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EX-31.3 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - Federal Home Loan Bank of San Franciscodex313.htm
EX-31.1 - CERTIFICATION OF THE PRESIDENT AND CEO PURSUANT TO SECTION 302 - Federal Home Loan Bank of San Franciscodex311.htm
EX-99.1 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - Federal Home Loan Bank of San Franciscodex991.htm
EX-32.4 - CERTIFICATION OF THE CONTROLLER AND OPERATIONS OFFICER PURSUANT TO SECTION 906 - Federal Home Loan Bank of San Franciscodex324.htm
EX-31.4 - CERTIFICATION OF THE CONTROLLER AND OPERATIONS OFFICER 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-31.2 - CERTIFICATION OF THE CHIEF OPERATING OFFICER PURSUANT TO SECTION 302 - Federal Home Loan Bank of San Franciscodex312.htm
EX-32.2 - CERTIFICATION OF THE CHIEF OPERATING OFFICER PURSUANT TO SECTION 906 - Federal Home Loan Bank of San Franciscodex322.htm
EX-32.1 - CERTIFICATION OF THE PRESIDENT AND CEO PURSUANT TO SECTION 906 - Federal Home Loan Bank of San Franciscodex321.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 June 30, 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 July 30, 2010

Class B Stock, par value $100

   129,740,703

 

 

 


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

   54
 

Quarterly Overview

   55
 

Financial Highlights

   58
 

Results of Operations

   59
 

Financial Condition

   71
 

Liquidity and Capital Resources

   85
 

Risk Management

   88
 

Critical Accounting Policies and Estimates

   105
 

Recently Issued Accounting Standards and Interpretations

   106
 

Recent Developments

   106
 

Off-Balance Sheet Arrangements, Guarantees, and Other Commitments

   109

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk    110

Item 4.

  Controls and Procedures    117

PART II.

  OTHER INFORMATION   

Item 1.

  Legal Proceedings    118

Item 1A.

  Risk Factors    118

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds    118

Item 3.

  Defaults Upon Senior Securities    118

Item 4.

  (Removed and Reserved)    119

Item 5.

  Other Information    119

Item 6.

  Exhibits    119
Signatures    120

 

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)    June 30,
2010
    December 31,
2009
 
   

Assets

    

Cash and due from banks

   $ 7,631      $ 8,280   

Federal funds sold

     14,470        8,164   

Trading securities(a)

     1,159        31   

Available-for-sale securities(a)

     1,932        1,931   

Held-to-maturity securities (fair values were $33,503 and $35,682, respectively)(b)

     33,563        36,880   

Advances (includes $12,819 and $21,616 at fair value under the fair value option, respectively)

     95,747        133,559   

Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $4 and $2, respectively

     2,788        3,037   

Loans to other Federal Home Loan Banks

     15          

Accrued interest receivable

     251        355   

Premises and equipment, net

     22        21   

Derivative assets

     476        452   

Other assets

     144        152   
                

Total Assets

   $ 158,198      $ 192,862   
   

Liabilities and Capital

    

Liabilities:

    

Deposits:

    

Interest-bearing:

    

Demand and overnight

   $ 144      $ 192   

Term

     29        29   

Other

     2        1   

Non-interest-bearing - other

     3        2   
                

Total deposits

     178        224   
                

Consolidated obligations, net:

    

Bonds (includes $21,148 and $37,022 at fair value under the fair value option, respectively)

     129,524        162,053   

Discount notes

     15,788        18,246   
                

Total consolidated obligations, net

     145,312        180,299   
                

Mandatorily redeemable capital stock

     4,690        4,843   

Accrued interest payable

     616        754   

Affordable Housing Program

     174        186   

Payable to REFCORP

     9        25   

Derivative liabilities

     173        205   

Other liabilities

     748        96   
                

Total Liabilities

     151,900        186,632   
                

Commitments and Contingencies (Note 13)

    

Capital:

    

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

    

83 shares and 86 shares, respectively

     8,280        8,575   

Restricted retained earnings

     1,350        1,239   

Accumulated other comprehensive loss

     (3,332     (3,584
                

Total Capital

     6,298        6,230   
                

Total Liabilities and Capital

   $ 158,198      $ 192,862   
   

 

(a) At June 30, 2010, and at December 31, 2009, none of these securities were pledged as collateral that may be repledged.
(b) Includes $76 at June 30, 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 June 30,     For the Six Months Ended June 30,  
(In millions)    2010     2009     2010     2009  
   

Interest Income:

        

Advances

   $ 285      $ 754      $ 606      $ 1,817   

Prepayment fees on advances, net

     28        18        39        20   

Federal funds sold

     8        6        13        13   

Trading securities

     1        1        1        1   

Available-for-sale securities

     1               2          

Held-to-maturity securities

     282        369        570        804   

Mortgage loans held for portfolio

     39        36        75        79   
                                

Total Interest Income

     644        1,184        1,306        2,734   
                                

Interest Expense:

        

Consolidated obligations:

        

Bonds

     269        588        558        1,448   

Discount notes

     9        112        22        368   

Mandatorily redeemable capital stock

     3               6          
                                

Total Interest Expense

     281        700        586        1,816   
                                

Net Interest Income

     363        484        720        918   
                                

Provision for credit losses on mortgage loans

     2        1        2        1   
                                

Net Interest Income After Mortgage Loan Loss Provision

     361        483        718        917   
                                

Other Loss:

        

Services to members

            1               1   

Net (loss)/gain on trading securities

     (1            (1     1   

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

     (190     (1,283     (382     (2,439

Portion of impairment loss recognized in other comprehensive income

     48        1,195        180        2,263   
                                

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

     (142     (88     (202     (176

Net loss on advances and consolidated obligation bonds held at fair value

     (21     (178     (121     (361

Net (loss)/gain on derivatives and hedging activities

     (123     224        (159     258   

Other

     2        2        3        2   
                                

Total Other Loss

     (285     (39     (480     (275
                                

Other Expense:

        

Compensation and benefits

     16        15        33        30   

Other operating expense

     13        13        25        24   

Federal Housing Finance Agency/Federal Housing Finance Board

     3        2        6        5   

Office of Finance

     1        1        3        3   

Other

     2               4          
                                

Total Other Expense

     35        31        71        62   
                                

Income Before Assessments

     41        413        167        580   
                                

REFCORP

     9        76        31        106   

Affordable Housing Program

     3        34        14        48   
                                

Total Assessments

     12        110        45        154   
                                

Net Income

   $ 29      $ 303      $ 122      $ 426   
   

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

 

2


Table of Contents

Federal Home Loan Bank of San Francisco

Statements of Capital Accounts

(Unaudited)

 

      Capital Stock
Class B—Putable
    Retained Earnings     Accumulated
Other
Comprehensive
Income/(Loss)
    Total
Capital
 
