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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _______________________________________________________
FORM 10-K
_______________________________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
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 of the United States
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
_______________________________________________________
Securities registered pursuant to Section 12(g) of the Act:
Class B Stock, par value $100
(Title of class)
________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes      No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes      No
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 filerAccelerated filer
Non-accelerated filerSmaller 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No
Registrant's capital stock is not publicly traded and is only issued to members of the registrant. Such capital stock is issued and redeemed at par value, $100 per share, subject to certain regulatory and statutory limits. At June 30, 2021, the aggregate par value of the capital stock held by shareholders of the registrant was approximately $2,272 million. At February 28, 2022, the total shares of capital stock outstanding, including mandatorily redeemable capital stock, totaled 21,080,505.
DOCUMENTS INCORPORATED BY REFERENCE: None.


Table of Contents

Federal Home Loan Bank of San Francisco
2021 Annual Report on Form 10-K
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3
Item 4
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
SIGNATURES


Table of Contents

PART I

ITEM 1.    BUSINESS
At the Federal Home Loan Bank of San Francisco (Bank, we, our, us), our purpose is to enhance the availability of credit for residential mortgages and economic development by providing a readily available, competitively priced source of funds for housing and community lenders. We are a wholesale bank—we link our customers to the global capital markets and seek to manage our own liquidity and interest rate risk so that funds are available when our customers need them. By providing needed liquidity and financial risk management tools, our credit programs enhance competition in the mortgage market and benefit homebuyers and communities.
We are one of 11 regional Federal Home Loan Banks (FHLBanks) that serve the United States as part of the Federal Home Loan Bank System (FHLBank System). Each FHLBank operates as a separate federally chartered corporation with its own board of directors, management, and employees. The FHLBanks were organized under the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), and are government-sponsored enterprises (GSEs). The FHLBanks are not government agencies and do not receive financial support from taxpayers. The U.S. government does not guarantee, directly or indirectly, the debt securities or other obligations of the Bank or the FHLBank System. The FHLBanks are regulated by the Federal Housing Finance Agency (Finance Agency), an independent federal agency.
We have a cooperative ownership structure. To access our products and services, a financial institution must be approved for membership and purchase capital stock in the Bank. The member’s capital stock requirement is generally based on its use of our products, subject to a minimum asset-based membership requirement that is intended to reflect the value to the member of having ready access to the Bank as a reliable source of competitively priced funds. Our capital stock is issued, transferred, redeemed, and repurchased at its par value of $100 per share, subject to certain regulatory and statutory limits. It is not publicly traded.
Our members may include federally insured and regulated financial depositories, regulated insurance companies that are engaged in residential housing finance, community development financial institutions (CDFIs) that have been certified by the CDFI Fund of the U.S. Treasury Department, and privately insured, state-chartered credit unions. Financial depositories may include commercial banks, credit unions, industrial loan companies, and savings institutions. CDFIs may include community development loan funds, community development venture capital funds, and privately insured, state-chartered credit unions. All members have their principal place of business located in Arizona, California, or Nevada, the three states that make up the Eleventh District of the FHLBank System. Our members range in asset size from $12 million to $208 billion.
Our primary business is providing competitively priced, collateralized loans, known as advances, to our members and certain qualifying housing associates. We accept a wide range of collateral types, some of which cannot be readily pledged elsewhere or readily securitized. Members use their access to advances to support their mortgage loan portfolios, lower their funding costs, facilitate asset-liability and liquidity management, offer a wider range of mortgage products to their customers, and improve profitability.
As of December 31, 2021, we had advances and capital stock, including mandatorily redeemable capital stock, outstanding to the following types of institutions:
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Advances
(Dollars in millions)Total Number of InstitutionsCapital Stock OutstandingNumber of InstitutionsPar Value of Advances Outstanding
Commercial banks138 $1,024 54 $10,306 
Savings institutions84 540 
Credit unions153 838 44 4,807 
Industrial loan companies26 
Insurance companies22 107 942 
Community development financial institutions113 
Total member institutions331 2,061 116 16,734 
Housing associates eligible to borrow— — — 
Other nonmember institutions(1)
124 
Total336 $2,064 118 $16,858 
(1)    Nonmember institutions may be former members or may have acquired the advances and capital stock of a former member. Capital stock held by nonmember shareholders is classified as mandatorily redeemable capital stock, a liability. Nonmember shareholders with advances outstanding are required to meet our applicable credit, collateral, and capital stock requirements, including requirements regarding creditworthiness and collateral borrowing capacity. Nonmembers (including former members and member successors) are not eligible to borrow new advances or renew existing advances as they mature.
To fund their operations, the FHLBanks issue debt in the form of consolidated obligation bonds and discount notes (jointly referred to as consolidated obligations) through the FHLBanks’ Office of Finance, the fiscal agent for the issuance and servicing of consolidated obligations on behalf of the FHLBanks. Because the FHLBanks’ consolidated obligations are rated Aaa/P-1 by Moody’s Investors Service (Moody’s) and AA+/A-1+ by S&P Global Ratings (S&P) and because of the FHLBanks’ GSE status, the FHLBanks are generally able to raise funds at rates that are typically at a small to moderate spread above U.S. Treasury security yields. Our cooperative ownership structure allows us to pass along the benefit of these low funding rates to our members.
Members also benefit from our affordable housing and economic development programs, which provide grants and below-market-rate loans that support members’ involvement in creating affordable housing and revitalizing communities.
Our Business Model
Our cooperative ownership structure has led us to develop a business model that is different from that of a typical financial services firm. Our business model is based on the premise that we maintain a balance between our objective to promote housing, homeownership, and community and economic development through our activities with members and our objective to provide a return on the private capital provided by our members through their investment in our capital stock, maintaining safety and soundness.
We require our members to purchase our capital stock to support their activities with the Bank. We leverage this capital stock and our retained earnings by using our GSE status to borrow funds in the capital markets at relatively favorable rates. We lend these funds to our members at rates that are competitive with the cost of most wholesale borrowing alternatives available to our largest members.
We may also invest in residential mortgage-backed securities (MBS) up to the regulatory policy limit of three times regulatory capital, which is composed of retained earnings and capital stock, including mandatorily redeemable capital stock. Our MBS investments include agency-issued MBS that are guaranteed through the direct obligation of or are supported by the U.S. government and private-label residential MBS (PLRMBS) that were AAA-rated at the time of purchase. We also have a portfolio of residential mortgage loans purchased from members. Earnings on these MBS investments and mortgage loans provide us with the financial flexibility to continue providing cost-effective credit and liquidity to our members. While the mortgage assets we hold are intended to increase our earnings, they also modestly increase our credit and interest rate risk. We consider the Finance Agency’s core mission achievement guidance when making investment decisions. The Finance Agency will assess annually each FHLBank’s core mission achievement by determining the ratio of primary mission assets, which is calculated as the
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average par balances of advances and mortgage loans acquired from members, to the average par balance of consolidated obligations less the average par balance of our U.S. Treasury security obligations with a maturity no greater than ten years. The Finance Agency’s expectation is that each FHLBank’s core mission asset ratio is at least 70% or higher. Our core mission asset ratio was 64.4% and 70.7% for the years ended December 31, 2021 and 2020, respectively. As we target meeting the core mission asset ratio of 70%, we may be limited in the purchase of new MBS.
Additional information about our investments is provided in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Investments.”
Our financial strategies are designed to enable us to safely expand and contract our assets, liabilities, and capital as our member base and our members' credit needs change. Our capital increases when members are required to purchase additional capital stock as they increase their borrowings, and it contracts when we repurchase excess capital stock from members as their advances decline. As a result of these strategies, we have been able to achieve our mission by meeting member credit needs and maintaining our adequately capitalized position, while paying dividends (including dividends on mandatorily redeemable capital stock) and repurchasing and redeeming excess capital stock. Information regarding our dividends and the repurchase of excess capital stock is provided in “Item 8. Financial Statements and Supplementary Data – Note 11 – Capital – Excess Stock Repurchase, Retained Earnings, and Dividend Framework.”
Products and Services
Advances. We offer our members and housing associates a wide array of fixed and adjustable rate loans, called advances, that are secured with eligible mortgage loans and other collateral. Our advance products are designed to help members and housing associates compete effectively in their markets and meet the credit needs of their communities. For members and housing associates that choose to retain the mortgage loans they originate as assets (portfolio lenders), advances serve as a funding source for a variety of conforming and nonconforming mortgage loans, including multifamily mortgage loans. As a result, advances support an array of housing market segments, including those focused on low- and moderate-income households. For members or housing associates that sell or securitize mortgage loans and other assets, advances can provide interim funding.
Our credit products also help members and housing associates with their asset-liability management. Members and housing associates can use a wide range of advance types, with different maturities and payment characteristics, to match the characteristics of their assets and reduce their interest rate risk. We offer advances that are callable at the member's or housing associate’s option and advances with embedded option features (such as caps and floors), which can reduce the interest rate risk associated with holding fixed rate mortgage loans and adjustable rate mortgage loans with interest rate caps in the member's portfolio.
We offer both standard and customized advance structures. Standard advances include fixed and adjustable rate advance products with different maturities, interest rates, and payment characteristics. 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. Customized advances may include:
advances with non-standard indices;
advances with embedded option features (such as interest rate caps, floors, and call and put options);
amortizing advances; and
advances with full prepayment symmetry. (Full prepayment symmetry is a product feature under which we may charge a prepayment fee or pay a prepayment credit, depending on certain circumstances, such as movements in interest rates, if the advance is prepaid.)
For each customized advance, we typically execute a derivative to enable us to offset the customized features embedded in the advance.
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The total amount of advances made available to each member or housing associate may be limited by the financing availability assigned by the Bank, which is generally expressed as a percentage of the member’s or housing associate’s assets. The amount of financing availability is generally determined by the creditworthiness of the member or housing associate.
Because of the funding alternatives available to our largest borrowers, we establish advances prices that take into account the cost of alternative market choices available to our largest members each day, along with our costs of conducting business and our profitability. We offer the same advances prices to all members and housing associates each day, which means that all members and housing associates benefit from this pricing strategy. In addition, if further price concessions are negotiated with any member or housing associate to reflect market conditions on a given day, those price concessions are also made available to all members and housing associates for the same product with the same terms on the same day.
Standby Letters of Credit. We issue standby letters of credit to support certain obligations of members to third parties. Members may use standby letters of credit issued by the Bank to facilitate residential housing finance and community lending, to achieve liquidity and asset-liability management goals, to secure certain state and local agency deposits, and to provide credit support to certain tax-exempt bonds. Our underwriting and collateral requirements for standby letters of credit are generally the same as our underwriting and collateral requirements for advances but may differ in cases where member creditworthiness is impaired.
Investments. We invest in high-quality investments to facilitate our role as a cost-effective provider of credit and liquidity to members and to enhance our earnings. We have adopted credit policies and exposure limits for investments that support liquidity and diversification of risk. These policies restrict the amounts and terms of our investments according to our own capital position as well as the capital and creditworthiness of the individual counterparties, with different unsecured credit limit policies for members and nonmembers. When we execute investments with members, we may give consideration to their secured credit availability with the Bank and our advances price levels.
We may invest in short-term unsecured interest-bearing deposits, Federal funds sold, negotiable certificates of deposit, and commercial paper. We may also invest in U.S. Treasury obligations as well as short-term secured transactions, such as U.S. Treasury resale agreements.
In addition, our investments include agency residential MBS, which are guaranteed through the direct obligation of, or are supported by, the U.S. government, and PLRMBS. Some of these PLRMBS were issued by or purchased from members, former members, or their respective affiliates. We execute 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. We have not purchased any PLRMBS since the first quarter of 2008.
Additional information about our investments is provided in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Investments” and in “Item 8. Financial Statements and Supplementary Data – Note 4 – Investments.”
