Federal Home Loan Bank Of San Francisco 10-Q 2008 Q1 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 March 31, 2008

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, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨	Accelerated filer  ¨
Non-accelerated filer  x (Do not check if a smaller reporting company)	Smaller reporting company  ¨

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 April 30, 2008
Class B Stock, par value $100	133,878,133

Federal Home Loan Bank of San Francisco

Form 10-Q

Index

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Statements of Condition (Unaudited)	1
	Statements of Income (Unaudited)	2
	Statements of Capital Accounts (Unaudited)	3
	Statements of Cash Flows (Unaudited)	4
	Notes to Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
	Quarterly Overview	34
	Financial Highlights	37
	Results of Operations	38
	Financial Condition	45
	Liquidity and Capital Resources	59
	Risk Management	61
	Critical Accounting Policies and Estimates	64
	Recently Issued Accounting Standards and Interpretations	66
	Recent Developments	66
	Off-Balance Sheet Arrangements, Guarantees, and Other Commitments	66
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	67
Item 4.	Controls and Procedures	73
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	74
Item 1A.	Risk Factors	74
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74
Item 3.	Defaults Upon Senior Securities	74
Item 4.	Submission of Matters to a Vote of Security Holders	74
Item 5.	Other Information	74
Item 6.	Exhibits	75
Signatures		76

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)	March 31, 2008			December 31, 2007
Assets
Cash and due from banks	$	6		$	5
Interest-bearing deposits in banks		14,112			14,590
Federal funds sold		19,623			11,680
Trading securities (a)		56			58
Held-to-maturity securities (fair values were $40,228 and $37,906, respectively) (b)		43,793			38,585
Advances (includes $19,990 at fair value under the fair value option at March 31, 2008)		248,425			251,034
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $0.9 and $0.9, respectively		4,025			4,132
Accrued interest receivable		1,056			1,590
Premises and equipment, net		16			16
Derivative assets		1,206			642
Other assets		162			114
Total Assets	$	332,480		$	322,446
Liabilities and Capital
Liabilities:
Deposits:
Interest-bearing:
Demand and overnight	$	366		$	223
Term		69			16
Other		3			2
Non-interest-bearing - Other		3			3
Total deposits		441			244
Borrowings:
Other Federal Home Loan Banks		—			955
Other		—			100
Total borrowings		—			1,055
Consolidated obligations, net:
Bonds (includes $20,141 at fair value under the fair value option at March 31, 2008)		228,750			225,328
Discount notes		84,872			78,368
Total consolidated obligations		313,622			303,696
Mandatorily redeemable capital stock		213			229
Accrued interest payable		1,944			2,432
Affordable Housing Program		194			175
Payable to REFCORP		63			58
Derivative liabilities		123			102
Other liabilities		1,541			828
Total Liabilities		318,141			308,819
Commitments and Contingencies: Note 11
Capital (Note 7):
Capital stock-Class B-Putable ($100 par value) issued and outstanding: 141 shares and 134 shares, respectively		14,049			13,403
Restricted retained earnings		292			227
Accumulated other comprehensive loss		(2	)		(3	)
Total Capital		14,339			13,627
Total Liabilities and Capital	$	332,480		$	322,446

(a) Includes $0 and $7, respectively, pledged as collateral that may be repledged.

(b) Includes $52 and $43, respectively, pledged as collateral that may be repledged.

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 March 31,
(In millions)	2008			2007
Interest Income:
Advances	$	2,584		$	2,425
Interest-bearing deposits in banks		139			119
Securities purchased under agreements to resell		—			4
Federal funds sold		132			180
Trading securities		1			1
Held-to-maturity securities		478			367
Mortgage loans held for portfolio		49			57
Total Interest Income		3,383			3,153
Interest Expense:
Consolidated obligations:
Bonds		2,348			2,611
Discount notes		790			330
Deposits		10			6
Mandatorily redeemable capital stock		3			1
Total Interest Expense		3,151			2,948
Net Interest Income		232			205
Other Income:
Net gain on instruments held at fair value		274			—
Net (loss)/gain on derivatives and hedging activities		(155	)		11
Other		1			1
Total Other Income		120			12
Other Expense:
Compensation and benefits		14			13
Other operating expense		7			7
Federal Housing Finance Board		2			2
Office of Finance		2			2
Total Other Expense		25			24
Income Before Assessments		327			193
REFCORP		60			35
Affordable Housing Program		27			16
Total Assessments		87			51
Net Income	$	240		$	142

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, 2006	106		$	10,616		$	143	$	—		$	143		$	(5	)	$	10,754
Issuance of capital stock	10			957														957
Repurchase/redemption of capital stock	(8	)		(799	)													(799	)
Capital stock reclassified to mandatorily redeemable capital stock	—			(1	)													(1	)
Comprehensive income:
Net income									142			142						142
Total comprehensive income																		142
Transfers to restricted retained earnings							17		(17	)		—						—
Dividends on capital stock (4.89%)
Stock issued	1			125			—		(125	)		(125	)					—
Balance, March 31, 2007	109		$	10,898		$	160	$	—		$	160		$	(5	)	$	11,053
Balance, December 31, 2007	134		$	13,403		$	227	$	—		$	227		$	(3	)	$	13,627
Adjustments to opening balance(a)									16			16						16
Issuance of capital stock	6			554														554
Repurchase/redemption of capital stock	(1	)		(97	)													(97	)
Capital stock reclassified to mandatorily redeemable capital stock				(2	)													(2	)
Comprehensive income:
Net income									240			240						240
Other comprehensive income:
Net amounts recognized as earnings															1			1
Total comprehensive income																		241
Transfers to restricted retained earnings							65		(65	)		—						—
Dividends on capital stock (5.73%)
Stock issued	2			191					(191	)		(191	)					—
Balance, March 31, 2008	141		$	14,049		$	292	$	—		$	292		$	(2	)	$	14,339

(a) Adjustments to the opening balance consist of the effects of the adoption of SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(SFAS 159), and changing the measurement date of the Bank’s pension and postretirement plans from September 30 to December 31, in accordance with SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans(SFAS 158). For more information, see Note 2 to the Financial Statements.

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 three months ended March 31,
(In millions)	2008			2007
Cash Flows from Operating Activities:
Net Income	$	240		$	142
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		(77	)		13
Non-cash interest on mandatorily redeemable capital stock		3			1
Change in net fair value adjustment on financial instruments held at fair value		(274	)		—
Change in net fair value adjustment on derivatives and hedging activities		(203	)		(147	)
Net change in:
Accrued interest receivable		436			102
Other assets		(45	)		1
Accrued interest payable		(426	)		(169	)
Other liabilities		33			—
Total adjustments		(553	)		(199	)
Net cash used in operating activities		(313	)		(57	)
Cash Flows from Investing Activities:
Net change in:
Interest-bearing deposits in banks		478			(912	)
Securities purchased under agreements to resell		—			(1,900	)
Federal funds sold		(7,943	)		(5,803	)
Deposits for mortgage loan program with other Federal Home Loan Banks		—			1
Premises and equipment		(1	)		2
Trading securities:
Proceeds from maturities		2			11
Held-to-maturity securities:
Net decrease/(increase) in short-term		1,631			(274	)
Proceeds from maturities of long-term		1,425			1,611
Purchases of long-term		(7,524	)		(1,596	)
Advances:
Principal collected		360,475			676,617
Made to members		(356,740	)		(670,305	)
Mortgage loans held for portfolio:
Principal collected		107			126
Net cash used in investing activities		(8,090	)		(2,422	)

4

Federal Home Loan Bank of San Francisco

Statements of Cash Flows (continued)

(Unaudited)

	For the three months ended March 31,
(In millions)	2008			2007
Cash Flows from Financing Activities:
Net change in:
Deposits		946			38
Borrowings from other Federal Home Loan Banks		(955	)		—
Other borrowings		(100	)		—
Net proceeds from consolidated obligations:
Bonds issued		52,238			23,123
Discount notes issued		212,110			54,983
Payments for consolidated obligations:
Bonds matured or retired		(50,740	)		(20,437	)
Discount notes matured or retired		(205,531	)		(55,381	)
Proceeds from issuance of capital stock		554			957
Payments for repurchase/redemption of mandatorily redeemable capital stock		(21	)		(5	)
Payments for repurchase/redemption of capital stock		(97	)		(799	)
Net cash provided by financing activities		8,404			2,479
Net increase in cash and cash equivalents		1			—
Cash and cash equivalents at beginning of period		5			7
Cash and cash equivalents at end of period	$	6		$	7
Supplemental Disclosures:
Interest paid during the period	$	4,313		$	3,360
Affordable Housing Program payments during the period		8			9
REFCORP payments during the period		55			38

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

5

Federal Home Loan Bank of San Francisco

Notes to Financial Statements

(Unaudited)

(Dollars in millions)

Note 1 – Summary of Significant Accounting Policies

The information about the Federal Home Loan Bank of San Francisco (Bank) included in these unaudited financial statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed. The results of operations in these interim statements are not necessarily indicative of the results to be expected for any subsequent period or for the entire year ending December 31, 2008. 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, 2007 (2007 Form 10-K).

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

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 2007 Form 10-K. Changes to these policies as of March 31, 2008, are discussed in Note 2 to the Financial Statements.

Note 2 – Recently Issued Accounting Standards and Interpretations

Adoption of SFAS 157.On September 15, 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157,Fair Value Measurements(SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value, and enhances disclosure requirements for fair value measurements. SFAS 157 defines “fair value” as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. On February 12, 2008, the FASB issued FASB Staff Position No. FAS 157-2,Effective Date of FASB Statement No. 157 (FSP FAS 157-2), which delayed the effective date of SFAS 157 until January 1, 2009, for non-financial assets and non-financial liabilities except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Bank adopted SFAS 157 as of January 1, 2008, except for the non-financial assets and non-financial liabilities identified in FSP FAS 157-2. The adoption of SFAS 157 did not have a material impact on the Bank’s results of operations or financial condition at the time of adoption. For more information related to the adoption of SFAS 157, see Note 10 to the Financial Statements.

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

SFAS 158 also requires an employer to measure plan assets and benefit obligations as of the date of the employer’s fiscal yearend statements of condition effective for fiscal years ending after December 15, 2008. In

6

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

accordance with SFAS 158, the Bank remeasured its plan assets and benefit obligations as of the beginning of 2008 and recognized an adjustment to the opening balance of retained earnings. The adoption of the change in the measurement date did not have a material impact on the Bank’s results of operations or financial condition.

Adoption of SFAS 159.On February 15, 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115(SFAS 159). SFAS 159 creates a fair value option allowing, but not requiring, an entity to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities, with changes in fair value recognized in earnings as they occur. It requires entities to separately display the fair value of those assets and liabilities for which the Bank has chosen to use fair value on the face of the balance sheet. In addition, SFAS 159 requires an entity to provide information that would allow users of the entity’s financials statements to understand the effect on earnings of changes in the fair value of those instruments selected for the fair value election. SFAS 159 is effective at the beginning of an entity’s first fiscal year beginning after November 15, 2007. The Bank adopted SFAS 159 as of January 1, 2008. Upon adoption, the Bank elected certain financial assets and liabilities to transition to the fair value option in accordance with SFAS 159, as follows:

• Adjustable rate credit advances with embedded options

• Callable fixed rate credit advances

• Putable fixed rate credit advances

• Putable fixed rate credit advances with embedded options

• Fixed rate credit advances with partial prepayment symmetry

• Callable or non-callable capped floater consolidated obligation bonds

• Convertible consolidated obligation bonds

• Floating or fixed rate range accrual consolidated obligation bonds

• Ratchet consolidated obligation bonds

The effect of transitioning these items was a net $16 increase to the Bank’s retained earnings balance at January 1, 2008.

Transition Impact of Adopting SFAS 159

	At December 31, 2007
	Principal Balance		Valuation Adjustments(1)			Accrued Interest		Carrying Value		Net Gain/(Loss) on Adoption			Opening Balance at January 1, 2008
Advances	$	15,659	$	215		$	94	$	15,968	$	17		$	15,985
Consolidated obligation bonds		1,233		(2	)		15		1,246		(1	)		1,247
Cumulative effect of adoption										$	16

(1) Represents valuation adjustments associated with instruments previously accounted for under SFAS 133

The Bank has made an accounting policy election for using the fair value option in accordance with SFAS 159 for certain categories of financial assets and liabilities. In addition to the items transitioned to the fair value option on January 1, 2008, the Bank has elected that any new transactions in these categories will be accounted for in accordance with SFAS 159. In general, transactions elected for the fair value option in accordance with SFAS 159 are in economic hedge relationships. The Bank has also elected the fair value option in accordance with SFAS 159 for the following additional categories for all new transactions entered into starting on January 1, 2008:

• Adjustable rate credit advances indexed to the following: Prime Rate, Treasury Bill, Fed funds, Constant Maturity Treasury (CMT), Constant Maturity Swap (CMS), and 12-month Moving Treasury Average of a one-year CMT (12MTA)

• Adjustable rate consolidated obligations bonds indexed to the following: Prime Rate, Treasury Bill, Fed funds, CMT, CMS, and 12MTA

7

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

The Bank has elected these items for the fair value option in accordance with SFAS 159 to allow the Bank to fair value the financial asset or liability to assist in mitigating potential income statement volatility that can arise from economic hedging relationships. This risk associated with using fair value only for the derivative is the Bank’s primary driver for electing the fair value option for financial assets and liabilities that do not qualify for hedge accounting under the provisions of 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; SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities; and SFAS No. 155,Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140 (together referred to as SFAS 133) or for items that have not previously met or may be at risk for not meeting the SFAS 133 hedge effectiveness requirements.

Cash Flows— SFAS 159 also amends FASB Statement No. 95,Statement of Cash Flows (SFAS 95), and FASB Statement No. 115,Accounting for Certain Investments in Debt and Equity Securities (SFAS 115), to specify that cash flows from trading securities, which include securities for which an entity has elected the fair value option in accordance with SFAS 159, should be classified in the Statements of Cash Flows based on the nature and purpose for which the securities were acquired. Prior to this amendment, SFAS 95 and SFAS 115 specified that all cash flows from trading securities had to be classified as cash flows from operating activities.

As a result, the Bank has reclassified certain amounts in prior period Statements of Cash Flows to conform to the 2008 presentation. Beginning in the first quarter of 2008, the Bank classifies purchases, sales, and maturities of trading securities held for investment purposes as cash flows from investing activities. Previously, all cash flows associated with trading securities were reflected in the Statements of Cash Flows as operating activities. While the Bank classifies certain investments acquired for purposes of liquidity and asset/liability management as trading and carries them at fair value, the Bank does not participate in speculative trading practices and may hold certain trading investments indefinitely as the Bank periodically evaluates its liquidity needs. The reclassifications for the three months ended March 31, 2007, are summarized below:

	Before Reclassification		Reclassification			After Reclassification
Operating Activities:
Net change in trading securities	$	11	$	(11	)	$	—
Investing Activities:
Trading securities: Proceeds from maturities	$	—	$	11		$	11

For more information related to the adoption of SFAS 159, see Note 10 to the Financial Statements.

Adoption of FSP FIN 39-1. On April 30, 2007, the FASB issued FSP FIN 39-1. FSP FIN 39-1 permits an entity to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instruments recognized at fair value executed with the same counterparty under a master netting arrangement. Under FSP FIN 39-1, the receivable or payable related to cash collateral may not be offset if the amount recognized does not represent or approximate fair value or arises from instruments in a master netting arrangement that are not eligible to be offset. The decision whether to offset such fair value amounts represents an elective accounting policy decision that, once elected, must be applied consistently. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007. An entity should recognize the effects of applying FSP FIN 39-1 as a change in accounting principle through retrospective application for all financial statements presented unless it is impracticable to do so. Upon adoption of FSP FIN 39-1, an entity is permitted to change its accounting policy to offset or not offset fair value amounts recognized for derivative instruments under master netting arrangements. The Bank adopted FSP FIN 39-1 on January 1, 2008, and recognized the effects of applying FSP FIN 39-1 as a change in accounting principle through retrospective application for all prior financial statement periods presented. As a result of the adoption of FSP FIN 39-1, certain amounts on the Bank’s Statements of Condition as of December 31, 2007, were modified to conform to the 2008 presentation, as summarized below:

8

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	Before Adoption		Effect of Adoption			After Adoption
Assets
Derivative assets	$	1,195	$	(553	)	$	642
Effect on total assets	$	1,195	$	(553	)	$	642
Liabilities
Deposits – Interest-bearing – Other	$	574	$	(572	)	$	2
Accrued interest payable		2,434		(2	)		2,432
Derivative liabilities		81		21			102
Effect on total liabilities	$	3,089	$	(553	)	$	2,536

SFAS 161. On March 19, 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Bank will adopt SFAS 161 on January 1, 2009. The Bank has not yet determined what effect, if any, the implementation of SFAS 161 will have on its financial statement disclosures.

Note 3 – Held-to-Maturity Securities

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

March 31, 2008
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Commercial paper	$	2,087	$	3	$	—		$	2,090
Housing finance agency bonds		832		3		—			835
Subtotal		2,919		6		—			2,925
MBS:
Fannie Mae		8,426		66		(14	)		8,478
Freddie Mac		4,376		55		(5	)		4,426
Ginnie Mae		21		—		—			21
Non-agency		28,051		1		(3,674	)		24,378
Total MBS		40,874		122		(3,693	)		37,303
Total	$	43,793	$	128	$	(3,693	)	$	40,228
December 31, 2007
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Commercial paper	$	3,688	$	—	$	—		$	3,688
Housing finance agency bonds		867		2		—			869
Subtotal		4,555		2		—			4,557
MBS:
Fannie Mae		2,817		15		(5	)		2,827
Freddie Mac		2,474		28		(4	)		2,498
Ginnie Mae		23		—		—			23
Non-agency		28,716		11		(726	)		28,001
Total MBS		34,030		54		(735	)		33,349
Total	$	38,585	$	56		(735	)	$	37,906

9

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

As of March 31, 2008, all of the commercial paper had a credit rating of AA, all of the housing finance agency bonds had a credit rating of at least AA, and all of the MBS had a credit rating of AAA. The Bank expects to receive all future contractual principal and interest payments on these investments.

The following tables summarize the held-to-maturity securities with unrealized losses as of March 31, 2008, and December 31, 2007. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

March 31, 2008
	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
MBS:
Fannie Mae	$	8,320	$	12	$	158	$	2	$	8,478	$	14
Freddie Mac		4,373		4		53		1		4,426		5
Ginnie Mae		11		—		10		—		21		—
Non-agency		13,002		2,231		11,376		1,443		24,378		3,674
Total temporarily impaired	$	25,706	$	2,247	$	11,597	$	1,446	$	37,303	$	3,693

December 31, 2007
	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
MBS:
Fannie Mae	$	2,544	$	1	$	283	$	4	$	2,827	$	5
Freddie Mac		2,442		3		56		1		2,498		4
Ginnie Mae		16		—		7		—		23		—
Non-agency		15,015		349		12,986		377		28,001		726
Total temporarily impaired	$	20,017	$	353	$	13,332	$	382	$	33,349	$	735

The Bank applies SFAS 115,Accounting for Certain Investments in Debt and Equity Securities(SFAS 115) as amended by FASB Staff Position FAS 115-1 and 124-1,The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (FSP FAS 115-1 and FAS 124-1) to determine whether the Bank’s investment securities have incurred other-than-temporary impairment. The Bank determines whether a decline in an individual investment security’s fair value below its amortized cost basis is other-than-temporary on a quarterly basis or if a loss-triggering event would occur. The Bank would recognize an other-than-temporary impairment if it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the security and if the fair value of the investment security is less than its amortized cost. The Bank also considers several qualitative factors when determining whether other-than-temporary impairment has occurred, including recent external rating agency actions or changes in a security’s external credit rating, the underlying collateral, sufficiency of the credit enhancement, the length of time and extent that fair value has been less than the amortized cost, and the Bank’s ability to hold the security until maturity or a period of time sufficient to allow for an anticipated recovery in the fair value of the security, and other factors. The Bank generally views changes in the fair value of the securities caused by movements in interest rates to be temporary.

As indicated in the tables above, as of March 31, 2008, the Bank’s investment in MBS classified as held-to-maturity had gross unrealized losses totaling $3,693, primarily from non-agency MBS. These gross unrealized losses were primarily due to extraordinarily wide mortgage asset spreads resulting from an extremely illiquid market, causing these assets to be valued at significant discounts to their acquisition cost.

