redeemable financial instruments is reflected as a cash outflow in the financing activities section of the statements of cash flows.

If a member cancels its written notice of redemption or notice of withdrawal, the Bank reclassifies mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock are no longer classified as interest expense. 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 14 for more information, including significant restrictions on stock redemption.

Cash Flows – For purposes of the statements of cash flows, the Bank considers cash and due from banks as cash and cash equivalents.

Reclassifications – Certain amounts in the 2003 and 2002 financial statements have been reclassified to conform to the 2004 presentation.

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Note 2 - Change in Accounting Principle and Recently Issued Accounting Standards & Interpretations

Change in Accounting Principle for Amortization of Mortgage Loan Premiums and Discounts – Effective January 1, 2004, the Bank changed its method of accounting for premiums and discounts and other deferred loan origination fees under SFAS 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases” (SFAS 91). In accordance with SFAS 91, the Bank defers and amortizes agent fees and premiums and discounts paid to and received by the Bank’s members as a component of interest income over the contractual life of the MPF Loan. Historically, the Bank deferred and amortized agent fees and premiums and discounts paid to and received by its members as a component of interest income over the estimated lives of the related mortgage loans. Actual prepayment experience and estimates of future principal repayments were used in calculating such estimated lives.

The Bank changed to the contractual method, which recognizes the income effects of premiums and discounts in a manner that is consistent with the actual behavior of the underlying MPF Loans and reflects the contractual terms of the assets without regard to changes in estimates based on assumptions about future borrower behavior. The Bank believes this method is preferable because it relies less than the previous method on the use of estimates inherent in calculating the weighted average lives that are used to determine the loan pool amortization periods. As a result the contractual method does not create income volatility related to estimate changes but instead reflects volatility related to actual loan behavior.

As a result of implementing the change in accounting for amortization and accretion from the retrospective method to the contractual maturity method, the Bank recorded a cumulative effect of a change in accounting principle effective to January 1, 2004 which resulted in an increase to earnings excluding REFCORP and AHP assessments of $41,441,000.

Adoption of SFAS 150 – The FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (SFAS 150) 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 Bank adopted SFAS 150 effective January 1, 2004. The Bank adopted SFAS 150 as of this date because the Bank met the definition of “nonpublic SEC registrant” as defined in SFAS 150. Specifically, the Bank meets the SFAS 150 definition because (a) the Bank’s equity does not trade in a public market; (b) the Bank is not registering its equity securities in preparation for the sale of any class of equity securities; and (c) the Bank is not controlled by an entity covered by (a) or (b).

Upon adoption of SFAS 150 on January 1, 2004, the Bank reclassified $33.6 million in capital stock subject to mandatory redemption from 6 members and former members as a liability (“mandatorily redeemable capital stock”) in the statements of condition. The earnings impact for the mandatorily redeemable dividend reclassification from retained earnings to interest expense resulted in an additional expense of $1.5 million through December 31, 2004.The Finance Board has confirmed that the SFAS 150 accounting treatment for certain shares of the Bank’s capital stock will not affect the definition of total capital for purposes of determining the Bank’s compliance with its regulatory capital requirements, calculating its mortgage securities investment authority (300% of total capital), calculating its unsecured credit exposure to other Government-sponsored enterprises (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).

EITF Issue No. 03-1 – “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-1). In March 2004, the Financial Accounting Standards Board (FASB) reached a consensus on EITF 03-1, which clarifies the application of an impairment model to determine whether investments are other-than-temporarily impaired. Provisions of EITF 03-1 must be applied prospectively to all current and future investments accounted for in accordance with SFAS 115 “Accounting for Certain Investments in Debt and Equity”. On September 15, September 30 and November 15, 2004, the FASB issued proposed staff positions to provide guidance on the application and scope of certain paragraphs and to defer the effective date of the impairment and recognition provisions contained in specific paragraphs of EITF 03-1. This deferral will be superseded in FASB’s final issuance of the staff position. The Bank is not able to determine the impact EITF 03-1 will have on its results of operations or financial condition until the final guidance has been issued.

Adoption of SOP 03-3 – The American Institute of Certified Public Accountants issued Statement of Position 03-3 (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 a transfer, if those differences are attributable, at least in part, to credit quality. Among other things, SOP 03-3: (1) prohibits the recognition of the excess of contractual cash flows over expected cash flows as an adjustment of yield, loss accrual or valuation allowance at the time of purchase; (2) requires that subsequent increases in expected cash flows be recognized prospectively through an adjustment of yield; and (3) requires that subsequent decreases in expected cash flows be recognized as an impairment. In addition, SOP 03-3 prohibits the creation or carryover of a valuation allowance in the initial

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accounting of all loans within its scope that are acquired in a transfer. The Bank will adopt SOP 03-3 as of January 1, 2005. The Bank does not expect the new rules to have a material impact on its results of operations or financial condition at the time of adoption.

Adoption of SFAS 149 – On April 30, 2003 FASB issued Statement 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS 149), which amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS 149 applies to mortgage loan commitments entered into or modified after June 30, 2003. Certain of these commitments are designated as cash flow hedges of forecasted purchases with resulting changes in their fair value recorded in accumulated other comprehensive income. When the loan commitment is settled, the Bank amortizes the amount recorded in accumulated other comprehensive income into earnings with an equal and offsetting amount from the amortization of the matching basis adjustment recorded to the loan balance over its life. Consequently, this amortization has no ongoing effect on earnings. Commitments that are not designated as cash flow hedges are hedged economically by selling “to be announced” mortgage-backed securities or other derivatives for forward settlement. Accordingly, the Bank marks these derivatives to market through earnings. The Bank adopted SFAS 149 as of the effective date and the adoption did not have a material impact on the Bank’s financial statements.

Adoption of FIN 46-R – In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), a new interpretation on consolidation accounting. In December 2003, the FASB issued a revision to FIN 46 (entitled FIN 46-R) to address various technical corrections and implementation issues that had arisen since the issuance of FIN 46. Application of FIN 46-R to the Bank is limited to the MPF Shared Funding^® securities and certain investments in Mortgage Backed Securities (MBSs). In regards to the Shared Funding Program, the Bank currently holds two MPF Shared Funding MBS issued by qualifying special purpose entities (QSPE) that are sponsored by One Mortgage Partners Corp., a subsidiary of JPMorgan Chase. A QSPE generally can be described as an entity whose permitted activities are limited to passively holding financial assets and distributing cash flows to investors based on pre-set terms. Further, a QSPE must meet certain criteria in SFAS 140 to be considered a QSPE. FIN 46-R does not require an investor to consolidate a QSPE, as long as the investor does not have the unilateral ability to liquidate the QSPE or cause it to no longer meet the QSPE criteria. The Bank meets this scope exception for QSPEs under FIN 46-R, and accordingly, does not consolidate its investments in the MPF Shared Funding securities.

Adoption of FIN 45 – FASB issued Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34” (FIN 45) on November 25, 2002. FIN 45 expands existing disclosure requirements at December 31, 2002 for guarantees and provides initial recognition and measurement provisions to be applied on a prospective basis for guarantees issued or modified after December 31, 2002. The initial recognition and measurement provisions apply to the Bank’s letters of credit. The resulting amounts recognized in “other liabilities” in 2003 were not material.

Note 3 - Cash and Due from Banks

Compensating Balances – The Bank maintains compensating balances based upon average daily collected cash balances with various commercial banks in consideration for certain services. There are no legal restrictions under these agreements as to the withdrawal of funds. The average compensating balances maintained for the years ended December 31, 2004 and 2003 were $828,000 and $584,000, respectively.

In addition, the Bank maintained average collected balances with various Federal Reserve Banks and branches of $22,838,000 and $15,319,000 for the years ended December 31, 2004 and 2003, respectively. The Bank was required to maintain minimum average daily clearing balances of $2,000,000 for the years ended December 31, 2004 and 2003. These are required clearing balances and may not be withdrawn; however, the Bank may use earnings credits on these balances to pay for services received from the Federal Reserve.

Pass-through Deposit Reserves – The Bank acts as a pass-through correspondent for some of its member institutions that are required to deposit reserves with the Federal Reserve Banks. The amount shown as cash and due from banks includes pass-through deposit reserves with Federal Reserve Banks of $20,130,000 and $18,491,000 at December 31, 2004 and 2003, respectively. Member reserve balances are included in deposits in the statements of condition.

Note 4 - Securities Purchased Under Agreements to Resell

The Bank has purchased securities under agreements to resell those securities. The amounts advanced under these agreements represent short term loans and are reflected as assets in the statements of condition. Securities purchased under

F-16

agreements to resell are held in safekeeping in the name of the Bank. Should the market value of the underlying securities decrease below the market value required as collateral, the counterparty is required to place an equivalent amount of additional securities in safekeeping in the name of the Bank or the dollar value of the resale agreement will be decreased accordingly. At December 31, 2004 and 2003, the fair value of collateral accepted by the Bank in connection with these activities was $389,840,000 and $418,596,000, respectively. Of the total collateral pledged at December 31, 2004 and 2003, $389,840,000 and $418,596,000 of collateral, respectively, was permitted to be sold or repledged by the Bank.

Note 5 - Trading Securities

Major Security Types – Trading securities as of December 31, 2004 and 2003 were as follows:

(Dollars in thousands)	2004		2003
Government-sponsored enterprises	$	585,579	$	593,574
Other FHLB		71,731		75,700
		657,310		669,274
Mortgage-backed securities:
Government-sponsored enterprises		52,711		68,654
Ginnie Mae		11,367		16,468
Other		38,669		39,901
Total trading securities	$	760,057	$	794,297

The net (loss) gain on trading securities for the years ended December 31, 2004, 2003, and 2002 were as follows:

(Dollars in thousands)	2004			2003			2002
Net realized gain	$	14,796		$	13,448		$	2,289
Net unrealized (loss) gain		(42,710	)		(70,090	)		293,293
Net (loss) gain on trading securities	$	(27,914	)	$	(56,642	)	$	295,582

F-17

Note 6 - Available-for-Sale Securities

Major Security Types – The amortized cost and estimated fair value of available-for-sale securities as of December 31, 2004 and 2003 were as follows:

	December 31, 2004
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Government-sponsored enterprises	$	901,046	$	524	$	(5,332	)	$	896,238
Mortgage-backed securities:
Government-sponsored enterprises		93,560		551		(2,739	)		91,372
Other		541,783		339		(44	)		542,078
Total available-for-sale securities	$	1,536,389	$	1,414	$	(8,115	)	$	1,529,688

	December 31, 2003
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Treasury	$	50,207	$	39	$	—		$	50,246
Government-sponsored enterprises		553,132		2,820		(834	)		555,118
Total available-for-sale securities	$	603,339	$	2,859	$	(834	)	$	605,364

Maturity Terms - - The amortized cost and estimated fair value of available-for-sale securities, by contractual maturity at December 31, 2004 and 2003 are shown below. Expected maturities of some securities and mortgaged-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

	2004				2003
(Dollars in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Year of Maturity
Due in one year or less	$	335,738	$	334,374	$	—	$	—
Due after one year through five years		513,325		510,395		451,827		454,647
Due after five years through ten years		51,983		51,469		151,512		150,717
		901,046		896,238		603,339		605,364
Mortgage-backed securities:
Government-sponsored enterprises		93,560		91,372		—		—
Other		541,783		542,078		—		—
Total available-for-sale securities	$	1,536,389	$	1,529,688	$	603,339	$	605,364

The amortized cost of the Bank’s mortgage-backed securities classified as available-for-sale includes net discounts of $695,000 at December 31, 2004.

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Interest Rate Payment Terms - The following amortized cost table details interest rate payment terms for investment securities classified as available-for-sale at December 31, 2004 and 2003.

(Dollars in thousands)	2004		2003
Amortized cost of available-for-sale securities other than mortgage-backed securities:
Fixed-rate	$	901,046	$	603,339
		901,046		603,339
Amortized cost of available-for-sale mortgage-backed securities:
Pass-through securities:
Fixed-rate		93,560		—
Collateralized mortgage obligations:
Variable-rate		541,783		—
		635,343		—
Total available-for-sale securities	$	1,536,389	$	603,339

The following tables summarize the available-for-sale securities with unrealized losses as of December 31, 2004 and 2003. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous loss position. Securities with unrealized losses are rated “AA” or better. The overall depreciation in fair value is attributable to changes in market interest rates. The overall depreciation is considered temporary as the Bank has the intent and ability to hold these investments to maturity with the expectation that the unrealized market value loss will be recovered.

	December 31, 2004
	Less than 12 Months					12 Months or More				Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Government-sponsored enterprises	$	896,238	$	(5,332	)	$	—	$	—	$	896,238	$	(5,332	)
Mortgage-backed securities:
Other		19,963		(2,783	)		—		—		19,963	$	(2,783	)
Total temporarily impaired	$	916,201	$	(8,115	)	$	—	$	—	$	916,201	$	(8,115	)

	December 31, 2003
	Less than 12 Months					12 Months or More				Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Government-sponsored enterprises	$	100,470	$	(834	)	$	—	$	—	$	100,470	$	(834	)
Total temporarily impaired	$	100,470	$	(834	)	$	—	$	—	$	100,470	$	(834	)

Gains and Losses – The following table presents realized gains and losses from available-for-sale securities for the years ended December 31, 2004, 2003, and 2002:

(Dollars in thousands)	2004			2003			2002
Realized gain	$	16,639		$	25,031		$	—
Realized loss		(39,005	)		(60,827	)		—
Net realized loss from sale of available-for-sale securities	$	(22,366	)	$	(35,796	)	$	—

F-19

The following table summarizes available-for-sale MPF Shared Funding activity for the year ended December 31, 2003. There was no available-for-sale activity in 2004:

For the Year Ended December 31, 2003

(Dollars in thousands)
MPF Shared Funding:
January 1, 2003 Opening Balance	$	—
Purchases		322,876
Sales to other FHLB		(322,876	)
December 31, 2003 Ending Balance	$	—

Note 7 - Held-To-Maturity Securities

Major Security Types - Held-to-maturity securities as of December 31, 2004 and 2003 were as follows:

	December 31, 2004
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Commercial paper	$	699,722	$	—	$	(62	)	$	699,660
Government-sponsored enterprises		249,570		—		(1,553	)		248,017
State or local housing agency obligations		100,690		902		(137	)		101,455
Other(1)		743,193		1,668		(318	)		744,543
		1,793,175		2,570		(2,070	)		1,793,675
Mortgage-backed securities:
Government-sponsored enterprises		2,958,672		21,056		(33,095	)		2,946,633
Ginnie Mae		84,077		1,418		—			85,495
MPF Shared Funding®		512,983		—		(16,164	)		496,819
Other		1,212,254		23,364		(160	)		1,235,458
Total held-to-maturity securities	$	6,561,161	$	48,408	$	(51,489	)	$	6,558,080

	December 31, 2003
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Commercial paper	$	99,991	$	—	$	(3	)	$	99,988
Government-sponsored enterprises		459,593		271		—			459,864
State or local housing agency obligations		132,388		1,439		(1,479	)		132,348
Other(1)		598,981		2,962		—			601,943
		1,290,953		4,672		(1,482	)		1,294,143
Mortgage-backed securities:
Government-sponsored enterprises		1,089,597		28,576		(25	)		1,118,148
Ginnie Mae		119,539		2,877		—			122,416
MPF Shared Funding®		621,459		695		(6,794	)		615,360
Other		2,017,519		34,976		(1,179	)		2,051,316
Total held-to-maturity securities	$	5,139,067	$	71,796	$	(9,480	)	$	5,201,383

⁽¹⁾ Other includes investment securities issued by the Small Business Administration, Small Business Investment Corporation and Low-and Moderate-Income Investments created by the Community Reinvestment Act of 1979.

F-20

Maturity Terms – The amortized cost and estimated fair value of held-to-maturity securities by contractual maturity at December 31, 2004 and 2003 are shown below. 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:

	2004				2003
(Dollars in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	1,603,627	$	1,601,810	$	1,071,079	$	1,071,614
Due after one year through five years		57,250		58,919		16,658		17,035
Due after five years through ten years		25,509		25,744		71,717		74,792
Due after ten years		106,789		107,202		131,499		130,702
		1,793,175		1,793,675		1,290,953		1,294,143
Mortgage-backed securities:
Government-sponsored enterprises		2,958,672		2,946,633		1,089,597		1,118,148
Ginnie Mae		84,077		85,495		119,539		122,416
MPF Shared Funding®		512,983		496,819		621,459		615,360
Other		1,212,254		1,235,458		2,017,519		2,051,316
Total held-to-maturity securities	$	6,561,161	$	6,558,080	$	5,139,067	$	5,201,383

The amortized cost of the Bank’s mortgage-backed securities classified as held-to-maturity includes net premiums of $15,234,000 and $13,288,000 at December 31, 2004 and 2003, respectively.

Interest Rate Payment Terms – The following amortized cost table details interest rate payment terms for investment securities classified as held-to-maturity at December 31, 2004 and 2003:

(Dollars in thousands)	2004		2003
Amortized cost of held-to-maturity securities other than mortgage-backed securities:
Fixed-rate	$	1,732,680	$	1,219,988
Variable-rate		60,495		70,965
		1,793,175		1,290,953
Amortized cost of held-to-maturity mortgage-backed securities:
Pass-through securities:
Fixed-rate		1,630,733		923,401
Variable-rate		72,654		106,139
Collateralized mortgage obligations:
Fixed-rate		2,217,657		1,323,803
Variable-rate		846,942		1,494,771
		4,767,986		3,848,114
Total held-to-maturity securities	$	6,561,161	$	5,139,067

F-21

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.

	Less than 12 Months					12 Months or More					Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Commercial paper	$	699,660	$	(62	)	$	—	$	—		$	699,660	$	(62	)
Government-sponsored enterprises		248,017		(1,553	)		—		—			248,017		(1,553	)
State or local housing agency obligations		1,705		(5	)		4,068		(132	)		5,773		(137	)
Other		508,403		(318	)		—		—			508,403		(318	)
Mortgage-backed securities:
Government-sponsored enterprises		1,589,954		(33,091	)		1,354		(4	)		1,591,308		(33,095	)
Ginnie Mae		—		—			—		—			—		—
MPF Shared Funding®		488,772		(15,529	)		8,046		(635	)		496,818		(16,164	)
Other		179,655		(151	)		5,693		(9	)		185,348		(160	)
Total temporarily impaired	$	3,716,166	$	(50,709	)	$	19,161	$	(780	)	$	3,735,327	$	(51,489	)

Securities with unrealized losses predominantly relate to mortgage-backed-securities that are rated AA or better. The overall depreciation in fair value is attributable to no established secondary market for the Bank’s MPF Shared Funding^® investments and changes in market interest rates. The overall depreciation is considered temporary as the Bank has the intent and ability to hold these investments to maturity with the expectation that the unrealized market value loss will be recovered.

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

	Less than 12 Months					12 Months or More					Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Commercial paper	$	99,988	$	(3	)	$	—	$	—		$	99,988	$	(3	)
State or local housing agency obligations		2,635		(110	)		17,016		(1,369	)		19,651		(1,479	)
Mortgage-backed securities:
Government-sponsored enterprises		8,006		(25	)		259		—			8,265		(25	)
Ginnie Mae		—		—			—		—			—		—
MPF Shared Funding®		497,013		(6,794	)		—		—			497,013		(6,794	)
Other		553,545		(887	)		269,714		(292	)		823,259		(1,179	)
Total temporarily impaired	$	1,161,187	$	(7,819	)	$	286,989	$	(1,661	)	$	1,448,176	$	(9,480	)

The following table summarizes held-to-maturity MPF Shared Funding activity since inception:

MPF Shared Funding:

(Dollars in thousands)
January 1, 2003 Opening Balance	$	—
Purchases		695,193
Paydowns		(70,214	)
Amortization		(3,520	)
December 31, 2003 Ending Balance		621,459
Purchases		—
Paydowns		(102,103	)
Amortization		(6,373	)
December 31, 2004 Ending Balance	$	512,983

The Bank had two occurrences during 2003 in which securities classified as held-to-maturity were sold. In the first occurrence, Standard and Poor’s stated they would no longer rate future issuances of this specific security. The second occurrence was precipitated due to a downgrade by Moody’s from “Aaa” to “Baa1”. The Bank’s policy outlines that securities held must be rated “Aa” or above by Moody’s or “AA” or above by Standard and Poor’s. Both of these events provided evidence of a significant deterioration in the issuers’ creditworthiness. As a result of these downgrades, the Bank liquidated these securities.

F-22

Note 8 - Advances

Redemption Terms – At December 31, 2004 and 2003, the Bank had advances outstanding to members, including AHP advances, at interest rates ranging from 1.20% to 8.47% and 0.89% to 8.47%, respectively, as summarized below. AHP subsidized advances have an average interest rate of 6.07% and 5.66% as of December 31, 2004 and 2003, respectively.

(Dollars in thousands)	2004					2003
Year of Maturity	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
2004	$	—		—		$	7,548,016		2.92	%
2005		6,943,773		2.95	%		5,338,526		3.77	%
2006		5,732,457		2.88	%		2,733,695		2.76	%
2007		3,427,577		3.21	%		3,404,312		1.96	%
2008		2,589,505		3.92	%		2,756,531		3.83	%
2009		1,479,162		3.74	%		406,850		5.54	%
2010		2,048,603		3.18	%		2,038,818		2.85	%
Thereafter		1,747,527		4.72	%		1,641,395		4.75	%
Total par value		23,968,604		3.27	%		25,868,143		3.20	%
Discount on AHP Advances		(97	)				(144	)
SFAS 133 hedging adjustments		223,051					575,064
Total Advances	$	24,191,558				$	26,443,063

Some of the Bank’s advances to members are callable at the member’s option (callable advances) such that a member may repay the advance on pertinent call dates without incurring prepayment fees. Other advances may only be prepaid by paying a fee to the Bank (prepayment fee) that makes the Bank financially indifferent to the prepayment of the advance. At December 31, 2004 and 2003, the Bank had callable advances outstanding totaling $132,600,000 and $2,348,600,000, respectively.

The following table summarizes advances at December 31, 2004 and 2003 by year of maturity or next call date for callable advances:

(Dollars in thousands)
Year of Maturity or Next Call Date	2004		2003
2004	$	—	$	9,881,116
2005		7,061,273		5,333,526
2006		5,698,457		1,981,095
2007		3,419,577		1,903,812
2008		2,514,505		2,681,531
2009		1,478,662		406,850
2010		2,048,603		2,038,818
Thereafter		1,747,527		1,641,395
Total par value	$	23,968,604	$	25,868,143

The Bank also issues advances to members in which the Bank has the right to put the advance after a specified lockout period, in whole or in part, at the par value with five business days notice. If the Bank exercises the right to put the advance, the member may pay off the advance with its existing liquidity or by obtaining funds under another advance product offered by the Bank at existing market prices for that member on the date that the advance was put back to the member. At December 31, 2004 and 2003, the Bank had putable advances outstanding totaling $4,588,863,000 and $5,150,586,000, respectively.

F-23

The following table summarizes advances at December 31, 2004 and 2003 by year of maturity or next put date for putable advances:

(Dollars in thousands)
Year of Maturity or Next Put Date	2004		2003
2004	$	—	$	11,332,398
2005		9,632,981		4,552,526
2006		5,836,324		2,620,287
2007		3,552,577		3,429,312
2008		1,815,510		1,581,036
2009		706,162		204,850
2010		1,655,603		1,645,818
Thereafter		769,447		501,916
Total par value	$	23,968,604	$	25,868,143

Security Terms – The Bank lends to financial institutions in Illinois and Wisconsin involved in housing finance, in accordance with federal statutes, including the FHLB Act. The Bank is required by statute to obtain sufficient collateral on advances to protect against losses and to accept certain investment securities, residential mortgage loans, deposits in the Bank, and other real estate related assets as collateral on such advances. However, “Community Financial Institutions” (CFIs) are eligible to utilize expanded statutory collateral provisions for small business and agriculture loans under the provisions of the Gramm-Leach-Bliley Act of 1999 (1999 Act). The capital stock of the Bank owned by borrowing members is also pledged as additional collateral on advances. The FHLB Act requires that the aggregate advances from the Bank to any single member not exceed 20 times the amount paid by that member for capital stock of the Bank. At December 31, 2004 and 2003, the Bank had rights to collateral with an estimated value in excess of outstanding advances. Based upon the financial condition of the member, the Bank:

1. Allows a member to physically retain possession of the collateral assigned to the Bank, provided that the member executes a written security agreement and agrees to hold the collateral for the benefit of and subject to the direction and control of the Bank; and perfects the security interest in such collateral; or

2. Requires the member to specifically assign or place physical possession of the collateral with the Bank or its safekeeping agent.

Beyond these provisions, Section 10(e) of the FHLB Act affords any security interest granted by a member to the Bank priority over the claims or rights of any other party. The two exceptions are claims for which the third party has a perfected security interest and those that would be entitled to priority under otherwise applicable law.

Credit Risk – While the Bank has never experienced a credit loss on an advance to a member, the expanded eligible collateral for CFIs provides additional credit risk to the Bank. The management of the Bank has policies and procedures in place to appropriately manage this credit risk. Accordingly, the Bank has not provided any allowances for losses on advances.

The Bank’s potential credit risk from advances is concentrated in commercial banks and savings institutions. As of December 31, 2004, the Bank had advances of $3,151,471,000 outstanding to one member institution, and this represented 13% of total advances outstanding. The interest income from advances to this member institution amounted to $90,004,000 and $106,055,000 during 2004 and 2003, respectively. The Bank held sufficient collateral to cover the advances to this institution, and the Bank does not expect to incur any credit losses on these advances.

F-24

Interest Rate Payment Terms – Additional interest rate payment terms for advances at December 31, 2004 and 2003 are detailed in the following table:

(Dollars in thousands)	2004		2003
Par Amount of advances:
Fixed-rate	$	19,675,923	$	19,730,994
Variable-rate		4,292,681		6,137,149
Total par value	$	23,968,604	$	25,868,143

Note 9 - Affordable Housing Program

The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) contains provisions for the establishment of an Affordable Housing Program (AHP) by each FHLB. Each FHLB provides subsidies in the form of direct grants or below-market interest rate advances for members who use the funds for qualifying affordable housing projects. Annually, the FHLBs individually and as a System must set aside for the AHP the greater of: (1) that FHLB’s pro-rata share of $100 million to be contributed in total by the FHLBs on the basis of net earnings (defined as net earnings before charges for AHP and interest expense on mandatorily redeemable capital stock but after the charge to REFCORP or “pre-assessment net earnings”); or (2) ten percent of that Bank’s current year’s pre-assessment net earnings. Each month, the Bank calculates ten percent of period pre-assessment net earnings for the AHP program, which is then charged to income and recognized as a liability of the Bank. As subsidies are provided, the AHP liability is relieved.

If the results of the aggregate ten percent calculation described above is less than $100 million for all twelve FHLBs, the Finance Board will allocate the shortfall among the FHLBs based on the ratio of each FHLB’s pre-assessment net earnings to the sum of the pre-assessment net earnings of the twelve FHLBs. There was no shortfall in either 2004, 2003 or 2002. If the Bank has a loss, a credit is recorded. This credit can be used to apply for a refund for previous amounts paid, reimbursed from other FHLBs that had income, or carried forward against future income. The Bank had outstanding principal in AHP-related advances of $1,199,000 and $2,090,000 at December 31, 2004 and 2003, respectively. For the three years ended December 31, 2004, the Bank has not issued any new AHP advances.

Note 10 - Mortgage Loans Held in Portfolio

The Mortgage Partnership Finance Program involves investment by the Bank in MPF Loans which are either funded by the Bank through or purchased from its members or members of another FHLB or purchased as participations from other FHLB’s. The MPF Loans are held-for-investment under the MPF Program whereby the PFIs create, service and credit enhance MPF Loans which are owned by the Bank. The following table presents information as of December 31, 2004 and 2003 on MPF Loans:

(Dollars in thousands)	2004			2003
Mortgages:
Fixed medium-term(1) single-family mortgages	$	17,129,505		$	17,365,079
Fixed long-term(2) single-family mortgages		29,448,280			29,775,492
Unamortized premiums, net		282,427			353,247
Plus: deferred loan cost, net		61,535			63,207
Total mortgage loans		46,921,747			47,557,025
Loan commitment basis adjustment		(15,072	)		(11,123	)
SFAS 133 hedging adjustments		18,755			59,288
Total mortgage loans held in portfolio	$	46,925,430		$	47,605,190

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

⁽²⁾ Long-term is defined as a term of greater than 15 years.

F-25

The par value of MPF Loans outstanding at December 31, 2004 and 2003, was comprised of Government loans (See Note 1) totaling $6,797,115,000 and $6,607,715,000 and conventional loans totaling $39,780,670,000 and $40,532,856,000, respectively.

The allowance for loan losses on MPF Loans was as follows:

(Dollars in thousands)	2004			2003			2002
Allowance for credit losses:
Balance, beginning of year	$	5,459		$	5,464		$	3,340
Chargeoffs		(1,094	)		(176	)		(138	)
Recoveries		514			171			45
Net (chargeoffs)		(580	)		(5	)		(93	)
Provisions for credit losses		—			—			2,217
Balance, end of year	$	4,879		$	5,459		$	5,464

MPF Loans are placed on non-accrual status when it is determined that the payment of interest or principal is doubtful of collection or when interest or principal is past due for 90 days or more, except when the MPF Loan is well secured and in the process of collection. When an MPF Loan is placed on non-accrual status, accrued but uncollected interest and the amortization of agent fees, premiums and discounts are reversed against interest income. The Bank records cash payments received on non-accrual MPF Loans as a reduction of principal with any remainder reported in interest income. At December 31, 2004 and 2003, the Bank had $71.2 million and $57.3 million of MPF Loans on non-accrual. At December 31, 2004 and 2003, the Bank had $18.3 million and $12.6 million from MPF Loans that have been foreclosed but not yet liquidated. Renegotiated MPF Loans are those for which concessions, such as the deferral of interest or principal payments, have been granted as a result of deterioration in the borrowers’ financial condition. MPF Loans may be renegotiated by the PFI acting in its role of servicer in accordance with the servicing agreement. The PFI servicer also may take physical possession of the property upon foreclosure or receipt of a deed in lieu of foreclosure.

MPF Loans that are on non-accrual and that are viewed as collateral dependent loans are considered impaired. Impaired MPF Loans are viewed as collateral-dependent loans when repayment is expected to be provided solely by the sale of the underlying property and there are no other available and reliable sources of repayment. An MPF Loan is considered collateral dependent when the debtor has filed for bankruptcy, an in-substance foreclosure has occurred or foreclosure proceedings have been initiated. Impaired MPF Loans are written down to the lower of cost or collateral value, less disposal costs. In the case where an in-substance foreclosure has occurred, MPF Loans are reclassified to other assets.

	As of December 31,
(Dollars in thousands)	2004		2003
Impaired MPF Loans with an allowance	$	—	$	—
Impaired MPF Loans without an allowance(a)		40,964		34,543
Total Impaired Loans		40,964		34,543
Allowance for Impaired Loans under SFAS 114	$	—	$	—

^(a) When the collateral value less estimated selling costs exceeds the recorded investment in the MPF Loan, then the MPF Loan does not require an allowance under SFAS 114 (e.g., if the MPF Loan has been charged down to the recorded investment in the MPF Loan).

	For the years ended December 31,
(Dollars in thousands)	2004	2003	2002
Average balance of impaired loans during the year	37,753	23,375	7,086
Interest income recognized on impaired loans during the year	2,525	2,216	839

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Note 11 - Deposits

The Bank offers demand, overnight and short term interest bearing deposit programs for members and qualifying non-members. The weighted average interest rates paid on the average interest-bearing deposits were 2.02%, 0.81%, and 1.05% during 2004, 2003, and 2002, respectively. In addition, PFIs that service MPF Loans (See Note 10) must deposit in the Bank funds collected in connection with certain MPF Loans pending disbursement of such funds to the owners of the MPF Loans; these items are classified as other non-interest bearing deposits on the statements of condition. If the PFI is a member of another FHLB, then the PFI’s respective FHLB must maintain these deposits on its behalf in the Bank.

Note 12 - Borrowings

Securities Sold Under Agreements to Repurchase – The Bank has sold securities under repurchase agreements. The amounts received under these agreements represent borrowings on the statements of condition. The Bank 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 Bank must deliver additional securities to the dealer. Assets having a book value of $1,240,205,000 and $1,239,388,000 as of December 31, 2004 and 2003, respectively, were pledged as collateral for repurchase agreements. The assets pledged were comprised of investment securities. Of the total collateral pledged as of December 31, 2004 and 2003, $1,014,000,000 and $810,482,000 of collateral was permitted to be sold or repledged by the secured party.

Note 13 - Consolidated Obligations

Consolidated obligations are the joint and several obligations of the FHLBs and consist of consolidated bonds and discount notes. The FHLBs issue consolidated obligations through the Office of Finance as their agent. Consolidated bonds are issued primarily to raise intermediate and long-term funds for the FHLBs. Usually, the maturity of consolidated bonds range from one year to fifteen years, but they are not subject to any statutory or regulatory limits on maturity. Consolidated discount notes are issued primarily to raise short-term funds. Discount notes are issued at less than their face amount and redeemed at par value when they mature.

The Finance Board, at its discretion, may require a FHLB to make principal or interest payments due on any consolidated obligation. Although it has never occurred, to the extent that a FHLB makes a payment on a consolidated obligation on behalf of another FHLB, the paying FHLB would be entitled to a reimbursement from the non-complying FHLB. If the Finance Board determines that the non-complying FHLB is unable to satisfy its direct obligations (as primary obligor), then the Finance Board may allocate the outstanding liability among the remaining FHLBs on a pro rata basis in proportion to each FHLB’s participation in all consolidated obligations outstanding, or on any other basis the Finance Board may prescribe, even in the absence of a default event by the primary obligor.

The par value of outstanding consolidated obligation bonds and discount notes for the System was $869.2 billion and $759.5 billion at December 31, 2004 and 2003, respectively. Regulations require the FHLBs to maintain, in the aggregate, unpledged qualifying assets in an amount equal to the consolidated obligations outstanding. Qualifying assets are defined as: cash, secured advances, assets with an assessment or rating at least equivalent to the current assessment or rating of the FHLB consolidated obligations, obligations, participations, mortgages, or other securities of or issued by the United States government or an agency of the United States government; and such securities as fiduciary and trust funds may invest in under the laws of the state in which each FHLB is located.

On June 2, 2000, the Finance Board adopted a final rule amending the FHLBs’ leverage limit requirements. Effective July 1, 2000, each FHLB’s leverage limit is based on a ratio of assets to capital, rather than a ratio of liabilities to capital. The Finance Board’s former regulations prohibited the issuance of consolidated obligations if such issuance would bring the FHLBs’ outstanding consolidated obligations and other unsecured senior liabilities above 20 times the FHLB’s total capital. The Finance Board’s Financial Management Policy also applied this limit on a FHLB-by-FHLB basis. The final rule deletes the FHLBs’ overall leverage limit from the regulations, but limits each FHLB’s assets generally to no more than 21 times its capital. Nevertheless, any FHLB whose non-mortgage assets, after deducting deposits and capital, do not exceed 11% of its assets may have total assets in an amount not greater than 25 times its capital.

In order to provide the holders of consolidated obligations issued prior to January 29, 1993 (prior bondholders) protection equivalent to that provided under the FHLBs’ previous leverage limit of twelve times FHLBs’ capital stock, prior bondholders have a singular 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 FHLBs’ capital stock was 4.7% and 5.0% of the par value of consolidated obligations outstanding, and the SAA balance was approximately $219,000 and $24.0 million,

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respectively. Each FHLB is required to transfer qualifying assets in the amount of its allocated share of the FHLBs’ SAA balance to a trust for the benefit of the prior bondholders if its capital-to-assets ratio falls below 2%. The FHLBs’ capital-to-assets ratios were greater than 2% at December 31, 2004, and 2003.

General Terms – Consolidated obligations are generally issued with either fixed or floating-rate 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 specific needs of certain investors in consolidated obligations, both fixed-rate bonds and variable-rate bonds may also contain certain embedded features, which may result in complex coupon payment terms and call features. When such consolidated obligations are issued, the Bank concurrently enters into interest rate exchange agreements containing offsetting features, that effectively converts the terms of the bond to a straightforward variable-rate bond tied to an index or a fixed-rate bond.

These consolidated obligation bonds, 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:

Optional Redemption Bonds (callable bonds) - May be redeemed in whole or in part at the discretion of the Bank on predetermined call dates in accordance with terms of bond offerings.

Step-Up Bonds – Pays interest at increasing fixed rates for specified intervals over the life of the bond. These bonds generally contain provisions enabling the bonds to be called at the Bank’s option on the step-up dates.

Inverse Floating Bonds – Coupon rates increase as an index declines and decrease as an index rises.

Comparative-Index Bonds – Coupon rates are determined by the difference between two or more market indices, typically CMT and LIBOR.

Zero-Coupon Bonds – Long-term discounted instruments that earn a fixed yield to maturity or to 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.

Interest Rate Payment Terms – Interest rate payment terms for consolidated bonds at December 31, 2004 and 2003 are detailed in the following table. Range bonds are classified as comparative-index bonds.

(Dollars in thousands)	2004		2003
Par amount of consolidated bonds:
Fixed rate	$	59,501,465	$	53,396,075
Variable rate		625,500		2,625,500
Inverse floating rate		50,000		50,000
Comparative-index		41,550		41,550
Step-up		220,000		385,000
Zero coupon		2,430,000		3,830,000
Total par value	$	62,868,515	$	60,328,125

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Redemption Terms – The following is a summary of the Bank’s participation in consolidated obligation bonds at December 31, 2004 and 2003 by year of maturity.

(Dollars in thousands)	2004					2003
Year of Maturity	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
2004	$	—		—		$	7,664,585		2.65	%
2005		11,446,710		2.96	%		8,508,210		3.34	%
2006		11,059,200		2.73	%		9,484,200		2.79	%
2007		7,568,915		3.49	%		6,222,915		3.74	%
2008		6,512,000		3.50	%		6,200,500		3.70	%
2009		4,071,470		4.11	%		1,480,500		4.99	%
2010		4,235,000		4.92	%		3,516,000		5.33	%
Thereafter		17,975,220		4.48	%		17,251,215		4.00	%
Total par value		62,868,515		3.68	%		60,328,125		3.59	%
Bond premiums		68,848					81,225
Bond discounts		(1,860,386	)				(2,993,465	)
SFAS 133 hedging adjustments		(200,987	)				56,512
Deferred net loss on terminated interest rate exchange agreements		(450	)				(1,342	)
Total consolidated obligation bonds	$	60,875,540				$	57,471,055

The Bank makes significant use of fixed-rate callable debt to finance MPF Loans, callable advances and mortgage-backed securities. Contemporaneous with such a debt issue, the Bank may also enter into a swap (in which the Bank pays variable interest payments and receives fixed interest payments) with a call feature that mirrors the option embedded in the debt (a sold callable swap). The combined sold callable swap and callable debt allows the Bank to provide its members with lower priced variable-rate advances.

The Bank’s consolidated bonds outstanding at December 31, 2004 and 2003 include:

	2004				2003
(Dollars in thousands)	Amount		Percentage of Callable/ Non-Callable Bonds to Total		Amount		Percentage of Callable/ Non-Callable Bonds to Total
Par amount of consolidated bonds:
Non-callable or non-putable	$	39,421,085	62.70	%	$	36,229,225	60.05	%
Callable		23,447,430	37.30	%		24,098,900	39.95	%
Total par value	$	62,868,515	100.00	%	$	60,328,125	100.00	%

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The following table summarizes the Bank’s participation in consolidated bonds outstanding at December 31, 2004 and 2003, by year of maturity or next call date:

(Dollars in thousands)
Year of Maturity or Next Call Date	2004		2003
2004	$	—	$	20,742,485
2005		21,725,740		11,315,710
2006		11,342,200		6,974,200
2007		5,968,915		4,732,915
2008		4,118,000		2,522,500
2009		2,511,250		975,500
2010		2,809,000		1,525,000
Thereafter		14,393,410		11,539,815
Total par value	$	62,868,515	$	60,328,125

Discount Notes – The Bank’s participation in consolidated discount notes, all of which are due within one year, is as follows:

(Dollars in thousands)	Book Value		Par Value		Weighted Average Interest Rate
December 31, 2004	$	16,871,736	$	16,942,524	2.08	%
December 31, 2003	$	20,456,395	$	20,500,073	1.05	%

The FHLB Act authorizes the Secretary of the Treasury, at his or her discretion, to purchase consolidated obligations of the FHLBs aggregating not more than $4 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 three years ended December 31, 2004.

Note 14 - Capital

The Finance Board published a final rule implementing a new capital structure for the Bank, which includes risk-based and leverage capital requirements, different classes of stock that the Bank may issue and the rights and preferences that may be associated with each class of stock. The Finance Board originally approved the Bank’s capital plan on June 12, 2002. However, the Bank is in the process of re-assessing its capital plan and may propose amendments to its capital plan to the Finance Board. Until such time as the Bank fully implements its new capital plan, the current capital rules remain in effect.

The current capital rules require members to purchase capital stock equal to the greater of 1 percent of their mortgage-related assets at the most recent calendar year end or 5 percent of outstanding member advances with the Bank. Members may, at the Bank’s discretion, redeem at par value any capital stock greater than their statutory requirement or, with the Bank’s approval, sell it to other Bank members at par value. Members may purchase through the Bank or from other members, with the Bank’s permission, Bank capital stock in excess of membership or collateral requirements. Member excess capital is referred to as voluntary capital stock. At December 31, 2004, Bank members held 27,428,000 shares of voluntary capital stock. These holdings represented 57% of the Bank’s regulatory capital which is equal to the Bank’s total capital stock plus its retained earnings and mandatorily redeemable capital stock. Voluntary capital stock at December 31, 2003 was 24,201,000 shares above membership collateral requirements, or 53% of the Bank’s regulatory capital.

When the new capital plan has been implemented, the Bank will be subject to risk-based capital rules. Each FHLB may offer two classes of stock. Provided the FHLB is adequately capitalized, members can redeem Class A stock by giving six months notice, and members can redeem Class B stock by giving five years notice. Only “permanent” capital, defined as retained earnings and Class B stock, satisfies the risk-based capital requirement. In addition, the 1999 Act specifies a 5 percent minimum leverage ratio based on total capital including a 1.5 weighting factor applicable to Class B stock and retained earnings. It also specifies a 4 percent minimum capital ratio that does not include the 1.5 weighting factor applicable to Class B stock used in determining compliance with the 5 percent minimum leverage ratio.

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The following table summarizes the Bank’s total regulatory capital requirements.

(Dollars in thousands)	Current Regulatory Requirement		Actual
December 31, 2004	3,428,345	(1)	4,792,793
December 31, 2003	3,477,679	(2)	4,542,092
December 31, 2002	2,601,836	(2)	3,296,041

⁽¹⁾ The total regulatory capital requirement is 4%, as shown in the table. Total regulatory capital required

by the Finance Board under the Written Agreement calculated at 5.1% was $4,371,140.

⁽²⁾ The total regulatory capital required by Finance Board regulations was calculated at 4%.

On June 30, 2004, the Bank entered into a Written Agreement with the Finance Board. Pursuant to the Written Agreement, the Bank will maintain a regulatory capital level of no less than of 5.1%. As of December 31, 2004, the Bank’s regulatory capital level was 5.6%. In accordance with the Written Agreement, the Bank has adopted a Business and Capital Management Plan for 2005-2007 which was accepted by the Finance Board on February 10, 2005. The plan sets forth commitments made by the Bank for the management of its operations, including the following:

• The Bank will continue complying with the terms of the Written Agreement until it is terminated.

• The Bank will manage a reduction of its voluntary capital stock ratio measured as a percent of regulatory capital (total capital stock plus retained earnings) to the following minimum targets:

December 31, 2005     53%

December 31, 2006     48%

December 31, 2007     43%

• The Bank will delay implementation of a new capital structure until December 31, 2006, or until a time mutually agreed upon with the Finance Board. Also, the Bank will reevaluate the structure of the Bank’s capital plan, originally approved by the Finance Board on June 12, 2002, and may propose amendments for approval by the Finance Board based on the review.

• As part of the continued development and evolution of the Mortgage Partnership Finance Program, the Bank will explore alternative methods of capitalizing and funding MPF assets including techniques to liquefy MPF assets, creating additional capacity for the Bank and other FHLBs.

• The Bank agreed to adopt a new dividend policy requiring its dividend payout ratio in a given quarter not to exceed 90% of adjusted core net income for that quarter. For these purposes, adjusted core net income means the Bank’s GAAP net income, excluding gains or losses arising from significant non-recurring events, such as advance prepayment fees and gains or losses on debt transfer transactions and associated derivative contracts and other hedge instruments. The Bank’s Board of Directors adopted the new dividend policy on March 15, 2005. While the Written Agreement remains in effect, quarterly dividends of greater than 5.5%, on an annualized basis, will require regulatory approval. Dividends may be in the form of cash or capital stock. Historically, the Bank’s Board of Directors could declare and pay dividends out of previous retained earnings and current net earnings in either cash or capital stock.

Mandatorily Redeemable Capital Stock

The 1999 Act established voluntary membership for all members. All members may withdraw from membership and redeem their capital after giving notice to do so within the required timeframe. Members that withdraw from membership must wait 5 years before being readmitted to membership in the Bank. Members may redeem capital stock through the Bank. The Bank’s customary practice is to honor member redemption requests promptly. However, all stock redemption requests remain subject to bank regulatory requirements and require Bank approval.

The Bank’s policy regarding capital stock redemption is governed by both the FHLB Act and Finance Board regulations. Under the FHLB Act and the regulations, the Bank in its discretion and upon application of a member may retire the stock of that member in excess of that member’s required capital stock amount. It is currently the Bank’s practice to redeem voluntary capital stock on the same day a member request is received, taking into account the Bank’s liquidity and capital needs at the time. Also, in accordance with Finance Board regulations, a member may withdraw from membership and redeem its capital stock by

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providing six months’ prior written notice to the Finance Board. It is the Bank’s practice to redeem the stock of a terminating member after the expiration of the six month period provided that the terminating member does not have any outstanding obligations owed to the Bank.

The following table is a summary of mandatorily redeemable capital stock since adoption of SFAS 150 on January 1, 2004:

	For the year ended December 31, 2004
(Dollars in thousands)	Amount			Number of Members
Mandatorily Redeemable Capital Stock
- Beginning Balance	$	33,588		6
Redemption Requests:
Out-of-District Acquisitions		1,450	*	—
Withdrawals		4,558		2
Redemption Distributions:
Out-of-District Acquisitions		(28,337	)	(3	)
Withdrawals		—		—
Mandatorily Redeemable Capital Stock
- Ending Balance	$	11,259		5
Earnings impact from reclassification of dividends to interest expense	$	1,516

* Includes partial paydowns or redemption requests

At December 31, 2004 the Bank had $11,259,000 in capital stock subject to mandatory redemption from five members and former members. This amount has been classified as a liability (“mandatorily redeemable capital stock”) in the statements of condition. The Finance Board has confirmed that the SFAS 150 accounting treatment for certain shares of the Bank’s capital stock will not affect the definition of total capital for purposes of determining the Bank’s compliance with its regulatory capital requirements, calculating its mortgage securities investment authority (300% of total capital), calculating its unsecured credit exposure to other Government-sponsored enterprises (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).

Note 15 - Employee Retirement Plans

The Bank participates in the Financial Institutions Retirement Fund (FIRF), a defined benefit plan. Substantially all officers and employees of the Bank are covered by the plan. The Bank’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 on July 1, 2002. Funding and administrative costs of FIRF charged to other operating expenses were $3,138,000, $2,690,000 and $465,000 in 2004, 2003 and 2002, respectively. The plan is fully funded through June 30, 2005. The FIRF is a multiemployer plan and does not segregate its assets, liabilities or costs by participating employer. As a result, disclosure of the accumulated benefit obligations, plan assets and the components of annual pension expense attributable to the Bank cannot be made.

The Bank also participates in the Financial Institutions Thrift Plan (FITP), a defined contribution plan. The Bank’s contribution is equal to a percentage of participants’ compensation and a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. The Bank contributed approximately $670,000, $581,000 and $523,000 for the years ended December 31, 2004, 2003, and 2002, respectively.

The Bank offers a supplemental retirement plan which is an unfunded non-qualified deferred compensation plan providing benefits limited in the other retirement plans by laws governing such plans. In addition, the Bank provides health care

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and life insurance benefits for active and retired employees. Substantially all of the Bank’s employees with at least five years of full-time employment service become eligible for postretirement benefits at age 60 or older at retirement date. Under the Bank’s current plan, eligible retirees are entitled to full medical coverage provided under Medicare. The Bank also provides term life insurance premium payments for eligible employees retiring after age 45.

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act”) was signed into law. The Medicare Act introduced a prescription drug benefit program under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans. Eligibility for the federal subsidy is dependent upon whether the prescription dug benefit under the employer plan is at least actuarially equivalent to the Medicare Part D benefit. The Bank’s actuarial consultant has not yet determined if the Bank’s program is actuarially equivalent to Medicare Part D. Therefore, the Bank has not anticipated any reduction resulting from this legislation or the subsidy effects upon the projected benefit obligation. Medicare prescription drug subsidy payments are expected to be released beginning in 2006. As a result, any measures of the postretirement benefit costs in the financial statements do not reflect any subsidy effects of the Medicare Act.

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The following table shows the activity as of December 31, 2004 and 2003.

(Dollars in thousands)	Supplemental Retirement Plan						Postretirement Health Benefit Plan
	2004			2003			2004			2003
Change in benefit obligation
Benefit obligation at beginning of year	$	4,267		$	3,526		$	3,869		$	3,388
Service cost		383			344			504			352
Interest cost		320			257			283			218
Actuarial gain		1,744			140			911			—
Benefits paid		—			—			(103	)		(89	)
Settlements		(2,187	)		—			—			—
Benefit obligation at end of year	$	4,527		$	4,267		$	5,464		$	3,869
Change in plan assets
Fair value of plan assets at beginning of year	$	—		$	—		$	—		$	—
Employer contribution		2,187			—			—			—
Plan participants’ contributions		—			—			103			89
Benefits paid		—			—			(103	)		(89	)
Settlements		(2,187	)
Fair value of plan assets at end of year	$	—		$	—		$	—		$	—
Funded status	$	(4,527	)	$	(4,267	)	$	(5,464	)	$	(3,869	)
Unrecognized net actuarial loss		2,724			2,071			1,594			763
Unrecognized prior service cost (benefit)		(270	)		(295	)		124			138
Net amount recognized	$	(2,073	)	$	(2,491	)	$	(3,746	)	$	(2,968	)

Components of the net periodic pension cost for the Bank’s supplemental retirement and postretirement health benefit plan for the years ended December 31, 2004, 2003 and 2002 were:

(Dollars in thousands)	Retirement Plan								Health Benefit Plan
	2004			2003			2002		2004		2003		2002
Service Cost	$	383		$	344		$	299	$	504	$	352	$	301
Interest Cost		320			257			203		283		218		170
Amortization of unrecognized prior service cost		(25	)		(18	)		2		14		14		14
Amortization of unrecognized net loss		206			195			165		80		19		(79	)
Settlement loss		885			—			—		—		—		—
Net periodic benefit cost	$	1,769		$	778		$	669	$	881	$	603	$	406

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

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

	2004			2003
Discount Rate		5.75	%		7.50	%
Salary Increases		5.50	%		5.50	%
Amortization period		8 years			8 years
Settlement paid during the year (in thousands)	$	2,187		$	—

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Key assumptions and other information for the Bank’s postretirement health benefit plan for the years ended December 31, 2004 and 2003 were:

	2004		2003
Discount Rate	6.0	%	6.0	%
Weighted average discount rate at the end of the year	6.0	%	6.0	%
Health care cost trend rates:
Assumed for next year	5.0	%	7.5	%
Ultimate rate	5.0	%	5.0	%
Year that ultimate rate is reached	—		1 year
Alternative amortization methods used to amortize
Prior service cost Straight-line	None		None
Unrecognized net (gain) or loss	Minimum method		Minimum method

The effect of a percentage point increase or decrease in the assumed healthcare trend rates:

(Dollars in thousands)	+1%		-1%
Effect on service and interest cost components	$	197	$	(181	)
Effect on postretirement benefit obligation		929		(874	)

Estimated future benefits payments through 2014 reflecting expected benefit services for the periods ended December 31 are:

(Dollars in thousands)
Years	Payments
2005	$	145
2006		176
2007		196
2008		220
2009		289
2010-2014		2,176

Note 16 - Derivative Financial Instruments

In connection with its interest rate risk management program, the Bank uses various derivative financial instruments. Interest rate swap transactions involve the contractual exchange of a floating rate for a fixed or another floating rate interest payment obligation based on a notional principal amount as defined in the agreement. Forward contracts are commitments to buy or sell at a future date a financial instrument or currency at a contracted price and may be settled in cash or through delivery. Interest rate cap and floor agreements, for which a premium is paid, allow the Bank to manage its exposure to unfavorable interest fluctuations over or under a specified rate. Interest rate caps and floors obligate one of the parties to the contract to make payments to the other if an interest rate index exceeds a specified upper “capped” level or if the index falls below a specified “floor” level.

The Bank enters into derivative financial instruments to hedge interest rate and embedded option risk on selected advances to members, structured Agency bonds held as investments, mortgage loans, and structured debt. These agreements effectively convert long term financial instruments from a fixed or an indexed rate with embedded options to a variable rate. The Bank also enters into derivative financial instruments to hedge groups of assets and liabilities. These agreements reduce market risk associated with the change in interest rates in conjunction with the Bank’s asset and liability management. The following section summarizes the Bank’s hedging activities.

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Hedging Activities

General – The Bank may enter into interest rate swaps, swaptions, interest rate cap and floor agreements, calls, puts, futures and forward contracts (collectively, derivative financial instruments) to manage its exposure to changes in interest rates or to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives. The Bank uses derivative financial instruments as part of its hedging activities in one of two ways: (1) by designating them as either a fair value or cash flow hedge or (2) by designating them as a non-SFAS 133 economic hedge as part of its asset-liability management activities.

Economic Hedges – A non-SFAS 133 economic hedge is defined as a derivative financial instrument hedging specific or non-specific underlying assets, liabilities, forecasted transactions or firm commitments that does not qualify for hedge accounting under SFAS 133, but is an acceptable hedging strategy under the Bank’s risk management program, and complies with the Finance Board’s regulatory requirements. For example, the Bank may use derivative financial instruments in its overall interest rate risk management to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of assets (advances, investments and mortgage loans). In addition to using derivative financial instruments to manage mismatches of interest rates between assets and liabilities, the Bank may also use derivative financial instruments to manage embedded options in assets and liabilities, to hedge the market value of existing assets and liabilities, to hedge the duration risk of prepayable instruments and to fix funding costs. A non-SFAS 133 economic hedge by definition introduces the potential for earnings variability due to the change in fair value recorded on the derivative financial instrument(s) that is not offset by corresponding changes in the value of the economically hedged assets, liabilities, forecasted transactions or firm commitments.

Economic hedges also include derivative financial instruments in which the Bank is an intermediary. This may arise when the Bank: (1) enters into interest rate exchange agreements with members and offsetting interest rate exchange agreements with other counterparties to allow smaller members indirect access to the swap market, or (2) enters into interest rate exchange agreements to offset the economic effect of other derivative financial instruments that are no longer designated to either advances, investments, or consolidated obligations. The notional principal of derivative financial instruments in which the Bank was an intermediary is $341,734,000 and $552,241,000 at December 31, 2004 and 2003, respectively. The net result of this activity does not significantly affect the operating results of the Bank.

Consolidated Obligations – The Bank manages the risk arising from changing market prices and volatility of a consolidated obligation by matching the cash inflow on the derivative financial instruments with the cash outflow on the consolidated obligation. For instance, when fixed-rate consolidated obligations are issued for the Bank, the Bank may simultaneously enter into a matching derivative financial instrument in which the Bank receives fixed cash flows from a counterparty designed to offset in timing and amount the cash outflows the Bank pays on the consolidated obligations. Such transactions are treated as fair value hedges. This intermediation between the capital and swap markets permits the Bank to raise funds at lower costs than would otherwise be available through the issuance of floating-rate consolidated obligations in the capital markets.

Advances – With issuances of putable advances, the Bank may purchase from the member an embedded option that enables the Bank to put the advance and extend additional credit on new terms. The Bank may hedge a putable advance by entering into a cancelable interest rate swap where the Bank pays fixed interest payments and receives variable interest payments. This type of hedge is accounted for as a fair value hedge. The swap counterparty can cancel the derivative financial instrument on the same date the Bank can put the advance to the member.

The optionality embedded in certain financial instruments held by the Bank can create interest rate risk. When a member prepays an advance prior to the call date, the Bank could suffer lower future income if the principal portion of the prepaid advance were invested 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 makes it financially indifferent to a borrower’s decision to prepay an advance. When the Bank offers advances (other than short-term advances) that a member may prepay without a prepayment fee, they usually finance such advances with callable debt or otherwise hedge this option.

Mortgage Loans – The Bank invests in mortgage loans. The prepayment options embedded in mortgage loans can result in extensions or contractions in the expected maturities of these investments, primarily depending on changes in interest rates. Finance Board regulations limit this source of interest rate risk by restricting the types of mortgage loans the Bank may own and establishing limitations on duration of equity and change in market value of equity.

The Bank manages the interest rate and prepayment risk associated with mortgage loans 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.

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A combination of swaps and options, including futures, may be used as a portfolio of derivative financial instruments linked to a portfolio of mortgage loans. The portfolio of mortgage loans consists of one or more pools of similar assets, as designated by factors such as product type and coupon. As the portfolio of mortgage loans changes due to new mortgage loans, liquidations and payments, the derivatives portfolio is modified accordingly to hedge the interest rate and prepayment risks effectively. A new hedging relationship is created with each change to the mortgage loan portfolio. Such relationships are accounted for as fair value hedges.

In addition, the Bank may use interest rate caps and floors, swaptions, callable swaps, calls, and puts as non-SFAS 133 economic hedges to minimize the prepayment risk embedded in the mortgage loans. Although these derivatives are valid economic hedges against the prepayment risk of the mortgage loans, they are not specifically identified to individual mortgage loans and, therefore, do not receive either fair value or cash flow hedge accounting.

Anticipated Streams of Future Cash Flows – The Bank 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 LIBOR advances and discount notes. The option will effectively cap or floor the variable cash stream at a predetermined target rate. Such hedge transactions are accounted for as a cash flow hedge.

Firm Commitment Strategies – The Bank may enter into mortgage purchase commitments as a cash flow hedge of the anticipated purchase of mortgage loans made in the normal course of business. The change in value of the delivery commitment is recorded as a basis adjustment on the resulting mortgage loans with offsetting changes in accumulated other comprehensive income. Upon settlement of the mortgage purchase commitment, the basis adjustments on the resulting performing mortgage loans and the balance in accumulated other comprehensive income are then amortized into net interest income in offsetting amounts over the life of these mortgage loans, resulting in no impact on earnings.

The Bank may also hedge a firm commitment for a forward starting advance 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 advance. The basis movement associated with the firm commitment will be rolled into the basis of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment will then be amortized into interest income over the life of the advance.

Investments – The Bank invests in Government-Sponsored Enterprise (GSE) obligations, mortgage-backed securities and the taxable portion of state or local housing finance agency securities. The interest rate and prepayment risks associated with these investment securities are managed through a combination of debt issuance and derivatives. The Bank may manage against prepayment and duration risk by funding investment securities with consolidated obligations that have call features, by hedging the prepayment risk with caps or floors or by adjusting the duration of the securities by using derivative financial instruments to modify the cash flows of the securities. These securities may be classified as available-for-sale or trading securities on the statements of condition.

For available-for-sale securities that have been hedged and qualify as a fair value hedge, the Bank 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 financial instruments, and the remainder of the change in other comprehensive income as “net unrealized gain or (loss) on available-for-sale securities”.

The Bank may also manage the risk arising from changing market prices and volatility of investment securities classified as trading by entering into derivative financial instruments (economic hedges) that offset the changes in fair value of the securities. The market value changes of both the securities classified as trading and the associated derivative financial instruments are included in other income in the statements of income.

Anticipated Debt Issuance – The Bank may enter into interest rate swap agreements as hedges of anticipated issuance of debt to effectively lock in a spread between the earning asset and the cost of funding. All amounts deemed effective, as defined in SFAS 133, are recorded in other comprehensive income while amounts deemed ineffective are recorded in current earnings. The swap is terminated upon issuance of the debt instrument, and amounts reported in accumulated other comprehensive income are reclassified into earnings over the periods in which earnings are affected by the variability of the cash flows of the debt that was issued.

Foreign Currencies – The Bank has issued some consolidated obligations denominated in currencies other than U.S. dollars, and the Bank uses forward exchange contracts to hedge the related foreign currency risk. These contracts are agreements to exchange different currencies at specified future dates and at specified rates. The use of these contracts effectively simulates the conversion of these consolidated obligations denominated in foreign currencies to ones denominated in U.S. dollars. Such transactions are treated as foreign currency fair value hedges under SFAS 133, whereby the fair value changes of the foreign-currency-denominated obligation and the forward contract are recorded in current period earnings.

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There was no amount for the years ended December 31, 2004, 2003, and 2002 that was reclassified into earnings as a result of the discontinuance of cash flow hedges because it became probable that the original forecasted transaction would not occur by the end of the originally specified time period or within a two month period thereafter. Further, there was no amount reclassified into earnings as a result of firm commitments no longer qualifying as fair value hedges for years ended December 31, 2004, 2003, and 2002. Over the next twelve months, it is expected that $12,995,000 recorded in other comprehensive income at December 31, 2004 will be recognized in earnings. The maximum length of time over which forecasted transactions are hedged is nine years relating to traditional member finance activities.

Debt Extinguishments – The accounting treatment of the Bank’s derivative hedges resulting from the extinguishment of the Bank’s debt is to include the cumulative basis adjustment from previous and current fair value hedge relationships accounted for under SFAS 133 in the extinguishment gain or loss determination. Additionally, amounts deferred in Other Comprehensive Income from previously-anticipated debt issuance hedges under SFAS 133 would also be immediately recognized into earnings and included in net realized and unrealized (loss) on derivatives.

The following table summarizes the results of the Bank’s hedging activities for the years ended December 31, 2004, 2003, and 2002, respectively.

(Dollars in thousands)	2004			2003			2002
Loss related to fair value hedge ineffectiveness	$	(85,667	)	$	(127,363	)	$	(34,063	)
Loss on economic hedges		(83,584	)		(47,454	)		(455,607	)
Gain related to cash flow hedge ineffectiveness		42,826			35,651			—
Net loss on derivative and hedging activities	$	(126,425	)	$	(139,166	)	$	(489,670	)

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The following table represents outstanding notional balances and estimated fair value of derivatives outstanding, at December 31, 2004 and 2003:

	2004						2003
(Dollars in thousands)	Notional			Estimated Fair Value			Notional			Estimated Fair Value
Interest rate Swaps:
Fair Value	$	23,444,454		$	(237,183	)	$	26,855,857		$	(499,342	)
Cash Flow		—			—			600,000			9,239
Economic		2,015,117			(37,105	)		955,285			(55,336	)
Total		25,459,571			(274,288	)		28,411,142			(545,439	)
Interest rate Swaptions:
Fair Value		4,000,000			30,604			7,482,000			121,977
Economic		7,249,000			37,524			5,079,000			182,048
Total		11,249,000			68,128			12,561,000			304,025
Interest rate Caps/Floors:
Fair Value		—			—			600,000			9,239
Cash Flow		3,400,500			153,204			4,090,000			307,296
Economic		8,000			8			1,698,000			133,058
Total		3,408,500			153,212			6,388,000			449,593
Interest rate Futures/Forwards:
Fair Value		5,578,000			(3,240	)		6,073,000			(2,169	)
Economic		150,000			(26	)		—			—
Total		5,728,000			(3,266	)		6,073,000			(2,169	)
Interest rate Forward Settlement Agreements:
Cash Flow		300,000			(4,068	)		—			—
Mortgage Delivery Commitments:
Cash Flow		98,481			751			233,836			863
Other:		—			—			—			—
Total	$	46,243,552		$	(59,531	)	$	53,666,978		$	206,873
Total Derivatives Excluding Accrued Interest		(59,531	)					206,873
Accrued Interest at year end		13,777						23,914
Net Derivative Balance at year end		(45,754	)					230,787
Net Derivative Asset Balance at year end		153,496						454,327
Net Derivative Liability Balance at year end		(199,250	)					(223,540	)
Net Derivative Balance at year end	$	(45,754	)				$	230,787

Derivative financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statements of condition. The contract or notional amounts of these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments; the notional amount does not represent exposure to credit loss. The amounts potentially subject to loss due to credit risks are the book value amounts of the derivatives, and not the notional amounts. Maximum credit risk is defined as the estimated cost of replacement for favorable interest rate swaps, forward agreements, mandatory delivery contracts for mortgage loans executed after June 30, 2003, and purchased caps and floors in the event of counterparty default and the related collateral, if any, proved to be of no value to the Bank. This collateral has not been sold or repledged. The Bank is subject to credit risk only due to the nonperformance by counterparties to the derivative agreements. The Bank manages counterparty credit risk through credit analysis and collateral requirements and by following the requirements set forth in the Finance Board’s regulations. Based on management’s credit analysis, collateral requirements and master netting arrangements, the Bank does not anticipate any losses on these agreements.

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At December 31, 2004 and 2003, the Bank’s maximum credit risk, as defined above, was approximately $153,496,000 and $454,327,000 respectively, including $13,778,000 and $23,914,000 of net accrued interest receivable, respectively. Accrued interest receivables and payables and legal right to offset assets and liabilities by a counterparty, in which amounts recognized for individual contracts may be offset against amounts recognized for other contracts, are considered in determining the maximum credit risk. The Bank held cash and securities with a market value of approximately $154,830,000 and $446,115,000 as collateral for interest rate exchange agreements as of December 31, 2004 and 2003, respectively. Additionally, collateral with respect to interest rate exchange agreements with member institutions includes collateral assigned to the Bank, as evidenced by a written security agreement.

A significant portion of the Bank’s derivative financial instruments are transacted with financial institutions such as major banks and broker-dealers, with no single institution dominating the business. Assets pledged as collateral by the Bank to these counterparties are discussed more fully in Note 19.

Note 17- Segment Information

The Bank has two business segments (MPF Program and traditional member finance) as defined in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”. The products and services provided reflect the manner in which financial information is evaluated by management including the chief operating decision makers. The Bank’s reporting process measures the performance of the operating segments based on the structure of the Bank and is not necessarily comparable with similar information for any other financial institution. The Bank’s operating segments are defined by the products it provides. The MPF Program income is derived primarily from the difference, or spread, between the yield on MPF Loans and the borrowing cost related to those loans. The traditional member finance segment includes products such as advances, investments and deposits.

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The following table sets forth the Bank’s financial performance by operating segment for the years ended December 31, 2004, 2003 and 2002.

(Dollars in thousands)	MPF			Traditional Member Finance			Total
2004
Net interest income	$	574,507		$	129,836		$	704,343
Provision for credit losses on mortgage loans		—			—			—
Other income		(137,989	)		10,858			(127,131	)
Other expenses		72,485			48,571			121,056
Income before assessments		364,033			92,123			456,156
Affordable Housing Program		33,222			7,522			40,744
REFCORP		74,476			16,919			91,395
Total assessments		107,698			24,441			132,139
Income before cumulative effect of change in accounting principle	$	256,335		$	67,682		$	324,017
Cumulative effect of change in accounting principle	$	41,441		$	—		$	41,441
Net income	$	297,776		$	67,682		$	365,458
2004
Total mortgage loans, net	$	46,918,118		$	2,433		$	46,920,551
Average mortgage loans, net		47,512,138			1,375			47,513,512
Total assets		48,047,208			37,661,429			85,708,637
2003
Net interest income	$	642,018		$	151,808		$	793,826
Provision for credit losses on mortgage loans		—			—			—
Other income		(120,769	)		7,590			(113,179	)
Other expenses		51,103			35,327			86,430
Income before assessments		470,146			124,071			594,217
Affordable Housing Program		38,395			10,128			48,523
REFCORP		86,375			22,789			109,164
Total assessments		124,770			32,917			157,687
Net income	$	345,376		$	91,154		$	436,530
2003
Total mortgage loans, net	$	47,599,575		$	156		$	47,599,731
Average mortgage loans, net		38,004,705			10			38,004,715
Total assets		49,392,492			37,549,495			86,941,987
2002
Net interest income	$	189,323		$	333,570		$	522,893
Provision for credit losses on mortgage loans		2,217			—			2,217
Other income		(38,344	)		(146,034	)		(184,378	)
Other expenses		28,763			28,918			57,681
Income before assessments		119,999			158,618			278,617
Affordable Housing Program		9,795			12,948			22,743
REFCORP		22,041			29,134			51,175
Total assessments		31,836			42,082			73,918
Net income	$	88,163		$	116,536		$	204,699
2002
Total mortgage loans, net	$	26,185,618		$	—		$	26,185,618
Average mortgage loans, net		20,430,459			—			20,430,459
Total assets		27,080,375			37,965,532			65,045,907

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Note 18 - Estimated Fair Values

The following estimated fair value amounts have been determined by the Bank: first, by using available market information and, second, if market values were not available, using the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of December 31, 2004 and 2003. Although the Bank 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 Bank’s financial instruments, in certain cases, fair values are not subject to precise quantification or verification and their values may change as economic and market factors, and the evaluation of those factors, change. Therefore, estimated fair values may not be necessarily indicative of the amounts that would be realized in current market transactions. The fair value summary tables do not represent an estimate of overall market value of the Bank as a going concern, which would take into account future business opportunities.

Cash and Due From Banks – The estimated fair value approximates the carrying value.

Securities Purchased Under Agreements to Resell – The estimated fair value is determined by calculating the present value of expected future cash flows. The discount rates used in these calculations are the rates for securities with similar terms.

Federal Funds Sold – The estimated fair value has been determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for Federal funds with similar terms.

Held-To-Maturity Securities – The estimated fair values of held-to-maturity securities have been determined based on quoted market prices as of the last business day of the year when those prices are available. However, active markets do not exist for many types of financial instruments. Consequently, fair values for these instruments were estimated using techniques such as discounted cash flow analysis and comparison to similar instruments. Estimates developed using these methods 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.

Advances – The estimated fair values have been determined by calculating the present value of expected future cash flows from the advances and excluding the amount for accrued interest receivable. The discount rates used in these calculations are the replacement advance rates for advances with similar terms. Per the Finance Board regulations, advances with a maturity or repricing period greater than six months generally require a fee sufficient to make the Bank financially indifferent to the borrower’s decision to prepay the advances. Therefore the estimated fair value of advances does not assume prepayment risk. For advances with floating rates and three months or less to repricing, the estimated fair value approximates the carrying value.

Mortgage Loans Held in Portfolio – The estimated fair values for MPF Loans are based on modeled prices. The modeled prices start with prices for new mortgage-backed securities issued by U.S. government agencies. Prices are then adjusted for differences in coupon, average loan rate, seasoning and cash flow remittance between the Bank’s MPF Loans and the mortgage-backed securities. The referenced mortgage-backed securities are highly dependent upon the underlying prepayment assumptions priced in the market. Changes in the prepayment rates often have a material effect on the fair value estimates. Since these underlying prepayment assumptions are made as of a specific point in time, they are susceptible to material changes in the near term.

Accrued Interest Receivable and Payable – The estimated fair value approximates the carrying value.

Derivative Assets and Liabilities – The Bank bases the estimated fair values of derivative financial instruments with similar terms on available market prices including accrued interest receivable and payable. Fair values of derivatives that do not have markets are 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. Since 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 estimated fair value of deposits with fixed rates has been determined 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 carrying value for deposits with floating rates with three months or less to repricing.

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Consolidated Obligations – Estimated fair values have been determined by calculating the present value of expected cash flows from the consolidated obligations. The discount rates used in these calculations are the replacement funding rates for liabilities with similar terms.

Securities Sold Under Agreements to Repurchase – The estimated fair values have been determined 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.

Mandatorily Redeemable Capital Stock – The fair value of capital subject to mandatory redemption is generally at par value. Fair value also includes estimated dividends earned at the time of reclassification from equity to liabilities, until such amount is paid, and any subsequently declared stock dividend. Stocks can only be acquired by members at par value and redeemed at par value. Stock is not traded and no market mechanism exits for the exchange of stock outside the cooperative structure.

Commitments – The estimated fair values of the Bank’s commitments to extend credit are 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 values of standby letters of credit are 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 carrying values and estimated fair values of the Bank’s financial instruments at December 31, 2004 were as follows:

(Dollars in thousands)
Financial Instrument	Carrying Value			Net Unrecognized Gain or (Loss)			Estimated Fair Value
Financial Assets
Cash and due from banks	$	20,530		$	—		$	20,530
Securities purchased under agreements to resell		389,840			(8	)		389,832
Federal funds sold		4,738,000			(84	)		4,737,916
Trading securities		760,057			—			760,057
Available-for-sale securities		1,529,688			—			1,529,688
Held-to-maturity securities		6,561,161			(3,081	)		6,558,080
Advances		24,191,558			(164,239	)		24,027,319
Mortgage loans held in portfolio, net		46,920,551			79,539			47,000,090
Accrued interest receivable		317,837			—			317,837
Derivative assets		153,496			—			153,496
Total Financial Assets	$	85,582,718		$	(87,873	)	$	85,494,845
Financial Liabilities
Deposits	$	(1,223,752	)	$	181		$	(1,223,571	)
Securities sold under agreements to repurchase		(1,200,000	)		(96,311	)		(1,296,311	)
Consolidated obligations:
Discount notes		(16,871,736	)		7,962			(16,863,774	)
Bonds		(60,875,540	)		(514,258	)		(61,389,798	)
Mandatorily redeemable capital stock		(11,259	)		—			(11,259	)
Accrued interest payable		(513,993	)		—			(513,993	)
Derivative liabilities		(199,250	)		—			(199,250	)
Total Financial Liabilities	$	(80,895,530	)	$	(602,426	)	$	(81,497,956	)
Commitments:
Loan commitments	$	—		$	339		$	339

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The carrying values and estimated fair values of the Bank’s financial instruments at December 31, 2003 were as follows:

(Dollars in thousands)
Financial Instrument	Carrying Value			Net Unrecognized Gain or (Loss)			Estimated Fair Value
Financial Assets
Cash and due from banks	$	3,629		$	—		$	3,629
Securities purchased under agreements to resell		418,600			(4	)		418,596
Federal funds sold		5,023,000			(43	)		5,022,957
Trading securities		794,297			—			794,297
Available-for-sale securities		605,364			—			605,364
Held-to-maturity securities		5,139,067			62,316			5,201,383
Advances		26,443,063			(26,259	)		26,416,804
Mortgage loans held in portfolio, net		47,599,731			304,929			47,904,660
Accrued interest receivable		336,655			—			336,655
Derivative assets		454,327			—			454,327
Total Financial Assets	$	86,817,733		$	340,939		$	87,158,672
Financial Liabilities
Deposits		(2,348,071	)		2			(2,348,069	)
Securities sold under agreements to repurchase		(1,200,000	)		(41,920	)		(1,241,920	)
Consolidated obligations:
Discount notes		(20,456,395	)		(5,621	)		(20,462,016	)
Bonds		(57,471,055	)		(674,006	)		(58,145,061	)
Accrued interest payable		(502,327	)		—			(502,327	)
Derivative liabilities		(223,540	)		—			(223,540	)
Total Financial Liabilities	$	(82,201,388	)	$	(721,545	)	$	(82,922,933	)
Commitments:
Loan commitments	$	—		$	727		$	727

Note 19 - Commitments and Contingencies

As described in Note 13, the FHLBs have joint and several liability for all the consolidated obligations issued on their behalf. Accordingly, should one or more of the FHLBs be unable to repay its participation in the consolidated obligations, each of the other FHLBs could be called upon to repay all or part of such obligations, as determined or approved by the Finance Board. For the years ended December 31, 2004, 2003 and 2002, no FHLB has had to assume or pay the consolidated obligation of another FHLB. Neither the Bank nor any other FHLB has had to assume or pay the consolidated obligation of another FHLB. However, the Bank considers the joint and several liability as a related party guarantee meeting the scope exceptions as noted in FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. Accordingly, the Bank has not recognized a liability for its joint and several obligations related to other FHLBs’ consolidated obligations at December 31, 2004 and 2003.

Commitments that legally bind and unconditionally obligate the Bank for additional advances totaled approximately $1,150,000 and $105,000 at December 31, 2004 and 2003, respectively. Commitments typically are for periods up to 12 months. Standby letters of credit are executed for members for a fee and are fully collateralized at the time of issuance. Based on management’s credit analysis, collateral requirements and master netting arrangements, the Bank does not deem it necessary to have any additional liability on these commitments and letters of credit.

The Bank has entered into standby bond purchase agreements with state housing authorities within its two state district whereby the Bank, for a fee, agrees to purchase and hold the authorities’ bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bond according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the Bank to purchase the bond. The bond purchase commitments entered into by the Bank expire after 10 years, no later than 2014 though some are renewable at the option of the

F-44

Bank. Total commitments for bond purchases with the Wisconsin Housing Economic Development Authority (WHEDA) were $242,651,000 and $248,656,000 and for the Illinois Housing Development Authority (IHDA) were $38,441,000 and $0 at December 31, 2004 and 2003, respectively. Both WHEDA and IHDA are state housing authorities. During 2004 and 2003, the Bank was not required to purchase any bonds under these agreements.

Commitments which unconditionally obligate the Bank to fund or purchase mortgage loans totaled $147,135,000 and $288,942,000 at December 31, 2004 and 2003, respectively. Commitments are generally for periods not to exceed 45 business days. Such commitments were recorded as derivatives at their fair value.

The Bank enters into bilateral collateral agreements and executes derivatives with major banks and broker-dealers. As of December 31, 2004, the Bank had pledged, as collateral, securities with a carrying value of $209,652,000, which cannot be sold or repledged, to counterparties who have market risk exposure from the Bank related to derivatives.

Lease agreements for Bank 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 Bank. Lease agreements for services and equipment are not material to the Bank.

The Bank charged to operating expenses net rental costs of approximately $3,537,000, $2,992,000, and $2,482,000, for the years ending December 31, 2004, 2003, and 2002. Future minimum rentals at December 31, 2004, were as follows:

(Dollars in thousands)
Year	Premises
2005	$	3,712
2006		4,024
2007		4,387
2008		4,603
2009		4,873
Thereafter		8,515
Total	$	30,114

The Bank 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 Bank’s financial condition or results of operations.

Note 20 - Transactions with Related Parties and Other FHLBs

Related Parties: The Bank is a cooperative whose member institutions own the capital stock of the Bank 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 Bank capital stock until the transactions mature or are paid off. 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 Bank, those transactions are subject to the same eligibility and credit criteria, as well as the same terms and conditions, as all other transactions. The Bank defines related parties as those members with capital stock outstanding in excess of 10% of total capital stock outstanding. Investment securities issued by affiliates of our members may be purchased in the secondary market through a third party at arm’s length.

Outlined below is the level of activity the Bank has with its members as reported in the statements of condition.

• Federal funds sold related to members reported in the Bank’s statements of condition at December 31, 2004 and 2003 were $0 and $350.0 million, respectively.

• Held-to-maturity securities relating to affiliates of members reported in the Bank’s statements of condition at December 31, 2004 and 2003 were $30.4 million and $45.0 million, respectively.

• All advances reported in the Bank’s statement of condition at December 31, 2004 and 2003 were issued to its members.

• Derivative assets relating to members and their affiliates reported in the Bank’s statements of condition at December 31, 2004 and 2003 were $24.3 million and $28.7 million, respectively. Derivative liabilities relating to members and their affiliates reported in the Bank’s statements of condition at December 31, 2004 and 2003 were $91.7 million and $4.7 million, respectively.

F-45

• Interest and non-interest bearing deposits from members of $885.2 million and $1.3 billion respectively at December 31, 2004 and 2003 are maintained by the Bank for its members primarily to facilitate settlement activities that are directly related to advances and mortgage loan purchases.

• Mandatorily redeemable capital stock reported in the Bank’s statements of condition at December 31, 2004 and 2003 relates to members.

The following table summarizes interest-rate exchange agreement activity in which the Bank was an intermediary with its members and third party counterparties.

	Years Ended December 31,
(Notional dollars in thousands)	2004		2003		2002
Beginning Notional	$	285,240	$	228,543	$	55,911
New Contracts		19,493		56,697		172,632
Maturities		50,000		—		—
Ending Notional	$	254,733	$	285,240	$	228,543

The following table summarizes the change in fair value related to interest-rate exchange agreement activity in which the Bank was an intermediary with its members and third party counterparties.

	Years Ended December 31,
(Dollars in thousands)	2004			2003		2002
Beginning Fair Value, net	$	441		$	204	$	86
Change in Derivative Asset		(42,612	)		59,404		186,130
Change in Derivative Liability		(42,456	)		59,167		186,012
Ending Fair Value, net	$	285		$	441	$	204

Other FHLBs: The Office of Finance may issue consolidated obligations through the Global Issuances Program. Historically, the Bank has been the primary obligor on any debt issued that is not taken by another FHLB. If another FHLB needs liquidity or additional funding, then the FHLB could obtain funding by issuing new consolidated obligations through the Office of Finance or the Bank could transfer its consolidated obligations at fair value to the other FHLB. Due to the fact that the Bank is no longer the primary obligor of the transferred consolidated obligations, the Bank records the transfer as an extinguishment of debt with a corresponding gain or loss recorded in the statements of income. The Bank transferred $4.3 billion $6.3 billion and $729.3 million of consolidated obligations to other FHLBs for the years ended December 31, 2004, 2003, and 2002. In addition, the Bank recognized a net realized gain (loss) from early extinguishment of debt transferred to other FHLBs of $45.8 million, $106.3 million and ($2.3 million) for the years ended December 31, 2004, 2003 and 2002, respectively.

As the MPF Provider, the Bank recorded $1.2 million as transaction service fees for the year ended December 31, 2004, which was the first year in which the Bank recorded such fees. Prior to 2004 the Bank incurred these costs to promote the MPF Program.

In December 2002, the Bank agreed to begin purchasing MPF Loans directly from members of the FHLB of Dallas and to pay the FHLB of Dallas a fee as the Bank’s marketing agent. The FHLB of Dallas acts as marketing agent for the Bank and receives a marketing fee for its services rather than purchasing MPF Loans from its members. The Bank incurred $731.8 thousand and $1.7 million in marketing fees paid to the FHLB of Dallas during the years ended December 31, 2004 and 2003, respectively. The Bank did not incur any such fees in 2002.

Upon joining the MPF Program in November 1999, the FHLB of Des Moines paid the Bank an MPF Program contribution of $1.5 million in installments that were due no later than the third anniversary after joining the MPF Program. In return, the Bank agreed to pay the FHLB of Des Moines a participation fee based on the outstanding balance of MPF Loans. These payments will terminate when there are less than $2 billion of MPF Loans in the MPF Program, but otherwise will continue in perpetuity. The Bank paid participation fees of $300,000 to the FHLB of Des Moines during each of the three years ended December 31, 2004, 2003 and 2002.

As of December 31, 2004 and 2003, the Bank held investment securities classified as trading in the Bank’s statements of condition of $71.7 million and $75.7 million of consolidated obligations in other FHLBs which were purchased from 1995 to 1997. The FHLB of Dallas was the primary obligor of $41.7 million of consolidated obligations at December 31, 2004 and $43.6 million at December 31, 2003. The FHLB of San Francisco was the primary obligor of $30.0 million of consolidated obligations

F-46

held by the Bank at December 31, 2004 and $32.1 million held at December 31, 2003. The respective changes in fair value are recorded within net (loss) gain on trading securities on the statements of income and within operating activities as a net (increase) decrease on trading securities in the Bank’s statements of cash flows.

The Bank has accounts receivable with other FHLBs, which was $1.0 million and $1.8 million at December 31, 2004 and 2003, respectively. Accounts receivable is classified in other assets in the Bank’s statements of condition, with the respective changes being recorded as Operating Activities in the Bank’s statements of cash flows. Other FHLBs have deposits with the Bank that are separately reported in the Bank’s statements of condition within interest-bearing deposits, with the respective changes being recorded as Financing Activities within the Bank’s statements of cash flows.

The Bank sold $878.9 million in participation interests to the FHLB of Topeka in 2004, and did not sell any participation interests to other FHLBs in 2003. The purchase and immediate sale to the FHLB of Topeka was recorded net in Operating Activities, and accordingly, there was no impact to the Bank’s statements of cash flows related to this transaction.

The Bank purchased $4.9 billion, $20.9 billion and $10.7 billion in participation interests from other FHLBs during the years ended December 31, 2004, 2003 and 2002, respectively. Participation interests purchased are recorded as Investing Activities in the Bank’s statements of cash flows in “Mortgage loans held in portfolio purchased from other FHLBs.”

The Bank completed two MPF Shared Funding transactions in March 2003 and June 2003. The outstanding principal balance of the A Certificates held by the Bank in connection with these transactions was $513.0 million at December 31, 2004. The Bank sold $322.9 million of MPF Shared Funding Certificates, classified as available-for-sale, to the FHLB of Des Moines and the FHLB of Pittsburgh in March 2003. The Bank recognized no gain or loss on the sales, and there have been no subsequent sales. In these two transactions, One Mortgage Partners Corp., the Shared Funding PFI, acquired Shared Funding MPF Loans from National City Bank of Pennsylvania, a member of the FHLB of Pittsburgh, and Superior Guaranty Insurance Company, a member of the FHLB of Des Moines (“Selling PFIs”). The Selling PFIs provided standard MPF Program representations and warranties to the Shared Funding PFI which were in turn passed through to the trust for the benefit of the holders of the A Certificates and the B Certificates. The Bank agreed to act as the agent for the Shared Funding PFI so that the Selling PFIs could deliver their loans in much the same manner as they would if they were selling the loans to their respective MPF Banks under the MPF Program products.

F-47

Federal Home Loan Bank of Chicago

September 30, 2005 Financial Statements and Notes (Unaudited)

F-48

TABLE OF CONTENTS

Financial Statements and Notes
Statements of Condition (unaudited) at September 30, 2005 and December 31, 2004	F-50
Statements of Income (unaudited) for the nine months ended September 30, 2005 and 2004	F-51
Statements of Capital (unaudited) for the nine months ended September 30, 2005 and 2004	F-52
Statements of Cash Flows (unaudited) for the nine months ended September 30, 2005 and 2004	F-53
Notes to Financial Statements (unaudited)	F-55

F-49

Statements of Condition (unaudited)

(In thousands, except par value)

	September 30, 2005			December 31, 2004
Assets
Cash and due from banks	$	20,103		$	20,530
Securities purchased under agreements to resell		388,200			389,840
Federal funds sold		6,907,000			4,738,000
Investment securities:
Trading ($451,389 and $477,416 pledged in 2005 and 2004)		1,244,890			760,057
Available-for-sale ($773,515 and $705,628 pledged in 2005 and 2004)		1,480,528			1,529,688
Held-to-maturity ($149,786 and $226,607 pledged in 2005 and 2004)		4,937,311			6,561,161
Advances		24,233,015			24,191,558
Mortgage loans held in portfolio, net of allowance for loan losses of $4,100 and $4,879 in 2005 and 2004		43,231,999			46,920,551
Accrued interest receivable		310,147			317,837
Derivative assets		192,253			153,496
Premises and equipment, net		61,257			62,664
Other assets		47,640			63,255
Total Assets	$	83,054,343		$	85,708,637
Liabilities and Capital
Liabilities
Deposits:
Interest-bearing
Demand and overnight	$	1,013,831		$	920,360
Term		41,000			89,000
Deposits from other FHLBs for MPF Program		10,334			13,395
Other		180,100			146,031
Other non-interest bearing		62,251			54,966
Total deposits		1,307,516			1,223,752
Securities sold under agreements to repurchase		1,200,000			1,200,000
Consolidated obligations, net:
Discount notes		15,180,067			16,871,736
Bonds		60,178,226			60,875,540
Total consolidated obligations, net		75,358,293			77,747,276
Accrued interest payable		630,120			513,993
Derivative liabilities		142,673			199,250
Affordable Housing Program		84,025			82,456
Payable to Resolution Funding Corporation (REFCORP)		13,528			42,487
Mandatorily redeemable capital stock		13,734			11,259
Other liabilities		63,131			62,305
Total Liabilities		78,813,020			81,082,778
Commitments and contingencies (Note 11)
Capital
Capital stock - Putable ($100 par value) issued and outstanding shares:
38,907 and 42,922 shares in 2005 and 2004		3,890,665			4,292,166
Retained earnings		517,168			489,368
Accumulated other comprehensive (loss) income:
Net unrealized loss on available-for-sale securities		(6,692	)		(7,224	)
Net unrealized loss relating to hedging activities		(159,818	)		(148,451	)
Total Capital		4,241,323			4,625,859
Total Liabilities and Capital	$	83,054,343		$	85,708,637

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

F-50

Statements of Income (unaudited)

(In thousands)

	For the nine months ended September 30,
	2005			2004
Interest Income:
Mortgage loans held in portfolio	$	1,640,060		$	1,696,229
Advances		565,295			411,951
Securities purchased under agreements to resell		8,575			4,192
Federal funds sold		146,486			48,674
Investment securities:
Trading		38,587			41,479
Available-for-sale		31,872			25,413
Held-to-maturity		184,704			143,403
Other		35			57
Total interest income		2,615,614			2,371,398
Interest Expense:
Consolidated obligations		2,163,773			1,784,443
Deposits		24,926			15,287
Deposits from other FHLBs for MPF Program		359			267
Securities sold under agreements to repurchase		39,005			21,720
Mandatorily redeemable stock		733			1,403
Other		9			13
Total interest expense		2,228,805			1,823,133
Net interest income before provision for credit losses on mortgage loans		386,809			548,265
Provision for credit losses on mortgage loans		—			—
Net interest income after provision for credit losses on mortgage loans		386,809			548,265
Other Income (Loss):
Service fees		685			755
Net gain (loss) on trading securities		(20,863	)		(21,388	)
Net realized gain (loss) on sale of available-for-sale securities		(1,843	)		(21,080	)
Net realized and unrealized gain (loss) on derivatives and hedging activities		(17,127	)		(105,377	)
Net realized gain from early extinguishment of debt transferred to other FHLBs		4,618			46,499
Other, net		5,726			1,799
Total other income (loss)		(28,804	)		(98,792	)
Other Expense:
Salary and benefits		41,279			32,825
Professional service fees		9,554			12,540
Depreciation of premises and equipment		13,505			9,646
Mortgage loan expense		5,526			8,183
Finance Board		2,375			2,061
Office of Finance		1,308			1,433
Other operating		15,566			16,267
Total other expense		89,113			82,955
Income before Assessments		268,892			366,518
Affordable Housing Program		22,010			33,417
Resolution Funding Corporation		49,388			74,910
Total assessments		71,398			108,327
Income before cumulative effect of change in accounting principle		197,494			258,191
Cumulative effect of change in accounting principle		—			41,441
Net Income	$	197,494		$	299,632

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

F-51

Statements of Capital (unaudited)

For the nine months ended September 30,

(In thousands)

	Capital Stock - Putable					Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total Capital
	Shares		Par Value
2004
Balance, December 31, 2003	41,552		$	4,155,218		$	386,874		$	31,348			4,573,440
Proceeds from issuance of capital stock	5,796			579,573									579,573
Redemption of capital stock	(5,590	)		(558,969	)								(558,969	)
Reclassification of mandatorily redeemable capital stock	(343	)		(34,298	)								(34,298	)
Comprehensive income:
Earnings before cumulative effect of change in accounting principle							258,191						258,191
Other comprehensive income:
Net unrealized loss on available-for-sale securities										(7,485	)		(7,485	)
Net unrealized loss on hedging activities										(159,638	)		(159,638	)
Total other comprehensive income										(167,123	)		(167,123	)
Total comprehensive income													91,068
Cumulative effect of change in accounting principle							41,441						41,441
Dividends on capital stock:
Cash							(135	)					(135	)
Stock	1,975			197,498			(197,498	)					—
Balance, September 30, 2004	43,390		$	4,339,022		$	488,873		$	(135,775	)	$	4,692,120
2005
Balance, December 31, 2004	42,922		$	4,292,166		$	489,368		$	(155,675	)		4,625,859
Proceeds from issuance of capital stock	4,022			402,211									402,211
Redemption of capital stock	(8,124	)		(812,326	)								(812,326	)
Reclassification of mandatorily redeemable capital stock	(1,609	)		(160,947	)								(160,947	)
Comprehensive income:
Net Income							197,494						197,494
Other comprehensive income:
Net unrealized loss on available-for-sale securities										(1,311	)		(1,311	)
Net unrealized gain on hedging activities										(9,524	)		(9,524	)
Total other comprehensive income										(10,835	)		(10,835	)
Total comprehensive income													186,659
Dividends on capital stock:
Cash							(133	)					(133	)
Stock	1,696			169,561			(169,561	)					—
Balance, September 30, 2005	38,907		$	3,890,665		$	517,168		$	(166,510	)	$	4,241,323

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

F-52

Statements of Cash Flows (unaudited)

(In thousands)

	For the nine months ended September 30,
	2005			2004
Operating Activities:
Net Income	$	197,494		$	299,632
Cumulative effect of change in accounting principle		—			(41,441	)
Income before cumulative effect of change in accounting principle		197,494			258,191
Adjustments to reconcile income before cumulative effect of change in accounting principle to net cash used in operating activities:
Depreciation and amortization:
Net premium (discount) on consolidated obligations, investments, and deferred costs and fees received on interest rate derivatives		383,688			(133,718	)
Net premium (discount) on mortgage loans		75,254			105,679
Concessions on consolidated obligation bonds		11,672			15,543
Premises and equipment		13,505			9,646
Non-cash interest on mandatorily redeemable capital stock		209			369
Net (increase) decrease on trading securities		(518,247	)		99,847
Net realized (gain) loss on sale of available-for-sale securities		1,843			21,080
Net (gain) loss due to change in net fair value adjustment on derivatives and hedging activities		(6,450	)		75,984
Net realized (gain) loss on early extinuishment of debt		83			1,318
Net realized (gain) on early extinuishment of debt transferred to other FHLBs		(4,618	)		(46,499	)
Net (increase) decrease in accrued interest receivable		9,844			19,147
Decrease in derivative assets-net accrued interest		6,077			19,782
Increase in derivative liabilities-net accrued interest		(11,952	)		291
Net (increase) decrease in other assets		(38,839	)		(77,908	)
Net increase (decrease) in Affordable Housing Program (AHP) liability and discount on AHP advances		1,557			10,933
Net increase (decrease) in accrued interest payable		115,918			112,995
Net increase (decrease) in payable to Resolution Funding Corporation		(28,959	)		14,845
Net increase (decrease) in other liabilities		3,302			25,747
Total adjustments		13,887			275,081
Net cash provided by (used in) operating activities		211,381			533,272
Investing activities:
Net (increase) decrease in securities purchased under agreements to resell		1,640			(75,930	)
Net (increase) decrease in Federal funds sold		(2,169,000	)		(2,181,000	)
Net (increase) decrease in short-term held-to-maturity securities		658,812			(99,336	)
Purchase of mortgage-backed securities		—			(1,740,936	)
Proceeds from maturities and sale of mortgage-backed securities		1,107,954			1,106,921
Purchase of long-term held-to-maturity securities		(57,147	)		(258,344	)
Proceeds from maturities of long-term held-to-maturity securities		263,846			489,368
Purchase of available-for-sale securities		(619,979	)		(2,437,447	)
Proceeds from sale of available-for-sale securities		321,187			2,035,375
Principal collected on advances		15,833,139			19,091,671
Advances made		(16,083,369	)		(17,999,438	)
Principal collected on mortgage loans held in portfolio		6,906,532			7,879,271
Mortgage loans held in portfolio originated or purchased		(1,692,862	)		(3,802,016	)
Mortgage loans held in portfolio purchased from other FHLBs		(1,637,443	)		(4,529,799	)
Recoveries on mortgage loans held in portfolio		294			215
Proceeds from sale of foreclosed assets		42,773			48,646
Purchase of premises and equipment		(12,099	)		(5,338	)
Net cash provided by (used in) investing activities	$	2,864,278		$	(2,478,117	)

(Continued on following page)

F-53

Statements of Cash Flows (unaudited)

(Continued from previous page)

(In thousands)

	For the nine months ended September 30,
	2005			2004
Financing Activities:
Net increase (decrease) in demand, overnight, term, and other deposits	$	86,824		$	(699,270	)
Net increase (decrease) in deposits from other FHLBs for MPF Program		(3,061	)		(10,656	)
Net proceeds from issuance of consolidated obligations:
Discount notes		273,842,229			372,011,780
Bonds		13,565,477			19,837,497
Payments for maturing and retiring consolidated obligations:
Discount notes		(275,894,398	)		(372,961,491	)
Bonds		(14,101,963	)		(16,201,754	)
Proceeds from issuance of capital stock		402,211			579,573
Payments for redemption of capital stock		(827,279	)		(591,871	)
Payments for redemption of mandatorily redeemable capital stock		(145,994	)		(1,396	)
Cash dividends paid		(132	)		(135	)
Net cash provided by (used in) financing activities		(3,076,086	)		1,962,277
Net increase (decrease) in cash and due from banks		(427	)		17,432
Cash and due from banks at beginning of year		20,530			3,629
Cash and due from banks at September 30,	$	20,103		$	21,061
Supplemental Disclosures:
Interest paid	$	2,112,678		$	1,708,735
REFCORP paid		78,348			60,064
AHP paid		20,442			22,440

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

F-54

Notes to Financial Statements (unaudited)

Note 1 – Basis of Presentation

The Federal Home Loan Bank of Chicago (the “Bank”), a federally chartered corporation and a member-owned cooperative, is one of twelve Federal Home Loan Banks (the “FHLBs”) which, with the Federal Housing Finance Board (the “Finance Board”) and the Office of Finance, comprise the Federal Home Loan Bank System. The twelve FHLBs are government-sponsored enterprises (“GSE”) of the United States of America and were organized under the Federal Home Loan Bank Act of 1932, as amended (the “FHLB Act”). Each FHLB has members in a specifically defined geographic district. The Bank’s defined geographic membership territory consists of the states of Illinois and Wisconsin. The Bank provides credit to its members principally in the form of advances and through the Mortgage Partnership Finance^® (“MPF”^®) Program¹, under which the Bank, in partnership with its members, provides funding for home mortgage loans. In addition, the Bank also invests in other Acquired Member Assets (“AMA”) such as MPF Shared Funding^® securities. AMA are assets acquired from or through FHLB members or housing associates by means of either a purchase or a funding transaction, subject to Finance Board regulations.

The accounting and financial reporting policies of the Bank conform to accounting principles generally accepted in the United States of America (“GAAP”) and prevailing industry practices for interim reporting. The unaudited financial statements prepared in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses. Actual results could differ from those estimates. In addition, certain amounts in the prior period have been reclassified to conform to the current presentation. In the opinion of management, all normal recurring adjustments have been included for a fair statement of this interim financial information. These unaudited financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2004.

Note 2 – Business Developments

Capital Stock Actions, Dividends and Amendment to the Written Agreement – On October 18, 2005, the Bank’s Board of Directors discontinued redemptions of voluntary stock for a period of time as permitted by the FHLB Act and the Finance Board regulations. The Bank also entered into an amendment to its Written Agreement with the Finance Board, which reduced the Bank’s minimum regulatory capital ratio from 5.1% to 4.5%. The amendment also requires the Bank to maintain minimum total regulatory capital stock of $3.978 billion which is the total amount of capital stock outstanding on October 18, 2005, including stock classified as mandatorily redeemable under Statement of Financial Accounting Standards No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”), plus the amount of the stock dividend approved based on the results of the third quarter, 2005. The minimum regulatory capital stock requirement was previously reported by the Bank to be $3.964 billion and was subsequently revised to $3.978 billion in order to include stock classified as mandatorily redeemable under SFAS 150. Under the terms of the amendment, the Bank has agreed to submit by December 15, 2005 a revised retained earnings and dividend policy and updated business plan strategies to the Finance Board for approval. See Note 7 – Capital for additional information on capital stock classified as mandatorily redeemable under SFAS 150.

The Board of Directors discontinued voluntary stock redemptions in part because net redemptions during the year had by October 17, 2005, reduced the Bank’s ratio of voluntary capital stock to regulatory capital ratio to 51%, which was 2% less than the amount expected by the end of the year under the Bank’s Business and Capital Management Plan for 2005-2007. For the nine months ended September 30, 2005, voluntary capital stock decreased by $404.7 million and from October 1 through October 17, 2005 decreased by another $44.3 million. With the reduction in the dividend rate from an average of 6.125% paid in 2004 to 3.75% to be paid in the fourth quarter of 2005 (see below), the Bank expected the redemption rate to accelerate even more in the remaining months of 2005.

Bank dividends are subject to the Bank’s financial policies and the Written Agreement, as amended requiring approval by the Finance Board’s Office of Supervision until the Bank completes the process of registering its capital stock under the

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

F-55

Securities Exchange Act of 1934, and until a revised retained earnings and dividend policy has been approved by the Finance Board. On October 18, 2005, the Board of Directors declared, with the approval of the Finance Board, a dividend on third quarter results equal to an annualized rate of 3.75%, which was paid to members in stock on November 15, 2005. When paid, stock dividends are voluntary stock and are not subject to redemption while the restriction on redemptions remains in place.

The Bank is undertaking various actions in order to address the capital concerns that led to the discontinuation of voluntary stock redemptions. The Bank is required to submit a revised retained earnings and dividend policy and updated business plan strategies to the Finance Board for approval no later than December 15, 2005. The Bank is also in the process of modifying its previously approved capital plan and will submit the revised plan to the Finance Board for approval.

Computer Software – The Bank assesses impairment of the capitalized amount of internal-use computer software at least annually and sooner if a triggering event occurs. On October 18, 2005 the Bank amended its Written Agreement. As a result of this change in the regulatory environment, the Bank re-evaluated its business opportunities and strategies as it related to the MPF Program. The Bank determined that certain internal-use computer software had become impaired due to management’s decision to abandon software being developed to support a new line of business related to servicing. An impairment write-down of $10.4 million was identified and will be recognized in the fourth quarter of 2005.

Publication of Combined Financial Reports and Securities and Exchange Commission (“SEC”) Registration Process – The Office of Finance has not yet published the 2004 third quarter combined Financial Report, 2004 full year combined Financial Report. In addition, the Office of Finance has announced that its board of directors decided to restate the FHLBs’ combined financial statements for the years ended December 31, 2001, 2002 and 2003, and subsequent interim periods. The Office of Finance has stated that the delays in publication and intended restatements were the result of regulatory and accounting matters at certain FHLBs, and that the Office of Finance board of directors may elect to delay publication of the FHLBs’ combined Financial Reports until all or substantially all of the FHLBs have completed their registration with the SEC.

The Bank and nine of the other FHLBs were unable to comply with the Finance Board’s August 29, 2005 deadline for registration of a class of their equity securities. Six of the other FHLBs have announced that they will restate prior period financial statements. It is uncertain at this time what effect, if any, the delays in publication, the delays in registration, or the intended restatements will have on the cost of FHLB debt, the timing of the issuance of new FHLB debt, or the demand for FHLB debt.

As part of the process to register its equity securities under the Securities Exchange Act of 1934, issues remain unresolved regarding the Bank’s accounting for certain derivative transactions under the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”. Resolving these issues should not affect the core businesses of the Bank nor its ability to serve its members. If the SEC staff were to determine that the Bank had incorrectly applied hedge accounting to certain transactions and further conclude that hedge accounting is inappropriate, the Bank may have to reverse the prior fair value changes of certain previously designated hedged items recorded in earnings. It is also possible that in connection with the SEC staff’s review, the Bank may be required to make other changes to its accounting policies and procedures. The Bank does not expect that any of these open issues will have a material impact on the Bank’s financial statements.

Hurricanes Katrina and Rita – Hurricanes Katrina and Rita (the “Hurricanes”) struck Louisiana, Mississippi, Alabama, Texas and surrounding areas during the third quarter, 2005. As of September 30, 2005, the Bank held approximately $500 million of conventional MPF Loans secured by properties located in the Individual Assistance and Public Assistance areas as designated by the Federal Emergency Management Agency (“FEMA”). “MPF Loans” are mortgage loans that are either funded by the Bank through, or purchased from, participating financial institutions (“PFIs”) or purchased as participations from other FHLBs. The Bank is in the process of assessing its potential loss exposure related to the Hurricanes, but does not believe that the loss exposure will have a material impact on the Bank’s financial statements. The Bank is working with its master servicing vendor to obtain information from PFIs in order to develop reasonable loss estimates.

In connection with the sale or funding of MPF Loans and the PFI’s servicing responsibilities, the PFI makes representations to the Bank that hazard insurance and flood insurance (for those mortgaged properties located in a FEMA designated Special Flood Hazard Area) are in place. In the event that required insurance is not in place, the PFI is required to repurchase the related MPF Loan. If the required insurance does not fully cover the damage from the Hurricanes, including related flood damage, losses may be allocated to the Bank’s First Loss Account (“FLA”) after application of the PFI’s Credit Enhancement (“CE Amount”). The Bank may also experience losses if the PFI fails to fulfill its repurchase obligation or pay the required CE Amount.

In addition, even if the mortgaged property is in good repair, property values in these states may be adversely affected by the Hurricanes. Mortgaged properties may have experienced environmental hazards related to mold and to gas and oil leaks. Mortgagors in areas affected by the hurricane may also be affected by any decline in the economic environment.

During the third quarter of 2005, the Bank announced a special disaster relief provision to lessen the hardship for victims of Hurricane Katrina. The Bank, as the MPF Provider of the MPF Program, has authorized PFIs to provide special relief to

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borrowers of conventional MPF Loans affected by Hurricane Katrina. As part of this special relief, a new loan modification process has been authorized for qualifying MPF Loans in the major disaster areas as designated by FEMA. These relief provisions authorize PFIs to suspend mortgage payments for the months of September, October and November, 2005 on those MPF Bank-owned loans whose borrowers qualify for individual assistance from FEMA. During this three month period, PFIs are expected to complete an assessment of each delinquent mortgage loan in the affected areas to determine the appropriate action that best fits the borrower’s circumstances (borrowers whose loans were delinquent prior to Katrina are not eligible for a loan modification workout unless they qualify for individual assistance from FEMA). In addition to loss mitigation actions currently authorized in the MPF Servicing Guide, the Bank granted the following loan modification approval authority to all PFIs of the Federal Home Loan Bank of Dallas with loans in the qualified areas as stated above: (i) loan modification to capitalize delinquent interest over the remaining term of the loan, or (ii) loan modification to capitalize delinquent interest and extend the term of the loan. All other modification requests will be handled by the PFI on a case by case basis with approval required by the MPF Program Master Servicer, the MPF Provider and the MPF Bank.

Accounting and Reporting Developments

FSP FAS 115-1 – On November 3, 2005, The Financial Accounting Standards Board (“FASB”) published FASB Staff Position (“FSP”) FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The FSP addresses the determination of when an investment is considered impaired, whether the impairment is other than temporary and the measurement of impairment loss. The FSP indicates that existing FASB and SEC guidance should be used to determine whether impairment is other-than-temporary. The FSP clarifies that an investor should recognize impairment when impairment is other than temporary even if a decision to sell a specific investment has not been made and provides impairment guidance on cost-method investments. The FSP also requires quantitative and qualitative disclosures related to unrealized losses that support why such unrealized losses are not other than temporary. The Bank does not anticipate the FSP will have a material effect on its financial statements.

DIG Issue B38 and DIG Issue B39 – On June 30, 2005, the FASB issued Derivatives Implementation Group (“DIG”) Issue B38, “Evaluation of Net Settlement with Respect to the Settlement of a Debt Instrument through Exercise of an Embedded Put Option or Call Option” and DIG Issue B39, “Application of Paragraph 13(b) to Call Options That Are Exercisable Only by the Debtor.” DIG Issue B38 addresses an application issue when applying SFAS 133, paragraph 12(c) to a put option or call option (including a prepayment option) embedded in a debt instrument. DIG Issue B39 addresses the conditions in SFAS 133, paragraph 13(b) as they relate to whether an embedded call option in a hybrid instrument containing a host contract is clearly and closely related to the host contract if the right to accelerate the settlement of debt is exercisable only by the debtor. DIG Issues B38 and B39 become effective for periods beginning after December 15, 2005. The Bank does not expect DIG Issues B38 and B39 to have a material impact on its results of operations or financial condition at the time of adoption.

SFAS 154 – On May 5, 2005 the FASB issued SFAS No. 154 “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 applies to all voluntary changes in accounting principle. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change, the cumulative effect of changing to the new accounting principle. In general, SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle.

Retrospective application is the application of a different accounting principle to prior accounting 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. The Bank does not expect this statement to have a material impact on its financial condition or results of operations.

FIN 47 – In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations – An Interpretation of FASB Statement No. 143”, (“FIN 47”) which clarifies the term “conditional asset retirement obligation” used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” and specifically when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Bank is required to adopt FIN 47 no later than December 31, 2005. The Bank does not expect the adoption of FIN 47 to have a material impact on its financial condition or results of operations.

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Note 3 – Investment Securities

For additional information concerning the Bank’s investment securities refer to Notes 5, 6 and 7 in the December 31, 2004 Financial Statements and Notes.

Trading Securities – Trading securities as of September 30, 2005 and December 31, 2004 were as follows:

(Dollars in thousands)	September 30, 2005		December 31, 2004
Government-sponsored enterprises1	$	1,127,044	$	585,579
Consolidated obligations of other FHLBs		34,090		71,731
Mortgage-backed securities:
Government-sponsored enterprises1		43,031		52,711
Government-guaranteed		8,854		11,367
Privately issued MBS		31,871		38,669
Total trading securities	$	1,244,890	$	760,057

¹ Securities issued by government sponsored enterprises are not guaranteed by the U.S. federal government.

The net (loss) gain on trading securities for the nine months ended September 30, 2005 and 2004 were as follows:

(Dollars in thousands)	For the nine months ended September 30,
	2005			2004
Net realized (loss) gain	$	(563	)	$	12,550
Net unrealized gain (loss)		(20,300	)		(33,938	)
Net (loss) gain on trading securities	$	(20,863	)	$	(21,388	)

Available-for-Sale Securities – The amortized cost and estimated fair value of available-for-sale securities as of September 30, 2005 and December 31, 2004 were as follows:

	September 30, 2005									December 31, 2004
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Government-sponsored enterprises1	$	1,038,523	$	1,099	$	(4,823	)	$	1,034,799	$	901,046	$	524	$	(5,332	)	$	896,238
Mortgage-backed securities:
Government-sponsored enterprises1		84,457		—		(3,468	)		80,989		93,560		551		(2,739	)		91,372
Privately issued MBS		364,240		500		—			364,740		541,783		339		(44	)		542,078
Total available-for-sale securities	$	1,487,220	$	1,599	$	(8,291	)	$	1,480,528	$	1,536,389	$	1,414	$	(8,115	)	$	1,529,688

¹ Securities issued by government sponsored enterprises are not guaranteed by the U.S. federal government.

