10-Q

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, 2007

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, 2007
Class B Stock, par value $100	125,204,190

Federal Home Loan Bank of San Francisco

Form 10-Q

Index

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Statements of Condition (Unaudited)	1
	Statements of Income (Unaudited)	2
	Statements of Capital Accounts (Unaudited)	3
	Statements of Cash Flows (Unaudited)	4
	Notes to Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
	Quarterly Overview	26
	Financial Highlights	29
	Results of Operations	30
	Financial Condition	40
	Liquidity and Capital Resources	53
	Risk Management	54
	Critical Accounting Policies and Estimates	55
	Off-Balance Sheet Arrangements, Guarantees, and Other Commitments	56
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
Item 4.	Controls and Procedures	62
PART II.	OTHER INFORMATION	63
Item 1.	Legal Proceedings	63
Item 1A.	Risk Factors	63
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3.	Defaults Upon Senior Securities	63
Item 4.	Submission of Matters to a Vote of Security Holders	63
Item 5.	Other Information	63
Item 6.	Exhibits	64
Signatures		65

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, 2007			December 31, 2006
Assets
Cash and due from banks	$	9		$	7
Interest-bearing deposits in banks		14,226			9,323
Deposits for mortgage loan program with other Federal Home Loan Bank		—			1
Securities purchased under agreements to resell		—			200
Federal funds sold		15,861			15,443
Trading securities (includes $7 and $29, respectively, pledged as collateral that may be repledged)		60			77
Held-to-maturity securities (includes $168 and $580, respectively, pledged as collateral that may be repledged) (a)		31,759			30,348
Advances		236,184			183,669
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $0.8 and $0.7, respectively		4,229			4,630
Accrued interest receivable		1,369			1,078
Premises and equipment, net		13			12
Derivative assets		333			20
Other assets		110			107
Total Assets	$	304,153		$	244,915
Liabilities and Capital
Liabilities:
Deposits:
Interest-bearing:
Demand and overnight	$	238		$	587
Term		15			5
Other		44			2
Non-interest-bearing - Other		3			4
Total deposits		300			598
Consolidated obligations, net:
Bonds		219,723			199,300
Discount notes		68,027			30,128
Total consolidated obligations		287,750			229,428
Mandatorily redeemable capital stock		95			106
Accrued interest payable		2,257			2,280
Affordable Housing Program		161			147
Payable to REFCORP		34			39
Derivative liabilities		251			995
Other liabilities		511			568
Total Liabilities		291,359			234,161
Commitments and Contingencies (Note 11):
Capital (Note 7):
Capital stock-Class B-Putable ($100 par value) issued and outstanding:
126 shares and 106 shares, respectively		12,629			10,616
Restricted retained earnings		170			143
Accumulated other comprehensive loss		(5	)		(5	)
Total Capital		12,794			10,754
Total Liabilities and Capital	$	304,153		$	244,915

(a) Fair values of held-to-maturity securities were $31,344 and $30,100, at September 30, 2007, and December 31, 2006, 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)	2007			2006			2007			2006
Interest Income:
Advances	$	2,741		$	2,351		$	7,537		$	6,319
Prepayment fees on advances, net		1			—			1			1
Interest-bearing deposits in banks		149			181			370			398
Securities purchased under agreements to resell		1			2			13			29
Federal funds sold		170			88			517			402
Trading securities		1			2			3			5
Held-to-maturity securities		400			387			1,136			1,101
Mortgage loans held for portfolio		51			60			162			185
Total Interest Income		3,514			3,071			9,739			8,440
Interest Expense:
Consolidated obligations:
Bonds		2,736			2,580			7,926			7,082
Discount notes		527			267			1,128			729
Deposits		2			5			17			14
Other borrowings		—			1			—			1
Mandatorily redeemable capital stock		2			1			4			3
Total Interest Expense		3,267			2,854			9,075			7,829
Net Interest Income		247			217			664			611
Other (Loss)/Income:
Services to members		1			1			1			1
Net loss on trading securities		—			—			—			(1	)
Net loss on derivatives and hedging activities		(40	)		(5	)		(22	)		(22	)
Other		—			1			1			3
Total Other Loss		(39	)		(3	)		(20	)		(19	)
Other Expense:
Compensation and benefits		12			11			37			33
Other operating expense		9			9			24			23
Federal Housing Finance Board		2			2			6			6
Office of Finance		1			1			4			3
Total Other Expense		24			23			71			65
Income Before Assessments		184			191			573			527
REFCORP		34			35			105			97
Affordable Housing Program		15			16			47			43
Total Assessments		49			51			152			140
Net Income	$	135		$	140		$	421		$	387

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, 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
Balance, December 31, 2006	106		$	10,616		$	143	$	—		$	143		$	(5	)	$	10,754
Issuance of capital stock	43			4,365														4,365
Repurchase/redemption of capital stock	(27	)		(2,738	)													(2,738	)
Capital stock reclassified to mandatorily redeemable capital stock	—			(8	)													(8	)
Comprehensive income:
Net income									421			421						421
Total comprehensive income																		421
Transfers to restricted retained earnings							27		(27	)		—						—
Dividends on capital stock (5.10%)
Stock issued	4			394			—		(394	)		(394	)					—
Balance, September 30, 2007	126		$	12,629		$	170	$	—		$	170		$	(5	)	$	12,794

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)	2007			2006
Cash Flows from Operating Activities:
Net Income	$	421		$	387
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		163			(36	)
Non-cash interest on mandatorily redeemable capital stock		4			3
Change in net fair value adjustment on derivative and hedging activities		(247	)		188
Gain on extinguishment of debt		—			(2	)
Net change in:
Trading securities		17			31
Accrued interest receivable		(291	)		(74	)
Other assets		(9	)		4
Accrued interest payable		(23	)		443
Affordable Housing Program liability and discount on
Affordable Housing Program advances		14			9
Payable to REFCORP		(5	)		8
Other liabilities		(1	)		1
Total adjustments		(378	)		575
Net cash provided by operating activities		43			962
Cash Flows from Investing Activities:
Net change in:
Interest-bearing deposits in banks		(4,903	)		(5,669	)
Securities purchased under agreements to resell		200			550
Federal funds sold		(418	)		8,397
Deposits for mortgage loan program with other FHLBank		1			—
Premises and equipment		(5	)		(5	)
Held-to-maturity securities:
Net decrease/(increase) in short-term		1,611			(361	)
Proceeds from maturities of long-term		4,444			5,062
Purchases of long-term		(7,459	)		(4,786	)
Advances:
Principal collected		1,518,959			1,296,557
Made to members		(1,571,149	)		(1,308,071	)
Mortgage loans held for portfolio:
Principal collected		400			457
Purchases		—			(18	)
Net cash used in investing activities		(58,319	)		(7,887	)

4

Federal Home Loan Bank of San Francisco

Statements of Cash Flows (continued)

(Unaudited)

	For the nine months ended September 30,
(In millions)	2007			2006
Cash Flows from Financing Activities:
Net change in:
Deposits		(298	)		44
Net proceeds from consolidated obligations:
Bonds issued		85,617			67,717
Discount notes issued		224,638			153,313
Bonds transferred from other FHLBanks		497			803
Payments for consolidated obligations:
Bonds matured or retired		(66,908	)		(54,177	)
Discount notes matured or retired		(186,872	)		(161,226	)
Proceeds from issuance of capital stock		4,365			2,676
Payments for repurchase/redemption of mandatorily redeemable capital stock		(23	)		(92	)
Payments for repurchase/redemption of capital stock		(2,738	)		(2,139	)
Net cash provided by financing activities		58,278			6,919
Net increase/(decrease) in cash and cash equivalents		2			(6	)
Cash and cash equivalents at beginning of year		7			12
Cash and cash equivalents at end of period	$	9		$	6
Supplemental Disclosures:
Interest paid during the period	$	9,384		$	6,580
Affordable Housing Program payments during the period		33			34
REFCORP payments during the period		110			89
Transfers of mortgage loans to real estate owned		1			—

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 about the Federal Home Loan Bank of San Francisco (Bank) 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, 2007. 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, 2006 (2006 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 2006 Form 10-K. There have been no significant changes to these policies as of September 30, 2007.

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 reasonable, actual results may differ.

Note 2 – Recently Issued Accounting Standards and Interpretations

Adoption of SFAS 155. On February 16, 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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, Recognition and Measurement of Derivatives: Application of Statement 133 to Beneficial Interests in Securitized Financial Assets (DIG Issue D1). SFAS 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which had been amended previously 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 (as amended, SFAS 133) to simplify the accounting for certain derivatives embedded in other financial instruments (hybrid financial instruments) 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 No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities – a replacement of FASB Statement 125 (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 the Bank), with earlier adoption allowed. The Bank adopted SFAS 155 on January 1, 2007. The adoption of SFAS 155 did not have a material impact on the Bank’s results of operations or financial condition at the time of adoption.

Adoption of DIG Issue B40. On December 20, 2006, the FASB issued DIG Statement 133 Implementation Issue No. B40, Application of Paragraph 13(b) to Securitized Interest in Prepayable Financial Assets (DIG Issue B40). DIG Issue B40 clarifies when a securitized interest in prepayable financial assets is subject to the conditions in paragraph 13(b) of SFAS 133. DIG Issue B40 becomes effective upon an entity’s initial adoption of SFAS 155 (January 1, 2007, for the Bank). The adoption of DIG Issue B40 did not have a material impact on the Bank’s results of operations or financial condition at the time of adoption.

6

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

SFAS 157. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with 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. The Bank will adopt SFAS 157 on January 1, 2008, and is assessing the expected impact of the adoption of this Statement.

SFAS 159. On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. It requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. In addition, unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. The Bank will adopt SFAS 159 on January 1, 2008. The Bank currently is in the process of evaluating SFAS 159, determining the financial assets and liabilities for which the fair value option may be elected, and assessing the potential impact on the results of operations and financial condition if these elections are made.

FSP FIN 39-1. On April 30, 2007, the FASB issued FASB Staff Position (FSP) No. FIN 39-1, Amendment of FASB Interpretation No. 39 (FSP FIN 39-1). FSP FIN 39-1 amends paragraph 3 of FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts – an interpretation of APB Opinion No. 10 and FASB Statement No. 105 (FIN 39) to replace the terms “conditional contracts” and “exchange contracts” with the term “derivative instruments” as defined in SFAS 133. It also amends paragraph 10 of FIN 39 to permit a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement that have been offset in accordance with that paragraph. The guidance in FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007. The Bank will adopt FSP FIN 39-1 on January 1, 2008. The Bank does not expect FSP FIN 39-1 to have a material impact on its results of operations or financial condition at the time of adoption.

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, 2007
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Commercial paper	$	997	$	—	$	—		$	997
Housing finance agency bonds		867		2		—			869
Subtotal		1,864		2		—			1,866
MBS:
GNMA		24		—		—			24
FHLMC		1,034		9		(1	)		1,042
FNMA		876		3		(7	)		872
Non-agency		27,961		20		(441	)		27,540
Total MBS		29,895		32		(449	)		29,478
Total	$	31,759	$	34	$	(449	)	$	31,344

7

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

December 31, 2006
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Commercial paper	$	2,235	$	—	$	—		$	2,235
Housing finance agency bonds		1,000		2		—			1,002
Discount notes:
FHLMC		150		—		—			150
FNMA		149		—		—			149
Subtotal		3,534		2		—			3,536
MBS:
GNMA		28		—		—			28
FHLMC		150		1		(1	)		150
FNMA		417		1		(11	)		407
Non-agency		26,219		37		(277	)		25,979
Total MBS		26,814		39		(289	)		26,564
Total	$	30,348	$	41	$	(289	)	$	30,100

Redemption Terms. The amortized cost and estimated fair value of certain securities by contractual maturity (based on contractual final principal payment) and mortgage-backed securities (MBS) as of September 30, 2007, and December 31, 2006, are shown below. Expected maturities of certain securities and MBS will differ from contractual maturities because borrowers generally have the right to prepay these obligations without prepayment fees.

September 30, 2007
Year of Contractual Maturity	Amortized Cost		Estimated Fair Value		Weighted Average Interest Rate
Within 1 year	$	997	$	997	5.25	%
After 1 year through 5 years		20		20	5.51
After 5 years through 10 years		31		31	5.48
After 10 years		816		818	5.56
Subtotal		1,864		1,866	5.40
MBS:
GNMA		24		24	6.13
FHLMC		1,034		1,042	5.74
FNMA		876		872	5.50
Non-agency		27,961		27,540	5.37
Total MBS		29,895		29,478	5.38
Total	$	31,759	$	31,344	5.38	%

December 31, 2006
Year of Contractual Maturity	Amortized Cost		Estimated Fair Value		Weighted Average Interest Rate
Within 1 year	$	2,534	$	2,534	5.24	%
After 5 years through 10 years		28		28	5.52
After 10 years		972		974	5.59
Subtotal		3,534		3,536	5.35
MBS:
GNMA		28		28	5.68
FHLMC		150		150	6.37
FNMA		417		407	4.80
Non-agency		26,219		25,979	5.16
Total MBS		26,814		26,564	5.16
Total	$	30,348	$	30,100	5.18	%

8

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

The amortized cost of the Bank’s MBS classified as held-to-maturity included net discounts of $14 at September 30, 2007, and net premiums of $33 at December 31, 2006.

Interest Rate Payment Terms. Interest rate payment terms for held-to-maturity securities at September 30, 2007, and December 31, 2006, are detailed in the following table:

	September 30, 2007		December 31, 2006
Amortized cost of held-to-maturity securities other than MBS:
Fixed rate	$	997	$	2,534
Adjustable rate		867		1,000
Subtotal		1,864		3,534
Amortized cost of held-to-maturity MBS:
Passthrough securities:
Fixed rate		1,149		395
Adjustable rate		100		122
Collateralized mortgage obligations:
Fixed rate		21,378		21,140
Adjustable rate		7,268		5,157
Subtotal		29,895		26,814
Total	$	31,759	$	30,348

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.

Note 4 – Advances

Redemption Terms. The Bank had advances outstanding at interest rates ranging from 1.69% to 8.57% at September 30, 2007, and 1.97% to 8.57% at December 31, 2006, as summarized below.

	September 30, 2007				December 31, 2006
Contractual Maturity	Amount Outstanding		Weighted Average Interest Rate		Amount Outstanding			Weighted Average Interest Rate
Overdrawn demand deposit accounts	$	10	1.69	%	$	—		3.69	%
Within 1 year		124,903	5.19			73,140		5.14
After 1 year through 2 years		51,205	5.30			40,762		5.14
After 2 years through 3 years		29,359	5.40			34,444		5.24
After 3 years through 4 years		14,634	5.42			9,468		5.13
After 4 years through 5 years		6,592	5.26			17,249		5.31
After 5 years		9,332	5.24			8,785		5.18
Total par amount		236,035	5.26	%		183,848		5.17	%
SFAS 133 valuation adjustments		148				(176	)
Net unamortized premiums/(discounts)		1				(3	)
Total	$	236,184			$	183,669

9

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

The following table summarizes advances at September 30, 2007, and December 31, 2006, by the earlier of the year of contractual maturity or next call date for callable advances.

Earlier of Contractual Maturity or Next Call Date	September 30, 2007		December 31, 2006
Overdrawn demand deposit accounts	$	10	$	—
Within 1 year		125,954		74,031
After 1 year through 2 years		50,881		40,850
After 2 years through 3 years		29,199		33,872
After 3 years through 4 years		14,449		9,429
After 4 years through 5 years		6,297		16,968
After 5 years		9,245		8,698
Total par amount	$	236,035	$	183,848

The following table summarizes advances to members at September 30, 2007, and December 31, 2006, by the earlier of the year of contractual maturity or next put date for putable advances.

Earlier of Contractual Maturity or Next Put Date	September 30, 2007		December 31, 2006
Overdrawn demand deposit accounts	$	10	$	—
Within 1 year		127,427		74,880
After 1 year through 2 years		51,664		40,174
After 2 years through 3 years		28,962		34,602
After 3 years through 4 years		14,557		9,493
After 4 years through 5 years		5,381		16,929
After 5 years		8,034		7,770
Total par amount	$	236,035	$	183,848

Security Terms. The Bank lends to member financial institutions that have their principal place of business in Arizona, California, or Nevada. The Bank is required by the Federal Home Loan Bank Act of 1932, as amended (FHLBank 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, and cash or deposits in the Bank. The capital stock of the Bank owned by each borrowing member is pledged as additional collateral for the member’s indebtedness to the Bank. The Bank may also accept small business, small farm, and small agribusiness loans and securities representing a whole interest in such loans as collateral from members that qualify as community financial institutions. Community financial institutions are defined for 2007 as Federal Deposit Insurance Corporation-insured depository institutions with average total assets over the preceding three-year period of $599 or less. For additional information on security terms, see Note 7 to the Financial Statements in the Bank’s 2006 Form 10-K.

Credit and Concentration Risk. The Bank’s potential credit risk from advances is concentrated in three institutions. The following tables present the concentration in advances to these three members as of September 30, 2007, and December 31, 2006. The tables also present the interest income from these advances before the impact of interest rate exchange agreements associated with these advances for the third quarter of 2007 and 2006 and for the first nine months of 2007 and 2006.

