10-Q 1 q1201410qfhlbsf.htm 10-Q Q1 2014 10Q FHLBSF
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  ____________________________________
FORM 10-Q
____________________________________
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
OR
o
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    o  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).    x  Yes    o  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
 
o
 
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
x  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  Yes    x  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Shares Outstanding as of April 30, 2014

Class B Stock, par value $100
50,832,445







Federal Home Loan Bank of San Francisco
Form 10-Q
Index

PART I.
  
  
 
 
 
 
Item 1.
  
  
 
  
  
 
  
  
 
 
 
 
  
  
 
  
  
 
  
  
 
 
 
Item 2.
  
  
 
  
  
 
  
  
 
  
  
 
  
  
 
  
  
 
  
  
 
  
  
 
  
  
 
  
  
 
  
  
 
 
 
Item 3.
  
  
 
 
 
Item 4.
  
  
 
 
 
PART II.
  
  
 
 
 
 
Item 1.
  
  
 
 
 
Item 1A.
  
  
 
 
 
Item 6.
  
  
 
 
  




PART I. FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

Federal Home Loan Bank of San Francisco
Statements of Condition
(Unaudited)

(In millions-except par value)
March 31,
2014

 
December 31,
2013

Assets:
 
 
 
Cash and due from banks
$
4,541

 
$
4,906

Securities purchased under agreements to resell
500

 

Federal funds sold
6,401

 
7,498

Trading securities(a)
3,127

 
3,208

Available-for-sale (AFS) securities(a)
6,916

 
7,047

Held-to-maturity (HTM) securities (fair values were $17,925 and $17,352, respectively)(a)
17,974

 
17,507

Advances (includes $6,936 and $7,069 at fair value under the fair value option, respectively)
45,552

 
44,395

Mortgage loans held for portfolio, net of allowance for credit losses of $2 and $2, respectively
852

 
905

Accrued interest receivable
74

 
81

Premises, software, and equipment, net
25

 
25

Derivative assets, net
137

 
116

Other assets
86

 
86

Total Assets
$
86,185

 
$
85,774

Liabilities:
 
 
 
Deposits
$
275

 
$
193

Consolidated obligations:
 
 
 
Bonds (includes $7,298 and $10,115 at fair value under the fair value option, respectively)
53,184

 
53,207

Discount notes
24,863

 
24,194

Total consolidated obligations
78,047

 
77,401

Mandatorily redeemable capital stock
1,644

 
2,071

Accrued interest payable
148

 
95

Affordable Housing Program (AHP) payable
151

 
151

Derivative liabilities, net
38

 
47

Other liabilities
240

 
107

Total Liabilities
80,543

 
80,065

Commitments and Contingencies (Note 17)



Capital:
 
 
 
Capital stock—Class B—Putable ($100 par value) issued and outstanding:
 
 
 
33 shares and 35 shares, respectively
3,325

 
3,460

Unrestricted retained earnings
312

 
317

Restricted retained earnings
2,069

 
2,077

Total Retained Earnings
2,381

 
2,394

Accumulated other comprehensive income/(loss) (AOCI)
(64
)
 
(145
)
Total Capital
5,642

 
5,709

Total Liabilities and Capital
$
86,185

 
$
85,774


(a)
At March 31, 2014, and December 31, 2013, none of these securities were pledged as collateral that may be repledged.

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

1


Federal Home Loan Bank of San Francisco
Statements of Income
(Unaudited)

 
For the Three Months Ended March 31,
(In millions)
2014

 
2013

Interest Income:
 
 
 
Advances
$
79

 
$
89

Securities purchased under agreements to resell

 
1

Federal funds sold
3

 
4

Trading securities
1

 
2

AFS securities
71

 
69

HTM securities
96

 
101

Mortgage loans held for portfolio
11

 
13

Total Interest Income
261

 
279

Interest Expense:
 
 
 
Consolidated obligations:
 
 
 
Bonds
81

 
123

Discount notes
6

 
3

Mandatorily redeemable capital stock
39

 
26

Total Interest Expense
126

 
152

Net Interest Income
135

 
127

Provision for/(reversal of) credit losses on mortgage loans
1

 

Net Interest Income After Mortgage Loan Loss Provision
134

 
127

Other Income/(Loss):
 
 
 
Net gain/(loss) on trading securities

 
2

Total other-than-temporary impairment (OTTI) loss
(1
)
 
(4
)
Net amount of OTTI loss reclassified to/(from) AOCI
1

 
1

Net OTTI loss, credit-related

 
(3
)
Net gain/(loss) on advances and consolidated obligation bonds held under fair value option
(39
)
 
(11
)
Net gain/(loss) on derivatives and hedging activities
(10
)
 
6

Other
1

 
2

Total Other Income/(Loss)
(48
)
 
(4
)
Other Expense:
 
 
 
Compensation and benefits
16

 
16

Other operating expense
12

 
10

Federal Housing Finance Agency
2

 
2

Office of Finance
2

 
2

Total Other Expense
32

 
30

Income/(Loss) Before Assessment
54

 
93

AHP Assessment
9

 
12

Net Income/(Loss)
$
45

 
$
81


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

2


Federal Home Loan Bank of San Francisco
Statements of Comprehensive Income
(Unaudited)

 
For the Three Months Ended March 31,
(In millions)
2014

 
2013

Net Income/(Loss)
$
45

 
$
81

Other Comprehensive Income/(Loss):
 
 
 
Net non-credit-related OTTI loss on AFS securities:
 
 
 
Non-credit-related OTTI loss transferred from HTM securities

 
(3
)
Net change in fair value of other-than-temporarily impaired securities
81

 
340

Reclassification of non-credit-related OTTI loss included in net income/(loss)
(1
)
 
2

Total net non-credit-related OTTI loss on AFS securities
80

 
339

Net non-credit-related OTTI loss on HTM securities:
 
 
 
Non-credit-related OTTI loss

 
(3
)
Accretion of non-credit-related OTTI loss
1

 
2

Non-credit-related OTTI loss transferred to AFS securities

 
3

Total net non-credit-related OTTI loss on HTM securities
1

 
2

Total other comprehensive income/(loss)
81

 
341

Total Comprehensive Income/(Loss)
$
126

 
$
422


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

3


Federal Home Loan Bank of San Francisco
Statements of Capital Accounts
(Unaudited)

 
Capital Stock
Class B—Putable
 
Retained Earnings
 
 
 
Total
Capital

(In millions)
Shares

 
Par Value

 
Restricted

 
Unrestricted

 
Total

 
AOCI

 
Balance, December 31, 2012
42

 
$
4,160

 
$
2,001

 
$
246

 
$
2,247

 
$
(794
)
 
$
5,613

Issuance of capital stock
1

 
106

 
 
 
 
 
 
 
 
 
106

Repurchase of capital stock
(3
)
 
(314
)
 
 
 
 
 
 
 
 
 
(314
)
Capital stock reclassified from/(to) mandatorily redeemable capital stock, net

 
(1
)
 
 
 
 
 
 
 
 
 
(1
)
Comprehensive income/(loss)
 
 
 
 
12

 
69

 
81

 
341

 
422

Cash dividends paid on capital stock (2.30%)
 
 
 
 
 
 
(25
)
 
(25
)
 
 
 
(25
)
Balance, March 31, 2013
40

 
$
3,951

 
$
2,013

 
$
290

 
$
2,303

 
$
(453
)
 
$
5,801

Balance, December 31, 2013
35

 
$
3,460

 
$
2,077

 
$
317

 
$
2,394

 
$
(145
)
 
$
5,709

Issuance of capital stock
2

 
197

 
 
 
 
 
 
 
 
 
197

Repurchase of capital stock
(4
)
 
(331
)
 
 
 
 
 
 
 
 
 
(331
)
Capital stock reclassified to mandatorily redeemable capital stock, net

 
(1
)
 
 
 
 
 
 
 
 
 
(1
)
Comprehensive income/(loss)
 
 
 
 
(8
)
 
53

 
45

 
81

 
126

Cash dividends paid on capital stock (6.67%)
 
 
 
 
 
 
(58
)
 
(58
)
 
 
 
(58
)
Balance, March 31, 2014
33

 
$
3,325

 
$
2,069

 
$
312

 
$
2,381

 
$
(64
)
 
$
5,642


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

4


Federal Home Loan Bank of San Francisco
Statements of Cash Flows
(Unaudited)
 
For the Three Months Ended March 31,
(In millions)
2014

 
2013

Cash Flows from Operating Activities:
 
 
 
Net Income/(Loss)
$
45

 
$
81

Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
(20
)
 
(15
)
Provision for/(reversal of) credit losses on mortgage loans
1

 

Change in net fair value adjustment on trading securities

 
(2
)
Change in net fair value adjustment on advances and consolidated obligation bonds held under the fair value option
39

 
11

Change in net derivatives and hedging activities
(94
)
 
(84
)
Net OTTI loss, credit-related

 
3

Net change in:
 
 
 
Accrued interest receivable
7

 
(3
)
Other assets

 
(1
)
Accrued interest payable
54

 
67

Other liabilities
(6
)
 
(1
)
Total adjustments
(19
)
 
(25
)
Net cash provided by/(used in) operating activities
26

 
56

Cash Flows from Investing Activities:
 
 
 
Net change in:
 
 
 
Interest-bearing deposits
(80
)
 
11

Securities purchased under agreements to resell
(500
)
 
1,000

Federal funds sold
1,097

 
1,823

Premises, software, and equipment
(1
)
 
(2
)
Trading securities:
 
 
 
Proceeds from maturities of long-term
81

 
1

Purchases of long-term

 
(525
)
AFS securities:
 
 
 
Proceeds from maturities of long-term
225

 
309

HTM securities:
 
 
 
Net (increase)/decrease in short-term
(848
)
 
103

Proceeds from maturities of long-term
589

 
1,213

Purchases of long-term
(69
)
 
(1,189
)
Advances:
 
 
 
Principal collected
146,806

 
112,034

Made to members
(147,969
)
 
(115,063
)
Mortgage loans held for portfolio:
 
 
 
Principal collected
52

 
113

Proceeds from sales of foreclosed assets
1

 

Net cash provided by/(used in) investing activities
(616
)
 
(172
)
 

5


Federal Home Loan Bank of San Francisco
Statements of Cash Flows (continued)
(Unaudited)


 
For the Three Months Ended March 31,
(In millions)
2014

 
2013

Cash Flows from Financing Activities:
 
 
 
Net change in:
 
 
 
Deposits
189

 
(25
)
Net (payments)/proceeds on derivative contracts with financing elements
(1
)
 
26

Net proceeds from issuance of consolidated obligations:
 
 
 
Bonds
8,377

 
3,875

Discount notes
17,912

 
19,784

Bonds transferred from another Federal Home Loan Bank

 
122

Payments for matured and retired consolidated obligations:
 
 
 
Bonds
(8,390
)
 
(9,862
)
Discount notes
(17,242
)
 
(12,166
)
Proceeds from issuance of capital stock
197

 
106

Payments for repurchase/redemption of mandatorily redeemable capital stock
(428
)
 
(437
)
Payments for repurchase of capital stock
(331
)
 
(314
)
Cash dividends paid
(58
)
 
(25
)
Net cash provided by/(used in) financing activities
225

 
1,084

Net increase/(decrease) in cash and due from banks
(365
)
 
968

Cash and due from banks at beginning of the period
4,906

 
104

Cash and due from banks at end of the period
$
4,541

 
$
1,072

Supplemental Disclosures:
 
 
 
Interest paid
$
124

 
$
118

AHP payments
9

 
11

Supplemental Disclosures of Noncash Investing Activities:
 
 
 
Transfers of mortgage loans to real estate owned
1

 
1

Transfers of other-than-temporarily impaired HTM securities to AFS securities

 
19


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

6

Federal Home Loan Bank of San Francisco
Notes to Financial Statements
(Unaudited)

(Dollars in millions except per share amounts)

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 the Bank, 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, 2014. 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, 2013 (2013 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 may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income, expenses, gains, and losses during the reporting period. The most significant of these estimates include estimating the allowance for credit losses on the advances and mortgage loan portfolios; accounting for derivatives; estimating fair values of investments classified as trading and available-for-sale, derivatives and associated hedged items carried at fair value in accordance with the accounting for derivative instruments and associated hedging activities, and financial instruments carried at fair value under the fair value option, and accounting for OTTI for investment securities; and estimating the prepayment speeds on mortgage-backed securities (MBS) and mortgage loans for the accounting of amortization of premiums and accretion of discounts on MBS and mortgage loans. Actual results could differ significantly from these estimates.

Variable Interest Entities. The Bank’s investments in variable interest entities (VIEs) are limited to private-label residential mortgage-backed securities (PLRMBS). On an ongoing basis, the Bank performs a quarterly evaluation
to determine whether it is the primary beneficiary in any VIE. The Bank evaluated its investments in VIEs as of March 31, 2014, to determine whether it is a primary beneficiary of any of these investments. The primary beneficiary is required to consolidate a VIE. The Bank determined that consolidation accounting is not required because the Bank is not the primary beneficiary of these VIEs for the periods presented. 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.

Descriptions of the Bank’s significant accounting policies are included in “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” in the Bank’s 2013 Form 10-K. Other changes to these policies as of March 31, 2014, are discussed in Note 2 – Recently Issued and Adopted Accounting Guidance.

Note 2 — Recently Issued and Adopted Accounting Guidance

Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. On January 17, 2014, the Financial Accounting Standards Board (FASB) issued guidance clarifying when consumer mortgage loans collateralized by real estate should be reclassified to real estate owned (REO). Specifically, these collateralized mortgage loans should be reclassified to REO when either the creditor obtains legal title to the residential real estate property upon completion of a foreclosure or the borrower conveys all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The guidance is effective for interim and annual periods beginning on or after December 15, 2014, and may be adopted under either the modified retrospective transition method or the

7

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



prospective transition method. The Bank is in the process of evaluating the effect of this guidance on the Bank’s financial condition, results of operations, and cash flows, but it is not expected to be material.

Joint and Several Liability Arrangements. On February 28, 2013, the FASB issued guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date. The guidance requires an entity to measure these obligations as the sum of (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. In addition, the guidance requires an entity to disclose the nature and amount of the obligations as well as other information about the obligations. The guidance became effective for interim and annual periods beginning on January 1, 2014, and was applied retrospectively to obligations with joint and several liabilities existing at January 1, 2014. The adoption of this guidance did not affect the Bank’s financial condition, results of operations, or cash flows.

Recently Issued Regulatory Guidance

Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention. On April 9, 2012, the Federal Housing Finance Agency (Finance Agency) issued Advisory Bulletin 2012-02, Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention (AB 2012-02). The guidance establishes a standard and uniform methodology for classifying loans, other real estate owned, and certain other assets (excluding investment securities) and prescribes the timing of asset charge-offs based on these classifications. The guidance is generally consistent with the Uniform Retail Credit Classification and Account Management Policy issued by the federal banking regulators in June 2000. The Bank implemented the asset classification provisions as of January 1, 2014, and this adoption did not have any impact on the Bank’s financial condition, results of operations, or cash flows. The charge-off provisions are to be implemented no later than January 1, 2015, and the adoption of those provisions is not expected to have a significant impact on the Bank’s financial condition, results of operations, or cash flows.

Note 3 — Trading Securities

The estimated fair value of trading securities as of March 31, 2014, and December 31, 2013, was as follows:

 
March 31, 2014

 
December 31, 2013

Government-sponsored enterprises (GSEs) – Federal Farm Credit Bank (FFCB) bonds
$
3,114

 
$
3,194

MBS – Other U.S. obligations – Ginnie Mae
13

 
14

Total
$
3,127

 
$
3,208


Redemption Terms. The estimated fair value of non-mortgage-backed securities (non-MBS) by contractual maturity (based on contractual final principal payment) and of mortgage-backed securities (MBS) as of
March 31, 2014, and December 31, 2013, is 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.


8

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



Year of Contractual Maturity
March 31, 2014

 
December 31, 2013

Trading securities other than MBS:
 
 
 
Due in 1 year or less
$
800

 
$
580

Due after 1 year through 5 years
2,314

 
2,614

Subtotal
3,114

 
3,194

MBS – Other U.S. obligations – Ginnie Mae
13

 
14

Total
$
3,127

 
$
3,208


Interest Rate Payment Terms. Interest rate payment terms for trading securities at March 31, 2014, and December 31, 2013, are detailed in the following table:

 
March 31, 2014

 
December 31, 2013

Estimated fair value of trading securities other than MBS:
 
 
 
Adjustable rate
$
3,114

 
$
3,194

Estimated fair value of trading MBS:
 
 
 
Passthrough securities – Adjustable rate
13

 
14

Total
$
3,127

 
$
3,208


The net unrealized gain/(loss) on trading securities was de minimis and $2 for the three months ended March 31, 2014 and 2013, respectively. These amounts represent the changes in the fair value of the securities during the reported periods.

Note 4 — Available-for-Sale Securities

Available-for-sale (AFS) securities by major security type as of March 31, 2014, and December 31, 2013, were as follows:
 
March 31, 2014
 
 
 
 
 
 
 
 
 
  
Amortized
Cost(1)

  
OTTI
Recognized in
AOCI

  
Gross
Unrealized
Gains

  
Gross
Unrealized
Losses

 
Estimated Fair Value

PLRMBS:
 
 
 
 
 
 
 
 
 
Prime
$
636

 
$
(13
)
 
$
35

 
$

 
$
658

Alt-A, option ARM
1,100

 
(69
)
 
63

 

 
1,094

Alt-A, other
5,211

 
(209
)
 
166

 
(4
)
 
5,164

Total
$
6,947

 
$
(291
)
 
$
264

 
$
(4
)
 
$
6,916

 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
Amortized
Cost(1)

  
OTTI
Recognized in
AOCI

  
Gross
Unrealized
Gains

  
Gross
Unrealized
Losses

 
Estimated Fair Value

PLRMBS:
 
 
 
 
 
 
 
 
 
Prime
$
661

 
$
(11
)
 
27

 
$

 
$
677

Alt-A, option ARM
1,122

 
(74
)
 
51

 

 
1,099

Alt-A, other
5,376

 
(239
)
 
142

 
(8
)
 
5,271

Total
$
7,159

 
$
(324
)
 
$
220

 
$
(8
)
 
$
7,047

 
(1)
Amortized cost includes unpaid principal balance, unamortized premiums and discounts, and previous OTTI recognized in earnings.


9

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



Expected maturities of PLRMBS will differ from contractual maturities because borrowers generally have the right to prepay the underlying obligations without prepayment fees.

At March 31, 2014, the amortized cost of the Bank’s PLRMBS classified as AFS included credit-related OTTI of $1,279. At December 31, 2013, the amortized cost of the Bank’s PLRMBS classified as AFS included credit-related OTTI of $1,312.

The following table summarizes the AFS securities with unrealized losses as of March 31, 2014, and December 31, 2013. 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. Total unrealized losses in the following table will not agree to the total gross unrealized losses in the table above. The unrealized losses in the following table also include non-credit-related OTTI losses recognized in AOCI. For OTTI analysis of AFS securities, see Note 6 – Other-Than-Temporary Impairment Analysis.

March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
  
Less Than 12 Months
  
12 Months or More
  
Total
  
Estimated
Fair Value

  
Unrealized
Losses

  
Estimated
Fair Value

  
Unrealized
Losses

  
Estimated
Fair Value

  
Unrealized
Losses

PLRMBS:
 
 
 
 
 
 
 
 
 
 
 
Prime
$
23

 
$

 
$
267

 
$
13

 
$
290

 
$
13

Alt-A, option ARM

 

 
642

 
69

 
642

 
69

Alt-A, other
454

 
8

 
2,185

 
205

 
2,639

 
213

Total
$
477

 
$
8

 
$
3,094

 
$
287

 
$
3,571

 
$
295

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
  
 
  
 
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Estimated
Fair Value

  
Unrealized
Losses

  
Estimated
Fair Value

  
Unrealized
Losses

  
Estimated
Fair Value

  
Unrealized
Losses

PLRMBS:
 
 
 
 
 
 
 
 
 
 
 
Prime
$
28

 
$

 
$
287

 
$
11

 
$
315

 
$
11

Alt-A, option ARM

 

 
674

 
74

 
674

 
74

Alt-A, other
677

 
10

 
2,351

 
237

 
3,028

 
247

Total
$
705

 
$
10

 
$
3,312

 
$
322

 
$
4,017

 
$
332


As indicated in the tables above, as of March 31, 2014, the Bank’s investments classified as AFS had gross unrealized losses related to PLRMBS, which were primarily due to illiquidity in the MBS market, uncertainty about the future condition of the housing and mortgage markets and the economy, and market expectations of the credit performance of loan collateral underlying these securities, which caused these assets to be valued at discounts to their acquisition cost.

Interest Rate Payment Terms. Interest rate payment terms for AFS securities at March 31, 2014, and December 31, 2013, are shown in the following table:


10

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



  
March 31, 2014

 
December 31, 2013

Amortized cost of AFS PLRMBS:
 
 
 
Collateralized mortgage obligations:
 
 
 
Fixed rate
$
2,284

 
$
2,450

Adjustable rate
4,663

 
4,709

Total
$
6,947

 
$
7,159


Certain MBS classified as 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:

 
March 31, 2014

 
December 31, 2013

Collateralized mortgage obligations:
 
 
 
Converts in 1 year or less
$
109

 
$
191

Converts after 1 year through 5 years
343

 
364

Total
$
452

 
$
555


See Note 6 – Other-Than-Temporary Impairment Analysis for information on the transfers of securities between the AFS portfolio and the held-to-maturity (HTM) portfolio.

Note 5 — Held-to-Maturity Securities

The Bank classifies the following securities as HTM because the Bank has the positive intent and ability to hold these securities to maturity:
 
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
  
Amortized
Cost(1)

 
OTTI
Recognized
in AOCI(1)

 
Carrying
Value(1)

 
Gross
Unrecognized
Holding
Gains(2)

 
Gross
Unrecognized
Holding
Losses(2)

 
Estimated
Fair Value

Certificates of deposit
$
2,508

 
$

 
$
2,508

 
$

 
$

 
$
2,508

Housing finance agency bonds:
 
 
 
 
 
 
 
 
 
 
 
California Housing Finance Agency (CalHFA) bonds
380

 

 
380

 

 
(88
)
 
292

Subtotal
2,888

 

 
2,888

 

 
(88
)
 
2,800

MBS:
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations – Ginnie Mae
1,676

 

 
1,676

 
5

 
(26
)
 
1,655

GSEs:
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
5,093

 

 
5,093

 
57

 
(58
)
 
5,092

Fannie Mae
6,139

 

 
6,139

 
116

 
(26
)
 
6,229

Subtotal GSEs
11,232

 

 
11,232

 
173

 
(84
)
 
11,321

PLRMBS:
 
 
 
 
 
 
 
 
 
 
 
Prime
1,319

 

 
1,319

 
2

 
(31
)
 
1,290

Alt-A, option ARM
16

 

 
16

 

 
(2
)
 
14

Alt-A, other
869

 
(26
)
 
843

 
24

 
(22
)
 
845

Subtotal PLRMBS
2,204

 
(26
)
 
2,178

 
26

 
(55
)
 
2,149

Total MBS
15,112

 
(26
)
 
15,086

 
204

 
(165
)
 
15,125

Total
$
18,000

 
$
(26
)
 
$
17,974

 
$
204

 
$
(253
)
 
$
17,925

 

11

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
  
Amortized
Cost(1)

 
OTTI
Recognized
in AOCI(1)

 
Carrying
Value(1)

 
Gross
Unrecognized
Holding
Gains(2)

 
Gross
Unrecognized
Holding
Losses(2)

 
Estimated
Fair Value

Certificates of deposit
$
1,660

 
$

 
$
1,660

 
$

 
$

 
$
1,660

Housing finance agency bonds:
 
 
 
 
 
 
 
 
 
 
 
CalHFA bonds
416

 

 
416

 

 
(100
)
 
316

Subtotal
2,076

 

 
2,076

 

 
(100
)
 
1,976

MBS:
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations – Ginnie Mae
1,575

 

 
1,575

 
3

 
(45
)
 
1,533

GSEs:
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
5,250

 

 
5,250

 
53

 
(90
)
 
5,213

Fannie Mae
6,331

 

 
6,331

 
109

 
(45
)
 
6,395

Subtotal GSEs
11,581

 

 
11,581

 
162

 
(135
)
 
11,608

PLRMBS:
 
 
 
 
 
 
 
 
 
 
 
Prime
1,380

 

 
1,380

 
1

 
(37
)
 
1,344

Alt-A, option ARM
16

 

 
16

 

 
(2
)
 
14

Alt-A, other
906

 
(27
)
 
879

 
24

 
(26
)
 
877

Subtotal PLRMBS
2,302

 
(27
)
 
2,275

 
25

 
(65
)
 
2,235

Total MBS
15,458

 
(27
)
 
15,431

 
190

 
(245
)
 
15,376

Total
$
17,534

 
$
(27
)
 
$
17,507

 
$
190

 
$
(345
)
 
$
17,352


(1)
Amortized cost includes unpaid principal balance, unamortized premiums and discounts, and previous OTTI recognized in earnings. The carrying value of HTM securities represents amortized cost after adjustment for non-credit-related OTTI recognized in AOCI.
(2)
Gross unrecognized holding gains/(losses) represent the difference between estimated fair value and carrying value.

At March 31, 2014, the amortized cost of the Bank’s MBS classified as HTM included premiums of $65, discounts of $65, and credit-related OTTI of $7. At December 31, 2013, the amortized cost of the Bank’s MBS classified as HTM included premiums of $71, discounts of $70, and credit-related OTTI of $6.

The following tables summarize the HTM securities with unrealized losses as of March 31, 2014, and December 31, 2013. 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. Total unrealized losses in the following table will not agree to the total gross unrecognized losses in the table above. The unrealized losses in the following table also include non-credit-related OTTI losses recognized in AOCI. For OTTI analysis of HTM securities, see Note 6 – Other-Than-Temporary Impairment Analysis.


12

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Estimated
Fair Value

 
Unrealized
Losses

 
Estimated
Fair Value

 
Unrealized
Losses

 
Estimated
Fair Value

 
Unrealized
Losses

Certificates of deposit
$
826

 
$

 
$

 
$

 
$
826

 
$

Housing finance agency bonds:
 
 
 
 
 
 
 
 
 
 
 
CalHFA bonds

 

 
292

 
88

 
292

 
88

MBS:
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations – Ginnie Mae
1,109

 
26

 
2

 

 
1,111

 
26

GSEs:
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
2,753

 
58

 
34

 

 
2,787

 
58

Fannie Mae
1,915

 
22

 
120

 
4

 
2,035

 
26

Subtotal GSEs
4,668

 
80

 
154

 
4

 
4,822

 
84

PLRMBS:
 
 
 
 
 
 
 
 
 
 
 
Prime
375

 
3

 
667

 
28

 
1,042

 
31

Alt-A, option ARM

 

 
14

 
2

 
14

 
2

Alt-A, other
154

 
2

 
650

 
46

 
804

 
48

Subtotal PLRMBS
529

 
5

 
1,331

 
76

 
1,860

 
81

Total MBS
6,306

 
111

 
1,487

 
80

 
7,793

 
191

Total
$
7,132

 
$
111

 
$
1,779

 
$
168

 
$
8,911

 
$
279

 

13

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Estimated
Fair Value

 
Unrealized
Losses

 
Estimated
Fair Value

 
Unrealized
Losses

 
Estimated
Fair Value

 
Unrealized
Losses

Housing finance agency bonds:
 
 
 
 
 
 
 
 
 
 
 
CalHFA bonds
$

 
$

 
$
316

 
$
100

 
$
316

 
$
100

MBS:
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations – Ginnie Mae
1,187

 
45

 
2

 

 
1,189

 
45

GSEs:
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
2,918

 
89

 
66

 
1

 
2,984

 
90

Fannie Mae
2,069

 
40

 
126

 
5

 
2,195

 
45

Subtotal GSEs
4,987

 
129

 
192

 
6

 
5,179

 
135

PLRMBS:
 
 
 
 
 
 
 
 
 
 
 
Prime
481

 
5

 
693

 
32

 
1,174

 
37

Alt-A, option ARM

 

 
14

 
2

 
14

 
2

Alt-A, other
159

 
2

 
688

 
51

 
847

 
53

Subtotal PLRMBS
640

 
7

 
1,395

 
85

 
2,035

 
92

Total MBS
6,814

 
181

 
1,589

 
91

 
8,403

 
272

Total
$
6,814

 
$
181

 
$
1,905

 
$
191

 
$
8,719

 
$
372


As indicated in the tables above, the Bank’s investments classified as HTM had gross unrealized losses primarily related to CalHFA bonds and MBS. The Bank also had gross unrealized losses associated with certificates of deposit that were de minimis, which were caused by movements in interest rates and not a deterioration of the issuers’ creditworthiness. The gross unrealized losses associated with the CalHFA bonds were mainly due to an illiquid market, credit concerns regarding the underlying mortgage collateral, and credit concerns regarding the monoline insurance providers, causing these investments to be valued at a discount to their acquisition cost. For its agency MBS, the Bank expects to recover the entire amortized cost basis of these securities because the Bank 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. 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 market expectations of the credit performance of the loan collateral underlying these securities, which caused these assets to be valued at discounts to their acquisition cost.

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 March 31, 2014, and December 31, 2013, 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.


14

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



March 31, 2014
 
 
 
 
 
Year of Contractual Maturity
Amortized
Cost(1)

 
Carrying
Value(1)

 
Estimated
Fair Value

HTM securities other than MBS:
 
 
 
 
 
Due in 1 year or less
$
2,508

 
$
2,508

 
$
2,508

Due after 5 years through 10 years
62


62

 
49

Due after 10 years
318

 
318

 
243

Subtotal
2,888

 
2,888

 
2,800

MBS:
 
 
 
 
 
Other U.S. obligations – Ginnie Mae
1,676

 
1,676

 
1,655

GSEs:
 
 
 
 
 
Freddie Mac
5,093

 
5,093

 
5,092

Fannie Mae
6,139

 
6,139

 
6,229

Subtotal GSEs
11,232

 
11,232

 
11,321

PLRMBS:
 
 
 
 
 
Prime
1,319

 
1,319

 
1,290

Alt-A, option ARM
16

 
16

 
14

Alt-A, other
869

 
843

 
845

Subtotal PLRMBS
2,204

 
2,178

 
2,149

Total MBS
15,112

 
15,086

 
15,125

Total
$
18,000

 
$
17,974

 
$
17,925

 

15

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



December 31, 2013
 
 
 
 
 
Year of Contractual Maturity
Amortized
Cost(1)

 
Carrying
Value(1)

 
Estimated
Fair Value

HTM securities other than MBS:
 
 
 
 
 
Due in 1 year or less
$
1,660

 
$
1,660

 
$
1,660

Due after 5 years through 10 years
62

 
62

 
49

Due after 10 years
354

 
354

 
267

Subtotal
2,076

 
2,076

 
1,976

MBS:
 
 
 
 
 
Other U.S. obligations – Ginnie Mae
1,575

 
1,575

 
1,533

GSEs:
 
 
 
 
 
Freddie Mac
5,250

 
5,250

 
5,213

Fannie Mae
6,331

 
6,331

 
6,395

Subtotal GSEs
11,581

 
11,581

 
11,608

PLRMBS:
 
 
 
 
 
Prime
1,380

 
1,380

 
1,344

Alt-A, option ARM
16

 
16

 
14

Alt-A, other
906

 
879

 
877

Subtotal PLRMBS
2,302

 
2,275

 
2,235

Total MBS
15,458

 
15,431

 
15,376

Total
$
17,534

 
$
17,507

 
$
17,352


(1)
Amortized cost includes unpaid principal balance, unamortized premiums and discounts, and previous OTTI recognized in earnings. The carrying value of HTM securities represents amortized cost after adjustment for non-credit-related OTTI recognized in AOCI.

Interest Rate Payment Terms. Interest rate payment terms for HTM securities at March 31, 2014, and December 31, 2013, are detailed in the following table:
 

16

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



  
March 31, 2014

 
December 31, 2013

Amortized cost of HTM securities other than MBS:
 
 
 
Fixed rate
$
2,508


$
1,660

Adjustable rate
380


416

Subtotal
2,888


2,076

Amortized cost of HTM MBS:
 
 
 
Passthrough securities:
 
 
 
Fixed rate
410


461

Adjustable rate
425


430

Collateralized mortgage obligations:
 
 
 
Fixed rate
10,681


10,820

Adjustable rate
3,596


3,747

Subtotal
15,112


15,458

Total
$
18,000


$
17,534


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:

 
March 31, 2014

 
December 31, 2013

Passthrough securities:
 
 
 
Converts in 1 year or less
$
43

 
$
62

Converts after 1 year through 5 years
287

 
316

Converts after 5 years through 10 years
70

 
72

Total
$
400

 
$
450

Collateralized mortgage obligations:
 
 
 
Converts in 1 year or less
$
203

 
$
185

Converts after 1 year through 5 years
93

 
133

Total
$
296

 
$
318


See Note 6 – Other-Than-Temporary Impairment Analysis for information on the transfers of securities between the AFS portfolio and the HTM portfolio.

Note 6 — Other-Than-Temporary Impairment Analysis


17

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



On a quarterly basis, the Bank evaluates its individual AFS and HTM 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 debt 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 statement of condition 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.

PLRMBS. To assess whether it expects to recover the entire amortized cost basis of its PLRMBS, the Bank performed a cash flow analysis for all of its PLRMBS as of March 31, 2014, using two third-party models. The first model projects prepayments, default rates, and loss severities on the underlying loan collateral based on borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions related primarily to future changes in home prices and interest rates. 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), which are based on an assessment of the regional 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 with a population of 10,000 or more people. The FHLBanks’ OTTI Governance Committee developed a short-term housing price forecast with projected changes ranging from a decrease of 3.0% to an increase of 9.0% over the 12-month period beginning January 1, 2014. For the vast majority of markets, the projected short-term housing price changes range from a decrease of 1.0% to an increase of 4.0%. Thereafter, home prices were projected to recover using one of five different recovery paths. The table below presents the ranges of the annualized projected home price recovery rates at March 31, 2014.

Months
March 31, 2014
1 - 6
0.0
%
-
3.0%
7 - 12
1.0
%
-
4.0%
13 - 18
2.0
%
-
4.0%
19 - 30
2.0
%
-
5.0%
31 - 54
2.0
%
-
6.0%
Thereafter
2.3
%
-
5.6%

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 housing price forecast that reflects the expectations for near- and long-term housing price behavior.

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 the effective interest rate derived from a variable rate index (for example, one-month LIBOR) plus the contractual spread, plus or minus a fixed spread adjustment when there is an existing discount or premium on the security. As the implied forward rates of the index change over time, the effective interest rates derived from that index will also change over time. The Bank then uses the effective interest

18

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



rate for the security prior to impairment for determining the present value of the future estimated cash flows. For all securities, including securities previously identified as other-than-temporarily impaired, the Bank updates its estimate of future estimated cash flows on a quarterly basis.

For all the PLRMBS in its AFS and HTM portfolios, 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.

For securities determined to be other-than-temporarily impaired as of March 31, 2014 (securities for which the Bank determined that it does not expect to recover the entire amortized cost basis), the following table presents a summary of the significant inputs used in measuring the amount of credit loss recognized in earnings in the first quarter of 2014, and the related current credit enhancement for the Bank.

March 31, 2014
 
 
 
 
 
 
 
 
Significant Inputs for Other-Than-Temporarily Impaired PLRMBS
 
Current
 
Prepayment Rates
 
Default Rates
 
Loss Severities
 
Credit Enhancement
Year of Securitization
Weighted Average %
 
Weighted Average %
 
Weighted Average %
 
Weighted Average %
Prime
 
 
 
 
 
 
 
2006
12.5
 
17.6
 
41.0
 
Total Prime
12.5
 
17.6
 
41.0
 
Alt-A, other
 
 
 
 
 
 
 
2007
9.9
 
34.4
 
43.2
 
8.4
2005
10.0
 
31.6
 
46.0
 
2004 and earlier
12.3
 
7.6
 
38.1
 
13.3
Total Alt-A, other
10.5
 
27.1
 
42.8
 
7.0
Total
10.5
 
27.1
 
42.8
 
6.9

Credit enhancement is defined as the percentage of subordinated tranches, excess spread, and over-collateralization, if any, in a security structure that will generally absorb losses before the Bank will experience a loss on the security. The calculated averages represent the dollar-weighted averages of all the PLRMBS investments in each category shown. The classification (Prime; Alt-A, option ARM; and Alt-A, other) 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.

