Attached files

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EX-99.1 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - Federal Home Loan Bank of San Franciscodex991.htm
EX-10.4 - 2009 AUDIT EXECUTIVE INCENTIVE PLAN - Federal Home Loan Bank of San Franciscodex104.htm
EX-31.4 - CERTIFICATION OF THE CONTROLLER PURSUANT TO SECTION 302 - Federal Home Loan Bank of San Franciscodex314.htm
EX-32.1 - CERTIFICATION OF THE PRESIDENT AND CEO PURSUANT TO SECTION 906 - Federal Home Loan Bank of San Franciscodex321.htm
EX-31.3 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - Federal Home Loan Bank of San Franciscodex313.htm
EX-10.5 - 2009 AUDIT PERFORMANCE UNIT PLAN - Federal Home Loan Bank of San Franciscodex105.htm
EX-31.2 - CERTIFICATION OF THE CHIEF OPERATING OFFICER PURSUANT TO SECTION 302 - Federal Home Loan Bank of San Franciscodex312.htm
EX-32.4 - CERTIFICATION OF THE CONTROLLER PURSUANT TO SECTION 906 - Federal Home Loan Bank of San Franciscodex324.htm
EX-32.2 - CERTIFICATION OF THE CHIEF OPERATING OFFICER PURSUANT TO SECTION 906 - Federal Home Loan Bank of San Franciscodex322.htm
EX-10.3 - 2009 EXECUTIVE PERFORMANCE UNIT PLAN - Federal Home Loan Bank of San Franciscodex103.htm
EX-10.1 - 2009 EXECUTIVE INCENTIVE PLAN - Federal Home Loan Bank of San Franciscodex101.htm
EX-10.2 - 2009 PRESIDENT'S INCENTIVE PLAN - Federal Home Loan Bank of San Franciscodex102.htm
EX-32.3 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - Federal Home Loan Bank of San Franciscodex323.htm
EX-31.1 - CERTIFICATION OF THE PRESIDENT AND CEO PURSUANT TO SECTION 302 - Federal Home Loan Bank of San Franciscodex311.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     ¨  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 October 30, 2009

Class B Stock, par value $100

   134,050,083

 

 

 


Table of Contents

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    55
  

Quarterly Overview

   56
  

Financial Highlights

   60
  

Results of Operations

   61
  

Financial Condition

   75
  

Liquidity and Capital Resources

   88
  

Risk Management

   90
  

Critical Accounting Policies and Estimates

   106
  

Recently Issued Accounting Standards and Interpretations

   109
  

Recent Developments

   109
  

Off-Balance Sheet Arrangements, Guarantees, and Other Commitments

   110

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    111

Item 4.

   Controls and Procedures    118

PART II.

   OTHER INFORMATION   

Item 1.

   Legal Proceedings    119

Item 1A.

   Risk Factors    119

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    120

Item 3.

   Defaults Upon Senior Securities    120

Item 4.

   Submission of Matters to a Vote of Security Holders    120

Item 5.

   Other Information    120

Item 6.

   Exhibits    122

Signatures

   123

 

i


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

Federal Home Loan Bank of San Francisco

Statements of Condition

(Unaudited)

 

(In millions-except par value)    September 30,
2009
    December 31,
2008
 

Assets

    

Cash and due from banks

   $ 6,115      $ 19,632   

Federal funds sold

     7,086        9,431   

Trading securities(a)

     32        35   

Held-to-maturity securities (fair values were $37,137 and $44,270, respectively)(b)

     38,825        51,205   

Advances (includes $27,381 and $38,573 at fair value under the fair value option, respectively)

     154,962        235,664   

Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $2 and $1, respectively

     3,172        3,712   

Accrued interest receivable

     371        865   

Premises and equipment, net

     21        20   

Derivative assets

     458        467   

Receivable from REFCORP

     19        51   

Other assets

     151        162   
                

Total Assets

   $ 211,212      $ 321,244   

Liabilities and Capital

    

Liabilities:

    

Deposits:

    

Interest-bearing:

    

Demand and overnight

   $ 174      $ 491   

Term

     48        103   

Other

     1        8   

Non-interest-bearing - Other

     2        2   
                

Total deposits

     225        604   
                

Consolidated obligations, net:

    

Bonds (includes $26,205 and $30,286 at fair value under the fair value option, respectively)

     154,869        213,114   

Discount notes

     43,901        91,819   
                

Total consolidated obligations

     198,770        304,933   
                

Mandatorily redeemable capital stock

     3,159        3,747   

Accrued interest payable

     878        1,451   

Affordable Housing Program

     180        180   

Derivative liabilities

     197        437   

Other liabilities

     95        107   
                

Total Liabilities

     203,504        311,459   
                

Commitments and Contingencies (Note 11)

    

Capital (Note 7):

    

Capital stock—Class B—Putable ($100 par value) issued and outstanding:

    

103 shares and 96 shares, respectively

     10,244        9,616   

Restricted retained earnings

     1,065        176   

Accumulated other comprehensive loss

     (3,601     (7
                

Total Capital

     7,708        9,785   
                

Total Liabilities and Capital

   $ 211,212      $ 321,244   

 

(a) At September 30, 2009, and at December 31, 2008, none of these securities were pledged as collateral that may be repledged.
(b) Includes $118 at September 30, 2009, and $307 at December 31, 2008, pledged as collateral that may be repledged.

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

 

1


Table of Contents

Federal Home Loan Bank of San Francisco

Statements of Income

(Unaudited)

 

     For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
(In millions)    2009     2008     2009     2008  
   

Interest Income:

        

Advances

   $ 546      $ 1,841      $ 2,363      $ 6,289   

Prepayment fees on advances, net

     2        (10     22        (10

Federal funds sold

     5        78        18        287   

Trading securities

                   1        2   

Held-to-maturity securities

     358        585        1,162        1,784   

Mortgage loans held for portfolio

     39        48        118        145   
                                

Total Interest Income

     950        2,542        3,684        8,497   
                                

Interest Expense:

        

Consolidated obligations:

        

Bonds

     418        1,673        1,866        5,704   

Discount notes

     67        462        435        1,793   

Deposits

            6               23   

Mandatorily redeemable capital stock

     7        8        7        14   
                                

Total Interest Expense

     492        2,149        2,308        7,534   
                                

Net Interest Income

     458        393        1,376        963   
                                

Provision for credit losses on mortgage loans

                   1          
                                

Net Interest Income After Mortgage Loan Loss Provision

     458        393        1,375        963   
                                

Other Loss:

        

Services to members

            1        1        1   

Net gain on trading securities

                   1          

Total other-than-temporary impairment loss on held-to-maturity securities

     (1,385            (3,824       

Portion of loss recognized in other comprehensive income

     1,069               3,332          
                                

Net other-than-temporary impairment loss on held-to-maturity securities (credit-related loss)

     (316            (492       

Net (loss)/gain on advances and consolidated obligation bonds held at fair value

     (62     99        (423     145   

Net (loss)/gain on derivatives and hedging activities

     (166     (326     92        (264

Other

     1        1        3        3   
                                

Total Other Loss

     (543     (225     (818     (115
                                

Other Expense:

        

Compensation and benefits

     14        13        44        39   

Other operating expense

     12        12        36        27   

Federal Housing Finance Agency/Federal Housing Finance Board

     3        3        8        7   

Office of Finance

     2        1        5        5   
                                

Total Other Expense

     31        29        93        78   
                                

(Loss)/Income Before Assessments

     (116     139        464        770   
                                

REFCORP

     (21     25        85        141   

Affordable Housing Program

     (10     13        38        65   
                                

Total Assessments

     (31     38        123        206   
                                

Net (Loss)/Income

   $ (85   $ 101      $ 341      $ 564   
   

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

 

2


Table of Contents

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, 2007

   134      $ 13,403      $ 227    $      $ 227      $ (3   $ 13,627   

Adjustments to opening balance(a)

            16        16          16   

Issuance of capital stock

   16        1,587                 1,587   

Repurchase/redemption of capital stock

   (12     (1,196              (1,196

Capital stock reclassified to mandatorily redeemable capital stock

   (37     (3,707              (3,707

Comprehensive income:

               

Net income

            564        564          564   

Other comprehensive income:

               

Net amounts recognized as earnings

                1        1   
                     

Total comprehensive income

                  565   
                     

Transfers to restricted retained earnings

         53      (53                

Dividends on capital stock (5.24%)

               

Stock issued

   5        527           (527     (527         
      

Balance, September 30, 2008

   106      $ 10,614      $ 280    $      $ 280      $ (2   $ 10,892   

Balance, December 31, 2008

   96      $ 9,616      $ 176    $      $ 176      $ (7   $ 9,785   

Adjustments to opening balance(b)

            570        570        (570       

Issuance of capital stock

   1        56                 56   

Capital stock reclassified from mandatorily redeemable capital stock, net

   6        572                 572   

Comprehensive income/(loss):

               

Net income

            341        341          341   

Other comprehensive income/(loss):

               

Additional minimum liability on benefit plans

                (1     (1

Other-than-temporary impairment loss related to all other factors

                (3,740     (3,740

Reclassified to income for previously impaired securities

                408        408   

Accretion of impairment loss

                309        309   
                           

Total other-than-temporary impairment loss related to all other factors

                (3,023     (3,023
                     

Total comprehensive income/(loss)

                  (2,683
                     

Transfers to restricted retained earnings

         889      (889                

Dividends on capital stock (0.28%)

               

Cash dividends paid

                   (22     (22       (22
      

Balance, September 30, 2009

   103      $ 10,244      $ 1,065    $      $ 1,065      $ (3,601   $ 7,708   

 

(a) Adjustments to the opening balance consist of the effects of adopting the fair value option for financial assets and financial liabilities, and changing the measurement date of the Bank’s pension and postretirement plans from September 30 to December 31, in accordance with the accounting for employers’ defined benefit pension and other postretirement plans. For more information, see Note 2 to the Financial Statements in the Bank’s 2008 Form 10-K.

 

(b) Adjustments to the opening balance consist of the effects of adopting guidance related to the recognition and presentation of other-than-temporary impairments. For more information, see Note 2 to the Financial Statements.

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

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Statements of Cash Flows

(Unaudited)

 

     For the Nine Months Ended September 30,  
(In millions)    2009     2008  

Cash Flows from Operating Activities:

    

Net Income

   $ 341      $ 564   

Adjustments to reconcile net income to net cash provided by/(used in) operating activities:

    

Depreciation and amortization

     (232     (230

Provision for credit losses on mortgage loans

     1          

Non-cash interest on mandatorily redeemable capital stock

            14   

Change in net fair value adjustment on trading securities

     (1       

Change in net fair value adjustment on advances and consolidated obligation bonds held at fair value

     423        (145

Change in net fair value adjustment on derivatives and hedging activities

     (597     (65

Net other-than-temporary impairment loss on held-to-maturity securities

     492          

Other adjustments

     1          

Net change in:

    

Accrued interest receivable

     547        539   

Other assets

     7        (67

Accrued interest payable

     (585     (628

Other liabilities

     20        36   
                

Total adjustments

     76        (546
                

Net cash provided by operating activities

     417        18   
                

Cash Flows from Investing Activities:

    

Net change in:

    

Federal funds sold

     2,345        (3,720

Premises and equipment

     (6     (7

Trading securities:

    

Proceeds from maturities

     4        21   

Held-to-maturity securities:

    

Net decrease in short-term

     3,324        6,105   

Proceeds from maturities of long-term

     5,933        4,646   

Purchases of long-term

     (406     (12,105

Advances:

    

Principal collected

     835,367        1,177,982   

Made to members

     (755,682     (1,190,091

Mortgage loans held for portfolio:

    

Principal collected

     530        336   
                

Net cash provided by/(used in) investing activities

     91,409        (16,833
                

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Statements of Cash Flows (continued)

(Unaudited)

 

     For the Nine Months Ended September 30,  
(In millions)    2009     2008  
   

Cash Flows from Financing Activities:

    

Net change in:

    

Deposits

     (834     428   

Borrowings from other Federal Home Loan Banks

            (955

Other borrowings

            (100

Net payments on derivative contracts with financing elements

     106        (116

Net proceeds from consolidated obligations:

    

Bonds issued

     57,264        108,270   

Discount notes issued

     126,457        657,679   

Bonds transferred from other Federal Home Loan Banks

            164   

Payments for consolidated obligations:

    

Bonds matured or retired

     (114,199     (98,085

Discount notes matured or retired

     (174,155     (648,355

Proceeds from issuance of capital stock

     56        1,587   

Payments for repurchase/redemption of mandatorily redeemable capital stock

     (16     (52

Payments for repurchase/redemption of capital stock

            (1,196

Cash dividends paid

     (22       

Net cash (used in)/provided by financing activities

     (105,343     19,269   
                

Net (decrease)/increase in cash and cash equivalents

     (13,517     2,454   
                

Cash and cash equivalents at beginning of period

     19,632        5   
                

Cash and cash equivalents at end of period

   $ 6,115      $ 2,459   
   

Supplemental Disclosures:

    

Interest paid during the period

   $ 3,528      $ 9,437   

Affordable Housing Program payments during the period

     38        30   

REFCORP payments during the period

     53        174   

Transfers of mortgage loans to real estate owned

     3        2   

Non-cash dividends on capital stock

            527   

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

 

5


Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements

(Unaudited)

(Dollars in millions)

Background Information

On July 30, 2008, the Housing and Economic Recovery Act of 2008 (Housing Act) was enacted. The Housing Act created a new federal agency, the Federal Housing Finance Agency (Finance Agency), which became the new federal regulator of the Federal Home Loan Banks (FHLBanks) effective on the date of enactment of the Housing Act. On October 27, 2008, the Federal Housing Finance Board (Finance Board), the federal regulator of the FHLBanks prior to the creation of the Finance Agency, merged into the Finance Agency. Pursuant to the Housing Act, all regulations, orders, determinations, and resolutions that were issued, made, prescribed, or allowed to become effective by the Finance Board will remain in effect until modified, terminated, set aside, or superseded by the Director of the Finance Agency, any court of competent jurisdiction, or operation of law. References throughout these notes to regulations of the Finance Agency also include the regulations of the Finance Board where they remain applicable.