10

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

For securities in an unrealized loss position because of factors other than movements in interest rates, such as widening of mortgage asset spreads, the Bank considers whether it is probable that it will collect all of the contractual principal and interest payments of the security. For these securities, the Bank tests the credit enhancement associated with each security to determine whether it is sufficient to protect against losses of principal and interest on the underlying mortgage loans. The Bank’s testing included performing analyses on most of its non-agency MBS as of March 31, 2008, using models that project prepayments, default rates, and loan losses based on underlying loan characteristics, expected housing price changes, and interest rate assumptions. The Bank reviewed the remaining non-agency MBS for adequate credit enhancements by comparing the securities to model results for similar securities. These analyses and reviews showed that the credit enhancement protection in these securities was sufficient to protect the Bank from losses based on current expectations. All of these MBS had a credit rating of AAA as of March 31, 2008. Because the decline in the market value of these securities is primarily attributable to illiquidity rather than a deterioration in the fundamental credit quality of these securities, and because the Bank has both the ability and intent to hold these securities to maturity and expects to receive all contractual principal and interest payments on the securities, the Bank has determined that the unrealized losses are temporary.

Redemption Terms.The amortized cost and estimated fair value of certain securities by contractual maturity (based on contractual final principal payment) and mortgage-backed securities (MBS) as of March 31, 2008, and December 31, 2007, are shown below. Expected maturities of certain securities and MBS will differ from contractual maturities because borrowers generally have the right to prepay these obligations without prepayment fees.

March 31, 2008
Year of Contractual Maturity	Amortized Cost		Estimated Fair Value		Weighted Average Interest Rate
Held-to-maturity securities other than MBS:
Due in one year or less	$	2,087	$	2,090	2.78	%
Due after one year through five years		19		19	3.39
Due after five years through ten years		28		28	3.36
Due after ten years		785		788	3.45
Subtotal		2,919		2,925	2.97
MBS:
Fannie Mae		8,426		8,478	4.96
Freddie Mac		4,376		4,426	5.23
Ginnie Mae		21		21	3.70
Non-agency		28,051		24,378	4.70
Total MBS		40,874		37,303	4.81
Total	$	43,793	$	40,228	4.69	%

December 31, 2007
Year of Contractual Maturity	Amortized Cost		Estimated Fair Value		Weighted Average Interest Rate
Held-to-maturity securities other than MBS:
Due in one year or less	$	3,688	$	3,688	4.96	%
Due one year through five years		20		20	5.06
Due after five years through ten years		31		31	5.03
Due after ten years		816		818	5.15
Subtotal		4,555		4,557	5.00
MBS:
Fannie Mae		2,817		2,827	5.66
Freddie Mac		2,474		2,498	5.84
Ginnie Mae		23		23	5.53
Non-agency		28,716		28,001	5.31
Total MBS		34,030		33,349	5.38
Total	$	38,585	$	37,906	5.34	%

The amortized cost of the Bank’s MBS classified as held-to-maturity included net discounts of $1 at March 31, 2008, and net premiums of $14 at December 31, 2007.

11

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Interest Rate Payment Terms.Interest rate payment terms for held-to-maturity securities at March 31, 2008, and December 31, 2007, are detailed in the following table:

	March 31, 2008		December 31, 2007
Amortized cost of held-to-maturity securities other than MBS:
Fixed rate	$	2,087	$	3,688
Adjustable rate		832		867
Subtotal		2,919		4,555
Amortized cost of held-to-maturity MBS:
Passthrough securities:
Fixed rate		9,636		4,557
Adjustable rate		594		96
Collateralized mortgage obligations:
Fixed rate		22,148		21,415
Adjustable rate		8,496		7,962
Subtotal		40,874		34,030
Total	$	43,793	$	38,585

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

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

Note 4 – Advances

Redemption Terms. The Bank had advances outstanding at interest rates ranging from 1.80% to 8.57% at March 31, 2008, and 1.88% to 8.57% at December 31, 2007, as summarized below.

	March 31, 2008				December 31, 2007
Contractual Maturity	Amount Outstanding		Weighted Average Interest Rate		Amount Outstanding		Weighted Average Interest Rate
Overdrawn demand deposit accounts	$	16	1.19	%	$	—	—	%
Within 1 year		132,798	3.21			48,466	4.15
After 1 year through 2 years		60,833	3.48			86,793	4.79
After 2 years through 3 years		22,545	3.59			54,462	4.98
After 3 years through 4 years		15,094	3.47			39,805	5.17
After 4 years through 5 years		5,101	4.12			12,974	5.27
After 5 years		10,291	3.56			7,914	5.57
Total par amount		246,678	3.36	%		250,414	4.82	%
SFAS 133 valuation adjustments		1,166				604
SFAS 159 valuation adjustments		567				—
Net unamortized premiums		14				16
Total	$	248,425			$	251,034

12

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

The following table summarizes advances at March 31, 2008, and December 31, 2007, by the earlier of the year of contractual maturity or next call date for callable advances.

Earlier of Contractual Maturity or Next Call Date	March 31, 2008		December 31, 2007
Overdrawn demand deposit accounts	$	16	$	—
Within 1 year		133,328		49,743
After 1 year through 2 years		61,139		86,551
After 2 years through 3 years		22,415		54,298
After 3 years through 4 years		14,954		39,523
After 4 years through 5 years		4,592		12,472
After 5 years		10,234		7,827
Total par amount	$	246,678	$	250,414

The following table summarizes advances to members at March 31, 2008, and December 31, 2007, by the earlier of the year of contractual maturity or next put date for putable advances.

Earlier of Contractual Maturity or Next Put Date	March 31, 2008		December 31, 2007
Overdrawn demand deposit accounts	$	16	$	—
Within 1 year		136,030		51,071
After 1 year through 2 years		60,833		87,479
After 2 years through 3 years		22,317		54,141
After 3 years through 4 years		14,455		39,555
After 4 years through 5 years		4,271		11,804
After 5 years		8,756		6,364
Total par amount	$	246,678	$	250,414

Security Terms. The Bank lends to member financial institutions that have their principal place of business in Arizona, California, or Nevada. The Bank is required by the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), to obtain sufficient collateral for advances to protect against losses and to accept as collateral for advances only certain U.S. government or government agency securities, residential mortgage loans or MBS, other eligible real estate-related assets, and cash or deposits in the Bank. The capital stock of the Bank owned by each borrowing member is pledged as additional collateral for the member’s indebtedness to the Bank. The Bank may also accept small business, small farm, and small agribusiness loans and securities representing a whole interest in such loans as collateral from members that qualify as community financial institutions. Community financial institutions are defined for 2008 as Federal Deposit Insurance Corporation-insured depository institutions with average total assets over the preceding three-year period of $625 or less. For more information on security terms, see Note 7 to the Financial Statements in the Bank’s 2007 Form 10-K.

Credit and Concentration Risk.The Bank’s potential credit risk from advances is concentrated in three institutions. The following tables present the concentration in advances to these three members as of March 31, 2008, and December 31, 2007. The tables also present the interest income from these advances before the impact of interest rate exchange agreements associated with these advances for the first quarter of 2008 and 2007.

13

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Concentration of Advances

	March 31, 2008				December 31, 2007
Name of Borrower	Advances Outstanding(1)		Percentage of Total Advances Outstanding		Advances Outstanding(1)		Percentage of Total Advances Outstanding
Citibank, N.A.	$	88,526	36	%	$	95,879	38	%
Washington Mutual Bank		51,479	21			54,050	22
Wachovia Mortgage, FSB(2)		31,928	13			24,110	10
Subtotal		171,933	70			174,039	70
Others		74,745	30			76,375	30
Total par	$	246,678	100	%	$	250,414	100	%

Concentration of Interest Income from Advances

	Three Months Ended March 31,
	2008				2007
Name of Borrower	Interest Income from Advances(3)		Percentage of Total Interest Income from Advances		Interest Income from Advances(3)		Percentage of Total Interest Income from Advances
Citibank, N.A.	$	947	36	%	$	999	42	%
Washington Mutual Bank		566	22			366	15
Wachovia Mortgage, FSB(2)		251	10			280	12
Subtotal		1,764	68			1,645	69
Others		836	32			720	31
Total	$	2,600	100	%	$	2,365	100	%

(1) Member advance amounts and total advance amounts are at par value, and total advance amounts will not agree to carrying value amounts shown in the Statements of Condition. The differences between the par and carrying value amounts primarily relate to unrealized gains or losses associated with hedged advances resulting from SFAS 133 and SFAS 159 valuation adjustments.

(2) On October 1, 2006, Wachovia Corporation completed its merger with Golden West Financial Corporation, the holding company of World Savings Bank, FSB. Effective December 31, 2007, World Savings Bank, FSB, changed its legal name to Wachovia Mortgage, FSB.

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

The Bank held a security interest in collateral from each of these institutions with borrowing capacity in excess of their respective advances outstanding, and the Bank does not expect to incur any credit losses on these advances. Each of these members owned more than 10% of the Bank’s capital stock as of March 31, 2008. Of these three members, only Citibank, N.A., and Washington Mutual Bank each owned more than 10% of the Bank’s capital stock outstanding as of December 31, 2007.

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.

14

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Interest Rate Payment Terms.Interest rate payment terms for advances at March 31, 2008, and December 31, 2007, are detailed below:

	March 31, 2008		December 31, 2007
Par amount of advances:
Fixed rate	$	94,882	$	106,200
Adjustable rate		151,796		144,214
Total par amount	$	246,678	$	250,414

Note 5 – Mortgage Loans Held for Portfolio

Under the Mortgage Partnership Finance^® (MPF^®) Program, the Bank purchased qualifying mortgage loans directly from its participating members. (“Mortgage Partnership Finance” and “MPF” are registered trademarks of the Federal Home Loan Bank of Chicago.) The mortgage loans are held-for-portfolio loans. Under the MPF Program, participating members originated or purchased the mortgage loans, credit-enhanced them and sold them to the Bank, and generally retained the servicing of the loans.

The following table presents information as of March 31, 2008, and December 31, 2007, on mortgage loans, all of which are qualifying conventional, conforming fixed rate residential mortgage loans on one- to four-unit residential properties and single-unit second homes.

	March 31, 2008			December 31, 2007
Fixed rate medium-term mortgage loans	$	1,333		$	1,385
Fixed rate long-term mortgage loans		2,710			2,765
Subtotal		4,043			4,150
Unamortized premiums		—			2
Unamortized discounts		(17	)		(19	)
Mortgage loans held for portfolio		4,026			4,133
Less: Allowance for credit losses		(1	)		(1	)
Mortgage loans held for portfolio, net	$	4,025		$	4,132

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 first quarter of 2008 and 2007, the Bank reduced net interest income for credit enhancement fees totaling $1 and $1, respectively.

Concentration Risk.The Bank had the following concentration in MPF loans with members whose outstanding total of mortgage loans sold to the Bank represented 10% or more of the Bank’s total outstanding mortgage loans at March 31, 2008, and December 31, 2007.

15

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Concentration of Mortgage Loans

March 31, 2008

Name of Member	Mortgage Loan Balances Outstanding		Percentage of Total Mortgage Loan Balances Outstanding		Number of Mortgage Loans Outstanding	Percentage of Total Number of Mortgage Loans Outstanding
Washington Mutual Bank	$	3,099	77	%	22,475	72	%
IndyMac Bank, F.S.B.		576	14		5,899	19
Subtotal		3,675	91		28,374	91
Others		368	9		2,750	9
Total	$	4,043	100	%	31,124	100	%

December 31, 2007

Name of Member	Mortgage Loan Balances Outstanding		Percentage of Total Mortgage Loan Balances Outstanding		Number of Mortgage Loans Outstanding	Percentage of Total Number of Mortgage Loans Outstanding
Washington Mutual Bank	$	3,168	76	%	22,785	72	%
IndyMac Bank, F.S.B.		600	14		6,048	19
Subtotal		3,768	90		28,833	91
Others		382	10		2,813	9
Total	$	4,150	100	%	31,646	100	%

Credit Risk. A loan is considered to be impaired when it is reported 90 days or more past due (nonaccrual) or when it is probable, based on current information and events, that the Bank will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreement. At March 31, 2008, the Bank had 57 loans totaling $6 classified as nonaccrual or impaired. Thirty-seven of these loans totaling $4 were in foreclosure or bankruptcy. At December 31, 2007, the Bank had 47 loans totaling $5 classified as nonaccrual or impaired. Thirty-four of these loans totaling $4 were in foreclosure or bankruptcy.

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

	Three months ended
	March 31, 2008		March 31, 2007
Balance, beginning of the period	$	0.9	$	0.7
Chargeoffs		—		—
Recoveries		—		—
Provision for credit losses		—		—
Balance, end of the period	$	0.9	$	0.7

For more information on how the Bank determines its estimated allowance for credit losses on mortgage loans, see Note 8 to the Financial Statements in the Bank’s 2007 Form 10-K.

The Bank’s average recorded investment in impaired loans totaled $6 for the first quarter of 2008 and $4 and the first quarter of 2007. The Bank did not recognize any interest income for impaired loans in the first quarter of 2008 or 2007.

At March 31, 2008 the Bank’s other assets included $1 of real estate owned resulting from foreclosure of mortgage loans held by the Bank. At December 31, 2007, the Bank’s other assets included $1 of real estate owned resulting from foreclosure of mortgage loans held by the Bank.

Note 6 – Consolidated Obligations

Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are jointly issued by the FHLBanks through the Office of Finance, which serves as the FHLBanks’ agent. As provided by the FHLBank Act or Federal Housing Finance Board (Finance Board) regulation, all FHLBanks have joint and several liability for all FHLBank consolidated obligations. For discussion of the Finance Board’s joint and

16

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

several liability regulation, see Note 19 to the Financial Statements in the Bank’s 2007 Form 10-K. In connection with each debt issuance, each FHLBank specifies the type, term, and amount of debt it requests to have issued on its behalf. The Office of Finance tracks the amount of debt issued on behalf of each FHLBank. In addition, the Bank separately tracks and records as a liability its specific portion of the consolidated obligations issued and is the primary obligor for that portion of the consolidated obligations issued. The Finance Board and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance.

Redemption Terms. The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding at March 31, 2008, and December 31, 2007.

	March 31, 2008					December 31, 2007
Contractual Maturity	Amount Outstanding			Weighted Average Interest Rate		Amount Outstanding			Weighted Average Interest Rate
Within 1 year	$	91,931		3.82	%	$	86,008		4.54	%
After 1 year through 2 years		69,544		3.54			69,660		4.78
After 2 years through 3 years		15,970		4.56			19,597		4.57
After 3 years through 4 years		15,813		5.05			18,573		5.06
After 4 years through 5 years		9,272		4.62			8,012		5.24
After 5 years		22,854		5.12			22,027		5.26
Index amortizing notes		8		4.61			8		4.61
Total par amount		225,392		4.04	%		223,885		4.76	%
Unamortized premiums		60					53
Unamortized discounts		(121	)				(138	)
SFAS 133 valuation adjustments		3,395					1,528
SFAS 159 valuation adjustments		24					—
Total	$	228,750				$	225,328

The Bank’s participation in consolidated obligation bonds outstanding includes callable bonds of $41,004 at March 31, 2008, and $56,133 at December 31, 2007. Contemporaneous with the issuance of a callable bond for which the Bank is the primary obligor, the Bank routinely enters into an interest rate swap (in which the Bank pays a variable rate and receives a fixed rate) with a call feature that mirrors the call option embedded in the bond (a sold callable swap). The Bank had notional amounts of interest rate exchange agreements hedging callable bonds of $23,053 at March 31, 2008, and $38,382 at December 31, 2007. 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 unswapped callable bonds are primarily used to hedge the prepayment risk of mortgage loans and fixed rate MBS.

17

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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

	March 31, 2008		December 31, 2007
Par amount of consolidated obligation bonds:
Non-callable	$	184,388	$	167,752
Callable		41,004		56,133
Total par amount	$	225,392	$	223,885

The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding at March 31, 2008, and December 31, 2007, by the earlier of the year of contractual maturity or next call date.

Earlier of Contractual Maturity or Next Call Date	March 31, 2008		December 31, 2007
Within 1 year	$	120,047	$	125,509
After 1 year through 2 years		73,186		64,272
After 2 years through 3 years		13,130		13,738
After 3 years through 4 years		9,490		11,638
After 4 years through 5 years		1,287		481
After 5 years		8,244		8,239
Index amortizing notes		8		8
Total par amount	$	225,392	$	223,885

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

	March 31, 2008					December 31, 2007
	Amount Outstanding			Weighted Average Interest Rate		Amount Outstanding			Weighted Average Interest Rate
Par amount	$	85,367		2.97	%	$	79,064		4.39	%
Unamortized discounts		(495	)				(696	)
Total	$	84,872				$	78,368

Interest Rate Payment Terms. Interest rate payment terms for consolidated obligations at March 31, 2008, and December 31, 2007, are detailed in the following table. For information on the general terms and types of consolidated obligations outstanding, see Note 10 to the Financial Statements in the Bank’s 2007 Form 10-K.

	March 31, 2008		December 31, 2007
Par amount of consolidated obligations:
Bonds:
Fixed rate	$	143,450	$	173,859
Adjustable rate		80,144		46,485
Step-up		480		2,515
Step-down		68		50
Fixed rate that converts to adjustable rate		—		37
Adjustable rate that converts to fixed rate		120		120
Range bonds		1,042		731
Zero-coupon		70		70
Inverse floating		10		10
Index amortizing notes		8		8
Total bonds, par		225,392		223,885
Discount notes, par		85,367		79,064
Total consolidated obligations, par	$	310,759	$	302,949

18

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Note 7 – Capital

Capital Requirements.The Bank is subject to risk-based capital requirements, which must be met with permanent capital (defined as retained earnings and Class B stock). In addition, the Bank is subject to a 5.0% minimum leverage capital ratio with a 1.5 weighting factor for permanent capital, and a 4.0% minimum total capital-to-assets ratio calculated without reference to the 1.5 weighting factor. As of March 31, 2008, and December 31, 2007, the Bank was in compliance with these capital rules and requirements. The FHLBank Act and Finance Board regulations require that the minimum stock requirement for members must be sufficient to enable the Bank to meet its regulatory requirements for total capital, leverage capital, and risk-based capital. In addition, the Finance Board has confirmed that mandatorily redeemable capital stock that is classified as a liability for financial reporting purposes under SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150), is considered capital for determining the Bank’s compliance with its regulatory capital requirements.

The following table shows the Bank’s compliance with its capital requirements at March 31, 2008, and December 31, 2007.

Regulatory Capital Requirements

	March 31, 2008						December 31, 2007
	Required			Actual			Required			Actual
Risk-based capital	$	4,925		$	14,554		$	1,578		$	13,859
Total capital-to-assets ratio		4.00	%		4.38	%		4.00	%		4.30	%
Total regulatory capital	$	13,299		$	14,554		$	12,898		$	13,859
Leverage ratio		5.00	%		6.57	%		5.00	%		6.45	%
Leverage capital	$	16,624		$	21,831		$	16,122		$	20,789

The Bank’s capital requirements are discussed more fully in Note 14 to the Financial Statements in the Bank’s 2007 Form 10-K.

Mandatorily Redeemable Capital Stock.The Bank had mandatorily redeemable capital stock totaling $213 at March 31, 2008, and $229 at December 31, 2007. These amounts included accrued interest expense (accrued stock dividends) of $3 at March 31, 2008, and $3 at December 31, 2007, and have been classified as a liability in the Statements of Condition.

The following table presents mandatorily redeemable capital stock amounts by contractual redemption period at March 31, 2008, and December 31, 2007.

Contractual Redemption Period	March 31, 2008		December 31, 2007
After 1 year through 2 years	$	20	$	17
After 2 years through 3 years		1		3
After 3 years through 4 years		70		64
After 4 years through 5 years		122		145
Total	$	213	$	229

19

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

The Bank’s activity for mandatorily redeemable capital stock for the three months ended March 31, 2008 and 2007, was as follows:

	Three months ended
	March 31, 2008				March 31, 2007
	Number of Institutions	Amount			Number of Institutions		Amount
Balance at the beginning of the period	16	$	229		12		$	106
Reclassified from/(to) capital during the period:
Withdrawal from membership	2		2		1			14
Conversion of nonmember institution to member institution	—		—		(1	)		(13	)
Repurchase of mandatorily redeemable capital stock	—		(21	)	—			(5	)
Dividends accrued on mandatorily redeemable capital stock	—		3		—			1
Balance at the end of the period	18	$	213		12		$	103

The Bank’s mandatorily redeemable capital stock is discussed more fully in Note 14 to the Financial Statements in the Bank’s 2007 Form 10-K.

