UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20202022
OR
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| ☐ | 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)
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| Federally chartered corporation of the United States | | 94-6000630 | |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. employer identification number) | |
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| 333 Bush Street, Suite 2700 | | | |
| San Francisco, | CA | | 94104 | |
| (Address of principal executive offices) | | (Zip code) | |
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(415) 616-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered | |
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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.
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| Large accelerated filer | | ☐ | | Accelerated filer | | ☐ |
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| Non-accelerated filer | | ☒ | | Smaller reporting company | | ☐ |
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| | | | 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. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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, 2020,2022, the aggregate par value of the capital stock held by shareholders of the registrant was approximately $2,751$2,759 million. At February 28, 2021,2023, the total shares of capital stock outstanding, including mandatorily redeemable capital stock, totaled 22,821,081.39,420,371.
DOCUMENTS INCORPORATED BY REFERENCE: None.
Federal Home Loan Bank of San Francisco
20202022 Annual Report on Form 10-K
Table of Contents
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PART I.I | | | | |
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| Item 1. | | | | |
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| Item 1A. | | | | |
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| Item 1B. | | | | |
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| Item 2. | | | | |
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| Item 3 | | | | |
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| Item 4 | | | | |
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PART II.II | | | | |
| Item 5. | | | | |
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| Item 6. | | | | |
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| Item 7. | | | | |
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| Item 7A. | | | | |
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| Item 8. | | | | |
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| Item 9. | | | | |
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| Item 9A. | | | | |
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| Item 9B. | | | | |
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| Item 9C. | | | | |
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PART III.III | | | | |
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| Item 10. | | | | |
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| Item 11. | | | | |
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| Item 12. | | | | |
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| Item 13. | | | | |
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| Item 14. | | | | |
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PART IV.IV | | | | |
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| Item 15. | | | | |
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| Item 16. | | | | |
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| SIGNATURES | | |
PART I. FINANCIAL INFORMATIONI
ITEM 1. BUSINESS
At the Federal Home Loan Bank of San Francisco (Bank)(Bank or we), 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 Bankour 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. BankOur 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 atheir 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 size from $6 million to over $142 billion in assets.
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, 2020,2022, we had advances and capital stock, including mandatorily redeemable capital stock, outstanding to the following types of institutions:
| | | Advances | | Advances |
| (Dollars in millions) | (Dollars in millions) | Total Number of Institutions | | Capital Stock Outstanding | | Number of Institutions | | Par Value of Advances Outstanding | (Dollars in millions) | Total Number of Institutions | | Capital Stock Outstanding | | Number of Institutions | | Par Value of Advances Outstanding |
| Commercial banks | Commercial banks | 144 | | | $ | 1,333 | | | 106 | | | $ | 23,143 | | Commercial banks | 132 | | | $ | 2,512 | | | 72 | | | $ | 71,704 | |
| Savings institutions | Savings institutions | 11 | | | 88 | | | 8 | | | 825 | | Savings institutions | 8 | | | 69 | | | 4 | | | 605 | |
| Credit unions | Credit unions | 153 | | | 743 | | | 74 | | | 5,084 | | Credit unions | 155 | | | 1,037 | | | 93 | | | 16,216 | |
| Industrial loan companies | Industrial loan companies | 2 | | | 2 | | | 2 | | | 42 | | Industrial loan companies | 2 | | | 1 | | | 1 | | | 20 | |
| Insurance companies | Insurance companies | 22 | | | 112 | | | 10 | | | 1,063 | | Insurance companies | 26 | | | 132 | | | 9 | | | 1,210 | |
| Community development financial institutions | Community development financial institutions | 7 | | | 6 | | | 7 | | | 103 | | Community development financial institutions | 7 | | | 7 | | | 6 | | | 100 | |
| Total member institutions | Total member institutions | 339 | | | 2,284 | | | 207 | | | 30,260 | | Total member institutions | 330 | | | 3,758 | | | 185 | | | 89,855 | |
| Housing associates eligible to borrow | Housing associates eligible to borrow | 2 | | | — | | | — | | | — | | Housing associates eligible to borrow | — | | | — | | | 1 | | | 95 | |
Other nonmember institutions(1) | Other nonmember institutions(1) | 3 | | | 2 | | | 2 | | | 78 | | Other nonmember institutions(1) | 3 | | | 5 | | | 3 | | | 167 | |
| Total | Total | 344 | | | $ | 2,286 | | | 209 | | | $ | 30,338 | | Total | 333 | | | $ | 3,763 | | | 189 | | | $ | 90,117 | |
(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 the Bank'sour 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 from the Bank 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 the Bank’sour capital stock, while remaining safemaintaining safety and sound.soundness.
We require our members to purchase our capital stock to support their activities with the Bank. We leverage this capital stock and the Bank’sour retained earnings by using our GSE status to borrow funds in the capital markets at rates that are generally at a small to moderate spread above U.S. Treasury security yields.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.
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 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 69.6% and 64.4% for the years ended December 31, 2022 and 2021, respectively.
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 advances 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 the Bank’sour 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 on a fixed and advances with embedded option features (such as caps and floors),floating rate basis, 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 the Bankwe 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.
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 the Bank'sour 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. The Bank hasWe have not purchased any PLRMBS since the first quarter of 2008.
Additional information about our investments and credit losses associated with our PLRMBS 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, the Bank may purchasewe purchased from members, for itsour own portfolio, conventional conforming fixed rate mortgage loans under the MPF Original product. In addition, the Bank may facilitatewe facilitated the purchase of conforming fixed rate mortgage loans from members for concurrent sale to Fannie Mae under the MPF Xtra® product. When members sellsold loans under the MPF Xtra product, the loans arewere sold to a third-party investor and arewere not recorded on the Bank’sour 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.
Housing and Community Investment Programs
FHLBank San Francisco offers grant and credit programs and other resources that promote homeownership, expand access to quality affordable housing, boost economic development, seed or sustain small businesses, and revitalize communities. Our members use our community program grants and discounted credit products to help:
•Create or preserve quality affordable housing for lower-income families and individuals, many with special needs;
•Facilitate sustainable and equitable homeownership for low- to moderate-income families and individuals;
•Deliver skill-building educational programs and life-enhancing social services to underserved communities;
•Support innovative targeted jobs programs and entrepreneurship; and
•Assist local nonprofits and small businesses and advance community-based economic development objectives.
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 theour 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$1.3 billion in AHP subsidies to support the purchase, development, or rehabilitation of approximately 145,500147,700 housing units.
We allocate at least 65% of our annual AHP subsidy to our competitive AHP General Fund, 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 General Fund 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 two homeownership set-aside programs, the Individual Development and Empowerment Account Program and the Workforce Initiative Subsidy for Homeownership Program.program. Under these programs,this program, 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 Boardboard of Directors,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 2020, the Bank2022, we awarded $3.5$1.5 million in AHEAD Program grants, and since 2004, we have awarded $22.0 million in AHEAD program grants.
Empowering Black Homeownership (EBH). In 2021, the Bank’s board of directors approved $1.0 million matching grant program designed to narrow the Black homeownership gap by expanding access to expert housing counseling services. EBH was established to address the historical and continuing racial discrimination in homeownership and expand the capacity of Department of Housing and Urban Development (HUD)-approved housing counseling agencies (HCAs) to serve more aspiring and at-risk homeowners in communities of color. EBH applications were submitted by members working with these agencies, and awards were based on the eligibility and evaluation of the applications. In 2022, the Bank disbursed $1.0 million for 41 EBH grants to 14 members that had made donations to 22 HCAs, for a total of $2.2 million in support for HCAs in Arizona, California, and Nevada.
Nevada Capacity Building Program. In 2022, the Bank’s board of directors approved a $500 thousand grant to the Nevada Housing Coalition (NHC) to build capacity for affordable housing development in Nevada. The funds were used to improve development resources in the state, grow its affordable housing ecosystem, and better position Nevada to secure and deploy affordable housing dollars from a variety of existing and new sources. Capacity building efforts will include delivering critical training to practitioners on the nuances of securing and applying for affordable housing dollars, increasing the state’s affordable housing project pipeline, and ultimately ensuring more housing options for all Nevadans. In 2022, the Bank disbursed $500 thousand to NHC.
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 as of December 31, 2020, and through the date of this report, we do not believe that it is probable that we will be asked to do so.
The Bank’sOur status as a GSE is critical to maintaining its 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, 2020,2022, S&P rated the FHLBanks’ consolidated obligations AA+/A-1+, and Moody’s rated them Aaa/P-1. As of December 31, 2020,2022, S&P assigned each of the FHLBanks a long-term credit rating of AA+ with a stable outlook, and Moody's 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 the Bank’sour requests for issuance of consolidated obligations has never adversely affected the Bank’sour 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 a variety of indices for interest rate resets, including the Secured Overnight Financing Rate and the Overnight Index Swapfor interest rate based on the effective Federal funds 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 the Bank iswe 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, the Bank iswe are the sole primary obligor on the consolidated obligation bond. When the Bankwe 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, the Bank iswe 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.
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 the Bank’sour 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 and hedging activities”derivatives” in other income,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 the Bank’sour 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 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-impairedwith previous credit losses related to the prior to January 1, 2020,methodology of evaluating credit losses, 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 funding costs and interest rate risk inherent in the ordinary course of business.and lower funding costs. The types of derivatives we use include interest rate swaps (including callable, putable, and basis swaps) and interest rate cap and floor agreements.
The regulations governing the operations of the FHLBanks and the Bank'sour Risk Management Policy establish standards and guidelines for our use of derivatives. These regulationsstandards 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 Boardboard of Directors.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 conservativelygenerally matched with respect to the expected repricingsrepricing of the assets and the liabilities. We may also use
derivatives to adjust the effective repricing frequency or option characteristics ofembedded in certain financial instruments (such as advances and consolidated obligations) to achieve our risk management objectives.
We measure the Bank’sour 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. The Bank’sOur low interest ratemarket 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 the Bank’sour 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 the Boardour board of Directors,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 Boardboard of Directorsdirectors and the Finance Agency.
BankOur 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. The Bank’sOur Excess Stock Repurchase, Retained Earnings, and Dividend Framework (Framework) summarizes the Bank’sour 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 the Bank’s Boardour board of Directors.directors. The Boardboard of Directorsdirectors may amend the Framework from time to time. The Framework includes a dividend philosophy to endeavor to pay a quarterly dividend at an annualized rate between 5% and 7%. The decision to declare any dividend and the dividend rate are at the discretion of the Bank’s Boardour board of Directors,directors, which may choose to follow the dividend philosophy as guidance in the dividend declaration. The Bank’sOur historical dividend rates and the dividend philosophy are not indicative of future dividend declarations. The Bank’s dividend policyOur Framework may be revised or eliminated in the future, and there can be no assurance as to future dividends.
In accordance with the Framework, the Bank retainswe retain certain amounts in restricted retained earnings, which are not made available for dividends in the current dividend period, and maintainsmaintain an amount of total retained earnings at least equal to itsthe required retained earnings as described in the Framework. The BankWe may be restricted from paying dividends if itthe Bank is not in compliance with any of itsour minimum capital requirements or if payment would cause the Bank to fail to meet any of itsour minimum capital requirements. In addition, the Bankwe may not pay dividends if any principal or interest due on any consolidated obligation has not been paid in full or is not expected to be paid in full, or, under certain circumstances, if the Bank failswe 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.”
The Bank’sOur Risk Management Policy limits the payment of dividends based on the ratio of the Bank’sour 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%, the Bankwe 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 – The Bank’sOur 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 itsour required retained earnings as described in the Framework. As determined usingThe methodology may be revised from time to time, and the Bank’slevel of required retained earnings under the methodology may change due to updating data and assumptions used in the methodology. The required level of total retained earnings had ranged from $2.4was $2.6 billion to $2.5and $1.5 billion during 2019at December 31, 2022, and continuing through September 2020.December 31, 2021, respectively. In September 2020,July 2022, the methodology was revised and resulted in a required level of retained earnings of $2.9was increased from $1.7 billion to $2.6 billion. In January 2021,2023, the methodology was further revised and resulted in a required level of retained earnings was increased from $2.6 billion to $2.7 billion. Our retained earnings requirement may be changed at any time. The board of $1.9 billion. The Bank satisfies itsdirectors periodically reviews the retained earnings methodology and analysis to determine whether any adjustments are appropriate.
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. The Bank’s retained earnings requirement may be changed at any time. The Board of Directors periodically reviews the retained earnings methodology and analysis to determine whether any adjustments are appropriate.
The JCE Agreement is intended to enhance the capital position of each FHLBank. In accordance with the JCE Agreement, each FHLBank is required to allocatereclassify an amount equal to 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 declineThe JCE Agreement also provides that amounts in consolidated obligations outstanding in 2020, the Bank ceased contributions to restricted retained earnings in the fourth quarterexcess of 2020, in accordance with the JCE Agreement; and no further allocations150% of net income intoour restricted retained earnings are required until such timeminimum (i.e., 1% of our total consolidated obligations calculated as of the allocation requirement exceeds the balancelast 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 Boardboard of Directorsdirectors declare and pay any dividend. A decision by the Boardboard of Directorsdirectors to declare or not declare a dividend is a discretionary matter and is subject to the requirements and restrictions of the FHLBank Act and applicable requirements under the regulations governing the operations of the FHLBanks. In addition, Finance Agency rules do not permit the Bank to pay dividends in the form of capital stock if its excess capital stock exceeds 1% of its total assets. Excess capital stock is defined as the aggregate of the capital stock held by each shareholder in excess of its minimum capital stock requirement, as established by the Bank’sour capital plan.
Competition
Demand for Bankour 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.
The Bank’sOur 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 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 Boardboard of Directorsdirectors 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 the Bank’s 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
The Bank’sOur human capital significantly contributes to the Bank’s success in achieving its strategic business objectives. In managing the Bank’sour human capital, we focus on our workforce profile and the various programs and philosophies described below.
Workforce Profile – The Bank’sOur workforce is primarily comprised of corporate employees, with the Bank’sour principal operations centralized in one location. As of December 31, 2020, the Bank2022, we had 305297 employees. As of December 31, 2020,2022, approximately 42.6%46.0% of the Bank’sour workforce identify as female, 57.1%53.0% identify as male, and 0.3%1.0% declined to state a gender. Approximately 63.3%68.0% of the Bank’sour workforce identify as an ethnic minority, and 1.3%1.0% declined to state an ethnicity. The Bank’s workforce includes long-tenured employees.As of December 31, 2022, the average tenure of our employees was 8.4 years. Our overall turnover rate for 2022 was 14.8%. We strive to both develop talent within the organization and to supplement our talent pool as needed, 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. As of December 31, 2020, the average tenure of the Bank’s employees was 8.3 years. There are no collective bargaining agreements with our employees.
Total Rewards – We seek to attract, develop, and retain talented employees toTo achieve our strategic business initiatives and enhance business performance.performance, we seek to attract, develop, and retain talented employees. We accomplish this objective 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:
◦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, and sporting events sponsorship;sessions;
◦Time away from work, including time off for vacation, illness, personal, holiday,federal holidays, and volunteer opportunities;
•Culture –Culture: includes employee resource groups, various cultural diversity, equity, and inclusion initiatives, and a mentormentorship program;
•Work/Life balance –balance: includes 100% paid salary continuation for short-term disability, parental, military, and militarybereavement leave, bereavement,and jury duty, and court appearances;duty;
•Development programs and training –training: leadership development, employee engagement, 360 feedback process, competency workshops and competency knowledge center learning modules, tuition reimbursement program, internal educational and development opportunities, and fee reimbursement for external educational and development programsopportunities, relevant to employees’ job responsibilities; and
•Management succession planning –planning: our Boardboard of Directorsdirectors and leadership actively engage in management succession planning, with a defined plan forreview of our senior management team.team at least annually.
Our performance management framework includes goal setting and an annual performance review.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 (D&I)(DEI) is a strategic business priority for the Bank. The Bank’sOur 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 Boardboard of Directors.directors. Equity is embedded in the Bank’s workforce management and business activities. We recognize that diversity increases our capacity for innovation
and creativity and that inclusion allows us to leverage the unique perspectives of all employees, facilitates a sense of belonging, and strengthens our retention efforts. We operationalize our commitment through the development and execution of a three-year D&IDEI Strategic Plan that includes quantifiable metrics to measure its success, and we report regularly on these metrics to management and the Boardboard of Directors.directors. Additionally, we offer a range of opportunities for our employees to connect and grow personally and professionally through our D&I committee, councils,Enterprise Diversity Committee, Workforce DEI Plan, and employee resource groups. We consider learning an important component of our D&IDEI 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.) The Bank is exempt from certain SEC statutes and regulations and the filing of certain reports with the SEC, including proxy statements, otherwise required by public companies whose securities are registered with the SEC.
ITEM 1A. RISK FACTORS
The following discussion summarizes certain of the risks and uncertainties that the Federal Home Loan Bank of San Francisco (Bank)(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 Condition Risks
Natural disasters, pandemics, terrorist attacks, or other catastrophic events could adversely affect the Bank’sour operations, business activities, results of operations, and financial condition.
Natural disasters, widespread public health emergencies (such as the recent outbreak of COVID-19)COVID-19 pandemic), terrorist attacks, civil unrest, geopolitical instability or conflicts (including the ongoing hostilities in Russia and Ukraine), trade disruptions, economic or other sanctions, 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 the Bank’sour business activities and results of operations.
In particular, the ongoing COVID-19 pandemic has disruptedand related developments that have lingered continue to have negative effects on the economy and may continue to disrupt the financial and credit markets in which the Bank operates and adversely affect our operations and business activities. Despite improvements in the decline in interest rates has adversely affectedoverall U.S. economy since the fair valueseffects of the Bank’s assets,COVID-19 pandemic, uncertainty remains around the valuationpace of collateral,the recovery going forward, given concerns about virus resurgence from variants, vaccine distribution and the Bank’s net incomevaccination rates, inflation, and capital.supply chain disruptions. In addition, because of changing economic and market conditions affecting the Bank’sour investments, the Bankwe 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 the Bank’sour profitability and financial condition. Market volatility and economic stress during a prolonged COVID-19 pandemic may adversely affect the Bank’sour access to the debt markets and possiblypotentially affect the Bank’sour liquidity. The Bank’sOur decision to have all employees work remotely certain days of the week in accordance with local “stay-at-home” ordersthe Bank’s hybrid schedule may create additional cyber-security risks and operational challenges that could affect the Bank’sour ability to conduct business or increase the risk of operational incidents and errors. In addition, the Bank relieswe 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 any interruption to their business because of the COVID-19 pandemic, the Bankwe may be unable to effectively conduct and manage itsour business. The outlook remains uncertain, and there is a possibility that if the Federal Reserve keeps interest rates low or if negative interest rates arise, this could significantly affect the Bank’s business and profitability.
Market uncertainty and volatility may adversely affect our business, profitability, or results of operations.
Adverse and volatile conditions in the housing, mortgage, and mortgagefinancial markets or GSE restructuring that weakens the government’s commitment to encourage home ownership 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.
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, member demand for advances, 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, orour ability to pay dividends or redeem or repurchase capital stock. Moreover,stock, or investor demand for consolidated obligations. During 2022 the U.S. economy continued to experience rising interest rates. 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. The Federal Reserve Bank’s policies directly and indirectly influence interest rates on the Bank’s assets and liabilities and could
Volatile market conditions increase
adversely affect the risk that ourdemand for advances and therefore adversely impact the Bank’s financial models will produce unreliable results.
We use market-based inputscondition and results of operations. Recent efforts of the Federal Reserve Board to ease inflation, such as continued increases in policy interest rates, have contributed to volatility in the financial models that we use to inform our operational decisionsmarkets and to derive estimates for use in our financial reporting processes. While model inputs based onuncertainties about the 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.outlook, including concerns about a possible recession.
Changes to and replacement of the London Interbank Offered Rate (LIBOR) benchmark interest rate to the Secured Overnight Financing Rate could adversely affect our business, financial condition, and results of operations.
In July 2017,Financial services regulators and industry groups, including the United Kingdom's Financial Conduct Authority (FCA), a regulator of financial services firmsthe Alternative Reference Rates Committee (ARRC), and financial markets in the U.K., stated that they will plan for a phase-out of regulatory oversight of LIBOR interest rate indices. The FCA has indicated they will support the LIBOR indices through 2021 to allow for an orderly transition to an alternative reference rate. Other financial services regulators and industry groups, including the International Swaps and Derivatives Association and the Alternative Reference Rates Committee (ARRC), have evaluated and are continuing to evaluate the phase-out of LIBOR.LIBOR as a benchmark interest rate. 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.
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.
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 the Bank began offering SOFR-indexed advances. During 2019, the Bank began to use derivatives indexed to SOFR to hedge interest rate risk. Because many of the Bank’s assets and liabilities are indexed to LIBOR, the Bank hasWe have developed and implementedare implementing a LIBOR Phase Out Transition Plan, which addressesto address potential LIBOR exposure, fallback language, operational and system 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 adjustmentARRC has recommended spread adjustments to the replacement floating rate will receive extraordinary scrutiny.rates meant to minimize the difference between LIBOR and SOFR. 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 Bankour systems, could be disruptive. The Bank isWe are planning for our LIBOR-indexed mortgage investments to convert to SOFR. Any disruption in the eventual replacement of its LIBOR-indexed instruments and expectsmarket transition towards SOFR to be the dominant replacement. When LIBOR will be discontinued and what theor another alternate reference rate could result in increased financial, operational, legal, or reputational risks. The impact of such aLIBOR transition may be on our business, financial condition, and results of operations cannot be fully ascertained at this time.
Business Risks
Limitations on the payment of dividends and repurchase of excess capital stock mayOur 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 attractivenessrisk 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 Bank’s business modelobligor or the credit quality of a security instrument. We have a high concentration of credit risk exposure to members.certain institutions and their affiliates. Significant credit losses or heightened focus on our credit exposure to individual members due to market events could have an adverse effect on our financial condition, reputation, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
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, custodians, 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 by eligible collateral types mostly with a nexus to housing. 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 premise thatrisks associated with each type of collateral. If we maintain a balance between our objectivehave insufficient collateral before or after an event of payment default by the borrower, or we are unable to promote housing, homeownership, and community and economic development through our activities with members and our objectiveliquidate the collateral for the value we assigned 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 the Bank’s 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, the Bank manages its retained earnings to ensure compliance with regulatory capital requirementsit in the event of significant growth in member businessa payment default by a borrower, we could experience a credit loss on advances, which could adversely affect our financial condition, reputation, results of operations, or in the event of significant Bank financial distress. As a result of these strategies, we have historically been ableability to achieve our mission by meeting member credit needs and maintaining our adequately capitalized position while payingpay dividends (including dividends on mandatorily redeemableor redeem or repurchase 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. For example, downgrades to the U.S. sovereign credit rating or outlook may occur if the U.S. government fails to adequately address, based on the credit rating agencies’ criteria, its fiscal budget deficit or statutory debt limits (which was most recently reached in January 2023). 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.
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.
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.
Strategic Execution Risks
Limitations on the payment of dividends and repurchase of excess 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 our adequately capitalized position while paying dividends (including dividends on mandatorily redeemable capital stock) and repurchasing and redeeming excess stock. Limitations on the payment of dividends and the repurchase of excess stock may diminish the value of membership from the perspective of a member.
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, Federal Reserve, 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 the Bank’s activity stock requirement is below the Bank’s regulatory capital requirements, a significantWe may increase in business growth may require the Bank to increase its activityour activity-based stock requirement in the future.
Under our capital plan, we have the authority to increase stock requirement that is belowrequirements within established ranges. Depending upon the Bank’ssize of our balance sheet, advance business growth potential, our regulatory capital requirement requireslevel, and other considerations, we may increase activity-based stock requirements (i.e., the Bankcapital stock required to maintain a certainbe owned by our members under our capital plan to support business activity with the Bank). Such increases would require members with activity-based stock outstanding to purchase additional stock in connection with their existing business. Members also would be required to purchase the new higher level of retained earnings foractivity-based stock in connection with new business. Higher stock levels may also lead to lower return on capital compliance and business growth. Depending onstock in the future. Finally, higher activity-based stock requirements would increase the level of the Bank’s retained earnings and business growth andadvances we could support while exceeding our regulatory capital requirements.
For more information on the Bank’s capital management strategies, the Bank may be required to increase its activityplan and activity-based stock, requirement in the future.see “Part II. Item 7. 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.”
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. 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 the Bank’sour discretion, or redeems the excess capital stock after the expiration of the relevant five-year redemption period. TheSuch a reduction in assets and capital could reduce the Bank’sour 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.”
AThe 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 the Bank’sour 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 with previous credit losses related to the prior methodology of evaluating credit losses. 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 the Bank’sour 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.
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 cyber attacks,cyberattacks, of our information systems or those of critical vendors and third parties, such as the Federal Reserve Banks, could disrupt the Bank’sour business or adversely affect our financial condition, results of operations, or reputation.
We rely heavily on our information systems, technology vendors, and other technologythird parties to conduct and manage our business, and we rely on vendors and other third parties to perform certain critical services.business. If we or one of our critical vendors experiencesexperience a failure, interruption, or security breach in any information systems or other technology, including events caused by cyber attacks,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 the Bank iswe 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, timelyswiftly and adequately address, or otherwise mitigate the negative effects of any failure, interruption, or interruption.breach. Any failure, interruption, or interruptionbreach 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.
We may fail to identify and manage risks related to a variety of aspects of our business, including operational risk, legal and compliance risk, interest-rate risk, liquidity risk, market risk, and credit risk.
We have adopted policies, procedures, and controls, and use systems and technology, and have an elaborate risk governance framework, designed to aid in monitoring and managing these risks. However, we cannot provide complete assurance that these controls, procedures, policies, systems, technology, and risk governance framework, are adequate to identify and manage all the risks inherent in the Bank’s business, including, for example, risks that arise as a result of changes in the business. Failed or inadequate controls, risk management practices, systems, and technology, and failure to adhere to applicable policies and procedures, and the overall risk governance framework, could have an adverse effect on our financial condition and results of operations.
The inability to attract and retain skilled key personnel could adversely affect the business, workforce, and operations of the Bank.
We rely on key personnel and a competent workforce 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 2022, as the ongoing COVID-19 pandemic brought about significant disruptions and changes to the U.S. labor market. In addition, increased remote-working opportunities have also increased competition in hiring and retaining skilled key personnel. 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.
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.
Restrictions on the redemption, repurchase, or transfer of the Bank’sour 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.
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 and state laws and regulations that could change or be applied in a manner detrimental to our operations.operations, or to the ability or motivation to invest in the Bank or use our products and services.
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. New or modified legislation enacted by Congress or states 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.business, or affect our members’ ability or motivation to acquire or own our capital stock or use of our products and services. 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, membership base, membership eligibility, our members’ access to our products and services (including whether a member meets required tangible capital levels to access advances), 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 the Bankwe 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.
In 2022, the Finance Agency initiated a comprehensive review of the FHLBank System. This review is expected to culminate with a written report from the Finance Agency. The expected report may include recommendations for statutory revisions, proposals for new or modified regulations, regulatory guidance under existing regulations, or other regulatory or supervisory actions consistent with the Finance Agency’s statutory authority. For more details on this Finance Agency review, see “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments - Finance Agency’s Review and Analysis of the Federal Home Loan Bank System “FHLBank System at 100: Focusing on the Future.”
At this time, we cannot predict what actions will ultimately result from this initiative or the extent of any changes to the FHLBank System or the Bank, or the ultimate impact on the FHLBanks or the Bank in the future. Potential changes resulting from this initiative, including those relating to the FHLBanks’ fulfillment of their mission, membership requirements, and requirements relating to affordable housing contributions and support for community investment, will likely impact our business and operations, which may impact our financial condition.
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.
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 or conflicts (including the ongoing hostilities in Russia and Ukraine), trade disruptions, or a sustained capital market correction could weaken consumer and business confidence and depress personal consumption, employment rates, and business investment. These factors could, in turn, adversely affect overall economic and housing market conditions. If economic and housing market conditions deteriorate, the Bank’sour business and results of operations could be adversely affected. During 2022, the U.S. economy continued to experience inflation. Prolonged inflation may adversely affect overall economic conditions, and in turn result in adverse consequences to the Bank or member business and impact the Bank’s financial condition, results of operation, or ability to pay dividends. Recent efforts of the Federal Reserve Board to ease inflation, such as continued increases in policy interest rates, have contributed to significant volatility in the financial markets and uncertainties about the economic outlook, including concerns about a possible recession.
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.
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.
On March 28, 2019, Lawrence H. Parks, a former officer of the Bank, along with another former employee, filed a lawsuit in the U.S. District Court for the District of Columbia, against the Bank and certain of the Bank’s current and former directors, chief executive officer, and two employees. The plaintiffs’ suit alleged breach of contract (and breach of the covenant of good faith and fair dealing) arising out of a mediation relating to threatened claims made by the plaintiffs of alleged: (i) race discrimination under the D.C. Human Rights Act against the Bank, (ii) aiding and abetting discrimination under the D.C. Human Rights Act against the chief executive officer and members of the Board, (iii) defamation against two Bank employees (and the Bank as their employer), and (iv) negligent hiring/supervision of the chief executive officer against the Bank and the Board of Directors. The plaintiffs sought damages not to exceed $3.6 million. On January 27, 2020, the defendants’ motion to dismiss was granted for the individual defendants and the claims against the directors, officers, and employees were dismissed without prejudice. On January 6, 2020, the same plaintiffs filed a complaint in the U.S. District Court for the District of Columbia, against the Bank and certain of the Bank’s current and former directors, chief executive officer, and two employees alleging the four threatened claims described along with three additional claims as follows: (i) discrimination in the course of employment termination on the basis of race in violation of 42 U.S.C. Section 1981 against the Bank, (ii) discrimination in the course of employment termination on the basis of race in violation of 42 U.S.C. Section 1981 against the chief executive officer and certain current and former members of the Board, (iii) discrimination in the course of employment termination in violation of the D.C. Human Rights Act against the Bank, (iv) aiding and abetting discrimination in the course of employment in violation of the D.C. Human Rights Act against the chief executive officer and certain current and former members of the Board, (v) retaliation in violation of the D.C. Human Rights Act against the Bank, (vi) defamation against two Bank employees and the Bank, and (vii) negligent hiring/supervision of the chief executive officer against the Bank and certain current and former members of the Board of Directors. Pursuant to the complaint, the plaintiffs sought damages and relief including compensatory, punitive, and exemplary damages, front and back pay, and certain injunctive relief. The parties to both actions settled the matters in November 2020 and the two actions were dismissed on November 18, 2020.
After consultation with legal counsel, the Bank is not aware of any other legal proceedings that are expected to have a material effect on its financial condition or results of operations or that are otherwise material to the Bank.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II.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 Boardboard of Directorsdirectors 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 Boardboard of Directors,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, 2021,2023, the Bank had 22,803,65437,621,520 shares of Class B stock held by 340328 members and 17,4271,798,851 shares of Class B stock held by 24 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 Boardboard of Directorsdirectors declare and pay any dividend. A decision by the Boardboard of Directorsdirectors 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. SELECTED FINANCIAL DATA
The following selected financial data of the Federal Home Loan Bank of San Francisco (Bank) should be read in conjunction with the financial statements and notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein.
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| (Dollars in millions) | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Selected Statement of Condition Data at Yearend | | | | | | | | | |
| Total Assets | $ | 68,634 | | | $ | 106,842 | | | $ | 109,326 | | | $ | 123,385 | | | $ | 91,941 | |
| Advances | 30,976 | | | 65,374 | | | 73,434 | | | 77,382 | | | 49,845 | |
| Mortgage Loans Held for Portfolio, Net | 1,935 | | | 3,314 | | | 3,066 | | | 2,076 | | | 826 | |
Investments(1) | 35,228 | | | 37,637 | | | 32,381 | | | 43,570 | | | 40,986 | |
Consolidated Obligations:(2) | | | | | | | | | |
| Bonds | 44,408 | | | 71,372 | | | 72,276 | | | 85,063 | | | 50,224 | |
| Discount Notes | 16,213 | | | 27,376 | | | 29,182 | | | 30,440 | | | 33,506 | |
| Mandatorily Redeemable Capital Stock | 2 | | | 138 | | | 227 | | | 309 | | | 457 | |
| Capital Stock —Class B —Putable | 2,284 | | | 3,000 | | | 2,949 | | | 3,243 | | | 2,370 | |
| Unrestricted Retained Earnings | 2,919 | | | 2,754 | | | 2,699 | | | 2,670 | | | 888 | |
| Restricted Retained Earnings | 761 | | | 713 | | | 647 | | | 575 | | | 2,168 | |
| Accumulated Other Comprehensive Income/(Loss) (AOCI) | 230 | | | 274 | | | 235 | | | 318 | | | 111 | |
| Total Capital | 6,194 | | | 6,741 | | | 6,530 | | | 6,806 | | | 5,537 | |
| Selected Operating Results for the Year | | | | | | | | | |
| Net Interest Income | $ | 505 | | | $ | 531 | | | $ | 601 | | | $ | 567 | | | $ | 471 | |
| Provision for/(Reversal of) Credit Losses | 26 | | | — | | | — | | | — | | | — | |
| Other Income/(Loss) | 59 | | | 21 | | | (11) | | | 78 | | | 485 | |
| Other Expense | 165 | | | 187 | | | 187 | | | 224 | | | 158 | |
| Assessments | 38 | | | 38 | | | 43 | | | 45 | | | 86 | |
| Net Income/(Loss) | $ | 335 | | | $ | 327 | | | $ | 360 | | | $ | 376 | | | $ | 712 | |
| Selected Other Data for the Year | | | | | | | | | |
Net Interest Margin(3) | 0.54 | % | | 0.50 | % | | 0.55 | % | | 0.55 | % | | 0.52 | % |
| Operating Expenses as a Percent of Average Assets | 0.16 | | | 0.15 | | | 0.13 | | | 0.14 | | | 0.16 | |
| Return on Average Assets | 0.36 | | | 0.31 | | | 0.32 | | | 0.36 | | | 0.77 | |
| Return on Average Equity | 5.32 | | | 4.92 | | | 5.42 | | | 6.21 | | | 13.63 | |
| Annualized Dividend Rate | 5.53 | | | 7.00 | | | 8.51 | | | 7.50 | | | 12.33 | |
Dividend Payout Ratio(4) | 47.39 | | | 63.19 | | | 72.97 | | | 49.59 | | | 39.98 | |
| Average Equity to Average Assets Ratio | 6.69 | | | 6.21 | | | 5.98 | | | 5.82 | | | 5.68 | |
| Selected Other Data at Yearend | | | | | | | | | |
Regulatory Capital Ratio(5) | 8.69 | | | 6.18 | | | 5.97 | | | 5.51 | | | 6.40 | |
| Duration Gap (in months) | 1 | | | 1 | | | 1 | | | 1 | | | 1 | |
(1)Investments consist of interest-bearing deposits, securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities.
(2)As provided by the Federal Home Loan Bank Act of 1932, as amended, or regulations governing the operations of the FHLBanks, all of the FHLBanks have joint and several liability for FHLBank consolidated obligations, which are backed only by the financial resources of the FHLBanks. The joint and several liability regulation authorizes the Federal Housing Finance Agency (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, 2020, and through the filing date of this report, does not believe that it is probable that it will be asked to do so. The par value of the outstanding consolidated obligations of all FHLBanks at the dates indicated was as follows:
| | | | | |
| Yearend | Par Value
(In millions) |
| 2020 | $ | 746,722 | |
| 2019 | 1,025,895 | |
| 2018 | 1,031,617 | |
| 2017 | 1,034,260 | |
| 2016 | 989,311 | |
(3)Net interest margin is net interest income divided by average interest-earning assets.
(4)This ratio is calculated as dividends per share divided by net income per share.
(5)This ratio is calculated as regulatory capital divided by total assets. Regulatory capital includes retained earnings, Class B capital stock, and mandatorily redeemable capital stock (which is classified as a liability), but excludes AOCI.[RESERVED]
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 inflation and rising interest rates, and 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, pandemics or other widespread public health emergencies, (such as the outbreak of COVID-19), terrorist attacks, civil unrest, geopolitical instability or conflicts (including the ongoing hostilities in Russia and Ukraine), trade disruptions, economic or other sanctions, 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;
•changes in the Bank’s capital stock requirements;
•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 withdrawal of one or more large members;
•the soundness of other financial institutions, including Bank members, nonmember borrowers, other counterparties, and the other FHLBanks;
•changes in Bank members’ demand for Bank advances;
•changes in the value or liquidity of collateral underlying advances to Bank members or nonmember borrowers or collateral pledged by the Bank’s derivative counterparties;
•changes in the fair value and economic value of, impairments of, and risks associated with the Bank’s investments in mortgage loans and mortgage-backed securities (MBS) or other assets and the related credit enhancement protections;
•changes in the Bank’s ability or intent to hold MBS and mortgage loans to maturity;
•competitive forces, including the availability of other sources of funding for Bank members;
•the willingness of the Bank’s members to do business with the Bank;
•changes in investor demand for consolidated obligations (including the terms of consolidated obligations) and/or the terms of interest rate exchange or similar agreements;
•the impact of any changes and developments in FHLBank System-wide debt issuance and governance practices;
•the ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the Bank has joint and several liability;
•changes in key Bank personnel;
•technology changes and enhancements, and the Bank’s ability to develop and support technology and information systems sufficient to manage the risks of the Bank’s business effectively;effectively (including cyber-security risks); and
•changes in the FHLBanks’ long-term credit ratings; andratings.
•the impending discontinuance of the London Interbank Offered Rate (LIBOR) or any other interest rate benchmark and the adverse consequences it could have for market participants, including the Bank.
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 20202022 was $335$323 million, compared with net income of $327$287 million for 2019.2021. The $36 million increase in net income of $8 million from 2019was primarily attributable to 2020 primarily reflected an increase in other income of $38 million and a decrease in other expense of $22 million, which were offset by a decrease in net interest income of $26$45 million and a change in other income/(loss) of $19 million, partially offset by an increase of $21 million in the Bank’s provision for credit losses of $26 million.losses.
The $38$45 million increase in othernet interest income for 2022 was primarily reflected the Bank’s receiptattributable to higher yields on growing average balances of $85 million in disgorgement proceeds in connection with a Securitiesadvances and Exchange Commission enforcement action in the third quarter of 2020,investments (primarily Federal funds sold), which was partially offset by an increase in net fair value losses associatedhigher funding levels with derivatives and financial instruments carried at fair value. The $22 million decrease in other expense primarily reflected a decrease of $15 million in expense associated with voluntary charitable contributions to the Quality Jobs Fund and a reduction in operating expense of $9 million that was primarily related to higher expenses associated with the relocation of the Bank’s premises during the second quarter of 2019.
Net interest income in 2020 decreased by $26 million, which primarily reflected a lower interest rate environment and lower average balances of interest-earning assets, partially offset by an increase in prepayment fees on advances of $30 millioncosts and a decrease in dividends paidnet gains on mandatory redeemable capital stock (classified as interest expense)designated fair value hedges.
The $19 million change in other income/(loss) for 2022 was primarily driven by $28 million in settlement proceeds received in 2022 from the final resolution of $9 million. putback litigation, to which the Bank was not a party, involving three private-label residential mortgage-backed securities’ (PLRMBS) trusts, including one trust in which the Bank owns a certificate.
The 2020increase of $21 million in the provision for credit losses increased by $26 millionfor 2022 was largely attributable to declines in the fair values and was primarily associated withthe present value of expected cash flows of certain private-label residential mortgage-backed securities (PLRMBS) classified as available-for-sale (AFS).PLRMBS.
Retained earnings grew to $3.7At December 31, 2022, total assets were $121.1 billion, an increase of $67.0 billion from $54.1 billion at December 31, 2020, from $3.52021. Advances increased to $89.4 billion at December 31, 2019, primarily resulting2022, from net income in 2020 of $335 million. The Bank also received a credit to unrestricted retained earnings related to the partial recovery of the Bank’s investment in the Financing Corporation of $40 million. These increases to retained earnings were partially offset by cash dividends of $159 million paid at an annualized rate of 5.53% during 2020.
At December 31, 2020, total assets were $68.6 billion, a decrease of $38.2 billion from $106.8$17.0 billion at December 31, 2019.2021, an increase of $72.4 billion, as member demand for primarily short-term advances increased. Total advancesinvestments decreased $34.4by $5.5 billion, to $31.0$30.3 billion at December 31, 2020,2022, from $65.4$35.8 billion at December 31, 2019. The decrease in advances primarily reflected reduced member liquidity needs related to the impact of the COVID-19 pandemic on the economy and on our members. In addition, investments decreased $2.4 billion, to $35.2 billion at December 31, 2020, from $37.6 billion at December 31, 2019.2021. The decrease in investments primarily reflected a decreasedeclines of $8.5 billion in MBS, Federal funds sold,securities purchased under agreements to resell and interest-bearing deposits,$2.2 billion in mortgage-backed securities, which was partially offset by increases of $3.3 billion in U.S. Treasury securities and $2.6 billion in interest-bearing deposits to support the Bank’s liquidity requirements.
As of December 31, 2022, the Bank complied with all regulatory capital requirements. The Bank exceeded its risk-based capital requirement of $898 million with $7.8 billion in permanent capital and exceeded the 4.0% regulatory requirement with a regulatory capital ratio of 6.4% at December 31, 2022. The decline in the regulatory capital ratio from 10.9% at December 31, 2021, was mainly attributable to an increase in U.S. Treasury securities.
Accumulated other comprehensive income/(loss) (AOCI) decreased by $44 milliontotal assets. during 2020,Total retained earnings increased to $230 million at$4.0 billion as of December 31, 2020,2022, from $274 million$3.8 billion at December 31, 2019. The decrease in AOCI during 2020 primarily reflected lower fair values of PLRMBS classified as AFS.yearend 2021.
On February 18, 2021,22, 2023, the Bank’s Boardboard of Directorsdirectors declared a quarterly cash dividend on the average capital stock outstanding during the fourth quarter of 20202022 at an annualized rate of 5.00%7.00%. 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 quarterly dividend will total $30$63 million, including a de minimis amount in dividends on mandatorily redeemable capital stock that will be reflected as interest expense inand the first quarter of 2021. The Bank recorded the dividend on February 18, 2021, and expects to pay the dividend on March 18, 2021. As a result of the COVID-19 pandemic and the measures taken to contain the spread of the virus, U.S. and global economies face great challenges and ongoing uncertainty. To preserve capital in this uncertain environment, the Bank’s Board of Directors has decided to pay a quarterly dividend rate at the low end of the range stated in the Bank's dividend philosophy.
As of December 31, 2020, the Bank was in compliance with all of its regulatory capital requirements. The Bank’s total regulatory capital ratio was 8.7%, exceeding the 4.0% requirement. The Bank had $6.0 billion in permanent capital, exceeding its risk-based capital requirement of $1.4 billion.
The Bank will continue to monitor theits financial condition, of its balance sheet, its financial performance, its capital position, overall financial market conditions, and other relevant information as the basis for determining the payment of dividends in future quarters. In addition, management will continue
During 2022, the U.S. economy continued to monitorexperience inflation and interest rates began rising. Prolonged inflation may adversely affect overall economic conditions, and, in turn, result in adverse consequences for the COVID-19 pandemic’sBank or Bank members’ businesses and impact on the Bank’s financial condition, and operations, including the Bank’s liquidity, advance levels, funding spreads, and workforce effectiveness.
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 rangeresults of tools to support the economy, including fiscal stimulus and quantitative easing. At the end of the year, the Federal Reserve maintained a Federal funds target range of 0.00% to 0.25%. 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 advances demand from members. The Bank continued to meet its funding needs throughout 2020.
The Bank transitioned to remote work in mid-March 2020 and operated effectively throughout the remainder of 2020. The ultimate impact of the disruption caused by the pandemic continues to be uncertain. 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 and cyber-security threats, and operational challenges that could affect the Bank’soperation, or ability to conduct business or increase the risk of operational errors.
The Bank relies on vendors and other third parties to perform certain critical services. If one of our critical vendors or third parties experiences a failure or any interruption to their business due to the COVID-19 pandemic, the Bank may be unable to conduct and effectively manage certain parts of its business.
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 effects of the COVID-19 pandemic, and of governmental and public actions taken in response, on the global and U.S. economy and on the Bank are continuing to evolve, and the full duration and impact of the pandemic and subsequent governmental and public actions are uncertain.
As the COVID-19 pandemic persists, the demand for advances may continue to decrease because of further government intervention, lower interest rates, and reduced member asset activity. The risk of credit losses is likely to increase. The Bank believes that lower demand from the Bank’s members for advances will likely continue into the foreseeable future. In addition, other possible effects from the COVID-19 pandemic on the Bank may include, but are not limited to, further disruption to the Bank’s members, uncertainties in the credit markets, and a decline in the fair value of assets or an increase in the write-down of investments.
The Bank has implemented certain relief measures to help members serve customers affected by the COVID-19 pandemic, such as accommodating forbearance and modifications to pledged loan collateral and allowing electronic signatures on loan documentation in specific circumstances. The Board of Directors also approved subsidized credit and grant programs to assist our members in responding to the challenges brought about by the COVID-19 pandemic.
Additionally, the level and volatility of interest rates affect, among other things, member demand for advances. For other risks and uncertainties that the Bank faces, see “Item 1A. Risk Factors.”
Results of Operations
Selected Financial Data and Financial Ratios
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| Selected Other Data for the Year | | | | | | | | | |
Net Interest Margin(1) | 0.66 | % | | 0.91 | % | | 0.54 | % | | | | |
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| Return on Average Assets | 0.37 | | | 0.49 | | | 0.36 | | | | | |
| Return on Average Equity | 4.67 | | | 4.46 | | | 5.32 | | | | | |
| Annualized Dividend Rate | 6.30 | | | 5.74 | | | 5.53 | | | | | |
Dividend Payout Ratio(2) | 50.17 | | | 46.95 | | | 47.39 | | | | | |
| Average Equity to Average Assets Ratio | 8.02 | | | 11.00 | | | 6.69 | | | | | |
| Selected Other Data at Yearend | | | | | | | | | |
Regulatory Capital Ratio(3) | 6.41 | | | 10.89 | | | 8.69 | | | | | |
| Duration Gap (in months) | 0.9 | | | 0.4 | | | 1.3 | | | | | |
(1) Net interest margin is calculated as net interest income divided by average interest-earning assets.
(2) This ratio is calculated as dividends per share divided by net income per share.
(3) This ratio is calculated as regulatory capital divided by total assets. Regulatory capital includes retained earnings, Class B capital stock, and mandatorily redeemable capital stock (which is classified as a liability), but excludes AOCI.
Comparison of 20202022 and 20192021
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-impairedwith previous credit losses related to the prior to January 1, 2020,methodology of evaluating credit losses, 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, 20202022 and 2019,2021, 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.
| | Average Balance Sheets | Average Balance Sheets | Average Balance Sheets |
| | | | | 2020 | | 2019 | | 2022 | | 2021 |
| (Dollars in millions) | (Dollars in millions) | Average
Balance | | Interest
Income/
Expense | | Average
Rate | | Average
Balance | | Interest
Income/
Expense | | Average
Rate | (Dollars in millions) | Average
Balance | | Interest
Income/
Expense | | Average
Rate | | Average
Balance | | Interest
Income/
Expense | | Average
Rate |
| Assets | Assets | | Assets | |
| Interest-earning assets: | Interest-earning assets: | | Interest-earning assets: | |
| Interest-bearing deposits | Interest-bearing deposits | $ | 3,077 | | | $ | 15 | | | 0.49 | % | | $ | 2,307 | | | $ | 51 | | | 2.23 | % | Interest-bearing deposits | $ | 2,319 | | | $ | 55 | | | 2.37 | % | | $ | 1,194 | | | $ | 2 | | | 0.14 | % |
| Securities purchased under agreements to resell | Securities purchased under agreements to resell | 4,745 | | | 20 | | | 0.43 | | | 7,770 | | | 174 | | | 2.24 | | Securities purchased under agreements to resell | 5,857 | | | 117 | | | 2.00 | | | 1,437 | | | 1 | | | 0.07 | |
| Federal funds sold | Federal funds sold | 4,672 | | | 17 | | | 0.37 | | | 4,856 | | | 114 | | | 2.35 | | Federal funds sold | 11,384 | | | 214 | | | 1.88 | | | 6,417 | | | 5 | | | 0.08 | |
| Trading securities: | Trading securities: | | Trading securities: | |
| MBS | MBS | 3 | | | — | | | 3.13 | | | 4 | | | — | | | 3.74 | | MBS | 1 | | | — | | | 2.04 | | | 2 | | | — | | | 2.19 | |
| Other investments | Other investments | 3,979 | | | 83 | | | 2.09 | | | 601 | | | 15 | | | 2.42 | | Other investments | 12 | | | — | | | 2.04 | | | 2,943 | | | 61 | | | 2.08 | |
AFS securities:(1) | AFS securities:(1) | | AFS securities:(1) | |
MBS(3)(4) | MBS(3)(4) | 10,686 | | | 213 | | | 1.99 | | | 8,471 | | | 354 | | | 4.17 | | MBS(3)(4) | 8,686 | | | 343 | | | 3.95 | | | 9,861 | | | 216 | | | 2.19 | |
Other investments(3) | Other investments(3) | 4,845 | | | 30 | | | 0.61 | | | 1,972 | | | 40 | | | 2.05 | | Other investments(3) | 2,539 | | | 65 | | | 2.56 | | | 1,766 | | | 4 | | | 0.22 | |
Held-to-maturity (HTM) securities:(1) | | |
| HTM securities: | | HTM securities: | |
| MBS | MBS | 6,226 | | | 109 | | | 1.75 | | | 9,345 | | | 269 | | | 2.87 | | MBS | 2,647 | | | 56 | | | 2.09 | | | 3,957 | | | 43 | | | 1.09 | |
| Other investments | — | | | — | | | — | | | 45 | | | 1 | | | 2.79 | | |
| Mortgage loans held for portfolio | Mortgage loans held for portfolio | 2,807 | | | 34 | | | 1.19 | | | 3,277 | | | 87 | | | 2.64 | | Mortgage loans held for portfolio | 875 | | | 46 | | | 5.21 | | | 1,361 | | | 42 | | | 3.10 | |
Advances(4)(6) | Advances(4)(6) | 52,834 | | | 598 | | | 1.13 | | | 67,604 | | | 1,677 | | | 2.48 | | Advances(4)(6) | 51,527 | | | 1,226 | | | 2.38 | | | 28,492 | | | 224 | | | 0.79 | |
| Loans to other FHLBanks | Loans to other FHLBanks | — | | | — | | | — | | | 6 | | | — | | | 2.95 | | Loans to other FHLBanks | 9 | | | — | | | 1.48 | | | — | | | — | | | — | |
| Total interest-earning assets | Total interest-earning assets | 93,874 | | | 1,119 | | | 1.19 | | | 106,258 | | | 2,782 | | | 2.62 | | Total interest-earning assets | 85,856 | | | 2,122 | | | 2.47 | | | 57,430 | | | 598 | | | 1.04 | |
Other assets(5)(7) | Other assets(5)(7) | 317 | | | — | | | | | 876 | | | — | | | | Other assets(5)(7) | 436 | | | — | | | | | 941 | | | — | | | |
| Total Assets | Total Assets | $ | 94,191 | | | $ | 1,119 | | | $ | 107,134 | | | $ | 2,782 | | | Total Assets | $ | 86,292 | | | $ | 2,122 | | | $ | 58,371 | | | $ | 598 | | |
| Liabilities and Capital | Liabilities and Capital | | | | | Liabilities and Capital | | | | |
| Interest-bearing liabilities: | Interest-bearing liabilities: | | Interest-bearing liabilities: | |
| Consolidated obligations: | Consolidated obligations: | | Consolidated obligations: | |
Bonds(3) | Bonds(3) | $ | 64,144 | | | $ | 437 | | | 0.68 | % | | $ | 72,255 | | | $ | 1,631 | | | 2.26 | % | Bonds(3) | $ | 34,086 | | | $ | 715 | | | 2.10 | % | | $ | 29,085 | | | $ | 62 | | | 0.21 | % |
| Discount notes | Discount notes | 22,137 | | | 169 | | | 0.76 | | | 26,714 | | | 599 | | | 2.24 | | Discount notes | 43,531 | | | 821 | | | 1.89 | | | 21,262 | | | 13 | | | 0.06 | |
| Deposits and other borrowings | Deposits and other borrowings | 828 | | | 3 | | | 0.29 | | | 322 | | | 7 | | | 2.13 | | Deposits and other borrowings | 1,114 | | | 18 | | | 1.61 | | | 1,089 | | | 1 | | | 0.08 | |
| Mandatorily redeemable capital stock | Mandatorily redeemable capital stock | 62 | | | 5 | | | 8.90 | | | 176 | | | 14 | | | 7.90 | | Mandatorily redeemable capital stock | 5 | | | — | | | 6.57 | | | 4 | | | — | | | 5.38 | |
| Borrowings from other FHLBanks | Borrowings from other FHLBanks | 1 | | | — | | | 8.41 | | | 7 | | | — | | | 2.27 | | Borrowings from other FHLBanks | 56 | | | 1 | | | 2.01 | | | — | | | — | | | 0.07 | |
| Total interest-bearing liabilities | Total interest-bearing liabilities | 87,172 | | | 614 | | | 0.70 | | | 99,474 | | | 2,251 | | | 2.26 | | Total interest-bearing liabilities | 78,792 | | | 1,555 | | | 1.97 | | | 51,440 | | | 76 | | | 0.15 | |
Other liabilities(4)(7) | Other liabilities(4)(7) | 718 | | | — | | | | | 1,008 | | | — | | | | Other liabilities(4)(7) | 577 | | | — | | | | | 508 | | | — | | | |
| Total Liabilities | Total Liabilities | 87,890 | | | 614 | | | 100,482 | | | 2,251 | | | Total Liabilities | 79,369 | | | 1,555 | | | 51,948 | | | 76 | | |
| Total Capital | Total Capital | 6,301 | | | — | | | 6,652 | | | — | | | Total Capital | 6,923 | | | — | | | 6,422 | | | — | | |
| Total Liabilities and Capital | Total Liabilities and Capital | $ | 94,191 | | | $ | 614 | | | $ | 107,134 | | | $ | 2,251 | | | Total Liabilities and Capital | $ | 86,292 | | | $ | 1,555 | | | $ | 58,370 | | | $ | 76 | | |
| Net Interest Income | Net Interest Income | | $ | 505 | | | | | $ | 531 | | | | Net Interest Income | | $ | 567 | | | | | $ | 522 | | | |
Net Interest Spread(6)(8) | Net Interest Spread(6)(8) | | | | 0.49 | % | | | | 0.36 | % | Net Interest Spread(6)(8) | | | | 0.50 | % | | | | 0.89 | % |
Net Interest Margin(7)(9) | Net Interest Margin(7)(9) | | 0.54 | % | | 0.50 | % | Net Interest Margin(7)(9) | | 0.66 | % | | 0.91 | % |
| Interest-earning Assets/Interest-bearing Liabilities | Interest-earning Assets/Interest-bearing Liabilities | 107.69 | % | | | | 106.82 | % | | | Interest-earning Assets/Interest-bearing Liabilities | 108.97 | % | | | | 111.64 | % | | |
(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.value.