10

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Concentration of Advances
(Dollars in millions)	September 30, 2007				December 31, 2006
Name of Borrower	Advances Outstanding(1)		Percentage of Total Advances Outstanding		Advances Outstanding(1)		Percentage of Total Advances Outstanding
Citibank, N.A.	$	97,780	42	%	$	72,323	39	%
Washington Mutual Bank		43,240	18			34,864	19
World Savings Bank, FSB		24,241	10			22,846	13
Subtotal		165,261	70			130,033	71
Others		70,774	30			53,815	29
Total par	$	236,035	100	%	$	183,848	100	%
Concentration of Interest Income from Advances
(Dollars in millions)	Three Months Ended September 30,
	2007				2006
Name of Borrower	Interest Income from Advances(2)		Percentage of Total Interest Income from Advances		Interest Income from Advances(2)		Percentage of Total Interest Income from Advances
Citibank, N.A. (3)	$	1,212	45	%	$	—	—	%
Citibank (West), FSB (3)		—	—			624	28
Washington Mutual Bank		353	13			579	26
World Savings Bank, FSB		272	10			337	15
Subtotal		1,837	68			1,540	69
Others		843	32			709	31
Total	$	2,680	100	%	$	2,249	100	%
	Nine Months Ended September 30,
	2007				2006
Name of Borrower	Interest Income from Advances(2)		Percentage of Total Interest Income from Advances		Interest Income from Advances(2)		Percentage of Total Interest Income from Advances
Citibank, N.A. (3)	$	3,333	45	%	$	—	—	%
Citibank (West), FSB (3)		—	—			1,408	23
Washington Mutual Bank		933	13			1,840	30
World Savings Bank, FSB		781	11			954	16
Subtotal		5,047	69			4,202	69
Others		2,311	31			1,857	31
Total	$	7,358	100	%	$	6,059	100	%

(1) Member advance amounts and total advance amounts are at par value, and total advance amounts will not agree to carrying value amounts shown in the Statements of Condition. The differences between the par and carrying value amounts primarily relate to fair value adjustments for hedged advances resulting from SFAS 133.

(2) Interest income amounts exclude the interest effect of interest rate exchange agreements with derivatives counterparties; as a result, the total interest income amounts will not agree to the Statements of Income.

(3) 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.

The Bank held a security interest in collateral from each of these institutions with borrowing capacity in excess of their respective advances outstanding, and the Bank does not expect to incur any credit losses on these advances. Of these three members, Citibank, N.A., and Washington Mutual Bank each owned more than 10% of the Bank’s capital stock outstanding as of September 30, 2007. Each of these three members owned more than 10% of the Bank’s capital stock outstanding as of December 31, 2006.

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.

11

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Interest Rate Payment Terms. Interest rate payment terms for advances at September 30, 2007, and December 31, 2006, are detailed below:

	September 30, 2007		December 31, 2006
Par amount of advances:
Fixed rate	$	96,738	$	53,120
Adjustable rate		139,297		130,728
Total par amount	$	236,035	$	183,848

Note 5 – Mortgage Loans Held for Portfolio

Under the Mortgage Partnership Finance^® (MPF^®) Program, the Bank purchased 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 are held-for-portfolio loans. Under the MPF Program, participating members originated or purchased the mortgage loans, credit-enhanced them and sold them to the Bank, and generally retained the servicing of the loans.

On October 6, 2006, the Bank announced that it would no longer offer new commitments to purchase mortgage loans from its members, but that it would retain its existing portfolio of mortgage loans. (For more information, see Note 8 to the Financial Statements in the Bank’s 2006 Form 10-K.) The Bank’s last purchase commitment expired on February 15, 2007.

The following table presents information as of September 30, 2007, and December 31, 2006, on mortgage loans, all of which are qualifying conventional, conforming fixed rate residential mortgage loans on one- to four-unit residential properties and single-unit second homes.

	September 30, 2007			December 31, 2006
Fixed rate medium-term mortgage loans	$	1,434		$	1,613
Fixed rate long-term mortgage loans		2,814			3,035
Subtotal		4,248			4,648
Unamortized premiums		2			6
Unamortized discounts		(20	)		(23	)
Mortgage loans held for portfolio		4,230			4,631
Less: Allowance for credit losses		(1	)		(1	)
Mortgage loans held for portfolio, net	$	4,229		$	4,630

Medium-term loans have contractual terms of 15 years or less, and long-term loans have contractual terms of more than 15 years.

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 2007 and 2006, the Bank reduced net interest income for credit enhancement fees totaling $1 and $2, respectively. In the first nine months of 2007 and 2006, the Bank reduced net interest income for credit enhancement fees totaling $3 and $4, respectively.

Concentration Risk. The Bank had the following concentration in MPF loans with members whose outstanding total of mortgage loans sold to the Bank represented 10% or more of the Bank’s total outstanding mortgage loans at September 30, 2007, and December 31, 2006.

12

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Concentration of Mortgage Loans
(Dollars in millions)
September 30, 2007
Name of Member	Mortgage Loan Balances Outstanding		Percentage of Total Mortgage Loan Balances Outstanding		Number of Mortgage Loans Outstanding	Percentage of Total Number of Mortgage Loans Outstanding
Washington Mutual Bank	$	3,235	76	%	23,073	72	%
IndyMac Bank, F.S.B.		622	15		6,160	19
Subtotal		3,857	91		29,233	91
Others		391	9		2,859	9
Total	$	4,248	100	%	32,092	100	%

December 31, 2006
Name of Member	Mortgage Loan Balances Outstanding		Percentage of Total Mortgage Loan Balances Outstanding		Number of Mortgage Loans Outstanding	Percentage of Total Number of Mortgage Loans Outstanding
Washington Mutual Bank	$	3,506	76	%	24,406	72	%
IndyMac Bank, F.S.B.		706	15		6,650	19
Subtotal		4,212	91		31,056	91
Others		436	9		3,057	9
Total	$	4,648	100	%	34,113	100	%

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, 2007, the Bank had 43 loans totaling $4 classified as nonaccrual or impaired. Twenty-eight of these loans totaling $3 were in foreclosure or bankruptcy. At December 31, 2006, the Bank had 31 loans totaling $4 classified as nonaccrual or impaired. Twenty-three 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
	September 30, 2007		September 30, 2006		September 30, 2007		September 30, 2006
Balance, beginning of the period	$	0.8	$	0.6	$	0.7	$	0.7
Chargeoffs		—		—		—		—
Recoveries		—		—		—		—
Provision for credit losses		—		0.1		0.1		—
Balance, end of the period	$	0.8	$	0.7	$	0.8	$	0.7

For more information on how the Bank determines its estimated allowance for credit losses on mortgage loans, see Note 8 to the Financial Statements in the Bank’s 2006 Form 10-K.

The Bank’s average recorded investment in impaired loans totaled $4 and $3 for the third quarter of 2007 and the third quarter of 2006, respectively. The Bank’s average recorded investment in impaired loans totaled $4 and $4 for the nine months ended September 30, 2007 and 2006, respectively. The Bank did not recognize any interest income for impaired loans in the third quarter of 2007 and 2006 and in the first nine months of 2007 and 2006.

At September 30, 2007, the Bank’s other assets included $1 of real estate owned resulting from foreclosure of mortgage loans held by the Bank. At December 31, 2006, the Bank’s other assets included an immaterial amount of real estate owned resulting from foreclosure of mortgage loans held by the Bank.

13

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. As provided by the FHLBank Act or Federal Housing Finance Board (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 2006 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 issued. The Finance Board and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance.

Redemption Terms. The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding at September 30, 2007, and December 31, 2006.

	September 30, 2007					December 31, 2006
Contractual Maturity	Amount Outstanding			Weighted Average Interest Rate		Amount Outstanding			Weighted Average Interest Rate
Within 1 year	$	75,906		4.56	%	$	64,617		4.19	%
After 1 year through 2 years		72,249		4.95			57,351		4.41
After 2 years through 3 years		22,386		4.75			28,036		4.72
After 3 years through 4 years		13,612		4.94			13,774		4.68
After 4 years through 5 years		13,812		5.16			18,653		5.08
After 5 years		21,665		5.28			17,956		5.04
Index amortizing notes		8		4.61			9		4.61
Total par amount		219,638		4.84	%		200,396		4.52	%
Unamortized premiums		28					38
Unamortized discounts		(163	)				(218	)
SFAS 133 valuation adjustments		220					(916	)
Total	$	219,723				$	199,300

The Bank’s participation in consolidated obligation bonds outstanding includes callable bonds of $61,108 at September 30, 2007, and $58,528 at December 31, 2006. Contemporaneous with the issuance of a callable bond for which the Bank is the primary obligor, the Bank routinely 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 $42,062 at September 30, 2007, and $43,027 at December 31, 2006. 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.

14

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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

	September 30, 2007		December 31, 2006
Par amount of consolidated obligation bonds:
Non-callable	$	158,530	$	141,868
Callable		61,108		58,528
Total par amount	$	219,638	$	200,396

The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding at September 30, 2007, and December 31, 2006, by the earlier of the year of contractual maturity or next call date.

Earlier of Contractual Maturity or Next Call Date	September 30, 2007		December 31, 2006
Within 1 year	$	113,857	$	103,397
After 1 year through 2 years		68,808		55,118
After 2 years through 3 years		13,987		15,454
After 3 years through 4 years		9,488		7,419
After 4 years through 5 years		5,633		11,461
After 5 years		7,857		7,538
Index amortizing notes		8		9
Total par amount	$	219,638	$	200,396

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, 2007					December 31, 2006
	Amount Outstanding			Weighted Average Interest Rate		Amount Outstanding			Weighted Average Interest Rate
Par amount	$	68,732		4.81	%	$	30,226		5.15	%
Unamortized discounts		(705	)				(98	)
Total	$	68,027				$	30,128

Interest Rate Payment Terms. Interest rate payment terms for consolidated obligations at September 30, 2007, and December 31, 2006, are detailed in the following table. For information on the general terms and types of consolidated obligations outstanding, see Note 10 to the Financial Statements in the Bank’s 2006 Form 10-K.

	September 30, 2007		December 31, 2006
Par amount of consolidated obligations:
Bonds:
Fixed rate	$	176,856	$	177,924
Adjustable rate		37,282		14,265
Step-up		4,040		5,840
Range bonds		1,200		1,236
Fixed rate that converts to adjustable rate		37		827
Adjustable rate that converts to fixed rate		120		160
Zero-coupon		70		110
Inverse floating		25		25
Index amortizing notes		8		9
Total bonds, par		219,638		200,396
Discount notes, par		68,732		30,226
Total consolidated obligations, par	$	288,370	$	230,622

15

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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 5.0% minimum leverage capital ratio with a 1.5 weighting factor for permanent capital, and a 4.0% minimum total capital-to-assets ratio calculated without reference to the 1.5 weighting factor. As of September 30, 2007, and December 31, 2006, the Bank was in compliance with these capital rules and requirements. The FHLBank 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, the Finance Board has confirmed that 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 its capital requirements at September 30, 2007, and December 31, 2006.

Regulatory Capital Requirements
	September 30, 2007						December 31, 2006
	Required			Actual			Required			Actual
Risk-based capital	$	1,387		$	12,894		$	1,182		$	10,865
Total capital-to-assets ratio		4.00	%		4.24	%		4.00	%		4.44	%
Total regulatory capital	$	12,166		$	12,894		$	9,797		$	10,865
Leverage ratio		5.00	%		6.36	%		5.00	%		6.65	%
Leverage capital	$	15,208		$	19,341		$	12,246		$	16,298

The Bank’s capital requirements are discussed more fully in Note 13 to the Financial Statements in the Bank’s 2006 Form 10-K.

Mandatorily Redeemable Capital Stock. The Bank had mandatorily redeemable capital stock totaling $95 at September 30, 2007, and $106 at December 31, 2006. These amounts included accrued interest expense (accrued stock dividends) of $1 at September 30, 2007, and $2 at December 31, 2006, and have been classified as a liability in the Statements of Condition.

The following table presents mandatorily redeemable capital stock amounts by contractual redemption period at September 30, 2007, and December 31, 2006.

Contractual Redemption Period	September 30, 2007		December 31, 2006
After 1 year through 2 years	$	4	$	—
After 2 years through 3 years		16		30
After 3 years through 4 years		57		4
After 4 years through 5 years		18		72
Total	$	95	$	106

16

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

The Bank’s activity for mandatorily redeemable capital stock for the three and nine months ended September 30, 2007 and 2006, was as follows:

	Three months ended
	September 30, 2007					September 30, 2006
	Number of institutions		Amount			Number of institutions	Amount
Balance at the beginning of the period	13		$	96		9	$	75
Reclassified from capital during the period:
Withdrawal from membership	1			—		2		29
Conversion of nonmember institution to member institution	(1	)		—		—		—
Repurchase of mandatorily redeemable capital stock	—			(3	)	—		(11	)
Dividends accrued on mandatorily redeemable capital stock	—			2		—		1
Balance at the end of the period	13		$	95		11	$	94

	Nine months ended
	September 30, 2007					September 30, 2006
	Number of institutions		Amount			Number of institutions	Amount
Balance at the beginning of the period	12		$	106		8	$	47
Reclassified from/(to) capital during the period:
Withdrawal from membership	3			21		3		136
Conversion of nonmember institution to member institution	(2	)		(13	)	—		—
Repurchase of mandatorily redeemable capital stock	—			(23	)	—		(92	)
Dividends accrued on mandatorily redeemable capital stock	—			4		—		3
Balance at the end of the period	13		$	95		11	$	94

The Bank’s mandatorily redeemable capital stock is discussed more fully in Note 13 to the Financial Statements in the Bank’s 2006 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 $9 at September 30, 2007, and $26 at December 31, 2006.

In addition to the SFAS 133 gains, 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. In 2006, the Bank’s Retained Earnings and Dividend Policy was amended, effective January 1, 2007, to increase the target for the buildup of retained earnings other than SFAS 133 gains to $296 and to change the amount that may be made available for dividends to 90% of net income, excluding the effects of SFAS 133, until the new target for the buildup of retained earnings is reached. The retained earnings restricted in accordance with this provision of the Retained Earnings and Dividend Policy totaled $161 at September 30, 2007, and $117 at December 31, 2006.

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 2006 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 and subject to certain statutory and regulatory requirements. The Bank may also repurchase some or all of a member’s excess capital stock at the member’s request, at the Bank’s discretion and subject to certain statutory and regulatory requirements. 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.

17

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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 and subject to certain statutory and regulatory requirements, 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 $256 in the third quarter of 2007 and $423 in the third quarter of 2006. The Bank also repurchased excess capital stock that was not surplus capital stock totaling $11 in the third quarter of 2007 and $608 in the third quarter of 2006.

The Bank repurchased surplus capital stock totaling $1,685 in the first nine months of 2007 and $1,036 in the first nine months of 2006. The Bank also repurchased excess capital stock that was not surplus capital stock totaling $1,076 in the first nine months of 2007 and $1,195 in the first nine months of 2006.

Excess capital stock totaled $728 as of September 30, 2007, which included surplus capital stock of $242. On October 31, 2007, the Bank repurchased $228 of surplus capital stock. The Bank also repurchased $17 of excess capital stock that was not surplus capital stock, including $8 in excess capital stock that was the subject of repurchase requests submitted during the third quarter of 2007 by one member, and $9 in excess mandatorily redeemable capital stock repurchased from former members of the Bank. Excess capital stock totaled $371 after the October 31, 2007, capital stock repurchase.

For more information on excess and surplus capital stock, see Note 13 to the Financial Statements in the Bank’s 2006 Form 10-K.

Limitation on Issuance of Excess Stock. On December 28, 2006, the Finance Board published a final rule that limits the ability of an FHLBank to create member excess stock under certain circumstances. Effective January 29, 2007, an FHLBank may not pay dividends in the form of capital stock or issue new stock to members if the FHLBank’s excess stock exceeds 1% of its total assets or if the issuance of stock would cause the FHLBank’s excess stock to exceed 1% of its total assets. At September 30, 2007, the Bank’s excess capital stock totaled $728, or 0.24% of total assets.

In addition, the Finance Board’s final rule states that FHLBanks may declare and pay dividends only from previously retained earnings or current net earnings, and may not declare or pay dividends based on projected or anticipated earnings.

Concentration. The following table represents the concentration in capital stock held by members whose capital stock ownership represented 10% or more of the Bank’s outstanding capital stock, including mandatorily redeemable capital stock, as of September 30, 2007, or December 31, 2006.

18

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Concentration of Capital Stock
(Dollars in millions)	September 30, 2007				December 31, 2006
Name of Member	Capital Stock		Percentage of Total Capital Stock Outstanding		Capital Stock		Percentage of Total Capital Stock Outstanding
Citibank, N.A.	$	4,661	37	%	$	3,399	32	%
Washington Mutual Bank		2,195	17			1,964	18
World Savings Bank, FSB		1,140	9			1,343	13
Total	$	7,996	63	%	$	6,706	63	%

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, 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.

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, 2007 and 2006.

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 Hedges(1)		Net Interest Income		Other (Loss)/ Income			Other Expense		Income Before Assessments
Three months ended:
September 30, 2007	$	201	$	34	$	235	$	12	$	247	$	(39	)	$	24	$	184
September 30, 2006		173		36		209		8		217		(3	)		23		191
Nine months ended:
September 30, 2007		560		88		648		16		664		(20	)		71		573
September 30, 2006		473		113		586		25		611		(19	)		65		527

(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.”

19

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

The following table presents total assets by operating segment at September 30, 2007, and December 31, 2006.