For each security classified as HTM, the estimated non-credit-related OTTI 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 $1 and $2 from AOCI to increase the carrying value of the respective PLRMBS classified as HTM for the three months ended March 31, 2014 and 2013, 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.

The following table presents the credit-related OTTI, which is recognized in earnings, for the three months ended March 31, 2014 and 2013.

19

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



 
Three Months Ended
 
March 31, 2014

 
March 31, 2013

Balance, beginning of the period
$
1,378

 
$
1,397

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

 
3

Increases in cash flows expected to be collected that are recognized over the remaining life of the securities
(16
)
 
(2
)
Balance, end of the period
$
1,362

 
$
1,398


(1)
For the three months ended March 31, 2014, “securities for which OTTI was previously recognized” represents all securities that were also other-than-temporarily impaired prior to January 1, 2014. For the three months ended March 31, 2013, “securities for which OTTI was previously recognized” represents all securities that were also previously other-than-temporarily impaired prior to January 1, 2013.

Changes in circumstances may cause the Bank to change its intent to hold a certain security to maturity without calling into question its intent to hold other debt securities to maturity in the future. The sale or transfer of an HTM security because of certain changes in circumstances, such as evidence of significant deterioration in the issuers’ creditworthiness, is not considered to be inconsistent with its original classification. In addition, other events that are isolated, nonrecurring, or unusual for the Bank that could not have been reasonably anticipated may cause the Bank to sell or transfer an HTM security without necessarily calling into question its intent to hold other debt securities to maturity.

Beginning in the first quarter of 2011, the Bank elected to transfer any PLRMBS that incurred a credit-related OTTI loss during the applicable period from the Bank’s HTM portfolio to its AFS portfolio at their fair values. The Bank recognized an OTTI credit loss on these HTM PLRMBS, which the Bank believes is evidence of a significant decline in the issuers’ creditworthiness. The decline in the issuers’ creditworthiness is the basis for the transfers to the AFS portfolio. These transfers allow the Bank the option to sell these securities prior to maturity in view of changes in interest rates, changes in prepayment risk, or other factors, while recognizing the Bank’s intent to hold these securities for an indefinite period of time. The Bank does not intend to sell its other-than-temporarily impaired securities 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 did not transfer any PLRMBS from its HTM portfolio to its AFS portfolio during the three months ended March 31, 2014. The following table summarizes the PLRMBS transferred during the three months ended March 31, 2013. The amounts shown represent the values when the securities were transferred from the HTM portfolio to the AFS portfolio.

 
Three Months Ended March 31, 2013
 
Amortized
Cost

 
OTTI
Recognized
in AOCI

 
Gross
Unrecognized
Holding
Gains 

 
Estimated
Fair Value

Other-than-temporarily impaired PLRMBS backed by loans classified at origination as:
 
 
 
 
 
 
 
Alt-A, option ARM
$
22

 
$
(3
)
 
$

 
$
19

Total
$
22

 
$
(3
)
 
$

 
$
19


The following tables present the Bank’s AFS and HTM PLRMBS that incurred OTTI losses anytime during the life of the securities at March 31, 2014, and December 31, 2013, by loan collateral type:


20

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-Sale Securities
 
Held-to-Maturity Securities
 
Unpaid
Principal
Balance

 
Amortized
Cost

 
Estimated
Fair Value

 
Unpaid
Principal
Balance

  
Amortized
Cost

  
Carrying
Value

  
Estimated
Fair Value

Other-than-temporarily impaired PLRMBS backed by loans classified at origination as:
 
 
 
 
 
 
 
  
 
  
 
  
 
Prime
$
765

 
$
636

 
$
658

 
$

 
$

 
$

 
$

Alt-A, option ARM
1,486

 
1,100

 
1,094

 

 

 

 

Alt-A, other
5,968

 
5,211

 
5,164

 
145

 
142

 
117

 
140

Total
$
8,219

 
$
6,947

 
$
6,916

 
$
145

 
$
142

 
$
117

 
$
140

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-Sale Securities
 
Held-to-Maturity Securities
 
Unpaid
Principal
Balance

 
Amortized
Cost

 
Estimated
Fair Value

 
Unpaid
Principal
Balance

  
Amortized
Cost

  
Carrying
Value

  
Estimated
Fair Value

Other-than-temporarily impaired PLRMBS backed by loans classified at origination as:
 
 
 
 
 
 
 
  
 
  
 
  
 
Prime
$
795

 
$
661

 
$
677

 
$

 
$

 
$

 
$

Alt-A, option ARM
1,516

 
1,122

 
1,099

 

 

 

 

Alt-A, other
6,151

 
5,376

 
5,271

 
150

 
147

 
120

 
144

Total
$
8,462

 
$
7,159

 
$
7,047

 
$
150

 
$
147

 
$
120

 
$
144


For the Bank’s PLRMBS that were not other-than-temporarily impaired as of March 31, 2014, the Bank has experienced net unrealized losses primarily because of illiquidity in the PLRMBS market, uncertainty about the future condition of the housing and mortgage markets and the economy, and market expectations of the credit performance of loan collateral underlying these securities, which caused these assets to be valued at 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 amortized cost basis of these securities. As a result, the Bank determined that, as of March 31, 2014, the gross unrealized losses on these PLRMBS are temporary. 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.

All Other Available-for-Sale and Held-to-Maturity Investments. As of March 31, 2014, the Bank’s investments in certificates of deposit had a de minimis gross unrealized loss resulting from movements in interest rates and not a deterioration of the issuers’ creditworthiness.

As of March 31, 2014, the Bank’s investments in housing finance agency bonds, which were issued by CalHFA, had gross unrealized losses totaling $88. These gross unrealized losses were mainly due to an illiquid market, credit concerns regarding the underlying mortgage collateral, and credit concerns regarding the monoline insurance providers, causing these investments to be valued at a discount to their acquisition cost. The Bank independently modeled cash flows for the underlying collateral, using assumptions for default rates and loss severity that a market participant would deem reasonable, and concluded that the available credit support within the CalHFA structure more than offset the projected underlying collateral losses. The Bank determined that, as of March 31, 2014, all of the gross unrealized losses on the bonds are temporary because the underlying collateral and credit enhancements were sufficient to protect the Bank from losses. As a result, the Bank expects to recover the entire amortized cost basis of these securities.


21

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 the Bank 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. As a result, the Bank determined that, as of March 31, 2014, all of the gross unrealized losses on its agency MBS are temporary.

Note 7 — Advances

The Bank offers a wide range of fixed and adjustable rate advance products with different maturities, interest rates, payment characteristics, and option features. Fixed rate advances generally have maturities ranging from one day to 30 years. Adjustable rate advances generally have maturities ranging from less than 30 days to 10 years, with the interest rates resetting periodically at a fixed spread to LIBOR or to another specified index.

Redemption Terms. The Bank had advances outstanding, excluding overdrawn demand deposit accounts, at interest rates ranging from 0.10% to 8.57% at March 31, 2014, and 0.06% to 8.57% at December 31, 2013, as summarized below.
 
 
March 31, 2014
 
December 31, 2013
Contractual Maturity
Amount
Outstanding

  
Weighted
Average
Interest Rate

 
Amount
Outstanding

  
Weighted
Average
Interest Rate

Within 1 year
$
24,092

  
0.55
%
 
$
22,556

  
0.50
%
After 1 year through 2 years
6,239

  
1.60

 
6,838

  
1.48

After 2 years through 3 years
6,663

  
1.10

 
6,754

  
1.24

After 3 years through 4 years
3,854

  
1.38

 
3,208

  
1.43

After 4 years through 5 years
2,723

  
1.88

 
2,825

  
1.79

After 5 years
1,779

  
2.63

 
2,006

  
2.41

Total par value
45,350

  
1.00
%
 
44,187

  
1.00
%
Valuation adjustments for hedging activities
82

  
 
 
95

  
 
Valuation adjustments under fair value option
120

  
 
 
113

  
 
Total
$
45,552

  
 
 
$
44,395

  
 

Many of the Bank’s advances are prepayable at the member’s option. However, when advances are prepaid, the member is generally charged a prepayment fee intended to make the Bank financially indifferent to the prepayment. In addition, for certain advances with partial prepayment symmetry, the Bank may charge the member a prepayment fee or pay the member a prepayment credit depending on certain circumstances, such as movements in interest rates, when the advance is prepaid. The Bank had advances with partial prepayment symmetry outstanding totaling $6,702 at March 31, 2014, and $6,833 at December 31, 2013. Some advances may be repaid on pertinent call dates

22

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



without prepayment fees (callable advances). The Bank had callable advances outstanding totaling $288 at March 31, 2014, and $235 at December 31, 2013.

The Bank’s advances at March 31, 2014, and December 31, 2013, included $180 and $182, respectively, of putable advances. At the Bank’s discretion, the Bank may terminate these advances on predetermined exercise dates and offer replacement funding at prevailing market rates, subject to certain conditions. The Bank would typically exercise such termination rights when interest rates increase.

The following table summarizes advances at March 31, 2014, and December 31, 2013, by the earlier of the year of contractual maturity or next call date for callable advances and by the earlier of the year of contractual maturity or next put date for putable advances.
 
 
Earlier of Contractual
Maturity or Next Call Date
 
Earlier of Contractual
Maturity or Next Put Date
 
March 31, 2014

  
December 31, 2013

 
March 31, 2014

 
December 31, 2013

Within 1 year
$
24,175

  
$
22,609

 
$
24,231

 
$
22,696

After 1 year through 2 years
6,254

  
6,843

 
6,239

 
6,838

After 2 years through 3 years
6,771

  
6,850

 
6,664

 
6,754

After 3 years through 4 years
3,890

  
3,208

 
3,714

 
3,108

After 4 years through 5 years
2,765

  
2,901

 
2,723

 
2,785

After 5 years
1,495

  
1,776

 
1,779

 
2,006

Total par value
$
45,350

  
$
44,187

 
$
45,350

 
$
44,187


Credit and Concentration Risk. The following tables present the concentration in advances to the top five borrowers and their affiliates at March 31, 2014 and 2013. The tables also present the interest income from these advances before the impact of interest rate exchange agreements associated with these advances for the three months ended March 31, 2014 and 2013.

 
March 31, 2014
 
Three Months Ended March 31, 2014
Name of Borrower
Advances
Outstanding(1)

 
Percentage of
Total
Advances
Outstanding

 
Interest
Income from
Advances(2)

  
Percentage of
Total Interest
Income from
Advances

Bank of America California, N.A.
$
10,000

 
22
%
 
$
5

 
5
%
JPMorgan Chase & Co.:
 
 
 
 
 
 
 
JPMorgan Bank & Trust Company, National Association
5,125

 
11

 
15

 
13

JPMorgan Chase Bank, National Association(3)
834

 
2

 
2

 
2

Subtotal JPMorgan Chase & Co.
5,959

 
13


17

 
15

First Republic Bank
5,650

 
12

 
21

 
19

Bank of the West
4,437

 
10

 
8

 
7

OneWest Bank, N.A.
3,040

 
7

 
3

 
3

     Subtotal
29,086

 
64


54

 
49

Others
16,264

 
36

 
57

 
51

Total
$
45,350

 
100
%

$
111

 
100
%



23

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



 
March 31, 2013
 
Three Months Ended March 31, 2013
Name of Borrower
Advances
Outstanding(1)

 
Percentage of
Total
Advances
Outstanding

 
Interest
Income from
Advances(2)

  
Percentage of
Total Interest
Income from
Advances

JPMorgan Chase & Co.:
 
 
 
 
 
 
 
JPMorgan Bank & Trust Company, National Association
$
7,850

 
17
%
 
$
21

 
17
%
JPMorgan Chase Bank, National Association(3)
841

 
2

 
2

 
2

Subtotal JPMorgan Chase & Co.
8,691

 
19

 
23

 
19

Citibank, N.A.(3)
8,284

 
18

 
5

 
4

Bank of America California, N.A.
6,000

 
13

 
2

 
2

First Republic Bank
4,140

 
9

 
14

 
12

OneWest Bank, FSB
3,639

 
8

 
11

 
9

     Subtotal
30,754

 
67

 
55

 
46

Others
15,455

 
33

 
66

 
54

Total
$
46,209

 
100
%
 
$
121

 
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 valuation adjustments under the fair value option.
(2)
Interest income amounts exclude the interest effect of interest rate exchange agreements with derivative 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.
(3)
Nonmember institution.

The Bank held a security interest in collateral from each of the top five advances borrowers and their affiliates sufficient to support their respective advances outstanding, and the Bank does not expect to incur any credit losses on these advances.

For information related to the Bank’s credit risk on advances and allowance methodology for credit losses, see Note 9 – Allowance for Credit Losses.

Interest Rate Payment Terms. Interest rate payment terms for advances at March 31, 2014, and December 31, 2013, are detailed below:

  
March 31, 2014

 
December 31, 2013

Par value of advances:
 
 
 
Fixed rate:
 
 
 
Due within 1 year
$
18,910

 
$
17,998

Due after 1 year
16,080

 
16,453

Total fixed rate
34,990

 
34,451

Adjustable rate:
 
 
 
Due within 1 year
5,182

 
4,558

Due after 1 year
5,178

 
5,178

Total adjustable rate
10,360

 
9,736

Total par value
$
45,350

  
$
44,187


The Bank may use derivatives to adjust the repricing and/or options characteristics of advances to more closely match the characteristics of the Bank’s funding liabilities. In general, whenever a member executes a fixed rate advance or a variable rate advance with embedded options, the Bank will simultaneously execute an interest rate exchange agreement with terms that offset the terms and embedded options, if any, in the advance. The combination of the advance and the interest rate exchange agreement effectively creates a variable rate asset. This type of hedge is treated as a fair value hedge. In addition, for certain advances for which the Bank has elected the fair value

24

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



option, the Bank will simultaneously execute an interest rate exchange agreement with terms that economically offset the terms of the advance. However, this type of hedge is treated as an economic hedge because these combinations generally do not meet the requirements for fair value hedge accounting treatment. For more information, see Note 15 – Derivatives and Hedging Activities and Note 16 – Fair Value.

The Bank did not have any advances with embedded features that met the requirements to separate the embedded feature from the host contract and designate the embedded feature as a stand-alone derivative at March 31, 2014, and December 31, 2013.

Note 8 — 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 FHLBank of Chicago.) Participating members originated or purchased the mortgage loans, credit-enhanced them and sold them to the Bank, and generally retained the servicing of the loans.

The following table presents information as of March 31, 2014, and December 31, 2013, on mortgage loans, all of which are secured by one- to four-unit residential properties and single-unit second homes.

  
March 31, 2014

 
December 31, 2013

Fixed rate medium-term mortgage loans
$
217

 
$
238

Fixed rate long-term mortgage loans
643

 
675

Subtotal
860

 
913

Unamortized premiums
9

 
10

Unamortized discounts
(15
)
 
(16
)
Mortgage loans held for portfolio
854

 
907

Less: Allowance for credit losses
(2
)
 
(2
)
Total mortgage loans held for portfolio, net
$
852

 
$
905


Medium-term loans have original contractual terms of 15 years or less, and long-term loans have contractual terms of more than 15 years.

Concentration Risk. The Bank had the following concentration in MPF loans with institutions whose outstanding total of mortgage loans sold to the Bank represented 10% or more of the Bank’s total outstanding mortgage loans at March 31, 2014, and December 31, 2013.

25

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



March 31, 2014
 
 
 
 
 
 
 
Name of Institution
Mortgage
Loan Balances
Outstanding

  
Percentage of 
Total
Mortgage
Loan Balances
Outstanding

 
Number of
Mortgage Loans
Outstanding

  
Percentage of
Total Number
of Mortgage 
Loans
Outstanding

JPMorgan Chase Bank, National Association(1)
$
678

  
79
%
 
7,090

  
69
%
OneWest Bank, N.A.
110

  
13

 
2,408

  
23

Subtotal
788

  
92

 
9,498

  
92

Others
72

  
8

 
840

  
8

Total
$
860

  
100
%
 
10,338

  
100
%
 
 
 
 
 
 
 
 
December 31, 2013
 
  
 
 
 
  
 
Name of Institution
Mortgage
Loan Balances
Outstanding

  
Percentage of 
Total
Mortgage
Loan Balances
Outstanding

 
Number of
Mortgage Loans
Outstanding

  
Percentage of
Total Number
of Mortgage 
Loans
Outstanding

JPMorgan Chase Bank, National Association(1)
$
715

  
78
%
 
7,355

  
69
%
OneWest Bank, FSB
120

  
13

 
2,510

  
23

Subtotal
835

  
91

 
9,865

  
92

Others
78

  
9

 
883

  
8

Total
$
913

  
100
%
 
10,748

  
100
%

(1)
Nonmember institution.

For information related to the Bank’s credit risk on mortgage loans and allowance methodology for credit losses, see Note 9 – Allowance for Credit Losses.

Note 9 — Allowance for Credit Losses

The Bank has established an allowance methodology for each of its portfolio segments: credit products, mortgage loans held for portfolio, term securities purchased under agreements to resell, and term Federal funds sold. For more information on these portfolio segments, see “Item 8. Financial Statements and Supplementary Data – Note 10 – Allowance for Credit Losses” in the Bank’s 2013 Form 10-K.

Credit Products. The Bank manages its credit exposure related to credit products through an integrated approach that generally provides for a credit limit to be established for each borrower, includes an ongoing review of each borrower’s financial condition, and is coupled with conservative collateral and lending policies to limit the risk of loss while taking into account borrowers’ needs for a reliable funding source. At March 31, 2014, and December 31, 2013, none of the Bank’s credit products were past due, on nonaccrual status, or considered impaired. There were no troubled debt restructurings related to credit products during the three months ended March 31, 2014, or during 2013.

Based on the collateral pledged as security for advances, the Bank’s credit analyses of borrowers’ financial condition, and the Bank’s credit extension and collateral policies as of March 31, 2014, the Bank expects to collect all amounts due according to the contractual terms. Therefore, no allowance for losses on credit products was deemed necessary by the Bank. The Bank has never experienced any credit losses on its credit products.

No member institutions were placed into receivership during the first three months of 2014, or from April 1 to April 30, 2014.



26

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)




Mortgage Loans Held for Portfolio. The following table presents information on delinquent mortgage loans as of March 31, 2014, and December 31, 2013.

 
March 31, 2014

 
December 31, 2013

 
Recorded
Investment(1)

 
Recorded
Investment(1)

30 – 59 days delinquent
$
14

 
$
14

60 – 89 days delinquent
5

 
7

90 days or more delinquent
26

 
27

Total past due
45

 
48

Total current loans
813

 
863

Total mortgage loans
$
858

 
$
911

In process of foreclosure, included above(2)
$
13

 
$
17

Nonaccrual loans
$
26

 
$
27

Serious delinquencies as a percentage of total mortgage loans outstanding(3)
3.06
%
 
3.00
%

(1)
The recorded investment in a loan is the unpaid principal balance of the loan, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts, and direct write-downs. The recorded investment is not net of any valuation allowance.
(2)
Includes loans for which the servicer has reported a decision to foreclose or to pursue a similar alternative, such as deed-in-lieu. Loans in process of foreclosure are included in past due or current loans depending on their delinquency status.
(3)
Represents loans that are 90 days or more past due or in the process of foreclosure as a percentage of the recorded investment of total mortgage loans outstanding. The ratio increased primarily because of the decline in the recorded investment of the Bank’s mortgage loans.

The allowance for credit losses on the mortgage loan portfolio was as follows:
 
Three Months Ended
 
March 31, 2014
 
March 31, 2013
Balance, beginning of the period
$
2

 
$
3

Charge-offs – transferred to REO
(1
)
 

Provision for/(reversal of) credit losses
1

 

Balance, end of the period
$
2

 
$
3

Ratio of net charge-offs during the period to average loans outstanding during the period
(0.02
)%
 
(0.01
)%

The allowance for credit losses and recorded investment by impairment methodology for individually and collectively evaluated impaired loans are as follows:

 
March 31, 2014
 
December 31, 2013
Allowance for credit losses, end of period
 
 
 
Individually evaluated for impairment
$
2

 
$
2

Total allowance for credit losses
$
2


$
2

Recorded investment, end of period
 
 
 
Individually evaluated for impairment
$
26

 
$
27

Collectively evaluated for impairment
832

 
884

Total recorded investment
$
858

 
$
911


The recorded investment, unpaid principal balance, and related allowance of impaired loans individually evaluated for impairment are as follows:


27

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



 
March 31, 2014
 
December 31, 2013
 
Recorded Investment

 
Unpaid Principal Balance

 
Related Allowance

 
Recorded Investment

 
Unpaid Principal Balance

 
Related Allowance

With no related allowance
$
18

 
$
18

 
$

 
$
20

 
$
20

 
$

With an allowance
8

 
8

 
2

 
7

 
7

 
2

Total
$
26

 
$
26

 
$
2

 
$
27

 
$
27

 
$
2


The average recorded investment on impaired loans individually evaluated for impairment is as follows:

 
Three Months Ended
 
March 31, 2014
 
March 31, 2013
With no related allowance
$
19

 
$
19

With an allowance
7

 
12

Total
$
26

 
$
31


The Bank and any participating financial institution share in the credit risk of the loans sold by that institution as specified in a master agreement. Loans purchased under the MPF Program generally had a credit risk exposure at the time of purchase equivalent to AA-rated assets taking into consideration the credit risk sharing structure mandated by the Finance Agency’s acquired member assets (AMA) regulation. The Bank holds additional risk-based capital when it determines that purchased loans do not have a credit risk exposure equivalent to AA-rated assets. The MPF Program structures potential credit losses on conventional MPF loans into layers with respect to each pool of loans purchased by the Bank under a single master commitment for the member selling the loans, as follows:

1.
The first layer of protection against loss is the liquidation value of the real property securing the loan.
2.
The next layer of protection comes from the primary mortgage insurance that is required for loans with a loan-to-value ratio greater than 80%, if still in place.
3.
Losses that exceed the liquidation value of the real property and any primary mortgage insurance, up to an agreed-upon amount called the first loss account for each master commitment, are incurred by the Bank.
4.
Losses in excess of the first loss account for each master commitment, up to an agreed-upon amount called the credit enhancement amount, are covered by the participating institution’s credit enhancement obligation at the time losses are incurred.
5.
Losses in excess of the first loss account and the participating institution’s remaining credit enhancement for the master commitment, if any, are incurred by the Bank.

The Bank calculates its estimated allowance for credit losses on mortgage loans acquired under its two MPF products, Original MPF and MPF Plus, as described below.

Allowance for Credit Losses on MPF Loans The Bank evaluates the allowance for credit losses on MPF mortgage loans based on two components. The first component applies to each individual loan that is specifically identified as impaired. The Bank evaluates the exposure on these loans by considering the first layer of loss protection (the liquidation value of the real property securing the loan) and the availability and collectability of credit enhancements under the terms of each master commitment and records a provision for credit losses. For this component, the Bank established an allowance for credit losses for Original MPF loans totaling de minimis amounts as of March 31, 2014, and December 31, 2013, and for MPF Plus loans totaling $2 as of March 31, 2014, and $2 as of December 31, 2013.

The second component applies to loans that are not specifically identified as impaired and is based on the Bank’s estimate of probable credit losses on those loans as of the financial statement date. The Bank evaluates the credit loss exposure on a loan pool basis considering various observable data, such as delinquency statistics, past performance, current performance, loan portfolio characteristics, collateral valuations, industry data, and prevailing

28

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



economic conditions. The Bank also considers the availability and collectability of credit enhancements from institutions or from mortgage insurers under the terms of each master commitment. For this component, the Bank established an allowance for credit losses for Original MPF loans totaling de minimis amounts as of March 31, 2014, and December 31, 2013, and for MPF Plus loans totaling de minimis amounts as of March 31, 2014, and December 31, 2013.

Troubled Debt Restructurings Troubled debt restructuring (TDR) is considered to have occurred when a concession is granted to the debtor for economic or legal reasons related to the debtor’s financial difficulties and that concession would not have been considered otherwise. An MPF loan considered a TDR is individually evaluated for impairment when determining its related allowance for credit losses. Credit loss is measured by factoring in expected cashflow shortfalls incurred as of the reporting date as well as the economic loss attributable to delaying the original contractual principal and interest due dates, if applicable.

The Bank’s TDRs of MPF loans primarily involve modifying the borrower’s monthly payment for a period of up to 36 months to reflect a housing expense ratio that is no more than 31% of the borrower’s qualifying monthly income. The outstanding principal balance is re-amortized to reflect a principal and interest payment for a term not to exceed 40 years from the original note date and a housing expense ratio not to exceed 31%. This would result in a balloon payment at the original maturity date of the loan because the maturity date and number of remaining monthly payments are not adjusted. If the 31% ratio is still not achieved through re-amortization, the interest rate is reduced in 0.125% increments below the original note rate, to a floor rate of 3.00%, resulting in reduced principal and interest payments, for the temporary payment modification period of up to 36 months, until the 31% housing expense ratio is met. 

The recorded investment of the Bank's nonperforming MPF loans classified as TDRs totaled $0.8 as of March 31, 2014, and $0.8 as of December 31, 2013. During the three months ended March 31, 2014 and 2013, the amount of the pre- and post-modification recorded investment in TDRs that occurred during the year was equal because there were no write-offs resulting from either principal forgiveness or direct write-offs. None of the MPF loans classified as TDRs within the previous 12 months experienced a payment default.

Term Securities Purchased Under Agreements to Resell. Securities purchased under agreements to resell are considered collateralized financing arrangements and effectively represent short-term loans with investment-grade counterparties, which are classified as assets in the Statements of Condition. Securities purchased under agreements to resell are held in safekeeping in the name of the Bank by third-party custodians approved by the Bank. In accordance with the terms of these loans, if the market value of the underlying securities decreases below the market value required as collateral, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash. If an agreement to resell is deemed to be impaired, the difference between the fair value of the collateral and the amortized cost of the agreement is charged to earnings. The Bank did not have any term securities purchased under agreements to resell at March 31, 2014, and at December 31, 2013.

Term Federal Funds Sold. The Bank invests in Federal funds sold with highly rated counterparties, and these investments are evaluated for purposes of an allowance for credit losses if the investment is not paid when due. All investments in Federal funds sold as of March 31, 2014, and December 31, 2013, were repaid or are expected to be repaid according to the contractual terms.

Note 10 — Deposits

The Bank maintains demand deposit accounts that are directly related to the extension of credit to members and offers short-term deposit programs to members and qualifying nonmembers. In addition, a member that services mortgage loans may deposit in the Bank funds collected in connection with the mortgage loans, pending disbursement of these funds to the owners of the mortgage loans. The Bank classifies these types of deposits as non-interest-bearing deposits.

Deposits as of March 31, 2014, and December 31, 2013, were as follows:

29

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)




 
March 31, 2014

 
December 31, 2013

Interest-bearing deposits:
 
 
 
Demand and overnight
$
272

 
$
190

Term
1

 
1

Other
1

 
1

Total interest-bearing deposits
274

 
192

Non-interest-bearing deposits
1

 
1

Total
$
275

 
$
193


Interest Rate Payment Terms. Deposits classified as demand, overnight, and other pay interest based on a daily interest rate. Term deposits pay interest based on a fixed rate determined at the issuance of the deposit. Interest rate payment terms for deposits at March 31, 2014, and December 31, 2013, are detailed in the following table:

 
March 31, 2014
 
December 31, 2013
 
Amount
Outstanding

 
Weighted
Average
Interest Rate

 
Amount
Outstanding

 
Weighted
Average
Interest Rate

Interest-bearing deposits:
 
 
 
 
 
 
 
Fixed rate
$
1

 
0.01
%
 
$
1

 
0.01
%
Adjustable rate
273

 
0.01

 
191

 
0.01

Total interest-bearing deposits
274

 
0.01

 
192

 
0.01

Non-interest-bearing deposits
1

 

 
1

 

Total
$
275

 
0.01
%
 
$
193

 
0.01
%

The aggregate amount of time deposits with a denomination of $0.1 or more was $1 at March 31, 2014, and $1 at December 31, 2013. These time deposits were scheduled to mature within three to six months.

Note 11 — 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 “Item 8. Financial Statements and Supplementary Data – Note 21 – Commitments and Contingencies” in the Bank’s 2013 Form 10-K. In connection with each issuance of consolidated obligations, 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 and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance.

Redemption Terms. The following is a summary of the Bank’s participation in consolidated obligation bonds at March 31, 2014, and December 31, 2013.


30

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



 
March 31, 2014
 
December 31, 2013
Contractual Maturity
Amount
Outstanding

 
Weighted
Average
Interest Rate

 
Amount
Outstanding

 
Weighted
Average
Interest Rate

Within 1 year
$
25,671

 
0.40
%
 
$
26,161

 
0.40
%
After 1 year through 2 years
5,982

 
1.14

 
7,101

 
0.80

After 2 years through 3 years
8,746

 
2.58

 
7,740

 
2.94

After 3 years through 4 years
2,331

 
2.36

 
1,963

 
2.50

After 4 years through 5 years
2,740

 
1.51

 
2,420

 
1.49

After 5 years
7,279

 
1.98

 
7,384

 
1.99

Total par value
52,749

 
1.21
%
 
52,769

 
1.17
%
Unamortized premiums
77

 
 
 
78

 
 
Unamortized discounts
(15
)
 
 
 
(16
)
 
 
Valuation adjustments for hedging activities
440

 
 
 
491

 
 
Fair value option valuation adjustments
(67
)
 
 
 
(115
)
 
 
Total
$
53,184

 
 
 
$
53,207

 
 

The Bank’s participation in consolidated obligation bonds outstanding includes callable bonds of $15,901 at March 31, 2014, and $13,042 at December 31, 2013. When a callable bond for which the Bank is the primary obligor is issued, the Bank may simultaneously enter 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 $12,121 at March 31, 2014, and $9,997 at December 31, 2013. The combined sold callable swaps and callable bonds enable the Bank to meet its funding needs at costs not otherwise directly attainable solely through the issuance of non-callable debt, while effectively converting the Bank’s net payment to an adjustable rate.

The Bank’s participation in consolidated obligation bonds was as follows:
 
  
March 31, 2014

  
December 31, 2013

Par value of consolidated obligation bonds:
 
  
 
Non-callable
$
36,848

  
$
39,727

Callable
15,901

  
13,042

Total par value
$
52,749

  
$
52,769


The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding at March 31, 2014, and December 31, 2013, by the earlier of the year of contractual maturity or next call date.
 
Earlier of Contractual
Maturity or Next Call Date
March 31, 2014
  
December 31, 2013

Within 1 year
$
36,932

  
$
36,093

After 1 year through 2 years
5,742

  
6,046

After 2 years through 3 years
7,012

  
7,550

After 3 years through 4 years
1,531

  
1,478

After 4 years through 5 years
720

  
830

After 5 years
812

  
772

Total par value
$
52,749

  
$
52,769


Consolidated obligation discount notes are consolidated obligations issued to raise short-term funds. These notes are issued at less than their face value 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:

31

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



 
 
March 31, 2014
 
December 31, 2013
 
Amount
Outstanding

 
Weighted
Average
Interest Rate

 
Amount
Outstanding

 
Weighted
Average
Interest Rate

Par value
$
24,867

 
0.10
%
 
$
24,199

 
0.10
%
Unamortized discounts
(4
)
 
 
 
(5
)
 
 
Total
$
24,863

 
 
 
$
24,194

 
 

Interest Rate Payment Terms. Interest rate payment terms for consolidated obligations at March 31, 2014, and December 31, 2013, are detailed in the following table. For information on the general terms and types of consolidated obligations outstanding, see “Item 8. Financial Statements and Supplementary Data – Note 12 – Consolidated Obligations” in the Bank’s 2013 Form 10-K.
 
  
March 31, 2014

  
December 31, 2013

Par value of consolidated obligations:
 
  
 
Bonds:
 
  
 
Fixed rate
$
41,334

  
$
38,489

Adjustable rate
7,943

  
11,218

Step-up
2,855

  
2,460

Step-down
365

  
340

Fixed rate that converts to adjustable rate
252

  
262

Total bonds, par value
52,749

  
52,769

Discount notes, par value
24,867

  
24,199

Total consolidated obligations, par value
$
77,616

  
$
76,968


The Bank did not have any bonds with embedded features that met the requirements to separate the embedded feature from the host contract and designate the embedded feature as a stand-alone derivative at March 31, 2014, or December 31, 2013. In general, the Bank has elected to account for bonds with embedded features under the fair value option, and these bonds are carried at fair value on the Statements of Condition. For more information, see Note 16 – Fair Value.

Note 12 — Accumulated Other Comprehensive Income/(Loss)

The following table summarizes the changes in AOCI for the three months ended March 31, 2014 and 2013:



32

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



 
Net Non-Credit-Related OTTI Loss on AFS Securities


Net Non-Credit-Related OTTI Loss on HTM Securities


Pension and Postretirement Benefits


Total
AOCI

Balance, December 31, 2012
$
(748
)
 
$
(34
)
 
$
(12
)
 
$
(794
)
Other comprehensive income/(loss) before reclassifications:
 
 
 
 
 
 
 
Non-credit-related OTTI loss

 
(3
)
 
 
 
(3
)
Non-credit-related OTTI loss transferred
(3
)
 
3

 
 
 

Net change in fair value
340

 
 
 
 
 
340

Accretion of non-credit-related OTTI loss
 
 
2

 
 
 
2

Reclassification from other comprehensive income/(loss) to net income/(loss):
 
 
 
 
 
 
 
Non-credit-related OTTI to credit-related OTTI
2

 

 
 
 
2

Net current period other comprehensive income/(loss)
339

 
2

 

 
341

Balance, March 31, 2013
$
(409
)
 
$
(32
)
 
$
(12
)
 
$
(453
)
 
 
 
 
 
 
 
 
Balance, December 31, 2013
$
(111
)
 
$
(27
)
 
$
(7
)

$
(145
)
Other comprehensive income/(loss) before reclassifications:
 
 
 
 
 
 
 
Net change in fair value
81

 
 
 
 
 
81

Accretion of non-credit-related OTTI loss
 
 
1

 
 
 
1

Reclassification from other comprehensive income/(loss) to net income/(loss):
 
 
 
 
 
 
 
Non-credit-related OTTI to credit-related OTTI
(1
)
 

 
 
 
(1
)
Net current period other comprehensive income/(loss)
80

 
1

 

 
81

Balance, March 31, 2014
$
(31
)
 
$
(26
)
 
$
(7
)
 
$
(64
)


33

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



Note 13 — 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 Bank’s minimum capital stock requirement for shareholders 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 that is greater than or equal to its risk-based capital requirement. Because the Bank issues only Class B stock, regulatory capital and permanent capital for the Bank are both composed of retained earnings and Class B stock, including mandatorily redeemable capital stock (which 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.

The risk-based capital requirement is 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 requirement as defined.

As of March 31, 2014, and December 31, 2013, the Bank was in compliance with these capital rules and requirements as shown in the following table.  
 
March 31, 2014
 
December 31, 2013
 
Required

 
Actual

 
Required

 
Actual

Risk-based capital
$
3,735

 
$
7,350

 
$
3,912

 
$
7,925

Total regulatory capital
$
3,447

 
$
7,350

 
$
3,431

 
$
7,925

Total regulatory capital ratio
4.00
%
 
8.53
%
 
4.00
%
 
9.24
%
Leverage capital
$
4,309

 
$
11,024

 
$
4,289

 
$
11,888

Leverage ratio
5.00
%
 
12.79
%
 
5.00
%
 
13.86
%

Mandatorily Redeemable Capital Stock. The Bank had mandatorily redeemable capital stock totaling $1,644 outstanding to 43 institutions at March 31, 2014, and $2,071 outstanding to 44 institutions at December 31, 2013. The change in mandatorily redeemable capital stock for the three months ended March 31, 2014 and 2013, was as follows:
 
Three Months Ended
 
March 31, 2014

 
March 31, 2013

Balance at the beginning of the period
$
2,071

 
$
4,343

Reclassified from/(to) capital during the period:
 
 
 
Merger with or acquisition by nonmember institution

 
1

Acquired by/transferred to members
1

 

Redemption of mandatorily redeemable capital stock
(9
)
 
(1
)
Repurchase of excess mandatorily redeemable capital stock
(419
)
 
(436
)
Balance at the end of the period
$
1,644

 
$
3,907

 
Cash dividends on mandatorily redeemable capital stock in the amount of $39 and $26 were recorded as interest expense for the three months ended March 31, 2014 and 2013, respectively.

The Bank’s mandatorily redeemable capital stock is discussed more fully in “Item 8. Financial Statements and Supplementary Data – Note 16 – Capital” in the Bank’s 2013 Form 10-K.


