Federal Home Loan Bank Of San Francisco 10-Q 2006 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2006

OR

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

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 July 31, 2006
Class B Stock, par value $100	91,602,088

Federal Home Loan Bank of San Francisco

Form 10-Q

Index

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Statements of Condition	1
	Statements of Income	2
	Statements of Capital Accounts	3
	Statements of Cash Flows	4
	Notes to Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
	Quarterly Overview	24
	Financial Highlights	26
	Results of Operations	27
	Financial Condition	36
	Liquidity and Capital Resources	43
	Risk Management	45
	Critical Accounting Policies and Estimates	65
	Recent Developments	65
	Off-Balance Sheet Arrangements, Guarantees, and Other Commitments	66
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	67
Item 4.	Controls and Procedures	67
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	68
Item 1A.	Risk Factors	68
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 3.	Defaults Upon Senior Securities	69
Item 4.	Submission of Matters to a Vote of Security Holders	69
Item 5.	Other Information	69
Item 6.	Exhibits	70
SIGNATURES		71

i

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Federal Home Loan Bank of San Francisco

Statements of Condition

(Unaudited)

(In millions-except par value)	June 30, 2006			December 31, 2005
Assets
Cash and due from banks	$	5		$	12
Interest-bearing deposits in banks		16,519			6,899
Securities purchased under agreements to resell		700			750
Federal funds sold		12,306			16,997
Trading securities ($77 and $41, respectively, were pledged as collateral)		107			128
Held-to-maturity securities ($2,175 and $1,236, respectively, were pledged as collateral) (a)		30,825			29,691
Advances		167,356			162,873
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $0.6 and $0.7, respectively		4,928			5,214
Accrued interest receivable		878			909
Premises and equipment, net		10			9
Derivative assets		29			24
Other assets		87			96
Total Assets	$	233,750		$	223,602
Liabilities and Capital
Liabilities:
Deposits:
Interest-bearing:
Demand and overnight	$	382		$	407
Term		21			30
Other		5			2
Non-interest-bearing - Other		4			5
Total deposits		412			444
Consolidated obligations, net:
Bonds		187,769			182,625
Discount notes		29,325			27,618
Total consolidated obligations		217,094			210,243
Mandatorily redeemable capital stock		75			47
Accrued interest payable		1,812			1,448
Affordable Housing Program		135			126
Payable to REFCORP		32			27
Derivative liabilities		2,197			1,561
Other liabilities		1,812			58
Total Liabilities		223,569			213,954
Commitments and Contingencies (Note 10):
Capital (Note 6):
Capital stock-Class B-Putable ($100 par value) issued and outstanding:
100 shares and 95 shares, respectively		10,049			9,520
Restricted retained earnings		134			131
Accumulated other comprehensive loss:
Unrecognized net loss related to hedging activities		(2	)		(3	)
Total Capital		10,181			9,648
Total Liabilities and Capital	$	233,750		$	223,602

(a) Fair values of held-to-maturity securities were $30,311 and $29,345, at June 30, 2006, and December 31, 2005, respectively.

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

1

Federal Home Loan Bank of San Francisco

Statements of Income

(Unaudited)

	For the three months ended June 30,					For the six months ended June 30,
(In millions)	2006			2005		2006			2005
Interest Income:
Advances	$	2,080		$	1,161	$	3,968		$	2,079
Prepayment fees on advances, net		—			—		1			—
Interest-bearing deposits in banks		134			31		217			64
Securities purchased under agreements to resell		3			2		27			4
Federal funds sold		142			92		314			154
Trading securities		1			5		3			10
Held-to-maturity securities		361			261		714			498
Mortgage loans held for portfolio		62			69		125			144
Total Interest Income		2,783			1,621		5,369			2,953
Interest Expense:
Consolidated obligations:
Bonds		2,320			1,270		4,502			2,319
Discount notes		256			187		462			308
Deposits		5			5		9			7
Mandatorily redeemable capital stock		1			—		2			1
Total Interest Expense		2,582			1,462		4,975			2,635
Net Interest Income		201			159		394			318
Other (Loss)/Income:
Net loss on trading securities		(1	)		—		(1	)		(5	)
Net (loss)/gain on derivatives and hedging activities		(6	)		4		(17	)		(47	)
Other		1			1		2			2
Total Other (Loss)/Income		(6	)		5		(16	)		(50	)
Other Expense:
Compensation and benefits		11			10		22			20
Other operating expense		7			8		14			14
Federal Housing Finance Board		2			1		4			3
Office of Finance		1			1		2			2
Total Other Expense		21			20		42			39
Income Before Assessments		174			144		336			229
REFCORP		32			26		62			42
Affordable Housing Program		14			12		27			19
Total Assessments		46			38		89			61
Net Income	$	128		$	106	$	247		$	168

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

2

Federal Home Loan Bank of San Francisco

Statements of Capital Accounts

(Unaudited)

	Capital Stock Class B - Putable					Retained Earnings									Accumulated Other Comprehensive Income/(Loss)			Total Capital
(In millions)	Shares		Par Value			Restricted			Unrestricted			Total
Balance, December 31, 2004	78		$	7,765		$	139		$	—		$	139		$	(4	)	$	7,900
Issuance of capital stock	10			1,041															1,041
Repurchase/redemption of capital stock	(3	)		(246	)														(246	)
Capital stock reclassified to mandatorily redeemable capital stock	—			(5	)														(5	)
Comprehensive income:
Net income										168			168						168
Other comprehensive income:
Net amounts recognized as earnings																2			2
Net change in period relating to hedging activities																(1	)		(1	)
Additional minimum liability on benefit plans																(1	)		(1	)
Total comprehensive income																			168
Transfers from restricted retained earnings							(2	)		2			—						—
Dividends on capital stock (4.23%)
Stock issued	2			170						(170	)		(170	)					—
Balance, June 30, 2005	87		$	8,725		$	137		$	—		$	137		$	(4	)	$	8,858
Balance, December 31, 2005	95		$	9,520		$	131		$	—		$	131		$	(3	)	$	9,648
Issuance of capital stock	15			1,511															1,511
Repurchase/redemption of capital stock	(11	)		(1,118	)														(1,118	)
Capital stock reclassified to mandatorily redeemable capital stock	(1	)		(108	)														(108	)
Comprehensive income:
Net income										247			247						247
Other comprehensive income:
Net amounts recognized as earnings																1			1
Total comprehensive income																			248
Transfers to restricted retained earnings							3			(3	)		—						—
Dividends on capital stock (5.13%)
Stock issued	2			244						(244	)		(244	)					—
Balance, June 30, 2006	100		$	10,049		$	134		$	—		$	134		$	(2	)	$	10,181

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 six months ended June 30,
(In millions)	2006			2005
Cash Flows from Operating Activities:
Net Income	$	247		$	168
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization:
Net premiums and discounts on consolidated obligations, advances, investments, and mortgage loans		21			69
Concessions on consolidated obligations		16			16
Premises and equipment		2			2
Non-cash interest on mandatorily redeemable capital stock		2			1
(Gain)/loss due to change in net fair value adjustment on derivative and hedging activities		(3	)		16
Gain on extinguishment of debt		(2	)		—
Net change in:
Trading securities		21			287
Derivative assets and liabilities accrued interest		128			59
Accrued interest receivable		31			(196	)
Other assets		3			—
Accrued interest payable		364			374
Affordable Housing Program liability and discount on Affordable Housing Program advances		9			(3	)
Payable to REFCORP		5			7
Other liabilities		—			(5	)
Total adjustments		597			627
Net cash provided by operating activities		844			795
Cash Flows from Investing Activities:
Net change in:
Interest-bearing deposits in banks		(8,720	)		49
Federal funds sold		5,191			(5,038	)
Securities purchased under agreements to resell		50			(1,250	)
Short-term held-to-maturity securities		(891	)		(486	)
Deposits for mortgage loan program with other FHLBank		—			(2	)
Premises and equipment		(3	)		(2	)
Held-to-maturity securities:
Proceeds from maturities		3,351			3,872
Purchases		(3,216	)		(6,972	)
Advances:
Principal collected		818,255			674,320
Made to members		(822,930	)		(686,952	)
Mortgage loans held for portfolio:
Principal collected		299			428
Purchases		(12	)		(41	)
Net cash used in investing activities		(8,626	)		(22,074	)

4

Federal Home Loan Bank of San Francisco

Statements of Cash Flows (continued)

(Unaudited)

	For the six months ended June 30,
(In millions)	2006			2005
Cash Flows from Financing Activities:
Net change in:
Deposits		(32	)		360
Net proceeds from consolidated obligations:
Bonds issued		37,951			55,306
Discount notes issued		110,536			114,973
Bonds transferred from other FHLBanks		584			97
Payments for consolidated obligations:
Bonds matured or retired		(32,726	)		(30,227	)
Discount notes matured or retired		(108,850	)		(120,020	)
Proceeds from issuance of capital stock		1,511			1,041
Payments for repurchase/redemption of mandatorily redeemable capital stock		(81	)		(10	)
Payments for repurchase/redemption of capital stock		(1,118	)		(246	)
Net cash provided by financing activities		7,775			21,274
Net decrease in cash and cash equivalents		(7	)		(5	)
Cash and cash equivalents at beginning of period		12			16
Cash and cash equivalents at end of period	$	5		$	11
Supplemental Disclosure:
Interest paid during the period	$	3,979		$	1,793
Affordable Housing Program payments during the period		18			21
REFCORP payments during the period		57			35

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

5

Federal Home Loan Bank of San Francisco

Notes to Financial Statements

(Unaudited)

(Dollars in millions)

Note 1 – Summary of Significant Accounting Policies

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

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

Use of 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.

Note 2 – 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:

June 30, 2006
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Commercial paper	$	1,754	$	—	$	—		$	1,754
Housing finance agency bonds		1,085		6		(1	)		1,090
Discount notes:
FHLMC		149		—		—			149
FNMA		546		—		—			546
Subtotal		3,534		6		(1	)		3,539
Mortgage-backed securities (MBS):
GNMA		31		—		—			31
FHLMC		176		3		(1	)		178
FNMA		468		1		(15	)		454
Non-agency		26,616		7		(514	)		26,109
Total MBS		27,291		11		(530	)		26,772
Total	$	30,825	$	17	$	(531	)	$	30,311

December 31, 2005
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Commercial paper	$	1,267	$	—	$	—		$	1,267
Housing finance agency bonds		1,211		8		—			1,219
Discount notes – FNMA		248		—		—			248
Subtotal		2,726		8		—			2,734
MBS:
GNMA		36		—		(1	)		35
FHLMC		207		4		(1	)		210
FNMA		522		2		(12	)		512
Non-agency		26,200		4		(350	)		25,854
Total MBS		26,965		10		(364	)		26,611
Total	$	29,691	$	18	$	(364	)	$	29,345

6

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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

June 30, 2006
Contractual Maturity	Amortized Cost		Estimated Fair Value		Weighted Average Interest Rate
Within 1 year	$	2,449	$	2,449	5.05	%
After 5 years through 10 years		29		29	5.30
After 10 years		1,056		1,061	5.33
Subtotal		3,534		3,539	5.15
MBS:
GNMA		31		31	5.50
FHLMC		176		178	6.06
FNMA		468		454	4.72
Non-agency		26,616		26,109	5.16
Total MBS		27,291		26,772	5.16
Total	$	30,825	$	30,311	5.16	%
December 31, 2005
Contractual Maturity	Amortized Cost		Estimated Fair Value		Weighted Average Interest Rate
Within 1 year	$	1,515	$	1,515	4.28	%
After 5 years through 10 years		33		33	4.40
After 10 years		1,178		1,186	4.44
Subtotal		2,726		2,734	4.36
MBS:
GNMA		36		35	4.69
FHLMC		207		210	5.64
FNMA		522		512	4.56
Non-agency		26,200		25,854	4.91
Total MBS		26,965		26,611	4.91
Total	$	29,691	$	29,345	4.86	%

The amortized cost of the Bank’s MBS classified as held-to-maturity included net premiums of $38 at June 30, 2006, and net premiums of $102 at December 31, 2005.

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

	June 30, 2006		December 31, 2005
Amortized cost of held-to-maturity securities other than MBS:
Fixed rate	$	2,449	$	1,515
Adjustable rate		1,085		1,211
Subtotal		3,534		2,726
Amortized cost of held-to-maturity MBS:
Passthrough securities:
Fixed rate		443		497
Adjustable rate		141		160
Collateralized mortgage obligations:
Fixed rate		21,458		19,942
Adjustable rate		5,249		6,366
Subtotal		27,291		26,965
Total	$	30,825	$	29,691

7

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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 the Bank’s members or the members of other FHLBanks.

Note 3 – Advances

Redemption Terms.   The Bank had advances outstanding at interest rates ranging from 1.72% to 8.57% at June 30, 2006, and 1.54% to 8.57% at December 31, 2005, as summarized below.

	June 30, 2006					December 31, 2005
Contractual Maturity	Amount Outstanding			Weighted Average Interest Rate		Amount Outstanding			Weighted Average Interest Rate
Overdrawn demand deposit accounts	$	4		4.94	%	$	2		3.81	%
Within 1 year		93,807		4.95			76,246		4.03
After 1 year through 2 years		28,759		4.85			40,275		4.16
After 2 years through 3 years		27,997		5.03			32,050		4.31
After 3 years through 4 years		6,931		4.89			5,668		4.33
After 4 years through 5 years		7,028		5.10			5,668		4.50
After 5 years		3,357		4.66			3,298		4.55
Subtotal		167,883		4.95	%		163,207		4.16	%
SFAS 1331 valuation adjustments		(520	)				(339	)
Net unamortized (discounts)/premiums		(7	)				5
Total	$	167,356				$	162,873
1    Statement of Financial Accounting Standards (SFAS) No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138,Accounting for Certain Derivative Instruments and Certain Hedging Activities, on January 1, 2001, and by SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities, on July 1, 2003 (together referred to as “SFAS 133”).

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

Earlier of Contractual Maturity or Next Call Date	June 30, 2006		December 31, 2005
Overdrawn demand deposit accounts	$	4	$	2
Within 1 year		94,615		77,019
After 1 year through 2 years		29,000		40,363
After 2 years through 3 years		27,771		31,860
After 3 years through 4 years		6,377		5,126
After 4 years through 5 years		6,847		5,629
After 5 years		3,269		3,208
Total par amount	$	167,883	$	163,207

8

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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

Earlier of Contractual Maturity or Next Put Date	June 30, 2006		December 31, 2005
Overdrawn demand deposit accounts	$	4	$	2
Within 1 year		95,847		78,130
After 1 year through 2 years		28,242		40,476
After 2 years through 3 years		28,043		31,446
After 3 years through 4 years		6,911		5,660
After 4 years through 5 years		6,878		5,688
After 5 years		1,958		1,805
Total par amount	$	167,883	$	163,207

Security Terms.   The Bank lends to member financial institutions involved in housing finance that have a principal place of business in Arizona, California, or Nevada. The Bank is required by the Federal Home Loan Bank Act of 1932, as amended (FHLB Act), to obtain sufficient collateral for advances to protect against losses and to accept as collateral for advances only certain U.S. government or government agency securities, residential mortgage loans or MBS, other eligible real estate-related assets, cash or deposits in the Bank, and Bank capital stock. The Bank may also accept secured small business, small farm, and small agribusiness loans as collateral from members that qualify as community financial institutions. Community financial institutions are defined for 2006 as Federal Deposit Insurance Corporation-insured depository institutions with average total assets over the preceding three-year period of $587 or less. For additional information on security terms, see Note 7 to the Financial Statements in the Bank’s 2005 Form 10-K.

Credit and Concentration Risk.   The Bank’s potential credit risk from advances is concentrated in savings institutions. As of June 30, 2006, the Bank had a concentration of advances totaling $114,002 outstanding to three members, representing 68% of total outstanding advances (27% to Washington Mutual Bank; 26% to Citibank (West), FSB; and 15% to World Savings Bank, FSB). As of December 31, 2005, the Bank had a concentration of advances totaling $115,250 outstanding to three members, representing 71% of total outstanding advances (35% to Washington Mutual Bank; 19% to Citibank (West), FSB; and 17% to World Savings Bank, FSB). During the second quarter of 2006 and 2005, the interest income from advances to these members amounted to $1,381 and $800, respectively. During the first six months of 2006 and 2005, the interest income from advances to these members amounted to $2,663 and $1,447, respectively. The Bank held a security interest in collateral from each of these institutions with an estimated value in excess of their respective advances outstanding, and the Bank does not expect to incur any credit losses on these advances. Each of these members owned more than 10% of the Bank’s capital stock outstanding as of June 30, 2006, and December 31, 2005.

