UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2006

OR

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

Commission File Number: 000-51398

FEDERAL HOME LOAN BANK OF SAN FRANCISCO

(Exact name of registrant as specified in its charter)

Federally chartered corporation	94-6000630
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification number)
600 California Street San Francisco, CA	94108
(Address of principal executive offices)	(Zip code)

(415) 616-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days.    x  Yes    ¨  No

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

¨  Large accelerated filer                                         ¨  Accelerated filer                                         x   Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

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

	Shares outstanding as of October 31, 2006
Class B Stock, par value $100	98,544,252

Federal Home Loan Bank of San Francisco

Form 10-Q

Index

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Statements of Condition	1
	Statements of Income	2
	Statements of Capital Accounts	3
	Statements of Cash Flows	4
	Notes to Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
	Quarterly Overview	25
	Financial Highlights	27
	Results of Operations	28
	Financial Condition	37
	Liquidity and Capital Resources	44
	Risk Management	46
	Critical Accounting Policies and Estimates	64
	Recent Developments	64
	Off-Balance Sheet Arrangements, Guarantees, and Other Commitments	66
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	67
Item 4.	Controls and Procedures	67
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	68
Item 1A.	Risk Factors	68
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 3.	Defaults Upon Senior Securities	69
Item 4.	Submission of Matters to a Vote of Security Holders	69
Item 5.	Other Information	69
Item 6.	Exhibits	70
SIGNATURES		71

i

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Federal Home Loan Bank of San Francisco

Statements of Condition

(Unaudited)

(In millions-except par value)	September 30, 2006			December 31, 2005
Assets
Cash and due from banks	$	6		$	12
Interest-bearing deposits in banks		12,568			6,899
Securities purchased under agreements to resell		200			750
Federal funds sold		8,600			16,997
Trading securities ($67 and $41, respectively, were pledged as collateral)		97			128
Held-to-maturity securities ($915 and $1,236, respectively, were pledged as collateral) (a)		29,824			29,691
Advances		174,538			162,873
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $0.7 and $0.7, respectively		4,775			5,214
Accrued interest receivable		983			909
Premises and equipment, net		11			9
Derivative assets		26			24
Other assets		91			96
Total Assets	$	231,719		$	223,602
Liabilities and Capital
Liabilities:
Deposits:
Interest-bearing:
Demand and overnight	$	469		$	407
Term		5			30
Other		11			2
Non-interest-bearing – Other		3			5
Total deposits		488			444
Consolidated obligations, net:
Bonds		197,711			182,625
Discount notes		19,653			27,618
Total consolidated obligations		217,364			210,243
Mandatorily redeemable capital stock		94			47
Accrued interest payable		1,891			1,448
Affordable Housing Program		135			126
Payable to REFCORP		35			27
Derivative liabilities		1,216			1,561
Other liabilities		59			58
Total Liabilities		221,282			213,954
Commitments and Contingencies (Note 11):
Capital (Note 7):
Capital stock – Class B – Putable ($100 par value) issued and outstanding: 103 shares and 95 shares, respectively		10,301			9,520
Restricted retained earnings		138			131
Accumulated other comprehensive loss:
Unrecognized net loss related to hedging activities		(2	)		(3	)
Total Capital		10,437			9,648
Total Liabilities and Capital	$	231,719		$	223,602

(a) Fair values of held-to-maturity securities were $29,574 and $29,345, at September 30, 2006, and December 31, 2005, respectively.

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

1

Federal Home Loan Bank of San Francisco

Statements of Income

(Unaudited)

	For the three months ended September 30,						For the nine months ended September 30,
(In millions)	2006			2005			2006			2005
Interest Income:
Advances	$	2,351		$	1,369		$	6,319		$	3,448
Prepayment fees on advances, net		—			1			1			1
Interest-bearing deposits in banks		181			39			398			103
Securities purchased under agreements to resell		2			19			29			23
Federal funds sold		88			123			402			277
Trading securities		2			3			5			13
Held-to-maturity securities		387			292			1,101			790
Mortgage loans held for portfolio		60			71			185			215
Total Interest Income		3,071			1,917			8,440			4,870
Interest Expense:
Consolidated obligations:
Bonds		2,580			1,574			7,082			3,893
Discount notes		267			159			729			467
Deposits		5			5			14			12
Other borrowings		1			—			1			—
Mandatorily redeemable capital stock		1			1			3			2
Total Interest Expense		2,854			1,739			7,829			4,374
Net Interest Income		217			178			611			496
Other (loss)/Income:
Services to members		1			1			1			1
Net loss on trading securities		—			(8	)		(1	)		(13	)
Net loss on derivatives and hedging activities		(5	)		(28	)		(22	)		(75	)
Other		1			—			3			2
Total Other Loss		(3	)		(35	)		(19	)		(85	)
Other Expense:
Compensation and benefits		11			10			33			30
Other operating expense		9			6			23			20
Federal Housing Finance Board		2			2			6			5
Office of Finance		1			1			3			3
Total Other Expense		23			19			65			58
Income Before Assessments		191			124			527			353
REFCORP		35			23			97			65
Affordable Housing Program		16			10			43			29
Total Assessments		51			33			140			94
Net Income	$	140		$	91		$	387		$	259

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

2

Federal Home Loan Bank of San Francisco

Statements of Capital Accounts

(Unaudited)

	Capital Stock Class B—Putable					Retained Earnings									Accumulated Other Comprehensive Income/(Loss)			Total Capital
(In millions)	Shares		Par Value			Restricted			Unrestricted			Total
Balance, December 31, 2004	78		$	7,765		$	139		$	—		$	139		$	(4	)	$	7,900
Issuance of capital stock	14			1,458															1,458
Repurchase/redemption of capital stock	(5	)		(464	)														(464	)
Capital stock reclassified to mandatorily redeemable capital stock	—			(5	)														(5	)
Comprehensive income:
Net income										259			259						259
Other comprehensive income:
Net amounts recognized as earnings																1			1
Total comprehensive income																			260
Transfers from restricted retained earnings							(12	)		12			—						—
Dividends on capital stock (4.35%)
Stock issued	3			271						(271	)		(271	)					—
Balance, September 30, 2005	90		$	9,025		$	127		$	—		$	127		$	(3	)	$	9,149
Balance, December 31, 2005	95		$	9,520		$	131		$	—		$	131		$	(3	)	$	9,648
Issuance of capital stock	26			2,676															2,676
Repurchase/redemption of capital stock	(21	)		(2,139	)														(2,139	)
Capital stock reclassified to mandatorily redeemable capital stock	(1	)		(136	)														(136	)
Comprehensive income:
Net income										387			387						387
Other comprehensive income:
Net amounts recognized as earnings																1			1
Total comprehensive income																			388
Transfers to restricted retained earnings							7			(7	)		—						—
Dividends on capital stock (5.27%)
Stock issued	4			380						(380	)		(380	)					—
Balance, September 30, 2006	103		$	10,301		$	138		$	—		$	138		$	(2	)	$	10,437

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

3

Federal Home Loan Bank of San Francisco

Statements of Cash Flows

(Unaudited)

	For the nine months ended September 30,
(In millions)	2006			2005
Cash Flows from Operating Activities:
Net Income	$	387		$	259
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Depreciation and amortization:
Net (discounts)/premiums and deferred net (gains)/losses on consolidated obligations, advances, investments, and mortgage loans		(66	)		76
Concessions on consolidated obligations		27			23
Premises and equipment		3			2
Non-cash interest on mandatorily redeemable capital stock		3			2
Loss due to change in net fair value adjustment on derivative and hedging activities		1			33
Gain on extinguishment of debt		(2	)		—
Net change in:
Trading securities		31			460
Derivative assets and liabilities accrued interest		187			158
Accrued interest receivable		(74	)		(265	)
Other assets		4			(5	)
Accrued interest payable		443			529
Affordable Housing Program liability and discount on Affordable Housing Program advances		9			(7	)
Payable to REFCORP		8			3
Other liabilities		1			8
Total adjustments		575			1,017
Net cash provided by operating activities		962			1,276
Cash Flows from Investing Activities:
Net change in:
Interest-bearing deposits in banks		(5,669	)		305
Securities purchased under agreements to resell		550			(1,500	)
Federal funds sold		8,397			(8,727	)
Short-term held-to-maturity securities		(361	)		(752	)
Premises and equipment		(5	)		(3	)
Held-to-maturity securities:
Proceeds from maturities		5,062			6,419
Purchases		(4,786	)		(10,634	)
Advances:
Principal collected		1,296,557			1,011,598
Made to members		(1,308,071	)		(1,024,583	)
Mortgage loans held for portfolio:
Principal collected		457			686
Purchases		(18	)		(56	)
Net cash used in investing activities		(7,887	)		(27,247	)

4

Federal Home Loan Bank of San Francisco

Statements of Cash Flows (continued)

(Unaudited)

	For the nine months ended September 30,
(In millions)	2006			2005
Cash Flows from Financing Activities:
Net change in:
Deposits		44			(236	)
Net proceeds from consolidated obligations:
Bonds issued		67,717			73,661
Discount notes issued		153,313			168,123
Bonds transferred from other FHLBanks		803			97
Payments for consolidated obligations:
Bonds matured or retired		(54,177	)		(47,094	)
Discount notes matured or retired		(161,226	)		(169,563	)
Proceeds from issuance of capital stock		2,676			1,458
Payments for repurchase/redemption of mandatorily redeemable capital stock		(92	)		(14	)
Payments for repurchase/redemption of capital stock		(2,139	)		(464	)
Net cash provided by financing activities		6,919			25,968
Net decrease in cash and cash equivalents		(6	)		(3	)
Cash and cash equivalents at beginning of period		12			16
Cash and cash equivalents at end of period	$	6		$	13
Supplemental Disclosure:
Interest paid during the period	$	6,580		$	3,120
Affordable Housing Program payments during the period		34			36
REFCORP payments during the period		89			62

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

5

Federal Home Loan Bank of San Francisco

Notes to Financial Statements

(Unaudited)

(Dollars in millions)

Note 1 – Summary of Significant Accounting Policies

The information included in these unaudited financial statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed. The results of operations in these interim statements are not necessarily indicative of the results to be expected for any subsequent period or for the entire year ending December 31, 2006. These unaudited financial statements should be read in conjunction with the Bank’s Annual Report on Form 10-K for the year ended December 31, 2005 (2005 Form 10-K).

Descriptions of the Bank’s significant accounting policies are included in Note 1 (Summary of Significant Accounting Policies) to the Financial Statements in the Bank’s 2005 Form 10-K. There have been no significant changes to these policies as of September 30, 2006.

Use of Estimates. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, if applicable, and the reported amounts of income, expenses, gains, and losses during the reporting period. Changes in judgments, estimates, and assumptions could potentially affect the Bank’s financial position and results of operations significantly. Although management believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ.

Note 2 – Recently Issued Accounting Standards and Interpretations

Statement of Financial Accounting Standards (SFAS) No. 157. In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted. The Bank has not yet determined the effect that the implementation of SFAS 157 will have on its financial position or results of operations.

SFAS No. 158. In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). SFAS 158 requires that an employer recognize the funded status of its defined benefit pension and other postretirement plans in the statement of condition and recognize as a component of other comprehensive income the gains or losses and prior service costs or credits that arise during the period but are not immediately recognized as components of net periodic benefit cost. SFAS 158 also requires additional disclosures in the notes to the financial statements. SFAS 158 is effective as of the end of fiscal years ending after December 15, 2006. The Bank plans to adopt SFAS 158 for its fiscal year ending December 31, 2006. SFAS 158 also requires an employer to measure plan assets and benefit obligations as of the date of the employer’s fiscal yearend statement of condition effective for fiscal years ending after December 15, 2008. The Bank does not expect the adoption of SFAS 158 to have a material impact on its financial statements.

Staff Accounting Bulletin (SAB) No. 108. In September 2006, the Securities and Exchange Commission (SEC) released SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108), which provides interpretive guidance on how SEC registrants should quantify financial statement misstatements. SAB 108 requires SEC registrants to use a “dual approach” to assessing the quantitative effects of errors using both a balance sheet-focused assessment and an income statement-focused assessment, and to evaluate whether either approach results in quantifying a

6

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

misstatement that is material, when all relevant quantitative and qualitative factors are considered. SAB 108 provides transition accounting and disclosure guidance for situations in which an SEC registrant concludes that a material error existed in prior period financial statements under the dual approach. Specifically, SEC registrants will be permitted to restate prior period financial statements or recognize the cumulative effect in initially applying SAB 108 through an adjustment to beginning retained earnings in the year of adoption. SAB 108 is effective for annual financial statements in the first fiscal year ending after November 15, 2006. The Bank is currently assessing the impact the application of SAB 108 will have on its financial statements.

Note 3 – Held-to-Maturity Securities

The Bank classifies the following securities as held-to-maturity because the Bank has the positive intent and ability to hold these securities to maturity:

September 30, 2006
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Commercial paper	$	1,598	$	—	$	—		$	1,598
Housing finance agency bonds		1,000		2		—			1,002
Discount notes:
FHLMC		100		—		—			100
FNMA		249		—		—			249
Subtotal		2,947		2		—			2,949
Mortgage-backed securities (MBS):
GNMA		29		—		—			29
FHLMC		162		4		(1	)		165
FNMA		439		1		(12	)		428
Non-agency		26,247		42		(286	)		26,003
Total MBS		26,877		47		(299	)		26,625
Total	$	29,824	$	49	$	(299	)	$	29,574
December 31, 2005
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Commercial paper	$	1,267	$	—	$	—		$	1,267
Housing finance agency bonds		1,211		8		—			1,219
Discount notes – FNMA		248		—		—			248
Subtotal		2,726		8		—			2,734
MBS:
GNMA		36		—		(1	)		35
FHLMC		207		4		(1	)		210
FNMA		522		2		(12	)		512
Non-agency		26,200		4		(350	)		25,854
Total MBS		26,965		10		(364	)		26,611
Total	$	29,691	$	18	$	(364	)	$	29,345

Redemption Terms. The amortized cost and estimated fair value of certain securities by contractual maturity (based on contractual final principal payment) and MBS as of September 30, 2006, and December 31, 2005, are shown below. Expected maturities of certain securities and MBS will differ from contractual maturities because borrowers generally have the right to prepay obligations without prepayment fees.

7

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

September 30, 2006
Contractual Maturity	Amortized Cost		Estimated Fair Value		Weighted Average Interest Rate
Within 1 year	$	1,947	$	1,947	5.25	%
After 5 years through 10 years		28		28	5.64
After 10 years		972		974	5.69
Subtotal		2,947		2,949	5.41
MBS:
GNMA		29		29	5.60
FHLMC		162		165	6.24
FNMA		439		428	4.78
Non-agency		26,247		26,003	5.21
Total MBS		26,877		26,625	5.21
Total	$	29,824	$	29,574	5.23	%
December 31, 2005
Contractual Maturity	Amortized Cost		Estimated Fair Value		Weighted Average Interest Rate
Within 1 year	$	1,515	$	1,515	4.28	%
After 5 years through 10 years		33		33	4.40
After 10 years		1,178		1,186	4.44
Subtotal		2,726		2,734	4.36
MBS:
GNMA		36		35	4.69
FHLMC		207		210	5.64
FNMA		522		512	4.56
Non-agency		26,200		25,854	4.91
Total MBS		26,965		26,611	4.91
Total	$	29,691	$	29,345	4.86	%

The amortized cost of the Bank’s MBS classified as held-to-maturity included net premiums of $14 at September 30, 2006, and net premiums of $102 at December 31, 2005.

