FEDERAL HOME LOAN BANKS

Transcription

1 FEDERAL HOME LOAN BANKS 2005 COMBINED FINANCIAL REPORT This Combined Financial Report provides financial information on the Federal Home Loan Banks. You should use this Combined Financial Report, together with the other information expressly provided by the Federal Home Loan Banks for this purpose, when considering whether or not to purchase the consolidated bonds and consolidated discount notes (collectively referred to in this Combined Financial Report as consolidated obligations) of the Federal Home Loan Banks. The Securities Act of 1933, as amended, does not require the registration of consolidated obligations. No registration statement has been filed with the Securities and Exchange Commission with respect to the consolidated obligations. None of the Securities and Exchange Commission, the Federal Housing Finance Board, or any State securities commission has approved or disapproved the consolidated obligations or has passed upon the accuracy or adequacy of any offering material. The consolidated obligations are not obligations of the United States and are not guaranteed by the United States. Neither this Combined Financial Report nor any offering material provided by the Office of Finance on behalf of the Federal Home Loan Banks concerning any offering of consolidated obligations describes all the risks of investing in consolidated obligations. Prior to investing in consolidated obligations you should consult your financial and legal advisors about the risks of investing in any particular issue of consolidated obligations. The financial information contained in this Combined Financial Report is as of and for periods ended on or before December 31, This document is available on the Federal Home Loan Banks' Office of Finance web site at: You should direct questions about the Federal Home Loan Banks' Combined Financial Report to the Federal Home Loan Banks' Office of Finance, Senior Director of Accounting Policy & Financial Reporting. You should direct questions about the Federal Home Loan Banks' consolidated obligations to the Federal Home Loan Banks' Office of Finance, Marketing & Corporate Communications Division. The address is Federal Home Loan Banks' Office of Finance, Freedom Drive, Suite 1000, Reston, VA 20190, (703) , and the web site is The Office of Finance will provide additional copies of this Combined Financial Report upon request. Please contact the Office of Finance if you want to receive subsequent annual and quarterly financial reports. You should not assume, based on the delivery of this Combined Financial Report, that there has been no change in the financial condition of the Federal Home Loan Banks since December 31, The date of this Combined Financial Report is November 8, 2006.

2 TABLE OF CONTENTS Explanatory Statement about FHLBanks Combined Financial Report ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 Available Information on Individual FHLBanks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 Summary Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 General Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 Historical Perspective ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 Advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7 Acquired Member Asset ProgramsÌMortgage Loans Held for Portfolio ÏÏÏÏÏÏÏÏÏÏÏÏ 9 Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11 Debt FinancingÌConsolidated Obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11 Debt FinancingÌSubordinated Notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13 Deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14 Capital, Capital Rules and Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14 Other Mission-Related Activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21 Use of Interest-Rate Exchange Agreements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22 Competition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23 Oversight, Audits and Examinations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24 Tax Status ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25 Office of FinanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26 Properties and Geographic Distribution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27 Employees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29 Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30 Submission of Matters to Vote of Capital Stockholders Other than Election of Directors ÏÏ 30 Market for FHLBanks' Capital Stock and Related Stockholder MattersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30 Risk Factors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31 Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36 Financial Discussion and Analysis of Financial Condition and Results of Operations ÏÏÏÏÏÏ 38 Forward-Looking Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38 Business OverviewÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39 Restatement of Prior Year Combined Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40 Comparative Highlights ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41 Financial Trends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43 Combined Statement of Condition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47 Results of Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66 REFCORP PaymentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 76 Capital Adequacy ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 77 Liquidity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 78 Critical Accounting Policies and Estimates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 78 Off-Balance Sheet Arrangements and Other Commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 83 Contractual Obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 84 Legislative and Regulatory Developments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 84 Recent Rating Agency Actions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 90 Risk Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 90 Quantitative and Qualitative Disclosures about Market Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 90 Liquidity Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 99 Credit RiskÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100 Operational Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 108 Business Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 108 Financial Statements and Supplementary Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 109 Changes in and Disagreements with Accountants on Combined Accounting and Financial DisclosureÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 111 Directors and Executive Officers of FHLBanks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 111 Executive Compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 112 Page

3 Security Ownership of Certain Beneficial Owners ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 112 Certain Relationships and Related Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 114 Index to Combined Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 115 Supplemental Information Additional Information on FHLBanks' Regulator and Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 222 FHLBanks' RegulatorÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 222 Mortgage Partnership Finance Program (MPF» Program) and Mortgage Purchase Program (MPP) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 223 FHLBank Management and Compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 240 Five Largest Regulatory Capital Stockholders of and Borrowers from Each FHLBankÏÏÏÏÏ 260 Audit Fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 264 Audit Committee Charter, Combined Financial Reports ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 264 Consolidated obligations issued under the Federal Home Loan Banks' Global Debt Program may be listed on the Euro MTF market of the Luxembourg Stock Exchange. The Luxembourg Stock Exchange has allocated the number 2306 to the Federal Home Loan Banks' Global Debt Program for listing purposes. Under the Federal Home Loan Banks' agreement with the underwriter(s) of a particular series of consolidated obligations, any series of consolidated obligations listed on the Luxembourg Stock Exchange may be delisted if the continuation of the listing has become unduly onerous in the opinion of the issuer, and the issuer has agreed with the underwriter(s) that it will use reasonable efforts to list the consolidated obligations on another stock exchange. Page