34

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



The following table presents mandatorily redeemable capital stock amounts by contractual redemption period at March 31, 2014, and December 31, 2013.

 
Contractual Redemption Period
March 31, 2014

  
December 31, 2013

Within 1 year
$
452

  
$
571

After 1 year through 2 years
84

  
111

After 2 years through 3 years
1,016

  
1,289

After 3 years through 4 years
16

  
20

After 4 years through 5 years
3

  
3

Past contractual redemption date because of remaining activity(1)
73

 
77

Total
$
1,644

  
$
2,071


(1)
Represents mandatorily redeemable capital stock that is past the end of the contractual redemption period because of outstanding activity.

Excess Stock Repurchase, Retained Earnings, and Dividend Framework. The Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework summarizes the Bank’s capital risk management principles, strategy, and objectives, as well as its policies, analysis, and practices with respect to retained earnings, dividend payments, and the repurchase of excess capital stock. The Bank may be restricted from paying dividends if the Bank is not in compliance with any of its minimum capital requirements or if payment would cause the Bank to fail to meet any of its minimum capital requirements. In addition, the Bank may not pay dividends if any principal or interest due on any consolidated obligations has not been paid in full or is not expected to be paid in full by any FHLBank, or, under certain circumstances, if the Bank fails to satisfy certain liquidity requirements under applicable Finance Agency regulations.

The Bank’s Risk Management Policy limits the payment of dividends if the ratio of the Bank’s estimated market value of total capital to par value of capital stock falls below certain levels. If this ratio at the end of any quarter is less than 100% but greater than or equal to 70%, any dividend would be limited to an annualized rate no greater than the daily average of the three-month LIBOR for the applicable quarter (subject to certain conditions), and if this ratio is less than 70%, the Bank would be restricted from paying a dividend. The ratio of the Bank’s estimated market value of total capital to par value of capital stock was 151% as of March 31, 2014.

Retained Earnings - The Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework establishes amounts to be retained in restricted retained earnings, which are not made available in the current dividend period.

The following table summarizes the activity related to restricted retained earnings for the three months ended March 31, 2014 and 2013:
 
Three Months Ended
 
March 31, 2014
 
March 31, 2013
 
Restricted Retained Earnings Related to:
 
Restricted Retained Earnings Related to:
 
Valuation Adjustments

Targeted Buildup

Joint Capital Enhancement Agreement

Total

 
Valuation Adjustments

Targeted Buildup

Joint Capital Enhancement Agreement

Total

Balance at the beginning of the period
$
88

$
1,800

$
189

$
2,077

 
$
73

$
1,800

$
128

$
2,001

Transfers to/(from) restricted retained earnings
(17
)

9

(8
)
 
(4
)

16

12

Balance at the end of the period
$
71

$
1,800

$
198

$
2,069

 
$
69

$
1,800

$
144

$
2,013


For more information on these three categories of restricted retained earnings and the Bank’s Retained Earnings and Dividend Policy, see “Item 8. Financial Statements and Supplementary Data – Note 16 – Capital” in the Bank’s 2013 Form 10-K.

35

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)




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 or not 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.

The Bank currently pays dividends in cash rather than capital stock to comply with Finance Agency rules, which do not permit the Bank to pay dividends in the form of capital stock if its excess capital stock exceeds 1% of its total assets. Excess capital stock is defined as the aggregate of the capital stock held by each shareholder in excess of its minimum capital stock requirement, as established by the Bank’s capital plan. As of March 31, 2014, the Bank’s excess capital stock totaled $1,850, or 2.15% of total assets.

Dividends on capital stock are recognized as cash dividends on the Statements of Capital Accounts, and dividends on mandatorily redeemable capital stock are recognized as interest expense on the Statements of Income.

In the first quarter of 2014, the Bank paid dividends at an annualized rate of 6.67%, totaling $97, including $58 in dividends on capital stock and $39 in dividends on mandatorily redeemable capital stock. In the first quarter of 2013, the Bank paid dividends at an annualized rate of 2.30%, totaling $51, including $25 in dividends on capital stock and $26 in dividends on mandatorily redeemable capital stock.

On April 28, 2014, the Bank’s Board of Directors declared a cash dividend on the capital stock outstanding during the first quarter of 2014 at an annualized rate of 6.80%, totaling $93, including $59 in dividends on capital stock and $34 in dividends on mandatorily redeemable capital stock. The Bank recorded the dividend on April 28, 2014, the day it was declared by the Board of Directors. The Bank expects to pay the dividend on or about May 15, 2014. Dividends on mandatorily redeemable capital stock will be recognized as interest expense in the second quarter of 2014.

The Bank will continue to monitor the condition of its PLRMBS portfolio, the ratio of the estimated market value of the Bank’s capital to the par value of the Bank’s capital stock, its overall financial performance and retained earnings, developments in the mortgage and credit markets, and other relevant information as the basis for determining the payment of dividends in future quarters.

Excess Capital Stock – The Bank may repurchase some or all of a shareholder’s excess capital stock, including any excess mandatorily redeemable capital stock, at the Bank’s discretion, subject to certain statutory and regulatory requirements. The Bank must give the shareholder 15 days’ written notice; however, the shareholder may waive this notice period. The Bank may also repurchase some or all of a shareholder’s excess capital stock at the shareholder’s request, at the Bank’s discretion, subject to certain statutory and regulatory requirements. A shareholder’s excess capital stock is defined as any capital stock holdings in excess of the shareholder’s minimum capital stock requirement, as established by the Bank’s capital plan.

On a quarterly basis, the Bank determines whether it will repurchase excess capital stock. The Bank repurchased $750 in excess capital stock in the first quarter of 2014 and 2013, respectively.

During the first quarter of 2014, the five-year redemption period for $9 in mandatorily redeemable capital stock expired, and the Bank redeemed the capital stock at its $100 par value on the relevant scheduled redemption date.

On April 28, 2014, the Bank announced that it plans to repurchase $750 in excess capital stock on May 16, 2014. The amount of excess capital stock to be repurchased from each shareholder will be based on the total amount of capital stock (including mandatorily redeemable capital stock) outstanding to all shareholders on the repurchase

36

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



date. The Bank will repurchase an equal percentage of each shareholder’s total capital stock to the extent that the shareholder has sufficient excess capital stock.
 
The Bank will continue to monitor the condition of its PLRMBS portfolio, the ratio of the estimated market value of the Bank’s capital to the par value of the Bank’s capital stock, its overall financial performance and retained earnings, developments in the mortgage and credit markets, and other relevant information as the basis for determining the repurchase of excess capital stock in future quarters.

Excess capital stock totaled $1,850 as of March 31, 2014, and $2,446 as of December 31, 2013.

For more information on excess capital stock, see “Item 8. Financial Statements and Supplementary Data – Note 16 – Capital” in the Bank’s 2013 Form 10-K.
Concentration. The following table presents the concentration in capital stock held by institutions whose capital stock ownership represented 10% or more of the Bank’s outstanding capital stock, including mandatorily redeemable capital stock, as of March 31, 2014, and December 31, 2013.
 
 
March 31, 2014
 
December 31, 2013
Name of Institution
Capital Stock
Outstanding

  
Percentage
of Total
Capital Stock
Outstanding

 
Capital Stock
Outstanding

  
Percentage
of Total
Capital Stock
Outstanding

Citigroup Inc.:
 
 
 
 
 
 
 
Citibank, N.A.(1)
$
1,010

 
20
%
 
$
1,279

 
23
%
Banamex USA
1

 

 
1

 

Subtotal Citigroup Inc.
1,011

 
20

 
1,280

 
23

JPMorgan Chase & Co.:
 
 
 
 
 
 
 
JPMorgan Bank & Trust Company, National Association
469

 
9

 
594

 
11

JPMorgan Chase Bank, National Association(1)
73

 
1

 
77

 
1

Subtotal JPMorgan Chase & Co.
542

 
10

 
671

 
12

Total capital stock ownership over 10%
1,553

 
30

 
1,951

 
35

Others
3,416

 
70

 
3,580

 
65

Total
$
4,969

 
100
%
 
$
5,531

 
100
%

(1)
The capital stock held by these nonmember institutions is classified as mandatorily redeemable capital stock.

Note 14 — Segment Information

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

For more information on these operating segments, see “Item 8. Financial Statements and Supplementary Data – Note 18 – Segment Information” in the Bank’s 2013 Form 10-K.

37

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)




The following table presents the Bank’s adjusted net interest income by operating segment and reconciles total adjusted net interest income to income before the AHP assessment for the three months ended March 31, 2014 and 2013.
 
 
Advances-
Related
Business

  
Mortgage-
Related
Business(1)

  
Adjusted
Net
Interest
Income

  
Amortization
of Basis
Adjustments(2)

 

Income/(Expense)
on Economic
Hedges(3)

 
Interest
Expense on
Mandatorily
Redeemable
Capital
Stock(4)

  
Net
Interest
Income

  
Other
Income/
(Loss)

 
Other
Expense

  
Income
Before AHP
Assessment

Three months ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2014
$
39

 
$
110

 
$
149

 
$
(2
)
 
$
(22
)
 
$
39

 
$
134

 
$
(48
)
 
$
32

 
$
54

March 31, 2013
43

 
113

 
156

 
(18
)
 
21

 
26

 
127

 
(4
)
 
30

 
93


(1)
Does not include credit-related OTTI losses of a de minimis amount and $3 for the three months ended March 31, 2014 and 2013, respectively.
(2)
Represents amortization of amounts deferred for adjusted net interest income purposes only, in accordance with the Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework.
(3)
The Bank includes income and expense associated with cash flow settlements from economic hedges in adjusted net interest income in its analysis of financial performance for its two operating segments. For financial reporting purposes, the Bank does not include these amounts in net interest income in the Statements of Income, but instead records them in other income in “Net gain/(loss) on derivatives and hedging activities.”
(4)
The Bank excludes interest expense on mandatorily redeemable capital stock from adjusted net interest income in its analysis of financial performance for its two operating segments.

The following table presents total assets by operating segment at March 31, 2014, and December 31, 2013.
 
  
Advances-
Related Business

  
Mortgage-
Related Business

  
Total
Assets

March 31, 2014
$
63,241

  
$
22,944

  
$
86,185

December 31, 2013
62,297

  
23,477

  
85,774


Note 15 — Derivatives and Hedging Activities

General. The Bank may enter into interest rate swaps (including callable, putable, and basis swaps); swaptions; and cap, floor, corridor, and collar agreements (collectively, interest rate exchange agreements or derivatives). Most of the Bank’s interest rate exchange agreements are executed in conjunction with the origination of advances and the issuance of consolidated obligation bonds to create variable rate structures. The interest rate exchange agreements are generally executed at the same time the advances and bonds are transacted and generally have the same maturity dates as the related advances and bonds. The Bank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. Over-the-counter derivatives may be either transacted with a counterparty (bilateral derivatives) or cleared after execution through a clearing agent with a derivative clearing organization (cleared derivatives). Once a derivative transaction has been accepted for clearing by a derivative clearing organization (clearinghouse), the derivative transaction is novated and the executing counterparty is replaced with the clearinghouse. The clearinghouse notifies the clearing agent of the required initial and variation margin, and the clearing agent notifies the Bank and transmits the required initial and variation margin from the Bank to the clearinghouse. The Bank is not a derivative dealer and does not trade derivatives for short-term profit.

Additional uses of interest rate exchange agreements include: (i) offsetting embedded features in assets and liabilities, (ii) hedging anticipated issuance of debt, (iii) matching against consolidated obligation discount notes or bonds to create the equivalent of callable or non-callable fixed rate debt, (iv) modifying the repricing frequency of assets and liabilities, (v) matching against certain advances and consolidated obligations for which the Bank elected the fair value option, and (vi) exactly offsetting other derivatives that may be executed with members (with the Bank serving as an intermediary) or cleared at a derivative clearing organization. The Bank’s use of interest rate exchange

38

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



agreements results in one of the following classifications: (i) a fair value hedge of an underlying financial instrument, (ii) an economic hedge of a specific asset or liability, or (iii) an intermediary transaction for members.

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

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

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

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

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

Intermediation As an additional service to its members, the Bank has in the past entered into offsetting interest rate exchange agreements, acting as an intermediary between offsetting derivative transactions with members and other counterparties. This intermediation allows members indirect access to the derivatives market. Derivatives in which the Bank is an intermediary may also arise when the Bank enters into derivatives to offset the economic effect of other derivatives that are no longer designated to advances, investments, or consolidated obligations. The offsetting derivatives used in intermediary activities do not receive hedge accounting treatment and are separately marked to market through earnings. The net result of the accounting for these derivatives does not significantly affect the operating results of the Bank.

The notional principal of the interest rate exchange agreements associated with derivatives with members and offsetting derivatives with other counterparties was $330 at March 31, 2014, and $330 at December 31, 2013. The Bank did not have any interest rate exchange agreements outstanding at March 31, 2014, or December 31, 2013, that

39

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



were used to offset the economic effect of other derivatives that were no longer designated to advances, investments, or consolidated obligations.

Investments The Bank may invest in U.S. Treasury and agency obligations, agency MBS, and the taxable portion of highly rated state or local housing finance agency obligations. In the past, the Bank has also invested in PLRMBS rated AAA at the time of acquisition. The interest rate and prepayment risk associated with these investment securities is managed through a combination of debt issuance and derivatives. The Bank may manage prepayment risk and interest rate risk by funding investment securities with consolidated obligations that have call features or by hedging the prepayment risk with a combination of consolidated obligations and callable swaps or swaptions. The Bank may execute callable swaps and purchase swaptions in conjunction with the issuance of certain liabilities to create funding that is economically equivalent to fixed rate callable debt. Although these derivatives are economic hedges against prepayment risk and are designated to individual liabilities, they do not receive either fair value or cash flow hedge accounting treatment. Investment securities may be classified as trading, AFS, or HTM.

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

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

In addition, for certain advances for which the Bank has elected the fair value option, the Bank will simultaneously execute an interest rate exchange agreement with terms that economically offset the terms of the advance. However, this type of hedge is treated as an economic hedge because these combinations generally do not meet the requirements for fair value hedge accounting treatment.

Mortgage Loans The Bank’s investment portfolio includes fixed rate mortgage loans. The prepayment options embedded in mortgage loans can result in extensions or contractions in the expected repayment of these investments, depending on changes in estimated prepayment speeds. The Bank manages the interest rate risk and prepayment risk associated with fixed rate mortgage loans through a combination of debt issuance and derivatives. The Bank uses both callable and non-callable debt to achieve cash flow patterns and market value sensitivities for liabilities similar to those expected on the mortgage loans. Net income could be reduced if the Bank replaces prepaid mortgages with lower-yielding assets and the Bank’s higher funding costs are not reduced accordingly.

The Bank executes callable swaps and purchases swaptions in conjunction with the issuance of certain consolidated obligations to create funding that is economically equivalent to fixed rate callable bonds. Although these derivatives are economic hedges against the prepayment risk of specific loan pools and are referenced to individual liabilities, they do not receive either fair value or cash flow hedge accounting treatment.

Consolidated Obligations – Consolidated obligation bonds are structured to meet the Bank’s and/or investors’ needs. Common structures include fixed rate bonds with or without call options and adjustable rate bonds with or without embedded options. In general, when bonds with these structures are issued, the Bank will simultaneously execute an interest rate exchange agreement with terms that offset the terms and embedded options, if any, of the consolidated obligation bond. This combination of the consolidated obligation bond and the interest rate exchange agreement effectively creates an adjustable rate bond. The cost of this funding combination is generally lower than the cost that

40

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



would be available through the issuance of an adjustable rate bond alone. The Bank will generally elect fair value hedge accounting treatment for these hedging relationships.

In addition, for certain consolidated obligation bonds for which the Bank has elected the fair value option, the Bank will simultaneously execute an interest rate exchange agreement with terms that economically offset the terms of the consolidated obligation bond. However, this type of hedge is treated as an economic hedge because these combinations generally do not meet the requirements for fair value hedge accounting treatment.

The Bank did not have any consolidated obligations denominated in currencies other than U.S. dollars outstanding during the three months ended March 31, 2014, or the year ended December 31, 2013.

Credit Risk – The Bank is subject to credit risk as a result of the risk of potential nonperformance by counterparties to the derivative agreements. All of the Bank’s agreements governing bilateral derivative transactions contain master netting provisions to help mitigate the credit risk exposure to each counterparty. The Bank manages counterparty credit risk through credit analyses and collateral requirements and by following the requirements of the Bank’s risk management policies and credit guidelines and Finance Agency regulations. The Bank also requires collateral agreements with collateral delivery thresholds on all bilateral derivatives. In addition, collateral related to derivative transactions with member institutions includes collateral pledged to the Bank, as evidenced by the Advances and Security Agreement, and held by the member institution for the benefit of the Bank.

For cleared derivatives, the clearinghouse is the Bank’s counterparty. The requirement that the Bank post initial and variation margin through the clearing agent, to the clearinghouse, exposes the Bank to institutional credit risk in the event that the clearing agent or the clearinghouse fails to meet its obligations. The use of cleared derivatives, however, mitigates the Bank’s overall credit risk exposure because a central counterparty is substituted for individual counterparties and variation margin is posted daily for changes in the value of cleared derivatives through a clearing agent. The Bank has analyzed the enforceability of offsetting rights applicable to its cleared derivative transactions and determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable bankruptcy law and CFTC rules in the event of a clearinghouse or clearing agent insolvency and under applicable clearinghouse rules upon a non-insolvency-based event of default of the clearinghouse or clearing agent. Based on this analysis, the Bank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular clearinghouse.

Based on the Bank’s credit analyses and the collateral requirements, the Bank does not expect to incur any credit losses on its derivative transactions.
 
The notional amount of an interest rate exchange agreement serves as a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged nor the overall exposure of the Bank to credit risk and market risk. The risks of derivatives can be measured meaningfully on a portfolio basis by taking into account the counterparties, the types of derivatives, the items being hedged, and any offsets between the derivatives and the items being hedged.

The Bank’s agreements for bilateral derivative transactions contain provisions that link the Bank’s credit rating from Moody’s and Standard & Poor’s to various rights and obligations. Certain of these derivative agreements provide that, if the Bank’s long-term debt rating falls below A3/A- (and in one agreement, below A2/A), the Bank’s counterparty would have the right, but not the obligation, to terminate all of its outstanding derivative transactions with the Bank; the Bank’s agreements with its clearing agents for cleared derivative transactions have similar provisions with respect to the debt rating of FHLBank System consolidated bonds. If this occurs, the Bank may choose to enter into replacement hedges, either by transferring the existing transactions to another counterparty or entering into new replacement transactions, based on prevailing market rates. In addition, the amount of collateral that the Bank is required to deliver to a counterparty under its agreements for bilateral derivative transactions depends on the Bank’s credit rating. The aggregate fair value of all bilateral derivative instruments with credit-risk-related contingent features that were in a net derivative liability position (before cash collateral and related accrued

41

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



interest) at March 31, 2014, was $70, for which the Bank had posted cash collateral of $34 in the normal course of business. If the Bank’s credit rating at March 31, 2014, had been Aa/AA (the next lower rating that might require an increase in collateral to be delivered by the Bank) instead of Aaa/AA+ (the Bank’s current rating), then the Bank would have been required to deliver up to $21 of collateral (at fair value) to its derivative counterparties at March 31, 2014.

The following table summarizes the fair value of derivative instruments without the effect of netting arrangements or collateral as of March 31, 2014, and December 31, 2013. For purposes of this disclosure, the derivative values include the fair value of derivatives and related accrued interest.

 
March 31, 2014
 
December 31, 2013
 
Notional
Amount of
Derivatives

 
Derivative
Assets

 
Derivative
Liabilities

 
Notional
Amount of
Derivatives

  
Derivative
Assets

 
Derivative
Liabilities

Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
  
 
 
 
Interest rate swaps
$
37,042

 
$
568

 
$
139

 
$
31,395

 
$
572

 
$
156

Total
37,042

 
568

 
139

 
31,395

 
572

 
156

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
39,494

 
121

 
195

 
49,715

 
146

 
242

Interest rate caps, floors, corridors, and/or collars
2,586

 
24

 
4

 
460

 
2

 
4

Total
42,080

 
145

 
199

 
50,175

 
148

 
246

Total derivatives before netting and collateral adjustments
$
79,122

 
713

 
338

 
$
81,570

 
720

 
402

Netting adjustments by counterparty
 
 
(267
)
 
(267
)
 
 
 
(313
)
 
(313
)
Cash collateral and related accrued interest
 
 
(309
)
 
(33
)
 
 
 
(291
)
 
(42
)
Total collateral and netting adjustments(1)
 
 
(576
)
 
(300
)
 
 
 
(604
)
 
(355
)
Total derivative assets and total derivative liabilities
 
 
$
137

 
$
38

 
 
 
$
116

 
$
47


(1)
Amounts include the netting of derivative assets and liabilities by counterparty, including cash collateral and related accrued interest, where the netting requirements have been met.

The following table presents the components of net gain/(loss) on derivatives and hedging activities as presented in the Statements of Income for the three months ended March 31, 2014 and 2013.
 
 
Three Months Ended
 
March 31, 2014

 
March 31, 2013

 
Gain/(Loss)

 
Gain/(Loss)

Derivatives and hedged items in fair value hedging relationships – hedge ineffectiveness by derivative type:
 
 
 
Interest rate swaps
$
(2
)
 
$
(2
)
Total net gain/(loss) related to fair value hedge ineffectiveness
(2
)
 
(2
)
Derivatives not designated as hedging instruments:
 
 
 
Economic hedges:
 
 
 
Interest rate swaps
15

 
(13
)
Interest rate caps, floors, corridors and/or collars
(1
)
 

Net cash flow settlements
(22
)
 
21

Total net gain/(loss) related to derivatives not designated as hedging instruments
(8
)
 
8

Net gain/(loss) on derivatives and hedging activities
$
(10
)
 
$
6


42

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)




The following table presents, by type of hedged item, the gains and losses on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income for the three months ended March 31, 2014 and 2013.
 
Three Months Ended
 
March 31, 2014
 
March 31, 2013
Hedged Item Type
Gain/(Loss)
on Derivatives

 
Gain/(Loss)
on Hedged Item

 
Net Fair
Value Hedge
Ineffectiveness

 
Effect of
Derivatives on
Net Interest Income(1)

 
Gain/(Loss)
on Derivatives

 
Gain/(Loss)
on Hedged Item

 
Net Fair
Value Hedge
Ineffectiveness

 
Effect of
Derivatives on
Net Interest Income
(1)

Advances
$
10

 
$
(10
)
 
$

 
$
(32
)
 
$
37

 
$
(37
)
 
$

 
$
(30
)
Consolidated obligation bonds
(51
)
 
49

 
(2
)
 
65

 
(114
)
 
112

 
(2
)
 
113

Total
$
(41
)
 
$
39

 
$
(2
)
 
$
33

 
$
(77
)
 
$
75

 
$
(2
)
 
$
83


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

The Bank may present derivative instruments, related cash collateral received or pledged, and associated accrued interest by clearing agent or by counterparty when the netting requirements have been met.

The following table presents separately the fair value of derivative assets and derivative liabilities that have met the netting requirements, including the related collateral received from or pledged to counterparties as of March 31, 2014, and December 31, 2013.

 
March 31, 2014
 
December 31, 2013
 
Derivative
Assets

 
Derivative
Liabilities

 
Derivative
Assets

 
Derivative
Liabilities

Derivative instruments meeting netting requirements
 
 
 
 
 
 
 
Gross recognized amount
 
 
 
 
 
 
 
Bilateral derivatives
$
697

 
$
331

 
$
699

 
$
395

Cleared derivatives
16

 
7

 
21

 
7

Total gross recognized amount
713

 
338

 
720

 
402

Gross amounts of netting adjustments and cash collateral
 
 
 
 
 
 
 
Bilateral derivatives
(598
)
 
(293
)
 
(604
)
 
(348
)
Cleared derivatives
22

 
(7
)
 

 
(7
)
Total gross amount of netting adjustments and cash collateral
(576
)
 
(300
)
 
(604
)
 
(355
)
Total derivative assets and total derivative liabilities
 
 
 
 
 
 
 
Bilateral derivatives
99

 
38

 
95

 
47

Cleared derivatives
38

 

 
21

 

Total derivative assets and derivative liabilities presented in the Statements of Condition
137

 
38

 
116

 
47

Non-cash collateral received or pledged not offset
 
 
 
 
 
 
 
Can be sold or repledged - Bilateral derivatives
93

 

 
89

 

Net unsecured amount
 
 
 
 
 
 
 
Bilateral derivatives
6

 
38

 
6

 
47

Cleared derivatives
38

 

 
21

 

Total net unsecured amount
$
44

 
$
38

 
$
27

 
$
47





43

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



Note 16 — Fair Value

The following fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank at March 31, 2014, and December 31, 2013. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases fair values cannot be precisely quantified or verified and may change as economic and market factors and evaluation of those factors change. The Bank continues to refine its valuation methodologies as markets and products develop and the pricing for certain products becomes more or less transparent. While the Bank believes that its valuation methodologies are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a materially different estimate of fair value as of the reporting date. Therefore, the fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect the Bank’s judgment as to how a market participant would estimate the fair values. The fair value summary table does not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of total assets and liabilities on a combined basis.

The following tables present the carrying value, the estimated fair value, and the fair value hierarchy level of the Bank’s financial instruments at March 31, 2014, and December 31, 2013.

 
March 31, 2014
  
Carrying
Value

  
Estimated Fair Value

 
Level 1

 
Level 2

 
Level 3

 
Netting Adjustments(1)

Assets
 
  
 
  
 
  
 
 
 
 
 
Cash and due from banks
$
4,541

  
$
4,541

  
$
4,541

  
$

 
$

 
$

Securities purchased under agreements to resell
500

 
500

 

 
500

 

 

Federal funds sold
6,401

  
6,401

  

  
6,401

 

 

Trading securities
3,127

  
3,127

  

  
3,127

 

 

AFS securities
6,916

  
6,916

  

  

 
6,916

 

HTM securities
17,974

  
17,925

  

  
15,483

 
2,442

 

Advances
45,552

  
45,640

  

  
45,640

 

 

Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans
852

  
905

  

  
905

 

 

Accrued interest receivable
74

  
74

  

  
74

 

 

Derivative assets, net(1)
137

  
137

  

  
713

 

 
(576
)
Other assets(2)
11

 
11

 
11

 

 

 

Liabilities
 
  
 
  
 
  
 
 
 
 
 
Deposits
275

  
275

  

  
275

 

 

Consolidated obligations:
 
  
 
  
 
  
 
 
 
 
 
Bonds
53,184

  
53,049

  

  
53,049

 

 

Discount notes
24,863

  
24,865

  

  
24,865

 

 

Total consolidated obligations
78,047

 
77,914

 

 
77,914

 

 

Mandatorily redeemable capital stock
1,644

  
1,644

  
1,644

  

 

 

Accrued interest payable
148

  
148

  

  
148

 

 

Derivative liabilities, net(1)
38

  
38

  

  
338

 

 
(300
)
Other
 
  
 
  
 
  
 
 
 
 
 
Standby letters of credit
12

  
12

  

  
12

 

 

Commitments to issue consolidated obligation bonds(3)

 
2

 

 
2

 

 


44

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)




 
December 31, 2013
 
Carrying
Value

  
Estimated Fair Value

 
Level 1

 
Level 2

 
Level 3

 
Netting Adjustments(1)

Assets
 
  
 
  
 
  
 
 
 
 
 
Cash and due from banks
$
4,906

  
$
4,906

  
$
4,906

  
$

 
$

 
$

Federal funds sold
7,498

  
7,498

  

  
7,498

 

 

Trading securities
3,208

  
3,208

  

  
3,208

 

 

AFS securities
7,047

  
7,047

  

  

 
7,047

 

HTM securities
17,507

  
17,352

  

  
14,802

 
2,550

 

Advances
44,395

  
44,457

  

  
44,457

 

 

Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans
905

  
956

  

  
956

 

 

Accrued interest receivable
81

  
81

  

  
81

 

 

Derivative assets, net(1)
116

  
116

  

  
720

 

 
(604
)
Other assets(2)
10

 
10

 
10

 

 

 

Liabilities
 
  
 
  
 
  
 
 
 
 
 
Deposits
193

  
193

  

  
193

 

 

Consolidated obligations:
 
  
 
  
 
  
 
 
 
 
 
Bonds
53,207

  
52,940

  

  
52,940

 

 

Discount notes
24,194

  
24,195

  

  
24,195

 

 

Total consolidated obligations
77,401

 
77,135

 

 
77,135

 

 

Mandatorily redeemable capital stock
2,071

  
2,071

  
2,071

  

 

 

Accrued interest payable
95

  
95

  

  
95

 

 

Derivative liabilities, net(1)
47

  
47

  

  
402

 

 
(355
)
Other
 
  
 
  
 
  
 
 
 
 
 
Standby letters of credit
12

  
12

  

  
12

 

 

Commitments to fund advances(3)

 
(1
)
 

 
(1
)
 

 


(1)
Amounts include the netting of derivative assets and liabilities by counterparty, including cash collateral and related accrued interest, where the netting requirements have been met.
(2)
Represents publicly traded mutual funds held in a grantor trust.
(3)
Estimated fair values of these commitments are presented as a net gain or (loss). For more information regarding these commitments, see Note 17 – Commitments and Contingencies.


Fair Value Hierarchy. The fair value hierarchy is used to prioritize the fair value methodologies and valuation techniques as well as the inputs to the valuation techniques used to measure fair value for assets and liabilities carried at fair value on the Statements of Condition. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of market observability of the fair value measurement for the asset or liability. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). An entity must disclose the level within the fair value hierarchy in which the measurements are classified for all financial assets and liabilities measured on a recurring or non-recurring basis.

The application of the fair value hierarchy to the Bank’s financial assets and financial liabilities that are carried at fair value either on a recurring or non-recurring basis is as follows:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date.
Level 2 – Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar

45

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



assets or liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – Unobservable inputs for the asset or liability.

A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The following assets and liabilities, including those for which the Bank has elected the fair value option, are carried at fair value on the Statements of Condition as of March 31, 2014:
Trading securities
AFS securities
Certain advances
Derivative assets and liabilities
Certain consolidated obligation bonds
Certain other assets

For instruments carried at fair value, the Bank reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. Such reclassifications are reported as transfers in or out as of the beginning of the quarter in which the changes occur. For the periods presented, the Bank did not have any reclassifications for transfers in or out of the fair value hierarchy levels.

Summary of Valuation Methodologies and Primary Inputs.

Cash and Due from Banks The estimated fair value equals the carrying value.

Federal Funds Sold and Securities Purchased Under Agreements to Resell – The estimated fair value of overnight Federal funds sold and securities purchased under agreements to resell approximates the carrying value. The estimated fair value of term Federal funds sold and term securities purchased under agreements to resell has been determined by calculating the present value of expected cash flows for the instruments and reducing the amount for accrued interest receivable. The discount rates used in these calculations are the replacement rates for comparable instruments with similar terms.
 
Investment Securities Certificates of Deposit The estimated fair values of these investments are determined by calculating the present value of expected cash flows and reducing the amount for accrued interest receivable, using market-observable inputs as of the last business day of the period or using industry standard analytical models and certain actual and estimated market information. The discount rates used in these calculations are the replacement rates for comparable instruments with similar terms.

Investment Securities MBS – To value its MBS, the Bank obtains prices from four designated third-party pricing vendors when available. The pricing vendors use various proprietary models to price these securities. The inputs to those models are derived from various sources including, but not limited to: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many securities do not trade on a daily basis, the pricing vendors use available information as applicable, such as benchmark yield curves, benchmarking of like securities, sector groupings, and matrix pricing, to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all security valuations, which facilitates resolution of price discrepancies identified by the Bank.

In January 2014, the Bank conducted reviews of the four pricing vendors to update and confirm its understanding of the vendors’ pricing processes, methodologies, and control procedures.

46

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)




The Bank’s valuation technique for estimating the fair values of its MBS first requires the establishment of a median vendor price for each security. If four vendor prices are received, the average of the middle two prices is the median price; if three prices are received, the middle price is the median price; if two prices are received, the average of the two prices is the median price; and if one price is received, it is the median price (and also the default fair value) subject to additional validation. All vendor prices that are within a specified tolerance threshold of the median price are included in the cluster of vendor prices that are averaged to establish a default fair value. All vendor prices that are outside the threshold (outliers) are subject to further analysis including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities and/or dealer estimates, or use of internal model prices, which are deemed to be reflective of all relevant facts and circumstances that a market participant would consider. Such analysis is also applied in those limited instances where no third-party vendor price or only one third-party vendor price is available in order to arrive at an estimated fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price, as appropriate) is used as the fair value rather than the default fair value. If, instead, the analysis confirms that an outlier is (or outliers are) not representative of fair value and the default fair value is the best estimate, then the default fair value is used as the fair value.

If all vendor prices received for a security are outside the tolerance threshold level of the median price, then there is no default fair value, and the fair value is determined by an evaluation of all outlier prices (or the other prices, as appropriate) as described above.

As of March 31, 2014, four vendor prices were received for most of the Bank’s MBS, and the fair value estimates for most of those securities were determined by averaging the four vendor prices. Based on the Bank’s reviews of the pricing methods employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers or significant yield variances, the Bank’s additional analyses), the Bank believes that its fair value estimates are reasonable and that the fair value measurements are classified appropriately in the fair value hierarchy. Based on limited market liquidity for PLRMBS, the fair value measurements for these securities were classified as Level 3 within the fair value hierarchy.

As an additional step, the Bank reviewed the fair value estimates of its PLRMBS as of March 31, 2014, for reasonableness using a market-implied yield test. The Bank calculated a market-implied yield for each of its PLRMBS using the estimated fair value derived from the process described above and the security’s projected cash flows from the Bank’s OTTI process and compared the market-implied yield to the yields for comparable securities according to dealers and other third-party sources to the extent comparable market yield data was available. This analysis did not indicate that any adjustments to the fair value estimates were necessary.

Investment Securities FFCB Bonds and CalHFA Bonds The Bank estimates the fair values of these securities using the methodology described above for Investment Securities – MBS.

Advances Because quoted prices are not available for advances, the fair values are measured using model-based valuation techniques (such as calculating the present value of future cash flows and reducing the amount for accrued interest receivable).

The Bank’s primary inputs for measuring the fair value of advances are market-based consolidated obligation yield curve (CO Curve) inputs obtained from the Office of Finance. The CO Curve is then adjusted to reflect the rates on replacement advances with similar terms and collateral. These spread adjustments are not market-observable and are evaluated for significance in the overall fair value measurement and the fair value hierarchy level of the advance. The Bank obtains market-observable inputs from derivative dealers for complex advances. These inputs may include volatility assumptions, which are market-based expectations of future interest rate volatility implied from current market prices for similar options (swaption volatility and volatility skew). The discount rates used in these calculations are the replacement advance rates for advances with similar terms. Pursuant to the Finance

47

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



Agency’s advances regulation, advances with an original term to maturity or repricing period greater than six months generally require a prepayment fee sufficient to make the Bank financially indifferent to the borrower’s decision to prepay the advances. The Bank determined that no adjustment is required to the fair value measurement of advances for prepayment fees. In addition, the Bank did not adjust its fair value measurement of advances for creditworthiness primarily because advances were fully collateralized.

Mortgage Loans Held for Portfolio – The estimated fair value for mortgage loans represents modeled prices based on observable market prices for seasoned Agency mortgage-backed passthrough securities adjusted for differences in coupon, average loan rate, credit, and cash flow remittance between the Bank’s mortgage loans and the referenced instruments. Market prices are highly dependent on the underlying prepayment assumptions. Changes in the prepayment speeds often have a material effect on the fair value estimates. These underlying prepayment assumptions are susceptible to material changes in the near term because they are made at a specific point in time.

Accrued Interest Receivable and Payable – The estimated fair value approximates the carrying value of accrued interest receivable and accrued interest payable.

Derivative Assets and Liabilities In general, derivative instruments transacted and held by the Bank for risk management activities are traded in over-the-counter markets where quoted market prices are not readily available. These derivatives are interest rate-related. For these derivatives, the Bank measures fair value using internally developed discounted cash flow models that use market-observable inputs, such as the overnight index swap (OIS) curve; volatility assumptions, which are market-based expectations of future interest rate volatility implied from current market prices for similar options (swaption volatility and volatility skew) adjusted for counterparty credit risk, as necessary; and prepayment assumptions. Effective December 31, 2012, the Bank refined its method for estimating the fair values of its derivatives by using the OIS curve to discount the cash flows of its derivatives to determine fair value, instead of using the LIBOR swap curve, which was used in prior periods.