Total Assets
	Advances- Related Business		Mortgage- Related Business		Total Assets
September 30, 2007	$	269,817	$	34,336	$	304,153
December 31, 2006		213,258		31,657		244,915

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 2006 Form 10-K.

Net gains/(losses) on derivatives and hedging activities for the three and nine months ended September 30, 2007 and 2006, were as follows:

	Three months ended						Nine months ended
	September 30, 2007			September 30, 2006			September 30, 2007			September 30, 2006
Net loss related to fair value hedge ineffectiveness	$	(54	)	$	(8	)	$	(42	)	$	(13	)
Net loss related to cash flow ineffectiveness		—			—			—			(1	)
Net gain on economic hedges		26			11			36			17
Net interest expense on derivative instruments used in economic hedges		(12	)		(8	)		(16	)		(25	)
Net loss on derivatives and hedging activities	$	(40	)	$	(5	)	$	(22	)	$	(22	)

For the three and nine months ended September 30, 2007 and 2006, 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, 2007, the amount of unrecognized net losses on derivative instruments accumulated in other comprehensive income expected to be reclassified to earnings during the next 12 months was immaterial.

20

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

The following table represents outstanding notional balances and estimated fair values of the derivatives outstanding at September 30, 2007, and December 31, 2006.

	September 30, 2007					December 31, 2006
Type of Derivative and Hedge Classification	Notional		Estimated Fair Value			Notional		Estimated Fair Value
Interest rate swaps:
Fair value	$	187,691	$	(22	)	$	185,477	$	(839	)
Economic		84,063		27			78,151		(13	)
Interest rate swaptions: Economic		3,080		9			3,575		6
Interest rate caps, floors, corridors, and/or collars:
Fair value		5,195		12			9,090		62
Economic		595		—			70		—
Total	$	280,624	$	26		$	276,363	$	(784	)
Total derivatives excluding accrued interest			$	26				$	(784	)
Accrued interest, net				56					(191	)
Net derivative balances			$	82				$	(975	)
Derivative assets			$	333				$	20
Derivative liabilities				(251	)				(995	)
Net derivative balances			$	82				$	(975	)

The estimated 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, 2007		December 31, 2006
Host contract:
Non-callable bonds	$	6	$	15
Total	$	6	$	15

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 contain master netting provisions to help mitigate the credit risk exposure to each counterparty. 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 provisions in each agreement, credit analyses, and the collateral requirements in place with each counterparty, management of the Bank does not anticipate any credit losses on derivative agreements.

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 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 that the Bank has transacted with counterparties for which 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, 2007, the Bank’s maximum credit risk, as defined above, was estimated at $333, including $149 of net accrued interest and fees receivable. At December 31, 2006, the Bank’s maximum credit risk was estimated at $20, including $1 of net accrued interest and fees receivable. Accrued interest and fees receivable and payable 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 derivatives 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 $286 and $19 as collateral from

21

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

counterparties as of September 30, 2007, and December 31, 2006, 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 highly rated derivatives dealers. Some of these financial institutions or their broker-dealer affiliates buy, sell, and distribute consolidated obligations. Assets pledged as collateral by the Bank to these counterparties are more fully discussed in Note 11.

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, 2007, and December 31, 2006. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases fair values are not subject to precise quantification or verification and 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 2006 Form 10-K.

The following tables show the estimated fair values of the Bank’s financial instruments at September 30, 2007, and December 31, 2006.

Fair Value of Financial Instruments – September 30, 2007
	Carrying Value		Net Unrealized Gains/(Losses)			Estimated Fair Value
Assets
Cash and due from banks	$	9	$	—		$	9
Interest-bearing deposits in banks		14,226		—			14,226
Federal funds sold		15,861		—			15,861
Trading securities		60		—			60
Held-to-maturity securities		31,759		(415	)		31,344
Advances		236,184		272			236,456
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans		4,229		(147	)		4,082
Accrued interest receivable		1,369		—			1,369
Derivative assets		333		—			333
Other assets		123		(60	)		63
Total	$	304,153	$	(350	)	$	303,803
Liabilities
Deposits	$	300	$	—		$	300
Consolidated obligations:
Bonds		219,723		(101	)		219,824
Discount notes		68,027		(36	)		68,063
Mandatorily redeemable capital stock		95		—			95
Accrued interest payable		2,257		—			2,257
Derivative liabilities		251		—			251
Other liabilities		706		—			706
Total	$	291,359	$	(137	)	$	291,496

22

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Fair Value of Financial Instruments – December 31, 2006
	Carrying Value		Net Unrealized Gains/(Losses)			Estimated Fair Value
Assets
Cash and due from banks	$	8	$	—		$	8
Interest-bearing deposits in banks		9,323		—			9,323
Securities purchased under agreements to resell		200		—			200
Federal funds sold		15,443		—			15,443
Trading securities		77		—			77
Held-to-maturity securities		30,348		(248	)		30,100
Advances		183,669		184			183,853
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans		4,630		(112	)		4,518
Accrued interest receivable		1,078		—			1,078
Derivative assets		20		—			20
Other assets		119		(66	)		53
Total	$	244,915	$	(242	)	$	244,673
Liabilities
Deposits	$	598	$	—		$	598
Consolidated obligations:
Bonds		199,300		323			198,977
Discount notes		30,128		3			30,125
Mandatorily redeemable capital stock		106		—			106
Accrued interest payable		2,280		—			2,280
Derivative liabilities		995		—			995
Other liabilities		754		—			754
Total	$	234,161	$	326		$	233,835

Note 11 – Commitments and Contingencies

As provided by the FHLBank 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 $1,148,571 at September 30, 2007, and $951,990 at December 31, 2006. The par value of the Bank’s participation in consolidated obligations was $288,370 at September 30, 2007, and $230,622 at December 31, 2006. For more information on the Finance Board’s joint and several liability regulation, see Note 18 to the Financial Statements in the Bank’s 2006 Form 10-K.

Commitments that legally obligate the Bank for additional advances totaled $727 at September 30, 2007, and $3,289 at December 31, 2006. Advance commitments are generally for periods up to 12 months. Standby letters of credit are generally 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 under a letter of credit, 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 $1,237 at September 30, 2007, and $1,124 at December 31, 2006, and had original terms of 30 days to 10 years with the latest final expiration in 2017. The value of the guarantees related to standby letters of credit is recorded in other liabilities and amounted to $2 at September 30, 2007, and $2 at December 31, 2006. 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 and letters of credit are fully collateralized at the time of funding or issuance (see Note 4). The estimated fair value of commitments and letters of credit was immaterial to the balance sheet as of September 30, 2007, and December 31, 2006.

23

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 guarantees 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. The Bank enters into master agreements with netting provisions with all counterparties and into bilateral security agreements with all active derivatives dealer counterparties. All member counterparty master agreements, excluding those with derivatives dealers, are subject to the terms of the Bank’s Advances and Security Agreement with members, and all member counterparties (except for those that are derivatives dealers) must fully collateralize the Bank’s net credit exposure. As of September 30, 2007, the Bank had pledged as collateral securities with a carrying value of $175, all of which could be sold or repledged, to counterparties that have market risk exposure from the Bank related to derivatives. As of December 31, 2006, the Bank had pledged as collateral securities with a carrying value of $687, of which $78 could not be sold or repledged and $609 could 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 that may arise in the normal course of business. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the Bank’s financial condition or results of operations.

At September 30, 2007, the Bank had committed to the issuance of $1,825 in consolidated obligation bonds and $1,000 in consolidated obligation discount notes. At December 31, 2006, the Bank had committed to the issuance of $175 in consolidated obligation bonds and $11 in consolidated obligation discount notes.

The Bank entered into interest rate exchange agreements that had traded but not yet settled with notional amounts totaling $1,390 at September 30, 2007, and $1,062 at December 31, 2006.

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

Note 12 – Transactions with Certain Members and Other FHLBanks

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 period ended on the respective dates or during the respective periods, and (iii) affiliates of the foregoing members or former members. All transactions with members and their affiliates are entered into in the normal course of business.

	September 30, 2007		December 31, 2006
Assets:
Cash and due from banks	$	8	$	7
Interest-bearing deposits in banks		1,250		—
Federal funds sold		—		700
Held-to-maturity securities(1)		3,009		3,101
Advances		167,348		132,912
Mortgage loans held for portfolio		3,235		3,691
Accrued interest receivable		852		662
Derivative assets		1		1
Total	$	175,703	$	141,074
Liabilities:
Deposits	$	23	$	48
Derivative liabilities		29		70
Total	$	52	$	118
Notional amount of derivatives	$	6,722	$	9,474
Letters of credit		165		172

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

24

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	Three months ended				Nine months ended
	September 30, 2007		September 30, 2006		September 30, 2007		September 30, 2006
Interest Income:
Interest-bearing deposits in banks	$	10	$	1	$	10	$	9
Federal funds sold		1		4		23		13
Held-to-maturity securities		36		36		107		98
Advances(1)		1,861		1,587		5,126		4,359
Mortgage loans held for portfolio		40		45		124		146
Total	$	1,948	$	1,673	$	5,390	$	4,625
Interest Expense:
Deposits	$	—	$	1	$	—	$	1
Consolidated obligations(1)		14		19		46		41
Total	$	14	$	20	$	46	$	42
Other (Loss)/Income
Net gain on derivatives and hedging activities	$	45	$	41	$	41	$	3

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

Transactions with Other FHLBanks. Transactions with other FHLBanks are identified on the face of the Bank’s financial statements, which begin on page 1.

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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; the ability of the Bank to pay dividends or redeem or repurchase capital stock; 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, 2006 (2006 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 its member base and its members’ credit needs. The Bank’s capital grows when members are required to purchase additional capital stock as they increase their advance borrowings. The Bank may repurchase excess capital stock from members as their advances or balances of mortgage loans previously sold to the Bank decline. As a result of its financial strategies, the Bank has been able to achieve its housing mission by meeting member credit needs and paying market-rate dividends despite significant fluctuations in total assets, liabilities, and capital in recent years.

The Bank strives to pay a market-rate return on its members’ investment in the Bank’s capital stock. The Bank assesses the effectiveness of this policy by comparing the dividend rate on its capital stock to a benchmark calculated as the combined average for the dividend period 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 business and results of operations are sensitive to the condition of the mortgage markets, as well as to general business and economic conditions. These conditions, which may also affect the business and results of operations of the Bank’s members, include real estate values, short- and long-term interest rates, liquidity in the credit markets, and the strength of the United States economy and the local and regional economies in which the Bank’s members conduct business. In light of conditions in the financial markets during the third quarter of 2007, including events adversely affecting the mortgage and credit markets, the Bank experienced significant growth in assets, and in particular, advances to members. All advances were fully collateralized in accordance with the Bank’s credit and collateral requirements. Members increased advances for different reasons, including growth in their mortgage portfolios and increases in the cost or decreases in the availability of liquidity from other sources. Much of the growth in member advances was in maturities under one year. The growth in the Bank’s assets was accompanied by increases in the Bank’s consolidated obligations during the

26

quarter, primarily short-term discount notes. In addition, the prevailing market conditions, especially the movement in interest rates during the quarter and the Bank’s lower funding costs relative to the London Interbank Offered Rate (LIBOR), favorably impacted the Bank’s profitability. At the same time, market interest rates and liquidity concerns in the credit markets had a net unfavorable impact on the fair value of the Bank’s hedging instruments and mortgage portfolio—mortgage-backed securities (MBS) and mortgage loans. These items are more thoroughly discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The Bank’s dividend rate for the third quarter of 2007 was 5.26% (annualized), compared to 5.54% (annualized) for the third quarter of 2006. In the third quarter of 2007, the Bank paid 90% of its earnings excluding the effects of 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; SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, on July 1, 2003; and SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140 (together referred to as “SFAS 133”). In the third quarter of 2006, the Bank paid 94% of its earnings excluding the effects of SFAS 133.

The Bank’s dividend rate for the first nine months of 2007 was 5.10% (annualized), compared to 5.27% (annualized) for the first nine months of 2006. In the first nine months of 2007, the Bank paid 90% of its earnings excluding the effects of SFAS 133. In the first nine months of 2006, the Bank paid 94% of its earnings excluding the effects of SFAS 133.

The difference between the dividend rates for the third quarter and first nine months of 2007 compared to the same periods in 2006 reflects a lower net interest spread on the Bank’s combined mortgage loan and MBS portfolio, partially offset by a higher yield on invested capital during the third quarter and first nine months of 2007 compared to the same periods in 2006.

For the third quarter of 2007, net income decreased $5 million, or 4%, to $135 million from $140 million in the third quarter of 2006. The decrease primarily reflected differences in fair value adjustments, partially offset by growth in net interest income for the respective periods.

For the first nine months of 2007, net income rose $34 million, or 9%, to $421 million from $387 million in the first nine months of 2006. The increase primarily reflected growth in net interest income, as well as differences in fair value adjustments for the respective periods.

Net interest income for the third quarter of 2007 rose $30 million, or 14%, to $247 million from $217 million for the third quarter of 2006. Net interest income for the first nine months of 2007 rose $53 million, or 9%, to $664 million from $611 million for the first nine months of 2006. The increases in net interest income were primarily driven by the effect of higher interest rates on higher average capital balances and by higher advances balances. These increases were partially offset by lower net interest income on the Bank’s mortgage portfolio.

Net income also reflected fair value adjustments, primarily associated with derivatives and hedged items, after assessments (excluding the impact from net interest expense on derivative instruments used in economic hedges), which resulted in net fair value losses of $21 million in the third quarter of 2007, compared to net fair value gains of $3 million in the third quarter of 2006. Most of the net fair value losses in the third quarter of 2007 and most of the net fair value gains in the third quarter of 2006 consisted of unrealized fair value adjustments.

Fair value adjustments, primarily associated with derivatives and hedged items, after assessments (excluding the impact from net interest expense on derivative instruments used in economic hedges) resulted in net fair value losses of $5 million in the first nine months of 2007, compared to net fair value gains of $2 million in the first nine months of 2006. Most of the $5 million net fair value losses in the first nine months of 2007 consisted of unrealized fair value adjustments. Most of the $2 million net fair value gains in the first nine months of 2006 reflected net fair value gains on the termination of hedges related to consolidated obligations.

27

Nearly all of the Bank’s derivatives and hedged instruments are held to the maturity, call, or put date. For these derivatives and hedged items, net 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 dates. However, the Bank may have instances in which hedging relationships are terminated prior to maturity or prior to the call or put dates. 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.

During the first nine months of 2007, total assets grew $59.2 billion, or 24%, to $304.2 billion at September 30, 2007, from $244.9 billion at December 31, 2006, primarily because advances increased by $52.5 billion, or 29%, to $236.2 billion from $183.7 billion. Most of the growth in advances occurred in the third quarter of 2007, reflecting the prevailing conditions in the financial markets during the quarter, and was funded primarily by consolidated obligation discount notes.

In addition to the increase in advances, interest-bearing deposits in banks increased by $4.9 billion, or 53%, to $14.2 billion from $9.3 billion, and held-to-maturity securities increased by $1.4 billion, or 5%, to $31.8 billion from $30.4 billion.

28

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, 2007			June 30, 2007			March 31, 2007			December 31, 2006			September 30, 2006
Selected Balance Sheet Items at Quarter End
Total Assets	$	304,153		$	234,615		$	246,906		$	244,915		$	231,719
Advances		236,184			171,019			177,455			183,669			174,538
Mortgage Loans		4,229			4,363			4,505			4,630			4,775
Held-to-Maturity Securities		31,759			30,154			30,120			30,348			29,824
Interest-Bearing Deposits in Banks		14,226			8,306			10,235			9,323			12,568
Federal Funds Sold		15,861			19,062			21,246			15,443			8,600
Consolidated Obligations:(1)
Bonds		219,723			194,305			202,437			199,300			197,711
Discount Notes		68,027			25,361			29,729			30,128			19,653
Capital Stock – Class B – Putable		12,629			9,782			10,898			10,616			10,301
Total Capital		12,794			9,954			11,053			10,754			10,437
Selected Operating Results for the Quarter
Net Interest Income	$	247		$	212		$	205		$	228		$	217
Other (Loss)/Income		(39	)		7			12			9			(3	)
Other Expense		24			23			24			25			23
Assessments		49			52			51			57			51
Net Income	$	135		$	144		$	142		$	155		$	140
Selected Other Data for the Quarter
Net Interest Margin		0.38	%		0.37	%		0.35	%		0.38	%		0.38	%
Operating Expenses as a Percent of Average Assets		0.03			0.03			0.03			0.04			0.03
Return on Assets		0.20			0.25			0.24			0.26			0.24
Return on Equity		4.86			5.65			5.40			5.88			5.59
Annualized Dividend Rate		5.26			5.14			4.89			5.83			5.54
Spread of Dividend Rate to Dividend Benchmark(2)		0.73			0.61			0.42			1.44			1.21
Dividend Payout Ratio(3)		105.16			88.61			87.98			96.77			96.72
Selected Other Data at Quarter End
Capital to Assets Ratio(4)		4.24			4.29			4.52			4.44			4.55
Duration Gap (in months)		1			1			1			1			1

(1) As provided by the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), or Federal Housing Finance Board (Finance Board) regulation, all of the 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:

	Par amount
September 30, 2007	$	1,148,571
June 30, 2007		970,857
March 31, 2007		951,470
December 31, 2006		951,990
September 30, 2006		958,023

(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. This calculation has been modified for prior periods to exclude mandatorily redeemable capital stock (which is classified as a liability) and the dividends on that stock (which are classified as interest expense).