Interest Rate Payment Terms. Interest rate payment terms for held-to-maturity securities at September 30, 2006, and December 31, 2005, are detailed in the following table:

	September 30, 2006		December 31, 2005
Amortized cost of held-to-maturity securities other than MBS:
Fixed rate	$	1,947	$	1,515
Adjustable rate		1,000		1,211
Subtotal		2,947		2,726
Amortized cost of held-to-maturity MBS:
Passthrough securities:
Fixed rate		415		497
Adjustable rate		131		160
Collateralized mortgage obligations:
Fixed rate		21,530		19,942
Adjustable rate		4,801		6,366
Subtotal		26,877		26,965
Total	$	29,824	$	29,691

Certain MBS classified as fixed rate passthrough securities and fixed rate collateralized mortgage obligations have an initial fixed interest rate that subsequently converts to an adjustable interest rate on a specified date.

The Bank does not own MBS that are backed by mortgage loans purchased by another Federal Home Loan Bank (FHLBank) from either (i) the Bank’s members or (ii) the members of other FHLBanks.

8

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Note 4 – Advances

Redemption Terms. The Bank had advances outstanding at interest rates ranging from 1.89% to 8.57% at September 30, 2006, and 1.54% to 8.57% at December 31, 2005, as summarized below.

	September 30, 2006					December 31, 2005
Contractual Maturity	Amount Outstanding			Weighted Average Interest Rate		Amount Outstanding			Weighted Average Interest Rate
Overdrawn demand deposit accounts	$	1		4.88	%	$	2		3.81	%
Within 1 year		86,262		5.15			76,246		4.03
After 1 year through 2 years		32,572		5.08			40,275		4.16
After 2 years through 3 years		28,042		5.22			32,050		4.31
After 3 years through 4 years		10,249		5.15			5,668		4.33
After 4 years through 5 years		13,156		5.32			5,668		4.50
After 5 years		4,441		5.06			3,298		4.55
Subtotal		174,723		5.16	%		163,207		4.16	%
SFAS 1331 valuation adjustments		(179	)				(339	)
Net unamortized (discounts)/premiums		(6	)				5
Total	$	174,538				$	162,873

1 SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, on January 1, 2001, and by SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, on July 1, 2003 (together referred to as “SFAS 133”).

The following table summarizes advances at September 30, 2006, and December 31, 2005, by the earlier of the contractual maturity or next call date for callable advances.

Earlier of Contractual Maturity or Next Call Date	September 30, 2006		December 31, 2005
Overdrawn demand deposit accounts	$	1	$	2
Within 1 year		87,157		77,019
After 1 year through 2 years		32,589		40,363
After 2 years through 3 years		27,439		31,860
After 3 years through 4 years		10,214		5,126
After 4 years through 5 years		12,970		5,629
After 5 years		4,353		3,208
Total par amount	$	174,723	$	163,207

The following table summarizes advances to members at September 30, 2006, and December 31, 2005, by the earlier of the contractual maturity or next put date for putable advances.

Earlier of Contractual Maturity or Next Put Date	September 30, 2006		December 31, 2005
Overdrawn demand deposit accounts	$	1	$	2
Within 1 year		87,771		78,130
After 1 year through 2 years		32,170		40,476
After 2 years through 3 years		28,137		31,446
After 3 years through 4 years		10,151		5,660
After 4 years through 5 years		13,039		5,688
After 5 years		3,454		1,805
Total par amount	$	174,723	$	163,207

Security Terms. The Bank lends to member financial institutions involved in housing finance that have a principal place of business in Arizona, California, or Nevada. The Bank is required by the Federal Home Loan Bank Act of 1932, as amended (FHLB Act), to obtain sufficient collateral for advances to protect against losses and to accept as collateral for advances only certain U.S. government or government agency securities, residential mortgage loans or MBS, other eligible real estate-related assets, cash or deposits in the Bank, and Bank capital stock. The Bank may also accept secured small business, small farm, and small agribusiness loans as collateral from members that qualify as community financial institutions. Community financial institutions are defined for 2006 as Federal Deposit Insurance Corporation-insured depository

9

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

institutions with average total assets over the preceding three-year period of $587 or less. For additional information on security terms, see Note 7 to the Financial Statements in the Bank’s 2005 Form 10-K.

Credit and Concentration Risk. The Bank’s potential credit risk from advances is concentrated in savings institutions. As of September 30, 2006, the Bank had a concentration of advances totaling $119,447 outstanding to three members, representing 69% of total outstanding advances (33% to Citibank (West), FSB; 22% to Washington Mutual Bank; and 14% to World Savings Bank, FSB). As of December 31, 2005, the Bank had a concentration of advances totaling $115,250 outstanding to three members, representing 71% of total outstanding advances (35% to Washington Mutual Bank; 19% to Citibank (West), FSB; and 17% to World Savings Bank, FSB).

During the third quarter of 2006 and 2005, the interest income from advances to these members amounted to $1,540 and $958, respectively, or 69% and 71%, respectively, of total interest income from advances. During the first nine months of 2006 and 2005, the interest income from advances to these members amounted to $4,202 and $2,405, respectively, or 69% and 70%, respectively, of total interest income from advances.

The Bank held a security interest in collateral from each of these institutions with an estimated value in excess of their respective advances outstanding, and the Bank does not expect to incur any credit losses on these advances. Each of these members owned more than 10% of the Bank’s capital stock outstanding as of September 30, 2006, and December 31, 2005.

On October 1, 2006, Citibank (West), FSB, was reorganized into its affiliate Citibank, N.A., and Citibank, N.A., assumed the outstanding advances of Citibank (West), FSB. On October 2, 2006, Citibank, N.A., became a member of the Bank.

The Bank has never experienced any credit losses on advances to a member. The Bank has policies and procedures in place to manage the credit risk of advances. Based on the collateral pledged as security for advances, management’s credit analyses of members’ financial condition, and prior repayment history, no allowance for losses on advances is deemed necessary by management.

Interest Rate Payment Terms. Interest rate payment terms for advances at September 30, 2006, and December 31, 2005, are detailed below:

	September 30, 2006		December 31, 2005
Par amount of advances:
Fixed rate	$	49,709	$	46,124
Adjustable rate		125,014		117,083
Total par amount	$	174,723	$	163,207

Note 5 – Mortgage Loans Held for Portfolio

Under the Mortgage Partnership Finance^® (MPF^®) Program, the Bank may purchase qualifying mortgage loans directly from its participating members. (“Mortgage Partnership Finance” and “MPF” are registered trademarks of the Federal Home Loan Bank of Chicago.) The mortgage loans represent held-for-portfolio loans. Under the MPF Program, participating members originate or purchase the mortgage loans, credit-enhance them and sell them to the Bank, and generally retain the servicing of the loans.

On October 6, 2006, the Bank announced that it will no longer offer new commitments to purchase mortgage loans from its members, but that it intends to purchase mortgage loans under existing purchase commitments and to retain its existing portfolio of mortgage loans. Most of the growth in the MPF Program occurred in 2003, and since that time the Bank’s purchased mortgage loan balances have declined. In particular, mortgage loan purchase activity was low during 2005 and the first nine months of 2006 because (i) originations of conforming fixed rate mortgage loans were lower in these periods than in prior years, (ii) member business strategies led most participating members to sell their conforming fixed rate mortgage loans to other purchasers, and (iii) the Bank limited its purchases of fixed rate mortgage loans because the profit spreads available were below the Bank’s targets.

10

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

The following table presents information as of September 30, 2006, and December 31, 2005, on mortgage loans, all of which are qualifying conventional, conforming fixed rate residential mortgage loans on single-family properties. Medium-term loans have contractual terms of 15 years or less, and long-term loans have contractual terms of more than 15 years.

	September 30, 2006			December 31, 2005
Fixed rate medium-term mortgage loans	$	1,675		$	1,878
Fixed rate long-term mortgage loans		3,118			3,355
Unamortized premiums		9			18
Unamortized discounts		(27	)		(37	)
Total mortgage loans held for portfolio	$	4,775		$	5,214

For taking on the credit enhancement obligation, the Bank pays the participating member a credit enhancement fee, which is calculated on the remaining unpaid principal balance of the mortgage loans. The Bank records credit enhancement fees as a reduction to interest income. In the third quarter of 2006 and 2005, the Bank reduced net interest income for credit enhancement fees totaling $2 and $1, respectively. In the first nine months of 2006 and 2005, the Bank reduced net interest income for credit enhancement fees totaling $4 and $4, respectively.

Concentration Risk. At September 30, 2006, 75% and 15% of the mortgage loan balances held by the Bank were purchased from Washington Mutual Bank and IndyMac Bank, FSB, respectively, out of the ten participating members. At December 31, 2005, 75% and 16% of the mortgage loan balances held by the Bank were purchased from Washington Mutual Bank and IndyMac Bank, FSB, respectively, out of the nine participating members. Of these two members, only Washington Mutual Bank owned more than 10% of the capital stock outstanding as of September 30, 2006, and December 31, 2005. No other participants in the MPF Program represented more than 10% of the Bank’s mortgage loan portfolio at September 30, 2006, and December 31, 2005.

Credit Risk. A loan is considered to be impaired when it is reported 90 days or more past due (nonaccrual) or when it is probable, based on current information and events, that the Bank will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreement. At September 30, 2006, the Bank had 30 loans totaling $4 classified as nonaccrual or impaired. Twenty of these loans totaling $2 were in foreclosure or bankruptcy. At December 31, 2005, the Bank had 38 loans totaling $4 classified as nonaccrual or impaired. Twenty of these loans totaling $3 were in foreclosure or bankruptcy.

The allowance for credit losses on the mortgage loan portfolio was as follows:

	Three months ended				Nine months ended
x	September 30, 2006		September 30, 2005		September 30, 2006		September 30, 2005
Balance, beginning of the period	$	0.6	$	0.4	$	0.7	$	0.3
Chargeoffs		—		—		—		—
Recoveries		—		—		—		—
Provision for credit losses		0.1		0.1		—		0.2
Balance, end of the period	$	0.7	$	0.5	$	0.7	$	0.5

For more information on how the Bank determines its estimated allowance for credit losses on mortgage loans, see Note 10 to the Financial Statements in the Bank’s 2005 Form 10-K.

At September 30, 2006, the Bank’s other assets included $0.2 of real estate owned resulting from foreclosure of three mortgage loans held by the Bank. At December 31, 2005, the Bank’s other assets included $0.3 of real estate owned resulting from foreclosure of three mortgage loans held by the Bank.

11

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Note 6 – Consolidated Obligations

Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are jointly issued by the FHLBanks through the Office of Finance, which serves as the FHLBanks’ agent. The Federal Housing Finance Board (Finance Board) and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance. As provided by the FHLB Act or Finance Board regulation, all FHLBanks have joint and several liability for all FHLBank consolidated obligations. For discussion of the Finance Board’s joint and several liability regulation, see Note 18 to the Financial Statements in the Bank’s 2005 Form 10-K. In connection with each debt issuance, each FHLBank specifies the type, term, and amount of debt it requests to have issued on its behalf. The Office of Finance tracks the amount of debt issued on behalf of each FHLBank. In addition, the Bank separately tracks and records as a liability its specific portion of the consolidated obligations issued and is the primary obligor for that portion of the consolidated obligations.

Redemption Terms. The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding at September 30, 2006, and December 31, 2005.

	September 30, 2006					December 31, 2005
Contractual Maturity	Amount Outstanding			Weighted Average Interest Rate		Amount Outstanding			Weighted Average Interest Rate
Within 1 year	$	78,406		4.16	%	$	68,720		3.33	%
After 1 year through 2 years		52,187		4.32			49,233		3.84
After 2 years through 3 years		29,077		4.57			36,078		3.94
After 3 years through 4 years		15,359		4.51			11,046		3.89
After 4 years through 5 years		11,462		5.00			10,653		4.43
After 5 years		12,431		5.01			8,774		4.74
Index amortizing notes		9		4.61			11		4.61
Subtotal		198,931		4.39	%		184,515		3.75	%
Unamortized premiums		49					78
Unamortized discounts		(225	)				(179	)
SFAS 133 valuation adjustments		(1,044	)				(1,789	)
Total	$	197,711				$	182,625

The Bank’s participation in consolidated obligation bonds outstanding includes callable bonds of $53,295 at September 30, 2006, and $60,271 at December 31, 2005. Contemporaneous with the issuance of callable bonds for which the Bank is the primary obligor, the Bank usually enters into an interest rate swap (in which the Bank pays a variable rate and receives a fixed rate) with a call feature that mirrors the call option embedded in the bond (a sold callable swap). The Bank had notional amounts of interest rate exchange agreements hedging callable bonds of $38,584 at September 30, 2006, and $47,737 at December 31, 2005. The combined sold callable swap and callable bond enable the Bank to meet its funding needs at costs not otherwise directly attainable solely through the issuance of non-callable debt, while effectively converting the Bank’s net payment to an adjustable rate. The Bank uses fixed rate callable bonds to finance fixed rate callable advances, fixed rate MBS, and fixed rate mortgage loans.

The Bank’s participation in consolidated obligation bonds was as follows:

	September 30, 2006		December 31, 2005
Par amount of consolidated obligation bonds:
Non-callable	$	145,636	$	124,244
Callable		53,295		60,271
Total par amount	$	198,931	$	184,515

12

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding at September 30, 2006, and December 31, 2005, by the earlier of the contractual maturity or next call date.

Earlier of Contractual Maturity or Next Call Date	September 30, 2006		December 31, 2005
Within 1 year	$	117,016	$	119,893
After 1 year through 2 years		45,961		35,415
After 2 years through 3 years		16,642		20,040
After 3 years through 4 years		8,385		3,238
After 4 years through 5 years		7,099		4,437
After 5 years		3,819		1,481
Index amortizing notes		9		11
Total par amount	$	198,931	$	184,515

Consolidated obligation discount notes are consolidated obligations issued to raise short-term funds; discount notes have original maturities up to 365 days. These notes are issued at less than their face amount and redeemed at par value when they mature. The Bank’s participation in consolidated obligation discount notes, all of which are due within one year, was as follows:

	September 30, 2006					December 31, 2005
	Amount Outstanding			Weighted Average Interest Rate		Amount Outstanding			Weighted Average Interest Rate
Par amount	$	19,734		5.14	%	$	27,747		4.04	%
Unamortized discounts		(81	)				(129	)
Total	$	19,653				$	27,618

Interest Rate Payment Terms. Interest rate payment terms for consolidated obligations at September 30, 2006, and December 31, 2005, are detailed in the following table. For information on the general terms and types of consolidated obligations outstanding, see Note 12 to the Financial Statements in the Bank’s 2005 Form 10-K.

	September 30, 2006		December 31, 2005
Par amount of consolidated obligations:
Bonds:
Fixed rate	$	174,773	$	150,049
Adjustable rate		14,242		21,973
Step-up		7,380		8,159
Fixed rate that converts to adjustable rate		1,245		1,297
Adjustable rate that converts to fixed rate		75		1,745
Comparative index		1,042		1,091
Zero-coupon		140		165
Inverse floating		25		25
Index amortizing notes		9		11
Total bonds, par		198,931		184,515
Discount notes, par		19,734		27,747
Total consolidated obligations, par	$	218,665	$	212,262

Section 11(i) of the FHLB Act authorizes the U.S. Secretary of the Treasury, at his or her discretion, to purchase certain obligations issued by the FHLBanks aggregating not more than $4,000 under certain conditions. The terms, conditions, and interest rates are determined by the U.S. Secretary of the Treasury. There were no such purchases by the U.S. Treasury during the first nine months of 2006.

