UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2006

OR

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

For the transition period from              to             

Commission File No. 000-51401

FEDERAL HOME LOAN BANK OF CHICAGO

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

There were 30,033,783 shares of registrant’s capital stock outstanding as of July 31, 2006.

Federal Home Loan Bank of Chicago

TABLE OF CONTENTS

PART I
Item 1	Financial Statements
	Statements of Condition (unaudited) at June 30, 2006 and December 31, 2005	3
	Statements of Income (unaudited) for the three and six months ended June 30, 2006 and 2005	4
	Statements of Capital (unaudited) for the six months ended June 30, 2006 and 2005	5
	Statements of Cash Flows (unaudited) for the six months ended June 30, 2006 and 2005	6
	Notes to Financial Statements (unaudited)	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4	Controls and Procedures	54
PART II
Item 1	Legal Proceedings	55
Item 1A	Risk Factors	55
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3	Defaults Upon Senior Securities	57
Item 4	Submission of Matters to a Vote of Security Holders	57
Item 5	Other Information	57
Item 6	Exhibits	57
	Signatures	S-1

2

Federal Home Loan Bank of Chicago

PART I

Item 1. Financial Statements

Statements of Condition (unaudited)

(Dollars in millions, except par value)	June 30, 2006			December 31, 2005
Assets
Cash and due from banks	$	26		$	33
Federal funds sold and securities purchased under agreements to resell		9,039			6,945
Investment securities -
Trading ($372 and $431 pledged in 2006 and 2005)		778			1,087
Available-for-sale ($836 and $777 pledged in 2006 and 2005)		2,536			1,790
Held-to-maturity ($149 and $149 pledged in 2006 and 2005)		10,799			7,893
Advances		24,718			24,921
MPF Loans held in portfolio, net of allowance for loan losses of $1 in 2006 and 2005		39,755			42,005
Accrued interest receivable		361			336
Derivative assets		241			232
Software and equipment, net		48			49
Other assets		83			55
Total Assets	$	88,384		$	85,346
Liabilities and Capital
Liabilities
Deposits -
Interest-bearing ($12 and $12 from other FHLBs in 2006 and 2005)	$	1,116		$	951
Non-interest bearing		117			106
Total deposits		1,233			1,057
Securities sold under agreements to repurchase		1,200			1,200
Consolidated obligations, net -
Discount notes		13,922			16,778
Bonds		66,563			61,118
Total consolidated obligations, net		80,485			77,896
Accrued interest payable		653			551
Mandatorily redeemable capital stock		42			222
Derivative liabilities		162			136
Affordable Housing Program (AHP) assessment payable		73			78
Resolution Funding Corporation (REFCORP) assessment payable		14			12
Other liabilities		109			56
Subordinated notes		1,000			—
Total Liabilities		84,971			81,208
Commitments and contingencies (Note 13)
Capital
Capital stock - Putable ($100 par value) issued and outstanding shares -
30 million and 38 million shares in 2006 and 2005		2,960			3,759
Retained earnings		579			525
Accumulated other comprehensive income (loss)		(126	)		(146	)
Total Capital		3,413			4,138
Total Liabilities and Capital	$	88,384		$	85,346

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

3

Federal Home Loan Bank of Chicago

Statements of Income (unaudited)

	For the three months ended June 30,						For the six months ended June 30,
(In millions)	2006			2005			2006			2005
Interest income	$	1,071		$	877		$	2,081		$	1,720
Interest expense		956			750			1,845			1,450
Net interest income before provision for credit losses on loans		115			127			236			270
Provision for credit losses on loans		—			—			—			—
Net interest income after provision for credit losses on loans		115			127			236			270
Non-interest income (loss) -
Trading securities		(19	)		22			(46	)		5
Sale of available-for-sale securities		1			—			(3	)		(2	)
Derivatives and hedging activities		5			(28	)		16			(24	)
Early extinguishment of debt transferred to other FHLBs		—			1			4			4
Other, net		3			2			3			3
Total non-interest income (loss)		(10	)		(3	)		(26	)		(14	)
Non-interest expense -
Compensation		15			14			30			28
Professional service fees		2			5			5			7
Amortization and depreciation of software and equipment		5			5			9			9
MPF Program expense		2			2			4			4
Finance Board and Office of Finance expenses		2			1			3			2
Other expense		5			2			9			10
Total non-interest expense		31			29			60			60
Income before assessments		74			95			150			196
Assessments -
Affordable Housing Program		6			8			12			16
Resolution Funding Corporation		14			17			28			36
Total assessments		20			25			40			52
Net Income	$	54		$	70		$	110		$	144

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

4

Federal Home Loan Bank of Chicago

Statements of Capital (unaudited)

	Capital Stock -Putable					Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Capital
(In millions)	Shares		Par Value
Balance, December 31, 2004	43		$	4,292		$	489		$	(155	)	$	4,626
Comprehensive income -
Net Income							144						144
Other comprehensive income (loss) -
Net unrealized gain (loss) on available-for-sale securities										—			—
Net unrealized gain (loss) on hedging activities										(37	)		(37	)
Total other comprehensive income (loss)							—			(37	)		(37	)
Total comprehensive income							144			(37	)		107
Proceeds from issuance of capital stock	4			356									356
Reclassification of capital stock to mandatorily redeemable	(7	)		(688	)								(688	)
Stock dividends on capital stock (5.50%)1	1			118			(118	)					—
Balance, June 30, 2005	41		$	4,078		$	515		$	(192	)	$	4,401
Balance, December 31, 2005	38		$	3,759		$	525		$	(146	)	$	4,138
Comprehensive income -
Net Income							110						110
Other comprehensive income (loss) -
Net unrealized gain (loss) on available-for-sale securities										(16	)		(16	)
Net unrealized gain (loss) on hedging activities										36			36
Total other comprehensive income (loss)							—			20			20
Total comprehensive income							110			20			130
Proceeds from issuance of capital stock	—			21									21
Reclassification of capital stock to mandatorily redeemable	(8	)		(820	)								(820	)
Cash dividends on capital stock (3.05%)1							(56	)					(56	)
Balance, June 30, 2006	30		$	2,960		$	579		$	(126	)	$	3,413

¹ Dividend rate is annualized.

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

5

Federal Home Loan Bank of Chicago

Statements of Cash Flows (unaudited)

	For the six months ended June 30,
(In millions)	2006			2005
Operating Activities -
Net Income	$	110		$	144
Adjustments to reconcile net income to net cash provided by (used in) operating activities -
Depreciation and amortization		63			111
Change in net fair value adjustment on trading, derivatives and hedging activities		115			(51	)
Early extinguishment of debt transferred to other FHLBs		(5	)		(4	)
Other adjustments		2			2
Net change in -
Trading securities		257			(416	)
Accrued interest receivable		(28	)		—
Other assets		(21	)		(50	)
Accrued interest payable		103			21
Other liabilities		(13	)		(14	)
Total adjustments		473			(401	)
Net cash provided by (used in) operating activities		583			(257	)
Investing activities -
Net change in -
Federal funds sold and securities purchased under agreements to resell		(2,094	)		(1,288	)
Advances		107			(1,024	)
MPF Loans (incl. $255 and $1,103 for purchases from other FHLBs)		2,086			2,137
Held-to-maturity securities -
Purchases		(3,655	)		(4	)
Proceeds from maturities		811			699
Available-for-sale securities -
Purchases		(1,795	)		(273	)
Proceeds		1,023			428
Proceeds from sale of foreclosed assets		26			33
Capital expenditures for software and equipment		(7	)		(9	)
Net cash provided by (used in) investing activities		(3,498	)		699
Financing Activities -
Net change in deposits (incl. $9 and $7 from other FHLBs)		175			52
Net proceeds from issuance of consolidated obligations -
Discount notes		336,287			187,587
Bonds		13,218			10,248
Transfer of bonds from other FHLBs		65			—
Payments for maturing and retiring consolidated obligations -
Discount notes		(339,137	)		(187,223	)
Bonds		(7,174	)		(10,157	)
Transfer of bonds to other FHLBs		(485	)		(618	)
Net proceeds from the issuance of subordinated notes		994			—
Proceeds from issuance of capital stock		21			356
Redemptions of mandatorily redeemable capital stock		(1,000	)		(685	)
Cash dividends paid		(56	)		—
Net cash provided by (used in) financing activities		2,908			(440	)
Net increase (decrease) in cash and due from banks		(7	)		2
Cash and due from banks at beginning of year		33			21
Cash and due from banks at end of period	$	26		$	23
Supplemental Disclosures -
Interest paid	$	1,753		$	1,429
AHP assessments paid		17			10
REFCORP assessments paid		26			62
Capital stock reclassed to mandatorily redeemable capital stock		820			688

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

6

Federal Home Loan Bank of Chicago

Notes to Financial Statements—(Unaudited)

Note 1 – Basis of Presentation

The Federal Home Loan Bank of Chicago¹, a federally chartered corporation and a member-owned cooperative, is one of 12 Federal Home Loan Banks (the “FHLBs”) which, with the Federal Housing Finance Board (the “Finance Board”) and the Office of Finance, comprise the Federal Home Loan Bank System (the “System”). The 12 FHLBs are government-sponsored enterprises (“GSE”) of the United States of America and are organized under the Federal Home Loan Bank Act of 1932, as amended (the “FHLB Act”). Each FHLB has members in a specifically defined geographic district. Our defined geographic district consists of the states of Illinois and Wisconsin. We provide credit to our members principally in the form of advances and to members approved as Participating Financial Institutions (“PFIs”) through the Mortgage Partnership Finance^® (“MPF”^®) Program², under which we, in partnership with our PFIs, provide funding for home mortgage loans. In addition, we also invest in other Acquired Member Assets (“AMA”) such as MPF Shared Funding^® securities. AMA are assets acquired from or through FHLB members or eligible housing associates by means of either a purchase or a funding transaction, subject to Finance Board regulations.

