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 March 31, 2010

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 April  30, 2010
Class B Stock, par value $100		134,525,193

 

 

 

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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		52
		Quarterly Overview		53
		Financial Highlights		56
		Results of Operations		57
		Financial Condition		64
		Liquidity and Capital Resources		77
		Risk Management		80
		Critical Accounting Policies and Estimates		97
		Recently Issued Accounting Standards and Interpretations		98
		Recent Developments		98
		Off-Balance Sheet Arrangements, Guarantees, and Other Commitments		101
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		102
Item 4.		Controls and Procedures		109
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings		110
Item 1A.		Risk Factors		110
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		110
Item 3.		Defaults Upon Senior Securities		110
Item 4.		(Removed and Reserved)		110
Item 5.		Other Information		111
Item 6.		Exhibits		111
Signatures				112

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

Federal Home Loan Bank of San Francisco

Statements of Condition

(Unaudited)

 

(In millions-except par value)		March 31, 2010				December 31, 2009
Assets
Cash and due from banks		$	2,942			$	8,280
Federal funds sold			17,839				8,164
Trading securities(a)			29				31
Available-for-sale securities(a)			1,929				1,931
Held-to-maturity securities (fair values were $33,923 and $35,682, respectively)(b)			34,586				36,880
Advances (includes $17,459 and $21,616 at fair value under the fair value option, respectively)			112,139				133,559
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $2 and $2, respectively			2,909				3,037
Accrued interest receivable			220				355
Premises and equipment, net			21				21
Derivative assets			529				452
Other assets			708				152
Total Assets		$	173,851			$	192,862
Liabilities and Capital
Liabilities:
Deposits:
Interest-bearing:
Demand and overnight		$	92			$	192
Term			36				29
Other			1				1
Non-interest-bearing - Other			2				2
Total deposits			131				224
Consolidated obligations, net:
Bonds (includes $24,241 and $37,022 at fair value under the fair value option, respectively)			136,588				162,053
Discount notes			24,764				18,246
Total consolidated obligations, net			161,352				180,299
Mandatorily redeemable capital stock			4,858				4,843
Accrued interest payable			705				754
Affordable Housing Program			183				186
Payable to REFCORP			35				25
Derivative liabilities			110				205
Other liabilities			91				96
Total Liabilities			167,465				186,632
Commitments and Contingencies (Note 12)
Capital:
Capital stock—Class B—Putable ($100 par value) issued and outstanding:
86 shares and 86 shares, respectively			8,561				8,575
Restricted retained earnings			1,326				1,239
Accumulated other comprehensive loss			(3,501	)			(3,584	)
Total Capital			6,386				6,230
Total Liabilities and Capital		$	173,851			$	192,862

 

(a)	At March 31, 2010, and at December 31, 2009, none of these securities were pledged as collateral that may be repledged.

(b)	Includes $40 at March 31, 2010, and $40 at December 31, 2009, pledged as collateral that may be repledged.

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

 

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Federal Home Loan Bank of San Francisco

Statements of Income

(Unaudited)

 

		For the Three Months Ended March 31,
(In millions)		2010				2009
Interest Income:
Advances		$	332			$	1,065
Federal funds sold			5				7
Available-for-sale securities			1				—
Held-to-maturity securities			288				435
Mortgage loans held for portfolio			36				43
Total Interest Income			662				1,550
Interest Expense:
Consolidated obligations:
Bonds			289				860
Discount notes			13				256
Mandatorily redeemable capital stock			3				—
Total Interest Expense			305				1,116
Net Interest Income			357				434
Provision for credit losses on mortgage loans			—				—
Net Interest Income After Mortgage Loan Loss Provision			357				434
Other Loss:
Net gain on trading securities			—				1
Total other-than-temporary impairment loss on held-to-maturity securities			(192	)			(1,156	)
Portion of impairment loss recognized in other comprehensive income			132				1,068
Net other-than-temporary impairment loss on held-to-maturity securities			(60	)			(88	)
Net loss on advances and consolidated obligation bonds held at fair value			(100	)			(183	)
Net (loss)/gain on derivatives and hedging activities			(36	)			34
Other			1				—
Total Other Loss			(195	)			(236	)
Other Expense:
Compensation and benefits			17				15
Other operating expense			12				11
Federal Housing Finance Agency/Federal Housing Finance Board			3				3
Office of Finance			2				2
Other			2				—
Total Other Expense			36				31
Income Before Assessments			126				167
REFCORP			22				30
Affordable Housing Program			11				14
Total Assessments			33				44
Net Income		$	93			$	123

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

 

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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, 2008		96		$	9,616			$	176		$	—			$	176			$	(7	)		$	9,785
Adjustments to opening balance(a)												570				570				(570	)			—
Issuance of capital stock		—			20																			20
Capital stock reclassified from mandatorily redeemable capital stock, net		6			602																			602
Comprehensive income/(loss):
Net income												123				123								123
Other comprehensive income/(loss):
Other-than-temporary impairment loss related to all other factors																				(1,118	)			(1,118	)
Reclassified to income for previously impaired securities																				50				50
Accretion of impairment loss																				30				30
Total comprehensive income/(loss)																								(915	)
Transfers to restricted retained earnings									222			(222	)			—								—
Balance, March 31, 2009		102		$	10,238			$	398		$	471			$	869			$	(1,615	)		$	9,492
Balance, December 31, 2009		86		$	8,575			$	1,239		$	—			$	1,239			$	(3,584	)		$	6,230
Issuance of capital stock		—			4																			4
Capital stock reclassified to mandatorily redeemable capital stock, net		—			(18	)																		(18	)
Comprehensive income/(loss):
Net income												93				93								93
Other comprehensive income/(loss):
Other-than-temporary impairment loss related to all other factors																				(191	)			(191	)
Reclassified to income for previously impaired securities																				59				59
Accretion of impairment loss																				215				215
Total comprehensive income/(loss)																								176
Transfers to restricted retained earnings									87			(87	)			—								—
Dividends on capital stock (0.26%)
Cash dividends paid					—				—			(6	)			(6	)							(6	)
Balance, March 31, 2010		86		$	8,561			$	1,326		$	—			$	1,326			$	(3,501	)		$	6,386

 

(a)	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 in the Bank’s 2009 Form 10-K.

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

 

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Federal Home Loan Bank of San Francisco

Statements of Cash Flows

(Unaudited)

 

		For the Three Months Ended March 31,
(In millions)		2010				2009
Cash Flows from Operating Activities:
Net Income		$	93			$	123
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			(4	)			(83	)
Change in net fair value adjustment on advances and consolidated obligation bonds held at fair value			100				183
Change in net fair value adjustment on derivatives and hedging activities			(115	)			(284	)
Net other-than-temporary impairment loss on held-to-maturity securities			60				88
Net change in:
Accrued interest receivable			152				374
Other assets			3				19
Accrued interest payable			(39	)			(332	)
Other liabilities			3				15
Total adjustments			160				(20	)
Net cash provided by operating activities			253				103
Cash Flows from Investing Activities:
Net change in:
Federal funds sold			(9,675	)			(2,953	)
Premises and equipment			(2	)			(2	)
Trading securities:
Proceeds from maturities			1				1
Held-to-maturity securities:
Net (increase)/decrease in short-term			(51	)			1,269
Proceeds from maturities of long-term			1,786				1,622
Advances:
Principal collected			68,372				316,521
Made to members			(47,113	)			(285,150	)
Mortgage loans held for portfolio:
Principal collected			127				124
Net cash provided by investing activities			13,445				31,432

 

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Federal Home Loan Bank of San Francisco

Statements of Cash Flows (continued)

(Unaudited)

 

		For the Three Months Ended March 31,
(In millions)		2010				2009
Cash Flows from Financing Activities:
Net change in:
Deposits			(129	)			(501	)
Net payments on derivative contracts with financing elements			30				36
Net proceeds from consolidated obligations:
Bonds issued			30,973				23,623
Discount notes issued			38,827				47,064
Payments for consolidated obligations:
Bonds matured or retired			(56,453	)			(46,856	)
Discount notes matured or retired			(32,279	)			(72,566	)
Proceeds from issuance of capital stock			4				20
Payments for redemption of mandatorily redeemable capital stock			(3	)			—
Cash dividends paid			(6	)			—
Net cash used in financing activities			(19,036	)			(49,180	)
Net decrease in cash and cash equivalents			(5,338	)			(17,645	)
Cash and cash equivalents at beginning of the period			8,280				19,632
Cash and cash equivalents at end of the period		$	2,942			$	1,987
Supplemental Disclosures:
Interest paid during the period		$	344			$	1,905
Affordable Housing Program payments during the period			14				12
REFCORP payments during the period			12				—
Transfers of mortgage loans to real estate owned			1				—

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

 

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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, 2010. 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, 2009 (2009 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, certain investment securities, 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 2009 Form 10-K. Other changes to these policies as of March 31, 2010, are discussed in Note 2 to the Financial Statements.