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, in the opinion of management, are 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, 2009. 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, 2008 (2008 Form 10-K).

Use of Estimates. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. 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. The most significant of these estimates include the fair value of derivatives, investments classified as other-than-temporarily impaired, certain advances, and certain consolidated obligations that are reported at fair value in the Statements of Condition. In addition, significant judgments, estimates, and assumptions were made in the determination of other-than-temporarily impaired securities. 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 2008 Form 10-K. Other changes to these policies as of September 30, 2009, are discussed in Note 2.

Note 2 – Recently Issued and Adopted Accounting Guidance

Recently Issued Accounting Guidance

Fair Value Measurements and Disclosures - Measuring Liabilities at Fair Value. On August 28, 2009, the Financial Accounting Standards Board (FASB) issued an amendment to existing fair value measurement guidance with respect to measuring liabilities in a hypothetical transaction (assuming the transfer of a liability to a third party), as currently required by U.S. GAAP. This guidance reaffirms that fair value measurement of a liability assumes the transfer of a liability to a market participant as of the measurement date; that is, the liability is

 

6


Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

presumed to continue and is not settled with the counterparty. In addition, this guidance emphasizes that a fair value measurement of a liability includes nonperformance risk and that such risk does not change after transfer of the liability. In a manner consistent with this underlying premise (that is, a transfer notion), this guidance requires that an entity should first determine whether a quoted price of an identical liability traded in an active market exists (that is, a Level 1 fair value measurement). This guidance clarifies that the quoted price for the identical liability, when traded as an asset in an active market, is also a Level 1 measurement for that liability when no adjustment to the quoted price is required. In the absence of a quoted price in an active market for the identical liability, an entity must use one or more of the following valuation techniques to estimate fair value:

 

   

A valuation technique that uses:

 

   

The quoted price of an identical liability when traded as an asset.

 

   

The quoted price of a similar liability or of a similar liability when traded as an asset.

 

   

Another valuation technique that is consistent with the accounting principles for fair value measurements and disclosures, including one of the following:

 

   

An income approach, such as a present value technique.

 

   

A market approach, such as a technique based on the amount at the measurement date that an entity would pay to transfer an identical liability or would receive to enter into an identical liability.

In addition, this guidance clarifies that when estimating the fair value of a liability, a reporting entity should not include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The guidance is effective for the first reporting period (including interim periods) beginning after issuance (October 1, 2009, for the Bank). Entities may also elect to adopt this guidance early if financial statements have not been issued. The Bank does not expect the adoption of this guidance to have a material impact on the Bank’s results of operations, financial condition, or cash flows.

Accounting for Consolidation of Variable Interest Entities. On June 12, 2009, the FASB issued guidance for amending certain requirements of consolidation of variable interest entities. This guidance is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 (January 1, 2010, for the Bank), for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Bank has not yet determined what effect, if any, the adoption of this guidance will have on its results of operations, financial condition, or cash flows.

Accounting for Transfers of Financial Assets. On June 12, 2009, the FASB issued guidance intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 (January 1, 2010, for the Bank), for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Bank has not yet determined what effect, if any, the adoption of this guidance will have on its results of operations, financial condition, or cash flows.

Employers’ Disclosures About Postretirement Benefit Plan Assets. On December 30, 2008, the FASB issued guidance requiring additional disclosures about plan assets of a defined benefit pension or other

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

postretirement plan. This guidance requires more detailed disclosures about employers’ plan assets, including employers’ investment strategies, major categories of plan assets, concentration of risk within plan assets, and valuation techniques used to measure the fair value of plan assets. This guidance is effective for fiscal years ending after December 15, 2009 (December 31, 2009, for the Bank). In periods after initial adoption, this guidance requires comparative disclosures only for periods ending subsequent to initial adoption and does not require earlier periods to be disclosed for comparative purposes at initial adoption. Because this guidance affects financial statement disclosures only, its adoption will not have a material impact on the Bank’s results of operations, financial condition, or cash flows. Its adoption will result in increased financial statement disclosures.

Recently Adopted Accounting Guidance

Accounting Standards Codification. On June 29, 2009, the FASB issued the FASB Accounting Standards Codification (Codification) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by non-government entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification is not intended to change current U.S. GAAP; rather, its intent is to organize the authoritative accounting literature by topic in one place. The Codification modifies the U.S. GAAP hierarchy to include only two levels of GAAP, authoritative and non-authoritative. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. Following the establishment of the Codification, the FASB will issue new accounting guidance in the form of Accounting Standards Updates (ASU). The ASU will serve only to update the Codification, provide background information about the guidance, and provide the basis for conclusions regarding the changes to the Codification. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Bank adopted the Codification for the interim period ended September 30, 2009. Because the Codification is not intended to change or alter previous U.S. GAAP, its adoption did not have any impact on the Bank’s results of operations, financial condition, or cash flows.

Subsequent Events. On May 28, 2009, the FASB issued guidance establishing general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance sets forth: (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date, including disclosure of the date through which an entity has evaluated subsequent events and whether that represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. This guidance does not apply to subsequent events or transactions that are within the scope of other applicable U.S. GAAP that provide different guidance on the accounting treatment for subsequent events or transactions. This guidance is effective for interim and annual financial periods ending after June 15, 2009. The Bank adopted this guidance for the period ended June 30, 2009. Its adoption resulted in increased financial statement disclosures. Subsequent events have been evaluated until the time of the Form 10-Q filing with the SEC on November 12, 2009.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Recognition and Presentation of Other-Than-Temporary Impairments. On April 9, 2009, the FASB issued guidance amending the recognition and reporting requirements of the other-than-temporary impairment (OTTI) guidance in U.S. GAAP for debt securities classified as available-for-sale and held-to-maturity to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This OTTI guidance clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired and changes the presentation and calculation of the OTTI on debt securities recognized in earnings in the financial statements. This OTTI guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This OTTI guidance expands and increases the frequency of existing OTTI disclosures for debt and equity securities and requires new disclosures to help users of financial statements understand the significant inputs used in determining a credit loss as well as a rollforward of that amount each period.

For impaired debt securities, this guidance requires an entity to assess whether (i) it has the intent to sell the debt security, or (ii) it is more likely than not that it will be required to sell the debt security before its anticipated recovery of the remaining amortized cost basis of the security. If either of these conditions is met, an OTTI on the security must be recognized.

With respect to any debt security, a credit loss is defined as the amount by which the amortized cost basis exceeds the present value of the cash flows expected to be collected. If a credit loss exists but the entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis (that is, the amortized cost basis less any current-period credit loss), the OTTI guidance changes the presentation and amount of the OTTI recognized in the statements of earnings. The impairment is separated into (i) the amount of the total impairment related to credit loss, and (ii) the amount of the total impairment related to all other factors. The amount of the total OTTI related to credit loss is recognized in earnings. The amount of the total impairment related to all other factors is recognized in other comprehensive income and will be accreted prospectively, based on the amount and timing of future estimated cash flows, over the remaining life of the debt security as an increase in the carrying value of the security, with no effect on earnings unless the security is subsequently sold or there are additional decreases in cash flows expected to be collected. The total OTTI is presented in the statements of earnings with an offset for the amount of the total OTTI that is recognized in other comprehensive income. This new presentation provides additional information about the amounts that the entity does not expect to collect related to a debt security.

Following implementation of this OTTI guidance, the present value of the cash flows expected to be collected with respect to any debt security is compared to the amortized cost basis of the security to determine whether a credit loss exists. For securities previously identified as other-than-temporarily impaired, the Bank updates its estimate of future estimated cash flows on a regular basis. If there is no additional impairment on the security, the yield of the security is adjusted on a prospective basis when there is a significant increase in the expected cash flows. This accretion is included in net interest income in the Statements of Income.

This OTTI guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. This OTTI guidance is to be applied to existing and new investments held by an entity as of the beginning of the interim period in which it is adopted. For debt securities held at the beginning of the interim period of adoption for which an other-than-temporary impairment was previously recognized, if an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

basis, the entity shall recognize the cumulative effect of initially applying this guidance as an adjustment to the opening balance of retained earnings with a corresponding adjustment to accumulated other comprehensive income. If an entity elects to adopt this OTTI guidance early, it must also concurrently adopt recently issued guidance regarding the determination of fair value when there has been a significant decrease in the volume and level of activity for an asset or liability or when price quotations are associated with transactions that are not orderly (discussed below). This OTTI guidance does not require disclosures for earlier periods presented for comparative purposes at initial adoption, and in periods after initial adoption, comparative disclosures are required only for periods ending after initial adoption. The Bank adopted this OTTI guidance as of January 1, 2009, and recognized the effects as a change in accounting principle. The Bank recognized the cumulative effect of initially applying this OTTI guidance, totaling $570, as an increase in the retained earnings balance at January 1, 2009, with a corresponding change in accumulated other comprehensive loss. This adjustment did not affect either the Bank’s Affordable Housing Program or Resolution Funding Corporation expense or accruals, because these assessments are calculated based on GAAP net income. Had the Bank elected not to adopt this OTTI guidance early, the Bank would have recognized the entire first quarter 2009 OTTI amount in other income in the first quarter of 2009. The adoption of this OTTI guidance also increased financial statement disclosures.

Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. On April 9, 2009, the FASB issued guidance providing additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and also including guidance on identifying circumstances that indicate a transaction is not orderly. This guidance emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement under U.S. GAAP remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current conditions. In addition, the guidance requires enhanced disclosures regarding fair value measurements.

This guidance is effective for interim and annual reporting periods ending after June 15, 2009, and will be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. If an entity elects to adopt this guidance early, it must also concurrently adopt the new OTTI guidance discussed above. This guidance does not require disclosures for earlier periods presented for comparative purposes at initial adoption, and in periods after initial adoption, comparative disclosures are required only for periods ending after initial adoption. The Bank adopted this guidance as of January 1, 2009, and the adoption did not have a material impact on the Bank’s results of operations, financial condition, or cash flows.

Interim Disclosures About Fair Value of Financial Instruments. On April 9, 2009, the FASB issued guidance amending the disclosure requirements for the fair value of financial instruments, including disclosures of the method(s) and significant assumptions used to estimate the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. In addition, the guidance requires disclosure in interim and annual financial statements of any changes in the methods and significant assumptions used to estimate the fair value of financial instruments. This guidance is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may adopt this guidance early only if it also concurrently adopts the new guidance discussed in the preceding paragraphs on OTTI and fair value. This guidance does not require disclosures for earlier periods presented for comparative purposes at initial adoption, and in periods after initial adoption, comparative disclosures are required only for periods ending after initial adoption. The Bank adopted this guidance as of January 1, 2009. Its adoption resulted in increased financial statement disclosures.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Enhanced Disclosures about Derivative Instruments and Hedging Activities. On March 19, 2008, the FASB issued guidance requiring enhanced disclosures about an entity’s derivative instruments and hedging activities including: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedged items are accounted for under U.S. GAAP; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with earlier application encouraged. The Bank adopted this guidance on January 1, 2009. Its adoption resulted in increased financial statement disclosures.

Determining Fair Value for Non-Financial Assets and Liabilities. On February 12, 2008, the FASB issued guidance delaying the effective date of fair value measurement guidance 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 the fair value measurement guidance for these items as of January 1, 2009, and its adoption did not have a material impact on the Bank’s results of operations, financial condition, or cash flows.

Note 3 – Held-to-Maturity Securities

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

September 30, 2009

 

      Amortized
Cost(1)
  

OTTI

Related to All
Other Factors
Recognized in
Accumulated
Other
Comprehensive
Loss(1)

    Carrying
Value(1)
   Gross
Unrecognized
Holding
Gains(2)
   Gross
Unrecognized
Holding
Losses(2)
    Estimated
Fair
Value

Interest-bearing deposits in banks

   $ 7,029    $ —        $ 7,029    $ —      $ —        $ 7,029

Commercial paper

     1,000      —          1,000      —        —          1,000

Housing finance agency bonds

     769      —          769      —        (24     745

Subtotal

     8,798      —          8,798      —        (24     8,774

Mortgage-backed securities (MBS):

               

Ginnie Mae

     16      —          16      —        —          16

Freddie Mac

     3,639      —          3,639      153      (3     3,789

Fannie Mae

     9,031      —          9,031      302      (15     9,318

Private-label residential MBS (PLRMBS)

     20,934      (3,593     17,341      287      (2,388     15,240

Total MBS

     33,620      (3,593     30,027      742      (2,406     28,363

Total

   $ 42,418    $ (3,593   $ 38,825    $ 742    $ (2,430   $ 37,137

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

December 31, 2008

 

    

Amortized

Cost(1)

   Gross
Unrealized
Gains(2)
   Gross
Unrealized
Losses(2)
   

Estimated

Fair
Value

 

Interest-bearing deposits in banks

   $ 11,200    $    $      $ 11,200

Commercial paper

     150                  150

Housing finance agency bonds

     802      4             806
 

Subtotal

     12,152      4             12,156
 

MBS:

          

Ginnie Mae

     19           (1     18

Freddie Mac

     4,408      57      (8     4,457

Fannie Mae

     10,083      99      (22     10,160

PLRMBS

     24,543           (7,064     17,479
 

Total MBS

     39,053      156      (7,095     32,114
 

Total

   $ 51,205    $ 160    $ (7,095   $ 44,270
 

 

(1) Amortized cost includes unpaid principal balance, unamortized premiums and discounts, and previous other-than-temporary impairments recognized in earnings (less any cumulative-effect adjustments recognized). The carrying value of held-to-maturity securities represents amortized cost after adjustment for impairment related to all other factors recognized in other comprehensive income/(loss). At December 31, 2008, amortized cost was equivalent to carrying value.
(2) Gross unrecognized holding gains/(losses) represent the difference between estimated fair value and carrying value, while gross unrealized gains/(losses) represent the difference between estimated fair value and amortized cost.

