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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
FORM 10-Q
______________________________________________________
|
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
OR
|
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-51398
FEDERAL HOME LOAN BANK OF SAN FRANCISCO
(Exact name of registrant as specified in its charter)
___________________________________________
|
| | | | | |
| Federally chartered corporation | | 94-6000630 | |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. employer identification number) | |
| | |
| 333 Bush Street, Suite 2700 | | | |
| San Francisco, | CA | | 94104 | |
| (Address of principal executive offices) | | (Zip code) | |
(415) 616-1000
(Registrant’s telephone number, including area code) |
| | | | | | |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered | |
| — | | — | | — | |
___________________________________________
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. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | | | | |
Large accelerated filer | | ☐
| | Accelerated filer | | ☐ |
| | | |
Non-accelerated filer | | ☒ | | Smaller reporting company | | ☐ |
| | | | | | |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
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, 2020 |
|
Class B Stock, par value $100 | 32,006,983 |
|
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 5. | | | | |
| | | | |
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, 2020 |
| | December 31, 2019 |
|
Assets: | | | |
Cash and due from banks | $ | 328 |
| | $ | 118 |
|
Interest-bearing deposits | 3,577 |
| | 2,269 |
|
Securities purchased under agreements to resell | 2,000 |
| | 7,000 |
|
Federal funds sold | 10,081 |
| | 3,562 |
|
Trading securities(a) | 4,319 |
| | 1,766 |
|
Available-for-sale (AFS) securities, net (amortized cost of $16,427 and $15,206, respectively)(b) | 16,175 |
| | 15,495 |
|
Held-to-maturity (HTM) securities (fair values were $6,867 and $7,566, respectively)(a) | 6,864 |
| | 7,545 |
|
Advances (includes $4,334 and $4,370 at fair value under the fair value option, respectively) | 77,872 |
| | 65,374 |
|
Mortgage loans held for portfolio, net | 3,239 |
| | 3,314 |
|
Accrued interest receivable | 139 |
| | 139 |
|
Derivative assets, net | 62 |
| | 33 |
|
Other assets | 214 |
| | 227 |
|
Total Assets | $ | 124,870 |
| | $ | 106,842 |
|
Liabilities: | | | |
Deposits | $ | 721 |
| | $ | 537 |
|
Consolidated obligations: | | | |
Bonds (includes $254 and $337 at fair value under the fair value option, respectively) | 77,937 |
| | 71,372 |
|
Discount notes | 39,102 |
| | 27,376 |
|
Total consolidated obligations | 117,039 |
| | 98,748 |
|
Mandatorily redeemable capital stock | 83 |
| | 138 |
|
Accrued interest payable | 121 |
| | 164 |
|
Affordable Housing Program (AHP) payable | 133 |
| | 152 |
|
Other liabilities | 366 |
| | 362 |
|
Total Liabilities | 118,463 |
| | 100,101 |
|
Commitments and Contingencies (Note 13) |
|
|
|
Capital: | | | |
Capital stock—Class B—Putable ($100 par value) issued and outstanding: | | | |
32 shares and 30 shares, respectively | 3,231 |
| | 3,000 |
|
Unrestricted retained earnings | 2,691 |
| | 2,754 |
|
Restricted retained earnings | 713 |
| | 713 |
|
Total Retained Earnings | 3,404 |
| | 3,467 |
|
Accumulated other comprehensive income/(loss) (AOCI) | (228 | ) | | 274 |
|
Total Capital | 6,407 |
| | 6,741 |
|
Total Liabilities and Capital | $ | 124,870 |
| | $ | 106,842 |
|
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of San Francisco
Statements of Income
(Unaudited)
|
| | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2020 |
| | 2019 |
|
Interest Income: | | | |
Advances | $ | 279 |
| | $ | 498 |
|
Interest-bearing deposits | 12 |
| | 14 |
|
Securities purchased under agreements to resell | 18 |
| | 45 |
|
Federal funds sold | 14 |
| | 41 |
|
Trading securities | 16 |
| | 4 |
|
AFS securities | 51 |
| | 79 |
|
HTM securities | 44 |
| | 79 |
|
Mortgage loans held for portfolio | (1 | ) | | 26 |
|
Total Interest Income | 433 |
| | 786 |
|
Interest Expense: | | | |
Consolidated obligations: | | | |
Bonds | 276 |
| | 455 |
|
Discount notes | 104 |
| | 181 |
|
Deposits | 2 |
| | 2 |
|
Mandatorily redeemable capital stock | 2 |
| | 4 |
|
Total Interest Expense | 384 |
| | 642 |
|
Net Interest Income | 49 |
| | 144 |
|
Provision for/(reversal of) credit losses | 39 |
| | — |
|
Net Interest Income After Provision for/(Reversal of) Credit Losses | 10 |
| | 144 |
|
Other Income/(Loss): | | | |
Net gain/(loss) on trading securities | 73 |
| | (1 | ) |
Net gain/(loss) on advances and consolidated obligation bonds held under fair value option | 89 |
| | 39 |
|
Net gain/(loss) on derivatives and hedging activities | (147 | ) | | (28 | ) |
Other, net | 3 |
| | 5 |
|
Total Other Income/(Loss) | 18 |
| | 15 |
|
Other Expense: | | | |
Compensation and benefits | 21 |
| | 20 |
|
Other operating expense | 12 |
| | 13 |
|
Federal Housing Finance Agency | 2 |
| | 2 |
|
Office of Finance | 1 |
| | 2 |
|
Quality Jobs Fund expense | — |
| | 5 |
|
Other, net | — |
| | 1 |
|
Total Other Expense | 36 |
| | 43 |
|
Income/(Loss) Before Assessment | (8 | ) | | 116 |
|
AHP Assessment | — |
| | 12 |
|
Net Income/(Loss) | $ | (8 | ) | | $ | 104 |
|
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of San Francisco
Statements of Comprehensive Income
(Unaudited)
|
| | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2020 |
| | 2019 |
|
Net Income/(Loss) | $ | (8 | ) | | $ | 104 |
|
Other Comprehensive Income/(Loss): | | | |
Net unrealized gain/(loss) on AFS securities | (502 | ) | | 38 |
|
Net non-credit-related OTTI gain/(loss) on AFS securities | — |
| | 14 |
|
Total other comprehensive income/(loss) | (502 | ) | | 52 |
|
Total Comprehensive Income/(Loss) | $ | (510 | ) | | $ | 156 |
|
The accompanying notes are an integral part of these financial statements.
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, 2018 | 29 |
| | $ | 2,949 |
| | $ | 647 |
| | $ | 2,699 |
| | $ | 3,346 |
| | $ | 235 |
| | $ | 6,530 |
|
Comprehensive income/(loss) | | | | | 21 |
| | 83 |
| | 104 |
| | 52 |
| | 156 |
|
Issuance of capital stock | 4 |
| | 354 |
| | | | | | | | | | 354 |
|
Repurchase of capital stock | (3 | ) | | (344 | ) | | | | | | | | | | (344 | ) |
Cash dividends paid on capital stock (7.00%) | | | | | | | (50 | ) | | (50 | ) | | | | (50 | ) |
Balance, March 31, 2019 | 30 |
| | $ | 2,959 |
| | $ | 668 |
| | $ | 2,732 |
| | $ | 3,400 |
| | $ | 287 |
| | $ | 6,646 |
|
| | | | | | | | | | | | | |
Balance, December 31, 2019 | 30 |
| | $ | 3,000 |
| | $ | 713 |
| | $ | 2,754 |
| | $ | 3,467 |
| | $ | 274 |
| | $ | 6,741 |
|
Adjustment for cumulative effect of accounting change | | | | | | | (3 | ) | | (3 | ) | | | | (3 | ) |
Comprehensive income/(loss) |
|
| |
|
| | — |
| | (8 | ) | | (8 | ) | | (502 | ) | | (510 | ) |
Issuance of capital stock | 6 |
| | 607 |
| |
| |
| | | |
| | 607 |
|
Repurchase of capital stock | (4 | ) | | (373 | ) | |
| |
| | | |
| | (373 | ) |
Capital stock reclassified from/(to) mandatorily redeemable capital stock, net | — |
| | (3 | ) | |
|
| |
|
| | | |
|
| | (3 | ) |
Cash dividends paid on capital stock (7.00%) |
| |
|
| |
| | (52 | ) | | (52 | ) | |
| | (52 | ) |
Balance, March 31, 2020 | 32 |
| | $ | 3,231 |
| | $ | 713 |
| | $ | 2,691 |
| | $ | 3,404 |
| | $ | (228 | ) | | $ | 6,407 |
|
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of San Francisco
Statements of Cash Flows
(Unaudited)
|
| | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2020 |
| | 2019 |
|
Cash Flows from Operating Activities: | | | |
Net Income/(Loss) | $ | (8 | ) | | $ | 104 |
|
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: | | | |
Depreciation and amortization | 22 |
| | 5 |
|
Provision for/(reversal of) credit losses | 39 |
| | — |
|
Change in net fair value of trading securities | (73 | ) | | 1 |
|
Change in net fair value adjustment on advances and consolidated obligation bonds held under the fair value option | (89 | ) | | (39 | ) |
Change in net derivatives and hedging activities | (804 | ) | | (128 | ) |
Other adjustments | 1 |
| | 3 |
|
Net change in: | | | |
Accrued interest receivable | — |
| | (65 | ) |
Other assets | 10 |
| | (6 | ) |
Accrued interest payable | (43 | ) | | 26 |
|
Other liabilities | (48 | ) | | (11 | ) |
Total adjustments | (985 | ) | | (214 | ) |
Net cash provided by/(used in) operating activities | (993 | ) | | (110 | ) |
Cash Flows from Investing Activities: | | | |
Net change in: | | | |
Interest-bearing deposits | (2,011 | ) | | 850 |
|
Securities purchased under agreements to resell | 5,000 |
| | (950 | ) |
Federal funds sold | (6,519 | ) | | (3,390 | ) |
Trading securities: | | | |
Proceeds | — |
| | 50 |
|
Purchases | (2,480 | ) | | — |
|
AFS securities: | | | |
Proceeds | 120 |
| | 133 |
|
Purchases | (403 | ) | | (1,119 | ) |
HTM securities: | | | |
Proceeds | 681 |
| | 709 |
|
Advances: | | | |
Repaid | 291,662 |
| | 408,394 |
|
Originated | (303,461 | ) | | (405,074 | ) |
Mortgage loans held for portfolio: | | | |
Principal collected | 321 |
| | 75 |
|
Purchases | (278 | ) | | (174 | ) |
Other investing activities, net | — |
| | (7 | ) |
Net cash provided by/(used in) investing activities | (17,368 | ) | | (503 | ) |
Federal Home Loan Bank of San Francisco
Statements of Cash Flows (continued)
(Unaudited)
|
| | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2020 |
| | 2019 |
|
Cash Flows from Financing Activities: | | | |
Net change in deposits and other financing activities | 188 |
| | 28 |
|
Net change in borrowings from other Federal Home Loan Banks | — |
| | (250 | ) |
Net (payments)/proceeds on derivative contracts with financing elements | (4 | ) | | 11 |
|
Net proceeds from issuance of consolidated obligations: | | | |
Bonds | 26,053 |
| | 22,935 |
|
Discount notes | 62,055 |
| | 30,881 |
|
Payments for matured and retired consolidated obligations: | | | |
Bonds | (19,518 | ) | | (21,148 | ) |
Discount notes | (50,327 | ) | | (31,798 | ) |
Proceeds from issuance of capital stock | 607 |
| | 354 |
|
Payments for repurchase/redemption of mandatorily redeemable capital stock | (58 | ) | | — |
|
Payments for repurchase of capital stock | (373 | ) | | (344 | ) |
Cash dividends paid | (52 | ) | | (50 | ) |
Net cash provided by/(used in) financing activities | 18,571 |
| | 619 |
|
Net increase/(decrease) in cash and due from banks | 210 |
| | 6 |
|
Cash and due from banks at beginning of the period | 118 |
| | 13 |
|
Cash and due from banks at end of the period | $ | 328 |
| | $ | 19 |
|
Supplemental Disclosures: | | | |
Interest paid | $ | 422 |
| | $ | 594 |
|
AHP payments | 19 |
| | 18 |
|
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements
(Unaudited)
(Dollars in millions except per share amounts)
Note 1 — Basis of Presentation
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 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, 2020. 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, 2019 (2019 Form 10‑K).
There have been no changes to the basis of presentation of the Bank’s financial instruments meeting netting requirements or of the Bank’s investments in variable interest entities disclosed in “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” in the Bank’s 2019 Form 10-K.
Summary of Significant Accounting Policies
Beginning January 1, 2020, the Bank adopted new accounting guidance related to the measurement of credit losses on financial instruments that requires a financial asset or group of financial assets measured at amortized cost to be presented at the net amount expected to be collected. The new guidance also requires credit losses relating to these financial instruments as well as available-for-sale (AFS) securities to be recorded through the allowance for credit losses. Key changes as compared to prior accounting guidance are detailed below. Consistent with the modified retrospective method of adoption, the prior period has not been revised to conform to the new basis of accounting. For information on the prior accounting treatment and for descriptions of the Bank’s significant accounting policies, see “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” in the Bank’s 2019 Form 10-K. Other changes to these policies as of March 31, 2020, are discussed in Note 2 – Recently Issued and Adopted Accounting Guidance.
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:
| |
• | 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 |
| |
• | estimating the prepayment speeds on mortgage-backed securities (MBS) and mortgage loans for the accounting of amortization of premiums and accretion of discounts and credit losses previously recorded prior to the adoption of new accounting guidance related to the measurement of credit losses on MBS and mortgage loans. |
Actual results could differ significantly from these estimates.
Interest-bearing Deposits, Securities Purchased under Agreements to Resell, and Federal Funds Sold. The Bank invests in interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold. These investments provide short-term liquidity and are carried at cost. Accrued interest receivable is recorded separately on the Statements of Condition.
These investments are evaluated quarterly for expected credit losses. If applicable, an allowance for credit loss is recorded with a corresponding adjustment to the provision for/(reversal of) credit losses. The Bank treats securities
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
purchased under agreements to resell as collateralized financing arrangements because they effectively represent short-term loans to counterparties that are considered by the Bank to be of investment quality, 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. Consequently, a credit loss would be recognized if there is a collateral shortfall which the Bank does not believe the counterparty will replenish in accordance with its contractual terms. The credit loss would be limited to the difference between the fair value of the collateral and the investment’s cost. The Bank invests in Federal funds sold with counterparties that are considered by the Bank to be of investment quality.
See Note 3 – Investments for details on the allowance methodologies relating to interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold.
Investment Securities. On a quarterly basis, the Bank evaluates its individual AFS investment securities in an unrealized loss position for impairment. A security is considered impaired when its fair value is less than its amortized cost basis. With respect to any debt security, a credit loss is defined as the amount by which the amortized cost basis exceeds the present value of the cash flows expected to be collected. If a credit loss exists but the entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis (the amortized cost basis less any current-period credit loss), an allowance for credit losses is recorded with a corresponding adjustment to the provision for/(reversal of) credit losses. The allowance is limited by the amount of the unrealized loss. Accrued interest receivable is recorded separately on the Statements of Condition. The allowance for credit losses excludes uncollectible accrued interest receivable, which is measured separately.
If management intends to sell an impaired security classified as AFS, or more likely than not will be required to sell the security before expected recovery of its amortized cost basis, any allowance for credit losses is written off and the amortized cost basis is written down to the security’s fair value at the reporting date with any incremental impairment reported in earnings as net unrealized gain/(loss) on AFS securities. If management does not intend to sell an impaired security classified as AFS and it is not more likely than not that management will be required to sell the debt security, then the credit portion of the difference is recognized as an allowance for credit losses and any remaining difference between the security’s fair value and amortized cost is recorded to net unrealized gain/(loss) on AFS securities within other comprehensive income/(loss).
Prior to January 1, 2020, credit losses were recorded as a direct write-down of the AFS security carrying value. For improvements in cash flows of AFS securities, interest income follows the recognition pattern pursuant to the impairment guidance in effect prior to January 1, 2020, and recoveries of amounts previously written off are recorded when received. AFS securities with a credit loss recognized pursuant to the impairment guidance in effect prior to January 1, 2020, continue to follow the prior accounting until maturity or disposition. For improvements in impaired AFS securities with an allowance for credit losses recognized after the adoption of the new guidance, the allowance for credit losses associated with recoveries may be derecognized up to its full amount. Effective January 1, 2020, the net non-credit-related other-than-temporary impairment (OTTI) gain/(loss) on AFS securities was reclassified to net unrealized gain/(loss) on AFS securities within other comprehensive income/(loss).
Held-to-maturity (HTM) securities are carried at cost, adjusted for periodic principal repayments, amortization of premiums and accretion of discounts, and previous credit loss recognized in net income and Accumulated Other Comprehensive Income (AOCI) recorded prior to January 1, 2020. On a quarterly basis, the Bank evaluates its HTM investment securities for expected credit losses on a pool basis unless an individual assessment is deemed necessary because the securities do not possess similar risk characteristics. If necessary, an allowance for credit losses is recorded with a corresponding adjustment to the provision for/(reversal of) credit losses. Prior to January 1, 2020, credit losses were recorded as a direct write-down of the HTM security carrying value. Accrued interest
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
receivable is recorded separately on the Statements of Condition. The allowance for credit losses excludes uncollectible accrued interest receivable, which is measured separately.
For improvements in HTM securities impaired prior to January 1, 2020, interest income continues to follow the recognition pattern pursuant to the impairment guidance in effect prior to January 1, 2020, and recoveries of amounts previously written off are recorded when received. For improvements in impaired HTM securities with an allowance for credit losses recognized after the adoption of the new guidance, the allowance for credit losses associated with recoveries may be derecognized up to its full amount.
See Note 3 – Investments for details on the allowance methodologies relating to AFS and HTM securities.
Advances. The Bank reports advances (loans to members, former members or their successors or housing associates) either at amortized cost or at fair value when the fair value option is elected. Advances carried at amortized cost are reported net of premiums, discounts (including discounts related to the Affordable Housing Program), and hedging adjustments. Accrued interest receivable is recorded separately on the Statements of Condition. The advances carried at amortized cost are evaluated quarterly for expected credit losses. If deemed necessary, an allowance for credit losses is recorded with a corresponding adjustment to the provision for/(reversal of) credit losses. See Note 4 – Advances for details on the allowance methodologies relating to advances.
Mortgage Loans Held for Portfolio. The Bank classifies mortgage loans as held for investment and, accordingly, reports them at their principal amount outstanding net of unamortized premiums, unamortized credit enhancement fees paid as a lump sum at the time loans are purchased, discounts, and unrealized gains and losses from loans initially classified as mortgage loan commitments. The Bank performs a quarterly assessment of its mortgage loans held for portfolio to estimate expected credit losses. An allowance for credit losses is recorded with a corresponding adjustment to the provision for/(reversal of) credit losses.
The Bank measures expected credit losses on mortgage loans on a collective basis, pooling loans with similar risk characteristics. If a mortgage loan no longer shares risk characteristics with other loans, it is removed from the pool and evaluated for expected credit losses on an individual basis.
When developing the allowance for credit losses, the Bank measures the estimated loss over the remaining life of a mortgage loan, which also considers how the Bank’s credit enhancements mitigate credit losses. The Bank includes estimates of expected recoveries within the allowance for credit losses. If a loan is purchased at a discount, the discount does not offset the allowance for credit losses. Accrued interest receivable is recorded separately on the Statements of Condition. The allowance excludes uncollectible accrued interest receivable, as the Bank writes off accrued interest receivable by reversing interest income if a mortgage loan is placed on nonaccrual status.
The Bank does not purchase mortgage loans with credit deterioration present at the time of purchase. See Note 5 – Mortgage Loans Held for Portfolio for details on the allowance methodologies relating to mortgage loans. For more information related to the Bank’s accounting policies for the Mortgage Partnership Finance® (MPF®) Program, see “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” in the Bank’s 2019 Form 10-K. (“Mortgage Partnership Finance,” “MPF,” and “MPF Xtra” are registered trademarks of the FHLBank of Chicago.)
Off-Balance Sheet Credit Exposures. The Bank evaluates its off-balance sheet credit exposures on a quarterly basis for expected credit losses. If deemed necessary, an allowance for expected credit losses on these off-balance sheet exposures is recorded in other liabilities with a corresponding adjustment to the provision for/(reversal of) credit losses. See Note 13 – Commitments and Contingencies for details on the allowance methodologies relating to off-balance sheet credit exposure.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 2 — Recently Issued and Adopted Accounting Guidance
The following table provides a summary of recently issued accounting standards that may have an effect on the financial statements.
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| | | | | | |
Accounting Standards Update (ASU) | | Description | | Effective Date | | Effect on the Financial Statements or Other Significant Matters |
Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04) | | This guidance provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include: • contract modifications, • hedging relationships, and • sale or transfer of debt securities classified as HTM. | | This guidance is effective immediately for the Bank, and the Bank may elect to apply the amendments prospectively through December 31, 2022. | | The Bank is in the process of evaluating the guidance. Its effect on the Bank’s financial condition, results of operations, and cash flows has not yet been determined. |
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15)
| | This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). | | This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2020. | | The guidance was adopted as of January 1, 2020. The adoption of this guidance did not have any effect on the Bank’s financial condition, results of operations, or cash flows. |
Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14) | | This guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans to improve disclosure effectiveness. | | This guidance becomes effective for the Bank for the annual period ended December 31, 2020, and the annual periods thereafter. Early adoption is permitted. | | The Bank does not intend to adopt this guidance early. The adoption of this guidance may affect the Bank’s disclosures but will not have any effect on the Bank’s financial condition, results of operations, or cash flows. |
Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13) | | This guidance modifies the disclosure requirements for fair value measurements to improve disclosure effectiveness. | | This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2020. | | The guidance was adopted as of January 1, 2020. The adoption of this guidance impacted the Bank’s disclosures but did not have any effect on the Bank’s financial condition, results of operations, or cash flows. |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
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| | | | | | |
Accounting Standards Update (ASU) | | Description | | Effective Date | | Effect on the Financial Statements or Other Significant Matters |
Measurement of Credit Losses on Financial Instruments, as amended (ASU 2016-13) | | The guidance replaces the current incurred loss impairment model and requires entities to measure expected credit losses based on consideration of a broad range of relevant information, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The guidance also requires, among other things, credit losses relating to AFS securities to be recorded through an allowance for credit losses and expands disclosure requirements. | | This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2020. | | This guidance was adopted using a modified retrospective basis as of January 1, 2020. Upon adoption, this guidance had no effect on advances or U.S. obligations and Government-Sponsored Enterprises (GSEs) investments. The adoption of this guidance had an immaterial effect on the remaining investment portfolio given the specific terms, issuer guarantees, and collateralized/securitized nature of these instruments, on mortgage loans, and on the Bank’s financial condition, results of operations, and cash flows. |
Note 3 — Investments
The Bank makes short-term investments in interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold, and may make other investments in debt securities, which are classified as either trading, AFS, or HTM.
Interest-Bearing Deposits, Securities Purchased under Agreements to Resell, and Federal Funds Sold. The Bank invests in interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold to provide short-term liquidity. These investments are generally transacted with counterparties that have received an investment grade credit rating of BBB or greater by a nationally recognized statistical rating organization (NRSRO). At March 31, 2020, none of these investments were with counterparties rated below BBB, and approximately 1% were with unrated counterparties. These may differ from any internal ratings of the investments by the Bank, if applicable.
Federal funds sold are unsecured loans that are generally transacted on an overnight term. Federal Finance Housing Agency (Finance Agency) regulations include a limit on the amount of unsecured credit the Bank may extend to a counterparty. At March 31, 2020, and December 31, 2019, all investments in interest-bearing deposits and Federal funds sold were repaid or expected to be repaid according to the contractual terms. No allowance for credit losses was recorded for these assets at March 31, 2020, and December 31, 2019. Carrying values of interest-bearing deposits and Federal funds sold exclude accrued interest receivable of $2 and a de minimis amount as of March 31, 2020, respectively, and $3 and a de minimis amount as of December 31, 2019, respectively.
Based upon the collateral held as security and collateral maintenance provisions with its counterparties, the Bank determined that no allowance for credit losses was needed for its securities purchased under agreements to resell at March 31, 2020, and December 31, 2019. The carrying value of securities purchased under agreements excludes de minimis amounts of accrued interest receivable as of March 31, 2020, and December 31, 2019.
Debt Securities
The Bank invests in debt securities, which are classified as either trading, AFS, or HTM. Within these investments, the Bank is primarily subject to credit risk related to private-label residential mortgage-backed securities (PLRMBS) that are supported by underlying mortgage loans. The Bank is prohibited by Finance Agency regulations from purchasing certain higher risk securities, such as equity securities and debt instruments that are not investment quality at time of purchase.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Trading Securities. The estimated fair value of trading securities as of March 31, 2020, and December 31, 2019, was as follows:
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| | | | | | | |
| March 31, 2020 |
| | December 31, 2019 |
|
U.S. obligations – Treasury securities | $ | 4,315 |
| | $ | 1,762 |
|
MBS – Other U.S. obligations – Ginnie Mae | 4 |
| | 4 |
|
Total | $ | 4,319 |
| | $ | 1,766 |
|
The net unrealized gain/(loss) on trading securities was $73 and $(1) for the three months ended March 31, 2020 and 2019, respectively. These amounts represent the changes in the fair value of the securities during the reported periods.
Available-for-Sale Securities. AFS securities by major security type as of March 31, 2020, and December 31, 2019, were as follows:
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| | | | | | | | | | | | | | | | | | | |
March 31, 2020 | | | | | | | | | |
| Amortized Cost(1) |
| | Allowance for Credit Losses(2) |
| | Gross Unrealized Gains |
| | Gross Unrealized Losses |
| | Estimated Fair Value |
|
U.S. obligations – Treasury securities | $ | 5,347 |
| | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | 5,353 |
|
MBS: | | | | | | | | | |
GSEs – multifamily: | | | | | | | | | |
Freddie Mac | 857 |
| | — |
| | — |
| | (24 | ) | | 833 |
|
Fannie Mae | 7,991 |
| | — |
| | — |
| | (228 | ) | | 7,763 |
|
Subtotal – GSEs – multifamily | 8,848 |
| | — |
| | — |
| | (252 | ) | | 8,596 |
|
PLRMBS: | | | | | | | | | |
Prime | 204 |
| | (6 | ) | | 2 |
| | (2 | ) | | 198 |
|
Alt-A | 2,028 |
| | (33 | ) | | 97 |
| | (64 | ) | | 2,028 |
|
Subtotal PLRMBS | 2,232 |
| | (39 | ) | | 99 |
| | (66 | ) | | 2,226 |
|
Total MBS | 11,080 |
| | (39 | ) | | 99 |
| | (318 | ) | | 10,822 |
|
Total | $ | 16,427 |
| | $ | (39 | ) | | $ | 105 |
| | $ | (318 | ) | | $ | 16,175 |
|
|
| | | | | | | | | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | |
| Amortized Cost(1) |
| | OTTI Recognized in AOCI(2) |
| | Gross Unrealized Gains(3) |
| | Gross Unrealized Losses |
| | Estimated Fair Value |
|
U.S. obligations – Treasury securities | $ | 5,281 |
| | $ | — |
| | $ | 7 |
| | $ | — |
| | $ | 5,288 |
|
MBS: | | | | | | | | | |
GSEs – multifamily: | | | | | | | | | |
Freddie Mac | 773 |
| | — |
| | 4 |
| | — |
| | 777 |
|
Fannie Mae | 6,823 |
| | — |
| | 23 |
| | (13 | ) | | 6,833 |
|
Subtotal – GSEs – multifamily | 7,596 |
| | — |
| | 27 |
| | (13 | ) | | 7,610 |
|
PLRMBS: | | | | | | | | | |
Prime | 213 |
| | — |
| | 17 |
| | — |
| | 230 |
|
Alt-A | 2,116 |
| | (9 | ) | | 260 |
| | — |
| | 2,367 |
|
Subtotal PLRMBS | 2,329 |
| | (9 | ) | | 277 |
| | — |
| | 2,597 |
|
Total MBS | 9,925 |
| | (9 | ) | | 304 |
| | (13 | ) | | 10,207 |
|
Total | $ | 15,206 |
| | $ | (9 | ) | | $ | 311 |
| | $ | (13 | ) | | $ | 15,495 |
|
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| |
(2) | Effective January 1, 2020, the Bank completed an analysis to determine whether to record an allowance for credit losses for expected credit losses on AFS securities. Prior to January 1, 2020, credit losses were recorded as a direct write-down to the AFS security carrying value. OTTI recognized in AOCI excludes subsequent unrealized gains/(losses) in fair value of previously other-than-temporarily impaired AFS securities at December 31, 2019, which is included in net non-credit-related OTTI on AFS securities. |
| |
(3) | Includes $277 in subsequent unrealized gains in fair value of previously other-than-temporarily impaired AFS securities at December 31, 2019. |
At March 31, 2020, the amortized cost of the Bank’s MBS classified as AFS included premiums of $68, discounts of $50, and credit-related OTTI of $547 for AFS securities with an OTTI recognized pursuant to the impairment guidance in effect prior to January 1, 2020. At December 31, 2019, the amortized cost of the Bank’s MBS classified as AFS included premiums of $65, discounts of $52, and credit-related OTTI of $574.