The Bank is subject to credit risk because of the risk of potential nonperformance by its derivative counterparties. To mitigate this risk, the Bank executes bilateral derivative transactions only with highly rated derivative dealers and major banks (derivative dealer counterparties) that meet the Bank’s eligibility criteria. In addition, the Bank has entered into master netting agreements and bilateral security agreements with all active derivative dealer counterparties that provide for delivery of collateral at specified levels to limit the Bank’s net unsecured credit exposure to these counterparties. Under these policies and agreements, the amount of unsecured credit exposure to an individual derivative dealer counterparty is limited to an absolute dollar credit exposure limit according to the counterparty’s credit rating, as determined by rating agency long-term credit ratings of the counterparty’s debt securities or deposits. The Bank clears its cleared derivative transactions only through clearing agents that meet the Bank’s strict eligibility requirements, and the Bank’s credit exposure to the clearinghouse is secured by variation margin received from the clearinghouse. All credit exposure from derivative transactions entered into by the Bank with member counterparties that are not derivative dealers must be fully secured by eligible collateral. The Bank evaluated the potential for the fair value of the instruments to be affected by counterparty credit risk and determined that no adjustments to the overall fair value measurements were required.

The fair values of the derivative assets and liabilities include accrued interest receivable/payable and cash collateral remitted to/received from counterparties. The estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values because of their short-term nature. The fair values of derivatives that met the netting requirements are presented on a net basis. If these netted amounts are positive, they are classified as an asset and, if negative, they are classified as a liability.

Deposits The fair value of deposits is generally equal to the carrying value of the deposits because the deposits are primarily overnight deposits or due on demand. The Bank determines the fair values of term deposits by calculating the present value of expected future cash flows from the deposits and reducing the amount for accrued interest payable. The discount rates used in these calculations are the cost of deposits with similar terms.


48

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



Consolidated Obligations Because quoted prices in active markets are not generally available for identical liabilities, the Bank measures fair values using internally developed models that use primarily market-observable inputs. The Bank’s primary inputs for measuring the fair value of consolidated obligation bonds are market-based CO Curve inputs obtained from the Office of Finance. The Office of Finance constructs the CO Curve using the Treasury yield curve as a base curve, which may be adjusted by indicative spreads obtained from market-observable sources. These market indications are generally derived from pricing indications from dealers, historical pricing relationships, and market activity for similar liabilities, such as recent GSE trades or secondary market activity. For consolidated obligation bonds with embedded options, the Bank also obtains market-observable quotes and inputs from derivative dealers. These inputs may include volatility assumptions, which are market-based expectations of future interest rate volatility implied from current market prices for similar options (swaption volatility and volatility skew).

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

Mandatorily Redeemable Capital Stock The estimated fair value of capital stock subject to mandatory redemption is generally at par value as indicated by contemporaneous purchases, redemptions, and repurchases at par value. Fair value includes estimated dividends earned at the time of reclassification from capital to liabilities, until such amount is paid, and any subsequently declared capital stock dividend. The Bank’s capital stock can only be acquired by members at par value and redeemed or repurchased at par value, subject to statutory and regulatory requirements. The Bank’s capital stock is not traded, and no market mechanism exists for the exchange of Bank capital stock outside the cooperative ownership structure.

Commitments – The estimated fair value of standby letters of credit is based on the present value of fees currently charged for similar agreements and is recorded in other liabilities. The estimated fair value of off-balance sheet fixed rate commitments to fund advances and commitments to issue consolidated obligations takes into account the difference between current and committed interest rates.

Subjectivity of Estimates Related to Fair Values of Financial Instruments. Estimates of the fair value of financial assets and liabilities using the methodologies described above are subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest rate volatility, methods to determine possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair value estimates.

Fair Value Measurements. The tables below present the fair value of assets and liabilities, which are recorded on a recurring or nonrecurring basis at March 31, 2014, and December 31, 2013, by level within the fair value hierarchy.



49

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



March 31, 2014
 
 
 
 
 
 
 
 
 
 
Fair Value Measurement Using:
 
Netting

 
 
 
Level 1

 
Level 2

 
Level 3

 
Adjustments(1)

 
Total

Recurring fair value measurements – Assets:
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
GSEs – FFCB bonds
$

 
$
3,114

 
$

 
$

 
$
3,114

MBS:
 
 
 
 
 
 
 
 
 
Other U.S. obligations – Ginnie Mae

 
13

 

 

 
13

Total trading securities

 
3,127

 

 

 
3,127

AFS securities:
 
 
 
 
 
 
 
 
 
PLRMBS

 

 
6,916

 

 
6,916

Total AFS securities

 

 
6,916

 

 
6,916

Advances(2)

 
6,936

 

 

 
6,936

Derivative assets, net: interest rate-related

 
713

 

 
(576
)
 
137

Other assets
11

 

 

 

 
11

Total recurring fair value measurements – Assets
$
11

 
$
10,776

 
$
6,916

 
$
(576
)
 
$
17,127

Recurring fair value measurements – Liabilities:
 
 
 
 
 
 
 
 
 
Consolidated obligation bonds(3)
$

 
$
7,298

 
$

 
$

 
$
7,298

Derivative liabilities, net: interest rate-related

 
338

 

 
(300
)
 
38

Total recurring fair value measurements – Liabilities
$

 
$
7,636

 
$

 
$
(300
)
 
$
7,336

Nonrecurring fair value measurements – Assets:
 
 
 
 
 
 
 
 
 
REO
$

 
$

 
$
2

 
 
 
$
2


December 31, 2013
 
 
 
 
 
 
 
 
 
 
Fair Value Measurement Using:
 
Netting

 
 
 
Level 1

 
Level 2

 
Level 3

 
Adjustments(1)

 
Total

Recurring fair value measurements – Assets:
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
GSEs – FFCB bonds
$

 
$
3,194

 
$

 
$

 
$
3,194

MBS:
 
 
 
 
 
 
 
 
 
Other U.S. obligations – Ginnie Mae

 
14

 

 

 
14

Total trading securities

 
3,208

 

 

 
3,208

AFS securities:
 
 
 
 
 
 
 
 
 
PLRMBS

 

 
7,047

 

 
7,047

Total AFS securities

 

 
7,047

 

 
7,047

Advances(2)

 
7,069

 

 

 
7,069

Derivative assets, net: interest rate-related

 
720

 

 
(604
)
 
116

Other assets
10

 

 

 

 
10

Total recurring fair value measurements – Assets
$
10

 
$
10,997

 
$
7,047

 
$
(604
)
 
$
17,450

Recurring fair value measurements – Liabilities:
 
 
 
 
 
 
 
 
 
Consolidated obligation bonds(3)
$

 
$
10,115

 
$

 
$

 
$
10,115

Derivative liabilities, net: interest rate-related

 
402

 

 
(355
)
 
47

Total recurring fair value measurements – Liabilities
$

 
$
10,517

 
$

 
$
(355
)
 
$
10,162

Nonrecurring fair value measurements – Assets:
 
 
 
 
 
 
 
 
 
REO
$

 
$

 
$
2

 
 
 
$
2


(1)
Amounts represent the netting of derivative assets and liabilities by counterparty, including cash collateral, where the netting requirements have been met.
(2)
Includes $6,936 and $7,069 of advances recorded under the fair value option at March 31, 2014, and December 31, 2013, respectively. There were no advances recorded at fair value at March 31, 2014, or December 31, 2013, where the exposure to overall changes in fair value was hedged in accordance with the accounting for derivative instruments and hedging activities.

50

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



(3)
Includes $7,298 and $10,115 of consolidated obligation bonds recorded under the fair value option at March 31, 2014, and December 31, 2013, respectively. There were no consolidated obligation bonds recorded at fair value at March 31, 2014, or December 31, 2013, where the exposure to overall changes in fair value was hedged in accordance with the accounting for derivative instruments and hedging activities.

The following table presents a reconciliation of the Bank’s AFS PLRMBS that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2014 and 2013.
 
Three Months Ended
 
March 31, 2014

 
March 31, 2013

Balance, beginning of the period
$
7,047

 
$
7,604

Total gain/(loss) realized and unrealized included in:
 
 
 
Interest income
15

 

Net OTTI loss, credit-related

 
(3
)
Unrealized gain/(loss) of other-than-temporarily impaired securities included in AOCI
81

 
340

Reclassification of non-credit-related OTTI included in net income/(loss)
(1
)
 
2

Settlements
(226
)
 
(309
)
Transfers of HTM securities to AFS securities

 
19

Balance, end of the period
$
6,916

 
$
7,653

Total amount of gain/(loss) for the period included in earnings attributable to the change in unrealized gains/losses relating to assets and liabilities still held at the end of the period
$
15

 
$
(3
)

Fair Value Option. The fair value option provides an entity with an irrevocable option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value. It requires an entity to display the fair value of those assets and liabilities for which the entity has chosen to use fair value on the face of the Statements of Condition. Fair value is used for both the initial and subsequent measurement of the designated assets, liabilities, and commitments, with the changes in fair value recognized in net income. Interest income and interest expense on advances and consolidated bonds carried at fair value are recognized solely on the contractual amount of interest due or unpaid. Any transaction fees or costs are immediately recognized in non-interest income or non-interest expense.

For more information on the Bank’s election of the fair value option, see “Item 8. Financial Statements and Supplementary Data – Note 20 – Fair Values” in the Bank’s 2013 Form 10-K.

The Bank has elected the fair value option for certain financial instruments to assist in mitigating potential earnings volatility that can arise from economic hedging relationships in which the carrying value of the hedged item is not adjusted for changes in fair value. The potential earnings volatility associated with using fair value only for the derivative is the Bank’s primary reason for electing the fair value option for financial assets and liabilities that do not qualify for hedge accounting or that have not previously met or may be at risk for not meeting the hedge effectiveness requirements.

The following table summarizes the activity related to financial assets and liabilities for which the Bank elected the fair value option during the three months ended March 31, 2014 and 2013:


51

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



 
Three Months Ended
 
March 31, 2014
 
March 31, 2013
 
Advances

 
Consolidated
Obligation Bonds

 
Advances


Consolidated
Obligation Bonds

Balance, beginning of the period
$
7,069

 
$
10,115

 
$
7,390

 
$
27,884

New transactions elected for fair value option
138

 
700

 
157

 
885

Maturities and terminations
(279
)
 
(3,565
)
 
(133
)
 
(2,810
)
Net gain/(loss) on advances and net (gain)/loss on consolidated obligation bonds held under fair value option
8

 
47

 
(26
)
 
(15
)
Change in accrued interest

 
1

 
(1
)
 

Balance, end of the period
$
6,936

 
$
7,298

 
$
7,387

 
$
25,944


For instruments for which the fair value option has been elected, the related contractual interest income and contractual interest expense are recorded as part of net interest income on the Statements of Income. The remaining changes in fair value for instruments for which the fair value option has been elected are recorded as net gains/ (losses) on financial instruments held under the fair value option in the Statements of Income. The change in fair value does not include changes in instrument-specific credit risk. For advances and consolidated obligations recorded under the fair value option, the Bank determined that no adjustments to the fair values of these instruments for instrument-specific credit risk were necessary for the three months ended March 31, 2014 and 2013.

The following table presents the difference between the aggregate remaining contractual principal balance outstanding and aggregate fair value of advances and consolidated obligation bonds for which the Bank elected the fair value option at March 31, 2014, and December 31, 2013:

 
At March 31, 2014
 
At December 31, 2013
 
Principal Balance

 
Fair Value

 
Fair Value
Over/(Under)
Principal Balance

 
Principal Balance

 
Fair Value

 
Fair Value
Over/(Under)
Principal Balance

Advances(1)
$
6,816

 
$
6,936

 
$
120

 
$
6,956

 
$
7,069

 
$
113

Consolidated obligation bonds
7,365

 
7,298

 
(67
)
 
10,230

 
10,115

 
(115
)

(1)
At March 31, 2014, and December 31, 2013, none of these advances were 90 days or more past due or had been placed on nonaccrual status.

Note 17 — Commitments and Contingencies

As provided by the FHLBank Act or regulations governing the operations of the FHLBanks, all FHLBanks have joint and several liability for all FHLBank consolidated obligations, which are backed only by the financial resources of the FHLBanks. The joint and several liability regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The regulations provide a general framework for addressing the possibility that an FHLBank may be unable to repay the consolidated obligations for which it is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank, and as of March 31, 2014, and through the filing date of this report, does not believe that it is probable that it will be asked to do so. The par value of the outstanding consolidated obligations of all 12 FHLBanks was $753,941 at March 31, 2014, and $766,837 at December 31, 2013. The par value of the Bank’s participation in consolidated obligations was $77,616 at March 31, 2014, and $76,968 at December 31, 2013. For more information on the joint and several liability regulation, see “Item 8. Financial Statements and Supplementary Data – Note 21 – Commitments and Contingencies” in the Bank’s 2013 Form 10-K.

Off-balance sheet commitments as of March 31, 2014, and December 31, 2013, were as follows:

52

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)




 
March 31, 2014
 
December 31, 2013
 
Expire Within
One Year

 
Expire After
One Year

 
Total

 
Expire Within
One Year

 
Expire After
One Year

 
Total

Standby letters of credit outstanding
$
2,102

 
$
2,655

 
$
4,757

 
$
1,031

 
$
2,572

 
$
3,603

Commitments to fund advances(1)
54

 
3

 
57

 
4

 
4

 
8

Commitments to issue consolidated obligation bonds, par(2)
805

 

 
805

 
1,640

 

 
1,640


(1)
At March 31, 2014, and December 31, 2013, none of the commitments to fund additional advances were hedged with associated interest rate swaps.
(2)
At March 31, 2014, and December 31, 2013, $805 and $1,640, respectively, of the unsettled consolidated obligation bonds were hedged with associated interest rate swaps.

Standby letters of credit are generally issued for a fee on behalf of members to support their obligations to third parties. If the Bank is required to make a payment for a beneficiary’s drawing under a letter of credit, the amount is immediately due and payable by the member to the Bank and is charged to the member’s demand deposit account with the Bank. The original terms of these standby letters of credit range from 107 days to 10 years, including a final expiration in 2024. The Bank monitors the creditworthiness of members that have standby letters of credit. In addition, standby letters of credit are fully collateralized. As a result, the Bank determined that it was not necessary to record any allowance for losses on these commitments.

The value of the Bank’s obligations related to standby letters of credit is recorded in other liabilities and amounted to $12 at March 31, 2014, and $12 at December 31, 2013. Letters of credit are fully collateralized at the time of issuance. Based on the Bank’s credit analyses of members’ financial condition and collateral requirements, the Bank deemed it unnecessary to record any additional liability on the letters of credit outstanding as of March 31, 2014, and December 31, 2013.

Commitments to fund advances totaled $57 at March 31, 2014, and $8 at December 31, 2013. Advances funded under advance commitments are fully collateralized at the time of funding (see Note 9 – Allowance for Credit Losses). Based on the Bank’s credit analyses of members’ financial condition and collateral requirements, the Bank deemed it unnecessary to record any additional liability on the advance commitments outstanding as of March 31, 2014, and December 31, 2013.

The Bank executes over-the-counter bilateral interest rate exchange agreements with major banks and derivative entities affiliated with broker-dealers and with its members. The Bank enters into master agreements with netting provisions with all bilateral swap counterparties and into bilateral security agreements with all active derivative dealer counterparties. All member counterparty master agreements, excluding those with derivative dealers, are subject to the terms of the Bank’s Advances and Security Agreement with members, and all member counterparties (except for those that are derivative dealers) must fully collateralize the Bank’s net credit exposure. For cleared derivatives, the clearinghouse is the Bank’s counterparty, and the Bank has clearing agreements with clearing agents that provide for delivery of initial margin to, and exchange of variation margin with, the clearinghouse. See Note 15 – Derivatives and Hedging Activities for additional information about the Bank’s pledged collateral and other credit-risk-related contingent features. As of March 31, 2014, the Bank had pledged cash collateral of $230 to counterparties and the clearing house that had market risk exposure to the Bank related to derivatives. As of December 31, 2013, the Bank had pledged cash collateral of $149 to counterparties and the clearing house that had market risk exposure to the Bank related to derivatives.

The Bank may be subject to various pending legal proceedings that may arise in the normal course of business. After consultation with legal counsel, the Bank does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on its financial condition or results of operations.



53

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



Note 18 — Transactions with Certain Members, Certain Nonmembers, and Other FHLBanks

Transactions with Certain Members and Certain Nonmembers. The following tables set forth information at the dates and for the periods indicated with respect to transactions with: (i) members and nonmembers that held more than 10% of the outstanding shares of the Bank’s capital stock, including mandatorily redeemable capital stock, at any time during the periods indicated, (ii) members that had an officer or director serving on the Bank’s Board of Directors at any time during the periods indicated, and (iii) affiliates of the foregoing members and nonmembers. All transactions with members, the nonmembers described in the preceding sentence, and their respective affiliates are entered into in the normal course of business. The tables include securities transactions where certain members, nonmembers, and their affiliates (as described above) are the issuers or obligors of the securities, but do not include securities purchased, sold or issued through, or otherwise underwritten by, affiliates of certain members and nonmembers. The tables also do not include any AHP or Community Investment Cash Advance (CICA) grants. Securities purchased, sold or issued through, or otherwise underwritten by, and AHP or CICA grants provided to, the affiliates of certain members and nonmembers are in the ordinary course of the Bank’s business.

  
March 31, 2014

 
December 31, 2013

Assets:
 
 
 
Cash and due from banks
$

 
$

Investments(1)
1,124

 
1,176

Advances
11,125

 
11,268

Mortgage loans held for portfolio
719

 
760

Accrued interest receivable
22

 
25

Other assets
31

 
37

Derivative assets, net
277

 
257

Total Assets
$
13,298

 
$
13,523

Liabilities:
 
 
 
Deposits
$
277

 
$
260

Mandatorily redeemable capital stock
1,083

 
1,356

Derivative liabilities, net
31

 
37

Total Liabilities
$
1,391

 
$
1,653

Notional amount of derivatives
$
12,774

 
$
12,256

Standby letters of credit
59

 
205


(1)
Investments consist of securities purchased under agreements to resell, Federal funds sold, AFS securities, and HTM securities issued by and/or purchased from the members or nonmembers described in this section or their affiliates.

54

Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



  
 
Three Months Ended
 
March 31, 2014

 
March 31, 2013

Interest Income:
 
 
 
Investments(1)
$
5

 
$
8

Advances(2) 
24

 
39

Mortgage loans held for portfolio
9

 
12

Total Interest Income
$
38

 
$
59

Interest Expense:
 
 
 
Mandatorily redeemable capital stock
$
25

 
$
23

Consolidated obligations(2)
(36
)
 
(46
)
Total Interest Expense
$
(11
)
 
$
(23
)
Other Income/(Loss):
 
 
 
Net gain/(loss) on derivatives and hedging activities
$
(44
)
 
$
(35
)
Other income

 

Total Other Income/(Loss)
$
(44
)
 
$
(35
)

(1)
Investments consist of securities purchased under agreements to resell, Federal funds sold, AFS securities, and HTM securities issued by and/or purchased from the members or nonmembers described in this section or their affiliates.
(2)
Reflects the effect of associated derivatives with the members or nonmembers described in this section or their affiliates.

Transactions with Other FHLBanks. Transactions with other FHLBanks are identified on the face of the Bank’s financial statements.

Note 19 — Subsequent Events

The Bank evaluated events subsequent to March 31, 2014, until the time of the Form 10-Q filing with the Securities and Exchange Commission, and no material subsequent events were identified.

55


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements contained in this quarterly report on Form 10-Q, including statements describing the objectives, projections, estimates, or predictions of the future of the Federal Home Loan Bank of San Francisco (Bank) or the Federal Home Loan Bank System (FHLBank System), are “forward-looking statements.” These statements may use forward-looking terms, such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “probable,” “project,” “should,” “will,” or their negatives or other variations on these terms, and include statements related to, among others, gains and losses on derivatives, plans to pay dividends and repurchase excess capital stock, future other-than-temporary impairment losses, future classification of securities, and reform legislation. The Bank cautions that by their nature, forward-looking statements involve risk or uncertainty that could cause actual results to differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These risks and uncertainties include, among others, the following:
changes in economic and market conditions, including conditions in the mortgage, housing, and capital markets;
the volatility of market prices, rates, and indices;
the timing and volume of market activity;
political events, including legislative, regulatory, judicial, or other developments that affect the Bank, its members, counterparties, or investors in the consolidated obligations of the Federal Home Loan Banks (FHLBanks), such as the impact of any government-sponsored enterprises (GSE) legislative reforms, changes in the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), changes in applicable sections of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, or changes in regulations applicable to the FHLBanks;
changes in the Bank’s capital structure;
the ability of the Bank to pay dividends or redeem or repurchase capital stock;
membership changes, including changes resulting from mergers or changes in the principal place of business of Bank members;
the soundness of other financial institutions, including Bank members, nonmember borrowers, other counterparties, and the other FHLBanks;
changes in Bank members’ demand for Bank advances;
changes in the value or liquidity of collateral underlying advances to Bank members or nonmember borrowers or collateral pledged by the Bank’s derivative counterparties;
changes in the fair value and economic value of, impairments of, and risks associated with the Bank’s investments in mortgage loans and mortgage-backed securities (MBS) or other assets and the related credit enhancement protections;
changes in the Bank’s ability or intent to hold MBS and mortgage loans to maturity;
competitive forces, including the availability of other sources of funding for Bank members;
the willingness of the Bank’s members to do business with the Bank whether or not the Bank is paying dividends or repurchasing excess capital stock;
changes in investor demand for consolidated obligations and/or the terms of interest rate exchange or similar agreements;
the ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the Bank has joint and several liability;
designation of the Bank for Federal Reserve Board supervision by the Financial Stability Oversight Council;
technological changes and enhancements, and the Bank’s ability to develop and support technology and information systems sufficient to manage the risks of the Bank’s business effectively; and
changes in the FHLBanks’ long-term credit ratings.

Readers of this report should not rely solely on the forward-looking statements and should consider all risks and uncertainties addressed throughout this report, as well as those discussed under “Item 1A. Risk Factors” in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2013 (2013 Form 10-K).

56



This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Bank’s interim financial statements and notes and the Bank’s 2013 Form 10-K.

Quarterly Overview

Net income for the first quarter of 2014 was $45 million, compared with net income of $81 million for the first quarter of 2013. Net interest income for the first quarter of 2014 was $135 million, up from $127 million for the first quarter of 2013. The increase was primarily due to accretion of yield adjustments on certain other-than-temporarily impaired private-label residential mortgage-backed securities (PLRMBS) resulting from improvement in expected cash flows and to improved spreads on interest-earning assets primarily resulting from lower funding costs. These factors were partially offset by an increase in dividends on mandatorily redeemable capital stock, which are classified as interest expense, and a decrease in earnings on invested capital because of lower average capital balances and the lower interest rate environment. Dividends on mandatorily redeemable capital stock totaled $39 million, an increase of $13 million, or 50%, compared with the first quarter of 2013.

Other income/(loss) for the first quarter of 2014 was a loss of $48 million, compared with a loss of $4 million for the first quarter of 2013. The increase in the loss primarily reflected expense on derivative instruments used in economic hedges of $22 million (compared with income of $21 million for the first quarter of 2013) and a fair value loss associated with derivatives, hedged items, and financial instruments carried at fair value of $27 million (compared with a fair value loss of $24 million for the first quarter of 2013), partially offset by a de minimis credit-related other-than-temporary impairment (OTTI) loss on certain PLRMBS (compared with an OTTI loss of $3 million for the prior-year period).

Income/expense on derivative instruments used in economic hedges is generally offset by net interest expense/income on the economically hedged assets and liabilities. The increase in the fair value loss associated with derivatives, hedged items, and financial instruments carried at fair value for the first quarter of 2014 was primarily due to the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors during the period. As of March 31, 2014, the Bank's restricted retained earnings included a cumulative net gain of $71 million associated with derivatives, hedged items, and financial instruments carried at fair value.

During the first quarter of 2014, total assets increased $0.4 billion, to $86.2 billion at March 31, 2014, from $85.8 billion at December 31, 2013. Advances increased $1.2 billion, or 3%, to $45.6 billion at March 31, 2014, from $44.4 billion at December 31, 2013. In total, 43 members increased their use of advances during the first quarter of 2014, while 59 institutions reduced their advances borrowings.

Accumulated other comprehensive loss declined $81 million during the first quarter of 2014, to $64 million at March 31, 2014, from $145 million at December 31, 2013, primarily as a result of improvement in the fair value of PLRMBS classified as available-for-sale (AFS).

Additional information about investments and OTTI losses associated with the Bank’s PLRMBS is provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Investments” and in “Item 1. Financial Statements – Note 6 – Other-Than-Temporary Impairment Analysis.” Additional information about the Bank’s PLRMBS is also provided in “Part II. Item 1. Legal Proceedings.”

On April 28, 2014, the Bank’s Board of Directors declared a cash dividend on the capital stock outstanding during the first quarter of 2014 at an annualized rate of 6.80%. The dividend will total $93 million, including $34 million in dividends on mandatorily redeemable capital stock that will be reflected as interest expense in the second quarter of 2014. The Bank recorded the dividend on April 28, 2014, the day it was declared by the Board of Directors. The Bank expects to pay the dividend on or about May 15, 2014. The Bank will pay the dividend in cash rather than capital stock to comply with the rules of the Federal Housing Finance Agency (Finance Agency), which do not permit the Bank to pay dividends in the form of capital stock if the Bank’s excess capital stock exceeds 1% of its

57


total assets. Excess capital stock is defined as any capital stock holdings in excess of a shareholder’s minimum capital stock requirement, as established by the Bank’s capital plan. As of March 31, 2014, the Bank’s excess capital stock totaled $1.9 billion, or 2.1% of total assets.

As of March 31, 2014, the Bank was in compliance with all of its regulatory capital requirements. The Bank’s total regulatory capital ratio was 8.5%, exceeding the 4.0% requirement. The Bank had $7.4 billion in permanent capital, exceeding its risk-based capital requirement of $3.7 billion. Total retained earnings were $2.4 billion as of March 31, 2014.
 
In light of the Bank’s strong regulatory capital position, the Bank plans to repurchase $750 million in excess capital stock on May 16, 2014. This repurchase, combined with the estimated redemption of up to $6 million in mandatorily redeemable capital stock during the second quarter of 2014, will reduce the Bank’s excess capital stock by up to $756 million. The amount of excess capital stock to be repurchased from each shareholder will be based on the total amount of capital stock (including mandatorily redeemable capital stock) outstanding to all shareholders on the repurchase date. The Bank will repurchase an equal percentage of each shareholder’s total capital stock to the extent that the shareholder has sufficient excess capital stock.

The Bank will continue to monitor the condition of its PLRMBS portfolio, the ratio of the estimated market value of the Bank’s capital to the par value of the Bank’s capital stock, its overall financial performance and retained earnings, developments in the mortgage and credit markets, and other relevant information as the basis for determining the payment of dividends and the repurchase of excess capital stock in future quarters.


58


Financial Highlights
 
The following table presents a summary of certain financial information for the Bank for the periods indicated.

Financial Highlights
(Unaudited)

(Dollars in millions)
March 31, 2014

 
December 31, 2013

 
September 30, 2013

 
June 30, 2013

 
March 31, 2013

Selected Balance Sheet Items at Quarter End
 
 
 
 
 
 
 
 
 
Total Assets
$
86,185

 
$
85,774

 
$
87,661

 
$
85,122

 
$
87,593

Advances
45,552

 
44,395

 
44,213

 
46,288

 
46,713

Mortgage Loans Held for Portfolio, Net
852

 
905

 
967

 
1,067

 
1,173

Investments(1)
34,918

 
35,260

 
38,072

 
36,422

 
37,861

Consolidated Obligations:(2)
 
 
 
 
 
 
 
 
 
Bonds
53,184

 
53,207

 
56,102

 
60,686

 
64,296

Discount Notes
24,863

 
24,194

 
21,821

 
14,156

 
12,829

Mandatorily Redeemable Capital Stock
1,644

 
2,071

 
2,588

 
3,464

 
3,907

Capital Stock —Class B —Putable
3,325

 
3,460

 
3,526

 
3,784

 
3,951

Unrestricted Retained Earnings
312

 
317

 
316

 
316

 
290

Restricted Retained Earnings
2,069

 
2,077

 
2,056

 
2,056

 
2,013

Accumulated Other Comprehensive Income/(Loss) (AOCI)
(64
)
 
(145
)
 
(275
)
 
(354
)
 
(453
)
Total Capital
5,642

 
5,709

 
5,623

 
5,802

 
5,801

Selected Operating Results for the Quarter
 
 
 
 
 
 
 
 
 
Net Interest Income
$
135

 
$
127

 
$
114

 
$
114

 
$
127

Provision for/(Reversal of) Credit Losses on Mortgage Loans
1

 
(1
)
 

 

 

Other Income/(Loss)
(48
)
 
(5
)
 
(22
)
 
36

 
(4
)
Other Expense
32

 
35

 
32

 
31

 
30

Affordable Housing Program Assessment
9

 
14

 
11

 
15

 
12

Net Income/(Loss)
$
45

 
$
74

 
$
49

 
$
104

 
$
81

Selected Other Data for the Quarter
 
 
 
 
 
 
 
 
 
Net Interest Margin(3)
0.64
%
 
0.59
%
 
0.53
%
 
0.52
%
 
0.59
%
Operating Expenses as a Percent of Average Assets
0.14

 
0.15

 
0.13

 
0.13

 
0.12

Return on Average Assets
0.21

 
0.34

 
0.23

 
0.47

 
0.37

Return on Average Equity
3.11

 
5.20

 
3.48

 
7.11

 
5.59

Annualized Dividend Rate
6.67

 
5.65

 
5.14

 
3.38

 
2.30

Dividend Payout Ratio(4)
131.28

 
70.31

 
99.57

 
33.48

 
30.89

Average Equity to Average Assets Ratio
6.74

 
6.46

 
6.49

 
6.64

 
6.62

Selected Other Data at Quarter End
 
 
 
 
 
 
 
 
 
Regulatory Capital Ratio(5)
8.53

 
9.24

 
9.68

 
11.30

 
11.60

Duration Gap (in months)
1

 
1

 
1

 
1

 
1


(1)
Investments consist of securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale securities, held-to-maturity securities, and loans to other Federal Home Loan Banks (FHLBanks).
(2)
As provided by the FHLBank Act or regulations governing the operations of the FHLBanks, all of the FHLBanks have joint and several liability for FHLBank consolidated obligations, which are backed only by the financial resources of the FHLBanks. The joint and several liability regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank, and as of March 31, 2014, and through the filing date of this report, does not believe that it is probable that it will be asked to do so. The par value of the outstanding consolidated obligations of all 12 FHLBanks at the dates indicated was as follows:


59


 
Par Value
(In millions)

March 31, 2014
$
753,941

December 31, 2013
766,837

September 30, 2013
720,725

June 30, 2013
704,504

March 31, 2013
665,975


(3)
Net interest margin is net interest income (annualized) divided by average interest-earning assets.
(4)
This ratio is calculated as dividends per share divided by net income per share.
(5)
This ratio is calculated as regulatory capital divided by total assets. Regulatory capital includes retained earnings, Class B capital stock, and mandatorily redeemable capital stock (which is classified as a liability), but excludes AOCI.


Results of Operations

The primary source of the Bank's earnings is net interest income, which is the interest earned on advances, mortgage loans, and investments, less interest paid on consolidated obligations, deposits, mandatorily redeemable capital stock, and other borrowings. The Average Balance Sheets table that follows presents the average balances of interest-earning asset categories and the sources that funded those interest-earning assets (liabilities and capital) for the three months ended March 31, 2014 and 2013, together with the related interest income and expense. It also presents the average rates on total interest-earning assets and the average costs of total funding sources.



60


First Quarter of 2014 Compared to First Quarter of 2013

Average Balance Sheets
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
March 31, 2014
 
March 31, 2013
(Dollars in millions)
Average
Balance

 
Interest
Income/
Expense

 
Average
Rate

 
Average
Balance

 
Interest
Income/
Expense

 
Average
Rate

Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
187

 
$

 
0.02
%
 
$
14

 
$

 
0.12
%
Securities purchased under agreements to resell
1,178

 

 
0.03

 
2,058

 
1

 
0.13

Federal funds sold
9,830

 
3

 
0.11

 
9,863

 
4

 
0.18

Trading securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities (MBS)
13

 

 
1.65

 
15

 

 
1.71

Other investments
3,177

 
1

 
0.18

 
3,385

 
2

 
0.23

AFS securities:(1)
 
 
 
 
 
 
 
 
 
 
 
MBS (2)
7,028

 
71

 
4.11

 
8,164

 
69

 
3.41

Held-to-maturity (HTM) securities:(1)
 
 
 
 
 
 
 
 
 
 
 
MBS
15,133

 
95

 
2.54

 
14,452

 
99

 
2.79

Other investments
2,594

 
1

 
0.18

 
2,287

 
2

 
0.26

Mortgage loans held for portfolio
880

 
11

 
5.17

 
1,235

 
13

 
4.35

Advances(3)
45,015

 
79

 
0.71

 
45,753

 
89

 
0.79

Loans to other FHLBanks
2

 

 
0.05

 

 

 
0.14

Total interest-earning assets
85,037

 
261

 
1.24

 
87,226

 
279

 
1.30

Other assets(4)(5)
925

 

 

 
1,010

 

 

Total Assets
$
85,962

 
$
261

 
1.23
%
 
$
88,236

 
$
279

 
1.28
%
Liabilities and Capital
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligations:
 
 
 
 
 
 
 
 
 
 
 
Bonds(3)
$
52,410

 
$
81

 
0.62
%
 
$
68,350

 
$
123

 
0.73
%
Discount notes
24,556

 
6

 
0.10

 
8,412

 
3

 
0.13

Deposits
643

 

 
0.05

 
348

 

 
0.04

Mandatorily redeemable capital stock
2,017

 
39

 
7.87

 
4,314

 
26

 
2.46

Other borrowings
15

 

 
0.06

 
43

 

 
0.11

Total interest-bearing liabilities
79,641

 
126

 
0.64

 
81,467

 
152

 
0.75

Other liabilities(4)
526

 

 

 
927

 

 

Total Liabilities
80,167

 
126

 
0.64

 
82,394

 
152

 
0.75

Total Capital
5,795

 

 

 
5,842

 

 

Total Liabilities and Capital
$
85,962

 
$
126

 
0.59
%
 
$
88,236

 
$
152

 
0.70
%
Net Interest Income
 
 
$
135

 
 
 
 
 
$
127

 
 
Net Interest Spread(6)
 
 
 
 
0.60
%
 
 
 
 
 
0.55
%
Net Interest Margin(7)
 
 
 
 
0.64
%
 
 
 
 
 
0.59
%
Interest-earning Assets/Interest-bearing Liabilities
106.78
%
 
 
 
 
 
107.07
%
 
 
 
 

(1)
The average balances of AFS securities and HTM securities are reflected at amortized cost. As a result, the average rates do not reflect changes in fair value or non-credit-related OTTI losses.
(2)
Interest income on AFS securities includes accretion of yield adjustments on other-than-temporarily impaired PLRMBS resulting from improvement in expected cash flows totaling $16 and $2 for the first quarter of 2014 and 2013, respectively.
(3)
Interest income/expense and average rates include the effect of associated interest rate exchange agreements, as follows:


61


 
Three Months Ended
 
March 31, 2014
 
March 31, 2013
(In millions)
(Amortization)/
Accretion of
Hedging
Activities

 
Net Interest
Settlements

 
Total Net Interest
Income/(Expense)

 
(Amortization)/
Accretion of
Hedging
Activities

 
Net Interest
Settlements

 
Total Net Interest
Income/(Expense)

Advances
$
(1
)
 
$
(32
)
 
$
(33
)
 
$
(2
)
 
$
(30
)
 
$
(32
)
Consolidated obligation bonds
1

 
65

 
66

 
16

 
113

 
129


(4)
Includes forward settling transactions and valuation adjustments for certain cash items.
(5)
Includes non-credit-related OTTI losses on AFS and HTM securities.
(6)
Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities.
(7)
Net interest margin is net interest income (annualized) divided by average interest-earning assets.

Net interest income in the first quarter of 2014 was $135 million, a 6% increase from $127 million in the first quarter of 2013. The following table details the changes in interest income and interest expense for the first quarter of 2014 compared to the first quarter of 2013. Changes in both volume and interest rates influence changes in net interest income, net interest spread, and net interest margin.