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

Retained Earnings Related to SFAS 133, 157, and 159 — 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. Effective January 1, 2008, the Bank’s Retained Earnings and Dividend Policy was amended to also include in restricted retained earnings any cumulative net unrealized gains resulting from the transition impact of adopting SFAS 157 and SFAS 159 and the ongoing impact from the application of SFAS 159. As these cumulative net unrealized gains are reversed by periodic net unrealized losses, the amount of cumulative net unrealized gains decreases. The amount of retained earnings required by this provision of the policy is therefore decreased, and that portion of the previously restricted retained earnings becomes unrestricted and may be made available for dividends. Retained earnings restricted in accordance with these provisions totaled $91 at March 31, 2008, and $47 at December 31, 2007.

Other Retained Earnings–Targeted Buildup — In addition to the above gains, the Bank holds a targeted amount in 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 or 159 quarterly result, or an extremely low (or negative) level of net income before the effects of SFAS 133 and 159 resulting from an adverse interest rate environment. Under this provision of the Retained Earnings and Dividend Policy, each quarter the Bank will retain in restricted retained earnings 10% of earnings, excluding the effects of SFAS 133 and 159, until the amount of restricted retained earnings under this provision of the Retained Earnings and Dividend Policy reaches $296. The retained earnings restricted in accordance with this provision of the Retained Earnings and Dividend Policy totaled $201 at March 31, 2008, and $180 at December 31, 2007.

For more information on these two categories of restricted retained earnings and the Bank’s Retained Earnings and Dividend Policy, see Note 14 to the Financial Statements in the Bank’s 2007 Form 10-K.

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

The Bank’s surplus capital stock repurchase policy provides for the Bank to repurchase excess stock that constitutes surplus stock, at the Bank’s discretion and subject to certain statutory and regulatory requirements,

20

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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 $97 in the first quarter of 2008 and $330 in the first quarter of 2007. The Bank also repurchased excess capital stock that was not surplus capital stock totaling $21 in the first quarter of 2008 and $474 in the first quarter of 2007.

Excess capital stock totaled $1,765 as of March 31, 2008, which included surplus capital stock of $496. On April 30, 2008, the Bank repurchased $460 of surplus capital stock. The Bank also repurchased $391 of excess capital stock that was not surplus capital stock, including $364 in excess capital stock that was the subject of repurchase requests submitted during the first quarter of 2008 by five members, and $27 in excess mandatorily redeemable capital stock repurchased from former members of the Bank. Excess capital stock totaled $547 after the April 30, 2008, capital stock repurchase.

For more information on excess and surplus capital stock, see Note 14 to the Financial Statements in the Bank’s 2007 Form 10-K.

Limitation on Issuance of Excess Stock.Finance Board rules limit the ability of an FHLBank to create member excess stock under certain circumstances. An FHLBank may not pay dividends in the form of capital stock or issue new stock to members if the FHLBank’s excess stock exceeds 1% of its total assets or if the issuance of stock would cause the FHLBank’s excess stock to exceed 1% of its total assets. At March 31, 2008, the Bank’s excess capital stock totaled $1,765, or 0.5% of total assets.

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

Concentration.The following table represents the concentration in capital stock held by members whose capital stock ownership represented 10% or more of the Bank’s outstanding capital stock, including mandatorily redeemable capital stock, as of March 31, 2008, or December 31, 2007.

Concentration of Capital Stock

	March 31, 2008				December 31, 2007
Name of Member	Capital Stock Outstanding		Percentage of Total Capital Stock Outstanding		Capital Stock Outstanding		Percentage of Total Capital Stock Outstanding
Citibank, N.A.	$	4,964	35	%	$	4,899	36	%
Washington Mutual Bank		2,763	20			2,722	20
Wachovia Mortgage, FSB		1,516	11			1,153	9
Total	$	9,243	66	%	$	8,774	65	%

On April 30, 2008, the Bank repurchased $440 in excess capital stock, including $180 in surplus capital stock, from Citibank, N.A. After the repurchase, Citibank, N.A., Washington Mutual Bank, and Wachovia Mortgage, FSB, held 34%, 21%, and 11%, respectively, of the Bank’s total capital stock and mandatorily redeemable capital stock outstanding.

21

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Note 8 – Segment Information

The Bank analyzes financial performance based on the balances and adjusted net interest income of two operating segments, the advances-related business and the mortgage-related business, based on the Bank’s method of internal reporting. For purposes of segment reporting, adjusted net interest income includes interest income and expenses associated with economic hedges that are recorded in “Net (loss)/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.

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 first quarter of 2008 and 2007.

Reconciliation of Adjusted Net Interest Income and Income Before Assessments

Three months ended	Advances- Related Business		Mortgage- Related Business		Adjusted Net Interest Income		Net Interest Income/ (Expense) on Economic Hedges(1)			Net Interest Income		Other Income		Other Expense		Income Before Assessments
March 31, 2008	$	209	$	90	$	299	$	67		$	232	$	120	$	25	$	327
March 31, 2007		180		23		203		(2	)		205		12		24		193

(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 March 31, 2008, and December 31, 2007.

Total Assets

	Advances- Related Business		Mortgage- Related Business		Total Assets
March 31, 2008	$	287,283	$	45,197	$	332,480
December 31, 2007		284,046		38,400		322,446

Note 9 – Derivatives and Hedging Activities.

Accounting for Derivative Instruments and Hedging Activities. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The gains and losses on derivative instruments that are reported in other comprehensive income are recognized as earnings in the

22

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

periods in which earnings are affected by the variability of the cash flows of the hedged item. The difference between the gains or losses on derivatives and the related hedged items that qualify as fair value hedges under SFAS 133 represents hedge ineffectiveness and is recognized in other income. 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 17 to the Financial Statements in the Bank’s 2007 Form 10-K.

Net (loss)/gain on derivatives and hedging activities for the first quarter of 2008 and 2007 were as follows:

	Three months ended
	March 31, 2008			March 31, 2007
Net gain related to fair value hedge ineffectiveness	$	20		$	8
Net (loss)/gain on economic hedges		(242	)		5
Net interest income/(expense) on derivative instruments used in economic hedges		67			(2	)
Net (loss)/gain on derivatives and hedging activities	$	(155	)	$	11

For the first quarter of 2008 and 2007, 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 March 31, 2008, the amount of unrecognized net losses on derivative instruments accumulated in other comprehensive income expected to be reclassified to earnings during the next 12 months was immaterial. 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 March 31, 2008, and December 31, 2007.

	March 31, 2008					December 31, 2007
Type of Derivative and Hedge Classification	Notional		Estimated Fair Value			Notional		Estimated Fair Value
Interest rate swaps:
Fair value	$	157,617	$	2,175		$	197,193	$	864
Economic		143,305		(355	)		92,423		61
Interest rate swaptions: Economic		170		3			3,080		21
Interest rate caps, floors, corridors, and/or collars:
Fair value		—		—			3,895		(3	)
Economic		3,980		(16	)		585		—
Total	$	305,072	$	1,807		$	297,176	$	943
Total derivatives excluding accrued interest			$	1,807				$	943
Accrued interest, net				599					171
Cash collateral held from counterparties – liabilities(1)				(1,323	)				(574	)
Net derivative balances			$	1,083				$	540
Derivative assets			$	1,206				$	642
Derivative liabilities				(123	)				(102	)
Net derivative balances			$	1,083				$	540

(1) Amount represents the receivable or payable related to cash collateral arising from derivative instruments recognized at fair value executed with the same counterparty under a master netting arrangement, in accordance with FSP FIN 39-1.

Embedded derivatives are bifurcated, and their estimated fair values are accounted for in accordance with SFAS 133. The estimated fair values of the embedded derivatives are included as valuation adjustments to the host contract and are not included in the table above. The estimated fair values of these embedded derivatives are as follows:

23

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Estimated Fair Values of Embedded Derivatives

	March 31, 2008			December 31, 2007
Host contract: Non-callable bonds	$	(2	)	$	3

Credit Risk –The Bank is subject to credit risk as a result of the risk of nonperformance by counterparties to the derivative agreements. All derivative agreements contain master netting provisions to help mitigate the credit risk exposure to each counterparty. The Bank manages counterparty credit risk through credit analyses and collateral requirements and by following the requirements of the Bank’s risk management policies and credit guidelines. Based on the master netting provisions in each agreement, credit analyses, and the collateral requirements in place with each counterparty, management of the Bank does not anticipate any credit losses on derivative agreements.

The contractual or notional amounts of interest rate exchange agreements reflect the extent of the Bank’s involvement in particular classes of financial instruments. The notional amount does not represent the exposure to credit loss. The amount potentially subject to credit loss is the estimated cost of replacing an interest rate exchange agreement that has a net positive market value if the counterparty defaults; this amount is substantially less than the notional amount.

Maximum credit risk is defined as the estimated cost of replacing all interest rate exchange agreements that the Bank has transacted with counterparties for which the Bank is in a net favorable position (has a net unrealized gain) if the counterparties all defaulted and the related collateral proved to be of no value to the Bank. At March 31, 2008, the Bank’s maximum credit risk, as defined above, was estimated at $2,507, including $559 of net accrued interest and fees receivable. At December 31, 2007, the Bank’s maximum credit risk was estimated at $1,195, including $199 of net accrued interest and fees receivable. Accrued interest and fees receivable and payable and the legal right to offset assets and liabilities by counterparty (under which amounts recognized for individual transactions may be offset against amounts recognized for other derivatives transactions with the same counterparty) are considered in determining the maximum credit risk. The Bank held cash, investment grade securities, and mortgage loans valued at $2,429 and $1,024 as collateral from counterparties as of March 31, 2008, and December 31, 2007, respectively. This collateral has not been sold or repledged. A significant number of the Bank’s interest rate exchange agreements are transacted with financial institutions such as major banks and highly rated derivatives dealers. Some of these financial institutions or their broker-dealer affiliates buy, sell, and distribute consolidated obligations. Assets pledged as collateral by the Bank to these counterparties are more fully discussed in Note 11.

Note 10 – Fair Values

Fair Value Measurement.The Bank adopted SFAS 157 on January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS 157 applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. The Bank uses fair value measurements to record fair value adjustments for certain financial assets and liabilities and to determine fair value disclosures.

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Fair value is a market-based measurement, and the price used to measure fair value is an exit price considered from the perspective of the market participant that holds the asset or owes the liability.

SFAS 157 establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

• Level 1 – Inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

24

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

• Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

• Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are supported by little or no market activity or by the Bank’s own assumptions.

A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.

In general, fair values are based on quoted or market list prices in the principal market when they are available. If listed prices or quotes are not available, fair values are based on dealer prices and prices of similar instruments. If dealer prices and prices of similar instruments are not available, fair value is based on internally developed models that use primarily market-based or independently sourced inputs, including interest rate yield curves and option volatilities. Adjustments may be made to fair value measurements to ensure that financial instruments are recorded at fair value.

The following assets and liabilities, including those for which the Bank has elected the fair value option in accordance with SFAS 159, are carried at fair value on the Statements of Condition as of March 31, 2008:

• Trading securities

• Certain advances

• Derivative assets and liabilities

• Certain consolidated obligation bonds

These assets and liabilities are measured at fair value on a recurring basis and are summarized in the following table by SFAS 157 valuation hierarchy (as described above).

March 31, 2008
	Fair Value Measurement Using:			Netting
	Level 1	Level 2	Level 3	Adjustments(1)		Total
Assets:
Trading securities	$—	$       56	$—	$      —		$       56
Advances(2)	—	24,074	—	—		24,074
Derivative assets	—	4,255	—	(3,049	)	1,206
Total assets	$—	$28,385	$—	$(3,049	)	$25,336
Liabilities:
Consolidated obligation bonds(3)	$—	$26,706	$—	$      —		$26,706
Derivative liabilities	—	1,850	—	(1,727	)	123
Total liabilities	$—	$28,556	$—	$(1,727	)	$26,829

(1) Amounts represent the netting of derivative assets and liabilities by counterparty, including cash collateral, where the Bank has the legal right to do so under its master netting agreement with each counterparty, in accordance with FASB Interpretation No. 39,Offsetting of Amounts Related to Certain Contracts – an interpretation of APB Opinion No. 10 and FASB Statement No. 105 (FIN 39) and FSP FIN 39-1.

(2) Includes $19,990 of advances recorded under the fair value option in accordance with SFAS 159 and $4,084 of advances recorded at fair value in accordance with SFAS 133.

(3) Includes $20,141 of consolidated obligation bonds recorded under the fair value option in accordance with SFAS 159 and $6,565 of consolidated obligation bonds recorded at fair value in accordance with SFAS 133.

The following is a description of the Bank’s valuation methodologies for assets and liabilities measured at fair value. These valuation methodologies were applied to all of the assets and liabilities carried at fair value, whether as a result of electing the fair value option in accordance with SFAS 159 or because they were previously carried at fair value.

Trading Securities — The Bank’s trading securities portfolio currently consists of agency MBS investments. These securities are recorded at fair value on a recurring basis. Fair value measurement is based on pricing

25

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

models or other model-based valuation techniques, such as the present value of future cash flows adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions. Because quoted prices are not available for these securities, the Bank has primarily relied on market observable inputs and model-based valuation techniques for the fair value measurements, and the Bank generally classifies these investments as Level 2 within the valuation hierarchy.

The contractual interest income on the trading securities is recorded as part of net interest income on the Statements of Income. The remaining changes in fair values on the trading securities are included in the other income section on the Statements of Income.

Advances —Certain advances either elected for the fair value option in accordance with SFAS 159 or accounted for in an SFAS 133-qualifying full fair value hedging relationship are recorded at fair value on a recurring basis. Because quoted prices are not available for advances, the fair values are measured using model-based valuation techniques, such as the present value of future cash flows, creditworthiness of members, advance collateral type, prepayment assumptions, and other factors such as credit loss assumptions, as necessary.

Because no principal market exists for the sale of advances, the Bank has defined the most advantageous market as a hypothetical market in which an advance sale could occur with a hypothetical financial institution. The Bank’s primary inputs for measuring the fair value of advances are market-based consolidated obligation yield curve (CO Curve) inputs obtained from the Office of Finance and provided to the Bank. The CO Curve is then adjusted to reflect the rates on replacement advances with similar terms and collateral. These adjustments are not market observable and are evaluated for significance in the overall fair value measurement and fair value hierarchy level of the advance. In addition, the Bank obtains market observable inputs from derivatives dealers for complex advances. Pursuant to the Finance Board’s advances regulation, advances with an original term to maturity or repricing period greater than six months generally require a prepayment fee sufficient to make the Bank financially indifferent to the borrower’s decision to prepay the advances, and the Bank has determined that no adjustment is required to the fair value measurement of advances for prepayment fees. The inputs used in the Bank’s fair value measurement of these advances are primarily market observable, and the Bank generally classifies these advances as Level 2 within the valuation hierarchy.

The contractual interest income on advances is recorded as part of net interest income on the Statements of Income. The remaining changes in fair values on the advances are included in the other income section on the Statements of Income.

Derivative Assets and Derivative Liabilities —In general, derivative instruments held by the Bank for risk management activities are traded in over-the-counter markets where quoted market prices are not readily available. For these derivatives, the Bank measures fair value using internally developed models that use primarily market observable inputs, such as yield curves and option volatilities adjusted for counterparty credit risk, as necessary.

The Bank is subject to credit risk in derivatives transactions due to potential nonperformance by the derivatives counterparties. To mitigate this risk, the Bank only executes transactions with highly rated derivatives dealers and major banks (derivatives dealer counterparties). In addition, the Bank has entered into master netting agreements and bilateral security agreements with all active derivatives dealer counterparties that provide for delivery of collateral at specified levels tied to counterparty credit ratings to limit the Bank’s net unsecured credit exposure to these counterparties. Under these policies and agreements, the amount of unsecured credit exposure to an individual derivatives dealer counterparty is limited to the lesser of (i) a percentage of the counterparty’s capital or (ii) an absolute credit exposure limit, both according to the counterparty’s credit rating, as determined by rating agency long-term credit ratings of the counterparty’s debt securities or deposits. All credit exposure from derivatives transactions entered into by the Bank with member counterparties that are not derivatives dealers must be fully secured by eligible collateral. The Bank has evaluated the potential for the fair value of the instruments to be impacted by counterparty credit risk and has determined that no adjustments were significant to the overall fair value measurements.

26

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

The inputs used in the Bank’s fair value measurement of these derivative instruments are primarily market observable, and the Bank generally classifies these derivatives as Level 2 within the valuation hierarchy. The fair values are netted by counterparty where such legal right of offset exists. If these netted amounts are positive, they are classified as an asset and, if negative, a liability.

The Bank accounts for derivatives in accordance with SFAS 133, which 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 difference between the gains or losses on derivatives and the related hedged items that qualify as fair value hedges under SFAS 133 represents hedge ineffectiveness and is recognized in other income. 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 additional information, see Note 9 to the Financial Statements.

Consolidated Obligation Bonds —Certain consolidated obligation bonds either elected for the fair value option in accordance with SFAS 159 or accounted for in an SFAS 133-qualifying full fair value hedging relationship are recorded at fair value on a recurring basis. As quoted prices in active markets are not generally available for identical liabilities, the Bank measures fair values using internally developed models that use primarily market observable inputs. The Bank’s primary inputs for measuring the fair value of consolidated obligation bonds are market-based CO Curve inputs obtained from the Office of Finance and provided to the Bank. The Bank has determined that the CO Curve is based on market observable data. For consolidated obligation bonds with embedded options, the Bank also obtains market observable quotes and inputs from derivative dealers. For example, the Bank uses swaption volatilities as an input.

Adjustments may be necessary to reflect the Bank’s credit quality or the credit quality of the FHLBank System when valuing consolidated obligation bonds measured at fair value. The Bank monitors its own creditworthiness, the creditworthiness of the other 11 FHLBanks, and the FHLBank System to determine whether any adjustments are necessary for creditworthiness in its fair value measurement of consolidated obligation bonds. The credit ratings of the FHLBank System and any changes to the credit ratings are the basis for the Bank to determine whether the fair values of consolidated obligations have been significantly affected during the reporting period by changes in the instrument-specific credit risk.

The inputs used in the Bank’s fair value measurement of these consolidated obligation bonds are primarily market observable, and the Bank generally classifies these consolidated obligation bonds as Level 2 within the valuation hierarchy. For complex transactions, market observable inputs may not be available and the inputs are evaluated to determine whether they may result in a Level 3 classification in the fair value hierarchy.

The contractual interest expense on the consolidated obligation bonds is recorded as part of net interest income on the Statements of Income. The remaining changes in fair values on the consolidated obligation bonds are included in the other income section on the Statements of Income.

Nonrecurring Fair Value Measurements —Certain assets and liabilities are measured at fair value on a nonrecurring basis—that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustment in certain circumstances (for example, when there is evidence of impairment). During the first quarter of 2008, the Bank had no nonrecurring fair value adjustments.

Fair Value Option.The Bank adopted SFAS 159 on January 1, 2008. SFAS 159 provides an option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value. The Bank elected the fair value option in accordance with SFAS 159 for certain financial instruments on the adoption date.

SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. It requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. In addition, unrealized gains and losses on items for which the

27

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

fair value option has been elected in accordance with SFAS 159 are reported in earnings. Under SFAS 159, fair value is used for both the initial and subsequent measurement of the designated assets, liabilities, and commitments, with the changes in fair value recognized in net income.

For more information, see Note 2 to the Financial Statements.

The following table summarizes the activity related to financial assets and liabilities for which the Bank elected the fair value option in accordance with SFAS 159 during the first quarter of 2008:

	Three months ended March 31, 2008
	Advances			Consolidated Obligation Bonds
Balance, beginning of the period	$	15,985		$	1,247
New transactions elected for fair value option		5,239			19,897
Maturities and terminations		(1,476	)		(1,014	)
Net gain on instruments held at fair value		239			(35	)
Change in accrued interest		3			46
Balance, end of the period	$	19,990		$	20,141

For advances and consolidated obligations recorded under the fair value option in accordance with SFAS 159, the estimated impact of changes in credit risk for the first quarter of 2008 was not material.

The following table presents the changes in fair value included in the Statements of Income for each item for which the fair value option has been elected in accordance with SFAS 159:

Three months ended March 31, 2008	Interest Income on Advances		Interest Expense on Consolidated Obligation Bonds			Net Gain on Instruments Held at Fair Value		Total Changes in Fair Value Included in Current Period Earnings
Advances	$	190	$	—		$	239	$	429
Consolidated obligation bonds		—		(68	)		35		(33	)

The following table presents the difference between the aggregate fair value and aggregate remaining contractual principal balance outstanding of advances and consolidated obligation bonds for which the fair value option has been elected in accordance with SFAS 159:

At March 31, 2008	Principal Balance		Fair Value		Fair Value Over/(Under) Principal Balance
Advances(1)	$	19,423	$	19,990	$	567
Consolidated obligation bonds		20,117		20,141		24

(1) At March 31, 2008, none of these advances were 90 days or more past due or had been placed on nonaccrual status.