Note 2 – Recently Issued and Adopted Accounting Guidance

Embedded Credit Derivative Features. On March 5, 2010, the Financial Accounting Standards Board (FASB) issued amendments clarifying what constitutes the scope exception for embedded credit derivative features related to the transfer of credit risk in the form of subordination of one financial instrument to another. The embedded credit derivative feature related to the transfer of credit risk that is only in the form of subordination of one financial instrument to another is not subject to potential bifurcation and separate accounting as a derivative. The amendments clarify that the circumstances listed below (among others) are not subject to the scope exception. This means that certain embedded credit derivative features, including

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

those in some collateralized debt obligations and synthetic collateralized debt obligations, will need to be assessed to determine whether bifurcation and separate accounting as a derivative are required.

 

•

An embedded derivative feature relating to another type of risk (including another type of credit risk) is present in the securitized financial instruments.

 

•

The holder of an interest in a tranche is exposed to the possibility (however remote) of being required to make potential future payments (not merely receive reduced cash inflows) because the possibility of those future payments is not created by subordination.

 

•

The holder owns an interest in a single-tranche securitization vehicle; therefore, the subordination of one tranche to another is not relevant.

The amendments are effective for the Bank as of July 1, 2010. Upon adoption, entities are permitted to irrevocably elect the fair value option for any investment in a beneficial interest in a securitized financial asset. If the fair value option is elected at adoption, whether the investment had been recorded at amortized cost or at fair value with changes recorded in other comprehensive income, the cumulative unrealized gains and losses at that date are included in the cumulative-effect adjustment to beginning retained earnings for the period of adoption. If the fair value option is not elected and the embedded credit derivative feature is required to be bifurcated and accounted for separately, the initial effect of adoption is also recorded as a cumulative-effect adjustment to the beginning retained earnings for the period of adoption. The Bank is currently assessing the potential effect of the amendments on its financial condition, results of operations, or cash flows.

Fair Value Measurements and Disclosures - Improving Disclosures about Fair Value Measurements. On January 21, 2010, the FASB issued amended guidance for fair value measurement disclosures. The update requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. Furthermore, this update requires a reporting entity to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs; clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value; and amends guidance on employers’ disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2009. In the period of initial adoption, entities will not be required to provide the amended disclosures for any previous periods presented for comparative purposes. Early adoption is permitted. The Bank adopted this amended guidance as of January 1, 2010. Its adoption resulted in increased annual and interim financial statement disclosures and did not have any impact on the Bank’s financial condition, results of operations, or cash flows. The disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010 (January 1, 2011 for the Bank), and for interim periods within those fiscal years. The Bank’s adoption of this amended guidance may result in increased annual and interim financial statement disclosures but will not affect the Bank’s financial condition, results of operations, 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 (VIEs). This guidance was to improve financial reporting by enterprises involved with VIEs and to provide more relevant and reliable information to users of financial statements. This guidance amended the manner in which entities evaluate whether consolidation is required for VIEs. An entity must first perform a qualitative analysis in determining whether it must consolidate a VIE, and if the qualitative analysis is not determinative, the entity must perform a quantitative analysis. This guidance also required that an entity continually evaluate VIEs for consolidation, rather than making such an assessment based on the occurrence of triggering events. In addition, the guidance required enhanced disclosures about how an entity’s involvement with a VIE affects its financial

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

statements and its exposure to risks. This guidance was effective as of the beginning of each reporting entity’s first annual reporting period beginning after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application was prohibited. The Bank’s investment in VIEs is limited to senior interests in mortgage-backed securities. The Bank evaluated its investments in VIEs held as of January 1, 2010, and determined that consolidation accounting is not required under the new accounting guidance because the Bank is not the primary beneficiary. The Bank does not have the power to significantly affect the economic performance of any of these investments because it does not act as a key decision maker nor does it have the unilateral ability to replace a key decision maker. In addition, because the Bank holds the senior interest, rather than the residual interest, in these investments, the Bank does not have either the obligation to absorb losses of, or the right to receive benefits from, any of its investments in VIEs that could potentially be significant to the VIEs. Furthermore, the Bank does not design, sponsor, transfer, service, or provide credit or liquidity support in any of its investments in VIEs. Therefore, the adoption of this guidance as of January 1, 2010, did not have a material impact on the Bank’s financial condition, results of operations, 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 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. Key provisions of the guidance included (i) the removal of the concept of qualifying special purpose entities; (ii) the introduction of the concept of a participating interest, in circumstances in which a portion of a financial asset has been transferred; and (iii) the requirement that to qualify for sale accounting, the transferor must evaluate whether it maintains effective control over transferred financial assets either directly or indirectly. The guidance also required enhanced disclosures about transfers of financial assets and a transferor’s continuing involvement. This guidance was effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application was prohibited. The Bank adopted this guidance as of January 1, 2010, and the adoption did not have a material impact on the Bank’s financial condition, results of operations, or cash flows.

Note 3 – Available-for-Sale Securities

Available-for-sale securities as of March 31, 2010, and December 31, 2009, were as follows:

March 31, 2010

 

		Amortized Cost(1)			Other-Than- Temporary Impairment (OTTI) Recognized in Accumulated Other Comprehensive Income/(Loss) (AOCI)			Gross Unrealized Gains			Gross Unrealized Losses				Estimated Fair Value			Weighted Average Interest Rate
TLGP(2)		$	1,930		$	—		$	—		$	(1	)		$	1,929		0.40	%

December 31, 2009

 

		Amortized Cost(1)			OTTI Recognized in AOCI			Gross Unrealized Gains			Gross Unrealized Losses				Estimated Fair Value			Weighted Average Interest Rate
TLGP(2)		$	1,932		$	—		$	—		$	(1	)		$	1,931		0.41	%

 

(1)	Amortized cost includes unpaid principal balance and unamortized premiums and discounts.

(2)	Temporary Liquidity Guarantee Program (TLGP) securities represent corporate debentures of the issuing party that are guaranteed by the Federal Deposit Insurance Corporation (FDIC) and backed by the full faith and credit of the U.S. government.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

The following table summarizes the available-for-sale securities with unrealized losses as of March 31, 2010, and December 31, 2009. 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.

March 31, 2010

		Less than 12 months						12 months or more						Total
		Estimated Fair Value			Unrealized Losses			Estimated Fair Value			Unrealized Losses			Estimated Fair Value			Unrealized Losses
TLGP(1)		$	1,821		$	1		$	—		$	—		$	1,821		$	1

December 31, 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
TLGP(1)		$	1,281		$	1		$	—		$	—		$	1,281		$	1

 

(1)	TLGP securities represent corporate debentures of the issuing party that are guaranteed by the FDIC and backed by the full faith and credit of the U.S. government.

Redemption Terms. The amortized cost and estimated fair value of certain securities by contractual maturity (based on contractual final principal payment) as of March 31, 2010, and December 31, 2009, are shown below. Expected maturities of certain securities will differ from contractual maturities because borrowers generally have the right to prepay the underlying obligations without prepayment fees.

March 31, 2010

 

Year of Contractual Maturity		Amortized Cost(1)			Estimated Fair Value			Weighted Average Interest Rate
Available-for-sale securities other than mortgage-backed securities (MBS):
Due after one year through five years		$	1,930		$	1,929		0.40	%

December 31, 2009

 

Year of Contractual Maturity		Amortized Cost(1)			Estimated Fair Value			Weighted Average Interest Rate
Available-for-sale securities other than MBS:
Due after one year through five years		$	1,932		$	1,931		0.41	%

 

(1)	Amortized cost includes unpaid principal balance and unamortized premiums and discounts.

The amortized cost of the Bank’s TLGP securities, which are classified as available-for-sale, included net premiums of $7 at March 31, 2010, and net premiums of $8 at December 31, 2009.

Interest Rate Payment Terms. Available-for-sale securities at March 31, 2010, and December 31, 2009, had adjustable rate interest payment terms.

Other-Than-Temporary Impairment. On a quarterly basis, the Bank evaluates its individual available-for-sale 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

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

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 available-for-sale 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 March 31, 2010, gross unrealized losses on its available-for-sale investment securities are temporary because it determined that the strength of the guarantees and the direct support from the U.S. government was sufficient to protect the Bank from losses.