(In millions)    Shares     Par Value     Restricted    Unrestricted     Total      
           

Balance, December 31, 2008

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

Adjustments to opening balance(a)

            570        570        (570       

Issuance of capital stock

   1        55                 55   

Capital stock reclassified from mandatorily redeemable capital stock, net

   6        582                 582   

Comprehensive income/(loss):

               

Net income

            426        426          426   

Other comprehensive income/(loss):

               

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

                (2,390     (2,390

Reclassified to income for previously impaired securities

                127        127   

Accretion of impairment loss

                123        123   
                     

Total comprehensive income/(loss)

                  (1,714
                     

Transfers to restricted retained earnings

         996      (996                
      

Balance, June 30, 2009

   103      $ 10,253      $ 1,172    $      $ 1,172      $ (2,717   $ 8,708   
   

Balance, December 31, 2009

   86      $ 8,575      $ 1,239    $      $ 1,239      $ (3,584   $ 6,230   

Issuance of capital stock

          42                 42   

Repurchase/redemption of capital stock

   (3     (307              (307

Capital stock reclassified to mandatorily redeemable capital stock, net

          (30              (30

Comprehensive income/(loss):

               

Net income

            122        122          122   

Other comprehensive income/(loss):

               

Net change in available-for-sale valuation

                4        4   

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

                (379     (379

Reclassified to income for previously impaired securities

                199        199   

Accretion of impairment loss

                428        428   
                     

Total comprehensive income/(loss)

                  374   
                     

Transfers to restricted retained earnings

         111      (111                

Dividends on capital stock (0.27%)

               

Cash dividends paid

                   (11     (11       (11
      

Balance, June 30, 2010

   83      $ 8,280      $ 1,350    $      $ 1,350      $ (3,332   $ 6,298   
   

 

(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 Six Months Ended June 30,  
(In millions)    2010     2009  

Cash Flows from Operating Activities:

    

Net Income

   $ 122      $ 426   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     (5     (238

Provision for credit losses on mortgage loans

     2        1   

Change in net fair value adjustment on trading securities

     1        (1

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

     121        361   

Change in net fair value adjustment on derivatives and hedging activities

     68        (518

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

     202        176   

Net change in:

    

Accrued interest receivable

     141        416   

Other assets

     (5     11   

Accrued interest payable

     (142     (456

Other liabilities

     224        116   
                

Total adjustments

     607        (132
                

Net cash provided by operating activities

     729        294   
                

Cash Flows from Investing Activities:

    

Net change in:

    

Federal funds sold

     (6,306     (7,227

Loans to other Federal Home Loan Banks

     (15       

Premises and equipment

     (4     (3

Trading securities:

    

Proceeds from maturities

     3        3   

Purchases

     (1,132       

Held-to-maturity securities:

    

Net (increase)/decrease in short-term

     (940     2,799   

Proceeds from maturities of long-term

     5,109        3,827   

Purchases of long-term

     (412       

Advances:

    

Principal collected

     116,246        596,074   

Made to members

     (78,626     (535,969

Mortgage loans held for portfolio:

    

Principal collected

     249        345   
                

Net cash provided by investing activities

     34,172        59,849   
                

 

4


Table of Contents

Federal Home Loan Bank of San Francisco

Statements of Cash Flows (continued)

(Unaudited)

 

     For the Six Months Ended June 30,  
(In millions)    2010     2009  

Cash Flows from Financing Activities:

    

Net change in:

    

Deposits

     (107     (830

Net payments on derivative contracts with financing elements

     33        32   

Net proceeds from consolidated obligations:

    

Bonds issued

     49,510        34,210   

Discount notes issued

     61,780        89,224   

Payments for consolidated obligations:

    

Bonds matured or retired

     (82,107     (69,861

Discount notes matured or retired

     (64,200     (131,794

Proceeds from issuance of capital stock

     42        55   

Payments for repurchase/redemption of mandatorily redeemable capital stock

     (183       

Payments for repurchase of capital stock

     (307       

Cash dividends paid

     (11       
                

Net cash used in financing activities

     (35,550     (78,964
                

Net decrease in cash and cash equivalents

     (649     (18,821

Cash and cash equivalents at beginning of the period

     8,280        19,632   
                

Cash and cash equivalents at end of the period

   $ 7,631      $ 811   

Supplemental Disclosures:

    

Interest paid during the period

   $ 655      $ 2,816   

Affordable Housing Program payments during the period

     26        25   

REFCORP payments during the period

     47          

Transfers of mortgage loans to real estate owned

     3        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)

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 June 30, 2010, are discussed in Note 2 to the Financial Statements.

Note 2 – Recently Issued and Adopted Accounting Guidance

Disclosures About the Credit Quality of Financing Receivables and the Allowance for Credit Losses. On July 21, 2010, the Financial Accounting Standards Board (FASB) issued amended guidance to enhance disclosures about an entity’s allowance for credit losses and the credit quality of its financing receivables. The amended guidance requires all public and nonpublic entities with financing receivables, including loans, lease receivables, and other long-term receivables, to provide disclosure of the following: (i) the nature of the credit risk inherent in the financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses, and (iii) the changes in the allowance of credit losses and reasons for those changes. Both new and existing disclosures must be disaggregated by portfolio segment or class of financing receivable. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. Short-term accounts receivable, receivables measured at fair value or at the lower of cost or fair value, and debt securities are exempt from this amended guidance. For public entities, the required disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010 (December 31, 2010, for the Bank). The required disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010 (January 1, 2011, for the Bank). The adoption of this amended guidance will likely result in increased financial statement disclosures, but will not affect the Bank’s financial condition, results of operations, or cash flows.

 

6


Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Scope Exception Related to Embedded Credit Derivative. On March 5, 2010, the FASB issued amended guidance to clarify that the only type of embedded credit derivative feature related to the transfer of credit risk that is exempt from derivative bifurcation requirements is one that is in the form of subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination will need to assess those embedded credit derivatives to determine whether bifurcation and separate accounting as a derivative are required. Upon adoption, entities are permitted to irrevocably elect the fair value option for any investment in a beneficial interest in a securitized financial asset. Any impairment would be recognized prior to applying the fair value option election. This amended guidance became effective at the beginning of the first interim reporting period beginning after June 15, 2010 (July 1, 2010, for the Bank). The Bank adopted this amended guidance as of July 1, 2010, and the adoption has not had a material effect on the Bank’s 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 measurements and 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 of 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 amended guidance became effective for interim and annual reporting periods beginning after December 15, 2009 (January 1, 2010, for the Bank), except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 (January 1, 2011, for the Bank), and for interim periods within those fiscal years. 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, with the exception of the required changes noted above related to the reconciliation of Level 3 fair values. Its adoption resulted in increased financial statement disclosures but did not have any effect on 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 requires enhanced disclosures about how an entity’s involvement with a VIE affects its financial statements and its exposure to risks. The Bank evaluated its investments in VIEs, which are limited to the Bank’s private-label residential mortgage-backed securities (PLRMBS), and determined that as of January 1, 2010, and June 30, 2010, 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, the Bank does not design, sponsor, transfer, service, or provide credit or liquidity support in any of its investments in VIEs. The Bank’s maximum loss exposure for these investments is limited to the carrying value. 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.