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

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

	June 30, 2006		December 31, 2005
Par amount of advances:
Fixed rate	$	51,120	$	45,352
Adjustable rate		116,763		117,855
Total par amount	$	167,883	$	163,207

Note 4 – Mortgage Loans Held for Portfolio

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

9

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

loans. Under the MPF Program, participating members originate or purchase the mortgage loans, credit-enhance them and sell them to the Bank, and generally retain the servicing of the loans. The following table presents information as of June 30, 2006, and December 31, 2005, on mortgage loans, all of which are qualifying conventional, conforming fixed rate residential mortgage loans on single-family properties:

	June 30, 2006			December 31, 2005
Fixed rate medium-term mortgage loans	$	1,742		$	1,878
Fixed rate long-term mortgage loans		3,204			3,355
Unamortized premiums		13			18
Unamortized discounts		(31	)		(37	)
Total mortgage loans held for portfolio	$	4,928		$	5,214

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 second quarter of 2006 and 2005, the Bank reduced net interest income for credit enhancement fees totaling $1 and $2, respectively. In the first six months of 2006 and 2005, the Bank reduced net interest income for credit enhancement fees totaling $2 and $3, respectively.

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

Credit Risk.   A loan is considered to be impaired when it is reported 90 days or more past due (nonaccrual) or when it is probable, based on current information and events, that the Bank will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreement. At June 30, 2006, the Bank had 27 loans totaling $3 classified as nonaccrual or impaired. Seventeen of these loans totaling $2 were in foreclosure or bankruptcy. At December 31, 2005, the Bank had 38 loans totaling $4 classified as nonaccrual or impaired. Twenty of these loans totaling $3 were in foreclosure or bankruptcy.

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

	Three months ended				Six months ended
	June 30, 2006		June 30, 2005		June 30, 2006			June 30, 2005
Balance, beginning of the period	$	0.6	$	0.4	$	0.7		$	0.3
Chargeoffs		—		—		—			—
Recoveries		—		—		—			—
Provision for credit losses		—		—		(0.1	)		0.1
Balance, end of the period	$	0.6	$	0.4	$	0.6		$	0.4

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

At June 30, 2006, the Bank’s other assets included $0.4 of real estate owned resulting from foreclosure of five mortgage loans held by the Bank. At December 31, 2005, the Bank’s other assets included $0.3 of real estate owned resulting from foreclosure of three mortgage loans held by the Bank.

Note 5 – Consolidated Obligations

Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are jointly issued by the FHLBanks through the Office of Finance, which serves as the FHLBanks’ agent. The Federal Housing

10

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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

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

	June 30, 2006					December 31, 2005
Contractual Maturity	Amount Outstanding			Weighted Average Interest Rate		Amount Outstanding			Weighted Average Interest Rate
Within 1 year	$	78,148		3.83	%	$	68,720		3.33	%
After 1 year through 2 years		53,684		4.28			49,233		3.84
After 2 years through 3 years		24,865		4.18			36,078		3.94
After 3 years through 4 years		14,823		4.33			11,046		3.89
After 4 years through 5 years		9,671		4.68			10,653		4.43
After 5 years		9,158		4.86			8,774		4.74
Index amortizing notes		10		4.61			11		4.61
Subtotal		190,359		4.13	%		184,515		3.75	%
Unamortized premiums		51					78
Unamortized discounts		(202	)				(179	)
SFAS 133 valuation adjustments		(2,439	)				(1,789	)
Total	$	187,769				$	182,625

The Bank’s participation in consolidated obligation bonds outstanding includes callable bonds of $52,277 at June 30, 2006, and $60,271 at December 31, 2005. Contemporaneous with the issuance of callable bonds for which the Bank is the primary obligor, the Bank usually enters into an interest rate swap (in which the Bank pays a variable rate and receives a fixed rate) with a call feature that mirrors the call option embedded in the bond (a sold callable swap). The Bank had notional amounts of interest rate exchange agreements hedging callable bonds of $37,491 at June 30, 2006, and $47,737 at December 31, 2005. The combined sold callable swap and callable bond enable the Bank to meet its funding needs at costs not otherwise directly attainable solely through the issuance of non-callable debt, while effectively converting the Bank’s net payment to an adjustable rate. The Bank uses fixed rate callable bonds to finance fixed rate callable advances, fixed rate MBS, and fixed rate mortgage loans.

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

	June 30, 2006		December 31, 2005
Par amount of consolidated obligation bonds:
Non-callable	$	138,082	$	124,244
Callable		52,277		60,271
Total par amount	$	190,359	$	184,515

11

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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

Earlier of Contractual Maturity or Next Call Date	June 30, 2006		December 31, 2005
Within 1 year	$	117,231	$	119,893
After 1 year through 2 years		46,145		35,415
After 2 years through 3 years		13,422		20,040
After 3 years through 4 years		7,278		3,238
After 4 years through 5 years		5,015		4,437
After 5 years		1,258		1,481
Index amortizing notes		10		11
Total par amount	$	190,359	$	184,515

Consolidated obligation discount notes are consolidated obligations issued to raise short-term funds; discount notes have original maturities up to 360 days. These notes are issued at less than their face amount and redeemed at par value when they mature. The Bank’s participation in consolidated obligation discount notes, all of which are due within one year, was as follows:

	June 30, 2006					December 31, 2005
	Amount Outstanding			Weighted Average Interest Rate		Amount Outstanding			Weighted Average Interest Rate
Par amount	$	29,453		4.96	%	$	27,747		4.04	%
Unamortized discounts		(128	)				(129	)
Total	$	29,325				$	27,618

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

	June 30, 2006		December 31, 2005
Par amount of consolidated obligations:
Bonds:
Fixed rate	$	165,047	$	150,049
Adjustable rate		14,680		21,973
Step-up		7,514		8,159
Fixed rate that converts to adjustable rate		1,257		1,297
Adjustable rate that converts to fixed rate		595		1,745
Comparative index		1,091		1,091
Zero-coupon		140		165
Inverse floating		25		25
Index amortizing notes		10		11
Total bonds, par		190,359		184,515
Discount notes, par		29,453		27,747
Total consolidated obligations, par	$	219,812	$	212,262

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

Note 6 – Capital

Capital Requirements.  The Bank is subject to risk-based capital requirements, which must be met with permanent capital (defined as retained earnings and Class B stock). In addition, the Bank is subject to a 5% minimum leverage capital ratio with a 1.5 weighting factor for permanent capital, and a 4% minimum total capital-to-assets ratio calculated without reference to the 1.5 weighting factor. As of June 30, 2006, and December 31, 2005, the Bank was in compliance with these capital rules and requirements. The FHLB Act

12

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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

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

Regulatory Capital Requirements

	June 30, 2006						December 31, 2005
	Required			Actual			Required			Actual
Risk-based capital	$	1,061		$	10,258		$	862		$	9,698
Total capital-to-assets ratio		4.00	%		4.39	%		4.00	%		4.34	%
Total capital	$	9,350		$	10,258		$	8,944		$	9,698
Leverage ratio		5.00	%		6.58	%		5.00	%		6.51	%
Leverage capital	$	11,688		$	15,387		$	11,180		$	14,547

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

Mandatorily Redeemable Capital Stock.  The Bank had mandatorily redeemable capital stock held by former members totaling $75 at June 30, 2006, of which $37 was scheduled for redemption in 2009, $4 was scheduled for redemption in 2010, and $34 was scheduled for redemption in 2011. All nine of these former members had notified the Bank to redeem their capital stock because of mergers with or acquisitions by nonmember institutions. During 2006, the Bank repurchased the mandatorily redeemable capital stock held by a former member that had no continuing capital stock requirement.

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

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

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

Mandatorily Redeemable Capital Stock Activity

	Three months ended						Six months ended
	June 30, 2006			June 30, 2005			June 30, 2006			June 30, 2005
Balance at beginning of the period	$	46		$	54		$	47		$	55
Mandatorily redeemable capital stock reclassified from capital during the period		106			—			106			5
Repurchase of mandatorily redeemable capital stock		(79	)		(4	)		(81	)		(10	)
Dividends paid on mandatorily redeemable capital stock		2			2			3			2
Balance at end of the period	$	75		$	52		$	75		$	52

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

13

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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 $32 at June 30, 2006, and $44 at December 31, 2005.

In addition, the Bank holds other restricted retained earnings intended to protect members’ paid-in capital from an extremely adverse credit or operations risk event, an extremely adverse SFAS 133 quarterly result, or an extremely low (or negative) level of net income before the effects of SFAS 133 resulting from an adverse interest rate environment. The retained earnings restricted in accordance with this provision totaled $102 at June 30, 2006, and $87 at December 31, 2005, and is targeted to reach $130 by the end of the third quarter of 2007.

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

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

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

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

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 $501 in the second quarter of 2006 and $163 in the second quarter of 2005. The Bank also repurchased excess capital stock that was not surplus capital stock totaling $584 in the second quarter of 2006 and $8 in the second quarter of 2005.

The Bank repurchased surplus capital stock totaling $613 in the first six months of 2006 and $202 in the first six months of 2005. The Bank also repurchased excess capital stock that was not surplus capital stock totaling $586 in the first six months of 2006 and $54 in the first six months of 2005.

Excess capital stock totaled $1,288 as of June 30, 2006, which included surplus capital stock of $452. On July 31, 2006, the Bank repurchased $423 of surplus capital stock. The Bank also repurchased $609 of excess capital stock that was not surplus capital stock, including $598 in excess capital stock that was the subject of repurchase requests submitted during the second quarter of 2006 by four members, of which one had an officer or director serving on the Bank’s Board of Directors, and $11 in excess mandatorily redeemable

14

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

capital stock repurchased from former members of the Bank. Excess capital stock totaled $440 after the July 31, 2006, capital stock repurchase.

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

Concentration.   As of June 30, 2006, the Bank had a concentration of capital stock totaling 61 million shares outstanding to three members, representing 61% of total capital stock and mandatorily redeemable capital stock outstanding (27% to Washington Mutual Bank; 20% to Citibank (West), FSB; and 14% to World Savings Bank, FSB). On July 31, 2006, the Bank repurchased $494 in excess capital stock from Washington Mutual Bank. After the repurchase, Washington Mutual Bank held 25% of the Bank’s total capital stock and mandatorily redeemable capital stock outstanding.

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

Note 7 – 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)/gain 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.

15

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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 six months ended June 30, 2006 and 2005.

Reconciliation of Adjusted Net Interest Income and Income Before Assessments

	Advances- Related Business		Mortgage- Related Business		Adjusted Net Interest Income		Net Interest Expense on Economic Hedges1		Net Interest Income		Other (Loss)/ Income			Other Expense		Income Before Assessments
Three months ended:
June 30, 2006	$	155	$	35	$	190	$	11	$	201	$	(6	)	$	21	$	174
June 30, 2005		114		36		150		9		159		5			20		144
Six months ended:
June 30, 2006	$	300	$	77	$	377	$	17	$	394	$	(16	)	$	42	$	336
June 30, 2005		212		81		293		25		318		(50	)		39		229

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)/gain on derivatives and hedging activities.”

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

Total Assets

	Advances- Related Business		Mortgage- Related Business		Total Assets
June 30, 2006	$	201,289	$	32,461	$	233,750
December 31, 2005		191,161		32,441		223,602

Note 8 – Derivatives and Hedging Activities

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

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

Net (losses)/gains on derivatives and hedging activities recorded in other income for the three and six months ended June 30, 2006 and 2005, were as follows:

	Three months ended						Six months ended
	June 30, 2006			June 30, 2005			June 30, 2006			June 30, 2005
Net loss related to fair value hedge ineffectiveness	$	(1	)	$	(7	)	$	(5	)	$	(24	)
Net loss related to cash flow ineffectiveness		—			—			(1	)		(1	)
Net gain on economic hedges		6			20			6			3
Net interest expense on derivative instruments used in economic hedges		(11	)		(9	)		(17	)		(25	)
Net (loss)/gain on derivatives and hedging activities	$	(6	)	$	4		$	(17	)	$	(47	)

For the three and six months ended June 30, 2006 and 2005, there were no reclassifications from other comprehensive income into earnings as a result of the discontinuance of cash flow hedges because the original forecasted transactions occurred by the end of the originally specified time period or within a two-month period thereafter. As of June 30, 2006, approximately $0.5 million in unrecognized net losses on derivative instruments accumulated in other comprehensive income is expected to be reclassified to earnings

16

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

during the next 12 months. The maximum length of time over which the Bank is hedging its exposure to the variability in future cash flows for forecasted transactions, excluding those forecasted transactions related to the payment of variable interest on existing financial instruments, is less than three months.

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

	June 30, 2006					December 31, 2005
Type of Derivative and Hedge Classification	Notional		Estimated Fair Value			Notional		Estimated Fair Value
Interest rate swaps:
Fair value	$	175,088	$	(2,066	)	$	164,803	$	(1,554	)
Cash flow		—		—			270		—
Economic		68,068		(18	)		61,845		(37	)
Interest rate swaptions: Economic		3,575		3			3,587		16
Interest rate caps/floors:
Fair value		14,871		134			13,862		131
Economic		70		—			70		—
Total	$	261,672	$	(1,947	)	$	244,437	$	(1,444	)
Total derivatives excluding accrued interest			$	(1,947	)			$	(1,444	)
Accrued interest, net				(221	)				(93	)
Net derivative balances			$	(2,168	)			$	(1,537	)
Derivative assets			$	29				$	24
Derivative liabilities				(2,197	)				(1,561	)
Net derivative balances			$	(2,168	)			$	(1,537	)

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

	Estimated Fair Values of Embedded Derivatives
(In millions)	June 30, 2006			December 31, 2005
Host contract:
Advances	$	(4	)	$	(6	)
Non-callable bonds		26			36
Callable bonds		1			1
Total	$	23		$	31

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

The contractual or notional amounts of interest rate exchange agreements reflect the extent of the Bank’s involvement in particular classes of financial instruments. The Bank had notional amounts outstanding of $261,672 at June 30, 2006, and $244,437 at December 31, 2005. The notional amount does not represent the exposure to credit loss. The amount potentially subject to credit loss is the estimated cost of replacing an interest rate exchange agreement that has a net positive market value if the counterparty defaults; this amount is substantially less than the notional amount.

Maximum credit risk is defined as the estimated cost of replacing all interest rate exchange agreements the Bank has transacted with counterparties where the Bank is in a net favorable position (has a net unrealized

17

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

gain) if the counterparties all defaulted and the related collateral proved to be of no value to the Bank. At June 30, 2006, the Bank’s maximum credit risk, as defined above, was estimated at $29, including $2 of net accrued interest receivable. At December 31, 2005, the Bank’s maximum credit risk was estimated at $24, including $1 of net accrued interest receivable. Accrued interest receivables and payables and the legal right to offset assets and liabilities by counterparty (under which amounts recognized for individual transactions may be offset against amounts recognized for other transactions with the same counterparty) are considered in determining the maximum credit risk. The Bank held cash, investment grade securities, and mortgage loans valued at $27 and $23 as collateral from counterparties as of June 30, 2006, and December 31, 2005, respectively. This collateral has not been sold or repledged. A significant number of the Bank’s interest rate exchange agreements are transacted with financial institutions such as major banks and broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. See Note 10 for more information on assets pledged by the Bank to these counterparties as collateral for derivatives transactions.

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

Derivatives in which the Bank is an intermediary may arise when the Bank (i) enters into derivatives with members and offsetting derivatives with other counterparties to meet the needs of its members, and (ii) enters into derivatives to offset the economic effect of other derivatives that are no longer designated to either advances, investments, or consolidated obligations. The notional principal of interest rate exchange agreements arising from the Bank entering into derivatives with members and offsetting derivatives with other counterparties was $1,390 at June 30, 2006, and $1,430 at December 31, 2005. The Bank did not have any interest rate exchange agreements outstanding at June 30, 2006, that were used to offset the economic effect of other derivatives that were no longer designated to either advances, investments, or consolidated obligations. The notional principal of interest rate exchange agreements that were used to offset the economic effect of other derivatives that were no longer designated to either advances, investments, or consolidated obligations was $130 at December 31, 2005.

Note 9 – 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 June 30, 2006, and December 31, 2005. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions. The fair value summary tables do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities. The assumptions used in estimating the fair values of the Bank’s financial instruments are more fully discussed in Note 17 to the Financial Statements in the Bank’s 2005 Form 10-K.