Note 4 – Held-to-Maturity Securities

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

March 31, 2010

 

		Amortized Cost(1)			OTTI Recognized in AOCI(1)				Carrying Value(1)			Gross Unrecognized Holding Gains(2)			Gross Unrecognized Holding Losses(2)				Estimated Fair Value
Interest-bearing deposits		$	6,161		$	—			$	6,161		$	—		$	—			$	6,161
Commercial paper			1,500			—				1,500			—			—				1,500
Housing finance agency bonds			758			—				758			—			(142	)			616
TLGP(3)			303			—				303			—			—				303
Subtotal			8,722			—				8,722			—			(142	)			8,580
MBS:
Other U.S. obligations:
Ginnie Mae			15			—				15			—			—				15
Government-sponsored enterprises (GSEs):
Freddie Mac			2,554			—				2,554			113			(1	)			2,666
Fannie Mae			7,831			—				7,831			252			(24	)			8,059
Other:
PLRMBS			18,956			(3,492	)			15,464			605			(1,466	)			14,603
Total MBS			29,356			(3,492	)			25,864			970			(1,491	)			25,343
Total		$	38,078		$	(3,492	)		$	34,586		$	970		$	(1,633	)		$	33,923

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

December 31, 2009

 

		Amortized Cost(1)			OTTI Recognized in AOCI(1)				Carrying Value(1)			Gross Unrecognized Holding Gains(2)			Gross Unrecognized Holding Losses(2)				Estimated Fair Value
Interest-bearing deposits		$	6,510		$	—			$	6,510		$	—		$	—			$	6,510
Commercial paper			1,100			—				1,100			—			—				1,100
Housing finance agency bonds			769			—				769			—			(138	)			631
TLGP(3)			304			—				304			—			(1	)			303
Subtotal			8,683			—				8,683			—			(139	)			8,544
MBS:
Other U.S. obligations:
Ginnie Mae			16			—				16			—			—				16
GSEs:
Freddie Mac			3,423			—				3,423			150			(1	)			3,572
Fannie Mae			8,467			—				8,467			256			(13	)			8,710
Other:
PLRMBS			19,866			(3,575	)			16,291			494			(1,945	)			14,840
Total MBS			31,772			(3,575	)			28,197			900			(1,959	)			27,138
Total		$	40,455		$	(3,575	)		$	36,880		$	900		$	(2,098	)		$	35,682

 

(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 AOCI.

(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.

(3)	TLGP securities represent corporate debentures of the issuing party that are guaranteed by the FDIC and backed by the full faith and credit of the U.S. government.

As of March 31, 2010, all of the interest-bearing deposits had a credit rating of at least A, all of the commercial paper had a credit rating of AA, and all of the housing finance agency bonds had a credit rating of at least AA. The TLGP securities are guaranteed by the FDIC and backed by the full faith and credit of the U.S. government. In addition, as of March 31, 2010, 46% of the amortized cost of the private-label residential MBS (PLRMBS) were rated above investment grade (13% had a credit rating of AAA), and the remaining 54% 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 March 31, 2010, and December 31, 2009. 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.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

March 31, 2010

 

		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		$	6,161		$	—		$	—		$	—		$	6,161		$	—
Commercial paper			1,500			—			—			—			1,500			—
Housing finance agency bonds			—			—			616			142			616			142
Subtotal			7,661			—			616			142			8,277			142
MBS:
Other U.S. obligations:
Ginnie Mae			—			—			5			—			5			—
GSEs:
Freddie Mac			61			1			38			—			99			1
Fannie Mae			1,093			10			142			14			1,235			24
Other:
PLRMBS(2)			—			—			14,358			4,958			14,358			4,958
Total MBS			1,154			11			14,543			4,972			15,697			4,983
Total		$	8,815		$	11		$	15,159		$	5,114		$	23,974		$	5,125

December 31, 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		$	6,510		$	—		$	—		$	—		$	6,510		$	—
Housing finance agency bonds			30			7			600			131			630			138
TLGP(1)			303			1			—			—			303			1
Subtotal			6,843			8			600			131			7,443			139
MBS:
Other U.S. obligations:
Ginnie Mae			—			—			13			—			13			—
GSEs:
Freddie Mac			—			—			40			1			40			1
Fannie Mae			1,037			10			172			3			1,209			13
Other:
PLRMBS( 2 )			—			—			14,840			5,520			14,840			5,520
Total MBS			1,037			10			15,065			5,524			16,102			5,534
Total		$	7,880		$	18		$	15,665		$	5,655		$	23,545		$	5,673

 

(1)	TLGP securities represent corporate debentures of the issuing party that are guaranteed by the FDIC and backed by the full faith and credit of the U.S. government.

(2)	Includes securities with gross unrecognized holding losses of $1,466 and 1,945 at March 31, 2010, and December 31, 2009, respectively, and securities with OTTI charges of $3,492 and $3,575 that have been recognized in AOCI at March 31, 2010, and December 31, 2009, respectively.

As indicated in the tables above, as of March 31, 2010, the Bank’s investments classified as held-to-maturity had gross unrealized losses totaling $5,125, primarily relating to PLRMBS. The gross unrealized losses associated with the PLRMBS were primarily due to illiquidity in the MBS market, uncertainty about the future condition of the housing and mortgage market and the economy, and continued deterioration in the credit performance of loan collateral underlying these securities, which caused these assets to be valued at significant discounts to their acquisition cost.

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 March 31, 2010, and December 31, 2009, 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.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

March 31, 2010

 

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		$	7,964		$	7,964		$	7,964		0.22	%
Due after one year through five years			9			9			9		0.40
Due after five years through ten years			27			27			23		0.37
Due after ten years			722			722			584		0.47
Subtotal			8,722			8,722			8,580		0.24
MBS:
Other U.S. obligations:
Ginnie Mae			15			15			15		1.27
GSEs:
Freddie Mac			2,554			2,554			2,666		4.75
Fannie Mae			7,831			7,831			8,059		4.14
Other:
PLRMBS			18,956			15,464			14,603		3.59
Total MBS			29,356			25,864			25,343		3.84
Total		$	38,078		$	34,586		$	33,923		3.03	%

December 31, 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		$	7,610		$	7,610		$	7,610		0.15	%
Due after one year through five years			316			316			314		1.75
Due after five years through ten years			27			27			23		0.40
Due after ten years			730			730			597		0.53
Subtotal			8,683			8,683			8,544		0.24
MBS:
Other U.S. obligations:
Ginnie Mae			16			16			16		1.26
GSEs:
Freddie Mac			3,423			3,423			3,572		4.83
Fannie Mae			8,467			8,467			8,710		4.15
Other:
PLRMBS			19,866			16,291			14,840		3.73
Total MBS			31,772			28,197			27,138		3.95
Total		$	40,455		$	36,880		$	35,682		3.17	%

 

(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 AOCI.

At March 31, 2010, the carrying value of the Bank’s MBS classified as held-to-maturity included net discounts of $25, OTTI related to credit loss of $716 (including interest accretion adjustments of $28), and OTTI related to all other factors of $3,492. At December 31, 2009, the carrying value of the Bank’s MBS classified as held-to-maturity included net discounts of $16, OTTI related to credit loss of $652 (including interest accretion adjustments of $24), and OTTI related to all other factors of $3,575.

Interest Rate Payment Terms. Interest rate payment terms for held-to-maturity securities at March 31, 2010, and December 31, 2009, are detailed in the following table:

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

		March 31, 2010			December 31, 2009
Amortized cost of held-to-maturity securities other than MBS:
Fixed rate		$	7,964		$	7,914
Adjustable rate			758			769
Subtotal			8,722			8,683
Amortized cost of held-to-maturity MBS:
Passthrough securities:
Fixed rate			2,861			3,326
Adjustable rate			99			87
Collateralized mortgage obligations:
Fixed rate			14,739			16,619
Adjustable rate			11,657			11,740
Subtotal			29,356			31,772
Total		$	38,078		$	40,455

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

The Bank does not own MBS that are backed by mortgage loans purchased by another 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 March 31, 2010, the immaterial gross unrealized losses on its short-term unsecured Federal funds sold, interest-bearing deposits, 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 short-term unsecured Federal funds sold, interest-bearing deposits, and commercial paper were all with issuers that had credit ratings of at least A at March 31, 2010; and all of the securities had maturity dates within 45 days of March 31, 2010. As a result, the Bank expects to recover the entire amortized cost basis of these securities.