As of September 30, 2009, all of the interest-bearing deposits in banks had a credit rating of at least A, all of the commercial paper had a credit rating of A, and all of the housing finance agency bonds had a credit rating of at least AA. In addition, as of September 30, 2009, all of the residential agency MBS, which are backed by Ginnie Mae, Freddie Mac, or Fannie Mae, had a credit rating of AAA, and 50% of the PLRMBS were rated above investment grade (15% had a credit rating of AAA based on the amortized cost), and the remaining 50% were rated below investment grade. Credit ratings of BB and lower are below investment grade. The credit ratings used by the Bank are based on the lowest of Moody’s Investors Service (Moody’s), Standard & Poor’s Rating Services (Standard & Poor’s), or comparable Fitch ratings.

The following tables summarize the held-to-maturity securities with unrealized losses as of September 30, 2009, and December 31, 2008. The unrealized losses are aggregated by major security type and the length of time that individual securities have been in a continuous unrealized loss position.

September 30, 2009

     Less than 12 months    12 months or more    Total
     Estimated
Fair Value
   Unrealized
Losses
   Estimated
Fair Value
   Unrealized
Losses
   Estimated
Fair Value
   Unrealized
Losses
 

Interest-bearing deposits in banks

   $ 7,029       $    $    $ 7,029    $

Housing finance agency bonds

     745    24                745      24
 

Subtotal

     7,774    24                7,774      24
 

MBS:

                 

Ginnie Mae

     10         6           16     

Freddie Mac

     44    2      40      1      84      3

Fannie Mae

     483    11      182      4      665      15

PLRMBS(1)

     1         15,239      5,981      15,240      5,981
 

Total

   $ 8,312    37    $ 15,467    $ 5,986    $ 23,779    $ 6,023
 

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

December 31, 2008

 

      Less than 12 months    12 months or more    Total
     Estimated
Fair Value
   Unrealized
Losses
   Estimated
Fair Value
   Unrealized
Losses
   Estimated
Fair Value
   Unrealized
Losses
 

MBS:

                 

Ginnie Mae

   $ 10    $    $ 8    $ 1    $ 18    $ 1

Freddie Mac

     707      6      44      2      751      8

Fannie Mae

     2,230      20      117      2      2,347      22

PLRMBS

     3,708      1,145      12,847      5,919      16,555      7,064
 

Total

   $ 6,655    $ 1,171    $ 13,016    $ 5,924    $ 19,671    $ 7,095
 

 

(1) Includes securities with gross unrecognized holding losses of $2,388 and securities with OTTI losses of $3,593 that have been recorded in other comprehensive
income/(loss).

As indicated in the tables above, as of September 30, 2009, the Bank’s investments classified as held-to-maturity had gross unrealized losses totaling $6,023, primarily relating to PLRMBS. The gross unrealized losses associated with the PLRMBS were primarily due to extraordinarily high investor yield requirements resulting from an extremely illiquid market, significant uncertainty about the future condition of the mortgage market and the economy, and continued deterioration in the credit performance of loan collateral underlying these securities, causing these assets to be valued at significant discounts to their acquisition cost.

For a discussion of the Bank’s OTTI analysis, see Other-Than-Temporary Impairment section below.

Redemption Terms. The amortized cost, carrying value, and estimated fair value of certain securities by contractual maturity (based on contractual final principal payment) and MBS as of September 30, 2009, and December 31, 2008, are shown below. Expected maturities of certain securities and MBS will differ from contractual maturities because borrowers generally have the right to prepay the underlying obligations without prepayment fees.

September 30, 2009

 

Year of Contractual Maturity    Amortized
Cost(1)
   Carrying
Value(1)
   Estimated
Fair Value
   Weighted
Average
Interest Rate
 
   

Held-to-maturity securities other than MBS:

           

Due in one year or less

   $ 8,029    $ 8,029    $ 8,029    0.18

Due after one year through five years

     12      12      12    0.63   

Due after five years through ten years

     27      27      26    0.60   

Due after ten years

     730      730      707    0.72   
    

Subtotal

     8,798      8,798      8,774    0.22   
    

MBS:

           

Ginnie Mae

     16      16      16    1.32   

Freddie Mac

     3,639      3,639      3,789    4.84   

Fannie Mae

     9,031      9,031      9,318    4.17   

PLRMBS

     20,934      17,341      15,240    3.85   
    

Total MBS

     33,620      30,027      28,363    4.04   
    

Total

   $ 42,418    $ 38,825    $ 37,137    3.26
   

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

December 31, 2008

 

Year of Contractual Maturity    Amortized
Cost(1)
   Estimated
Fair Value
   Weighted
Average
Interest Rate
 
   

Held-to-maturity securities other than MBS:

        

Due in one year or less

   $ 11,350    $ 11,350    0.53

Due one year through five years

     17      17    3.34   

Due after five years through ten years

     28      28    3.31   

Due after ten years

     757      761    3.40   
    

Subtotal

     12,152      12,156    0.72   
    

MBS:

        

Ginnie Mae

     19      18    2.07   

Freddie Mac

     4,408      4,457    4.95   

Fannie Mae

     10,083      10,160    4.38   

PLRMBS

     24,543      17,479    4.11   
    

Total MBS

     39,053      32,114    4.27   
    

Total

   $ 51,205    $ 44,270    3.44
   

 

(1) Amortized cost includes unpaid principal balance, unamortized premiums and discounts, and previous other-than-temporary impairments recognized in earnings (less any cumulative-effect adjustments recognized). The carrying value of held-to-maturity securities represents amortized cost after adjustment for impairment related to all other factors recognized in other comprehensive income/(loss). At December 31, 2008, amortized cost was equivalent to carrying value.

The carrying value of the Bank’s MBS classified as held-to-maturity included net discounts of $4,133 at September 30, 2009, and net discounts of $597 at December 31, 2008. At September 30, 2009, net discounts included $512 from the OTTI related to credit losses and $3,593 from the OTTI related to all other factors. At December 31, 2008, net discounts included $20 from the OTTI related to credit losses and $570 from the OTTI related to all other factors.

Interest Rate Payment Terms. Interest rate payment terms for held-to-maturity securities at September 30, 2009, and December 31, 2008, are detailed in the following table:

 

      September 30, 2009    December 31, 2008

Amortized cost of held-to-maturity securities other than MBS:

     

Fixed rate

   $ 8,029    $ 11,350

Adjustable rate

     769      802
 

Subtotal

     8,798      12,152
 

Amortized cost of held-to-maturity MBS:

     

Passthrough securities:

     

Fixed rate

     3,556      4,120

Adjustable rate

     90      100

Collateralized mortgage obligations:

     

Fixed rate

     18,712      24,604

Adjustable rate

     11,262      10,229
 

Subtotal

     33,620      39,053
 

Total

   $ 42,418    $ 51,205
 

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.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

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

Other-Than-Temporary Impairment. On a quarterly basis, the Bank evaluates its individual held-to-maturity investment securities in an unrealized loss position for OTTI. As part of this evaluation, the Bank considers whether it intends to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery of the amortized cost basis. If either of these conditions is met, the Bank recognizes an OTTI charge to earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For securities in an unrealized loss position that meet neither of these conditions, the Bank considers whether it expects to recover the entire amortized cost basis of the security by comparing its best estimate of the present value of the cash flows expected to be collected from the security with the amortized cost basis of the security. If the Bank’s best estimate of the present value of the cash flows expected to be collected is less than the amortized cost basis, the difference is considered the credit loss.

For all the securities in its held-to-maturity portfolio, the Bank does not intend to sell any security and it is not more likely than not that the Bank will be required to sell any security before its anticipated recovery of the remaining amortized cost basis.

The Bank has determined that, as of September 30, 2009, all of the gross unrealized losses on its interest-bearing deposits in banks and commercial paper are temporary because the gross unrealized losses were caused by movements in interest rates and not by the deterioration of the issuers’ creditworthiness; the interest-bearing deposits in banks and commercial paper were all with issuers that had credit ratings of at least A at September 30, 2009; and all of the securities had maturity dates within 45 days of September 30, 2009. As a result, the Bank expects to recover the entire amortized cost basis of these securities.

As of September 30, 2009, the Bank’s investments in housing finance agency bonds, which were issued by the California Housing Finance Agency, had gross unrealized losses totaling $24. These gross unrealized losses were mainly due to extraordinarily high investor yield requirements resulting from an illiquid market, causing these investments to be valued at a discount to their acquisition cost. The Bank has determined that, as of September 30, 2009, all of the gross unrealized losses on these bonds are temporary because the strength of the underlying collateral and credit enhancements was sufficient to protect the Bank from losses based on current expectations and the California Housing Finance Agency had a credit rating of AA–  at September 30, 2009 (based on the lowest of Moody’s, Standard & Poor’s, or comparable Fitch ratings). As a result, the Bank expects to recover the entire amortized cost basis of these securities.

For its agency MBS, the Bank expects to recover the entire amortized cost basis of these securities because it determined that the strength of the issuers’ guarantees through direct obligations or support from the U.S. government is sufficient to protect the Bank from losses based on current expectations. As a result, the Bank has determined that, as of September 30, 2009, all of the gross unrealized losses on its agency MBS are temporary.

To assess whether it expects to recover the entire amortized cost basis of its PLRMBS, the Bank performed a cash flow analysis for all but five of its PLRMBS as of September 30, 2009. For the remaining five PLRMBS, for which underlying collateral data is not available, alternative procedures were used to assess these securities for OTTI.

In performing the cash flow analysis for each security, the Bank used two third-party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the Bank’s securities,

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

in conjunction with assumptions about future changes in home prices, interest rates, and other assumptions, to project prepayments, default rates, and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core-based statistical areas (CBSAs) based on an assessment of the relevant housing markets. CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget. As currently defined, a CBSA must contain at least one urban area of 10,000 or more people. The Bank’s housing price forecast assumed CBSA-level current-to-trough housing price declines ranging from 0 percent to 20 percent over the next 9 to 15 months. Thereafter, home prices are projected to increase 0 percent in the first six months, 0.5 percent in the next six months, 3 percent in the second year, and 4 percent in each subsequent year. The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, default rates, and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in each securitization structure in accordance with the structure’s prescribed cash flow and loss allocation rules. When the credit enhancement for the senior securities in a securitization is derived from the presence of subordinated securities, losses are generally allocated first to the subordinated securities until their principal balance is reduced to zero. The 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. The scenario of cash flows determined based on the model approach described above reflects a best-estimate scenario and includes a base case current-to-trough housing price forecast and a base case housing price recovery path.

For securities determined to be other-than-temporarily impaired as of September 30, 2009 (that is, securities for which the Bank determined that it was more likely than not that the entire amortized cost basis would not be recovered), the following table presents a summary of the significant inputs used in measuring the amount of credit loss recognized in earnings in the third quarter of 2009.

 

     Significant Inputs   Current
        
     Prepayment Rates   Default Rates   Loss Severities   Credit Enhancement
    
Year of Securitization    Weighted
Average %
  Range %   Weighted
Average %
  Range %   Weighted
Average %
   Range %   Weighted
Average %
  Range %

2004 and earlier

   16.6   13.5 – 18.2   17.7   12.5 – 28.2   18.4    11.2 – 33.2   17.3   14.4 – 23.1

2005

   10.0   6.8 – 14.7   41.7   16.4 – 78.0   43.4    33.1 – 57.8   19.0   9.1 – 34.0

2006

   9.6   2.8 – 12.6   48.0   23.6 – 89.1   44.8    35.0 – 57.9   25.4   11.4 – 43.1

2007

   8.5   4.9 – 13.0   61.5   17.5 – 87.8   44.2    37.5 – 54.2   29.8   10.0 – 46.2

2008

   11.5   10.5 – 11.7   48.8   47.6 – 49.2   41.7    41.7   31.3   31.3

Total

   9.3   2.8 – 18.2   52.3   12.5 – 89.1   43.9    11.2 – 57.9   25.9   9.1 – 46.2

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Based on the analysis described above, the Bank recorded OTTI related to credit loss of $316 and $492 that was recognized in “Other Loss” for the third quarter of 2009 and the first nine months of 2009, respectively, and recognized OTTI related to all other factors of $1,069 and $3,332 in “Other comprehensive income/(loss)” for the third quarter of 2009 and the first nine months of 2009, respectively. For each security, the estimated impairment related to all other factors for each security will be accreted prospectively, based on the amount and timing of future estimated cash flows, over the remaining life of the security as an increase in the carrying value of the security (with no effect on earnings unless the security is subsequently sold or there are additional decreases in the cash flows expected to be collected). The Bank does not intend to sell these securities and it is not more likely than not that the Bank will be required to sell these securities before its anticipated recovery of the remaining amortized cost basis. At September 30, 2009, the estimated weighted average life of these securities was approximately four years.