The following tables summarize the AFS securities with unrealized losses as of March 31, 2020, and December 31, 2019. 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. At December 31, 2019, total unrealized losses in the following table will not agree to total gross unrealized losses in the table above. The unrealized losses in the following table as of December 31, 2019, also include non-credit-related OTTI losses recognized in AOCI.
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| | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2020 | | | | | | | | | | | |
| Less Than 12 Months | | 12 Months or More | | Total |
| Estimated Fair Value |
| | Unrealized Losses |
| | Estimated Fair Value |
| | Unrealized Losses |
| | Estimated Fair Value |
| | Unrealized Losses |
|
U.S. obligations – Treasury securities | $ | 104 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 104 |
| | $ | — |
|
MBS: | | | | | | | | | | | |
MBS – GSEs – multifamily: | | | | | | | | | | | |
Freddie Mac | $ | 833 |
| | $ | 24 |
| | $ | — |
| | $ | — |
| | $ | 833 |
| | $ | 24 |
|
Fannie Mae | 7,402 |
| | 216 |
| | 235 |
| | 12 |
| | 7,637 |
| | 228 |
|
Subtotal MBS – GSEs – multifamily | 8,235 |
| | 240 |
| | 235 |
| | 12 |
| | 8,470 |
| | 252 |
|
PLRMBS: | | | | | | | | | | | |
Prime | 109 |
| | 1 |
| | 6 |
| | 1 |
| | 115 |
| | 2 |
|
Alt-A | 747 |
| | 37 |
| | 161 |
| | 27 |
| | 908 |
| | 64 |
|
Subtotal PLRMBS | 856 |
| | 38 |
| | 167 |
| | 28 |
| | 1,023 |
| | 66 |
|
Total MBS | 9,091 |
| | 278 |
| | 402 |
| | 40 |
| | 9,493 |
| | 318 |
|
Total | $ | 9,195 |
| | $ | 278 |
| | $ | 402 |
| | $ | 40 |
| | $ | 9,597 |
| | $ | 318 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2019 | | | | | |
| Less Than 12 Months | | 12 Months or More | | Total |
| Estimated Fair Value |
| | Unrealized Losses |
| | Estimated Fair Value |
| | Unrealized Losses |
| | Estimated Fair Value |
| | Unrealized Losses |
|
MBS – GSEs – multifamily: | | | | | | | | | | | |
Freddie Mac | $ | 211 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 211 |
| | $ | — |
|
Fannie Mae | 2,433 |
| | 9 |
| | 623 |
| | 4 |
| | 3,056 |
| | 13 |
|
Subtotal MBS – GSEs – multifamily | 2,644 |
| | 9 |
| | 623 |
| | 4 |
| | 3,267 |
| | 13 |
|
PLRMBS: | | | | | | | | | | | |
Prime | 4 |
| | — |
| | 8 |
| | — |
| | 12 |
| | — |
|
Alt-A | 75 |
| | — |
| | 193 |
| | 9 |
| | 268 |
| | 9 |
|
Subtotal PLRMBS | 79 |
| | — |
| | 201 |
| | 9 |
| | 280 |
| | 9 |
|
Total | $ | 2,723 |
| | $ | 9 |
| | $ | 824 |
| | $ | 13 |
| | $ | 3,547 |
| | $ | 22 |
|
Redemption Terms. The amortized cost and estimated fair value of non-MBS investments by contractual maturity (based on contractual final principal payment) and of MBS as of March 31, 2020, and December 31, 2019, are
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
shown below. Expected maturities of MBS will differ from contractual maturities because borrowers may have the right to call or prepay the underlying obligations with or without call or prepayment fees.
|
| | | | | | | |
March 31, 2020 | | | |
Year of Contractual Maturity | Amortized Cost |
| | Estimated Fair Value |
|
AFS securities other than MBS: | | | |
Due in 1 year or less | $ | 3,290 |
| | $ | 3,293 |
|
Due after 1 year through 5 years | 2,057 |
| | 2,060 |
|
Subtotal | 5,347 |
| | 5,353 |
|
MBS | 11,080 |
| | 10,822 |
|
Total | $ | 16,427 |
| | $ | 16,175 |
|
|
| | | | | | | |
December 31, 2019 | | | |
Year of Contractual Maturity | Amortized Cost |
| | Estimated Fair Value |
|
AFS securities other than MBS: | | | |
Due in 1 year or less | $ | 2,309 |
| | $ | 2,312 |
|
Due after 1 year through 5 years | 2,972 |
| | 2,976 |
|
Subtotal | 5,281 |
| | 5,288 |
|
MBS | 9,925 |
| | 10,207 |
|
Total | $ | 15,206 |
| | $ | 15,495 |
|
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, 2020 | | | | | | | | | | | |
| Amortized Cost(1) |
| | OTTI Recognized in AOCI(2) |
| | Net Carrying Value |
| | Gross Unrecognized Holding Gains(3) |
| | Gross Unrecognized Holding Losses(3) |
| | Estimated Fair Value |
|
MBS – Other U.S. obligations – single-family: | | | | | | | | | | | |
Ginnie Mae | $ | 441 |
| | $ | — |
| | $ | 441 |
| | $ | 15 |
| | $ | — |
| | $ | 456 |
|
MBS – GSEs – single-family: | | | | | | | | | | | |
Freddie Mac | 952 |
| | — |
| | 952 |
| | 20 |
| | — |
| | 972 |
|
Fannie Mae | 1,686 |
| | — |
| | 1,686 |
| | 28 |
| | (3 | ) | | 1,711 |
|
Subtotal MBS – GSEs – single-family | 2,638 |
| | — |
| | 2,638 |
| | 48 |
| | (3 | ) | | 2,683 |
|
MBS – GSEs – multifamily: | | | | | | | | | | | |
Freddie Mac | 2,388 |
| | — |
| | 2,388 |
| | — |
| | (25 | ) | | 2,363 |
|
Fannie Mae | 1,039 |
| | — |
| | 1,039 |
| | — |
| | (2 | ) | | 1,037 |
|
Subtotal MBS – GSEs – multifamily | 3,427 |
| | — |
| | 3,427 |
| | — |
| | (27 | ) | | 3,400 |
|
Subtotal MBS – GSEs | 6,065 |
| | — |
| | 6,065 |
| | 48 |
| | (30 | ) | | 6,083 |
|
PLRMBS: | | | | | | | | | | | |
Prime | 229 |
| | — |
| | 229 |
| | — |
| | (21 | ) | | 208 |
|
Alt-A | 130 |
| | (1 | ) | | 129 |
| | 2 |
| | (11 | ) | | 120 |
|
Subtotal PLRMBS | 359 |
| | (1 | ) | | 358 |
| | 2 |
| | (32 | ) | | 328 |
|
Total | $ | 6,865 |
| | $ | (1 | ) | | $ | 6,864 |
| | $ | 65 |
| | $ | (62 | ) | | $ | 6,867 |
|
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | |
| Amortized Cost(1) |
| | OTTI Recognized in AOCI(2) |
| | Carrying Value |
| | Gross Unrecognized Holding Gains(3) |
| | Gross Unrecognized Holding Losses(3) |
| | Estimated Fair Value |
|
MBS – Other U.S. obligations – single-family: | | | | | | | | | | | |
Ginnie Mae | $ | 470 |
| | $ | — |
| | $ | 470 |
| | $ | 5 |
| | $ | — |
| | $ | 475 |
|
MBS – GSEs – single-family: | | | | | | | | | | | |
Freddie Mac | 1,063 |
| | — |
| | 1,063 |
| | 8 |
| | (1 | ) | | 1,070 |
|
Fannie Mae | 1,844 |
| | — |
| | 1,844 |
| | 20 |
| | (1 | ) | | 1,863 |
|
Subtotal MBS – GSEs – single-family | 2,907 |
| | — |
| | 2,907 |
| | 28 |
| | (2 | ) | | 2,933 |
|
MBS – GSEs – multifamily: | | | | | | | | | | | |
Freddie Mac | 2,625 |
| | — |
| | 2,625 |
| | — |
| | (9 | ) | | 2,616 |
|
Fannie Mae | 1,159 |
| | — |
| | 1,159 |
| | — |
| | (2 | ) | | 1,157 |
|
Subtotal MBS – GSEs – multifamily | 3,784 |
| | — |
| | 3,784 |
| | — |
| | (11 | ) | | 3,773 |
|
Subtotal MBS – GSEs | 6,691 |
| | — |
| | 6,691 |
| | 28 |
| | (13 | ) | | 6,706 |
|
PLRMBS: | | | | | | | | | | | |
Prime | 243 |
| | — |
| | 243 |
| | 1 |
| | (4 | ) | | 240 |
|
Alt-A | 142 |
| | (1 | ) | | 141 |
| | 6 |
| | (2 | ) | | 145 |
|
Subtotal PLRMBS | 385 |
| | (1 | ) | | 384 |
| | 7 |
| | (6 | ) | | 385 |
|
Total | $ | 7,546 |
|
| $ | (1 | ) |
| $ | 7,545 |
|
| $ | 40 |
|
| $ | (19 | ) |
| $ | 7,566 |
|
| |
(1) | Amortized cost includes unpaid principal balance, unamortized premiums and discounts, and net charge offs, and excludes accrued interest receivable of $10 and $12 at March 31, 2020, and December 31, 2019, respectively. |
| |
(2) | With the adoption of new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020, the OTTI approach was replaced with an evaluation for an allowance for credit loss; however, OTTI remains for those securities that had credit impairment prior to the adoption date. |
| |
(3) | Gross unrecognized gains/(losses) represent the difference between estimated fair value and net carrying value. |
Expected maturities of MBS classified as HTM will differ from contractual maturities because borrowers may have the right to call or prepay the underlying obligations with or without call or prepayment fees.
At March 31, 2020, the amortized cost of the Bank’s MBS classified as HTM included premiums of $7, discounts of $10, and credit-related OTTI of $6 for HTM securities with an OTTI recognized pursuant to the impairment guidance in effect prior to January 1, 2020. At December 31, 2019, the amortized cost of the Bank’s MBS classified as HTM included premiums of $8, discounts of $11, and credit-related OTTI of $7.
Allowance for Credit Losses on AFS and HTM Securities. The Bank adopted new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020. For additional information, see Note 2 – Recently Issued and Adopted Accounting Guidance. For information on the prior methodology for evaluating credit losses, see “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” in the Bank’s 2019 Form 10-K.
During the three months ended March 31, 2020, the Bank recognized a provision for credit losses of $39 associated with PLRMBS classified as AFS and no provision for credit losses associated with HTM investments. Under the previous accounting methodology of security impairment, the Bank recognized credit-related net OTTI loss of $1 during the three months ended March 31, 2019. To evaluate investment securities for credit loss at March 31, 2020, the Bank employed the following methodologies, based on the type of security.
AFS and HTM Securities (Excluding PLRMBS) – The Bank’s AFS and HTM securities are principally U.S. obligations and MBS issued by Ginnie Mae, Freddie Mac, and Fannie Mae that are backed by single-family or multifamily mortgage loans. The Bank only purchases securities considered investment quality. Excluding PLRMBS investments, at March 31, 2020, approximately 100% of AFS securities and HTM securities, based on
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
amortized cost, were rated A, or above, by an NRSRO, based on the lowest long-term credit rating for each security. These may differ from any internal ratings of the securities by the Bank, if applicable.
At March 31, 2020, certain of the Bank’s AFS securities were in an unrealized loss position. These losses are considered temporary as the Bank expects to recover the entire amortized cost basis on these AFS investment securities and neither intends to sell these securities nor considers it more likely than not that it will be required to sell these securities before its anticipated recovery of each security's remaining amortized cost basis. Further, the Bank has not experienced any payment defaults on the instruments. In addition, substantially all of these securities carry an implicit or explicit government guarantee. As a result, no allowance for credit losses was recorded on these AFS securities at March 31, 2020.
As of March 31, 2020, the Bank had not established an allowance for credit loss on any of its HTM securities because the securities: (i) were all highly rated or had short remaining terms to maturity, (ii) had not experienced, nor did the Bank expect, any payment default on the instruments, and (iii) in the case of GSE or other U.S. obligations, carry an implicit or explicit government guarantee such that the Bank consider the risk of nonpayment to be zero.
Private-Label Residential Mortgage-Backed Securities – The Bank also holds investments in PLRMBS. The Bank has not purchased any PLRMBS since the first quarter of 2008. However, many of these securities have subsequently experienced significant credit deterioration. As of March 31, 2020, approximately 7% of PLRMBS (AFS and HTM combined, based on amortized cost) were rated A, or above, by an NRSRO; and the remaining securities were either rated less than A, or were unrated. To determine whether an allowance for credit loss is necessary on these securities, the Bank uses cash flow analyses. For certain PLRMBS where underlying collateral data is not available, alternative procedures as determined by the Bank are used to assess these securities for credit loss measurement.
At each quarter end, the Bank compares the present value of the cash flows expected to be collected on its PLRMBS, using the effective interest rate, to the amortized cost basis of the securities to determine whether a credit loss exists. The expected credit losses are measured using:
| |
• | the remaining payment terms for the security; |
| |
• | prepayment speeds based on underlying loan-level borrower and loan characteristics; |
| |
• | expected default rates based on underlying loan-level borrower and loan characteristics; |
| |
• | expected housing price changes; |
| |
• | expected interest rate assumptions; and |
| |
• | loss severities on the collateral supporting each unique PLRMBS based on underlying loan-level borrower and loan characteristics. |
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 reflects management’s expectations and includes a base case housing price forecast for near- and long-term horizons.
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 with an OTTI recognized pursuant to the impairment guidance in effect prior to January 1, 2020, as of March 31, 2020 (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 fair value of PLRMBS classified as Level 3 as of March 31, 2020, and the related current credit enhancement for the Bank.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | |
March 31, 2020 | | | | | |
| Significant Inputs for Other-Than-Temporarily Impaired PLRMBS |
| Prepayment Rates | | Default Rates | | Loss Severities |
Collateral Type at Origination | Weighted Average % (1) | | Weighted Average % (1) | | Weighted Average % (1) |
Prime | 16.3 | | 11.2 | | 54.1 |
Alt-A | 15.0 | | 16.1 | | 40.3 |
Total | 15.0 | | 16.0 | | 40.6 |
| |
(1) | Weighted average percentage is based on unpaid principal balance. |
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 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.
The following table presents the credit-related OTTI, which is recognized in earnings, for the three months ended March 31, 2020 and 2019.
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 |
| | 2019 |
|
Balance, beginning of the period | $ | 1,021 |
| | $ | 1,077 |
|
Additional charges on securities for which OTTI was previously recognized(1) | — |
| | 1 |
|
Accretion of yield adjustments resulting from improvement of expected cash flows that are recognized over the remaining life of the securities(2) | (17 | ) | | (15 | ) |
Balance, end of the period | $ | 1,004 |
| | $ | 1,063 |
|
| |
(1) | For the three months ended March 31, 2019, “securities for which OTTI was previously recognized” represents all securities that were also other-than-temporarily impaired prior to January 1, 2020. |
| |
(2) | The total net accretion/(amortization) associated with PLRMBS that were other-than-temporarily impaired prior to January 1, 2020, (amount recognized in interest income) totaled $20 and $18 for the three months ended March 31, 2020 and 2019, respectively. |
In general, the Bank elects to transfer any PLRMBS that incurred a credit loss during the applicable period from the Bank’s HTM portfolio to its AFS portfolio at their fair values. The Bank recognized a 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 transferred PLRMBS from its HTM portfolio to its AFS portfolio with an amortized cost and fair value of $1 during the three months ended March 31, 2020. The Bank did not transfer any PLRMBS from its HTM portfolio to its AFS portfolio during the three months ended March 31, 2019.
For the Bank’s PLRMBS, the Bank experienced declines in fair value in March 2020 as a result of disruptions in the financial markets combined with illiquidity in the PLRMBS market and decreased expectations of the performance of loan collateral underlying these securities, which caused these assets to be valued at discounts to their amortized cost. As a result, an allowance for credit losses of $39 was recorded on these securities as of March 31, 2020.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 4 — 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 a specified index.
Redemption Terms. The Bank had advances outstanding, excluding overdrawn demand deposit accounts, at interest rates ranging from 0.13% to 8.57% at March 31, 2020, and 1.15% to 8.57% at December 31, 2019, as summarized below.
|
| | | | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Redemption Term | Amount Outstanding(1) |
| | Weighted Average Interest Rate |
| | Amount Outstanding(1) |
| | Weighted Average Interest Rate |
|
Within 1 year | $ | 37,311 |
| | 1.04 | % | | $ | 32,351 |
| | 1.91 | % |
After 1 year through 2 years | 26,281 |
| | 1.65 |
| | 22,380 |
| | 2.15 |
|
After 2 years through 3 years | 3,784 |
| | 2.12 |
| | 4,847 |
| | 2.08 |
|
After 3 years through 4 years | 3,520 |
| | 2.67 |
| | 2,909 |
| | 2.97 |
|
After 4 years through 5 years | 4,308 |
| | 1.43 |
| | 1,461 |
| | 2.32 |
|
After 5 years | 1,684 |
| | 2.40 |
| | 1,140 |
| | 2.96 |
|
Total par value | 76,888 |
| | 1.43 | % | | 65,088 |
| | 2.08 | % |
Valuation adjustments for hedging activities | 812 |
| | | | 203 |
| | |
Valuation adjustments under fair value option | 172 |
| | | | 83 |
| | |
Total | $ | 77,872 |
| | | | $ | 65,374 |
| | |
| |
(1) | Carrying amounts exclude accrued interest receivable of $30 and $39 at March 31, 2020, and December 31, 2019, respectively. |
Many of the Bank’s advances are prepayable at the borrower’s option. However, when advances are prepaid, the borrower is generally charged a prepayment fee intended to make the Bank financially indifferent to the prepayment. In addition, for certain advances with full or partial prepayment symmetry, 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. The Bank had advances with full prepayment symmetry outstanding totaling $23,430 at March 31, 2020, and $14,059 at December 31, 2019. The Bank had advances with partial prepayment symmetry outstanding totaling $3,387 at March 31, 2020, and $3,513 at December 31, 2019. Some advances may be repaid on pertinent call dates without prepayment fees (callable advances). The Bank had callable advances outstanding totaling $11,444 at March 31, 2020, and $14,024 at December 31, 2019.
The Bank had putable advances totaling $220 at March 31, 2020, and $20 at December 31, 2019. 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 relative to contractual rates.
The following table summarizes advances at March 31, 2020, and December 31, 2019, by the earlier of the year of redemption term or next call date for callable advances and by the earlier of the year of redemption term or next put date for putable advances.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | | | | | |
| Earlier of Redemption Term or Next Call Date | | Earlier of Redemption Term or Next Put Date |
| March 31, 2020 |
| | December 31, 2019 |
| | March 31, 2020 |
| | December 31, 2019 |
|
Within 1 year | $ | 43,383 |
| | $ | 39,075 |
| | $ | 37,531 |
| | $ | 32,371 |
|
After 1 year through 2 years | 20,231 |
| | 15,731 |
| | 26,281 |
| | 22,380 |
|
After 2 years through 3 years | 3,782 |
| | 4,800 |
| | 3,784 |
| | 4,847 |
|
After 3 years through 4 years | 3,520 |
| | 2,895 |
| | 3,520 |
| | 2,909 |
|
After 4 years through 5 years | 4,288 |
| | 1,447 |
| | 4,308 |
| | 1,461 |
|
After 5 years | 1,684 |
| | 1,140 |
| | 1,464 |
| | 1,120 |
|
Total par value | $ | 76,888 |
| | $ | 65,088 |
| | $ | 76,888 |
| | $ | 65,088 |
|
Concentration Risk. The following tables present the concentration in advances to the top five borrowers and their affiliates at March 31, 2020 and 2019. 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, 2020 and 2019.
|
| | | | | | | | | | | | | |
| March 31, 2020 | | Three Months Ended March 31, 2020 |
Name of Borrower | Advances Outstanding |
| | Percentage of Total Advances Outstanding |
| | Interest Income from Advances(1) |
| | Percentage of Total Interest Income from Advances |
|
First Republic Bank | $ | 16,250 |
|
| 21 | % | | $ | 70 |
|
| 22 | % |
MUFG Union Bank, National Association | 10,900 |
|
| 14 |
| | 62 |
|
| 19 |
|
Wells Fargo & Company | |
| | | |
| |
Wells Fargo Financial National Bank West(2) | 9,000 |
|
| 12 |
| | 35 |
|
| 11 |
|
Wells Fargo Bank, National Association(3) | 36 |
|
| — |
| | 1 |
|
| — |
|
Subtotal Wells Fargo & Company | 9,036 |
|
| 12 |
| | 36 |
|
| 11 |
|
Bank of the West | 8,206 |
|
| 11 |
| | 21 |
|
| 7 |
|
JPMorgan Chase Bank, National Association(3) | 3,053 |
| | 4 |
| | 25 |
| | 8 |
|
Subtotal | 47,445 |
|
| 62 |
| | 214 |
| | 67 |
|
Others | 29,443 |
|
| 38 |
| | 105 |
|
| 33 |
|
Total par value | $ | 76,888 |
|
| 100 | % | | $ | 319 |
| | 100 | % |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | | | |
| March 31, 2019 | | Three Months Ended March 31, 2019 |
Name of Borrower | Advances Outstanding |
| | Percentage of Total Advances Outstanding |
| | Interest Income from Advances(1) |
| | Percentage of Total Interest Income from Advances |
|
MUFG Union Bank, National Association | $ | 14,550 |
| | 21 | % | | $ | 103 |
| | 22 | % |
JPMorgan Chase Bank, National Association(3) | 8,358 |
| | 12 |
| | 60 |
| | 13 |
|
Wells Fargo & Company |
|
| |
|
| |
|
| |
|
|
Wells Fargo Financial National Bank(2) | 8,000 |
| | 11 |
| | 47 |
| | 10 |
|
Wells Fargo Bank, National Association(3) | 45 |
| | — |
| | 1 |
| | — |
|
Subtotal Wells Fargo & Company | 8,045 |
| | 11 |
| | 48 |
| | 10 |
|
First Republic Bank | 8,000 |
| | 11 |
| | 49 |
| | 10 |
|
Bank of the West | 6,807 |
| | 10 |
| | 43 |
| | 9 |
|
Subtotal | 45,760 |
| | 65 |
| | 303 |
| | 64 |
|
Others | 24,415 |
| | 35 |
| | 174 |
| | 36 |
|
Total par value | $ | 70,175 |
| | 100 | % | | $ | 477 |
| | 100 | % |
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.
Credit Risk Exposure and Security Terms. The Bank manages its credit exposure related to advances 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.
In addition, the Bank lends to eligible borrowers in accordance with federal law and Finance Agency regulations. Specifically, the Bank is required to obtain sufficient collateral to fully secure credit products up to the member’s total credit limit. Borrowers may pledge the following eligible assets to secure advances:
| |
• | one-to-four-family first lien residential mortgage loans; |
| |
• | securities issued, insures, or guaranteed by the U.S. government or any of its agencies, including without limitation MBS backed by Fannie Mae, Freddie Mac, or Ginnie Mae; |
| |
• | cash or deposits in the Bank; |
| |
• | certain other real estate-related collateral, such as multifamily loans, commercial real estate loans, and second lien residential mortgage loans or home equity loans; and |
| |
• | small business, small farm, and small agribusiness loans that are fully secured by collateral (such as real estate, equipment and vehicles, accounts receivable, and inventory) from members that are community financial institutions. |
At March 31, 2020 and December 31, 2019, none of the Bank’s credit products were past due or on nonaccrual status. There were no troubled debt restructurings related to credit products during the three months ended March 31, 2020, or during 2019.
Based on the collateral pledged as security for advances, the Bank’s credit analyses of borrowers’ financial condition, repayment history on advances, and the Bank’s credit extension and collateral policies as of March 31, 2020, the Bank expects to collect all amounts due according to the contractual terms. Therefore, no allowance for losses on advances was deemed necessary by the Bank as of March 31, 2020, and December 31, 2019.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
For more information on the credit risk exposure and security terms of advances, see “Item 8. Financial Statements and Supplementary Data – Note 10 – Allowance for Credit Losses” in the Bank’s 2019 Form 10-K
Interest Rate Payment Terms. Interest rate payment terms for advances at March 31, 2020, and December 31, 2019, are detailed below:
|
| | | | | | | |
| March 31, 2020 |
| | December 31, 2019 |
|
Par value of advances: | | | |
Fixed rate: | | | |
Due within 1 year | $ | 21,846 |
| | $ | 15,327 |
|
Due after 1 year | 28,277 |
| | 21,337 |
|
Total fixed rate | 50,123 |
| | 36,664 |
|
Adjustable rate: | | | |
Due within 1 year | 15,465 |
| | 17,024 |
|
Due after 1 year | 11,300 |
| | 11,400 |
|
Total adjustable rate | 26,765 |
| | 28,424 |
|
Total par value | $ | 76,888 |
| | $ | 65,088 |
|
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, 2020, or December 31, 2019. The Bank has generally elected to account for certain advances with embedded features under the fair value option, and these advances are carried at fair value on the Statements of Condition. For more information, see Note 11 – Derivatives and Hedging Activities and Note 12 – Fair Value.