Change in Net Interest Income: Rate/Volume Analysis
Three Months Ended March 31, 2014, Compared to Three Months Ended March 31, 2013
 
 
 
 
 
 
 
Increase/
(Decrease)

 
Attributable to Changes in(1)
(In millions)
 
Average Volume

 
Average Rate

Interest-earning assets:
 
 
 
 
 
Securities purchased under agreements to resell
$
(1
)
 
$

 
$
(1
)
Federal funds sold
(1
)
 

 
(1
)
Trading securities: Other investments
(1
)
 

 
(1
)
AFS securities:
 
 
 
 
 
MBS
2

 
(11
)
 
13

HTM securities:
 
 
 
 
 
MBS
(4
)
 
5

 
(9
)
Other investments
(1
)
 

 
(1
)
Mortgage loans held for portfolio
(2
)
 
(4
)
 
2

Advances(2) 
(10
)
 
(1
)
 
(9
)
Total interest-earning assets
(18
)
 
(11
)
 
(7
)
Interest-bearing liabilities:
 
 
 
 
 
Consolidated obligations:
 
 
 
 
 
Bonds(2)
(42
)
 
(26
)
 
(16
)
Discount notes
3

 
4

 
(1
)
Mandatorily redeemable capital stock
13

 
(20
)
 
33

Total interest-bearing liabilities
(26
)
 
(42
)
 
16

Net interest income
$
8

 
$
31

 
$
(23
)

(1)
Combined rate/volume variances, a third element of the calculation, are allocated to the rate and volume variances based on their relative sizes.
(2)
Interest income/expense and average rates include the interest effect of associated interest rate exchange agreements.

The net interest margin was 64 basis points for the first quarter of 2014, 5 basis points higher than the net interest margin for the first quarter of 2013, which was 59 basis points. The net interest spread was 60 basis points for the first quarter of 2014, 5 basis points higher than the net interest spread for the first quarter of 2013, which was 55 basis points. These increases were primarily due to accretion of yield adjustments on certain other-than-temporarily impaired PLRMBS resulting from improvement in expected cash flows and to improved spreads on interest-earning assets primarily resulting from lower funding costs, partially offset by an increase in dividends on mandatorily

62


redeemable capital stock, which are classified as interest expense, and a decrease in earnings on invested capital because of lower average capital balances and the lower interest rate environment.

Member demand for wholesale funding from the Bank can vary greatly depending on a number of factors, including economic and market conditions, competition from other wholesale funding sources, member deposit inflows and outflows, the activity level of the primary and secondary mortgage markets, and strategic decisions made by individual member institutions. As a result, Bank asset levels and operating results may vary significantly from period to period.

Other Income/(Loss). The following table presents the components of “Other Income/(Loss)” for the three months ended March 31, 2014 and 2013.
 
Other Income/(Loss)
 
 
 
 
 
Three Months Ended
(In millions)
March 31, 2014
 
March 31, 2013
Other Income/(Loss):
 
 
 
Net gain/(loss) on trading securities
$

 
$
2

Total OTTI loss
(1
)
 
(4
)
Net amount of OTTI loss reclassified to/(from) AOCI
1

 
1

Net OTTI loss, credit-related

 
(3
)
Net gain/(loss) on advances and consolidated obligation bonds held under fair value option
(39
)
 
(11
)
Net gain/(loss) on derivatives and hedging activities
(10
)
 
6

Other
1

 
2

Total Other Income/(Loss)
$
(48
)
 
$
(4
)

Net Other-Than-Temporary Impairment Loss, Credit-Related Each quarter, the Bank updates its OTTI analysis to reflect current housing market conditions, changes in anticipated housing market conditions, observed and anticipated borrower behavior, and updated information on the loans supporting the Bank's PLRMBS. This analysis resulted in a de minimis credit-related OTTI loss for the first quarter of 2014. The following table presents the net OTTI loss for the three months ended March 31, 2014 and 2013.



63


Net Other-Than-Temporary Impairment Loss
 
 
 
 
 
Three Months Ended
 
March 31, 2014
 
March 31, 2013
(In millions)
Total
 OTTI

 
Non-Credit-
Related
OTTI

 
Credit-
Related
OTTI

 
Total
OTTI

 
Non-Credit-
Related
OTTI

 
Credit-
Related
OTTI

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

 
$

 
$

 
$

 
$

 
$

Alt-A, option ARM

 

 

 
(3
)
 
3

 

Alt-A, other
(1
)
 
1

 

 
(1
)
 
(2
)
 
(3
)
Total
$
(1
)
 
$
1

 
$

 
$
(4
)
 
$
1

 
$
(3
)
 
 
 
 
 
 
 
 
 
 
 
 
Other-than-temporarily impaired PLRMBS by period:
 
 
 
 
 
 
 
 
 
 
 
Securities newly impaired during the period
$

 
$

 
$

 
$
(3
)
 
$
3

 
$

Securities previously impaired prior to current period(1)
(1
)
 
1

 

 
(1
)
 
(2
)
 
(3
)
Total
$
(1
)
 
$
1

 
$

 
$
(4
)
 
$
1

 
$
(3
)


(1)
For the three months ended March 31, 2014, “securities previously impaired prior to current period” represents all securities that were also other-than-temporarily impaired prior to January 1, 2014. For the three months ended March 31, 2013, “securities previously impaired prior to current period” represents all securities that were also other-than-temporarily impaired prior to January 1, 2013.

Additional information about the OTTI loss is provided in “Management's Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Investments” and in “Item 1. Financial Statements – Note 6 – Other-Than-Temporary Impairment Analysis.”

Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option – The following table presents the net gain/(loss) on advances and consolidated obligation bonds held under the fair value option for the three months ended March 31, 2014 and 2013.
 
Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option
 
 
 
 
 
Three Months Ended
(In millions)
March 31, 2014
 
March 31, 2013
Advances
$
8

 
$
(26
)
Consolidated obligation bonds
(47
)
 
15

Total
$
(39
)
 
$
(11
)

In general, transactions elected for the fair value option are in economic hedge relationships. Gains or losses on these transactions are generally offset by losses or gains on the derivatives that economically hedge these instruments.

The unrealized net fair value gains/(losses) on advances and on consolidated obligation bonds were primarily driven by the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors relative to the actual terms on the Bank's advances and consolidated obligation bonds during the period.

Additional information about advances and consolidated obligation bonds held under the fair value option is provided in “Item 1. Financial Statements – Note 16 – Fair Value.”


64


Net Gain/(Loss) on Derivatives and Hedging Activities – The following table shows the accounting classification of hedges and the categories of hedged items that contributed to the gains and losses on derivatives and hedged items that were recorded in “Net gain/(loss) on derivatives and hedging activities” in the first quarter of 2014 and 2013.

Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives and Hedging Activities
Three Months Ended March 31, 2014, Compared to Three Months Ended March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
(In millions)
March 31, 2014
 
March 31, 2013
 
Gain/(Loss)
 

Income/
(Expense) on

 
 
 
Gain/(Loss)
 

Income/
(Expense) on

 
 
Hedged Item
Fair Value
Hedges, Net

 
Economic
Hedges

 
Economic
Hedges

 
Total

 
Fair Value
Hedges, Net

 
Economic
Hedges

 
Economic
Hedges

 
Total

Advances:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Elected for fair value option
$

 
$
5

 
$
(28
)
 
$
(23
)
 
$

 
$
34

 
$
(28
)
 
$
6

Not elected for fair value option

 
3

 
(3
)
 

 

 
5

 
(5
)
 

Consolidated obligation bonds:
 
 
 
 
 
 
 
 

 

 

 
 
Elected for fair value option

 
17

 
12

 
29

 

 
(19
)
 
17

 
(2
)
Not elected for fair value option
(2
)
 
(7
)
 
4

 
(5
)
 
(2
)
 
(39
)
 
41

 

Consolidated obligation discount notes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Not elected for fair value option

 
(3
)
 
(7
)
 
(10
)
 

 
5

 
(4
)
 
1

MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Not elected for fair value option

 
(1
)
 

 
(1
)
 

 

 

 

Non-MBS investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Not elected for fair value option

 

 

 

 

 
1

 

 
1

Total
$
(2
)
 
$
14

 
$
(22
)
 
$
(10
)
 
$
(2
)
 
$
(13
)
 
$
21

 
$
6


During the first quarter of 2014, net losses on derivatives and hedging activities totaled $10 million compared to net gains of $6 million in the first quarter of 2013. These amounts included expense of $22 million and income of $21 million resulting from cash flow settlements on derivative instruments used in economic hedges in the first quarter of 2014 and 2013, respectively. Excluding the impact of income or expense from cash flow settlements on derivative instruments used in economic hedges, the net gains or losses on fair value and economic hedges were primarily associated with the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors during the period.

The ongoing impact of these valuation adjustments on the Bank cannot be predicted and the effects of these valuation adjustments may lead to significant volatility in future earnings, including earnings available for dividends.

Additional information about derivatives and hedging activities is provided in “Item 1. Financial Statements – Note 15 – Derivatives and Hedging Activities.”

Return on Average Equity

Return on average equity (ROE) was 3.11% (annualized) for the first quarter of 2014, compared to 5.59% (annualized) for the first quarter of 2013, reflecting the decrease in net income in the first quarter of 2014 relative to the first quarter of 2013.

Dividends and Retained Earnings

Under regulations governing the operations of the FHLBanks, dividends may be paid only out of current net earnings or previously retained earnings. As required by the regulations, the Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework is reviewed at least annually by the Bank’s Board of Directors. The

65


Board of Directors may amend the Excess Stock Repurchase, Retained Earnings, and Dividend Framework from time to time. In accordance with the Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework, the Bank retains certain amounts in restricted retained earnings, which are not made available for dividends in the current dividend period. The Bank may be restricted from paying dividends if it is not in compliance with any of its minimum capital requirements or if payment would cause the Bank to fail to meet any of its minimum capital requirements. In addition, the Bank may not pay dividends if any principal or interest due on any consolidated obligation has not been paid in full or is not expected to be paid in full, or, under certain circumstances, if the Bank fails to satisfy certain liquidity requirements under applicable regulations.

The regulatory liquidity requirements state that each FHLBank must: (i) maintain eligible high quality assets (advances with a maturity not exceeding five years, U.S. Treasury securities investments, and deposits in banks or trust companies) in an amount equal to or greater than the deposits received from members, and (ii) hold contingent liquidity in an amount sufficient to meet its liquidity needs for at least five business days without access to the consolidated obligations markets. At March 31, 2014, advances maturing within five years totaled $43.6 billion, significantly in excess of the $275 million of member deposits on that date. At December 31, 2013, advances maturing within five years totaled $42.2 billion, also significantly in excess of the $193 million of member deposits on that date. In addition, as of March 31, 2014, and December 31, 2013, the Bank’s estimated total sources of funds obtainable from liquidity investments, repurchase agreement borrowings collateralized by the Bank’s marketable securities, and advance repayments would have allowed the Bank to meet its liquidity needs for more than 90 days without access to the consolidated obligations markets, subject to certain conditions. For more information, see “Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition – Risk Management – Liquidity Risk” in the Bank’s 2013 Form 10-K.

The Bank’s Risk Management Policy limits the payment of dividends based on the ratio of the Bank’s estimated market value of total capital to par value of capital stock. If this ratio at the end of any quarter is less than 100% but greater than or equal to 70%, any dividend would be limited to an annualized rate no greater than the daily average of the three-month London Interbank Offered Rate (LIBOR) for the applicable quarter (subject to certain conditions), and if this ratio is less than 70%, the Bank would be restricted from paying a dividend. The ratio of the Bank’s estimated market value of total capital to par value of capital stock was 151% as of March 31, 2014. For more information, see “Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition – Risk Management – Market Risk” in the Bank’s 2013 Form 10-K.

Retained Earnings Related to Valuation Adjustments In accordance with the Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework, the Bank retains in restricted retained earnings any cumulative net gains in earnings (net of applicable assessments) resulting from valuation adjustments.

In general, the Bank’s derivatives and hedged instruments, as well as certain assets and liabilities that are carried at fair value, are held to the maturity, call, or put date. For these financial instruments, net valuation gains or losses are primarily a matter of timing and will generally reverse through changes in future valuations and settlements of contractual interest cash flows over the remaining contractual terms to maturity, or by the exercised call or put dates. However, the Bank may have instances in which hedging relationships are terminated prior to maturity or prior to the call or put dates. Terminating the hedging relationship may result in a realized gain or loss. In addition, the Bank may have instances in which it may sell trading securities prior to maturity, which may also result in a realized gain or loss.

The purpose of retaining cumulative net gains in earnings resulting from valuation adjustments as restricted retained earnings is to provide sufficient retained earnings to offset future net losses that result from the reversal of cumulative net gains, so that potential dividend payouts in future periods are not necessarily affected by the reversals of these gains. Although restricting retained earnings in this way may preserve the Bank’s ability to pay dividends, the reversal of cumulative net gains in any given period may result in a net loss if the reversal exceeds net earnings before the impact of valuation adjustments for that 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 paid-in capital

66


from the effects of an extremely adverse credit event, an extremely adverse operations risk event, a cumulative net loss related to the Bank’s derivatives and associated hedged items and financial instruments carried at fair value, an extremely adverse change in the market value of the Bank’s capital, a significant amount of additional credit-related OTTI on PLRMBS, or some combination of these effects, especially in periods of extremely low net income resulting from an adverse interest rate environment.

The Board of Directors set the targeted amount of restricted retained earnings at $1.8 billion, and the Bank reached this target as of March 31, 2012. The Bank’s retained earnings target may be changed at any time. The Board of Directors periodically reviews the methodology and analysis to determine whether any adjustments are appropriate. As of March 31, 2014, the amount of restricted retained earnings in the Bank's targeted buildup account was $1.8 billion.

Joint Capital Enhancement Agreement – In 2011, the 12 FHLBanks entered into a Joint Capital Enhancement Agreement, as amended, intended to enhance the capital position of each FHLBank by allocating that portion of each FHLBank’s earnings historically paid to satisfy its Resolution Funding Corporation (REFCORP) obligation to a separate retained earnings account at that FHLBank.

On August 5, 2011, the Finance Agency certified that the FHLBanks had fully satisfied their REFCORP obligation. In accordance with the Agreement, starting in the third quarter of 2011, each FHLBank is required to allocate 20% of its net income each quarter to a separate restricted retained earnings account until the balance of the account equals at least 1% of that FHLBank’s average balance of outstanding consolidated obligations for the previous quarter. Under the Agreement, these restricted retained earnings will not be available to pay dividends.

The following table summarizes the activity related to restricted retained earnings for the three months ended March 31, 2014 and 2013:

 
Three Months Ended
 
March 31, 2014
 
March 31, 2013
 
Restricted Retained Earnings Related to:
 
Restricted Retained Earnings Related to:
(In millions)
Valuation Adjustments

Targeted Buildup

Joint Capital Enhancement Agreement

Total

 
Valuation Adjustments

Targeted Buildup

Joint Capital Enhancement Agreement

Total

Balance at beginning of the period
$
88

$
1,800

$
189

$
2,077

 
$
73

$
1,800

$
128

$
2,001

Transfers to/(from) restricted retained earnings
(17
)

9

(8
)
 
(4
)

16

12

Balance at end of the period
$
71

$
1,800

$
198

$
2,069

 
$
69

$
1,800

$
144

$
2,013


For more information on these three categories of restricted retained earnings and the Bank’s Retained Earnings and Dividend Policy, see “Item 8. Financial Statements and Supplementary Data – Note 16 – Capital” in the Bank’s 2013 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 or not 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.

The Bank currently pays dividends in cash rather than capital stock 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 capital stock (defined as any capital stock holdings in excess of a shareholder’s minimum capital stock requirement, as established by the Bank’s capital plan) exceeds 1% of its total assets. As of March 31, 2014, the Bank’s excess capital stock totaled $1.9 billion, or 2.1% of total assets.


67


In the first quarter of 2014, the Bank paid dividends at an annualized rate of 6.67%, totaling $97 million, including $58 million in dividends on capital stock and $39 million in dividends on mandatorily redeemable capital stock. In the first quarter of 2013, the Bank paid dividends at an annualized rate of 2.30%, totaling $51 million, including $25 million in dividends on capital stock and $26 million in dividends on mandatorily redeemable capital stock. Dividends on mandatorily redeemable capital stock are recognized as interest expense.

On April 28, 2014, the Bank's Board of Directors declared a cash dividend on the capital stock outstanding during the first quarter of 2014 at an annualized rate of 6.80% totaling $93 million, including $59 million in dividends on capital stock and $34 million in dividends on mandatorily redeemable capital stock. The Bank recorded the dividend on April 28, 2014, the day it was declared by the Board of Directors. The Bank expects to pay the dividend on or about May 15, 2014. Dividends on mandatorily redeemable capital stock will be recognized as interest expense in the second quarter of 2014.

The Bank will continue to monitor the condition of its PLRMBS portfolio, the ratio of the estimated market value of the Bank's capital to the par value of the Bank's capital stock, its overall financial performance and retained earnings, developments in the mortgage and credit markets, and other relevant information as the basis for determining the payment of dividends in future quarters.

For more information on the Bank’s Retained Earnings and Dividend Policy, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Comparison of 2013 to 2012 – Dividends and Retained Earnings” in the Bank’s 2013 Form 10-K.

Financial Condition

Total assets were $86.2 billion at March 31, 2014, compared to $85.8 billion at December 31, 2013. Advances increased by $1.2 billion, or 3%, to $45.6 billion at March 31, 2014, from $44.4 billion at December 31, 2013. Average total assets were $86.0 billion for the first quarter of 2014, a 3% decrease compared to $88.2 billion for the first quarter of 2013. Average advances were $45.0 billion for the first quarter of 2014, a 2% decrease from $45.8 billion for the first quarter of 2013.

Advances outstanding at March 31, 2014, included unrealized gains of $202 million, of which $82 million represented unrealized gains on advances hedged in accordance with the accounting for derivative instruments and hedging activities and $120 million represented unrealized gains on economically hedged advances that are carried at fair value in accordance with the fair value option. Advances outstanding at December 31, 2013, included unrealized gains of $208 million, of which $95 million represented unrealized gains on advances hedged in accordance with the accounting for derivative instruments and hedging activities and $113 million represented unrealized gains on economically hedged advances that are carried at fair value in accordance with the fair value option. The overall decrease in the unrealized gains of the hedged advances and advances carried at fair value from December 31, 2013, to March 31, 2014, was primarily attributable to the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors relative to the terms on the Bank’s advances during the period.

Total liabilities were $80.5 billion at March 31, 2014, an increase of $0.4 billion from $80.1 billion at December 31, 2013, reflecting an increase in consolidated obligations outstanding from $77.4 billion at December 31, 2013, to $78.0 billion at March 31, 2014, partially offset by the decrease in mandatory redeemable capital stock from $2.1 billion at December 31, 2013, to $1.6 billion at March 31, 2014 . The decrease in mandatorily redeemable capital stock was primarily attributable to the Bank’s redemption and repurchase of excess capital stock during the first quarter of 2014. Average total liabilities were $80.2 billion for the first quarter of 2014, a 3% decrease compared to

68


$82.4 billion for the first quarter of 2013. Average consolidated obligations were $77.0 billion in the first quarter of 2014 and $76.8 billion in the first quarter of 2013.

Consolidated obligations outstanding at March 31, 2014, included unrealized losses of $440 million on consolidated obligation bonds hedged in accordance with the accounting for derivative instruments and hedging activities and unrealized gains of $67 million on economically hedged consolidated obligation bonds that are carried at fair value in accordance with the fair value option. Consolidated obligations outstanding at December 31, 2013, included unrealized losses of $491 million on consolidated obligation bonds hedged in accordance with the accounting for derivative instruments and hedging activities and unrealized gains of $115 million on economically hedged consolidated obligation bonds that are carried at fair value in accordance with the fair value option. The overall decrease in the unrealized losses on the hedged consolidated obligation bonds and the consolidated obligation bonds carried at fair value from December 31, 2013, to March 31, 2014, was primarily attributable to the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors relative to the actual terms on the Bank's consolidated obligation bonds during the period.

As provided by the FHLBank Act or regulations governing the operations of the FHLBanks, all FHLBanks have joint and several liability for all FHLBank consolidated obligations. The joint and several liability regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank, and as of March 31, 2014, and through the filing date of this report, does not believe that it is probable that it will be asked to do so. The par value of the outstanding consolidated obligations of all 12 FHLBanks was $753.9 billion at March 31, 2014, and $766.8 billion at December 31, 2013.

Changes in the long-term credit ratings of individual FHLBanks do not necessarily affect the credit rating of the consolidated obligations issued on behalf of the FHLBanks. Rating agencies may change or withdraw a rating from time to time because of various factors, including operating results or actions taken, business developments, or changes in their opinion regarding, among other factors, the general outlook for a particular industry or the economy.

The Bank evaluated the publicly disclosed FHLBank regulatory actions and long-term credit ratings of the other FHLBanks as of March 31, 2014, and as of each period end presented, and does not believe, as of the date of this report, that it is probable that the Bank will be required to repay any principal or interest associated with consolidated obligations for which the Bank is not the primary obligor.

The Bank’s financial condition is further discussed under “Segment Information.”

Segment Information

The Bank uses an analysis of financial performance based on the balances and adjusted net interest income of two operating segments, the advances-related business and the mortgage-related business, as well as other financial information, to review and assess financial performance and to determine the allocation of resources to these two major business segments. For purposes of segment reporting, adjusted net interest income includes income and expense associated with cash flow settlements from economic hedges that are recorded in “Net gain/(loss) on derivatives and hedging activities” in other income and excludes interest expense that is recorded in “Mandatorily redeemable capital stock.” Other key financial information, such as any credit-related OTTI losses on the Bank’s PLRMBS, other expenses, and assessments, is not included in the segment reporting analysis, but is incorporated into the Bank’s overall assessment of financial performance. For a reconciliation of the Bank’s operating segment adjusted net interest income to the Bank’s total net interest income, see “Item 1. Financial Statements – Note 14 – Segment Information.”

Advances-Related Business. The advances-related business consists of advances and other credit products, related financing and hedging instruments, liquidity and other non-MBS investments associated with the Bank’s role as a

69


liquidity provider, and capital stock. Assets associated with this segment increased $0.9 billion, or 2%, to $63.2 billion (73% of total assets) at March 31, 2014, from $62.3 billion (73% of total assets) at December 31, 2013.

Adjusted net interest income for this segment is derived primarily from the difference, or spread, between the yield on advances and non-MBS investments and the cost of the consolidated obligations funding these assets, including the cash flow settlements from associated interest rate exchange agreements.

Adjusted net interest income for this segment was $39 million in the first quarter of 2014, a decrease of $4 million, or 9%, compared with $43 million in the first quarter of 2013. The decrease was primarily due to a decline in earnings on invested capital because of lower average capital balances and the lower interest rate environment, as well as lower earnings on non-MBS investments, partially offset by lower funding costs.

Adjusted net interest income for this segment represented 26% and 28% of total adjusted net interest income for the first quarter of 2014 and 2013, respectively.

Advances – The par value of advances outstanding increased by $1.2 billion, or 3%, to $45.4 billion at March 31, 2014, from $44.2 billion at December 31, 2013. Average advances outstanding were $45.0 billion in the first quarter of 2014, a 2% decrease from $45.8 billion in the first quarter of 2013.

The increase in advances outstanding was primarily attributable to a $0.8 billion net increase in advances outstanding to the Bank’s top five borrowers and their affiliates. Advances to the top five borrowers increased to $29.1 billion at March 31, 2014, from $28.3 billion at December 31, 2013. The increase was also attributable to a $0.4 billion increase in total advances outstanding to the Bank’s other borrowers of varying asset sizes and charter types. (See “Item 1. Financial Statements – Note 7 – Advances” for further information.) In total, 43 members increased their use of advances during the first quarter of 2014, while 59 borrowers decreased their advances borrowings.

The $1.2 billion increase in advances outstanding primarily reflected a $0.6 billion increase in fixed rate advances and a $0.8 billion increase in adjustable rate advances, partially offset by a net $0.2 billion decrease in variable rate advances.

The components of the advances portfolio at March 31, 2014, and December 31, 2013, are presented in the following table.

70


Advances Portfolio by Product Type
 
 
 
 
 
 
 
 
 
March 31, 2014
 
December 31, 2013
(Dollar in millions)
Par Value

 
Percentage of Total Par Value

 
Par Value

 
Percentage of Total Par Value

Adjustable – LIBOR
$
7,204

 
16
%
 
$
6,378

 
15
%
Adjustable – LIBOR, with caps and/or floors and PPS(1)
100

 

 
124

 

Subtotal adjustable rate advances
7,304

 
16

 
6,502

 
15

Fixed
28,021

 
62

 
27,365

 
62

Fixed – amortizing
268

 
1

 
276

 
1

Fixed – with PPS(1)
6,033

 
13

 
6,193

 
14

Fixed – with caps and PPS(1)
200

 

 
200

 

Fixed – callable at member’s option
4

 

 
4

 

Fixed – callable at member’s option with PPS(1)
284

 
1

 
231

 
1

Fixed – putable at Bank’s option
95

 

 
97

 

Fixed – putable at Bank’s option with PPS(1)
85

 

 
85

 

Subtotal fixed rate advances
34,990

 
77

 
34,451

 
78

Daily variable rate
3,056

 
7

 
3,234

 
7

Total par value
$
45,350

 
100
%
 
$
44,187

 
100
%

(1)
Partial prepayment symmetry (PPS) is a product feature under which the Bank may charge the borrower a prepayment fee or pay the borrower a prepayment credit, depending on certain circumstances, such as movements in interest rates, when the advance is prepaid. Any prepayment credit on an advance with PPS would be limited to the lesser of 10% of the par value of the advance or the gain recognized on the termination of the associated interest rate swap, which may also include a similar contractual gain limitation.

For a discussion of advances credit risk, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Advances.”

Non-MBS Investments The Bank’s non-MBS investment portfolio consists of financial instruments that are used primarily to facilitate the Bank’s role as a cost-effective provider of credit and liquidity to members and to support the operations of the Bank. The Bank’s total non-MBS investment portfolio was $12.9 billion as of March 31, 2014, an increase of $0.1 billion, or 1%, from $12.8 billion as of December 31, 2013. The increase in the non-MBS investment portfolio was primarily due to higher balances of certificates of deposit and short-term securities purchased under agreements to resell, partially offset by lower balances of Federal funds sold.

Cash and Due from Banks – Cash and due from banks was $4.5 billion at March 31, 2014, a $0.4 billion decrease from December 31, 2013. Cash and due from banks is largely comprised of cash held at the Federal Reserve Bank of San Francisco and declined as a result of the Bank’s $0.5 billion investment in short-term securities purchased under agreements to resell. Many of the Bank’s Federal funds and repurchase agreement counterparties had low demand for funds as of March 31, 2014, and December 31, 2013.

Borrowings – Total liabilities (primarily consolidated obligations) funding the advances-related business increased from $56.6 billion at December 31, 2013, to $57.6 billion at March 31, 2014. For further information and discussion of the Bank’s joint and several liability for FHLBank consolidated obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations Financial Condition”
and “Item 1. Financial Statements – Note 17 – Commitments and Contingencies.”

To meet the specific needs of certain investors, fixed and adjustable rate consolidated obligation bonds may contain embedded call options or other features that result in complex coupon payment terms. When these consolidated obligation bonds are issued on behalf of the Bank, typically the Bank simultaneously enters into interest rate

71


exchange agreements with features that offset the complex features of the bonds and, in effect, convert the bonds to adjustable rate instruments tied to an index, primarily LIBOR. For example, the Bank uses fixed rate callable bonds that are typically offset with interest rate exchange agreements with call features that offset the call options embedded in the callable bonds. This combined financing structure enables the Bank to meet its funding needs at costs not generally attainable solely through the issuance of comparable term non-callable debt.

At March 31, 2014, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $70.3 billion, of which $24.1 billion were hedging advances, $43.0 billion were hedging consolidated obligations, $2.9 billion were economically hedging trading securities, and $0.3 billion were interest rate exchange agreements that the Bank entered into as an intermediary between offsetting derivative transactions with members and other counterparties. At December 31, 2013, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $72.8 billion, of which $21.3 billion were hedging advances, $48.2 billion were hedging consolidated obligations, $2.9 billion were economically hedging trading securities, and $0.4 billion were interest rate exchange agreements that the Bank entered into as an intermediary between offsetting derivative transactions with members and other counterparties. The hedges associated with advances and consolidated obligations were primarily used to convert the fixed rate cash flows and non-LIBOR-indexed cash flows of the advances and consolidated obligations to adjustable rate LIBOR-indexed cash flows or to manage the interest rate sensitivity and net repricing gaps of assets, liabilities, and interest rate exchange agreements.

FHLBank System consolidated obligation bonds and discount notes, along with similar debt securities issued by other GSEs such as Fannie Mae and Freddie Mac, are generally referred to as agency debt. The agency debt market is a large sector of the debt capital markets. The costs of debt issued by the FHLBanks and the other GSEs generally rise and fall with increases and decreases in general market interest rates. For more information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources” in the Bank’s 2013 Form 10-K.

The Federal Open Market Committee (FOMC) has not changed the target Federal funds rate since December 16, 2008. As of March 31, 2014, rates on 3-month U.S. Treasury bills, 3-month LIBOR, and 5-year U.S. Treasury notes declined while rates on 2-year U.S. Treasury notes increased compared with December 31, 2013. The FOMC’s forward guidance regarding monetary policy continues to identify a commitment to taper the pace of Treasury and MBS asset purchases and to keep the target Federal funds rate low beyond the date that asset purchases are expected to be completed.
 
Selected Market Interest Rates
 
 
 
 
 
 
 
 
 
Market Instrument
March 31, 2014
December 31, 2013
March 31, 2013
December 31, 2012
Federal Reserve target rate for overnight Federal funds
0-0.25

%
0-0.25

%
0-0.00

%
0-0.25

%
3-month Treasury bill
0.04

 
0.06

 
0.07

 
0.04

 
3-month LIBOR
0.23

 
0.25

 
0.28

 
0.31

 
2-year Treasury note
0.42

 
0.38

 
0.24

 
0.25

 
5-year Treasury note
1.72

 
1.74

 
0.77

 
0.72

 

The following table presents a comparison of the average cost of FHLBank System consolidated obligation bonds relative to 3-month LIBOR and discount notes relative to comparable term LIBOR in the first three months of 2014 and 2013. Lower 3-month LIBOR rates during the first three months of 2014 compared to the same period in 2013 contributed to higher borrowing costs relative to LIBOR for FHLBank System consolidated obligation bonds and discount notes.
 

72


 
Spread to LIBOR of Average Cost of
Consolidated Obligations for the Three Months Ended
(In basis points)
March 31, 2014
  
March 31, 2013
Consolidated obligation bonds
-12.4
  
-16.4
Consolidated obligation discount notes (one month and greater)
-15.8
  
-18.6

Mortgage-Related Business. The mortgage-related business consists of mortgage-backed securities (MBS)
investments, mortgage loans acquired through the Mortgage Partnership Finance® (MPF®) Program, and the related financing and hedging instruments. (“Mortgage Partnership Finance” and “MPF” are registered trademarks of the FHLBank of Chicago.) Adjusted net interest income for this segment is derived primarily from the difference, or spread, between the yield on the MBS and mortgage loans and the cost of the consolidated obligations funding those assets, including the cash flow settlements from associated interest rate exchange agreements.

At March 31, 2014, assets associated with this segment were $22.9 billion (27% of total assets), a decrease of $0.6 billion from $23.5 billion at December 31, 2013 (27% of total assets).

Adjusted net interest income for this segment was $110 million in the first quarter of 2014, a decrease of $3 million, or 3%, from $113 million in the first quarter of 2013. The decrease was primarily due to lower average unpaid principal balances of MBS and mortgage loans.

Adjusted net interest income for this segment represented 74% and 72% of total adjusted net interest income for the first quarter of 2014 and 2013, respectively.

MBS Investments – The Bank’s MBS portfolio was $22.0 billion at March 31, 2014, compared with $22.5 billion at December 31, 2013. During the first quarter of 2014, the Bank’s MBS portfolio decreased primarily because of principal repayments totaling $0.8 billion, partially offset by purchases of $0.1 billion of agency residential MBS and a $0.1 billion improvement in the fair value of PLRMBS classified as AFS. In the first quarter of 2014, average MBS investments were $22.2 billion, a decrease of $0.4 billion from $22.6 billion in the first quarter of 2013. For a discussion of the composition of the Bank’s MBS portfolio and the Bank’s OTTI analysis of that portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Investments” and “Item 1. Financial Statements – Note 6 – Other-Than-Temporary Impairment Analysis.”

Intermediate-term and long-term fixed rate MBS investments are subject to prepayment risk, and intermediate-term and long-term adjustable rate MBS investments are also subject to interest rate cap risk. The Bank has managed these risks predominately by purchasing intermediate-term fixed rate MBS (rather than long-term fixed rate MBS), funding the fixed rate MBS with a mix of non-callable and callable debt, and using interest rate exchange agreements with interest rate risk characteristics similar to callable debt.

MPF Program – On October 2, 2013, the Bank announced its renewed participation in the MPF Program. In 2014, the Bank plans to begin purchasing conventional conforming fixed rate mortgage loans and FHA/VA-insured mortgage loans from members for the Bank’s own portfolio under the MPF Original and MPF Government products. The Bank also plans to facilitate the purchase of fixed rate mortgage loans from members for concurrent sale to Fannie Mae under the MPF Xtra® product. (“MPF Xtra” is a registered trademark of the FHLBank of Chicago.)

The Bank plans to begin with a small number of participating members, then add other members that are active
mortgage originators and servicers later in 2014 or in 2015. The Bank previously purchased conventional
conforming fixed rate residential mortgage loans from participating members from May 2002 to October 2006.

Mortgage loan balances equaled $0.9 billion at March 31, 2014, and December 31, 2013. Average mortgage loans were $0.9 billion in the first quarter of 2014, a decrease of $0.3 billion from $1.2 billion in the first quarter of 2013.


73


At March 31, 2014, and December 31, 2013, the Bank held conventional conforming fixed rate mortgage loans purchased under one of two MPF products, MPF Plus or Original MPF, which are described in greater detail in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – MPF Program” in the Bank’s 2013 Form 10-K. Mortgage loan balances at March 31, 2014, and December 31, 2013, were as follows:

Mortgage Loan Balances by MPF Product Type
 
 
 
 
(In millions)
March 31, 2014
 
December 31, 2013
MPF Plus
$
788

 
$
835

Original MPF
72

 
78

Subtotal
860

 
913

Unamortized premiums
9

 
10

Unamortized discounts
(15
)
 
(16
)
Mortgage loans held for portfolio
854

 
907

Less: Allowance for credit losses
(2
)
 
(2
)
Mortgage loans held for portfolio, net
$
852

 
$
905


The Bank performs periodic reviews of its mortgage loan portfolio to identify probable credit losses in the portfolio and to determine the likelihood of collection of the loans in the portfolio. For more information on the Bank’s mortgage loan portfolio, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – MPF Program” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – Allowance for Credit Losses – Mortgage Loans Acquired Under the MPF Program” in the Bank’s 2013 Form 10-K.

Borrowings – Total consolidated obligations funding the mortgage-related business decreased $0.6 billion to $22.9 billion at March 31, 2014, from $23.5 billion at December 31, 2013, paralleling the decrease in mortgage portfolio assets. For further information and discussion of the Bank’s joint and several liability for FHLBank consolidated obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” and “Item 1. Financial Statements – Note 17 – Commitments and Contingencies.”

The notional amount of interest rate exchange agreements associated with the mortgage-related business totaled $8.8 billion at March 31, 2014, of which $6.6 billion were hedged or were associated with consolidated obligations funding the mortgage portfolio and $2.2 billion were associated with MBS. The notional amount of interest rate agreements associated with the mortgage-related business, all of which hedged or were associated with consolidated obligations funding the mortgage portfolio, totaled $8.8 billion at December 31, 2013.

Interest Rate Exchange Agreements

A derivative transaction or interest rate exchange agreement is a financial contract whose fair value is generally derived from changes in the value of an underlying asset or liability. The Bank uses interest rate swaps; options to enter into interest rate swaps (swaptions); interest rate cap, floor, corridor, and collar agreements; and callable and putable interest rate swaps (collectively, interest rate exchange agreements) to manage its exposure to interest rate risks inherent in its normal course of business, including its lending, investment, and funding activities. For more information on the primary strategies that the Bank employs for using interest rate exchange agreements and the associated market risks, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Market Risk – Interest Rate Exchange Agreements” in the Bank’s 2013 Form 10-K.