The following table presents the OTTI related to credit loss, which is recognized in earnings, and the OTTI related to all other factors, which is recognized in “Other comprehensive income/(loss).”

 

     Three Months Ended September 30, 2009     Nine Months Ended September 30, 2009  
                
     OTTI
Related to
Credit Loss
   OTTI
Related to
All Other
Factors
    Total
OTTI
    OTTI
Related to
Credit Loss
   OTTI
Related to
All Other
Factors
    Total
OTTI
 
   

Balance, beginning of the period(1)

   $ 196    $ 2,710      $ 2,906      $ 20    $ 570      $ 590   

Charges on securities for which OTTI was not previously recognized

     34      1,219        1,253        308      3,368        3,676   

Additional charges on securities for which OTTI was previously recognized(2)

     282      (150     132        184      (36     148   

Accretion of impairment related to all other factors

          (186     (186          (309     (309
   

Balance, end of the period

   $ 512    $ 3,593      $ 4,105      $ 512    $ 3,593      $ 4,105   
   

 

(1) The Bank adopted the OTTI guidance as of January 1, 2009, and recognized the cumulative effect of initially applying the OTTI guidance, totaling $570, as an increase in the retained earnings balance at January 1, 2009, with a corresponding change in accumulated other comprehensive loss.
(2) For the three months ended September 30, 2009, “securities for which OTTI was previously recognized” represents all securities that were also previously other-than-temporarily impaired prior to July 1, 2009. For the nine months ended September 30, 2009, “securities for which OTTI was previously recognized” represents all securities that were also previously other-than-temporarily impaired prior to January 1, 2009.

To determine the estimated fair value of PLRMBS at December 31, 2008, March 31, 2009, and June 30, 2009, the Bank used a weighting of its internal price (based on valuation models using market-based inputs obtained from broker-dealer data and price indications) and the price from an external pricing service to determine the estimated fair value that the Bank believed market participants would use to purchase the PLRMBS. In evaluating the resulting estimated fair value of PLRMBS, the Bank compared the estimated implied yields to a range of broker indications of yields for similar transactions or to a range of yields that brokers reported market participants would use in purchasing PLRMBS.

Beginning with the quarter ended September 30, 2009, the Bank changed the methodology used to estimate the fair value of PLRMBS in an effort to achieve consistency among all the FHLBanks in applying a fair value methodology. In this regard, the FHLBanks formed the MBS Pricing Governance Committee with the responsibility for developing a fair value methodology that all FHLBanks could adopt. Under the methodology approved by the MBS Pricing Governance Committee and adopted by the Bank, the Bank requests prices for all mortgage-backed securities from four specific third-party vendors. Depending on the number of prices received for each security, the Bank selects a median or average price as determined by the methodology. The methodology also incorporates variance thresholds to assist in identifying median or average prices that may require further review. In certain limited instances (for example, when prices are outside of variance thresholds or the third-party services do not provide a price), the Bank will obtain a price from securities dealers or internally model a price that is deemed appropriate after consideration of the relevant facts and

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

circumstances that a market participant would consider. Prices for PLRMBS held in common with other FHLBanks are reviewed with those FHLBanks for consistency. In adopting this common methodology, the Bank remains responsible for the selection and application of its fair value methodology and the reasonableness of assumptions and inputs used.

This change in fair value methodology did not have a significant impact on the Bank’s estimated fair values of its PLRMBS at September 30, 2009.

The following table presents the Bank’s other-than-temporarily impaired PLRMBS that incurred an OTTI charge during the three months ended September 30, 2009, by loan collateral type:

 

September 30, 2009    Unpaid
Principal
Balance
   Amortized
Cost
  

Carrying

Value

   Estimated
Fair Value
 

Other-than-temporarily impaired PLRMBS backed by loans classified at origination as:

           

Prime

   $ 1,396    $ 1,357    $ 923    $ 935

Alt-A, option ARM

     2,146      1,971      986      997

Alt-A, other

     6,142      5,835      3,915      4,124
 

Total

   $ 9,684    $ 9,163    $ 5,824    $ 6,056
 

The following table presents the Bank’s total portfolio of other-than-temporarily impaired PLRMBS at September 30, 2009, by loan collateral type:

 

September 30, 2009    Unpaid
Principal
Balance
   Amortized
Cost
  

Carrying

Value

   Estimated
Fair Value
 

Other-than-temporarily impaired PLRMBS backed by loans classified at origination as:

           

Prime

   $ 1,396    $ 1,357    $ 923    $ 935

Alt-A, option ARM

     2,146      1,971      986      997

Alt-A, other

     6,800      6,494      4,320      4,576
 

Total

   $ 10,342    $ 9,822    $ 6,229    $ 6,508
 

The following table presents the Bank’s OTTI related to credit loss and OTTI related to all other factors on its other-than-temporarily impaired PLRMBS during the three months and nine months ended September 30, 2009:

 

     Three Months Ended September 30, 2009    Nine Months Ended September 30, 2009
             
    

OTTI

Related to
Credit Loss

   OTTI
Related to
All Other
Factors
  

Total

OTTI

   OTTI
Related to
Credit Loss
   OTTI
Related to
All Other
Factors
   Total
OTTI
 

Other-than-temporarily impaired PLRMBS backed by loans classified at origination as:

                 

Prime

   $ 26    $ 91    $ 117    $ 41    $ 403    $ 444

Alt-A, option ARM

     121      425      546      171      981      1,152

Alt-A, other

     169      553      722      280      1,948      2,228
 

Total

   $ 316    $ 1,069    $ 1,385    $ 492    $ 3,332    $ 3,824
 

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

The following tables present the other-than-temporarily impaired PLRMBS for the three and nine months ended September 30, 2009, by loan collateral type and the length of time that the individual securities were in a continuous loss position prior to the current period write-down:

 

     Three Months Ended September 30, 2009
      
     Gross Unrealized Losses
Related to Credit
   Gross Unrealized Losses Related
to All Other Factors
             
     Less than
12 months
  

12 months

or more

   Total    Less than
12 months
    12 months
or more
   Total
 

Other-than-temporarily impaired PLRMBS backed by loans classified at origination as:

                

Prime

   $ 8    $ 18    $ 26    $ (8   $ 99    $ 91

Alt-A, option ARM

          121      121             425      425

Alt-A, other

          169      169             553      553
 

Total

   $ 8    $ 308    $ 316    $ (8   $ 1,077    $ 1,069
 
     Nine Months Ended September 30, 2009
      
     Gross Unrealized Losses
Related to Credit
   Gross Unrealized Losses Related
to All Other Factors
             
     Less than
12 months
  

12 months

or more

   Total    Less than
12 months
    12 months
or more
   Total
 

Other-than-temporarily impaired PLRMBS backed by loans classified at origination as:

                

Prime

   $ 17    $ 24    $ 41    $ (9   $ 412    $ 403

Alt-A, option ARM

          171      171             981      981

Alt-A, other

          280      280             1,948      1,948
 

Total

   $ 17    $ 475    $ 492    $ (9   $ 3,341    $ 3,332
 

For the Bank’s PLRMBS that were not other-than-temporarily impaired as of September 30, 2009, the Bank does not intend to sell these securities, it is not more likely than not that the Bank will be required to sell these securities before its anticipated recovery of the remaining amortized cost basis, and the Bank expects to recover the entire amortized cost basis of these securities. As a result, the Bank has determined that, as of September 30, 2009, the gross unrealized losses on these remaining PLRMBS are temporary. Thirty-seven percent of the PLRMBS that were not other-than-temporarily impaired were rated investment grade (10% were rated AAA based on the amortized cost), with the remainder rated below investment grade. These securities were included in the securities that the Bank reviewed and analyzed for OTTI as discussed above, and the analyses performed indicated that these securities were not other-than-temporarily impaired. The credit ratings used by the Bank are based on the lowest of Moody’s, Standard & Poor’s, or comparable Fitch ratings.

At September 30, 2009, PLRMBS representing 43% of the amortized cost of the Bank’s MBS portfolio were labeled Alt-A by the issuer. Alt-A securities are generally collateralized by mortgage loans that are considered less risky than subprime loans, but more risky than prime loans. These loans are generally made to borrowers who have sufficient credit ratings to qualify for a conforming mortgage loan, but the loans may not meet standard guidelines for documentation requirements, property type, or loan-to-value ratios. In addition, the property securing the loan may be non-owner-occupied.

From October 1, 2009, through October 30, 2009, the rating agencies downgraded certain PLRMBS held by the Bank with a carrying value of approximately $159 and an estimated fair value of approximately $141. These downgraded securities were included in the Bank’s OTTI analysis performed as of September 30, 2009, and no additional OTTI charges were required as a result of these downgrades. The Bank does not intend to sell these securities, it is not more likely than not that the Bank will be required to sell these securities before its anticipated recovery of the remaining amortized cost basis, and the Bank expects to recover the entire amortized cost basis of these securities. As a result, the Bank has determined that, as of September 30, 2009, all of the gross unrealized losses on these securities are temporary.

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

If current conditions in the mortgage markets and general business and economic conditions continue or deteriorate further, the fair value of MBS may decline further and the Bank may experience OTTI of additional MBS in future periods, as well as further impairment of PLRMBS that were identified as other-than-temporarily impaired as of September 30, 2009. Additional future OTTI charges could adversely affect the Bank’s earnings and retained earnings and its ability to pay dividends and repurchase capital stock. The Bank cannot predict whether it will be required to record additional OTTI charges on its MBS in the future.

Federal and state government authorities, as well as private entities, such as financial institutions and the servicers of residential mortgage loans, have begun or promoted implementation of programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures. These loan modification programs, as well as future legislative, regulatory, or other actions, including amendments to the bankruptcy laws, that result in the modification of outstanding mortgage loans, may adversely affect the value of, and the returns on, these mortgage loans or MBS related to these mortgage loans.

Note 4 – Advances

Redemption Terms. The Bank had advances outstanding, excluding overdrawn demand deposit accounts, at interest rates ranging from 0.05% to 8.57% at September 30, 2009, and December 31, 2008, as summarized below.

 

     September 30, 2009     December 31, 2008  
                
Contractual Maturity   

Amount

Outstanding

  

Weighted

Average

Interest Rate

   

Amount

Outstanding

  

Weighted

Average

Interest Rate

 

Within 1 year

   $ 94,735    1.77   $ 139,842    2.42

After 1 year through 2 years

     28,908    2.05        41,671    3.24   

After 2 years through 3 years

     11,191    2.30        25,853    2.70   

After 3 years through 4 years

     8,203    2.00        6,158    3.78   

After 4 years through 5 years

     3,068    2.84        11,599    2.70   

After 5 years

     7,136    2.18        7,804    2.80   
             

Total par amount

     153,241    1.91     232,927    2.66
                  

Valuation adjustments for hedging activities

     822        1,353   

Valuation adjustments under fair value option

     840        1,299   

Net unamortized premiums

     59        85   
             

Total

   $ 154,962      $ 235,664   
             

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

The following table summarizes advances at September 30, 2009, and December 31, 2008, by the earlier of the year of contractual maturity or next call date for callable advances.

 

Earlier of Contractual

Maturity or Next Call Date

   September 30, 2009    December 31, 2008
 

Within 1 year

   $ 94,745    $ 140,147

After 1 year through 2 years

     28,908      41,678

After 2 years through 3 years

     11,196      25,851

After 3 years through 4 years

     8,193      5,858

After 4 years through 5 years

     3,068      11,589

After 5 years

     7,131      7,804
 

Total par amount

   $ 153,241    $ 232,927
 

The following table summarizes advances at September 30, 2009, and December 31, 2008, by the earlier of the year of contractual maturity or next put date for putable advances.

 

Earlier of Contractual

Maturity or Next Put Date

   September 30, 2009    December 31, 2008
 

Within 1 year

   $ 97,416    $ 143,424

After 1 year through 2 years

     29,078      41,200

After 2 years through 3 years

     10,299      25,755

After 3 years through 4 years

     7,875      5,099

After 4 years through 5 years

     2,800      11,189

After 5 years

     5,773      6,260
 

Total par amount

   $ 153,241    $ 232,927
 

Security Terms. The Bank lends to member financial institutions that have a principal place of business in Arizona, California, or Nevada. The Bank is required by the Federal Home Loan Bank Act of 1932, as amended (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 or securities representing a whole interest in such loans as collateral from members that qualify as community financial institutions. The Housing Act added secured loans for community development activities as collateral that the Bank may accept from community financial institutions. The Housing Act defined community financial institutions for 2008 as FDIC-insured depository institutions with average total assets over the preceding three-year period of $1,000 or less. The Finance Agency adjusts the average total asset cap for inflation annually. Effective January 1, 2009, the cap was $1,011. In addition, the Bank has advances outstanding to former members and member successors, which are also subject to these security terms. For more information on security terms, see Note 6 to the Financial Statements in the Bank’s 2008 Form 10-K.

Credit and Concentration Risk. The Bank’s potential credit risk from advances is concentrated in three institutions whose advances outstanding represented 10% or more of the Bank’s total par amount of advances outstanding. The following tables present the concentration in advances to these three institutions as of September 30, 2009, and December 31, 2008. The tables also present the interest income from these advances before the impact of interest rate exchange agreements associated with these advances for the third quarter of 2009 and 2008 and for the first nine months of 2009 and 2008.

 

21


Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Concentration of Advances

 

     September 30, 2009     December 31, 2008  
Name of Borrower    Advances
Outstanding(1)
   Percentage of
Total
Advances
Outstanding
    Advances
Outstanding(1)
   Percentage of
Total
Advances
Outstanding
 
   

Citibank, N.A.