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

29

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 the 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, 2007 and 2006, together with the related interest income and expense. They also present the average rates on total earning assets and the average costs 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 2007 compared to the third quarter of 2006 and for the first nine months of 2007 compared to the first nine months of 2006. Changes in both volume and interest rates influence changes in net interest income and the net interest margin.

Average Balance Sheets

	Three months ended
	September 30, 2007							September 30, 2006
(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	$	10,965		$	149	5.39	%	$	13,513		$	181	5.31	%
Securities purchased under agreements to resell		92			1	4.31			151			2	5.25
Federal funds sold		12,731			170	5.30			6,665			88	5.24
Trading securities:
MBS		61			1	6.50			100			2	7.93
Held-to-maturity securities:
MBS		26,991			365	5.37			26,814			344	5.09
Other investments		2,562			35	5.42			3,139			43	5.43
Mortgage loans		4,299			51	4.71			4,860			60	4.90
Advances(1)		201,276			2,742	5.40			173,566			2,351	5.37
Loans to other FHLBanks		6			—	2.43			3			—	0.48
Total interest-earning assets		258,983			3,514	5.38			228,811			3,071	5.32
Other assets(2)		4,334			—	—			2,119			—	—
Total Assets	$	263,317		$	3,514	5.29	%	$	230,930		$	3,071	5.28	%
Liabilities and Capital
Interest-bearing liabilities:
Consolidated obligations:
Bonds(1)	$	205,669		$	2,736	5.28	%	$	196,851		$	2,580	5.20	%
Discount notes(1)		40,950			527	5.11			20,469			267	5.18
Deposits		213			2	3.73			419			5	4.73
Borrowings from other FHLBanks		4			—	5.36			2			—	5.27
Mandatorily redeemable capital stock		95			2	5.26			82			1	5.54
Other borrowings		30			—	5.16			21			1	5.42
Total interest-bearing liabilities		246,961			3,267	5.25			217,844			2,854	5.20
Other liabilities(2)		5,323			—	—			3,107			—	—
Total Liabilities		252,284			3,267	5.14			220,951			2,854	5.12
Total Capital		11,033			—	—			9,979			—	—
Total Liabilities and Capital	$	263,317		$	3,267	4.92	%	$	230,930		$	2,854	4.90	%
Net Interest Income				$	247						$	217
Net Interest Spread(3)						0.13	%						0.12	%
Net Interest Margin(4)						0.38	%						0.38	%
Total Average Assets/Capital Ratio(5)		23.7	x						23.0	x
Interest-earning Assets/Interest-bearing Liabilities		1.0	x						1.1	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

Three Months Ended September 30, 2007, Compared to Three Months Ended September 30, 2006

	Increase/ (Decrease)			Attributable to Changes in(1)
(In millions)				Average Volume			Average Rate
Interest-earning assets:
Interest-bearing deposits in banks	$	(32	)	$	(35	)	$	3
Securities purchased under agreements to resell		(1	)		(1	)		—
Federal funds sold		82			81			1
Trading securities:
MBS		(1	)		(1	)		—
Held-to-maturity securities:
MBS		21			2			19
Other Investments		(8	)		(8	)		—
Mortgage loans		(9	)		(7	)		(2	)
Advances(2)		391			377			14
Total interest-earning assets		443			408			35
Interest-bearing liabilities:
Consolidated obligations:
Bonds(2)		156			117			39
Discount notes(2)		260			264			(4	)
Deposits		(3	)		(2	)		(1	)
Mandatorily redeemable capital stock		1			1			—
Other borrowings		(1	)		(1	)		—
Total interest-bearing liabilities		413			379			34
Net interest income	$	30		$	29		$	1

(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, 2007							September 30, 2006
(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	$	9,226		$	370	5.36	%	$	10,558		$	398	5.04	%
Securities purchased under agreements to resell		324			13	5.36			855			29	4.53
Federal funds sold		13,000			517	5.32			11,151			402	4.82
Trading securities:
MBS		65			3	6.17			110			5	6.08
Held-to-maturity securities:
MBS		26,228			1,024	5.22			26,623			987	4.96
Other investments		2,751			112	5.44			3,012			114	5.06
Mortgage loans		4,433			162	4.89			5,005			185	4.94
Advances(1)		187,360			7,538	5.38			169,584			6,320	4.98
Loans to other FHLBanks		5			—	4.15			7			—	—
Total interest-earning assets		243,392			9,739	5.35			226,905			8,440	4.97
Other assets(2)		3,606			—	—			1,820			—	—
Total Assets	$	246,998		$	9,739	5.27	%	$	228,725		$	8,440	4.93	%
Liabilities and Capital
Interest-bearing liabilities:
Consolidated obligations:
Bonds(1)	$	202,001		$	7,926	5.25	%	$	195,437		$	7,082	4.84	%
Discount notes(1)		29,128			1,128	5.18			20,213			729	4.82
Deposits		465			17	4.89			416			14	4.50
Borrowings from other FHLBanks		2			—	5.35			6			—	4.86
Mandatorily redeemable capital stock		98			4	5.10			67			3	5.27
Other borrowings		13			—	5.19			16			1	5.12
Total interest-bearing liabilities		231,707			9,075	5.24			216,155			7,829	4.84
Other liabilities(2)		4,660			—	—			2,673			—	—
Total Liabilities		236,367			9,075	5.13			218,828			7,829	4.78
Total Capital		10,631			—	—			9,897			—	—
Total Liabilities and Capital	$	246,998		$	9,075	4.91	%	$	228,725		$	7,829	4.58	%
Net Interest Income				$	664						$	611
Net Interest Spread(3)						0.11	%						0.13	%
Net Interest Margin(4)						0.36	%						0.36	%
Total Average Assets/Capital Ratio(5)		23.0	x						23.0	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 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, 2007, Compared to Nine Months Ended September 30, 2006

	Increase/ (Decrease)			Attributable to Changes in(1)
(In millions)				Average Volume			Average Rate
Interest-earning assets:
Interest-bearing deposits in banks	$	(28	)	$	(52	)	$	24
Securities purchased under agreements to resell		(16	)		(21	)		5
Federal funds sold		115			71			44
Trading securities:
MBS		(2	)		(2	)		—
Held-to-maturity securities:
MBS		37			(15	)		52
Other investments		(2	)		(10	)		8
Mortgage loans		(23	)		(21	)		(2	)
Advances(2)		1,218			692			526
Total interest-earning assets		1,299			642			657
Interest-bearing liabilities:
Consolidated obligations:
Bonds(2)		844			244			600
Discount notes(2)		399			342			57
Deposits		3			2			1
Mandatorily redeemable capital stock		1			1			—
Other borrowings		(1	)		(1	)		—
Total interest-bearing liabilities		1,246			588			658
Net interest income	$	53		$	54		$	(1	)

(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 was 38 basis points for the third quarter of 2007, unchanged from the third quarter of 2006. The net interest margin was 36 basis points for the first nine months of 2007, unchanged from the first nine months of 2006.

The net interest spread was 13 basis points for the third quarter of 2007, 1 basis point higher than the net interest spread for the third quarter of 2006, which was 12 basis points. The increase reflected higher net interest spreads on non-MBS investments and new advances, which were driven primarily by lower funding costs, relative to the LIBOR, during the third quarter of 2007 as events adversely affecting the financial markets led to higher demand for FHLBank consolidated obligations. The increase also reflected the impact of higher estimated prepayment speeds on MBS with purchase discounts during the third quarter of 2007, which resulted in a positive cumulative retrospective adjustment for the amortization of the purchase discounts from the acquisition dates of the 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). These increases were partially offset by a lower net interest spread on the Bank’s mortgage portfolio.

The net interest spread was 11 basis points for the first nine months of 2007, 2 basis points lower than the net interest spread for the first nine months of 2006, which was 13 basis points. The decrease was driven primarily by a lower net interest spread on the Bank’s mortgage portfolio. The lower net interest spread on the mortgage portfolio reflected the impact of higher estimated prepayment speeds on MBS with purchase premiums primarily during the first quarter of 2007, which resulted in an adverse cumulative retrospective adjustment for the amortization of the purchase premiums from the acquisition dates of the MBS in accordance with SFAS 91. These decreases were partially offset by a higher net interest spread on non-MBS investments, which was driven primarily by lower funding costs, relative to LIBOR, during the third quarter of 2007 as events adversely affecting the financial markets led to higher demand for FHLBank consolidated obligations.

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Net Interest Income

Third Quarter of 2007 Compared to Third Quarter of 2006. Net interest income in the third quarter of 2007 was $247 million, a 14% increase from $217 million in the third quarter of 2006. The increase was driven primarily by the effect of higher interest rates on higher average capital balances and by higher average advances balances. These increases were partially offset by lower net interest income on the Bank’s mortgage portfolio.

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 held-to-maturity—increased $41 million in the third quarter of 2007 compared to the third quarter of 2006. The increase consisted of a $37 million increase attributable to a 12% increase in average non-MBS investment balances and a $4 million increase. attributable to higher average yields on non-MBS investments.

Interest income from the mortgage portfolio increased $11 million in the third quarter of 2007 compared to the third quarter of 2006. The increase consisted of a $19 million increase attributable to higher average yields on MBS investments and a $1 million increase attributable to a 1% increase in average MBS outstanding, partially offset by a $7 million decrease attributable to a 12% decrease in average mortgage loans outstanding and a $2 million decrease attributable to lower average yields on mortgage loans. Interest income from the mortgage portfolio includes the impact of cumulative retrospective adjustments for the amortization of purchase premiums and discounts from the acquisition dates of the MBS and mortgage loans in accordance with SFAS 91, which decreased interest income by $6 million in the third quarter of 2007 and increased interest income by $2 million in the third quarter of 2006.

Interest income from advances increased $391 million in the third quarter of 2007 compared to the third quarter of 2006. The increase consisted of a $377 million increase attributable to a 16% increase in average advances outstanding, reflecting higher member demand during the third quarter of 2007 relative to the third quarter of 2006, and a $14 million increase attributable to higher average yields because of increases in interest rates for new advances and adjustable rate advances repricing at higher rates.

Paralleling the growth in interest-earning assets, average consolidated obligations (bonds and discount notes) funding the earning assets increased 13%, resulting in a $416 million increase in interest expense for the third quarter of 2007 relative to the third quarter of 2006. Higher interest rates on consolidated obligations outstanding in the third quarter of 2007 compared to the third quarter of 2006 contributed $35 million to the increase in interest expense. Higher average consolidated obligation balances, which were issued primarily to finance the growth in advances, contributed $381 million to the increase in interest expense during the third quarter of 2007 relative to the third quarter of 2006.

Nine Months Ended September 30, 2007, Compared to Nine Months Ended September 30, 2006. Net interest income in the first nine months of 2007 was $664 million, a 9% increase from $611 million in the first nine months of 2006. The increase was driven primarily by the effect of higher interest rates on higher average capital balances and higher average advances balances. These increases were partially offset by lower net interest income on the Bank’s mortgage portfolio, which included the impact of retrospective adjustments for the amortization of purchase premiums and discounts from the acquisition dates of the mortgage loans and MBS in accordance with SFAS 91.

Interest income on non-MBS investments contributed $69 million to the increase in interest income in the first nine months of 2007 compared to the first nine months of 2006. The increase consisted of an $81 million increase attributable to higher average yields on non-MBS investments, partially offset by a $12 million decrease that was attributable to a 1% decrease in average non-MBS investment balances.

Interest income from the mortgage portfolio increased $12 million in the first nine months of 2007 compared to the first nine months of 2006. The increase consisted of a $52 million increase attributable to higher average yields on MBS investments, partially offset by a $17 million decrease attributable to a 2% decrease in

34

average MBS outstanding, a $21 million decrease attributable to an 11% decrease in average mortgage loans outstanding, and a $2 million decrease attributable to lower average yields on mortgage loans outstanding. Interest income from the mortgage portfolio includes the impact of cumulative retrospective adjustments for the amortization of purchase premiums and discounts primarily during the first and third quarters of 2007 from the acquisition dates of the MBS and mortgage loans in accordance with SFAS 91, which decreased interest income by $9 million in the first nine months of 2007 and increased interest income by $37,000 in the first nine months of 2006.

Interest income from advances increased $1,218 million, which consisted of a $692 million increase attributable to a 10% increase in average advances outstanding, reflecting higher member demand during the first nine months of 2007 relative to the first nine months of 2006, and a $526 million increase attributable to higher average yields because of increases in interest rates for new advances and adjustable rate advances repricing at higher rates.

Paralleling the growth in interest-earning assets, average consolidated obligations (bonds and discount notes) funding the earning assets increased 7%, resulting in a $1,243 million increase in interest expense for the first nine months of 2007 relative to the first nine months of 2006. Higher interest rates on consolidated obligations outstanding in the first nine months of 2007 compared to the first nine months of 2006 contributed $657 million to the increase in interest expense. Higher average consolidated obligation balances, which were issued primarily to finance growth in advances, contributed $586 million to the increase in interest expense during the first nine months of 2007 relative to the first nine months of 2006.

The growth in average interest-earning assets and net interest income during the third quarter of 2007 compared to the third quarter of 2006 and during the first nine months of 2007 compared to the first nine months of 2006 was driven primarily by member demand for advances. 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 2007 Compared to Third Quarter of 2006. Other (loss)/income was a net loss of $39 million in the third quarter of 2007 compared to a net loss of $3 million in the third quarter of 2006. The increased loss was the result of changes in 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 the maturity, call, 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 dates, 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 call or put dates. 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.

35

SFAS 133-related income volatility during the third quarter of 2007 was primarily driven by (i) the significant change in short-term interest rates following the September 18, 2007, Federal Open Market Committee’s reduction in the Federal Funds target rate from 5.25% to 4.75%, and (ii) the changes in consolidated obligations rate levels, consolidated obligations spreads to LIBOR, and swap volatilities during the third quarter of 2007. The adverse fair value impact of SFAS 133 from the most recent changes in short-term interest rates is generally expected to reverse over the next few months as the floating-rate payments that the Bank makes on certain interest rate exchange agreements adjust downward to current market rates. The adverse impacts from the spread and volatility changes are also expected generally to reverse, either as spreads and volatilities revert to the market conditions that existed prior to August 2007 or over the remaining lives of the affected interest rate exchange agreements or hedged financial instruments. Additional declines in short-term interest rates or additional adverse changes in spreads and volatility could create additional fair value losses, but these fair value losses, if any, would generally be expected to reverse in the manner described above.

The ongoing impact of SFAS 133 on the Bank cannot be predicted, and the Bank’s retained earnings in the future may not be sufficient to offset the impact of SFAS 133. The effects of SFAS 133 may lead to significant volatility in future earnings, other comprehensive income, and dividends.

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 2007 and 2006.

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

Three Months Ended September 30, 2007, Compared to Three Months Ended September 30, 2006

(In millions)	Three months ended
	September 30, 2007													September 30, 2006
	Gain/(Loss)							Net Interest Income/ (Expense) on Economic Hedges			Total			Gain/(Loss)								Net Interest Income/ (Expense) on Economic Hedges			Total
Hedged Item	Fair Value Hedges			Cash Flow Hedges		Economic Hedges								Fair Value Hedges			Cash Flow Hedges		Economic Hedges
Advances	$	4		$	—	$	1	$	1		$	6		$	5		$	—	$	(14	)	$	4		$	(5	)
Consolidated obligations		(58	)		—		25		(13	)		(46	)		(13	)		—		25			(12	)		—
MBS		—			—		—		—			—			—			—		—			—			—
Total	$	(54	)	$	—	$	26	$	(12	)	$	(40	)	$	(8	)	$	—	$	11		$	(8	)	$	(5	)

During the third quarter of 2007, net losses on derivatives and hedging activities totaled $40 million compared to net losses of $5 million in the third quarter of 2006. These amounts included net interest expense on derivative instruments used in economic hedges of $12 million in the third quarter of 2007 and $8 million in the third quarter of 2006. The majority of this net interest expense was attributable to interest rate swaps associated with consolidated obligations.

Excluding the $12 million impact from net interest expense on derivative instruments used in economic hedges, fair value adjustments for the third quarter of 2007 resulted in net losses of $28 million. The $28 million net losses consisted primarily of unrealized net losses of $33 million attributable to the hedges related to consolidated obligations and net fair value losses of $2 million on the termination of hedges related to advances, partially offset by unrealized net gains of $7 million attributable to the hedges related to advances.

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 resulted in net gains of $3 million. The $3 million net gains consisted primarily of 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.

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Nine Months Ended September 30, 2007, Compared to Nine Months Ended September 30, 2006. Other (loss)/income was a net loss of $20 million in the first nine months of 2007 compared to a net loss of $19 million in the first nine months of 2006. The loss in both periods consisted of net interest expense on derivative instruments used in economic hedges and fair value adjustments associated with derivatives and hedging activities under the provisions of SFAS 133.