Note 7 – Capital

Capital Requirements. The Bank is subject to risk-based capital requirements, which must be met with permanent capital (defined as retained earnings and Class B stock). In addition, the Bank is subject to a 5% minimum leverage capital ratio with a 1.5 weighting factor for permanent capital, and a 4% minimum total capital-to-assets ratio calculated without reference to the 1.5 weighting factor. As of September 30, 2006, and

13

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

December 31, 2005, the Bank was in compliance with these capital rules and requirements. The FHLB Act and Finance Board regulations require that the minimum stock requirement for members must be sufficient to enable the Bank to meet its regulatory requirements for total capital, leverage capital, and risk-based capital. In addition, in accordance with the Finance Board’s interpretation, mandatorily redeemable capital stock that is classified as a liability for financial reporting purposes under SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150), is considered capital for determining the Bank’s compliance with its regulatory capital requirements.

The following table shows the Bank’s compliance with the Finance Board’s capital requirements at September 30, 2006, and December 31, 2005.

Regulatory Capital Requirements

	September 30, 2006						December 31, 2005
r	Required			Actual			Required			Actual
Risk-based capital	$	1,045		$	10,533		$	862		$	9,698
Total capital-to-assets ratio		4.00	%		4.55	%		4.00	%		4.34	%
Total regulatory capital	$	9,269		$	10,533		$	8,944		$	9,698
Leverage ratio		5.00	%		6.82	%		5.00	%		6.51	%
Leverage capital	$	11,586		$	15,800		$	11,180		$	14,547

The Bank’s capital requirements are more fully discussed in Note 13 to the Financial Statements in the Bank’s 2005 Form 10-K.

Mandatorily Redeemable Capital Stock. The Bank had mandatorily redeemable capital stock held by 11 former members totaling $94 at September 30, 2006, of which $31 was scheduled for redemption in 2009, $4 was scheduled for redemption in 2010, and $59 was scheduled for redemption in 2011. All 11 of these former members had notified the Bank to redeem their capital stock because of mergers with or acquisitions by nonmember institutions. During 2006, the Bank repurchased the mandatorily redeemable capital stock held by a former member that had no continuing capital stock requirement.

The Bank had mandatorily redeemable capital stock held by eight former members totaling $47 at December 31, 2005, of which $43 was scheduled for redemption in 2009 and $4 was scheduled for redemption in 2010. Of these eight former members, seven had notified the Bank to redeem their capital stock because of mergers with or acquisitions by nonmember institutions and one had outstanding a request that the Bank repurchase all of its excess mandatorily redeemable capital stock following withdrawal from membership.

These mandatorily redeemable capital stock amounts included accrued interest expense (accrued stock dividends) of $1 at September 30, 2006, and $2 at December 31, 2005, and have been classified as a liability in the Statements of Condition.

The following table presents the Bank’s activity for mandatorily redeemable capital stock for the three and nine months ended September 30, 2006 and 2005.

14

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Mandatorily Redeemable Capital Stock Activity

	Three months ended						Nine months ended
x	September 30, 2006			September 30, 2005			September 30, 2006			September 30, 2005
Balance at beginning of the period	$	75		$	52		$	47		$	55
Mandatorily redeemable capital stock reclassified from capital during the period		29			—			136			5
Repurchase of mandatorily redeemable capital stock		(11	)		(4	)		(92	)		(14	)
Dividends paid on mandatorily redeemable capital stock		1			—			3			2
Balance at end of the period	$	94		$	48		$	94		$	48

The Bank’s mandatorily redeemable capital stock is more fully discussed in Note 13 to the Financial Statements in the Bank’s 2005 Form 10-K.

Retained Earnings and Dividend Policy. The Bank’s Retained Earnings and Dividend Policy establishes amounts to be retained in restricted retained earnings, which are not made available for dividends in the current dividend period.

In accordance with the Retained Earnings and Dividend Policy, the Bank retains in restricted retained earnings any cumulative net unrealized gains in earnings (net of applicable assessments) resulting from the application of SFAS 133. Retained earnings restricted in accordance with this provision totaled $28 at September 30, 2006, and $44 at December 31, 2005.

In addition, the Bank holds other restricted retained earnings intended to protect members’ paid-in capital from an extremely adverse credit or operations risk event, an extremely adverse SFAS 133 quarterly result, or an extremely low (or negative) level of net income before the effects of SFAS 133 resulting from an adverse interest rate environment. The retained earnings restricted in accordance with this provision totaled $110 at September 30, 2006, and $87 at December 31, 2005, and is targeted to reach $130 by the end of the third quarter of 2007.

On June 14, 2006, the Bank announced that the Board of Directors had amended the Retained Earnings and Dividend Policy to increase the target for the build-up of retained earnings other than SFAS 133 fair value gains to $296 and to make available for dividends, beginning with the third quarter of 2006, approximately 80% of net income (excluding the effects of SFAS 133) until that target was reached. On June 30, 2006, the Bank’s Board of Directors voted to delay implementation of the amendment to provide additional time to review alternatives to the Bank’s capital structure.

For more information on these two categories of restricted retained earnings and the Bank’s Retained Earnings and Dividend Policy, see Note 13 to the Financial Statements in the Bank’s 2005 Form 10-K.

Excess and Surplus Capital Stock. The Bank may repurchase some or all of a member’s excess capital stock and any excess mandatorily redeemable capital stock, at the Bank’s discretion. At its discretion, the Bank may also repurchase some or all of a member’s excess capital stock at the member’s request. Excess capital stock is defined as any stock holdings in excess of a member’s minimum capital stock requirement, as established by the Bank’s capital plan.

The Bank’s surplus capital stock repurchase policy provides for the Bank to repurchase excess stock that constitutes surplus stock, at the Bank’s discretion, if a member has surplus capital stock as of the last business day of the quarter. A member’s surplus capital stock is defined as any stock holdings in excess of 115% of the member’s minimum capital stock requirement, generally excluding stock dividends earned and credited for the current year.

15

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

On a quarterly basis, the Bank determines whether it will repurchase excess capital stock, including surplus capital stock. The Bank generally repurchases capital stock approximately one month after the end of each quarter. On the scheduled repurchase date, the Bank recalculates the amount of stock to be repurchased to ensure that each member will continue to meet its minimum stock requirement after the stock repurchase.

The Bank repurchased surplus capital stock totaling $423 in the third quarter of 2006 and $218 in the third quarter of 2005. The Bank also repurchased excess capital stock that was not surplus capital stock totaling $608 in the third quarter of 2006 and $4 in the third quarter of 2005.

The Bank repurchased surplus capital stock totaling $1,036 in the first nine months of 2006 and $420 in the first nine months of 2005. The Bank also repurchased excess capital stock that was not surplus capital stock totaling $1,195 in the first nine months of 2006 and $58 in the first nine months of 2005.

Excess capital stock totaled $1,225 as of September 30, 2006, which included surplus capital stock of $287. On October 31, 2006, the Bank repurchased $236 of surplus capital stock. The Bank also repurchased $424 of excess capital stock that was not surplus capital stock, including $418 in excess capital stock that was the subject of repurchase requests submitted during the third quarter of 2006 by two members, and $6 in excess mandatorily redeemable capital stock repurchased from former members of the Bank. Excess capital stock totaled $629 after the October 31, 2006, capital stock repurchase.

For more information on excess and surplus capital stock, see Note 13 to the Financial Statements in the Bank’s 2005 Form 10-K.

Concentration. As of September 30, 2006, the Bank had a concentration of capital stock totaling 64 million shares outstanding to three members, representing 63% of total capital stock and mandatorily redeemable capital stock outstanding (27% to Citibank (West), FSB; 22% to Washington Mutual Bank; and 14% to World Savings Bank, FSB). On October 1, 2006, Citibank (West), FSB, was reorganized into its affiliate Citibank, N.A., and Citibank, N.A., assumed the outstanding capital stock of Citibank (West), FSB. On October 2, 2006, Citibank, N.A., became a member of the Bank.

As of December 31, 2005, the Bank had a concentration of capital stock totaling 61 million shares outstanding to three members, representing 64% of total capital stock and mandatorily redeemable capital stock outstanding (35% to Washington Mutual Bank; 15% to Citibank (West), FSB; and 14% to World Savings Bank, FSB).

Note 8 – Segment Information

The Bank analyzes financial performance based on the balances and adjusted net interest income of two operating segments, the advances-related business and the mortgage-related business, based on the Bank’s method of internal reporting. For purposes of segment reporting, adjusted net interest income includes interest income and expenses associated with economic hedges that are recorded in “Net loss on derivatives and hedging activities” in other income. It is at the adjusted net interest income level that the Bank’s chief operating decision maker reviews and analyzes financial performance and determines the allocation of resources to the two operating segments. Except for the interest income and expenses associated with economic hedges, the Bank does not allocate other income, other expense, or assessments to its operating segments.

The advances-related business consists of advances and other credit products provided to members, related financing and hedging instruments, liquidity and other non-MBS investments associated with the Bank’s role as a liquidity provider, and member capital. Adjusted net interest income for this segment is derived primarily from the difference, or spread, between the yield on all assets associated with the business activities in this segment and the cost of funding those activities, cash flows from associated interest rate exchange agreements, and earnings on invested member capital.

The mortgage-related business consists of MBS investments, mortgage loans acquired through the MPF Program, the consolidated obligations specifically identified as funding those assets, and related hedging instruments. Adjusted net interest income for this segment is derived primarily from the difference, or spread,

16

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

between the yield on the MBS and mortgage loans and the cost of the consolidated obligations funding those assets, including the cash flows from associated interest rate exchange agreements, less the provision for credit losses on mortgage loans.

On October 6, 2006, the Bank announced that it will no longer offer new commitments to purchase mortgage loans from its members, but that it intends to purchase mortgage loans under existing purchase commitments and to retain its existing portfolio of mortgage loans.

The following table presents the Bank’s adjusted net interest income by operating segment and reconciles total adjusted net interest income to income before assessments for the three and nine months ended September 30, 2006 and 2005.

Reconciliation of Adjusted Net Interest Income and Income Before Assessments

	Advances- Related Business		Mortgage- Related Business		Adjusted Net Interest Income		Net Interest Expense on Economic Hedges1		Net Interest Income		Other (Loss)/ Income			Other Expense		Income Before Assessments
Three months ended:
September 30, 2006	$	173	$	36	$	209	$	8	$	217	$	(3	)	$	23	$	191
September 30, 2005		127		41		168		10		178		(35	)		19		124
Nine months ended:
September 30, 2006	$	473	$	113	$	586	$	25	$	611	$	(19	)	$	65	$	527
September 30, 2005		339		122		461		35		496		(85	)		58		353

1 The Bank includes interest income and interest expense associated with economic hedges in its evaluation of financial performance for its two operating segments. For financial reporting purposes, the Bank does not include these amounts in net interest income in the Statements of Income, but instead records them in other income in “Net loss on derivatives and hedging activities.”

The following table presents total assets by operating segment at September 30, 2006, and December 31, 2005.

Total Assets

	Advances- Related Business		Mortgage- Related Business		Total Assets
September 30, 2006	$	199,833	$	31,886	$	231,719
December 31, 2005		191,161		32,441		223,602

Note 9 – Derivatives and Hedging Activities

Accounting for Derivative Instruments and Hedging Activities. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The gains and losses on derivative instruments that are reported in other comprehensive income are recognized as earnings in the periods in which earnings are affected by the variability of the cash flows of the hedged item. The gains or losses on the ineffective portion of all hedges are recognized in current period earnings. Changes in the fair value of a derivative instrument that does not qualify as a hedge of an asset or liability under SFAS 133 for asset/liability management (economic hedge) are recorded each period in current earnings.

For more information on the Bank’s use of derivatives and hedging activities, see Note 16 to the Financial Statements in the Bank’s 2005 Form 10-K.

17

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Net loss on derivatives and hedging activities recorded in other income for the three and nine months ended September 30, 2006 and 2005, were as follows:

	Three months ended						Nine months ended
x	September 30, 2006			September 30, 2005			September 30, 2006			September 30, 2005
Net loss related to fair value hedge ineffectiveness	$	(8	)	$	(18	)	$	(13	)	$	(42	)
Net loss related to cash flow ineffectiveness		—			—			(1	)		(1	)
Net gain on economic hedges		11			—			17			3
Net interest expense on derivative instruments used in economic hedges		(8	)		(10	)		(25	)		(35	)
Net loss on derivatives and hedging activities	$	(5	)	$	(28	)	$	(22	)	$	(75	)

For the three and nine months ended September 30, 2006 and 2005, there were no reclassifications from other comprehensive income into earnings as a result of the discontinuance of cash flow hedges because the original forecasted transactions occurred by the end of the originally specified time period or within a two-month period thereafter. As of September 30, 2006, approximately $0.6 in unrecognized net losses on derivative instruments accumulated in other comprehensive income is expected to be reclassified to earnings during the next 12 months. The maximum length of time over which the Bank is hedging its exposure to the variability in future cash flows for forecasted transactions, excluding those forecasted transactions related to the payment of variable interest on existing financial instruments, is less than three months.

The following table represents outstanding notional balances and estimated fair values of the derivatives outstanding at September 30, 2006, and December 31, 2005.

	September 30, 2006					December 31, 2005
Type of Derivative and Hedge Classification	Notional		Estimated Fair Value			Notional		Estimated Fair Value
Interest rate swaps:
Fair value	$	184,052	$	(962	)	$	164,803	$	(1,554	)
Cash flow		—		—			270		—
Economic		72,205		(29	)		61,845		(37	)
Interest rate swaptions: Economic		3,575		8			3,587		16
Interest rate caps, floors, corridors, and/or collars:
Fair value		11,916		73			13,862		131
Economic		70		—			70		—
Total	$	271,818	$	(910	)	$	244,437	$	(1,444	)
Total derivatives excluding accrued interest			$	(910	)			$	(1,444	)
Accrued interest, net				(280	)				(93	)
Net derivative balances			$	(1,190	)			$	(1,537	)
Derivative assets			$	26				$	24
Derivative liabilities				(1,216	)				(1,561	)
Net derivative balances			$	(1,190	)			$	(1,537	)

The fair values of embedded derivatives presented on a combined basis with the host contract and not included in the above table are as follows:

	Estimated Fair Values of Embedded Derivatives
	September 30, 2006		December 31, 2005
Host contract:
Advances	$	—	$	(6	)
Non-callable bonds		25		36
Callable bonds		1		1
Total	$	26	$	31

18

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Credit Risk – The Bank is subject to credit risk as a result of the risk of nonperformance by counterparties to the derivative agreements. All derivative agreements are subject to master netting arrangements with each counterparty to mitigate the credit risk exposure. The Bank manages counterparty credit risk through credit analyses and collateral requirements and by following the requirements of the Bank’s risk management policies and credit guidelines. Based on the master netting arrangements, its credit analyses, and the collateral requirements in place with each counterparty, management of the Bank does not anticipate any credit losses on its agreements, and no allowance for losses is deemed necessary by management.

The contractual or notional amounts of interest rate exchange agreements reflect the extent of the Bank’s involvement in particular classes of financial instruments. The Bank had notional amounts outstanding of $271,818 at September 30, 2006, and $244,437 at December 31, 2005. The notional amount does not represent the exposure to credit loss. The amount potentially subject to credit loss is the estimated cost of replacing an interest rate exchange agreement that has a net positive market value if the counterparty defaults; this amount is substantially less than the notional amount.

Maximum credit risk is defined as the estimated cost of replacing all interest rate exchange agreements the Bank has transacted with counterparties where the Bank is in a net favorable position (has a net unrealized gain) if the counterparties all defaulted and the related collateral proved to be of no value to the Bank. At September 30, 2006, the Bank’s maximum credit risk, as defined above, was estimated at $26, including $6 of net accrued interest receivable. At December 31, 2005, the Bank’s maximum credit risk was estimated at $24, including $1 of net accrued interest receivable. Accrued interest receivables and payables and the legal right to offset assets and liabilities by counterparty (under which amounts recognized for individual transactions may be offset against amounts recognized for other transactions with the same counterparty) are considered in determining the maximum credit risk. The Bank held cash, investment grade securities, and mortgage loans valued at $25 and $23 as collateral from counterparties as of September 30, 2006, and December 31, 2005, respectively. This collateral has not been sold or repledged. A significant number of the Bank’s interest rate exchange agreements are transacted with financial institutions such as major banks and broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. See Note 11 for more information on assets pledged by the Bank to these counterparties as collateral for derivatives transactions.