18

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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

Fair Value of Financial Instruments – June 30, 2006

	Carrying Value		Net Unrealized Gains/(Losses)			Estimated Fair Value
Assets
Cash and due from banks	$	5	$	—		$	5
Interest-bearing deposits in banks		16,519		—			16,519
Securities purchased under agreements to resell		700		—			700
Federal funds sold		12,306		—			12,306
Trading securities		107		—			107
Held-to-maturity securities		30,825		(514	)		30,311
Advances		167,356		(9	)		167,347
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans		4,928		(240	)		4,688
Accrued interest receivable		878		—			878
Derivative assets		29		—			29
Other assets		97		(57	)		40
Total	$	233,750	$	(820	)	$	232,930
Liabilities
Deposits	$	412	$	—		$	412
Consolidated obligations:
Bonds		187,769		686			187,083
Discount notes		29,325		10			29,315
Mandatorily redeemable capital stock		75		—			75
Accrued interest payable		1,812		—			1,812
Derivative liabilities		2,197		—			2,197
Other liabilities		1,979		—			1,979
Total	$	223,569	$	696		$	222,873

19

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Fair Value of Financial Instruments – December 31, 2005

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

Note 10 – Commitments and Contingencies

As provided by the FHLB Act or Finance Board regulation, all FHLBanks have joint and several liability for all FHLBank consolidated obligations. The joint and several liability regulation of the Finance Board authorizes the Finance Board to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank. The par amount of the outstanding consolidated obligations of all 12 FHLBanks was $958,570 at June 30, 2006, and $937,460 at December 31, 2005. The par value of the Bank’s participation in consolidated obligations was $219,812 at June 30, 2006, and $212,262 at December 31, 2005. For more information on the Finance Board’s joint and several liability regulation, see Note 18 to the Financial Statements in the Bank’s 2005 Form 10-K.

Commitments that legally obligate the Bank for additional advances totaled $3,157 at June 30, 2006, and $2,843 at December 31, 2005. Commitments are generally for periods up to 12 months. Standby letters of credit are issued for a fee on behalf of members to support their obligations to third parties. If the Bank is required to make payment for a beneficiary’s drawing, the amount is charged to the member’s demand deposit account with the Bank or converted into a collateralized advance to the member. Outstanding standby letters of credit were approximately $778 at June 30, 2006, and $810 at December 31, 2005, and had original terms of 30 days to 10 years with the latest final expiration in 2016. The value of the guarantees related to standby letters of credit is recorded in other liabilities and amounted to $2 at June 30, 2006, and $2 at December 31, 2005. Based on management’s credit analyses of members’ financial condition and collateral requirements, no allowance for losses is deemed necessary by management on these advance commitments and letters of credit. Advances funded under these advance commitments are fully collateralized at the time of funding (see Note 3). Letters of credit are fully collateralized at the time of issuance. The estimated fair value of commitments and letters of credit was immaterial to the balance sheet as of June 30, 2006, and December 31, 2005.

20

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

The Bank executes interest rate exchange agreements with major banks and derivatives entities affiliated with broker-dealers that have, or are supported by guaranties from related entities that have, long-term credit ratings of single-A or better from both Standard & Poor’s Rating Services (Standard & Poor’s) and Moody’s Investors Service. The Bank also executes interest rate exchange agreements with its members. The Bank enters into master agreements with netting provisions with all counterparties and bilateral security agreements with all nonmember counterparties. All member counterparty master agreements are subject to the terms of the Bank’s Advances and Security Agreement with members, and all member counterparties must fully collateralize the Bank’s net credit exposure. As of June 30, 2006, the Bank had pledged as collateral securities with a carrying value of $2,252, of which $291 cannot be sold or repledged and $1,961 can be sold or repledged, to counterparties that have market risk exposure from the Bank related to derivatives. As of December 31, 2005, the Bank had pledged as collateral securities with a carrying value of $1,277, of which $100 cannot be sold or repledged and $1,177 can be sold or repledged, to counterparties that have market risk exposure from the Bank related to derivatives.

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

The Bank had committed to the issuance of consolidated obligations totaling $831 at June 30, 2006, and $1,401 at December 31, 2005.

The Bank entered into interest rate exchange agreements that had traded but not yet settled with notional amounts totaling $540 at June 30, 2006, and $616 at December 31, 2005.

Other commitments and contingencies are discussed in Notes 3, 4, 5, 6, and 8.

Note 11 – Transactions with Members

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

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

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

In addition, the Bank has banking relationships with the affiliates of three members, which provide (i) custodial services for the Bank’s securities services, (ii) custodial services for the Bank’s deferred compensation plans, and (iii) services for the Bank’s payroll activities. These services are provided to the Bank in the ordinary course of business, which management believes are on terms and conditions similar to comparable services that would be provided by unaffiliated entities.

21

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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

	June 30, 2006		December 31, 2005
Assets:
Cash and due from banks	$	4	$	11
Interest-bearing deposits in banks		2,388		989
Federal funds sold		2,330		3,130
Held-to-maturity securities1		7,378		7,347
Advances		167,356		162,873
Mortgage loans held for portfolio		4,928		5,214
Accrued interest receivable		713		756
Derivative assets		28		24
Other assets		25		22
Total	$	185,150	$	180,366
Liabilities:
Deposits	$	412	$	444
Accrued interest payable		1		—
Derivative liabilities		275		164
Total	$	688	$	608
Notional amount of derivatives	$	32,067	$	29,354
Letters of credit		778		810

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

	Three months ended						Six months ended
	June 30, 2006			June 30, 2005			June 30, 2006			June 30, 2005
Interest Income:
Interest-bearing deposits in banks	$	21		$	4		$	30		$	6
Federal funds sold		30			22			61			33
Held-to-maturity securities		84			61			166			120
Advances1		2,080			1,161			3,968			2,079
Prepayment fees on advances, net		—			—			1			—
Mortgage loans held for portfolio		62			69			125			144
Total	$	2,277		$	1,317		$	4,351		$	2,382
Interest Expense:
Deposits	$	5		$	5		$	9		$	7
Consolidated obligations1		34			(15	)		50			(29	)
Total	$	39		$	(10	)	$	59		$	(22	)
Other (Loss)/Income:
Net (loss)/gain on derivatives and hedging activities	$	(25	)	$	37		$	(80	)	$	(13	)

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

22

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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

	June 30, 2006		December 31, 2005
Assets:
Cash and due from banks	$	4	$	11
Interest-bearing deposits in banks		200		440
Federal funds sold		500		—
Held-to-maturity securities1		2,932		2,960
Advances		117,988		120,361
Mortgage loans held for portfolio		3,913		4,124
Derivative assets		1		—
Accrued interest receivable		566		576
Total	$	126,104	$	128,472
Liabilities:
Deposits	$	39	$	63
Derivative liabilities		110		64
Total	$	149	$	127
Notional amount of derivatives	$	10,335	$	11,831
Letters of credit		193		197

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

	Three months ended						Six months ended
	June 30, 2006			June 30, 2005			June 30, 2006			June 30, 2005
Interest Income:
Interest-bearing deposits in banks	$	3		$	2		$	8		$	2
Federal funds sold		7			3			9			5
Held-to-maturity securities		31			25			112			53
Advances1		1,435			844			2,772			1,530
Mortgage loans held for portfolio		51			56			101			113
Total	$	1,527		$	930		$	3,002		$	1,703
Interest Expense:
Consolidated obligations1	$	14		$	(9	)	$	22		$	(15	)
Other (Loss)/Income:
Net (loss)/gain on derivatives and hedging activities	$	(11	)	$	26		$	(38	)	$	(6	)

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

23

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

Statements contained in this quarterly report on Form 10-Q, including statements describing the objectives, projections, estimates, or predictions of the future of the Federal Home Loan Bank of San Francisco (Bank), may be “forward-looking statements.” These statements may use forward-looking terms, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or their negatives or other variations on these terms. The Bank cautions that by their nature, forward-looking statements involve risk or uncertainty and that actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: economic and market conditions; volatility of market prices, rates, and indices; political, legislative, regulatory, or judicial events; changes in the Bank’s capital structure; membership changes; changes in the demand by Bank members for Bank advances; competitive forces, including the availability of other sources of funding for Bank members; changes in investor demand for consolidated obligations and/or the terms of interest rate exchange agreements and similar agreements; the ability of the Bank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services; the ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the Bank has joint and several liability; and timing and volume of market activity. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Bank’s interim financial statements and notes, which begin on page 1, and the Bank’s Annual Report on Form 10-K for the year ended December 31, 2005 (2005 Form 10-K).

Quarterly Overview

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

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

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

The Bank’s annualized dividend rate for the second quarter of 2006 was 5.22%, compared to 4.21% in the second quarter of 2005. The Bank’s annualized dividend rate for the first six months of 2006 was 5.13%, compared to 4.23% in the first six months of 2005. The increases in the annualized dividend rate reflect a higher yield on invested capital, partially offset by a lower net interest spread on the Bank’s mortgage loan and mortgage-backed securities (MBS) portfolio during the second quarter of 2006 and the first six months of 2006 compared to the same periods in 2005.

Total assets grew $10.2 billion, or 5%, to $233.8 billion at June 30, 2006, from $223.6 billion at December 31, 2005, primarily because interest-bearing deposits in banks increased to $16.5 billion from $6.9 billion, advances increased to $167.4 billion from $162.9 billion, and held-to-maturity securities increased to $30.8 billion from $29.7 billion. In contrast, Federal funds sold decreased to $12.3 billion from $17.0 billion.

24

Net income was $128 million in the second quarter of 2006 compared to $106 million in the second quarter of 2005 and was $247 million in the first six months of 2006 compared to $168 million in the first six months of 2005. The increases reflect higher net interest income, which increased $42 million, or 26%, to $201 million in the second quarter of 2006 from $159 million in the second quarter of 2005 and increased $76 million, or 24%, to $394 million in the first six months of 2006 from $318 million in the first six months of 2005. The increases in net interest income were driven primarily by higher average interest-earning assets outstanding, combined with the effect of higher interest rates on higher average capital balances.

Excluding the impact from net interest expense on derivative instruments used in economic hedges, the net effect of fair value adjustments on trading securities, derivatives, and hedged items, after assessments, resulted in a net fair value gain of $2 million in the second quarter of 2006 compared to a net fair value gain of $10 million in the second quarter of 2005. The majority of the net fair value gains in the second quarter of 2006 and 2005 reflected unrealized fair value adjustments.

Excluding the impact from net interest expense on derivative instruments used in economic hedges, the net effect of fair value adjustments on trading securities, derivatives, and hedged items, after assessments, resulted in a net fair value loss of $1 million in the first six months of 2006 compared to a net fair value loss of $19 million in the first six months of 2005. The $1 million net fair value loss in the first six months of 2006 consisted of $2 million of net unrealized fair value losses, partially offset by $1 million of net fair value gains on the termination of hedges related to consolidated obligations. The majority of the $19 million net fair value loss in the first six months of 2005 reflected unrealized fair value adjustments.

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

25

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)	June 30, 2006			March 31, 2006			December 31, 2005			September 30, 2005			June 30, 2005
Selected Balance Sheet Items at Period End
Total Assets	$	233,750		$	227,213		$	223,602		$	211,760		$	206,727
Advances		167,356			164,004			162,873			152,956			152,808
Mortgage Loans		4,928			5,079			5,214			5,408			5,648
Held-to-Maturity Securities		30,825			29,963			29,691			28,823			27,283
Interest-Bearing Deposits in Banks		16,519			9,195			6,899			4,946			5,202
Federal Funds Sold		12,306			16,244			16,997			17,188			13,499
Consolidated Obligations:1
Bonds		187,769			198,305			182,625			173,790			173,061
Discount Notes		29,325			14,541			27,618			24,873			21,261
Capital Stock – Class B – Putable		10,049			10,007			9,520			9,025			8,725
Total Capital		10,181			10,135			9,648			9,149			8,858
Quarterly Operating Results
Net Interest Income	$	201		$	193		$	187		$	178		$	159
Other (Loss)/Income		(6	)		(10	)		(15	)		(35	)		5
Other Expense		21			21			23			19			20
Assessments		46			43			39			33			38
Net Income	$	128		$	119		$	110		$	91		$	106
Other Data
Net Interest Margin		0.36	%		0.34	%		0.35	%		0.34	%		0.32	%
Operating Expenses as a Percent of Average Assets		0.03			0.03			0.04			0.03			0.03
Return on Assets		0.23			0.21	��		0.20			0.17			0.21
Return on Equity		5.23			4.87			4.70			4.03			4.94
Annualized Dividend Rate		5.22			5.03			4.67			4.58			4.21
Spread of Dividend Rate to Dividend Benchmark2		1.12			1.17			1.07			1.26			1.13
Dividend Payout Ratio3		99.46			100.93			97.59			111.38			83.51
Capital to Assets Ratio4		4.39			4.48			4.34			4.34			4.31
Duration Gap (in months)		1			1			1			1			0

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

Quarter ended	Par amount
June 30, 2006	$	958,570
March 31, 2006		935,828
December 31, 2005		937,460
September 30, 2005		920,369
June 30, 2005		908,305

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

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

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

26

Results of Operations

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

27

Average Balance Sheets

	Three months ended
	June 30, 2006							June 30, 2005
(In millions)	Average Balance			Interest Income/ Expense		Average Rate		Average Balance			Interest Income/ Expense		Average Rate
Assets
Interest-earning assets:
Interest-bearing deposits in banks	$	10,643		$	134	5.05	%	$	3,988		$	31	3.12	%
Securities purchased under agreements to resell		301			3	4.00			228			2	3.52
Federal funds sold		11,500			142	4.95			12,271			92	3.01
Trading securities:
MBS		114			1	3.52			311			5	6.45
Held-to-maturity securities:
MBS		26,325			323	4.92			23,237			243	4.19
Other investments		2,966			38	5.14			2,345			18	3.08
Mortgage loans		5,009			62	4.96			5,754			69	4.81
Advances1		167,079			2,080	4.99			150,027			1,161	3.10
Loans to other FHLBanks		12			—	4.75			7			—	3.15
Total interest-earning assets		223,949			2,783	4.98			198,168			1,621	3.28
Other assets2		1,650			—	—			1,790			—	—
Total Assets	$	225,599		$	2,783	4.95	%	$	199,958		$	1,621	3.25	%
Liabilities and Capital
Interest-bearing liabilities:
Consolidated obligations:
Bonds1	$	191,763		$	2,320	4.85	%	$	163,161		$	1,270	3.12	%
Discount notes1		20,937			256	4.90			25,750			187	2.91
Deposits		432			5	4.64			586			5	3.42
Borrowings from other FHLBanks		10			—	4.73			4			—	3.01
Mandatorily redeemable capital stock		73			1	5.22			52			—	4.21
Other borrowings		20			—	4.93			17			—	2.08
Total interest-bearing liabilities		213,235			2,582	4.86			189,570			1,462	3.09
Other liabilities2		2,549			—	—			1,823			—	—
Total Liabilities		215,784			2,582	4.80			191,393			1,462	3.06
Total Capital		9,815			—	—			8,565			—	—
Total Liabilities and Capital	$	225,599		$	2,582	4.59	%	$	199,958		$	1,462	2.93	%
Net Interest Income				$	201						$	159
Net Interest Spread3						0.12	%						0.19	%
Net Interest Margin4						0.36	%						0.32	%
Total Average Assets/Capital Ratio5		22.8	x						23.2	x
Interest-earning Assets/ Interest-bearing Liabilities		1.1	x						1.0	x

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

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

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

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

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

28

Change in Net Interest Income: Rate/Volume Analysis

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

(In millions)	Increase/ (Decrease)			Attributable to Changes in1
				Average Volume			Average Rate
Interest-earning assets:
Interest-bearing deposits in banks	$	103		$	75		$	28
Securities purchased under agreements to resell		1			1			—
Federal funds sold		50			(6	)		56
Trading securities:
MBS		(4	)		(2	)		(2	)
Held-to-maturity securities:
MBS		80			35			45
Other investments		20			6			14
Mortgage loans		(7	)		(9	)		2
Advances2		919			145			774
Total interest-earning assets		1,162			245			917
Interest-bearing liabilities:
Consolidated obligations:
Bonds2		1,050			252			798
Discount notes2		69			(40	)		109
Deposits		—			(2	)		2
Mandatorily redeemable capital stock		1			1			—
Total interest-bearing liabilities		1,120			211			909
Net interest income	$	42		$	34		$	8
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