(2)Interest income on AFS securities includes accretion of yield adjustments on other-than-temporarily impairedcertain PLRMBS (resulting from improvement in expected cash flows) recognized pursuantwith previous credit losses related to the impairment guidance in effect prior to January 1, 2020,methodology of evaluating credit losses, totaling $59$36 million and $61$51 million in 2020for 2022 and 2019,2021, respectively.
(3)Interest income/expense and average rates include the effect of associated interest rate exchange agreements, as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| 2022 |
| (In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | | Total |
| (Amortization)/accretion of hedging activities | $ | (27) | | | $ | (105) | | | $ | — | | | $ | (132) | |
| Net gain/(loss) on derivatives and hedged items | (20) | | | (5) | | | 6 | | | (19) | |
| Net interest settlements on derivatives | 57 | | | 65 | | | (100) | | | 22 | |
| Total net interest income/(expense) | $ | 10 | | | $ | (45) | | | $ | (94) | | | $ | (129) | |
29 | | | | | | | | | | | | | | | | | | | | | | | |
| |
| 2021 |
| (In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | | Total |
| (Amortization)/accretion of hedging activities | $ | (22) | | | $ | (108) | | | $ | — | | | $ | (130) | |
| Net gain/(loss) on derivatives and hedged items | 2 | | | 11 | | | — | | | 13 | |
| Net interest settlements on derivatives | (195) | | | (76) | | | 65 | | | (206) | |
| Total net interest income/(expense) | $ | (215) | | | $ | (173) | | | $ | 65 | | | $ | (323) | |
Table(4)Interest income includes net prepayment fees received on AFS MBS of Contents$24 million and $2 million 2022 and 2021, respectively.
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| 2020 |
| (In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | | Total |
| (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) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| 2019 |
| (In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | | Total |
| | | | | | | |
| Net gain/(loss) on derivatives and hedged items | $ | — | | | $ | (9) | | | $ | (1) | | | $ | (10) | |
| Net interest settlements on derivatives | 15 | | | (27) | | | (15) | | | (27) | |
| Total net interest income/(expense) | $ | 15 | | | $ | (36) | | | $ | (16) | | | $ | (37) | |
(4)(6)Interest income includes net prepayment fees on advances of $(9) million and $31 million for 2022 and 2021, respectively.
(7)Includes forward settling transactions and valuation adjustments for certain cash items.items received/(paid).
(5)Includes non-credit-related losses on HTM securities for 2020. Includes non-credit-related losses on AFS and HTM securities for 2019.
(6)(8)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)(9)Net interest margin is calculated as net interest income (annualized) divided by average interest-earning assets.
Net interest income in 20202022 was $505$567 million, a 5% decrease9% increase from $531$522 million in 2019.2021. The following table details the changes in interest income and interest expense for 20202022 compared to 2019.2021. 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
2020 Compared to 2019 |
| | | | | |
| | Increase/
(Decrease) | | Attributable to Changes in(1) |
| (In millions) | | Average Volume | | Average Rate |
| Interest-earning assets: | | | | | |
| Interest-bearing deposits | $ | (36) | | | $ | 13 | | | $ | (49) | |
| Securities purchased under agreements to resell | (154) | | | (50) | | | (104) | |
| Federal funds sold | (97) | | | (4) | | | (93) | |
| Trading securities: Other investments | 68 | | | 70 | | | (2) | |
| | | | | |
| AFS securities: | | | | | |
MBS(2) | (141) | | | 76 | | | (217) | |
Other investments(2) | (10) | | | 32 | | | (42) | |
| HTM securities: | | | | | |
| MBS | (160) | | | (74) | | | (86) | |
| Other investments | (1) | | | (1) | | | — | |
| Mortgage loans held for portfolio | (53) | | | (11) | | | (42) | |
Advances(2) | (1,079) | | | (309) | | | (770) | |
| Total interest-earning assets | (1,663) | | | (258) | | | (1,405) | |
| Interest-bearing liabilities: | | | | | |
| Consolidated obligations: | | | | | |
Bonds(2) | (1,194) | | | (165) | | | (1,029) | |
| Discount notes | (430) | | | (89) | | | (341) | |
| Deposits and other borrowings | (4) | | | 5 | | | (9) | |
| Mandatorily redeemable capital stock | (9) | | | (10) | | | 1 | |
| Total interest-bearing liabilities | (1,637) | | | (259) | | | (1,378) | |
| Net interest income | $ | (26) | | | $ | 1 | | | $ | (27) | |
| | | | | | | | | | | | | | | | | |
Change in Net Interest Income: Rate/Volume Analysis 2022 Compared to 2021 |
| | | | | |
| | Increase/
(Decrease) | | Attributable to Changes in(1) |
| (In millions) | | Average Volume | | Average Rate |
| Interest-earning assets: | | | | | |
| Interest-bearing deposits | $ | 53 | | | $ | 3 | | | $ | 50 | |
| Securities purchased under agreements to resell | 116 | | | 12 | | | 104 | |
| Federal funds sold | 209 | | | 7 | | | 202 | |
| Trading securities: Other investments | (61) | | | (60) | | | (1) | |
| | | | | |
| AFS securities: | | | | | |
MBS(2) | 127 | | | (28) | | | 155 | |
Other investments(2) | 61 | | | 2 | | | 59 | |
| | | | | |
| HTM securities: MBS | 13 | | | (18) | | | 31 | |
| | | | | |
| Mortgage loans held for portfolio | 4 | | | (19) | | | 23 | |
Advances(2) | 1,002 | | | 286 | | | 716 | |
| | | | | |
| Total interest-earning assets | 1,524 | | | 185 | | | 1,339 | |
| Interest-bearing liabilities: | | | | | |
| Consolidated obligations: | | | | | |
Bonds(2) | 653 | | | 12 | | | 641 | |
| Discount notes | 808 | | | 28 | | | 780 | |
| Deposits and other borrowings | 17 | | | — | | | 17 | |
| Borrowings from other FHLBanks | 1 | | | 1 | | | — | |
| | | | | |
| Total interest-bearing liabilities | 1,479 | | | 41 | | | 1,438 | |
| Net interest income | $ | 45 | | | $ | 144 | | | $ | (99) | |
(1)Combined rate/volume variances, a third element of the calculation, are allocated to the rate and volume variances based on their relative sizes.
(2)Interest income/expense and average rates include the interest effect of associated interest rate exchange agreements.
The net interest margin was 5466 basis points for 2020, 42022, 25 basis points higherlower than the net interest margin for 2019,2021, which was 5091 basis points. The net interest spread was 4950 basis points for 2020, 132022, 39 basis points higherlower than the net interest spread for 2019,2021, which was 3689 basis points. These increasesdecreases were primarily a result of the effectsan increase in costs of changes in marketinterest-bearing liabilities from higher funding levels and costs, which were offset by higher yields on interest-earning assets that primarily resulted from higher interest rates interest rate volatility, and other market factors during the period.on growing advance balances.
For securities previously identified as other-than-temporarily impaired pursuantPLRMBS with previous credit losses related to the impairment guidance in effect prior to January 1, 2020,methodology of evaluating credit losses, the Bank updates its estimate of future estimated cash flows on a regular basis. If there is no additional credit loss on the security, the yield of the security is adjusted upward on a prospective basis and accreted into interest income when there is a significant increase inbased on the expected cash flows. As a result of improvements in the estimated cash flows of these 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, 20202022 and 2019.2021.
| | | | | | | | | | | |
| Other Income/(Loss) |
| |
| |
| (In millions) | 2020 | | 2019 |
| Other Income/(Loss): | | | |
Net gain/(loss) on trading securities(1) | $ | 15 | | | $ | (2) | |
| Net gain/(loss) on advances and consolidated obligation bonds held under fair value option | 85 | | | 101 | |
| Net gain/(loss) on derivatives and hedging activities | (152) | | | (92) | |
| Gain on disgorgement settlement | 85 | | | — | |
| Other, net | 26 | | | 14 | |
| Total Other Income/(Loss) | $ | 59 | | | $ | 21 | |
| | | | | | | | | | | |
| Other Income/(Loss) |
| |
| |
| (In millions) | 2022 | | 2021 |
| Other Income/(Loss): | | | |
Net gain/(loss) on trading securities(1) | $ | — | | | $ | (57) | |
| Net gain/(loss) on advances and consolidated obligation bonds held under fair value option | (65) | | | (54) | |
| Net gain/(loss) on derivatives | (9) | | | 37 | |
| Private-label residential mortgage-backed securities trust settlement | 28 | | | — | |
| Standby letters of credit fees | 17 | | | 16 | |
| Other, net | (2) | | | 8 | |
| Total Other Income/(Loss) | $ | (31) | | | $ | (50) | |
(1)The net gain/(loss) on trading securities that were economically hedged totaled $15a de minimis amount and $(57) million for 2022 and $(1) million in 2020 and 2019,2021, respectively.
Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option – The following table presents the net gain/(loss) recognized in earnings on advances and consolidated obligation bonds held under the fair value option for the years ended December 31, 20202022 and 2019.2021.
| | Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option | Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option | Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option |
| | | (In millions) | (In millions) | 2020 | | 2019 | (In millions) | 2022 | | 2021 |
| Advances | Advances | $ | 85 | | | $ | 116 | | Advances | $ | (119) | | | $ | (62) | |
| Consolidated obligation bonds | Consolidated obligation bonds | — | | | (15) | | Consolidated obligation bonds | 54 | | | 8 | |
| Total | Total | $ | 85 | | | $ | 101 | | Total | $ | (65) | | | $ | (54) | |
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 gainslosses or lossesgains 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 and Hedging Activities – Under the accounting guidance for derivative instruments and hedging activities, the Bank is required to carry all of its derivative instruments on the StatementStatements 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 StatementStatements 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 derivativesderivatives” for 2022 and hedging activities” in 2020 and 2019.2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives and Hedging Activities
2020 Compared to 2019 |
| | | | | | | | | | | | | |
| | | |
| (In millions) | | | 2020 | | 2019 |
| | | | Gain/(Loss) on | | Income/
(Expense) on | | | | Gain/(Loss) on | | Income/
(Expense) on | | |
| Hedged Item | | | Economic
Hedges | | Economic
Hedges | | Total | | Economic
Hedges | | Economic
Hedges | | Total |
| Advances: | | | | | | | | | | | | | |
| Elected for fair value option | | | $ | (67) | | | $ | (37) | | | $ | (104) | | | $ | (108) | | | $ | 17 | | | $ | (91) | |
| Not elected for fair value option | | | 27 | | | (28) | | | (1) | | | 13 | | | (14) | | | (1) | |
| Consolidated obligation bonds: | | | | | | | | | | | | | |
| Elected for fair value option | | | — | | | 2 | | | 2 | | | 12 | | | (4) | | | 8 | |
| Not elected for fair value option | | | (1) | | | 9 | | | 8 | | | 45 | | | (16) | | | 29 | |
| Consolidated obligation discount notes: | | | | | | | | | | | | | |
| Not elected for fair value option | | | (1) | | | 21 | | | 20 | | | (46) | | | 2 | | | (44) | |
| MBS: | | | | | | | | | | | | | |
| Not elected for fair value option | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
| Non-MBS investments: | | | | | | | | | | | | | |
| Not elected for fair value option | | | (31) | | | (50) | | | (81) | | | 4 | | | (1) | | | 3 | |
| Mortgage delivery commitment: | | | | | | | | | | | | | |
| Not elected for fair value option | | | 3 | | | — | | | 3 | | | 4 | | | — | | | 4 | |
Price alignment amount(1) | | | 1 | | | — | | | 1 | | | 1 | | | — | | | 1 | |
| Total | | | $ | (69) | | | $ | (83) | | | $ | (152) | | | $ | (76) | | | $ | (16) | | | $ | (92) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives 2022 Compared to 2021 |
| | | | | | | | | | | |
| |
| (In millions) | 2022 | | 2021 |
| Hedged Item | Gain/(Loss) on Economic
Hedges | | Income/
(Expense) on Economic
Hedges | | Total | | Gain/(Loss) on Economic
Hedges | | Income/
(Expense) on Economic
Hedges | | Total |
| Advances: | | | | | | | | | | | |
| Elected for fair value option | $ | 104 | | | $ | (14) | | | $ | 90 | | | $ | 90 | | | $ | (38) | | | $ | 52 | |
| Not elected for fair value option | 30 | | | 23 | | | 53 | | | (8) | | | 5 | | | (3) | |
| Consolidated obligation bonds: | | | | | | | | | | | |
| Elected for fair value option | (50) | | | (14) | | | (64) | | | (5) | | | 1 | | | (4) | |
| Not elected for fair value option | (57) | | | (9) | | | (66) | | | (11) | | | 3 | | | (8) | |
| Consolidated obligation discount notes: | | | | | | | | | | | |
| Not elected for fair value option | 3 | | | (28) | | | (25) | | | 3 | | | (2) | | | 1 | |
| MBS: | | | | | | | | | | | |
| Not elected for fair value option | 4 | | | — | | | 4 | | | — | | | — | | | — | |
| Non-MBS investments: | | | | | | | | | | | |
| Not elected for fair value option | — | | | — | | | — | | | 39 | | | (40) | | | (1) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Price alignment amount(1) | (1) | | | — | | | (1) | | | — | | | — | | | — | |
| Total | $ | 33 | | | $ | (42) | | | $ | (9) | | | $ | 108 | | | $ | (71) | | | $ | 37 | |
(1)This amount is forrelates to derivatives for which variation margin on cleared derivatives is characterized as a daily settled contract.
During 2020,2022, net losses on derivatives totaled $152$9 million compared to net lossesgains of $92$37 million in 2019.2021. These amounts included expense of $83$42 million and expense of $16$71 million resulting from net settlements on derivative instruments used in economic hedges in 20202022 and 2019,2021, respectively. Excluding the impact of income or expense from net settlements on derivative instruments used in economic hedges, the net gains or losses on economic hedges were primarily associated with the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors during the period.
The Bank cannot predict the ongoing impact of these valuation adjustments on the Bank cannot be predicted and the effects of these valuation adjustments may lead to significant volatility in future
earnings, including earnings available for dividends.
Additional information about derivatives and hedging activities is provided in “Item 8. Financial Statements and Supplementary Data – Note 14 – Derivatives and Hedging Activities.”
Gain on disgorgement settlementPLRMBS Trust 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 2019.
Other Expense. Other expenses totaled $165 million in 2020 compared to $187 million in 2019. The $22 million decrease in other expense primarily reflected a decrease of $15 million in expense associated with voluntary charitable contributions to the Quality Jobs Fund and a $9 million reduction in operating expense that was primarily related to higher expenses associated with the relocationOne of the Bank’s premises duringPLRMBS investments is held within a trust that has been the secondsubject of litigation by the trustee since 2012. Upon final resolution of the litigation, to which the Bank was not a party, the trustee was required to transmit settlement proceeds to the trust. In the first quarter of 2019.2022, as a result of the distribution of the settlement proceeds to the beneficial owners of the securities in the trust, including the Bank, the Bank recorded settlement proceeds of $28 million as income in 2022. The Bank recorded no settlement proceeds 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, whichwho 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 $315$355 million and $362$201 million for their AHPs in 20202022 and 2019,2021, respectively, and there was no AHP shortfall in anyeither of those years.
The Bank’s total AHP assessments equaled $38$36 million in 20202022 and $38$32 million in 2019.2021.
Return on Average Equity. Return on average equityROE was 5.32% in 2020,4.67% for 2022, compared to 4.92% in 2019. This4.46% for 2021. The increase reflected lower average equity and higher net income for 2022, which increased 13% to $323 million in 2020. Average2022 from $287 million in 2021, which was partially offset by an increase in average equity was $6.3to $6.9 billion for 2020, compared to $6.7in 2022 from $6.4 billion for 2019.in 2021.
Dividends and Retained Earnings. In 2020,2022, the Bank paid dividends at an annualized rate of 5.53%6.30%, totaling $164$161 million, including $159$161 million in dividends on capital stock and $5 milliona de minimis amount in dividends on mandatorily redeemable capital stock. In 2019,2021, the Bank paid dividends at an annualized rate of 7.00%5.74%, totaling $220$135 million, including $206$135 million in dividends on capital stock and $14 milliona de minimis amount in dividends on mandatorily redeemable capital stock.
The Bank paid these dividends in cash. Dividends on capital stock are recognized as dividends on the Statements of Capital Accounts, and dividends on mandatorily redeemable capital stock are recognized as interest expense on the Statements of Income.
On February 18, 2021, the Bank’s Board of Directors declared a quarterly cash dividend on the capital stock outstanding during the fourth quarter of 2020 at an annualized rate of 5.00% totaling $30 million, including $30 million in dividends on capital stock and a de minimis amount in dividends on mandatorily redeemable capital stock. The Bank recorded the quarterly dividend on February 18, 2021. The Bank expects to pay the quarterly dividend on March 18, 2021. Dividends on mandatorily redeemable capital stock will be recognized as interest expense in the first quarter of 2021.
The Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework (Framework) assesses the level and adequacy of retained earnings and establishes amounts to be retained in restricted retained earnings, which are not made available in the current dividend period, and maintains an amount of total retained earnings at least equal to its required retained earnings as described in the Framework. As determined using the Bank’s methodology, the required level of total retained earnings had ranged from $2.4 billion to $2.5 billion during 2019 and continuing through September 2020. In September 2020, the methodology was revised and resulted in a required level of retained earnings of $2.9 billion. In January 2021, the methodology was further revised and resulted in a required level of retained earnings of $1.9 billion. The Bank satisfies its retained earnings requirement with both restricted
retained earnings (i.e., amounts related to the Joint Capital Enhancement (JCE) Agreement) and unrestricted retained earnings. The Bank’s retained earnings requirement may be changed at any time. The Board of Directors periodically reviews the retained earnings methodology and analysis to determine whether any adjustments are appropriate. Total restricted retained earnings were $761 million and $713 million as of December 31, 2020 and 2019, respectively.
The Bank will continue to monitor the condition of its balance sheet, its financial performance, its capital position, overall financial market conditions, and other relevant information as the basis for determining the payment of dividends in future quarters.
For more information, see “Item 1. Business – Dividends and Retained Earnings”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 20192021 and 20182020 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 20192021 Form 10-K.
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 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 with previous credit losses related to the prior methodology of evaluating credit losses, 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 assets were $68.6Bank 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.
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 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 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 Framework 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 the 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. The methodology may be revised from time to time, and the level of required retained earnings under the methodology may change due to updating data and assumptions used in the methodology. The required level of total retained earnings was $2.6 billion and $1.5 billion at December 31, 2020, compared to $106.8 billion at2022, and December 31, 2019. Advances decreased2021, respectively. In July 2022, the required level of retained earnings was increased from $1.7 billion to $2.6 billion. In January 2023, the required level of retained earnings was increased from $2.6 billion to $2.7 billion. 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.
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. The JCE Agreement is intended to enhance the capital position of each FHLBank. In accordance with the JCE Agreement, each FHLBank is required to reclassify an amount equal to 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. The JCE Agreement also 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 $34.4 billion,the board of directors to declare or 53%,not declare a dividend is a discretionary matter and is subject to $31.0 billionthe 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 stock exceeds 1% of its total assets. Excess 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 December 31, 2020, from $65.4 billioncompetitive 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 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 December 31, 2019. MBS investments decreasedthe same cost.
Regulatory Oversight, Audits, and Examinations
The FHLBanks are supervised and regulated by $2.0 billion, or 11%,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 $15.8 billion at December 31, 2020, from $17.8 billion at December 31, 2019. Average total assets were $94.2 billion for 2020,raise funds in the capital markets, and operate in a 12% decrease comparedsafe 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 $107.1 billion for 2019. Average advances were $52.8 billion for 2020,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 22% decrease from $67.6 billion for 2019. Average MBS investments were $16.9 billion for 2020, a 5% decrease from $17.8 billion for 2019.result, we are required to comply with the disclosure and reporting requirements of the 1934 Act and to file annual, quarterly, and current reports with the SEC, as well as meet other SEC requirements.
Advances outstanding at December 31, 2020, included unrealized gainsOur board of $639 million, of which $509 million represented unrealized gains on advances hedgeddirectors 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 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 derivative instrumentswhich 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 hedgingterms 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, 2022, we had 297 employees. As of December 31, 2022, approximately 46.0% of our workforce identify as female, 53.0% identify as male, and 1.0% declined to state a gender. Approximately 68.0% of our workforce identify as an ethnic minority, and 1.0% declined to state an ethnicity. As of December 31, 2022, the average tenure of our employees was 8.4 years. Our overall turnover rate for 2022 was 14.8%. 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:
◦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. Equity is embedded in the Bank’s workforce management and business activities. We recognize that diversity increases our capacity for innovation
and creativity and that inclusion allows us to leverage the unique perspectives of all employees, facilitates a sense of belonging, 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 furnishedSEC 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.) The Bank is exempt from certain SEC statutes and regulations and the filing of certain reports with the SEC, including proxy statements, otherwise required by public companies whose securities are registered with the SEC.
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, geopolitical instability or conflicts (including the ongoing hostilities in Russia and Ukraine), trade disruptions, economic or other sanctions, 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 $130 million represented unrealized gainsresults of operations.
In particular, the COVID-19 pandemic and related developments that have lingered continue to have negative effects on economically hedged advances that are carried at fair valuethe economy and may continue to disrupt the financial and credit markets in which the Bank operates and adversely affect our operations and business activities. Despite improvements in the overall U.S. economy since the 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 certain days of the week in accordance with the fair value option. AdvancesBank’s hybrid schedule 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.
Market uncertainty and volatility may adversely affect our business, profitability, or results of operations.
Adverse and volatile conditions in the housing, mortgage, and financial markets 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.
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, member demand for advances, 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, our ability to pay dividends or redeem or repurchase capital stock, or investor demand for consolidated obligations. During 2022 the U.S. economy continued to experience rising interest rates. 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. The Federal Reserve Bank’s policies directly and indirectly influence interest rates on the Bank’s assets and liabilities and could
adversely affect the demand for advances and therefore adversely impact the Bank’s financial condition and results of operations. Recent efforts of the Federal Reserve Board to ease inflation, such as continued increases in policy interest rates, have contributed to volatility in the financial markets and uncertainties about the economic outlook, including concerns about a possible recession.
Changes to and replacement of the London Interbank Offered Rate (LIBOR) benchmark interest rate to the Secured Overnight Financing 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 the phase-out of LIBOR as a benchmark interest rate. 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.
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, 2019, included unrealized gains2021, in the case of $286 million,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.
We have developed and are implementing a LIBOR Phase Out Transition Plan, to address potential LIBOR exposure, fallback language, operational and system 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 ARRC has recommended spread adjustments to the replacement floating rates meant to minimize the difference between LIBOR and SOFR. 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 our LIBOR-indexed mortgage investments to convert to SOFR. 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 fully 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 certain institutions and their affiliates. Significant credit losses or heightened focus on our credit exposure to individual members due to market events could have an adverse effect on our financial condition, reputation, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
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, custodians, 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 $203 million represented unrealized gainsin 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 by eligible collateral types mostly with a nexus to housing. 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, hedgedwhich could adversely affect our financial condition, reputation, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
Changes in accordancethe 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. For example, downgrades to the U.S. sovereign credit rating or outlook may occur if the U.S. government fails to adequately address, based on the credit rating agencies’ criteria, its fiscal budget deficit or statutory debt limits (which was most recently reached in January 2023). 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.
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 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 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.
Strategic Execution Risks
Limitations on the payment of dividends and repurchase of excess 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 our adequately capitalized position while paying dividends (including dividends on mandatorily redeemable capital stock) and repurchasing and redeeming excess stock. Limitations on the payment of dividends and the repurchase of excess stock may diminish the value of membership from the perspective of a member.
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, Federal Reserve, 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.
We may increase our activity-based stock requirement in the future.
Under our capital plan, we have the authority to increase stock requirements within established ranges. Depending upon the size of our balance sheet, advance business growth potential, our regulatory capital level, and other considerations, we may increase activity-based stock requirements (i.e., the capital stock required to be owned by our members under our capital plan to support business activity with the Bank). Such increases would require members with activity-based stock outstanding to purchase additional stock in connection with their existing business. Members also would be required to purchase the new higher level of activity-based stock in connection with new business. Higher stock levels may also lead to lower return on capital stock in the future. Finally, higher activity-based stock requirements would increase the level of advances we could support while exceeding our regulatory capital requirements.
For more information on the Bank’s capital plan and activity-based stock, see “Part II. Item 7. 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.”
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. 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 stock, at our discretion, or redeems the excess 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 with previous credit losses related to the prior methodology of evaluating credit losses. 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.
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, technology vendors, and 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 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.
We may fail to identify and manage risks related to a variety of aspects of our business, including operational risk, legal and compliance risk, interest-rate risk, liquidity risk, market risk, and credit risk.
We have adopted policies, procedures, and controls, and use systems and technology, and have an elaborate risk governance framework, designed to aid in monitoring and managing these risks. However, we cannot provide complete assurance that these controls, procedures, policies, systems, technology, and risk governance framework, are adequate to identify and manage all the risks inherent in the Bank’s business, including, for example, risks that arise as a result of changes in the business. Failed or inadequate controls, risk management practices, systems, and technology, and failure to adhere to applicable policies and procedures, and the overall risk governance framework, could have an adverse effect on our financial condition and results of operations.
The inability to attract and retain skilled key personnel could adversely affect the business, workforce, and operations of the Bank.
We rely on key personnel and a competent workforce 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 2022, as the ongoing COVID-19 pandemic brought about significant disruptions and changes to the U.S. labor market. In addition, increased remote-working opportunities have also increased competition in hiring and retaining skilled key personnel. 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.
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.
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 stock) may be redeemed at the end of the redemption period. In addition, we may elect to repurchase some or all of the excess 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 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 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.
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 and state laws and regulations that could change or be applied in a manner detrimental to our operations, or to the ability or motivation to invest in the Bank or use our products and services.
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. New or modified legislation enacted by Congress or states 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, or affect our members’ ability or motivation to acquire or own our capital stock or use of our products and services. 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 forpolicies, liquidity management, debt issuance, derivative instruments and hedging activities, permissible business activities, additional contributions to the Bank’s AHP, membership base, membership eligibility, our members’ access to our products and $83 million represented unrealized gainsservices (including whether a member meets required tangible capital levels to access advances), 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 economically hedgeda 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.
In 2022, the Finance Agency initiated a comprehensive review of the FHLBank System. This review is expected to culminate with a written report from the Finance Agency. The expected report may include recommendations for statutory revisions, proposals for new or modified regulations, regulatory guidance under existing regulations, or other regulatory or supervisory actions consistent with the Finance Agency’s statutory authority. For more details on this Finance Agency review, see “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments - Finance Agency’s Review and Analysis of the Federal Home Loan Bank System “FHLBank System at 100: Focusing on the Future.”
At this time, we cannot predict what actions will ultimately result from this initiative or the extent of any changes to the FHLBank System or the Bank, or the ultimate impact on the FHLBanks or the Bank in the future. Potential changes resulting from this initiative, including those relating to the FHLBanks’ fulfillment of their mission, membership requirements, and requirements relating to affordable housing contributions and support for community investment, will likely impact our business and operations, which may impact our financial condition.
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.
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 or conflicts (including the ongoing hostilities in Russia and Ukraine), trade disruptions, or a sustained capital market correction could weaken consumer and business confidence and depress personal consumption, employment rates, 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. During 2022, the U.S. economy continued to experience inflation. Prolonged inflation may adversely affect overall economic conditions, and in turn result in adverse consequences to the Bank or member business and impact the Bank’s financial condition, results of operation, or ability to pay dividends. Recent efforts of the Federal Reserve Board to ease inflation, such as continued increases in policy interest rates, have contributed to significant volatility in the financial markets and uncertainties about the economic outlook, including concerns about a possible recession.
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.
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 carriedexpected 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.
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 fairpar 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 accordanceexcess 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 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, 2023, the Bank had 37,621,520 shares of Class B stock held by 328 members and 1,798,851 shares of Class B stock held by 4 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 stock exceeds 1% of its total assets. Excess 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]
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 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 inflation and rising interest rates, and 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, pandemics or other widespread public health emergencies, terrorist attacks, civil unrest, geopolitical instability or conflicts (including the ongoing hostilities in Russia and Ukraine), trade disruptions, economic or other sanctions, 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;
•changes in the Bank’s capital stock requirements;
•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 withdrawal of one or more large 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 option. The changeand 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 net unrealized gains onBank’s ability or intent to hold MBS and mortgage loans to maturity;
•competitive forces, including the hedged advances and advances carried at fair value from December 31, 2019,availability of other sources of funding for Bank members;
•the willingness of the Bank’s members to December 31, 2020, was primarily attributable todo business with the effects of Bank;
•changes in market interest rates,investor demand for consolidated obligations (including the terms of consolidated obligations) or the terms of interest rate spreads,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 rate volatility, and other market factors relative to the terms on the Bank’s advances during the period.
Total liabilities were $62.4 billion at December 31, 2020, a decrease of $37.7 billion from $100.1 billion at December 31, 2019, primarily reflecting a $38.1 billion decrease in consolidated obligations outstandingfor which it is the primary obligor and with respect to $60.6 billion at December 31, 2020, from $98.7 billion at December 31, 2019. Average total liabilities were $87.9 billion for 2020, a 13% decrease compared to $100.5 billion for 2019. Average consolidated obligations were $86.3 billion for 2020which the Bank has joint and $99.0 billion for 2019.
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. Consolidated obligations outstanding at December 31, 2019, included unrealized losses of $9 million on consolidated obligation bonds hedged in accordance with the accounting for derivative instruments and hedging activities and unrealized losses of $2 million on economically hedged consolidated obligation bonds that are carried at fair value in accordance with the fair value option. The change in the net unrealized losses on the hedged consolidated obligation bonds and on the consolidated obligation bonds carried at fair value from December 31, 2019, to December 31, 2020, were primarily attributable to the effects ofseveral liability;
•changes in key Bank personnel;
•technology changes and enhancements, and the Bank’s ability to develop and support technology and information systems sufficient to manage the risks of the Bank’s business effectively (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 2022 was $323 million, compared with net income of $287 million for 2021. The $36 million increase in net income was primarily attributable to an increase in net interest income of $45 million and a change in other income/(loss) of $19 million, partially offset by an increase of $21 million in the Bank’s provision for credit losses.
The $45 million increase in net interest income for 2022 was primarily attributable to higher yields on growing average balances of advances and investments (primarily Federal funds sold), which was partially offset by higher funding levels with higher interest costs and a decrease in net gains on designated fair value hedges.
The $19 million change in other income/(loss) for 2022 was primarily driven by $28 million in settlement proceeds received in 2022 from the final resolution of putback litigation, to which the Bank was not a party, involving three private-label residential mortgage-backed securities’ (PLRMBS) trusts, including one trust in which the Bank owns a certificate.
The increase of $21 million in the provision for credit losses for 2022 was largely attributable to declines in the fair values and the present value of expected cash flows of certain PLRMBS.
At December 31, 2022, total assets were $121.1 billion, an increase of $67.0 billion from $54.1 billion at December 31, 2021. Advances increased to $89.4 billion at December 31, 2022, from $17.0 billion at December 31, 2021, an increase of $72.4 billion, as member demand for primarily short-term advances increased. Total investments decreased by $5.5 billion, to $30.3 billion at December 31, 2022, from $35.8 billion at December 31, 2021. The decrease in investments primarily reflected declines of $8.5 billion in securities purchased under agreements to resell and $2.2 billion in mortgage-backed securities, which was partially offset by increases of $3.3 billion in U.S. Treasury securities and $2.6 billion in interest-bearing deposits to support the Bank’s liquidity requirements.
As of December 31, 2022, the Bank complied with all regulatory capital requirements. The Bank exceeded its risk-based capital requirement of $898 million with $7.8 billion in permanent capital and exceeded the 4.0% regulatory requirement with a regulatory capital ratio of 6.4% at December 31, 2022. The decline in the regulatory capital ratio from 10.9% at December 31, 2021, was mainly attributable to an increase in total assets. Total retained earnings increased to $4.0 billion as of December 31, 2022, from $3.8 billion at yearend 2021.
On February 22, 2023, the Bank’s board of directors declared a quarterly cash dividend on the average capital stock outstanding during the fourth quarter of 2022 at an annualized rate of 7.00%. 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 quarterly dividend will total $63 million, and the Bank expects to pay the dividend on March 10, 2023.
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.
During 2022, the U.S. economy continued to experience inflation and interest rates began rising. Prolonged inflation may adversely affect overall economic conditions, and, in turn, result in adverse consequences for the Bank or Bank members’ businesses and impact the Bank’s financial condition, results of operation, or ability to pay dividends.
Additionally, the level and volatility of interest rates affect, among other things, member demand for advances. For other risks and uncertainties that the Bank faces, see “Item 1A. Risk Factors.”
Results of Operations
Selected Financial Data and Financial Ratios
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| Selected Other Data for the Year | | | | | | | | | |
Net Interest Margin(1) | 0.66 | % | | 0.91 | % | | 0.54 | % | | | | |
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| Return on Average Assets | 0.37 | | | 0.49 | | | 0.36 | | | | | |
| Return on Average Equity | 4.67 | | | 4.46 | | | 5.32 | | | | | |
| Annualized Dividend Rate | 6.30 | | | 5.74 | | | 5.53 | | | | | |
Dividend Payout Ratio(2) | 50.17 | | | 46.95 | | | 47.39 | | | | | |
| Average Equity to Average Assets Ratio | 8.02 | | | 11.00 | | | 6.69 | | | | | |
| Selected Other Data at Yearend | | | | | | | | | |
Regulatory Capital Ratio(3) | 6.41 | | | 10.89 | | | 8.69 | | | | | |
| Duration Gap (in months) | 0.9 | | | 0.4 | | | 1.3 | | | | | |
(1) Net interest margin is calculated as net interest income divided by average interest-earning assets.
(2) This ratio is calculated as dividends per share divided by net income per share.
(3) This ratio is calculated as regulatory capital divided by total assets. Regulatory capital includes retained earnings, Class B capital stock, and mandatorily redeemable capital stock (which is classified as a liability), but excludes AOCI.
Comparison of 2022 and 2021
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 with previous credit losses related to the prior methodology of evaluating credit losses, 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 2022 and 2021, 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 |
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| | 2022 | | 2021 |
| (Dollars in millions) | Average
Balance | | Interest
Income/
Expense | | Average
Rate | | Average
Balance | | Interest
Income/
Expense | | Average
Rate |
| Assets | | | | | | | | | | | |
| Interest-earning assets: | | | | | | | | | | | |
| Interest-bearing deposits | $ | 2,319 | | | $ | 55 | | | 2.37 | % | | $ | 1,194 | | | $ | 2 | | | 0.14 | % |
| Securities purchased under agreements to resell | 5,857 | | | 117 | | | 2.00 | | | 1,437 | | | 1 | | | 0.07 | |
| Federal funds sold | 11,384 | | | 214 | | | 1.88 | | | 6,417 | | | 5 | | | 0.08 | |
| Trading securities: | | | | | | | | | | | |
| MBS | 1 | | | — | | | 2.04 | | | 2 | | | — | | | 2.19 | |
| Other investments | 12 | | | — | | | 2.04 | | | 2,943 | | | 61 | | | 2.08 | |
AFS securities:(1) | | | | | | | | | | | |
MBS(2)(3)(4) | 8,686 | | | 343 | | | 3.95 | | | 9,861 | | | 216 | | | 2.19 | |
Other investments(3) | 2,539 | | | 65 | | | 2.56 | | | 1,766 | | | 4 | | | 0.22 | |
| HTM securities: | | | | | | | | | | | |
| MBS | 2,647 | | | 56 | | | 2.09 | | | 3,957 | | | 43 | | | 1.09 | |
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Mortgage loans held for portfolio(5) | 875 | | | 46 | | | 5.21 | | | 1,361 | | | 42 | | | 3.10 | |
Advances(3)(6) | 51,527 | | | 1,226 | | | 2.38 | | | 28,492 | | | 224 | | | 0.79 | |
| Loans to other FHLBanks | 9 | | | — | | | 1.48 | | | — | | | — | | | — | |
| Total interest-earning assets | 85,856 | | | 2,122 | | | 2.47 | | | 57,430 | | | 598 | | | 1.04 | |
Other assets(7) | 436 | | | — | | | | | 941 | | | — | | | |
| Total Assets | $ | 86,292 | | | $ | 2,122 | | | | | $ | 58,371 | | | $ | 598 | | | |
| Liabilities and Capital | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | |
| Consolidated obligations: | | | | | | | | | | | |
Bonds(3) | $ | 34,086 | | | $ | 715 | | | 2.10 | % | | $ | 29,085 | | | $ | 62 | | | 0.21 | % |
| Discount notes | 43,531 | | | 821 | | | 1.89 | | | 21,262 | | | 13 | | | 0.06 | |
| Deposits and other borrowings | 1,114 | | | 18 | | | 1.61 | | | 1,089 | | | 1 | | | 0.08 | |
| Mandatorily redeemable capital stock | 5 | | | — | | | 6.57 | | | 4 | | | — | | | 5.38 | |
| Borrowings from other FHLBanks | 56 | | | 1 | | | 2.01 | | | — | | | — | | | 0.07 | |
| Total interest-bearing liabilities | 78,792 | | | 1,555 | | | 1.97 | | | 51,440 | | | 76 | | | 0.15 | |
Other liabilities(7) | 577 | | | — | | | | | 508 | | | — | | | |
| Total Liabilities | 79,369 | | | 1,555 | | | | | 51,948 | | | 76 | | | |
| Total Capital | 6,923 | | | — | | | | | 6,422 | | | — | | | |
| Total Liabilities and Capital | $ | 86,292 | | | $ | 1,555 | | | | | $ | 58,370 | | | $ | 76 | | | |
| Net Interest Income | | | $ | 567 | | | | | | | $ | 522 | | | |
Net Interest Spread(8) | | | | | 0.50 | % | | | | | | 0.89 | % |
Net Interest Margin(9) | | | | | 0.66 | % | | | | | | 0.91 | % |
| Interest-earning Assets/Interest-bearing Liabilities | 108.97 | % | | | | | | 111.64 | % | | | | |
(1)The average balances of AFS securities are reflected at amortized cost. As a result, the average rates do not reflect changes in fair value.
(2)Interest income on AFS securities includes accretion of yield adjustments on certain PLRMBS (resulting from improvement in expected cash flows) with previous credit losses related to the prior methodology of evaluating credit losses, totaling $36 million and $51 million for 2022 and 2021, respectively.
(3)Interest income/expense and average rates include the effect of associated interest rate exchange agreements, as follows:
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| 2022 |
| (In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | | Total |
| (Amortization)/accretion of hedging activities | $ | (27) | | | $ | (105) | | | $ | — | | | $ | (132) | |
| Net gain/(loss) on derivatives and hedged items | (20) | | | (5) | | | 6 | | | (19) | |
| Net interest settlements on derivatives | 57 | | | 65 | | | (100) | | | 22 | |
| Total net interest income/(expense) | $ | 10 | | | $ | (45) | | | $ | (94) | | | $ | (129) | |
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| 2021 |
| (In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | | Total |
| (Amortization)/accretion of hedging activities | $ | (22) | | | $ | (108) | | | $ | — | | | $ | (130) | |
| Net gain/(loss) on derivatives and hedged items | 2 | | | 11 | | | — | | | 13 | |
| Net interest settlements on derivatives | (195) | | | (76) | | | 65 | | | (206) | |
| Total net interest income/(expense) | $ | (215) | | | $ | (173) | | | $ | 65 | | | $ | (323) | |
(4)Interest income includes net prepayment fees received on AFS MBS of $24 million and $2 million 2022 and 2021, respectively.
(5)Nonperforming mortgage loans are included in average balances used to determine average rate. Interest income from retrospective adjustment of the effective yields was $22 million and $16 million for 2022 and 2021, respectively. Interest income includes amortization of upfront loan costs and delivery commitments of $(8) million and $(23) million for 2022 and 2021, respectively.
(6)Interest income includes net prepayment fees on advances of $(9) million and $31 million for 2022 and 2021, respectively.
(7)Includes forward settling transactions and valuation adjustments for certain cash items received/(paid).
(8)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.
(9)Net interest margin is calculated as net interest income (annualized) divided by average interest-earning assets.
Net interest income in 2022 was $567 million, a 9% increase from $522 million in 2021. The following table details the changes in interest income and interest expense for 2022 compared to 2021. Changes in both volume and interest rates influence changes in net interest income, net interest spread, and net interest margin.
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Change in Net Interest Income: Rate/Volume Analysis 2022 Compared to 2021 |
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| | Increase/
(Decrease) | | Attributable to Changes in(1) |
| (In millions) | | Average Volume | | Average Rate |
| Interest-earning assets: | | | | | |
| Interest-bearing deposits | $ | 53 | | | $ | 3 | | | $ | 50 | |
| Securities purchased under agreements to resell | 116 | | | 12 | | | 104 | |
| Federal funds sold | 209 | | | 7 | | | 202 | |
| Trading securities: Other investments | (61) | | | (60) | | | (1) | |
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| AFS securities: | | | | | |
MBS(2) | 127 | | | (28) | | | 155 | |
Other investments(2) | 61 | | | 2 | | | 59 | |
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| HTM securities: MBS | 13 | | | (18) | | | 31 | |
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| Mortgage loans held for portfolio | 4 | | | (19) | | | 23 | |
Advances(2) | 1,002 | | | 286 | | | 716 | |
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| Total interest-earning assets | 1,524 | | | 185 | | | 1,339 | |
| Interest-bearing liabilities: | | | | | |
| Consolidated obligations: | | | | | |
Bonds(2) | 653 | | | 12 | | | 641 | |
| Discount notes | 808 | | | 28 | | | 780 | |
| Deposits and other borrowings | 17 | | | — | | | 17 | |
| Borrowings from other FHLBanks | 1 | | | 1 | | | — | |
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| Total interest-bearing liabilities | 1,479 | | | 41 | | | 1,438 | |
| Net interest income | $ | 45 | | | $ | 144 | | | $ | (99) | |
(1)Combined rate/volume variances, a third element of the calculation, are allocated to the rate and volume variances based on their relative sizes.
(2)Interest income/expense and average rates include the interest effect of associated interest rate exchange agreements.
The net interest margin was 66 basis points for 2022, 25 basis points lower than the net interest margin for 2021, which was 91 basis points. The net interest spread was 50 basis points for 2022, 39 basis points lower than the net interest spread for 2021, which was 89 basis points. These decreases were primarily a result of an increase in costs of interest-bearing liabilities from higher funding levels and costs, which were offset by higher yields on interest-earning assets that primarily resulted from higher interest rates on growing advance balances.
For PLRMBS with previous credit losses related to the prior methodology of evaluating credit losses, 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 these securities, the net accretion of income is likely to continue to be a positive source of net interest income in future periods.
Member demand for wholesale funding from the Bank can vary greatly depending on a number of factors, including economic and market conditions, competition from other wholesale funding sources, member deposit inflows and outflows, the activity level of the primary and secondary mortgage markets, and strategic decisions made by individual member institutions. As a result, Bank asset levels and operating results may vary significantly from period to period.
Other Income/(Loss). The following table presents the components of “Other Income/(Loss)” for 2022 and 2021.
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| Other Income/(Loss) |
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| (In millions) | 2022 | | 2021 |
| Other Income/(Loss): | | | |
Net gain/(loss) on trading securities(1) | $ | — | | | $ | (57) | |
| Net gain/(loss) on advances and consolidated obligation bonds held under fair value option | (65) | | | (54) | |
| Net gain/(loss) on derivatives | (9) | | | 37 | |
| Private-label residential mortgage-backed securities trust settlement | 28 | | | — | |
| Standby letters of credit fees | 17 | | | 16 | |
| Other, net | (2) | | | 8 | |
| Total Other Income/(Loss) | $ | (31) | | | $ | (50) | |
(1)The net gain/(loss) on trading securities that were economically hedged totaled a de minimis amount and $(57) million for 2022 and 2021, 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 2022 and 2021.
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| Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option |
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| (In millions) | 2022 | | 2021 |
| Advances | $ | (119) | | | $ | (62) | |
| Consolidated obligation bonds | 54 | | | 8 | |
| Total | $ | (65) | | | $ | (54) | |
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 Bank’sadvances and consolidated obligation bonds during the period.
AsAdditional information about advances and consolidated obligation bonds held under the fair value option is provided byin “Item 8. Financial Statements and Supplementary Data – Note 15 – Fair Value.”
Net Gain/(Loss) on Derivatives – Under the FHLBank Act or regulations governingaccounting guidance for derivative instruments and hedging activities, 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 FHLBankBank 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, 2020, and through the filing date of this report, does not believe that it is probable that it will be asked to do so. The par value of the outstanding consolidated obligations of the FHLBanks was $746.7 billion at December 31, 2020, and $1,025.9 billion at December 31, 2019.
On July 22, 2020, S&P Global Ratings (S&P) affirmed the long-term issuer credit ratings oncarry all of its derivative instruments on the FHLBanksStatements of Condition at AA+. The outlook for all ratings remained stable.
On October 11, 2019, 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 FHLBanksfair value. Certain derivatives are associated with assets or liabilities but do not necessarily affectqualify as fair value hedges under 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 outlookaccounting guidance for a particular industry or the economy.
Certain Bank assets, liabilities,derivative instruments and derivativeshedging activities. These economic hedges are indexed to LIBOR. The Bank recognizes that the impending discontinuation of LIBOR presents risks and challenges that could have an impactrecorded on the Bank’s business. For information about the risks to the Bank from discontinuationStatements 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 addresses three key strategies to mitigate the risks to the Bank associatedCondition at fair value with the discontinuation of LIBOR: (i) execute hedging strategies that permit alternative reference rates, includingunrealized gain or loss recorded in earnings without any offsetting unrealized gain or loss from the Secured Overnight Financing Rate (SOFR), (ii) transact SOFR-indexed advances and bonds, and (iii) where practicable, implement improved fallback provisions for the discontinuation of LIBOR in new and legacy contracts. In addition, the Transition Plan limits new LIBOR transactions with maturities beyond the end of 2021 consistent with the limits set by the Finance Agency’s Supervisory Letter issued on September 27, 2019. The Transition Plan states that the Bank’s Asset and Liability Management Committee has primary responsibility for driving the transition from LIBOR to SOFR and that the Bank’s Business Development Committee is responsible for advance product development to facilitate our members’ transition from LIBOR to an alternative index.associated asset or liability.
The following tables present LIBOR-indexed variable rate financial instruments by due date or termination date at December 31, 2020table shows the accounting classification of economic hedges and 2019.the categories of hedged items that contributed to the gains and losses on derivatives that were recorded in “Net gain/(loss) on derivatives” for 2022 and 2021.
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| LIBOR-Indexed Financial Instruments |
| (In millions) | | | | | | | |
| December 31, 2020 | | | | | | | |
| | | 2021 | | 2022 and Thereafter | | Total |
| Assets indexed to LIBOR: | | | | | | | |
| Par value of advances by redemption term | | | $ | 100 | | | $ | 260 | | | $ | 360 | |
| Unpaid principal balance of investment securities by contractual maturity | | | | | | | |
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MBS(1) | | | — | | | 5,744 | | | 5,744 | |
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| Notional amount of receive leg LIBOR interest rate swaps by termination date | | | | | | | |
| Cleared | | | 6,852 | | | 2,054 | | | 8,906 | |
| Uncleared | | | 213 | | | 528 | | | 741 | |
| Total | | | $ | 7,165 | | | $ | 8,586 | | | $ | 15,751 | |
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| 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 | | | | | | | |
| Cleared | | | 1,523 | | | 687 | | | 2,210 | |
| Uncleared | | | 238 | | | 130 | | | 368 | |
| Total | | | $ | 8,559 | | | $ | 817 | | | $ | 9,376 | |
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Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives 2022 Compared to 2021 |
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| (In millions) | 2022 | | 2021 |
| Hedged Item | Gain/(Loss) on Economic
Hedges | | Income/
(Expense) on Economic
Hedges | | Total | | Gain/(Loss) on Economic
Hedges | | Income/
(Expense) on Economic
Hedges | | Total |
| Advances: | | | | | | | | | | | |
| Elected for fair value option | $ | 104 | | | $ | (14) | | | $ | 90 | | | $ | 90 | | | $ | (38) | | | $ | 52 | |
| Not elected for fair value option | 30 | | | 23 | | | 53 | | | (8) | | | 5 | | | (3) | |
| Consolidated obligation bonds: | | | | | | | | | | | |
| Elected for fair value option | (50) | | | (14) | | | (64) | | | (5) | | | 1 | | | (4) | |
| Not elected for fair value option | (57) | | | (9) | | | (66) | | | (11) | | | 3 | | | (8) | |
| Consolidated obligation discount notes: | | | | | | | | | | | |
| Not elected for fair value option | 3 | | | (28) | | | (25) | | | 3 | | | (2) | | | 1 | |
| MBS: | | | | | | | | | | | |
| Not elected for fair value option | 4 | | | — | | | 4 | | | — | | | — | | | — | |
| Non-MBS investments: | | | | | | | | | | | |
| Not elected for fair value option | — | | | — | | | — | | | 39 | | | (40) | | | (1) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Price alignment amount(1) | (1) | | | — | | | (1) | | | — | | | — | | | — | |
| Total | $ | 33 | | | $ | (42) | | | $ | (9) | | | $ | 108 | | | $ | (71) | | | $ | 37 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | | |
| 2020 | | 2021 | | 2022 and Thereafter | | Total |
| Assets indexed to LIBOR: | | | | | | | |
| Par value of advances by redemption term | $ | 10,860 | | | $ | 11,300 | | | $ | 260 | | | $ | 22,420 | |
| Unpaid principal balance of investment securities by contractual maturity | | | | | | | |
| | | | | | | |
MBS(1) | — | | | — | | | 7,533 | | | 7,533 | |
| | | | | | | |
| Notional amount of receive leg LIBOR interest rate swaps by termination date | | | | | | | |
| Cleared | 8,448 | | | 2,094 | | | 2,793 | | | 13,335 | |
| Uncleared | 760 | | | 368 | | | 1,101 | | | 2,229 | |
| Total | $ | 20,068 | | | $ | 13,762 | | | $ | 11,687 | | | $ | 45,517 | |
| | | | | | | |
| Liabilities indexed to LIBOR: | | | | | | | |
| Par value of consolidated obligation bonds by contractual maturity | $ | 22,030 | | | $ | 165 | | | $ | — | | | $ | 22,195 | |
| Notional amount of pay leg LIBOR interest rate swaps by termination date | | | | | | | |
| Cleared | 19,062 | | | 3,920 | | | 272 | | | 23,254 | |
| Uncleared | 1,360 | | | 1,137 | | | 420 | | | 2,917 | |
| Total | $ | 42,452 | | | $ | 5,222 | | | $ | 692 | | | $ | 48,366 | |
(1)Certain MBS with multiple indices where LIBOR is the majority index areDuring 2022, net losses on derivatives totaled $9 million compared to net gains of $37 million in 2021. These amounts included expense of $42 million and expense of $71 million resulting from net settlements on derivative instruments used in this amount.
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 terminateeconomic hedges in 2022 and thereafter. As2021, respectively. Excluding the impact of December 31, 2019,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 capsspreads, interest rate volatility, and floors indexedother market factors during the period.
The Bank cannot predict the ongoing impact of these valuation adjustments and the effects of these valuation adjustments may lead to LIBOR totaling $430significant volatility in future earnings, including earnings available for dividends.
Additional information about derivatives and hedging activities is provided in “Item 8. Financial Statements and Supplementary Data – Note 14 – Derivatives and Hedging Activities.”
PLRMBS Trust Settlement – One of the Bank’s PLRMBS investments is held within a trust that has been the subject of litigation by the trustee since 2012. Upon final resolution of the litigation, to which the Bank was not a party, the trustee was required to transmit settlement proceeds to the trust. In the first quarter of 2022, as a result of the distribution of the settlement proceeds to the beneficial owners of the securities in the trust, including the Bank, the Bank recorded settlement proceeds of $28 million were dueas income in 2022. The Bank recorded no settlement proceeds in 2021.
Affordable Housing Program. The FHLBank Act requires each FHLBank to terminateestablish and fund an AHP. Each FHLBank’s AHP provides subsidies to members, who use the funds to assist in 2021the 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 totaling $550the assessment for the AHP). To the extent that the aggregate 10% calculation is less than $100 million, were duethe FHLBank Act requires that each FHLBank contribute such prorated sums as may be required to terminate in 2022 and thereafter.ensure that the aggregate contribution of the FHLBanks equals $100 million. The proration would be made on the basis of the
Market activityincome of the FHLBanks for the previous year. In the aggregate, the FHLBanks set aside $355 million and $201 million for their AHPs in SOFR-indexed financial instruments continues2022 and 2021, respectively, and there was no AHP shortfall in either of those years.
The Bank’s total AHP assessments equaled $36 million in 2022 and $32 million in 2021.
Return on Average Equity. ROE was 4.67% for 2022, compared to increase. 4.46% for 2021. The increase reflected higher net income for 2022, which increased 13% to $323 million in 2022 from $287 million in 2021, which was partially offset by an increase in average equity to $6.9 billion in 2022 from $6.4 billion in 2021.
Dividends and Retained Earnings. In total,2022, the Bank has issued $101.2 billionpaid dividends at an annualized rate of 6.30%, totaling $161 million, including $161 million in SOFR-indexed consolidated obligation bonds. dividends on capital stock and a de minimis amount in dividends on mandatorily redeemable capital stock. 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.
The table below presentsBank paid these dividends in cash. Dividends on capital stock are recognized as dividends on the par valueStatements of variable rate consolidated obligation bonds byCapital Accounts, and dividends on mandatorily redeemable capital stock are recognized as interest rate index at December 31, 2020 and 2019.expense on the Statements of Income.
| | | | | | | | | | | |
| Variable Rate Consolidated Obligation Bonds by Interest Rate Index |
| (In millions) | Amount Outstanding |
| Interest Rate Index | 2020 | | 2019 |
| LIBOR | $ | 6,798 | | | $ | 22,195 | |
| SOFR | 30,915 | | | 38,022 | |
| | | |
| Total par value | $ | 37,713 | | | $ | 60,217 | |
For more information, on LIBOR-indexed advances, 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 Condition Statements and Supplementary Data – Segment Information Note 11 – Advances-Related Business. Capital – Excess Stock Repurchase, Retained Earnings, and Dividend Framework.”
For more information on LIBOR-indexed investmentsa comparison of 2021 and derivatives,2020 results of operations, see “Management’s“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations” in the Bank’s 2021 Form 10-K.
– Risk Management.”
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 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 with previous credit losses related to the prior methodology of evaluating credit losses, 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.
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 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 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 Framework 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 the 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. The methodology may be revised from time to time, and the level of required retained earnings under the methodology may change due to updating data and assumptions used in the methodology. The required level of total retained earnings was $2.6 billion and $1.5 billion at December 31, 2022, and December 31, 2021, respectively. In July 2022, the required level of retained earnings was increased from $1.7 billion to $2.6 billion. In January 2023, the required level of retained earnings was increased from $2.6 billion to $2.7 billion. 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.