Intermediation – As an additional service to its members, the Bank enters into offsetting interest rate exchange agreements, acting as an intermediary between exactly offsetting derivatives transactions with members and other counterparties. This intermediation allows members indirect access to the derivatives market. The offsetting derivatives used in intermediary activities do not receive SFAS 133 hedge accounting treatment and are separately marked to market through earnings. The net result of the accounting for these derivatives does not significantly affect the operating results of the Bank. These amounts are recorded in other income and presented as “Net loss on derivatives and hedging activities.”

Derivatives in which the Bank is an intermediary may arise when the Bank (i) enters into derivatives with members and offsetting derivatives with other counterparties to meet the needs of its members, and (ii) enters into derivatives to offset the economic effect of other derivatives that are no longer designated to either advances, investments, or consolidated obligations. The notional principal of interest rate exchange agreements arising from the Bank entering into derivatives with members and offsetting derivatives with other counterparties was $1,340 at September 30, 2006, and $1,430 at December 31, 2005. The Bank did not have any interest rate exchange agreements outstanding at September 30, 2006, that were used to offset the economic effect of other derivatives that were no longer designated to either advances, investments, or consolidated obligations. The notional principal of interest rate exchange agreements that were used to offset the economic effect of other derivatives that were no longer designated to either advances, investments, or consolidated obligations was $130 at December 31, 2005.

Note 10 – Estimated Fair Values

The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of September 30, 2006, and December 31, 2005. 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

19

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions. The fair value summary tables do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities. The assumptions used in estimating the fair values of the Bank’s financial instruments are more fully discussed in Note 17 to the Financial Statements in the Bank’s 2005 Form 10-K.

The following tables show the estimated fair values of the Bank’s financial instruments at September 30, 2006, and December 31, 2005.

Fair Value of Financial Instruments – September 30, 2006

	Carrying Value		Net Unrealized Gains/(Losses)			Estimated Fair Value
Assets
Cash and due from banks	$	6	$	—		$	6
Interest-bearing deposits in banks		12,568		—			12,568
Securities purchased under agreements to resell		200		—			200
Federal funds sold		8,600		—			8,600
Trading securities		97		—			97
Held-to-maturity securities		29,824		(250	)		29,574
Advances		174,538		117			174,655
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans		4,775		(131	)		4,644
Accrued interest receivable		983		—			983
Derivative assets		26		—			26
Other assets		102		(60	)		42
Total	$	231,719	$	(324	)	$	231,395
Liabilities
Deposits	$	488	$	—		$	488
Consolidated obligations:
Bonds		197,711		286			197,425
Discount notes		19,653		1			19,652
Mandatorily redeemable capital stock		94		—			94
Accrued interest payable		1,891		—			1,891
Derivative liabilities		1,216		—			1,216
Other liabilities		229		—			229
Total	$	221,282	$	287		$	220,995

20

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Fair Value of Financial Instruments – December 31, 2005

	Carrying Value		Net Unrealized Gains/(Losses)			Estimated Fair Value
Assets
Cash and due from banks	$	12	$	—		$	12
Interest-bearing deposits in banks		6,899		—			6,899
Securities purchased under agreements to resell		750		—			750
Federal funds sold		16,997		—			16,997
Trading securities		128		—			128
Held-to-maturity securities		29,691		(346	)		29,345
Advances		162,873		76			162,949
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans		5,214		(133	)		5,081
Accrued interest receivable		909		—			909
Derivative assets		24		—			24
Other assets		105		(61	)		44
Total	$	223,602	$	(464	)	$	223,138
Liabilities
Deposits	$	444	$	—		$	444
Consolidated obligations:
Bonds		182,625		349			182,276
Discount notes		27,618		3			27,615
Mandatorily redeemable capital stock		47		—			47
Accrued interest payable		1,448		—			1,448
Derivative liabilities		1,561		—			1,561
Other liabilities		211		—			211
Total	$	213,954	$	352		$	213,602

Note 11 – Commitments and Contingencies

As provided by the FHLB Act or Finance Board regulation, all FHLBanks have joint and several liability for all FHLBank consolidated obligations. The joint and several liability regulation of the Finance Board authorizes the Finance Board to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank. The par amount of the outstanding consolidated obligations of all 12 FHLBanks was $958,023 at September 30, 2006, and $937,460 at December 31, 2005. The par value of the Bank’s participation in consolidated obligations was $218,665 at September 30, 2006, and $212,262 at December 31, 2005. For more information on the Finance Board’s joint and several liability regulation, see Note 18 to the Financial Statements in the Bank’s 2005 Form 10-K.

Commitments that legally obligate the Bank for additional advances totaled $8,355 at September 30, 2006, and $2,843 at December 31, 2005. Commitments are generally for periods up to 12 months. Standby letters of credit are issued for a fee on behalf of members to support their obligations to third parties. If the Bank is required to make payment for a beneficiary’s drawing, the amount is charged to the member’s demand deposit account with the Bank or converted into a collateralized advance to the member. Outstanding standby letters of credit were $1,037 at September 30, 2006, and $810 at December 31, 2005, and had original terms of 30 days to 10 years with the latest final expiration in 2016. The value of the guarantees related to standby letters of credit is recorded in other liabilities and amounted to $2 at September 30, 2006, and $2 at December 31, 2005. Based on management’s credit analyses of members’ financial condition and collateral requirements, no allowance for losses is deemed necessary by management on these advance commitments and letters of credit. Advances funded under these advance commitments are fully collateralized at the time of funding (see Note 4). Letters of credit are fully collateralized at the time of issuance. The estimated fair value of commitments and letters of credit was immaterial to the balance sheet as of September 30, 2006, and December 31, 2005.

21

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

The Bank executes interest rate exchange agreements with major banks and derivatives entities affiliated with broker-dealers that have, or are supported by guaranties from related entities that have long-term credit ratings of single-A or better from both Standard & Poor’s Rating Services (Standard & Poor’s) and Moody’s Investors Service. The Bank also executes interest rate exchange agreements with its members, in which the Bank serves as an intermediary. The Bank enters into master agreements with netting provisions with all counterparties and bilateral security agreements with all derivatives dealer counterparties. All member counterparty master agreements are subject to the terms of the Bank’s Advances and Security Agreement with members, and all member counterparties must fully collateralize the Bank’s net credit exposure. As of September 30, 2006, the Bank had pledged as collateral securities with a carrying value of $982, of which $137 cannot be sold or repledged and $845 can be sold or repledged, to counterparties that have market risk exposure from the Bank related to derivatives. As of December 31, 2005, the Bank had pledged as collateral securities with a carrying value of $1,277, of which $100 cannot be sold or repledged and $1,177 can be sold or repledged, to counterparties that have market risk exposure from the Bank related to derivatives.

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

The Bank had committed to the issuance of consolidated obligations totaling $2,495 at September 30, 2006, and $1,401 at December 31, 2005.

The Bank entered into interest rate exchange agreements that had traded but not yet settled with notional amounts totaling $3,275 at September 30, 2006, and $616 at December 31, 2005.

Other commitments and contingencies are discussed in Notes 4, 5, 6, 7, and 9.

Note 12 – Transactions with Members

Transactions with Members. The Bank is a cooperative whose member institutions own the capital stock of the Bank. Certain former members are also required to maintain their investment in the Bank’s capital stock until their outstanding transactions mature or are paid off or until their capital stock is redeemed following the five-year redemption period for capital stock, in accordance with the Bank’s capital requirements. See Note 13 to the Financial Statements in the Bank’s 2005 Form 10-K for more information on the Bank’s capital requirements.

All advances are issued to members, and all mortgage loans held for portfolio are purchased from members. The Bank also maintains deposit accounts for members primarily to facilitate settlement activities that are directly related to advances and mortgage loan purchases. All transactions with members and their affiliates are entered into in the normal course of business. In instances where the member has an officer or director who is a director of the Bank, transactions with the member are subject to the same eligibility and credit criteria, as well as the same conditions, as transactions with all other members, in accordance with Finance Board regulations.

The Bank has investments in Federal funds sold, interest-bearing deposits, commercial paper, and MBS with members or their affiliates and executes derivatives transactions with members or their affiliates. All investments are transacted at market prices, and MBS are purchased through securities brokers or dealers. As an additional service to its members, the Bank enters into offsetting interest rate exchange agreements, acting as an intermediary between exactly offsetting derivative transactions with members and other counterparties. These transactions are also executed at market rates.

22

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

The following tables set forth information at the dates and for the periods indicated with respect to the Bank’s transactions with members and their affiliates and former members and their affiliates with outstanding transactions.

	September 30, 2006		December 31, 2005
Assets:
Cash and due from banks	$	5	$	11
Interest-bearing deposits in banks		1,988		989
Federal funds sold		686		3,130
Held-to-maturity securities1		7,788		7,347
Advances		174,538		162,873
Mortgage loans held for portfolio		4,775		5,214
Accrued interest receivable		874		756
Derivative assets		20		24
Other assets		26		22
Total	$	190,700	$	180,366
Liabilities:
Deposits	$	488	$	444
Accrued interest payable		1		—
Derivative liabilities		175		164
Total	$	664	$	608
Notional amount of derivatives	$	38,027	$	29,354
Letters of credit		1,037		810

1 Held-to-maturity securities include MBS issued by and/or purchased from the Bank’s members or their affiliates.

	Three months ended					Nine months ended
x	September 30, 2006		September 30, 2005			September 30, 2006		September 30, 2005
Interest Income:
Interest-bearing deposits in banks	$	30	$	6		$	60	$	12
Federal funds sold		19		24			80		57
Held-to-maturity securities		94		72			260		192
Advances1		2,351		1,369			6,319		3,448
Prepayment fees on advances, net		—		1			1		1
Mortgage loans held for portfolio		60		71			185		215
Total	$	2,554	$	1,543		$	6,905	$	3,925
Interest Expense:
Deposits	$	5	$	5		$	14	$	12
Consolidated obligations1		49		(9	)		99		(38	)
Total	$	54	$	(4	)	$	113	$	(26	)
Other (Loss)/Income:
Fees earned on letters of credit	$	1	$	1		$	1	$	1
Net gain/(loss) on derivatives and hedging activities		109		(84	)		29		(97	)
Total	$	110	$	(83	)	$	30	$	(96	)

1 Includes the effect of associated derivatives with members and their affiliates.

Transactions with Certain Members. The following tables set forth information at the dates and for the periods indicated with respect to transactions with (i) members and former members holding more than 10% of the outstanding shares of the Bank’s capital stock at each respective period end, (ii) members or former members with a representative serving on the Bank’s Board of Directors at any time during the year ended on the respective dates or during the respective periods, and (iii) affiliates of the foregoing members or former members.

23

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	September 30, 2006		December 31, 2005
Assets:
Cash and due from banks	$	5	$	11
Interest-bearing deposits in banks		—		440
Federal funds sold		200		—
Held-to-maturity securities1		3,410		2,960
Advances		122,979		120,361
Mortgage loans held for portfolio		3,799		4,124
Accrued interest receivable		630		576
Total	$	131,023	$	128,472
Liabilities:
Deposits	$	28	$	63
Derivative liabilities		79		64
Total	$	107	$	127
Notional amount of derivatives	$	8,283	$	11,831
Letters of credit		183		197

1 Held-to-maturity securities include MBS securities issued by and/or purchased from the members described in this section or their affiliates.

	Three months ended					Nine months ended
x	September 30, 2006		September 30, 2005			September 30, 2006		September 30, 2005
Interest Income:
Interest-bearing deposits in banks	$	1	$	1		$	9	$	3
Federal funds sold		4		1			13		6
Held-to-maturity securities		36		29			98		82
Advances1		1,587		997			4,359		2,527
Mortgage loans held for portfolio		45		54			146		167
Total	$	1,673	$	1,082		$	4,625	$	2,785
Interest Expense:
Deposits	$	1	$	—		$	1	$	—
Consolidated obligations1		19		(4	)		41		(19	)
Total	$	20	$	(4	)	$	42	$	(19	)
Other (Loss)/Income
Net gain/(loss) on derivatives and hedging activities	$	41	$	(39	)	$	3	$	(45	)

1 Includes the effect of associated derivatives with the members described in this section or their affiliates.

At September 30, 2006, Citibank, N.A., was an affiliate of the Bank’s largest shareholder, Citibank (West), FSB. In October 2006, Citibank (West), FSB, was reorganized into Citibank, N.A., and Citibank, N.A., became a member of the Bank, assumed the outstanding capital stock of Citibank (West), FSB, and became the Bank’s largest shareholder. Citibank, N.A., is the Bank’s primary securities custodian and a derivatives dealer counterparty. In addition, the Bank has financial relationships with two affiliates of Citibank, N.A. They are (i) Citigroup Global Markets, Inc., which is a bond underwriter and dealer for the issuance of the FHLBank System’s consolidated obligations, and (ii) Citigroup Institutional Trust Company, which is the Bank’s securities custodian for securities pledged to the Bank by Citibank, N.A., and its approved subsidiaries. Citibank, N.A., and its affiliates served in these roles prior to and after Citibank, N.A., became a member of the Bank. These financial relationships with Citibank, N.A., and its affiliates are conducted in the ordinary course of business, and management believes these financial relationships are conducted on terms and conditions similar to those that would be available for comparable services if provided by unaffiliated entities.

24

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements contained in this quarterly report on Form 10-Q, including statements describing the objectives, projections, estimates, or predictions of the future of the Federal Home Loan Bank of San Francisco (Bank), may be “forward-looking statements.” These statements may use forward-looking terms, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or their negatives or other variations on these terms. The Bank cautions that by their nature, forward-looking statements 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: economic and market conditions; volatility of market prices, rates, and indices; political, legislative, regulatory, or judicial events; changes in the Bank’s capital structure; membership changes; changes in the demand by Bank members for Bank advances; competitive forces, including the availability of other sources of funding for Bank members; changes in investor demand for consolidated obligations and/or the terms of interest rate exchange agreements and similar agreements; the ability of the Bank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services; the ability of each of the other Federal Home Loan Banks (FHLBanks) to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the Bank has joint and several liability; and timing and volume of market activity. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Bank’s interim financial statements and notes, which begin on page 1, and the Bank’s Annual Report on Form 10-K for the year ended December 31, 2005 (2005 Form 10-K).

Quarterly Overview

The Federal Home Loan Bank of San Francisco maintains a balance between its obligation to achieve its public policy mission to promote housing, homeownership, and community development through its activities with members, and its objective to provide adequate returns on the private capital provided by its members. The Bank achieves this balance by delivering low-cost credit to help its members meet the credit needs of their communities while paying members a market-rate dividend.

The Bank’s financial strategies are designed to enable it to safely expand and contract its assets, liabilities, and capital in response to changes in membership composition and member credit needs. The Bank’s capital grows when members are required to purchase additional capital stock as they increase their advance borrowings or sell mortgage loans to the Bank under the Mortgage Partnership Finance^® (MPF^®) Program. (“Mortgage Partnership Finance” and “MPF” are registered trademarks of the Federal Home Loan Bank of Chicago.) The Bank may repurchase capital stock from members if their advances or mortgage loan balances decline. As a result of these strategies, the Bank has been able to achieve its housing mission by meeting member credit needs and to pay market-rate dividends despite significant fluctuations in total assets, liabilities, and capital in recent years.