4 EXPLANATORY STATEMENT ABOUT FHLBANKS COMBINED FINANCIAL REPORT The Office of Finance assumed responsibility for the preparation of the combined financial reports of the Federal Home Loan Banks (FHLBanks) in 2001, which previously had been prepared by the Federal Housing Finance Board (Finance Board). The Office of Finance does not have the same access to information about the FHLBanks as the Finance Board does in its capacity as regulator of the FHLBanks. In connection with its responsibilities in preparing combined financial reports, the Office of Finance is responsible for combining the financial information it receives from each of the FHLBanks. Each FHLBank is responsible for the financial information it provides to the Office of Finance. The combined financial reports of the FHLBanks are intended to be used by investors who invest in the consolidated bonds and consolidated discount notes of the FHLBanks. These consolidated obligations are the joint and several obligations of the FHLBanks. This means that each individual FHLBank is responsible to the registered holders of the consolidated obligations for the payment of principal of and interest on all consolidated obligations issued by the FHLBanks. Even though the consolidated obligations are the joint and several obligations of all of the FHLBanks, each FHLBank is a separately chartered entity. Each has its own board of directors and management. This is the case even though some financial institutions may have one or more affiliates which are members of one or more FHLBanks. All FHLBanks are subject to regulations issued by the Finance Board, which periodically examines their operations. Although each FHLBank has publicly available financial information, the financial information relating to the FHLBanks is presented to investors in consolidated obligations on a ""combined'' basis because this is considered more convenient for investors than providing financial information on each FHLBank on a stand-alone basis only. You should note, however, that this combined presentation describes a combination of assets and liabilities for this purpose only. This combined presentation in no way indicates that these assets and liabilities are under joint management and control. Each individual FHLBank manages its operations independently and with only minimal consideration as to how the transactions it enters into might affect the combined financial results. The FHLBanks engage in transactions in which one FHLBank transfers its direct liability on outstanding consolidated bonds to another FHLBank that assumes the direct liability on those outstanding consolidated bonds. By engaging in these transactions, two FHLBanks are able to better match their funding needs. Excess funds held by one FHLBank are transferred to another FHLBank that needs them. These transfers generally result in costs for the FHLBank that assumes the liability for the debt that are equal to or lower than those available for a similarly-sized transaction in the capital markets at that time. Because the consolidated bonds are the joint and several obligation of all 12 FHLBanks, these interbank transactions have no effect on the holders of the consolidated bonds. (See ""Financial Discussion and Analysis of Financial Condition and Results of OperationsÌ Results of OperationsÌInterbank Transfers of Liability on Outstanding Consolidated Bonds and Their Effect on Combined Net Income'' and Note 1 to the accompanying combined financial statements.) 2

5 AVAILABLE INFORMATION ON INDIVIDUAL FHLBANKS The FHLBanks provide information on their operations on an ongoing basis. Pursuant to a Finance Board regulation, each FHLBank is subject to certain reporting requirements of the 1934 Act and must file certain periodic reports and other information with the Securities and Exchange Commission (SEC). These periodic reports and other information filed pursuant to the Securities Exchange Act of 1934 (1934 Act), including each FHLBank's description of the risk factors applicable to that FHLBank, may be inspected without charge and copied at prescribed rates at the public reference facilities of the SEC's principal office at 100 F Street, N.E., Washington, D.C You may obtain information on the operation of the SEC's public reference facilities by calling the SEC at SEC The SEC also maintains an Internet site at: that will contain the periodic reports and other information filed by the FHLBanks with the SEC. As of August 8, 2006, all twelve FHLBanks registrations were effective. Each FHLBank prepares individual financial reports containing financial information relating to its financial condition and results of operations and files this information annually with the SEC on Form 10-K and quarterly on Form 10-Q. All of this information is made available on the respective web sites of the FHLBanks and through the Office of Finance. The web site of the Office of Finance is located at This site also contains links to the web site of each individual FHLBank. Please note that we are providing all of the web site addresses and the identification of available information above solely as a matter of convenience. These web site addresses are not intended to be active links and their contents and the other available information are not a part of this report and are not intended to be incorporated by reference into this report. 3