As of March 31, 2010, the Bank’s investments in housing finance agency bonds, which were issued by the California Housing Finance Agency (CalHFA), had gross unrealized losses totaling $142. These gross unrealized losses were mainly due to an illiquid market, causing these investments to be valued at a discount to their acquisition cost. In addition, the Bank independently modeled cash flows for the underlying collateral, using assumptions for default rates and loss severity that management deemed reasonable, and concluded that the available credit support within the CalHFA structure more than offset the projected underlying collateral losses. The Bank has determined that, as of March 31, 2010, all of the gross unrealized losses on these bonds

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

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 because CalHFA had a credit rating of A at March 31, 2010 (based on the lowest of Moody’s or Standard & Poor’s ratings). As a result, the Bank expects to recover the entire amortized cost basis of these securities.

The Bank also invests in corporate debentures issued under the TLGP, which are guaranteed by the FDIC and backed by the full faith and credit of the U.S. government. The Bank expects to recover the entire amortized cost basis of these securities because it determined that the strength of the guarantees and the direct 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 March 31, 2010, all of the gross unrealized losses on its TLGP investments are temporary.

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 March 31, 2010, 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 of its PLRMBS as of March 31, 2010. 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, 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 as of March 31, 2010, assumed CBSA-level current-to-trough housing price declines ranging from 0% to 12% over the 6- to 12-month periods beginning January 1, 2010 (average price decline during this time period equaled 5%). Thereafter, home prices are projected to increase 0% in the first six months, 0.5% in the next six months, 3% in the second year, and 4% 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.

At each quarter end, the Bank compares the present value of the cash flows expected to be collected on its PLRMBS to the amortized cost basis of the securities to determine whether a credit loss exists. For the Bank’s variable rate and hybrid PLRMBS, the Bank uses a forward interest rate curve to project the future estimated cash flows. The Bank then uses the effective interest rate for the security prior to impairment for determining the present value of the future estimated cash flows. For securities previously identified as other-than-temporarily impaired, the Bank updates its estimate of future estimated cash flows on a quarterly basis.

For securities determined to be other-than-temporarily impaired as of March 31, 2010 (that is, securities for which the Bank determined that it does not expect to recover the entire amortized cost basis), the following table presents a summary of the significant inputs used in measuring the amount of credit loss recognized in earnings in the first quarter of 2010.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Credit enhancement is defined as the percentage of subordinated tranches and over-collateralization, if any, in a security structure that will generally absorb losses before the Bank will experience a loss on the security. The calculated averages represent the dollar-weighted averages of all the PLRMBS investments in each category shown. The classification (prime and Alt-A) is based on the model used to run the estimated cash flows for the CUSIP, which may not necessarily be the same as the classification at the time of origination.

March 31, 2010

 

		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 %
Prime
2004 and earlier		10.7		10.7		8.2		8.2		37.3		37.3		11.3		11.3
2006		9.4		9.4		22.2		22.2		41.2		41.2		21.8		21.8
Total Prime		9.6		9.4 – 10.7		19.7		8.2 – 22.2		40.5		37.3 – 41.2		19.9		11.3 – 21.8
Alt-A
2004 and earlier		14.0		9.2 – 17.3		38.7		26.2 – 52.3		48.7		41.1 – 52.3		19.7		14.5 – 25.5
2005		10.2		7.6 – 15.2		35.0		15.9 – 72.4		43.5		28.5 – 53.7		14.5		5.7 – 30.2
2006		9.4		5.3 – 13.8		51.4		27.8 – 88.1		47.1		36.6 – 60.7		24.6		8.4 – 40.6
2007		8.1		4.1 – 12.0		63.6		22.4 – 90.7		48.0		41.2 – 59.1		29.4		9.5 – 46.4
2008		12.0		11.0 – 12.3		51.1		46.9 – 52.4		42.1		41.8 – 42.9		31.1		31.1
Total Alt-A		9.3		4.1 – 17.3		52.4		15.9 – 90.7		46.5		28.5 – 60.7		24.5		5.7 – 46.4
Total		9.3		4.1 – 17.3		51.8		8.2 – 90.7		46.3		28.5 – 60.7		24.4		5.7 – 46.4

The Bank recorded OTTI related to credit loss of $60 and $88 that was recognized in “Other Loss” for the first quarter of 2010 and 2009, respectively, and recognized OTTI related to all other factors of $132 and $1,068 in “Other comprehensive income/(loss)” for the first quarter of 2010 and 2009, respectively. For each security, the estimated impairment related to all other factors for each security is 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). For the first quarter of 2010 and 2009, the Bank accreted $215 and $30 from AOCI to increase the carrying value of the respective PLRMBS, respectively. 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 March 31, 2010, the estimated weighted average life of these securities was approximately four years, respectively.

For certain other-than-temporarily impaired securities that had previously been impaired and subsequently incurred additional OTTI related to credit loss, the additional credit-related OTTI, up to the amount in AOCI, was reclassified out of non-credit-related OTTI in AOCI and charged to earnings. This amount was $59 for the first quarter of 2010 and $50 for the first quarter of 2009.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

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)” for the three months ended March 31, 2010 and 2009.

 

		Three Months Ended March 31, 2010											Three Months Ended March 31, 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)		$	628		$	3,575			$	4,203			$	20		$	570			$	590
Charges on securities for which OTTI was not previously recognized			1			116				117				38			1,015				1,053
Additional charges on securities for which OTTI was previously recognized(2)			59			16				75				50			53				103
Accretion of impairment related to all other factors			—			(215	)			(215	)			—			(30	)			(30	)
Balance, end of the period		$	688		$	3,492			$	4,180			$	108		$	1,608			$	1,716

 

(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 AOCI.

(2)

For the three months ended March 31, 2010, “securities for which OTTI was previously recognized” represents all securities that were also other-than-temporarily impaired prior to January 1, 2010. For the three months ended March 31, 2009, “securities for which OTTI was previously recognized” represents all securities that were also previously other-than-temporarily impaired prior to January 1, 2009.

The following tables present the Bank’s other-than-temporarily impaired PLRMBS that incurred an OTTI charge during the three months ended March 31, 2010, and 2009, by loan collateral type:

 

March 31, 2010		Unpaid Principal Balance			Amortized Cost			Carrying Value			Estimated Fair Value
Other-than-temporarily impaired PLRMBS backed by loans classified at origination as:
Prime		$	719		$	696		$	453		$	487
Alt-A, option ARM			1,536			1,402			756			791
Alt-A, other			5,212			4,899			3,357			3,652
Total		$	7,467		$	6,997		$	4,566		$	4,930
March 31, 2009		Unpaid Principal Balance			Amortized Cost			Carrying Value			Estimated Fair Value
Other-than-temporarily impaired PLRMBS backed by loans classified at origination as:
Alt-A, option ARM		$	944		$	919		$	431		$	431
Alt-A, other			2,705			2,633			1,570			1,578
Total		$	3,649		$	3,552		$	2,001		$	2,009
The following tables present the Bank’s other-than-temporarily impaired PLRMBS that incurred an OTTI charge anytime during the life of the securities at March 31, 2010, and December 31, 2009, by loan collateral type:
March 31, 2010		Unpaid Principal Balance			Amortized Cost			Carrying Value			Estimated Fair Value
Other-than-temporarily impaired PLRMBS backed by loans classified at origination as:
Prime		$	1,360		$	1,294		$	857		$	940
Alt-A, option ARM			2,026			1,801			968			1,010
Alt-A, other			7,597			7,176			4,954			5,430
Total		$	10,983		$	10,271		$	6,779		$	7,380

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

December 31, 2009		Unpaid Principal Balance			Amortized Cost			Carrying Value			Estimated Fair Value
Other-than-temporarily impaired PLRMBS backed by loans classified at origination as:
Prime		$	1,392		$	1,333		$	927		$	998
Alt-A, option ARM			2,084			1,873			964			1,001
Alt-A, other			7,410			7,031			4,771			5,150
Total		$	10,886		$	10,237		$	6,662		$	7,149

The following tables present 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 ended March 31, 2010 and 2009:

 

		Three Months Ended March 31, 2010										Three Months Ended March 31, 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		$	6		$	53			$	59		$	—		$	—		$	—
Alt-A, option ARM			15			(14	)			1			25			417			442
Alt-A, other			39			93				132			63			651			714
Total		$	60		$	132			$	192		$	88		$	1,068		$	1,156

The following tables present the other-than-temporarily impaired PLRMBS for the three months ended March 31, 2010 and 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 March 31, 2010
		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		$	—		$	6		$	6				$	—		$	53			$	53
Alt-A, option ARM			—			15			15					—			(14	)			(14	)
Alt-A, other			—			39			39					—			93				93
Total		$	—		$	60		$	60				$	—		$	132			$	132
		Three Months Ended March 31, 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:
Alt-A, option ARM		$	—		$	25		$	25				$	—		$	417			$	417
Alt-A, other			—			63			63					—			651				651
Total		$	—		$	88		$	88				$	—		$	1,068			$	1,068

For the Bank’s PLRMBS that were not other-than-temporarily impaired as of March 31, 2010, 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 March 31, 2010, the gross unrealized losses on these remaining PLRMBS are temporary. Thirty-three percent of the amortized cost of the PLRMBS that were not other-than-temporarily impaired were rated investment

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

grade (9% were rated AAA), 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 March 31, 2010, PLRMBS labeled Alt-A by the issuer represented 46% of the amortized cost of the Bank’s MBS portfolio. 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.