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. The JCE Agreement is intended to enhance the capital position of each FHLBank. In accordance with the JCE Agreement, each FHLBank is required to reclassify an amount equal to 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. The JCE Agreement also 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 stock exceeds 1% of its total assets. Excess 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 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 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 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, 2022, we had 297 employees. As of December 31, 2022, approximately 46.0% of our workforce identify as female, 53.0% identify as male, and 1.0% declined to state a gender. Approximately 68.0% of our workforce identify as an ethnic minority, and 1.0% declined to state an ethnicity. As of December 31, 2022, the average tenure of our employees was 8.4 years. Our overall turnover rate for 2022 was 14.8%. 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:
◦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. Equity is embedded in the Bank’s workforce management and business activities. We recognize that diversity increases our capacity for innovation
and creativity and that inclusion allows us to leverage the unique perspectives of all employees, facilitates a sense of belonging, 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 furnishedSEC 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.) The Bank is exempt from certain SEC statutes and regulations and the filing of certain reports with the SEC, including proxy statements, otherwise required by public companies whose securities are registered with the SEC.
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, geopolitical instability or conflicts (including the ongoing hostilities in Russia and Ukraine), trade disruptions, economic or other sanctions, 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 COVID-19 pandemic and related developments that have lingered continue to have negative effects on the economy and may continue to disrupt the financial and credit markets in which the Bank operates and adversely affect our operations and business activities. Despite improvements in the overall U.S. economy since the 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 certain days of the week in accordance with the Bank’s hybrid schedule 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.
Market uncertainty and volatility may adversely affect our business, profitability, or results of operations.
Adverse and volatile conditions in the housing, mortgage, and financial markets 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.
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, member demand for advances, 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, our ability to pay dividends or redeem or repurchase capital stock, or investor demand for consolidated obligations. During 2022 the U.S. economy continued to experience rising interest rates. 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. The Federal Reserve Bank’s policies directly and indirectly influence interest rates on the Bank’s assets and liabilities and could
adversely affect the demand for advances and therefore adversely impact the Bank’s financial condition and results of operations. Recent efforts of the Federal Reserve Board to ease inflation, such as continued increases in policy interest rates, have contributed to volatility in the financial markets and uncertainties about the economic outlook, including concerns about a possible recession.
Changes to and replacement of the London Interbank Offered Rate (LIBOR) benchmark interest rate to the Secured Overnight Financing 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 the phase-out of LIBOR as a benchmark interest rate. 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.
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.
We have developed and are implementing a LIBOR Phase Out Transition Plan, to address potential LIBOR exposure, fallback language, operational and system 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 ARRC has recommended spread adjustments to the replacement floating rates meant to minimize the difference between LIBOR and SOFR. 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 our LIBOR-indexed mortgage investments to convert to SOFR. 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 fully 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 certain institutions and their affiliates. Significant credit losses or heightened focus on our credit exposure to individual members due to market events could have an adverse effect on our financial condition, reputation, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
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, custodians, 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 by eligible collateral types mostly with a nexus to housing. 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, reputation, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
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. For example, downgrades to the U.S. sovereign credit rating or outlook may occur if the U.S. government fails to adequately address, based on the credit rating agencies’ criteria, its fiscal budget deficit or statutory debt limits (which was most recently reached in January 2023). 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.
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 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 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.
Strategic Execution Risks
Limitations on the payment of dividends and repurchase of excess 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 our adequately capitalized position while paying dividends (including dividends on mandatorily redeemable capital stock) and repurchasing and redeeming excess stock. Limitations on the payment of dividends and the repurchase of excess stock may diminish the value of membership from the perspective of a member.
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, Federal Reserve, 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.
We may increase our activity-based stock requirement in the future.
Under our capital plan, we have the authority to increase stock requirements within established ranges. Depending upon the size of our balance sheet, advance business growth potential, our regulatory capital level, and other considerations, we may increase activity-based stock requirements (i.e., the capital stock required to be owned by our members under our capital plan to support business activity with the Bank). Such increases would require members with activity-based stock outstanding to purchase additional stock in connection with their existing business. Members also would be required to purchase the new higher level of activity-based stock in connection with new business. Higher stock levels may also lead to lower return on capital stock in the future. Finally, higher activity-based stock requirements would increase the level of advances we could support while exceeding our regulatory capital requirements.
For more information on the Bank’s capital plan and activity-based stock, see “Part II. Item 7. 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.”
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. 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 stock, at our discretion, or redeems the excess 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 with previous credit losses related to the prior methodology of evaluating credit losses. 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.
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, technology vendors, and 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 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.
We may fail to identify and manage risks related to a variety of aspects of our business, including operational risk, legal and compliance risk, interest-rate risk, liquidity risk, market risk, and credit risk.
We have adopted policies, procedures, and controls, and use systems and technology, and have an elaborate risk governance framework, designed to aid in monitoring and managing these risks. However, we cannot provide complete assurance that these controls, procedures, policies, systems, technology, and risk governance framework, are adequate to identify and manage all the risks inherent in the Bank’s business, including, for example, risks that arise as a result of changes in the business. Failed or inadequate controls, risk management practices, systems, and technology, and failure to adhere to applicable policies and procedures, and the overall risk governance framework, could have an adverse effect on our financial condition and results of operations.
The inability to attract and retain skilled key personnel could adversely affect the business, workforce, and operations of the Bank.
We rely on key personnel and a competent workforce 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 2022, as the ongoing COVID-19 pandemic brought about significant disruptions and changes to the U.S. labor market. In addition, increased remote-working opportunities have also increased competition in hiring and retaining skilled key personnel. 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.
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.
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 stock) may be redeemed at the end of the redemption period. In addition, we may elect to repurchase some or all of the excess 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 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 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.
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 and state laws and regulations that could change or be applied in a manner detrimental to our operations, or to the ability or motivation to invest in the Bank or use our products and services.
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. New or modified legislation enacted by Congress or states 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, or affect our members’ ability or motivation to acquire or own our capital stock or use of our products and services. 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, membership base, membership eligibility, our members’ access to our products and services (including whether a member meets required tangible capital levels to access advances), 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.
In 2022, the Finance Agency initiated a comprehensive review of the FHLBank System. This review is expected to culminate with a written report from the Finance Agency. The expected report may include recommendations for statutory revisions, proposals for new or modified regulations, regulatory guidance under existing regulations, or other regulatory or supervisory actions consistent with the Finance Agency’s statutory authority. For more details on this Finance Agency review, see “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments - Finance Agency’s Review and Analysis of the Federal Home Loan Bank System “FHLBank System at 100: Focusing on the Future.”
At this time, we cannot predict what actions will ultimately result from this initiative or the extent of any changes to the FHLBank System or the Bank, or the ultimate impact on the FHLBanks or the Bank in the future. Potential changes resulting from this initiative, including those relating to the FHLBanks’ fulfillment of their mission, membership requirements, and requirements relating to affordable housing contributions and support for community investment, will likely impact our business and operations, which may impact our financial condition.
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.
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 or conflicts (including the ongoing hostilities in Russia and Ukraine), trade disruptions, or a sustained capital market correction could weaken consumer and business confidence and depress personal consumption, employment rates, 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. During 2022, the U.S. economy continued to experience inflation. Prolonged inflation may adversely affect overall economic conditions, and in turn result in adverse consequences to the Bank or member business and impact the Bank’s financial condition, results of operation, or ability to pay dividends. Recent efforts of the Federal Reserve Board to ease inflation, such as continued increases in policy interest rates, have contributed to significant volatility in the financial markets and uncertainties about the economic outlook, including concerns about a possible recession.
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.
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.
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 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, 2023, the Bank had 37,621,520 shares of Class B stock held by 328 members and 1,798,851 shares of Class B stock held by 4 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 stock exceeds 1% of its total assets. Excess 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]
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 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 inflation and rising interest rates, and 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, pandemics or other widespread public health emergencies, terrorist attacks, civil unrest, geopolitical instability or conflicts (including the ongoing hostilities in Russia and Ukraine), trade disruptions, economic or other sanctions, 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;
•changes in the Bank’s capital stock requirements;
•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 withdrawal of one or more large 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;
•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 2022 was $323 million, compared with net income of $287 million for 2021. The $36 million increase in net income was primarily attributable to an increase in net interest income of $45 million and a change in other income/(loss) of $19 million, partially offset by an increase of $21 million in the Bank’s provision for credit losses.
The $45 million increase in net interest income for 2022 was primarily attributable to higher yields on growing average balances of advances and investments (primarily Federal funds sold), which was partially offset by higher funding levels with higher interest costs and a decrease in net gains on designated fair value hedges.
The $19 million change in other income/(loss) for 2022 was primarily driven by $28 million in settlement proceeds received in 2022 from the final resolution of putback litigation, to which the Bank was not a party, involving three private-label residential mortgage-backed securities’ (PLRMBS) trusts, including one trust in which the Bank owns a certificate.
The increase of $21 million in the provision for credit losses for 2022 was largely attributable to declines in the fair values and the present value of expected cash flows of certain PLRMBS.
At December 31, 2022, total assets were $121.1 billion, an increase of $67.0 billion from $54.1 billion at December 31, 2021. Advances increased to $89.4 billion at December 31, 2022, from $17.0 billion at December 31, 2021, an increase of $72.4 billion, as member demand for primarily short-term advances increased. Total investments decreased by $5.5 billion, to $30.3 billion at December 31, 2022, from $35.8 billion at December 31, 2021. The decrease in investments primarily reflected declines of $8.5 billion in securities purchased under agreements to resell and $2.2 billion in mortgage-backed securities, which was partially offset by increases of $3.3 billion in U.S. Treasury securities and $2.6 billion in interest-bearing deposits to support the Bank’s liquidity requirements.
As of December 31, 2022, the Bank complied with all regulatory capital requirements. The Bank exceeded its risk-based capital requirement of $898 million with $7.8 billion in permanent capital and exceeded the 4.0% regulatory requirement with a regulatory capital ratio of 6.4% at December 31, 2022. The decline in the regulatory capital ratio from 10.9% at December 31, 2021, was mainly attributable to an increase in total assets. Total retained earnings increased to $4.0 billion as of December 31, 2022, from $3.8 billion at yearend 2021.
On February 22, 2023, the Bank’s board of directors declared a quarterly cash dividend on the average capital stock outstanding during the fourth quarter of 2022 at an annualized rate of 7.00%. 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 quarterly dividend will total $63 million, and the Bank expects to pay the dividend on March 10, 2023.
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.
During 2022, the U.S. economy continued to experience inflation and interest rates began rising. Prolonged inflation may adversely affect overall economic conditions, and, in turn, result in adverse consequences for the Bank or Bank members’ businesses and impact the Bank’s financial condition, results of operation, or ability to pay dividends.
Additionally, the level and volatility of interest rates affect, among other things, member demand for advances. For other risks and uncertainties that the Bank faces, see “Item 1A. Risk Factors.”
Results of Operations
Selected Financial Data and Financial Ratios
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| Selected Other Data for the Year | | | | | | | | | |
Net Interest Margin(1) | 0.66 | % | | 0.91 | % | | 0.54 | % | | | | |
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| Return on Average Assets | 0.37 | | | 0.49 | | | 0.36 | | | | | |
| Return on Average Equity | 4.67 | | | 4.46 | | | 5.32 | | | | | |
| Annualized Dividend Rate | 6.30 | | | 5.74 | | | 5.53 | | | | | |
Dividend Payout Ratio(2) | 50.17 | | | 46.95 | | | 47.39 | | | | | |
| Average Equity to Average Assets Ratio | 8.02 | | | 11.00 | | | 6.69 | | | | | |
| Selected Other Data at Yearend | | | | | | | | | |
Regulatory Capital Ratio(3) | 6.41 | | | 10.89 | | | 8.69 | | | | | |
| Duration Gap (in months) | 0.9 | | | 0.4 | | | 1.3 | | | | | |
(1) Net interest margin is calculated as net interest income divided by average interest-earning assets.
(2) This ratio is calculated as dividends per share divided by net income per share.
(3) This ratio is calculated as regulatory capital divided by total assets. Regulatory capital includes retained earnings, Class B capital stock, and mandatorily redeemable capital stock (which is classified as a liability), but excludes AOCI.
Comparison of 2022 and 2021
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 with previous credit losses related to the prior methodology of evaluating credit losses, 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 2022 and 2021, 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 |
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| | 2022 | | 2021 |
| (Dollars in millions) | Average
Balance | | Interest
Income/
Expense | | Average
Rate | | Average
Balance | | Interest
Income/
Expense | | Average
Rate |
| Assets | | | | | | | | | | | |
| Interest-earning assets: | | | | | | | | | | | |
| Interest-bearing deposits | $ | 2,319 | | | $ | 55 | | | 2.37 | % | | $ | 1,194 | | | $ | 2 | | | 0.14 | % |
| Securities purchased under agreements to resell | 5,857 | | | 117 | | | 2.00 | | | 1,437 | | | 1 | | | 0.07 | |
| Federal funds sold | 11,384 | | | 214 | | | 1.88 | | | 6,417 | | | 5 | | | 0.08 | |
| Trading securities: | | | | | | | | | | | |
| MBS | 1 | | | — | | | 2.04 | | | 2 | | | — | | | 2.19 | |
| Other investments | 12 | | | — | | | 2.04 | | | 2,943 | | | 61 | | | 2.08 | |
AFS securities:(1) | | | | | | | | | | | |
MBS(2)(3)(4) | 8,686 | | | 343 | | | 3.95 | | | 9,861 | | | 216 | | | 2.19 | |
Other investments(3) | 2,539 | | | 65 | | | 2.56 | | | 1,766 | | | 4 | | | 0.22 | |
| HTM securities: | | | | | | | | | | | |
| MBS | 2,647 | | | 56 | | | 2.09 | | | 3,957 | | | 43 | | | 1.09 | |
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Mortgage loans held for portfolio(5) | 875 | | | 46 | | | 5.21 | | | 1,361 | | | 42 | | | 3.10 | |
Advances(3)(6) | 51,527 | | | 1,226 | | | 2.38 | | | 28,492 | | | 224 | | | 0.79 | |
| Loans to other FHLBanks | 9 | | | — | | | 1.48 | | | — | | | — | | | — | |
| Total interest-earning assets | 85,856 | | | 2,122 | | | 2.47 | | | 57,430 | | | 598 | | | 1.04 | |
Other assets(7) | 436 | | | — | | | | | 941 | | | — | | | |
| Total Assets | $ | 86,292 | | | $ | 2,122 | | | | | $ | 58,371 | | | $ | 598 | | | |
| Liabilities and Capital | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | |
| Consolidated obligations: | | | | | | | | | | | |
Bonds(3) | $ | 34,086 | | | $ | 715 | | | 2.10 | % | | $ | 29,085 | | | $ | 62 | | | 0.21 | % |
| Discount notes | 43,531 | | | 821 | | | 1.89 | | | 21,262 | | | 13 | | | 0.06 | |
| Deposits and other borrowings | 1,114 | | | 18 | | | 1.61 | | | 1,089 | | | 1 | | | 0.08 | |
| Mandatorily redeemable capital stock | 5 | | | — | | | 6.57 | | | 4 | | | — | | | 5.38 | |
| Borrowings from other FHLBanks | 56 | | | 1 | | | 2.01 | | | — | | | — | | | 0.07 | |
| Total interest-bearing liabilities | 78,792 | | | 1,555 | | | 1.97 | | | 51,440 | | | 76 | | | 0.15 | |
Other liabilities(7) | 577 | | | — | | | | | 508 | | | — | | | |
| Total Liabilities | 79,369 | | | 1,555 | | | | | 51,948 | | | 76 | | | |
| Total Capital | 6,923 | | | — | | | | | 6,422 | | | — | | | |
| Total Liabilities and Capital | $ | 86,292 | | | $ | 1,555 | | | | | $ | 58,370 | | | $ | 76 | | | |
| Net Interest Income | | | $ | 567 | | | | | | | $ | 522 | | | |
Net Interest Spread(8) | | | | | 0.50 | % | | | | | | 0.89 | % |
Net Interest Margin(9) | | | | | 0.66 | % | | | | | | 0.91 | % |
| Interest-earning Assets/Interest-bearing Liabilities | 108.97 | % | | | | | | 111.64 | % | | | | |
(1)The average balances of AFS securities are reflected at amortized cost. As a result, the average rates do not reflect changes in fair value.
(2)Interest income on AFS securities includes accretion of yield adjustments on certain PLRMBS (resulting from improvement in expected cash flows) with previous credit losses related to the prior methodology of evaluating credit losses, totaling $36 million and $51 million for 2022 and 2021, respectively.
(3)Interest income/expense and average rates include the effect of associated interest rate exchange agreements, as follows:
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| 2022 |
| (In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | | Total |
| (Amortization)/accretion of hedging activities | $ | (27) | | | $ | (105) | | | $ | — | | | $ | (132) | |
| Net gain/(loss) on derivatives and hedged items | (20) | | | (5) | | | 6 | | | (19) | |
| Net interest settlements on derivatives | 57 | | | 65 | | | (100) | | | 22 | |
| Total net interest income/(expense) | $ | 10 | | | $ | (45) | | | $ | (94) | | | $ | (129) | |
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| 2021 |
| (In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | | Total |
| (Amortization)/accretion of hedging activities | $ | (22) | | | $ | (108) | | | $ | — | | | $ | (130) | |
| Net gain/(loss) on derivatives and hedged items | 2 | | | 11 | | | — | | | 13 | |
| Net interest settlements on derivatives | (195) | | | (76) | | | 65 | | | (206) | |
| Total net interest income/(expense) | $ | (215) | | | $ | (173) | | | $ | 65 | | | $ | (323) | |
(4)Interest income includes net prepayment fees received on AFS MBS of $24 million and $2 million 2022 and 2021, respectively.
(5)Nonperforming mortgage loans are included in average balances used to determine average rate. Interest income from retrospective adjustment of the effective yields was $22 million and $16 million for 2022 and 2021, respectively. Interest income includes amortization of upfront loan costs and delivery commitments of $(8) million and $(23) million for 2022 and 2021, respectively.
(6)Interest income includes net prepayment fees on advances of $(9) million and $31 million for 2022 and 2021, respectively.
(7)Includes forward settling transactions and valuation adjustments for certain cash items received/(paid).
(8)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.
(9)Net interest margin is calculated as net interest income (annualized) divided by average interest-earning assets.
Net interest income in 2022 was $567 million, a 9% increase from $522 million in 2021. The following table details the changes in interest income and interest expense for 2022 compared to 2021. Changes in both volume and interest rates influence changes in net interest income, net interest spread, and net interest margin.
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Change in Net Interest Income: Rate/Volume Analysis 2022 Compared to 2021 |
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| | Increase/
(Decrease) | | Attributable to Changes in(1) |
| (In millions) | | Average Volume | | Average Rate |
| Interest-earning assets: | | | | | |
| Interest-bearing deposits | $ | 53 | | | $ | 3 | | | $ | 50 | |
| Securities purchased under agreements to resell | 116 | | | 12 | | | 104 | |
| Federal funds sold | 209 | | | 7 | | | 202 | |
| Trading securities: Other investments | (61) | | | (60) | | | (1) | |
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| AFS securities: | | | | | |
MBS(2) | 127 | | | (28) | | | 155 | |
Other investments(2) | 61 | | | 2 | | | 59 | |
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| HTM securities: MBS | 13 | | | (18) | | | 31 | |
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| Mortgage loans held for portfolio | 4 | | | (19) | | | 23 | |
Advances(2) | 1,002 | | | 286 | | | 716 | |
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| Total interest-earning assets | 1,524 | | | 185 | | | 1,339 | |
| Interest-bearing liabilities: | | | | | |
| Consolidated obligations: | | | | | |
Bonds(2) | 653 | | | 12 | | | 641 | |
| Discount notes | 808 | | | 28 | | | 780 | |
| Deposits and other borrowings | 17 | | | — | | | 17 | |
| Borrowings from other FHLBanks | 1 | | | 1 | | | — | |
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| Total interest-bearing liabilities | 1,479 | | | 41 | | | 1,438 | |
| Net interest income | $ | 45 | | | $ | 144 | | | $ | (99) | |
(1)Combined rate/volume variances, a third element of the calculation, are allocated to the rate and volume variances based on their relative sizes.
(2)Interest income/expense and average rates include the interest effect of associated interest rate exchange agreements.
The net interest margin was 66 basis points for 2022, 25 basis points lower than the net interest margin for 2021, which was 91 basis points. The net interest spread was 50 basis points for 2022, 39 basis points lower than the net interest spread for 2021, which was 89 basis points. These decreases were primarily a result of an increase in costs of interest-bearing liabilities from higher funding levels and costs, which were offset by higher yields on interest-earning assets that primarily resulted from higher interest rates on growing advance balances.
For PLRMBS with previous credit losses related to the prior methodology of evaluating credit losses, 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 these securities, the net accretion of income is likely to continue to be a positive source of net interest income in future periods.
Member demand for wholesale funding from the Bank can vary greatly depending on a number of factors, including economic and market conditions, competition from other wholesale funding sources, member deposit inflows and outflows, the activity level of the primary and secondary mortgage markets, and strategic decisions made by individual member institutions. As a result, Bank asset levels and operating results may vary significantly from period to period.
Other Income/(Loss). The following table presents the components of “Other Income/(Loss)” for 2022 and 2021.
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| Other Income/(Loss) |
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| (In millions) | 2022 | | 2021 |
| Other Income/(Loss): | | | |
Net gain/(loss) on trading securities(1) | $ | — | | | $ | (57) | |
| Net gain/(loss) on advances and consolidated obligation bonds held under fair value option | (65) | | | (54) | |
| Net gain/(loss) on derivatives | (9) | | | 37 | |
| Private-label residential mortgage-backed securities trust settlement | 28 | | | — | |
| Standby letters of credit fees | 17 | | | 16 | |
| Other, net | (2) | | | 8 | |
| Total Other Income/(Loss) | $ | (31) | | | $ | (50) | |
(1)The net gain/(loss) on trading securities that were economically hedged totaled a de minimis amount and $(57) million for 2022 and 2021, 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 2022 and 2021.
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| Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option |
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| (In millions) | 2022 | | 2021 |
| Advances | $ | (119) | | | $ | (62) | |
| Consolidated obligation bonds | 54 | | | 8 | |
| Total | $ | (65) | | | $ | (54) | |
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” for 2022 and 2021.
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Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives 2022 Compared to 2021 |
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| (In millions) | 2022 | | 2021 |
| Hedged Item | Gain/(Loss) on Economic
Hedges | | Income/
(Expense) on Economic
Hedges | | Total | | Gain/(Loss) on Economic
Hedges | | Income/
(Expense) on Economic
Hedges | | Total |
| Advances: | | | | | | | | | | | |
| Elected for fair value option | $ | 104 | | | $ | (14) | | | $ | 90 | | | $ | 90 | | | $ | (38) | | | $ | 52 | |
| Not elected for fair value option | 30 | | | 23 | | | 53 | | | (8) | | | 5 | | | (3) | |
| Consolidated obligation bonds: | | | | | | | | | | | |
| Elected for fair value option | (50) | | | (14) | | | (64) | | | (5) | | | 1 | | | (4) | |
| Not elected for fair value option | (57) | | | (9) | | | (66) | | | (11) | | | 3 | | | (8) | |
| Consolidated obligation discount notes: | | | | | | | | | | | |
| Not elected for fair value option | 3 | | | (28) | | | (25) | | | 3 | | | (2) | | | 1 | |
| MBS: | | | | | | | | | | | |
| Not elected for fair value option | 4 | | | — | | | 4 | | | — | | | — | | | — | |
| Non-MBS investments: | | | | | | | | | | | |
| Not elected for fair value option | — | | | — | | | — | | | 39 | | | (40) | | | (1) | |
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Price alignment amount(1) | (1) | | | — | | | (1) | | | — | | | — | | | — | |
| Total | $ | 33 | | | $ | (42) | | | $ | (9) | | | $ | 108 | | | $ | (71) | | | $ | 37 | |
(1) This amount relates to derivatives for which variation margin on cleared derivatives is characterized as a daily settled contract.
During 2022, net losses on derivatives totaled $9 million compared to net gains of $37 million in 2021. These amounts included expense of $42 million and expense of $71 million resulting from net settlements on derivative instruments used in economic hedges in 2022 and 2021, respectively. Excluding the impact of income or expense from net settlements on derivative instruments used in economic hedges, the net gains or losses on economic hedges were primarily associated with the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors during the period.
The Bank cannot predict the ongoing impact of these valuation adjustments and the effects of these valuation adjustments may lead to significant volatility in future earnings, including earnings available for dividends.
Additional information about derivatives and hedging activities is provided in “Item 8. Financial Statements and Supplementary Data – Note 14 – Derivatives and Hedging Activities.”
PLRMBS Trust Settlement – One of the Bank’s PLRMBS investments is held within a trust that has been the subject of litigation by the trustee since 2012. Upon final resolution of the litigation, to which the Bank was not a party, the trustee was required to transmit settlement proceeds to the trust. In the first quarter of 2022, as a result of the distribution of the settlement proceeds to the beneficial owners of the securities in the trust, including the Bank, the Bank recorded settlement proceeds of $28 million as income in 2022. The Bank recorded no settlement proceeds 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 $355 million and $201 million for their AHPs in 2022 and 2021, respectively, and there was no AHP shortfall in either of those years.
The Bank’s total AHP assessments equaled $36 million in 2022 and $32 million in 2021.
Return on Average Equity. ROE was 4.67% for 2022, compared to 4.46% for 2021. The increase reflected higher net income for 2022, which increased 13% to $323 million in 2022 from $287 million in 2021, which was partially offset by an increase in average equity to $6.9 billion in 2022 from $6.4 billion in 2021.
Dividends and Retained Earnings. In 2022, the Bank paid dividends at an annualized rate of 6.30%, totaling $161 million, including $161 million in dividends on capital stock and a de minimis amount in dividends on mandatorily redeemable capital stock. 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.
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 2021 and 2020 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 2021 Form 10-K.
Financial Condition
Total assets were $121.1 billion at December 31, 2022, compared to $54.1 billion at December 31, 2021. Advances increased by $72.4 billion, or 425%, to $89.4 billion at December 31, 2022, from $17.0 billion at December 31, 2021. Average total assets were $86.3 billion for 2022, a 48% increase from $58.4 billion for 2021. Average advances were $51.5 billion for 2022, an 81% increase from $28.5 billion for 2021. Average MBS investments were $11.3 billion for 2022, an 18% decrease from $13.8 billion for 2021.
Advances outstanding at December 31, 2022, included net unrealized losses of $717 million, of which $670 million represented unrealized losses on advances hedged in accordance with the accounting for derivative instruments and hedging activities and $47 million represented unrealized losses on economically hedged advances that are carried at fair value in accordance with the fair value option. Advances outstanding at December 31, 2021, included net 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. The change in the net unrealized losses on the hedged advances and advances carried at fair value from December 31, 2021, to December 31, 2022, 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 $113.3 billion at December 31, 2022, an increase of $65.4 billion from $47.9 billion at December 31, 2021, primarily reflecting a $65.0 billion increase in consolidated obligations outstanding to $111.7 billion at December 31, 2022, from $46.7 billion at December 31, 2021. Average total liabilities were $79.4 billion for 2022, a 53% increase compared to $51.9 billion for 2021. Average consolidated obligations were $77.6 billion for 2022 and $50.3 billion for 2021.
Consolidated obligations outstanding at December 31, 2022, included net unrealized gains of $1.1 billion on consolidated obligation bonds hedged in accordance with the accounting for derivative instruments and hedging activities and unrealized gains of $52 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, 2021, included net 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. 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, 2021, to December 31, 2022, 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, 2022, and through the filing date of this report, does not believe that it is probable that it will be asked to do so. The par value of the outstanding consolidated obligations of the FHLBanks was $1.2 trillion at December 31, 2022, and $652.9 billion at December 31, 2021.
Credit Ratings. On July 14, 2022, 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 January 28, 2022, 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 changes in their opinion regarding, among other factors, the general outlook for a particular industry or the economy.
Deposit Liabilities. All Bank deposits are uninsured. The average balances of interest-bearing demand and overnight deposits were $817 million, $925 million, and $799 million, and the weighted average interest rates paid on demand and overnight deposits were 1.38%, 0.01%, and 0.16% during the years ended December 31, 2022, 2021, and 2020, respectively. The average balances of term deposits were $32 million, $25 million, and $14 million, and the weighted average interest rates paid on term deposits were 2.86%, 0.01%, and 0.02% during the years ended December 31, 2022, 2021, and 2020, respectively.
Term deposits totaling a de minimis amount and $18 million at December 31, 2022 and 2021, respectively, mature in three months or less.
LIBOR Transition. 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 and promotes the use of robust benchmarks, like SOFR, in the Bank’s financial activities. 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 Bank 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 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.
On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act was signed into law. On a nationwide basis, the legislation provides a statutory fallback mechanism to replace LIBOR with a benchmark rate, selected by the Federal Reserve Board and based on SOFR, including any applicable tenor spread adjustment, for certain contracts that reference LIBOR and contain no fallback provisions or insufficient fallback provisions. On December 16, 2022, the Federal Reserve Board finalized rules to implement the Adjustable Interest Rate (LIBOR) Act by identifying specific benchmark rates based on SOFR that will replace LIBOR in certain financial contracts after June 30, 2023. The final rule provides default rules for certain contracts (covered contracts) that: reference LIBOR, are governed by U.S. law, do not mature on or before the LIBOR replacement date, and lack adequate provisions to identify a replacement rate for LIBOR. The final rule identifies separate Board-selected replacement rates for derivatives transactions, covered GSE contracts, and all other covered contracts. The final rule defines covered GSE contracts to include FHLBank advances and will become effective 30 days after publication in the Federal Register.
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, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | |
| LIBOR-Indexed Financial Instruments |
| | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | |
| (In millions) | | | | | | Due/Terminates through June 30, 2023 | | Due/Terminates thereafter | | Total |
| Assets indexed to LIBOR: | | | | | | | | | | |
| | | | | | | | | | |
Unpaid principal balance of MBS by contractual maturity(1) | | | | | | $ | 5 | | | $ | 2,953 | | | $ | 2,958 | |
| Notional amount of receive leg LIBOR interest rate swaps by termination date | | | | | | | | | | |
| Cleared | | | | | | 303 | | | 182 | | | 485 | |
| Uncleared | | | | | | 19 | | | — | | | 19 | |
| Total | | | | | | $ | 327 | | | $ | 3,135 | | | $ | 3,462 | |
| | | | | | | | | | |
| Notional amount of pay leg LIBOR interest rate swaps by termination date - Cleared | | | | | | $ | 50 | | | $ | 5 | | | $ | 55 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | | | | | | | | | |
| (In millions) | | | | | Due/Terminates in 2022 | | Due/Terminates through June 30, 2023 | | Due/Terminates thereafter | | Total |
| Assets indexed to LIBOR: | | | | | | | | | | | |
| Par value of advances by redemption term | | | | | $ | 250 | | | $ | — | | | $ | 10 | | | $ | 260 | |
Unpaid principal balance of MBS by contractual maturity(1) | | | | | — | | | 12 | | | 4,098 | | | 4,110 | |
| Notional amount of receive leg LIBOR interest rate swaps by termination date | | | | | | | | | | | |
| Cleared | | | | | 517 | | | 309 | | | 562 | | | 1,388 | |
| Uncleared | | | | | 112 | | | 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 | |
| Uncleared | | | | | 35 | | | — | | | — | | | 35 | |
| Total | | | | | $ | 245 | | | $ | 52 | | | $ | 40 | | | $ | 337 | |
(1)Certain MBS with multiple indices where LIBOR is the majority index are included in this amount.
As of December 31, 2022, there were no interest rate caps and floors indexed to LIBOR. At December 31, 2021, interest rate caps and floors indexed to LIBOR totaled $550 million.
All adjustable rate consolidated obligation bonds are indexed to SOFR, totaling $49.0 billion at December 31, 2022, and $5.6 billion at December 31, 2021.
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 and hedging activities”derivatives” in other income,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.” AHPAffordable Housing Program (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 $34.8increased $69.2 billion to $50.9$109.3 billion (90% of total assets) at December 31, 2022, from $40.1 billion (74% of total assets) at December 31, 2020, from $85.7 billion (80% of total assets) at December 31, 2019.2021.
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 $247$292 million in 2020, a decrease2022, an increase of $60$94 million, or 20%47%, compared to $307$198 million in 2019.2021. This decreaseincrease was primarily due to a declineresult of an improvement in spreads on advances-related assets due to lower interest rates and lowerhigher balances of advances and other credit products, partially offset by an increasea decrease of $40 million in net advancesadvance prepayment fee income.
Adjusted net interest income for this segment represented 54%56% and 55%43% of total adjusted net interest income for 20202022 and 2019,2021, respectively.
Advances – The par value of advances outstanding decreasedincreased by $34.8$73.2 billion, or 53%434%, to $30.3$90.1 billion at December 31, 2020,2022, from $65.1$16.9 billion at December 31, 2019.2021. Average advances outstanding were $52.8$51.5 billion for 2020, a 22% decrease2022, an 81% increase from $67.6$28.5 billion for 2019.2021. Outstanding balances of advances may significantly increase and decrease from period to period because of a member’s liquidity and financial strategies.strategies; therefore, yearend balances may vary significantly from average balances for the year.
As of December 31, 2020, advances and capital with certain institutions and their affiliates. Advances outstanding to the Bank’s top five10 borrowers and their affiliates decreasedincreased by $24.7$53.2 billion from the Bank’s top five borrowers and their affiliates asto $63.9 billion, or 71% of December 31, 2019, andtotal advances outstanding to the Bank’s other borrowers decreased by $10.1 billion. Advances to the top five borrowers decreased to $19.5 billion at December 31, 2020,2022, from $44.2$10.7 billion, or 63% of total advances outstanding at December 31, 2019, including First Republic Bank, whose advances and capital stock exceeded 10% of the Bank’s total advances and capital stock, respectively, as of December 31, 2020, as presented in2021. (See “Item 8. Financial Statements and Supplementary Data – Note 5 – Advances – Concentration Risk” for further information.) Silicon Valley Bank is the Bank’s largest borrower and “Item 8. Financial Statementsheld $15.0 billion, or 17% of the Bank’s advances outstanding at December 31, 2022. Silicon Valley Bank had no advances outstanding at December 31, 2021.
Several acquisitions involving large regional financial institutions in the Bank’s district have been announced or completed, potentially reducing the opportunity to grow advances, for advances to be prepaid or renewed when due, or to replace the advances from these large regional financial institutions with other advances. On December 20, 2021, it was announced that BMO Harris, a nonmember, entered into an agreement to acquire Bank of the West, and Supplementary Data – Note 11 – Capital – Concentration.”on February 1, 2023, BMO Harris announced its completion of this acquisition. Bank of the West held $4.3 billion of the Bank’s total advances at December 31, 2022. This advances balance may be reduced in subsequent quarters. Bank of the West held no advances at the Bank at December 31, 2021. On October 19, 2022, it was
announced that U.S. Bancorp, a nonmember, received all regulatory approvals to acquire MUFG Union Bank, National Association (Union Bank), and on December 1, 2022, U.S. Bancorp announced that it completed its acquisition of Union Bank. Union Bank held $4.3 billion and $2.1 billion of the Bank’s advances at December 31, 2022 and 2021, respectively. If Bank of the West and Union Bank are no longer a member of the Bank or any successor does not become a member of the Bank, and if no other advances are made to replace Bank of the West’s and Union Bank’s outstanding advances, the Bank’s total advances may be significantly reduced due to the loss of significant members.
At March 1, 2023, Silvergate Bank had no advances outstanding from the Bank, a reduction of $4.3 billion from yearend 2022.
The Bank has a significant long-term funding arrangement with one membera borrower that had contributedadvances outstanding as of December 31, 2022, and the borrower may further contribute to the level of outstanding advances during 2020. The borrower prepaid $9 billion of its outstanding advances duringin the second quarter of 2020, which resulted in prepayment fees of $10 million.future.
The $34.8 billion decrease in advances outstanding reflected a $21.5 billion decrease in adjustable rate advances, an $8.5 billion decrease in fixed rate advances, and a $4.7 billion decrease in variable rate advances. In 2019, the Bank began to offer SOFR-indexed advances to its members.
The components offollowing table presents the advances portfolio at December 31, 20202022 and 2019, are presented in the following table.2021.
| | Advances Portfolio by Product Type | Advances Portfolio by Product Type | Advances Portfolio by Product Type |
| | | 2020 | | 2019 | | 2022 | | 2021 |
| (Dollar in millions) | Par Value | | Percentage of Total Par Value | | Par Value | | Percentage of Total Par Value | |
| (Dollars in millions) | | (Dollars in millions) | Par Value | | Percentage of Total Par Value | | Par Value | | Percentage of Total Par Value |
| Adjustable – LIBOR | Adjustable – LIBOR | $ | 250 | | | 1 | % | | $ | 8,260 | | | 13 | % | Adjustable – LIBOR | $ | — | | | — | % | | $ | 250 | | | 1 | % |
| Adjustable – LIBOR, callable at borrower’s option | — | | | — | | | 13,950 | | | 21 | | |
| | Adjustable – SOFR | Adjustable – SOFR | — | | | — | | | 5 | | | — | | Adjustable – SOFR | 2,690 | | | 3 | | | — | | | — | |
| Adjustable – SOFR, callable at borrower’s option | Adjustable – SOFR, callable at borrower’s option | 1,100 | | | 4 | | | — | | | — | | Adjustable – SOFR, callable at borrower’s option | 9,500 | | | 11 | | | — | | | — | |
| Adjustable – other indices | — | | | — | | | 700 | | | 1 | | |
| | | Subtotal adjustable rate advances | Subtotal adjustable rate advances | 1,350 | | | 5 | | | 22,915 | | | 35 | | Subtotal adjustable rate advances | 12,190 | | | 14 | | | 250 | | | 1 | |
| Fixed | Fixed | 6,108 | | | 20 | | | 18,784 | | | 29 | | Fixed | 45,471 | | | 50 | | | 4,765 | | | 28 | |
| Fixed – amortizing | Fixed – amortizing | 126 | | | — | | | 234 | | | 1 | | Fixed – amortizing | 60 | | | — | | | 69 | | | — | |
Fixed – with PPS(1) | Fixed – with PPS(1) | 1,687 | | | 5 | | | 3,283 | | | 5 | | Fixed – with PPS(1) | 965 | | | 1 | | | 1,406 | | | 9 | |
Fixed – with FPS(1) | Fixed – with FPS(1) | 19,919 | | | 66 | | | 14,059 | | | 22 | | Fixed – with FPS(1) | 18,035 | | | 20 | | | 8,957 | | | 54 | |
Fixed – with caps and PPS(1) | Fixed – with caps and PPS(1) | 110 | | | — | | | 210 | | | — | | Fixed – with caps and PPS(1) | — | | | — | | | 10 | | | — | |
| Fixed – callable at borrower’s option | — | | | — | | | 74 | | | — | | |
| Fixed – callable at borrower’s option with FPS(1) | | Fixed – callable at borrower’s option with FPS(1) | 340 | | | — | | | 70 | | | — | |
| | Fixed – putable at Bank’s option | Fixed – putable at Bank’s option | 200 | | | 1 | | | — | | | — | | Fixed – putable at Bank’s option | — | | | — | | | 200 | | | 1 | |
Fixed – putable at Bank’s option with FPS(1) | | Fixed – putable at Bank’s option with FPS(1) | 800 | | | 1 | | | — | | | — | |
Fixed – putable at Bank’s option with PPS(1) | Fixed – putable at Bank’s option with PPS(1) | 20 | | | — | | | 20 | | | — | | Fixed – putable at Bank’s option with PPS(1) | — | | | — | | | 20 | | | — | |
| Subtotal fixed rate advances | Subtotal fixed rate advances | 28,170 | | | 92 | | | 36,664 | | | 57 | | Subtotal fixed rate advances | 65,671 | | | 72 | | | 15,497 | | | 92 | |
| Daily variable rate | Daily variable rate | 818 | | | 3 | | | 5,509 | | | 8 | | Daily variable rate | 12,256 | | | 14 | | | 1,111 | | | 7 | |
| Total par value | Total par value | $ | 30,338 | | | 100 | % | | $ | 65,088 | | | 100 | % | Total par value | $ | 90,117 | | | 100 | % | | $ | 16,858 | | | 100 | % |
(1)Partial prepayment symmetry (PPS) and full prepayment symmetry (FPS) are product features under which the Bank may charge the borrower a prepayment fee or pay the borrower a prepayment credit, depending on certain circumstances, such as movements in interest rates, when the advance is prepaid. AnyIn November 2018, the Bank discontinued offering advances with PPS, and any prepayment credit on an advance with PPS would be limited to the lesser of 10% of the par value of the advance or the gain recognized on the termination of the associated interest rate swap, which may also include a similar contractual gain limitation.
The types of advances by redemption term at December 31, 2022 and 2021, are presented in the following table.
| | | | | | | | | | | | | | | | | | | | | | | |
| Types of Advances by Redemption Term |
| | | | | | | |
| 2022 | | 2021 |
| (Dollars in millions) | Par Value | | Percentage of Total Par Value | | Par Value | | Percentage of Total Par Value |
| Fixed: | | | | | | | |
| Within 1 year | $ | 47,607 | | | 54 | % | | $ | 2,741 | | | 17 | % |
| After 1 year through 3 years | 10,428 | | | 12 | | | 5,770 | | | 34 | |
| After 3 years through 5 years | 5,598 | | | 6 | | | 5,671 | | | 34 | |
| After 5 years through 15 years | 827 | | | 1 | | | 946 | | | 6 | |
| Thereafter | 10 | | | — | | | 10 | | | — | |
| Subtotal fixed rate advances | 64,470 | | | 73 | | | 15,138 | | | 91 | |
| Fixed – callable at borrower’s option: | | | | | | | |
| | | | | | | |
| After 1 year through 3 years | — | | | — | | | 50 | | | — | |
| | | | | | | |
| After 5 years through 15 years | 340 | | | — | | | 20 | | | — | |
| | | | | | | |
| Subtotal fixed – callable at borrower’s option advances | 340 | | | — | | | 70 | | | — | |
| Fixed – putable: | | | | | | | |
| | | | | | | |
| After 1 year through 3 years | 200 | | | — | | | — | | | — | |
| After 3 years through 5 years | 600 | | | 1 | | | — | | | — | |
| After 5 years through 15 years | — | | | — | | | 220 | | | 1 | |
| | | | | | | |
| Subtotal fixed rate – putable advances | 800 | | | 1 | | | 220 | | | 1 | |
| Fixed – amortizing: | | | | | | | |
| Within 1 year | 14 | | | — | | | 27 | | | — | |
| After 1 year through 3 years | 27 | | | — | | | 16 | | | — | |
| After 3 years through 5 years | 8 | | | — | | | 10 | | | — | |
| After 5 years through 15 years | 12 | | | — | | | 16 | | | — | |
| | | | | | | |
| Subtotal fixed – amortizing advances | 61 | | | — | | | 69 | | | — | |
| Adjustable and variable: | | | | | | | |
| Within 1 year | 13,929 | | | 15 | | | 1,361 | | | 8 | |
| After 1 year through 3 years | 1,015 | | | 1 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Subtotal adjustable and variable rate advances | 14,944 | | | 16 | | | 1,361 | | | 8 | |
| Adjustable – callable at borrower’s option: | | | | | | | |
| Within 1 year | 9,500 | | | 10 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Subtotal adjustable – callable at borrower’s option advances | 9,500 | | | 10 | | | — | | | — | |
| Overdrawn and overnight deposit accounts | 2 | | | — | | | — | | | — | |
| Total par value | $ | 90,117 | | | 100 | % | | $ | 16,858 | | | 100 | % |
| | | | | | | |
| | | | | | | |
The Bank had no exposure to LIBOR-indexed advances at December 31, 2022. The following table presents the par value of LIBOR-indexed advances for LIBOR tenors that cease or will no longer be representative immediately after June 30, 2023, by redemption term at December 31, 2020 and 2019.2021.
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| LIBOR-Indexed Advances by Redemption Term |
| (In millions) | Par Value |
| Redemption Term | 2020 | | 2019 |
| Due in 2020 | $ | — | | | $ | 10,860 | |
| Due in 2021 | 100 | | | 11,300 | |
Due in 2022 and thereafter(1) | 260 | | | 260 | |
Total LIBOR-Indexed Advances(2) | $ | 360 | | | $ | 22,420 | |
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| LIBOR-Indexed Advances by Redemption Term |
| (In millions) | | | Par Value |
| Redemption Term | | | 2021 |
| | | |
| | | |
| Due in 2022 | | | $ | 250 | |
| | | |
Due after June 30, 2023(1) | | | 10 | |
Total LIBOR-Indexed Advances(2) | | | $ | 260 | |
(1)For more information on the Bank’s Transition Plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.”
(2)Total LIBOR-indexed advances include fixed rate advances with caps and PPS.
For a discussion of advances credit risk, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Advances.”
Non-MBS Investments – The Bank’s non-MBS investment portfolio consists of financial instruments that are used primarily to facilitate the Bank’s role as a cost-effective provider of credit and liquidity to members and to support the operations of the Bank. The Bank’s total non-MBS investment portfolio was $19.4 billion and $19.9$22.7 billion as of December 31, 20202022 and 2019,2021, respectively. The decrease in the total size of the non-MBS investment portfolio primarily reflected a decrease in Federal funds sold and interest-bearing deposits, partially offset by an increase in U.S. Treasury securities.
Interest rate payment terms for non-MBS investments classified as trading and AFS at December 31, 20202022 and 2019,2021, are detailed in the following table:
| | Non-MBS Investments: Interest Rate Payment Terms | Non-MBS Investments: Interest Rate Payment Terms | Non-MBS Investments: Interest Rate Payment Terms |
| | (In millions) | (In millions) | 2020 | | 2019 | (In millions) | 2022 | | 2021 |
| | Fair value of fixed rate trading securities | Fair value of fixed rate trading securities | $ | 4,257 | | | $ | 1,762 | | Fair value of fixed rate trading securities | $ | — | | | $ | 250 | |
| | Amortized cost of AFS securities | Amortized cost of AFS securities | 4,980 | | | 5,281 | | Amortized cost of AFS securities | 4,012 | | | 503 | |
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Borrowings – Total liabilities (primarily consolidated obligations) funding the advances-related business decreasedincreased to $44.7$101.6 billion at December 31, 2020,2022, from $79.0$33.8 billion at December 31, 2019.2021. For further information and discussion of the Bank’s joint and several liability for FHLBank consolidated obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” and “Item 8. Financial Statements and Supplementary Data – Note 16 – Commitments and Contingencies.”
To meet the specific needs of certain investors, fixed and adjustable rate consolidated obligation bonds may contain embedded call options or other features that result in complex coupon payment terms. When these types of consolidated obligation bonds are issued on behalf of the Bank, typically the Bank simultaneouslytypically enters into interest rate exchange agreements with features that offset the complex features of the bonds and, in effect,to convert the bonds to adjustable rate instruments. For example, the Bank may issue fixed rate callable bonds and simultaneously execute an interest rate exchange agreement with call features to offset the call options embedded in the callable bonds.
At December 31, 2020,2022, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $67.4$100.3 billion, of which $28.5$48.0 billion were hedging advances, $20.7$46.7 billion were hedging consolidated obligations, $7.1$4.3 billion were economically hedging non-MBS investments, and $11.1$1.3 billion were offsetting derivatives. At December 31, 2019,2021, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $84.4$48.0 billion, of which $41.2$15.8 billion were hedging advances, $36.2$24.3 billion were hedging consolidated obligations, $7.0$0.8 billion were economically hedging trading securities,non-MBS investments, and $40
million$7.1 billion were offsetting derivatives. The hedges associated with advances and consolidated obligations were primarily used to convert the fixed rate cash flows of the advances and consolidated obligations to adjustable rate cash flows or to manage the interest rate sensitivity and net repricing gaps of assets, liabilities, and interest rate exchange agreements.
FHLBank System consolidated obligation bonds and discount notes, along with similar debt securities issued by other GSEs such as Fannie Mae and Freddie Mac, are generally referred to as agency debt. The costs of debt issued by the FHLBanks and the other GSEs generally rise and fall with increases and decreases in general market interest rates.
The current range of the Federal funds rate, established by the Federal Open Market Committee (FOMC) stated that the COVID-19 outbreak presents evolving risks, is 4.25% to economic activity. Consequently,4.50%. At its February 2023 meeting, the FOMC decided to lowerraised the target range forof the Federal funds rate by 50 basis points,0.25%, to a4.50% to 4.75%, anticipating that ongoing increases in the target range will be appropriate. Interest rate changes have and are expected to continue to increase the volatility of 1.00% to 1.25%, noting that it would closely monitor developments and their implications for the economic outlook and would act as appropriate to support the economy. On March 15, 2020,reported earnings. In addition, the FOMC again loweredis expected to continue reducing its holdings of U.S. Treasury securities, agency debt, and agency MBS to reduce the size of the Federal funds rate, to a target range of 0.00% to 0.25%, noting that the COVID-19 outbreak had harmed communities and disrupted economic activity in many countries, including the United States, and had significantly affected global financial conditions. In the weeks before and after the early March Federal funds target rate cut, interest rates declined significantly. Since the end of the first quarter, financial conditions have improved, in part because of the monetary and fiscal stimulus measures taken, and the Bank continues to be able to meet its funding needs.Reserve’s balance sheet. The following table presents a comparison of selected market interest rates as of December 31, 20202022 and 2019.2021.
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| Selected Market Interest Rates | |
| | | | | | | | | | | | |
| Market Instrument | 2020 | | 2019 | | | | | |
| Federal Reserve target range for overnight Federal funds | 0.00-0.25 | % | | 1.50-1.75 | % | | | | | | | |
| Secured Overnight Financing Rate | 0.07 | | | | 1.55 | | | | | | | | | |
| 3-month Treasury bill | 0.06 | | | | 1.55 | | | | | | | | | |
| 3-month LIBOR | 0.24 | | | | 1.91 | | | | | | | | | |
| 2-year Treasury note | 0.12 | | | | 1.57 | | | | | | | | | |
| 5-year Treasury note | 0.36 | | | | 1.69 | | | | | | | | | |
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| Selected Market Interest Rates | |
| | | | | | | | | | | | |
| Market Instrument | 2022 | | 2021 | | | | | |
| Federal Reserve target range for overnight Federal funds | 4.25-4.50 | % | | 0.00-0.25 | % | | | | | | | |
| Secured Overnight Financing Rate | 4.30 | | | | 0.05 | | | | | | | | | |
| 3-month Treasury bill | 4.34 | | | | 0.04 | | | | | | | | | |
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| 2-year Treasury note | 4.43 | | | | 0.73 | | | | | | | | | |
| 5-year Treasury note | 4.01 | | | | 1.26 | | | | | | | | | |
Mortgage-Related Business. The mortgage-related business consists of MBS investments, mortgage loans acquired through the Mortgage Partnership Finance® (MPF®) Program, and the related financing and hedging instruments. (“Mortgage Partnership Finance,” “MPF,”Finance” and “MPF Xtra”“MPF” are registered trademarks of the FHLBank of Chicago.) Adjusted net interest income for this segment is derived primarily from the difference, or spread, between the yield on the MBS investments and mortgage loans and the cost of the consolidated obligations funding those assets, including the net settlements from associated interest rate exchange agreements.
Assets associated with this segment were $17.8$11.7 billion (26%(10% of total assets) at December 31, 2020,2022, and $21.1$14.1 billion at December 31, 2019 (20%2021 (26% of total assets).
Adjusted net interest income for this segment was $208$233 million in 2020,2022, a decrease of $48$25 million, or 19%10%, from $256$258 million in 2019.2021. This decrease was primarily a result of lower earnings from lower balances of mortgage-related products and current expected credit losses, lower balancespartially offset by an increase in net prepayment fee income on AFS MBS and an improvement in retrospective adjustment of MBS investments, higher premium amortization expense, and lower income from reversals of prior period credit losses.the effective yields on mortgage loans.
Adjusted net interest income for this segment represented 46%44% and 45%57% of total adjusted net interest income for 20202022 and 2019,2021, respectively.
MBS Investments – The Bank’s MBS portfolio was $15.8$10.9 billion at December 31, 2020,2022, compared with $17.8$13.0 billion at December 31, 2019.2021. During 2020,2022, the Bank’s MBS portfolio decreased with $3.0as a result of $1.8 billion in principal repayments, partially offset by a $0.7$1.0 billion increasedecrease in basis adjustments, and $0.5$365 million of fair value losses, partially offset by $1.0 billion in new agency MBS investment purchases. Average MBS investments were $16.9$11.3 billion in 2020,2022, a decrease of $0.9$2.5 billion from $17.8
$13.8 billion in 2019.2021. For a discussion of the composition of the Bank’s MBS portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Investments.”
Interest rate payment terms for MBS investments classified as trading, AFS, and held-to-maturity (HTM) at December 31, 20202022 and 2019,2021, are shown in the following table:
| | | | | | | | | | | |
| MBS Investments: Interest Rate Payment Terms |
| | | |
| (In millions) | 2020 | | 2019 |
| Fair value of trading securities: | | | |
| | | |
| Adjustable rate | $ | 3 | | | $ | 4 | |
| Total trading securities | $ | 3 | | | $ | 4 | |
| Amortized cost of AFS securities: | | | |
| Fixed rate | $ | 9,050 | | | $ | 8,156 | |
| Adjustable rate | 1,426 | | | 1,769 | |
| Total AFS securities | $ | 10,476 | | | $ | 9,925 | |
| Amortized cost of HTM securities: | | | |
| Fixed rate | $ | 1,013 | | | $ | 2,082 | |
| Adjustable rate | 4,068 | | | 5,464 | |
| Total HTM securities | $ | 5,081 | | | $ | 7,546 | |
| | | | | | | | | | | |
| MBS: Interest Rate Payment Terms |
| | | |
| (In millions) | 2022 | | 2021 |
| Fair value of trading securities: | | | |
| | | |
| Adjustable rate | $ | 1 | | | $ | 2 | |
| Total trading securities | $ | 1 | | | $ | 2 | |
| Amortized cost of AFS securities: | | | |
| Fixed rate | $ | 7,881 | | | $ | 8,423 | |
| Adjustable rate | 864 | | | 1,083 | |
| Total AFS securities | $ | 8,745 | | | $ | 9,506 | |
| Amortized cost of HTM securities: | | | |
| Fixed rate | $ | 265 | | | $ | 403 | |
| Adjustable rate | 1,916 | | | 2,808 | |
| Total HTM securities | $ | 2,181 | | | $ | 3,211 | |
MPF Program– Under the MPF Program, the Bank may purchasepurchased from members, for its own portfolio, conventional conforming fixed rate mortgage loans under the MPF Original product. Participating members originated or purchased mortgage loans, credit-enhanced them and sold them to the Bank, and generally retained the servicing of the loans. In addition, the Bank may facilitatefacilitated the purchase of conforming fixed rate mortgage loans from members for concurrent sale to Fannie Mae under the MPF Xtra® product. When members sellsold loans under the MPF Xtra product, the loans arewere sold to a third-party investor and arewere not recorded on the Bank’s Statements of Condition. Unlike with conventional MPF products held for portfolio, participating members are not required to provide credit enhancement and do not receive credit enhancement fees under the MPF Xtra product. On December 17, 2020, the Bank announced that it would no longer offer new commitments to directly purchase, or to facilitate the purchase of, mortgage loans from its members. On March 31, 2021, the Bank closed all remaining open commitments to purchase mortgage loans for its own portfolio under the MPF Original product, and by June 30, 2021, the Bank no longer facilitated the purchase of mortgage loans under the MPF Xtra product.