The following table summarizes the Bank’s interest rate exchange agreements by type of hedged item, hedging instrument, associated hedging strategy, accounting designation as specified under the accounting for derivative instruments and hedging activities, and notional amount as of March 31, 2014, and December 31, 2013.


74


Interest Rate Exchange Agreements
 
 
 
 
 
 
 
 
 
(In millions)
  
 
  
 
 
Notional Amount
Hedging Instrument
  
Hedging Strategy
  
Accounting Designation
 
March 31,
2014

  
December 31,
2013

Hedged Item: Advances
  
 
  
 
 
 
  
 
Pay fixed, receive adjustable interest rate swap
  
Fixed rate advance converted to a LIBOR adjustable rate
  
Fair Value Hedge
 
$
15,950

 
$
12,448

Pay fixed, receive adjustable interest rate swap
  
Fixed rate advance converted to a LIBOR adjustable rate
  
Economic Hedge(1)
 
1,377

 
1,926

Pay fixed, receive adjustable interest rate swap; swap may be callable at the Bank’s option or putable at the counterparty’s option
  
Fixed rate advance (with or without an embedded cap) converted to a LIBOR adjustable rate; advance and swap may be callable or putable; matched to advance accounted for under the fair value option
  
Economic Hedge(1)
 
6,710

 
6,826

Interest rate cap, floor, corridor, and/or collar
  
Interest rate cap, floor, corridor, and/or collar embedded in an adjustable rate advance; matched to advance accounted for under the fair value option
  
Economic Hedge(1)
 
106

 
130

Subtotal Economic Hedges(1)
 
 
  
 
 
8,193

  
8,882

Total
  
 
  
 
 
24,143

  
21,330

Hedged Item: Non-Callable Bonds
 
 
  
 
 
 
  
 
Receive fixed or structured, pay adjustable interest rate swap
  
Fixed rate or structured rate non-callable bond converted to a LIBOR adjustable rate
  
Fair Value Hedge
 
17,998

 
17,877

Receive fixed or structured, pay adjustable interest rate swap
  
Fixed rate or structured rate non-callable bond converted to a LIBOR adjustable rate
  
Economic Hedge(1)
 
1,763

 
1,163

Receive fixed or structured, pay adjustable interest rate swap
  
Fixed rate or structured rate non-callable bond converted to a LIBOR adjustable rate; matched to non-callable bond accounted for under the fair value option
  
Economic Hedge(1)
  
1,425

 
1,350

Basis swap
  
Non-LIBOR adjustable rate non-callable bond converted to a LIBOR adjustable rate; matched to non-callable bond accounted for under the fair value option
  
Economic Hedge(1)
  
2,473

 
5,823

Basis swap
 
Fixed rate or adjustable rate non-callable bond previously converted to an adjustable rate index, converted to another adjustable rate to reduce interest rate sensitivity and repricing gaps
 
Economic Hedge(1)
 
3,900

 
3,545

Pay fixed, receive adjustable interest rate swap
  
Fixed rate or adjustable rate non-callable bond, which may have been previously converted to LIBOR, converted to fixed rate debt that offsets the interest rate risk of mortgage assets
  
Economic Hedge(1)
  
890

 
860

Subtotal Economic Hedges(1)
 
 
  
 
  
10,451

  
12,741

Total
  
 
  
 
  
28,449

  
30,618



75


Interest Rate Exchange Agreements (continued)
 
 
 
 
 
 
 
 
 
(In millions)
  
 
  
 
  
Notional Amount
Hedging Instrument
  
Hedging Strategy
  
Accounting Designation
  
March 31,
2014

  
December 31,
2013

Hedged Item: Callable Bonds
 
 
  
 
  
 
  
 
Receive fixed or structured, pay adjustable interest rate swap with an option to call at the counterparty’s option
  
Fixed or structured rate callable bond converted to a LIBOR adjustable rate; swap is callable
  
Fair Value Hedge
  
3,094

 
1,070

Receive fixed or structured, pay adjustable interest rate swap with an option to call at the counterparty’s option
  
Fixed or structured rate callable bond converted to a LIBOR adjustable rate; swap is callable
  
Economic Hedge(1)
  
5,355

 
5,830

Receive fixed or structured, pay adjustable interest rate swap with an option to call at the counterparty’s option
  
Fixed or structured rate callable bond converted to a LIBOR adjustable rate; swap is callable; matched to callable bond accounted for under the fair value option
  
Economic Hedge(1)
  
3,672

 
3,097

Subtotal Economic Hedges(1)
 
 
  
 
  
9,027

  
8,927

Total
  
 
  
 
  
12,121

  
9,997

Hedged Item: Discount Notes
 
 
  
 
  
 
  
 
Pay fixed, receive adjustable callable interest rate swap
  
Discount note, which may have been previously converted to LIBOR, converted to fixed rate callable debt that offsets the prepayment risk of mortgage assets
  
Economic Hedge(1)
  
1,330

 
1,025

Basis swap or receive fixed, pay adjustable interest rate swap
  
Discount note converted to one-month LIBOR or other short-term adjustable rate to hedge repricing gaps
  
Economic Hedge(1)
  
7,737

 
15,048

Pay fixed, receive adjustable non-callable interest rate swap
  
Discount note, which may have been previously converted to LIBOR, converted to fixed rate non-callable debt that offsets the interest rate risk of mortgage assets
  
Economic Hedge(1)
  

 
280

Total
  
 
  
 
  
9,067

  
16,353

Hedged Item: Trading Securities
 
 
  
 
  
 
  
 
Basis swap
 
Basis swap hedging adjustable rate FFCB bonds
 
Economic Hedge(1)
 
2,862

 
2,942

Interest rate cap
 
Stand-alone interest rate cap used to offset cap risk embedded in floating rate MBS
 
Economic Hedge(1)
 
2,150

 

Total
 
 
 
 
 
5,012

 
2,942

Hedged Item: Intermediary Positions
  
 
  
 
  
 
Interest rate cap/floor
  
Stand-alone interest rate cap and/or floor executed with a member offset by executing an interest rate cap and/or floor with derivative dealer counterparties
  
Economic Hedge(1)
  
330

 
330

Total
  
 
  
 
  
330

  
330

Total Notional Amount
 
 
  
 
  
$
79,122

 
$
81,570


(1)
Economic hedges are derivatives that are matched to balance sheet instruments or other derivatives that do not meet the requirements for hedge accounting under the accounting for derivative instruments and hedging activities.

At March 31, 2014, the total notional amount of interest rate exchange agreements outstanding was $79.1 billion, compared with $81.6 billion at December 31, 2013. The $2.5 billion decrease in the notional amount of derivatives during the first quarter of 2014 was due to a net $7.3 billion decrease in interest rate exchange agreements hedging discount notes, partially offset by a net $2.8 billion increase in interest rate exchange agreements hedging advances and a net $2.0 billion increase in interest rate exchange agreements hedging non-MBS investments. The notional amount serves as a basis for calculating periodic interest payments or cash flows received and paid and is not a basis for measuring the amount of credit risk in the transaction.


76


The following tables categorize the notional amounts and estimated fair values of the Bank’s interest rate exchange agreements, unrealized gains and losses from the related hedged items, and estimated fair value gains and losses from financial instruments carried at fair value by type of accounting treatment and product as of March 31, 2014, and December 31, 2013.

Interest Rate Exchange Agreements
Notional Amounts and Estimated Fair Values

 
 
 
 
 
 
 
 
 
March 31, 2014
 
  
 
 
 
 
 
  
 
(In millions)
Notional
Amount

  
Fair Value of
Derivatives

 
Unrealized
Gain/(Loss)
on Hedged
Items

 
Financial
Instruments
Carried at
Fair Value

  
Difference

Fair value hedges:
 
  
 
 
 
 
 
  
 
Advances
$
15,950

  
$
(76
)
 
$
77

 
$

  
$
1

Non-callable bonds
17,998

  
442

 
(443
)
 

  
(1
)
Callable bonds
3,094

  
(3
)
 
14

 

  
11

Subtotal
37,042

  
363

 
(352
)
 

  
11

Not qualifying for hedge accounting (economic hedges):
  
 
 
 
 
 
  
 
Advances
8,193

  
(99
)
 

 
103

  
4

Non-callable bonds
10,451

  
64

 

 
(17
)
  
47

Callable bonds
9,027

  
(55
)
 

 
95

  
40

Discount notes
9,067

  
10

 

 

  
10

FFCB bonds
2,862

 
(1
)
 

 

 
(1
)
MBS
2,150

 
23

 

 

 
23

Intermediated
330

  

 

 

  

Subtotal
42,080

  
(58
)
 

 
181

  
123

Total excluding accrued interest
79,122

  
305

 
(352
)
 
181

  
134

Accrued interest

  
70

 
(85
)
 
6

  
(9
)
Total
$
79,122

  
$
375

 
$
(437
)
 
$
187

  
$
125


 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
  
 
 
 
 
 
 
 
(In millions)
Notional
Amount

  
Fair Value of
Derivatives

 
Unrealized
Gain/(Loss)
on Hedged
Items

 
Financial
Instruments
Carried at
Fair Value

 
Difference

Fair value hedges:
 
  
 
 
 
 
 
 
 
Advances
$
12,448

 
$
(87
)
 
$
87

 
$

 
$

Non-callable bonds
17,877

 
490

 
(491
)
 

 
(1
)
Callable bonds
1,070

 
(8
)
 
13

 

 
5

Subtotal
31,395

  
395

 
(391
)
 

 
4

Not qualifying for hedge accounting (economic hedges):
  
 
 
 
 
 
 
 
Advances
8,882

 
(107
)
 

 
96

 
(11
)
Non-callable bonds
12,741

 
73

 

 
(17
)
 
56

Callable bonds
8,927

 
(74
)
 

 
142

 
68

Discount notes
16,353

 
13

 

 

 
13

FFCB bonds
2,942

 
(1
)
 

 

 
(1
)
Intermediated
330

 

 

 

 

Subtotal
50,175

  
(96
)
 

 
221

 
125

Total excluding accrued interest
81,570

  
299

 
(391
)
 
221

 
129

Accrued interest

  
19

 
(33
)
 
7

 
(7
)
Total
$
81,570

  
$
318

 
$
(424
)
 
$
228

 
$
122


77



Effective December 31, 2012, the Bank refined its method for estimating the fair values of its derivatives by using the overnight index swap (OIS) curve to discount the cash flows of its derivatives to determine fair value, instead of using the LIBOR swap curve, which was used in prior periods. Based on the Bank’s analysis of market participants, the Bank concluded that the OIS curve was a more representative input in determining the fair value of its derivatives.

Credit Risk. For a discussion of derivatives credit exposure, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Derivative Counterparties.”

Concentration Risk. The following table presents the concentration in derivatives with derivative counterparties whose outstanding notional balances represented 10% or more of the Bank’s total notional amount of derivatives outstanding as of March 31, 2014, or December 31, 2013.


78


Concentration of Derivative Counterparties
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
March 31, 2014
 
December 31, 2013
Derivative Counterparty
Credit  
Rating(1)  
  
Notional
Amount

  
Percentage of
Total
Notional Amount

 
Credit  
Rating(1)  
 
Notional
Amount

  
Percentage of
Total
Notional Amount

Morgan Stanley Capital Services
BBB
 
$
8,577

 
11
%
 
BBB
 
$
8,362

 
10
%
JPMorgan Chase Bank, National Association
A
  
8,283

  
10

 
A
 
7,852

  
10

BNP Paribas
A
  
6,485

  
8

 
A
 
7,808

  
10

Subtotal
 
  
23,345

 
29

 
 
 
24,022

  
30

Others
At least BBB
  
26,414

  
34

 
At least A
 
26,466

  
32

LCH Clearnet(2)
 
 
 
 
 
 
 
 
 
 
 
Credit Suisse Securities (USA) LLC
A
 
19,215

 
24

 
A
 
20,414

 
25

Deutsche Bank Securities Inc.
A
 
10,148

 
13

 
A
 
10,668

 
13

Subtotal
 
 
29,363

 
37

 
 
 
31,082

 
38

Total
 
  
$
79,122

  
100
%
 
 
 
$
81,570

  
100
%

(1)
The credit ratings used by the Bank are based on the lower of Moody's or Standard & Poor's ratings. 
(2)
London Clearing House (LCH) Clearnet is the Bank’s counterparty for all of its cleared swaps. Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Incorporated are the Bank’s clearing agents for purposes of clearing swaps with LCH Clearnet. LCH Clearnet’s parent, LCH Clearnet Group, Ltd., is rated A+ by S&P.


Liquidity and Capital Resources

The Bank’s financial strategies are designed to enable the Bank to expand and contract its assets, liabilities, and capital as membership composition and member credit needs change. The Bank’s liquidity and capital resources are designed to support its financial strategies. The Bank’s primary source of liquidity is its access to the debt capital markets through consolidated obligation issuance. The maintenance of the Bank’s capital resources are governed by its capital plan.

Liquidity

The Bank strives to maintain the liquidity necessary to meet member credit demands, repay maturing consolidated obligations for which it is the primary obligor, and meet other obligations and commitments. The Bank monitors its financial position in an effort to ensure that it has ready access to sufficient liquid funds to meet normal transaction requirements, take advantage of appropriate investment opportunities, and cover unforeseen liquidity demands.

The Bank generally manages operational, contingent, and structural liquidity risks using a portfolio of cash and short-term investments—which include commercial paper, certificates of deposit, securities purchased under agreements to resell, and Federal funds sold to highly rated counterparties—and access to the debt capital markets. In addition, the Bank maintains alternate sources of funds, detailed in its contingent liquidity plan, which also includes an explanation of how sources of funds may be allocated under stressed market conditions. The Bank maintains short-term, high-quality money market investments and government and agency securities in amounts that may average up to three times the Bank’s capital as a primary source of funds to satisfy these requirements and objectives.

The Bank maintains a contingent liquidity plan to meet its obligations and the liquidity needs of members and housing associates in the event of short-term operational disruptions at the Bank or the Office of Finance or short-term disruptions in the debt capital markets. The Finance Agency has established liquidity guidelines that require each FHLBank to maintain sufficient on-balance sheet liquidity in an amount at least equal to its anticipated cash outflows for two different scenarios, both of which assume no capital markets access and no reliance on repurchase

79


agreements or the sale of existing HTM and AFS investments. The two scenarios differ only in the treatment of maturing advances. One scenario assumes that the Bank does not renew any maturing advances. For this scenario, the Bank must have sufficient liquidity to meet its obligations for 15 calendar days. The second scenario requires the Bank to renew maturing advances for certain members based on specific criteria established by the Finance Agency. For this scenario, the Bank must have sufficient liquidity to meet its obligations for 5 calendar days.

The Bank has a regulatory contingency liquidity requirement to maintain at least 5 business days of liquidity to enable it to meet its obligations without issuance of new consolidated obligations. In addition to the regulatory requirement and the Finance Agency’s guidelines on contingent liquidity, the Bank’s asset-liability management committee has established an operational guideline for the Bank to maintain at least 90 days of liquidity to enable the Bank to meet its obligations in the event of a longer-term consolidated obligations market disruption. This operational guideline assumes that the Bank can obtain funds by using MBS and other eligible debt securities as collateral in the repurchase agreement markets. Under this guideline, the Bank maintained at least 90 days of liquidity at all times during the first three months of 2014 and 2013. On a daily basis, the Bank models its cash commitments and expected cash flows for the next 90 days to determine its projected liquidity position. If a market or operational disruption occurred that prevented the issuance of new consolidated obligation bonds or discount notes through the capital markets, the Bank could meet its obligations by: (i) allowing short-term liquid investments to mature, (ii) using eligible securities as collateral for repurchase agreement borrowings, and (iii) if necessary, allowing advances to mature without renewal. In addition, the Bank may be able to borrow on a short-term unsecured basis from financial institutions (Federal funds purchased) or other FHLBanks (inter-FHLBank borrowings).

The Bank actively monitors and manages structural liquidity risks, which the Bank defines as maturity mismatches greater than 90 days for all sources and uses of funds. Structural liquidity maturity mismatches are identified using maturity gap analysis and valuation sensitivity metrics that quantify the risk associated with the Bank’s structural liquidity position.

The following table shows the Bank’s principal financial obligations due, estimated sources of funds available to meet those obligations, and the net difference between funds available and funds needed for the 5-business-day and 90-day periods following March 31, 2014, and December 31, 2013. Also shown are additional contingent sources of funds from on-balance sheet collateral available for repurchase agreement borrowings.


80


Principal Financial Obligations Due and Funds Available for Selected Periods
 
 
 
 
 
 
 
 
 
As of March 31, 2014
  
As of December 31, 2013
(In millions)
5 Business
Days

  
90 Days

  
5 Business
Days

  
90 Days

Obligations due:
 
  
 
  
 
  
 
Commitments for new advances
$
50

  
$
54

  
$

  
$

Commitments to purchase investments

 
143

 

 

Demand deposits
780

  
780

  
590

  
590

Maturing member term deposits

  

  

  
1

Discount note and bond maturities and expected exercises of bond call options
4,650

  
23,639

  
4,203

  
23,509

Subtotal obligations due
5,480

  
24,616

  
4,793

  
24,100

Sources of available funds:
 
  
 
  
 
  
 
Maturing investments
4,420

  
9,639

  
3,577

  
9,387

Cash at Federal Reserve Bank of San Francisco
4,538

  
4,538

  
4,905

  
4,905

Proceeds from scheduled settlements of discount notes and bonds
195

  
804

  
1,625

  
1,640

Maturing advances and scheduled prepayments
3,758

  
10,290

  
4,974

  
11,191

Subtotal sources of available funds
12,911

  
25,271

  
15,081

  
27,123

Net funds available
7,431

  
655

  
10,288

  
3,023

Additional contingent sources of funds:(1)
 
  
 
  
 
  
 
Estimated borrowing capacity of securities available for repurchase agreement borrowings:
 
  
 
  
 
  
 
MBS

  
18,978

  

  
19,574

FFCB bonds
3,052

 
3,052

 
3,130

 
3,052

Subtotal contingent sources of funds
3,052

  
22,030

  
3,130

  
22,626

Total contingent funds available
$
10,483

  
$
22,685

  
$
13,418

  
$
25,649

 

(1)
The estimated amount of repurchase agreement borrowings obtainable from authorized securities dealers is subject to market conditions and the ability of securities dealers to obtain financing for the securities transactions entered into with the Bank. The estimated maximum amount of repurchase agreement borrowings obtainable is based on the current par amount and estimated market value of MBS and other investments (not included in above figures) that are not pledged at the beginning of the period and is subject to estimated collateral discounts taken by securities dealers.

For more information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Liquidity” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk” in the Bank’s 2013 Form
10-K.

Regulatory Capital Requirements

The FHLBank Act and Finance Agency regulations specify that each FHLBank must meet certain minimum regulatory capital standards. 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 that is greater than or equal to its risk-based capital requirement. Because the Bank issues only Class B stock, regulatory capital and permanent capital for the Bank are both composed of retained earnings and Class B stock, including mandatorily redeemable capital stock (which 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. The risk-based capital requirement is 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.


81


The following table shows the Bank’s compliance with the Finance Agency’s capital requirements at March 31, 2014, and December 31, 2013. The Bank's risk-based capital requirement decreased from $3.9 billion at December 31, 2013, to $3.7 billion at March 31, 2014.  
Regulatory Capital Requirements
 
 
 
 
 
 
 
 
 
March 31, 2014
 
December 31, 2013
(Dollars in millions)
Required

 
Actual

 
Required

 
Actual

Risk-based capital
$
3,735

 
$
7,350

 
$
3,912

 
$
7,925

Total regulatory capital
$
3,447

 
$
7,350

 
$
3,431

 
$
7,925

Total regulatory capital ratio
4.00
%
 
8.53
%
 
4.00
%
 
9.24
%
Leverage capital
$
4,309

 
$
11,024

 
$
4,289

 
$
11,888

Leverage ratio
5.00
%
 
12.79
%
 
5.00
%
 
13.86
%

The Bank's total regulatory capital ratio decreased to 8.53% at March 31, 2014, from 9.24% at December 31, 2013, primarily because of the decrease in regulatory capital resulting from the Bank’s excess capital stock repurchase activity. The Bank repurchased $750 million in excess capital stock in the first quarter of 2014.

The Bank’s capital requirements are more fully discussed in “Item 8. Financial Statements and Supplementary Data – Note 16 – Capital” in the Bank’s 2013 Form 10-K.

Risk Management

The Bank has an integrated corporate governance and internal control framework designed to support effective management of the Bank’s business activities and the risks inherent in these activities. As part of this framework, the Bank’s Board of Directors has adopted a Risk Management Policy and a Member Products Policy, which are reviewed regularly and reapproved at least annually. The Risk Management Policy establishes risk guidelines, limits (if applicable), and standards for credit risk, market risk, liquidity risk, operations risk, concentration risk, and business risk in accordance with Finance Agency regulations, the risk profile established by the Board of Directors, and other applicable guidelines in connection with the Bank’s capital plan and overall risk management. For more detailed information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management” in the Bank’s 2013 Form 10‑K.
 
Advances. The Bank manages the credit risk of advances and other member credit products by setting the credit and collateral terms available to individual borrowers based on their creditworthiness and on the quality and value of the assets they pledge as collateral. The Bank also has procedures to assess the mortgage loan quality and documentation standards of the borrowers that pledge mortgage loan collateral. In addition, the Bank has collateral policies and restricted lending procedures in place to help manage its exposure to borrowers that experience difficulty in meeting their capital requirements or other standards of creditworthiness. These credit and collateral policies balance the Bank’s dual goals of meeting members’ needs as a reliable source of liquidity and mitigating credit risk by adjusting credit and collateral terms in view of deterioration in creditworthiness. The Bank has never experienced a credit loss on an advance.


82


The Bank determines the maximum amount and maximum term of the advances it will make to a member based on the member’s creditworthiness and eligible collateral pledged in accordance with the Bank’s credit and collateral policies and regulatory requirements. The Bank may review and change the maximum amount and maximum term at any time. The maximum amount a member may borrow is also limited by the amount and type of collateral pledged because all advances must be fully collateralized.

To identify the credit strength of each borrower and potential borrower, other than community development financial institutions (CDFIs) and insurance companies, the Bank assigns each member and each nonmember borrower an internal credit quality rating from one to ten, with one as the highest credit quality rating. These ratings are based on results from the Bank’s credit model, which considers financial, regulatory, and other qualitative information, including regulatory examination reports. The internal ratings are reviewed on an ongoing basis using current available information and are revised, if necessary, to reflect the borrower’s current financial position. Credit and collateral terms may be adjusted based on the results of this credit analysis.

The Bank determines the maximum amount and maximum term of the advances it will make to an insurance company based on an ongoing risk assessment that considers the member's financial and regulatory standing and other qualitative information deemed relevant by the Bank. This evaluation results in the assignment of an internal credit quality rating from one to ten, with one as the highest credit quality rating. Approved terms are designed to meet the needs of the individual member while mitigating the unique credit and collateral risks associated with insurance companies, including risks related to the resolution process for insurance companies, which is significantly different from the one established for the Bank’s insured depository members.

The Bank determines the maximum amount and maximum term of the advances it will make to a CDFI based on a separate risk assessment system that considers information from the CDFI’s audited annual financial statements, supplemented by additional information deemed relevant by the Bank. Approved terms are designed to meet the needs of the individual member while mitigating the unique credit and collateral risks of CDFIs, which do not file quarterly regulatory financial reports and are not subject to the same inspection and regulation requirements as other types of members.

Pursuant to the Bank’s lending agreements with its borrowers, the Bank limits extensions of credit to individual borrowers to a percentage of the market value or unpaid principal balance of the borrower’s pledged collateral, known as the borrowing capacity. The borrowing capacity percentage varies according to several factors, including the charter type of the member, the collateral type, the value assigned to the collateral, the results of the Bank’s collateral field review of the borrower’s collateral, the pledging method used for loan collateral (specific identification or blanket lien), the amount of loan data provided (detailed or summary reporting), the data reporting frequency (monthly or quarterly), the borrower’s financial strength and condition, and any member-specific collateral risks. Under the terms of the Bank’s lending agreements, the aggregate borrowing capacity of a borrower’s pledged eligible collateral must meet or exceed the total amount of the borrower’s outstanding advances, other extensions of credit, and certain other borrower obligations and liabilities. The Bank monitors each borrower’s aggregate borrowing capacity and collateral requirements on a daily basis by comparing the institution’s borrowing capacity to its obligations to the Bank.

In addition, the total amount of advances made available to each member or housing associate may be limited by the financing availability assigned by the Bank, which is generally expressed as a percentage of the member’s or housing associate’s assets. The amount of financing availability is generally determined by the creditworthiness of the member or housing associate.

When a nonmember financial institution acquires some or all of the assets and liabilities of a member, including outstanding advances and Bank capital stock, the Bank may allow the advances to remain outstanding, at its discretion. The nonmember borrower is required to meet the Bank’s applicable credit, collateral, and capital stock requirements, including requirements regarding creditworthiness and collateral borrowing capacity.


83


The following tables present a summary of the status of the credit outstanding and overall collateral borrowing capacity of the Bank’s member and nonmember borrowers as of March 31, 2014, and December 31, 2013. During the three months ended March 31, 2014, the Bank's internal credit ratings stayed the same or improved for the majority of members and nonmember borrowers.
Member and Nonmember Credit Outstanding and Collateral Borrowing Capacity
by Credit Quality Rating
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
 
 
 
 
 
 
 
 
March 31, 2014
 
 
 
 
 
 
 
 
 
  
All Members and
Nonmembers
  
Members and Nonmembers with Credit Outstanding
 
 
  
 
  
 
  
Collateral Borrowing Capacity(2)
Member or Nonmember
Credit Quality Rating
Number

  
Number

  
Credit
Outstanding(1)

  
Total

  
Used

1-3
232

  
135

  
$
37,398

  
$
145,605

  
26
%
4-6
102

  
49

  
12,612

  
21,886

  
58

7-10
18

  
7

  
61

  
146

  
42

Subtotal
352

  
191

  
50,071

  
167,637

  
30

CDFIs
5

 
3

 
39

 
50

 
78

Total
357

 
194

 
$
50,110

 
$
167,687

 
30
%
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
All Members and
Nonmembers
  
Members and Nonmembers with Credit Outstanding
 
 
  
 
  
 
  
Collateral Borrowing Capacity(2)
Member or Nonmember
Credit Quality Rating
Number

  
Number

  
Credit
Outstanding(1)

  
Total

  
Used

1-3
224

  
135

  
$
37,451

  
$
141,076

  
27
%
4-6
119

  
60

  
10,269

  
21,969

  
47

7-10
17

  
5

  
44

  
133

  
33

Total
360

  
200

  
47,764

  
163,178

  
29

CDFIs
4

 
2

 
30

 
37

 
81

Total
364

 
202

 
$
47,794

 
$
163,215

 
29
%
 
(1)
Includes advances, letters of credit, the market value of swaps, estimated prepayment fees for certain borrowers, and the credit enhancement obligation on MPF loans.
(2)
Collateral borrowing capacity does not represent any commitment to lend on the part of the Bank.


84


Member and Nonmember Credit Outstanding and Collateral Borrowing Capacity
by Unused Borrowing Capacity
 
 
 
 
 
 
(Dollars in millions)
 
 
 
 
 
March 31, 2014
 
 
 
 
 
Unused Borrowing Capacity
Number of Members and Nonmembers with
Credit Outstanding

  
Credit
Outstanding(1)

  
Collateral
Borrowing
Capacity(2)

0% – 10%
7

  
$
3,118

  
$
3,191

11% – 25%
9

  
10,229

  
12,463

26% – 50%
19

  
9,943

  
18,592

More than 50%
159

  
26,820

  
133,441

Total
194

  
$
50,110

  
$
167,687

 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
Unused Borrowing Capacity
Number of Members and Nonmembers with
Credit Outstanding

  
Credit
Outstanding(1)

  
Collateral
Borrowing
Capacity(2)

0% – 10%
3

  
$
42

  
$
44

11% – 25%
13

  
4,805

  
5,983

26% – 50%
23

  
13,862

  
21,433

More than 50%
163

  
29,085

  
135,755

Total
202

  
$
47,794

  
$
163,215

 

(1)
Includes advances, letters of credit, the market value of swaps, estimated prepayment fees for certain borrowers, and the credit enhancement obligation on MPF loans.
(2)
Collateral borrowing capacity does not represent any commitment to lend on the part of the Bank.

Total collateral borrowing capacity increased in the first quarter of 2014 because of improvement in collateral values and member credit quality. Based on the collateral pledged as security for advances, the Bank's credit analyses of borrowers' 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 credit losses on advances is deemed necessary by the Bank. The Bank has never experienced any credit losses on advances.

Securities pledged as collateral are assigned borrowing capacities that reflect the securities’ pricing volatility and market liquidity risks. Securities are delivered to the Bank’s custodian when they are pledged. The Bank prices securities collateral on a daily basis or twice a month, depending on the availability and reliability of external pricing sources. Securities that are normally priced twice a month may be priced more frequently in volatile market conditions. The Bank benchmarks the borrowing capacities for securities collateral to the market on a periodic basis and may review and change the borrowing capacity for any security type at any time. As of March 31, 2014, the borrowing capacities assigned to U.S. Treasury and agency securities ranged from 55% to 99% of their market value. The borrowing capacities assigned to private-label MBS, which must be rated AAA or AA when initially pledged, generally ranged from 50% to 75% of their market value, depending on the underlying collateral (residential mortgage loans, home equity loans, or commercial real estate loans), the rating, and the subordination structure of the respective securities.

The following table presents the securities collateral pledged by all members and by nonmembers with credit outstanding at March 31, 2014, and December 31, 2013.

85


 
Composition of Securities Collateral Pledged
by Members and by Nonmembers with Credit Outstanding
 
 
 
 
 
 
 
 
(In millions)
March 31, 2014
  
December 31, 2013
Securities Type with Current Credit Ratings
Current Par

  
Borrowing
Capacity

  
Current Par

  
Borrowing
Capacity

U.S. Treasury (bills, notes, bonds)
$
500

  
$
495

  
$
484

  
$
481

Agency (notes, subordinated debt, structured notes, indexed amortization notes, and Small Business Administration pools)
3,068

  
2,985

  
3,156

  
3,059

Agency pools and collateralized mortgage obligations
9,687

  
9,265

  
10,029

  
9,543

PLRMBS – publicly registered investment-grade-rated senior tranches
3

  
1

  
4

  
1

Private-label commercial MBS – publicly registered AAA-rated subordinated tranches
79

  
65

  
83

  
68

Term deposits with the Bank
1

  
1

  
1

  
1

Total
$
13,338

  
$
12,812

  
$
13,757

  
$
13,153


With respect to loan collateral, most borrowers (except insurance companies) may choose to pledge loan collateral by specific identification or under a blanket lien. Insurance company members are required to pledge loan collateral by specific identification with monthly reporting. All other borrowers pledging by specific identification must provide a detailed listing of all the loans pledged to the Bank on a monthly or quarterly basis. With a blanket lien, a borrower generally pledges the following loan types, whether or not the individual loans are eligible to receive borrowing capacity: all loans secured by real estate; all loans made for commercial, corporate, or business purposes; and all participations in these loans. Borrowers pledging under a blanket lien may provide a detailed listing of loans or may use a summary reporting method.

The Bank may require certain borrowers to deliver pledged loan collateral to the Bank for one or more reasons, including the following: the borrower is a de novo institution (chartered within the last three years), an insurance company, or a CDFI; the Bank is concerned about the borrower’s creditworthiness; or the Bank is concerned about the maintenance of its collateral or the priority of its security interest. With the exception of insurance companies and CDFIs, borrowers required to deliver loan collateral must pledge those loans under a blanket lien with detailed reporting. The Bank’s largest borrowers are required to report detailed data on a monthly basis and may pledge loan collateral using either the specific identification method or the blanket lien method with detailed reporting.

As of March 31, 2014, 42% of the loan collateral pledged to the Bank was pledged by 34 institutions by specific identification, 43% was pledged by 153 institutions under a blanket lien with detailed reporting, and 15% was pledged by 101 institutions under a blanket lien with summary reporting.

As of March 31, 2014, the Bank’s maximum borrowing capacities as a percentage of the assigned market value of mortgage loan collateral pledged under a blanket lien with detailed reporting were as follows: 90% for first lien residential mortgage loans, 88% for multifamily mortgage loans, 84% for commercial mortgage loans, and 81% for second lien residential mortgage loans. The maximum borrowing capacity for small business, small agribusiness, and small farm loans was 50% of the unpaid principal balance, although most of these loans are pledged under blanket lien with summary reporting, with a maximum borrowing capacity of 25%. The highest borrowing capacities are available to borrowers that pledge under a blanket lien with detailed reporting because the detailed loan information allows the Bank to assess the value of the collateral more precisely and because additional collateral is pledged under the blanket lien that may not receive borrowing capacity but may be liquidated to repay advances in the event of default. The Bank may review and change the maximum borrowing capacity for any type of loan collateral at any time.

The table below presents the mortgage loan collateral pledged by all members and by nonmembers with credit outstanding at March 31, 2014, and December 31, 2013.

86


 
Composition of Loan Collateral Pledged
by Members and by Nonmembers with Credit Outstanding
 
 
 
 
 
 
 
 
(In millions)
March 31, 2014
  
December 31, 2013
Loan Type
Unpaid Principal
Balance

  
Borrowing
Capacity

  
Unpaid Principal
Balance

  
Borrowing
Capacity

First lien residential mortgage loans
$
100,704

  
$
80,923

  
$
98,377

  
$
78,992

Second lien residential mortgage loans and home equity lines of credit
30,220

  
10,425

  
31,344

  
8,968

Multifamily mortgage loans
20,263

  
16,450

  
21,162

  
17,131

Commercial mortgage loans
49,541

  
33,883

  
47,780

  
32,326

Loan participations(1)
17,078

  
12,416

  
16,540

  
11,843

Small business, small farm, and small agribusiness loans
2,788

  
682

  
2,956

  
709

Other
139

  
96

  
135

  
93

Total
$
220,733

  
$
154,875

  
$
218,294

  
$
150,062


(1)
The unpaid principal balance for loan participations is 100% of the outstanding loan amount. The borrowing capacity for loan participations is based on the participated amount pledged to the Bank.

The Bank holds a security interest in subprime residential mortgage loans pledged as collateral. Subprime loans are defined as loans with a borrower FICO score of 660 or less at origination, or if the original FICO score is not available, as loans with a current borrower FICO score of 660 or less. At March 31, 2014, and December 31, 2013, the unpaid principal balance of these loans totaled $14 billion and $14 billion, respectively. The Bank reviews and assigns borrowing capacities to subprime mortgage loans as it does for all other types of loan collateral, taking into account the known credit attributes in the pricing of the loans. All advances, including those made to borrowers pledging subprime mortgage loans, are required to be fully collateralized. The Bank limits the amount of borrowing capacity that may be supported by subprime collateral.

Investments. The Bank has adopted credit policies and exposure limits for investments that promote risk limitation, diversification, and liquidity. These policies determine eligible counterparties and restrict the amounts and terms of the Bank’s investments with any given counterparty according to the Bank’s own capital position as well as the capital and creditworthiness of the counterparty.

The Bank monitors its investments for substantive changes in relevant market conditions and any declines in fair value. For securities in an unrealized loss position because of factors other than movements in interest rates, such as widening of mortgage asset spreads, the Bank considers whether it expects to recover the entire amortized cost basis of the security by comparing the 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.

When the fair value of an individual investment security falls below its amortized cost, the Bank evaluates whether the decline is other than temporary. The Bank recognizes an OTTI when it determines that it will be unable to recover the entire amortized cost basis of the security and the fair value of the investment security is less than its amortized cost. The Bank considers its intent to hold the security and whether it is more likely than not that the Bank will be required to sell the security before its anticipated recovery of the remaining cost basis, and other factors. The Bank generally views changes in the fair value of the securities caused by movements in interest rates to be temporary.

The following tables present the Bank’s investment credit exposure at the dates indicated, based on the lowest of the long-term credit ratings provided by Moody’s, Standard & Poor’s, or comparable Fitch ratings.