Note 5 – Advances

Redemption Terms. The Bank had advances outstanding, excluding overdrawn demand deposit accounts, at interest rates ranging from 0.05% to 8.57% at March 31, 2010, and 0.01% to 8.57% at December 31, 2009, as summarized below.

 

		March 31, 2010						December 31, 2009
Contractual Maturity		Amount Outstanding			Weighted Average Interest Rate			Amount Outstanding			Weighted Average Interest Rate
Overdrawn demand deposit accounts		$	1		0.01	%		$	—		—	%
Within 1 year			54,651		1.62				76,854		1.54
After 1 year through 2 years			31,112		1.41				30,686		1.69
After 2 years through 3 years			8,657		2.12				7,313		2.85
After 3 years through 4 years			8,068		1.84				9,211		1.77
After 4 years through 5 years			1,760		3.55				1,183		4.12
After 5 years			6,805		2.07				7,066		2.12
Total par amount			111,054		1.67	%			132,313		1.72	%
Valuation adjustments for hedging activities			480						524
Valuation adjustments under fair value option			516						616
Net unamortized premiums			89						106
Total		$	112,139					$	133,559

The following table summarizes advances at March 31, 2010, and December 31, 2009, by the earlier of the year of contractual maturity or next call date for callable advances.

 

Earlier of Contractual Maturity or Next Call Date		March 31, 2010			December 31, 2009
Overdrawn demand deposit accounts		$	1		$	—
Within 1 year			54,651			76,864
After 1 year through 2 years			31,120			30,686
After 2 years through 3 years			8,657			7,318
After 3 years through 4 years			8,065			9,201
After 4 years through 5 years			1,760			1,183
After 5 years			6,800			7,061
Total par amount		$	111,054		$	132,313

The following table summarizes advances at March 31, 2010, and December 31, 2009, by the earlier of the year of contractual maturity or next put date for putable advances.

 

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Notes to Financial Statements (continued)

 

Earlier of Contractual Maturity or Next Put Date		March 31, 2010			December 31, 2009
Overdrawn demand deposit accounts		$	1		$	—
Within 1 year			57,268			79,552
After 1 year through 2 years			30,747			30,693
After 2 years through 3 years			8,118			6,385
After 3 years through 4 years			7,785			8,933
After 4 years through 5 years			1,484			942
After 5 years			5,651			5,808
Total par amount		$	111,054		$	132,313

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 that are fully secured by collateral (such as real estate, equipment and vehicles, accounts receivable, and inventory) or securities representing a whole interest in such loans as eligible 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 defines community financial institutions 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, 2010, the cap was $1,029. 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 7 to the Financial Statements in the Bank’s 2009 Form 10-K.

Credit and Concentration Risk. The Bank’s potential credit risk from advances is concentrated in four 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 four institutions as of March 31, 2010, and December 31, 2009. The tables also present the interest income from these advances before the impact of interest rate exchange agreements associated with these advances for the first quarter of 2010 and 2009.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Concentration of Advances

 

		March 31, 2010						December 31, 2009
Name of Borrower		Advances Outstanding(1)			Percentage of Total Advances Outstanding			Advances Outstanding(1)			Percentage of Total Advances Outstanding
Citibank, N.A.		$	34,159		31	%		$	46,544		35	%
JPMorgan Chase Bank, National Association			13,615		12				20,622		16
Bank of America California, N.A.			13,404		12				9,304		7
Wells Fargo Bank, N.A.(2)			11,173		10				14,695		11
Subtotal			72,351		65				91,165		69
Others			38,703		35				41,148		31
Total par amount		$	111,054		100	%		$	132,313		100	%

Concentration of Interest Income from Advances

 

		Three Months Ended
		March 31, 2010						March 31, 2009
Name of Borrower		Interest Income from Advances(3)			Percentage of Total Interest Income from Advances			Interest Income from Advances(3)			Percentage of Total Interest Income from Advances
Citibank, N.A.		$	22		4	%		$	233		18	%
JPMorgan Chase Bank, National Association			137		27				397		31
Bank of America California, N.A.			29		6				64		5
Wells Fargo Bank, N.A.(2)			31		6				102		8
Subtotal			219		43				796		62
Others			287		57				485		38
Total		$	506		100	%		$	1,281		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 December 31, 2008, Wells Fargo & Company, a nonmember, acquired Wachovia Corporation, the parent company of Wachovia Mortgage, FSB. Wachovia Mortgage, FSB, operated as a separate entity and continued to be a member of the Bank until its merger into Wells Fargo Bank, N.A., a subsidiary of Wells Fargo & Company, on November 1, 2009. 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. 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 reclassified the capital stock transferred to Wells Fargo Bank, N.A., totaling $1,567, to mandatorily redeemable capital stock (a liability).

 

(3)

Interest income amounts exclude the interest effect of interest rate exchange agreements with derivatives counterparties; as a result, the total interest income amounts will not agree to the Statements of Income. The amount of interest income from advances can vary depending on the amount outstanding, terms to maturity, interest rates, and repricing characteristics.

The Bank held a security interest in collateral from each of its four 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 March 31, 2010, and December 31, 2009, three of the four largest advances borrowers (Citibank, N.A.; JPMorgan Chase Bank, National Association; and Wells Fargo Bank, N.A.) each owned more than 10% of the Bank’s outstanding capital stock, including mandatorily redeemable capital stock.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

During the first quarter of 2010, four member institutions were placed into receivership or liquidation. All of these institutions had advances outstanding at the time they were placed into receivership or liquidation. The advances outstanding to these four institutions were either repaid prior to March 31, 2010, or assumed by other institutions, and no losses were incurred by the Bank. Bank capital stock held by three of the four institutions totaling $18 was classified as mandatorily redeemable capital stock (a liability). The capital stock of the other institution was transferred to 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, the Bank’s credit analyses of members’ financial condition, and the Bank’s credit extension and collateral policies, 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.

From April 1, 2010, to April 30, 2010, two member institutions were placed into receivership. The outstanding advances and capital stock of one institution were assumed by a member institution. The advances outstanding to the other institution were assumed by another member institution, however the Bank capital stock totaling $9 was not acquired by the member institution and was classified as mandatorily redeemable capital stock (a liability). Because the estimated fair value of the collateral exceeds the carrying amount of the advances outstanding, and the Bank expects to collect all amounts due according to the contractual terms of the advances, no allowance for loan losses on the advances outstanding to this member institution was deemed necessary by management.

Interest Rate Payment Terms. Interest rate payment terms for advances at March 31, 2010, and December 31, 2009, are detailed below:

 

		March 31, 2010				December 31, 2009
Par amount of advances:
Fixed rate		$	62,099			$	68,411
Adjustable rate			48,955				63,902
Total par amount		$	111,054			$	132,313

Note 6 – Mortgage Loans Held for Portfolio

Under the Mortgage Partnership Finance^® (MPF^®) Program, the Bank purchased conventional conforming 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 March 31, 2010, and December 31, 2009, on mortgage loans, all of which are on one- to four-unit residential properties and single-unit second homes.

 

		March 31, 2010				December 31, 2009
Fixed rate medium-term mortgage loans		$	874			$	927
Fixed rate long-term mortgage loans			2,056				2,130
Subtotal			2,930				3,057
Net unamortized discounts			(19	)			(18	)
Mortgage loans held for portfolio			2,911				3,039
Less: Allowance for credit losses			(2	)			(2	)
Total mortgage loans held for portfolio, net		$	2,909			$	3,037

 

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Notes to Financial Statements (continued)

 

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 first quarter of 2010 and 2009, the Bank reduced net interest income for credit enhancement fees totaling $1 and $1, respectively.

Concentration Risk. The Bank had the following concentration in MPF loans with institutions whose outstanding total of mortgage loans sold to the Bank represented 10% or more of the Bank’s total outstanding mortgage loans at March 31, 2010, and December 31, 2009.

