Attached files

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EX-31.2 - CERTIFICATION OF THE CHIEF OPERATING OFFICER PURSUANT TO SECTION 302 - Federal Home Loan Bank of San Franciscodex312.htm
EX-31.1 - CERTIFICATION OF THE PRESIDENT AND CEO PURSUANT TO SECTION 302 - Federal Home Loan Bank of San Franciscodex311.htm
EX-31.4 - CERTIFICATION OF THE CONTROLLER PURSUANT TO SECTION 302 - Federal Home Loan Bank of San Franciscodex314.htm
EX-32.3 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - Federal Home Loan Bank of San Franciscodex323.htm
EX-99.1 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - THREE MONTHS ENDED 03/31/10 - Federal Home Loan Bank of San Franciscodex991.htm
EX-31.3 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - Federal Home Loan Bank of San Franciscodex313.htm
EX-32.1 - CERTIFICATION OF THE PRESIDENT AND CEO PURSUANT TO SECTION 906 - Federal Home Loan Bank of San Franciscodex321.htm
EX-10.1 - 2010 AUDIT EXECUTIVE INCENTIVE PLAN - Federal Home Loan Bank of San Franciscodex101.htm
EX-32.2 - CERTIFICATION OF THE CHIEF OPERATING OFFICER PURSUANT TO SECTION 906 - Federal Home Loan Bank of San Franciscodex322.htm
EX-32.4 - CERTIFICATION OF THE CONTROLLER PURSUANT TO SECTION 906 - Federal Home Loan Bank of San Franciscodex324.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended 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

 

 

 


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

 

i


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

Federal Home Loan Bank of San Francisco

Statements of Condition

(Unaudited)

 

(In millions-except par value)    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.

 

1


Table of Contents

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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Table of Contents

Federal Home Loan Bank of San Francisco

Statements of Capital Accounts

(Unaudited)

 

     Capital Stock
Class B—Putable
    Retained Earnings     Accumulated
Other
Comprehensive

Income/(Loss)
    Total
Capital
 
(In millions)    Shares    Par Value     Restricted    Unrestricted     Total      

Balance, December 31, 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.

 

3


Table of Contents

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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Table of Contents

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.

 

5


Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements

(Unaudited)

(Dollars in millions)

Background Information

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

Note 1 – Summary of Significant Accounting Policies

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

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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Table of Contents

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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Table of Contents

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.

 

15


Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents

Federal Home Loan Bank of San Francisco

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.

 

20


Table of Contents

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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Table of Contents

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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Federal Home Loan Bank of San Francisco

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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Table of Contents

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.

 

24


Table of Contents

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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Federal Home Loan Bank of San Francisco

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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Federal Home Loan Bank of San Francisco

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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Federal Home Loan Bank of San Francisco

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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Federal Home Loan Bank of San Francisco

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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Federal Home Loan Bank of San Francisco

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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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

The following table summarizes the fair value of derivative instruments without the effect of netting arrangements or collateral as of 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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Federal Home Loan Bank of San Francisco

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 securities at fair value on a nonrecurring basis. The following tables present the investment securities as of March 31, 2010, and December 31, 2009, for which a nonrecurring change in fair value was recorded at March 31, 2010, and December 31, 2009, by level within the fair value hierarchy.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

March 31, 2010

 

      Fair Value Measurement Using:
      Level 1    Level 2    Level 3

Assets:

        

Held-to-maturity securities – PLRMBS

   $    $    $ 1,178

PLRMBS with a carrying value of $1,370 were written down to their fair value of $1,178.

December 31, 2009

 

      Fair Value Measurement Using:
      Level 1    Level 2    Level 3

Assets:

        

Held-to-maturity securities – PLRMBS

   $    $    $ 1,880

PLRMBS with a carrying value of $2,177 were written down to their fair value of $1,880.

To determine the estimated fair value of PLRMBS prior to September 30, 2009, the Bank used a weighting of its internal price (based on valuation models using market-based inputs obtained from broker-dealer data and price indications) and the price from an external pricing service to determine the estimated fair value that the Bank believed market participants would use to purchase the PLRMBS. The divergence among prices obtained from third-party broker/dealers and pricing services, which were derived from third parties’ proprietary models, led the Bank to conclude that the prices received were reflective of significant unobservable inputs. Because of the significant unobservable inputs used by the pricing services, the Bank considered these to be Level 3 inputs.

Beginning with the quarter ended September 30, 2009, the Bank changed the methodology used to estimate the fair value of PLRMBS. In an effort to achieve consistency among all the FHLBanks in applying a fair value methodology, the FHLBanks formed the MBS Pricing Governance Committee with the responsibility for developing a fair value methodology that all FHLBanks could adopt. Under the methodology approved by the MBS Pricing Governance Committee and adopted by the Bank, the Bank requests prices for all MBS from 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 PLRMBS held in common with other FHLBanks are reviewed with those FHLBanks for consistency. In adopting this common methodology, the Bank remains responsible for the selection and application of its fair value methodology and the reasonableness of assumptions and inputs used.

As of March 31, 2010, the Bank employed the fair value methodology described above, and four vendor prices were received for substantially all of the Bank’s MBS holdings. Substantially all of those prices fell within the specified thresholds, providing additional support for the Bank’s conclusion that the final computed prices are reasonable estimates of fair value. Based on the current lack of significant market activity for PLRMBS, the

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

non-recurring fair value measurements for such securities as of December 31, 2009, and March 31, 2010, fell within Level 3 of the fair value hierarchy.

Fair Value Option. The fair value option permits an entity to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value. The Bank elected the fair value option for certain financial instruments on January 1, 2008, as follows.

 

   

Adjustable rate credit advances with embedded options

 

   

Callable fixed rate credit advances

 

   

Putable fixed rate credit advances

 

   

Putable fixed rate credit advances with embedded options

 

   

Fixed rate credit advances with partial prepayment symmetry

 

   

Callable or non-callable capped floater consolidated obligation bonds

 

   

Convertible consolidated obligation bonds

 

   

Flo