The Bank measures the dividend rate on its capital stock relative to a unique dividend benchmark that is calculated as the combined average of (i) the daily average of the overnight Federal funds effective rate and (ii) the four-year moving average of the U.S. Treasury note yield calculated as the average of the three-year and five-year U.S. Treasury note yields. The benchmark is consistent with the Bank’s interest rate risk and capital management goals.

The Bank’s annualized dividend rate for the third quarter of 2006 was 5.54%, compared to 4.58% for the third quarter of 2005. The Bank’s annualized dividend rate for the first nine months of 2006 was 5.27%, compared to 4.35% for the first nine months of 2005. The increases in the annualized dividend rate reflect a higher yield on invested capital, partially offset by higher Resolution Funding Corporation (REFCORP) and Affordable Housing Program (AHP) assessments and a lower net interest spread on the Bank’s mortgage loan and mortgage-backed securities (MBS) portfolio during the third quarter of 2006 and the first nine months of 2006 compared to the same periods in 2005.

25

Net income was $140 million in the third quarter of 2006 compared to $91 million in the third quarter of 2005 and was $387 million in the first nine months of 2006 compared to $259 million in the first nine months of 2005. The increases reflect higher net interest income, which increased $39 million, or 22%, to $217 million in the third quarter of 2006 from $178 million in the third quarter of 2005 and increased $115 million, or 23%, to $611 million in the first nine months of 2006 from $496 million in the first nine months of 2005. The increases in net interest income were driven primarily by the effect of higher interest rates on higher average capital balances, combined with higher average interest-earning assets outstanding.

Excluding the impact from net interest expense on derivative instruments used in economic hedges, the net effect of fair value adjustments on trading securities, derivatives, and hedged items, after assessments, resulted in a net fair value gain of $3 million in the third quarter of 2006 compared to a net fair value loss of $19 million in the third quarter of 2005. Most of the net fair value gain in the third quarter of 2006 and the net fair value loss in the third quarter of 2005 reflected unrealized fair value adjustments.

Excluding the impact from net interest expense on derivative instruments used in economic hedges, the net effect of fair value adjustments on trading securities, derivatives, and hedged items, after assessments, resulted in a net fair value gain of $2 million in the first nine months of 2006 compared to a net fair value loss of $39 million in the first nine months of 2005. Most of the $2 million net fair value gain in the first nine months of 2006 reflected net fair value gains on the termination of hedges related to consolidated obligations. Most of the $39 million net fair value loss in the first nine months of 2005 reflected unrealized fair value adjustments.

Nearly all of the Bank’s derivatives and hedged instruments are held to maturity, call date, or put date. For these derivatives and hedged items, net unrealized fair value gains or losses are primarily a matter of timing because they will generally reverse over the remaining contractual terms to maturity, or by the exercised call or put date. However, the Bank may have instances in which hedging relationships are terminated prior to maturity or prior to the exercised call or put dates. The impact of terminating a hedging relationship may result in a realized gain or loss. In addition, the Bank may have instances in which it may sell trading securities prior to maturity, which may also result in a realized gain or loss.

Total assets grew $8.1 billion, or 4%, to $231.7 billion at September 30, 2006, from $223.6 billion at December 31, 2005, primarily because advances increased to $174.5 billion from $162.9 billion and interest-bearing deposits in banks increased to $12.6 billion from $6.9 billion. In contrast, Federal funds sold decreased to $8.6 billion from $17.0 billion.

On October 6, 2006, the Bank announced that it will no longer offer new commitments to purchase mortgage loans from its members, but that it intends to purchase mortgage loans under existing purchase commitments and to retain its existing portfolio of mortgage loans. Most of the growth in the MPF Program occurred in 2003, and since that time the Bank’s purchased mortgage loan balances have declined. In particular, mortgage loan purchase activity was low during 2005 and the first nine months of 2006 because (i) originations of conforming fixed rate mortgage loans were lower in these periods than in prior years, (ii) member business strategies led most participating members to sell their conforming fixed rate mortgage loans to other purchasers, and (iii) the Bank limited its purchases of fixed rate mortgage loans because the profit spreads available were below the Bank’s targets.

26

Financial Highlights

The following table presents a summary of certain financial information for the Bank for the periods indicated.

Financial Highlights

(Unaudited)

(Dollars in millions)	September 30, 2006			June 30, 2006			March 31, 2006			December 31, 2005			September 30, 2005
Selected Balance Sheet Items at Period End
Total Assets	$	231,719		$	233,750		$	227,213		$	223,602		$	211,760
Advances		174,538			167,356			164,004			162,873			152,956
Mortgage Loans		4,775			4,928			5,079			5,214			5,408
Held-to-Maturity Securities		29,824			30,825			29,963			29,691			28,823
Interest-Bearing Deposits in Banks		12,568			16,519			9,195			6,899			4,946
Federal Funds Sold		8,600			12,306			16,244			16,997			17,188
Consolidated Obligations:1
Bonds		197,711			187,769			198,305			182,625			173,790
Discount Notes		19,653			29,325			14,541			27,618			24,873
Capital Stock – Class B – Putable		10,301			10,049			10,007			9,520			9,025
Total Capital		10,437			10,181			10,135			9,648			9,149
Quarterly Operating Results
Net Interest Income	$	217		$	201		$	193		$	187		$	178
Other (Loss)/Income		(3	)		(6	)		(10	)		(15	)		(35	)
Other Expense		23			21			21			23			19
Assessments		51			46			43			39			33
Net Income	$	140		$	128		$	119		$	110		$	91
Other Data
Net Interest Margin		0.38	%		0.36	%		0.34	%		0.35	%		0.34	%
Operating Expenses as a Percent of Average Assets		0.03			0.03			0.03			0.04			0.03
Return on Assets		0.24			0.23			0.21			0.20			0.17
Return on Equity		5.59			5.23			4.87			4.70			4.03
Annualized Dividend Rate		5.54			5.22			5.03			4.67			4.58
Spread of Dividend Rate to Dividend Benchmark2		1.21			1.12			1.17			1.07			1.26
Dividend Payout Ratio3		97.54			98.09			100.93			97.59			111.38
Capital to Assets Ratio4		4.55			4.39			4.48			4.34			4.34
Duration Gap (in months)		1			1			1			1			1

1 As provided by the Federal Home Loan Bank Act of 1932, as amended (FHLB Act), or Federal Housing Finance Board (Finance Board) regulation, all of the Federal Home Loan Banks (FHLBanks) have joint and several liability for FHLBank consolidated obligations, which are backed only by the financial resources of the FHLBanks. The joint and several liability regulation of the Finance Board authorizes the Finance Board to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank. The par amount of the outstanding consolidated obligations of all 12 FHLBanks was as follows:

Quarter ended	Par amount
September 30, 2006	$	958,023
June 30, 2006		958,570
March 31, 2006		935,828
December 31, 2005		937,460
September 30, 2005		920,369

2 The dividend benchmark is calculated as the combined average of (i) the daily average of the overnight Federal funds effective rate and (ii) the four-year moving average of the U.S. Treasury note yield calculated as the average of the three-year and five-year U.S. Treasury note yields.

3 This ratio is calculated as dividends declared per share divided by net income per share.

4 This ratio is based on regulatory capital, which includes mandatorily redeemable capital stock that is classified as a liability.

27

Results of Operations

The primary source of Bank earnings is net interest income, which is the interest earned on advances, mortgage loans, and investments, less interest paid on consolidated obligations, deposits, and other borrowings. The following Average Balance Sheets tables present average balances of earning asset categories and the sources that fund those earning assets (liabilities and capital) for the three and nine months ended September 30, 2006 and 2005, together with the related interest income and expense. They also present the average rate on total earning assets and the average cost of total funding sources. The Change in Net Interest Income tables detail the changes in interest income and interest expense for the third quarter of 2006 compared to the third quarter of 2005 and for the first nine months of 2006 compared to the first nine months of 2005. Changes in both volume and interest rates influence changes in net interest income and the net interest margin.

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Average Balance Sheets

	Three months ended
	September 30, 2006							September 30, 2005
(In millions)	Average Balance			Interest Income/ Expense		Average Rate		Average Balance			Interest Income/ Expense		Average Rate
Assets
Interest-earning assets:
Interest-bearing deposits in banks	$	13,513		$	181	5.31	%	$	4,466		$	39	3.46	%
Securities purchased under agreements to resell		151			2	5.25			2,163			19	3.48
Federal funds sold		6,665			88	5.24			14,078			123	3.47
Trading securities:
MBS		100			2	7.93			248			3	4.80
Held-to-maturity securities:
MBS		26,814			344	5.09			24,440			267	4.33
Other investments		3,139			43	5.43			2,676			25	3.71
Mortgage loans		4,860			60	4.90			5,535			71	5.09
Advances1		173,566			2,351	5.37			153,038			1,370	3.55
Deposits for mortgage loan program with other FHLBank		—			—	—			1			—	3.53
Loans to other FHLBanks		3			—	0.48			1			—	—
Total interest-earning assets		228,811			3,071	5.32			206,646			1,917	3.68
Other assets2		2,119			—	—			2,342			—	—
Total Assets	$	230,930		$	3,071	5.28	%	$	208,988		$	1,917	3.64	%
Liabilities and Capital
Interest-bearing liabilities:
Consolidated obligations:
Bonds1	$	196,851		$	2,580	5.20	%	$	178,231		$	1,574	3.50	%
Discount notes1		20,469			267	5.18			18,594			159	3.39
Deposits		419			5	4.73			626			5	3.17
Borrowings from other FHLBanks		2			—	5.27			14			—	3.50
Mandatorily redeemable capital stock		82			1	5.54			48			1	4.58
Other borrowings		21			1	5.42			26			—	4.01
Total interest-bearing liabilities		217,844			2,854	5.20			197,539			1,739	3.49
Other liabilities2		3,107			—	—			2,493			—	—
Total Liabilities		220,951			2,854	5.12			200,032			1,739	3.45
Total Capital		9,979			—	—			8,956			—	—
Total Liabilities and Capital	$	230,930		$	2,854	4.90	%	$	208,988		$	1,739	3.30	%
Net Interest Income				$	217						$	178
Net Interest Spread3						0.12	%						0.19	%
Net Interest Margin4						0.38	%						0.34	%
Total Average Assets/Capital Ratio5		23.0	x						23.2	x
Interest-earning Assets/Interest-bearing Liabilities		1.1	x						1.0	x

1 Interest income/expense and average rates include the effect of associated interest rate exchange agreements.

2 Includes forward settling transactions and fair value adjustments in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, on January 1, 2001, and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, on July 1, 2003 (together referred to as “SFAS 133”).

3 Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities.

4 Net interest margin is net interest income (annualized) divided by average interest-earning assets.

5 For this purpose, capital includes mandatorily redeemable capital stock.

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Change in Net Interest Income: Rate/Volume Analysis

Three Months Ended September 30, 2006, Compared to Three Months Ended September 30, 2005

(In millions)	Increase/ (Decrease)			Attributable to Changes in1
				Average Volume			Average Rate
Interest-earning assets:
Interest-bearing deposits in banks	$	142		$	112		$	30
Securities purchased under agreements to resell		(17	)		(23	)		6
Federal funds sold		(35	)		(82	)		47
Trading securities:
MBS		(1	)		(2	)		1
Held-to-maturity securities:
MBS		77			28			49
Other investments		18			5			13
Mortgage loans		(11	)		(8	)		(3	)
Advances2		981			203			778
Total interest-earning assets		1,154			233			921
Interest-bearing liabilities:
Consolidated obligations:
Bonds2		1,006			179			827
Discount notes2		108			17			91
Deposits		—			(2	)		2
Mandatorily redeemable capital stock		—			—			—
Other borrowings		1			—			1
Total interest-bearing liabilities		1,115			194			921
Net interest income	$	39		$	39		$	—

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

2 Interest income/expense and average rates include the interest effect of associated interest rate exchange agreements.

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Average Balance Sheets

	Nine months ended
	September 30, 2006							September 30, 2005
(In millions)	Average Balance			Interest Income/ Expense		Average Rate		Average Balance			Interest Income/ Expense		Average Rate
Assets
Interest-earning assets:
Interest-bearing deposits in banks	$	10,558		$	398	5.04	%	$	4,632		$	103	2.97	%
Securities purchased under agreements to resell		855			29	4.53			901			23	3.41
Federal funds sold		11,151			402	4.82			12,127			277	3.05
Trading securities:
MBS		110			5	6.08			293			12	5.48
Other investments		—			—	—			30			1	4.46
Held-to-maturity securities:
MBS		26,623			987	4.96			23,235			733	4.22
Other investments		3,012			114	5.06			2,368			57	3.22
Mortgage loans		5,005			185	4.94			5,742			215	5.01
Advances1		169,584			6,320	4.98			148,338			3,449	3.11
Deposits for mortgage loan program with other FHLBanks		—			—	—			—			—	3.01
Loans to other FHLBanks		7			—	—			5			—	2.67
Total interest-earning assets		226,905			8,440	4.97			197,671			4,870	3.29
Other assets2		1,820			—	—			2,061			—	—
Total Assets	$	228,725		$	8,440	4.93	%	$	199,732		$	4,870	3.26	%
Liabilities and Capital
Interest-bearing liabilities:
Consolidated obligations:
Bonds1	$	195,437		$	7,082	4.84	%	$	166,874		$	3,893	3.12	%
Discount notes1		20,213			729	4.82			21,531			467	2.90
Deposits		416			14	4.50			566			12	2.83
Borrowings from other FHLBanks		6			—	4.86			13			—	2.81
Mandatorily redeemable capital stock		67			3	5.27			51			2	4.35
Other borrowings		16			1	5.12			20			—	3.09
Total interest-bearing liabilities		216,155			7,829	4.84			189,055			4,374	3.09
Other liabilities2		2,673			—	—			2,130			—	—
Total Liabilities		218,828			7,829	4.78			191,185			4,374	3.06
Total Capital		9,897			—	—			8,547			—	—
Total Liabilities and Capital	$	228,725		$	7,829	4.58	%	$	199,732		$	4,374	2.93	%
Net Interest Income				$	611						$	496
Net Interest Spread3						0.13	%						0.20	%
Net Interest Margin4						0.36	%						0.34	%
Total Average Assets/Capital Ratio5		23.0	x						23.4	x
Interest-earning Assets/Interest-bearing Liabilities		1.0	x						1.0	x

1 Interest income/expense and average rates include the effect of associated interest rate exchange agreements.

2 Includes forward settling transactions and fair value adjustments in accordance with SFAS 133.

3 Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities.

4 Net interest margin is net interest income (annualized) divided by average interest-earning assets.

5 For this purpose, capital includes mandatorily redeemable capital stock.

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Change in Net Interest Income: Rate/Volume Analysis

Nine Months Ended September 30, 2006, Compared to Nine Months Ended September 30, 2005

	Increase/ (Decrease)			Attributable to Changes in1
(In millions)				Average Volume			Average Rate
Interest-earning assets:
Interest-bearing deposits in banks	$	295		$	191		$	104
Securities purchased under agreements to resell		6			(1	)		7
Federal funds sold		125			(24	)		149
Trading securities:
MBS		(7	)		(8	)		1
Other investments		(1	)		(1	)		—
Held-to-maturity securities:
MBS		254			115			139
Other investments		57			18			39
Mortgage loans		(30	)		(27	)		(3	)
Advances2		2,871			551			2,320
Total interest-earning assets		3,570			814			2,756
Interest-bearing liabilities:
Consolidated obligations:
Bonds2		3,189			753			2,436
Discount notes2		262			(30	)		292
Deposits		2			(4	)		6
Mandatorily redeemable capital stock		1			1			—
Other borrowings		1			—			1
Total interest-bearing liabilities		3,455			720			2,735
Net interest income	$	115		$	94		$	21

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

2 Interest income/expense and average rates include the interest effect of associated interest rate exchange agreements.

The net interest margin increased 4 basis points during the third quarter of 2006 compared to the third quarter of 2005. The net interest margin increased 2 basis points during the first nine months of 2006 compared to the first nine months of 2005. The increases reflect a higher yield on invested capital, partially offset by lower profit spreads on the combined mortgage loan and MBS portfolios.