Mortgage Loans. Under the Mortgage Partnership Finance® (MPF®) Program, we purchased from members, for our own portfolio, conventional conforming fixed rate mortgage loans under the MPF Original product. In addition, we facilitated the purchase of conforming fixed rate mortgage loans from members for concurrent sale to Fannie Mae under the MPF Xtra® product. When members sold loans under the MPF Xtra product, the loans were sold to a third-party investor and were not recorded on our Statements of Condition. (“Mortgage Partnership Finance,” “MPF,” and “MPF Xtra” are registered trademarks of the FHLBank of Chicago.) On December 17, 2020, we announced that we would no longer offer new commitments to directly purchase, or to facilitate the purchase of, mortgage loans from our members. On March 31, 2021, we closed all remaining open commitments to purchase mortgage loans for our own portfolio under the MPF Original product, and by June 30, 2021, we no longer facilitated the purchase of mortgage loans under the MPF Xtra product.
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Affordable Housing Program. Through our Affordable Housing Program (AHP), we provide subsidies to assist in the purchase, construction, or rehabilitation of housing for households earning up to 80% of the median income for the area in which they live. Each year, to fund the AHP, we set aside 10% of our current year’s net earnings (income before interest expense related to dividends paid on mandatorily redeemable capital stock and the assessment for the AHP), to be awarded in the following year. Since 1990, we have awarded approximately $1.2 billion in AHP subsidies to support the purchase, development, or rehabilitation of approximately 145,500 housing units.
We allocate at least 65% of our annual AHP subsidy to our competitive AHP, under which applications for specific owner-occupied and rental housing projects are submitted by members and are evaluated and scored by the Bank in an annual competitive process. All subsidies for the competitive AHP are funded to affordable housing sponsors or developers through our members in the form of direct subsidies or subsidized advances.
We allocate the remainder of our annual AHP subsidy, up to 35%, to our homeownership set-aside programs. Under these programs, members reserve funds from the Bank to be used as matching grants for eligible first-time homebuyers.
Access to Housing and Economic Assistance for Development (AHEAD) Program. AHEAD Program grants, funded annually at the discretion of our board of directors, provide funding for targeted economic development projects and non-AHP-eligible housing initiatives that create or preserve jobs, deliver social services, training, or education programs, or provide other services and programs that benefit low- and moderate-income communities. AHEAD Program applications are submitted by members working with local community groups, and awards are based on project eligibility and evaluation of the applications. In 2021, we awarded $1.5 million in AHEAD Program grants, and since 2004, we have awarded $20.5 million in AHEAD program grants.
Discounted Credit Programs. We offer members two discounted credit programs available in the form of advances and standby letters of credit. Members may use the Community Investment Program to fund mortgages for low- and moderate-income households, to finance first-time homebuyer programs, to create and maintain affordable housing, and to support other eligible lending activities related to housing or economic development for low- and moderate-income families. Members may use the Advances for Community Enterprise (ACE) Program to fund projects and activities that create or retain jobs or provide services or other benefits for low- and moderate-income people and communities. Members may also use ACE Program funds to support eligible community lending and economic development, including small business, community facilities, and public works projects.
Funding Sources
We obtain most of our funds from the sale of the FHLBanks’ debt instruments (consolidated obligations), which consist of consolidated obligation bonds and discount notes. The consolidated obligations are issued through the Office of Finance using authorized securities dealers and are backed only by the financial resources of the FHLBanks. 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 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. For more information, see “Item 8. Financial Statements and Supplementary Data – Note 16 – Commitments and Contingencies.” We have never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank, and through the date of this report, we do not believe that it is probable that we will be asked to do so.
Our status as a GSE is critical to maintaining access to the capital markets. Although consolidated obligations are backed only by the financial resources of the FHLBanks and are not guaranteed by the U.S. government, the capital markets have traditionally treated the FHLBanks’ consolidated obligations as a close alternative to federal agency debt, providing the FHLBanks with access to funding at relatively favorable rates. As of December 31, 2021, S&P rated the FHLBanks’ consolidated obligations AA+/A-1+, and Moody’s rated them Aaa/P-1. As of December 31, 2021, S&P assigned each of the FHLBanks a long-term credit rating of AA+ with a stable outlook, and Moody's
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assigned each of the FHLBanks a long-term credit rating of Aaa with a stable outlook. 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.
Regulations govern the issuance of debt on behalf of the FHLBanks and related activities. All new debt is jointly issued by the FHLBanks through the Office of Finance, which serves as their fiscal agent in accordance with the FHLBank Act and applicable regulations. Pursuant to these regulations, the Office of Finance, often in conjunction with the FHLBanks, has adopted policies and procedures for consolidated obligations that may be issued by the FHLBanks. The policies and procedures relate to the frequency and timing of issuance, issue size, minimum denomination, selling concessions, underwriter qualifications and selection, currency of issuance, interest rate change or conversion features, call or put features, principal amortization features, and selection of clearing organizations and outside counsel. The Office of Finance has responsibility for facilitating and approving the issuance of the consolidated obligations in accordance with these policies and procedures. In addition, the Office of Finance has the authority to redirect, limit, or prohibit the FHLBanks’ requests to issue consolidated obligations that are otherwise allowed by its policies and procedures if it determines that its action is consistent with: (i) the regulatory requirement that consolidated obligations be issued efficiently and at the lowest all-in cost over time, consistent with prudent risk management practices, prudent debt parameters, short- and long-term market conditions, and the FHLBanks’ status as GSEs; (ii) maintaining reliable access to the short-term and long-term capital markets; and (iii) positioning the issuance of debt to take advantage of current and future capital markets opportunities. The authority of the Office of Finance to redirect, limit, or prohibit our requests for issuance of consolidated obligations has never adversely affected our ability to finance its operations. The Office of Finance also services all outstanding FHLBank debt, serves as a source of information for the FHLBanks on developments in the capital markets, and prepares the FHLBanks’ quarterly and annual combined financial reports. In addition, it administers the Resolution Funding Corporation, established by Congress in 1989 to provide funding for the resolution and disposition of insolvent savings institutions.
Consolidated Obligation Bonds. Consolidated obligations are generally issued with either fixed rate payment terms or adjustable rate payment terms, which use the Secured Overnight Financing Rate for interest rate resets. In addition, to meet the specific needs of certain investors, fixed rate and adjustable rate consolidated obligation bonds may contain certain embedded features, which may result in call options and complex coupon payment terms. In general, when such consolidated obligation bonds are issued for which we are the primary obligor, we simultaneously enter into interest rate exchange agreements containing offsetting features to, in effect, convert the terms of the bond to the terms of a simple adjustable rate bond. Typically, the maturities of consolidated obligation bonds range from 6 months to 15 years, but the maturities are not subject to any statutory or regulatory limit. Consolidated obligation bonds may be issued and distributed daily through negotiated or competitively bid transactions with approved underwriters or selling group members.
We receive 100% of the net proceeds of a bond issued through direct negotiation with underwriters of debt when we are the only FHLBank involved in the negotiation. In these cases, we are the sole primary obligor on the consolidated obligation bond. When we and one or more other FHLBanks jointly negotiate the issuance of a bond directly with underwriters, we receive the portion of the proceeds of the bond agreed upon with the other FHLBank(s); in those cases, we are the primary obligor for a pro rata portion of the bond, including all customized features and terms, based on the proceeds received.
We may also request specific amounts of specific consolidated obligation bonds to be offered by the Office of Finance for sale in a competitive auction conducted with the underwriters in a bond selling group. One or more other FHLBanks may also request amounts of those same bonds to be offered for sale for their benefit in the same auction. We may receive zero to 100% of the proceeds of the bonds issued in a competitive auction depending on: (i) the amounts of and costs for the consolidated obligation bonds bid by underwriters; (ii) the maximum costs we or other FHLBanks participating in the same issue, if any, are willing to pay for the bonds; and (iii) guidelines for the allocation of bond proceeds among multiple participating FHLBanks administered by the Office of Finance.
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Consolidated Obligation Discount Notes. The FHLBanks also issue consolidated obligation discount notes with maturities ranging from one day to one year, which may be offered daily through a consolidated obligation discount note selling group and through other authorized underwriters. Discount notes are issued at a discount and mature at par.
On a daily basis, we may request specific amounts of discount notes with specific maturity dates to be offered by the Office of Finance at a specific cost for sale to underwriters in the discount note selling group. One or more other FHLBanks may also request amounts of discount notes with the same maturities to be offered for sale for their benefit the same day. The Office of Finance commits to issue discount notes on behalf of the participating FHLBanks when underwriters in the selling group submit orders for the specific discount notes offered for sale. We may receive zero to 100% of the proceeds of the discount notes issued through this sales process depending on: (i) the maximum costs we or other FHLBanks participating in the same discount note issuance, if any, are willing to pay for the discount notes; (ii) the order amounts for the discount notes submitted by underwriters; and (iii) guidelines for the allocation of discount note proceeds among multiple participating FHLBanks administered by the Office of Finance.
Twice weekly, we may also request specific amounts of discount notes with fixed terms to maturity ranging from 4 to 26 weeks to be offered by the Office of Finance for sale in a competitive auction conducted with underwriters in the discount note selling group. One or more other FHLBanks may also request amounts of those same discount notes to be offered for sale for their benefit in the same auction. The discount notes offered for sale in a competitive auction are not subject to a limit on the maximum costs the FHLBanks are willing to pay. We may receive zero to 100% of the proceeds of the discount notes issued in a competitive auction depending on: (i) the amounts of and costs for the discount notes bid by underwriters and (ii) guidelines for the allocation of discount note proceeds among multiple participating FHLBanks administered by the Office of Finance.
Debt Investor Base. The FHLBanks’ consolidated obligations have traditionally had a diversified funding base of domestic and foreign investors. Purchasers of the FHLBanks’ consolidated obligations include fund managers, commercial banks, pension funds, insurance companies, foreign central banks, state and local governments, and retail investors. These purchasers are also diversified geographically, with a significant portion of investors historically located in the United States, Europe, and Asia.
Segment Information
We use an analysis of our 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 interest income and expense associated with net settlements from economic hedges that are recorded in “Net gain/(loss) on derivatives” in other income/(loss), excludes interest income and expense associated with changes in fair value from fair value hedges that are recorded in the same line as the earning effect of the hedged item, and excludes interest expense that is recorded in “Mandatorily redeemable capital stock.” AHP assessments are not included in the segment reporting analysis but are incorporated into our overall assessment of financial performance.
The advances-related business consists of advances and other credit products, related financing and hedging instruments, liquidity and other non-MBS investments associated with our role as a liquidity provider, and capital stock. Adjusted net interest income for this segment is derived primarily from the difference, or spread, between the yield on all assets associated with the business activity in this segment and the cost of funding those activities, including the net settlements from associated interest rate exchange agreements, and from earnings attributed to our capital stock and retained earnings.
The mortgage-related business consists of MBS investments, mortgage loans acquired through the MPF Program, consolidated obligations specifically identified as funding those assets, and related hedging instruments. Adjusted net interest income for this segment is derived primarily from the difference, or spread, between the yield on the
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MBS and mortgage loans and the cost of the consolidated obligations funding those assets. This includes the net settlements from associated interest rate exchange agreements and net accretion of related income, which is a result of improvement in expected cash flows on certain PLRMBS that were other-than-temporarily-impaired prior to January 1, 2020, less the provision for credit losses on mortgage loans and MBS.
Additional information about business segments is provided in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Segment Information” and in “Item 8. Financial Statements and Supplementary Data – Note 13 – Segment Information.”
Use of Interest Rate Exchange Agreements
We use interest rate exchange agreements, also known as derivatives, in the ordinary course of business as part of our risk management and funding strategies to reduce interest rate risk and lower funding costs. The types of derivatives we use include interest rate swaps and interest rate cap and floor agreements.
The regulations governing the operations of the FHLBanks and our Risk Management Policy establish standards and guidelines for our use of derivatives. These standards and guidelines prohibit trading in derivatives for profit and any other speculative purposes and limit the amount of credit risk allowable from derivative counterparties.
We primarily use derivatives to manage our exposure to market risk from changes in interest rates. The goal of our market risk management strategy is not to eliminate market risk, but to manage it within appropriate limits that are consistent with the financial strategies approved by the board of directors. One key way we manage market risk is to acquire and maintain a portfolio of assets and liabilities, which, together with their associated derivatives, are generally matched with respect to the expected repricing of the assets and the liabilities. We may also use derivatives to adjust the effective repricing frequency or option characteristics embedded in certain financial instruments (such as advances and consolidated obligations) to achieve our risk management objectives.