Our accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America (“GAAP”). Preparation of the unaudited financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses. Actual results could differ from those estimates. In addition, certain amounts in the prior period have been reclassified to conform to the current presentation. In the opinion of management, all normal recurring adjustments have been included for a fair statement of this interim financial information. These unaudited financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2005 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).

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

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

Note 2 – Business Developments

On April 18, 2006 the Finance Board approved our Retained Earnings and Dividend Policy and our Revised Business Plan Strategies. For a further discussion of our Retained Earnings and Dividend Policy, see page 45 of this Form 10-Q.

On April 18, 2006, we entered into Amendment No. 2 to our Written Agreement with the Finance Board, which reduced our minimum regulatory capital stock requirement by $204 million from $3.978 billion to $3.774 billion. In addition, the Finance Board also approved our application to issue subordinated notes.

7

Federal Home Loan Bank of Chicago

Notes to Financial Statements—(Unaudited)

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

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

On June 6, 2006, we entered into Amendment No. 3 to our Written Agreement, which became effective on June 13, 2006 upon receipt of proceeds from the subordinated notes. Amendment No. 3 replaced our aggregate minimum regulatory capital stock requirement of $3.774 billion, with a requirement to maintain an aggregate amount of outstanding regulatory capital stock plus a Designated Amount of subordinated notes of at least $3.500 billion. Amendment No. 3 also replaced the prior minimum regulatory capital ratio requirement, with a requirement to maintain a ratio of regulatory capital stock, plus retained earnings, plus a Designated Amount of subordinated notes to assets of at least 4.5%.

On June 13, 2006 we issued $1 billion of 10-year subordinated notes. The subordinated notes are unsecured obligations and rank junior in priority of payment to all of our existing consolidated obligations and senior liabilities. For a further discussion concerning our subordinated notes, see “Note 8 – Subordinated Notes” on page 14 of this Form 10-Q. On June 20, 2006 we used a portion of the net proceeds from the sale of subordinated notes to redeem $795 million of voluntary capital stock from members. We also redeemed $205 million of capital stock from institutions whose membership had terminated between April 18, 2006 and June 30, 2006, resulting in total capital stock redemptions of $1 billion during the second quarter of 2006.

On July 18, 2006, the Board of Directors declared and approved a 3.10% (annualized rate) cash dividend based on second quarter 2006 results to be paid to members on August 15, 2006.

Accounting and Reporting Developments

SFAS 155 – On February 16, 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140” (“SFAS 155”), which resolves issues addressed in Derivatives Implementation Group (“DIG”) Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets” (“DIG Issue D1”). SFAS 155 amends FASB Statement No.133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), to simplify the accounting for certain derivatives embedded in other financial instruments (a hybrid financial instrument) by permitting fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise required bifurcation, provided that the entire hybrid financial instrument is accounted for on a fair value basis. SFAS 155 also establishes the requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, which replaces the interim guidance in DIG Issue D1. SFAS 155 amends SFAS 140 to allow a qualifying special-purpose entity to hold a derivative financial instrument that pertains to beneficial interests other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006 (January 1, 2007 for us), with earlier adoption allowed under certain circumstances. Prior period restatement is not permitted. We have decided to adopt SFAS 155 effective January 1, 2007. At the time of adoption, the impact is not expected to be material to our results of operations or financial condition.

8

Federal Home Loan Bank of Chicago

Notes to Financial Statements—(Unaudited)

Note 3 – Interest Income and Interest Expense

Details of interest income and interest expense for the three and six months ended June 30, 2006 and 2005 were as follows:

	For the three months ended June 30,						For the six months ended June 30,
(In millions)	2006			2005			2006			2005
Interest Income -
Federal funds sold and securities purchased under agreements to resell	$	107		$	52		$	194		$	92
Investment securities -
Trading		14			14			30			24
Available-for-sale		24			10			47			20
Held-to-maturity		124			62			224			123
Advances		294			190			562			349
MPF Loans held in portfolio		518			561			1,045			1,136
Credit enhancement fees paid		(10	)		(12	)		(21	)		(24	)
MPF Loans held in portfolio, net		508			549			1,024			1,112
Total interest income		1,071			877			2,081			1,720
Interest Expense -
Deposits		13			7			24			14
Securities sold under agreements to repurchase		22			13			42			24
Consolidated obligation-
Discount notes		190			133			375			237
Bonds		727			596			1,398			1,174
Total consolidated obligations		917			729			1,773			1,411
Mandatorily redeemable capital stock		1			1			3			1
Subordinated notes		3			—			3			—
Total interest expense		956			750			1,845			1,450
Net Interest Income before provision for credit losses on loans		115			127			236			270
Provision for credit losses on loans		—			—			—			—
Net interest income after provision for credit losses on loans	$	115		$	127		$	236		$	270

9

Federal Home Loan Bank of Chicago

Notes to Financial Statements—(Unaudited)

Note 4 – Investment Securities

We did not recognize any other-than-temporary impairment on our investment securities classified as available-for-sale or held-to-maturity during the second quarter of 2006. Securities issued by government-sponsored entities are not guaranteed by the U.S. federal government. For accounting policies concerning our investment securities refer to Note 6 of our December 31, 2005 Annual Financial Statements and Notes.

Trading Securities – Trading securities as of June 30, 2006 and December 31, 2005 were as follows:

(In millions)	June 30, 2006 Fair Value		December 31, 2005 Fair Value
Government-sponsored enterprises	$	685	$	986
Consolidated obligations of other FHLBs		25		25
Mortgage-backed securities:
Government-sponsored enterprises		36		40
Government-guaranteed		7		8
Privately issued MBS		25		28
Total trading securities	$	778	$	1,087

The net gain (loss) on trading securities for the three and six months ended June 30, 2006 and 2005 were as follows:

	For the three months ended June 30,					For the six months ended June 30,
(In millions)	2006			2005		2006			2005
Net gain (loss) recognized on trading securities sold	$	(3	)	$	—	$	(3	)	$	—
Net gain (loss) on trading securities still held at period end		(16	)		22		(43	)		5
Net gain (loss) on trading securities recognized	$	(19	)	$	22	$	(46	)	$	5

Available-for-Sale Securities - The amortized cost and estimated fair value of available-for-sale securities as of June 30, 2006 and December 31, 2005 were as follows:

	June 30, 2006									December 31, 2005
(In millions)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Government-sponsored enterprises	$	1,200	$	—	$	(20	)	$	1,180	$	980	$	—	$	(5	)	$	975
Mortgage-backed securities:
Government-sponsored enterprises		75		—		(5	)		70		81		—		(4	)		77
Privately issued MBS		1,285		1		—			1,286		737		1		—			738
Total available-for-sale securities	$	2,560	$	1	$	(25	)	$	2,536	$	1,798	$	1	$	(9	)	$	1,790

10

Federal Home Loan Bank of Chicago

Notes to Financial Statements—(Unaudited)

Realized gains and losses from the sale of available-for-sale securities for the three and six months ended June 30, 2006 and 2005 were as follows:

(In millions)	For the three months ended June 30,				For the six months ended June 30,
	2006		2005		2006			2005
Realized gain	$	1	$	—	$	1		$	1
Realized loss		—		—		(4	)		(3	)
Net realized gain (loss) from sale of available-for-sale securities	$	1	$	—	$	(3	)	$	(2	)

Held-to-Maturity Securities – Held-to-maturity securities as of June 30, 2006 and December 31, 2005 were as follows:

(In millions)	June 30, 2006									December 31, 2005
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Commercial paper	$	1,245	$	—	$	(1	)	$	1,244	$	1,493	$	5	$	—		$	1,498
Government-sponsored enterprises		149		—		(1	)		148		149		—		(1	)		148
State or local housing agency obligations		74		—		—			74		82		—		—			82
SBA/SBIC		598		—		(1	)		597		666		—		—			666
Mortgage-backed securities:
Government-sponsored enterprises		5,606		2		(158	)		5,450		4,381		6		(72	)		4,315
Government-guaranteed		47		—		—			47		56		—		—			56
MPF Shared Funding ®		395		—		(28	)		367		417		—		(20	)		397
Privately issued MBS		2,685		5		(19	)		2,671		649		9		(1	)		657
Total held-to-maturity securities	$	10,799	$	7	$	(208	)	$	10,598	$	7,893	$	20	$	(94	)	$	7,819

Note 5 – Advances

For accounting policies concerning advances refer to Note 7 of our December 31, 2005 Annual Financial Statements and Notes. We had advances outstanding to members at interest rates ranging from 1.83% to 8.47% at both June 30, 2006 and December 31, 2005 as summarized below.