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Gains and Losses – Realized gains and losses from available-for-sale securities for the nine months ended September 30, 2005 and 2004 were as follows:

	For the nine months ended September 30,
(Dollars in thousands)	2005			2004
Realized gain	$	1,083		$	16,115
Realized loss		(2,926	)		(37,195	)
Net realized (loss) gain from sale of available-for-sale securities	$	(1,843	)	$	(21,080	)

Held-to-Maturity Securities – Held-to-maturity securities as of September 30, 2005 and December 31, 2004 were as follows:

	September 30, 2005									December 31, 2004
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Commercial paper	$	449,405	$	—	$	(83	)	$	449,322	$	699,722	$	—	$	(62	)	$	699,660
Government-sponsored enterprises1		149,786		—		(714	)		149,072		249,570		—		(1,553	)		248,017
State or local housing agency obligations		82,317		672		(21	)		82,968		100,690		902		(137	)		101,455
Other 2		319,665		339		(197	)		319,807		743,193		1,668		(318	)		744,543
		1,001,173		1,011		(1,015	)		1,001,169		1,793,175		2,570		(2,070	)		1,793,675
Mortgage-backed securities:
Government-sponsored enterprises1		2,669,771		4,196		(59,341	)		2,614,626		2,958,672		21,056		(33,095	)		2,946,633
Government-guaranteed		62,316		496		(51	)		62,761		84,077		1,418		—			85,495
MPF Shared Funding ®		436,600		—		(17,933	)		418,667		512,983		—		(16,164	)		496,819
Privately issued MBS		767,451		12,351		(493	)		779,309		1,212,254		23,364		(160	)		1,235,458
Total held-to-maturity securities	$	4,937,311	$	18,054	$	(78,833	)	$	4,876,532	$	6,561,161	$	48,408	$	(51,489	)	$	6,558,080

¹ Securities issued by government sponsored enterprises are not guaranteed by the U.S. federal government.

² Other includes investment securities guaranteed by the Small Business Administration.

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Note 4 – Advances

For additional information concerning advances refer to Note 8 – Advances in the December 31, 2004 Annual Financial Statements and Notes.

Redemption Terms – At September 30, 2005 and December 31, 2004, the Bank had advances outstanding to members, at interest rates ranging from 1.53% to 8.47% and 1.20% to 8.47%, respectively, as summarized below.

(Dollars in thousands)	September 30, 2005				December 31, 2004
Contractual Maturity	Amount		Weighted Average Interest Rate		Amount		Weighted Average Interest Rate
2005	$	3,175,192	3.67	%	$	6,943,773	2.95	%
2006		6,735,215	3.16	%		5,732,457	2.88	%
2007		4,668,491	3.74	%		3,427,577	3.21	%
2008		3,228,011	4.22	%		2,589,505	3.92	%
2009		1,439,716	3.98	%		1,479,162	3.74	%
2010		2,608,922	3.68	%		2,048,603	3.18	%
Thereafter		2,363,286	4.42	%		1,747,527	4.72	%
Total par value		24,218,833	3.71	%		23,968,604	3.27	%
SFAS 133 hedging adjustments and discount on AHP advances		14,182				222,954
Total Advances	$	24,233,015			$	24,191,558

Credit Risk – Management of the Bank has policies and procedures in place to appropriately manage credit risk and the Bank has never experienced a credit loss on an advance to a member. Accordingly, the Bank has not provided any allowances for losses on advances.

The Bank’s advances are concentrated with commercial bank and thrift members. As of both September 30, 2005 and December 31, 2004, the Bank had outstanding advances at par of $3.2 billion to one member institution (LaSalle Bank N.A.). This represented 13.0% and 13.2% of total outstanding advances at September 30, 2005 and December 31, 2004, respectively. The interest income from advances to this member was $62.5 million and $70.5 million for the nine months ended September 30, 2005 and September 30, 2004, respectively. The Bank held sufficient collateral to cover the par value of these advances, and the Bank does not expect to incur any credit losses. No other member holds more than 10% of advances at September 30, 2005 or December 31, 2004.

Note 5 – Mortgage Loans Held in Portfolio

For additional information concerning mortgage loans held in portfolio refer to Note 10 – Mortgage Loans Held in Portfolio in the December 31, 2004 Annual Financial Statements and Notes.

The MPF Program involves investment by the Bank in MPF Loans which are either funded by the Bank through or purchased from its members or members of another FHLB or purchased as participations from other FHLBs. Under the MPF 100 product, the Bank table funds MPF Loans, which means that the Bank provides the funds, through the PFI as its agent, to make the loan to the borrower. The PFI performs all the traditional retail loan origination functions under this and all MPF products. For the MPF 100 product, the Bank is considered the originator of the loan for accounting purposes since the PFI is acting as its agent when originating the loan. This differs from the other MPF products in which the Bank purchases loans that have already been closed by the PFI with its own funds.

The MPF Loans are held-for-investment under the MPF Program whereby the PFIs create, service and credit enhance the residential mortgage loans owned by the Bank.

The Bank pays the member a credit enhancement fee for assuming its portion of the credit risk in the MPF Loans. These fees are paid monthly and are determined based on the remaining unpaid principal balance of the MPF Loans. The required credit enhancement obligation amount may vary depending on the MPF product alternatives selected. Credit enhancement fees, payable to a member as compensation for assuming credit risk, are recorded as an offset to mortgage loan interest income when paid by the Bank. The Bank also pays performance credit enhancement fees which are based on actual performance of the mortgage loans. In general, performance based fees are net of cumulative unrecovered losses paid by the Bank. To the extent that losses in the current month exceed performance credit enhancement fees accrued, the remaining losses are recovered from future performance credit enhancement fees payable to the member. The Bank recorded total credit enhancement fees of $35,396,000 and $38,441,000 for the nine months ended September 30, 2005 and 2004, respectively.

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The following table presents information as of September 30, 2005 and December 31, 2004 on MPF Loans:

(Dollars in thousands)	September 30, 2005			December 31, 2004
Mortgages:
Fixed medium term1 single-family mortgages	$	15,416,879		$	17,129,505
Fixed long term2 single-family mortgages		27,565,879			29,448,280
Unamortized premiums, net		234,429			282,427
Plus: deferred loan cost, net		52,016			61,535
Total mortgage loans		43,269,203			46,921,747
Loan commitment basis adjustment		(12,519	)		(15,072	)
SFAS 133 hedging adjustments		(20,585	)		18,755
Total mortgage loans held in portfolio	$	43,236,099		$	46,925,430

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

² Long term is defined as a term of greater than 15 years.

The par value of outstanding MPF Loans at September 30, 2005 and December 31, 2004, was comprised of Federal Housing Administration insured and Veteran’s Administration guaranteed government loans totaling $6.4 billion and $6.8 billion and conventional loans totaling $36.6 billion and $39.8 billion, respectively.

The allowance for loan losses on mortgage loans was as follows:

(Dollars in thousands)	For the nine months ended September 30,
	2005			2004
Allowance for credit losses:
Balance, beginning of year	$	4,879		$	5,459
Chargeoffs		(1,074	)		(747	)
Recoveries		295			215
Net (chargeoffs)		(779	)		(532	)
Balance at end of period	$	4,100		$	4,927

MPF Loans are placed on non-accrual status when it is determined that the payment of interest or principal is doubtful of collection or when interest or principal is past due for 90 days or more, except when the MPF Loan is well secured and in the process of collection. When an MPF Loan is placed on non-accrual status, accrued but uncollected interest and the amortization of agent fees, premiums and discounts are reversed against interest income. Subsequent accruals and amortization are discontinued. The Bank records cash payments received on non-accrual MPF Loans as a reduction of principal with any remainder reported in interest income. At September 30, 2005 and December 31, 2004, the Bank had $75.1 million and $71.2 million of MPF Loans on non-accrual. At September 30, 2005 and December 31, 2004, the Bank had $14.5 million and $18.3 million in MPF Loans that have been foreclosed but not yet liquidated. Renegotiated MPF Loans are those for which concessions, such as the deferral of interest or principal payments, have been granted as a result of deterioration in the borrowers’ financial condition. MPF Loans may be renegotiated by the PFI acting in its role of servicer in accordance with the servicing agreement. The PFI servicer also may take physical possession of the property upon foreclosure or receipt of a deed in lieu of foreclosure.

MPF Loans that are on non-accrual status and that are viewed as collateral dependent loans are considered impaired. Impaired MPF Loans are viewed as collateral-dependent loans when repayment is expected to be provided solely by the sale of the underlying property and there are no other available and reliable sources of repayment. An MPF Loan is considered collateral dependent when the debtor has filed for bankruptcy, an in-substance foreclosure has occurred or foreclosure proceedings have been initiated. Impaired MPF Loans are written down to the lower of cost or collateral value, less disposal costs. In the case where an in-substance foreclosure has occurred, MPF Loans are reclassified to other assets.

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(Dollars in thousands)	September 30, 2005		December 31, 2004
Impaired MPF Loans1	$	41,154	$	40,964
Total Impaired Loans	$	41,154	$	40,964
Allowance for Impaired Loans under SFAS 114	$	—	$	—

¹ When the collateral value less estimated selling costs exceeds the recorded investment in the MPF Loan, then the MPF Loan does not require an allowance under SFAS 114 (e.g., if the MPF Loan has been charged down to the recorded investment in the MPF Loan).

	For the nine months ended September 30,
(Dollars in thousands)	2005		2004
Average balance of impaired loans	$	41,059	$	36,131
Interest income recognized on impaired loans	$	1,813	$	1,774

Note 6 – Consolidated Obligations

For additional information concerning consolidated obligations refer to Note 13 – Consolidated Obligations in the December 31, 2004 Annual Financial Statements and Notes.

Consolidated obligations are the joint and several obligations of the FHLBs and consist of consolidated bonds and discount notes. The FHLBs issue consolidated obligations through the Office of Finance as their agent. Consolidated bonds are issued primarily to raise intermediate and long term funds for the FHLBs. Usually, the maturities of consolidated bonds range from one year to fifteen years, but they are not subject to any statutory or regulatory limits on maturity. Consolidated discount notes are issued primarily to raise short term funds. Discount notes are issued at less than their face amount and are redeemed at par value when they mature.

The Finance Board, at its discretion, may require a FHLB to make principal or interest payments due from another FHLB on any consolidated obligation. To the extent that a FHLB makes a payment on a consolidated obligation on behalf of another FHLB, the paying FHLB would be entitled to reimbursement from the non-complying FHLB. If the Finance Board determines that the non-complying FHLB is unable to satisfy its direct obligations (as primary obligor), then the Finance Board may allocate the outstanding liabilities among the remaining FHLBs on a pro rata basis in proportion to each FHLB’s participation in all consolidated obligations outstanding, or on any other basis the Finance Board may prescribe, even in the absence of a default event by the primary obligor. The par value of outstanding consolidated obligation bonds and discount notes for the FHLBs was $920.4 billion at September 30, 2005 and $869.2 billion at December 31, 2004.

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Interest Rate Payment Terms – Interest rate payment terms for consolidated bonds at September 30, 2005 and December 31, 2004 are detailed in the following table.

(Dollars in thousands)	September 30, 2005		December 31, 2004
Par amount of consolidated bonds:
Fixed Rate1	$	59,025,225	$	59,501,465
Variable rate		675,500		625,500
Zero coupon		2,050,000		2,430,000
Step-up		160,000		220,000
Inverse floating rate		50,000		50,000
Comparative-index		41,550		41,550
Total par value	$	62,002,275	$	62,868,515

¹ Fixed rate consolidated obligation bonds include non-callable bonds and bonds that are callable at the option of the Bank. At September 30, 2005 and December 31, 2004, the Bank had callable bonds, at par, of $22.7 billion and $23.4 billion, respectively.

Redemption Terms – The following table is a summary of the Bank’s participation in consolidated obligation bonds at September 30, 2005 and December 31, 2004 by year of contractual maturity.

(Dollars in thousands)	September 30, 2005					December 31, 2004
Year of Maturity	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
2005	$	2,475,200		2.51	%	$	11,446,710		2.96	%
2006		11,602,200		2.78	%		11,059,200		2.73	%
2007		9,758,605		3.63	%		7,568,915		3.49	%
2008		8,939,000		3.71	%		6,512,000		3.50	%
2009		5,056,650		4.17	%		4,071,470		4.11	%
2010		6,636,000		4.56	%		4,235,000		4.92	%
Thereafter		17,534,620		4.51	%		17,975,220		4.48	%
Total par value		62,002,275		3.83	%		62,868,515		3.68	%
Bond premiums		58,592					68,848
Bond discounts		(1,511,583	)				(1,860,386	)
SFAS 133 hedging adjustments		(371,058	)				(201,437	)
Total consolidated obligation bonds	$	60,178,226				$	60,875,540

The following table is a summary of the Bank’s participation in consolidated obligation discount notes at September 30, 2005 and December 31, 2004.

	September 30, 2005						December 31, 2004
(Dollars in thousands)	Carrying Value		Par Value		Weighted Average Interest Rate		Carrying Value		Par Value		Weighted Average Interest Rate
Discount notes	$	15,180,067	$	15,243,731	3.47	%	$	16,871,736	$	16,942,524	2.08	%

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Note 7 – Capital

The following table summarizes the Bank’s regulatory capital requirements as a percentage of the Bank’s total assets. Regulatory capital is defined as capital stock (including capital stock classified as mandatorily redeemable under SFAS 150) and retained earnings.

(Dollars in thousands)	Regulatory Capital Ratio In Effect (1)		Regulatory Capital Requirement In Effect		Actual		Standard Regulatory Capital Requirement (2)
Total Capital
October 18, 2005	4.5	%	$	3,728,483	$	4,464,688	$	3,314,207
September 30, 2005	5.1	%		4,235,771		4,421,567		3,322,174
December 31, 2004	5.1	%		4,371,140		4,792,793		3,428,345
December 31, 2003	4.0	%		3,477,679		4,542,092		3,477,679

¹ The regulatory capital ratio required by Finance Board regulations for all FHLBs is 4.0% for all periods presented. However, effective June 30, 2004, the Bank had been operating under a Written Agreement that required a 5.1% regulatory capital ratio. On October 18, 2005, the Written Agreement was amended to reduce the regulatory capital ratio to 4.5% and added a required minimum total regulatory capital stock amount of $3.978 billion as further described below. The minimum dollar amount requirement is currently more restrictive than the regulatory capital ratio requirement in the table above and takes precedence until such a time that the Bank’s assets were to increase to a point where the regulatory capital ratio would become more restrictive.

² The standard regulatory capital requirement was calculated assuming the regulatory capital ratio was 4.0%.

For additional information concerning capital reporting refer to Note 14 – Capital in the December 31, 2004 Annual Financial Statements and Notes.

On October 18, 2005 the Finance Board amended the Written Agreement with the Bank reducing the Bank’s required regulatory capital ratio to 4.5% from 5.1%. In addition, until amended or terminated, the amendment also requires the Bank to maintain another separate measure of minimum total regulatory capital stock of $3.978 billion defined as the total amount of capital stock outstanding on October 18, 2005, including stock classified as mandatorily redeemable under SFAS 150, plus the amount of the stock dividend approved based on the results of the third quarter, 2005. Additionally, Bank stock may not be redeemed, including in connection with a membership withdrawal, if redemptions would cause the Bank to fail to meet any of its minimum capital requirements. Also, on October 18, 2005, the Bank’s Board of Directors discontinued the redemption of voluntary capital stock for a period of time in accordance with the FHLB Act and Finance Board regulations.

At September 30, 2005 and December 31, 2004, Bank members held 23.4 million and 27.4 million shares, respectively, of voluntary capital stock. At September 30, 2005 and December 31, 2004, these holdings represented 53% and 57%, respectively, of the Bank’s regulatory capital.

Pursuant to the Written Agreement prior to the amendment, the Bank agreed to maintain a regulatory capital ratio of no less than 5.1% beginning June 30, 2004. The Bank’s regulatory capital ratio on September 30, 2005 and December 31, 2004 was 5.3% and 5.6%, respectively.

At September 30, 2005 and December 31, 2004, the Bank had $13.7 million and $11.3 million in capital stock subject to mandatory redemption from six current members and five former members. This amount has been classified as a liability (“mandatorily redeemable capital stock”) in the statements of condition.

In accordance with SFAS 150, the Bank reclassifies capital stock subject to redemption from equity to a liability once a member gives notice of intent to withdraw from membership or attains non-member status by merger or acquisition, charter termination, or involuntary termination from membership. In each case such shares of capital stock meet the definition of a mandatorily redeemable financial instrument. The restriction on paying out voluntary capital stock or other provisions that may delay or accelerate the timing of a mandatory redemption does not affect the classification of mandatorily redeemable capital stock as a liability. Capital stock is reclassified to a liability (mandatorily redeemable capital stock) 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 statements of income.

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The following table summarizes the effects of mandatorily redeemable capital stock:

	For the nine months ended September 30, 2005					For the nine months ended September 30, 2004
(Dollars in thousands)	Amount			Number of Members		Amount			Number of Members
Mandatorily redeemable capital stock - beginning balance	$	11,259		5		$	33,588		6
Redemption requests:
Acquisition related		148,348		7			1,408	*	—
Withdrawals		121		1			698		1
Redemption distributions:
Acquisition related		(140,557	)	(3	)		(1,396	)*	—
Withdrawals		(5,437	)	(4	)		—		—
Mandatorily redeemable capital stock - ending balance	$	13,734		6		$	34,298		7
Earnings impact from reclassification of dividends to interest expense	$	733				$	1,403

* Includes partial pay downs or redemption requests

Subsequent to the Bank announcing its discontinuance of voluntary capital stock redemptions and through October 31, 2005 the Bank received membership withdrawal notices and related redemption requests from two members totaling $201.6 million. During the period from October 1, 2005 through October 31, 2005, no payments were made based on redemption requests previously classified as mandatorily redeemable capital stock. Redemption requests are honored subject to the Bank maintaining its minimum regulatory capital requirements. The Bank also considers its liquidity requirements in conjunction with redemptions.

Note 8 – Derivative Financial Instruments

For additional information concerning derivative financial instruments refer to Note 16 – Derivative Financial Instruments in the December 31, 2004 Annual Financial Statements and Notes.

In connection with the Bank’s interest rate risk management program, the Bank uses various derivative financial instruments, including interest rate swaps, swaptions, interest rate cap and floor agreements, calls, puts, futures and forward contracts (collectively, derivative financial instruments) to manage its exposure to changes in interest rates or to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives. The Bank uses derivative financial instruments as part of its hedging activities in one of two ways: (1) by designating them as

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either a fair value or cash flow hedge or (2) by designating them as a non-SFAS 133 economic hedge as part of its asset-liability management activities.

For the nine month periods ended September 30, 2005 and September 30, 2004, no amount was reclassified into earnings as a result of the discontinuance of cash flow hedges because it became probable that a forecasted transaction would not occur by the end of the originally specified time period or within a two month period thereafter. Further, there was no amount reclassified into earnings as a result of firm commitments no longer qualifying as fair value hedges for the nine months ended September 30, 2005 or September 30, 2004. Over the next twelve months it is expected that $12.9 million recorded in other comprehensive income on September 30, 2005 will be recognized in earnings. The length of time over which the Bank is hedging its exposure to the variability in future cash flows is from overnight to eight years.

The following table summarizes derivative activity in which the Bank was an intermediary for its members.

	For the nine months ended September 30,
Dollars in thousands	2005		2004
Beginning Notional	$	254,734	$	285,241
Additions		50,000		19,259
Maturities/Terminations		129,284		106
Ending Notional	$	175,450	$	304,394

The following table summarizes the change in fair value related to derivative activity in which the Bank was an intermediary for its members.

	For the nine months ended September 30,
Dollars in thousands	2005			2004
Beginning Fair Value, net	$	285		$	441
Change in Derivative Asset		(81,827	)		10,484
Change in Derivative Liability		81,748			(10,594	)
Ending Fair Value, net	$	206		$	331

The following table summarizes the results of the Bank’s hedging activities.

	For the nine months ended September 30,
(Dollars in thousands)	2005			2004
Gain (loss) related to fair value hedge ineffectiveness	$	(16,085	)	$	(71,192	)
Gain (loss) on economic hedges		(1,042	)		(75,290	)
Gain (loss) related to cash flow hedge ineffectiveness		—			41,105
Net gain (loss) on derivatives and hedging activities	$	(17,127	)	$	(105,377	)

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The following table represents outstanding notional balances and estimated fair values of derivatives outstanding, at September 30, 2005 and December 31, 2004:

	September 30, 2005					December 31, 2004
(Dollars in thousands)	Notional		Estimated Fair Value			Notional		Estimated Fair Value
Interest rate Swaps:
Fair Value	$	26,310,580	$	(161,325	)	$	23,444,454	$	(237,183	)
Economic		7,254,321		(16,199	)		2,015,117		(37,105	)
Total		33,564,901		(177,524	)		25,459,571		(274,288	)
Interest rate Swaptions:
Fair Value		3,301,000		51,000			4,000,000		30,604
Economic		4,765,000		19,915			7,249,000		37,524
Total		8,066,000		70,915			11,249,000		68,128
Interest rate Caps/Floors:
Cash Flow		3,300,500		131,740			3,400,500		153,204
Economic		8,000		7			8,000		8
Total		3,308,500		131,747			3,408,500		153,212
Interest rate Futures/Forwards:
Fair Value		2,107,000		5,208			5,578,000		(3,240	)
Economic		—		—			150,000		(26	)
Total		2,107,000		5,208			5,728,000		(3,266	)
Interest rate Forward Settlement Agreements:
Cash Flow		—		—			300,000		(4,068	)
Mortgage Delivery Commitments:
Cash Flow		117,937		269			98,481		751
Other
Deferred Fees		—		(689	)		—		—
Total	$	47,164,338	$	29,926		$	46,243,552	$	(59,531	)
Total derivatives excluding accrued interest			$	29,926				$	(59,531	)
Accrued interest (payable) receivable at end of period				19,654					13,777
Net derivative balance at end of period				49,580					(45,754	)
Net derivative asset balance at end of period				192,253					153,496
Net derivative liability balance at end of period				(142,673	)				(199,250	)
Net derivative balance at end of period			$	49,580				$	(45,754	)

The amounts potentially subject to loss due to credit risks are the fair value amounts of the derivatives, and not the notional amounts. Maximum credit risk is defined as the estimated cost of replacement for favorable interest rate swaps, forward agreements, mandatory delivery contracts for mortgage loans, and purchased caps and floors in the event of counterparty default and the related collateral, if any, proved to be of no value to the Bank. Using this definition the Bank’s maximum credit risk was approximately $192.3 million and $153.5 million at September 30, 2005 and December 31, 2004, respectively, including $19.7 million and $13.8 million of net accrued interest receivables, respectively. Accrued interest receivables and payables and legal

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rights to offset assets and liabilities by a counterparty, in which amounts recognized for individual contracts may be offset against amounts recognized for other contracts, are considered in determining the maximum credit risk. The Bank held cash and securities with a market value of approximately $192.3 million and $161.0 million as collateral for derivative financial instruments as of September 30, 2005 and December 31, 2004, respectively. Collateral with respect to derivative financial instruments with member institutions includes collateral assigned to the Bank, as evidenced by a written security agreement.

A significant portion of the Bank’s derivative financial instruments are transacted with major banks and broker-dealers, with no single institution dominating such transactions.

Note 9 – Segment Information

The Bank has two business segments (MPF Program and Traditional Member Finance). The products and services provided reflect the manner in which financial information is evaluated by management including the chief operating decision makers. The Bank’s reporting process measures the performance of the operating segments based on the structure of the Bank and is not necessarily comparable with similar information for any other financial institution. The Bank’s operating segments are defined by the products each provides. MPF Program income is derived primarily from the difference, or spread, between the yield on mortgage loans and the borrowing cost related to those mortgage loans. The Traditional Member Finance segment includes products such as advances, investments and deposits.

The following table sets forth the Bank’s financial performance by operating segment for the nine months ended September 30, 2005 and 2004.

	Nine months ended September 30, 2005									Nine months ended September 30, 2004
	MPF			Traditional Member Finance			Total			MPF			Traditional Member Finance		Total
Net interest income	$	299,924		$	86,885		$	386,809		$	448,556		$	99,709	$	548,265
Other income (loss)		(16,688	)		(12,116	)		(28,804	)		(114,696	)		15,904		(98,792	)
Other expense		51,465			37,648			89,113			51,793			31,162		82,955
Income before assessments		231,771			37,121			268,892			282,067			84,451		366,518
Affordable Housing Program		18,972			3,038			22,010			26,514			6,903		33,417
REFCORP		42,570			6,818			49,388			59,420			15,490		74,910
Total assessments		61,542			9,856			71,398			85,934			22,393		108,327
Income before cumulative effect of change in accounting principle	$	170,229		$	27,265		$	197,494		$	196,133		$	62,058	$	258,191
Cumulative effect of change in accounting principle		—			—			—			—			—		41,441
Net income	$	170,229		$	27,265		$	197,494		$	196,133		$	62,058	$	299,632
As of September 30,
Total mortgage loans, net1	$	43,226,870		$	5,129		$	43,231,999		$	47,940,752		$	2,006	$	47,942,758
Total assets		44,116,983			38,937,360			83,054,343			49,312,025			40,166,301		89,478,326

¹ Mortgage loans in the Traditional Member Finance segment include the Native American Mortgage Purchase Program HUD Section 184 loans. These loans are fully guaranteed by the U.S. Department of Housing and Urban Development, in the event of default by the homeowner.

Note 10 – Estimated Fair Values

For additional information concerning the estimated fair values information refer to Note 18 – Estimated Fair Values in the December 31, 2004 Annual Financial Statements and Notes.

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The following estimated fair value amounts have been determined by the Bank: first, by using available market information and, second, if market values were not available, using the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of September 30, 2005 and December 31, 2004. Although the Bank 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 Bank’s financial instruments, in certain cases, fair values are not subject to precise quantification or verification and their values may change as economic and market factors, and the evaluation of those factors, change. Therefore, estimated fair values may not be necessarily indicative of the amounts that would be realized in current market transactions. The fair value tables do not represent an estimate of overall market value of the Bank as a going concern, which would take into account future business opportunities.

The carrying values and estimated fair values of the Bank’s financial instruments at September 30, 2005 were as follows:

(Dollars in thousands)	Carrying Value			Net Unrecognized Gain or (Loss)			Estimated Fair Value
Financial Instrument
Financial Assets
Cash and due from banks	$	20,103		$	—		$	20,103
Securities purchased under agreements to resell		388,200			(5	)		388,195
Federal funds sold		6,907,000			—			6,907,000
Trading securities		1,244,890						1,244,890
Available-for-sale securities		1,480,528			—			1,480,528
Held-to-maturity securities		4,937,311			(60,779	)		4,876,532
Advances		24,233,015			(193,047	)		24,039,968
Mortgage loans held in portfolio, net		43,231,999			(471,974	)		42,760,025
Accrued interest receivable		310,147			—			310,147
Derivative assets		192,253			—			192,253
Total Financial Assets	$	82,945,446		$	(725,805	)	$	82,219,641
Financial Liabilities
Deposits	$	(1,307,516	)	$	14		$	(1,307,502	)
Securities sold under agreements to repurchase		(1,200,000	)		(105,330	)		(1,305,330	)
Consolidated obligations:
Discount notes		(15,180,067	)		5,394			(15,174,673	)
Bonds		(60,178,226	)		6,479			(60,171,747	)
Accrued interest payable		(630,120	)		—			(630,120	)
Derivative liabilities		(142,673	)		—			(142,673	)
Mandatorily redeemable capital stock		(13,734	)		—			(13,734	)
Total Financial Liabilities	$	(78,652,336	)	$	(93,443	)	$	(78,745,779	)
Commitments:
Loan commitments	$	—		$	104		$	104

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The carrying values and estimated fair values of the Bank’s financial instruments at December 31, 2004 were as follows:

(Dollars in thousands)	Carrying Value			Net Unrecognized Gain or (Loss)			Estimated Fair Value
Financial Instrument
Financial Assets
Cash and due from banks	$	20,530		$	—		$	20,530
Securities purchased under agreements to resell		389,840			(8	)		389,832
Federal funds sold		4,738,000			(84	)		4,737,916
Trading securities		760,057			—			760,057
Available-for-sale securities		1,529,688			—			1,529,688
Held-to-maturity securities		6,561,161			(3,081	)		6,558,080
Advances		24,191,558			(164,239	)		24,027,319
Mortgage loans held in portfolio, net		46,920,551			79,539			47,000,090
Accrued interest receivable		317,837			—			317,837
Derivative assets		153,496			—			153,496
Total Financial Assets	$	85,582,718		$	(87,873	)	$	85,494,845
Financial Liabilities
Deposits	$	(1,223,752	)	$	181		$	(1,223,571	)
Securities sold under agreements to repurchase		(1,200,000	)		(96,311	)		(1,296,311	)
Consolidated obligations:
Discount notes		(16,871,736	)		7,962			(16,863,774	)
Bonds		(60,875,540	)		(514,258	)		(61,389,798	)
Accrued interest payable		(513,993	)		—			(513,993	)
Derivative liabilities		(199,250	)		—			(199,250	)
Mandatorily redeemable capital stock		(11,259	)		—			(11,259	)
Total Financial Liabilities	$	(80,895,530	)	$	(602,426	)	$	(81,497,956	)
Commitments:
Loan commitments	$	—		$	339		$	339

Note 11 – Commitments and Contingencies

The Bank is not currently aware of any pending or threatened legal proceedings against it that could have a material effect on the Bank’s financial condition or results of operations and there have been no significant changes in commitments and contingencies since December 31, 2004. Refer to Note 19 – Commitments and Contingencies in the December 31, 2004 Annual Financial Statements and Notes for further discussion.

Note 12 – Transactions with Related Parties and Other FHLBs

Related Parties: The Bank is a cooperative whose member institutions own the capital stock of the Bank 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 Bank capital stock until the transactions mature or are paid off. 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 Bank, those transactions are subject to the same eligibility and credit criteria, as well as the same terms and conditions, as all other transactions. The Bank defines related parties as those members with capital stock outstanding in excess of 10% of total capital stock outstanding. At September 30, 2005 and December 31, 2004 the Bank had no member with capital stock outstanding in excess of 10% of the Bank’s total capital stock.

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Outlined below is the level of activity the Bank has with its members and their affiliates as reported in the statements of condition.

• The Bank acquired $1.5 billion and $3.5 billion in MPF Loans from or through member PFIs during the nine months ended September 30, 2005 and 2004, respectively.

• Investment securities issued by affiliates of our members may be purchased in the secondary market through a third party at arm’s length. Held-to-maturity securities issued by affiliates of our members at September 30, 2005 and December 31, 2004 were $12.8 million and $30.4 million, respectively.

• Derivative assets of members and their affiliates at September 30, 2005 and December 31, 2004 were $30.6 million and $24.3 million, respectively. Derivative liabilities of members and their affiliates at September 30, 2005 and December 31, 2004 were $72.6 million and $91.7 million, respectively.

• Interest and non-interest bearing deposits from members of $838.8 million and $885.2 million at September 30, 2005 and December 31, 2004, respectively are maintained by the Bank for its members primarily to facilitate settlement activities that are directly related to advances and mortgage loan purchases.

Other FHLBs: The Office of Finance may issue consolidated obligations through the Global Issuances Program. Historically, the Bank has been the primary obligor on any consolidated obligation debt issued under this program that is not taken by another FHLB. If another FHLB needs liquidity or additional funding, then the FHLB could obtain funding by issuing new consolidated obligations through the Office of Finance, or the Bank could transfer its consolidated obligations at fair value to the other FHLB. Due to the fact that the Bank is no longer the primary obligor of the transferred consolidated obligations, the Bank records the transfer as an extinguishment of debt with a corresponding gain or loss recorded in the statements of income. The Bank transferred $975.2 million and $3.8 billion of consolidated obligations to other FHLBs for the nine months ended September 30, 2005 and 2004, respectively. In addition, the Bank recognized a net realized gain from early extinguishment of debt transferred to other FHLBs of $4.6 million and $46.5 million for the nine months ended September 30, 2005 and 2004, respectively.

The Bank purchased $1.6 billion and $4.5 billion in participation interests from other FHLBs during the nine months ended September 30, 2005 and 2004, respectively. Participation interests purchased are recorded as a component of “Loans held in portfolio purchased from other FHLBs” on the statements of cash flows.

The Bank purchased A certificates from two MPF Shared Funding transactions in March 2003 and June 2003. The outstanding principal balance of the A Certificates held by the Bank in connection with these transactions is $436.6 million as of September 30, 2005.

As the MPF Provider, the Bank recorded $2.2 million and $812.1 thousand in the nine months ended September 30, 2005 and 2004, respectively. Transaction service fees are recorded in other income on the Bank’s statements of income.

In December 2002, the Bank agreed to begin purchasing MPF Loans directly from members of the FHLB of Dallas and pay the FHLB of Dallas as the Bank’s marketing agent. The FHLB of Dallas acts as marketing agent for the Bank and receives a marketing fee for its services rather than purchasing MPF Loans from its members. Direct acquisitions from another FHLB’s members are permitted under the AMA Regulation with the consent of that FHLB. The Bank incurred $305.5 thousand and $629.3 thousand during the nine months ended September 30, 2005 and 2004, respectively. Marketing fees paid to Dallas are recorded in mortgage loan expense on the Bank’s statements of income.

The Bank paid participation fees of $225.0 thousand to the FHLB of Des Moines for both nine month periods ended September 30, 2005 and 2004. Participation fees paid to the FHLB of Des Moines are recorded in mortgage loan expense on the Bank’s statements of income.

As of September 30, 2005 and December 31, 2004, the Bank held investment securities classified as trading in the Bank’s statements of condition of $34.1 million and $71.7 million related to consolidated obligations of other FHLBs which were purchased from 1995 to 1997. The FHLB of Dallas was the primary obligor of $28.0 million of consolidated obligations at September 30, 2005 and $41.7 million at December 31, 2004. The FHLB of San Francisco was the primary obligor for $6.1 million of consolidated obligations held at September 30, 2005 and $30.0 million held at December 31, 2004. The respective

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changes in fair value are recorded within net (loss) gain on trading securities on the statements of income and within Operating Activities as a net (increase) decrease on trading securities in the Bank’s statement of cash flows.

The Bank has receivables with other FHLBs, which were $1.1 million and $1.0 million at September 30, 2005 and December 31, 2004, respectively. Receivables are classified in other assets on the Bank’s statements of condition. Other FHLBs have deposits with the Bank that are separately reported on the Bank’s statements of condition.

Note 13 – Employee Retirement Plans

For additional information concerning employee retirement benefit plans refer to the Note 15 – Employee Retirement Plans in the December 31, 2004 Annual Financial Statements and Notes.

The following table shows the components of the net periodic pension cost for the Bank’s supplemental retirement and post retirement health benefit plan for the nine months ended September 30, 2005 and 2004.

	Supplemental Retirement Plan						Post-retirement Health Benefit
(Dollars in thousands)	2005			2004			2005		2004
Service Cost	$	312		$	287		$	561	$	378
Interest Cost		221			240			233		212
Amortization of unrecognized prior service cost		(19	)		(19	)		11		11
Amortization of unrecognized net loss		233			155			52		60
Net periodic benefit cost	$	747		$	663		$	857	$	661

In December 2003 the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act”) was enacted. The Medicare Act introduces a prescription drug benefit for individuals under Medicare (Medicare Part D), as well as a federal subsidy equal to 28% of the prescription drug claims for sponsors of retiree health care plans with drug benefits that are at least actuarially equivalent to those to be offered under Medicare Part D. In January 2004, the FASB issued FASB Staff Position (“FSP”) FAS 106-1 “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” which allowed for a one-time election to defer accounting for the Medicare Act until authoritative guidance on the federal subsidy is issued or sooner if a significant event occurs that calls for remeasurement of a plan’s assets and obligations. The Bank elected this one-time deferral. In May 2004, the FASB issued Staff Position (“FSP”) FAS 106-2 “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (FSP FAS 106-2), which supersedes FSP FAS 106-1, in response to the December 2003 enactment of the Medicare Act. FSP FAS 106-2 provides authoritative guidance on the accounting for the federal subsidy. Specifically, if a plan is determined to be actuarially equivalent to Medicare Part D, FSP FAS 106-2 requires plan sponsors to recognize and disclose the effect of the subsidy on the net periodic postretirement expense and the accumulated postretirement benefit obligation in their interim and annual financial statements for periods beginning after June 15, 2004.

Prior to the second quarter of 2005, the Bank’s actuarial consultant had not determined if the Bank’s program was actuarially equivalent to Medicare Part D and as such, the 2004 Bank’s net periodic postretirement obligation and expense did not include amounts for the subsidy. In May 2005, the Bank’s actuarial consultant reviewed the Bank’s program and concluded that the Bank’s post retirement program is actuarially equivalent to Medicare Part D. As a result of this determination, the Bank will apply for the subsidy under the Medicare Act and has included the subsidy in the accumulated postretirement benefit obligation and net post retirement benefit expense prospectively. The Bank expects the actual subsidy amounts to be immaterial.

The Bank participates in the Financial Institutions Thrift Plan (FITP), a defined contribution plan. The Bank’s contribution is equal to a percentage of participants’ compensation and a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. The Bank expects to contribute approximately $1.0 million for the year ended December 31, 2005 as compared to $0.7 million contributed for the year ended December 31, 2004.

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SIGNATURES

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

Federal Home Loan Bank of Chicago
/S/    J. MIKESELL THOMAS
By:	J. Mikesell Thomas
Title:	President and Chief Executive Officer

Date: December 14, 2005

S-1

EX-3.1

Exhibit 3.1

ORGANIZATION CERTIFICATE

THE FEDERAL HOME LOAN BANK OF

EVANSTON

The undersigned directors of the Federal Home Loan Bank of Evanston, 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 EVANSTON.

2. The location of the principal office of this Bank will be in the City of Evanston, State of Illinois, 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 Evanston, State of Illinois, in District Number Seven, 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 Seven as now defined is as follows:

The States of Illinois and Wisconsin.

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 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 Evanston, 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

IN WITNESS WHEREOF, We, the directors aforesaid, have hereunto set our hands this 11th day of October, 1932.

Name	/s/ S.F. Phillips
Address	Danville, Illinois
Name	/s/ Henry G. Zander
Address	110 So Dearborn St., Chicago, III.
Name	/s/ August F. Backus
Address	539 N. 31st St., Milwaukee, Wis.
Name	/s/ Alfred Mc Arthur
Address	720 North Michigan Ave., Chicago, III.
Name	/s/ B.F. Kuehlhorn
Address	2746 N. Tentmia Ave., Milwaukee, Wis.
Name	/s/ Fred W. Hermans
Address	5617 6th Ave., Kenosha, Wis.
Name	/s/ Maurice E. Vasen
Address	613 Main St., Quincy, III.
Name	/s/ Paul E. Stark
Address	124 W. Mifflin St., Madison Wis.
Name	/s/ Arthur G. Erdman
Address	5447 Agatits Ave., Chicago, III.
Name	/s/ John A. Sierocinski
Address	4228 W. 26th Street, Chicago, III.
Name	/s/ W.B. Whitlock
Address	800 Security Bldg, Springfield, III.

2

State of Illinois	} ss:
County of Cook

BE IT REMEMBERED, that on this Fourteenth day of October, 1932, before me, the undersigned, a Notary Public within and for the county and State aforesaid, came

S.F. Phllips, A.G. Erdman, Henry G. Zander, W.B. Whitlock, August F. Backus, Paul Stark, Alfred Mc Arthur, F.W. Hermans, M.E. Vasen, J.A. Sierocinski and B.F. Kuehlhorn, 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/ CAURLANCE M. WRIGHT

Notary Public.

[SEAL]

My commission expires July 21, 1933.

3

EX-3.2

Exhibit 3.2

BYLAWS OF THE

FEDERAL HOME LOAN BANK OF CHICAGO

[as restated and effective March 15, 2005]

ARTICLE I

OFFICES

Section 1. Principal Office:

The principal office of the Bank is to be located in the City of Chicago, County of Cook, State of Illinois or such location as the Board of Directors (“Board”) may legally designate.

Section 2. Other Offices:

In addition to its principal office, the Bank may maintain offices at any other place, or places, designated by the Board.

ARTICLE II

STOCKHOLDERS’ MEETING

Section 1. Annual Report and Meeting:

Following the close of each fiscal year the officers of the Bank shall issue an Annual Report which shall make a full report of the financial condition of the Bank, of its progress for the preceding year, and shall outline a program for the succeeding year. An annual meeting of the stockholders may be called by the Board. At any annual meeting, any appropriate business shall be transacted. The Board, or any officer thereof, may submit such matters to the stockholders’ meeting as they may deem to be appropriate. The stockholders may discuss all of the affairs of the Bank and the situation in the district in reference to home financing and make such recommendations, as to them may appear to be appropriate, to the Board or to the Federal Housing Finance Board.

Section 2. Special Meetings:

Special meetings of the stockholders for any purpose or purposes may be called by the President or by the Board, or by the stockholders of the Bank entitled to cast one-fourth of the votes eligible to be cast at any such meeting.

FEDERAL HOME LOAN BANK OF CHICAGO	ARTICLE II
BYLAWS	PAGE 2

Section 3. Time and Place of Meeting:

The Board may designate the time, day and place for any annual meeting or any special meeting called by the Board. If a special meeting is called by the President or the stockholders, the Board shall designate the time, day and place for such special meeting to be held not less than 15 days, nor more than 60 days after such request therefore. Should the Board 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.

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, by one of its officers or other duly authorized person, for the transaction of any business coming before the meeting.

ARTICLE III

DIRECTORS

Section 1. General Powers:

All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Bank shall be managed under the direction of the Board.

Section 2. Number and Qualifications:

The Board shall consist of such persons as shall be appointed or elected thereto in such manner and for such terms of office in accordance with the Federal Home Loan Bank Act, as amended.

FEDERAL HOME LOAN BANK OF CHICAGO	ARTICLE III
BYLAWS	PAGE 3

Section 3. Regular Meetings:

Stated meetings of the Board may be held at such time and place as shall be determined from time to time by the Board; provided, however, that such meetings shall be held at least quarterly. Stated meetings may be held without notice thereof, or the Board may direct the giving of five days’ notice of regular meetings to each director.

Section 4. Special Meetings:

Special meetings of the Board may be called by its Chairman or the President of the Bank on at least five days’ written notice or three days’ facsimile or telephonic notice to each director, and shall be called upon like notice on the written request of three directors stating the reasons therefore. Whenever the person calling a special meeting shall determine that, in the interests of time and economy it is desirable, the special meeting shall be conducted by long distance conference telephone at which all members of the Board attending the meeting are able to hear and be heard by all other persons so participating. The notice of such special meetings shall stipulate the time and place of such meetings, and shall contain a statement of the purpose or purposes of such meetings. Such meetings may be held at any time and place without previous notice if all of the directors are in attendance, or notice may be waived by any director.

Section 5. Quorum:

At any regular or special meeting of the Board, a majority of the directors holding office shall constitute a quorum for the transaction of business, but a smaller number may adjourn from time to time until a quorum is present. A majority of the directors present at any meeting, a quorum being present, shall decide questions submitted for decision.

Section 6. Officers of the Board:

The officers of the Board shall be a Chairman and a Vice Chairman, elected by a majority of the Board from among the directors, and a Corporate Secretary. The Corporate Secretary of the Bank or, in that person’s absence, the assistant secretary or such other officer as may be so designated by the Board, shall be the secretary of the Board and shall also act as secretary to the committees of the Board. The officers shall have such duties as are usually incident to their respective offices and such as may be assigned to them by the Board. The Chairman, or in his absence the Vice Chairman, or in the absence of both of these officers, the President of the Bank, shall preside at all meetings of the stockholders.

Section 7. Order of Business:

At all meetings of the Board, business shall be transacted in such order as, from time to time, the Board may determine. The Chairman of the Board, or in his absence the Vice Chairman, or in the absence of both of these officers, a chairman pro tempore selected by the Board shall preside. Robert’s Rules of Order Revised shall govern the conduct of business except where inconsistent with these Bylaws.

FEDERAL HOME LOAN BANK OF CHICAGO	ARTICLE III
BYLAWS	PAGE 4

Section 8. Committees:

In addition to the Executive & Governance and Audit Committees, which are governed, respectively, by Article IV and Section 9 of this Article of these Bylaws, the Board may delegate, subject to such conditions as the Board may determine, from time to time to suitable committees on an ad hoc or standing basis any duties of the Board and such committees shall report to the Board when and as required; provided, however that the following duties of the Board may not be delegated to a committee: (1) approval of annual business plan and budget; (2) declaration of dividends; (3) approval of compensation of directors or the President; (4) actions (to the extent permitted by law) regarding the merger, sale or dissolution of the Bank; (5) amendment of the Bank’s bylaws; and (6) such actions which, under applicable law, must be taken by the Board. Committee membership shall be selected so as to employ the services as nearly as is feasible of all of the members of the Board. Stated meetings of committees may be held at such time and place as shall be determined from time to time by the chairman of the committee. Stated meetings may be held without notice thereof, or the chairman of the committee may direct the giving of five days’ notice of regular meetings to each member. Special meetings of a committee may be called by its Chairman or the President of the Bank on at least five days’ written notice or three days’ facsimile or telephonic notice to each member, and shall be called upon like notice on the written request of three members stating the reasons therefore. Whenever the person calling a special meeting shall determine that, in the interests of time and economy it is desirable, the special meeting shall be conducted by long distance conference telephone at which all members attending the meeting are able to hear and be heard by all other persons so participating. The notice of such special meetings shall stipulate the time and place of such meetings, and shall contain a statement of the purpose or purposes of such meetings. Such meetings may be held at any time and place without previous notice if all of the members are in attendance, or notice may be waived by any member. At any regular or special meeting of a committee, a majority of the members shall constitute a quorum for the transaction of business, but a smaller number may adjourn from time to time until a quorum is present. A majority of the members present at any meeting, a quorum being present, shall decide questions submitted for decision.

Section 9. Audit Committee:

There shall be appointed by the Board an Audit Committee consisting of not less than five directors, whose duty it shall be to assist the Board in fulfilling its fiduciary responsibilities. The committee, with the assistance of the Bank’s internal and outside auditors, shall oversee Bank compliance with laws, regulations, policies, procedures, ethical standards, and public responsibilities and shall recommend such action as may be necessary to assure adequate administrative, operating, and internal accounting controls. The committee shall also review the performance of the internal auditor annually. The Board may further specify the duties and procedures of the Audit Committee through adoption of a charter for said Committee.

FEDERAL HOME LOAN BANK OF CHICAGO	ARTICLE III
BYLAWS	PAGE 5

Section 10. Telephone Meetings:

Whenever the Chairman of the Board or the President of the Bank or, in their absence, the Corporate Secretary upon the request of any two members of the Board, shall determine that in the interest of time and economy it is desirable that a meeting of the Board be so held, such meeting shall be conducted by long distance conference telephone. Telephone meetings shall be held only upon at least five days’ written or three days’ facsimile notice to each director, and such notice shall contain a statement of the purpose(s). Such meetings may be held without previous notice if all of the directors are in attendance, or notice may be waived by any director.

ARTICLE IV

EXECUTIVE & GOVERNANCE COMMITTEE

Section 1. Appointment & Composition:

At its first meeting of each year, the Board shall select an Executive & Governance Committee consisting of not less than five members of the Board, the chairman of which shall be the Chairman of the Board. At such meeting, the Board shall also select members of the Board as alternative members for specific members of the Executive & Governance Committee. In the event that any member or members of the Executive & Governance Committee named by the Board are unavailable for duty, the specific alternate for any unavailable members may serve and shall be empowered to act as members of the committee. In the event that a member of the Executive & Governance Committee and his alternate are unavailable for duty, another member’s alternate may serve and shall be empowered to act as a member of the committee.

Section 2. Powers:

During the intervals between the meetings of the Board, the Executive & Governance Committee shall possess and may exercise all of the powers of the Board, 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. All action taken by the Executive & Governance Committee on behalf of the Board shall be reported to the Board for ratification at its next meeting succeeding such action and shall be subject to revision and alteration by the Board; provided, that no rights of third parties shall be affected by any such revision or alteration. In addition, the Executive & Governance Committee shall be responsible for the following: (i) corporate governance related issues; (ii) reviewing and making recommendations to the Board concerning the Bank’s annual operating business plan and budget; (iii) overseeing the Bank’s strategies; and (iv) overseeing and making recommendations to the Board concerning strategic plans and new businesses and products. Regular minutes of the proceedings of the Executive & Governance Committee shall be kept by the Corporate Secretary.

FEDERAL HOME LOAN BANK OF CHICAGO	ARTICLE IV
BYLAWS	PAGE 6

Section 3. Procedures:

A majority of the Executive & Governance Committee shall be necessary to constitute a quorum, and in every case the affirmative vote of a majority of the members of the Executive & Governance Committee shall be necessary for the passage of any resolution. The Executive & Governance Committee may fix its own rules of procedure, and shall meet as provided by such rules or by resolution of the Board, and it shall also meet at the call of its chairman or of the President of the Bank. In the event of a emergency, if all of the persons hereinbefore authorized to call a meeting of the Executive & Governance Committee are unavailable for duty, a meeting may be called by any other member of the Executive & Governance Committee. Whenever the person calling a meeting of the Executive & Governance Committee or the Executive & Governance Committee by resolution shall determine that in the interests of time and economy it is desirable, such meeting shall be conducted by conference telephone at which all members of the Executive & Governance Committee attending the meeting are able to hear and be heard by all other persons so participating. Minutes of telephone meetings of the Executive & Governance Committee shall be kept in the same manner as minutes of other meetings.

ARTICLE V

OFFICERS AND EMPLOYEES

Section 1. Officers:

The officers of the Bank shall be a President, one or more Vice Presidents, a Treasurer and a Corporate Secretary, all of whom shall be elected by the Board. One person may hold any two offices. 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; provided, however, in case of vacancy or incapacity, the Board may temporarily designate a vice president as the chief executive officer of the Bank. All officers shall hold office for one year or until their respective successors are elected and qualified. The Board may appoint such other officers as they shall deem necessary who shall have such authority and shall perform such duties as from time to time may be prescribed by the Board. The Board shall adopt an appropriate resolution electing officers for the next calendar year. The designation of a specified term does not grant to the officer any contract rights, and the Board, in the case of the President, and the President in the case of all other officers, may remove the officer at any time prior to the expiration of such term. The 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. They shall have full responsibility for the operation of the Bank under the direction of the Board. They shall make full report to committees of the Board 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 at each regular meeting. When so designated by resolution of the Board and under such direction as may be stated therein, the President, or other officers may act as ex officio members of any standing committee of the Board; provided, that the presence of only one such ex officio member may be counted in determining the requirement of a quorum. The officers of the Bank designated by the Board may extend or deny credit and take such other action as is in conformity with the credit policy of the Bank.

FEDERAL HOME LOAN BANK OF CHICAGO	ARTICLE V
BYLAWS	PAGE 7

Section 2. Employees and Legal Counsel:

There shall also be such other employees, which may include inside legal counsel, as the Board may authorize or whose appointment the Board may ratify; and they shall have such duties as shall be assigned to them by the Board and the President of the Bank. The Board or the President may retain outside legal or other counsel, as may be deemed necessary from time to time.

Section 3. Compensation:

The Board shall adopt an appropriate resolution approving the compensation of the President to be effective during the next calendar year. The compensation of senior officers shall be reviewed and approved by the Board or a committee thereof having jurisdiction over personnel matters. The compensation of other officers and employees shall be established by the President in accordance with the budget approved by the Board.

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 therefore, 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:

Shares of stock of the Bank shall be transferable only upon its books by the duly authorized representative of the owner, or owners, thereof as shown on the books of the Bank.

Section 3. Certificates of Stock:

If expressly requested to do so by a member stockholder, the President shall issue, or cause to be issued, a certificate, or certificates, signed by any two officers of the Bank, in such form as the Board shall approve.

Section 4. Dividends:

Dividends may be declared by the Board in its discretion, out of retained earnings from current or prior periods remaining after all reserves and charge-offs required under the Federal Home Loan Bank Act, as amended, have been provided for; provided that such dividends shall be declared and paid in the manner prescribed by the Rules and Regulations governing the Bank.

FEDERAL HOME LOAN BANK OF CHICAGO	ARTICLE VII
BYLAWS	PAGE 8

ARTICLE VII

GENERAL PROVISIONS

Section 1. Minutes:

Accurate minutes of all meetings of the stockholders of the Bank, of the Board, of the Executive & Governance Committee and other committees of the Board, shall be signed by the presiding officer and attested by the secretary officiating at such meetings. The original copies of the minutes shall be preserved by the Bank in minute books in custody of the Corporate Secretary of the Board but available to any member of the Federal Housing Finance Board or to the examiners or other official representatives of said Board.

Section 2. Banking Hours:

The Bank shall be open for business for such hours as the Board shall fix and employees shall remain in performance of their duties for such hours as may be required by the Board.

Section 3. Budget:

The President of the Bank shall prepare and submit to the Board a proposed budget for the following calendar year. The Board shall promptly consider the proposed budget and shall adopt a budget for the following calendar year.

Section 4. Surety Bonds:

The Bank shall maintain adequate surety bonds, covering all officers, employees, attorneys or agents having control over or access to monies or securities owned by the Bank or in its possession. The Bank shall comply with all provisions of law as to maintenance of liability, compensation or other insurance, and shall maintain such additional forms and amounts of insurance as the Board may, from time to time, determine.

Section 5. Signing of Papers:

All checks, contracts, deeds, bonds, assignments, releases or other like documents of the Bank shall be signed in the name of the Bank by such of its officers or employees as may from time to time be authorized by the Board. When authorized by the Board, checks may be issued by the Bank bearing only the facsimile signature of the President of the Bank.

Section 6. Designation of Depositories:

The Board shall designate the trust company, or trust companies, bank or banks, in which shall be deposited the monies or securities of the Bank.

FEDERAL HOME LOAN BANK OF CHICAGO	ARTICLE VII
BYLAWS	PAGE 9

Section 7. Credit Policy:

The Board shall adopt and regularly review a policy governing the extension of credit to the members of the Bank which is consistent with the policies and regulations of the Federal Housing Finance Board.

Section 8. Operations:

The Bank shall operate and do business within the provisions of the Federal Home Loan Bank Act, as amended, the Rules and Regulations promulgated thereunder, its certificate of organization, these Bylaws, and such directives not inconsistent with the foregoing as the Board may from time to time adopt.

Section 9. Fiscal Year:

The fiscal year of the Bank shall begin on the first day of January.

Section 10. Indemnification and Limitations on Liability:

(a) Definitions and rules of construction.

(1) Definitions for purposes of this Bylaw.

(i) Action. Any judicial, administrative or investigative proceeding, or threatened proceeding, whether civil, criminal, or otherwise, including any appeal or other proceeding for review.

(ii) Bank. The Federal Home Loan Bank of Chicago.

(iii) Bank-Related Office. Includes community organizations, non-profit organizations, the Financial Institutions Retirement Fund, and any Bank employee benefit plans.

(iv) Bank System Office. Includes the following offices or entities: the Office of Finance, the Federal Housing Finance Board, the Financing Corporation, the Resolution Funding Corporation, the Resolution Trust Corporation, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision.

(v) Court. Includes, without limitation, any state or Federal court to which or in which any appeal or any proceeding for review is brought or any administrative agency.

(vi) Final Judgment. A judgment, decree, or order which is not appealable or as to which the period for appeal has expired with no appeal taken.

FEDERAL HOME LOAN BANK OF CHICAGO	ARTICLE VII
BYLAWS	PAGE 10

(vii) Settlement. Includes entry of a judgment by consent or confession or plea of guilty or nolo contendere.

(2) References in this Bylaw to any individual or other person, including the Bank or Bank System Office, shall include any legal representatives, successors, assigns, executors and administrators thereof. The provisions of this section shall apply to any application for indemnification of Bank personnel that is pending on, or filed after the effective date of this Bylaw, without regard to whether the application for indemnification concerns actions taken prior to the effective date of this Bylaw.

(b) General. Subject to paragraph (c) of this Bylaw, the Bank shall indemnify any person against whom an action is brought or threatened because that person is or was a director, officer, or employee of the Bank for:

(1) Any amount for which that person becomes liable under a judgment or settlement in such action; and

(2) Reasonable costs and expenses, including reasonable attorney’s fees, actually paid or incurred by that person in defending or settling such action, or in enforcing his rights under this Bylaw if he attains a favorable judgment in such enforcement action.

(c) Requirements for indemnification of a director, officer, or employee of the Bank.

(1) Indemnification shall be made to such person under paragraph (b) of this Bylaw only if:

(i) Final judgment on the merits is in his favor; or

(ii) In case of: (A) Settlement, (B) judgment against him, or (C) final judgment in his favor, other than on the merits, if a majority of a quorum of disinterested directors of the Bank duly adopts a resolution determining that he was acting in good faith within the scope of his employment or authority as he could reasonably have perceived it under the circumstances and for a purpose he could reasonably have believed under the circumstances was in the best interest of the Bank or its members.

(2) Any director of the Bank having a personal interest in the application for indemnification shall be disqualified from voting on the resolution required under paragraph (c)(1)(ii) of this Bylaw. In the event that the necessary resolution cannot be duly adopted by a majority of a quorum of the Bank’s disinterested directors, then the determination to indemnify under this Bylaw shall be made by independent legal counsel pursuant to the standard set forth in paragraph (c)(1)(ii) of this Bylaw.

FEDERAL HOME LOAN BANK OF CHICAGO	ARTICLE VII
BYLAWS	PAGE 11

(d) Limitations on Liability of Directors, Officers or Employees. A director, officer or employee of the Bank shall have no liability for monetary damages directly or indirectly to any person other than the Bank or the Federal Housing Finance Board (including without limitation, any member, non-member borrower, shareholder, director, officer or agent of a member or a non-member borrower, director, officer, employee, or agent of the Bank or contractor with or supplier to the Bank) in respect of his acts or omissions in his capacity as a director, officer or employee of the Bank or otherwise because of his position as a director, officer or employee of the Bank except for liability which may exist (1) for acts or omissions which involve intentional misconduct or a knowing and culpable violation of criminal law, (2) for acts or omissions which a director, officer or employee believes to be contrary to the best interests of the Bank, or which otherwise involve bad faith on the part of the director, officer or employee, or (3) for any transaction from which a director, officer or employee derived an improper personal economic benefit.

(e) Insurance. The Bank may obtain insurance to protect it and its directors, officers, and employees from potential losses arising from claims against any of them for alleged wrongful acts committed in their capacity as directors, officers or employees.

(f) Advance Payment of Expenses.

(1) Payments of reasonable costs and expenses (including reasonable attorneys’ fees) shall be paid by the Bank as they are incurred in defending against any action, and in advance of any settlement or resolution of the action, beginning 30 days from the date of receipt by the Bank and its General Counsel of any person’s written application for indemnification, including a certification and supporting statement of that person’s belief that he ultimately may become entitled to indemnification under this Bylaw; provided, however, that no such advance payment of incurred costs and expenses shall be made, or continued to be made, if a disinterested majority of a quorum of the Bank’s directors reasonably concludes that the director, officer, or employee ultimately would not likely become entitled to indemnification under this Bylaw. In the case of such a finding, advanced payments to which the director, officer, or employee is not entitled under this paragraph shall be reimbursed to the Bank.

(2) Nothing in this paragraph shall prevent the directors of the Bank from imposing such contractual conditions on the advance payment of costs and expenses as they deem warranted to protect the interests of the Bank.

(3) In any action in which advance payments have been made under this paragraph, and following termination of the action, whether by final judgment, settlement, or otherwise, the Bank shall make a finding under this paragraph as to whether or not reimbursement should be made of the advance payments. Nothing in this

FEDERAL HOME LOAN BANK OF CHICAGO	ARTICLE VII
BYLAWS	PAGE 12

paragraph shall prevent the due adoption of a resolution at any time prior to the termination of the action as to whether advance payment of expenses should or should not be made under this paragraph.

(g) Indemnification Relating to Services Performed on Behalf of a Bank-Related Office, a Bank System Office or System Committee. For the purposes of paragraph (b) of this Bylaw, if an action is brought or threatened against a director, officer, or employee of the Bank because of that person’s service to or on behalf of a Bank-Related Office, a Bank System Office or a Federal Home Loan Bank System committee, then the action shall be deemed to be brought or threatened because that person is or was a director, officer, or employee of the Bank then employing that person at the time the service was performed, and indemnification may accordingly be sought under the appropriate provisions of this Bylaw.

(h) Nonexclusivity. The indemnification and insurance provided in this Bylaw shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any Bylaws, agreement, vote of the disinterested directors of the Bank or otherwise. If any portion of this Bylaw is deemed to be unenforceable for any reason, the remainder of this Bylaw shall remain in all respects enforceable. If for any reason the rights in paragraph (d) of this Bylaw are not available to any director, officer or employee such director, officer or employee shall be entitled to the rights afforded by the remainder of this Bylaw.

(i) Effective Date. March 20, 1990.

Section 11. Actions Subject to Federal Housing Finance Board:

All actions taken pursuant to these Bylaws are subject to the Federal Home Loan Bank Act, as amended, and the regulations, rules and policies of the Federal Housing Finance Board. Such actions which are subject to specific approval of the Federal Housing Finance Board are not deemed effective until such approval is given.

Section 12. Amendment:

The Bylaws of the Bank may be amended by the affirmative vote of a majority of the Board at any regular or special meeting of the Board, provided that each director shall have been given notice of the proposed amendment and of the form of such amendment at least five days preceding any meeting called for such purpose. The Bylaws may be amended by the affirmative vote of a majority of the Board 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 and has been incorporated into the minutes of said meeting.

Last amended: March 15, 2005

FEDERAL HOME LOAN BANK OF CHICAGO
BYLAWS	PAGE 13

CERTIFICATION

I hereby certify that the above is a true and correct copy of the restated Bylaws of the Federal Home Loan Bank of Chicago adopted by the Board of Directors of the Federal Home Loan Bank of Chicago at a meeting held on March 15, 2005, a quorum being present.

/s/    PETER E. GUTZMER        

Peter E. Gutzmer

Executive Vice President, General Counsel &

Corporate Secretary

EX-10.1

Exhibit 10.1

* * * * * * * * * * * * * * * * * * * *

LEASE

111 East Wacker Drive

Chicago Illinois

* * * * * * * * * * * * * * * * * * * *

Between

Federal Home Loan Bank of Chicago

(Tenant)

and

SM Brell, L.P.

(Landlord)

TABLE OF CONTENTS

1.	LEASE AGREEMENT			2
2.	RENT			3
	A.	Types of Rent		3
		(i)	Base Rent	3
		(ii)	Phase I Rent Adjustments	3
		(iii)	Tax Share Rent	4
		(iv)	Additional Rent	4
		(v)	Rent	4
	B.	Payment of Operating Cost Share Rent and Tax Share Rent		5
		(i)	Payment of Estimated Operating Cost Share Rent and Tax Share Rent	5
		(ii)	Correction of Operating Cost Share Rent	5
		(iii)	Correction of Tax Share Rent	5
	C.	Definitions		5
		(i)	Taxes	5
		(ii)	Operating Costs	6
		(iii)	Calendar Year	9
	D.	Computation of Base Rent and Rent Adjustments		9
		(i)	Prorations	9
		(ii)	Default Interest	9
		(iii)	Rent Adjustments	9
		(iv)	Books and Records	9
		(v)	Miscellaneous	10
3.	PREPARATION AND CONDITION OF PREMISES; POSSESSION AND SURRENDER OF PREMISES			10
	A.	Condition of Premises		10
	B.	Tenant’s Possession		10
	C.	Maintenance		10
	D.	Ownership of Improvements		10
	E.	Removal at Termination		10
4.	PROJECT SERVICES			11
	A.	Heating and Air Conditioning		11
	B.	Elevators		11
	C.	Electricity		11
	D.	Water		11
	E.	Janitorial Service		12
	F.	Telephone Service		12
	G.	Access; Security Service		12

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	H.	Window Washing	12
	I.	Additional Services	12
	J.	Interruption of Services	12
5.	ALTERATIONS AND REPAIRS		13
	A.	Landlord’s Consent and Conditions	13
	B.	Electronic Systems	14
	C.	Damage to Systems	14
	D.	No Liens	14
6.	USE		14
	A.	Use of Premises	14
	B.	Use of Roof	15
7.	GOVERNMENTAL REQUIREMENTS AND BUILDING RULES		15
8.	WAIVER OF CLAIMS; INDEMNIFICATION; INSURANCE		16
	A.	Waiver of Claims	16
	B.	Indemnification	16
	C.	Insurance Coverage	16
	D.	Insurance Certificates	16
9.	FIRE AND OTHER CASUALTY		16
	A.	Termination	16
	B.	Restoration	17
10.	EMINENT DOMAIN		17
11.	RIGHTS RESERVED TO LANDLORD		17
	A.	Name	17
	B.	Signs	17
	C.	Window Treatments	17
	D.	Service Contracts	17
	E.	Keys	17
	F.	Access	18
	G.	Preparation for Reoccupancy	18
	H.	Heavy Articles	18
	I.	Show Premises	18
	J.	Restrict Access	18
	K.	Relocation of Tenant	18
	L.	Use of Lockbox	18
	M.	Repairs and Alterations	18
	N.	Landlord’s Agents	19
	O.	Building Services	19

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	P.	Exclusive Uses	19
	Q.	Other Actions	19
12.	TENANT’S DEFAULT		19
	A.	Rent Default	19
	B.	Assignment/Sublease or Hazardous Substances Default	19
	C.	Other Performance Default	19
	D.	Credit Default	19
13.	LANDLORD REMEDIES		20
	A.	Termination of Lease or Possession	20
	B.	Lease Termination Damages	20
	C.	Possession Termination Damages	20
	D.	Landlord’s Remedies Cumulative	20
	E.	WAIVER OF TRIAL BY JURY	20
	F.	Litigation Costs	20
	G.	Assumption or Rejection in Bankruptcy	21
14.	SURRENDER		21
15.	HOLDOVER		21
16.	SUBORDINATION TO GROUND LEASES AND MORTGAGES		21
	A.	Subordination	21
	B.	Termination of Ground Lease or Foreclosure of Mortgage	21
	C.	Notice and Right to Cure	22
	D.	Definitions	22
17.	ASSIGNMENT AND SUBLEASE		22
	A.	Consent Required	22
	B.	Procedure	23
	C.	Change of Management or Ownership	23
	D.	Excess Payments	23
	E.	Landlord’s Right to Terminate	23
18.	CONVEYANCE BY LANDLORD		23
19.	ESTOPPEL CERTIFICATE		24
20.	Intentionally Deleted		24
21.	FORCE MAJEURE		24
22.	Intentionally Deleted		24

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23.	NOTICES		24
	A.	Landlord	24
	B.	Tenant	24
24.	QUIET POSSESSION		25
25.	REAL ESTATE BROKER		25
26.	MISCELLANEOUS		25
	A.	Successors and Assigns	25
	B.	Date Payments are Due	25
	C.	Meaning of “Landlord”, “Re-Entry”, “including” and “Affiliate”	25
	D.	Time of the Essence	25
	E.	No Option	25
	F.	Severability	25
	G.	Governing Law	25
	H.	No Oral Modification	25
	I.	Landlord’s Right to Cure	26
	J.	Captions	26
	K.	Authority	26
	L.	Landlord’s Enforcement of Remedies	26
	M.	Entire Agreement	26
	N.	Landlord’s Title	26
	O.	Light and Air Rights	26
	P.	Consents	26
	Q.	Singular and Plural	26
	R.	No Recording by Tenant	26
	S.	Exclusivity	26
	T.	No Construction Against Drafting Party	26
	U.	Survival	27
	V.	Rent Not Based on Income	27
	W.	Building Manager and Service Providers	27
	X.	Interest on Late Payments	27
	Y.	Representations	27
27.	UNRELATED BUSINESS INCOME		27
28.	HAZARDOUS SUBSTANCES		27
29	EXCULPATION		28
30.	AMERICANS WITH DISABILITIES ACT		28

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31.	TERMINATION OPTION	28
32.	ARBITRATION	28
33.	EXTENSION OPTION	29
34.	OPTIONS TO EXPAND	31
35.	STAIRWELL ACCESS	33
36.	INTERNAL STAIRWAY	33
37.	PARKING	33
38.	GENERATOR	33
39.	BUILDING DIRECTORY	33

APPENDIX A - PLAN OF THE PREMISES

APPENDIX B - RULES AND REGULATIONS

APPENDIX C - TENANT IMPROVEMENT AGREEMENT

APPENDIX D - MORTGAGES CURRENTLY AFFECTING THE PROJECT

APPENDIX E - JANITORIAL SERVICES

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LEASE

111 EAST WACKER DRIVE

CHICAGO, ILLINOIS

THIS LEASE (the “Lease”) is made as of December 30^th, 1997 between SM Brell, L.P., a California limited partnership (the “Landlord”), the owner in fee of the Project (as hereinafter defined), and the Tenant as named in the Schedule below. The term “Project” means the building (the “Building”) located at 111 East Wacker Drive and the land (the “Land”) underlying the Building. “Premises” means that part of the Project leased to Tenant described in the Schedule and outlined on Appendix A.

The following schedule (the “Schedule”) is an integral part of this Lease. Terms defined in this Schedule shall have the same meaning throughout the Lease.

SCHEDULE

1. Tenant: Federal Home Loan Bank of Chicago, a corporation organized and existing under the laws of the United States of America.

2. Premises: All of the 7th and 8th floors, and a portion of the 4th floor, of the Building all as shown on Appendix A.

3. Rentable Square Feet of the Premises: 77,165 during Phase I (defined below) and 81,000 during Phase II (defined below). Landlord and Tenant acknowledge that difference in the size of the Premises during Phase I and Phase II is due to a change in the measurement of rentable area and not due to a change in the dimensions of the Premises.

4. Tenant’s Proportionate Share: 8.412% during Phase I, and 8.293% during Phase II based upon a total Building square footage of 917,312 during Phase I and 976,726 during Phase II. Landlord and Tenant acknowledge that the difference in the size of the Building during Phase I and Phase II is due to a change in the measurement of rentable area and not due to a change in the dimensions of the Building.

5. Rent Abatement: None.

6. Security Deposit: None.

7. Tenant’s address for notices: The Premises.

8. Tenant’s Real Estate Broker for this Lease: Julien J. Studley, Inc.

9. Tenant Improvements: See the Tenant Improvement Agreement attached hereto as Appendix C.

10. Commencement Date: January 1, 1998.

11. Termination Date/Term: July 31, 2011, thirteen (13) years and seven (7) months, after the Commencement Date.

12. Base Rent:

A. For the period of January 1, 1998 through July 31, 2001 (“Phase I”) annual Base Rent shall be $1,637,241.50, subject to adjustment based on increases in the CPI as hereinafter described.

B. For the period August 1, 2001 through the end of the term (“Phase II”):

Period	Annual Base Rent	Monthly Base Rent
August 1, 2001 through July 31, 2002	$972,000 ($12.00 per rentable square foot)	$	81,000.00
August 1, 2002 through July 31, 2003	$1,012,500 ($12.50 per rentable square foot)	$	84,375.00
August 1, 2003 through July 31, 2004	$1,053,000 ($13.00 per rentable square foot)	$	87,750.00
August 1, 2004 through July 31, 2005	$1,093,500 ($13.50 per rentable square foot)	$	91,125.00
August 1, 2005 through July 31, 2006	$1,134,000 ($14.00 per rentable square foot)	$	94,500.00
August 1, 2006 through July 31, 2007	$1,336,500 ($16.50 per rentable square foot)	$	111,375.00
August 1, 2007 through July 31, 2008	$1,377,000 ($17.00 per rentable square foot)	$	114,750.00
August 1, 2008 through July 31, 2009	$1,417,500 ($17.50 per rentable square foot)	$	118,125.00
August 1, 2009 through July 31, 2010	$1,458,000 ($18.00 per rentable square foot)	$	121,500.00
August 1, 2010 through the end of the Term	$1,498,500 ($18.50 per rentable square foot)	$	124,875.00

13. Guarantor: None.

1.  LEASE AGREEMENT. On the terms stated in this Lease, Landlord leases the Premises to Tenant, and Tenant leases the Premises from Landlord, for the Term beginning on the Commencement Date and ending on the Termination Date unless extended or sooner terminated pursuant to this Lease. Prior to the execution of this Lease Tenant leased from Landlord pursuant to a lease dated February 12, 1970, as amended (the “Previous Lease), the Premises as well as approximately 17,191 rentable square feet of space on the 4th floor of the Building (the “Fiserv Space”) which is subject to a sublease (“the Fiserv Sublease”) between Tenant and Fiserv, Inc. It is the intention of Landlord and Tenant that (a) the Previous Lease continue in full force and effect with respect to the Fiserv Space alone until the expiration of the Fiserv Sublease on July 31, 2001, at which time the term of the Previous Lease shall expire, and (b) this Lease be entered into with respect to the Premises in order to (i) replicate the economic terms of the Previous Lease as they relate to the Premises during Phase I, and (ii) document the complete agreement

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of Landlord and Tenant concerning the terms of Tenant’s lease of the Premises during Phases I and II of this Lease, rather than further amending the Previous Lease.

2. RENT.

A. Types of Rent. Tenant shall pay the following Rent in the form of a check or by electronic transfer to Landlord’s building manager at the office of the Building, or in such other manner as Landlord may notify Tenant:

(i) Base Rent. Base Rent shall be paid in monthly installments in advance on or before the first day of each month in the amount set forth in the Schedule, subject to adjustment as hereinafter described.

(ii) Phase I Rent Adjustments. Landlord and Tenant acknowledge and agree that it is their intention that during Phase I the Operating Cost Share Rent (defined below), Tax Share Rent (defined below) and Base Rent payable hereunder be calculated in the same manner as Base Rent and Rent Adjustment were calculated pursuant to the Previous Lease and the following is intended to reflect such method of calculation:

(1) During Phase I if the Consumer Price Index (as defined below) for any calendar year is greater than the Base Year Consumer Price Index (107.3), 25% of the Base Rent due for such calendar year shall be increased by multiplying such Base Rent by the percentage of increase by which the Consumer Price Index in such calendar year exceeds 107.3. Consumer Price Index (“CPI”) means the U.S. City Averages for all Urban Consumers of the United States Bureau of Labor Statistics (all items figure 1982-84 = 100). If the Bureau of Labor Statistics substantially revises the manner in which the CPI is determined, an adjustment shall be made in the revised index which would produce results equivalent, as nearly as possible, to those which would be obtained if the CPI had not been so revised. If the 1982-84 average shall no longer be used as an index of 100, such change shall constitute a substantial revision. If the CPI becomes unavailable to the public because publication is discontinued, or otherwise, Landlord shall substitute therefor a comparable index based upon changes in the cost of living or purchasing power of the consumer dollar published by any other governmental agency or, if no such index is available, then a comparable index published by a major bank, or other financial institution, university or recognized financial publication.

(2) During Phase I the Operating Cost Share Rent and Tax Share Rent with respect to all of the Premises with the exception of 5,993 rentable square feet of space on the 7th floor of the Building which was added to the Premises by the Sixth Amendment to the Previous Lease (hereinafter, the “1985 Space”), shall equal Tenant’s Proportionate Share of the amount by which Operating Costs (defined below) and Taxes (defined below) for each calendar year exceed $8,164,077 and the Operating Cost Share Rent and Tax Share Rent with respect to the 1985 Space shall equal Tenant’s Proportionate Share of the amount by which Operating Costs and Taxes with respect to the 1985 Space for such calendar year exceed $8,356,712.00 (such amounts being referred to hereinafter as the “Base Amounts”). For purposes of the foregoing provision only, Tenant’s Proportionate Share with respect to the 1985 Space shall be .6533% and Tenant’s Proportionate Share with respect to the remainder of the Premises shall be 7.759%.

(3) During Phase II Operating Cost Share Rent shall be in an amount equal to the sum of Tenant’s Proportionate Share of Controllable Operating Cost Share Rent (defined below) and

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Non-Controllable Operating Cost Share Rent (defined below) for the applicable calendar year, paid monthly in advance in an estimated amount. Definitions of Controllable Operating Cost Share Rent, Non-Controllable Operating Cost Share Rent and Tenant’s Proportionate Share, and the method for billing and payment of Operating Cost Share Rent are set forth below in this Section.

Controllable Operating Cost Share Rent (defined below) applicable to calendar year 2002 and each calendar year thereafter shall be subject to a cumulative cap based on the Cap Amount (defined below). Thus, Controllable Operating Cost Share Rent for the year 2003 shall be an amount equal to the lesser of (i) Tenant’s Proportionate Share of Controllable Operating Costs during such year, or (ii) 108% of Tenant’s Proportionate Share of Controllable Operating Costs for the prior year (such amount described in this clause (ii) is herein referred to as the “Cap Amount”). For each calendar year thereafter. Controllable Operating Cost Share Rent shall be equal to the lesser of: (a) Tenant’s Proportionate Share of Controllable Operating Costs of the applicable calendar year; or (b) 108% of the Tenant’s Controllable Operating Cost Share Rent for the immediately preceding calendar year (which becomes the new Cap Amount).

Assume, for example, that Controllable Operating Cost Share Rent for the first calendar year of Phase II was $100.00. In the second calendar year, Controllable Operating Cost Share Rent shall be an amount equal to the lesser of (i) Tenant’s Proportionate Share of Controllable Operating Costs of the second calendar year, or (ii) $108.00 (108% of $100.00), (which amount becomes the Cap Amount). In the third calendar year, Controllable Operating Cost Share Rent shall be an amount equal to the lesser of (i) Tenant’s Proportionate Share of Controllable Operating Costs of the third calendar year, or (ii) 108% of Tenant’s Controllable Operating Cost Share Rent for the prior year, (which amount becomes the new Cap Amount).

“Controllable Operating Costs” shall mean only Building management office expenses, Building administrative expenses, Building management fees and professional service fees. All other costs shall be deemed “Non-Controllable Operating Costs”. There shall be no cap on Non-Controllable Operating Costs for purposes of this Section 2.A.(ii)(3). “Non-Controllable Operating Cost Share Rent” shall be an amount equal to Tenant’s Proportionate share of Non-Controllable Operating Costs.

(iii) Tax Share Rent. During Phase II Tax Share Rent shall be in an amount equal to the Tenant’s Proportionate Share of the Taxes for the applicable calendar year, paid monthly in advance in an estimated amount. A definition of Taxes and the method for billing and payment of Tax Share Rent are set forth below in this Section.

(iv) Additional Rent. Additional Rent shall be in the amount of all costs, expenses, liabilities, and amounts which Tenant is required to pay under this Lease, excluding Base Rent, Operating Cost Share Rent, and Tax Share Rent, but including any interest for late payment of any item of Rent.

(v) Rent. As used in this Lease, Rent means Base Rent, Operating Cost Share Rent, Tax Share Rent and Additional Rent. Tenant’s agreement to pay Rent is an independent covenant, with no right of setoff, deduction or counterclaim of any kind except as to abatements specifically set forth in this Lease.

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B. Payment of Operating Cost Share Rent and Tax Share Rent.

(i) Payment of Estimated Operating Cost Share Rent and Tax Share Rent. Landlord shall estimate the Operating Costs and Taxes of the Project each year which falls totally or partially within the Term, after the beginning of the year. Landlord may revise these estimates whenever it obtains more accurate information (but no more frequently than twice during each calendar year), such as the final real estate tax assessment or tax rate for the Project.

Within fifteen (15) days after receiving the original or revised estimate from Landlord, Tenant shall pay Landlord one-twelfth (1/12th) of Tenant’s Proportionate Share of this estimate, multiplied by the number of months that have elapsed in the applicable calendar year which falls totally or partially within the Term to the date of such payment including the current month, minus payments previously made by Tenant for the months elapsed. On the first day of each month thereafter, Tenant shall pay Landlord one-twelfth (1/12th) of Tenant’s Proportionate Share of this estimate, until a new estimate becomes applicable. Notwithstanding the foregoing to the contrary, during Phase I such estimate payments shall be determined based on the amount by which the estimated Operating Costs and Taxes exceed the applicable Base Amount.

(ii) Correction of Operating Cost Share Rent. Within one hundred eighty (180) days after the end of each calendar year which falls totally or partially within the Term, Landlord shall deliver to Tenant a report for such year (the “Operating Cost Report”) setting forth (a) the actual Operating Costs incurred, (b) the amount of Operating Cost Share Rent due from Tenant, and (c) the amount of Operating Cost Share Rent paid by Tenant. Within thirty (30) days after such delivery, Tenant shall pay to Landlord the amount due minus the amount paid. If the amount paid previously exceeds the amount due, Landlord shall apply the excess to Tenant’s next monthly payment of Operating Cost Share Rent, refunding any overage directly to Tenant.

(iii) Correction of Tax Share Rent. Within one hundred eighty (180) days after the end of each calendar year which falls totally or partially within the Term, Landlord shall deliver to Tenant a report for such calendar year (the “Tax Report”) setting forth (a) the actual Taxes, (b) the amount of Tax Share Rent due from Tenant, and (c) the amount of Tax Share Rent paid by Tenant. Within thirty (30) days after such delivery, Tenant shall pay to Landlord the amount due from Tenant minus the amount previously paid by Tenant. If the amount paid exceeds the amount due, Landlord shall apply any the excess as a credit against Tenant’s next monthly payment of Tax Share Rent, refunding any overage directly to Tenant.

C. Definitions.

(i) Taxes. “ Taxes” means any and all taxes, assessments and charges of any kind, general or special, ordinary or extraordinary, levied by any governmental entity, which Landlord shall pay or become obligated to pay during the Term in connection with the ownership, leasing, renting, management, control or operation of the Project or of the personal property, fixtures, machinery, equipment, systems and apparatus used in connection therewith. Taxes shall include real estate taxes, personal property taxes, sewer rents, water rents, special or general assessments, transit taxes, ad valorem taxes, and any tax levied on the rents hereunder or the interest of Landlord under this Lease (the “Rent Tax). Taxes shall also include all legal fees and other costs and expenses paid by Landlord in seeking a refund or reduction of any Taxes, whether or not the Landlord is ultimately successful. Landlord agrees to diligently monitor the amount of Taxes and use reasonable commercial efforts to keep the Taxes as low as possible.

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For any year which falls totally or partially within the Term, the amount to be included in Taxes (a) from taxes or assessments payable in installments, shall be the amount of the installments (with any interest) due and payable during such year, and (b) from all other Taxes, shall at Landlord’s election be the amount accrued. assessed, or otherwise imposed for such year and due and payable in such year. Any refund or other adjustment to any Taxes by the taxing authority, shall apply during the year which falls totally or partially within the Term in which the adjustment is made. All taxes or assessments payable in installments shall be paid over the longest allowable period.

Taxes shall not include any net income (except Rent Tax), capital, stock, succession, transfer franchise, gift, estate or inheritance tax, except to the extent that such tax shall be imposed in lieu of any portion of Taxes.

(ii) Operating Costs. “ Operating Costs” means any expenses, costs and disbursements of any kind other than Taxes, paid or incurred by Landlord in connection with the ownership, leasing, management, maintenance, operation and repair of any part of the Project and of the personal property, fixtures, machinery, equipment, systems and apparatus used in connection therewith, including the cost of providing those services required to be furnished by Landlord under this Lease. Operating Costs shall not include:

(1) the cost of capital improvements (determined in accordance with generally accepting accounting principles (“GAAP”)), except those made for the principal purpose of reducing Operating Costs and those made to keep the Project in compliance with governmental requirements first applicable to the Building after February 12, 1970, amortized by Landlord over the useful life thereof utilized for federal income tax purposes, together with interest on the unamortized cost at the per annum rate equal to the interest rate charged to Landlord on funds used to pay for such improvements or if Landlord did not borrow such funds, the per annum rate of interest equal to the “Corporate Base Rate” as defined in Section 2D(ii);

(2) any tenant work, painting or decorating performed or alteration of space leased to Tenant or other tenants or occupants of the Building whether such work or alteration is performed for the initial occupancy by such tenant or occupant or thereafter;

(3) any cash or other consideration paid by Landlord on account of, with respect to or in lieu of the tenant work or alterations described in Clause 2 above;

(4) ground rent;

(5) depreciation of the Building and amortization (except as provided above);

(6) repairs necessitated by the negligence of Landlord, required to cure violations of laws in effect on February 12, 1970 and any penalties or interest incurred or accumulated for any such violations which are not caused by the acts or omissions of Tenant, its employees or agents;

(7) costs of enforcement of leases;

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(8) interest on indebtedness or any costs of financing or refinancing the Building, building equipment, or building improvements, replacements, or repairs;

(9) management fees in excess of the greater of (a) three percent (3%) of gross rental collections or (b) the then-current acceptable management fee for office buildings in Chicago for the then class and character of the Building;

(10) compensation paid to officers or executives of the Landlord above the rank of general manager of the Project;

(11) leasing commissions and advertising and promotional expenses;

(12) legal fees or other professional fees incurred in connection with the preparation and enforcement of leases for space in the Building;

(13) taxes other than Taxes;

(14) the cost of repairs incurred by reason of fire or other casualty or condemnation to the extent that either (a) Landlord is compensated therefor through proceeds of insurance or condemnation awards; (b) Landlord failed to obtain insurance against such fire or casualty, if insurance was available at a commercially reasonable rate, against a risk of such nature at the time of same; or (c) Landlord is not fully compensated therefor due to the coinsurance provisions of its insurance policies on account of Landlord’s failure to obtain a sufficient amount of coverage against such risk;

(15) overtime HVAC costs or electricity costs if charged separately to Building tenants;

(16) the cost of performing additional services or installation to or for tenants to the extent that such service exceeds that provided by Landlord to Tenant without charge hereunder;

(17) “takeover expenses” (i.e., expenses incurred by Landlord with respect to space located in another building of any kind or nature in connection with the leasing of space in the Building);

(18) any amounts payable by Landlord by way of indemnity or for damages or which constitute a fine, interest, or penalty, including interest or penalties for any late payments of operating costs, unless such fine, penalty or late payment is caused by the acts or omissions of Tenant, its employees or agents;

(19) any cost representing an amount paid for services or materials to a person, firm, or entity related to or affiliated with Landlord to the extent such amount exceeds the amount that would be paid if such relationship or affiliation did not exist;

(20) expenses attributable to the parking garage;

(21) if any Taxes paid by Landlord and previously including in Operating Costs are refunded, Landlord shall promptly pay Tenant an amount equal to the amount of such refund (less

7

the reasonable expenses incurred by Landlord in obtaining such refund) multiplied by Tenant’s Proportionate Share in effect for the period to which such refund relates. In the event the operator of the garage in the Building or any third party who is not a tenant of the Building pays any amount to Landlord comprising an item of Operating Costs, then such amount shall be deducted from Operating Costs, if such amount was included in Operating Costs;

(22) the cost of correcting defects in the construction of the Building;

(23) the cost of common area compliance with the Americans with Disabilities Act as provided in Section 30 of this Lease;

(24) the cost associated with converting the common Building systems away from the use of CFC’s;

(25) any improvement installed or work performed or any other cost or expense incurred by the Landlord in order to comply with the requirements for the obtaining of or renewal of a certificate of occupancy for the Building or any space therein; and

(26) the cost of overtime or other expense to Landlord incurred in curing its defaults hereunder.

If the Project is not fully leased during any portion of any calendar year which falls totally or partially within the Term, Landlord may adjust (an “Equitable Adjustment”) Operating Costs to equal what would have been incurred by Landlord had the Project been fully leased. For example, assume (i) the Building has ten floors; (ii) the Tenant occupies one floor and Tenant’s Proportionate Share is ten percent (10%); (iii) the other nine floors are vacant; (iv) the cost of providing a particular service for Tenant’s floor is $1,000. If Tenant paid Tenant’s Proportionate Share of that cost, Tenant would pay $100. Instead, Landlord shall estimate the cost of such service for the Building if it were one hundred percent (100%) leased. Landlord would take into account any economies of scale; for example, the cost for the entire Building might be $9,000. The Landlord’s estimate ($9,000) minus the actual cost incurred by the Landlord ($1,000) equals the Equitable Adjustment ($8,000). The Equitable Adjustment is added to the actual cost and Tenant pays Tenant’s Proportionate Share of the total; in this example, Tenant would pay $9,000 times 10% or $900. This Equitable Adjustment shall apply only to Operating Costs which are variable and therefore increase as leasing of the Project increases. Landlord may incorporate the Equitable Adjustment in its estimates of Operating Costs.

If Landlord does not furnish any particular service whose cost would have constituted an Operating Cost to another tenant who has undertaken to perform such service itself, Operating Costs shall be increased by the amount which Landlord would have incurred if it had furnished the service to such tenant.

“Lease Year” means each consecutive twelve-month period beginning with the Commencement Date, except that if the Commencement Date is not the first day of a calendar month, then the first Lease Year shall be the period from the Commencement Date through the final day of the twelve months after the first day of the following month, and each subsequent Lease Year shall be the twelve months following the prior Lease Year.

8

(iii) Calendar Year. “Calendar year” means any calendar year within the Term, except that the first calendar year and the last calendar year of the Term may be a partial calendar year.

D. Computation of Base Rent and Rent Adjustments.

(i) Prorations. Operating Cost Share Rent and Tax Share Rent shall be prorated for the last partial calendar year of Phase I and the first and last partial calendar years of Phase II.

(ii) Default Interest. Any sum due from Tenant to Landlord not paid when due shall bear interest from the date due until paid at the annual rate equal to three percent (3%) plus the “Corporate Base Rate” at the time of such nonpayment. “Corporate Base Rate” means the rate of interest most recently announced by the First National Bank of Chicago, or its successor (the “First”) as its corporate base rate. If the First ceases to use the term corporate base rate, then the Corporate Base Rate shall be the rate used by the First as a base rate of interest for commercial loans, however this rate is designated by the First. A certificate by an officer of the First stating the corporate base rate (or such designated rate) in effect shall be conclusive evidence thereof.

(iii) Rent Adjustments. If the number of rentable square feet in either the Premises or the Building shall be changed, Tenant’s Proportionate Share shall be appropriately recalculated as of the date of the change. In no event shall Tenant’s Proportionate Share be increased as a result of a reduction in the rentable square footage of the Building. If any Operating Cost paid in one calendar year which falls totally or partially within the Term relates to more than one calendar year which falls totally or partially within the Term, Landlord shall proportionately allocate such Operating Cost among the related calendar years.

(iv) Books and Records. Landlord shall maintain books and records reflecting the Operating Costs and Taxes in accordance with sound accounting and management practices. Tenant, and its agents and representatives (including an outside auditing firm retained by Tenant (“Outside Auditor”)), may inspect Landlord’s records at Landlord’s office upon one day’s prior notice during normal business hours during the one hundred twenty (120) days following delivery of either the Operating Cost Report or the Tax Report. Tenant and any agent, representative and Outside Auditor must agree, in their contract for such services, that the results of any such inspection shall be kept entirely confidential and shall specifically not be made available to any other tenant of the Building. Landlord acknowledges that notwithstanding the foregoing to the contrary, Tenant shall be permitted to disclose such information to the extent reasonably required in connection with the assertion of Tenant’s rights hereunder or to the extent Tenant is legally obligated to disclose such information. Unless Tenant sends to Landlord any written exception to either such report within said one hundred twenty (120) day period, such report shall be deemed final and accepted by Tenant. Tenant shall pay the amount shown on both reports in the manner prescribed in this Lease, whether or not Tenant takes any such written exception, without any prejudice to such exception. If Tenant makes a timely exception, Landlord shall cause an independent certified public accountant acceptable to Landlord and Tenant to issue a final and conclusive resolution of Tenant’s exception. Tenant shall pay the cost of such certification unless Landlord’s original determination of annual Operating Costs or Taxes was in error by more than three percent (3%). In the event the audit discloses an error, such error shall be corrected by payment to Landlord by Tenant if Tenant has underpaid or to Tenant by Landlord if Tenant has overpaid within thirty (30) days following issuance of the accountant’s resolution.

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(v) Miscellaneous. So long as Tenant is not in Default of any material obligation under this Lease, Tenant shall be entitled to the refund of all amounts from Landlord. If this Lease is terminated for any reason prior to the annual determination of operating Cost Share Rent or Tax Share Rent with respect to Phase II, either party shall pay the full amount due to the other within thirty (30) days after Landlord’ notice to Tenant of the amount when it is determined. Landlord may commingle any payments made with respect to Operating Cost Share Rent or Tax Share Rent, without payment of interest.

3. PREPARATION AND CONDITION OF PREMISES; POSSESSION AND SURRENDER OF PREMISES.

A. Condition of Premises. Except to the extent of the Tenant Improvements item in the Schedule and as otherwise specifically provided in this Lease, Landlord is leasing the Premises to Tenant “as is” without any representations or warranties, including any express or implied warranties or merchantability, fitness or habitability, and without any obligation to alter, remodel, improve, repair, decorate or clean any part of the Premises. Notwithstanding anything to the contrary contained herein. Tenant shall not be responsible for structural repairs, structural defects or latent defects.

B. Tenant’s Possession. Tenant’s continuing in possession of the Premises shall be conclusive evidence that such portion remains in good order, repair and condition.

C. Maintenance. Throughout the Term, Tenant shall maintain the Premises in their condition as of the Commencement Date, loss or damage caused by the elements, ordinary wear, and fire and other casualty excepted, and at the termination of this Lease, or Tenant’s right to possession, Tenant shall return the Premises to Landlord in broom-clean condition. To the extent Tenant fails to perform either obligation Landlord may, but need not, restore the Premises to such condition and Tenant shall pay the reasonable cost thereof.

D. Ownership of Improvements. All Lease Term Work as defined in Section 5, partitions, hardware, and all fixtures except trade fixtures, constructed in the Premises by either Landlord or Tenant shall become Landlord’s property upon termination of this Lease if not removed by Tenant without compensation to Tenant unless Landlord consents otherwise in writing.

E. Removal at Termination. Tenant shall remove its trade fixtures, furniture, moveable equipment and other personal property from the Premises upon the natural termination of this Lease, or at the time of the termination of Tenant’s right of possession. If Tenant does not, then Tenant shall be conclusively presumed to have, at Landlord’s election (i) conveyed such property to Landlord without compensation or (ii) abandoned such property, and Landlord may dispose of any part thereof in any manner without liability to Tenant or any other person. Landlord shall have no duty to be a bailee of any such personal property. If Landlord elects abandonment, Tenant shall pay to Landlord, upon demand, any reasonable expenses incurred for disposition.

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4. PROJECT SERVICES.

Landlord shall furnish the following services during the Term in a manner consistent with the standards of quality typically maintained by other first class office buildings in downtown Chicago:

A. Heating and Air Conditioning. During the normal business hours of 8:00 a.m. to 6:00 p.m., Monday through Friday, and 8:00 a.m. to 1:00 p.m. on Saturday, Landlord shall furnish heating and air conditioning to provide a comfortable temperature, in Landlord’s judgment, for normal business operations, except to the extent Tenant installs equipment which adversely affects the temperature maintained by the air conditioning system. If Tenant installs such equipment, following notice to Tenant Landlord may install supplementary air conditioning units in the Premises, and Tenant shall pay to Landlord upon demand as Additional Rent the reasonable cost of installation, operation and maintenance thereof.

Landlord shall furnish heating and air conditioning after business hours if Tenant provides Landlord at least twenty-four (24) hours’ notice, and pays Landlord all then-current charges for such additional heating or air conditioning.

B. Elevators. Landlord shall provide normal passenger elevator service to Tenant in common with Landlord and other parties, daily from 8:00 a.m. to 8:00 p.m. (Saturdays from 8:00 a.m. to 1:00 p.m.), Sundays and holidays excepted. At all other times, Landlord shall provide limited passenger elevator service, but shall provide normal passenger elevator service only at Landlord’s sole option. Landlord shall provide freight elevator service to Tenant in common with Landlord and other parties daily from 8:00 a.m. to 5:00 p.m., Saturdays, Sundays and holidays excepted.

C. Electricity. Landlord shall pay for the electricity required for (i) the operation of the heating and air conditioning systems in the Premises during the hours specified in Paragraph 4.A. above, and (ii) illumination of the exit lights, emergency lights, stairwell lights and night lights in or about the Premises and shall include such payment in Operating Costs. All other electricity used in the Premises shall be supplied by the electricity company through a separate meter and paid for by Tenant. Tenant shall pay for the installation of any submeter required on any floor of its Premises. Any decrease or discontinuance of electric service shall not affect the parties’ rights and obligations under this Lease, except as specifically provided herein. Tenant shall not use electricity at a rate which causes the use by all tenants to exceed the capacity of the Building or the risers or wiring to the Premises. Landlord shall maintain the light fixtures and install lamps, bulbs, ballasts and starters in the Premises. Tenant shall provide to Landlord all lamps bulbs, ballasts and starters at its expense, and Landlord shall install the same and maintain the light fixtures and Tenant shall pay to Landlord, Landlord’s actual labor cost incurred for such maintenance and for installation, plus an additional charge not to exceed 10% of such labor cost.

Tenant shall pay for all electricity required for janitorial service, for alterations and repairs to the Premises, and for the operation of any supplementary air conditioning or ventilating system required for its equipment.

D. Water. Landlord shall furnish domestic water in common with other tenants for drinking, lavatory and toilet purposes drawn through fixtures installed by Landlord, or by Tenant in the Premises with Landlord’s written consent, and hot water in common with other tenants for lavatory purposes from

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the regular Building supply. Tenant shall pay Landlord for water furnished for any other purpose as Additional Rent at rates fixed by Landlord. Tenant shall not permit water to be wasted.

E. Janitorial Service. Landlord shall furnish janitorial service as set forth on Appendix E, Saturdays, Sundays and holidays excepted. Tenant may obtain supplementary janitorial service only at its sole cost and responsibility. Landlord hereby consents to Tenant’s usage of a contractor to be retained by Tenant to provide supplemental janitorial services, provided that disharmony of trades at the Building will not result and such service will be provided on a periodic basis as a supplement to and not a replacement of the janitorial and cleaning services provided by Landlord pursuant to this Lease.

F. Telephone Service. Tenant shall arrange for telephone service in the Premises directly with the telephone company. Tenant shall pay the cost of all telephone company charges for installation and service.

G. Access; Security Service. Landlord shall provide access to the Premises and Building 24 hours a day, seven days a week. Landlord shall provide 24 hour a day security service for the Building consistent with that of comparable, institutionally owned office buildings in the vicinity, with no warranty or liability respecting the effectiveness of the service. Landlord shall use reasonable efforts to cause the operation of the Building parking garage to provide access to the Building parking garage 24 hours a day.

H. Window Washing. The exterior of all windows in the Premises shall be washed four (4) times during each calendar year and the interior of such windows shall be washed two (2) times during each calendar year.

I. Additional Services. Landlord may provide extra or additional services as are reasonably possible for Landlord to provide, and as Tenant may request from time to time, within a reasonable period after Tenant requests such extra or additional services. Tenant shall pay Landlord an amount equal to one hundred ten percent (110%) of Landlord’s actual out-of-pocket cost incurred in providing such additional services, such amount to be considered Additional Rent hereunder. All charges for such extra or additional services shall be due and payable at the same time as the installment of Base Rent with which they are billed, or if billed separately, shall be due and payable within thirty (30) days after such billing. Any such billings for extra or additional services shall include an itemization of the extra or additional services rendered, and the charge for each such service.

J. Interruption of Services. Except as provided below, no interruption of services caused by repairs, replacements, or alterations to the service system, or by any other cause beyond the reasonable control of Landlord, shall be deemed an eviction or disturbance of Tenant’s possession of any part of the Premises, or render Landlord liable to Tenant for damages, or otherwise affect the rights and obligations of Landlord and Tenant under this Lease. Notwithstanding anything in this Lease to the contrary, if (a) there is any interruption of an essential service which renders the Premises in a condition which materially and adversely affects Tenant’s ability to conduct its business in all or any portion of the Premises and on account thereof, Tenant ceases performing business from the Premises or a portion thereof, (b) Tenant gives Landlord notice of such condition and (c) such interruption continues for a period of five (5) consecutive business days after such notice (an interruption which satisfies all of the conditions of this sentence is referred to herein as an “Interruption”), then Tenants sole and exclusive remedy shall be that Tenant’s obligation to pay Rent hereunder shall be reduced proportionately based on the portion of the Premises which cannot be occupied for purposes of performing business therefrom for the period

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commencing upon the expiration of said five (5) business-day period and continuing until the Premises are rendered in a condition so that Tenant can again perform its business therefrom. Notwithstanding the foregoing to the contrary, in the event that any interruption is caused by Force Majeure (as defined in Section 21) such rent abatement shall be available only to the extent that Landlord is compensated for the amount of Rent so abated by Landlord’s rental interruption insurance. Tenant may terminate this Lease by providing written notice to Landlord if an Interruption continues for longer than 150 days in which event this Lease shall terminate on the later of (i) five (5) business days after the date of Tenant’s notice, or (ii) the expiration of the 150-day period, and neither party shall have any further rights or obligations under this Lease except any rights or obligations which by their terms survive the termination of this Lease.

5. ALTERATIONS AND REPAIRS.

A. Landlord’s Consent and Conditions. Tenant shall not make any improvements or alterations in or additions, changes or installations to the Premises other than those made in accordance with the Tenant Improvement Agreement attached as Appendix C (collectively, “Alterations”) which (i) adversely impact, in Landlord’s sole opinion, the base structural components or the heating, air conditioning, ventilation, electrical, plumbing or mechanical systems (collectively, the “Systems”) of the Building, or (ii) impact any other tenant’s premises (collectively, the “Systems/Structure Work”), without submitting plans and specifications therefor to Landlord, and obtaining Landlord’s prior written consent thereto (which consent may be withheld in Landlord’s sole discretion). Tenant shall not make any Alterations to the Premises which are not deemed Systems/Structure Work pursuant to this Section 5.A., without submitting plans and specifications therefor to Landlord, and obtaining Landlord’s prior written consent thereto (which consent shall not be unreasonably withheld), if (a) the cost thereof is in excess of $25,000,000, or (b) such Alterations are visible from outside the Premises, or (c) such Alterations impact the Systems but are not deemed Systems/Structure Work by Landlord in its sole opinion (collectively, the “Consent Work”). Tenant shall be allowed to make any Alterations to the Premises which are not deemed Systems/Structure Work or Consent Work pursuant to this Section 5.A. without Landlord’s consent (collectively, the “Non-Consent Work”). For purposes of this Lease, Systems/Structure Work, Consent Work and Non-Consent Work are sometimes collectively referred to herein as the “Lease Term Work.” Tenant shall pay Landlord’s reasonable out of pocket expenses for review of the plans and all other items submitted by Tenant. Landlord may impose any reasonable conditions it chooses on any such consent it is entitled to give. Tenant shall pay for the cost of all Lease Term Work. All Lease Term Work shall become the property of Landlord upon termination, except for Tenant’s trade fixtures which Tenant shall remove at Tenant’s cost at the termination of the Lease. The following requirements shall apply to all Lease Term Work:

(i) Prior to commencement, Tenant shall furnish to Landlord building permits and certificates of insurance satisfactory to Landlord.

(ii) Tenant shall perform all Lease Term Work so as to maintain peace and harmony among other contractors serving the Project and shall avoid interference with other work to be performed or services to be rendered in the Project.

(iii) The Lease Term Work shall be performed in a good and workmanlike manner, meeting the standard for construction and quality of materials in the Building, and shall comply with all insurance requirements and all applicable laws, ordinances and regulations.

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(iv) Tenant shall permit Landlord to monitor all Lease Term Work. Landlord may charge a fee not to exceed its actual reasonable out-of-pocket expenses, without mark-up, if Tenant’s employees or contractors perform the Lease Term Work.

(v) Upon completion, Tenant shall furnish Landlord with contractor’s affidavits and full and final statutory waivers of liens, as-built plans and specifications, and receipted bills covering all labor and materials.

B. Electronic Systems. If Tenant notifies Landlord that Tenant requires additional electrical or cable capacity for telegraph, telephone, burglar alarm, computer, or signal service, Landlord shall direct how the installation shall be done. Tenant shall make no installation of additional electrical or cable capacity except in accordance with Landlord’s direction. At Landlord’s election, Landlord may make such installation itself. Tenant shall pay for the entire cost of both the installation and the service.

C. Damage to Systems. If any part of the mechanical, electrical or other systems in the Premises shall be damaged, Tenant shall promptly notify Landlord, and Landlord shall repair such damage. Landlord may also at any reasonable time make any repairs or alterations which Landlord deems necessary for the safety or protection of the Project, or which Landlord is required to make by any court or other governmental authority. Tenant shall at its expense make all other repairs necessary to keep the Premises, and Tenant’s fixtures and personal property, in good order, condition and repair; to the extent Tenant fails to do so, following notice to Tenant, Landlord may make such repairs itself. The reasonable cost of any repairs made by Landlord on account of Tenant’s default, or on account of the misuse or neglect by Tenant or its invitees, contractors or agents anywhere in the Project, shall become Additional Rent payable on demand by Tenant.

D. No Liens. Tenant has no authority to cause or permit any lien or encumbrance of any kind to affect Landlord’s interest in the Project; any such lien or encumbrance shall attach to Tenant’s interest only. If any mechanic’s lien shall be filed or claim of lien made for work or materials furnished to Tenant, then Tenant shall at its expense within thirty (30) days thereafter either discharge or contest the lien or claim. If Tenant contests the lien or claim, then Tenant shall (i) within such thirty (30) day period, provide Landlord adequate security for the lien or claim, (ii) contest the lien or claim in good faith by appropriate proceedings that operate to stay its enforcement, and (iii) pay promptly any final adverse judgment entered in any such proceeding. If Tenant does not comply with these requirements, Landlord may discharge the lien or claim, and the amount paid, as well as reasonable attorneys’ fees and other expenses incurred by Landlord, shall become Additional Rent payable on demand by Tenant.

6. USE.

A. Use of Premises. Tenant shall use the Premises only for general office purposes. Tenant shall not allow any use of the Premises which will negatively affect the cost of coverage of Landlord’s insurance on the Project. Tenant shall not allow any flammable or explosive liquids or materials to be kept on the Premises other than in normal quantities used for cleaning or operating of equipment. Tenant shall not allow any use of the Premises which would interfere with any other tenant or with the operation of the Project by Landlord. Tenant shall not permit any nuisance or waste upon the Premises, or allow any offensive noise or odor in or around the Premises. Tenant shall not place vending or dispensing machines of any kind in the Premises, except for those intended for use by Tenant’s employees and guests.

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B. Use of Roof. Subject to the rights of other users existing as of the date of execution hereof so long as space is then available, Tenant may at any time during the Term of this Lease, at its sole cost and expense but without further charge by Landlord (and subject to the prior approval of Landlord, which will not be unreasonably withheld), locate, install and maintain on and in, as applicable, (and be responsible for all repairs and damage necessitated or caused to) the roof of the Building, a receiving/sending communications dish antenna and in conjunction therewith, utilize reasonable Building shaft space for coaxial cable in order to connect the Premises with such antenna (collectively, the “Equipment”). The location, size, installation and maintenance of the Equipment shall (i) conform to all applicable zoning and other applicable governmental guidelines, laws, codes, rules, regulations and ordinances in effect from time to time as well as all architectural standards and insurance requirements established by Landlord from time to time; (ii) be subject to and completed in accordance with the terms and conditions of Article 5 hereof; (iii) be located on that part of the roof of the Building as Landlord may from time to time designate away from the perimeter of the roof so as not to be visible from street level (except that Landlord may after the initial installation of such antenna from time to time cause Tenant to relocate such antenna to another portion of the roof, at Landlord’s sole cost and expense so long as such relocation does not unreasonably interfere with Tenant’s use of such antenna or unreasonably result in the diminished capacity, quality of service or use of such antenna); and (iv) not interfere with use of any other communications equipment installed on the roof of the Building prior to the time Tenant seeks permission from Landlord to install its Equipment (which permission shall not be requested by Tenant later than sixty (60) days prior to the date of the proposed installation). Landlord shall not be liable to Tenant for any interference with Tenant’s operation of the Equipment caused by Landlord’s repair, maintenance or replacement of the roof or the Building, unless such repair, maintenance or replacement is performed in a negligent manner, and Landlord shall be entitled to suspend operation of the Equipment temporarily if such temporarily suspended operation is reasonably necessary for the performance of such repair, maintenance or replacement activities by Landlord. Tenant acknowledges that it is aware of Landlord’s intention as of the date of this Lease to replace the roof during calendar year 1998 and the potential suspension of the operation of the Equipment at such time. Upon termination of this Lease by expiration of time or otherwise, Tenant, at its sole cost and expense, shall remove the Equipment from the Building and shall restore any areas of the Building affected by the Equipment or its removal to the condition existing prior to the installation of the Equipment, ordinary wear and tear excepted. Notwithstanding anything contained herein to the contrary, Tenant shall not remove, and shall not be reimbursed for the cost of any Equipment which was affixed to, imbedded in or attached in or to the Building, including, but not limited to, cables and other wiring which cannot be removed without damage to the Building, unless Landlord determines in its reasonable judgment that the Building can be repaired and Tenant compensates Landlord for the cost of such removal and repairs. In such event, Landlord, at Landlord’s option exercised by written notice given to Tenant, shall have the right to perform any such repairs, removal and restoration at Tenant’s sole cost and expense and such expense shall be reimbursed by Tenant to Landlord promptly upon demand by Landlord.

7. GOVERNMENTAL REQUIREMENTS AND BUILDING RULES. Tenant shall comply with all governmental laws or regulations applying to its use of the Premises. Tenant shall also comply with all reasonable, non-discriminatory rules established for the Project from time to time by Landlord. The present rules are contained in Appendix B. Failure by another tenant to comply with the rules or failure by Landlord to enforce them shall not relieve Tenant of its obligation to comply with the rules or make Landlord responsible to Tenant in any way.

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8. WAIVER OF CLAIMS; INDEMNIFICATION; INSURANCE.

A. Waiver of Claims. To the extent permitted by law, Tenant waives any claims it may have against the Landlord or its officers, directors, agents, contractors or employees for business interruption, damage to property, or any other loss sustained by Tenant as the result of any accident or occurrence in the Project or of any part of the Building becoming in disrepair, except if such resulted from Landlord’s negligence or misconduct.

B. Indemnification. Tenant shall indemnify, defend and hold harmless Landlord, the property manager of the Project and their respective directors, officers, employees, agents and contractors against any claims by any third party for injury to any person or damage to or loss of any property occurring in the Project and arising from the use of the Premises or from any other act or omission of Tenant or any of Tenant’s employees, agents, invitees or contractors.