	Six months ended
	June 30, 2006							June 30, 2005
(In millions)	Average Balance			Interest Income/ Expense		Average Rate		Average Balance			Interest Income/ Expense		Average Rate
Assets
Interest-earning assets:
Interest-bearing deposits in banks	$	9,056		$	217	4.83	%	$	4,716		$	64	2.74	%
Securities purchased under agreements to resell		1,213			27	4.49			260			4	3.10
Federal funds sold		13,432			314	4.71			11,136			154	2.79
Trading securities:
MBS		119			3	5.08			315			9	5.76
Other investments		—			—	—			46			1	4.38
Held-to-maturity securities:
MBS		26,525			643	4.89			22,622			466	4.15
Other investments		2,947			71	4.86			2,212			32	2.92
Mortgage loans		5,079			125	4.96			5,848			144	4.97
Advances1		167,560			3,969	4.78			145,949			2,079	2.87
Loans to other FHLBanks		9			—	4.48			7			—	2.88
Total interest-earning assets		225,940			5,369	4.79			193,111			2,953	3.08
Other assets2		1,665			—	—			1,917			—	—
Total Assets	$	227,605		$	5,369	4.76	%	$	195,028		$	2,953	3.05	%
Liabilities and Capital
Interest-bearing liabilities:
Consolidated obligations:
Bonds1	$	194,719		$	4,502	4.66	%	$	161,102		$	2,319	2.90	%
Discount notes1		20,082			462	4.64			23,024			308	2.70
Deposits		414			9	4.38			535			7	2.64
Borrowings from other FHLBanks		8			—	4.54			12			—	2.52
Mandatorily redeemable capital stock		59			2	5.13			52			1	4.23
Other borrowings		13			—	4.81			17			—	2.37
Total interest-bearing liabilities		215,295			4,975	4.66			184,742			2,635	2.88
Other liabilities2		2,455			—	—			1,946			—	—
Total Liabilities		217,750			4,975	4.61			186,688			2,635	2.85
Total Capital		9,855			—	—			8,340			—	—
Total Liabilities and Capital	$	227,605		$	4,975	4.41	%	$	195,028		$	2,635	2.73	%
Net Interest Income				$	394						$	318
Net Interest Spread3						0.13	%						0.21	%
Net Interest Margin4						0.35	%						0.33	%
Total Average Assets/Capital Ratio5		23.0	x						23.2	x
Interest-earning Assets/ Interest-bearing Liabilities		1.0	x						1.0	x

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

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

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

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

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

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Change in Net Interest Income: Rate/Volume Analysis

Six Months Ended June 30, 2006, Compared to Six Months Ended June 30, 2005

(In millions)	Increase/ (Decrease)			Attributable to Changes in1
				Average Volume			Average Rate
Interest-earning assets:
Interest-bearing deposits in banks	$	153		$	84		$	69
Securities purchased under agreements to resell		23			21			2
Federal funds sold		160			37			123
Trading securities:
MBS		(6	)		(5	)		(1	)
Other investments		(1	)		(1	)		—
Held-to-maturity securities:
MBS		177			87			90
Other investments		39			13			26
Mortgage loans		(19	)		(19	)		—
Advances2		1,890			345			1,545
Total interest-earning assets		2,416			562			1,854
Interest-bearing liabilities:
Consolidated obligations:
Bonds2		2,183			559			1,624
Discount notes2		154			(44	)		198
Deposits		2			(2	)		4
Mandatorily redeemable capital stock		1			1			—
Total interest-bearing liabilities		2,340			514			1,826
Net interest income	$	76		$	48		$	28

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

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

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

The net interest spread was 7 basis points lower during the second quarter of 2006 compared to the second quarter of 2005. The net interest spread was 8 basis points lower during the first six months of 2006 compared to the first six months of 2005. The decreases were primarily due to lower profit spreads on the combined mortgage loan and MBS portfolios, reflecting the impact on financing costs of higher interest rates and a flatter yield curve. The increased volume of lower-spread non-MBS investments relative to the overall asset mix also contributed to the decreases in the net interest spread.

Net Interest Income

Second Quarter of 2006 Compared to the Second Quarter of 2005.   Net interest income in the second quarter of 2006 was $201 million, a 26% increase from $159 million in the second quarter of 2005. The increase was largely the result of higher average interest-earning assets outstanding, particularly advances, MBS investments, and interest-bearing deposits in banks, combined with higher average capital balances and higher earnings on capital.

Interest income on non-MBS investments (interest-bearing deposits in banks, securities purchased under agreements to resell (resale agreements), Federal funds sold, and other non-MBS investments classified as held-to-maturity and trading securities) contributed $174 million to the increase in interest income in the

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second quarter of 2006 compared to the second quarter of 2005. Of this increase, $98 million was the result of higher average yields on non-MBS investments and $76 million was the result of a 35% rise in average non-MBS investment balances, primarily in interest-bearing deposits in banks.

Interest income from the mortgage portfolio (MBS and mortgage loans) increased $69 million in the second quarter of 2006 compared to the second quarter of 2005. Of this increase, $33 million was the result of a 12% increase in average MBS outstanding, $43 million was the result of higher average yields on MBS investments, and $2 million was the result of higher average yields on mortgage loans, partially offset by a $9 million decrease as a result of lower average mortgage loans outstanding. The increase was net of the impact of retrospective adjustments for amortization of purchase premiums and discounts from the acquisition dates of the mortgage loans and MBS in accordance with SFAS No. 91,Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases(SFAS 91), which decreased interest income by $2 million in the second quarter of 2006 and by $7 million in the second quarter of 2005.

Interest income from advances increased $919 million, which consisted of $145 million from an 11% increase in average advances outstanding, reflecting higher member demand during the second quarter of 2006 relative to the second quarter of 2005, and $774 million as a result of higher average yields because of increases in interest rates for new advances, adjustable rate advances repricing at higher rates, and paydowns and maturities of lower-yielding advances.

Paralleling the growth in interest-earning assets, average consolidated obligations (bonds and discount notes) funding the earning assets increased 13%, resulting in a $1,119 million increase in interest expense for the second quarter of 2006 relative to the second quarter of 2005. Higher average consolidated obligation balances, which were issued primarily to finance growth in intermediate-term advances, contributed $212 million to the increase in interest expense during the second quarter of 2006. Higher interest rates on consolidated obligations outstanding in the second quarter of 2006 compared to the second quarter of 2005 contributed $907 million to the increase in interest expense.

Six Months Ended June 30, 2006, Compared to Six Months Ended June 30, 2005.   Net interest income in the first six months of 2006 was $394 million, a 24% increase from $318 million in the first six months of 2005. The increase was largely the result of higher average interest-earning assets outstanding, particularly advances, interest-bearing deposits in banks, MBS investments, and Federal funds sold, combined with higher average capital balances and higher earnings on capital.

Interest income on non-MBS investments contributed $374 million to the increase in interest income in the first six months of 2006 compared to the first six months of 2005. Of this increase, $220 million was the result of higher average yields on non-MBS investments and $154 million was the result of a 45% rise in average non-MBS investment balances, primarily in interest-bearing deposits in banks and Federal funds sold.

Interest income from the mortgage portfolio (MBS and mortgage loans) increased $152 million in the first six months of 2006 compared to the first six months of 2005. Of this increase, $82 million was the result of a 16% increase in average MBS outstanding and $89 million was the result of higher average yields on MBS investments, partially offset by a $19 million decrease as a result of lower average mortgage loans outstanding. The increase was net of the impact of retrospective adjustments for amortization of purchase premiums and discounts from the acquisition dates of the mortgage loans and MBS in accordance with SFAS 91, which decreased interest income by $2 million in the first six months of 2006 and by $6 million in the first six months of 2005.

Interest income from advances increased $1,890 million, which consisted of $345 million from a 15% increase in average advances outstanding, reflecting higher member demand during the first six months of 2006 relative to the first six months of 2005, and $1,545 million as a result of higher average yields because of increases in interest rates for new advances, adjustable rate advances repricing at higher rates, and paydowns and maturities of lower-yielding advances.

Paralleling the growth in interest-earning assets, average consolidated obligations (bonds and discount notes) funding the earning assets increased 17%, resulting in a $2,337 million increase in interest expense for the first

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six months of 2006 relative to the first six months of 2005. Higher average consolidated obligation balances, which were issued primarily to finance growth in intermediate-term advances, contributed $515 million to the increase in interest expense during the first six months of 2006. Higher interest rates on consolidated obligations outstanding in the first six months of 2006 compared to the first six months of 2005 contributed $1,822 million to the increase in interest expense.

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

Other (Loss)/Income

Second Quarter of 2006 Compared to the Second Quarter of 2005.   Other (loss)/income was a net loss of $6 million in the second quarter of 2006 compared to a net gain of $5 million in the second quarter of 2005. The loss was primarily the result of fair value adjustments associated with derivatives and hedging activities under the provisions of SFAS 133 and net interest expense on derivative instruments used in economic hedges.

Under SFAS 133, the Bank is required to carry all of its derivative instruments on the balance sheet at fair value. If derivatives meet the hedging criteria, including effectiveness measures, specified in SFAS 133, the underlying hedged instruments may also be carried at fair value so that some or all of the unrealized gain or loss recognized on the derivative is offset by a corresponding unrealized loss or gain on the underlying hedged instrument. The unrealized gain or loss on the “ineffective” portion of all hedges, which represents the amount by which the change in the fair value of the derivative differs from the change in the fair value of the hedged item or the variability in the cash flows of the forecasted transaction, is recognized in current period earnings. In addition, certain derivatives are associated with assets or liabilities but do not qualify as fair value or cash flow hedges under SFAS 133. These economic hedges are recorded on the balance sheet at fair value with the unrealized gain or loss recorded in earnings without any offsetting unrealized loss or gain from the associated asset or liability.

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

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

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

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

(In millions)	Three months ended
	June 30, 2006													June 30, 2005
	Gain/(Loss)							Net Interest Expense on Economic Hedges			Total			Gain/(Loss)							Net Interest Expense on Economic Hedges			Total
Hedged Item	Fair Value Hedges			Cash Flow Hedges		Economic Hedges								Fair Value Hedges			Cash Flow Hedges		Economic Hedges
Advances	$	(2	)	$	—	$	3	$	2		$	3		$	—		$	—	$	17	$	—		$	17
Consolidated obligations		1			—		2		(13	)		(10	)		(7	)		—		3		(7	)		(11	)
MBS		—			—		1		—			1			—			—		—		(2	)		(2	)
Total	$	(1	)	$	—	$	6	$	(11	)	$	(6	)	$	(7	)	$	—	$	20	$	(9	)	$	4

During the second quarter of 2006, net losses on derivatives and hedging activities totaled $6 million compared to net gains of $4 million in the second quarter of 2005. These amounts included net interest expense on derivative instruments used in economic hedges of $11 million in the second quarter of 2006 and $9 million in the second quarter of 2005. The majority of this net interest expense is attributable to interest rate swaps associated with consolidated obligations.

Excluding the $11 million impact from net interest expense on derivative instruments used in economic hedges, fair value adjustments for the second quarter of 2006 were net gains of $5 million. The $5 million net gains consisted of unrealized net gains of $3 million attributable to the hedges related to consolidated obligations, unrealized net gains of $1 million attributable to the hedges related to advances, and unrealized net gains of $1 million attributable to the economic hedges related to MBS classified as trading.

Excluding the $9 million impact from net interest expense on derivative instruments used in economic hedges, fair value adjustments were primarily unrealized net gains of $13 million in the second quarter of 2005. The $13 million net gains consisted of net gains of $17 million attributable to the economic hedges related to advances and net losses of $4 million attributable to the hedges related to consolidated obligations.

Six Months Ended June 30, 2006, Compared to Six Months Ended June 30, 2005.   Other (loss)/income was a net loss of $16 million in the first six months of 2006 compared to a net loss of $50 million in the first six months of 2005. The decreased loss was primarily the result of fair value adjustments associated with derivatives and hedging activities under the provisions of SFAS 133.

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

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

Six Months Ended June 30, 2006, Compared to Six Months Ended June 30, 2005

(In millions)	Six months ended
	June 30, 2006															June 30, 2005
	Gain/(Loss)									Net Interest Expense on Economic Hedges			Total			Gain/(Loss)									Net Interest Expense on Economic Hedges			Total
Hedged Item	Fair Value Hedges			Cash Flow Hedges			Economic Hedges									Fair Value Hedges			Cash Flow Hedges			Economic Hedges
Advances	$	(2	)	$	—		$	7		$	—		$	5		$	2		$	—		$	5		$	(4	)	$	3
Consolidated obligations		(3	)		(1	)		(2	)		(17	)		(23	)		(26	)		(1	)		(7	)		(17	)		(51	)
MBS		—			—			1			—			1			—			—			5			(4	)		1
Total	$	(5	)	$	(1	)	$	6		$	(17	)	$	(17	)	$	(24	)	$	(1	)	$	3		$	(25	)	$	(47	)

During the first six months of 2006, net losses on derivatives and hedging activities totaled $17 million compared to net losses of $47 million in the first six months of 2005. These amounts included net interest expense on derivative instruments used in economic hedges of $17 million in the first six months of 2006 and

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$25 million in the first six months of 2005. The majority of this net interest expense is attributable to interest rate swaps associated with consolidated obligations.

Excluding the $17 million impact from net interest expense on derivative instruments used in economic hedges, fair value adjustments for the first six months of 2006 consisted of unrealized net losses of $7 million attributable to the hedges related to consolidated obligations, offset by unrealized net gains of $5 million attributable to the hedges related to advances, unrealized net gains of $1 million attributable to the economic hedges related to MBS classified as trading, and net fair value gains of $1 million on the termination of hedges related to consolidated obligations.

Excluding the $25 million impact from net interest expense on derivative instruments used in economic hedges, fair value adjustments were primarily unrealized net losses of $22 million in the first six months of 2005. The $22 million net losses consisted of net losses of $34 million attributable to the hedges related to consolidated obligations, net gains of $7 million attributable to the hedges related to advances, and net gains of $5 million attributable to the economic hedges related to MBS classified as trading.

Return on Equity

Return on equity (ROE) was 5.23% (annualized) for the second quarter of 2006, an increase of 29 basis points from the second quarter of 2005. This increase reflects the 21% rise in net income, to $128 million in the second quarter of 2006 from $106 million in the second quarter of 2005. In addition, the growth in net income more than kept pace with the growth in average capital. Average capital increased 15% to $9.8 billion in the second quarter of 2006 from $8.6 billion in the second quarter of 2005.

ROE was 5.05% (annualized) for the first six months of 2006, an increase of 100 basis points from the first six months of 2005. This increase reflects the 47% rise in net income, to $247 million in the first six months of 2006 from $168 million in the first six months of 2005. In addition, the growth in net income more than kept pace with the growth in average capital. Average capital increased 18% to $9.9 billion in the first six months of 2006 from $8.3 billion in the first six months of 2005.

Dividends

The Bank’s annualized dividend rate increased to 5.22% for the second quarter of 2006 from 4.21% in the second quarter of 2005. The Bank’s annualized dividend rate increased to 5.13% for the first six months of 2006 from 4.23% in the first six months of 2005. These increases were primarily due to a higher yield on invested capital, partially offset by lower net interest spreads on the Bank’s mortgage loan and MBS portfolio during the second quarter of 2006 and the first six months of 2006 compared to the year-earlier periods.

The spread between the dividend rate and the dividend benchmark decreased to 1.12% for the second quarter of 2006 from 1.13% for the second quarter of 2005, and to 1.15% for the first six months of 2006 from 1.25% for the first six months of 2005. These decreases were due, in part, to the decline in the net interest spread, including narrower profit spreads on the mortgage portfolio. In addition, higher market interest rates in the second quarter of 2006 and the first six months of 2006 compared to the year-earlier periods caused an increase in the dividend benchmark and in the yield on invested capital. However, because of the effect of assessments, the yield on invested capital after assessments increased by a smaller amount than the increase in the benchmark yield, resulting in a lower spread.

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, 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

35

an amount equal to or greater than the deposits received from members and (ii) each FHLBank must hold contingency liquidity in an amount sufficient to meet its liquidity needs for at least five business days without access to the consolidated obligation debt markets. At June 30, 2006, advances maturing within five years totaled $164.5 billion, significantly in excess of the $0.4 billion of member deposits on that date. At December 31, 2005, advances maturing within five years totaled $159.9 billion, also significantly in excess of the $0.4 billion of member deposits on that date. In addition, as of June 30, 2006, and December 31, 2005, the Bank’s estimated total sources of funds obtainable from liquidity investments, repurchase agreement borrowings collateralized by the Bank’s marketable securities, and advance repayments would have allowed the Bank to meet its liquidity needs for more than 90 days without access to the consolidated obligation debt markets.

In accordance with the Bank’s Retained Earnings and Dividend Policy, the Bank retains in restricted retained earnings any cumulative net unrealized gains in earnings (net of applicable assessments) resulting from the application of SFAS 133. Retained earnings restricted in accordance with this provision totaled $32 million at June 30, 2006, and $44 million at December 31, 2005.