As of December 31, 2020,2022, all mortgage loans purchased by the Bank under the MPF Program were qualifying conventional conforming fixed rate, first lien mortgage loans with fully amortizing original loan terms of up to 30 years. A conventional loan is one that is not insured by the federal government or any of its agencies. Conforming loan size, which is established annually as required by Finance Agency regulations, may not exceed the loan limits set by the Finance Agency each year. All MPF loans are secured by owner-occupied, one- to four-unit residential properties or single-unit second homes. The Bank purchased $463 million in eligible loans under the MPF Original product during 2020.
The MPF Servicing Guide establishes the MPF Program requirements for loan servicing and servicer eligibility. At the time the Bank purchases loans under the MPF Program, the member selling the loans makes representations that all mortgage loans it delivers to the Bank have the characteristics of an investment quality mortgage. An investment quality mortgage is a loan that is made to a borrower from whom repayment of the debt can be expected, is adequately secured by real property, and was originated and is being serviced in accordance with the MPF Origination Guide and MPF Servicing Guide or an approved waiver.
The FHLBank of Chicago, which developed the MPF Program, establishes the minimum eligibility standards for members to participate in the program, the structure of the MPF products, and the standard eligibility criteria for the loans; establishes pricing and manages the delivery mechanism for the loans; publishes and maintains the MPF Origination Guide and the MPF Servicing Guide; and provides operational support for the program. In addition, the FHLBank of Chicago acts as master servicer and as master custodian for the MPF loans held by the Bank and is compensated for these services through fees paid by the Bank. The FHLBank of Chicago is obligated to provide operational support to the Bank for all loans purchased until those loans are fully repaid.
Mortgage loan balances decreased to $1.9 billion$815 million at December 31, 2020,2022, from $3.3 billion$980 million at December 31, 2019,2021, a decrease of $1.4 billion.$165 million. Average mortgage loans were $2.8 billion$875 million in 2020,2022, a decrease of $0.5 billion$486 million from $3.3$1.4 billion in 2019.2021.
At December 31, 20202022 and 2019,2021, the Bank held conventional conforming fixed rate mortgage loans purchased under one of two MPF products, MPF Plus or MPF Original, which are described in greater detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – MPF Program.” Mortgage loan balances at December 31, 20202022 and 2019,2021, were as follows:
| | | | | | | | | | | |
| Mortgage Loan Balances by MPF Product Type |
| | | |
| (In millions) | 2020 | | 2019 |
| MPF Plus | $ | 139 | | | $ | 177 | |
| MPF Original | 1,767 | | | 3,049 | |
| Subtotal | 1,906 | | | 3,226 | |
| Unamortized premiums | 35 | | | 91 | |
| Unamortized discounts | (2) | | | (3) | |
| Mortgage loans held for portfolio | 1,939 | | | 3,314 | |
| Less: Allowance for credit losses | (4) | | | — | |
| Mortgage loans held for portfolio, net | $ | 1,935 | | | $ | 3,314 | |
| | | | | | | | | | | |
| Mortgage Loan Balances by MPF Product Type |
| | | |
| (In millions) | 2022 | | 2021 |
| MPF Plus | $ | 85 | | | $ | 106 | |
| MPF Original | 690 | | | 848 | |
| Subtotal | 775 | | | 954 | |
| Unamortized premiums | 43 | | | 28 | |
| Unamortized discounts | (2) | | | (1) | |
| Mortgage loans held for portfolio | 816 | | | 981 | |
| Less: Allowance for credit losses | (1) | | | (1) | |
| Mortgage loans held for portfolio, net | $ | 815 | | | $ | 980 | |
Mortgage loan balances by redemption term at December 31, 2022, were as follows:
| | | | | | | |
| Mortgage Loan Balances by Redemption Term |
| | | |
| (In millions) | 2022 | | |
| Within 1 year | $ | 27 | | | |
| After 1 year through 5 years | 116 | | | |
| After 5 years through 15 years | 297 | | | |
| Thereafter | 335 | | | |
| Total unpaid principal balance | $ | 775 | | | |
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The following table presents the balances of loans wholly owned by the Bank and loans with allocated participation interests that were outstanding as of December 31, 20202022 and 2019.2021. Only the FHLBank of Chicago owned participation interests in any of the Bank’s MPF loans.
| | Balances Outstanding on Mortgage Loans | Balances Outstanding on Mortgage Loans | Balances Outstanding on Mortgage Loans |
| | (Dollars in millions) | (Dollars in millions) | 2020 | | 2019 | (Dollars in millions) | 2022 | | 2021 |
| Outstanding amounts wholly owned by the Bank | Outstanding amounts wholly owned by the Bank | $ | 1,862 | | | $ | 3,169 | | Outstanding amounts wholly owned by the Bank | $ | 747 | | | $ | 921 | |
| Outstanding amounts with participation interests by FHLBank: | Outstanding amounts with participation interests by FHLBank: | | Outstanding amounts with participation interests by FHLBank: | |
| San Francisco | San Francisco | 44 | | | 57 | | San Francisco | 28 | | | 34 | |
| Chicago | Chicago | 32 | | | 42 | | Chicago | 20 | | | 25 | |
| Total | Total | $ | 1,938 | | | $ | 3,268 | | Total | $ | 795 | | | $ | 980 | |
| Number of loans outstanding: | Number of loans outstanding: | | Number of loans outstanding: | |
| Number of outstanding loans wholly owned by the Bank | Number of outstanding loans wholly owned by the Bank | 5,097 | | | 7,702 | | Number of outstanding loans wholly owned by the Bank | 2,591 | | | 3,011 | |
| Number of outstanding loans participated | Number of outstanding loans participated | 866 | | | 1,039 | | Number of outstanding loans participated | 628 | | | 719 | |
| Total number of loans outstanding | Total number of loans outstanding | 5,963 | | | 8,741 | | Total number of loans outstanding | 3,219 | | | 3,730 | |
Under the Bank’s agreement with the FHLBank of Chicago, the credit risk is shared pro rata between the two FHLBanks according to: (i) their respective ownership of the loans in each master commitment for MPF Plus and (ii) their respective participation shares of the first loss account for the master commitment for MPF Original.
The Bank is responsible for credit oversight of the participating financial institution, which consists of monitoring the financial condition of the participating financial institution on a quarterly basis and holding collateral to secure the participating financial institution’s outstanding credit enhancement obligations. Monitoring of the participating financial institution’s financial condition includes an evaluation of its capital, assets, management, earnings, and liquidity.
The Bank performs periodic reviews of its mortgage loan portfolio to identify probable credit losses in the portfolio and to determine the likelihood of collection on the loans in the portfolio. For more information on the Bank’s mortgage loan portfolio, see “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of
Significant Accounting Policies,” “Item 8. Financial Statements and Supplementary Data – Note 6 – Mortgage Loans Held for Portfolio,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – MPF Program.”
Borrowings – Total consolidated obligations funding the mortgage-related business decreased $3.3$2.4 billion to $17.8$11.7 billion at December 31, 2020,2022, from $21.1$14.1 billion at December 31, 2019.2021. For further information and discussion of the Bank’s joint and several liability for FHLBank consolidated obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” and “Item 8. Financial Statements and Supplementary Data – Note 16 – Commitments and Contingencies.”
The notional amount of derivative instruments associated with the mortgage-related business totaled $11.2$16.5 billion at December 31, 2020,2022, of which $8.3$8.2 billion were associated with MBS, $2.5$8.3 billion were hedging or were associated with consolidated obligations funding the mortgage portfolio, and $0.4 billion$36 million were offsetting derivatives. The notional amount of derivative instruments associated with the mortgage-related business totaled $16.6$15.6 billion at December 31, 2019,2021, of which $8.5$8.0 billion were associated with MBS and $7.6 billion were hedging or were associated with consolidated obligations funding the mortgage portfolio and $8.1 billion were associated with MBS.portfolio.
For information on the Bank’s management of interest rate risk and market risk related to the mortgage-related business segment, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations –Risk– Risk Management – Market Risk.”
Liquidity and Capital Resources
The Bank’s financial strategies are designed to enable the Bank to expand and contract its assets, liabilities, and capital as membership composition and member credit needs change. The Bank’s liquidity and capital resources are designed to support its financial strategies. The Bank’s primary source of liquidity is its access to the debt capital markets through consolidated obligation issuance, which is described in “Item 1. Business – Funding Sources.” The Bank’s status as a GSE is critical to maintaining its 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 comparable to federal agency debt, providing the FHLBanks with access to funding at relatively favorable rates. The maintenance of the Bank’s capital resources is governed by its capital plan.
Liquidity
The Bank seeks to maintain the liquidity necessary to repay maturing consolidated obligations for which it is the primary obligor, meet other obligations and commitments, and meet expected and unexpected member credit demands. The Bank monitors its financial position to maintain ready access to available funds to meet normal transaction requirements, take advantage of appropriate investment opportunities, and manage unforeseen liquidity demands.
The Bank is also able to contract its balance sheet as borrowers’ credit needs decrease. As changing borrower credit needs result in reduced advances, borrowers will have capital stock in excess of the amount required by the Bank’s capital plan. The Bank’s capital plan allows the Bank to repurchase a borrower’s excess capital stock, including mandatorily redeemable capital stock, at the Bank’s discretion, subject to certain statutory and regulatory requirements and to the Bank’s Risk Management Policy, Capital Plan, and the Framework. Surplus capital stock is defined as any stock holdings in excess of 115% of a member’s minimum stock requirement. The Bank may also allow its consolidated obligations to mature without replacement or repurchase and retire outstanding consolidated obligations, allowing its balance sheet to contract.
The Bank is not able to predict future trends in member credit needs since they are driven by complex interactions among a number of factors, including members’ mortgage loan growth, other asset portfolio growth, deposit
growth, and the attractiveness of advances compared to other wholesale borrowing alternatives. The Bank regularly
monitors current trends and anticipates future debt issuance needs with the objective of being prepared to fund its members’ credit needs and appropriate investment opportunities.
Short-term liquidity management practices are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk.” The Bank manages its liquidity needs to enable it to meet all of its contractual obligations on a timely basis, to support its members’ daily liquidity needs, and to pay operating expenditures as they come due. At December 31, 2022, the Bank’s contractual obligations on operating leases were $46 million due through 2027 and $33 million due thereafter.
The Bank maintains contingency liquidity plans to meet its obligations and the liquidity needs of members in the event of short-term operational disruptions at the Bank or the Office of Finance or short-term disruptions of the capital markets. For further information and discussion of the Bank’s aggregate contractual commitments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Off-Balance Sheet Arrangements and Aggregate Contractual Commitments.” For further information and discussion of the Bank’s joint and several liability for FHLBank consolidated obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” and “Item 8. Financial Statements and Supplementary Data – Note 16 – Commitments and Contingencies.” Additional information with respect to the Bank’s consolidated obligations is presented in “Item 8. Financial Statements and Supplementary Data – Note 8 – Consolidated Obligations” and “Note 16 – Commitments and Contingencies.”
In addition, “Item 8. Financial Statements and Supplementary Data – Note 11 – Capital” includes a discussion of the Bank’s mandatorily redeemable capital stock, and “Item 8. Financial Statements and Supplementary Data – Note 12 – Employee Retirement Plans and Incentive Compensation Plans” includes a discussion of the Bank’s retirement plans and related expenses and commitments.
The Bank enters into derivative financial instruments, which create contractual obligations, as part of the Bank’s market risk management. “Item 8. Financial Statements and Supplementary Data – Note 14 – Derivatives and Hedging Activities” includes additional information regarding derivative financial instruments.
Capital
The Bank’s ability to expand as member credit needs increase is based, in part, on the capital stock requirements for advances. A member is required to maintain sufficient capital stock to support its advances and letters of credit activity with the Bank. Unless a member already has sufficient excess capital stock, it must increase its capital stock investment in the Bank as its balance of outstanding advances increases. Under the Bank’s capital plan, the Bank may also require a member to purchase activity-basedcapital stock for mortgage loans purchased and held by the Bank. The activity-based capital stock requirement is currently 2.7% for outstanding advances, 0.1% of notional balances for outstanding letters of credit, and 0.0% for mortgage loans purchased and held by the Bank. In November 2020, the Bank amended its capital plan, which resulted in a member’s activity capital stock requirement of 0.1% of notional balances for outstanding letters of credit and an authorized range for the letters of credit activity stock requirement of 0.1% to 1.0%. The Bank’s minimum regulatory capital-to-assets ratio requirement is currently 4.0%; therefore, the Bank maintains a certain required level of retained earnings to support capital compliance and business growth. For more information, see “Item 1. Business – Dividends and Retained Earnings” and “Item 8. Financial Statements and Supplementary Data – Note 11 – Capital – Excess Stock Repurchase, Retained Earnings, and Dividend Framework.” Because the Bank’s capital plan does not provide for the issuance of Class A stock (non-permanent capital that is redeemable upon six months’ notice), regulatory capital for the Bank is composed of retained earnings and Class B stock, including mandatorily redeemable capital stock (which is classified as a liability for financial reporting purposes), and excludes accumulated other comprehensiveAOCI.
Retained Earnings – The Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework (Framework) assesses the level and adequacy of retained earnings and establishes amounts to be retained in restricted retained earnings, which are not made available in the current dividend period, and maintains an amount of total retained earnings at least equal to its required retained earnings as described in the Framework. As determined using the Bank’s methodology, the required level of total retained earnings had ranged from $1.5 billion to $2.9 billion during 2021 and 2022. 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. The Bank satisfies its retained earnings requirement with both restricted retained earnings (i.e., amounts related to the Joint Capital Enhancement (JCE) Agreement) and unrestricted retained earnings. The Bank’s retained
earnings requirement may be changed at any time. The board of directors periodically reviews the retained earnings methodology and analysis to determine whether any adjustments are appropriate.
The JCE Agreement is intended to enhance the capital position of each FHLBank. In accordance with the JCE Agreement, each FHLBank is required to reclassify an amount equal to 20% of its net income (AOCI)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, the Bank ceased contributions to restricted retained earnings in the fourth quarter of 2020, in accordance with the JCE Agreement; and no further reclassifications of net income into restricted retained earnings are required until such time as the reclassification requirement exceeds the balance of restricted retained earnings. Additionally, the JCE Agreement provides that amounts in restricted retained earnings in excess of 150% of the Bank’s restricted retained earnings minimum (i.e., 1% of the Bank’s total consolidated obligations calculated as of the last day of each calendar quarter) may be released from restricted retained earnings. As a result of the Bank exceeding this threshold, the Bank reclassified $16 million from restricted retained earnings to unrestricted retained earnings during 2022. As a result of increased consolidated obligations during the third quarter of 2022, the Bank resumed reclassifying an amount equal to 20% of net income into restricted retained earnings in accordance with the JCE Agreement.Total restricted retained earnings were $732 million and $708 million as of December 31, 2022 and 2021, respectively.
Excess Stock – The Bank’s practice is to repurchase the surplus capital stock of all members and the excess capital stock of all former members on a daily schedule. The Bank calculates the amount of stock to be repurchased each business day based on the shareholder’s capital stock outstanding after all stock transactions are completed for the day, ensuring that each member and former member would continue to meet its minimum capital stock requirement after the repurchase. The Bank may change this practice at any time.
A member may schedule redemption of its excess capital stock following a five-year redemption period, subject to certain conditions, by providing a written redemption notice to the Bank. Capital stock may also become subject to redemption following a five-year redemption period after a member gives notice of intention to withdraw from membership or 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. Capital stock required to meet a withdrawing member’s membership capital stock requirement may only be redeemed at the end of the five-year redemption period, subject to statutory and regulatory limits and other conditions.
The Bank remained adequately capitalized while repurchasing $1.6$5.0 billion and $1.2$1.6 billion in excess capital stock during 20202022 and 2019,2021, respectively. The Bank is required to redeem any mandatorily redeemable capital stock that is in excess of a former member’s minimum stock requirement on or after the expiration of the five-year redemption
date. During 20202022 and 2019,2021, the Bank redeemed a de minimis amountsamount and $1 million, respectively, in mandatorily redeemable capital stock for which the five-year redemption period had expired at its $100 par value. The stock was redeemed on the scheduled redemption dates or, for stock that was not excess stock on its scheduled redemption date because of outstanding activity with the Bank, on the first available repurchase date after the stock was no longer required to support outstanding activity with the Bank. Total excess capital stock was $161$157 million as of December 31, 2020,2022, compared to $197$120 million as of December 31, 2019.2021.
The Bank will continue to monitor theits financial condition, of its balance sheet, its financial performance, its capital position, overall financial market conditions, and other relevant information as the basis for determining the repurchase of excess capital stock in future quarters.
On July 29, 2022, the Bank’s board of directors approved proposed amendments to the Bank’s capital plan that are subject to review and approval by the Finance Agency.
The proposed amendments include the following substantive changes:
•The formula for calculating the “Membership Stock Requirement” will use a percentage of a member’s total assets (as determined by the Bank), rather than a percentage of a member’s individual “Membership Asset
Value,” as provided in the Bank’s current Plan. The proposed amendments provide that the Membership Stock Requirement will be 0.36% of a member’s total assets, with each member’s Membership Stock Requirement subject to a cap equal to $15 million (which remains unchanged), as provided in the current Plan, and may be adjusted by the Bank’s board of directors to an amount within a range of 0.05% to 1.00% of total assets.
•Permits (but does not require) the Bank’s board of directors to authorize the issuance of two subclasses of its Class B Stock: Class B-1 Stock and Class B-2 Stock. The Bank does not currently plan to authorize the conversion of Class B Stock into Class B-1 Stock and Class B-2 Stock but may do so at a future date. If the Bank’s board of directors authorizes the conversion, the Class B-2 Stock would be eligible to meet the Activity-Based Stock Requirement. All other shares of capital stock held by a member, including shares held to meet the Membership Stock Requirement, would be classified as Class B-1 Stock. The proposed amendments provide that the dividend rate for Class B-2 Stock must always be equal to or greater than the rate for Class B-1 Stock.
In connection with the Finance Agency’s review, the proposed amendments are subject to change and there can be no assurance that any amendments will be adopted. If the amendments are approved by the Finance Agency as proposed, a revised plan will become effective at a future date to be determined by the Bank. Because these proposed amendments are still under review at the Finance Agency, in April 2023 the Bank will continue using the existing membership stock calculation methodology based on membership asset value as outlined in the Bank’s Capital Plan.
Provisions of the Bank’s capital plan are more fully discussed in “Item 8. Financial Statements and Supplementary Data – Note 11 – Capital.”
Regulatory Capital Requirements
Under the Housing and Economic Recovery Act of 2008 (Housing Act), the Director of the Finance Agency is responsible for setting the risk-based capital standards for the FHLBanks. The FHLBank Act and regulations governing the operations of the FHLBanks require that the Bank’s minimum capital stock requirement for shareholders must be sufficient to enable the Bank to meet its regulatory requirements for total capital, leverage capital, and risk-based capital. The Bank must maintain: (i) total regulatory capital in an amount equal to at least 4% of its total assets, (ii) leverage capital in an amount equal to at least 5% of its total assets, and (iii) permanent capital in an amount that is greater than or equal to its risk-based capital requirement.
Beginning in February 2020, theThe Finance Agency issued guidance that augmented existing statutory and regulatory capital requirements to requirerequires each FHLBank to maintain a ratio of at least two percent2% of capital stock to total assets in order to help preserve the cooperative structure incentives that encourage members to remain fully engaged in the oversight of their investment in the FHLBank. The Finance Agency will consider the proportion of capital stock to assets, measured on a daily average basis at monthend, when assessing each FHLBank’s capital management practices. As of December 31, 2020,2022 and 2021, the Bank was in compliancecomplied with this capital guidance.
Because the Bank issues only Class B stock, regulatory capital and permanent capital for the Bank are both composed of retained earnings and Class B stock, including mandatorily redeemable capital stock (which is classified as a liability for financial reporting purposes). Regulatory capital and permanent capital do not include AOCI. Leverage capital is defined as the sum of permanent capital, weighted by a 1.5 multiplier, plus non-permanent capital.
The risk-based capital requirement is equal to the sum of the Bank’s credit risk, market risk, and operationsoperational risk capital requirements, all of which are calculated in accordance with the rules and regulations of the Finance Agency. The Finance Agency may require an FHLBank to maintain a greater amount of permanent capital than is required by the risk-based capital requirement as defined.
The following table shows the Bank’s compliance with the Finance Agency’s capital requirements at December 31, 20202022 and 2019.2021. The Bank’s risk-based capital requirement decreased to $1.4$898 million at December 31, 2022, from $1.1 billion at December 31, 2020, from $1.5 billion at December 31, 2019.2021.
| | Regulatory Capital Requirements | Regulatory Capital Requirements | Regulatory Capital Requirements |
| | | | 2020 | | 2019 | | 2022 | | 2021 |
| (Dollars in millions) | (Dollars in millions) | Required | | Actual | | Required | | Actual | (Dollars in millions) | Required | | Actual | | Required | | Actual |
| Risk-based capital | Risk-based capital | $ | 1,404 | | | $ | 5,966 | | | $ | 1,519 | | | $ | 6,605 | | Risk-based capital | $ | 898 | | | $ | 7,757 | | | $ | 1,054 | | | $ | 5,896 | |
| Total regulatory capital | Total regulatory capital | $ | 2,745 | | | $ | 5,966 | | | $ | 4,274 | | | $ | 6,605 | | Total regulatory capital | $ | 4,842 | | | $ | 7,757 | | | $ | 2,165 | | | $ | 5,896 | |
| Total regulatory capital ratio | Total regulatory capital ratio | 4.00 | % | | 8.69 | % | | 4.00 | % | | 6.18 | % | Total regulatory capital ratio | 4.00 | % | | 6.41 | % | | 4.00 | % | | 10.89 | % |
| Leverage capital | Leverage capital | $ | 3,432 | | | $ | 8,949 | | | $ | 5,342 | | | $ | 9,908 | | Leverage capital | $ | 6,053 | | | $ | 11,636 | | | $ | 2,706 | | | $ | 8,844 | |
| Leverage ratio | Leverage ratio | 5.00 | % | | 13.04 | % | | 5.00 | % | | 9.27 | % | Leverage ratio | 5.00 | % | | 9.61 | % | | 5.00 | % | | 16.34 | % |
The Bank’s capital requirements are more fully discussed in “Item 8. Financial Statements and Supplementary Data – Note 11 – Capital.”
Risk Management
The Bank has an integrated corporate governance and internal control framework designed to support effective management of the Bank’s business activities and the risks inherent in these activities. As part of this framework, the Bank’s Boardboard of Directorsdirectors has adopted a Risk Governance Policy that outlines the key roles and responsibilities of the Boardboard of Directorsdirectors and management and sets forth how the Bank is organized to achieve its risk management objectives, including the implementation of the Bank’s strategic objectives, risk management strategies, corporate governance, and standards of conduct. The policy also establishes the Bank’s risk governance organizational structure and identifies the general roles and responsibilities of the Board of Directors and management in establishing risk management policies, procedures, and guidelines; in overseeing the enterprise risk profile; and in implementing enterprise risk management processes and business strategies. The policy establishes an independent risk oversight function to identify, assess, measure, monitor, and report on the enterprise risk profile and risk management capabilities of the Bank.
The Bank’s Risk Appetite Framework establishes a standardized process whereby the Bank’s risk managementappetite is articulated and established, and adherence to the Bank’s risk appetite is monitored by the risk oversight function and reported to the board.Additionally, the Risk Appetite Framework links risk-taking and risk-mitigating activities to the achievement of the Bank’s strategic objectives and helps bring forth key metrics within the Bank to enable better risk insights and decision making. The framework includes athe Bank’s risk appetite statement, risk policies,statements and related proceduresqualitative statements and guidelinesquantitative risk metrics and tolerances, as established by the Boardboard of Directorsdirectors and performed by management to addressmonitor and manage risk. These include both enterprise-wide risk policies and related procedures and guidelines.accordingly.
The Risk Management Policy establishes risk limits, guidelines, and standards for creditthe Bank’s management of financial risk (credit risk, market risk, liquidity risk, operationsand mortgage asset risk), operational risk (people, process, and systems risk), strategic risk, and businessregulatory and compliance risk in accordance with Finance Agency regulations and consideration of industry leading practices, the risk profiletolerances established by the Boardboard of Directors,directors, and other applicable guidelines in connection with the Bank’s overall risk management. The Member Products Policy, which applies to products offered to members and housing associates (nonmember mortgagees approved under Title II of the National Housing Act, to which the Bank is permitted to make advances under the FHLBank Act), addresses the credit risk of secured credit by establishing credit underwriting criteria, appropriate collateralization levels, and collateral valuation methodologies. The Bank also establishes policies for capital management and compliance risk management.
Strategic Risk
Strategic risk is defined as the possibility of an adverse impact on the Bank’s ability to fulfill its mission and to meet ongoing business and profitability objectives resultingthat results from external factors that may occur in both the shortshort- and long term.long-term. Such factors may include, but are not limited to, continued financial services industry consolidation; changes in the membership base and in member demand for Bank products; the concentration of borrowing among members; the introduction of new competing products and services; increased inter-FHLBank and non-FHLBank competition; andor significant adverse changes to the effectiveness and competitiveness of the Bank’s products, services, or business model associated with regulatory and legislative changes.
The identification of strategic risks is an integral part of the Bank’s annual planning process, and the Bank’s strategic plan identifies initiatives and plans to address these risks.
OperationsOperational Risk
OperationsOperational risk is defined as the risk of loss to the Bank resulting from inadequate or failed internal processes, resources, and systems, and from external events. The Bank’s operationsoperational risk is controlled through a system of internal controls designed to minimize the risk of operational losses. Also, theThe Bank has established and annually tests its business continuity plan under various business disruption scenarios involvingthat would involve offsite recovery and the testingan assessment of the Bank’s availability and integrity of its operations and information systems. Further, the Bank maintains two geographically dispersed, colocation data centers which are on electrical grids that are separate from each other and from our principal offices and off-site business continuity facilities. Both data centers are subject to periodic testing to demonstrate adequate operational capability. In addition, an ongoing internal audit function audits significant risk areas to evaluate the Bank’s internal controls.
Regulatory and compliance risk is defined as noncompliance with laws, rules, regulations, agreements, prescribed practices, and ethical standards, including noncompliance with employee-related regulations. Regulatory and compliance risk tolerances determined by the board of directors are outlined in the Risk Appetite Framework. The board of director's objective is to manage and mitigate the impact of noncompliance with all regulations and laws applicable to the Bank. Additionally, the Bank will put in place the necessary processes, controls, and frameworks to comply with legal and regulatory requirements. This includes, but is not limited to, directing resources to compliance programs to train personnel and increase awareness of those regulatory areas that pose the highest level of risk to the Bank.
Financial Risk
Financial risk is defined as the variance of the company’s financial position or ability to operate due to investment decisions and financial risk management practices specifically related to capital, credit, market (including hedging and funding), mortgage asset, and liquidity risks. Subsequent sections of this document outline the definitions and management of various risk components of the Bank’s financial risk tolerances, as determined by the board of directors.
Concentration Risk
Concentration risk for the Bank is defined as the exposure to economic loss arising from a disproportionately large number of financial transactions with a limited number of individual customers or counterparties.
Advances. The following tables present the concentration in advances and the interest income (before the impact of interest rate exchange agreements associated with advances) from the advances toIf the Bank’s top fiveadvances borrowers and their affiliates at December 31, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | |
Concentration of Advances and Interest Income from Advances
Top Five Borrowers and Their Affiliates |
| | | | | | | |
| (Dollars in millions) | | | | | | | |
| December 31, 2020 |
| Name of Borrower | Advances
Outstanding | | Percentage of
Total
Advances
Outstanding | | Interest Income from Advances(1) | | Percentage of
Total Interest
Income from
Advances |
| First Republic Bank | $ | 11,755 | | | 39 | % | | $ | 254 | | | 29 | % |
| MUFG Union Bank, National Association | 4,575 | | | 15 | | | 173 | | | 20 | |
| | | | | | | |
| First Technology Federal Credit Union | 1,292 | | | 4 | | | 43 | | | 5 | |
| CIT Bank, National Association | 1,100 | | | 3 | | | 23 | | | 3 | |
| Luther Burbank Savings | 807 | | | 3 | | | 21 | | | 2 | |
| Subtotal | 19,529 | | | 64 | | | 514 | | | 59 | |
| Others | 10,809 | | | 36 | | | 353 | | | 41 | |
| Total par value | $ | 30,338 | | | 100 | % | | $ | 867 | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | | |
| Name of Borrower | Advances
Outstanding | | Percentage of
Total
Advances
Outstanding | | Interest Income from Advances(1) | | Percentage of
Total Interest
Income from
Advances |
| MUFG Union Bank, National Association | $ | 12,700 | | | 19 | % | | $ | 371 | | | 22 | % |
| First Republic Bank | 12,550 | | | 19 | | | 248 | | | 15 | |
| Wells Fargo & Company | | | | | | | |
| Wells Fargo Financial National Bank West | 7,500 | | | 12 | | | 191 | | | 12 | |
Wells Fargo Bank, National Association(2) | 39 | | | — | | | 2 | | | — | |
| Subtotal Wells Fargo & Company | 7,539 | | | 12 | | | 193 | | | 12 | |
| Bank of the West | 6,356 | | | 10 | | | 155 | | | 9 | |
JPMorgan Chase Bank, National Association(2) | 5,055 | | | 8 | | | 174 | | | 11 | |
| Subtotal | 44,200 | | | 68 | | | 1,141 | | | 69 | |
| Others | 20,888 | | | 32 | | | 518 | | | 31 | |
| Total par value | $ | 65,088 | | | 100 | % | | $ | 1,659 | | | 100 | % |
(1) Interest income amounts exclude the interest effect of interest rate exchange agreements with derivative counterparties; as a result, the total interest income amounts will not agree to the Statements of Income. The amount of interest income from advances can vary depending on the amount outstanding, terms to maturity, interest rates, and repricing characteristics.
(2) Nonmember institution.
Because of this concentration in advances, the Bank may perform more frequent credit and collateral reviews for some of these institutions, including more frequent analysis of detailed data on pledged loan collateral to assess the credit quality and risk-based valuation of the loans. The Bank also analyzes the implications for its financial management and profitability if it were to lose the advances business of one or more of these institutions or if the advances outstanding to one or more of these institutions were not replaced when repaid.
If these institutions were to prepay thetheir advances (subject to the Bank’s limitations on the amount of advances prepayments from a single borrower in a day or a month) or repay the advances as they came due and no other advances were made to replace them, the Bank’s assets would decrease significantly and income could be adversely affected. The timing and magnitude of the impact would depend on a number of factors, including: (i) the amount of advances prepaid or repaid and the period over which the advances were prepaid or repaid, (ii) the amount and timing of any decreases in capital, (iii) the profitability of the advances, (iv) the size and profitability of the Bank’s investments, (v) the extent to which debt matured as the advances were prepaid or repaid, and (vi) the ability of the Bank to extinguish debt or transfer it to other FHLBanks and the costs to extinguish or transfer the debt. As discussed in “Item 1. Business – Our Business Model,” theThe Bank’s financial strategies are designed to enable it to expand and contract its assets, liabilities, and capital in view of changes in membership composition and member credit needs. Under the Bank’s capital plan, the Bank may not be required to repurchase all of a shareholder’s excess capital stock, including any excess mandatorily redeemable capital stock at the Bank’s discretion, subject to certain statutory and regulatory requirements.
The Bank held a security interest in collateral from each of its top 10 advances borrowers and their affiliates sufficient to support their respective advances outstanding, and the Bank does not expect to incur any credit losses on the advances of its top 10 advances borrowers and their affiliates.
See Note 5 – Advances for more information on the concentration in advances.
MPF Program. The Bank had the following concentration in MPF loans with institutions whose outstanding total of mortgage loans sold to the Bank represented 10% or more of the Bank’s total outstanding mortgage loans at December 31, 20202022 and 2019.2021.
| | Concentration of Mortgage Loans | Concentration of Mortgage Loans | Concentration of Mortgage Loans |
| | (Dollars in millions) | | |
| December 31, 2020 | | |
| Name of Institution | Mortgage
Loan Balances
Outstanding | | Percentage of
Total
Mortgage
Loan Balances
Outstanding | | Number of
Mortgage Loans
Outstanding | | Percentage of
Total Number
of Mortgage
Loans
Outstanding | |
| December 31, 2022 | | December 31, 2022 | |
(Dollars in millions)
Name of Institution | | (Dollars in millions)
Name of Institution | Mortgage
Loan Balances
Outstanding | | Percentage of
Total
Mortgage
Loan Balances
Outstanding | | Number of
Mortgage Loans
Outstanding | | Percentage of
Total Number
of Mortgage
Loans
Outstanding |
| Fremont Bank | Fremont Bank | $ | 878 | | | 46 | % | | 1,581 | | | 27 | % | Fremont Bank | $ | 261 | | | 34 | % | | 502 | | | 16 | % |
| Community First Credit Union | | Community First Credit Union | 114 | | | 15 | | | 357 | | | 11 | |
| Bank of Hope | Bank of Hope | 240 | | | 13 | | | 574 | | | 10 | | Bank of Hope | 105 | | | 14 | | | 275 | | | 9 | |
| Logix Federal Credit Union | 224 | | | 12 | | | 664 | | | 11 | | |
| JPMorgan Chase Bank, National Association(1) | | JPMorgan Chase Bank, National Association(1) | 81 | | | 10 | | | 1,191 | | | 37 | |
Logix Federal Credit Union(2) | | Logix Federal Credit Union(2) | 80 | | | 10 | | | 282 | | | 9 | |
| Subtotal | Subtotal | 1,342 | | | 71 | | | 2,819 | | | 48 | | Subtotal | 641 | | | 83 | | | 2,607 | | | 82 | |
| Others | Others | 564 | | | 29 | | | 3,144 | | | 52 | | Others | 134 | | | 17 | | | 612 | | | 18 | |
| Total | Total | $ | 1,906 | | | 100 | % | | 5,963 | | | 100 | % | Total | $ | 775 | | | 100 | % | | 3,219 | | | 100 | % |
| | December 31, 2019 | | |
| Name of Institution | Mortgage
Loan Balances
Outstanding | | Percentage of
Total
Mortgage
Loan Balances
Outstanding | | Number of
Mortgage Loans
Outstanding | | Percentage of
Total Number
of Mortgage
Loans
Outstanding | |
| December 31, 2021 | | December 31, 2021 | |
(Dollars in millions)
Name of Institution | |
(Dollars in millions)
Name of Institution | Mortgage
Loan Balances
Outstanding | | Percentage of
Total
Mortgage
Loan Balances
Outstanding | | Number of
Mortgage Loans
Outstanding | | Percentage of
Total Number
of Mortgage
Loans
Outstanding |
| Fremont Bank | Fremont Bank | $ | 1,880 | | | 58 | % | | 3,351 | | | 38 | % | Fremont Bank | $ | 344 | | | 36 | % | | 641 | | | 17 | % |
| Bank of Hope | Bank of Hope | 361 | | | 11 | | | 845 | | | 10 | | Bank of Hope | 128 | | | 13 | | | 321 | | | 9 | |
| Logix Federal Credit Union | 327 | | | 10 | | | 912 | | | 10 | | |
| Community First Credit Union | | Community First Credit Union | 122 | | | 13 | | | 370 | | | 10 | |
JPMorgan Chase Bank, National Association(1) | | JPMorgan Chase Bank, National Association(1) | 101 | | | 11 | | | 1,369 | | | 37 | |
Logix Federal Credit Union(2) | | Logix Federal Credit Union(2) | 99 | | | 10 | | | 333 | | | 9 | |
| Subtotal | Subtotal | 2,568 | | | 79 | | | 5,108 | | | 58 | | Subtotal | 794 | | | 83 | | | 3,034 | | | 82 | |
| Others | Others | 658 | | | 21 | | | 3,633 | | | 42 | | Others | 160 | | | 17 | | | 696 | | | 18 | |
| Total | Total | $ | 3,226 | | | 100 | % | | 8,741 | | | 100 | % | Total | $ | 954 | | | 100 | % | | 3,730 | | | 100 | % |
(1) Nonmember institution.
the member is a Bank director.Members that sellsold mortgage loans to the Bank through the MPF Program make representations and warranties that the loans comply with the MPF underwriting guidelines. In the event a mortgage loan does not comply with the MPF underwriting guidelines, the Bank’s agreement with the participating financial institution provides that the institution is required to repurchase the loan as a result of the breach of the institution’s representations and warranties. The Bank may, at its discretion, choose to retain the loan if the Bank determines that the noncompliance can be cured or mitigated through additional contract assurances from the institution or any successor. In addition, most participating financial institutions have retained the servicing on the mortgage loans purchased by the Bank, and the servicing obligation of any former participating financial institution is held by the successor or another Bank-approved financial institution. The FHLBank of Chicago (the MPF Provider and master servicer) has contracted with Wells Fargo Bank, National Association, to monitormonitors the servicing performed by all participating financial institutions and successors, including Bank of Hope, Fremont Bank, and Logix Federal Credit Union.successors. The Bank obtains a Type II Statement on Standards for Attestation Engagements No. 18 service auditor's report to confirm the effectiveness of the MPF Provider's controls over the services it provides to the Bank, including its monitoring of the participating financial institutions’ servicing. The Bank has the right to transfer the servicing at any time, without paying the participating financial institution or any successor a servicing termination fee, in the event a participating financial institution or any successor does not meet the MPF servicing requirements. The Bank may also transfer servicing without cause subject to a servicing transfer fee payable to the participating financial institution or any successor.
Investments. The following table presents the portfolio concentration in the Bank’s investment portfolios at December 31, 2020 and 2019, with U.S. government corporation and GSE issuers and other issuers (at the time of purchase), whose aggregate carrying values represented 10% or more of the Bank’s capital (including mandatorily redeemable capital stock). The amounts include securities issued by the issuer’s holding company, along with its affiliated companies. The Bank’s investment portfolio includes securities classified as trading, AFS, and HTM.
Investments: Portfolio Concentration
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| (In millions) | Carrying
Value | | Estimated
Fair Value | | Carrying
Value | | Estimated
Fair Value |
| Non-MBS: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| U.S. obligations – Treasury securities | $ | 9,240 | | | $ | 9,240 | | | $ | 7,050 | | | $ | 7,050 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| MBS: | | | | | | | |
| Other U.S. obligations: | | | | | | | |
| Ginnie Mae | 264 | | | 271 | | | 474 | | | 479 | |
| GSEs: | | | | | | | |
| Freddie Mac | 3,206 | | | 3,217 | | | 4,465 | | | 4,463 | |
| Fannie Mae | 9,984 | | | 10,003 | | | 9,836 | | | 9,853 | |
| Total GSEs | 13,190 | | | 13,220 | | | 14,301 | | | 14,316 | |
| PLRMBS: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other(1) | 2,326 | | | 2,323 | | | 2,981 | | | 2,982 | |
| | | | | | | |
| Total MBS | 15,780 | | | 15,814 | | | 17,756 | | | 17,777 | |
| Total securities | $ | 25,020 | | | $ | 25,054 | | | $ | 24,806 | | | $ | 24,827 | |
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(1) Includes issuers of securities that have a carrying value that is less than 10% of total Bank capital (including mandatorily redeemable capital stock).
Many of the Bank’s members and their affiliates are extensively involved in residential mortgage finance. Accordingly, members or their affiliates may be involved in the sale of MBS to the Bank or in the origination or securitization of the mortgage loans backing the MBS purchased by the Bank.
Capital Stock. The following table presents the concentration in capital stock held by institutions whose capital stock ownership represented 10% or more of the Bank’s outstanding capital stock, including mandatorily redeemable capital stock, as of December 31, 20202022 or 2019.2021:
| | Concentration of Capital Stock | |
| Including Mandatorily Redeemable Capital Stock | |
| | | 2022 | | 2021 |
| (Dollars in millions) | (Dollars in millions) | 2020 | | 2019 | (Dollars in millions) | Capital Stock Outstanding | | Percentage of Total Capital Stock Outstanding | | Capital Stock Outstanding | | Percentage of Total Capital Stock Outstanding |
| Name of Institution | Capital Stock
Outstanding | | Percentage
of Total
Capital Stock
Outstanding | | Capital Stock
Outstanding | | Percentage
of Total
Capital Stock
Outstanding | |
| Silicon Valley Bank | | Silicon Valley Bank | $ | 418 | | | 11 | % | | $ | 17 | | | 1 | % |
| First Republic Bank | First Republic Bank | $ | 354 | | | 16 | % | | $ | 368 | | | 12 | % | First Republic Bank | 379 | | | 10 | | | 115 | | | 6 | |
| | MUFG Union Bank, National Association | 142 | | | 6 | | | 394 | | | 12 | | |
| | Subtotal | Subtotal | 496 | | | 22 | | | 762 | | | 24 | | Subtotal | 797 | | | 21 | | | 132 | | | 7 | |
| Others | Others | 1,790 | | | 78 | | | 2,376 | | | 76 | | Others | 2,966 | | | 79 | | | 1,932 | | | 93 | |
| Total | Total | $ | 2,286 | | | 100 | % | | $ | 3,138 | | | 100 | % | Total | $ | 3,763 | | | 100 | % | | $ | 2,064 | | | 100 | % |
Derivative Counterparties. The following table presents the concentration in derivatives with derivative counterparties whose outstanding notional balances represented 10% or more of the Bank’s total notional amount of derivatives outstanding as of December 31, 2020Bank currently utilizes an approved clearing house, LCH Ltd, and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Concentration of Derivative Counterparties |
| | | | | | | | | | | |
| (Dollars in millions) | 2020 | | 2019 |
| Derivative Counterparty | Credit Rating(1) | | Notional
Amount | | Percentage of
Total
Notional Amount | | Credit Rating(1) | | Notional
Amount | | Percentage of
Total
Notional Amount |
| Uncleared | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Others | At least BBB | | $ | 7,227 | | | 9 | % | | At least BBB | | $ | 11,476 | | | 11 | % |
| Subtotal uncleared | | | 7,227 | | | 9 | | | | | 11,476 | | | 11 | |
| Cleared | | | | | | | | | | | |
LCH Ltd(2) | | | | | | | | | | | |
| Credit Suisse Securities (USA) LLC | A | | 28,977 | | | 37 | | | A | | 61,067 | | | 61 | |
| Morgan Stanley & Co. LLC | A | | 42,440 | | | 54 | | | A | | 28,483 | | | 28 | |
| Subtotal cleared | | | 71,417 | | | 91 | | | | | 89,550 | | | 89 | |
Total(3) | | | $ | 78,644 | | | 100 | % | | | | $ | 101,026 | | | 100 | % |
(1)The credit ratings used by the Bank are based oncurrently has the lower of Moody’s Investors Service (Moody’s) or S&P Global Ratings (S&P) ratings.
(2)London Clearing House (LCH) Ltd is the Bank’s counterparty for all of its cleared swaps and was rated AA- by S&P at December 31, 2020, and 2019, with a Stable and Negative CreditWatch by S&P at December 31, 2020, and 2019, respectively. For purposes offollowing two approved clearing swaps with LCH Ltd, Credit Suisse Securities (USA) LLC andagents: Morgan Stanley & Co. LLC, and Goldman Sachs & Co. The Bank monitors the clearing agents through its unsecured credit system. The clearing agents are approved by the Bank’s Credit Committee. The clearing agents.agents also have approved counterparty trading limits with the Bank, subjecting them to annual credit reviews and on-going credit quality surveillance by the Credit Department. The parent companies of the clearing agents are monitored through annual reviews, as well as through the Bank’s daily monitoring tools, which include reviewing equity triggers, debt triggers, and credit default swap spread triggers. In addition, exposures to the clearing agents are monitored daily on a swap counterparty report. The Bank does not anticipate any credit losses on its cleared derivatives as of December 31, 2022.
(3)Total notional amount at December 31, 2020 and 2019, does not include $1 million and $46 million of mortgage delivery commitments with members, respectively.
Liquidity Risk
Liquidity risk is defined as the risk that the Bank will be unable to meet its obligations as they come due or meet the credit needs of its members and eligible nonmember borrowers in a timely and cost-effective manner. The Bank is required to maintain liquidity for operating needs and for contingency purposes in accordance with Finance Agency regulations and guidelines and with the Bank’s own Risk Management Policy.
The Bank generally manages operational, contingent, and refinancing risks using a portfolio of cash and short-term investments, U.S. Treasury securities, and access to the debt capital markets. In addition, the Bank maintains alternate sources of funds, detailed in its contingent funding plan, which also includes an explanation of how sources of funds may be allocated under stressed market conditions, such as short-term operational disruptions at the Bank or the Office of Finance or short-term disruptions in the debt capital markets.
The Finance Agency has established base case liquidity guidelines that each FHLBank maintain sufficient liquidity at least equal to its anticipated cash outflows, assuming no new consolidated obligation issuance, renewal of all
maturing advances, a specified percentage drawdown notional on letters of credit balances, and certain Treasury investments as a source of funds. The Finance Agency’s guidance provides that base case liquidity should generally be maintained for 10 to 30 days. The Bank actively monitors and manages refinancing risk. Finance Agency guidance specifies tolerance levels related to the size of each FHLBank’s funding gaps to measure refinancing risk as the difference between assets and liabilities that are scheduled to mature during a specified period, expressed as a percentage of total assets. The guidance limits three-month and one-year funding gaps between the range of –10% to –20% and –25% to –35%, respectively. Funding gaps are measured at monthend, using the average ratio for the three most recent monthends. The Bank is also required to perform an annual liquidity stress test and to report the results to the Finance Agency.
In addition to the Finance Agency’s guidelines on contingent liquidity, the Bank models its cash commitments and expected cash flows daily to determine its projected liquidity position. If a market or operational disruption occurred that prevented the issuance of new consolidated obligations, the Bank could meet its obligations by: (i) allowing short-term liquid investments to mature, (ii) using eligible securities as collateral for repurchase agreement borrowings, and (iii) if necessary, allowing advances to mature without renewal. In addition, the Bank may be able to borrow on a short-term unsecured basis from other financial institutions (Federal funds purchased) or other FHLBanks (inter-FHLBank borrowings).
As of December 31, 20202022 and 2019,2021, the Bank held total sources of funds in an amount that would have allowed the Bank to meet its liquidity needs without issuing new consolidated obligations for over ten days, in accordance with
the Finance Agency guidance. In addition, the Bank’s funding gap positions as of December 31, 20202022 and 2019,2021, were within the tolerance levels provided by the Finance Agency guidance.
In addition, Section 11(i) of the FHLBank Act authorizes the U.S. Treasury to purchase certain obligations issued by the FHLBanks aggregating not more than $4.0 billion under certain conditions. There were no such purchases by the U.S. Treasury during the two-year period ended December 31, 2020.2022.
Credit Risk
Credit risk is defined as the risk that the market value, or estimated fair value if market value is not available, of an obligation will decline as a result of deterioration in the creditworthiness of the obligor. The Bank further refines the definition of credit risk as the risk that a secured or unsecured borrower is unable to meet its financial obligations and the Bank is inadequately protected by the liquidation value of collateral, if any, which could result in a credit loss to the Bank.
Advances. The Bank manages the credit risk of advances and other credit products by setting the credit and collateral terms available to individual members and housing associates based on their creditworthiness and on the quality and value of the assets they pledge as collateral. The Bank also has procedures to assess the mortgage loan quality and documentation standards of institutions that pledge mortgage loan collateral. In addition, the Bank has collateral policies and restricted lending procedures in place to help manage its exposure to institutions that experience difficulty in meeting their capital requirements or other standards of creditworthiness. These credit and collateral policies balance the Bank’s dual goals of meeting the needs of members and housing associates as a reliable source of liquidity and mitigating credit risk by adjusting credit and collateral terms in view of deterioration in creditworthiness. The Bank has never experienced a credit loss on an advance.
The Bank determines the maximum amount and maximum term of the advances it will make to a member or housing associate based on the institution’s creditworthiness and eligible collateral pledged in accordance with the Bank’s credit and collateral policies and regulatory requirements.
To identify the credit strength of each borrower and potential borrower, other than insurance companies, community development financial institutions (CDFIs), and housing associates, the Bank assigns each member and each nonmember borrower an internal credit quality rating from one to ten, with one as the highest credit quality rating. These ratings are based on results from the Bank’s credit model, which considers financial, regulatory, and other qualitative information, including regulatory examination reports.
The Bank determines the maximum amount and maximum term of the advances it will make to an insurance company based on an ongoing risk assessment that considers the member's financial and regulatory standing and other qualitative information deemed relevant by the Bank. This evaluation results in the assignment of an internal credit quality rating from one to ten, with one as the highest credit quality rating.
The Bank determines the maximum amount and maximum term of the advances it will make to a CDFI based on an ongoing risk assessment that considers information from the CDFI’s audited annual financial statements, supplemented by additional information deemed relevant by the Bank.
The Bank determines the maximum amount and maximum term of the advances it will make to a housing associate based on an ongoing risk assessment that considers the housing associate’s financial and regulatory standing and other qualitative information deemed relevant by the Bank.
The Bank underwrites and actively monitors the financial condition and performance of all borrowers to determine and periodically assess creditworthiness.
In accordance with the FHLBank Act, borrowers may pledge the following eligible assets to secure advances: one- to four-family
•one-to-four-family first lien residential mortgage loans; multifamily mortgage loans;
•securities issued, insured, or guaranteed by the U.S. government or any of its agencies, including without limitation MBS backed by Fannie Mae, Freddie Mac, or Ginnie Mae;
•cash or deposits in the Bank; and
•certain other real estate-related collateral, such as certain privately issued mortgage-backed securities, multifamily loans, commercial real estate loans, and second lien residential mortgage loans or home equity loans. The Bank may also accept loans; and
•small business, small farm, and small agribusiness loans that are fully secured by collateral (such as real estate, equipment and vehicles, accounts receivable, and inventory) from members that are community financial institutions. The Housing and Economic Recovery Act of 2008 (Housing Act) added secured loans for community development activities as collateral that the Bank may accept from community financial institutions.
The Housing Act defined community financial institutions as depository institutions insured by the Federal Deposit Insurance Corporation with average total assets over the preceding three-year period of $1 billion or less, to be adjusted for inflation annually by the Finance Agency. The average total asset cap for 20202022 was $1,224 million.$1.3 billion.
Under the Bank’s written lending agreements with its borrowers, its credit and collateral policies, and applicable statutory and regulatory provisions, the Bank has the right to take a variety of actions to address credit and collateral concerns, including calling for the borrower to pledge additional or substitute collateral (including ineligible collateral) at any time that advances are outstanding to the borrower, and requiring the delivery of all pledged collateral. In addition, if a borrower fails to repay any advance or is otherwise in default on its obligations to the Bank, the Bank may foreclose on and liquidate the borrower’s collateral and apply the proceeds toward repayment of the borrower’s obligations to the Bank. The Bank’s collateral policies are designed to address changes in the value of collateral and the risks and costs relating to foreclosure and liquidation of collateral, and the Bank periodically adjusts the amount it is willing to lend against various types of collateral to reflect these factors.
The Bank perfects its security interest in securities collateral by taking delivery of all securities at the time they are pledged. The Bank perfects its security interest in loan collateral by filing a Uniform Commercial Code-1 financing statement for each borrower that pledges loans. The Bank may also require delivery of loan collateral under certain conditions (for example, from a newly formed institution or when a borrower's creditworthiness deteriorates below a certain level). In addition, the FHLBank Act provides that any security interest granted to the Bank by any member or member affiliate has priority over the claims and rights of any other party, including any receiver, conservator, trustee, or similar entity that has the rights of a lien creditor, unless these claims and rights would be entitled to priority under otherwise applicable law or are held by bona fide purchasers for value or by parties that have actual perfected security interests.
Pursuant to the Bank’s lending agreements with its borrowers, the Bank limits extensions of credit to individual borrowers to a percentage of the market value or unpaid principal balance of the borrower’s pledged collateral, known as the borrowing capacity, which the Bank can change from time to time. The borrowing capacity percentage varies according to several factors, including the charter type of the institution, the collateral type, the value assigned to the collateral, the results of the Bank’s collateral field review of the borrower’s collateral, the
pledging method used for loan collateral (specific identification or blanket lien), the amount of loan data provided (detailed or summary reporting), the data reporting frequency (monthly or quarterly), the borrower’s financial strength and condition, and any institution-specific collateral risks. Under the terms of the Bank’s lending agreements, the aggregate borrowing capacity of a borrower’s pledged eligible collateral must meet or exceed the total amount of the borrower’s outstanding advances, other extensions of credit, and certain other borrower obligations and liabilities.
In addition, the total amount of advances made available to each member or housing associate may be limited by the financing availability assigned by the Bank, which is generally expressed as a percentage of the member’s or housing associate’s assets, which the Bank can change from time to time. The amount of financing availability is generally determined by the creditworthiness of the member or housing associate.
When a nonmember financial institution acquires some or all of the assets and liabilities of a member, including outstanding advances and Bank capital stock, the Bank may allow the advances to remain outstanding, at its discretion. The nonmember borrower is required to meet the Bank’s applicable credit, collateral, and capital stock requirements, including requirements regarding creditworthiness and collateral borrowing capacity.