	June 30, 2006					December 31, 2005
(In millions)	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
Contractual Year of Maturity -
2006	$	4,713		4.42	%	$	9,233		3.55	%
2007		5,844		4.29	%		5,043		3.93	%
2008		4,136		4.61	%		3,395		4.36	%
2009		1,904		4.50	%		1,389		4.11	%
2010		2,685		4.10	%		2,681		3.85	%
2011		3,016		4.93	%		1,825		4.51	%
Thereafter		2,547		4.27	%		1,385		4.12	%
Total par value		24,845		4.44	%		24,951		3.90	%
SFAS 133 hedging adjustments		(127	)				(30	)
Total advances	$	24,718				$	24,921

11

Federal Home Loan Bank of Chicago

Notes to Financial Statements—(Unaudited)

Our advances are concentrated with commercial bank and thrift members. At June 30, 2006 two members held advances representing more than 10% of total outstanding advances at par. LaSalle Bank N.A. held $3.1 billion at both June 30, 2006 and December 31, 2005, which represented 12.6% and 12.4%, respectively, of total outstanding advances at those dates. Mid America Bank, FSB, held advances of $2.6 billion or 10.4% of total advances at June 30, 2006, but held less than 10% of total advances at December 31, 2005. We held sufficient collateral to cover the par value of these advances and do not expect to incur any credit losses.

Note 6 - MPF Loans Held in Portfolio

For accounting policies concerning MPF Loans held in portfolio refer to Note 8 of our December 31, 2005 Annual Financial Statements and Notes.

The following table presents MPF Loan information by contractual maturity at June 30, 2006 and December 31, 2005:

(In millions)	June 30, 2006			December 31, 2005
MPF Loans:
Fixed medium term1 single-family mortgages	$	13,896		$	14,862
Fixed long term2, 3 single-family mortgages		25,818			26,938
Total par value of MPF Loans		39,714			41,800
Agent fees, premium (discount)		233			261
Loan commitment basis adjustment		(16	)		(14	)
SFAS 133 hedging adjustments		(175	)		(41	)
Allowance for loan loss		(1	)		(1	)
Total MPF Loans held in portfolio, net	$	39,755		$	42,005

¹ Medium term is defined as an MPF Loan that has a contractual maturity of 15 years or less.

² Long term is defined as an MPF Loan that has a contractual maturity of greater than 15 years.

³ Includes Native American Mortgage Purchase Program HUD Section 184 loans of $9 million and $7 million at June 30, 2006 and December 31, 2005, respectively, classified as fixed long term single-family mortgages.

The par value of outstanding MPF Loans at June 30, 2006 and December 31, 2005, was comprised of Federal Housing Administration-insured and Veteran’s Administration-guaranteed government loans totaling $5.7 billion and $6.2 billion and conventional loans totaling $34.0 billion and $35.6 billion, respectively.

At June 30, 2006 and December 31, 2005, we had $8 million and $15 million of MPF Loans on non-accrual. At June 30, 2006 and December 31, 2005, we had $18 million and $14 million in MPF Loans reclassified as other assets that have been foreclosed but not yet liquidated.

12

Federal Home Loan Bank of Chicago

Notes to Financial Statements—(Unaudited)

The following tables present impaired MPF Loan information:

(In millions)	June 30, 2006		December 31, 2005
Impaired MPF Loans with an allowance	$	—	$	—
Impaired MPF Loans without an allowance 1		5		7
Total Impaired Loans	$	5	$	7
Allowance for Impaired MPF Loans under SFAS 114	$	—	$	—

¹ When the collateral value less estimated selling costs exceeds the recorded investment in the MPF Loan, then the MPF Loan does not require an allowance under SFAS 114 (e.g., if the MPF Loan has been charged down to the recorded investment in the MPF Loan).

(In millions)	For the three months ended June 30,				For the six months ended June 30,
	2006		2005		2006		2005
Average balance of impaired MPF Loans during the period	$	5	$	3	$	6	$	4
Interest income recognized on impaired MPF Loans	$	—	$	—	$	—	$	—
during the period

Note 7 - Consolidated Obligations

For accounting policies and additional information concerning consolidated obligations refer to Note 13 of our December 31, 2005 Annual Financial Statements and Notes.

Interest Rate Payment Terms - Interest rate payment terms for consolidated obligation bonds for which we were the primary obligor at June 30, 2006 and December 31, 2005 were as follows:

(In millions)	June 30, 2006			December 31, 2005
Par amount of consolidated obligation bonds:
Fixed Rate - Callable	$	28,855		$	25,887
Fixed Rate - Non-Callable		37,008			34,342
Variable rate		517			517
Zero coupon		2,150			2,050
Step-up		160			160
Inverse floating rate		50			50
Total par value	$	68,740		$	63,006
Bond discounts, net		(1,542	)		(1,451	)
SFAS 133 hedging adjustments		(635	)		(437	)
Total consolidated obligation bonds	$	66,563		$	61,118

13

Federal Home Loan Bank of Chicago

Notes to Financial Statements—(Unaudited)

Redemption Terms – The following table summarizes our participation in consolidated obligation bonds at June 30, 2006 and December 31, 2005 by year of contractual maturity.

	June 30, 2006					December 31, 2005
(In millions)	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
Contractual Year of Maturity :
2006	$	5,087		3.24	%	$	11,697		2.79	%
2007		10,572		3.74	%		10,452		3.72	%
2008		10,744		3.97	%		9,279		3.76	%
2009		7,844		4.60	%		5,537		4.23	%
2010		8,554		4.71	%		7,240		4.61	%
2011		4,808		5.11	%		2,042		4.92	%
Thereafter		21,131		4.72	%		16,759		4.50	%
Total par value		68,740		4.36	%		63,006		3.95	%
Bond discounts, net		(1,542	)				(1,451	)
SFAS 133 hedging adjustments		(635	)				(437	)
Total consolidated obligation bonds	$	66,563				$	61,118

The following table summarizes our short-term borrowings consisting of consolidated obligation discount notes for which we were the primary obligor at June 30, 2006 and December 31, 2005:

(In millions)	June 30, 2006			December 31, 2005
Par value outstanding	$	14,017		$	16,865
Book value outstanding	$	13,922		$	16,778
Weighted average rate at period-end		4.99	%		4.00	%

Note 8 – Subordinated Notes

On June 13, 2006 we issued $1 billion of subordinated notes which mature on June 13, 2016. Moody’s and Standard and Poor’s rated the subordinated notes Aa2 and AA-, respectively. The subordinated notes are not obligations of the United States and are not guaranteed by the United States. The subordinated notes are not obligations of and are not guaranteed by the FHLBs other than the Bank. The subordinated notes are unsecured obligations and rank junior in priority of payment to our “senior liabilities.” Senior liabilities include all of our existing and future liabilities such as deposits, consolidated obligations for which we are the primary obligor, and consolidated obligations of the other FHLBs for which we are jointly and severally liable.

Senior liabilities do not include our existing and future liabilities related to payments of “junior equity claims” and payments to, or redemption of shares from, any holder of our capital stock that is barred or required to be deferred for any reason, such as noncompliance with any minimum regulatory capital requirement applicable to us. Also, senior liabilities do not include any liability that by its terms expressly ranks equal with or junior to the subordinated notes. Pursuant to an order of the Finance Board, we will not make any payment to, or redeem shares from any holder of capital stock which we are obligated to make, on or after any applicable interest payment date or the maturity date of the subordinated notes (all such payments to, and redemptions of shares from, holders of our capital stock being referred to as “junior equity claims”) unless we have paid in full all interest and principal due in respect of the subordinated notes on a particular date.

The notes may not be redeemed, in whole or in part, prior to maturity, and do not contain any provisions permitting holders to accelerate the maturity thereof on the occurrence of any default or other event. The subordinated notes were issued at par, and accrue interest from and including June 13, 2006 at a rate of 5.625% per annum. Interest will be paid semi-annually in arrears on each June 13^th and December 13^th, commencing December 13, 2006. We will defer interest payments if five business days prior to any interest payment date we do not satisfy any minimum regulatory leverage ratios then applicable to us.

14

Federal Home Loan Bank of Chicago

Notes to Financial Statements—(Unaudited)

We may not defer interest on the subordinated notes for more than five consecutive years and in no event beyond their maturity date. If we defer interest payments on the subordinated notes, interest will continue to accrue and will compound at a rate of 5.625% per annum. Any interest deferral period ends when we satisfy all minimum regulatory leverage ratios to which we are subject, after taking into account all deferred interest and interest on such deferred interest. During the periods when interest payments are deferred, we may not declare or pay dividends on, or redeem, repurchase or acquire, our capital stock (including mandatorily redeemable capital stock). As of June 30, 2006, we have satisfied the minimum regulatory leverage ratios applicable to us, and we have not deferred any interest payments.