6 FEDERAL HOME LOAN BANKS SUMMARY FINANCIAL DATA (Dollar amounts in millions) * 2003* 2002* 2001* (As (As (As Restated) Restated) Restated) At December 31, Advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $619,880 $581,216 $514,037 $489,338 $472,540 Mortgage loans held for portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏ 105, , ,438 60,455 27,641 Investments(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 266, , , , ,259 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 997, , , , ,254 Deposits and borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,737 21,165 23,255 29,906 26,969 Consolidated obligations, net(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 915, , , , ,003 Mandatorily redeemable capital stock ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,451 1,153 Capital stockóclass B putable(3)ïïïïïïïïïïïïï 37,786 31,819 15,082 7,733 Capital stockóclass A putable(3) ÏÏÏÏÏÏÏÏÏÏÏÏ Capital stockópreconversion putable(3) ÏÏÏÏÏÏÏ 3,759 7,947 22,621 27,453 33,288 Total capital stock putable(4)(5)ïïïïïïïïïïïïïïïïï 42,043 40,092 37,703 35,186 33,288 Retained earnings(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,600 1,744 1, Total capital(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44,480 41,863 38,980 36,200 34,096 Average balances for the year ended December 31, Advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 607, , , , ,675 Mortgage loans held for portfolio, net ÏÏÏÏÏÏÏÏÏÏÏÏÏ 109, ,434 88,959 39,749 19,809 Investments(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 229, , , , ,543 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 954, , , , ,642 Deposits and borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,094 21,947 30,312 29,473 26,236 Consolidated obligations(2)ïïïïïïïïïïïïïïïïïïïïïï 873, , , , ,174 Mandatorily redeemable capital stock ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1, Capital stockóclass B putable(3)ïïïïïïïïïïïïï 33,289 22,546 12, Capital stockóclass A putable(3) ÏÏÏÏÏÏÏÏÏÏÏÏ Capital stock-preconversion putable(3) ÏÏÏÏÏÏÏÏ 7,378 16,232 24,646 33,190 31,631 Total capital stock putable(4)(5)ïïïïïïïïïïïïïïïïï 41,061 38,846 36,646 34,171 31,631 Retained earnings(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,232 1, Operating results for the year ended December 31, Net interest income(5)(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,206 4,171 3,877 3,722 3,446 Net income(2)(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,525 1,994 1,885 1,507 1,970 Cash and stock dividends(5)ïïïïïïïïïïïïïïïïïïïïï 1,669 1,348 1,503 1,540 1,952 Weighted-average dividend rate(5)(7) ÏÏÏÏÏÏÏÏÏÏÏÏ 4.06% 3.47% 4.10% 4.51% 6.17% Return on average equityïïïïïïïïïïïïïïïïïïïïïïïï 5.84% 4.93% 4.97% 4.28% 6.05% Return on average assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.26% 0.23% 0.24% 0.21% 0.29% Net interest margin(6)(8)(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.45% 0.48% 0.49% 0.52% 0.52% At December 31, Total capital ratio(5)(9) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.46% 4.53% 4.74% 4.74% 4.90% Leverage ratio(10) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21.7:1 21.5:1 21.1:1 21.1:1 20.4:1 * The combined financial statements of the 12 FHLBanks have been restated as of and for the years ended December 31, 2003, 2002 and 2001 as a result of restatements at seven of the 12 FHLBanks. The effects of the FHLBanks' restatements are reflected in this annual report for the periods affected. The Office of Finance did not previously publish the 2004 Combined Financial Report. Accordingly, the 2004 combined financial statements are not considered restated (even though six of the 12 FHLBanks restated their financial statements as of and for the year ended December 31, 2004) because they are presented here for the first time. See ""Financial Discussion and Analysis of Financial Condition and Results of OperationsÌRestatement of Prior Year Combined Financial Statements'' and Note 2 to the accompanying combined financial statements. These restatements were due primarily to technical misapplications and interpretations 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, and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 133), and arose mainly from the rigorous accounting reviews undertaken during the SEC registration process. The majority of the FHLBanks' hedges involved in the restatements were economically highly effective and would have been eligible for hedge accounting if they had been appropriately documented at hedge inception. However, the provisions of SFAS 133 generally do 4