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

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

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. 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 – Trading Securities

Trading securities as of June 30, 2010, and December 31, 2009, were as follows:

 

     June 30, 2010     December 31, 2009  
      Estimated
Fair Value
   Weighted
Average
Interest
Rate
    Estimated
Fair Value
   Weighted
Average
Interest
Rate
 

Government-sponsored enterprises (GSEs):

          

Federal Farm Credit Bank (FFCB) bonds

   $ 1,132    0.36   $   

Mortgage-backed securities (MBS):

          

Other U.S. obligations:

          

Ginnie Mae

     21    3.61        23    4.11   

GSEs:

          

Fannie Mae

     6    4.77        8    4.77   
             

Total

   $ 1,159    0.44   $ 31    4.28
                     

Redemption Terms. The contractual maturity (based on contractual final principal payment) of the FFCB bonds is from one year through five years as of June 30, 2010. Expected maturities of MBS will differ from contractual maturities because borrowers generally have the right to prepay the underlying obligations without prepayment fees.

Interest Rate Payment Terms. Interest rate payment terms for trading securities at June 30, 2010, and December 31, 2009, are detailed in the following table:

 

      June 30, 2010    December 31, 2009

Estimated fair value of trading securities other than MBS:

     

Adjustable rate

   $ 1,132    $

Subtotal

     1,132     

Estimated fair value of trading MBS:

     

Passthrough securities:

     

Adjustable rate

     21      23

Collateralized mortgage obligations:

     

Fixed rate

     6      8

Subtotal

     27      31

Total

   $ 1,159    $ 31

The net unrealized loss on trading securities was $1 and $1 for the three and six months ended June 30, 2010, respectively. The net unrealized gain on trading securities was immaterial for the three months ended June 30, 2009, and $1 for the six months ended June 30, 2009, respectively. These amounts represent the changes in the fair value of the securities during the reported periods.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Note 4 – Available-for-Sale Securities

Available-for-sale securities as of June 30, 2010, and December 31, 2009, were as follows:

June 30, 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)

   $ 1,929    $    $ 3    $      $ 1,932    0.62
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.

The following table summarizes the available-for-sale securities with unrealized losses as of 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.

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

   $ 1,281    $ 1    $    $    $ 1,281    $ 1

Redemption Terms. The contractual maturity (based on contractual final principal payment) of the Bank’s TLGP securities is from one year through five years as of June 30, 2010, and December 31, 2009.

The amortized cost of the TLGP securities, which are classified as available-for-sale, included net premiums of $6 at June 30, 2010, and net premiums of $8 at December 31, 2009.

Interest Rate Payment Terms. Available-for-sale securities at June 30, 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

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

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 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.

As of June 30, 2010, the Bank’s available-for-sale portfolio had gross unrealized gains. As a result, the Bank expects to recover the entire amortized cost basis of these securities.

Note 5 – 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:

June 30, 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

   $ 6,594    $      $ 6,594    $ 1    $      $ 6,595

Commercial paper

     2,357             2,357                  2,357

Housing finance agency bonds

     758             758           (143     615

TLGP

     303             303                  303

Subtotal

     10,012             10,012      1      (143     9,870

MBS:

               

Other U.S. obligations:

               

Ginnie Mae

     14             14                  14

GSEs:

               

Freddie Mac

     2,268             2,268      117             2,385

Fannie Mae

     6,614             6,614      291      (11     6,894

Subtotal GSEs

     8,882             8,882      408      (11     9,279

PLRMBS:

               

Prime

     5,167      (389     4,778      139      (315     4,602

Alt-A, option ARM

     1,894      (799     1,095      39      (11     1,123

Alt-A, other

     10,921      (2,139     8,782      585      (752     8,615

Subtotal PLRMBS

     17,982      (3,327     14,655      763      (1,078     14,340

Total MBS

     26,878      (3,327     23,551      1,171      (1,089     23,633

Total

   $ 36,890    $ (3,327   $ 33,563    $ 1,172    $ (1,232   $ 33,503

 

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Table of Contents

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

     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

Subtotal GSEs

     11,890             11,890      406      (14     12,282

PLRMBS:

               

Prime

     5,999      (407     5,592      72      (554     5,110

Alt-A, option ARM

     2,086      (908     1,178      37      (104     1,111

Alt-A, other

     11,781      (2,260     9,521      385      (1,287     8,619

Subtotal 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.

As of June 30, 2010, all of the interest-bearing deposits, commercial paper, and housing finance agency bonds had a credit rating of at least A. 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 June 30, 2010, 36% of the PLRMBS, based on amortized cost, were rated above investment grade (13% had a credit rating of AAA), and the remaining 64% 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.

At June 30, 2010, PLRMBS labeled Alt-A by the issuer represented 48% of the amortized cost of the Bank’s MBS portfolio. Alt-A PLRMBS 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 all standard guidelines for documentation requirements, property type, or loan-to-value ratios.

The following tables summarize the held-to-maturity securities with unrealized losses as of June 30, 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.

 

11


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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

June 30, 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

   $ 4,722    $    $    $    $ 4,722    $

Commercial paper

     1,258                     1,258     

Housing finance agency bonds

               615      143      615      143

Subtotal

     5,980           615      143      6,595      143

MBS:

                 

Other U.S. obligations:

                 

Ginnie Mae

               5           5     

GSEs:

                 

Freddie Mac

     2           33           35     

Fannie Mae

     220      5      108      6      328      11

Subtotal GSEs

     222      5      141      6      363      11

PLRMBS(1) :

                 

Prime

     14           4,313      704      4,327      704

Alt-A, option ARM

               1,115      810      1,115      810

Alt-A, other

               8,615      2,891      8,615      2,891

Subtotal PLRMBS

     14           14,043      4,405      14,057      4,405

Total MBS

     236      5      14,189      4,411      14,425      4,416

Total

   $ 6,216    $ 5    $ 14,804    $ 4,554    $ 21,020    $ 4,559
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

     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

Subtotal GSEs

     1,037      10      212      4      1,249      14

PLRMBS(1):

                 

Prime

               5,110      961      5,110      961

Alt-A, option ARM

               1,111      1,012      1,111      1,012

Alt-A, other

               8,619      3,547      8,619      3,547

Subtotal PLRMBS

               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)

Includes securities with gross unrecognized holding losses of $1,078 and $1,945 at June 30, 2010, and December 31, 2009, respectively, and securities with OTTI charges of $3,327 and $3,575 that have been recognized in AOCI at June 30, 2010, and December 31, 2009, respectively.