Note 9 – Capital Stock and Mandatorily Redeemable Capital Stock

For accounting policies concerning capital stock and mandatorily redeemable capital stock, refer to Note 15 of our December 31, 2005 Annual Financial Statements and Notes. The following table summarizes our regulatory capital requirements as a percentage of our total assets. Regulatory capital is defined as the sum of the paid-in value of capital stock and mandatorily redeemable capital stock (together defined as “regulatory capital stock”) plus retained earnings. We are permitted to include the Designated Amount of subordinated notes in calculating compliance with our regulatory capital ratio. Under Amendment No. 3 to our Written Agreement, which became effective June 13, 2006, we are also required to maintain an aggregate amount of regulatory capital stock plus the Designated Amount of subordinated notes of at least $3.500 billion.

(In millions)	Standard Regulatory Capital Requirement 1		Regulatory Capital Requirements per Written Agreement
			Requirement				Actual
			Ratio 2		Amount		Ratio		Amount
June 30, 2006	$	3,535	4.5	%	$	3,977	5.2	%	$	4,581
December 31, 2005		3,414	4.5	%		3,841	5.3	%		4,506

¹ The regulatory capital ratio required by Finance Board regulations for a FHLB that has not implemented a capital plan under the GLB Act is 4.0% provided that its non-mortgage assets (defined as: total assets less advances, acquired member assets, standby letters of credit, intermediary derivative contracts, certain mortgage-backed securities, and other investments specified by Finance Board regulation) are not greater than 11% of total assets on an average monthly basis. If non-mortgage assets are greater than 11% of the FHLB’s total assets, the Finance Board regulations require a regulatory capital ratio of 4.76%. We did not have non-mortgage assets greater than 11% for any of the months in the periods presented.

² Amendment No. 1 to our Written Agreement dated October 18, 2005, reduced the regulatory capital ratio from 5.1% to 4.5%. Amendments No. 2 and No. 3 did not change this requirement, however, Amendment No. 3 allows us to include the Designated Amount of subordinated notes in calculating compliance with our regulatory capital ratio.

15

Federal Home Loan Bank of Chicago

Notes to Financial Statements—(Unaudited)

The following table summarizes mandatorily redeemable capital stock activity:

(Dollars in millions)	For the three months ended										For the six months ended
	June 30, 2006					June 30, 2005					June 30, 2006					June 30, 2005
	Amount			Number of Members		Amount			Number of Members		Amount			Number of Members		Amount			Number of Members
Mandatorily redeemable capital stock - beginning balance	$	260		15		$	10		5		$	222		12		$	11		5
Membership withdrawal requests 1		2		3			73		4			40		6			123		10
Voluntary portion of capital stock redemption requests 2		780		n/a			238		n/a			780		n/a			565		n/a
Membership withdrawal distributions 1		(205	)	(6	)		(69	)	(1	)		(205	)	(6	)		(120	)	(6	)
Voluntary portion of capital stock distributions 2		(795	)	n/a			(238	)	n/a			(795	)	n/a			(565	)	n/a
Mandatorily redeemable capital stock - ending balance	$	42		12		$	14		8		$	42		12		$	14		9
Earnings impact from reclassification of dividends to interest expense	$	1				$	—				$	3				$	—

¹ Includes voluntary withdrawal of membership and terminations of membership resulting from out-of-districts mergers.

² We received voluntary capital redemption requests totaling $1.951 billion dollars during the second quarter of 2006. Of that amount, $1.156 billion of redemption requests were denied, on a pro rata basis, because they exceeded the available redemption amount of $795 million. Of the $795 million redeemed, $15 million was voluntary capital related to withdrawing members which had previously submitted a withdrawal notice and their capital stock had already been reclassified to mandatorily redeemable stock.

Subsequently, from July 1, 2006, through July 31, 2006, no redemption payments have been made to any members. Redemption of members’ capital stock is honored subject to, among other things, our maintaining our minimum regulatory capital and leverage requirements, liquidity requirements (under certain circumstances) and Finance Board approval, to the extent required.

Note 10 – Derivatives and Hedging Activities

For accounting policies concerning derivatives and hedging activities refer to Note 18 of our December 31, 2005 Annual Financial Statements and Notes. The following table summarizes the results of our hedging activities:

(In millions)	For the three months ended						For the six months ended
	June 30, 2006			June 30, 2005			June 30, 2006			June 30, 2005
Fair value hedge ineffectiveness	$	(10	)	$	(6	)	$	(20	)	$	(6	)
Gain (loss) on economic hedges		15			(22	)		36			(18	)
Cash flow hedge ineffectiveness		—			—			—			—
Gain (loss) from firm commitments no longer qualifying as fair value hedges		—			—			—			—
Cash flow hedging gains (losses) on forecasted transactions that failed to occur		—			—			—			—
Net gain (loss) on derivatives and hedging activities	$	5		$	(28	)	$	16		$	(24	)

Over the next 12 months it is expected that $8 million recorded in other comprehensive income on June 30, 2006 will be recognized in earnings. The maximum length of time over which we use cash flow hedges to reduce our exposure to the variability in future cash flows for forecasted transactions is seven years.

16

Federal Home Loan Bank of Chicago

Notes to Financial Statements—(Unaudited)

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

(In millions)	June 30, 2006					December 31, 2005
	Notional		Estimated Fair Value			Notional		Estimated Fair Value
Interest rate Swaps:
Fair Value	$	35,699	$	(113	)	$	27,910	$	(124	)
Cash Flow		100		—			—		—
Economic		10,647		16			10,761		(7	)
Total		46,446		(97	)		38,671		(131	)
Interest rate Swaptions:
Fair Value		6,714		71			4,037		65
Economic		5,839		21			3,819		8
Total		12,553		92			7,856		73
Interest rate Caps/Floors:
Cash Flow		1,925		68			3,301		140
Economic		508		8			8		—
Total		2,433		76			3,309		140
Interest rate Futures/Forwards:
Fair Value		6,190		(5	)		3,136		—
Economic		—					—		—
Total		6,190		(5	)		3,136		—
Delivery Commitments under the MPF Program:
Economic		78		1			52		1
Total	$	67,700		67		$	53,024		83
Accrued Interest at period end				12					13
Net Derivative Balance at period end			$	79				$	96
Derivative assets			$	241				$	232
Derivative liabilities				(162	)				(136	)
Net Derivative Balance at period end			$	79				$	96

17

Federal Home Loan Bank of Chicago

Notes to Financial Statements—(Unaudited)

Note 11 - Segment Information

We have two business segments: MPF Program and Traditional Member Finance. The segments reflect the manner in which financial information is evaluated by management, including the chief operating decision makers. Our reporting process measures the performance of the business segments based on our structure and is not necessarily comparable with similar information for any other financial institution. Our business segments are defined by the products and services we provide. MPF Program income is derived primarily from the difference, or spread, between the yield on MPF Loans and the borrowing cost related to those MPF Loans. The Traditional Member Finance segment includes products such as advances, investments and deposits.

The following table sets forth our financial performance by segment for the three and six months ended June 30, 2006 and 2005.

	MPF Program						Traditional Member Finance						Total Bank
(In millions)	2006			2005			2006			2005			2006			2005
Income for the three months ended June 30 -
Interest income	$	519		$	547		$	552		$	330		$	1,071		$	877
Interest expense		436			457			520			293			956			750
Net interest income		83			90			32			37			115			127
Non-interest income (loss)		(7	)		6			(3	)		(9	)		(10	)		(3	)
Non-interest expense		16			15			15			14			31			29
Assessments		17			22			3			3			20			25
Net income	$	43		$	59		$	11		$	11		$	54		$	70
Income for the six months ended June 30 -
Interest income	$	1,046		$	1,121		$	1,035		$	599		$	2,081		$	1,720
Interest expense		875			912			970			538			1,845			1,450
Net interest income		171			209			65			61			236			270
Non-interest income (loss)		(23	)		(3	)		(3	)		(11	)		(26	)		(14	)
Non-interest expense		33			31			27			29			60			60
Assessments		31			47			9			5			40			52
Net income	$	84		$	128		$	26		$	16		$	110		$	144
As of June 30, 2006 and December 31, 2005
Total assets	$	40,691		$	42,926		$	47,693		$	42,420		$	88,384		$	85,346

18

Federal Home Loan Bank of Chicago

Notes to Financial Statements—(Unaudited)

Note 12 - Estimated Fair Values

For additional information concerning the estimated fair values of our financial instruments refer to Note 20 of our December 31, 2005 Annual Financial Statements and Notes. The carrying values and estimated fair values of our financial instruments at June 30, 2006 were as follows:

(In millions)	Carrying Value			Net Unrecognized Gain or (Loss)			Estimated Fair Value
Financial Assets
Cash and due from banks	$	26		$	—		$	26
Federal funds sold and securities purchased under agreements to resell		9,039			—			9,039
Trading securities		778			—			778
Available-for-sale securities		2,536			—			2,536
Held-to-maturity securities		10,799			(201	)		10,598
Advances		24,718			(225	)		24,493
MPF Loans held in portfolio, net		39,755			(1,691	)		38,064
Accrued interest receivable		361			—			361
Derivative assets		241			—			241
Total Financial Assets	$	88,253		$	(2,117	)	$	86,136
Financial Liabilities
Deposits	$	(1,233	)	$	—		$	(1,233	)
Securities sold under agreements to repurchase		(1,200	)		(105	)		(1,305	)
Consolidated obligations -
Discount notes		(13,922	)		4			(13,918	)
Bonds		(66,563	)		1,013			(65,550	)
Accrued interest payable		(653	)		—			(653	)
Mandatorily redeemable capital stock		(42	)		—			(42	)
Derivative liabilities		(162	)		—			(162	)
Subordinated notes		(1,000	)		12			(988	)
Total Financial Liabilities	$	(84,775	)	$	924		$	(83,851	)
Commitments	$	—		$	—		$	—