In addition, the Bank holds other restricted retained earnings intended to protect members’ paid-in capital from an extremely adverse credit or operations risk event, an extremely adverse SFAS 133 quarterly result, or an extremely low (or negative) level of net income before the effects of SFAS 133 resulting from an adverse interest rate environment. To provide for the build-up of retained earnings, the Bank retained from current earnings $7 million in the second quarter of 2006 and $7 million in the second quarter of 2005, which reduced the annualized dividend rate by 29 basis points in the second quarter of 2006 and by 34 basis points in the second quarter of 2005. The Bank retained from current earnings $15 million in the first six months of 2006 and $15 million in the first six months of 2005, which reduced the annualized dividend rate by 31 basis points in the first six months of 2006 and by 37 basis points in the first six months of 2005. The retained earnings restricted in accordance with this provision totaled $102 million at June 30, 2006, and $87 million at December 31, 2005, and is targeted to reach $130 million by the end of the third quarter of 2007.

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

Financial Condition

Total assets were $233.8 billion at June 30, 2006, a 5% increase from $223.6 billion at December 31, 2005. Average total assets were $225.6 billion for the second quarter of 2006, a 13% increase compared to $200.0 billion for the second quarter of 2005. Average total assets were $227.6 billion for the first six months of 2006, a 17% increase compared to $195.0 billion for the first six months of 2005. These increases were largely driven by growth in interest-bearing deposits in banks, MBS investments, and advances.

Total liabilities were $223.6 billion at June 30, 2006, a 4% increase from $214.0 billion at December 31, 2005. Average total liabilities were $215.8 billion for the second quarter of 2006, a 13% increase compared to $191.4 billion for the second quarter of 2005. Average total liabilities were $217.8 billion for the first six months of 2006, a 17% increase compared to $186.7 billion for the first six months of 2005. The increase in liabilities reflects increases in consolidated obligations, paralleling the growth in assets. Consolidated obligations were $217.1 billion at June 30, 2006, and $210.2 billion at December 31, 2005. Average consolidated obligations were $212.7 billion in the second quarter of 2006 and $188.9 billion in the second quarter of 2005. Average consolidated obligations were $214.8 billion in the first six months of 2006 and $184.1 billion in the first six months of 2005.

As provided by the FHLB Act or Finance Board regulation, all FHLBanks have joint and several liability for all FHLBank consolidated obligations. The joint and several liability regulation of the Finance Board authorizes the Finance Board to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank.

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The par amount of the outstanding consolidated obligations of all 12 FHLBanks was $958.6 billion at June 30, 2006, and $937.5 billion at December 31, 2005.

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

As of June 30, 2006, Standard & Poor’s Rating Services (Standard & Poor’s) rated the FHLBanks’ consolidated obligations AAA/A-1+, and Moody’s Investors Service rated them Aaa/P-1. As of June 30, 2006, Standard & Poor’s continued to assign nine FHLBanks, including the Bank, a long-term credit rating of AAA, and three FHLBanks a long-term credit rating of AA+. On April 26, 2006, Standard & Poor’s placed the FHLBank of Des Moines’ AAA long-term credit rating on credit watch with negative implications. As of June 30, 2006, Moody’s Investors Service continued to assign all the FHLBanks a long-term credit rating of Aaa. Changes in the long-term credit ratings of individual FHLBanks do not necessarily affect the credit rating of the consolidated obligations issued on behalf of the FHLBanks. Rating agencies may from time to time change a rating because of various factors, including operating results or actions taken, business developments, or changes in their opinion regarding, among other factors, the general outlook for a particular industry or the economy.

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

Financial condition is further discussed under “Segment Information.”

Segment Information

The Bank analyzes financial performance based on the adjusted net interest income of two operating segments: the advances-related business and the mortgage-related business. For purposes of segment reporting, adjusted net interest income includes the net interest expense on derivative instruments used in economic hedges that are recorded in “Net (loss)/gain on derivatives and hedging activities” in other income. For a reconciliation of the Bank’s adjusted net interest income by operating segment to the Bank’s total net interest income, see Note 7 to the Financial Statements.

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

Assets associated with this segment increased to $201.3 billion (86% of total assets) at June 30, 2006, from $191.2 billion (85% of total assets) at December 31, 2005, an increase of $10.1 billion, or 5%. The increase was primarily due to an increase in interest-bearing deposits in banks and higher demand for advances by the Bank’s members, partially offset by a decrease in Federal funds sold.

Adjusted net interest income for this segment was $155 million in the second quarter of 2006, an increase of $41 million, or 36%, compared to $114 million in the second quarter of 2005. In the first six months of 2006, adjusted net interest income for this segment was $300 million, an increase of $88 million, or 42%, compared to $212 million in the first six months of 2005. The increases were primarily due to an increase in average advance and capital balances and a higher yield on invested capital.

Adjusted net interest income for this segment represented 82% and 76% of total adjusted net interest income for the second quarter of 2006 and 2005, respectively, and 80% and 72% of total adjusted net interest income for the first six months of 2006 and 2005, respectively.

Advances –Advances outstanding increased $4.5 billion, or 3%, to $167.4 billion at June 30, 2006, from $162.9 billion at December 31, 2005. Advances outstanding included unrealized fair value losses of $520 million at

37

June 30, 2006, and unrealized fair value losses of $339 million at December 31, 2005. The increase in the unrealized fair value losses of hedged advances from June 30, 2006, to December 31, 2005, was primarily attributable to the effects of higher short-term and intermediate-term interest rates on the fair value of hedged fixed rate advances and hedged adjustable rate advances that contain caps on the interest rates that members may pay.

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

Advances Portfolio by Product Type

(In millions)	June 30, 2006			December 31, 2005
Standard advances:
Adjustable – London Interbank Offered Rate (LIBOR)-indexed	$	85,623		$	83,775
Adjustable – other indices		2,619			2,479
Fixed		45,451			40,824
Daily variable rate		5,645			5,460
Subtotal		139,338			132,538
Customized advances:
Adjustable – amortizing		4			7
Adjustable – constant maturity		1,750			1,750
Adjustable – LIBOR-indexed with caps or floors		47			37
Adjustable – LIBOR-indexed with caps and/or floors and partial prepayment symmetry (PPS)1		14,826			13,825
Adjustable – 3-month T-bill average		4,500			8,000
Adjustable – 12-month Treasury average		1,750			1,750
Fixed – amortizing		838			841
Fixed with PPS1		1,097			960
Fixed – callable at member’s option		1,156			971
Fixed – putable at Bank’s option		2,577			2,528
Subtotal		28,545			30,669
Total par value		167,883			163,207
SFAS 133 valuation adjustments		(520	)		(339	)
Net unamortized premiums		(7	)		5
Total	$	167,356		$	162,873

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

During the first six months of 2006, short-term fixed rate advances increased by $4.7 billion to $22.1 billion, fixed rate advances with terms of one year or more increased by $0.3 billion to $29.0 billion, and daily variable rate advances increased by $0.2 billion to $5.7 billion, while adjustable rate advances with terms of one year or more decreased by $0.5 billion to $111.1 billion.

Advances outstanding to the Bank’s three largest members totaled $114.0 billion at June 30, 2006, a net decrease of $1.2 billion from $115.2 billion at December 31, 2005. Of this decrease, $13.6 billion was from the maturing advances of two large members, partially offset by a $12.4 billion increase in advances outstanding to another large member. In addition, a net increase in advances outstanding to other members of varying asset sizes and charter types offset the net decrease of the three largest members. In total, 148 institutions increased their advance borrowings during the first six months of 2006, while 87 institutions decreased their advance borrowings.

Average advances were $167.1 billion in the second quarter of 2006, an 11% increase from $150.0 billion in the second quarter of 2005. Average advances were $167.6 billion in the first six months of 2006, a 15% increase from $145.9 billion in the first six months of 2005. The increase in average advances reflected members’ use of Bank advances to finance asset growth.

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Non-MBS Investments –The Bank’s non-MBS investment portfolio consists of high-quality financial instruments that are used to meet its ongoing payment obligations and to facilitate the Bank’s role as a cost-effective provider of credit and liquidity to members. The Bank’s total non-MBS investment portfolio was $33.1 billion as of June 30, 2006, an increase of $5.7 billion, or 21%, from $27.4 billion as of December 31, 2005. The overall increase in non-MBS investments during the first six months of 2006 generally reflected the impact of some members paying down advances during the second quarter of 2006. During the first six months of 2006, interest-bearing deposits in banks increased $9.6 billion, while Federal funds sold decreased $4.7 billion, as the Bank shifted the form of its investments to negotiable certificates of deposit to facilitate intraday cash management. In addition, commercial paper increased $0.5 billion and discount notes issued by Fannie Mae and Freddie Mac increased $0.4 billion, while housing finance agency bonds decreased $0.1 billion.

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

Borrowings –Consistent with the increases in advances and non-MBS investments, total liabilities (primarily consolidated obligations) funding the advances-related business increased $9.5 billion, or 5%, from $181.6 billion at December 31, 2005, to $191.1 billion at June 30, 2006. For further information and discussion of the Bank’s joint and several liability for FHLBank consolidated obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.”

To meet the specific needs of certain investors, fixed and adjustable rate consolidated obligation bonds may contain embedded call options or other features that result in complex coupon payment terms. When these consolidated obligation bonds are issued, typically the Bank simultaneously enters into interest rate exchange agreements with features that offset the complex features of the bonds and, in effect, convert the bonds to adjustable rate instruments tied to an index, primarily LIBOR. For example, the Bank uses fixed rate callable bonds that are typically offset with interest rate exchange agreements with call features that offset the call options embedded in the callable bonds. This combined financing structure enables the Bank to meet its funding needs at costs not generally attainable solely through the issuance of non-callable debt. These transactions generally receive fair value hedge accounting treatment under SFAS 133. Despite the fair value hedge classification, the interest rate movements of the Bank’s debt instruments and hedging instruments are highly but not perfectly correlated. As a result, there has been and may continue to be the potential for significant accounting income volatility arising from periodic net unrealized fair value gains or losses from the Bank’s portfolio of hedged callable bonds resulting from interest rate movements. Given the size of the Bank’s portfolio, relatively minor differences in rate movements can contribute to fair value changes resulting in significant income volatility.

At June 30, 2006, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $248.8 billion, of which $53.8 billion were hedging advances and $195.0 billion were hedging consolidated obligations that were funding advances. At December 31, 2005, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $231.0 billion, of which $56.2 billion were hedging advances and $174.8 billion were hedging consolidated obligations that were funding advances. The hedges associated with advances and consolidated obligations were primarily used to convert the fixed rate cash flows and non-LIBOR-indexed cash flows of the advances and consolidated obligations to adjustable rate LIBOR-indexed cash flows or to manage the interest rate sensitivity and net repricing gaps of assets, liabilities, and interest rate exchange agreements.

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

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

Market Instrument	June 30, 2006		December 31, 2005		June 30, 2005		December 31, 2004
Federal Reserve target rate for overnight Federal funds	5.25	%	4.25	%	3.25	%	2.25	%
3-month Treasury bill	4.98		4.08		3.21		2.22
3-month LIBOR	5.48		4.54		3.52		2.56
2-year Treasury note	5.15		4.40		3.64		3.07
5-year Treasury note	5.09		4.35		3.70		3.61

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

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

The average cost of FHLBank System discount notes relative to comparable term LIBOR rates in the first six months of 2006 relative to the first six months of 2005 improved between 0.00% and 0.01%. For the same time horizon, the average cost of intermediate-term non-callable bonds and callable bonds relative to rates of LIBOR-indexed interest rate swaps improved between 0.02% and 0.03%.

At June 30, 2006, the Bank had $119.3 billion of swapped non-callable bonds and $37.5 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 June 30, 2006. At December 31, 2005, the Bank had $100.0 billion of swapped non-callable bonds and $47.4 billion of swapped callable bonds that primarily funded advances and non-MBS investments. These swapped non-callable and callable bonds combined represented 81% of the Bank’s total consolidated obligation bonds outstanding at December 31, 2005. The Bank increased its swapped non-callable bonds outstanding by $19.3 billion in the first six months of 2006, as investors exhibited stronger demand for the FHLBank System’s non-callable fixed rate and adjustable rate bonds compared to callable bonds.

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

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

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At June 30, 2006, assets associated with this segment were $32.5 billion (14% of total assets), an increase of $0.1 billion, or 0.1%, from $32.4 billion at December 31, 2005 (15% of total assets). The increase was primarily due to higher investments in MBS, which increased $0.3 billion to $27.4 billion at June 30, 2006, from $27.1 billion at December 31, 2005, while mortgage loan balances decreased $0.3 billion to $4.9 billion at June 30, 2006, from $5.2 billion at December 31, 2005.

Average MBS investments increased $2.9 billion to $26.4 billion in the second quarter of 2006 compared to $23.5 billion in the second quarter of 2005 and increased $3.7 billion to $26.6 billion in the first six months of 2006 compared to $22.9 billion in the first six months of 2005. The increases in average MBS investments reflect the Bank’s strategy to maintain MBS investments close to the regulatory limit of three times capital; capital grew significantly on a year-over-year basis because of growth in advances.

Average mortgage loans decreased $0.8 billion to $5.0 billion in the second quarter of 2006 from $5.8 billion in the second quarter of 2005 and decreased $0.7 billion to $5.1 billion in the first six months of 2006 from $5.8 billion in the first six months of 2005. Mortgage loan purchase activity was subdued during 2005 and the first six months of 2006 because (i) the originations of conforming fixed rate mortgage loans were lower in these periods, (ii) member business strategies resulted in sales of these mortgage loans to other purchasers, and (iii) the Bank limited its purchases of fixed rate mortgage loans because the profit spreads available were below the Bank’s targets.

Adjusted net interest income for this segment was $35 million in the second quarter of 2006, a decrease of $1 million, or 3%, from $36 million in the second quarter of 2005. In the first six months of 2006, adjusted net interest income for this segment was $77 million, a decrease of $4 million, or 5%, from $81 million in the first six months of 2005. The decreases were primarily the result of narrower profit spreads on the mortgage portfolio, reflecting the impact on financing costs of higher interest rates and a flatter yield curve.

Adjusted net interest income for this segment represented 18% and 24% of total adjusted net interest income for the second quarter of 2006 and 2005, respectively, and 20% and 28% of total adjusted net interest income for the first six months of 2006 and 2005, respectively.

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

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

(In millions)	June 30, 2006			December 31, 2005
MPF Plus	$	4,484		$	4,751
Original MPF		462			482
Subtotal		4,946			5,233
Unamortized premiums		13			18
Unamortized discounts		(31	)		(37	)
Total	$	4,928		$	5,214

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

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management believes to be adequate to absorb estimated probable losses inherent in the total mortgage portfolio. The Bank established an allowance for credit losses on mortgage loans totaling $0.6 million at June 30, 2006, and $0.7 million at December 31, 2005. For more information on how the Bank determines its estimated allowance for credit losses on mortgage loans, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – Allowance for Credit Losses – Mortgage Loans Acquired Under the MPF Program” in the Bank’s 2005 Form 10-K.

At June 30, 2006, the Bank had 27 loans totaling $3 million classified as nonaccrual or impaired. Seventeen of these loans totaling $2 million were in foreclosure or bankruptcy. At December 31, 2005, the Bank had 38 loans totaling $4 million classified as nonaccrual or impaired. Twenty of these loans totaling $3 million were in foreclosure or bankruptcy.

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

MBS Investments –The Bank’s MBS portfolio was $27.4 billion, or 267% of Bank capital (as defined by the Finance Board), at June 30, 2006, compared to $27.1 billion, or 279% of Bank capital, at December 31, 2005. 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. All MBS purchases during the first six months of 2006 were AAA-rated non-agency MBS. In addition, the Bank generally required 100% to 200% of additional credit enhancement above the amount required by the rating agencies for AAA-rated investments for the MBS purchased during the first six months of 2006.

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

In accordance with the provisions of SFAS 133, interest rate exchange agreements associated with held-to-maturity securities are non-hedge-qualifying. This designation required the Bank to mark certain MBS to fair value through earnings to partially offset the mark-to-fair value of the associated interest rate exchange agreements, for net unrealized losses of $282,000 and net unrealized gains of $677,000 during the second quarter of 2006 and 2005, respectively, and for net unrealized losses of $186,000 and net unrealized gains of $274,000 during the first six months of 2006 and 2005, respectively.

Borrowings –Total consolidated obligations funding the mortgage-related business increased $0.1 billion, or 0.3%, from $32.4 billion at December 31, 2005, to $32.5 billion at June 30, 2006, 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 June 30, 2006, the notional amount of interest rate exchange agreements associated with the mortgage-related business totaled $12.9 billion, of which $0.1 billion were associated with specific MBS classified as trading securities and $12.8 billion hedged or were associated with consolidated obligations funding the mortgage portfolio. At June 30, 2006, $8.6 billion in notional amounts of interest rate exchange agreements associated with consolidated obligations were economic hedges that did not qualify for either fair value or cash flow hedge accounting under SFAS 133.