As indicated in the tables above, as of June 30, 2010, the Bank’s investments classified as held-to-maturity had gross unrealized losses totaling $4,559, 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 markets 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.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Redemption Terms. The amortized cost, carrying value, and estimated fair value of non-MBS securities by contractual maturity (based on contractual final principal payment) and of MBS as of June 30, 2010, and December 31, 2009, are shown below. Expected maturities of MBS will differ from contractual maturities because borrowers generally have the right to prepay the underlying obligations without prepayment fees.

June 30, 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 1 year or less

   $ 9,254    $ 9,254    $ 9,255    0.33

Due after 1 year through 5 years

     9      9      8    0.49   

Due after 5 years through 10 years

     27      27      23    0.46   

Due after 10 years

     722      722      584    0.56   
    

Subtotal

     10,012      10,012      9,870    0.34   
    

MBS:

           

Other U.S. obligations:

           

Ginnie Mae

     14      14      14    1.25   

GSEs:

           

Freddie Mac

     2,268      2,268      2,385    4.75   

Fannie Mae

     6,614      6,614      6,894    4.13   
    

Subtotal GSEs

     8,882      8,882      9,279    4.29   
    

PLRMBS:

           

Prime

     5,167      4,778      4,602    3.71   

Alt-A, option ARM

     1,894      1,095      1,123    0.61   

Alt-A, other

     10,921      8,782      8,615    4.03   
    

Subtotal PLRMBS

     17,982      14,655      14,340    3.55   
    

Total MBS

     26,878      23,551      23,633    3.78   
    

Total

   $ 36,890    $ 33,563    $ 33,503    2.87
   

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

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 1 year or less

   $ 7,610    $ 7,610    $ 7,610    0.15

Due after 1 year through 5 years

     316      316      314    1.75   

Due after 5 years through 10 years

     27      27      23    0.40   

Due after 10 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   
    

Subtotal GSEs

     11,890      11,890      12,282    4.35   
    

PLRMBS:

           

Prime

     5,999      5,592      5,110    3.91   

Alt-A, option ARM

     2,086      1,178      1,111    0.49   

Alt-A, other

     11,781      9,521      8,619    4.25   
    

Subtotal 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 June 30, 2010, the carrying value of the Bank’s MBS classified as held-to-maturity included net discounts of $9, OTTI related to credit loss of $861 (including interest accretion adjustments of $31), and OTTI related to all other factors of $3,327. 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 June 30, 2010, and December 31, 2009, are detailed in the following table:

 

      June 30, 2010    December 31, 2009

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

     

Fixed rate

   $ 9,254    $ 7,914

Adjustable rate

     758      769

Subtotal

     10,012      8,683

Amortized cost of held-to-maturity MBS:

     

Passthrough securities:

     

Fixed rate

     2,317      3,326

Adjustable rate

     109      87

Collateralized mortgage obligations:

     

Fixed rate

     13,244      16,619

Adjustable rate

     11,208      11,740

Subtotal

     26,878      31,772

Total

   $ 36,890    $ 40,455

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

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 as follows:

 

      June 30, 2010    December 31, 2009

Passthrough securities:

     

Converts in 1 year or less

   $ 109    $ 158

Converts after 1 year through 5 years

     1,478      2,061

Converts after 5 years through 10 years

     702      1,076

Total

   $ 2,289    $ 3,295

Collateralized mortgage obligations:

     

Converts in 1 year or less

   $ 508    $ 1,216

Converts after 1 year through 5 years

     4,546      6,167

Converts after 5 years through 10 years

     1,252      1,652

Total

   $         6,306    $     9,035

The Bank does not own MBS that are backed by mortgage loans purchased by another Federal Home Loan Bank (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 determined that, as of June 30, 2010, the immaterial gross unrealized losses on its 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 interest-bearing deposits and commercial paper were all with issuers that had credit ratings of at least A at June 30, 2010, and all of the securities had maturity dates within 45 days of June 30, 2010. As a result, the Bank expects to recover the entire amortized cost basis of these securities.

As of June 30, 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 $143. 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 losses on the underlying collateral. The Bank determined that, as of June 30, 2010, all of the gross unrealized losses on these bonds are temporary because the underlying collateral and credit enhancements were sufficient to protect the Bank from losses based on current expectations and because CalHFA had a credit rating of A at June 30, 2010 (based on the lower of Moody’s or Standard & Poor’s ratings). As a result, the Bank expects to recover the entire amortized cost basis of these securities.

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

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 determined that, as of June 30, 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 June 30, 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 June 30, 2010, assumed CBSA-level current-to-trough housing price declines ranging from 0% to 12% over the 3- to 9-month periods beginning April 1, 2010 (average price decline for all areas during their current-to-trough period equaled 4.5%). For each area, after the current-to-trough period, 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 June 30, 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 second quarter of 2010.

Credit enhancement is defined as the 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, expressed as a percentage of the underlying collateral balance. The calculated averages represent the dollar-weighted averages of all the PLRMBS investments in each category shown. The classification (prime or 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.

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

June 30, 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

                       

2008

   8.8    5.9 – 9.6    62.0    61.6 – 63.4    41.5    41.3 – 42.1    30.8    30.8

2006

   6.7    6.1 – 7.5    19.9    18.7 – 23.5    35.8    33.9 – 41.0    7.6    7.1 – 9.3

2005

   7.3    7.3    25.3    25.3    37.3    37.3    17.6    17.6

2004 and earlier

   10.8    10.8    3.7    3.7    28.4    28.4    11.3    11.3

Total Prime

   8.2    5.9 – 10.8    44.9    3.7 – 63.4    38.9    28.4 – 42.1    22.2    7.1 – 30.8

Alt-A

                       

2007

   8.8    4.4 – 13.7    63.5    22.9 – 89.3    48.7    40.5 – 60.4    28.2    9.1 – 46.4

2006

   10.2    5.3 – 13.7    52.0    28.5 – 88.4    49.0    39.4 – 62.0    24.8    10.0 – 40.5

2005

   11.3    6.5 – 15.7    38.8    15.5 – 77.7    45.7    31.8 – 59.5    15.7    5.4 – 32.0

2004 and earlier

   12.3    11.8 – 12.6    42.9    34.6 – 50.8    48.0    41.7 – 55.0    20.6    14.3 – 29.6

Total Alt-A

   9.9    4.4 – 15.7    52.7    15.5 – 89.3    47.8    31.8 – 62.0    23.3    5.4 – 46.4

Total

   9.8    4.4 – 15.7    52.3    3.7 – 89.3    47.3    28.4 – 62.0    23.2    5.4 – 46.4

The Bank recorded OTTI related to credit loss of $142 and $88 that was recognized in “Other Loss” for the second quarter of 2010 and 2009, respectively, and recognized OTTI related to all other factors of $48 and $1,195 in “Other comprehensive income/(loss)” for the second quarter of 2010 and 2009, respectively. The Bank recorded OTTI related to credit loss of $202 and $176 that was recognized in “Other Loss” for the first six months of 2010 and 2009, respectively, and recognized OTTI related to all other factors of $180 and $2,263 in “Other comprehensive income/(loss)” for the first six months 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). The Bank accreted $213 and $93 from AOCI to increase the carrying value of the respective PLRMBS for the second quarter of 2010 and 2009, respectively. The Bank accreted $428 and $123 from AOCI to increase the carrying value of the respective PLRMBS for the first six months of 2010 and 2009, 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 June 30, 2010, the estimated weighted average life of these securities was approximately four years.