We measure our market risk at the total Bank level, as well as on a portfolio basis, taking into account all financial instruments. The market risk of the derivatives and the hedged items is included in the measurement of our various market risk measures. Our low market risk profile reflects our conservative asset-liability mix, which is supported by integrated use of derivatives in our daily financial management.
Additional information about our interest rate exchange agreements is provided in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Market Risk – Total Bank Market Risk – Interest Rate Exchange Agreements” and in “Item 8. Financial Statements and Supplementary Data – Note 14 – Derivatives and Hedging Activities.”
Capital
From its enactment in 1932, the FHLBank Act provided for a subscription-based capital structure for the FHLBanks. The amount of capital stock that each FHLBank issued was determined by a statutory formula establishing how much FHLBank capital stock each member was required to purchase. With the enactment of the Gramm-Leach-Bliley Act of 1999, Congress replaced the statutory subscription-based member capital stock purchase formula with requirements for total capital, leverage capital, and risk-based capital for the FHLBanks and required the FHLBanks to develop new capital plans to replace the previous statutory structure.
Our capital plan has been amended over time to accommodate changes in our business model and financial strategies. The capital plan bases the stock purchase requirement on the level of activity a member has with the Bank, subject to a minimum membership requirement that is intended to reflect the value to the member of having access to the Bank as a funding source. With the approval of our board of directors, we may adjust these requirements from time to time within the ranges established in the capital plan. Any changes to our capital plan must be approved by our board of directors and the Finance Agency.
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Our capital stock cannot be publicly traded, and under the capital plan, may be issued, transferred, redeemed, and repurchased only at its par value of $100 per share, subject to certain regulatory and statutory limits. Under the capital plan, a member’s capital stock will be redeemed by the Bank upon five years’ notice from the member, subject to certain conditions. In addition, we have the discretion to repurchase excess capital stock from members.
Dividends and Retained Earnings. Our Excess Stock Repurchase, Retained Earnings, and Dividend Framework (Framework) summarizes our 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.
As required by the regulations governing the operations of the FHLBanks, the Framework is reviewed at least annually by our board of directors. The board of directors 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 our board of directors, which may choose to follow the dividend philosophy as guidance in the dividend declaration. Our historical dividend rates and the dividend philosophy are not indicative of future dividend declarations. Our dividend policy may be revised or eliminated in the future, and there can be no assurance as to future dividends.
In accordance with the Framework, we retain certain amounts in restricted retained earnings, which are not made available for dividends in the current dividend period, and maintain an amount of total retained earnings at least equal to its required retained earnings as described in the Framework. We may be restricted from paying dividends if the Bank is not in compliance with any of our minimum capital requirements or if payment would cause the Bank to fail to meet any of our minimum capital requirements. In addition, we may not pay dividends if any principal or interest due on any consolidated obligation has not been paid in full or is not expected to be paid in full, or, under certain circumstances, if we fail to satisfy certain liquidity requirements under applicable regulations. For more information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk.”
Our Risk Management Policy limits the payment of dividends based on the ratio of our estimated market value of total capital to par value of capital stock. If this ratio at the end of any quarter is less than 100% but greater than or equal to 70%, any dividend would be limited to an annualized rate no greater than the daily average of the Federal funds effective rate for the applicable quarter (subject to certain conditions), and if this ratio is less than 70%, we would be restricted from paying a dividend. For more information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Market Risk.”
Retained Earnings – Our 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 our required retained earnings as described in the Framework. As determined using our methodology, the required level of total retained earnings had ranged from $1.5 billion to $2.9 billion during 2020 and 2021. The methodology may be revised from time to time, and the required level of required retained earnings under the methodology may change due to updating data and assumptions used in the methodology. In January 2022, the required level of retained earnings was increased from $1.5 billion to $1.7 billion. We satisfy our retained earnings requirement with both restricted retained earnings (i.e., amounts related to the Joint Capital Enhancement (JCE) Agreement) and unrestricted retained earnings. Our 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 JCE Agreement is intended to enhance the capital position of each FHLBank. In accordance with the JCE Agreement, each FHLBank is required to allocate 20% of its net income each quarter to a separate restricted retained earnings account until the balance of the account, calculated as of the last day of each calendar quarter, equals at least 1% of that FHLBank's average balance of outstanding consolidated obligations for the calendar quarter. Under the JCE Agreement, these restricted retained earnings will not be available to pay dividends. With the decline in consolidated obligations outstanding in 2020, we ceased contributions to restricted retained earnings in the fourth quarter of 2020, in accordance with the JCE Agreement; and no further allocations of net income into restricted retained earnings are required until such time as the allocation requirement exceeds the balance of
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restricted retained earnings. Additionally, the JCE Agreement provides that amounts in restricted retained earnings in excess of 150% of our restricted retained earnings minimum (i.e., 1% of our total consolidated obligations calculated as of the last day of each calendar quarter) may be released from restricted retained earnings.
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 our capital plan.
Competition
Demand for our advances is affected by many factors, including the availability and cost of other sources of funding for members, including retail and brokered deposits. We also compete with our members' other suppliers of wholesale funding, both secured and unsecured. These suppliers may include securities dealers, commercial banks, and other FHLBanks for members with affiliated institutions that are members of other FHLBanks.
Under the FHLBank Act and regulations governing the operations of the FHLBanks, affiliated institutions in different FHLBank districts may be members of different FHLBanks. Members may have access to alternative funding sources through sales of securities under agreements to resell. Some members, particularly larger members, may have access to many more funding alternatives, including independent access to the national and global credit markets. The availability of alternative funding sources for members can significantly influence the demand for our advances and can vary as a result of many factors, including market conditions, members' creditworthiness, members' strategic objectives, and the availability of collateral.
Our ability to compete successfully for the advances business of our members depends primarily on our advances prices, ability to fund advances through the issuance of consolidated obligations at competitive rates, credit and collateral terms, prepayment terms, product features such as embedded option features, ability to meet members' specific requests on a timely basis, capital stock requirements, retained earnings policy, excess capital stock repurchase policies, and dividends.
In addition, the FHLBanks compete with the U.S. Treasury, Fannie Mae, Freddie Mac, and other GSEs, as well as corporate, sovereign, and supranational entities, for funds raised through the issuance of unsecured debt in the national and global debt markets. Increases in the supply of competing debt products may, in the absence of increases in demand, result in higher debt costs or lower amounts of debt issued at the same cost.
Regulatory Oversight, Audits, and Examinations
The FHLBanks are supervised and regulated by the Finance Agency, an independent agency in the executive branch of the U.S. government. The Finance Agency is charged with ensuring that the FHLBanks carry out their housing finance mission, remain adequately capitalized and able to raise funds in the capital markets, and operate in a safe and sound manner. The Finance Agency also establishes regulations governing the operations of the FHLBanks.
To assess the safety and soundness of the Bank, the Finance Agency conducts an annual examination of the Bank and other periodic reviews of its financial operations. In addition, we are required to submit information on our financial condition and results of operations each month to the Finance Agency.
Our capital stock is registered with the Securities and Exchange Commission (SEC) under Section 12(g)(1) of the Securities Exchange Act of 1934 (1934 Act) and, as a result, we are required to comply with the disclosure and
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reporting requirements of the 1934 Act and to file annual, quarterly, and current reports with the SEC, as well as meet other SEC requirements.
Our board of directors has an audit committee, and we have an internal audit department. An independent registered public accounting firm audits our annual financial statements. The independent registered public accounting firm conducts these audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Like other federally chartered corporations, the FHLBanks are subject to general congressional oversight. Each FHLBank must submit annual management reports to Congress, the President, the Office of Management and Budget, and the Comptroller General.
The U.S. Commodity Futures Trading Commission (CFTC) has been given regulatory authority over derivative transactions pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the FHLBanks are subject to the rules promulgated by the CFTC with respect to their derivatives activities. These rules affect all aspects of our derivatives activities by establishing requirements relating to derivatives recordkeeping and reporting, clearing, execution, and margining of uncleared derivative transactions.
The Comptroller General has authority under the FHLBank Act to audit or examine the Finance Agency and the FHLBanks and to determine the extent to which they fairly and effectively fulfill the purposes of the FHLBank Act. Furthermore, the Government Corporations Control Act provides that the Comptroller General may review any audit of the financial statements conducted by an independent registered public accounting firm. The Comptroller General may also conduct his or her own audit of any financial statements of an FHLBank.
The U.S. Treasury, or a permitted designee, is authorized under the combined provisions of the Government Corporations Control Act and the FHLBank Act to prescribe: the form, denomination, maturity, interest rate, and conditions to which FHLBank debt will be subject; the way and time FHLBank debt is issued; and the price for which FHLBank debt will be sold. The U.S. Treasury may purchase FHLBank debt up to an aggregate principal amount of $4.0 billion pursuant to the standards and terms of the FHLBank Act.
Human Capital Resources
Our human capital significantly contributes to the Bank’s success in achieving strategic business objectives. In managing our human capital, we focus on our workforce profile and the various programs and philosophies described below.
Workforce Profile – Our workforce is primarily comprised of corporate employees, with our principal operations centralized in one location. As of December 31, 2021, we had 297 employees. As of December 31, 2021, approximately 43.8% of our workforce identify as female, 55.9% identify as male, and 0.3% declined to state a gender. Approximately 66.3% of our workforce identify as an ethnic minority, and 1.0% declined to state an ethnicity. As of December 31, 2021, the average tenure of our employees was 8.4 years. Our overall turnover rate for 2021 was 13.1%. We strive to both develop talent within the organization and to supplement our talent pool with external hires. We believe that developing internal talent results in institutional strength and continuity and promotes engagement and commitment among our employees, which advances and broadens the overall success of the organization. Attracting new talent contributes to fresh perspectives, new ideas, continuous improvement, and our goal of supporting a diverse and inclusive workforce. There are no collective bargaining agreements with our employees.
Total Rewards – To achieve our strategic business initiatives and enhance business performance, we seek to attract, develop, and retain talented employees. We accomplish this through a combination of development programs and benefits, and by recognizing and rewarding performance. Specifically, our programs include:
Cash compensation that includes a competitive base salary and performance-based incentives;
Benefits:
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Health insurance, life and accidental death and dismemberment insurance, supplemental life insurance, 401(k) retirement savings plan with employer match, pension benefits, healthcare concierge;
Wellness program, including a wellness reimbursement, employee assistance program, and interactive education sessions;
Time away from work, including time off for vacation, illness, federal holidays, and volunteer opportunities;
Culture: includes employee resource groups, various cultural diversity, equity, and inclusion initiatives, and a mentorship program;
Work/Life balance: includes paid salary continuation for short-term disability, parental, military, and bereavement leave, and jury duty;
Development programs and training: leadership development, competency knowledge center learning modules, tuition reimbursement program, internal and external educational and development opportunities, relevant to employees’ job responsibilities; and
Management succession planning: our board of directors and leadership actively engage in management succession planning, with a review of our senior management team at least annually.
Our performance management framework includes goal setting and an annual performance review process. Overall annual ratings are calibrated across the leadership team, with base salary and incentive recommendations differentiated based upon employee contributions and overall performance.
We are committed to the health, safety, and wellness of our employees. In response to the COVID-19 pandemic, we have implemented significant changes to our operating environment, safety protocols, and procedures that we determined were in the best interest of our employees and members, and in compliance with government regulations. This includes ensuring all employees are able to work remotely when needed and implementing additional safety measures for employees to perform critical on-site work.
Diversity, Equity, and Inclusion Program – Diversity, Equity, and Inclusion (DEI) is a strategic business priority for the Bank. Our Chief Diversity Officer is a member of the senior management team, reports to the President and Chief Executive Officer, and serves as a liaison to the board of directors. We recognize that diversity increases our capacity for innovation and creativity and that inclusion allows us to leverage the unique perspectives of all employees and strengthens our retention efforts. We operationalize our commitment through the development and execution of a three-year DEI Strategic Plan that includes quantifiable metrics to measure its success, and we report regularly on these metrics to management and the board of directors. Additionally, we offer a range of opportunities for our employees to connect and grow personally and professionally through our Enterprise Diversity Committee, Workforce DEI Plan, and employee resource groups. We consider learning an important component of our DEI Strategic Plan and regularly offer educational opportunities to our employees and evaluate inclusive behaviors as part of our annual performance management process.