C. Insurance Coverage. Tenant shall maintain insurance customary for an office tenant, with such terms, coverages and insurers, as Landlord shall reasonably require from time to time. Initially, such insurance shall include:

(i) Commercial General Liability Insurance, with (a) Contractual Liability including the indemnification provisions contained in this Lease, (b) a severability of interest endorsement, (c) limits of not less than One Million Dollars ($1,000,000) combined single limit per occurrence for bodily injury, sickness or death, and property damage, and umbrella coverage of not less than Four Million Dollars ($4,000,000), and (d) Landlord and Landlord’s building manager named as additional insureds.

(ii) Insurance against “All Risks” of physical loss covering the replacement cost of all of Tenant’s fixtures and personal property. Tenant’s property insurance shall include a waiver of subrogation.

Tenant’s insurance shall be primary and not contributory.

D. Insurance Certificates. Tenant shall deliver to Landlord certificates and endorsements evidencing all required insurance no later than five (5) days prior to the Commencement Date and each renewal date. Each certificate will provide for the thirty (30) days’ prior written notice of cancellation to Landlord and Tenant.

9. FIRE AND OTHER CASUALTY.

A. Termination. If a fire or other casualty causes substantial damage to the Building or the Premises, Landlord shall engage a registered architect to certify within thirty (30) days of the casualty to both Landlord and Tenant the amount of time needed to restore the Building and the Premises to tenantability, using standard working methods. If the time needed exceeds two hundred seventy (270) days from the date of the casualty, or if the restoration would begin during the last eighteen (18) months of the Lease, then in the case of the Premises, either Landlord or Tenant may terminate this Lease, and in the case of the Building, Landlord may terminate this Lease, by notice to the other party within thirty (30) days after the notifying party’s receipt of the architect’s certificate. The termination shall be effective thirty (30) days from the date of the notice and Rent shall be paid by Tenant to that date, with an abatement for any portion of the space which has been untenantable due to the casualty.

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B. Restoration. If a casualty causes damage to the Building or the Premises but this Lease is not terminated for any reason, then subject to the rights of any mortgagees or ground lessors, Landlord shall diligently restore the Building and the Premises subject to current governmental requirements. Landlord shall not be required to replace Tenant’s damaged personal property and fixtures. Rent shall be abated on a per diem basis during the restoration for any portion of the Premises which is untenantable, except to the extent that Tenant’s negligence caused the casualty and Landlord’s rent loss insurance would not provide coverage if the Rent were abated.

10. EMINENT DOMAIN. If a part of the Project is taken by eminent domain or deed in lieu thereof which is so substantial that the Premises cannot reasonably be used by Tenant for the operation of its business, then either party may terminate this Lease effective as of the date of the taking. If any substantial portion of the Project is taken without affecting the Premises, then Landlord may terminate this Lease as of the date of such taking. Rent shall abate from the date of the taking in proportion to any part of the Premises taken or no longer tenantable. The entire award for a taking of any kind shall be paid to Landlord, and Tenant shall have no right to share in the award. Tenant may pursue its own award, provided that such award does not diminish in any way the award to be granted to Landlord or otherwise delay or interfere with the proceeding in which Landlord is engaged. All obligations accrued to the date of the taking shall be performed by each party.

11. RIGHTS RESERVED TO LANDLORD.

Landlord may exercise at any time any of the following rights respecting the operation of the Project without liability to the Tenant of any kind:

A. Name. To change the name or street address of the Building or the suite numbers of the Premises.

B. Signs. To install and maintain any signs on the exterior and in the interior of the Building, and to approve at its discretion prior to installation any of the Tenant’s signs in the Premises visible from the common areas or the exterior of the Building.

C. Window Treatments. To approve, at its discretion, prior to installation any shades, blinds ventilators or window treatments of any kind, as well as any lighting within the Premises that may be visible from the exterior of the Building.

D. Service Contracts. To enter into service contracts with all providers furnishing ice and drinking water, towels, toilet supplies, shoe shines, and sign painting, provided that the rates charged are reasonably competitive for office buildings in the Chicago area.

E. Keys. To retain and use at any time passkeys to enter the Premises or any door within the Premises. Tenant shall not alter or add any lock or bolt. If Tenant complies with all of the requirements set forth in this paragraph, Tenant may provide its own locks to an area or areas within the Premises, including any telephone closets (the “Secured Areas”). At least ten (10) days prior to the creation of any Secured Area, Tenant shall notify Landlord of the exact location of such Secured Area and the name of Tenant’s representative to be contacted and the manner of contact to avoid a forcible entry. Tenant need not furnish Landlord with keys to the Secured Areas. Upon the termination of this Lease, Tenant shall surrender all keys to Landlord. Landlord shall have no obligation to provide janitorial service to the

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Secured Areas. If Landlord determines in its reasonable discretion that a suspected fire or flood or other emergency in the Building requires Landlord to gain access to any Secured Area, Landlord may forcibly enter such Secured Area. Landlord shall make a reasonable effort to contact Tenant to secure access, but Landlord shall not be obligated to contact Tenant. In such event, Landlord shall have no liability whatsoever to Tenant except to the extent of Landlord’s negligence or misconduct, and Tenant shall pay all reasonable expenses in repairing any damaged Secured Area.

F. Access. Upon reasonable prior notice to Tenant (except in the case of an emergency or situation reasonably perceived to be an emergency in which case no notice shall be required), to have access to inspect the Premises, and to perform its obligations, or make repairs, alterations, additions or improvements, as permitted by this Lease.

G. Preparation for Reoccupancy. To decorate, remodel, repair, alter or otherwise prepare the Premises for reoccupancy at any time after Tenant abandons the Premises, without relieving Tenant of any obligation to pay Rent.

H. Heavy Articles. To approve the weight, size, placement and time and manner of movement within the Building of any safe or other heavy article of Tenant’s property. Tenant shall move its property entirely at its own risk.

I. Show Premises. To show the Premises to prospective purchasers or brokers at any reasonable time, and to prospective tenants during the final year of the Term, provided that Landlord gives prior notice to Tenant and does not materially interfere with Tenant’s use of the Premises.

J. Restrict Access. To restrict access to the Project during such hours as Landlord shall determine, so long as Landlord shall admit Tenant at all times to the Premises, Project and the parking garage in the Project (the “Parking Garage”), subject to appropriate regulation by Landlord.

K. Relocation of Tenant. Intentionally omitted.

L. Use of Lockbox. To designate a lockbox collection agent or electronic transfer account for collections of amounts due Landlord. In that case, the date of payment of Rent or other sums shall be the date of the agent’s receipt of such payment or the date of actual collection if payment is made in the form of a negotiable instrument thereafter dishonored upon presentment. However, if Tenant is in default under this Lease, Landlord may reject any payment for all purposes as of the date of receipt or actual collection by mailing to Tenant within 21 days after such receipt or collection a check equal to the amount sent by Tenant.

M. Repairs and Alterations. To make repairs or alterations to the Project and in doing so transport any required material through the Premises, to close entrances, doors, corridors, elevators and other facilities in the Project, to open any ceiling in the Premises, or, subject to rent abatement rights of Tenant provided in this Lease, to temporarily suspend services or use of common areas in the Building. Landlord may perform any such repairs or alterations during ordinary business hours, except that Tenant may require any Lease Term Work in the Premises to be done after business hours if Tenant pays Landlord for overtime and any other reasonable expenses incurred. Landlord may do or permit any work on any nearby building, land, street, alley or way. Notwithstanding anything to the contrary contained in this Lease, all repairs and alterations (other than those of an emergency nature) shall be performed only

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following no less than twenty-four (24) hours notice to Tenant and in such a manner as to minimize disruption with Tenant’s use of the Premises.

N. Landlord’s Agents. If Tenant is in default under this Lease, possession of Tenant’s funds or negotiation of Tenant’s negotiable instrument by any of Landlord’s agents shall not waive any breach by Tenant or any remedies of Landlord under this Lease.

O. Building Services. To install, use and maintain through the Premises pipes, conduits, wires and ducts serving the Building, provided that such installation is concealed and such installation, use and maintenance does not unreasonably interfere with Tenant’s use of the Premises.

P. Exclusive Uses. To grant to anyone the exclusive right to conduct any business (other than general office use) or render any service in the Building.

Q. Other Actions. To take any other action which Landlord deems reasonable in connection with the operation, maintenance or preservation of the Building.

12. TENANT’S DEFAULT.

Any of the following shall constitute a “Default” by Tenant:

A. Rent Default. Tenant fails to pay any Rent when due and this failure continues for five (5) days after written notice from Landlord;

B. Assignment/Sublease or Hazardous Substances Default. Tenant defaults in its obligations under Section 17 (Assignment and Sublease) or Section 28 (Hazardous Substances);

C. Other Performance Default. Tenant fails to perform any other obligation to Landlord under this Lease, and, this failure continues for thirty (30) days after written notice from Landlord, except that if Tenant begins to cure its failure within the thirty (30) day period but cannot reasonably complete its cure within such period, then the thirty (30) day period shall be extended for such period as is reasonably necessary to complete the cure;

D. Credit Default. One of the following credit defaults occurs:

(i) Tenant commences any proceeding under any law relating to bankruptcy, insolvency, reorganization or relief of debts, or seeks appointment of a receiver, trustee, custodian or other similar official for the Tenant or for any substantial part of its property, or any such proceeding is commenced against Tenant and either remains undismissed for a period of thirty (30) days or results in the entry of an order for relief against Tenant which is not fully stayed within seven (7) days after entry;

(ii) Tenant becomes insolvent or bankrupt, does not generally pay its debts as they become due, or admits in writing its inability to pay its debts, or makes a general assignment for the benefit of creditors; or

(iii) Any third party obtains a levy or attachment under process of law against Tenant’s leasehold interest.

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13. LANDLORD REMEDIES.

A. Termination of Lease or Possession. If Tenant defaults, Landlord may elect by notice to Tenant either to terminate this Lease or to terminate Tenants possession of the Premises without terminating this Lease. In either case, Tenant shall immediately vacate the Premises and deliver possession to Landlord, and Landlord may repossess the Premises and may remove any of Tenant’s signs and any of its other property, without relinquishing its right to receive Rent or any other right against Tenant.

B. Lease Termination Damages. If Landlord terminates the Lease, Tenant shall pay to Landlord all Rent due on or before the date of termination, plus Landlord’s reasonable estimate of the aggregate Rent that would have been payable from the date of termination through the Termination Date, reduced by the rental value of the Premises calculated as of the date of termination for the same period, taking into account reletting expenses and market concessions, both discounted to present value at the rate of five (5) percent per annum. If Landlord shall relet any part of the Premises for any part of such period before such present value amount shall have been paid by Tenant or finally determined by a court, then the amount of Rent payable pursuant to such reletting shall be deemed to be the reasonable rental value for that portion of the Premises relet during the period of the reletting.

C. Possession Termination Damages. If Landlord terminates Tenant’s right to possession without terminating the Lease and Landlord takes possession of the Premises itself, Landlord may relet any part of the Premises for such Rent, for such time, and upon such terms as Landlord in its sole discretion shall determine, without any obligation to do so prior to renting other vacant areas in the Building. Any proceeds from reletting the Premises shall first be applied to the expenses of reletting, including redecoration, repair, alteration, advertising, brokerage, legal, and other reasonably necessary expenses. If the reletting proceeds after payment of expenses are insufficient to pay the full amount of Rent under this Lease, Tenant shall pay such deficiency to Landlord monthly upon demand as it becomes due. Any excess proceeds shall be retained by Landlord.

D. Landlord’s Remedies Cumulative. All of Landlord’s remedies under this Lease shall be in addition to all other remedies Landlord may have at law or in equity. Waiver by Landlord of any breach of an obligation by Tenant shall be effective only if it is in writing, and shall not be deemed a waiver of any other breach, or any subsequent breach of the same obligation. Landlord’s acceptance of payment by Tenant shall not constitute a waiver of any breach by Tenant, and if the acceptance occurs after Landlord’s notice to Tenant, or termination of the Lease or of Tenant’s right to possession, the acceptance shall not affect such notice or termination. Acceptance of payment by Landlord after commencement of a legal proceeding or final judgment shall not affect such proceeding or judgment.

E. WAIVER OF TRIAL BY JURY. EACH PARTY WAIVES TRIAL BY JURY IN THE EVENT OF ANY LEGAL PROCEEDING BROUGHT BY THE OTHER IN CONNECTION WITH THIS LEASE. EACH PARTY SHALL BRING ANY ACTION AGAINST THE OTHER IN CONNECTION WITH THIS LEASE IN FEDERAL OR STATE COURTS LOCATED IN CHICAGO, ILLINOIS, CONSENTS TO THE JURISDICTION OF SUCH COURTS, AND WAIVES ANY RIGHT TO HAVE ANY PROCEEDING TRANSFERRED FROM SUCH COURTS ON THE GROUND OF IMPROPER VENUE OR INCONVENIENT FORUM.

F. Litigation Costs. Each party shall pay the other’s reasonable attorneys’ fees and other costs in enforcing this Lease, whether or not suit is filed.

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G. Assumption or Rejection in Bankruptcy. If Tenant is adjudged bankrupt, or a trustee in bankruptcy is appointed for Tenant, Landlord and Tenant, to the extent permitted by law, agree to request that the trustee in bankruptcy determine within sixty (60) days thereafter whether to assume or to reject this Lease.

14. SURRENDER. Upon termination of this Lease or Tenant’s right to possession, Tenant shall return the Premises to Landlord in good order and condition, ordinary wear and casualty damage excepted. If Landlord requires Tenant to remove any alterations, then Tenant shall remove the alterations in a good and workmanlike manner and restore the Premises to its condition prior to their installation.

15. HOLDOVER. If Tenant retains possession of any part of the Premises after the Term, Tenant shall become a month-to-month tenant upon all of the terms of this Lease as might be applicable to such month-to-month tenancy, except that Tenant shall pay all of Base Rent, Operating Cost Share Rent and Tax Share Rent at (a) 150% of the rate in effect immediately prior to such holdover with respect to the first 60 days of the holdover, and (b) 200% of the rate in effect immediately prior to such holdover beginning on the 61st day of the holdover, computed on a monthly basis for each full or partial month Tenant remains in possession. If Tenant holds over, Tenant shall also pay Landlord all of Landlord’s direct damages, and consequential damages which result to Landlord if Tenant holds over for longer than 60 days after the expiration of the Term. In addition, if Landlord so elects by notice to Tenant, such holdover in excess of 60 days shall constitute a renewal of this Lease for one year at the then-current market rate as reasonably determined by Landlord but in no event less than the Rent payable immediately prior to such holdover. No acceptance of Rent or other payments by Landlord under these holdover provisions shall operate as a waiver of Landlord’s right to regain possession or any other of Landlord’s remedies.

16. SUBORDINATION TO GROUND LEASES AND MORTGAGES.

A. Subordination. This Lease shall be subordinate to any present or future ground lease or mortgage respecting the Project, and any amendments to such ground lease or mortgage, at the election of the ground lessor or mortgagee as the case may be, effected by notice to Tenant in the manner provided in this Lease. The subordination shall be effective upon such notice, but at the request of Landlord or ground lessor or mortgagee, Tenant shall within thirty (30) days of the request, execute and deliver to the requesting party any reasonable documents provided to evidence the subordination. At any time that the Project is made subject to any ground lease or mortgage, Landlord shall use commercially reasonable efforts to cause the mortgagee or ground lessor to deliver to Tenant a non-disturbance agreement reasonably acceptable to Tenant, providing that so long as Tenant is not in default under this Lease after the expiration of any applicable notice and cure periods, Tenant may remain in possession of the Premises under the terms of this Lease, even if the ground lessor should terminate the ground lease or if the mortgagee or its successor should acquire Landlord’s title to the Project. This Lease shall not be subordinate to any ground lease or mortgage unless Tenant receives such non-disturbance agreement.

B. Termination of Ground Lease or Foreclosure of Mortgage. If any mortgage is foreclosed or if any ground or underlying lease is terminated, (i) the holder of the mortgage, ground lessor, or their respective grantees, or purchaser at any foreclosure sale (or grantee in a deed in lieu of foreclosure), as the case may be, shall not be (x) liable for any act or omission of any prior landlord (including Landlord), (y) subject to any offsets or counterclaims which Tenant may have against a prior landlord (including Landlord), or (z) bound by any prepayment of any of Base Rent, Operating Cost Share Rent, Tax Share Rent or Additional Rent which Tenant may have made in excess of the amounts then due for the next

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succeeding month, (ii) the liability of the ground lessor, mortgagee or trustee hereunder or purchaser at such foreclosure sale or the liability of a subsequent owner designated as Landlord under this Lease shall exist only so long as such ground lessor, trustee, mortgagee, purchaser or owner is the owner of the Building or Land and such liability shall not continue or survive after further transfer of ownership; and (iii) upon request of the ground lessor, mortgagee or trustee, if the mortgage is foreclosed or the ground or underlying lease is terminated, Tenant will attorn, as Tenant under this Lease, to the purchaser at any foreclosure sale under any mortgage or the ground lessor, if applicable, and Tenant will execute such instruments as may be necessary or appropriate to evidence such attornment. This Lease may not be modified or amended so as to reduce the rent or shorten the Term provided hereunder, or so as to affect adversely in any other respect to any material extent the rights of Landlord, nor shall this Lease be canceled or surrendered, without the prior written consent, in each instance, of the mortgagee or trustee under any Mortgage or the ground lessor, if applicable.

C. Notice and Right to Cure. The Project is subject to any ground lease and mortgage identified with name and address of ground lessor or mortgagee in Appendix D to this Lease. Tenant agrees to send by registered or certified mail to any ground lessor or mortgagee identified either in such Appendix or in any later notice from Landlord to Tenant a copy of any notice of default sent by Tenant to Landlord. If Landlord fails to cure such default within the required time period under this Lease, but ground lessor or mortgagee begins to cure within twenty (20) days after such period and proceeds diligently to complete such cure, then the ground lessor or mortgagee shall have such additional time as is necessary to complete such cure, including any time necessary to obtain possession if possession is necessary to cure, and Tenant shall not begin to enforce its remedies so long as the cure is being diligently pursued.

D. Definitions. As used in this Section 16, “mortgage” shall include “trust deeds” and mortgagee” shall include “trustee”, “mortgagee” shall include the mortgagee of any ground lessee, and “ground lessors”, “ mortgagee”, and “purchaser at a foreclosure sale” shall include, in each case, all of its successors and assigns, however remote.

17. ASSIGNMENT AND SUBLEASE.

A. Consent Required. Tenant shall not, without the prior consent of Landlord in each case, (i) make or allow any assignment or transfer, by operation of law or otherwise, of any part of Tenant’s interest in this Lease, (ii) grant or allow any lien or encumbrance, by operation of law or otherwise, upon any part of Tenant’s interest in this Lease, (iii) sublet any part of the Premises, or (iv) permit anyone other than Tenant and its employees to occupy any part of the Premises. Landlord may withhold its consent to the assignment or sublease if Tenant is in default under this Lease, if the proposed assignee or sublessee is a tenant in the Project, or if the financial responsibility, nature of business, and character of the proposed assignee or subtenant are not all reasonably satisfactory to Landlord. Landlord will not otherwise unreasonably withhold its consent on any other basis to such an assignment or subletting. Notwithstanding the foregoing and if no default on the part of Tenant has occurred and is continuing, Tenant may assign this Lease to an entity into which Tenant is merged or consolidated or to an entity to which substantially all of Tenant’s assets are transferred without first obtaining Landlord’s written consent, if Tenant (a) notifies Landlord at least ten (10) business days prior to the proposed transaction, and (b) provides information satisfactory to Landlord in order to determine the net worth of both the successor entity and of Tenant immediately prior to such assignment, and showing the net worth of the successor to be at least equal to the net worth of Tenant. No consent granted by Landlord shall relieve Tenant of any of its obligations under this Lease, nor shall it be deemed to be a consent to any subsequent assignment or

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transfer, lien or encumbrance, sublease or occupancy. Tenant shall pay all of Landlord’s reasonable attorneys’ fees and other expenses incurred in connection with any consent requested by Tenant or in reviewing any proposed assignment or subletting. Any assignment or transfer, grant of lien or encumbrance, or sublease or occupancy without Landlord’s prior written consent shall be void.

B. Procedure. Tenant shall notify Landlord of any proposed assignment or sublease at least thirty (30) days prior to its proposed effective date. The notice shall include the name and address of the proposed assignee or subtenant, its corporate affiliates in the case of a corporation and its partners in a case of a partnership, an execution copy of the proposed assignment or sublease, and sufficient information to permit Landlord to determine the financial responsibility and character of the proposed assignee or subtenant. As a condition to any effective assignment of this Lease, the assignee shall execute and deliver in form satisfactory to Landlord at least fifteen (15) days prior to the effective date of the assignment, an assumption of all of the obligations of Tenant under this Lease. As a condition to any effective sublease, subtenant shall execute and deliver in form satisfactory to Landlord at least fifteen (15) days prior to the effective date of the sublease, an agreement to comply with all of Tenant’s obligations under this Lease, and at Landlord’s option, an agreement (except for the economic obligations which subtenant will undertake directly to Tenant) to attorn to Landlord under the terms of the sublease in the event this Lease terminates before the sublease expires.

C. Change of Management or Ownership. Any direct or indirect change in 25% or more of the ownership interest in Tenant shall constitute an assignment of this Lease.

D. Excess Payments. If Tenant shall assign this Lease or sublet any part of the Premises for consideration in excess of the pro-rata portion of Rent applicable to the space subject to the assignment or sublet, then Tenant shall pay to Landlord as Additional Rent 50% of the Adjusted Excess immediately upon receipt (for purposes of this Lease, “Adjusted Excess” shall mean the gross excess less Tenant’s reasonable expenses (including without limitation, tenant improvement costs, tenant concessions, legal fees and broker’s commissions) incurred in connection with such assignment or sublet).

E. Landlord’s Right to Terminate. After Landlord receives a notice of a proposed assignment or sublease from Tenant, if the sublease term exceeds 75 % of the remaining term or if the sublease is for all or substantially all of the rentable area on any floor of the Building, Landlord shall have the right, to be exercised by giving written notice to Tenant within thirty (30) days after receipt of Tenant’s notice, to recapture the space described in Tenant’s notice and such recapture notice, if given, shall terminate this Lease with respect to the space therein described as of the date stated in Tenant’s notice. If Tenant’s notice covers all of the Premises, and if Landlord gives its recapture notice with respect thereto, the Term of this Lease shall expire on the date stated in Tenant’s notice as fully and completely as if that date had been the Termination Date. If, however, this Lease is terminated pursuant to the foregoing with respect to less than the entire Premises, Rent shall be adjusted on the basis of the number of rentable square feet retained by Tenant, and this Lease as so amended shall continue thereafter in full force and effect; provided that Tenant shall pay all costs in connection with the physical subdivision of any portion of the Premises.

18. CONVEYANCE BY LANDLORD. If Landlord shall at any time transfer its interest in the Project or this Lease, Landlord shall be released of any obligations occurring after such transfer, except the obligation to return to Tenant any security deposit not delivered to its transferee, and Tenant shall look solely to Landlord’s successors for performance of such obligations. This Lease shall not be affected by any such transfer.

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19. ESTOPPEL CERTIFICATE. Each party shall, within ten (10) days of receiving a request from the other party, execute, acknowledge in recordable form, and deliver to the other party or its designee a certificate stating, subject to a specific statement of any applicable exceptions, that the Lease as amended to date is in full force and effect, that the Tenant is paying Rent and other charges on a current basis, and that to the best of the knowledge of the certifying party, the other party has committed no uncured defaults and has no offsets or claims. The certifying party may also be required to state the date of commencement of payment of Rent, the Commencement Date, the Termination Date, the Base Rent, the current Operating Cost Share Rent and Tax Share Rent estimates, the status of any improvements required to be completed by Landlord and such other matters as may be reasonably requested. Failure to deliver such statement within the time required shall be conclusive evidence against the non-certifying party that this Lease, with any amendments identified by the requesting party, is in full force and effect, that there are no uncured defaults by the requesting party, that not more than one month’s Rent has been paid in advance and that the non-certifying party has no claims or offsets against the requesting party.

20. Intentionally Deleted.

21. FORCE MAJEURE. A party shall not be in default under this Lease to the extent such party is unable to perform any of its obligations on account of any strike or labor problem, energy shortage, governmental pre-emption or prescription, national emergency, or any other cause of any kind beyond the reasonable control of such party (“Force Majeure”); provided, however, that in no event shall any of the foregoing ever be deemed to excuse a failure to pay Rent or other monetary obligations due hereunder by Tenant in accordance with the requirements of this Lease.

22. Intentionally Deleted.

23. NOTICES. All notices, consents, approvals and similar communications to be given by one party to the other under this Lease, shall be given in writing, mailed or personally delivered as follows:

A. Landlord. To Landlord as follows:

CB/KOLL Management Services, Inc.

111 E. Wacker Drive

Chicago, Illinois 60601

Attn: General Manager

or to such other person at such other address as Landlord may designate by notice to Tenant.

B. Tenant. To Tenant at the Premises to the attention of Facilities Manager or such other address as Tenant may designate by notice to Landlord.

Notices shall be sent by hand delivery, facsimile, or by a reputable national overnight courier service. Hand delivered or facsimile notices shall be deemed to have been given on the date of actual delivery or sending, and overnight courier notices shall be deemed to have been given one business day after sending.

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24. QUIET POSSESSION. So long as Tenant shall perform all of its obligations under this Lease, Tenant shall enjoy peaceful and quiet possession of the Premises against any party claiming through the Landlord.

25. REAL ESTATE BROKER. Each party represents to the other that it has not dealt with any real estate broker with respect to this Lease except for CB/KOLL Management Services, Inc. and any broker listed in the Schedule (together, the “Brokers”) and no other broker is in any way entitled to any broker’s fee or other payment in connection with this Lease. Landlord agrees to pay all fees due to Brokers. Each party shall indemnify and defend the other against any claims by any other broker or third party resulting from the actions of the indemnifying party for any payment of any kind in connection with this Lease.

26. MISCELLANEOUS.

A. Successors and Assigns. Subject to the limits on Tenant’s assignment contained in Section 14, the provisions of this Lease shall be binding upon and inure to the benefit of all successors and assigns of Landlord and Tenant.

B. Date Payments are Due. Except as otherwise set forth in this Lease and except for payments to be made by Tenant under this Lease which are due upon demand, Tenant shall pay to Landlord any amount for which Landlord renders a statement of account and supporting documentation within thirty (30) days of Tenant’s receipt of Landlord’s statement.

C. Meaning of “Landlord”, “ Re-Entry”, “ including” and “Affiliate”. The term “Landlord” means only the owner of the Project and the lessors interest in this Lease from time to time. The words re-entry” and “re-enter” are not restricted to their technical legal meaning. The words “including” and similar words shall mean “without limitation.” The word “affiliate” shall mean a person or entity controlling, controlled by or under common control with the applicable entity. “Control” shall mean the power directly or indirectly, by contract or otherwise, to direct the management and policies of the applicable entity.

D. Time of the Essence. Time is of the essence of each provision of this Lease.

E. No Option. This document shall not be effective for any purpose until it has been executed and delivered by both parties; execution and delivery by one party shall not create any option or other right in the other party.

F. Severability. The unenforceability of any provision of this Lease shall not affect any other provision.

G. Governing Law. This Lease shall be governed in all respects by the laws of Illinois, without regard to the principles of conflicts of laws.

H. No Oral Modification. No modification of this Lease shall be effective unless it is a written modification signed by both parties.

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I. Landlord’s Right to Cure. If Landlord breaches any of its obligations under this Lease Tenant shall notify Landlord and shall take no action respecting such breach so long as Landlord immediately begins to cure the breach and diligently pursues such cure to its completion. Landlord may cure any Default by Tenant; any reasonable expenses incurred shall become Additional Rent due from Tenant on demand by Landlord.

J. Captions. The captions used in this Lease shall have no effect on the construction of this Lease.

K. Authority. Landlord and Tenant each represents to the other that it has full power and authority to execute and perform this Lease.

L. Landlord’s Enforcement of Remedies. Landlord may enforce any of its remedies under this Lease either in its own name or through an agent.

M. Entire Agreement. This Lease, together with all Appendices, constitutes the entire agreement between the parties. No representations or agreements of any kind have been made by either party which are not contained in this Lease.

N. Landlord’s Title. Landlord’s title shall always be paramount to the interest of the Tenant, and nothing in this Lease shall empower Tenant to do anything which might in any way impair Landlord’s title.

O. Light and Air Rights. Landlord does not grant in this Lease any rights to light and air in connection with Project. Landlord reserves to itself, the Land, the Building below the improved floor of each floor of the Premises, the Building above the ceiling of each floor of the Premises, the roof decks, the exterior of the Premises and the areas on the same floor outside the Premises, along with the areas within the Premises required for the installation and repair of utility lines and other items required to serve other tenants of the Building.

P. Consents. Neither party shall unreasonably withhold or delay any consent or approval required under this Lease, except as specifically permitted in this Lease.

Q. Singular and Plural. Wherever appropriate in this Lease, a singular term shall be construed to mean the plural where necessary, and a plural term the singular. For example, if at any time two parties shall constitute Landlord or Tenant, then the relevant term shall refer to both parties together.

R. No Recording by Tenant. Tenant shall not record in any public records any memorandum or any portion of this Lease.

S. Exclusivity. Landlord does not grant to Tenant in this Lease any exclusive right except the right to occupy its Premises.

T. No Construction Against Drafting Party. The rule of construction that ambiguities are resolved against the drafting party shall not apply to this Lease.

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U. Survival. All obligations of Landlord and Tenant under this Lease shall survive the termination of this Lease.

V. Rent Not Based on Income. No rent or other payment in respect of the Premises shall be based in any way upon net income or profits from the Premises. Tenant may not enter into or permit any sublease or license or other agreement in connection with the Premises which provides for a rental or other payment based on net income or profit.

W. Building Manager and Service Providers. Landlord may perform any of its obligations under this Lease through its employees, the building manager of the Project, or third parties hired by the Landlord or the building manager.

X. Interest on Late Payments. Interest shall be paid by Tenant to Landlord on any late payments of Rent from the date due until paid at the rate provided in Section 2.D.(ii).

Y. Representations. Tenant represents and warrants that this Lease has been duly authorized, executed and delivered by Tenant and constitutes the valid agreement of Tenant, binding in accordance with the terms hereof. If Tenant is a corporation and if Landlord so requests, Tenant shall deliver to Landlord or its agent, concurrently with its execution and delivery of this Lease, certified resolutions of the Board of Directors (and shareholders, if required) authorizing Tenant’s execution and delivery of this Lease and performance of Tenants obligations hereunder. If Tenant is a partnership, Tenant represents and warrants that all of the persons who are a general or managing partner in the partnership have executed this Lease, and that each of them, and each future general or managing partner of Tenant, shall be at all times jointly and severally liable hereunder, and that the death, resignation or withdrawal of any such partner shall not release the liability of such partner unless Landlord consents in writing to such release.

27. UNRELATED BUSINESS INCOME. If Landlord is advised by its counsel at any time that any part of the payments by Tenant to Landlord under this Lease may be characterized as unrelated business income under the United States Internal Revenue Code and its regulations, then Tenant shall enter into any amendment proposed by Landlord to avoid such income, so long as the amendment does not require Tenant to make more payments or accept fewer services from Landlord, than this Lease provides.

28. HAZARDOUS SUBSTANCES. Tenant shall not cause or permit any Hazardous Substances to be brought upon, produced, stored, used, discharged or disposed of in or near the Project unless Landlord has consented to such storage or use in its sole discretion. Notwithstanding the foregoing to the contrary, Tenant shall be permitted to use reasonable amounts of products typically used in connection with office operations which may fall within the definition of Hazardous Substances as hereinafter provided (e.g., photocopier toner and reasonable amounts of household cleaning materials) without obtaining Landlord’s consent, provided that Tenant uses such Hazardous Substances in strict compliance with environmental laws and all other applicable laws, codes, ordinances and insurance regulations. If Tenant is using any Hazardous Substances in the Premises and Landlord has reasonable grounds to believe that such Hazardous Substances are being used in violation of this Lease or applicable environmental laws, and because of such usage, any lender or governmental agency shall require testing for Hazardous Substances in the Premises, Tenant shall pay for such testing. “Hazardous Substances” include those hazardous substances described in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act, as

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amended, 42 U.S.C. Section 6901 et seq., any other applicable federal, state or local law, and the regulations adopted under these laws.

29. EXCULPATION. Landlord shall have no personal liability under this Lease; its liability shall be limited to its interest in the Project, and shall not extend to any other property or assets of the Landlord.

30. AMERICANS WITH DISABILITIES ACT. The parties acknowledge that the Americans With Disabilities Act of 1990 (42 U.S.C. §12101 et seq.) and regulations and guidelines promulgated thereunder, as all of the same may be amended and supplemented from time to time (collectively referred to herein as the “ADA”) establish requirements under Title III of the ADA (“Title III”) pertaining to business operations, accessibility and barrier removal. Except as may be otherwise specifically provided herein, Tenant accepts the Building in “as is” condition and agrees that Landlord makes no representation or warranty as to whether the Premises or the Building conform to the requirements of the ADA or any other requirements under the ADA pertaining to the accessibility of the Premises or the Building. To the extent that Landlord prepared, reviewed or approved any of plans and specifications such action shall in no event be deemed any representation or warranty that the same comply with any requirements of the ADA. Notwithstanding anything to the contrary in this Lease, the parties hereby allocate responsibility for Title III compliance as follows: (a) Tenant shall be responsible for all Title III compliance and costs in connection with the Premises, including structural work, if any, and including any leasehold improvements or other work to be performed under or in connection with this Lease, and (b) Landlord shall be responsible for all Title III compliance and costs in connection with all common areas of the Project. Tenant shall be responsible for all other requirements under the ADA relating to the operations of the Tenant or its affiliates, or the Premises, including, without limitation, requirements under Title I of the ADA pertaining to Tenant’s employees. Notwithstanding anything contained herein to the contrary, Landlord shall, at its sole cost and expense, renovate the mens and women’s restrooms, on the 4th, 7th and 8th floors of the Building, so that they comply with the requirements set forth in the ADA Accessibility Guidelines by January 1, 1999.

31. TERMINATION OPTION. Tenant may at its option terminate this Lease in its entirety (the “Termination Option”) effective as of August 1, 2008 (the “Early Termination Date”) by both delivering notice of its intent to terminate this Lease (the “Termination Notice) to Landlord on or before August 1, 2007 and paying Landlord the Termination Fee (defined below) on or before the Early Termination Date. If Tenant fails to deliver both the Termination Notice and Termination Fee timely, Tenant will be deemed to have waived such Termination Option. If there are any uncured material Defaults by Tenant, as of the date Tenant delivers the Termination Notice or as of the Early Termination Date, the Termination Option shall be void, and this Lease shall remain in effect. If Tenant properly exercises its Termination Option, this Lease shall terminate as of the Early Termination Date and neither party shall have any further rights or obligations under this Lease except those rights and obligations which by their terms survive any termination of this Lease. The “Termination Fee” shall be equal to $5,585,021.00.

32. ARBITRATION. The terms of this Section 32 shall be applicable to the determination of either of the Market Renewal Rate and Market Expansion Rate, which terms are respectively defined in Sections 33 and 34.

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A. Within five (5) days after both parties have notified the other of their good faith estimate of Market Renewal Rate or Market Expansion Rate, as applicable, Landlord and Tenant shall commence negotiations to agree upon either the Market Renewal Rate or Market Expansion Rate (to be multiplied by the rentable square feet in the Premises or the Expansion Premises applicable thereto). If the Landlord and Tenant are unable to reach agreement on such applicable rate within fourteen (14) days after the date negotiations commenced, then Tenant may, by written notice to Landlord within five (5) days after the expiration of such fourteen (14) day period, request to determine the appropriate rate by arbitration.

B. Within seven (7) days after the receipt of a request by Tenant as described in Paragraph A above, each party shall select a potential arbitrator who is a broker of commercial office space with at least ten (10) years experience in leasing office space in the downtown Chicago, Illinois area (a “Qualified Expert”). Within a second period of seven (7) days, the two appointed Qualified Experts shall appoint an arbitrator who shall determine the Market Renewal Rate or Market Expansion Rate, as applicable. If one party shall fail to appoint a Qualified Expert within the first seven (7) day period, then the Qualified Expert chosen by the other party shall be the sole arbitrator.

C. Once the arbitrator has been selected as provided above, then both parties shall submit to the arbitrator their respective good faith estimates of Market Renewal Rate or Market Expansion Rate, as applicable, within three (3) days after the selection of the arbitrator. As soon thereafter as practicable, but in any case within fourteen (14) days after receipt of the good faith estimates, the arbitrator shall select one of the two estimates of Market Renewal Rate or Market Expansion Rate, as applicable, which shall be the one that is closer to the arbitrator’s good faith estimate of the true Market Renewal Rate or Market Expansion Rate. The value so selected shall be deemed the Market Renewal Rate or Market Expansion Rate, as applicable. The decision of the arbitrator shall be submitted in writing to, and be final and binding, the Landlord and Tenant. If the arbitrator believes that expert advice would materially assist him, he may retain one or more qualified person, including but not limited to, legal counsel, brokers, architects or engineers, to provide such expert advice. The party whose estimate is not chosen by the arbitrator shall pay the costs of the arbitrator and of any experts retained by the arbitrator. Any fees of any counsel or expert engaged directly by the Landlord or Tenant, however, shall be borne by the party retaining such counsel or expert.

33. EXTENSION OPTION.

Subject to Subsections B and C below, Tenant may at its option extend the Term of this Lease for the entire Premises for one period of five (5) years (the “Renewal Term”) upon the same terms contained in this Lease, excluding Appendix C of the Lease and except for the amount of Base Rent payable during the Renewal Term. Tenant shall have no additional extension option.

A. The Rent during the Renewal Term shall be 95% of the Market Renewal Rate (as hereinafter defined) for a comparable term commencing on the first day of the Renewal Term.

B. To exercise its option, Tenant must deliver an initial non-binding notice to Landlord no later than August 30, 2010. Thereafter, both parties shall calculate their respective good faith estimates of the Market Renewal Rate and notify the other of such determination not later than September 30, 2010, and then unless Tenant gives Landlord written notice revoking Tenant’s exercise of the extension option within five (5) days of Landlord’s notice of Landlord’s estimate of the Market Renewal Rate, the terms of Section 32 above shall apply as to the procedure for determining the Market Renewal Rate.

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C. Tenant’s right to extend the Term shall be effective only if at the time of exercise of the Extension Option and as of the date of the commencement of the Renewal Term, (a) Tenant is not in Default under any of the material terms of this Lease; (b) this Lease has not been terminated and is still in full force and effect. (c) Tenant is either the original Tenant named in this Lease or an assignee whose net worth is sufficient in Landlord’s reasonable judgment to meet the financial obligations of Tenant hereunder, (d) the Premises consists of the entire rentable area on at least one (1) full floor of the Building, and (e) Tenant has not sublet more than the lesser of (i) one (1) full floor of the Building or (ii) 50% of the total rentable square feet of space in the Premises and Tenant is occupying the remainder of the Premises.

D. For purposes of this Lease, the following terms shall have the following meanings:

“Comparable Building” shall mean office buildings in downtown Chicago which are comparable to the Building in reputation, quality, age, size, location, and level and quality of services provided (the foregoing factors not being exclusive in identifying comparable buildings).

“Market Renewal Rate” shall be the then prevailing market rental rate, including Tenant Concessions, at which a financially responsible landlord and tenant would agree in an arm’s-length transaction to a lease of all of the Premises for the Renewal Term.

“Comparable” shall mean any new lease or renewal lease (but not sublease) of office space in excess of the number of rentable square feet Tenant occupies in the Premises as of the date Tenant delivers its initial non-binding written notice to Landlord of its election to extend or expand, as applicable, at the Building or any Comparable Building. Comparables shall exclude any expansion or renewal at a rent agreed to at an earlier date pursuant to a tenant’s expansion or renewal option.

“Tenant Concessions” shall mean, with respect to this Lease or the applicable Comparable, (i) rent concessions, rent abatements, free rent, or similar rent relief thereunder, and (ii) all costs incurred by the landlord thereunder to provide tenant improvements, pay legal fees and space planning fees, pay leasing commissions, assume existing lease obligations (after netting out the reasonable projected recovery thereon), pay moving expenses for the tenant and make any other payments to or for the benefit of the tenant thereunder.

The Market Renewal Rate shall be established by reference to the market rental rate for the relevant Comparables. In considering Comparables, lease renewals shall be given greater consideration than new leases.

The Market Renewal Rate shall be adjusted to take into account appropriate factors such as (i) any differences in loss factors used in determining the rentable areas of the leased premises of the Comparables considered and the subject portions of the Premises, (ii) any differences in the length of the term of the Comparables considered and the Renewal Term; (iii) any difference between the height of the Comparables within the applicable Comparable Buildings and that of the subject portions of the Premises in the Building, and (iv) any material variances between the definitions of Taxes and Operating Costs under this Lease and the definitions of taxes and operating costs with respect to any of the Comparable Buildings.

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34. OPTIONS TO EXPAND.

Subject to the provisions set forth in subsection D below and provided that such space has not been previously leased by Tenant, Landlord hereby grants to Tenant (i) the option (the “First Expansion Option”) to lease certain space (the “First Expansion Premises”) consisting of approximately 10,000 rentable square feet of area on a floor serviced by elevators which service floors 2 through 12 of the Building (the “Low-Rise Floors”), or if 10,000 rentable square feet of space is not available in the Low-Rise Floors, 10,000 rentable square feet of area on a non-Low-Rise Floor in the Building, and (ii) the option (the “Second Expansion Option”) to lease certain space (the “Second Expansion Premises” consisting of approximately 10,000 rentable square feet of area on a Low-Rise Floor, or, if 10,000 rentable square feet of area is not available in a Low-Rise Floor, 10,000 rentable square feet of area on a non-Low-Rise Floor in the Building, upon the same terms contained in this Lease except Appendix C and without any rent abatement and the Rent shall be at the Market Expansion Rate (as hereinafter defined). Any space added to the Premises pursuant to this Section 34 shall be delivered “as is,” unless Landlord and Tenant agree otherwise. Tenant’s obligations to pay Operating Cost Share Rent, Tax Share Rent and Base Rent for any particular Expansion Premises shall commence on the applicable “Expansion Space Commencement Date” (as defined in Section 34A below). If Tenant exercises either of its Expansion Options pursuant to subsection B below, the Expansion Premises thereby added to the Premises shall become a part of the Premises for all purposes of this Lease, and any reference in this Lease to the term “Premises” shall be deemed to refer to and include any such Expansion Premises, except as expressly provided otherwise in this Lease.

A. The First Expansion Option shall be exercisable upon an initial non-binding written notice being given by Tenant to Landlord not later than November 1, 2000, time being of the essence. The Second Expansion Option shall be exercisable upon an initial non-binding written notice being given by Tenant to Landlord not later than November 1, 2005, time being of the essence. After the giving of any such non-binding notice, both parties shall calculate their respective good faith estimates of the Market Expansion Rate and notify the other of such determination not more than thirty (30) days after such initial notice and then unless Tenant gives Landlord written notice revoking Tenant’s exercise of the applicable Expansion Option within five (5) days of Landlord’s notice of Landlord’s estimate of the Market Expansion Rate, the terms of Section 32 above shall apply as to the procedure for determining the Market Expansion Rate. The term of Tenant’s lease of the First Expansion Premises shall commence on a date designated by Landlord upon not less than two months’ prior written notice to Tenant, which date shall be the 60th day after Landlord makes the space available to Tenant (the “First Expansion Premises Commencement Date” which date shall occur not earlier than August 1, 2001 nor later than July 31, 2002, and shall terminate upon the expiration or earlier termination of this Lease. The term of Tenant’s lease of the Second Expansion Premises shall commence on a date designated by Landlord (the “Second Expansion Premises Commencement Date”) upon not less than two months’ prior notice to Tenant, which date shall be the 60th day after Landlord makes the space available to Tenant, which date shall occur not earlier than August 1, 2006 nor later than July 31, 2007, and shall terminate upon the expiration or earlier termination of this Lease.

B. If Tenant has validly exercised either Expansion Option, then effective as of the applicable Expansion Premises Commencement Date, the terms of this Lease shall apply to the applicable Expansion Premises subject to the following: (i) the applicable Expansion Premises shall be included as part of the Premises; (ii) the rentable area of the Premises shall be increased by the rentable area of the applicable Expansion Premises and Tenant’s Proportionate Share shall be adjusted accordingly; (iii) the applicable

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Expansion Premises shall be rented in their “as is” condition as of the applicable Expansion Premises Commencement Date, unless agreed to otherwise by Landlord and Tenant; and (iv) the Rent payable with respect to the applicable Expansion Premises shall be the Market Expansion Rate.

C. Promptly after Tenant’s exercise of such expansion option and the final determination of the Market Expansion Rate, Landlord shall prepare an amendment to this Lease to reflect changes in the size of the Premises, Base Rent, Tenant’s Proportionate Share and any other appropriate terms, due to the addition of the subject Expansion Premises. Tenant shall execute and return such amendment within thirty (30) days after its submission to Tenant.

D. For purposes of this Section 34 “Market Expansion Rate” shall mean the market rental rate, including Tenant Concessions, at which a financially responsible landlord and tenant would agree in an arm’s length transaction, to lease all of the subject Expansion Premises for the balance of the initial Term.

The Market Expansion Rate shall be determined for each exercise of Tenants right to expand under this Section 34.

In determining the subject Market Expansion Rate, such Market Expansion Rate shall be established by reference to the market rental rate for the relevant Comparables. In considering Comparables, lease expansions shall be given greater consideration than new leases.

The Market Expansion Rate shall be adjusted, upward or downward, from the market rental rate for respective Comparables to take into account appropriate factors such as (i) any differences in loss factors used in determining the rentable areas of the leased premises of the Comparables considered and the subject Expansion Premises, (ii) any differences in the length of the term of the Comparables considered and the term of this Lease with respect to the subject Expansion Premises, (iii) any difference between the height of the Comparables within the applicable Comparable Buildings and that of the subject Expansion Premises in the Building, and (iv) any material variances between the definitions of Taxes and Operating Costs under this Lease and the definitions of taxes and operating costs with respect to any of the Comparable Buildings.

E. Tenant’s right to exercise the Expansion Options shall be effective only if at the time of the exercise of the applicable Expansion Option and as of the applicable Expansion Premises Commencement Date, (a) Tenant is not in Default under any of the material terms of this Lease; (b) this Lease has not been terminated and is still in full force and effect; (c) Tenant is either the original Tenant named in this Lease or an assignee whose net worth is sufficient in Landlord’s reasonable judgment to meet the financial obligations of Tenant hereunder, including, without limitation, its obligations with respect to the leasing of the applicable Expansion Premises, (d) the Premises consists of the entire rentable area on at least two (2) full floors of the Building, and (e) Tenant has not sublet more than one full floor of the Building and Tenant is occupying the remainder of the Premises. No sublessee shall be entitled to exercise an Expansion Option.

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35. STAIRWELL ACCESS. Landlord shall provide Tenant with non-exclusive access to the Building stairwell between the 7th and 8th Floors of the Building (“Tenant’s Stairwell”) so long as the following conditions are met:

(i) For purposes of Tenant’s insurance coverage required to be maintained in accordance with Section 8 above and the indemnity and wavier provisions also described in such Section 8, Tenant’s Stairwell shall be deemed to be included within the Premises;

(ii) Tenant shall install a keycard (or similar) system to gain access to and from Tenant’s Stairwell (the “Keycard System”), which Keycard System shall be installed as part of Tenant’s Work (defined as Appendix C below);

(iii) Tenant shall provide evidence satisfactory to Landlord that the Keycard System and Tenant’s use of Tenant’s Stairwell will comply with the Chicago Zoning Code and Building Ordinance and any other applicable governmental requirements;

(iv) Tenant shall be responsible for the maintenance and repair of Tenant’s Stairwell as if Tenant’s Stairwell were part of the Premises, including, without limitation, repair and replacement, as necessary, of the doors, door frames and door hardware providing access from Tenant’s Stairwell to the Premises, and

(v) any improvements to Tenant’s Stairwell must be made in strict compliance with the provisions of this Lease and the Workletter.

36. INTERNAL STAIRWAY. With Landlord’s prior written consent, which consent will not be unreasonably withheld (notwithstanding the terms of Section 5 above), Tenant may install an internal stairway in the Premises between the 7th and 8th floors (the “Internal Stairway”) and the construction of such Internal Stairway shall otherwise be performed in accordance with Section 5 above. As of the expiration of this Lease and following Landlord’s written request, Tenant shall, in a manner approved by Landlord in writing in advance, at its sole cost and expense, demolish and remove the Internal Stairway and return the area of the Premises where the Internal Stairway was located to the condition it was in prior to its installation.

37. PARKING. During the Term, as may be extended by Section 33 above, Landlord shall provide Tenant up to fifteen (15) reserved parking spaces in the Parking Garage including Level P-1 Section A-43, space numbers 1, 2, 3 and 4 and otherwise in locations designated by Landlord (the “Parking”). Tenant shall notify Landlord annually as to the number of parking spaces it requires. If Tenant does not so notify Landlord, Landlord shall provide the number of spaces designated in the most recent notice from Tenant. Tenant shall reimburse Landlord monthly for such parking spaces at the rate then charged by the Parking Garage operator to monthly users.

38. GENERATOR. With Landlord’s prior written consent, which consent will not be unreasonably withheld (notwithstanding the terms of Section 5 above), Tenant may install a back-up power generator (a “Generator”) in the Project so long as it satisfies all of the terms and conditions of Section 5 above in installing such Generator. The Generator shall be located in an area of the Project which is accessible to Tenant and mutually acceptable to Landlord and Tenant. Tenant shall pay any additional electricity cost associated with powering the Generator.

39. BUILDING DIRECTORY. Landlord shall provide Tenant with space on the Building directory for the names of all officers and departments of Tenant at no additional cost to Tenant.

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IN WITNESS WHEREOF, the parties hereto have executed this Lease.

TENANT:
FEDERAL HOME LOAN BANK OF CHICAGO, a corporation organized and existing under the laws of the United States of America
By:	/s/    THOMAS D. SHEEHAN

Print Name:	Thomas D. Sheehan
Print Title:	Senior Vice President

LANDLORD:
SM BRELL, LP., a California limited partnership
By:	Its general partner, KB Investors IV, a California general partnership
By:	Its general partner, KE Holdings, L.P., a Washington limited partnership
By:	Its general partner, CB/KOLL Investment Management, Inc., a California corporation
By:	/s/    THOMAS P. VOUCKER

Print Name:	Thomas P. Voucker
Print Title:	Vice President

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APPENDIX B

RULES AND REGULATIONS

1. Tenant will not make or permit to be made any use of the Premises which, directly or indirectly, is forbidden by public law, ordinance or governmental regulation or which may be dangerous to persons or property, or which may invalidate or increase the premium cost of any policy of insurance carried on the Building or covering its operations and Tenant shall not do, or permit to be done, any act or thing upon the Premises which will be in conflict with fire insurance policies covering the Building. Tenant at its sole expense shall comply with reasonable rules, regulations or requirements of Landlord’s insurance underwriters so long as Tenant receives notice thereof and shall not do, or permit anything to be done upon the Premises, or bring or keep anything thereon in violation of rules, regulations or requirements of the City of Chicago Fire Department or other authority having jurisdiction and then only in such quantity and manner of storage as not to increase the rate of fire insurance applicable to the Building.

2. Tenant shall not advertise the business, profession or activities of Tenant conducted in the Building in any manner which violates the letter or spirit of any code of ethics adopted by any recognized association or organization pertaining to such business, profession or activities, and shall not use the name of the Building for any purpose other than that of the business address of Tenant, and shall never use any picture or likeness of the Building in any circulars, notices, advertisements or correspondence without Landlord’s consent.

3. Tenant shall not obstruct, or use for storage, or for any purpose other than ingress and egress, the sidewalks, entrances, passages, courts, corridors, vestibules, halls, elevators or stairways of the Building.

4. No bicycle or other vehicle and no dog (except dogs for the visually impaired) or other animal or bird shall be brought or permitted to be in the Building or on the Premises.

5. No noise, odor or litter, whether caused by Tenant, Tenant’s customers, clients, invitees or guests, which is objectionable to Landlord or other occupants of the Building, shall emanate from the Premises. Tenant shall not: (a) create or maintain a nuisance on the Premises, (b) disturb, solicit or canvass any occupant of the Building, or (c) do any act tending to injure the reputation of the Building.

6. Tenant shall not install any musical instrument or equipment in the Premises or the Building which may be heard outside the Premises, or any antennas, aerial wires or other equipment inside or outside the Building, without obtaining the approval of Landlord. The use thereof, if permitted, shall be subject to control by Landlord to the end that others shall not be disturbed or annoyed.

7. Tenant shall not waste water by tying, wedging or otherwise fastening open any faucet.

8. Subject to the provisions of Section 11.E. of the Lease, no additional locks or similar devices shall be attached to any door. No keys for any door other than those provided by Landlord shall be made. If more than two keys for one lock are desired by Tenant, Landlord may provide same upon payment by Tenant. Upon termination of this Lease or of Tenant’s possession, Tenant shall surrender all

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keys to the Premises and shall make known to Landlord the combination of all combination locks on built-in safes, cabinets and vaults.

9. Tenant shall lock all doors in and to the Premises when not in use and shall take any other measures to insure the security of the Premises.

10. If Tenant desires telegraphic, telephonic, burglar alarm or signal service, Landlord will, upon request, direct where and how connections and all wiring for such service shall be introduced and run. Without such directions, no boring, cutting or installation of wires or cables is permitted.

11. Shades, draperies or other form of inside window covering visible outside the Premises must be of such shape, color and material as approved by Landlord.

12. Tenant shall not overload any floor. Safes, furniture and all large articles shall be brought through the Building and into the Premises at such times and in such manner as Landlord shall permit and at the sole risk and responsibility of Tenant. Tenant shall list all furniture, equipment and similar articles to be removed from the Building, and the list must be approved at the Office of the Building or by a designated person before Building employees will permit any article to be removed.

13. Unless Landlord gives consent, other than with respect to the generator contemplated under the Lease, Tenant shall not install or operate any steam or internal combustion engine, boiler, machinery, refrigerating (other than used for food storage) or heating device or air conditioning apparatus (other than existing supplemental air-conditioning) in or about the Premises, or carry on any mechanical business therein, or use the Premises for housing accommodations or lodging or sleeping purposes, or do any cooking therein (except by microwave oven) or install or permit the installation of any vending machines for use by the general public, or use any illumination other than electric light, or use or permit to be brought into the Building any inflammable oils or fluids such as gasoline, kerosene, naphtha and benzene, or any explosive or other articles hazardous to persons or property. Should Landlord grant consent, the installation, operation and maintenance expenses for any such items shall be at Tenant’s expense and shall be included, among other charges as Additional Rent at rates fixed by Landlord and generally charged to other tenants in the Building. If air-conditioning apparatus is being installed, charges for a condenser water riser tap-in fee and condenser water shall be based upon the rated capacity in G.P.M. of the unit.

14. Tenant shall not place or allow anything to be against or near the glass of partitions or doors of the Premises which may diminish the light in, or be unsightly from, public halls or corridors.

15. Tenant shall ascertain from Landlord the maximum amount of electrical current which can safely be used in the Premises, taking into account the capacity of the electric wiring in the Building and the Premises and the needs of other tenants in the Building and shall not use more than such safe capacity. The consent of Landlord to the installation of electric equipment shall not relieve Tenant from the obligation not to use more electricity than such safe capacity.

16. Tenant may not install carpet padding or carpet by means of a mastic, glue or cement without the consent of Landlord provided Landlord shall not restrict Tenant’s use of carpet tiles.

17. Tenant shall not conduct any auction, fire, “going out of business” or bankruptcy sales in or from the Premises.

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APPENDIX C

TENANT IMPROVEMENT AGREEMENT

1. Space Plan. Tenant shall direct and authorize an architect licensed in the State of Illinois (the “Architect”) to prepare a space plan of the Premises (“Space Plan”) depicting the physical changes to be made by Tenant to the Premises. Upon completion, Tenant shall deliver the Space Plan to Landlord for Landlord’s approval, which approval shall not be unreasonably withheld or delayed.

2. Working Drawings. Tenant shall also cause Architect to prepare, to the extent necessary, the final architectural, mechanical (including heating, ventilating and air-conditioning), electrical, plumbing and structural plans and specifications (“Working Drawings”) necessary to complete the work (“Work”) required to construct the improvements to the Premises (the “Initial Improvements”) depicted in the Space Plan previously approved by Landlord. It is understood that the Work may be performed in phases and that Working Drawings may be prepared and submitted to Landlord in phases.

Tenant shall cause Architect to submit the finished Working Drawings to Landlord and Landlord shall review the Working Drawings and grant its consent or denial thereof within five (5) business days after receipt thereof, which approval shall not be unreasonably withheld (provided in all events Landlord may withhold its consent to the Working Drawings to the extent the same affect the structural integrity of the Building or adversely and materially affect any Building system). To the extent Landlord does not provide its consent to the Working Drawings as aforesaid, Landlord shall state, with reasonable specificity, Landlord’s reasons for such disapproval. Tenant shall then be required to make such corrections as Landlord may designate and resubmit the Working Drawings to Landlord for its consent.

Subsequent to Landlord’s approval of the Working Drawings, any material changes to the Working Drawings requested by Tenant shall be subject to the prior written consent of Landlord, which consent shall not be unreasonably withheld, provided Landlord may withhold its consent to any of said changes for the same reasons previously stated for not approving the Working Drawings. Tenant shall reimburse Landlord for Landlord’s reasonable out-of-pocket expenses incurred in connection with its review of the Space Plan and the Working Drawings, and its supervision of the Work.

3. The Work. The Work shall be completed by a general contractor selected by Tenant and approved by Landlord, which approval shall not be unreasonably withheld (the general contractor so chosen shall be referred to herein as the “General Contractor”). Tenant shall cause General Contractor to hire only union subcontractors (collectively, “Subcontractors”). Further, Tenant’s failure to contractually obligate the General Contractor to hire only union Subcontractors shall constitute a default under the Lease. Tenant shall indemnify and hold Landlord harmless from and against any loss, cost, damage, liability (other than that caused by Landlord’s negligence or misconduct) (including reasonable attorneys’ fees and court costs) incurred by Landlord with respect to all of Tenant’s obligations set forth in this Appendix C. Tenant guarantees to Landlord that the Work shall be completed in a lien-free manner and in substantial accordance with the Working Drawings and all applicable laws (the provisions of the Lease regarding the filing of mechanics’ liens against the Building by or through Tenant shall control with respect to mechanics’ liens filed against the Building as a result of the Work). Tenant shall only conduct the Work between the hours of 7:00 a.m. and 6:00 p.m., unless otherwise consented to by Landlord and shall cause as minimal disruption as reasonably possible to other tenants of the Building.

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4. Access to Premises for Performance of the Work. For purposes of the Work, Tenant shall have the nonexclusive right to use the Building’s freight elevator subject to availability and scheduling as may be reasonably established by Landlord. Such freight elevator use by Tenant during normal business hours shall be free of charge; provided, however, to the extent Tenant utilizes such freight elevators prior to 8:00 a.m. and after 5:00 p.m. on Monday through Friday and anytime on Saturday, Sunday and holidays, such use shall be at the standard Building charge for after hours freight elevator service; provided, further, if any other tenant of the Building is also using said freight elevator with Tenant after said time periods, then any charge to Tenant shall be apportioned between or among all parties utilizing said freight elevators.

5. Landlord’s Maximum Contribution. Landlord shall contribute an allowance in an amount not to exceed $810.000 ($10 per rentable square foot; the “Tenant Improvement Allowance”) to be applied toward payment or reimbursement of costs incurred in connection with the Work. Landlord shall pay Tenant the Tenant Improvement Allowance on August 1, 2001 with respect to Work performed prior to that time so long as at such time, Tenant is not in Default under any of the material terms, covenants and conditions of the Lease beyond the expiration of any applicable cure period provided for under the Lease. It shall be a condition of Landlord’s obligation to pay the Tenant Improvement Allowance that Tenant provides Landlord with contractor’s affidavits and waivers of lien covering all labor and materials expended and used, invoices reasonably acceptable to Landlord and any other documentation reasonably requested by Landlord establishing the actual cost of all items purchased with the Tenant Improvement Allowance. If the entire Tenant Improvement Allowance is not used to pay for the Work, any balance thereof shall be applied at the written direction of Tenant as a credit against Base Rent with respect to the Premises commencing as of the first full month after completion of the Work.

6. Insurance.

(a) Tenant shall cause General Contractor to obtain, pay for and maintain insurance for the coverages and amounts of coverage not less than those set forth below in the Schedule of Insurance Coverages (as hereinafter defined) and shall cause General Contractor to provide to Landlord certificates issued by insurance companies reasonably satisfactory to Landlord to evidence such coverages before any Work commences at the Premises. Such certificates shall provide that there shall be no termination, non-renewal, modification or expiration of such coverage without thirty (30) days prior written notice to Landlord. In the event of any failure by Tenant to cause General Contractor to comply with the provisions of this Section 6. Landlord may, at is option, upon notice to Tenant, cause Tenant to suspend the Work until such time as there is full compliance with this Section 6. Tenant shall provide to Landlord a certified copy of any and all applicable insurance policies upon request of Landlord.

(b) Schedule of Insurance Coverages. The following shall constitute the “Schedule of Insurance Coverages”:

(i) Workers’ Compensation Insurance. Coverage complying with the law of the State of Illinois and Employers Liability Insurance with a limit of $2,000,000.00 for each accident; including occupational disease coverage with a limit of $2,000,000.00 per person subject to aggregate limit of $2,000,000.00 per annum.

(ii) Comprehensive Automobile Liability Insurance. $1,000,000.00 combined single limit of liability for bodily injuries, death and property damage resulting from any one occurrence including all owned, hired and non-owned vehicles.

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(iii) Commercial General Liability Insurance. $3,000,000.00 ($2,000,000 with respect to any subcontractor) combined single limit of liability for bodily injuries, death and property damage, and personal injury resulting from any one occurrence, including the following coverages:

(1) Premises and Operations;

(2) Completed Operations for three (3) years after completion of the Work;

(3) Broad Form Comprehensive General Liability Endorsement, Personal Injury (with employment and contractual exclusions deleted) and Broad Form Property Damage Coverage;

(4) Independent Contractors; and

(5) Delete Exclusions relative to Collapse, Explosion and Underground Property Damage Hazards.

(c) Miscellaneous

(i) Any insured loss or claim of loss pursuant to this Section 6 shall be adjusted by Landlord and Tenant, and any settlement payments shall be made payable to Landlord as trustee for the insureds, as their interests may appear, subject to the requirements of any applicable mortgagee clause. Upon the occurrence of an insured loss or claim of loss, monies received will be held by Landlord who shall make distributions in accordance with an agreement to be reached in such event between Landlord and Tenant. If the parties are unable to agree between themselves on the settlement of the loss, such dispute shall be submitted to a court of competent jurisdiction to determine ownership of the disputed amounts, but the Work shall nevertheless progress during any such period of dispute without prejudice to the rights of any party to the dispute.

(ii) Landlord shall not insure or be responsible for any loss or damage to property of any property owned, rented or leased by General Contractor, Subcontractors, or their employees, servants or agents except to the extent caused by the negligent acts of Landlord or its agents or employees.

(iii) With respect to General Contractor’s operations, Tenant shall cause General Contractor to purchase, maintain and pay for an all-risk contractor’s equipment September 29, 1997 floater on all machinery, tools, equipment and other similar property in an amount at least equal to their fair market value and any deductible shall be for the account of General Contractor. This insurance coverage shall be the sole and complete means of recovery for any loss covered by such insurance.

(d) Subcontractors Insurance. Tenant shall cause General Contractor to require each of its Subcontractors to comply with subsection (b) above. Tenant shall cause General Contractor to cause each of the Subcontractors to deliver to Landlord certificates of insurance evidencing the foregoing coverages prior to commencement of their respective Work and, in the event Tenant fails to cause General Contractor to cause each Subcontractor to deliver to Landlord the required certificates of insurance from such Subcontractors and a claim is made or suffered, Tenant shall indemnify, defend and hold harmless, the Building manager, Landlord, Landlord’s partners, the parent companies and affiliates of Landlord, and the shareholders, officers and directors of Landlord, and employees and agents of any of the above mentioned parties (collectively, the “Indemnified Parties”) from any and all claims for which the required insurance

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would have provided coverage. This indemnity obligation is in addition to any other indemnity obligation provided herein.

(e) Certificates of Insurance. All certificates of insurance required to be delivered to Landlord as set forth herein from General Contractor or any Subcontractor shall name Landlord as an additional insured as its interest may appear.

(f) Commencement of Work. Tenant shall not commence construction of the Work until Landlord has approved the Space Plan, Working Drawings and insurance certificates and all necessary building permits and approvals for the Work have been obtained by Tenant to the reasonable satisfaction of Landlord.

(g) Compliance with Laws. All Work shall comply with all applicable federal, state and local statutes, ordinances, regulations, codes, requirements and standards, including without limitation, the City of Chicago Building Code.

(h) Tenant’s As Built Drawings. Within thirty (30) days after all of the Work has been completed, Tenant shall deliver to Landlord the final Working Drawings with any changes, additions or deletions that occurred during construction so noted on the Drawings.

7. Indemnification. To the fullest extent permitted by law, Tenant shall indemnify and hold harmless the Indemnified Parties, except to the extent of their negligence, from and against any and all loss, cost expense, damage, injury, liability, claim, demand, penalty or cause of action (including reasonable attorneys’ fees and court costs), directly or indirectly arising out of, resulting from or related to (in whole or in part), (a) the Work, (b) this Appendix C, (c) any mechanics’ liens which may be placed against the Building as a result of the Work, and (d) any act or omission of Tenant, General Contractor, any Subcontractor or any individual, partnership, joint venture or corporation (i) directly or indirectly employed by General Contractor or a Subcontractor or (ii) for whose acts or omissions General Contractor or any Subcontractor may be liable. Tenant shall promptly advise Landlord in writing of any action, administrative or legal proceeding or investigation as to which this indemnification may apply and Tenant, at Tenants expense, shall assume on behalf of Landlord and conduct with due diligence and in good faith the defense thereof with counsel reasonably satisfactory to Landlord; provided, that Landlord shall have the right to be represented therein by advisory counsel of its own selection and at its own expense. The obligations of this Section 7 shall survive final completion of the Work.

8. Landlord’s Supervision. Landlord may periodically inspect the Work to determine its compliance with the Working Drawings. Tenant shall provide access to the Work to Landlord at such times as Landlord may reasonably request to permit Landlord’s inspection of the construction of the Work.

9. Miscellaneous.

(a) This Appendix C shall not be deemed applicable to any additional space added to the original Premises at any time or from time to time, or to any portion of the original Premises or any additions thereto in the event of a renewal or extension of the original term of the Lease, unless expressly so provided in the Lease or any amendment or supplement thereto.

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(b) Tenant’s failure to pay any amounts owed by Tenant hereunder when due or Tenant’s failure to perform its obligations hereunder shall also constitute a default under the Lease, and Landlord shall have all the rights and remedies granted to Landlord under the Lease for nonpayment of any amounts owed thereunder for failure by Tenant to perform its obligations thereunder. Notices under this Appendix C shall be given in the same manner as under the Lease.

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APPENDIX D

MORTGAGES AND GROUND LEASES CURRENTLY AFFECTING THE PROJECT

None.

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APPENDIX E

JANITORIAL SERVICE

A. TENANT AREAS

Dust sweep hard surfaced flooring nightly.

Vacuum carpeted areas and rugs in traffic areas nightly.

Empty and clean wastepaper baskets and waste receptacles, etc., nightly; damp wipe as necessary.

Remove waste paper and waste materials to a designated area nightly.

Dust and wipe clean desk equipment, window sills, desk tops, chairs, filing cabinets, tables, bookcases, shelves, ledges and any other furniture or fixtures within reach throughout the Premises. Remove spots, stains, etc., from glass furniture tops nightly throughout the Premises.

Dust baseboards, chair rails, trim louvers, moldings and other “low-dust” areas nightly.

Spot clean to remove dirt, fingermarks, smudges, etc., from doors, door frames, switch plates, light switches, wall and glass areas adjacent to doors, push plates, handles, railings, etc., nightly.

Clean and sanitize drinking fountains and water coolers nightly.

Clean glass doors and entryway sidelites in entrances to tenant suites nightly.

Completely vacuum carpeted areas and rugs wall to wall once per week.

Damp mop hard surface flooring to remove spills, stains, heel marks, etc., once per week, or more often, if necessary.

Spot clean interior partition glass to remove fingermarks, smudges, etc., once per week.

Wipe clean and sanitize all telephones with germicidal detergent once per week.

Wipe clean and rub down interior building metal (except window mullions) once per week.

Wash and spray-buff resilient tile flooring once per month.

Brush and/or vacuum upholstered furniture once every three months.

Do high dusting which includes the following once every three months.

Dust pictures, frames, charts, graphs and similar wall hangings not reached in nightly cleaning.

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Dust exterior of lighting fixtures, overhead pipes, sprinklers, etc.

Dust partitions, ventilating louvers and vents, anemostats, walls, trim, etc., not reached in nightly cleaning.

Dust tops of cabinets, files, etc., not reached in nightly cleaning.

Dust Venetian blinds and window and door frames; vacuum draperies.

Machine strip and refinish and buff all resilient tile flooring once every three months.

Wash and clean baseboards during floor refinishing operations. Special care to be taken to insure chrome legs of metal furniture are wiped clean after each floor refinishing once every three months.

Completely clean interior partition glass using approved glass cleaning methods and materials once every four months.

Provide waste basket liners and change the same, as needed.

All references in this APPENDIX E to “nightly” services include Monday through Friday evenings, excluding holidays.

B. ELEVATOR LOBBIES AND PUBLIC CORRIDORS

Dust sweep hard surfaced flooring nightly.

Vacuum and spot clean carpeting nightly.

Empty and clear waste receptacles, ash trays, etc., empty and clean cigarette urns and replace sand or water as needed nightly.

Dust baseboards, trim, louvers, pictures, charts, graphs, doors, etc., within reach nightly.

Remove dirt, fingermarks, smudges, etc., from doors, doorframes, walls, switch plates, light switches. glass, pushplates, handles, railings, moldings, trim, etc., nightly.

Spray-buff tile/terrazzo flooring once per week.

Power pile lift carpeting once per month.

Machine strip and refinish resilient tile/terrazzo flooring once every two months.

Do high dusting once every two months.

Bonnett clean carpeting once every three months, but only if specified by the carpet manufacturer.

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Shampoo carpeting using extraction method once every six months, but only if specified by the carpet manufacturer.

C. MAIN ENTRANCE LOBBY AND SECONDARY ENTRANCES

Dust sweep and wash hard surfaced flooring nightly.

Spray-buff granite, terazzo and similar flooring nightly.

If floor mats have been used during the day, they shall be cleaned nightly.

Vacuum and spot clean carpeting nightly.

Clean cigarette urns and replace sand or water as needed nightly.

Dust baseboards, trim, louvers, moldings, pictures, charts, planters, furnishing, guard stations and all other fixtures nightly.

Clean and rub down building directory, mail depository and all other decorative metal nightly.

Completely clean all entrance door glass and entryway glass sidelites; clean glass in building directory nightly.

Empty and clean all waste receptacles and remove waste material to designated area in the building nightly.

Dust walls up to twelve feet and keep free from fingermarks and smudges nightly.

Machine strip and refinish granite, terrazzo and similar flooring using non-staining, non-slip, high solid, buffable floor finish once every two weeks.

Do high dusting once per month.

Clean lights, globes and fixtures once per month.

D. ELEVATORS

Floors in elevator cabs shall be properly maintained. If carpeted, vacuum and spot clean; if hard surfaced, sweep and wash nightly.

Clean and polish doors, inside and outside nightly.

Clean elevator saddles, door tracks, etc., keeping them free from dirt and debris; polish regularly as needed nightly.

Hand clean and polish baseboards, trim, railings, etc., nightly.

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Keep walls, panels, etc., clean and free from fingermarks and smudges; polish as needed using appropriate wood or metal polish nightly.

Clean carpeting either by rotary shampoo or hot water extraction method as necessary, but not less frequently than once per month.

Clean light fixtures and ceiling grilles once per month.

E. STAIRWAYS

Police stairs and landings to remove all trash and debris nightly.

Completely sweep stairs and landings; spot damp mop as necessary once per week.

Dust handrails, stringers, newels and risers, etc., once per week.

Wash stairs and landings once per month.

Do high dusting in stairwells once every three months.

F. LAVATORIES

Sweep and wash flooring with approved germicidal detergent solution, using spray tank method nightly.

Wash and polish mirrors, powder shelves, bright work, etc., including flushometers, piping and toilet seat hinges nightly.

Wash both sides of toilet seats, wash basins, bowls and urinals with approved germicidal detergent solution nightly.

Dust and wipe clean partitions, tile walls, dispensers, doors, receptacles, etc., with special attention to areas behind sinks and around urinals, etc., nightly. Remove graffiti nightly.

Fill toilet tissue, soap, towel and sanitary napkin dispensers to full capacity with supplies as furnished by owner.

Empty and clean towel and sanitary disposal receptacles and remove waste material and refuse to a designated area at least nightly and more often, if necessary.

Machine scrub flooring with approved germicidal detergent solutions necessary, but not less frequently than once per month.

Wash partitions, tile walls and enamel painted surfaces with approved germicidal detergent solution once per month.

Do high dusting and clean lighting fixtures once per month.

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Remove hard water deposits from vitreous fixtures using bowl cleaner as necessary.

G. BUILDING SERVICE AREAS

Keep service corridors and passageways clean; wet mop as needed nightly.

Keep locker rooms, service closets, janitory closets, etc., in neat and clean condition nightly.

Sweep dock and receiving area and remove all trash and debris nightly.

Wash flooring in dock and receiving area once per week.

Machine scrub or pressure wash dock and receiving area once per month.

H. MISCELLANEOUS

Sweep and/or hose exterior sidewalks at entrances nightly, weather permitting.

Scrub plaza once per week.

Sweep and mop mechanical areas once per month.

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EX-10.1.1

Exhibit 10.1.1

FIRST AMENDMENT TO LEASE

THIS FIRST AMENDMENT TO LEASE (“First Amendment”) is made as of the 15th day of December 2000, by and between LINCOLN-CARLYLE ILLINOIS CENTER, L.L.C., a Delaware limited liability company (“Landlord”) and FEDERAL HOME LOAN BANK OF CHICAGO, a corporation organized under the laws of the United States of America (“Tenant”).

W  I  T  N  E  S  S  E  T  H:

A. Landlord and Tenant entered into a certain lease dated December 30, 1997 (the “Lease”), whereby Landlord leased to Tenant certain premises consisting of approximately 81,000 square feet of rentable area of office space (the “Premises”) consisting of all of the office space on the 7^th and 8^th floors and a portion of the office space on the 4^th floor of the building located at 111 East Wacker Drive, Chicago, Illinois 60601 (the “Building”) for a lease term expiring on July 31, 2011.

B. Landlord’s predecessor in interest and Tenant entered into a certain lease dated February 12, 1970, which has been amended by eight Lease amendments thereto (the “Original Lease”), whereby Tenant, as of the date of this First Amendment, leases approximately 18,205 rentable square feet of office space (the “Additional Premises”) on the 4^th floor of the Building, depicted as Suite 450 on Exhibit A attached hereto and forming a part hereof.

C. The Original Lease expires on July 31, 2001, and by this Amendment Landlord and Tenant desire to add the Additional Premises to the Premises as of that date, to be governed by the terms of the Lease as amended by this First Amendment and subject to the terms and conditions set forth herein.

NOW, THEREFORE, for good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows:

1. Definitions. Each capitalized term used in this First Amendment shall have the same meaning as is ascribed to such capitalized term in the Lease, unless otherwise provided for herein.

2. Additional Premises. Effective as of August 1, 2001 (the “Additional Premises Commencement Date”) the Additional Premises shall be added to the Premises and deemed a part thereof for the remainder of the Term. The Tenant’s Proportionate Share with respect to the Additional Premises only (and in addition to Tenant’s Proportionate Share stated in the Lease) shall be 1.8495%, which is determined based on the remeasured rentable area of the Building which is 984,331 rentable square feet.

3. Term as to Additional Premises. The Term as to the Additional Premises (the “Additional Premises Term”) shall commence on the Additional Premises Commencement Date and terminate simultaneously with the expiration of the Term as to the remainder of the Premises.

4. Rent as to Additional Premises. Notwithstanding the Additional Premises Commencement Date of August 1, 2001, Landlord and Tenant hereby agree that in order to allow Tenant to renovate the Additional Premises, Tenant shall not be obligated to pay Base Rent, Operating Cost Share Rent or Tax Share Rent with respect to the Additional Premises until the earlier to occur of (a) Tenant’s commencement of business operations in the Additional Premises or (b) November 1, 2001 (such earlier date being the “ Additional Premises Rent Commencement Date”). Base Rent shall be due for the Additional Premises commencing on the Additional Premises Rent Commencement Date and throughout the remainder of the Additional Premises Term in the following amounts, payable as and when installments of Base Rent are otherwise due and payable under the Lease:

PERIOD	ANNUAL BASE RENT	MONTHLY BASE RENT
Additional Premises Rent Commencement Date through July 31, 2002	$291,280 ($16.00. per rentable square foot)	$	24,273.33
August 1, 2002 through July 31, 2003	$300,018.40 ($16.48 per rentable square foot)	$	25,001.53
August 1, 2003 through July 31, 2004	$309,018.95 ($16.9744 per rentable square foot)	$	25,751.58
August 1, 2004 through July 31, 2005	$318,288.94 ($17.4836 per rentable square foot)	$	26,524.08
August 1, 2005 through July 31, 2006	$327,835.64 ($18.008 per rentable square foot)	$	27,319.64
August 1, 2006 through July 31, 2007	$337,673.62 ($18.5484 per rentable square foot)	$	28,139.47
August 1, 2007 through July 31, 2008	$347,802.88 ($19.1048 per rentable square foot)	$	28,983.57
August 1, 2008 through July 31, 2009	$358,092.35 ($19.670 per rentable square foot)	$	29,841.03
August 1, 2009 through July 31, 2010	$368,984.40 ($20.2683 per rentable square foot)	$	30,748.70
August 1, 2010 through July 31, 2011	$380,054.86 ($20.8764 per rentable square foot)	$	31,671.24

This Base Rent for the Additional Premises shall be payable in addition to all amounts payable under the Lease and if such Base Rent is not paid when and as required, Landlord shall have all rights and remedies provided in the Lease.

5. Expense and Tax Charges as to Additional Premises. In addition to Base Rent for the Additional Premises, Tenant shall also pay Operating Cost Share Rent and Tax Share Rent therefor, defined and calculated as provided in the Lease, commencing with respect to the Additional Premises on the Additional Premises Rent Commencement Date. Operating Cost Share Rent and Tax Share Rent shall continue to be due and payable for the Premises in addition to the Additional Premises, and shall be billed as provided in the Lease. Tenant’s failure to pay such Additional Rent when and as required under the Lease shall constitute a default thereunder.

6. Termination Option. The last sentence of Section 31 of the Lease is hereby deleted in its entirety and replaced by the following:

The “Termination Fee” shall be equal to $6,840 272.00.

7. Condition of the Additional Premises; Tenant Allowance.

A. TENANT HEREBY ACKNOWLEDGES AND AGREES THAT TENANT, AS OF THE DATE HEREOF, LEASES THE ADDITIONAL PREMISES PURSUANT TO THE ORIGINAL LEASE, IS FAMILIAR WITH THE CONDITION THEREOF, AND, LANDLORD IS LEASING THE ADDITIONAL PREMISES TO TENANT “AS-IS” WITHOUT REPRESENTATIONS OR WARRANTIES, INCLUDING ANY EXPRESS OF IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS OR HABITABILITY AND WITHOUT OBLIGATION TO ALTER, REMODEL, IMPROVE, REPAIR, DECORATE OR CLEAN ANY PART OF THE ADDITIONAL PREMISES OR ANY OTHER PORTION OF THE BUILDING.

B. Landlord shall provide an allowance for improvement of the Additional Premises in the amount of $728,200.00 (“Landlord’s Contribution”) and an allowance for the preparation of Tenant’s plans and specifications in the amount of $2,194.60 (the “Plan Contribution”), in accordance with the Workletter attached hereto as Exhibit B. The Landlord’s Contribution and the Plan Contribution shall be used only for costs associated with the Additional Premises.

8. Real Estate Brokers. Landlord agrees to pay any commissions due to Lincoln Property Company Commercial, Inc. and Julien J. Studley Inc. (collectively, the “Broker”)

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arising out of this transaction. Each party hereby agrees to indemnify and hold the other party and their respective agents and employees harmless from and against any and all damages, liabilities, claims, actions, costs and expenses (including attorneys’ fees) arising from either (i) any claims or demands resulting from the actions of the indemnifying party, of any broker, other than the Broker, salesperson or finder for any fee or commission alleged to be due such broker, salesperson or finder in connection with this First Amendment or (ii) a claim of, or right to, any lien under the Statutes of the State of Illinois relating to real estate broker liens with respect to any such broker, salesperson or finder resulting from the actions of the indemnifying party (excluding the Broker).

9. Submission. Submission of this First Amendment by Landlord or Landlord’s agent, or their respective agents or representatives, to Tenant for examination and/or execution shall not in any manner bind Landlord and no obligations on Landlord shall arise under this First, Amendment unless and until this First Amendment is fully signed and delivered by Landlord and Tenant.

10. Binding Effect; Conflict. The Lease, as amended hereby, shall continue in full force and effect, subject to the terms and provisions thereof and hereof. In the event of any conflict between the terms of the Lease and the terms of this First Amendment, the terms of this First Amendment shall control. This First Amendment shall be binding upon and inure to the benefit of Landlord, Tenant and their respective successors and permitted assigns. Except as specifically provided herein to the contrary, all references and provisions in the Lease referring to the Premises shall be deemed to include and refer to the Additional Premises, as modified herein.

11. Limitation of Liability. Neither Landlord nor any officer, director, member or employee of Landlord nor any owner of the Building, whether disclosed or undisclosed, shall have any personal liability with respect to any of the provisions of the Lease, as hereby amended, or the Premises, and if Landlord is in breach or default with respect to Landlord’s obligations under the Lease, as hereby amended, or otherwise, Tenant shall look solely to the equity interest of Landlord in the Building for the satisfaction of Tenant’s remedies or judgments.

12. Limited Applicability. The terms of this First Amendment set forth in paragraphs 2, 3, 4, 5, and 6 shall not affect the terms and provisions of the Lease with respect to the original Premises (excluding the Additional Premises), but except for the amount of Rent payments and other terms specifically modified herein, all terms and provisions of the Lease shall apply to the Additional Premises.

13. Counterparts; Facsimile. This First Amendment may be executed in multiple counterparts and by facsimile transmission.

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IN WITNESS WHEREOF, this First Amendment is executed as of the day and year aforesaid.

LANDLORD: LINCOLN-CARLYLE ILLINOIS CENTER, L.L.C., a Delaware limited liability company
By:	Lincoln Illinois Center, LLC, a Delaware liability company, Managing Member
By:	Lincoln Investors Group 3, Inc., a Texas corporation, Managing Member
By:	/s/    JOHN B. GRISSIM
Name:	John B. Grissim, Vice President
TENANT:
FEDERAL HOME LOAN BANK OF CHICAGO, a corporation organized under the laws of the United States of America
By:	/s/    THOMAS D. SHEEHAN
Its:	Thomas D. Sheehan Senior Vice President

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EXHIBIT B

TENANT IMPROVEMENT WORKLETTER

This Work Letter Agreement (“Work Letter Agreement”) is executed simultaneously with that certain First Amendment to Lease (the “Lease”) between FEDERAL HOME LOAN BANK OF CHICAGO, a corporation organized under the laws of the United States of America “Tenant,” and LINCOLN-CARLYLE ILLINOIS CENTER, L.L.C., a Delaware limited liability company, as “Landlord”, relating to Additional Premises (as defined therein) at the building located at 111 East Wacker Drive, Chicago, Illinois (the “Building”), which Additional Premises are more fully identified in the Lease. Capitalized terms used herein, unless otherwise defined in this Work Letter Agreement, shall have the respective meanings ascribed to them in the Lease.

For and in consideration of the agreement to lease the Premises and the mutual covenants contained herein and in the Lease, Landlord and Tenant hereby agree as follows:

1. WORK. Tenant, at its sole cost and expense, shall perform, or cause to be performed, the work, and all other tenant improvements (collectively, the “Work”) in the Additional Premises provided for in the Approved Plans and Budget (as defined in Paragraph 2 hereof). Subject to Tenant’s satisfaction of the conditions specified in this Workletter, Tenant shall be entitled to Landlord’s Contribution (as defined hereinbelow).

2. PRE-CONSTRUCTION ACTIVITIES.

(a) On or before June 1, 2001, but in no event later than commencement of demolition and the Work, Tenant shall submit the Plans (as hereinafter defined) for the Work, which Plans and the Budget (as hereinafter defined) shall be subject to Landlord’s approval in accordance with Paragraph 3(b) below. Prior to commencement of the Work, Tenant shall submit the following information and items to Landlord for Landlord’s review and approval, which approval shall not be unreasonably withheld or delayed:

(i) A detailed construction schedule containing the major components of the Work and the time required for each, including the scheduled commencement date of construction of the Work, milestone dates and the estimated date of completion of construction.

(ii) A budget (the “Budget”) and an itemized statement of estimated design, planning, construction and other costs (as such figure may be revised to reflect actual costs, the “Costs”), including, without limitation, demolition construction, cabling, and all soft costs and all fees for permits and architectural and engineering fees.

(iii) The names and addresses of Tenant’s contractors (and said contractors subcontractors) and materialmen to be engaged by Tenant for the Work (individually, a “Tenant Contractor,” and collectively, “Tenant’s Contractors”). Landlord has the right to approve or disapprove all or any one or more of Tenant’s Contractors, which approval shall not be unreasonably withheld or delayed. Landlord may, at its election, provide a list of approved contractors for performance of those portions of work involving electrical, mechanical, plumbing, heating, air conditioning or life safety systems, from which Tenant may, but shall not be obligated to, select its contractors for such designated portions of Work.

(iv) Certified copies of insurance policies or certificates of insurance as hereinafter described. Tenant shall not permit Tenant’s Contractors to commence work until the required insurance has been obtained and certified copies of policies or certificates have been delivered to Landlord.

Tenant will update such information and items by notice to Landlord of any changes.

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(b) As used herein the term “Approved Plans” shall mean the Plans (as hereinafter defined), as and when approved in writing by Landlord pursuant to this paragraph. As used herein, the term “Plans” shall mean the full and detailed architectural and engineering plans and specifications covering the Work (including, without limitation, all items for which the Landlord’s Contribution is to be used and all architectural, mechanical and electrical working drawings for the Work). The Plans shall be subject to Landlord’s approval and the approval of all local governmental authorities requiring approval of the Work and/or the Approved Plans. Landlord shall give its approval or disapproval (giving detailed reasons in case of disapproval) of the Plans within five (5) business days after their delivery to Landlord. Landlord agrees not to unreasonably withhold its approval of said Plans; provided, however, that Landlord shall not be deemed to have acted unreasonably if it withholds its approval of the Plans because, in Landlord’s reasonable opinion: the Work as shown in the Plans is likely to adversely affect Building systems, the structure of the Building or the safety of the Building and/or its occupants; the Work as shown on the Plans might impair Landlord’s ability to furnish services to Tenant or other tenants; the Work would increase the cost of operating the Building; the Work would violate any governmental laws, rules or ordinances (or interpretations thereof); the Work contains or uses hazardous or toxic materials or substances; the Work would adversely affect the appearance of the Building; the Work might adversely affect another tenant’s premises; the Work does not conform to the then current building standards established by Landlord; or the Work is prohibited by any mortgage or trust deed encumbering the Building. The foregoing reasons, however, shall not be exclusive of the reasons for which Landlord may withhold consent, whether or not such other reasons are similar or dissimilar to the foregoing. If Landlord notifies Tenant that changes are required to the final Plans submitted by Tenant, Tenant shall submit to Landlord, for its approval, the Plans amended in accordance with the changes so required, which approval shall be subject to the terms of this paragraph. The Plans shall also be revised, and the Work shall be changed, all at Tenant’s cost and expense (but payable from Landlord’s Contribution), to incorporate any work required in the Premises by any local governmental field inspector. Landlord’s approval of the Plans shall in no way be deemed to be (i) an acceptance or approval of any element therein contained which is in violation of any applicable laws, ordinances, regulations or other governmental requirements, or (ii) an assurance that work done pursuant to the Approved Plans will comply with all applicable laws (or with the interpretations thereof) or satisfy Tenant’s objectives and needs.

(c) No demolition or Work shall be undertaken or commenced by Tenant in the Additional Premises without Landlord’s prior written consent until (i) Tenant has delivered, and Landlord has approved, all items set forth in Paragraph 2(a) above and (ii) all necessary building permits have been applied for and obtained by Tenant.

3. DELAYS. In the event Tenant fails to deliver or deliver in sufficient and accurate detail the information required under Paragraph 3 above on or before the respective dates specified in said Paragraph 3, or in the event Tenant, for any reason, fails to complete the Work on or before the Additional Premises Rent Commencement Date, Tenant shall be responsible for Rent and all other obligations set forth in the Lease from the Additional Premises Rent Commencement Date regardless of the degree of completion of the Work on such date, and no such delay in completion of the Work shall relieve Tenant of any of its obligations under the First Amendment to the Lease.

4. CHARGES AND FEES. Tenant shall pay Landlord supervisory fee in an amount equal to two percent (2%) of Landlord’s Contribution (as hereinafter defined) to defray Landlord’s expenses incurred to review the Plans and coordinate with Tenant’s on-site project manager the staging and progress of the Work.

5. CHANGE ORDERS. All changes to the Approved Plans requested by Tenant must be approved by Landlord in advance of the implementation of such changes as part of the Work which approval shall not be unreasonably withheld or delayed. All delays caused by Tenant-initiated change orders, including, without limitation, any stoppage of work during the change order review process, are solely the responsibility of Tenant and shall cause no delay in the Additional Premises Commencement Date or the payment of Rent and other obligations therein set forth; provided, however, that delays in approval or disapproval by Landlord of

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change orders in excess of the time periods permitted in Section 2(b) hereof, will result in a postponement of the Additional Premises Rent Commencement Date for a period of time equal to the number of days of such delay. All increases in the cost of the Work resulting from such change orders shall (subject to Paragraph 8 below) be borne by Tenant.

6. STANDARDS OF DESIGN AND CONSTRUCTION AND CONDITIONS OF TENANT’S PERFORMANCE. All work done in or upon the Premises by Tenant shall be done according to the standards set forth in this Paragraph 6, except as the same may be modified in the Approved Plans approved by or on behalf of Landlord and Tenant.

(a) Tenant’s Approved Plans and all design and construction of the Work shall comply with all applicable statutes, ordinances, regulations, laws, codes and industry standards, including, but not limited to, reasonable requirements of Landlord’s fire insurance underwriters.

(b) Tenant shall, at its own cost and expense (but payable from Landlord’s Contribution), obtain all required building permits and occupancy permits. Tenant’s failure to obtain such permits shall not cause a delay in the commencement of the Term or the obligation to pay Rent or any other obligations set forth in the Lease.

(c) Tenant’s Contractors shall be licensed contractors, possessing good labor relations, capable of performing quality workmanship and working in harmony with Landlord’s contractors and subcontractors and with other contractors and subcontractors in the Building. All work shall be coordinated with any other construction or other work in the Building in order not to adversely affect construction work being performed by or for Landlord or its tenants.

(d) Tenant shall use only new, first-class materials in the Work, except where explicitly shown in the Approved Plans. All Work shall be done in a good and workmanlike manner. Tenant shall obtain contractors’ warranties of at least one (1) year duration from the completion of the Work against defects in workmanship and materials on all work performed and equipment installed in the Additional Premises as part of the Work.

(e) Tenant and Tenant’s Contractors shall make all commercially reasonable efforts and take all commercially reasonable steps appropriate to assure that all construction activities undertaken comport with the reasonable expectations of all tenants and other occupants of a fully-occupied (or substantially fully occupied) first-class office building and do not unreasonably interfere with the operation of the Building or with other tenants and occupants of the Building. In any event, Tenant shall comply with all reasonable rules and regulations existing from time to time at the Building. Tenant and Tenant’s Contractors shall take all precautionary steps to minimize dust, noise and construction traffic, and to protect their facilities and the facilities of others affected by the Work and to properly police same. Construction equipment and materials are to be kept within the Additional Premises and delivery and loading of equipment and materials shall be done at such locations and at such time as Landlord reasonably shall direct so as not to burden the construction or operation of the Building. If and as reasonably required by Landlord, the Additional Premises shall be sealed off from the balance of the office space on the floor(s) containing the Premises so as to minimize the disbursement of dirt, debris and noise.

(f) Landlord shall have the right , after not less than five (5) days notice to Tenant, to order Tenant or any of Tenant’s Contractors who violate the requirements imposed on Tenant or Tenant’s Contractors in performing work to cease work and remove its equipment and employees from the Building. No such action by Landlord shall delay the commencement of the Lease or the obligation to pay Rent or any other obligations therein set forth.

(g) Utility costs or charges for any service (including HVAC, hoisting or freight elevator and the like) to the Additional Premises shall be the responsibility of Tenant and shall be paid for by Tenant at Landlord’s standard rates then in effect as provided below. Tenant shall pay for all support services provided by Landlord’s

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contractors at Tenant’s request or at Landlord’s discretion resulting from breaches or defaults by Tenant under this Work Letter Agreement. For purposes of the Work, Tenant shall have the nonexclusive right to use the Building’s freight elevators subject to availability and scheduling as may be reasonably established by Landlord. Such freight elevator use by Tenant during normal business hours shall be free of charge; provided, however, to the extent Tenant utilizes such freight elevators prior to 8:00 a.m. and after 5:00 p.m. on Monday through Friday and anytime on Saturday, Sunday and holidays, such use shall be at the standard Building charge for after-hours freight elevator service; provided, further, if any other tenant of the Building is also using said freight elevator’s with Tenant after such time periods, then any charge to Tenant shall be apportioned between or among all parties utilizing such freight elevators. Tenant shall arrange and pay for removal of construction debris and shall not place debris in the Building’s waste containers. Subject to space availability and Tenant’s compliance with Landlord’s reasonable rules and regulations, Landlord shall permit Tenant’s Contractors to place waste containers at the Building loading dock for after-hours removal of waste and debris. If required by Landlord, Tenant shall sort and separate its waste and debris for recycling and/or environmental law compliance purposes.

(h) Tenant shall permit access to the Additional Premises, and the Work shall be subject to inspection, by Landlord and Landlord’s architects, engineers, contractors and other representatives, at all times during the period in which the Work is being constructed and installed and following completion of the Work.

(i) Tenant shall proceed with its work expeditiously, continuously and efficiently, and shall use all commercially reasonable efforts to complete the same on or before the Additional Premises Rent Commencement Date. Tenant shall notify Landlord upon completion of the Work and shall furnish Landlord and Landlord’s title insurance company with such further documentation as may be necessary under the requirements herein.

(j) Tenant shall have no authority to deviate from the Approved Plans in performance of the Work, except as approved by Landlord and its designated representative in writing, which approval shall not be unreasonably withheld or delayed. Tenant shall furnish to Landlord “as-built” drawings of the Work within thirty (30) days after completion of the Work.

(k) Landlord shall have the right to run utility lines, pipes, conduits, duct work and component parts of all mechanical and electrical systems where necessary or desirable through the Additional Premises, to repair, alter, replace or remove the same, and to require Tenant to install and maintain proper access panels thereto.

(l) Tenant shall impose on and enforce all applicable terms of this Work Letter Agreement against Tenant’s architect and Tenant’s Contractors.

(m) Tenant and Landlord each acknowledges and agrees that the Work will include any work, both within and outside the Additional Premises, that may be necessary in order for Tenant to use and occupy the Premises.

7. INSURANCE AND INDEMNIFICATION.

(a) In addition to any insurance which may be required under the Lease, Tenant shall secure, pay for and maintain or cause Tenant’s Contractors to secure, pay for and maintain during the continuance of construction and fixturing work within the Building or Additional Premises, insurance in the following minimum coverages and the following minimum limits of liability:

(i) Worker’s Compensation and Employer’s Liability Insurance with limits of not less than $500,000.00, or such higher amounts as may be required from time to time by any Employee Benefit Acts or other statutes applicable where the work is to be performed, and in any event sufficient to protect Tenant’s Contractors from liability under the aforementioned acts.

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(ii) Comprehensive General Liability Insurance (including Contractors’ Protective Liability) in an amount not less than $1,000,000.00 per occurrence whether involving bodily injury liability (or death resulting therefrom) or property damage liability or a combination thereof with minimum aggregate limit of $2,000,000.00, and with umbrella coverage with limits not less than $3,000,000.00. Such insurance shall provide for explosion and collapse, completed operations coverage and broad form blanket contractual liability coverage and shall insure Tenant’s Contractors against any and all claims for bodily injury, including death resulting therefrom, and damage to the property of others and arising from its operations under the contracts whether such operations are performed by Tenant’s Contractors or by anyone directly or indirectly employed by any of them.

(iii) Comprehensive Automobile Liability Insurance, including the ownership, maintenance and operation of any automotive equipment, owned, hired, or non-owned in an amount not less than $500,000.00 for each person in one accident, and $1,000,000.00 for injuries sustained by two or more persons in any one accident and property damage liability in an amount not less than $1,000,000.00 for each accident. Such insurance shall insure Tenant’s Contractors against any and all claims for bodily injury, including death resulting therefrom, and damage to the property of others arising from its operations under the contracts, whether such operations are performed by Tenant’s Contractors, or by anyone directly or indirectly employed by any of them.

(iv) “All-risk” builder’s risk insurance upon the entire Work to the full insurable value thereof. This insurance shall include the interests of Landlord and Tenant (and their respective contractors and subcontractors of any tier to the extent of any insurable interest therein) in the Work and shall insure against the perils of fire and extended coverage and shall include “all-risk” builder’s risk insurance for physical loss or damage including, without duplication of coverage, theft vandalism and malicious mischief. If portions of the Work are stored off the site of the Building or in transit to said site are not covered under said “all-risk” builder’s risk insurance, then Tenant shall effect and maintain similar property insurance on such portions of the Work.

All policies (except the worker’s compensation policy) shall be endorsed to include Landlord and Lincoln Property Company as additional insureds as their interests may appear. The waiver of subrogation provisions contained in the Lease shall apply to all insurance policies (except the workmen’s compensation policy) to be obtained by Tenant pursuant to this paragraph. The insurance policy endorsements shall also provide that all additional insured parties shall be given thirty (30) days’ prior written notice of any reduction, cancellation or non-renewal of coverage (except that ten (10) days’ notice shall be sufficient in the case of cancellation for non-payment of premium) and shall provide that the insurance coverage afforded to the additional insured parties thereunder shall be primary to any insurance carried independently by said additional insured parties. Additionally, where applicable, each policy shall contain a cross-liability and severability of interest clause.

(b) Without limitation of the indemnification provisions contained in the Lease, to the fullest extent permitted by law Tenant agrees to indemnify, protect, defend and hold harmless Landlord, the parties listed, or required by, the Lease to be named as additional insureds, Landlord’s contractors, Landlord’s architects, and their respective beneficiaries, partners, directors, officers, employees and agents, from and against all claims , liabilities, losses, damages and expenses of whatever nature arising out of or in connection with the Work or the entry of Tenant or Tenant’s Contractors into the Building and the Additional Premises, including, without limitation, mechanic’s liens, the cost of any repairs to the Additional Premises or Building necessitated by activities of Tenant or Tenant’s Contractors, bodily injury to persons (including, to the maximum extent provided by law, claims arising under the Illinois Structural Work Act) or damage to the property of Tenant, its employees, agents, invitees, licensees or others. It is understood and agreed that the foregoing indemnity shall be in addition to the insurance requirements set forth above and shall not be in discharge of or in substitution for same or any other indemnity or insurance provision of the Lease.

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8. LANDLORD’ S CONTRIBUTION; EXCESS AMOUNTS.

(a) Upon Tenant’s satisfaction of the requirements set forth in this Work Letter Agreement, Landlord shall make dollar contributions in the total amount of (i) $728,200.00 (“Landlord’s Contribution”) (which is $40.00 per square foot of Rentable Area of the Additional Premises) for application to the extent thereof to the Costs of the Work and (ii) $1,456.40 solely for application to the cost incurred by Tenant for the preparation of the Plans and (iii) $738.20 solely for the revision of the Plans (collectively the “Plan Contribution”). The Plan Contribution shall be in addition to the Landlord’s Contribution, however, for all other purposes hereunder the Plan Contribution shall be deemed part of the Landlord Contribution and shall be disbursed as part of the Landlord Contribution. Landlord shall have no obligation to fund any portion of Landlord’s Contribution prior to Landlord’s review and approval of the items referenced in Paragraph 2(a) hereof. If the Costs exceed Landlord’s Contribution, Tenant shall have sole responsibility for the payment of such excess cost. If the Costs of the Work are less than Landlord’s Contribution, Landlord shall make such excess amounts available to reimburse Tenant for additional improvements to the Premises, subject to Landlord’s review and approval of all items listed in Paragraph 2 of this Workletter with respect to such additional improvements, which approval shall not be unreasonably withheld or delayed. If the Costs of the Work are less than Landlord’s Contribution and Tenant does not utilize the full amount of such excess for additional improvements pursuant to the preceding sentence, provided that Tenant is not in default under the Lease, as amended such excess, up to a maximum of $54,615.00, shall be credited against Base Rent first coming due with respect to the Additional Premises and any balance thereof shall be retained by Landlord and shall not be available to Tenant as a credit against Base Rent or for any other purpose. Notwithstanding anything herein to the contrary, Landlord may deduct from Landlord’s Contribution any amounts due to Landlord or its architects or engineers under this Work Letter Agreement before disbursing any other portion of Landlord’s Contribution.

(b) Subject to the conditions herein, landlord shall make progress payments of Landlord’s Contribution amounts to Tenant or Tenant’s project manager on a monthly basis, for the Work performed during the previous month, less a retainage of 10% of each progress payment (the “Retainage”). Landlord shall not be required to fund amounts for any item in excess of the amount shown on the Budget previously approved by Landlord. Provided that Tenant delivers requisitions to Landlord on or prior to the first (1^st) day of any month, such progress payments shall be made within thirty (30) days next following the delivery to Landlord of requisitions therefor, signed by a financial officer of Tenant or by Tenant’s project manager, which requisitions shall set forth the names of each contractor and subcontractor to whom payment is due, and the amount thereof, and shall be accompanied by (i) an owner’s sworn statement, accompanied by (after the first requisition) copies of partial waivers of lien from all contractors, subcontractors and material suppliers shown on such sworn statement and covering all work and materials which were the subject of previous progress payments by Landlord and Tenant, (ii) a written certification from Tenant’s architect that the work for which the requisition is being made has been completed substantially in accordance with the Approved Plans (iii) copies of all applicable invoices, and (iv) such other documents and information as Landlord may reasonably request. All requisitions which are true, correct and complete in Landlord’s reasonable judgment and which are made prior to the first (1^st) day of any month shall be paid no later than the last day of the month following the month in which such requisitions are made. All requisitions shall be submitted on AlA Form G702 and G703. Landlord shall disburse the Retainage upon submission by Tenant to Landlord of a requisition therefor, accompanied by all documentation required under this Paragraph 9(b), together with (A) proof of the satisfactory completion of all required inspections issuance of any required approvals, permits and sign-offs for the Work by all governmental authorities having jurisdiction thereover, (B) final “as-built” plans and specifications for the Work; and (C) the issuance of original final lien waivers by all contractors, subcontractors and material suppliers. Further, and notwithstanding anything to the contrary hereinabove, no portion of the Landlord’s Contribution shall be due and payable, and Landlord shall have no obligation to pay, any portion thereof notwithstanding Tenant’s submission of requisitions in accordance with this Paragraph 8(b)

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so long as any mechanic’s lien exists (regardless of whether same has been bonded over or otherwise secured) against the Building. Further, if at any time prior to or during construction, Landlord reasonably determines that the actual remaining costs of the Work will exceed the unfunded amount of the Landlord’ s Contribution (plus any cash previously deposited into escrow by Tenant), then Landlord’s obligation to fund any requisition shall at Landlord’s sole option be subject to Tenant’s direct out-of-pocket payment of amounts sufficient to eliminate such excess.

9. MISCELLANEOUS.

(a) If the Plans for the Work require the construction and installation of more fire hose cabinets or telephone/electrical closets than the number regularly provided by Landlord in the core of the Building in which the Additional Premises are located, Tenant agrees to pay all costs and expenses arising from the construction and installation of such additional fire hose cabinets or telephone/electrical closets.

(b) Time is of the essence of this Work Letter Agreement.

(c) Any person signing this Work Letter Agreement on behalf of Landlord and Tenant warrants and represents he has authority to sign and deliver this Work Letter Agreement and bind the party on behalf of which he has signed.

(d) If Tenant fails to make any payment relating to the Work as required hereunder, Landlord, at its option, may complete the Work pursuant to the Approved Plans and continue to hold Tenant liable for the costs thereof and all other costs due to Landlord. Tenant’s failure to pay any amounts owed by Tenant hereunder when due or Tenant’s failure to perform its obligations hereunder shall also constitute a default under the Lease and Landlord shall have all the rights and remedies granted to Landlord under the Lease for nonpayment of any amounts owed thereunder or failure by Tenant to perform its obligations thereunder.

(e) Notices under this Work Letter Agreement shall be given in the same manner as under the Lease.

(f) The headings set forth herein are for convenience only.

(g) This Work Letter Agreement sets forth the entire agreement of Tenant and Landlord regarding the Work. This Work Letter may only be amended if in writing, duly executed by both Landlord and Tenant. This Work Letter is incorporated into the First Amendment to Lease by reference and made a part thereof.

(h) All amounts due from Tenant hereunder shall be deemed to be additional Rent due under the Lease.

(i) Landlord agrees that Landlord will pay for and install a fire sprinkling system in the Additional Premises and in the remainder of the Premises comprising the balance of the 4^th Floor, not later than December 31, 2001.

10. LIMITATION OF LIABILITY. Any liability of Landlord under this Work Letter Agreement shall be limited solely to its equity interest in the Building, and in no event shall any personal liability be asserted against Landlord in connection with the Work Letter Agreement nor shall any recourse be had to any other property or assets of Landlord.

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EX-10.1.2

Exhibit 10.1.2

SECOND AMENDMENT TO LEASE

THIS SECOND AMENDMENT TO LEASE (this “Second Amendment”) is made as of the 29^th day of October, 2003, by and between LINCOLN-CARLYLE ILLINOIS CENTER, L.L.C., a Delaware limited liability company (“Landlord”) and FEDERAL HOME LOAN BANK OF CHICAGO, a corporation organized under the laws of the United States of America (“Tenant”).

W I T N E S S E T H:

A. Landlord and Tenant entered into a certain Lease dated December 30, 1997 (the “1997 Lease”), whereby Landlord leased to Tenant certain premises containing approximately 81,000 square feet of rentable area of office space (the “Premises”) consisting of all of the office space on the 7^th and 8^th floors and a portion of the office space on the 4^th floor of the building located at 111 East Wacker Drive, Chicago, Illinois 60601 (the “Building”) for a lease term expiring on July 31, 2011.

B. By a certain First Amendment (the “First Amendment”) dated as of December 15, 2000, Landlord and Tenant added certain additional premises consisting of approximately 18,205 square feet of rentable area to the Premises governed by the terms of the 1997 Lease.

C. Landlord and Tenant now desire to add certain further additional space to the Premises, containing approximately 33,068 rentable square feet (the “6^th Floor Additional Premises”) consisting of the entire sixth (6^th) floor of the Building, to be governed by the terms and provision of the 1997 Lease, as amended by the First Amendment and the terms and provision herein (the 1997 Lease, as amended by the First Amendment, is sometimes referred to herein as the “Lease”).

NOW, THEREFORE, for good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows:

1. Definitions. Each capitalized term used in this Second Amendment shall have the same meaning as is ascribed to such capitalized term in the Lease, unless otherwise provided for herein.

2. 6^th Floor Additional Premises. Effective as of January 1, 2004 (the “6^th Floor Additional Premises Commencement Date”), the 6^th Floor Additional Premises shall be added to the Premises and deemed a part thereof for the remainder of the Term. The Tenant’s Proportionate Share with respect to the 6^th Floor Additional Premises only shall be 3.337%. The Tenant’s Proportionate Share with respect to the remaining Premises (other than the 6^th Floor Additional Premises) shall remain as stated in the Lease. Further, the “Tenant’s stairwell” as used in paragraph 35 of the Lease shall be deemed to include the Building stairwell between the 6^th and 7^th Floors of the Building and the 4^th and 6^th Floors of the Building, as well as the

stairwell described in the Lease. Tenant’s right to use such stairwell shall be subject to the conditions in paragraph 35 of the Lease.

3. Term as to Additional Premises. The Term as to the 6^th Floor Additional Premises shall commence on the 6^th Floor Additional Premises Commencement Date and shall terminate simultaneously with the expiration of the Term as to the remainder of the Premises.

4. Rent as to Additional Premises. Notwithstanding the 6^th Floor Additional Premises Commencement Date of January 1, 2004, Landlord and Tenant hereby agree that in order to allow Tenant to renovate the 6^th Floor Additional Premises, Tenant shall not be obligated to pay Base Rent, Operating Cost Share Rent or Tax Share Rent with respect to the 6^th Floor Additional Premises until April 1, 2004 (the “6^th Floor Additional Premises Rent Commencement Date”); provided, however, Tenant shall have the right to occupy and use the 6^th Floor Additional Premises as of the 6^th Floor Additional Premises Commencement Date, subject to Force Majeure. Base Rent shall be due for the 6^th Floor Additional Premises commencing on the 6^th Floor Additional Premises Rent Commencement Date and throughout the remainder of the Term in the following amounts, payable as and when installments of Base Rent are otherwise due and payable under the Lease:

Period	Annual Base Rent			Monthly Base Rent
April 1, 2004 through March 31, 2005	$	529,088.04	*	$	44,090.67	*
April 1, 2005 through March 31, 2006	$	542,315.23		$	45,192.94
April 1, 2006 through March 31, 2007	$	555,873.08		$	46,322.76
April 1, 2007 through March 31, 2008	$	569,769.89		$	47,480.82
April 1, 2008 through March 31, 2009	$	584,014.13		$	48,667.84
April 1, 2009 through March 31, 2010	$	598,614.48		$	49,884.54
April 1, 2010 through March 31, 2011	$	613,579.84		$	51,131.65
April 1, 2011 through July 31, 2011	$	628,919.33		$	52,409.94

* Subject to partial abatement as provided hereinafter

This Base Rent for the 6^th Floor Additional Premises shall be payable in addition to all amounts payable under the Lease and if such Base Rent is not paid when and as required, Landlord shall have all rights and remedies provided in the Lease.