   $ 49,025    32   $ 80,026    34

JPMorgan Chase Bank, National Association(2)

     29,123    19        57,528    25   

Wachovia Mortgage, FSB(3)

     16,231    11        24,015    10   
   

Subtotal

     94,379    62        161,569    69   

Others

     58,862    38        71,358    31   
   

Total par amount

   $ 153,241    100   $ 232,927    100
   

Concentration of Interest Income from Advances

 

  

     Three Months Ended  
     September 30, 2009     September 30, 2008  
Name of Borrower   

Interest

Income from
Advances(4)

  

Percentage of
Total Interest

Income from
Advances

    Interest
Income from
Advances(4)
   Percentage of
Total Interest
Income from
Advances
 
   

Citibank, N.A.

   $ 57    7   $ 568    28

JPMorgan Chase Bank, National Association(2)

     299    36        447    22   

Wachovia Mortgage, FSB(3)

     45    5        232    12   
   

Subtotal

     401    48        1,247    62   

Others

     439    52        748    38   

Total

   $ 840    100   $ 1,995    100
   
     Nine Months Ended  
     September 30, 2009     September 30, 2008  
Name of Borrower   

Interest

Income from
Advances(4)

   Percentage of
Total Interest
Income from
Advances
    Interest
Income from
Advances(4)
   Percentage of
Total Interest
Income from
Advances
 
   

Citibank, N.A.

   $ 414    13   $ 2,147    33

JPMorgan Chase Bank, National Association(2)

     1,040    33        1,414    21   

Wachovia Mortgage, FSB(3)

     208    7        719    11   
   

Subtotal

     1,662    53        4,280    65   

Others

     1,466    47        2,322    35   

Total

   $ 3,128    100   $ 6,602    100

 

(1) Borrower 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 valuation adjustments related to hedging activities and the fair value option.

 

(2) On September 25, 2008, the Office of Thrift Supervision (OTS) closed Washington Mutual Bank and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver for Washington Mutual Bank. On the same day, JPMorgan Chase Bank, National Association, a nonmember, assumed Washington Mutual Bank’s outstanding Bank advances and acquired the associated Bank capital stock. JPMorgan Chase Bank, National Association, remains obligated for all of Washington Mutual Bank’s outstanding advances and continues to hold some of the Bank capital stock it acquired from the FDIC as receiver for Washington Mutual Bank.

 

(3) On December 31, 2008, Wells Fargo & Company, a nonmember, acquired Wachovia Corporation, the parent company of Wachovia Mortgage, FSB. Wachovia Mortgage, FSB, continued to operate as a separate entity and continued to be a member of the Bank. Effective November 1, 2009, Wells Fargo Financial National Bank, an affiliate of Wells Fargo & Company, became a member of the Bank, and the Bank allowed the transfer of excess capital stock totaling $5 from Wachovia Mortgage, FSB, to Wells Fargo Financial National Bank to enable Wells Fargo Financial National Bank to satisfy its initial membership stock requirement. Also effective November 1, 2009, Wachovia Mortgage, FSB, merged into Wells Fargo Bank, N.A., a subsidiary of Wells Fargo & Company. As a result of the merger, Wells Fargo Bank, N.A., assumed all outstanding Bank advances and the remaining Bank capital stock of Wachovia Mortgage, FSB. The Bank has reclassified the capital stock transferred to Wells Fargo Bank, N.A., totaling $1,567, to mandatorily redeemable capital stock (a liability).

 

(4) 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 amount of interest income from advances can vary depending on the amount outstanding, terms to maturity, interest rates, and repricing characteristics.

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

The Bank held a security interest in collateral from each of its three largest advances borrowers sufficient to support their respective advances outstanding, and the Bank does not expect to incur any credit losses on these advances. As of September 30, 2009, and December 31, 2008, the Bank’s three largest advances borrowers (Citibank, N.A.; JPMorgan Chase Bank, National Association; and Wachovia Mortgage, FSB) each owned more than 10% of the Bank’s outstanding capital stock, including mandatorily redeemable capital stock.

On July 11, 2008, the OTS closed IndyMac Bank, F.S.B., and appointed the FDIC as receiver for IndyMac Bank, F.S.B. In connection with the receivership, the OTS chartered IndyMac Federal Bank, FSB, and appointed the FDIC as conservator for IndyMac Federal Bank, FSB. IndyMac Federal Bank, FSB, assumed the outstanding Bank advances of IndyMac Bank, F.S.B., and acquired the associated Bank capital stock. Bank capital stock acquired by IndyMac Federal Bank, FSB, was classified as mandatorily redeemable capital stock (a liability). On March 19, 2009, OneWest Bank, FSB, became a member of the Bank, assumed the outstanding advances of IndyMac Federal Bank, FSB, and acquired the associated Bank capital stock. Bank capital stock acquired by OneWest Bank, FSB, is no longer classified as mandatorily redeemable capital stock (a liability). However, the capital stock remaining with IndyMac Federal Bank, FSB, totaling $49, remains classified as mandatorily redeemable capital stock (a liability).

During the first nine months of 2009, 16 member institutions were placed into receivership or liquidation. Three of these institutions had no advances outstanding at the time they were placed into receivership or liquidation. The advances outstanding to the other 13 institutions were either repaid prior to September 30, 2009, or assumed by other institutions, and no losses were incurred by the Bank. Bank capital stock held by 11 of the 16 institutions totaling $46 was classified as mandatorily redeemable capital stock (a liability). The capital stock of the other five institutions was transferred to other member institutions.

From October 1, 2009, to October 30, 2009, five member institutions were placed into receivership. The outstanding advances to four institutions were assumed by a nonmember institution, and the Bank capital stock held by the institutions totaling $115 was classified as mandatorily redeemable capital stock (a liability). The outstanding advances and capital stock of the other institution were assumed by another member institution.

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, the Bank expects to collect all amounts due according to the contractual terms of the advances. Therefore, no allowance for losses on advances is deemed necessary by management. The Bank has never experienced any credit losses on advances to a member.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Interest Rate Payment Terms. Interest rate payment terms for advances at September 30, 2009, and December 31, 2008, are detailed below:

 

      September 30, 2009    December 31, 2008

Par amount of advances:

     

Fixed rate

   $ 82,383    $ 115,681

Adjustable rate

     70,858      117,246

Total par amount

   $ 153,241    $ 232,927

Note 5 – Mortgage Loans Held for Portfolio

Under the Mortgage Partnership Finance® (MPF®) Program, the Bank purchased conventional fixed rate residential mortgage loans directly from its participating members from May 2002 through October 2006. (“Mortgage Partnership Finance” and “MPF” are registered trademarks of the Federal Home Loan Bank of Chicago.) The mortgage loans are held-for-portfolio loans. 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 September 30, 2009, and December 31, 2008, on mortgage loans, all of which are on one- to four-unit residential properties and single-unit second homes.

 

      September 30, 2009     December 31, 2008  

Fixed rate medium-term mortgage loans

   $ 982      $ 1,172   

Fixed rate long-term mortgage loans

     2,210        2,551   

Subtotal

     3,192        3,723   

Net unamortized discounts

     (18     (10

Mortgage loans held for portfolio

     3,174        3,713   

Less: Allowance for credit losses

     (2     (1

Total mortgage loans held for portfolio

   $ 3,172      $ 3,712   

Medium-term loans have original 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 or any successor a credit enhancement fee, which is calculated on the remaining unpaid principal balance of the mortgage loans. The Bank records credit enhancement fees as a reduction to interest income. In the third quarter of 2009 and 2008, the Bank reduced net interest income for credit enhancement fees totaling $1 and $1, respectively. In the first nine months of 2009 and 2008, the Bank reduced net interest income for credit enhancement fees totaling $2 and $3, respectively.

Concentration Risk. The Bank had the following concentration in MPF loans with institutions whose outstanding total of mortgage loans sold to the Bank represented 10% or more of the Bank’s total outstanding mortgage loans at September 30, 2009, and December 31, 2008.

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Concentration of Mortgage Loans

September 30, 2009

 

Name of Institution    Mortgage
Loan Balances
Outstanding
  

Percentage of Total
Mortgage

Loan Balances
Outstanding

    Number of
Mortgage
Loans
Outstanding
   Percentage of
Total Number
of Mortgage Loans
Outstanding
 

JPMorgan Chase Bank, National Association(1)

   $ 2,489    78   19,160    73

OneWest Bank, FSB(2)

     432    14      5,046    19   

Subtotal

     2,921    92      24,206    92   

Others

     271    8      2,197    8   

Total

   $ 3,192    100   26,403    100

December 31, 2008

 

          
Name of Institution    Mortgage
Loan Balances
Outstanding
   Percentage of Total
Mortgage Loan
Balances
Outstanding
    Number of
Mortgage
Loans
Outstanding
   Percentage of
Total Number
of Mortgage Loans
Outstanding
 

JPMorgan Chase Bank, National Association(1)

   $ 2,879    77   21,435    72

IndyMac Federal Bank, FSB(2)

     509    14      5,532    19   

Subtotal

     3,388    91      26,967    91   

Others

     335    9      2,601    9   

Total

   $ 3,723    100   29,568    100

 

(1) On September 25, 2008, the OTS closed Washington Mutual Bank and appointed the FDIC as receiver for Washington Mutual Bank. On the same day, JPMorgan Chase Bank, National Association, a nonmember, assumed Washington Mutual Bank’s obligations with respect to mortgage loans the Bank had purchased from Washington Mutual Bank. JPMorgan Chase Bank, National Association, continues to fulfill its servicing obligations under its participating financial institution agreement with the Bank and to provide supplemental mortgage insurance for its master commitments.

 

(2) On July 11, 2008, the OTS closed IndyMac Bank, F.S.B., and appointed the FDIC as receiver for IndyMac Bank F.S.B. In connection with the receivership, the OTS chartered IndyMac Federal Bank, FSB, and appointed the FDIC as conservator. IndyMac Federal Bank, FSB, assumed the obligations of IndyMac Bank, F.S.B., with respect to mortgage loans the Bank had purchased from IndyMac Bank, F.S.B. On March 19, 2009, OneWest Bank, FSB, became a member of the Bank, assumed the obligations of IndyMac Federal Bank, FSB, with respect to mortgage loans the Bank had purchased from IndyMac Bank, F.S.B., and agreed to fulfill its obligations to provide credit enhancement to the Bank and to service the mortgage loans as required.

Credit Risk. A mortgage 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.

The following table presents information on delinquent mortgage loans as of September 30, 2009, and December 31, 2008.

 

     September 30, 2009    December 31, 2008
Days Past Due    Number
of Loans
  

Mortgage

Loan Balance

   Number
of Loans
  

Mortgage

Loan Balance

Between 30 and 59 days

   195    $ 23    235    $ 29

Between 60 and 89 days

   79      9    44      5

Over 90 days

   159      20    84      9

Total

   433    $ 52    363    $ 43

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

At September 30, 2009, the Bank had 433 loans that were 30 days or more delinquent totaling $52, of which 159 loans totaling $20 were classified as nonaccrual or impaired. For 111 of these loans, totaling $13, the loan was in foreclosure or the borrower of the loan was in bankruptcy. At December 31, 2008, the Bank had 363 loans that were 30 days or more delinquent totaling $43, of which 84 loans totaling $9 were classified as nonaccrual or impaired. For 51 of these loans, totaling $5, the loan was in foreclosure or the borrower of the loan was in bankruptcy.

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

 

    Three Months Ended   Nine Months Ended
    September 30, 2009     September 30, 2008   September 30, 2009   September 30, 2008
 

Balance, beginning of the period

  $ 2.0      $ 0.9   $ 1.0   $ 0.9

Chargeoffs

                  

Recoveries

                  

Provision for/(recovery of) credit losses

    (0.1     0.1     0.9     0.1

Balance, end of the period

  $ 1.9      $ 1.0   $ 1.9   $ 1.0

For more information on how the Bank determines its estimated allowance for credit losses on mortgage loans, see Note 7 to the Financial Statements in the Bank’s 2008 Form 10-K.

The Bank’s average recorded investment in impaired loans totaled $17 for the third quarter of 2009 and $6 for the third quarter of 2008. The Bank’s average recorded investment in impaired loans totaled $13 and $6 for the nine months ended September 30, 2009 and 2008, respectively. The Bank did not recognize any interest income for impaired loans in the third quarter of 2009 and 2008 and in the first nine months of 2009 and 2008.

At September 30, 2009, the Bank’s other assets included $2 of real estate owned resulting from the foreclosure of 20 mortgage loans held by the Bank. At December 31, 2008, the Bank’s other assets included $1 of real estate owned resulting from the foreclosure of 7 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 the regulations governing the operations of the FHLBanks, all FHLBanks have joint and several liability for all FHLBank consolidated obligations. For a discussion of the joint and several liability regulation, see Note 18 to the Financial Statements in the Bank’s 2008 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 Agency, the successor agency to the Finance Board, and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance.

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Redemption Terms. The following is a summary of the Bank’s participation in consolidated obligation bonds at September 30, 2009, and December 31, 2008.

 

     September 30, 2009     December 31, 2008  
Contractual Maturity    Amount
Outstanding
  

Weighted

Average

Interest Rate

   

Amount

Outstanding

  

Weighted

Average

Interest Rate

 
   

Within 1 year

   $ 78,243    1.41   $ 116,069    2.29

After 1 year through 2 years

     33,905    2.69        37,803    2.88   

After 2 years through 3 years

     13,631    3.53        21,270    4.37   

After 3 years through 4 years

     10,131    4.16        3,862    4.67   

After 4 years through 5 years

     5,470    3.87        14,195    4.24   

After 5 years

     10,725    4.90        15,840    5.14   

Index amortizing notes

     6    4.61        8    4.61   
              

Total par amount

     152,111    2.40     209,047    3.00
                  

Unamortized premiums/(discounts)

     281        154   

Valuation adjustments for hedging activities

     2,409        3,863   

Fair value option valuation adjustments

     68        50   
              

Total

   $ 154,869      $ 213,114   
              

The Bank’s participation in consolidated obligation bonds outstanding includes callable bonds of $20,504 at September 30, 2009, and $24,429 at December 31, 2008. 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 $13,769 at September 30, 2009, and $8,484 at December 31, 2008. 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.