Estimated Fair Values.The following tables show the estimated fair values of the Bank’s financial instruments at March 31, 2008, and December 31, 2007. These estimates are based on pertinent information available to the Bank as of March 31, 2008, and December 31, 2007. 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. 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 at March 31, 2008, are discussed below. The assumptions used in estimating the fair values of the Bank’s financial instruments at December 31, 2007, are more fully discussed in Note 18 to the Financial Statements in the Bank’s 2007 Form 10-K.

28

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Cash and Due from Banks— The estimated fair value approximates the recorded carrying value.

Interest-Bearing Deposits in Banks, Deposits for Mortgage Loan Program, Securities Purchased Under Agreements to Resell, and Federal Funds Sold— The estimated fair value of these instruments has been determined based on quoted prices or by calculating the present value of expected cash flows for the instruments excluding accrued interest. The discount rates used in these calculations are the replacement rates for comparable instruments with similar terms.

Trading and Held-to-Maturity Securities— The estimated fair value of these instruments, including MBS, has been determined by calculating the present value of expected cash flows using market observable inputs as of the last business day of the year excluding accrued interest, or by using industry standard analytical models and certain actual and estimated market information. The discount rates used in these calculations are the replacement rates for securities with similar terms. Estimates developed using these methods require judgments regarding significant matters such as the appropriate discount rates and prepayment assumptions. Changes in these judgments often have a material effect on the fair value estimates.

Advances— The estimated fair value of these instruments is measured as described in “Fair Value Measurement – Advances” above.

Mortgage Loans Held for Portfolio— The estimated fair value for mortgage loans is modeled prices based on observable market spreads for agency passthrough MBS adjusted for differences in credit, coupon, average loan rate, and seasoning. Market prices are highly dependent on the underlying prepayment assumptions. Changes in the prepayment rates often have a material effect on the fair value estimates. Since these underlying prepayment assumptions are made at a specific point in time, they are susceptible to material changes in the near term.

Accrued Interest Receivable and Payable and Other Assets and Liabilities— The estimated fair value approximates the recorded carrying value of accrued interest receivable, accrued interest payable, other assets (except for concessions on consolidated obligations), and other liabilities. Concessions on consolidated obligations have an estimated fair value of zero.

Derivative Assets and Liabilities— The estimated fair value of these instruments is measured as described in “Fair Value Measurement – Derivative Assets and Derivative Liabilities” above.

Deposits and Other Borrowings— For deposits and other borrowings, the estimated fair value has been determined by calculating the present value of expected future cash flows from the deposits and other borrowings excluding accrued interest. The discount rates used in these calculations are the cost of deposits and borrowings with similar terms.

Consolidated Obligations— The estimated fair value of these instruments is measured as described in “Fair Value Measurement – Consolidated Obligation Bonds” above.

Mandatorily Redeemable Capital Stock— The fair value of capital subject to mandatory redemption is generally at par value. Fair value includes estimated dividends earned at the time of reclassification from capital to liabilities, until such amount is paid, and any subsequently declared stock dividend. The Bank’s stock can only be acquired by members at par value and redeemed at par value. The Bank’s stock is not traded, and no market mechanism exists for the exchange of Bank stock outside the cooperative ownership structure.

Commitments— The estimated fair value of the Bank’s commitments to extend credit, including letters of credit, was immaterial at March 31, 2008, and December 31, 2007.

29

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Fair Value of Financial Instruments – March 31, 2008

	Carrying Value		Net Unrealized Gains/(Losses)			Estimated Fair Value
Assets
Cash and due from banks	$	6	$	—		$	6
Interest-bearing deposits in banks		14,112		4			14,116
Federal funds sold		19,623		2			19,625
Trading securities		56		—			56
Held-to-maturity securities		43,793		(3,565	)		40,228
Advances (includes $19,990 at fair value under the fair value option)		248,425		(21	)		248,404
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans		4,025		(63	)		3,962
Accrued interest receivable		1,056		—			1,056
Derivative assets(1)		1,206		—			1,206
Other assets		178		(58	)		120
Total	$	332,480	$	(3,701	)	$	328,779
Liabilities
Deposits	$	441	$	—		$	441
Consolidated obligations:
Bonds (includes $20,141 at fair value under the fair value option)		228,750		(161	)		228,911
Discount notes		84,872		(125	)		84,997
Mandatorily redeemable capital stock		213		—			213
Accrued interest payable		1,944		—			1,944
Derivative liabilities(1)		123		—			123
Other liabilities		1,798		—			1,798
Total	$	318,141	$	(286	)	$	318,427

(1) Amounts include the netting of derivative assets and liabilities by counterparty, including cash collateral, where the Bank has the legal right to do so under its master netting agreement with each counterparty, in accordance with FIN 39 and FSP FIN 39-1.

As of March 31, 2008, the Bank’s investment in held-to-maturity securities had net unrealized losses totaling $3,565. These net unrealized losses were primarily in MBS and were mainly due to extraordinarily wide mortgage asset spreads resulting from an extremely illiquid market, causing these assets to be valued at significant discounts to their acquisition cost.

The Bank performed analyses on most of its non-agency MBS as of March 31, 2008, using models that project prepayments, default rates, and loan losses based on underlying loan characteristics, expected housing price changes, and interest rate assumptions. The Bank reviewed the remaining non-agency MBS for adequate credit enhancements by comparing the securities to model results for similar securities. These analyses and reviews showed that the credit enhancement protection in these securities was sufficient to protect the Bank from losses based on current expectations. All of these MBS had a credit rating of AAA as of March 31, 2008. Because the decline in the market value of these securities is primarily attributable to illiquidity rather than a deterioration in the fundamental credit quality of these securities, and because the Bank has both the ability and intent to hold these securities to maturity and expects to receive all contractual principal and interest payments on the securities, the Bank has determined that the unrealized losses are temporary.

30

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Fair Value of Financial Instruments – December 31, 2007

	Carrying Value		Net Unrealized Gains/(Losses)			Estimated Fair Value
Assets
Cash and due from banks	$	5	$	—		$	5
Interest-bearing deposits in banks		14,590		—			14,590
Federal funds sold		11,680		—			11,680
Trading securities		58		—			58
Held-to-maturity securities		38,585		(679	)		37,906
Advances		251,034		278			251,312
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans		4,132		(62	)		4,070
Accrued interest receivable		1,590		—			1,590
Derivative assets(1)		642		—			642
Other assets		130		(55	)		75
Total	$	322,446	$	(518	)	$	321,928
Liabilities
Deposits	$	244	$	—		$	244
Borrowings		1,055		—			1,055
Consolidated obligations:
Bonds		225,328		(96	)		225,424
Discount notes		78,368		(30	)		78,398
Mandatorily redeemable capital stock		229		—			229
Accrued interest payable		2,432		—			2,432
Derivative liabilities(1)		102		—			102
Other liabilities		1,061		—			1,061
Total	$	308,819	$	(126	)	$	308,945

(1) Amounts include the netting of derivative assets and liabilities by counterparty, including cash collateral, where the Bank has the legal right to do so under its master netting agreement with each counterparty, in accordance with FIN 39 and FSP FIN 39-1.

Note 11 – Commitments and Contingencies

As provided by the FHLBank Act or Finance Board regulation, all FHLBanks have joint and several liability for all FHLBank consolidated obligations, 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 $1,220,431 at March 31, 2008, and $1,189,706 at December 31, 2007. The par value of the Bank’s participation in consolidated obligations was $310,759 at March 31, 2008, and $302,949 at December 31, 2007. For more information on the Finance Board’s joint and several liability regulation, see Note 18 to the Financial Statements in the Bank’s 2007 Form 10-K.

Commitments that legally obligate the Bank for additional advances totaled $2,004 at March 31, 2008, and $2,648 at December 31, 2007. Advance commitments are generally for periods up to 12 months. Standby letters of credit are generally issued for a fee on behalf of members to support their obligations to third parties. If the Bank is required to make payment for a beneficiary’s drawing under a letter of credit, the amount is charged to the member’s demand deposit account with the Bank or converted into a collateralized advance to the member. The Bank’s outstanding standby letters of credit were as follows:

	March 31, 2008	December 31, 2007
Outstanding notional	$3,268	$1,204
Original terms	30 days to 10 years	30 days to 10 years
Final expiration year	2018	2017

The value of the guarantees related to standby letters of credit is recorded in other liabilities and amounted to $18 at March 31, 2008, and $2 at December 31, 2007. Based on management’s credit analyses of members’

31

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

financial condition and collateral requirements, no allowance for losses is deemed necessary by management on these advance commitments and letters of credit. Advances funded under these advance commitments and letters of credit are fully collateralized at the time of funding or issuance (see Note 4). The estimated fair value of advance commitments and letters of credit was immaterial to the balance sheet as of March 31, 2008, and December 31, 2007.

The Bank executes interest rate exchange agreements with highly rated major banks and derivatives dealers (derivatives dealer counterparties) that have, or are supported by guarantees from related entities that have, long-term credit ratings of single-A or better from both Standard & Poor’s Rating Services (Standard & Poor’s) and Moody’s Investors Service. The Bank also executes interest rate exchange agreements with its members. The Bank enters into master agreements with netting provisions with all counterparties and into bilateral security agreements with all active derivatives dealer counterparties. All member counterparty master agreements, excluding those with derivatives dealers, are subject to the terms of the Bank’s Advances and Security Agreement with members, and all member counterparties (except for those that are derivatives dealers) must fully collateralize the Bank’s net credit exposure. As of March 31, 2008, the Bank had pledged as collateral securities with a carrying value of $52, all of which could be sold or repledged to counterparties that have market risk exposure from the Bank related to derivatives. As of December 31, 2007, the Bank had pledged as collateral securities with a carrying value of $50, all of which could be sold or repledged, to counterparties that have market risk exposure from the Bank related to derivatives.

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

At March 31, 2008, the Bank had committed to the issuance of $4,555 in consolidated obligation bonds, of which $1,100 were hedged with associated interest rate swaps, and $23 in consolidated obligation discount notes, none of which were hedged with associated interest rate swaps. At December 31, 2007, the Bank had committed to the issuance of $855 in consolidated obligation bonds, of which $400 were hedged with associated interest rate swaps, and $1,500 in consolidated obligation discount notes, of which $1,200 were hedged with associated interest rate swaps.

The Bank entered into interest rate exchange agreements that had traded but not yet settled with notional amounts totaling $4,265 at March 31, 2008, and $4,021 at December 31, 2007.

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

Note 12 – Transactions with Certain Members and Other FHLBanks

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

32

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	March 31, 2008		December 31, 2007
Assets:
Cash and due from banks	$	5	$	5
Interest-bearing deposits in banks		1,600		1,890
Held-to-maturity securities(1)		2,472		2,903
Advances		175,102		177,141
Mortgage loans held for portfolio		3,100		3,169
Accrued interest receivable		676		1,022
Derivative assets		85		34
Total	$	183,040	$	186,164
Liabilities:
Deposits	$	165	$	36
Derivative liabilities		1		10
Total	$	166	$	46
Notional amount of derivatives	$	9,524	$	6,701
Letters of credit		1,986		162

(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
	March 31, 2008			March 31, 2007
Interest Income:
Interest-bearing deposits in banks	$	16		$	—
Federal funds sold		1			13
Held-to-maturity securities		30			36
Advances(1)		1,795			1,676
Mortgage loans held for portfolio		39			43
Total	$	1,881		$	1,768
Interest Expense:
Deposits	$	1		$	—
Consolidated obligations(1)		(1	)		17
Total	$	—		$	17
Other Income
Net (loss)/gain on derivatives and hedging activities	$	53		$	16

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

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

33

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), are “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 that could cause actual results to 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 risks and uncertainties include, among others, the following:

• changes in economic and market conditions, including conditions in the mortgage and housing markets;

• the volatility of market prices, rates, and indices;

• political events, including legislative, regulatory, judicial, or other developments that affect the Bank, its members, counterparties, or investors in the consolidated obligations of the Federal Home Loan Banks (FHLBanks), such as changes in the Federal Home Loan Bank Act or Finance Board regulations applicable to the FHLBanks;

• changes in the Bank’s capital structure;

• the ability of the Bank to pay dividends or redeem or repurchase capital stock;

• membership changes, including changes resulting from mergers or changes in the home offices of Bank members;

• changes in the demand by Bank members for Bank advances;

• changes in the value or liquidity of collateral underlying advances to Bank members;

• 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 or 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;

• the pace of technological change and the Bank’s ability to develop and support technology and information systems sufficient to manage the risks of the Bank’s business effectively; 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, 2007 (2007 Form 10-K).

Quarterly Overview

The tremendous turmoil that the housing and financial markets faced in 2007 continued to have a significant impact on the Federal Home Loan Bank of San Francisco and its members during the first quarter of 2008. The Bank’s business and results of operations are sensitive to the condition of the mortgage markets, as well as to general business and economic conditions. These conditions, which may also affect the business and results of operations of the Bank’s members, include real estate values, short- and long-term interest rates, liquidity in the credit markets, and the strength of the United States economy and the local and regional economies in which the Bank’s members conduct business.

In response to conditions in the financial markets from the third quarter of 2007 through the first quarter of 2008, including events adversely affecting the mortgage and credit markets, the Bank experienced significant growth in its assets. The growth in the Bank’s assets was accompanied by increases in the Bank’s consolidated obligations during this period, primarily short-term discount notes. In addition, the prevailing market conditions, especially the movements in interest rates during this period and the Bank’s lower funding costs relative to the London Interbank Offered Rate (LIBOR), favorably impacted the Bank’s profitability.

34

All advances the Bank made in the first quarter of 2008 were required to be fully collateralized in accordance with the Bank’s credit and collateral requirements, as in prior periods. The Bank monitors the creditworthiness of its members on an ongoing basis. The Bank also has an extensive process for assigning collateral values and determining how much it will lend against the collateral pledged. In the first quarter of 2008, the Bank reviewed and adjusted its lending parameters based on market conditions and required additional collateral, when necessary, to ensure that advances remained fully collateralized. Based on the Bank’s risk assessments of mortgage market conditions and of individual members and their collateral, during the first quarter of 2008 the Bank increased margins for certain collateral types, increased secondary market discounts, and increased margins for some individual members.

The Bank assesses the effectiveness of its market-rate return policy by comparing the dividend rate on its capital stock to a 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 dividend rate for the first quarter of 2008 was 5.73% (annualized), compared to 4.89% (annualized) for the first quarter of 2007. The increase in the dividend rate for the first quarter of 2008 compared to the same period in 2007 reflects a higher net interest spread on the Bank’s mortgage portfolio—mortgage loans and mortgage-backed securities (MBS)—and higher net interest spreads on investments and advances, partially offset by a lower yield on invested capital during the first quarter of 2008 compared to the same period in 2007.

Net income for the first quarter of 2008 rose $98 million, or 69%, to $240 million from $142 million in the first quarter of 2007. The increase reflected growth in net interest income and other income, partially offset by increased assessments for the Resolution Funding Corporation (REFCORP) and the Affordable Housing Program (AHP).

Net interest income for the first quarter of 2008 rose $27 million, or 13%, to $232 million from $205 million for the first quarter of 2007. The increase in net interest income was primarily driven by a higher net interest spread on the Bank’s mortgage portfolio, along with the effect of higher average capital, advances, and investment balances. In particular, the impact of cumulative retrospective adjustments for the amortization of purchase premiums and discounts from the acquisition dates of the MBS and mortgage loans in accordance with Statement of Financial Accounting Standards (SFAS) No. 91,Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases(SFAS 91), increased interest income by $9 million in the first quarter of 2008 and decreased interest income by $14 million in the first quarter of 2007.

Other income for the first quarter of 2008 rose $108 million to $120 million from $12 million for the first quarter of 2007. This increase was primarily due to an increase in net interest income on derivative instruments used in economic hedges, which consisted of $67 million for the first quarter of 2008, compared to net interest expense of $2 million for the first quarter of 2007. This shift reflected the abrupt and significant decrease in interest rates that occurred early in the first quarter of 2008, which had a favorable effect on certain LIBOR-based interest rate swaps. In addition, the increase in other income was due to net gains primarily associated with derivatives, hedged items, and financial instruments carried at fair value, which resulted in net gains of $52 million in the first quarter of 2008, compared to net gains of $13 million in the first quarter of 2007.

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

35

In accordance with the Bank’s Retained Earnings and Dividend Policy, the Bank retains the net unrealized gains on these financial instruments, after REFCORP and AHP assessments, in restricted retained earnings. The Bank retained $39 million in net unrealized gains after assessments in the first quarter of 2008 and $10 million in net unrealized gains after assessments in the first quarter of 2007. As of March 31, 2008, the cumulative effect of these unrealized gains on the Bank’s derivatives, hedged instruments, and certain assets and liabilities that are carried at fair value was a net unrealized gain of $91 million, which has been retained in restricted retained earnings.

As a result of the combined increases in net interest income and other income, the Bank’s REFCORP and AHP assessments in the first quarter of 2008 increased $36 million, or 71%, to $87 million from $51 million in the first quarter of 2007.

During the first quarter of 2008, total assets grew $10.0 billion, or 3%, to $332.5 billion at March 31, 2008, from $322.5 billion at December 31, 2007, primarily as a result of growth in investments in Federal funds sold, which increased by $7.9 billion, or 68%, to $19.6 billion at March 31, 2008, from $11.7 billion at December 31, 2007. In addition, investments in held-to-maturity securities increased $5.2 billion, or 13%, to $43.8 billion at March 31, 2008, from $38.6 billion at December 31, 2007. The increases were partially offset by a decrease in advances, which fell $2.6 billion, or 1%, to $248.4 billion at March 31, 2008, from $251.0 billion at December 31, 2007. During the first quarter of 2008, 108 institutions decreased their advances, while 143 institutions increased their advances. The Bank increased its investments in Federal Funds sold to maintain financial leverage until the repurchase of capital stock that had been supporting advances. The Bank increased its investments in held-to-maturity securities because of the growth in capital and the availability of MBS that met the Bank’s risk-adjusted spreads and credit enhancement requirements in the first quarter of 2008 relative to the first quarter of 2007.

As of March 31, 2008, the Bank’s investment in MBS classified as held-to-maturity had gross unrealized losses totaling $3.7 billion, primarily from non-agency MBS. These gross unrealized losses were primarily due to extraordinarily wide mortgage asset spreads resulting from an extremely illiquid market, causing these assets to be valued at significant discounts to their acquisition cost. The Bank performed analyses on most of its non-agency MBS as of March 31, 2008, using models that project prepayments, default rates, and loan losses based on underlying loan characteristics, expected housing price changes, and interest rate assumptions. The Bank reviewed the remaining non-agency MBS for adequate credit enhancements by comparing the securities to model results for similar securities. These analyses and reviews showed that the credit enhancement protection in these securities was sufficient to protect the Bank from losses based on current expectations. All of these MBS had a credit rating of AAA as of March 31, 2008. Because the decline in the market value of these securities is primarily attributable to illiquidity rather than a deterioration in the fundamental credit quality of these securities, and because the Bank has both the ability and intent to hold these securities to maturity and expects to receive all contractual principal and interest payments on the securities, the Bank has determined that the unrealized losses are temporary. The Bank monitors its MBS investments for substantive changes in relevant market conditions and any declines in fair value.