Note 5 — Mortgage Loans Held for Portfolio
The following table presents information as of March 31, 2020, and December 31, 2019, on mortgage loans, all of which are secured by one- to four-unit residential properties and single-unit second homes.
|
| | | | | | | |
| March 31, 2020 |
| | December 31, 2019 |
|
Fixed rate medium-term mortgage loans | $ | 29 |
| | $ | 27 |
|
Fixed rate long-term mortgage loans | 3,150 |
| | 3,199 |
|
Subtotal | 3,179 |
| | 3,226 |
|
Unamortized premiums | 66 |
| | 91 |
|
Unamortized discounts | (3 | ) | | (3 | ) |
Mortgage loans held for portfolio(1) | 3,242 |
| | 3,314 |
|
Less: Allowance for credit losses | (3 | ) | | — |
|
Total mortgage loans held for portfolio, net | $ | 3,239 |
| | $ | 3,314 |
|
| |
(1) | Excludes accrued interest receivable of $19 at March 31, 2020, and December 31, 2019. |
Medium-term loans have original contractual terms of 15 years or less, and long-term loans have contractual terms of more than 15 years.
Payment Status of Mortgage Loans. Payment status is the key credit quality indicator for conventional mortgage loans and allows the Bank to monitor the migration of past due loans. Past due loans are those where the borrower has failed to make timely payments of principal and/or interest in accordance with the terms of the loan. Other delinquency statistics include nonaccrual loans and loans in process of foreclosure. The following tables present the payment status for mortgage loans and other delinquency statistics for Bank’s mortgage loans at March 31, 2020, and December 31, 2019.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | |
March 31, 2020 | | | | | |
| Origination Year | | |
Payment Status | <2016 |
| | 2016 to 2020 |
| | Amortized Cost(1) |
|
30 – 59 days delinquent | $ | 12 |
| | $ | 3 |
| | $ | 15 |
|
60 – 89 days delinquent | 3 |
| | 2 |
| | 5 |
|
90 days or more delinquent | 3 |
| | 4 |
| | 7 |
|
Total past due | 18 |
| | 9 |
| | 27 |
|
Total current loans | 2,981 |
| | 234 |
| | 3,215 |
|
Total MPF | $ | 2,999 |
| | $ | 243 |
| | $ | 3,242 |
|
In process of foreclosure, included above(2) | | | | | $ | 1 |
|
Nonaccrual loans(3) | | | | | $ | 7 |
|
Serious delinquencies as a percentage of total mortgage loans outstanding(4) | | | | | 0.22 | % |
|
| | | |
December 31, 2019 | |
Payment Status | Recorded Investment(1) |
|
30 – 59 days delinquent | $ | 15 |
|
60 – 89 days delinquent | 2 |
|
90 days or more delinquent | 7 |
|
Total past due | 24 |
|
Total current loans | 3,310 |
|
Total MPF | $ | 3,334 |
|
In process of foreclosure, included above(2) | $ | — |
|
Nonaccrual loans | $ | 7 |
|
Serious delinquencies as a percentage of total mortgage loans outstanding(4) | 0.22 | % |
| |
(1) | With the adoption of new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020, payment status of mortgage loans is disclosed at amortized cost. The recorded investment at December 31, 2019, 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. The amortized cost at March 31, 2020, in a loan is the unpaid principal balance of the loan, adjusted for net deferred loan fees or costs, unamortized premiums or discounts, and direct write-downs. |
| |
(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) | At March 31, 2020, $6 of these mortgage loans on nonaccrual status did not have an associated allowance for credit losses. |
| |
(4) | 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. |
Allowance for Credit Losses on MPF Loans. MPF loans are evaluated collectively when similar risk characteristics exist. MPF loans that do not share risk characteristics with other pools are evaluated for expected credit losses on an individual basis, factoring in the credit enhancement structure at the master commitment level. The Bank determines its allowances for credit losses on MPF loans through analyses that include consideration of various loan portfolio and collateral-related characteristics, such as past performance, current conditions, and reasonable and supportable forecasts of expected economic conditions. The Bank uses models that employ a variety of methods, such as projected cash flows, to estimate expected credit losses over the life of the loans. These models rely on a number of inputs, such as current and forecasted property values and interest rates as well as historical borrower behavior experience. At March 31, 2020, the Bank’s reasonable and supportable forecast of housing prices expects, on average, for prices to appreciate 1% over a one-year forecast horizon before reverting to long-term housing price appreciation rates of 4% over a three-year forecast horizon based on historical averages. The Bank also incorporates associated credit enhancements, if any, to determine its estimate of expected credit losses.
Certain MPF loans may be evaluated for credit losses by the Bank using the practical expedient for collateral-dependent assets. A mortgage loan is considered collateral-dependent if repayment is expected to be provided by the
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
sale of the underlying property, that is, if it is considered likely that the borrower will default. The Bank may estimate the fair value of this collateral by applying an appropriate loss severity rate or using third-party estimates or property valuation models. The expected credit loss of a collateral-dependent mortgage loan is equal to the difference between the amortized cost of the loan and the estimated fair value of the collateral, less estimated selling costs. The Bank will either reserve for these estimated losses or record a direct charge-off of the loan balance, if certain triggering criteria are met. Expected recoveries of prior charge-offs, if any, are included in the allowance for credit loss.
Upon adoption of new accounting guidance for the measurement of credit losses on financial instruments applied prospectively on January 1, 2020, the Bank recorded an adjustment for the cumulative effect of the accounting change of $3. The amounts of charge-offs and recoveries of allowance for credit losses on the mortgage loan portfolio were de minimis during the three months ended March 31, 2020 and 2019, which resulted in an allowance for credit losses on MPF loans of $3 and a de minimis amount at March 31, 2020, and December 31, 2019, respectively.
See “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” and “Item 8. Financial Statements and Supplementary Data – Note 10 – Allowance for Credit Losses” in the Bank’s 2019 Form 10-K for information on the prior methodology for evaluating credit losses, as well as a discussion on classes of financing receivables, placing them on nonaccrual status, and charging them off when necessary. For more information related to the Bank’s accounting policies for collateral-dependent loans, see “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” in the Bank’s 2019 Form 10-K.
Note 6 — 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 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.
Deposits and interest rate payment terms for deposits as of March 31, 2020, and December 31, 2019, were as follows:
|
| | | | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| Amount Outstanding |
| | Weighted Average Interest Rate |
| | Amount Outstanding |
| | Weighted Average Interest Rate |
|
Interest-bearing deposits: | | | | | | | |
Adjustable rate | $ | 574 |
| | 0.01 | % | | $ | 427 |
| | 1.30 | % |
Fixed rate | 2 |
| | 0.30 |
| | — |
| | — |
|
Total interest-bearing deposits | 576 |
| | | | 427 |
| | |
Non-interest-bearing deposits | 145 |
| | | | 110 |
| | |
Total | $ | 721 |
| | | | $ | 537 |
| | |
Note 7 — Consolidated Obligations
Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are jointly issued by the Federal Home Loan Banks (FHLBanks) through the Office of Finance, which serves as the FHLBanks’ agent. As provided by the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act) or by regulations governing the operations of the FHLBanks, all FHLBanks have joint and several liability for all FHLBank consolidated
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
obligations. For a discussion of the joint and several liability regulation, see “Item 8. Financial Statements and Supplementary Data – Note 20 – Commitments and Contingencies” in the Bank’s 2019 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, 2020, and December 31, 2019.
|
| | | | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Contractual Maturity | Amount Outstanding |
| | Weighted Average Interest Rate |
| | Amount Outstanding |
| | Weighted Average Interest Rate |
|
Within 1 year | $ | 62,453 |
| | 0.51 | % | | $ | 53,549 |
| | 1.68 | % |
After 1 year through 2 years | 11,690 |
| | 0.46 |
| | 13,853 |
| | 1.67 |
|
After 2 years through 3 years | 596 |
| | 1.84 |
| | 770 |
| | 1.93 |
|
After 3 years through 4 years | 165 |
| | 2.14 |
| | 135 |
| | 2.74 |
|
After 4 years through 5 years | 812 |
| | 1.82 |
| | 937 |
| | 2.08 |
|
After 5 years | 2,191 |
| | 2.71 |
| | 2,126 |
| | 2.94 |
|
Total par value | 77,907 |
| | 0.59 | % | | 71,370 |
| | 1.73 | % |
Unamortized premiums | 3 |
| | | | 1 |
| | |
Unamortized discounts | (9 | ) | | | | (10 | ) | | |
Valuation adjustments for hedging activities | 32 |
| | | | 9 |
| | |
Fair value option valuation adjustments | 4 |
| | | | 2 |
| | |
Total | $ | 77,937 |
| | | | $ | 71,372 |
| | |
The Bank’s participation in consolidated obligation bonds outstanding includes callable bonds of $4,075 at March 31, 2020, and $6,345 at December 31, 2019. 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 $245 at March 31, 2020, and $2,085 at December 31, 2019. 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 at March 31, 2020, and December 31, 2019, was as follows: |
| | | | | | | |
| March 31, 2020 |
| | December 31, 2019 |
|
Par value of consolidated obligation bonds: | | | |
Non-callable | $ | 73,832 |
| | $ | 65,025 |
|
Callable | 4,075 |
| | 6,345 |
|
Total par value | $ | 77,907 |
| | $ | 71,370 |
|
The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding at March 31, 2020, and December 31, 2019, by the earlier of the year of contractual maturity or next call date.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | |
Earlier of Contractual Maturity or Next Call Date | March 31, 2020 |
| | December 31, 2019 |
|
Within 1 year | $ | 65,778 |
| | $ | 58,239 |
|
After 1 year through 2 years | 11,620 |
| | 12,768 |
|
After 2 years through 3 years | 381 |
| | 195 |
|
After 3 years through 4 years | 40 |
| | 70 |
|
After 4 years through 5 years | 37 |
| | 47 |
|
After 5 years | 51 |
| | 51 |
|
Total par value | $ | 77,907 |
| | $ | 71,370 |
|
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:
|
| | | | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| Amount Outstanding |
| | Weighted Average Interest Rate (1) |
| | Amount Outstanding |
| | Weighted Average Interest Rate (1) |
|
Par value | $ | 39,155 |
| | 0.84 | % | | $ | 27,447 |
| | 1.61 | % |
Unamortized discounts | (53 | ) | | | | (71 | ) | | |
Total | $ | 39,102 |
| | | | $ | 27,376 |
| | |
Interest Rate Payment Terms. Interest rate payment terms for consolidated obligations at March 31, 2020, and December 31, 2019, 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 2019 Form 10-K.
|
| | | | | | | |
| March 31, 2020 |
| | December 31, 2019 |
|
Par value of consolidated obligations: | | | |
Bonds: | | | |
Fixed rate | $ | 7,623 |
| | $ | 10,993 |
|
Adjustable rate | 70,099 |
| | 60,117 |
|
Step-up | 60 |
| | 60 |
|
Step-down | 25 |
| | 100 |
|
Range bonds | 100 |
| | 100 |
|
Total bonds, par value | 77,907 |
| | 71,370 |
|
Discount notes, par value | 39,155 |
| | 27,447 |
|
Total consolidated obligations, par value | $ | 117,062 |
| | $ | 98,817 |
|
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, 2020, or December 31, 2019. The Bank has generally elected to account for certain 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 11 – Derivatives and Hedging Activities and Note 12 – Fair Value.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 8 — Accumulated Other Comprehensive Income/(Loss)
The following table summarizes the changes in AOCI for the three months ended March 31, 2020 and 2019:
|
| | | | | | | | | | | | | | | | | | | |
| Net Unrealized Gain/(Loss) on AFS Securities |
| | 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, 2018 | $ | (32 | ) | | $ | 287 |
| | $ | (3 | ) | | $ | (17 | ) | | $ | 235 |
|
Other comprehensive income/(loss) before reclassifications: | | | | | | | | | |
Net change in fair value | 38 |
| | 14 |
| | | | | | 52 |
|
Net current period other comprehensive income/(loss) | 38 |
| | 14 |
| | — |
| | — |
| | 52 |
|
Balance, March 31, 2019 | $ | 6 |
| | $ | 301 |
| | $ | (3 | ) | | $ | (17 | ) | | $ | 287 |
|
| | | | | | | | | |
Balance, December 31, 2019 | $ | 21 |
| | $ | 268 |
| | $ | (1 | ) | | $ | (14 | ) | | $ | 274 |
|
Other comprehensive income/(loss) before reclassifications: | | | | | | | | | |
Net change in fair value | (502 | ) | | — |
| | | | | | (502 | ) |
Net current period other comprehensive income/(loss) | (502 | ) | | — |
| | — |
| | — |
| | (502 | ) |
Adoption of ASU 2016-13, as amended(1) | 268 |
| | (268 | ) | | | | | | — |
|
Balance, March 31, 2020 | $ | (213 | ) | | $ | — |
| | $ | (1 | ) | | $ | (14 | ) | | $ | (228 | ) |
| |
(1) | With the adoption of changes to accounting standards on measurement of credit losses for financial instruments on January 1, 2020, OTTI assessment was replaced with an evaluation for an allowance for credit loss (see Note 1 – Basis of Presentation and Note 2 – Recently Issued and Adopted Accounting Guidance for further information). |
Note 9 — Capital
Capital Requirements. Under the Housing Act, the Director of the Finance Agency is responsible for setting the risk-based capital standards for the FHLBanks. The FHLBank Act and regulations governing the operations of the FHLBanks require that the 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.
Beginning in February 2020, the Finance Agency issued guidance that augmented existing statutory and regulatory capital requirements to require each FHLBank to maintain a ratio of at least two percent of capital stock to total assets in order to help preserve the cooperative structure incentives that encourage members to remain fully engaged in the oversight of their investment in the FHLBank. The Finance Agency will consider the proportion of capital stock to assets, measured on a daily average basis at monthend, when assessing each FHLBank’s capital management practices. As of March 31, 2020, the Bank was in compliance with this 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.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
As of March 31, 2020, and December 31, 2019, the Bank was in compliance with these capital rules and requirements as shown in the following table. |
| | | | | | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| Required |
| | Actual |
| | Required |
| | Actual |
|
Risk-based capital | $ | 1,411 |
| | $ | 6,718 |
| | $ | 1,519 |
| | $ | 6,605 |
|
Total regulatory capital | $ | 4,995 |
| | $ | 6,718 |
| | $ | 4,274 |
| | $ | 6,605 |
|
Total regulatory capital ratio | 4.00 | % | | 5.38 | % | | 4.00 | % | | 6.18 | % |
Leverage capital | $ | 6,244 |
| | $ | 10,078 |
| | $ | 5,342 |
| | $ | 9,908 |
|
Leverage ratio | 5.00 | % | | 8.07 | % | | 5.00 | % | | 9.27 | % |
Mandatorily Redeemable Capital Stock. The Bank had mandatorily redeemable capital stock totaling $83 outstanding to three institutions at March 31, 2020, and $138 outstanding to three institutions at December 31, 2019. The change in mandatorily redeemable capital stock for three months ended March 31, 2020 and 2019, was as follows:
|
| | | | | | | |
| March 31, 2020 |
| | March 31, 2019 |
|
Balance at the beginning of the period | $ | 138 |
| | $ | 227 |
|
Reclassified from/(to) capital during the period | 3 |
| | — |
|
Repurchase of excess mandatorily redeemable capital stock | (58 | ) | | — |
|
Balance at the end of the period | $ | 83 |
| | $ | 227 |
|
Cash dividends on mandatorily redeemable capital stock were recorded as interest expense in the amount of $2 and $4 for the three months ended March 31, 2020 and 2019, respectively.
The Bank’s mandatorily redeemable capital stock is discussed more fully in “Item 8. Financial Statements and Supplementary Data – Note 15 – Capital” in the Bank’s 2019 Form 10-K.
The following table presents mandatorily redeemable capital stock amounts by contractual redemption period at March 31, 2020, and December 31, 2019.
|
| | | | | | | |
Contractual Redemption Period | March 31, 2020 |
| | December 31, 2019 |
|
Within 1 year | $ | 81 |
| | $ | 135 |
|
Past contractual redemption date because of remaining activity(1) | 2 |
| | 3 |
|
Total | $ | 83 |
| | $ | 138 |
|
Excess Stock Repurchase, Retained Earnings, and Dividend Framework. By Finance Agency regulation, dividends may be paid only out of current net earnings or previously retained earnings. As required by the Finance Agency, the Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework (Framework) summarizes the Bank’s capital management principles and objectives, as well as its policies 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, or, under certain circumstances, if the Bank fails to satisfy certain liquidity requirements under applicable Finance Agency regulations.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Bank’s Board of Directors reviews the Framework at least annually and may amend the Framework from time to time. The Framework includes a dividend philosophy to endeavor to pay a quarterly dividend at an annualized rate between 5% and 7%. The decision to declare any dividend and the dividend rate are at the discretion of the Bank’s Board of Directors, which may choose to follow the dividend philosophy as guidance in the dividend declaration. The Board may also revise or eliminate the dividend policy in the future. The Bank’s historical dividend rates and the dividend philosophy are not indicative of future dividend declarations.
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 Federal funds effective rate 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 198% as of March 31, 2020.
In addition, the Bank monitors the condition of its PLRMBS portfolio, the ratio of the Bank’s estimated market value of total capital to par value of 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.
Retained Earnings – The Bank’s Framework assesses the level and adequacy of retained earnings and establishes amounts to be retained in restricted retained earnings, which are not made available in the current dividend period, and maintains an amount of total retained earnings at least equal to its required retained earnings as described in the Framework. As determined using the Bank’s methodology, the required level of total retained earnings was $2,500 from January 2018 through July 2019. In July 2019, the methodology was further revised and resulted in a required level of retained earnings of $2,400. In January 2020, the methodology was further revised and resulted in a required level of retained earnings of $2,500. The Bank satisfies its retained earnings requirement with both restricted retained earnings (i.e., amounts related to the Joint Capital Enhancement (JCE) Agreement) and unrestricted retained earnings. The Bank’s retained earnings requirement may be changed at any time. The Board of Directors periodically reviews the retained earnings methodology and analysis to determine whether any adjustments are appropriate. The Bank’s restricted retained earnings totaled $713 at March 31, 2020, and December 31, 2019. The Bank’s unrestricted retained earnings totaled $2,691 and $2,754 at March 31, 2020, and December 31, 2019, respectively.
For more information on restricted retained earnings and the Bank’s Framework, see “Item 8. Financial Statements and Supplementary Data – Note 15 – Capital” in the Bank’s 2019 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.
In addition, Finance Agency rules 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. Excess capital stock totaled $175, or 0.14% of total assets as of March 31, 2020. Excess capital stock totaled $197, or 0.18% of total assets as of December 31, 2019.
In the first quarter of 2020, the Bank paid dividends at an annualized rate of 7.00%, totaling $54, including $52 in dividends on capital stock and $2 in dividends on mandatorily redeemable capital stock. In the first quarter of 2019,
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
the Bank paid dividends at an annualized rate of 7.00%, totaling $54, including $50 in dividends on capital stock and $4 in dividends on mandatorily redeemable capital stock.
For the periods referenced above, the Bank paid dividends in cash. Dividends on capital stock are recognized as dividends on the Statements of Capital Accounts, and dividends on mandatorily redeemable capital stock are recognized as interest expense on the Statements of Income.
On April 27, 2020, the Bank’s Board of Directors declared a quarterly cash dividend on the capital stock outstanding during the first quarter of 2020 at an annualized rate of 5.00%, totaling $39, including $37 in dividends on capital stock and $2 in dividends on mandatorily redeemable capital stock. The Bank recorded the dividend on April 27, 2020. The Bank expects to pay the dividend on May 14, 2020. Dividends on mandatorily redeemable capital stock will be recognized as interest expense in the second quarter of 2020.
Excess Capital Stock – The Bank’s capital plan provides that 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 may also repurchase all of a member’s excess capital stock at a member’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. The Bank’s practice is to repurchase the surplus capital stock of all members and the excess capital stock of all former members on a daily schedule. Surplus capital stock is defined as any stock holdings in excess of 115% of a member’s minimum stock requirement. The Bank calculates the amount of stock to be repurchased each business day based on the shareholder’s capital stock outstanding after all stock transactions are completed for the day, ensuring that each member and former member would continue to meet its minimum capital stock requirement after the repurchase. The Bank may change this practice at any time. The Bank repurchased $431 and $344 in excess capital stock during the first quarter of 2020 and 2019, respectively.
The Bank is required to redeem any mandatorily redeemable capital stock that is in excess of a former member’s minimum stock requirement on or after the expiration of the five-year redemption date. During the first quarter of 2020 and 2019, the Bank redeemed a de minimis amount in mandatorily redeemable capital stock, for which the five-year redemption period had expired, at its $100 par value. The stock was redeemed on the scheduled redemption dates or, for stock that was not excess stock on its scheduled redemption date because of outstanding activity with the Bank, on the first available repurchase date after the stock was no longer required to support outstanding activity with the Bank.
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, 2020, or December 31, 2019.
|
| | | | | | | | | | | | | |
| March 31, 2020 |
| December 31, 2019 |
Name of Institution | Capital Stock Outstanding |
|
| Percentage of Total Capital Stock Outstanding |
|
| Capital Stock Outstanding |
|
| Percentage of Total Capital Stock Outstanding |
|
First Republic Bank | $ | 494 |
|
| 15 | % |
| $ | 368 |
|
| 12 | % |
MUFG Union Bank, National Association
| 294 |
|
| 9 |
|
| 394 |
|
| 12 |
|
Subtotal | 788 |
|
| 24 |
|
| 762 |
|
| 24 |
|
Others | 2,526 |
|
| 76 |
|
| 2,376 |
|
| 76 |
|
Total | $ | 3,314 |
|
| 100 | % |
| $ | 3,138 |
|
| 100 | % |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 10 — Segment Information
The Bank uses an analysis of financial results based on the financial components 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 determine financial management strategies related to the operations of these two business segments. For purposes of segment reporting, adjusted net interest income includes income and expense associated with net settlements from economic hedges that are recorded in “Net gain/(loss) on derivatives and hedging activities” in other income, excludes interest income and expense associated with ineffectiveness from fair value hedges that are recorded in the same line as the earnings effect of the hedged item, 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 17 – Segment Information” in the Bank’s 2019 Form 10-K.
The following table presents the Bank’s adjusted net interest income by operating segment and reconciles total adjusted net interest income to income before the AHP assessment for the three months ended March 31, 2020 and 2019.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Advances- Related Business |
| | Mortgage- Related Business(1) |
| | Adjusted Net Interest Income |
| | Amortization of Basis Adjustments and (Gain)/Loss on Fair Value Hedges(2) |
| |
Income/(Expense) on Economic Hedges(3) |
| | Interest Expense on Mandatorily Redeemable Capital Stock(4) |
| | Net Interest Income After Provision for/(Reversal of) Credit Losses |
| | Other Income/ (Loss) |
| | Other Expense |
| | Income/(Loss) Before AHP Assessment |
|
Three months ended: |
March 31, 2020 | $ | 63 |
| | $ | 12 |
| | $ | 75 |
| | $ | 71 |
| | $ | (8 | ) | | $ | 2 |
| | $ | 10 |
| | $ | 18 |
| | $ | 36 |
| | $ | (8 | ) |
March 31, 2019 | 86 |
| | 68 |
| | 154 |
| | 11 |
| | (5 | ) | | 4 |
| | 144 |
| | 15 |
| | 43 |
| | 116 |
|
| |
(2) | and changes in fair value of the derivative hedging instrument and the hedged item attributable to the hedged risk for designated fair value hedges recorded in net interest income. |
The following table presents total assets by operating segment at March 31, 2020, and December 31, 2019.
|
| | | | | | | | | | | |
| Advances- Related Business |
| | Mortgage- Related Business |
| | Total Assets |
|
March 31, 2020 | $ | 103,877 |
| | $ | 20,993 |
| | $ | 124,870 |
|
December 31, 2019 | 85,709 |
| | 21,133 |
| | 106,842 |
|
Note 11 — Derivatives and Hedging Activities
General. The Bank may enter into interest rate swaps (including callable, putable, and basis swaps); and cap and floor 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 or the issuance of consolidated
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
obligations to create variable rate structures. The interest rate exchange agreements are generally executed at the same time the advances and consolidated obligations are transacted and generally have the same maturity dates as the related hedged instrument. 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. Derivatives may be either uncleared or cleared. In an uncleared derivative transaction, the Bank’s counterparty is the executing bank or broker-dealer. In a cleared derivative transaction, the Bank may execute the transaction either directly with the executing bank or broker-dealer or on a swap execution facility, but in either case, the Bank’s counterparty is a derivatives clearing organization or clearinghouse once the derivative transaction has been accepted for clearing. The Bank is not a derivatives 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 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 cleared at a derivatives clearing organization. The Bank’s use of interest rate exchange agreements results in one of the following classifications: (i) a fair value hedge of an underlying financial instrument or (ii) an economic hedge of assets, liabilities, or other derivatives.
The Bank primarily uses the following interest rate exchange agreement instruments:
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 based on a daily repricing index, such as the Secured Overnight Financing Rate (SOFR) or the effective Fed Funds rate.
Interest Rate Caps and Floors – In a cap agreement, additional cash flow is generated if the price or interest rate of an underlying variable rate 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 rate 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 at inception all relationships between derivatives designated as hedging instruments and hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing hedge effectiveness. Derivatives designated as fair value hedges may be transacted to hedge: (i) assets and liabilities on the Statements of Condition, (ii) firm commitments, or (iii) forecasted transactions. The Bank also formally assesses (both at hedge inception and on an ongoing basis) whether the hedging derivatives have been effective in offsetting changes in the fair value of hedged items attributable to the hedged risk and whether those derivatives may be expected to remain effective hedges 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 may have the following types of hedged items:
Investments – The Bank may invest in U.S. Treasury and agency obligations as well as agency MBS. 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
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
obligations that have call features or by hedging the prepayment risk with a combination of consolidated obligations and callable swaps. The Bank may execute callable swaps 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 or AFS by entering into interest rate exchange agreements that offset the changes in fair value or cash flows of the securities. Hedge relationships that involve trading securities are designated as economic hedges, while hedge relationships that involve AFS securities are designated as fair value hedges. For trading securities that have been designated as an economic hedge, 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. For AFS securities that have been hedged and qualify as a fair value hedge, the Bank records the portion of the change in the fair value of the investment related to the risk being hedged in interest income together with the related change in the fair value of the derivative, and records the remainder of the change in the fair value of the investment in AOCI as “Net unrealized gain/(loss) on AFS securities.”
Advances – The Bank offers a wide range 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 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, fixed rate advance with embedded options, 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 any embedded options in the advance. The combination of the advance and the interest rate exchange agreement effectively creates a variable rate asset. Fixed rate advances without options that are offset with an interest rate exchange agreement are generally treated as fair value hedges. Advances with embedded options are recorded using the fair value option and are economically hedged using interest rate exchange agreements.
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 mortgage loans with lower-yielding assets and the Bank’s higher funding costs are not reduced accordingly.
The Bank executes callable swaps 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 may be structured to meet the Bank’s or the 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 are issued, the Bank simultaneously executes 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. These transactions generally receive fair value hedge accounting treatment.
When the Bank issues consolidated obligation discount notes, it may also simultaneously enter into an interest rate exchange agreement to convert the fixed rate discount note to an adjustable rate discount note. This type of hedge is treated as an economic hedge.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
In addition, when certain consolidated obligation bonds for which the Bank has elected the fair value option are issued, the Bank simultaneously executes 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 do not meet the requirements for fair value hedge accounting treatment.
Offsetting Derivatives – The Bank enters into derivatives to offset the economic effect of other derivatives that are no longer designated to advances, investments, or consolidated obligations. Offsetting derivatives 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 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.
For more information related to the Bank’s accounting policies for derivatives, see “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” in the Bank’s 2019 Form 10-K.