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

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Liquidity and Capital Resources

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

Liquidity

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

During the last several years, the Bank has experienced a significant expansion of its balance sheet. The Bank’s advances increased from $81.2 billion at December 31, 2002, to $167.4 billion at June 30, 2006. This expansion was supported by an increase in capital stock purchased by members, in accordance with the Bank’s capital stock requirements, from $5.6 billion at December 31, 2002, to $10.1 billion at June 30, 2006, as the balances for both advances and mortgage loans (purchased from members and held by the Bank) increased. The increases in advances, mortgage loans, MBS, and other investments were also supported by an increase in consolidated obligations of $108.9 billion from $108.2 billion at December 31, 2002, to $217.1 billion at June 30, 2006.

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

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

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

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

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Capital

Total capital as of June 30, 2006, was $10.2 billion, a 6% increase from $9.6 billion as of December 31, 2005. This increase was consistent with the rise in advances during the first six months of 2006, and primarily reflected additional capital stock purchases by existing members to support additional borrowings during the period, and, to a lesser degree, capital stock purchases by new members. The increase was net of repurchases of capital stock, which primarily resulted from the Bank’s surplus capital stock repurchase policy, described below.

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

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

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

The Bank repurchased surplus capital stock totaling $501 million in the second quarter of 2006 and $163 million in the second quarter of 2005. The Bank also repurchased excess capital stock that was not surplus capital stock totaling $584 million in the second quarter of 2006 and $8 million in the second quarter of 2005.

The Bank repurchased surplus capital stock totaling $613 million in the first six months of 2006 and $202 million in the first six months of 2005. The Bank also repurchased excess capital stock that was not surplus capital stock totaling $586 million in the first six months of 2006 and $54 million in the first six months of 2005.

Excess capital stock totaled $1.3 billion as of June 30, 2006, which included surplus capital stock of $452 million. On July 31, 2006, the Bank repurchased $423 million of surplus capital stock. The Bank also repurchased $609 million of excess capital stock that was not surplus capital stock, including $598 million in excess capital stock that was the subject of repurchase requests submitted during the second quarter of 2006 by four members, of which one had an officer or director serving on the Bank’s Board of Directors, and $11 million in mandatorily redeemable excess stock repurchased from former members of the Bank. Excess capital stock totaled $440 million after the July 31, 2006, capital stock repurchase.

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

Capital Requirements

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

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Regulatory Capital Requirements

	June 30, 2006						December 31, 2005
	Required			Actual			Required			Actual
Risk-based capital	$	1,061		$	10,258		$	862		$	9,698
Total capital-to-assets ratio		4.00	%		4.39	%		4.00	%		4.34	%
Total capital	$	9,350		$	10,258		$	8,944		$	9,698
Leverage ratio		5.00	%		6.58	%		5.00	%		6.51	%
Leverage capital	$	11,688		$	15,387		$	11,180		$	14,547

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

Risk Management

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

Concentration Risk

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

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Concentration of Advances

(Dollars in millions)	June 30, 2006				December 31, 2005
Name of Borrower	Advances Outstanding1		Percentage of Total Advances Outstanding		Advances Outstanding1		Percentage of Total Advances Outstanding
Washington Mutual Bank	$	45,774	27	%	$	56,911	35	%
Citibank (West), FSB		43,028	26			30,627	19
World Savings Bank, FSB		25,200	15			27,712	17
Subtotal		114,002	68			115,250	71
Others		53,881	32			47,957	29
Total par	$	167,883	100	%	$	163,207	100	%

Concentration of Interest Income from Advances

(Dollars in millions)	Three Months Ended June 30,
	2006				2005
Name of Borrower	Interest Income from Advances2		Percentage of Total Interest Income from Advances		Interest Income from Advances2		Percentage of Total Interest Income from Advances
Washington Mutual Bank	$	628	31	%	$	441	38	%
Citibank (West), FSB		438	22			173	15
World Savings Bank, FSB		315	16			186	16
Subtotal		1,381	69			800	69
Others		609	31			356	31
Total	$	1,990	100	%	$	1,156	100	%
	Six Months Ended June 30,
	2006				2005
Name of Borrower	Interest Income from Advances2		Percentage of Total Interest Income from Advances		Interest Income from Advances2		Percentage of Total Interest Income from Advances
Washington Mutual Bank	$	1,261	33	%	$	791	38	%
Citibank (West), FSB		784	21			315	15
World Savings Bank, FSB		618	16			341	16
Subtotal		2,663	70			1,447	69
Others		1,148	30			646	31
Total	$	3,811	100	%	$	2,093	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 difference between the par and carrying value amounts primarily relates to fair value adjustments for hedged advances arising from SFAS 133.

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

Because of this concentration in advances, the Bank has implemented enhanced credit and collateral review procedures for these members. The Bank also analyzes the implications for its financial management and profitability if it were to lose the advances business of one or more of these members. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Concentration Risk – Advances” in the Bank’s 2005 Form 10-K.

On May 7, 2006, Golden West Financial Corporation, the parent company of World Savings Bank, FSB, announced that it had signed a definitive agreement to merge with Wachovia Corporation. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments.”

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MPF Program.  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 June 30, 2006, and December 31, 2005.

Of the ten members participating in the MPF Program at June 30, 2006:

• $3.7 billion, or 75% of the principal balance of outstanding mortgage loans held by the Bank, were purchased from Washington Mutual Bank. This amount represented 25,451, or 71%, of the total number of loans outstanding at June 30, 2006.

• $0.8 billion, or 16%, were purchased from IndyMac Bank, FSB (IndyMac). This amount represented 7,019, or 20%, of the total number of loans outstanding at June 30, 2006.

Of the nine members participating in the MPF Program at December 31, 2005:

• $3.9 billion, or 75% of the principal balance of outstanding mortgage loans held by the Bank, were purchased from Washington Mutual Bank. This amount represented 26,418, or 71%, of the total number of loans outstanding at December 31, 2005.

• $0.8 billion, or 16%, were purchased from IndyMac. This amount represented 7,407, or 20%, of the total number of loans outstanding at December 31, 2005.

Members participating in the MPF Program, including Washington Mutual Bank and IndyMac, have made representations and warranties that the mortgage loans comply with the MPF underwriting guidelines. The Bank relies on the quality control review process established for the MPF Program for identification of loans that may not comply with the underwriting guidelines. In the event a mortgage loan does not comply with the MPF underwriting guidelines, the agreement with the member provides that the member is required to repurchase the loan as a result of a breach of the member’s representations and warranties. The Bank may, at its discretion, choose to retain the loan if the Bank determines that the noncompliance can be cured or mitigated through additional contract assurances from the member. During the second quarter of 2006 and the first six months of 2006, there were no loans repurchased by members because of noncompliance with the MPF underwriting guidelines. During the second quarter of 2005, members repurchased 3 loans totaling $0.6 million that did not comply with the MPF underwriting guidelines. During the six months ended June 30, 2005, members repurchased 6 loans totaling $1.0 million that did not comply with the MPF underwriting guidelines. In addition, all participating members have retained the servicing on the mortgage loans purchased from them by the Bank, and the servicing of mortgage loans purchased from former members is held by Bank-approved financial institutions.

Capital Stock.  The following table presents the concentration in capital stock held by members whose capital stock outstanding represented 10% or more of the Bank’s total capital stock outstanding as of June 30, 2006, and December 31, 2005.

Concentration of Capital Stock

(Dollars in millions)	June 30, 2006				December 31, 2005
Name of Member	Capital Stock Outstanding		Percentage of Total Capital Stock Outstanding		Capital Stock Outstanding		Percentage of Total Capital Stock Outstanding
Washington Mutual Bank	$	2,713	27	%	$	3,350	35	%
Citibank (West), FSB		2,022	20			1,439	15
World Savings Bank, FSB		1,357	14			1,317	14
Total	$	6,092	61	%	$	6,106	64	%

For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Capital.”

On July 31, 2006, the Bank repurchased $494 million in excess capital stock from Washington Mutual Bank. After the repurchase, Washington Mutual Bank held 25% of the Bank’s total capital stock and mandatorily redeemable capital stock outstanding.

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On May 7, 2006, Golden West Financial Corporation, the parent company of World Savings Bank, FSB, announced that it had signed a definitive agreement to merge with Wachovia Corporation. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments.”

Derivatives Counterparties.   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 June 30, 2006, and December 31, 2005.

Concentration of Derivative Counterparties

(Dollars in millions)		June 30, 2006				December 31, 2005
Derivatives Counterparty	Credit Rating	Notional Amount		Percentage of Total Notional		Notional Amount		Percentage of Total Notional
Deutsche Bank AG	AA	$	48,437	19	%	$	41,773	17	%
JP Morgan Chase Bank, N.A.	A		38,268	15			35,642	15
Lehman Brothers Special Financing, Inc.	A		27,217	10			21,910	9
Subtotal			113,922	44			99,325	41
Others			147,750	56			145,112	59
Total		$	261,672	100	%	$	244,437	100	%

For more information regarding the credit risk of derivatives counterparties, see the Credit Exposure to Derivatives Counterparties table in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Derivatives Counterparties.”

Liquidity Risk

The Bank’s primary sources of liquidity are short-term investments and the issuance of new consolidated obligation bonds and discount notes. The Bank maintains short-term, high-quality money market investments in amounts that average up to three times the Bank’s capital as a primary source of funds to satisfy these requirements and objectives. Growth in advances to members may initially be funded by maturing on-balance sheet liquid investments, but within a short time the growth is usually funded by new issuances of consolidated obligations. The capital to support the growth in advances is provided by the borrowing members, through their capital stock purchase requirements, which are based in part on outstanding advances. At June 30, 2006, the Bank’s total capital to assets ratio was 4.39%, 0.39% above the minimum regulatory requirement. At December 31, 2005, the Bank’s total capital to assets ratio was 4.34%, 0.34% above the minimum regulatory requirement.

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 capital 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 capital markets disruption. The Bank maintained at least three months of contingency liquidity during the first six months of 2006. 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.

The following table shows the Bank’s principal financial obligations due, estimated sources of funds available to meet those obligations, and the net difference of funds available or funds needed for the five-business-day and 90-day periods following June 30, 2006, and December 31, 2005. Also shown are additional contingent sources of funds from on-balance sheet collateral available for repurchase agreement borrowings.

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Principal Financial Obligations Due and Funds Available for Selected Periods

	As of June 30, 2006				As of December 31, 2005
(In millions)	5 Business Days		90 Days		5 Business Days		90 Days
Obligations due:
Commitments for new advances	$	807	$	1,657	$	385	$	2,836
Commitments to purchase investments		1,400		1,755		—		—
Maturing member term deposits		20		20		18		30
Discount note and bond maturities and expected exercises of bond call options		4,826		47,856		3,114		35,628
Subtotal obligations		7,053		51,288		3,517		38,494
Sources of available funds:
Maturing investments		7,974		31,349		7,901		25,967
Proceeds from scheduled settlements of discount notes and bonds		386		831		1,156		1,401
Maturing advances and scheduled prepayments		8,118		37,174		7,178		25,249
Subtotal sources		16,478		69,354		16,235		52,617
Net funds available	$	9,425	$	18,066	$	12,718	$	14,123
Additional contingent sources of funds:1
Estimated borrowing capacity of securities available for repurchase agreement borrowings:
MBS	$	—	$	21,573	$	—	$	22,020
Housing finance agency bonds		—		922		—		1,030
Marketable money market investments		15,098		—		7,362		—

1 The estimated amount of repurchase agreement borrowings obtainable from authorized securities dealers is subject to market conditions and the ability of securities dealers to obtain financing for the securities and transactions entered into with the Bank. The estimated maximum amount of repurchase agreement borrowings obtainable is based on the current par amount and estimated market value of MBS and other investments (not included in above figures) that are not pledged at the beginning of the period and subject to estimated collateral discounts taken by securities dealers.

In addition, the U.S. Secretary of the Treasury is authorized, at his or her discretion, to purchase up to $4.0 billion of consolidated obligations.

Credit Risk

Advances.  The Bank manages the credit risk associated with lending to members by closely monitoring the creditworthiness of the members and the quality and value of the assets that they pledge as collateral. The Bank also has procedures to assess the mortgage loan underwriting and documentation standards of the members that pledge mortgage loan collateral. In addition, the Bank has collateral policies and restricted lending procedures in place to help manage its exposure to members that experience difficulty in meeting their capital requirements or other standards of creditworthiness. These credit and collateral policies balance the Bank’s dual goals of meeting members’ needs as a reliable source of liquidity and limiting credit loss by adjusting the credit and collateral terms. The Bank has never experienced a credit loss on an advance.

All advances must be fully collateralized. To secure advances, members may pledge one- to four-family residential mortgage loans; multifamily mortgage loans; mortgage-backed securities; securities issued, insured, or guaranteed by the U.S. government or any of its agencies, including without limitation MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae; cash or deposits in the Bank; and certain other real estate-related collateral, such as home equity or commercial real estate loans. The Bank may also accept secured small business, small farm, and small agribusiness loans as collateral from members that are community financial institutions. The Finance Board defined community financial institutions for 2006 as Federal Deposit Insurance Corporation-insured depository institutions with average total assets over the preceding three-year period of $587 million or less.

In accordance with the FHLB Act, any security interest granted to the Bank by any member or member affiliate has priority over the claims and rights of any other party, including any receiver, conservator, trustee,

49

or similar entity that has the rights of a lien creditor, unless these claims and rights would be entitled to priority under otherwise applicable law and are held by actual purchasers or by parties that are secured by actual perfected security interests. The Bank perfects its security interest in loan collateral by completing a UCC-1 filing for each member. The Bank requires delivery of all securities collateral and may also require delivery of loan collateral under certain conditions (for example, from a newly formed institution or when a member’s creditworthiness deteriorates).

Management determines the borrowing capacity of a member based on the member’s credit quality and eligible collateral pledged in accordance with the Bank’s Member Products Policy and regulatory requirements. Credit quality is determined and periodically assessed using the member’s financial information, regulatory examination and enforcement actions, and other public information. The Bank values the pledged collateral and conducts periodic collateral field reviews to establish the amount it will lend against each collateral type for each member.

The Bank evaluates the type of collateral pledged by members and assigns a borrowing capacity to the collateral, generally based on a percentage of its fair value. The borrowing capacities include a margin that incorporates components for: secondary market discounts for credit attributes and defects, potential risks and estimated costs to liquidate, and the risk of a decline in the fair value of the collateral.

Other factors that the Bank considers in assigning borrowing capacities to a member’s collateral include the pledging method for loans (for example, specific identification, blanket lien, or required delivery), collateral field review results, the member’s financial strength and condition, and the concentration of collateral type by member. The Bank monitors each member’s borrowing capacity and collateral requirements on a daily basis and adheres to the Bank’s Collateral Guide when assigning borrowing capacities.

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The following table presents a summary of the status of members’ credit outstanding and overall collateral borrowing capacity as of June 30, 2006, and December 31, 2005. Almost all credit outstanding and collateral borrowing capacity are with members that have the 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 an internal rating from one to ten, with one being the highest credit quality rating.

Member Credit Outstanding and Collateral Borrowing Capacity

By Credit Quality Rating

(Dollars in millions)
June 30, 2006
	All Members	Members with Credit Outstanding
					Collateral Borrowing Capacity2
Member Credit Quality Rating	Number	Number	Credit Outstanding1		Total	Used
1-3	310	231	$	168,548	$260,582	65	%
4-6	66	30		853	2,196	39
7-10	3	1		4	6	67
Total	379	262	$	169,405	$262,784	64	%

December 31, 2005
	All Members	Members with Credit Outstanding
					Collateral Borrowing Capacity2
Member Credit Quality Rating	Number	Number	Credit Outstanding1		Total	Used
1-3	318	235	$	163,683	$247,028	66	%
4-6	55	20		545	1,003	54
7-10	3	1		4	6	67
Total	376	256	$	164,232	$248,037	66	%

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

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

Based on the borrowing capacity of collateral held as security for advances, management’s credit analyses, and prior repayment history, no allowance for credit losses on advances is deemed necessary by management.

MPF Program.  On mortgage loans acquired under the MPF Program, the Bank provides for a loss allowance, net of credit enhancements, for any impaired loans and for the estimates of other probable losses, and the Bank has policies and procedures in place to monitor the credit risk. The Bank bases the allowance for credit losses for the Bank’s mortgage loan portfolio on management’s estimate of probable credit losses in the portfolio as of the balance sheet date. The Bank performs periodic reviews of its portfolio to identify the probable losses within the portfolio. The overall allowance is determined by an analysis that includes consideration of observable data such as delinquency statistics, past performance, current performance, loan portfolio characteristics, collateral valuations, industry data, collectibility of credit enhancements from participating members or from mortgage insurers, and prevailing economic conditions, taking into account the credit enhancement provided by the member under the terms of each Master Commitment.