7 not allow an entity to retroactively apply the long-haul method or reevaluate effectiveness/valuation methodologies, resulting in a one-sided mark-to-market due to the loss of hedge accounting. The net cumulative effect of these restatements resulted in a $168 million reduction in retained earnings as of December 31, 2004, of which approximately $130 million related to the reversal of cumulative unrealized gains (net of assessments) attributable to the hedged risk of certain available-for-sale securities held by the FHLBank of Dallas. These gains were subsequently recognized in earnings in 2005 upon the sale of the subject securities. (1) Investments consist of: a) held-to-maturity securities; b) available-for-sale securities; c) trading securities; d) interest-bearing deposits; e) securities purchased under agreements to resell; and f) Federal funds sold. (2) See ""Financial Discussion and Analysis of Financial Condition and Results of OperationsÌResults of OperationsÌ Interbank Transfers of Liabilities on Outstanding Consolidated Bonds and Their Effect on Combined Net Income'' and ""Explanatory Statement about FHLBanks Combined Financial Report.'' (3) The Federal Home Loan Banks of Cincinnati, Pittsburgh and Seattle each implemented their respective capital plans during The Federal Home Loan Banks of Indianapolis, Des Moines and Dallas each implemented their respective capital plans during The Federal Home Loan Banks of Atlanta, Boston, San Francisco and Topeka each implemented their respective capital plans during The Federal Home Loan Bank of New York implemented its capital plan in (See ""Financial Discussion and Analysis of Financial Condition and Results of OperationsÌLegislative and Regulatory Developments'' and Note 16 to the accompanying combined financial statements.) (4) Federal Home Loan Bank capital stock is redeemable at the request of a member subject to the statutory redemption periods and other conditions and limitations. (See ""BusinessÌCapital, Capital Rules and Dividends'' and Note 16 to the accompanying combined financial statements.) (5) Effective as of January 1, 2004, the Federal Home Loan Banks reclassified $946 million of their outstanding capital stock to ""mandatorily redeemable capital stock'' in the liability section of the Statement of Condition as a result of adopting Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for Certain Financial Instruments and Characteristics of both Liabilities and Equity (SFAS 150). Upon adoption, the Federal Home Loan Banks also recorded estimated dividends earned as a part of the carrying value of the mandatorily redeemable capital stock. The difference between the prior carrying amount and the mandatorily redeemable capital stock of $1 million was recorded as a cumulative effect of a change in accounting principle in the Statement of Income. For the years ended December 31, 2005 and 2004, dividends on mandatorily redeemable capital stock in the amounts of $48 million and $22 million were recorded as interest expense. Although the mandatorily redeemable capital stock is not included in capital for financial reporting purposes, it is considered capital for regulatory purposes. (See Note 16 to the accompanying combined financial statements for information on the significant restrictions on stock redemption.) (6) Net interest income is net interest income before (reversal) provision for credit losses. For the years ended December 31, 2002 and 2001, the Federal Home Loan Banks have reclassified realized gains and losses (e.g., net interest payments) on stand-alone derivative instruments used in economic hedges. Previously, realized gains and losses on stand-alone derivatives used in economic hedges were classified within net interest income after (reversal) provision for credit losses, while unrealized gains (losses) on these derivatives were recorded in net gains (losses) on derivatives and hedging activities within other income. To be consistent with the current presentation, these amounts have been reclassified and are now included in net gains (losses) on derivatives and hedging activities within other income for the years ended December 31, 2002 and For the years ended December 31, 2003, 2002, and 2001, the Federal Home Loan Banks reclassified prepayment fee income from other income to net interest income to be consistent with the current presentation. (See ""Financial Discussion and Analysis of Financial Condition and Results of OperationsÌResults of OperationsÌReclassifications'' and Note 1 to the accompanying combined financial statements.) (7) Weighted average dividend rates are cash and stock dividends divided by the average of capital stock eligible for dividends. (8) Net interest margin is net interest income before (reversal) provision for credit losses, represented as a percentage of average earning assets. (9) Total capital ratio is capital stock plus retained earnings and accumulated other comprehensive income, represented as a percentage of total assets at period end. This capital ratio is computed on a U.S. Generally Accepted Accounting Principles (GAAP) basis. (10) Effective January 1, 2004, capital for the leverage ratio calculation is based on GAAP plus mandatorily redeemable capital stock as described below in Note 16 to the accompanying combined financial statements. 5

8 BUSINESS General Information The 12 Federal Home Loan Banks (FHLBanks) are government-sponsored enterprises of the United States of America, organized under the authority of the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act). The Office of Finance is a joint office of the FHLBanks established by the Federal Housing Finance Board (Finance Board) to facilitate the issuance and servicing of the consolidated obligations of the FHLBanks and to prepare this financial report. The Finance Board is an independent agency within the executive branch of the U.S. government charged with the regulation of the FHLBanks and the Office of Finance. The primary purpose of the FHLBanks is to enable their member financial institutions (members) to assure the flow of credit and other services for housing and community development. The FHLBanks serve the general public by providing liquidity to members, thereby increasing the availability of credit for residential mortgages and community investments. The FHLBanks provide a readily available, low-cost source of funds to their members. In addition, most of the FHLBanks provide members with a means of enhancing liquidity by buying member home mortgages through mortgage purchase programs developed for their members. Under these programs, members are offered the opportunity to sell qualifying mortgage loans to an FHLBank. Members can also borrow from an FHLBank to fund low-income housing, helping the members satisfy their regulatory requirements under the Community Reinvestment Act (CRA). Finally, the FHLBanks offer their members a variety of services such as: correspondent banking; cash management; security safekeeping; wire transfers; letters of credit; and settlements. The FHLBanks fund their assets and operations principally through the sale of debt instruments to the public, known as consolidated obligations, through the Office of Finance. Each FHLBank is jointly and severally liable with the other FHLBanks for all consolidated obligations issued. Consolidated obligations are not obligations of the United States, and the U.S. government does not guarantee them. Additional funds are provided by: Ì deposits; Ì other borrowings; and Ì the issuance of capital stock. The FHLBanks are cooperatives, which means that only members and former members own the capital stock in each of the FHLBanks and receive dividends on their investment in capital stock from the earnings of their respective FHLBank. Membership is limited to regulated depositories and insurance companies engaged in housing finance. A table identifying members of the FHLBanks by type of financial institution is included on page 112. Each member must own capital stock in the FHLBank located in the member's district. Each FHLBank is privately-owned and has its own board of directors, management and employees. Membership is voluntary. Historical Perspective The fundamental business of the FHLBanks is to provide members and housing associates with advances and other credit products in a wide range of maturities to meet their demand. Congress created the FHLBanks in 1932 to improve the availability of funds to support home ownership. Although the FHLBanks were initially capitalized with government funds, their members have provided all the FHLBanks' capital for over 50 years. Congress originally granted access to advances only to those institutions with the potential to make and hold long-term, amortizing home mortgage loans. Such institutions were primarily Federally and state-chartered savings and loan associations, cooperative banks, and state-chartered savings banks (thrift institutions). As a result, FHLBanks and their member thrift institutions became an integral part of the home mortgage financing system in the United States. However, a 6