The net interest spread was 7 basis points lower during the third quarter of 2006 compared to the third quarter of 2005. The net interest spread was 7 basis points lower during the first nine months of 2006 compared to the first nine months of 2005. The decreases were primarily due to lower profit spreads on the combined mortgage loan and MBS portfolios, reflecting the impact on financing costs of higher interest rates and a flatter yield curve. The increased volume of lower-spread non-MBS investments and advances relative to the overall asset mix also contributed to the decreases in the net interest spread.

Net Interest Income

Third Quarter of 2006 Compared to the Third Quarter of 2005. Net interest income in the third quarter of 2006 was $217 million, a 22% increase from $178 million in the third quarter of 2005. The increase was largely the result of higher average interest-earning assets outstanding, particularly advances, MBS investments, and interest-bearing deposits in banks, combined with higher average capital balances and higher earnings on capital.

Interest income on non-MBS investments (interest-bearing deposits in banks, securities purchased under agreements to resell (resale agreements), Federal funds sold, and other non-MBS investments classified as

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held-to-maturity and trading securities) contributed $108 million to the increase in interest income in the third quarter of 2006 compared to the third quarter of 2005. Of this increase, $96 million was the result of higher average yields on non-MBS investments and $12 million was the result of a 0.4% increase in average non-MBS investment balances.

Interest income from the mortgage portfolio (MBS and mortgage loans) increased $65 million in the third quarter of 2006 compared to the third quarter of 2005. Of this increase, $26 million was the result of a 9% increase in average MBS outstanding and $50 million was the result of higher average yields on MBS investments, partially offset by an $8 million decrease as a result of lower average mortgage loans outstanding and $3 million as a result of lower average yields on mortgage loans. The increase was net of the impact of retrospective adjustments for amortization of purchase premiums and discounts from the acquisition dates of the mortgage loans and MBS in accordance with SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases (SFAS 91), which increased interest income by $2 million in the third quarter of 2006 and by $6,000 in the third quarter of 2005.

Interest income from advances increased $981 million, which consisted of $203 million from a 13% increase in average advances outstanding, reflecting higher member demand during the third quarter of 2006 relative to the third quarter of 2005, and $778 million as a result of higher average yields because of increases in interest rates for new advances, adjustable rate advances repricing at higher rates, and paydowns and maturities of lower-yielding advances.

Paralleling the growth in interest-earning assets, average consolidated obligations (bonds and discount notes) funding the earning assets increased 10%, resulting in a $1,114 million increase in interest expense for the third quarter of 2006 relative to the third quarter of 2005. Higher average consolidated obligation balances, which were issued primarily to finance growth in intermediate-term advances, contributed $196 million to the increase in interest expense during the third quarter of 2006. Higher interest rates on consolidated obligations outstanding in the third quarter of 2006 compared to the third quarter of 2005 contributed $918 million to the increase in interest expense.

Nine Months Ended September 30, 2006, Compared to Nine Months Ended September 30, 2005. Net interest income in the first nine months of 2006 was $611 million, a 23% increase from $496 million in the first nine months of 2005. The increase was largely the result of higher average interest-earning assets outstanding, particularly advances, interest-bearing deposits in banks, and MBS investments, combined with higher average capital balances and higher earnings on capital.

Interest income on non-MBS investments contributed $482 million to the increase in interest income in the first nine months of 2006 compared to the first nine months of 2005. Of this increase, $299 million was the result of higher average yields on non-MBS investments and $183 million was the result of a 28% rise in average non-MBS investment balances, primarily in interest-bearing deposits in banks.

Interest income from the mortgage portfolio (MBS and mortgage loans) increased $217 million in the first nine months of 2006 compared to the first nine months of 2005. Of this increase, $107 million was the result of a 14% increase in average MBS outstanding and $140 million was the result of higher average yields on MBS investments, partially offset by a $27 million decrease as a result of lower average mortgage loans outstanding and $3 million as a result of lower average yields on mortgage loans. The increase was net of the impact of retrospective adjustments for amortization of purchase premiums and discounts from the acquisition dates of the mortgage loans and MBS in accordance with SFAS 91, which increased interest income by $37,000 in the first nine months of 2006 and decreased interest income by $6 million in the first nine months of 2005.

Interest income from advances increased $2,871 million, which consisted of $551 million from a 14% increase in average advances outstanding, reflecting higher member demand during the first nine months of 2006 relative to the first nine months of 2005, and $2,320 million as a result of higher average yields because of increases in interest rates for new advances, adjustable rate advances repricing at higher rates, and paydowns and maturities of lower-yielding advances.

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Paralleling the growth in interest-earning assets, average consolidated obligations (bonds and discount notes) funding the earning assets increased 14%, resulting in a $3,451 million increase in interest expense for the first nine months of 2006 relative to the first nine months of 2005. Higher average consolidated obligation balances, which were issued primarily to finance growth in intermediate-term advances, contributed $723 million to the increase in interest expense during the first nine months of 2006. Higher interest rates on consolidated obligations outstanding in the first nine months of 2006 compared to the first nine months of 2005 contributed $2,728 million to the increase in interest expense.

The Bank experienced significant growth in average interest-earning asset portfolios and net interest income during the third quarter of 2006 compared to the third quarter of 2005 and during the first nine months of 2006 compared to the first nine months of 2005. This growth was driven primarily by member demand for advances and growth in average MBS and liquidity investment balances. Member demand for wholesale funding from the Bank can vary greatly depending on a number of factors, including economic and market conditions, competition from other wholesale funding sources, member deposit inflows and outflows, the activity level of the primary and secondary mortgage markets, and strategic decisions made by individual member institutions. As a result, Bank asset levels and operating results may vary significantly from period to period.

Other (Loss)/Income

Third Quarter of 2006 Compared to the Third Quarter of 2005. Other (loss)/income was a net loss of $3 million in the third quarter of 2006 compared to a net loss of $35 million in the third quarter of 2005. The loss was primarily the result of fair value adjustments associated with derivatives and hedging activities under the provisions of SFAS 133 and net interest expense on derivative instruments used in economic hedges.

Under SFAS 133, the Bank is required to carry all of its derivative instruments on the balance sheet at fair value. If derivatives meet the hedging criteria, including effectiveness measures, 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 the fair value of the hedged item or the variability in the cash flows of the forecasted transaction, is recognized in current period earnings. In addition, certain derivatives are associated with assets or liabilities but do not qualify as fair value or cash flow hedges under SFAS 133. These economic hedges are recorded on the balance sheet at fair value with the unrealized gain or loss recorded in earnings without any offsetting unrealized loss or gain from the associated asset or liability.

In general, the Bank’s derivatives and hedged instruments are held to maturity, call date, or put date. Therefore, nearly all of the SFAS 133 cumulative net gains and losses that are unrealized fair value gains or losses are primarily a matter of timing and will generally reverse over the remaining contractual terms to maturity, or by the exercised call or put date, of the hedged financial instruments and associated interest rate exchange agreements. However, the Bank may have instances in which hedging relationships are terminated prior to maturity or prior to the exercised call or put dates. The impact of terminating the hedging relationship may result in a realized gain or loss. In addition, the Bank may have instances in which it may sell trading securities prior to maturity, which may also result in a realized gain or loss.

The following table shows the accounting classification of hedges and the categories of hedged items that contributed to the gains and losses on derivatives and hedged items that were recorded in earnings in the third quarter of 2006 and 2005.

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Sources of Gains/(Losses) on Derivatives and Hedged Items Recorded in Earnings

Three Months Ended September 30, 2006, Compared to Three Months Ended September 30, 2005

(In millions)	Three months ended
	September 30, 2006														September 30, 2005
	Gain/(Loss)								Net Interest Expense on Economic Hedges						Gain/(Loss)								Net Interest Expense on Economic Hedges
Hedged Item	Fair Value Hedges			Cash Flow Hedges		Economic Hedges						Total			Fair Value Hedges			Cash Flow Hedges		Economic Hedges						Total
Advances	$	5		$	—	$	(14	)	$	4		$	(5	)	$	—		$	—	$	(4	)	$	(2	)	$	(6	)
Consolidated obligations		(13	)		—		25			(12	)		—			(18	)		—		(4	)		(7	)		(29	)
MBS		—			—		—			—			—			—			—		8			(1	)		7
Total	$	(8	)	$	—	$	11		$	(8	)	$	(5	)	$	(18	)	$	—	$	—		$	(10	)	$	(28	)

During the third quarter of 2006, net losses on derivatives and hedging activities totaled $5 million compared to net losses of $28 million in the third quarter of 2005. These amounts included net interest expense on derivative instruments used in economic hedges of $8 million in the third quarter of 2006 and $10 million in the third quarter of 2005. The majority of this net interest expense is attributable to interest rate swaps associated with consolidated obligations.

Excluding the $8 million impact from net interest expense on derivative instruments used in economic hedges, fair value adjustments for the third quarter of 2006 were net gains of $3 million. The $3 million net gains consisted of primarily unrealized net gains of $12 million attributable to the hedges related to consolidated obligations, partially offset by unrealized net losses of $9 million attributable to the hedges related to advances.

Excluding the $10 million impact from net interest expense on derivative instruments used in economic hedges, fair value adjustments were primarily unrealized net losses of $18 million in the third quarter of 2005. The $18 million net losses consisted of net losses of $22 million attributable to the hedges related to consolidated obligations and net losses of $4 million attributable to the economic hedges related to advances, partially offset by net gains of $8 million on the economic hedges related to MBS classified as trading.

Nine Months Ended September 30, 2006, Compared to Nine Months Ended September 30, 2005. Other (loss)/income was a net loss of $19 million in the first nine months of 2006 compared to a net loss of $85 million in the first nine months of 2005. The decreased loss was primarily the result of fair value adjustments associated with derivatives and hedging activities under the provisions of SFAS 133.

The table below shows the accounting classification of hedges and the categories of hedged items that contributed to the gains and losses on derivatives and hedged items that were recorded in earnings in the first nine months of 2006 and 2005.

Sources of Gains/(Losses) on Derivatives and Hedged Items Recorded in Earnings

Nine Months Ended September 30, 2006, Compared to Nine Months Ended September 30, 2005

(In millions)	Nine months ended
	September 30, 2006															September 30, 2005
	Gain/(Loss)									Net Interest Expense on Economic Hedges						Gain/(Loss)									Net Interest Expense on Economic Hedges
Hedged Item	Fair Value Hedges			Cash Flow Hedges			Economic Hedges						Total			Fair Value Hedges			Cash Flow Hedges			Economic Hedges						Total
Advances	$	3		$	—		$	(7	)	$	4		$	—		$	2		$	—		$	1		$	(6	)	$	(3	)
Consolidated obligations		(16	)		(1	)		23			(29	)		(23	)		(44	)		(1	)		(11	)		(24	)		(80	)
MBS		—			—			1			—			1			—			—			13			(5	)		8
Total	$	(13	)	$	(1	)	$	17		$	(25	)	$	(22	)	$	(42	)	$	(1	)	$	3		$	(35	)	$	(75	)

During the first nine months of 2006, net losses on derivatives and hedging activities totaled $22 million compared to net losses of $75 million in the first nine months of 2005. These amounts included net interest

35

expense on derivative instruments used in economic hedges of $25 million in the first nine months of 2006 and $35 million in the first nine months of 2005. The majority of this net interest expense is attributable to interest rate swaps associated with consolidated obligations.

Excluding the $25 million impact from net interest expense on derivative instruments used in economic hedges, fair value adjustments were primarily unrealized net gains of $3 million for the first nine months of 2006. The $3 million unrealized net gains consisted of unrealized net gains of $4 million attributable to the hedges related to consolidated obligations, net fair value gains of $2 million on the termination of hedges related to consolidated obligations, and unrealized net gains of $1 million attributable to the economic hedges related to MBS classified as trading, partially offset by unrealized net losses of $4 million attributable to the hedges related to advances.

Excluding the $35 million impact from net interest expense on derivative instruments used in economic hedges, fair value adjustments were primarily unrealized net losses of $40 million in the first nine months of 2005. The $40 million net losses consisted of net losses of $56 million attributable to the hedges related to consolidated obligations, partially offset by net gains of $13 million attributable to the economic hedges related to MBS classified as trading and net gains of $3 million attributable to the hedges related to advances.

Return on Equity

Return on equity (ROE) was 5.59% (annualized) for the third quarter of 2006, an increase of 156 basis points from the third quarter of 2005. This increase reflected the 54% rise in net income, to $140 million in the third quarter of 2006 from $91 million in the third quarter of 2005. In addition, the growth in net income more than kept pace with the growth in average capital. Average capital increased 11% to $10.0 billion in the third quarter of 2006 from $9.0 billion in the third quarter of 2005.

ROE was 5.23% (annualized) for the first nine months of 2006, an increase of 118 basis points from the first nine months of 2005. This increase reflected the 49% rise in net income, to $387 million in the first nine months of 2006 from $259 million in the first nine months of 2005. In addition, the growth in net income more than kept pace with the growth in average capital. Average capital increased 16% to $9.9 billion in the first nine months of 2006 from $8.5 billion in the first nine months of 2005.

Dividends

The Bank’s annualized dividend rate increased to 5.54% for the third quarter of 2006 from 4.58% for the third quarter of 2005. The Bank’s annualized dividend rate increased to 5.27% for the first nine months of 2006 from 4.35% for the first nine months of 2005. These increases were primarily due to a higher yield on invested capital, partially offset by higher REFCORP and AHP assessments and a lower net interest spread on the Bank’s mortgage loan and MBS portfolio during the third quarter of 2006 and the first nine months of 2006 compared to the same periods in 2005.

The spread between the dividend rate and the dividend benchmark decreased to 1.21% for the third quarter of 2006 from 1.26% for the third quarter of 2005, and to 1.17% for the first nine months of 2006 from 1.26% for the first nine months of 2005. These decreases were due, in part, to the decline in the net interest spread, including narrower profit spreads on the mortgage portfolio. In addition, higher market interest rates in the third quarter of 2006 and the first nine months of 2006 compared to the year-earlier periods caused an increase in both the dividend benchmark and the yield on invested capital. However, the increase in REFCORP and AHP assessments caused the yield on invested capital after assessments to increase by a smaller amount than the benchmark yield, resulting in a lower spread between the dividend rate and the dividend benchmark.

By Finance Board regulation, dividends may be paid out of current net earnings or previously retained earnings. As required by the Finance Board, the Bank has a formal retained earnings policy that is reviewed at least annually. The Bank’s Retained Earnings and Dividend Policy establishes amounts to be retained in restricted retained earnings, which are not made available for dividends in the current dividend period. The Bank may be restricted from paying dividends if the Bank is not in compliance with any of its minimum capital requirements or if payment would cause the Bank to fail to meet any of its minimum capital requirements. In addition, the Bank may not pay dividends if any principal or interest due on any

36

consolidated obligations has not been paid in full, or, under certain circumstances, if the Bank fails to satisfy certain liquidity requirements under applicable Finance Board regulations. The Finance Board’s regulatory liquidity requirements state: (i) each FHLBank must maintain eligible high quality assets (advances with a maturity not exceeding five years, Treasury security investments, and deposits in banks or trust companies) in an amount equal to or greater than the deposits received from members and (ii) each FHLBank 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. At September 30, 2006, advances maturing within five years totaled $170.3 billion, significantly in excess of the $0.5 billion of member deposits on that date. At December 31, 2005, advances maturing within five years totaled $159.9 billion, also significantly in excess of the $0.4 billion of member deposits on that date. In addition, as of September 30, 2006, and December 31, 2005, the Bank’s estimated total sources of funds obtainable from liquidity investments, repurchase agreement borrowings collateralized by the Bank’s marketable securities, and advance repayments would have allowed the Bank to meet its liquidity needs for more than 90 days without access to the consolidated obligation debt markets.