SFAS 133-related income volatility during the first nine months of 2007 was primarily driven by (i) the significant change in short-term interest rates following the September 18, 2007, Federal Open Market Committee’s reduction in the Federal Funds target rate from 5.25% to 4.75%, and (ii) the changes in consolidated obligations rate levels, consolidated obligations spreads to LIBOR, and swap volatilities during the third quarter of 2007. The adverse fair value impact of SFAS 133 from the most recent changes in short-term interest rates is generally expected to reverse over the next few months as the floating-rate payments that the Bank makes on certain interest rate exchange agreements adjust downward to current market rates. The adverse impacts from the spread and volatility changes are also expected generally to reverse, either as spreads and volatilities revert to the market conditions that existed prior to August 2007 or over the remaining lives of the affected interest rate exchange agreements or hedged financial instruments. Additional declines in short-term interest rates or additional adverse changes in spreads and volatility could create additional fair value losses, but these fair value losses, if any, would generally be expected to reverse in the manner described above.

In addition, SFAS 133-related income volatility included the impact of economic hedges from the first six months of 2007. These hedges do not qualify for hedge accounting treatment under SFAS 133. Economic hedges introduce the potential for earnings volatility because the changes in fair value recorded on the interest rate exchange agreements generally are not offset by corresponding changes in the value of the economically hedged assets, liabilities, or firm commitments. These economic hedges are primarily transacted as non-SFAS 133-hedge qualifying at inception, but also occur when hedge accounting is discontinued because the Bank determines that a derivative no longer qualifies as an effective hedge.

The ongoing impact of SFAS 133 on the Bank cannot be predicted, and the Bank’s retained earnings in the future may not be sufficient to offset the impact of SFAS 133. The effects of SFAS 133 may lead to significant volatility in future earnings, other comprehensive income, and dividends.

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 first nine months of 2007 and 2006.

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

Nine Months Ended September 30, 2007, Compared to Nine Months Ended September 30, 2006

(In millions)	Nine months ended
	September 30, 2007													September 30, 2006
	Gain/(Loss)							Net Interest Income/ (Expense) on Economic Hedges			Total			Gain/(Loss)									Net Interest Income/ (Expense) on Economic Hedges			Total
Hedged Item	Fair Value Hedges			Cash Flow Hedges		Economic Hedges								Fair Value Hedges			Cash Flow Hedges			Economic Hedges
Advances	$	3		$	—	$	2	$	3		$	8		$	3		$	—		$	(7	)	$	4		$	—
Consolidated obligations		(45	)		—		34		(19	)		(30	)		(16	)		(1	)		23			(29	)		(23	)
MBS		—			—		—		—			—			—			—			1			—			1
Total	$	(42	)	$	—	$	36	$	(16	)	$	(22	)	$	(13	)	$	(1	)	$	17		$	(25	)	$	(22	)

During the first nine months of 2007, net losses on derivatives and hedging activities totaled $22 million compared to net losses of $22 million in the first nine months of 2006. These amounts included net interest expense on derivative instruments used in economic hedges of $16 million in the first nine months of 2007 and $25 million in the first nine months of 2006. The majority of this net interest expense was attributable to interest rate swaps associated with consolidated obligations.

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Excluding the $16 million impact from net interest expense on derivative instruments used in economic hedges, fair value adjustments for the first nine months of 2007 resulted in net losses of $6 million. The $6 million net losses consisted primarily of unrealized net losses of $11 million attributable to the hedges related to consolidated obligations and net fair value losses of $1 million on the termination of hedges related to advances, partially offset by net gains of $6 million attributable to the hedges related to advances.

Excluding the $25 million impact from net interest expense on derivative instruments used in economic hedges, fair value adjustments resulted in net gains of $3 million for the first nine months of 2006. The $3 million 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.

Return on Equity

Return on equity (ROE) was 4.86% (annualized) for the third quarter of 2007, a decrease of 73 basis points from the third quarter of 2006. This decrease reflected the 4% decline in net income, to $135 million in the third quarter of 2007 from $140 million in the third quarter of 2006, and the 11% growth in average capital, to $11.0 billion in the third quarter of 2007 from $10.0 billion in the third quarter of 2006.

ROE was 5.29% (annualized) for the first nine months of 2007, an increase of 6 basis points from the first nine months of 2006. This increase reflected the 9% rise in net income, to $421 million in the first nine months of 2007 from $387 million in the first nine months of 2006. In addition, the growth in net income more than kept pace with the growth in average capital. Average capital increased 7%, to $10.6 billion in the first nine months of 2007 from $9.9 billion in the first nine months of 2006.

Dividends

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 consolidated obligations has not been paid in full or is not expected to be 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 obligations markets. At September 30, 2007, advances maturing within five years totaled $226.7 billion, significantly in excess of the $0.3 billion of member deposits on that date. At December 31, 2006, advances maturing within five years totaled $175.1 billion, also significantly in excess of the $0.6 billion of member deposits on that date. In addition, as of September 30, 2007, and December 31, 2006, 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 obligations 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. As SFAS 133 cumulative net unrealized gains are reversed by periodic net unrealized losses, the amount of cumulative net unrealized gains decreases. The amount of retained earnings

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required by this provision of the policy is therefore decreased, and that portion of the previously restricted retained earnings becomes unrestricted and may be made available for dividends. As a result of the net unrealized losses that occurred during the third quarter of 2007, retained earnings restricted in accordance with this provision decreased to $9 million at September 30, 2007, as $23 million of previously restricted retained earnings was unrestricted and made available for dividends during the third quarter of 2007.

In addition to the SFAS 133 gains, 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. Effective January 1, 2007, the Bank’s Retained Earnings and Dividend Policy was amended to increase the target for the buildup of retained earnings other than SFAS 133 gains to $296 million and to change the amount that may be made available for dividends to 90% of net income, excluding the effects of SFAS 133, until the new target for the buildup of retained earnings is reached. The retained earnings restricted in accordance with this provision of the Retained Earnings and Dividend Policy totaled $161 million at September 30, 2007, and $117 million at December 31, 2006. Assuming that the Bank’s financial performance remains relatively consistent with its recent performance, the Bank would be expected to reach the $296 million target by the end of 2009.

The Bank’s dividend rate decreased to 5.26% (annualized) for the third quarter of 2007 from 5.54% (annualized) in the third quarter of 2006. The spread between the dividend rate and the dividend benchmark decreased to 0.73% for the third quarter of 2007 from 1.21% for the third quarter of 2006. In the third quarter of 2007, the Bank retained $16 million, or 10% of its earnings excluding the effects of SFAS 133, to build retained earnings to its target amount of $296 million, in accordance with the Bank’s Retained Earnings and Dividend Policy, and made available for dividends an amount equal to the remaining 90% of earnings excluding the effects of SFAS 133. In the third quarter of 2006, the Bank retained $8 million for the buildup of retained earnings, which was equal to 6% of its earnings excluding the effects of SFAS 133, and made available for dividends an amount equal to the remaining 94% of earnings excluding the effects of SFAS 133. These retained amounts reduced the annualized dividend rate by 57 basis points in the third quarter of 2007 and by 32 basis points in the third quarter of 2006.

The Bank’s dividend rate decreased to 5.10% (annualized) for the first nine months of 2007 from 5.27% (annualized) in the first nine months of 2006. The spread between the dividend rate and the dividend benchmark decreased to 0.59% for the first nine months of 2007 from 1.17% for the first nine months of 2006. In the first nine months of 2007, the Bank retained $44 million, or 10% of its earnings excluding the effects of SFAS 133, to build retained earnings to its target amount of $296 million, in accordance with the Bank’s Retained Earnings and Dividend Policy, and made available for dividends an amount equal to the remaining 90% of earnings excluding the effects of SFAS 133. In the first nine months of 2006, the Bank retained $23 million for the buildup of retained earnings, which was equal to 6% of its earnings excluding the effects of SFAS 133, and made available for dividends an amount equal to the remaining 94% of earnings excluding the effects of SFAS 133. These retained amounts reduced the annualized dividend rate by 56 basis points in the first nine months of 2007 and by 31 basis points in the first nine months of 2006.

In addition to the impact of the change in the amount of earnings retained to build the Bank’s retained earnings, the decrease in the dividend rate and the decrease in the spread between the dividend rate and the dividend benchmark for the third quarter and first nine months of 2007 compared to the same periods in 2006 reflect a lower net interest spread on the Bank’s mortgage portfolio, partially offset by a higher yield on invested capital, during the third quarter and first nine months of 2007 compared to the same periods in 2006.

For more information on 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 2006 to 2005 – Dividends” in the Bank’s 2006 Form 10-K.

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Financial Condition

Total assets were $304.2 billion at September 30, 2007, a 24% increase from $244.9 billion at December 31, 2006, reflecting increases in advances, interest-bearing deposits in banks, and held-to-maturity securities during the first nine months of 2007. Average total assets were $263.3 billion for the third quarter of 2007, a 14% increase compared to $230.9 billion for the third quarter of 2006. Average total assets were $247.0 billion for the first nine months of 2007, an 8% increase compared to $228.7 billion for the first nine months of 2006. These increases were primarily due to higher average advance balances.

Total liabilities were $291.4 billion at September 30, 2007, a 24% increase from $234.2 billion at December 31, 2006, reflecting increases in consolidated obligations outstanding from $229.4 billion at December 31, 2006, to $287.8 billion at September 30, 2007. The increase in consolidated obligations outstanding paralleled the increase in assets during the first nine months of 2007. Average total liabilities were $252.3 billion for the third quarter of 2007, a 14% increase compared to $221.0 billion for the third quarter of 2006. Average total liabilities were $236.4 billion for the first nine months of 2007, an 8% increase from $218.8 billion for the first nine months of 2006. The increase in average liabilities reflects increases in average consolidated obligations, paralleling the growth in average assets. Average consolidated obligations were $246.6 billion in the third quarter of 2007 and $217.3 billion in the third quarter of 2006. Average consolidated obligations were $231.1 billion in the first nine months of 2007 and $215.7 billion in the first nine months of 2006.

As provided by the FHLBank 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 $1,148.6 billion at September 30, 2007, and $952.0 billion at December 31, 2006.

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 maintain higher levels of capital, among other requirements. The Bank cannot provide assurance that it has been informed or will be informed of regulatory actions at other FHLBanks.

As of September 30, 2007, 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, 2007, 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+. As of September 30, 2007, 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 change a rating from time to time 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, 2007, 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 its 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 operating segment adjusted net interest income to the Bank’s total net interest income, see Note 8 to the Financial Statements.

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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 $269.8 billion (89% of total assets) at September 30, 2007, from $213.3 billion (87% of total assets) at December 31, 2006, representing an increase of $56.5 billion, or 27%. The increase was primarily in advances, which increased $52.5 billion, or 29%, to $236.2 billion from $183.7 billion, reflecting higher demand for advances by the Bank’s members primarily during the third quarter of 2007. In addition to the increase in advances, non-MBS investments increased $3.5 billion, or 12%, to $32.0 billion from $28.5 billion.

Adjusted net interest income for this segment was $201 million in the third quarter of 2007, an increase of $28 million, or 16%, compared to $173 million in the third quarter of 2006. In the first nine months of 2007, adjusted net interest income for this segment was $560 million, an increase of $87 million, or 18%, compared to $473 million in the first nine months of 2006. The increases were primarily attributable to the effect of higher interest rates on higher average capital balances and higher average advances balances.

Adjusted net interest income for this segment represented 86% and 83% of total adjusted net interest income for the third quarter of 2007 and 2006, respectively, and 86% and 81% of total adjusted net interest income for the first nine months of 2007 and 2006, respectively.

Advances – Advances outstanding increased by $52.5 billion, or 29%, to $236.2 billion at September 30, 2007, from $183.7 billion at December 31, 2006. Members increased advances for different reasons, including growth in their mortgage portfolios and increases in the cost or decreases in the availability of liquidity from other sources. Of the $52.5 billion increase, $35.2 billion, or 67%, was attributable to an increase in advances outstanding to the Bank’s three largest members. The remaining increase reflected significant growth in advances outstanding to other members of varying asset sizes and charter types. In total, 161 institutions increased their advances during the first nine months of 2007, while 94 institutions decreased their advances.

During the first nine months of 2007, fixed rate advances increased by $43.6 billion and adjustable rate advances increased by $11.7 billion, while variable rate overnight advances decreased by $3.1 billion.

Advances outstanding included unrealized fair value gains of $148 million at September 30, 2007, and unrealized fair value losses of $176 million at December 31, 2006. The increase in the unrealized fair value gains of hedged advances from December 31, 2006, to September 30, 2007, was primarily attributable to lower short- to intermediate-term advance rates during the third quarter of 2007.

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The components of the advances portfolio at September 30, 2007, and December 31, 2006, are presented in the following table.

Advances Portfolio by Product Type

(In millions)	September 30, 2007		December 31, 2006
Standard advances:
Adjustable – LIBOR	$	127,533	$	112,163
Adjustable – other indices		2,371		2,677
Fixed		85,459		46,602
Daily variable rate		3,673		6,799
Subtotal		219,036		168,241
Customized advances:
Adjustable – LIBOR, with caps and/or floors		20		15
Adjustable – LIBOR, with caps and/or floors and partial prepayment symmetry (PPS)(1)		5,700		9,074
Fixed – amortizing		683		803
Fixed with PPS(1)		4,429		1,915
Fixed – callable at member’s option		1,559		1,275
Fixed – putable at Bank’s option		3,944		2,157
Fixed – putable at Bank’s option with PPS(1)		664		368
Subtotal		16,999		15,607
Total par value		236,035		183,848
SFAS 133 valuation adjustments		148		(176	)
Net unamortized premiums/(discounts)		1		(3	)
Total	$	236,184	$	183,669

(1) Partial prepayment symmetry (PPS) means that 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. Any prepayment credit on an advance with PPS would be limited to the lesser of 10% of the par value of the advance or the gain recognized on the termination of the associated interest rate swap, which may also include a similar contractual gain limitation.

Average advances were $201.3 billion in the third quarter of 2007, a 16% increase from $173.6 billion in the third quarter of 2006. Average advances were $187.4 billion in the first nine months of 2007, a 10% increase from $169.6 billion in the first nine months of 2006.

Non-MBS Investments – The Bank’s non-MBS investment portfolio consists of high-quality financial instruments that are used primarily to facilitate the Bank’s role as a cost-effective provider of credit and liquidity to members. These investments are also used as a source of liquidity to meet the Bank’s financial obligations on a timely basis and to supplement earnings. The Bank’s total non-MBS investment portfolio was $32.0 billion as of September 30, 2007, an increase of $3.5 billion, or 12%, from $28.5 billion as of December 31, 2006. During the first nine months of 2007, interest-bearing deposits in banks increased $4.9 billion, Federal funds sold increased $0.4 billion, while commercial paper decreased $1.2 billion, holdings of discount notes issued by Fannie Mae and Freddie Mac decreased $0.3 billion, resale agreements decreased $0.2 billion, and housing finance agency bonds decreased $0.1 billion. The Bank increased its non-MBS investments to maintain financial leverage.

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 – Total liabilities (primarily consolidated obligations) funding the advances-related business increased $54.5 billion, or 27%, from $202.5 billion at December 31, 2006, to $257.0 billion at September 30, 2007, primarily to fund the growth in advances. 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

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consolidated obligation bonds are issued on behalf of the Bank, 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, 2007, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $269.1 billion, of which $50.6 billion were hedging advances and $218.5 billion were hedging consolidated obligations. At December 31, 2006, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $264.9 billion, of which $40.2 billion were hedging advances and $224.7 billion were hedging consolidated obligations. 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 generally rise and fall with increases and decreases in general market interest rates.

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

Market Instrument	September 30, 2007		December 31, 2006		September 30, 2006		December 31, 2005
Federal Reserve target rate for overnight Federal funds	4.75	%	5.25	%	5.25	%	4.25	%
3-month Treasury bill	3.81		5.01		4.88		4.08
3-month LIBOR	5.23		5.36		5.37		4.54
2-year Treasury note	3.99		4.81		4.69		4.40
5-year Treasury note	4.26		4.69		4.58		4.35

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Despite declining Treasury rates during the first nine months of 2007, the average cost of fixed rate FHLBank System consolidated obligation bonds and discount notes issued on behalf of the Bank in the first nine months of 2007 was marginally higher than the cost of comparable bonds and discount notes issued in the first nine months of 2006 due to increased issuance volume and wider agency spreads to the Treasury benchmark.

The average 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 in the first nine months of 2007 compared to the first nine months of 2006, reflecting strong investor demand for AAA-rated GSE debt, especially in the third quarter of 2007.

The following table presents a comparison of the average cost of FHLBank System consolidated obligation bonds and discount notes relative to comparable term LIBOR rates in the first nine months of 2007 and 2006.

	Spread of average cost of consolidated obligations to LIBOR for the nine months ended
(In basis points)	September 30, 2007	September 30, 2006
Consolidated obligation auctioned and negotiated bonds	–17.3	–16.6
Consolidated obligation auctioned discount notes	–27.6	–17.5

At September 30, 2007, the Bank had $122.6 billion of swapped non-callable bonds and $42.0 billion of swapped callable bonds that primarily funded advances and non-MBS investments. These swapped non-callable and callable bonds combined represented 75% of the Bank’s total consolidated obligation bonds outstanding at September 30, 2007. At December 31, 2006, the Bank had $122.6 billion of swapped non-callable bonds and $43.0 billion of swapped callable bonds that primarily funded advances and non-MBS investments. These swapped non-callable and callable bonds combined represented 83% of the Bank’s total consolidated obligation bonds outstanding at December 31, 2006.