Concentration of Mortgage Loans

March 31, 2010

 

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		$	2,301		79	%		18,096		73	%
OneWest Bank, FSB			387		13			4,750		19
Subtotal			2,688		92			22,846		92
Others			242		8			2,009		8
Total		$	2,930		100	%		24,855		100	%
December 31, 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		$	2,391		78	%		18,613		73	%
OneWest Bank, FSB			409		13			4,893		19
Subtotal			2,800		91			23,506		92
Others			257		9			2,109		8
Total		$	3,057		100	%		25,615		100	%

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 March 31, 2010, and December 31, 2009.

 

		March 31, 2010					December 31, 2009
Days Past Due		Number of Loans		Mortgage Loan Balance			Number of Loans		Mortgage Loan Balance
Between 30 and 59 days		260		$	29		243		$	29
Between 60 and 89 days		73			9		81			10
90 days or more		213			27		177			22
Total		546		$	65		501		$	61

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

At March 31, 2010, the Bank had 546 loans that were 30 days or more delinquent totaling $65, of which 213 loans totaling $27 were classified as nonaccrual or impaired. For 123 of these loans, totaling $15, the loan was in foreclosure or the borrower of the loan was in bankruptcy. At December 31, 2009, the Bank had 501 loans that were 30 days or more delinquent totaling $61, of which 177 loans totaling $22 were classified as nonaccrual or impaired. For 103 of these loans, totaling $11, the loan was in foreclosure or the borrower of the loan was in bankruptcy.

The Bank’s average recorded investment in impaired loans totaled $24 for the first quarter of 2010 and $11 for the first quarter of 2009. The Bank did not recognize any interest income for impaired loans in the first quarter of 2010 and 2009.

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

 

		Three Months Ended
		March 31, 2010				March 31, 2009
Balance, beginning of the period		$	2.0			$	1.0
Charge-offs – transferred to real estate owned			(0.4	)			—
Recoveries			—				—
Provision for credit losses			0.4				0.1
Balance, end of the period		$	2.0			$	1.1

For more information on how the Bank determines its estimated allowance for credit losses on mortgage loans, see Note 8 to the Financial Statements in the Bank’s 2009 Form 10-K.

At March 31, 2010, the Bank’s other assets included $3 of real estate owned resulting from foreclosure of 31 mortgage loans held by the Bank. At December 31, 2009, the Bank’s other assets included $3 of real estate owned resulting from foreclosure of 26 mortgage loans held by the Bank.

Note 7 – 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 by 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 2009 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.

Redemption Terms. The following is a summary of the Bank’s participation in consolidated obligation bonds at March 31, 2010, and December 31, 2009.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

		March 31, 2010							December 31, 2009
Contractual Maturity		Amount Outstanding				Weighted Average Interest Rate			Amount Outstanding				Weighted Average Interest Rate
Within 1 year		$	50,373			1.83	%		$	75,865			1.29	%
After 1 year through 2 years			44,268			1.88				42,745			2.40
After 2 years through 3 years			13,762			1.99				11,589			2.12
After 3 years through 4 years			11,315			3.81				12,855			3.86
After 4 years through 5 years			4,102			3.28				5,308			3.11
After 5 years			10,629			4.26				11,561			4.38
Index amortizing notes			6			4.61				6			4.61
Total par amount			134,455			2.26	%			159,929			2.14	%
Unamortized premiums/(discounts)			234							251
Valuation adjustments for hedging activities			1,922							1,926
Fair value option valuation adjustments			(23	)						(53	)
Total		$	136,588						$	162,053

The Bank’s participation in consolidated obligation bonds outstanding includes callable bonds of $27,607 at March 31, 2010, and $32,185 at December 31, 2009. 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 $24,280 at March 31, 2010, and $25,530 at December 31, 2009. The combined sold callable swap and callable bond enable the Bank to meet its funding needs at costs not otherwise directly attainable solely through the issuance of non-callable debt, while effectively converting the Bank’s net payment to an adjustable rate.

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

 

		March 31, 2010			December 31, 2009
Par amount of consolidated obligation bonds:
Non-callable		$	106,848		$	127,744
Callable			27,607			32,185
Total par amount		$	134,455		$	159,929

The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding at March 31, 2010, and December 31, 2009, by the earlier of the year of contractual maturity or next call date.

 

Earlier of Contractual Maturity or Next Call Date		March 31, 2010			December 31, 2009
Within 1 year		$	73,460		$	103,215
After 1 year through 2 years			39,883			36,750
After 2 years through 3 years			8,157			5,494
After 3 years through 4 years			7,955			9,480
After 4 years through 5 years			658			593
After 5 years			4,336			4,391
Index amortizing notes			6			6
Total par amount		$	134,455		$	159,929

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:

 

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Notes to Financial Statements (continued)

 

		March 31, 2010							December 31, 2009
		Amount Outstanding				Weighted Average Interest Rate			Amount Outstanding				Weighted Average Interest Rate
Par amount		$	24,769			0.18	%		$	18,257			0.35	%
Unamortized discounts			(5	)						(11	)
Total		$	24,764						$	18,246

Interest Rate Payment Terms. Interest rate payment terms for consolidated obligations at March 31, 2010, and December 31, 2009, 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 2009 Form 10-K.

 

		March 31, 2010			December 31, 2009
Par amount of consolidated obligations:
Bonds:
Fixed rate		$	91,230		$	98,619
Adjustable rate			31,915			49,244
Step-up			9,439			10,433
Step-down			500			350
Fixed rate that converts to adjustable rate			983			915
Adjustable rate that converts to fixed rate			285			250
Range bonds			97			112
Index amortizing notes			6			6
Total bonds, par			134,455			159,929
Discount notes, par			24,769			18,257
Total consolidated obligations, par		$	159,224		$	178,186

Note 8 – 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 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. The Bank must maintain (i) total regulatory capital in an amount equal to at least 4% of its total assets, (ii) leverage capital in an amount equal to at least 5% of its total assets, and (iii) permanent capital in an amount at least equal to its regulatory risk-based capital requirement. 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 AOCI. Leverage capital is defined as the sum of permanent capital, weighted by a 1.5 multiplier, plus non-permanent capital. (Non-permanent capital consists of Class A capital stock, which is redeemable upon six months’ notice. The Bank’s capital plan does not provide for the issuance of Class A capital stock.)

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 and regulations 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.

The following table shows the Bank’s compliance with the Finance Agency’s capital requirements at March 31, 2010, and December 31, 2009.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Regulatory Capital Requirements

 

		March 31, 2010								December 31, 2009
			Required				Actual				Required				Actual
Risk-based capital		$	5,610			$	14,745			$	6,207			$	14,657
Total regulatory capital		$	6,954			$	14,745			$	7,714			$	14,657
Total regulatory capital ratio			4.00	%			8.48	%			4.00	%			7.60	%
Leverage capital		$	8,693			$	22,117			$	9,643			$	21,984
Leverage ratio			5.00	%			12.72	%			5.00	%			11.40	%

The Bank’s total regulatory capital ratio increased to 8.48% at March 31, 2010, from 7.60% at December 31, 2009, 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.

Mandatorily Redeemable Capital Stock. The Bank had mandatorily redeemable capital stock totaling $4,858 at March 31, 2010, and $4,843 at December 31, 2009. The change in mandatorily redeemable capital stock for the three months ended March 31, 2010 and 2009, was as follows:

 

		Three Months Ended
		March 31, 2010						March 31, 2009
		Number of Institutions		Amount				Number of Institutions		Amount
Balance at the beginning of the period		42		$	4,843			30		$	3,747
Reclassified from/(to) capital during the period:
Merger with or acquisition by nonmember institution		1			—			1			—
Termination of membership		2			18			2			16
Acquired by/transferred to members(1)(2)		—			—			—			(618	)
Redemption of mandatorily redeemable capital stock		—			(3	)		—			—
Balance at the end of the period		45		$	4,858			33		$	3,145

 

(1)

During 2008, JPMorgan Chase Bank, National Association, a nonmember, assumed Washington Mutual Bank’s outstanding Bank advances and acquired the associated Bank capital stock. The Bank reclassified the capital stock transferred to JPMorgan Chase Bank, National Association, totaling $3,208, to mandatorily redeemable capital stock (a liability). 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 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).

Cash dividends on mandatorily redeemable capital stock in the amount of $3 were recorded as interest expense for the three months ended March 31, 2010. There were no dividends on mandatorily redeemable capital stock recorded as interest expense for the three months ended March 31, 2009.

The Bank’s mandatorily redeemable capital stock is discussed more fully in Note 13 to the Financial Statements in the Bank’s 2009 Form 10-K.