The following table summarizes the notional amount and fair value of derivative instruments, including the effect of netting adjustments and cash collateral as of March 31, 2020, and December 31, 2019. For purposes of this disclosure, the derivative values include the fair value of derivatives and related accrued interest.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| Notional Amount of Derivatives |
| | Derivative Assets |
| | Derivative Liabilities |
| | Notional Amount of Derivatives |
| | Derivative Assets |
| | Derivative Liabilities |
|
Derivatives designated as hedging instruments: | | | | | | | | | | | |
Interest rate swaps | $ | 46,837 |
| | $ | 24 |
| | $ | 1,011 |
| | $ | 39,622 |
| | $ | 31 |
| | $ | 370 |
|
Total | 46,837 |
| | 24 |
| | 1,011 |
| | 39,622 |
| | 31 |
| | 370 |
|
Derivatives not designated as hedging instruments: | | | | | | | | | | | |
Interest rate swaps | 70,963 |
| | 18 |
| | 44 |
| | 60,424 |
| | 13 |
| | 14 |
|
Interest rate caps and floors | 980 |
| | — |
| | — |
| | 980 |
| | — |
| | — |
|
Mortgage delivery commitments | 87 |
| | 3 |
| | — |
| | 46 |
| | — |
| | — |
|
Total | 72,030 |
| | 21 |
| | 44 |
| | 61,450 |
| | 13 |
| | 14 |
|
Total derivatives before netting and collateral adjustments | $ | 118,867 |
| | 45 |
| | 1,055 |
| | $ | 101,072 |
| | 44 |
| | 384 |
|
Netting adjustments and cash collateral(1) | | | 17 |
| | (1,055 | ) | | | | (11 | ) | | (384 | ) |
Total derivative assets and total derivative liabilities | | | $ | 62 |
| | $ | — |
| | | | $ | 33 |
| | $ | — |
|
The following tables present, by type of hedged item, the gains and losses on fair value hedging relationships and the impact of those derivatives on the Bank’s Statements of Income for the three months ended March 31, 2020 and 2019.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | |
| Three Months Ended March 31, 2020 |
| Interest Income/(Expense) |
| Advances |
| | AFS Securities |
| | Consolidated Obligation Bonds |
|
Total interest income/(expense) presented in the Statements of Income | $ | 279 |
| | $ | 51 |
| | $ | (276 | ) |
Gain/(loss) on fair value hedging relationships | | | | | |
Derivatives(1) | $ | (651 | ) | | $ | (968 | ) | | $ | 26 |
|
Hedged items | 610 |
| | 893 |
| | (23 | ) |
Net gain/(loss) on fair value hedging relationships | $ | (41 | ) | | $ | (75 | ) | | $ | 3 |
|
|
| | | | | | | | | | | |
| Three Months Ended March 31, 2019 |
| Interest Income/(Expense) |
| Advances |
| | AFS Securities |
| | Consolidated Obligation Bonds |
|
Total income/(expense) presented in the Statements of Income | $ | 498 |
| | $ | 79 |
| | $ | (455 | ) |
Gain/(loss) on fair value hedging relationships | | | | | |
Derivatives(1) | $ | (82 | ) | | $ | (128 | ) | | $ | 19 |
|
Hedged items | 103 |
| | 117 |
| | (28 | ) |
Net gain/(loss) on fair value hedging relationships | $ | 21 |
| | $ | (11 | ) | | $ | (9 | ) |
| |
(1) | Includes net interest settlements |
The following table presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of the hedged items as of March 31, 2020.
|
| | | | | | | | | | | | | | | |
| March 31, 2020 |
Hedged Item Type | Amortized Cost of Hedged Asset/(Liability)(1) |
| | Basis Adjustments for Active Hedging Relationships Included in Amortized Cost |
| | Basis Adjustments for Discontinued Hedging Relationships Included in Amortized Cost |
| | Cumulative Amount of Fair Value Hedging Basis Adjustments |
|
Advances | $ | 32,880 |
| | $ | 804 |
| | $ | 8 |
| | $ | 812 |
|
AFS securities | 14,195 |
| | 1,275 |
| | 49 |
| | 1,324 |
|
Consolidated obligation bonds | (2,707 | ) | | (32 | ) | | — |
| | (32 | ) |
| |
(1) | Includes only the portion of amortized cost representing the hedged items in fair value hedging relationships. |
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, 2020 and 2019.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | |
| Three Months Ended |
| March 31, 2020 |
| | March 31, 2019 |
|
| Gain/(Loss) |
| | Gain/(Loss) |
|
Derivatives not designated as hedging instruments: | | | |
Economic hedges: | | | |
Interest rate swaps | $ | (143 | ) | | $ | (23 | ) |
Interest rate caps and floors | — |
| | (1 | ) |
Net settlements | (8 | ) | | (5 | ) |
Mortgage delivery commitments | 4 |
| | 1 |
|
Net gain/(loss) on derivatives and hedging activities | $ | (147 | ) | | $ | (28 | ) |
Credit Risk – The Bank is subject to credit risk from potential nonperformance by counterparties to the interest rate exchange agreements. All of the Bank’s agreements governing uncleared 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, credit guidelines, and Finance Agency and other regulations. The Bank also requires credit support agreements on all uncleared derivatives.
For cleared derivatives, the clearinghouse is the Bank’s counterparty. The requirement that the Bank post initial and variation margin through a 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. Variation margin and initial margin are posted for changes in the value and risk profile of cleared derivatives. 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 Commodity Futures Trading Commission 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 Bank’s agreements for uncleared derivative transactions contain provisions that link the Bank’s credit rating from Moody’s Investors Service and S&P Global Ratings to various rights and obligations. Certain of these derivative agreements provide that, if the Bank’s long-term debt rating falls below a specified rating (ranging from A3/A- to Baa3/BBB-), 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. The aggregate fair value of all uncleared derivative instruments with credit risk-related contingent features that were in a net derivative liability position (before cash collateral and related accrued interest) at March 31, 2020, was $1,036, for which the Bank had posted cash collateral of $1,070 in the ordinary course of business.
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 tables present 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,
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
2020, and December 31, 2019.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 |
| Derivative Instruments Meeting Netting Requirements | | | | | | | | |
| Amount Recognized |
| | Gross Amount of Netting Adjustments and Cash Collateral |
| | Derivative Instruments Not Meeting Netting Requirements(1) |
| | Total Derivative Assets and Total Derivative Liabilities |
| | Noncash Collateral Not Offset That Can Be Sold or Repledged |
| | Net Amount |
|
Derivative Assets | | | | | | | | | | | |
Uncleared | $ | 15 |
| | $ | 20 |
| | $ | 3 |
| | $ | 38 |
| | $ | — |
| | $ | 38 |
|
Cleared | 27 |
| | (3 | ) | | — |
| | 24 |
| | (643 | ) | | 667 |
|
Total | | | | | | | $ | 62 |
| | | | $ | 705 |
|
Derivative Liabilities | | | | | | | | | | | |
Uncleared | $ | 1,041 |
| | $ | (1,041 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Cleared | 14 |
| | (14 | ) | | — |
| | — |
| | — |
| | — |
|
Total | | | | | | | $ | — |
| | | | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Derivative Instruments Meeting Netting Requirements | | | | | | |
| Amount Recognized |
| | Gross Amount of Netting Adjustments and Cash Collateral |
| | Total Derivative Assets and Total Derivative Liabilities |
| | Noncash Collateral Not Offset That Can Be Sold or Repledged |
| | Net Amount |
|
Derivative Assets | | | | | | | | | |
Uncleared | $ | 34 |
| | $ | (16 | ) | | $ | 18 |
| | $ | — |
| | $ | 18 |
|
Cleared | 10 |
| | 5 |
| | 15 |
| | (381 | ) | | 396 |
|
Total | | | | | $ | 33 |
| | | | $ | 414 |
|
Derivative Liabilities | | | | | | | | | |
Uncleared | $ | 382 |
| | $ | (382 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
Cleared | 2 |
| | (2 | ) | | — |
| | — |
| | — |
|
Total | | | | | $ | — |
| | | | $ | — |
|
| |
(1) | Represents derivatives that are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments). |
Note 12 — 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, 2020, and December 31, 2019. 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. U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). 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
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
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.
The following tables present the net carrying value or carrying value, as applicable, the estimated fair value, and the fair value hierarchy level of the Bank’s financial instruments at March 31, 2020, and December 31, 2019. The Bank records trading securities, AFS securities, derivative assets, derivative liabilities, certain advances, certain consolidated obligations, and certain other assets at fair value on a recurring basis, and on occasion certain mortgage loans held for portfolio and certain other assets at fair value on a nonrecurring basis. The Bank records all other financial assets and liabilities at amortized cost. Refer to the following tables for further details about the financial assets and liabilities held at fair value on either a recurring or non-recurring basis.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 |
| Net Carrying Value |
| | Estimated Fair Value |
| | Level 1 |
| | Level 2 |
| | Level 3 |
| | Netting Adjustments and Cash Collateral(1) |
|
Assets | | | | | | | | | | | |
Cash and due from banks | $ | 328 |
| | $ | 328 |
|
| $ | 328 |
|
| $ | — |
| | $ | — |
| | $ | — |
|
Interest-bearing deposits | 3,577 |
| | 3,577 |
| | 3,577 |
| | — |
| | — |
| | — |
|
Securities purchased under agreements to resell | 2,000 |
| | 2,000 |
| | — |
| | 2,000 |
| | — |
| | — |
|
Federal funds sold | 10,081 |
| | 10,081 |
| | — |
| | 10,081 |
| | — |
| | — |
|
Trading securities | 4,319 |
| | 4,319 |
| | — |
| | 4,319 |
| | — |
| | — |
|
AFS securities | 16,175 |
| | 16,175 |
| | — |
| | 13,949 |
| | 2,226 |
| | — |
|
HTM securities | 6,864 |
| | 6,867 |
| | — |
| | 6,539 |
| | 328 |
| | — |
|
Advances | 77,872 |
| | 77,951 |
| | — |
| | 77,951 |
| | — |
| | — |
|
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans | 3,239 |
| | 3,320 |
| | — |
| | 3,320 |
| | — |
| | — |
|
Accrued interest receivable | 139 |
| | 139 |
| | — |
| | 139 |
| | — |
| | — |
|
Derivative assets, net(1) | 62 |
| | 62 |
| | — |
| | 45 |
| | — |
| | 17 |
|
Other assets(2) | 16 |
| | 16 |
| | 16 |
| | — |
| | — |
| | — |
|
Liabilities | | | | | | | | | | | |
Deposits | 721 |
| | 721 |
| | — |
| | 721 |
| | — |
| | — |
|
Consolidated obligations: | | | | | | | | | | | |
Bonds | 77,937 |
| | 77,992 |
| | — |
| | 77,992 |
| | — |
| | — |
|
Discount notes | 39,102 |
| | 39,146 |
| | — |
| | 39,146 |
| | — |
| | — |
|
Total consolidated obligations | 117,039 |
| | 117,138 |
| | — |
| | 117,138 |
| | — |
| | — |
|
Mandatorily redeemable capital stock | 83 |
| | 83 |
|
| 83 |
|
| — |
| | — |
| | — |
|
Accrued interest payable | 121 |
|
| 121 |
|
| — |
|
| 121 |
| | — |
| | — |
|
Derivative liabilities, net(1) | — |
| | — |
| | — |
| | 1,055 |
| | — |
| | (1,055 | ) |
Other | | | | | | | | | | | |
Standby letters of credit | 33 |
| | 33 |
|
| — |
|
| 33 |
| | — |
| | — |
|
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Carrying Value |
| | Estimated Fair Value |
| | Level 1 |
| | Level 2 |
| | Level 3 |
| | Netting Adjustments and Cash Collateral(1) |
|
Assets | | | | | | | | | | | |
Cash and due from banks | $ | 118 |
| | $ | 118 |
| | $ | 118 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Interest-bearing deposits | 2,269 |
| | 2,269 |
| | 2,269 |
| | — |
| | — |
| | — |
|
Securities purchased under agreements to resell | 7,000 |
| | 7,000 |
| | — |
| | 7,000 |
| | — |
| | — |
|
Federal funds sold | 3,562 |
| | 3,562 |
| | — |
| | 3,562 |
| | — |
| | — |
|
Trading securities | 1,766 |
| | 1,766 |
| | — |
| | 1,766 |
| | — |
| | — |
|
AFS securities | 15,495 |
| | 15,495 |
| | — |
| | 12,898 |
| | 2,597 |
| | — |
|
HTM securities | 7,545 |
| | 7,566 |
| | — |
| | 7,181 |
| | 385 |
| | — |
|
Advances | 65,374 |
| | 65,492 |
| | — |
| | 65,492 |
| | — |
| | — |
|
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans | 3,314 |
| | 3,332 |
| | — |
| | 3,332 |
| | — |
| | — |
|
Accrued interest receivable | 139 |
| | 139 |
| | — |
| | 139 |
| | — |
| | — |
|
Derivative assets, net(1) | 33 |
| | 33 |
| | — |
| | 44 |
| | — |
| | (11 | ) |
Other assets(2) | 19 |
| | 19 |
| | 19 |
| | — |
| | — |
| | — |
|
Liabilities | | |
|
| | | | | | | | |
Deposits | 537 |
| | 537 |
| | — |
| | 537 |
| | — |
| | — |
|
Consolidated obligations: | | |
|
| | | | | | | | |
Bonds | 71,372 |
| | 71,386 |
| | — |
| | 71,386 |
| | — |
| | — |
|
Discount notes | 27,376 |
| | 27,378 |
| | — |
| | 27,378 |
| | — |
| | — |
|
Total consolidated obligations | 98,748 |
| | 98,764 |
| | — |
| | 98,764 |
| | — |
| | — |
|
Mandatorily redeemable capital stock | 138 |
| | 138 |
| | 138 |
| | — |
| | — |
| | — |
|
Accrued interest payable | 164 |
| | 164 |
| | — |
| | 164 |
| | — |
| | — |
|
Derivative liabilities, net(1) | — |
| | — |
| |
|
| | 384 |
| | — |
| | (384 | ) |
Other | | |
|
| | | | | | | | |
Standby letters of credit | 32 |
| | 32 |
| | — |
| | 32 |
| | — |
| | — |
|
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. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| |
• | 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 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, 2020:
| |
• | Derivative assets and liabilities |
| |
• | Certain consolidated obligation bonds |
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. For the periods presented, the Bank did not have any reclassifications for transfers in or out of level 3 of the fair value hierarchy.
Summary of Valuation Methodologies and Primary Inputs
The valuation methodologies and primary inputs used to develop the measurement of fair value for assets and liabilities that are measured at fair value on a recurring or nonrecurring basis in the Statements of Condition are listed below.
Investment Securities – MBS – To value its MBS, the Bank obtains prices from multiple 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, prices on 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.
At least annually, the Bank conducts reviews of the multiple pricing vendors to update and confirm its understanding of the vendors’ pricing processes, methodologies, and control procedures.
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 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
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
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, 2020, multiple vendor prices were received for most of the Bank’s MBS, and the fair value estimates for most of those securities were determined in accordance with the Bank’s valuation technique based on these 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, 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.
Investment Securities – Non-MBS – To determine the estimated fair values of non-MBS investments, the Bank uses a market approach using prices from third-party pricing vendors, generally consistent with the methodologies for MBS. The Bank believes that its methodologies result in fair values that are reasonable and similar in all material respects based on the nature of the financial instruments being measured.
Advances Recorded Under the Fair Value Option – 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 recorded under the fair value option 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 for complex advances recorded under the fair value option. 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 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 recorded under the fair value option for creditworthiness primarily because advances were fully collateralized.
Other Assets – The estimated fair value of grantor trust assets is based on quoted market prices.
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 swap rates and volatility assumptions, which are market-based expectations of future interest rate volatility implied from current market
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
prices for similar options (swaption volatility and volatility skew), adjusted for counterparty credit risk, as necessary.
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 uncleared 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 credit support 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 set at zero (subject to a minimum transfer amount). The Bank clears its cleared derivative transactions only through clearing agents that meet the Bank’s 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.
Consolidated Obligations Recorded Under the Fair Value Option – 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 input for measuring the fair value of consolidated obligation bonds is a market-based CO Curve obtained from the Office of Finance. The Office of Finance constructs the CO Curve using the Treasury yield curve as a base curve, which is adjusted by indicative consolidated obligation 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 issuances or secondary market activity. For consolidated obligation bonds with embedded options, the Bank also obtains market-observable inputs, such as 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 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 recorded under the fair value option have been significantly affected during the reporting period by changes in the instrument-specific credit risk.
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.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
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, 2020, and December 31, 2019, by level within the fair value hierarchy.
|
| | | | | | | | | | | | | | | | | | | |
March 31, 2020 | | | | | | | | | |
| Fair Value Measurement Using: | | Netting Adjustments and Cash |
| | |
| Level 1 |
| | Level 2 |
| | Level 3 |
| | Collateral(1) |
| | Total |
|
Recurring fair value measurements – Assets: | | | | | | | | | |
Trading securities: | | | | | | | | | |
U.S. obligations – Treasury securities | $ | — |
| | $ | 4,315 |
| | $ | — |
| | $ | — |
| | $ | 4,315 |
|
MBS – Other U.S. obligations – Ginnie Mae | — |
| | 4 |
| | — |
| | — |
| | 4 |
|
Total trading securities | — |
| | 4,319 |
| | — |
| | — |
| | 4,319 |
|
AFS securities: | | | | | | | | | |
U.S. obligations – Treasury securities | — |
| | 5,353 |
| | — |
| | — |
| | 5,353 |
|
MBS: | | | | | | | | | |
GSEs – multifamily | — |
| | 8,596 |
| | — |
| | — |
| | 8,596 |
|
PLRMBS | — |
| | — |
| | 2,226 |
| | — |
| | 2,226 |
|
Subtotal MBS | — |
| | 8,596 |
| | 2,226 |
| | — |
| | 10,822 |
|
Total AFS securities | — |
| | 13,949 |
| | 2,226 |
| | — |
| | 16,175 |
|
Advances(2) | — |
| | 4,334 |
| | — |
| | — |
| | 4,334 |
|
Derivative assets, net: interest rate-related | — |
| | 42 |
| | — |
| | 17 |
| | 59 |
|
Derivative assets, net: mortgage delivery commitments | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
Other assets | 16 |
| | — |
| | — |
| | — |
| | 16 |
|
Total recurring fair value measurements – Assets | $ | 16 |
| | $ | 22,647 |
| | $ | 2,226 |
| | $ | 17 |
| | $ | 24,906 |
|
Recurring fair value measurements – Liabilities: | | | | | | | | | |
Consolidated obligation bonds(3) | $ | — |
| | $ | 254 |
| | $ | — |
| | $ | — |
| | $ | 254 |
|
Derivative liabilities, net: interest rate-related | — |
| | 1,055 |
| | — |
| | (1,055 | ) | | — |
|
Total recurring fair value measurements – Liabilities | $ | — |
| | $ | 1,309 |
| | $ | — |
| | $ | (1,055 | ) | | $ | 254 |
|
Nonrecurring fair value measurements – Assets:(4) | | | | | | | | | |
Impaired mortgage loans held for portfolio | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
|
Total nonrecurring fair value measurements – Assets | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
|
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | |
| Fair Value Measurement Using: | | Netting Adjustments and Cash |
| | |
| Level 1 |
| | Level 2 |
| | Level 3 |
| | Collateral(1) |
| | Total |
|
Recurring fair value measurements – Assets: | | | | | | | | | |
Trading securities: | | | | | | | | | |
U.S. obligations – Treasury securities | $ | — |
| | $ | 1,762 |
| | $ | — |
| | $ | — |
| | $ | 1,762 |
|
MBS – Other U.S. obligations – Ginnie Mae | — |
| | 4 |
| | — |
| | — |
| | 4 |
|
Total trading securities | — |
| | 1,766 |
| | — |
| | — |
| | 1,766 |
|
AFS securities: | | | | | | | | | |
U.S. obligations – Treasury securities | — |
| | 5,288 |
| | — |
| | — |
| | 5,288 |
|
MBS: | | | | | | | | | |
GSEs – multifamily | — |
| | 7,610 |
| | — |
| | — |
| | 7,610 |
|
PLRMBS | — |
| | — |
| | 2,597 |
| | — |
| | 2,597 |
|
Subtotal MBS | — |
| | 7,610 |
| | 2,597 |
| | — |
| | 10,207 |
|
Total AFS securities | — |
| | 12,898 |
| | 2,597 |
| | — |
| | 15,495 |
|
Advances(2) | — |
| | 4,370 |
| | — |
| | — |
| | 4,370 |
|
Derivative assets, net: interest rate-related | — |
| | 44 |
| | — |
| | (11 | ) | | 33 |
|
Other assets | 19 |
| | — |
| | — |
| | — |
| | 19 |
|
Total recurring fair value measurements – Assets | $ | 19 |
| | $ | 19,078 |
| | $ | 2,597 |
| | $ | (11 | ) | | $ | 21,683 |
|
Recurring fair value measurements – Liabilities: | | | | | | | | | |
Consolidated obligation bonds(3) | $ | — |
| | $ | 337 |
| | $ | — |
| | $ | — |
| | $ | 337 |
|
Derivative liabilities, net: interest rate-related | — |
| | 384 |
| | — |
| | (384 | ) | | — |
|
Total recurring fair value measurements – Liabilities | $ | — |
| | $ | 721 |
| | $ | — |
| | $ | (384 | ) | | $ | 337 |
|
Nonrecurring fair value measurements – Assets:(4) | | | | | | | | | |
Impaired mortgage loans held for portfolio | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
|
Total nonrecurring fair value measurements – Assets | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
|
| |
(4) | , and the year ended December 31, 2019. |
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, 2020 and 2019.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | |
| Three Months Ended |
| March 31, 2020 |
| | March 31, 2019 |
|
Balance, beginning of the period | $ | 2,597 |
| | $ | 3,157 |
|
Total gain/(loss) realized and unrealized included in: | | | |
Interest income/(loss) | 19 |
| | 18 |
|
(Provision for)/reversal of credit losses | (39 | ) | | — |
|
Other income, net | — |
| | (1 | ) |
Unrealized gain/(loss) included in AOCI | (234 | ) | | 14 |
|
Settlements | (118 | ) | | (133 | ) |
Transfers of HTM securities to AFS securities | 1 |
| | — |
|
Balance, end of the period | $ | 2,226 |
| | $ | 3,055 |
|
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 | $ | (19 | ) | | $ | 17 |
|
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 19 – Fair Values” in the Bank’s 2019 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, 2020 and 2019:
|
| | | | | | | | | | | | | | | |
| Three Months Ended |
| March 31, 2020 | | March 31, 2019 |
| Advances |
| | Consolidated Obligation Bonds |
| | Advances |
| | Consolidated Obligation Bonds |
|
Balance, beginning of the period | $ | 4,370 |
| | $ | 337 |
| | $ | 5,133 |
| | $ | 2,019 |
|
New transactions elected for fair value option | 7,070 |
| | — |
| | — |
| | — |
|
Maturities and terminations | (7,197 | ) | | (85 | ) | | (125 | ) | | (830 | ) |
Net gain/(loss) on advances and net (gain)/loss on consolidated obligation bonds from changes in fair value recognized in earnings | 91 |
| | 2 |
| | 46 |
| | 7 |
|
Change in accrued interest | — |
| | — |
| | (1 | ) | | (5 | ) |
Balance, end of the period | $ | 4,334 |
| | $ | 254 |
| | $ | 5,053 |
| | $ | 1,191 |
|
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
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, except for changes in fair value related to instrument-specific credit risk, which are recorded in AOCI on the Statements of Condition. For advances and consolidated obligations recorded under the fair value option, the Bank determined that none of the remaining changes in fair value were related to instrument-specific credit risk for the three months ended March 31, 2020 and 2019. In determining that there has been no change in instrument-specific credit risk period to period, the Bank primarily considered the following factors:
| |
• | The Bank is a federally chartered GSE, and as a result of this status, the consolidated obligations have historically received the same credit ratings as the government bond credit rating of the United States, even though they are not obligations of the United States and are not guaranteed by the United States. |
| |
• | The Bank is jointly and severally liable with the other FHLBanks for the payment of principal and interest on all consolidated obligations of each of the FHLBanks. |
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, 2020, and December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| Principal Balance |
| | Fair Value |
| | Fair Value Over/(Under) Principal Balance |
| | Principal Balance |
| | Fair Value |
| | Fair Value Over/(Under) Principal Balance |
|
Advances(1) | $ | 4,162 |
| | $ | 4,334 |
| | $ | 172 |
| | $ | 4,287 |
| | $ | 4,370 |
| | $ | 83 |
|
Consolidated obligation bonds | 250 |
| | 254 |
| | 4 |
| | 335 |
| | 337 |
| | 2 |
|
Note 13 — 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, 2020, 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 the FHLBanks was $1,174,670 at March 31, 2020, and $1,025,895 at December 31, 2019. The par value of the Bank’s participation in consolidated obligations was $117,062 at March 31, 2020, and $98,817 at December 31, 2019. For more information on the joint and several liability regulation, see “Item 8. Financial Statements and Supplementary Data – Note 20 – Commitments and Contingencies” in the Bank’s 2019 Form 10-K.
Off-balance sheet commitments as of March 31, 2020, and December 31, 2019, were as follows:
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| Expire Within One Year |
| | Expire After One Year |
| | Total |
| | Expire Within One Year |
| | Expire After One Year |
| | Total |
|
Standby letters of credit outstanding | $ | 15,207 |
| | $ | 4,954 |
| | $ | 20,161 |
| | $ | 16,898 |
| | $ | 4,658 |
| | $ | 21,556 |
|
Commitments to fund additional advances | 24 |
| | — |
| | 24 |
| | — |
| | — |
| | — |
|
Commitments to issue consolidated obligation discount notes, par | 250 |
| | — |
| | 250 |
| | 805 |
| | — |
| | 805 |
|
Commitments to issue consolidated obligation bonds, par | 1,160 |
| | — |
| | 1,160 |
| | — |
| | — |
| | — |
|
Commitments to purchase mortgage loans | 87 |
| | — |
| | 87 |
| | 46 |
| | — |
| | 46 |
|
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. At March 31, 2020, the original terms of these standby letters of credit range from 2 days to 15 years, including a final expiration in 2035. The Bank monitors the creditworthiness of members that have standby letters of credit. The value of the Bank’s obligations related to standby letters of credit is recorded in other liabilities and amounted to $33 at March 31, 2020, and $32 at December 31, 2019. Standby 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 for credit losses on the letters of credit outstanding or other off-balance sheet commitments as of March 31, 2020, and December 31, 2019.
Commitments to fund advances totaled $24 at March 31, 2020. There were no commitments to fund advances at December 31, 2019. Advances funded under advance commitments are fully collateralized at the time of funding. Based on the Bank’s credit analyses of members’ financial condition and collateral requirements, the Bank deemed it unnecessary to record any additional liability for credit losses on the advance commitments outstanding as of March 31, 2020.
The Bank may enter into commitments that unconditionally obligate it to purchase mortgage loans from its members. Commitments are generally for periods not exceeding 60 days. Delivery commitments are recorded at fair value as derivative assets or derivative liabilities in the Statements of Condition.
The Bank has pledged securities as collateral related to derivatives. See Note 11 – Derivatives and Hedging Activities for additional information about the Bank’s pledged collateral and other credit-risk-related contingent features. As of March 31, 2020, the Bank had pledged total collateral of $1,725, including securities with a carrying value of $643, all of which may be repledged, and cash collateral and related accrued interest of $1,082 to counterparties and the clearinghouse that had market risk exposure to the Bank related to derivatives. As of December 31, 2019, the Bank had pledged total collateral of $759, including securities with a carrying value of $381, all of which may be repledged, and cash collateral and related accrued interest of $378 to counterparties and the clearinghouse 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 ordinary 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.