Further, notwithstanding any other provision herein, provided no Default has occurred under the Lease, Base Rent in the amount of $22,045.33 per month shall abate until April 1, 2005, and until April 1, 2005, the Tenant’s Proportionate Share with respect to the 6^th Floor Additional Premises only shall be reduced to 1.669%, rather than 3.337%, for purposes of calculating the Operating Cost Share Rent or Tax Share Rent due with respect to the 6^th Floor Additional Premises. Notwithstanding the foregoing, in the event that due to Force Majeure or for any other reason other than a delay caused by Tenant or its agents, representatives,

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employees, or contractors, the 6^th Floor Additional Premises Commencement Date occurs after January 15, 2004, as Tenant’s sole remedy, the 6^th Floor Additional Premises Rent Commencement Date shall be postponed for an equal number of days and Tenant shall be entitled to a further credit against Rent due from and after the 6^th Floor Additional Premises Commencement Date equal to one-and-one-half day’s Rent times the number of days the 6^th Floor Additional Premises Rent Commencement Date is delayed beyond January 15, 2004. Further, if the 6^th Floor Additional Premises Commencement Date has not occurred by February 15, 2004, then Tenant shall have the option to terminate Tenant’s obligation to lease the 6^th Floor Additional Premises pursuant to this Second Amendment by written notice to Landlord at any time after February 15, 2004 and prior to the occurrence of the 6^th Floor Additional Premises Rent Commencement Date. If Tenant does so terminate its obligations under this Second Amendment, such termination shall not affect any of the parties’ obligations under the Lease, but this Second Amendment shall terminate and shall be of no further force or effect. Landlord agrees to use diligent, commercially reasonable efforts to enforce its rights to obtain the 6^th Floor Additional Premises and to deliver same to Tenant when and as required under the lease applicable thereto.

5. Expense and Tax Charges as to Additional Premises. In addition to Base Rent for the 6^th Floor Additional Premises, Tenant shall also pay Operating Cost Share Rent and Tax Share Rent therefor, defined and calculated as provided in the Lease, commencing with respect to the 6^th Floor Additional Premises on the 6^th Floor Additional Premises Rent Commencement Date. Operating Cost Share Rent and Tax Share Rent shall continue to be due and payable for the Premises in addition to the 6^th Floor Additional Premises, and shall be billed as provided in the Lease. Tenant’s failure to pay such 6^th Floor Additional Rent when and as required under the Lease shall constitute a default thereunder.

6. Termination Option. The last sentence of Section 31 of the Lease is hereby deleted in its entirety and replaced by the following:

“The Termination Fee shall be equal to $8,451,272.”

7. Tenant Allowance. Landlord shall provide an allowance for improvement of the 6^th Floor Additional Premises and Tenant’s stairwell in the amount of $1,818,740.00 (“Landlord’s Contribution”) and an allowance for the preparation of Tenant’s plans and specifications in the amount of $3,968.16 (the “Plan Contribution”), in accordance with the Work Letter attached hereto as Exhibit B. The Landlord’s Contribution and the Plan Contribution shall be used only for costs associated with the 6^th Floor Additional Premises.

8. Real Estate Brokers. Landlord agrees to pay any commissions due to Lincoln Property Company Commercial, Inc. and Julian J. Studley, Inc. (collectively, the “Broker”) arising out of this transaction. Each party hereby agrees to indemnify and hold the other party and their respective agents and employees harmless from and against any and all damages, liabilities, claims, actions, costs and expenses (including attorneys’ fees) arising from either (i) any claims or demands resulting from the actions of the indemnifying party, of any broker, other than the Broker, salesperson or finder for any fee or commission alleged to be due such broker, salesperson or finder in connection with this Amendment or (ii) a claim of, or right to,

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any lien under the Statutes of the State of Illinois relating to real estate broker liens with respect to any such broker, salesperson or finder resulting from the actions of the indemnifying party (excluding the Broker).

9. Submission. Submission of this Second Amendment by Landlord or Landlord’s agent, or their respective agents or representatives, to Tenant for examination and/or execution shall not in any manner bind Landlord and no obligations on Landlord shall arise under this Second Amendment unless and until this Second Amendment is fully signed and delivered by Landlord and Tenant.

10. Binding Effect; Conflict. The Lease, as amended hereby, shall continue in full force and effect, subject to the terms and provisions thereof and hereof. In the event of any conflict between the terms of the Lease and the terms of this Second Amendment, the terms of this Second Amendment shall control. This Second Amendment shall be binding upon and inure to the benefit of Landlord, Tenant and their respective successors and permitted assigns. Except as specifically provided herein to the contrary, all references and provisions in the Lease referring to the Premises shall be deemed to include and refer to the 6^th Floor Additional Premises, as modified herein.

11. Limitation of Liability. Neither Landlord nor any officer, director, member or employee or Landlord nor any owner of the Building, whether disclosed or undisclosed, shall have any personal liability with respect to any of the provisions of the Lease, as hereby amended of the Premises, and if Landlord is in breach or default with respect to Landlord’s obligations under the Lease, as hereby amended, or otherwise, Tenant shall look solely to the equity interest of Landlord in the Building for the satisfaction of Tenant’s remedies or judgments.

12. Limited Applicability. The terms of this Second Amendment set forth in paragraphs 2, 3, 4, 5, and 7 shall not affect the terms and provisions of the Lease with respect to the remaining Premises, but except for the amount of Rent payments and other terms specifically modified herein, all terms and provisions of the Lease shall apply to the 6^th Floor Additional Premises.

13. Counterparts; Facsimile. This Second Amendment may be executed in multiple counterparts and by facsimile transmission.

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LANDLORD:
LINCOLN-CARLYLE ILLINOIS CENTER, L.L.C., a Delaware limited liability company
By:	Lincoln Illinois Center, LLC, a Delaware liability company, Managing Member
By:	Lincoln Investors Group 31, Inc., a Texas corporation Managing Member
By:	/s/    JOHN B. GRISSIM
Name:	John B. Grissim
Its:	Vice President
TENANT:
FEDERAL HOME LOAN BANK OF CHICAGO, a corporation organized under the laws of the United States of America
By:	/s/    THOMAS D. SHEEHAN
Its:	Senior Vice President

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EXHIBIT A

6^TH FLOOR ADDITIONAL PREMISES

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EXHIBIT B

TENANT IMPROVEMENT WORKLETTER

This Work Letter Agreement (“Work Letter Agreement” ) is executed simultaneously with that certain Second Amendment to Lease (the “Lease” ) between FEDERAL HOME LOAN BANK OF CHICAGO, a corporation organized under the laws of the United States of America “Tenant”, and LINCOLN-CARLYLE ILLINOIS CENTER, L.L.C., a Delaware limited liability company, as “Landlord”, relating to the 6^th Floor Additional Premises (as defined therein) at the building located at 111 East Wacker Drive, Chicago, Illinois (the “Building”), which 6^th Floor Additional Premises are more fully identified in the Lease. Capitalized terms used herein, unless otherwise defined in this Work Letter Agreement, shall have the respective meanings ascribed to them in the Lease.

For and in consideration of the agreement to lease the Premises and the mutual covenants contained herein and in the Lease, Landlord and Tenant hereby agree as follows:

1. WORK. Tenant, at its sole cost and expense, shall perform, or cause to be performed, the work and all other tenant improvements (collectively, the “Work”) in the 6^th Floor Additional Premises provided for in the Approved Plans and Budget (as defined in Paragraph 2 hereof). Subject to Tenant’s satisfaction of the conditions specified in this Work Letter, Tenant shall be entitled to Landlord’s Contribution (as defined hereinbelow).

2. PRE-CONSTRUCTION ACTIVITIES.

(a) Prior to commencement of demolition and the Work, Tenant shall submit the Plans (as hereinafter defined) for the Work, which Plans and the Budget (as hereinafter defined) shall be subject to Landlord’s approval in accordance with Paragraph 3(b) below. Prior to commencement of the Work, Tenant shall also submit the following information and items to Landlord for Landlord’s review and approval, which approval shall not be unreasonably withheld or delayed;

(i) A detailed construction schedule containing the major components of the Work and the time required for each, including the scheduled commencement date of construction of the Work, milestone dates and the estimated date of completion of construction.

(ii) A budget (“Budget”) and an itemized statement of estimated design, planning, construction and other costs (as such figure may be revised to reflect actual costs, the “Costs”), including, without limitation, demolition construction, cabling, and all soft costs and all fees for permits and architectural and engineering fees.

(iii) The names and addresses of Tenant’s contractors (and said contractor’s subcontractors) and materialmen to be engaged by Tenant for the

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Work (individually, a “Tenant Contractor,” and collectively, “Tenant’s Contractors”). Landlord has the right to approve or disapprove all or anyone or more of Tenant’s Contractors, which approval shall not be unreasonably withheld or delayed. Landlord may, at its election, provide a list of approved contractors for performance of those portions of work involving electrical, mechanical, plumbing, heating, air conditioning or life safety systems, from which Tenant may, but shall not be obligated to, select its contractors for such designated portions of Work.

(iv) Certified copies of insurance policies or certificates of insurance as hereinafter described. Tenant shall not permit Tenant’s Contractors to commence work until the required insurance has been obtained and certified copies of policies or certificates have been delivered to Landlord.

Tenant will update such information and items by notice to Landlord of any changes.

(b) As used herein the term “Approved Plans” shall mean the Plans (as hereinafter defined), as and when approved in writing by Landlord pursuant to this paragraph. As used herein, the term “Plans” shall mean the full and detailed architectural and engineering plans and specifications covering the Work (including, without limitation, all items for which the Landlord’s Contribution is to be used and all architectural, mechanical and electrical, working drawings for the Work). The Plans shall be subject to Landlord’s approval and the approval of all local governmental authorities requiring approval of the Work and/or the Approved Plans. Landlord shall give its approval or disapproval (giving detailed reasons in case of disapproval) of the Plans within five (5) business days after their delivery to Landlord. Landlord agrees not to unreasonably withhold its approval of said Plans; provided, however, that Landlord shall not be deemed to have acted unreasonably if it withholds its approval of the Plans because, in Landlord’s reasonable opinion: the Work as shown in the Plans is likely to adversely affect Building systems, the structure of the Building or the safety of the Building and/or its occupants; the Work as shown on the Plans might impair Landlord’s ability to furnish services to Tenant or other tenants; the Work would increase the cost of operating the Building; the Work would violate any governmental laws, rules or ordinances (or interpretations thereof); the Work contains or uses hazardous or toxic materials or substances; the Work would adversely affect the appearance of the Building; the Work might adversely affect another tenant’s premises; the Work does not conform to the then current building standards established by Landlord; or the Work is prohibited by any mortgage or trust deed encumbering the Building. The foregoing reasons, however, shall not exclusive of the reasons for which Landlord may withhold consent, whether or not such other reasons are similar or dissimilar to the foregoing. If Landlord notifies Tenant that changes are required to the final Plans submitted by Tenant, Tenant shall prior to commencement of any Work, submit to Landlord, for its approval, the Plans amended in accordance with the changes so required. Landlord shall respond to Tenant’s submission of such amended Plans within five (5) business days of receipt, it being agreed that Landlord’s approval thereto shall be limited to those items to which Landlord had objected pursuant to the prior submission of the Plans. Such procedure for review

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with respect to any further objections to the Plans by Landlord shall continue until the Plans are finally approved by Landlord. The Plans shall also be revised, and the Work shall be changed, all at Tenant’s cost and expense (but payable from Landlord’s Contribution), to incorporate any work required in the Premises by any local governmental field inspector. Landlord’s approval of the Plans shall in no way be deemed to be (i) an acceptance or approval of any element therein contained which is in violation of any applicable laws, ordinances, regulations or other governmental requirements, or (ii) an assurance that work done pursuant to the Approved Plans will comply with all applicable laws (or with the interpretations thereof) or satisfy Tenant’s objectives and needs.

(c) No demolition or Work shall be undertaken or commenced by Tenant in the 6^th Floor Additional Premises without Landlord’s prior written consent until (i) Tenant has delivered, and Landlord has approved, all items set forth in Paragraph 2(a) above and (ii) all necessary building permits have been applied for and obtained by Tenant.

3. DELAYS. In the event Tenant fails to deliver or deliver in sufficient and accurate detail the information required under Paragraph 2 above or in the event Tenant, for any reason, fails to complete the Work on or before the 6^th Floor Additional Premises Rent Commencement Date, Tenant shall be responsible for Rent and all other obligations set forth in the Lease from the 6^th Floor Additional Premises Rent Commencement Date regardless of the degree of completion of the Work on such date, and no such delay in completion of the Work shall relieve Tenant of any of its obligations under the Second Amendment to the Lease.

4. CHARGES AND FEES. Tenant shall pay Landlord a supervisory fee in an amount equal to one and one-half percent (1.5%) of Landlord’s Contribution (as hereinafter defined) (not to exceed $19,840.80) to defray Landlord’s expenses incurred to review the Plans and coordinate with Tenant’s on-site project manager the staging and progress of the Work.

5. CHANGE ORDERS. All changes to the Approved Plans requested by Tenant must be approved by Landlord in advance of the implementation of such changes as part of the Work which approval shall not be unreasonably withheld or delayed. All delays caused by Tenant-initiated change orders, including, without limitation, any stoppage of work during the change order review process, are solely the responsibility of Tenant and shall cause no delay in the 6^th Floor Additional Premises Commencement Date or the payment of Rent and other obligations therein set forth; provided, however, that delays in approval or disapproval by Landlord in excess of the time periods permitted in Section 2(b) hereof, will result in a postponement of the 6^th Floor Additional Premises Rent Commencement Date for a period of time equal to the number of days of such delay. All increases in cost of the Work resulting from such change orders shall (subject to Paragraph 8 below) be borne by Tenant.

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6. STANDARDS OF DESIGN AND CONSTRUCTION AND CONDITIONS OF TENANT’S PERFORMANCE. All work done in or upon the 6^th Floor Additional Premises by Tenant shall be done according to the standards set forth in this Paragraph 6, except as the same may be modified in the Approved Plans approved by or on behalf of Landlord and Tenant:

(a) Tenant’s Approved Plans and all design and construction of the Work shall comply with all applicable statutes, ordinances, regulations, laws, codes and industry standards, including, but not limited to, reasonable requirements of Landlord’s fire insurance underwriters.

(b) Tenant shall, at its own cost and expense (but payable from Landlord’s Contribution), obtain all required building permits and occupancy permits. Tenant’s failure to obtain such permits shall not cause a delay in the commencement of the Term or the obligation to pay Rent or any other obligations set forth in the Lease.

(c) Tenant’s Contractors shall be licensed contractors, possessing good labor relations, capable of performing quality workmanship and working in harmony with Landlord’s contractors and subcontractors and with other contractors and subcontractors in the Building. All work shall be coordinated with any other construction or other work in the Building in order not to adversely affect construction work being performed by or for Landlord or its tenants.

(d) Tenant shall use only new, first-class materials in the Work, except where explicitly shown in the Approved Plans. All Work shall be done in a good and workmanlike manner. Tenant shall obtain contractors’ warranties of at least one (1) year duration from the completion of the Work against defects in workmanship and materials on all work performed and equipment installed in the 6^th Floor Additional Premises as part of the Work.

(e) Tenant and Tenant’s Contractors shall make all commercially reasonable efforts and take all commercially reasonable steps appropriate to assure that all construction activities undertaken comport with the reasonable expectations of all tenants and other occupants of a full-occupied (or substantially fully occupied) first-class office building and do not unreasonably interfere with the operation of the Building or with other tenants and occupants of the Building. In any event, Tenant shall comply with all reasonable rules and regulations existing from time to time at the Building. Tenant and Tenant’s Contractors shall take all precautionary steps to minimize dust, noise and construction traffic, and to protect their facilities and the facilities of others affected by the Work and to properly police same. Construction equipment and materials are to be kept within the 6^th Floor Additional Premises and delivery and loading of equipment and materials shall be done at such locations and at such time as Landlord reasonably shall direct so as not to burden the construction or operation of the Building.

(f) Landlord shall have the right, after not less than five (5) days notice to Tenant, to order Tenant or any of Tenant’s Contractors who violate the requirements imposed on Tenant or Tenant’s Contractors in performing work to cease work and remove its equipment and employees from the Building. No such action by Landlord shall delay the commencement of the Lease or the obligation to pay Rent or any other obligations therein set forth.

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(g) Utility costs or charges for any service (including HVAC, hoisting or freight elevator and the like) to the 6^th Floor Additional Premises shall be the responsibility of Tenant and shall be paid for by Tenant at Landlord’s standard rates then in effect as provided below. Tenant shall pay for all support services provided by Landlord’s contractors at Tenant’s request or at Landlord’s discretion resulting from breaches or defaults by Tenant under this Work Letter Agreement. For purposes of the Work, Tenant shall have the nonexclusive right to use the Building’s freight elevators subject to the availability and scheduling as may be reasonably established by Landlord. Such freight elevator use by Tenant during normal business hours shall be free of charge; provided, however, to the extent Tenant utilizes such freight elevators prior to 8:00 a.m. and after 5:00 p.m. on Monday through Friday and anytime on Saturday, Sunday and holidays, such use shall be at the standard Building charge for after-hours freight elevator service; provided, further, if any other tenant of the Building is also using said freight elevators with Tenant after such time periods, then any charge to Tenant shall be apportioned between or among all parties utilizing such freight elevators. Tenant shall arrange and pay for removal of construction debris and shall not place debris in the Building’s waste containers. Subject to space availability and Tenant’s compliance with Landlord’s reasonable rules and regulations, Landlord shall permit Tenant’s Contractors to place waste containers at the Building loading dock for after-hours removal of waste and debris. If required by Landlord, Tenant shall sort and separate its waste and debris for recycling and/or environmental law compliance purposes.

(h) Tenant shall permit access to the 6^th Floor Additional Premises, and the Work shall be subject to inspection, by Landlord and Landlord’s architects, engineers, contractors and other representatives at an times during the period in which the Work is being constructed and installed following completion of the Work.

(i) Tenant shall proceed with its work expeditiously, continuously and efficiently, and shall use all commercially reasonable efforts to complete the same on or before the 6^th Additional Premises Rent Commencement Date. Tenant shall notify Landlord upon completion of the Work and shall furnish Landlord and Landlord’s title insurance company with such further documentation as may be necessary under the requirements herein.

(j) Tenant shall have no authority to deviate from the Approved Plans in performance of the Work, except as approved by Landlord and its designated representative in writing, which approval shall not be unreasonably withheld or delayed. Tenant shall furnish to Landlord “as-built” drawings of the Work within thirty (30) days after completion of the Work.

(k) Landlord shall have the right to run utility lines, pipes, conduits, duct work and component parts of all mechanical and electrical systems where necessary or desirable through the 6^th Floor Additional Premises, to repair, alter, replace or remove the same, and to require Tenant to install and maintain proper access panels thereto.

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(l) Tenant shall impose on and enforce all applicable terms of this Work Letter Agreement against Tenant’s architect and Tenant’s Contractors.

(m) Tenant and Landlord each acknowledges and agrees that the Work will include any work, both within and outside the 6^th Floor Additional Premises, that may be necessary in order for Tenant to use and occupy the 6^th Floor Additional Premises

7. INSURANCE AND INDEMNIFICATION.

(a) In addition to any insurance which may be required under the Lease, Tenant shall secure, pay for and maintain or cause Tenant’ s Contractors to secure, pay for and maintain during the continuance of construction and fixturing work within the Building or 6^th Floor Additional Premises, insurance in the following minimum coverages and the following minimum limits of liability:

(i) Worker’s Compensation and Employer’s Liability Insurance with limits of not less than $500,000.00, or such higher amounts as may be required from time to time by any Employee Benefit Acts or other statutes applicable where the work is to be performed, and in any event sufficient to protect Tenant’s Contractors from liability under the aforementioned acts.

(ii) Commercial General Liability Insurance (including Contractors’ Protective Liability) in an amount not less than $1,000,000.00 per occurrence, whether involving bodily injury liability (or death resulting therefrom) or property damage liability or a combination thereof with a minimum aggregate limit of $2,000,000.00, and with umbrella coverage with limits not less than $3,000,000.00. Such insurance shall provide for explosion and collapse, completed operations coverage and broad form blanket contractual liability coverage and shall insure Tenant’s Contractors against any and all claims for bodily injury, including death resulting therefrom, and damage to the property of others and arising from its operations under the contracts whether such operations are performed by Tenant’s Contractors or by anyone directly or indirectly employed by any of them.

(iii) Comprehensive Automobile Liability Insurance, including the ownership, maintenance and operation of any automotive equipment, owned, hired, or non-owned in an amount not less than $500,000.00 for each person in one accident, and $1,000,000.00 for injuries sustained by two or more persons in any one accident and property damage liability in an amount not less than $1,000,000.00 for each, accident. Such insurance shall insure Tenant’s Contractors against any and all claims for bodily injury, including death resulting therefrom, and damage to the property of others arising from its operations under the contracts, whether such operations are performed by Tenant’s Contractors, or by anyone directly or indirectly employed by any of them.

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(iv) “All-risk” builder’s risk insurance upon the entire Work to the full insurable value thereof. This insurance shall include the interests of Landlord and Tenant (and their respective contractors and subcontractors of any tier to the extent of any insurable interest therein) in the Work and shall insure against the perils of fire and extended coverage and shall include “all-risk” builder’s risk insurance for physical loss or damage including, without duplication of coverage, theft vandalism and malicious mischief. If portions of the Work are stored off the site of the Building or in transit to said site are not covered under said “all-risk” builder’s risk insurance, then Tenant shall effect and maintain similar property insurance on such portions of the Work.

All policies (except the worker’s compensation policy) shall be endorsed to include Landlord and Lincoln Property Company as additional insureds as their interests may appear. The waiver of subrogation provisions contained in the Lease shall apply to all insurance policies (except the workmen’s compensation policy) to be obtained by Tenant pursuant to this paragraph. The insurance policy endorsements shall also provide that all additional insured parties shall be given thirty (30) days’ prior written notice of any reduction, cancellation or non-renewal of coverage (except that ten (10) days’ notice shall be sufficient in the case of cancellation for non-payment of premium) and shall provide that the insurance coverage afforded to the additional insured parties thereunder shall be primary to any insurance carried independently by said additional insured parties. Additionally, where applicable, each policy shall contain a cross-liability and severability of interest clause.

(b) Without limitation of the indemnification provisions contained in the Lease, to the fullest extent permitted by law Tenant agrees to indemnify, protect, defend and hold harmless Landlord, the parties listed, or required by, the Lease to be named as additional insureds, Landlord’s contractors, Landlord’s architects, and their respective beneficiaries, partners, directors, officers, employees and agents, from and against all claims, liabilities, losses, damages and expenses of whatever nature arising out of or in connection with the Work or the entry of Tenant or Tenant’s Contractors into the Building and the 6^th Floor Additional Premises, including, without limitation, mechanic’s liens, the cost of any repairs to the 6^th Floor Additional Premises or Building necessitated by activities of Tenant or Tenant’s Contractors, bodily injury to persons (including, to the maximum extent, provided by law, claims arising under the Illinois Structural Work Act) or damage to the property of Tenant, its employees, agents, invitees, licensees or others. It is understood and agreed that the foregoing indemnity shall be in addition to the insurance requirements set forth above and shall not be in discharge of or in substitution for same or any other indemnity or insurance provision of the Lease.

8. LANDLORD’S CONTRIBUTION: EXCESS AMOUNTS.

(a) Upon Tenant’s satisfaction of the requirements set forth in this Work Letter Agreement, Landlord shall make dollar contributions in the total amount of (i) $1,818,740.00 (“Landlord’s Contribution” ) (which is $55.00 per square foot of rentable area of the 6^th Floor Additional Premises) for application to the extent thereof to the Costs of the Work and (ii) $3,968. 16 solely for application to the cost incurred by

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Tenant for the preparation and revision of the Plans (collectively, the “Plan Contribution”). The Plan Contribution shall be in addition to the Landlord’s Contribution, however, for all other purposes hereunder the Plan Contribution shall be deemed part of the Landlord Contribution and shall be disbursed as part of the Landlord Contribution. Landlord shall, have no obligation to fund any portion of Landlord’s Contribution prior to Landlord’s review and approval of the items referenced in Paragraph 2(a) hereof. If the Costs exceed Landlord’s Contribution, Tenant shall have sole responsibility for the payment of such excess cost. If the Costs of the Work are less than Landlord’s Contribution, Landlord shall make such excess amounts available to reimburse Tenant for additional improvements to the Premises, subject to Landlord’s review and approval of all items listed in Paragraph 2 of this Work Letter with respect to such additional improvements, which approval shall not be unreasonably withheld delayed. If the Costs of the Work are less than Landlord’s Contribution and Tenant does not utilize the fun amount of such excess for additional improvements pursuant to the preceding sentence, provided that Tenant is not in default under the Lease, as amended, such excess, shall be credited against Base Rent first coming due with respect to the 6^th Floor Additional Premises or, at Tenant’s option and subject to the procedures herein, be used for portions of the Premises other than the 6^th Floor Additional Premises. Notwithstanding anything herein to the contrary, Landlord may deduct from Landlord’s Contribution any amounts due to Landlord or its architects or engineers under this Work Letter Agreement before disbursing any other portion of Landlord’s Contribution.

(b) Subject to the conditions herein, Landlord shall make progress payments of Landlord’s Contribution amounts to Tenant or Tenant’s project manager on a monthly basis, for the Work performed during the previous month, less a retainage of 10% of each progress payment (the “Retainage”). Landlord shall not be required to fund amounts for any item in excess of the amount shown on the Budget previously approved by Landlord. Provided that Tenant delivers requisitions to Landlord on or prior to the first (1^st) day of any month, such progress payments shall be made within thirty (30) days next following the delivery to Landlord of requisitions therefor, signed by a financial officer of Tenant or by Tenant’s project manager, which requisitions shall set forth the names of each contractor and subcontractor to whom payment is due, and the amount thereof, and shall be accompanied by (i) an owner’s sworn statement, and after the first requisition, copies of partial waivers of lien from all contractors, subcontractors and material suppliers shown on such sworn statement and covering all work and materials which were the subject of previous progress payments by Landlord and Tenant, (ii) a written certification from Tenant’s architect that the work for which the requisition is being made has been completed substantially in accordance with the Approved Plans, (iii) copies of all applicable invoices, and (iv) such other documents and information as Landlord may reasonably request. All requisitions which are true, correct and complete in Landlord’s reasonable judgment and which are made prior to the first (1st) day of any month shall be paid no later than the last day of the month following the month in which such requisitions are made. All requisitions shall be submitted on AIA Form G702 and G703. Landlord shall disburse the Retainage upon submission by Tenant to Landlord of a requisition therefor, accompanied by all documentation required under this Paragraph 8(b), together with (A) proof of the satisfactory completion of all required

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inspections and issuance of any required approvals, permits and sign-offs for the Work by all governmental authorities having jurisdiction thereover, (B) final “as-built” plans and specifications for the Work; and (C) the issuance of original final lien waivers by all contractors, subcontractors and material suppliers. Further, and notwithstanding anything to the contrary hereinabove, no portion of the Landlord’s Contribution shall be due and payable and Landlord shall have no obligation to pay, any portion thereof notwithstanding Tenant’s submission of requisitions in accordance with this Paragraph 8(b) so long as any mechanic’s lien exists (regardless of whether same has been bonded over or otherwise secured) against the Building. Further, if at any time prior to or during construction, Landlord reasonably determines that the actual remaining costs of the Work will exceed the unfunded amount of the Landlord’s Contribution (plus any cash previously deposited into escrow by Tenant), then Landlord’s obligation to fund any requisition shall at Landlord’s sole option be subject to Tenant’s direct out-of-pocket payment of amounts sufficient to eliminate such excess.

9. MISCELLANEOUS.

(a) If the Plans for the Work require the construction and installation of more fire hose cabinets or telephonic/electrical closets than the number regularly provided by Landlord in the core of the Building in which the 6^th Floor Additional Premises are located, Tenant agrees to pay all costs and expenses arising from the construction and installation of such additional fire hose cabinets or telephone/electrical closets.

(b) Time is of the essence of this Work Letter Agreement.

(c) Any person signing this Work Letter Agreement on behalf of Landlord and Tenant warrants and represents he has authority to sign and deliver this Work Letter Agreement and bind the party on behalf of which he has signed.

(d) If Tenant fails to make any payment relating to the Work as required hereunder, Landlord, at its option, may complete the Work pursuant to the Approved Plans and continue to hold Tenant liable for the costs thereof and all other costs due to Landlord. Tenant’s failure to pay any amounts owed by Tenant hereunder when due or Tenant’s failure to perform its obligations hereunder shall also constitute a default under the Lease and Landlord shall have all the rights and remedies granted to Landlord under the Lease for nonpayment of any amounts owed thereunder or failure by Tenant to perform its obligations thereunder.

(e) Notices under this Work Letter Agreement shall be given in the same manner as under the Lease.

(f) The headings set forth herein are for convenience only.

(g) This Work Letter Agreement sets forth the entire agreement of Tenant and Landlord regarding the Work. This Work Letter may only be amended if in writing, duly

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executed by both Landlord and Tenant. This Work Letter is incorporated into the Second Amendment to Lease by reference and made a part hereof.

(h) All amounts due from Tenant hereunder shall be deemed to be additional Rent due under the Lease.

10. LIMITATION OF LIABILITY. Any liability of Landlord under this Work Letter Agreement shall be limited solely to its equity interest in the Building, and in no event shall any personal liability be asserted against Landlord in connection with the Work Letter Agreement nor shall any recourse be had to any other property or assets of Landlord.

LANDLORD:		TENANT:
LANDLORD-CARLYLE ILLINOIS CENTER. L.L.C., a Delaware limited liability company		FEDERAL HOME LOAN BANK OF CHICAGO, a corporation organized under the laws of the United States of America
By:	Lincoln Illinois Center, LLC, a Delaware liability company, Managing Member
By:	Lincoln Investors Group 31, Inc., a Texas corporation, Managing Member
By:	/s/    JOHN B. GRISSIM	By:	/s/    THOMAS D. SHEEHAN
Name:	John B. Grissim	Its:	Thomas D. Sheehan
Its:	Vice President		Senior Vice President

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EX-10.2

Exhibit 10.2

FEDERAL HOME LOAN BANK OF CHICAGO

ADVANCES, COLLATERAL PLEDGE, AND SECURITY AGREEMENT

THIS AGREEMENT, dated as of                 , 20          between                                                                       having its principal place of business at                              (“Member”) and the FEDERAL HOME LOAN BANK OF CHICAGO, 111 East Wacker Drive, Chicago, Illinois 60601 (“Bank”).

WHEREAS, the Member desires from time to time to participate in the Bank’s credit programs under the terms of this Agreement (as hereinafter defined) and the Bank is authorized to make advances to the Member, subject to the provisions of the Credit Policy of the Bank adopted from time to time by the Board of Directors of the Bank and communicated to the Member in writing (“Credit Policy”), the Federal Home Loan Bank Act, as now and hereafter amended (the “Act”), and the regulations and guidelines of the Federal Housing Finance Board now and hereafter in effect (collectively, the “Regulations”); and

WHEREAS, the Bank requires that advances by the Bank be secured pursuant to this Agreement, and the Member agrees to provide the security the Bank requests in accordance with this Agreement.

NOW THEREFORE, the Member and Bank agree as follows:

ARTICLE I

DEFINITIONS

Section 1.01 DEFINITIONS. As used herein, the following terms shall have the following meanings:

(a) “Additional Collateral” means items of property other than Capital Stock and Eligible Collateral which are accepted by the Bank as security, as it deems necessary, to fully secure and protect the Bank’s security position on outstanding Advances (as hereinafter defined) or to renew an outstanding Advance in accordance with Section 10(a)(5) of the Act (12 U.S.C. § 1430(a)(5), as amended) and any Regulations adopted thereunder.

(b) “Advance” or “Advances” means any and all loans or other extensions of credit, and all Outstanding Commitment(s) (as hereinafter defined), heretofore, now or hereafter granted by the Bank to, on behalf of, or for the account of, the Member in accordance with such terms and conditions as are applicable to each such transaction under Advance Lending Plans, Special Offerings, and the Commitment Program as set forth in the Credit Policy (but excluding any obligations that the Bank may now or hereafter have to honor items or transfer orders under a depository or similar agreement between the Member and the Bank).

(c) “Agreement” means this Advances, Collateral Pledge, and Security Agreement, together with any and all permitted and authorized amendments, modifications, or restatements hereof as may be duly entered into by the parties hereto and all documents or other agreements incorporated by reference including, but not limited to, the Credit Policy.

(d) “Application” means a writing, signed by the Member, and in such form or forms as shall be specified by the Bank from time to time, by which the Member requests, and which if executed by the Bank shall together with this Agreement evidence the terms of, an Advance or a commitment for an Advance.

(e) “Capital Stock” means all of the capital stock of the Bank and all payments which have been or hereafter are made on account of subscriptions to and all unpaid dividends on such capital stock.

(f) “Collateral” means all property, including the proceeds thereof, heretofore assigned, transferred, or pledged to the Bank by the Member as collateral for Advances or other extensions of credit prior to the date hereof, and all Capital Stock, Eligible Collateral, and Additional Collateral, including the proceeds thereof, which is now or hereafter pledged to the Bank pursuant to Section 3.01 hereof.

(g) “Collateral Maintenance Level” means a dollar amount of Qualifying Collateral equal to such percentage(s) as the Bank may specify from time to time in its Credit Policy of the aggregate dollar amount of (1) the outstanding amounts of all Advances; (2) with respect to each outstanding Swap Transaction, the amount for which the Member is required to maintain Collateral; (3) letters of credit; and (4) any additional obligations and liabilities of the Member to the Bank. The Bank may increase or decrease the Collateral Maintenance Level at any time.

(h) “Confirmation of Advance” means a writing or machine readable electronic transmission, in such form or forms as the Bank may generate from time to time, by which the Bank agrees to and confirms the Member’s telephonic or other unsigned request for an Advance or a commitment for an Advance and which, together with this Agreement, shall evidence the terms of such Advance or commitment for an Advance.

(i) “Eligible Collateral” means Capital Stock, First Mortgage Collateral, Government and Agency Securities Collateral, Other Eligible Collateral, and Other Securities Collateral.

(j) “Event of Default” means Event of Default as defined in Section 4.01 hereof.

(k) “First Mortgage Collateral” means First Mortgage Documents (excluding participation or other fractional interests therein) and all ancillary security agreements, policies and certificates of insurance or guarantees, rent assignments, FHA mortgage insurance or VA loan guarantee certificates, title insurance policies, evidences of recordation, applications, underwriting materials, surveys, appraisals, approvals, permits, notices, opinions of counsel, loan servicing data, and all other electronically stored and written records or materials relating to the loans evidenced or secured by the First Mortgage Documents.

(l) “First Mortgage Documents” means fully disbursed whole first mortgages and deeds of trust (herein “mortgages”) secured by a first lien on one-to-four unit dwellings, and all notes, bonds, or other instruments (herein “mortgage notes”) evidencing loans secured by such mortgages and any endorsements or assignments thereof to the Member.

(m) “Government and Agency Securities Collateral” means mortgage-backed securities (including participation certificates) issued by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association, obligations guaranteed by the Government National Mortgage Association, consolidated obligations of the Federal Home Loan Bank System and obligations issued or guaranteed by the United States or an agency thereof.

(n) “Indebtedness” means all indebtedness, now or hereafter outstanding, of the Member to the Bank, including, without limitation, all Advances, interest, and all other obligations to pay and liabilities of the Member to the Bank.

(o) “Lendable Collateral Value” means an amount equal to such percentage as the Bank shall from time to time, in its sole discretion, ascribe to the market value or unpaid principal balances of items of Qualifying Collateral.

(p) “Other Eligible Collateral” means items of property other than Capital Stock, First Mortgage Collateral, Government and Agency Securities Collateral, and Other Securities Collateral such as deposits at a Federal Home Loan Bank and other real estate related collateral as defined in Section 10(a)(4) of the Act (12 U.S.C. 1430(a)(4), as amended) and in any Regulations adopted thereunder.

(q) “Other Mortgage Documents” mean mortgages secured by an interest in real property other than a first lien on a one-to-four unit dwelling and all mortgage notes secured by such mortgages and any endorsements or assignments thereof to the Member.

(r) “Other Securities Collateral” means securities, other than Government and Agency Securities Collateral, representing a whole interest in fully disbursed whole first mortgages on improved residential property such as certain classes of REMICs, mortgage-backed debt obligations, collateralized mortgage obligations, mortgage pass-through certificates, and mortgage participation certificates.

(s) “Outstanding Commitment(s)” means, at any point in time, the maximum aggregate principal amount of each Advance or payment which the Bank may be obligated to make to, on behalf of, or for the account of, the Member, regardless of whether such obligation is contingent in whole or in part, including, without limitation, letters of credit, firm commitments, guarantees, or other arrangements intended to facilitate transactions between the Member and third parties.

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(t) “Qualifying Collateral” means Collateral other than Capital Stock which: (1) qualifies as security for Advances under the terms and conditions of the Credit Policy, the Act, and the Regulations and satisfies requirements that may be established by the Bank; (2) is owned by the Member free and clear of any liens, encumbrances, or other interests other than the assignment to the Bank hereunder; (3) has not been in default within the most recent 12-month period, excepting only, in the case of First Mortgage Collateral, payments which are overdue by not more than 90 days; (4) in the case of First Mortgage Collateral, relates to residential real property on which is located a one-to-four unit dwelling that is covered by fire and hazard insurance in an amount at least sufficient to discharge the mortgage loan in full in case of loss and as to which all real estate taxes are current; (5) in the case of First Mortgage Collateral and Other Eligible Collateral, does not secure an indebtedness on which any director, officer, employee, attorney, or agent of the Member or any Federal Home Loan Bank is personally liable; and (6) in the case of Government and Agency Securities Collateral, Other Eligible Collateral, Other Securities Collateral, and Additional Collateral, has been offered by the Member to the Bank and specifically accepted by the Bank as Qualifying Collateral.

(u) “REMIC” means a “real estate mortgage investment conduit” within the meaning of Section 860D of the Internal Revenue Code of 1986, as amended, or any successor provision thereto.

(v) “Swap Transaction” means an interest rate swap, interest rate cap, floor or collar, currency exchange transaction, or similar transaction entered into between the Bank and the Member.

ARTICLE II

ADVANCES AGREEMENT

Section 2.01 ADVANCE DOCUMENTATION.

(a) The Member may apply for Advances and commitments for Advances or to renew an Advance by completing and submitting an Application to the Bank or by telephonic or other unsigned communication (“telephonic application”). The Bank may suspend the use of telephonic applications at any time. The terms of each Advance or commitment for an Advance shall be conclusively established by this Agreement and by either (1) the Member’s Application when such Application is executed by the Bank without any change; (2) in the case of a telephonic application received, completed, or modified by the Bank, by a Confirmation of Advance generated by the Bank; or (3) in the case of an open line of credit Advance, the Member’s Daily Investment Deposit Statement (“DIDS”).

(b) Within three (3) business days of the date of the Member’s receipt of the Bank’s Confirmation of Advance, the Member shall prepare, sign, and submit to the Bank a completed Application conforming to such Confirmation of Advance. Failure of the Bank to receive such conforming Application from the Member shall in no way affect the Member’s obligations with respect to such Advance. The Member shall be estopped from asserting any claim or defense with respect to the terms applicable to an Advance or a commitment for an Advance entered into pursuant to a telephonic application unless, within two (2) business days of receipt of the Bank’s Confirmation of Advance, or, in the case of an open line of credit Advance, the DIDS, the Member delivers to the Bank a written notice specifying the disputed term(s) or condition(s) of the Advance or commitment for an Advance. Upon the request of the Bank, the Member shall sign and deliver to the Bank a promissory note or notes in such form as the Bank may reasonably require evidencing any Advance. Unless otherwise agreed to by the Bank in writing, each Advance shall be made by crediting the Member’s Daily Investment Deposit Account (“DID Account”) with the Bank.

Section 2.02 REPAYMENT OF ADVANCES.

(a) The Member agrees to repay each Advance in accordance with this Agreement and the terms and conditions of the Application or Confirmation of Advance evidencing such Advance, or, in the case of an open line of credit Advance, on demand. Interest shall be paid on each Advance at the times specified by the Bank in the Credit Policy, Application, Confirmation of Advance, or, in the case of an open line of credit Advance, the DIDS, and shall be charged for each day that an Advance is outstanding at the rate applicable to each such Advance.

(b) The Member shall insure that, on any day on which any payment is due to the Bank with respect to Advances or other Indebtedness, the Member’s DID Account with the Bank has an available balance in an amount at least equal to the amounts then due and payable to the Bank, and the Member hereby authorizes the Bank to debit the Member’s DID Account with the Bank for all amounts due and payable with respect to any Advance and for all other amounts due and payable hereunder. In the event that the available balance in the Member’s DID Account is insufficient to pay such due and payable amounts, the Bank may, without notice to or request from the Member, apply any other deposits, credits, or monies of the

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Member then in the possession of the Bank (and not held by the Bank as bailee for a third party) to the payment of amounts due and payable or, in the sole discretion of the Bank, the Bank may fund an Advance to the Member in the amount of the insufficiency, which Advance shall bear interest from the date the same shall be made until paid at the rate in effect and being charged by the Bank from time to time on overdrafts on DID Accounts of its members.

(c) The Member shall pay to the Bank, immediately and without demand, interest on any past due principal of and interest on any Advance at an interest rate which is the greater of (1) the rate applicable to such Advance plus one percent (1%), or (2) as specified in the Credit Policy, but in no event more than any applicable limit set by the Regulations. A payment on any Advance shall be deemed past due if such payment is not received by the Bank on or before the applicable due date provided in the Application or the Confirmation of Advance, or, in the case of an open line of credit Advance or a declaration pursuant to Section 4.01 hereof, on demand.

(d) All payments with respect to Advances shall be applied first to any fees or charges applicable thereto and to interest due thereon, in such order as the Bank may determine, and then to any principal amount thereof that is then due and payable.

Section 2.03 OUTSTANDING COMMITMENT(S).

(a) In the event that there are one or more Outstanding Commitment(s) at the time of an Event of Default, the Bank may at its option, and without notice to or request from the Member, make an Advance by crediting a special account of the Member with the Bank in an amount equal to the Outstanding Commitment(s). The Bank shall have a first priority perfected security interest in any such special account, and amounts credited to such special account may not be withdrawn by the Member for so long as there shall be Outstanding Commitment(s). Amounts credited to such special account shall be utilized by the Bank for the purpose of satisfying the Bank’s obligations under the Outstanding Commitment(s). When all such obligations have expired or have been satisfied, the Bank shall disburse the balance, if any, in such special account first to the satisfaction of any amounts then due and owing by the Member to the Bank and then to the Member or its successor’s interest. Advances made pursuant to this Section 2.03 shall be payable on demand and shall bear interest from the date the same shall be made until paid at the rate in effect and being charged by the Bank from time to time on overdrafts on DID Accounts of its members, but in no event more than any applicable limit set by the Regulations.

(b) The Bank shall not honor an Outstanding Commitment to Member if Member’s access to advances is restricted pursuant to § 935.13(a) or (c) of the Regulations. Member releases the Bank from any and all liability in connection with such action by the Bank.

Section 2.04 AMORTIZATION OF ADVANCES.

(a) In the event that the Bank determines that the creditworthiness of the Member, as determined from time to time by the Bank, does not meet the requirements of the Bank, the Bank may, without limitation of the Bank’s rights upon the occurrence of an Event of Default, require amortization by means of monthly payments of principal on all or part of the Member’s Advances. The Member agrees to begin making such monthly amortization payments, upon thirty (30) days written notice from the Bank, in such monthly amounts as the Bank shall specify in writing. Member shall make such payments while any amount remains unpaid on the subject Advances or until notified otherwise by the Bank. No monthly payment shall exceed ten percent (10%) of the original principal balance of the Advance being amortized. Unless otherwise specified by the Bank in writing to the Member, such monthly amortizing payments shall not extend or modify the maturity date or other scheduled payment dates applicable to the Advance being amortized. Amortization payments required pursuant to this Section 2.04 shall be in addition to all other payments of principal and interest with respect to Advances.

(b) In the event the Bank renews an Advance which is not fully secured by Eligible Collateral pursuant to Section 10(a)(5) of the Act (12 U.S.C. 1430(a)(5), as amended) and any Regulations adopted thereunder, the Member shall reduce the level of such Advance in accordance with a repayment schedule determined by the Federal Housing Finance Board as required by this section of the Act.

Section 2.05 DISCRETION OF THE BANK TO GRANT OR DENY ADVANCES. Nothing contained herein, in the Credit Policy, or in any other documents describing or setting forth the Bank’s credit program and credit policies shall be construed as an agreement or commitment on the part of the Bank to grant Advances or extend commitments for Advances hereunder or to enter into any other transaction, the right and power of the Bank, in its discretion to either grant or deny any Advance or commitment for an Advance requested hereunder, being expressly reserved. The determination by the Bank of Lendable Collateral Value shall not constitute a determination by the Bank that the Member may obtain Advances or commitments for Advances in amounts up to such Lendable Collateral Value.

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ARTICLE III

SECURITY AGREEMENT

Section 3.01 CREATION OF SECURITY INTEREST.

(a) As security for all Indebtedness, the Member hereby assigns, transfers, and pledges to the Bank, and grants to the Bank a security interest in all of the (i) Capital Stock now or hereafter owned by the Member and all proceeds thereof and (ii) First Mortgage Collateral now or hereafter owned by the Member, and all proceeds thereof provided, however, that First Mortgage Collateral shall not be subject to the security interest created hereunder if encumbered or disposed of by the Member in conformity with the requirements of Section 3.02(a) hereof. As security for all Indebtedness, the Member hereby assigns, transfers and pledges to the Bank and grants to the Bank a security interest in such Government and Agency Securities Collateral now or hereafter owned by the Member and all proceeds thereof which is specified pursuant to Section 3.03 or delivered pursuant to Section 3.04.

(b) The Member also hereby assigns, transfers, and pledges to the Bank as security for all Indebtedness, and grant to the Bank a security interest in such Other Eligible Collateral, Other Securities Collateral, and Additional Collateral now or hereafter owned by the Member, and all proceeds thereof, which is specified pursuant to Section 3.03 or delivered pursuant to Section 3.04 (1) at any time the Member shall not have assigned, transferred, or pledged to the Bank, under this Agreement, First Mortgage Collateral and Government and Agency Securities Collateral which are Qualifying Collateral and which have a Lendable Collateral Value at least equal to the Collateral Maintenance Level; (2) at any time the Member does not qualify under the Bank’s criteria in the Credit Policy for Member eligibility to secure Advances under this Agreement; (3) if the Bank determines in good faith that the value of the Collateral pledged pursuant to Section 3.01(a) may not be adequately ascertained; or (4) at any time the Bank deems itself insecure. To assure that the Member provides to the Bank Qualifying Collateral with a Lendable Collateral Value at least equal to the Collateral Maintenance Level at all times, the Bank may require that the Member make, execute, record, and deliver to the Bank additional agreements, financing statements, notices, assignments, listings, powers, and other documents in connection with any such Collateral being pledged pursuant to this Section 3.01(b) and the Bank’s security interest therein.

(c) The lien on First Mortgage Collateral created by Section 3.01(a) hereof is limited to an undivided interest in such First Mortgage Collateral equal to the Indebtedness multiplied by the Collateral Maintenance Level percentage specified in the Bank’s Credit Policy (Collateral).

Section 3.02 COLLATERAL MAINTENANCE REQUIREMENT.

(a) The Member shall at all times maintain as Collateral an amount of Qualifying Collateral which has a Lendable Collateral Value that is at least equal to the then current required Collateral Maintenance Level. The Member shall not assign, pledge, transfer, create any security interest in, sell, or otherwise dispose of any Collateral, nor shall the Member foreclose any First Mortgage Collateral without the prior written consent of the Bank if: (1) such Collateral has been specified or identified pursuant to Section 3.03 hereof or has been delivered to and is held by or on behalf of the Bank pursuant to Section 3.04 hereof, or the Bank has otherwise perfected its security interest in such Collateral; or (2) at the time of or immediately after such action, the Member is not or would not be in compliance with the collateral maintenance requirements of the first sentence of this Section 3.02(a) or is or would otherwise be in default under this Agreement.

(b) Subject to Sections 3.03 and 3.04 hereof, Collateral shall be held by the Member in trust for the benefit of, and subject to the direction and control of, the Bank and will be physically safeguarded by the Member with at least the same degree of care as the Member uses in physically safeguarding its other property. Without limitation of the foregoing, the Member shall take all action necessary or desirable to protect and preserve the Collateral and the Bank’s interest therein, including without limitation the maintaining of insurance on property securing First Mortgage Collateral (such policies and certificates of insurance or guaranty relating to such mortgages are herein called “insurance”), the collection of payments under all mortgages and under all insurance, and otherwise assuring that all mortgages are serviced in accordance with the standards of a reasonable and prudent mortgagee.

(c) If any Collateral that was Qualifying Collateral ceases to be Qualifying Collateral, the Member shall promptly notify the Bank in writing of that fact and, if so requested by the Bank, of the reason that the Collateral has ceased to be Qualifying Collateral. If such Collateral was specified or identified pursuant to Section 3.03 hereof, or delivered to the Bank pursuant to Section 3.04 hereof, the Member shall request withdrawal of such Collateral pursuant to Section 3.05 hereof and shall promptly specify, or deliver, as the case may be, other Qualifying Collateral having at least the same Lendable Collateral Value as the Collateral so requested to be withdrawn.

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(d) The Bank may review the form and sufficiency of all documents pertaining to the Collateral. Such documents must be satisfactory to the Bank and, if not, such Collateral may not be acceptable as Qualifying Collateral or may have a Lendable Collateral Value applied thereto that is less than the Lendable Collateral Value otherwise applicable under the Bank’s Credit Policy, as the Bank may specify. The Bank may require that the Member make any or all documents pertaining to the Collateral available to the Bank for its inspection and approval.

Section 3.03 SPECIFICATION AND IDENTIFICATION OF COLLATERAL.

(a) Upon the Bank’s written or oral request, or at such times as shall be necessary to satisfy the requirements of the Bank, or promptly, at any time that the Member becomes subject to any mandatory collateral specification requirements that may be established in the Credit Policy and in any case from time to time thereafter until such time as may be agreed upon by the Bank in writing, the Member shall deliver to the Bank a status report and accompanying schedules, all in the form(s) prescribed by the Bank, specifying and describing the First Mortgage Collateral and Government and Agency Securities Collateral pledged as Collateral pursuant to Section 3.01(a) hereof and/or specifying and describing Other Eligible Collateral, Other Securities Collateral, and Additional Collateral pledged pursuant to Section 3.01(b) hereof.

(b) The Member shall hold such amount of the Collateral so specified in the status report and accompanying schedules delivered pursuant to Section 3.03(a) hereof, which is certified by the Member to be Qualifying Collateral, as may be necessary so that the Lendable Collateral Value of such Qualifying Collateral meets or exceeds the Collateral Maintenance Level at all times, separately from all other property of the Member. Each set of First Mortgage Documents and all Other Mortgage Documents which are a part of such amount of specified Qualifying Collateral shall be held in a separate file folder with each file folder clearly labeled with the loan identification number and the name of the borrower(s). Each such file folder shall be clearly marked or stamped with the statement: “The Deed of Trust/Mortgage and Note Relating to This Loan Have Been Assigned to the Federal Home Loan Bank of Chicago.” Each mortgage note evidencing First Mortgage Collateral or Other Eligible Collateral shall be endorsed by Member at such time as the Bank may request as follows: “Pay to the order of the Federal Home Loan Bank of Chicago without recourse.” All Government and Agency Securities Collateral, Other Securities Collateral, any Other Eligible Collateral, and Additional Collateral, which are part of such amount of specified Qualifying Collateral being separately held, shall also be marked and assigned to the Bank in such manner as shall be specified by the Bank. If so requested by the Bank, the Member shall also physically segregate the First Mortgage Documents, Other Mortgage Documents, and the Other Qualifying Collateral described in this Section 3.03(b), which is being separately held, from all other property of the Member in a manner satisfactory to the Bank.

Section 3.04 DELIVERY OF COLLATERAL.

(a) Upon the Bank’s written or oral request, or promptly, at any time that the Member becomes subject to any mandatory collateral delivery requirements that may be established in the Credit Policy, and until such time as may be agreed upon by the Bank in writing, the Member shall deliver to the Bank, or to a custodian designated by the Bank, such amount of Qualifying Collateral as may be necessary so that the Lendable Collateral Value of such Qualifying Collateral held by the Bank, or such custodian, meets or exceeds the Collateral Maintenance Level at all times. Collateral delivered to the Bank shall be endorsed or assigned, as appropriate, in recordable form by the Member to the Bank, as specified by the Bank. When requested by the Bank, such endorsements or assignments shall be in blanket form except that, in the case of First Mortgage Documents and Other Mortgage Documents, there shall be separate endorsements and assignments for each county or recording district in which the real property covered by an item of First Mortgage Collateral or Other Eligible Collateral is located. With respect to First Mortgage Collateral and mortgage loans which are Other Eligible Collateral that are delivered hereunder, the Member need only deliver the First Mortgage Documents and Other Mortgage Documents, unless otherwise directed by the Bank. Concurrently with the initial delivery of Collateral, the Member shall deliver to the Bank a status report and accompanying schedules, all in the form(s) prescribed by the Bank, specifying and describing the Collateral held by the Bank or its custodian and certifying that such Collateral is Qualifying Collateral.

(b) With respect to uncertificated securities pledged to the Bank as Government and Agency Securities Collateral, Other Securities Collateral, or Additional Collateral hereunder, the delivery requirements contained in this Agreement shall be satisfied by the transfer of a security interest in such securities to the Bank, such transfer to be effected in such manner and to be evidenced by such documents as shall be specified by the Bank.

(c) The Member agrees to pay to the Bank such reasonable fees and charges as may be assessed by the Bank to cover the Bank’s overhead and other costs relating to the receipt, holding, redelivery, and reassignment of Collateral and to reimburse the Bank upon request for all recording fees and other reasonable expenses, disbursements, and advances incurred or made by the Bank in connection therewith (including the reasonable compensation and the expenses and disbursements of

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any custodian, consultant, or appraiser that may be appointed by the Bank hereunder, and the agents and legal counsel of the Bank and of such custodian). Any sums owed to the Bank under this Section 3.04(c) may be collected by the Bank, at its option, by debiting the Member’s DID account with the Bank.

(d) The Member shall, upon request of the Bank, immediately take such other actions as the Bank shall deem necessary or appropriate to perfect the Bank’s security interest in the Collateral or otherwise to obtain, preserve, protect, enforce, or collect the Collateral or the proceeds thereof.

Section 3.05 WITHDRAWAL OF COLLATERAL. Upon receipt by the Bank of writings in the form specified by the Bank constituting (a) a request from the Member for the withdrawal of Collateral which has been specified or identified pursuant to Section 3.03 hereof or has been delivered pursuant to Section 3.04 hereof, or as to which the Bank has otherwise perfected its security interest; (b) a detailed listing of the Collateral to be withdrawn; and (c) a certificate of a responsible officer of the Member certifying as to the Qualifying Collateral, remaining after such withdrawal, that is specified and identified by the Member or held by the Bank, as appropriate, and upon the Bank’s determination that the Lendable Collateral Value of the remaining Qualifying Collateral is not less than the current required Collateral Maintenance Level, the Bank shall promptly redeliver, release, or reassign to the Member, at the Member’s expense, the Collateral specified in the Member’s listing of the Collateral to be withdrawn. Notwithstanding anything to the contrary herein contained, while an Event of Default shall have occurred and be continuing, or at any time that the Bank reasonably and in good faith deems itself insecure, the Member may not obtain any such withdrawal.

Section 3.06 BANK’S RESPONSIBILITIES AS TO COLLATERAL. In the event that the Bank takes possession of any Collateral hereunder, the Bank’s duty as to the Collateral shall be solely to use reasonable care in the custody and preservation of the Collateral in its possession, which shall not include any steps necessary to preserve rights against prior parties nor the duty to send notices, perform services, or take any action in connection with the management of the Collateral. The Bank shall not have any responsibility or liability for the form, sufficiency, correctness, genuineness, or legal effect of any instrument or document constituting a part of the Collateral, or any signature thereon or the description or misdescription, or value of property represented, or purported to be represented, by any such document or instrument. The Member agrees that any and all Collateral may be removed by the Bank from the state or location where situated, and may be subsequently dealt with by the Bank as provided in this Agreement.

Section 3.07 BANK’S RIGHTS AS TO COLLATERAL; POWER OF ATTORNEY.

(a) At any time or times, at the expense of the Member, the Bank may in its discretion, before or after the occurrence of an Event of Default, in its own name or in the name of its nominee or of the Member, do any or all things and take any and all actions that are pertinent to the protection of the Bank’s interest hereunder and, if such actions are subject to the laws of a state, are lawful under the laws of the State of Illinois including, but not limited to the following:

(1) Terminate any consent given hereunder;

(2) Notify obligors on any Collateral to make payments thereon directly to the Bank;

(3) Endorse any Collateral in the Member’s name or that has been endorsed by others to the Member’s name;

(4) Enter into any extension, compromise, settlement, release, renewal, exchange, or other agreement relating to or affecting any Collateral;

(5) Take any action the Member is required to take or which is otherwise reasonably necessary to (A) sign and record a financing statement or otherwise perfect a security interest in any or all of the Collateral or (B) obtain, preserve, protect, enforce, or collect the Collateral;

(6) Take control of any funds or other proceeds generated by the Collateral and use the same to reduce Indebtedness as it becomes due; and

(7) Cause the Collateral to be transferred to its name or the name of its nominee.

(b) The Member hereby appoints the Bank as its true and lawful attorney, for and on behalf of the Member and in its name, place, and stead, to prepare, execute, and record endorsements and assignments to the Bank of all or any item of Collateral, giving or granting to the Bank, as such attorney, full power and authority to do or perform every lawful act

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necessary or proper in connection therewith as fully as the Member might or could do. The Member hereby ratifies and confirms all that the Bank shall lawfully do or cause to be done by virtue of this special power of attorney. This special power of attorney is granted for a period commencing on the date of the incurrence of any Indebtedness hereunder and continuing until the discharge of all Indebtedness and all obligations of the Member hereunder regardless of any default by the Member, is coupled with an interest, and is irrevocable for the period granted.

Section 3.08 SUBORDINATION OF OTHER LOANS TO FIRST MORTGAGE COLLATERAL. The Member hereby agrees that all mortgage notes which are part of the First Mortgage Collateral or Other Eligible Collateral (“pledged notes”) shall have priority in right and remedy over any claims for other loans, whenever made, and, however evidenced, which are also secured by the mortgages or security agreements securing the pledged notes. The pledged notes shall be satisfied out of the property (or proceeds thereof) covered by such mortgages or security agreements before recourse to such property may be obtained for the repayment of such other loans which are not part of the Collateral. To this end, the Member hereby subordinates the lien of such mortgages and security agreements with respect to such other loans to the lien of such mortgages and security agreements with respect to the pledged notes. The Member further agrees to retain possession of all notes or other instruments evidencing such other loans and not to pledge, assign, or transfer the same, or any interest therein, except insofar as such other loans may be pledged to the Bank as part of the Collateral.

Section 3.09 PROCEEDS OF COLLATERAL. The Member, as the Bank’s agent, shall collect all payments when due on all Collateral. If the Bank so requires, the Member shall hold such collections separate from its other monies in one or more designated cash collateral accounts maintained at the Bank and apply them to the reduction of Indebtedness as it becomes due; otherwise, the Bank consents to the Member’s use and disposition of all such collections.

Section 3.10 REPORTS; COLLATERAL AUDITS; ACCESS.

(a) The Member shall furnish to the Bank annually, and at such times as the Bank may request, an audit report with respect to the Member’s Collateral, Qualifying Collateral, and Collateral Maintenance Level prepared by the Member’s external auditor, in accordance with generally accepted auditing standards, and in form and substance acceptable to the Bank.

(b) The Member shall furnish to the Bank at such times as the Bank may request, or as necessary to satisfy the requirements of the Bank, a status report with respect to the Member’s Collateral prepared by the Member in form and substance acceptable to the Bank, and as of a date within two weeks of the report due date. The status report shall be a written report covering such matters regarding the Collateral as the Bank may require, including listings of mortgages and unpaid principal balances thereof and certifications concerning the status of payments on mortgages and of taxes and insurance on property securing mortgages.

(c) All Collateral and the satisfaction of the Collateral Maintenance Level, and any matters relating thereto, shall be subject to audit and verification by or on behalf of the Bank. Such audits and verifications may occur without notice during the Member’s normal business hours or upon reasonable notice at such other times as the Bank may reasonably request. The Member shall provide access to, and shall make adequate working facilities available to, the representatives or agents of the Bank for purposes of such audits and verification. Reasonable fees and charges may be assessed to the Member by the Bank to cover overhead and other costs relating to such audit and verification.

(d) If so requested by the Bank, the Member shall promptly report to the Bank any event which reduces the principal balance of any mortgage or securities or other item of Collateral by five percent (5%) or more, whether by prepayment, foreclosure sale, insurance, guaranty payment, or otherwise.

(e) The Member shall give the Bank access at all reasonable times to Collateral in the Member’s possession and to the Member’s books and records of account relating to such Collateral, for the purpose of the Bank’s examining, verifying, or reconciling the Collateral and the Member’s reports to the Bank thereon.

(f) If the Member becomes aware or has reason to believe that the Lendable Collateral Value of the Member’s Qualifying Collateral has fallen below the Collateral Maintenance Level, or that a contingency exists which with the lapse of time could result in the Member failing to meet the Collateral Maintenance Level, the Member shall immediately notify the Bank.

(g) Notwithstanding anything to the contrary, the Member shall be solely responsible for the accuracy and adequacy of all information and data in each audit or status report (or other writing specifying and describing any Collateral) submitted to the Bank, regardless of the form in which submitted. To enable the Bank to regenerate any files or data previously furnished to the Bank with respect to any Collateral or any information contained in any audit or status report, the Member

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shall at all times maintain complete and accurate records and materials supporting and/or relating to any audit or status report and shall make the same available, on request, to the Bank. The parties hereto agree that the maintenance and retention of such supporting records and materials shall be the sole responsibility of the Member and that the Bank shall not be liable for any loss of such data.

(h) The Bank shall have no duty to make any independent examination of or calculation with respect to the information submitted in an audit or status report (or in any written schedule that may be submitted by the Member) and, without limiting the generality of the foregoing, the Bank makes no representation or warranty as to the validity, accuracy, or completeness of any information contained in any written records of the Bank concerning, or of any response to, such audit or status report.

Section 3.11 MEMBER’S REPRESENTATIONS AND WARRANTIES CONCERNING COLLATERAL. The Member represents and warrants to the Bank, as of the date hereof and the date of each Advance hereunder, as follows:

(a) The Member owns and has marketable title to the Collateral and has the right and authority to grant a security interest in the Collateral and to subject all of the Collateral to this Agreement;

(b) The information given from time to time by the Member as to each item of Collateral is true, accurate, and complete in all material respects;

(c) All the Collateral meets the standards and requirements with respect thereto from time to time established by the Act, the Regulations, and the Bank;

(d) The lien of the First Mortgage Collateral and Other Eligible Collateral on the real property securing the same is a perfected lien under applicable state law and the lien of the First Mortgage Collateral is a first lien;

(e) Except as may be approved in writing by the Bank, the Member has not conveyed or otherwise created, and there does not otherwise exist, any participation interest or other direct, indirect, legal, or beneficial interest in any Collateral on the part of anyone other than the Bank and the Member;

(f) All signatories to any and all writings that constitute any Collateral are and will be bound as they appear to be by their signatures and have the requisite authority and capacity (corporate or other) to execute such writings;

(g) Except as may be approved in writing by the Bank, no account debtor or other obligor owing any obligation to the Member with respect to any item of First Mortgage Collateral or Other Eligible Collateral has or will have any defenses, offsetting claims, or other rights affecting the right of the Member or the Bank to enforce the writings constituting any such mortgage, mortgage note or promissory obligation, and no defaults (or conditions that, with the passage of time or the giving of notice or both, would constitute a default) exist or will exist under any such writings; and

(h) No part of any real property or interest in real property that is the subject of mortgages included in Qualifying Collateral contains or is subject to the effects of toxic or hazardous materials or other hazardous substances (including those defined in the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, 42 U.S.C. 9601, et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. 1801 etseq.; the Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq.; and in the regulations adopted and publications promulgated pursuant to said laws) the presence of which could subject the Bank to any liability under applicable state or Federal law or local ordinance either at any time that such property is pledged to the Bank or upon the enforcement by the Bank of its security interest therein. The Member hereby agrees to indemnify and hold the Bank harmless against all costs, claims, expenses, damages, and liabilities resulting in any way from the presence or effects of any such toxic or hazardous substances or materials in, on, or under any real property or interest in real property that is subject to or included in the Collateral.

Section 3.12 ADDITIONAL DOCUMENTATION. The Member shall make, execute, acknowledge, record, and deliver to the Bank such financing statements, notices, assignments, listings, powers, and other documents with respect to the Collateral and the Bank’s security interest therein and in such form as the Bank may reasonably require.

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ARTICLE IV

DEFAULT; REMEDIES

Section 4.01 EVENTS OF DEFAULT; ACCELERATION. Upon the occurrence of and during the continuation of any of the following events or conditions of default (“Event of Default”), the Bank may at its option and in its discretion, by a notice to the Member, declare all or any part(s) of the Indebtedness and accrued interest thereon, including any prepayment fees or charges which are payable in connection with the payment prior to the originally scheduled maturity of any Advance, to be immediately due and payable without presentment, demand, protest, or any further notice:

(a) Failure of the Member to pay when due any interest on or principal of any Advance;

(b) Failure of the Member to perform any promise or obligation or to satisfy any condition or liability contained herein, in any Application, in any Confirmation of Advance or in any other agreement to which the Member and the Bank are parties;

(c) Evidence coming to the attention of the Bank that any representations, statements, or warranties made or furnished in any manner to the Bank by or on behalf of the Member in connection with any Advance, any specification or description of Qualifying Collateral or any report or certification concerning the status, or principal balance of any item of Collateral was false in any material respect when made or furnished;

(d) Failure of the Member to maintain adequate Qualifying Collateral free of any encumbrances or claims as required herein;

(e) The issuance of any tax, levy, seizure, attachment, garnishment, levy of execution, or other process with respect to the Collateral;

(f) Any suspension of payment by the Member to any creditor of sums due or the occurrence of any event which results (or which with the giving of notice or passage of time, or both, will result) in another creditor having the right to accelerate the maturity of any indebtedness of the Member under any security agreement, indenture, loan agreement, or comparable undertaking;

(g) Appointment of a conservator, receiver, or similar official for the Member or any subsidiary of the Member, or the Member’s property, entry of a judgment, decree, or administrative decision adjudicating the Member or any subsidiary of the Member insolvent or bankrupt or an assignment by the Member or any subsidiary of the Member for benefit of creditors or the appointment of a trustee, conservator, receiver, liquidator, custodian, or similar official for any parent company (direct or indirect) of the Member or the filing of a petition or application by any person for the appointment of any such official for any such parent of the Member or the transfer of any of the Member’s assets or liabilities (whether by purchase and assumption by any third party or merger or otherwise) in connection with or as a result of any event heretofore described in this Section 4.01(g);

(h) Sale by the Member of all or a material part of the Member’s assets or the taking of any other action by the Member to liquidate or dissolve;

(i) Termination for any reason of the Member’s membership in the Bank, or the Member’s ceasing to be a type of entity that is eligible under the Act to become a member of the Bank;

(j) Merger, consolidation, or other combination of the Member with an entity which is not a member of the Bank if the nonmember entity is the surviving entity; or

(k) The Bank reasonably and in good faith determines that a material adverse change has occurred in the financial condition of the Member from that disclosed at the time of the making of any Advance or from the condition of the Member as theretofore most recently disclosed to the Bank.

Section 4.02 REMEDIES.

(a) Upon the occurrence of any Event of Default, the Bank shall have all of the rights and remedies provided by applicable law which shall include, but not be limited to, all of the remedies of a secured party under the Uniform Commercial Code as in effect in the State of Illinois.

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(b) Without limiting or affecting other rights of the Bank pertaining to the Collateral contained herein, the Bank, at its option and in its discretion, may take or cause its agent to take immediate possession of any of the Collateral or any part thereof wherever the same may be found by suit or otherwise. The Bank may sell, assign, and deliver the Collateral or any part thereof at public or private sale for such price as the Bank deems appropriate without any liability for any loss due to a decrease in the market value of the Collateral during the period held. The Bank shall have the right to purchase all or part of the Collateral at such sale. If the Collateral includes insurance or securities which will be redeemed by the issuer upon surrender, or any accounts or deposits in the possession of the Bank, the Bank may realize upon such Collateral without notice to the Member.

(c) Member waives any demand, advertisement, or notice of the time or place of intended disposition of any of the Collateral unless required by applicable law. When required, such notification shall be deemed reasonably and properly given if given as provided by applicable law or in accordance with Section 5.05 hereof at least 5 days before any such disposition. The Member agrees that the Bank may exercise its rights of setoff upon the occurrence of an Event of Default in the same manner as if the Advances were unsecured.

(d) Notwithstanding any other provision hereof, upon the occurrence of any Event of Default at any time when all or part of the obligations of the Member to the Bank hereunder shall be the subject of any guarantee by a third party for the Bank’s benefit and there shall be other outstanding obligations of the Member to the Bank that are not so guaranteed but that are secured by the Collateral, then any sums realized by the Bank from the Collateral, or from any other collateral pledged or furnished to the Bank by the Member under any other agreement, shall be applied first to the satisfaction of such other nonguaranteed obligations and then to the Member’s guaranteed obligations hereunder.

(e) The Member agrees to pay all the costs and expenses of the Bank in the collection of the Indebtedness and enforcement and preservation of the Bank’s rights and remedies in case of default, including, without limitation, reasonable attorneys’ fees. Any sums owed to the Bank under this Section 4.02(e) may be collected by the Bank, at its option, by debiting the Member’s DID Account with the Bank.

Section 4.03 PAYMENT OF PREPAYMENT CHARGES. Any prepayment fees or charges applicable to an Advance shall be payable at the time of any voluntary or involuntary payment of all or part of the principal of such Advance prior to the originally scheduled maturity thereof, including without limitation payments that are made as part of a liquidation of the Member or that become due as a result of an acceleration pursuant to Section 4.01 hereof, whether such payment is made by the Member, by a conservator, receiver, liquidator, or trustee of or for the Member, or by any successor to or any assignee of the Member.

Section 4.04 CERTAIN PROVISIONS AS TO SALE OF COLLATERAL. In view of the possibility that Federal and state securities laws and Federal and state laws applicable to Member, may impose certain restrictions on the method by which a sale of the Collateral may be effected, the Bank and the Member agree that any sale of the Collateral as a result of an Event of Default shall be deemed “commercially reasonable” irrespective of whether the notice or manner of such sale contains provisions, or imposes, or is subject to, conditions or restrictions deemed appropriate to comply with the Securities Act of 1933 or any other applicable Federal or state securities law or any state or Federal law applicable to Member. It is further agreed that from time to time the Bank may attempt to sell the Collateral by means of private placement. In so doing, the Bank may restrict the bidders and prospective purchasers to those who will represent and agree that they are purchasing for investment only and not for distribution or otherwise impose restrictions deemed appropriate by the Bank for the purpose of complying with the requirements of applicable securities laws. The Bank may solicit offers to buy such Collateral, for cash or otherwise, from a limited number of investors deemed by the Bank to be responsible parties who might be interested in purchasing such Collateral. If the Bank solicits offers from not less than three such investors, then the acceptance by the Bank of the highest offer obtained therefrom (whether or not three offers are obtained) shall be deemed to be a commercially reasonable method of disposing of the Collateral.

Section 4.05 APPLICATION OF PAYMENTS. Upon the occurrence of any Event of Default, the Bank shall apply any payment by or recovery from the Member, or any sum realized from Collateral which shall be received by the Bank (a) to payment of all costs of collection and enforcement; (b) to payment of the Indebtedness in such manner as the Bank shall choose; and (c) to repayment to the Bank of any amounts to be paid or advanced under Outstanding Commitments. The Bank shall, unless otherwise required by applicable law, apply any surplus to the claims of any person(s) legally entitled thereto with any remaining surplus paid to the Member at such time and in such manner as the Bank shall deem fit irrespective of any manifestation of any contrary intention or desire on the part of the Member or the provisions of any other agreement between the Bank and the Member.

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ARTICLE V

MISCELLANEOUS

Section 5.01 GENERAL REPRESENTATIONS AND WARRANTIES BY THE MEMBER. The Member hereby represents and warrants that, as of the date hereof and the date of each Advance hereunder:

(a) The Member is not, and neither the execution of nor the performance of any of the transactions or obligations of the Member under this Agreement shall, with the passage of time, the giving of notice or otherwise, cause the Member to be: (1) in violation of its charter or articles of incorporation, bylaws, the Act or the Regulations, any other law or administrative regulation, any court decree, or any order of a regulatory authority; or (2) in default under or in breach of any material indenture, contract, or other instrument or agreement to which the Member is a party or by which it or any of its property is bound;

(b) The Member has full corporate power and authority and has received all corporate and governmental authorizations and approvals (including without limitation those required under the Act and the Regulations) as may be required to enter into and perform its obligations under this Agreement, to borrow each Advance, and to obtain each commitment for an Advance;

(c) The information given by the Member in any document provided, or in any oral statement made, in connection with an Application, request for an Advance, commitment for an Advance, a pledge, specification, or delivery of Collateral, is true, accurate, and complete in all material respects;

(d) The Member, unless otherwise exempted, is in compliance with any Regulations pertaining to community investment or service adopted pursuant to Section 10(g) of the Act (12 U.S.C. 1430(g), as amended);

(e) All long-term Advances shall be utilized solely for the purpose of providing funds for residential housing finance. “Long-term” is defined as five years or greater in term or as defined by the Federal Housing Finance Board;

(f) Except for any Advances made for liquidity purposes pursuant to Section 10(h) of the Act (12 U.S.C. 1430(h), as amended), any Advance received by the Member, when not a qualified thrift lender, shall be utilized solely to provide funds for housing finance pursuant to Section 10(e) of the Act (12 U.S.C. 1430(e), as amended); and

(g) The member, if a savings association, is a qualified thrift lender and will immediately notify the Bank if it becomes a non-qualified thrift lender.

Section 5.02 ASSIGNMENT. The Member hereby gives the Bank the full right, power, and authority to assign or transfer all or any part of the Bank’s right, title, and interest in and to this Agreement, and to pledge, assign, or negotiate to any other Federal Home Loan Bank or to any other person or entity, with or without recourse, all or any part of the Indebtedness or participations therein, and may assign and deliver the whole or any part of the Collateral to the transferee, which shall succeed to all the powers and rights of the Bank in respect thereof, and the Bank shall thereafter be forever relieved and fully discharged from any liability or responsibility with respect to the Collateral so assigned or pledged, and all references herein to the Bank shall be read to refer to the pledgee or assignee. The Member may not assign or transfer any of its rights or obligations hereunder without the express prior written consent of the Bank.

Section 5.03 AMENDMENT; WAIVERS. No modification, amendment, or waiver of any provision of this Agreement or consent to any departure therefrom shall be effective unless in a writing executed by a responsible officer of the party against whom such change is asserted and shall be effective only in the specific instance and for the purpose of which given. No notice to or demand on the Member in any case shall entitle the Member to any other or further notice or demand in the same, or similar or other circumstances. Any forbearance, failure, or delay by the Bank in exercising any right, power, or remedy hereunder shall not be deemed to be a waiver thereof, and any single or partial exercise by the Bank of any right, power, or remedy hereunder shall not preclude the further exercise thereof. Every right, power, and remedy of the Bank shall continue in full force and effect until specifically waived by the Bank in writing.

Section 5.04 JURISDICTION; LEGAL FEES. In any action or proceeding brought by the Bank or the Member in order to enforce any right or remedy under this Agreement, the parties hereby consent to, and agree that they will submit to, the jurisdiction of the United States District Court for the Northern District of Illinois or, if such action or proceeding may not be brought in Federal court, the jurisdiction of the courts of the State of Illinois located in the City of Chicago. The Member agrees that if any action or proceeding is brought by the Member seeking to obtain any legal or equitable relief against the Bank under or arising out of this Agreement or any transaction contemplated hereby and such relief is not granted by the final

- 12 -

decision, after any and all appeals, of a court of competent jurisdiction, the Member will pay all attorneys’ fees and other costs incurred by the Bank in connection therewith. The Member agrees to reimburse the Bank for all costs and expenses (including reasonable fees and out-of-pocket expenses of counsel for the Bank) incurred by the Bank in connection with the enforcement or preservation of the Bank’s rights under this Agreement including, but not limited to, its rights in respect of any Collateral and the audit or possession thereof. Any sums owed to the Bank under this Section 5.04 may be collected by the Bank, at its option, by debiting the Member’s DID Account with the Bank.

Section 5.05 NOTICES. Except as provided in the last sentence of this Section 5.05, any written notice, advice, request, consent, or direction given, made, or withdrawn pursuant to this Agreement shall be either in writing or transmitted electronically and reproduced mechanically by the addressee, and shall be given by first class mail, postage prepaid, by telecopy or other facsimile transmission, or by private courier or delivery service. All non-oral notices shall be deemed given when actually received at the principal office of the Bank or the Member, as appropriate. All notices shall be designated to the attention of an office or section of the Bank or of the Member if the Bank or the Member has made a request for the notice to be so addressed. Any notice by the Bank to the Member pursuant to Sections 3.03 or 3.04 hereof may be oral and shall be deemed to have been duly given to and received by the Member at the time of the oral communication.

Section 5.06 SIGNATURES OF MEMBER. For purposes of this Agreement, documents shall be deemed signed by the Member when a signature of an authorized signatory or an authorized facsimile thereof appears on the document. The Bank may rely on any signature or facsimile thereof which reasonably appears to the Bank to be the signature of an authorized person, including signatures appearing on documents transmitted electronically to and reproduced mechanically at the Bank. The secretary or an assistant secretary of the Member shall from time to time furnish to the Bank, on forms provided by the Bank, a certified copy of the resolution of the Board of Directors of the Member authorizing persons to apply on behalf of the Member to the Bank for Advances and commitments for Advances and otherwise act for and on behalf of the Member in accordance with this Agreement together with specimen signatures of such persons. Such certifications are incorporated herein and made a part of this Agreement and shall continue in effect until expressly revoked in writing by the Member notwithstanding that subsequent certifications may authorize additional persons to act for and on behalf of the Member.

Section 5.07 APPLICABLE LAW; SEVERABILITY. In addition to the terms and conditions specifically set forth herein and in any Application or Confirmation of an Advance between the Bank and the Member, this Agreement and all Advances and all commitments for Advances shall be governed by the statutory and common law of the United States and, to the extent Federal law incorporates or defers to state law, the laws (exclusive of the choice of law provisions) of the State of Illinois. Notwithstanding the foregoing, the Uniform Commercial Code as in effect in the State of Illinois shall be deemed applicable to this Agreement and to any Advance hereunder and shall govern the attachment and perfection of any security interest granted hereunder to the extent that the Act, Regulations, or other statutory law of the United States is not applicable. In the event that any portion of this Agreement conflicts with applicable law, such conflict shall not affect other provisions of this Agreement which can be given effect without the conflicting provision, and to this end the provisions of this Agreement are declared to be severable.

Section 5.08 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the Member and Bank.

Section 5.09 ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding between the parties hereto relating to the subject matter hereof and supersedes all prior agreements between such parties which relate to such subject matter. Notwithstanding the above, Advances and commitments for Advances made by the Bank to the Member prior to the execution of this Agreement shall continue to be governed by the terms of the Application or Confirmation of Advance pursuant to which such Advances and commitments for Advances were made, and otherwise by the terms and conditions of this Agreement.

Section 5.10 CAPTIONS AND HEADINGS. The captions and headings in this Agreement are for convenience only and shall not be considered as part of or affect the construction or interpretation of any provision of this Agreement.

Section 5.11 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties by Member contained in this Agreement or made in writing in connection herewith, shall be continuing and shall survive execution and delivery of this Agreement and the making of any Advances.

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IN WITNESS WHEREOF, the Member and the Bank have caused this Agreement to be signed in their names by their duly authorized officers as of the date first above mentioned.

MEMBER

(Typed Name of Member)

By:	By:
Title:	Title:

MEMBER ACKNOWLEDGMENT

STATE OF	)
	) ss:
COUNTY OF	)

On this                  day of                     , 20          , before me personally came                                      and                                 , to me known, who, being by me duly sworn, did depose and state that said person is the                                  and                                 of the corporation described in and which executed the above instrument; that said people know the seal of the corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation; and that each person signed his/her name thereto by order of the Board of Directors of said corporation.

Notary Public

FEDERAL HOME LOAN BANK OF CHICAGO

By:	By:
Title:	Title:

FEDERAL HOME LOAN BANK OF CHICAGO ACKNOWLEDGEMENT

STATE OF	)
	) ss:
COUNTY OF	)

On this                  day of                     , 20          , before me personally came                                      and                                     , to me known, who, being by me duly sworn, did depose and state that said person is the                                      and                                      of the corporation described in and which executed the above instrument; that said people know the seal of the corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation; and that each person signed his/her name thereto by order of the Board of Directors of said corporation.

Notary Public

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EX-10.3

Exhibit 10.3

WRITTEN AGREEMENT BETWEEN

THE FEDERAL HOME LOAN BANK OF CHICAGO

AND

THE FEDERAL HOUSING FINANCE BOARD

WHEREAS, the Federal Home Loan Bank of Chicago (Bank) and the Federal Housing Finance Board (Finance Board) have as common goals that the Bank maintains its safe and sound condition, operates in a prudential manner, and meets or exceeds all requirements of the Federal Home Loan Bank Act (Bank Act) and Finance Board regulations and policies; and

WHEREAS, on September 23, 2003, the board of directors of the Bank (Chicago Board) adopted a resolution (2003 Resolution) approving Action Plans for addressing, to the satisfaction of the Finance Board’s Office of Supervision (Office of Supervision), each of the findings cited in the Finance Board’s 2003 Report of Examination on the Bank; and

WHEREAS, during the 2004 examination of the Bank conducted by staff of the Office of Supervision (Examiners) between January 26, 2004 and March 12, 2004, the Examiners developed findings regarding certain practices of the Bank related to governance, risk management, audit, and financial recordkeeping and accounting, some of which were to have been redressed pursuant to the 2003 Resolution; and

WHEREAS, the Examiners summarized their findings in a Report of Examination dated April 13, 2004 (2004 ROE), which was presented to the Chicago Board on April 20, 2004; and

WHEREAS, the Bank, acting through the Chicago Board, has expressed its intent to address the findings made in the 2004 ROE; and

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WHEREAS, the Office of Supervision and the Bank agree that it is advisable and appropriate to enter into a written agreement (Agreement) setting forth measures to redress the deficiencies in the Bank’s practices identified by the Office of Supervision; and

WHEREAS, by Resolution No. 2004-08, dated June 23, 2004, the Board of Directors of the Finance Board duly authorized Stephen M. Cross, Director, Office of Supervision (OS Director), to enter into this Agreement on behalf of the Finance Board.

NOW THEREFORE, the Bank and the Finance Board agree as follows:

Article 1: General Provisions

1. This Agreement constitutes a “written agreement entered into by the Bank with the agency” as used in 12 U.S.C. 1422b(a)(5), and a “written agreement” for purposes of the public disclosure requirements under 12 U.S.C. 1422b(a)(5) and 12 C.F.R. § 908. 13(a)(1). This Agreement shall supersede and replace the 2003 Resolution, and from its effective date, this Agreement, and not the 2003 Resolution, shall apply to the Bank.

2. Any report, plan, or consultant’s report to be submitted by the Bank or the Chicago Board under this Agreement shall be sent to:

Stephen M. Cross

Director, Office of Supervision

Federal Housing Finance Board

1777 F St. NW

Washington D.C. 20006

The OS Director may designate any other Office of Supervision employee to receive any plan or report required under this Agreement or other communication concerning this Agreement by notifying the Bank in writing of such designation.

3. Any approval or agreement to be given to the Bank by the Office of Supervision shall be provided in writing by the OS Director or by such other person designated by him.

2

4. For purposes of this Agreement, an independent, outside consultant shall be a person or entity not controlled by or affiliated with the Bank or any officer or board member of the Bank. Such consultants may have previously been engaged by the Bank and may be engaged to perform one or more of the functions required by the provisions of this Agreement.

5. As referenced in this Agreement, actions taken by the “Finance Board” shall include any actions taken by its Board of Directors or by an employee of the Finance Board.

6. All communications provided by the Finance Board to the Bank related to or concerning this Agreement shall be directed to:

Peter E. Gutzmer

Executive Vice President, General Counsel & Corporate Secretary

Federal Home Loan Bank of Chicago

111 East Wacker Drive

Chicago, IL 60601

The Bank may designate any other officer or director of the Bank to receive any communication from the Finance Board related to or concerning this Agreement by notifying the OS Director, or his designee, in writing of such designation.

Article 2: Compliance with the Agreement

1. The Chicago Board shall be responsible for monitoring and coordinating the Bank’s adherence to the provisions of this Agreement. Not later than thirty (30) days from the date of this Agreement the Chicago Board shall submit to the OS Director an action plan acceptable to the OS Director, including timeframes and action steps, for addressing each of the Articles and provisions of this Agreement. Such steps shall include the identification of specific timeframes for the redress of each finding in the 2004 ROE.

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2. Every thirty (30) days thereafter, the Chicago Board shall prepare and submit to the OS Director a written progress report setting forth in detail:

(a) Actions taken up to the date of the report to comply with each Article of this Agreement, including actions taken to implement recommendations made by the independent consultants that are hired pursuant to Articles 5-8 of this Agreement;

(b) The results of those actions;

(c) A description of the actions still needed to achieve full compliance with each Article of this Agreement; and

(d) Any other information that the OS Director deems appropriate.

Article 3: Redress of Examinations Findings

The Chicago Board shall take, as soon as practicable, all necessary steps to ensure that the Bank redresses each finding in the 2004 ROE to the satisfaction of the OS Director. The preparation of the action plan shall not suspend or delay the Bank’s obligation to begin immediately to redress all such findings.

Article 4: Business and Capital Management Plan

1. The Chicago Board shall submit a three-year business and capital management plan acceptable to the OS Director that:

(a) Does not increase the market, credit, or operational risk profiles of the Bank;

(b) Maintains a capital ratio not less than the ratio of the sum of the paid-in value of capital stock plus retained earnings to total assets, rounded to the nearest one-tenth of one percent, on May 31, 2004 (5.1%); and

(c) Establishes capital stock, retained earnings, and dividend policies appropriate for the Bank’s business strategies.

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2. The business plan required by this Article also shall include, at a minimum:

(a) Projections for growth and capital requirements that are based upon a detailed analysis of the Bank’s assets, liabilities, earnings, and off-balance sheet activities;

(b) Identification of any new activities contemplated by the Bank; and

(c) Projections of the sources of additional capital, as required to meet the Bank’s needs under its business plan, and the timing for when such capital will be acquired.

3. The Chicago Board shall submit a draft business and capital management plan for the review of the OS Director by no later than August 31, 2004, and a final business and capital management plan that is acceptable to the OS Director by no later than September 30, 2004.

Article 5: Independent Review of Bank Management and the Chicago Board

1. The Chicago Board shall employ, by no later than sixty (60) days from the date of this Agreement, an independent, outside management consultant to review the Bank’s management and the Chicago Board’s oversight of the Bank.

2. Within sixty (60) days after employment of the consultant required under paragraph 1 of this Article, the consultant shall complete a study of the Bank’s management organizational structure and staffing, and the Chicago Board’s oversight. For purposes of this Article, “management” shall be defined to include the Bank’s Director of Internal Audit, the Vice President of Market Risk Analysis, and all persons holding a title of senior vice president or above. The findings and any recommendations of the consultant shall be set forth in a written report.

3. At a minimum, the report shall contain:

(a) An assessment of the adequacy and the quality of the skills and expertise of management, as defined above, in light of current duties;

5

(b) An assessment of the adequacy and the quality of management, management organization and structure, and staffing for each functional area of the Bank;

(c) An assessment of the adequacy and the quality of information regarding the operation of the Bank that the Chicago Board receives relative to its fiduciary responsibilities and other responsibilities under law; and

(d) Recommendations on how to correct any deficiencies noted by the consultant, and any recommendations of ways to otherwise enhance management and improve the Chicago Board’s performance.

4. Until such time as the Chicago Board provides a plan acceptable to the OS Director that addresses each of the recommendations in the management consultant review, the name and qualifications of any person being considered for employment in a management capacity shall be submitted to the OS Director. The OS Director shall have the right to reject the proposed employment of any such management official. The failure to exercise this right shall not constitute approval or endorsement by the Office of Supervision or the Finance Board of the person in question.

Article 6: Independent Review of Risk Management

1. The Chicago Board shall employ an independent, outside consultant to review the Bank’s risk management policies, procedures, and practices.

2. Within sixty (60) days after employment of the consultant required under paragraph 1 of this Article, the consultant shall complete a study of the Bank’s risk management program. The findings and any recommendations of the consultant shall be set forth in a written report.

6

3. At a minimum, the report shall:

(a) Identify the market, credit, and operational risks faced by the Bank, and provide a written analysis of each of those risks;

(b) Recommend risk measurement tools and controls for specific risk variables most appropriate for the Bank’s current lines of business and operations; and

(c) Describe policies, procedures, and practices, consistent with the business and capital management plan required under Article 4 of this Agreement and the Bank’s financial position, that the Bank should adopt and that: (i) are designed to ensure the strategic direction and risk tolerances are effectively communicated and followed throughout the Bank; and (ii) identify the actions to be taken whenever noncompliance with risk policies is found.

Article 7: Independent Review of Internal Audit

1. The Chicago Board shall employ, by no later than sixty (60) days from the date of this Agreement, an independent, outside consultant to review the Bank’s internal audit function.

2. Within sixty (60) days after employment of the consultant required under paragraph 1 of this Article, the consultant shall complete a study of the Bank’s internal audit function. The findings and any recommendations of the consultant shall be set forth in a written report.

3. At a minimum, the report shall address the independence, expertise, and staffing of the internal audit function, and the extent to which the Chicago Board adequately monitors and evaluates the internal audit function.

7

Article 8: Independent Review of Accounting, Recordkeeping, and Reporting Practices and Controls

1. The Chicago Board shall employ, by no later than sixty (60) days from the date of this Agreement, an independent, outside consultant to review the internal and external accounting, recordkeeping, and reporting practices and controls at the Bank.

2. Within sixty (60) days after employment of the consultant required under paragraph 1 of this Article, the consultant shall complete a study of the Bank’s accounting, recordkeeping, and reporting practices and controls. The findings and any recommendations of the consultant shall be set forth in a written report.

3. At a minimum, the report shall address any accounting, recordkeeping and reporting deficiencies identified in the 2004 ROE, specifically including an assessment of the Bank’s debt transfer activities and a determination of whether the Bank’s hedge accounting practices, procedures and recordkeeping fully meet the requirements of generally accepted accounting principles.

Article 9: Provisions Affecting the Retention of Independent, Outside Consultants

1. Prior to the employment of a consultant pursuant to Articles 5-8 of this Agreement, the name and qualifications of the consultant being considered for employment along with the corresponding proposed contract or engagement letter, shall be submitted to the OS Director who shall have the right to expand the scope of the proposed contract or engagement letter or to reject the employment of the proposed consultant. The OS Director’s failure to exercise any right conferred by this paragraph shall not constitute approval or endorsement by the Office of Supervision or the Finance Board of the consultant, and the consultant shall not be deemed to be an employee, contractor, service provider or agent of the Finance Board.

8

2. A copy of each draft report and each final report required by Articles 5-8 shall be submitted to the OS Director at the same time that the report or draft is provided to the Bank.

3. Each consultant employed pursuant to Articles 5-8 of this Agreement shall consider or accept comments from the Bank’s management or the Chicago Board concerning drafts of the consultant’s report regarding factual errors or misstatements made in the drafts, but must ensure and certify in its report that its findings and recommendations have been made independently.

4. Within thirty (30) days of completion of each consultant’s report required by Articles 5-8 of this Agreement, the Chicago Board shall provide a plan, acceptable to the OS Director, addressing each of the recommendations in such report.

Article 10: Growth Limitations on the Bank’s Acquired Member Assets Program

Without the prior agreement of the OS Director, the Bank shall not increase the Acquired Member Assets (AMA) on its books, either in whole loans, participations, Shared Funding Certificates, or any other manner, greater than ten (10) percent per annum from the aggregate net book value of such assets on May 31, 2004. Any increase in the Bank’s AMA consistent with this Article shall not by itself be deemed a violation of the requirements of paragraph 1 (a) in Article 4.

Article 11: Closing Provisions

1. Notwithstanding that this Agreement requires the Bank to submit certain plans or reports to the Office of Supervision for review or approval, the Chicago Board has the ultimate responsibility for proper and sound management of the Bank.

2. The OS Director shall have the sole discretion, in accordance with Finance Board Resolution 2004-08, to determine whether any plan adopted and implemented by the Chicago

9

Board or the Bank under an Article of this Agreement meets the requirements and the purposes of the Article and this Agreement.

3. The Bank’s failure to undertake or complete any commitment made in a plan submitted by the Bank and approved by the Office of Supervision pursuant to the Agreement, or the Bank’s violation of any terms or conditions in such a plan shall be deemed a violation of this Agreement, subject to all remedies applicable to a violation of a “written agreement entered into by the Bank with the agency” under the Bank Act and Finance Board regulations.

4. It is expressly understood that if, at any time, the Finance Board deems it appropriate in fulfilling the responsibilities placed upon it by the Bank Act to undertake any action affecting the Bank, nothing in this Agreement shall in any way inhibit, estop, bar, or otherwise prevent the Finance Board from doing so. This Agreement does not relieve the Bank of any responsibility it has to comply with the Bank Act or with Finance Board regulations or policies or to comply with any other actions requested or directed by the Finance Board.

5. The provisions of this Agreement shall be effective upon execution by the parties hereto, and the provisions shall continue in full force and effect until such provisions are amended in writing by mutual consent of the parties to the Agreement or excepted, waived, or terminated in writing by the OS Director.

6. Any time limitations imposed by this Agreement shall begin to run from the date of this Agreement. Such time requirements may be waived or extended in writing by the OS Director or his designee, for good cause.

7. This Agreement expressly does not form, and may not be construed to form, a contract binding on the Finance Board or the United States. Notwithstanding the absence of mutuality of obligation, or of consideration, or of a contract, the Finance Board may enforce any

10

of the commitments or obligations herein undertaken by the Bank under its supervisory powers, including 12 U.S.C. 1422b(a)(5), and not as a matter of contract law. The Bank expressly acknowledges that neither the Bank nor the Finance Board has any intention to enter into a contract. The Bank also expressly acknowledges that no Finance Board officer or employee has statutory or other authority to bind the United States, the Finance Board, or any other federal regulatory agency or entity, or any officer or employee of those entities to a contract affecting the Finance Board’ s exercise of its supervisory responsibilities. The terms of this Agreement, including this paragraph, are not subject to amendment or modification by any extraneous expression, prior agreements or arrangements, or negotiations between the parties, whether oral or written.

IN WITNESS WHEREOF, the undersigned, authorized by the Federal Housing Finance Board, has hereunto set his hand on behalf of the Federal Housing Finance Board.

/s/    STEPHEN M. CROSS	6/30/04
Stephen M. Cross	Date
Director, Office of Supervision Federal Housing Finance Board

11

IN WITNESS WHEREOF, the undersigned, as the duly elected or appointed members of the Chicago Board, have hereunto set their hands on behalf of the Bank.

/s/    ALLEN H. KORANDA	6/30/04
Allen H. Koranda, Chairman	Date
/s/    RICHARD W. GRABER	6/30/04
Richard W. Graber, Vice Chairman	Date
/s/    JAMES K. CALDWELL	6/30/04
James K. Caldwell	Date
/s/    GERARDO H. GONZALEZ	6/30/04
Gerardo H. Gonzalez	Date
/s/    TERRY W. GROSENHEIDER	June 30, 2004
Terry W. Grosenheider	Date
/s/    SCOTT K. HEITMANN	6/30/04
Scott K. Heitmann	Date
/s/    P. DAVID KUHL	6/30/04
P. David Kuhl	Date
/s/    ALEX J. LABELLE	6/30/04
Alex J. LaBelle	Date

12

/s/    ROGER L. LEHMANN	6/30/04
Roger L. Lehmann	Date
/s/    KATHLEEEN E. MARINANGEL	6/30/04
Kathleen E. Marinangel	Date
/s/    RICHARD K. MCCORD	6-30-04
Richard K. McCord	Date
/s/    JAMES F. MCKENNA	6/30/04
James F. McKenna	Date
/s/    WILLIAM H. ROSS	6/30/04
William H. Ross	Date
/s/    JACK C. RUSCH	6/30/04
Jack C. Rusch	Date
/s/    H. LEE SWANSON	7/7/04
H. Lee Swanson	Date
/s/    SARAH D. VEGA	7/2/04
Sarah D. Vega	Date

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EX-10.3.1

Exhibit 10.3.1

AMENDMENT NO. 1 TO

WRITTEN AGREEMENT BETWEEN

THE FEDERAL HOME LOAN BANK OF CHICAGO

AND

THE FEDERAL HOUSING FINANCE BOARD

WHEREAS, the Federal Home Loan Bank of Chicago (the “Bank”) and the Federal Housing Finance Board (the “Finance Board”) entered into a Written Agreement on June 30, 2004 (the “Written Agreement”);

WHEREAS, on October 18, 2005, the Board of Directors of the Bank (the “Chicago Board”), based on an assessment of the Bank’s business operations, voted to suspend as of 12:00 pm CDT on October 18, 2005, all redemptions of excess capital stock and to maintain the suspension in effect until such time that the Chicago Board determines that the suspension should be terminated and obtains Finance Board written approval to reinstitute such redemptions; and

WHEREAS, the Bank and the Finance Board consider it to be advisable to amend the Written Agreement in certain respects,

NOW THEREFORE, pursuant to Article 11, Section 5, the Bank and the Finance Board, effective upon execution of this Amendment No. 1, hereby amend the Written Agreement as follows:

Article 4 is amended by adding new Sections 4., 5., 6., and 7. thereto:

4. The Finance Board accepted the Bank’s Business and Capital Management Plan on February 10, 2005 (“Business Plan”), pursuant to which the Bank is currently required to maintain a ratio of the sum of the paid-in value of its capital stock plus retained earnings to total assets of 5.1 percent. Effective as of October 18, 2005, the Bank shall be subject to a revised minimum capital requirement under which it shall maintain both: (i) a ratio of the sum of the paid-in value of its capital stock plus retained earnings (regulatory capital) to total assets of 4.5 percent, and (ii) an aggregate amount of capital stock equal to the

paid-in value of the Bank’s capital stock as of the close of business on October 18, 2005, after payment of the third quarter stock dividend. This revised minimum capital requirement shall supersede the capital requirement currently in effect pursuant to Article 4, Section 1.(b) of the Written Agreement and the Business Plan.

5. Pursuant to the last sentence of 12 U.S.C. § 1426(f) (2000), the Bank may in no case redeem or repurchase any applicable capital stock if, following the redemption or repurchase, the Bank would fail to satisfy any minimum capital requirement. The Finance Board has informed the Bank that (i) the capital requirements set forth in Article 4, Section 4 of the Written Agreement, as amended, are minimum capital requirements for the purposes of that sentence, (ii) the prohibitions in 12 U.S.C. § 1426(h)(3) (2000) are currently applicable to the Bank, and (iii) the capital requirements set forth in Article 4, Section 4 of the Written Agreement, as amended, are applicable capital requirements for purposes of § 1426(h)(3).

6. The Bank shall submit a Retained Earnings and Dividend Policy, and revisions to its Business Plan strategies to enhance and improve the earnings and capital of the Bank. Those documents shall be submitted for review by the OS Director by no later than December 15, 2005.

7. Subsequent to the execution of this Amendment, the Bank shall not declare or pay any dividend without the prior written approval of the OS Director until such time as (i) the OS Director has approved the Bank’s Retained Earnings and Dividend Policy and the revisions to its Business Plan strategies, submitted pursuant to Section 6, and (ii) the Bank has an effective registration statement filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934,

Nothing in this Amendment No. 1 to the Written Agreement between the Bank and the Finance Board shall alter, suspend, or otherwise amend any provisions of the Written Agreement, other than those expressly identified as being superseded this Amendment.

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In Witness Whereof, the undersigned, authorized by the Board of Directors of the Federal Housing Finance Board has hereunto set his hand on behalf of the Federal Housing Finance Board.

/S/    STEPHEN M. CROSS	12-9-05
Stephen M. Cross	Date
Director, Office of Supervision Federal Housing Finance Board

In Witness Whereof, the undersigned, as the duly elected or appointed members of the Chicago Board, have hereunto set their hands on behalf of the Bank.

/s/    ALLEN H. KORANDA	10-18-05
Allen H. Koranda, Chairman	Date
/s/    JAMES K. CALDWELL	10-18-05
James K. Caldwell	Date
/s/    THOMAS M. GOLDSTEIN	10-18-05
Thomas M. Goldstein	Date
/s/    GERARDO H. GONZALEZ	10-20-05
Gerardo H. Gonzalez	Date
/s/    TERRY W. GROSENHEIDER	10-18-05
Terry W. Grosenheider	Date

3

/s/    THOMAS L. HERLACHE	10-18-05
Thomas L. Herlache	Date
/s/    P. DAVID KUHL	10-18-05
P. David Kuhl	Date
/s/    ALEX J. LABELLE	10-18-05
Alex J. LaBelle	Date
/s/    ROGER L. LEHMANN	10-18-05
Roger L. Lehmann	Date
/s/    GERALD J. LEVY	10-18-05
Gerald J. Levy	Date
/s/    KATHLEEN E. MARINANGEL	10-20-05
Kathleen E. Marinangel	Date
/s/    RICHARD K. MCCORD	10-18-05
Richard K. McCord	Date
/s/    JAMES F. MCKENNA	10-18-05
James F. McKenna	Date
/s/    WILLIAM H. ROSS	10-18-05
William H. Ross	Date

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EX-10.4

Exhibit 10.4

FEDERAL HOME LOAN BANK OF CHICAGO

MORTGAGE PARTNERSHIP FINANCE^® PROGRAM

PARTICIPATING FINANCIAL INSTITUTION AGREEMENT

[origination or purchase]

THIS PARTICIPATING FINANCIAL INSTITUTION AGREEMENT (“Contract”) is dated as of                                                      , 20     between the participating financial institution (the “PFI”) that signs this document and the FEDERAL HOME LOAN BANK OF CHICAGO (the “Bank”), a corporation organized and existing under the laws of the United States of America.

I. GENERAL INFORMATION

This article contains important basic information about this Contract.

1.1. Purpose of Contract. The purpose of this Contract is:

(a) to establish the PFI as an approved originator of mortgages for and a seller of mortgages to the Bank under the MORTGAGE PARTNERSHIP FINANCE (“MPF^®”) Program, a program established by the Federal Home Loan Bank of Chicago (in such capacity, the “MPF Provider”);

(b) to establish the terms and conditions for the origination of those mortgages which the Bank will fund or purchase;

(c) to establish the terms and conditions, including, without limitation, the Credit Enhancement of the PFI, under which the Bank will fund or purchase mortgages;

(d) to establish the PFI as an approved servicer of mortgages held by the Bank, whether originated or sold by the PFI or by others;

(e) to provide the terms and conditions of servicing mortgages for the Bank, whether originated or sold by the PFI or by others; and

(f) to supercede in certain respects any prior MPF Program Participating Financial Agreement(s) which the PFI may have executed (“Prior Contract”).

1.2. Consideration. In consideration of the purpose of this Contract and of all the provisions and mutual promises contained in it, the PFI and the Bank agree to all that this Contract contains.

1.3. The Guides. The MPF Provider has issued its guides to PFIs (collectively, the “Guides”), and, from time to time, issues modifications of the Guides, and furnishes them to the PFI which the PFI agrees are incorporated into this Contract by reference as if fully set forth herein. These Guides are:

(a) the MORTGAGE PARTNERSHIP FINANCE Origination Guide; and

(b) the MORTGAGE PARTNERSHIP FINANCE Servicing Guide.

Whenever there is a reference to the Guides in this Contract, it means either or both the Origination Guide and the Servicing Guide, as the context may require and as they exist now and as they may be amended or supplemented in writing. The MPF Provider may amend or supplement the Guides, or either of them, from time to time, at its sole discretion, by furnishing amendments or supplementary matter to the PFI in accordance with Section 13.2 of this Contract, and such amendments or supplements shall be included in the Guides for the purposes hereof. The Origination Guide is applicable to (i) the origination of Bank Funded Mortgages by the PFI or an approved designee, and (ii) the origination of Closed Mortgages sold to the Bank whether originated or purchased by the PFI.

The Servicing Guide is applicable to the servicing of mortgages for the Bank whether originated for or purchased by the Bank from the PFI or from other PFIs.

The term “Guides” also includes anything that, in whole or in part, supersedes or is substituted for the Guides.

1.4 Certain Definitions. All capitalized terms defined in this Section 1.4 when used in this Contract shall have the meanings set forth in this Section 1.4. All other capitalized terms that are defined in this Contract by use of quotation marks to indicate a definition shall have the meanings set forth in the body of this Contract where they are defined. All other capitalized terms used but not defined herein shall have the same respective meanings as set forth in the Guides.

(a) “Acquired Mortgage”. Any mortgage which the PFI purchased and sold to the Bank or for which the PFI acquired the Servicing and is Servicing for the Bank.

(b) “Actual Credit Enhancement”. Until the date a Master Commitment is filled, closed or expires, the cumulative amount of the PFI’s credit enhancement obligation as determined by the MPF Provider’s system with respect to the mortgages then delivered under that Master Commitment. On and after such date, the amount of the PFI’s credit enhancement obligation as determined by such system with respect to all mortgages actually delivered under the Master Commitment in accordance with the applicable MPF Mortgage Product description, which may permit the Actual Credit Enhancement to be reset from time to time by the MPF Provider. In no event shall the Actual Credit Enhancement be less than any minimum amount required for the applicable MPF Mortgage Product or greater than the Maximum Credit Enhancement stated in the Master Commitment. Further, if any mortgages are subsequently purchased or repurchased by the PFI pursuant to Section 5.5, the Actual Credit Enhancement may, at the option of the Bank, be recalculated as if such mortgages had never been delivered under the Master Commitment.

(c) “Advances Agreement”. The advances and security agreement between the PFI and the Bank.

(d) “Agent Fee”. The fee payable to the PFI by the Bank in accordance with the Origination Guide in connection with the origination of a Bank Funded Mortgage. An Agent Fee may be positive or negative.

(e) “Applicable Laws”. All federal, state and local laws, ordinances, rules, regulations and orders applicable to the origination, holding, sale or servicing of Mortgages, whether performed as an agent, principal, independent contractor or vendor.

(f) “Bank Funded Mortgage”. A mortgage originated by the PFI or an approved designee as agent for the Bank, which is funded by the Bank at or prior to Closing and which at no time is owned by the PFI but is rather owned by the Bank at Closing.

(g) “Business Day”. Any day (other than Saturdays and Sundays) that the MPF Provider is open for business.

(h) “Closed Mortgage”. A mortgage that the Bank purchases from the PFI which is owned by the PFI prior to such purchase and owned by the Bank after such purchase and which was previously made or purchased by the PFI.

(i) “Confirmation”. A writing or machine- or electronically-generated transmission issued by the Bank confirming the Bank’s funding or purchase of one or more mortgages and which shall evidence the Bank’s ownership of such mortgage(s), in a form as specified in the Guides.

(j) “Contract”. This document as referenced in the opening clause as this Contract, any addenda attached hereto or amendments hereto, and the documents incorporated by reference, which are the

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Guides, the Master Commitments issued under this Contract, Delivery Commitments issued pursuant to such Master Commitments and, if issued, the MPF Program Requirements, and any amendments or supplements of any of the foregoing.

(k) “Credit Enhancement”. The PFI’s obligations under Article IV of this Contract, including without limitation, the Actual Credit Enhancement and Remaining Credit Enhancement for all Mortgages delivered by the PFI to the Bank under this Contract, and, if applicable, Mortgages serviced for the Bank.

(l) “Credit Enhancement Fee”. A fee payable monthly by the Bank to the PFI in consideration of the PFI’s Credit Enhancement obligation to fund the Realized Loss for a Master Commitment, based upon the fee rate applicable to such Master Commitment and subject to the terms of the Master Commitment and applicable MPF Mortgage Product which may include performance and risk participation features as to such Credit Enhancement Fee.

(m) “DDA”. A depository account established by the PFI at the Bank which is used for processing transactions under this Contract.

(n) “Delivery Commitment”. The commitment of the parties, evidenced by a writing or a machine- or electronically-generated transmission issued by the Bank to the PFI accepting the PFI’s oral delivery commitment offer made from time to time under this Contract and in accordance with the provisions of the Guides. Pursuant to the Delivery Commitment, the PFI commits to deliver mortgages to the Bank that satisfy the terms set forth in the Delivery Commitment within the period set forth therein, and the Bank commits to fund or purchase such mortgages in accordance with the provisions of the Guides.

(o) “First Loss Account”. A contingent liability account established by the Bank for each Master Commitment based on and in the amount required under the applicable MPF Mortgage Product description. This account is the liability of the Bank with respect to Realized Losses arising under such Master Commitment.

(p) “Indemnified Party”. Each of the Bank, any Participant, and each of their respective successors and assigns, and each of their respective shareholders, directors, officers, employees and agents.

(q) “Master Commitment”. A document (including any addenda or attachments thereto) executed by the PFI and the Bank in accordance with the Guides, which provides the terms under which the PFI will deliver mortgages to the Bank.

(r) “mortgage / mortgage loan”. A residential mortgage loan which is evidenced by a mortgage note. The term also includes, as the context requires, the mortgage note, the security instrument which secures the loan and the evidence of title to the mortgaged property.

(s) “Mortgage / Mortgage Loan”. A mortgage loan delivered to the Bank or serviced by the PFI for the Bank under the MPF Program.

(t) “Mortgage Records”. All books, records and information (including, without limitation, any item in electronic form) reasonably required to document or properly service any mortgage originated, sold or serviced by the PFI to or for the Bank.

(u) “MPF Program Requirements”. Requirements with respect to the MPF Program which may be established and as amended from time to time by the Bank, which are intended to govern certain aspects of the relationship of the PFI and the Bank in addition to the rights and duties set forth in this Contract and the Guides.

(v) “Origination and Sales Provisions”. The provisions contained in Articles III and IV of this Contract under which mortgages may be originated for or purchased by the Bank.

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(w) “Participant”. A Person who acquires an ownership or a participation interest in some or all of the Mortgages delivered or serviced by the PFI to or for the Bank.