19

Federal Home Loan Bank of Chicago

Notes to Financial Statements—(Unaudited)

The carrying values and estimated fair values of our financial instruments at December 31, 2005 were as follows:

(In millions)	Carrying Value			Net Unrecognized Gain or (Loss)			Estimated Fair Value
Financial Assets
Cash and due from banks	$	33		$	—		$	33
Federal funds sold and securities purchased under agreements to resell		6,945			—			6,945
Trading securities		1,087			—			1,087
Available-for-sale securities		1,790			—			1,790
Held-to-maturity securities		7,893			(74	)		7,819
Advances		24,921			(193	)		24,728
MPF Loans held in portfolio, net		42,005			(714	)		41,291
Accrued interest receivable		336			—			336
Derivative assets		232			—			232
Total Financial Assets	$	85,242		$	(981	)	$	84,261
Financial Liabilities
Deposits	$	(1,057	)	$	—		$	(1,057	)
Securities sold under agreements to repurchase		(1,200	)		(104	)		(1,304	)
Consolidated obligations -
Discount notes		(16,778	)		89			(16,689	)
Bonds		(61,118	)		197			(60,921	)
Accrued interest payable		(551	)		—			(551	)
Mandatorily redeemable capital stock		(222	)		—			(222	)
Derivative liabilities		(136	)		—			(136	)
Total Financial Liabilities	$	(81,062	)	$	182		$	(80,880	)
Commitments	$	—		$	—		$	—

Note 13 – Commitments and Contingencies

We are not currently a defendant in any legal proceedings, nor are we aware of any pending or threatened legal proceedings against us that could have a material adverse effect on our financial condition or results of operations. There have been no significant changes in commitments and contingencies since December 31, 2005.

Commitments that legally bind and unconditionally obligate us for additional advances totaled $1 million and $12 million at June 30, 2006 and December 31, 2005, respectively. Commitments typically are for periods up to 12 months. Standby letters of credit are executed with members for a fee. If we are required to make a payment for a beneficiary’s draw, the amount of the payment would be converted into a collateralized advance to the member. Notional amounts of outstanding standby letters of credit were $488 million and $437 million at June 30, 2006 and December 31, 2005, respectively.

We have entered into standby bond-purchase agreements with state housing authorities, whereby we, for a fee, agree to purchase at market and hold the authority’s bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bonds according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require us to purchase the bonds. The bond purchase commitments we have entered into expire no later than 2014, though some are renewable at our option. Total standby commitments for bond purchases were $266 million and $271 million at June 30, 2006 and December 31, 2005, respectively. We were not required to purchase any bonds under these agreements through June 30, 2006.

We record a liability for consolidated obligations on our statements of condition for the proceeds we receive from the issuance of those consolidated obligations. For these issuances, we are designated the primary obligor. However, each FHLB is jointly and severally obligated for the payment of all consolidated obligations of all of the FHLBs. This guarantee

20

Federal Home Loan Bank of Chicago

Notes to Financial Statements—(Unaudited)

is not reflected on our statements of condition. The par value of outstanding consolidated obligations for the FHLBs was $959 billion and $937 billion at June 30, 2006 and December 31, 2005, respectively. Accordingly, should one or more of the FHLBs be unable to repay their participation in the consolidated obligations, each of the other FHLBs could be called upon to repay all or part of such obligations, as determined or approved by the Finance Board.

We are required to pay 20% of our net earnings (after deduction of our AHP expense) to REFCORP to support payment of part of the interest on bonds issued by REFCORP. We must make these payments to REFCORP until the total amount of payments made by all FHLBs is equivalent to a $300 million annual annuity where the final maturity date is October 15, 2017. Additionally, the FHLBs must set aside annually for AHP the greater of $100 million or 10% of the current year’s pre-assessment net earnings.

Note 14 – Transactions with Related Parties and Other FHLBs

Related Parties: We are a cooperative. Capital stock ownership is a prerequisite to transacting any member business with us. Members (and former members with outstanding obligations owed to us) own all of our capital stock. The majority of our directors are elected by members. We execute advances almost exclusively with members and conduct the MPF Program with PFIs who are members. Therefore, in the normal course of business, we extend credit to members whose officers and directors may serve as our directors. However, such transactions are based on market terms that are no more favorable to them than the terms of comparable transactions with other members. In addition, we may purchase short-term investments, Federal funds and mortgage-backed securities from members (or affiliates of members) whose officers or directors serve as our directors. All investments are market rate transactions and all mortgage-backed securities are purchased through securities brokers or dealers. Derivative transactions with members and affiliates are executed at market rates. In connection with the issuance of our subordinated notes, we paid $2.5 million in underwriting and other fees to our members or affiliates of our members.

Members: The table below summarizes balances we had with our members as reported in the statements of condition.

(In millions)	June 30, 2006		December 31, 2005
Assets-
Federal funds sold	$	650	$	400
Held-to-maturity securities		5		10
Advances		24,718		24,921
Interest receivable - advances		93		83
Derivative Assets		46		33
Liabilities-
Deposits	$	798	$	647
Derivative Liabilities		65		67
Mandatorily Redeemable Capital Stock		42		222

21

Federal Home Loan Bank of Chicago

Notes to Financial Statements—(Unaudited)

Other FHLBs: The table below summarizes balances we had with other FHLBs as reported in the statements of condition.

(In millions)	June 30, 2006		December 31, 2005
Assets-
Trading Securities 1	$	25	$	25
Accounts Receivable		2		2
Liabilities-
Deposits	$	12	$	12

¹ Trading Securities consist of consolidated obligations of the FHLB of Dallas and San Francisco of $19 million and $6 million, respectively, for both June 30, 2006 and December 31, 2005.

The table below summarizes transactions we had with other FHLBs as reported in the statements of income.

(In millions)	For the three months ended June 30,						For the six months ended June 30,
	2006			2005			2006			2005
Income -
MPF Program Transaction Service Fees	$	1		$	1		$	2		$	2
Expense -
Extinguishment of debt transferred to other FHLBs		—			1			4			4
The table below summarizes transactions we had with other FHLBs as reported in the statements of cash flows.
(In millions)	For the three months ended June 30,						For the six months ended June 30,
	2006			2005			2006			2005
Financing Activities
Purchase of MPF Loans from other FHLBs	$	(132	)	$	(484	)	$	(255	)	$	(1,103	)
Investing Activities
Transfer of bonds to other FHLBs	$	(35	)	$	(475	)	$	(485	)	$	(618	)
Transfer of bonds from other FHLBs		65			—			65			—

22

Federal Home Loan Bank of Chicago

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and notes at the beginning of this Form 10-Q and in conjunction with our December 31, 2005 Form 10-K.

Financial Highlights

(Dollars in millions)	For the three months ended															For the six months ended
	June 30, 2006			March 31, 2006			December 31, 2005			September 30, 2005			June 30, 2005			June 30, 2006			June 30, 2005
Selected Statements of Income Data
Net interest income before provision for credit losses on MPF Loans	$	115		$	121		$	114		$	119		$	127		$	236		$	270
Provision (release of allowance) for credit losses		—			—			(3	)		—			—			—			—
Net interest income after provision (release of allowance) for credit losses on MPF Loans		115			121			117			119			127			236			270
Non-interest income (loss)		(10	)		(16	)		1			(28	)		(3	)		(26	)		(14	)
Non-interest expense		31			29			43			29			29			60			60
AHP assessment		6			6			7			5			8			12			16
REFCORP assessment		14			14			13			12			17			28			36
Net income	$	54		$	56		$	55		$	45		$	70		$	110		$	144
Dividends declared	$	28		$	28		$	38		$	52		$	58		$	56		$	118
Selected Ratios
Net income to average assets		0.25	%		0.26	%		0.27	%		0.22	%		0.33	%		0.25	%		0.34	%
Return on average equity		5.44	%		5.45	%		5.33	%		4.13	%		6.18	%		5.44	%		6.34	%
Total average equity to average assets		4.55	%		4.74	%		5.01	%		5.20	%		5.27	%		4.64	%		5.31	%
Annualized dividend rate declared		3.10	%		3.00	%		3.75	%		5.00	%		5.50	%		3.05	%		5.50	%
Dividend payout ratio		53	%		51	%		69	%		114	%		83	%		52	%		82	%
(Dollars in millions)	June 30, 2006			March 31, 2006			December 31, 2005			September 30, 2005			June 30, 2005
Selected Statements of Condition Data
Federal funds sold and securities purchased under agreements to resell	$	9,039		$	8,148		$	6,945		$	7,295		$	6,416
Investment securities		14,113			12,552			10,770			7,663			8,431
Advances		24,718			25,381			24,921			24,233			25,123
MPF Loans held in portfolio, net of allowance for loan losses		39,755			40,931			42,005			43,232			44,729
Total assets		88,384			87,809			85,346			83,054			85,350
Total deposits		1,233			1,333			1,057			1,308			1,276
Securities sold under agreements to repurchase		1,200			1,200			1,200			1,200			1,200
Total consolidated obligations, net 1		80,485			79,926			77,896			75,358			77,594
Accrued interest payable		653			683			551			630			535
Mandatorily redeemable capital stock		42			260			222			14			14
AHP assessment payable		73			77			78			83			88
REFCORP assessment payable		14			15			12			11			17
Subordinated notes		1,000			—			—			—			—
Total liabilities		84,971			83,662			81,208			78,810			80,950
Total Capital		3,413			4,147			4,138			4,244			4,400
Other Selected Data
Regulatory capital	$	4,581		$	4,537		$	4,506		$	4,413		$	4,607
Regulatory capital to assets ratio		5.2	%		5.2	%		5.3	%		5.3	%		5.4	%
All FHLBs Consolidated Obligations Outstanding (par) 2	$	958,570		$	935,828		$	937,460		$	920,369		$	908,305
Headcount		462			451			443			427			412