The following tables present a summary of the status of the credit outstanding and overall collateral borrowing capacity of the Bank’s member and nonmember borrowers as of December 31, 20202022 and 2019. During 2020, the Bank’s internal credit ratings stayed the same or slightly declined for the majority of members and nonmember borrowers.2021.
| Member and Nonmember Credit Outstanding and Collateral Borrowing Capacity
by Credit Quality Rating | Member and Nonmember Credit Outstanding and Collateral Borrowing Capacity
by Credit Quality Rating | Member and Nonmember Credit Outstanding and Collateral Borrowing Capacity
by Credit Quality Rating |
| | | December 31, 2022 | | December 31, 2022 | |
| |
| All Members and
Nonmembers | | Members and Nonmembers with Credit Outstanding |
| (Dollars in millions) | (Dollars in millions) | | (Dollars in millions) | | | | | Collateral Borrowing Capacity(2) |
| December 31, 2020 | | |
| All Members and
Nonmembers | | Members and Nonmembers with Credit Outstanding | |
| | | | | | Collateral Borrowing Capacity(2) | |
Member or Nonmember
Credit Quality Rating | Member or Nonmember
Credit Quality Rating | Number | | Number | | Credit Outstanding(1) | | Total | | Used | Member or Nonmember
Credit Quality Rating | Number | | Number | | Credit Outstanding(1) | | Total | | Used |
| 1-3 | 1-3 | 236 | | | 164 | | | $ | 37,225 | | | $ | 188,637 | | | 20 | % | 1-3 | 257 | | | 172 | | | $ | 98,702 | | | $ | 323,212 | | | 31 | % |
| 4-6 | 4-6 | 95 | | | 59 | | | 12,508 | | | 50,199 | | | 25 | | 4-6 | 65 | | | 33 | | | 13,891 | | | 31,536 | | | 44 | |
| 7-10 | 7-10 | 4 | | | 2 | | | 32 | | | 34 | | | 94 | | 7-10 | 4 | | | 3 | | | 8 | | | 51 | | | 16 | |
| Subtotal | Subtotal | 335 | | | 225 | | | 49,765 | | | 238,870 | | | 21 | | Subtotal | 326 | | | 208 | | | 112,601 | | | 354,799 | | | 32 | |
| CDFIs | 7 | | | 7 | | | 103 | | | 116 | | | 89 | | |
| Community development financial institutions (CDFIs) | | Community development financial institutions (CDFIs) | 7 | | | 6 | | | 100 | | | 151 | | | 66 | |
| Housing associates | Housing associates | 2 | | | — | | | — | | | — | | | — | | Housing associates | 2 | | | 1 | | | 95 | | | 102 | | | 93 | |
| Total | Total | 344 | | | 232 | | | $ | 49,868 | | | $ | 238,986 | | | 21 | % | Total | 335 | | | 215 | | | $ | 112,796 | | | $ | 355,052 | | | 32 | % |
| | December 31, 2019 | | |
| December 31, 2021 | | December 31, 2021 | |
| | | All Members and
Nonmembers | | Members and Nonmembers with Credit Outstanding | | All Members and
Nonmembers | | Members and Nonmembers with Credit Outstanding |
| | | | | | Collateral Borrowing Capacity(2) | |
| (Dollars in millions) | | (Dollars in millions) | | | | | Collateral Borrowing Capacity(2) |
Member or Nonmember
Credit Quality Rating | Member or Nonmember
Credit Quality Rating | Number | | Number | | Credit Outstanding(1) | | Total | | Used | Member or Nonmember
Credit Quality Rating | Number | | Number | | Credit Outstanding(1) | | Total | | Used |
| 1-3 | 1-3 | 271 | | | 151 | | | $ | 67,982 | | | $ | 204,970 | | | 33 | % | 1-3 | 260 | | | 127 | | | $ | 26,398 | | | $ | 213,172 | | | 12 | % |
| 4-6 | 4-6 | 54 | | | 33 | | | 18,654 | | | 50,732 | | | 37 | | 4-6 | 64 | | | 32 | | | 7,158 | | | 33,733 | | | 21 | |
| 7-10 | 7-10 | 5 | | | 4 | | | 41 | | | 65 | | | 63 | | 7-10 | 3 | | | 2 | | | 20 | | | 37 | | | 54 | |
| Subtotal | Subtotal | 330 | | | 188 | | | 86,677 | | | 255,767 | | | 34 | | Subtotal | 327 | | | 161 | | | 33,576 | | | 246,942 | | | 14 | |
| CDFIs | CDFIs | 7 | | | 5 | | | 102 | | | 112 | | | 91 | | CDFIs | 7 | | | 7 | | | 112 | | | 135 | | | 83 | |
| Housing associates | Housing associates | 2 | | | — | | | — | | | — | | | — | | Housing associates | 2 | | | — | | | — | | | — | | | — | |
| Total | Total | 339 | | | 193 | | | $ | 86,779 | | | $ | 255,879 | | | 34 | % | Total | 336 | | | 168 | | | $ | 33,688 | | | $ | 247,077 | | | 14 | % |
(1)Includes advances, letters of credit, the market value of swaps, estimated prepayment fees for certain borrowers, and the credit enhancement obligation on MPF loans.
(2)Collateral borrowing capacity does not represent any commitment to lend on the part of the Bank.
| | | | | | | | | | | | | | | | | |
Member and Nonmember Credit Outstanding and Collateral Borrowing Capacity
by Unused Borrowing Capacity |
| | | | | |
| | | | | |
| December 31, 2022 | | | | | |
(Dollars in millions) Unused Borrowing Capacity | Number of Members and Nonmembers with
Credit Outstanding | | Credit Outstanding(1) | | Collateral Borrowing Capacity(2) |
| 0% – 10% | 11 | | | $ | 6,637 | | | $ | 7,319 | |
| 11% – 25% | 11 | | | 5,644 | | | 7,380 | |
| 26% – 50% | 22 | | | 15,509 | | | 24,465 | |
| More than 50% | 171 | | | 85,006 | | | 315,888 | |
| Total | 215 | | | $ | 112,796 | | | $ | 355,052 | |
| | | | | | | | | | | | | | | | | |
Member and Nonmember Credit Outstanding and Collateral Borrowing Capacity
by Unused Borrowing Capacity |
| | | | | |
| (Dollars in millions) | | | | | |
| December 31, 2020 | | | | | |
| Unused Borrowing Capacity | Number of Members and Nonmembers with
Credit Outstanding | | Credit Outstanding(1) | | Collateral Borrowing Capacity(2) |
| 0% – 10% | 18 | | | $ | 1,417 | | | $ | 1,511 | |
| 11% – 25% | 3 | | | 116 | | | 137 | |
| 26% – 50% | 27 | | | 9,858 | | | 18,210 | |
| More than 50% | 184 | | | 38,477 | | | 219,128 | |
| Total | 232 | | | $ | 49,868 | | | $ | 238,986 | |
| | December 31, 2019 | | |
| Unused Borrowing Capacity | Number of Members and Nonmembers with
Credit Outstanding | | Credit Outstanding(1) | | Collateral Borrowing Capacity(2) | |
| December 31, 2021 | | December 31, 2021 | |
(Dollars in millions) Unused Borrowing Capacity | | (Dollars in millions) Unused Borrowing Capacity | Number of Members and Nonmembers with
Credit Outstanding | | Credit Outstanding(1) | | Collateral Borrowing Capacity(2) |
| 0% – 10% | 0% – 10% | 7 | | | $ | 1,352 | | | $ | 1,419 | | 0% – 10% | 5 | | | $ | 467 | | | $ | 512 | |
| 11% – 25% | 11% – 25% | 9 | | | 754 | | | 903 | | 11% – 25% | 8 | | | 895 | | | 1,079 | |
| 26% – 50% | 26% – 50% | 24 | | | 21,955 | | | 34,221 | | 26% – 50% | 15 | | | 1,837 | | | 3,032 | |
| More than 50% | More than 50% | 153 | | | 62,718 | | | 219,336 | | More than 50% | 140 | | | 30,489 | | | 242,454 | |
| Total | Total | 193 | | | $ | 86,779 | | | $ | 255,879 | | Total | 168 | | | $ | 33,688 | | | $ | 247,077 | |
(1)Includes advances, letters of credit, the market value of swaps, estimated prepayment fees for certain borrowers, and the credit enhancement obligation on MPF loans.
(2)Collateral borrowing capacity does not represent any commitment to lend on the part of the Bank.
Based on the collateral pledged as security for advances, the Bank’s credit analyses of borrowers’ financial condition, and the Bank’s credit extension and collateral policies, the Bank expects to collect all amounts due according to the contractual terms of the advances. Therefore, no allowance for credit losses on advances is deemed necessary by the Bank. The Bank has never experienced any credit losses on advances.
Securities pledged as collateral are assigned borrowing capacities that reflect the securities’ market valuations and market liquidation risks. The following table presents the securities collateral pledged by all members and by nonmembers with credit outstanding at December 31, 20202022 and 2019.2021.
| Composition of Securities Collateral Pledged
by Members and by Nonmembers with Credit Outstanding | Composition of Securities Collateral Pledged
by Members and by Nonmembers with Credit Outstanding | Composition of Securities Collateral Pledged
by Members and by Nonmembers with Credit Outstanding |
| | (In millions) | (In millions) | 2020 | | 2019 | (In millions) | 2022 | | 2021 |
| Securities Type with Current Credit Ratings | Securities Type with Current Credit Ratings | Current Par | | Borrowing
Capacity | | Current Par | | Borrowing
Capacity | Securities Type with Current Credit Ratings | Current Par | | Borrowing
Capacity | | Current Par | | Borrowing
Capacity |
| U.S. Treasury (bills, notes, bonds) | U.S. Treasury (bills, notes, bonds) | $ | 195 | | | $ | 190 | | | $ | 183 | | | $ | 176 | | U.S. Treasury (bills, notes, bonds) | $ | 3,004 | | | $ | 2,688 | | | $ | 659 | | | $ | 631 | |
| Agency (notes, subordinated debt, structured notes, indexed amortization notes, and Small Business Administration pools) | Agency (notes, subordinated debt, structured notes, indexed amortization notes, and Small Business Administration pools) | 4,236 | | | 4,120 | | | 2,897 | | | 2,846 | | Agency (notes, subordinated debt, structured notes, indexed amortization notes, and Small Business Administration pools) | 79,360 | | | 64,153 | | | 4,192 | | | 3,978 | |
| Agency pools and collateralized mortgage obligations | Agency pools and collateralized mortgage obligations | 16,399 | | | 15,758 | | | 8,576 | | | 8,287 | | Agency pools and collateralized mortgage obligations | 8,617 | | | 7,622 | | | 17,571 | | | 16,553 | |
| | Private-label commercial MBS – publicly registered investment-grade-rated senior tranches | Private-label commercial MBS – publicly registered investment-grade-rated senior tranches | 3 | | | 3 | | | 5 | | | 5 | | Private-label commercial MBS – publicly registered investment-grade-rated senior tranches | 392 | | | 244 | | | 4 | | | 3 | |
| | PLRMBS – private label investment-grade-rated senior tranches | PLRMBS – private label investment-grade-rated senior tranches | 18 | | | 12 | | | 45 | | | 34 | | PLRMBS – private label investment-grade-rated senior tranches | 762 | | | 409 | | | 311 | | | 194 | |
| | Municipal Bonds – investment-grade-rated | | Municipal Bonds – investment-grade-rated | 17 | | | 12 | | | — | | | — | |
| Term deposits with the Bank | Term deposits with the Bank | 16 | | | 16 | | | — | | | — | | Term deposits with the Bank | — | | | — | | | 18 | | | 18 | |
| | Total | Total | $ | 20,867 | | | $ | 20,099 | | | $ | 11,706 | | | $ | 11,348 | | Total | $ | 92,152 | | | $ | 75,128 | | | $ | 22,755 | | | $ | 21,377 | |
With respect to loan collateral, most borrowers may choose to pledge loan collateral by specific identification or under a blanket lien. Insurance companies, CDFIs, and housing associates are required to pledge loan collateral by specific identification with monthly reporting. All other borrowers pledging by specific identification must provide a detailed listing of all the loans pledged to the Bank on a monthly basis.
The Bank may require certain borrowers to deliver pledged loan collateral to the Bank for one or more reasons, including the following: the borrower is a de novo institution (chartered within the last three years), an insurance company, a CDFI, or a housing associate; the Bank is concerned about the borrower’s creditworthiness; or the Bank is concerned about the maintenance of its collateral or the priority of its security interest.
As of December 31, 2020,2022, of the loan collateral pledged to the Bank, 15%14% was pledged by 2521 institutions by specific identification, 55%57% was pledged by 117113 institutions under a blanket lien with detailed reporting, and 30%29% was pledged by 131130 institutions under a blanket lien with summary reporting. For each borrower that pledges loan collateral, the Bank conducts loan collateral field reviews once every six months or every one, two, or three years, depending on the risk profile of the borrower and the types of collateral pledged by the borrower.
As of December 31, 2020,2022, the Bank’s maximum borrowing capacities as a percentage of the assigned market value of mortgage loan collateral pledged under a blanket lien with detailed reporting were as follows: 85%84% for first lien residential mortgage loans, 81% for multifamily mortgage loans, 81% for commercial mortgage loans, and 70%69% for second lien residential mortgage loans. The maximum borrowing capacity for small business, small agribusiness, and small farm loans was 50% of the unpaid principal balance, although most of these loans are pledged under blanket lien with summary reporting, with a maximum borrowing capacity of 25%. The highest borrowing capacities are available to borrowers that pledge under a blanket lien with detailed reporting because the detailed loan information allows the Bank to assess the value of the collateral more precisely and because additional collateral is pledged under the blanket lien that may not receive borrowing capacity but may be liquidated to repay advances in the event of default. The Bank may review and change the maximum borrowing capacity for any type of loan collateral at any time.
The following table presents the mortgage loan collateral pledged by all members and by nonmembers with credit outstanding at December 31, 20202022 and 2019.2021.
| Composition of Loan Collateral Pledged
by Members and by Nonmembers with Credit Outstanding | Composition of Loan Collateral Pledged
by Members and by Nonmembers with Credit Outstanding | Composition of Loan Collateral Pledged
by Members and by Nonmembers with Credit Outstanding |
| | (In millions) | (In millions) | 2020 | | 2019 | (In millions) | 2022 | | 2021 |
| Loan Type | Loan Type | Unpaid Principal
Balance | | Borrowing
Capacity | | Unpaid Principal
Balance | | Borrowing
Capacity | Loan Type | Unpaid Principal
Balance | | Borrowing
Capacity | | Unpaid Principal
Balance | | Borrowing
Capacity |
| First lien residential mortgage loans | First lien residential mortgage loans | $ | 167,058 | | | $ | 131,671 | | | $ | 174,580 | | | $ | 152,960 | | First lien residential mortgage loans | $ | 265,972 | | | $ | 180,564 | | | $ | 175,319 | | | $ | 140,994 | |
| Second lien residential mortgage loans and home equity lines of credit | Second lien residential mortgage loans and home equity lines of credit | 15,349 | | | 6,441 | | | 17,469 | | | 9,437 | | Second lien residential mortgage loans and home equity lines of credit | 15,423 | | | 7,381 | | | 13,659 | | | 6,653 | |
| Multifamily mortgage loans | Multifamily mortgage loans | 43,324 | | | 28,376 | | | 32,652 | | | 25,321 | | Multifamily mortgage loans | 60,989 | | | 36,809 | | | 41,239 | | | 28,517 | |
| Commercial mortgage loans | Commercial mortgage loans | 78,886 | | | 48,637 | | | 72,118 | | | 52,329 | | Commercial mortgage loans | 92,413 | | | 54,341 | | | 73,750 | | | 48,394 | |
Loan participations(1) | Loan participations(1) | 3,783 | | | 2,591 | | | 4,610 | | | 3,496 | | Loan participations(1) | 871 | | | 306 | | | 1,064 | | | 383 | |
| Small business, small farm, and small agribusiness loans | Small business, small farm, and small agribusiness loans | 4,820 | | | 1,171 | | | 4,010 | | | 988 | | Small business, small farm, and small agribusiness loans | 2,180 | | | 523 | | | 3,157 | | | 759 | |
| Other | Other | — | | | — | | | 2 | | | — | | Other | 2 | | | — | | | — | | | — | |
| Total | Total | $ | 313,220 | | | $ | 218,887 | | | $ | 305,441 | | | $ | 244,531 | | Total | $ | 437,850 | | | $ | 279,924 | | | $ | 308,188 | | | $ | 225,700 | |
(1)The unpaid principal balance for loan participations is 100% of the outstanding loan amount. The borrowing capacity for loan participations is based on the participated amount pledged to the Bank.
The Bank holds a security interest in subprime residential mortgage loans pledged as collateral. Subprime loans are defined as loans with a borrower FICO score of 660 or less at origination, or if the original FICO score is not available, as loans with a current borrower FICO score of 660 or less. At December 31, 20202022 and 2019,2021, the unpaid principal balance of these loans totaled $5$5.2 billion and $6$5.4 billion, respectively. The Bank reviews and assigns borrowing capacities to subprime mortgage loans as it does for all other types of loan collateral, taking into account the known credit attributes in the pricing of the loans. All advances, including those made to borrowers pledging subprime mortgage loans, are required to be fully collateralized. The Bank limits the amount of borrowing capacity that may be supported by subprime collateral.
MPF Program. Under the MPF Program, the Bank may purchase from participating members, for its own portfolio, conventional conforming fixed rate residential mortgage loans under the MPF Original product. Participating members originate or purchase mortgage loans, credit-enhance them and sell them to the Bank, and generally retain the servicing of the loans. In addition, the Bank may facilitate the purchase of conforming fixed rate mortgage loans from members for concurrent sale to Fannie Mae under the MPF Xtra product. When members sell loans under the MPF Xtra product, the loans are sold to a third-party investor and are not recorded on the Bank’s Statements of Condition. Unlike conventional MPF products held for portfolio, participating members are not required to provide credit enhancement and do not receive credit enhancement fees under the MPF Xtra product. On December 17, 2020, the Bank announced that it would no longer offer new commitments to directly purchase, or to facilitate the purchase of, mortgage loans from its members.
The Bank and any participating financial institution share in the credit risk of the loans sold by that institution under the MPF Original and MPF Plus products as specified in a master agreement. As of December 31, 2020,2022, loans purchased under the MPF Program generally had a credit risk exposure at the time of purchase that, as determined by the MPF Program methodology, would be expected from an equivalent investment rated AA if purchased prior to April 2017, or rated BBB if purchased since April 2017, taking into consideration the credit risk sharing structure mandated by the Finance Agency’s acquired member assets (AMA) regulation. The MPF Program structures potential credit losses on conventional MPF loans into layers with respect to each pool of loans purchased by the Bank under a single master commitment, as follows:
(1)The first layer of protection against loss is the liquidation value of the real property securing the loan.
(2)The next layer of protection comes from the primary mortgage insurance that is required for loans with an initial loan-to-value ratio greater than 80%, if still in place.
(3)Losses that exceed the liquidation value of the real property and any primary mortgage insurance, up to an agreed-upon amount called the first loss account for each master commitment, are incurred by the Bank.
(4)Losses in excess of the first loss account for each master commitment, up to an agreed-upon amount called the “credit enhancement amount,” are covered by the participating financial institution's credit enhancement obligation at the time losses are incurred.
(5)Losses in excess of the first loss account and the participating financial institution's remaining credit enhancement for the master commitment, if any, are incurred by the Bank.
The Bank performs a quarterly assessment of its mortgage loans held for portfolio to estimate expected credit losses. An allowance for credit losses is recorded with a corresponding adjustment to the provision for/(reversal of) credit losses. The Bank measures expected credit losses on mortgage loans on a collectiveloan-level basis, pooling loans with similar risk characteristics. If a mortgage loan no longer shares risk characteristics with other loans, it is removed fromfactoring in the pool and evaluated for expected credit losses on an individual basis.enhancement structure at the master commitment level.
The following table presents a rollforward of the allowance for credit losses on the mortgage loan portfolio for the year ended December 31, 2020. The Bank recorded a de minimis allowance for credit losses on the mortgage loan portfolio for the year ended December 31, 2019.2022 and 2021. The amounts of charge-offs and recoveries of allowance for credit losses on the mortgage loan portfolio were de minimis during the years ended December 31, 20202022 and 2019.2021.
| | | | | | | | | | | |
| | | |
(in millions) | | | | | 2020 | | |
Balance, beginning of the period | | | | | $ | — | | | |
Adjustment for cumulative effect of accounting change | | | | | 3 | | | |
| | | | | | | |
Provision for/(reversal of) credit losses | | | | | 1 | | | |
Balance, end of the period | | | | | $ | 4 | | | |
| | | | | | | | | | | |
| (in millions) | 2022 | | 2021 |
| Balance, beginning of the period | $ | 1 | | | $ | 4 | |
| | | |
| | | |
| Provision for/(reversal of) credit losses | — | | | (3) | |
| Balance, end of the period | $ | 1 | | | $ | 1 | |
For more information on how the Bank determines its estimated allowance for credit losses on mortgage loans, see “Item 8. Financial Statements and Supplementary Data – Note 6 – Mortgage Loans Held for Portfolio.”
The following tables present the payment status for mortgage loans and other delinquency statistics for the Bank’s mortgage loans at December 31, 20202022 and 2019.2021.
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | |
| (Dollars in millions) | Origination Year | | |
| Payment Status | 2018 to 2022 | | Prior to 2018 | | Amortized Cost(1) |
| 30 – 59 days delinquent | $ | 4 | | | $ | 5 | | | $ | 9 | |
| 60 – 89 days delinquent | 2 | | | 1 | | | 3 | |
| 90 days or more delinquent | 11 | | | 8 | | | 19 | |
| Total past due | 17 | | | 14 | | | 31 | |
| Total current loans | 449 | | | 336 | | | 785 | |
| Total MPF | $ | 466 | | | $ | 350 | | | $ | 816 | |
In process of foreclosure, included above(2) | | | | | $ | 3 | |
Nonaccrual loans(3) | | | | | $ | 19 | |
| | | | | |
Serious delinquencies as a percentage of total mortgage loans outstanding(4) | | | | | 2.30 | % |
| | | | | | | | | | | | | | | | | |
| December 31, 2020 | | | | | |
| Origination Year | | |
| Payment Status | <2016 | | 2016 to 2020 | | Amortized Cost(1) |
| 30 – 59 days delinquent | $ | 20 | | | $ | 2 | | | $ | 22 | |
| 60 – 89 days delinquent | 5 | | | 2 | | | 7 | |
| 90 days or more delinquent | 95 | | | 9 | | | 104 | |
| Total past due | 120 | | | 13 | | | 133 | |
| Total current loans | 1,628 | | | 178 | | | 1,806 | |
Total MPF(2) | $ | 1,748 | | | $ | 191 | | | $ | 1,939 | |
In process of foreclosure, included above(3) | | | | | $ | 1 | |
Nonaccrual loans(2)(4) | | | | | $ | 104 | |
| | | | | |
Serious delinquencies as a percentage of total mortgage loans outstanding(2)(5) | | | | | 5.34 | % |
| | | | | |
December 31, 2019 | |
| |
Payment Status | Recorded
Investment(1)
|
30 – 59 days delinquent | $ | 15 | |
60 – 89 days delinquent | 2 | |
90 days or more delinquent | 7 | |
Total past due | 24 | |
Total current loans | 3,310 | |
Total MPF | $ | 3,334 | |
In process of foreclosure, included above(3)
| $ | — | |
Nonaccrual loans | $ | 7 | |
| |
Serious delinquencies as a percentage of total mortgage loans outstanding(5)
| 0.22 | % |
| | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | | | |
| (Dollars in millions) | Origination Year | | |
| Payment Status | 2017 to 2021 | | Prior to 2017 | | Amortized Cost(1) |
| 30 – 59 days delinquent | $ | 7 | | | $ | 2 | | | $ | 9 | |
| 60 – 89 days delinquent | 1 | | | 2 | | | 3 | |
| 90 days or more delinquent | 26 | | | 10 | | | 36 | |
| Total past due | 34 | | | 14 | | | 48 | |
| Total current loans | 729 | | | 204 | | | 933 | |
| Total MPF | $ | 763 | | | $ | 218 | | | $ | 981 | |
In process of foreclosure, included above(2) | | | | | $ | 1 | |
Nonaccrual loans(3) | | | | | $ | 36 | |
| | | | | |
Serious delinquencies as a percentage of total mortgage loans outstanding(4) | | | | | 3.64 | % |
(1) With the adoption of new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020, payment status of mortgage loans is disclosed at amortized cost. The recorded investment at December 31, 2019, in a loan is the unpaid principal balance of the loan, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts, and direct write-downs. The recorded investment is not net of any valuation allowance. The amortized cost at December 31, 2020, in a loan is the unpaid principal balance of the loan, adjusted for net deferred loan fees or costs, unamortized premiums or discounts, and direct write-downs.
(2) At December 31, 2020, unpaid principal balances of conventional mortgage loans held for portfolio that were in a forbearance plan as a result of the COVID-19 pandemic totaled $78. Of that total, $2 were current, $7 were 30 to 59 days past due, $1 were 60 to 90 days past due, and $68 were greater than 90 days past due and in nonaccrual payment status. The conventional mortgage loans in forbearance represent 4% of the Bank’s mortgage loans held for portfolio at December 31, 2020.
(3) Includes loans for which the servicer has reported a decision to foreclose or to pursue a similar alternative, such as deed-in-lieu. Loans in process of foreclosure are included in past due or current loans depending on their delinquency status.
(4)(3) At December 31, 2020, $1032022 and 2021, $7 million and $21 million, respectively, of these mortgage loans on nonaccrual status did not have an associated allowance for credit losses.losses because these loans were either previously charged off to the expected recoverable value or the fair value of the underlying collateral, including any credit enhancements, is greater than the amortized cost of the loans.
(5)(4) Represents loans that are 90 days or more past due or in the process of foreclosure as a percentage of the recorded investment of total mortgage loans outstanding.
Section 4013 of the Coronavirus Aid, Relief,For 2022 and Economic Security Act (CARES Act) provides optional, temporary relief from the accounting and reporting requirements for TDR for certain loan modifications for which borrowers were adversely affected by the COVID-19 pandemic. Specifically, the CARES Act provides that a qualifying financial institution may elect to suspend (i) the requirements under U.S. GAAP for certain loan modifications that would otherwise be categorized as a TDR, and (ii) any determination that such loan modifications would be considered a TDR, including the related accounting. Section 4013 of the CARES Act applies to any modification related to an economic hardship as a result of the COVID-19 pandemic, including an interest rate modification, a repayment plan, or any similar arrangement that defers or delays payment of principal or interest, that occurs during the period beginning on March 1, 2020, until the earlier of December 31, 2020, or 60 days following the termination of the national emergency declared on March 13, 2020. On December 27, 2020, the Consolidated Appropriations Act, 2021, was signed into law, extending the applicable period to the earlier of January 1, 2022, or 60 days following the termination of the national emergency declared on March 13, 2020. The Bank has elected to suspend TDR accounting for eligible modifications under Section 4013 of the CARES Act.
The participating members may grant a forbearance period to borrowers who have requested forbearance based on COVID-19-related difficulties regardless of the status of the loan at the time of the request. The accrual status for loans under forbearance will be driven by the past due status of the loan.
For 2020 and 2019, the interest on nonaccrual loans that was contractually due and recognized in income was immaterial. Delinquencies amounted to 6.84%3.77% of the total loans in the Bank’s portfolio as of December 31, 2020,2022, and 0.72%4.84% of the total loans in the Bank’s portfolio as of December 31, 2019.2021.
The following table presents risk elements and credit ratios for the Bank’s mortgage loans at December 31, 2022 and 2021. The amount of charge-offs and recoveries of allowance for credit losses on the mortgage loan portfolio were de minimis for the years ended December 31, 2022 and 2021.
| | | | | | | | | | | |
Unpaid Principal Balance (Dollars in millions) | 2022 | | 2021 |
| Average loans outstanding during the period | $ | 840 | | | $ | 1,329 | |
| Mortgage loans held for portfolio | $ | 775 | | | $ | 954 | |
| Nonaccrual loans | $ | 17 | | | $ | 35 | |
| Allowance for credit losses on mortgage loans held for portfolio | $ | 1 | | | $ | 1 | |
| | | |
| | | |
| Ratio of net charge-offs to average loans outstanding during the period | 0.02 | % | | 0.06 | % |
| Ratio of allowance for credit losses to mortgage loans held for portfolio | 0.14 | % | | 0.10 | % |
| Ratio of nonaccrual loans to mortgage loans held for portfolio | 2.25 | % | | 3.62 | % |
| Ratio of allowance for credit losses to nonaccrual loans | 6.45 | % | | 2.64 | % |
Investments. The Bank has adopted credit policies and exposure limits for investments that promote risk limitation, diversification, and liquidity. These policies determine eligible counterparties and restrict the amounts and terms of the Bank’s investments with any given counterparty according to the Bank’s own capital position as well as the capital and creditworthiness of the counterparty.
The Bank monitors its investments for substantive changes in relevant market conditions and any declines in fair value. For securities in an unrealized loss position because of factors other than movements in interest rates, such as widening of mortgage asset spreads, the Bank considers whether it expects to recover the entire amortized cost basis of the security by comparing the expectations of the present value of the cash flows to be collected from the security with the amortized cost basis of the security. If the Bank’s expectations
When the fair value of an individual investment security falls below its amortized cost, the Bank evaluates whether an allowance for credit losses is necessary on the security. The Bank recognizes an allowance for credit losses when it determines that it will be unable to recover the entire amortized cost basis of the security and the fair value of the investment security is less than its amortized cost. The Bank considers its intent to hold the security and whether it is more likely than not that the Bank will be required to sell the security before its anticipated recovery of the remaining cost basis, and other factors. The Bank generally views changes in the fair value of the securities caused by movements in interest rates to be temporary.
The following tables presenttable presents the Bank’s investment credit exposure at the dates indicated,December 31, 2022, based on the lowest of the long-term credit ratings provided by Moody’s, S&P, or Fitch Ratings (Fitch) ratings.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment Credit Exposure |
| | | | | | | | | | | | | |
| (In millions) | | | | | | | | | | | | | |
| December 31, 2020 | | | | | | | | | | | | | |
| | | Carrying Value |
| | | | Credit Rating(1) | | | | |
| Investment Type | | | AA | | A | | BBB | | Below Investment Grade | | Unrated | | Total |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| U.S. obligations – Treasury securities | | | $ | 9,240 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 9,240 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| MBS: | | | | | | | | | | | | | |
| Other U.S. obligations – single-family: | | | | | | | | | | | | | |
| Ginnie Mae | | | 264 | | | — | | | — | | | — | | | — | | | 264 | |
| GSEs – single-family: | | | | | | | | | | | | | |
| Freddie Mac | | | 511 | | | — | | | — | | | — | | | — | | | 511 | |
Fannie Mae(2) | | | 1,222 | | | 4 | | | — | | | 3 | | | — | | | 1,229 | |
| Subtotal | | | 1,733 | | | 4 | | | — | | | 3 | | | — | | | 1,740 | |
| GSEs – multifamily: | | | | | | | | | | | | | |
| Freddie Mac | | | 2,695 | | | — | | | — | | | — | | | — | | | 2,695 | |
| Fannie Mae | | | 8,755 | | | — | | | — | | | — | | | — | | | 8,755 | |
| Subtotal | | | 11,450 | | | — | | | — | | | — | | | — | | | 11,450 | |
| Total GSEs | | | 13,183 | | | 4 | | | — | | | 3 | | | — | | | 13,190 | |
| PLRMBS: | | | | | | | | | | | | | |
| Prime | | | 22 | | | 26 | | | 53 | | | 162 | | | 104 | | | 367 | |
| Alt-A | | | 31 | | | 49 | | | 33 | | | 1,298 | | | 548 | | | 1,959 | |
| Total PLRMBS | | | 53 | | | 75 | | | 86 | | | 1,460 | | | 652 | | | 2,326 | |
| Total MBS | | | 13,500 | | | 79 | | | 86 | | | 1,463 | | | 652 | | | 15,780 | |
| Total securities | | | 22,740 | | | 79 | | | 86 | | | 1,463 | | | 652 | | | 25,020 | |
| Interest-bearing deposits | | | 1 | | | 1,077 | | | — | | | — | | | — | | | 1,078 | |
| Securities purchased under agreements to resell | | | 6,000 | | | 1,250 | | | — | | | — | | | — | | | 7,250 | |
| Federal funds sold | | | — | | | 1,880 | | | — | | | — | | | — | | | 1,880 | |
| Total investments | | | $ | 28,741 | | | $ | 4,286 | | | $ | 86 | | | $ | 1,463 | | | $ | 652 | | | $ | 35,228 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | | | | | | | | |
| | | Carrying Value |
| | | | Credit Rating(1) | | | |
| Investment Type | | | AA | | A | | BBB | | Below Investment Grade | | Unrated | | Total |
| | | | | | | | | | | | | |
| U.S. obligations – Treasury securities | | | $ | 7,050 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 7,050 | |
| | | | | | | | | | | | | |
| MBS: | | | | | | | | | | | | | |
| Other U.S. obligations – single-family: | | | | | | | | | | | | | |
| Ginnie Mae | | | 474 | | | — | | | — | | | — | | | — | | | 474 | |
| GSEs – single-family: | | | | | | | | | | | | | |
| Freddie Mac | | | 1,063 | | | — | | | — | | | — | | | — | | | 1,063 | |
Fannie Mae(2) | | | 1,836 | | | 5 | | | — | | | 3 | | | — | | | 1,844 | |
| Subtotal | | | 2,899 | | | 5 | | | — | | | 3 | | | — | | | 2,907 | |
| GSEs – multifamily: | | | | | | | | | | | | | |
| Freddie Mac | | | 3,402 | | | — | | | — | | | — | | | — | | | 3,402 | |
| Fannie Mae | | | 7,992 | | | — | | | — | | | — | | | — | | | 7,992 | |
| Subtotal | | | 11,394 | | | — | | | — | | | — | | | — | | | 11,394 | |
| Total GSEs | | | 14,293 | | | 5 | | | — | | | 3 | | | — | | | 14,301 | |
| PLRMBS: | | | | | | | | | | | | | |
| Prime | | | 35 | | | 39 | | | 71 | | | 201 | | | 127 | | | 473 | |
| Alt-A | | | 58 | | | 53 | | | 60 | | | 1,667 | | | 670 | | | 2,508 | |
| Total PLRMBS | | | 93 | | | 92 | | | 131 | | | 1,868 | | | 797 | | | 2,981 | |
| Total MBS | | | 14,860 | | | 97 | | | 131 | | | 1,871 | | | 797 | | | 17,756 | |
| Total securities | | | 21,910 | | | 97 | | | 131 | | | 1,871 | | | 797 | | | 24,806 | |
| Interest-bearing deposits | | | — | | | 2,269 | | | — | | | — | | | — | | | 2,269 | |
| Securities purchased under agreements to resell | | | 7,000 | | | — | | | — | | | — | | | — | | | 7,000 | |
Federal funds sold(3) | | | 441 | | | 3,121 | | | — | | | — | | | — | | | 3,562 | |
| Total investments | | | $ | 29,351 | | | $ | 5,487 | | | $ | 131 | | | $ | 1,871 | | | $ | 797 | | | $ | 37,637 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment Credit Exposure |
| | | | | | | | | | | | | |
| (In millions) | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | | | |
| Carrying Value |
| | Credit Rating(1) | | | | |
| Investment Type | AAA | | AA | | A | | BBB | | Below Investment Grade | | Unrated | | Total |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| U.S. obligations – Treasury securities | $ | — | | | $ | 4,024 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,024 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| MBS: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Other U.S. obligations – single-family | — | | | 73 | | | — | | | — | | | — | | | — | | | 73 | |
| MBS – GSEs: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
GSEs – single-family(2) | 4 | | | 737 | | | 2 | | | — | | | 2 | | | — | | | 745 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| GSEs – multifamily | — | | | 8,716 | | | — | | | — | | | — | | | — | | | 8,716 | |
| Total MBS – GSEs | 4 | | | 9,453 | | | 2 | | | — | | | 2 | | | — | | | 9,461 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| PLRMBS | — | | | 21 | | | 35 | | | 58 | | | 719 | | | 504 | | | 1,337 | |
| Total MBS | 4 | | | 9,547 | | | 37 | | | 58 | | | 721 | | | 504 | | | 10,871 | |
| Total securities | 4 | | | 13,571 | | | 37 | | | 58 | | | 721 | | | 504 | | | 14,895 | |
| Interest-bearing deposits | — | | | — | | | 3,677 | | | — | | | — | | | — | | | 3,677 | |
Securities purchased under agreements to resell(3) | — | | | 6,250 | | | — | | | — | | | — | | | 750 | | | 7,000 | |
| Federal funds sold | — | | | 1,751 | | | 2,456 | | | 512 | | | — | | | — | | | 4,719 | |
| Total investments | $ | 4 | | | $ | 21,572 | | | $ | 6,170 | | | $ | 570 | | | $ | 721 | | | $ | 1,254 | | | $ | 30,291 | |
(1)Credit ratings of BB and lower are below investment grade.
(2)The Bank has one security guaranteed by Fannie Mae but rated BB at December 31, 2020 and 2019,2022, by S&P because of extraordinary expenses incurred during bankruptcy of the security's sponsor.
(3)Includes $141 million at December 31, 2019, in Federal funds sold to a member counterparty determinedUnrated counterparties were broker-dealers authorized by the BankOffice of Finance for these investments. The securities purchased under agreements to have an internal credit rating equivalent to an AA rating.resell with the broker-dealers were fully guaranteed by the U.S. government.
For all securities in its AFS and HTM portfolios, for Federal funds sold, and for securities purchased under agreements to resell, the Bank does not intend to sell any security and it is not more likely than not that the Bank will be required to sell any security before its anticipated recovery of the remaining amortized cost basis.
The Bank invests in short-term unsecured interest-bearing deposits, short-term unsecured Federal funds sold, and securities purchased under agreements to resell with member and nonmember counterparties, all of which are highly rated.
Bank policies set forth the creditworthiness requirements for member and nonmember counterparties for unsecured credit. All Federal funds counterparties (members and nonmembers) must be federally insured financial institutions or domestic branches of foreign commercial banks. The general unsecured credit policy limits are as follows:
| | December 31, 2020 | | |
| December 31, 2022 | | December 31, 2022 | |
| Unsecured Credit Policy Limits | Unsecured Credit Policy Limits | Unsecured Credit Policy Limits |
| | | Unsecured Credit Limit Amount
(Lower of Percentage of Bank Capital
or Percentage of Counterparty Capital) | | | Unsecured Credit Limit Amount
(Lower of Percentage of Bank Capital
or Percentage of Counterparty Capital) | |
| | Finance Agency Credit Rating(1) | | Maximum Percentage Limit for Outstanding Term(2) | | Maximum
Percentage Limit
for Total Outstanding | | Maximum
Investment
Term (Months) | | Finance Agency Credit Rating(1) | | Maximum Percentage Limit for Outstanding Term(2) | | Maximum
Percentage Limit
for Total Outstanding | | Maximum
Investment
Term (Months) |
| Member counterparty | Member counterparty | FHFA 1 | | 15 | % | | 30 | % | | 3 | | Member counterparty | FHFA 1 | | 15 | % | | 30 | % | | 3 | |
| | FHFA 2 | | 14 | | | 28 | | | 3 | | | FHFA 2 | | 14 | | | 28 | | | 3 | |
| | FHFA 3 | | 9 | | | 18 | | | 3 | | | FHFA 3 | | 9 | | | 18 | | | 3 | |
| | FHFA 4 | | — | | | 6 | | | Overnight | | FHFA 4 | | — | | | 6 | | | Overnight |
| Nonmember counterparty | Nonmember counterparty | FHFA 1 | | 15 | | | 30 | | | 3 | | Nonmember counterparty | FHFA 1 | | 15 | | | 30 | | | 3 | |
| | FHFA 2 | | 14 | | | 28 | | | 3 | | | FHFA 2 | | 14 | | | 28 | | | 3 | |
| | FHFA 3 | | 9 | | | 18 | | | 3 | | | FHFA 3 | | 9 | | | 18 | | | 3 | |
| | | FHFA 4 | | 1.5 | | | 1.5 | | | Derivatives only |
(1)Finance Agency ratings are mapped to equivalent internal credit quality ratings on a rating scale of FHFA 1 through FHFA 7, reflecting progressively lower credit quality. The Bank uses internal credit quality ratings to determine maximum limits to members and nonmembers. The Bank will determine the counterparty’s credit rating by using primary sources such as external ratings, other credit and fixed income research, company reports, and market-based indications.
(2)Term limit applies to unsecured extensions of credit excluding Federal funds transactions with a maturity of one day or less and Federal funds subject to a continuing contract.
The Bank’s unsecured investment credit limits and terms for member counterparties may be less restrictive than for nonmember counterparties because the Bank has access to more information about members to assist in evaluating the member counterparty credit risk.
The Bank actively monitors its credit exposures and the credit quality of its counterparties, including an assessment of each counterparty’s financial performance, capital adequacy, likelihood of parental or sovereign support, and the current market perceptions of the counterparties. The Bank may also consider general macroeconomic and market conditions and political stability when establishing limits on unsecured investments with U.S. branches and agency offices of foreign commercial banks. As a result of deteriorating financial condition or concerns about adverse economic or market developments, the Bank may reduce limits or terms on unsecured investments or suspend a counterparty.
Finance Agency regulations limit the amount of unsecured credit that an individual FHLBank may extend to a single counterparty. In addition, the FHLBanks are prohibited by Finance Agency regulation from investing in financial instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks.
Under Finance Agency regulations, the total amount of unsecured credit that an FHLBank may extend to a group of affiliated counterparties for term extensions of unsecured credit and overnight Federal funds sales, combined, may not exceed 30% of the FHLBank’s total capital. These limits on affiliated counterparty groups are in addition to the limits on extensions of unsecured credit applicable to any single counterparty within the affiliated group.
The following table presents the unsecured credit exposure with counterparties by investment type at December 31, 20202022 and 2019.2021.
| | | | | | | | | | | | |
| Unsecured Investment Credit Exposure by Investment Type | |
| | | | |
| | Carrying Value(1) |
| (In millions) | 2020 | | 2019 | |
| Interest-bearing deposits | $ | 1,077 | | | $ | 2,269 | | |
| | | | |
| | | | |
| Federal funds sold | 1,880 | | | 3,562 | | |
| Total | $ | 2,957 | | | $ | 5,831 | | |
| | | | | | | | | | | | |
| Unsecured Investment Credit Exposure by Investment Type | |
| | | | |
| | Carrying Value(1) |
| (In millions) | 2022 | | 2021 | |
| Interest-bearing deposits | $ | 3,677 | | | $ | 1,125 | | |
| | | | |
| | | | |
| Federal funds sold | 4,719 | | | 5,348 | | |
| Total | $ | 8,396 | | | $ | 6,473 | | |
(1)Excludes unsecured investment credit exposure to U.S. government agencies and instrumentalities, government-sponsored enterprises, and supranational entities and does not include related accrued interest as of December 31, 20202022, and 2019.2021.
The following table presents the credit ratings of the unsecured investment credit exposures presented by the domicile of the counterparty or the domicile of the counterparty’s parent for U.S. branches and agency offices of foreign commercial banks, based on the lowest of the credit ratings provided by Moody’s, S&P, or Fitch ratings. This table does not reflect the foreign sovereign government’s credit rating. At December 31, 2020, 64%2022, 50% of the Bank’s total unsecured investments were to U.S. branches and agency offices of foreign commercial banks. At December 31, 2020,2022, all of the unsecured investments held by the Bank had overnight maturities.
| | | | | | | | | | | |
Ratings of Unsecured Investment Credit Exposure by Domicile of Counterparty |
| | | | | | | |
(In millions) | | | | | | | |
December 31, 2020 | | | | | | | |
| | | Carrying Value(1)
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| | | Credit Rating(2)
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Domicile of Counterparty | | | A | | | | |
Domestic | | | $ | 1,077 | | | | | |
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U.S. branches and agency offices of foreign commercial banks: | | | | | | | |
Australia | | | 500 | | | | | |
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Canada | | | 1,000 | | | | | |
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Netherlands | | | 380 | | | | | |
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Total U.S. branches and agency offices of foreign commercial banks | | | 1,880 | | | | | |
Total unsecured credit exposure | | | $ | 2,957 | | | | | |
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| Ratings of Unsecured Investment Credit Exposure by Domicile of Counterparty |
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| (In millions) | | | | | | | |
| December 31, 2022 | | | | | | | |
| Carrying Value(1) |
| | Credit Rating(2) | | |
| Domicile of Counterparty | AA | | A | | BBB | | Total |
| Domestic | $ | — | | | $ | 3,327 | | | $ | 512 | | | $ | 3,839 | |
| U.S. subsidiaries of foreign commercial banks | — | | | 350 | | | — | | | 350 | |
| Total domestic and U.S. subsidiaries of foreign commercial banks | — | | | 3,677 | | | 512 | | | 4,189 | |
| U.S. branches and agency offices of foreign commercial banks: | | | | | | | |
| Australia | — | | | 1,646 | | | — | | | 1,646 | |
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| Canada | 1,251 | | | 100 | | | — | | | 1,351 | |
| Finland | 500 | | | — | | | — | | | 500 | |
| France | — | | | 300 | | | — | | | 300 | |
| Germany | — | | | 410 | | | — | | | 410 | |
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| Total U.S. branches and agency offices of foreign commercial banks | 1,751 | | | 2,456 | | | — | | | 4,207 | |
| Total unsecured credit exposure | $ | 1,751 | | | $ | 6,133 | | | $ | 512 | | | $ | 8,396 | |
(1)Excludes unsecured investment credit exposure to U.S. government agencies and instrumentalities, government-sponsored enterprises, and supranational entities and does not include related accrued interest as of December 31, 2020.2022.
(2)Does not reflect changes in ratings, outlook, or watch status occurring after December 31, 2020.2022. These ratings represent the lowest rating available for each unsecured investment owned by the Bank, based on the ratings provided by Fitch, Moody’s, or S&P. The Bank’s internal rating may differ from this rating.
The Bank’s MBS investments include PLRMBS, all of which were AAA-rated at the time of purchase, and agency residential MBS, which are backed by Fannie Mae, Freddie Mac, or Ginnie Mae. Some of the PLRMBS were issued by and/or purchased from members, former members, or their affiliates. The Bank has investment credit limits and terms for these investments that do not differ for members and nonmembers. Regulatory policy limits total MBS investments, including unpaid principal balance, unamortized premiums and discounts, and net charge-offs, to three times the Bank’s regulatory capital at the time of purchase. At December 31, 2020,2022, the Bank’s MBS portfolio was 261%148% of Bank regulatory capital (as determined in accordance with regulations governing the operations of the FHLBanks). The Bank has not purchased any PLRMBS since the first quarter of 2008.
The Bank executes all MBS investments without preference to the status of the counterparty or the issuer of the investment as a nonmember, member, or affiliate of a member. When the Bank executes non-MBS investments with members, the Bank may give consideration to their secured credit availability and the Bank’s advances price levels.
At December 31, 2020,2022, PLRMBS representing 12%10% of the amortized cost of the Bank’s MBS portfolio were labeled Alt-A by the issuer. These PLRMBS are generally collateralized by mortgage loans that are considered less risky than subprime loans but more risky than prime loans. These loans are generally made to borrowers with credit scores that are high enough to qualify for a prime mortgage loan, but the loans may not meet standard underwriting guidelines for documentation requirements, property type, or loan-to-value ratios.
As of December 31, 2020,2022, the Bank’s investment in MBS had gross unrealized losses totaling $36$128 million, $26$37 million of which were related to PLRMBS. These gross unrealized losses were primarily due to illiquidity in the MBS market and market expectations of the credit performance of loan collateral underlying these securities, which caused these assets to be valued at discounts to their amortized cost.
For its agency MBS, the Bank expects to recover the entire amortized cost basis of these securities because the Bank determined that the strength of the issuers’ guarantees through direct obligations or support from the U.S. government is sufficient to protect the Bank from losses. As a result, the Bank determined that, as of December 31, 2020,2022, all of the gross unrealized losses on its agency MBS are temporary.
If conditions in the housing and mortgage markets and general business and economic conditions deteriorate, the fair value of MBS may decline further, and the Bank may experience additional credit losses on additional PLRMBS in future periods, as well as further impairment of PLRMBS that were identified as other-than-temporarily impaired prior to January 1, 2020.periods. Additional credit losses could adversely affect the Bank’s earnings and retained earnings and its ability to pay dividends and repurchase capital stock. The Bank cannot predict whether it will be required to record an allowance for credit losses on its PLRMBS in the future.
The Bank has exposure to investment securitiesMBS with interest rates indexed to LIBOR. The following table presentstables present the unpaid principal balance of adjustable rate investment securitiesMBS by interest rate index and the unpaid principal balance of LIBOR-indexed MBS for LIBOR tenors that cease or will no longer be representative immediately after June 30, 2023, by redemption term at December 31, 20202022, and 2019.2021. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” for more information on the LIBOR transition and on SOFR as an alternative market benchmark.
| | Adjustable Rate Investment Securities by Interest Rate Index | | |
| Adjustable Rate MBS by Interest Rate Index | | Adjustable Rate MBS by Interest Rate Index | |
| (In millions) | (In millions) | | MBS | | (In millions) | | | |
| Interest Rate Index | Interest Rate Index | | 2020 | | | 2019 | | Interest Rate Index | | 2022 | | | 2021 | |
LIBOR(1) | LIBOR(1) | | $ | 5,744 | | | | $ | 7,533 | | | LIBOR(1) | | $ | 2,958 | | | | $ | 4,110 | | |
| | Constant maturity Treasury | Constant maturity Treasury | | 101 | | | | — | | | Constant maturity Treasury | | 51 | | | | 64 | | |
| Other | | 1 | | | | 132 | | | |
| Total adjustable rate investment securities(2) | Total adjustable rate investment securities(2) | | $ | 5,846 | | | | $ | 7,665 | | | Total adjustable rate investment securities(2) | | $ | 3,009 | | | | $ | 4,174 | | |
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| LIBOR-Indexed MBS by Redemption Term |
| (In millions) | |
| Redemption Term | 2022 | | 2021 |
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| Due through June 30, 2023 | $ | 5 | | | $ | 12 | |
Due thereafter(2) | 2,953 | | | 4,098 | |
| Total LIBOR-Indexed investment securities | $ | 2,958 | | | $ | 4,110 | |
(1)Certain MBS with multiple indices where LIBOR is the majority index are included in this amount. At December 31, 2020 and 2019, all LIBOR-indexed MBS were due in 2022 and thereafter.
(2)For more information on the Bank’s Transition Plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.”
The following table presents the maturity (based on contractual final principal payment) and yield characteristics of the Bank’s investment portfolio as of December 31, 2022.
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| (Dollars in millions) | Within One Year | | After One Year But
Within Five Years | | After Five Years But
Within Ten Years | | After Ten Years | | Carrying Value |
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| AFS securities: | | | | | | | | | |
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| U.S. obligations – Treasury notes | $ | — | | | $ | 4,024 | | | $ | — | | | $ | — | | | $ | 4,024 | |
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| MBS: | | | | | | | | | |
| GSEs multifamily: | | | | | | | | | |
| Freddie Mac | — | | | — | | | 604 | | | 103 | | | 707 | |
| Fannie Mae | — | | | — | | | 6,441 | | | 359 | | | 6,800 | |
| Subtotal GSEs multifamily | — | | | — | | | 7,045 | | | 462 | | | 7,507 | |
| PLRMBS | — | | | — | | | 2 | | | 1,180 | | | 1,182 | |
| Total AFS securities | $ | — | | | $ | 4,024 | | | $ | 7,047 | | | $ | 1,642 | | | $ | 12,713 | |
Yield on AFS securities(1) | — | % | | 1.31 | % | | 3.35 | % | | 8.79 | % | | 3.41 | % |
| HTM securities: | | | | | | | | | |
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| MBS: | | | | | | | | | |
| Other U.S. obligations – single-family – Ginnie Mae | $ | — | | | $ | — | | | $ | — | | | $ | 72 | | | $ | 72 | |
| GSEs single-family: | | | | | | | | | |
| Freddie Mac | — | | | — | | | — | | | 140 | | | 140 | |
| Fannie Mae | — | | | — | | | 23 | | | 582 | | | 605 | |
| Subtotal GSEs single-family | — | | | — | | | 23 | | | 722 | | | 745 | |
| GSEs multifamily: | | | | | | | | | |
| Freddie Mac | 9 | | | 581 | | | 34 | | | — | | | 624 | |
| Fannie Mae | — | | | 585 | | | — | | | — | | | 585 | |
| Subtotal GSEs multifamily | 9 | | | 1,166 | | | 34 | | | — | | | 1,209 | |
| PLRMBS | — | | | 2 | | | 12 | | | 141 | | | 155 | |
| Total HTM securities | $ | 9 | | | $ | 1,168 | | | $ | 69 | | | $ | 935 | | | $ | 2,181 | |
Yield on HTM securities(1) | 4.60 | % | | 4.56 | % | | 4.14 | % | | 3.50 | % | | 4.09 | % |
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(1) The weighted average yields on AFS and HTM securities are calculated as the sum of each debt security using the period end balances multiplied by the coupon rate adjusted by the impact of amortization and accretion of premiums and discounts, divided by the total debt securities in the applicable HTM or AFS portfolio. The result is then multiplied by 100 to express it as a percentage.
Derivative Counterparties. The Bank has adopted credit policies and exposure limits for uncleared derivatives counterparty credit exposure. Over-the-counter derivativesInterest rate exchange agreements may be either entered into directly withuncleared or cleared at a counterparty (uncleared derivatives) or executed either with an executing dealer or on a swap execution facility and then cleared through a futures commission merchant (clearing agent) with a derivatives clearing organization (cleared derivatives).house.
Uncleared Derivatives.Derivatives – The Bank selects only highly rated derivative dealers and major banks (derivative dealer counterparties) that meet the Bank’s eligibility criteria to act as counterparties for its uncleared derivative activities. In addition, for all uncleared derivative transactions, the Bank has entered into master netting agreements and bilateral credit support agreements with all activeits derivative dealer counterparties that provide for delivery of collateral at specified levelsmargin to limit the Bank’s net unsecured credit exposure to these counterparties. Under these policies and agreements, the amount of unsecured credit exposure to an individual derivative dealer counterparty is set at zero (subject to a minimum transfer amount).
Uncleared derivative transactions executed on or after September 1, 2022, are subject to two-way initial margin requirements as mandated by regulatory requirements issued in response to the Wall Street Reform and Consumer Protection Act, if the Bank’s average aggregate notional amount of uncleared derivative transactions exceeds a specified threshold. The initial margin is required to be held at a third-party custodian and does not change
ownership. The Bank, or its counterparty, can only take ownership upon the occurrence of certain events, including an event of default due to bankruptcy, insolvency, or similar proceeding.
All uncleared derivative transactions entered into by the Bank on or after March 1, 2017, are fully collateralized and subject to a minimum transfer amount, in accordance with variation margin requirements issued by the U.S. Federal bank regulatory agencies and the U.S. Commodity Futures Trading Commission.
The Bank is subject to the risk of potential nonperformance by the counterparties toits counterparty in a derivative agreements.transaction. A counterparty generally must deliver collateralor return margin to the Bank if the total market value of the Bank’sunsecured exposure to that counterparty rises above a specific trigger point. Currently, all ofexceeds the Bank’s active uncleared derivative counterparties have a zero threshold. minimum transfer amount.
As a result of these risk mitigation initiatives, the Bank does not anticipate any credit losses on its uncleared derivative transactions with counterparties as of December 31, 2020.
Cleared Derivatives.Derivatives – TheIn a cleared derivatives transaction, the Bank is subject to nonperformance by the derivatives clearing organizations (clearinghouses)house and its futures commission merchant or clearing agents.agent. The requirement that the Bank post initial and variation margin through a clearing agent to the clearinghouse,clearing house exposes the Bank to institutional credit risk in the event thatif the clearing agent or the clearinghouse fails to meet its obligations. The use of cleared derivatives, however, mitigates the Bank’sa clearing house, or central counterparty, lowers overall credit risk exposure because a centralit employs standard valuation and initial and variation margin processes and is specifically designed to withstand remote but plausible counterparty is substituted for individual counterparties.default credit events. Variation margin and initial margin areis posted or collected for changes in the value of the portfolio, and initial margin is posted for changes in risk profile of cleared derivatives. Due to declinesthe portfolio. Because of an increase in market values of cleared derivatives during 2020,2022 and 2021, there was an increase in variation margin postedcollected on cleared derivatives to the clearinghouses resultingthat resulted in an increase in net cash used inprovided by operating activities reported on the Statements of Cash Flows during the period.Flows. The Bank does not anticipate any credit losses on its cleared derivatives as of December 31, 2020. The increase or decrease in the credit exposure net of cash collateral, from one period to the next, may be affected by changes in several variables, such as the size and composition of the portfolio, market values of derivatives, and accrued interest. Based on the master netting arrangements, its credit analyses, and the collateral requirements in place with each counterparty, the Bank does not currently expect to incur any credit losses on its derivative agreements.