(x) “Person”. Any individual, corporation, partnership, joint venture, association, joint-stock company, trust, limited liability company, unincorporated organization, government or any agency or political subdivision thereof.

(y) “PFI”. The participating financial institution referenced in the opening clause of this Contract which signs this Contract, and its successors and assigns.

(z) “PFIs”. Two or more financial institutions that are participating in the MPF Program, whether members of the Bank or any other MPF Bank(s).

(aa) “Prior Contract.” If applicable, the Mortgage Partnership Finance Program Participating Financial Institution Agreement as referenced in Section 1.1 (f) of this Contract previously executed by the PFI and the Bank or another MPF Bank.

(bb) “Principal Officers”. Those officers of the PFI (i) that are “Reporting Persons” under Section 16 of the Securities and Exchange Act of 1934 and/or (ii) that have a critical influence on or substantive control over any material aspect of the PFI’s mortgage origination or servicing operation or any function related to such operations.

(cc) “Property” or “Mortgaged Property”. The property that is subject to a Mortgage or, where the Mortgage has been foreclosed or the Servicer has taken title to the property on the Bank’s behalf that was subject to such Mortgage.

(dd) “Realized Loss”. With respect to a Conventional Mortgage, the loss incurred or arising from the default of such Mortgage (after application of any applicable governmental or private primary mortgage insurance or guaranties, but not including any Supplemental MI Policy) as determined in accordance with the Guides and prior to any payments or allocations under Article IV of this Contract. With respect to a Government Mortgage, the loss incurred in connection with any default, whether on the part of the Borrower or the PFI that is not covered by FHA Insurance, VA Guaranty or other governmental insurance nor included in the Unreimbursed Servicing Expenses.

(ee) “Remaining Credit Enhancement”. At any time, the PFI’s obligation with respect to a Master Commitment in an amount equal to the Actual Credit Enhancement less the Realized Loss paid by the PFI pursuant to Section 4.5 of this Contract.

(ff) “Replacement Contract”. Any agreement or combination of agreements made by the Bank to substitute an obligor or obligors with respect to the PFI’s Credit Enhancement, including without limitation, a substitute credit enhancement structure, acceptable (in the Bank’s sole discretion) to the Bank, which obligors may include, but are not limited to, one or more other PFIs, mortgage guaranty insurers, surety companies or any other type of entity or structure that will result in the Bank having the equivalent quality and amount of credit enhancement coverage as provided by the PFI under Article IV with respect to each Master Commitment.

(gg) “Servicer”. The PFI, in its capacity as a servicer of Mortgages under this Contract.

(hh) “Spread Account”. A name for the First Loss Account initially used in the MPF Program.

(ii) “Supplemental MI Policy”. With respect to a Master Commitment, any and all supplemental or pool mortgage guaranty insurance policies in addition to private primary mortgage insurance.

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(jj) “Unreimbursed Servicing Expenses”. Those expenses incurred by the Servicer or its designee in connection with any defaulted Mortgage that are not reimbursed by the FHA Insurance, by the VA Guaranty or by any other government agency under the terms of any other governmental insurance or guaranty (including, without limitation, all advances made by the Servicer to the Bank to pay all principal thereon and interest through the month of repayment or repurchase of the Mortgage or in which the disposition of the Mortgaged Property occurs, or as may be required to obtain the benefit of FHA Insurance, VA Guaranty or other governmental insurance or guaranty). Unreimbursed Servicing Expenses are customarily incurred by servicers of government mortgages securitized through Ginnie Mae. Losses with respect to Mortgages repurchased by the PFI from the Bank are the responsibility of the PFI.

II. ELIGIBILITY REQUIREMENTS TO ORIGINATE OR SELL MORTGAGES

For the PFI to originate mortgages for, or sell mortgages to, the Bank, the PFI must satisfy the eligibility requirements specified in this article.

2.1. General Requirements. These are the general requirements the PFI must meet to be eligible to originate mortgages for, or sell mortgages to, the Bank:

(a) Meet the Bank’s Standards. The PFI must have and maintain as one of its principal business purposes the origination or purchase of mortgages of the type that the PFI will sell to the Bank under this Contract. In addition, the PFI, must, at all times, have the capacity to originate or purchase mortgages that meet the MPF Program standards and the standards generally imposed by other GSEs and private institutional mortgage investors. The PFI must, at all times, satisfy the applicable requirements for PFIs to originate or sell mortgages set forth in the Guides and, if issued, comply with the MPF Program Requirements.

(b) Have Qualified Staff and Adequate Facilities and Systems. The PFI must, at all times, employ personnel or agents who are well trained and qualified to perform the functions required under Articles III and IV of this Contract, and maintain facilities and systems that are able to perform its functions under Articles III and IV of this Contract.

(c) Maintain Fidelity Bond and Errors and Omissions Coverage. The PFI must maintain, at its own expense, a fidelity bond and errors and omissions insurance, as required by the Guides.

(d) Report Basic Changes. The PFI must notify the Bank promptly in writing of any material changes that occur in its or its agents’ principal purpose, activities, manner of originating or acquiring mortgages, ownership, financial condition, staffing, facilities, fidelity bond or errors and omissions insurance, which changes adversely affect the PFI’s ability to perform its obligations under this Contract.

2.2 Ownership and Status of PFI. In approving a PFI in connection with the obligations of Articles III and IV, the Bank relies on the information the PFI has provided about the eligibility, qualifications and financial status of the PFI and its owners. The PFI covenants and agrees to comply with the provisions of the Guides and, if issued, the MPF Program Requirements regarding these matters, including, without limitation, the delivery of notices regarding these matters as required by the Origination Guide. Changes in any such matters may affect the PFI’s eligibility to originate mortgages for the Bank or sell mortgages to the Bank.

2.3. Financial Information. In order to become and remain a PFI approved to originate or sell mortgages under this Contract, the PFI agrees to provide the financial information required by the Guides and, if issued, MPF Program Requirements from time to time and the PFI shall, at all times, satisfy the standards set forth in the Guides and the MPF Program Requirements. The PFI agrees that the Bank may make such information available to the MPF Provider and to Participants or potential Participants.

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2.4. Access to PFI’s Records. As set forth in the Guides, the PFI agrees to permit, and cause its agents to permit, the Bank’s employees and designated representatives to examine or audit books, records and information pertaining to the Mortgages.

III. ORIGINATION AND SALE OF MORTGAGES

This article contains the basic rules governing the origination of mortgages for the Bank and the sale of mortgages to the Bank. The PFI hereby agrees as follows:

3.1. Governing Contractual Provisions. The origination and sale of each Mortgage will be governed by:

(a) this Contract;

(b) the Guides in effect on the day a written or electronic commitment is issued to the Borrower for the loan evidenced and secured by the Mortgage, except if no commitment is issued to the Borrower, then the Guides in effect on the day the Mortgage is closed;

(c) the applicable Master Commitment;

(d) the applicable Delivery Commitment;

(e) the Confirmation issued by the Bank at the time it funds or purchases the Mortgage; and

(f) if issued by the Bank, the MPF Program Requirements in effect on the day the applicable Master Commitment is issued or as otherwise specified in the MPF Program Requirements.

3.2. Eligible Mortgages. The PFI will only originate for or sell to the Bank mortgages which satisfy the requirements set forth herein and in the Guides on the day a written or electronic commitment is issued to the Borrower for the loan evidenced and secured by the mortgage, except with respect to any mortgage for which no commitment is issued to the Borrower, in which case the Guides in effect on the day the mortgage is closed shall govern. The PFI may originate Bank Funded Mortgages through a designee approved by the Bank but the PFI remains liable for all acts and omissions of its designee.

3.3 Master Commitment.

(a) General. Mortgages will be originated for, or sold to, the Bank under Master Commitments. The PFI commits to use its best efforts to originate on behalf of the Bank, or sell to the Bank, mortgages satisfying the terms of the Master Commitment within the estimated period for the delivery of such mortgages set forth in the applicable Master Commitment, as such estimated period may be modified in accordance with the Guides.

(b) Execution of Master Commitments. From time to time, the Bank and the PFI may jointly elect in writing to enter into one or more Master Commitments. There can be more than one Master Commitment outstanding at any time. Each Master Commitment will specify whether the mortgages thereunder will be either (i) Bank Funded Mortgages, or (ii) Closed Mortgages.

(c) Types of Mortgages. Though various types of mortgages may be sold under the MPF Program, only the types of mortgage permitted for a given MPF Mortgage Product, as described in the Guides, may be included in a Master Commitment for that MPF Mortgage Product.

(d) First Loss Account Information. Each Master Commitment shall have its own First Loss Account (formerly known as a Spread Account) as described in Section 4.1, the amount of which shall be

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determined in accordance with the Guides, including without limit, the product description for the MPF Mortgage Product applicable to such Master Commitment, and the terms of the Master Commitment.

(e) Allocation of Delivery Commitments to a Master Commitment. The PFI shall identify the Master Commitment for which it makes a Delivery Commitment offer, and such offer must be consistent with the then unused amount of such Master Commitment. The Bank, in its sole discretion, may accept any Delivery Commitment offer which acceptance may be oral but in all cases shall be evidenced by a written or electronic confirmation of such Delivery Commitment thereby allocating it to the identified Master Commitment. Unless the Bank approves and the MPF Provider processes a waiver of this limitation, once a Delivery Commitment is allocated to a Master Commitment such Delivery Commitment shall not be reallocated to another Master Commitment.

(f) Allocation of Mortgages to a Delivery Commitment. Each Mortgage must be consistent with the then unallocated amount under an outstanding Delivery Commitment, which shall be identified by the PFI with respect to such Mortgage, as a condition to the Bank funding or purchasing the Mortgage. Upon funding or purchase, such Mortgage shall be allocated to the specified Delivery Commitment, and the Bank shall issue a Confirmation with respect thereto. Upon such allocation, such Mortgage shall not be reallocated to another Delivery Commitment.

(g) Mandatory Delivery Commitments; Pairoff Fees. The PFI’s failure to meet its commitment to deliver mortgages in an amount equal to, and prior to the expiration of, a Delivery Commitment may result in the assessment of a Pairoff Fee. The MPF Provider shall calculate the amount of any Pairoff Fee in accordance with the Origination Guide, which amount shall be payable by the PFI to the Bank as provided in the Origination Guide. In no event shall the Bank be obligated to pay a Pairoff Fee to the PFI.

3.4. Purchase Price.

(a) For each Bank Funded Mortgage delivered under this Contract, the PFI shall be entitled to the following origination fees:

(i) An Agent Fee payable by the Bank in an amount determined as provided in the Origination Guide; and

(ii) Fees and “points,” if any, payable by the applicable Borrower, as permitted by the Origination Guide.

The Bank will determine the Agent Fee for any particular Mortgage based upon the applicable Delivery Commitment and rate and fee schedule published by the MPF Provider, all as more fully described in the Origination Guide. The rate and fee schedule for different types of Mortgages may be different, and the rate and fee schedule for a particular type of Mortgage may change daily or more often. For any Mortgage where the applicable Agent Fee is negative, such negative Agent Fee shall be payable by the PFI to the Bank as provided in the Origination Guide. Fees and “points” payable by the Borrower may include points paid to obtain a lower interest rate for the Mortgage (commonly known as “buy-downs”).

(b) For each Closed Mortgage delivered under this Contract, the PFI shall be paid the purchase price determined as provided in the Origination Guide or separate agreement with the Bank. The MPF Provider will publish the purchase price for any particular Mortgage, which may be at par, at a premium or a discount, based upon the applicable Delivery Commitment and rate and fee schedule, all as more fully described in the Origination Guide. The price schedule for different types of Mortgages may be different, and the price schedule for a particular type of Mortgage may change daily or more often.

(c) Nothing in this Section 3.4 or any other provision of this Contract shall obligate the Bank to publish prices or shall prohibit the Bank from withdrawing any published prices prior to accepting any

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Delivery Commitment offer. Funding for each Bank Funded Mortgage and payment of applicable Agent Fees and payment of the purchase price for each Closed Mortgage under this Contract shall be made by the Bank crediting the PFI’s DDA as provided in the Guides.

(d) In the event that the Bank is not opened for business on a Business Day and the PFI has outstanding Delivery Commitments under which it desires to deliver mortgages to the Bank on that Business Day but the PFI is unable to access its DDA, the PFI may nonetheless process the settlement of such Delivery Commitments with the MPF Provider as if the amount of the mortgage being originated for the Bank or the purchase price for the mortgages being sold to the Bank had been deposited to the PFI’s DDA. The Bank agrees that the first day on which it opens for business after such settlement date, the Bank will credit the amount of such purchase price to the PFI’s DDA plus interest on the purchase price at the Fed Funds Rate from the settlement date through such deposit date. For purposes of the Contract, the term “Fed Funds Rate” shall mean, for any day, a rate equal to the weighted average rate the Bank earns on its overnight investments in the federal funds market, determined as of the close of business for that day. Except for the payment of interest on the purchase price as provided in this Section 3.4, the Bank shall have no liability to the PFI with respect to the delivered mortgage loans due to the PFI’s inability to access its DDA on any Business Day that the Bank is not opened for business.

3.5. The Bank Has No Obligation to Commit. The fact that the Bank has executed or delivered this Contract or any Master Commitment does not mean that the Bank must accept any offer for a Delivery Commitment or make a commitment to fund or purchase any mortgage through or from the PFI.

3.6. PFI’s Role as Mortgage Originator, Seller and Servicer.

(a) This Section 3.6 (a) shall be applicable to all Bank Funded Mortgages. The PFI shall be the agent for the Bank and shall owe the Bank fiduciary duties in the origination and servicing of the Mortgages, with respect to (i) the handling of money, (ii) the handling of Mortgage Documents, and (iii) compliance with Applicable Laws in the origination and servicing of the Mortgages. The PFI shall originate all such Mortgages under this Contract either (x) in the name of the Bank (or a Person designated by the Bank from time to time), (y) in the name of the PFI, expressly as origination agent for the Bank or (z) in the name of the PFI, as an undisclosed agent for the Bank, as the Bank may direct. The PFI may originate Bank Funded Mortgages through a designee accepted and approved in writing by the Bank but the PFI shall remain liable for all acts and omissions of such designee and will be deemed to have made all the representations and warranties applicable to the origination of such Bank Funded Mortgages as if it had acted directly as the agent of the Bank with respect to such origination. Except for any Mortgage the PFI purchases under Section 5.5, the PFI acknowledges and agrees that at no time will it or any other Person (other than the Bank, the Participants and their respective successors and assigns) have any interest in the Bank Funded Mortgages originated under this Contract.

(b) This Section 3.6 (b) shall be applicable to all Closed Mortgages. The PFI shall owe the Bank fiduciary duties in the origination, selling and servicing of the Mortgages, with respect to (i) the handling of money, (ii) the handling of Mortgage Documents, and (iii) compliance with Applicable Laws in the origination, sale and servicing of the Mortgages. The PFI shall originate or acquire all such Mortgages under this Contract in its own name and transfer such Mortgages to the Bank in accordance with the Origination Guide. Except for any Mortgages the PFI repurchases under Section 5.5, the PFI acknowledges and agrees that at no time will it or any other Person (other than the Bank, the Participants and their respective successors and assigns) have any interest in Closed Mortgages purchased under this Contract after the sale of such Mortgages to the Bank.

(c) The Bank’s interest in all Mortgages delivered under this Contract shall be evidenced by a Confirmation that shall conclusively establish the Bank’s ownership of the Mortgages. Section 5.5 of this Contract specifies certain circumstances in which the PFI may be obligated to purchase or repurchase a Mortgage from the Bank. Except for any Mortgages the PFI purchases or repurchases under Section 5.5, the PFI will take all action necessary to protect the rights of the Bank, the Participants and their respective

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successors and assigns in the Mortgages delivered under this Contract against any other Person claiming any interest arising by, through or under the PFI and/or any prior holder of the Mortgages.

3.7 Intent of the Parties. It is the intent of the Bank and the PFI that the acquisition by the Bank of all the Closed Mortgages that are sold under the terms of this Contract shall be deemed for all purposes to be a sale and not a borrowing by the PFI secured by such Closed Mortgages. Each of the parties agrees for the benefit of the other party that it shall treat the conveyance of the Mortgages hereunder as a sale by the PFI and a purchase by the Bank, respectively.

IV. CREDIT ENHANCEMENT; REALIZED LOSSES

4.1. First Loss Account (Spread Account) for Conventional Mortgages.

(a) Establishment. In accordance with the MPF Mortgage Product terms and the Master Commitment, the Bank shall assume liability for a certain amount of Realized Loss (the “First Loss Account”, formerly known as the “Spread Account”) arising under each Conventional Mortgage Master Commitment. The First Loss Account functions as a deductible for the Credit Enhancement provided by the PFI or credit enhancement obligations undertaken by other Persons. The First Loss Account is the responsibility of the Bank.

(b) Allocations. The Bank shall determine the amount of the First Loss Account for each Master Commitment, which amount may be calculated on a monthly basis, or at the time the Mortgages are delivered under such Master Commitment, or as otherwise agreed between the parties, in accordance with the terms of the Guides and such Master Commitment.

(c) Losses. Without limiting the provisions of Section 4.6, all Realized Loss on Conventional Mortgages (and related REO properties) up to the amount of the First Loss Account for a Master Commitment will be the responsibility of the Bank in accordance with the provisions of Section 4.3 below.

4.2. Credit Enhancement Obligations.

(a) The PFI hereby agrees to pay to the Bank an amount equal to the Realized Loss for the Mortgages delivered under each Conventional Mortgage Master Commitment which exceeds the available First Loss Account but in no event shall such amount exceed, in the aggregate, the lesser of (i) the Actual Credit Enhancement for such Master Commitment or (ii) any other limitations in the applicable MPF Mortgage Product terms and/or as may be specified in the Master Commitment.

(b) For certain conventional MPF Mortgage Products, the amount of the Maximum Credit Enhancement will be set at execution of the Master Commitment and for other conventional MPF Mortgage Products it will be an amount equal to a specified percentage of the Mortgages delivered under the Master Commitment. The Maximum Credit Enhancement is the PFI’s maximum liability for Realized Loss with respect to the pool of Mortgages to be delivered under any Master Commitment for which a Maximum Credit Enhancement is stated. The Bank and the PFI may from time to time modify the Maximum Credit Enhancement in accordance with the Guides. As individual Mortgages are assigned to Delivery Commitments, the Bank in accordance with the Guides will calculate the Actual Credit Enhancement required for such Master Commitment including such Delivery Commitments. In no case shall the Actual Credit Enhancement exceed the then outstanding Maximum Credit Enhancement for any pool. When the Master Commitment is closed to further Delivery Commitments and all Delivery Commitments allocated to such Master Commitment have either expired or been funded, the Actual Credit Enhancement calculated by the Bank in accordance with the Guides shall become the Remaining Credit Enhancement, which Remaining Credit Enhancement shall be reduced over time as payments are made by the PFI to the Bank with respect to Realized Loss, and as may be adjusted from time to time by the Bank in accordance with the terms of the Master Commitment.

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(c) The PFI agrees that the Bank may obtain a Replacement Contract should the Bank reasonably and in good faith determine that (i) the value of the PFI’s Credit Enhancement has become impaired, (ii) an event pertaining to the PFI has occurred which results in the Mortgages delivered under the Master Commitment not having an equivalent credit enhancement to “AA” as determined by the MPF Program rating system, or (iii) that a material adverse change has occurred in the financial condition of the PFI or in any collateral pledged by the PFI, excluding the Mortgages, to secure its obligations under this Contract or the Advances Agreement. In the event the Bank exercises its rights to obtain a Replacement Contract under this Section 4.2 (c) then as of that date, the Bank shall have all the rights provided in Section 10.2 (b) of this Contract. The Bank’s exercise of its right to obtain a Replacement Contract shall not affect, limit or be deemed to satisfy any prior or outstanding claim against a PFI for a Realized Loss.

4.3. Allocation of Realized Loss and Unreimbursed Servicing Expenses.

(a) Conventional Mortgages – Realized Loss. This Section 4.3 (a) shall be applicable to all Conventional Mortgages except as may be otherwise specified in the Master Commitment. Upon the Bank’s receipt of notification from the Servicer of the amount of a Realized Loss as provided in Section 4.4 below, such Realized Loss (after application of any applicable governmental or private primary mortgage insurance or guaranties) will be allocated to, and paid or incurred by, the following Persons in the following order of priority:

(i) First, by the Bank up to the amount of the First Loss Account except to the extent that all or any part of such Realized Loss is covered under any Supplemental MI Policy;

(ii) Second, any Realized Loss that is covered under any Supplemental MI Policy (i.e., a Realized Loss in excess of the deductible for such Supplemental MI Policy), by the issuer of the Supplemental MI Policy as insurance proceeds, until the benefits available under the Supplemental MI Policy have been paid in full;

(iii) Third, any Realized Loss, which when aggregated with all prior Realized Loss, is in excess of the First Loss Account and is not covered by any Supplemental MI Policy, up to the amount of the PFI’s Remaining Credit Enhancement for the Master Commitment, by the PFI and remitted as provided in Section 4.5 below; and

(iv) Finally, any Realized Loss remaining after the application set forth in clauses (i) through (iii) of this Section 4.3 (a) shall be allocated directly to the Bank.

If the First Loss Account for a Master Commitment increases over time, it is possible that such First Loss Account could be fully applied to Realized Loss at a given point in time but that subsequent credits to the First Loss Account would be available to cover future Realized Loss. No subsequent credits to the First Loss Account will be used to reimburse the PFI for Realized Loss previously incurred and paid by the PFI under clause (iii).

(b) Government Mortgages – Realized Loss. This Section 4.3 (b) shall be applicable to all Government Mortgages. The PFI as the Servicer shall be responsible for any and all Unreimbursed Servicing Expenses for any Government Mortgage (after application of all applicable FHA Insurance, VA Guaranty or other government insurance or guaranty) in accordance with Section 7.1(d) below, and therefore no losses with respect to a Government Mortgage are payable by the Bank except as may expressly be agreed to in writing by the Bank. However, should the Bank incur any Realized Loss arising from the PFI’s default as Servicer of the Mortgages, such Realized Loss will be subject to the provisions of Section 7.4. The Bank may create a First Loss Account in an amount established for the applicable MPF loan product applicable to any Realized Loss the Bank might incur, but such First Loss Account shall not be available to pay or reimburse the PFI as the Servicer for Unreimbursed Servicing Expenses.

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4.4. Procedure for Making Claims against the First Loss Account. In the event that the Servicer or any other applicable mortgage loan servicer determines that there is a Realized Loss with respect to a Conventional Mortgage or REO, the Servicer or such other mortgage loan servicer will promptly deliver a written notice as specified in the Servicing Guide and the Bank shall charge the applicable First Loss Account with the amount as provided for in the Servicing Guide except to the extent that the Bank disputes the existence or determination of any Realized Loss or the amount thereof or the process related thereto, in which event the Bank’s determination of Realized Loss shall control. The Servicer or any other applicable mortgage loan servicer shall be reimbursed for such portion of the Realized Loss chargeable to the First Loss Account to the extent that such Servicer or other mortgage loan servicer has previously advanced such funds to the Bank.

4.5. Procedure for Making Claims against the PFI. If a notice of Realized Loss delivered pursuant to Section 4.4 includes an amount to be paid by the PFI pursuant to Section 4.3 (a) (iii) above and the PFI has not already advanced all of such amount to the Bank, the Bank shall immediately debit from the PFI’s DDA that part of such amount not previously advanced. Further, in the event that the PFI fails to pay any amounts it is required to pay under this Contract at such time as it is required to do so, then at such time or thereafter, the Bank may debit such amounts from the PFI’s DDA, and if such amounts are payable to a third party, to make the payment on behalf of the PFI, and if such amounts are payable to the Bank, to retain such amounts. In the event that any such debit from the PFI’s DDA shall cause the balance in such account to become negative, such deficit shall be subject to the overdraft provisions of the depository agreement between the PFI and the Bank, which may include, without limitation, treating such overdraft as an advance under the Advances Agreement. In the event of the breach by the PFI of its obligation to make any payment due under this Contract, the Bank shall have all rights available at law or in equity, including specifically, but not limited to, (x) the right to terminate, in whole or in part, the rights of the PFI under this Contract, (y) the right of set-off against any funds of the PFI held by, or at, the Bank and (z) the right to realize upon any collateral pledged to the Bank to secure the PFI’s obligations to the Bank.

4.6. Credit Enhancement Fees. For each Master Commitment, in consideration of the obligation of the PFI to fund a Realized Loss pursuant to Section 4.3(a) (iii), the Bank shall pay to the PFI monthly a Credit Enhancement Fee determined in accordance with the Guides, based upon the Credit Enhancement Fee rate applicable to such Master Commitment, subject, however, to the terms of the MPF Mortgage Product and Master Commitment which may include, but are not limited to, performance or risk participation features or a delay in payment of such Credit Enhancement Fees.

4.7. Credit and Collateral for the PFI’s Obligations. The PFI shall pledge collateral pursuant to the terms and conditions of the Advances Agreement to secure its Credit Enhancement. As security for its Credit Enhancement together with all other obligations of the PFI arising under this Contract, the PFI, pursuant to the Advances Agreement, assigns, transfers, and pledges to the Bank, and grants to the Bank, a security interest in collateral identified, by category, by specific item or otherwise, by the PFI. The Credit Enhancement and all other obligations of the PFI under this Contract shall be an obligation arising under and secured pursuant to the Advances Agreement, and deemed to be Indebtedness or Liabilities (if either term is used in the Advances Agreement) of the PFI and an extension of credit by the Bank pursuant to the Advances Agreement. The PFI shall at all times maintain an adequate amount of pledged collateral for its Credit Enhancement, which amount shall be determined by the Bank, taking into account other credit obligations of the PFI secured pursuant to the terms and conditions of the Advances Agreement. It is understood and agreed, notwithstanding any other provision of this Contract or any pledge of collateral for a particular purpose, that all collateral, and proceeds thereof, in which the Bank has a security interest secures any and all indebtedness or liability of the PFI to the Bank arising under any agreement with the Bank as more fully provided in the Advances Agreement and in Section 4.8 of this Contract. Notwithstanding the foregoing provision of this Section 4.7, the collateral and security interest granted hereunder shall not be deemed in any manner to evidence that the delivery of the Mortgages hereunder is a secured borrowing as opposed to a true sale. The PFI agrees that until all Mortgages serviced or credit enhanced under this Contract are repaid or otherwise disposed of, the PFI will continue to provide the Bank with financial information as required by the Guides, the MPF Program Requirements and the Bank from time to time, and to notify the Bank promptly in writing of any material changes that occur in the PFI’s financial condition. The PFI further agrees that the Bank may provide such financial information to the MPF Provider and other Participants or potential Participants in the Mortgages. Further, the PFI represents and warrants to the Bank that the PFI has the full power and authority to provide the Credit Enhancement

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required under this Article IV, and has duly authorized such Credit Enhancement as more particularly described in Section 5.2 (b).

4.8. Right of Setoff and Grant of Security Interest. To secure any and all indebtedness or liability of the PFI to the Bank under this Contract and under any other agreement with the Bank, however and whenever incurred or evidenced, whether direct or indirect, absolute or contingent, due or to become due, the PFI hereby assigns, transfers, and pledges to the Bank and grants to the Bank a first priority security interest in (i) all balances, credits, deposits, moneys, and drafts now or hereafter in the deposit account(s) or any other account that the PFI may maintain with the Bank, (ii) all collateral provided by the PFI from time to time as described in Section 4.7 above, and (iii) any rights accruing to the PFI under the terms of this Contract including, without limitation, servicing rights with respect to the Mortgages delivered and/or serviced under this Contract; and the Bank is authorized to charge such indebtedness or liability against the deposit account(s), or any other account or such other collateral, whether or not the same is then due. The Bank shall notify the PFI of any actions taken pursuant to this Section 4.8, but such notification shall not be a condition precedent to the right of the Bank to take any such action. The Bank shall have all other rights available at law or in equity with respect to the right of setoff and the security interest provided in this Section 4.8. The PFI hereby authorizes the Bank to create and file such Uniform Commercial Code financing statements and take such other action from time to time as the Bank deems necessary and appropriate to perfect and maintain the perfection of the Bank’s security interest and rights under this Section 4.8. Further, the PFI agrees, at its cost, to (i) execute and deliver to the Bank such specific pledge or security agreement as is provided in the Guides, the MPF Program Requirements or required by the Bank, and (ii) execute, deliver and file such Uniform Commercial Code financing statements and take such other action from time to time as the Bank may reasonably request to perfect and maintain the perfection of the Bank’s security interest and rights under this Section 4.8. Notwithstanding the provisions of Section 19.3, the perfection and priority of any security interest granted by the PFI to secure the PFI’s obligations under this Contract shall be governed by the laws of the relevant jurisdiction determined in accordance with the applicable provisions of the Uniform Commercial Code in effect in the state where the Bank is located.

V. ORIGINATION OF MORTGAGES - PFI’S WARRANTIES

5.1. General. The PFI makes certain warranties to the Bank set forth in Sections 5.2 and 5.3. These warranties:

(a) apply to each Bank Funded Mortgage, each Closed Mortgage and each Acquired Mortgage;

(b) are made as of the date hereof, except for warranties under Section 5.3 with respect to Mortgages originated after the date hereof, which are made with respect to each Mortgage, (i) as of the Closing date of each Bank Funded Mortgage, (ii) as of the date of sale to the Bank of each Closed Mortgage and, (iii) for all other Acquired Mortgages, as of the day the PFI acquires the servicing for such Acquired Mortgage;

(c) made under Section 5.2 and the warranties made under Section 5.3 (a), (b), (c), (e), (h), (n) and (t) are made each day thereafter until this Contract expires (which shall be the date on which all of the Mortgages delivered or serviced under this Contract are repaid in cash, liquidated, purchased or repurchased by the PFI, or the Mortgaged Properties are disposed of and all proceeds are reduced to cash), provided, however, that representations under Section 5.3 (a) shall not be deemed to be a representation that the Mortgage is not in default after the date of sale;

(d) are for the benefit of the Bank and any Participants, and its and their respective successors and assigns;

(e) include the warranties set forth in the Guides; and

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(f) survive the termination of this Contract, unless the Bank agrees in writing to an earlier termination.

Warranties may be waived, but only by the Bank in a writing duly executed and delivered by the Bank.

5.2. General PFI Warranties. The PFI makes each of the representations and warranties set forth below regarding the PFI:

(a) It is duly organized, validly existing and in good standing under the laws governing its creation and existence, and has full corporate power and authority to own its property, to carry on its business as presently conducted and to enter into and perform its obligations under this Contract;

(b) The execution, delivery and performance by it of this Contract have been duly authorized by all necessary action on its part, including approval of its board of directors and such approval is duly and properly recorded in the minutes, books and records of the PFI and a copy of this Contract is maintained in the official records of the PFI. Neither the execution and delivery of this Contract by it, nor the consummation by it of the transactions herein contemplated, nor compliance by it with the provisions hereof, will conflict with or result in a material breach of, or constitute a material default under (i) any of the provisions of any law, governmental rule, regulation, judgment, decree or order binding on it or its properties; (ii) its organizational documents or by-laws; or (iii) the terms of any material indenture or other agreement or instrument to which it is a party or by which it is bound. Neither it nor any of its Affiliates is a party to, bound by, or in breach of or violation of any indenture or other agreement or instrument, or subject to or in violation of any statute, order or regulation of any court, regulatory body, administrative agency or governmental body having jurisdiction over it, which materially and adversely affects or to its knowledge may in the future materially and adversely affect its ability to perform its obligations under this Contract or its business, operations, financial condition, properties or assets;

(c) The execution, delivery and performance by it of this Contract and the consummation of the transactions contemplated hereby do not require the consent or approval of, the giving of notice to, the registration with, or the taking of any other action in respect of, any state, federal or other governmental authority or agency, except such as has been obtained, given, effected or taken prior to the date hereof;

(d) This Contract has been duly executed and delivered by it and constitutes a legal, valid and binding obligation of it, enforceable against it in accordance with the terms hereof, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, receivership, conservatorship, moratorium and other similar laws affecting the enforcement of creditors’ rights in general and by general equity principles, regardless of whether such enforcement is considered in a proceeding in equity or at law;

(e) There are no actions, suits or proceedings pending or, to its knowledge, threatened against or affecting it, before or by any court, administrative agency, arbitrator or governmental body (i) with respect to any of the transactions contemplated by this Contract or (ii) with respect to any other matter which in its judgment will be determined adversely to it and will, if determined adversely to it, materially and adversely affect it or its business, assets, operations or condition (financial or otherwise) or materially and adversely affect its ability to perform its obligations under this Contract;

(f) The PFI has all licenses, permits, authorizations, approvals and consents of all governmental authorities required in order for it to originate, purchase, hold and sell the Mortgages, and in all cases, to service the Mortgages;

(g) The PFI satisfies all requirements set forth in the Guides and, if applicable, the MPF Program Requirements to be an eligible Mortgage originator, an eligible Mortgage seller and an eligible Mortgage servicer;

(h) The PFI is in compliance with all Applicable Laws;

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(i) The PFI is solvent and no event has occurred or is contemplated to occur (based on facts presently known to the PFI) which event would have a material adverse impact on the financial condition of the PFI or the ability of the PFI to perform its obligations hereunder and under the Guides; and

(j) The PFI understands the nature and structure of the transactions contemplated under this Contract; it is familiar with all of the documents and instruments relating to such transactions; it understands the risks inherent in such transactions, including, without limitation, the risk of loss related to the PFI’s Credit Enhancement, if any, with respect to Mortgages delivered to the Bank under this Contract; and it has not relied on the Bank for any guidance or expertise in analyzing the financial, accounting, tax or other consequences of the transactions contemplated by this Contract or otherwise relied on the Bank in any manner.

5.3. Specific Mortgage Representations, Warranties and Covenants. The PFI makes each of the following specific representations and warranties with respect to each Mortgage and each Property, and, where applicable, covenants as follows:

(a) Mortgage Meets Requirements. The Mortgage conforms to all of the applicable requirements in the Guides, this Contract and Applicable Laws.

(b) PFI Authorized to Do Business. The PFI and any other party involved in the origination of the Mortgage, at all applicable times:

(1) were authorized to transact business in all applicable jurisdictions, including, without limitation, the jurisdiction where the Property is located, unless at all such times, such authorization to transact business was not required, based upon the activities of the PFI or other relevant party, as the case may be;

(2) possessed all licenses, permits and approvals required by all Applicable Laws, including, without limitation, all Applicable Laws of the jurisdiction where the Property is located; and

(3) complied with all Applicable Laws.

(c) PFI has Full Right to Originate, Sell or Service. The PFI has, and in the case of any Acquired Mortgage, every prior holder of any interest in such Mortgage or prior servicer has, full power and authority to originate, purchase, sell and service the Mortgage, and each has duly authorized the origination or purchase and sale and servicing of the Mortgage. The PFI has not, and in the case of any Acquired Mortgage, no prior holder of any interest in such Mortgage or prior servicer has, granted to any Person other than the Bank any interest in the Mortgage or the right to fund or hold the Mortgage, or any interest therein except as authorized in this Contract. In addition, neither the PFI’s nor any prior holder’s nor any prior servicer’s right, power and authority to originate or purchase and sell, and service the Mortgage is subject to any other Person’s interest, consent or approval or to any agreement with any other Person.

(d) Lien on Property. The Mortgage is a valid and subsisting perfected first lien and security interest on the Property described in it, and the Property is free and clear of all encumbrances and liens having priority over it except for (i) liens for real estate taxes, and liens for special assessments, that are not yet due and payable, (ii) covenants, conditions and restrictions, rights of way, easements and other matters of the public record as of the date of recording, acceptable to mortgage lending institutions generally and (iii) other matters to which like properties are commonly subject which do not materially interfere with the benefits of the security intended to be provided by the Mortgage or the use, enjoyment, value or marketability of the related Property.

(e) Documents are Valid and Enforceable. All documents and instruments constituting a part of the Mortgage have been properly signed and delivered, are legal, valid and binding obligations of the

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Persons purporting to be parties thereto, enforceable in accordance with their respective terms, subject only to bankruptcy laws, Soldiers’ and Sailors’ Relief Acts, laws relating to administering decedents’ estates and general principles of equity.

(f) Property Not Subject to Liens. The Property is free and clear of all mechanics’ liens, materialmen’s liens or similar liens and there are no rights outstanding that could result in any of such liens being imposed on the Property. The PFI does not make the warranty in this subsection (f) if the PFI furnishes the Bank with a title insurance policy in an amount and in a form acceptable to the Bank and issued by a title insurance company acceptable to the Bank that gives the Bank substantially the same protection as this warranty.

(g) Title Insurance. There is a mortgagee title insurance policy or other title evidence acceptable to the Bank, on the Property. The title insurance policy is in a current ALTA form (or other generally acceptable form) issued by a title insurance company satisfying the standards set forth in the Guides, is in an amount equal to the maximum principal amount of the Mortgage and includes all title endorsements required by the Guides. The title insurance insures (or the other title evidence protects) the Bank or the PFI (pursuant to Section 3.6), as holding a first perfected lien against the Property.

(h) Modification or Subordination of Mortgage. Except and only to the extent as expressly consented to by the Bank in a writing signed and delivered by the Bank, the PFI has not done, and in the case of any Acquired Mortgage, no prior servicer or holder of any interest in such Mortgage has done, any of the following, except as may be necessary to reform the Mortgage documents for the purpose of correcting or conforming such Mortgage documents to accurately reflect the Mortgage transaction:

(1) materially modified or waived any provision of the Mortgage;

(2) satisfied or canceled the Mortgage in whole or in part;

(3) subordinated the Mortgage in whole or in part;

(4) released the Property in whole or in part from the Mortgage lien; or

(5) signed any release, cancellation, modification or satisfaction of the Mortgage.

(i) Mortgage in Good Standing. There is no default (or event or occurrence which, with notice or lapse of time or both, if uncured, would constitute a default) under the Mortgage, and all of the following that have become due and payable have been paid:

(1) taxes;

(2) governmental and other assessments;

(3) insurance premiums;

(4) water, sewer and municipal charges;

(5) leasehold payments; and

(6) ground rents.

(j) Advances. The PFI has not, and in the case of any Acquired Mortgage, no prior servicer or holder of any interest in such Mortgage has, made or knowingly received from others, any direct or indirect advance of funds in connection with the loan transaction on behalf of the Borrower except as provided in the Guides. This warranty does not cover payment of interest out of proceeds of the Mortgage for the period commencing on the earliest of:

(1) the date of the Mortgage Note; or

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(2) the date on which the Mortgage proceeds were disbursed; or

(3) the date one month before the first installment of principal and interest on the Mortgage is due,

and ending on the last day of the month in which such date occurs, by the PFI, and in the case of any Acquired Mortgage, by the initial servicer or holder of such Mortgage.

(k) Property Conforms to Zoning Laws. The PFI has no, and in the case of any Mortgage which the PFI purchased or acquired the servicing for, no prior servicer or holder of any interest in such Mortgage has any, knowledge that any improvement to the Property is in violation of any applicable zoning law or regulation.

(l) Property Intact. The Property is not damaged by fire, wind or other cause of loss. There are no proceedings pending or, to the best of the PFI’s knowledge, and in the case of any Mortgage which the PFI purchased or acquired the servicing for, to the best of each prior servicer’s and holder’s knowledge, threatened, for the partial or total condemnation of the Property.

(m) Improvements. Any improvements that are included in the appraised value of the Property are totally within the Property’s boundaries and building restriction lines. No improvements on adjoining Property encroach on the Property unless the Guides permit such an encroachment.

(n) Mortgage Not Usurious. The Mortgage is not usurious and either meets or is exempt from all applicable usury laws or regulations.

(o) Compliance With Applicable Laws. The PFI and, in the case of any Acquired Mortgage, every prior holder and servicer of the Mortgage has complied with all Applicable Laws in connection with the Mortgage.

(p) Property is Insured.

(1) A property insurance policy on the Property is in effect that is provided by the Borrower or, if the Borrower fails to do so, by the PFI. It is written by an insurance company satisfying the standards set forth in the Guides, in the form required by the Guides, and provides fire and extended coverage for an amount at least equal to the amount required by the Guides.

(2) A flood insurance policy is in effect on the Property if required by the Guides, in conformance with the requirements of the Guides.

(3) Any policy included in this warranty contains a standard mortgage clause that names the PFI or, with the Bank’s approval, the Bank as mortgagee.

(q) Mortgage is Acceptable Investment. The PFI knows of nothing, and in the case of any Acquired Mortgage, no prior servicer or holder of such Mortgage, at the time it transferred its interest in the Mortgage, knew of anything involving the Mortgage, the Property, the Borrower or the Borrower’s credit standing that can reasonably be expected to:

(1) cause GSEs or private institutional investors to regard the Mortgage as an unacceptable investment;

(2) cause the Mortgage to become delinquent; or

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(3) adversely affect the Mortgage’s value or marketability, including, without limitation, any environmental conditions.

(r) Mortgage Insurance or Guaranty in Force. If the Mortgage is required to be insured by a mortgage insurance company, the PFI represents that the Mortgage is so insured and that the insurance is in full force. If a Mortgage is intended to be insured by the FHA under the National Housing Act as amended (“FHA Insurance”), guaranteed by the VA under the Servicemen’s Readjustment Act of 1944 as amended (“VA Guaranty”), or insured or guaranteed by any other federal agency, the PFI represents that (1) each Mortgage to be insured by the FHA is eligible for FHA Insurance, and the FHA Insurance premiums that are due and payable for each such Mortgage have been paid, (2) each Mortgage to be guaranteed by the VA is eligible for a VA Guaranty, and any VA Guaranty fees that are due and payable for each such Mortgage have been paid, and (c) each Mortgage to be federally insured or guaranteed is eligible for such insurance or guaranty, and any fees or premiums that are due and payable for each such Mortgage have been paid, and all actions required to obtain such insurance or guaranty have been taken. In addition, the PFI and each prior servicer and holder of the Mortgage have complied with all Applicable Laws pertaining to such FHA, VA or other federal insurance or guaranty, or with the provisions of the mortgage insurance contract, that cover the Mortgage.

(s) Adjustable Mortgages. If the Guides and applicable Master Commitment permit adjustable rate mortgages, and the Mortgage provides that the interest rate or the principal balance of the Mortgage may be adjusted, the PFI represents that all of the terms of the Mortgage may be enforced by the Bank, its successors and assigns and all prior adjustments made or required to be made have been made in accordance with the applicable Mortgage provisions and Applicable Laws. These adjustments will not affect the priority of the lien as a first priority perfected lien against the Property.

(t) Mortgage Assignments. For each Closed Mortgage, the PFI has done or shall do the following within the time period set forth in the Guides:

(1) The Mortgage Note has been endorsed by the PFI in blank and delivered to the Bank, and if the Mortgage is an Acquired Mortgage, by the payee thereof and by each successive holder of such Mortgage. Each such endorsement shall be substantially in the following form: “Pay to the order of [assignee’s name], without recourse” except that the final endorsement from the PFI shall leave a blank rather than complete the assignee’s name. An endorsement without recourse does not and shall not be deemed to limit any of the PFI’s representations, warranties or covenants under this Contract.

(2) Unless MERS is the mortgagee of record, the PFI has executed and delivered to the Bank an Assignment of Mortgage in blank, satisfying the requirements of the Origination Guide. If the Mortgage is an Acquired Mortgage and MERS is not the mortgagee of record, the original mortgagee thereof and each successive holder of such Mortgage has executed and, except for the PFI, recorded in the appropriate real estate records, an Assignment of Mortgage substantially in the form of the aforementioned Assignment of Mortgage, which Assignments or certified copies thereof have been delivered to the Bank, as necessary to satisfy the requirements of the Origination Guide.

(3) Each such endorsement and Assignment has been duly authorized, executed and delivered by each applicable party to each thereof and is the legal, valid and binding obligation of such party, enforceable in accordance with its terms.

(4) The PFI has delivered to the Bank the Mortgage File for such Mortgage in compliance with the Origination Guide.

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(5) The original Mortgage was duly recorded in the appropriate real estate records where such recordation is necessary to perfect the lien thereof, in compliance with the Guides.

(u) Mortgage Documents. If the Mortgage is a Bank Funded Mortgage, the PFI shall do the following within the time period set forth in the Guides:

(1) The Mortgage Note shall be endorsed in blank by the PFI and delivered to the Bank. Each such endorsement shall be substantially in the following form: “Pay to the order of _________________, without recourse.” An endorsement without recourse does not and shall not be deemed to limit any of the PFI’s representations, warranties or covenants under this Contract.

(2) Unless MERS is the mortgagee of record, the PFI shall execute and deliver to the Bank an Assignment of Mortgage in blank, satisfying the requirements of the Origination Guide.

(3) Each endorsement and Assignment shall be duly authorized, executed and delivered by each applicable party and when performed, shall be the legal, valid and binding obligation of such party, enforceable in accordance with its terms.

(4) The PFI shall deliver to the Bank the Mortgage File for such Mortgage in compliance with the Origination Guide.

(5) The original Mortgage shall be duly recorded in the appropriate real estate records where such recordation is necessary to perfect the lien thereof, in compliance with the Guides.

(v) Compliance Matters. The servicing of such Mortgage is properly held by the PFI and all notices required by Applicable Laws regarding any transfer of servicing shall have been delivered to the applicable Borrower. The servicing of such Mortgage by the PFI and any other servicer has complied in all material respects with the applicable Mortgage documents and Applicable Laws pertaining to servicing.

(w) Ownership of Mortgages. Except and only to the extent as expressly consented to by the Bank in a writing signed and delivered by the Bank, immediately prior to giving effect to the Assignment of Mortgage to the Bank, the PFI holds all right, title and interest in and to the Mortgage, including, without limitation, all servicing rights with respect thereto, free and clear of all liens, encumbrances, participation interests, claims or other interests of any other Person, unless the Mortgage is a Bank Funded Mortgage in which case it is owned by the Bank from inception.

(x) Industry Standard Practices. The origination and collection practices relating to the Mortgage used by the PFI, and in the case of any Acquired Mortgage, all prior servicers and holders of such Mortgage, have been legal, proper, prudent and customary in origination and servicing of residential first mortgage loans.

(y) Full Disbursement. The proceeds of the Mortgage have been fully disbursed. All costs, fees and expenses incurred in making, closing or recording the Mortgage have been paid in full.

(z) No Foreclosure. There is no foreclosure proceeding pending or, to the best of the PFI’s knowledge, threatened, with respect to such Mortgage or any Property subject thereto.

(aa) No Bulk Transfer. No transfer of such Mortgage by any holder thereof, including (without limitation) the transfer by the PFI to the Bank was or is the subject of any bulk sale law or other similar law of any jurisdiction.

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5.4. Notice of Breach. The PFI shall promptly give the Bank notice of any breach of any representation or warranty set forth herein or incorporated herein by reference, which notice shall be in writing and shall describe in reasonable detail the nature of such breach. The PFI shall promptly provide to the Bank such additional information regarding any such breach, as the Bank shall request.

5.5. Consequences of Untrue, Misleading or Incomplete Warranties or Representations; Purchase or Repurchase.

(a) The Bank may require the PFI to purchase or repurchase a Mortgage if any warranty or representation made by the PFI about the Mortgage or the related Property is untrue, misleading or incomplete (whether the warranty is in this Contract or any of the Guides, or was made at the Bank’s specific request).

(b) The Bank may require such purchase or repurchase whether or not the PFI had actual knowledge of the breach of warranty or representation. The Bank may also enforce any other remedy available at law or in equity.

(c) To effect the sale or resale of such Mortgage, the Bank shall debit an amount equal to the purchase or repurchase price from the PFI’s DDA, and in the event that any such debit from the PFI’s DDA shall cause the balance in such account to become negative, such deficit shall be subject to the overdraft provisions of the depository agreement between the PFI and the Bank, which may include, without limitation, treating such overdraft as an advance. The purchase or repurchase price shall be as provided in the Guides, which shall include adjustments to the price to reflect any Agent Fee or premium or discount paid to or by, the Bank to or from, the PFI in connection with the funding or purchase of such Mortgage but shall not include fees paid to the PFI by the Borrower.

5.6. Consequences of Untrue, Misleading or Incomplete Warranties or Representations - Termination of Contract. While untrue, misleading or incomplete warranties or representations about a particular Mortgage or Property may be the basis for requiring the PFI to purchase or repurchase the Mortgage, there can be additional consequences. Such untrue, misleading or incomplete warranties or representations may also give rise to liabilities of the PFI under Section 5.7. In addition, untrue, misleading or incomplete warranties or representations can, under certain circumstances as determined by the Bank, be treated as a breach of this Contract that could result in the withdrawal of the Bank’s approval of the PFI and the termination of this Contract as set forth in Articles X and XI.

5.7. Indemnification for Breach of Warranties or Representations; Holding the Bank Harmless. If there is a breach of warranty or representation under this Contract (whether such breach was intentional, negligent, or unintentional or whether or not the PFI had actual or constructive knowledge thereof), the PFI agrees to indemnify, defend and hold the Bank and the other Indemnified Parties harmless from and against any related losses, damages, claims, actions, causes of action, liabilities, obligations, judgments, penalties, fines, forfeitures, costs and expenses, including, without limitation, legal fees and expenses. Without limiting the PFI’s obligation for any Remaining Credit Enhancement in effect from time to time, the indemnification arising under this Section 5.7 shall not be deemed to be a guarantee of the payment by any obligor of any Mortgage. If the Bank seeks indemnification under this Section 5.7, it must promptly give the PFI notice of any legal action. However, delay or failure by the Bank to provide such notice shall not release the PFI from any indemnity obligations, except and only to the extent that the PFI shows that such delay or failure materially prejudiced the defense of such action. The PFI shall be responsible to conduct such defense through counsel reasonably satisfactory to the Bank; provided, however, that the Bank is permitted to control fully the defense of any such claim and to settle any such claim subject to the PFI’s approval, which approval shall not be unreasonably withheld; provided further that the Bank shall have the right to retain counsel to represent it at its expense in connection with any such claim. If there is a default by the PFI of its indemnity obligation, or a default under or termination of this Contract, or the Bank believes that there is a conflict between the Bank and the PFI or its counsel, the Bank may engage separate counsel at the expense of the PFI. If the PFI fails to assume the defense of an action within ten (10) days after receiving notice, then the PFI shall be bound by any determination made in the action or by any compromise or settlement the Bank may effect. The Bank agrees to use reasonable efforts to mitigate any claims tendered to the PFI. The Bank shall assign to the PFI all of its claims

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for recovery against third parties for any indemnification provided by the PFI, whether such claims arise pursuant to insurance coverage, contribution, subrogation or otherwise.

VI. ELIGIBILITY REQUIREMENTS FOR SERVICERS

For the PFI to service Mortgages for the Bank, the PFI must satisfy the eligibility requirements specified in this article.

6.1. General Requirements. These are the general requirements the PFI must meet to be eligible to service mortgages for the Bank:

(a) Meet the Bank’s Standards. The PFI must have and maintain as one of its principal business purposes, the servicing of mortgages of the type that PFI will service under this Contract. In addition, the PFI, in the Bank’s judgment, must, at all times, have the capacity to service mortgages for the Bank in a manner satisfying the Bank’s servicing standards and the standards generally imposed by other GSEs and private institutional mortgage investors. Finally, the PFI must, at all times, satisfy the applicable requirements for servicers of mortgages set forth in the Guides and, if issued, in the MPF Program Requirements.

(b) Have Qualified Staff and Adequate Facilities and Systems. The PFI must, at all times, employ personnel or agents who are well trained and qualified to perform the functions required of the PFI, as Servicer, under this Contract, and the PFI and any agents must maintain facilities and systems that, in the Bank’s judgment, are able to perform its functions as Servicer under this Contract.

(c) Maintain Fidelity Bond and Errors and Omissions Coverage. The PFI must maintain, at its own expense, a fidelity bond and errors and omissions insurance, as required by the Guides.

(d) Report Basic Changes. The PFI must notify the Bank promptly in writing of any material changes that occur in its principal purpose, activities, financial condition, staffing, facilities, fidelity bond or errors and omissions insurance.

6.2. Ownership and Status of Servicer. In approving a PFI as Servicer, the Bank relies on the information the PFI has provided about the eligibility, qualifications and financial status of the PFI and its owners. The PFI covenants and agrees to comply with the provisions of the Guides and, if issued, the MPF Program Requirements, regarding these matters, including, without limitation, the delivery of notices regarding these matters as required by the Servicing Guide. Changes in any such matters may affect the PFI’s eligibility to service Mortgages for the Bank.

6.3. Financial Information. In order to become and remain an approved Servicer under this Contract, the PFI must provide the financial information required by the Guides from time to time and must satisfy the standards set forth in the Guides and the MPF Program Requirements. The PFI further agrees that the Bank may provide such financial information to the MPF Provider and other Participants or potential Participants in the Mortgages.

6.4. Access to PFI’s Records. As set forth in the Guides, the PFI agrees to permit, and cause its agents to permit, the Bank’s employees and designated representatives to examine or audit books, records and information pertaining to the Mortgages.

VII. SERVICING MORTGAGES

This article contains the basic rules governing the servicing of Mortgages owned by the Bank (whether originated by the PFI or any other Person) and Mortgages for which the PFI acquires the Servicing subject to the terms of this Contract, during the period that the PFI is to service such Mortgages.

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7.1. Servicing Duties of the Servicer. The PFI hereby agrees to perform the following servicing duties for the benefit of the Bank and any Participants:

(a) Scope of Duties. The Servicer will diligently perform all duties that are necessary or incident to the servicing of Mortgages that the Servicer is required to service by the terms of this Contract or any other existing or future agreement between the Bank and the Servicer.

(b) Mortgages to be Serviced. Any Bank Funded Mortgage, Closed Mortgage and any Acquired Mortgage will be serviced by the PFI for the Bank according to the terms of this Contract, unless, with respect to any such Mortgage, the Bank gives the PFI written notification or consent that such Mortgage will not be serviced by the PFI, whether:

(1) at the time of origination or acquisition by the Bank, as applicable;

(2) thereafter as a result of the PFI or its designee breaching any representation, warranty, covenant or agreement contained in Articles V, VI or VII of this Contract or in any provision of the Guides pertaining to the servicing of the Mortgages or eligibility to service the Mortgages; or.

(3) at the time of the transfer of Servicing to another.

(c) Service According to Guides and Industry Standards. Any Mortgage serviced under this Contract must be serviced by the Servicer according to the provisions in the Guides in effect on the date of this Contract or as the Guides may be amended or supplemented in the future, provided that such amendments or supplements shall apply only for Mortgages delivered to the Bank on or after the respective effective dates thereof unless such amendments or supplements (i) implement or are required by Applicable Law, or (ii) do not materially increase the PFI’s responsibilities. The Servicer will also follow other reasonable instructions the Bank or MPF Provider (through its Master Servicer) gives it from time to time and shall follow accepted industry standards and comply with Applicable Laws when servicing a Mortgage for the Bank, which includes without limitation, the maintenance of all insurance and guaranty coverage required by the Guides and the payment of all premiums and fees thereon as they become due and payable.

(d) Service at Servicer’s Own Expense. The Servicer shall be solely responsible for all costs of Servicing unless the Guides expressly provide otherwise. Without limiting the foregoing sentence, the Servicer shall be responsible for Unreimbursed Servicing Expenses as provided in Section 4.3, and shall, if required by the Bank, repurchase delinquent Government Mortgages in accordance with the provisions of the Guides or as the Bank otherwise agrees in writing.

(e) Special Responsibilities in Foreclosures. Among the other duties that may be assigned to the Servicer through the Bank’s special instructions or under the terms of the Guides is the responsibility to manage and appropriately dispose of the Property when a Mortgage it is servicing for the Bank has been foreclosed, or possession or title has been acquired by the Servicer on behalf of the Bank. The Servicer shall manage the Property according to the terms of the Mortgage (during the foreclosure process) and shall manage and dispose of the Property in accordance with the Guides (both during the foreclosure process, or the acceptance of a deed in lieu of foreclosure or other remedy, and after title to the Property has been acquired on behalf of the Bank).

(f) Service Until Need Ends. The Servicer shall service each Mortgage continuously from the date its servicing duties begin until the earliest of:

(1) the Mortgage’s principal and interest have been paid in full and the Mortgage shall have been canceled or released of record and a satisfaction or canceled Note shall have been issued to the Borrower;

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(2) the Mortgage has been foreclosed or liquidated and the Mortgaged Property properly disposed of; or

(3) the Servicer’s servicing duties are transferred or terminated in accordance with this Contract.

7.2. Compensation.

(a) The Servicer’s compensation for servicing Mortgages under this Contract, including, without limitation, the management and disposal of foreclosure Properties, shall be the Servicing Fees specified in the Guides and in the Master Commitment.

(b) From time to time the MPF Provider may publish amendments to the Guides or revisions of the MPF Mortgage Products that effect a change in the Servicer’s compensation which will take effect no earlier than thirty (30) days after such publication. However, such a change shall not affect Master Commitments under which one or more Delivery Commitments have been issued before the effective date of the change.

7.3. Ownership of Records.

(a) General. The Mortgage Records are the Bank’s property at all times. This is true whether or not the Servicer developed or originated them.

The Mortgage Records shall include, but are not limited to:

(1) all Mortgage documents;

(2) tax receipts;

(3) insurance policies;

(4) insurance premium receipts;

(5) ledger sheets or their electronic equivalent;

(6) payment records;

(7) insurance claim files and correspondence;

(8) foreclosure files and correspondence;

(9) current and historical data files; and

(10) all other papers, records, correspondence, memoranda and electronic data.

(b) Servicer as Custodian. The Mortgage Records belong to the Bank. The Servicer shall have possession of the Mortgage Records only with the Bank’s approval. The Servicer hereby acknowledges that it is acting as the Bank’s custodian in connection with any Mortgage Records at any time in its possession or control and it shall have no other interest in them. This is true whether the Servicer receives the Mortgage Records from an outside source or prepares them itself.

(c) Delivery.

(1) The Servicer shall deliver to the Bank or its designee such original Mortgage Records as the Guides shall require. In addition, when the Bank or its designee asks in

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writing for any Mortgage Records, the Servicer shall deliver them promptly to the Bank or its designee. The Servicer shall also provide such Servicing information as required by the Guides and as the Bank may reasonably request from time to time.

(2) If the Bank asks the Servicer in writing for reproductions of any Mortgage Records the Servicer or any predecessor servicer or holder of any Mortgage microfilmed, condensed or stored in electronic form, the Servicer will reproduce them in fully readable form promptly at no cost to the Bank or its designee. Further, in the event the Bank requires copies of an extensive number of Mortgage Records (in contrast to normal quality control reviews or similar targeted requests for Mortgage Records) that have been microfilmed, condensed or stored in electronic form, the Servicer may provide duplicates of the microfilm or condensed data, or electronically transmit such data, to the Bank in a format readable by the Bank or its designee rather than provide reproductions of the Mortgage Records in paper format.

7.4. Agreement to Indemnify, Defend and Hold Harmless.

(a) The PFI as the Servicer agrees to indemnify, defend and hold the Bank and the other Indemnified Parties harmless from and against all losses, damages, claims, actions, causes of action, liabilities, obligations, judgments, penalties, fines, forfeitures, costs and expenses, including, without limitation, legal fees and expenses, that result from (i) the failure or purported failure of the PFI or its assignee or designee in any way to perform its servicing obligations and duties with respect to the Mortgages or managing or disposing of Property in accordance with this Contract or the Guides, or (ii) the actual or purported willful misfeasance, bad faith or negligence of the PFI or its assignee or designee in the performance of its obligations or duties as the Servicer in connection with this Contract or the Guides, or the reckless disregard of such obligations or duties. In no event shall this indemnification be deemed to be a guarantee of payment by any obligor of any Mortgage. If an Indemnified Party seeks indemnification under this Section 7.4 (a), it must promptly give the PFI notice of any legal action or dispute. However, delay or failure by the Indemnified Party to provide such notice shall not release the PFI from any indemnity obligations, except and only to the extent that the PFI shows that such delay or failure materially prejudiced the defense of such action. The PFI shall be responsible to conduct such defense through counsel reasonably satisfactory to the Indemnified Party; provided, however, that the Indemnified Party is permitted to control fully the defense of any such claim and to settle any such claim subject to the PFI’s approval, which approval shall not be unreasonably withheld; provided further that the Indemnified Party shall have the right to retain counsel to represent it at its expense in connection with any such claim. If the PFI fails to comply with its indemnity obligations or breaches this Contract, or the Bank believes that there is a conflict between the Bank and the PFI or its counsel, the Bank may engage separate counsel at the expense of the PFI. If the PFI fails to assume the defense of an action within ten (10) days after receiving notice, then the PFI shall be bound by any determination made in the action or by any compromise or settlement the Indemnified Party may effect. The Indemnified Party shall use reasonable efforts to mitigate any claims tendered to the PFI. The Indemnified Party shall assign to the PFI all of its claims for recovery against third parties for any indemnification provided by the PFI, whether such claims arise pursuant to insurance coverage, contribution, subrogation or otherwise.

(b) If any Person, including, without limitation, any governmental agency, department or official, sues the Bank or any other Indemnified Party, makes a claim against any Indemnified Party or starts a proceeding against any Indemnified Party based on the PFI’s acts or omissions, or purported acts or omissions, in servicing Mortgages or managing or disposing of Property, the PFI’s obligation to indemnify, defend and hold harmless the Bank or any other Indemnified Parties shall be met regardless of whether the suit, claim or proceeding has merit or not.

(c) The PFI’s indemnification obligation does not apply, however, to the extent that during a suit, claim or proceeding, the Bank gives the PFI express written instructions and solely as a result of the PFI following them an Indemnified Party suffers losses, damages, judgments or legal expenses.

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7.5. PFI’s Role as Mortgage Servicer. The Servicer shall be an independent contractor and shall not be an agent for the Bank except as may be expressly provided for in the Guides, and shall not hold itself out as an agent of the Bank.

VIII.  ASSIGNMENT, CONSIDERATION AND CONTINUANCE

This article describes the Bank’s requirements covering assignment of, consideration for, and continuance of, this Contract.

8.1. Assignment. Because the relationships created by this Contract are personal, the PFI may not, without the Bank’s prior written approval, assign:

(a) this Contract (whether in whole or in part) under any circumstances, either voluntarily or involuntarily, by operation of law, or otherwise;

(b) its responsibility regarding the origination of Mortgages under this Contract;

(c) its Credit Enhancement arising under Article IV of this Contract, nor may the PFI enter into or acquire any agreement to indemnify, offset, hedge or share its Credit Enhancement, including, without limitation, such agreements as mortgage pool insurance, reinsurance or securitizations in any form; or

(d) any fees payable or rights arising under this Contract.

Notwithstanding the foregoing, other Persons may assist the PFI in originating Mortgages, either as an agent of the PFI or as a vendor supplying services to the PFI. In all such cases, the PFI shall remain primarily responsible and liable for (and shall not be released from) the performance of all PFI obligations hereunder and shall be and remain primarily liable for the acts and omissions of such other Persons. In addition, the PFI shall be solely responsible for any payments due all such other Persons for their services, and shall indemnify, defend and hold harmless the Bank and the other Indemnified Parties from and against all losses, damages, claims, actions, causes of action, liabilities, obligations, judgments and expenses (including, without limitation, legal fees and expenses) relating to such services or such Persons. Nothing in this Contract shall be deemed to limit the Bank’s right to sell, pledge, hypothecate, securitize or assign the Mortgages or any interests or rights it has arising out of the Mortgages or under this Contract.

8.2. Limited Value of Contract to PFI.

(a) The PFI acknowledges that it has paid the Bank no monetary consideration for making it an approved PFI or Servicer.

(b) The PFI also agrees that, except for any Agent Fee or premium payable with respect to Mortgages delivered under this Contract, any Credit Enhancement Fee payable under this Contract, the Servicing Fee with respect to the servicing of Mortgages under this Contract, or any termination fee for terminating servicing under this Contract, this Contract has no value to the PFI.

8.3. Requirements for Continuance. The PFI acknowledges that it may continue to originate, sell and service Mortgages under this Contract only as long as, among other things, it continues to meet all of the eligibility requirements set forth in this Contract, the Guides and, if issued, the MPF Program Requirements.

IX.  ASSIGNING MORTGAGE SERVICING

The PFI may not sell, assign or pledge its responsibility for servicing all or any part of the Mortgages that it is servicing for the Bank without first obtaining the Bank’s written consent, which consent may be granted or withheld by the Bank in its sole discretion and may be subject to conditions specified in the Guides.

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X. BREACHES OF CONTRACT

The Bank can treat the PFI’s taking certain actions, or failing to take certain actions, as a breach of this Contract. A breach of this Contract can lead to a termination of this Contract by the Bank at the Bank’s option. Termination is provided for in detail in Article XI. In addition, upon the PFI’s breach of this Contract, the Bank, at its option, may revoke the Bank’s approval of the PFI as a Mortgage originator, seller or servicer.

10.1 Specific Breaches of Contract. The following constitute breaches of this Contract:

(a) Harm, Damage, Loss or Untrue Warranties. It is a breach of this Contract if any act or omission of the PFI in connection with the origination, sale, servicing or Credit Enhancement of any Mortgage causes the Bank any harm, damage or loss, provided, however, that the PFI’s liability for any such breach shall not be deemed to be a guarantee of the payment by any obligor of any Mortgage except to the extent of any Remaining Credit Enhancement in effect from time to time. It is also a breach of this Contract if the PFI breaches any representations or warranties made or furnished by or on behalf of the PFI in connection with this Contract (including, without limitation, those set forth in Section 5.2) or if the PFI delivers to the Bank any Mortgage which breaches any of the warranties described in Section 5.3.

(b) Failure to Comply with this Contract, the Guides or the MPF Program Requirements. It is a breach of this Contract if the PFI does not comply, through any act or omission, with any term or condition of this Contract, the Guides or, if issued, the MPF Program Requirements.

(c) Failure to Properly Foreclose or Liquidate. Where a Mortgage is in default and the PFI is required or has decided to foreclose or liquidate such Mortgage, it is a breach of this Contract if the PFI fails to take prompt and diligent action consistent with Applicable Laws to foreclose on or otherwise appropriately liquidate such Mortgage and to perform all incidental actions, whether or not the failure results from the acts or omissions of an attorney, trustee or other Person or entity the PFI chooses to effect foreclosure or liquidation.

(d) Failure to Properly Manage, Dispose of, or Effect Proper Conveyance of Title. It is a breach of this Contract if any Mortgage serviced under this Contract has been foreclosed or the possession or title to the Property has been taken by the PFI on behalf of the Bank and the PFI fails to properly manage, dispose of or effect proper conveyance of title to the Mortgaged Property in accordance with this Contract, the Guides, any Applicable Laws or any applicable Mortgage insurance policies or contracts.

(e) PFI’s Financial Ability Impaired. It is a breach of this Contract if there is a change in the PFI’s financial status that, in the Bank’s opinion, materially and adversely affects the PFI’s ability to satisfactorily perform any of its obligations under this Contract. Changes of this type include without limitation:

(1) the PFI’s insolvency;

(2) adjudication of the PFI as a bankrupt;

(3) appointment of a receiver or conservator for the PFI;

(4) the PFI’s execution of a general assignment for the benefit of its creditors; or

(5) any regulatory action taken against the PFI by any regulatory agency that in the Bank’s sole judgment is likely to have a material adverse impact on the financial condition of the PFI or its ability to perform any of its obligations under this Contract.

(f) Failure to Obtain the Bank’s Prior Written Consent. It is a breach of this Contract if the PFI fails to obtain the Bank’s prior written consent for:

(1) a sale or transfer (directly or indirectly) of the majority interest in the PFI; or

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(2) a change in its corporate status, charter or structure.

(g) Failure to Comply with Eligibility Standards. It is a breach of this Contract if the PFI, in the Bank’s opinion, fails at any time to meet the eligibility standards for originating, selling or servicing Mortgages set forth in this Contract, the Guides or, if issued, the MPF Program Requirements.

(h) Court Findings against PFI or Principal Officers. It is a breach of this Contract if:

(1) a court of competent jurisdiction finds that the PFI or any of its Principal Officers has committed an act of civil fraud related to the PFI’s lending or mortgage origination, selling or servicing activities, or that, in the Bank’s reasonable opinion, adversely affects the PFI’s reputation or the Bank’s reputation or interests; or

(2) the PFI or any of its Principal Officers is convicted of any criminal act related to the PFI’s lending or mortgage origination, selling or servicing activities or that, in the Bank’s opinion, adversely affects the PFI’s reputation or the Bank’s reputation or interests.

(i) Cross-Defaults. It is a breach of this Contract if any default occurs under any other agreement between (1) the PFI (or any Affiliate of the PFI) and the Bank, or (2) the PFI (or any Affiliate of the PFI) and any other Federal Home Loan Bank.

(j) Replacement Contract. It is a breach of the Contract if the PFI does not immediately reimburse the Bank for any funds advanced by the Bank to obtain a Replacement Contract.

10.2. The Bank’s Rights upon Breach.

(a) Rights Regarding PFI Relationship. If there is a breach of this Contract by the PFI, the Bank will have no obligation to permit the PFI to correct or cure the breach and the Bank shall have the following rights:

(1) the right (but not the obligation) to require or permit the PFI to take any reasonable action to correct or cure the breach, provided, however, if the Bank determines the PFI’s breach is capable of being cured and is not the result of the PFI’s breach of a fiduciary duty, willful misconduct or intentional wrongdoing, then the Bank may, in its sole discretion, so notify the PFI and allow the PFI a reasonable time period, as determined by the Bank, to cure such breach, and if the breach is not cured within such time period, then the Bank may enforce its rights as provided in Section 10.2 and under Article XI;

(2) the right to terminate this Contract in whole or in part, except for a breach that involves an individual Mortgage which the Bank requires the PFI to purchase or repurchase, and (i) that, in the Bank’s sole judgment, is not indicative of a pattern or practice on the part of the PFI which is likely to result in breaches with respect to other Mortgages, or (ii) that, in the Bank’s sole judgment, does not involve a breach of fiduciary duty, willful misconduct or intentional wrongdoing on the part of the PFI or its designee;

(3) the right to revoke the Bank’s approval of the PFI as an approved Originator, seller or Servicer; and

(4) any other rights under this Contract or the Guides or available at law or in equity, including, without limitation, the Bank’s rights to indemnification provided for in this Contract and the Guides.

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(b) Rights With Respect to the Collateral and the Advances Agreement. Without limiting the provisions of subsection (a) above, in the event of a breach of this Contract by the PFI or the Bank’s exercise of its rights under Section 4.2 (c), the Bank shall have any and all of the following rights, which are not mutually exclusive and which are in addition to, and not in limitation of any rights of the Bank under the Advances Agreement:

(1) to obtain a Replacement Contract (which may be one or more agreements as determined by the Bank in its sole discretion);

(2) to terminate the PFI’s right to receive any Credit Enhancement Fee or Government Loan Fee accruing under each Master Commitment; thereafter, the Bank may pay such Credit Enhancement Fee to the obligor of, or as needed to fund, the Replacement Contract as well as to reinstate, if necessary, and to maintain in force any credit enhancement agreements provided by third parties that were in place prior to the breach, such as FHA insurance, supplemental mortgage insurance, VA guaranty, and others as may be applicable;

(3) to liquidate any collateral securing the PFI’s Credit Enhancement under Article IV and to apply the proceeds thereof in such manner as the Bank may determine to any obligations of the PFI to the Bank, whether arising under this Contract or any other agreement, including without limitation to the cost of obtaining any and all Replacement Contracts, and any other damages incurred by the Bank arising under this Contract; and

(4) to treat any sums paid (or payable) or incurred to obtain a Replacement Contract, which sums shall include but are not limited to, the present value of future payments due under the Replacement Contract (that are in excess of the present value of any Credit Enhancement Fees that would have been payable to the PFI with respect to each Master Commitment), as Indebtedness or Liabilities (if either such term is used in the Advances Agreement) of the PFI to the Bank, and an extension of credit by the Bank pursuant to the Advances Agreement, and shall become immediately due and payable under this Contract by the PFI;

provided, however, upon the PFI’s full and unconditional payment of the amounts advanced by the Bank to obtain a Replacement Contract together with all prior or outstanding claims against the PFI, if any, the PFI shall be released of its Credit Enhancement under Article IV with respect to that Master Commitment and the Bank shall have no obligation to pay Credit Enhancement Fees to the PFI.

(c) Forbearance Not a Waiver. Any forbearance by the Bank in exercising any of its rights will not be a waiver of any present or future right the Bank has under this Contract to so terminate it or to revoke the Bank’s approval of the PFI as an approved Originator, seller or Servicer.

XI. TERMINATION OF CONTRACT

Without limiting the rights of the parties as provided elsewhere in this Contract, this Contract may be terminated for the reasons and in the manner as provided in this Article XI.

11.1. Termination by Either Party of Mortgage Origination Arrangements. The Origination and Sale Provisions of this Contract may be terminated by the PFI or by the Bank, with or without cause, by giving notice to the other party. Notice of termination of the Origination and Sale Provisions may be given at any time but must conform to Article XIII of this Contract. In the event of termination of the Origination and Sale Provisions for cause, such termination shall take effect immediately upon notice of termination, and may include the cancellation of the unused portion of any Master Commitments. Termination of the Origination and Sale Provisions without cause shall be effective with respect to the unused portion of any Master Commitments sixty (60) days after notice of termination is given, unless the notice specifies a later effective date. Termination of the Origination and Sale

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Provisions will not affect any outstanding Delivery Commitments for which the Bank has issued its written acceptance, provided, however, that if the PFI has breached this Contract, the Bank may declare any or all outstanding Delivery Commitments and its acceptance thereof void. No termination fee is payable with respect to the termination of the Origination and Sale Provisions, whether terminated by the PFI or the Bank. Nothing in this Section 11.1 shall affect the PFI’s obligations, or impair the Bank’s rights, with respect to the Mortgages delivered to the Bank under this Contract prior to such termination or pursuant to Delivery Commitments entered into prior to such termination.

11.2. Termination by PFI of Mortgage Servicing Arrangements. The PFI may terminate the provisions of this Contract covering the servicing of Mortgages by giving the Bank notice at any time. Notice must conform to Article XIII of this Contract. Termination is effective the last day of the third calendar month after the calendar month in which notice is given. If the PFI terminates the servicing provisions of this Contract in whole or in part, the Bank will not pay the PFI a termination fee, and the PFI shall pay the costs of transferring the servicing of the Mortgages to a party acceptable to the Bank.

11.3. Termination by the Bank of Servicing Arrangements. The Bank may terminate the provisions of this Contract covering the servicing of Mortgages by following the procedures outlined below.

(a) Termination Without Cause. The Bank may, in its sole discretion, terminate the servicing provisions of this Contract by giving the PFI notice of the termination and directing the PFI to transfer the Servicing to a party designated by the Bank in exchange for a termination fee. Such termination of Servicing shall take effect on the last day of the third calendar month after the calendar month in which the Bank gives its notice unless a later date is specified. The termination fee for such transfer of Servicing shall be equal to the fair market value of such transferred Servicing, which shall be mutually agreed upon by the PFI, the Bank and the designated buyer. If the parties are not able to agree on the fair market value of such Servicing they shall abide by the determination of fair market value made by an independent nationally recognized evaluator of mortgage servicing agreed upon by the Bank and the PFI. The Bank shall pay reasonable servicing transfer expenses in connection with a termination without cause.

(b) Termination With Cause. The Bank may terminate Servicing if the PFI breaches this Contract, including, without limitation, any of those breaches listed in Section 10.1, provided, however, if the Bank, in its sole judgment, determines the PFI’s breach is capable of being cured and is not the result of the PFI’s breach of a fiduciary duty, willful misconduct or intentional wrongdoing, the Bank may so notify the PFI and specify a time period, determined by the Bank in its sole discretion, to cure such breach, and if the breach is not cured within such time period, then the Bank may enforce its rights to terminate Servicing as provided in this Section 11.3 (b). The Bank may terminate Servicing by giving the PFI a notice of termination. Notwithstanding anything in this Contract to the contrary, the Bank may make the termination effective immediately, and the Bank will not pay the PFI a termination fee or any of the proceeds from any sale of the Servicing involved. Furthermore, the Bank will not pay a termination fee if a Mortgage is purchased by the PFI under Article V.

The provisions applicable to any such termination with or without cause, including, without limitation, the procedures for effecting any such termination and the transfer of servicing, are set forth in the Servicing Guide.

11.4. Credit Enhancement Obligations Not Terminated. Unless such obligations are earlier modified, waived or released by the Bank in writing or replaced by a Replacement Contract accepted by the Bank in full satisfaction of the PFI’s Credit Enhancement, the PFI’s Credit Enhancement under Article IV, including without limitation, the representations and supporting obligations, are not subject to termination and shall survive termination of this Contract. Such obligations shall remain in full force and effect until the last of the Mortgages delivered, credit enhanced or serviced under this Contract is repaid, liquidated, or foreclosed or the Mortgaged Property relating thereto is disposed of.

11.5. Rights of Termination Not Impaired. The exercise of a right of termination under any provision of this Contract will not impair any further right of termination under another provision.

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XII.  SURVIVAL OF RESPONSIBILITIES AND LIABILITIES

Notwithstanding anything contained in this Contract to the contrary, in the event that all or any part of this Contract is terminated, any and all of the responsibilities and liabilities of the PFI in existence before the termination of this Contract, including without limitation, the obligations arising under Articles IV and V and Sections 7.3, 7.4, 19.5 and 19.6, shall survive such termination and shall continue to exist after termination unless the Bank expressly releases the PFI from any of such responsibilities or obligations in writing. This is true whether this Contract was terminated by the PFI or by the Bank.

XIII.  NOTICE

13.1. General. Whenever notice is required under this Contract or by Applicable Law, it must be given as described in this article. All demands, notices and communications under this Contract shall be in writing (except as expressly provided in Section 13.2 below) and shall be delivered in person or sent by certified United States mail, postage prepaid, return receipt requested or sent by facsimile transmission or 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.

13.2. The Guides and Other Documents. Copies of the Guides, including, without limitation, any amendments or supplements, or any changes or pronouncements with respect thereto, will be provided to the PFI from time to time by the Bank, at its option, either (a) via regular mail or other delivery service, or (b) electronically by posting these items on an Internet website and notifying the PFI of the Internet address of such website.

13.3. Addresses. For purposes of this Article XIII, the addresses and facsimile numbers for the Bank and the PFI (and the electronic transmission information for the PFI) are as set forth in the Addendum attached hereto. Any change must be given in writing in accordance with the provisions of Section 13.1, but shall be effective only upon actual receipt.

13.4 Telephonic and Electronic Communications. In addition to the provisions set forth in the Guides, the PFI hereby authorizes the Bank, from time to time without notice to the PFI, to record telephonic and other electronic communications of the PFI with the Bank.

XIV.  PRIOR AGREEMENTS

The Origination and Sales Provisions of the Prior Contract and the terms and conditions of any Master Commitments executed pursuant to the Prior Contract shall continue to govern all Mortgages delivered under Master Commitments executed pursuant to the Prior Contract, but in all other respects such Mortgages shall be governed by and serviced under this Contract including, without limitation, Section 3.7 thereof. Except for the Origination and Sales Provisions applicable to Mortgages delivered under the Prior Contract, this Contract supersedes and replaces the Prior Contract. This Contract shall govern all Bank Funded Mortgages, Acquired Mortgages and all Mortgages delivered under Master Commitments executed pursuant to this Contract in all respects. This Article XIV does not affect the respective rights or obligations of the PFI or the Bank under any prior agreement or understanding that does not relate to the origination, selling or servicing of Mortgages to which this Contract relates.

XV.  SEVERABILITY AND ENFORCEMENT

15.1. Severability. If any provision of this Contract conflicts with Applicable Law, the other provisions of this Contract that can be carried out without the conflicting provision will not be affected.

15.2. Rights and Remedies Cumulative. All rights and remedies under this Contract are distinct and cumulative not only as to each other but as to any rights or remedies afforded by law or equity. They may be exercised together, separately or successively. Subject to Section 19.6, these rights and remedies are for the benefit of the parties and their respective successors and assigns.

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XVI.  CAPTIONS

This Contract’s captions and headings are for convenience only and are not part of this Contract.

XVII.  SCOPE OF CONTRACT

The following provision applies, whether or not it is contrary to other provisions in this Contract. The Bank reserves the right to restrict the PFI’s origination, selling or servicing of Mortgages for the Bank to the type that the PFI and its employees have the experience and ability to originate or service.

XVIII.  OTHER PARTIES

18.1. Participants. The PFI acknowledges that the Bank may and intends to enter into one or more participation agreements with other Persons (the “Participants”) to convey participation interests in some or all of the mortgages originated, sold or serviced under this Contract. Nothing in this Contract shall prohibit such participation agreements. The PFI authorizes the Bank to disclose to potential Participants the information used to approve the PFI as PFI, credit enhancer and Servicer and to maintain those qualifications so long as such potential Participants have agreed in writing to maintain the confidentiality of such information.

18.2. Master Servicer; Custodian; Underwriter; Subservicer; etc. The PFI acknowledges and agrees that from time to time the Bank may enter into agreements with other Persons regarding the Mortgages. Such agreements may include master servicing agreements, custodial agreements, underwriting agreements, securitization agreements, subservicing agreements and other agreements for the benefit of the Bank, the Participants and their respective successors and assigns. No party to such other agreement shall owe any obligation to the PFI. To the extent the Bank assigns or delegates any of its rights or obligations to any such other party from time to time and so notifies the PFI thereof in writing, the PFI shall be bound by such assignment or delegation. In such event, the PFI agrees that it shall not be the agent of any such other party.

XIX.  MISCELLANEOUS PROVISIONS

19.1. Amendment. All amendments to this Contract shall be in writing duly executed and delivered by the PFI and the Bank, except as expressly provided in the Guides; provided, however, that the Bank may extend the period applicable to any Master Commitment without the written approval of the PFI.

19.2. REMIC, FASIT or Other Securitization or Sale Transaction. The PFI hereby acknowledges and agrees that the Bank may hereafter transfer some or all of the Mortgages to purchasers of whole loans or into a trust or other entity, which trust or other entity may elect REMIC or FASIT status. In the case of any such transfer (whether or not such entity elects REMIC or FASIT status), (a) the Bank may assign to the transferee the Bank’s rights under this Contract in respect of the Mortgages so transferred and upon such assignment, the transferee shall be entitled to all rights of the Bank under this Contract in respect of such Mortgages, except to the extent provided otherwise in the transfer agreement between the Bank and such transferee, (b) the PFI will comply with all applicable REMIC or FASIT legal and regulatory requirements in connection with the performance of its obligations and the exercise of its rights hereunder, and (c) upon the request of the Bank, the PFI shall provide all information reasonably required and otherwise cooperate with the Bank, any applicable rating agencies and any prospective transferees or investors in connection with any such securitization or sale of any or all of the Mortgages and shall enter into such amendments to this Contract as the Bank shall reasonably request to effectuate the provisions of this Section 19.2.

19.3. Governing Law. The parties acknowledge that the MORTGAGE PARTNERSHIP FINANCE Program is or will be offered to participating financial institutions in numerous states, that the MPF Provider will be

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providing services to the Bank, the PFI and all participating financial institutions wherever located, and that this Contract will be performed in part in the State of Illinois because of the services to be provided by the MPF Provider to, or on behalf of, the Bank. THEREFORE THE PARTIES AGREE THAT THIS CONTRACT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE STATUTORY AND COMMON LAW OF THE UNITED STATES OF AMERICA. TO THE EXTENT FEDERAL LAW INCORPORATES OR DEFERS TO STATE LAW, THE RELEVANT STATE LAW SHALL BE THE LAW OF THE STATE OF ILLINOIS (WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES) APPLICABLE TO AGREEMENTS TO BE PERFORMED IN THE STATE OF ILLINOIS. Any action or proceeding to enforce or interpret this Contract shall be brought in the state or federal court for the county and state where the Bank is located, and if any basis for federal jurisdiction exists in such action or proceeding, it must be brought in the federal court for such state and county. Section 4.7 of this Contract provides that the Advances Agreement will govern the pledging of collateral by the PFI to secure obligations under this Contract, in addition to any other obligations of the PFI arising under the Advances Agreement or other contracts or agreements between the Bank and the PFI. It is expressly agreed and understood that the choice of Illinois law in this Section 19.3 shall apply only to this Contract, and shall not apply to any transaction governed by the terms of the Advances Agreement or other contracts or agreements between the Bank and the PFI, which shall continue to be governed by the choice of law specified therein, even if such transaction is related to a transaction under this Contract. In addition, the PFI agrees that if it should bring any action or proceeding seeking to obtain any legal or equitable relief against the Bank under or arising out of this Contract or any transaction contemplated by this Contract, and such relief is not granted by the final decision, after any and all appeals, of a court of competent jurisdiction, the PFI will pay all attorneys’ fees and other costs incurred by the Bank in connection therewith. The PFI agrees to reimburse the Bank for all costs and expenses (including reasonable fees and out-of-pocket expenses of counsel for the Bank) incurred by the Bank in connection with the enforcement or preservation of the Bank’s rights under this Contract including, but not limited to, its rights in respect of any Mortgages delivered or serviced by the PFI and any collateral pledged to the Bank in connection with such Mortgages.

19.4. Intention of the Parties. It is the intention of the parties hereto that this Contract does not create a joint venture or partnership between the PFI and the Bank, but rather this Contract constitutes a contractual arrangement between the parties. The Bank shall not be obligated to fund or purchase any particular mortgage unless and until it formally commits in writing to do so.

19.5. Confidentiality of Proprietary Information. The PFI agrees to maintain the confidentiality of any information provided by the Bank or the MPF Provider which is labeled “confidential” or “proprietary information” or otherwise transmitted as confidential information, including, without limitation, the Credit Enhancement data described in Section 19.6, and not to disclose such information except to employees who have a need to know its contents and to third party agents who have a need to know and have signed confidentiality agreements protecting the Bank. It is understood that such information will not be considered confidential if (a) it is or becomes publicly available through no breach of the PFI’s obligations under this Contract, (b) it is provided by the Bank to any third Person without restriction on disclosure, (c) it is provided to the PFI by a third Person who properly has such information, without restriction on disclosure and without breach by such third Person of any nondisclosure obligation it may have, or (d) it is independently developed by the PFI without use of the Bank’s information. If the PFI is served with process or any other governmental or regulatory request for such confidential information, the PFI shall immediately notify the Bank’s General Counsel, or if the Bank has no General Counsel, the Bank’s President, prior to complying with such process or request, except where such prior notice is prohibited by law.

19.6. Use of Credit Enhancement Data. Information regarding the determination of the Actual Credit Enhancement or proposed Credit Enhancement, both on a loan level basis and on a pool level basis, supplied by the MPF Provider on behalf of the Bank is proprietary information. This information is shared with the PFI for the sole purposes of assisting the PFI to evaluate whether to originate for, or sell a mortgage or mortgages to the Bank, and for the PFI to determine the appropriate capital treatment for such mortgage(s), and for no other purpose, including but not limited to valuation for market securitization purposes. The Bank and MPF Provider, their vendors and licensors and all Affiliates thereof do not and cannot warrant the accuracy, adequacy or completeness of, or performance or results that may be obtained by using the MPF Provider’s system and/or any information or data generated with the use of this system or the capital, accounting, regulatory or tax treatment applicable to the PFI. The information and data generated by the MPF Provider’s system are provided “as is” without any express or

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implied warranties, including but not limited to any implied warranties of merchantability or fitness for any particular purpose or use. With respect to such information and data generated by or with the use of the MPF Provider’s system, neither the Bank, MPF Provider, their vendors and licensors nor any Affiliates thereof shall be liable to any PFI or anyone else for any inaccuracy, delay, interruption in service, error or omission, regardless of cause, or for any damages resulting therefrom. Neither the Bank, MPF Provider, their vendors and licensors and all Affiliates thereof nor anyone else who has been involved in the creation or production of the MPF Provider’s system and/or delivery of the information and data generated thereby or any component of the forgoing shall be liable for any indirect, incidental, special, punitive, consequential or similar damages, such as but not limited to, loss of anticipated profits or benefits resulting from the use of the information and data generated by the MPF Provider’s system, even if any of them has been advised as to the possibility of such damages. This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise. In the event that liability is nevertheless imposed, the cumulative liability of the Bank and MPF Provider, their vendors and licensors and all Affiliates thereof shall not exceed twenty thousand dollars ($20,000) in the aggregate.

19.7. Successors and Assigns. This Contract will inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns; provided, however, that the foregoing provision shall not be deemed to permit the assignment by the PFI of any of its rights or obligations hereunder in violation of this Contract.

19.8 Conflict with Guides. In the event of any conflict between the provisions of this Contract and the provisions of the Guides, the Guides shall prevail unless this Contract expressly provides otherwise.

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XX. SIGNATURES

By executing this Contract, the PFI and the Bank agree to all of this Contract’s terms and provisions. The PFI and the Bank have caused this Contract to be executed and delivered by their duly authorized officers as of the date first written above.

This Contract takes effect when executed and delivered by both the PFI and the Bank.

THE PFI:

_________________________________________,

a

By:

Name:

Title:

By:

Name:

Title:

THE BANK:

FEDERAL HOME LOAN BANK OF CHICAGO

By:

Name:

Title:

By:

Name:

Title:

Customer No.                        

“MORTGAGE PARTNERSHIP FINANCE” and “MPF” are registered trademarks of the Federal Home Loan Bank of Chicago.

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ADDENDUM

Address and Other Contact Information

The Bank:

Address:

Federal Home Loan Bank of Chicago

111 East Wacker Drive

Suite 800

Chicago, Illinois 60601

Attention: MORTGAGE PARTNERSHIP FINANCE^® Group

Facsimile No.: (312) 565-5855

Electronic Transmission: generalcounsel@fhlbc.com

The PFI:

Address:  __________________________

__________________________

__________________________

Attention: _________________

Facsimile No.: (            )             -            

Electronic Transmission:

____________________________________

[List authorized individuals, their respective roles, their addresses, e-mail addresses, telephone numbers and facsimile numbers.]

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EX-10.4.1

Exhibit 10.4.1

FEDERAL HOME LOAN BANK OF CHICAGO

MORTGAGE PARTNERSHIP FINANCE^® PROGRAM

PARTICIPATING FINANCIAL INSTITUTION AGREEMENT

[purchase only]

THIS PARTICIPATING FINANCIAL INSTITUTION AGREEMENT (the “Contract”) is dated as of April 11, 2000 between the participating financial institution (the “PFI”) that signs this document and the FEDERAL HOME LOAN BANK OF CHICAGO (the “Bank”), a corporation organized and existing under the laws of the United States of America.

I. GENERAL INFORMATION

This article contains important basic information about the Contract.

1.1. Purpose of Contract. The purpose of this Contract is:

(a) to establish the PFI as an approved seller of Mortgages to the Bank under the MORTGAGE PARTNERSHIP FINANCE^® Program, a program established by the Federal Home Loan Bank of Chicago (in such capacity, the “MPF Provider”);

(b) to establish the terms and conditions for the origination of those Mortgages which the Bank will purchase;

(c) to establish the terms and conditions, including, without limitation, the credit enhancement obligations of the PFI, under which the Bank will purchase Mortgages;

(d) to establish the PFI as an approved servicer of Mortgages held by the Bank, whether originated by the PFI or by others; and

(e) to provide the terms and conditions of servicing Mortgages for the Bank, whether originated by the PFI or by others.

1.2. Consideration. In consideration of the purpose of this Contract and of all the provisions and mutual promises contained in it, the PFI and the Bank agree to all that this Contract contains.

1.3. The Guides. From time to time, the MPF Provider issues its guides to PFIs (collectively, the “Guides”), and modifications of the Guides, and furnishes them to the PFI which the PFI agrees are incorporated into this Contract by reference as if fully set forth herein. These Guides are:

(a) the MORTGAGE PARTNERSHIP FINANCE Origination Guide; and

(b) the MORTGAGE PARTNERSHIP FINANCE Servicing Guide.

Whenever there is a reference to the Guides in this Contract, it means either or both the Origination Guide and the Servicing Guide, as the context may require and as they exist now and as they may be amended or supplemented in writing. The MPF Provider may amend or supplement the Guides, or either of them, from time to time, at its sole discretion, by furnishing amendments or supplementary matter to the PFI. The Origination Guide is applicable to the origination of Mortgages by the PFI for sale to the Bank or the sale of Mortgages to the Bank which were purchased by the PFI. However, such provisions of the Origination Guide applicable solely to Bank Funded Mortgages do not apply to this Contract.

The term “Guides” also includes anything that, in whole or in part, supersedes or is substituted for the Guides.

1.4 Certain Definitions. Anywhere the words that appear below are used in this Contract (whether or not capitalized, and whether used in the singular or the plural), the following definitions apply:

(a) “Applicable Laws”. All federal and state laws, ordinances, rules, regulations and orders applicable to the origination, holding or servicing of Mortgages by the PFI for itself or as agent for the Bank.

(b) “Bank Funded Mortgages”. Mortgages originated by the Originator as agent for the Bank, which Mortgages are funded by the Bank at or prior to the closing thereof and which at no time are owned by the Originator but are rather owned by the Bank at closing.

(c) “Business Day”. Any day (other than Saturdays and Sundays) that the MPF Provider is open for business.

(d) “Closed Mortgages”. Mortgages that the Bank purchases from the Originator which are owned by the Originator prior to such purchase and owned by the Bank after such purchase and which were previously funded or purchased by the Originator.

(e) “Confirmation”. A writing or machine- or electronically-generated transmission issued by the Bank confirming the purchase of one or more Mortgages and which shall evidence the Bank’s ownership of such Mortgage or Mortgages, in a form as specified in the Guides.

(f) “Delivery Commitment”. A written confirmation of the Bank to the Originator in response to the Originator’s oral delivery commitment offer made from time to time under this Contract and in accordance with the provisions of the Guide, pursuant to which the Originator commits to deliver to the Bank Mortgages satisfying the terms set forth therein within the period set forth therein.

(g) “GSEs”. The federal government sponsored enterprises, including, without limitation, the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), and their successors.

(h) “Indemnified Party”. Each of the Bank, any Participant, and each of their respective successors and assigns, and each of their respective shareholders, directors, officers, employees and agents.

(i) “Master Commitment”. A Master Commitment of the Originator to sell Mortgages under this Contract, to be entered into by the Originator and the Bank in accordance with the Guides.

(j) “Mortgage”. A loan, evidenced by a note, bond or other instrument or evidence of indebtedness which is secured by a Mortgage, deed of trust, deed to secure debt or other instrument or document of security that applies to property. The term “Mortgage” also includes, as the context requires, such instruments, evidences or documents of indebtedness and security, together with:

(1) the evidence of title; and

(2) all other documents, instruments and papers pertaining to the loan.

(k) “Originator”. The PFI, in its capacity as an owner and seller of Mortgages under this Contract.

(l) “Participants”. See Section 18.1 below.

(m) “Person”. Any individual, corporation, partnership, joint venture, association, joint-stock company, trust, limited liability company, unincorporated organization, government or any agency or political subdivision thereof.

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(n) “Property” or “Mortgaged Property”. The property that is subject to a Mortgage or, where the Mortgage has been foreclosed or possession or title to the property has been taken by the Bank or on the Bank’s behalf, was subject to such Mortgage.

(o) “Remaining Credit Enhancement”. At any time, the credit enhancement obligation of the PFI which amount shall be equal to the Actual Credit Enhancement less the Realized Loss paid by the PFI pursuant to Section 4.5.

(p) “Servicer”. The PFI, in its capacity as a servicer of Mortgages under this Contract.

All other terms used but not defined herein shall have the same respective meanings as set forth in the Guides.

II. ELIGIBILITY REQUIREMENTS FOR ORIGINATORS

For the PFI to sell Mortgages to the Bank, the PFI must satisfy the eligibility requirements specified in this article.

2.1. General Requirements. These are the general requirements the PFI must meet to be eligible to sell Mortgages to the Bank:

(a) Meet the Bank’s Standards. The PFI must have and maintain as one of its principal business purposes the origination or purchase of Mortgages of the type that the PFI will sell to the Bank under this Contract. In addition, the PFI, in the Bank’s judgment, must, at all times, have the capacity to purchase Mortgages for the Bank that meet the Bank’s standards and the standards generally imposed by other GSEs and private institutional Mortgage investors. Finally, the PFI must, at all times, satisfy the applicable requirements for sellers of Mortgages set forth in the Guides.

(b) Have Qualified Staff and Adequate Facilities and Systems. The PFI must, at all times, employ personnel or agents who are well trained and qualified to perform the functions required of the PFI under this Contract. In addition, the PFI must maintain facilities and systems that are able to perform its functions under this Contract.

(c) Maintain Fidelity Bonds and Errors and Omissions Coverage. The PFI must maintain, at its own expense, a fidelity bond and errors and omissions insurance, as required by the Guides.

(d) Report Basic Changes. The PFI must notify the Bank promptly in writing of any material changes that occur in its or its agents’ principal purpose, activities, staffing, facilities, fidelity bond or errors and omissions insurance.

2.2 Ownership and Status of PFI. In approving a PFI in connection with the obligations of Articles III and IV, the Bank relies on the information the PFI has provided about the eligibility, qualifications and financial status of the PFI and its owners. The PFI covenants and agrees to comply with the provisions of the Guides regarding these matters, including, without limitation, the delivery of notices regarding these matters as required by the Origination Guide. Changes in any such matters may affect the PFI’s eligibility to sell Mortgages to the Bank.

2.3. Financial Information. In order to become and remain an approved Originator under this Contract, the PFI must provide the financial information required by the Guides from time to time and must satisfy the standards set forth in the Guides.

2.4. Access to PFI’s Records. As set forth in the Guides, the PFI agrees to permit, and cause its agents to permit, the Bank’s employees and designated representatives to examine or audit books, records and information pertaining to the Mortgages.

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III. SALE OF MORTGAGES

This article contains the basic rules governing the origination of Mortgages for sale to the Bank. The Originator hereby agrees as follows:

3.1. What Governs Origination. The sale of Mortgages will be governed by:

(a) this Contract;

(b) the Guides, including, without limitation, with respect to any particular Mortgage, all amendments in effect on the day the Originator or its designee issues a written or electronic commitment to the mortgagor of such Mortgage to make the loan evidenced and secured by the Mortgage;

(c) the applicable Master Commitment;

(d) the Bank’s written confirmations of its acceptance of Delivery Commitments issued from time to time; and

(e) the Bank’s issuance of a Confirmation at the time it funds its purchase of a Mortgage.

3.2. What Mortgages can be Originated under this Contract. The Originator will only sell to the Bank a Mortgage under this Contract which satisfies the requirements set forth herein and in the Guides on the day the Originator or its designee issues a written or electronic commitment to the mortgagor of such Mortgage to make the loan evidenced and secured by the Mortgage.

3.3 Master Commitment.

(a) General. Mortgages will be sold to the Bank under Master Commitments. The Originator commits to use its best efforts sell to the Bank Mortgages satisfying the Master Commitment within the estimated period for the origination or sale of such Mortgages as set forth in the applicable Master Commitment, as such estimated period may be modified in accordance with the Guides.

(b) Execution of Master Commitments. From time to time, the Bank and the Originator may jointly elect in writing to enter into one or more Master Commitments. There can be more than one Master Commitment outstanding at any time. Each Master Commitment will specify that the Mortgages thereunder will be Closed Mortgages.

(c) Types of Mortgages. A Master Commitment may contain various types of either fixed rate or adjustable rate Mortgages, as permitted by the Guides.

(d) Allocation of Delivery Commitments to a Master Commitment. Each Delivery Commitment must be consistent with the then unallocated amount under an outstanding Master Commitment which shall be identified by the Originator as part of the Delivery Commitment. Upon the Bank’s issuance of a confirmation of a Delivery Commitment, such Delivery Commitment shall be allocated to the specified Master Commitment. Unless the MPF Provider waives this provision, once a Delivery Commitment is allocated to a Master Commitment such Delivery Commitment shall not be reallocated to another Master Commitment.

(e) Allocation of Mortgages to a Delivery Commitment. Each Mortgage must be consistent with the then unallocated amount under an outstanding Delivery Commitment which shall be identified by the Originator with respect to such Mortgage. Upon the Bank’s funding of its purchase of such Mortgage, as applicable, such Mortgage shall be allocated to the specified Delivery Commitment. Upon such allocation, such Mortgage shall not be reallocated to another Delivery Commitment.

(f) Spread Account Information. Each Master Commitment shall have its own Spread Account. The amounts to be allocated with respect to each Spread Account from time to time shall be determined in accordance with the Guides and the information set forth in the applicable Master Commitment.

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3.4. Purchase Price. For each Closed Mortgage under this Contract, the Originator shall be paid the purchase price as determined by the Origination Guide or separate agreement with the Bank. The MPF Provider will determine the purchase price for any particular Mortgage, which may be at par, at a premium or a discount, based upon the applicable Delivery Commitment and rate and fee schedule, all as more fully described in the Origination Guide. The rate and fee schedule for different types of Mortgages may be different, and the rate and fee schedule for a particular type of Mortgage may change daily or more often.

3.5. The Bank has No Obligation to Commit. The fact that the Bank has executed or delivered this Contract does not mean that it must make a commitment to purchase any Mortgage through the Originator.

3.6. PFI’s Role as Mortgage Originator. The Originator shall owe the Bank fiduciary duties in connection with the origination or acquisition and sale of Mortgages. The Originator shall originate or acquire all such Mortgages under this Contract in its own name and transfer such Mortgages to the Bank in accordance with the Origination Guide. The Bank’s interest in all Mortgages purchased under this Contract shall be evidenced by a Confirmation which shall conclusively establish the Bank’s ownership of the Mortgages. Section 5.5 of this Contract specifies certain circumstances in which the Originator may be obligated to purchase or repurchase a Mortgage from the Bank. Except with regard to any Mortgage the Originator is required to purchase under Section 5.5, the Originator acknowledges and agrees that at no time will it or any other Person (other than the Bank, the Participants and their respective successors and assigns) have any interest in Closed Mortgages purchased under this Contract after the sale of such Mortgages to the Bank. With the exception of any Mortgages the Originator may be required to purchase or repurchase under Section 5.5, the Originator will take all action necessary to protect the rights of the Bank, the Participants and their respective successors and assigns in the Mortgages purchased under this Contract against any other Person.

IV. CREDIT ENHANCEMENT; REALIZED LOSSES

4.1. Spread Account.

(a) Establishment. For each Master Commitment, the Bank will establish a contingent liability account (the “Spread Account”). All amounts from time to time allocated to the Spread Account shall be the responsibility of the Bank, and the PFI shall have no obligation with respect thereto.

(b) Allocations. For each Master Commitment, the Bank shall allocate amounts to the applicable Spread Account which may be done monthly based upon the moneys received from the Servicer with respect to the Mortgages allocated to such Master Commitment, or the Bank may make such allocation at the time the Mortgages are purchased under such Master Commitment, or allocations to the Spread Account may be made as otherwise agreed between the parties, in the amounts determined in accordance with the Guides and such Master Commitment.

(c) Losses. Amounts allocated to the Spread Account for a Master Commitment will be used to absorb losses realized on Mortgages (and related REO Properties) allocated to such Master Commitment in accordance with the provisions of Section 4.3 below.

4.2. Credit Enhancement/Recourse Obligation. Each Master Commitment will include a Maximum Credit Enhancement for the pool of Mortgages to be purchased under such Master Commitment. The Bank and the PFI may from time to time modify the Maximum Credit Enhancement in accordance with the Guides. As individual Mortgages are assigned to Delivery Commitments, the Actual Credit Enhancement will be calculated by the Bank in accordance with the Guides. In no case shall the Actual Credit Enhancement exceed the then outstanding Maximum Credit Enhancement for any pool. When the Master Commitment is deemed to be closed to further Delivery Commitments and all Delivery Commitments have been funded or expired, the Actual Credit Enhancement calculated by the Bank in accordance with the Guides shall become the Remaining Credit Enhancement.

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4.3. Allocation of Realized Losses; Priorities. The Realized Loss for any Mortgage (after application of any applicable governmental or private Mortgage insurance or guaranties) will be allocated and paid in the following order of priority:

(a) First, out of amounts allocated to the applicable Spread Account, by the Bank upon its receipt of notification from the Servicer or any other applicable Mortgage loan servicer providing the notice of the amount of such Realized Loss to the Bank as provided in Section 4.4 below;

(b) Second, for any Realized Loss remaining after the application set forth in clause (a), from the Originator, not to exceed the Remaining Credit Enhancement for the applicable Master Commitment, by the PFI remitting such amount pursuant to Section 4.5 below; and

(c) Finally, for any Realized Loss remaining after the application set forth in clauses (a) and (b), such loss shall be allocated directly to the Bank.

It is understood that the Spread Account for any Master Commitment may be exhausted at a given point in time but that subsequent credits to the Spread Account may thereafter cause the Spread Account to have a positive balance which could then be applied to cover any future Realized Losses. No such subsequent positive balance will be available or used to reimburse the Originator for Realized Losses previously incurred and funded by the Originator under clause (b).

4.4. Procedure for Making Claims against the Spread Account. In the event that the Servicer or any other applicable Mortgage loan servicer determines that there is a Realized Loss with respect to a Mortgage or REO Property, the Servicer or such other Mortgage loan servicer will promptly deliver a written notice as specified in the Servicing Guide and the Bank shall charge the applicable Spread Account with the amount as provided for in the Servicing Guide except to the extent that the Bank disputes the existence or determination of any Realized Loss or the amount thereof or the process related thereto, in which event the Bank’s determination shall control. The Servicer or any other applicable Mortgage loan servicer shall be reimbursed for such portion of the Realized Loss chargeable to the Spread Account to the extent that such Servicer or other Mortgage loan servicer has previously advanced such funds to the Bank.

4.5. Procedure for Making Claims against the PFI. From time to time upon notice by the Bank, which notice shall identify the aggregate amount of Realized Loss to be funded by the PFI pursuant to clause (b) of Section 4.3 above at such time, the Bank shall withdraw such amounts from the Daily Investment Deposit (“DID”) account of the PFI at the Bank and in the event that any such withdrawal from the PFI’s DID account shall cause the balance in such account to become negative, such deficit shall be deemed an advance under the Master Transactions Agreement between the PFI and the Bank. In the event of the breach by the PFI of its obligation to make any such payment, the Bank shall have all rights available at law or in equity, specifically, but not limited to, (x) the right to terminate, in whole or in part, the rights of the PFI under this Contract and (y) the right of set-off against any funds of the PFI held by, or at, the Bank.

4.6. Credit Enhancement Fees. For each Master Commitment, in consideration of the obligation of the PFI to fund a Realized Loss pursuant to Section 4.3(b), the Bank shall pay to the PFI monthly a credit enhancement fee determined in accordance with the Guides, based upon the Credit Enhancement Fee Rate applicable to such Master Commitment.

4.7. Collateral for the PFI’s Obligations. Upon the request of the Bank, the PFI shall deliver to the Bank from time to time collateral for its obligations under this Article IV. The Bank may change the nature or amount of the required collateral from time to time, and the PFI, at its expense, shall deliver to the Bank such replacement or additional collateral as provided in the advances and security agreement between the PFI and the Bank (the “Advances Agreement”), it being understood that the PFI’s obligations under this Article IV are included in and subject to the terms of the Advances Agreement.

4.8. Right of Setoff and Grant of Security Interest. To secure any and all indebtedness or liability of the PFI to the Bank under this Contract or under any other agreement with the Bank, however and whenever incurred or evidenced, whether direct or indirect, absolute or contingent, due or to become due, the PFI hereby assigns, transfers, and pledges to the Bank and grants to the Bank a first priority perfected security interest in (i) all balances, credits, deposits, moneys, and drafts now or hereafter in the deposit account(s) or any other account that the PFI may maintain with the Bank, and (ii) all collateral provided by the PFI from time to time as described in Section 4.7 above; and the Bank is authorized to charge such indebtedness or liability against the deposit account(s), or any other account or such other collateral, whether or not the same is then due. The Bank shall notify the PFI of any actions

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taken pursuant to this Section 4.8, but such notification shall not be a condition precedent to the right of the Bank to take any such action. The Bank shall have all other rights available at law or in equity with respect to the right of setoff and the security interest provided in this Section 4.8. The PFI, at its cost, will (i) execute and deliver to the Bank such specific pledge or security agreement as is provided in the Guides or required by the Bank, and (ii) execute, deliver and file such UCC financing statements and take such other action from time to time to perfect and maintain the perfection of the Bank’s security interest and rights under this Section 4.8.

V. ORIGINATION OF MORTGAGES - PFI’S WARRANTIES

5.1. General. The PFI makes certain warranties to the Bank. These warranties:

(a) apply to each Mortgage sold to the Bank;

(b) are made as of the date hereof (except with respect to warranties under Section 5.3 with respect to Mortgages originated after the date hereof), as of the closing date of each such Mortgage (with respect to Closed Mortgages originated by the Originator) and as of the date of sale of each such Mortgage to the Bank (with respect to Closed Mortgages not originated by the Originator);

(c) continue after the origination of the Mortgage;

(d) continue after the Bank’s purchase of any Mortgage;

(e) are for the benefit of the Bank and any Participants, and its and their respective successors and assigns; and

(f) include the warranties set forth in the Guides.

Warranties may be waived, but only by the Bank in a writing duly executed and delivered by the Bank.

5.2. General PFI Warranties. The PFI makes each of the representations and warranties set forth below regarding the PFI as of the date hereof and as of each day thereafter until termination of this Contract in accordance with its terms:

(a) It is duly organized, validly existing and in good standing under the laws governing its creation and existence, and has full corporate power and authority to own its property, to carry on its business as presently conducted and to enter into and perform its obligations under this Contract.

(b) The execution, delivery and performance by it of this Contract have been duly authorized by all necessary action on its part. Neither the execution and delivery of this Contract by it, nor the consummation by it of the transactions herein contemplated, nor compliance by it with the provisions hereof, will conflict with or result in a material breach of, or constitute a material default under (i) any of the provisions of any law, governmental rule, regulation, judgment, decree or order binding on it or its properties; (ii) its organizational documents or by-laws; or (iii) the terms of any material indenture or other agreement or instrument to which it is a party or by which it is bound. Neither it nor any of its affiliates is a party to, bound by, or in breach of or violation of any indenture or other agreement or instrument, or subject to or in violation of any statute, order or regulation of any court, regulatory body, administrative agency or governmental body having jurisdiction over it, which materially and adversely affects or to its knowledge may in the future materially and adversely affect its ability to perform its obligations under this Contract or its business, operations, financial condition, properties or assets.

(c) The execution, delivery and performance by it of this Contract and the consummation of the transactions contemplated hereby do not require the consent or approval of, the giving of notice to, the registration with, or the taking of any other action in respect of, any state, federal or other governmental authority or agency, except such as has been obtained, given, effected or taken prior to the date hereof.

(d) This Contract has been duly executed and delivered by it and constitutes a legal, valid and binding obligation of it, enforceable against it in accordance with the terms hereof, except as such

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enforcement may be limited by bankruptcy, insolvency, reorganization, receivership, conservatorship, moratorium and other similar laws affecting the enforcement of creditors’ rights in general and by general equity principles, regardless of whether such enforcement is considered in a proceeding in equity or at law.