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 $140 and $77 for the second quarter of 2010 and 2009, respectively. This amount was $199 and $127 for the first six months of 2010 and 2009, respectively.

The following tables present 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 and six months ended June 30, 2010 and 2009.

 

     Three Months Ended June 30, 2010     Three Months Ended June 30, 2009  
                
    

OTTI

Related to

Credit Loss

  

OTTI

Related to
All Other

Factors

    Total
OTTI
   

OTTI

Related to

Credit Loss

  

OTTI

Related to
All Other

Factors

    Total
OTTI
 
   

Balance, beginning of the period

   $ 688    $ 3,492      $ 4,180      $ 108    $ 1,608      $ 1,716   

Charges on securities for which OTTI was not previously recognized

     2      175        177        48      1,196        1,244   

Additional charges on securities for which OTTI was previously recognized(1)

     140      (127     13        40      (1     39   

Accretion of impairment related to all other factors

          (213     (213          (93     (93
   

Balance, end of the period

   $     830    $     3,327      $     4,157      $     196    $     2,710      $     2,906   
   

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

     Six Months Ended June 30, 2010     Six Months Ended June 30, 2009  
                
    

OTTI

Related to

Credit Loss

  

OTTI

Related to
All Other

Factors

    Total
OTTI
   

OTTI

Related to

Credit Loss

  

OTTI

Related to
All Other

Factors

    Total
OTTI
 
   

Balance, beginning of the period(2)

   $     628    $ 3,575      $ 4,203      $ 20    $ 570      $ 590   

Charges on securities for which OTTI was not previously recognized

     5      289        294        86      2,211        2,297   

Additional charges on securities for which OTTI was previously recognized(1)

     197      (109     88        90      52        142   

Accretion of impairment related to all other factors

          (428     (428          (123     (123
   

Balance, end of the period

   $     830    $     3,327      $     4,157      $     196    $     2,710      $     2,906   
   

 

(1) For the three months ended June 30, 2010, “securities for which OTTI was previously recognized” represents all securities that were also other-than-temporarily impaired prior to April 1, 2010. For the three months ended June 30, 2009, “securities for which OTTI was previously recognized” represents all securities that were also previously other-than-temporarily impaired prior to April 1, 2009. For the six months ended June 30, 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 six months ended June 30, 2009, “securities for which OTTI was previously recognized” represents all securities that were also previously other-than-temporarily impaired prior to January 1, 2009.
(2) 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.

The following tables present the Bank’s other-than-temporarily impaired PLRMBS that incurred an OTTI charge during the three months ended June 30, 2010, and 2009, by loan collateral type:

 

June 30, 2010    Unpaid
Principal
Balance
   Amortized
Cost
  

Carrying

Value

   Estimated
Fair Value
 

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

           

Prime

   $ 1,265    $ 1,180    $ 825    $ 950

Alt-A, option ARM

     2,004      1,734      998      1,031

Alt-A, other

     6,139      5,729      3,982      4,416
 

Total

   $ 9,408    $ 8,643    $ 5,805    $ 6,397
 

 

June 30, 2009    Unpaid
Principal
Balance
   Amortized
Cost
  

Carrying

Value

   Estimated
Fair Value
 

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

           

Prime

   $ 1,203    $ 1,190    $ 824    $ 824

Alt-A, option ARM

     4,318      4,203      2,554      2,596

Alt-A, other

     1,165      1,114      515      531
 

Total

   $ 6,686    $ 6,507    $ 3,893    $ 3,951
 

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 June 30, 2010, and December 31, 2009, by loan collateral type:

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

June 30, 2010    Unpaid
Principal
Balance
   Amortized
Cost
  

Carrying

Value

   Estimated
Fair Value
 

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

           

Prime

   $ 1,438    $ 1,345    $ 956    $ 1,092

Alt-A, option ARM

     2,146      1,865      1,066      1,105

Alt-A, other

     7,745      7,265      5,126      5,711
 

Total

   $ 11,329    $ 10,475    $ 7,148    $ 7,908
 

 

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 and six months ended June 30, 2010 and 2009:

 

     Three Months Ended June 30, 2010    Three Months Ended June 30, 2009
             
     OTTI
Related to
Credit Loss
   OTTI
Related to
All Other
Factors
   

Total

OTTI

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

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

                

Prime

   $ 28    $ (24   $ 4    $ 15    $ 312    $ 327

Alt-A, option ARM

     56      28        84      25      139      164

Alt-A, other

     58      44        102      48      744      792
 

Total

   $ 142    $ 48      $ 190    $   88    $ 1,195    $ 1,283
 
     Six Months Ended June 30, 2010    Six Months Ended June 30, 2009
             
     OTTI
Related to
Credit Loss
   OTTI
Related to
All Other
Factors
   

Total

OTTI

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

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

                

Prime

   $ 34    $ 29      $ 63    $ 15    $ 312    $ 327

Alt-A, option ARM

     71      14        85      50      556      606

Alt-A, other

     97      137        234      111      1,395      1,506
 

Total

   $ 202    $ 180      $ 382    $ 176    $ 2,263    $ 2,439
 

The following tables present the other-than-temporarily impaired PLRMBS for the three and six months ended June 30, 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:

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

     Three Months Ended June 30, 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

   $    $ 28    $ 28    $      $ (24     $(24)   

Alt-A, option ARM

     1      55      56      (1     29        28    

Alt-A, other

          58      58             44        44    
 

Total

   $ 1    $ 141    $ 142    $ (1   $ 49      $ 48    
 
     Three Months Ended June 30, 2009
      
    

Gross Unrealized Losses

Related to Credit

  

Gross Unrealized Losses

Related to All Other Factors

             
     Less than
12 months
  

12 months

or more

   Total    Less than
12 months
    12 months
or more
    Total     
 

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

               