The following tables present the Bank’s credit exposure to its derivative dealer counterparties at the dates indicated.
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| Credit Exposure to Derivative Dealer Counterparties |
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| (In millions) | | | | | | | | | |
| December 31, 2020 | | | | | | | | | |
Counterparty Credit Rating(1) | Notional Amount | | Net Fair Value of Derivatives Before Collateral | | Cash Collateral Pledged
to/ (from) Counterparty | | Noncash Collateral Pledged
to/ (from) Counterparty | | Net Credit
Exposure to Counterparties |
| Asset positions with credit exposure: | | | | | | | | | |
| Uncleared derivatives | | | | | | | | | |
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| A | $ | 91 | | | $ | 3 | | | $ | (3) | | | $ | — | | | $ | — | |
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| Liability positions with credit exposure: | | | | | | | | | |
| Uncleared derivatives | | | | | | | | | |
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| A | 101 | | | (4) | | | 4 | | | — | | | — | |
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Cleared derivatives(2) | 71,417 | | | (12) | | | 13 | | | 379 | | | 380 | |
| Total derivative positions with credit exposure to nonmember counterparties | 71,609 | | | (13) | | | 14 | | | 379 | | | 380 | |
Member institutions(3) | 1 | | | — | | | — | | | — | | | — | |
| Total | 71,610 | | | $ | (13) | | | $ | 14 | | | $ | 379 | | | $ | 380 | |
| Derivative positions without credit exposure | 7,035 | | | | | | | | | |
| Total notional | $ | 78,645 | | | | | | | | | |
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| December 31, 2019 | | | | | | | | | |
Counterparty Credit Rating(1) | Notional Amount | | Net Fair Value of Derivatives Before Collateral | | Cash Collateral Pledged
to/ (from) Counterparty | | Non-cash Collateral Pledged
to/ (from) Counterparty | | Net Credit
Exposure to Counterparties |
| Asset positions with credit exposure: | | | | | | | | | |
| Uncleared derivatives | | | | | | | | | |
| | | | | | | | | |
| A | $ | 488 | | | $ | 2 | | | $ | (2) | | | $ | — | | | $ | — | |
| BBB | 493 | | | 1 | | | (1) | | | — | | | — | |
Cleared derivatives(2) | 89,550 | | | 8 | | | 7 | | | 381 | | | 396 | |
| Liability positions with credit exposure: | | | | | | | | | |
| Uncleared derivatives | | | | | | | | | |
| AA | 1,263 | | | (46) | | | 49 | | | — | | | 3 | |
| A | 8,296 | | | (266) | | | 279 | | | — | | | 13 | |
| BBB | 713 | | | (41) | | | 43 | | | — | | | 2 | |
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| Total derivative positions with credit exposure to nonmember counterparties | 100,803 | | | (342) | | | 375 | | | 381 | | | 414 | |
Member institutions(3) | 46 | | | — | | | — | | | — | | | — | |
| Total | 100,849 | | | $ | (342) | | | $ | 375 | | | $ | 381 | | | $ | 414 | |
| Derivative positions without credit exposure | 223 | | | | | | | | | |
| Total notional | $ | 101,072 | | | | | | | | | |
(1)The credit ratings used by the Bank are based on the lower of Moody's or S&P ratings.
(2)Represents derivative transactions cleared with LCH Ltd, the Bank’s clearinghouse, which was rated AA- by S&P at December 31, 2020 and 2019, with a Stable and Negative CreditWatch by S&P at December 31, 2020 and 2019, respectively.
(3)Member institutions include mortgage delivery commitments with members.2022.
The increase or decrease in the credit exposure net of cash collateral, from one period to the next, may be affected by changes in several variables, such as interest rates, the size and composition of the portfolio, market values of derivatives, and accrued interest. Based on the master netting arrangements, its credit analyses, and the collateral requirements in place with each counterparty, the Bank does not expect to incur any credit losses on its derivative agreements.
The following tables present the Bank’s credit exposure to its derivative dealer counterparties at the dates indicated.
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| Credit Exposure to Derivative Dealer Counterparties |
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| (In millions) | | | | | | | | | |
| December 31, 2022 | | | | | | | | | |
Counterparty Credit Rating(1) | Notional Amount | | Net Fair Value of Derivatives Before Collateral | | Cash Collateral Pledged
to/ (from) Counterparty | | Noncash Collateral Pledged
to/ (from) Counterparty | | Net Credit
Exposure to Counterparties |
| Asset positions with credit exposure: | | | | | | | | | |
| Uncleared derivatives | | | | | | | | | |
| | | | | | | | | |
| A | $ | 6,115 | | | $ | 38 | | | $ | (35) | | | $ | — | | | $ | 3 | |
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Cleared derivatives(2) | 89,148 | | | 7 | | | 14 | | | 435 | | | 456 | |
| Liability positions with credit exposure: | | | | | | | | | |
| Uncleared derivatives | | | | | | | | | |
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| A | 11,246 | | | (356) | | | 358 | | | — | | | 2 | |
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| Total derivative positions with credit exposure to nonmember counterparties | 106,509 | | | $ | (311) | | | $ | 337 | | | $ | 435 | | | $ | 461 | |
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| Derivative positions without credit exposure | 10,284 | | | | | | | | | |
| Total notional | $ | 116,793 | | | | | | | | | |
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| December 31, 2021 | | | | | | | | | |
(In millions) Counterparty Credit Rating(1) | Notional Amount | | Net Fair Value of Derivatives Before Collateral | | Cash Collateral Pledged
to/ (from) Counterparty | | Non-cash Collateral Pledged
to/ (from) Counterparty | | Net Credit
Exposure to Counterparties |
| Asset positions with credit exposure: | | | | | | | | | |
| Uncleared derivatives | | | | | | | | | |
| | | | | | | | | |
| A | $ | 1,500 | | | $ | 9 | | | $ | (9) | | | $ | — | | | $ | — | |
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| Liability positions with credit exposure: | | | | | | | | | |
| Uncleared derivatives | | | | | | | | | |
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| A | 42 | | | (1) | | | 1 | | | — | | | — | |
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Cleared derivatives(2) | 45,235 | | | (7) | | | 15 | | | 252 | | | 260 | |
| Total derivative positions with credit exposure to nonmember counterparties | 46,777 | | | $ | 1 | | | $ | 7 | | | $ | 252 | | | $ | 260 | |
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| Derivative positions without credit exposure | 16,839 | | | | | | | | | |
| Total notional | $ | 63,616 | | | | | | | | | |
(1)The credit ratings used by the Bank are based on the lower of Moody's or S&P ratings.
(2)Represents derivative transactions cleared with LCH Ltd, the Bank’s clearing house, which was rated AA- with a Stable CreditWatch by S&P at December 31, 2022 and 2021.
The Bank primarily executes overnight index swap derivatives indexed to the Overnight Index Swap (OIS) rate andbased on SOFR to manage interest rate risk and monitors marketwide efforts to address fallback language related to LIBOR-indexed derivative transactions.risk. The following table presents the notional amount of interest rate swaps by interest rate index broken out by the pay or receive leg at December 31, 20202022 and 2019.2021.
| | LIBOR-Indexed Interest Rate Swaps by Interest Rate Index | LIBOR-Indexed Interest Rate Swaps by Interest Rate Index | LIBOR-Indexed Interest Rate Swaps by Interest Rate Index |
| | (In millions) | (In millions) | 2020 | | 2019 | (In millions) | 2022 | | 2021 |
| Interest Rate Index | Interest Rate Index | Pay Leg | | Receive Leg | | Pay Leg | | Receive Leg | Interest Rate Index | Pay Leg | | Receive Leg | | Pay Leg | | Receive Leg |
| Fixed | Fixed | $ | 47,425 | | | $ | 24,640 | | | $ | 47,393 | | | $ | 31,953 | | Fixed | $ | 58,910 | | | $ | 57,883 | | | $ | 25,846 | | | $ | 37,220 | |
| LIBOR | LIBOR | 2,578 | | | 9,647 | | | 26,171 | | | 15,564 | | LIBOR | 55 | | | 504 | | | 337 | | | 1,533 | |
| SOFR | SOFR | 20,481 | | | 32,609 | | | 1,965 | | | 39,264 | | SOFR | 57,577 | | | 57,523 | | | 35,887 | | | 22,526 | |
| OIS | 7,380 | | | 10,968 | | | 24,517 | | | 13,265 | | |
| Overnight Index Swap – Effective Federal Funds Rate | | Overnight Index Swap – Effective Federal Funds Rate | 251 | | | 883 | | | 996 | | | 1,787 | |
| Total notional amount | Total notional amount | $ | 77,864 | | | $ | 77,864 | | | $ | 100,046 | | | $ | 100,046 | | Total notional amount | $ | 116,793 | | | $ | 116,793 | | | $ | 63,066 | | | $ | 63,066 | |
The following tables present the notional amount of interest rate swaps with LIBOR exposure for LIBOR tenors that cease or will no longer be representative immediately after June 30, 2023, by termination date broken out by the pay or receive leg and further bifurcated by cleared and uncleared derivative transactions at December 31, 20202022 and 2019.2021. As of December 31, 2020,2022, there were no interest rate caps and floors indexed to LIBOR. At December 31, 2021, interest rate caps and floors indexed to LIBOR totaling $230 million were due to terminate in 2021 and totalingtotaled $550 million were due to terminate in 2022 and thereafter. As of December 31, 2019, interest rate caps and floors indexed to LIBOR totaling $430 million were due to terminate in 2021 and totaling $550 million were due to terminate in 2022 and thereafter.million. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” for more information on the LIBOR transition and on SOFR as an alternative market benchmark.
| | LIBOR-Indexed Interest Rate Swaps by Termination Date | LIBOR-Indexed Interest Rate Swaps by Termination Date | LIBOR-Indexed Interest Rate Swaps by Termination Date |
| | December 31, 2022 | | December 31, 2022 | | | |
| (In millions) | (In millions) | | (In millions) | Pay Leg | | Receive Leg |
| December 31, 2020 | | |
| Pay Leg | | Receive Leg | |
| Termination Date | Termination Date | Cleared | | Uncleared | | Cleared | | Uncleared | Termination Date | Cleared | | | Cleared | | Uncleared |
| | Terminates in 2021 | $ | 1,523 | | | $ | 238 | | | $ | 6,852 | | | $ | 213 | | |
Terminates in 2022 and thereafter(1) | 687 | | | 130 | | | 2,054 | | | 528 | | |
| | Terminates through June 30, 2023 | | Terminates through June 30, 2023 | $ | 50 | | | | $ | 303 | | | $ | 19 | |
Terminates thereafter(1) | | Terminates thereafter(1) | 5 | | | | 182 | | | — | |
| Total Notional Amount | Total Notional Amount | $ | 2,210 | | | $ | 368 | | | $ | 8,906 | | | $ | 741 | | Total Notional Amount | $ | 55 | | | | $ | 485 | | | $ | 19 | |
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|
| December 31, 2019 | | | | | | | |
| Pay Leg | | Receive Leg |
| Termination Date | Cleared | | Uncleared | | Cleared | | Uncleared |
| Terminates in 2020 | $ | 19,062 | | | $ | 1,360 | | | $ | 8,448 | | | $ | 760 | |
| Terminates in 2021 | 3,920 | | | 1,137 | | | 2,094 | | | 368 | |
Terminates in 2022 and thereafter(1) | 272 | | | 420 | | | 2,793 | | | 1,101 | |
| Total Notional Amount | $ | 23,254 | | | $ | 2,917 | | | $ | 13,335 | | | $ | 2,229 | |
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|
| December 31, 2021 | | | | | | | |
| (In millions) | Pay Leg | | Receive Leg |
| Termination Date | Cleared | | Uncleared | | Cleared | | Uncleared |
| | | | | | | |
| | | | | | | |
| Terminates in 2022 | $ | 210 | | | $ | 35 | | | $ | 517 | | | $ | 112 | |
| Terminates through June 30, 2023 | 52 | | | — | | | 309 | | | 23 | |
Terminates thereafter(1) | 40 | | | — | | | 562 | | | 10 | |
| Total Notional Amount | $ | 302 | | | $ | 35 | | | $ | 1,388 | | | $ | 145 | |
(1)For more information on the Bank’s Transition Plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.”
Market Risk
Market Risk
Market risk is defined as the risk to the Bank’s market value of capital and future earnings (excluding the impact of any cumulative net gains or losses on derivatives and associated hedged items and on financial instruments carried at fair value) as a result of movements in market interest rates, interest rate spreads, interest rate volatility, and other market factors (market rate factors). This profile reflects the Bank’s objective of maintaining a conservative asset-liability mix and its commitment to providing value to its members through products and dividends without subjecting their investments in Bank capital stock to significant market risk.
The Bank’s Risk Management PolicyAppetite Framework includes a market risk management objective aimed at maintaining a relatively low adverse exposure of the market value of capital and future earnings (excluding the impact of any cumulative net gains or losses on derivatives and associated hedged items and on financial instruments carried at fair value) to changes in market rate factors. See “Total Bank Market Risk” below.
Market risk identification and measurement are primarily accomplished through market value of capital sensitivity analyses and projected earnings and adjusted return onnet interest income as a percent of the capital sensitivity analyses. The Risk Management PolicyAppetite Framework approved by the Bank’s Boardboard of Directorsdirectors establishes market risk policy limits and market risk measurement standards at the total Bank level as well as at the business segment level. Additional guidelines approved by the Bank’s Enterprise Risk Committee apply to the Bank’s two business segments, the advances-related business and the mortgage-related business. These guidelines provide limits that are monitored at the segment level and are consistent with the Bank’s policy limits.Risk Appetite Framework. Market risk is managed for each business segment on a daily basis, as discussed below in “Segment Market Risk.” Compliance with Bank policieslimits and guidelines is reviewed by the Bank’s Boardboard of Directorsdirectors on a regular basis, along with a corrective action plan if applicable.
Total Bank Market Risk
Market Value of Capital Sensitivity – The Bank uses market value of capital sensitivity (the interest rate sensitivity of the net fair value of all assets, liabilities, and interest rate exchange agreements) as an important measure of the Bank’s exposure to changes in interest rates.
The Bank’s market value of capital sensitivity policyrisk limits for the potential adverse impact of an instantaneous parallel shift of a plus or minus 100-basis-point change in interest rates from current rates (base case) tois no worse than 4.0% ofa 3.0% change in the estimated market value of capital. In addition, the policyrisk limits for the potential adverse impact of an instantaneous plus or minus 100-basis-point change in interest rates measured from interest rates that are 200 basis points above or below the base case tois no worse than 6.0%4.0% of the estimated market value of capital. In the case where a market risk sensitivity compliance metric cannot be estimated with a parallel shift in interest rates because of prevailing low interest rates, the sensitivity metric is not reported. The Bank’s measured market value of capital sensitivity was within the policy limits as of December 31, 2020.2022.
To determine the Bank’s estimated risk sensitivities to interest rates for the market value of capital sensitivity, the Bank uses a third-party proprietary asset and liability system to calculate estimated market values under alternative interest rate scenarios. The system analyzes all of the Bank’s financial instruments, including derivatives, on a
transaction-level basis using sophisticated valuation models with consistent and appropriate behavioral assumptions and current position data. The system also includes a third-party mortgage prepayment model.
At least annually, the Bank reexamines the major assumptions and methodologies used in the model, including interest rate curves, spreads for discounting, and mortgage prepayment assumptions. The Bank also compares the mortgage prepayment assumptions in the third-party model to other sources, including actual mortgage prepayment history.
The following table presents the sensitivity of the market value of capital (the market value of all of the Bank’s assets, liabilities, and associated interest rate exchange agreements, with mortgage assets valued using market spreads implied by current market prices) to changes in interest rates. The table presents the estimated percentage change in the Bank’s market value of capital that would be expected to result from changes in interest rates under different interest rate scenarios, using market spread assumptions.assumptions as of December 31, 2022 and 2021.
| Market Value of Capital Sensitivity
Estimated Percentage Change in Market Value of Bank Capital
for Various Changes in Interest Rates | Market Value of Capital Sensitivity
Estimated Percentage Change in Market Value of Bank Capital
for Various Changes in Interest Rates | Market Value of Capital Sensitivity
Estimated Percentage Change in Market Value of Bank Capital
for Various Changes in Interest Rates |
| Interest Rate Scenario(1) | Interest Rate Scenario(1) | 2020 | | 2019 | | Interest Rate Scenario(1) | 2022 | | 2021 | |
| +200 basis-point change above current rates | +200 basis-point change above current rates | –3.0 | % | –2.4 | % | +200 basis-point change above current rates | –2.8 | % | –2.3 | % |
| +100 basis-point change above current rates | +100 basis-point change above current rates | –1.3 | | –1.1 | | +100 basis-point change above current rates | –1.4 | | –0.9 | |
–100 basis-point change below current rates(2) | –100 basis-point change below current rates(2) | +4.9 | | +1.1 | | –100 basis-point change below current rates(2) | +1.3 | | +0.5 | |
–200 basis-point change below current rates(2) | –200 basis-point change below current rates(2) | +5.2 | | +6.9 | | –200 basis-point change below current rates(2) | +2.3 | | +4.9 | |
(1)Instantaneous change from actual rates at dates indicated.
(2)Interest rates for each maturity are limited to non-negative rates.
The Bank’s estimates of the sensitivity of the market value of capital to changes in interest rates as of December 31, 2020,2022, are comparable with the estimates as of December 31, 2019,2021, with the exception of the declining rate scenarios, primarily the down 100 basis-point scenario. Given the significant declinescenarios. The increase in interest rates from yearend resulted in 2020,a larger absolute downward rate shocks for all term points. Compared to yearend, interest rates on a subsetas of the Bank’s floating rate instruments cannot decrease to the same extent that interest rates in the rising rate scenarios can increase because of embedded interest rate floors in both declining scenarios. Interest rates continue to remain at historically low levels,December 31, 2022, have increased ranging from 4393 basis points for the one-month Treasury bill, to 91271 basis points for the ten-yearfive-year Treasury note, and 233 basis points for the 10-year Treasury note.
The Bank’s Risk Management Policy provides guidelines for the payment of dividends and the repurchase of excess capital stock based on the ratio of the Bank’s estimated market value of total capital to par value of capital stock. If this ratio at the end of any quarter is: (i) less than 100% but greater than or equal to 90%, any dividend would be limited to an annualized rate no greater than the daily average of the Federal funds effective rate for the applicable quarter (subject to certain conditions), and any excess capital stock repurchases would not exceed $500 million (subject to certain conditions); (ii) less than 90% but greater than or equal to 70%, any dividend and any excess capital stock repurchases would be subject to the same limitations and conditions as in (i) above, except that any excess capital stock repurchases would not exceed 4% of the Bank’s outstanding capital stock as of the repurchase date; and (iii) less than 70%, the Bank would not pay a dividend, not repurchase excess capital stock (but continue to redeem excess capital stock as provided in the Bank’s capital plan), limit the acquisition of certain assets, and review the Bank’s risk policies. A decision by the Boardboard of Directorsdirectors to declare or not declare any dividend or repurchase any excess capital stock is a discretionary matter and is subject to the requirements and restrictions of the FHLBank Act and applicable requirements under the regulations governing the operations of the FHLBanks. The ratio of the Bank’s estimated market value of total capital to par value of capital stock was 280%205% as of December 31, 2020.2022.
Adjusted Return onNet Interest Income as a Percent of Capital – The adjusted return onnet interest income as a percent of capital is a non-GAAP measure used by the Bank to assess financial performance. The adjusted return on capitalmeasurement is based on current period economic earnings that exclude the effects of unrealized net gains or losses resulting from the Bank’s derivatives and associated hedged items and from financial instruments carried at fair value, which will generally reverse through changes in future valuations and settlements of contractual interest cash flows over the remaining contractual terms to maturity or by the call or put date of the assets and liabilities held under the fair value option,
hedged assets and liabilities, and derivatives. Economic earnings also exclude the interest expense on mandatorily redeemable capital stock and the 20% of net income allocated to the Bank’s restricted retained earnings account in accordance with the FHLBanks’ JCE Agreement. Economic earnings exclude these amounts in order to more accurately reflect the amount of earnings that may be available to be paid as dividends to shareholders. With the decline in consolidated obligations outstanding in 2020, the Bank 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 restricted retained earnings.stock.
The Bank limitsBank’s Risk Appetite Framework incorporates a limit on the adverse sensitivity of projected financial performance throughnet interest income as a Boardpercent of Directors policy limit on projected adverse changes in the adjusted return on capital. The Bank’s adjusted returnnet interest income on capital sensitivity policy limitslimit to the potential adverse impact of an instantaneous parallel shift of a plus or minus 200-basis-point change in interest rates from current rates (base case) to no worse than –120a –210 basis points change from the base casebase-case projected adjusted returnnet interest income on capital. Given the current low interest rate environment, in the downward shift interest rates were limited to non-negative rates. With the indicated interest rate shifts, the adjusted returnnet interest income on capital for the projected 12-month horizon would be expectedis projected to decrease by 4 basis points in the –200 basis-points scenario, wellremain within the policy limit of –120–210 basis points.
Duration Gap – Duration gap is the difference between the estimated durations (market value sensitivity) of assets and liabilities (including the impact of interest rate exchange agreements) and reflects the extent to which estimated maturity and repricing cash flows for assets and liabilities are matched. The Bank monitors duration gap analysis at the total Bank level and does not have a policyrisk limit.
| | Total Bank Duration Gap Analysis | Total Bank Duration Gap Analysis | Total Bank Duration Gap Analysis |
| | | | 2020 | | 2019 | | 2022 | | 2021 |
| Amount
(In millions) | | Duration Gap(1) (In months) | | Amount
(In millions) | | Duration Gap(1) (In months) | |
| (Dollars in millions) | | (Dollars in millions) | Amount
(In millions) | | Duration Gap(1) (In months) | | Amount
(In millions) | | Duration Gap(1) (In months) |
| Assets | Assets | $ | 68,634 | | | 4 | | | $ | 106,842 | | | 3 | | Assets | $ | 121,056 | | | 1.8 | | | $ | 54,121 | | | 3.4 | |
| Liabilities | Liabilities | 62,440 | | | 3 | | | 100,101 | | | 2 | | Liabilities | 113,333 | | | 0.9 | | | 47,897 | | | 3.0 | |
| Net | Net | $ | 6,194 | | | 1 | | | $ | 6,741 | | | 1 | | Net | $ | 7,723 | | | 0.9 | | | $ | 6,224 | | | 0.4 | |
(1)Duration gap values include the impact of interest rate exchange agreements.
Segment Market Risk. The financial performance and interest rate risks of each business segment are managed within prescribed guidelines and policy limits.
Advances-Related Business – Interest rate risk arises from the advances-related business primarily through the use of shareholder-contributed capital and retained earnings to fund fixed rate investments of targeted amounts and maturities. In general, advances result in very little net interest rate risk for the Bank because most fixed rate advances with original maturities greater than three months and all advances with embedded options are simultaneously hedged with an interest rate swap or option with terms to offset the advance. The interest rate swap or option generally is maintained as a hedge for the life of the advance. These hedged advances effectively create a pool of variable rate assets, which, in combination with the strategy of raising debt swapped to variable rate liabilities, creates an advances portfolio with low net interest rate risk.
Money market investments used for liquidity management generally have maturities of one month or less. In addition, to increase the Bank’s liquidity position, the Bank invests in Treasury securities, generally with terms of less than threeup to four years. These fixed rate investments are swapped to variable rate investments.
The interest rate risk in the advances-related business is primarily associated with the Bank’s strategy for investing capital (capital stock, including mandatorily redeemable capital stock, and retained earnings).capital. The Bank’s strategy is generally to invest 50% of capital in short-term investments (maturities of three months or less) and 50% in intermediate-term investments (a laddered portfolio of investments with(laddered maturities of up to four years). However, this strategy may be altered from time to time depending on market conditions. The strategy to invest 50% of capital in short-term assets is intended to mitigate the market value of capital risks associated with the potential repurchase or redemption of excess capital stock. Excess capital stock usually results from a decline in a borrower’s outstanding advances or by a membership termination. Under the Bank’s capital plan, capital stock, when repurchased or redeemed, is required to be repurchased or redeemed at its par value of $100 per share, subject to certain regulatory and statutory limits. The strategy to invest 50% of capital in a laddered portfolio of investments with short to intermediate maturities is intended to take advantage of the higher earnings available from a generally positively sloped yield curve, when intermediate-term investments generally have higher yields than short-term investments.
The Bank updates the repricing and maturity gaps for actual asset, liability, and derivative transactions that occur in the advances-related segment each day.regularly. The Bank regularly compares the targeted repricing and maturity gaps to the actual repricing and maturity gaps to identify rebalancing needs for the targeted gaps. On a weekly basis, the Bank evaluates the projected impact of expected maturities and scheduled repricingsrepricing of assets, liabilities, and interest rate exchange agreements on the interest rate risk of the advances-related segment. These analyses are used to measure and manage potential reinvestment risk (when the remaining term of advances is shorter than the remaining term of the financing) and potential refinancing risk (when the remaining term of advances is longer than the remaining term of the financing).
Because of the short-term and variable rate nature of the assets, liabilities, and derivatives of the advances-related business, the Bank’s interest rate risk guidelines address the amounts of net assets that are expected to mature or reprice in a given period. The market value sensitivity analyses and net interest income simulations are also used to identify and measure risk and variances to the target interest rate risk exposure in the advances-related segment.
Mortgage-Related Business – The Bank’s mortgage assets include MBS, most of which are classified as HTM or AFS, with a small amount classified as trading, and mortgage loans held for portfolio purchased under the MPF Program. The Bank is exposed to interest rate risk from the mortgage-related business because the principal cash flows of the mortgage assets and the liabilities that fund them are not exactly matched through time and across all possible interest rate scenarios, given the effect of mortgage prepayments and the existence of interest rate caps on certain adjustable rate MBS.
The Bank manages the interest rate risk and market risk of the mortgage-related segment through its investment in low risk assets and selected funding and hedging strategies. The total carrying value of MBS and mortgage loans at December 31, 2020,2022, was $17.7$11.7 billion, including $15.8$10.9 billion in MBS and $1.9 billion$816 million in mortgage loans. The total carrying value of MBS and mortgage loans at December 31, 2019,2021, was $21.1$14.0 billion, including $17.8$13.0 billion in MBS and $3.3 billion$981 million in mortgage loans. Floating rate securities, and fixed rate multifamily securities that have been converted to floating rate through the use of interest rate swaps, were $14.2$10.3 billion, or 80%88%, of MBS and mortgage loans at December 31, 2020,2022, and $15.1$12.2 billion, or 72%87%, of MBS and mortgage loans at December 31, 2019.2021. Intermediate and long-term fixed rate assets, whose interest rate and market risks have been partially offset through the use of fixed rate callable debt, fixed rate non-callable debt, and certain interest rate swaps, were $3.5$1.4 billion, or 20%12%, of MBS and mortgage loans, at December 31, 2020,2022, and $6.0$1.8 billion, or 28%13%, of MBS and mortgage loans at December 31, 2019.2021.
The estimated market risk of the mortgage-related business is managed both at the time an asset is purchased and on an ongoing basis for the total portfolio. At the time of purchase (for all significant mortgage asset acquisitions), the Bank analyzes the estimated earnings sensitivity and estimated market value sensitivity, taking into consideration the estimated mortgage prepayment sensitivity of the mortgage assets and anticipated funding and hedging activities under various interest rate scenarios. The related funding and hedging transactions are executed at or close to the time of purchase of a mortgage asset.
At least monthly, the Bank reviews the estimated market risk profile of the entire portfolio of mortgage assets and related funding and hedging transactions. The Bank then considers rebalancing strategies to modify the estimated mortgage portfolio market risk profile. Periodically, the Bank performs more in-depth analyses, which include an analysis of the impacts of non-parallel shifts in the yield curve and assessments of the impacts of unanticipated mortgage prepayment behavior. Based on these analyses, the Bank may take actions to rebalance the mortgage portfolio’s market risk profile. These rebalancing strategies may include entering into new funding and hedging transactions, forgoing or modifying certain funding or hedging transactions normally executed with new mortgage purchases, or terminating certain funding and hedging transactions for the mortgage asset portfolio.
The Bank manages the estimated interest rate risk associated with mortgage assets, including mortgage prepayment risk, through a combination of debt issuance and derivatives. The Bank may obtain funding through callable and non-callable FHLBank System debt and may execute derivative transactions to achieve principal cash flow patterns and market value sensitivities for the liabilities and derivatives that provide a significant offset to the interest rate and mortgage prepayment risks associated with the mortgage assets. Debt issued to finance mortgage assets may be fixed rate debt, callable fixed rate debt, adjustable rate debt, or callable adjustable rate debt. Derivatives may be
used as temporary hedges of anticipated debt issuance or long-term hedges of debt used to finance the mortgage assets. The derivatives used to hedge the interest rate risk of fixed rate mortgage assets generally may be callable and non-callable pay-fixed interest rate swaps. Derivatives may also be used to offset the interest rate cap risk embedded in adjustable rate MBS.
As discussed above in “Total Bank Market Risk – Market Value of Capital Sensitivity,” the Bank uses market value of capital sensitivity as a primary market value metric for measuring the Bank’s exposure to interest rates. The Bank’s interest rate risk policieslimits and guidelines for the mortgage-related business address the market value of capital sensitivity of the assets, liabilities, and derivatives of the mortgage-related business.
The following table presents results of the estimated market value of capital sensitivity analysis attributable to the mortgage-related business as of December 31, 20202022 and 2019.2021.
| Market Value of Capital Sensitivity
Estimated Percentage Change in Market Value of Bank Capital
Attributable to the Mortgage-Related Business for Various Changes in Interest Rates | Market Value of Capital Sensitivity
Estimated Percentage Change in Market Value of Bank Capital
Attributable to the Mortgage-Related Business for Various Changes in Interest Rates | Market Value of Capital Sensitivity
Estimated Percentage Change in Market Value of Bank Capital
Attributable to the Mortgage-Related Business for Various Changes in Interest Rates |
| Interest Rate Scenario(1) | Interest Rate Scenario(1) | 2020 | | 2019 | | Interest Rate Scenario(1) | 2022 | | 2021 | |
| +200 basis-point change | +200 basis-point change | –1.3 | % | –0.6 | % | +200 basis-point change | –0.5 | % | –0.5 | % |
| +100 basis-point change | +100 basis-point change | –0.4 | | –0.2 | | +100 basis-point change | –0.2 | | –0.1 | |
–100 basis-point change(2) | –100 basis-point change(2) | +2.8 | | +0.2 | | –100 basis-point change(2) | +0.1 | | –0.2 | |
–200 basis-point change(2) | –200 basis-point change(2) | +2.9 | | +3.2 | | –200 basis-point change(2) | +0.1 | | +2.6 | |
(1)Instantaneous change from actual rates at dates indicated.
(2)Interest rates for each maturity are limited to non-negative rates.
The explanations for the changes in Bank’s estimates of the sensitivity of the market value of capital to changes in interest rates attributable to the mortgage-related business from December 31, 2019,2021, to December 31, 2020,2022, are the same as the explanations for the sensitivity of the market value of capital attributable to all of the Bank’s assets, liabilities, and associated interest rate exchange agreements.
For a discussion of risk factors related to the COVID-19 pandemic, see “Part I. Item 1A. Risk Factors.”
Interest Rate Exchange Agreements
A derivative transaction or interest rate exchange agreement is a financial contract whose fair value is generally derived from changes in the value of an underlying asset or liability. The Bank uses interest rate swaps; interest rate cap and floor agreements; and callable and putable interest rate swaps (collectively, interest rate exchange agreements) to manage its exposure to market risks inherent in its ordinary course of business, including its lending, investment, and funding activities.
The Bank uses interest rate exchange agreements to implement the following hedging strategies for addressing market risk:
•To convert fixed rate advances to adjustable rate structures, which reduces the Bank’s exposure to fixed interest rates.
•To convert certain adjustable rate indexed advances to other adjustable rate structures, which reduces the Bank’s exposure to basis risk.
•To convert fixed rate consolidated obligations to adjustable rate structures, which reduces the Bank’s exposure to fixed interest rates. (A combined structure of the callable derivative and callable debt instrument is usually lower in cost than a comparable adjustable rate debt instrument, allowing the Bank to reduce its funding costs.)
•To convert certain adjustable rate indexed consolidated obligations to other adjustable rate structures, which reduces the Bank’s exposure to basis risk.
•To reduce the interest rate sensitivity and modify the repricing frequency of assets and liabilities.
•To obtain callable fixed rate equivalent funding by entering into a callable pay-fixed interest rate swap in connection with the issuance of a short-term discount note. The callable fixed rate equivalent funding is used to reduce the Bank’s exposure to prepayment of mortgage assets.
•To offset an embedded option in an advance.
The following table summarizes the Bank’s interest rate exchange agreements by type of hedged item, hedging instrument, associated hedging strategy, accounting designation as specified under the accounting for derivative instruments and hedging activities, and notional amount as of December 31, 20202022 and 2019.2021.
| | Interest Rate Exchange Agreements | Interest Rate Exchange Agreements | Interest Rate Exchange Agreements |
| | (In millions) | (In millions) | | | | | | Notional Amount | (In millions) | | | | | | Notional Amount |
| Hedging Instrument | Hedging Instrument | | Hedging Strategy | | Hedge Designation | | 2020 | | 2019 | Hedging Instrument | | Hedging Strategy | | Hedge Designation | | 2022 | | 2021 |
| Hedged Item: Advances | Hedged Item: Advances | | | | | | | | | Hedged Item: Advances | | | | | | | | |
| Pay fixed, receive adjustable interest rate swap | Pay fixed, receive adjustable interest rate swap | | Fixed rate advance converted to an adjustable rate | | Fair Value Hedge | | $ | 21,502 | | | $ | 22,663 | | Pay fixed, receive adjustable interest rate swap | | Fixed rate advance converted to an adjustable rate | | Fair Value Hedge | | $ | 33,793 | | | $ | 9,983 | |
| Pay adjustable, receive adjustable basis swap | | Adjustable rate advance converted to another adjustable rate index | | Economic Hedge(1) | | — | | | 7,550 | | |
| | | Received fixed, pay adjustable interest rate swap | Received fixed, pay adjustable interest rate swap | | Adjustable rate advance converted to a fixed rate | | Economic Hedge(1) | | 1,800 | | | 2,435 | | Received fixed, pay adjustable interest rate swap | | Adjustable rate advance converted to a fixed rate | | Economic Hedge(1) | | 2,260 | | | 1,905 | |
| Pay fixed, receive adjustable interest rate swap | Pay fixed, receive adjustable interest rate swap | | Fixed rate advance converted to an adjustable rate | | Economic Hedge(1) | | 3,124 | | | 4,986 | | Pay fixed, receive adjustable interest rate swap | | Fixed rate advance converted to an adjustable rate | | Economic Hedge(1) | | 9,800 | | | 2,221 | |
| Pay fixed, receive adjustable interest rate swap; swap may be callable at the Bank’s option or putable at the counterparty’s option | Pay fixed, receive adjustable interest rate swap; swap may be callable at the Bank’s option or putable at the counterparty’s option | | Fixed rate advance (with or without an embedded cap) converted to an adjustable rate; advance and swap may be callable or putable; matched to advance accounted for under the fair value option | | Economic Hedge(1) | | 2,027 | | | 3,587 | | Pay fixed, receive adjustable interest rate swap; swap may be callable at the Bank’s option or putable at the counterparty’s option | | Fixed rate advance (with or without an embedded cap) converted to an adjustable rate; advance and swap may be callable or putable; matched to advance accounted for under the fair value option | | Economic Hedge(1) | | 2,105 | | | 1,716 | |
| Subtotal Economic Hedges(1) | Subtotal Economic Hedges(1) | | | | | | 6,951 | | | 18,558 | | Subtotal Economic Hedges(1) | | | | | | 14,165 | | | 5,842 | |
| Total | Total | | | | | | 28,453 | | | 41,221 | | Total | | | | | | 47,958 | | | 15,825 | |
| Hedged Item: Non-Callable Bonds | Hedged Item: Non-Callable Bonds | | | | | | | | Hedged Item: Non-Callable Bonds | | | | | | | |
| Receive fixed or structured, pay adjustable interest rate swap | Receive fixed or structured, pay adjustable interest rate swap | | Fixed rate or structured rate non-callable bond converted to an adjustable rate | | Fair Value Hedge | | 2,915 | | | 3,732 | | Receive fixed or structured, pay adjustable interest rate swap | | Fixed rate or structured rate non-callable bond converted to an adjustable rate | | Fair Value Hedge | | 6,216 | | | 2,169 | |
| Receive fixed or structured, pay adjustable interest rate swap | Receive fixed or structured, pay adjustable interest rate swap | | Fixed rate or structured rate non-callable bond converted to an adjustable rate | | Economic Hedge(1) | | 30 | | | 445 | | Receive fixed or structured, pay adjustable interest rate swap | | Fixed rate or structured rate non-callable bond converted to an adjustable rate | | Economic Hedge(1) | | 30 | | | 30 | |
| Receive fixed or structured, pay adjustable interest rate swap | Receive fixed or structured, pay adjustable interest rate swap | | Fixed rate or structured rate non-callable bond converted to an adjustable rate; matched to non-callable bond accounted for under the fair value option | | Economic Hedge(1) | | 80 | | | 185 | | Receive fixed or structured, pay adjustable interest rate swap | | Fixed rate or structured rate non-callable bond converted to an adjustable rate; matched to non-callable bond accounted for under the fair value option | | Economic Hedge(1) | | 1,845 | | | — | |
| | Basis swap | | Fixed rate or adjustable rate non-callable bond previously converted to an adjustable rate index, converted to another adjustable rate index to reduce interest rate sensitivity and repricing gaps | | Economic Hedge(1) | | 5,733 | | | 13,075 | | |
| | Subtotal Economic Hedges(1) | Subtotal Economic Hedges(1) | | | | | | 5,843 | | | 13,705 | | Subtotal Economic Hedges(1) | | | | | | 1,875 | | | 30 | |
| Total | Total | | | | | | 8,758 | | | 17,437 | | Total | | | | | | 8,091 | | | 2,199 | |
| Hedged Item: Callable Bonds | | Hedged Item: Callable Bonds | |
| Receive fixed or structured, pay adjustable interest rate swap with an option to call at the counterparty’s option | | Receive fixed or structured, pay adjustable interest rate swap with an option to call at the counterparty’s option | | Fixed or structured rate callable bond converted to an adjustable rate; swap is callable | | Fair Value Hedge | | 16,730 | | | 11,413 | |
| Receive fixed or structured, pay adjustable interest rate swap with an option to call at the counterparty’s option | | Receive fixed or structured, pay adjustable interest rate swap with an option to call at the counterparty’s option | | Fixed or structured rate callable bond converted to an adjustable rate; swap is callable | | Economic Hedge(1) | | 960 | | | 765 | |
| Receive fixed or structured, pay adjustable interest rate swap with an option to call at the counterparty’s option | | Receive fixed or structured, pay adjustable interest rate swap with an option to call at the counterparty’s option | | Fixed or structured rate callable bond converted to an adjustable rate; swap is callable; matched to callable bond accounted for under the fair value option | | Economic Hedge(1) | | 433 | | | 618 | |
Subtotal Economic Hedges(1) | | Subtotal Economic Hedges(1) | | 1,393 | | | 1,383 | |
| Total | | Total | | 18,123 | | | 12,796 | |
| Hedged Item: Discount Notes | | Hedged Item: Discount Notes | |
| Pay fixed, receive adjustable callable interest rate swap | | Pay fixed, receive adjustable callable interest rate swap | | Discount note, which may have been previously converted to an adjustable rate, converted to fixed rate callable debt that offsets the prepayment risk of mortgage assets | | Economic Hedge(1) | | 50 | | | 50 | |
| Basis swap or receive fixed, pay adjustable interest rate swap | | Basis swap or receive fixed, pay adjustable interest rate swap | | Discount note converted to short-term adjustable rate to hedge repricing gaps | | Economic Hedge(1) | | 28,714 | | | 16,755 | |
| Pay fixed, receive adjustable non-callable interest rate swap | | Pay fixed, receive adjustable non-callable interest rate swap | | Discount note, which may have been previously converted to an adjustable rate, converted to fixed rate non-callable debt that offsets the interest rate risk of mortgage assets | | Economic Hedge(1) | | — | | | 100 | |
| Total | | Total | | 28,764 | | | 16,905 | |
| | Interest Rate Exchange Agreements (continued) | Interest Rate Exchange Agreements (continued) | Interest Rate Exchange Agreements (continued) |
| | (In millions) | (In millions) | | | | | | Notional Amount | (In millions) | | | | | | Notional Amount |
| Hedging Instrument | Hedging Instrument | | Hedging Strategy | | Hedge Designation | | 2020 | | 2019 | Hedging Instrument | | Hedging Strategy | | Hedge Designation | | 2022 | | 2021 |
| Hedged Item: Callable Bonds | | | | | | | | | |
| Receive fixed or structured, pay adjustable interest rate swap with an option to call at the counterparty’s option | | Fixed or structured rate callable bond converted to an adjustable rate; swap is callable | | Fair Value Hedge | | 180 | | | 840 | | |
| Receive fixed or structured, pay adjustable interest rate swap with an option to call at the counterparty’s option | | Fixed or structured rate callable bond converted to an adjustable rate; swap is callable | | Economic Hedge(1) | | 750 | | | 1,095 | | |
| Receive fixed or structured, pay adjustable interest rate swap with an option to call at the counterparty’s option | | Fixed or structured rate callable bond converted to an adjustable rate; swap is callable; matched to callable bond accounted for under the fair value option | | Economic Hedge(1) | | — | | | 150 | | |
Subtotal Economic Hedges(1) | | | | 750 | | | 1,245 | | |
| Total | | | | | | 930 | | | 2,085 | | |
| Hedged Item: Discount Notes | | | | | | |
| Pay fixed, receive adjustable callable interest rate swap | | Discount note, which may have been previously converted to an adjustable rate, converted to fixed rate callable debt that offsets the prepayment risk of mortgage assets | | Economic Hedge(1) | | 100 | | | 950 | | |
| Basis swap or receive fixed, pay adjustable interest rate swap | | Discount note converted to short-term adjustable rate to hedge repricing gaps | | Economic Hedge(1) | | 13,192 | | | 23,126 | | |
| Pay fixed, receive adjustable non-callable interest rate swap | | Discount note, which may have been previously converted to an adjustable rate, converted to fixed rate non-callable debt that offsets the interest rate risk of mortgage assets | | Economic Hedge(1) | | 250 | | | 1,050 | | |
| Total | | | | | | 13,542 | | | 25,126 | | |
| | Hedged Item: Investment Securities | Hedged Item: Investment Securities | | | | | | Hedged Item: Investment Securities | | | | | |
| Pay fixed, receive adjustable interest rate swap | Pay fixed, receive adjustable interest rate swap | | Fixed rate investment securities converted to an adjustable rate | | Fair Value Hedge | | 10,463 | | | 12,387 | | Pay fixed, receive adjustable interest rate swap | | Fixed rate investment securities converted to an adjustable rate | | Fair Value Hedge | | 12,465 | | | 7,961 | |
| Pay fixed, receive adjustable interest rate swap | Pay fixed, receive adjustable interest rate swap | | Fixed rate investment securities converted to an adjustable rate | | Economic Hedge(1) | | 4,200 | | | 1,750 | | Pay fixed, receive adjustable interest rate swap | | Fixed rate investment securities converted to an adjustable rate | | Economic Hedge(1) | | — | | | 250 | |
| | Interest rate cap | Interest rate cap | | Interest rate cap used to offset cap risk embedded in floating rate investment securities | | Economic Hedge(1) | | 780 | | | 980 | | Interest rate cap | | Interest rate cap used to offset cap risk embedded in floating rate investment securities | | Economic Hedge(1) | | — | | | 550 | |
Subtotal Economic Hedges(1) | Subtotal Economic Hedges(1) | | 4,980 | | | 2,730 | | Subtotal Economic Hedges(1) | | — | | | 800 | |
| Total | Total | | | 15,443 | | | 15,117 | | Total | | | 12,465 | | | 8,761 | |
| Hedged Item: Offsetting Derivatives | Hedged Item: Offsetting Derivatives | | | | Hedged Item: Offsetting Derivatives | | | |
| Pay fixed, receive adjustable interest rate swap and receive fixed, pay adjustable interest rate swap | Pay fixed, receive adjustable interest rate swap and receive fixed, pay adjustable interest rate swap | | Interest rate swap used to offset the economic effect of interest rate swap that is no longer designated to advances, investments, or consolidated obligations | | Economic Hedge(1) | | 11,518 | | | 40 | | Pay fixed, receive adjustable interest rate swap and receive fixed, pay adjustable interest rate swap | | Interest rate swap used to offset the economic effect of interest rate swap that is no longer designated to advances, investments, or consolidated obligations | | Economic Hedge(1) | | 1,392 | | | 7,130 | |
| Total | Total | | | | | | 11,518 | | | 40 | | Total | | | | | | 1,392 | | | 7,130 | |
| Stand-Alone Derivatives | | |
| Mortgage delivery commitments | | N/A | | N/A | | 1 | | | 46 | | |
| Total | | 1 | | | 46 | | |
| Total Notional Amount | Total Notional Amount | | | | $ | 78,645 | | | $ | 101,072 | | Total Notional Amount | | | | $ | 116,793 | | | $ | 63,616 | |
(1)Economic hedges are derivatives that are matched to balance sheet instruments or other derivatives that do not meet the requirements for hedge accounting under the accounting for derivative instruments and hedging activities.
Although the Bank uses interest rate exchange agreements to achieve the specific financial objectives described above, certain transactions do not qualify for hedge accounting (economic hedges). An economic hedge introduces the potential for earnings variability caused by changes in the fair value of the derivatives that are recorded in the Bank’s income but are not offset by corresponding changes in the value of the economically hedged assets and
liabilities. Finance Agency regulations and the Bank’s Risk Management Policy prohibit the speculative use of interest rate exchange agreements, and the Bank does not trade derivatives for profit.
It is the Bank’s policy to use interest rate exchange agreements only to reduce the market risk exposures inherent in the otherwise unhedged asset and funding positions of the Bank and to achieve other financial objectives of the Bank, such as obtaining low-cost funding for advances and mortgage assets. The primary objective of the financial management practices of the Bank is to preserve and enhance the long-term economic performance and risk management of the Bank. In accordance with the accounting for derivative instruments and hedging activities, reported net income and other comprehensive income will likely exhibit period-to-period volatility, which may be significant.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, if applicable, and the reported amounts of income, expenses, gains, and losses during the reporting period. Changes in these judgments, estimates, and assumptions could potentially affect the Bank’s financial position and results of operations significantly. Although the Bank believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ.
The Bank has identified the following accounting policies and estimates as critical because they require the Bank to make subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies and estimates are:
•accounting for derivatives;
•estimating fair values of investments classified as trading and AFS, derivatives and associated hedged items carried at fair value in accordance with the accounting for derivative instruments and associated hedging activities, and financial instruments carried at fair value under the fair value option;
and
•estimating the prepayment speeds on MBS and mortgage loans for the accounting of amortization of premiums and accretion of discounts and credit losses previously recorded prior to the adoption of new accounting guidance related to the measurement of credit losses on MBS and mortgage loans.
These policies and the judgments, estimates, and assumptions are also described in “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies.”
Accounting for Derivatives
Accounting for derivatives includes the following assumptions and estimates by the Bank: (i) assessing whether the hedging relationship qualifies for hedge accounting, (ii) assessing whether an embedded derivative should be bifurcated, (iii) calculating the estimated effectiveness of the hedging relationship, (iv) evaluating exposure associated with counterparty credit risk, and (v) estimating the fair value of the derivatives (which is discussed in “Fair Values” below). The Bank’s assumptions and judgments include subjective calculations and estimates based on information available as of the date of the financial statements and could be materially different based on different assumptions, calculations, and estimates.
For additional discussion of the Bank’s accounting for derivatives, see “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” and “Item 8. Financial Statements and Supplementary Data – Note 14 – Derivatives and Hedging Activities.”
Assessment of Effectiveness. Highly effective hedging relationships that use interest rate swaps as the hedging instrument and that meet certain criteria under the accounting for derivative instruments and hedging activities may qualify for the “short-cut” method of assessing effectiveness. The short-cut method allows the Bank to make the
assumption of no ineffectiveness, which means that the change in fair value of the hedged item can be assumed to be equal to the change in fair value of the derivative. No further evaluation of effectiveness is performed for these hedging relationships unless a critical term is changed. Included in these hedging relationships may be hedged items for which the settlement of the hedged item occurs within the shortest period of time possible for the type of instrument based on market settlement conventions. The Bank defines market settlement conventions to be 5 business days or less for advances and 30 calendar days, using a next business day convention, for consolidated obligations. The Bank designates the hedged item in a qualifying hedging relationship as of its trade date. Although the hedged item will not be recognized in the financial statements until the settlement date, in certain circumstances when the fair value of the hedging instrument is zero on the trade date, the Bank believes that it meets a condition that allows the use of the short-cut method. The Bank then records the changes in fair value of the derivative and the hedged item beginning on the trade date.
For a hedging relationship that does not qualify for the short-cut method, the Bank measures its effectiveness using the “long-haul” method, in which the change in fair value of the hedged item must be measured separately from the change in fair value of the derivative. The Bank designs effectiveness testing criteria based on its knowledge of the hedged item and hedging instrument that were employed to create the hedging relationship. The Bank uses regression analyses or other statistical analyses to evaluate effectiveness results, which must fall within established tolerances. Effectiveness testing is performed at inception and on at least a quarterly basis for both prospective considerations and retrospective evaluations.
Hedge Discontinuance. When a hedging relationship fails the effectiveness test, the Bank immediately discontinues hedge accounting for that relationship. In addition, the Bank discontinues hedge accounting when it is no longer probable that a forecasted transaction will occur in the original expected time period and when a hedged firm commitment no longer meets the required criteria of a firm commitment. The Bank treats modifications of hedged items (such as a reduction in par value, change in maturity date, or change in strike rates) as a termination of a hedge relationship.
Credit Risk for Counterparties. The Bank is subject to credit risk as a result of potential nonperformance by counterparties to the derivative agreements. All uncleared derivatives with counterparties that are members of the Bank and that are not derivative dealers, in which the Bank serves as an intermediary, are fully secured by eligible collateral and are subject to both the Bank’s Advances and Security Agreement and a master netting agreement. For all derivative dealer counterparties, the Bank selects only highly rated derivative dealers and major banks that meet the Bank's eligibility requirements. In addition, the Bank enters into master netting agreements and bilateral security agreements with all active derivative dealer and major bank counterparties that provide for delivery of collateral at specified levels tied to counterparty credit rating to limit the Bank’s net unsecured credit exposure to these counterparties. The Bank makes judgments on each counterparty’s creditworthiness and estimates of collateral values in analyzing its credit risk for nonperformance by counterparties. In addition, the Bank is subject to nonperformance by the clearinghouse(s)clearing house(s) and clearing agents. The requirement that the Bank post initial and variation margin through the clearing agent to the clearinghouseclearing house exposes the Bank to institutional credit risk in the event that the clearing agent or the clearinghouseclearing house fails to meet its obligations. However, the use of cleared derivatives mitigates the Bank’s overall credit risk exposure because a central counterparty is substituted for individual counterparties and variation margin is posted daily for changes in the value of cleared derivatives through a clearing agent. See additional discussion of credit exposure to derivatives counterparties in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Derivative Counterparties.”
Fair Values
Fair value measurement guidance defines fair value, establishes a framework for measuring fair value under U.S. GAAP, and stipulates disclosures about fair value measurements. This guidance applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. The Bank uses fair value measurements to record fair value adjustments for certain assets and liabilities and to determine fair value disclosures.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is a market-based measurement, and the price used to measure fair value is an exit price considered from the perspective of the market participant that holds the asset or owes the liability.
This guidance establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation technique used to measure fair value. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
•Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
•Level 2 – Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
•Level 3 – Unobservable inputs for the asset or liability. Valuations are derived from techniques that use significant assumptions not observable in the market, which include pricing models, discounted cash flow models, or similar techniques.
A financial instrument's categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The use of fair value to measure the Bank’s financial instruments is fundamental to the Bank’s financial statements and is a critical accounting estimate because a significant portion of the Bank’s assets and liabilities are carried at fair value.
The following assets and liabilities, including those for which the Bank has elected the fair value option, are carried at fair value on the Statements of Condition as of December 31, 2020:2022:
•Trading securities
•AFS securities
•Certain advances
•Derivative assets and liabilities
•Certain consolidated obligation bonds
•Certain other assets
In general, these items carried at fair value are categorized within Level 2 of the fair value hierarchy and are valued primarily using inputs that are observable in the marketplace or can be substantially derived from observable market data.
The total notional amount of derivatives as of December 31, 2022, was $116.8 billion, of which 59% were designated as hedging instruments, and the fair value of derivative assets and liabilities as of December 31, 2022, was $26 million and $2 million, respectively. The fair values of interest rate-related derivatives and hedged items are estimated using internally developed discounted cash flow models that use market-observable inputs, such as swap rates and volatility assumptions.
Certain assets and liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustment in certain circumstances. At December 31, 2020,2022, the Bank measured certain mortgage loans held for portfolio on a nonrecurring basis at Level 3 of the fair value hierarchy.
The Bank monitors and evaluates the inputs into its fair value measurements to ensure that the asset or liability is properly categorized in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. Because items classified as Level 3 are generally based on unobservable inputs, the process to determine the fair value of such items is generally more subjective and involves a higher degree of judgment and assumptions by the Bank.
The Bank employs internal control processes to validate the fair value of its financial instruments. These control processes are designed to ensure that the fair value measurements used for financial reporting are based on observable inputs wherever possible. In the event that observable market-based inputs are not available, the control processes are designed to ensure that the valuation approach used is appropriate and consistently applied and that the assumptions and judgments made are reasonable. The Bank’s control processes provide for segregation of duties and oversight of the fair value methodologies and valuations by the Bank. Valuation models are regularly reviewed by the Bank and are subject to an independent model validation process. Any changes to the valuation methodology or the models are also reviewed to confirm that the changes are appropriate.
The assumptions and judgments applied by the Bank may have a significant effect on its estimates of fair value, and the use of different assumptions as well as changes in market conditions could have a material effect on the Bank’s results of operations or financial condition. See “Item 8. Financial Statements and Supplementary Data – Note 15 – Fair Value” for further information regarding the fair value measurement guidance (including the classification within the fair value hierarchy) and the summary of valuation methodologies and primary inputs used to measure fair value for all the Bank’s assets and liabilities carried at fair value.
The Bank continues to refine its valuation methodologies as markets and products develop and the pricing for certain products becomes more or less transparent. While the Bank believes that its valuation methodologies are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a materially different
estimate of fair value as of the reporting date. These fair values may not represent the actual values of the financial instruments that could have been realized as of yearend or that will be realized in the future. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology.