(e) There are no actions, suits or proceedings pending or, to its knowledge, threatened against or affecting it, before or by any court, administrative agency, arbitrator or governmental body (i) with respect to any of the transactions contemplated by this Contract or (ii) with respect to any other matter which in its judgment will be determined adversely to it and will, if determined adversely to it, materially and adversely affect it or its business, assets, operations or condition (financial or otherwise) or materially and adversely affect its ability to perform its obligations under this Contract.

(f) The PFI has all licenses, permits, authorizations, approvals and consents of all governmental authorities required in order for it to originate or purchase, hold and sell the Mortgages, and in all cases, to service the Mortgages.

(g) The PFI satisfies all requirements set forth in the Guides to be an eligible Mortgage seller and an eligible Mortgage servicer.

(h) The PFI is in compliance with all Applicable Laws.

5.3. Specific Mortgage Warranties. The Originator makes each of the following specific representations and warranties with respect to each Mortgage and each Property as of the date the applicable Mortgage is originated (in the case of Closed Mortgages originated by the Originator) or as of the date the applicable Mortgage is sold to the Bank (in the case of Closed Mortgages not originated by the Originator):

(a) Mortgage Meets Requirements. The Mortgage conforms to all of the applicable requirements in the Guides, this Contract and Applicable Laws.

(b) Originator Authorized to Do Business. The Originator and any other party involved in the origination of the Mortgage, at all applicable times:

(1) were authorized to transact business in all applicable jurisdictions, including, without limitation, the jurisdiction where the Property is located, unless at all such times, such authorization to transact business was not required, based upon the activities of the Originator or other relevant party, as the case may be; and

(2) possessed all licenses, permits and approvals required by all Applicable Laws, including, without limitation, all Applicable Laws of the jurisdiction where the Property is located.

(c) Originator has Full Right to Sell. The Originator has full power and authority to sell and service the Mortgage, and has duly authorized the sale and the servicing of the Mortgage. The Originator has not granted to any person other than the Bank any interest in the Mortgage or the right to originate, fund or hold the Mortgage, or any interest therein. In addition, the Originator’s right, power and authority to sell and service the Mortgage is not subject to any other person’s interest, consent or approval or to any agreement with any other person.

(d) Lien on Property. The Mortgage is a valid and subsisting perfected first lien and security interest on the Property described in it, and the Property is free and clear of all encumbrances and liens having priority over it except for liens for real estate taxes, and liens for special assessments, that are not yet due and payable.

(e) Documents are Valid and Enforceable. All documents and instruments constituting a part of the Mortgage have been properly signed and delivered, are legal, valid and binding obligations of the persons purporting to be parties thereto, enforceable in accordance with their respective terms, subject only to bankruptcy laws, Soldiers’ and Sailors’ Relief Acts, laws relating to administering decedents’ estates and general principles of equity.

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(f) Property Not Subject to Liens. The Property is free and clear of all mechanics’ liens, materialmen’s liens or other liens (whether senior to, pari passu with or subordinate to the Mortgage). There are no rights outstanding that could result in any of such liens being imposed on the Property. The warranty set forth in this subsection (f) is not made if the Originator furnishes the Bank with a title insurance policy in an amount and in a form acceptable to the Bank and issued by a title insurance company acceptable to the Bank, that gives the Bank substantially the same protection as this warranty.

(g) Title Insurance. There is a Mortgage title insurance policy, or other title evidence acceptable to the Bank, on the Property. The title insurance policy is in a current ALTA form (or other generally acceptable form) issued by a title insurance company satisfying the standards set forth in the Guides, is in an amount equal to the maximum principal amount of the Mortgage and includes all title endorsements required by the Guides. The title insurance insures (or the other title evidence protects) the Bank or the Originator (pursuant to Section 3.6), as holding a first perfected lien against the Property.

(h) Modification or Subordination of Mortgage. The Originator has not done, and in the case of any Mortgage which the Originator purchased, no prior holder of any interest in such Mortgage has done, any of the following, except as may be necessary to reform the Mortgage documents for the purpose of correcting or conforming such Mortgage documents to accurately reflect the Mortgage transaction:

(1) materially modified or waived any provision of the Mortgage;

(2) satisfied or canceled the Mortgage in whole or in part;

(3) subordinated the Mortgage in whole or in part;

(4) released the Property in whole or in part from the Mortgage lien; or

(5) signed any release, cancellation, modification or satisfaction of the Mortgage.

The warranty set forth in this subsection (h) is not made to the extent that any of the actions or occurrences set forth above have been done and have been expressly consented to by the Bank in a writing signed and delivered by the Bank prior to the Bank’s purchase of the Mortgage.

(i) Mortgage in Good Standing. There is no default (or event or occurrence which, with notice or lapse of time or both, if uncured, would constitute a default) under the Mortgage, and all of the following that have become due and payable have been paid or an escrow of funds sufficient to pay them has been established and funded and is held by the Originator:

(1) taxes;

(2) governmental and other assessments;

(3) insurance premiums;

(4) water, sewer and municipal charges;

(5) leasehold payments; and

(6) ground rents.

(j) Advances. The Originator has not made or knowingly received from others, any direct or indirect advance of funds in connection with the loan transaction on behalf of the mortgagor except as provided in the Guides. This warranty does not cover payment of interest from the earliest of:

(1) the date of the Mortgage note; or

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(2) the date on which the Mortgage proceeds were disbursed; or

(3) the date one month before the first installment of principal and interest on the Mortgage is due, to the end of the month in which such date occurs, by the Originator out of proceeds of the Mortgage.

(k) Property Conforms to Zoning Laws. The Originator has no knowledge that any improvement to the Property is in violation of any applicable zoning law or regulation.

(l) Property Intact. The Property is not damaged by fire, wind or other cause of loss. There are no proceedings pending or, to the best of the Originator’s knowledge, threatened, for the partial or total condemnation of the Property.

(m) Improvements. Any improvements that are included in the appraised value of the Property are totally within the Property’s boundaries and building restriction lines. No improvements on adjoining Property encroach on the Property unless the Guides permit such an encroachment.

(n) Mortgage Not Usurious. The Mortgage is not usurious and either meets or is exempt from all applicable usury laws or regulations.

(o) Compliance With Applicable Laws. The Originator and, in the case of any Mortgage which the Originator purchased, the originator of the Mortgage and any holder of the Mortgage has complied with all Applicable Laws.

(p) Property is Insured.

(1) A property insurance policy on the Property is in effect. It is written by an insurance company satisfying the standards set forth in the Guides, in the form required by the Guides, and provides fire and extended coverage for an amount at least equal to the amount required by the Guides.

(2) A flood insurance policy is in effect on the Property if required by the Guides.

(3) The Originator agrees to maintain, or cause to be maintained, the required insurance as long as it services the Mortgage. Any policy mentioned in this warranty contains a standard Mortgage clause that names the Bank or Originator as Mortgagee.

(q) Mortgage is Acceptable Investment. The Originator knows of nothing involving the Mortgage, the Property, the mortgagor or the mortgagor’s credit standing that can reasonably be expected to:

(1) cause GSEs or private institutional investors to regard the Mortgage as an unacceptable investment;

(2) cause the Mortgage to become delinquent; or

(3) adversely affect the Mortgage’s value or marketability.

(r) Mortgage Insurance or Guaranty in Force. If the Mortgage is intended to be insured or guaranteed under the National Housing Act as amended, or under the Servicemen’s Readjustment Act of 1944 as amended, or by a contract with a Mortgage insurance company, the Originator represents that the Mortgage is so insured or guaranteed and that the insurance or guaranty is in full force. In addition, each of the Originator and any prior holder of any interest in the Mortgage has complied with all Applicable Laws, or the insurance contract, that cover the Mortgage.

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(s) Adjustable Mortgages. If the Mortgage provides that the interest rate or the principal balance of the Mortgage may be adjusted, all of the terms of the Mortgage may be enforced by the Bank, its successors and assigns. These adjustments will not affect the priority of the lien as a first priority perfected lien against the Property.

(t) Mortgage Assignments.

(1) The Mortgage Note has been duly endorsed by the Originator to the Bank and if the Originator shall not have originated the Mortgage, by the originator thereof and by each successive holder of such Mortgage. Each such endorsement shall be substantially in the following form: “Pay to the order of [assignee’s name], without recourse.”

(2) The Originator has executed and delivered to the Bank an Assignment of Mortgage, satisfying the requirements of the Origination Guide and if the Originator shall not have originated the Mortgage, the originator thereof and each successive holder of such Mortgage has executed and delivered to the Bank, and, except for the Originator, recorded in the appropriate real estate records, an Assignment of Mortgage substantially in the form of the aforementioned Assignment of Mortgage.

(3) Each such endorsement and assignment has been duly authorized, executed and delivered by each applicable party to each thereof and is the legal, valid and binding obligation of such party, enforceable in accordance with its terms.

(4) The Originator has delivered to the Bank the Mortgage File for such Mortgage in compliance with the Origination Guide.

(5) The original Mortgage was duly recorded in the appropriate real estate records where such recordation is necessary to perfect the lien thereof.

(u) The servicing of such Mortgage is properly held by the Originator and all notices required by Applicable Laws regarding any transfer of servicing shall have been delivered to the applicable mortgagor. The servicing of such Mortgage by the Originator or any other servicer shall have complied with the applicable Mortgage documents and all Applicable Laws.

(v) Immediately prior to giving effect to the assignment of the Mortgage to the Bank, the Originator holds all right, title and interest in and to the Mortgage, including, without limitation, all servicing rights with respect thereto, free and clear of all liens, encumbrances, participation interests, claims or other interests of any other person.

(w) The origination and collection practices used by the originator of the Mortgage, the Originator and any servicer of the Mortgage have been legal, proper, prudent and customary in origination and servicing of residential first mortgage loans.

(x) The proceeds of the Mortgage have been fully disbursed. All costs, fees and expenses incurred in making, closing or recording the Mortgage have been paid in full.

(y) There is no foreclosure proceeding pending or, to the best of the Originator’s knowledge, threatened, with respect to such Mortgage or any Property subject thereto.

(z) No transfer of such mortgage by any holder thereof, including (without limitation) the transfer by the Originator to the Bank was or is the subject of any bulk sale law or other similar law of any jurisdiction.

5.4. Notice of Breach. The PFI shall promptly give the Bank notice of any breach of any representation or warranty set forth herein or incorporated herein by reference, which notice shall be in writing and shall describe in reasonable detail the nature of such breach. The PFI shall promptly provide to the Bank such additional information regarding any such breach as the Bank shall request.

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5.5. Consequences of Untrue Warranties or Representations - Purchase; Other Remedies.

(a) The Bank may require the Originator to purchase a Mortgage if any warranty or representation made by the Originator about the Mortgage or the related Property is untrue (whether the warranty is in this Contract or any of the Guides, or was made at the Bank’s specific request).

(b) The Bank may require such purchase whether or not the Originator had actual knowledge of the breach of warranty or representation. The Bank may also enforce any other remedy available at law or in equity.

(c) To effect the resale of such Mortgage, the Bank shall withdraw an amount equal to the repurchase price from the DID account of the PFI at the Bank, and in the event that any such withdrawal from the PFI’s DID account shall cause the balance in such account to become negative, such deficit shall be deemed an advance under the Master Transactions Agreement between the PFI and the Bank. The repurchase price shall be as provided in the Guides. The repurchase price shall be adjusted to reflect any premium or discount paid to or by the Bank to or from the Originator in connection with the purchase of such Mortgage but shall not include fees paid to the Originator by the mortgagor.

5.6. Consequences of Untrue Warranties or Representations - Termination of Contract. While untrue warranties or representations about a particular Mortgage or Property may be the basis for requiring repurchase of the particular Mortgage by the Originator, there can be additional consequences. They may also give rise to responsibilities of the PFI under Section 5.7. In addition, untrue warranties or representations can, under certain circumstances, be treated as a breach of contract that could result in the withdrawal of the Bank’s approval of the PFI and the termination of this Contract as set forth in Articles X and XI.

5.7. Indemnification for Breach of Warranties or Representations; Holding the Bank Harmless. If there is a breach of warranty or representation under this Contract, the PFI agrees to indemnify, defend and hold the Bank and the other Indemnified Parties harmless from and against any related losses, damages, claims, actions, causes of action, liabilities, obligations, judgments, penalties, fines, forfeitures, costs and expenses, including, without limitation, legal fees and expenses. Such defense shall be conducted by counsel acceptable to the Bank.

VI. ELIGIBILITY REQUIREMENTS FOR SERVICERS

For the PFI to service Mortgages for the Bank, the PFI must satisfy the eligibility requirements specified in this article.

6.1. General Requirements. These are the general requirements the PFI must meet to be eligible to service Mortgages for the Bank:

(a) Meet the Bank’s Standards. The PFI must have and maintain as one of its principal business purposes, the servicing of Mortgages of the type that PFI will service under this Contract. In addition, the PFI, in the Bank’s judgment, must, at all times, have the capacity to service Mortgages for the Bank in a manner satisfying the Bank’s servicing standards and the standards generally imposed by other GSEs and private institutional Mortgage investors. Finally, the PFI must, at all times, satisfy the applicable requirements for servicers of Mortgages set forth in the Guides.

(b) Have Qualified Staff and Adequate Facilities and Systems. The PFI must, at all times, employ personnel or agents who are well trained and qualified to perform the functions required of the PFI, as Servicer, under this Contract. In addition, the PFI and any agents must maintain facilities and systems that are able to perform its functions as Servicer under this Contract.

(c) Maintain Fidelity Bonds and Errors and Omissions Coverage. The PFI must maintain, at its own expense, a fidelity bond and errors and omissions insurance, as required by the Guides.

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(d) Report Basic Changes. The PFI must notify the Bank promptly in writing of any material changes that occur in its principal purpose, activities, staffing, facilities, fidelity bond or errors and omissions insurance.

6.2. Ownership and Status of Servicer. In approving a PFI as Servicer, the Bank relies on the information the PFI has provided about the eligibility, qualifications and financial status of the PFI and its owners. The PFI covenants and agrees to comply with the provisions of the Guides regarding these matters, including, without limitation, the delivery of notices regarding these matters as required by the Servicing Guide. Changes in any such matters may affect the PFI’s eligibility to service Mortgages for the Bank.

6.3. Financial Information. In order to become and remain an approved Servicer under this Contract, the PFI must provide the financial information required by the Guides from time to time and must satisfy the standards set forth in the Guides.

6.4. Access to PFI’s Records. As set forth in the Guides, the PFI agrees to permit, and cause its agents to permit, the Bank’s employees and designated representatives to examine or audit books, records and information pertaining to the Mortgages.

VII.   SERVICING MORTGAGES

This article contains the basic rules governing the servicing of Mortgages owned by the Bank (whether originated by the Originator or any other Person) during the period that the PFI is to service such Mortgages.

7.1. Servicing Duties of the Servicer. The servicing duties of the Servicer are:

(a) Scope of Duties. The Servicer will diligently perform all duties that are necessary or incident to the servicing of all Mortgages that the Servicer is required to service by the terms of this Contract or any other existing or future agreement between the Bank and the Servicer.

(b) Mortgages to be Serviced. Any Mortgage sold by the Originator to the Bank under this Contract will be serviced by the PFI for the Bank according to the terms of this Contract, unless, with respect to any such Mortgage, the Bank gives the PFI written notification or consent that such Mortgage will not be serviced by the PFI, whether:

(1) at the time of acquisition by the Bank, as applicable, or

(2) thereafter as a result of the PFI breaching any representation, warranty, covenant or agreement in this Contract or the Guides.

(c) Service According to Guides. Any Mortgage serviced under this Contract must be serviced by the Servicer according to the provisions in the Guides that are in effect on the date of this Contract or as amended in the future. This is true regardless of when:

(1) the Mortgage was originated;

(2) the Servicer began servicing the Mortgage.

The Servicer will also follow other reasonable instructions the Bank gives it from time to time and shall strictly follow accepted industry standards when servicing a Mortgage for the Bank.

(d) Service at Servicer’s Own Expense. The cost of servicing will be the Servicer’s unless the Guides expressly provide otherwise.

(e) Special Responsibilities in Foreclosures. Among the other duties that may be assigned to the Servicer through the Bank’s special instructions or under the terms of the Guides is the responsibility to manage and appropriately dispose of Property when a Mortgage it is servicing for the Bank has been foreclosed, or possession or title has been taken by or on behalf of the Bank. The Servicer shall manage

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and dispose of the Property according to the terms of the Mortgage (during the foreclosure process) and the Guides (both during the foreclosure process, or the acceptance of a deed in lieu of foreclosure or other remedy, and after title to the Property has been acquired by, or on behalf of, the Bank).

(f) Service Until Need Ends. The Servicer shall service each Mortgage continuously from the date its servicing duties begin until the earliest of:

(1) the Mortgage’s principal and interest have been paid in full and the Mortgage shall have been canceled and a release shall have been issued to the mortgagor;

(2) the Mortgage has been liquidated and the Mortgaged Property properly disposed of (if the Servicer is required to do these things); or

(3) the Servicer’s servicing duties are terminated in accordance with this Contract.

7.2. Compensation.

(a) The Servicer’s compensation for servicing Mortgages, including, without limitation, the management and disposal of foreclosure properties, under this Contract is specified in the Guides.

(b) The MPF Provider may change the Servicer’s compensation by modifying the Guides at any time. However, such a change shall not affect Mortgages that have been originated or are the subject of a Delivery Commitment issued before the date of the change.

7.3. Ownership of Records.

(a) General. All books, records and information (including, without limitation, any item in electronic form) (collectively, the “Mortgage Records”) reasonably required to document or properly service any Mortgage owned by the Bank are the Bank’s property at all times. This is true whether or not the Servicer developed or originated them.

The Mortgage Records shall include, but are not limited to:

(1) all Mortgage documents;

(2) tax receipts;

(3) insurance policies;

(4) insurance premium receipts;

(5) ledger sheets or their electronic equivalent;

(6) payment records;

(7) insurance claim files and correspondence;

(8) foreclosure files and correspondence;

(9) current and historical data files; and

(10) all other papers, records, memoranda and electronic data.

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(b) Servicer as Custodian. The Mortgage Records belong to the Bank. The Servicer shall have possession of the Mortgage Records only with the Bank’s approval. The Servicer hereby acknowledges that it is acting as the Bank’s custodian in connection with any Mortgage Records in its possession. This is true whether the Servicer receives the Mortgage Records from an outside source or prepares them itself.

(c) Delivery.

(1) The Servicer shall deliver to the Bank or its designee such original Mortgage Records as the Guides shall require. In addition, when the Bank asks for any Mortgage Records in writing, the Servicer shall deliver them to the Bank or its designee. The Servicer shall also provide such Mortgage servicing information as required by the Guides.

(2) If the Bank asks the Servicer in writing for reproductions of any Mortgage Records the Servicer or any predecessor servicer or holder of any Mortgage microfilmed, condensed or stored in electronic form, the Servicer will reproduce them in fully readable form promptly at no cost to the Bank or its designee.

7.4. Agreement to Indemnify, Defend and Hold Harmless.

(a) The PFI agrees to indemnify, defend and hold the Bank and the other Indemnified Parties harmless from and against all losses, damages, claims, actions, causes of action, liabilities, obligations, judgments, penalties, fines, forfeitures, costs and expenses, including, without limitation, legal fees and expenses, that result from (i) its failure or purported failure in any way to perform its services and duties in connection with servicing Mortgages or managing or disposing of Property according to this Contract or the Guides, or (ii) the actual or purported willful misfeasance, bad faith or negligence of the PFI in the performance of its obligations or duties under this Contract or the Guides, or the reckless disregard of such obligations or duties. Such defense shall be conducted by counsel acceptable to the Bank.

(b) If any Person, including, without limitation, any governmental agency, department or official, sues the Bank or any other Indemnified Party, makes a claim against the Bank or any other Indemnified Party or starts a proceeding against the Bank or any other Indemnified Party based on the PFI’s acts or omissions, or purported acts or omissions, in servicing Mortgages or managing or disposing of Property, the PFI’s obligation to indemnify, defend and hold harmless the Bank or any other Indemnified Parties shall be met regardless of whether the suit, claim or proceeding has merit or not.

(c) The PFI’s obligation does not apply, however, to the extent that during a suit, claim or proceeding, the Bank gives the PFI express written instructions and solely as a result of the PFI following them an Indemnified Party suffers losses, damages, judgments or legal expenses.

7.5. PFI’s Role as Mortgage Servicer. The Servicer shall be an independent contractor and shall not be an agent for the Bank except as may be expressly provided for in the Guides, and shall not hold itself out as an agent of the Bank.

VIII.   ASSIGNMENT, CONSIDERATION AND CONTINUANCE

This article describes the Bank’s requirements covering assignment of, consideration for, and continuance of, this Contract.

8.1. Assignment. Because the relationships created by this Contract are personal, the PFI may not, without the Bank’s prior written approval, assign:

(a) this Contract under any circumstances, either voluntarily or involuntarily, by operation of law, or otherwise; or

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(b) its responsibility regarding the origination of Mortgages under this Contract or its responsibility for servicing individual Mortgages owned by the Bank; or

(c) its Credit Enhancement obligations arising under Article IV of this Contract, nor may the PFI enter into or acquire any agreement to indemnify, offset, hedge or share its credit enhancement obligations, including, without limitation, such agreements as mortgage pool insurance, reinsurance or securitizations in any form.

In any such cases, the Originator shall remain primarily responsible for (and shall not be released from) the performance of all of its obligations hereunder and shall be liable for the acts and omissions of such other persons. In addition, the Originator shall be solely responsible for any payments due all such other persons for their services, and shall indemnify, defend and hold harmless the Bank and the other Indemnified Parties from and against all losses, damages, claims, actions, causes of action, liabilities, obligations, judgments and expenses (including, without limitation, legal fees and expenses) relating to such services or such persons.

8.2. Limited Value of Contract to PFI.

(a) The PFI acknowledges that it has paid the Bank no monetary consideration for making it an approved Mortgage Originator or Servicer.

(b) The PFI also agrees that, except for the sale of Mortgages, the servicing of Mortgages, or any fee for the termination of this Contract, this Contract has no value to the PFI.

8.3. Requirements for Continuance. The PFI’s right to continue selling and servicing Mortgages under this Contract depends on, among other things, its continuing to meet the eligibility requirements set forth in Articles II and VI of this Contract.

IX. ASSIGNING MORTGAGE SERVICING

The PFI may not assign its responsibility for servicing all or any part of the Mortgages that it is servicing for the Bank without first obtaining the Bank’s written consent, which consent may be granted or withheld by the Bank in its sole discretion and may be subject to conditions specified in the Guides.

X. BREACHES OF CONTRACT

The PFI’s taking certain actions, or failing to take certain actions, can be treated by the Bank as a breach of contract. A breach of contract can lead to a termination of the Contract by the Bank at the Bank’s option. Termination is provided for in detail in Article XI. In addition, upon the PFI’s breach of this Contract, the Bank, at its option, may revoke the Bank’s approval of the PFI as a Mortgage seller or servicer.

10.1 Specific Breaches of Contract. The following constitute breaches of this Contract:

(a) Harm, Damage, Loss or Untrue Warranties. It is a breach if any act or omission of the PFI in connection with the sale of any Mortgage causes the Bank any harm, damage or loss. It is also a breach if the PFI breaches any of the warranties set forth in Section 5.2 or sells any Mortgage to the Bank which breaches any of the warranties described in Section 5.3.

(b) Failure to Comply with this Contract or the Guides. It is a breach if the PFI does not comply with this Contract or the Guides through any act or omission.

(c) Failure to Properly Foreclose or Liquidate. Where a Mortgage is in default and the PFI is required or has decided to foreclose or liquidate it, it is a breach if the PFI fails to take prompt and diligent action consistent with Applicable Laws to foreclose on or otherwise appropriately liquidate such Mortgage and to perform all incidental actions. It is a breach whether or not the failure results from the acts or omissions of an attorney, trustee or other person or entity the PFI chooses to effect foreclosure or liquidation.

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(d) Failure to Properly Manage, Dispose of, or Effect Proper Conveyance of Title. It is a breach if any Mortgage serviced under this Contract has been foreclosed or the possession or title to the Property has been taken by or on behalf of the Bank and the PFI fails to properly manage, dispose of or effect proper conveyance of title to the Mortgaged Property in accordance with this Contract, the Guides, any Applicable Laws or any applicable Mortgage insurance policies or contracts.

(e) PFI’s Financial Ability Impaired. It is a breach if there is a change in the PFI’s financial status that, in the Bank’s opinion, materially and adversely affects the PFI’s ability to satisfactorily sell or service Mortgages. Changes of this type include without limitation:

(1) the PFI’s insolvency;

(2) adjudication of the PFI as a bankrupt;

(3) appointment of a receiver or conservator for the PFI; or

(4) the PFI’s execution of a general assignment for the benefit of its creditors.

If any such change does take place:

(x) no interest in this Contract will be considered an asset or liability of the PFI or of its successors or assigns; and

(y) no interest in this Contract will pass by operation of law without the Bank’s consent.

(f) Failure to Obtain the Bank’s Prior Written Consent. It is a breach if the PFI fails to obtain the Bank’s prior written consent for:

(1) a sale or transfer (directly or indirectly) of the majority interest in the PFI; or

(2) a change in its corporate status, charter or structure.

(g) Failure to Comply with Eligibility Standards. It is a breach if the PFI fails at any time to meet the Bank’s standards for eligible Mortgage sellers or servicers so that, in the Bank’s opinion, the PFI’s ability to comply with this Contract or the Guides is adversely affected.

(h) Court Findings against PFI or Principal Officers. It is a breach if:

(1) a court of competent jurisdiction finds that the PFI or any of its principal officers has committed an act of civil fraud; or

(2) the PFI or any of its principal officers is convicted of any criminal act related to the PFI’s lending or Mortgage origination, selling or servicing activities or that, in the Bank’s opinion, adversely affects the PFI’s reputation or the Bank’s reputation or interests.

(i) Cross-Defaults. It is a breach if any default occurs under any other agreement between (1) the PFI or any affiliate of the PFI and (2) the Bank or any other Federal Home Loan Bank.

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10.2. The Bank’s Rights upon Breach.

(a) If there is a breach of this Contract by the PFI, the Bank will have the following rights:

(1) the right (but not the obligation) to take, or permit the PFI to take, any reasonable action to have any breach corrected or cured by the PFI;

(2) the right to terminate this Contract in whole or in part;

(3) the right to revoke the Bank’s approval of the PFI as an approved originator or servicer; and

(4) any other rights under this Contract or the Guides or available at law or in equity, including, without limitation, the Bank’s rights to indemnification provided for in this Contract and the Guides.

provided, however, that the Bank shall have no obligation to take, or to permit the PFI to take, any action to correct or cure the applicable breach.

(b) Any forbearance by the Bank in exercising any of its rights will not be a waiver of any present or future right the Bank has under this Contract to so terminate it or to revoke the Bank’s approval of the PFI as an approved originator or servicer.

XI. TERMINATION OF CONTRACT

The reasons why this Contract may be terminated and the ways in which this may be done are outlined in this article. When the Contract is terminated, the entire relationship between the PFI and the Bank ends (with certain exceptions that are explained in this article).

11.1. Termination by Either Party of Mortgage Origination Arrangements. The provisions of this Contract covering the sale of Mortgages to the Bank under this Contract may be terminated by the PFI or by the Bank, with or without cause, by giving notice to the other party. Notice of termination may be given at any time but must conform to Article XIII of this Contract. Termination is effective immediately upon notice of termination, unless the notice specifies later termination. Termination will not affect any outstanding written Delivery Commitments for which the Bank has issued its written acceptance. However, if the PFI has breached this Contract, the Bank may declare any or all outstanding Delivery Commitments and its acceptance thereof void. If the PFI or the Bank terminates this Contract in whole or in part, the Bank will not pay the PFI a termination fee.

11.2. Termination by PFI of Mortgage Servicing Arrangements. The PFI may terminate the provisions of this Contract covering the servicing of Mortgages owned by the Bank by giving the Bank notice at any time. Notice must conform to Article XIII of this Contract. Termination is effective the last day of the third calendar month after the calendar month in which notice is given. If the PFI terminates this Contract in whole or in part, the Bank will not pay the PFI a termination fee.

11.3. Termination by the Bank of Servicing Arrangements. The Bank may terminate the provisions of this Contract covering the servicing under this Contract of any or all Mortgages. This may be done by following the procedures outlined below.

(a) Termination Without Cause. The Bank may terminate servicing in its sole discretion, by giving the PFI notice of the termination and directing the PFI to transfer the servicing to a party designated by the Bank in exchange for a termination fee. The termination fee for such transfer of servicing shall be equal to the fair market value of such transfer of servicing, which shall be mutually agreed upon by the PFI, the Bank and the designated buyer.

(b) Termination With Cause. The Bank may terminate servicing if the PFI breaches any agreement in this Contract or the Guides, including, without limitation, any of those breaches listed in Section 10.1. This may be done by giving the PFI notice of termination. Notwithstanding anything in this Contract to the contrary, if the Bank terminates for breach, the Bank may make it effective immediately, and the Bank will not pay the PFI a termination fee or proceeds from any sale of the servicing involved. Furthermore, the Bank will not pay a termination fee if a Mortgage is purchased by the PFI under Article V.

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The provisions applicable to any such termination with or without cause, including, without limitation, the procedures for effecting any such termination and the transfer of servicing, are set forth in the Servicing Guide.

11.4. Credit Enhancement Obligations Not Terminated. The credit enhancement obligations of the PFI under Article IV are not subject to termination and shall survive termination of this Contract. Such obligations shall remain in full force and effect until the last of the Mortgages funded, purchased or serviced under this Contract is repaid or otherwise disposed of, unless such obligations are earlier modified, waived or released by the Bank in writing.

11.5. Rights of Termination Not Impaired. The exercise of a right of termination under any provision of this Contract will not impair any further right of termination under another provision.

XII.   CONTINUANCE OF RESPONSIBILITIES OR LIABILITIES

Responsibilities or liabilities of the PFI that exist before the termination of this Contract will continue to exist after termination unless the Bank expressly releases the PFI from any of them in writing. This is true whether the Contract was terminated by the PFI or by the Bank.

XIII.   NOTICE

13.1. General. Whenever notice is required under this Contract or by Applicable Law, it must be given as described in this article. All demands, notices and communications under this Contract shall be in writing (except as expressly provided in Section 13.2 below) and shall be delivered in person or sent by certified United States mail, postage prepaid, return receipt requested or sent by facsimile transmission or 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.

13.2. The Guides and Other Documents. Copies of the Guides, including, without limitation, any amendments or supplements, or any changes or pronouncements with respect thereto, may be provided to the PFI from time to time by the Bank, at its option, either (a) by regular mail or other means, or (b) electronically to the PFI.

13.3. Addresses. For purposes of this Article XIII, the addresses and facsimile numbers for the Bank and the PFI (and the electronic transmission information for the PFI) are as set forth in the Addendum attached hereto. Any change must be given in writing in accordance with the provisions of Section 13.1, but shall be effective only upon actual receipt.

13.4 Telephonic and Electronic Communications. In addition to the provisions set forth in the Guides, the PFI hereby authorizes the Bank, from time to time without notice to the PFI, to record telephonic and other electronic communications of the PFI with the Bank.

XIV.   PRIOR AGREEMENTS

This Contract supersedes any prior agreements between the PFI and the Bank that govern selling or servicing of Mortgages to which this Contract relates. However, this article will not release the PFI or the Bank from any responsibility or liability under any prior agreements and understandings.

XV.   SEVERABILITY AND ENFORCEMENT

15.1. Severability. If any provision of this Contract conflicts with Applicable Law, the other provisions of this Contract that can be carried out without the conflicting provision will not be affected.

15.2. Rights and Remedies Cumulative. All rights and remedies under this Contract are distinct and cumulative not only as to each other but as to any rights or remedies afforded by law or equity. They may be

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exercised together, separately or successively. Subject to Section 19.6., these rights and remedies are for the benefit of the parties and their respective successors and assigns.

XVI.   CAPTIONS

This Contract’s captions and headings are for convenience only and are not part of the Contract.

XVII.   SCOPE OF CONTRACT

The following provision applies, whether or not it is contrary to other provisions in this Contract. The Bank reserves the right to restrict the PFI’s selling or servicing of Mortgages for the Bank to the type that the PFI and its employees have the experience and ability to originate or service.

XVIII.   OTHER PARTIES

18.1. Participants. The PFI acknowledges that the Bank may and intends to enter into one or more participation agreements with other Persons (the “Participants”) to convey participation interests in some or all of the Mortgages acquired or serviced under this Contract. Nothing in this Contract shall prohibit such participation agreements. The PFI authorizes the Bank to disclose to potential Participants the information used to approve the PFI as Originator, credit enhancer and Servicer and to maintain those qualifications so long as such potential Participants have agreed in writing to maintain the confidentiality of such information.

18.2. Master Servicer; Custodian; Underwriter; Subservicer; etc. The PFI acknowledges and agrees that from time to time the Bank may enter into agreements with other persons regarding the Mortgages. Such agreements may include master servicing agreements, custodial agreements, underwriting agreements, subservicing agreements and other agreements for the benefit of the Bank, the Participants and their respective successors and assigns. No such other party shall owe any obligation to the PFI. To the extent the Bank assigns or delegates any of its rights or obligations to any such other party from time to time and so notifies the PFI thereof in writing, the PFI shall be bound by such assignment or delegation. In such event, the PFI agrees that it shall not be the agent of any such other party.

XIX.   MISCELLANEOUS PROVISIONS

19.1. Amendment. All amendments to this Contract shall be in writing duly executed and delivered by the PFI and the Bank, except as expressly provided in the Guides; provided, however, that the Bank may extend the period applicable to any Master Commitment without the written approval of the PFI.

19.2. REMIC, FASIT or Other Securitization or Sale Transaction. The PFI hereby acknowledges and agrees that the Bank may hereafter transfer some or all of the Mortgages to purchasers of whole loans or into a trust or other entity, which trust or other entity may elect REMIC or FASIT status. In the case of any such transfer (whether or not such entity elects REMIC or FASIT status), (a) the Bank may assign to the transferee the Bank’s rights under this Contract in respect of the Mortgages so transferred and upon such assignment, the transferee shall be entitled to all rights of the Bank under this Contract in respect of such Mortgages, except to the extent provided otherwise in the transfer agreement between the Bank and such transferee, (b) the PFI will comply with all applicable REMIC or FASIT legal and regulatory requirements in connection with the performance of its obligations and the exercise of its rights hereunder, and (c) upon the request of the Bank, the PFI shall provide all information reasonably required and otherwise cooperate with the Bank, any applicable rating agencies and any prospective transferees or investors in connection with any such securitization or sale of any or all of the Mortgages and shall enter into such amendments to this Contract as the Bank shall reasonably request to effectuate the provisions of this Section 19.2.

19.3. Governing Law. The parties acknowledge that the MORTGAGE PARTNERSHIP FINANCE Program is or will be offered to participating financial institutions in numerous states, that the MPF Provider will be

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providing services to the Bank, the PFI and all participating financial institutions wherever located, and that this Contract will be performed in part in the State of Illinois because of the services to be provided by the MPF Provider to, or on behalf of, the Bank. THEREFORE THE PARTIES AGREE THAT THIS CONTRACT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE SUBSTANTIVE LAWS (AND NOT THE CONFLICTS LAW) OF THE STATE OF ILLINOIS APPLICABLE TO AGREEMENTS TO BE PERFORMED IN THE STATE OF ILLINOIS. Any action or proceeding to enforce or interpret this Contract shall be brought in the state or federal court for the county and state where the Bank is located, and if any basis for federal jurisdiction exists in such action or proceeding, it must be brought in the federal court for such state and county.

19.4. Intention of the Parties. It is the intention of the parties hereto that this Contract does not create a joint venture or partnership between the PFI and the Bank, but rather this Contract constitutes a contractual arrangement between the parties. The Bank shall not be obligated to purchase any particular Mortgage unless and until it formally commits in writing to do so.

19.5 Confidentiality of Proprietary Information. The PFI agrees to maintain the confidentiality of any information provided by the Bank or the MPF Provider which is labeled “confidential” or “proprietary information” or otherwise transmitted as confidential information and not disclose such information except to employees who have a need to know its contents and to third party agents who have a need to know and have signed confidentiality agreements protecting the Bank. It is understood that such information will not be considered confidential if (a) it is or becomes publicly available through no breach of the PFI’s obligations under this Contract, (b) it is provided by the Bank to any third Person without restriction on disclosure, (c) it is provided to the PFI by a third Person who properly has such information, without restriction on disclosure and without breach by such third Person of any nondisclosure obligation it may have, or (d) it is independently developed by the PFI without use of the Bank’s information. If the PFI is served with process or any other governmental or regulatory request for such confidential information, the PFI shall immediately notify the Bank’s General Counsel, or if the Bank has no General Counsel, the Bank’s President, prior to complying with such process or request, except where such prior notice is prohibited by law.

19.6. Successors and Assigns. This Contract will inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns; provided, however, that the foregoing provision shall not be deemed to permit the assignment by the PFI of any of its rights or obligations hereunder in violation of this Contract.

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19.7. Conflict with Guides. In the event of any conflict between the provisions of this Contract and the provisions of the Guides, the latter shall prevail unless this Contract expressly provides otherwise.

XX.   SIGNATURES

By executing this Contract, the PFI and the Bank agree to all of this Contract’s terms and provisions. Both the PFI and the Bank have executed and delivered and dated this Contract below.

This Contract takes effect on the date this Contract has been executed and delivered by both the PFI and the Bank.

THE PFI:
By:
Name:
Title:
THE BANK:
FEDERAL HOME LOAN BANK OF CHICAGO
By:
Name:
Title:
By:
Name:	Timothy J. Maloney
Title:	Vice President

Customer No.                    

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ADDENDUM

Address and Other Contact Information

The Bank:

Address:

The Federal Home Loan Bank of Chicago

111 East Wacker Drive

Suite 800

Chicago, Illinois 60601

Attention: MORTGAGE PARTNERSHIP FINANCE ^® Group

Facsimile No.: (312) 565-5855

Electronic Transmission:

Kgould@fhlbc.com

The PFI:

Address:

La Salle Bank National Association

c/o ABN AMRO Mortgage Group Inc.

777 East Eisenhower Parkway, suite 700

Ann Arbor, Michigan 48108

Attention of: Karen Jackson, Counsel

Facsimile Number for Notices: 734-997-2866

Electronic Transmission:

Karen.Jackson@abnamro.com

[List authorized persons, their respective roles, their addresses, e-mail addresses, telephone numbers and facsimile numbers.]

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EX-10.5

EXHIBIT 10.5

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 quotes. The three participants to be contacted shall be agreed upon by both the MPF Provider and the Pittsburgh Bank.

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“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.

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“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 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.

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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

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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

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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,

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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.

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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 to update 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.

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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.

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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;

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(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

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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 that indicated the Master Servicer was not in compliance with the provisions of the Master Servicing Agreement;

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(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

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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

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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 Pittsburgh Bank and will report these amounts to the Pittsburgh Bank. The Pittsburgh Bank shall be responsible for collecting Pairoff Fees from its PFIs.

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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”).

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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:

(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.

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(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

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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 &

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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.

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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 period following notice, if the default is not capable of being cured within sixty (60) days following notice.

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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

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(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

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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

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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.

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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 the subsequent modifications to the FHLB Guide which may be made by the MPF Provider after consultation with all the MPF Banks.

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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 Bank and MPF Provider waive all claims of lack of effectiveness or error by reason of any such service.

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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.

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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

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EX-10.5.1

EXHIBIT 10.5.1

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

EX-10.5.2

EXHIBIT 10.5.2

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:	KENNETH L. GOULD	Name:	CRAIG C. HOWIE
Title:	EXECUTIVE VICE PRESIDENT	Title:	SENIOR VICE PRESIDENT

2

EX-10.5.3

EXHIBIT 10.5.3

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 BANKOF 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

EX-10.5.4

EXHIBIT 10.5.4

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.

EX-10.5.5

EXHIBIT 10.5.5

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 Batz
Name: Title:	Thomas D. Sheehan Senior Vice President	Name:
		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

EX-10.5.6

EXHIBIT 10.5.6

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

EX-10.5.7

EXHIBIT 10.5.7

Federal Home Loan Bank

of Pittsburgh

VIA FACSIMILE AND FEDERAL EXPRESS

May 27, 2004

Ms. Sybil C. Malinowski

Vice President & Associate General Counsel

Federal Home Loan Bank of Chicago

111 East Wacker Drive

Chicago, IL 60601

RE: Mortgage Partnership Finance^® Program

Enclosed is one original of the 7^th Amendment to the Pittsburgh Bank’s Services Agreement which has been executed by the Pittsburgh Bank.

Thanks for your assistance in this matter.

Sincerely yours,

/s/ Michele H. Weatherly

Michele H. Weatherly

Vice President and Assistant General Counsel

Enclosure

cc: Renee Pfender

63219

601 Grant Street • Pittsburgh, PA 15219-4455 • 412/288-3400

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-10.5.8

EXHIBIT 10.5.8

PRO RATA MPF^® PARTICIPATION AGREEMENT

This Pro Rata MPF Participation Agreement (the “Agreement”) is entered into as of the 30th day of April, 1999 between the FEDERAL HOME LOAN BANK OF PITTSBURGH, (“MPF Bank”), a corporation of the United States of America, and the FEDERAL HOME LOAN BANK OF CHICAGO (the “MPF Provider”), a corporation of the United States of America.

RECITALS

WHEREAS, the MPF Bank has entered into a separate agreement with the MPF Provider (the “Services Agreement”) pursuant to which the MPF Bank has agreed to make the MORTGAGE PARTNERSHIP FINANCE^® Program available to its members and the MPF Provider has agreed to provide certain services in connection with the MPF Bank’s participation in the MPF Program.

WHEREAS, the MPF Bank proposes to enter into Participating Financial Institution Agreements (“PFI Agreements”) with its member financial institutions (each a “PFI”), whereby the PFI, pursuant to Master Commitments entered into between the PFI and the MPF Bank from time to time (each a “Master Commitment”), will do one or more of the following from time to time:

(i) underwrite and originate, as agent for the MPF Bank, residential mortgage loans which will be funded and owned by the MPF Bank (such loans being “Agency Loans”); or

(ii) sell to the MPF Bank residential mortgage loans originated or purchased by the PFI which the MPF Bank will purchase and own (such loans being “Closed Loans”),

(each such residential mortgage loan is herein called a “Loan” and are collectively called “Loans”);

WHEREAS, under the terms of the Services Agreement, the MPF Bank has certain rights and opportunities to sell to the MPF Provider, and the MPF Provider in certain cases is obligated, or otherwise may agree, to purchase certain participation interests in Designated Loans (hereinafter defined), such participation interests being transferred pursuant to that certain Liquidity Option MPF Participation Agreement amongst the parties hereto and of even date herewith (the “LOP Agreement); and

WHEREAS, under the terms of the Services Agreement, the MPF Bank has certain rights and opportunities to sell to MPF Provider, and MPF Provider in certain cases is obligated, or otherwise may agree, to purchase certain pro rata participation interests in the Loans funded or purchased under one or more Master Commitments, in each case such participations shall be at the Master Commitment level and not at the Delivery Commitment or Loan level.

NOW, THEREFORE, in consideration of the premises, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

ARTICLE I

CERTAIN DEFINITIONS

As used herein, the following terms shall have the following respective meanings:

“Borrower” shall mean the obligor or obligors under any Loan.

“Business Day” shall mean any day that the MPF Provider is open for business.

“Designated Delivery Commitment” shall have the meaning set forth in the Services Agreement and as more particularly described in the LOP Agreement.

“Designated Loan(s)” shall mean, for any Master Commitment, the Loan or Loans funded under each Designated Delivery Commitment.

“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.

“Loan Documents” for any Loan shall mean the Note, the mortgage or other security documents executed and delivered by the applicable Borrower and all other documents evidencing or securing such Loan, as the same may be amended, supplemented, modified or restated from time to time.

“Majority Investor” shall mean, for any Master Commitment subject to this Agreement and for which there are no Designated Loans, either the MPF Provider if the MPF Provider’s Share in such Master Commitment is greater than fifty percent (50%), or the MPF Bank if the MPF Provider’s Share in the Master Commitment is fifty percent (50%) or less, at the time the Participation Certificate is issued. In the event a Master Commitment has Designated Loans, then “Majority Investor” shall mean, with respect to such Master Commitment, either the MPF Provider if the MPF Provider’s Share in such Master Commitment together with the aggregate balance of the Designated Loans is greater than fifty percent (50%) of the aggregate balance of the Loans subject to the Master Commitment, or the MPF Bank if the MPF Provider’s Share in the Master Commitment together with the aggregate balance of the Designated Loans is fifty percent (50%) or less of the aggregate balance of the Loans subject to the Master Commitment, at the tune the Participation Certificate is issued.

“Minority Investor” shall mean, for any Master Commitment, either the MPF Provider if the MPF Bank is the Majority Investor, or the MPF Bank if the MPF Provider is the Majority Investor, at the time the Participation Certificate is issued.

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“MPF Provider’s Share” shall mean a percentage equal to the percentage undivided interest of the MPF Provider in each Loan for each Master Commitment that becomes subject to this Agreement. In the event a Master Commitment has Designated Loans, such percentage undivided interest shall be determined after excluding any Designated Loans.

“MPF Provider’s Pro Rata Spread Account” shall mean, for any Master Commitment not having Designated Loans, a memo account in the amount of the MPF Provider’s Share of that Master Commitment multiplied by the total amount allocable to the Spread Account for such Master Commitment, and for any Master Commitment having Designated Loans, a memo account in the amount of the MPF Provider’s Share of that Master Commitment multiplied by the total amount allocable to the Spread Account for such Master Commitment after deducting the amount allocable to the Designated Loans.

“MPF Provider’s LOP Spread Account” shall mean, for any Master Commitment having one or more Designated Delivery Commitments, a memo account in the amount of the Spread Account for such Master Commitment allocable to the Designated Loans.

“Note” for any Loan shall mean the promissory note from the Borrower payable to the order of (i) the PFI or the MPF Bank (in the case of Loans Originated for MPF Bank) or (ii) the PFI and duly endorsed by the PFI to the MPF Bank (in the case of Loans which the PFI has originated and have been Purchased by MPF Bank) or (iii) the originator of such Loan and duly endorsed by such originator and by all intervening holders of such Loan, if any, and duly endorsed by the PFI to the MPF Bank for Loans which PFI has purchased (in the case of Loans which the PFI did not originate and which have been Purchased by MPF Bank), in each case evidencing such Loan.

“Participation Interest” shall mean the undivided interest of the MPF Provider in each Loan in a Master Commitment, the size of such undivided interest being the percent stated in the related Participation Certificate for such Master Commitment, provided however, that for any Master Commitment having Designated Loans, the undivided percent interest will be determined after excluding the Designated Loans, and in either case, subject to the provisions of Article III of this Agreement, and in either case, subject to Realized Losses arising from all Loans in the Master Commitment being paid from or charged against the following sources, in the following order:

(i) if arising from Designated Loans, first against the MPF Provider’s LOP Spread Account and then, and first for all other Loans, against the MPF Provider’s Pro Rata Spread Account and the MPF Bank’s Spread Account on a pro rata basis until both are exhausted;

(ii) next from the Credit Enhancement obligation of the PFI; and

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(iii) lastly, any Residual Realized Losses shall be shared by the parties on the following basis:

For Designated Loans, the MPF Provider shall pay or absorb an amount equal to the Residual Realized Losses as provided in the LOP Agreement, then the balance of the Realized Residual Losses shall be shared by the MPF Provider and MPF Bank on a pro rata basis. For all other Loans, the MPF Bank and MPF Provider shall share the Realized Residual Losses on a pro rata basis.

“Participation Certificate” shall mean the notices or reports given by the MPF Provider to the MPF Bank for each Master Commitment, evidencing the MPF Provider’s Participation Interest in the Master Commitment which has been transferred to the MPF Provider pursuant to this Agreement, which when the Master Commitment closes or expires, the MPF Bank shall acknowledge in the form of the Certificate attached hereto as Exhibit A.

“Program” shall mean the MORTGAGE PARTNERSHIP FINANCE Program of the MPF Provider, which is governed by the Guides (as defined in the Services Agreement and PFI Agreement), the PFI Agreements and the Master Commitments.

“Pro rata basis” when used to describe how Realized Losses will be allocated to the MPF Provider’s Pro Rata Spread Account and the MPF Bank’s Spread Account or how other items will be allocated between the parties, shall mean sharing such losses based on the ratio of each party’s interest in a Master Commitment but excluding any Designated Loans from such calculation.

“Residual Realized Losses” means, with respect to any Master Commitment, Realized Losses as that term is defined in the Guides in excess of the sum of the MPF Bank’s Spread Account, the MPF Provider’s Pro Rata Spread Account and the Credit Enhancement obligation of the PFI, plus for a Master Commitment having Designated Loans, the MPF Provider’s LOP Spread Account.

Other terms used herein shall be defined as set forth in this Agreement. Any term used herein which is not so defined shall have the meaning ascribed to such term in the Services Agreement, which includes the FHLB Guide, or in the Guides.

ARTICLE II

SUBSCRIPTION PROVISIONS

2.1. MPF PROVIDER’S REPRESENTATIONS. The MPF Provider enters into this Agreement upon the following representations and warranties, which shall inure to the benefit of the MPF Bank and survive the acceptance of the subscription being made hereby:

2.1.1. Investment. The MPF Provider, by the execution of this Agreement, represents and warrants that (i) the Participation Certificates to be acquired pursuant to this Agreement will be acquired solely for its own account, for investment and not with a view to the resale or distribution of any thereof; and (ii) the purchase of its Participation Interest is a legal investment for the MPF Provider under applicable laws. The MPF Provider understands that the Participation Certificates have not been registered under the

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Securities Act of 1933, as amended (the “1933 Act”), or any state securities or blue sky laws, and represents and warrants that if any of the Participation Certificates shall be later disposed of or encumbered in any manner, which such the MPF Provider does not now contemplate, such disposition or encumbrance shall be accomplished in a manner which does not violate, or create a potential violation of, the registration provisions of the 1933 Act and the rules and regulations thereunder, or any applicable state securities or blue sky laws.

2.1.2. MPF Provider Experience. The MPF Provider has such knowledge and experience in financial and business matters that the MPF Provider is capable of evaluating the merits and risks of investment in the Program and of making an informed investment decision. The MPF Provider understands that there are substantial risks incident to the investment in the Participation Certificates. The MPF Provider has carefully reviewed and understands the risks of, and the financial and non-financial considerations relating to, the investment in the Participation Certificates.

2.1.3. MPF Provider’s Risk of Loss. The MPF Provider assumes all risk of loss in connection with its interest in each Loan, each PFI Agreement and each Master Commitment, as if it had lent the Loan directly to the Borrower or entered into each PFI Agreement and each Master Commitment directly with each applicable PFI, respectively, subject, however, to the allocation of Realized Losses in accordance with the terms of this Agreement.

2.1.4. No Public Market. The MPF Provider understands that there is no public or established market for the Participation Certificates. The MPF Provider has adequate means in providing for its current needs and possible future contingencies, and has no need, and anticipates no need in the foreseeable future, to sell its Participation Certificates. The MPF Provider is able to bear the economic risks of this investment and, consequently, without limiting the generality of the foregoing, it is able to hold the Participation Certificates for an indefinite period of time and has sufficient net worth to sustain a loss of its entire investment in the Participation Certificates in the event such loss should occur.

2.1.5. MPF Provider a U.S. Person. The MPF Provider hereby certifies under penalties of perjury that the MPF Provider is not a nonresident alien for purposes of U.S. income taxation, that the MPF Provider’s tax identification number is 36-6001019 and that the MPF Provider is not subject to backup withholding.

2.2. COVENANTS.

2.2.1. Funding of MPF Provider’s Participation Interest. The MPF Provider will fund the MPF Bank’s Clearing Account established pursuant to the Services Agreement

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sufficiently from time to time to cover funding of the MPF Provider’s Share of the Loans funded or purchased under the MPF Bank’s Delivery Commitments. The MPF Bank may withdraw funds from such account from time to time to fund the origination of Loans subject to the terms of this Agreement.

2.2.2. Allocation to Spread Accounts. From time to time, as the MPF Bank makes allocations to the Spread Account under each Master Commitment, such allocation shall be split on a pro rata basis between the MPF Provider’s Pro Rata Spread Account and the MPF Bank’s Spread Account provided, however, that for any Master Commitment having Designated Loans, the amount of the Spread Account attributable to the Designated Loans shall be allocated to the MPF Provider’s LOP Spread Account.

2.2.3. Delivery of Participation Certificates. From time to time as each Master Commitment closes or expires, the MPF Bank shall acknowledge the prior notices and reports by delivering a final Participation Certificate to the MPF Provider.

2.2.4. Participation Provisions and Priorities. The Participation Interest shall be subject to the provisions of Article III of this Agreement. The MPF Bank and the MPF Provider agree that except for interests in Designated Loans, all other participation interests granted to any of the parties to this Agreement, pursuant to any other participation agreement shall be subject and subordinate to Participation Interests and MPF Provider’s Shares granted under this Agreement. It is understood and agreed that all percentage or pro rata participations granted pursuant to this Agreement or any other participation agreement among any of the parties to this Agreement shall be determined after subtracting Designated Loans from each Master Commitment for the purpose of calculating the percentage or pro rata participations in each Master Commitment.

2.3. MPF PROVIDER’S INDEMNIFICATION OBLIGATION. The MPF Provider agrees to indemnify, defend and hold harmless the MPF 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 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 MPF Provider in this Agreement, any breach by the MPF Provider of its warranties and/or any failure by the MPF Provider to fulfill any covenants or agreements set forth in this Agreement. All representations, warranties and covenants and the indemnification contained in this Agreement shall survive the acceptance of this subscription and the receipt of the Participation Certificates and the termination or expiration of this Agreement. The MPF Provider’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 Program, including Texas Savings & Community Bankers Assoc., et al. v. Federal Housing Finance Board, Case No. A 97 CA 421SS (W. Dist. Texas).

2.4. MPF BANK’S REPRESENTATIONS. The MPF Bank enters into this Agreement and makes the following representations, which shall inure to the benefit of the MPF Provider and survive the acceptance of the subscription being made hereby: (i) the MPF Bank is the owner of

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the Loans and of the Participation Interests to be sold to MPF Provider hereunder, and the MPF Bank’s interest in the Loans and the Participation has not been encumbered or hypothecated; (ii) the MPF Bank has received all necessary regulatory approvals to engage in the Program; and (iii) each Participation Interest to be sold to the MPF Provider hereunder is free and clear of any adverse claim from any person or entity claiming by or through the MPF Bank.

2.5. MPF BANK’S WARRANTY. The MPF Bank warrants to MPF Provider that in accordance with terms of the Program, the Loans will have a level of credit enhancement equivalent to the amount of subordination necessary for a mortgage pool (constituted similarly to the Loans) to receive a AA rating from a nationally recognized rating agency.

2.6. MPF BANK’S INDEMNIFICATION OBLIGATION. The MPF 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 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 Bank in this Agreement, any breach by the MPF Bank of its warranties and/or any failure by the MPF Bank to fulfill any covenants or agreements set forth in this Agreement or arising out of the sale or distribution of any of the Participation Certificates by it in violation of the Securities Act of 1933, as amended, or any applicable state securities or blue sky laws. All representations, warranties and covenants and the indemnification contained in this Agreement shall survive the acceptance of this subscription and the receipt of the Participation Certificates and the termination of this Agreement. The MPF 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 Program, including Texas Savings & Community Bankers Assoc., et al. v. Federal Housing Finance Board, Case No. A 97 CA 421SS (W. Dist. Texas).

ARTICLE III

PARTICIPATION PROVISIONS

3.1. PARTICIPATION INTEREST. Subject to the terms and conditions of this Agreement, the MPF Bank hereby sells and assigns to the MPF Provider, and the MPF Provider hereby purchases and accepts from the MPF Bank, a Participation Interest in its Loans funded or purchased under a Master Commitment, along with the Notes and the other Loan Documents evidencing and securing such Loans upon the terms and conditions stated herein as further evidenced by a Participation Certificate assumed by the MPF Bank. THIS SALE IS MADE BY THE MPF BANK WITHOUT RECOURSE, REPRESENTATION OR WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED, EXCEPT AS MAY OTHERWISE BE EXPRESSLY CONTAINED HEREIN.

3.2. DISBURSEMENTS SOLELY BY MPF BANK. Each Loan shall be funded solely by the MPF Bank or the PFI, to or for the benefit of the Borrower, and not by the MPF Provider directly.

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3.3. LOAN FEES. The MPF Bank shall be entitled to any loan fees received by the MPF Bank in connection with any Loan (“Loan Fee”), except for Designated Loans which are governed by the terms of the LOP Agreement.

3.4. REVIEW OF MPF BANK’S ACCOUNTING BOOKS AND RECORDS. From time to time Upon reasonable advance request and provided the MPF Bank is not prohibited by law, regulation or court order, the MPF Provider shall be entitled to review, at its cost, the accounting books and records of the MPF Bank with respect to the Program, including but not limited to, credit information pertaining to PFIs, confidential PFI bank examiner’s reports, any classification by an examiner of any PFI, any PFI Agreement, any Borrower or any Loan, provided that such information relate to the Loans or the Credit Enhancement provided for Master Commitments, on condition that only those employees or agents of the MPF Provider who have the need to know any confidential information relating to a PFI shall review such information.

3.5. MPF PROVIDER’S RIGHT TO ITS SHARE OF PRINCIPAL AND INTEREST PAYMENTS. After the purchase by the MPF Provider of its Participation Interest with respect to a Loan and the funding of such Loan to or for the benefit of the Borrower by the MPF Bank, MPF Provider shall be entitled to the MPF Provider’s Share of principal and interest received by MPF Bank with respect to such Loan, subject to its obligation to pay its share of (i) the Credit Enhancement fees payable under the applicable PFI Agreement, (ii) Agent Fees under the PFI Agreement, (iii) all other costs and expenses incurred or payable by the MPF Bank in respect of such Loan or the Master Commitment or PFI Agreement to which such Loan relates, and (iv) all Administrative Costs, as defined in §3.11.1 herein, however, the foregoing shall be subject to the allocation of Realized Losses as provided for in §3.6.9. of this Agreement. Furthermore, if at any time, all or any of the amounts payable by the MPF Bank described in clauses (i) through (iv) above shall be in excess of principal and interest received by the MPF Bank at such time, the MPF Provider will pay the MPF Provider’s Share of such amounts to the MPF Bank upon demand.

3.6. COLLECTIONS, DISBURSEMENTS TO MPF PROVIDER, AND ADMINISTRATION.

3.6.1. Collections of Payments by MPF BANK. Subject to the provisions of § 3.6.5., the MPF Bank shall have the right and obligation to collect from the Borrower or any guarantors, third parties, or otherwise on account of each Loan, including, without limitation, principal, advances to protect the collateral, interest, fees, prepayment premiums (if any), and repayment of advances in excess of the face amount of the Loan, whether such sums are received directly from the Borrower, any guarantors, or any other persons, or by reason of total or partial condemnation or taking by governmental authority, proceeds or recoveries under insurance policies, payment and performance bonds (if any), title insurance policies, amounts realized by reason of any sale or operation of the collateral for the Loan, or enforcement of the Loan Documents (all collectively, the “Loan Recoveries”). The MPF Provider or its designee will hold the Loan Documents in its customary fashion for this Program. The MPF Bank will receive and

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hold all receipts and collections with respect to the Loan for the pro rata benefit of the MPF Provider. Except to the extent of its obligations under the preceding sentence, the MPF Bank shall have no fiduciary obligations to the MPF Provider. Notwithstanding the foregoing, the MPF Provider acknowledges that:

(a) the Services Agreement provides for custodial services for the possession, retention and holding of the Loan Documents for the Loans, and the MPF Bank shall not be responsible or liable for any act or omission of the MPF Provider or any document custodian or for the breach or violation by the MPF Provider or any document custodian of its obligations under the applicable custodial agreement; and

(b) the MPF Bank expects that the PFIs under the PFI Agreements, or other companies selected by the MPF Provider from time to time, will service the Loans and collect and hold Loan Recoveries prior to remittance to MPF Bank, and the MPF Bank shall not be responsible or liable for any act or omission of any such PFIs or other mortgage loan servicers or for the breach or violation by any such person of its obligations under the applicable PFI Agreement or mortgage loan servicing agreement.

If the MPF Provider shall in any manner receive any payments or any other funds or property in connection with any Loan (whether or not voluntary), except from the MPF Bank, the MPF Provider shall immediately notify the MPF Bank, and to the extent appropriate, transfer all or part of such receipts to the MPF Bank.

3.6.2. Distribution of Payments. Whenever the MPF Bank receives a payment of principal, interest or any other Loan Recoveries in connection with a Loan, the MPF Bank shall promptly (and generally, within one Business Day) pay to the MPF Provider, in lawful money of the United States of America and in the kind of the funds so received by the MPF Bank, the MPF Provider’s Share of such amounts, subject to the allocation of Realized Losses as provided in §3.6.9. of this Agreement; provided, however, that the MPF Bank shall be entitled to pay to the MPF Provider any amounts owed under this Agreement by deposit into the MPF Bank’s Clearing Account maintained pursuant to the Services Agreement and such deposit shall satisfy MPF Bank’s payment obligation to the MPF Provider for such amounts. Subject to the allocation of Realized Losses as provided in §3.6.9. of this Agreement, the MPF Bank shall not be required to remit to the MPF Provider any amount not actually collected by the MPF Bank, whether or not the Loan is then in default.

3.6.3. Rescission of Payments. If all or part of any payment of Loan Recoveries or other amounts paid to the MPF Bank is rescinded or must otherwise be returned for any reason and if the MPF Bank has paid the same to the MPF Provider, then the MPF Provider shall pay to the MPF Bank an amount equal to MPF Provider’s Share of the amount which

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was rescinded or which must be so returned by the MPF Bank, in accordance with the provisions of the FHLB Guide referenced in and incorporated into the Services Agreement. The MPF Provider shall also pay to the MPF Bank any interest on such Loan Recoveries which was also rescinded or must be returned that the MPF Bank is obligated to pay or return to the Borrower.

3.6.4 Application of Loan Recoveries. Subject to Section 4.4 regarding reimbursement to MPF Bank of Defaulted Funds, the MPF Provider’s Share of all Loan Recoveries received by the MPF Bank in connection with a Loan or the Loan Documents shall be paid to the MPF Provider and shall be applied in accordance with the Loan Documents unless no provision is made therein, and then in the following order of priority:

(a) to the payment of all Administrative Costs;

(b) to the payment of any amounts payable by Borrower pursuant to any Loan Document (other than the payment of interest or principal) and to the repayment to the MPF Bank of any amount permitted to be paid by the MPF Bank under the Loan Documents and actually paid by the MPF Bank (such as past due taxes not paid by Borrower);

(c) to the payment of all interest due and payable on the Note; and

(d) to the payment of principal of the Note.

3.6.5. Powers Granted to the Majority Investor.

(a) The MPF Bank and the MPF Provider appoint and authorize the Majority Investor (and its agents and independent contractors) as an independent contractor, acting on behalf of the MPF Bank as the named lender, to take any and all actions with respect to Loans, provided however, that the MPF Bank shall retain the power and authority to enforce the Master Commitments, the PFI Agreements and the Guides with respect to its PFIs. The Majority Investor’s power and authority to act with respect to any Loan, includes (without limitation) the following authorizations: (i) to negotiate, administer, control, manage and service each Loan; (ii) to give consents, approvals or waivers in connection with any Loan Document; (iii) to agree to any amendments or modifications of any Loan Document; (iv) to take or refrain from taking any action and make any determination provided herein or in any Loan Document; (v) to acquire additional security for the Loan; (vi) to enforce or refrain from enforcing the Loan Documents; (vii) to

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make all decisions under the Loan Documents in connection with the day to day administration of the Loan, inspections, and other routine administrating and servicing matters; (viii) to collect and receive from Borrower or any third persons all Loan Recoveries; (ix) to exercise all such powers as are incidental to any of the foregoing matters; and (x) to exercise all powers, rights and remedies and to take all actions with respect to the Loans.

(b) Without limiting the foregoing, the Majority Investor may, with notice to but without the consent of the Minority Investor: (i) consent to or accept any cancellation or termination of any Loan Document, or agree to a transfer or termination of any instrument now or hereafter assigned to it as security for any Loan; (ii) release, partially or fully, any collateral given as security for any Loan; (iii) release, partially or fully, any party liable on any guaranty or materially amend any guaranty for a Loan (including, without limitation, restricting the amount of the right of recovery thereunder); (iv) agree to any amendment of any Loan Documents; or (v) waive any default involving the payment of principal or interest which is an event of default under any Loan Documents.

3.6.6. Powers Granted to MPF Bank.

(a) The MPF Provider appoints and authorizes the MPF Bank (and its agents and independent contractors) as an independent contractor, acting on behalf of the MPF Provider and without notice to the MPF Provider, to take any and all actions with respect to the Master Commitments, the PFI Agreements and the Guides, including (without limitation) the following: (i) to take or refrain from taking any action and make any determination provided herein or in the Master Commitments, the PFI Agreement or the Guides; (ii) to acquire additional security for the Credit Enhancement obligations of the PFIs; (iii) to exercise all such powers as are incidental to any of the foregoing matters; and (iv) to exercise all powers, rights and remedies and to take all actions with respect to the Master Commitments, the PFI Agreements and the Guides.

(b) Without limiting the foregoing, the MPF Bank may, with prior notice to but without the consent of the MPF Provider: (i) consent to or accept any cancellation or termination of any Master Commitment or PFI Agreement, or agree to a transfer or termination of any instrument now or hereafter assigned to it as security for any Master Commitment or PFI Agreement; (ii) release, partially or fully, any collateral given as security for any Master Commitment or PFI Agreement; or (iii) waive any default involving the payment of principal or interest which is an event of default under any PFI Agreement.

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(c) The MPF Bank shall exercise the appointment and authority granted under clauses (a) and (b) of this Section 3.6.6. in the same manner and with the same care that the MPF Bank handles in own assets and as if the MPF Bank were acting for its own account.

3.6.7. Default by Borrowers or PFIs; Enforcement.

(a) The MPF Bank and the MPF Provider, as the case may be, shall use commercially reasonable efforts to notify the other party, with reasonable promptness, of any material default under any Loan or PFI Agreement of which it becomes actually aware. Both parties are entitled to assume that no default or event which, with the giving of notice or lapse of time, or both, would constitute such a default, has occurred and is continuing unless that party (i) has actual knowledge of such default or event, or (ii) has been notified by the other party in writing that the other party considers that such a default or event has occurred and is continuing and specifies the nature thereof.

(b) The MPF Bank shall be entitled to take whatever action in its sole discretion it deems appropriate to enforce the rights and remedies accruing on account of such default that the MPF Bank believes in good faith must be taken immediately without an opportunity for consultation in order to protect and preserve the value of any security held for a Loan or for the protection of life, limb or property. The costs and expenses related to such action shall be included in Realized Losses.

(c) If any Borrower or PFI fails to pay taxes, assessments, insurance premiums or any other charges or expenditures for which such Borrower is responsible under the applicable Loan Documents for any Loans, the MPF Bank may, and at the request of the Majority Investor shall, advance the necessary amounts or make such expenditures. Such advances and expenses shall be included in Realized Losses. The MPF Bank shall cause the servicer to use commercially reasonable efforts to recover from the applicable Borrower all advances and expenses that are the responsibility of such Borrower under the applicable Loan Documents, but making such efforts shall not be a precondition to including such advances and expenses in Realized Losses.

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3.6.8. Retention of Counsel. If, in the MPF Provider’s judgment, attorneys should be retained for the protection of its interests, including (without limitation) in connection with actual or threatened litigation, the MPF Provider may employ counsel to represent either or both the MPF Bank and the MPF Provider in connection with the Loan. The MPF Bank shall seek to cause the Borrower or the PFI (as the case may be) to pay the fees and expenses of such counsel in accordance with the Loan Documents or the PFI Agreement, but all such costs and expenses, whether or not the MPF Bank has sought or received reimbursement from the Borrower or the PFI, shall be included in Realized Losses. If the MPF Bank later receives reimbursement therefor from Borrower or the PFI, the MPF Bank shall share such amounts with the MPF Provider on a pro rata basis. The MPF Bank acknowledges that any claim or action against the MPF Bank with respect to a Loan also affects the MPF Provider as the owner of its Participation Interest.

3.6.9. Allocation of Realized Losses. Notwithstanding the transfer of the Participation Interest in the Loans under any Master Commitment to the MPF Provider, the MPF Bank and MPF Provider acknowledge that their respective Spread Accounts must be charged on a pro rata basis to cover any Realized Losses for that Master Commitment, provided however, if those losses arise from Designated Loans, the MPF Provider’s LOP Spread Account shall first be charged in accordance with the LOP Agreement, and further in connection with Master Commitments having Designated Loans, that all Realized Losses occurring after exhaustion of all Spread Accounts shall be paid from the Credit Enhancement obligation of the PFI on a first come, first paid basis. If there are no Designated Loans in a Master Commitment, Realized Losses will be paid from the Credit Enhancement on a pro rata basis once the Spread Accounts have been exhausted. In addition, the parties acknowledge and agree that Residual Realized Losses shall be shared as provided in the definition of Participation Interest in Article I of this Agreement.

3.7. TERMINATION OF THE MPF PROVIDER’S OBLIGATION TO ACQUIRE ADDITIONAL PARTICIPATION INTERESTS. At such time as the Services Agreement expires or terminates, the MPF Bank’s right to sell and the MPF Provider’s obligations to acquire Participations Interests under this Agreement will terminate; provided, however that no such termination shall be effective with respect to any Loans or Master Commitments existing on or prior to the date of such termination or any REO Property (as defined in the Guides) related thereto.

3.8. INTEREST IN LOAN DOCUMENTS.

3.8.1. Proportional Interest. Upon payment by the MPF Provider of the amounts due from the MPF Provider pursuant to Section 2.2, the MPF Provider shall thereupon, without the necessity of any written instrument of assignment or document, become vested with its Participation Interest. Upon such payment, the respective interests of the MPF Provider and the MPF Bank in the Loan Documents and the other rights and claims of the MPF Bank shall be as provided in this Agreement. If the MPF Bank acquires, directly or indirectly, an ownership interest due to the purchase, foreclosure or other realization of any security interest in or lien granted by any of the Loan Documents, the MPF Provider

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shall have the MPF Provider’s Interest in such ownership interest subject only to the allocation of Realized Losses as provided in §3.6.9. of this Agreement, notwithstanding that title is taken in the name of the MPF Bank (or its nominee or designee, including, without limitation, the applicable PFI) alone. The MPF Provider and the MPF Bank agree that the other party shall not be liable or responsible to the MPF Provider or MPF Bank, as the case may be, for any loss upon the enforcement of any Loan or any loss or liability incurred by virtue of the MPF Bank (or its nominee or designee) acquiring, holding or disposing of any title to or interest in any security for any Loan, as long as the MPF Provider or the MPF Bank, as the case may be, acts with respect to such Loan in the same manner as it would act with respect to its own assets.

3.8.2. Documents and Third Parties. All original Loan Documents shall be held in accordance with the terms of the Services Agreement. The MPF Provider authorizes any third person, without inquiry as to whether any action by the MPF Bank is authorized hereunder, to deal with the MPF Bank concerning any Loan in the same manner as if the MPF Provider did not own its Participation Interest and the MPF Bank were the sole owner of the Loan.

3.8.3. Other Collateral for Loans. The MPF Bank holds for the MPF Provider’s and its own benefit all collateral described in the Loan Documents directly securing performance and payment of the Borrower’s and any guarantor’s obligations and liabilities under the Loan. Except for the security and collateral provisions of the PFI Agreement, the MPF Provider, however, shall have no interest in any (i) other property taken as security for any other credit, loan or financial accommodation made or furnished to Borrower or any guarantor by the MPF Bank in which the MPF Provider has no participation interest; (ii) property now or hereafter in the MPF Bank’s possession or under the MPF Bank’s control other than by reason of the Loan Documents or Master Commitment; or (iii) deposits or other indebtedness which may be or might become security for performance or payment of any of Borrower’s or any guarantor’s obligations and liabilities under the Designated Loan by reason of the general description contained in any instrument other than the Loan Document held by the MPF 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 Borrower to the MPF Bank in connection with the Loan, then the MPF Provider shall be entitled to have the same applied to the Loan.

3.8.4. Collateral for Credit Enhancement. The MPF Bank holds for its and the MPF Provider’s proportional benefit the proceeds of all collateral provided from time to time by PFIs under their respective PFI Agreements, Master Commitments and the Guides securing performance and payment of certain credit enhancement obligations of the respective PFIs under the PFI Agreements, but only to the extent such proceeds are applied to cover Realized Losses (as defined in the Guides) incurred by the MPF Bank in Loans. The MPF Provider shall not share in any such collateral to the extent it secures obligations of any PFI with respect to any Master Commitment in which the MPF

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Provider does not have a Participation Interest. In addition, the MPF Provider shall have no interest in any (i) other property taken as security for any other credit, loan or financial accommodation made or furnished to any PFI or any affiliate thereof by the MPF Bank in which the MPF Provider has no participation interest; or (ii) property now or hereafter in the MPF Bank’s possession or under the MPF Bank’s control other than by reason of any PFI Agreement. 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 to the MPF Bank in connection with any Master Commitment, then the MPF Provider shall be entitled to application of such amounts to the allocation of Realized Losses with respect to Loans. Notwithstanding any thing else herein contained to the contrary, 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 MPF 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 MPF 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 MPF 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.

3.9. BOOKKEEPING ENTRIES. The MPF Provider shall record in its financial records the amount of its interest in each Master Commitment and its Participation Interest in the MPF Bank’s rights and obligations in connection with such Master Commitments. The MPF Bank will reflect in its financial records the reduction of such rights and obligations by the amount of such Participation Interest, which may be adjusted from time to time.

3.10. PARTICIPATION CERTIFICATES AND REPORTS. The MPF Bank shall furnish to the MPF Provider from time to time various reports regarding the PFI Agreements and the Master Commitments, including (without limitation):

(a) Updated Participation Certificates as Master Commitments close or expire;

(b) Monthly reports regarding the Loans, including (without limitation) monthly payments, aggregate outstanding balances of Loans with respect to each applicable Master Commitment and balances in the MPF Provider’s Pro Rata Spread Account.

The MPF Bank may furnish such reports in such manner (including, without limitation, electronically) as the MPF Bank may provide from time to time. To the extent that such information is based upon information received from third parties (including, without limitation,

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PFIs and mortgage loan servicers), the MPF Bank shall have no responsibility with respect to the authenticity, validity, accuracy or completeness thereof. The MPF Provider agrees not to distribute any such information received from the MPF Bank (or copies thereof) to any person or entity, except (i) as required by law or by order of any court or regulatory agency; (ii) to the Federal Housing Finance Board; or (iii) to MPF Provider’s external auditor.

3.11. COSTS AND EXPENSES.

3.11.1. Administrative Costs. The MPF Provider shall, immediately upon demand, indemnify and reimburse the MPF Bank for the MPF Provider’s Share of any and all liabilities, costs, expenses and disbursements (collectively, “Administrative Costs”) which may be incurred or paid by the MPF Bank under or in connection with any Loan or any of the Loan Documents, or any amendment, modification, supplement, restatement or waiver of any thereof, or in any action taken by the MPF Bank to collect the liabilities created under or in connection with such Loan or Loan Documents or to enforce or protect any collateral for any such liabilities (including, without limitation, under Section 3.6.6), for which the MPF Bank has not previously been reimbursed by or on behalf of the applicable Borrower or PFI. Administrative Costs shall include any Agent Fees payable under the PFI Agreements (to the extent the MPF Provider has not paid the same in accordance with Section 3.5 above). However, if the MPF Bank is later reimbursed by any applicable Borrower or PFI or any other obligor for any such expenses, the MPF Bank shall reimburse the MPF Provider according to the MPF Provider’s Share. Further, the parties do not expect the MPF Bank to incur more than nominal Administrative Costs given the services to be provided to the MPF Bank under the Services Agreement.

3.11.2. Costs of Enforcement. Any and all liabilities, costs, expenses and disbursements (including, without limitation, reasonable attorneys’ fees and other legal expenses) incurred by the MPF Bank or MPF Provider in any effort to collect any amounts payable hereunder by the other party to the MPF Bank or the MPF Provider, as the case may be, shall be paid by the defaulting party upon demand of the collecting party whether or not suit is filed, together with interest thereon from the date due until paid at the Default Rate (hereinafter defined).

3.11.3. Payment through Clearing Account. To effect payment of any amount owed by the MPF Provider under this Section 3.11, the MPF Bank shall withdraw funds from the MPF Provider’s Clearing Account from time to time (whether or not any such withdrawal shall cause the balance in the MPF Provider’s Clearing Account to become negative). In the event that any withdrawal from the MPF Provider’s Clearing Account shall cause the balance in such account to become negative, such deficit shall be governed by the provisions of Section 4.4.

3.11.4. Certain Costs Excluded. Subject to the provisions of Section 3.11.2., no party hereto is responsible for any other party’s attorney’s fees or any other expenses in connection with the negotiation and execution of this Agreement; provided, however that this provision shall not limit the obligations of any PFI, the MPF Bank or the MPF Provider to reimburse the MPF Bank or MPF Provider for attorneys’ fees or any other expenses as required by the applicable PFI Agreement or this Agreement, respectively.

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3.12. EXCULPATIONS.

(a) Neither the MPF Bank nor any of its shareholders, directors, officers, employees or agents shall be liable to the MPF Provider for any obligation, undertaking, act or judgment of any Borrower, any PFI, any guarantor or any other person, or for any error of judgment or any action taken or omitted to be taken by the MPF Bank (except for any liability of the MPF Bank, but only to the extent that the same arises directly and solely from (i) gross negligence or willful misconduct by the MPF Bank or (ii) when handling funds, ordinary negligence of the MPF Bank). Without limiting the generality of the foregoing, the MPF Bank (a) may consult with legal counsel, accountants, financial advisers and other consultants and experts reasonably selected by the MPF Bank and shall not be liable for any action taken or omitted to be taken in good faith in accordance with the advice of such counsel and advisers; (b) shall incur no liability under or in respect of any such agreement, document or collateral by acting upon any notice by telephone or otherwise, or writing (including, without limitation, telex and telegraphic communication) reasonably believed by the MPF Bank to be genuine and to be signed or sent by the proper party or person; (c) shall not be responsible for any warranty or representation made in or in connection with any PFI Agreement, Master Commitment, the Guides, the Program, any Loan or any of the Loan Documents, or for the financial condition of any Borrower, any PFI, any guarantor or any other person, or for the value of any collateral, or for the observance or performance of any obligations of Borrower, any PFI, any guarantor or any other person or entity; and (d) makes no warranty or representation (except as provided in Section 2.4) and shall not be responsible for the due execution, validity, enforceability, sufficiency or collectibility of any PFI Agreement, Master Commitment, the Guides, the Program, any Loan or any of the Loan Documents.

(b) Neither the MPF Provider nor any of its shareholders, directors, officers, employees or agents shall be liable to the MPF Bank for any obligation, undertaking, act or judgment of any Borrower, any PFI, any guarantor or any other person, or for any error of judgment or any action taken or omitted to be taken by the MPF Provider (except for any liability of the MPF Provider, but only to the extent that the same arises directly and solely from (i) gross negligence or willful misconduct by the MPF Provider or (ii) when handling funds, ordinary negligence of the MPF Provider), or be bound to ascertain or inquire as to the performance or observance of any provision of any PFI Agreement, Master Commitment, the Guides, the Program, any Loan or any of the Loan Documents. Without limiting the generality of the foregoing, the MPF Provider (a) may consult with legal counsel, accountants, financial advisers and other consultants and experts reasonably selected by the MPF Provider and shall not be liable for any action taken or omitted to be taken in good faith in accordance with the advice of such counsel and advisers; (b) shall incur no liability under or in respect of any such agreement, document or collateral by acting upon any notice by telephone or otherwise, or writing (including, without limitation, telex and telegraphic communication) reasonably believed by the MPF Provider to be genuine and

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to be signed or sent by the proper party or person; (c) shall not be responsible for any warranty or representation made by PFIs in or in connection with any PFI Agreement, Master Commitment, the Guides, the Program, any Loan or any of the Loan Documents, or for the financial condition of any Borrower, any PFI, any guarantor or any other person, or for the value of any collateral, or for the observance or performance of any obligations of Borrower, any PFI, any guarantor or any other person or entity; and (d) makes no warranty or representation (except as provided in Section 2.4) and shall not be responsible for the due execution, validity, enforceability, sufficiency or collectibility of any PFI Agreement, Master Commitment, the Guides, the Program, any Loan or any of the Loan Documents.

3.13. UNCONDITIONAL OBLIGATIONS. The MPF Provider and the MPF Bank agree that their respective obligations under this Agreement are, and at all times and in all events shall be, absolute, irrevocable and unconditional and shall not be affected by any intervening circumstances occurring after the date hereof or by, among other things, any of the following:

(a) any act or omission of any kind by the any PFI, any Borrower, any guarantor or any other person (except for a breach by the other party); or

(b) any set-off, counterclaim or defense to payment which the MPF Provider or MPF Bank may have or have had against the other party unrelated to this Agreement; or

(c) the existence of any event of default hereunder or under any of the Loan Documents, PFI Agreements, Master Commitments, the Guides or any other agreement (except this Agreement), instrument or document referred to in or executed and delivered pursuant to any thereof; or

(d) any change of any kind whatsoever in the financial position or creditworthiness of the MPF Bank, the MPF Provider, any Borrower, any PFI, any guarantor or any other person.

ARTICLE IV

GENERAL

4.1. AUTHORIZATION AND ENFORCEABILITY REPRESENTATIONS. The MPF Bank and the MPF Provider 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) this Agreement is the legal, valid and binding obligation of such party, enforceable against it.

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4.2. ASSIGNMENT BY PARTICIPANT AND MPF BANK. The rights of the MPF Bank and the MPF Provider to subparticipate, transfer or assign to any other person or entity, all or any portion of the MPF Provider’s rights and obligations hereunder or of the MPF Bank’s interests in the Loans shall be subject to the terms of the Services Agreement.

4.3. OTHER TRANSACTIONS BETWEEN MPF BANK AND PFIS. The MPF Bank may accept deposits from, lend money to, and generally engage in any kind of business with any PFI, any guarantor and their subsidiaries, owners, partners and affiliates, if any (collectively, “PFI Affiliates”) and any person who may do business with or own interests in any of them. The MPF Provider shall have no interest in any property taken as security for any other loans or any credits extended to any PFI or any of PFI Affiliates by the MPF Bank. Nothing herein shall in any manner be deemed to limit or preclude the right of the MPF Bank to enter into any such other arrangements or to exercise any rights or remedies available in connection therewith, including (without limitation) the exercise of any right of set-off or other rights available as a matter of law.

4.4. MPF PROVIDER’S DEFAULT. If the MPF Provider shall default in or otherwise fail to meet its obligations to provide funds pursuant to Section 2.2 (such funds being referred to as “Defaulted Funds”), then the MPF Bank may advance funds to the Borrower in an amount not exceeding the amount of such Defaulted Funds. If the MPF Bank makes any such advance, then the MPF Provider shall immediately reimburse the MPF Bank upon demand. Any sums due from the MPF Provider to the MPF Bank (including, without limitation, Defaulted Funds and the MPF Provider’s Share of costs and expenses under Section 3.11) shall: (i) accrue interest, payable upon demand, at the MPF Provider’s DID Rate (as it may change from time to time) plus one percent (1%) per annum (“Default Rate”); and (ii) shall be paid in full, together with interest thereon, from any moneys (including, without limitation, all payments of principal, interest, expenses or fees, whether obtained from or on behalf of the Borrower, voluntarily or otherwise) which would have been payable to the MPF Provider in the absence of the MPF Provider’s default, prior to the MPF Provider’s receiving such moneys. In addition, the MPF Bank may withdraw funds from the Clearing Account from time to time to satisfy the MPF Provider’s obligations under this Section 4.4 (whether or not any such withdrawal shall cause the balance in the MPF Provider’s Clearing Account to become negative) upon giving the MPF Provider concurrent notice. Such payments to the MPF Bank shall be first applied to accrued interest and then to the repayment of the amounts initially owed to the MPF Bank. The MPF Provider shall remain obligated to fund all other amounts under this Agreement. The MPF Bank’s remedies and rights under this Agreement are cumulative and concurrent and in addition to every other available right, power or remedy at law or in equity.

4.5. MPF BANK’S DEFAULT. Any sums due from the MPF Bank to the MPF Provider shall be payable upon demand and shall accrue interest, payable upon demand, at the Default Rate. In addition, the MPF Provider may withdraw funds from the MPF Bank’s Clearing Account from time to time to satisfy the MPF Bank’s obligations under this Section 4.5 (whether or not any such withdrawal shall cause the balance in the MPF Bank’s Clearing Account to become negative) upon giving the MPF Bank concurrent notice. In such event, the provisions of the Services Agreement shall be applicable. Such payments to the MPF Provider shall be first applied to accrued interest and then to the repayment of the amounts initially owed to the MPF

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Provider. The MPF Bank shall remain obligated to fund all other amounts under this Agreement. The MPF Provider’s remedies and rights under this Agreement are cumulative and concurrent and in addition to every other available right, power or remedy at law or in equity.

4.6. MISCELLANEOUS.

4.6.1. Notices. Whenever notice is required under this Agreement or by applicable law, it must be given as described in this section. All demands, notices and communications under this Agreement shall be in writing and shall be delivered in person or sent by certified United States mail, postage prepaid, return receipt requested or sent by facsimile transmission or 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.

4.6.2. Addresses. For purposes of this Agreement, the addresses and facsimile numbers for the MPF Bank and the MPF Provider and the electronic transmission information for the parties 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 4.6.1, but shall be effective only upon actual receipt.

4.6.3. Effect of Agreement and Relationship of Parties. This Agreement does not affect any relationships created pursuant to the Services Agreement or any other participation agreements. The MPF Bank will have no obligation or responsibility or fiduciary duty to the MPF Provider except as specifically stated herein. The execution of this Agreement, the performance of the terms or provisions hereof, and the performance or exercise of any obligations or rights pursuant hereto (including, without limitation, the MPF Provider’s purchase of and ownership interest in its Participation Interest in any Designated Loan and any Loan Documents) shall not constitute the MPF Provider as the owner, holder, purchaser or seller of any security (as that term is defined in the Securities Act of 1933 or the Securities Exchange Act of 1934) issued, owned, purchased or sold by the MPF Bank, either as principal or as agent for the Borrower. The MPF Provider is purchasing and acquiring legal and equitable ownership of its Participation Interest in the Loans and is not making a loan to the MPF Bank, and no debtor-creditor relationship exists between them as a result of this Agreement. This Agreement, along with the Services Agreement and LOP Agreement, constitutes the entire agreement among the parties, and no representation, promise, inducement or statement of intent has been made by the MPF Bank to the MPF Provider which is not embodied in this Agreement.

4.6.4. Execution in Counterparts. 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.

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4.6.5. 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.

4.6.6 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.

4.6.7. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the MPF Bank and the MPF Provider and their respective successors and permitted assigns (subject to Section 4.2).

4.6.8. Waivers and Amendments. No delay on the part of 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 either 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 Bank and the MPF Provider; provided, however, that the MPF Provider may amend, modify or waive any provisions of the Guides from time to time with respect to any matter, PFI, Borrower or Loan without the consent of the MPF Bank.

4.6.9. 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 4.6.8. Article and Section captions used in this Agreement are for convenience only, and shall not affect the construction of this Agreement.

4.6.10. Mediation of Disputes; Jurisdiction, Venue and Service of Process. No MPF 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 Federal Housing 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.

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The MPF 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 MPF Bank hereby waives any and all personal or other rights to object to such jurisdiction for such purposes. The MPF 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 MPF Bank agrees that service of process may be made, and personal jurisdiction over the MPF 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 MPF Bank at its address for notices as provided in this Agreement. The MPF Bank waives all claims of lack of effectiveness or error by reason of any such service.

4.6.11. Confidentiality. Except as may be required by law, or as may occur as a result of the operation of law, or as may be requested by any regulatory authority having authority over the parties, each of the parties agrees to maintain the confidentiality of all confidential information furnished to the party hereunder or in connection with the Loans, except that no party will have no obligation of confidentiality with respect to information that may be generally available to the public, or becomes generally available to the public through no fault of that party. Each party shall use the confidential information only in connection with the underwriting, administration and enforcement of the Loans and this Agreement.

4.6.14. 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.

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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

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EXHIBIT A

PARTICIPATION CERTIFICATE

, 1999                

ISSUED TO:

FEDERAL HOME LOAN BANK OF CHICAGO

111 E. Wacker Drive

Chicago, Illinois 60601

Attention: MORTGAGE PARTNERSHIP FINANCE Group

Re: Pro Rata MPF^® Participation Agreement dated as of                        , 1999 (herein, as it may be modified or amended from time to time, the “Agreement”) among the Federal Home Loan Bank of Chicago (the “MPF Provider”), and the Federal Home Loan Bank of                          (the “MPF Bank”), and that certain Master Commitment No.                          dated                         .

Ladies/Gentlemen:

Please refer to the Agreement. All capitalized but undefined terms used herein shall have the same respective meanings as in the Agreement.

Pursuant to the Agreement, we acknowledge receipt of your funding of the MPF Provider’s Participation Share in the Loans under the above referenced Master Commitment as set forth on Schedule I and the attachments thereto.

This certificate evidences your Participation Interest in the Loans and sets forth the MPF Provider’s Share under the Master Commitment in the amount set forth on the attachments.

FEDERAL HOME LOAN BANK OF                         

By:

Title:

SCHEDULE I

to Participation Certificate

issued by

Federal Home Loan Bank of             

dated                     , 1999

in favor of

Federal Home Loan Bank of Chicago

Identification and Fundings of the MPF Provider’s Participation Interest in the Loans under the

Master Commitment

and of the MPF Provider’s Share of such Master Commitment

[Identify the Master Commitment to which

the Participation Certificate relates,

and the calculation of the MPF Provider’s Share; and

if applicable, refer to the Designated Loans for such Master Commitment

which are excluded in calculating the parties interests in the remaining Loans]

EX-10.6

EXHIBIT 10.6

MORTGAGE PARTNERSHIP FINANCE^®

INVESTMENT AND SERVICES AGREEMENT

(Participation Program Contribution)

This MORTGAGE PARTNERSHIP FINANCE (“MPF^®”) Investment and Services Agreement (the “Agreement”) is entered into as of the 20th day of April, 2000, and is executed by the FEDERAL HOME LOAN BANK OF BOSTON (the “Boston Bank”), a corporation organized and existing under the laws of the United States of America, having its principal office at One Financial Center, 20^th Floor, Boston, Massachusetts 02111 and the FEDERAL HOME LOAN BANK OF CHICAGO (the “MPF Provider”), a corporation organized and existing under the laws of the United States of America, having its principal office at 111 East Wacker Drive, Suite 800, Chicago, Illinois 60601.

RECITALS:

WHEREAS, the MPF Provider and Boston 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 the MPF Provider funds residential mortgage loans (“Loans”) through its members acting as agents of the MPF Provider, or whereby the MPF Provider purchases Loans from its members, pursuant to separate Participating Financial Institution Agreements (“PFI Agreements”) with each participating member;

WHEREAS, the Boston Bank wishes to provide its members access to the MPF Program, and is therefore willing (i) to fund Loans through its members acting as its agents pursuant to the MPF Program, (ii) to purchase Loans from its members pursuant to the MPF Program, and (iii) to have the MPF Provider operate and maintain the MPF Program for the benefit of the Boston Bank, in addition to the MPF Provider and any other FHLBs that are or may participate in the MPF Program; and

WHEREAS, the MPF Provider is willing (i) to make the MPF Program available to those Boston Bank members designated by the Boston Bank, and (ii) to operate and maintain the MPF Program for the benefit of the Boston Bank as well as itself 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 an 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:

“Administrative Costs” shall mean any and all liabilities, costs, expenses and disbursements which may be incurred or paid by the Boston Bank or the MPF Provider under or in the management of any PFI Agreement, Master Commitment, the Guides, any Loan or any Loan Documents, or any amendment, modification, supplement, restatement or waiver of any thereof, or in any action taken to collect the liabilities created under or in connection with any PFI Agreement, Master Commitment, the Guides, or any Loan or Loan Documents or to enforce or protect any collateral for such liabilities, for which no previous reimbursement has been made by or on behalf of the applicable Borrower or PFI, except those which one of the parties has specifically agreed to bear without reimbursement from the other party.

“Agency Loan” shall mean a Loan that is originated by a member of a FHLB as agent for that FHLB under the MPF Program and funded by that FHLB, and which is therefore owned by such FHLB from origination and is never owned by the member.

“Borrower” shall mean the obligor or obligors under any Loan.

“Business Day” shall mean any day that the MPF Provider is open for business.

“Clearing Account” shall mean the Boston Bank’s deposit account or accounts at the MPF Provider, pursuant to the MPF Provider standard agreement for such account(s) from time to time, for the clearing of debits and credits between the MPF Provider and the Boston Bank.

“Closed Loan” shall mean a Loan that was owned by a PFI prior to the sale of the Loan to a FHLB under the MPF Program.

“Custodian” shall mean, at any time, the custodian to whom the MPF Provider delegates its duties and obligations under the MPF Program to hold the Loan Documents pertaining to the Program Loans.

“Customized Enhancement” shall mean a technical enhancement to the MPF Program system made at the request of an MPF Bank that solely benefits such MPF Bank.

“DDA Account” shall mean a transactional account with an MPF Bank or the MPF Provider.

“Default Rate” shall mean a rate equal to the then current 10 year U.S. Treasury note rate.

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“Designated Delivery Commitment” shall mean each Delivery Commitment entered into by the Boston Bank on any Business Day after it has given a Liquidity Option Notice to the MPF Provider.

“FHLB Guide” shall mean the Guide for the MPF Banks published by the MPF Provider detailing policy and procedures among the MPF Banks for their participation in the MPF Program, as the same may be amended after consultation with the MPF Banks from time to time, which FHLB Guide is hereby incorporated by reference into this Agreement.

“Guides” shall mean, collectively, the Origination Guide and the Servicing Guide promulgated by the MPF Provider for the MPF Program, as the MPF Provider may revise them from time to time.

“Liquidity Option MPF Participation Agreement” shall mean that certain agreement referenced in Section 5.10.2.

“Liquidity Option Notice” shall mean a notice to MPF Provider that the Boston Bank elects to participate to the MPF Provider a 100% participation interest in the Program Loans funded or purchased under any and all Delivery Commitments issued by the Boston Bank for the balance of the Business Day, and pursuant to which notice the MPF Provider shall acquire a 100% participation in such Program Loans; such Delivery Commitments will be issued in the Boston Bank’s name and the Program Loans funded or purchased thereunder will be 100% participated to the MPF Provider pursuant to the terms of the Liquidity Option MPF Participation Agreement.

“Loan” shall mean a residential loan made by a member bank to a Borrower that is evidenced by a promissory note and secured by a mortgage lien, deed of trust, security deed or other security instrument.

“Loan Documents” shall mean, for any Loan, the note, the mortgage or other security documents executed and delivered by the applicable Borrower and all other documents evidencing or securing such Loan, as the same may be amended, supplemented, modified or restated from time to time.

“Loan Recoveries” shall mean all payments and any other sums received with respect to a Program Loan, including, but not limited to, from the disposition of any collateral for such loan. Notwithstanding the foregoing, Loan Recoveries shall not include any amounts due to the seller of a Closed Loan for payment or sums due prior to the date of the purchase of such Closed Loan by the MPF Bank.

“Note” for any Loan shall mean the promissory note from the Borrower evidencing such Loan.

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“Master Commitment” shall mean an agreement between an MPF Bank and its PFI pursuant to which the PFI agrees to originate Agency Loans for or sell Closed Loans to such MPF Bank, credit enhance and service such Loans thereafter, in accordance with the Guides.

“Master Servicer” shall mean, at any tune, the entity to which the MPF Provider delegates its duties and obligations under the MPF Program as the master servicer of the Program Loans.

“MPF Banks” shall mean the Boston Bank and any other FHLB that has entered into an agreement with the MPF Provider to offer the MPF Program to their 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.

“Participation Share” shall mean the MPF Provider’s pro rata participation interest in the Program Loans the Boston Bank funds or purchases under the MPF Program (which is in addition to any participation interest granted to the MPF Provider pursuant to the Liquidity Option MPF Participation Agreement).

“PFI” shall mean a member of the MPF Bank that is a “participating financial institution” that elects to participate in the MPF Program by executing a PFI Agreement with the MPF Bank.

“Program Contribution” shall have the meaning set forth in Section 2.2.(a).

“Program Loans” shall mean Agency Loans funded or Closed Loans purchased under the MPF Program.

“Servicer” shall have the meaning set forth in the PFI 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; (b) the Federal Housing Finance Board orders or otherwise causes the MPF Banks to stop offering 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 in a manner that materially affects the structure or processes of the MPF Program.

“Transaction Services Fee” shall mean, at any time, the fee charged by the MPF Provider to the MPF Banks for operational support provided by the MPF Provider in connection with Program Loans owned by such MPF Banks.

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 Guides. The singular shall include the plural as the context may require.

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ARTICLE II

TERM AND INVESTMENT SHARES

2.1. Term of Agreement. Unless terminated earlier as provided in Section 7.2.2, the initial term of this Agreement shall be three (3) years ending on the third anniversary of the date of this Agreement and thereafter, this Agreement shall continue in force until terminated by either party giving the other ninety (90) days written notice. Notwithstanding the foregoing, the obligations of the parties shall continue with respect to all Program Loans funded or purchased under this Agreement prior to the expiration of the initial term or any extended term, or prior to any termination pursuant to Article VII hereof. Upon the termination of this Agreement for any reason, the Boston Bank agrees to use its best efforts to promptly return to the MPF Provider all marketing and operational materials previously provided by the MPF Provider unless other mutually acceptable arrangements have been made.

2.2. Program Contribution; Participation Share. (a) A Program Contribution in the amount of One Million Five Hundred Thousand Dollars ($1,500,000) is required for a FHLB to participate in the MPF Program, such Program Contribution being payable in installments as follows: (i) One Million Dollars ($1,000,000) upon the execution of a Services Agreement and (ii) Five Hundred Thousand Dollars ($500,000) upon the earlier to occur of (y) One Billion Dollars ($1,000,000,000) in Program Loans being funded or purchased under such Services Agreement or (z) the third anniversary of the execution of such Services Agreement.

(b) In lieu of paying the Program Contribution and the Transaction Services Fee, the Boston Bank hereby agrees to grant the MPF Provider a Participation Share in the amount of a fifty percent (50%) interest in the first Five Hundred Million Dollars ($500,000,000) of Boston Bank Program Loans, and the MPF Provider agrees to acquire such Participation Share.

2.3. Option to Change Participation Share. After the earlier to occur of (i) the cumulative amount of assets transferred as a Participation Share equaling Two Hundred Fifty Million Dollars ($250,000,000), or (ii) the second anniversary of the date of this Agreement, the Boston Bank shall have the right to change the percentage of the MPF Provider’s Participation Share upon giving the MPF Provider thirty (30) days written notice, thereafter each Master Commitment executed with the Boston Bank PFIs shall be subject to the Participation Share at the investment percentage specified in such notice (which may be zero). Subject to the provisions of Section 2.5., the MPF Provider will continue to provide operational support services for all Program Loans.

2.4. Transaction Services Fee. Unless exempted under the provisions of Sections 2.2. or 2.5., the Boston Bank shall pay a monthly Transaction Services Fee in accordance with the schedule listed in Appendix A, to the MPF Provider as compensation for the transaction processing services to be provided to the Boston Bank, all payments to be made by the MPF Provider debiting the Boston Bank’s Clearing Account. The Transaction Services Fee shall be calculated each month by multiplying (x) one-twelfth of the applicable annual rate by (y) the

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aggregate outstanding balance of the Boston Bank’s non-exempted Program Loans at the end of the previous month as reported by the Master Servicer. The rates shown in Appendix A are annual rates. The rates shown in Appendix A may be adjusted annually to reflect any increases in the fees charged to the MPF Provider by the Custodian or Master Servicer.

2.5 Participation Share in Lieu of Transaction Services Fee. If the Boston Bank elects to change the Participation Share under Section 2.3, as long as the MPF Provider’s Participation Share in the Program Loans funded or purchased under Master Commitments executed after the notice period required in Section 2.3, equals or exceeds twenty-five percent (25 %), the MPF Provider will not charge the Boston Bank a Transaction Services Fee for such Program Loans, provided, however, that the MPF Provider may elect on sixty (60) days prior written notice to the Boston Bank to cease accepting a Participation Share in the Program Loans and instead to charge the Boston Bank the then applicable Transaction Services Fee for providing support services under this Agreement.

ARTICLE III

MARKETING TO BOSTON BANK PFIs

3.1. Designation of Boston Bank PFIs. The Boston Bank may market the MPF Program directly to its members or the Boston Bank may allow the MPF Provider’s MPF Marketing staff to make or participate in marketing and sales calls to those members designated by the Boston Bank.

3.2. Operational Training. From time to time the MPF Provider will provide training for those Boston Bank employees who will have responsibility for completing and administering PFI Agreements and Master Commitments in conjunction with the MPF Provider. The training shall take place at the offices of the MPF Provider, unless the parties agree otherwise. The dates for such training shall be scheduled by mutual agreement. The Boston Bank shall be responsible for selecting employees with adequate knowledge of the Boston Bank’s operations and systems, as well as residential mortgage originations and servicing. The Boston Bank shall pay all travel and related expenses of its employees in connection with their attending training, and of the MPF Provider’s employees in connection with their providing training, if such training is provided at a location other than the MPF Provider’s offices.

3.3. Press Releases and Media Relations. (a) The MPF Provider agrees that during the term of this Agreement, it will provide the Boston Bank advance notice of all press releases and written communications with the media, concerning the Boston Bank’s or Boston Bank PFIs’ involvement with the MPF Program, and that it will not release or publish such items without the Boston Bank’s prior consent; provided however, that failure of the Boston Bank to respond to the notice of a communication by the close of the following Business Day after receipt shall be deemed to be consent to its publication.

(b) The Boston Bank agrees that during the term of this Agreement, it will provide the MPF Provider advance notice of all press releases and written communications with the

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media, concerning the MPF Program, and that it will not release or publish such items without the MPF Provider’s prior consent; provided however, that failure of the MPF Provider to respond to the notice of a communication by the close of the following Business Day after receipt shall be deemed to be consent to its publication.

ARTICLE IV

OPERATIONAL SYSTEMS

4.1. Loan Funding and Reporting Systems. The MPF Provider shall work with the Boston Bank to develop an appropriate interface or method for receiving or sending data transmissions and reports to or from the MPF Provider. Data regarding the Boston Bank PFIs and the Program Loans serviced by its PFIs will be processed on the same system the MPF Provider uses to process its own MPF Program data. However, in connection with Agency Loans, the Boston Bank will be the undisclosed or disclosed principal in whose name Agency Loans will be funded. Therefore, disclosures made to or by PFIs shall refer to the Boston Bank as the funding party notwithstanding the MPF Provider’s concurrent investment in its Participation Share of each Loan.

4.2. Program Enhancements. The MPF Provider shall hold periodic meetings 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, which wish to attend in person or telephonically.

4.3. Y2K Compliance. The MPF Provider represents and warrants to the Boston 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 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 4.3. shall be limited to direct compensatory damages and in no event shall the MPF Provider be liable under this Section 4.3. for consequential or punitive damages (except for willful misconduct or gross negligence on the part of the MPF Provider).

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ARTICLE V

PARTICIPATION IN MPF PROGRAM

5.1. Services of the Custodian. (a) The MPF Provider shall act as the custodian for the Boston Bank with respect to all Loans funded or purchased by the Boston 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. Notwithstanding the MPF Provider’s delegation of its custodial obligations to the Custodian, the MPF Provider shall have direct and primary responsibility to the Boston Bank for the performance of the duties of the Custodian under the Custody Agreement.

(b) The MPF Provider shall perform or cause to be performed the following custodial duties for the Boston 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 Loan Documents and any other documents or papers relating to a Loan deposited with the Custodian as an agent for and bailee of the Boston Bank;

(ii) To review the documents received with respect to a Loan to confirm whether they comply with the MPF Program requirements;

(iii) To provide exception reports and status reports regarding Loan Documents as provided for in the FHLB Guide;

(iv) Upon the payment in full or the purchase by a PFI of a Loan, or as needed for servicing or foreclosure purposes, to release the Loan Documents to the Servicer or notify the Servicer that the Loan Documents are no longer held by the Custodian; and

(v) To maintain or cause the Custodian to maintain customary fidelity and other insurance in connection with the performance of its obligations under the Custody Agreement.

(c) In the event that the Custodian fails to produce a Loan Document when requested by the Servicer, and provided that (i) the Custodian previously acknowledged in writing that it had possession of such Loan Document, (ii) such Loan Document is not outstanding pursuant to a prior request for release from the Servicer, and (iii) such Loan Document was held by the Custodian on behalf of the Boston Bank (a “Custodial Delivery Failure”), then the MPF Provider shall, with respect to any missing Loan Document, furnish or cause the Custodian to furnish a lost Loan Document affidavit in a form reasonably satisfactory to the Boston Bank and to indemnify (such indemnification to survive any termination of the Custody Agreement) the Boston 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.

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(d) The MPF Provider shall forward from the Custodian, or cause the Custodian to deliver to the Boston Bank, such reports applicable to the Boston Bank’s Program Loans regarding Loan Documents received and the status of requests for missing loan files or missing documents as required to be provided in the FHLB Guide. The Custodian shall acknowledge that its holds the Loan Documents pertaining to Loans owned or held by the Boston Bank which come into its possession for the benefit of the Boston Bank, and shall dispose of the same only in accordance with instructions furnished by the MPF Provider on behalf of the Boston Bank. The Custodian shall not, however, be required to verify the validity, sufficiency or genuineness of any Loan Document.

5.2. Services of the Master Servicer. (a) The MPF Provider shall act as the Master Servicer for the Boston Bank with respect to all Loans funded or purchased by the Boston 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. The MPF Provider shall have direct and primary responsibility to the Boston 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 PFI Agreements, the Guides, and the Servicing Agreements:

(i) To supervise, monitor and oversee the servicing of the 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 collect information, reconcile such information with each Servicer, and submit reports pertaining to the Loans and any funds due with respect thereto, to the Boston Bank as provided for in the FHLB Guide;

(iv) To recommend to the Boston Bank corrective action to be taken relative to any Servicer that fails to comply with the terms and conditions of the Servicing Guide with respect to defaulted Loans or the property encumbered as security for Loans;

(v) To notify the Boston Bank in the event a Servicer has materially or consistently defaulted under the Servicing Agreement or Servicing Guide and to advise the Boston Bank of its recommended response to the default, and to assist the Boston Bank in working with such Servicer to cure any such defaults expeditiously;

(vi) 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;

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(vii) 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 Federal Housing Finance Board and by the Boston Bank at any time during normal business hours.

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 Boston Bank for the master servicing of the Loans in accordance with the provisions of this Agreement, provided, however, that the MPF Provider’s liability arising from or related to its master servicing obligations under this Section 5.2 shall be limited to solely liability resulting from the MPF Provider’s or Master Servicer’s negligence or willful misconduct.

5.3. Acknowledgements. The MPF Provider shall provide copies of the Custodian’s and Master Servicer’s acknowledgments that the Boston Bank is an intended third party beneficiary of the agreements between the Custodian and the MPF Provider and between the Master Servicer and the MPF Provider, respectively.

5.4. Approval of Boston Bank PFIs. The MPF Provider and the Boston Bank shall jointly determine the first fifteen (15) Boston Bank members through which Loans will be originated or from which Loans will be purchased pursuant to the MPF Program. Thereafter, the Boston Bank shall continue to supply the MPF Provider a copy of each member’s PFI application, or portion thereof as specified in the FHLB Guide, prior to approving any of its members as a PFI. If the MPF Provider objects to the approval of any member as an Originator and/or Servicer within the time period provided in the FHLB Guide, then the parties agree to have the suitability of the Boston Bank member reviewed by KPMG Peat Marwick LLP or such other third party agreed to by the parties, and they both agree to abide by the determination of such auditor to either approve or deny the application of such member to become a Boston Bank PFI. The costs of such review and recommendation shall be paid by the Boston Bank unless the parties agree otherwise. The Boston Bank shall enter into a PFI Agreement in the form provided by the MPF Provider with each such member in order for its member to be deemed a “PFI” under this Agreement. The Boston 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.

5.5. Creditworthiness of PFIs. Because the financial condition of a PFI may impact the quality of its servicing, the Boston Bank shall supply information as requested by the MPF Provider for evaluating the creditworthiness of each Boston Bank PFI to provide the credit enhancement required of such PFI under the MPF Program, consistent with applicable law and regulation. The Boston Bank shall promptly inform the MPF Provider or any participant in the Program Loans, of any material adverse changes in the financial condition of any Boston Bank PFIs of which it becomes aware. The Boston 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.

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5.6. Training of Boston Bank PFIs. If requested in writing by the Boston Bank, the MPF Provider shall train the personnel of the PFIs to enable them to participate in the MPF Program as Originators (defined in the Guides), sellers and Servicers in accordance with the Guides. The costs and expenses of MPF Provider’s personnel shall be paid for by the Boston Bank for any training supplied by the MPF Provider. All PFI training materials shall be supplied by or approved by the MPF Provider.

5.7. MPF Program Materials. Any MPF Bank may submit requests for revisions to the PFI Agreements, the Guides and other MPF Program documents at any time. The MPF Provider may revise the form of the PFI Agreements, the Guides or any other MPF Program document at any time, provided that the effective date of changes to the Guides may be delayed to allow appropriate time for the MPF Bank and/or the PFIs to make changes to their systems. The MPF Provider shall send revisions to the Guides directly to the Boston Bank PFIs.

5.8. Support of Boston Bank 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 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 Boston Bank PFIs in a commercially reasonable manner and with no less service than the MPF Provider is providing to its own participating members. The MPF Provider shall provide the data transmissions and reports as required by the FHLB Guide.

5.9. Execution of Master Commitments. The Boston Bank will establish the Spread Account/First Loss Account percentage, the Maximum Credit Enhancement Amount and the credit enhancement fee for each Master Commitment in accordance with the FHLB Guide, and notify the MPF Provider of the same. The Service Center’s personnel will be responsible for entering each Master Commitment into the MPF Program system. All Participation Shares 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 under Designated Delivery Commitments.

5.10. Delivery Commitments; Pricing.

5.10.1. Pricing of Loans. Pursuant to the delegation of pricing authority established by the Federal Housing Finance Board in Resolution No. 99-50, dated October 4, 1999, the Boston Bank has elected to utilize the pricing methodology developed by the MPF Provider, provided that such methodology shall not be modified without prior notice to the Boston Bank. Thus, the MPF Provider shall be responsible for the calculation and publication of the prices applicable to both Agency Loans and Closed Loans.