Available Information
The SEC maintains a website at www.sec.gov that contains all electronically filed or furnished SEC reports, including our annual reports on Form 10-K, our quarterly reports on Form 10-Q, and our current reports on Form 8-K, as well as any amendments. On our website at www.fhlbsf.com, we provide a link to the page on the SEC website that lists all of these reports. In addition, we provide direct links from our website to our annual report on Form 10-K and our quarterly reports on Form 10-Q on the SEC website as soon as reasonably practicable after electronically filing or furnishing the reports to the SEC. (Note: The website addresses of the SEC and the Bank have been included as inactive textual references only. Information on those websites is not part of this report.)

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ITEM 1A.    RISK FACTORS
The following discussion summarizes certain of the risks and uncertainties that the Federal Home Loan Bank of San Francisco (Bank, we, our, us) faces. The list is not exhaustive and there may be other risks and uncertainties that are not described below that may also affect our business. Any of these risks or uncertainties, if realized, could negatively affect our financial condition or results of operations or limit our ability to fund advances, pay dividends, or redeem or repurchase capital stock.
Market, Financial, and Economic Risks
Natural disasters, pandemics, terrorist attacks, or other catastrophic events could adversely affect our operations, business activities, results of operations, and financial condition.
Natural disasters, widespread public health emergencies (such as the COVID-19 pandemic), terrorist attacks, civil unrest, 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. While it is difficult to predict the future demand for advances, advances may remain at reduced levels or decline further if the level of liquidity in the financial markets and deposit levels at members remain elevated or if another economic downturn occurs. 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 our business activities and results of operations.
In particular, the ongoing 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 our assets, the valuation of collateral, and our net income and capital. Despite significant improvements in the overall U.S. economy since the initial effects of the COVID-19 pandemic, uncertainty remains around the pace of the recovery going forward, given concerns about virus resurgence from variants, vaccine distribution and vaccination rates, inflation, and supply chain disruptions. In addition, because of changing economic and market conditions affecting our investments, we may be required to recognize further impairments on securities held, which may result in additional provision for credit losses or write-downs on private label residential mortgage-backed securities (PLRMBS) or reduced comprehensive income, depending on the classification of the investment. A prolonged COVID-19 pandemic may continue to have adverse effects on our profitability and financial condition. Market volatility and economic stress during a prolonged COVID-19 pandemic may adversely affect our access to the debt markets and potentially affect our liquidity. Our decision to have all employees work remotely in accordance with local “stay-at-home” orders may create additional cyber-security risks and operational challenges that could affect our ability to conduct business or increase the risk of operational incidents and errors. In addition, we rely on vendors and other third parties to perform certain critical services, and if one of our critical vendors or third parties experiences a significant failure or interruption to their business because of the COVID-19 pandemic, we may be unable to effectively conduct and manage our business. The outlook remains uncertain, and although the Federal Reserve has indicated its expectations for increasing the target range for the Effective Federal Funds Rate starting in 2022, there is a possibility that if the Federal Reserve keeps interest rates low or if negative interest rates emerge, this could significantly affect our business and profitability.
Market uncertainty and volatility may adversely affect our business, profitability, or results of operations.
Adverse conditions in the housing and mortgage markets, or GSE restructuring that weakens the government’s commitment to encourage homeownership as a pillar of financial security, could result in a decrease in the availability of credit and liquidity within the mortgage industry, causing disruptions in the operations of mortgage originators, including some of our members. We continue to be subject to potential adverse effects on our financial condition, results of operations, ability to pay dividends, and ability to redeem or repurchase capital stock should economic conditions significantly deteriorate.
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Weaknesses in the housing and mortgage markets may undermine the need for wholesale funding and have a negative impact on the demand for advances.
A reduction in mortgage lending or mortgage assets held by member institutions may reduce their demand for wholesale funding. This could result in a decline in advance levels and adversely affect our financial condition and results of operations.
Changes in or limits on our ability to access the capital markets could adversely affect our financial condition, results of operations, or ability to fund advances, pay dividends, or redeem or repurchase capital stock.
Our primary source of funds is the sale of Federal Home Loan Bank (FHLBank) System consolidated obligations in the capital markets. Our ability to obtain funds through the sale of consolidated obligations depends in part on prevailing conditions in the capital markets, such as investor demand and liquidity in the financial markets. The sale of FHLBank System consolidated obligations can also be influenced by factors other than conditions in the capital markets, including legislative and regulatory developments and government programs and policies that affect the relative attractiveness of FHLBank System consolidated obligations. In addition, the level of dealer participation and support also affect liquidity in the agency debt markets. Based on these factors, the availability of funds may become limited or terms may become less acceptable. If funding access or terms are significantly adversely affected, our ability to support and continue our operations could be adversely affected, which could negatively affect our financial condition, results of operations, or ability to fund advances, pay dividends, or redeem or repurchase capital stock.
Changes in interest rates could adversely affect our financial condition, results of operations, or ability to fund advances on acceptable terms, pay dividends, or redeem or repurchase capital stock.
We realize income primarily from the spread between interest earned on our outstanding advances and investments and interest paid on our consolidated obligations and other liabilities. Although we use various methods and procedures to monitor and manage our exposure to changes in interest rates, we may experience instances when our interest-bearing liabilities will be significantly more sensitive to changes in interest rates than our interest-earning assets, or vice versa. In either case, interest rate movements contrary to our position could negatively affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock. Moreover, the impact of changes in interest rates on mortgage-related assets can be exacerbated by prepayments, with the risk that the assets will be refinanced by the obligor in low interest rate environments and the risk that the assets will remain outstanding longer than expected at below-market yields when interest rates increase.
Volatile market conditions increase the risk that our financial models will produce unreliable results.
We use market-based inputs in the financial models that we use to inform our operational decisions and to derive estimates for use in our financial reporting processes. While model inputs based on economic conditions and expectations are regularly evaluated and adjusted to changing conditions, sudden significant changes in these conditions may increase the risk that our models could produce unreliable results or estimates that vary widely or prove to be inaccurate.
Changes to and replacement of the London Interbank Offered Rate (LIBOR) benchmark interest rate could adversely affect our business, financial condition, and results of operations.
Financial services regulators and industry groups, including the United Kingdom's Financial Conduct Authority (FCA), the Alternative Reference Rates Committee (ARRC), and the International Swaps and Derivatives Association have evaluated and are continuing to evaluate the phase-out of LIBOR. The ARRC has settled on the Secured Overnight Financing Rate (SOFR) as its recommended alternative to U.S. dollar LIBOR. SOFR is based on a broad segment of the overnight Treasuries repurchase market and is intended to be a measure of the cost of borrowing cash overnight collateralized by Treasury securities. The Federal Reserve Bank of New York began publishing SOFR in April 2018.
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On March 5, 2021, the FCA announced the dates that panel bank submissions for all LIBOR settings will cease, after which representative LIBOR rates will no longer be available. The FCA confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative:
immediately after December 31, 2021, in the case of all sterling, euro, Swiss franc, and Japanese yen settings, and the 1-week and 2-month US dollar settings; and
immediately after June 30, 2023, in the case of the remaining U.S. dollar settings.
Because we generally are not permitted to continue to use instruments that reference LIBOR for hedging and risk-mitigating purposes, we have had to alter our hedging strategies and interest rate risk management. While the full effects of these adjustments remain to be seen, they may adversely affect our financial condition and results of operations.
During the third quarter of 2018, several market participants began issuing variable rate debt securities indexed to SOFR. In November 2018, the FHLBank System offered its first SOFR-indexed consolidated obligation, and we began offering SOFR-indexed advances. During 2019, we began to use derivatives indexed to SOFR to hedge interest rate risk. We have developed and are implementing a LIBOR Phase Out Transition Plan, to address LIBOR exposure, fallback language, operational preparedness, balance sheet management, and other related issues. Given the large volume of LIBOR-based mortgages and other LIBOR-based financial instruments in the marketplace, the basis adjustment to the replacement floating rate will receive extraordinary scrutiny. Whether the net impact will be positive or negative cannot yet be ascertained. The infrastructure changes necessary to manage the transition away from LIBOR in the markets, and corresponding adjustments to our systems, could be disruptive. We are planning for the eventual replacement of our LIBOR-indexed instruments and expect SOFR to be the dominant replacement. However, while demand for SOFR-indexed consolidated obligations has gained momentum, a robust demand for SOFR-indexed advances has yet to develop. Among other factors, demand for SOFR-indexed financial instruments will continue to depend upon market participants’ preference for SOFR over any other alternative reference rate. In addition, while market activity in SOFR-indexed financial instruments has continued to develop, the progress has been uneven and there can be no guarantee that SOFR will become widely accepted and used across market segments and financial products in a timely manner, and any other alternative reference rate may or may not be developed. Any disruption in the market transition towards SOFR or another alternate reference rate could result in increased financial, operational, legal, or reputational risks. The impact of LIBOR transition on our business, financial condition, and results of operations cannot be ascertained at this time.
Our exposure to credit risk could adversely affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
We assume secured and unsecured credit risk associated with the risk that a borrower or counterparty could default, and we could suffer a loss if we were not able to fully recover amounts owed to us on a timely basis. In addition, we have exposure to credit risk because the market value of an obligation may decline as a result of deterioration in the creditworthiness of the obligor or the credit quality of a security instrument. We have a high concentration of credit risk exposure to financial institutions. Significant credit losses could have an adverse effect on our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
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We depend on institutional counterparties to provide credit obligations that are critical to our business. Defaults by one or more of these institutional counterparties on their obligations to the Bank could adversely affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
We face the risk that one or more of our institutional counterparties may fail to fulfill contractual obligations to us. The primary exposures to institutional counterparty risk are with unsecured investment counterparties, derivative counterparties, mortgage servicers that service the loans we hold as collateral for advances, and third-party providers of supplemental or primary mortgage insurance for mortgage loans purchased under the Mortgage Partnership Finance® (MPF®) Program. A default by a counterparty could result in losses to the Bank if our credit exposure to the counterparty was under-collateralized or our credit obligations to the counterparty were over-collateralized, and could also adversely affect our ability to conduct our operations efficiently and at cost-effective rates, which in turn could adversely affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock. (“Mortgage Partnership Finance” and “MPF” are registered trademarks of the FHLBank of Chicago.)
Insufficient collateral protection could adversely affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
We require that all outstanding advances be fully collateralized. In addition, for mortgage loans that we purchase under the MPF Program, we require that the participating financial institutions fully collateralize the outstanding credit enhancement obligations not covered through the purchase of supplemental mortgage insurance. We evaluate the types of collateral pledged by borrowers and participating financial institutions and assign borrowing capacities to the collateral based on the risks associated with each type of collateral. If we have insufficient collateral before or after an event of payment default by the borrower, or we are unable to liquidate the collateral for the value we assigned to it in the event of a payment default by a borrower, we could experience a credit loss on advances, which could adversely affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
Under certain extreme stress conditions, we may not be able to meet our obligations as they come due or meet the credit and liquidity needs of our members in a timely and cost-effective manner.
We seek to be in a position to meet our members’ credit and liquidity needs and pay our obligations without maintaining excessive holdings of low-yielding liquid investments or having to incur unnecessarily high borrowing costs. In addition, we maintain a contingency liquidity plan designed to enable us to meet our obligations and the credit and liquidity needs of members in the event of operational disruptions or short-term disruptions in the capital markets. Under certain extreme stress conditions, our efforts to manage our liquidity position, including our contingency liquidity plan, may not enable us to meet our obligations and the credit and liquidity needs of our members, which could have an adverse effect on our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
Business and Strategic Risks
Limitations on the payment of dividends and repurchase of excess capital stock may adversely affect the attractiveness of our business model to members.