9 variety of factors, including a severe recession, record-high interest rates, and deregulation, resulted in significant losses for thrift institutions in the 1980s. In reaction to the significant cost to the American taxpayer of resolving failed thrift institutions, Congress restructured the home mortgage financing system in 1989 by passing the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). Congress reaffirmed the housing finance mission of the FHLBanks, and expanded membership eligibility in the FHLBanks to include commercial banks and credit unions with a commitment to housing finance. Advances The FHLBanks make loans, called ""advances,'' to their members and eligible housing associates on the security of mortgages and other collateral pledged by the borrowing member or housing associate. Advances are the largest category of assets of the FHLBanks on a combined basis, representing 62.1 percent of total assets as of December 31, 2005 and 62.9 percent of total assets as of December 31, Advances generally support mortgages held in member portfolios. Because portfolio lenders may originate loans that they are unwilling or unable to sell in the secondary mortgage market, FHLBank advances can serve as a funding source for a variety of conforming and nonconforming mortgages. FHLBank advances support important housing markets, including those focused on low- and moderate-income households. For those members that choose to sell or securitize their mortgages, FHLBank advances can provide interim funding. Each FHLBank develops its program of advances so as to meet the particular needs of its members. The FHLBanks offer a wide array of fixed- and adjustable-rate advances, with maturities ranging from one day to 30 years. The FHLBanks offer both standard and customized advance structures. The more standard advances include the following: Fixed-Rate Advances. Fixed-rate advances have maturities from one day to 30 years. The FHLBanks also offer convertible fixed-rate advances, which allow the FHLBanks to convert to open-line advances or other structures after an agreed upon lockout period. In addition, the FHLBanks offer putable fixed-rate advances, which allow FHLBanks to put or extinguish their fixed-rate advances and borrowers to enter into new advances. Maturities of convertible fixed-rate advances generally range from one month to 15 years. Variable-Rate Advances. Variable-rate advances include advances with maturities less than 30 days to 10 years, with the interest rates reset periodically at a fixed spread to LIBOR or other standardized indices. Depending upon the plan selected, the member can have a cap or prepay the advance with or without a prepayment fee. Open-Line Advances. Open-line advances are designed to provide flexible funding to meet borrowers' daily liquidity needs and can be withdrawn for one day. These advances are automatically renewed until the member pays down the advances. Rates are set daily at the end of business. Fixed Amortizing Advances. Fixed amortizing advances have final maturities that range from one year to 30 years, with the principal repaid over the term of the advances with monthly, quarterly, annual or semi-annual amortization periods. Variable to Fixed Convertible Advances. Variable to fixed convertible advances have maturities that range from two years to 10 years, with a defined lockout period during which the interest rates adjust based on a spread to LIBOR. At the end of the lockout period, these advances may convert to fixed-rate advances. The interest rates on the converted advances are set at origination. Customized advances may include: Ì advances with non-standard indices; Ì advances with embedded options (such as interest rate caps, floors and collars, and call and put options); 7

10 Ì advances with standard indices that are averaged; Ì amortizing advances; and Ì advances with partial prepayment symmetry. (Partial prepayment symmetry means that the FHLBank may charge the member a prepayment fee or pay the member a prepayment fee, depending on certain factors such as movements in interest rates, when the advance is prepaid.) Pursuant to the FHLBank Act, the FHLBanks are permitted to make advances to nonmembers that are approved mortgagees under Title II of the National Housing Act (housing associates). In addition, to be eligible for advances from an FHLBank, housing associates must also: Ì be chartered under law and have succession; Ì be subject to inspection and supervision by some governmental agency; and Ì lend their own funds as their principal activity in the mortgage field. Housing associates are not subject to certain provisions applicable to members under the FHLBank Act. For example, they do not purchase capital stock in an FHLBank. However, the same regulatory lending requirements generally apply to them as apply to members. FHLBank advances can also provide funding to smaller lenders that lack diverse funding sources. Smaller community lenders very often do not have access to many of the funding alternatives available to larger financial entities, including repurchase agreements, commercial paper and brokered deposits. The FHLBanks give these lenders access to wholesale funding at competitive prices. FHLBank credit products also help members in the management of their assets and liabilities. The FHLBanks can offer advances that are matched to the maturity and prepayment characteristics of mortgage loans. These advances can reduce a member's interest-rate risk associated with holding long-term, fixed-rate mortgages. Alternatively, members can also enter into interest-rate exchange agreements directly with an FHLBank to reduce their exposure to interest-rate risk. In addition, an FHLBank may make commitments for advances to a member covering a pre-defined period. This program aids members and the FHLBanks in their cash flow planning and enables members to reduce their funding risk. The FHLBanks help members meet their responsibilities under the CRA. Through the Affordable Housing Program (AHP), the Community Investment Program (CIP) and the Community Investment Cash Advance (CICA) programs, members have access to subsidized and other low-cost funding to create affordable rental and homeownership opportunities and for commercial and economic development activities that benefit low- and moderate-income neighborhoods, thereby contributing to the revitalization of these communities. From the establishment of the CIP in 1990 through 2005, $34.7 billion in FHLBank-supported lending for housing development has financed over 609 thousand housing units. In addition to housing developments, over $9.3 billion in FHLBank-supported community lending has helped finance thousands of local economic community development projects. For 15 years, the AHP has provided significant resources for housing development across the 50 states and U.S. territories. The FHLBanks awarded AHP subsidies of $229 million in 2005 for projects designed to provide approximately 36 thousand housing units. From the inception of the AHP in 1990 through 2005, the FHLBanks have awarded over $2.1 billion in AHP subsidies to facilitate development of affordable housing projects designed to create approximately 466 thousand units for low- and moderate-income families. The FHLBanks are one of the largest sources of private funding for affordable housing in the nation. (See Note 10 to the accompanying combined financial statements.) 8