Mortgage loan delinquencies as of June 30, 2006, and December 31, 2005, were as follows:

(Dollars in millions)	June 30, 2006			December 31, 2005
30 – 59 days delinquent	$	22		$	24
60 – 89 days delinquent		2			4
90 days or more delinquent		3			4
Total delinquencies	$	27		$	32
Nonaccrual loans1	$	3		$	4
Loans past due 90 days or more and still accruing interest		—			—
Delinquencies as a percentage of total mortgage loans outstanding		0.54	%		0.59	%
Nonaccrual loans as a percentage of total mortgage loans outstanding		0.06	%		0.08	%

1 The nonaccrual loans included 17 loans totaling $2 million that were in foreclosure or bankruptcy as of June 30, 2006, and 20 loans totaling $3 million that were in foreclosure or bankruptcy as of December 31, 2005.

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For the first six months of 2006, interest income that was contractually due but not received and interest income forgone on the nonaccrual loans totaled $116,000.

Delinquencies amounted to 0.54% of the total loans in the Bank’s portfolio as of June 30, 2006, which was below the national delinquency rate for prime fixed rate mortgages of 1.81% in the first quarter of 2006 published in the Mortgage Bankers Association’s National Delinquency Survey. Delinquencies amounted to 0.59% of the total loans in the Bank’s portfolio as of December 31, 2005, which was below the national delinquency rate for prime fixed rate mortgages of 2.41% in the fourth quarter of 2005 published in the Mortgage Bankers Association’s National Delinquency Survey. However, the Bank’s MPF mortgage loan portfolio may not be as seasoned as the portfolios used by the Mortgage Bankers Association. Therefore, the delinquency rate for the Bank’s portfolio may not be comparable to the national delinquency rates published in the Mortgage Bankers Association’s National Delinquency Survey. The weighted average age of the Bank’s MPF mortgage loan portfolio was 35 months as of June 30, 2006, and 29 months as of December 31, 2005.

The estimated risk that losses on the Bank’s MPF mortgage loans would exceed the liquidation value of real property securing the loans and primary mortgage insurance was not material in the second quarter of 2006 and 2005 and first six months of 2006 and 2005. These estimated losses are evaluated and included in the Bank’s assessment of its allowance for credit losses. Since these losses occurred in MPF Plus Master Commitments, they are expected to be recovered through the performance credit enhancement fees, and no realized losses were incurred in the second quarter of 2006 and 2005 and in the first six months of 2006 and 2005.

Investments.  The Bank has adopted credit policies and exposure limits for investments that promote diversification and liquidity. These policies restrict the amounts and terms of the Bank’s investments with any given counterparty according to the Bank’s own capital position as well as the capital and creditworthiness of the counterparty. The following table presents the Bank’s investment credit exposure at the dates indicated, based on counterparties’ long-term credit ratings provided by Moody’s Investors Service, Standard & Poor’s, or comparable Fitch ratings.

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Investment Credit Exposure

(In millions)
June 30, 2006
	Credit Rating1
Investment Type	AAA		AA		A		BBB		Total
Interest-bearing deposits in banks	$	—	$	11,629	$	4,890	$	—	$	16,519
Securities purchased under agreements to resell2		700		—		—		—		700
Federal funds sold		—		8,372		3,913		21		12,306
Trading securities:
MBS:
GNMA		43		—		—		—		43
FHLMC		15		—		—		—		15
FNMA		49		—		—		—		49
Total trading securities		107		—		—		—		107
Held-to-maturity securities:
Commercial paper		499		299		956		—		1,754
Housing finance agency bonds		1,085		—		—		—		1,085
Discount notes:
FHLMC		149		—		—		—		149
FNMA		546		—		—		—		546
MBS:
GNMA		31		—		—		—		31
FHLMC		176		—		—		—		176
FNMA		468		—		—		—		468
Non-agency		26,616		—		—		—		26,616
Total held-to-maturity securities		29,570		299		956		—		30,825
Total investments	$	30,377	$	20,300	$	9,759	$	21	$	60,457

December 31, 2005
	Credit Rating1
Investment Type	AAA		AA		A		Total
Interest-bearing deposits in banks	$	—	$	5,719	$	1,180	$	6,899
Securities purchased under agreements to resell2		750		—		—		750
Federal funds sold		—		11,602		5,395		16,997
Trading securities:
MBS:
GNMA		49		—		—		49
FHLMC		15		—		—		15
FNMA		64		—		—		64
Total trading securities		128		—		—		128
Held-to-maturity securities:
Commercial paper		—		557		710		1,267
Housing finance agency bonds		1,211		—		—		1,211
Discount notes – FNMA		248		—		—		248
MBS:
GNMA		36		—		—		36
FHLMC		207		—		—		207
FNMA		522		—		—		522
Non-agency		26,200		—		—		26,200
Total held-to-maturity securities		28,424		557		710		29,691
Total investments	$	29,302	$	17,878	$	7,285	$	54,465

1 At June 30, 2006, $1.1 billion of the A-rated investments and $21 million of the BBB-rated investments were with members. At December 31, 2005, $0.7 billion of the A-rated investments were with members. The A- and BBB-rated investments all had maturities of 3 months or less as of June 30, 2006, and December 31, 2005.

2 Classified based on the credit rating of securities held as collateral.

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Many of the Bank’s members and their affiliates are extensively involved in residential mortgage finance. Accordingly, members or their affiliates may be involved in the sale of MBS to the Bank or in the origination or securitization of the mortgage loans backing the MBS purchased by the Bank.

The Bank held approximately $6.9 billion carrying value of non-agency MBS at June 30, 2006, that had been issued by entities sponsored by five members or their affiliates. In addition, the Bank held $3.3 billion carrying value of MBS at June 30, 2006, that had been purchased from three registered securities dealers that were affiliates of members at the time of purchase.

The Bank held approximately $6.6 billion carrying value of non-agency MBS at December 31, 2005, that had been issued by entities sponsored by five members or their affiliates. In addition, the Bank held $3.1 billion carrying value of MBS at December 31, 2005, that had been purchased from three registered securities dealers that were affiliates of members at the time of purchase.

Derivatives Counterparties.  The Bank has also adopted credit policies and exposure limits for derivatives and off-balance sheet credit exposure. All extensions of credit (including interest rate swaps, caps, and floors) to counterparties that are members of the Bank must be fully secured by eligible collateral and are subject to both the Bank’s Advances and Security Agreement and a master netting agreement. For nonmember 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 nonmember derivatives counterparties that provide for delivery of collateral at specified levels tied to counterparty credit rating to limit 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)
June 30, 2006
Counterparty Credit Rating	Notional Balance		Gross Credit Exposure		Collateral		Net Unsecured Exposure
AA	$	141,868	$	2	$	—	$	2
A		119,109		—		—		—
Subtotal		260,977		2		—		2
Member institutions1		695		27		27		—
Total derivatives	$	261,672	$	29	$	27	$	2
December 31, 2005
Counterparty Credit Rating	Notional Balance		Gross Credit Exposure		Collateral		Net Unsecured Exposure
AA	$	119,428	$	1	$	—	$	1
A		124,294		—		—		—
Subtotal		243,722		1		—		1
Member institutions1		715		23		23		—
Total derivatives	$	244,437	$	24	$	23	$	1

1 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 June 30, 2006, the Bank had a total of $261.7 billion in notional amounts of derivatives contracts outstanding. Of this total:

• $261.0 billion represented notional amounts of derivatives contracts outstanding with 22 nonmember derivatives counterparties. Nine of these counterparties made up 81% of the total nonmember notional amount outstanding and individually ranged from 5% to 19% of the total. The remaining nonmember counterparties each represented less than 5% of the total nonmember notional amount outstanding. Four of the nonmember derivatives counterparties, with $31 billion of derivatives outstanding at June 30, 2006, were affiliates of members.

• $695 million represented notional amounts with member counterparties, which included notional amounts of derivatives contracts and MPF purchase commitments with seven member counterparties. The Bank entered into this $695 million notional amount of derivatives as an intermediary and entered into the same amount of exactly offsetting transactions with nonmember derivatives counterparties. The Bank’s intermediation in this manner allows members indirect access to the derivatives market.

Gross credit exposure at June 30, 2006, was $29 million, which consisted of:

• $2 million of gross credit exposure with three nonmember derivatives counterparties. After consideration of collateral held by the Bank, the amount of net unsecured exposure totaled $2 million.

• $27 million of gross credit exposure on open derivative contracts with four member counterparties, all of which was secured with eligible collateral.

At December 31, 2005, the Bank had a total of $244.4 billion in notional amounts of derivatives contracts outstanding. Of this total:

• $243.7 billion represented notional amounts of derivatives contracts outstanding with 20 nonmember derivatives counterparties. Ten of these counterparties made up 84% of the total nonmember notional amount outstanding and individually ranged from 5% to 17% of the total. The remaining nonmember counterparties each represented less than 5% of the total nonmember notional amount

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outstanding. Three of the nonmember derivatives counterparties, with $28.6 billion of derivatives outstanding at December 31, 2005, were affiliates of members.

• $715 million represented notional amounts with member counterparties, which included notional amounts of derivatives contracts and MPF purchase commitments with seven member counterparties. The Bank entered into this $715 million notional amount of derivatives as an intermediary and entered into the same amount of exactly offsetting transactions with nonmember derivatives counterparties. The Bank’s intermediation in this manner allows members indirect access to the derivatives market.

Gross credit exposure at December 31, 2005, was $24 million, which consisted of:

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

• $23 million of gross credit exposure on open derivative contracts with four member counterparties, all of which was secured with eligible collateral.

The notional amount of derivatives contracts outstanding with nonmember derivatives counterparties grew $17.3 billion from December 31, 2005, to June 30, 2006. The increase was primarily due to a $19.9 billion increase in interest rate exchange agreements that hedge various types of consolidated obligations and a $2.4 billion decrease in interest rate swaps used to hedge the market risk of new short- and intermediate-term fixed rate advances. An increase or decrease in the notional amounts of derivative 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.

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.

Risk identification and risk 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 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.

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 in “Segment Market Risk.” At least monthly, compliance with Bank policies and management guidelines is presented to the ALCO or Board of Directors 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.

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The following table presents the estimated percentage change in the Bank’s market value of equity that would 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 Scenario1	June 30, 2006		December 31, 2005
+200 basis-point change	–4.5	%	–4.1	%
+100 basis-point change	–2.1		–1.9
–100 basis-point change	+1.7		+1.5
–200 basis-point change	+2.7		+1.8
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 a small increase in sensitivity as of June 30, 2006, compared to estimates as of December 31, 2005. This increased sensitivity is primarily attributable to the impact of higher interest rates at June 30, 2006, compared to December 31, 2005. Compared to interest rates as of December 31, 2005, interest rates as of June 30, 2006, were 85 basis points higher for terms of 1 year, 77 basis points higher for terms of 5 years, and 78 basis points higher for terms of 10 years. In general, higher interest rates have increased the duration or effective maturity of the Bank’s portfolio of mortgage loans and MBS more than the increase in duration or effective maturity of the callable bonds and derivatives that fund and hedge these assets. The result of these changes has been to increase the duration gap between mortgage assets and mortgage liabilities, which has increased net market value sensitivity or risk.

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 exercised call or put date, of the hedged assets, hedged liabilities, and derivatives.

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 June 30, 2006, showed that the adverse change in the projected potential dividend yield from an instantaneous and parallel increase or decrease of 200 basis points in interest rates was –74 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”).

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Repricing Gap Analysis

As of June 30, 2006

	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	$	33,064		$	—	$	—		$	—
Advances		143,104			4,459		16,867			2,926
Other assets		869			—		—			—
Total Assets		177,037			4,459		16,867			2,926
Liabilities
Consolidated obligations:
Bonds		50,351			26,774		79,432			3,476
Discount notes		24,878			79		—			—
Deposits		412			—		—			—
Mandatorily redeemable capital stock		—			—		75			—
Other liabilities		5,053			—		—			578
Total Liabilities		80,694			26,853		79,507			4,054
Interest rate exchange agreements		(89,602	)		23,020		65,986			596
Periodic gap of advances-related business		6,741			626		3,346			(532	)
Mortgage-related business:
Assets
MBS		8,035			2,393		14,310			2,660
Mortgage loans		316			258		1,927			2,427
Other assets		135			—		—			—
Total Assets		8,486			2,651		16,237			5,087
Liabilities
Consolidated obligations:
Bonds		2,312			4,072		17,200			4,152
Discount notes		4,236			132		—			—
Other liabilities		357			—		—			—
Total Liabilities		6,905			4,204		17,200			4,152
Interest rate exchange agreements		(1,153	)		1,718		(190	)		(375	)
Periodic gap of mortgage-related business		428			165		(1,153	)		560
Total periodic gap	$	7,169		$	791	$	2,193		$	28

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 both June 30, 2006, and December 31, 2005.

Total Bank Duration Gap Analysis

	June 30, 2006			December 31, 2005
	Amount (In millions)		Duration Gap1 (In months)	Amount (In millions)		Duration Gap1 (In months)
Assets	$	233,750	6	$	223,602	5
Liabilities		223,569	5		213,954	4
Net	$	10,181	1	$	9,648	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.

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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 interest rate swaps or options with terms offsetting the advance. The interest rate swaps and options generally are maintained as hedges for the life of the advances. 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 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; capital stock, when repurchased or redeemed, is required to be repurchased or redeemed at its par value of $100 per share.

Management updates the repricing and maturity gaps for actual asset, liability, and derivative 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).

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 June 30, 2006, in “Repricing Gap Analysis” above shows that approximately $6.7 billion of net assets for the advances-related business (66% of capital) were scheduled to mature or reprice in the six-month period following June 30, 2006, 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 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. This results in a mortgage portfolio that has a diversified set of interest rate risk attributes.

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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 mortgage 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 derivative 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, as temporary hedges of mortgage loan purchase commitments, 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 June 30, 2006, and December 31, 2005.

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 Scenario1	June 30, 2006		December 31, 2005
+200 basis-point change	–2.4	%	–1.9	%
+100 basis-point change	–1.0		–0.9
–100 basis-point change	+0.7		+0.8
–200 basis-point change	+0.8		+0.5
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 a small increase in sensitivity as of June 30, 2006, compared to estimates as of December 31, 2005. This increased sensitivity is primarily attributable to the impact of higher interest rates at June 30, 2006, compared to December 31, 2005. Compared to interest rates as of December 31, 2005, interest rates as of June 30, 2006, were 85 basis points higher for terms of 1 year, 77 basis points higher for terms of 5 years, and 78 basis points higher for terms of 10 years. In general, higher interest rates have increased the duration or effective maturity of the Bank’s portfolio of mortgage loans and MBS more than the increase in duration or effective maturity of the callable bonds and derivatives that fund and hedge these assets. The result of these changes has been to increase the duration gap between mortgage assets and mortgage liabilities, which has increased net market value sensitivity or risk.

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Interest Rate Exchange Agreements.   A derivative 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, swaptions, interest rate cap and floor 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 2005 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 June 30, 2006, and December 31, 2005.