In accordance with the Bank’s Retained Earnings and Dividend Policy, the Bank retains in restricted retained earnings any cumulative net unrealized gains in earnings (net of applicable assessments) resulting from the application of SFAS 133. Retained earnings restricted in accordance with this provision totaled $28 million at September 30, 2006, and $44 million at December 31, 2005.

In addition, the Bank holds other restricted retained earnings intended to protect members’ paid-in capital from an extremely adverse credit or operations risk event, an extremely adverse SFAS 133 quarterly result, or an extremely low (or negative) level of net income before the effects of SFAS 133 resulting from an adverse interest rate environment. To provide for the build-up of retained earnings, the Bank retained from current earnings $8 million in the third quarter of 2006 and $8 million in the third quarter of 2005, which reduced the annualized dividend rate by 32 basis points in the third quarter of 2006 and by 36 basis points in the third quarter of 2005. The Bank retained from current earnings $23 million in the first nine months of 2006 and $23 million in the first nine months of 2005, which reduced the annualized dividend rate by 31 basis points in the first nine months of 2006 and by 37 basis points in the first nine months of 2005. The retained earnings restricted in accordance with this provision totaled $110 million at September 30, 2006, and $87 million at December 31, 2005, and is targeted to reach $130 million by the end of the third quarter of 2007.

For more information on these two categories of restricted retained earnings and the Bank’s Retained Earnings and Dividend Policy, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Comparison of 2005 to 2004 – Dividends” in the Bank’s 2005 Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments – Delay in Implementation of Amendment to the Bank’s Retained Earnings and Dividend Policy.”

Financial Condition

Total assets were $231.7 billion at September 30, 2006, a 4% increase from $223.6 billion at December 31, 2005. Average total assets were $230.9 billion for the third quarter of 2006, a 10% increase compared to $209.0 billion for the third quarter of 2005. Average total assets were $228.7 billion for the first nine months of 2006, a 15% increase compared to $199.7 billion for the first nine months of 2005. These increases were largely driven by growth in advances and interest-bearing deposits in banks.

Total liabilities were $221.3 billion at September 30, 2006, a 3% increase from $214.0 billion at December 31, 2005. Average total liabilities were $221.0 billion for the third quarter of 2006, a 10% increase compared to $200.0 billion for the third quarter of 2005. Average total liabilities were $218.8 billion for the first nine months of 2006, a 14% increase compared to $191.2 billion for the first nine months of 2005. The increase in liabilities reflects increases in consolidated obligations, paralleling the growth in assets. Consolidated obligations were $217.4 billion at September 30, 2006, and $210.2 billion at December 31, 2005. Average consolidated obligations were $217.3 billion in the third quarter of 2006 and $196.8 billion in the third quarter of 2005. Average consolidated obligations were $215.7 billion in the first nine months of 2006 and $188.4 billion in the first nine months of 2005.

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As provided by the FHLB Act or Finance Board regulation, all FHLBanks have joint and several liability for all FHLBank consolidated obligations. The joint and several liability regulation of the Finance Board authorizes the Finance Board to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank. The par amount of the outstanding consolidated obligations of all 12 FHLBanks was $958.0 billion at September 30, 2006, and $937.5 billion at December 31, 2005.

Some FHLBanks have been the subject of regulatory actions pursuant to which their boards of directors and/or managements have agreed with the Office of Supervision of the Finance Board to, among other requirements, maintain higher levels of capital. The Bank cannot provide assurance that it has been informed or will be informed of additional regulatory actions taken at these or other FHLBanks.

As of September 30, 2006, Standard & Poor’s Rating Services (Standard & Poor’s) rated the FHLBanks’ consolidated obligations AAA/A-1+, and Moody’s Investors Service rated them Aaa/P-1. As of September 30, 2006, Standard & Poor’s assigned ten FHLBanks, including the Bank, a long-term credit rating of AAA, and two FHLBanks a long-term credit rating of AA+. On September 21, 2006, Standard & Poor’s upgraded the FHLBank of New York’s long-term credit rating from AA+ to AAA and removed the FHLBank of Des Moines from CreditWatch. As of September 30, 2006, Moody’s Investors Service continued to assign all the FHLBanks a long-term credit rating of Aaa. Changes in the long-term credit ratings of individual FHLBanks do not necessarily affect the credit rating of the consolidated obligations issued on behalf of the FHLBanks. Rating agencies may from time to time change a rating because of various factors, including operating results or actions taken, business developments, or changes in their opinion regarding, among other factors, the general outlook for a particular industry or the economy.

The Bank evaluated the publicly disclosed FHLBank regulatory actions and long-term credit ratings of other FHLBanks as of September 30, 2006, and as of each period end presented, and determined that they have not materially increased the likelihood that the Bank will be required by the Finance Board to repay any principal or interest associated with consolidated obligations for which the Bank is not the primary obligor.

Financial condition is further discussed under “Segment Information.”

Segment Information

The Bank analyzes financial performance based on the adjusted net interest income of two operating segments: the advances-related business and the mortgage-related business. For purposes of segment reporting, adjusted net interest income includes the net interest expense on derivative instruments used in economic hedges that are recorded in “Net loss on derivatives and hedging activities” in other income. For a reconciliation of the Bank’s adjusted net interest income by operating segment to the Bank’s total net interest income, see Note 8 to the Financial Statements.

Advances-Related Business. The advances-related business consists of advances and other credit products provided to members, related financing and hedging instruments, liquidity and other non-MBS investments associated with the Bank’s role as a liquidity provider, and member capital.

Assets associated with this segment increased to $199.8 billion (86% of total assets) at September 30, 2006, from $191.2 billion (85% of total assets) at December 31, 2005, an increase of $8.6 billion, or 4%. The increase was primarily due to an increase in interest-bearing deposits in banks and higher demand for advances by the Bank’s members, partially offset by a decrease in Federal funds sold.

Adjusted net interest income for this segment was $173 million in the third quarter of 2006, an increase of $46 million, or 36%, compared to $127 million in the third quarter of 2005. In the first nine months of 2006, adjusted net interest income for this segment was $473 million, an increase of $134 million, or 40%, compared to $339 million in the first nine months of 2005. The increases were primarily due to an increase in average advance and capital balances and a higher yield on invested capital.

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Adjusted net interest income for this segment represented 83% and 76% of total adjusted net interest income for the third quarter of 2006 and 2005, respectively, and 81% and 74% of total adjusted net interest income for the first nine months of 2006 and 2005, respectively.

Advances – Advances outstanding increased $11.6 billion, or 7%, to $174.5 billion at September 30, 2006, from $162.9 billion at December 31, 2005. Advances outstanding included unrealized fair value losses of $179 million at September 30, 2006, and unrealized fair value losses of $339 million at December 31, 2005. The decrease in the unrealized fair value losses of hedged advances from December 31, 2005, to September 30, 2006, was primarily attributable to the reversal of prior period unrealized losses from maturing advances and net unrealized gains resulting from the impact of declining interest rates on hedged advances during the third quarter of 2006, partially offset by net unrealized losses resulting from the impact of higher short- and intermediate-term interest rates on the fair value of hedged advances during the first six months of 2006.

The components of the advances portfolio at September 30, 2006, and December 31, 2005, are presented in the following table.

Advances Portfolio by Product Type

(In millions)	September 30, 2006			December 31, 2005
Standard advances:
Adjustable – London Interbank Offered Rate (LIBOR)	$	100,887		$	83,775
Adjustable – other indices		2,672			2,479
Fixed		43,770			40,824
Daily variable rate		6,788			5,460
Subtotal		154,117			132,538
Customized advances:
Adjustable – amortizing		—			7
Adjustable – Constant Maturity Swap		1,000			1,750
Adjustable – LIBOR, with caps or floors		42			37
Adjustable – LIBOR, with caps and/or floors and partial prepayment symmetry (PPS)1		11,875			13,825
Adjustable – 3-month T-bill average		—			8,000
Adjustable – 12-month Moving Treasury Average		1,750			1,750
Fixed – amortizing		820			841
Fixed with PPS1		1,707			960
Fixed – callable at member’s option		1,175			971
Fixed – putable at Bank’s option		2,094			2,528
Fixed – putable at Bank’s option with PPS1		143			—
Subtotal		20,606			30,669
Total par value		174,723			163,207
SFAS 133 valuation adjustments		(179	)		(339	)
Net unamortized premiums		(6	)		5
Total	$	174,538		$	162,873

1 Partial prepayment symmetry (PPS) means the Bank may charge the member a prepayment fee or pay the member a prepayment credit, depending on certain circumstances such as movements in interest rates, when the advance is prepaid.

During the first nine months of 2006, fixed rate advances increased by $3.6 billion, adjustable rate advances increased by $6.6 billion, and variable rate overnight advances increased by $1.3 billion.

Advances outstanding to the Bank’s three largest members totaled $119.4 billion at September 30, 2006, a net increase of $4.2 billion from $115.2 billion at December 31, 2005. Of this increase, $27.0 billion was attributable to one large member, which continued to use advances to fund asset growth, while advances to two other large members decreased by $22.8 billion. A net increase in advances outstanding to other members of varying asset sizes and charter types also contributed to the overall growth in advances. In total, 165 institutions increased their advance borrowings during the first nine months of 2006, while 86 institutions decreased their advance borrowings.

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Average advances were $173.6 billion in the third quarter of 2006, a 13% increase from $153.0 billion in the third quarter of 2005. Average advances were $169.6 billion in the first nine months of 2006, a 14% increase from $148.3 billion in the first nine months of 2005. The increase in average advances reflected members’ use of Bank advances to finance asset growth.

Non-MBS Investments – The Bank’s non-MBS investment portfolio consists of high-quality financial instruments that are used to meet its ongoing payment obligations and to facilitate the Bank’s role as a cost-effective provider of credit and liquidity to members. The Bank’s total non-MBS investment portfolio was $24.3 billion as of September 30, 2006, a decrease of $3.1 billion, or 11%, from $27.4 billion as of December 31, 2005. The overall decrease in non-MBS investments during the first nine months of 2006 generally reflected higher advances outstanding relative to member capital as of September 30, 2006. During the first nine months of 2006, Federal funds sold decreased $8.4 billion, while interest-bearing deposits in banks increased $5.7 billion, as the Bank shifted the form of its investments to negotiable certificates of deposit to facilitate intraday cash management. In addition, resale agreements decreased $0.6 billion and housing finance agency bonds decreased $0.2 billion, while commercial paper increased $0.3 billion and discount notes issued by Fannie Mae and Freddie Mac increased $0.1 billion.

Non-MBS investments other than housing finance agency bonds generally have terms to maturity of three months or less. The rates on housing finance agency bonds generally adjust quarterly.

Borrowings – Consistent with the increase in advances, total liabilities (primarily consolidated obligations) funding the advances-related business increased $7.8 billion, or 4%, from $181.6 billion at December 31, 2005, to $189.4 billion at September 30, 2006. For further information and discussion of the Bank’s joint and several liability for FHLBank consolidated obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.”

To meet the specific needs of certain investors, fixed and adjustable rate consolidated obligation bonds may contain embedded call options or other features that result in complex coupon payment terms. When these consolidated obligation bonds are issued, typically the Bank simultaneously enters into interest rate exchange agreements with features that offset the complex features of the bonds and, in effect, convert the bonds to adjustable rate instruments tied to an index, primarily LIBOR. For example, the Bank uses fixed rate callable bonds that are typically offset with interest rate exchange agreements with call features that offset the call options embedded in the callable bonds. This combined financing structure enables the Bank to meet its funding needs at costs not generally attainable solely through the issuance of non-callable debt.

At September 30, 2006, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $259.7 billion, of which $45.5 billion were hedging advances and $214.2 billion were hedging consolidated obligations that were funding advances. At December 31, 2005, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $231.0 billion, of which $56.2 billion were hedging advances and $174.8 billion were hedging consolidated obligations that were funding advances. The hedges associated with advances and consolidated obligations were primarily used to convert the fixed rate cash flows and non-LIBOR-indexed cash flows of the advances and consolidated obligations to adjustable rate LIBOR-indexed cash flows or to manage the interest rate sensitivity and net repricing gaps of assets, liabilities, and interest rate exchange agreements.

FHLBank System consolidated obligation bonds and discount notes, along with similar debt securities issued by other government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, are generally referred to as agency debt. The agency debt market is a large sector of the debt capital markets. The costs of fixed rate debt issued by the FHLBanks and the other GSEs rise and fall with increases and decreases in general market interest rates.

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The following table provides selected market interest rates as of the dates shown.

Market Instrument	September 30, 2006		December 31, 2005		September 30, 2005		December 31, 2004
Federal Reserve target rate for overnight Federal funds	5.25	%	4.25	%	3.75	%	2.25	%
3-month Treasury bill	4.88		4.08		3.55		2.22
3-month LIBOR	5.37		4.54		4.07		2.56
2-year Treasury note	4.69		4.40		4.17		3.07
5-year Treasury note	4.58		4.35		4.19		3.61

The costs of fixed rate FHLBank System consolidated obligation bonds and discount notes issued on behalf of the Bank in the first nine months of 2006 were higher than the costs of comparable bonds and discount notes issued in the first nine months of 2005, consistent with the general rise in short- and intermediate-term market interest rates.

The relative cost of FHLBank System consolidated obligation bonds and discount notes compared to market benchmark rates (such as LIBOR and LIBOR-indexed interest rate swap rates) improved modestly in the first nine months of 2006 compared to the first nine months of 2005 because of several factors. These factors included continued strong investor demand for intermediate-term GSE debt and lower FHLBank System debt issuance volume, both of which tend to increase the differences between agency debt costs and other market rates.

The average cost of FHLBank System discount notes relative to comparable term LIBOR rates in the first nine months of 2006 improved between 0.005% and 0.01% relative to the first nine months of 2005. For the same time horizon, the average cost of intermediate-term non-callable bonds and callable bonds relative to rates of LIBOR-indexed interest rate swaps improved between 0.01% and 0.02%.

At September 30, 2006, the Bank had $127.9 billion of swapped non-callable bonds and $38.6 billion of swapped callable bonds that primarily funded advances and non-MBS investments. These swapped non-callable and callable bonds combined represented 77% of the Bank’s total consolidated obligation bonds outstanding at September 30, 2006. At December 31, 2005, the Bank had $100.0 billion of swapped non-callable bonds and $47.4 billion of swapped callable bonds that primarily funded advances and non-MBS investments. These swapped non-callable and callable bonds combined represented 81% of the Bank’s total consolidated obligation bonds outstanding at December 31, 2005. The Bank increased its swapped non-callable bonds outstanding by $27.9 billion in the first nine months of 2006, as investors exhibited stronger demand for the FHLBank System’s non-callable fixed rate and adjustable rate bonds compared to callable bonds.

These swapped callable and non-callable bonds are used in part to fund the Bank’s advances portfolio. In general, the Bank does not match-fund advances with consolidated obligations. Instead, the Bank uses interest rate exchange agreements to, in effect, convert the advances to floating rate LIBOR-indexed assets (except overnight advances and adjustable rate advances that are already indexed to LIBOR) and to, in effect, convert the consolidated obligation bonds to floating rate LIBOR-indexed liabilities.

Mortgage-Related Business. The mortgage-related business consists of MBS investments, mortgage loans acquired through the MPF Program, and the related financing and hedging instruments. Adjusted net interest income for this segment is derived primarily from the difference, or spread, between the yield on the MBS and mortgage loans and the cost of the consolidated obligations funding those assets, including the cash flows from associated interest rate exchange agreements, less the provision for credit losses on mortgage loans.