Our business model is based on the premise that we maintain a balance between our objective to promote housing, homeownership, and community and economic development through our activities with members and our objective to provide a return on the private capital provided by our members. We achieve this balance by delivering low-cost credit to help our members meet the credit needs of their communities while striving to pay members a reasonable return on their investment in our capital stock. Our financial strategies are designed to enable us to safely expand and contract our assets, liabilities, and capital as our member base and our members’ credit needs change. In addition, we manage our retained earnings to ensure compliance with regulatory capital requirements in the event of significant growth in member business or in the event of significant Bank financial distress. As a result of these strategies, we have historically been able to achieve our mission by meeting member credit needs and maintaining
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our adequately capitalized position while paying dividends (including dividends on mandatorily redeemable capital stock) and repurchasing and redeeming excess capital stock. Limitations on the payment of dividends and the repurchase of excess capital stock may diminish the value of membership from the perspective of a member.
Changes in the credit ratings on FHLBank System consolidated obligations may adversely affect the cost of consolidated obligations.
FHLBank System consolidated obligations are rated AA+/A-1+ with a stable outlook by S&P Global Ratings and Aaa/P-1 with a stable outlook by Moody’s Investors Service. Rating agencies may from time to time change a rating or issue negative reports. Because all of the FHLBanks have joint and several liability for all FHLBank consolidated obligations, negative developments at any FHLBank may affect these credit ratings or result in the issuance of a negative report regardless of our own financial condition and results of operations. In addition, because of the FHLBanks’ GSE status, the credit ratings of the FHLBank System and the FHLBanks are generally constrained by the long-term sovereign credit rating of the United States, and any downgrade in that sovereign credit rating may result in a corresponding downgrade to the credit ratings of FHLBank System consolidated obligations. Any adverse rating change or negative report may adversely affect our cost of funds and the FHLBanks’ ability to issue consolidated obligations on acceptable terms, which could also adversely affect our financial condition or results of operations or limit our ability to make advances on acceptable terms, pay dividends, or redeem or repurchase capital stock.
We face competition for advances and access to funding, which could adversely affect our business.
Our primary business is making advances to our members. We compete with other suppliers of wholesale funding, both secured and unsecured, including investment banks, commercial banks, the Federal Reserve Banks, and, in certain circumstances, other FHLBanks. Our members may have access to alternative funding sources, including independent access to deposits, along with the national and global credit markets. These alternative funding sources may offer more favorable terms than we do on our advances, including more flexible credit or collateral standards. In addition, many of our competitors are not subject to the same regulations as the FHLBanks, which may enable those competitors to offer products and terms that we are not able to offer.
The FHLBanks also compete with the U.S. Treasury, Fannie Mae, Freddie Mac, and other GSEs, as well as corporate, sovereign, and supranational entities, for funds raised through the issuance of unsecured debt in the national and global debt markets. Increases in the supply of competing debt products may, in the absence of increases in demand, result in higher debt costs or lower amounts of debt issued at the same cost. Increased competition could adversely affect our ability to access funding, reduce the amount of funding available to us, or increase the cost of funding available to us. Any of these results could adversely affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
Lowering advances pricing to our members may affect earnings.
A decision to lower advances prices to maintain or gain volume or increase the benefits to borrowing members could result in lower earnings, which could adversely affect the dividends on our capital stock.
If our activity stock requirement is below our regulatory capital requirements, a significant increase in business growth may require the Bank to increase its activity stock requirement in the future.
An activity stock requirement that is below our regulatory capital requirement requires the Bank to maintain a certain level of retained earnings for capital compliance and business growth. Depending on the level of our retained earnings and business growth and our capital management strategies, we may be required to increase our activity stock requirement in the future.
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We have a high concentration of advances and capital with certain institutions and their affiliates, and a loss or change of business activities with any of these institutions could adversely affect our results of operations, financial condition, or ability to pay dividends or redeem or repurchase capital stock.
We have a high concentration of advances and capital with certain institutions and their affiliates. All of the institutions may prepay or repay advances as they come due. If no other advances or investments are made to replace the prepaid and repaid advances of these institutions, it would result in a significant reduction of our total assets. During 2021, mergers and acquisitions have been announced involving certain of the Bank’s members, including some of the Bank’s largest borrowers. If other advances are not made to replace the advances of these members, the Bank’s total advances may be significantly reduced. The reduction in advances could result in a reduction of capital as the Bank repurchases the resulting excess capital stock, at our discretion, or redeems the excess capital stock after the expiration of the relevant five-year redemption period. Such a reduction in assets and capital could reduce our net income.
Additional information regarding concentration risk is set forth in “Item 8. Financial Statements and Supplementary Data – Note 5 – Advances – Credit and Concentration Risk.”
The lack of long-term growth or a material and prolonged decline in advances could adversely affect our results of operations, financial condition, or ability to pay dividends or redeem or repurchase capital stock.
The Bank’s ability to sustainably fulfill its mission and achieve business objectives, including our ability to pay dividends or redeem or repurchase capital stock, is influenced by the long-term growth in membership and advances. Although our business model is designed to enable us to safely expand and contract our assets, liabilities, and capital as our members’ credit needs change, a lack of long-term growth in membership and advances or a prolonged material decline in advances could affect our results of operations, financial condition, or ability to pay dividends or redeem or repurchase capital stock.
A prolonged decline and lack of mortgage-backed securities purchases could adversely affect our results of operations, financial condition, or ability to pay dividends or redeem or repurchase capital stock.
The primary source of the Bank’s earnings is interest income, which includes the net accretion of related income from improvement in expected cash flows on certain PLRMBS that were other-than-temporarily-impaired prior to January 1, 2020. At the time these securities mature, the Bank may not be able to replace these securities with other mortgage-backed securities with the same or better yields, or be limited in the purchase of other mortgage-backed securities due to, among other things, regulatory guidance on the Bank’s core mission assets.
We may become liable for all or a portion of the consolidated obligations for which other FHLBanks are the primary obligors.
As provided by the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), and 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 Federal Housing Finance Agency (Finance Agency) to require any FHLBank to repay all or any portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor, whether or not the other FHLBank has defaulted in the payment of those obligations and even though the FHLBank making the repayment received none of the proceeds from the issuance of the obligations. The likelihood of triggering our joint and several liability obligation depends on many factors, including the financial condition and financial performance of the other FHLBanks. If we are required by the Finance Agency to repay the principal or interest on consolidated obligations for which another FHLBank is the primary obligor, our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock could be adversely affected.
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If the Bank or any other FHLBank has not paid the principal or interest due on all consolidated obligations, we may not be able to pay dividends or redeem or repurchase any shares of our capital stock.
If the principal or interest due on any consolidated obligations has not been paid in full or is not expected to be paid in full, we may not be able to pay dividends on our capital stock or redeem or repurchase any shares of our capital stock. If another FHLBank defaults on its obligation to pay principal or interest on any consolidated obligations, the regulations governing the operations of the FHLBanks provide that the Finance Agency may allocate outstanding principal and interest payments among one or more of the remaining FHLBanks on a pro rata basis or any other basis the Finance Agency may determine. Our ability to pay dividends or redeem or repurchase capital stock could be affected not only by our own financial condition, but also by the financial condition of one or more of the other FHLBanks.
We could change our policies, programs, and agreements affecting our members.
We could change our policies, programs, and agreements affecting our members from time to time, including, without limitation, policies, programs, and agreements affecting the availability of and conditions for access to our advances and other credit products, the Affordable Housing Program (AHP), dividends, the repurchase of capital stock, and other programs, products, and services. These changes could cause our members to obtain financing from alternative sources, which could adversely affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock. In addition, changes to our policies, programs, and agreements affecting our members could adversely affect the value of membership from the perspective of a member.
The failure of the FHLBanks to set aside, in the aggregate, at least $100 million annually for the AHP could result in an increase in our AHP contribution, which could adversely affect our results of operations or ability to pay dividends or redeem or repurchase capital stock.
The FHLBank Act requires each FHLBank to establish and fund an AHP. Annually, the FHLBanks are required to set aside, in the aggregate, the greater of $100 million or 10% of their current year's net earnings (income before interest expense related to dividends paid on mandatorily redeemable capital stock and the assessment for the AHP) for their AHPs. If the FHLBanks do not make the minimum $100 million annual AHP contribution in a given year, we could be required to contribute more than 10% of our current year’s net earnings to the AHP. An increase in our AHP contribution could adversely affect our results of operations or ability to pay dividends or redeem or repurchase capital stock.
Operational Risks
We rely heavily on information systems and other technology. A failure, interruption, or security breach, including events caused by cyberattacks, of our information systems or those of critical vendors and third parties, such as the Federal Reserve Banks, could disrupt our business or adversely affect our financial condition, results of operations, or reputation.
We rely heavily on our information systems, other technology vendors, and other third parties to conduct and manage our business. If we or one of our critical vendors experience a failure, interruption, or security breach in any information systems or other technology, including events caused by cyberattacks, we may be unable to conduct and manage our business effectively. In addition, such a failure, interruption, or security breach could result in significant losses, a loss of personal and confidential information, or reputational damage. Cyberattacks, in particular those on financial institutions and financial market infrastructures, have become more frequent, sophisticated, and difficult to detect or prevent. In the event of a breach resulting in loss of data, such as personally identifiable information or other such data protected by data privacy or other laws, we may be liable for damages, fines, and penalties for such losses under applicable regulatory frameworks despite not being able to limit our liability or damages in the event of such a loss. In addition, significant initiatives undertaken by the Bank to replace information systems or other technology infrastructures may subject the Bank to a temporary risk of failure or interruption while we are in the process of implementing these new systems or technology infrastructures. Although we have implemented a business continuity plan, we may not be able to prevent, swiftly and adequately address, or
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otherwise mitigate the negative effects of any failure, interruption, or breach. Any failure, interruption, or breach could adversely affect our member business, member relations, risk management, reputation, or profitability, which could then negatively affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
The inability to attract and retain skilled key personnel could adversely affect the business and operations of the Bank.
We rely on key personnel to manage our business and conduct our operations. Competition for key skilled personnel has been intense within the financial services industry and businesses outside the financial services industry, including the technology sector. The Bank experienced higher employee turnover and increased competition in hiring and retaining key skilled personnel in 2021, as the ongoing COVID-19 pandemic brought about significant disruptions and changes to the U.S. labor market. Failure to attract and retain key skilled personnel, or to develop and implement an effective succession plan, could adversely affect the business and operations of the Bank.
Restrictions on the redemption, repurchase, or transfer of our capital stock could significantly reduce the liquidity of our shareholders’ capital stock investment.
Under the Gramm-Leach-Bliley Act of 1999, Finance Agency regulations, and our capital plan, our capital stock must be redeemed upon the expiration of the relevant five-year redemption period, subject to certain conditions. Capital stock may become subject to redemption following a five-year redemption period after a member provides a written redemption notice to the Bank; gives notice of intention to withdraw from membership; attains nonmember status by merger or acquisition, charter termination, or other involuntary membership termination; or after a receiver or other liquidating agent for a member transfers the member's Bank capital stock to a nonmember entity. Only capital stock that is not required to meet the membership capital stock requirement of a member or nonmember shareholder or to support a member or nonmember shareholder's outstanding activity with the Bank (excess capital stock) may be redeemed at the end of the redemption period. In addition, we may elect to repurchase some or all of the excess capital stock of a shareholder at any time at our sole discretion.
There is no guarantee, however, that we will be able to redeem capital stock held by a shareholder even at the end of the redemption period or to repurchase excess capital stock. If the redemption or repurchase of the capital stock would cause us to fail to meet our minimum regulatory capital requirements or cause the shareholder to fail to maintain its minimum investment requirement, then the redemption or repurchase is prohibited by Finance Agency regulations and our capital plan. In addition, since our capital stock may only be owned by our members (or, under certain circumstances, former members and certain successor institutions), and our capital plan requires our approval before a member or nonmember shareholder may transfer any of its capital stock to another member or nonmember shareholder, we cannot provide assurance that a member or nonmember shareholder would be allowed to transfer any excess capital stock to another member or nonmember shareholder at any time.
Regulatory Risks
Changes in federal fiscal and monetary policy could adversely affect our business or results of operations.
Our business and results of operations are significantly affected by the fiscal and monetary policies of the federal government and its agencies, including the Federal Reserve Board, which regulates the supply of money and credit in the United States. The Federal Reserve Board’s policies directly and indirectly influence the yield on interest-earning assets and the cost of interest-bearing liabilities, and could adversely affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
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We rely on derivative transactions to reduce our market risk and funding costs, and changes in our credit ratings or the credit ratings of our derivative counterparties, or changes in the legislation or the regulations affecting derivatives, may adversely affect our ability to enter into derivative transactions on cost-effective terms.