Prime

   $ 9    $ 6    $ 15    $      $ 312      $ 312    

Alt-A, option ARM

          25      25             139        139    

Alt-A, other

          48      48             744        744    
 

Total

   $ 9    $ 79    $ 88    $      $ 1,195      $ 1,195    
 
     Six Months Ended June 30, 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

   $    $ 34    $ 34    $      $ 29      $ 29    

Alt-A, option ARM

     1      70      71      (1     15        14    

Alt-A, other

          97      97             137        137    
 

Total

   $ 1    $ 201    $ 202    $ (1   $ 181      $ 180    
 
     Six Months Ended June 30, 2009
      
    

Gross Unrealized Losses

Related to Credit

  

Gross Unrealized Losses

Related to All Other Factors

             
     Less than
12 months
  

12 months

or more

   Total    Less than
12 months
    12 months
or more
    Total     
 

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

               

Prime

   $ 9    $ 6    $ 15    $      $ 312      $ 312    

Alt-A, option ARM

          50      50             556        556    

Alt-A, other

          111      111             1,395        1,395    
 

Total

   $ 9    $ 167    $ 176    $      $ 2,263      $ 2,263    
 

For the Bank’s PLRMBS that were not other-than-temporarily impaired as of June 30, 2010, the Bank has experienced net unrealized losses and a decrease in fair value primarily because of illiquidity in the MBS market, uncertainty about the future condition of the housing and mortgage markets 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. 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

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

amortized cost basis of these securities. As a result, the Bank determined that, as of June 30, 2010, the gross unrealized losses on these remaining PLRMBS are temporary. Seventy-three percent of the PLRMBS, based on amortized cost, that were not other-than-temporarily impaired were rated investment grade (31% were rated AAA), and the remaining 27% were 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.

Note 6 – Advances

Redemption Terms. The Bank had advances outstanding, excluding overdrawn demand deposit accounts, at interest rates ranging from 0.04% to 8.57% at June 30, 2010, and 0.01% to 8.57% at December 31, 2009, as summarized below.

 

     June 30, 2010     December 31, 2009  
                
Contractual Maturity    Amount
Outstanding
  

Weighted

Average

Interest Rate

    Amount
Outstanding
  

Weighted

Average

Interest Rate

 

Within 1 year

   $ 46,427    1.60   $ 76,854    1.54

After 1 year through 2 years

     24,176    1.41        30,686    1.69   

After 2 years through 3 years

     10,003    1.85        7,313    2.85   

After 3 years through 4 years

     5,572    2.42        9,211    1.77   

After 4 years through 5 years

     1,774    3.31        1,183    4.12   

After 5 years

     6,737    2.12        7,066    2.12   
             

Total par amount

     94,689    1.70     132,313    1.72
                  

Valuation adjustments for hedging activities

     476        524   

Valuation adjustments under fair value option

     523        616   

Net unamortized premiums

     59        106   
             

Total

   $ 95,747      $ 133,559   
             

The following table summarizes advances at June 30, 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

   June 30, 2010    December 31, 2009
 

Within 1 year

   $ 46,492    $ 76,864

After 1 year through 2 years

     24,180      30,686

After 2 years through 3 years

     10,000      7,318

After 3 years through 4 years

     5,572      9,201

After 4 years through 5 years

     1,766      1,183

After 5 years

     6,679      7,061
 

Total par amount

   $ 94,689    $ 132,313
 

The following table summarizes advances at June 30, 2010, and December 31, 2009, by the earlier of the year of contractual maturity or next put date for putable advances.

 

21


Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Earlier of Contractual

Maturity or Next Put Date

   June 30, 2010    December 31, 2009
 

Within 1 year

   $ 49,054    $ 79,552

After 1 year through 2 years

     23,651      30,693

After 2 years through 3 years

     9,452      6,385

After 3 years through 4 years

     5,394      8,933

After 4 years through 5 years

     1,551      942

After 5 years

     5,587      5,808
 

Total par amount

   $ 94,689    $ 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 and Economic Recovery Act of 2008 (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 Federal Housing Finance Agency (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 63% of the Bank’s total par amount of advances outstanding at June 30, 2010. The following tables present the concentration in advances to these four institutions as of June 30, 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 second quarter of 2010 and 2009 and for the first six months of 2010 and 2009.

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Concentration of Advances

 

     June 30, 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.

   $ 30,003    32   $ 46,544    35

Bank of America California, N.A.

     13,904    15        9,304    7   

JPMorgan Chase Bank, National Association

     8,609    9        20,622    16   

Wells Fargo Bank, N.A.(2)

     6,387    7        14,695    11   

Subtotal

     58,903    63        91,165    69   

Others(3)

     35,786    37        41,148    31   

Total par amount

   $ 94,689    100   $ 132,313    100

Concentration of Interest Income from Advances

 

  

     Three Months Ended  
     June 30, 2010     June 30, 2009  
Name of Borrower   

Interest

Income from
Advances(4)

  

Percentage of
Total Interest

Income from
Advances

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

Citibank, N.A.

   $ 25    6   $ 124    12

Bank of America California, N.A.

     34    8        31    3   

JPMorgan Chase Bank, National Association

     89    20        344    34   

Wells Fargo Bank, N.A.(2)

     25    6        61    6   

Subtotal

     173    40        560    55   

Others(5)

     268    60        447    45   

Total

   $ 441    100   $ 1,007    100
     Six Months Ended  
     June 30, 2010     June 30, 2009  
Name of Borrower   

Interest

Income from
Advances(4)

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

Citibank, N.A.

   $ 47    5   $ 357    16

Bank of America California, N.A.

     63    6        95    4   

JPMorgan Chase Bank, National Association

     226    24        741    32   

Wells Fargo Bank, N.A.(2)

     56    6        163    7   

Subtotal

     392    41        1,356    59   

Others(5)

     555    59        932    41   

Total

   $ 947    100   $ 2,288    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., to mandatorily redeemable capital stock (a liability).
(3) Includes advances outstanding totaling $5,000 to JPMorgan Bank and Trust Company, National Association, an affiliate of JPMorgan Chase Bank, National Association, at June 30, 2010, and December 31, 2009.
(4) Interest income amounts exclude the interest effect of interest rate exchange agreements with derivatives counterparties; as a result, the total interest income amounts will not agree to the Statements of Income. The amount of interest income from advances can vary depending on the amount outstanding, terms to maturity, interest rates, and repricing characteristics.
(5) Includes interest income from advances totaling $4 and $3 from JPMorgan Bank and Trust Company, National Association, an affiliate of JPMorgan Chase Bank, National Association, for the three months ended June 30, 2010 and 2009, respectively. Includes interest income from advances totaling $6 and $3 from JPMorgan Bank and Trust Company, National Association, an affiliate of JPMorgan Chase Bank, National Association, for the six months ended June 30, 2010 and 2009, respectively.