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5.10.2. Delivery Commitments. (a) As provided in the Guides, the MPF Provider’s Service Center will publish Rate and Fee Schedules for Agency Loans and Closed Loans not purchased in bulk transactions. Rate and Fee Schedules for Closed Loans purchased in bulk transactions may be calculated by the MPF Provider separately for each Delivery Commitment. Rate and Fee Schedules are subject to change as provided for in the Guides. The Boston Bank PFIs will contact the Service Center to obtain and fill Delivery Commitments. The Service Center will provide reports and loan data transmissions concerning all Delivery Commitment activities of the Boston Bank PFIs to the Boston Bank at the times and in the manner provided in the FHLB Guide. The funding and purchasing of Program Loans will be processed through a PFI’s DDA Account with the Boston Bank. The Service Center shall compute any Pairoff Fees that are owed to the Boston Bank by any PFI and will report these amounts to the Boston Bank. The Boston Bank shall be responsible for collecting Pairoff Fees from its PFIs and disbursing the same to itself and its participants (including the MPF Provider), as applicable.

(b) (i) At any time when outstanding Program Loans funded or purchased pursuant to this Agreement (regardless of the issuance of any participation interests therein) are less than One Billion Dollars ($1,000,000,000), the Boston Bank shall have the right to identify Designated Delivery Commitments by giving a Liquidity Option Notice to the MPF Provider. Pursuant to the issuance of such Liquidity Option Notice, the MPF Provider hereby agrees to acquire a 100% participation in the Program Loans funded or purchased under any Delivery Commitments requested by the Boston Bank’s PFIs, such Delivery Commitments shall be issued as Designated Delivery Commitments.

(ii) If outstanding Program Loans funded or purchased pursuant to this Agreement (regardless of the issuance of any participation interests therein) equal or exceed One Billion Dollars ($1,000,000,000), the MPF Provider may, at its sole discretion either accept in writing a Liquidity Option Notice from the Boston Bank and acquire a 100% participation in such Designated Delivery Commitments, or advise the Boston Bank that it elects to treat the Liquidity Option Notice as the Boston Bank’s election not to issue any Delivery Commitments for the remainder of that Business Day. In such later case, the MPF Provider shall cancel all prices published on behalf of the Boston Bank until the next Business Day.

(iii) Any Liquidity Option Notice must be given to the MPF Provider as provided for in the FHLB Guide. The MPF Provider’s 100% participation in the Program Loans funded or purchased under Designated Delivery Commitments shall be pursuant to a Liquidity Option MPF Participation Agreement, which shall be in a form mutually acceptable to the parties.

5.11. Quality Control and Loss Mitigation. The MPF Provider will perform the same level of quality control review and loss mitigation oversight for the Boston Bank’s Program

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Loans as it performs for its own Loans and will communicate the results of its quality control activities and loss mitigation oversight promptly to the persons designated by the Boston Bank to receive such reports. Consistent with applicable law and regulation, the Boston Bank agrees to provide information to the MPF Provider for monitoring the PFIs’ origination and servicing activities. The Boston Bank agrees to administer its PFI Agreements in accordance with their terms, including the Guides and all incorporated documents. The Boston Bank hereby acknowledges that the MPF Provider, as the drafter of the MPF Program documents, can provide a definitive interpretation of such documents in the event of conflict with a PFI over their meaning. The obligation of the Boston Bank to manage the PFIs’ origination and servicing activities with respect to Program Loans shall survive termination of this Agreement.

5.12. Transactional Relationships.

5.12.1. Maintenance of Accounts at the MPF Provider. The Boston Bank will establish and maintain the Clearing Account with the MPF Provider.

5.12.2. Funding of Payment Obligations. The MPF Provider agrees to fund its share of all Program Loans through the Boston Bank’s Clearing Account with the MPF Provider which obligation shall be fulfilled by its funding the Clearing Account with same day funds from time to time in amounts sufficient to cover its contractual obligations. The MPF Provider hereby consents to the Boston Bank withdrawing funds from the Clearing Account from time to time to satisfy the MPF Provider’s obligations to fund its share of Program Loans and any other obligation under this Agreement. The Boston Bank hereby consents to the MPF Provider withdrawing funds from the Clearing Account from time to time to satisfy the Boston Bank’s obligations to pay any fees and any other obligation under this Agreement.

5.12.3. Interest on Clearing Account. The MPF Provider will credit to the Boston 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 Boston 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 Boston 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%).

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5.13. Relationship of the Parties; Restrictions on Transfers. (a) The MPF Provider or its designee will hold the Loan Documents pertaining to the Boston Bank Program Loans in the same manner as it holds Loan Documents pertaining to its own Program Loans. The Boston Bank will receive and hold all receipts and collections with respect to the Program Loans funded through or purchased from the Boston Bank PFIs, for the benefit of itself, the MPF Provider and any other participants who may invest therein, in accordance with their respective interests in the Loans. Except to the extent of its obligations under Section 5.1, the MPF Provider shall have no fiduciary duty to the Boston Bank. Except to the extent of its obligations under Sections 6.4.1. and 7.3., the Boston Bank shall have no fiduciary duty to the MPF Provider. The Boston Bank and the MPF Provider agree that their respective decisions to invest in their respective shares of the Program Loans to be funded or purchased under each Master Commitment shall be independent credit decisions.

(b) Notwithstanding the foregoing, the Boston Bank agrees that it will not sell or transfer any of its interests in Program Loans or its rights under this Agreement, or any portion of 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 Program Loans, provided, however, servicing must be provided by a PFI or an MPF Program approved Servicer, and the Boston Bank shall continue to monitor the creditworthiness of its PFIs and, when appropriate to protect the interests of the holders of the Program Loans, demand and hold collateral to secure any of its PFIs’ obligations under their respective PFI Agreements. The MPF Provider will continue to provide reports defined by Master Commitment.

5.14. Memo Spread Account/First Loss Account Allocations. The MPF Provider and the Boston Bank shall each maintain their own respective loan loss reserves with respect to the Program Loans. The Spread Account/First Loss Account for each Master Commitment (which is an off balance sheet contingent liability) will be allocated between the parties based upon their pro rata interests in such Master Commitment.

5.15. Rescission of Payments. If all or part of any payment of Loan Recoveries or other amounts paid to the Boston Bank is rescinded or must otherwise be returned for any reason and if the Boston Bank has paid to the MPF Provider its pro rata share thereof, then the MPF Provider shall pay to the Boston Bank an amount equal to the MPF Provider’s pro rata share of the amount which was rescinded or which must be so returned by the Boston Bank in accordance with the requirements of the FHLB Guide. The MPF Provider shall also pay to the Boston Bank any interest on such Loan Recoveries which was also rescinded or must be returned.

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ARTICLE VI

REPRESENTATIONS AND COVENANTS

6.1. Participation Share and Management of Assets.

6.1.1. Participation Share. Notwithstanding the Boston Bank obligations under Delivery Commitments to fund Agency Loans, the MPF Provider will become vested in its Participation Share in each such Agency Loan concurrent with the funding of said loan, and without the need for further documentation, upon the deposit by the MPF Provider of its Participation Share to the Boston Bank’s Clearing Account. Upon purchase of each Closed Loan by the Boston Bank and the deposit by the MPF Provider of its Participation Share of such Closed Loan to the Boston Bank’s Clearing Account, the MPF Provider shall, without the need for further documentation, become vested in its Participation Share of such Closed Loan.

6.1.2. Management of Assets. The PFIs are obligated under the terms of the PFI Agreements to perform all customary servicing functions, including loss mitigation and property disposition, with respect to the Program Loans. The Boston Bank shall have the responsibility to protect its Program Loans by enforcing the terms of the PFI Agreement and PFIs compliance with the Guides, on behalf of itself and the MPF Provider. Except for funds received from the MPF Provider, if the Boston Bank shall in any manner receive any Loan Recoveries or property in connection with any such Loan, including but not limited to payments from PFIs or the proceeds of collateral pledged by PFIs to secure their respective obligations under PFI Agreements, the Boston Bank shall transfer to the MPF Provider its pro rata share of all such receipts as provided in the FHLB Guide.

6.1.3. Sharing in the Assets. The Boston Bank and MPF Provider shall be entitled to their respective pro rata shares of all principal, interest and other recoveries received relative to each of the Boston Bank Program Loans subject to their respective pro rata obligations with respect to the (i) the credit enhancement fees payable under the applicable PFI Agreement, (ii) Realized Losses defined in the applicable PFI Agreement, (iii) Agent Fees under the PFI Agreement and all other costs and expenses incurred or payable for the management of the asset, with respect to such Loan or the PFI Agreement to which such Loan relates, and (iv) Administrative Costs in connection with such dispositions that are in excess of the Spread Account/First Loss Account and the Credit Enhancement provided by the PFI.

6.2. Risk of Loss. (a) The Boston Bank assumes all risk of loss in connection with retaining its share of each Boston Program Loan, and its execution of each PFI Agreement and each Master Commitment except for any losses arising directly from the negligence or willful misconduct of the MPF Provider in its provision of services pursuant to this Agreement or breach of its fiduciary duties; 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. The Boston Bank acknowledges that it is familiar with the Guides and the FHLB Guide and the operation of the MPF Program as described therein.

(b) The MPF Provider assumes all risk of loss in connection with the investment in its Participation Share of each Boston Bank Program Loan, except for any losses arising directly from the negligence or willful misconduct of the Boston Bank in the performance of its obligations under this Agreement or breach of its fiduciary duties; 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.

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6.3. Loan Recoveries.

6.3.1. Application of Loan Recoveries. All Loan Recoveries received in connection with each Loan shall be applied as provided in the Loan Documents if specific provision is made therefor, or otherwise in the following order of priority:

(a) to the payment of all Administrative Costs, if any;

(b) to the payment of any amounts payable by the Borrower pursuant to any Loan Document (other than the payment of interest or principal) to protect the interests of the holder of the Loan and to the repayment of any amount permitted to be paid by the lender under the Loan Documents and actually paid by the PFI, the Boston Bank or the MPF Provider (such as past due taxes not paid by Borrower), if any;

(c) to the payment of all interest due and payable on the Note; and

(d) to the payment of principal of the Note.

Notwithstanding any other term or condition in this Agreement, in the event that any party has advanced moneys with respect to items (a) and (b) above, the party that has advanced such fees shall be reimbursed by the other according to its pro rata share of said advances.

6.3.2. Default by Borrowers or PFIs; Enforcement. (a) The parties are entitled to assume that no Borrower or PFI default or event which, with the giving of notice or lapse of time, or both, would constitute such a default, has occurred and is continuing unless the parties (i) have actual knowledge of such default or event, or (ii) have been notified in writing that such a default or event has occurred.

(b) Under the terms of the PFI Agreement, the PFI shall be responsible for taking whatever action that is appropriate to enforce the rights and remedies accruing on account of such Borrower default. The Boston Bank shall be responsible for taking whatever action that is appropriate to enforce the rights and remedies accruing on account of any PFI default. All related costs and expenses of such enforcement are Administrative Costs and are subject to the terms of Section 6.1.3.

(c) If any Borrower or PFI fails to pay taxes, assessments, insurance premiums or any other charges or expenditures for which such Borrower or PFI is responsible, the Boston Bank may, but shall not be required to, advance the necessary amounts or make such expenditures.

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6.4. Boston Bank’s Covenants. The Boston Bank covenants and agrees as follows:

6.4.1. Collateral for Credit Enhancement The Boston Bank holds for its, the MPF Provider’s and any other investors’ proportional benefit the proceeds of all collateral provided from time to time by each Boston Bank PFI under its PFI Agreement or any other credit agreement, securing performance and payment of the credit enhancement obligations of the PFI under its PFI Agreement. The parties acknowledge that (i) a security interest in a PFI’s assets under the PFI Agreement is obtained by the incorporation by reference into that document of the PFI’s advances and security agreement executed with the Boston 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 Boston Bank on a pari passu basis, which include the credit enhancement and other obligations arising under the PFI Agreement and any advances made by the Boston Bank or MPF Provider, 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.

6.4.2. Use of Proprietary Information and Confidentiality. The Boston Bank has been and may hereafter 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”). The Boston Bank agrees (i) to keep the Confidential Information confidential using reasonable means, not less than those used to protect its own proprietary material, (ii) to 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 Boston 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, and (iii) upon completion of its use of the Confidential Information or at any time upon the MPF Provider’s request, to promptly return the Confidential Information to the MPF Provider, including all copies made thereof in any format and all notes pertaining to the same. The Boston Bank further agrees that if it is served with process or any other governmental or regulatory request for the Confidential Information, it will immediately notify the General Counsel of the MPF Provider as provided in the FHLB Guide, prior to complying with such process, order or request, unless prohibited by applicable law, regulation or court order. The term “Confidential Information” does not include information that (a) is or becomes publicly known or enters the public domain; or (b)(i) was available to the Boston Bank prior to its disclosure to the Boston Bank by the MPF Provider or (ii) becomes available to the Boston Bank from a source other than the MPF Provider, provided that such source is not known by the Boston Bank to be subject to another confidentiality agreement with the MPF Provider.

Nothing in this Agreement in intended to limit or prohibit the Boston Bank from developing or participating in a program or offering a product that resembles or competes with the MPF Program except to the extent that Confidential Information may not be

17

used by the Boston Bank or anyone receiving Confidential Information from the Boston Bank to develop or assist in the development of any program or product that resembles or competes with the MPF Program and that the use of Confidential Information is subject to the terms of this Section 6.4.2.

6.4.3. Use of Intellectual Property. The MPF Provider hereby licenses to the Boston 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:

(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 Boston 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 Boston 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 Boston 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.

6.5. Authorization and Enforceability Representations. Each of the parties 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 obtained and (iii) this Agreement is the legal, valid and binding obligation of such party, enforceable against it.

6.6. MPF Provider Representations and Warranties. In addition to the above representations, the MPF Provider represents to the Boston Bank and warrants 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 & Community Bankers Assoc., et al. v. Federal Housing Finance Board, Case No. A 97 CA 421SS (W. Dist. Texas). Further, the MPF Provider represents to the Boston 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.

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6.7. Boston Bank’s Indemnification Obligation. The Boston Bank acknowledges that the ability to participate in the MPF Program will be based upon its representations and warranties set forth above, and the Boston 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 Boston Bank in this Agreement, or any breach by Boston Bank of its warranties set forth in this Agreement. The Boston 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).

6.8. MPF Provider’s Indemnification Obligation. The MPF Provider agrees to indemnify, defend and hold harmless the Boston 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, or any breach by MPF Provider of its warranties set forth in this Agreement. The 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).

6.9. Review of Accounting Books and Records. From time to time upon reasonable advance request, either party shall be entitled to review, at its cost, the accounting books and records of the other party with respect to the Boston Bank’s participation in the MPF Program. Both parties agree and acknowledge that the other party need not provide copies of or information pertaining to confidential bank examiner’s reports.

ARTICLE VII

TERMINATION

7.1. 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 notice if the cure is commenced within the sixty (60) day period and diligently pursued thereafter.

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7.2. Termination and Other Remedies.

7.2.1. Remedies for the Boston Bank’s Default. Without limiting the effect of Section 6.7, upon the occurrence of an Event of Default caused by the Boston Bank, (i) the Boston Bank shall, at the option of the MPF Provider, cease issuing new Master Commitments under the MPF Program, provided that all other provisions of this Agreement shall remain in full force and effect for the Boston Bank’s outstanding Program Loans (including Program Loans funded or purchased under existing Master Commitments), and (ii) the Boston Bank shall pay to the MPF Provider an amount equal to the MPF Provider’s actual and direct damages arising from the Event of Default, but the Boston Bank shall have no responsibility for any consequential or punitive damages.

7.2.2. Remedies for the MPF Provider’s Default or for a Termination Event. Without limiting the effect of Section 6.8., upon the occurrence of an Event of Default caused by the MPF Provider or a Termination Event, (i) the Boston Bank shall have the right to cease issuing new Master Commitments, provided that all other provisions of this Agreement shall remain in full force and effect for the Boston Bank’s outstanding Program Loans (including Program Loans funded or purchased under existing Master Commitments) except (ii) the Transaction Services Fee for support services provided by the MPF Provider shall be at a rate equal to the lesser of (a) the rate described in Section 2.4., or (b) the MPF Provider’s costs of providing such services to the Boston Bank, subject however, to the provisions of Sections 5.11, 6.7. and 7.3., and (iii) the MPF Provider shall pay to the Boston Bank an amount equal to the Boston Bank’s actual and direct damages arising from the Event of Default, but the MPF Provider shall have no responsibility for any consequential or punitive damages. For purposes of this Section 7.2.2., the MPF Provider’s costs in providing support services shall be calculated on a pro rata basis for all Loans in the MPF Program rather than on a marginal basis, and shall include all costs and expenses incurred in improving the MPF System, whether or not such charges are considered capital improvements or chargeable over more than one accounting period.

7.3. Obligations Regarding PFIs; Support for Program Loans. (a) The Boston Bank’s covenant to monitor the credit and collateral of PFIs set forth in Section 6.4. and the Boston Bank’s obligations set forth in this Section 7.3. shall apply and shall survive the expiration or termination of this Agreement as well as the sale of the Program Loans by the Boston Bank.

(b) The Boston Bank hereby acknowledges that the MPF Provider has the need to have the credit enhancement obligations of any PFI relating to Program Loans in which the MPF Provider has an interest secured if the creditworthiness of the PFI should become impaired. The Boston Bank agrees to notify the MPF Provider of any material adverse changes in the financial condition of those PFIs who provide credit enhancements for any Program Loans in which the MPF Provider has an interest, and to share relevant credit assessments and information on those PFIs with the MPF Provider.

(c) The Boston Bank agrees to call and hold for the benefit of the MPF Provider and any other participants collateral as may be necessary to secure the obligations of the Boston Bank PFIs under their respective PFI Agreements to maintain the value of such PFI obligations.

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7.4. Costs of Enforcement. Each party agrees to bear its own share of any and all liabilities, costs, expenses and disbursements (including, without limitation, reasonable attorneys’ fees and other legal expenses) incurred by it in any effort to collect any amounts payable hereunder to it by the other party.

7.5. Exculpation of Parties. Neither party nor any of its shareholders, directors, officers, employees or agents shall be liable to the other for any obligation, undertaking, act or judgment of any Borrower, any PFI, any guarantor or any other person, or be bound to ascertain or inquire as to the performance or observance by any PFI of any provision of any PFI Agreement, Master Commitment, the Guides, any Loan or any of the Loan Documents.

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 (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, delivery fee prepaid. 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 Boston Bank.

8.3. Addresses. For purposes of this Agreement, the address, telephone and facsimile numbers for the Boston Bank and the electronic transmission information for the Boston Bank are as set forth below its signature to this Agreement. For purposes of this Agreement, the address, telephone and facsimile numbers for the MPF Provider and the electronic transmission information for the MPF Provider are as set forth in the FHLB Guide. Any such change must be given in writing and given in accordance with the provisions of Section 8.1 or as published in the FHLB Guide from time to time, but shall be effective only upon actual receipt.

8.4. Effect of Agreement. The MPF Provider will have no obligation or responsibility to the Boston Bank except as specifically stated herein. 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 Boston Bank which is not embodied in this Agreement and the incorporated FHLB Guide.

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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, when so executed and delivered, shall be deemed an original and all of which, 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 and applicable federal law.

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. Subject to the terms of Section 5.13., this Agreement shall be binding upon and inure to the benefit of the MPF Provider and the Boston Bank and their respective successors and permitted assigns. Nothing contained in this Agreement shall limit the right of the MPF Provider to transfer participation interests in its Participation Share in Program Loans that were funded or purchased under PFI Agreements with the Boston Bank.

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 be effective unless in writing and executed and delivered by the MPF Provider and the Boston Bank.

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

22

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 Boston 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 Federal Housing 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 Boston 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 Boston Bank hereby waives any and all personal or other rights to object to such jurisdiction for such purposes. The Boston 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 agree 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 Boston Bank and MPF Provider waive all claims of lack of effectiveness or error by reason of any such service.

IN WITNESS WHEREOF, each of the MPF Provider and the Boston Bank has caused this Agreement to be executed by its duly authorized officers, as of the date first above written.

MPF PROVIDER: FEDERAL HOME LOAN BANK OF CHICAGO
By:	/s/ Kenneth L. Gould
Title:	Executive Vice President

23

BOSTON BANK:
FEDERAL HOME LOAN BANK OF BOSTON
By:	/s/ Michael L. Wilson
Title:	Senior Expand COO
Address:	One Financial Center, 20th Floor Boston, Massachusetts 02111
Attention:	Michael L. Wilson
Facsimile No.: (617)261-3450
Electronic Transmission: Michael.wilson@fhlbboston.com

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APPENDIX A

Boston Bank’s Aggregate Loan Balance	Transaction Services Fee Tiered Annual % Rate		Cumulative Annual % Rate
First $100 Million	0.25	%	0.250	%
>$100 Million to $500 Million	0.17	%	0.186	%
>$500 Million to $1 Billion	0.13	%	0.158	%
>$1 Billion to $2 Billion	0.12	%	0.139	%
>$2 Billion to $4 Billion	0.11	%	0.125	%
>$4 Billion to $10 Billion	0.10	%	0.110	%
More than $10 Billion	0.10	%

EX-10.6.1

EXHIBIT 10.6.1

FIRST AMENDMENT TO

MORTGAGE PARTNERSHIP FINANCE^®

INVESTMENT AND SERVICES AGREEMENT

THIS FIRST AMENDMENT TO INVESTMENT AND SERVICES AGREEMENT (the “Amendment”) is made as of the 7th day of September, 2000, between the FEDERAL HOME LOAN BANK OF CHICAGO (the “MPF^® Provider”) and the FEDERAL HOME LOAN BANK OF BOSTON (the “Boston Bank”).

RECITALS:

WHEREAS, the Boston Bank and the MPF Provider have previously entered into that certain MORTGAGE PARTNERSHIP FINANCE Investment and Services Agreement dated as of April 20, 2000 (the “Agreement”) pursuant to which the parties agreed, among other things, to make the MORTGAGE PARTNERSHIP FINANCE Program available to members of the Boston Bank; and

WHEREAS, the parties desire to amend the Agreement to modify the Participation Share provision, to reduce to zero the MPF Provider’s Participation Share in the first One Billion Dollars of Program Loans sold to the Boston Bank under the Fleet MC (hereinafter defined), and to set the MPF Provider’s Participation Share to 25% of any Program Loans sold under the Fleet MC in excess of One Billion Dollars. 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 by deleting Section 2.2 (b) in its entirety and substituting the following in its place:

(b) In lieu of paying the Program Contribution, the Boston Bank hereby agrees to grant the MPF Provider a Participation Share in the amount of a fifty percent (50%) interest in the Program Loans purchased by the Boston Bank under that certain Master Commitment issued for an amount up to One Billion Two Hundred Million Dollars, dated August 22, 2000, to Second Charter Reinsurance Company (the “SCRC MC”), and the MPF Provider agrees to acquire such Participation Share and that no Transaction Services Fee is payable with respect to such Program Loans, provided, however, that if less than Five Hundred Million Dollars of Program Loans are acquired under the SCRC MC, then the Boston Bank agrees to grant the MPF Provider a Participation Share in the amount of a fifty percent (50%) interest in Program Loans acquired under one or more Master Commitments that in the aggregate, equal the difference between Five Hundred Million Dollars and the actual amount of Program Loans purchased by the Boston Bank under the SCRC MC, and the MPF Provider agrees to acquire such Participation Share and that no Transaction Services Fee is payable with respect to such Program Loans. Without limiting the foregoing, the Boston Bank and the MPF Provider agree that the MPF Provider’s Participation Share with respect to the first One Billion Dollars of Program Loans purchased by the Boston Bank under the Fleet MC shall be zero but the Boston

Bank hereby agrees to grant the MPF Provider a Participation Share in the amount of a twenty-five percent (25%) interest any Program Loans purchased by the Boston Bank under the Fleet MC in excess of One Billion Dollars, and the MPF Provider agrees to acquire such Participation Share and that no Transaction Services Fee is payable with respect to such Program Loans. The MPF Provider further acknowledges and agrees that its obligation to acquire the Participation Share described in the preceding sentence shall not be limited by or conditioned upon any requirement that the Boston Bank purchase any additional Program Loans of a type other than original MPF for FHA insured/VA guaranteed Loans.

2. The Agreement is hereby amended with respect the Fleet MC only, and not with respect to any other Master Commitments, by exempting the first One Billion Dollars of Program Loans purchased by the Boston Bank under the Fleet MC from the provisions of Section 2.4 of the Agreement.

3. The Agreement is hereby amended by adding the following definition to Article I:

“Fleet MC” shall mean that certain Master Commitment the Boston Bank entered into with Fleet National Bank, dated August 24, 2000, in an amount up to Two Billion Dollars.

4. 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 BOSTON
By:	/s/ Kenneth L. Gould	By:	/s/ Michael L. Wilson
	Kenneth L. Gould		Michael L. Wilson
	Executive Vice President		Executive Vice President & COO

2

EX-10.6.2

EXHIBIT 10.6.2

SECOND AMENDMENT TO

MORTGAGE PARTNERSHIP FINANCE^®

INVESTMENT AND SERVICES AGREEMENT

THIS SECOND AMENDMENT TO INVESTMENT AND SERVICES AGREEMENT (the “Amendment”) is made as of the 18^thday of May, 2001, between the FEDERAL HOME LOAN BANK OF CHICAGO (the “MPF^® Provider”) and the FEDERAL HOME LOAN BANK OF BOSTON (the “Boston Bank”).

RECITALS:

WHEREAS, the Boston Bank and the MPF Provider have previously entered into that certain MORTGAGE PARTNERSHIP FINANCE Investment and Services Agreement dated as of April 20, 2000, amended by First Amendment dated September 7, 2000 (together, the “Agreement”) pursuant to which the parties agreed, among other things, to make the MORTGAGE PARTNERSHIP FINANCE (“MPF”) Program available to members of the Boston Bank; and

WHEREAS, the parties desire to amend the Agreement to modify the Participation Share provision, to reduce to zero the MPF Provider’s Participation Share in the Program Loans sold to the Boston Bank under the Shorted MCs (hereinafter defined), and to increase by a corresponding amount the MPF Provider’s Participation Share in the Program Loans sold under the Increased MCs (hereinafter defined). 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 Shorted MCs and Increased MCs, but not with respect to any other Master Commitments, by amending Sections 2.3 and 2.5 so that the Shorted MCs shall be excluded from the grant by the Boston Bank of a Participation Share to the MPF Provider, and the MPF Provider shall waive its rights (i) to receive a Participation Share in the Shorted MCs and (ii) to be paid a Transaction Services Fee with respect to the Program Loans delivered under the Shorted MCs.

2. From Time to time, the Boston Bank anticipates executing various Master Commitments that do not conform to the established MPF Product requirements (each, a “Shorted MC” and collectively, the “Shorted MCs”). Shorted MCs shall be identified by using the “Master Commitment Participation Form” in the form of Exhibit A attached hereto. The MPF Provider is willing to consent to such non-conforming Shorted MCs provided that (i) its Participation Share therein be reduced to zero and (ii) the Boston Bank grant increased Participation Shares in other Master Commitments to make up for the amount of the Participation Share that would otherwise have been granted to the MPF Provider with respect to the Shorted MCs had the MPF Provider received the amount of the Participation Share it is entitled to receive under Sections 2.2 and 2.5 of the Agreement (such amount referred to herein as the “Forgone Participation Amount”).

3. Commencing with the third month following the first delivery of Program Loans under the first Shorted MC, and each 90 days thereafter, until the final amount of Program Loans delivered under the Shorted MCs has been determined, the MPF Provider shall determine the aggregate Forgone Participation Amount, and the Boston Bank shall deliver a notice or direction increasing the MPF Provider’s Participation Share of existing Master Commitments and/or new Master Commitments (each, an “Increased MC” and collectively, the “Increased MCs”) which increased aggregate amount of the Participation Shares are estimated to equal, when the Shorted MCs and Increased MCs have been filled, the aggregate Forgone Participation Amount. Increased MCs shall be identified by using the “Master Commitment Participation Form” in the form of Exhibit A attached hereto.

4. The parties acknowledge that adjustments of the percentage of the Participation Share to reflect the Forgone Participation Amount will be an ongoing process given that participation percentages must be set from time to time before the parties can know the amount of Program Loans that will actually be delivered under the Shorted MCs and/or the Increased MCs. The parties agree to use good faith making periodic adjustments to the Participation Share granted under the Increased MCs so as to come as close as possible each quarter to putting the parties in the same relative position that they would have been, in terms of aggregate interests in Boston Bank Program Loans, had they followed the provisions of Sections 2.2 and 2.5 of the Agreement. The MPF Provider shall provide a written reconciliation upon request of the Boston Bank.

5. 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 BOSTON
By:	/s/ Kenneth L. Gould	By:	/s/ Michael L. Wilson
	Kenneth L. Gould		Michael L. Wilson
	Executive Vice President		Executive Vice President & COO

2

EXHIBIT A

Master Commitment Participation Form

(for Shorted MC or Increased MC subject to the Second Boston Amendment)

MPF Bank - Owner: Federal Home Loan Bank of Boston

PFI Name: __________________________________________

PFI Number: __________________________

Master Commitment Number: _______________________

Master Commitment Participation allocation:

MPF Bank:		Authorized Signature:	Date:
By signing below the Federal Home Loan Bank of Boston agrees that the Master Commitment referenced in this Participation Form is subject to the terms of the Second Amendment to Investment and Services Agreement between the Federal Home Loan Bank of Boston and the Federal Home Loan Bank of Chicago (the “Second Boston Amendment”).
Boston:	%	______________________________________________	________
Atlanta:	%	______________________________________________	________
Chicago:	%	______________________________________________	________
Cincinnati:	%	______________________________________________	________
Dallas:	%	______________________________________________	________
Des Moines:	%	______________________________________________	________
Indianapolis:	%	______________________________________________	________
New York:	%	______________________________________________	________
Pittsburgh:	%	______________________________________________	________
Topeka:	%	______________________________________________	________
San Francisco:	%	______________________________________________	________
Seattle:	%	______________________________________________	________
By signing below the MPF Provider agrees that the Master Commitment referenced in this Participation Form is subject to the terms of the Second Boston Amendment. MPF Provider Acknowledgment:

Name Date

3

EX-10.6.3

EXHIBIT 10.6.3

THIRD AMENDMENT TO THE

MORTGAGE PARTNERSHIP FINANCE^®

INVESTMENT AND SERVICES AGREEMENT

THIS THIRD AMENDMENT to the INVESTMENT AND SERVICES AGREEMENT is made as of the 18^th day of March, 2003, between the FEDERAL HOME LOAN BANK OF CHICAGO (the “MPF^® Provider”) and the FEDERAL HOME LOAN BANK OF BOSTON (the “Boston Bank”).

RECITALS:

WHEREAS, the Boston Bank and the MPF Provider have previously entered into that certain MORTGAGE PARTNERSHIP FINANCE Investment and Services Agreement dated as of April 20, 2000, amended by First and Second Amendments dated September 7, 2000 and May 18, 2001, a Custody Amendment dated November 14, 2001, and a Custody Amendment dated December 31, 2002 (together, the “I&S Agreement”) pursuant to which the parties agreed, among other things, to make the MORTGAGE PARTNERSHIP FINANCE (“MPF”) Program available to members of the Boston Bank; and

WHEREAS, the Boston Bank and the MPF Provider wish to modify the terms of the I&S Agreement to extend the term of the I&S Agreement in the manner set forth below.

NOW THEREFORE, in consideration of the foregoing recitals and the covenants contained herein, the parties hereto agree as follows:

1. The I&S Agreement is hereby modified by deleting the first sentence of Section 2.1 Term of Agreement and substituting the following therefor: “Unless terminated earlier as provided in Section 7.2.2, the initial term of this Agreement shall be four (4) years ending on the fourth anniversary of the date of this Agreement and thereafter, his Agreement shall continue in force until terminated by either party giving the other party ninety (90) days written notice.”

2. Section 2.4 of the I&S Agreement is hereby amended so that no Transaction Services Fee shall become due or payable under the I&S Agreement through December 31, 2003.

3. Except for the terms of this Third Amendment, the I&S Agreement remains unmodified and in full force and effect.

IN WITNESS WHEREOF, the parties have caused this Third 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 BOSTON
By:	/s/ Kenneth L. Gould	By:	/s/ M. Susan Elliott
Name:	Kenneth L.Gould	Name:	M. Susan Elliott
Title:	Executive Vice President	Title:	Executive Vice President

“MORTGAGE PARTNERSHIP FINANCE®” and “MPF®” are registered trademarks of the Federal Home Loan Bank of Chicago.

EX-10.6.4

EXHIBIT 10.6.4

FOURTH AMENDMENT TO

MORTGAGE PARTNERSHIP FINANCE^®

INVESTMENT AND SERVICES AGREEMENT

THIS FOURTH AMENDMENT TO MORTGAGE PARTNERSHIP FINANCE INVESTMENT AND SERVICES AGREEMENT (the “Amendment”) is made as of the 21^st day of January, 2004, between the FEDERAL HOME LOAN BANK OF CHICAGO (the “MPF^® Provider”) and the FEDERAL HOME LOAN BANK OF BOSTON (the “Boston Bank”).

RECITALS:

WHEREAS, the Boston Bank and the MPF Provider have previously entered into that certain MORTGAGE PARTNERSHIP FINANCE Investment and Services Agreement dated as of April 20, 2000, amended by First Amendment dated September 7, 2000, a Second Amendment dated May 18, 2001, Custody Amendments dated November 14, 2001 and December 31, 2002, and a Third Amendment dated March 18, 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 Boston Bank; and

WHEREAS, the Agreement currently prohibits changing the participation interests in any Master Commitment once Program Loans have been delivered under such Master Commitment; and

WHEREAS, the parties desire to amend the Agreement to extend the term, to allow the Boston Bank’s retained interest and the MPF Provider’s Participation Share in the Program Loans to vary for different Delivery Commitments within a Master Commitment and also to change the method for assessing, and the rate for, the Services Transaction Fee.

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 modified by deleting the first sentence of Section 2.1 Term of Agreement and substituting the following in its place:

Unless terminated earlier as provided in Section 7.2.2, the initial term of this Agreement shall be six (6) years ending on the sixth anniversary of the date of this Agreement and thereafter, this Agreement shall continue in force until terminated by either party giving the other party ninety (90) days written notice.

2. Section 2.3 of the Agreement is hereby deleted in its entirety and the following substituted in its place:

2.3 Option to Change Participation Share. Commencing January 1, 2004, the Boston Bank shall have the right to change the percentage of the MPF Provider’s Participation Share in Program Loans to be acquired by the Boston Bank under a Master Commitment by giving the MPF Provider prior

written notice in the form of the Direction described in Section 5.9 (as amended) to be effective on the date specified in such Direction (“Effective Date”). Subject to the provisions of Sections 2.4. and 2.5., the MPF Provider will continue to provide operational support services for all Program Loans.

3. Section 2.4 of the Agreement is hereby deleted in its entirety and the following substituted in its place:

2.4. Transaction Services Fee.

(a) Commencing in February, 2004, the Boston Bank shall pay a monthly Transaction Services Fee to the MPF Provider as compensation for the transaction processing services to be provided to the Boston Bank, all payments to be made by the MPF Provider debiting the Boston Bank’s Clearing Account.

(b) The Transaction Services Fee shall be calculated each month by multiplying (x) one-twelfth of the applicable annual rate by (y) the aggregate outstanding balance of the Boston Bank’s retained interest in the Covered Loans at the end of the previous month as reported by the Master Servicer. The annual rate for the Transaction Services Fee applicable to a Covered Loan shall apply for the life of the loan.

(c) The annual rate applicable to Covered Loans acquired by the Boston Bank in 2004 and 2005 is 5 basis points (0.05%).

(d) For calendar year 2006 and subsequent years, the MPF Provider shall, on or before June 30, 2005, and each June 30 thereafter, inform the Boston Bank in writing of the annual rate for the Transaction Services Fee applicable to the Covered Loans that will be acquired by the Boston Bank during the next succeeding calendar year.

(e) It is understood that Program Loans purchased by the Boston Bank before January 1, 2004 will not be subject to a Transaction Services Fee for the life of such Program Loans.

(f) Notwithstanding clauses (c) and (d) above, if at any time the MPF Provider shall charge a lower Transaction Services Fee to any other Federal Home Loan Bank on the basis of volume discounts or otherwise, such lower fee shall be extended to the Boston Bank on the same terms and conditions.

4. Section 2.5 of the Agreement is hereby deleted in its entirety and the following substituted in its place:

2.5. Covered Loans. The Program Loans funded or purchased by the Boston Bank after January 1, 2004, (“Covered Loans”) will be subject to the Transaction Services Fee as provided in Section 2.4 of this Agreement, excluding, however, those Program Loans that the parties agree in writing to exempt from being subject to the Transaction Services Fee.

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5. Section 5.9 of the Agreement is hereby amended by deleting the last sentence thereof in its entirety and substituting the following in its place:

All Participation Shares or any other participation interest shall be set for each Master Commitment when activated on the MPF Provider system, and may be changed thereafter (i) by the Boston Bank’s delivery to the MPF Provider of a Direction in the form attached hereto as Appendix A (as amended), directing the MPF Provider to change participation interests in the specified Master Commitment(s) for Delivery Commitments issued after the Effective Date of such Direction, or (ii) by the issuance of Designated Delivery Commitments. Any Direction which increases the MPF Provider’s Participation Share must be accepted in writing by the MPF Provider, and any Direction which changes the interest of any other MPF Bank, must be signed by such other MPF Bank as well as the Boston Bank.

6. Appendix A to the Agreement is hereby amended by deleting it in its entirety and by substituting in its place Exhibit A attached to this Amendment.

7. Any capitalized terms not defined in this Amendment shall have the meaning assigned to them in the Agreement. Except for the foregoing amendments, 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 BOSTON
By:	/s/ Thomas D. Sheehan	By:	/s/ Michael L. Wilson
	Thomas D. Sheehan	Name:	Michael L. Wilson
	Senior Vice President	Title:	Senior Executive Vice President

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EXHIBIT A TO FIRST AMENDMENT

APPENDIX A

DIRECTION

Date:	Master Commitment No.
Effective Date:	PFI Name:

To: FEDERAL HOME LOAN BANK OF CHICAGO, as MPF Provider

Pursuant to Section 2.3 of the Investment and Services Agreement, as amended, the Federal Home Loan Bank of Boston (“Boston Bank”) hereby directs the MPF Provider to enter the Participation Share of the MPF Provider and the pro rata percentage participation interest(s) (“Specified Interest(s)”) of the Federal Home Loan Bank(s) (“MPF Bank(s)”) named below, in the following percentage(s) set across from their respective names, with respect to the Program Loans to be funded or purchased under Delivery Commitments issued after the above Effective Date under the above referenced Master Commitment (“Subsequent DCs”), into the MPF Program origination system:

Federal Home Loan Bank:	Specified Interest/Participation Share
Federal Home Loan Bank of Boston
Federal Home Loan Bank of Chicago
Percentage Total:	100%

This Direction constitutes the order of the Boston Bank and the MPF Bank(s) signing below to the MPF Provider to treat the MPF Provider’s Participation Share and the MPF Bank(s)’ Specified Interest(s) as the parties respective pro rata interest in the Program Loans funded or purchased under Subsequent DCs for the purposes of (i) debiting and crediting the Boston Bank’s and MPF Bank(s)’ respective Clearing Accounts with the MPF Provider, (ii) providing MPF Program reports and (iii) providing services under the I&S Agreement with respect to the subject Program Loans. Further, the MPF Bank(s) hereby authorizes the MPF Provider to send general ledger entries to its/their respective general ledger by means of electronic file reports to reflect the MPF Banks’ respective Specified Interests in the Program Loans funded or purchased under the Master Commitment.

FEDERAL HOME LOAN BANK OF BOSTON		FEDERAL HOME LOAN BANK OF CHICAGO
By:	[SPECIMEN]	By:	[SPECIMEN]
Title:		Title:
FEDERAL HOME LOAN BANK OF		FEDERAL HOME LOAN BANK OF
By:	[SPECIMEN]	By:	[SPECIMEN]
Title:		Title:

MORTGAGE PARTNERSHIP FINANCE^® and MPR^® are registered trademarks of the Federal Home Loan Bank of Chicago.

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EX-10.7

Exhibit 10.7

MORTGAGE PARTNERSHIP FINANCE^® PROGRAM

LIQUIDITY OPTION

AND

MASTER PARTICIPATION AGREEMENT

This MORTGAGE PARTNERSHIP FINANCE^® PROGRAM LIQUIDITY OPTION AND MASTER PARTICIPATION AGREEMENT (the “Agreement”) is entered into this 15^th day of September, 2000, among the FEDERAL HOME LOAN BANKS that now and hereafter execute this Agreement, effective for each on the date set below such Bank’s signature (individually, an “MPF Bank” and collectively, the “MPF Banks”), each a corporation of the United States of America, and the FEDERAL HOME LOAN BANK OF CHICAGO (the “MPF Provider”), a corporation of the United States of America.

RECITALS:

WHEREAS, the MPF Provider has developed a financial services program for funding and purchasing residential mortgage loans (each such residential mortgage loan is herein called a “Loan” and collectively, they are called “Loans”) originated or sold by its members which is known as the MORTGAGE PARTNERSHIP FINANCE^® (“MPF^®”) Program, and those members that participate in the MPF Program are known individually as a “PFI” and collectively as “PFIs”;

WHEREAS, each of the MPF Banks has entered into a separate agreement with the MPF Provider (each a “Services Agreement”) pursuant to which the MPF Bank has agreed to make the MPF Program available to its members and the MPF Provider has agreed to provide certain services in connection with the MPF Banks’ participation in the MPF Program;

WHEREAS, certain of the MPF Banks (the Federal Home Loan Banks of Atlanta, Boston, Des Moines, New York, Pittsburgh and Topeka) have entered into a separate “Liquidity Option Mortgage Partnership Finance^® Participation Agreement” with the MPF Provider;

WHEREAS, the MPF Provider and each of the MPF Banks have or propose to enter into Participating Financial Institution Agreements (“PFI Agreements”) with their respective PFIs whereby each PFI, pursuant to Master Commitments issued from time to time pursuant to its PFI Agreement (each a “Master Commitment”), will do one or more of the following from time to time:

(i) underwrite and originate, as agent for the MPF Provider or its MPF Bank, Loans which will be funded and owned by the MPF Bank or MPF Provider, as the case may be (such loans being “Agency Loans”); or

(ii) sell to the MPF Provider or its MPF Bank, Loans originated or purchased by the PFI which the MPF Bank or MPF Provider, as the case may be, will purchase and own (such loans being “Closed Loans”);

WHEREAS, under the terms of the Services Agreements, each of the MPF Banks may sell to the MPF Provider, and the MPF Provider may purchase, certain pro rata participation interests in the Loans funded or purchased under the MPF Bank’s Master Commitments (herein and in the Services Agreements called “MPF Provider’s Share”);

WHEREAS, under the terms of the Services Agreements, the MPF Banks have certain rights and opportunities to sell to the MPF Provider, and the MPF Provider in certain cases is obligated, or otherwise may agree, to purchase certain participation interests in Designated Loans (hereinafter defined); and

WHEREAS, the MPF Provider and MPF Banks wish to provide a framework for selling and acquiring additional participation interests among themselves in the Loans they fund or purchase under the MPF Program, and they would like the MPF Provider to provide certain operational support with respect to the transfer of, and investment in, such participation interests.

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NOW, THEREFORE, in consideration of the premises, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

ARTICLE I

CERTAIN DEFINITIONS

As used herein, the following terms shall have the following respective meanings:

“Borrower” shall mean the obligor or obligors under any Loan.

“Business Day” shall mean any day that the MPF Provider is open for business.

“Clearing Account” shall mean an MPF Bank’s deposit 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 MPF Bank or between MPF Banks.

“Confirmation” shall mean, with respect to a Participation Interest, one or more documents exchanged between the parties, which taken together, confirm and evidence the creation of a Participation Interest. Such Confirmation shall be legally binding on the parties thereto and may be created, exchanged and entered into by any of the following means: (i) paper documents; (ii) paper documents exchanged by facsimile transmission; or (iii) by any electronic means, including electronic messaging, electronic forms on the MPF Provider’s web site, or otherwise.

“Consensual Participation” shall mean a transaction, other than (i) pursuant to a Liquidity Option Notice or (ii) a Participation Interest between the MPF Provider and a MPF Bank pursuant to the applicable Services Agreement, in which a Participation Interest is created between a Lead Bank and one or more Participant Banks.

“Credit Enhancement Fees” shall mean the fee payable each month to a PFI under the terms of and with respect to a Master Commitment subject to this Agreement.

“Designated Delivery Commitment” shall mean: (i) each Delivery Commitment entered into by the MPF Bank on any Business Day after it has given a Liquidity Option Notice to the MPF Provider or as otherwise may be provided in the MPF Bank’s Services Agreement; or (ii) each Delivery Commitment subject to a Consensual Participation between a Lead Bank and a Participant Bank.

“Designated Loan(s)” shall mean, for any Master Commitment, the Loan(s) funded or purchased under each Designated Delivery Commitment.

“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.

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“Lead Bank” shall mean either the MPF Provider or a MPF Bank, as the case may be, with respect to any of its Master Commitments which contains one or more Designated Delivery Commitments.

“Liquidity Option Notice” shall mean a notice to the MPF Provider that the MPF Bank elects not to issue any Delivery Commitments for the balance of the day of such notice, provided, however, that if the MPF Provider is obligated or agrees to acquire a Participation Interest in the Program Loans funded or purchased under any Delivery Commitments requested by the MPF Bank’s PFIs for the balance of that day, such Delivery Commitments will be issued in the MPF Bank’s name and the Program Loans funded or purchased thereunder will be participated to the MPF Provider pursuant to the terms of this Agreement.

“Loan Documents” for any Loan shall mean the Note, the mortgage or other security documents executed and delivered by the applicable Borrower and all other documents evidencing or securing such Loan, as the same may be amended, supplemented, modified or restated from time to time.

“Monthly Report” shall mean the report prepared by the MPF Provider and delivered to the MPF Banks on a monthly basis which may be in electronic or paper form. Such report shall, among other things, set forth the Participation Interests of the MPF Provider and the MPF Banks in Designated Loans and other Loans under a Master Commitment.

“Note” for any Loan shall mean the promissory note from the Borrower evidencing such Loan.

“Original Principal Balance” shall mean the principal balance of a Loan on the day it is funded or purchased by the MPF Bank or MPF Provider.

“Participant Bank” shall mean either the MPF Provider or any MPF Bank, as the case may be, which is the owner of a Participation Interest.

“Participant Bank’s Share” shall mean a percentage, for each Master Commitment, equal to the amount of the Participant Bank’s Participation Interest in the aggregate Original Principal Balance of the Designated Loans, if any, funded or purchased under that Master Commitment pursuant to this Agreement divided by the aggregate Original Principal Balance of all the Loans funded or purchased under the Master Commitment.

“Participant Bank’s Spread Account” shall mean, for any Master Commitment, a memo account in the amount of the Spread Account allocable to the Participant Bank’s Participation Interest in Designated Loans under that Master Commitment.

“Participation Certificate” shall mean (i) prior to the time a Master Commitment is closed or expires, the Confirmations given by or to the Lead Bank for each Designated Delivery Commitment included in such Master Commitment, and (ii) upon the closing or expiration of

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such Master Commitment, the recording of such Participation Interests in an electronic book entry system maintained by the MPF Provider or a participation certificate in the form of Exhibit A hereto, either of which shall conclusively evidence the Participant Bank’s Participation Interest in the Designated Loans under that Master Commitment, and the Participant Bank’s Share with regard to Residual Realized Losses under the Master Commitment, which have been transferred to the Participant Bank pursuant to this Agreement.

“Participation Interest” shall mean, for any Master Commitment having Designated Delivery Commitments, such undivided percentage interest in the Designated Loans as set forth in a Confirmation and contained in the Monthly Report, subject to the provisions of Article III of this Agreement and further subject to Realized Losses arising from all Loans in the Master Commitment being paid from the following sources:

(i) first from the Spread Accounts on a pro rata basis until one or more are exhausted;

(ii) next from any remaining Spread Account until all Spread Accounts are exhausted;

(iii) next from the Credit Enhancement obligation of the PFI; and

(iv) lastly, any Residual Realized Losses shall be shared by the parties on the following basis:

The Participant Bank shall pay an amount equal to the Residual Realized Losses multiplied by the Participant Bank’s Share. The Lead Bank shall pay the difference of the Realized Residual Losses excluding the portion payable by the Participant Bank.

“Program” shall mean the MORTGAGE PARTNERSHIP FINANCE Program of the MPF Provider, which is governed by the Origination Guide and the Servicing Guide promulgated by the MPF Provider for the Program, as they may be revised by the MPF Provider from time to time (collectively, the “Guides”), the PFI Agreements and the Master Commitments.

“Pro rata basis” when used to describe how Realized Losses will be allocated to the Spread Accounts, shall mean sharing such losses based on the ratio of each party’s Spread Account to the amount of the combined Spread Accounts for a Master Commitment, provided however, if one of the party’s Spread Account is zero, all Realized Losses shall be paid from the remaining parties’ Spread Accounts until all Spread Accounts are exhausted.

“Residual Realized Losses” means, with respect to any Master Commitment having Designated Delivery Commitments, Realized Losses as that term is defined in the Guides in excess of the sum of the Lead Bank’s Spread Account, the Participant Bank’s Spread Account and the Credit Enhancement obligation of the PFI.

Other terms used herein shall be defined as set forth in this Agreement. Any term used herein which is not so defined shall have the meaning ascribed to such term in the Services Agreement, which includes the FHLB Guide, or in the Guides.

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ARTICLE II

SUBSCRIPTION PROVISIONS

2.1. PARTICIPANT BANK’S REPRESENTATIONS. Each Participant Bank enters into this Agreement upon the following representations and warranties, which shall inure to the benefit of the Lead Bank and survive the acceptance of the subscription being made hereby:

2.1.1. Investment. The Participant Bank, by the execution of this Agreement, represents and warrants that (i) the Participation Certificates to be acquired pursuant to this Agreement will be acquired solely for its own account, for investment and not with a view to the resale or distribution of any thereof; and (ii) the purchase of its Participation Interest is a legal investment for the Participant Bank under applicable laws. The Participant Bank understands that the Participation Certificates have not been registered under the Securities Act of 1933, as amended (the “1933 Act”), or any state securities or blue sky laws, and represents and warrants that if any of the Participation Certificates shall be later disposed of or encumbered in any manner, which such the Participant Bank does not now contemplate, such disposition or encumbrance shall be accomplished in a manner which does not violate, or create a potential violation of, the registration provisions of the 1933 Act and the rules and regulations thereunder, or any applicable state securities or blue sky laws.

2.1.2. Participant Bank Experience. The Participant Bank has such knowledge and experience in financial and business matters that the Participant Bank is capable of evaluating the merits and risks of investment in the Program and of making an informed investment decision. The Participant Bank understands that there are substantial risks incident to the investment in the Participation Interests. The Participant Bank has carefully reviewed and understands the risks of, and the financial and non-financial considerations relating to, the investment in the Participation Interests.

2.1.3. Participant Bank’s Risk of Loss. The Participant Bank assumes all risk of loss, except as provided in Section 3.12. of this Agreement, in connection with its Participation Interest in each PFI Agreement and each Master Commitment having Designated Delivery Commitments, as if it entered into each PFI Agreement and each Master Commitment directly with each applicable PFI, respectively, subject, however, to the allocation of Realized Losses in accordance with the terms of this Agreement.

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2.1.4. No Public Market. The Participant Bank understands that there is no public or established market for the Participation Certificates. The Participant Bank has adequate means in providing for its current needs and possible future contingencies, and has no need, and anticipates no need in the foreseeable future, to sell its Participation Certificates. The Participant Bank is able to bear the economic risks of this investment and, consequently, without limiting the generality of the foregoing, it is able to hold the Participation Certificates for an indefinite period of time and has sufficient net worth to sustain a loss of its entire investment in the Participation Certificates in the event such loss should occur.

2.1.5. Participant Bank a U.S. Person. The Participant Bank hereby certifies under penalties of perjury that the Participant Bank is not a nonresident alien for purposes of U.S. income taxation, that the tax identification numbers for all parties to this Agreement are set forth in Exhibit B and that the Participant Bank is not subject to backup withholding.

2.2. COVENANTS.

2.2.1. Funding of Participant Bank’s Participation Interest. The Participant Bank will fund its Clearing Account so that the MPF Provider will be able to transfer such funds to the Lead Bank’s Clearing Account established pursuant to the Services Agreement sufficiently from time to time to cover funding or purchase of the Lead Bank’s Designated Loans. The Lead Bank may withdraw funds from such account from time to time to fund the origination or purchase of Designated Loans subject to the terms of this Agreement.

2.2.2. Allocation to Spread Accounts. From time to time, as the Lead Bank makes allocations to the Spread Account under each Master Commitment, for any Master Commitment having Designated Loans, the amount of the Spread Account attributable to the Participant Bank’s Participation Interest in Designated Loans shall be allocated to the Participant Bank’s Spread Account.

2.2.3. Delivery of Participation Certificates. The MPF Bank will provide a Liquidity Option Notice to the MPF Provider in accordance with the Services Agreement. If the MPF Provider acquires a 100% Participation Interest in all Loans funded or purchased under Designated Delivery Commitments, then all such Loans will be Designated Loans without the need for a specific participation certificate. As provided in Section 3.10.2, the Lead Bank shall send the MPF Provider a Confirmation of a Consensual Participation.

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2.2.4. Participation Provisions. The Participation Interest shall be subject to the provisions of Article III of this Agreement. The MPF Banks and the MPF Provider agree that all participation interests granted to any other parties or to another party to this Agreement, pursuant to any other participation agreement shall be subject to Participation Interests granted under this Agreement and shall be deemed to be granted after the Participation Interests granted hereunder have been granted.

2.3. PARTICIPANT BANK’S INDEMNIFICATION OBLIGATION. The Participant Bank agrees to indemnify, defend and hold harmless the Lead 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 reasonable 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 Participant Bank in this Agreement, any breach by the Participant Bank of its warranties and/or any failure by the Participant Bank to fulfill any covenants or agreements set forth in this Agreement. All representations, warranties and covenants and the indemnification contained in this Agreement shall survive the acceptance of this subscription and the receipt of the Participation Certificates and the termination or expiration of this Agreement. The Participant 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 or any MPF Bank to engage in the Program.

2.4. LEAD BANK’S REPRESENTATIONS. The Lead Bank enters into this Agreement and makes the following representations, which shall inure to the benefit of the Participant Bank and survive the acceptance of the subscription being made hereby: (i) the Lead Bank is the owner of the Loans and of the Participation Interests to be sold to Participant Bank hereunder, and the Lead Bank’s interest in the Loans and the Participation has not been encumbered or hypothecated; (ii) Lead Bank has received all necessary regulatory approvals to engage in the Program; and (iii) each Participation Interest to be sold to the Participant Bank hereunder is free and clear of any adverse claim from any person or entity claiming by or through the Lead Bank.

2.5. [intentionally omitted]

2.6. LEAD BANK’S INDEMNIFICATION OBLIGATION. The Lead Bank agrees to indemnify, defend and hold harmless the Participant 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 reasonable 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 Lead Bank in this Agreement, any breach by Lead Bank of its warranties and/or any failure by the Lead Bank to fulfill any covenants or agreements set forth in this Agreement or arising out of the sale or distribution of any of the Participation Certificates by it in violation of the Securities Act of 1933, as amended, or any applicable state securities or blue sky laws. All representations, warranties and covenants and the indemnification contained in this Agreement shall survive the acceptance of this subscription and the receipt of the Participation

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Certificates and the termination of this Agreement. The Lead 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 or any MPF Bank to engage in the Program.

ARTICLE III

PARTICIPATION PROVISIONS

3.1. PARTICIPATION INTEREST. Subject to the terms and conditions of this Agreement, the Lead Bank hereby sells and assigns to the Participant Bank, and the Participant Bank hereby purchases and accepts from the Lead Bank, a Participation Interest in its Designated Loans, the Notes and the other Loan Documents evidencing and securing such Designated Loans upon the terms and conditions stated herein as further evidenced by a Participation Certificate acknowledged by Lead Bank. THIS SALE IS MADE BY THE LEAD BANK WITHOUT RECOURSE, REPRESENTATION OR WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED, EXCEPT AS MAY OTHERWISE BE EXPRESSLY CONTAINED HEREIN.

3.2. DISBURSEMENTS SOLELY BY LEAD BANK. Each Designated Loan shall be funded solely by the Lead Bank or the PFI, to or for the benefit of the Borrower, and not by the Participant Bank directly, or shall be purchased by the Lead Bank.

3.3. LOAN FEES. The Participant Bank shall be entitled to its Participation Interest in any loan fees received by the Lead Bank in connection with any Designated Loan (“Loan Fee”). The Lead Bank will pay such amount to the Participant Bank promptly upon the Lead Bank’s receipt of such Loan Fees. The Participant Bank shall be entitled to its Participation Interest in any prepayment premium received by the Lead Bank from the Borrower of a Designated Loan.

3.4. REVIEW OF LEAD BANK’S ACCOUNTING BOOKS AND RECORDS. From time to time upon reasonable advance request and provided the Lead Bank is not prohibited by law, regulation or court order or third party agreement, and subject to the Participant Bank’s obligations under Section 4.6.11. of this Agreement, the Participant Bank shall be entitled to review, at its cost, the accounting books and records of the Lead Bank with respect to the Program, including but not limited to, such credit information pertaining to PFIs necessary for monitoring a PFI’s ability to fulfill its obligations under the PFI Agreement, confidential PFI bank examiner’s reports, any classification by an examiner of any PFI, any PFI Agreement, any Borrower or any Loan, provided that such information related to Designated Loans or the Credit Enhancement provided for Master Commitments having Designated Delivery Commitments, on condition that only those employees or agents of the Participant Bank who have the need to know any confidential information relating to a PFI shall review such information.

3.5. PARTICIPANT BANK’S RIGHT TO ITS SHARE OF PRINCIPAL AND INTEREST PAYMENTS. After the purchase by the Participant Bank of its Participation Interest with respect to a Designated Loan and the funding of such Designated Loan to or for the

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benefit of the Borrower or acquisition by the Lead Bank, Participant Bank shall be entitled to its Participation Interest in all principal and interest received by Lead Bank with respect to such Designated Loan, subject to its obligation to pay its share of (i) the Credit Enhancement Fees payable under the applicable PFI Agreement, (ii) Agent Fees under the PFI Agreement, (iii) all other costs and expenses incurred or payable by the Lead Bank in respect of such Designated Loan or the Master Commitment or PFI Agreement to which such Designated Loan relates, and (iv) all Administrative Costs, as defined in Section 3.11.1 herein, however, the foregoing shall be subject to the allocation of Realized Losses as provided for in Section 3.6.9. of this Agreement. Furthermore, if at any time, all or any of the amounts payable by the Lead Bank described in clauses (i) through (iv) above shall be in excess of principal and interest received by the Lead Bank at such time, the Participant Bank will pay the Participant Bank’s Share of such amounts to the Lead Bank upon demand.

3.6. COLLECTIONS, DISBURSEMENTS TO PARTICIPANT BANK, AND ADMINISTRATION.

3.6.1. Collections of Payments by Lead Bank. Subject to the provisions of Section 3.6.5., the Lead Bank shall have the right and obligation to collect all amounts owing from the Borrower or any guarantors, third parties, or otherwise on account of each Designated Loan, including, without limitation, principal, advances to protect the collateral, interest, fees, prepayment premiums (if any), and repayment of advances in excess of the face amount of the Designated Loan, whether such sums are received directly from the Borrower, any guarantors, or any other persons, or by reason of total or partial condemnation or taking by governmental authority, proceeds or recoveries under insurance policies, payment and performance bonds (if any), title insurance policies, amounts realized by reason of any sale or operation of the collateral for the Designated Loan, or enforcement of the Loan Documents (all collectively, the “Loan Recoveries”). The MPF Provider or its designee will hold the Loan Documents in its customary fashion for this Program. The Lead Bank will receive and hold all Loan Recoveries with respect to the Designated Loan for the benefit of the Participant Bank. Except to the extent of its obligations under the preceding sentence, the Lead Bank shall have no fiduciary obligations to the Participant Bank. Notwithstanding the foregoing, the Participant Bank acknowledges that:

(a) the Services Agreement provides for custodial services for the possession, retention and holding of the Loan Documents for the Designated Loans, and the Lead Bank shall not be responsible or liable for any act or omission of the MPF Provider or any document custodian or for the breach or violation by the MPF Provider or any document custodian of its obligations under the applicable custodial agreement; and

(b) the Lead Bank expects that the PFIs under the PFI Agreements, or other companies selected by the MPF Provider from time to time, will service the Designated Loans and collect and hold Loan

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Recoveries prior to remittance to Lead Bank, and the Lead Bank shall not be responsible or liable for any act or omission of any such PFIs or other mortgage loan servicers or for the breach or violation by any such person of its obligations under the applicable PFI Agreement or mortgage loan servicing agreement.

If the Participant Bank shall in any manner receive any payments or any other funds or property in connection with any Designated Loan (whether or not voluntary), except from the Lead Bank, the Participant Bank shall immediately notify the Lead Bank, and to the extent appropriate, transfer all or part of such receipts to the Lead Bank.

3.6.2. Distribution of Payments. Whenever the Lead Bank receives a payment of principal, interest or any other Loan Recoveries in connection with a Designated Loan, the Lead Bank shall promptly (and generally, within one Business Day) pay to the Participant Bank, in lawful money of the United States of America and in the kind of funds so received by the Lead Bank, such amounts, subject to the allocation of Realized Losses as provided in Section 3.6.9. of this Agreement; provided, however, that both the Lead Bank and the Participant Bank hereby direct the MPF Provider to transfer any amounts owed under this Agreement by debiting and crediting the Lead Bank’s and Participant Bank’s respective Clearing Accounts maintained with the MPF Provider pursuant to their respective Services Agreements and such credit shall satisfy Lead Bank’s payment obligation to the Participant Bank for such amounts. Subject to the allocation of Realized Losses as provided in Section 3.6.9. of this Agreement, the Lead Bank shall not be required to remit to the Participant Bank any amount not actually collected by the Lead Bank, whether or not the Designated Loan is then in default.

3.6.3. Rescission of Payments. If all or part of any payment of Loan Recoveries or other amounts paid to the Lead Bank is rescinded or must otherwise be returned for any reason and if the Lead Bank has paid the same to the Participant Bank, then the Participant Bank shall pay to the Lead Bank an amount equal to the amount paid to the Participant Bank which was rescinded or which must be so returned by the Lead Bank, in accordance with the provisions of the FHLB Guide referenced in and incorporated into the Services Agreement. The Participant Bank shall also pay to the Lead Bank any interest on such Loan Recoveries which was also rescinded or must be returned that the Lead Bank is obligated to pay or return to the Borrower.

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3.6.4 Application of Loan Recoveries. Subject to Section 4.4 regarding reimbursement to Lead Bank of Defaulted Funds, all Loan Recoveries received by the Lead Bank in connection with a Designated Loan shall be applied in accordance with the Loan Documents unless no provision is made therein, and then in the following order of priority:

(a) to the payment of all Administrative Costs (as defined in Section 3.11.1 herein);

(b) to the payment of any amounts payable by Borrower pursuant to any Loan Document (other than the payment of interest or principal) and to the repayment to the Lead Bank of any amount permitted to be paid by the Lead Bank under the Loan Documents and actually paid by the Lead Bank (such as past due taxes not paid by Borrower);

(c) to the payment of all interest due and payable on the Note; and

(d) to the payment of principal of the Note.

3.6.5. [Intentionally Omitted]

3.6.6. Powers Granted to Lead Bank.

(a) The Participant Bank appoints and authorizes the Lead Bank (and its agents and independent contractors) as an independent contractor, acting on behalf of the Participant Bank and without notice to the Participant Bank, to take any and all actions with respect to the Master Commitments, the PFI Agreements and the Guides, including (without limitation) the following: (i) to take or refrain from taking any action and make any determination provided herein or in the Master Commitments, the PFI Agreement or the Guides; (ii) to acquire additional security for the Credit Enhancement obligations of the PFI’s; (iii) to exercise all such powers as are incidental to any of the foregoing matters; and (iv) to exercise all powers, rights and remedies and to take all actions with respect to the Master Commitments, the PFI Agreements and the Guides.

(b) Without limiting the foregoing, the Lead Bank may, with prior notice to but without the consent of the Participant Bank: (i) consent to or accept any cancellation or termination of any Master Commitment or PFI Agreement, or agree to a transfer or

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termination of any instrument now or hereafter assigned to it as security for any Master Commitment or PFI Agreement; or (ii) waive any default involving the payment of principal or interest which is an event of default under any PFI Agreement.

(c) The Lead Bank shall exercise the appointment and authority granted under clauses (a) and (b) of this Section 3.6.6. in the same manner and with the same care that that the Lead Bank handles in own assets and as if the Lead Bank were acting for its own account.

3.6.7. Default by Borrowers or PFIs; Enforcement.

(a) The Lead Bank and the Participant Bank, as the case may be, shall use commercially reasonable efforts to notify the other party, with reasonable promptness, of any material default under any Loan or PFI Agreement of which it becomes actually aware. Both parties are entitled to assume that no default or event which, with the giving of notice or lapse of time, or both, would constitute such a default, has occurred and is continuing unless that party (i) has actual knowledge of such default or event, or (ii) has been notified by the other party in writing that the other party considers that such a default or event has occurred and is continuing and specifies the nature thereof.

(b) The Lead Bank shall be entitled to take whatever action in its sole discretion it deems appropriate to enforce the rights and remedies accruing on account of such default that the Lead Bank believes in good faith must be taken immediately without an opportunity for consultation in order to protect and preserve the value of any security held for a Designated Loan or for the protection of life, limb or property. The costs and expenses related to such action shall be included in Realized Losses.

(c) If any Borrower or PFI fails to pay taxes, assessments, insurance premiums or any other charges or expenditures for which such Borrower is responsible under the applicable Loan Documents for Designated Loans, the Lead Bank may advance the necessary amounts or make such expenditures. Such advances and expenses shall be included in Realized Losses. The Lead Bank shall cause the servicer to use commercially reasonable efforts to recover from the applicable Borrower all advances and expenses that are the responsibility of such Borrower under the applicable Loan Documents, but making such efforts shall not be a precondition to including such advances and expenses in Realized Losses.

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3.6.8. Retention of Counsel. If, in the Lead Bank’s judgment, attorneys should be retained for the protection of its interests and those of any Participant Bank, including (without limitation) in connection with actual or threatened litigation, the Lead Bank may employ counsel to represent either or both the Lead Bank and the Participant Bank in connection with the Designated Loan, provided that any such representation of the Participant Bank shall be subject to the prior written consent of the Participant Bank. The Lead Bank shall take commercially reasonable steps to cause the Borrower or the PFI (as the case may be) to pay the fees and expenses of such counsel in accordance with the Loan Documents or the PFI Agreement, but all such costs and expenses, whether or not the Lead Bank has sought or received reimbursement from the Borrower or the PFI, shall be included in Realized Losses. If the Lead Bank later receives reimbursement therefor from Borrower or the PFI, the Lead Bank shall share such amounts with the Participant Bank on a pro rata basis. The Lead Bank acknowledges that any claim or action against the Lead Bank with respect to a Designated Loan also affects the Participant Bank as the owner of its Participation Interest.

3.6.9. Allocation of Realized Losses. Notwithstanding the transfer of the Participation Interest in the Designated Loans of any Master Commitment to the Participant Bank, the Lead Bank and Participant Bank acknowledge that their respective Spread Accounts must be charged to cover any Realized Losses for that Master Commitment whether arising from Designated Loans or not, and further that all Realized Losses occurring after exhaustion of both Spread Accounts shall be paid from the Credit Enhancement obligation of the PFI on a first come, first paid basis. In addition, the parties acknowledge and agree that Residual Realized Losses shall be shared as provided in the definition of Participation Interest in Article I of this Agreement. The MPF Provider and MPF Banks hereby agree in the event that a Master Commitment becomes subject to this Agreement which pertains to a product other than Original MPF, the methodology for sharing the credit enhancement for such Master Commitment shall be as set forth in the Master Commitment and in the Participation Certificate for such Master Commitment. The administration of Realized Losses under this Agreement is illustrated in Exhibit C to this Agreement which is incorporated herein.

3.7. TERMINATION OF THE PARTICIPANT BANK’S RIGHT TO ACQUIRE ADDITIONAL PARTICIPATION INTERESTS. At such time as the Services Agreement expires or terminates, the Participant Bank’s right to acquire Participation Interests in Designated Delivery Commitments will terminate; provided, however that no such termination shall be effective with respect to any unfunded Designated Delivery Commitments existing on or prior to the date of such termination.

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3.8. INTEREST IN LOAN DOCUMENTS.

3.8.1. Proportional Interest. Upon payment by the Participant Bank of the amounts due from the Participant Bank pursuant to Section 2.2, the Participant Bank shall thereupon, without the necessity of any written instrument of assignment or document, become vested with its Participation Interest. Upon such payment, the respective interests of the Participant Bank and the Lead Bank in the Loan Documents and the other rights and claims of the Lead Bank with respect to the Designated Loans shall be as provided in this Agreement. If the Lead Bank acquires, directly or indirectly, an ownership interest due to the purchase, foreclosure or other realization of any security interest in or lien granted by any of the Loan Documents, the Participant Bank shall have a Participation Interest in such ownership interest subject only to the allocation of Realized Losses as provided in Section 3.6.9. of this Agreement, notwithstanding that title is taken in the name of the Lead Bank (or its nominee or designee, including, without limitation, the applicable PFI) alone. The Participant Bank and the Lead Bank agree that the other party shall not be liable or responsible to the Participant Bank or Lead Bank, as the case may be, for any loss upon the enforcement of any Designated Loan or any loss or liability incurred by virtue of the Lead Bank (or its nominee or designee) acquiring, holding or disposing of any title to or interest in any security for any Designated Loan, as long as the Participant Bank or the Lead Bank, as the case may be, acts with respect to such Designated Loan in the same manner as it would act with respect to its own assets.

3.8.2. Documents and Third Parties. All original Loan Documents shall be held in accordance with the terms of the Services Agreement. The Participant Bank authorizes any third person, without inquiry as to whether any action by the Lead Bank is authorized hereunder, to deal with the Lead Bank concerning any Designated Loan in the same manner as if the Participant Bank did not own its Participation Interest and the Lead Bank was the sole owner of the Designated Loan.

3.8.3. Other Collateral for Loans. The Lead Bank holds for its own and the Participant Bank’s benefit all collateral described in the Loan Documents directly securing performance and payment of the Borrower’s and any guarantor’s obligations and liabilities under the Designated Loan. The Participant Bank, however, shall have no interest in any (i) other property taken as security for any other credit, loan or financial accommodation made or furnished to Borrower or any guarantor by the Lead Bank in which the Participant Bank has no Participation Interest; (ii) property now or hereafter in the Lead Bank’s possession or under the Lead Bank’s control other than by reason of the Designated Loan Documents; or (iii) deposits or other indebtedness which may be or might become security for performance or payment of any of Borrower’s or any guarantor’s obligations and liabilities under the Designated Loan by reason of the general description contained in any instrument other than the Loan Document held by the Lead 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 Borrower to the Lead Bank in connection with the Designated Loan,

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then the Participant Bank shall be entitled to have the same applied to the Designated Loan.

3.8.4. Collateral for Credit Enhancement. The Lead Bank holds for its and the Participant Bank’s proportional benefit the proceeds of all collateral provided from time to time by PFIs under their respective PFI Agreements, Master Commitments and the Guides securing performance and payment of certain credit enhancement obligations of the respective PFIs under the PFI Agreements, but only to the extent such proceeds are applied to cover Realized Losses (as defined in the Guides) incurred by the Lead Bank in Designated Loans. The Participant Bank shall not share in any such collateral to the extent it secures obligations of any PFI with respect to any Master Commitment in which the Participant Bank does not have a Participation Interest.

3.9. BOOKKEEPING ENTRIES. The MPF Provider shall provide general ledger entries to the Lead Bank and the Participant Bank which shall reflect their respective interests in each Master Commitment having Designated Loans, including the Participation Interest with respect to the Designated Loans and the Participation Share of the Participant Bank for each such Master Commitment.

3.10. PARTICIPATION CERTIFICATES AND REPORTS.

3.10.1. Reports. The MPF Provider shall furnish to each MPF Bank, with respect to its interests, from time to time various reports regarding the PFI Agreements and the Master Commitments, including (without limitation):

(a) Updated Participation Certificates as Master Commitments close or expire;

(b) Monthly Reports regarding the Designated Loans, including (without limitation) monthly payments, aggregate outstanding balances of Designated Loans with respect to each applicable Master Commitment and balances in the Participant Bank’s Spread Account.

The Lead Bank may furnish such reports in such manner (including, without limitation, electronically) as the Lead Bank may provide from time to time. To the extent that such information is based upon information received from third parties (including, without limitation, PFIs and mortgage loan servicers), the Lead Bank shall have no responsibility with respect to the authenticity, validity, accuracy or completeness thereof. The MPF Provider and each Participant Bank shall treat all such information as Confidential Information of the Lead Bank and subject to the terms of Section 4.6.11. of this

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Agreement. The Participant Bank agrees not to distribute any such information received from the Lead Bank or the MPF Provider (or copies thereof) to any person or entity, except (i) as required by law or by order of any court or regulatory agency; (ii) to the Federal Housing Finance Board; or (iii) to Participant Bank’s external auditor.

3.10.2. MPF Provider Administration.

(a) Upon receipt of a Confirmation with respect to a new Consensual Participation from a Lead Bank, the MPF Provider agrees to enter the Participant Bank’s Share of the Participant Bank or Participant Banks named on such Confirmation in the percentages shown on the Confirmation with respect to the Designated Loans to be funded or purchased under all Delivery Commitments subsequently issued under the Master Commitment, into the MPF Program origination system. Such Confirmation shall constitute the order of both or all parties to the MPF Provider to treat the Participant Bank’s Share as the Participant Bank’s or Participant Banks’ respective pro rata interest(s) in the Designated Loans funded or purchased under all Delivery Commitments subsequently issued under the Master Commitment, for the purposes of (i) debiting and crediting the MPF Banks’ Clearing Accounts with the MPF Provider, (ii) providing MPF Program reports, a Monthly Report and loan level information to the Lead Bank and the Participant Bank indicating their respective interests with respect to Master Commitments having Designated Loans and (iii) providing services under the applicable Services Agreement with respect to the subject Designated Loans.

(b) The MPF Banks hereby direct the MPF Provider to debit and credit the MPF Banks’ Clearing Accounts in the same fashion as the MPF Provider does for its own Participation Interests, to effectuate the funding of Consensual Participations and the disbursement of funds to the Participant Banks with respect to their respective Participant Bank’s Share in the Designated Loans. The MPF Banks hereby authorize the MPF Provider to send general ledger entries to the MPF Banks’ general ledgers by means of electronic file reports to reflect the Participant Bank’s Participation Interests and the MPF Provider’s Participation Interests, if any, in the Designated Loans funded or purchased under the Master Commitment.

(c) It is understood and agreed that the MPF Provider’s systems track loan level pro rata participation interests in Designated Loans with respect to the obligation to fund the Designated Loans, to pay fees with respect thereto and to receive payments of principal and interest, provided, however, that Realized Losses arising with respect to Designated Loans may only be shared by all investors on a Master Commitment level rather than loan level. Realized Losses shall be allocated and administered by the MPF Provider at the Master Commitment level and shared among the MPF Banks owning Participation Interests in the Designated Loans and the MPF Provider, on a pro rata basis based on the original amounts funded under such Master Commitment, as more particularly described in Section 3.6.9 of this Agreement.

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(d) The MPF Provider shall have the right to rely on any Confirmation in dealing with the MPF Banks, including without limitation, in debiting and crediting their respective Clearing Accounts. The MPF Banks agree 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 reasonable attorneys’ fees and expenses, to which it may be put or which it may incur by reason of, or in connection with, for the collection, payment or transfer of cash or other funds to, from or among the MPF Banks, except those arising (i) from the MPF Provider’s negligence or willful misconduct, or (ii) with respect to the MPF Provider’s own Participation Interest granted pursuant to the applicable Services Agreement or this Agreement.

3.11. COSTS AND EXPENSES.

3.11.1. Administrative Costs. The Participant Bank shall, immediately upon demand, indemnify and reimburse the Lead Bank for the Participant Bank’s Participation Interest of any and all liabilities, costs, expenses and disbursements (collectively, “Administrative Costs”) which may be incurred or paid by the Lead Bank under or in connection with any Designated Loan or any of the Loan Documents, or any amendment, modification, supplement, restatement or waiver of any thereof, or in any action taken by the Lead Bank to collect the liabilities created under or in connection with such Designated Loan or Loan Documents or to enforce or protect any collateral for any such liabilities (including, without limitation, under Section 3.6.6), for which the Lead Bank has not previously been reimbursed by or on behalf of the applicable Borrower or PFI. Administrative Costs shall include any Agent Fees payable under the PFI Agreements (to the extent the Participant Bank has not paid the same in accordance with Section 3.5 above). However, if the Lead Bank is later reimbursed by any applicable Borrower or PFI or any other obligor for any such expenses, the Lead Bank shall reimburse the Participant Bank according to the Participant Bank’s Participation Interest. Further, the parties do not expect the Lead Bank to incur more than nominal Administrative Costs given the services to be provided to the Lead Bank under the Services Agreement.

3.11.2. Costs of Enforcement. Any and all liabilities, costs, expenses and disbursements (including, without limitation, reasonable attorneys’ fees and other legal expenses) incurred by the Lead Bank or the Participant Bank in any effort to collect any amounts payable hereunder by the other party to the Lead Bank or the Participant Bank, as the case may be, shall be paid by the defaulting party upon demand of the collecting party whether or not suit is filed, together with interest thereon from the date due until paid at the Default Rate (hereinafter defined).

3.11.3. Payment through Clearing Account. To effect payment of any amount owed by the Participant Bank under this Section 3.11, the Lead Bank shall draw against the Participant Bank’s Clearing Account from time to time (whether or not any such draw shall cause the balance in the Participant Bank’s Clearing Account to become negative). In the event that any withdrawal from the Participant Bank’s Clearing Account shall

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cause the balance in such account to become negative, such deficit shall be governed by the provisions of Section 4.4.

3.11.4. Certain Costs Excluded. Subject to the provisions of Section 3.11.2., no party hereto is responsible for any other party’s attorney’s fees or any other expenses in connection with the negotiation and execution of this Agreement; provided, however that this provision shall not limit the obligations of any PFI, the Lead Bank or the Participant Bank to reimburse the Lead Bank or Participant Bank for attorneys’ fees or any other expenses as required by the applicable PFI Agreement or this Agreement, respectively.

3.12. EXCULPATIONS.

(a) Neither the Lead Bank nor any of its shareholders, directors, officers, employees or agents shall be liable to the Participant Bank for any obligation, undertaking, act or judgment of any Borrower, any PFI, any guarantor or any other person, or for any error of judgment or any action taken or omitted to be taken by the Lead Bank (except for any liability of the Lead Bank, but only to the extent that the same arises directly and solely from negligence or willful misconduct by the Lead Bank. Without limiting the generality of the foregoing, the Lead Bank (a) may consult with legal counsel, accountants, financial advisers and other consultants and experts reasonably selected by the Lead Bank and shall not be liable for any action taken or omitted to be taken in good faith in accordance with the advice of such counsel and advisers; (b) shall incur no liability under or in respect of any such agreement, document or collateral by acting upon any notice by telephone or otherwise, or writing (including, without limitation, telex and telegraphic communication) reasonably believed by the Lead Bank to be genuine and to be signed or sent by the proper party or person; (c) shall not be responsible for any warranty or representation made in or in connection with any PFI Agreement, Master Commitment, the Guides, the Program, any Loan or any of the Loan Documents, or for the financial condition of any Borrower, any PFI, any guarantor or any other person, or for the value of any collateral, or for the observance or performance of any obligations of Borrower, any PFI, any guarantor or any other person or entity; and (d) makes no warranty or representation (except as provided in Section 2.4) and shall not be responsible for the due execution, validity, enforceability, sufficiency or collectibility of any PFI Agreement, Master Commitment, the Guides, the Program, any Loan or any of the Loan Documents.

(b) Neither the Participant Bank nor any of its shareholders, directors, officers, employees or agents shall be liable to the Lead Bank for any obligation, undertaking, act or judgment of any Borrower, any PFI, any guarantor or any other person, or for any error of judgment or any action taken or omitted to be taken by the Participant Bank (except for any liability of the Participant Bank, but only to the extent that the same arises directly and solely from negligence or willful misconduct by the Participant Bank, or be bound to ascertain or inquire as to the performance or observance of any provision of any PFI Agreement, Master Commitment, the Guides, the Program, any Loan or any of the Loan Documents. Without limiting the generality of the foregoing, the Participant Bank (a) may consult with legal counsel, accountants, financial advisers and other consultants and experts

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reasonably selected by the Participant Bank and shall not be liable for any action taken or omitted to be taken in good faith in accordance with the advice of such counsel and advisers; (b) shall incur no liability under or in respect of any such agreement, document or collateral by acting upon any notice by telephone or otherwise, or writing (including, without limitation, telex and telegraphic communication) reasonably believed by the Participant Bank to be genuine and to be signed or sent by the proper party or person; (c) shall not be responsible for any warranty or representation made by PFIs in or in connection with any PFI Agreement, Master Commitment, the Guides, the Program, any Loan or any of the Loan Documents, or for the financial condition of any Borrower, any PFI, any guarantor or any other person, or for the value of any collateral, or for the observance or performance of any obligations of Borrower, any PFI, any guarantor or any other person or entity; and (d) makes no warranty or representation (except as provided in Section 2.1) and shall not be responsible for the due execution, validity, enforceability, sufficiency or collectibility of any PFI Agreement, Master Commitment, the Guides, the Program, any Loan or any of the Loan Documents.

3.13. UNCONDITIONAL OBLIGATIONS. The Participant Bank and the Lead Bank agree that their respective obligations under this Agreement are, and at all times and in all events shall be, absolute, irrevocable and unconditional and shall not be affected by any intervening circumstances occurring after the date hereof or by, among other things, any of the following:

(a) any act or omission of any kind by any PFI, any Borrower, any guarantor or any other person (except for a breach by the other party); or

(b) any set-off, counterclaim or defense to payment which the Participant Bank or Lead Bank may have or have had against the other party unrelated to this Agreement; or

(c) the existence of any event of default hereunder or under any of the Loan Documents, PFI Agreements, Master Commitments, the Guides or any other agreement (except this Agreement), instrument or document referred to in or executed and delivered pursuant to any thereof; or

(d) any change of any kind whatsoever in the financial position or creditworthiness of the Lead Bank, the Participant Bank, any Borrower, any PFI, any guarantor or any other person.

3.14. CREDIT ENHANCEMENT FEES. Certain products offered under the Program provide for performance-based Credit Enhancement Fees. Because the Participation Interests in a Master Commitment are subject to change until the Master Commitment is filled or expires and thereafter, different Designated Delivery Commitments may experience different prepayment rates, then it is possible that the Lead Bank or the Participant Bank might incur Realized Losses which may be recovered by the reduction of future Credit Enhancement Fees in a different proportion than the parties subsequent obligations to pay Credit Enhancement Fees to the PFI. In such an event, any excess Credit Enhancement Fee shall be allocated among the Lead Bank and

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the Participant Bank to offset previously incurred Realized Losses rather than be paid to the PFI. For example, if only the Lead Bank incurred $10,000 of Realized Losses in the prior month with respect to a Master Commitment, and in the current month the Credit Enhancement Fee otherwise payable to the PFI would be $12,000 of which $9,000 is attributable to the Lead Bank’s interest in the Master Commitment and $3,000 is attributable to the new Participation Interest of the Participant Bank, the Participant Bank shall pay the PFI a $2,000 Credit Enhancement Fee and the Lead Bank the balance of $ 1,000. The administration of Credit Enhancement Fees under the Agreement is illustrated in Exhibit C to this Agreement.

3.15. MPF BANK’S PARTICIPATION AUTHORITY. A MPF Bank, acting in the capacity of a Lead Bank, may grant a Participation Interest to one or more Participant Banks notwithstanding that the subject Delivery Commitment is also subject to a Liquidity Option Notice exercised by the Lead Bank. The Confirmation shall specify the Participation Interest transferred to the MPF Provider pursuant to the Liquidity Option Notice and the Participation Interest transferred to one or more MPF Banks and shall conform to any requirements set forth in the FHLB Guide. Any provisions in any Services Agreement or other document between the MPF Provider and any MPF Bank which would contravene this section are hereby superseded but this Section shall not be construed to alter or expand any provisions pertaining to the issuance of a Liquidity Option Notice under a Services Agreement.

ARTICLE IV

GENERAL

4.1. AUTHORIZATION AND ENFORCEABILITY REPRESENTATIONS. Each of the MPF Banks and the MPF Provider each hereby represents to the other parties 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) this Agreement is the legal, valid and binding obligation of such party, enforceable against it.

4.2. ASSIGNMENT BY LEAD BANK AND PARTICIPANT BANK. The rights of the Lead Bank and the Participant Bank to subparticipate, transfer or assign to any other person or entity, all or any portion of the Participant Bank’s rights and obligations hereunder or of the Lead Bank’s interests in the Program Loans shall be subject to the terms of the applicable Services Agreement. Notwithstanding any other provision contained in this Agreement, the Lead Bank shall retain at least a ten percent (10%) interest in the balance of each Master Commitment having Designated Delivery Commitments.

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4.3. OTHER TRANSACTIONS BETWEEN LEAD BANK AND PFI’S. The Lead Bank may accept deposits from, lend money to, and generally engage in any kind of business with any PFI, any guarantor and their subsidiaries, owners, partners and affiliates, if any (collectively, “PFI Affiliates”) and any person who may do business with or own interests in any of them. The Participant Bank shall have no interest in any property taken as security for any other loans or any credits extended to any PFI or any of PFI Affiliates by the Lead Bank except pursuant to the PFI Agreements. Nothing herein shall in any manner be deemed to limit or preclude the right of the Lead Bank to enter into any such other arrangements or to exercise any rights or remedies available in connection therewith, including (without limitation) the exercise of any right of set-off or other rights available as a matter of law.

4.4. PARTICIPANT BANK’S DEFAULT. If the Participant Bank shall default in or otherwise fail to meet its obligations to provide funds pursuant to Section 2.2 (such funds being referred to as “Defaulted Funds”), then the Lead Bank may advance funds to the PFI or the Borrower in an amount not exceeding the amount of such Defaulted Funds. If the Lead Bank makes any such advance, then the Participant Bank shall immediately reimburse the Lead Bank upon demand. Any sums due from the Participant Bank to the Lead Bank (including, without limitation, Defaulted Funds and the Participant Bank’s Share of costs and expenses under Section 3.11) shall: (i) accrue interest, payable upon demand, at such rate as specified in the applicable Services Agreement (“Default Rate”); and (ii) shall be paid in full, together with interest thereon, from any moneys (including, without limitation, all payments of principal, interest, expenses or fees, whether obtained from or on behalf of the Borrower, voluntarily or otherwise) which would have been payable to the Participant Bank in the absence of the Participant Bank’s default, prior to the Participant Bank’s receiving such moneys. In addition, the Lead Bank may draw against funds from the Clearing Account from time to time to satisfy the Participant Bank’s obligations under this Section 4.4 (whether or not any such withdrawal shall cause the balance in the Participant Bank’s Clearing Account to become negative) upon giving the Participant Bank concurrent notice. Such payments to the Lead Bank shall be first applied to accrued interest and then to the repayment of the amounts initially owed to the Lead Bank. The Participant Bank shall remain obligated to fund all other amounts under this Agreement. The Lead Bank’s remedies and rights under this Agreement are cumulative and concurrent and in addition to every other available right, power or remedy at law or in equity.

4.5. LEAD BANK’S DEFAULT. Any sums due from the Lead Bank to the Participant Bank shall be payable upon demand and shall accrue interest, payable upon demand, at the Default Rate. In addition, the Participant Bank may draw against funds from the Lead Bank’s Clearing Account from time to time to satisfy the Lead Bank’s obligations under this Section 4.5 (whether or not any such withdrawal shall cause the balance in the Lead Bank’s Clearing Account to become negative) upon giving the Lead Bank concurrent notice. In such event, the provisions of the applicable Services Agreement shall be applicable. Such payments to the Participant Bank shall be first applied to accrued interest and then to the repayment of the amounts initially owed to the Participant Bank. The Lead Bank shall remain obligated to fund all other amounts under this Agreement. The Participant Bank’s remedies and rights under this Agreement are cumulative and concurrent and in addition to every other available right, power or remedy at law or in equity.

- 22 -

4.6. MISCELLANEOUS.

4.6.1. Notices. Whenever notice is required under this Agreement or by applicable law, it must be given as described in this section. All demands, notices and communications under this Agreement shall be in writing and shall be delivered in person or sent by certified United States mail, postage prepaid, return receipt requested or sent by electronic mail or by facsimile transmission or 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.

4.6.2. Addresses. For purposes of this Agreement, the addresses, facsimile numbers and the electronic transmission information for the parties 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 4.6.1, but shall be effective only upon actual receipt.

4.6.3. Effect of Agreement and Relationship of Parties. (a) This Agreement does not affect any relationships created pursuant to the applicable Services Agreement or any other participation agreements, except that any Master Commitments having Designated Loans will be governed by this Agreement and all other Master Commitments will be governed by the terms of the applicable Services Agreement. The Lead Bank will have no obligation or responsibility or fiduciary duty to the Participant Bank except as specifically stated herein. The execution of this Agreement, the performance of the terms or provisions hereof, and the performance or exercise of any obligations or rights pursuant hereto (including, without limitation, the Participant Bank’s purchase of and ownership interest in its Participation Interest in any Designated Loan and any Loan Documents) shall not cause the Participant Bank to be deemed the owner, holder, purchaser or seller of any security (as that term is defined in the Securities Act of 1933 or the Securities Exchange Act of 1934) issued, owned, purchased or sold by the Lead Bank, either as principal or as agent for the Borrower. The Participant Bank is purchasing and acquiring legal and equitable ownership of its Participation Interest in the Designated Loans and is not making a loan to the Lead Bank, and no debtor-creditor relationship exists between them as a result 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 any of the parties which is not embodied in this Agreement.

- 23 -

(b) This Agreement supersedes the following agreements as of the date of this Agreement:

Liquidity Option Mortgage Partnership Finance Program Participation Agreements, between the MPF Provider and the following parties, dated as shown:

Party	Date
Federal Home Loan Bank of Atlanta	June 14, 2000
Federal Home Loan Bank of Boston	August 16, 2000
Federal Home Loan Bank of Des Moines	November 1, 1999
Federal Home Loan Bank of New York	January 13, 2000
Federal Home Loan Bank of Pittsburgh	April 30, 1999
Federal Home Loan Bank of Topeka	May 2, 2000

4.6.4. Execution in Counterparts. 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.

4.6.5. 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.

4.6.6. 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.

4.6.7. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns (subject to Section 4.2).

4.6.8. Waivers and Amendments. No delay on the part of any party in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by any 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 all of the parties hereto; provided, however, that the MPF Provider may amend, modify or waive any provisions of the Guides from time to time to the extent provided in the applicable Services Agreement.

- 24 -

4.6.9. 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 4.6.8. Article and Section captions used in this Agreement are for convenience only, and shall not affect the construction of this Agreement.

4.6.10. Mediation of Disputes; Jurisdiction, Venue and Service of Process.

(a) No party to this Agreement 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 a Dispute review. The president of each party, or his or her designee, involved in a Dispute shall meet (by conference call or in person at a mutually agreeable site) to endeavor to resolve any Dispute. If the Dispute cannot be resolved, the parties agree to submit the Dispute to mediation and to do their best to select a mutually acceptable mediator. If the parties do not promptly agree on a mediator, either party may request the sitting Chief Judge of the United States District Court in Washington D.C. 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 shared equally by the parties to the mediation.

(b) Each party hereto 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 parties hereby waive any and all personal or other rights to object to such jurisdiction for such purposes; provided, that any Dispute over which a federal court would have jurisdiction must be litigated only in federal court. Each party hereto, 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, each party agrees that service of process may be made, and personal jurisdiction over such 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. Each party hereto waives all claims of lack of effectiveness or error by reason of any such service.

- 25 -

4.6.11. Confidentiality. Except as may be required by law, or as may occur as a result of the operation of law, or as may be requested by any regulatory authority having authority over the parties, each of the parties agrees to maintain the confidentiality of all confidential information furnished to the party hereunder or in connection with the Loans, except that no party will have any obligation of confidentiality with respect to information that may be generally available to the public, or becomes generally available to the public through no fault of that party. Each party shall use the confidential information only in connection with the underwriting, administration and enforcement of the Loans and this Agreement.

4.6.12. 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 proving actual damages.

- 26 -

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly authorized officers, as of the dates first above written.

MPF PROVIDER:
FEDERAL HOME LOAN BANK OF CHICAGO
By:	/s/    KENNETH L. GOULD
	Kenneth L. Gould Executive Vice President

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
Dated: September 15, 2000

- 27 -

MPF BANK:
FEDERAL HOME LOAN BANK OF ATLANTA
By:
	[name & title]
By:
	[name & title]

Address:	[                    ]
	[                    ]
Attention:	[                    ]
Facsimile No.:	(        )
Electronic Transmission:

Dated:                                                                      

MPF BANK:
FEDERAL HOME LOAN BANK OF BOSTON
By:	/s/    MICHAEL L. WILSON
	Michael L. Wilson, Senior Executive Vice President
By:
	[name & title]

Address:	[                    ]
	[                    ]
Attention:	[                    ]

Facsimile No.:	(        )
Electronic Transmission:

Dated:                                                                      

- 28 -

MPF BANK:
FEDERAL HOME LOAN BANK OF CINCINNATI
By:
	[name & title]
By:
	[name & title]

Address:	[                    ]
	[                    ]
Attention:	[                    ]
Facsimile No.:	(        )
Electronic Transmission:

Dated:                                                                      

MPF BANK:
FEDERAL HOME LOAN BANK OF DALLAS
By:	/s/    PAUL JOINER - SVP
	[name & title]
By:	/s/    HARVEY SIMON - SVP
	[name & title]

Address:	[                    ]
	[                    ]
Attention:	[                    ]
Facsimile No.:	(        )

Electronic Transmission:                     

Dated: 9-20-2000

- 29 -

MPF BANK:
FEDERAL HOME LOAN BANK OF DES MOINES
By:
	[name & title]
By:
	[name & title]

Address:	[                    ]
	[                    ]
Attention:	[                    ]
Facsimile No.:	(        )
Electronic Transmission:

Dated:                                                                      

MPF BANK:

FEDERAL HOME LOAN BANK OF INDIANAPOLIS

By:	/s/    MARTIN HEGER, PRESIDENT & CEO
	[name & title]

By:	/s/    PAUL J. WEAVER
	[name & title]

Address:	[                    ]
	[                    ]
Attention:	[                    ]
Facsimile No.:	(        )

Electronic Transmission:                     

Dated: 9/22/2000

- 30 -

MPF BANK:
FEDERAL HOME LOAN BANK OF NEW YORK
By:	/s/    HAROLD J. FLETCHER
	Harold J. Fletcher Executive Vice President and Chief Operating Officer
By:	/s/    JAMES A. GILMORE
	James A. Gilmore Senior Vice President

Address:	7 World Trade Center, 22nd Floor New York, New York 10048
Attention:	Harold J. Fletcher, EVP and COO
Facsimile No.:	(212) 608-4006
Electronic Transmission: fletcher@fhlbny.com
Dated: December     , 2000

MPF BANK: FEDERAL HOME LOAN BANK OF PITTSBURGH
By:	/s/    CRAIG C. HOWIE
	Craig C. Howie
By:	/s/    RENEE PFENDER
	Renee Pfender
Address:   [                    ]
[                    ]
Attention: [                    ]
Facsimile No.: (        )
Electronic Transmission: _______________
Dated: January 23, 2004

- 31 -

MPF BANK: FEDERAL HOME LOAN BANK OF SAN FRANCISCO
By:	/s/    DEAN SCHULTZ
	Dean Schultz President and CEO

Address:	600 California Street     San Francisco, CA 94120
Attention:	Jennifer Burlison
Facsimile No.: (415) 616-2626
Electronic Transmission: burlisj@fhlbsf.com
Dated: April 5, 2001
MPF BANK:
FEDERAL HOME LOAN BANK OF SEATTLE

By:
	[name & title]

By:
	[name & title]

Address:	[                    ]
	[                    ]
Attention:	[                    ]
Facsimile No.: (        )
Electronic Transmission: _______________
Dated:

- 32 -

MPF BANK: FEDERAL HOME LOAN BANK OF TOPEKA
By:	/S/    FRANK M. TIERNAN

Frank M. Tiernan, Ph.D.

Senior Vice President and Treasurer

Address: 2 Townsite Plaza 120 S.E. Sixth Avenue, 2^nd Floor Topeka, KS 66603 Attention:  Frank M. Tiernan, Ph.D.

Facsimile No.: (785) 234-1796

Electronic Transmission: Frank.Tiernan@FHLBTopeka.com

Dated: September 29, 2000

- 33 -

SCHEDULE I

to Participation Certificate

issued by

Federal Home Loan Bank of                     

dated                     , 200  

in favor of

Federal Home Loan Bank of                         

Identification and Fundings of Designated Loans under the Master Commitment

[Identify the Master Commitment to which

the Participation Certificate relates,

including the names of the applicable PFI and

the description of the Designated Delivery Commitments, Designated Loans,

and the calculation of the MPF Provider’s Share, if any.]

EXHIBIT A

PARTICIPATION CERTIFICATE

                     , 200  

ISSUED TO:

FEDERAL HOME LOAN BANK OF _____________

_______________________

_______________________

Attention: _______________________________

Re: Mortgage Partnership Finance^® Program Liquidity Option and Master Participation Agreement dated as of September 15, 2000 (herein, as it may be modified or amended from time to time, the “Agreement”) among the Federal Home Loan Bank of Chicago (the “MPF Provider”), the Federal Home Loan Bank of                      (the “MPF Bank”) and other Federal Home Loan Banks named therein, and that certain Master Commitment No.                      dated                     .

Dear Sir/Madam:

Please refer to the Agreement. All capitalized but undefined terms used herein shall have the same respective meanings as in the Agreement.

Pursuant to the Agreement, we acknowledge receipt of your funding of the origination of the Designated Loans under the above referenced Master Commitment as set forth on Schedule I and the attachments thereto.

This certificate evidences your Participation Interest in the Designated Loans under the Master Commitment in the amount set forth on the attachments.

FEDERAL HOME LOAN BANK OF                       

By:

Title: 

EXHIBIT B TO

MORTGAGE PARTNERSHIP FINANCE^® PROGRAM

LIQUIDITY OPTION

AND MASTER PARTICIPATION AGREEMENT

LIST OF TAX IDENTIFICATION NUMBERS

Federal Home Loan Bank of Atlanta	56-6000442
Federal Home Loan Bank of Boston	04-6002575
Federal Home Loan Bank of Dallas	71-6013989
Federal Home Loan Bank of Des Moines	42-6000149
Federal Home Loan Bank of Indianapolis	35-6001443
Federal Home Loan Bank of New York	13-6400946
Federal Home Loan Bank of Pittsburgh	25-6001324
Federal Home Loan Bank of Topeka	48-0561319

EXHIBIT C TO

MORTGAGE PARTNERSHIP FINANCE^® PROGRAM

LIQUIDITY OPTION

AND MASTER PARTICIPATION AGREEMENT

SCENARIO OF REALIZED LOSS SHARING

FOR A

SAMPLE MASTER COMMITMENT

Master Commitment Analysis

Pool Background Information

Master Commitment Analysis

Pool Background Information

How are allocations made to

the First Loss Account?

The FLA conceptually is

allocated

$200,000 per Delivery

Commitment, divided by the

participation percentage...

Master Commitment Analysis

Pool Background Information

Lead Bank FLA Allocation:

	Pct		FLA		FLA Share
DC1 -	75	%	$	200,000	$	150,000
DC2 -	75	%	$	200,000	$	150,000
DC3 -	0	%	$	200,000	$	0
DC4 -	50	%	$	200,000	$	100,000
DC5 -	25	%	$	200,000	$	50,000
Total:	45	%	$	1,000,000	$	450,000

Master Commitment Analysis

Pool Background Information

Participant Bank 1 FLA Allocation:

        [Chicago]

	Pct		FLA		FLA Share
DC1 -	25	%	$	200,000	$	50,000
DC2 -	25	%	$	200,000	$	50,000
DC3 -	100	%	$	200,000	$	200,000
DC4 -	25	%	$	200,000	$	50,000
DC5 -	25	%	$	200,000	$	50,000
Total:	40	%	$	1,000,000	$	400,000

2

Master Commitment Analysis

Pool Background Information

Participant Bank 2 FLA Allocation:

	Pct		FLA		FLA Share
DC1 -	0	%	$	200,000	$	0
DC2 -	0	%	$	200,000	$	0
DC3 -	0	%	$	200,000	$	0
DC4 -	25	%	$	200,000	$	50,000
DC5 -	25	%	$	200,000	$	50,000
Total:	10	%	$	1,000,000	$	100,000

Master Commitment Analysis

Pool Background Information

Participant Bank 3 FLA Allocation:

	Pct		FLA		FLA Share
DC 1 -	0	%	$	200,000	$	0
DC2 -	0	%	$	200,000	$	0
DC3 -	0	%	$	200,000	$	0
DC4 -	0	%	$	200,000	$	0
DC5 -	25	%	$	200,000	$	50,000
Total:	5	%	$	1,000,000	$	50,000

3

Master Commitment Analysis

Loss Scenario No. 1

Master Commitment Analysis

Loss Scenario No. 1

$50,000 Realized Loss in June, after DC 3

	MC Pct		FLA (After Loss)		Share of Loss
Lead -	50	%	$	275,000	$	25,000
Part 1 -	50	%	$	275,000	$	25,000
Part 2 -	0	%	$	0	$	0
Part 3 -	0	%	$	0	$	0
Total:			$	550,000	$	50,000

Applied pro rata based on percentage interest of each FHLB in MC at the time of loss.

4

Master Commitment Analysis

Loss Scenario No. 1

Credit Enhancement Fee payable in August, after DC 4

($80m x 10 bps = $80,000 /12 mo = $6,667)

	MC Pct		Share of Fee
Lead -	50.00	%	$	3,334
Part 1 -	43.75	%	$	2,917
Part 2 -	6.25	%	$	417
Part 3 -	0	%	$	0
Total:	100	%	$	6,667

Normal fees payable if no loss.

Master Commitment Analysis

Loss Scenario No. 1

Reflecting Losses

Credit Enhancement Fee payable in August, after DC 4

($80m x 10 bps = $80,000 /12 mo = $6,667)

	MC Pct		Fee Offset			Payment to PFI
Lead -	50.00	%	$	3,543		$	0
Part 1 -	43.75	%	$	3,126		$	0
Part 2 -	6.25	%	$	417 / 2		$	0
Part 3 -	0	%		Cash fees paid by ‘Part:2’ are paid to the Lead and ‘Part:1’ as offset to June losses.
Total:	100	%

5

Master Commitment Analysis

Loss Scenario No. 2

Master Commitment Analysis

Loss Scenario No. 2

Credit Enhancement Fee payable in month 18, after

DC 5 (9% loans) prepays by 50%.

MC Balance = $90M

Percent MC Ownership

	Before Prepay			After Prepay
Lead -	45/100 or	45	%	42.5/90 or	47.22	%
Part 1 -	40/100 or	40	%	37.5/90 or	41.67	%
Part 2 -	10/100 or	10	%	7.5/90 or	8.33	%
Part 3 -	5/100 or	5	%	2.5/90 or	2.78	%

6

Master Commitment Analysis

Loss Scenario No. 2

Credit Enhancement Fee payable in month 18, after

DC 5 (9% loans) prepays by 50%.

($90m x 10 bps = $90,000 /12 mo = $7,500)

	MC Pct		Share of Fee
Lead -	47.22	%	$	3,542
Part 1 -	41.67	%	$	3,125
Part 2 -	8.33	%	$	625
Part 3 -	2.78	%	$	209
Total:	100	%	$	7,500

Master Commitment Analysis

Loss Scenario No. 3

Year 10 of Pool - amortization has reduced principal

by 10%, higher rate DCs have prepayments...

7

Master Commitment Analysis

Loss Scenario No. 3

Year 10 of Pool - amortization has reduced principal

by 10%, higher rate DCs have prepayments...

...and we have a $50,000 Realized Loss in Year 10

Master Commitment Analysis

Loss Scenario No. 3

$50,000 Realized Loss in Year 10

	Original MC Pct		Current MC Pct		Current FLA Balance		Share of Loss		New FLA Bal
Lead -	45	%	53.8	%	$	425,000	$	22,500	$	402,500
Part 1 -	40	%	42.3	%	$	375,000	$	20,000	$	355,000
Part 2 -	10	%	3.9	%	$	100,000	$	5,000	$	95,000
Part 3 -	5	%	0.0	%	$	50,000	$	2.500	$	47,500
Total:					$	950,000	$	50,000	$	900,000

Even though Part 3 DC is fully prepaid, Part 3 shares in loss because loss sharing is at MC level.

8

Master Commitment Analysis

Loss Scenario No. 3

CE Fee payable in month after $50,000 Realized Loss

($58.5m x 10 bps = $58,500 /12 mo = $4,875)

	Original MC Pct		Current MC Pct		Share of Fee
Lead-	45	%	53.8	%	$	2,623
Part 1 -	40	%	42.3	%	$	2,062
Part 2 -	10	%	3.9	%	$	190
Part 3 -	5	%	0.0	%	$	0
Total:					$	4,875

Master Commitment Analysis

Loss Scenario No. 3

CE Fee available to offset $50,000 Realized Loss in following month

($58.5m x 10 bps = $58,500 /12 mo = $4,875)

	Current MC Pct		CE Fees are paid based on ownership percent CE Fees are paid to Part 2 & 3 from Lead and Part 1 to offset losses taken in prior period	Fee Offset (pro rata adjustment)
Lead -	53.8	%			$	2,194
Part 1 -	42.3	%			$	1,950
Part 2 -	3.9	%			$	488
Part 3 -	0.0	%			$	244
Total:					$	4,875

9

Master Commitment Analysis

Loss Scenario No. 3

CE Fee (paid)/received in month after $50,000 Realized Loss

($58.5m x 10 bps = $58,500 /12 mo = $4,875)

	Current MC Pct			Net CE Fee* $
Lead -	53.8	%		$	(429	)
Part 1 -	42.3	%		$	(112	)
Part 2 -	3.9	%		$	298
Part 3 -	0.0	%		$	244

* Inter FHLB adjustment — no fees paid to PFI.

10

EX-10.7.1

Exhibit 10.7.1

FIRST AMENDMENT TO

LIQUIDITY OPTION AND MASTER PARTICIPATION AGREEMENT

THIS FIRST AMENDMENT TO LIQUIDITY OPTION AND MASTER PARTICIPATION AGREEMENT (the “Amendment”) is made as of the 16th day of April, 2001 , among the FEDERAL HOME LOAN BANKS that now and hereafter execute this Agreement, effective for each on the date set below such Bank’ s signature (individually, an “MPF^® Bank” and collectively, the “MPF Banks”), each a corporation of the United States of America, and the FEDERAL HOME LOAN BANK OF CHICAGO (the “MPF Provider”), a corporation of the United States of America.

RECITALS:

WHEREAS, the MPF Banks and the MPF Provider have previously entered into that certain MORTGAGE PARTNERSHIP FINANCE^® (“MPF”) Program Liquidity Option and Master Participation Agreement dated as of September 15 2000, (the “Agreement”) pursuant to which the parties agreed how the interests, rights, duties and obligations in Designated Delivery Commitments and their related Master Commitments under the MPF Program shall be allocated among the MPF Banks and the MPF Provider; and

WHEREAS, the parties desire to amend the Agreement to delete a provision that is no longer applicable to Designated Delivery Commitments. 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 by deleting the last sentence of Section 4.2.

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.

MPF PROVIDER:
FEDERAL HOME LOAN BANK OF CHICAGO
By:	/s/    KENNETH L. GOULD
	Kenneth L. Gould
	Executive Vice President

MPF BANK:
FEDERAL HOME LOAN BANK OF ATLANTA
By:
	[name & title]
By:
	[name & title]
Dated:
MPF BANK:
FEDERAL HOME LOAN BANK OF BOSTON
By:	/s/    MICHAEL L. WILSON
	Michael L. Wilson
		Senior Executive Vice President
By:
	[name & title]
Dated:	August 14, 2001
MPF BANK:
FEDERAL HOME LOAN BANK OF CINCINNATI
By:
	[name & title]
By:
	[name & title]
Dated:

2

MPF BANK:
FEDERAL HOME LOAN BANK OF DALLAS
By:	/s/    PAUL JOINER - S.V.P.
	[name & title]
By:	/s/    JENNIFER STOUT - S.V.P.
	[name & title]
Dated:	5/1/01
MPF BANK:
FEDERAL HOME LOAN BANK OF DES MOINES
By:
	[name & title]
By:
	[name & title]
Dated:
MPF BANK:
FEDERAL HOME LOAN BANK OF INDIANAPOLIS
By:
	[name & title]
By:
	[name & title]
Dated:

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MPF BANK:
FEDERAL HOME LOAN BANK OF NEW YORK
By:	/s/    HAROLD J FLETCHER
	Harold J Fletcher
	Executive Vice President & Chief Operating Officer
By:	/s/    JAMES A. GILMORE
	James A. Gilmore
	Senior Vice President
Dated:	7-27-01

MPF BANK:
FEDERAL HOME LOAN BANK OF PITTSBURGH
By:	/s/    CRAIG C. HOWIE
	Craig C. Howie, SVP
By:	/s/    RENEE PFENDER
	Renee Pfender, SVP
Dated:	January 23, 2004
MPF BANK:
FEDERAL HOME LOAN BANK OF SAN FRANCISCO
By:	/s/    DEAN SCHULTz
	[name & title]
	President , CEO
By:
	[name & title]
Dated:	5/22/01

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MPF BANK:
FEDERAL HOME LOAN BANK OF SEATTLE
By:
	[name & title]
By:
	[name & title]
Dated:
MPF BANK:
FEDERAL HOME LOAN BANK OF TOPEKA
By:	/s/    FRANK M. TIERNAN
	Frank M. Tiernan
	SVP and Treasurer
Dated:	27 Aug 2001

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EX-10.7.2

Exhibit 10.7.2

SECOND AMENDMENT TO

LIQUIDITY OPTION AND MASTER PARTICIPATION AGREEMENT

THIS SECOND AMENDMENT TO LIQUIDITY OPTION AND MASTER PARTICIPATION AGREEMENT (the “Amendment”) is made as of the 22nd day of January, 2004, among the FEDERAL HOME LOAN BANKS that now and hereafter execute this Agreement, effective for each on the date set below such Bank’s signature (individually, an “MPF^® Bank” and collectively, the “MPF Banks”), each a corporation of the United States of America, and the FEDERAL HOME LOAN BANK OF CHICAGO (the “MPF Provider”), a corporation of the United States of America.