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, 2007, assets associated with this segment were $34.3 billion (11% of total assets), an increase of $2.6 billion, or 8%, from $31.7 billion at December 31, 2006 (13% of total assets). The increase was due to higher investments in MBS, which grew $3.1 billion to $30.0 billion at September 30, 2007, from $26.9 billion at December 31, 2006, partially offset by lower mortgage loan balances, which decreased $0.4 billion to $4.2 billion at September 30, 2007, from $4.6 billion at December 31, 2006.

On October 6, 2006, the Bank announced that it would no longer offer new commitments to purchase mortgage loans from its members, but that it would retain its existing portfolio of mortgage loans. The Bank’s last purchase commitment expired on February 15, 2007. Average mortgage loans decreased $0.6 billion to $4.3 billion in the third quarter of 2007 from $4.9 billion in the third quarter of 2006 and decreased $0.6 billion to $4.4 billion in the first nine months of 2007 from $5.0 billion in the first nine months of 2006.

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In the third quarter of 2007, average MBS investments increased $0.2 billion to $27.1 billion compared to $26.9 billion in the third quarter of 2006 because of the growth in capital and the availability of MBS that met the Banks’ risk-adjusted spreads and credit enhancement requirements in the third quarter of 2007 relative to the third quarter of 2006. In the first nine months of 2007, average MBS investments decreased $0.4 billion to $26.3 billion in the first nine months of 2007 compared to $26.7 billion in the first nine months of 2006 because of the limited availability of MBS that met the Bank’s risk-adjusted return thresholds and credit enhancement requirements in the first nine months of 2007 relative to the first nine months of 2006.

Adjusted net interest income for this segment was $34 million in the third quarter of 2007, a decrease of $2 million, or 6%, from $36 million in the third quarter of 2006. The decrease was primarily the result of a decline in the average profit spread on the mortgage portfolio, reflecting the unfavorable impact on financing costs of a relatively flat yield curve over the last two years. The decrease was partially offset by the impact of cumulative retrospective adjustments for the amortization of purchase discounts of the MBS in accordance with SFAS 91 due to higher estimated prepayment speeds on the MBS during the third quarter of 2007.

In the first nine months of 2007, adjusted net interest income for this segment was $88 million, a decrease of $25 million, or 22%, from $113 million in the first nine months of 2006. The decrease was primarily the result of a decline in the average profit spread on the mortgage portfolio, reflecting the unfavorable impact on financing costs of a relatively flat yield curve over the last two years. The decrease also reflected the impact of cumulative retrospective adjustments for the amortization of purchase premiums during the first quarter of 2007 from the acquisition dates of the MBS in accordance with SFAS 91 due to higher estimated prepayment speeds on the MBS during the first quarter of 2007.

Adjusted net interest income for this segment represented 14% and 17% of total adjusted net interest income for the third quarter of 2007 and 2006, respectively, and 14% and 19% of total adjusted net interest income for the first nine months of 2007 and 2006, respectively.

MPF Program – Under the MPF Program, the Bank purchased conventional fixed rate conforming residential mortgage loans directly from eligible members. Under the program, participating members originated or purchased the mortgage loans, credit-enhanced them and sold them to the Bank, and generally retained the servicing of the loans. The Bank manages the interest rate and prepayment risks 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 2006 Form 10-K.

At September 30, 2007, and December 31, 2006, 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 2006 Form 10-K. Mortgage loan balances at September 30, 2007, and December 31, 2006, were as follows:

(In millions)	September 30, 2007			December 31, 2006
MPF Plus	$	3,854		$	4,210
Original MPF		394			438
Subtotal		4,248			4,648
Unamortized premiums		2			6
Unamortized discounts		(20	)		(23	)
Mortgage loans held for portfolio		4,230			4,631
Less: Allowance for credit losses		(1	)		(1	)
Mortgage loans held for portfolio, net	$	4,229		$	4,630

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 loan portfolio. The Bank established an allowance for credit losses on mortgage loans totaling $0.8 million at

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September 30, 2007, and $0.7 million at December 31, 2006. 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 2006 Form 10-K.

At September 30, 2007, the Bank had 43 loans totaling $4 million classified as nonaccrual or impaired. Twenty-eight of these loans totaling $3 million were in foreclosure or bankruptcy. At December 31, 2006, the Bank had 31 loans totaling $4 million classified as nonaccrual or impaired. Twenty-three 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.

MBS Investments – The Bank’s MBS portfolio was $30.0 billion, or 232% of Bank capital (as defined by the Finance Board), at September 30, 2007, compared to $26.9 billion, or 248% of Bank capital, at December 31, 2006. The Bank’s MBS portfolio increased because of the growth in capital and the availability of MBS that met the Bank’s risk-adjusted return thresholds and credit enhancement requirements during the first nine months of 2007. All MBS purchases during the first nine months of 2007 were agency and AAA-rated non-agency MBS. For all of the non-agency MBS purchases the Bank, on average, obtained an amount in excess of the credit enhancement required by the rating agencies for AAA-rated investments.

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 primarily managed these risks 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 with interest rate risk characteristics similar to callable debt.

In addition, the Bank’s MBS portfolio included certain MBS classified as trading securities, which were marked to fair value through earnings to partially offset the mark-to-fair value of the associated interest rate exchange agreements, for net unrealized losses of $315,000 and $178,000 during the third quarter of 2007 and 2006, respectively, and for net unrealized losses of $362,000 and $8,000 during the first nine months of 2007 and 2006, respectively.

Borrowings – Total consolidated obligations funding the mortgage-related business increased $2.6 billion, or 8%, from $31.7 billion at December 31, 2006, to $34.3 billion at September 30, 2007, paralleling the increase 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, 2007, the notional amount of interest rate exchange agreements associated with the mortgage-related business totaled $11.6 billion, most of which hedged or was associated with consolidated obligations funding the mortgage portfolio. At September 30, 2007, $11.1 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, 2006, the notional amount of interest rate exchange agreements associated with the mortgage-related business totaled $11.5 billion, all of which hedged or was associated with consolidated obligations funding the mortgage portfolio. At December 31, 2006, $8.2 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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Interest Rate Exchange Agreements

A derivatives transaction or interest rate exchange agreement is a financial contract whose fair value is generally derived from changes in the value of an underlying asset or liability. The Bank uses interest rate swaps, options to enter into interest rate swaps (swaptions), interest rate cap, floor, corridor and collar agreements, and callable and putable interest rate swaps (collectively, interest rate exchange agreements) to manage its exposure to interest rate risks inherent in its normal course of business—lending, investment, and funding activities. For more information on the primary strategies that the Bank employs for using interest rate exchange agreements and the associated market risks, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Market Risk – Interest Rate Exchange Agreements” in the Bank’s 2006 Form 10-K.

The following table summarizes the Bank’s interest rate exchange agreements by type of hedged item, hedging instrument, associated hedging strategy, accounting designation as specified under SFAS 133, and notional amount as of September 30, 2007, and December 31, 2006.

(In millions)			Notional Amount
Hedging Instrument	Hedging Strategy	Accounting Designation	September 30, 2007		December 31, 2006
Hedged Item: Advances
Pay fixed, receive floating interest rate swap	Fixed rate advance converted to a LIBOR floating rate	Fair Value Hedge	$	29,857	$	24,334
Pay fixed, receive floating interest rate swap – swap is callable at Bank’s option	Fixed rate callable advance converted to a LIBOR floating rate; swap is callable	Fair Value Hedge		1,480		1,249
Pay fixed, receive floating interest rate swap – swap is putable at counterparty’s option or is index-based	Fixed rate putable advance converted to a LIBOR floating rate; swap is putable	Fair Value Hedge		4,383		2,125
Interest rate cap, floor, corridor, and/or collar	Interest rate cap, floor, corridor, and/or collar embedded in an adjustable rate advance	Fair Value Hedge		5,195		9,090
Subtotal Fair Value Hedges				40,915		36,798
Basis swap	Adjustable rate advance converted to a LIBOR floating rate	Economic Hedge(1)		2,226		2,552
Receive fixed, pay floating interest rate swap	LIBOR index rate advance converted to a fixed rate	Economic Hedge(1)		175		75
Basis swap	Floating rate index advance converted to another floating rate index to reduce interest rate sensitivity and repricing gaps	Economic Hedge(1)		3,310		—
Pay fixed, receive floating interest rate swap; swap may be callable or putable	Fixed rate advance converted to a LIBOR floating rate; advance and swap may be callable or putable	Economic Hedge(1)		3,430		773
Interest rate cap, floor, corridor, and/or collar	Interest rate cap, floor, corridor, and/or collar embedded in an adjustable rate advance	Economic Hedge(1)		525		—
Subtotal Economic Hedges(1)				9,666		3,400
Total				50,581		40,198
Hedged Item: Non-Callable Bonds
Receive fixed or structured, pay floating interest rate swap	Fixed rate or structured rate non-callable bond converted to a LIBOR floating rate	Fair Value Hedge		113,355		118,131
Receive fixed or structured, pay floating interest rate swap	Fixed rate or structured rate non-callable bond converted to a LIBOR floating rate	Economic Hedge(1)		3,244		1,800

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(In millions)

			Notional Amount
Hedging Instrument	Hedging Strategy	Accounting Designation	September 30, 2007		December 31, 2006
Basis swap	Non-LIBOR index non-callable bond converted to a LIBOR floating rate	Economic Hedge(1)		8,210		6,377
Basis swap	Floating rate index non-callable bond converted to another floating rate index to reduce interest rate sensitivity and repricing gaps	Economic Hedge(1)		43,666		48,566
Swaption	Option to enter into an interest rate swap to receive a fixed rate, which provides an option to reduce the Bank’s exposure to fixed interest rates on non-callable bonds that offset the prepayment risk of mortgage assets	Economic Hedge(1)		3,080		3,575
Subtotal Economic Hedges(1)				58,200		60,318
Total				171,555		178,449
Hedged Item: Callable Bonds
Receive fixed or structured rate, pay floating interest rate swap with an option to call	Fixed or structured rate callable bond converted to a LIBOR floating rate; swap is callable	Fair Value Hedge		38,616		39,638
Receive fixed or structured, pay floating interest rate swap with an option to call	Fixed rate or structured rate callable bond converted to a LIBOR floating rate; swap is callable	Economic Hedge(1)		3,446		3,389
Total				42,062		43,027
Hedged Item: Discount Notes
Pay fixed, receive floating callable interest rate swap	Discount note converted to fixed rate callable debt that offsets the prepayment risk of mortgage assets	Economic Hedge(1)		2,423		2,253
Basis swap or receive fixed, pay floating interest rate swap	Discount note converted to one-month LIBOR or other short-term floating rate to hedge repricing gaps	Economic Hedge(1)		12,645		11,067
Total				15,068		13,320
Hedged Item: Trading Securities
Pay MBS rate, receive floating interest rate swap	MBS rate converted to a LIBOR floating rate	Economic Hedge(1)		28		39
Hedged Item: Intermediary Positions
Pay fixed, receive floating interest rate swap, and receive fixed, pay floating interest rate swap	Interest rate swaps executed with members offset by executing interest rate swaps with derivatives dealer counterparties	Economic Hedge(1)		1,260		1,260
Interest rate cap/floor	Stand-alone interest rate cap and/or floor executed with a member offset by executing an interest rate cap and/or floor with derivatives dealer counterparties	Economic Hedge(1)		70		70
Total				1,330		1,330
Total Notional Amount			$	280,624	$	276,363

(1) Economic hedges are derivatives that are matched to balance sheet instruments or other derivatives but do not meet the requirements for hedge accounting under SFAS 133.

At September 30, 2007, the total notional amount of interest rate exchange agreements outstanding was $280.6 billion, compared with $276.4 billion at December 31, 2006. The $4.2 billion increase in the notional amount of derivatives during the first nine months of 2007 was primarily due to a $10.3 billion increase in interest rate swaps used to hedge the market risk of fixed rate advances, partially offset by a $6.1 billion decrease in interest rate exchange agreements that hedge various types of consolidated obligations. The notional amount serves as a basis for calculating periodic interest payments or cash flows received and paid.

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The following table categorizes the notional amounts and estimated fair values of the Bank’s interest rate exchange agreements, excluding accrued interest, and related hedged items by product and type of accounting treatment under SFAS 133 as of September 30, 2007, and December 31, 2006.

Estimated Fair Values of Derivatives and Hedged Items

(In millions)

September 30, 2007

	Notional Amount		Derivatives			Hedged Items			Difference
Fair value hedges:
Advances	$	40,915	$	(137	)	$	148		$	11
Non-callable bonds		113,355		227			(286	)		(59	)
Callable bonds		38,616		(100	)		60			(40	)
Subtotal		192,886		(10	)		(78	)		(88	)
Not qualifying for hedge accounting (economic hedges):
Advances		9,666		2			—			2
Non-callable bonds		56,156		27			—			27
Non-callable bonds with embedded derivatives		2,044		(6	)		—			(6	)
Callable bonds		3,436		(9	)		—			(9	)
Callable bonds with embedded derivatives		10		—			—			—
Discount notes		15,068		22			—			22
MBS – trading		28		—			—			—
Intermediated		1,330		—			—			—
Subtotal		87,738		36			—			36
Total	$	280,624	$	26		$	(78	)	$	(52	)
December 31, 2006
	Notional Amount		Derivatives			Hedged Items			Difference
Fair value hedges:
Advances	$	36,798	$	182		$	(176	)	$	6
Non-callable bonds		118,131		(606	)		565			(41	)
Callable bonds		39,638		(353	)		335			(18	)
Subtotal		194,567		(777	)		724			(53	)
Not qualifying for hedge accounting (economic hedges):
Advances		3,400		—			—			—
Non-callable bonds		55,238		(6	)		—			(6	)
Non-callable bonds with embedded derivatives		5,080		(15	)		—			(15	)
Callable bonds		3,364		(28	)		—			(28	)
Callable bonds with embedded derivatives		25		—			—			—
Discount notes		13,320		41			—			41
MBS – trading		39		—			—			—
Intermediated		1,330		1			—			1
Subtotal		81,796		(7	)		—			(7	)
Total	$	276,363	$	(784	)	$	724		$	(60	)

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The estimated 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

(In millions)	September 30, 2007		December 31, 2006
Host contract:
Non-callable bonds	$	6	$	15
Total	$	6	$	15

Because the SFAS 133 periodic and cumulative net unrealized gains or losses are primarily a matter of timing, the unrealized gains or losses will generally reverse over the remaining contractual terms to maturity, call date, 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 call or put dates. 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.

SFAS 133-related income volatility during the first nine months of 2007 was primarily driven by (i) the significant change in short-term interest rates following the September 18, 2007, Federal Open Market Committee’s reduction in the Federal Funds target rate from 5.25% to 4.75%, and (ii) the changes in consolidated obligations rate levels, consolidated obligations spreads to LIBOR, and swap volatilities during the third quarter of 2007. The adverse fair value impact of SFAS 133 from the most recent changes in short-term interest rates is generally expected to reverse over the next few months as the floating-rate payments that the Bank makes on certain interest rate exchange agreements adjust downward to current market rates. The adverse impacts from the spread and volatility changes are also expected generally to reverse, either as spreads and volatilities revert to the market conditions that existed prior to August 2007 or over the remaining lives of the affected interest rate exchange agreements or hedged financial instruments. Additional declines in short-term interest rates or additional adverse changes in spreads and volatility could create additional fair value losses, but these fair value losses, if any, would generally be expected to reverse in the manner described above.

In addition, SFAS 133-related income volatility included the impact of economic hedges from the first six months of 2007. These hedges do not qualify for hedge accounting treatment under SFAS 133. Economic hedges introduce the potential for earnings volatility because the changes in fair value recorded on the interest rate exchange agreements generally are not offset by corresponding changes in the value of the economically hedged assets, liabilities, or firm commitments. These economic hedges are primarily transacted as non-SFAS 133-hedge qualifying at inception, but also occur when hedge accounting is discontinued because the Bank determines that a derivative no longer qualifies as an effective hedge.

The ongoing impact of SFAS 133 on the Bank cannot be predicted, and the Bank’s retained earnings in the future may not be sufficient to offset the impact of SFAS 133. The effects of SFAS 133 may lead to significant volatility in future earnings, other comprehensive income, and dividends.

Credit Risk. The Bank has also adopted credit policies and exposure limits for derivatives credit exposure. All credit exposure from derivatives transactions entered into by the Bank with member counterparties that are not derivatives dealers (including interest rate swaps, caps, floors, corridors, and collars), for which the Bank serves as an intermediary, must be fully secured by eligible collateral, and all such derivatives transactions are subject to both the Bank’s Advances and Security Agreement and a master netting agreement.

For all derivatives dealer counterparties, the Bank selects only highly rated derivatives dealers and major banks that meet the Bank’s eligibility criteria. In addition, the Bank has entered into master netting agreements and bilateral security agreements with all active derivatives dealer counterparties that provide for delivery of collateral at specified levels tied to counterparty credit ratings to limit the Bank’s net unsecured credit exposure to these counterparties. The following table presents the Bank’s credit exposure to its derivatives counterparties at the dates indicated.