At September 30, 2006, assets associated with this segment were $31.9 billion (14% of total assets), a decrease of $0.5 billion, or 2%, from $32.4 billion at December 31, 2005 (15% of total assets). The decrease was due to lower mortgage loan balances, which decreased $0.4 billion to $4.8 billion at September 30, 2006, from $5.2

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billion at December 31, 2005, and lower investments in MBS, which decreased $0.1 billion to $27.0 billion at September 30, 2006, from $27.1 billion at December 31, 2005.

On October 6, 2006, the Bank announced that it will no longer offer new commitments to purchase mortgage loans from its members, but that it intends to continue to purchase mortgage loans under existing purchase commitments and to retain its existing portfolio of mortgage loans. Most of the growth in the MPF Program occurred in 2003, and since that time the Bank’s purchased mortgage loan balances have declined. Average mortgage loans decreased $0.6 billion to $4.9 billion in the third quarter of 2006 from $5.5 billion in the third quarter of 2005 and decreased $0.7 billion to $5.0 billion in the first nine months of 2006 from $5.7 billion in the first nine months of 2005. Mortgage loan purchase activity was low during 2005 and the first nine months of 2006 because (i) the originations of conforming fixed rate mortgage loans were lower in these periods, (ii) member business strategies led most participating members to sell their conforming fixed rate mortgage loans to other purchasers, and (iii) the Bank limited its purchases of fixed rate mortgage loans because the profit spreads available were below the Bank’s targets.

Average MBS investments increased $2.2 billion to $26.9 billion in the third quarter of 2006 compared to $24.7 billion in the third quarter of 2005 and increased $3.2 billion to $26.7 billion in the first nine months of 2006 compared to $23.5 billion in the first nine months of 2005. The increases in average MBS investments reflect the Bank’s strategy to maintain MBS investments close to the regulatory limit of three times capital; capital grew significantly on a year-over-year basis because of the growth in advances.

Adjusted net interest income for this segment was $36 million in the third quarter of 2006, a decrease of $5 million, or 12%, from $41 million in the third quarter of 2005. In the first nine months of 2006, adjusted net interest income for this segment was $113 million, a decrease of $9 million, or 7%, from $122 million in the first nine months of 2005. The decreases were primarily the result of narrower profit spreads on the mortgage portfolio, reflecting the impact on financing costs of higher interest rates and a flatter yield curve.

Adjusted net interest income for this segment represented 17% and 24% of total adjusted net interest income for the third quarter of 2006 and 2005, respectively, and 19% and 26% of total adjusted net interest income for the first nine months of 2006 and 2005, respectively.

MPF Program – Under the MPF Program, the Bank may purchase FHA-insured, VA-guaranteed, and conventional fixed rate conforming residential mortgage loans directly from eligible members. Under the program, participating members originate or purchase the mortgage loans, credit-enhance them and sell them to the Bank, and retain the servicing of the loans. The Bank manages the interest rate and prepayment risk of the loans. The Bank and the member selling the loans share in the credit risk of the loans. For more information regarding credit risk, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – MPF Program” in the Bank’s 2005 Form 10-K.

At September 30, 2006, and December 31, 2005, the Bank held conventional fixed rate conforming mortgage loans purchased under one of two MPF products, MPF Plus or Original MPF, which are described in greater detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – MPF Program” in the Bank’s 2005 Form 10-K. Mortgage loan balances at September 30, 2006, and December 31, 2005, were as follows:

(In millions)	September 30, 2006			December 31, 2005
MPF Plus	$	4,341		$	4,751
Original MPF		452			482
Subtotal		4,793			5,233
Unamortized premiums		9			18
Unamortized discounts		(27	)		(37	)
Total	$	4,775		$	5,214

The Bank periodically reviews its mortgage loan portfolio to identify probable credit losses in the portfolio and to determine the likelihood of collection of the portfolio. The Bank maintains an allowance for credit losses, net of credit enhancements, on mortgage loans acquired under the MPF Program at levels management believes to be adequate to absorb estimated probable losses inherent in the total mortgage

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portfolio. The Bank established an allowance for credit losses on mortgage loans totaling $0.7 million at both September 30, 2006, and December 31, 2005. For more information on how the Bank determines its estimated allowance for credit losses on mortgage loans, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – Allowance for Credit Losses – Mortgage Loans Acquired Under the MPF Program” in the Bank’s 2005 Form 10-K.

At September 30, 2006, the Bank had 30 loans totaling $4 million classified as nonaccrual or impaired. Twenty of these loans totaling $2 million were in foreclosure or bankruptcy. At December 31, 2005, the Bank had 38 loans totaling $4 million classified as nonaccrual or impaired. Twenty of these loans totaling $3 million were in foreclosure or bankruptcy.

The Bank manages the interest rate and prepayment risks of the mortgage loans by funding these assets with callable and non-callable debt and by limiting the size of the fixed rate mortgage loan portfolio. Currently, the size of the portfolio is limited to a level of two times Bank capital.

MBS Investments – The Bank’s MBS portfolio was $27.0 billion, or 256% of Bank capital (as defined by the Finance Board), at September 30, 2006, compared to $27.1 billion, or 279% of Bank capital, at December 31, 2005. The Bank’s MBS portfolio decreased because of the limited availability of MBS that met the Bank’s risk-adjusted return thresholds and credit enhancement requirements. All MBS purchases during the first nine months of 2006 were AAA-rated non-agency MBS. In addition, the Bank generally required 100% to 200% of additional credit enhancement above the amount required by the rating agencies for AAA-rated investments for the MBS purchased during the first nine months of 2006.

Intermediate-term and long-term fixed rate MBS investments are subject to prepayment risk, and long-term adjustable rate MBS investments are subject to interest rate cap risk. The Bank has managed these risks primarily by predominantly purchasing intermediate-term fixed rate MBS (rather than long-term fixed rate MBS), funding the fixed rate MBS with a mix of non-callable and callable debt, and using interest rate exchange agreements that have the economic effect of callable debt.

In accordance with the provisions of SFAS 133, interest rate exchange agreements associated with held-to-maturity securities are non-hedge-qualifying. This designation required the Bank to mark certain MBS to fair value through earnings to partially offset the mark-to-fair value of the associated interest rate exchange agreements, for net unrealized gains of $178,000 and net unrealized losses of $476,000 during the third quarter of 2006 and 2005, respectively, and for net unrealized losses of $8,000 and net unrealized losses of $202,000 during the first nine months of 2006 and 2005, respectively.

Borrowings – Total consolidated obligations funding the mortgage-related business decreased $0.5 billion, or 2%, from $32.4 billion at December 31, 2005, to $31.9 billion at September 30, 2006, paralleling the decrease in mortgage portfolio assets. For further information and discussion of the Bank’s joint and several liability for FHLBank consolidated obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.”

At September 30, 2006, the notional amount of interest rate exchange agreements associated with the mortgage-related business totaled $12.1 billion, of which $0.1 billion were associated with specific MBS classified as trading securities and $12.0 billion hedged or were associated with consolidated obligations funding the mortgage portfolio. At September 30, 2006, $8.3 billion in notional amounts of interest rate exchange agreements associated with consolidated obligations were economic hedges that did not qualify for either fair value or cash flow hedge accounting under SFAS 133.

At December 31, 2005, the notional amount of interest rate exchange agreements associated with the mortgage-related business totaled $13.5 billion, of which $0.1 billion were associated with specific MBS classified as trading securities and $13.4 billion hedged or were associated with consolidated obligations funding the mortgage portfolio. At December 31, 2005, $9.2 billion in notional amounts of interest rate exchange agreements associated with consolidated obligations were economic hedges that did not qualify for either fair value or cash flow hedge accounting under SFAS 133.

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Liquidity and Capital Resources

The Bank’s financial strategies are designed to enable the Bank to expand and contract its assets, liabilities, and capital in response to changes in membership composition and member credit needs. The Bank’s liquidity and capital resources are designed to support these financial strategies. The Bank’s primary source of liquidity is its access to the capital markets through consolidated obligation issuance. The Bank’s equity capital resources are governed by the Bank’s capital plan.

Liquidity

The Bank strives to maintain the liquidity necessary to meet member credit demands, repay maturing consolidated obligations, meet other obligations and commitments, and respond to significant changes in membership composition. The Bank monitors its financial position in an effort to ensure that it has ready access to sufficient liquid funds to meet normal transaction requirements, take advantage of investment opportunities, and cover unforeseen liquidity demands.

During the last several years, the Bank has experienced a significant expansion of its balance sheet. The Bank’s advances increased from $81.2 billion at December 31, 2002, to $174.5 billion at September 30, 2006. This expansion was supported by an increase in capital stock purchased by members, in accordance with the Bank’s capital stock requirements, from $5.6 billion at December 31, 2002, to $10.4 billion at September 30, 2006, as the balances for both advances and mortgage loans (purchased from members and held by the Bank) increased. The increases in advances, mortgage loans, MBS, and other investments were also supported by an increase in consolidated obligations of $109.2 billion from $108.2 billion at December 31, 2002, to $217.4 billion at September 30, 2006.

The Bank’s ability to expand in response to member credit needs is based on the capital stock requirements for advances and mortgage loans. A member is required to increase its capital stock investment in the Bank as its balances of outstanding advances and mortgage loans sold to the Bank increase. The activity-based capital stock requirement is currently 4.7% for advances and 5.0% for mortgage loans sold to the Bank, while the Bank’s regulatory minimum capital to assets leverage requirement is currently 4.0%. The additional capital stock from higher balances of advances and mortgage loans expands the Bank’s capacity to participate in the issuance of consolidated obligations, which are used not only to support the increase in these balances but also to increase the Bank’s purchases of MBS and other investments.

The Bank can also contract its balance sheet and liquidity requirements in response to members’ reduced credit needs. As advances and mortgage loan balances are reduced, members will have capital stock in excess of the amount required by the capital plan. The Bank’s capital stock policies allow the Bank to repurchase a member’s excess capital stock if the member reduces its advances or its balance of mortgage loans sold to the Bank decreases. The Bank may allow its consolidated obligations to mature without replacement, or repurchase and retire outstanding consolidated obligations, allowing its balance sheet to shrink.

The Bank is not able to predict future trends in member credit needs since they are driven by complex interactions among a number of factors, including members’ mortgage loan originations, other loan portfolio growth, deposit growth, and the availability and pricing of other wholesale borrowing alternatives. The Bank regularly monitors current trends and anticipates future debt issuance needs to be prepared to fund its members’ credit needs and its investment opportunities.

For information on short-term liquidity, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk.”

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Capital

Total capital as of September 30, 2006, was $10.4 billion, an 8% increase from $9.6 billion as of December 31, 2005. This increase was consistent with the rise in advances during the first nine months of 2006, and primarily reflected additional capital stock purchases by existing members to support additional borrowings during the period, and, to a lesser degree, capital stock purchases by new members. The increase was net of repurchases of capital stock, which primarily resulted from the Bank’s surplus capital stock repurchase policy, described below.

The Bank may repurchase some or all of a member’s excess capital stock and any excess mandatorily redeemable capital stock, at the Bank’s discretion. At its discretion, the Bank may also repurchase some or all of a member’s excess capital stock at the member’s request. Excess capital stock is defined as any stock holdings in excess of a member’s minimum capital stock requirement, as established by the Bank’s capital plan.

The Bank’s surplus capital stock repurchase policy provides for the Bank to repurchase excess stock that constitutes surplus stock, at the Bank’s discretion, if a member has surplus capital stock as of the last business day of the quarter. A member’s surplus capital stock is defined as any stock holdings in excess of 115% of the member’s minimum capital stock requirement, generally excluding stock dividends earned and credited for the current year.

On a quarterly basis, the Bank determines whether it will repurchase excess capital stock, including surplus capital stock. The Bank generally repurchases capital stock approximately one month after the end of each quarter. On the scheduled repurchase date, the Bank recalculates the amount of stock to be repurchased to ensure that each member will continue to meet its minimum stock requirement after the stock repurchase.

The Bank repurchased surplus capital stock totaling $423 million in the third quarter of 2006 and $218 million in the third quarter of 2005. The Bank also repurchased excess capital stock that was not surplus capital stock totaling $608 million in the third quarter of 2006 and $4 million in the third quarter of 2005.

The Bank repurchased surplus capital stock totaling $1,036 million in the first nine months of 2006 and $420 million in the first nine months of 2005. The Bank also repurchased excess capital stock that was not surplus capital stock totaling $1,195 million in the first nine months of 2006 and $58 million in the first nine months of 2005.

Excess capital stock totaled $1.2 billion as of September 30, 2006, which included surplus capital stock of $287 million. On October 31, 2006, the Bank repurchased $236 million of surplus capital stock. The Bank also repurchased $424 million of excess capital stock that was not surplus capital stock, including $418 million in excess capital stock that was the subject of repurchase requests submitted during the third quarter of 2006 by two members, and $6 million in mandatorily redeemable excess stock repurchased from former members of the Bank. Excess capital stock totaled $629 million after the October 31, 2006, capital stock repurchase.

Provisions of the Bank’s capital plan are more fully discussed in Note 13 to the Financial Statements in the Bank’s 2005 Form 10-K.

Capital Requirements

The FHLB Act and Finance Board regulations specify that each FHLBank must meet certain minimum regulatory capital standards. The Bank must maintain (i) total capital in an amount equal to at least 4.0% of its total assets, (ii) leverage capital in an amount equal to at least 5.0% of its total assets, and (iii) permanent capital in an amount at least equal to its regulatory risk-based capital requirement. Permanent capital is defined as total capital stock outstanding, including mandatorily redeemable capital stock, plus retained earnings. Finance Board staff has indicated that mandatorily redeemable capital stock is considered capital for regulatory purposes. The following table shows the Bank’s compliance with the Finance Board’s capital requirements at September 30, 2006, and December 31, 2005.

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Regulatory Capital Requirements

	September 30, 2006						December 31, 2005
x	Required			Actual			Required			Actual
Risk-based capital	$	1,045		$	10,533		$	862		$	9,698
Total capital-to-assets ratio		4.00	%		4.55	%		4.00	%		4.34	%
Total regulatory capital	$	9,269		$	10,533		$	8,944		$	9,698
Leverage ratio		5.00	%		6.82	%		5.00	%		6.51	%
Leverage capital	$	11,586		$	15,800		$	11,180		$	14,547

The Bank’s capital requirements are more fully discussed in Note 13 to the Financial Statements in the Bank’s 2005 Form 10-K.

Risk Management

The Bank has an integrated corporate governance and internal control framework designed to support effective management of the Bank’s business activities and the risks inherent in these activities. As part of this framework, the Bank’s Board of Directors has adopted a Risk Management Policy and a Member Products Policy, which are reviewed regularly and reapproved at least annually. The Risk Management Policy establishes risk guidelines, limits (if applicable), and standards in accordance with Finance Board regulations, the risk profile established by the Board of Directors, and other applicable guidelines in connection with the Bank’s capital plan and overall risk management. For more detailed information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management” in the Bank’s 2005 Form 10-K.

Concentration Risk

Advances. The following tables present the concentration in advances to members whose advances outstanding represented 10% or more of the Bank’s total par amount of advances outstanding as of September 30, 2006, and December 31, 2005. They also present the interest income from these advances before the impact of interest rate exchange agreements associated with these advances for the three and nine months ended September 30, 2006 and 2005.

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Concentration of Advances

(Dollars in millions)	September 30, 2006				December 31, 2005
Name of Borrower	Advances Outstanding1		Percentage of Total Advances Outstanding		Advances Outstanding1		Percentage of Total Advances Outstanding
Citibank (West), FSB	$	57,624	33	%	$	30,627	19	%