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

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

 

      September 30, 2009    December 31, 2008

Par amount of consolidated obligation bonds:

     

Non-callable

   $ 131,607    $ 184,618

Callable

     20,504      24,429

Total par amount

   $ 152,111    $ 209,047

The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding at September 30, 2009, and December 31, 2008, by the earlier of the year of contractual maturity or next call date.

 

Earlier of Contractual

Maturity or Next Call Date

   September 30, 2009    December 31, 2008

Within 1 year

   $ 95,047    $ 131,783

After 1 year through 2 years

     33,535      43,003

After 2 years through 3 years

     9,551      19,795

After 3 years through 4 years

     6,521      819

After 4 years through 5 years

     3,010      8,755

After 5 years

     4,441      4,884

Index amortizing notes

     6      8

Total par amount

   $ 152,111    $ 209,047

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

 

     September 30, 2009     December 31, 2008  
     Amount
Outstanding
    Weighted
Average
Interest Rate
    Amount
Outstanding
    Weighted
Average
Interest Rate
 
   

Par amount

   $ 43,945      0.50   $ 92,155      1.49

Unamortized discounts

     (44       (336  
               

Total

   $ 43,901        $ 91,819     
               

Interest Rate Payment Terms. Interest rate payment terms for consolidated obligations at September 30, 2009, and December 31, 2008, 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 2008 Form 10-K.

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

      September 30, 2009    December 31, 2008

Par amount of consolidated obligations:

     

Bonds:

     

Fixed rate

   $ 96,694    $ 112,952

Adjustable rate

     51,934      95,570

Step-up

     3,265      196

Step-down

          18

Adjustable rate that converts to fixed rate

     125      100

Range bonds

     87      203

Index amortizing notes

     6      8

Total bonds, par

     152,111      209,047

Discount notes, par

     43,945      92,155

Total consolidated obligations, par

   $ 196,056    $ 301,202

Note 7 – Capital

Capital Requirements. Under the Housing Act, the director of the Finance Agency is responsible for setting the risk-based capital standards for the FHLBanks. The FHLBank Act and the regulations governing the operations of the FHLBanks 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. Regulatory capital and permanent capital are defined as retained earnings and Class B stock, which includes mandatorily redeemable capital stock that is classified as a liability for financial reporting purposes. Regulatory capital and permanent capital do not include accumulated other comprehensive income/(loss).

The risk-based capital requirements must be met with permanent capital, which must be at least equal to the sum of the Bank’s credit risk, market risk, and operations risk capital requirements, all of which are calculated in accordance with the rules of the Finance Agency. The Finance Agency may require an FHLBank to maintain a greater amount of permanent capital than is required by the risk-based capital requirements as defined. In addition, the Bank is subject to a 5% minimum leverage capital ratio with a 1.5 weighting factor for permanent capital, and a 4% minimum total capital-to-assets ratio calculated without reference to the 1.5 weighting factor. As of September 30, 2009, and December 31, 2008, the Bank was in compliance with these capital rules and requirements.

The following table shows the Bank’s compliance with the Finance Agency’s capital requirements at September 30, 2009, and December 31, 2008.

Regulatory Capital Requirements

 

     September 30, 2009     December 31, 2008  
       Required        Actual        Required        Actual   

Risk-based capital

   $ 7,309      $ 14,468      $ 8,635      $ 13,539   

Total regulatory capital

   $ 8,448      $ 14,468      $ 12,850      $ 13,539   

Total capital-to-assets ratio

     4.00     6.85     4.00     4.21

Leverage capital

   $ 10,561      $ 21,701      $ 16,062      $ 20,308   

Leverage ratio

     5.00     10.27     5.00     6.32

The Bank’s total capital-to-assets ratio increased to 6.85% at September 30, 2009, from 4.21% at December 31, 2008, primarily because of increased excess capital stock resulting from the decline in advances outstanding coupled with the Bank’s decision not to repurchase excess capital stock, as noted below.

On September 9, 2008, each of the FHLBanks, including the Bank, entered into a lending agreement with the U.S. Treasury. Pursuant to that lending agreement between the Bank and the U.S. Treasury, the Bank must notify the U.S. Treasury promptly if the Bank fails or is about to fail to meet applicable regulatory capital requirements. The Bank’s capital requirements are discussed more fully in Note 13 to the Financial Statements in the Bank’s 2008 Form 10-K.

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Mandatorily Redeemable Capital Stock. The Bank had mandatorily redeemable capital stock totaling $3,159 at September 30, 2009, and $3,747 at December 31, 2008. The decrease in mandatorily redeemable capital stock is primarily due to members’ acquisition of mandatorily redeemable capital stock held by nonmembers.

The changes in mandatorily redeemable capital stock for the three and nine months ended September 30, 2009 and 2008, were as follows:

 

     Three Months Ended  
     September 30, 2009     September 30, 2008  
      Number of
Institutions
    Amount     Number of
Institutions
    Amount  

Balance at the beginning of the period

   34      $ 3,165      19      $ 189   

Reclassified from/(to) capital during the period:

        

Termination of membership

   6        10      6        3,702   

Withdrawal from membership

               1        3   

Merger of nonmember institution

   1             (1       

Redemption of mandatorily redeemable capital stock

   (2     (16            

Repurchase of excess mandatorily redeemable capital stock

                      (4

Dividends accrued on mandatorily redeemable capital stock

                      8   

Balance at the end of the period

   39      $ 3,159      25      $ 3,898   
     Nine Months Ended  
     September 30, 2009     September 30, 2008  
      Number of
Institutions
    Amount     Number of
Institutions
    Amount  

Balance at the beginning of the period

   30      $ 3,747      16      $ 229   

Reclassified from/(to) capital during the period:

        

Termination of membership

   10        46      6        3,702   

Withdrawal from membership

               4        5   

Acquired by/transferred to new members

          (618 )(1)             

Merger of nonmember institution

   1             (1       

Redemption of mandatorily redeemable capital stock

   (2     (16            

Repurchase of excess mandatorily redeemable capital stock

                      (52

Dividends accrued on mandatorily redeemable capital stock

                      14   

Balance at the end of the period

   39      $ 3,159      25      $ 3,898   

 

(1) On March 19, 2009, OneWest Bank, FSB, became a member of the Bank, assumed the outstanding advances of IndyMac Federal Bank, FSB, a nonmember, and acquired the associated Bank capital stock totaling $318. Bank capital stock acquired by OneWest Bank, FSB, is no longer classified as mandatorily redeemable capital stock (a liability). However, the capital stock remaining with IndyMac Federal Bank, FSB, totaling $49, remains classified as mandatorily redeemable capital stock (a liability).

 

   During 2008, JPMorgan Chase Bank, National Association, a nonmember, assumed Washington Mutual Bank’s outstanding Bank advances and acquired the associated Bank capital stock. JPMorgan Bank and Trust Company, National Association, an affiliate of JPMorgan Chase Bank, National Association, became a member of the Bank. During the first quarter of 2009, the Bank allowed the transfer of excess stock totaling $300 from JPMorgan Chase Bank, National Association, to JPMorgan Bank and Trust Company, National Association, to enable JPMorgan Bank and Trust Company, National Association, to satisfy its activity-based stock requirement. The capital stock transferred is no longer classified as mandatorily redeemable capital stock (a liability). However, the capital stock remaining with JPMorgan Chase Bank, National Association, totaling $2,695, remains classified as mandatorily redeemable capital stock (a liability).

The Bank’s mandatorily redeemable capital stock is discussed more fully in Note 13 to the Financial Statements in the Bank’s 2008 Form 10-K.

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

The following table presents mandatorily redeemable capital stock amounts by contractual redemption period at September 30, 2009, and December 31, 2008.

 

Contractual Redemption Period    September 30, 2009    December 31, 2008

Within 1 year

   $ 3    $ 17

After 1 year through 2 years

     55      3

After 2 years through 3 years

     85      63

After 3 years through 4 years

     2,776      91

After 4 years through 5 years

     240      3,573

Total

   $ 3,159    $ 3,747

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 Valuation Adjustments – In accordance with the Retained Earnings and Dividend Policy, the Bank retains in restricted retained earnings any cumulative net gains in earnings (net of applicable assessments) resulting from gains or losses on derivatives and associated hedged items and financial instruments carried at fair value (valuation adjustments). As the cumulative net gains are reversed by periodic net losses and settlements of contractual interest cash flows, the amount of cumulative net 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 $116 at September 30, 2009, and $52 at December 31, 2008. In accordance with this provision, the amount increased by $64 in the first nine months of 2009 as a result of net unrealized gains resulting from valuation adjustments during this period.

Other Retained Earnings–Targeted Buildup – In addition to any cumulative net gains resulting from valuation adjustments, the Bank holds an additional amount in restricted retained earnings intended to protect members’ paid-in capital from the effects of an extremely adverse credit event, an extremely adverse operations risk event, an extremely high level of quarterly losses related to the Bank’s derivatives and associated hedged items and financial instruments carried at fair value, and the risk of higher-than-anticipated credit losses related to other-than-temporary impairment of PLRMBS, especially in periods of extremely low net income resulting from an adverse interest rate environment. In September 2009, the Board of Directors increased the targeted amount to $1,800. Most of the increase in the target was due to an increase in the projected losses on the collateral underlying the Bank’s PLRMBS under stress case assumptions about housing market conditions. The retained earnings restricted in accordance with this provision of the Retained Earnings and Dividend Policy totaled $949 at September 30, 2009, and $124 at December 31, 2008.

For more information on these two categories of restricted retained earnings and the Bank’s Retained Earnings and Dividend Policy, see Note 13 to the Financial Statements in the Bank’s 2008 Form 10-K. In addition, on May 29, 2009, the Bank’s Board of Directors amended the Bank’s Retained Earnings and Dividend Policy to change the way the Bank determines the amount of earnings to be restricted for the targeted buildup. Instead of retaining a fixed percentage of earnings toward the retained earnings target each quarter, the Bank will designate any earnings not restricted for other reasons or not paid out in dividends as restricted retained earnings for the purpose of meeting the target.

Dividend Payments – Finance Agency 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. There is no requirement that the Board of Directors declare and pay any dividend. A decision by the Board of Directors to declare a dividend is a discretionary matter and is subject to the requirements and restrictions of the FHLBank Act and applicable requirements under the regulations governing the operations of the FHLBanks.

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

On October 29, 2009, the Bank announced that it would not pay a dividend for the third quarter of 2009 and would not repurchase excess capital stock during the fourth quarter of 2009. The Bank continues to face a number of uncertainties in the current economic environment. Market conditions continue to be volatile, particularly in the MBS market, which could result in additional OTTI charges on the Bank’s PLRMBS. In light of these and other uncertainties in the Bank’s operating environment, the Bank determined that it is essential to preserve the Bank’s capital. The Bank will continue to monitor the condition of the Bank’s MBS portfolio, its overall financial performance and retained earnings, developments in the mortgage and credit markets, and other relevant information as the basis for determining the status of dividends and capital stock repurchases in future quarters.

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 must give the member 15 days’ written notice; however, the member may waive this notice period. 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, 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. Although the Bank continues to redeem stock upon expiration of the five-year redemption period, the Bank has not repurchased excess stock since the fourth quarter of 2008 to preserve the Bank’s capital. As noted above, the Bank does not intend to repurchase any excess capital stock during the fourth quarter of 2009.

For the nine months ended September 30, 2009, the Bank did not repurchase any capital stock. In the first nine months of 2008, the Bank repurchased surplus capital stock totaling $727 and excess capital stock that was not surplus capital stock totaling $521.

Excess capital stock totaled $5,467 as of September 30, 2009, which included surplus capital stock of $4,605.

For more information on excess and surplus capital stock, see Note 13 to the Financial Statements in the Bank’s 2008 Form 10-K.

Concentration. The following table presents the concentration in capital stock held by institutions whose capital stock ownership represented 10% or more of the Bank’s outstanding capital stock, including mandatorily redeemable capital stock, as of September 30, 2009, or December 31, 2008.

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Concentration of Capital Stock

Including Mandatorily Redeemable Capital Stock

 

     September 30, 2009     December 31, 2008  
Name of Institution    Capital Stock
Outstanding
  

Percentage

of Total
Capital Stock
Outstanding

    Capital Stock
Outstanding
  

Percentage

of Total
Capital Stock
Outstanding

 

Citibank, N.A.