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Credit Exposure to Derivatives Counterparties

(In millions)

September 30, 2007

Counterparty Credit Rating	Notional Balance		Gross Credit Exposure		Collateral		Net Unsecured Exposure
AA(1)	$	260,467	$	289	$	246	$	43
A		19,492		34		30		4
Subtotal		279,959		323		276		47
Member institutions(2)		665		10		10		—
Total derivatives	$	280,624	$	333	$	286	$	47
December 31, 2006
Counterparty Credit Rating	Notional Balance		Gross Credit Exposure		Collateral		Net Unsecured Exposure
AA(1)	$	179,874	$	1	$	—	$	1
A		95,824		—		—		—
Subtotal		275,698		1		—		1
Member institutions(2)		665		19		19		—
Total derivatives	$	276,363	$	20	$	19	$	1

(1) Includes notional amounts of derivatives contracts outstanding totaling $1.5 billion at September 30, 2007, and $1.9 billion at December 31, 2006, with Citibank, N.A., a member that is a derivatives dealer counterparty.

(2) Collateral held with respect to interest rate exchange agreements with members represents either collateral physically held by or on behalf of the Bank or collateral assigned to the Bank, as evidenced by an Advances and Security Agreement, and held by the members for the benefit of the Bank.

At September 30, 2007, the Bank had a total of $280.6 billion in notional amounts of derivatives contracts outstanding. Of this total:

• $280.0 billion represented notional amounts of derivatives contracts outstanding with 22 derivatives dealer counterparties. Nine of these counterparties made up 81% of the total notional amount outstanding with these derivatives dealer counterparties, individually ranging from 5% to 16% of the total. The remaining counterparties each represented less than 5% of the total. Four of these counterparties, with $29.2 billion of derivatives outstanding at September 30, 2007, were affiliates of members, and one counterparty, with $1.5 billion outstanding at September 30, 2007, was a member of the Bank.

• $665 million represented notional amounts of derivatives contracts with five non-derivatives dealer member counterparties. The Bank entered into this $665 million notional amount of derivatives as an intermediary and entered into the same amount of exactly offsetting transactions with derivatives dealer counterparties. The Bank’s intermediation in this manner allows members indirect access to the derivatives market.

Gross credit exposure on derivatives contracts at September 30, 2007, was $333 million, which consisted of:

• $323 million of gross credit exposure on open derivatives contracts with nine derivatives dealer counterparties. After consideration of collateral held by the Bank, the amount of net unsecured exposure totaled $47 million.

• $10 million of gross credit exposure on open derivatives contracts, in which the Bank served as an intermediary, with three non-derivatives dealer member counterparties, all of which was secured with eligible collateral.

At December 31, 2006, the Bank had a total of $276.4 billion in notional amounts of derivatives contracts outstanding. Of this total:

• $275.7 billion represented notional amounts of derivatives contracts outstanding with 22 derivatives dealer counterparties. Eight of these counterparties made up 78% of the total notional amount outstanding with these derivatives dealer counterparties, individually ranging from 5% to 17% of the total. The remaining counterparties each represented less than 5% of the

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total. Four of these counterparties, with $37.9 billion of derivatives outstanding at December 31, 2006, were affiliates of members, and one counterparty, with $1.9 billion outstanding at December 31, 2006, was a member of the Bank.

• $665 million represented notional amounts of derivatives contracts with five non-derivatives dealer member counterparties. The Bank entered into this $665 million notional amount of derivatives as an intermediary and entered into the same amount of exactly offsetting transactions with nonmember derivatives dealer counterparties. The Bank’s intermediation in this manner allows members indirect access to the derivatives market.

Gross credit exposure on derivatives contracts at December 31, 2006, was $20 million, which consisted of:

• $1 million of gross credit exposure on open derivatives contracts with one derivatives dealer counterparty. After consideration of collateral held by the Bank, the amount of net unsecured exposure totaled $1 million.

• $19 million of gross credit exposure on open derivatives contracts, in which the Bank served as an intermediary, with three non-derivatives dealer member counterparties, all of which was secured with eligible collateral.

The Bank’s gross credit exposure with derivatives dealer counterparties, representing net gain amounts due to the Bank, was $323 million at September 30, 2007, and $1 million at December 31, 2006. The gross credit exposure reflects the fair value of derivatives contracts, including interest amounts accrued through the reporting date, and is netted by counterparty because a legal right of offset exists with each counterparty.

The Bank’s gross credit exposure grew $313 million from December 31, 2006, to September 30, 2007. In general, the Bank is a net receiver of fixed interest rates and a net payer of floating interest rates under its derivatives contracts with counterparties. From December 31, 2006, to September 30, 2007, interest rates decreased, causing interest rate swaps in which the Bank is a net receiver of fixed interest rates to increase in value. As a result, the Bank’s gross credit exposure to these counterparties grew, as its net receivable position increased.

The notional amount of derivatives contracts outstanding with derivatives dealer counterparties increased $4.2 billion from December 31, 2006, to September 30, 2007. The increase was primarily was primarily due to a $10.4 billion increase in interest rate swaps used to hedge the market risk of fixed rate advances, partially offset by a $6.1 billion decrease in interest rate exchange agreements that hedge various types of consolidated obligations. An increase or decrease in the notional amounts of derivatives contracts may not result in a corresponding increase or decrease in gross credit exposure because the fair values of derivatives contracts are generally zero at inception.

Concentration Risk. The following table presents the concentration in derivatives with derivatives counterparties whose outstanding notional balances represented 10% or more of the Bank’s total notional amount of derivatives outstanding as of September 30, 2007, and December 31, 2006.

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Concentration of Derivatives Counterparties

(Dollars in millions)			September 30, 2007				December 31, 2006
Derivatives Counterparty	Credit Rating		Notional Amount		Percentage of Total Notional		Notional Amount		Percentage of Total Notional
JPMorgan Chase Bank, N.A.	AA	(1)	$	45,914	16	%	$	47,914	17	%
Deutsche Bank AG	AA			44,614	16			36,810	13
Barclays Bank PLC	AA			28,079	10			18,407	7
Merrill Lynch Capital Services	AA	(2)		23,685	9			29,555	11
Subtotal				142,292	51			132,686	48
Others				138,332	49			143,677	52
Total			$	280,624	100	%	$	276,363	100	%

(1) The credit rating for JPMorgan Chase Bank, N.A., was single-A at December 31, 2006.

(2) The credit rating for Merrill Lynch Capital Services was downgraded to single-A, effective October 24, 2007.

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 for which it is the primary obligor, 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.

The Bank maintains contingency liquidity plans designed to enable it to meet its obligations and the liquidity needs of members in the event of operational disruptions at the Bank or the Office of Finance or short-term disruptions of the consolidated obligations markets. The Bank has a regulatory contingency liquidity requirement to maintain at least five days of liquidity to enable it to meet its obligations without issuance of new consolidated obligations. In addition, the Bank’s asset-liability management committee has a formal guideline to maintain at least three months of liquidity to enable the Bank to meet its obligations in the event of a longer-term consolidated obligations markets disruption. The Bank maintained at least three months of contingency liquidity during the first nine months of 2007. On a daily basis, the Bank models its cash commitments and expected cash flows for the next 90 days to determine the Bank’s projected liquidity position.

For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Liquidity” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk” in the Bank’s 2006 Form 10-K.

Capital

Total capital as of September 30, 2007, was $12.8 billion, a 19% increase from $10.8 billion as of December 31, 2006. The increase primarily reflects 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.

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The FHLBank 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, 2007, and December 31, 2006.

Regulatory Capital Requirements

	September 30, 2007						December 31, 2006
(Dollars in millions)	Required			Actual			Required			Actual
Risk-based capital	$	1,387		$	12,894		$	1,182		$	10,865
Total capital-to-assets ratio		4.00	%		4.24	%		4.00	%		4.44	%
Total regulatory capital	$	12,166		$	12,894		$	9,797		$	10,865
Leverage ratio		5.00	%		6.36	%		5.00	%		6.65	%
Leverage capital	$	15,208		$	19,341		$	12,246		$	16,298

The Bank’s capital requirements are more fully discussed in the Bank’s 2006 Form 10-K in Note 13 to the Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Capital.”

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 2006 Form 10-K.

The Bank manages the credit risk associated with lending to members by monitoring the creditworthiness of the members and the quality and value of the assets that they pledge as collateral. Creditworthiness is determined and periodically assessed using the member’s financial information, regulatory examination and enforcement actions, and other public information. The Bank estimates the risk-adjusted liquidation value of the pledged collateral and conducts periodic collateral field reviews to establish the amount it will lend against each collateral type for each member, known as the “borrowing capacity.” The Bank monitors each member’s borrowing capacity and collateral requirements on a daily basis. The borrowing capacities include a margin that incorporates components for estimates of value, secondary market discounts for credit attributes and defects that address prime, Alt-A, and subprime characteristics, potential risks and estimated costs to liquidate, and the risk of a decline in the fair value of the collateral. The Bank reviews the secondary market discounts regularly and may adjust them at any time as market conditions change.

As discussed in the Bank’s 2006 Form 10-K, the Bank holds a security interest in subprime residential mortgage loans pledged as collateral. At September 30, 2007, the amount of these loans was not significant compared to the total amount of residential mortgage loan collateral pledged to the Bank. The Bank reviews and assigns borrowing capacities to subprime mortgage loans as it does all other types of loan collateral, taking into account the known credit attributes in assigning the appropriate secondary market discounts, and has determined that all advances, including those made to members pledging subprime mortgage loans, are fully collateralized. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Advances” in the Bank’s 2006 Form 10-K. In addition, the Bank prohibits the purchase of MBS backed by pools of residential mortgage loans labeled as subprime or having certain Bank-defined subprime characteristics. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations –Financial Condition – Segment Information – Mortgage-Related Business – MBS Investments” in the Bank’s 2006 Form 10-K.

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Other factors that the Bank considers in assigning borrowing capacities to a member’s collateral include the pledging method for loans (specific identification, blanket lien, or required delivery), data reporting frequency, collateral field review results, the member’s financial strength and condition, and the concentration of collateral type by member.

The following table presents a summary of the status of members’ credit outstanding and overall collateral borrowing capacity as of September 30, 2007, and December 31, 2006. Most of the credit outstanding and collateral borrowing capacity are with members that have the Bank’s top three credit quality ratings. Credit quality ratings are determined based on results from the Bank’s credit model and on other qualitative information, including regulatory examination reports. The Bank assigns to each member an internal rating from one to ten, with one as the highest rating. Changes in the number of members in each of the credit quality rating categories may occur due to the addition of new Bank members as well as changes to the credit quality ratings of current members based on the analysis discussed above.

Member Credit Outstanding and Collateral Borrowing Capacity

By Credit Quality Rating

(Dollars in millions)

September 30, 2007

	All Members	Members with Credit Outstanding
					Collateral Borrowing Capacity(1)
Member Credit Quality Rating	Number	Number	Credit Outstanding(2)		Total		Used
1-3	287	216	$	222,722	$	305,529	73	%
4-6	111	59		16,430		25,664	64
7-10	5	2		8		11	73
Total	403	277	$	239,160	$	331,204	72	%

December 31, 2006

	All Members	Members with Credit Outstanding
					Collateral Borrowing Capacity(1)
Member Credit Quality Rating	Number	Number	Credit Outstanding(2)		Total		Used
1-3	309	229	$	184,481	$	285,446	65	%
4-6	77	35		1,336		2,921	46
7-10	1	1		4		5	80
Total	387	265	$	185,821	$	288,372	64	%

(1) Collateral borrowing capacity does not represent any commitment to lend on the part of the Bank.

(2) Includes letters of credit, the market value of swaps, Federal funds and other investments, and the credit enhancement obligation on MPF loans.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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.

The Bank has identified five accounting policies that it believes are critical because they require management to make subjective or complex judgments about matters that are inherently uncertain and because of the

55

likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies include (i) estimating the allowance for credit losses on the advances and mortgage loan portfolios; (ii) accounting for derivatives; (iii) estimating fair values of investments classified as trading and all derivatives and hedged items carried at fair value in accordance with SFAS 133; (iv) estimating the fair value of the collateral pledged to the Bank; and (v) estimating the prepayment speeds on MBS and mortgage loans for the accounting of amortization of premiums and accretion of discounts on MBS and mortgage loans. These policies and the judgments, estimates, and assumptions are also described in greater detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” and in Note 1 to the Financial Statements in the Bank’s 2006 Form 10-K and in the Bank’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.

Off-Balance Sheet Arrangements, Guarantees, and Other Commitments

In accordance with Finance Board regulations, the Bank is jointly and severally liable for the FHLBank System’s consolidated obligations issued under Section 11(a) of the FHLBank Act, and in accordance with the FHLBank Act, the Bank is jointly and severally liable for consolidated obligations issued under Section 11(c) of the FHLBank Act. 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’s joint and several contingent liability is a guarantee, as defined by FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34 (FIN 45), but is excluded from the initial recognition and measurement provisions of FIN 45. The valuation of this contingent liability is therefore not recorded on the balance sheet of the Bank. The par amount of the outstanding consolidated obligations of all 12 FHLBanks was $1,148.6 billion at September 30, 2007, and $952.0 billion at December 31, 2006. The par value of the Bank’s participation in consolidated obligations was $288.4 billion at September 30, 2007, and $230.6 billion at December 31, 2006. At September 30, 2007, the Bank had committed to the issuance of $1.8 billion in consolidated obligation bonds and $1.0 billion in consolidated obligation discount notes. At December 31, 2006, the Bank had committed to the issuance of $175 in consolidated obligation bonds and $11 in consolidated obligation discount notes. For additional information on the Bank’s joint and several liability contingent obligation, see Note 10 and Note 18 to the Financial Statements in the Bank’s 2006 Form 10-K.

In addition, in the ordinary course of business, the Bank engages in financial transactions that, in accordance with GAAP, are not recorded on the Bank’s balance sheet or may be recorded on the Bank’s balance sheet in amounts that are different from the full contract or notional amount of the transactions. For example, the Bank routinely enters into commitments to extend advances and issues standby letters of credit. These advance commitments and standby letters of credit may represent future cash requirements of the Bank, although the standby letters of credit usually expire without being drawn upon. Standby letters of credit are subject to the same underwriting and collateral requirements as advances made by the Bank. At September 30, 2007, the Bank had $0.7 billion of advance commitments and $1.2 billion in standby letters of credit outstanding. At December 31, 2006, the Bank had $3.3 billion of advance commitments and $1.1 billion in standby letters of credit outstanding. The estimated fair values of these advance commitments and standby letters of credit were immaterial to the balance sheet at September 30, 2007, and December 31, 2006.

The Bank’s financial statements do not include a liability for future statutorily mandated payments from the Bank to the Resolution Funding Corporation (REFCORP). No liability is recorded because each FHLBank must pay 20% of net earnings (after its Affordable Housing Program obligation) to the REFCORP to support the payment of part of the interest on the bonds issued by the REFCORP, and each FHLBank is unable to estimate its future required payments because the payments are based on the future earnings of that FHLBank and the other FHLBanks and are not estimable under SFAS 5, Accounting for Contingencies. Accordingly, the REFCORP payments are disclosed as a long-term statutory payment requirement and, for accounting purposes, are treated, accrued, and recognized like an income tax.

56

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Bank’s market risk management objective is to maintain a relatively low exposure of net equity value and future earnings (excluding the impact of SFAS 133) to changes in interest rates. This profile reflects the Bank’s objective of maintaining a conservative asset-liability mix and its commitment to providing value to its members through products and the dividend without subjecting their investments in Bank capital stock to significant interest rate risk.

Market risk identification and measurement are primarily accomplished through (i) market value sensitivity analyses, (ii) net interest income sensitivity analyses, and (iii) repricing gap analyses. The Risk Management Policy approved by the Bank’s Board of Directors establishes market risk policy limits and market risk measurement standards at the total Bank level. Additional guidelines approved by the Bank’s asset-liability management committee (ALCO) apply to the Bank’s two business segments, the advances-related business and the mortgage-related business. These guidelines provide limits that are monitored at the segment level and are consistent with the total Bank policy limits. Interest rate risk is managed for each business segment on a daily basis, as discussed below in “Segment Market Risk.” At least monthly, compliance with Bank policies and management guidelines is presented to the ALCO or Board of Directors, along with a corrective action plan if applicable.

Total Bank Market Risk

Market Value of Equity Sensitivity

The Bank uses market value of equity sensitivity (the interest rate sensitivity of the net fair value of all assets, liabilities, and interest rate exchange agreements) to measure the Bank’s exposure to changes in interest rates. The Bank maintains its estimated market value of equity sensitivity within the limits specified by the Board of Directors in the Risk Management Policy primarily by managing the term, size, timing, and interest rate attributes of assets, liabilities, and interest rate exchange agreements acquired, issued, or executed.

The following table presents the estimated percentage change in the Bank’s market value of equity that would be expected to result from changes in interest rates under different interest rate scenarios.

Market Value of Equity Sensitivity

Estimated Percentage Change in Market Value of Bank Equity

for Various Changes in Interest Rates

Interest Rate Scenario(1)	September 30, 2007		December 31, 2006
+200 basis-point change	–5.5	%	–4.0	%
+100 basis-point change	–2.7		–1.8
–100 basis-point change	+2.6		+1.3
–200 basis-point change	+3.6		+1.9

(1) Instantaneous change from actual rates at dates indicated

The Bank’s estimates of the sensitivity of the market value of equity to changes in interest rates show more sensitivity as of September 30, 2007, compared to the estimates as of December 31, 2006. Compared to interest rates as of December 31, 2006, interest rates as of September 30, 2007, were 60 basis points lower for terms of 1 year, 53 basis points lower for terms of 5 years, and 46 basis points lower for terms of 10 years. The measured increase in market value sensitivity is primarily attributable to the increased sensitivity from the Bank’s mortgage-related portfolio.