The following table presents mandatorily redeemable capital stock amounts by contractual redemption period at March 31, 2010, and December 31, 2009.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Contractual Redemption Period		March 31, 2010			December 31, 2009
Within 1 year		$	26		$	3
After 1 year through 2 years			44			63
After 2 years through 3 years			86			91
After 3 years through 4 years			2,970			2,955
After 4 years through 5 years			1,732			1,731
Total		$	4,858		$	4,843

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 $140 at March 31, 2010, and $181 at December 31, 2009. In accordance with this provision, the amount decreased by $41 in the first quarter of 2010 as a result of net unrealized losses 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 OTTI related to credit loss on PLRMBS, especially in periods of extremely low net income resulting from an adverse interest rate environment.

The Board of Directors has set the targeted amount of restricted retained earnings at $1,800. The retained earnings restricted in accordance with this provision of the Retained Earnings and Dividend Policy totaled $1,186 at March 31, 2010, and $1,058 at December 31, 2009.

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 2009 Form 10-K.

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.

On April 29, 2010, the Bank’s Board of Directors declared a cash dividend for the first quarter of 2010 at an annualized dividend rate of 0.26%. The Bank recorded the first quarter dividend on April 29, 2010, the day it was declared by the Board of Directors. The Bank expects to pay the first quarter dividend (including dividends on mandatorily redeemable capital stock), which will total $9, on or about May 13, 2010. The Bank did not pay a dividend for the first quarter of 2009.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

The Bank expects to pay the first quarter 2010 dividend in cash rather than stock form to comply with Finance Agency rules, which do not permit the Bank to pay dividends in the form of capital stock if the Bank’s excess stock (defined as any stock holdings in excess of a member’s minimum capital stock requirement, as established by the Bank’s capital plan) exceeds 1% of its total assets. As of March 31, 2010, the Bank’s excess capital stock totaled $7,368, or 4.24% of total assets.

The Bank will continue to monitor the condition of its PLRMBS 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 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. The Bank did not repurchase excess stock in 2009 and in the first quarter of 2010 to preserve the Bank’s capital.

Although the Bank did not repurchase excess capital stock in the first quarter of 2010, the five-year redemption period for $3 in mandatorily redeemable capital stock expired in the first quarter of 2010, and the Bank redeemed the stock at its $100 par value on the relevant expiration dates.

On April 29, 2010, the Bank announced that it plans to repurchase up to $500 in excess capital stock on May 14, 2010. The amount of excess capital stock to be repurchased from any shareholder will be based on the shareholder’s pro rata ownership share of total capital stock outstanding as of the repurchase date, up to the amount of the shareholder’s excess capital stock.

The Bank will continue to monitor the condition of its PLRMBS 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 capital stock repurchases in future quarters.

Excess capital stock totaled $7,368 as of March 31, 2010, which included surplus capital stock of $6,782.

For more information on excess and surplus capital stock, see Note 13 to the Financial Statements in the Bank’s 2009 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 March 31, 2010, and December 31, 2009.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Concentration of Capital Stock

Including Mandatorily Redeemable Capital Stock

 

		March 31, 2010						December 31, 2009
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			2,695		20				2,695		20
Wells Fargo Bank, N.A.			1,567		12				1,567		12
Subtotal			8,139		61				8,139		61
Others			5,280		39				5,279		39
Total		$	13,419		100	%		$	13,418		100	%

Note 9 – 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 expense associated with economic hedges that are recorded in “Net (loss)/gain 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 2009 Form 10-K.

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 months ended March 31, 2010 and 2009.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Reconciliation of Adjusted Net Interest Income and Income Before Assessments

 

		Advances- Related Business			Mortgage- Related Business(1)			Adjusted Net Interest Income			Amortization  of Deferred Gains/(Losses)(2)				Net Interest Income/ (Expense)  on Economic Hedges(3)				Interest Expense on Mandatorily Redeemable Capital Stock(4)			Net Interest Income			Other (Loss)/ Income				Other Expense			Income Before Assessments
Three months ended:
March 31, 2010		$	138		$	138		$	276		$	(20	)		$	(64	)		$	3		$	357		$	(195	)		$	36		$	126
March 31, 2009			204			136			340			(9	)			(85	)			—			434			(236	)			31			167

 

(1)	Does not include credit-related OTTI charges of $60 and $88 for the three months ended March 31, 2010 and 2009, respectively.

 

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

 

(3)

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 (loss)/gain on derivatives and hedging activities.”

 

(4)	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 March 31, 2010, and December 31, 2009.

Total Assets

 

		Advances- Related Business			Mortgage- Related Business			Total Assets
March 31, 2010		$	144,303		$	29,548		$	173,851
December 31, 2009			161,406			31,456			192,862

Note 10 – 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 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

 

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Notes to Financial Statements (continued)

 

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 (LIBOR).

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.

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 (loss)/gain on derivatives and hedging activities.”

 

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Notes to Financial Statements (continued)

 

The notional principal of the interest rate exchange agreements associated with derivatives with members and offsetting derivatives with other counterparties was $716 at March 31, 2010, and $616 at December 31, 2009. The Bank did not have any interest rate exchange agreements outstanding at March 31, 2010, and December 31, 2009, 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 and prepayment risk associated with these investment securities is 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 provide modest income volatility. Investment securities may be classified as trading or held-to-maturity.

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 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 a variable 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 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

 

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Notes to Financial Statements (continued)

 

marked to market through earnings and are presented as “Net (loss)/gain 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 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 upon or after the issuance of 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 three months ended March 31, 2010, or the twelve months ended December 31, 2009.

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. 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 AOCI 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

 

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Notes to Financial Statements (continued)

 

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 $212,127 and $235,014 at March 31, 2010, and December 31, 2009, 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 March 31, 2010, the Bank’s maximum credit risk, as defined above, was estimated at $1,919, including $440 of net accrued interest and fees receivable. At December 31, 2009, the Bank’s maximum credit risk was estimated at $1,827, including $399 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 $1,922 and $1,868 as collateral from counterparties as of March 31, 2010, and December 31, 2009, 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 12 to the Financial Statements.

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 March 31, 2010, was $97, for which the Bank had posted collateral of $40 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 $21 of collateral to its derivatives counterparties at March 31, 2010. The Bank’s credit ratings continue to be AAA/AAA.

 

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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 March 31, 2010, and December 31, 2009. For purposes of this disclosure, the derivatives values include the fair value of derivatives and related accrued interest.

Fair Values of Derivative Instruments

 

		March 31, 2010											December 31, 2009
		Notional Amount of Derivatives			Derivative Assets				Derivative Liabilities				Notional Amount of Derivatives			Derivative Assets				Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate swaps		$	101,419		$	2,442			$	578			$	104,211		$	2,476			$	699
Total			101,419			2,442				578				104,211			2,476				699
Derivatives not designated as hedging instruments:
Interest rate swaps			108,913			601				622				129,108			684				756
Interest rate caps, floors, corridors, and/or collars			1,795			13				22				1,695			16				22
Total			110,708			614				644				130,803			700				778
Total derivatives before netting and collateral adjustments		$	212,127			3,056				1,222			$	235,014			3,176				1,477
Netting adjustments by counterparty						(1,137	)			(1,137	)						(1,349	)			(1,349	)
Cash collateral and related accrued interest						(1,390	)			25							(1,375	)			77
Total collateral and netting adjustments(1)						(2,527	)			(1,112	)						(2,724	)			(1,272	)
Derivative assets and derivative liabilities as reported on the Statements of Condition					$	529			$	110						$	452			$	205

 

(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 (loss)/gain on derivatives and hedging activities as presented in the Statements of Income for the three months ended March 31, 2010 and 2009.

 

		Three Months Ended
		March 31, 2010				March 31, 2009
			Gain/(Loss)				Gain/(Loss)
Derivatives and hedged items in fair value hedging relationships – hedge ineffectiveness by derivative type:
Interest rate swaps		$	4			$	16
Total net gain related to fair value hedge ineffectiveness			4				16
Derivatives not designated as hedging instruments:
Economic hedges:
Interest rate swaps			26				101
Interest rate caps, floors, corridors, and/or collars			(2	)			2
Net interest settlements			(64	)			(85	)
Total net (loss)/gain related to derivatives not designated as hedging instruments			(40	)			18
Net (loss)/gain on derivatives and hedging activities		$	(36	)		$	34

The following table presents, 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 months ended March 31, 2010 and 2009.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

		Three Months Ended
		March 31, 2010															March 31, 2009
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		$	38		$	(39	)		$	(1	)		$	(168	)		$	132			$	(168	)		$	(36	)		$	(191	)
Consolidated obligation bonds			8			(3	)			5				511				(403	)			455				52				490
Total		$	46		$	(42	)		$	4			$	343			$	(271	)		$	287			$	16			$	299

 

(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 months ended March 31, 2010 and 2009, 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 March 31, 2010, the amount of unrecognized net losses on derivative instruments accumulated in other comprehensive income expected to be reclassified to earnings during the next 12 months was immaterial. The maximum length of time over which the Bank is hedging its exposure to the variability in future cash flows for forecasted transactions, excluding those forecasted transactions related to the payment of variable interest on existing financial instruments, is less than three months.