36

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)	March 31, 2008			December 31, 2007			September 30, 2007			June 30, 2007			March 31, 2007
Selected Balance Sheet Items at Quarter End
Total Assets(1)	$	332,480		$	322,446		$	304,111		$	234,607		$	246,900
Advances		248,425			251,034			236,184			171,019			177,455
Mortgage Loans		4,025			4,132			4,229			4,363			4,505
Held-to-Maturity Securities		43,793			38,585			31,759			30,154			30,120
Interest-Bearing Deposits in Banks		14,112			14,590			14,226			8,306			10,235
Federal Funds Sold		19,623			11,680			15,861			19,062			21,246
Consolidated Obligations:(2)
Bonds		228,750			225,328			219,723			194,305			202,437
Discount Notes		84,872			78,368			68,027			25,361			29,729
Capital Stock – Class B – Putable		14,049			13,403			12,629			9,782			10,898
Total Capital		14,339			13,627			12,794			9,954			11,053
Selected Operating Results for the Quarter
Net Interest Income	$	232		$	267		$	247		$	212		$	205
Other Income/(Loss)		120			75			(39	)		7			12
Other Expense		25			27			24			23			24
Assessments		87			84			49			52			51
Net Income	$	240		$	231		$	135		$	144		$	142
Selected Other Data for the Quarter
Net Interest Margin		0.29	%		0.34	%		0.38	%		0.37	%		0.35	%
Operating Expenses as a Percent of Average Assets		0.03			0.03			0.03			0.03			0.03
Return on Assets		0.29			0.29			0.20			0.25			0.24
Return on Equity		6.94			7.02			4.86			5.65			5.40
Annualized Dividend Rate		5.73			5.43			5.26			5.14			4.89
Spread of Dividend Rate to Dividend Benchmark(3)		2.13			1.16			0.73			0.61			0.42
Dividend Payout Ratio(4)		79.28			75.16			105.16			88.61			87.98
Selected Other Data at Quarter End
Capital to Assets Ratio(1),(5)		4.38			4.30			4.24			4.29			4.52
Duration Gap (in months)		4			2			1			1			1

(1) As permitted by FASB Staff Position No. FIN 39-1, Amendment of FASB Interpretation No. 39 (FSP FIN 39-1), effective January 1, 2008, the Bank has changed its accounting policy to offset fair value amounts for cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty. The Bank has recognized the effects of applying FSP FIN 39-1 as a change in accounting principle through retrospective application for all prior periods presented.

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

	Par amount
March 31, 2008	$	1,220,431
December 31, 2007		1,189,706
September 30, 2007		1,148,571
June 30, 2007		970,857
March 31, 2007		951,470

(3) 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.

(4) This ratio is calculated as dividends declared per share divided by net income per share.

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

37

Results of Operations

The primary source of Bank earnings is net interest income, which is the interest earned on advances, mortgage loans, and investments, less the interest paid on consolidated obligations, deposits, and other borrowings. The following Average Balance Sheets tables present average balances of earning asset categories and the sources that fund those earning assets (liabilities and capital) for the three months ended March 31, 2008 and 2007, together with the related interest income and expense. They also present the average rates on total earning assets and the average costs of total funding sources. The Change in Net Interest Income table details the changes in interest income and interest expense for the first quarter of 2008 compared to the first quarter of 2007. Changes in both volume and interest rates influence changes in net interest income and the net interest margin.

38

Average Balance Sheets

	Three months ended
	March 31, 2008							March 31, 2007
(Dollars 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	$	15,362		$	139	3.64	%	$	9,044		$	119	5.34	%
Securities purchased under agreements to resell		—			—	—			345			4	4.70
Federal funds sold		16,133			132	3.29			13,713			180	5.32
Trading securities:
MBS		56			1	7.18			69			1	5.88
Held-to-maturity securities:
MBS		34,109			440	5.19			26,047			325	5.06
Other investments		4,035			38	3.79			3,114			42	5.47
Mortgage loans		4,081			49	4.83			4,565			57	5.06
Advances(1)		247,545			2,584	4.20			183,179			2,425	5.37
Loans to other FHLBanks		18			—	3.28			4			—	5.38
Total interest-earning assets		321,339			3,383	4.23			240,080			3,153	5.33
Other assets(2)		9,770			—	—			3,526			—	—
Total Assets	$	331,109		$	3,383	4.11	%	$	243,606		$	3,153	5.25	%
Liabilities and Capital
Interest-bearing liabilities:
Consolidated obligations:
Bonds(1)	$	223,969		$	2,348	4.22	%	$	202,190		$	2,611	5.24	%
Discount notes(1)		81,695			790	3.89			25,468			330	5.25
Deposits		1,391			10	2.89			488			6	4.99
Borrowings from other FHLBanks		11			—	0.15			—			—	5.26
Mandatorily redeemable capital stock		216			3	5.73			103			1	4.89
Other borrowings		7			—	3.93			6			—	5.32
Total interest-bearing liabilities		307,289			3,151	4.12			228,255			2,948	5.24
Other liabilities(2)		9,884			—	—			4,696			—	—
Total Liabilities		317,173			3,151	4.00			232,951			2,948	5.13
Total Capital		13,936			—	—			10,655			—	—
Total Liabilities and Capital	$	331,109			3,151	3.83	%	$	243,606		$	2,948	4.91	%
Net Interest Income				$	232						$	205
Net Interest Spread(3)						0.11	%						0.09	%
Net Interest Margin(4)						0.29	%						0.35	%
Interest-earning Assets/Interest-bearing Liabilities		104.57	%						105.18	%
Total Average Assets/Capital Ratio(5)		23.4	x						22.6	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; SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities; and SFAS No. 155,Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140 (together referred to as SFAS 133) and SFAS 159.

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

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

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

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Change in Net Interest Income: Rate/Volume Analysis

Three Months Ended March 31, 2008, Compared to Three Months Ended March 31, 2007

	Increase/			Attributable to Changes in(1)
(In millions)	(Decrease)			Average Volume			Average Rate
Interest-earning assets:
Interest-bearing deposits in banks	$	20		$	66		$	(46	)
Securities purchased under agreements to resell		(4	)		(2	)		(2	)
Federal funds sold		(48	)		29			(77	)
Held-to-maturity securities:
MBS		115			106			9
Other Investments		(4	)		11			(15	)
Mortgage loans		(8	)		(6	)		(2	)
Advances(2)		159			756			(597	)
Total interest-earning assets		230			960			(730	)
Interest-bearing liabilities:
Consolidated obligations:
Bonds(2)		(263	)		272			(535	)
Discount notes(2)		460			566			(106	)
Deposits		4			7			(3	)
Other borrowings		2			2			—
Total interest-bearing liabilities		203			847			(644	)
Net interest income	$	27		$	113		$	(86	)

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

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

The net interest margin was 29 basis points for the first quarter of 2008, 6 basis points lower than the net interest margin for the first quarter of 2007, which was 35 basis points. The decrease reflects a lower yield on invested capital due to the lower interest rate environment, partially offset by higher profit spreads on the combined mortgage loan and MBS portfolio, a higher net interest spread on non-MBS investments—interest-bearing deposits in banks, Federal funds sold and other non-MBS investments classified as held-to-maturity—and a higher net interest spread on advances made to members during the first quarter of 2008 compared to the first quarter of 2007.

The net interest spread was 11 basis points for the first quarter of 2008, 2 basis points higher than the net interest spread for the first quarter of 2007, which was 9 basis points. The increase reflected a higher net interest spread on the Bank’s mortgage portfolio and higher net interest spreads on non-MBS investments and new advances, which were driven primarily by lower funding costs relative to LIBOR during the first quarter of 2008, as events adversely affecting the financial markets led to higher demand for FHLBank consolidated obligations. The increase also reflected the impact of cumulative retrospective adjustments for the amortization of purchase premiums and discounts from the acquisition dates of the MBS and mortgage loans in accordance with SFAS 91. These increases were partially offset by a lower net interest spread on the Bank’s mortgage portfolio.

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Net Interest Income

Net interest income in the first quarter of 2008 was $232 million, a 13% increase from $205 million in the first quarter of 2007. The increase was driven primarily by higher net interest income on the Bank’s mortgage portfolio, which included the impact of retrospective adjustments for the amortization of purchase premiums and discounts from the acquisition dates of the MBS and mortgage loans in accordance with SFAS 91, and by higher average advances balances. The increase was partially offset by the effect of lower interest rates on average 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—decreased $36 million in the first quarter of 2008 compared to the first quarter of 2007. The decrease consisted of a $140 million decrease attributable to lower average yields on non-MBS investments, partially offset by a $104 million increase attributable to a 36% increase in average non-MBS investment balances.

Interest income from the mortgage portfolio increased $107 million in the first quarter of 2008 compared to the first quarter of 2007. The increase consisted of a $9 million increase attributable to higher average yields on MBS investments and a $106 million increase attributable to a 31% increase in average MBS outstanding, partially offset by a $6 million decrease attributable to an 11% decrease in average mortgage loans outstanding and a $2 million decrease attributable to lower average yields on mortgage loans. Interest income from the mortgage portfolio includes the impact of cumulative retrospective adjustments for the amortization of purchase premiums and discounts from the acquisition dates of the MBS and mortgage loans in accordance with SFAS 91, which increased interest income by $9 million in the first quarter of 2008 and decreased interest income by $14 million in the first quarter of 2007.

Interest income from advances increased $159 million in the first quarter of 2008 compared to the first quarter of 2007. The increase consisted of a $756 million increase attributable to a 35% increase in average advances outstanding, reflecting higher member demand during the first quarter of 2008 relative to the first quarter of 2007, partially offset by a $597 million decrease attributable to lower average yields.

Paralleling the growth in interest-earning assets, average consolidated obligations (bonds and discount notes) funding the earning assets increased 34%, resulting in a $197 million increase in interest expense for the first quarter of 2008 relative to the first quarter of 2007. Higher average consolidated obligation balances, which were issued primarily to finance the growth in advances, contributed $838 million to the increase in interest expense during the first quarter of 2008 relative to the first quarter of 2007. Lower interest rates on consolidated obligations outstanding in the first quarter of 2008 compared to the first quarter of 2007 partially offset the increased volume with a $641 million decrease in interest expense.

The growth in average interest-earning assets and net interest income during the first quarter of 2008 compared to the first quarter of 2007 was driven primarily by higher member demand for advances in the second half of 2007. 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 Income

Other income was a net gain of $120 million in the first quarter of 2008 compared to a net gain of $12 million in the first quarter of 2007. The net gain in the first quarter of 2008 consisted primarily of net unrealized fair value gains associated with assets and liabilities carried at fair value in accordance with the provisions of SFAS 159 and net interest income on derivative instruments used in economic hedges, partially offset by net unrealized losses associated with derivatives and hedging activities under the provisions of SFAS 133.

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 its estimated value so that some or all of the unrealized

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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 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 recognized in current period earnings without any offsetting unrealized loss or gain from the associated asset or liability.

Under SFAS 159, the Bank elected to carry certain assets and liabilities (advances and consolidated obligation bonds) at fair value. The Bank recognizes the unrealized gains and losses on these assets and liabilities in current period earnings. In general, transactions elected for the fair value option in accordance with SFAS 159 are in economic hedge relationships.

In general, the Bank’s derivatives and associated hedged instruments, and certain assets and liabilities that are carried at fair value, are held to the maturity, call, or put date. Therefore, for these financial instruments, nearly all of the cumulative net gains and losses that are unrealized gains or losses are primarily a matter of timing and will generally reverse over the remaining contractual terms of the hedged financial instrument, associated interest rate exchange agreement, or financial instrument carried at fair value. However, the Bank may have instances in which these instruments are terminated prior to maturity or prior to the call or put dates. Terminating the financial instrument or hedging relationship may result in a realized gain or loss. In addition, the Bank may have instances in which it may sell trading securities prior to maturity, which may also result in a realized gain or loss.

SFAS 133- and SFAS 159-related income volatility during the first quarter of 2008 was primarily driven by (i) the significant drop in short-term interest rates following the Federal Open Market Committee’s reductions in the Federal Funds target rate from 4.25% to 2.25% during the first quarter of 2008, and (ii) the changes in consolidated obligation rate levels, consolidated obligation spreads to LIBOR, and swap volatilities during the first quarter of 2008. The positive fair value impact from the declining market rates experienced in the first quarter of 2008 is generally expected to reverse over a period of months as the floating-rate payments that the Bank receives on certain interest rate exchange agreements adjust downward to current market rates. The positive impacts from the spread and volatility changes in 2008 are also expected generally to reverse, as spreads and volatilities revert to the market conditions that existed prior to August 2007 or over the remaining lives of the affected interest rate exchange agreements or hedged financial instruments. Additional declines in short-term interest rates or additional adverse changes in spreads and volatility could create additional unrealized gains, but these unrealized gains, if any, would generally be expected to reverse in the manner described above.

The ongoing impact of SFAS 133 and SFAS 159 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 and SFAS 159. The effects of SFAS 133 and SFAS 159 may lead to significant volatility in future earnings, other comprehensive income, and dividends.

Net Gain on Instruments Held at Fair Value – Fair value adjustments on advances and consolidated obligation bonds carried at fair value in accordance with SFAS 159 were net gains of $274 million for the first quarter of 2008. The $274 million net gains, primarily driven by the sharp decline in interest rates during the first quarter of 2008, consisted of $239 million in unrealized fair value gains on $20.0 billion of advances carried at fair value and $35 million in unrealized fair value gains on $20.1 billion of consolidated obligation bonds carried at fair value.

Net (Loss)/Gain on Derivatives and Hedging Activities –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 “Net (loss)/gain on derivatives and hedging activities” in the first quarter of 2008 and 2007.

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Sources of Gains/(Losses) Recorded in Net (Loss)/Gain on Derivatives and Hedging Activities

Three Months Ended March 31, 2008, Compared to Three Months Ended March 31, 2007

(In millions)	Three months ended
	March 31, 2008														March 31, 2007
Hedged Item	Gain/(Loss)								Net Interest Income/ (Expense) on Economic Hedges			Total			Gain/(Loss)								Net Interest Income/ (Expense) on Economic Hedges			Total
	Fair Value Hedges, net			Cash Flow Hedges		Economic Hedges									Fair Value Hedges, net			Cash Flow Hedges		Economic Hedges
Advances	$	(5	)	$	—	$	(288	)	$	(1	)	$	(294	)	$	(1	)	$	—	$	(1	)	$	1		$	(1	)
Consolidated obligations		25			—		46			68			139			9			—		6			(3	)		12
MBS		—			—		—			—			—			—			—		—			—			—
Total	$	20		$	—	$	(242	)	$	67		$	(155	)	$	8		$	—	$	5		$	(2	)	$	11

During the first quarter of 2008, net losses on derivatives and hedging activities totaled $155 million compared to net gains of $11 million in the first quarter of 2007. These amounts included net interest income on derivative instruments used in economic hedges of $67 million in the first quarter of 2008, compared to net interest expense on derivative instruments used in economic hedges of $2 million in the first quarter of 2007. The increase in net interest income on derivative instruments used in economic hedges was primarily due to the abrupt and significant decrease in interest rates that occurred early in the first quarter of 2008, which had a favorable effect on certain LIBOR-based interest rate swaps.

Excluding the $67 million impact from net interest income on derivative instruments used in economic hedges, net losses for the first quarter of 2008 totaled $222 million. The $222 million net losses, primarily attributable to the sharp decline in interest rates during the first quarter of 2008, consisted of unrealized net losses of $293 million attributable to the hedges related to advances, partially offset by unrealized net gains of $71 million attributable to the hedges related to consolidated obligations. Most of the economic hedges matched to advances were associated with the advances accounted for under the fair value option in accordance with SFAS 159.

Excluding the $2 million impact from net interest expense on derivative instruments used in economic hedges, net gains for the first quarter of 2007 totaled $13 million. The $13 million net gains consisted primarily of unrealized net gains of $15 million attributable to the hedges related to consolidated obligations, partially offset by unrealized net losses of $2 million attributable to the hedges related to advances.

Return on Equity

Return on equity (ROE) was 6.94% (annualized) for the first quarter of 2008, an increase of 154 basis points from the first quarter of 2007. This increase reflected the 69% increase in net income, to $240 million in the first quarter of 2008 from $142 million in the first quarter of 2007. The growth in net income more than kept pace with the growth in average capital, which increased 31%, to $13.9 billion in the first quarter of 2008 from $10.7 billion in the first quarter of 2007.

Dividends

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

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The Finance Board’s regulatory liquidity requirements state: (i) each FHLBank must maintain eligible high quality assets (advances with a maturity not exceeding five years, Treasury security investments, and deposits in banks or trust companies) in an amount equal to or greater than the deposits received from members, and (ii) each FHLBank must hold contingency liquidity in an amount sufficient to meet its liquidity needs for at least five business days without access to the consolidated obligations markets. At March 31, 2008, advances maturing within five years totaled $236.4 billion, significantly in excess of the $0.4 billion of member deposits on that date. At December 31, 2007, advances maturing within five years totaled $242.5 billion, also significantly in excess of the $0.2 billion of member deposits on that date. In addition, as of March 31, 2008, and December 31, 2007, the Bank’s estimated total sources of funds obtainable from liquidity investments, repurchase agreement borrowings collateralized by the Bank’s marketable securities, and advance repayments would have allowed the Bank to meet its liquidity needs for more than 90 days without access to the consolidated obligations markets.

Retained Earnings Related to SFAS 133, 157, and 159 –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. Effective January 1, 2008, the Bank’s Retained Earnings and Dividend Policy was amended to also include in restricted retained earnings any cumulative net unrealized gains resulting from the transition impact of adopting SFAS 157 and SFAS 159 and the ongoing impact from the application of SFAS 159. As these cumulative net unrealized gains are reversed by periodic net unrealized losses, the amount of cumulative net unrealized gains decreases. The amount of retained earnings required by this provision of the policy is therefore decreased, and that portion of the previously restricted retained earnings becomes unrestricted and may be made available for dividends. The retained earnings restricted in accordance with this provision of the Retained Earnings and Dividend Policy totaled $91 million at March 31, 2008, and $47 million at December 31, 2007.

Other Retained Earnings – Targeted Buildup –In addition to the above gains, the Bank holds a targeted amount in 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 or 159 quarterly result, or an extremely low (or negative) level of net income before the effects of SFAS 133 and 159 resulting from an adverse interest rate environment. Under this provision of the Retained Earnings and Dividend Policy, each quarter the Bank will retain in restricted retained earnings 10% of earnings, excluding the effects of SFAS 133 and 159, until the amount of restricted retained earnings under this provision of the Retained Earnings and Dividend Policy reaches $296 million. The retained earnings restricted in accordance with this provision of the Retained Earnings and Dividend Policy totaled $201 million at March 31, 2008, and $180 million at December 31, 2007. Assuming that the Bank’s financial performance remains relatively consistent with its recent performance, the Bank would be expected to reach the $296 million target by the end of 2009.

Dividend Paid –The Bank’s dividend rate increased to 5.73% (annualized) for the first quarter of 2008 from 4.89% (annualized) in the first quarter of 2007. The spread between the dividend rate and the dividend benchmark increased to 2.13% for the first quarter of 2008 from 0.42% for the first quarter of 2007. These increases reflect a higher net interest spread on the Bank’s mortgage portfolio and higher net interest spreads on investments and advances, partially offset by a lower yield on invested capital during the first quarter of 2008 compared to the same period in 2007. The higher spread between the dividend rate and the dividend benchmark also reflects a decrease in the dividend benchmark, resulting from the significant drop in short-term interest rates following the Federal Open Market Committee’s reductions in the Federal Funds target rate during the third and fourth quarters of 2007 and the first quarter of 2008.

The increase in the dividend rate and the increase in the spread between the dividend rate and the dividend benchmark were also partially offset by an increase in the amount of earnings that the Bank retained to build its retained earnings to a targeted amount of $296 million, in accordance with the Bank’s Retained Earnings and Dividend Policy. The amounts retained in accordance with this provision of the Retained Earnings and Dividend Policy totaled $21 million in the first quarter of 2008 and $14 million in the first quarter of 2007. These retained amounts represented 10% of the Bank’s earnings in the applicable period, excluding the effects of SFAS 133 and 159, and reduced the annualized dividend rate by 63 basis points in the first quarter of 2008 and by 54 basis points in the first quarter of 2007.

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For more information on the Bank’s Retained Earnings and Dividend Policy, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Comparison of 2007 to 2006 – Dividends” in the Bank’s 2007 Form 10-K.

Financial Condition

Total assets were $332.5 billion at March 31, 2008, a 3% increase from $322.5 billion at December 31, 2007, reflecting increases in Federal funds sold and held-to-maturity securities during the first quarter of 2008. Average total assets were $331.1 billion for the first quarter of 2008, a 36% increase compared to $243.6 billion for the first quarter of 2007.

Total liabilities were $318.1 billion at March 31, 2008, a 3.4% increase from $308.8 billion at December 31, 2007, reflecting increases in consolidated obligations outstanding from $303.7 billion at December 31, 2007, to $313.6 billion at March 31, 2008. The increase in consolidated obligations outstanding paralleled the increase in assets during the first quarter of 2008. Average total liabilities were $317.2 billion for the first quarter of 2008, a 36% increase compared to $233.0 billion for the first quarter of 2007. The increase in average liabilities reflects increases in average consolidated obligations, paralleling the growth in average assets. Average consolidated obligations were $305.7 billion in the first quarter of 2008 and $227.7 billion in the first quarter of 2007.