Note 14 — Transactions with Certain Members, Certain Nonmembers, and Other FHLBanks
Transactions with Members and Nonmembers. The following tables set forth information at the dates and for the periods indicated with respect to transactions with members that have an officer or director serving on the Bank’s Board of Directors.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | |
| March 31, 2020 |
| | December 31, 2019 |
|
Assets: | | | |
Advances | $ | 3,896 |
| | $ | 3,697 |
|
Mortgage loans held for portfolio | — |
| | 8 |
|
Accrued interest receivable | 5 |
| | 6 |
|
Liabilities: | | | |
Deposits | $ | 3 |
| | $ | 22 |
|
Capital: | | | |
Capital Stock | $ | 132 |
| | $ | 132 |
|
|
| | | | | | | |
| Three Months Ended |
| March 31, 2020 |
| | March 31, 2019 |
|
Interest Income: | | | |
Advances | $ | 20 |
| | $ | 22 |
|
All transactions with members, nonmembers, and their affiliates are entered into in the ordinary course of business. As of March 31, 2020, and December 31, 2019, no shareholder owned more than 10% of the total voting interests in the Bank because of the statutory limit on members' voting rights. For more information on transactions with members and nonmembers, see “Item 8. Financial Statements and Supplementary Data – Note 21 – Transactions with Certain Members, Certain Nonmembers, and Other FHLBanks” in the Bank’s 2019 Form 10-K.
Transactions with Other FHLBanks. The Bank may occasionally enter into transactions with other FHLBanks. These transactions are summarized below.
Deposits with other FHLBanks. The Bank may, from time to time, maintain deposits with other FHLBanks. Deposits with other FHLBanks totaled $2 and $1 at March 31, 2020, and December 31, 2019, respectively, which were recorded in the Statements of Condition in the Interest-bearing deposits line item.
Overnight Funds. The Bank may borrow or lend unsecured overnight funds from or to other FHLBanks. All such transactions are at current market rates. Interest income and interest expense related to these transactions with other FHLBanks are included in interest income and interest expense in the Statements of Income. Balances outstanding at period end with other FHLBanks, if any, are identified in the Bank’s financial statements. During the three months ended March 31, 2020 and 2019, the Bank extended overnight loans to other FHLBanks for $900 and $1,050, respectively. During the three months ended March 31, 2020 and 2019, the Bank borrowed $850 and $25, respectively, from other FHLBanks. The impact to net interest income related to these transactions was de minimis for all periods in this report.
MPF Mortgage Loans. The Bank pays a membership fee to the FHLBank of Chicago for its participation in the MPF Program and a transaction services fee that is assessed monthly based on the amount of mortgage loans in which the Bank invested and which remain outstanding on its Statements of Condition. For the three months ended March 31, 2020 and 2019, the Bank recorded $1 and $1, respectively, in MPF membership fee expense and transaction services fee expense to the FHLBank of Chicago.
In addition, the Bank receives a counterparty fee from the FHLBank of Chicago for facilitating the sale of loans under the MPF Program. For the three months ended March 31, 2020 and 2019, the Bank recorded de minimis amounts in MPF counterparty fee income from the FHLBank of Chicago, which were recorded in the Statements of Income as other income.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Consolidated Obligations. The Bank may, from time to time, transfer to or assume from another FHLBank the outstanding primary liability for FHLBank consolidated obligations. During the three months ended March 31, 2020 and 2019, the Bank did not transfer any debt to other FHLBanks or assume any debt from other FHLBanks.
Transactions with the Office of Finance. The Bank’s proportionate share of the cost of operating the Office of Finance is identified in the Statements of Income.
Note 15 — Subsequent Events
There were no material subsequent events identified, subsequent to March 31, 2020, until the time of the Form 10‑Q filing with the Securities and Exchange Commission.
| |
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 redeem or 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 other statutes or regulations applicable to the FHLBanks; |
| |
• | changes in the Bank’s capital structure and composition; |
| |
• | 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; |
| |
• | changes in investor demand for consolidated obligations (including the terms of consolidated obligations) and/or the terms of interest rate exchange or similar agreements; |
| |
• | the impact of any changes and developments in FHLBank System-wide debt issuance and governance practices; |
| |
• | 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; |
| |
• | changes in key Bank personnel; |
| |
• | technology 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; |
| |
• | changes in the FHLBanks’ long-term credit ratings; |
| |
• | the impending discontinuance of the London Interbank Offered Rate (LIBOR) or any other interest rate benchmark and the adverse consequences it could have for market participants, including the Bank; |
| |
• | the satisfaction of any claims and payment of administrative expenses upon the Financing Corporation’s dissolution; and |
| |
• | natural disasters, pandemics, or other widespread health emergencies (such as the recent outbreak of COVID-19), terrorist attacks, or other unanticipated or catastrophic events. |
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 this report and in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2019 (2019 Form 10-K).
Quarterly Overview
The Bank serves eligible financial institutions in Arizona, California and Nevada, the three states that make up the Eleventh District of the FHLBank System. The Bank’s primary business is providing competitively priced, collateralized loans, known as advances, to its member institutions and certain qualifying housing associates. The Bank’s principal source of funds is debt issued in the capital markets. All 11 FHLBanks issue debt in the form of consolidated obligations through the Office of Finance as their agent, and all 11 FHLBanks are jointly and severally liable for the repayment of all consolidated obligations.
The Bank incurred a net loss of $8 million for the first quarter of 2020, compared with net income of $104 million for the first quarter of 2019. The $112 million decrease in net income/(loss) relative to the prior-year period primarily reflected a $95 million decrease in net interest income, from $144 million for the first quarter of 2019 to $49 million for the first quarter of 2020. As a result of the global COVID-19 pandemic, conditions in the financial markets deteriorated significantly beginning in late February and into March 2020, causing significant disruption to the availability of funds in the credit markets and resulting in adverse changes in interest rates, credit spreads, and asset prices. The decrease in net interest income, driven both by lower interest rates and by increases in credit spreads, was primarily attributable to an increase of $43 million in net fair value losses on designated fair value hedges, from $10 million for the first quarter of 2019 to $53 million for the first quarter of 2020. The decrease in net interest income also reflected a retrospective adjustment of the effective yields on mortgage loans of $15 million, driven by faster projected prepayments because of lower mortgage rates. Finally, the decrease in net income/(loss) also reflected a provision for current expected credit losses of $39 million for the first quarter of 2020 associated with certain private-label residential mortgage-backed securities (PLRMBS) classified as available-for-sale (AFS), primarily resulting from a significant decline in fair values.
The decrease in net interest income was partially offset by a decline in Affordable Housing Program (AHP) assessments. Because of the net loss in the first quarter of 2020, the Bank recorded no AHP assessment for the quarter. In the first quarter of 2019, the AHP assessment was $12 million.
Retained earnings decreased to $3.4 billion at March 31, 2020, from $3.5 billion at December 31, 2019, primarily resulting from a net loss of $8 million in the first three months of 2020 and dividends paid at an annualized rate of 7.00%, totaling $54 million, including $52 million in dividends on capital stock and $2 million in dividends on mandatorily redeemable capital stock during the first three months of 2020.
Total assets increased $18.1 billion during the first three months of 2020, to $124.9 billion at March 31, 2020, from $106.8 billion at December 31, 2019. Total advances increased $12.5 billion, to $77.9 billion at March 31, 2020, from $65.4 billion at December 31, 2019. During March 2020, the Bank experienced increased demand for advances to support its members' liquidity needs in response to the pandemic and maintained its liquidity investments in compliance with Finance Agency guidance. As interest rates declined significantly during the quarter, investor demand for high credit quality, fixed income investments, including the Bank’s consolidated obligations, increased, and the Bank continued to meet its funding needs during this time. Investments increased $5.4 billion, to $43.0 billion at March 31, 2020, from $37.6 billion at December 31, 2019. The increase in investments primarily reflected an increase of $6.5 billion in Federal funds sold, an increase of $2.6 billion in trading securities, and an increase of $1.3 billion in interest-bearing deposits, partially offset by a decrease of $5.0 billion in securities purchased under agreements to resell.
Accumulated other comprehensive income/(loss) (AOCI) decreased by $502 million during the first three months of 2020, to accumulated other comprehensive loss of $228 million at March 31, 2020, from accumulated other comprehensive income of $274 million at December 31, 2019, primarily as a result of lower fair values of MBS classified as AFS.
On April 27, 2020, the Bank’s Board of Directors declared a quarterly cash dividend on the capital stock outstanding during the first quarter of 2020 at an annualized rate of 5.00%. The dividend will total $39 million, including $2 million in dividends on mandatorily redeemable capital stock that will be reflected as interest expense in the second quarter of 2020. The Bank recorded the dividend on April 27, 2020, and expects to pay the dividend on May 14, 2020. As a result of the COVID-19 pandemic and the measures taken to contain the spread of the virus, U.S. and global economies face great challenges and ongoing uncertainty. To preserve capital in this uncertain environment, the Bank’s Board of Directors has decided to pay a quarterly dividend rate at the low end of the range stated in the Bank's dividend philosophy.
As of March 31, 2020, the Bank was in compliance with all of its regulatory capital requirements. The Bank’s total regulatory capital ratio was 5.4%, exceeding the 4.0% requirement. The Bank had $6.7 billion in permanent capital, exceeding its risk-based capital requirement of $1.4 billion.
The Bank will continue to monitor the condition of its balance sheet, its financial performance, its capital position, overall financial market conditions, and other relevant information as the basis for determining the payment of dividends in future quarters.
Primarily due to the COVID-19 pandemic, conditions in the financial markets deteriorated significantly beginning in late February and into March 2020, creating substantial uncertainty about the future economic activity and environment. The Federal Reserve undertook a number of emergency actions in March 2020 to, among other things, help facilitate liquidity and support stability in the fixed income markets while volatility across global capital markets dramatically increased. Notably, the Federal Reserve substantially increased its provision of liquidity to the repurchase agreement and U.S. Treasury markets via open market operations while also providing liquidity to related markets, such as the commercial paper market, via an array of new programs, as part of a commitment to using a full range of tools to support households, businesses, and the U.S. economy overall in this challenging time. The effects of the coronavirus pandemic, and governmental and public actions taken in response, on the global and U.S. economy and the Bank are evolving, and the full duration and impact of the pandemic and related governmental and public actions are uncertain.
The Bank’s operations in the first quarter of 2020 were affected by the COVID-19 pandemic. The Bank’s staff began working remotely in mid-March 2020 to protect the Bank’s workforce and communities. The ultimate impact of the disruption caused by the outbreak is uncertain. Possible effects of a remote workforce may include, but are not limited to, operational incidents, additional cyber-security risks, and operational challenges that could affect the Bank’s ability to conduct business or increase the risk of operational errors. In addition, the Bank relies on vendors and other third parties to perform certain critical services. If one of our critical vendors or third parties experiences a failure or any interruption to their business due to the COVID-19 pandemic, the Bank may be unable to conduct and manage its business effectively.
To address the operational impact of the pandemic, the Bank maintains a Board-approved Business Continuity Management Program, along with a Crisis Management Plan and Business Continuity Plans (BCPs), which are updated and tested annually. The Bank’s BCPs provide procedures to ensure personnel safety and welfare, to safeguard the Bank’s assets, including physical property and information, and to permit the continued operations of the Bank in the event of a short-term disruption or long-term catastrophic event. The Bank’s BCPs contain operating procedures for all critical processes and identify resources and staff necessary to continue operations based on business defined recovery time objectives and communication requirements for internal and external stakeholders.
In light of the COVID-19 pandemic, the Bank’s leadership team has also reconfirmed its succession plan in the event any key team leader becomes incapacitated or is unable to perform his or her duties.
The Bank continued to meet its funding needs throughout recent events; however, funding costs, measured as the spread between the Bank’s consolidated obligations and U.S. Treasury securities, increased, with market participants favoring shorter-term obligations, while fixed income market conditions remained challenging. The FHLBanks coordinated and cooperated in the issuance of FHLBank System consolidated obligations, including being prepared to provide an orderly allocation of debt if needed and issuing certain structures and tenors that reduced the funding risks to the FHLBanks. As a consequence of the Federal Reserve’s Open Market Operations in response to market disruptions, interest rates declined significantly, improving stability in the funding markets, increasing investor demand for System consolidated obligations, and reducing the need for coordination of debt issuance by the FHLBanks.
During the COVID-19 pandemic, the Bank’s member demand for advances increased notably in March, but future demand for advances may decrease because of lower interest rates and reduced member asset activity, while the risk of credit losses has likely increased. Other possible effects from the COVID-19 pandemic may include, but are not limited to, disruption to the Bank’s members, uncertainties in the credit markets, and a decline in the fair value of assets.
The market disruption caused by the COVID-19 pandemic has also affected the valuation of mortgage collateral pledged to the Bank to secure advances, and the Bank has responded by adjusting collateral terms to reflect current market conditions. The Bank will continue to monitor credit and collateral conditions and make adjustments as needed. Because of the disruptions caused by the COVID-19 pandemic, the Bank is working with members on a case by case basis to reschedule field reviews of collateral or conduct an electronic file review and postpone the onsite portion of the review.
In addition, the Bank implemented certain relief measures in April 2020 to help members serve customers affected by the COVID-19 pandemic, such as accommodating forbearance and modifications to pledged loan collateral and allowing electronic signatures on loan documentation in specific circumstances. The Board of Directors has also approved subsidized programs to assist our members in responding to the challenges brought about by the COVID-19 pandemic:
| |
(i) | The Bank is offering a new credit product–the Recovery Advance–that provides a six-month or one-year advance with a 0% interest rate to support members in their efforts to address COVID-19. The Bank estimates that the subsidy for the new product will range from $11 million to $15 million (depending on advances rates, interest rates, and member activity); |
| |
(ii) | Through the Access to Housing and Economic Assistance for Development Program, the Bank will provide an additional $1.0 million to support and augment working capital, infrastructure, and capacity building for nonprofit organizations, tribal associations, and local governments affected by the COVID-19 pandemic; |
| |
(iii) | The Bank will add $1.5 million to the Bank’s disaster relief matching donation program to match member donations to communities affected by the COVID-19 pandemic; and |
| |
(iv) | The Bank has increased the overall limit on the Bank’s Community Investment Cash Advance programs–Community Investment Program and Advances for Community Enterprise–from $8.0 billion to $13.0 billion and doubled the individual member limits, which are based on the member’s asset size. The total subsidy, if the funds are fully utilized, would be approximately $3 million. |
Also, in response to the COVID-19 pandemic, the Finance Agency has taken certain actions to provide various forms of relief and guidance regarding the financial, operational, credit, market, and other effects of the pandemic. See “Part II. Other Information – Item 1A. Risk Factors” for more information.
On October 2, 2019, the Financing Corporation, formed pursuant to the Federal Savings and Loan Insurance Corporation Recapitalization Act of 1987 to provide financing for the resolution of failed savings and loan associations, commenced the process of dissolution in accordance with relevant statutory requirements and the terms of a plan of dissolution approved by the Director of the Federal Housing Finance Agency (Finance Agency). In connection with the pending dissolution of the Financing Corporation, an aggregate of approximately $200 million in the Financing Corporation’s surplus and remaining cash on hand is expected to be distributed in the second quarter of 2020 to the FHLBanks, as the Financing Corporation’s sole stockholders, in proportion to their
ownership in the Financing Corporation’s nonvoting capital stock. The Bank’s ownership in the Financing Corporation’s nonvoting capital stock is 19.96%. The receipt by the FHLBanks of any such distribution from the Financing Corporation will be treated as a partial return of their prior capital contributions to the Financing Corporation and credited to their retained earnings.
On April 6, 2020, the Bank filed a proof of claim as a “potentially eligible claimant” to share in disgorgement proceeds paid into a distribution fund in connection with a Securities and Exchange Commission enforcement action. The potential distribution payment to the Bank may be significant; however, there can be no assurance that the Bank will receive any distribution payment. Any distribution payment to the Bank is subject to acceptance of the proof of claim by the distribution agent and a court order to disburse the funds.
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, 2020 |
| | December 31, 2019 |
| | September 30, 2019 |
| | June 30, 2019 |
| | March 31, 2019 |
|
Selected Balance Sheet Items at Quarter End | | | | | | | | | |
Total Assets | $ | 124,870 |
| | $ | 106,842 |
| | $ | 104,153 |
| | $ | 106,762 |
| | $ | 110,577 |
|
Advances | 77,872 |
| | 65,374 |
| | 62,826 |
| | 67,189 |
| | 70,262 |
|
Mortgage Loans Held for Portfolio, Net | 3,239 |
| | 3,314 |
| | 3,382 |
| | 3,327 |
| | 3,160 |
|
Investments(1) | 43,016 |
| | 37,637 |
| | 37,490 |
| | 35,180 |
| | 36,494 |
|
Consolidated Obligations:(2) | | | | | | | | | |
Bonds | 77,937 |
| | 71,372 |
| | 67,431 |
| | 73,915 |
| | 74,094 |
|
Discount Notes | 39,102 |
| | 27,376 |
| | 28,605 |
| | 24,901 |
| | 28,281 |
|
Mandatorily Redeemable Capital Stock | 83 |
| | 138 |
| | 138 |
| | 138 |
| | 227 |
|
Capital Stock —Class B —Putable | 3,231 |
| | 3,000 |
| | 2,898 |
| | 2,967 |
| | 2,959 |
|
Unrestricted Retained Earnings | 2,691 |
| | 2,754 |
| | 2,715 |
| | 2,719 |
| | 2,732 |
|
Restricted Retained Earnings | 713 |
| | 713 |
| | 690 |
| | 678 |
| | 668 |
|
Accumulated Other Comprehensive Income/(Loss) (AOCI) | (228 | ) | | 274 |
| | 267 |
| | 300 |
| | 287 |
|
Total Capital | 6,407 |
| | 6,741 |
| | 6,570 |
| | 6,664 |
| | 6,646 |
|
Selected Operating Results for the Quarter | | | | | | | | | |
Net Interest Income | $ | 49 |
| | $ | 165 |
| | $ | 112 |
| | $ | 110 |
| | $ | 144 |
|
Provision for/(Reversal of) Credit Losses | 39 |
| | — |
| | — |
| | — |
| | — |
|
Other Income/(Loss) | 18 |
| | 10 |
| | 3 |
| | (7 | ) | | 15 |
|
Other Expense | 36 |
| | 49 |
| | 47 |
| | 48 |
| | 43 |
|
Affordable Housing Program Assessment | — |
| | 13 |
| | 7 |
| | 6 |
| | 12 |
|
Net Income/(Loss) | $ | (8 | ) | | $ | 113 |
| | $ | 61 |
| | $ | 49 |
| | $ | 104 |
|
Selected Other Data for the Quarter | | | | | | | | | |
Net Interest Margin(3) | 0.18 | % | | 0.63 | % | | 0.44 | % | | 0.41 | % | | 0.52 | % |
Operating Expenses as a Percent of Average Assets | 0.12 |
| | 0.17 |
| | 0.15 |
| | 0.15 |
| | 0.12 |
|
Return on Average Assets | (0.03 | ) | | 0.43 |
| | 0.24 |
| | 0.18 |
| | 0.37 |
|
Return on Average Equity | (0.46 | ) | | 6.82 |
| | 3.65 |
| | 2.91 |
| | 6.34 |
|
Annualized Dividend Rate | 7.00 |
| | 7.00 |
| | 7.00 |
| | 7.00 |
| | 7.00 |
|
Dividend Payout Ratio(4) | — |
| | 45.18 |
| | 86.78 |
| | 108.09 |
| | 48.21 |
|
Average Equity to Average Assets Ratio | 6.09 |
| | 6.37 |
| | 6.47 |
| | 6.16 |
| | 5.87 |
|
Selected Other Data at Quarter End | | | | | | | | | |
Regulatory Capital Ratio(5) | 5.38 |
| | 6.18 |
| | 6.18 |
| | 6.09 |
| | 5.96 |
|
Duration Gap (in months) | — |
| | 1 |
| | 1 |
| | 1 |
| | 1 |
|
| |
(1) | Investments consist of interest-bearing deposits, securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities. |
| |
(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, 2020, 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 FHLBanks at the dates indicated was as follows: |
|
| | | |
| Par Value (In millions) |
|
March 31, 2020 | $ | 1,174,670 |
|
December 31, 2019 | 1,025,895 |
|
September 30, 2019 | 1,010,271 |
|
June 30, 2019 | 1,048,412 |
|
March 31, 2019 | 1,010,895 |
|
| |
(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
Net Interest Income. The primary source of the Bank’s earnings is net interest income, which is the interest earned on advances, mortgage loans, and investments, including net accretion of related income from improvement in expected cash flows on certain other-than-temporarily-impaired PLRMBS, 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, 2020 and 2019, 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.
First Quarter of 2020 Compared to First Quarter of 2019
|
| | | | | | | | | | | | | | | | | | | | | |
Average Balance Sheets |
| | | | | | | | | | | |
| Three Months Ended |
| March 31, 2020 | | March 31, 2019 |
(Dollars in millions) | Average Balance |
| | Interest Income/ Expense |
| | Average Rate |
| | Average Balance |
| | Interest Income/ Expense |
| | Average Rate |
|
Assets | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | |
Interest-bearing deposits | $ | 3,430 |
| | $ | 12 |
| | 1.37 | % | | $ | 2,230 |
| | $ | 14 |
| | 2.50 | % |
Securities purchased under agreements to resell | 4,912 |
| | 18 |
| | 1.44 |
| | 7,453 |
| | 45 |
| | 2.47 |
|
Federal funds sold | 5,242 |
| | 14 |
| | 1.12 |
| | 6,331 |
| | 41 |
| | 2.62 |
|
Trading securities: | | | | | | | | | | | |
Mortgage-backed securities (MBS) | 3 |
| | — |
| | 3.50 |
| | 5 |
| | — |
| | 3.70 |
|
Other investments | 3,035 |
| | 16 |
| | 2.10 |
| | 613 |
| | 4 |
| | 2.70 |
|
Available-for-sale (AFS) securities:(1) | | | | | | | | | | | |
MBS(2)(3) | 10,204 |
| | 32 |
| | 1.26 |
| | 6,913 |
| | 79 |
| | 4.62 |
|
Other investments(3) | 5,295 |
| | 19 |
| | 1.48 |
| | — |
| | — |
| | — |
|
Held-to-maturity (HTM) securities:(1) | | | | | | | | | | | |
MBS | 7,129 |
| | 44 |
| | 2.46 |
| | 10,580 |
| | 78 |
| | 3.00 |
|
Other investments | — |
| | — |
| | — |
| | 76 |
| | 1 |
| | 2.88 |
|
Mortgage loans held for portfolio | 3,311 |
| | (1 | ) | | (0.06 | ) | | 3,115 |
| | 26 |
| | 3.35 |
|
Advances(3) | 66,954 |
| | 279 |
| | 1.67 |
| | 75,385 |
| | 498 |
| | 2.68 |
|
Loans to other FHLBanks | — |
| | — |
| | — |
| | 13 |
| | — |
| | 3.49 |
|
Total interest-earning assets | 109,515 |
| | 433 |
| | 1.59 |
| | 112,714 |
| | 786 |
| | 2.83 |
|
Other assets(4)(5) | 1,216 |
| | — |
| | | | 1,091 |
| | — |
| | |
Total Assets | $ | 110,731 |
| | $ | 433 |
| | | | $ | 113,805 |
| | $ | 786 |
| | |
Liabilities and Capital | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Consolidated obligations: | | | | | | | | | | | |
Bonds(3) | $ | 73,730 |
| | $ | 276 |
| | 1.50 | % | | $ | 75,587 |
| | $ | 455 |
| | 2.44 | % |
Discount notes | 28,550 |
| | 104 |
| | 1.47 |
| | 30,035 |
| | 181 |
| | 2.44 |
|
Deposits and other borrowings | 560 |
| | 2 |
| | 1.11 |
| | 268 |
| | 2 |
| | 2.39 |
|
Mandatorily redeemable capital stock | 130 |
| | 2 |
| | 7.51 |
| | 227 |
| | 4 |
| | 7.16 |
|
Borrowings from other FHLBanks | 3 |
| | — |
| | 9.90 |
| | 4 |
| | — |
| | 2.43 |
|
Total interest-bearing liabilities | 102,973 |
| | 384 |
| | 1.50 |
| | 106,121 |
| | 642 |
| | 2.45 |
|
Other liabilities(4) | 1,012 |
| | — |
| | | | 1,003 |
| | — |
| | |
Total Liabilities | 103,985 |
| | 384 |
| | | | 107,124 |
| | 642 |
| | |
Total Capital | 6,746 |
| | — |
| | | | 6,681 |
| | — |
| | |
Total Liabilities and Capital | $ | 110,731 |
| | $ | 384 |
| | | | $ | 113,805 |
| | $ | 642 |
| | |
Net Interest Income | | | $ | 49 |
| | | | | | $ | 144 |
| | |
Net Interest Spread(6) | | | | | 0.09 | % | | | | | | 0.38 | % |
Net Interest Margin(7) | | | | | 0.18 | % | | | | | | 0.52 | % |
Interest-earning Assets/Interest-bearing Liabilities | 106.35 | % | | | | | | 106.21 | % | | | | |
| |
(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) recognized pursuant to the impairment guidance in effect prior to January 1, 2020, totaling $17 million and $15 million for the three months ended March 31, 2020 and 2019, respectively. |
| |
(3) | Interest income/expense and average rates include the effect of associated interest rate exchange agreements, as follows: |
|
| | | | | | | | | | | | | | | |
| Three Months Ended |
| March 31, 2020 |
(In millions) | Advances |
| | AFS Securities |
| | Consolidated Obligation Bonds |
| | Total |
|
Gain/(loss) on designated fair value hedges | $ | (8 | ) | | $ | (45 | ) | | $ | — |
| | $ | (53 | ) |
Net interest settlements on derivatives | (33 | ) | | (30 | ) | | 3 |
| | (60 | ) |
Total net interest income/(expense) | $ | (41 | ) | | $ | (75 | ) | | $ | 3 |
| | $ | (113 | ) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended |
| March 31, 2019 |
(In millions) | Advances |
| | AFS Securities |
| | Consolidated Obligation Bonds |
| | Total |
|
Gain/(loss) on designated fair value hedges | $ | — |
| | $ | (9 | ) | | $ | — |
| | $ | (9 | ) |
Net interest settlements on derivatives | 21 |
| | (2 | ) | | (9 | ) | | 10 |
|
Total net interest income/(expense) | $ | 21 |
| | $ | (11 | ) | | $ | (9 | ) | | $ | 1 |
|
| |
(4) | Includes forward settling transactions and valuation adjustments for certain cash items. |
| |
(5) | Includes non-credit-related OTTI losses on HTM securities for the first quarter of 2020. Includes non-credit-related OTTI losses on AFS and HTM securities for the first quarter of 2019. |
| |
(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 2020 was $49 million, a 66% decrease from $144 million in the first quarter of 2019. The following table details the changes in interest income and interest expense for the first quarter of 2020 compared to the first quarter of 2019. 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, 2020, Compared to Three Months Ended March 31, 2019 |
| | | | | |
| Increase/ (Decrease) |
| | Attributable to Changes in(1) |
(In millions) | | Average Volume |
| | Average Rate |
|
Interest-earning assets: | | | | | |
Interest-bearing deposits | $ | (2 | ) | | $ | 6 |
| | $ | (8 | ) |
Securities purchased under agreements to resell | (27 | ) | | (12 | ) | | (15 | ) |
Federal funds sold | (27 | ) | | (6 | ) | | (21 | ) |
Trading securities: Other investments | 12 |
| | 13 |
| | (1 | ) |
AFS securities: |
|
| | | | |
MBS(2) | (47 | ) | | 27 |
| | (74 | ) |
Other investments(2) | 19 |
| | 19 |
| | — |
|
HTM securities: | | | | | |
MBS | (34 | ) | | (22 | ) | | (12 | ) |
Other investments | (1 | ) | | (1 | ) | | — |
|
Mortgage loans held for portfolio | (27 | ) | | 2 |
| | (29 | ) |
Advances(2) | (219 | ) | | (50 | ) | | (169 | ) |
Total interest-earning assets | (353 | ) | | (24 | ) | | (329 | ) |
Interest-bearing liabilities: | | | | | |
Consolidated obligations: | | | | | |
Bonds(2) | (179 | ) | | (11 | ) | | (168 | ) |
Discount notes | (77 | ) | | (8 | ) | | (69 | ) |
Deposits and other borrowings | — |
| | 1 |
| | (1 | ) |
Mandatorily redeemable capital stock | (2 | ) | | (2 | ) | | — |
|
Total interest-bearing liabilities | (258 | ) | | (20 | ) | | (238 | ) |
Net interest income | $ | (95 | ) | | $ | (4 | ) | | $ | (91 | ) |
| |
(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 18 basis points for the first quarter of 2020, 34 basis points lower than the net interest margin for the first quarter of 2019, which was 52 basis points. The net interest spread was 9 basis points for the first quarter of 2020, 29 basis points lower than the net interest spread for the first quarter of 2019, which was 38 basis points. These decreases were primarily due to the effects of changes in market interest rates, interest rate volatility, and other market factors during the period.