11 The FHLBanks serve as a source of liquidity for their members. Access to FHLBank advances can reduce the amount of low-yielding liquid assets a member would otherwise need to hold to ensure the same amount of liquidity. The FHLBanks' members are required to pledge collateral to secure their advances, which is described in more detail in ""Risk ManagementÌCredit RiskÌ Managing Credit RiskÌAdvances.'' Acquired Member Asset ProgramsÌMortgage Loans Held for Portfolio The FHLBank of Chicago and the four MPP FHLBanks have developed programs to purchase mortgage loans from Participating Financial Institutions (PFIs). The primary programs are the Mortgage Partnership Finance (MPF») Program 1 and the Mortgage Purchase Program (MPP). Under the MPF Program, loans are funded through or purchased from PFIs. The current MPF FHLBanks are the FHLBanks of Atlanta, Boston, Chicago, Dallas, Des Moines, New York, Pittsburgh, San Francisco and Topeka. On October 6, 2006, the FHLBank of San Francisco announced that it will no longer offer new master commitments to purchase mortgage loans from its PFIs under the MPF Program. The FHLBank of Chicago acts as ""MPF Provider'' and provides programmatic and operational support to the MPF FHLBanks and their PFIs. The current MPP FHLBanks are Cincinnati, Indianapolis, Seattle and Atlanta. In March 2005, the FHLBank of Seattle announced that it is exiting its MPP by ceasing to enter into new master commitment contracts under the MPP, and plans to eliminate existing MPP assets over time. MPF Loans and MPP Loans. Many members who originate mortgage loans choose to sell these loans into the secondary market rather than holding them in their own portfolios. Under the MPF Program and MPP, the FHLBanks principally invest in qualifying five-year to 30-year conventional conforming and government-guaranteed (i.e., FHA-insured and VA-guaranteed) fixed-rate mortgage loans and participations in pools of such mortgage loans, secured by one-to-four family residential properties, by purchasing them from participating members. Mortgage loans held for portfolio represented 10.6 percent of total assets at December 31, 2005 and 12.3 percent of total assets at December 31, Under the MPF Program, one or more MPF FHLBanks may participate in all or a portion of the acquired mortgage loans obtained from a PFI of any MPF FHLBank. The FHLBanks may also provide funding for the mortgage loans. Under the mortgage programs, an FHLBank manages the interest-rate risk, prepayment option risk and liquidity risk of the fixed-rate mortgage loans in which it holds an interest, while the corresponding member manages the origination and servicing activities. Each FHLBank holding an interest in a mortgage loan and the member selling the mortgage loan share in the credit risk of the mortgage loans pursuant to a master agreement and master commitment contract. Under these programs, a participating member, referred to as a PFI, provides a measure of credit-loss protection to the FHLBank(s) holding interests in loans generated by the PFI. In the case of the MPF Program, the selling PFI receives a credit-enhancement fee, and in the case of MPP, the selling PFI benefits from the Lender Risk Account. In the case of the MPF Program, all loss allocations to a PFI and its FHLBank are covered by each master commitment contract between that PFI and its FHLBank. In the case of MPP, all loss allocations to a PFI and its FHLBank are based upon individual pools of loans covered by each master commitment contract between that PFI and its FHLBank. As of December 31, 2005, the FHLBanks had invested in MPF Loans and MPP loans in all fifty states, the District of Columbia and Puerto Rico. A more detailed discussion of the credit enhancement and risk-sharing arrangements, and loan product information for the MPF Program and MPP is included under ""Risk ManagementÌCredit 1 ""Mortgage Partnership Finance,'' ""MPF,'' ""MPF Shared Funding'' and ""empf'' are registered trademarks of the FHLBank of Chicago. 9