As provided by the FHLBank Act or Finance Board regulation, all FHLBanks have joint and several liability for all FHLBank consolidated obligations. The joint and several liability regulation of the Finance Board authorizes the Finance Board to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank. The par amount of the outstanding consolidated obligations of all 12 FHLBanks was $1,220.4 billion at March 31, 2008, and $1,189.7 billion at December 31, 2007.

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

As of March 31, 2008, 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 March 31, 2008, Standard & Poor’s assigned ten FHLBanks, including the Bank, a long-term credit rating of AAA, and two FHLBanks a long-term credit rating of AA+. As of March 31, 2008, Moody’s Investors Service continued to assign all the FHLBanks a long-term credit rating of Aaa. Changes in the long-term credit ratings of individual FHLBanks do not necessarily affect the credit rating of the consolidated obligations issued on behalf of the FHLBanks. Rating agencies may change a rating from time to time because of various factors, including operating results or actions taken, business developments, or changes in their opinion regarding, among other factors, the general outlook for a particular industry or the economy.

The Bank evaluated the publicly disclosed FHLBank regulatory actions and long-term credit ratings of other FHLBanks as of March 31, 2008, 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.”

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Segment Information

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

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 $287.3 billion (86% of total assets) at March 31, 2008, from $284.0 billion (88% of total assets) at December 31, 2007, representing an increase of $3.3 billion, or 1%. The increase was primarily in Federal funds sold, partially offset by lower demand for advances by the Bank’s members.

Adjusted net interest income for this segment was $209 million in the first quarter of 2008, an increase of $29 million, or 16%, compared to $180 million in the first quarter of 2007.

Adjusted net interest income for this segment represented 70% and 89% of total adjusted net interest income for the first quarter of 2008 and 2007, respectively.

Advances –Advances outstanding decreased by $2.6 billion, or 1%, to $248.4 billion at March 31, 2008, from $251.0 billion at December 31, 2007. The decrease reflects a $11.3 billion decrease in fixed rate advances and a $1.4 billion decrease in variable rate overnight advances, partially offset by a $9.0 billion increase in adjustable rate advances.

Advances outstanding to the Bank’s three largest members totaled $171.9 billion at March 31, 2008, a net decrease of $2.1 billion from $174.0 billion at December 31, 2007. Of this decrease, $9.9 billion was attributable to lower advance borrowings by the Bank’s two largest members, partially offset by a $7.8 billion increase in advances to the Bank’s third largest member. The remaining decrease reflected decreases in advances outstanding to other members of varying asset sizes and charter types. In total, 108 institutions decreased their advances during the first quarter of 2008, while 143 institutions increased their advances.

Average advances were $247.5 billion in the first quarter of 2008, a 35% increase from $183.2 billion in the first quarter of 2007. Members increased advances for various reasons, including increases in the cost of alternative funding sources, as well as limited availability of liquidity from other sources.

Advances outstanding at March 31, 2008, included unrealized gains of $1.7 billion, of which $1.2 billion represented unrealized gains on advances hedged in accordance with SFAS 133 and $567 million represented unrealized fair value gains on economically hedged advances that are carried at fair value in accordance with SFAS 159. Advances outstanding at December 31, 2007, included unrealized gains of $604 million, all of which represented unrealized gains on advances hedged in accordance with SFAS 133. The overall increase in the unrealized gains of the hedged advances and advances carried at fair value from December 31, 2007, to March 31, 2008, was primarily attributable to lower short- to intermediate-term advance rates during the first quarter of 2008.

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The components of the advances portfolio at March 31, 2008, and December 31, 2007, are presented in the following table.

Advances Portfolio by Product Type

(In millions)	March 31, 2008		December 31, 2007
Standard advances:
Adjustable – LIBOR	$	140,804	$	130,847
Adjustable – other indices		4,213		4,723
Fixed		79,375		94,339
Daily variable rate		2,859		4,224
Subtotal		227,251		234,133
Customized advances:
Adjustable – LIBOR, with caps and/or floors		20		20
Adjustable – LIBOR, with caps and/or floors and partial prepayment symmetry (PPS)(1)		3,900		4,400
Fixed – amortizing		650		666
Fixed with PPS(1)		9,124		4,573
Fixed – callable at member’s option		999		1,813
Fixed – putable at Bank’s option		3,956		4,081
Fixed – putable at Bank’s option with PPS(1)		778		728
Subtotal		19,427		16,281
Total par value		246,678		250,414
SFAS 133 valuation adjustments		1,166		604
SFAS 159 valuation adjustments		567		—
Net unamortized premiums		14		16
Total	$	248,425	$	251,034

(1) Partial prepayment symmetry (PPS) means that the Bank may charge the member a prepayment fee or pay the member a prepayment credit, depending on certain circumstances such as movements in interest rates, when the advance is prepaid. Any prepayment credit on an advance with PPS would be limited to the lesser of 10% of the par value of the advance or the gain recognized on the termination of the associated interest rate swap, which may also include a similar contractual gain limitation.

Non-MBS Investments –The Bank’s non-MBS investment portfolio consists of high-quality financial instruments that are used primarily to facilitate the Bank’s role as a cost-effective provider of credit and liquidity to members. These investments are also used as a source of liquidity to meet the Bank’s financial obligations on a timely basis and to supplement earnings. The Bank’s total non-MBS investment portfolio was $36.6 billion as of March 31, 2008, an increase of $5.8 billion, or 19%, from $30.8 billion as of December 31, 2007. During the first quarter of 2008, Federal funds sold increased $7.9 billion, while commercial paper decreased $1.6 billion, and interest-bearing deposits in banks decreased $0.5 billion. The Bank increased its non-MBS investments to maintain financial leverage until the repurchase of capital stock on April 30, 2008. For more information on the repurchase of capital stock, see Note 7 to the Financial Statements.

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

Borrowings –Total liabilities (primarily consolidated obligations) funding the advances-related business increased $2.5 billion, or 1%, from $270.4 billion at December 31, 2007, to $272.9 billion at March 31, 2008, primarily to maintain financial leverage until the repurchase of capital stock on April 30, 2008. For more information on the repurchase of capital stock, see Note 7 to the Financial Statements. 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 on behalf of the Bank, typically the Bank simultaneously enters into interest rate exchange agreements with features that offset the complex features of the bonds and, in effect, convert the bonds to adjustable rate instruments tied to an index, primarily LIBOR. For example, the Bank

47

uses fixed rate callable bonds that are typically offset with interest rate exchange agreements with call features that offset the call options embedded in the callable bonds. This combined financing structure enables the Bank to meet its funding needs at costs not generally attainable solely through the issuance of non-callable debt.

At March 31 2008, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $291.5 billion, of which $67.0 billion were hedging advances and $224.5 billion were hedging consolidated obligations. At December 31, 2007, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $288.9 billion, of which $62.6 billion were hedging advances and $226.3 billion were hedging consolidated obligations. The hedges associated with advances and consolidated obligations were primarily used to convert the fixed rate cash flows and non-LIBOR-indexed cash flows of the advances and consolidated obligations to adjustable rate LIBOR-indexed cash flows or to manage the interest rate sensitivity and net repricing gaps of assets, liabilities, and interest rate exchange agreements.

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

The Federal Reserve Board, through its Federal Open Market Committee, kept the Federal funds rate unchanged during the first and second quarters of 2007 at 5.25%. On September 18, 2007, the Federal Open Market Committee reduced its Federal funds rate target for the first time in four years from 5.25% to 4.75%. In anticipation of further slowing in economic activity, on October 31, 2007, December 11, 2007, January 22, 2008, January 30, 2008, and March 18, 2008, the Federal Open Market Committee lowered its target for the Federal funds rate a total of 250 basis points to 2.25%. Both short-term and long-term U.S. Treasury securities rates generally followed this downward trend in the Federal funds rate. The following table provides selected market interest rates as of the dates shown.

Market Instrument	March 31, 2008		December 31, 2007		March 31, 2007		December 31, 2006
Federal Reserve target rate for overnight Federal funds	2.25	%	4.25	%	5.25	%	5.25	%
3-month Treasury bill	1.34		3.24		5.03		5.01
3-month LIBOR	2.69		4.70		5.35		5.36
2-year Treasury note	1.60		3.06		4.58		4.81
5-year Treasury note	2.45		3.46		4.54		4.69

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The average cost of fixed rate FHLBank System consolidated obligation bonds and discount notes were lower in the first quarter of 2008 than in the first quarter of 2007, reflecting a “flight to quality” premium associated with GSE debt that began during the second half of 2007 and continued through the first quarter of 2008.

The average relative cost of FHLBank System discount notes compared to market benchmark rates (such as LIBOR and LIBOR-indexed interest rate swap rates) improved in the first quarter of 2008 compared to the first quarter of 2007, reflecting strong investor demand for short-term GSE debt. The average relative cost of FHLBank System consolidated obligation bonds issued in the first quarter of 2008, however, was marginally higher than the cost of comparable bonds issued in the first quarter of 2007 due to increased issuance volume.

The following table presents a comparison of the average cost of FHLBank System consolidated obligation bonds and discount notes relative to comparable term LIBOR rates in the first quarter of 2008 and 2007.

	Spread of average cost of consolidated obligations to LIBOR for the three months ended
(In basis points)	March 31, 2008	March 31, 2007
Consolidated obligation auctioned and negotiated bonds	–16.1	–18.0
Consolidated obligation auctioned discount notes	–39.8	–14.5

At March 31, 2008, the Bank had $121.6 billion of swapped non-callable bonds and $23.1 billion of swapped callable bonds that primarily funded advances and non-MBS investments. These swapped non-callable and callable bonds combined represented 63% of the Bank’s total consolidated obligation bonds outstanding at March 31, 2008. At December 31, 2007, the Bank had $119.3 billion of swapped non-callable bonds and $38.3 billion of swapped callable bonds that primarily funded advances and non-MBS investments. These swapped non-callable and callable bonds combined represented 70% of the Bank’s total consolidated obligation bonds outstanding at December 31, 2007.

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, in effect, to convert the advances to floating rate LIBOR-indexed assets (except overnight advances and adjustable rate advances that are already indexed to LIBOR) and, in effect, to convert the consolidated obligation bonds to floating rate LIBOR-indexed liabilities.

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

At March 31, 2008, assets associated with this segment were $45.2 billion (14% of total assets), an increase of $6.8 billion, or 18%, from $38.4 billion at December 31, 2007 (12% of total assets). The increase was due to higher investments in MBS, which grew $6.9 billion to $40.9 billion at March 31, 2008, from $34.0 billion at December 31, 2007, partially offset by lower mortgage loan balances, which decreased $0.1 billion to $4.0 billion at March 31, 2008, from $4.1 billion at December 31, 2007.

In the first quarter of 2008, average MBS investments increased $8.0 billion to $34.1 billion compared to $26.1 billion in the first quarter of 2007 because of the growth in capital and the availability of MBS that met the Bank’s risk-adjusted spreads and credit enhancement requirements in the first quarter of 2008 relative to the first quarter of 2007.

Average mortgage loans decreased $0.4 billion to $4.1 billion in the first quarter of 2008 from $4.5 billion in the first quarter of 2007.

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Adjusted net interest income for this segment was $90 million in the first quarter of 2008, an increase of $67 million, or 291%, from $23 million in the first quarter of 2007. The increase was primarily the result of a rise in the average profit spread on the mortgage portfolio, reflecting the favorable impact of lower interest rates, a steeper yield curve, and wider market spreads on new MBS investments. Lower interest rates provided the Bank with the opportunity to call fixed rate callable debt and refinance that debt with new callable debt at a lower cost. The steeper yield curve further reduced the cost of financing the Bank’s investment in MBS and mortgage loans. The wider market spreads on MBS that have been prevalent since October 2007 allowed the Bank to invest in new MBS at higher than historical profit spreads, further improving the overall spread on the Bank’s portfolio of MBS and mortgage loans. The increase also reflected the impact of cumulative retrospective adjustments for the amortization of purchase premiums and discounts from the acquisition dates of the mortgage loans and MBS in accordance with SFAS 91, which increased adjusted net interest income by $9 million in the first quarter of 2008 and decreased adjusted net interest income by $14 million in the first quarter of 2007.

Adjusted net interest income for this segment represented 30% and 11% of total adjusted net interest income for the first quarter of 2008 and 2007, respectively.

MPF Program –Under the MPF Program, the Bank purchased conventional fixed rate conforming residential mortgage loans directly from eligible members from 2002 to 2006. Under the program, participating members originated or purchased the mortgage loans, credit-enhanced them and sold them to the Bank, and generally retained the servicing of the loans. The Bank manages the interest rate and prepayment risks of the loans. The Bank and the member that sold 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 2007 Form 10-K.

At March 31, 2008, and December 31, 2007, 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 2007 Form 10-K. Mortgage loan balances at March 31, 2008, and December 31, 2007, were as follows:

(In millions)	March 31, 2008			December 31, 2007
MPF Plus	$	3,674		$	3,768
Original MPF		369			382
Subtotal		4,043			4,150
Unamortized premiums		—			2
Unamortized discounts		(17	)		(19	)
Mortgage loans held for portfolio		4,026			4,133
Less: Allowance for credit losses		(1	)		(1	)
Mortgage loans held for portfolio, net	$	4,025		$	4,132

The Bank periodically reviews its mortgage loan portfolio to identify probable credit losses in the portfolio and to determine the likelihood of collection of the portfolio. The Bank maintains an allowance for credit losses, net of credit enhancements, on mortgage loans acquired under the MPF Program at levels management believes to be adequate to absorb estimated probable losses inherent in the total mortgage loan portfolio. The Bank established an allowance for credit losses on mortgage loans totaling $0.9 million at March 31, 2008, and $0.9 million at December 31, 2007. 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 2007 Form 10-K.

At March 31, 2008, the Bank had 57 loans totaling $6 million classified as nonaccrual or impaired. Thirty-seven of these loans totaling $4 million were in foreclosure or bankruptcy. At December 31, 2007, the Bank had 47 loans totaling $5 million classified as nonaccrual or impaired. Thirty-four of these loans totaling $4 million were in foreclosure or bankruptcy.

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The Bank manages the interest rate and prepayment risks of the mortgage loans by funding these assets with callable and non-callable debt and by limiting the size of the fixed rate mortgage loan portfolio.

MBS Investments –The Bank’s MBS portfolio was $40.9 billion, or 281% of Bank capital (as defined by the Finance Board), at March 31, 2008, compared to $34.0 billion, or 246% of Bank capital, at December 31, 2007. The Bank’s MBS portfolio increased because of the growth in capital and the availability of MBS that met the Bank’s risk-adjusted return thresholds and credit enhancement requirements during the first quarter of 2008. All MBS purchases during the first quarter of 2008 were agency or AAA-rated non-agency MBS. All non-agency MBS purchases were backed by agency bonds.

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

On March 24, 2008, the Finance Board authorized the FHLBanks to increase their purchases of MBS by increasing the regulatory limit on MBS purchases from 300% of capital to 600% of capital. The Finance Board requires an FHLBank to provide prior notification of its first acquisition under the temporary authority and include in its notification a description of the risk management principles underlying its purchases and an updated retained earnings analysis. The temporary authority is limited to MBS issued or backed by pools of mortgages guaranteed by Fannie Mae or Freddie Mac, including collateralized mortgage obligations or real estate mortgage investment conduits backed by the MBS. Furthermore, the temporary authority is limited to MBS backed by mortgage loans originated after January 1, 2008, and underwritten to conform to the standards imposed by the federal banking regulators on non-traditional and subprime mortgages in 2006 and 2007. The temporary authority expires on March 31, 2010. The Bank is currently reviewing the temporary authority and has not yet determined the effect, if any, the temporary authority may have on the results of operations or financial condition of the Bank.

Borrowings –Total consolidated obligations funding the mortgage-related business increased $6.8 billion, or 18%, from $38.4 billion at December 31, 2007, to $45.2 billion at March 31, 2008, 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 March 31, 2008, the notional amount of interest rate exchange agreements associated with the mortgage-related business totaled $13.5 billion, most of which hedged or was associated with consolidated obligations funding the mortgage portfolio. At March 31, 2008, $13.0 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, 2007, the notional amount of interest rate exchange agreements associated with the mortgage-related business totaled $8.2 billion, most of which hedged or was associated with consolidated obligations funding the mortgage portfolio. At December 31, 2007, $7.8 billion in notional amounts of interest rate exchange agreements associated with consolidated obligations were economic hedges that did not qualify for either fair value or cash flow hedge accounting under SFAS 133.

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Interest Rate Exchange Agreements

A derivatives transaction or interest rate exchange agreement is a financial contract whose fair value is generally derived from changes in the value of an underlying asset or liability. The Bank uses interest rate swaps, options to enter into interest rate swaps (swaptions), interest rate cap, floor, corridor and collar agreements, and callable and putable interest rate swaps (collectively, interest rate exchange agreements) to manage its exposure to interest rate risks inherent in its normal course of business—lending, investment, and funding activities. For more information on the primary strategies that the Bank employs for using interest rate exchange agreements and the associated market risks, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Market Risk – Interest Rate Exchange Agreements” in the Bank’s 2007 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 March 31, 2008, and December 31, 2007.

(In millions)			Notional Amount
Hedging Instrument	Hedging Strategy	Accounting Designation	March 31, 2008		December 31, 2007
Hedged Item: Advances
Pay fixed, receive floating interest rate swap	Fixed rate advance converted to a LIBOR floating rate	Fair Value Hedge	$	40,800	$	42,155
Pay fixed, receive floating interest rate swap – swap is callable at Bank’s option	Fixed rate callable advance converted to a LIBOR floating rate; swap is callable	Fair Value Hedge		—		1,787
Pay fixed, receive floating interest rate swap – swap is putable at counterparty’s option or is index-based	Fixed rate putable advance converted to a LIBOR floating rate; swap is putable	Fair Value Hedge		—		4,439
Interest rate cap, floor, corridor, and/or collar	Interest rate cap, floor, corridor, and/or collar embedded in an adjustable rate advance	Fair Value Hedge		—		3,895
Subtotal Fair Value Hedges				40,800		52,276
Basis swap	Adjustable rate advance converted to a LIBOR floating rate	Economic Hedge(1)		2,470		2,370
Receive fixed, pay floating interest rate swap	LIBOR index rate advance converted to a fixed rate	Economic Hedge(1)		150		175
Basis swap	Floating rate index advance converted to another floating rate index to reduce interest rate sensitivity and repricing gaps	Economic Hedge(1)		4,063		4,573
Pay fixed, receive floating interest rate swap; swap may be callable at the Bank’s option or putable at the counterparty’s option	Fixed rate advance converted to a LIBOR floating rate; advance and swap may be callable or putable	Economic Hedge(1)		15,567		2,715
Interest rate cap, floor, corridor, and/or collar	Interest rate cap, floor, corridor, and/or collar embedded in an adjustable rate advance	Economic Hedge(1)		3,920		525
Subtotal Economic Hedges(1)				26,170		10,358
Total				66,970		62,634
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		94,690		111,307
Receive fixed or structured, pay floating interest rate swap	Fixed rate or structured rate non-callable bond converted to a LIBOR floating rate	Economic Hedge(1)		4,905		2,734

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(In millions)

			Notional Amount
Hedging Instrument	Hedging Strategy	Accounting Designation	March 31, 2008		December 31, 2007
Basis swap	Non-LIBOR index non-callable bond converted to a LIBOR floating rate	Economic Hedge(1)		26,255		7,330
Basis swap	Floating rate index non-callable bond converted to another floating rate index to reduce interest rate sensitivity and repricing gaps	Economic Hedge(1)		50,887		48,236
Swaption	Option to enter into an interest rate swap to receive a fixed rate, which provides an option to reduce the Bank’s exposure to fixed interest rates on non-callable bonds that offset the prepayment risk of mortgage assets	Economic Hedge(1)		170		3,080
Subtotal Economic Hedges(1)				82,217		61,380
Total				176,907		172,687
Hedged Item: Callable Bonds
Receive fixed or structured rate, pay floating interest rate swap with an option to call at the counterparty’s option	Fixed or structured rate callable bond converted to a LIBOR floating rate; swap is callable	Fair Value Hedge		22,127		37,505
Receive fixed or structured, pay floating interest rate swap with an option to call at the counterparty’s option	Fixed rate or structured rate callable bond converted to a LIBOR floating rate; swap is callable	Economic Hedge(1)		926		877
Total				23,053		38,382
Hedged Item: Discount Notes
Pay fixed, receive floating callable interest rate swap	Discount note converted to fixed rate callable debt that offsets the prepayment risk of mortgage assets	Economic Hedge(1)		3,555		2,672
Basis swap or receive fixed, pay floating interest rate swap	Discount note converted to one-month LIBOR or other short-term floating rate to hedge repricing gaps	Economic Hedge(1)		33,410		19,523
Total				36,965		22,195
Hedged Item: Trading Securities
Pay MBS rate, receive floating interest rate swap	MBS rate converted to a LIBOR floating rate	Economic Hedge(1)		27		28
Hedged Item: Intermediary Positions
Pay fixed, receive floating interest rate swap, and receive fixed, pay floating interest rate swap	Interest rate swaps executed with members offset by executing interest rate swaps with derivatives dealer counterparties	Economic Hedge(1)		1,090		1,190
Interest rate cap/floor	Stand-alone interest rate cap and/or floor executed with a member offset by executing an interest rate cap and/or floor with derivatives dealer counterparties	Economic Hedge(1)		60		60
Total				1,150		1,250
Total Notional Amount			$	305,072	$	297,176

(1) Economic hedges are derivatives that are matched to balance sheet instruments for which the Bank has elected the fair value option in accordance with SFAS 159 or balance sheet instruments or other derivatives that do not meet the requirements for hedge accounting under SFAS 133.