   $ 3,877    29   $ 3,877    29

JPMorgan Chase Bank, National Association(1)

     2,695    20        2,995    22   

Wachovia Mortgage, FSB(2)

     1,572    12        1,572    12   

Subtotal

     8,144    61        8,444    63   

Others

     5,259    39        4,919    37   

Total

   $ 13,403    100   $ 13,363    100

 

(1) On September 25, 2008, the OTS closed Washington Mutual Bank and appointed the FDIC as receiver for Washington Mutual Bank. On the same day, JPMorgan Chase Bank, National Association, a nonmember, assumed Washington Mutual Bank’s outstanding Bank advances and acquired the associated Bank capital stock. The capital stock held by JPMorgan Chase Bank, National Association, is classified as mandatorily redeemable capital stock (a liability). JPMorgan Chase Bank, National Association, remains obligated for all of Washington Mutual Bank’s outstanding advances and continues to hold some of the Bank capital stock it acquired from the FDIC as receiver for Washington Mutual Bank. JPMorgan Bank and Trust Company, National Association, an affiliate of JPMorgan Chase Bank, National Association, became a member of the Bank. During the first quarter of 2009, the Bank allowed the transfer of excess stock totaling $300 from JPMorgan Chase Bank, National Association, to JPMorgan Bank and Trust Company, National Association, to enable JPMorgan Bank and Trust Company, National Association, to satisfy its activity-based stock requirement. The capital stock transferred is no longer classified as mandatorily redeemable capital stock (a liability). However, the capital stock remaining with JPMorgan Chase Bank, National Association, totaling $2,695, remains classified as mandatorily redeemable capital stock (a liability).

 

(2) On December 31, 2008, Wells Fargo & Company, a nonmember, acquired Wachovia Corporation, the parent company of Wachovia Mortgage, FSB. Wachovia Mortgage, FSB, continued to operate as a separate entity and continued to be a member of the Bank. Effective November 1, 2009, Wells Fargo Financial National Bank, an affiliate of Wells Fargo & Company, became a member of the Bank, and the Bank allowed the transfer of excess capital stock totaling $5 from Wachovia Mortgage, FSB, to Wells Fargo Financial National Bank to enable Wells Fargo Financial National Bank to satisfy its initial membership stock requirement. Also effective November 1, 2009, Wachovia Mortgage, FSB, merged into Wells Fargo Bank, N.A., a subsidiary of Wells Fargo & Company. As a result of the merger, Wells Fargo Bank, N.A., assumed all outstanding Bank advances and the remaining Bank capital stock of Wachovia Mortgage, FSB. The Bank has reclassified the capital stock transferred to Wells Fargo Bank, N.A., totaling $1,567, to mandatorily redeemable capital stock (a liability).

Note 8 – Segment Information

The Bank uses an analysis of financial performance based on the balances and adjusted net interest income of two operating segments, the advances-related business and the mortgage-related business, as well as other financial information, to review and assess financial performance and to determine the allocation of resources to these two major business segments. For purposes of segment reporting, adjusted net interest income includes interest income and expenses associated with economic hedges that are recorded in “Net gain/(loss) on derivatives and hedging activities” in other income and excludes interest expense that is recorded in “Mandatorily redeemable capital stock.” Other key financial information, such as any OTTI loss on the Bank’s held-to-maturity PLRMBS, other expenses, and assessments, are not included in the segment reporting analysis, but are incorporated into management’s overall assessment of financial performance.

For more information on these operating segments, see Note 15 to the Financial Statements in the Bank’s 2008 Form 10-K.

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

The following table presents the Bank’s adjusted net interest income by operating segment and reconciles total adjusted net interest income to (loss)/income before assessments for the three and nine months ended September 30, 2009 and 2008.

Reconciliation of Adjusted Net Interest Income and (Loss)/Income Before Assessments

 

     Advances-
Related
Business
   Mortgage-
Related
Business
   Adjusted
Net
Interest
Income
   Amortization of
Deferred
Gains/(Losses)(1)
   

Net Interest
Income/

(Expense) on
Economic
Hedges(2)

    Interest
Expense on
Mandatorily
Redeemable
Capital
Stock(3)
   Net
Interest
Income
  

Other

Loss

    Other
Expense
   (Loss)/
Income
Before
Assessments
 
   

Three months ended:

                          

September 30, 2009

   $ 159    $ 151    $ 310    $ (21   $ (134   $ 7    $ 458    $ (543   $ 31    $ (116

September 30, 2008

     232      122      354      1        (48     8      393      (225     29      139   

Nine months ended:

                          

September 30, 2009

     552      405      957      (66     (359     7      1,375      (818     93      464   

September 30, 2008

     681      329      1,010      18        15        14      963      (115     78      770   

 

(1) Represents amortization of amounts deferred for adjusted net interest income purposes only in accordance with the Bank’s Retained Earnings and Dividend Policy.

 

(2) The Bank includes interest income and interest expense associated with economic hedges in adjusted net interest income in its analysis 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 gain/(loss) on derivatives and hedging activities.”

 

(3) The Bank excludes interest expense on mandatorily redeemable capital stock from adjusted net interest income in its analysis of financial performance for its two operating segments.

The following table presents total assets by operating segment at September 30, 2009, and December 31, 2008.

Total Assets

 

      Advances-
Related Business
   Mortgage-
Related Business
   Total
Assets

September 30, 2009

   $ 177,784    $ 33,428    $ 211,212

December 31, 2008

     278,221      43,023      321,244

Note 9 – Derivatives and Hedging Activities

General. The Bank may enter into interest rate swaps (including callable, putable, and basis swaps); swaptions; and cap, floor, corridor, and collar agreements (collectively, interest rate exchange agreements or derivatives). Most of the Bank’s interest rate exchange agreements are executed in conjunction with the origination of advances and the issuance of consolidated obligation bonds to create variable rate structures. The interest rate exchange agreements are generally executed at the same time as the advances and bonds are transacted and generally have the same maturity dates as the related advances and bonds.

Additional active uses of interest rate exchange agreements include: (i) offsetting interest rate caps, floors, corridors, or collars embedded in adjustable rate advances made to members, (ii) hedging the anticipated issuance of debt, (iii) matching against consolidated obligation discount notes or bonds to create the equivalent of callable fixed rate debt, (iv) modifying the repricing intervals between variable rate assets and

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

variable rate liabilities, and (v) exactly offsetting other derivatives executed with members (with the Bank serving as an intermediary). The Bank’s use of interest rate exchange agreements results in one of the following classifications: (i) a fair value hedge of an underlying financial instrument, (ii) a forecasted transaction, (iii) a cash flow hedge of an underlying financial instrument, (iv) an economic hedge for specific asset and liability management purposes, or (v) an intermediary transaction for members.

Interest Rate Swaps – An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. One of the simplest forms of an interest rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, this party receives cash flows equivalent to the interest on the same notional principal amount at a variable rate index for the same period of time. The variable rate received or paid by the Bank in most interest rate exchange agreements is the London Inter-Bank Offered Rate.

Swaptions – A swaption is an option on a swap that gives the buyer the right to enter into a specified interest rate swap at a certain time in the future. When used as a hedge, a swaption can protect the Bank against future interest rate changes when it is planning to lend or borrow funds in the future. The Bank purchases receiver swaptions. A receiver swaption is the option to receive fixed interest payments at a later date.

Interest Rate Caps and Floors – In a cap agreement, a cash flow is generated if the price or rate of an underlying variable rate rises above a certain threshold (or cap) price. In a floor agreement, a cash flow is generated if the price or rate of an underlying variable falls below a certain threshold (or floor) price. Caps may be used in conjunction with liabilities and floors may be used in conjunction with assets. Caps and floors are designed as protection against the interest rate on a variable rate asset or liability rising above or falling below a certain level.

Hedging Activities. The Bank documents all relationships between derivative hedging instruments and hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value or cash flow hedges to (i) assets and liabilities on the balance sheet, (ii) firm commitments, or (iii) forecasted transactions. The Bank also formally assesses (both at the hedge’s inception and at least quarterly on an ongoing basis) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain effective in future periods. The Bank typically uses regression analyses or other statistical analyses to assess the effectiveness of its hedges. When it is determined that a derivative has not been or is not expected to be effective as a hedge, the Bank discontinues hedge accounting prospectively.

The Bank discontinues hedge accounting prospectively when (i) it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (ii) the derivative and/or the hedged item expires or is sold, terminated, or exercised; (iii) it is no longer probable that the forecasted transaction will occur in the originally expected period; (iv) a hedged firm commitment no longer meets the definition of a firm commitment; (v) management determines that designating the derivative as a hedging instrument is no longer appropriate; or (vi) management decides to use the derivative to offset changes in the fair value of other derivatives or instruments carried at fair value.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Intermediation – As an additional service to its members, the Bank enters into offsetting interest rate exchange agreements, acting as an intermediary between exactly offsetting derivatives transactions with members and other counterparties. This intermediation allows members indirect access to the derivatives market. Derivatives in which the Bank is an intermediary may also arise when the Bank enters into derivatives to offset the economic effect of other derivatives that are no longer designated to advances, investments, or consolidated obligations. The offsetting derivatives used in intermediary activities do not receive hedge accounting treatment and are separately marked to market through earnings. The net result of the accounting for these derivatives does not significantly affect the operating results of the Bank. These amounts are recorded in other income and presented as “Net gain/(loss) on derivatives and hedging activities.”

The notional principal of the interest rate exchange agreements associated with derivatives with members and offsetting derivatives with other counterparties was $606 at September 30, 2009, and $346 at December 31, 2008. The Bank did not have any interest rate exchange agreements outstanding at September 30, 2009, and December 31, 2008, that were used to offset the economic effect of other derivatives that were no longer designated to advances, investments, or consolidated obligations.

Investments – The Bank may invest in U.S. Treasury and agency obligations, MBS rated AAA at the time of acquisition, and the taxable portion of highly rated state or local housing finance agency obligations. The interest rate risk and prepayment risk associated with these investment securities are managed through a combination of debt issuance and derivatives. The Bank may manage prepayment risk and interest rate risk by funding investment securities with consolidated obligations that have call features or by hedging the prepayment risk with a combination of consolidated obligations and callable swaps or swaptions. The Bank executes callable swaps and purchases swaptions in conjunction with the issuance of certain liabilities to create funding equivalent to fixed rate callable debt. Although these derivatives are economic hedges against prepayment risk and are designated to individual liabilities, they do not receive either fair value or cash flow hedge accounting treatment. The derivatives are marked to market through earnings and cause modest income volatility. Investment securities may be classified as held-to-maturity or trading.

The Bank may also manage the risk arising from changing market prices or cash flows of investment securities classified as trading by entering into interest rate exchange agreements (economic hedges) that offset the changes in fair value or cash flows of the securities. The market value changes of both the trading securities and the associated interest rate exchange agreements are included in other income in the Statements of Income.

Advances – The Bank offers a wide array of advance structures to meet members’ funding needs. These advances may have maturities up to 30 years with fixed or adjustable interest rates and may include early termination features or options. The Bank may use derivatives to adjust the repricing and/or options characteristics of advances to more closely match the characteristics of the Bank’s funding liabilities. In general, whenever a member executes a fixed rate advance or an adjustable rate advance with embedded options, the Bank will simultaneously execute an interest rate exchange agreement with terms that offset the terms and embedded options, if any, in the advance. The combination of the advance and the interest rate exchange agreement effectively creates a variable rate asset. This type of hedge is treated as a fair value hedge.

Mortgage Loans – The Bank’s investment portfolio includes fixed rate mortgage loans. The prepayment options embedded in mortgage loans can result in extensions or contractions in the expected repayment of these investments, depending on changes in estimated prepayment speeds. The Bank manages the interest rate risk and prepayment risk associated with fixed rate mortgage loans through a combination of debt issuance and

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

derivatives. The Bank uses both callable and non-callable debt to achieve cash flow patterns and market value sensitivities for liabilities similar to those expected on the mortgage loans. Net income could be reduced if the Bank replaces prepaid mortgages with lower-yielding assets and the Bank’s higher funding costs are not reduced accordingly.

The Bank executes callable swaps and purchases swaptions in conjunction with the issuance of certain consolidated obligations to create funding equivalent to fixed rate callable bonds. Although these derivatives are economic hedges against the prepayment risk of specific loan pools and are referenced to individual liabilities, they do not receive either fair value or cash flow hedge accounting treatment. The derivatives are marked to market through earnings and are presented as “Net gain/(loss) on derivatives and hedging activities.”

Consolidated Obligations – Although the joint and several liability regulation authorizes the Finance Agency 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, FHLBanks individually are counterparties to interest rate exchange agreements associated with specific debt issues. The Office of Finance acts as agent of the FHLBanks in the debt issuance process. In connection with each debt issuance, each FHLBank specifies the terms and the 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 consolidated obligations and is the primary obligor for its specific portion of consolidated obligations issued. Because the Bank knows the amount and structure of consolidated obligations issued on its behalf, it has the ability to structure hedging instruments to match its specific debt. The hedge transactions may be executed on or after the date of issuance of the consolidated obligations and are accounted for based on the accounting for derivative instruments and hedging activities.

Consolidated obligation bonds are structured to meet the Bank’s and/or investors’ needs. Common structures include fixed rate bonds with or without call options and adjustable rate bonds with or without embedded options. In general, when bonds with these structures are issued, the Bank will simultaneously execute an interest rate exchange agreement with terms that offset the terms and embedded options, if any, of the consolidated obligation bond. This combination of the consolidated obligation bond and the interest rate exchange agreement effectively creates an adjustable rate bond. The cost of this funding combination is generally lower than the cost that would be available through the issuance of just an adjustable rate bond. These transactions generally receive fair value hedge accounting treatment.

The Bank did not have any consolidated obligations denominated in currencies other than U.S. dollars outstanding during the nine months ended September 30, 2009, or the twelve months ended December 31, 2008.

Firm Commitments – A firm commitment for a forward starting advance hedged through the use of an offsetting forward starting interest rate swap is considered a derivative. In this case, the interest rate swap functions as the hedging instrument for both the firm commitment and the subsequent advance. When the commitment is terminated and the advance is made, the current market value associated with the firm commitment is included with the basis of the advance. The basis adjustment is then amortized into interest income over the life of the advance.