¹ Total consolidated obligations, net represents the obligations for which the Bank is primary obligor.

² The Bank is jointly and severally liable for the consolidated obligations of the FHLBs. See "Note 13—Consolidated Obligations" to the Bank's 2005 Annual Financial Statements and Notes for further discussion on the joint and several liability.

23

Federal Home Loan Bank of Chicago

Forward-Looking Information

Statements contained in this quarterly report on Form 10-Q, including statements describing the objectives, projections, estimates, or future predictions of management may be “forward-looking statements.” These statements may use forward-looking terminology, such as “anticipates,” “believes,” “expects,” “could,” “estimates,” “may,” “should,” “will” or their negatives or other variations of these terms. We caution that, by their nature, forward-looking statements involve risk or uncertainty, that actual results could differ materially from those expressed or implied in these forward-looking statements and that actual events could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: the effect of the Written Agreement with the Finance Board; the effect of the Retained Earnings and Dividend Policy on our goal to strengthen our capital base; our ability to make additional redemptions of voluntary capital stock; economic and market conditions; volatility of market prices, rates, and indices; political, legislative, regulatory, or judicial events; changes in the FHLB Act or Finance Board regulations; changes in our capital structure; membership changes, including the withdrawal of members due to our inability to satisfy all member requests for redemption of voluntary capital stock; changes in the demand by our members for advances; competitive forces, including the availability of other sources of funding for our members; changes in investor demand for consolidated obligations and/or the terms of interest rate derivatives and similar agreements; our ability to introduce new products and services to meet market demand and to manage successfully the risk associated with new products and services; the impact of our new business strategy to develop off-balance sheet capabilities to fund MPF assets; the impact of new accounting standards; and the ability of each of the other FHLBs to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which we have joint and several liability.

Business Overview

Our net income for the second quarter of 2006 was $54 million, compared with $70 million in the second quarter of 2005. The decrease in net income of $16 million was principally attributable to a decrease in net interest income of $12 million, offset by a reduction in AHP and REFCORP assessments of $5 million and a loss of $19 million in our trading securities portfolio, which was partially offset by a gain of $5 million in derivatives and hedging activities. Net interest margins have tightened 7 basis points compared to a year ago due principally to a flattening yield curve, as short-term interest rates have increased more significantly than longer-term interest rates. In addition, our asset mix has shifted since the prior year to shorter-term, more liquid investments, which has further reduced net interest margins. Finally, capital stock decreased by $1.118 billion to $2.960 billion at June 30, 2006 compared to June 30, 2005, further causing net interest margins to decrease because we had less capital to invest in interest-earning assets.

We continue to experience a decline in MPF Loan balances due principally to regulatory capital constraints limiting on-balance sheet growth of MPF Loans and reduced MPF Loan volume due to higher interest rates and lower borrower demand for fixed rate mortgage products. Principal pay downs and maturities have outpaced new purchases and funding of MPF Loans.

On June 13, 2006 we issued $1 billion of ten-year subordinated notes. The subordinated notes are unsecured obligations and rank junior in priority of payment to our senior liabilities. For a further discussion concerning our subordinated notes, see “Note 8 – Subordinated Notes” on page 14 of this Form 10-Q. On June 6, 2006, we entered into Amendment No. 3 to our Written Agreement with the Finance Board, which became effective on June 13, 2006 upon our receipt of the proceeds from the subordinated notes. Amendment No. 3 revised our regulatory capital and leverage limits and allowed us to use a portion of the net proceeds from the sale of subordinated notes to redeem $795 million of voluntary capital stock from members on June 20, 2006. For further discussion of Amendment No. 3, see “Note 2 – Business Developments” on page 7 of this Form 10-Q. During the second quarter of 2006 we also redeemed $205 million of capital stock from institutions whose membership had terminated between April 18, 2006 and June 30, 2006, resulting in total capital stock redemptions of $1 billion.

On July 18, 2006, the Board of Directors declared and approved a 3.10% (annualized rate) cash dividend based on second quarter 2006 results to be paid to members on August 15, 2006.

We continue to make progress on and have met nearly all of the requirements under our Written Agreement with the Finance Board, including the following: maintaining our MPF Loan balances within required limits; consistent compliance

24

Federal Home Loan Bank of Chicago

with our minimum capital requirements; completion of required outside consulting studies on our management, risk management, hedge accounting and internal audit practices; implementation of recommendations from those studies; and Finance Board approval of our Retained Earnings and Dividend Policy.

Business Outlook

We expect that net interest margins will remain flat or continue to tighten in the third quarter, further negatively impacting net interest income. The issuance of subordinated notes and capital stock redemptions will further contribute to lower net interest income. Also, our new Retained Earnings and Dividend Policy requires minimum additions to retained earnings for each of the years 2006 through 2009 of a fixed dollar amount plus a percentage of earnings. During this time, the policy limits the percentage of earnings we can pay as dividends. As a result, we expect that the dividend rate in 2006 will remain between 3% and 3.5%. For a further discussion of anticipated future dividends see “Liquidity and Capital Resources – Capital Resources – Retained Earnings & Dividend Policy” on page 45 of this Form 10-Q.

We expect that member demand for advances will remain flat in the third quarter. A number of factors may cause the advances portfolio to remain at similar levels. Such factors include a flat yield curve, an increase in the number of refunding notifications on our putable advance portfolio that are not subsequently refinanced through advances and substantial competition from alternative funding sources including brokered certificates of deposit and structured financing vehicles. Future planned voluntary capital stock redemptions and level of dividends as compared to general interest rate levels may also affect advance volumes.

We are continuing our work on further development of the MPF Program. In connection with reducing outstanding voluntary capital stock, we expect to have less capital available to support the assets on our balance sheet while maintaining the regulatory capital plus subordinated notes to assets ratio of 4.5% imposed by the Written Agreement. As such, we are exploring ways to make changes to our balance sheet structure by developing off-balance sheet capabilities for funding future MPF Program investments and substantially reducing the amount of MPF assets that will remain on the balance sheet. However, prior to entering into any new off-balance-sheet MPF activity, we are required to submit a new business activity notice to, and receive approval from, the Finance Board. We have not yet submitted a new business activity notice to the Finance Board for any MPF off-balance-sheet activity. Income from the off-balance sheet MPF business is expected to be less than the income generated under the current business model. During the first half of the year 2006, MPF Loan balances have decreased 5%. Based upon current projections, we expect our outstanding MPF Loans to decrease by approximately 10% for the entire calendar year 2006. We continue to look for opportunities to purchase mortgage-backed securities to offset the decline in MPF Loans.

25

Federal Home Loan Bank of Chicago

Results of Operations

(In millions)	For the three months ended June 30,
	2006			2005			Increase/ (Decrease)			%
Interest income	$	1,071		$	877		$	194		22	%
Interest expense		956			750			206		27	%
Net interest income after provision (release of allowance) for credit losses on mortgage loans		115			127			(12	)	-9	%
Non-interest income (loss)		(10	)		(3	)		(7	)	-233	%
Non-interest expense		31			29			2		7	%
Income before assessments		74			95			(21	)	-22	%
Assessments		20			25			(5	)	-20	%
Net income	$	54		$	70		$	(16	)	-23	%
Non-interest expense to average assets - annualized 1		0.14	%		0.14	%		0.00	%
Interest spread between yields on interest-earning assets and interest-bearing liabilities		0.33	%		0.42	%		-0.09	%
Net interest margin on interest-earning assets		0.53	%		0.60	%		-0.07	%
Return on average equity - annualized		5.44	%		6.18	%		-0.74	%
(In millions)	For the six months ended June 30,
	2006			2005			Increase/ (Decrease)			%
Interest income	$	2,081		$	1,720		$	361		21	%
Interest expense		1,845			1,450			395		27	%
Net interest income after provision (release of allowance) for credit losses on mortgage loans		236			270			(34	)	-13	%
Non-interest income (loss)		(26	)		(14	)		(12	)	-86	%
Non-interest expense		60			60			—		0	%
Income before assessments		150			196			(46	)	-23	%
Assessments		40			52			(12	)	-23	%
Net income	$	110		$	144		$	(34	)	-24	%
Non-interest expense to average assets - annualized 1		0.14	%		0.14	%		0.00	%
Interest spread between yields on interest-earning assets and interest-bearing liabilities		0.35	%		0.46	%		-0.11	%
Net interest margin on interest-earning assets		0.55	%		0.64	%		-0.09	%
Return on average equity - annualized		5.44	%		6.34	%		-0.90	%

¹ Non-interest expense includes compensation, professional service fees, amortization and depreciation of software and equipment, and other operating expenses.