87


Investment Credit Exposure
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Carrying Value
 
Credit Rating(1)
 
 
 
 
Investment Type
AAA

 
AA

  
A

 
BBB

 
BB

 
B

 
CCC

 
CC

 
C

 
D

 
Unrated

 
Total

Non-MBS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
$

 
$
827

 
$
1,681

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
2,508

Housing finance agency bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CalHFA bonds

 

 
110

 
270

 

 

 

 

 

 

 

 
380

GSEs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FFCB bonds

 
3,114

 

 

 

 

 

 

 

 

 

 
3,114

Total non-MBS

 
3,941

 
1,791

 
270

 

 

 

 

 

 

 

 
6,002

MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ginnie Mae

 
1,689

 

 

 

 

 

 

 

 

 

 
1,689

GSEs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac

 
5,093

 

 

 

 

 

 

 

 

 

 
5,093

Fannie Mae

 
6,099

 
24

 

 
16

 

 

 

 

 

 

 
6,139

Total GSEs

 
11,192

 
24

 

 
16

 

 

 

 

 

 

 
11,232

PLRMBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prime

 

 
3

 
452

 
554

 
343

 
304

 

 
159

 
160

 
2

 
1,977

Alt-A, option ARM

 

 

 

 
16

 
76

 
927

 
66

 
25

 

 

 
1,110

Alt-A, other
12

 
2

 
109

 
283

 
308

 
555

 
2,774

 
344

 
311

 
1,307

 
2

 
6,007

Total PLRMBS
12

 
2

 
112

 
735

 
878

 
974

 
4,005

 
410

 
495

 
1,467

 
4

 
9,094

Total MBS
12

 
12,883

 
136

 
735

 
894

 
974

 
4,005

 
410

 
495

 
1,467

 
4

 
22,015

Total securities
12

 
16,824

 
1,927

 
1,005

 
894

 
974

 
4,005

 
410

 
495

 
1,467

 
4

 
28,017

Securities purchased under agreements to resell

 
500

 

 

 

 

 

 

 

 

 

 
500

Federal funds sold(2)

 
3,668

 
2,733

 

 

 

 

 

 

 

 

 
6,401

Total investments
$
12

 
$
20,992

 
$
4,660

 
$
1,005

 
$
894

 
$
974

 
$
4,005

 
$
410

 
$
495

 
$
1,467

 
$
4

 
$
34,918



88


(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Carrying Value
 
Credit Rating(1)
 
 
 
 
Investment Type
AAA

 
AA

 
A

 
BBB

 
BB

 
B

 
CCC

 
CC

 
C

 
D

 
Unrated

 
Total

Non-MBS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
$

 
$
360

 
$
1,300

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
1,660

Housing finance agency bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

CalHFA bonds

 

 
110

 
306

 

 

 

 

 

 

 

 
416

GSEs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FFCB bonds

 
3,194

 

 

 

 

 

 

 

 

 

 
3,194

Total non-MBS

 
3,554

 
1,410

 
306

 

 

 

 

 

 

 

 
5,270

MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ginnie Mae

 
1,589

 

 

 

 

 

 

 

 

 

 
1,589

GSEs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac

 
5,250

 

 

 

 

 

 

 

 

 

 
5,250

Fannie Mae

 
6,286

 
27

 

 
18

 

 

 

 

 

 

 
6,331

Total GSEs

 
11,536

 
27

 

 
18

 

 

 

 

 

 

 
11,581

PLRMBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prime

 

 
3

 
498

 
555

 
364

 
307

 

 
166

 
162

 
2

 
2,057

Alt-A, option ARM

 

 

 

 
16

 
76

 
937

 
60

 
26

 

 

 
1,115

Alt-A, other
12

 
2

 
116

 
311

 
307

 
572

 
2,832

 
387

 
352

 
1,257

 
2

 
6,150

Total PLRMBS
12

 
2

 
119

 
809

 
878

 
1,012

 
4,076

 
447

 
544

 
1,419

 
4

 
9,322

Total MBS
12

 
13,127

 
146

 
809

 
896

 
1,012

 
4,076

 
447

 
544

 
1,419

 
4

 
22,492

Total securities
12

 
16,681

 
1,556

 
1,115

 
896

 
1,012

 
4,076

 
447

 
544

 
1,419

 
4

 
27,762

Federal funds sold(2)

 
3,773

 
3,686

 
39

 

 

 

 

 

 

 

 
7,498

Total investments
$
12

 
$
20,454

 
$
5,242

 
$
1,154

 
$
896

 
$
1,012

 
$
4,076

 
$
447

 
$
544

 
$
1,419

 
$
4

 
$
35,260


(1)
Credit ratings of BB and lower are below investment grade.
(2)
Includes $100 million in Federal funds sold to a member counterparty determined by the Bank to have an internal credit rating equivalent to AA.

For all securities in its AFS and HTM portfolios, for Federal funds sold, and for securities purchased under agreements to resell, 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 invests in short-term unsecured Federal funds sold, securities purchased under agreements to resell, and negotiable certificates of deposit with member and nonmember counterparties, all of which are highly rated.

The Bank actively monitors its credit exposures and the credit quality of its counterparties, including an assessment of each counterparty’s financial performance, capital adequacy, likelihood of parental or sovereign support, and the current market perceptions of the counterparties. The Bank may also consider general macroeconomic and market conditions and political stability when establishing limits on unsecured investments with U.S. branches and agency offices of foreign commercial banks. As a result of deteriorating financial condition or concerns about adverse economic or market developments, the Bank may reduce limits or terms on unsecured investments or suspend a counterparty.

Finance Agency regulations limit the amount of unsecured credit that an individual FHLBank may extend to a single counterparty. This limit is calculated with reference to a percentage of either the FHLBank’s or the counterparty’s capital and to the counterparty’s overall credit rating. Under these regulations, the lesser of the FHLBank’s total regulatory capital or the counterparty’s Tier 1 capital is multiplied by a percentage specified in the

89


regulation. The percentages used to determine the maximum amount of term extensions of unsecured credit range from 1% to 15%, depending on the counterparty’s overall credit rating. Term extensions of unsecured credit include on-balance sheet transactions, off-balance sheet commitments, and derivative transactions, but exclude overnight Federal funds sales, even if subject to a continuing contract. (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Derivative Counterparties” for additional information related to derivatives exposure.)

Finance Agency regulations also permit the FHLBanks to extend additional unsecured credit to the same single counterparty for overnight sales of Federal funds, even if subject to a continuing contract. However, an FHLBank’s total unsecured credit to a single counterparty (total term plus additional overnight Federal funds unsecured credit) may not exceed twice the regulatory limit for term exposures (2% to 30% of the lesser of the FHLBank’s total capital or the counterparty’s Tier 1 capital, based on the counterparty’s overall credit rating). In addition, the FHLBanks are prohibited by Finance Agency regulation from investing in financial instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks.

Under Finance Agency regulations, the total amount of unsecured credit that an FHLBank may extend to a group of affiliated counterparties for term extensions of unsecured credit and overnight Federal funds sales, combined, may not exceed 30% of the FHLBank’s total capital. These limits on affiliated counterparty groups are in addition to the limits on extensions of unsecured credit applicable to any single counterparty within the affiliated group.

As of March 31, 2014, the Bank’s unsecured investment credit exposure to U.S. branches and agency offices of foreign commercial banks was limited to Federal funds sold and certificates of deposit, which represented 95% and 26%, respectively, of the Bank’s total unsecured investment credit exposure in Federal funds sold and certificates of deposit.

The following table presents the credit ratings of the unsecured investment credit exposures presented by the domicile of the counterparty or the domicile of the counterparty’s parent for U.S. branches and agency offices of foreign commercial banks, based on the lowest of the credit ratings provided by Moody’s, Standard & Poor’s, or comparable Fitch ratings. This table does not reflect the foreign sovereign government’s credit rating. At March 31, 2014, 50% of the carrying value of unsecured investments held by the Bank were rated AA.


90


Ratings of Unsecured Investment Credit Exposure by Domicile of Counterparty
 
 
 
 
 
 
(In millions)
 
 
 
 
 
March 31, 2014
 
 
 
 
 
  
Carrying Value(1)
 
Credit Rating(2)
 
Domicile of Counterparty
AA

 
A

 
Total

Domestic(3)
$
927

 
$
1,039

 
$
1,966

U.S. subsidiaries of foreign commercial banks

 
250

 
250

Total domestic and U.S. subsidiaries of foreign commercial banks
927

 
1,289

 
2,216

U.S. branches and agency offices of foreign commercial banks:
 
 
 
 
 
Australia
999

 

 
999

Canada
999

 
1,854

 
2,853

Japan

 
1,271

 
1,271

Netherlands
785

 

 
785

Sweden
785

 

 
785

Total U.S. branches and agency offices of foreign commercial banks
3,568

 
3,125

 
6,693

Total unsecured credit exposure
$
4,495

 
$
4,414

 
$
8,909


(1)
Excludes unsecured investment credit exposure to U.S. government agencies and instrumentalities, government-sponsored enterprises, and supranational entities and does not include related accrued interest as of March 31, 2014.
(2)
Does not reflect changes in ratings, outlook, or watch status occurring after March 31, 2014. These ratings represent the lowest rating available for each security owned by the Bank, based on the ratings provided by Moody’s, Standard & Poor’s, or comparable Fitch ratings. The Bank’s internal rating may differ from this rating.
(3)
Includes $100 million in Federal funds sold to a member counterparty determined by the Bank to have an internal credit rating equivalent to AA.

The following table presents the contractual maturity of the Bank’s unsecured investment credit exposure by the domicile of the counterparty or the domicile of the counterparty’s parent for U.S. branches and agency offices of foreign commercial banks.


91


Contractual Maturity of Unsecured Investment Credit Exposure by Domicile of Counterparty
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
March 31, 2014
 
 
 
 
 
 
 
  
Carrying Value(1)
Domicile of Counterparty
Overnight
 
Due 2 Days Through
30 Days

 
Due 31 Days Through
90 Days

 
Total

Domestic
$
100

 
$
1,026

 
$
840

 
$
1,966

U.S. subsidiaries of foreign commercial banks
250

 

 

 
250

Total domestic and U.S. subsidiaries of foreign commercial banks
350

 
1,026

 
840

 
2,216

U.S. branches and agency offices of foreign commercial banks:
 
 
 
 
 
 
 
Australia

 
757

 
242

 
999

Canada

 
1,028

 
1,825

 
2,853

Japan

 
1,271

 

 
1,271

Netherlands

 
785

 

 
785

Sweden
785

 

 

 
785

Total U.S. branches and agency offices of foreign commercial banks
785

 
3,841

 
2,067

 
6,693

Total unsecured credit exposure
$
1,135

 
$
4,867

 
$
2,907

 
$
8,909


(1)
Excludes unsecured investment credit exposure to U.S. government agencies and instrumentalities, government-sponsored enterprises, and supranational entities and does not include related accrued interest as of March 31, 2014.

The Bank determined that, as of March 31, 2014, the de minimis gross unrealized losses on its certificates of deposit were temporary because the gross unrealized losses were caused by movements in interest rates and not by the deterioration of the issuers’ creditworthiness. The certificates of deposit were all with issuers that had credit ratings of at least A at March 31, 2014. As a result, the Bank expects to recover the entire amortized cost basis of these securities.

The Bank’s investments may also include housing finance agency bonds issued by housing finance agencies located in Arizona, California, and Nevada, the three states that make up the Bank’s district. These bonds are mortgage revenue bonds (federally taxable), are collateralized by pools of first lien residential mortgage loans, and are credit-enhanced by bond insurance. The bonds held by the Bank are issued by the California Housing Finance Agency (CalHFA) and insured by either Ambac Assurance Corporation (Ambac), National Public Financial Guarantee (formerly MBIA Insurance Corporation), or Assured Guaranty Municipal Corporation (formerly Financial Security Assurance Incorporated). At March 31, 2014, all of the bonds were rated at least BBB by Moody’s or Standard & Poor’s.

At March 31, 2014, the Bank’s investments in housing finance agency bonds, which were issued by CalHFA, had gross unrealized losses totaling $88 million. These gross unrealized losses were due to an illiquid market, credit concerns regarding the underlying mortgage collateral, and credit concerns regarding the monoline insurance providers, causing these investments to be valued at a discount to their acquisition cost. The Bank independently modeled cash flows for the underlying collateral, using assumptions for default rates and loss severity that a market participant would deem reasonable, and concluded that the available credit support within the CalHFA structure more than offset the projected underlying collateral losses. The Bank determined that, as of March 31, 2014, all of the gross unrealized losses on the CalHFA bonds are temporary because the underlying collateral and credit

92


enhancements were sufficient to protect the Bank from losses. As a result, the Bank expects to recover the entire amortized cost basis of these securities. If conditions in the housing and mortgage markets and general business and economic conditions deteriorate, the fair value of the CalHFA bonds may decline further and the Bank may experience OTTI in future periods.

The Bank’s MBS investments include PLRMBS, all of which were AAA-rated at the time of purchase, and
agency residential MBS, which are backed by Fannie Mae, Freddie Mac, or Ginnie Mae. Some of the PLRMBS were issued by and/or purchased from members, former members, or their affiliates. The Bank does not have investment credit limits and terms for these investments that differ for members and nonmembers. Bank policy limits total MBS investments to three times the Bank’s capital. At March 31, 2014, the Bank’s MBS portfolio was 300% of Bank capital (as determined in accordance with regulations governing the operations of the FHLBanks).

The Bank executes all MBS investments without preference to the status of the counterparty or the issuer of the investment as a nonmember, member, or affiliate of a member. When the Bank executes non-MBS investments with members, the Bank may give consideration to their secured credit availability and the Bank’s advances price levels.

The Bank has not purchased any PLRMBS since the first quarter of 2008, and current Bank policy prohibits the purchase of PLRMBS.

At March 31, 2014, PLRMBS representing 33% of the amortized cost of the Bank’s MBS portfolio were labeled Alt-A by the issuer. These 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 that have sufficient credit ratings to qualify for a prime mortgage loan, but the loans may not meet standard underwriting guidelines for documentation requirements, property type, or loan-to-value ratios.

As of March 31, 2014, the Bank’s investment in MBS had gross unrealized losses totaling $486 million, most of which were related to PLRMBS. These gross unrealized losses were primarily due to illiquidity in the MBS market, uncertainty about the future condition of the housing and mortgage markets and the economy, and market expectations of the credit performance of loan collateral underlying these securities, causing these assets to be valued at discounts to their acquisition cost.

For its agency MBS, the Bank expects to recover the entire amortized cost basis of these securities because the Bank 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. As a result, the Bank determined that, as of March 31, 2014, all of the gross unrealized losses on its agency MBS are temporary.

To assess whether it expects to recover the entire amortized cost basis of its PLRMBS, the Bank performed a cash flow analysis for all of its PLRMBS as of March 31, 2014, using two third-party models. The first model projects prepayments, default rates, and loss severities on the underlying collateral based on borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions related primarily to future changes in home prices and interest rates. 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), which are based on an assessment of the regional 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 with a population of 10,000 or more people.

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

93


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 housing price forecast that reflects the expectations for near- and long-term housing price behavior.

The FHLBanks’ OTTI Governance Committee developed a short-term housing price forecast with projected changes ranging from a decrease of 3.0% to an increase of 9.0% over the 12-month period beginning January 1, 2014. For the vast majority of markets, the projected short-term housing price changes range from a decrease of 1.0% to an increase of 4.0%. Thereafter, home prices were projected to recover using one of five different recovery paths. In addition to evaluating its PLRMBS under a base case (or best estimate) scenario, the Bank performed a cash flow analysis for each of these securities under a more adverse housing price scenario. This more adverse scenario was primarily based on a short-term housing price forecast that was decreased five percentage points, followed by a recovery path that was 33.0% lower than the base case.

The following table presents the ranges of the annualized projected home price recovery rates at March 31, 2014:
Recovery in Terms of Annualized Rates of Housing Price Change Under Base Case Scenario
 
Housing Price Scenario
Months
Base Case
1 - 6
0.0
%
-
3.0%
7 - 12
1.0
%
-
4.0%
13 - 18
2.0
%
-
4.0%
19 - 30
2.0
%
-
5.0%
31 - 54
2.0
%
-
6.0%
Thereafter
2.3
%
-
5.6%

The following table shows the base case scenario and what the credit-related OTTI loss would have been under the more adverse housing price scenario at March 31, 2014:
 
OTTI Analysis Under Base Case and Adverse Case Scenarios
 
 
 
 
 
 
 
 
 
 
 
 
 
Housing Price Scenario
 
Base Case
  
Adverse Case
(Dollars in millions)
Number of
Securities
  
Unpaid
Principal
Balance

  
Credit-
Related
OTTI(1)

  
Number of
Securities
 
Unpaid
Principal
Balance

  
Credit-
Related
OTTI(1)

Other-than-temporarily impaired PLRMBS backed by loans classified at origination as:
 
  
 
  
 
  
 
 
 
  
 
Prime
1
  
$

  
$

  
1
 
$

  
$

Alt-A, other
5
  
107

  

  
15
 
480

  
(3
)
Total
6
  
$
107

  
$

  
16
 
$
480

  
$
(3
)

(1)
Amounts are for the three months ended March 31, 2014.

For more information on the Bank’s OTTI analysis and reviews, see “Item 1. Financial Statements – Note 6 – Other-Than-Temporary Impairment Analysis.”


94


The following table presents the ratings of the Bank’s PLRMBS as of March 31, 2014, by collateral type at origination and by year of securitization.

Unpaid Principal Balance of PLRMBS by Year of Securitization and Credit Rating
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unpaid Principal Balance
 
Credit Rating(1) 
  
 
 
 
 
 
Collateral Type at Origination and Year of Securitization
AAA

  
AA

 
A

  
BBB

  
BB

  
B

  
CCC

  
CC

  
C

  
D

 
Unrated

 
Total

Prime
 
  
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
2008
$

 
$

 
$

 
$

 
$

 
$

 
$
196

 
$

 
$

  
$

 
$

 
$
196

2007

 

 

 

 

 
84

 
47

 

 
204

  
162

 

 
497

2006

 

 

 

 

 
58

 

 

 

  
37

 

 
95

2005

 

 

 
32

 

 
15

 
63

 

 

  

 

 
110

2004 and earlier

 

 
3

 
419

 
553

 
191

 
16

 

 

  

 
2

 
1,184

Total Prime

  

 
3

  
451

  
553

  
348

  
322

  

  
204

  
199

 
2

 
2,082

Alt-A, option ARM
 
  
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
2007

 

 

 

 

 
68

 
1,002

 

 

  

 

 
1,070

2006

 

 

 

 

 

 
187

 

 

  

 

 
187

2005

 

 

 

 
16

 
19

 

 
130

 
80

  

 

 
245

Total Alt-A, option ARM

  

 

  

  
16

  
87

  
1,189

  
130

  
80

  

 

 
1,502

Alt-A, other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2008

 

 

 

 

 
139

 

 

 

 

 

 
139

2007

 

 

 

 

 
94

 
909

 

 
235

 
572

 

 
1,810

2006

 

 
39

 

 

 
9

 
199

 

 

 
562

 

 
809

2005

 

 
21

 

 

 
157

 
1,922

 
403

 
147

 
489

 

 
3,139

2004 and earlier
12

 
2

 
48

 
284

 
307

 
170

 
111

 

 

 

 
2

 
936

Total Alt-A, other
12

 
2

 
108

 
284

 
307

 
569

 
3,141

 
403

 
382

 
1,623

 
2

 
6,833

Total par value
$
12

  
$
2

 
$
111

  
$
735

  
$
876

  
$
1,004

  
$
4,652

  
$
533

  
$
666

  
$
1,822

 
$
4

 
$
10,417


(1)
The credit ratings used by the Bank are based on the lowest of Moody’s, Standard & Poor’s, or comparable Fitch ratings. Credit ratings of BB and lower are below investment grade.

95


The following table presents the ratings of the Bank’s other-than-temporarily impaired PLRMBS at March 31, 2014, by collateral type at origination and by year of securitization.
 
Unpaid Principal Balance of Other-Than-Temporarily Impaired PLRMBS
by Year of Securitization and Credit Rating
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unpaid Principal Balance
 
Credit Rating(1)
  
 
Collateral Type at Origination and Year of Securitization
A

  
BBB

  
BB

  
B

  
CCC

  
CC

  
C

 
D

  
Total

Prime
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
  
 
2008
$

  
$

  
$

  
$

  
$
179

  
$

  
$

 
$

  
$
179

2007

  

  

  
17

  
46

  

  
204

 
162

  
429

2006

  

  

  
3

  

  

  

 
37

  
40

2005

  

  

  
15

  
21

  

  

 

  
36

2004 and earlier

  

  

  
70

  
11

  

  

 

  
81

Total Prime

  

  

  
105

  
257

  

  
204

 
199

  
765

Alt-A, option ARM
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
  
 
2007

  

  

  
68

  
1,002

  

  

 

  
1,070

2006

  

  

  

  
187

  

  

 

  
187

2005

  

  

  
19

  

  
130

  
80

 

  
229

Total Alt-A, option ARM

  

  

  
87

  
1,189

  
130

  
80

 

  
1,486

Alt-A, other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2008

 

 

 
139

 

 

 

 

 
139

2007

 

 

 

 
909

 

 
235

 
572

 
1,716

2006
39

 

 

 
9

 
199

 

 

 
562

 
809

2005

 

 

 
144

 
1,922

 
404

 
147

 
489

 
3,106

2004 and earlier
14

 
76

 
77

 
93

 
83

 

 

 

 
343

Total Alt-A, other
53

 
76

 
77

 
385

 
3,113

 
404

 
382

 
1,623

 
6,113

Total par value
$
53

  
$
76

  
$
77

  
$
577

  
$
4,559

  
$
534

  
$
666

 
$
1,822

  
$
8,364

 

(1)
The credit ratings used by the Bank are based on the lowest of Moody’s, Standard & Poor’s, or comparable Fitch ratings. Credit ratings of BB and lower are below investment grade.

For the Bank’s PLRMBS, the following table shows the amortized cost, estimated fair value, credit- and non-credit-related OTTI, performance of the underlying collateral based on the classification at the time of origination, and credit enhancement statistics by type of collateral and year of securitization. Credit enhancement is defined as the percentage of subordinated tranches and over-collateralization, if any, in a security structure that will absorb losses before the Bank will experience a loss on the security, expressed as a percentage of the underlying collateral balance. The credit enhancement figures include the additional credit enhancement required by the Bank (above the amounts required for an AAA rating by the credit rating agencies) for selected securities starting in late 2004, and for all securities starting in late 2005. The calculated weighted averages represent the dollar-weighted averages of all the PLRMBS in each category shown. The classification (prime or Alt-A) is based on the model used to run the estimated cash flows for the security, which may not necessarily be the same as the classification at the time of origination.

PLRMBS Credit Characteristics
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underlying Collateral Performance and
Credit Enhancement Statistics
Collateral Type at Origination and Year of Securitization
Amortized
Cost

 
Gross
Unrealized
Losses

 
Estimated
Fair
Value

 
Total
OTTI

 
Non-
Credit-
Related
OTTI

 
Credit-
Related
OTTI

 
Weighted
Average
60+ Days
Collateral
Delinquency
Rate

 
Original
Weighted
Average
Credit
Support

 
Current
Weighted
Average
Credit
Support

Prime
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2008
$
168

 
$

 
$
183

 
$

 
$

 
$

 
17.68
%
 
30.00
%
 
16.60
%
2007
410

 
19

 
403

 

 

 

 
18.21

 
22.60

 
5.64

2006
84

 
1

 
89

 

 

 

 
17.66

 
12.26

 
4.76

2005
109

 
3

 
107

 

 

 

 
12.71

 
11.86

 
14.86

2004 and earlier
1,184

 
21

 
1,166

 

 

 

 
8.22

 
4.44

 
11.17

Total Prime
1,955

 
44

 
1,948

 

 

 

 
12.16

 
11.93

 
10.27

Alt-A, option ARM
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2007
882

 
61

 
840

 

 

 

 
30.58

 
44.15

 
21.04

2006
132

 
7

 
145

 

 

 

 
29.01

 
44.87

 
11.62

2005
102

 
3

 
123

 

 

 

 
25.67

 
22.78

 
7.67

Total Alt-A, option ARM
1,116

 
71

 
1,108

 

 

 

 
29.58

 
40.75

 
17.69

Alt-A, other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2008
136

 
3

 
133

 

 

 

 
14.24

 
31.80

 
24.60

2007
1,559

 
85

 
1,538

 

 

 

 
25.27

 
26.96

 
13.47

2006
607

 
1

 
678

 

 

 

 
23.53

 
18.49

 
2.98

2005
2,844

 
146

 
2,742

 
(1
)
 
1

 

 
16.05

 
13.99

 
7.41

2004 and earlier
934

 
26

 
918

 

 

 

 
11.36

 
8.09

 
16.34

Total Alt-A, other
6,080

 
261

 
6,009

 
(1
)
 
1

 

 
18.70

 
17.51

 
10.06

Total
$
9,151

 
$
376

 
$
9,065

 
$
(1
)
 
$
1

 
$

 
18.96
%
 
19.75
%
 
11.20
%

The following table presents a summary of the significant inputs used to determine potential OTTI credit losses in the Bank’s PLRMBS portfolio at March 31, 2014.


96


Significant Inputs to OTTI Credit Analysis for All PLRMBS
(In millions)
 
 
 
 
 
 
 
March 31, 2014
 
 
 
 
 
 
 
 
Significant Inputs
 
Current
 
Prepayment Rates
 
Default Rates
 
Loss Severities
 
Credit Enhancement
Year of Securitization
Weighted Average %
  
Weighted Average %
  
Weighted Average %
  
Weighted Average %
Prime
 
  
 
  
 
  
 
2008
12.3
 
15.7
 
34.7
 
20.0
2007
9.2
 
4.4
 
31.8
 
9.8
2006
11.6
 
14.4
 
36.0
 
12.1
2005
13.9
 
6.5
 
31.7
 
13.4
2004 and earlier
14.9
 
4.4
 
31.1
 
10.7
Total Prime
13.8
 
7.4
 
32.2
 
12.7
Alt-A, option ARM
 
 
 
 
 
 
 
2007
5.4
 
45.7
 
44.9
 
21.5
2006
4.9
 
46.0
 
45.9
 
12.1
2005
6.2
 
30.6
 
39.3
 
7.8
Total Alt-A, option ARM
5.4
 
43.3
 
44.1
 
18.1
Alt-A, other
 
 
 
 
 
 
 
2007
11.6
 
31.0
 
41.7
 
8.8
2006
10.3
 
28.1
 
44.8
 
10.3
2005
10.9
 
17.1
 
40.5
 
7.7
2004 and earlier
13.1
 
12.1
 
33.2
 
16.3
Total Alt-A, other
11.3
 
21.6
 
40.5
 
9.6
Total
10.8
 
22.5
 
39.7
 
11.3

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 security, which may not necessarily be the same as the classification at the time of origination.

The following table presents the unpaid principal balance of PLRMBS by collateral type at the time of origination at March 31, 2014, and December 31, 2013.
 
Unpaid Principal Balance of PLRMBS by Collateral Type at Origination
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2014
 
December 31, 2013
(In millions)
Fixed Rate

 
Adjustable
Rate

 
Total

 
Fixed Rate

 
Adjustable
Rate

 
Total

PLRMBS:
 
 
 
 
 
 
 
 
 
 
 
Prime
$
276

 
$
1,806

 
$
2,082

 
$
295

 
$
1,878

 
$
2,173

Alt-A, option ARM

 
1,502

 
1,502

 

 
1,532

 
1,532

Alt-A, other
2,504

 
4,329

 
6,833

 
2,716

 
4,337

 
7,053

Total
$
2,780

 
$
7,637

 
$
10,417

 
$
3,011

 
$
7,747

 
$
10,758



97


The following table presents PLRMBS in a loss position at March 31, 2014.

PLRMBS in a Loss Position at March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
Collateral Type at Origination:
 
Unpaid
Principal
Balance

 
Amortized
Cost

 
Carrying
Value

 
Gross
Unrealized
Losses

 
Weighted
Average
60+ Days
Collateral
Delinquency
Rate

 
%
Rated
AAA

Prime
 
$
1,432

 
$
1,375

 
$
1,362

 
$
44

 
11.53
%
 
%
Alt-A, option ARM
 
829

 
727

 
658

 
71

 
28.43

 

Alt-A, other
 
3,909

 
3,683

 
3,444

 
261

 
16.65

 
0.30

Total
 
$
6,170

 
$
5,785

 
$
5,464

 
$
376

 
17.05
%
 
0.19
%

The following table presents the fair value of the Bank’s PLRMBS as a percentage of the unpaid principal balance by collateral type at origination and year of securitization.

Fair Value of PLRMBS as a Percentage of Unpaid Principal Balance by Year of Securitization
 
 
 
 
 
 
 
 
 
 
Collateral Type at Origination and Year of Securitization
March 31,
2014

 
December 31,
2013

 
September 30,
2013

 
June 30,
2013

 
March 31,
2013

Prime
 
 
 
 
 
 
 
 
 
2008
93.56
%
 
91.67
%
 
88.46
%
 
89.37
%
 
91.15
%
2007
81.17

 
80.36

 
80.06

 
79.45

 
79.37

2006
93.97

 
92.56

 
93.71

 
93.93

 
93.83

2005
97.26

 
97.01

 
96.88

 
96.67

 
95.97

2004 and earlier
98.52

 
98.14

 
97.81

 
97.47

 
98.51

Weighted average of all Prime
93.64

 
93.01

 
92.53

 
92.35

 
93.04

Alt-A, option ARM
 
 
 
 
 
 
 
 
 
2007
78.53

 
77.90

 
74.73

 
74.94

 
72.20

2006
77.30

 
75.71

 
70.78

 
72.28

 
72.26

2005
50.35

 
47.44

 
46.38

 
45.14

 
40.21

Weighted average of all Alt-A, option ARM
73.78

 
72.66

 
69.63

 
69.73

 
66.94

Alt-A, other
 
 
 
 
 
 
 
 
 
2008
95.42

 
93.74

 
92.58

 
91.14

 
91.06

2007
85.01

 
83.76

 
83.24

 
82.39

 
81.82

2006
83.68

 
82.84

 
82.12

 
80.48

 
80.43

2005
87.36

 
86.80

 
85.94

 
85.45

 
85.30

2004 and earlier
98.09

 
97.60

 
97.47

 
96.88

 
97.18

Weighted average of all Alt-A, other
87.94

 
87.17

 
86.52

 
85.77

 
85.60

Weighted average of all PLRMBS
87.04
%
 
86.28
%
 
85.39
%
 
84.95
%
 
84.67
%

The Bank determined that, as of March 31, 2014, the gross unrealized losses on the PLRMBS that have not had an OTTI loss are primarily due to illiquidity in the PLRMBS market, uncertainty about the future condition of the housing and mortgage markets and the economy, and market expectations of the credit performance of loan collateral underlying these securities, which caused these assets to be valued at 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 amortized cost basis of these securities. As a result, the Bank determined that, as of March 31, 2014, all of the gross unrealized losses on these securities are temporary. The Bank will continue to monitor and

98


analyze the performance of these securities to assess the likelihood of the recovery of the entire amortized cost basis of these securities as of each balance sheet date.

If conditions in the housing and mortgage markets and general business and economic conditions deteriorate, the fair value of MBS may decline further and the Bank may experience OTTI of additional PLRMBS in future periods, as well as further impairment of PLRMBS that were identified as other-than-temporarily impaired as of March 31, 2014. Additional future credit-related OTTI losses could adversely affect the Bank’s earnings and retained earnings and its ability to pay dividends and repurchase capital stock. The Bank cannot predict whether it will be required to record additional credit-related OTTI losses on its PLRMBS in the future.

Derivative Counterparties. The Bank has also adopted credit policies and exposure limits for bilateral derivatives credit exposure. Over-the-counter derivatives may be either transacted with a counterparty (bilateral derivatives) or cleared after execution through a futures commission merchant (clearing agent) with a derivative clearing organization (cleared derivatives). All credit exposure from derivative transactions entered into by the Bank with member counterparties that are not derivative dealers (including interest rate swaps, caps, floors, corridors, and collars), for which the Bank serves as an intermediary, must be fully secured by eligible collateral, and all such derivative transactions are subject to both the Bank’s Advances and Security Agreement and a master netting agreement.

Bilateral Derivatives. The Bank selects only highly rated derivative dealers and major banks (derivative dealer counterparties) that meet the Bank’s eligibility criteria to act as counterparties for its bilateral derivative activities. In addition, the Bank has entered into master netting agreements and bilateral security agreements with all active derivative dealer counterparties that provide for delivery of collateral at specified levels to limit the Bank’s net unsecured credit exposure to these counterparties. Under these policies and agreements, the amount of unsecured credit exposure to an individual derivative dealer counterparty is limited to an absolute dollar credit exposure limit according to the counterparty’s credit rating, as determined by rating agency long-term credit ratings of the counterparty’s debt securities or deposits.

The Bank is subject to the risk of potential nonperformance by the counterparties to derivative agreements. The amount of net unsecured credit exposure that is permissible with respect to each counterparty depends on the credit rating of that counterparty. A counterparty generally must deliver collateral to the Bank if the total market value of the Bank's exposure to that counterparty rises above a specific trigger point. As a result of these risk mitigation initiatives, the Bank does not anticipate any credit losses on its bilateral derivative agreements with counterparties as of March 31, 2014.

Cleared Derivatives. The Bank is subject to nonperformance by the derivative clearing organizations (clearinghouses) and clearing agents. The requirement that the Bank post initial and variation margin through the clearing agent, to the clearinghouse, exposes the Bank to institutional credit risk in the event that the clearing agent or the clearinghouse fails to meet its obligations. However, the use of cleared derivatives mitigates the Bank’s overall credit risk exposure because a central counterparty is substituted for individual counterparties and variation margin is posted daily for changes in the value of cleared derivatives through a clearing agent. The Bank does not anticipate any credit losses on its cleared derivatives as of March 31, 2014.

The following table presents the Bank’s credit exposure to its derivative dealer counterparties at the dates indicated.
 

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Credit Exposure to Derivative Dealer Counterparties
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
March 31, 2014
 
 
 
  
 
  
 
  
 
Counterparty Credit Rating(1)
Notional Amount

 
Net Fair Value of Derivatives Before Collateral

  
Cash Collateral Pledged
to/ (from) Counterparty

  
Non-cash Collateral Pledged
to/ (from) Counterparty

  
Net Credit
Exposure to Counterparties

Asset positions with credit exposure:
 
 
 
 
 
 
 
 
 
Bilateral derivatives
 
 
 
 
 
 
 
 
 
A
$
20,490

 
$
391

  
$
(294
)
  
$
(91
)
  
$
6

Cleared derivatives(2)
29,363

 
8

 
30

 

 
38

Liability positions with credit exposure:
 
 
 
 
 
 
 
 
 
Bilateral derivatives
 
 
 
 
 
 
 
 
 
A
4,491

 
(31
)
 
31

 

 

Total derivative positions with credit exposure to nonmember counterparties
54,344

 
$
368

  
$
(233
)
  
$
(91
)
  
$
44

Derivative positions without credit exposure
24,778

 
 
 
 
 
 
 
 
Total notional
$
79,122

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
  
 
  
 
  
 
Counterparty Credit Rating(1)
Notional Amount

 
Net Fair Value of Derivatives Before Collateral

  
Cash Collateral Pledged
to/ (from) Counterparty

  
Non-cash Collateral Pledged
to/ (from) Counterparty

  
Net Credit
Exposure to Counterparties

Asset positions with credit exposure:
 
 
 
 
 
 
 
 
 
Bilateral derivatives
 
 
 
 
 
 
 
 
 
AA
$
8

 
$

 
$

  
$

  
$

A
12,739

 
332

 
(255
)
  
(71
)
  
6

Cleared Derivatives(2)
31,082

 
$
14

 
$
7

 
$

 
$
21

Liability positions with credit exposure:
 
 
 
 
 
 
 
 
 
Bilateral derivatives
 
 
 
 
 
 
 
 
 
A
4,404

 
$
(36
)
 
$
37

 
$

 
$
1

Total derivative positions with credit exposure to nonmember counterparties
48,233

 
$
310

 
$
(211
)
 
$
(71
)
 
$
28

Derivative positions without credit exposure
33,337

 
 
  
 
  
 
  
 
Total notional
$
81,570

 
 
  
 
  
 
 
 

(1)
The credit ratings used by the Bank are based on the lower of Moody's or Standard & Poor's ratings.
(2)
Represents derivative transactions cleared with clearinghouses, which are not rated.

The increase or decrease in the credit exposure net of cash collateral, from one period to the next, may be affected by changes in several variables, such as the size and composition of the portfolio, market values of derivatives, and accrued interest.