For securities previously identified as other-than-temporarily impaired pursuant to the impairment guidance in effect prior to January 1, 2020, the Bank updates its estimate of future estimated cash flows on a regular basis. If there is no additional credit loss on the security, the yield of the security is adjusted upward on a prospective basis and accreted into interest income when there is a significant increase in the expected cash flows. As a result of improvements in the estimated cash flows of securities previously identified as other-than-temporarily impaired, the net accretion of income is likely to continue to be a positive source of net interest income in future periods.
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, 2020 and 2019.
|
| | | | | | | |
Other Income/(Loss) |
| | | |
| Three Months Ended |
(In millions) | March 31, 2020 |
| | March 31, 2019 |
|
Other Income/(Loss): | | | |
Net gain/(loss) on trading securities(1)
| $ | 73 |
| | $ | (1 | ) |
Net gain/(loss) on advances and consolidated obligation bonds held under fair value option | 89 |
| | 39 |
|
Net gain/(loss) on derivatives and hedging activities | (147 | ) | | (28 | ) |
Other, net | 3 |
| | 5 |
|
Total Other Income/(Loss) | $ | 18 |
| | $ | 15 |
|
| |
(1) | The net gain/(loss) on trading securities that were economically hedged totaled $73 and a de minimis amount for the three months ended March 31, 2020 and 2019, respectively. |
Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option – The following table presents the net gain/(loss) recognized in earnings on advances and consolidated obligation bonds held under the fair value option for the three months ended March 31, 2020 and 2019.
|
| | | | | | | |
Net Gain/(Loss) on Advances and Consolidated Obligations Bonds Held Under Fair Value Option |
| | | |
| Three Months Ended |
(In millions) | March 31, 2020 |
| | March 31, 2019 |
|
Advances | $ | 91 |
| | $ | 46 |
|
Consolidated obligation bonds | (2 | ) | | (7 | ) |
Total | $ | 89 |
| | $ | 39 |
|
Under the fair value option, the Bank elected to carry certain assets and liabilities at fair value. 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 net gains/(losses) on advances and consolidated obligation bonds held under the fair value option 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 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 12 – Fair Value.”
Net Gain/(Loss) on Derivatives and Hedging Activities – Under the accounting for derivative instruments and hedging activities, the Bank is required to carry all of its derivative instruments on the Statements of Condition at fair value. If derivatives meet the hedging criteria, including effectiveness measures, the carrying value of the underlying hedged instruments may also be adjusted to reflect changes in the fair value attributable to the risk being hedged so that some or all of the unrealized gain or loss recognized on the derivative is offset by a corresponding unrealized gain or loss on the underlying hedged instrument. In addition, certain derivatives are associated with assets or liabilities but do not qualify as fair value hedges under the accounting for derivative instruments and hedging activities. These economic hedges are recorded on the Statements of Condition at fair value with the unrealized gain or loss recorded in earnings without any offsetting unrealized gain or loss from the associated asset or liability.
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 2020 and 2019.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives and Hedging Activities Three Months Ended March 31, 2020, Compared to Three Months Ended March 31, 2019 |
| | | | | | | | | | | |
| Three Months Ended |
(In millions) | March 31, 2020 | | March 31, 2019 |
Hedged Item | Gain/(Loss) on Economic Hedges |
| | Income/ (Expense) on Economic Hedges |
| | Total |
| | Gain/(Loss) on Economic Hedges |
| | Income/ (Expense) on Economic Hedges |
| | Total |
|
Advances: | | | | | | | | | | | |
Elected for fair value option | $ | (109 | ) | | $ | (2 | ) | | $ | (111 | ) | | $ | (41 | ) | | $ | 8 |
| | $ | (33 | ) |
Not elected for fair value option | 9 |
| | (11 | ) | | (2 | ) | | 11 |
| | (3 | ) | | 8 |
|
Consolidated obligation bonds: | | | | | | |
| |
| | |
Elected for fair value option | 2 |
| | — |
| | 2 |
| | 6 |
| | (2 | ) | | 4 |
|
Not elected for fair value option | 18 |
| | — |
| | 18 |
| | 23 |
| | (8 | ) | | 15 |
|
Consolidated obligation discount notes: | | | | | | | | | | | |
Not elected for fair value option | 13 |
| | 9 |
| | 22 |
| | (23 | ) | | — |
| | (23 | ) |
Non-MBS investments: | | | | | | | | | | | |
Not elected for fair value option | (76 | ) | | (4 | ) | | (80 | ) | | — |
| | — |
| | — |
|
Mortgage delivery commitment: | | | | | | | | | | | |
Not elected for fair value option | 4 |
| | — |
| | 4 |
| | 1 |
| | — |
| | 1 |
|
Total | $ | (139 | ) | | $ | (8 | ) | | $ | (147 | ) | | $ | (23 | ) | | $ | (5 | ) | | $ | (28 | ) |
During the first quarter of 2020, net losses on derivatives and hedging activities totaled $147 million compared to net losses of $28 million in the first quarter of 2019. These amounts included expense of $8 million and expense of $5 million resulting from net settlements on derivative instruments used in economic hedges in the first quarter of 2020 and 2019, respectively. Excluding the impact of income or expense from net settlements on derivative instruments used in economic hedges, the net gains or losses on 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 11 – Derivatives and Hedging Activities.”
Other Expense. During the first quarter of 2020, other expenses totaled $36 million, compared to $43 million in the first quarter of 2019, primarily reflecting the decrease in voluntary charitable contributions.
Quality Jobs Fund Expense and Other – During the first quarter of 2019, the Bank made a voluntary charitable contribution of $5 million for the Quality Jobs Fund as well as a voluntary contribution of $1 million to the AHP to offset the impact on the AHP assessment of the charitable contribution expense. The Bank did not make any charitable contributions in the first quarter of 2020.
Return on Average Equity
Return on average equity was (0.46)% (annualized) for the first quarter of 2020, compared to 6.34% (annualized) for the first quarter of 2019. The decrease primarily reflected lower net income/(loss) for the first quarter of 2020, which decreased from net income of $104 million in the first quarter of 2019 to a net loss of $8 million in the first quarter of 2020.
Dividends and Retained Earnings
In the first quarter of 2020, the Bank paid dividends at an annualized rate of 7.00%, totaling $54 million, including $52 million in dividends on capital stock and $2 million in dividends on mandatorily redeemable capital stock. In the first quarter of 2019, the Bank paid dividends at an annualized rate of 7.00%, totaling $54 million, including $50 million in dividends on capital stock and $4 million in dividends on mandatorily redeemable capital stock.
The Bank paid these dividends in cash. Dividends on capital stock are recognized as dividends on the Statements of Capital Accounts, and dividends on mandatorily redeemable capital stock are recognized as interest expense on the Statements of Income.
On April 27, 2020, the Bank’s Board of Directors declared a cash dividend on the capital stock outstanding during the first quarter of 2020 at an annualized rate of 5.00%, totaling $39 million, including $37 million in dividends on capital stock and $2 million in dividends on mandatorily redeemable capital stock. The Bank recorded the dividend on April 27, 2020. The Bank expects to pay the dividend on May 14, 2020. Dividends on mandatorily redeemable capital stock will be recognized as interest expense in the second quarter of 2020.
The Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework (Framework) assesses the level and adequacy of retained earnings and establishes amounts to be retained in restricted retained earnings, which are not made available in the current dividend period, and maintains an amount of total retained earnings at least equal to its required retained earnings as described in the Framework. As determined using the Bank’s methodology, the required level of total retained earnings was $2.5 billion from January 2018 through July 2019. In July 2019, the methodology was further revised and resulted in a required level of retained earnings of $2.4 billion. In January 2020, the methodology was further revised and resulted in a required level of retained earnings of $2.5 billion. The Bank satisfies its retained earnings requirement with both restricted retained earnings (i.e., amounts related to the Joint Capital Enhancement Agreement) and unrestricted retained earnings. The Bank’s retained earnings requirement may be changed at any time. The Board of Directors periodically reviews the retained earnings methodology and analysis to determine whether any adjustments are appropriate. Total restricted retained earnings was $713 million as of March 31, 2020, and December 31, 2019.
The Bank will continue to monitor the condition of its balance sheet, its financial performance, its capital position, overall financial market conditions, and other relevant information as the basis for determining the payment of dividends in future quarters. On March 16, 2020, in light of market volatility, the Finance Agency extended the Bank’s ability to enter into LIBOR-indexed instruments that mature after December 31, 2021, from March 31, 2020, to June 30, 2020.
For more information, see “Item 1. Financial Statements – Note 9 – Capital” in this report and see “Item 1. Business – Dividends and Retained Earnings,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk,” and “Item 8. Financial Statements and Supplementary Data – Note 15 – Capital – Excess Stock Repurchase, Retained Earnings, and Dividend Framework” in the Bank’s 2019 Form 10‑K.
Financial Condition
Total assets were $124.9 billion at March 31, 2020, compared to $106.8 billion at December 31, 2019. Advances increased by $12.5 billion, or 19%, to $77.9 billion at March 31, 2020, from $65.4 billion at December 31, 2019. MBS investments decreased by $0.1 billion, or 1%, to $17.7 billion at March 31, 2020, from $17.8 billion at
December 31, 2019. Average total assets were $110.7 billion for the first quarter of 2020, a 3% decrease compared to $113.8 billion for the first quarter of 2019. Average advances were $67.0 billion for the first quarter of 2020, an 11% decrease from $75.4 billion for the first quarter of 2019. Average MBS investments were $17.3 billion for the first quarter of 2020, a 1% decrease from $17.5 billion for the first quarter of 2019.
Advances outstanding at March 31, 2020, included unrealized gains of $984 million, of which $812 million represented unrealized gains on advances hedged in accordance with the accounting for derivative instruments and hedging activities and $172 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, 2019, included unrealized gains of $286 million, of which $203 million represented unrealized losses on advances hedged in accordance with the accounting for derivative instruments and hedging activities and $83 million represented unrealized losses on economically hedged advances that are carried at fair value in accordance with the fair value option. The change in the unrealized gains on the hedged advances and advances carried at fair value from December 31, 2019, to March 31, 2020, 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 $118.5 billion at March 31, 2020, an increase of $18.4 billion from $100.1 billion at December 31, 2019, primarily reflecting an $18.3 billion increase in consolidated obligations outstanding to $117.0 billion at March 31, 2020, from $98.7 billion at December 31, 2019. Average total liabilities were $104.0 billion for the first quarter of 2020, a 3% decrease compared to $107.1 billion for the first quarter of 2019. Average consolidated obligations were $102.3 billion for the first quarter of 2020 and $105.6 billion for the first quarter of 2019.
Consolidated obligations outstanding at March 31, 2020, included unrealized losses of $32 million on consolidated obligation bonds hedged in accordance with the accounting for derivative instruments and hedging activities and unrealized losses of $4 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, 2019, included unrealized losses of $9 million on consolidated obligation bonds hedged in accordance with the accounting for derivative instruments and hedging activities and unrealized losses of $2 million on economically hedged consolidated obligation bonds that are carried at fair value in accordance with the fair value option. The change in the net unrealized losses on the hedged consolidated obligation bonds and on the consolidated obligation bonds carried at fair value from December 31, 2019, to March 31, 2020, were 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, 2020, 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 the FHLBanks was $1,174.7 billion at March 31, 2020, and $1,025.9 billion at December 31, 2019.
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 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.
Certain Bank assets, liabilities, and derivatives are indexed to LIBOR. The Bank recognizes that the impending discontinuation of LIBOR presents risks and challenges that could have an impact on the Bank’s business. For information about the risks to the Bank from discontinuation of LIBOR, see “Item 1A. Risk Factors” in the Bank’s 2019 Form 10-K. Accordingly, the Bank has established the LIBOR Transition Working Group, led by the Chief Financial Officer, and developed a LIBOR Phase Out Transition Plan (Transition Plan). Among other things, the Transition Plan addresses three key strategies to mitigate the risks to the Bank associated with the discontinuation of LIBOR: (i) execute hedging strategies that permit alternative reference rates, including the Secured Overnight Financing Rate (SOFR), (ii) transact SOFR-indexed advances and bonds, and (iii) where practicable, implement improved fallback provisions for the discontinuation of LIBOR in new and legacy contracts. In addition, the Transition Plan limits new LIBOR transactions with maturities beyond the end of 2021 consistent with the limits set by the Finance Agency’s Supervisory Letter issued on September 27, 2019. The Transition Plan states that the Bank’s Asset and Liability Management Committee has primary responsibility for driving the transition from LIBOR to SOFR and that the Bank’s Business Development Committee is responsible for advance product development to facilitate our members’ transition from LIBOR to an alternative index.
The tables below present LIBOR-indexed variable rate financial instruments by due date or termination date at March 31, 2020.
|
| | | | | | | | | | | | | | | |
LIBOR-Indexed Financial Instruments |
| | | | | | | |
March 31, 2020 | | | | | | | |
(In millions) | 2020 |
| | 2021 |
| | 2022 and Thereafter |
| | Total |
|
Assets indexed to LIBOR: | | | | | | | |
Par value of advances by redemption term | $ | 10,500 |
| | $ | 10,750 |
| | $ | 260 |
| | $ | 21,510 |
|
Unpaid principal balance of investment securities by contractual maturity | | | | | | | |
MBS(1) | — |
| | — |
| | 6,970 |
| | 6,970 |
|
Notional amount of receive leg LIBOR interest rate swaps by termination date | | | | | | | |
Cleared | 12,163 |
| | 6,023 |
| | 2,776 |
| | 20,962 |
|
Uncleared | 224 |
| | 317 |
| | 938 |
| | 1,479 |
|
Total | $ | 22,887 |
| | $ | 17,090 |
| | $ | 10,944 |
| | $ | 50,921 |
|
| | | | | | | |
Liabilities indexed to LIBOR: | | | | | | | |
Par value of consolidated obligation bonds by contractual maturity | $ | 22,130 |
| | $ | 5,098 |
| | $ | — |
| | $ | 27,228 |
|
Notional amount of pay leg LIBOR interest rate swaps by termination date | | | | | | | |
Cleared | 17,438 |
| | 5,330 |
| | 423 |
| | 23,191 |
|
Uncleared | 420 |
| | 352 |
| | 200 |
| | 972 |
|
Total | $ | 39,988 |
| | $ | 10,780 |
| | $ | 623 |
| | $ | 51,391 |
|
| |
(1) | Certain MBS with multiple indices where LIBOR is the majority index are included in this amount. |
Interest rate caps and floors indexed to LIBOR totaling $430 million terminate in 2021 and totaling $550 million terminate in 2022 and thereafter.
Market activity in SOFR-indexed financial instruments continues to increase. In total, the Bank has issued $57.1 billion in SOFR-indexed consolidated obligation bonds. The table below presents the par value of variable rate consolidated obligation bonds by interest rate index.
|
| | | |
Variable Rate Consolidated Obligation Bonds by Interest Rate Index |
| |
(In millions) | |
March 31, 2020 | |
Interest Rate Index | Amount Outstanding |
LIBOR | $ | 27,228 |
|
SOFR | 42,971 |
|
Total par value(1) | $ | 70,199 |
|
| |
(1) | Total variable rate consolidated obligation bonds include adjustable rate bonds and range bonds with coupons at variable rates. |
For more information on LIBOR-indexed advances, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.” For more information on LIBOR-indexed investments and derivatives, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management.”
Segment Information
The Bank uses an analysis of financial results based on the financial components 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 determine financial management strategies related to the operations of these two business segments. For purposes of segment reporting, adjusted net interest income includes income and expense associated with net settlements from economic hedges that are recorded in “Net gain/(loss) on derivatives and hedging activities” in other income, excludes interest income and expense associated with changes in fair value of the derivative hedging instrument and the hedged item attributable to the hedged risk for designated fair value hedges that are recorded in net interest 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 10 – 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 liquidity provider, and capital. Assets associated with this segment increased $18.2 billion to $103.9 billion (83% of total assets) at March 31, 2020, from $85.7 billion (80% of total assets) at December 31, 2019.
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 net settlements from associated interest rate exchange agreements, and from earnings attributed to the Bank’s capital stock and retained earnings.
Adjusted net interest income for this segment was $63 million in the first quarter of 2020, a decrease of $23 million, or 27%, compared to $86 million in the first quarter of 2019. This decrease was primarily due to a decline in spreads in advances-related assets due to lower rates.
Adjusted net interest income for this segment represented 84% and 56% of total adjusted net interest income for the first quarter of 2020 and 2019, respectively.
Advances – The par value of advances outstanding increased by $11.8 billion, or 18%, to $76.9 billion at March 31, 2020, from $65.1 billion at December 31, 2019. Average advances were $67.0 billion for the first quarter of 2020, an 11% decrease from $75.4 billion for the first quarter of 2019. Outstanding balances of advances may significantly increase and decrease from period to period because of a member’s liquidity and financial strategies.
As of March 31, 2020, advances outstanding to the Bank’s top five borrowers and their affiliates increased by $3.2 billion, and advances outstanding to the Bank’s other borrowers increased by $8.6 billion. Advances to the top five borrowers increased to $47.4 billion at March 31, 2020, from $44.2 billion at December 31, 2019. (See “Item 1. Financial Statements – Note 4 – Advances – Credit and Concentration Risk” for further information.)
The Bank has a significant long-term funding arrangement with one of the top five borrowers that contributes to the level of outstanding advances, and prepayments or repayments of advances or any changes to this arrangement could have a significant adverse impact on the Bank’s level of advances. Any prepayments or termination of this arrangement may result in prepayment fees or a termination fee. It is possible that our advances may increase or decrease to the extent our members elect to use alternative funding resources. The $11.8 billion increase in advances outstanding reflected a $13.4 billion increase in fixed rate advances and a $0.4 billion increase in adjustable rate advances, partially offset by a $2.0 billion decrease in variable rate advances. In 2019, the Bank began to offer SOFR-indexed advances to its members.
The components of the advances portfolio at March 31, 2020, and December 31, 2019, are presented in the following table.
|
| | | | | | | | | | | | | |
Advances Portfolio by Product Type |
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
(Dollar in millions) | Par Value |
| | Percentage of Total Par Value |
| | Par Value |
| | Percentage of Total Par Value |
|
Adjustable – LIBOR | $ | 11,450 |
| | 15 | % | | $ | 8,260 |
| | 13 | % |
Adjustable – LIBOR, callable at borrower’s option | 9,950 |
| | 13 |
| | 13,950 |
| | 21 |
|
Adjustable – SOFR | 5 |
| | — |
| | 5 |
| | — |
|
Adjustable – SOFR, callable at borrower’s option | 1,400 |
| | 2 |
| | — |
| | — |
|
Adjustable – other indices | 500 |
| | 1 |
| | 700 |
| | 1 |
|
Subtotal adjustable rate advances | 23,305 |
| | 31 |
| | 22,915 |
| | 35 |
|
Fixed | 22,806 |
| | 29 |
| | 18,784 |
| | 29 |
|
Fixed – amortizing | 226 |
| | 1 |
| | 234 |
| | 1 |
|
Fixed – with PPS(1) | 3,237 |
| | 4 |
| | 3,283 |
| | 5 |
|
Fixed – with FPS(1) | 23,430 |
| | 30 |
| | 14,059 |
| | 22 |
|
Fixed – with caps and PPS(1) | 110 |
| | — |
| | 210 |
| | — |
|
Fixed – callable at borrower’s option | 74 |
| | — |
| | 74 |
| | — |
|
Fixed – callable at borrower’s option with PPS(1) | 20 |
| | — |
| | — |
| | — |
|
Fixed – putable at Bank’s option | 200 |
| | — |
| | — |
| | — |
|
Fixed – putable at Bank’s option with PPS(1) | 20 |
| | — |
| | 20 |
| | — |
|
Subtotal fixed rate advances | 50,123 |
| | 64 |
| | 36,664 |
| | 57 |
|
Daily variable rate | 3,460 |
| | 5 |
| | 5,509 |
| | 8 |
|
Total par value | $ | 76,888 |
| | 100 | % | | $ | 65,088 |
| | 100 | % |
| |
(1) | Partial prepayment symmetry (PPS) and full prepayment symmetry (FPS) are product features 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. |
The table below presents the par value of LIBOR-indexed advances by redemption term at March 31, 2020. |
| | | |
LIBOR-Indexed Advances by Redemption Term |
| |
(In millions) | |
March 31, 2020 | |
Redemption Term | Par Value |
|
Due in 2020 | $ | 10,500 |
|
Due in 2021 | 10,750 |
|
Due in 2022 and thereafter(1) | 260 |
|
Total LIBOR-Indexed Advances(2) | $ | 21,510 |
|
| |
(1) | For more information on the Bank’s Transition Plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.” |
| |
(2) | Total LIBOR-indexed advances include fixed rate advances with caps and PPS. |
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 $25.3 billion and $19.9 billion as of March 31, 2020, and December 31, 2019, respectively. The increase in the total size of the non-MBS investment
portfolio reflects the increased overnight liquidity investments and additional purchases of U.S. Treasury bonds to increase resiliency to adverse liquidity conditions.
Interest rate payment terms for non-MBS investments classified as trading and AFS at March 31, 2020, and December 31, 2019, are detailed in the following table:
|
| | | | | | | |
Non-MBS Investments: Interest Rate Payment Terms |
| | | |
(In millions) | March 31, 2020 |
| | December 31, 2019 |
|
Fair value of trading securities: | | | |
Fixed rate | $ | 4,315 |
| | $ | 1,762 |
|
Total trading securities | $ | 4,315 |
| | $ | 1,762 |
|
Amortized cost of AFS securities: | | | |
Fixed rate | $ | 5,347 |
| | $ | 5,281 |
|
Total AFS securities | $ | 5,347 |
| | $ | 5,281 |
|
Borrowings – Total liabilities (primarily consolidated obligations) funding the advances-related business increased to $97.5 billion at March 31, 2020, from $79.0 billion at December 31, 2019. 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 13 – 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 exchange agreements with features that offset the complex features of the bonds and, in effect, convert the bonds to adjustable rate instruments. 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.
At March 31, 2020, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $104.1 billion, of which $49.0 billion were hedging advances, $42.9 billion were hedging consolidated obligations, $9.4 billion were economically hedging non-MBS investments, and $2.8 billion were offsetting derivatives. At December 31, 2019, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $84.4 billion, of which $41.2 billion were hedging advances, $36.2 billion were hedging consolidated obligations, $7.0 billion were economically hedging trading securities, and $40 million were offsetting derivatives. The hedges associated with advances and consolidated obligations were primarily used to convert the fixed rate cash flows of the advances and consolidated obligations to adjustable rate 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 costs of debt issued by the FHLBanks and the other GSEs generally rise and fall with increases and decreases in general market interest rates.
In early March 2020, the Federal Open Market Committee (FOMC) stated that the COVID-19 outbreak poses evolving risks to economic activity and decided to lower the target range for the Federal funds rate by 50 basis points, to a target range of 1.00% to 1.25%, noting that it would closely monitor developments and their implications for the economic outlook and would act as appropriate to support the economy. On March 15, 2020, the FOMC again lowered the Federal funds rate, to a target range of 0.00% to 0.25%, noting that the COVID-19 outbreak had harmed communities and disrupted economic activity in many countries, including the United States, and had significantly affected global financial conditions. In the weeks before and after the early March cut by the
FOMC in the Federal funds target rate, interest rates declined significantly. Generally, investor demand for high credit quality, fixed income investments, including the Bank’s consolidated obligations, increased relative to other investments, and the Bank continued to meet its funding needs during this time. However, the spreads on the Bank’s consolidated obligations relative to U.S. Treasury securities widened and fixed income market conditions became more challenging, with market participants favoring shorter-term obligations. During March 2020, the Bank experienced increased demand for advances and maintained its liquidity investments in compliance with Finance Agency guidance. See “Item 1A. Risk Factors” for additional information on potential risks to the Bank, including from pandemics such as COVID-19. The following table presents a comparison of selected market interest rates as of March 31, 2020, and December 31, 2019. |
| | | | | | | | | | | | |
Selected Market Interest Rates | |
| | | | | | | | | | | | |
Market Instrument | March 31, 2020 | | December 31, 2019 | | March 31, 2019 | | December 31, 2018 | |
Federal Reserve target range for overnight Federal funds | 0.00-0.25 | % | | 1.50-1.75 | % | | 2.25-2.50 | % | | 2.25-2.50 | % | |
Secured Overnight Financing Rate | 0.01 | | | 1.55 | | | 2.65 | | | 3.00 | | |
3-month Treasury bill | 0.09 | | | 1.55 | | | 2.39 | | | 2.36 | | |
3-month LIBOR | 1.45 | | | 1.91 | | | 2.60 | | | 2.81 | | |
2-year Treasury note | 0.25 | | | 1.57 | | | 2.26 | | | 2.49 | | |
5-year Treasury note | 0.38 | | | 1.69 | | | 2.23 | | | 2.51 | | |
Mortgage-Related Business. The mortgage-related business consists of MBS investments, mortgage loans acquired through the Mortgage Partnership Finance® (MPF®) Program, and the related financing and hedging instruments. (“Mortgage Partnership Finance,” “MPF,” and “MPF Xtra” 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 investments and mortgage loans and the cost of the consolidated obligations funding those assets, including the net settlements from associated interest rate exchange agreements.
Assets associated with this segment were $21.0 billion (17% of total assets) at March 31, 2020, and $21.1 billion at December 31, 2019 (20% of total assets).
Adjusted net interest income for this segment was $12 million in the first quarter of 2020, a decrease of $56 million, or 82%, from $68 million in the first quarter of 2019. The decrease in adjusted net interest income was due to lower spreads on mortgage-related assets, primarily caused by lower spreads on new MBS investments, higher premium amortization expense, and lower balances of MBS investments, which more than offset the impact of higher accretion-related income. Additionally, the Bank recorded a $39 million provision for credit losses on the Bank’s PLRMBS investments.