Our financial strategies are highly dependent on our ability to enter into derivative transactions on acceptable terms to reduce our market risk and funding costs. Rating agencies may from time to time change a rating or issue negative reports, which may adversely affect our ability to enter into derivative transactions on satisfactory terms in the quantities necessary to manage our interest rate risk and funding costs effectively. Changes in legislation or regulations affecting derivatives may also adversely affect our ability to enter into derivative transactions with acceptable counterparties on satisfactory terms. Any of these changes could negatively affect our financial condition, results of operations, or ability to make advances on acceptable terms, pay dividends, or redeem or repurchase capital stock.
We are affected by federal laws and regulations that could change or be applied in a manner detrimental to our operations.
The FHLBanks are GSEs, organized under the authority of and governed by the FHLBank Act, and, as such, are also governed by the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 and other federal laws and regulations. From time to time, Congress has amended the FHLBank Act and amended or enacted other legislation in ways that have significantly affected the FHLBanks and the manner in which the FHLBanks carry out their housing finance mission and business operations. Recently, legislative proposals are being considered that may require the FHLBanks to increase the percentage of their annual earnings devoted to their affordable housing programs than is currently required by law. New or modified legislation enacted by Congress and regulations or policies implemented by the Finance Agency could have a negative effect on our ability to conduct business or on our cost of doing business. In addition, new or modified legislation or regulations governing our members may affect our ability to conduct business or our cost of doing business with our members.
Changes in statutory or regulatory requirements or policies, or in their application, could result in changes in, among other things, the FHLBanks’ cost of funds, capital requirements, accounting policies, liquidity management, debt issuance, derivative hedging activities, permissible business activities, additional contributions to the Bank’s AHP, and the size, scope, and nature of the FHLBanks’ lending, investment, and mortgage purchase program activities. These changes could negatively affect our financial condition, results of operations, ability to pay dividends, or ability to redeem or repurchase capital stock. In addition, given the Bank’s relationship with other FHLBanks, events other than another FHLBank’s default on a consolidated obligation can affect us. Events that affect other FHLBanks, such as member failures or capital deficiencies at another FHLBank, could lead the Finance Agency to require or request that one FHLBank provide capital or other assistance to another FHLBank, purchase assets from another FHLBank, or impose other forms of resolution affecting one or more of the other FHLBanks. If we were called upon by the Finance Agency to take any of these steps, it could affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
Our members are governed by federal and state laws and regulations that could change in a manner detrimental to their ability or motivation to invest in the Bank or to use our products and services.
Most of our members are highly regulated financial institutions, and the regulatory environment in which our members operate could change in a manner that would negatively affect their ability or motivation to acquire or own our capital stock or use our products and services. Statutory or regulatory changes that make it less attractive to hold our capital stock or use our products and services could negatively affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
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Changes in the status, regulation, and perception of the housing GSEs or in policies and programs relating to the housing GSEs may adversely affect our business activities, future advances balances, the cost of debt issuance, or future dividend payments.
Changes in the status of Fannie Mae and Freddie Mac during the next phases of their conservatorships may result in higher funding costs for the FHLBanks, which could negatively affect our business and financial condition. In addition, negative news articles, industry reports, and other announcements pertaining to GSEs, including Fannie Mae, Freddie Mac, and any of the FHLBanks, could create pressure on all GSE debt pricing, as investors may perceive that their debt instruments bear increased risk.
As a result of these factors, the FHLBank System may have to pay higher rates on consolidated obligations to make them attractive to investors. If we maintain our current approach to pricing advances, an increase in the cost of issuing consolidated obligations could reduce our net interest spread (the difference between the interest rate received on advances and the interest rate paid on consolidated obligations) and cause our advances to be less profitable. If we increase the price of our advances to avoid a decrease in the net interest spread, the advances may be less attractive to our members, and our outstanding advances balances may decrease. In addition, an increase in the cost of issuing consolidated obligations could reduce our net interest spread on other interest-earning assets. As a result, an increase in the cost of issuing consolidated obligations could negatively affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
General Risk Factors
Economic weakness could adversely affect the business of many of our members and of our business and results of operations.
Our business and results of operations are sensitive to conditions in the housing and mortgage markets, as well as general business and economic conditions. Geopolitical instability, trade disruptions, or a sustained capital market correction could weaken consumer and business confidence and depress personal consumption and business investment. These factors could, in turn, adversely affect overall economic and housing market conditions. If economic and housing market conditions deteriorate, our business and results of operations could be adversely affected.
Significant climate change events could adversely affect the members and business of our Bank, and failure to meet investor or other stakeholder expectations regarding climate change and other environmental matters may damage the reputation of the Bank.
The region where we operate is subject to natural disasters, including risks from floods, wild fires, drought, and other natural disasters. Climate change is increasing the frequency, intensity, and duration of these events, which could destroy or damage Bank facilities or member properties, including collateral that members have pledged to secure advances or mortgages, disrupt the business of the Bank or our members, increase the probability of power or other outages, negatively affect the livelihood of our members, or otherwise cause significant economic dislocation in disaster-affected regions. Any of these situations may adversely affect the financial condition and results of operations of the Bank.
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There is increasing focus from investors, policymakers, regulators, and other stakeholders on climate change. Enhanced governmental, regulatory, and societal attention to climate change, including expanding mandatory and voluntary reporting, diligence, and disclosure on topics such as climate change, carbon emissions, water usage, waste management, and risk oversight, could expand the nature, scope, and complexity of matters that we are required to control, assess, and report. These issues and rapidly changing laws, regulations, policies, interpretations, and expectations may increase the cost of compliance and internal risk management programs for the Bank and alter the environment in which we do business, which could adversely affect the financial condition and results of operations of the Bank. In addition, the shift toward a lower-carbon economy, driven by policy regulations, low-carbon technology advancement, consumer sentiment, or liability risks, may negatively affect the Bank’s or our members’ business models, asset valuations, and operating costs.
ITEM 1B.    UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.    PROPERTIES
The Federal Home Loan Bank of San Francisco (Bank) maintains its principal offices in leased premises totaling 96,139 square feet of space at 333 Bush Street in San Francisco, California. The Bank also leases 6,808 square feet of space in off-site business continuity facilities located in Rancho Cordova, California. The Bank believes these facilities are adequate for the purposes for which they are currently used and are well maintained.

ITEM 3.    LEGAL PROCEEDINGS
The Federal Home Loan Bank of San Francisco (Bank) may be subject to various legal proceedings arising in the normal course of business.
After consultation with legal counsel, the Bank is not aware of any legal proceedings that are expected to have a material effect on its financial condition or results of operations or that are otherwise material to the Bank.

ITEM 4.        MINE SAFETY DISCLOSURES
Not applicable.
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PART II

ITEM 5.        MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Federal Home Loan Bank of San Francisco (Bank) has a cooperative ownership structure. The members and certain nonmembers own all the capital stock of the Bank, the majority of the directors of the Bank are officers or directors of members, and the directors are elected by members (or selected by the board of directors to fill mid-term vacancies). There is no established marketplace for the Bank’s capital stock. The Bank’s capital stock is not publicly traded. The Bank issues only one class of capital stock, Class B stock, which, under the Bank’s capital plan, may be redeemed at par value, $100 per share, upon five years’ notice from the member to the Bank, subject to certain statutory and regulatory requirements and to the satisfaction of any ongoing capital stock investment requirements applying to the member.
At the Bank’s discretion and at any time, the Bank may repurchase shares held by a member in excess of the member’s required capital stock holdings. 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 restricted retained earnings, dividend payments, and the repurchase of excess capital stock. 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 Bank’s historical dividend rates and the dividend philosophy are not indicative of future dividend declarations. The Bank’s dividend policy may be revised or eliminated in the future and there can be no assurance as to future dividends. For information on the Bank’s policies and practices with respect to dividend payments, see “Part I. Financial Information, Item 1. Business – Capital – Dividends and Retained Earnings,” which is herein incorporated by reference.
The information regarding the Bank’s capital requirements is set forth in “Item 8. Financial Statements and Supplementary Data – Note 11 – Capital.” At February 28, 2022, the Bank had 21,050,637 shares of Class B stock held by 330 members and 29,868 shares of Class B stock held by 2 nonmembers. Class B stock held by nonmembers is classified as mandatorily redeemable capital stock.
Federal Housing Finance Agency (Finance Agency) rules state that Federal Home Loan Banks (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. 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.
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 Federal Home Loan Bank Act and applicable requirements under the regulations governing the operations of the FHLBanks.
Additional information regarding the Bank’s dividends is set forth in “Item 1. Business” and in “Item 8. Financial Statements and Supplementary Data – Note 11 – Capital.”

ITEM 6.    [RESERVED]
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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements contained in this annual report on Form 10-K, 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,” “plan,” “project,” “should,” “will,” “would,” “possible,” 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 credit 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;
natural disasters (including those resulting from significant climate change), widespread health emergencies (such as the COVID-19 pandemic), terrorist attacks, civil unrest, or other unanticipated or catastrophic events;
changes to, and replacement of, the London Interbank Offered Rate (LIBOR) benchmark interest rate, and the use and acceptance of the Secured Overnight Financing Rate (SOFR) and any alternative reference rate;
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) 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;
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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 (including cyber-security risks); and
changes in the FHLBanks’ long-term credit ratings.
Readers of this report should not rely solely on the forward-looking statements and should consider all risks and uncertainties addressed throughout this report, as well as those discussed under “Item 1A. Risk Factors.”
Overview
Net income for 2021 was $287 million, compared with net income of $335 million for 2020. Net income declined $48 million relative to 2020 net income, primarily reflecting a reduction of $109 million in other income/(loss) that was partially offset by an improvement in credit losses of $32 million and an increase in net interest income of $17 million.
The $109 million reduction in other income/(loss) for 2021 was primarily a result of the Bank's receipt of disgorgement proceeds in connection with a Securities and Exchange Commission enforcement action, in the amount of $85 million, in the third quarter of 2020, and an increase in net fair value losses of $22 million associated with derivatives and financial instruments carried at fair value.
The $17 million increase in net interest income for 2021 primarily reflected lower funding costs, an improvement of $46 million in retrospective adjustment of the effective yields on mortgage loans and related delivery commitments, and an increase of $30 million in net gains on designated fair value hedges. These increases in net interest income were partially offset by a decline in average interest-earning assets. Additionally, the Bank recorded a reversal of credit losses of $6 million for 2021, primarily associated with certain private-label residential mortgage-backed securities (PLRMBS) classified as available-for-sale (AFS), which largely resulted from improved credit performance and a more optimistic economic outlook. This reversal of credit losses for 2021 compares with a provision for credit losses of $26 million for 2020 associated with certain PLRMBS classified as AFS, which primarily resulted from a significant decline in fair values in the first quarter of 2020.
At December 31, 2021, total assets were $54.1 billion, a decrease of $14.5 billion from $68.6 billion at December 31, 2020. Advances decreased by $14.0 billion, to $17.0 billion at December 31, 2021, from $31.0 billion at December 31, 2020, as demand for advances remained muted in response to substantial market liquidity resulting from the ongoing economic and financial market impacts of the COVID-19 pandemic, including government intervention. In addition, mortgage loans held for portfolio decreased by $0.9 billion, to $1.0 billion at December 31, 2021, from $1.9 billion at December 31, 2020, because the Bank ceased purchasing new mortgage loans for its own portfolio on March 31, 2021. These decreases to total assets were partially offset by an increase in total investments of $0.6 billion, to $35.8 billion at December 31, 2021, from $35.2 billion at December 31, 2020. The increase in investments primarily reflected an increase in securities purchased under agreements to resell of $8.3 billion and an increase in Federal funds sold of $3.5 billion, which were partially offset by a reduction in U.S. Treasury securities of $8.5 billion as the Bank continued to manage its liquidity. A decrease of $2.8 billion in MBS also partially offset the other increases in investments balances.
Accumulated other comprehensive income (AOCI) increased by $101 million during 2021, to $331 million at December 31, 2021, from $230 million at December 31, 2020, primarily reflecting higher fair values of MBS classified as AFS.