Based on the master netting arrangements, its credit analyses, and the collateral requirements in place with each counterparty, the Bank does not expect to incur any credit losses on its derivative agreements.

For more information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Derivative Counterparties” in the Bank’s 2013 Form 10-K.


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Critical Accounting Policies and 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. Changes in these judgments, estimates, and assumptions could potentially affect the Bank’s financial position and results of operations significantly. Although the Bank believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ.

In the Bank’s 2013 Form 10-K, the following accounting policies and estimates were identified as critical because they require the Bank to make subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies and estimates are: estimating the allowance for credit losses on the advances and mortgage loan portfolios; accounting for derivatives; estimating fair values of investments classified as trading and AFS, derivatives and associated hedged items carried at fair value in accordance with the accounting for derivative instruments and associated hedging activities, and financial instruments carried at fair value under the fair value option, and accounting for OTTI for investment securities; and estimating the prepayment speeds on MBS and mortgage loans for the accounting of amortization of premiums and accretion of discounts on MBS and mortgage loans.

There have been no significant changes in the judgments and assumptions made during the first three months of 2014 in applying the Bank’s critical accounting policies. These policies and the judgments, estimates, and assumptions are also described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” and “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” in the Bank’s 2013 Form 10-K and in “Item 1. Financial Statements – Note 16 – Fair Value.”

Recently Issued Accounting Guidance and Interpretations

See “Item 1. Financial Statements – Note 2 – Recently Issued and Adopted Accounting Guidance” for a discussion of recently issued accounting standards and interpretations.

Recent Developments

Final Rule on Executive Compensation. On January 28, 2014, the Finance Agency issued a final rule setting forth requirements and processes with respect to compensation provided to executive officers by FHLBanks and the Office of Finance. The final rule addresses the authority of the Finance Agency Director to approve, disapprove, prohibit, or withhold compensation of certain executive officers of the FHLBanks and the Office of Finance. The final rule also addresses the Director’s authority to approve, in advance, agreements or contracts of executive officers that provide compensation in connection with termination of employment. The final rule prohibits an FHLBank or the Office of Finance from paying compensation to an executive officer that is not reasonable and comparable with compensation paid by similar businesses for similar duties and responsibilities. Failure by an FHLBank or the Office of Finance to comply with the rule may result in supervisory action by the Finance Agency. The final rule became effective on February 27, 2014.

Final Rule on Golden Parachute Payments. On January 28, 2014, the Finance Agency issued a final rule setting forth the standards that the Finance Agency will take into consideration when limiting or prohibiting golden parachute payments. The primary impact of this final rule is to better conform existing Finance Agency regulations on golden parachutes with FDIC golden parachute regulations and to limit golden parachute payments made by an FHLBank or the Office of Finance that is assigned a less than satisfactory composite Finance Agency examination rating. The final rule became effective on February 27, 2014.

Proposed Rule on Responsibilities of Boards of Directors, Corporate Practices and Corporate Governance Matters. On January 28, 2014, the Finance Agency published a proposed rule to relocate and consolidate existing Federal
Housing Finance Board and Office of Federal Housing Enterprise Oversight regulations pertaining to director responsibilities, corporate practices, and corporate governance matters for Fannie Mae and Freddie Mac (together, the Enterprises) and the FHLBanks. In addition, the proposed rule would make certain amendments or additions, including provisions to:
Revise existing risk management provisions to better align them with more recent proposals of the Federal Reserve Board, including a requirement that the entities adopt an enterprise-wide risk management program and have a chief risk officer with certain enumerated responsibilities;
Require each entity to maintain a compliance program headed by a compliance officer who reports directly to the president;
Require each entity’s board to include committees specifically responsible for the following matters: (a) risk management; (b) audit; (c) compensation; and (d) corporate governance;
Require each FHLBank to designate in its bylaws a body of law to follow for its corporate governance practices and governance issues that may arise for which no federal law controls, choosing from (a) the law of the jurisdiction in which the FHLBank maintains its principal office; (b) the Delaware General Corporation Law; or (c) the Revised Model Business Corporation Act.

The proposed rule further subjects an entity’s indemnification policies to review by the Finance Agency for safety and soundness. Comments on the proposed rule are due by May 15, 2014.

National Credit Union Administration Final Rule on Access to Emergency Liquidity. On October 30, 2013, the National Credit Union Administration (NCUA) published a final rule requiring, among other things, that federally insured credit unions with assets of $250 million or more must maintain access to at least one federal liquidity source for use in times of financial emergency and distressed economic circumstances. This access must be demonstrated through direct or indirect membership in the Central Liquidity Facility (a U.S. government corporation created to improve the general financial stability of credit unions by serving as a liquidity lender to credit unions) or by establishing access to the Federal Reserve’s discount window. The final rule does not include FHLBank membership as access to an emergency liquidity source. Accordingly, the final rule may adversely affect the Bank’s results of operations if it causes the Bank’s federally insured credit union members to favor these federal liquidity sources over FHLBank membership or advances. The published rule became effective March 31, 2014.

Off-Balance Sheet Arrangements and Other Commitments

In accordance with regulations governing the operations of the FHLBanks, each FHLBank, including the Bank, is jointly and severally liable for the FHLBank System’s consolidated obligations issued under Section 11(a) of the FHLBank Act, and in accordance with the FHLBank Act, each FHLBank, including the Bank, is jointly and severally liable for consolidated obligations issued under Section 11(c) of the FHLBank Act. The joint and several liability regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor.

The par value of the outstanding consolidated obligations of all 12 FHLBanks was $753.9 billion at March 31, 2014, and $766.8 billion at December 31, 2013. The par value of the Bank’s participation in consolidated obligations was $77.6 billion at March 31, 2014, and $77.0 billion at December 31, 2013. At March 31, 2014, the Bank had committed to the issuance of $0.8 billion in consolidated obligations, all of which were hedged with associated interest rate swaps. At December 31, 2013, the Bank had committed to the issuance of $1.6 billion in consolidated obligations, all of which were hedged with associated interest rate swaps. For additional information on the Bank’s joint and several contingent liability obligation, see “Item 8. Financial Statements and Supplementary Data – Note 21 – Commitments and Contingencies” in the Bank’s 2013 Form 10-K.

In addition, in the ordinary course of business, the Bank engages in financial transactions that, in accordance with U.S. GAAP, are not recorded on the Bank’s balance sheet or may be recorded on the Bank’s balance sheet in amounts that are different from the full contract or notional amount of the transactions. For example, the Bank routinely enters into commitments to extend advances and issues standby letters of credit. These commitments and standby letters of credit may represent future cash requirements of the Bank, although the standby letters of credit

101


usually expire without being drawn upon. Standby letters of credit are subject to the same underwriting and collateral requirements as advances made by the Bank. At March 31, 2014, the Bank had $57 million in advance commitments and $4.8 billion in standby letters of credit outstanding. At December 31, 2013, the Bank had $8 million in advance commitments and $3.6 billion in standby letters of credit outstanding. The estimated fair value of the advance commitments was de minimis at March 31, 2014, and $(1) million at December 31, 2013. The estimated fair value of the letters of credit was $12 million at March 31, 2014, and at December 31, 2013.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The market risk management objective of the Federal Home Loan Bank of San Francisco (Bank) is to maintain a relatively low exposure of the value of capital and future earnings (excluding the impact of any cumulative net gains or losses on derivatives and associated hedged items and on financial instruments carried at fair value) to changes in market rate factors. This profile reflects the Bank’s objective of maintaining a conservative asset-liability mix and its commitment to providing value to its members through products and dividends without subjecting their investments in Bank capital stock to significant market risk.

The Bank’s Risk Management Policy includes a market risk management objective aimed at maintaining a relatively low exposure of the net portfolio value of capital and future earnings (excluding the impact of any cumulative net gains or losses on derivatives and associated hedged items and on financial instruments carried at fair value) to changes in market rate factors. See “Total Bank Market Risk” below.

Market risk identification and measurement are primarily accomplished through market value of capital sensitivity analyses, net portfolio value of capital sensitivity analyses, and projected earnings and adjusted return on capital sensitivity analyses. The Risk Management Policy approved by the Bank’s Board of Directors establishes market risk policy limits and market risk measurement standards at the total Bank level as well as at the business segment level. Additional guidelines approved by the Bank’s Enterprise Risk Committee apply to the Bank’s two business segments, the advances-related business and the mortgage-related business. These guidelines provide limits that are monitored at the segment level and are consistent with the Bank’s policy limits. Market risk is managed for each business segment on a daily basis, as discussed below in “Segment Market Risk.” At least monthly, compliance with Bank policies and guidelines is presented to the Bank’s Enterprise Risk Committee, the Asset-Liability Management Committee, and the Board of Directors, along with a corrective action plan if applicable.

Total Bank Market Risk

Market Value of Capital Sensitivity and Net Portfolio Value of Capital Sensitivity

The Bank uses market value of capital sensitivity (the interest rate sensitivity of the net fair value of all assets, liabilities, and interest rate exchange agreements) as an important measure of the Bank’s exposure to changes in interest rates. As explained below, the Bank measures, monitors, and reports on market value of capital sensitivity but does not have a policy limit for this measure.

Since 2008, the Bank has used net portfolio value of capital sensitivity as the primary market value metric for measuring the Bank’s exposure to changes in interest rates and has established a policy limit on net portfolio value of capital sensitivity. This approach uses valuation methods that estimate the value of mortgage-backed securities (MBS) and mortgage loans in alternative interest rate environments based on valuation spreads that existed at the time the Bank acquired the MBS and mortgage loans (acquisition spreads), rather than valuation spreads implied by the current market prices of MBS and mortgage loans (market spreads). Risk metrics based on spreads existing at the time of acquisition of mortgage assets better reflect the market risk of the Bank because the Bank does not intend to sell its mortgage assets and the use of market spreads calculated from estimates of current market prices (which may include large embedded liquidity spreads) would not reflect the actual risks faced by the Bank.

102



Beginning in the third quarter of 2009, in the case of specific private-label residential mortgage-backed securities (PLRMBS) for which the Bank expects loss of principal in future periods, the par value of the other-than-temporarily impaired security is reduced by the amount of the projected principal shortfall and the asset price is calculated based on the acquisition spread. This approach directly takes into consideration the impact of projected principal (credit) losses from PLRMBS on the net portfolio value of capital, but eliminates the impact of large liquidity spreads inherent in the prior treatment of other-than-temporarily impaired securities.

The Bank’s net portfolio value of capital sensitivity policy limits the potential adverse impact of an instantaneous parallel shift of a plus or minus 100-basis-point change in interest rates from current rates (base case) to no worse than –3% of the estimated net portfolio value of capital. In addition, the policy limits the potential adverse impact of an instantaneous plus or minus 100-basis-point change in interest rates measured from interest rates that are 200 basis points above or below the base case to no worse than –4% of the estimated net portfolio value of capital. In the case where a market risk sensitivity compliance metric cannot be estimated with a parallel shift in interest rates because of prevailing low interest rates, the sensitivity metric is not reported. The Bank’s measured net portfolio value of capital sensitivity was within the policy limits as of March 31, 2014.

To determine the Bank’s estimated risk sensitivities to interest rates for both the market value of capital sensitivity and the net portfolio value of capital sensitivity, the Bank uses a third-party proprietary asset and liability system to calculate estimated net portfolio values under alternative interest rate scenarios. The system analyzes all of the Bank’s financial instruments, including derivatives, on a transaction-level basis using sophisticated valuation models with consistent and appropriate behavioral assumptions and current position data. The system also includes a third-party mortgage prepayment model.

At least annually, the Bank reexamines the major assumptions and methodologies used in the model, including interest rate curves, spreads for discounting, and mortgage prepayment assumptions. The Bank also compares the mortgage prepayment assumptions in the third-party model to other sources, including actual mortgage prepayment history.

The table below presents the sensitivity of the market value of capital (the market value of all of the Bank’s assets, liabilities, and associated interest rate exchange agreements, with mortgage assets valued using market spreads implied by current market prices) to changes in interest rates. The table presents the estimated percentage change in the Bank’s market value of capital that would be expected to result from changes in interest rates under different interest rate scenarios, using market spread assumptions. 

Market Value of Capital Sensitivity
Estimated Percentage Change in Market Value of Bank Capital
for Various Changes in Interest Rates
 
 
 
 
 
Interest Rate Scenario(1)
March 31, 2014
 
December 31, 2013
 
+200 basis-point change above current rates
–3.5
%
–3.7
%
+100 basis-point change above current rates
–1.6
 
–1.7
 
–100 basis-point change below current rates(2)
+2.1
 
+1.5
 
–200 basis-point change below current rates(2)
+5.9
 
+3.1
 

(1)
Instantaneous change from actual rates at dates indicated.
(2)
Interest rates for each maturity are limited to non-negative interest rates.

The Bank’s estimates of the sensitivity of the market value of capital to changes in interest rates as of March 31, 2014, show a small decrease in adverse sensitivity in the rising rate scenarios and greater sensitivity in the declining rate scenarios compared with the estimates as of December 31, 2013. The change in sensitivity in the declining rate scenarios is primarily related to the impact of slower projected mortgage prepayment speeds and increased leverage. The slower mortgage prepayment speeds are primarily related to improved (slower) estimates of mortgage

103


prepayments by borrowers that have experienced past opportunities to refinance, but have not. These types of borrowers are now considered less likely to prepay in the future. The effect of excess capital stock repurchases also increased sensitivity because sensitivities are expressed as a percentage of capital and the level of capital declined. The impact of the slower mortgage prepayment speeds and increased leverage were mitigated in the rising rate scenarios as a result of rebalancing actions implemented in the mortgage portfolio. In addition, the decrease in long-term interest rates contributed to the decrease in adverse sensitivity in the rising rate scenarios. LIBOR interest rates as of March 31, 2014, were 4 basis points lower for the 1-year term, 3 basis points higher for the 5-year term, and 23 basis points lower for the 10-year term. Because interest rates in the declining rate scenarios are limited to non-negative interest rates and the current interest rate environment is so low, the interest rates in the declining rate scenarios cannot decrease to the same extent that the interest rates in the rising rate scenarios can increase. As of March 31, 2014, interest rates could decrease less in a declining rate scenario relative to the measurements as of December 31, 2013.

Embedded in the market value of capital sensitivity table are risk projections for mortgage assets. In general, as interest rates increase, mortgage assets, including MBS, are expected to remain outstanding for a longer period of time because mortgage prepayment speeds decline as a result of reduced incentives to refinance. Because most of the Bank’s MBS were purchased when mortgage asset spreads to pricing benchmarks were significantly lower than what is currently required by investors, the adverse spread difference causes an embedded negative impact on the market value of MBS, which directly reduces the estimated market value of Bank capital. If interest rates increase and MBS consequently remain outstanding for a longer period of time, the adverse spread difference will exist for a longer period of time, causing an even larger embedded negative market value impact than at current interest rate levels. This creates additional downward pressure on the measured market value of capital. As a result, the Bank’s measured market value of capital sensitivity to changes in interest rates is generally higher than it would be if it were measured based on the fundamental underlying repricing and option risks (a greater decline in the market value of capital when rates increase and a greater increase in the market value of capital when rates decrease). Based on the liquidity premium investors require for these assets and the Bank’s intent and ability to hold the assets to maturity, the Bank determined that the market value of capital sensitivity is not the best indication of risk, and the Bank now uses estimates of the sensitivity of the net portfolio value of capital to measure that risk, as explained above.

The table below presents the sensitivity of the net portfolio value of capital (the net value of the Bank’s assets, liabilities, and hedges, with mortgage assets valued using acquisition valuation spreads) to changes in interest rates. The table presents the estimated percentage change in the Bank’s net portfolio value of capital that would be expected to result from changes in interest rates under different interest rate scenarios based on pricing mortgage assets at spreads that existed at the time of purchase rather than at current market spreads. The Bank’s estimates of the net portfolio value of capital sensitivity to changes in interest rates as of March 31, 2014, show a small increase in adverse sensitivity in the rising rate scenarios and greater sensitivity in the declining rate scenarios compared with the estimates as of December 31, 2013. The change in sensitivity in the declining rate scenarios is primarily related to the impact of slower projected mortgage prepayment speeds and increased leverage. The slower mortgage prepayment speeds are primarily related to improved (slower) estimates of mortgage prepayments by borrowers that have experienced past opportunities to refinance, but have not. These types of borrowers are now considered less likely to prepay in the future. The effect of excess capital stock repurchases also increased sensitivity because sensitivities are expressed as a percentage of capital and the level of capital declined. The impact of the slower mortgage prepayment speeds and increased leverage were mitigated in the rising rate scenarios as a result of rebalancing actions implemented in the mortgage portfolio. In addition, the decrease in long-term interest rates partially offset the adverse impact of slower projected mortgage prepayment speeds and increased leverage in rising rate scenarios.


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Net Portfolio Value of Capital Sensitivity
Estimated Percentage Change in Net Portfolio Value of Bank Capital
for Various Changes in Interest Rates Based on Acquisition Spreads
 
 
 
 
 
Interest Rate Scenario(1)
March 31, 2014
 
December 31, 2013
 
+200 basis-point change above current rates
–3.9
%
–3.7
%
+100 basis-point change above current rates
–1.7
 
–1.6
 
–100 basis-point change below current rates(2)
+1.6
 
+0.7
 
–200 basis-point change below current rates(2)
+3.7
 
+0.6
 

(1)
Instantaneous change from actual rates at dates indicated.
(2)
Interest rates for each maturity are limited to non-negative interest rates.

Adjusted Return on Capital

The adjusted return on capital is a measure used by the Bank to assess financial performance. The adjusted return on capital is based on current period economic earnings that exclude the effects of unrealized net gains or losses resulting from the Bank’s derivatives and associated hedged items and from financial instruments carried at fair value, which will generally reverse through changes in future valuations and settlements of contractual interest cash flows over the remaining contractual terms to maturity or by the call or put date of the assets and liabilities held under the fair value option, hedged assets and liabilities, and derivatives. Economic earnings also exclude the interest expense on mandatorily redeemable capital stock and the 20% of net income allocated to the Bank’s restricted retained earnings account in accordance with the FHLBanks’ Joint Capital Enhancement Agreement, as amended. Economic earnings exclude these amounts in order to more accurately reflect the amount of earnings that may be available to be paid as dividends to shareholders.

The Bank limits the sensitivity of projected financial performance through a Board of Directors’ policy limit on projected adverse changes in the adjusted return on capital. The Bank’s adjusted return on capital sensitivity policy limits the potential adverse impact of an instantaneous parallel shift of a plus or minus 200-basis-point change in interest rates from current rates (base case) to no worse than –120 basis points from the base case projected adjusted return on capital. In both the upward and downward shift scenarios, the adjusted return on capital for the projected 12-month horizon is not expected to deteriorate relative to the base case environment.

Duration Gap

Duration gap is the difference between the estimated durations (market value sensitivity) of assets and liabilities (including the impact of interest rate exchange agreements) and reflects the extent to which estimated maturity and repricing cash flows for assets and liabilities are matched. The Bank monitors duration gap analysis at the total Bank level and does not have a policy limit. The Bank’s duration gap was one month at March 31, 2014, and one month at December 31, 2013.
Total Bank Duration Gap Analysis
 
 
 
 
 
 
 
 
 
March 31, 2014
  
December 31, 2013
  
Amount
(In millions)

  
Duration Gap(1)(2)
(In months)

  
Amount
(In millions)

  
Duration Gap(1)(2)
(In months) 

Assets
$
86,185

  
11

  
$
85,774

  
11

Liabilities
80,543

  
10

  
80,065

  
10

Net
$
5,642

  
1

  
$
5,709

  
1


(1)
Duration gap values include the impact of interest rate exchange agreements.
(2)
Because of the current low interest rate environment, the duration gap is estimated using an instantaneous, one-sided parallel change upward of 100 basis points from base case interest rates.


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Since duration gap is a measure of market value sensitivity, the impact of large embedded mortgage liquidity spreads on duration gap is the same as described in the analysis in “Total Bank Market Risk Market Value of Capital Sensitivity and Net Portfolio Value of Capital Sensitivity” above. As a result of the liquidity premium investors require for these assets and the Bank’s intent and ability to hold its mortgage assets to maturity, the Bank does not believe that market value-based sensitivity risk measures provide a fundamental indication of risk.

Segment Market Risk

The financial performance and interest rate risks of each business segment are managed within prescribed guidelines and policy limits.

Advances-Related Business

Interest rate risk arises from the advances-related business primarily through the use of shareholder-contributed capital to fund fixed rate investments of targeted amounts and maturities. In general, advances result in very little net interest rate risk for the Bank because most fixed rate advances with original maturities greater than three months and all advances with embedded options are simultaneously hedged with an interest rate swap or option with terms offsetting the advance. The interest rate swap or option generally is maintained as a hedge for the life of the advance. These hedged advances effectively create a pool of variable rate assets, which, in combination with the strategy of raising debt swapped to variable rate liabilities, creates an advances portfolio with low net interest rate risk.

Money market investments used for liquidity management generally have maturities of less than three months. In addition, the Bank invests in non-MBS agency securities, generally with terms of less than three years. These investments may be variable rate or fixed rate, and the interest rate risk resulting from the fixed rate coupon is hedged with an interest rate swap or fixed rate debt.

The interest rate risk in the advances-related business is primarily associated with the Bank’s strategy for investing capital (capital stock, including mandatorily redeemable capital stock, and retained earnings). The Bank’s strategy is generally to invest 50% of capital in short-term investments (maturities of three months or less) and 50% in intermediate-term investments (a laddered portfolio of investments with maturities of up to four years). However, this strategy may be altered from time to time depending on market conditions. The strategy to invest 50% of capital in short-term assets is intended to mitigate the market value of capital risks associated with the potential repurchase or redemption of excess capital stock. Excess capital stock usually results from a decline in a borrower’s outstanding advances or by a membership termination. Under the Bank’s capital plan, capital stock, when repurchased or redeemed, is required to be repurchased or redeemed at its par value of $100 per share, subject to certain regulatory and statutory limits. The strategy to invest 50% of capital in a laddered portfolio of instruments with short to intermediate maturities is intended to take advantage of the higher earnings available from a generally positively sloped yield curve, when intermediate-term investments generally have higher yields than short-term investments.

The Bank updates the repricing and maturity gaps for actual asset, liability, and derivative transactions that occur in the advances-related segment each day. The Bank regularly compares the targeted repricing and maturity gaps to the actual repricing and maturity gaps to identify rebalancing needs for the targeted gaps. On a weekly basis, the Bank evaluates the projected impact of expected maturities and scheduled repricings of assets, liabilities, and interest rate exchange agreements on the interest rate risk of the advances-related segment. The analyses are prepared under base case and alternate interest rate scenarios to assess the effect of options embedded in the advances, related financing, and hedges. These analyses are also used to measure and manage potential reinvestment risk (when the remaining term of advances is shorter than the remaining term of the financing) and potential refinancing risk (when the remaining term of advances is longer than the remaining term of the financing).

Because of the short-term and variable rate nature of the assets, liabilities, and derivatives of the advances-related business, the Bank’s interest rate risk guidelines address the amounts of net assets that are expected to mature or

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reprice in a given period. Net market value sensitivity analyses and net interest income simulations are also used to identify and measure risk and variances to the target interest rate risk exposure in the advances-related segment.

Mortgage-Related Business

The Bank’s mortgage assets include MBS, most of which are classified as HTM or as AFS, with a small amount classified as trading, and mortgage loans held for portfolio purchased under the MPF Program. The Bank is exposed to interest rate risk from the mortgage-related business because the principal cash flows of the mortgage assets and the liabilities that fund them are not exactly matched through time and across all possible interest rate scenarios, given the impact of mortgage prepayments and the existence of interest rate caps on certain adjustable rate MBS.

The Bank purchases a mix of intermediate-term fixed rate and adjustable rate MBS. Generally, purchases of long-term fixed rate MBS have been relatively limited. Any MPF loans that have been acquired are medium- or long-term fixed rate mortgage assets. This results in a mortgage portfolio that has a diversified set of interest rate risk attributes.

The estimated market risk of the mortgage-related business is managed both at the time an asset is purchased and on an ongoing basis for the total portfolio. At the time of purchase (for all significant mortgage asset acquisitions), the Bank analyzes the estimated earnings sensitivity and estimated net market value sensitivity, taking into consideration the estimated mortgage prepayment sensitivity of the mortgage assets and anticipated funding and hedging activities under various interest rate scenarios. The related funding and hedging transactions are executed at or close to the time of purchase of a mortgage asset.

At least monthly, the Bank reviews the estimated market risk profile of the entire portfolio of mortgage assets and related funding and hedging transactions. The Bank then considers rebalancing strategies to modify the estimated mortgage portfolio market risk profile. Periodically, the Bank performs more in-depth analyses, which include an analysis of the impacts of non-parallel shifts in the yield curve and assessments of the impacts of unanticipated mortgage prepayment behavior. Based on these analyses, the Bank may take actions to rebalance the mortgage portfolio’s market risk profile. These rebalancing strategies may include entering into new funding and hedging transactions, forgoing or modifying certain funding or hedging transactions normally executed with new mortgage purchases, or terminating certain funding and hedging transactions for the mortgage asset portfolio.

The Bank manages the estimated interest rate risk associated with mortgage assets, including mortgage prepayment risk, through a combination of debt issuance and derivatives. The Bank may obtain funding through callable and non-callable FHLBank System debt and may execute derivative transactions to achieve principal cash flow patterns and market value sensitivities for the liabilities and derivatives that provide a significant offset to the interest rate and mortgage prepayment risks associated with the mortgage assets. Debt issued to finance mortgage assets may be fixed rate debt, callable fixed rate debt, or adjustable rate debt. Derivatives may be used as temporary hedges of anticipated debt issuance or long-term hedges of debt used to finance the mortgage assets. The derivatives used to hedge the interest rate risk of fixed rate mortgage assets generally may be options to enter into interest rate swaps (swaptions) or callable and non-callable pay-fixed interest rate swaps. Derivatives may also be used to offset the interest rate cap risk embedded in adjustable rate MBS.

As discussed above in “Total Bank Market Risk Market Value of Capital Sensitivity and Net Portfolio Value of Capital Sensitivity,” the Bank uses net portfolio value of capital sensitivity as a primary market value metric for measuring the Bank’s exposure to interest rates. The Bank’s interest rate risk policies and guidelines for the mortgage-related business address the net portfolio value of capital sensitivity of the assets, liabilities, and derivatives of the mortgage-related business. In addition, the Bank continues to use market value of capital sensitivity (the interest rate sensitivity of the net fair value of all assets, liabilities, and interest rate exchange agreements) as an important measure of the Bank’s exposure to changes in interest rates. The Bank measures, monitors, and reports on both the net portfolio value of capital sensitivity and the market value of capital sensitivity attributable to the mortgage-related business.


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The following table presents results of the estimated market value of capital sensitivity analysis attributable to the mortgage-related business as of March 31, 2014, and December 31, 2013.

Market Value of Capital Sensitivity
Estimated Percentage Change in Market Value of Bank Capital
Attributable to the Mortgage-Related Business for Various Changes in Interest Rates
 
 
 
 
 
Interest Rate Scenario(1)
March 31, 2014

December 31, 2013
 
+200 basis-point change
–2.0
%
–2.1
%
+100 basis-point change
–0.9
 
–1.0
 
–100 basis-point change(2)
+1.6
 
+1.0
 
–200 basis-point change(2)
+4.9
 
+2.1
 

(1)
Instantaneous change from actual rates at dates indicated.
(2)
Interest rates for each maturity are limited to non-negative interest rates.

The Bank’s estimates of the sensitivity of the market value of capital to changes in interest rates as of March 31, 2014, generally show a small decrease in adverse sensitivity in the rising rate scenarios and greater sensitivity in the declining rate scenarios compared with the estimates as of December 31, 2013. The change in sensitivity in the declining rate scenarios is primarily related to the impact of slower projected mortgage prepayment speeds and increased leverage. The slower mortgage prepayment speeds are primarily related to improved (slower) estimates of mortgage prepayments by borrowers that have experienced past opportunities to refinance, but have not. These types of borrowers are now considered less likely to prepay in the future. The effect of excess capital stock repurchases also increased sensitivity because sensitivities are expressed as a percentage of capital and the level of capital declined. The impact of the slower mortgage prepayment speeds and increased leverage were mitigated in the rising rate scenarios as a result of rebalancing actions implemented in the mortgage portfolio. In addition, the decrease in long-term interest rates contributed to the decrease in adverse sensitivity in the rising rate scenarios. LIBOR interest rates as of March 31, 2014, were 4 basis point lower for the 1-year term, 3 basis points higher for the 5-year term, and 23 basis points lower for the 10-year term. Because interest rates in the declining rate scenarios are limited to non-negative interest rates and the current interest rate environment is so low, the interest rates in the declining rate scenarios cannot decrease to the same extent that the interest rates in the rising rate scenarios can increase. As of March 31, 2014, interest rates could decrease less in a declining rate scenario relative to the measurements as of December 31, 2013.

The Bank’s interest rate risk policies and guidelines for the mortgage-related business address the net portfolio value of capital sensitivity of the assets, liabilities, and derivatives of the mortgage-related business. The following table presents results of the estimated net portfolio value of capital sensitivity analysis attributable to the mortgage-related business as of March 31, 2014, and December 31, 2013. The table presents the estimated percentage change in the value of Bank capital attributable to the mortgage-related business that would be expected to result from changes in interest rates under different interest rate scenarios based on pricing mortgage assets at spreads that existed at the time of purchase rather than current market spreads. The Bank’s estimates of the net portfolio value of capital sensitivity to changes in interest rates as of March 31, 2014, show a small increase in adverse sensitivity in rising rate scenarios and greater sensitivity in declining rate scenarios compared with the estimates as of December 31, 2013. The change in sensitivity in the declining rate scenarios is primarily related to the impact of slower projected mortgage prepayment speeds and increased leverage. The slower mortgage prepayment speeds are primarily related to improved (slower) estimates of mortgage prepayments by borrowers that have experienced past opportunities to refinance, but have not. These types of borrowers are now considered less likely to prepay in the future. The effect of excess capital stock repurchases also increased sensitivity because sensitivities are expressed as a percentage of capital and the level of capital declined. The impact of the slower mortgage prepayment speeds and increased leverage were mitigated in the rising rate scenarios as a result of rebalancing actions implemented in the mortgage portfolio. In addition, the decrease in long-term interest rates partially offset the adverse impact of slower projected prepayments and increased leverage in rising rate scenarios. Because interest rates in the declining rate scenarios are limited to non-negative interest rates and the current interest rate environment is so low, the interest

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rates in the declining rate scenarios cannot decrease to the same extent that the interest rates in the rising rate scenarios can increase. As of March 31, 2014, interest rates could decrease less in a declining rate scenario relative to the measurements as of December 31, 2013.

Net Portfolio Value of Capital Sensitivity
Estimated Percentage Change in Net Portfolio Value of Bank Capital
Attributable to the Mortgage-Related Business for Various Changes in
Interest Rates Based on Acquisition Spreads
 
 
 
 
 
Interest Rate Scenario(1)
March 31, 2014

December 31, 2013
 
+200 basis-point change above current rates
–2.5
%
–2.3
%
+100 basis-point change above current rates
–1.1
 
–1.0
 
–100 basis-point change below current rates(2)
+1.1
 
+0.2
 
–200 basis-point change below current rates(2)
+2.8
 
–0.2
 

(1)
Instantaneous change from actual rates at dates indicated.
(2)
Interest rates for each maturity are limited to non-negative interest rates.

ITEM 4.
CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The senior management of the Federal Home Loan Bank of San Francisco (Bank) is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports filed or submitted under the Securities Exchange Act of 1934 (1934 Act) is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The Bank’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports that it files or submits under the 1934 Act is accumulated and communicated to the Bank’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the Bank’s disclosure controls and procedures, the Bank’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Bank’s management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.

Management of the Bank has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with the participation of the president and chief executive officer, executive vice president and chief operating officer, and senior vice president and chief financial officer as of the end of the period covered by this report. Based on that evaluation, the Bank’s president and chief executive officer, executive vice president and chief operating officer, and senior vice president and chief financial officer have concluded that the Bank’s disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.

Internal Control Over Financial Reporting

During the three months ended March 31, 2014, there were no changes in the Bank’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.


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Consolidated Obligations

The Bank’s disclosure controls and procedures include controls and procedures for accumulating and communicating information in compliance with the Bank’s disclosure and financial reporting requirements relating to the joint and several liability for the consolidated obligations of the Federal Home Loan Banks (FHLBanks). Because the FHLBanks are independently managed and operated, the Bank’s management relies on information that is provided or disseminated by the Federal Housing Finance Agency (Finance Agency), the Office of Finance, and the other FHLBanks, as well as on published FHLBank credit ratings, in determining whether the joint and several liability regulation is reasonably likely to result in a direct obligation for the Bank or whether it is reasonably possible that the Bank will accrue a direct liability.

The Bank’s management also relies on the operation of the joint and several liability regulation. The joint and several liability regulation requires that each FHLBank file with the Finance Agency a quarterly certification that it will remain capable of making full and timely payment of all of its current obligations, including direct obligations, coming due during the next quarter. In addition, if an FHLBank cannot make such a certification or if it projects that it may be unable to meet its current obligations during the next quarter on a timely basis, it must file a notice with the Finance Agency. Under the joint and several liability regulation, the Finance Agency may order any FHLBank to make principal and interest payments on any consolidated obligations of any other FHLBank, or allocate the outstanding liability of an FHLBank among all remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding or on any other basis.

PART II. OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

The Federal Home Loan Bank of San Francisco (Bank) may be subject to various legal proceedings arising in the normal course of business.

In 2010, the Bank filed two complaints in the Superior Court of the State of California, County of San Francisco (San Francisco Superior Court), relating to the purchase of private-label residential mortgage-backed securities

110


(PLRMBS). The Bank seeks rescission and damages and asserts claims for and violations of the California Corporate Securities Act and rescission of contract.
 
The Bank's PLRMBS litigation is now in the discovery phase, and a trial has been scheduled for September 2, 2014.
 
In 2010, the Bank also filed a complaint in San Francisco Superior Court against Bank of America Corporation (BAC) seeking a determination that BAC or its subsidiaries are successors to the liabilities of Countrywide Financial Corporation (CFC) and other Countrywide entities that are defendants in the Bank's PLRMBS litigation. On January 28, 2014, the parties stipulated to and the Court ordered a stay of the Bank's claim against BAC until November 30, 2014. 

For a further discussion of this litigation, see “Part I. Item 3. Legal Proceedings” in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2013.

After consultation with legal counsel, the Bank is not aware of any other legal proceedings that are expected to have a material effect on its financial condition or results of operations or that are otherwise material to the Bank.

ITEM 1A.
RISK FACTORS

For a discussion of risk factors, see “Part I. Item 1A. Risk Factors” in the Federal Home Loan Bank of San Francisco’s (Bank’s) Annual Report on Form 10-K for the year ended December 31, 2013 (2013 Form 10-K). There have been no material changes from the risk factors disclosed in the “Part I. Item 1A. Risk Factors” section of the Bank’s 2013 Form 10-K.


ITEM 6.
EXHIBITS

Exhibit No.
 
Description
 
 
 
 
 
 
10.1+

 
2014 President’s Incentive Plan
 
 
 
10.2+

 
2014 Executive Incentive Plan
 
 
 
10.3

 
2014 Executive Performance Unit Plan
 
 
 
31.1

  
Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2

  
Certification of the Chief Operating Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.3

  
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32.1

  
Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
32.2

  
Certification of the Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
32.3

  
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101

 
Pursuant to Rule 405 of Regulation S-T, the following financial information from the Bank's quarterly report on Form 10-Q for the period ended March 31, 2014, is formatted in XBRL interactive data files: (i) Statements of Condition at March 31, 2014, and December 31, 2013; (ii) Statements of Income for the Three Months Ended March 31, 2014 and 2013; (iii) Statements of Comprehensive Income for the Three Months Ended March 31, 2014 and 2013; (iv) Statements of Capital Accounts for the Three Months Ended March 31, 2014 and 2013; (v) Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013; and (vi) Notes to Financial Statements.

+
Confidential treatment has been requested as to portions of this exhibit.




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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 9, 2014.
 
 
Federal Home Loan Bank of San Francisco
 
 
 
/S/ DEAN SCHULTZ
 
Dean Schultz
President and Chief Executive Officer
 
 
 
/S/ LISA B. MACMILLEN
 
Lisa B. MacMillen
Executive Vice President and Chief Operating Officer
 
 
 
/S/ KENNETH C. MILLER
 
Kenneth C. Miller Senior Vice President and Chief Financial Officer
(Principal Financial Officer)


112