12 RiskÌManaging Credit RiskÌMortgage Loans Held for Portfolio'' below and in the ""Supplemental Information'' section. MPF Loan Product Information/MPP Product Information. A variety of MPF Loan products have been developed to meet the differing needs of PFIs, but they are all premised on the same risksharing concept. The MPP operates with a single structure but also includes FHA-insured mortgage loans. PRODUCT COMPARISON CHART MPF PROGRAM AND MPP* Average PFI Credit Credit Credit Credit FHLBank First Enhancement Enhancement Enhancement Enhancement Servicing Fee Product Name Loss Account Size Description Amount Fee to PFI Fee Offset(1) to PFI Original MPF 3 to 5 basis Equivalent to ""AA'' 1.80% 8 to 11 basis points/ No 25 basis points/added each yearìpaid monthly points/year year based on the unpaid balance MPF basis points After First Loss 0.50% 7 to 11 basis points/ YesÌafter 25 basis fixed based on the Account to ""AA'' yearìpaid monthly; first 2 to points/year size of the loan performance-based 3 years pool at closing after 2 or 3 years MPF basis points After First Loss 0.92% 7 to 10 basis points/ Yes 25 basis fixed based on the Account to ""AA'' yearìpaid monthly; points/year size of the loan performance-based pool at closing MPF Plus Sized to equal 0 to 20 basis points 1.34% 6.5 to 8.5 basis Yes 25 basis expected losses after First Loss points/yearìplus 8 points/year Account and to 10 basis points/ Supplemental year performance- Mortgage Insurance based (delayed for (SMI) to ""AA'' 1 year); all fees paid monthly Original MPF for N/A Not applicable N/A N/A N/A 44 basis FHA/VA (Unreimbursed points/year servicing expenses) plus 2 basis points/yearì paid monthly (U.S. Government loan fee) MPP 30 to 50 basis After First Loss N/A N/A N/A 25 basis points based on Account to ""AA'' points/year pool risk factors using SMI and expected losses MPP FHA N/A Unreimbursed N/A N/A N/A 44 basis servicing expenses points/year * Current as of December 31, 2005 (1) May not exceed the First Loss Account amount for the life of the pool. MPF Shared Funding Program. Several FHLBanks participate in the MPF Shared Funding Program, which is administered by an unrelated third party. This program allows mortgage loans originated through the MPF Program to be sold to a third party-sponsored trust and ""pooled'' into securities. The FHLBank of Chicago purchases the Acquired Member Asset eligible securities, which are rated at least AA, and are either retained or partially sold to other FHLBanks. The investments are classified as held-to-maturity securities and are reported at amortized cost of 10

13 $556 million and $694 million as of December 31, 2005 and These securities are not publicly traded and are not guaranteed by any of the FHLBanks. Investments The FHLBanks maintain portfolios of investments for liquidity purposes, to manage excess stock repurchases and redemptions and to provide additional earnings. This investment income also bolsters the FHLBanks' capacity to meet their commitment to affordable housing and community investment, to cover operating expenses and to satisfy the Resolution Funding Corporation (REFCORP) assessment, as discussed in more detail in the ""Business-Tax Status'' section. To ensure the availability of funds to meet the credit needs of their members, the FHLBanks maintain portfolios of short-term investments issued by highly-rated institutions, which include: Ì overnight Federal funds; Ì term Federal funds; Ì interest-bearing certificates of deposits; and Ì commercial paper. The FHLBanks also enhance interest income by maintaining longer-term investment portfolios. These include mortgage-backed securities issued by government-sponsored mortgage agencies and enterprises or those that carry the highest ratings from Moody's Investors Service (Moody's) or Standard & Poor's Ratings Services (S&P) at the time of purchase and securities issued by U.S. government-sponsored agencies and instrumentalities. The long-term investment portfolios provide the FHLBanks with higher returns than those available in the short-term money markets. Investments represented 26.7 percent of total assets at December 31, 2005 and 24.3 percent of total assets at December 31, Finance Board regulations prohibit the FHLBanks from investing in certain types of securities and limit the FHLBanks' investment in MBS and asset-backed securities. These restrictions and limitations are set out in more detail in ""Risk ManagementÌCredit RiskÌManaging Credit RiskÌ Investments.'' Debt FinancingÌConsolidated Obligations Consolidated obligations, consisting of bonds and discount notes, are the principal funding source for the FHLBanks and are the joint and several obligations of the 12 FHLBanks. Consolidated obligations represent the primary source of liabilities used by the FHLBanks to fund advances, the mortgage programs and investments. All consolidated obligations are issued through the Office of Finance. Regardless of the method of issuance, the Office of Finance can only issue consolidated obligations when an FHLBank provides a request for and agrees to accept the funds. Consolidated obligations represented an amount equal to 91.8 percent of total assets as of December 31, 2005 and 91.5 percent of total assets at December 31, The capital markets have traditionally considered the FHLBanks' obligations as ""Federal agency'' debt. As a result, although the U.S. government does not guarantee the FHLBanks' debt, the FHLBanks have traditionally had ready access to funding at relatively favorable rates. The FHLBanks' ability to access the capital markets through the sale of consolidated obligations, across the entire maturity spectrum and through a variety of debt structures, allows the FHLBanks to manage their balance sheets effectively and efficiently. Consolidated obligations are currently rated Aaa/P-1 by Moody's Investor Service and AAA/ A-1 by Standard & Poor's Ratings Services. These are the highest ratings available for such debt from a Nationally Recognized Statistical Rating Organization (NRSRO). These ratings indicate that the FHLBanks have an extremely strong capacity to meet their commitments to pay principal and interest on consolidated obligations and that the consolidated obligations are judged to be of the highest quality with minimal credit risk. The ratings on the FHLBanks consolidated obligations also 11