Adjusted net interest income for this segment represented 16% and 44% of total adjusted net interest income for the first quarter of 2020 and 2019, respectively.
MBS Investments – The Bank’s MBS portfolio was $17.7 billion at March 31, 2020, compared with $17.8 billion at December 31, 2019. During the first quarter of 2020, the Bank’s MBS portfolio decreased slightly with $0.8 billion in principal repayments and $0.5 billion of fair value losses, offset by a $0.8 billion increase in basis adjustments and $0.4 billion in new agency MBS investment purchases. Average MBS investments were $17.3 billion for the first quarter of 2020, a 1% decrease from $17.5 billion for the first quarter of 2019. For a discussion of the composition of the Bank’s MBS portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Investments.”
Interest rate payment terms for MBS investments classified as trading, AFS, and HTM at March 31, 2020, and December 31, 2019, are shown in the following table:
|
| | | | | | | |
MBS Investments: Interest Rate Payment Terms |
| | | |
(In millions) | March 31, 2020 |
| | December 31, 2019 |
|
Fair value of trading securities: | | | |
Adjustable rate | $ | 4 |
| | $ | 4 |
|
Total trading securities | $ | 4 |
| | $ | 4 |
|
Amortized cost of AFS securities: | | | |
Fixed rate | $ | 9,387 |
| | $ | 8,156 |
|
Adjustable rate | 1,693 |
| | 1,769 |
|
Total AFS securities | $ | 11,080 |
| | $ | 9,925 |
|
Amortized cost of HTM securities: | | | |
Fixed rate | $ | 1,869 |
| | $ | 2,082 |
|
Adjustable rate | 4,996 |
| | 5,464 |
|
Total HTM securities | $ | 6,865 |
| | $ | 7,546 |
|
MPF Program – Under the MPF Program, the Bank may purchase from members, for its own portfolio, conventional conforming fixed rate mortgage loans under the MPF Original product and mortgage loans insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) under the MPF Government product. In addition, the Bank may facilitate the purchase of conforming fixed rate mortgage loans from members for concurrent sale to Fannie Mae under the MPF Xtra product; of jumbo fixed rate mortgage loans for concurrent sale to Redwood Residential Acquisition Corporation, a subsidiary of Redwood Trust, Inc., a real estate investment trust, under the MPF Direct product; and of government-insured or government-guaranteed mortgage loans that will be packaged into securities backed by the mortgage loans and guaranteed by Ginnie Mae under the MPF Government MBS product. When members sell mortgage loans under the MPF Xtra, MPF Direct, and MPF Government MBS products, the loans are sold to a third-party investor and are not recorded on the Bank’s Statements of Condition.
As of March 31, 2020, all mortgage loans purchased by the Bank under the MPF Program were qualifying conventional conforming fixed rate, first lien mortgage loans with fully amortizing loan terms of up to 30 years. A conventional loan is one that is not insured by the federal government or any of its agencies. Conforming loan size, which is established annually as required by Finance Agency regulations, may not exceed the loan limits set by the Finance Agency each year. All MPF loans are secured by owner-occupied, one- to four-unit residential properties or single-unit second homes. The Bank purchased $278 million in eligible loans under the MPF Original product during the first three months of 2020.
Mortgage loan balances decreased to $3.2 billion at March 31, 2020, from $3.3 billion at December 31, 2019, a decrease of $0.1 billion. Average mortgage loans were $3.3 billion in the first quarter of 2020, an increase of $0.2 billion from $3.1 billion in the first quarter of 2019.
At March 31, 2020, and December 31, 2019, the Bank held conventional conforming fixed rate mortgage loans purchased under one of two MPF products, MPF Plus or MPF Original, 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 2019 Form 10-K. Mortgage loan balances at March 31, 2020, and December 31, 2019, were as follows:
|
| | | | | | | |
Mortgage Loan Balances by MPF Product Type |
| | | |
(In millions) | March 31, 2020 |
| | December 31, 2019 |
|
MPF Plus | $ | 168 |
| | $ | 177 |
|
MPF Original | 3,011 |
| | 3,049 |
|
Subtotal | 3,179 |
| | 3,226 |
|
Unamortized premiums | 66 |
| | 91 |
|
Unamortized discounts | (3 | ) | | (3 | ) |
Mortgage loans held for portfolio | 3,242 |
| | 3,314 |
|
Less: Allowance for credit losses | (3 | ) | | — |
|
Mortgage loans held for portfolio, net | $ | 3,239 |
| | $ | 3,314 |
|
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 on 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 2019 Form 10-K.
Borrowings – Total consolidated obligations funding the mortgage-related business decreased $0.1 billion to $21.0 billion at March 31, 2020, from $21.1 billion at December 31, 2019, paralleling the decrease in MBS investments. 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 13 – Commitments and Contingencies.”
The notional amount of derivative instruments associated with the mortgage-related business totaled $14.8 billion at March 31, 2020, of which $8.5 billion were associated with MBS, $5.8 billion were hedging or were associated with consolidated obligations funding the mortgage portfolio, $0.4 billion were offsetting derivatives, and $0.1 billion were associated with mortgage delivery commitments. The notional amount of derivative instruments associated with the mortgage-related business totaled $16.6 billion at December 31, 2019, of which $8.5 billion were hedging or were associated with consolidated obligations funding the mortgage portfolio and $8.1 billion were associated with MBS.
For information on the Bank’s management of interest rate risk and market risk related to the mortgage-related business segment, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations –Risk Management – Market Risk.”
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; interest rate cap and floor agreements; and callable and putable interest rate swaps (collectively, interest rate exchange agreements) to manage its exposure to market risks inherent in its ordinary course of business, including its lending, investment, and funding activities. For more information on 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, and 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 2019 Form 10-K.
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.”
Derivative Counterparties. 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, 2020, and December 31, 2019.
|
| | | | | | | | | | | | | | | | | |
Concentration of Derivative Counterparties |
| | | | | | | | | | | |
(Dollars in millions) | March 31, 2020 | | December 31, 2019 |
Derivative Counterparty | Credit Rating(1) | | Notional Amount |
| | Percentage of Total Notional Amount |
| | Credit Rating(1) | | Notional Amount |
| | Percentage of Total Notional Amount |
|
Uncleared | | | | | | | | | | | |
Others | At least BBB | | $ | 9,049 |
| | 8 | % | | At least BBB | | $ | 11,476 |
| | 11 | % |
Subtotal uncleared | | | 9,049 |
| | 8 |
| | | | 11,476 |
| | 11 |
|
Cleared | | | | | | | | | | | |
LCH Ltd(2) | | | | | | | | | | | |
Credit Suisse Securities (USA) LLC | A | | 50,370 |
| | 42 |
| | A | | 61,067 |
| | 61 |
|
Morgan Stanley & Co. LLC | A | | 59,361 |
| | 50 |
| | A | | 28,483 |
| | 28 |
|
Subtotal cleared | | | 109,731 |
| | 92 |
| | | | 89,550 |
| | 89 |
|
Total(3) | | | $ | 118,780 |
| | 100 | % | | | | $ | 101,026 |
| | 100 | % |
| |
(1) | The credit ratings used by the Bank are based on the lower of Moody’s Investors Service (Moody’s) or S&P Global Ratings (S&P) ratings. |
| |
(2) | London Clearing House (LCH) Ltd is the Bank’s counterparty for all of its cleared swaps and was rated AA- with a Negative CreditWatch by S&P at March 31, 2020, and December 31, 2019. For purposes of clearing swaps with LCH Ltd, Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. LLC are the Bank’s clearing agents. |
| |
(3) | Total notional amount at March 31, 2020, and December 31, 2019, does not include $87 million and $46 million of mortgage delivery commitments with members, respectively. |
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 is governed by its capital plan.
Liquidity
The Bank strives to maintain the liquidity necessary to repay maturing consolidated obligations for which it is the primary obligor, meet other obligations and commitments, and meet expected and unexpected member credit demands. The Bank monitors its financial position to maintain ready access to available funds to meet normal transaction requirements, take advantage of appropriate investment opportunities, and manage unforeseen liquidity demands.
The Bank generally manages operational, contingent, and refinancing risks using a portfolio of cash and short-term investments 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, such as 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 base case liquidity guidelines that each FHLBank maintain sufficient liquidity at least equal to its anticipated cash outflows, assuming no new consolidated obligation issuance, renewal of all maturing advances, a specified percentage drawdown on letters of credit balances, and certain Treasury investments as a source of funds. The Finance Agency’s guidance provides that base case liquidity should generally be maintained for 10 to 30 days. The Bank actively monitors and manages refinancing risk. Finance Agency guidance
specifies tolerance levels related to the size of each FHLBank’s funding gaps to measure refinancing risk as the difference between assets and liabilities that are scheduled to mature during a specified period, expressed as a percentage of total assets. The guidance limits three-month and one-year funding gaps generally between the range of –10% to –20% and –25% to –35%, respectively. Funding gaps are measured at monthend, using the average ratio for the three most recent monthends.
In addition to the Finance Agency’s guidelines on contingent liquidity, the Bank models its cash commitments and expected cash flows on a daily basis to determine its projected liquidity position. If a market or operational disruption occurred that prevented the issuance of new consolidated obligations, 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 other financial institutions (Federal funds purchased) or other FHLBanks (inter-FHLBank borrowings).
As of March 31, 2020, and December 31, 2019, the Bank held total sources of funds in an amount that would have allowed the Bank to meet its liquidity needs without issuing new consolidated obligations for over ten days, in accordance with the Finance Agency guidance. In addition, the Bank’s funding gap positions as of March 31, 2020, and December 31, 2019, were within the tolerance levels provided by the Finance Agency guidance.
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 2019 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.
The following table shows the Bank’s compliance with the Finance Agency’s capital requirements at March 31, 2020, and December 31, 2019. The Bank’s risk-based capital requirement decreased to $1.4 billion at March 31, 2020, from $1.5 billion at December 31, 2019.
|
| | | | | | | | | | | | | | | |
Regulatory Capital Requirements |
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
(Dollars in millions) | Required |
| | Actual |
| | Required |
| | Actual |
|
Risk-based capital | $ | 1,411 |
| | $ | 6,718 |
| | $ | 1,519 |
| | $ | 6,605 |
|
Total regulatory capital | $ | 4,995 |
| | $ | 6,718 |
| | $ | 4,274 |
| | $ | 6,605 |
|
Total regulatory capital ratio | 4.00 | % | | 5.38 | % | | 4.00 | % | | 6.18 | % |
Leverage capital | $ | 6,244 |
| | $ | 10,078 |
| | $ | 5,342 |
| | $ | 9,908 |
|
Leverage ratio | 5.00 | % | | 8.07 | % | | 5.00 | % | | 9.27 | % |
The Bank’s capital requirements are more fully discussed in “Item 8. Financial Statements and Supplementary Data – Note 15 – Capital” in the Bank’s 2019 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 Governance Policy that outlines the key roles and responsibilities of the Board of Directors and management and sets forth how the Bank is organized to achieve its risk management objectives, including the implementation of the Bank’s strategic objectives, risk management strategies, corporate governance, and standards of conduct. The policy also establishes the Bank’s risk governance organizational structure and identifies the general roles and responsibilities of the Board of Directors and management in establishing risk management policies, procedures, and guidelines; in overseeing the enterprise risk profile; and in implementing enterprise risk management processes and business strategies. The policy establishes an independent risk oversight function to identify, assess, measure, monitor, and report on the enterprise risk profile and risk management capabilities of the Bank. For more information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management” in the Bank’s 2019 Form 10-K.
Advances. The Bank manages the credit risk of advances and other credit products by setting the credit and collateral terms available to individual members and housing associates 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 institutions that pledge mortgage loan collateral. In addition, the Bank has collateral policies and restricted lending procedures in place to help manage its exposure to institutions 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 the needs of members and housing associates 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.
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, which the Bank can change from time to time. The borrowing capacity percentage varies according to several factors, including the charter type of the institution, 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 institution-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.
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, which the Bank can change from time to time. 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.
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, 2020, and December 31, 2019. During the three months ended March 31, 2020, 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, 2020 | | | | | | | | | |
| 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 | 268 |
| | 159 |
| | $ | 76,482 |
| | $ | 203,853 |
| | 38 | % |
4-6 | 58 |
| | 36 |
| | 20,549 |
| | 57,356 |
| | 36 |
|
7-10 | 5 |
| | 4 |
| | 53 |
| | 62 |
| | 85 |
|
Subtotal | 331 |
| | 199 |
| | 97,084 |
| | 261,271 |
| | 37 |
|
Community development financial institutions (CDFIs) | 7 |
| | 6 |
| | 104 |
| | 111 |
| | 94 |
|
Housing associates | 2 |
| | — |
| | — |
| | — |
| | — |
|
Total | 340 |
| | 205 |
| | $ | 97,188 |
| | $ | 261,382 |
| | 37 | % |
|
| | | | | | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | |
| 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 | 271 |
| | 151 |
| | $ | 67,982 |
| | $ | 204,970 |
| | 33 | % |
4-6 | 54 |
| | 33 |
| | 18,654 |
| | 50,732 |
| | 37 |
|
7-10 | 5 |
| | 4 |
| | 41 |
| | 65 |
| | 63 |
|
Subtotal | 330 |
| | 188 |
| | 86,677 |
| | 255,767 |
| | 34 |
|
CDFIs | 7 |
| | 5 |
| | 102 |
| | 112 |
| | 91 |
|
Housing associates | 2 |
| | — |
| | — |
| | — |
| | — |
|
Total | 339 |
| | 193 |
| | $ | 86,779 |
| | $ | 255,879 |
| | 34 | % |
| |
(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. |
|
| | | | | | | | | | |
Member and Nonmember Credit Outstanding and Collateral Borrowing Capacity by Unused Borrowing Capacity |
| | | | | |
(Dollars in millions) | | | | | |
March 31, 2020 | | | | | |
Unused Borrowing Capacity | Number of Members and Nonmembers with Credit Outstanding |
| | Credit Outstanding(1) |
| | Collateral Borrowing Capacity(2) |
|
0% – 10% | 11 |
| | $ | 1,436 |
| | $ | 1,503 |
|
11% – 25% | 12 |
| | 13,262 |
| | 16,502 |
|
26% – 50% | 31 |
| | 18,771 |
| | 28,002 |
|
More than 50% | 151 |
| | 63,719 |
| | 215,375 |
|
Total | 205 |
| | $ | 97,188 |
| | $ | 261,382 |
|
|
| | | | | | | | | | |
December 31, 2019 | | | | | |
Unused Borrowing Capacity | Number of Members and Nonmembers with Credit Outstanding |
| | Credit Outstanding(1) |
| | Collateral Borrowing Capacity(2) |
|
0% – 10% | 7 |
| | $ | 1,352 |
| | $ | 1,419 |
|
11% – 25% | 9 |
| | 754 |
| | 903 |
|
26% – 50% | 24 |
| | 21,955 |
| | 34,221 |
|
More than 50% | 153 |
| | 62,718 |
| | 219,336 |
|
Total | 193 |
| | $ | 86,779 |
| | $ | 255,879 |
|
| |
(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. |
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’ market valuations and market liquidation risks. The following table presents the securities collateral pledged by all members and by nonmembers with credit outstanding at March 31, 2020, and December 31, 2019.
|
| | | | | | | | | | | | | | | |
Composition of Securities Collateral Pledged by Members and by Nonmembers with Credit Outstanding |
| | | | | | | |
(In millions) | March 31, 2020 | | December 31, 2019 |
Securities Type with Current Credit Ratings | Current Par |
| | Borrowing Capacity |
| | Current Par |
| | Borrowing Capacity |
|
U.S. Treasury (bills, notes, bonds) | $ | 857 |
| | $ | 909 |
| | $ | 183 |
| | $ | 176 |
|
Agency (notes, subordinated debt, structured notes, indexed amortization notes, and Small Business Administration pools) | 3,111 |
| | 3,092 |
| | 2,897 |
| | 2,846 |
|
Agency pools and collateralized mortgage obligations | 17,410 |
| | 17,119 |
| | 8,576 |
| | 8,287 |
|
Private-label commercial MBS – publicly registered investment-grade-rated senior tranches | 6 |
| | 6 |
| | 5 |
| | 5 |
|
PLRMBS – private label investment-grade-rated senior tranches | 40 |
| | 29 |
| | 45 |
| | 34 |
|
Term deposits with the Bank | 2 |
| | 2 |
| | — |
| | — |
|
Total | $ | 21,426 |
| | $ | 21,157 |
| | $ | 11,706 |
| | $ | 11,348 |
|
With respect to loan collateral, most borrowers may choose to pledge loan collateral by specific identification or under a blanket lien. Insurance companies, CDFIs, and housing associates 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 basis.
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, a CDFI, or a housing associate; 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.
As of March 31, 2020, of the loan collateral pledged to the Bank, 23% was pledged by 27 institutions by specific identification, 50% was pledged by 115 institutions under a blanket lien with detailed reporting, and 27% was pledged by 130 institutions under a blanket lien with summary reporting. For each borrower that pledges loan collateral, the Bank conducts loan collateral field reviews once every six months or every one, two, or three years, depending on the risk profile of the borrower and the types of collateral pledged by the borrower.
As of March 31, 2020, 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: 85% for first lien residential mortgage loans, 83% for multifamily mortgage loans, 83% for commercial mortgage loans, and 67% for second lien residential mortgage loans. The maximum borrowing capacity for small business, small agribusiness, and small farm loans was 25% 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, 2020, and December 31, 2019.
|
| | | | | | | | | | | | | | | |
Composition of Loan Collateral Pledged by Members and by Nonmembers with Credit Outstanding |
| | | | | | | |
(In millions) | March 31, 2020 | | December 31, 2019 |
Loan Type | Unpaid Principal Balance |
| | Borrowing Capacity |
| | Unpaid Principal Balance |
| | Borrowing Capacity |
|
First lien residential mortgage loans | $ | 188,087 |
| | $ | 150,952 |
| | $ | 174,580 |
| | $ | 152,960 |
|
Second lien residential mortgage loans and home equity lines of credit | 17,452 |
| | 7,779 |
| | 17,469 |
| | 9,437 |
|
Multifamily mortgage loans | 35,502 |
| | 24,823 |
| | 32,652 |
| | 25,321 |
|
Commercial mortgage loans | 77,346 |
| | 52,262 |
| | 72,118 |
| | 52,329 |
|
Loan participations(1) | 4,778 |
| | 3,316 |
| | 4,610 |
| | 3,496 |
|
Small business, small farm, and small agribusiness loans | 4,391 |
| | 1,093 |
| | 4,010 |
| | 988 |
|
Other | 4 |
| | — |
| | 2 |
| | — |
|
Total | $ | 327,560 |
| | $ | 240,225 |
| | $ | 305,441 |
| | $ | 244,531 |
|
| |
(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, 2020, and December 31, 2019, the unpaid principal balance of these loans totaled $6 billion and $6 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 expectations of the present value of the cash flows to be collected from the security with the amortized cost basis of the security. If the Bank’s expectations of the present value of the cash flows 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 an allowance for credit losses is necessary on the security. The Bank recognizes an allowance for credit losses 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, S&P, or Fitch Ratings (Fitch) ratings.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Investment Credit Exposure |
| | | | | | | | | | | |
(In millions) | | | | | | | | | | | |
March 31, 2020 | | | | | | | | | | | |
| Carrying Value |
| Credit Rating(1) | | | | |
Investment Type | AA |
| | A |
| | BBB |
| | Below Investment Grade |
| | Unrated |
| | Total |
|
Non-MBS | | | | | | | | | | | |
U.S. obligations – Treasury securities | $ | 9,668 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 9,668 |
|
Total non-MBS | 9,668 |
| | — |
| | — |
| | — |
| | — |
| | 9,668 |
|
MBS: | | | | | | | | | | | |
Other U.S. obligations – single-family: | | | | | | | | | | | |
Ginnie Mae | 445 |
| | — |
| | — |
| | — |
| | — |
| | 445 |
|
GSEs – single-family: | | | | | | | | | | | |
Freddie Mac | 952 |
| | — |
| | — |
| | — |
| | — |
| | 952 |
|
Fannie Mae(2) | 1,678 |
| | 5 |
| | — |
| | 3 |
| | — |
| | 1,686 |
|
Subtotal | 2,630 |
| | 5 |
| | — |
| | 3 |
| | — |
| | 2,638 |
|
GSEs – multifamily: | | | | | | | | | | | |
Freddie Mac | 3,221 |
| | — |
| | — |
| | — |
| | — |
| | 3,221 |
|
Fannie Mae | 8,802 |
| | — |
| | — |
| | — |
| | — |
| | 8,802 |
|
Subtotal | 12,023 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 12,023 |
|
Total GSEs | 14,653 |
| | 5 |
| | — |
| | 3 |
| | — |
| | 14,661 |
|
PLRMBS: | | | | | | | | | | | |
Prime | 34 |
| | 32 |
| | 71 |
| | 179 |
| | 111 |
| | 427 |
|
Alt-A | 53 |
| | 55 |
| | 42 |
| | 1,438 |
| | 569 |
| | 2,157 |
|
Total PLRMBS | 87 |
| | 87 |
| | 113 |
| | 1,617 |
| | 680 |
| | 2,584 |
|
Total MBS | 15,185 |
| | 92 |
| | 113 |
| | 1,620 |
| | 680 |
| | 17,690 |
|
Total securities | 24,853 |
| | 92 |
| | 113 |
| | 1,620 |
| | 680 |
| | 27,358 |
|
Interest-bearing deposits | 832 |
| | 2,745 |
| | — |
| | — |
| | — |
| | 3,577 |
|
Securities purchased under agreements to resell | 2,000 |
| | — |
| | — |
| | — |
| | — |
| | 2,000 |
|
Federal funds sold(3) | 2,041 |
| | 8,040 |
| | — |
| | — |
| | — |
| | 10,081 |
|
Total investments | $ | 29,726 |
| | $ | 10,877 |
| | $ | 113 |
| | $ | 1,620 |
| | $ | 680 |
| | $ | 43,016 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | |
| Carrying Value |
| Credit Rating(1) | | | |
Investment Type | AA |
| | A |
| | BBB |
| | Below Investment Grade |
| | Unrated |
| | Total |
|
Non-MBS | | | | | | | | | | | |
U.S. obligations – Treasury securities | $ | 7,050 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 7,050 |
|
Total non-MBS | 7,050 |
| | — |
| | — |
| | — |
| | — |
| | 7,050 |
|
MBS: | | | | | | | | | | | |
Other U.S. obligations – single-family: | | | | | | | | | | |
|
Ginnie Mae | 474 |
| | — |
| | — |
| | — |
| | — |
| | 474 |
|
GSEs – single-family: | | | | | | | | | | |
|
Freddie Mac | 1,063 |
| | — |
| | — |
| | — |
| | — |
| | 1,063 |
|
Fannie Mae(2) | 1,836 |
| | 5 |
| | — |
| | 3 |
| | — |
| | 1,844 |
|
Subtotal | 2,899 |
| | 5 |
| | — |
| | 3 |
| | — |
| | 2,907 |
|
GSEs – multifamily: | | | | | | | | | | |
|
|
Freddie Mac | 3,402 |
| | — |
| | — |
| | — |
| | — |
| | 3,402 |
|
Fannie Mae | 7,992 |
| | — |
| | — |
| | — |
| | — |
| | 7,992 |
|
Subtotal | 11,394 |
| | — |
| | — |
| | — |
| | — |
| | 11,394 |
|
Total GSEs | 14,293 |
| | 5 |
| | — |
| | 3 |
| | — |
| | 14,301 |
|
PLRMBS: | | | | | | | | | | |
|
Prime | 35 |
| | 39 |
| | 71 |
| | 201 |
| | 127 |
| | 473 |
|
Alt-A | 58 |
| | 53 |
| | 60 |
| | 1,667 |
| | 670 |
| | 2,508 |
|
Total PLRMBS | 93 |
| | 92 |
| | 131 |
| | 1,868 |
| | 797 |
| | 2,981 |
|
Total MBS | 14,860 |
| | 97 |
| | 131 |
| | 1,871 |
| | 797 |
| | 17,756 |
|
Total securities | 21,910 |
| | 97 |
| | 131 |
| | 1,871 |
| | 797 |
| | 24,806 |
|
Interest-bearing deposits | — |
| | 2,269 |
| | — |
| | — |
| | — |
| | 2,269 |
|
Securities purchased under agreements to resell | 7,000 |
| | — |
| | — |
| | — |
| | — |
| | 7,000 |
|
Federal funds sold(3) | 441 |
| | 3,121 |
| | — |
| | — |
| | — |
| | 3,562 |
|
Total investments | $ | 29,351 |
| | $ | 5,487 |
| | $ | 131 |
| | $ | 1,871 |
| | $ | 797 |
| | $ | 37,637 |
|
| |
(1) | Credit ratings of BB and lower are below investment grade. |
| |
(2) | The Bank has one security guaranteed by Fannie Mae but rated BB at March 31, 2020, and December 31, 2019, by S&P because of extraordinary expenses incurred during bankruptcy of the security's sponsor. |
| |
(3) | Includes $141 million at March 31, 2020, and December 31, 2019, in Federal funds sold to a member counterparty determined by the Bank to have an internal credit rating equivalent to an AA rating. |
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 interest-bearing deposits, 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. 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.
The following table presents the unsecured credit exposure with counterparties by investment type at March 31, 2020, and December 31, 2019.
|
| | | | | | | |
Unsecured Investment Credit Exposure by Investment Type |
| | | |
| Carrying Value(1)
|
(In millions) | March 31, 2020 |
| | December 31, 2019 |
|
Interest-bearing deposits | $ | 3,575 |
| | $ | 2,269 |
|
Federal funds sold | 10,081 |
| | 3,562 |
|
Total | $ | 13,656 |
| | $ | 5,831 |
|
| |
(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, 2020, and December 31, 2019. |
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, S&P, or Fitch ratings. This table does not reflect the foreign sovereign government’s credit rating. At March 31, 2020, 21% of the carrying value of unsecured investments held by the Bank were rated AA, and 54% of the Bank’s total unsecured investments were to U.S. branches and agency offices of foreign commercial banks. At March 31, 2020, all of the unsecured investments held by the Bank had overnight maturities.
|
| | | | | | | | | | | |
Ratings of Unsecured Investment Credit Exposure by Domicile of Counterparty |
| | | | | |
(In millions) | | | | | |
March 31, 2020 | | | | | |
| Carrying Value(1) |
| Credit Rating(2) | |
Domicile of Counterparty | AA |
| | A |
| | Total |
|
Domestic(3) | $ | 971 |
| | $ | 3,555 |
| | $ | 4,526 |
|
U.S. subsidiaries of foreign commercial banks | — |
| | 1,790 |
| | 1,790 |
|
Total domestic and U.S. subsidiaries of foreign commercial banks | 971 |
| | 5,345 |
| | 6,316 |
|
U.S. branches and agency offices of foreign commercial banks: | | | | | |
Australia | 1,400 |
| | — |
| | 1,400 |
|
Austria | — |
| | 300 |
| | 300 |
|
Canada | 500 |
| | 1,400 |
| | 1,900 |
|
Japan | — |
| | 500 |
| | 500 |
|
Netherlands | — |
| | 1,400 |
| | 1,400 |
|
Switzerland | — |
| | 920 |
| | 920 |
|
United Kingdom | — |
| | 920 |
| | 920 |
|
Total U.S. branches and agency offices of foreign commercial banks | 1,900 |
| | 5,440 |
| | 7,340 |
|
Total unsecured credit exposure | $ | 2,871 |
| | $ | 10,785 |
| | $ | 13,656 |
|
| |
(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, 2020. |
| |
(2) | Does not reflect changes in ratings, outlook, or watch status occurring after March 31, 2020. These ratings represent the lowest rating available for each unsecured investment owned by the Bank, based on the ratings provided by Fitch, Moody’s, or S&P. The Bank’s internal rating may differ from this rating. |
| |
(3) | Includes $141 million at March 31, 2020, in Federal funds sold to a member counterparty determined by the Bank to have an internal credit rating equivalent to an AA rating. |
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 has investment credit limits and terms for these investments that do not differ for members and nonmembers. Regulatory policy limits total MBS investments to three times the Bank’s regulatory capital at the time of purchase. At March 31, 2020, the Bank’s MBS portfolio was 267% of Bank regulatory capital (as determined in accordance with regulations governing the operations of the FHLBanks). The Bank has not purchased any PLRMBS since the first quarter of 2008.