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
When the Bank purchases MBS and mortgage loans, it does not necessarily pay the seller the par value of the MBS or the exact amount of the unpaid principal balance of the mortgage loans. If the Bank pays more than the par value or the unpaid principal balance, purchasing the asset at a premium, the premium reduces the yield the Bank recognizes on the asset below the coupon rate. Conversely, if the Bank pays less than the par value or the unpaid principal balance, purchasing the asset at a discount, the discount increases the yield above the coupon rate.
The Bank amortizes premiums and accretes discounts from the acquisition dates of the MBS and mortgage loans. The Bank applies the level-yield method on a retrospective basis over the estimated life of the MBS and purchased mortgage loans for which prepayments reasonably can be expected and estimated. This method requires a retrospective adjustment of the effective yield each time the Bank changes the estimated life as if the new estimate had been known since the original acquisition date of the securities. Use of the retrospective method may increase volatility of reported earnings during periods of changing interest rates, and the use of different estimates or assumptions as well as changes in external factors could produce significantly different results.
For securities previously identified as other-than-temporarily impaired, the Bank recognizes accretion or amortization of credit losses previously recorded prior to the adoption of new accounting guidance related to the measurement of credit losses along with the net interest income associated with the securities’ effective yield in net interest income in the Statements of Income. For securities classified as HTM, the previously recorded credit losses in AOCI are accreted to the carrying value of each security on a prospective basis, based on the amount and timing of future estimated cash flows (with no effect on earnings unless the security is subsequently sold or there are additional decreases in cash flows expected to be collected). For securities classified as AFS, the Bank does not accrete the previously recorded credit losses in AOCI to the carrying value because the subsequent measurement basis for these securities is fair value. The total accretion or amortization associated with the previously recorded credit losses was $55 million and $70 million, for 2022 and $78 million, for the years ended December 31, 2020 and 2019,2021, respectively. The Bank updates its estimate of future expected cash flows for previously other-than-temporarily impaired securities on
a regular basis. If there is no additional impairment on the security, any improvement in expected cash flows is accreted into interest income. This accretion, included in the total accretion or amortization amounts above, totaled $59$36 million and $61$51 million for the years ended December 31, 20202022 and 2019,2021, respectively.
As a result of the improvements in expected cash flows and resulting decreases in estimated lifetime losses, the Bank has recognized significant amounts of accretion-related income since 2015. As of December 31, 2020,2022, the Bank estimates that it will accrete approximately $162$61 million of additional interest income associated with the reduction in previously recorded credit losses over the life of the securities. The net accretion of income is likely to continue to be a positive source of net interest income in future periods until the associated MBS mature. Expected maturities of MBS will differ from contractual maturities because borrowers may have the right to call or prepay the underlying obligations. This estimate of accretion of additional interest income and effect on future interest income is a forward-looking statement. The Bank updates its estimates on an ongoing basis, and actual results may differ materially from the Bank’s current estimation.
Recently Issued Accounting Guidance and Interpretations
See “Item 8. Financial Statements and Supplementary Data – Note 2 – Recently Issued and Adopted Accounting Guidance” for a discussion of recently issued accounting standards and interpretations.
Recent Developments
Finance Agency’s Review and Analysis of the Federal Deposit Insurance Corporation (FDIC) Brokered Deposits Restrictions.Home Loan Bank System “FHLBank System at 100: Focusing on the Future.” On January 22, 2021,July 20, 2022, Finance Agency’s Director Sandra L. Thompson provided testimony to the FDIC publishedU.S. House Committee on Financial Services, indicating that the Finance Agency would conduct a final rule, effective April 1, 2021, that amends brokered deposits restrictions that apply to less than well capitalized insured depository institutions.review and analysis of the FHLBank System. As part of its review and analysis, the Finance Agency has held a series of public listening sessions and regional roundtable discussions and has requested written comments from stakeholders. The amendments are intended to modernize and clarify the FDIC’s brokered deposit regulations, and they establish a new framework for analyzing whether deposits placed through deposit placement arrangements qualify as brokered deposits. Such deposit placement arrangements include those between insured depository institutions and third parties,review has been examining matters such as financial technology companies, forthe FHLBanks’ adequate fulfillment of their mission and purpose in a varietychanging marketplace; their organization, operational efficiency, and effectiveness; their role in promoting affordable, sustainable, equitable, and resilient housing and community investment; their role in addressing the unique needs of business purposes, including access to deposits. By creating a new framework for analyzing certain provisions of the deposit broker definition, including shortening the list of activities that are considered facilitating the placement of depositsrural and expanding the scope of the primary purpose exception, the rule amendments narrow the definition of deposit brokerfinancially vulnerable communities; member products, services, collateral requirements; and exclude more deposits from treatment as brokered deposits.membership eligibility and requirements. The amendments also establish an application and reporting process with respect to the primary purpose exception and affirm the FDIC’s positionBank anticipates that the brokeringFinance Agency’s review and analysis will culminate in a written report. The report may involve recommendations for changes related to a number of certificatesareas such as the FHLBanks’ fulfillment of deposit constitutes deposit brokering.their mission, membership requirements, contributions to affordable housing and support to community investment and may lead to recommendations for statutory revisions, proposals for new or modified regulations, regulatory guidance under existing regulations, or other regulatory or supervisory actions consistent with the Finance Agency’s statutory authority.
ThisFinal Rule Implementing the Adjustable Interest Rate (LIBOR) Act. The Federal Reserve Board of Governors adopted a final rule maythat implements the Adjustable Interest Rate (LIBOR) Act. The rule identifies which benchmark rates based on SOFR (Secured Overnight Financing Rate) will replace LIBOR in certain financial contracts upon LIBOR’s discontinuation as of June 30, 2023 (the “replacement date”). Generally, the rule provides that Board-selected benchmark replacements will apply by operation of law to contracts which have an effect on member demand for advances,the following characteristics: (a) contain no fallback provisions; (b) contain fallback provisions but fail to specify either the fallback rate or the party that can determine the fallback rate; or (c) contain a fallback provision that identifies the party that can determine the fallback rate, but the Bank cannot predictdetermining party has failed to do so before (i) the extentLIBOR replacement date or (ii) the latest date to select a benchmark replacement according to the contract terms. If an FHLBank advance has any of the impact.
LIBOR Transition – International Swaps and Derivatives Association, Inc. (ISDA) 2020 Interbank Offered Rate (IBOR) Fallbacks Protocol and Supplement toabove characteristics, the 2006 ISDA Definitions. On October 23, 2020, ISDA launched the Supplement to the 2006 ISDA Definitions (Supplement) andfallback rate (SOFR) will be calculated under the ISDA 2020 IBOR Fallbacks Protocol (Protocol). Bothprotocol. For any other FHLBank contract with the Supplement andabove characteristics, references to one-, three-, six, or 12-month LIBOR will be replaced with 30-day Average SOFR plus the Protocol took effect on January 25, 2021. On that date, all legacy bilateral derivative transactions subject to Protocol-covered agreements (including ISDA agreements) that incorporate certain covered ISDA definitional booklets and reference a covered IBOR, including U.S. dollar LIBOR, were amended to apply the new ISDA-recommended IBOR fallbacksapplicable tenor spread adjustment specified in the event of the relevant IBOR’s cessation. Both the Bank and its relevant counterparty must have adhered to the Protocol to effectively amend legacy derivative contracts, or the parties must bilaterally agree to include amended legacy contracts to address LIBOR fallbacks. The Protocol will remain open for adherence after this effective date. As of January 25, 2021, new and future derivative contracts are subject to the relevant IBOR fallbacks set forth in the Supplement.
On October 21, 2020, the Finance Agency issued a Supervisory Letter to the FHLBanks that required each FHLBank to adhere to the 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.
As part of its LIBOR Transition efforts, the Bank and all of its uncleared derivatives counterparties have adhered to the Protocol.
Off-Balance Sheet Arrangements and Aggregate Contractual Commitments
Off-Balance Sheet Arrangements and Other Commitments
In accordance with regulations governing the operations of the FHLBanks, each FHLBank, including the Bank, is jointly and severally liable for the FHLBank System’s consolidated obligations issued under Section 11(a) of the FHLBank Act, and in accordance with the FHLBank Act, each FHLBank, including the Bank, is jointly and severally liable for consolidated obligations issued under Section 11(c) of the FHLBank Act. The joint and several liability regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor.
The par value of the outstanding consolidated obligations of the FHLBanks was $746.7 billion at December 31, 2020, and $1,025.9 billion at December 31, 2019. The par value of the Bank’s participation in consolidated obligations was $60.6 billion at December 31, 2020, and $98.8 billion at December 31, 2019. The Bank had no commitments to issue consolidated obligations at December 31, 2020. The Bank had committed to the issuance of $805 million in consolidated obligations at December 31, 2019.
In addition, in the ordinary course of business, the Bank engages in financial transactions that, in accordance with U.S. GAAP, are not recorded on the Bank’s Statements of Condition or may be recorded on the Bank’s Statements of Condition in amounts that are different from the full contract or notional amount of the transactions. For example, the Bank routinely enters into commitments to extend advances and issues standby letters of credit. These commitments and standby letters of credit may represent future cash requirements of the Bank, although the standby letters of credit usually expire without being drawn upon. Standby letters of credit are subject to the same underwriting and collateral requirements as advances made by the Bank. At December 31, 2020, the Bank had no advance commitments and $19.4 billion in standby letters of credit outstanding. At December 31, 2019, the Bank had no advance commitments and $21.6 billion in standby letters of credit outstanding. For additional information, see “Item 8. Financial Statements and Supplementary Data – Note 16 – Commitments and Contingencies.”
Contractual Obligations
The following table summarizes the Bank’s contractual obligations as of December 31, 2020, except for obligations associated with short-term discount notes. Additional information with respect to the Bank’s consolidated obligations is presented in “Item 8. Financial Statements and Supplementary Data – Note 8 – Consolidated Obligations” and “Note 16 – Commitments and Contingencies.”
In addition, “Item 8. Financial Statements and Supplementary Data – Note 11 – Capital” includes a discussion of the Bank’s mandatorily redeemable capital stock, and “Item 8. Financial Statements and Supplementary Data – Note 12 – Employee Retirement Plans and Incentive Compensation Plans” includes a discussion of the Bank’s pension and retirement expenses and commitments.
The Bank enters into derivative financial instruments, which create contractual obligations, as part of the Bank’s market risk management. “Item 8. Financial Statements and Supplementary Data – Note 14 – Derivatives and Hedging Activities” includes additional information regarding derivative financial instruments.
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| Contractual Obligations |
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| (In millions) | | | | | | | | | |
| December 31, 2020 | | | | | | | | | |
| Payments Due By Period |
| Contractual Obligations | < 1 Year | | 1 to < 3 Years | | 3 to < 5 Years | | ≥ 5 Years | | Total |
Long-term debt(1) | $ | 34,542 | | | $ | 7,674 | | | $ | 862 | | | $ | 1,311 | | | $ | 44,389 | |
| Mandatorily redeemable capital stock | — | | | — | | | — | | | 2 | | | 2 | |
| Capital leases | 1 | | | 1 | | | — | | | — | | | 2 | |
| Operating leases | 8 | | | 17 | | | 18 | | | 52 | | | 95 | |
| Pension and post-retirement contributions | 6 | | | 6 | | | 6 | | | 7 | | | 25 | |
| Commitments to fund/purchase mortgage loans | 1 | | | — | | | — | | | — | | | 1 | |
| Total contractual obligations | $ | 34,558 | | | $ | 7,698 | | | $ | 886 | | | $ | 1,372 | | | $ | 44,514 | |
(1)Does not include discount notesThe Bank continues to monitor these actions and contractual interest payments relatedguidance as they evolve and to consolidated obligation bonds. Payments for consolidated obligation bonds are allocated to a period basedevaluate their potential impact on contractual maturities. The actual timing of payments could be influenced by factors affecting redemptions. See “Item 8. Financial Statements and Supplementary Data – Note 8 – Consolidated Obligations” for more information.the Bank.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition – Risk Management – Market Risk.”
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Supplementary Data
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Management's Report on Internal Control Over Financial Reporting
The management of the Federal Home Loan Bank of San Francisco (Bank) is responsible for establishing and maintaining adequate internal control over the Bank's financial reporting. The Bank’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There are inherent limitations in the ability of internal control over financial reporting to provide absolute assurance of achieving financial reporting objectives. These inherent limitations include the possibility of human error and the circumvention or overriding of controls. Accordingly, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. These inherent limitations are known features of the financial reporting process, however, and it is possible to design into the process safeguards to reduce, although not eliminate, this risk.
Management assessed the effectiveness of the Bank’s internal control over financial reporting as of December 31, 2020.2022. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concludes that, as of December 31, 2020,2022, the Bank maintained effective internal control over financial reporting. The effectiveness of the Bank's internal control over financial reporting as of December 31, 2020,2022, has been audited by PricewaterhouseCoopers LLP, the Bank's independent registered public accounting firm, as stated in its report appearing on the following page, which expressed an unqualified opinion on the effectiveness of the Bank’s internal control over financial reporting as of December 31, 2020.2022.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of the Federal Home Loan Bank of San Francisco
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying statements of condition of the Federal Home Loan Bank of San Francisco (the “FHLBank”) as of December 31, 20202022 and 2019,2021, and the related statements of income, comprehensive income,income/(loss), capital accounts and cash flows for each of the three years in the period ended December 31, 2020,2022, including the related notes (collectively referred to as the “financial statements”). We also have audited the FHLBank’s internal control over financial reporting as of December 31, 2020,2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the FHLBank as of December 31, 20202022 and 2019,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20202022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the FHLBank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The FHLBank’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the FHLBank’s financial statements and on the FHLBank’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the FHLBank in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.they relate.
Valuation of Interest Rate-Related Derivatives and Hedged Items
As described in Notes 14 and 15 to the financial statements, the FHLBank uses derivatives to reduce funding costs and to manage its exposure to interest rate risks. The total notional amount of derivatives as of December 31, 20202022 was $79$117 billion, of which 45%59% were designated as hedging instruments, and the fair value of derivative assets and liabilities as of December 31, 20202022 was $3$26 million and $12$2 million, respectively. The fair values of interest rate-related derivatives and hedged items are estimated using internally developed discounted cash flow models that use market-observable inputs, such as swap rates and volatility assumptions.
The principal considerations for our determination that performing procedures relating to the valuation of interest rate-related derivatives and hedged items is a critical audit matter are the significant audit effort in evaluating the swap rates and volatility assumptions used to fair value these derivatives and hedged items, and the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included testing the effectiveness of controls relating to the valuation of interest rate-related derivatives and hedged items, including controls over the models, data, and assumptions. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent range of prices for a sample of interest rate-related derivatives and hedged items and comparison of management’s estimate to the independently developed ranges. Developing the independent range of prices involved testing the completeness and accuracy of data provided by management and independently developing the swap rates and volatility assumptions.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 12, 202110, 2023
We have served as the FHLBank’s auditor since 1990.
Federal Home Loan Bank of San Francisco
Statements of Condition
| | | | | | | | | | | |
| (In millions-except par value) | December 31,
2022 | | December 31,
2021 |
| Assets: | | | |
| Cash and due from banks | $ | 9 | | | $ | 55 | |
| Interest-bearing deposits | 3,677 | | | 1,125 | |
| Securities purchased under agreements to resell | 7,000 | | | 15,500 | |
| Federal funds sold | 4,719 | | | 5,348 | |
| Trading securities | 1 | | | 252 | |
Available-for-sale (AFS) securities, net of allowance for credit losses of $30 and $17, respectively (amortized cost of $12,757 and $10,009, respectively)(a) | 12,713 | | | 10,332 | |
| Held-to-maturity (HTM) securities (fair values of $2,136 and $3,235, respectively) | 2,181 | | | 3,211 | |
| Advances (includes $2,059 and $1,772 at fair value under the fair value option, respectively) | 89,400 | | | 17,027 | |
| Mortgage loans held for portfolio, net of allowance for credit losses of $1 and $1, respectively | 815 | | | 980 | |
| | | |
| Accrued interest receivable | 313 | | | 45 | |
| Derivative assets, net | 26 | | | 8 | |
| Other assets | 202 | | | 238 | |
| Total Assets | $ | 121,056 | | | $ | 54,121 | |
| Liabilities: | | | |
| Deposits | $ | 989 | | | $ | 769 | |
| Consolidated obligations: | | | |
| Bonds (includes $2,226 and $627 at fair value under the fair value option, respectively) | 75,768 | | | 22,716 | |
| Discount notes | 35,929 | | | 23,987 | |
| Total consolidated obligations | 111,697 | | | 46,703 | |
| Mandatorily redeemable capital stock | 5 | | | 3 | |
| | | |
| Accrued interest payable | 326 | | | 33 | |
| Affordable Housing Program (AHP) payable | 111 | | | 115 | |
| Derivative liabilities, net | 2 | | | 5 | |
| Other liabilities | 203 | | | 269 | |
| Total Liabilities | 113,333 | | | 47,897 | |
| Commitments and Contingencies (Note 16) | | | |
| Capital: | | | |
| Capital stock—Class B—Putable ($100 par value) issued and outstanding: | | | |
| 38 shares and 21 shares, respectively | 3,758 | | | 2,061 | |
| Unrestricted retained earnings | 3,262 | | | 3,124 | |
| Restricted retained earnings | 732 | | | 708 | |
| Total Retained Earnings | 3,994 | | | 3,832 | |
| Accumulated other comprehensive income/(loss) (AOCI) | (29) | | | 331 | |
| Total Capital | 7,723 | | | 6,224 | |
| Total Liabilities and Capital | $ | 121,056 | | | $ | 54,121 | |
(a)At December 31, 2022 and 2021, $435 million and $252 million, respectively, of these securities were pledged as collateral that may be repledged.
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of San Francisco
Statements of Condition
| | | | | | | | | | | |
| (In millions-except par value) | December 31,
2020 | | December 31,
2019 |
| Assets: | | | |
| Cash and due from banks | $ | 174 | | | $ | 118 | |
| Interest-bearing deposits | 1,078 | | | 2,269 | |
| Securities purchased under agreements to resell | 7,250 | | | 7,000 | |
| Federal funds sold | 1,880 | | | 3,562 | |
Trading securities(a) | 4,260 | | | 1,766 | |
Available-for-sale (AFS) securities, net of allowance for credit losses of $21 and $0, respectively (amortized cost of $15,456 and $15,206, respectively)(b)(c) | 15,679 | | | 15,495 | |
Held-to-maturity (HTM) securities (fair values were $5,115 and $7,566, respectively)(a) | 5,081 | | | 7,545 | |
| Advances (includes $2,147 and $4,370 at fair value under the fair value option, respectively) | 30,976 | | | 65,374 | |
| Mortgage loans held for portfolio, net of allowance for credit losses of $4 and $0, respectively | 1,935 | | | 3,314 | |
| | | |
| Accrued interest receivable | 82 | | | 139 | |
| Derivative assets, net | 3 | | | 33 | |
| Other assets | 236 | | | 227 | |
| Total Assets | $ | 68,634 | | | $ | 106,842 | |
| Liabilities: | | | |
| Deposits | $ | 887 | | | $ | 537 | |
| Consolidated obligations: | | | |
| Bonds (includes $111 and $337 at fair value under the fair value option, respectively) | 44,408 | | | 71,372 | |
| Discount notes | 16,213 | | | 27,376 | |
| Total consolidated obligations | 60,621 | | | 98,748 | |
| Mandatorily redeemable capital stock | 2 | | | 138 | |
| | | |
| Accrued interest payable | 24 | | | 164 | |
| Affordable Housing Program (AHP) payable | 120 | | | 152 | |
| Derivative liabilities, net | 12 | | | 0 | |
| Other liabilities | 774 | | | 362 | |
| Total Liabilities | 62,440 | | | 100,101 | |
| Commitments and Contingencies (Note 16) | 0 | | 0 |
| Capital: | | | |
| Capital stock—Class B—Putable ($100 par value) issued and outstanding: | | | |
| 23 shares and 30 shares, respectively | 2,284 | | | 3,000 | |
| Unrestricted retained earnings | 2,919 | | | 2,754 | |
| Restricted retained earnings | 761 | | | 713 | |
| Total Retained Earnings | 3,680 | | | 3,467 | |
| Accumulated other comprehensive income/(loss) (AOCI) | 230 | | | 274 | |
| Total Capital | 6,194 | | | 6,741 | |
| Total Liabilities and Capital | $ | 68,634 | | | $ | 106,842 | |
(a)At December 31, 2020 and 2019, none of these securities were pledged as collateral that may be repledged.
(b)At December 31, 2020 and 2019, $379 and $381, respectively, of these securities were pledged as collateral that may be repledged.
(c)Prior to the adoption of new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020, the allowance for credit losses on AFS securities was not applicable and is therefore presented as $0 at December 31, 2019. For additional information, see Note 1 – Summary of Significant Accounting Policies.
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of San Francisco
Statements of Income
| | | | For the Years Ended December 31, | | | For the Years Ended December 31, |
| | (In millions) | (In millions) | | 2020 | | 2019 | | 2018 | (In millions) | | 2022 | | 2021 | | 2020 |
| Interest Income: | Interest Income: | | | Interest Income: | | |
| Advances | Advances | | $ | 598 | | | $ | 1,677 | | | $ | 1,563 | | Advances | | $ | 1,235 | | | $ | 193 | | | $ | 565 | |
| Prepayment fees on advances, net | | Prepayment fees on advances, net | | (9) | | | 31 | | | 33 | |
| Interest-bearing deposits | Interest-bearing deposits | | 15 | | | 51 | | | 35 | | Interest-bearing deposits | | 55 | | | 2 | | | 15 | |
| Securities purchased under agreements to resell | Securities purchased under agreements to resell | | 20 | | | 174 | | | 106 | | Securities purchased under agreements to resell | | 117 | | | 1 | | | 20 | |
| Federal funds sold | Federal funds sold | | 17 | | | 114 | | | 160 | | Federal funds sold | | 214 | | | 5 | | | 17 | |
| Trading securities | Trading securities | | 83 | | | 15 | | | 16 | | Trading securities | | — | | | 61 | | | 83 | |
| AFS securities | AFS securities | | 243 | | | 394 | | | 247 | | AFS securities | | 408 | | | 220 | | | 243 | |
| HTM securities | HTM securities | | 109 | | | 270 | | | 335 | | HTM securities | | 56 | | | 43 | | | 109 | |
| Mortgage loans held for portfolio | Mortgage loans held for portfolio | | 34 | | | 87 | | | 98 | | Mortgage loans held for portfolio | | 46 | | | 42 | | | 34 | |
| Total Interest Income | Total Interest Income | | 1,119 | | | 2,782 | | | 2,560 | | Total Interest Income | | 2,122 | | | 598 | | | 1,119 | |
| Interest Expense: | Interest Expense: | | | Interest Expense: | | |
| Consolidated obligations: | Consolidated obligations: | | | Consolidated obligations: | | |
| Bonds | Bonds | | 437 | | | 1,631 | | | 1,393 | | Bonds | | 715 | | | 62 | | | 437 | |
| Discount notes | Discount notes | | 169 | | | 599 | | | 537 | | Discount notes | | 821 | | | 13 | | | 169 | |
| Deposits | Deposits | | 3 | | | 7 | | | 5 | | Deposits | | 18 | | | 1 | | | 3 | |
| Borrowings from other Federal Home Loan Banks | | Borrowings from other Federal Home Loan Banks | | 1 | | | — | | | — | |
| Mandatorily redeemable capital stock | Mandatorily redeemable capital stock | | 5 | | | 14 | | | 24 | | Mandatorily redeemable capital stock | | — | | | — | | | 5 | |
| Total Interest Expense | Total Interest Expense | | 614 | | | 2,251 | | | 1,959 | | Total Interest Expense | | 1,555 | | | 76 | | | 614 | |
| Net Interest Income | Net Interest Income | | 505 | | | 531 | | | 601 | | Net Interest Income | | 567 | | | 522 | | | 505 | |
| Provision for/(reversal of) credit losses | Provision for/(reversal of) credit losses | | 26 | | | 0 | | | 0 | | Provision for/(reversal of) credit losses | | 15 | | | (6) | | | 26 | |
| Net Interest Income After Provision for/(Reversal of) Credit Losses | Net Interest Income After Provision for/(Reversal of) Credit Losses | | 479 | | | 531 | | | 601 | | Net Interest Income After Provision for/(Reversal of) Credit Losses | | 552 | | | 528 | | | 479 | |
| Other Income/(Loss): | Other Income/(Loss): | | | Other Income/(Loss): | | |
| Net gain/(loss) on trading securities | Net gain/(loss) on trading securities | | 15 | | | (2) | | | (2) | | Net gain/(loss) on trading securities | | — | | | (57) | | | 15 | |
| Net gain/(loss) on advances and consolidated obligation bonds held under fair value option | Net gain/(loss) on advances and consolidated obligation bonds held under fair value option | | 85 | | | 101 | | | (21) | | Net gain/(loss) on advances and consolidated obligation bonds held under fair value option | | (65) | | | (54) | | | 85 | |
| Net gain/(loss) on derivatives and hedging activities | | (152) | | | (92) | | | 5 | | |
| Net gain/(loss) on derivatives | | Net gain/(loss) on derivatives | | (9) | | | 37 | | | (152) | |
| Private-label residential mortgage-backed securities (PLRMBS) trust settlement | | Private-label residential mortgage-backed securities (PLRMBS) trust settlement | | 28 | | | — | | | — | |
| Gain on disgorgement settlement | Gain on disgorgement settlement | | 85 | | | 0 | | | 0 | | Gain on disgorgement settlement | | — | | | — | | | 85 | |
| Standby letters of credit fees | | Standby letters of credit fees | | 17 | | | 16 | | | 20 | |
| Other, net | Other, net | | 26 | | | 14 | | | 7 | | Other, net | | (2) | | | 8 | | | 6 | |
| Total Other Income/(Loss) | Total Other Income/(Loss) | | 59 | | | 21 | | | (11) | | Total Other Income/(Loss) | | (31) | | | (50) | | | 59 | |
| Other Expense: | Other Expense: | | | Other Expense: | | |
| Compensation and benefits | Compensation and benefits | | 88 | | | 84 | | | 78 | | Compensation and benefits | | 93 | | | 93 | | | 88 | |
| Other operating expense | Other operating expense | | 60 | | | 73 | | | 67 | | Other operating expense | | 58 | | | 54 | | | 60 | |
| Federal Housing Finance Agency | Federal Housing Finance Agency | | 7 | | | 7 | | | 6 | | Federal Housing Finance Agency | | 7 | | | 7 | | | 7 | |
| Office of Finance | Office of Finance | | 6 | | | 6 | | | 6 | | Office of Finance | | 6 | | | 6 | | | 6 | |
| Quality Jobs Fund expense | | 0 | | | 15 | | | 25 | | |
| | Other, net | Other, net | | 4 | | | 2 | | | 5 | | Other, net | | (2) | | | (1) | | | 4 | |
| Total Other Expense | Total Other Expense | | 165 | | | 187 | | | 187 | | Total Other Expense | | 162 | | | 159 | | | 165 | |
| Income/(Loss) Before Assessment | Income/(Loss) Before Assessment | | 373 | | | 365 | | | 403 | | Income/(Loss) Before Assessment | | 359 | | | 319 | | | 373 | |
| AHP Assessment | AHP Assessment | | 38 | | | 38 | | | 43 | | AHP Assessment | | 36 | | | 32 | | | 38 | |
| Net Income/(Loss) | Net Income/(Loss) | | $ | 335 | | | $ | 327 | | | $ | 360 | | Net Income/(Loss) | | $ | 323 | | | $ | 287 | | | $ | 335 | |
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of San Francisco
Statements of Comprehensive Income
| | | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| | | |
| (In millions) | | | | | 2020 | | 2019 | | 2018 |
| Net Income/(Loss) | | | | | $ | 335 | | | $ | 327 | | | $ | 360 | |
| Other Comprehensive Income/(Loss): | | | | | | | | | |
| Net unrealized gain/(loss) on AFS securities | | | | | (45) | | | 53 | | | (32) | |
| Net change in pension and postretirement benefits | | | | | 0 | | | 3 | | | (4) | |
| Net non-credit-related gain/(loss) on AFS securities | | | | | 0 | | | (19) | | | (50) | |
| Net non-credit-related gain/(loss) on HTM securities | | | | | 1 | | | 2 | | | 3 | |
| Total other comprehensive income/(loss) | | | | | (44) | | | 39 | | | (83) | |
| Total Comprehensive Income/(Loss) | | | | | $ | 291 | | | $ | 366 | | | $ | 277 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| | | |
| (In millions) | | | | | 2022 | | 2021 | | 2020 |
| Net Income/(Loss) | | | | | $ | 323 | | | $ | 287 | | | $ | 335 | |
| Other Comprehensive Income/(Loss): | | | | | | | | | |
| Net unrealized gain/(loss) on AFS securities | | | | | (354) | | | 96 | | | (45) | |
| Net change in pension and postretirement benefits | | | | | (6) | | | 5 | | | — | |
| | | | | | | | | |
| Net non-credit-related gain/(loss) on HTM securities | | | | | — | | | — | | | 1 | |
| Total other comprehensive income/(loss) | | | | | (360) | | | 101 | | | (44) | |
| Total Comprehensive Income/(Loss) | | | | | $ | (37) | | | $ | 388 | | | $ | 291 | |
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of San Francisco
Statements of Capital Accounts
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital Stock
Class B—Putable | | Retained Earnings | | | | Total
Capital |
| (In millions) | Shares | | Par Value | | Restricted | | Unrestricted | | Total | | AOCI | |
| Balance, December 31, 2017 | 32 | | | $ | 3,243 | | | $ | 575 | | | $ | 2,670 | | | $ | 3,245 | | | $ | 318 | | | $ | 6,806 | |
| Comprehensive income/(loss) | | | | | 72 | | | 288 | | | 360 | | | (83) | | | 277 | |
| Issuance of capital stock | 14 | | | 1,377 | | | | | | | | | | | 1,377 | |
| Repurchase of capital stock | (17) | | | (1,669) | | | | | | | | | | | (1,669) | |
| Capital stock reclassified from/(to) mandatorily redeemable capital stock, net | 0 | | | (2) | | | | | | | | | | | (2) | |
| | | | | | | | | | | | | |
| Cash dividends paid on capital stock (8.51%) | | | | | | | (259) | | | (259) | | | | | (259) | |
| Balance, December 31, 2018 | 29 | | | $ | 2,949 | | | $ | 647 | | | $ | 2,699 | | | $ | 3,346 | | | $ | 235 | | | $ | 6,530 | |
| Comprehensive income/(loss) | | | | | 66 | | | 261 | | | 327 | | | 39 | | | 366 | |
| Issuance of capital stock | 12 | | | 1,186 | | | | | | | | | | | 1,186 | |
| Repurchase of capital stock | (11) | | | (1,129) | | | | | | | | | | | (1,129) | |
| Capital stock reclassified from/(to) mandatorily redeemable capital stock, net | 0 | | | (6) | | | | | | | | | | | (6) | |
| | | | | | | | | | | | | |
| Cash dividends paid on capital stock (7.00%) | | | | | | | (206) | | | (206) | | | | | (206) | |
| Balance, December 31, 2019 | 30 | | | $ | 3,000 | | | $ | 713 | | | $ | 2,754 | | | $ | 3,467�� | | | $ | 274 | | | $ | 6,741 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Adjustment for cumulative effect of accounting change | | | | | | | (3) | | | (3) | | | | | (3) | |
| Comprehensive income/(loss) | | | | | 48 | | | 287 | | | 335 | | | (44) | | | 291 | |
| Issuance of capital stock | 8 | | | 789 | | | | | | | | | | | 789 | |
| Repurchase of capital stock | (15) | | | (1,465) | | | | | | | | | | | (1,465) | |
| Capital stock reclassified from/(to) mandatorily redeemable capital stock, net | 0 | | | (40) | | | | | | | | | | | (40) | |
| | | | | | | | | | | | | |
| Partial recovery of prior capital distribution to Financing Corporation | | | | | | | 40 | | | 40 | | | | | 40 | |
| Cash dividends paid on capital stock (5.53%) | | | | | | | (159) | | | (159) | | | | | (159) | |
| Balance, December 31, 2020 | 23 | | | $ | 2,284 | | | $ | 761 | | | $ | 2,919 | | | $ | 3,680 | | | $ | 230 | | | $ | 6,194 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital Stock
Class B—Putable | | Retained Earnings | | | | Total
Capital |
| (In millions) | Shares | | Par Value | | Restricted | | Unrestricted | | Total | | AOCI | |
| Balance, December 31, 2019 | 30 | | | $ | 3,000 | | | $ | 713 | | | $ | 2,754 | | | $ | 3,467 | | | $ | 274 | | | $ | 6,741 | |
| Adjustment for cumulative effect of accounting change | | | | | | | (3) | | | (3) | | | | | (3) | |
| Comprehensive income/(loss) | | | | | 48 | | | 287 | | | 335 | | | (44) | | | 291 | |
| Issuance of capital stock | 8 | | | 789 | | | | | | | | | | | 789 | |
| Repurchase of capital stock | (15) | | | (1,465) | | | | | | | | | | | (1,465) | |
| Capital stock reclassified from/(to) mandatorily redeemable capital stock, net | — | | | (40) | | | | | | | | | | | (40) | |
| Partial recovery of prior capital distribution to Financing Corporation | | | | | — | | | 40 | | | 40 | | | | | 40 | |
| Cash dividends paid on capital stock (5.53%) | | | | | | | (159) | | | (159) | | | | | (159) | |
| Balance, December 31, 2020 | 23 | | | $ | 2,284 | | | $ | 761 | | | $ | 2,919 | | | $ | 3,680 | | | $ | 230 | | | $ | 6,194 | |
| Comprehensive income/(loss) | | | | | — | | | 287 | | | 287 | | | 101 | | | 388 | |
| Issuance of capital stock | 14 | | | 1,409 | | | | | | | | | | | 1,409 | |
| Repurchase of capital stock | (16) | | | (1,607) | | | | | | | | | | | (1,607) | |
| Capital stock reclassified from/(to) mandatorily redeemable capital stock, net | — | | | (25) | | | | | | | | | | | (25) | |
| Transfers from restricted retained earnings | | | | | (53) | | | 53 | | | — | | | | | — | |
| Cash dividends paid on capital stock (5.74%) | | | | | | | (135) | | | (135) | | | | | (135) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Balance, December 31, 2021 | 21 | | | $ | 2,061 | | | $ | 708 | | | $ | 3,124 | | | $ | 3,832 | | | $ | 331 | | | $ | 6,224 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Comprehensive income/(loss) | | | | | 40 | | | 283 | | | 323 | | | (360) | | | (37) | |
| Issuance of capital stock | 68 | | | 6,740 | | | | | | | | | | | 6,740 | |
| Repurchase of capital stock | (50) | | | (4,997) | | | | | | | | | | | (4,997) | |
| Capital stock reclassified from/(to) mandatorily redeemable capital stock, net | (1) | | | (46) | | | | | | | | | | | (46) | |
| Transfers from restricted retained earnings | | | | | (16) | | | 16 | | | — | | | | | — | |
| Cash dividends paid on capital stock (6.30%) | | | | | | | (161) | | | (161) | | | | | (161) | |
| Balance, December 31, 2022 | 38 | | | $ | 3,758 | | | $ | 732 | | | $ | 3,262 | | | $ | 3,994 | | | $ | (29) | | | $ | 7,723 | |
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of San Francisco
Statements of Cash Flows
| | | For the Years Ended December 31, | | For the Years Ended December 31, |
| | (In millions) | (In millions) | 2020 | | 2019 | | 2018 | (In millions) | 2022 | | 2021 | | 2020 |
| Cash Flows from Operating Activities: | Cash Flows from Operating Activities: | | Cash Flows from Operating Activities: | |
| Net Income/(Loss) | Net Income/(Loss) | $ | 335 | | | $ | 327 | | | $ | 360 | | Net Income/(Loss) | $ | 323 | | | $ | 287 | | | $ | 335 | |
| Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: | Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: | | Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: | |
| Depreciation and amortization | 35 | | | (53) | | | (12) | | |
| Depreciation and amortization/(accretion) | | Depreciation and amortization/(accretion) | 270 | | | 79 | | | 35 | |
| Provision for/(reversal of) credit losses | Provision for/(reversal of) credit losses | 26 | | | — | | | 0 | | Provision for/(reversal of) credit losses | 15 | | | (6) | | | 26 | |
| Change in net fair value of trading securities | Change in net fair value of trading securities | (15) | | | 2 | | | 2 | | Change in net fair value of trading securities | — | | | 57 | | | (15) | |
| Change in net fair value adjustment on advances and consolidated obligation bonds held under the fair value option | Change in net fair value adjustment on advances and consolidated obligation bonds held under the fair value option | (85) | | | (101) | | | 21 | | Change in net fair value adjustment on advances and consolidated obligation bonds held under the fair value option | 65 | | | 54 | | | (85) | |
| Change in net derivatives and hedging activities | Change in net derivatives and hedging activities | (1,073) | | | (319) | | | (18) | | Change in net derivatives and hedging activities | 1,302 | | | 531 | | | (1,073) | |
| PLRMBS trust settlement | | PLRMBS trust settlement | (28) | | | — | | | — | |
| Other adjustments, net | Other adjustments, net | 8 | | | 23 | | | 11 | | Other adjustments, net | 6 | | | 7 | | | 8 | |
| Net change in: | Net change in: | | Net change in: | |
| Accrued interest receivable | Accrued interest receivable | 62 | | | (3) | | | (16) | | Accrued interest receivable | (272) | | | 39 | | | 62 | |
| Other assets | Other assets | (19) | | | (23) | | | (6) | | Other assets | 27 | | | (12) | | | (19) | |
| Accrued interest payable | Accrued interest payable | (140) | | | 1 | | | 46 | | Accrued interest payable | 302 | | | 9 | | | (140) | |
| Other liabilities | Other liabilities | (34) | | | (5) | | | (30) | | Other liabilities | (33) | | | (4) | | | (34) | |
| PLRMBS contingent liability | | PLRMBS contingent liability | (41) | | | — | | | — | |
| Total adjustments | Total adjustments | (1,235) | | | (478) | | | (2) | | Total adjustments | 1,613 | | | 754 | | | (1,235) | |
| Net cash provided by/(used in) operating activities | Net cash provided by/(used in) operating activities | (900) | | | (151) | | | 358 | | Net cash provided by/(used in) operating activities | 1,936 | | | 1,041 | | | (900) | |
| Cash Flows from Investing Activities: | Cash Flows from Investing Activities: | | Cash Flows from Investing Activities: | |
| Net change in: | Net change in: | | Net change in: | |
| Interest-bearing deposits | Interest-bearing deposits | 1,497 | | | 165 | | | (1,686) | | Interest-bearing deposits | (3,167) | | | (52) | | | 1,497 | |
| Securities purchased under agreements to resell | Securities purchased under agreements to resell | (250) | | | 300 | | | 4,450 | | Securities purchased under agreements to resell | 8,500 | | | (8,250) | | | (250) | |
| Federal funds sold | Federal funds sold | 1,682 | | | 283 | | | 7,183 | | Federal funds sold | 629 | | | (3,468) | | | 1,682 | |
| | Trading securities: | Trading securities: | | Trading securities: | |
| Proceeds | 1 | | | 656 | | | 501 | | |
| Proceeds from maturities and paydowns | | Proceeds from maturities and paydowns | 251 | | | 3,951 | | | 1 | |
| Purchases | Purchases | (2,480) | | | (1,763) | | | 0 | | Purchases | — | | | — | | | (2,480) | |
| AFS securities: | AFS securities: | | AFS securities: | |
| Proceeds | 2,853 | | | 616 | | | 709 | | |
| Proceeds from sales | | Proceeds from sales | 28 | | | — | | | — | |
| Proceeds from maturities and paydowns | | Proceeds from maturities and paydowns | 1,270 | | | 8,797 | | | 2,853 | |
| Purchases | Purchases | (2,025) | | | (8,739) | | | (3,637) | | Purchases | (5,159) | | | (4,275) | | | (2,025) | |
| HTM securities: | HTM securities: | | HTM securities: | |
| Proceeds | 2,466 | | | 3,549 | | | 4,764 | | |
| Purchases | 0 | | | 0 | | | (1,179) | | |
| Proceeds from maturities and paydowns | | Proceeds from maturities and paydowns | 1,015 | | | 1,868 | | | 2,466 | |
| | Advances: | Advances: | | Advances: | |
| Repaid | Repaid | 494,273 | | | 1,258,362 | | | 1,698,247 | | Repaid | 1,704,744 | | | 257,403 | | | 494,273 | |
| Originated | Originated | (459,523) | | | (1,249,955) | | | (1,694,256) | | Originated | (1,778,003) | | | (243,923) | | | (459,523) | |
| Mortgage loans held for portfolio: | Mortgage loans held for portfolio: | | Mortgage loans held for portfolio: | |
| Principal collected | Principal collected | 1,777 | | | 968 | | | 263 | | Principal collected | 179 | | | 958 | | | 1,777 | |
| Purchases | Purchases | (463) | | | (1,253) | | | (1,246) | | Purchases | — | | | (7) | | | (463) | |
| Other investing activities, net | Other investing activities, net | (3) | | | (38) | | | 0 | | Other investing activities, net | (2) | | | — | | | (3) | |
| Net cash provided by/(used in) investing activities | Net cash provided by/(used in) investing activities | 39,805 | | | 3,151 | | | 14,113 | | Net cash provided by/(used in) investing activities | (69,715) | | | 13,002 | | | 39,805 | |
Federal Home Loan Bank of San Francisco
Statements of Cash Flows (continued)
| | | For the Years Ended December 31, | | For the Years Ended December 31, |
| | (In millions) | (In millions) | 2020 | | 2019 | | 2018 | (In millions) | 2022 | | 2021 | | 2020 |
| Cash Flows from Financing Activities: | Cash Flows from Financing Activities: | | Cash Flows from Financing Activities: | |
| Net change in deposits and other financing activities | Net change in deposits and other financing activities | 375 | | | 256 | | | (18) | | Net change in deposits and other financing activities | 412 | | | (20) | | | 375 | |
| Net change in borrowings from other Federal Home Loan Banks | 0 | | | (250) | | | 250 | | |
| | Net (payments)/proceeds on derivative contracts with financing elements | Net (payments)/proceeds on derivative contracts with financing elements | (167) | | | 82 | | | 0 | | Net (payments)/proceeds on derivative contracts with financing elements | (10) | | | (35) | | | (167) | |
| Net proceeds from issuance of consolidated obligations: | Net proceeds from issuance of consolidated obligations: | | Net proceeds from issuance of consolidated obligations: | |
| Bonds | Bonds | 54,657 | | | 75,458 | | | 73,669 | | Bonds | 70,127 | | | 17,888 | | | 54,657 | |
| Discount notes | Discount notes | 111,474 | | | 144,800 | | | 143,464 | | Discount notes | 216,863 | | | 78,977 | | | 111,474 | |
| Payments for matured and retired consolidated obligations: | Payments for matured and retired consolidated obligations: | | Payments for matured and retired consolidated obligations: | |
| Bonds | Bonds | (81,633) | | | (76,433) | | | (86,444) | | Bonds | (16,086) | | | (39,417) | | | (81,633) | |
| Discount notes | Discount notes | (122,584) | | | (146,564) | | | (144,775) | | Discount notes | (205,111) | | | (71,198) | | | (122,584) | |
| Proceeds from issuance of capital stock | Proceeds from issuance of capital stock | 789 | | | 1,186 | | | 1,377 | | Proceeds from issuance of capital stock | 6,740 | | | 1,409 | | | 789 | |
| Payments for repurchase/redemption of mandatorily redeemable capital stock | Payments for repurchase/redemption of mandatorily redeemable capital stock | (176) | | | (95) | | | (84) | | Payments for repurchase/redemption of mandatorily redeemable capital stock | (44) | | | (24) | | | (176) | |
| Payments for repurchase of capital stock | Payments for repurchase of capital stock | (1,465) | | | (1,129) | | | (1,669) | | Payments for repurchase of capital stock | (4,997) | | | (1,607) | | | (1,465) | |
| Cash dividends paid | Cash dividends paid | (159) | | | (206) | | | (259) | | Cash dividends paid | (161) | | | (135) | | | (159) | |
| Partial recovery of prior capital distribution to Financing Corporation | Partial recovery of prior capital distribution to Financing Corporation | 40 | | | 0 | | | 0 | | Partial recovery of prior capital distribution to Financing Corporation | — | | | — | | | 40 | |
| Net cash provided by/(used in) financing activities | Net cash provided by/(used in) financing activities | (38,849) | | | (2,895) | | | (14,489) | | Net cash provided by/(used in) financing activities | 67,733 | | | (14,162) | | | (38,849) | |
| Net increase/(decrease) in cash and due from banks | Net increase/(decrease) in cash and due from banks | 56 | | | 105 | | | (18) | | Net increase/(decrease) in cash and due from banks | (46) | | | (119) | | | 56 | |
| Cash and due from banks at beginning of the period | Cash and due from banks at beginning of the period | 118 | | | 13 | | | 31 | | Cash and due from banks at beginning of the period | 55 | | | 174 | | | 118 | |
| Cash and due from banks at end of the period | Cash and due from banks at end of the period | $ | 174 | | | $ | 118 | | | $ | 13 | | Cash and due from banks at end of the period | $ | 9 | | | $ | 55 | | | $ | 174 | |
| Supplemental Disclosures: | Supplemental Disclosures: | | Supplemental Disclosures: | |
| Interest paid | Interest paid | $ | 753 | | | $ | 2,289 | | | $ | 1,891 | | Interest paid | $ | 1,078 | | | $ | 94 | | | $ | 753 | |
| AHP payments | AHP payments | 70 | | | 70 | | | 68 | | AHP payments | 40 | | | 37 | | | 70 | |
| Supplemental Disclosures of Noncash Investing and Financing Activities: | Supplemental Disclosures of Noncash Investing and Financing Activities: | | Supplemental Disclosures of Noncash Investing and Financing Activities: | |
| | Transfers of HTM securities to AFS securities | Transfers of HTM securities to AFS securities | 3 | | | 1 | | | 12 | | Transfers of HTM securities to AFS securities | 17 | | | 2 | | | 3 | |
| Transfers of capital stock to mandatorily redeemable capital stock | Transfers of capital stock to mandatorily redeemable capital stock | 40 | | | 6 | | | 2 | | Transfers of capital stock to mandatorily redeemable capital stock | 46 | | | 25 | | | 40 | |
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
(Dollars in millions except per share amounts)
Background Information
The Federal Home Loan Bank of San Francisco (Bank), a federally chartered corporation exempt from ordinary federal, state, and local taxation except real property taxes, is one of 11 regional Federal Home Loan Banks (FHLBanks). The FHLBanks are government-sponsored enterprises (GSEs) that serve the public by enhancing the availability of credit for residential mortgages and targeted community development by providing a readily available, competitively priced source of funds to their member institutions. Each FHLBank is operated as a separate entity with its own management, employees, and board of directors. The Bank does not have any special purpose entities or any other type of off-balance sheet conduits. The Bank has a cooperative ownership structure. Regulated financial depositories and insurance companies engaged in residential housing finance, with principal places of business located in Arizona, California, and Nevada, are eligible to apply for membership. In addition, authorized community development financial institutions are eligible to be members of the Bank. All members are required to purchase capital stock in the Bank. State and local housing authorities that meet certain statutory criteria may also borrow from the Bank. While eligible to borrow, these housing authorities are not members of the Bank, and, as such, are not required to hold capital stock. To access the Bank’s 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 Bank 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. Bank 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. All shareholders may receive dividends on their capital stock, to the extent declared by the Bank’s Boardboard of Directors.directors.
The Bank conducts business with members in the ordinary course of business. See Note 17 – Transactions with Certain Members, Certain Nonmembers, and Other FHLBanks for more information.
The Federal Housing Finance Agency (Finance Agency), an independent federal agency in the executive branch of the United States government, supervises and regulates the FHLBanks and the FHLBanks’ Office of Finance.
The Office of Finance is a joint office of the FHLBanks that facilitates the issuance and servicing of the debt instruments (consolidated obligations) of the FHLBanks and prepares the combined quarterly and annual financial reports of the FHLBanks.
The primary source of funds for the FHLBanks is the proceeds from the sale to the public of the FHLBanks’ consolidated obligations through the Office of Finance using authorized securities dealers. As provided by the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), or regulations governing the operations of the FHLBanks, all the FHLBanks have joint and several liability for all FHLBank consolidated obligations. Other funds are provided by deposits, other borrowings, and the issuance of capital stock to members. The Bank primarily uses these funds to provide advances to members.
Note 1 — Summary of Significant Accounting Policies
Use of Estimates. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make a number of judgments, estimates, and assumptions that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income, expenses, gains, and losses during the reporting period. The most significant of these estimates include:
•accounting for derivatives;
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
•accounting for derivatives;
•estimating fair values of investments classified as trading and available-for-sale (AFS), derivatives and associated hedged items carried at fair value in accordance with the accounting for derivative instruments and associated hedging activities, and financial instruments carried at fair value under the fair value option;
and
•estimating the prepayment speeds on mortgage-backed securities (MBS) and mortgage loans for the accounting of amortization of premiums and accretion of discounts and credit losses previously recorded prior to the adoption of new accounting guidance related to the measurement of credit losses on MBS and mortgage loans.
Actual results could differ significantly from these estimates.
Estimated Fair Values. Many of the Bank’s financial instruments lack an available liquid trading market as characterized by frequent exchange transactions between a willing buyer and willing seller. Therefore, the Bank uses financial models employing significant assumptions and present value calculations for the purpose of determining estimated fair values. Thus, the fair values may not represent the actual values of the financial instruments that could have been realized as of yearend or that will be realized in the future.
Fair values for certain financial instruments are based on quoted prices, market rates, or replacement rates for similar financial instruments as of the last business day of the year. The estimated fair values of the Bank’s financial instruments and related assumptions are detailed in Note 15 – Fair Value.
Adoption of Measurement of Credit Losses on Financial Instruments Accounting Guidance. Beginning January 1, 2020, the Bank adopted, on a modified retrospective basis, new accounting guidance related to the measurement of credit losses on financial instruments that requires a financial asset or group of financial assets measured at amortized cost to be presented at the net amount expected to be collected. The new guidance also requires credit losses relating to these financial instruments as well as AFS securities to be recorded through the allowance for credit losses. Key changes as compared to prior accounting guidance are detailed below. Consistent with the modified retrospective method of adoption, the prior period has not been revised to conform to the new basis of accounting.
Interest-bearing Deposits, Securities Purchased under Agreements to Resell, and Federal Funds Sold. The Bank invests in interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold. These investments provide short-term liquidity and are carried at cost. The Bank invests in Federal Funds sold with counterparties that are considered by the Bank to be of investment quality. Interest-bearing deposits include interest-bearing deposits in banks not meeting the definition of a security. Interest income on these investments is accrued as earned and recorded in interest income on the Statements of Income. Accrued interest receivable is recorded separately on the Statements of Condition.
These investments are evaluated quarterly for expected credit losses. If applicable, an allowance for credit loss is recorded with a corresponding adjustment to the provision for/(reversal of) credit losses. The Bank treats securities purchased under agreements to resell as collateralized financing arrangements because they effectively represent short-term loans to counterparties that are considered by the Bank to be of investment quality, which are classified as assets in the Statements of Condition. Securities purchased under agreements to resell are held in safekeeping in the name of the Bank by third-party custodians approved by the Bank. In accordance with the terms of these loans, if the market value of the underlying securities decreases below the market value required as collateral, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash. Consequently, a credit loss would be recognized if there is a collateral shortfall which the Bank does not believe the counterparty will replenish in accordance with its contractual terms. The credit loss would be limited to the difference between the fair value of the collateral and the investment’s cost.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Prior to January 1, 2020, if an agreement to resell was deemed to be impaired, the difference between the fair value of the collateral and the amortized cost of the agreement was charged to earnings.
See Note 4 – Investments for details on the allowance methodologies relating to interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold.
Investment Securities. The Bank classifies investments as trading, AFS, or held-to-maturity (HTM) at the date of acquisition. Purchases and sales of securities are recorded on a trade date basis.
The Bank classifies certain investments as trading. These securities are held for liquidity purposes and carried at fair value with changes in the fair value of these investments recorded in other income.income/(loss). The Bank does not participate in speculative trading practices and holds these investments indefinitely as the Bank periodically evaluates its liquidity needs.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Bank classifies certain securities as AFS and carries these securities at their fair value. Unrealized gains and losses on these securities are recognized in accumulated other comprehensive income (AOCI).
HTM securities are carried at cost, adjusted for periodic principal repayments, amortization of premiums and accretion of discounts, and previous credit loss recognized in net income and AOCI recorded prior to January 1, 2020. The Bank classifies these investments as HTM securities because the Bank has the positive intent and ability to hold these securities until maturity.
Certain changes in circumstances may cause the Bank to change its intent to hold a certain security to maturity without calling into question its intent to hold other debt securities to maturity in the future. Thus, the sale or transfer of an HTM security because of certain changes in circumstances, such as evidence of significant deterioration in the issuer's creditworthiness or changes in regulatory requirements, is not considered to be inconsistent with its original classification. Other events that are isolated, nonrecurring, and unusual for the Bank that could not have been reasonably anticipated may cause the Bank to sell or transfer an HTM security without necessarily calling into question its intent to hold other debt securities to maturity. In addition, sales of debt securities that meet either of the following two conditions may be considered as maturities for purposes of the classification of securities: (i) the sale occurs near enough to its maturity date (or call date if exercise of the call is probable) that interest rate risk is substantially eliminated as a pricing factor and changes in market interest rates would not have a significant effect on the security's fair value, or (ii) the sale occurs after the Bank has already collected a substantial portion (at least 85%) of the principal outstanding at acquisition because of prepayments on the debt security or scheduled payments on a debt security payable in equal installments (both principal and interest) over its term.
The Bank calculates the amortization of purchase premiums and accretion of purchase discounts on investments using the level-yield method on a retrospective basis over the estimated life of the securities. This method requires a retrospective adjustment of the effective yield each time the Bank changes the estimated life as if the new estimate had been known since the original acquisition date of the securities. The Bank uses nationally recognized, market-based, third-party prepayment models to project estimated lives.
On a quarterly basis, the Bank evaluates its individual AFS investment securities in an unrealized loss position for impairment. A security is considered impaired when its fair value is less than its amortized cost basis. With respect to any debt security, a credit loss is defined as the amount by which the amortized cost basis exceeds the present value of the cash flows expected to be collected. If a credit loss exists but the entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis (the amortized cost basis less any current-period credit loss), an allowance for credit losses is recorded with a corresponding adjustment to the provision for/(reversal of) credit losses. The allowance is limited by the amount of the unrealized loss. Accrued interest receivable is recorded
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
separately on the Statements of Condition. The allowance for credit losses excludes uncollectible accrued interest receivable, which is measured separately.