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At March 31, 2008, the total notional amount of interest rate exchange agreements outstanding was $305.1 billion, compared with $297.2 billion at December 31, 2007. The $7.9 billion increase in the notional amount of derivatives during the first three months of 2008 was primarily due to a net $4.3 billion increase in interest rate exchange agreements hedging the market risk of fixed rate advances and a net $3.6 billion increase in interest rate exchange agreements hedging various types of consolidated obligations to fund advances growth. By category, the Bank experienced large changes in the levels of interest rate exchange agreements, which reflects the January 1, 2008, transition of certain hedging instruments from a fair value hedge classification under SFAS 133 to an economic hedge classification under SFAS 159.

The following tables categorize the notional amounts and estimated fair values of the Bank’s interest rate exchange agreements, unrealized gains/(losses) from the related hedged items, and estimated fair value gains/(losses) from financial instruments carried at fair value by product and type of accounting treatment as of March 31, 2008, and December 31, 2007.

(In millions)

March 31, 2008

	Notional Amount		Derivatives			Hedged Items			Financial Instruments Carried at Fair Value		Difference
Fair value hedges:
Advances	$	40,800	$	(1,163	)	$	1,166		$	—	$	3
Non-callable bonds		94,690		2,985			(3,023	)		—		(38	)
Callable bonds		22,127		353			(370	)		—		(17	)
Subtotal		157,617		2,175			(2,227	)		—		(52	)
Not qualifying for hedge accounting (economic hedges):
Advances		26,170		(506	)		—			470		(36	)
Non-callable bonds		81,708		92			—			26		118
Non-callable bonds with embedded derivatives		509		2			—			—		2
Callable bonds		926		7			—			11		18
Discount notes		36,965		38			—			—		38
MBS – trading		27		(1	)		—			—		(1	)
Intermediated		1,150		—			—			—		—
Subtotal		147,455		(368	)		—			507		139
Total excluding accrued interest		305,072		1,807			(2,227	)		507		87
Accrued interest		—		599			(1,280	)		36		(645	)
Total	$	305,072	$	2,406		$	(3,507	)	$	543	$	(558	)

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December 31, 2007

	Notional Amount		Derivatives			Hedged Items			Difference
Fair value hedges:
Advances	$	52,276	$	(595	)	$	604		$	9
Non-callable bonds		111,307		1,353			(1,405	)		(52	)
Callable bonds		37,505		103			(128	)		(25	)
Subtotal		201,088		861			(929	)		(68	)
Not qualifying for hedge accounting (economic hedges):
Advances		10,358		(5	)		—			(5	)
Non-callable bonds		60,171		80			—			80
Non-callable bonds with embedded derivatives		1,209		(3	)		—			(3	)
Callable bonds		877		(3	)		—			(3	)
Discount notes		22,195		13			—			13
MBS – trading		28		—			—			—
Intermediated		1,250		—			—			—
Subtotal		96,088		82			—			82
Total excluding accrued interest		297,176		943			(929	)		14
Accrued interest		—		171			(1,650	)		(1,479	)
Total	$	297,176	$	1,114		$	(2,579	)	$	(1,465	)

Embedded derivatives are bifurcated, and their estimated fair values are accounted for in accordance with SFAS 133. The estimated fair values of the embedded derivatives are included as valuation adjustments to the host contract and are not included in the above table. The estimated fair values of these embedded derivatives are as follows:

Estimated Fair Values of Embedded Derivatives

(In millions)	March 31, 2008			December 31, 2007
Host contract: Non-callable bonds	$	(2	)	$	3

Because the periodic and cumulative net unrealized gains or losses on the Bank’s derivatives, hedged instruments, and certain assets and liabilities that are carried at fair value are primarily a matter of timing, the unrealized gains or losses will generally reverse over the remaining contractual term to maturity, call date, or put date of the hedged financial instruments, associated interest rate exchange agreements, and financial instruments carried at fair value. However, the Bank may have instances in which the financial instruments or hedging relationships are terminated prior to maturity or prior to the call or put date. Terminating the financial instruments or hedging relationship may result in a realized gain or loss. In addition, the Bank may have instances in which it may sell trading securities prior to maturity, which may also result in a realized gain or loss.

SFAS 133- and SFAS 159-related income volatility during the first quarter of 2008 was primarily driven by (i) the significant drop in short-term interest rates following the Federal Open Market Committee’s reductions in the Federal Funds target rate from 4.25% to 2.25% during the first quarter of 2008, and (ii) the changes in consolidated obligation rate levels, consolidated obligation spreads to LIBOR, and swap volatilities during the first quarter of 2008. The positive impact from the declining market rates experienced in the first quarter of 2008 is generally expected to reverse over a period of months as the floating-rate payments that the Bank receives on certain interest rate exchange agreements adjust downward to current market rates. The positive impacts from the spread and volatility changes in 2008 are also expected generally to reverse, as spreads and volatilities revert to the market conditions that existed prior to August 2007 or over the remaining lives of the affected interest rate exchange agreements or hedged financial instruments. Additional declines in short-term interest rates or additional adverse changes in spreads and volatility could create additional unrealized gains, but these unrealized gains, if any, would generally be expected to reverse in the manner described above.

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The ongoing impact of SFAS 133 and SFAS 159 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 and SFAS 159. The effects of SFAS 133 and SFAS 159 may lead to significant volatility in future earnings, other comprehensive income, and dividends.

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

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

Under these policies and agreements, the amount of unsecured credit exposure to an individual derivatives dealer counterparty is limited to the lesser of (i) a percentage of the counterparty’s capital or (ii) an absolute credit exposure limit, both according to the counterparty’s credit rating, as determined by rating agency long-term credit ratings of the counterparty’s debt securities or deposits. 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)

March 31, 2008

Counterparty Credit Rating	Notional Balance		Gross Credit Exposure		Collateral		Net Unsecured Exposure
AA(1)	$	261,131	$	2,142	$	2,040	$	102
A		42,952		363		346		17
BBB		414		—		—		—
Subtotal		304,497		2,505		2,386		119
Member institutions(2)		575		2		2		—
Total derivatives	$	305,072	$	2,507	$	2,388	$	119
December 31, 2007
Counterparty Credit Rating	Notional Balance		Gross Credit Exposure		Collateral		Net Unsecured Exposure
AA(1)	$	251,497	$	1,040	$	843	$	197
A		45,054		151		131		20
Subtotal		296,551		1,191		974		217
Member institutions(2)		625		4		4		—
Total derivatives	$	297,176	$	1,195	$	978	$	217

(1) Includes notional amounts of derivatives contracts outstanding totaling $3.0 billion at March 31, 2008, and $1.6 billion at December 31, 2007, with Citibank, N.A., a member that is a derivatives dealer counterparty.

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

At March 31, 2008, the Bank had a total of $305.1 billion in notional amounts of derivatives contracts outstanding. Of this total:

• $304.5 billion represented notional amounts of derivatives contracts outstanding with 22 derivatives dealer counterparties. Seven of these counterparties made up 75% of the total notional amount outstanding with these derivatives dealer counterparties, individually ranging from 6% to 18% of the total. The remaining counterparties each represented less than 5% of the total. Four of these counterparties, with $40.5 billion of derivatives outstanding at March 31, 2008, were affiliates of members, and one counterparty, with $3.0 billion outstanding at March 31, 2008, was a member of the Bank.

�� • $575 million represented notional amounts of derivatives contracts with four non-derivatives dealer member counterparties. The Bank entered into this $575 million notional amount of derivatives as an intermediary and entered into the same amount of exactly offsetting transactions with derivatives dealer counterparties. The Bank’s intermediation in this manner allows members indirect access to the derivatives market.

Gross credit exposure on derivatives contracts at March 31, 2008, was $2.5 billion, which consisted of:

• $2.5 billion of gross credit exposure on open derivatives contracts with 17 derivatives dealer counterparties. After consideration of collateral held by the Bank, the amount of net unsecured exposure totaled $119 million.

• $2 million of gross credit exposure on open derivatives contracts, in which the Bank served as an intermediary, with four- non-derivatives dealer member counterparties, all of which was secured with eligible collateral.

At December 31, 2007, the Bank had a total of $297.2 billion in notional amounts of derivatives contracts outstanding. Of this total:

• $296.6 billion represented notional amounts of derivatives contracts outstanding with 22 derivatives dealer counterparties. Eight of these counterparties made up 76% of the total notional amount

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outstanding with these derivatives dealer counterparties, individually ranging from 5% to 17% of the total. The remaining counterparties each represented less than 5% of the total. Four of these counterparties, with $30.8 billion of derivatives outstanding at December 31, 2007, were affiliates of members, and one counterparty, with $1.6 billion outstanding at December 31, 2007, was a member of the Bank.

• $625 million represented notional amounts of derivatives contracts with five non-derivatives dealer member counterparties. The Bank entered into this $625 million notional amount of derivatives as an intermediary and entered into the same amount of exactly offsetting transactions with nonmember derivatives dealer counterparties. The Bank’s intermediation in this manner allows members indirect access to the derivatives market.

Gross credit exposure on derivatives contracts at December 31, 2007, was $1.2 billion, which consisted of:

• $1.2 billion of gross credit exposure on open derivatives contracts with 14 derivatives dealer counterparties. After consideration of collateral held by the Bank, the amount of net unsecured exposure totaled $217 million.

• $4 million of gross credit exposure on open derivatives contracts, in which the Bank served as an intermediary, with 2 member counterparties that are not derivatives dealers, all of which was secured with eligible collateral.

The Bank’s gross credit exposure with derivatives dealer counterparties, representing net gain amounts due to the Bank, was $2.5 billion at March 31, 2008, and $1.2 billion at December 31, 2007. The gross credit exposure reflects the fair value of derivatives contracts, including interest amounts accrued through the reporting date, and is netted by counterparty because the Bank has the legal right to do so under its master netting agreement with each counterparty.

The Bank’s gross credit exposure grew $1.3 billion from December 31, 2007, to March 31, 2008. In general, the Bank is a net receiver of fixed interest rates and a net payer of floating interest rates under its derivatives contracts with counterparties. From December 31, 2007, to March 31, 2008, interest rates decreased, causing interest rate swaps in which the Bank is a net receiver of fixed interest rates to increase in value. As a result, the Bank’s gross credit exposure to these counterparties grew, as its net receivable position increased.

The notional amount of derivatives contracts outstanding with derivatives dealer counterparties increased $7.9 billion from December 31, 2007, to March 31, 2008. The increase was primarily due to a $4.3 billion increase in interest rate exchange agreements hedging the market risk of fixed rate advances and a net $3.6 billion increase in interest rate exchange agreements hedging various types of consolidated obligations to fund advances growth. By category, the Bank experienced large changes in the levels of interest rate exchange agreements, which reflects the January 1, 2008, transition of certain hedging instruments from a fair value hedge classification under SFSA 133 to an economic hedge classification under SFAS 159. An increase or decrease in the notional amounts of derivatives contracts may not result in a corresponding increase or decrease in gross credit exposure because the fair values of derivatives contracts are generally zero at inception.

Concentration Risk. The following table presents the concentration in derivatives with derivatives dealer counterparties whose outstanding notional balances represented 10% or more of the Bank’s total notional amount of derivatives outstanding as of March 31, 2008, and December 31, 2007.

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Concentration of Derivatives Counterparties

(Dollars in millions)		March 31, 2008				December 31, 2007
Derivatives Counterparty	Credit Rating	Notional Amount		Percentage of Total Notional		Notional Amount		Percentage of Total Notional
JPMorgan Chase Bank, N.A.	AA	$	54,189	18	%	$	50,066	17	%
Deutsche Bank AG	AA		46,933	16			44,600	15
Barclays Bank PLC	AA		37,959	12			33,427	11
Subtotal			139,081	46			128,093	43
Others			165,991	54			169,083	57
Total		$	305,072	100	%	$	297,176	100	%

Liquidity and Capital Resources

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

Liquidity

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

The Bank maintains contingency liquidity plans designed to enable it to meet its obligations and the liquidity needs of members in the event of operational disruptions at the Bank or the Office of Finance or short-term disruptions of the consolidated obligations markets. The Bank has a regulatory contingency liquidity requirement to maintain at least five days of liquidity to enable it to meet its obligations without issuance of new consolidated obligations. In addition, the Bank’s asset-liability management committee has a formal guideline to maintain at least three months of liquidity to enable the Bank to meet its obligations in the event of a longer-term consolidated obligations markets disruption. The Bank maintained at least three months of contingency liquidity during the first three months of 2008. 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 March 31, 2008, and December 31, 2007. 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 March 31, 2008				As of December 31, 2007
(In millions)	5 Business Days		90 Days		5 Business Days		90 Days
Obligations due:
Commitments for new advances	$	2,004	$	2,004	$	648	$	2,648
Commitments to purchase investments		—		1,458		—		755
Maturing member term deposits		46		68		—		10
Borrowings		—		—		1,055		1,055
Discount note and bond maturities and expected exercises of bond call options		8,496		72,702		4,710		82,102
Subtotal obligations		10,546		76,232		6,413		86,570
Sources of available funds:
Maturing investments		12,719		33,745		6,211		29,958
Proceeds from scheduled settlements of discount notes and bonds		3,913		4,578		2,265		2,355
Maturing advances and scheduled prepayments		8,880		45,899		7,688		60,999
Subtotal sources		25,512		84,222		16,164		93,312
Net funds available	$	14,966	$	7,990	$	9,751	$	6,742
Additional contingent sources of funds:(1)
Estimated borrowing capacity of securities available for repurchase agreement borrowings:
MBS	$	—	$	27,595	$	—	$	28,278
Housing finance agency bonds		—		707		—		737
Marketable money market investments		14,187		—		16,494		—

(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.

For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Liquidity” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk” in the Bank’s 2007 Form 10-K.

Capital

Total capital as of March 31, 2008, was $14.3 billion, a 5% increase from $13.6 billion as of December 31, 2007. The increase primarily reflects additional capital stock purchases by existing members to support additional borrowings during the period, and, to a lesser degree, capital stock purchases by new members.

The FHLBank Act and Finance Board regulations specify that each FHLBank must meet certain minimum regulatory capital standards. The Bank must maintain (i) total capital in an amount equal to at least 4.0% of its total assets, (ii) leverage capital in an amount equal to at least 5.0% of its total assets, and (iii) permanent capital in an amount at least equal to its regulatory risk-based capital requirement. Permanent capital is defined as total capital stock outstanding, including mandatorily redeemable capital stock, plus retained earnings. Finance Board staff has indicated that mandatorily redeemable capital stock is considered capital for regulatory purposes. The following table shows the Bank’s compliance with the Finance Board’s capital requirements at March 31, 2008, and December 31, 2007. During the first quarter of 2008, the Bank’s required risk-based capital increased from $1.6 billion at December 31, 2007, to $4.9 billion at March 31, 2008. The increase was due to higher market risk capital requirements, reflecting the impact of unrealized losses on the Bank’s MBS investment portfolio.

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Regulatory Capital Requirements

	March 31, 2008						December 31, 2007
(Dollars in millions)	Required			Actual			Required			Actual
Risk-based capital	$	4,925		$	14,554		$	1,578		$	13,859
Total capital-to-assets ratio		4.00	%		4.38	%		4.00	%		4.30	%
Total regulatory capital	$	13,299		$	14,554		$	12,898		$	13,859
Leverage ratio		5.00	%		6.57	%		5.00	%		6.45	%
Leverage capital	$	16,624		$	21,831		$	16,122		$	20,789

The Bank’s capital requirements are more fully discussed in the Bank’s 2007 Form 10-K in Note 13 to the Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Capital.”

Risk Management

The Bank has an integrated corporate governance and internal control framework designed to support effective management of the Bank’s business activities and the risks inherent in these activities. As part of this framework, the Bank’s Board of Directors has adopted a Risk Management Policy and a Member Products Policy, which are reviewed regularly and reapproved at least annually. The Risk Management Policy establishes risk guidelines, limits (if applicable), and standards in accordance with Finance Board regulations, the risk profile established by the Board of Directors, and other applicable guidelines in connection with the Bank’s capital plan and overall risk management. For more detailed information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management” in the Bank’s 2007 Form 10-K.

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

As discussed in the Bank’s 2007 Form 10-K, the Bank holds a security interest in subprime residential mortgage loans pledged as collateral. At March 31, 2008, the amount of these loans was not significant compared to the total amount of residential mortgage loan collateral pledged to the Bank. The Bank reviews and assigns borrowing capacities to subprime mortgage loans as it does all other types of loan collateral, taking into account the known credit attributes in assigning the appropriate secondary market discounts, and has determined that all advances, including those made to members pledging subprime mortgage loans, are fully collateralized. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Advances” in the Bank’s 2007 Form 10-K. In addition, the Bank prohibits the purchase of MBS backed by pools of residential mortgage loans labeled as subprime or having certain Bank-defined subprime characteristics. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations –Financial Condition – Segment Information – Mortgage-Related Business – MBS Investments” in the Bank’s 2007 Form 10-K.

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

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The following table presents a summary of the status of members’ credit outstanding and overall collateral borrowing capacity as of March 31, 2008, and December 31, 2007. Most of the credit outstanding and collateral borrowing capacity are with members that have the Bank’s top three credit quality ratings. Credit quality ratings are determined based on results from the Bank’s credit model and on other qualitative information, including regulatory examination reports. The Bank assigns to each member an internal rating from one to ten, with one as the highest rating. Changes in the number of members in each of the credit quality rating categories may occur due to the addition of new Bank members as well as changes to the credit quality ratings of current members based on the analysis discussed above.

Member Credit Outstanding and Collateral Borrowing Capacity

By Credit Quality Rating

(Dollars in millions)

March 31, 2008

	All Members	Members with Credit Outstanding
					Collateral Borrowing Capacity(2)
Member Credit Quality Rating	Number	Number	Credit Outstanding(1)		Total		Used
1-3	227	184	$	179,110	$	241,075	74	%
4-6	172	117		70,655		107,085	66
7-10	9	5		975		1,259	77
Total	408	306	$	250,740	$	349,419	72	%

December 31, 2007

	All Members	Members with Credit Outstanding
					Collateral Borrowing Capacity(2)
Member Credit Quality Rating	Number	Number	Credit Outstanding(1)		Total		Used
1-3	265	211	$	180,972	$	262,657	69	%
4-6	133	88		69,413		82,218	84
7-10	7	3		1,211		1,567	77
Total	405	302	$	251,596	$	346,442	73	%

(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.

For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Advances” in the Bank’s 2007 Form 10-K.

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 Bank’s investments include housing finance agency bonds issued by housing finance agencies located in Arizona, California, and Nevada, the three states that make up the 11^th District of the FHLBank System. These bonds are mortgage revenue bonds (federally taxable) and are collateralized by pools of residential mortgage loans and credit-enhanced by bond insurance. On January 18, 2008, $106 million of housing agency bonds issued by the California Housing Finance Agency and insured by Ambac Assurance Corporation (Ambac) were downgraded from AAA to AA as a result of a downgrade of Ambac’s financial strength rating to AA by Fitch Ratings. On April 7, 2008, $408 million of housing agency bonds issued by the California Housing Finance Agency and insured by MBIA Insurance Corporation (MBIA) were downgraded from AAA to AA as a result of a downgrade of MBIA’s financial strength rating to AA by Fitch Ratings. Based on information obtained from the rating agencies, the Bank’s California Housing Finance Agency bonds are AA- rated without considering the bond insurance. The Bank expects to receive all future contractual principal and interest payments on these investments.