Potential Dividend Yield

The potential dividend yield is a measure used by the Bank to assess financial performance. The potential dividend yield is based on current period earnings excluding the effects of unrealized fair value adjustments made in accordance with SFAS 133, which will generally reverse over the remaining contractual terms to maturity or by the call or put date of the hedged assets, hedged liabilities, and derivatives.

57

The Bank limits the sensitivity of projected financial performance through a Board of Directors’ policy limit on projected adverse changes in the potential dividend yield. The policy limits the adverse impact of a simulated plus or minus 200-basis-point instantaneous change in interest rates (limited such that interest rates cannot be less than zero) on the projected potential dividend yield, measured over a 12-month forecast period, to –175 basis points. Results of simulations as of September 30, 2007, showed that the estimated adverse change in the projected potential dividend yield from an instantaneous and parallel increase or decrease of 200 basis points in interest rates was –20 basis points, well within the policy limit of –175 basis points.

Repricing Gap Analysis

Repricing gap analysis shows the interest rate sensitivity of assets, liabilities, and interest rate exchange agreements by term-to-maturity (fixed rate instruments) or repricing interval (adjustable rate instruments). The amounts shown in the following table represent the net difference between total asset and liability repricings, including the impact of interest rate exchange agreements, for a specified time period (the “periodic gap”).

58

Repricing Gap Analysis

As of September 30, 2007

	Interest Rate Sensitivity Period
(In millions)	6 Months or Less			> 6 Months to 1 Year		> 1 to 5 Years			Over 5 Years
Advances-related business:
Assets
Investments	$	31,960		$	—	$	—		$	—
Advances		198,094			6,450		28,379			3,261
Other assets		1,673			—		—			—
Total Assets		231,727			6,450		28,379			3,261
Liabilities
Consolidated obligations:
Bonds		65,033			32,524		81,326			14,602
Discount notes		59,606			769		—			—
Deposits		300			—		—			—
Mandatorily redeemable capital stock		—			—		95			—
Other liabilities		2,061			—		—			707
Total Liabilities		127,000			33,293		81,421			15,309
Interest rate exchange agreements		(96,068	)		27,470		57,053			11,545
Periodic gap of advances-related business		8,659			627		4,011			(503	)
Mortgage-related business:
Assets
MBS		9,611			2,575		13,635			4,134
Mortgage loans		254			276		1,616			2,083
Other assets		152			—		—			—
Total Assets		10,017			2,851		15,251			6,217
Liabilities
Consolidated obligations:
Bonds		3,544			3,708		12,684			6,302
Discount notes		7,520			132		—			—
Other liabilities		446			—		—			—
Total Liabilities		11,510			3,840		12,684			6,302
Interest rate exchange agreements		629			1,589		(2,013	)		(205	)
Periodic gap of mortgage-related business		(864	)		600		554			(290	)
Total periodic gap		7,795			1,227		4,565			(793	)
Cumulative gap	$	7,795		$	9,022	$	13,587		$	12,794

Duration Gap

Duration gap is the difference between the estimated durations (market value sensitivity) of assets and liabilities (including the impact of interest rate exchange agreements) and reflects the extent to which estimated maturity and repricing cash flows for assets and liabilities are matched. The Bank monitors duration gap analysis at the total Bank level but does not have a policy limit. The Bank’s duration gap was one month at September 30, 2007, and one month at December 31, 2006.

59

Total Bank Duration Gap Analysis

	September 30, 2007			December 31, 2006
	Amount (In millions)		Duration Gap(1) (In months)	Amount (In millions)		Duration Gap(1) (In months)
Assets	$	304,153	5	$	244,915	5
Liabilities		291,359	4		234,161	4
Net	$	12,794	1	$	10,754	1

(1) Duration gap values include the impact of interest rate exchange agreements.

Segment Market Risk

The financial performance and interest rate risks of each business segment are managed within prescribed guidelines, which, when combined, are consistent with the policy limits for the total Bank.

Advances-Related Business

Interest rate risk arises from the advances-related business primarily through the use of member-contributed capital to fund fixed rate investments of targeted amounts and maturities. In general, advances result in very little net interest rate risk for the Bank because most fixed rate advances with original maturities greater than three months and advances with embedded options are hedged contemporaneously with an interest rate swap or option with terms offsetting the advance. The interest rate swap or option generally is maintained as a hedge for the life of the advance. These hedged advances effectively create a pool of variable rate assets, which, in combination with the strategy of raising debt swapped to variable rate liabilities, creates an advances portfolio with low net interest rate risk.

Non-MBS investments have maturities of less than three months or are variable rate investments. These investments also effectively match the interest rate risk of the Bank’s variable rate funding.

The interest rate risk in the advances-related business is primarily associated with the Bank’s strategy for investing the members’ contributed capital. The Bank invests approximately 50% of its capital in short-term assets (maturities of three months or less) and approximately 50% of its capital in a laddered portfolio of fixed rate financial instruments with maturities of one month to four years (“targeted gaps”).

The strategy to invest 50% of members’ contributed capital in short-term assets is intended to mitigate the market value of capital risks associated with potential repurchase or redemption of members’ excess capital stock. The strategy to invest 50% of capital in a laddered portfolio of instruments with maturities up to four years is intended to take advantage of the higher earnings available from a generally positively sloped yield curve, when intermediate-term investments generally have higher yields than short-term investments. Excess capital stock primarily results from a decline in a member’s advances. Under the Bank’s capital plan, capital stock, when repurchased or redeemed, is repurchased or redeemed at its par value of $100 per share, subject to certain regulatory and statutory limits.

Management updates the repricing and maturity gaps for actual asset, liability, and derivatives transactions that occur in the advances-related segment each day. Management regularly compares the targeted repricing and maturity gaps to the actual repricing and maturity gaps to identify rebalancing needs for the targeted gaps. On a weekly basis, management evaluates the projected impact of expected maturities and scheduled repricings of assets, liabilities, and interest rate exchange agreements on the interest rate risk of the advances-related segment. The analyses are prepared under base case and alternate interest rate scenarios to assess the effect of put options and call options embedded in the advances, related financing, and hedges. These analyses are also used to measure and manage potential reinvestment risk (when the remaining term of advances is shorter than the remaining term of the financing) and potential refinancing risk (when the remaining term of advances is longer than the remaining term of the financing).

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Because of the short-term and variable rate nature of the assets, liabilities, and derivatives of the advances-related business, the Bank’s interest rate risk guidelines address the amounts of net assets that are expected to mature or reprice in a given period. The repricing gap analysis table as of September 30, 2007, in “Repricing Gap Analysis” above shows that approximately $8.7 billion of net assets for the advances-related business (68% of capital) were scheduled to mature or reprice in the six-month period following September 30, 2007, which is consistent with the Bank’s guidelines. Net market value sensitivity analysis and net interest income simulations are also used to identify and measure risk and variances to the target interest rate risk exposure in the advances-related business segment.

Mortgage-Related Business

The Bank’s mortgage assets include MBS, most of which are classified as held-to-maturity and some of which are classified as trading, and mortgage loans purchased under the MPF Program. The Bank is exposed to interest rate risk from the mortgage-related business because the principal cash flows of the mortgage assets and the liabilities that fund them are not exactly matched through time and across all possible interest rate scenarios, given the uncertainty of the mortgage prepayments and the existence of interest rate caps on certain adjustable rate MBS.

The Bank purchases a mix of intermediate-term fixed rate and floating rate MBS. Generally, purchases of long-term fixed rate MBS have been relatively small. Any MPF loans acquired are long-term fixed rate mortgage assets, resulting in a mortgage portfolio that has a diversified set of interest rate risk attributes.

The estimated market risk of the mortgage-related business is managed both at the time an individual asset is purchased and on a total portfolio level. At the time of purchase (for all significant mortgage asset acquisitions), the Bank analyzes the estimated earnings sensitivity risk, estimated net market value sensitivity, and estimated prepayment sensitivity of the mortgage assets and anticipated funding and hedging under various interest rate scenarios. The related funding and hedging transactions are executed at or close to the time of purchase of a mortgage asset.

At least monthly, management reviews the estimated market risk of the entire portfolio of mortgage assets and related funding and hedges. Rebalancing strategies to modify the estimated mortgage portfolio market risks are then considered. Periodically, management performs more in-depth analyses, which include the impacts of non-parallel shifts in the yield curve and assessments of unanticipated prepayment behavior. Based on these analyses, management may take actions to rebalance the mortgage portfolio’s estimated market risk profile. These rebalancing strategies may include entering into new funding and hedging transactions, forgoing or modifying certain funding or hedging transactions normally executed with new MBS purchases, or terminating certain funding and hedging transactions for the mortgage asset portfolio.

The Bank manages the estimated interest rate and prepayment risk associated with mortgage assets through a combination of debt issuance and derivatives. The Bank may obtain funding through callable and non-callable FHLBank System debt and execute derivatives transactions to achieve principal cash flow patterns and market value sensitivities for the liabilities and derivatives similar to those expected on the mortgage assets. Debt issued to finance mortgage assets may be fixed rate debt, callable fixed rate debt, or adjustable rate debt. Derivatives may be used as temporary hedges of anticipated debt issuance or as long-term hedges of debt used to finance the mortgage assets. The derivatives used to hedge the interest rate risk of fixed rate mortgage assets generally may be options to enter into interest rate swaps (swaptions) or callable and non-callable pay-fixed interest rate swaps. Derivatives used to hedge the periodic cap risks of adjustable rate mortgages may be receive-adjustable, pay-adjustable swaps with embedded caps that offset the periodic caps in the mortgage assets.

The Bank’s interest rate risk guidelines for the mortgage-related business address the net market value sensitivity of the assets, liabilities, and derivatives of the mortgage-related business. The following table presents results of the estimated market value of equity sensitivity analysis attributable to the mortgage-related business as of September 30, 2007, and December 31, 2006.

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Market Value of Equity Sensitivity

Estimated Percentage Change in Market Value of Bank Equity Attributable to

the Mortgage-Related Business for Various Changes in Interest Rates

Interest Rate Scenario(1)	September 30, 2007		December 31, 2006
+200 basis-point change	–4.2	%	–2.0	%
+100 basis-point change	–2.1		–0.9
–100 basis-point change	+1.9		+0.4
–200 basis-point change	+2.2		+0.0

(1) Instantaneous change from actual rates at dates indicated

The Bank’s estimates of the contribution of the mortgage-related business to the sensitivity of the market value of equity to changes in interest rates show more adverse sensitivity to changes in rates as of September 30, 2007, compared to the estimates as of December 31, 2006. Compared to interest rates as of December 31, 2006, interest rates as of September 30, 2007, were 60 basis points lower for terms of 1 year, 53 basis points lower for terms of 5 years, and 46 basis points lower for terms of 10 years. The increase in market value sensitivity is primarily attributable to the recent widening of market spreads within the mortgage portfolio.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Bank’s senior management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The Bank’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Bank’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the Bank’s disclosure controls and procedures, the Bank’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Bank’s management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.

The Bank’s management has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with the participation of the President and Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and Controller as of the end of the quarterly period covered by this report. Based on that evaluation, the Bank’s President and Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and Controller have concluded that the Bank’s disclosure controls and procedures were effective at a reasonable assurance level as of the end of the fiscal quarter covered by this report.

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Internal Control Over Financial Reporting

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

Consolidated Obligations

The Bank’s disclosure controls and procedures include controls and procedures for accumulating and communicating information in compliance with the Bank’s disclosure and financial reporting requirements relating to the joint and several liability for the consolidated obligations of other FHLBanks. Because the FHLBanks are independently managed and operated, the Bank’s management relies on information that is provided or disseminated by the Finance Board, the Office of Finance, or the other FHLBanks, as well as on published FHLBank credit ratings, in determining whether the Bank’s joint and several liability is reasonably likely to result in a direct obligation for the Bank or whether it is reasonably possible that the Bank will accrue a direct liability.

The Bank’s management also relies on the operation of the Finance Board’s joint and several liability regulation (12 C.F.R. Section 966.9). The joint and several liability regulation requires that each FHLBank file with the Finance Board a quarterly certification that it will remain capable of making full and timely payment of all of its current obligations, including direct obligations, coming due during the next quarter. In addition, if an FHLBank cannot make such a certification or if it projects that it may be unable to meet its current obligations during the next quarter on a timely basis, it must file a notice with the Finance Board. Under the joint and several liability regulation, the Finance Board may order any FHLBank to make principal and interest payments on any consolidated obligations of any other FHLBank, or allocate the outstanding liability of an FHLBank among all remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding or on any other basis.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

For a discussion of risk factors, see “Part I. Item 1A. Risk Factors” in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2006 (2006 Form 10-K). There have been no material changes from the risk factors disclosed in the “Risk Factors” section of the Bank’s 2006 Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

31.1	Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Operating Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.4	Certification of the Controller pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of the Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.3	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.4	Certification of the Controller pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1	Computation of Ratio of Earnings to Fixed Charges – Three and Nine Months Ended September 30, 2007

64

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 14, 2007.

Federal Home Loan Bank of San Francisco

/S/    STEVEN T. HONDA        

Steven T. Honda

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

/S/    VERA MAYTUM        

Vera Maytum

Senior Vice President and Controller

(Chief Accounting Officer)

65

EX-31.1

EXHIBIT 31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

for the President and Chief Executive Officer

I, Dean Schultz, certify that:

1. I have reviewed this quarterly report on Form 10-Q of the Federal Home Loan Bank of San Francisco;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2007	/S/ DEAN SCHULTZ
	Dean Schultz
	President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

for the Chief Operating Officer

I, Lisa B. MacMillen, certify that:

1. I have reviewed this quarterly report on Form 10-Q of the Federal Home Loan Bank of San Francisco;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2007	/S/ LISA B. MACMILLEN
	Lisa B. MacMillen
	Executive Vice President and Chief Operating Officer

EX-31.3

EXHIBIT 31.3

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

for the Chief Financial Officer

I, Steven T. Honda, certify that:

1. I have reviewed this quarterly report on Form 10-Q of the Federal Home Loan Bank of San Francisco;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2007	/S/ STEVEN T. HONDA
	Steven T. Honda
	Senior Vice President and Chief Financial Officer

EX-31.4

EXHIBIT 31.4

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

for the Controller

I, Vera Maytum, certify that:

1. I have reviewed this quarterly report on Form 10-Q of the Federal Home Loan Bank of San Francisco;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2007	/S/ VERA MAYTUM
	Vera Maytum
	Senior Vice President and Controller

EX-32.1

EXHIBIT 32.1

Certification by the President and Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350,

as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, Dean Schultz, President and Chief Executive Officer of the Federal Home Loan Bank of San Francisco (“Registrant”), certify that, to the best of my knowledge:

1. The Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2007, (“Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date: November 14, 2007	/S/ DEAN SCHULTZ
	Dean Schultz
	President and Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to the Federal Home Loan Bank of San Francisco and will be retained by the Federal Home Loan Bank of San Francisco and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

Certification by the Chief Operating Officer

Pursuant to 18 U.S.C. Section 1350,

as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, Lisa B. MacMillen, Executive Vice President and Chief Operating Officer of the Federal Home Loan Bank of San Francisco (“Registrant”), certify that, to the best of my knowledge:

1. The Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2007, (“Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date: November 14, 2007	/S/ LISA B. MACMILLEN
	Lisa B. MacMillen
	Executive Vice President and Chief Operating Officer

A signed original of this written statement required by Section 906 has been provided to the Federal Home Loan Bank of San Francisco and will be retained by the Federal Home Loan Bank of San Francisco and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.3

EXHIBIT 32.3

Certification by the Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350,

as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, Steven T. Honda, Senior Vice President and Chief Financial Officer of the Federal Home Loan Bank of San Francisco (“Registrant”), certify that, to the best of my knowledge:

1. The Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2007, (“Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date: November 14, 2007	/S/ STEVEN T. HONDA
	Steven T. Honda
	Senior Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to the Federal Home Loan Bank of San Francisco and will be retained by the Federal Home Loan Bank of San Francisco and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.4

EXHIBIT 32.4

Certification by the Controller

Pursuant to 18 U.S.C. Section 1350,

as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, Vera Maytum, Senior Vice President and Controller of the Federal Home Loan Bank of San Francisco (“Registrant”), certify that, to the best of my knowledge:

1. The Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2007, (“Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date: November 14, 2007	/S/ VERA MAYTUM
	Vera Maytum
	Senior Vice President and Controller

A signed original of this written statement required by Section 906 has been provided to the Federal Home Loan Bank of San Francisco and will be retained by the Federal Home Loan Bank of San Francisco and furnished to the Securities and Exchange Commission or its staff upon request.

EX-99.1

EXHIBIT 99.1

Federal Home Loan Bank of San Francisco

Computation of Ratio of Earnings to Fixed Charges

(Unaudited)

	Three months ended				Nine months ended
(Dollars in millions)	September 30, 2007		September 30, 2006		September 30, 2007		September 30, 2006
Earnings:
Income before assessments	$	184	$	191	$	573	$	527
Fixed charges		3,267		2,854		9,076		7,830
Total earnings	$	3,451	$	3,045	$	9,649	$	8,357
Fixed charges:
Interest expense	$	3,267	$	2,854	$	9,075	$	7,829
Estimated interest component of net rental expense1		—		—		1		1
Total fixed charges	$	3,267	$	2,854	$	9,076	$	7,830
Ratio of earnings to fixed charges		1.06		1.07		1.06		1.07

(1) Represents an estimated interest factor