26

Federal Home Loan Bank of Chicago

Our second quarter 2006 net income was $54 million, compared with $70 million in the second quarter of last year. The decrease in net income of $16 million was principally attributable to a decrease in net interest income of $12 million, offset by a reduction in AHP and REFCORP assessments of $5 million. The decrease in net interest income was due to the following factors:

Net interest margin decreased 7 basis points to 0.53% as compared to the second quarter of 2005. The decrease was due principally to a flattening yield curve, as short-term interest rates have increased more significantly than long-term rates. In addition, we experienced a decrease in MPF Loans, which historically have generated higher yields than advances. Also, net interest income was negatively impacted by an increase in our cost of funds and the decrease in our capital stock, which decreased the amount of capital available to invest in interest-earning assets. Capital stock decreased by $1.118 billion to $2.960 billion at June 30, 2006 compared to $4.078 billion at June 30, 2005.

We incurred net losses of $10 million in non-interest income for the quarter ended June 30, 2006. Non-interest income consisted principally of income from trading securities and derivatives and hedging activities. The portfolio of investments classified as trading experienced an unrealized loss of $19 million in the second quarter of 2006, compared to an unrealized gain of $22 million in the comparable quarter in the prior year. The increase in trading losses was due to a continued increase in market interest rates.

We recognized income from derivatives and hedging activities of $5 million in the second quarter of 2006 compared to a loss of $28 million in the second quarter of 2005. We economically hedged investment securities classified as trading and recognized a gain of $17 million and a loss of $25 million on these derivatives for the second quarter of 2006 and 2005, respectively.

The table below shows the types of hedges and the categories of hedged items that contributed to the gains and losses on derivatives and hedging activities that were recorded as a component of non-interest income (loss) for the three and six month periods ended June 30, 2006 and 2005.

27

Federal Home Loan Bank of Chicago

(In millions)	Sources of Gains / (Losses) on Derivatives and Hedging Activities Recorded in Non-Interest Income (Loss) For the three months ended June 30,
	2006											2005
	Fair Value Hedges			Cash Flow Hedges		Economic Hedges			Total			Fair Value Hedges			Cash Flow Hedges			Economic Hedges			Total
Hedged Item-
Advances	$	(1	)	$	—	$	—		$	(1	)	$	—		$	—		$	—		$	—
Consolidated Obligations		—			—		—			—			(1	)		—			—			(1	)
Investments		—			—		17			17			—			—			(25	)		(25	)
MPF Loans		(9	)		—		(2	)		(11	)		(5	)		—			3			(2	)
Total	$	(10	)	$	—	$	15		$	5		$	(6	)	$	—		$	(22	)	$	(28	)
	For the six months ended June 30,
(In millions)	2006											2005
	Fair Value Hedges			Cash Flow Hedges		Economic Hedges			Total			Fair Value Hedges			Cash Flow Hedges			Economic Hedges			Total
Hedged Item-
Advances	$	—		$	—	$	—		$	—		$	1		$	(3	)	$	—		$	(2	)
Consolidated Obligations		(2	)		—		(2	)		(4	)		3			3			—			6
Investments		—			—		46			46			—			—			(11	)		(11	)
MPF Loans		(18	)		—		(8	)		(26	)		(10	)		—			(7	)		(17	)
Total	$	(20	)	$	—	$	36		$	16		$	(6	)	$	—		$	(18	)	$	(24	)

Non-interest expense increased $2 million to $31 million for the current quarter, compared to $29 million for the second quarter of 2005. Compensation increased $1 million to $15 million and professional fees decreased $3 million, in the second quarter of 2006, compared to the same period in 2005. Compensation costs increased due principally to an increase in number of employees and salary increases.

Total AHP and REFCORP assessments decreased $5 million to $20 million for the second quarter of 2006 as a result of a decrease in income before assessments.

28

Federal Home Loan Bank of Chicago

Average Balances/Net Interest Margin/Rates

Provided below is a summary of average balances, interest rates and interest differentials for the three months ended June 30, 2006 and 2005, and the six months ended June 30, 2006 and 2005. The table below also presents an analysis of the effect on net interest income of volume and rate changes for the periods. In this analysis, the change due to the volume/rate variance has been allocated to the change in interest rate.

(In millions)	For the three months ended June 30,
	2006							2005							Change in interest
	Average Balance			Interest		Yield / Rate		Average Balance			Interest		Yield / Rate		Volume			Rate			Increase/ (Decrease)
Assets
Federal funds sold and securities purchased under agreements to resell	$	8,552		$	107	5.16	%	$	7,043		$	52	2.95	%	$	11		$	44		$	55
Total investments 1		12,696			162	4.93	%		8,237			86	4.18	%		47			29			76
Advances 1		25,088			294	4.69	%		24,359			190	3.12	%		6			98			104
MPF Loans held in portfolio 1 2 3		40,249			508	5.07	%		44,927			549	4.89	%		(57	)		16			(41	)
Total interest-earning assets	$	86,585		$	1,071	4.95	%	$	84,566		$	877	4.15	%	$	7		$	187		$	194
Allowance for loan losses		(1	)						(5	)
Other assets		988							761
Total assets	$	87,572						$	85,322
Liabilities and Capital
Interest bearing deposits	$	1,097		$	13	4.85	%	$	1,098		$	7	2.55	%	$	—		$	6		$	6
Securities sold under agreements to repurchase		1,203			22	7.44	%		1,200			13	4.33	%		—			9			9
Consolidated obligation bonds 1		64,909			727	4.48	%		60,749			596	3.92	%		41			90			131
Consolidated obligation discount notes		15,220			190	4.98	%		17,480			133	3.04	%		(17	)		74			57
Mandatorily redeemable capital stock		209			1	2.64	%		17			1	6.01	%		3			(3	)		—
Subordinated notes		198			3	5.75	%		—			—	0.00	%		—			3			3
Total interest-bearing liabilities	$	82,836		$	956	4.62	%	$	80,544		$	750	3.73	%	$	27		$	179		$	206
Other liabilities		754							286
Total Capital		3,982							4,492
Total Liabilities and Capital	$	87,572						$	85,322
Interest spread between yields on interest-earning assets and interest-bearing liabilities						0.33	%						0.42	%
Net interest margin on interest-earning assets	$	86,585		$	115	0.53	%	$	84,566		$	127	0.60	%	$	(20	)	$	8		$	(12	)
Average interest-earning assets to interest-bearing liabilities						104.53	%						104.99	%

Notes:

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

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

³ Interest income includes amortization of net premiums of $14 million and $25 million during the three months ended June 30, 2006 and 2005, respectively.

29

Federal Home Loan Bank of Chicago

Average Balances/Net Interest Margin/Rates

(In millions)	For the six months ended June 30,
	2006							2005							Change in interest
	Average Balance			Interest		Yield / Rate		Average Balance			Interest		Yield / Rate		Volume			Rate			Increase/ (Decrease)
Assets
Federal funds sold and securities purchased under agreements to resell	$	8,204		$	194	4.72	%	$	6,819		$	92	2.70	%	$	19		$	83		$	102
Total investments 1		12,102			301	4.97	%		8,120			167	4.11	%		82			52			134
Advances 1		25,155			562	4.47	%		24,116			349	2.89	%		15			198			213
MPF Loans held in portfolio 1 2 3		40,756			1,024	5.03	%		45,469			1,112	4.89	%		(115	)		27			(88	)
Total interest-earning assets	$	86,217		$	2,081	4.83	%	$	84,524		$	1,720	4.07	%	$	1		$	360		$	361
Allowance for loan losses		(1	)						(5	)
Other assets		1,003							760
Total assets	$	87,219						$	85,279
Liabilities and Capital
Interest bearing deposits	$	1,046		$	24	4.60	%	$	1,150		$	14	2.43	%	$	(1	)	$	11		$	10
Securities sold under agreements to repurchase		1,202			42	7.04	%		1,200			24	4.00	%		—			18			18
Consolidated obligation bonds 1		64,060			1,398	4.36	%		60,630			1,174	3.87	%		66			158			224
Consolidated obligation discount notes		15,789			375	4.76	%		17,440			237	2.72	%		(22	)		160			138
Mandatorily redeemable capital stock		227			3	2.80	%		17			1	5.70	%		6			(4	)		2
Subordinated notes		99			3	5.72	%		—			—	0.00	%		—			3			3
Total interest-bearing liabilities	$	82,423		$	1,845	4.48	%	$	80,437		$	1,450	3.61	%	$	49		$	346		$	395
Other liabilities		748							312
Total Capital		4,048							4,530
Total Liabilities and Capital	$	87,219						$	85,279
Interest spread between yields on interest-earning assets and interest-bearing liabilities						0.35	%						0.46	%
Net interest margin on interest-earning assets	$	86,217		$	236	0.55	%	$	84,524		$	270	0.64	%	$	(48	)	$	14		$	(34	)
Average interest-earning assets to interest-bearing liabilities						104.60	%						105.08	%

Notes:

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

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

³ Interest income includes amortization of net premiums of $29 million and $49 million during the six months ended June 30, 2006 and 2005, respectively.