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.
At March 31, 2020, PLRMBS representing 12% 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 with credit scores that are high enough 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, 2020, the Bank’s investment in MBS had gross unrealized losses totaling $380 million, $98 million of which were related to PLRMBS. These gross unrealized losses were primarily due to illiquidity in the MBS market and market expectations of the credit performance of loan collateral underlying these securities, which caused these assets to be valued at discounts to their amortized 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, 2020, all of the gross unrealized losses on its agency MBS are temporary.
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 credit losses on additional PLRMBS in future periods, as well as further impairment of PLRMBS that were identified as other-than-temporarily impaired prior to January 1, 2020. Additional credit 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 an allowance for credit losses on its PLRMBS in the future.
The Bank has exposure to investment securities with interest rates indexed to LIBOR. The table below presents the unpaid principal balance of adjustable rate investment securities by interest rate index at March 31, 2020. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” for more information on the LIBOR transition and on SOFR as an alternative market benchmark.
|
| | | |
Adjustable Rate Investment Securities by Interest Rate Index |
| |
(In millions) | |
March 31, 2020 | |
Interest Rate Index | MBS |
|
LIBOR(1) | $ | 6,970 |
|
Other | 125 |
|
Total adjustable rate investment securities(2) | $ | 7,095 |
|
| |
(1) | Certain MBS with multiple indices where LIBOR is the majority index are included in this amount. A de minimis amount of LIBOR-indexed MBS are due in 2020 and 2021. LIBOR-indexed MBS of $7.0 billion are due in 2022 and thereafter. |
| |
(2) | For more information on the Bank’s Transition Plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.” |
Derivative Counterparties. The Bank has adopted credit policies and exposure limits for uncleared derivatives credit exposure. Over-the-counter derivatives may be either entered into directly with a counterparty (uncleared derivatives) or executed either with an executing dealer or on a swap execution facility and then cleared through a futures commission merchant (clearing agent) with a derivatives clearing organization (cleared derivatives).
Uncleared 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 uncleared derivative activities. In addition, for all uncleared derivative transactions, the Bank has entered into master netting agreements and bilateral credit support 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 set at zero (subject to a minimum transfer amount).
The Bank is subject to the risk of potential nonperformance by the counterparties to derivative agreements. 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. Currently, all of the Bank’s active uncleared derivative counterparties have a zero threshold. As a result of these risk mitigation initiatives, the Bank does not anticipate any credit losses on its uncleared derivative transactions with counterparties as of March 31, 2020.
Cleared Derivatives. The Bank is subject to nonperformance by the derivatives clearing organizations (clearinghouses) and clearing agents. The requirement that the Bank post initial and variation margin through a 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. Variation
margin and initial margin are posted for changes in the value and risk profile of cleared derivatives. The Bank does not anticipate any credit losses on its cleared derivatives as of March 31, 2020.
The following table presents the Bank’s credit exposure to its derivative dealer counterparties at the dates indicated.
|
| | | | | | | | | | | | | | | | | | | |
Credit Exposure to Derivative Dealer Counterparties |
| | | | | | | | | |
(In millions) | | | | | | | | | |
March 31, 2020 | | | | | | | | | |
Counterparty Credit Rating(1) | Notional Amount |
| | Net Fair Value of Derivatives Before Collateral |
| | Cash Collateral Pledged to/ (from) Counterparty |
| | Noncash Collateral Pledged to/ (from) Counterparty |
| | Net Credit Exposure to Counterparties |
|
Asset positions with credit exposure: | | | | | | | | | |
Cleared derivatives(2) | $ | 109,731 |
| | $ | 14 |
| | $ | 11 |
| | $ | 643 |
| | $ | 668 |
|
Liability positions with credit exposure: | | | | | | | | | |
Uncleared derivatives | | | | | | | | | |
AA | 121 |
| | (13 | ) | | 13 |
| | — |
| | — |
|
A | 7,201 |
| | (899 | ) | | 929 |
| | — |
| | 30 |
|
BBB | 678 |
| | (119 | ) | | 123 |
| | — |
| | 4 |
|
Total derivative positions with credit exposure to nonmember counterparties | 117,731 |
| | (1,017 | ) | | 1,076 |
| | 643 |
| | 702 |
|
Member institutions(3) | 87 |
| | 3 |
| | — |
| | — |
| | 3 |
|
Total | 117,818 |
| | $ | (1,014 | ) | | $ | 1,076 |
| | $ | 643 |
| | $ | 705 |
|
Derivative positions without credit exposure | 1,049 |
| | | | | | | | |
Total notional | $ | 118,867 |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | |
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: | | | | | | | | | |
Uncleared derivatives | | | | | | | | | |
A | $ | 488 |
| | $ | 2 |
| | $ | (2 | ) | | $ | — |
| | $ | — |
|
BBB | 493 |
| | 1 |
| | (1 | ) | | — |
| | — |
|
Cleared derivatives(2) | 89,550 |
| | 8 |
| | 7 |
| | 381 |
| | 396 |
|
Liability positions with credit exposure: | | | | | | | | | |
Uncleared derivatives | | | | | | | | | |
AA | 1,263 |
| | (46 | ) | | 49 |
| | — |
| | 3 |
|
A | 8,296 |
| | (266 | ) | | 279 |
| | — |
| | 13 |
|
BBB | 713 |
| | (41 | ) | | 43 |
| | — |
| | 2 |
|
Total derivative positions with credit exposure to nonmember counterparties | 100,803 |
| | (342 | ) | | 375 |
| | 381 |
| | 414 |
|
Member institutions(3) | 46 |
| | — |
| | — |
| | — |
| | — |
|
Total | 100,849 |
| | $ | (342 | ) | | $ | 375 |
| | $ | 381 |
| | $ | 414 |
|
Derivative positions without credit exposure | 223 |
| | | | | | | | |
Total notional | $ | 101,072 |
| | | | | | | | |
| |
(1) | The credit ratings used by the Bank are based on the lower of Moody's or S&P ratings. |
| |
(2) | Represents derivative transactions cleared with LCH Ltd, the Bank’s clearinghouse, which was rated AA- by S&P with a Negative CreditWatch at March 31, 2020, and December 31, 2019. |
| |
(3) | Member institutions include mortgage delivery commitments with members. |
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.
The Bank primarily executes derivatives indexed to the Overnight Index Swap (OIS) rate and SOFR to manage interest rate risk and monitors marketwide efforts to address fallback language related to LIBOR-indexed derivative transactions.
The table below presents the notional amount of interest rate swaps by interest rate index broken out by the pay or receive leg at March 31, 2020.
|
| | | | | | | |
LIBOR-Indexed Interest Rate Swaps by Termination Date by Interest Rate Index |
| | | |
(In millions) | | | |
March 31, 2020 | | | |
Interest Rate Index | Pay Leg | | Receive Leg |
Fixed | $ | 57,946 |
| | $ | 27,682 |
|
LIBOR | 24,163 |
| | 22,441 |
|
SOFR | 14,881 |
| | 50,351 |
|
OIS | 20,810 |
| | 17,326 |
|
Total notional amount | $ | 117,800 |
| | $ | 117,800 |
|
The table below presents the notional amount of interest rate swaps with LIBOR exposure by termination date broken out by the pay or receive leg and further bifurcated by cleared and uncleared derivative transactions at March 31, 2020. Interest rate caps and floors indexed to LIBOR totaling $430 million terminate in 2021 and totaling $550 million terminate in 2022 and thereafter. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” for more information on the LIBOR transition and on SOFR as an alternative market benchmark.
|
| | | | | | | | | | | | | | | |
LIBOR-Indexed Interest Rate Swaps by Termination Date |
| | | | | | | |
(In millions) | | | | | | | |
March 31, 2020 | | | | | | | |
| Pay Leg | | Receive Leg |
Termination Date | Cleared | | Uncleared | | Cleared | | Uncleared |
Terminates in 2020 | $ | 17,438 |
| | $ | 420 |
| | $ | 12,163 |
| | $ | 224 |
|
Terminates in 2021 | 5,330 |
| | 352 |
| | 6,023 |
| | 317 |
|
Terminates in 2022 and thereafter(1) | 423 |
| | 200 |
| | 2,776 |
| | 938 |
|
Total Notional Amount | $ | 23,191 |
| | $ | 972 |
| | $ | 20,962 |
| | $ | 1,479 |
|
| |
(1) | For more information on the Bank’s Transition Plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.” |
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 2019 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: 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 estimating the prepayment speeds on MBS and mortgage loans for the accounting of amortization of premiums and accretion of discounts and credit losses previously recorded prior to the adoption of new accounting guidance related to the measurement of credit losses on MBS and mortgage loans.
There have been no significant changes in the judgments and assumptions made during the first three months of 2020 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 2019 Form 10-K and in “Item 1. Financial Statements – Note 12 – 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
Advisory Bulletin (AB) 2019-03 Capital Stock Management. On August 14, 2019, the Finance Agency issued a final AB providing guidance that augments existing statutory and regulatory capital requirements to require each FHLBank to maintain a ratio of at least two percent of capital stock to total assets in order to help preserve the cooperative structure incentives that encourage members to remain fully engaged in the oversight of their investment in the FHLBank. Beginning in February 2020, the Finance Agency will consider the proportion of capital stock to assets, measured on a daily average basis at monthend, when assessing each FHLBank’s capital management practices.
The Bank does not expect the AB to have a material impact on the Bank’s capital management practices, financial condition, or results of operations.
Finance Agency Supervisory Letter. On September 27, 2019, the Finance Agency issued a Supervisory Letter to the FHLBanks that the Finance Agency stated is designed to ensure the FHLBanks will be able to identify and prudently manage the risks associated with the termination of LIBOR in a safe and sound manner. The Supervisory Letter provides among other things that, by March 31, 2020, the FHLBanks should limit and cease entering into new LIBOR-indexed financial assets, liabilities, and derivatives with maturities beyond December 31, 2021, for all product types except investments. With respect to investments, the FHLBanks must, by December 31, 2019, stop purchasing investments that reference LIBOR and mature after December 31, 2021. The Supervisory Letter also directs the FHLBanks to update their pledged collateral certification reporting requirements by March 31, 2020, in an effort to encourage members to distinguish LIBOR-indexed collateral maturing after December 31, 2021. The FHLBanks are expected to cease entering into LIBOR-indexed financial instruments maturing after December 31, 2021, by the deadlines specified in the Supervisory Letter, subject to limited exceptions granted by the Finance
Agency under the Supervisor Letter for LIBOR-indexed products serving compelling mission, risk mitigating, and/or hedging purposes that do not currently have readily available alternatives.
As a result of the Supervisory Letter, the Bank’s Transition Plan was revised to limit new LIBOR transactions with maturities beyond the end of 2021 consistent with the limits set by the Supervisory Letter. On March 16, 2020, in light of market volatility, the Finance Agency extended the Bank’s ability to enter into LIBOR-indexed instruments that mature after December 31, 2021, from March 31, 2020, to June 30, 2020.
AB 2020-01 FHLBank Risk Management of AMA. On January 31, 2020, the Finance Agency released guidance on risk management of AMA. The guidance communicates the Finance Agency’s expectations with respect to an FHLBank’s funding of its members through the purchase of eligible mortgage loans and includes expectations that an FHLBank will have Board-established limits on AMA portfolios and management-established thresholds to serve as monitoring tools to manage AMA-related risk exposure. The guidance provides that the board of an FHLBank should ensure that the bank serves as a liquidity source for members, and an FHLBank should ensure that its portfolio limits do not result in the FHLBank’s acquisition of mortgages from smaller members being “crowded out” by the acquisition of mortgages from larger members. The AB contains the expectation that the board of an FHLBank should set limits on the size and growth of portfolios and on acquisitions from a single participating financial institution. In addition, the guidance sets forth that the board of an FHLBank should consider concentration risk of geographic area, high-balance loans, and third-party loan originations.
The Bank continues to evaluate the potential impact of this AB but currently do not expect it to materially affect our financial condition or results of operations.
Finance Agency Final Rule on Stress Testing. On March 24, 2020, the Finance Agency issued a final rule, effective upon issuance, to amend its stress testing rule, consistent with section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (EGRRCPA). The final rule (i) raises the minimum threshold for entities regulated by the Finance Agency to conduct periodic stress tests from $10 billion to $250 billion or more in total consolidated assets, (ii) removes the requirements for FHLBanks to conduct stress testing, and (iii) removes the adverse scenario from the list of required scenarios. FHLBanks are currently excluded from this regulation because no FHLBank has total consolidated assets over $250 billion, but the Finance Agency reserved its discretion to require an FHLBank with total consolidated assets below the $250 billion threshold to conduct stress testing. These amendments align the Finance Agency’s stress testing rule with rules adopted by other financial institution regulators that implement the Dodd-Frank Act stress testing requirements, as amended by EGRRCPA.
Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act was passed by the Senate on March 25, 2020, and by the House on March 27, 2020, and the President signed it into law the same day. The $2.2 trillion package is the largest stimulus bill in U.S. history. The CARES Act is in addition to previous relief legislation passed by Congress in March 2020. The legislation provides the following:
| |
• | Assistance to businesses, states, and municipalities. |
| |
• | Creates a loan program for small businesses, non-profits, and physician practices that can be forgiven through employee retention incentives. |
| |
• | Provides the Treasury Secretary authority to make loans or loan guarantees to states, municipalities, and eligible businesses and loosens some regulations imposed through the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). |
| |
• | Direct payments to some individual taxpayers and their children. |
| |
• | Expands eligibility for unemployment insurance and payment amounts. |
| |
• | Includes mortgage forbearance provisions and a foreclosure moratorium. |
Additional phases of the CARES Act or other COVID-19 relief legislation may be enacted by Congress. The Bank is evaluating the potential impact of the CARES Act on its business, including its impact to the U.S. economy (which is unknown), the possible acceptance of Small Business Administration (SBA) loans as a new collateral source for the Bank’s advances, and impacts to mortgages held or serviced by the Bank’s members and that the Bank accepts as collateral.
Additional COVID-19 Legislative and Regulatory Developments. In light of the COVID-19 pandemic, governmental agencies, including the Securities and Exchange Commission, Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation, National Credit Union Association, Commodity Futures Trading Commission, the Finance Agency, and state governments and agencies, have taken actions to provide various forms of relief from and guidance regarding the financial, operational, credit, market, and other effects of the pandemic, some of which may have a direct or indirect impact on the Bank and its members. Many of these actions are temporary in nature. The Bank is monitoring these actions and guidance and evaluating their potential impact on the Bank.
Finance Agency Supervisory Letter – Paycheck Protection Program (PPP) Loans as Collateral for FHLBank Advances. On April 23, 2020, the Finance Agency issued a Supervisory Letter (PPP Supervisory Letter) permitting the FHLBanks to accept PPP loans as collateral for advances as agency securities, given the SBA’s 100% guarantee of the unpaid principal balance. On April 20, 2020, the SBA published its third interim final rule related to PPP loans, which explicitly waived certain regulatory requirements that must be satisfied before a member could pledge PPP loans to the FHLBanks as collateral. The PPP Supervisory Letter establishes a series of conditions under which the FHLBanks may accept PPP loans as collateral, which conditions focus on the financial condition of members, collateral discounts, and pledge dollar limits.
The Bank is evaluating the potential impact of the PPP Supervisory Letter, including the determination whether to accept PPP loans as collateral and the terms on which the Bank would accept such collateral, but does not expect the PPP Supervisory Letter to materially affect its financial condition or results of operations.
Off-Balance Sheet Arrangements and Aggregate Contractual Commitments
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 the FHLBanks was $1,174.7 billion at March 31, 2020, and $1,025.9 billion at December 31, 2019. The par value of the Bank’s participation in consolidated obligations was $117.1 billion at March 31, 2020, and $98.8 billion at December 31, 2019. The Bank had committed to the issuance of $1,410 million and $805 million in consolidated obligations at March 31, 2020, and December 31, 2019, respectively.
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 Statements of Condition or may be recorded on the Bank’s Statements of Condition 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 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, 2020, the Bank had $24 million in advance commitments and $20.2 billion in standby letters of credit outstanding. At December 31, 2019, the Bank had no advance commitments and $21.6 billion in standby letters of credit outstanding.
For additional information, see “Item 1. Financial Statements – Note 13 – Commitments and Contingencies.”
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market risk is defined as the risk to the Bank’s market 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) as a result of movements in market interest rates, interest rate spreads, interest rate volatility, and other market factors (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 adverse exposure of the market 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 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.” Compliance with Bank policies and guidelines is reviewed by the Bank’s Board of Directors on a regular basis, along with a corrective action plan if applicable.
Total Bank Market Risk
Market 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.
The Bank’s market 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 4.0% of the estimated market 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 6.0% of the estimated market 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 market value of capital sensitivity was within the policy limits as of March 31, 2020.
To determine the Bank’s estimated risk sensitivities to interest rates for the market value of capital sensitivity, the Bank uses a third-party proprietary asset and liability system to calculate estimated market 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, 2020 | | December 31, 2019 | |
+200 basis-point change above current rates | +2.6 | % | –2.4 | % |
+100 basis-point change above current rates | +1.9 | | –1.1 | |
–100 basis-point change below current rates(2) | +11.5 | | +1.1 | |
–200 basis-point change below current rates(2) | +12.7 | | +6.9 | |
| |
(1) | Instantaneous change from actual rates at dates indicated. |
| |
(2) | Interest rates for each maturity are limited to non-negative rates. |
The Bank’s estimates of the sensitivity of the market value of capital to changes in interest rates as of March 31, 2020, show considerably more positive sensitivity compared with the estimates as of December 31, 2019. As a result of the uncertainty associated with the COVID-19 pandemic, there have been significant changes in interest rates and spread relationships. LIBOR interest rates as of March 31, 2020, were 109 basis points lower for the one-year term, 120 basis points lower for the five-year term, and 117 basis points lower for the ten-year term. In March 2020, the ten-year Treasury hit an all-time low of 0.54%. In addition to the material changes in interest rates, price changes in two segments of the Bank’s mortgage portfolio materially impacted the Bank’s market value sensitivity profile. Prices on the Bank’s fixed rate mortgage loans purchased under the MPF Program increased, resulting in the asset spread relative to pricing benchmark to materially decline. The favorable spread change improves the market value of the Bank’s mortgage loans. If interest rates increase, these loans will remain outstanding for a longer period of time, and the favorable spread difference will exist for a longer period of time resulting in a less detrimental impact on the Bank’s projected market value. The Bank investment portfolio also includes fixed rate multifamily MBS that are swapped to overnight assets at time of trade. Given the prepayment protection provisions embedded in these securities, the MBS cashflows are consistent across alternative interest rate scenarios. For these securities, the asset spread to the pricing benchmark increased, which caused the decline in prices in rising rate scenarios to lessen. The change in the declining market value sensitivity profile is driven by the historically low interest rate environment. Given the significant decline in interest rates during the first quarter of 2020, interest rates on a subset of the Bank’s floating rate instruments cannot decrease to the same extent that interest rates in the rising rate scenarios can increase because of embedded interest rate floors.
The Bank’s Risk Management Policy provides guidelines for the payment of dividends and the repurchase of excess capital stock 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: (i) less than 100% but greater than or equal to 90%, any dividend would be limited to an annualized rate no greater than the daily average of the Federal funds effective rate for the applicable quarter (subject to certain conditions), and any excess capital stock repurchases would not exceed $500 million (subject to certain conditions); (ii) less than 90% but greater than or equal to 70%, any dividend and any excess capital stock repurchases would be subject to the same limitations and conditions as in (i) above, except that any excess capital stock repurchases would not exceed 4% of the Bank’s outstanding capital stock as of the repurchase date; and (iii) less than 70%, the Bank would not pay a dividend, not repurchase excess capital stock (but continue to redeem excess capital stock as provided in the Bank’s capital plan), limit the acquisition of certain assets, and review the Bank’s risk policies. A decision by the Board of Directors to declare or not declare any dividend or repurchase any excess capital stock 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 ratio of the Bank’s estimated market value of total capital to par value of capital stock was 198% as of March 31, 2020.
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. 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. Given the current low interest rate environment, in the downward shift interest rates were limited to non-negative rates. With the indicated interest rate shifts, the adjusted return on capital for the projected 12-month horizon would be expected to decrease by 17 basis points in the –200 basis-points scenario, well within the policy limit of –120 basis points.
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.
|
| | | | | | | | | | | | | |
Total Bank Duration Gap Analysis |
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| Amount (In millions) |
| | Duration Gap(1) (In months) |
| | Amount (In millions) |
| | Duration Gap(1) (In months) |
|
Assets | $ | 124,870 |
| | 3 |
| | $ | 106,842 |
| | 3 |
|
Liabilities | 118,463 |
| | 3 |
| | 100,101 |
| | 2 |
|
Net | $ | 6,407 |
| | — |
| | $ | 6,741 |
| | 1 |
|
| |
(1) | Duration gap values include the impact of interest rate exchange agreements. |
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 and retained earnings 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 to offset 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 one month or less. In addition, to increase the Bank’s liquidity position, the Bank invests in Treasury securities, generally with terms of less than three years. These fixed rate investments are swapped to variable rate investments.
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 investments 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. These analyses are 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 reprice in a given period. The 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 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 effect of mortgage prepayments and the existence of interest rate caps on certain adjustable rate MBS.
The Bank manages the interest rate risk and market risk of the mortgage-related segment through its investment in low risk assets and selected funding and hedging strategies. The total carrying value of MBS and mortgage loans at March 31, 2020, was $20.9 billion, including $17.7 billion in MBS and $3.2 billion in mortgage loans. The total carrying value of MBS and mortgage loans at December 31, 2019, was $21.1 billion, including $17.8 billion in MBS and $3.3 billion in mortgage loans. Floating rate securities, and fixed rate multifamily securities that have been converted to floating rate through the use of interest rate swaps, were $15.2 billion, or 73%, of MBS and mortgage loans at March 31, 2020, and $15.1 billion, or 72%, of MBS and mortgage loans at December 31, 2019. Intermediate and long-term fixed rate assets, whose interest rate and market risks have been partially offset through the use of fixed rate non-callable debt, fixed rate callable debt, and certain interest rate swaps whose characteristics mimic that of fixed rate callable debt, were $5.7 billion, or 27%, of MBS and mortgage loans, at March 31, 2020, and $6.0 billion, or 28%, of MBS and mortgage loans at December 31, 2019.
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 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 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,” the Bank uses market 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 market value of capital sensitivity of the assets, liabilities, and derivatives of the mortgage-related business.
The following table presents results of the estimated market value of capital sensitivity analysis attributable to the mortgage-related business as of March 31, 2020, and December 31, 2019.
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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 |
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Interest Rate Scenario(1) | March 31, 2020 | | December 31, 2019 | |
+200 basis-point change | +4.1 | % | –0.6 | % |
+100 basis-point change | +2.5 | | –0.2 | |
–100 basis-point change(2) | +5.6 | | +0.2 | |
–200 basis-point change(2) | +6.1 | | +3.2 | |
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(1) | Instantaneous change from actual rates at dates indicated. |
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(2) | Interest rates for each maturity are limited to non-negative rates. |
The explanations for the changes in Bank’s estimates of the sensitivity of the market value of capital to changes in interest rates attributable to the mortgage-related business from December 31, 2019, to March 31, 2020, are the same as the explanations for the sensitivity of the market value of capital attributable to all of the Bank’s assets, liabilities, and associated interest rate exchange agreements.
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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 and executive 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 and executive 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, 2020, 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.
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
The Federal Home Loan Bank of San Francisco (Bank) may be subject to various legal proceedings arising in the normal course of business. For information regarding the two lawsuits filed by former Bank officer, Lawrence H. Parks, and another former officer of the Bank, against the Bank, certain of the Bank’s current and former directors, the Bank’s former chief executive officer, one current employee, and one former employee, see “Part I. Item 3. Legal Proceedings” in the Bank’s 2019 Form 10-K.
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.
Natural disasters, pandemics, terrorist attacks, or other catastrophic events could adversely affect the Bank’s operations, business activities, results of operations and financial condition.
Natural disasters, pandemics, or other widespread health emergencies (such as the recent outbreak of COVID-19), terrorist attacks, or other unanticipated or catastrophic events could create economic and financial disruptions and uncertainties, which may lead to reduced demand for advances and an increased risk of credit losses for the Bank and may adversely affect its cost of funding or access to funding. These events may also lead to operational difficulties that could adversely affect the ability of the Bank and the Office of Finance to conduct and manage their businesses. Any of these factors could adversely affect the Bank’s business activities and results of operations.
In particular, the current COVID-19 pandemic has disrupted the credit markets in which the Bank operates, and the decline in interest rates has adversely affected the fair values of the Bank’s assets, the valuation of collateral, and the Bank’s net income and capital. A prolonged COVID-19 outbreak may continue to have adverse effects on the Bank’s profitability and financial condition. Market volatility and economic stress during a prolonged COVID-19 outbreak may adversely affect the Bank’s access to the debt markets and possibly affect the Bank’s liquidity. The Bank’s decision to have all employees work remotely in accordance with local “stay-at-home” orders may create additional cybersecurity risks and operational challenges that could affect the Bank’s ability to conduct business or increase the risk of operational incidents and errors. In addition, the Bank relies on vendors and other third parties to perform certain critical services, and if one of our critical vendors or third parties experiences a failure or any interruption to their business due to the COVID-19 pandemic, the Bank may be unable to conduct and manage its business effectively. The outlook for the remainder of 2020 is uncertain, and there is a possibility that if the Federal Reserve keeps interest rates low or even uses negative interest rates, this could significantly affect the Bank’s business and profitability.
For a discussion of other risk factors, see “Part I. Item 1A. Risk Factors” in the Bank’s 2019 Form 10-K.
As previously reported, Kenneth C. Miller, executive vice president and chief financial officer of the Bank, notified the Bank of his decision to retire from the Bank in the second quarter of 2020. On May 7, 2020, Mr. Miller notified the Bank of his decision to revise his retirement date to the fourth quarter of 2020, after the Bank’s quarterly report on Form 10-Q for the period ending September 30, 2020, is filed with the Securities and Exchange Commission.
ITEM 6. EXHIBITS
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Exhibit No. | | Description |
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| | Description of Registered Securities |
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| | Certification of the Acting President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| | Certification of the Acting 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 |
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| | 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 |
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101.INS | | Inline XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
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101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 | | Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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 12, 2020.
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| Federal Home Loan Bank of San Francisco |
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| /S/ STEPHEN P. TRAYNOR |
| Stephen P. Traynor Acting President and Chief Executive Officer |
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| /S/ KENNETH C. MILLER |
| Kenneth C. Miller Executive Vice President and Chief Financial Officer (Principal Financial Officer) |