(In millions)			Notional Amount
Hedging Instrument	Hedging Strategy	Accounting Designation	June 30, 2006		December 31, 2005
Hedged Item: Advances
Pay fixed, receive floating interest rate swap	Fixed rate advance converted to a LIBOR floating rate	Fair Value Hedge	$	23,218	$	24,418
Pay fixed, receive floating interest rate swap – swap is callable at Bank’s option	Fixed rate advance converted to a LIBOR floating rate; swap is callable on the same date(s) as the advance	Fair Value Hedge		1,141		946
Pay fixed, receive floating interest rate swap – swap is putable at counterparty’s option or is index based	Fixed rate advance converted to a LIBOR floating rate; swap is putable on the same date(s) as the advance	Fair Value Hedge		2,327		2,428
Interest rate cap and/or floor	Interest rate cap and/or floor embedded in a variable rate advance	Fair Value Hedge		14,871		13,862
Subtotal Fair Value Hedges				41,557		41,654
Basis swap	Non-LIBOR index rate advance converted to a LIBOR floating rate	Economic Hedge1		10,497		13,860
Receive fixed, pay floating interest rate swap	LIBOR index rate advance converted to a fixed rate	Economic Hedge1		75		75
Basis swap	Three-month LIBOR floating rate advance converted to a one-month LIBOR floating rate to reduce interest rate sensitivity and repricing gaps	Economic Hedge1		500		500
Pay fixed, receive floating interest rate swap; swap may be callable or putable	Fixed rate advance converted to a LIBOR floating rate; swap is callable or putable on same date(s) as advance	Economic Hedge1		1,149		139
Subtotal Economic Hedges1				12,221		14,574
Total				53,778		56,228
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		114,640		92,973
Receive fixed or structured, pay floating interest rate swap	Fixed rate or structured rate non-callable bond converted to a LIBOR floating rate	Economic Hedge1		1,951		729
Basis swap	Non-LIBOR index non-callable bond converted to a LIBOR floating rate	Economic Hedge1		7,465		7,965

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(In millions)			Notional Amount
Hedging Instrument	Hedging Strategy	Accounting Designation	June 30, 2006		December 31, 2005
Basis swap	Three-month LIBOR or other short-term floating rate non-callable bond converted to a one-month LIBOR or other short-term floating rate to reduce interest rate sensitivity and repricing gaps	Economic Hedge1		28,612		23,872
Swaption	An 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 Hedge1		3,575		3,587
Subtotal Economic Hedges1				41,603		36,153
Total				156,243		129,126
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 on the same date(s) as the bond	Fair Value Hedge		33,762		44,038
Pay fixed, receive LIBOR forward starting interest rate swap with an option to call	To offset the variability of cash flows associated with anticipated callable fixed rate debt issuance; swap is callable	Cash Flow Hedge		—		270
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 Hedge1		3,729		3,429
Total				37,491		47,737
Hedged Item: Discount Notes
Receive fixed, pay floating interest rate swap	Individual fixed rate discount note converted to a LIBOR floating rate	Economic Hedge1		270		1,519
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 Hedge1		2,253		2,253
Basis swap, receive fixed, pay floating interest rate swap	Discount note converted to a one-month LIBOR or other short-term floating rate to hedge repricing gaps	Economic Hedge1		10,177		5,926
Total				12,700		9,698
Hedged Item: Trading Securities
Pay MBS rate, receive floating interest rate swap	MBS rate converted to a LIBOR floating rate	Economic Hedge1		70		88
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 counterparties	Economic Hedge1		1,320		1,490
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 counterparties	Economic Hedge1		70		70
Total				1,390		1,560
Total Notional			$	261,672	$	244,437

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

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At June 30, 2006, the total notional amount of interest rate exchange agreements outstanding was $261.7 billion, compared with $244.4 billion at December 31, 2005. The $17.3 billion increase in the notional amount of derivatives during the first six months of 2006 was primarily due to a $19.9 billion increase in interest rate exchange agreements that hedge various types of consolidated obligations and a $2.4 billion decrease in interest rate swaps used to hedge the market risk of new short- and intermediate-term fixed rate advances. The notional amount serves as a basis for calculating periodic interest payments or cash flows received and paid.

The following table categorizes the notional amounts and estimated fair value gains and losses 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 June 30, 2006, and December 31, 2005.

Estimated Fair Values of Derivatives and Hedged Items

June 30, 2006

(In millions)	Notional Amount		Derivatives			Hedged Items			Difference
Fair value hedges:
Advances	$	41,557	$	518		$	(516	)	$	2
Non-callable bonds		114,640		(1,635	)		1,603			(32	)
Callable bonds		33,762		(815	)		809			(6	)
Subtotal		189,959		(1,932	)		1,896			(36	)
Not qualifying for hedge accounting (economic hedges):
Advances		8,721		14			—			14
Advances with embedded derivatives		3,500		4			—			4
Non-callable bonds		35,788		(33	)		—			(33	)
Non-callable bonds with embedded derivatives		5,815		(26	)		—			(26	)
Callable bonds		3,704		(52	)		—			(52	)
Callable bonds with embedded derivatives		25		(1	)		—			(1	)
Discount notes		12,700		78			—			78
MBS – trading		70		—			—			—
Intermediated		1,390		1			—			1
Subtotal		71,713		(15	)		—			(15	)
Total	$	261,672	$	(1,947	)	$	1,896		$	(51	)

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December 31, 2005

(In millions)	Notional Amount		Derivatives			Hedged Items			Difference
Fair value hedges:
Advances	$	41,654	$	337		$	(333	)	$	4
Non-callable bonds		92,973		(1,057	)		1,061			4
Callable bonds		44,038		(703	)		691			(12	)
Subtotal		178,665		(1,423	)		1,419			(4	)
Cash flow hedges:
Callable bonds		270		—			—			—
Not qualifying for hedge accounting (economic hedges):
Advances		11,074		(4	)		—			(4	)
Advances with embedded derivatives		3,500		6			—			6
Non-callable bonds		30,343		4			—			4
Non-callable bonds with embedded derivatives		5,810		(36	)		—			(36	)
Callable bonds		3,404		(34	)		—			(34	)
Callable bonds with embedded derivatives		25		(1	)		—			(1	)
Discount notes		9,698		43			—			43
MBS – trading		88		—			—			—
Intermediated		1,560		1			—			1
Subtotal		65,502		(21	)		—			(21	)
Total	$	244,437	$	(1,444	)	$	1,419		$	(25	)

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

	Estimated Fair Values of Embedded Derivatives
(In millions)	June 30, 2006			December 31, 2005
Host contract:
Advances	$	(4	)	$	(6	)
Non-callable bonds		26			36
Callable bonds		1			1
Total	$	23		$	31

The primary source of SFAS 133-related income volatility arises from hedging certain callable bonds to effectively create floating rate debt with uncertain maturities; the callable bond and related callable swap may be called prior to their contractual maturity. These transactions generally receive fair value hedge accounting treatment under SFAS 133. Despite the fair value hedge classification, there is potential for significant accounting income volatility from period to period on the Bank’s portfolio of hedged callable bonds as a result of hedge ineffectiveness caused by interest rate movements, including changes in (i) interest rate spreads between FHLBank System consolidated obligation debt and comparable term LIBOR-indexed interest rate swaps, and (ii) the expected life of swapped callable debt resulting from changes in the level of interest rates. The interest rate movements of the Bank’s debt instruments and hedging instruments are highly but not perfectly correlated. Given the size of the Bank’s portfolio, relatively minor differences in interest rate movements can create significant income volatility.

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. 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 exercised call or put

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dates. The impact of terminating the hedging relationship may result in a realized gain or loss. In addition, the Bank may have instances in which it may sell trading securities prior to maturity, which may also result in a realized gain or loss.

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 and expenses during the reported period. Changes in 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 four 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 likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies include estimating the allowance for credit losses on the advance and mortgage loan portfolios; accounting for derivatives; estimating fair values of investments classified as trading and all derivatives and hedged items carried at fair value in accordance with SFAS 133; and estimating the fair value of the collateral pledged to the Bank. These policies and the judgments, estimates, and assumptions are described in greater detail in the Bank’s 2005 Form 10-K in Note 1 to the Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.”

Recent Developments

Delays in Publication of FHLBanks’ Combined Financial Reports; Intended Restatements by Office of Finance and other FHLBanks; Delays in Other FHLBanks’ SEC Registration.   The Office of Finance has not published the FHLBanks’ 2004 third quarter combined Financial Report, 2004 full year combined Financial Report, any 2005 quarterly combined Financial Reports, 2005 full year combined Financial Report, or 2006 first quarter combined Financial Report. In addition, the Office of Finance has announced that its board of directors has decided to restate the FHLBanks’ combined financial statements for the years ended December 31, 2001, 2002, and 2003, and subsequent interim periods. All 12 FHLBanks have registered a class of equity securities with the SEC, as required by the Finance Board. The Office of Finance has said that it expects to publish current combined financial reports as soon as practical after all FHLBank SEC registration statements are effective. The delays in publication of the combined Financial Reports may have an effect on the cost of FHLBank System debt, the timing of the issuance of new FHLBank System debt, and other aspects of the Bank’s operations.

Federal Reserve Bank Policy Statement on Payments System Risk (PSR Policy).   The Federal Reserve Board’s revision of its PSR Policy as it applies to interest and redemption payments on Fedwire-eligible securities issued by GSEs and certain international organizations became effective July 20, 2006. The revised PSR Policy provides that the Federal Reserve Banks will now post these payments only when the issuer’s Federal Reserve Bank account contains sufficient funds to cover the payments before 4:00 p.m. Eastern time. To address the requirements of the revised PSR Policy, the FHLBanks and the Office of Finance prepared principal and interest funding procedures and entered into a related agreement among the FHLBanks and the Office of Finance to provide for the timely funding of principal and interest payments on consolidated obligations. As of the date of this report, all interest and principal payments have been made before 4:00 p.m. Eastern time.

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Proposed Finance Board Rule to Change the Capital Structure of the FHLBanks.   On March 15, 2006, the Finance Board published a proposed rule that would change the capital structure of the FHLBanks by requiring a minimum level of retained earnings and restricting the amount of excess stock that an FHLBank can accumulate. The comment period on the proposed rule ended on July 13, 2006. The final rule, if any, approved by the Finance Board may be different from the proposed rule. Under the proposed rule:

• Each FHLBank would be required to hold retained earnings of at least $50 million plus 1% of non-advance assets.

• Dividends would be limited to no more than 50% of net income until the FHLBank reaches its required level of retained earnings.

• Payment of any dividends thereafter would be restricted if the FHLBank’s retained earnings drop below its required level.

• The FHLBank’s excess capital stock would be limited to no more than 1% of total assets.

• Members would be prohibited from purchasing capital stock in excess of their minimum capital stock requirements.

• The FHLBanks would be prohibited from paying stock dividends to their members.

Based on management’s current analysis, the Bank has determined that the proposed rule, if approved in its current form, would significantly reduce the percentage of Bank earnings available for dividends for a number of years, would require the Bank to pay dividends in the form of cash instead of stock, could have a negative effect on the Bank’s ability to compete for the business of its members and ability to attract capital from members and potential members, and may have other unanticipated consequences. See “Part II. Item 1A. Risk Factors” on page 68 of this Form 10-Q.

Proposed Merger between Wachovia Corporation and Golden West Financial Corporation.  On May 7, 2006, Wachovia Corporation and Golden West Financial Corporation (Golden West) announced that they had signed a definitive agreement to merge. Golden West is the holding company of World Savings Bank, FSB, the Bank’s third largest borrower and stockholder as of June 30, 2006. Completion of the merger is subject to shareholder approvals by both Wachovia Corporation and Golden West and regulatory approvals. The closing is expected to be in the fourth quarter of 2006. It is uncertain at this time what effect, if any, the merger will have on the Bank.

Annual Designation of Elected Director Positions.  Earlier this year, the Finance Board redesignated two of the Bank’s eight elected director positions from California to Nevada, effective January 1, 2007, which will result in four elected director positions for California, three for Nevada, and one for Arizona for 2007. One of the two newly designated Nevada director positions will be filled by the Bank’s Nevada members in an election to be held in 2006. The other new Nevada director position will be filled by the Bank’s Board of Directors as an interim vacancy, effective January 1, 2007, to complete the remaining two years of a three-year term. Each elected director elected by the members or selected by the Board to fill a vacancy must be an officer or director of a member of the Bank located in the relevant state.

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

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 FHLB Act, and in accordance with the FHLB Act, the Bank is jointly and severally liable for consolidated obligations issued under Section 11(c) of the FHLB 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

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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 $958.6 billion at June 30, 2006, and $937.5 billion at December 31, 2005. The par value of the Bank’s participation in consolidated obligations was $219.8 billion at June 30, 2006, and $212.3 billion at December 31, 2005. For additional information on the Bank’s joint and several liability contingent obligation, see Notes 12 and 18 to the Financial Statements in the Bank’s 2005 Form 10-K.

In addition, in the ordinary course of business, the Bank engages in financial transactions that, in accordance with accounting principles generally accepted in the United States of America (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 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 June 30, 2006, the Bank had $3.2 billion of advances commitments and $778 million in standby letters of credit outstanding. At December 31, 2005, the Bank had $2.8 billion of advances commitments and $810 million in standby letters of credit outstanding. The estimated fair values of these commitments and standby letters of credit were immaterial to the balance sheet at June 30, 2006, and December 31, 2005.

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Management’s Discussion and Analysis of Results of Operations and Financial Condition – Risk Management – Market Risk” beginning on page 56 of this Form 10-Q.

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.

Management of the Bank 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 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 Financial Officer, and Controller have concluded that

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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.

Internal Control Over Financial Reporting

For the second quarter of 2006, 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, management of the Bank 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.

Management of the Bank 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.

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, 2005 (2005 Form 10-K). Other than with respect to the risk factor below, there have been no material changes from the risk factors disclosed in the “Risk Factors” section of the Bank’s 2005 Form 10-K. The risk factor below is an update on the possible impact on the Bank and members if the Finance Board adopts its proposed rule regarding retained earnings in its current form. The Finance Board’s proposed rule regarding retained earnings was previously discussed in the “Risk Factors” section of the Bank’s 2005 Form 10-K and the “Recent Developments” section of the Bank’s Form 10-Q for the period ended March 31, 2006.

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Adoption of the Finance Board’s proposed rule on FHLBank retained earnings and stock dividends could have adverse consequences for the Bank and its members.

If adopted in its current form, the Finance Board’s proposed rule would, among other things, require each FHLBank to hold retained earnings of at least $50 million plus 1% of non-advance assets, limit dividends to no more than 50% of net income until an FHLBank reaches its required level of retained earnings, restrict dividends if an FHLBank’s retained earnings drop below the required level, and prohibit dividends in the form of capital stock. The proposed rule would be likely to significantly reduce the percentage of Bank earnings available for dividends for a number of years, which could harm members, have a negative effect on the Bank’s ability to compete for the business of its members and ability to attract capital from members and potential members, and have other unanticipated consequences. In particular, the proposed rule could increase the all-in cost of advances for members since the all-in cost takes into account the value of dividends associated with the required stock holdings. Increasing the cost of advances will likely make Bank advances less attractive to members, which could adversely affect the Bank’s core business and could cause larger members to leave the FHLBank System or shift their business to other FHLBanks. Increasing the level of retained earnings and limiting dividend payments during periods of transition could also constrain the expansion and contraction features of the Bank’s business model and may reduce the amount of funds available for the Affordable Housing Program and other Bank initiatives to foster housing and community economic development.

Based on our current analysis, we have determined that the proposed retained earnings formula of $50 million plus 1% of non-advance assets would require the Bank to raise its target for the build-up of retained earnings from $130 million to approximately $714 million, based on the Bank’s balance sheet as of June 30, 2006. The results of this current analysis are not necessarily indicative of the future impact on the Bank under any final rule approved by the Finance Board and any actions taken by the Bank in response to any final rule.

Comments on the proposed rule were due to the Finance Board by July 13, 2006. It is not known at this time whether the Finance Board will adopt the proposed rule in its current form or any rule to require the FHLBanks to increase retained earnings, limit dividends, or prohibit dividends in the form of capital stock.

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

3.1	Organization Certificate and resolutions relating to the organization of the Federal Home Loan Bank of San Francisco, incorporated by reference to Exhibit 3.1 to the Bank’s Registration Statement on Form 10 filed with the Securities and Exchange Commission on June 30, 2005 (Commission File No. 000-51398)
3.2	Bylaws of the Federal Home Loan Bank of San Francisco, as amended, incorporated by reference to Exhibit 3.2 to the Bank’s Registration Statement on Form 10 filed with the Securities and Exchange Commission on June 30, 2005 (Commission File No. 000-51398)
4.1	Capital Plan, incorporated by reference to Exhibit 4.1 to the Bank’s Registration Statement on Form 10 filed with the Securities and Exchange Commission on June 30, 2005 (Commission File No. 000-51398)
10.1	Summary Sheet: Terms of Employment for Named Executive Officers for 2006, incorporated by reference to Exhibit 10.1 to the Bank’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 16, 2006 (Commission File No. 000-51398)
10.2	Board Resolution for Directors’ 2006 Compensation and Expense Reimbursement Policy, incorporated by reference to Exhibit 10.4 to the Bank’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 16, 2006 (Commission File No. 000-51398)
10.3	2006 Executive Incentive Plan, incorporated by reference to Exhibit 10.5 to the Bank’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 16, 2006 (Commission File No. 000-51398)
10.4	2006 Executive Performance Unit Plan, incorporated by reference to Exhibit 10.7 to the Bank’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 16, 2006 (Commission File No. 000-51398)
10.5	2006 President’s Incentive Plan, incorporated by reference to Exhibit 10.11 to the Bank’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 16, 2006 (Commission File No. 000-51398)
10.6	Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, effective as of July 20, 2006, by and among the Office of Finance and each of the Federal Home Loan Banks, incorporated by reference to Exhibit 10.1 to the Bank’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 28, 2006 (Commission File No. 000-51398)
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 Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3	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 Financial 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 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 Six Months Ended June 30, 2006

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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 August 14, 2006.

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)

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