30

Federal Home Loan Bank of Chicago

Statements of Condition Overview

The major components of our statements of condition are as follows:

(In millions)	June 30, 2006		December 31, 2005		Increase /(Decrease)
					Amount			Percent
Assets
Federal funds sold and securities purchased under agreement to resell	$	9,039	$	6,945	$	2,094		30	%
Investment securities		14,113		10,770		3,343		31	%
Advances		24,718		24,921		(203	)	-1	%
MPF Loans held in portfolio, net		39,755		42,005		(2,250	)	-5	%
Other assets		759		705		54		8	%
Total Assets	$	88,384	$	85,346	$	3,038		4	%
Liabilities and Capital
Deposits	$	1,233	$	1,057	$	176		17	%
Discount notes		13,922		16,778		(2,856	)	-17	%
Bonds		66,563		61,118		5,445		9	%
Other liabilities		2,253		2,255		(2	)	0	%
Subordinated notes		1,000		—		1,000		0	%
Total Liabilities		84,971		81,208		3,763		5	%
Total Capital		3,413		4,138		(725	)	-18	%
Total Liabilities and Capital	$	88,384	$	85,346	$	3,038		4	%

Federal funds sold and securities purchased under agreements to resell – We increased investment in overnight and term Federal funds to increase liquidity in response to the Federal Reserve Bank Policy Statement on Payments System Risk. To support this policy, we agreed with the other FHLBs and the Office of Finance to provide liquidity in the event of a failure by one or more FHLBs to timely make payments on consolidated obligations. As part of that agreement, since we are the 7th District Bank in the FHLB System, we will be the designated Bank to provide this liquidity every July, the 7th month of the year. We expect this increase in liquidity to be seasonal. For further information see “Part II – Item 1A – Risk Factors – The Federal Reserve Bank Policy Statement on Payments System Risk may negatively impact our operations” on page 56 of this Form 10-Q.

Investment securities – We purchased additional mortgage-backed securities in 2006 in order to generate additional interest income to help offset the decline in MPF Loan balances. Purchases of mortgage-backed securities during 2006 were classified as held-for-maturity. Also, we increased our position in investment securities classified as available-for-sale to earn additional income.

Under the Finance Board’s Financial Management Policy, the total carrying value of mortgage-backed securities and related investments may not exceed 300% of our previous month-end regulatory capital on the day we purchase the securities and we may not exceed our holdings of such securities in any one calendar quarter by more than 50 percent of our total capital at the beginning of that quarter. See “Item 1 – Business – Traditional Member Finance – Investments” on page 10 of our December 31, 2005 10-K. In addition, as part of the Finance Board’s resolution issued April 18, 2006, we are permitted to include a Designated Amount of the subordinated notes in the calculation of our mortgage backed securities and investments limitation so long as we are subject to the Regulatory Leverage Limit. See “Liquidity & Capital Resources – Capital Resources – Capital Amounts” on page 41 of this Form 10-Q. The resolution also places an overall cap on mortgage backed securities and related investments so that such investments may not exceed 300% of $4.521 billion, which consists of the sum of (i) capital stock outstanding as of the close of business on April 18, 2006, and (ii) the retained earnings account as of the close of business on April 18, 2006. At June 30, 2006, our mortgage-backed securities and related investments were 222% of our regulatory capital plus the Designated Amount of subordinated notes of $4.581 billion as of June 30, 2006 and 225% of the $4.521 billion as of April 18, 2006.

31

Federal Home Loan Bank of Chicago

Advances – Advances have decreased by $203 million compared to year-end 2005. Advances have decreased slightly due to a flat yield curve, an increase in the number of refunding notifications on our putable advance portfolio that were subsequently not refinanced through advances and substantial competition from alternative funding sources including brokered certificates of deposit and structured financing vehicles. Future planned voluntary capital stock redemptions and level of dividends as compared to general interest rate levels may also affect advance volumes.

MPF Loans held in portfolio, net – MPF Loans decreased by $2.2 billion from December 31, 2005 to $39.8 billion at June 30, 2006. The decrease was due principally to regulatory capital constraints. The constraints limited the amount of MPF Loans that we were able to purchase or fund. In addition, we experienced less MPF Loan volume, due in part to higher interest rates and a decrease in fixed-rate mortgage loan demand. We continued to purchase and fund MPF Loans from small to medium-sized PFIs but purchased less MPF Loan volume from larger PFIs compared to the prior period. Effective March 1, 2006, we no longer enter into new Master Commitments to purchase participation interests unless we have a pre-existing contractual obligation with another FHLB. We stopped entering into new Master Commitments to purchase participation interests in order to increase our control on liquidity over our MPF Loan volume.

The table below summarizes our PFI MPF Loan repurchase activity for the three and six month periods ended June 30, 2006 and 2005:

(In millions, except number of loans)	For the three months ended June 30,						For the six months ended June 30,
	2006			2005			2006			2005
Conventional MPF Loans-
Conventional MPF Loan repurchases	$	2		$	4		$	5		$	9
Average Daily Balance of Conventional MPF Loans		34,458			38,243			34,847			38,778
% Repurchased		0.01	%		0.01	%		0.01	%		0.02	%
Number of conventional MPF Loans repurchased		31			52			70			128
Government MPF Loans-
Government MPF Loan repurchases	$	2		$	42		$	7		$	63
Average Daily Balance of Government MPF Loans		5,776			6,684			5,898			6,691
% Repurchased		0.03	%		0.63	%		0.12	%		0.94	%
Number of government MPF Loans repurchased		23			519			87			775

Consolidated Obligation Discount Notes and Bonds – We used the proceeds from longer-termed consolidated obligation bonds to purchase mortgage-backed securities and investments and to reduce outstanding shorter-termed consolidated obligation discount notes.

Other Liabilities - There were no significant changes in other liabilities, which consist primarily of securities sold under agreements to repurchase and accrued interest payable. The table below summarizes the changes in the AHP and REFCORP assessments payable, also components of other liabilities in the Statements of Condition Overview:

(In millions)	For the three months ended June 30,						For the six months ended June 30,
	2006			2005			2006			2005
AHP-
Balance, Beginning of Period	$	77		$	84		$	78		$	82
AHP assessments		6			8			12			16
AHP assessments paid		(10	)		(4	)		(17	)		(10	)
Balance, June 30	$	73		$	88		$	73		$	88
REFCORP-
Balance, Beginning of Period	$	15		$	30		$	12		$	43
REFCORP assessments		14			17			28			36
REFCORP assessments paid		(15	)		(30	)		(26	)		(62	)
Balance, June 30	$	14		$	17		$	14		$	17

32

Federal Home Loan Bank of Chicago

Subordinated Notes – On June 13, 2006 we issued $1 billion aggregate principal amount of 5.625% ten-year subordinated notes. See “Note 8 – Subordinated Notes” on page 14 of this Form 10-Q.

Total Capital – Total capital decreased primarily due to the redemption of $795 million of voluntary capital stock related to the sale of the subordinated notes in the second quarter of 2006 and redemption of $205 million of capital stock held by members whose membership terminated between April 18, 2006 and June 30, 2006. Retained earnings increased $54 million to $579 million at June 30, 2006. In accordance with our then-effective Retained Earnings and Dividend Policy, we retained more earnings in order to contribute to a stronger capital base. The accumulated loss in Other Comprehensive Income (“OCI”) decreased $20 million from a loss of $146 million at December 31, 2005 to a loss of $126 million at June 30, 2006. The decrease was principally a result of OCI amortization of basis adjustments related to cash flow hedges and changes in fair value of derivatives associated with these hedges.

33

Federal Home Loan Bank of Chicago

Operating Segment Results

We manage our operations by grouping products and services within two operating segments. The measure of profit or loss and total assets for each segment is contained in Note 11 – “Segment Information” on page 18 in this Form 10-Q. These operating segments are:

• The MPF Program; and

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

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

The table below summarizes operating segment results:

(In millions)	MPF Program					Traditional Member Finance						Total Bank
	2006			2005		2006			2005			2006			2005
Income for the three months ended June 30 -
Interest income	$	519		$	547	$	552		$	330		$	1,071		$	877
Interest expense		436			457		520			293			956			750
Net interest income		83			90		32			37			115			127
Non-interest income (loss)		(7	)		6		(3	)		(9	)		(10	)		(3	)
Non-interest expense		16			15		15			14			31			29
Assessments		17			22		3			3			20			25
Net income	$	43		$	59	$	11		$	11		$	54		$	70
Income for the six months ended June 30 -