The following table presents outstanding notional balances and estimated fair values of the derivatives outstanding at March 31, 2010, and December 31, 2009.

 

		March 31, 2010							December 31, 2009
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		$	101,419		$	1,436			$	104,211		$	1,392
Economic			108,913			(46	)			129,108			(78	)
Interest rate caps, floors, corridors, and/or collars:
Economic			1,795			(8	)			1,695			(6	)
Total		$	212,127		$	1,382			$	235,014		$	1,308
Total derivatives excluding accrued interest					$	1,382						$	1,308
Accrued interest, net						452							391
Cash collateral held from counterparties – liabilities(1)						(1,415	)						(1,452	)
Net derivative balances					$	419						$	247
Derivative assets					$	529						$	452
Derivative liabilities						(110	)						(205	)
Net derivative balances					$	419						$	247

 

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

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.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

The estimated fair values of these embedded derivatives were immaterial as of March 31, 2010, and December 31, 2009.

Note 11 – 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.

 

•

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 March 31, 2010:

 

•

Trading securities

 

•

Available-for-sale securities

 

•

Certain advances

 

•

Derivative assets and liabilities

 

•

Certain consolidated obligation bonds

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

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).

March 31, 2010

 

		Fair Value Measurement Using:									Netting
		Level 1			Level 2			Level 3			Adjustments(1)				Total
Assets:
Trading securities:
GSEs:
Fannie Mae		$	—		$	7		$	—		$	—			$	7
Other U.S. obligations:
Ginnie Mae			—			22			—			—				22
Total trading securities			—			29			—			—				29
Available-for-sale securities (TLGP)			—			1,929			—			—				1,929
Advances(2)			—			18,602			—			—				18,602
Derivative assets (interest-rate related)			—			3,056			—			(2,527	)			529
Total assets		$	—		$	23,616		$	—		$	(2,527	)		$	21,089
Liabilities:
Consolidated obligation bonds(3)		$	—		$	24,865		$	—		$	—			$	24,865
Derivative liabilities (interest-rate related)			—			1,222			—			(1,112	)			110
Total liabilities		$	—		$	26,087		$	—		$	(1,112	)		$	24,975

December 31, 2009

 

		Fair Value Measurement Using:									Netting
		Level 1			Level 2			Level 3			Adjustments(1)				Total
Assets:
Trading securities:
GSEs:
Fannie Mae		$	—		$	8		$	—		$	—			$	8
Other U.S. obligations:
Ginnie Mae			—			23			—			—				23
Total trading securities			—			31			—			—				31
Available-for-sale securities (TLGP)			—			1,931			—			—				1,931
Advances(2)			—			22,952			—			—				22,952
Derivative assets (interest-rate related)			—			3,176			—			(2,724	)			452
Total assets		$	—		$	28,090		$	—		$	(2,724	)		$	25,366
Liabilities:
Consolidated obligation bonds(3)		$	—		$	38,173		$	—		$	—			$	38,173
Derivative liabilities (interest-rate related)			—			1,477			—			(1,272	)			205
Total liabilities		$	—		$	39,650		$	—		$	(1,272	)		$	38,378

 

(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 $17,459 and $21,616 of advances recorded under the fair value option at March 31, 2010, and December 31, 2009, respectively, and $1,143 and $1,336 of advances recorded at fair value in accordance with the accounting for derivative instruments and hedging activities at March 31, 2010, and December 31, 2009, respectively.

 

(3)

Includes $24,241 and $37,022 of consolidated obligation bonds recorded under the fair value option at March 31, 2010, and December 31, 2009, respectively, and $624 and $1,151 of consolidated obligation bonds recorded at fair value in accordance with the accounting for derivatives instruments and hedging activities at March 31, 2010, and December 31, 2009, respectively.

For instruments carried at fair value, the Bank reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation attributes may result in a reclassification of certain

 

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Notes to Financial Statements (continued)

 

financial assets or liabilities. Such reclassifications are reported as transfers in/out at fair value in the quarter in which the changes occur. For the periods presented, the Bank did not have any reclassifications for transfers in/out of the fair value hierarchy levels.

Valuation Methodologies and Significant Inputs for Assets and Liabilities Measured at Fair Value on a Recurring Basis. The following valuation methodologies and significant inputs were applied to all of the assets and liabilities carried at fair value, whether as a result of certain accounting requirements or election of the fair value option.

Trading Securities – The Bank’s trading securities portfolio currently consists of agency residential MBS investments collateralized by residential mortgages. These securities are recorded at fair value on a recurring basis. In 2008, fair value measurement was based on pricing models or other model-based valuation techniques, such as the present value of future cash flows adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions. In an effort to achieve consistency among all the FHLBanks in applying a fair value methodology, 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’s valuation technique incorporates prices for all MBS from up to four specific third-party vendors. These pricing vendors use methods that generally employ, but are not limited to, trading input (recent trade information, dealer quotations, evaluation of benchmark securities), calculated input (reverse engineered model input factors such as benchmark yields, prepayments speeds), evaluation models, and asset type groupings/matrix pricing. 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 circumstances that a market participant would consider. Prices for agency residential MBS held in common with other FHLBanks are reviewed with those FHLBanks for consistency. As of March 31, 2010, substantially all of the Bank’s MBS holdings were priced using this valuation technique. 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.

Available-for-Sale Securities – The Bank’s available-for-sale securities portfolio currently consists of corporate debentures issued under the TLGP, which are guaranteed by the FDIC and backed by the full faith and credit of the U.S. government. These securities are recorded at fair value on a recurring basis. In determining the estimated fair value, the Bank requests 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 as determined by the methodology. The methodology also incorporates variance thresholds to assist in identifying median or average prices that may require further review. The Bank has relied on the pricing vendors’ valuation methodology, which includes quoted prices or observable inputs from an active market for similar assets, and the Bank considers these to be Level 2 inputs.

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 available for advances, the fair values are measured using model-based valuation techniques (such as the

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

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 spread adjustments are not market-observable and are evaluated for significance in the overall fair value measurement and fair value hierarchy level of the advance. As of March 31, 2010, the spread adjustment to the CO Curve ranged from 1 to 16 basis points for advances carried at fair value. The Bank obtains market-observable inputs from derivatives dealers for complex advances. These inputs may include volatility assumptions, which are market-based expectations of future interest rate volatility implied from current market prices for similar options (swaptions volatilities). 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. These derivatives are interest-rate related. For these derivatives, the Bank measures fair value using internally developed models that use primarily market-observable inputs, such as the LIBOR swap yield curve, option volatilities adjusted for counterparty credit risk, as necessary, and prepayment assumptions.

The Bank is subject to credit risk in derivatives transactions due to potential nonperformance by the derivatives counterparties. To mitigate this risk, the Bank only executes transactions with highly rated derivatives dealers and major banks (derivatives dealer counterparties) 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 dollar 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 pursuant to the provisions of the Bank’s master derivatives agreements. If these netted amounts are positive, they are classified as an asset and, if negative, as a liability.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

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 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 and liability management purposes (economic hedge) are also recorded each period in net gain/(loss) on derivatives and hedging activities. For additional information, see Note 10 to the Financial Statements.

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 CO Curve inputs obtained from the Office of Finance and provided to the Bank. The Office of Finance constructs a market observable curve, referred to as the CO Curve, using the Treasury yield curve as a base curve, which may be adjusted by indicative spreads obtained from market observable sources. These market indications are generally derived from pricing indications from dealers, historical pricing relationships, market activity for similar liabilities such as recent GSE trades or secondary market activity. For consolidated obligation bonds with embedded options, the Bank also obtains market-observable quotes and inputs from derivatives dealers. The Bank uses these swaption volatilities as significant inputs for measuring the fair value of consolidated obligations.

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

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

The contractual interest expense on the consolidated obligation bonds is recorded as 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 March 31, 2010, and December 31, 2009, the Bank measured certain of its held-to-maturity investment securiti