Anticipated Debt Issuance – The Bank may enter into interest rate swaps for the anticipated issuances of fixed rate bonds to hedge the cost of funding. These hedges are designated and accounted for as cash flow hedges.

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

The interest rate swap is terminated upon issuance of the fixed rate bond, with the effective portion of the realized gain or loss on the interest rate swap recorded in other comprehensive income. Realized gains and losses reported in accumulated other comprehensive income are recognized as earnings in the periods in which earnings are affected by the cash flows of the fixed rate bonds.

Credit Risk – The Bank is subject to credit risk as a result of the risk of nonperformance by counterparties to the derivative agreements. All of the Bank’s 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, the Bank does not expect to incur any credit losses on derivative agreements.

The notional amount of an interest rate exchange agreement serves as a basis for calculating periodic interest payments or cash flows and is not a measure of the amount of credit risk from that transaction. The Bank had notional amounts outstanding of $261,907 and $331,643 at September 30, 2009, and December 31, 2008, respectively. The notional amount does not represent the exposure to credit loss. The amount potentially subject to credit loss is the estimated cost of replacing an interest rate exchange agreement that has a net positive market value if the counterparty defaults; this amount is substantially less than the notional amount.

Maximum credit risk is defined as the estimated cost of replacing all interest rate exchange agreements the Bank has transacted with counterparties where the Bank is in a net favorable position (has a net unrealized gain) if the counterparties all defaulted and the related collateral proved to be of no value to the Bank. At September 30, 2009, the Bank’s maximum credit risk, as defined above, was estimated at $2,055, including $541 of net accrued interest and fees receivable. At December 31, 2008, the Bank’s maximum credit risk was estimated at $2,493, including $493 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 $2,057 and $2,508 as collateral from counterparties as of September 30, 2009, and December 31, 2008, 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.

Certain of the Bank’s derivatives agreements contain provisions that link the Bank’s credit rating from each of the major credit rating agencies to various rights and obligations. In several of the Bank’s derivatives agreements, if the Bank’s debt rating falls below A, the Bank’s counterparty would have the right, but not the obligation, to terminate all of its outstanding derivatives transactions with the Bank. In addition, the amount of collateral that the Bank is required to deliver to a counterparty depends on the Bank’s credit rating. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net derivative liability position (before cash collateral and related accrued interest) at September 30, 2009, was $187, for which the Bank had posted collateral of $118 in the normal course of business. If the credit rating of the Bank’s debt had been lowered to AAA/AA, then the Bank would have been required to deliver up to an additional $54 of collateral to its derivatives counterparties at September 30, 2009. The Bank’s credit ratings continue to be AAA/AAA.

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

The following table summarizes the fair value of derivative instruments without the effect of netting arrangements or collateral as of September 30, 2009, and December 31, 2008. For purposes of this disclosure, the derivatives values include the fair value of derivatives and related accrued interest.

Fair Values of Derivative Instruments

 

     September 30, 2009     December 31, 2008  
     Notional
Amount of
Derivatives
   Derivative
Assets
    Derivative
Liabilities
    Notional
Amount of
Derivatives
   Derivative
Assets
    Derivative
Liabilities
 

Derivatives designated as hedging instruments:

              

Interest rate swaps

   $ 112,677    $ 2,986      $ 977      $ 114,374    $ 4,216      $ 1,340   
                

Total

     112,677      2,986        977        114,374      4,216        1,340   
                

Derivatives not designated as hedging instruments:

              

Interest rate swaps

     147,585      865        1,007        215,374      923        1,699   

Interest rate caps. floors, corridors, and/or collars

     1,645      10        19        1,895      1        20   
                

Total

     149,230      875        1,026        217,269      924        1,719   
                

Total derivatives before netting and collateral adjustments

   $ 261,907      3,861        2,003      $ 331,643      5,140        3,059   
                      

Netting adjustments by counterparty

        (1,806     (1,806        (2,647     (2,647

Cash collateral and related accrued interest

        (1,597               (2,026     25   
                      

Total collateral and netting adjustments(1)

        (3,403     (1,806        (4,673     (2,622
                      

Derivative assets and derivative liabilities as reported on the Statements of Condition

      $ 458      $ 197         $ 467      $ 437   
                      

 

(1) Amounts represent the effect of legally enforceable master netting agreements that allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same counterparty.

The following table presents the components of net gain/(loss) on derivatives and hedging activities as presented in the Statements of Income for the three and nine months ended September 30, 2009 and 2008.

 

     Three Months Ended     Nine Months Ended  
     September 30,
2009
    September 30,
2008
    September 30,
2009
    September 30,
2008
 
      Gain/(Loss)     Gain/(Loss)     Gain/(Loss)     Gain/(Loss)  

Derivatives and hedged items in fair value hedging relationships – hedge ineffectiveness by derivative type:

        

Interest rate swaps

   $ (10   $ (1   $ 14      $ 43   

Total net gain/(loss) related to fair value hedge ineffectiveness

     (10     (1     14        43   

Derivatives not designated as hedging instruments:

        

Economic hedges:

        

Interest rate swaps

     (21     (276     428        (298

Interest rate swaptions

                          (20

Interest rate caps, floors, corridors, and/or collars

     (1     (1     9        (4

Net interest settlements

     (134     (48     (359     15   

Total net gain/(loss) related to derivatives not designated as hedging instruments

     (156     (325     78        (307

Net gain/(loss) on derivatives and hedging activities

   $ (166   $ (326   $ 92      $ (264

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

The following tables present, by type of hedged item, the gains and losses on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income for the three and nine months ended September 30, 2009 and 2008.

 

     Three Months Ended  
     September 30, 2009     September 30, 2008  
Hedged Item Type   

Gain/

(Loss) on
Derivative

  

Gain/

(Loss) on
Hedged
Item

   

Net Fair

Value Hedge
Ineffectiveness

    Effect of
Derivatives
on Net
Interest
Income(1)
   

Gain/

(Loss) on
Derivative

   

Gain/

(Loss) on
Hedged
Item

   

Net Fair

Value Hedge
Ineffectiveness

    Effect of
Derivatives
on Net
Interest
Income(1)
 
   

Advances

   $ 44    $ (56   $ (12   $ (281   $ 2      $ (77   $ (75   $ (151

Consolidated obligation bonds

     2             2        556        (48     122        74        502   
   

Total

   $ 46    $ (56   $ (10   $ 275      $ (46   $ 45      $ (1   $ 351   
   

 

     Nine Months Ended  
     September 30, 2009     September 30, 2008  
Hedged Item Type   

Gain/

(Loss) on
Derivative

   

Gain/

(Loss) on
Hedged
Item

   

Net Fair

Value Hedge
Ineffectiveness

    Effect of
Derivatives
on Net
Interest
Income(1)
   

Gain/

(Loss) on
Derivative

   

Gain/

(Loss) on
Hedged
Item

   

Net Fair

Value Hedge
Ineffectiveness

    Effect of
Derivatives
on Net
Interest
Income(1)
 
   

Advances

   $ 437      $ (477   $ (40   $ (709   $ (24   $ (54   $ (78   $ (305

Consolidated obligation bonds

     (1,173     1,227        54        1,578        (100     221        121        1,254   
   

Total

   $ (736   $ 750      $ 14      $ 869      $ (124   $ 167      $ 43      $ 949   
   

 

(1) The net interest on derivatives in fair value hedge relationships is presented in the interest income/expense line item of the respective hedged item.

For the three and nine months ended September 30, 2009 and 2008, there were no reclassifications from other comprehensive income/(loss) into earnings as a result of the discontinuance of cash flow hedges because the original forecasted transactions occurred by the end of the originally specified time period or within a two-month period thereafter.

As of September 30, 2009, 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.

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

The following table presents outstanding notional balances and estimated fair values of the derivatives outstanding at September 30, 2009, and December 31, 2008.

 

     September 30, 2009     December 31, 2008  
Type of Derivative and Hedge Classification    Notional
Amount of
Derivatives
  

Estimated

Fair Value

    Notional
Amount of
Derivatives
  

Estimated

Fair Value

 
   

Interest rate swaps:

          

Fair value

   $ 112,677    $ 1,578      $ 114,374    $ 2,486   

Economic

     147,585      (235     215,374      (907

Interest rate caps, floors, corridors, and/or collars:

          

Economic

     1,645      (9     1,895      (18
   

Total

   $ 261,907    $ 1,334      $ 331,643    $ 1,561   
   

Total derivatives excluding accrued interest

      $ 1,334         $ 1,561   

Accrued interest, net

        524           520   

Cash collateral held from counterparties – liabilities(1)

        (1,597        (2,051
   

Net derivative balances

      $ 261         $ 30   
   

Derivative assets

      $ 458         $ 467   

Derivative liabilities

        (197        (437
   

Net derivative balances

      $ 261         $ 30   
   

 

(1) Amounts represent the amount receivable or payable, including accrued interest, related to cash collateral arising from derivative instruments recognized at fair value executed with the same counterparty under a master netting arrangement.

Embedded derivatives are bifurcated, and their estimated fair values are accounted for in accordance with the accounting for derivative instruments and hedging activities. 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 were immaterial as of September 30, 2009, and December 31, 2008.

Note 10 – Fair Values

Fair Value Measurement. Fair value measurement guidance defines fair value, establishes a framework for measuring fair value under U.S. GAAP, and expands disclosures about fair value measurements. The Bank adopted the fair value measurement guidance on January 1, 2008. This guidance 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.

This guidance 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.

 

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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, are carried at fair value on the Statements of Condition as of September 30, 2009:

 

   

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 fair value hierarchy (as described above).

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

September 30, 2009

 

     Fair Value Measurement Using:    Netting      
      Level 1    Level 2     Level 3    Adjustments(1)     Total

Assets:

            

Trading securities

   $    $       32         $    $      $ 32

Advances(2)

        29,415                    29,415

Derivative assets

        3,861             (3,403     458

Total assets

   $    $33,308      $    $ (3,403   $ 29,905

Liabilities:

            

Consolidated obligation bonds(3)

   $    $28,231      $    $      $ 28,231

Derivative liabilities

        2,003             (1,806     197

Total liabilities

   $    $30,234      $    $ (1,806   $ 28,428

December 31, 2008

 

     Fair Value Measurement Using:    Netting      
      Level 1    Level 2     Level 3    Adjustments(1)     Total

Assets:

            

Trading securities

   $    $       35         $    $      $ 35

Advances(2)

        41,599                    41,599

Derivative assets

        5,140             (4,673     467

Total assets

   $    $46,774      $    $ (4,673   $ 42,101

Liabilities:

            

Consolidated obligation bonds(3)

   $    $32,243      $    $      $ 32,243

Derivative liabilities

        3,059             (2,622     437

Total liabilities

   $    $35,302      $    $ (2,622   $ 32,680

 

(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.

 

(2) Includes $27,381 and $38,573 of advances recorded under the fair value option at September 30, 2009, and December 31, 2008, respectively, and $2,034 and $3,026 of advances recorded at fair value in accordance with the accounting for derivative instruments and hedging activities at September 30, 2009, and December 31, 2008, respectively.

 

(3) Includes $26,205 and $30,286 of consolidated obligation bonds recorded under the fair value option at September 30, 2009, and December 31, 2008, respectively, and $2,026 and $1,957 of consolidated obligation bonds recorded at fair value in accordance with the accounting for derivatives instruments and hedging activities at September 30, 2009, and December 31, 2008, respectively.

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 or because they were previously carried at fair value.

Trading Securities – The Bank’s trading securities portfolio currently consists of agency MBS investments collateralized by residential mortgages. These securities are recorded at fair value on a recurring basis. Fair value measurement is based on prices from four specific third-party vendors. Depending on the number of prices received for each security, the Bank selects a median or average price. Because quoted prices are not available for these securities, the Bank has primarily relied on the pricing vendors’ use of market-observable inputs and model-based valuation techniques for the fair value measurements, and the Bank 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 the fair values of 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 or accounted for in a qualifying full fair value hedging relationship are recorded at fair value on a recurring basis. Because quoted prices are not

 

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Notes to Financial Statements (continued)

 

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 types, 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 Agency’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 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 of 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 because of 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) 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. 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 affected by counterparty credit risk and has determined that no adjustments were significant to the overall fair value measurements.

The inputs used in the Bank’s fair value measurement of these derivative instruments are primarily market observable, and the Bank 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, as a liability.

The Bank records all derivative instruments on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in net gain/(loss) on derivatives and hedging activities or other comprehensive income, depending on whether or not 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

 

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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 on the related hedged items that qualify for fair value hedge accounting represents hedge ineffectiveness and is recognized in net gain/(loss) on derivatives and hedging activities. Changes in the fair value of a derivative instrument that does not qualify as a hedge of an asset or liability for asset/liability management (economic hedge) are also recorded each period in net gain/(loss) on derivatives and hedging activities. For additional information, see Note 9.

Consolidated Obligation Bonds – Certain consolidated obligation bonds either elected for the fair value option or accounted for in a qualifying full fair value hedging relationship are recorded at fair value on a recurring basis. Because 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 inputs obtained from the Office of Finance and provided to the Bank. For consolidated obligation bonds with embedded options, the Bank also obtains market-observable quotes and inputs from derivatives 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 and 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 those 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 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 net interest income on the Statements of Income. The remaining changes in fair values of 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). At September 30, 2009, and December 31, 2008, the Bank measured certain of its held-to-maturity investment securities at fair value on a nonrecurring basis. The following tables present the investment securities as of September 30, 2009, and December 31, 2008, for which a nonrecurring change in fair value was recorded during the third quarter of 2009 and during the fourth quarter of 2008, by level within the fair value hierarchy.

September 30, 2009

 

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