On February 16, 2022, the Bank’s board of directors declared a quarterly cash dividend on the average capital stock outstanding during the fourth quarter of 2021 at an annualized rate of 6.00% that will total $35 million. The quarterly dividend rate is consistent with the Bank's dividend philosophy of endeavoring to pay a quarterly dividend at a rate between 5% and 7% annualized. The Bank recorded the dividend on February 16, 2022, and the Bank expects to pay the dividend on March 10, 2022.
As of December 31, 2021, the Bank complied with all of its regulatory capital requirements. The Bank’s total regulatory capital ratio was 10.9%, exceeding the 4.0% requirement. The Bank had $5.9 billion in permanent capital, exceeding its risk-based capital requirement of $1.1 billion.
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The Bank will continue to monitor its financial condition, 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.
As previously disclosed, legislation has been introduced in both the U.S. Senate and the House of Representatives that, if enacted in its proposed form, would require that the FHLBanks set aside a higher percentage of earnings for their affordable housing and community investment programs than is currently required under the existing law. Senate bill S. 1684, Federal Home Loan Banks’ Mission Implementation Act, and the related House bill, H.R. 3323, would require the FHLBanks to set aside 20% of net income for their affordable housing program and 10% of net income for a newly created economic development program. As part of the subsequent Congressional budget reconciliation process, a legislative proposal is under consideration for the FHLBanks to set aside 15% of net income for their affordable housing program. The FHLBanks have had discussions with members of Congress and their staffs about the proposal to increase the AHP set aside percentage and continue to closely monitor any such proposals and developments.
COVID-19 Pandemic Impact. In 2020, the COVID-19 pandemic impacted the financial markets and created substantial uncertainty about future economic activity and the Bank’s operating environment. In response, the federal government and the Federal Reserve used their full range of tools to support the economy. The emergency measures taken by the federal government and the Federal Reserve helped facilitate liquidity and support stability in fixed income markets but contributed to the significant reduction in demand for advances from members. The Bank continued to meet its funding needs throughout 2021.
The Bank transitioned to remote work in mid-March 2020 and continued to operate effectively with employees working remotely throughout 2021. The Bank has assessed the remote work environment and has taken measures to mitigate cyber-security risks and operational challenges that could affect the Bank’s ability to conduct business or increase the risk of operational incidents and errors. Possible adverse impacts as a result of the Bank’s workforce working remotely may include, but are not limited to, increased risk of operational incidents, cyber-security threats, and operational challenges that could affect the Bank’s ability to conduct business or increase the risk of operational errors.
To reduce the risk of 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), that 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.
The full duration and impact of the pandemic and subsequent governmental and public actions remain uncertain. Demand for advances may continue to remain low or decrease because of the impact of government stimulus on member liquidity, Federal Reserve Board policies (including lower interest rates set by the Federal Open Market Committee (FOMC)), and reduced member asset activity. The Bank believes that lower demand from the Bank’s members for advances will likely continue into the foreseeable future.
Management will continue to monitor the COVID-19 pandemic’s impact on the Bank’s financial condition and operations, including the Bank’s liquidity, advance levels, funding spreads, and workforce effectiveness.
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Results of Operations
Comparison of 2021 and 2020
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 PLRMBS that were other-than-temporarily-impaired prior to January 1, 2020, 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 years ended December 31, 2021 and 2020, 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.
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Average Balance Sheets
 20212020
(Dollars in millions)Average
Balance
Interest
Income/
Expense
Average
Rate
Average
Balance
Interest
Income/
Expense
Average
Rate
Assets
Interest-earning assets:
Interest-bearing deposits$1,194 $0.14 %$3,077 $15 0.49 %
Securities purchased under agreements to resell1,437 0.07 4,745 20 0.43 
Federal funds sold6,417 0.08 4,672 17 0.37 
Trading securities:
MBS— 2.19 — 3.13 
Other investments2,943 61 2.08 3,979 83 2.09 
AFS securities:(1)
MBS(2)(3)
9,861 216 2.19 10,686 213 1.99 
Other investments(3)
1,766 0.22 4,845 30 0.61 
HTM securities:(1)
MBS3,957 43 1.09 6,226 109 1.75 
Mortgage loans held for portfolio1,361 42 3.10 2,807 34 1.19 
Advances(4)
28,492 224 0.79 52,834 598 1.13 
Total interest-earning assets57,430 598 1.04 93,874 1,119 1.19 
Other assets(4)(5)
941 — 317 — 
Total Assets$58,371 $598 $94,191 $1,119 
Liabilities and Capital
Interest-bearing liabilities:
Consolidated obligations:
Bonds(3)
$29,085 $62 0.21 %$64,144 $437 0.68 %
Discount notes21,262 13 0.06 22,137 169 0.76 
Deposits and other borrowings1,089 0.08 828 0.29 
Mandatorily redeemable capital stock— 5.38 62 8.90 
Borrowings from other FHLBanks— — 0.07 — 8.41 
Total interest-bearing liabilities51,440 76 0.15 87,172 614 0.70 
Other liabilities(4)
508 — 718 — 
Total Liabilities51,948 76 87,890 614 
Total Capital6,422 — 6,301 — 
Total Liabilities and Capital$58,370 $76 $94,191 $614 
Net Interest Income$522 $505 
Net Interest Spread(6)
0.89 %0.49 %
Net Interest Margin(7)
0.91 %0.54 %
Interest-earning Assets/Interest-bearing Liabilities111.64 %107.69 %
(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 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 $51 million and $59 million in 2021 and 2020, respectively.
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(3)Interest income/expense and average rates include the effect of associated interest rate exchange agreements, as follows:
2021
(In millions)AdvancesAFS SecuritiesConsolidated Obligation BondsTotal
(Amortization)/accretion of hedging activities$(22)$(108)$— $(130)
Net gain/(loss) on derivatives and hedged items11 — 13 
Net interest settlements on derivatives(195)(76)65 (206)
Total net interest income/(expense)$(215)$(173)$65 $(323)
2020
(In millions)AdvancesAFS SecuritiesConsolidated Obligation BondsTotal
(Amortization)/accretion of hedging activities$(5)$(50)$— $(55)
Net gain/(loss) on derivatives and hedged items(3)(14)— (17)
Net interest settlements on derivatives(297)(174)23 (448)
Total net interest income/(expense)$(305)$(238)$23 $(520)
(4)Includes forward settling transactions and valuation adjustments for certain cash items.
(5)Includes non-credit-related OTTI losses on HTM securities.
(6)Net interest spread is calculated as 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 calculated as net interest income divided by average interest-earning assets.
Net interest income in 2021 was $522 million, a 3% increase from $505 million in 2020. The following table details the changes in interest income and interest expense for 2021 compared to 2020. Changes in both volume and interest rates influence changes in net interest income, net interest spread, and net interest margin.
Change in Net Interest Income: Rate/Volume Analysis
2021 Compared to 2020
 Increase/
(Decrease)
Attributable to Changes in(1)
(In millions)Average VolumeAverage Rate
Interest-earning assets:
Interest-bearing deposits$(13)$(6)$(7)
Securities purchased under agreements to resell(19)(9)(10)
Federal funds sold(12)(17)
Trading securities: Other investments(22)(22)— 
AFS securities:
MBS(2)
(17)20 
Other investments(2)
(26)(13)(13)
HTM securities: MBS(66)(32)(34)
Mortgage loans held for portfolio(24)32 
Advances(2)
(374)(225)(149)
Total interest-earning assets(521)(343)(178)
Interest-bearing liabilities:
Consolidated obligations:
Bonds(2)
(375)(166)(209)
Discount notes(156)(7)(149)
Deposits and other borrowings(2)(3)
Mandatorily redeemable capital stock(5)(4)(1)
Total interest-bearing liabilities(538)(176)(362)
Net interest income$17 $(167)$184 
(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.
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The net interest margin was 91 basis points for 2021, 37 basis points higher than the net interest margin for 2020, which was 54 basis points. The net interest spread was 89 basis points for 2021, 40 basis point higher than the net interest spread for 2020, which was 49 basis points. These increases were primarily a result of lower funding costs, an improvement in retrospective adjustment of the effective yields on mortgage loans and related delivery commitments, and an increase in net gains on designated fair value hedges.
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 on a prospective basis and accreted into interest income based on 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. (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – 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” for further information.)
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 years ended December 31, 2021 and 2020.
Other Income/(Loss)
(In millions)20212020
Other Income/(Loss):
Net gain/(loss) on trading securities(1)
$(57)$15 
Net gain/(loss) on advances and consolidated obligation bonds held under fair value option(54)85 
Net gain/(loss) on derivatives37 (152)
Gain on disgorgement settlement— 85 
Standby letters of credit fees16 20 
Other, net
Total Other Income/(Loss)$(50)$59 
(1)The net gain/(loss) on trading securities that were economically hedged totaled $(57) million and $15 million in 2021 and 2020, respectively.
Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option – The following table presents the net gain/(loss) on advances and consolidated obligation bonds held under the fair value option for the years ended December 31, 2021 and 2020.
Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option
(In millions)20212020
Advances$(62)$85 
Consolidated obligation bonds— 
Total$(54)$85 
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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 8. Financial Statements and Supplementary Data – Note 15 – Fair Value.”
Net Gain/(Loss) on Derivatives – Under the accounting guidance 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. Certain derivatives are associated with assets or liabilities but do not qualify as fair value hedges under the accounting guidance 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 economic hedges and the categories of hedged items that contributed to the gains and losses on derivatives that were recorded in “Net gain/(loss) on derivatives” in 2021 and 2020.
Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives
2021 Compared to 2020
(In millions)20212020
Hedged ItemGain/(Loss) on Economic
Hedges
Income/
(Expense) on Economic
Hedges
TotalGain/(Loss) on Economic
Hedges
Income/
(Expense) on Economic
Hedges
Total
Advances:
Elected for fair value option$90 $(38)$52 $(67)$(37)$(104)
Not elected for fair value option(8)(3)27 (28)(1)
Consolidated obligation bonds:
Elected for fair value option(5)(4)— 
Not elected for fair value option(11)(8)(1)
Consolidated obligation discount notes:
Not elected for fair value option(2)(1)21 20 
Non-MBS investments:
Not elected for fair value option39 (40)(1)(31)(50)(81)
Mortgage delivery commitment:
Not elected for fair value option— — — — 
Price alignment amount(1)
— — — — 
Total$108 $(71)$37 $(69)$(83)$(152)
(1)This amount relates to derivatives for which variation margin on cleared derivatives is characterized as a daily settled contract.
During 2021, net gains on derivatives totaled $37 million compared to net losses of $152 million in 2020. These amounts included expense of $71 million and expense of $83 million resulting from net settlements on derivative instruments used in economic hedges in 2021 and 2020, 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.
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Additional information about derivatives and hedging activities is provided in “Item 8. Financial Statements and Supplementary Data – Note 14 – Derivatives and Hedging Activities.”
Gain on disgorgement settlement – During 2020, the Bank received disgorgement proceeds in the amount of $85 million in connection with a Securities and Exchange Commission enforcement action. The Bank had no gains on disgorgement settlements during 2021.
Other Expense. Other expenses totaled $159 million in 2021 compared to $165 million in 2020. The $6 million decrease in other expense primarily resulted from $3 million in matching grant programs the Bank provided in 2020 to partner with members providing assistance to their communities in response to the challenges brought about by the COVID-19 pandemic and a $2 million improvement in the net periodic benefit cost associated with the Bank’s defined benefit plans in 2021.
Affordable Housing Program. The FHLBank Act requires each FHLBank to establish and fund an AHP. Each FHLBank’s AHP provides subsidies to members, who use the funds to assist in the purchase, construction, or rehabilitation of housing for households earning up to 80% of the median income for the area in which they live. Subsidies may be in the form of direct grants or below-market interest rate advances.
To fund the AHP, the FHLBanks must set aside, in the aggregate, the greater of $100 million or 10% of the current year's net earnings (income before interest expense related to dividends paid on mandatorily redeemable capital stock and the assessment for the AHP). To the extent that the aggregate 10% calculation is less than $100 million, the FHLBank Act requires that each FHLBank contribute such prorated sums as may be required to ensure that the aggregate contribution of the FHLBanks equals $100 million. The proration would be made on the basis of the income of the FHLBanks for the previous year. In the aggregate, the FHLBanks set aside $201 million and $315 million for their AHPs in 2021 and 2020, respectively, and there was no AHP shortfall in either of those years.