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

The Bank held a security interest in collateral from each of its 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 June 30, 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.

During the first six months of 2010, eleven member institutions were placed into receivership or liquidation. Ten of these institutions had advances outstanding at the time they were placed into receivership or liquidation. The advances outstanding to these ten institutions were either repaid prior to June 30, 2010, or assumed by other institutions, and no losses were incurred by the Bank. The eleventh institution had no advances outstanding at the time it was placed into receivership or liquidation. Bank capital stock held by six of the eleven institutions totaling $30 was classified as mandatorily redeemable capital stock (a liability). The capital stock of the other five institutions was transferred to other member institutions.

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 was deemed necessary by management. The Bank has never experienced any credit losses on advances.

From July 1, 2010, to July 30, 2010, two member institutions were placed into receivership. The outstanding advances and capital stock of one institution were assumed by another member institution. The advances outstanding to the second institution were assumed by a nonmember institution, and the Bank capital stock held by the institution totaling $3 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 was deemed necessary by management.

Interest Rate Payment Terms. Interest rate payment terms for advances at June 30, 2010, and December 31, 2009, are detailed below:

 

      June 30, 2010    December 31, 2009

Par amount of advances:

     

Fixed rate

   $ 52,152    $ 68,411

Adjustable rate

     42,537      63,902

Total par amount

   $ 94,689    $ 132,313

 

24


Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Prepayment Fees, Net. The Bank charges borrowers prepayment fees or pays borrowers prepayment credits when the principal on certain advances is paid prior to original maturity. The Bank records prepayment fees net of any associated fair value adjustments related to prepaid advances that were hedged. The net amount of prepayment fees is reflected as interest income in the Statements of Income, as follows:

 

     Three Months Ended          Six Months Ended  
       June 30, 2010        June 30, 2009             June 30, 2010        June 30, 2009   

Prepayment fees received

   $ 59      $ 32         $ 78      $ 52   

Fair value adjustments

     (11     (14        (19     (32

Other basis adjustments

     (20                 (20       

Net

   $ 28      $ 18           $ 39      $ 20   

Advance principal prepaid

   $ 8,146      $ 11,376         $ 14,551      $ 14,067   

Note 7 – 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 June 30, 2010, and December 31, 2009, on mortgage loans, all of which are secured by one- to four-unit residential properties and single-unit second homes.

 

      June 30, 2010     December 31, 2009  

Fixed rate medium-term mortgage loans

   $ 823      $ 927   

Fixed rate long-term mortgage loans

     1,984        2,130   

Subtotal

     2,807        3,057   

Net unamortized discounts

     (15     (18

Mortgage loans held for portfolio

     2,792        3,039   

Less: Allowance for credit losses

     (4     (2

Total mortgage loans held for portfolio, net

   $ 2,788      $ 3,037   

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. For the three and six months ended June 30, 2010, the credit enhancement fees were immaterial. For the three and six months ended June 30, 2009, the credit enhancement fees totaled $1 and $2, 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 June 30, 2010, and December 31, 2009.

 

25


Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Concentration of Mortgage Loans

June 30, 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

   $ 2,211    79   17,575    73

OneWest Bank, FSB

     366    13      4,610    19   

Subtotal

     2,577    92      22,185    92   

Others

     230    8      1,947    8   

Total

   $ 2,807    100   24,132    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 June 30, 2010, and December 31, 2009.

 

     June 30, 2010          December 31, 2009  
Days Past Due    Number
of Loans
  

Mortgage

Loan Balance

          Number
of Loans
  

Mortgage

Loan Balance

 

30 – 59 days delinquent

   205    $ 22         243    $ 29   

60 – 89 days delinquent

   60      8         81      10   

90 days or more delinquent

   115      15         97      13   

In process of foreclosure(1)

   104      13           80      9   

Total

   484    $ 58           501    $ 61   

Nonaccrual loans(2)

   219    $ 28         177    $ 22   

Loans past due 90 days or more and still accruing interest

                       

Real estate owned inventory

   43    $ 4         26    $ 3   

Serious delinquency rate(3)

        0.98           0.70

 

(1) Includes loans for which the servicer has reported a decision to foreclose or to pursue a similar alternative, such as deed-in-lieu.
(2) Nonaccrual loans at June 30, 2010, included 22 loans, totaling $3, for which the borrower was in bankruptcy. Nonaccrual loans at December 31, 2009, included 23 loans, totaling $2, for which the borrower was in bankruptcy.
(3) Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total conventional loan portfolio principal balance.

 

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Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

The Bank’s average recorded investment in impaired loans totaled $28 for the second quarter of 2010 and $15 for the second quarter of 2009. The Bank’s average recorded investment in impaired loans totaled $26 and $12 for the six months ended June 30, 2010 and 2009, respectively. The Bank did not recognize any interest income for impaired loans in the second quarter of 2010 and 2009 and in the first six months of 2010 and 2009.

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

 

                               
     Three Months Ended          Six Months Ended  
       June 30, 2010        June 30, 2009             June 30, 2010        June 30, 2009   

Balance, beginning of the period

   $ 2.0      $ 1.1         $ 2.0      $ 1.0   

Chargeoffs – transferred to real estate owned

     (0.3               (0.7       

Recoveries

                               

Provision for credit losses

     1.9        0.9             2.3        1.0   

Balance, end of the period

   $ 3.6      $ 2.0           $ 3.6      $ 2.0   

Ratio of net charge-offs during the period to average loans outstanding during the period

     (0.01 )%             (0.02 )%     

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.

Note 8 – 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 Federal Housing Finance Board (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 June 30, 2010, and December 31, 2009.

 

27


Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

     June 30, 2010     December 31, 2009  
                
Contractual Maturity    Amount
Outstanding
  

Weighted

Average

Interest Rate

    Amount
Outstanding
   

Weighted

Average

Interest Rate

 
   

Within 1 year

   $ 59,565    1.59   $ 75,865      1.29

After 1 year through 2 years

     34,609    2.08        42,745      2.40   

After 2 years through 3 years

     14,360    2.36        11,589      2.12   

After 3 years through 4 years

     7,467    4.05        12,855      3.86   

After 4 years through 5 years

     2,415    3.02        5,308      3.11   

After 5 years

     8,913    4.43        11,561      4.38   

Index amortizing notes

     6    4.61        6      4.61   
              

Total par amount

     127,335    2.18     159,929      2.14
                 

Unamortized premiums/(discounts)

     217        251     

Valuation adjustments for hedging activities

     1,953        1,926     

Fair value option valuation adjustments

     19        (53  
              

Total

   $ 129,524      $ 162,053     
              

The Bank’s participation in consolidated obligation bonds outstanding includes callable bonds of $19,172 at June 30, 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 $14,939 at June 30, 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:

 

     June 30, 2010    December 31, 2009
 

Par amount of consolidated obligation bonds:

     

Non-callable

   $ 108,163    $ 127,744

Callable

     19,172      32,185
 

Total par amount

   $ 127,335    $ 159,929
 

The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding at June 30, 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

   June 30, 2010    December 31, 2009
 

Within 1 year

   $ 74,592    $ 103,215

After 1 year through 2 years

     32,249      36,750

After 2 years through 3 years

     10,210      5,494

After 3 years through 4 years

     5,787      9,480

After 4 years through 5 years

     210      593

After 5 years

     4,281      4,391

Index amortizing notes

     6      6
 

Total par amount

   $ 127,335    $ 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:

 

28


Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

         June 30, 2010          December 31, 2009  
           Amount
Outstanding
    Weighted
Average
Interest Rate
          Amount
Outstanding
    Weighted
Average
Interest Rate
 

Par amount

     $ 15,800      0.22      $ 18,257      0.35

Unamortized discounts

         (12          (11  

Total

       $ 15,788           $ 18,246     

Interest Rate Payment Terms. Interest rate payment terms for consolidated obligations at June 30, 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.

 

     June 30, 2010    December 31, 2009
 

Par amount of consolidated obligations:

     

Bonds:

     

Fixed rate

   $ 89,345    $ 98,619

Adjustable rate

     30,900      49,244

Step-up

     5,522      10,433

Step-down

     200      350

Fixed rate that converts to adjustable rate

     1,042      915

Adjustable rate that converts to fixed rate

     285      250

Range bonds

     35      112

Index amortizing notes

     6      6
 

Total bonds, par

     127,335      159,929

Discount notes, par

     15,800      18,257
 

Total consolidated obligations, par

   $ 143,135    $ 178,186
 

Note 9 – 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 June 30, 2010, and December 31, 2009.

 

29


Table of Contents

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Regulatory Capital Requirements

 

     

 

June 30, 2010

    December 31, 2009  
   Required     Actual     Required     Actual  

Risk-based capital

   $ 5,468      $ 14,320      $ 6,207      $ 14,657   

Total regulatory capital

   $ 6,328      $ 14,320      $ 7,714      $ 14,657   

Total regulatory capital ratio

     4.00     9.05     4.00     7.60

Leverage capital

   $ 7,910      $ 21,479      $ 9,643      $ 21,984   

Leverage ratio

     5.00     13.58     5.00     11.40

The Bank’s total regulatory capital ratio increased to 9.05% at June 30, 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 in 2009 and the first quarter of 2010.

Mandatorily Redeemable Capital Stock. The Bank had mandatorily redeemable capital stock totaling $4,690 at June 30, 2010, and $4,843 at December 31, 2009. The change in mandatorily redeemable capital stock for the three and six months ended June 30, 2010 and 2009, was as follows:

 

     Three Months Ended  
     June 30, 2010     June 30, 2009  
     

Number of

Institutions

   Amount    

Number of

Institutions

    Amount  

Balance at the beginning of the period

   45    $ 4,858      33      $ 3,145   

Reclassified from/(to) capital during the period:

         

Merger with or acquisition by nonmember institution

             (1       

Termination of membership(1)

   2      12      2        20   

Repurchase of excess mandatorily redeemable capital stock

        (180            

Balance at the end of the period

   47    $ 4,690      34      $ 3,165   

 

     Six Months Ended  
     June 30, 2010     June 30, 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                  

Termination of membership(1)

   4      30      4      36   

Acquired by/transferred to members(2)(3)

                  (618

Redemption of mandatorily redeemable capital stock

        (3          

Repurchase of excess mandatorily redeemable capital stock

        (180          

Balance at the end of the period

   47    $ 4,690      34    $ 3,165   

 

(1) For the three and six months ended June 30, 2010, the capital stock of three and six institutions, respectively, was reclassified to mandatorily redeemable capital stock as a result of termination of membership. Because the capital stock of one institution in the three-month period and two institutions in the six-month period was acquired by nonmembers that were already included in the table, those institutions are not included in the number of institutions listed, while the capital stock transferred to mandatorily redeemable capital stock is reflected in the table.

 

(2) 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, remains classified as mandatorily redeemable capital stock (a liability).

 

(3) 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, remains classified as mandatorily redeemable capital stock (a liability).

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

Cash dividends on mandatorily redeemable capital stock in the amount of $3 and $6 were recorded as interest expense for the three and six months ended June 30, 2010. There were no dividends on mandatorily redeemable capital stock recorded as interest expense for the three and six months ended June 30, 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 June 30, 2010, and December 31, 2009.

 

Contractual Redemption Period    June 30, 2010    December 31, 2009

Within 1 year

   $ 29    $ 3

After 1 year through 2 years

     41      63

After 2 years through 3 years

     81      91

After 3 years through 4 years

     2,878      2,955

After 4 years through 5 years

     1,661      1,731

Total

   $ 4,690    $ 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 $79 at June 30, 2010, and $181 at December 31, 2009. In accordance with this provision, the amount decreased by $102 in the first six months 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 $1,271 at June 30, 2010, and $1,058 at December 31, 2009.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

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 July 29, 2010, the Bank’s Board of Directors declared a cash dividend for the second quarter of 2010 at an annualized dividend rate of 0.44%. The Bank recorded the second quarter dividend on July 29, 2010, the day it was declared by the Board of Directors. The Bank expects to pay the second quarter dividend (including dividends on mandatorily redeemable capital stock), which will total $14, on or about August 12, 2010. On April 29, 2010, the Bank’s Board of Directors declared a cash dividend for the first quarter of 2010 at an annualized rate of 0.26%. The Bank recorded the first quarter dividend during the second quarter of 2010. The total amount of the dividend was $9 and was recorded and paid during the second quarter of 2010. On July 30, 2009, the Bank’s Board of Directors declared a cash dividend for the second quarter of 2009 at an annualized rate of 0.84%. The total amount of the dividend was $28 and was recorded and paid during the third quarter of 2009.

The Bank expects to pay the second 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 June 30, 2010, the Bank’s excess capital stock totaled $7,654, or 4.84% 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.

In the second quarter of 2010, the Bank repurchased excess capital stock totaling $487. The amount of excess capital stock repurchased from any shareholder was 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.

 

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Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

 

On July 29, 2010, the Bank announced that it plans to repurchase up to $500 in excess capital stock on August 13, 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 $7,654 as of June 30, 2010, which included surplus capital stock of $7,138.

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 June 30, 2010, and December 31, 2009.

Concentration of Capital Stock

Including Mandatorily Redeemable Capital Stock

 

     June 30, 2010     December 31, 2009  
Name of Institution   

Capital Stock

Outstanding