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In addition, the Bank’s investments include AAA-rated non-agency MBS, some of which are issued by and/or purchased from members or their affiliates, and MBS that are guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. At March 31, 2008, 45% of the carrying value of the Bank’s MBS portfolio was labeled Alt-A by the issuer. The following table details the par amount of the Alt-A securities as of March 31, 2008, by year of issuance, with the currently available credit enhancement securing the credit risk. Credit enhancement is defined as the percentage of subordinated tranches and over-collateralization, if any, in a security structure that will absorb losses before the security will take a loss. The calculated average credit enhancement amount is a dollar-weighted average of all the MBS in each category shown.

(Dollars in millions)
Year of Issuance:	Par Amount		Average Credit Enhancement
2003 and earlier	$	754	17.19	%
2004		1,573	16.51
2005		7,569	17.77
2006		2,260	24.56
2007		5,670	32.80
2008		447	31.89
Total	$	18,273	23.49	%

As of May 7, 2008, all of the Bank’s Alt-A MBS were rated AAA, and none had been downgraded. However, since the end of 2007 through May 7, 2008, approximately $1.1 billion, or 6%, of the Bank’s Alt-A MBS had been placed on negative watch by Moody’s Investors Service and Fitch Ratings for potential downgrades in the future.

As of March 31, 2008, the Bank’s investment in MBS classified as held-to-maturity had gross unrealized losses totaling $3.7 billion, primarily from non-agency MBS. These gross unrealized losses were primarily due to extraordinarily wide mortgage asset spreads resulting from an extremely illiquid market, causing these assets to be valued at significant discounts to their acquisition cost.

When an individual investment security’s fair value falls below its amortized cost basis, the Bank evaluates whether the decline is other-than-temporary. The Bank would recognize an other-than-temporary impairment if it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the security and if the fair value of the investment security is less than its amortized cost. The Bank also considers several qualitative factors when determining whether other-than-temporary impairment has occurred, including recent external rating agency actions or changes in a security’s external credit rating, the underlying collateral, sufficiency of the credit enhancement, the length of time and extent that fair value has been less than the amortized cost, and the Bank’s ability to hold the security until maturity or a period of time sufficient to allow for an anticipated recovery in the fair value of the security, and other factors. The Bank generally views changes in the fair value of the securities caused by movements in interest rates to be temporary.

For securities in an unrealized loss position because of factors other than movements in interest rates, such as widening of mortgage asset spreads, the Bank considers whether it is probable that it will collect all of the contractual principal and interest payments of the security. For these securities, the Bank tests the credit enhancement associated with each security to determine whether it is sufficient to protect against losses of principal and interest on the underlying mortgage loans. The Bank’s testing included performing analyses on most of its non-agency MBS as of March 31, 2008, using models that project prepayments, default rates, and loan losses based on underlying loan characteristics, expected housing price changes, and interest rate assumptions. The Bank reviewed the remaining non-agency MBS for adequate credit enhancements by comparing the securities to model results for similar securities. These analyses and reviews showed that the credit enhancement protection in these securities was sufficient to protect the Bank from losses based on current expectations. All of these MBS had a credit rating of AAA as of March 31, 2008. Because the decline in the market value of these securities is primarily attributable to illiquidity rather than a deterioration in the fundamental credit

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quality of these securities, and because the Bank has both the ability and intent to hold these securities to maturity and expects to receive all contractual principal and interest payments on the securities, the Bank has determined that the unrealized losses are temporary. The Bank monitors its MBS investments for substantive changes in relevant market conditions and any declines in fair value.

The Bank uses models in projecting the cash flows for non-agency MBS with unrealized losses for its analysis of other-than-temporary impairment. These projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations.

For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Investments” in the Bank’s 2007 Form 10-K.

Critical Accounting Policies and Estimates

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

In the Bank’s 2007 Form 10-K, the following accounting policies and estimates have been identified as 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 and estimates are: estimating the allowance for credit losses on the advances and mortgage loan portfolios; accounting for derivatives; estimating fair values of investments classified as trading, derivatives and hedged items carried at fair value in accordance with SFAS 133, and financial instruments elected under SFAS 159 to be carried at fair value; and estimating the prepayment speeds on MBS and mortgage loans for the accounting of amortization of premiums and accretion of discounts on MBS and mortgage loans.

Any significant changes in the judgments and assumptions made during the first quarter of 2008 in applying the Bank’s critical accounting policies are described below. In addition, these policies and the judgments, estimates, and assumptions are also described in greater detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” and Note 1 to the Financial Statements in the Bank’s 2007 Form 10-K and in Note 10 to the Financial Statements.

Fair Value Measurements.The Bank adopted SFAS 157, which defines fair value, establishes a framework for measuring fair value, and outlines a fair value hierarchy based on the inputs to valuation techniques used to measure fair value, effective January 1, 2008. SFAS 157 applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. The Bank uses fair value measurements to record fair value adjustments for certain assets and liabilities and to determine fair value disclosures.

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Since fair value is a market-based measurement, the price used to measure fair value is an exit price considered from the perspective of a market participant that holds the asset or owes the liability.

SFAS 157 establishes a three-level fair value hierarchy that prioritizes the inputs into valuation technique used to measure fair value. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

• Level 1 – Inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

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• Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

• Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are supported by little or no market activity or by the Bank’s own assumptions.

A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The use of fair value to measure the Bank’s financial instruments is fundamental to the Bank’s financial statements and is a critical accounting estimate because a significant portion of the Bank’s assets and liabilities are carried at fair value.

The following assets and liabilities, including those for which the Bank has elected the fair value option in accordance with SFAS 159, are carried at fair value on the Statements of Condition as of March 31, 2008:

• Trading securities

• Certain advances

• Derivative assets and liabilities

• Certain consolidated obligation bonds

In general, the fair values of these items carried at fair value are categorized within Level 2 of the fair value hierarchy and are valued primarily using inputs and assumptions that are observable in the marketplace or can be substantially derived from observable market data.

The Bank currently does not have assets and liabilities carried at fair value that are categorized within Level 3 of the fair value hierarchy. The Bank monitors and evaluates the inputs into its fair value measurements to ensure that the asset or liability is properly categorized in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. Because items classified as Level 3 are generally based on unobservable inputs, the process to determine fair value is generally more subjective and involves a higher degree of management judgment and assumptions.

The assumptions and judgment applied by management may have a significant effect on the Bank’s estimates of fair value, and the use of different assumptions as well as changes in market conditions could have a material effect on the Bank’s results of operations or financial condition. See Note 10 to the Financial Statements for further information regarding SFAS 157, including the classification within the fair value hierarchy of all the Bank’s assets and liabilities carried at fair value as of March 31, 2008.

The Bank employs internal control processes to validate the fair value of its financial instruments. These control processes are designed to ensure that the fair value measurements used for financial reporting are based on observable inputs wherever possible. In the event that observable market-based inputs are not available, the control processes are designed to ensure that the valuation approach used is appropriate and consistently applied and that the assumptions and judgments made are reasonable. The Bank’s control processes provide for segregation of duties and oversight of the fair value methodologies and valuations by management. Valuation models are regularly reviewed by the Bank and are subject to an annual independent model validation process. Any changes to the valuation methodology or the models are also reviewed to confirm that the changes are appropriate.

The Bank continues to refine its valuation methodologies as markets and products develop and the pricing for certain products becomes more or less transparent. While the Bank believes that its valuation methodologies are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a materially different estimate of fair value as of the reporting date.

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The Bank made significant estimates in projecting the cash flows on non-agency MBS with unrealized losses in its analysis of other-than-temporary impairment. These projected cash flows included expectations of delinquencies, estimated prepayment rates, future estimated housing prices, and projected losses on foreclosures. Different estimates and assumptions could produce different results.

Recently Issued Accounting Standards and Interpretations

See Note 2 to the Financial Statements for a discussion of recently issued accounting standards and interpretations.

Recent Developments

Proposed Changes to Regulation of GSEs. Congress is considering proposed legislation designed to address the current housing crisis, modernize the Federal Housing Administration and address GSE reform issues. On May 8, 2008, the House of Representatives approved a bill (H.R. 3221) which would, among other things, establish a new regulator for the housing GSEs (the FHLBanks, Fannie Mae, and Freddie Mac). It is uncertain at this time whether there will be final legislation affecting the FHLBanks, the other housing GSEs, or their regulators.

Off-Balance Sheet Arrangements, Guarantees, and Other Commitments

In accordance with Finance Board regulations, the Bank is jointly and severally liable for the FHLBank System’s consolidated obligations issued under Section 11(a) of the FHLBank Act, and in accordance with the FHLBank Act, the Bank is jointly and severally liable for consolidated obligations issued under Section 11(c) of the FHLBank Act. The joint and several liability regulation of the Finance Board authorizes the Finance Board to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor.

The Bank’s joint and several contingent liability is a guarantee, as defined by FASB Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34 (FIN 45), but is excluded from the initial recognition and measurement provisions of FIN 45. The valuation of this contingent liability is therefore not recorded on the balance sheet of the Bank. The par amount of the outstanding consolidated obligations of all 12 FHLBanks was $1,220.4 billion at March 31, 2008, and $1,189.7 billion at December 31, 2007. The par value of the Bank’s participation in consolidated obligations was $310.8 billion at March 31, 2008, and $302.9 billion at December 31, 2007. At March 31, 2008, the Bank had committed to the issuance of $4.6 billion in consolidated obligation bonds, of which $1.1 billion were hedged with associated interest rate swaps, and $23 million in consolidated obligation discount notes, none of which were hedged with associated interest rate swaps. At December 31, 2007, the Bank had committed to the issuance of $855 million in consolidated obligation bonds, of which $400 million were hedged with associated interest rate swaps, and $1.5 billion in consolidated obligation discount notes, of which $1.2 billion were hedged with associated interest rate swaps. For additional information on the Bank’s joint and several liability contingent obligation, see Notes 11 and 19 to the Financial Statements in the Bank’s 2007 Form 10-K.

In addition, in the ordinary course of business, the Bank engages in financial transactions that, in accordance with GAAP, are not recorded on the Bank’s balance sheet or may be recorded on the Bank’s balance sheet in amounts that are different from the full contract or notional amount of the transactions. For example, the Bank routinely enters into commitments to extend advances and issues standby letters of credit. These advance commitments and standby letters of credit may represent future cash requirements of the Bank, although the standby letters of credit usually expire without being drawn upon. Standby letters of credit are subject to the same underwriting and collateral requirements as advances made by the Bank. At March 31, 2008, the Bank had $2.0 billion of advance commitments and $3.3 billion in standby letters of credit outstanding. At December 31, 2007, the Bank had $2.6 billion of advance commitments and $1.2 billion in standby letters of credit outstanding. The estimated fair values of these advance commitments and standby letters of credit were immaterial to the balance sheet at March 31, 2008, and December 31, 2007.

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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

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, 157, and 159) to changes in interest rates. This profile reflects the Bank’s objective of maintaining a conservative asset-liability mix and its commitment to providing value to its members through products and the dividend without subjecting their investments in Bank capital stock to significant interest rate risk.

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

Total Bank Market Risk

Market Value of Equity Sensitivity

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

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

Market Value of Equity Sensitivity

Estimated Percentage Change in Market Value of Bank Equity

for Various Changes in Interest Rates

Interest Rate Scenario(1)	March 31, 2008		December 31, 2007
+200 basis-point change	–14.2	%	–6.6	%
+100 basis-point change	–8.7		–3.4
–100 basis-point change	+11.9		+3.2
–200 basis-point change	+21.8		+4.0

(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 significantly more sensitivity as of March 31, 2008, compared to the estimates as of December 31, 2007. Compared to interest rates as of December 31, 2007, interest rates as of March 31, 2008, were 174 basis points lower for terms of 1 year, 88 basis points lower for terms of 5 years, and 60 basis points lower for

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terms of 10 years. The measured increase in market value of equity sensitivity is primarily attributable to the increased sensitivity from the Bank’s mortgage assets. As noted in the table above, the market value of equity sensitivity is adversely impacted when rates increase. In general, mortgages assets, including MBS, are expected to remain outstanding for a longer period of time when interest rates increase, and prepayment rates decline as a result of reduced incentives to refinance. Since the Bank’s MBS were purchased when mortgage asset spreads to pricing benchmarks were significantly lower than what is currently required by investors, the adverse spread difference gives rise to an embedded negative impact on the market value of MBS, which directly reduces the estimated market value of Bank capital. When interest rates increase, and the MBS are expected to remain outstanding for a longer period of time, the adverse spread difference will exist for a longer period of time, giving rise to an even larger embedded negative market value impact than exists at current interest rate levels. This creates additional downward pressure on the measured market value of equity. As a result, the Bank’s measured market value of equity sensitivity to changes in rates is higher than it would be if it were measured based on the fundamental underlying repricing and option risks (a greater decline in the market value of equity when rates increase and a greater increase in the market value of equity when rates decrease). Based on the credit enhancement protection of these securities and the Bank’s held-to-maturity classification, management does not believe that the increased sensitivity indicates a fundamental change in risk. If mortgage asset spreads were closer to the historical average and the assets were priced closer to par, the Bank’s market value sensitivity would be materially unchanged from December 31, 2007.

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 net gains recognized in accordance with SFAS 133, SFAS 157, and SFAS 159, which will generally reverse over the remaining contractual terms to maturity or by the call or put date of the assets and liabilities held at fair value, hedged assets and 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 Bank’s potential dividend yield sensitivity policy limits the potential adverse impact of an instantaneous parallel shift of a plus or minus 200-basis-point change in interest rates from current rates (base case) to no worse than –120 basis points from the base case projected potential dividend yield. For the projected period March 2008 through February 2009, the potential dividend yield is projected to decline by 138 basis points as the result of an instantaneous 200-basis-point decline in interest rates, compared to the policy limit of –120 basis points. The policy limit exception is primarily driven by the significant decline in interest rates in the first quarter of 2008 and its adverse impact on the sensitivity of the MBS and mortgage loan portfolio spread to changes in interest rates. In the first quarter of 2008, short-term and intermediate-term rates declined 150 to 200 basis points. As a result, a significant amount of the Bank’s fixed rate callable debt that was funding fixed rate and hybrid ARM MBS and fixed rate mortgage loans was called and refinanced with callable debt with lockouts of one to two years. If rates decline, the recently issued debt cannot be called until the lockout period expires. Spread compression in the fixed rate mortgage portfolio occurs as prepayment rates increase faster than the runoff of the existing funding, resulting in excess debt at much higher rates than current rates. The excess debt position is short-lived once the lockout period expires. As a result, the Bank does not currently intend to change its market risk management strategies to reduce the potential dividend yield sensitivity.

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 March 31, 2008

	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	$	36,660		$	—		$	—		$	—
Advances		189,820			11,920			42,848			3,837
Other assets		2,198			—			—			—
Total Assets		228,678			11,920			42,848			3,837
Liabilities
Consolidated obligations:
Bonds		113,438			18,601			55,931			13,431
Discount notes		64,428			4,058			—			(3	)
Deposits		441			—			—			—
Mandatorily redeemable capital stock		—			—			213			—
Other liabilities		2,066			—			—			340
Total Liabilities		180,373			22,659			56,144			13,768
Interest rate exchange agreements		(40,247	)		11,598			18,858			9,791
Periodic gap of advances-related business		8,058			859			5,562			(140	)
Mortgage-related business:
Assets
MBS		13,149			2,581			18,022			7,178
Mortgage loans		296			223			1,584			1,922
Other assets		242			—			—			—
Total Assets		13,687			2,804			19,606			9,100
Liabilities
Consolidated obligations:
Bonds		3,445			2,453			12,985			8,466
Discount notes		15,100			1,289			—			—
Other liabilities		1,459			—			—			—
Total Liabilities		20,004			3,742			12,985			8,466
Interest rate exchange agreements		2,205			525			(2,730	)		—
Periodic gap of mortgage-related business		(4,112	)		(413	)		3,891			634
Total periodic gap		3,946			446			9,453			494
Cumulative gap	$	3,946		$	4,392		$	13,845		$	14,339

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 4 months at March 31, 2008, and 2 months at December 31, 2007.

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Total Bank Duration Gap Analysis

	March 31, 2008			December 31, 2007
	Amount (In millions)		Duration Gap(1) (In months)	Amount (In millions)		Duration Gap(1) (In months)
Assets	$	332,480	8	$	322,446	5
Liabilities		318,141	4		308,819	3
Net	$	14,339	4	$	13,627	2

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

The increase in the duration gap during the first quarter of 2008 is related to the extraordinarily wide mortgage asset spreads from an extremely illiquid market. Since duration gap is a measure of market value sensitivity, the impact of the extraordinarily wide mortgage asset spreads on duration gap is the same as described in the analysis in “Market Value of Equity Sensitivity” above. As a result of the credit enhancement protection of these securities and the Bank’s held-to-maturity classification, management does not believe that the increased sensitivity indicates a fundamental change in risk. If mortgage asset spreads were closer to the historical average, and the assets were priced closer to par, the Bank’s duration gap would be materially unchanged from December 31, 2007.

Segment Market Risk

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

Advances-Related Business

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

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

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

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

Management updates the repricing and maturity gaps for actual asset, liability, and derivatives transactions that occur in the advances-related segment each day. Management regularly compares the targeted repricing and maturity gaps to the actual repricing and maturity gaps to identify rebalancing needs for the targeted gaps.

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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 March 31, 2008, in “Repricing Gap Analysis” above shows that approximately $8.1 billion of net assets for the advances-related business (56% of capital) were scheduled to mature or reprice in the six-month period following March 31, 2008, which is consistent with the Bank’s guidelines. Net market value sensitivity analysis and net interest income simulations are also used to identify and measure risk and variances to the target interest rate risk exposure in the advances-related business segment.

Mortgage-Related Business

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

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

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

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

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

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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 March 31, 2008, and December 31, 2007.

Market Value of Equity Sensitivity

Estimated Percentage Change in Market Value of Bank Equity Attributable to

the Mortgage-Related Business for Various Changes in Interest Rates

Interest Rate Scenario(1)	March 31, 2008		December 31, 2007
+200 basis-point change	–12.5	%	–5.1	%
+100 basis-point change	–7.9		–2.8
–100 basis-point change	+10.7		+2.3
–200 basis-point change	+19.2		+2.2

(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 significantly more sensitivity as of March 31, 2008, compared to the estimates as of December 31, 2007. Compared to interest rates as of December 31, 2007, interest rates as of March 31, 2008, were 174 basis points lower for terms of 1 year, 88 basis points lower for terms of 5 years, and 60 basis points lower for terms of 10 years. The measured increase in market value of equity sensitivity is primarily attributable to the increased sensitivity from the Bank’s mortgage assets. As noted in the table above, the market value of equity sensitivity is adversely impacted when rates increase. In general, mortgages assets, including MBS, are expected to remain outstanding for a longer period of time when interest rates increase, and prepayment rates decline as a result of reduced incentives to refinance. Since the Bank’s MBS were purchased when mortgage asset spreads to pricing benchmarks were significantly lower than what is currently required by investors, the adverse spread difference gives rise to an embedded negative impact on the market value of MBS, which directly reduces the estimated market value of Bank capital. When interest rates increase, and the MBS are expected to remain outstanding for a longer period of time, the adverse spread difference will exist for a longer period of time, giving rise to an even larger embedded negative market value impact than exists at current interest rate levels. This creates additional downward pressure on the measured market value of equity. As a result, the Bank’s measured market value of equity sensitivity to changes in rates is higher than it would be if it were measured based on the fundamental underlying repricing and option risks (a greater decline in the market value of equity when rates increase and a greater increase in the market value of equity when rates decrease). Based on the credit enhancement protection of these securities and the Bank’s held-to-maturity classification, management does not believe that the increased sensitivity indicates a fundamental change in risk. If mortgage asset spreads were closer to the historical average and the assets were priced closer to par, the Bank’s market value sensitivity would be materially unchanged from December 31, 2007.

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ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

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

Internal Control Over Financial Reporting

For the first quarter of 2008, there were no changes in the Bank’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.

Consolidated Obligations

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

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

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

For a discussion of risk factors, see “Part I. Item 1A. Risk Factors” in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2007 (2007 Form 10-K). There have been no material changes from the risk factors disclosed in the “Risk Factors” section of the Bank’s 2007 Form 10-K.

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

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

31.1	Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Operating Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.4	Certification of the Controller pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of the Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.3	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.4	Certification of the Controller pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1	Computation of Ratio of Earnings to Fixed Charges – Three Months Ended March 31, 2008

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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 May 14, 2008.

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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