The Bank’s total AHP assessments equaled $32 million in 2021 and $38 million in 2020.
Return on Average Equity. Return on average equity was 4.46% for 2021, compared to 5.32% for 2020. The decrease reflected lower net income for 2021, which decreased 14%, from $335 million in 2020 to $287 million in 2021, and an increase in average equity from $6.3 billion in 2020 to $6.4 billion in 2021.
Dividends and Retained Earnings. In 2021, the Bank paid dividends at an annualized rate of 5.74%, totaling $135 million, including $135 million in dividends on capital stock and a de minimis amount in dividends on mandatorily redeemable capital stock. In 2020, the Bank paid dividends at an annualized rate of 5.53%, totaling $164 million, including $159 million in dividends on capital stock and $5 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.
For more information, see “Item 1. Business – Dividends and Retained Earnings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Capital,” and “Item 8. Financial Statements and Supplementary Data – Note 11 – Capital – Excess Stock Repurchase, Retained Earnings, and Dividend Framework.”
For a comparison of 2020 and 2019 results of operations, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations” in the Bank’s 2020 Form 10-K.
Financial Condition
Total assets were $54.1 billion at December 31, 2021, compared to $68.6 billion at December 31, 2020. Advances decreased by $14.0 billion, or 45%, to $17.0 billion at December 31, 2021, from $31.0 billion at December 31,
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2020. MBS investments decreased by $2.8 billion, or 18%, to $13.0 billion at December 31, 2021, from $15.8 billion at December 31, 2020. Average total assets were $58.4 billion for 2021, a 38% decrease from $94.2 billion for 2020. Average advances were $28.5 billion for 2021, a 46% decrease from $52.8 billion for 2020. Average MBS investments were $13.8 billion for 2021, an 18% decrease from $16.9 billion for 2020.
Advances outstanding at December 31, 2021, included unrealized gains of $169 million, of which $103 million represented unrealized gains on advances hedged in accordance with the accounting for derivative instruments and hedging activities and $66 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, 2020, included unrealized gains of $639 million, of which $509 million represented unrealized gains on advances hedged in accordance with the accounting for derivative instruments and hedging activities and $130 million represented unrealized gains on economically hedged advances that are carried at fair value in accordance with the fair value option. The change in the net unrealized gains on the hedged advances and advances carried at fair value from December 31, 2020, to December 31, 2021, 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 $47.9 billion at December 31, 2021, a decrease of $14.5 billion from $62.4 billion at December 31, 2020, primarily reflecting a $13.9 billion decrease in consolidated obligations outstanding to $46.7 billion at December 31, 2021, from $60.6 billion at December 31, 2020. Average total liabilities were $51.9 billion for 2021, a 41% decrease compared to $87.9 billion for 2020. Average consolidated obligations were $50.3 billion for 2021 and $86.3 billion for 2020.
Consolidated obligations outstanding at December 31, 2021, included unrealized gains of $139 million on consolidated obligation bonds hedged in accordance with the accounting for derivative instruments and hedging activities and unrealized gains of $6 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, 2020, included unrealized losses of $13 million on consolidated obligation bonds hedged in accordance with the accounting for derivative instruments and hedging activities and unrealized losses of $1 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 gains on the hedged consolidated obligation bonds and on the consolidated obligation bonds carried at fair value from December 31, 2020, to December 31, 2021, 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 December 31, 2021, 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 $652.9 billion at December 31, 2021, and $746.8 billion at December 31, 2020.
On August 5, 2021, S&P Global Ratings (S&P) affirmed the long-term issuer credit ratings on all of the FHLBanks at AA+. The outlook for all ratings remained stable.
On July 28, 2021, Moody’s Investors Service (Moody’s) affirmed the Aaa long-term ratings of the FHLBank System. The outlook for all ratings remained stable.
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
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changes in their opinion regarding, among other factors, the general outlook for a particular industry or the economy.
Certain Bank assets 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.” 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 identifies key strategies to manage and mitigate the risks associated with the discontinuation of LIBOR: (i) execute hedging strategies that permit alternative reference rates, including SOFR, (ii) transact SOFR-indexed advances and bonds, (iii) where practicable, implement improved fallback provisions for the discontinuation of LIBOR in new and legacy contracts, and (iv) where practicable, terminate LIBOR derivatives with maturities after June 30, 2023, and replace them with SOFR derivatives. In addition, the Transition Plan prohibits new LIBOR transactions, 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.
On October 21, 2020, the Finance Agency issued a Supervisory Letter to the FHLBanks that required each FHLBank to adhere to the Fallbacks Protocol (Protocol) by December 31, 2020, and, to the extent necessary, to amend any bilateral agreements regarding the adoption of the Protocol by December 15, 2020. On October 23, 2020, International Swaps and Derivatives Association, Inc. (ISDA) launched the Supplement to the 2006 ISDA Definitions (Supplement) and the ISDA 2020 Interbank Offered Rate (IBOR) Protocol. Both the Supplement and the Protocol took effect on January 25, 2021. As part of its LIBOR transition efforts, the Bank and all of its uncleared derivatives counterparties have adhered to the Protocol. On January 25, 2021, all of the Bank’s outstanding legacy bilateral derivative transactions that referenced a covered IBOR, including U.S. dollar LIBOR, were amended to apply the new ISDA-recommended IBOR fallbacks in the event of the relevant IBOR’s cessation.
On March 5, 2021, the United Kingdom’s Financial Conduct Authority (FCA) further announced that LIBOR will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021, in the case of 1-week and 2-month U.S. dollar LIBOR, and immediately after June 30, 2023, in the case of the remaining U.S. dollar LIBOR settings.
Although the FCA does not expect LIBOR to become unrepresentative before the applicable cessation date and intends to consult on requiring the administrator of LIBOR to continue publishing LIBOR of certain currencies and tenors on a non-representative, synthetic basis for a period after the applicable cessation date, there is no assurance that LIBOR, of any particular currency or tenor, will continue to be published or be representative through any particular date. The FCA’s announcements constitutes an index cessation event under the Protocol and Supplement, and as a result, the fallbacks spread adjustment for each tenor was fixed as of the date of the announcement.
At December 31, 2021, the Bank had no exposure to LIBOR settings that ceased immediately after December 31, 2021.
The following tables present LIBOR-indexed variable rate financial instruments for LIBOR tenors that cease or will no longer be representative immediately after June 30, 2023, by due date or termination date at December 31, 2021 and 2020.
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LIBOR-Indexed Financial Instruments
(In millions)
December 31, 2021
Due/Terminates in 2022Due/Terminates through June 30, 2023Due/Terminates thereafterTotal
Assets indexed to LIBOR:
Par value of advances by redemption term$250 $— $10 $260 
Unpaid principal balance of investment securities by contractual maturity
MBS(1)
— 12 4,098 4,110 
Total securities
Notional amount of receive leg LIBOR interest rate swaps by termination date
Cleared517 309 562 1,388 
Uncleared112 23 10 145 
Total $879 $344 $4,680 $5,903 
Notional amount of pay leg LIBOR interest rate swaps by termination date
Cleared$210 $52 $40 $302 
Uncleared35 — — 35 
Total $245 $52 $40 $337 
December 31, 2020
Due/Terminates in 2021Due/Terminates in 2022Due/Terminates through June 30, 2023Due/Terminates thereafterTotal
Assets indexed to LIBOR:
Par value of advances by redemption term$100 $250 $— $10 $360 
Unpaid principal balance of investment securities by contractual maturity
MBS(1)
— 98 5,645 5,744 
Notional amount of receive leg LIBOR interest rate swaps by termination date
Cleared6,852 887 369 798 8,906 
Uncleared213 112 22 394 741 
Total $7,165 $1,250 $489 $6,847 $15,751 
Liabilities indexed to LIBOR:
Par value of consolidated obligation bonds by contractual maturity$6,798 $— $— $— $6,798 
Notional amount of pay leg LIBOR interest rate swaps by termination date
Cleared1,523 559 100 28 2,210 
Uncleared238 35 — 95 368 
Total $8,559 $594 $100 $123 $9,376 
(1)Certain MBS with multiple indices where LIBOR is the majority index are included in this amount.
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As of December 31, 2021, interest rate caps and floors indexed to LIBOR totaling $550 million were due to terminate after June 30, 2023. As of December 31, 2020, interest rate caps and floors indexed to LIBOR totaling $230 million were due to terminate in 2021 and totaling $550 million were due to terminate after June 30, 2023.
Market activity in SOFR-indexed financial instruments continues to increase. During 2021 and in total, the Bank has issued $1.1 billion and $102.3 billion, respectively, in SOFR-indexed consolidated obligation bonds. The table below presents the par value of variable rate consolidated obligation bonds by interest rate index at December 31, 2021 and 2020.
Variable Rate Consolidated Obligation Bonds by Interest Rate Index
(In millions)Amount Outstanding
Interest Rate Index20212020
LIBOR$— $6,798 
SOFR5,575 30,915 
Total par value$5,575 $37,713 
For more information on LIBOR-indexed advances, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations Financial Condition Segment Information Advances-Related Business.” 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” in other income/(loss), 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.” AHP assessments are not included in the segment reporting analysis but are 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 8. Financial Statements and Supplementary Data – Note 13 – 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 decreased $10.8 billion to $40.1 billion (74% of total assets) at December 31, 2021, from $50.9 billion (74% of total assets) at December 31, 2020.
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 $198 million in 2021, a decrease of $69 million, or 26%, compared to $267 million in 2020, which was primarily due to lower balances and profit spreads of advances and other credit products. Adjusted net interest income for this segment represented 43% and 56% of total adjusted net interest income for 2021 and 2020, respectively.
Advances – The par value of advances outstanding decreased by $13.4 billion, or 44%, to $16.9 billion at December 31, 2021, from $30.3 billion at December 31, 2020. Average advances outstanding were $28.5 billion for
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2021, a 46% decrease from $52.8 billion for 2020. Outstanding balances of advances may significantly increase and decrease from period to period because of a member’s liquidity and financial strategies; therefore, yearend balances may vary significantly from average balances for the year.
Advances outstanding to the Bank’s top five borrowers and their affiliates decreased by $10.6 billion to $8.9 billion at December 31, 2021, from $19.5 billion at December 31, 2020, including First Republic Bank, MUFG Union Bank, National Association (Union Bank), and First Technology Federal Credit Union, whose advances exceeded 10% of the Bank’s total advances as of December 31, 2021. (See “Item 8. Financial Statements and Supplementary Data – Note 5 – Advances – Concentration Risk” for further information.) If First Republic Bank continues to prepay advances or does not renew advances that come due, and if no other advances are made to replace these advances, the Bank’s total advances may be significantly reduced in subsequent quarters. In addition, it was announced on September 21, 2021, that U.S. Bancorp entered into an agreement to acquire Union Bank. U.S. Bancorp is not a member of the Bank. If Union Bank is no longer a member of the Bank or any successor to Union Bank does not become a member of the Bank, and if no other advances are made to replace Union Bank’s outstanding advances, the Bank’s total advances may be significantly reduced due to the loss of a significant member. Other acquisitions have been announced or completed involving large regional financial institutions in the Bank’s district, which potentially reduce the opportunity to grow advances from these large regional financial institutions. Advances outstanding to the Bank’s other borrowers decreased by $2.8 billion. The $13.4 billion decrease in advances outstanding reflected a $12.6 billion decrease in fixed rate advances and a $1.1 billion decrease in adjustable rate advances, offset by a $0.3 billion increase in variable rate advances.
The Bank has a significant long-term funding arrangement with a borrower that had, in prior periods, significantly contributed to the level of outstanding advances and may significantly contribute to the level of outstanding advances in the future; however, there can be no assurance that any advances will be made under this arrangement.
The components of the advances portfolio at December 31, 2021 and 2020, are presented in the following table.
Advances Portfolio by Product Type
20212020
(Dollars in millions)Par ValuePercentage of Total Par ValuePar ValuePercentage of Total Par Value
Adjustable – LIBOR$250 %$250