RECITALS:

WHEREAS, the MPF Banks and the MPF Provider have previously entered into that certain MORTGAGE PARTNERSHIP FINANCE^®(“MPF”) Program Liquidity Option and Master Participation Agreement dated as of September 15, 2000, as amended by First Amendment dated April 16, 2001 (together, the “Agreement”) pursuant to which the parties agreed how the interests, rights, duties and obligations in Designated Delivery Commitments and their related Master Commitments under the MPF Program shall be allocated among the MPF Banks and the MPF Provider; and

WHEREAS, the parties desire to amend the Agreement to delete a provision that is no longer applicable to Designated Delivery Commitments and to make other clarifications. 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 agree as follows:

1. Section 2.1.1 of the Agreement is hereby amended by deleting the term “Participation Certificates” in the second line thereof and substituting the term “Participation Interests” in its place.

2. Because Participation Certificates may be in electronic format, Section 3.1 of the Agreement is hereby amended by deleting the words “acknowledged by Lead Bank” from the end of the first sentence.

3. Section 3.6.1 of the Agreement is hereby amended as follows:

(i) by deleting the reference to “Section 3.6.5” in the first sentence of Section 3.6.1 and substituting “Section 3.6.6” in its place.

(ii) by deleting the third sentence in its entirety and substituting the following in its place:

The Lead Bank will receive and hold all Loan Recoveries with respect to the Designated Loan for the benefit of itself and the Participant Bank.

(iii) by inserting the words “by the Lead Bank and approved” between the words selected “and” “by” in the second line of Subsection (b).

4. The Agreement is hereby amended by deleting Section 3.8.4 in its entirety and substituting the following in its place:

3.8.4. Collateral for Credit Enhancement. The Lead Bank holds for its and the Participant Bank’s proportional benefit the collateral and the proceeds of all collateral provided from time to time by PFIs under their respective PFI Agreements, Master Commitments, the Guides and the Advances Agreements securing performance and payment of certain credit enhancement obligations of the respective PFIs under the PFI Agreements. The parties acknowledge that all collateral provided by a PFI to the Lead Bank secures all obligations of the PFI to the Lead Bank, arising under any and all agreements between the PFI and Lead Bank, on a pari passu basis unless the Lead Bank notifies the Participant Bank that certain specifically identified collateral has been pledged by a PFI to secure primarily the obligations of the PFI to the Lead Bank under a particular Master Commitment or under another agreement between the Lead Bank and the PFI, in which case such collateral will first secure the particular obligation identified and will secondarily secure any and all other obligations of the PFI to the Lead Bank on a pari passu basis.

5. Section 4.3 of the Agreement is hereby amended (i) by deleting the word “any” between the words “with” and “PFI” in the first sentence thereof and substituting in its place the word “its” and (ii) by adding the following phrase to the end of the second sentence: “and as provided in Section 3.8.4 of this Agreement.”

6. The Agreement is hereby amended by adding a new definition to Article I following the definition of “Residual Realized Losses” as follows:

“Services Agreement” means with respect to each MPF Bank, the Mortgage Partnership Finance Investment and Services Agreement or Mortgage Partnership Finance Services Agreement, as the case may be, between such MPF Bank and the MPF Provider, including all side letters, as the same may be amended from time to time.

7. Except for the foregoing amendment, the Agreement remains unmodified and in full force and effect.

MORTGAGE PARTNERSHIP FINANCE^® and MPF^® are registered trademarks of the Federal Home Loan Bank of Chicago

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IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their authorized officers as of the date first above written.

MPF PROVIDER:
FEDERAL HOME LOAN BANK OF CHICAGO
By:	/s/    KENNETH L. GOULD
	Kenneth L. Gould Executive Vice President

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MPF BANK:
FEDERAL HOME LOAN BANK OF ATLANTA
By:
Name:
Title:
By:
Name:
Title:
Dated:
MPF BANK:
FEDERAL HOME LOAN BANK OF BOSTON
By:
Name:
Title:
By:
Name:
Title:
Dated:
MPF BANK:
FEDERAL HOME LOAN BANK OF DALLAS
By:	/s/    MICHAEL SIMS
Name:	Michael Sims
Title:	SVP
By:	/s/    PAUL JOINER
Name:	Paul Joiner
Title:	SVP
Dated:	4/22/05

4

MPF BANK:
FEDERAL HOME LOAN BANK OF DES MOINES
By:
Name:
Title:
By:
Name:
Title:
Dated:
MPF BANK:
FEDERAL HOME LOAN BANK OF INDIANAPOLIS
By:
Name:
Title:
By:
Name:
Title:
Dated:
MPF BANK:
FEDERAL HOME LOAN BANK OF NEW YORK
By:	/s/    PAUL B. HEROUX
Name:	Paul B. Heroux
Title:	Senior Vice President
By:	/s/    JAMES A. GILMORE
Name:	James A. Gilmore
Title:	Senior Vice President
Dated:	May 19, 2004

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MPF BANK:
FEDERAL HOME LOAN BANK OF PITTSBURGH
By:	/s/    CRAIG C. HOWIE
Name:	Craig C. Howie
Title:	Senior Vice President
By:	/s/    RENEE PFENDER
Name:	Renee Pfender
Title:	Senior Vice President
Dated:	1.23.04
MPF BANK:
FEDERAL HOME LOAN BANK OF SAN FRANCISCO
By:	/s/    STEPHEN P. TRAYNOR
Name:	Stephen P. Traynor
Title:	Senior Vice President, Financial Services & Community Investment
By:
Name:
Title:
Dated:	June 11, 2004
MPF BANK:
FEDERAL HOME LOAN BANK OF TOPEKA
By:	/s/    SONIA BETSWORTH
Name:	Sonia Betsworth
Title:	SVP & Director of Member Products

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EX-10.8

Exhibit 10.8

EMPLOYMENT AGREEMENT

THIS AGREEMENT (“Agreement”), by and between the Chicago Federal Home Loan Bank, a federally chartered corporation (“Company”), and J. Mikesell Thomas (“Executive”) is effective as of August 30, 2004 (the “Effective Date”). In consideration of the mutual covenants set forth herein, the Company and the Executive hereby agree as follows:

1. Employment. The Company hereby agrees to employ the Executive, and the Executive agrees to serve the Company, in the capacities described herein during the Period of Employment (as defined in Section 2 of this Agreement), in accordance with the terms and conditions of this Agreement.

2. Period of Employment. The term “Period of Employment” shall mean the period which commences on the Effective Date and, unless earlier terminated pursuant to Section 6, ends on December 31, 2007; provided, however, that the Period of Employment shall automatically be extended by one year effective January 1, 2008 and each year thereafter until such date as either the Company or the Executive shall have terminated such automatic extension provision by giving written notice to the other at least three months prior to the end of the initial Period of Employment or any extension thereof.

3. Duties During the Period of Employment.

(a) Executive Representations. Executive represents and warrants to the Company that Executive is not bound by any restrictive covenants and has no prior or other obligations or commitments of any kind that would in any way prevent, restrict, hinder or interfere with Executive’s acceptance of continued employment or the performance of all duties and services hereunder to the fullest extent of Executive’s ability and knowledge.

(b) Duties. During the Period of Employment, the Executive shall be employed as the President and Chief Executive Officer of the Company with overall charge and responsibility for the business and affairs of the Company. The Executive shall report directly to the Company’s Board of Directors (“Board”) and shall perform such duties as the Executive shall reasonably be directed to perform by the Board. Executive may (i) serve on corporate, civic or charitable boards or committees, (ii) deliver lectures and fulfill speaking engagements, or (iii) manage personal investments, so long as such activities under clauses (i), (ii) and (iii) do not in the view of the Company’s Board interfere, in any substantive respect, with the Executive’s responsibilities hereunder or conflict in any material way with the business of the Company or the Company’s Code of Ethics.

(c) Scope. During the Period of Employment, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote substantially all of his business time and attention to the business and affairs of the Company.

4. Compensation and Other Payments.

(a) Salary. During the Period of Employment, the Company shall pay the Executive an annualized (as shown below) base salary (“Base Salary”) of not less than the following amounts:

Calendar Year	Base Salary
2004	$	625,000	(prorated)
2005	$	650,000
2006	$	676,000
2007	$	703,040

The Executive’s Base Salary shall be paid in accordance with the Company’s executive payroll policy. The Base Salary shall be reviewed by the Compensation Committee of the Board (the “Committee”) as soon as practicable after the end of each calendar year during the Period of Employment. Based upon such reviews, the Committee may, in its discretion, increase the Executive’s Base Salary above the minimum amount described above, but may not decrease such Base Salary. Any increase in Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement.

(b) Bonus Programs. The Executive shall participate in the President’s Incentive Compensation Plan and the Long Term Incentive Plan, with a minimum total incentive compensation during the period ending not later than December 31, 2007 equal to 100% of the Executive’s Base Salary for the calendar year (pro rated for any partial calendar years). The Executive’s maximum total incentive compensation amount will be 125% of the Executive’s Base Salary for the calendar year (pro rated for any partial calendar years). Beginning January 1, 2008, the Executive’s total incentive compensation target for each calendar year will not be less than 74% of his Base Salary. The Executive shall be paid his annual bonus (minimum total incentive compensation and/or any other bonus amounts) no later than the date when annual bonuses are payable to other senior executives of the Company.

5. Other Executive Benefits.

(a) Regular Reimbursed Business Expenses. The Company shall promptly reimburse the Executive for all expenses and disbursements reasonably incurred by the Executive in the performance of his duties hereunder during the Period of Employment upon proper submission in accordance with Company policy. In addition, the Company will reimburse the Executive up to $10,000 for the legal fees he incurred in connection with the negotiation and documentation of this Agreement.

(b) Benefit Plans; Vacation. The Executive and his eligible family members shall be entitled to participate in any group and/or executive life, hospitalization or disability insurance plan, health program, vacation policy, pension, profit sharing, 401 (k) and similar benefit plans (qualified, non-qualified and supplemental) or other fringe benefits of the Company on terms generally applicable to the Company’s senior executives, subject to the terms, conditions and limitations of such plans and programs. If the Executive chooses not to participate in the Company’s health program, the Company shall pay Executive an amount in cash equal to the premiums for the medical policy covering himself and his eligible dependents

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that is in effect on the Effective Date on a monthly basis, and shall gross up Executive for any taxes incurred by Executive in connection with such premium payments. The Executive shall be entitled to four (4) weeks of vacation during each of the Company’s fiscal years (pro rated for any partial fiscal years) in lieu of any other vacation pay policy of the Company.

(c) Perquisites. The Company shall provide the Executive such perquisites of employment as are commonly provided to other senior executives of the Company. In addition, the Company shall provide Executive with a parking space at the Company’s main office.

6. Termination.

(a) Death or Disability. This Agreement and the Period of Employment shall terminate automatically upon the Executive’s death. If the Company determines in good faith that the Disability of the Executive has occurred (pursuant to the definition of “Disability” set forth below), it may give to the Executive written notice of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the thirtieth day after receipt by the Executive of such notice given at any time after a period of ninety (90) consecutive days of Disability or a period of one hundred twenty (120) days of Disability within any twelve (12) consecutive months, and, in either case, while such Disability is continuing (“Disability Effective Date”); provided that, within the thirty (30) days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties. For purposes of this Agreement, “Disability” means the Executive’s inability to substantially perform his duties hereunder, with reasonable accommodation, as evidenced by a certificate signed either by a physician mutually acceptable to the Company and the Executive or, if the Company and the Executive cannot agree upon a physician, by a physician selected by agreement of a physician designated by the Company and a physician designated by the Executive; provided, however, that if such physicians cannot agree upon a third physician within thirty (30) days, such third physician shall be designated by the American Arbitration Association.

(b) By the Company for Cause. During the Period of Employment after the Effective Date, the Company may terminate the Executive’s employment immediately for “Cause.” For purposes of this Agreement, “Cause” shall mean that Executive:

(i) shall have been convicted (or pled guilty or nolo contendere) to a felony or other crime involving moral turpitude;

(ii) shall have committed willful acts of misconduct that materially impair the goodwill or business of the Company or cause material damage to its property, goodwill, or business monetarily or otherwise;

(iii) shall have breached the representation in Section 3(a) of this Agreement;

(iv) shall have a willful and continued failure to perform his material duties hereunder; or

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(v) shall have violated the Company’s policies regarding sexual harassment, discrimination, substance abuse or the Company’s Code of Ethics to the extent such acts would provide grounds for a termination for Cause with respect to other employees.

No act or failure to act on the part of the Executive shall be considered “willful” unless it is done, or omitted to be done, by the Executive in bad faith and without reasonable belief that the Executive’s action or omission was in the best interest of the Company. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless he has (i) had ten (10) business days’ written notice setting forth the reasons for the Company’s intention to terminate for Cause, (ii) had an opportunity (with his attorney) to be heard before the Board, and (iii) received a notice of termination from the Board stating that in the opinion of a majority of the full Board the Executive is guilty of conduct of a type set forth above and specifying the particulars thereof. Notwithstanding the foregoing, the Company may immediately suspend the Executive with pay upon provision of the notice required in subsection (i) above if the Company’s Board determines that Executive’s presence could potentially cause harm or disrupt the operations of the Company.

(c) By Executive for Good Reason. During the Period of Employment, the Executive’s employment hereunder may be terminated by the Executive for Good Reason upon written notice. For purposes of this Agreement, “Good Reason” shall mean (i) diminution in Executive’s titles, (ii) the assignment of duties to Executive that are materially and adversely inconsistent with Executive’s positions, (iii) any material diminution in Executive’s authority, responsibility or reporting lines, (iv) reduction in Executive’s Base Salary or (v) material breach of this Agreement by the Company. If (I) Executive provides written notice to the Company of the occurrence of Good Reason fifteen days after Executive has knowledge of the circumstances constituting Good Reason, which notice shall specifically identify the circumstances which Executive believes constitute Good Reason; (II) the Company fails to correct the circumstances within thirty days after receiving such notice; and (III) Executive resigns fifteen days after the Company fails to correct such circumstances; then Executive shall be considered to have terminated for Good Reason for purposes of this Agreement.

(d) Other than for Cause or Good Reason. The Executive or the Company may terminate this Agreement for any reason other than for Good Reason or Cause, respectively, upon thirty (30) days’ written notice to the Company or Executive, as the case may be. If the Executive terminates the Agreement for any reason, he shall have no liability to the Company or its affiliates as a result thereof. If the Company terminates the Agreement, or if the Agreement terminates because of the death of the Executive, the obligations of the Company shall be as set forth in Section 7 hereof.

(e) Notice of Termination. Any termination by the Company or by the Executive shall be communicated by a Notice of Termination to the other party hereto given in accordance with Section 18(b) of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail, if necessary, the basis for termination of the Executive’s employment under the provision so indicated, and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date. The failure by the Executive or Company to set forth in the Notice of

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Termination any fact or circumstance which contributes to a showing of the basis for termination shall not waive any right of such party hereunder or preclude such party from asserting such fact or circumstance in enforcing his or its rights hereunder.

(f) Date of Termination. “Date of Termination” means the date specified in the Notice of Termination; provided, however, that if the Executive’s employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be.

7. Obligations of the Company Upon Termination. The following provisions describe the obligations of the Company to the Executive under this Agreement upon termination of his employment. However, except as explicitly provided in this Agreement, nothing in this Agreement shall limit or otherwise adversely affect any rights which the Executive may have under applicable law, under any other agreement with the Company, or under any compensation or benefit plan, program, policy or practice of the Company.

(a) Termination by the Company for Cause, by the Executive without Good Reason, or due to Death or Disability. If the Executive’s employment is terminated by the Company for Cause or by the Executive without Good Reason, or due to the Executive’s death or Disability, he shall be entitled to his Base Salary and accrued vacation through his Date of Termination and all vested benefits under the terms of the Company’s employee benefit plans, subject to the terms of such plans.

(b) Termination by the Company without Cause or by the Executive for Good Reason. In addition to the items in Section 7(a), if the Executive’s employment is terminated by the Company without Cause or by the Executive for Good Reason, he shall be entitled, upon execution of a release of claims (exclusive of claims for indemnification under Section 9 or under Company benefit plans) in a form acceptable to the Company without subsequent revocation within the period described in such release, to severance payments, in lieu of any other severance benefits, equal to two (2) times the sum of Executive’s Base Salary as of the Date of Termination plus his minimum total incentive compensation as of such date (total incentive compensation target effective for any such termination after December 31, 2007). The Base Salary amounts shall be paid in a lump sum within ten (10) days of the date the release becomes effective. Fifty percent of the total incentive compensation amount shall be paid on each of the first two anniversaries of the termination date. No severance shall be paid in connection with the expiration or non-renewal of this Agreement.

8. Mitigation. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. Any severance benefits payable to the Executive shall not be subject to reduction for any compensation received from other employment.

9. Indemnification. The Company shall maintain, for the benefit of the Executive, director and officer liability insurance in form at least as comprehensive as, and in an amount that is at least equal to, that maintained by the Company on the Effective Date. In addition, the Executive shall be indemnified by the Company against liability as an officer and director of the Company and any subsidiary or affiliate of the Company to the maximum extent permitted by

5

applicable law provided, however, that the Company need not indemnify Executive for actions taken in bad faith, fraud or for breach of Executive’s fiduciary duties to the Company. The Executive’s rights under this Section 9 shall continue so long as he may be subject to such liability, whether or not this Agreement may have terminated prior thereto.

10. Executive Covenants.

(a) General. The Executive and the Company understand and agree that the purpose of the provisions of this Section 10 is to protect legitimate business interests of the Company, as more fully described below, and is not intended to impair or infringe upon the Executive’s right to work, earn a living, or acquire and possess property from the fruits of his labor. The Executive hereby acknowledges that the post-employment restrictions set forth in this Section 10 are reasonable and that they do not, and will not, unduly impair his ability to earn a living after the termination of his employment with the Company. Therefore, subject to the limitations of reasonableness imposed by law upon restrictions set forth herein, the Executive shall be subject to the restrictions set forth in this Section 10.

(b) Definitions. The following capitalized terms used in this Section 10 shall have the meanings assigned to them below, which definitions shall apply to both the singular and the plural forms of such terms:

“Confidential Information” means any confidential or proprietary information possessed by the Company without limitation, any confidential “know-how”, customer lists, details of client or consultant contracts, current and anticipated customer requirements, pricing policies, price lists, market studies, business plans, operational methods, marketing plans or strategies, product development techniques or plans, computer software programs (including object code and source code), data and documentation, data base technologies, systems, structures and architectures, inventions and ideas, past, current and planned research and development, compilations, devices, methods, techniques, processes, financial information and data, business acquisition plans, new personnel acquisition plans and any other information that would constitute a trade secret under the common law or statutory law of the State of Illinois.

“Determination Date” means the date of termination of the Executive’s employment with the Company for any reason whatsoever or any earlier date (during the Restricted Period) of an alleged breach of the Restrictive Covenants by the Executive.

“Person” means any individual or any corporation, partnership, joint venture, association or other entity or enterprise.

“Principal or Representative” means a principal, owner, partner, shareholder, joint venturer, member, trustee, director, officer, manager, employee, agent, representative or consultant.

“Protected Employees” means employees of the Company or its affiliated companies who were employed by the Company or its affiliated companies at any time within six (6) months prior to the Determination Date.

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“Restricted Period” means the period of the Executive’s employment by the Company plus a period extending two (2) years from the date of termination of employment.

“Restrictive Covenants” means the restrictive covenants contained in Section 10(c) and (d) hereof.

(c) Restriction on Disclosure and Use of Confidential Information. The Executive understands and agrees that the Confidential Information constitutes a valuable asset of the Company and its affiliated entities, and may not be converted to the Executive’s own use. Accordingly, the Executive hereby agrees that the Executive shall not, directly or indirectly, at any time during the Restricted Period reveal, divulge or disclose to any Person not expressly authorized by the Company any Confidential Information, and the Executive shall not, directly or indirectly, at any time during the Restricted Period use or make use of any Confidential Information in connection with any business activity other than that of the Company. The parties acknowledge and agree that this Agreement is not intended to, and does not, alter either the Company’s rights or the Executive’s obligations under any state or federal statutory or common law regarding trade secrets and unfair trade practices.

(d) Nonsolicitation of Protected Employees. The Executive understands and agrees that the relationship between the Company and each of its Protected Employees constitutes a valuable asset of the Company and may not be converted to the Executive’s own use. Accordingly, the Executive hereby agrees that during the Restricted Period the Executive shall not directly or indirectly on the Executive’s own behalf or as a Principal or Representative of any Person solicit any Protected Employee to terminate his or her employment with the Company.

(e) Exceptions from Disclosure Restrictions. Anything herein to the contrary notwithstanding, the Executive shall not be restricted from disclosing or using Confidential Information that: (i) is or becomes generally available to the public other than as a result of an unauthorized disclosure by the Executive or his agent; (ii) becomes available to the Executive in a manner that is not in contravention of applicable law from a source (other than the Company or its affiliated entities or one of its or their officers, employees, agents or representative) that is not known by the Executive to be bound by a confidential relationship with the Company or its affiliated entities or by a confidentiality or other similar agreement; (iii) was known to the Executive on a non-confidential basis and not in contravention of applicable law or a confidentiality or other similar agreement before its disclosure to the Executive by the Company or its affiliated entities or one of its or their officers, employees, agents or representatives; or (iv) is required to be disclosed by law, court order or other legal process; provided, however, that in the event disclosure is required by law, court order or legal process, the Executive shall provide the Company with prompt notice of such requirement so that the Company may seek an appropriate protective order prior to any such required disclosure by the Executive.

11. Enforcement of the Restrictive Covenants.

(a) Rights and Remedies upon Breach. In the event the Executive breaches, or threatens to commit a breach of, any of the provisions of the Restrictive Covenants, the

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Company shall have the right and remedy to enjoin, preliminarily and permanently, the Executive from violating or threatening to violate the Restrictive Covenants and to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to the Company and that money damages would not provide an adequate remedy to the Company. The rights referred to in the preceding sentence shall be independent of any others and severally enforceable, and shall be in addition to, and not in lieu of, any other rights and remedies available to the Company at law or in equity.

(b) Severability of Covenants. The Executive acknowledges and agrees that the Restrictive Covenants are reasonable and valid in time and space and in all other respects. If any court determines that any Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions.

12. Cooperation in Future Matters. The Executive hereby agrees that, for a period of three (3) years following his Date of Termination, he shall cooperate with the Company’s reasonable requests relating to matters that pertain to the Executive’s employment by the Company, including, without limitation, providing information or limited consultation as to such matters, participating in legal proceedings, investigations or audits on behalf of the Company, or otherwise making himself reasonably available to the Company for other related purposes. Any such cooperation shall be performed at times scheduled taking into consideration the Executive’s other commitments, and the Executive shall be compensated at a reasonable hourly or per diem rate to be agreed by the parties to the extent such cooperation is required on more than an occasional and limited basis. The Executive shall also be reimbursed for all reasonable out of pocket expenses. The Executive shall not be required to perform such cooperation to the extent it conflicts with any requirements of exclusivity of service for another employer or otherwise, nor in any manner that in the good faith belief of the Executive would conflict with his rights under or ability to enforce this Agreement.

13. Assistance with Claims. Executive agrees that, for the period beginning on the Effective Date, and continuing for a reasonable period after Executive’s termination date, Executive will assist the Company in defense of any claims that may be made against the Company, and will assist the Company in the prosecution of any claims that may be made by the Company, to the extent that such claims may relate to services performed by Executive for the Company. Executive agrees to promptly inform the Company if he becomes aware of any lawsuits involving such claims that may be filed against the Company. The Company agrees to provide legal counsel to Executive in connection with such assistance (to the extent legally permitted), and to reimburse Executive for all of Executive’s reasonable out-of-pocket expenses associated with such assistance, including travel expenses. For periods after Executive’s employment with the Company terminates, the Company agrees to provide reasonable compensation to Executive for such assistance. Executive also agrees to promptly inform the Company if he is asked to assist in any investigation of the Company (or their actions) that may relate to services performed by Executive for the Company, regardless of whether a lawsuit has then been filed against the Company with respect to such investigation.

14. Publicity. Neither party shall issue, without consent of the other party, any press release or make any public announcement with respect to this Agreement or the employment

8

relationship between them. Following the date of this Agreement and regardless of any dispute that may arise in the future, Executive and the Company jointly and mutually agree that they will not disparage, criticize or make statements which are negative, detrimental or injurious to the other to any individual, company or client, including within the Company.

15. Withholding. Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the Company hereunder to the Executive shall be subject to withholding, at the time payments are actually made to the Executive and received by him, of such amounts relating to taxes as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Company may, in its sole discretion, accept other provision for payment of taxes as required by law, provided that it is satisfied that all requirements of law as to its responsibilities to withhold such taxes have been satisfied.

16. Arbitration. Any dispute or controversy between the Company and the Executive, whether arising out of or relating to this Agreement, the breach of this Agreement, or otherwise, shall be settled by arbitration administered by the American Arbitration Association (“AAA”) in accordance with its Commercial Arbitration Rules then in effect, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Any arbitration shall be held before a single arbitrator who shall be selected by the mutual agreement of the Company and the Executive, unless the parties are unable to agree to an arbitrator, in which case, the arbitrator will be selected under the procedures of the AAA. The arbitrator shall have the authority to award any remedy or relief that a court of competent jurisdiction could order or grant, including, without limitation, the issuance of an injunction. However, either party may, without inconsistency with this arbitration provision, apply to any court having jurisdiction over such dispute or controversy and seek interim provisional, injunctive or other equitable relief until the arbitration award is rendered or the controversy is otherwise resolved. Except as necessary in court proceedings to enforce this arbitration provision or an award rendered hereunder, or to obtain interim relief, neither a party nor an arbitrator may disclose the existence, content or results of any arbitration hereunder without the prior written consent of the Company and the Executive. The Company and the Executive acknowledge that this Agreement evidences a transaction involving interstate commerce. Notwithstanding any choice of law provision included in this Agreement, the United States Federal Arbitration Act shall govern the interpretation and enforcement of this arbitration provision. The arbitration proceeding shall be conducted in Chicago, Illinois, or such other location to which the parties may agree. The Company shall be responsible for the costs of any arbitrator appointed hereunder.

17. Successors.

(a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive’s heirs and legal representatives.

(b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.

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(c) The Company shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation, or otherwise) to all or a substantial portion of its assets, by agreement in form and substance reasonably satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform this Agreement if no such succession had taken place. Regardless of whether such an agreement is executed, this Agreement shall be binding upon any successor of the Company in accordance with the operation of law, and such successor shall be deemed the “Company” for purposes of this Agreement.

(d) As used in this Agreement, the term “Company” shall include any successor to the Company’s business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.

18. Miscellaneous.

(a) This Agreement shall be governed by and construed in accordance with the laws of Illinois, without reference to principles of conflicts of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.

(b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party, by overnight courier, or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Executive:

At the most recent address on file with the Company

If to the Company:

Chicago Federal Home Loan Bank

111 East Wacker Drive, Suite 800

Chicago, IL 60601

Attn: General Counsel

or to such other address as either of the parties shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.

(c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

(d) Any party’s failure to insist upon strict compliance with any provision hereof shall not be deemed to be a waiver of such provision or any other provision hereof.

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(e) This Agreement supersedes any prior employment agreement or understandings, written or oral between the Company and the Executive and contains the entire understanding of the Company and the Executive with respect to the subject matter hereof.

(f) This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

[signature page follows]

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the dates written below.

CHICAGO FEDERAL HOME LOAN BANK
By:	/s/ ALLEN H. KORANDA
Title:	Chairman
Date:	8/30/04

/s/ J. MIKESELL THOMAS
Date:	August 30, 2004

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EX-10.8.1

Exhibit 10.8.1

FEDERAL HOME LOAN BANK OF CHICAGO

PRESIDENT’S INCENTIVE COMPENSATION PLAN

I. PLAN OBJECTIVES

The purpose of the Federal Home Loan Bank of Chicago’s (“Bank”) President’s Incentive Compensation Plan (“Plan”) is to:

• Promote the achievement of the Bank’s profitability and business goals which directly support the Bank’s business plan.

• Link compensation to specific performance measures; and,

• Provide a competitive compensation program.

II. PLAN YEAR ACTIONS

A. The Board of Directors shall each Plan Year establish Criteria and Performance Targets consistent with the Bank’s Business Plan approved by the Board of Directors.

B. Each Plan Year’s Criteria, Performance Targets, Target Values and Definitions of Plan Criteria will be established in January by the Personnel & Compensation Committee, with the approval of the Board of Directors on a schedule in the general form of Exhibit B.

C. The President’s performance will be appraised by the Personnel and Compensation Committee in January following the Plan Year and any award pursuant to this Plan shall be paid in cash to the President.

D. The President’s Incentive Award payout levels are identified in Exhibit A.

III. AWARD CALCULATIONS

A. An Award for a Plan Year is calculated by:

(1) Calculating the actual Plan Year Performance as a Percent of Target for each of the Criteria separately;

(2) Multiplying the Target Value by the Performance as a Percent of Target for each of the Criteria;

(3) Totaling the products of (2), above, which constitutes the Total Award Percentage (Weighted Average);

(4) Identifying the Total Award Percentage that correlates to the Payout Level on Exhibit A;

(5) Multiplying the Payout Level by the Plan Year base salary to determine the dollar amount of the award.

The maximum and minimum incentive award payments are established in Exhibit A. The incentive award payment shall be calculated in accordance with the Incentive Compensation Payout and Award Scale in Exhibit A.

IV. MISCELLANEOUS

Base pay may be adjusted annually by merit increases, but is not affected by any incentive award.

The Bank shall, during each plan year, give the Personnel & Compensation Committee a mid-year status report on progress toward performance targets established hereunder.

The Plan shall be maintained in accordance with and is subject to Federal Housing Finance Board regulations and policies.

V. OTHER TERMS AND CONDITIONS

A. Discretionary Authority.

The Bank, with the approval of the Personnel & Compensation Committee, may make adjustments in the criteria established herein for any award period whether before or after the end of the award period and, to the extent it deems appropriate in its sole discretion which shall be conclusive and binding upon all parties concerned, make awards or adjust awards to compensate for or reflect any significant changes which may have occurred during the award period which alter the basis

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upon which such performance targets were determined or otherwise. The Bank, with the approval of the Board of Directors, may, in its discretion, make additional awards in such amounts as it deems appropriate to the President in consideration of extraordinary performance by the Bank.

B. Other Conditions.

(1) No person shall have any claim to be granted an award under the Plan and there is no obligation for uniformity of treatment of eligible employees under the Plan. Except as otherwise required by law, awards under the Plan may not be assigned.

(2) Neither the Plan nor any action taken hereunder shall be construed as giving the President the right to be retained in the employ of the Bank.

(3) The Bank shall have the right to deduct from any award to be paid under the Plan any Federal, state or local taxes required by law to be withheld with respect to such payment.

(4) No award shall be paid to the President for the current plan year if the President’s employment ceases prior to the end of the Plan year, whether by resignation, termination or otherwise.

(5) Any award hereunder may be reduced pro rata in the event that an award recipient (i) commences employment with the Bank during the calendar year or (ii) is absent from the Bank (other than regular vacation) during the calendar year whether through approved leave or otherwise, including but not limited to: short or long term disability, leave under the Family and Medical Leave Act, a personal leave of absence or military leave.

C. Plan Administration

(1) The Bank shall have full power to administer and interpret the Plan and to establish rules for its administration. The levels of financial and individual performance referred to in Sections II & III achieved for each award period shall be conclusively determined by the

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Bank. The determination of financial performance achieved for any award period may, but need not, be adjusted to reflect extraordinary financial items and adjustments or restatements of the financial statements, in the discretion of the Bank. Any such determination shall not be affected by subsequent adjustments or restatements. Any determinations or actions required or permitted to be made by the Bank may be made by the Personnel & Compensation Committee. The Personnel & Compensation Committee in making any determinations under or referred to in the Plan shall be entitled to rely on opinions, reports or statements of officers or employees of the Bank and of counsel, public accountants and other professional or expert persons.

(2) The Plan shall be governed by applicable Federal law.

(3) This Plan supersedes any prior Incentive Compensation Plan for the President for the plan year commencing on January 1, 1998.

D. Modification or Termination of Plan.

The Bank may modify or terminate the Plan at any time to be effective at such date as the Bank may determine. A modification may affect present and future awards and eligible employees.

E. Effective Date.

The Plan shall be effective January 1, 1998.

Approved by the
Board of Directors
on January 20, 1998
and revised on
January 21, 2003.

/s/ Peter E. Gutzmer

Corporate Secretary

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EX-10.8.2

Exhibit 10.8.2

FEDERAL HOME LOAN BANK OF CHICAGO

MANAGEMENT INCENTIVE COMPENSATION PLAN

I. PURPOSE

Members of the Bank’s Management Committee (excluding the President & CEO) are eligible to participate in the Federal Home Loan Bank of Chicago Management Incentive Compensation Plan (“Plan”). The purpose of the Plan is to give a select group of management and highly compensated employees strong incentives to make difficult decisions and to expend exceptional efforts to enhance the financial performance of the Bank.

Incentive compensation is to be awarded by the President & CEO with approval of the Personnel & Compensation Committee of the Board of Directors in accordance with the terms and conditions in this Plan.

II. ELIGIBILITY FOR AWARD

To receive an award under the Plan, the following eligibility conditions must be satisfied:

A. The recipient is a member of the Bank’s Management Committee (excluding the President & CEO) during the Plan year or is a senior officer designated by the President & CEO to participate in the Plan; and

B. The recipient displays, in the judgment of the President & CEO, a commitment to the Bank as a whole and team spirit.

III. PLAN CRITERIA AND MAXIMUM AWARD PERCENTAGE

A. Plan Criteria

The Plan criteria consist of a series of corporate goals established annually (“Bank Criteria”) based upon the approved Business Plan for the Plan year. The Bank Criteria will be communicated at the beginning of each Plan year and will specify:

(i) Bank Criteria description;

(ii) Plan Year Performance Target for each of the Bank Criteria; and

(iii) Target Value or weighting attributed to each of the Bank Criteria.

The Bank Criteria, Performance Targets and Target Values for a Plan year shall be established by the Personnel & Compensation Committee.

B. Plan Administration

The Maximum Award Percentage is calculated by calculating the actual Plan year performance as a percent of target for each of the Bank Criteria separately, multiplying the results for each criterion by its associated Target Value and adding the resulting totals to calculate the Award Coefficient Factor.

The total Award Coefficient Factor is applied to the Award Formula Table to determine the Maximum Award Percentage. The Maximum Award Percentage and the Award Formula Table are established for each Plan year and communicated as part of the Plan Worksheet for that Plan year.

Except as may be otherwise determined in Section III.C., no award may exceed the maximum percentage specified for the Plan year multiplied by the recipient’s base salary.

C. Discretionary Management Awards

In any Plan year in which the Bank’s net income performance exceeds the Plan Year Performance Target for the Bank’s net income, the President & CEO shall have the discretion to create a discretionary bonus pool which may be used to grant individual Discretionary Management Awards as set forth in this Section III.C. The amount of such discretionary bonus pool shall be determined at the discretion of the President & CEO up to a percentage of net income above plan as established for each Plan Year by the Personnel & Compensation Committee.

If the President & CEO has created a discretionary bonus pool for a Plan year, the President & CEO shall also have the discretionary authority to grant an additional incentive award (“Discretionary Management Award”) to recipients who are otherwise eligible to receive an incentive award under this Plan for the Plan year. The determination of the recipients of a Discretionary Management Award and the amount of such Discretionary Management Award for each such recipient shall be in the sole discretion of the President & CEO, provided that the aggregate amount of Discretionary Management Awards granted in any Plan year shall not exceed the amount of the discretionary bonus pool previously determined by the President & CEO for such year. A Discretionary Management Award is made to a recipient in

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addition to the incentive award made to such recipient pursuant to Section IV of this Plan and need not necessarily be related to the recipient’s base compensation. The President shall not be required to distribute the full amount of any discretionary bonus pool. All Discretionary Management Awards shall be deemed to be an “award” for all purposes under this Plan.

The Personnel & Compensation Committee shall receive a report covering Plan years where Discretionary Management Awards are granted.

IV. INDIVIDUAL AWARD

The President & CEO shall establish one or more key goals for each eligible recipient.

The award to each eligible recipient shall be calculated by multiplying the Individual Award Percentage specified in the Plan Worksheet (which takes into account the completion of personal goals) by the Maximum Award Percentage; and then multiplying the resulting percentage by the recipient’s actual base salary received during the Plan year.

V. FORM OF PAYMENT

Payment shall be made as follows:

• 60% in cash

• 40% to the Stock Equivalent Account

A. Cash

The cash portion of any award is payable after year-end results are reported and Personnel & Compensation Committee approval.

B. Stock Equivalent Account

A Stock Equivalent Account (“SEA”) shall be established for each award recipient hereunder. Payments to the SEA shall be credited as “shares” at $100 per share. “Shares” in the SEA shall earn interest at the same rate as the Bank’s net return on equity after REFCO during each corresponding

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quarter. Interest shall be paid in the form of additional and fractional “shares” in the SEA. The interest calculation method herein shall apply to all existing SEA balances as of January 1, 1996.

SEA “shares” and interest thereon are vested on March 1 in the year following the year in which such “shares” were first credited to the SEA. (For example, payment of an award for performance in 1996 would be credited in February of 1997 and would vest on March 1, 1998.)

Award recipients who resign or whose employment is terminated shall have no interest in any SEA balance not yet vested, as provided above, as of their termination date and must withdraw all “shares” that have vested by such date.

SEA “shares” may be converted to cash and withdrawn, at the option of the award recipient, as follows: (1) 50% upon vesting and (2) the balance one year after vesting.

Notwithstanding the foregoing,

(1) the entire balance in a SEA (whether or not vested) of any award recipient, who dies while still employed at the Bank, shall be payable to such decedent’s heirs or legatees as provided by law; and

(2) the entire balance in a SEA (whether or not vested) of any award recipient who (i) is age 60 or older and (ii) retires (for purposes of the Financial Institutions Retirement Fund) from active employment at the Bank shall be available upon such retirement to the award recipient; and

(3) should any income tax become due based on payments to the SEA, such amount of tax shall become immediately available for withdrawal.

C. Payment Deferral

An award recipient may elect to defer the receipt of all or any amount of the cash portion and/or the SEA share portion of any award under the Plan and to have such amount applied to the purchase of Performance Units under the Federal Home Loan Bank of Chicago Long Term Incentive Compensation Plan. An election relating to the cash portion must be made by November 1st of the Plan year for which the award relates, and an election relating to the SEA share portion must be made by December 31st of the Plan year preceding the Plan year in which the SEA share portion will vest.

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VI. MISCELLANEOUS

Base pay may be adjusted annually by merit increases, but is not affected by any incentive award.

The Bank shall during each plan year give the Personnel & Compensation Committee a mid-year status report on progress toward performance targets established hereunder.

The Plan shall be maintained in accordance with and is subject to Federal Housing Finance Board regulations and policies.

VII. OTHER TERMS AND CONDITIONS

A. Discretionary Authority.

The Bank, with the approval of the Personnel & Compensation Committee, may make adjustments in the criteria established herein for any award period whether before or after the end of the award period and, to the extent it deems appropriate in its sole discretion which shall be conclusive and binding upon all parties concerned, make awards or adjust awards to compensate for or reflect any significant changes which may have occurred during the award period which alter the basis upon which such performance targets were determined or otherwise. The Bank, with the approval of the Personnel & Compensation Committee, may, in its discretion, make additional awards in such amounts as it deems appropriate in consideration of extraordinary performance by the Bank.

B. Other Conditions.

(1) No person shall have any claim to be granted an award under the Plan and there is no obligation for uniformity of treatment of eligible employees under the Plan. Except as otherwise required by law, awards under the Plan may not be assigned.

(2) Neither the Plan nor any action taken hereunder shall be construed as giving to any employee the right to be retained in the employ of the Bank.

(3) The Bank shall have the right to deduct from any award to be paid under the Plan any Federal, state or local taxes required by law to be withheld with respect to such payment.

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(4) No award shall be paid to an employee for the current plan year if such employee’s employment ceases prior to the end of the plan year, whether by resignation, termination or otherwise.

(5) Any award hereunder may be reduced pro rata in the event that an award recipient (i) commences employment with the Bank during the calendar year or (ii) is absent from the Bank (other than regular vacation) during the calendar year whether through approved leave or otherwise, including but not limited to: short or long term disability, leave under the Family and Medical Leave Act, a personal leave of absence or military leave.

C. Plan Administration

(1) The Bank shall have full power to administer and interpret the Plan and to establish rules for its administration. The levels of financial and individual performance, established pursuant to this Plan, achieved for each award period shall be conclusively determined by the Bank. The determination of financial performance achieved for any award period may, but need not, be adjusted to reflect extraordinary financial items and adjustments or restatements of the financial statements, in the discretion of the Bank. Any such determination shall not be affected by subsequent adjustments or restatements. Any determinations or actions required or permitted to be made by the Bank may be made by the President and Chief Executive Officer. The Bank and President and Chief Executive Officer of the Bank in making any determinations under or referred to in the Plan shall be entitled to rely on opinions, reports or statements of officers or employees of the Bank and of counsel, public accountants and other professional or expert persons.

(2) The Plan shall be governed by applicable Federal law.

(3) This Plan supersedes any prior Management Incentive Compensation Plan for the plan year commencing on January 1, 2001.

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D. Modification or Termination of Plan.

The Bank may modify or terminate the Plan at any time to be effective at such date as the Bank may determine. A modification may affect present and future awards and eligible employees.

E. Effective Date.

The Plan shall be effective January 1, 2001.

Approved by the Board of Directors on

March 20, 2001 and amended on

March 15, 2005.

/s/ Peter E. Gutzmer

Corporate Secretary

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EX-10.8.3

Exhibit 10.8.3

FEDERAL HOME LOAN BANK OF CHICAGO

LONG TERM INCENTIVE COMPENSATION PLAN

I. PURPOSE

The purpose of the Federal Home Loan Bank of Chicago Long Term Incentive Compensation Plan (the “Plan”) is to provide additional incentive for the required sustained efforts, decisions innovation and discipline from certain senior officers who significantly contribute to the attainment of long-term goals of the Federal Home Loan Bank of Chicago (“Bank”), and to enhance the retention of such senior officers by providing such officers with a competitive compensation opportunity, which aligns their interests with those of the Bank’s members.

II. ADMINISTRATION

The Plan shall be administered by the Personnel and Compensation Committee of the Board of Directors of the Bank (the “Committee”). In addition to any authority granted from time to time to the Committee by the Board of Directors of the Bank, the Committee shall have the authority to: (a) prescribe, amend and rescind Plan rules, regulations and procedures consistent with the Plan; (b) approve performance goals (with Board of Directors approval); (c) determine from time to time the eligibility of employees of the Bank for participation in the Plan; (d) determine the number and monetary value of Performance Units to be allocated to each Participant for each Performance Period; (e) delegate from time to time the performance of ministerial functions in connection with the administration of the Plan to such person or persons as it deems appropriate; (f) act upon the vote of a majority of its members; and (g) take all other action necessary or appropriate for the administration of the Plan. All such actions by the Committee shall also be consistent with the terms and provisions of the Plan.

III. ELIGIBILITY

Participants in the Plan for each Performance Period shall be those senior officers of the Bank who are designated by the Committee in its sole discretion.

Before the beginning of each Performance Period, the Committee shall designate those senior officers who shall be eligible to participate in the Plan for that Performance Period and shall allocate to them Performance Units for that Performance Period. Each such person eligible to participate in the Plan for a Performance Period is referred to as a “Participant”. The continued eligibility of any Participant for any Performance Period is at all times determined in the sole discretion of the Committee and may be subject to such restrictions as the Committee may in its sole discretion from time to time determine. Restrictions on one Participant’s eligibility need not be applicable or the same as restrictions applicable to any other Participant’s eligibility.

IV. PERFORMANCE UNITS

Performance Units shall be allocated by the Committee to Participants before each Performance Period. A Participant may elect to purchase from twenty percent (20%) to one hundred percent (100%) of the Performance Units allocated to him and eligible for purchase. The purchase price for a Performance Unit shall be as designated by the Committee on the Performance Period Worksheet. The purchase price may be paid in cash, by personal check, by electing to forego payments under the Federal Home Loan Bank of Chicago Management Incentive Compensation Plan or other similar incentive plan, or in any combination thereof. The number of Performance Units elected and the purchase price payment or direction must be received by April 15th of the first year of the applicable Performance Period, or for the first Performance Period (2001-2003)

2

hereunder, by June 1, 2001. Participants who become employed during a Performance Period may purchase their Performance Units for such Performance Period at the time of employment.

The President & CEO of the Bank shall have the authority to allocate additional Purchased Performance Units to any Participant other than the President & CEO. Any such Performance Units so allocated shall not exceed, in the aggregate, ten percent (10%) of the total number of Performance Units available for purchase by all Participants for the applicable Performance Period.

V. GRANTED PERFORMANCE UNITS

A Participant shall receive three (3) additional Performance Units for each Performance Unit purchased. The Participant will not be required to pay for these additional Performance Units.

VI. PERFORMANCE PERIODS AND GOALS

Each year shall begin a new three (3) year Performance Period.

As of the beginning of each Performance Period, the Committee, with the approval of the Board of Directors, shall establish one or more performance goals and Performance Unit values (“Performance Goals”) consistent with the purposes of the Plan, as determined in the sole discretion of the Committee, for that Performance Period, and if appropriate, the weight to be given to each such Performance Goal for that period. The Committee may, from time to time thereafter, make appropriate adjustments in Performance Goals to reflect major unforeseen transactions, events or circumstances which in the Committees opinion alter or affect such goals or the basis or assumptions upon which such goals were determined.

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At the beginning of each Performance Period, the Bank’s Human Resources Department shall send a letter (“Notification Letter”) to each Participant who has been allocated Performance Units for that period. The Notification Letter shall indicate for that Performance Period: (a) the number of purchased and granted Performance Units available to that Participant; (b) the Performance Goals applicable for such Performance Period; and (3) such other information relevant to such Performance Period.

As soon as practicable after the end of each Performance Period, the Committee shall determine the extent to which the Performance Goals for that period were achieved.

VII. VESTING

Except as provided below, if a Participant is actively employed by the Bank at the end of the Performance Period he shall be vested at the end of such Performance Period in the Performance Units allocated to him for that Performance Period.

If a Participant dies, becomes totally and permanently disabled, or retires under the qualified defined benefit retirement plan sponsored by the Bank before the end of a Performance Period, such Participant shall be vested at the end of the corresponding Performance Period in the number of Performance Units he would have received had his employment with the Bank continued to the end of the Performance Period, multiplied by a fraction, the numerator of which is the number of full months he was employed by the Bank during the Performance Period (excluding any period of disability in excess of three months), and the denominator of which is the total number of months in the Performance Period.

4

The balance of a Participant’s Performance Units for any Performance Period that are not vested as provided above shall automatically be forfeited by the Participant as of the last day of that Performance Period. The Participant shall receive the purchase price paid for any nonvested Performance Units forfeited, subject to downward adjustment by the Committee, in its sole discretion.

Any award or Performance Unit allocation hereunder may be reduced pro rata in the event that a Participant (i) commences employment with the Bank during a Performance Period or (ii) is absent from the Bank (other than regular vacation) during a Performance Period whether through approved leave or otherwise, disability, leave under the Family and Medical Leave Act, a personal leave of absence or military leave.

VIII. BENEFITS

a. Benefit Value. The benefits to a Participant under the Plan will be the cash value of Performance Units based upon the achievement of the Performance Goals as established and determined by the Committee in which such Participant becomes vested and adjusted for interest accruals as provided below for deferred payments.

b. Time of Payment. Except as otherwise provided for herein, payments due hereunder for vested Performance Units will be made within ninety (90) days of the end of the Performance Period in which such Performance Units vested. If the Participant will own at least three hundred (300) Performance Units at the end of the Performance Period, he may elect, not less than one (1) year prior to the end of any Performance Period, by a writing filed with and accepted by the Bank, to

5

defer distribution of Plan benefits (or any portion thereof) in which he becomes vested at the end of such Performance Period. Such deferral shall be for a period of not less than two (2) years from the otherwise applicable time of payment. Such deferral election may be changed thereafter as long as such change is made at least one (1) year prior to the then current distribution date, and the new distribution date is at least two (2) years from the new election date. In the event the Participant’s employment is terminated for any reason other than death, total and permanent disability or retirement under the qualified defined benefit retirement plan sponsored by the Bank, all deferred distributions shall be paid in a lump sum within ninety (90) days of such termination. Interest shall accrue on deferred payments from the end of the applicable Performance Period to the date of payment at a rate equal to the 90 day FHLB note rate (or such successor reference rate designated by the Committee) for each calendar quarter thereafter. The Bank may, in its sole discretion, choose at any time and from time to time to accelerate the payment of any Plan benefits of a Participant after the Participant’s death, total and permanent disability or retirement.

c. Financial Emergency Withdrawal. If the Participant experiences a financial emergency as defined below, the Participant may petition the Committee to receive a partial or full payment from the Plan. The payout shall not exceed the lesser of the Participant’s benefit under the Plan, or the amount reasonably needed to satisfy the financial emergency. If, subject to the sole discretion of the Committee, the petition for payout is approved, payout shall be made as soon as practical after the date of approval. A financial emergency is an unanticipated

6

emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant resulting from (i) a sudden and unexpected illness or accident of the Participant or dependent of the Participant, (ii) a loss of the Participant’s property due to casualty, or (iii) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee.

d. Form of Payment. A Participant may elect to receive a distribution from the Plan in the form of a lump sum or installments. In the event of the termination of the Participant’s employment for other than death, total and permanent disability or retirement, all vested amounts shall be distributed in a lump sum within ninety (90) days of such termination. In the event of the termination of the Participant’s employment for death, total and permanent disability or retirement, vested amounts shall be distributed on the date or dates otherwise elected by the Participant. The Committee may prescribe such rules as it deems necessary regarding the payment of benefits. The Bank may, in its sole discretion, choose at any time and from time to time, to accelerate the payment of any Plan benefits of a Participant after the Participant’s death, total and permanent disability or retirement.

7

IX. DESIGNATION OF BENEFICIARY

In the event of the death of a Participant, all benefits to which that Participant is entitled but which are unpaid at the time of his death shall be paid to the beneficiary or beneficiaries of that Participant who are designated in writing by the Participant on a form provided by, filed with and accepted by the Bank, or in the absence of any such designation, to the beneficiary or beneficiaries of that Participant who are entitled to receive the benefits of that Participant which are payable under the qualified defined benefit plan sponsored by the Bank or its successor plan.

X. AMENDMENT OR TERMINATION OF PLAN

The Bank may terminate, amend or modify this Plan at any time and from time to time; provided however, any such termination, amendment or modification may not divest any Participant of any of his benefits under this Plan which are granted as of the date of such termination amendment or modification.

XI. GENERAL PROVISIONS

a. No Right of Continued Employment. Nothing contained in the Plan shall give any Participant the right to be retained in the employment of the Bank or affect the right of the Bank to dismiss any Participant.

b. No Right to Continued Payments. The allocation of any Performance Units, the vesting therein or the payment of any Plan benefits for any Performance Period shall not guarantee a Participant the right to receive any such allocation, vesting or payment for any subsequent Performance Period.

8

c. No Right of Transfer. The interests of persons entitled to benefits under the Plan are not subject to their debts or other obligations and, except for tax withholding requirements or as otherwise specifically provided herein, may not be voluntarily or involuntarily sold, transferred, alienated, assigned or encumbered.

d. Withholding for Taxes. The Bank shall have the right to deduct from all amounts paid under this Plan any taxes required by federal, state or local law to be withheld with respect to such payments.

e. Special Compensation. Except as otherwise provided by law, benefits received under the Plan shall not be included or taken into account in determining benefits under pension, retirement, profit sharing, group insurance, or any other benefit plan maintained by the Bank, unless so provided in such plan. Neither the Bank nor the Committee guarantee in any way the deferral of tax liability if a Participant defers the payment of Plan benefits.

f. Law to Govern. All questions pertaining to the construction, regulation, validity and effect of the provisions of the Plan shall be determined in accordance with applicable Federal law.

g. Funding of Benefits. Benefits payable hereunder to or on account of any Participant shall be paid directly by the Bank from its general assets. The Bank shall not be required to segregate on its books or otherwise set aside any amount to be used for the payment of benefits under this Plan.

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h. Interpretation. The Committee shall have the sole and complete authority to interpret the provisions of and decide all disputes arising under the Plan, which interpretations and decisions shall be final and binding on all parties having any interests arising under or by virtue of the Plan.

i. Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural.

j. Litigation. If any Participant, former Participant or beneficiary shall bring a suit or proceeding against the Committee or the Bank, or if any dispute shall arise as to the person or persons to whom payment or delivery of any funds shall be made by the Bank, the costs (including attorneys’ fees) to the Bank of defending the action, where the result is adverse to the complainant, or pursuant to the authorization of the court or other forum in which the suit or proceeding is brought, shall be charged against the Plan benefits of the applicable Participant, former Participant or beneficiary, and only the excess of such Plan benefits, if any, over the amount of such costs shall be payable by the Bank.

k. Effective Date. The Plan shall be effective beginning January 1, 2001 until modified or revoked by the Bank.

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l. Federal Housing Finance Board. This Plan shall be maintained in accordance with and is subject to Federal Housing Finance Board regulations and policies.

Approved by the Board of Directors

this 20th day of March, 2001, as

amended on July 15, 2003.

/s/ Peter E. Gutzmer

Corporate Secretary

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EX-10.8.4

Exhibit 10.8.4

FEDERAL HOME LOAN BANK OF CHICAGO

BENEFIT EQUALIZATION PLAN

Effective January 1, 1994

AS AMENDED JANUARY 1, 2004

TABLE OF CONTENTS

		Page
ARTICLE I	DEFINITIONS	1
ARTICLE II	MEMBERSHIP	2
ARTICLE III	AMOUNT AND PAYMENT OF PENSION BENEFITS	3
ARTICLE IV	AMOUNT AND PAYMENT OF THRIFT BENEFITS	4
ARTICLE V	SOURCE OF PAYMENTS	7
ARTICLE VI	DESIGNATION OF BENEFICIARIES	7
ARTICLE VII	ADMINISTRATION OF THE PLAN	8
ARTICLE VIII	AMENDMENT AND TERMINATION	9
ARTICLE IX	GENERAL PROVISIONS	9

-i-

FEDERAL HOME LOAN BANK OF CHICAGO

BENEFIT EQUALIZATION PLAN

Effective January 1, 1994, the FEDERAL HOME LOAN BANK OF CHICAGO (the “Bank”) established this Benefit Equalization Plan (the “Plan”).

INTRODUCTION

The purpose of this Plan is to provide to certain employees of the Bank the benefits which would have been payable under the Comprehensive Retirement Program of the Financial Institutions Retirement Fund (the “Retirement Fund”), and benefits equivalent to the salary reduction contributions and matching contributions which would have been available under the Financial Institutions Thrift Plan (the “Thrift Plan”), but for (i) the limitations placed on benefits and matching contributions for employees by Sections 401(a)(17), 401(k)(3)(A)(ii), 402(g) and 415 of the Internal Revenue Code of 1986, as amended, (ii) the amounts deferred under Sections 4.01 and 4.02 of this Plan from the definition of “Base Salary” under the Retirement Fund and the Thrift Plan; and (iii) amounts deferred from bonus and incentive compensation.

This Plan is intended to constitute a nonqualified unfunded deferred compensation plan for a select group of management or highly compensated employees under Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA). All benefits payable under this Plan shall be paid solely out of the general assets of the Bank. No benefits under this Plan shall be payable by or from the Retirement Fund or its assets or the Thrift Plan or its assets.

ARTICLE I. DEFINITIONS

When used in the Plan, the following terms shall have the following meanings:

1.01 “Account” means the account established and maintained hereunder to record the contributions deemed to be made by the Member and the Bank, as well as the increase in value attributable to the earnings thereon, all as described hereafter.

1.02 “Actuary” means the independent consulting actuary retained by the Bank to assist the Committee in its administration of the Plan.

1.03 “Adoption Date” means the date the Plan is adopted by the Board of Directors.

1.04 “Bank” means the Federal Home Loan Bank of Chicago.

1.05 “Beneficiary” means the beneficiary or beneficiaries designated in accordance with Article VI of the Plan to receive the benefit, if any, payable upon the death of a Member of the Plan.

1.06 “Board of Directors” means the Board of Directors of the Bank.

1.07 “Code” means the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto.

1.08 “Code Limitations” means the cap on compensation taken into account by a plan under Code Section 401(a)(17), the limitations on salary deferral contributions necessary to meet the average deferral percentage (“ADP”) test under Code Section 401(k)(3)(A)(ii), the limitations on employee and matching contributions necessary to meet the average contribution percentage (“ACP”) test under Code Section 401(m), the dollar limitations on elective deferrals under Code Section 402(g) and the overall limitations on contributions and benefits imposed on qualified plans by Code Section 415, as such provisions may be amended from time to time, and any similar successor provisions of federal tax law.

1.09 “Committee” means the Personnel and Compensation Committee of the Board of Directors of the Bank, which is authorized to administer the Plan.

1.10 “Deferral Agreement” means the agreement under which a Member elects to defer compensation under the Plan in accordance with the provisions of Section 4.01.

1.11 “Effective Date” means January 1, 1994.

1.12 “Eligible Executive” means an employee of the Bank who is a corporate officer and who has been selected to be an Eligible Executive by the Committee.

1.13 “Member” means any person included in the membership of the Plan as provided in Article II.

1.14 “Plan” means the Federal Home Loan Bank of Chicago Benefit Equalization Plan, as set forth herein or as it may be amended or restated from time to time.

1.15 “Retirement Fund” means the Comprehensive Retirement Program of the Financial Institutions Retirement Fund, a qualified and tax-exempt defined benefit pension plan and trust under Sections 401 (a) and 501 (a) of the Code, as adopted and amended by the Bank.

1.16 “Thrift Plan” means the Financial Institutions Thrift Plan, a qualified and tax-exempt defined contribution plan and trust under Sections 401(a) and 501(a) of the Code, as adopted and amended by the Bank.

ARTICLE II. MEMBERSHIP

2.01 Each Eligible Executive of the Bank shall become a Member of the Plan for purposes of Article III on the latest of (i) the date on which he is included in the membership of the Retirement Fund, (ii) the date he is selected as an Eligible Executive, or (iii) the Effective Date.

2.02 Each Eligible Executive of the Bank shall become a Member of the Plan for purposes of Article IV on the latest of (i) the date on which he is credited with an elective contribution under the Thrift Plan, (ii) the date he is selected as an Eligible Executive, or (iii) the Effective Date.

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2.03 A benefit shall be payable under the Plan to or on account of a Member only upon the Member’s retirement, death or other termination of employment with the Bank, except as provided in Section 4.08.

2.04 No employee shall have the automatic right to be selected as an Eligible Executive for any year, or, having been selected as an Eligible Executive for one year, be considered an Eligible Executive for any other year. If a Member ceases to be an Eligible Executive but continues to be employed by the Bank, he shall not be eligible to defer any further portion of his compensation under Sections 4.01 or 4.02 until he shall again become an Eligible Executive, and the Member shall cease to accrue any further pension benefit under Section 3.01(a)(ii).

ARTICLE III. AMOUNT AND PAYMENT OF PENSION BENEFITS

3.01 The amount, if any, of the annual pension benefit payable to or on account of a Member pursuant to the Plan shall equal the excess of (a) over (b), as determined by the Committee, where:

(a) is the annual pension benefit (as calculated by the Retirement Fund on the basis of the “Regular Form” of payment, as defined in the Retirement Fund) that would otherwise be payable to or on account of the Member by the Retirement Fund if its provisions were administered:

(i) without regard to the Code Limitations;

(ii) with the inclusion in the definition of “Base Salary” for the year deferred of any amounts deferred by a Member under Sections 4.01 and 4.02 of this Plan;

(b) is the annual pension benefit (as calculated by the Retirement Fund on the basis of the Regular Form of payment) that is payable to or on account of the Member under the Retirement Fund.

For purposes of this Section 3.01 “annual pension benefit” includes any “Active Service Death Benefit”, “Retirement Adjustment Payment”, “Annual Increment” and “Single Purchase Fixed Percentage Adjustment” which the Bank elected to provide its employees under the Retirement Fund.

3.02 The benefit payable to or on account of a Member pursuant to Section 3.01 shall be paid in the same form as elected by the Member under the Retirement Fund. Notwithstanding the foregoing, a Member shall be entitled to receive a lump sum payment under the terms of this Plan if he has filed an irrevocable election to that effect with the Committee at least 12 full calendar months prior to his date of retirement. In the event a Member elects to receive his benefit under the Retirement Fund in the form of a lump sum payment and has failed to make the election required by the preceding sentence, the Member’s pension benefit payable under this Plan shall be payable to or on account of the Member in the Regular Form of payment unless the Committee, in its sole discretion, decides to pay the benefit in a lump sum.

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If the Members benefit is not payable in the Regular Form under this Section 3.02, the benefit payable in an optional form shall be of equivalent actuarial value to the benefit otherwise payable in the Regular Form. For this purpose, equivalent actuarial value shall be determined by the Actuary under the same actuarial factors and assumptions then used by the Retirement Fund to determine actuarial equivalence under the Retirement Fund.

3.03 If a Member dies after the date his benefit payments under the Plan had commenced, the only death benefit payable under the Plan in respect of said Member shall be the amount, if any, payable under the form of payment which the Member had elected unless the Committee, in its sole discretion, decides to pay the benefit in a lump sum.

3.04 If a Member to whom an annual pension benefit is payable under the Plan dies while in active service or following retirement or other termination of employment but prior to the commencement of his benefit payments under this Plan, the death benefit will be computed as under the Retirement Fund with the adjustments provided under Section 3.01 above and any amount which may not be paid under the Retirement Fund shall be payable under this Plan in the form of payment provided under the Retirement Fund or, in the discretion of the Committee, in a lump sum.

3.05 If a Member is restored to employment with the Bank, payment of any benefits shall cease. Upon his subsequent retirement or termination of employment with the Bank, his benefit under the Plan shall be recomputed in accordance with Section 3.01, but shall be reduced by the equivalent actuarial value of the amount of any benefit paid by the Plan in respect of his previous retirement or termination of employment, and such reduced benefit shall be paid to the Member in accordance with the provisions of the Plan. For purposes of this Section 3.05, the equivalent actuarial value of the benefit paid in respect of the Member’s previous retirement or termination of employment shall be determined by the Actuary utilizing for that purpose the same actuarial factors and assumptions then used by the Retirement Fund to determine actuarial equivalence under the Retirement Fund.

3.06 Notwithstanding any other provision of this Plan, if, on the date payment under the Plan would otherwise commence, the lump sum settlement value of a Member’s benefit determined by the Actuary does not exceed $5000, or such other amount as may be determined under Section 411(a)(11) of the Code, then that Members benefit shall automatically be paid in the form of a lump sum settlement.

3.07 All annual pension benefits under the Plan shall be paid in monthly, quarterly, or annual installments, as determined by the Committee in its discretion. Benefits shall commence as soon as practicable following the Members retirement date under the Retirement Fund, except that no benefits shall be paid prior to the date that benefits under the Plan can be definitely determined by the Committee.

ARTICLE IV. AMOUNT AND PAYMENT OF THRIFT BENEFITS

4.01 If the employees salary reduction account contributions under the Thrift Plan for such year have reached the maximum permitted by the Code Limitations as determined by the

4

Committee, and if the employee has elected to reduce his compensation for the current calendar year in accordance with the provisions of Section 4.03, then such employee shall be credited with an elective contribution addition under this Plan equal to the reduction in his compensation made in accordance with such election; provided, however, that the sum of all such elective contribution additions for an employee with respect to any single calendar year shall not be greater than the excess of (a) over (b), where:

(a) is an amount equal to the maximum salary reduction account contributions permitted under the Thrift Plan for the calendar year as determined under the Thrift Plan if its provisions were administered without regard to the Code Limitations and if compensation as defined in the Thrift Plan included any deferrals made under this Section 4.01 or Section 4.02 plus, any bonus or incentive payments allowed by the Committee to be deferred under the Plan for such calendar year; and

(b) is an amount equal to his regular account and salary reduction-account contributions actually made under the Thrift Plan for the calendar year.

If the reduction in an employee’s compensation under such election is determined to exceed the maximum allowable elective contribution additions for such year, the excess and any related earnings credited under Section 4.04 shall be paid to such employee within the first two and one-half months of the succeeding calendar year.

4.02 If a portion of an employee’s regular account contribution or salary reduction account contribution to the Thrift Plan for the preceding year is returned to an employee after the end of such preceding year on account of the Code Limitations, and if the employee has elected in accordance with the provisions of Section 4.03 to reduce his compensation for the current year by the amount of such Thrift Plan contributions and related earnings returned to him for the preceding year, then such employee shall be credited with a make up contribution addition under this Plan equal to the reduction in his compensation made in accordance with such election.

4.03 A Member’s elections under Sections 4.01 and 4.02 shall be made in accordance with the following provisions:

(a) The Committee shall provide each Member with a Base Salary Deferral Agreement prior to the commencement of the calendar year in which compensation is to be earned and paid. Each Member shall execute and deliver the Deferral Agreement to the Committee no later than the last business day preceding the calendar year in which compensation is to be earned and paid. The Committee shall provide each Member designated by the Committee to be allowed to defer bonus and incentive compensation with a Bonus/Incentive Deferral Agreement prior to the determination of such bonus or incentive payments for such calendar year, but not later than October 1^st of such year. Such Member shall execute and deliver the Bonus/Incentive Deferral Agreement to the Committee no later than November 1^st of such calendar year.

5

Notwithstanding the above, an Eligible Executive who becomes eligible to participate during a calendar year may execute a Deferral Agreement with respect to his elections under Section 4.01 and 4.02 within 30 days of the date he becomes eligible to participate. An individual who is an Eligible Executive immediately prior to the Adoption Date may file a Deferral Agreement with the Committee within such period prior to the Adoption Date and in such manner as the Committee may prescribe. With respect to Sections 4.01 and 4.02, the Deferral Agreement shall only apply to compensation earned by the Member in the payroll periods beginning on or after the later of the date such Agreement is submitted to the Committee or the Adoption Date.

(b) The Deferral Agreement shall provide for separate elections with respect to elective contribution additions under Section 4.01 and make-up contribution additions under Section 4.02. Any Member who has been designated by the Committee to be allowed to defer bonus and incentive compensation under the Plan shall complete a separate Bonus/Incentive Deferral Agreement.

(c) An Eligible Executive’s elections on his Deferral Agreement of the rates at which he authorizes deferrals under Sections 4.01 and 4.02 shall be irrevocable for the calendar year for which the deferral is elected. Notwithstanding the foregoing, a Member may, in the event of an unforeseeable emergency which results in a severe financial hardship, request a suspension of his salary deferrals under the Plan. The request shall be made in a time and manner determined by the Committee. The suspension shall be effective with respect to the portion of the calendar year remaining after the Committees determination that the Member has incurred a severe financial hardship. The Committee shall apply standards, to the extent applicable, identical to those described in Section 4.08 in making its determination.

4.04 For each salary reduction contribution addition credited to a Member under Section 4.01 (except amounts deferred as bonus and incentive deferrals), such Member shall also be credited with a matching contribution addition under this Plan equal to the matching contribution, if any, that would be credited under the Thrift Plan with respect to such amount if contributed to the Thrift Plan, determined as if the Thrift Plan were administered in accordance with its terms up to the maximum Code Limitations, and determined after taking into account the Member’s actual salary reduction contributions to and actual matching contributions under the Thrift Plan.

For each make-up contribution addition credited to a Member under Section 4.02, such Member shall also be credited with a matching contribution addition under this Plan equal to the matching contribution, if any, that was lost under the Thrift Plan with respect to the contributions returned for the preceding calendar year.

4.05 The Committee shall maintain an Account on the books and records of the Bank for each employee who is a Member by reason of amounts credited under Sections 4.01 and 4.02. The salary reduction contribution additions, make-up contribution additions and matching contribution additions of a Member under Sections 4.01, 4.02 and 4.03 shall be credited

6

to the Member’s Account as soon as practical after the date that the compensation reduced under Section 4.01 or 4.02 would otherwise have been paid to such Member. In addition, the Account of a Member shall be credited as of the end of each calendar quarter with interest at the same rate as the Bank’s net return on equity after REFCO during each corresponding quarter. In lieu of such rate, the Committee may designate from time to time, such other indices of investment performance or investment funds as the measure of investment performance under this Section 4.05. A Member shall at all times be 100% vested in his Account.

4.06 The balance credited to a Member’s Account shall be paid to him in a lump sum payment as soon as reasonably practicable after his retirement or other termination of employment with the Bank.

4.07 If a Member dies prior to receiving the balance credited to his Account under Section 4.06 above, the balance in his Account shall be paid to his Beneficiary in a lump sum payment as soon as reasonably practicable after his death.

4.08 While employed by the Bank, a Member may, in the event of an unforeseeable emergency, request a withdrawal from his Account. The request shall be made in a time and manner determined by the Committee, shall not be for an amount greater than the lesser of (i) the amount required to meet the financial hardship, or (ii) the amount of his Account, and shall be subject to approval by the Committee. For purposes of this Section 08, an unforeseeable emergency means a financial hardship as defined under the Thrift Plan, which hardship the Member is unable to satisfy with funds reasonably available from other sources. The circumstances that will constitute an unforeseeable emergency will depend upon the facts of each case as determined by the Committee.

ARTICLE V. SOURCE OF PAYMENTS

5.01 All payments of benefits under the Plan shall be paid from, and shall only be a general claim upon, the general assets of the Bank, notwithstanding that the Bank, in its discretion, may establish a bookkeeping reserve or a grantor trust (as such term is used in Code Sections 671 through 677) to reflect or to aid it in meeting its obligations under the Plan with respect to any Member or prospective Member or Beneficiary. No benefit provided by the Plan shall be payable from the assets of the Retirement Fund or the Thrift Plan.

5.02 No Member shall have any right, title or interest whatever in or to any investments which the Bank may make or any specific assets which the Bank may reserve to aid it in meeting its obligations under the Plan. To the extent that any person acquires a right to receive payments from the Bank under the Plan, such right shall be no greater than the right of an unsecured general creditor of the Bank.

ARTICLE VI. DESIGNATION OF BENEFICIARIES

6.01 Each Member of the Plan may file with the Committee a written designation of one or more persons as the Beneficiary who shall be entitled to receive the amount, if any, payable under the Plan upon his death. The Member may, from time to time, revoke or

7

change his Beneficiary designation without the consent of any prior Beneficiary by filing a new designation with the Committee. The last such designation received by the Committee shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Committee prior to the Member’s death, and in no event shall it be effective as to a date prior to such receipt.

6.02 If no such Beneficiary designation is in effect at the time of a Member’s death, or if no designated Beneficiary survives the Member, or if, in the opinion of the Committee, such designation conflicts with applicable law, the Member’s estate shall be deemed to have been designated his Beneficiary and shall be paid the amount, if any, payable under the Plan upon the Member’s death. If the Committee is in doubt as to the right of any person to receive such amount, the Committee may retain such amount, without liability for any interest thereon, until the rights thereto are determined, or the Committee may pay such amount into any court of appropriate jurisdiction and such payment shall be a complete discharge of the liability of the Plan and the Bank therefore.

ARTICLE VII. ADMINISTRATION OF THE PLAN

7.01 The Committee shall have general authority over and responsibility for the administration and interpretation of the Plan. The Committee shall have full power and discretionary authority, subject to Board approval, to interpret and construe the Plan, to make all determinations considered necessary or advisable for the administration of the Plan and any trust referred to in Article V, and the calculation of the amount of benefits payable thereunder, and to review claims for benefits under the Plan. The Committee’s interpretations and constructions of the Plan and its decisions or actions thereunder shall be binding and conclusive on all persons for all purposes.

7.02 The Committee shall arrange for the engagement of the Actuary, and if the Committee deems it advisable, it shall arrange for the engagement of legal counsel and certified public accountants (who may be counsel or accountants for the Bank), and other consultants, and make use of agents and clerical or other personnel, for purposes of the Plan. The Committee may rely upon the written opinions of such Actuary, counsel accountants and consultants, and upon any information supplied by the Retirement Fund or the Thrift Plan for purposes of Sections 3.01, 4.01 and 4.02 of the Plan, and delegate to any agent or to any sub-committee or Committee member its authority to perform any act hereunder, including without limitations those matters involving the exercise of discretion; provided, however, that such delegation shall be subject to revocation at any time at the discretion of the Committee. The Committee shall report to the Board, or to a committee designated by the Board, at such intervals as shall be specified by the Board or such designated committee, with regard to the matters for which it is responsible under the Plan.

7.03 No Committee member shall be entitled to act on or decide any matters relating solely to such member or any of his rights or benefits under the Plan.

8

7.04 A Committee member shall be reimbursed for any reasonable expenses incurred in connection with his services as a Committee member. No bond or other security need be required of the Committee or any member thereof in any jurisdiction.

7.05 All claims for benefits under the Plan shall be submitted in writing to the Chairman of the Committee. Written notice of the decision on each such claim shall be furnished with reasonable promptness to the Member or his Beneficiary (the claimant). The claimant may request a review by the Committee of any decision denying the claim in whole or in part. Such request shall be made in writing, and filed with the Committee within 30 days of such denial. A request for review shall contain all additional information which the claimant wishes the Committee to consider. The Committee may hold any hearing or conduct any independent investigation which it deems desirable to render its decision, and the decision on review shall be made as soon as feasible after the Committee’s receipt of the request for review. Written notice of the decision on review shall be furnished to the claimant. For all purposes under the Plan, such decisions on claims (where no review is requested) and decisions on review (where review is requested) shall be final, binding and conclusive on all interested persons as to all matters relating to the Plan.

7.06 All expenses incurred by the Committee in its administration of the Plan shall be paid by the Bank.

ARTICLE VIII. AMENDMENT AND TERMINATION

8.01 The Board of Directors may amend, suspend or terminate, in whole or in part, the Plan without the consent of the Committee, any Member, beneficiary or other person, except that no amendment, suspension or termination shall retroactively impair or otherwise adversely affect the rights of any Member, Beneficiary or other person to benefits under the Plan which have accrued prior to the date of such action, as determined by the amendment or take any other action which may be necessary or appropriate to facilitate the administration, management and interpretation of the Plan or to conform the Plan thereto, provided any such amendment or action does not have a material effect on the then currently estimated cost to the Bank of maintaining the Plan.

ARTICLE IX. GENERAL PROVISIONS

9.01 The Plan shall be binding upon and inure to the benefit of the Bank and its successors and assigns and the Members, and the successors, assigns, designees and estates of the Members. The Plan shall also be binding upon and inure to the benefit of any successor bank or 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 bank which assumes the Plan and all obligations of the Bank hereunder. The Bank agrees that it will make appropriate provision for the preservation of Members’ rights under the Plan in any agreement or plan which it may enter into to effect any merger, consolidation reorganization or transfer of assets. In such a merger, consolidation, reorganization, or

9

transfer of assets and assumption of Plan obligations of the Bank, the term Bank shall refer to such other bank and the Plan shall continue in full force and effect.

9.02 Neither the Plan nor any action taken thereunder shall be construed as giving to a Member the right to be retained in the employ of the Bank or as affecting the right of the Bank to dismiss any Member from its employ.

9.03 The Bank shall withhold or cause to be withheld from all benefits payable under the Plan all federal, state, local or other taxes required by applicable law to be withheld with respect to such payments.

9.04 No right or interest of a Member under the Plan may be assigned, sold, encumbered transferred or otherwise disposed of and any attempted disposition of such right or interest shall be null and void. Further, no right or interest of a Member may be reached by any creditor of the Member.

9.05 If the Committee shall find that any person to whom any amount is or was payable under the Plan is unable to care for his affairs because of illness or accident or because he is a minor then any payment, or any part thereof, due to such person (unless a prior claim therefor has been made by a duly appointed legal representative), may, if the Committee is so inclined, be paid to such person’s spouse, child or other relative, an institution maintaining or having custody of such person, or any other person deemed by the Committee to be a proper recipient on behalf of such person otherwise entitled to payment. Any such payment shall be in complete discharge of the liability of the Plan and the Bank therefor.

9.06 All elections, designations, requests, notices, instructions, and other communications from a Member, Beneficiary or other person to the Committee required or permitted under the Plan shall be in such form as is prescribed from time to time by the Committee and shall be mailed by first class mail or delivered to such location as shall be specified by the Committee and shall be deemed to have been given and delivered only upon actual receipt thereof at such location.

9.07 The benefits payable under the Plan shall be in addition to all other benefits provided for employees of the Bank and shall not be deemed salary or other compensation by the Bank for the purpose of computing benefits to which he may be entitled under any other plan or arrangement of the Bank.

9.08 No Committee member shall be personally liable by reason of any instrument executed by him or on his behalf, or action taken by him, in his capacity as a Committee member nor for any mistake of judgment made in good faith. The Bank hereby indemnifies and holds harmless the Retirement Fund, the Thrift Plan and each Committee member and each employee, officer or director of the Bank, the Retirement Fund or the Thrift Plan, to whom any duty, power, function or action in respect of the Plan may be delegated or assigned, or from whom any information is requested for Plan purposes, against any cost or expense (including fees of legal counsel) and liability (including any sum paid in settlement of a claim or legal action with the approval of the Bank) arising out of

10

anything done or omitted to be done in connection with the Plan, unless arising out of such person’s fraud or bad faith.

9.09 As used in the Plan, the masculine gender shall be deemed to refer to the feminine, and the singular person shall be deemed to refer to the plural, wherever appropriate.

9.10 The captions preceding the Sections of the Plan have been inserted solely as a matter of convenience and shall not in any manner define or limit the scope or intent of any provisions of the Plan.

9.11 The Plan shall be construed according to the laws of the State of Illinois in effect from time to time.

IN WITNESS WHEREOF, the FEDERAL HOME LOAN BANK OF CHICAGO has caused the amended Plan to be executed effective as of January 1, 2004.

Approved by the Board of Directors this 16th day

of December, 2003.

/s/ Peter E. Gutzmer

Corporate Secretary

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EX-10.8.5

Exhibit 10.8.5

FEDERAL HOME LOAN BANK

OF CHICAGO

EMPLOYEE SEVERANCE

AND

RETENTION PLAN

TABLE OF CONTENTS

		Page
SECTION 1.	PLAN NAME AND EFFECTIVE DATE	1
SECTION 2.	PURPOSE	1
SECTION 3.	DEFINITIONS	1
SECTION 4.	ELIGIBILITY	2
SECTION 5.	SEVERANCE PAYMENT CALCULATION; PAYMENT AND BENEFIT CONTINUATION	3
SECTION 6.	RETENTION BONUS PAYMENT CALCULATION; PAYMENT AND BENEFIT CONTINUATION	3
SECTION 7.	ADMINISTRATION	4
SECTION 8.	CLAIMS PROCEDURE	5
SECTION 9.	GENERAL INFORMATION	5
SECTION 10.	ERISA RIGHTS STATEMENT	6
SECTION 11.	GOVERNING LAW	7

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FEDERAL HOME LOAN BANK OF CHICAGO

EMPLOYEE SEVERANCE AND RETENTION PLAN

SECTION 1. PLAN NAME AND EFFECTIVE DATE

1.1 The name of the Plan is the Federal Home Loan Bank of Chicago Employee Severance and Retention Plan. The effective date of the Plan shall be June 30, 2004.

SECTION 2. PURPOSE

2.1 The purpose of the Plan is to (a) provide severance pay to eligible Employees under the conditions set forth in this Plan and (b) provide an incentive for current Employees to continue in their current positions with the Bank through a period of organizational change. Severance payments under the Plan are designed to provide the Employee with funds while seeking other employment. The retention bonus is designed to encourage Employees to continue providing valuable service to the Bank during a transition period.

SECTION 3. DEFINITIONS

3.1 Bank shall mean the Federal Home Loan Bank of Chicago.

3.2 Board shall mean the Board of Directors (or a Committee thereof) of the Bank.

3.3 Cause shall mean: (a) a material violation by the Employee of any applicable law or regulation respecting the business of the Bank; (b) the Employee being found guilty of a felony or an act of dishonesty in connection with the performance of his duties as an employee of the Bank; or (c) the willful or negligent failure of the Employee to fulfill the duties and responsibilities of his position. The Employee shall be entitled to at least seven (7) days’ prior written notice of the Bank’s intention to terminate his or her employment for any Cause specifying the grounds for such termination and the means to rectify such conduct, if any, and seven (7) days to rectify or appeal in writing to the Board regarding the existence of such Cause.

3.4 Constructive Discharge shall mean any one of the following events: (i) the Employee is moved from the position(s) held with the Bank as of the Effective Date, other than as a result of the Employee’s appointment to one or more position(s) of equal or superior scope and responsibility; or (ii) the Employee shall fail to be vested by the Bank with the powers authority and support services of any of such position(s); or (iii) the Bank otherwise commits a material breach of its obligations under this Plan.

3.5 Employee shall mean a regular, active full-time or Part-time Plus employee of the Bank, but excludes an employee who has a written employment agreement, severance agreement or similar agreement with the Bank providing for severance payment(s) in the event of termination of employment.

3.6 Participant shall mean an Employee who satisfies the eligibility requirements as set forth in Section 4.1 with respect to severance payments or Section 4.2 with respect to retention bonus payments, as the case may be.

3.7 Pay shall mean the base or regular compensation rate as of the calendar month preceding the employment termination date.

3.8 Payment Period shall mean the number of weeks of Pay a Participant is entitled to under Section 5.1. The Payment Period is not dependent on whether a benefit payment under Section 5 is made periodically or in a lump sum.

3.9 Plan shall mean this Federal Home Loan Bank of Chicago Employee Severance and Retention Plan as it may be amended from time to time.

3.10 Retention Period shall mean the period of time commencing on June 30, 2004 and ending on June 30, 2005.

3.11 Service shall mean all employment with the Bank, or any successor thereof.

SECTION 4. ELIGIBILITY

4.1 An Employee shall be eligible for severance payments and employee benefits under the Plan, as set forth in Section 5, if:

(a) the Employee is selected for inclusion by the Board; and

(b) the Employee is terminated by the Bank, other than for Cause; and

(c) the Employee signs a general release waiving any employment related claims against the Bank in a form provided by the Bank.

4.2 An Employee shall be eligible for the retention bonus payment and employee benefits under the Plan, as set forth in Section 6, if:

(a) the Employee is selected for inclusion by the Board; and

(b) the Employee remains employed by the Bank during the Retention Period; and

(c) the Employee signs a Retention Agreement in the form of Annex I to this Plan; and

(d) the Employee signs a general release waiving any employment related claims against the Bank in a form provided by the Bank, provided that this clause (d) shall only apply in the case of an Employee whose employment is terminated pursuant to Section 6.3.

2

SECTION 5. SEVERANCE PAYMENT CALCULATION; PAYMENT AND BENEFIT CONTINUATION

5.1 A Participant under the Plan shall be eligible to receive the following severance payment:

Management Committee – the greater of (a) four (4) weeks’ Pay for each full calendar year of Service, or (b) one (1) year’s Pay; or

Senior Vice President and Vice President – the greater of (a) three (3) weeks’ Pay for each full calendar year of Service, or (b) nine (9) months’ Pay;

5.2 The Bank reserves the right to offset the payments described in Section 5.1 above against any monies the Participant owes the Bank.

5.3 Payments under the Plan shall be made during the Payment Period in accordance with the regular payroll schedule of the Bank or, at the discretion of the Board, in a lump sum within five (5) business days after the date the Participant’s employment with the Bank is terminated, subject to any necessary or required benefit or tax withholding.

5.4 If a Participant dies before receiving a payment due under the Plan, such payment shall continue to be paid to the beneficiary designated by the Participant.

5.5 A Participant who elects to continue health insurance coverage after termination of employment under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), shall have the premium for such continuation coverage paid by the Bank. The period of such payment, if any, shall be the Payment Period. After the end of the Payment Period (if applicable), the Participant will be required to pay the full COBRA premium for such coverage until the end of the COBRA continuation period.

5.6 In the event of an involuntary termination for Cause, the voluntary termination by the Employee of his or her employment during the Retention Period for any reason other than a Constructive Discharge, or termination of employment after the Plan terminates, the Employee will not be entitled to any compensation or benefits under this Section 5, other than compensation and benefits up to the date of termination.

SECTION 6. RETENTION BONUS PAYMENT CALCULATION; PAYMENT AND BENEFIT CONTINUATION

6.1 If the Employee has continued in his or her employment with the Bank during the Retention Period, the Bank shall pay to the Employee in a lump sum within 30 days of the end of the Retention Period an amount equal to the Target Award Percentage payable under the Federal Home Loan Bank of Chicago Management Incentive Compensation Plan or the Bankwide Incentive Compensation Plan, as may be applicable, based upon the Plan Worksheet established for the Employee for the 2004 Plan Year as in effect on the Effective Date. The Bank shall

3

withhold from amounts payable to the Employee hereunder, any federal, state or local withholding or other taxes or changes which it is required to withhold.

6.2 During the Retention Period, the Employee shall continue to receive compensation at his or her annual base salary rate, and shall be entitled to participate in all plans and benefits including, but not limited to, incentive compensation, disability income, life insurance, medical and hospitalization insurance, severance pay, and similar or comparable plans, and also receive perquisites extended to similarly situated employees, at the greatest amount and level as was paid or provided to similarly situated employees during the Retention Period.

6.3 If, during the Retention Period, the Employee’s employment is either (a) terminated by the Bank for any reason other than Cause or (b) voluntarily terminated by the Employee because the Employee as a result of a Constructive Discharge, then the Employee will be entitled to payment of the retention bonus as provided for under Section 4 hereof; provided, however, that payment of the retention bonus will be made to the Employee within 30 days of the Employee’s last day of work.

6.4 In the event of an involuntary termination for Cause or the voluntary termination by the Employee of his or her employment during the Retention Period for any reason other than a Constructive Discharge, the Employee will not be entitled to any compensation or benefits under this Section 6, other than compensation and benefits up to the date of termination.

6.5 The provisions of Sections 8, 9, and 10 shall not apply to Section 6.

SECTION 7. ADMINISTRATION

7.1 The Plan is sponsored and shall be administered by the Bank. The Human Resources Director of the Bank shall be the named fiduciary under the Plan.

7.2 The Bank may at any time delegate to a person or body, or reserve therefor, any of the fiduciary responsibilities or administrative duties with respect to the Plan. The Bank, or any such delegate, shall have the complete discretion and authority to interpret the Plan, including matters regarding eligibility and benefit entitlement.

7.3 Subject to the limitation of the provisions of the Plan, the Bank may establish such rules for the administration of the Plan as the Board may deem desirable.

7.4 The expenses of administering the Plan, including the benefits, shall be paid by the Bank out of its general assets.

7.5 The Plan and all of its records shall be kept on a calendar year basis, beginning January 1 and ending December 31 of each calendar year.

7.6 Except as required by applicable law, benefits provided under the Plan shall not be subject to assignment or alienation, since they are primarily for the support and maintenance of the Participants. Likewise, such benefits shall not be subject to attachment by creditors of or through legal process against the Bank or any Participant.

4

7.7 The Bank reserves the right to change or amend the Plan in order to carry out the intent hereof by a resolution adopted by a majority of the Board. Participants will be notified of any changes, and all changes will be subject to the Plan’s provisions and applicable laws. The Plan will automatically terminate on June 30, 2005.

7.8 Nothing herein shall be construed as giving to any Employee of the Bank any right to remain in the employ of the Bank, nor shall it provide or be construed as providing any right to claim any pension or other benefit or allowance after termination of employment with the Bank.

SECTION 8. CLAIMS PROCEDURE

8.1 Employees normally do not need to take any action to receive benefits under the Plan. Employees will normally be contacted by the Bank or its delegate concerning the receipt of benefits. Employees who are not so contacted, and who believe they are entitled to benefits under the Plan, must submit a written claim to the Bank within sixty (60) days of the date of the alleged occurrence giving rise to the claim. If the Bank or any delegate believes that the claim should be denied, the Employee shall be notified in writing of the denial of the claim within ninety (90) days after the Bank’s receipt of the claim. Such notice shall (a) set forth the specific reason or reasons for the denial, making reference to the pertinent provisions of the Plan on which the denial is based; (b) describe any additional material or information that should be received before the claim may be acted upon favorably and explain the reason why such material or information, if any, is needed; (c) inform the Employee of his or her right pursuant to this section to request review of the decision by the Bank; and (d) explain the Plan’s claims review procedure and the time limits applicable to such procedures, including a statement of the Employee’s right to bring a civil action under Section 502(a) of ERISA following an adverse determination on review. An Employee who believes that he or she has submitted all available and relevant information may appeal the denial of a claim to the Bank by submitting a written request for review within sixty (60) days after the date on which such denial is received. Such period may be extended by the Bank for good cause shown. During this period, the Employee making the request for review may examine the Plan documents, records and other information relevant to the Employee’s claim for benefits. The Bank shall decide whether or not to grant the claim within sixty (60) days after receipt of the request for review, but this period may be extended by the Bank for up to an additional sixty (60) days in special circumstances. The Bank’s decision shall be in writing, shall include specific reasons for the decision, shall refer to pertinent provisions of the Plan on which the decision is based, and shall be conclusive and binding on all persons.

SECTION 9. GENERAL INFORMATION

9.1 The Plan administrative contact and agent for service of process is the Bank’s Director of Human Resources, who can be contacted at:

Federal Home Loan Bank of Chicago

111 East Wacker Drive

Chicago, IL 60601

(312) 565-5700

5

9.2 The Bank Employer Identification Number is 36-6001019 and the Plan number is 510.

SECTION 10. ERISA RIGHTS STATEMENT

10.1 As a Participant in the Plan, you are entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA provides that you are entitled to:

• Examine, without charge at the office of the Plan administrator, all Plan documents, including copies of all documents filed by the Plan with the U.S. Department of Labor, such as annual reports;

• Obtain copies of the Plan document and other documents governing the operation of the Plan upon written request to the Plan administrator. The administrator may make a reasonable charge for the copies.

In addition to creating rights for plan participants, ERISA imposes duties upon the people who are responsible for the operation of an employee benefit plan. The people who operate your Plan, called “fiduciaries” of the Plan, have a duty to do so prudently and in the interest of you and other participants.

No one may fire you or otherwise discriminate against you in any way to prevent you from obtaining a benefit or exercising your rights under ERISA.

If your claim for a benefit is denied in whole or in part, you must receive a written explanation of the reason for the denial. You have the right to have the Plan administrator review and reconsider your claim.

Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials from the Plan administrator and do not receive them within thirty (30) days, you may file suit in a federal court. In such case, the court may require the Plan administrator to provide the materials and pay up to $110 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Plan administrator.

If you have a claim for a benefit which is denied or ignored, in whole or in part, you may file suit in a state or federal court. If it should happen that Plan fiduciaries misuse the Plans assets, or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file a suit in federal court.

The court will decide who should pay court costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees if, for example, it finds your claim is frivolous.

If you have questions about the Plan, you should contact the Plan administrator. If you have any questions about this statement or your rights under ERISA, you should contact the nearest office of the Employee Benefits Security Administration, U.S. Department of Labor, listed in your

6

telephone directory, or the Division of Technical Assistance and Inquiries, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington, D.C. 20210. You may also obtain certain publications under ERISA by calling the publications hotline of the Employee Benefits Security Administration.

SECTION 11. GOVERNING LAW

11.1 The Plan and the rights of the parties hereunder shall be governed by and interpreted in accordance with federal law, and the laws of the State of Illinois. The invalidity or unenforceability of any provision or any part of any provision, hereof shall in no way effect the validity or enforceability of any other provision or part hereof.

Approved by the Personnel & Compensation Committee
of the Board of Directors this 30th day of June, 2004
FEDERAL HOME LOAN BANK OF CHICAGO
By:	/s/ Peter E. Gutzmer
	Its Corporate Secretary

7

ANNEX I

TO

EMPLOYEE SEVERANCE PAY AND RETENTION BONUS PLAN

RETENTION BONUS AGREEMENT

This RETENTION BONUS AGREEMENT (this “Agreement”) is made and entered into as of the 30th day of June, 2004 (the “Effective Date”) by and between THE FEDERAL HOME LOAN BANK OF CHICAGO (the “Bank”), and                                  (the “Employee”)

RECITALS

A. The Employee is a valued and valuable member of the workforce of the Bank.

B. The Bank recognizes that an organizational change at the Bank may cause uncertainty of employment which uncertainty may result in the loss of the valuable services of the Employee.

C. The Bank desires to continue to employ the Employee through the date of any organizational change and the Employee is willing to continue such employment.

D. The Employee has been selected as a Participant in the Federal Home Loan Bank of Chicago Employee Severance Pay and Retention Bonus Plan (the “Plan”) and the execution of this Agreement is a condition to the Employees receipt of certain benefits under the Plan.

NOW THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter contained, it is covenanted and agreed by and between the parties hereto as follows:

AGREEMENT

1. Definitions. All capitalized terms used but not otherwise defined in this Agreement shall have the respective meanings given to such terms in the Plan.

2. Position and Duties. The Employee hereby agrees to remain in the employ of the Bank throughout the Retention Period in his or her current capacity. During the period of the Employees employment hereunder, the Employee shall devote his or her best efforts and full business time, energy, skills and attention to the business and affairs of the Bank.

3. Retention Bonus Payment; Compensation and Benefits. The Employee shall be entitled to receive the payment, compensation and other benefits specified in Section 6 of the Plan, all pursuant to and in accordance with the terms of the Plan.

4. Governing Law. This Agreement shall be construed and the legal relations of the parties hereto shall be determined in accordance with the laws of the State of Illinois without regard to the law regarding conflicts of law.

5. Amendment. This Agreement may not be amended or modified except by written agreement signed by the Employee and the Bank.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date.

FEDERAL HOME LOAN BANK OF CHICAGO	EMPLOYEE
By:
Its

2

EX-10.8.6

Exhibit 10.8.6

FEDERAL HOME LOAN BANK

OF CHICAGO

EMPLOYEE SEVERANCE PLAN

TABLE OF CONTENTS

		Page
SECTION 1.	PLAN NAME AND EFFECTIVE DATE	1
SECTION 2.	PURPOSE	1
SECTION 3.	DEFINITIONS	1
SECTION 4.	ELIGIBILITY	2
SECTION 5.	SEVERANCE PAYMENT CALCULATION; PAYMENT AND BENEFIT CONTINUATION	2
SECTION 6.	ADMINISTRATION	3
SECTION 7.	CLAIMS PROCEDURE	4
SECTION 8.	GENERAL INFORMATION	4
SECTION 9.	ERISA RIGHTS STATEMENT	5
SECTION 10.	GOVERNING LAW	6

-i-

FEDERAL HOME LOAN BANK OF CHICAGO

EMPLOYEE SEVERANCE PLAN

SECTION 1. PLAN NAME AND EFFECTIVE DATE

1.1 The name of the Plan is the Federal Home Loan Bank of Chicago Employee Severance Plan. The effective date of the Plan shall be July 1, 2005.

SECTION 2. PURPOSE

2.1 The purpose of the Plan is to provide severance pay to eligible Employees under the conditions set forth in this Plan. Severance payments under the Plan are designed to provide the Employee with funds while seeking other employment.

SECTION 3. DEFINITIONS

3.1 Bank shall mean the Federal Home Loan Bank of Chicago.

3.2 Board shall mean the Board of Directors (or a Committee thereof) of the Bank.

3.3 Cause shall mean: (a) a material violation by the Employee of any applicable law or regulation respecting the business of the Bank; (b) the Employee being found guilty of a felony or an act of dishonesty in connection with the performance of his duties as an employee of the Bank; or (c) the willful or negligent failure of the Employee to fulfill the duties and responsibilities of his position. The Employee shall be entitled to at least seven (7) days’ prior written notice of the Bank’s intention to terminate his or her employment for any Cause specifying the grounds for such termination and the means to rectify such conduct, if any, and seven (7) days to rectify or appeal in writing to the Board regarding the existence of such Cause.

3.4 Constructive Discharge shall mean any one of the following events: (i) the Employee is moved from the position(s) held with the Bank as of the Effective Date, other than as a result of the Employees appointment to one or more position(s) of equal or superior scope and responsibility; or (ii) the Employee shall fail to be vested by the Bank with the powers authority and support services of any of such position(s); or (iii) the Bank otherwise commits a material breach of its obligations under this Plan.

3.5 Employee shall mean a regular, active full-time or Part-time Plus employee of the Bank, but excludes an employee who has a written employment agreement, severance agreement, or similar agreement with the Bank providing for severance payment(s) in the event of termination of employment.

3.6 Participant shall mean an Employee who satisfies the eligibility requirements as set forth in Section 4.1.

3.7 Pay shall mean the base or regular compensation rate as of the calendar month preceding the employment termination date. In the case of a non-exempt Employee, “Pay” shall not include overtime compensation paid to such Employee during such month.

3.8 Payment Period shall mean the number of weeks of Pay a Participant is entitled to under Section 5.1. The Payment Period is not dependent on whether a benefit payment under Section 5 is made periodically or in a lump sum.

3.9 Plan shall mean this Federal Home Loan Bank of Chicago Employee Severance Plan as it may be amended from time to time.

3.10 Service shall mean all employment with the Bank, or any successor thereof.

SECTION 4. ELIGIBILITY

4.1 An Employee shall be eligible for severance payments and employee benefits under the Plan, as set forth in Section 5, if:

(a) the Employee is terminated by the Bank, other than under the circumstances described in Section 5.6; and

(b) the Employee signs a general release waiving any employment-related claims against the Bank in a form provided by the Bank.

SECTION 5. SEVERANCE PAYMENT CALCULATION; PAYMENT AND BENEFIT CONTINUATION

5.1 A Participant under the Plan shall be eligible to receive the following severance payment:

Management Committee – the greater of (a) four (4) weeks’ Pay for each full calendar year of Service, or (b) one (1) year’s Pay; or

Senior Vice President and Vice President – the greater of (a) three (3) weeks’ Pay for each full calendar year of Service, or (b) nine (9) months’ Pay; or

Assistant Vice President – the greater of (a) three (3) weeks’ Pay for each full calendar year of Service, or (b) six (6) months’ Pay; or

Exempt Employee (non-officer) – the greater of (a) two (2) weeks’ Pay for each full calendar year of Service, or (b) two (2) months’ Pay; or

Non-exempt Employee – the greater of (a) two (2) weeks’ Pay for each full calendar year of Service, or (b) one (1) month’s Pay;

5.2 The Bank reserves the right to offset the payments described in Section 5.1 above against any monies the Participant owes the Bank.

2

5.3 Payments under the Plan shall be made during the Payment Period in accordance with the regular payroll schedule of the Bank or, at the discretion of the Board, in a lump sum within five (5) business days after the date the Participant’s employment with the Bank is terminated, subject to any necessary or required benefit or tax withholding.

5.4 If a Participant dies before receiving a payment due under the Plan, such payment shall continue to be paid to the beneficiary designated by the Participant.

5.5 A Participant who elects to continue group medical insurance coverage after termination of employment under the Consolidated Omnibus Budget Reconciliation Act of 1985 as amended (“COBRA”), shall have the premium for such continuation coverage paid by the Bank. The period of such payment, if any, shall be the Payment Period. After the end of the Payment Period (if applicable), the Participant will be required to pay the full COBRA premium for such coverage until the end of the COBRA continuation period.

5.6 In the event of an involuntary termination for Cause, the voluntary termination by the Employee of his or her employment for any reason other than a Constructive Discharge, or termination of employment after the Plan terminates, the Employee will not be entitled to any compensation or benefits under this Section 5, other than regular compensation and benefits earned up to the date of termination.

SECTION 6. ADMINISTRATION

6.1 The Plan is sponsored and shall be administered by the Bank. The Human Resources Director of the Bank shall be the named fiduciary under the Plan.

6.2 The Bank may at any time delegate to a person or body, or reserve therefore, any of the fiduciary responsibilities or administrative duties with respect to the Plan. The Bank, or any such delegate, shall have the complete discretion and authority to interpret the Plan, including matters regarding eligibility and benefit entitlement.

6.3 Subject to the limitation of the provisions of the Plan, the Bank may establish such rules for the administration of the Plan as the Board may deem desirable.

6.4 The expenses of administering the Plan, including the benefits, shall be paid by the Bank out of its general assets.

6.5 The Plan and all of its records shall be kept on a calendar year basis, beginning January 1 and ending December 31 of each calendar year.

6.6 Except as required by applicable law, benefits provided under the Plan shall not be subject to assignment or alienation, since they are primarily for the support and maintenance of the Participants. Likewise, such benefits shall not be subject to attachment by creditors of or through legal process against the Bank or any Participant.

6.7 The Bank reserves the right to change or amend the Plan in order to carry out the intent hereof by a resolution adopted by a majority of the Board. Participants will be notified of

3

any changes, and all changes will be subject to the Plan’s provisions and applicable laws. The Plan will automatically terminate on June 30, 2005.

6.8 Nothing herein shall be construed as giving to any Employee of the Bank any right to remain in the employ of the Bank, nor shall it provide or be construed as providing any right to claim any pension or other benefit or allowance after termination of employment with the Bank.

SECTION 7. CLAIMS PROCEDURE

7.1 Employees normally do not need to take any action to receive benefits under the Plan. Employees will normally be contacted by the Bank or its delegate concerning the receipt of benefits. Employees who are not so contacted, and who believe they are entitled to benefits under the Plan, must submit a written claim to the Bank within sixty (60) days of the date of the alleged occurrence giving rise to the claim. If the Bank or any delegate believes that the claim should be denied, the Employee shall be notified in writing of the denial of the claim within ninety (90) days after the Bank’s receipt of the claim. Such notice shall (a) set forth the specific reason or reasons for the denial, making reference to the pertinent provisions of the Plan on which the denial is based; (b) describe any additional material or information that should be received before the claim may be acted upon favorably and explain the reason why such material or information, if any, is needed; (c) inform the Employee of his or her right pursuant to this section to request review of the decision by the Bank; and (d) explain the Plan’s claims review procedure and the time limits applicable to such procedures, including a statement of the Employee’s right to bring a civil action under Section 502(a) of ERISA following an adverse determination on review. An Employee who believes that he or she has submitted all available and relevant information may appeal the denial of a claim to the Bank by submitting a written request for review within sixty (60) days after the date on which such denial is received. Such period may be extended by the Bank for good cause shown. During this period, the Employee making the request for review may examine the Plan documents, records and other information relevant to the Employee’s claim for benefits. The Bank shall decide whether or not to grant the claim within sixty (60) days after receipt of the request for review, but this period may be extended by the Bank for up to an additional sixty (60) days in special circumstances. The Bank’s decision shall be in writing, shall include specific reasons for the decision, shall refer to pertinent provisions of the Plan on which the decision is based, and shall be conclusive and binding on all persons.

SECTION 8. GENERAL INFORMATION

8.1 The Plan administrative contact and agent for service of process is the Bank’s Director of Human Resources, who can be contacted at:

Federal Home Loan Bank of Chicago

111 East Wacker Drive

Chicago, IL 60601

(312) 565-5700

4

8.2 The Bank Employer Identification Number is 36-6001019 and the Plan number is 510.

SECTION 9. ERISA RIGHTS STATEMENT

9.1 As a Participant in the Plan, you are entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA provides that you are entitled to:

• Examine, without charge at the office of the Plan administrator, all Plan documents, including copies of all documents filed by the Plan with the U.S. Department of Labor, such as annual reports;

• Obtain copies of the Plan document and other documents governing the operation of the Plan upon written request to the Plan administrator. The administrator may make a reasonable charge for the copies.

In addition to creating rights for plan participants, ERISA imposes duties upon the people who are responsible for the operation of an employee benefit plan. The people who operate your Plan, called “fiduciaries” of the Plan, have a duty to do so prudently and in the interest of you and other participants.

No one may fire you or otherwise discriminate against you in any way to prevent you from obtaining a benefit or exercising your rights under ERISA.

If your claim for a benefit is denied in whole or in part, you must receive a written explanation of the reason for the denial. You have the right to have the Plan administrator review and reconsider your claim.

Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials from the Plan administrator and do not receive them within thirty (30) day’s, you may file suit in a federal court. In such case, the court may require the Plan administrator to provide the materials and pay up to $110 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Plan administrator.

If you have a claim for a benefit which is denied or ignored, in whole or in part, you may file suit in a state or federal court. If it should happen that Plan fiduciaries misuse the Plan’s assets, or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file a suit in federal court.

The court will decide who should pay court costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees if, for example, it finds your claim is frivolous.

If you have questions about the Plan, you should contact the Plan administrator. If you have any questions about this statement or your rights under ERISA, you should contact the nearest office of the Employee Benefits Security Administration, U.S. Department of Labor, listed in your telephone directory, or the Division of Technical Assistance and Inquiries, Employee Benefits

5

Security Administration, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington, D.C. 20210. You may also obtain certain publications under ERISA by calling the publications hotline of the Employee Benefits Security Administration.

SECTION 10. GOVERNING LAW

10.1 The Plan and the rights of the parties hereunder shall be governed by and interpreted in accordance with federal law, and the laws of the State of Illinois. The invalidity or unenforceability of any provision or any part of any provision, hereof shall in no way effect the validity or enforceability of any other provision or part hereof.

Approved by the Board of Directors This 15th day of March, 2005
FEDERAL HOME LOAN BANK OF CHICAGO
By:	/s/ Peter E. Gutzmer
	Its Corporate Secretary

6

EX-10.8.7

Exhibit 10.8.7

FEDERAL HOME LOAN BANK OF CHICAGO

BOARD OF DIRECTORS 2004 COMPENSATION POLICY

GENERAL

The Board of Directors of the Federal Home Loan Bank of Chicago (“Bank”) hereby adopts this directors’ compensation policy for 2004 (“Policy”).

COMPENSATION POLICY METHODOLOGY

The goal of the Policy is to appropriately compensate the Directors for actual attendance and participation at the meetings of the Board of Directors and the committees of the Board and also for work performed on behalf of the Board of Directors and the Bank apart from such meetings. Under this policy, compensation consists of per-meeting fees. The fees are intended to compensate Directors for: (1) their time spent reviewing the material sent to them on a periodic basis by the Bank; (2) making themselves available and participating in any necessary telephonic meetings and for chairing meetings; (3) actual time spent attending the meetings; and (4) fulfilling the responsibility of directors.

PAYMENT AND FEE STRUCTURE

Each Director, other than the Chairman and the Vice Chairman, will receive (i) $2,500 for each day spent in attendance at one or more meetings of the Board or its committees; or (ii) in the case of a Director who chairs one or more Committee meetings, $2,700 for each day chairing such Committee.

The Chairman of the Board of Directors will receive $4,100 for each day spent in attendance presiding at one or more meetings of the Board of Directors or the Executive Committee and for each day spent attending other committee meetings.

The Vice Chairman will receive $3,300 for each day spent in attendance at one or more meetings of the Board or its committees.

Meeting fees of $1,500 per day will also be paid to Directors for their participation in any other special meetings or events (where no other fee or compensation is paid to such Director) on behalf of the Board of Directors and the Bank at the request of the Federal Housing Finance Board or at other events approved by the Board of Directors.

COMPLIANCE WITH LEGAL REQUIREMENTS

In no event shall any Director be paid amounts which would exceed the annual limitations on compensation set forth in Section 7(i) of the Federal Home Loan Bank Act (12 U.S.C. §1427(i)), as amended by the Gramm-Leach-Bliley Act of 1999, and as adjusted by the Federal Housing Finance Board pursuant to 12 C.F.R. §918.3.

EXPENSES

Each Director will be reimbursed for necessary and reasonable travel, subsistence and other related expenses incurred in connection with the performance of their official duties (including telephonic meetings or meetings called at the request of the Federal Housing Finance Board or other FHLB System body) as are payable to senior officers of the Bank under the Bank’s Travel Policy.

Approved by the Board of Directors

Dated: December 16, 2003

/s/ Peter E. Gutzmer

Corporate Secretary

- 2 -

EX-10.8.8

Exhibit 10.8.8

FEDERAL HOME LOAN BANK OF CHICAGO

BOARD OF DIRECTORS 2005 COMPENSATION POLICY

GENERAL

The Board of Directors of the Federal Home Loan Bank of Chicago (“Bank”) hereby adopts this directors’ compensation policy for 2005 (“Policy”).

COMPENSATION POLICY METHODOLOGY

The goal of the Policy is to appropriately compensate the Directors for actual attendance and participation at the meetings of the Board of Directors and the committees of the Board and also for work performed on behalf of the Board of Directors and the Bank apart from such meetings. Under this policy, compensation consists of per-meeting fees. The fees are intended to compensate Directors for: (1) their time spent reviewing the material sent to them on a periodic basis by the Bank; (2) making themselves available and participating in any necessary telephonic meetings and for chairing meetings; (3) actual time spent attending the meetings; and (4) fulfilling the responsibility of directors.

PAYMENT AND FEE STRUCTURE

Each Director, other than the Chairman and the Vice Chairman, will receive (i) $2,600 for each day spent in attendance at one or more meetings of the Board or its committees; or (ii) in the case of a Director who chairs one or more Committee meetings, $2,800 for each day chairing such Committee.

The Chairman of the Board of Directors will receive $4,200 for each day spent in attendance presiding at one or more meetings of the Board of Directors or the Executive Committee and for each day spent attending other committee meetings.

The Vice Chairman will receive $3,400 for each day spent in attendance at one or more meetings of the Board or its committees.

Meeting fees of $1,500 per day will also be paid to Directors for their participation in any other special meetings or events (where no other fee or compensation is paid to such Director) on behalf of the Board of Directors and the Bank at the request of the Federal Housing Finance Board or at other events approved by the Board of Directors.

COMPLIANCE WITH LEGAL REQUIREMENTS

In no event shall any Director be paid amounts which would exceed the annual limitations on compensation set forth in Section 7(i) of the Federal Home Loan Bank Act (12 U.S.C. §1427(i)), as amended by the Gramm-Leach-Bliley Act of 1999, and as adjusted by the Federal Housing Finance Board pursuant to 12 C.F.R. §918.3.

EXPENSES

Each Director will be reimbursed for necessary and reasonable travel, subsistence and other related expenses incurred in connection with the performance of their official duties (including telephonic meetings or meetings called at the request of the Federal Housing Finance Board or other FHLB System body) as are payable to senior officers of the Bank under the Bank’s Travel Policy.

Approved by the Board of Directors

Dated: December 14, 2004

/s/ Peter E. Gutzmer

Corporate Secretary

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