14 reflect the FHLBank System's status as a government-sponsored enterprise (GSE). These ratings were not affected by rating actions taken with respect to individual FHLBanks. You should note that a rating issued by an NRSRO is not a recommendation to buy, sell or hold securities and that the ratings may be revised or withdrawn by the NRSRO at any time. You should evaluate the rating of each NRSRO independently. Consolidated obligations are generally issued with either fixed-rate payment terms or variablerate payment terms that use a variety of indices to reset interest rates. The indices include: Ì the London Interbank Offered Rate (LIBOR); Ì the Constant Maturity Treasury (CMT); and Ì the 11th District Cost of Funds Index (COFI). In connection with the sale of any particular issue of consolidated obligations, any FHLBank receiving the proceeds may enter into interest-rate exchange agreements or other transactions with or arranged by the applicable securities dealer, bank, affiliate, or an unaffiliated third party. Certain securities dealers and banks and their affiliates also engage in other transactions with and perform services for the FHLBanks. These services include the purchase and sale of investment securities. In some cases, some or all of the net proceeds from an issue of consolidated obligations may be loaned to a member that is affiliated with the securities dealer involved in underwriting that issue. Among the 12 FHLBanks, each FHLBank is primarily liable for that portion of consolidated obligations corresponding to the proceeds it receives. Each FHLBank is also jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on all consolidated obligations. Each FHLBank, individually and together with the other FHLBanks, must ensure that the timely payment of principal and interest on all consolidated obligations is given priority over, and is paid in full in advance of, any payment to or any redemption of shares from any shareholder. The Finance Board, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations at any time, whether or not an actual default has occurred. To the extent that an FHLBank makes a payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank will be entitled to reimbursement from the FHLBank otherwise responsible for the payment. If the Finance Board determines that the responsible FHLBank is unable to satisfy its obligations, the Finance Board may allocate the outstanding liability among the other FHLBanks. The Finance Board may make this allocation among the other FHLBanks on a pro-rata basis (in proportion to each FHLBank's ownership of all of the consolidated obligations outstanding at that time) or on any other basis it may determine. Finance Board regulations require that each FHLBank maintain the following types of assets, free from any lien or pledge, in an amount at least equal to the amount of that FHLBank's participation in the total consolidated obligations outstanding: Ì Cash; Ì Obligations of, or fully guaranteed by, the United States; Ì Secured advances; Ì Mortgages, which have any guaranty, insurance or commitment from the U.S. or any agency of the United States; Ì Investments described in Section 16(a) of the FHLBank Act (e.g., securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located); and Ì Other securities that are assigned a rating or assessment by an NRSRO that is equivalent or higher than the rating or assessment assigned by that NRSRO to consolidated obligations. 12

15 In addition, each FHLBank must adhere to the leverage limits set by the Finance Board. As of December 31, 2005, each FHLBank was in compliance with these requirements. Discount Notes. On a daily basis, FHLBanks may request that specific amounts of discount notes with specific maturity dates be offered by the Office of Finance for sale through certain securities dealers. One or more other FHLBanks may also request that amounts of discount notes with the same maturities be offered for sale for their benefit on the same day. The Office of Finance commits to issue discount notes on behalf of the participating FHLBanks when dealers submit orders for the specific discount notes offered for sale. The FHLBanks receive funding based on the time of the request, the rate requested for issuance, the trade date, the settlement date and the maturity date. If all terms of the request are the same except for the time of the request, then the FHLBank may receive from zero to 100 percent of the proceeds of the sale of the discount notes issued depending on the time of the request, the maximum costs the FHLBank or other FHLBanks, if any, participating in the same issuance of discount notes are willing to pay for the discount notes, and the amount of orders for the discount notes submitted by dealers. Twice weekly, FHLBanks may also request that specific amounts of discount notes with fixed maturity dates ranging from four to 26 weeks be offered by the Office of Finance through competitive auction conducted with securities dealers in the discount note selling group. One or more of the FHLBanks may also request that amounts of those same discount notes be offered for sale for their benefit through the same auction. The discount notes offered for sale through competitive auction are not subject to a limit on the maximum costs the FHLBanks are willing to pay. The FHLBanks receive funding based on their requests at a weighted-average rate of the winning bids from the dealers. If the bids submitted are less than the total of the FHLBanks' requests, an FHLBank receives funding based on that FHLBank's capital relative to the capital of other FHLBanks offering discount notes. These discount notes presently have a maturity range of up to 365 days. They are sold at a discount and mature at par. Consolidated Bonds. Consolidated bonds are issued primarily to raise intermediate and longterm funds. They can be issued and distributed through negotiated or competitively bid transactions with approved underwriters or selling group members. Consolidated bonds generally carry fixed- or variable-rate payment terms and have maturities ranging from one to 30 years, although there is no statutory or regulatory limitation as to their maturity. To meet the specific needs of certain investors in consolidated obligations, both fixed-rate bonds and variable-rate bonds issued by the FHLBanks may contain certain embedded features, which can result in complex coupon payment terms and call features. When consolidated obligations with these kinds of features are issued, the FHLBank concurrently enters into interest-rate exchange agreements that contain offsetting features, which effectively alter the terms of the bond to a straight-forward variable-rate bond tied to an index. The FHLBanks also use the TAP Issue Program to issue fixed-rate, noncallable (bullet) bonds. This program uses specific maturities that may be reopened daily during a three-month period through competitive auctions. The goal of the TAP Issue Program is to aggregate frequent smaller issues into a larger bond issue that may have greater market liquidity. Debt FinancingÌSubordinated Notes Under Section 11(a) of the FHLBank Act, no FHLBank is permitted to issue individual debt unless it has received approval from the Finance Board. As approved by the Finance Board, on June 13, 2006, the FHLBank of Chicago issued $1 billion of its 10-year subordinated notes. These subordinated notes are the sole obligation of the FHLBank of Chicago and not consolidated obligations. 13