If management intends to sell an impaired security classified as AFS, or more likely than not will be required to sell the security before expected recovery of its amortized cost basis, any allowance for credit losses is written off and the amortized cost basis is written down to the security’s fair value at the reporting date with any incremental impairment reported in earnings as net unrealized gain/(loss) on AFS securities. If management does not intend to sell an impaired security classified as AFS and it is not more likely than not that management will be required to sell the debt security, then the credit portion of the difference is recognized as an allowance for credit losses and any remaining difference between the security’s fair value and amortized cost is recorded to net unrealized gain/(loss) on AFS securities within other comprehensive income/(loss).
Prior to January 1, 2020, credit losses were recorded as a direct write-down of the AFS security carrying value. For improvements in cash flows of AFS securities, interest income follows the recognition pattern pursuant to the impairment guidance in effect prior to January 1, 2020, and recoveries of amounts previously written off are recorded when received. AFS securities with a credit loss recognized pursuant to the impairment guidance in effect prior to January 1, 2020, continue to follow the prior accounting until maturity or disposition. For improvements in impaired AFS securities with an allowance for credit losses recognized after the adoption of the new guidance, the allowance for credit losses associated with recoveries may be derecognized up to its full amount. Effective January 1, 2020, the net non-credit-related other-than-temporary impairment (OTTI) gain/(loss) on AFS securities was reclassified to net unrealized gain/(loss) on AFS securities within other comprehensive income/(loss).
On a quarterly basis, the Bank evaluates its HTM investment securities for expected credit losses on a pool basis unless an individual assessment is deemed necessary because the securities do not possess similar risk
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
characteristics. If necessary, an allowance for credit losses is recorded with a corresponding adjustment to the provision for/(reversal of) credit losses. Prior to January 1, 2020, credit losses were recorded as a direct write-down of the HTM security carrying value. Accrued interest receivable is recorded separately on the Statements of Condition. The allowance for credit losses excludes uncollectible accrued interest receivable, which is measured separately.
For improvements in HTM securities impaired prior to January 1, 2020, interest income continues to follow the recognition pattern pursuant to the impairment guidance in effect prior to January 1, 2020, and recoveries of amounts previously written off are recorded when received. For improvements in impaired HTM securities with an allowance for credit losses recognized after the adoption of the new guidance, the allowance for credit losses associated with recoveries may be derecognized up to its full amount.
Under the impairment guidance in effect prior to January 1, 2020, the Bank evaluated its individual AFS and HTM investment securities in an unrealized loss position for OTTI. A security was considered impaired when its fair value was less than its amortized cost basis. For impaired debt securities, an entity was required to assess whether: (i) it had the intent to sell the debt security; (ii) it is more likely than not that it would be required to sell the debt security before its anticipated recovery of the remaining amortized cost basis of the security; or (iii) it did not expect to recover the entire amortized cost basis of the impaired debt security. If any of these conditions was met, an OTTI on the security was recognized.
If a credit loss existed but the entity did not intend to sell the debt security and it was not more likely than not that the entity would be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis (the amortized cost basis less any current-period credit loss), the carrying value of the debt security was adjusted to its fair value. However, instead of recognizing the entire difference between the amortized cost basis and fair value in earnings, only the amount of the impairment representing the credit loss was recognized in earnings, while the amount of non-credit-related impairment was recognized in AOCI. The total OTTI was presented in the Statements of Income with an offset for the amount of the total OTTI that was recognized in AOCI.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
See Note 4 – Investments for details on the allowance methodologies relating to AFS and HTM securities.
Financial Instruments Meeting Netting Requirements. The Bank presents certain financial instruments, including derivative instruments and securities purchased under agreements to resell, on a net basis when they have a legal right of offset and all other requirements for netting are met (collectively referred to as the netting requirements). The Bank has elected to offset its derivative asset and liability positions, as well as cash collateral received or pledged, when the netting requirements are met. The Bank did not have any offsetting liabilities related to its securities purchased under agreements to resell for the periods presented.
The net exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. For derivative instruments that meet the netting requirements, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset. Additional information regarding these agreements is provided in Note 14 – Derivatives and Hedging Activities. Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented.
Variable Interest Entities. The Bank’s investments in variable interest entities (VIEs) are limited toinclude private-label residential mortgage-backed securities (PLRMBS). On an ongoing basis, the Bank performs a quarterly evaluation to determine whether it is the primary beneficiary in any VIE. The Bank evaluated its investments in VIEs as of December 31, 2020,2022, to determine whether it is a primary beneficiary of any of these investments. The primary beneficiary is required to consolidate a VIE. The Bank determined that consolidation accounting is not required because the Bank is not the primary beneficiary of these VIEs for the periods presented. The Bank does not have the power to significantly affect the economic performance of any of these investments because it does not act as a key decision maker nor does it have the unilateral ability to replace a key decision maker. In addition, the Bank does not design, sponsor, transfer, service, or provide credit or liquidity support in any of its investments in VIEs. The Bank’s maximum loss exposure for these investments is limited to the carrying value.
Advances. The Bank reports advances (loans to members, former members or their successors or housing associates) either at amortized cost or at fair value when the fair value option is elected. Advances carried at amortized cost are evaluated quarterly for expected credit losses and reported net of premiums, discounts (including discounts related to the Affordable Housing Program), and hedging adjustments. The Bank amortizes premiums and accretes discounts and recognizes hedging adjustments resulting from the discontinuation of a hedging relationship to interest income using a level-yield methodology. Interest on advances is credited to income as earned. For advances carried at fair value, the Bank recognizes contractual interest in interest income. Accrued interest receivable is recorded separately on the Statements of Condition. The advances carried at amortized cost are evaluated quarterly for expected credit losses. If deemed necessary, an allowance for credit losses is recorded with a corresponding adjustment to the provision for/(reversal of) credit losses.
Prior to January 1, 2020, the Bank evaluated advances to determine if an allowance for credit losses was necessary if it was probable that impairment had occurred as of the Statements of Condition date and the amount of loss could be reasonably estimated. The Bank evaluated advances for impairment with respect to which it was probable that all principal and interest due would not be collected according to its contractual terms.
See Note 5 – Advances for details on the allowance methodologies relating to advances.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Advance Modifications. In cases in which the Bank funds an advance concurrent with or within a short period of time before or after the prepayment of a previous advance to the same member, the Bank evaluates whetherat market rates, the subsequent advance meets the accounting criteria to qualifyis accounted for as a new advance. The Bank does not issue advances at non-market rates. If a member makes a request for a modification ofto an existing advance, or whether it constitutes a new advance. Thethe Bank compares the present value of the cash flows on the subsequentmodified advance to the present value of the cash flows remaining on the previousoriginal advance. If there is at leastless than a 10% difference in the present value of the cash flows or if the Bank concludes that the difference between the advances is not more than
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
minor based on a qualitative assessment of the modifications made to the previous advance's contractual terms, then the subsequent advance is accounted for as a new advance. In all other instances,modification. Modification requests with a difference in cash flows that is more than minor are not accepted by the subsequent advance is accounted for as a modification.Bank.
Prepayment Fees. When a borrower prepays certain advances prior to the original maturity, the Bank may charge the borrower a prepayment fee. For certain advances with full or partial prepayment symmetry, the Bank may charge the borrower a prepayment fee or pay the borrower a prepayment credit, depending on certain circumstances, such as movements in interest rates, when the advance is prepaid. TheIn November 2018, the Bank no longer offersdiscontinued offering advances with partial prepayment symmetry.
For prepaid advances that are hedged and meet the hedge accounting requirements, the Bank terminates the hedging relationship upon prepayment and records the associated fair value gains and losses, adjusted for the prepayment fees, in interest income. If a new advance represents a modification of an original hedged advance, the fair value gains or losses on the advance and the prepayment fees are included in the carrying amount of the modified advance, and gains or losses and prepayment fees are amortized in interest income over the life of the modified advance using the level-yield method. If the modified advance is also hedged and the hedge meets the hedge accounting requirements, the modified advance is marked to fair value after the modification, and subsequent fair value changes are recorded in interest income on advances effective January 1, 2019. Prior to January 1, 2019, subsequent fair value changes were recorded in other income.advances. If the prepayment represents an extinguishment of the original hedged advance, the prepayment fee and any fair value gain or loss are immediately recognized in interest income.
For prepaid advances that are not hedged or that are hedged but do not meet the hedge accounting requirements, the Bank records prepayment fees in interest income unless the Bank determines that the new advance represents a modification of the original advance. If the new advance represents a modification of the original advance, the prepayment fee on the original advance is deferred, recorded in the basis of the modified advance, and amortized over the life of the modified advance using the level-yield method. This amortization is recorded in interest income.
Mortgage Loans Held for Portfolio. Under the Mortgage Partnership Finance® (MPF®) Program, the Bank may purchasepurchased from participating members, for its own portfolio, conventional conforming fixed rate residential mortgage loans under the MPF Original product. In addition, the Bank may facilitatefacilitated the purchase of conforming fixed rate mortgage loans from members for concurrent sale to Fannie Mae under the MPF Xtra® product. When members sellsold loans under the MPF Xtra product, the loans arewere sold to a third-party investor and arewere not recorded on the Bank’s Statements of Condition. (“Mortgage Partnership Finance,” “MPF,” and “MPF Xtra” are registered trademarks of the FHLBank of Chicago.) On December 17, 2020, the Bank announced that it would no longer offer new commitments to directly purchase, or to facilitate the purchase of, mortgage loans from its members. On March 31, 2021, the Bank closed all remaining open commitments to purchase mortgage loans for its own portfolio under the MPF Original product, and by June 30, 2021, the Bank no longer facilitated the purchase of mortgage loans under the MPF Xtra product.
Participating members originated or purchased the mortgage loans, credit-enhanced them and sold them to the Bank, and generally retained the servicing of the loans. Unlike conventional MPF products held for portfolio, participating members are not required to provide credit enhancement and do not receive credit enhancement fees under the MPF Xtra product. The Bank manages the interest rate risk, prepayment risk, and liquidity risk of each loan in its portfolio. The Bank and the participating financial institution (either the original participating member that sold the loans to the Bank or a successor to that member) share in the credit risk of the loans by structuring potential losses on conventional MPF loans into layers with respect to each master commitment, as follows:
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
(1)The first layer of protection against loss is the liquidation value of the real property securing the loan.
(2)The next layer of protection comes from the primary mortgage insurance that is required for loans with a loan-to-value ratio greater than 80%, if still in place.
(3)Losses that exceed the liquidation value of the real property and any primary mortgage insurance, up to an agreed-upon amount called the first loss account for each master commitment, are incurred by the Bank.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
(4)Losses in excess of the first loss account for each master commitment, up to an agreed-upon amount called the credit enhancement amount, are covered by the participating financial institution’s credit enhancement obligation at the time losses are incurred.
(5)Losses in excess of the first loss account and the participating financial institution’s remaining credit enhancement for the master commitment, if any, are incurred by the Bank.
Under the MPF Program, the participating financial institution’s credit enhancement protection consists of the credit enhancement amount, which may be a direct obligation of the participating financial institution or may be a supplemental mortgage insurance (SMI) policy paid for by the participating financial institution, and may include a contingent performance-based credit enhancement fee payable to the participating financial institution. The participating financial institution is required to pledge collateral to secure any portion of its credit enhancement amount that is a direct obligation. The amount of the credit enhancement iswas calculated at the time loans were purchased so that any Bank credit losses (excluding special hazard losses) in excess of the first loss account are limited to those that would be expected from an equivalent investment with a long-term credit rating of AA for loans purchased prior to April 2017 and BBB for loans purchased thereafter through March 2021, as determined by the MPF Program methodology.
For taking on the credit enhancement obligation, the Bank pays the participating financial institution or any successor a credit enhancement fee, typically 10 basis points per annum, which is calculated on the remaining unpaid principal balance of the mortgage loans. Depending on the specific MPF product, all or a portion of the credit enhancement fee is typically paid monthly beginning with the month after each delivery of loans. The MPF Original product provides participating financial institutions the option to receive credit enhancement fees monthly over the life of the loans or as an upfront lump sum amount that is included in the purchase price at the time loans are sold to the Bank. The lump sum amount is approximately equivalent to the present value of the monthly credit enhancement fees that the Bank would otherwise be expected to pay over the life of the loans. The MPF Plus product provides for a performance-based credit enhancement fee, which accrues monthly, beginning with the month after each delivery of loans, and is paid to the participating financial institution beginning 12 months later. The performance-based credit enhancement fee will be reduced by an amount equivalent to loan losses up to the amount of the first loss account established for each master commitment. The participating financial institutions obtain SMI to cover their credit enhancement obligations under this product. If the SMI provider's claims-paying ability rating falls below a specified level, the participating financial institution has six months to either replace the SMI policy or assume the credit enhancement obligation and fully collateralize the obligation; otherwise the Bank may choose not to pay the participating financial institution its performance-based credit enhancement fee.
The Bank classifies mortgage loans as held for portfolio and, accordingly, reports them at their principal amount outstanding net of unamortized premiums, unamortized credit enhancement fees paid as a lump sum at the time loans are purchased, discounts, and unrealized gains and losses from loans initially classified as mortgage loan commitments. The Bank defers and amortizes these amounts as interest income using the level-yield method on a retrospective basis over the estimated life of the related mortgage loan. Actual prepayment experience and estimates of future principal prepayments are used in calculating the estimated life of the mortgage loans. The Bank aggregates the mortgage loans by similar characteristics (type, maturity, interest rate, and acquisition date) in determining prepayment estimates. A retrospective adjustment is required each time the Bank changes the estimated amounts as if the new estimate had been known since the original acquisition date of the assets. The Bank uses nationally recognized, market-based, third-party prepayment models to project estimated lives.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Bank performs a quarterly assessment of its mortgage loans held for portfolio to estimate expected credit losses. An allowance for credit losses is recorded with a corresponding adjustment to the provision for/(reversal of) credit losses.
The Bank measures expected credit losses on mortgage loans on a collectiveloan-level basis, pooling loans with similar risk characteristics. If a mortgage loan no longer shares risk characteristics with other loans, it is removed fromfactoring in the pool and evaluated for expected credit losses on an individual basis.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
enhancement structure at the master commitment level.When developing the allowance for credit losses, the Bank measures the estimated loss over the remaining life of a mortgage loan, which also considers how the Bank’s credit enhancements mitigate credit losses. The Bank includes estimates of expected recoveries within the allowance for credit losses. If a loan is purchased at a discount, the discount does not offset the allowance for credit losses. Accrued interest receivable is recorded separately on the Statements of Condition. The allowance excludes uncollectible accrued interest receivable, as the Bank writes off accrued interest receivable by reversing interest income if a mortgage loan is placed on nonaccrual status.
A past due loan is one where the borrower has failed to make a scheduled full payment of principal and interest within 30 days of its due date. The Bank places a mortgage loan on nonaccrual status when the collection of the contractual principal or interest from the participating financial institution is doubtful, when the collection of the contractual principal or interest from the participating financial institution is reported 90 days or more past due, or when the loan is in foreclosure.foreclosure, except when the loan is well-secured (e.g., through credit enhancements) and in the process of collection. Loans that are on nonaccrual status and that are considered collateral-dependent are measured for credit losses based on the fair value of the underlying property less estimated selling costs. Loans are considered collateral-dependent ifwhen the borrower is experiencing financial difficulty and repayment is expected to be provided solely bysubstantially through the sale of the underlying property;collateral; that is, if it is considered likely that the borrower will default and there is no credit enhancement to offset losses under the master commitment, or the collectability or availability of credit enhancement is deemed to be uncertain. Collateral-dependent loans are credit deteriorated if the fair value of the underlying collateral less estimated selling costs is insufficient to recover the unpaid principal balance on the loan.
When a mortgage loan is placed on nonaccrual status, accrued but uncollected interest is reversed against interest income. The Bank records cash payments received on nonaccrual loans first as interest income and then as a reduction of principal as specified in the contractual agreement, unless the collection of the remaining principal amount due is considered doubtful. If the collection of the remaining principal amount due is considered doubtful, then cash payments received would be applied first solely to principal until the remaining principal amount due is expected to be collected and then as a recovery of any charge-off, if applicable, followed by recording interest income. A loan on non-accrualnonaccrual status may be restored to accrual when (1) none of its contractual principal and interest is due and unpaid, and the Bank expects repayment of the remaining contractual interest and principal, or (2) it otherwise becomes well secured and in the process of collection.
Troubled debt restructuring (TDR) is considered to have occurred when a concession is granted to the debtor for economic or legal reasons related to the debtor's financial difficulties and that concession would not have been considered otherwise. An MPF loan considered a TDR that shares similar risk characteristics with other loans is evaluated for credit losses on a collective basis. TDRs that do not share risk characteristics with other loans are individually evaluated for credit losses. Credit loss is measured by factoring in expected cash flow shortfalls incurred as of the reporting date, as well as the economic loss attributable to delaying the original contractual principal and interest due dates, if applicable.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. Section 4013 of the CARES Act provides optional, temporary relief from the accounting and reporting requirements for TDRs for certain loan modifications granted to borrowers adversely affected by the COVID-19 pandemic (COVID-related modifications) that were not more than 30 days past due on payments as of December 31, 2019. Specifically, the CARES Act provides that a financial institution may elect to suspend: (i) the requirements under U.S. GAAP for certain loan modifications that would otherwise be categorized as a TDR, and (ii) any determination that such loan modifications would be considered a TDR, including the related accounting. TDR relief applies to COVID-related modifications made from March 1, 2020, until the earlier of December 31, 2020, or 60 days following the termination of the national emergency declared by the President of the United States on March 13, 2020. On December 27, 2020, the Consolidated Appropriations Act, 2021, was signed into law, extending the applicable period to the earlier of January 1, 2022, or 60 days following the termination of the national emergency declared on March 13, 2020. Starting in the second quarter of 2020, the Bank elected to apply the TDR relief provided by the CARES Act. As such, all COVID-related modifications meeting the provisions of the CARES Act are excluded from TDR classification and accounting, and the Bank considers these loans to have a current payment status as long as payments are being made in accordance with the new terms. Alternatively, COVID-related modifications that do not meet the provisions of the CARES Act continue to be assessed for TDR classification. The
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Bank estimates the allowance for credit losses for COVID-related modifications in the same manner as other mortgage loans held for portfolio.
Mortgage loans with COVID-related modifications that are greater than 180 days past due are reviewed individually for borrower credit characteristics that could support an expectation that the mortgage borrower could exit a forbearance plan in good standing. Credit factors used in making this determination include, but are not limited to, FICO scores, past payment history, and modeled probability of foreclosure (default risk). For loans where an expectation of exit from a forbearance plan could be supported based on the credit review, the expected loss amount is included in the Bank’s estimated allowance for credit losses on mortgage loans. For all other mortgage loans that are more than 180 days past due that do not have COVID-related modifications, or thoseand that have COVID-related modifications but the expectation of exit from a forbearance plan cannot be supported, and any outstanding balance is in excess of the fair value of the property, less costcosts to sell, thisthe excess is charged off by the end of the period. Likewise, when a borrower is in bankruptcy, loans are written down to the fair value of the collateral, less cost to sell, generally within 60 days of receipt of the notification of filing from the bankruptcy court, unless it can be clearly demonstrated and documented that repayment is likely to occur.
Prior to January 1, 2020, the Bank evaluated the allowance for credit losses on MPF mortgage loans based on two components. The first component applied to impaired mortgage loans that were considered collateral-dependent. The second component applied to loans that were not specifically identified as impaired and was based on the Bank’s estimate of probable credit losses on those loans as of the financial statement date. For the first component, the Bank recorded an allowance for credit losses on mortgage loans if it was probable an impairment occurred in the Bank’s mortgage loans held for portfolio as of the Statements of Condition date and the amount of loss could be reasonably estimated. A mortgage loan was considered to be impaired when it was reported 90 days or more past due (nonaccrual) or when it was probable, based on current information and events, that the Bank would be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreement.
The Bank does not purchase mortgage loans with credit deterioration present at the time of purchase. See Note 6 – Mortgage Loans Held for Portfolio for details on the allowance methodologies relating to mortgage loans.
Other Fees. Letter of credit fees are recorded as other incomeincome/(loss) over the term of the letter of credit.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Derivatives and Hedging Activities. All derivatives are recognized on the Statements of Condition at their fair values and are reported as either derivative assets or derivative liabilities, net of cash collateral, and accrued interest received from or pledged to clearing agents or counterparties. The fair values of derivatives are netted by clearing agent or counterparty when the netting requirements have been met. If these netted amounts are positive, they are classified as an asset, and if negative, they are classified as a liability. Cash flows associated with derivatives are reflected as cash flows from operating activities in the Statements of Cash Flows unless the derivative meets the criteria to be a financing derivative.
The Bank uses London Clearing House (LCH) Ltd for all cleared derivative transactions. The rulebook of LCH Ltd characterizes variation margin as daily settlement payments, and initial margin is considered cash collateral.
Each derivative is designated as one of the following:
(1)a qualifying hedge of the change in fair value of (i) a recognized asset or liability or (ii) an unrecognized firm commitment (a fair value hedge); or
(2)a non-qualifying hedge of an asset or liability for asset-liability management purposes or of certain advances and consolidated obligation bonds for which the Bank elected the fair value option (an economic hedge).
If hedging relationships meet certain criteria, including but not limited to formal documentation of the hedging relationship and an expectation to be hedge effective, they are eligible for hedge accounting, and the offsetting changes in fair value of the hedged items attributable to the hedged risk may be recorded in earnings. The
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
application of hedge accounting generally requires the Bank to evaluate the effectiveness of the hedging relationships at inception and on an ongoing basis and to calculate the changes in fair value of the derivatives and the related hedged items independently. This is known as the long-haul method of hedge accounting. Transactions that meet certain criteria qualify for the short-cut method of hedge accounting, in which an assumption can be made that the change in the fair value of a hedged item, because of changes in the benchmark rate, exactly offsets the change in the value of the related derivative. Under the short-cut method, the entire change in fair value of the interest rate swap is considered to be effective at achieving offsetting changes in fair values of the hedged asset or liability.
Derivatives are typically executed at the same time as the hedged item, and the Bank designates the hedged item in a qualifying hedge relationship as of the trade date. In many hedging relationships, the Bank may designate the hedging relationship upon its commitment to disburse an advance or trade a consolidated obligation in which settlement occurs within the shortest period of time possible for the type of instrument based on market settlement conventions. The Bank records the changes in the fair value of the derivatives and the hedged item beginning on the trade date.
Beginning January 1, 2019, the Bank prospectively adopted hedge accounting guidance, which, among other things, affected the presentation of gains and losses on derivatives and hedging activities for qualifying hedges. Upon adoption, changesChanges in the fair value of a derivative that is designated as a fair value hedge, along with changes in the fair value of the hedged asset or liability (hedged item) that are attributable to the hedged risk (including changes that reflect gains or losses on firm commitments), are recorded in net interest income in the same line as the earnings effect of the hedged item. Net gains and losses on derivatives and hedging activities for qualifying hedges recorded in net interest income include unrealized and realized gains and losses, which include net interest settlements. For AFS securities that have been hedged and qualify as a fair value hedge, the Bank records the portion of the change in the fair value of the investment related to the risk being hedged in interest income together with the related change in the fair value of the derivative, and records the remainder of the change in the fair value of the investment in Accumulated Other Comprehensive Income (AOCI) as “Net unrealized gain/(loss) on AFS securities.” The hedge accounting guidance also permits hedging ofBank hedges the benchmark risk component of cash flows in a fair value hedge. The Bank modified the risk of prospective fair value hedges from the contractual coupon interest rate to the benchmark rate component, improving hedge effectiveness.
Prior to January 1, 2019, for fair value hedges, any hedge ineffectiveness (which represented the amount by which the change in the fair value of the derivative differed from the change in the fair value of the hedged item) was recorded in other income as “Net gain/(loss) on derivatives and hedging activities.” For AFS securities that were hedged and qualified as a fair value hedge, the Bank recorded the portion of the change in the fair value of the investment related to the risk being hedged in other income as “Net gain/(loss) on derivatives and hedging activities” together with the related change in the fair value of the derivative, and recorded the remainder of the change in the fair value of the investment in AOCI as “Net unrealized gain/(loss) on AFS securities.”
Changes in the fair value of a derivative designated as an economic hedge are recorded in current period earnings with no fair value adjustment to an asset or liability. An economic hedge is defined as a derivative hedging certain advances and consolidated obligation bonds for which the Bank elected the fair value option, or hedging specific or
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
non-specific underlying assets, liabilities, or firm commitments, that does not qualify or was not designated for fair value hedge accounting, but is an acceptable hedging strategy under the Bank's risk management program. These economic hedging strategies also comply with Finance Agency regulatory requirements prohibiting speculative hedge transactions. An economic hedge introduces the potential for earnings variability caused by the changes in fair value of the derivatives that are recorded in the Bank's income but are not offset by corresponding changes in the value of the economically hedged assets, liabilities, or firm commitments. Changes in the fair value of these non-qualifying hedges are recorded in other incomeincome/(loss) as “Net gain/(loss) on derivatives and hedging activities.derivatives.” In addition, the net settlements associated with these non-qualifying hedges are recorded in other incomeincome/(loss) as “Net gain/(loss) on derivatives and hedging activities.derivatives.” Cash flows associated with these stand-alone derivatives are reflected
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
as cash flows from operating activities in the Statements of Cash Flows unless the derivative meets the criteria to be designated as a financing derivative.
The net settlements of interest receivables and payables on derivatives designated as fair value hedges are recognized as adjustments to the interest income or interest expense of the designated underlying hedged item. The net settlements of interest receivables and payables on intermediated derivatives for members and other economic hedges are recognized in other incomeincome/(loss) as “Net gain/(loss) on derivatives and hedging activities.derivatives.”
The Bank discontinues hedge accounting prospectively when: (i) it determines that the derivative is no longer highly effective in offsetting changes in the fair value of a hedged item (including hedged items such as firm commitments or forecasted transactions); (ii) the derivative and/or the hedged item expires or is sold, terminated, or exercised; (iii) it is no longer probable that the forecasted transaction will occur in the originally expected period; (iv) a hedged firm commitment no longer meets the definition of a firm commitment; (v) it determines that designating the derivative as a hedging instrument is no longer appropriate; (vi) a critical term on the hedged item changes; or (vii) it decides to use the derivative to offset changes in the fair value of other derivatives or instruments carried at fair value.
When hedge accounting is discontinued, the Bank either terminates the derivative or continues to carry the derivative on the Statements of Condition at its fair value, ceases to adjust the hedged asset or liability for changes in fair value, and amortizes the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using a level-yield methodology.
When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Bank continues to carry the derivative on the Statements of Condition at its fair value, removing from the Statements of Condition any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.
The Bank may be the primary obligor on consolidated obligations and may make advances in which derivative instruments are embedded. Upon execution of these transactions, the Bank assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the advance or debt (the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that: (i) the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (ii) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as a stand-alone derivative instrument equivalent to an economic hedge. However, the entire contract is carried on the Statements of Condition at fair value and no portion of the contract is designated as a hedging instrument if the entire contract (the host contract and the embedded derivative) is to be measured at fair value, with changes in fair value reported in current period earnings (such as an investment security classified as trading, as well as hybrid financial instruments that are eligible for the fair value option), or if the Bank cannot reliably identify and measure the embedded derivative for purposes of separating the derivative from its host contract.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Premises, Software, and Equipment. Premises, software, and equipment are included in Other Assets on the StatementStatements of Condition. The Bank records premises, software, and equipment at cost less accumulated depreciation and amortization. At December 31, 20202022 and 2019,2021, premises, software, and equipment were $39$29 million and $44,$32 million, respectively, which was net of accumulated depreciation and amortization of $76$75 million and $69,$74 million, respectively. Improvements and major renewals are capitalized; ordinary maintenance and repairs are expensed as incurred. Depreciation is computed on the straight-line method over the estimated useful lives of assets ranging from 3 to 10 years, and leasehold improvements are amortized on the straight-line method over the estimated useful life of the improvement or the remaining term of the lease, whichever is shorter. Depreciation and amortization expense was $6 million for 2022, $7 million for 2020, $92021, and $7 million for 2019, and $13 for 2018.2020.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Consolidated Obligations. Consolidated obligations are recorded at amortized cost unless the Bank has elected the fair value option, in which case the consolidated obligations are carried at fair value.
Concessions on Consolidated Obligations. Concessions are paid to dealers in connection with the issuance of consolidated obligations for which the Bank is the primary obligor. The amount of the concession is allocated to the Bank by the Office of Finance based on the percentage of the debt issued for which the Bank is the primary obligor. Concessions paid on consolidated obligations designated under the fair value option are expensed as incurred in non-interestother expense. Concessions paid on consolidated obligations not designated under the fair value option are deferred and amortized to expense using the level-yield method over the remaining contractual life or on a retrospective basis over the estimated life of the consolidated obligations. Amortization of concessions is included in consolidated obligation interest expense and totaled $7 million, $5 million, and $13 $11,million, in 2022, 2021, and $6, in 2020, 2019, and 2018, respectively.
Discounts and Premiums on Consolidated Obligations. The discounts on consolidated obligation discount notes for which the Bank is the primary obligor are amortized to expense using the level-yield method over the term to maturity. The discounts and premiums on consolidated obligation bonds for which the Bank is the primary obligor are amortized to expense using the level-yield method over the remaining contractual life or on a retrospective basis over the estimated life of the consolidated obligation bonds.
Mandatorily Redeemable Capital Stock. The Bank reclassifies the capital stock subject to redemption from capital to a liability after a member provides the Bank with a written notice of redemption; gives notice of intention to withdraw from membership; or 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, resulting in the member's shares then meeting the definition of a mandatorily redeemable financial instrument. Shares meeting this definition are reclassified to a liability at fair value. Dividends declared on shares classified as a liability are accrued at the expected dividend rate and reflected as interest expense in the Statements of Income. The repayment of these mandatorily redeemable financial instruments (by repurchase or redemption of the shares) is reflected as a financing cash outflow in the Statements of Cash Flows once settled. See Note 11 – Capital for more information.
If a member cancels its written notice of redemption or notice of withdrawal or if the Bank allows the transfer of mandatorily redeemable capital stock to a member, the Bank reclassifies mandatorily redeemable capital stock from a liability to capital. After the reclassification, dividends on the capital stock are no longer classified as interest expense.
Off-Balance Sheet Credit Exposures. The Bank evaluates its off-balance sheet credit exposures on a quarterly basis for expected credit losses. If deemed necessary, an allowance for expected credit losses on these off-balance sheet exposures is recorded in other liabilities with a corresponding adjustment to the provision for/(reversal of) credit losses. See Note 16 – Commitments and Contingencies for details on the allowance methodologies relating to off-balance sheet credit exposure.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Finance Agency Expenses. The FHLBanks fund a portion of the costs of operating the Finance Agency, and each FHLBank is assessed a proportionate share of those costs. The Finance Agency allocates its expenses and working capital fund among the FHLBanks based on the ratio between each FHLBank's minimum required regulatory capital and the aggregate minimum required regulatory capital of all the FHLBanks.
Office of Finance Expenses. Each FHLBank is assessed a proportionate share of the cost of operating the Office of Finance, which facilitates the issuance and servicing of consolidated obligations. The Office of Finance allocates its operating and capital expenditures among the FHLBanks as follows: (1) two-thirds of the assessment is based on each FHLBank’s share of total consolidated obligations outstanding, and (2) one-third of the assessment is based on an equal pro rata allocation.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Affordable Housing Program. As more fully discussed in Note 9 – Affordable Housing Program, the FHLBank Act requires each FHLBank to establish and fund an Affordable Housing Program (AHP). The Bank charges the required funding for the AHP to earnings and establishes a liability. The AHP funds provide subsidies to members 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.
Gain on Disgorgement Settlement. During the third quarter of 2020, the Bank received disgorgement proceeds in the amount of $85 million in connection with a Securities and Exchange Commission enforcement action. Disgorgement proceeds are recorded in Other Income/(Loss)other income/(loss) in “Gain on disgorgement settlement” in the Statements of Income. Disgorgement proceeds are considered realized and recorded when the Bank receives cash or assets that are readily convertible to known amounts of cash or claims to cash, when the Bank enters into a signed agreement that is not subject to appeal, where the counterparty has the ability to pay, and the amount to be received can be reasonably estimated. Prior to being realized or realizable, the Bank considers potential disgorgement proceeds to be gain contingencies, and therefore they are not recorded in the Statements of Income.
Note 2 — Recently Issued and Adopted Accounting Guidance
The following table provides a summary of recently issued and adopted accounting standards that may have an effect on the Bank’s financial statements.
Recently Issued and Accounting Guidance, Not Yet Adopted
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | |
| Accounting Standards Update (ASU) | | Description | | Effective Date | | Effect on the Financial Statements or Other Significant Matters |
| Facilitation of the Effects of Reference Rate Reform on Financial Reporting, as amended (ASU 2020-04) | | This guidanceupdate provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include:
• contract modifications,
• hedging relationships, and
• sale or transfer of debt securities classified as HTM. | | This guidance isbecame effective immediately for the Bank, and the Bank may elect to apply the amendments prospectivelybeginning March 2020 through December 31, 2022.2024. | | The Bank has assessed the guidance and plans to electhas elected some of the optional expedients and exceptions provided; however,provided related to the fulldiscounting transition for uncleared derivative transactions on a prospective basis since 2021, which did not have a material effect on the Bank’s financial condition, results of operations, and cash flows, has not yet been determined. In particular, during the fourth quarter of 2020, the Bank elected optional expedients specific to the discounting transition on a retrospective basis, which did not have a material effect.and financial statement disclosures. |
| | | | | | |
Troubled Debt Restructurings and Vintage Disclosures (ASU 2022-02) | | | | | | |
| | | | | | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Recently Adopted Accounting Guidance
| | | | | | | | | | | | | | | | | | | | |
ASU | | Description | | Effective Date | | Effect on the Financial Statements or Other Significant Matters |
Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14) | | This guidance modifieseliminates the accounting guidance for troubled debt restructurings by creditors that have adopted the current expected credit losses methodology while enhancing disclosure requirements for employers that sponsor defined benefit pension or other postretirement planscertain loan refinancings and restructurings by creditors made to improveborrowers experiencing financial difficulty. Additionally, this guidance requires disclosure effectiveness.of current-period gross write-offs by year of origination for financing receivables and net investment in leases. | | This guidance became effective for the Bank for the annual period ended December 31, 2020, and the annual periods thereafter. | | The adoption of this guidance affected the Bank’s disclosures but did not have any effect on the Bank’s financial condition, results of operations, or cash flows. |
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15) | | This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). | | This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2020.2023. | | The Bank adopted this guidance was adopted as of January 1, 2020.2023. The adoption of this guidance did not have anya material effect on the Bank’s financial condition, results of operations, or cash flows. |
Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13) | | This guidance modifies the disclosure requirements for fair value measurements to improve disclosure effectiveness. | | This guidance became effective for the Bank for the interimflows, and annual periods beginning on January 1, 2020. | | The guidance was adopted as of January 1, 2020. The adoption of this guidance impacted the Bank’s disclosures but did not have any effect on the Bank’s financial condition, results of operations, or cash flows. |
Measurement of Credit Losses on Financial Instruments, as amended (ASU 2016-13) | | The guidance replaces the current incurred loss impairment model and requires entities to measure expected credit losses based on consideration of a broad range of relevant information, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The guidance also requires, among other things, credit losses relating to AFS securities to be recorded through an allowance for credit losses and expands disclosure requirements. | | This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2020. | | This guidance was adopted using a modified retrospective basis as of January 1, 2020. Upon adoption, this guidance had no effect on advances or U.S. obligations and GSEs investments. The adoption of this guidance had an immaterial effect on the remaining investment portfolio given the specific terms, issuer guarantees, and collateralized/securitized nature of these instruments, on mortgage loans, and on the Bank’s financial condition, results of operations, and cash flows.statement disclosures. |
Note 3 — Cash and Due from Banks
Cash on hand, cash items in the process of collection, and amounts due from correspondent banks and the Federal Reserve Bank are included in Cash and due from banks on the Statements of Condition.
Cash and due from banks includes certain compensating balances, where the Bank maintains collected cash balances with commercial banks in consideration for certain services. There are no legal restrictions under these agreements on the withdrawal of these funds. The average collected cash balances were approximately $134$34 million for 20202022 and $20$85 million for 2019.2021.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 4 — Investments
The Bank makes short-term investments in interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold, and may make other investments in debt securities, which are classified as either trading, AFS, or HTM.
Interest-Bearing Deposits, Securities Purchased under Agreements to Resell, and Federal Funds Sold. The Bank invests in interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold to provide short-term liquidity. These investments are generally transacted with counterparties that have received an investment grade credit rating of BBB or greater by a nationally recognized statistical rating organization (NRSRO).
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
At December 31, 2020,2022 and 2021, none of these investments were with counterparties rated below BBB nor with unrated counterparties. These may differ from any internal ratings of the investments by the Bank, if applicable.
Federal funds sold are unsecured loans that are generally transacted on an overnight term. Finance Agency regulations include a limit on the amount of unsecured credit the Bank may extend to a counterparty. At December 31, 20202022 and 2019,2021, all investments in interest-bearing deposits and Federal funds sold were repaid or expected to be repaid according to the relevant contractual terms. No allowance for credit losses was recorded for these assets at December 31, 20202022 and 2019.2021. Carrying values of interest-bearing deposits and Federal funds sold exclude accrued interest receivable of $13 million and $1 million, respectively, as of December 31, 2022, and de minimis amounts as of December 31, 2020, and $3 and a de minimis amount as of December 31, 2019, respectively.2021.
Based upon the collateral held as security and collateral maintenance provisions with its counterparties, the Bank determined that no allowance for credit losses was needed for its securities purchased under agreements to resell at December 31, 20202022 and 2019.2021. The carrying value of securities purchased under agreements to resell excludes $2 million and a de minimis amountsamount of accrued interest receivable as of December 31, 20202022 and 2019.2021, respectively.
Debt Securities
The Bank invests in debt securities, which are classified as either trading, AFS, or HTM. Within these investments, the Bank is primarily subject to credit risk related to PLRMBS that are supported by underlying mortgage loans. The Bank is prohibited by Finance Agency regulations from purchasing certain higher risk securities, such as equity securities and debt instruments that are not investment quality at time of purchase.
Trading Securities. The estimated fair value of trading securities as of December 31, 20202022 and 2019, was2021, were as follows:
| | 2020 | | 2019 | |
| (In millions) | | (In millions) | 2022 | | 2021 |
| U.S. obligations – Treasury notes | U.S. obligations – Treasury notes | $ | 4,257 | | | $ | 1,762 | | U.S. obligations – Treasury notes | $ | — | | | $ | 250 | |
| MBS – Other U.S. obligations – Ginnie Mae | 3 | | | 4 | | |
| MBS – Other U.S. obligations | | MBS – Other U.S. obligations | 1 | | | 2 | |
| Total | Total | $ | 4,260 | | | $ | 1,766 | | Total | $ | 1 | | | $ | 252 | |
The unrealized net unrealized gain/(loss) on trading securities held at December 31, 2022, was a de minimis amount for the year ended December 31, 2022. The unrealized net gain/(loss) on trading securities held at December 31, 2021 and 2020, was $(6) million and $15 $(2), and $(2)million for the years ended December 31, 2021 and 2020, 2019,respectively.
Available-for-Sale Securities. AFS securities by major security type as of December 31, 2022 and 2018, respectively. These amounts represent the changes in the fair value of the securities during the reported periods.2021, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | |
| (In millions) | Amortized Cost(1) | | Allowance for Credit Losses | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated Fair Value |
| | | | | | | | | |
| U.S. obligations – Treasury notes | $ | 4,012 | | | $ | — | | | $ | 12 | | | $ | — | | | $ | 4,024 | |
| | | | | | | | | |
| | | | | | | | | |
| MBS: | | | | | | | | | |
| Government Sponsored Enterprises (GSEs) – multifamily | 7,562 | | | — | | | 2 | | | (57) | | | 7,507 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| PLRMBS | 1,183 | | | (30) | | | 54 | | | (25) | | | 1,182 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total MBS | 8,745 | | | (30) | | | 56 | | | (82) | | | 8,689 | |
| Total | $ | 12,757 | | | $ | (30) | | | $ | 68 | | | $ | (82) | | | $ | 12,713 | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Available-for-Sale Securities. AFS securities by major security type as of December 31, 2020 and 2019, were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | | | | | | | |
| (In millions) | Amortized Cost(1) | | Allowance for Credit Losses | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated Fair Value |
| | | | | | | | | |
| U.S. obligations – Treasury notes | $ | 503 | | | $ | — | | | $ | 1 | | | $ | — | | | $ | 504 | |
| | | | | | | | | |
| | | | | | | | | |
| MBS: | | | | | | | | | |
| GSEs – multifamily | 8,056 | | | — | | | 164 | | | — | | | 8,220 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| PLRMBS | 1,450 | | | (17) | | | 179 | | | (4) | | | 1,608 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total MBS | 9,506 | | | (17) | | | 343 | | | (4) | | | 9,828 | |
| Total | $ | 10,009 | | | $ | (17) | | | $ | 344 | | | $ | (4) | | | $ | 10,332 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | | | | | | | | |
| Amortized Cost(1) | | Allowance for Credit Losses(2) | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated Fair Value |
| U.S. obligations – Treasury securities: | | | | | | | | | |
| U.S. Treasury notes | $ | 2,980 | | | $ | 0 | | | $ | 3 | | | $ | 0 | | | $ | 2,983 | |
| U.S. Treasury bills | 2,000 | | | 0 | | | 0 | | | 0 | | | 2,000 | |
| Total U.S. obligations – Treasury securities | 4,980 | | | 0 | | | 3 | | | 0 | | | 4,983 | |
| MBS: | | | | | | | | | |
| GSEs – multifamily: | | | | | | | | | |
| Freddie Mac | 833 | | | 0 | | | 18 | | | 0 | | | 851 | |
| Fannie Mae | 7,744 | | | 0 | | | 72 | | | (6) | | | 7,810 | |
| Subtotal MBS – GSEs – multifamily | 8,577 | | | 0 | | | 90 | | | (6) | | | 8,661 | |
| PLRMBS: | | | | | | | | | |
| Prime | 174 | | | (1) | | | 9 | | | 0 | | | 182 | |
| Alt-A | 1,725 | | | (20) | | | 168 | | | (20) | | | 1,853 | |
| Subtotal PLRMBS | 1,899 | | | (21) | | | 177 | | | (20) | | | 2,035 | |
| Total MBS | 10,476 | | | (21) | | | 267 | | | (26) | | | 10,696 | |
| Total | $ | 15,456 | | | $ | (21) | | | $ | 270 | | | $ | (26) | | | $ | 15,679 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | | | | |
| Amortized Cost(1) | | OTTI Recognized in AOCI(2) | | Gross Unrealized Gains(3) | | Gross
Unrealized
Losses | | Estimated Fair Value |
| U.S. obligations – Treasury notes | $ | 5,281 | | | $ | 0 | | | $ | 7 | | | $ | 0 | | | $ | 5,288 | |
| MBS: | | | | | | | | | |
| GSEs – multifamily: | | | | | | | | | |
| Freddie Mac | 773 | | | 0 | | | 4 | | | 0 | | | 777 | |
| Fannie Mae | 6,823 | | | 0 | | | 23 | | | (13) | | | 6,833 | |
| Subtotal MBS – GSEs – multifamily | 7,596 | | | 0 | | | 27 | | | (13) | | | 7,610 | |
| PLRMBS: | | | | | | | | | |
| Prime | 213 | | | 0 | | | 17 | | | 0 | | | 230 | |
| Alt-A | 2,116 | | | (9) | | | 260 | | | 0 | | | 2,367 | |
| Subtotal PLRMBS | 2,329 | | | (9) | | | 277 | | | 0 | | | 2,597 | |
| Total MBS | 9,925 | | | (9) | | | 304 | | | (13) | | | 10,207 | |
| Total | $ | 15,206 | | | $ | (9) | | | $ | 311 | | | $ | (13) | | | $ | 15,495 | |
(1) Amortized cost includes unpaid principal balance, unamortized premiums and discounts, net charge-offs, and valuation adjustments for hedging activities, and excludes accrued interest receivable of $46 million and $58$29 million at December 31, 20202022 and 2019,2021, respectively.
(2) Effective January 1, 2020, the Bank completes an analysis on a quarterly basis to determine whether to record an allowance for credit losses for expected credit losses on AFS securities. Prior to January 1, 2020, credit losses were recorded as a direct write-down to the AFS security carrying value. OTTI recognized in AOCI excludes subsequent unrealized gains/(losses) in fair value of previously other-than-temporarily impaired AFS securities at December 31, 2019, which is included in net non-credit-related OTTI on AFS securities.
(3) Includes $277 in subsequent unrealized gains in fair value of previously other-than-temporarily impaired AFS securities at December 31, 2019.
At December 31, 2020,2022, the amortized cost of the Bank’s MBS classified as AFS included premiums of $65,$52 million, discounts of $47,$113 million, and credit-related OTTI of $486 for AFS securities with an OTTI recognized pursuantprevious credit losses related to the impairment guidance in effect prior to January 1, 2020.methodology of evaluating credit losses of $351 million for PLRMBS. At December 31, 2019,2021, the amortized cost of the Bank’s MBS classified as AFS included premiums of $65,$59 million, discounts of $52,$41 million, and credit-related OTTIprevious credit losses related to the prior methodology of $574.evaluating credit losses of $405 million for PLRMBS.
The following tables summarize the AFS securities with unrealized losses as of December 31, 2022 and 2021. The unrealized losses are aggregated by major security type and the length of time that individual securities have been in a continuous unrealized loss position.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | |
| | Less Than 12 Months | | 12 Months or More | | Total |
| (In millions) | Estimated
Fair Value | | Gross Unrealized
Losses | | Estimated
Fair Value | | Gross Unrealized
Losses | | Estimated
Fair Value | | Gross Unrealized
Losses |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| MBS – GSEs – multifamily | $ | 6,635 | | | $ | 57 | | | $ | — | | | $ | — | | | $ | 6,635 | | | $ | 57 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| PLRMBS | 292 | | | 17 | | | 68 | | | 8 | | | 360 | | | 25 | |
| | | | | | | | | | | |
| Total | $ | 6,927 | | | $ | 74 | | | $ | 68 | | | $ | 8 | | | $ | 6,995 | | | $ | 82 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | | | |
| Less Than 12 Months | | 12 Months or More | | Total |
| (In millions) | Estimated
Fair Value | | Gross
Unrealized
Losses | | Estimated
Fair Value | | Gross Unrealized
Losses | | Estimated
Fair Value | | Gross Unrealized
Losses |
| | | | | | | | | | | |
| | | | | | | | | | | |
| PLRMBS | $ | 19 | | | $ | — | | | $ | 152 | | | $ | 4 | | | $ | 171 | | | $ | 4 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total | $ | 19 | | | $ | — | | | $ | 152 | | | $ | 4 | | | $ | 171 | | | $ | 4 | |
Redemption Terms – The amortized cost and estimated fair value of U.S. Treasury securities classified as AFS by contractual maturity (based on contractual final principal payment) and of MBS classified as AFS as of December 31, 2022 and 2021, are shown below. Expected maturities of MBS classified as AFS will differ from contractual maturities because borrowers may have the right to call or prepay the underlying obligations with or without call or prepayment fees.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | |
| December 31, 2022 | | | |
| (In millions) | | | |
| Year of Contractual Maturity | Amortized
Cost | | Estimated
Fair Value |
| | | |
| | | |
| | | |
| | | |
| | | |
| U.S. obligations – Treasury notes – Due after 1 year through 5 years | $ | 4,012 | | | $ | 4,024 | |
| MBS | 8,745 | | | 8,689 | |
| Total | $ | 12,757 | | | $ | 12,713 | |
| | | | | | | | | | | |
| December 31, 2021 | | | |
| (In millions) | | | |
| Year of Contractual Maturity | Amortized
Cost | | Estimated
Fair Value |
| U.S. obligations – Treasury notes – Due in 1 year or less | $ | 503 | | | $ | 504 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| MBS | 9,506 | | | 9,828 | |
| Total | $ | 10,009 | | | $ | 10,332 | |
Prepayment Fees, Net – The following tables summarizeBank records prepayment fees net of any associated fair value adjustments related to prepaid MBS that were hedged. The net amount of prepayment fees is reflected as AFS interest income in the AFS securities with unrealized losses asStatements of Income for the years ended December 31, 2022, 2021, and 2020 and 2019. The unrealized losses are aggregated by major security type and the length of time that individual securities have been in a continuous unrealized loss position. At December 31, 2019, total unrealized lossesdisplayed in the following table will not agree to total gross unrealized losses in the table above. table.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| (In millions) | | | | | 2022 | | 2021 | | 2020 | | | | |
| Prepayment fees received/(paid) | | | | | $ | 21 | | | $ | 5 | | | $ | 7 | | | | | |
| Fair value adjustments | | | | | 3 | | | (3) | | | (5) | | | | | |
| Net | | | | | $ | 24 | | | $ | 2 | | | $ | 2 | | | | | |
| MBS principal prepaid | | | | | $ | 385 | | | $ | 37 | | | $ | 28 | | | | | |
Held-to-Maturity Securities. The unrealized losses inBank classifies the following tablesecurities as of December 31, 2019, also include non-credit-related OTTI losses recognized in AOCI.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | | | | | | | | | | |
| | Less Than 12 Months | | 12 Months or More | | Total |
| | Estimated
Fair Value | | Unrealized
Losses | | Estimated
Fair Value | | Unrealized
Losses | | Estimated
Fair Value | | Unrealized
Losses |
| | | | | | | | | | | |
| U.S. obligations – Treasury notes | $ | 501 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 501 | | | $ | 0 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| MBS – GSEs – multifamily – Fannie Mae | 731 | | | 6 | | | 222 | | | 0 | | | 953 | | | 6 | |
| | | | | | | | | | | |
| PLRMBS: | | | | | | | | | | | |
| Prime | 4 | | | 0 | | | 7 | | | 0 | | | 11 | | | 0 | |
| Alt-A | 151 | | | 7 | | | 168 | | | 13 | | | 319 | | | 20 | |
| Subtotal PLRMBS | 155 | | | 7 | | | 175 | | | 13 | | | 330 | | | 20 | |
| | | | | | | | | | | |
| Total | $ | 1,387 | | | $ | 13 | | | $ | 397 | | | $ | 13 | | | $ | 1,784 | | | $ | 26 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | |
| Less Than 12 Months | | 12 Months or More | | Total |
| Estimated
Fair Value | | Unrealized
Losses | | Estimated
Fair Value | | Unrealized
Losses | | Estimated
Fair Value | | Unrealized
Losses |
| MBS – GSEs – multifamily: | | | | | | | | | | | |
| Freddie Mac | $ | 211 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 211 | | | $ | 0 | |
| Fannie Mae | 2,433 | | | 9 | | | 623 | | | 4 | | | 3,056 | | | 13 | |
| Subtotal MBS – GSEs – multifamily | 2,644 | | | 9 | | | 623 | | | 4 | | | 3,267 | | | 13 | |
| PLRMBS: | | | | | | | | | | | |
| Prime | 4 | | | 0 | | | 8 | | | 0 | | | 12 | | | 0 | |
| Alt-A | 75 | | | 0 | | | 193 | | | 9 | | | 268 | | | 9 | |
| Subtotal PLRMBS | 79 | | | 0 | | | 201 | | | 9 | | | 280 | | | 9 | |
| Total | $ | 2,723 | | | $ | 9 | | | $ | 824 | | | $ | 13 | | | $ | 3,547 | | | $ | 22 | |
Redemption Terms. The amortized costHTM because the Bank has the positive intent and estimated fair value of non-MBS investments by contractual maturity (based on contractual final principal payment) and of MBS as of December 31, 2020 and 2019, are shown below. Expected maturities of MBS will differ from contractual maturities because borrowers may have the rightability to call or prepay the underlying obligations with or without call or prepayment fees.hold these securities to maturity:
| | | | | | | | | | | |
| December 31, 2020 | | | |
| Year of Contractual Maturity | Amortized
Cost | | Estimated
Fair Value |
| AFS securities other than MBS: | | | |
| Due in 1 year or less | $ | 4,469 | | | $ | 4,470 | |
| Due after 1 year through 5 years | 511 | | | 513 | |
| | | |
| | | |
| Subtotal | 4,980 | | | 4,983 | |
| MBS | 10,476 | | | 10,696 | |
| Total | $ | 15,456 | | | $ | 15,679 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | | | |
| (In millions) | Amortized Cost(1) | | | | | | | | Gross Unrecognized Holding Gains(2) | | Gross Unrecognized Holding Losses(2) | | Estimated
Fair Value |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| MBS – Other U.S. obligations – single-family | $ | 72 | | | | | | | | | $ | — | | | $ | (2) | | | $ | 70 | |
| MBS – GSEs: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| MBS – GSEs – single-family | 745 | | | | | | | | | 1 | | | (22) | | | 724 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| MBS – GSEs – multifamily | 1,209 | | | | | | | | | — | | | (10) | | | 1,199 | |
| Subtotal MBS – GSEs | 1,954 | | | | | | | | | 1 | | | (32) | | | 1,923 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| PLRMBS | 155 | | | | | | | | | — | | | (12) | | | 143 | |
| | | | | | | | | | | | | |
| Total | $ | 2,181 | | | | | | | | | $ | 1 | | | $ | (46) | | | $ | 2,136 | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | |
| December 31, 2019 | | | |
| Year of Contractual Maturity | Amortized
Cost | | Estimated
Fair Value |
| AFS securities other than MBS: | | | |
| Due in 1 year or less | $ | 2,309 | | | $ | 2,312 | |
| Due after 1 year through 5 years | 2,972 | | | 2,976 | |
| | | |
| | | |
| Subtotal | 5,281 | | | 5,288 | |
| MBS | 9,925 | | | 10,207 | |
| Total | $ | 15,206 | | | $ | 15,495 | |
Held-to-Maturity Securities. The Bank classifies the following securities as HTM because the Bank has the positive intent and ability to hold these securities to maturity:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | | | | | | | | | | | | |
| Amortized Cost(1) | | | | | | | | Gross Unrecognized Holding Gains(3) | | Gross Unrecognized Holding Losses(3) | | Estimated
Fair Value |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| MBS – Other U.S. obligations – single-family: | | | | | | | | | | | | | |
| Ginnie Mae | $ | 261 | | | | | | | | | $ | 7 | | | $ | 0 | | | $ | 268 | |
| MBS – GSEs – single-family: | | | | | | | | | | | | | |
| Freddie Mac | 511 | | | | | | | | | 11 | | | 0 | | | 522 | |
| Fannie Mae | 1,229 | | | | | | | | | 21 | | | (1) | | | 1,249 | |
| Subtotal MBS – GSEs – single-family | 1,740 | | | | | | | | | 32 | | | (1) | | | 1,771 | |
| MBS – GSEs – multifamily: | | | | | | | | | | | | | |
| Freddie Mac | 1,844 | | | | | | | | | 2 | | | (2) | | | 1,844 | |
| Fannie Mae | 945 | | | | | | | | | 0 | | | (1) | | | 944 | |
| Subtotal MBS – GSEs – multifamily | 2,789 | | | | | | | | | 2 | | | (3) | | | 2,788 | |
| Subtotal MBS – GSEs | 4,529 | | | | | | | | | 34 | | | (4) | | | 4,559 | |
| PLRMBS: | | | | | | | | | | | | | |
| Prime | 185 | | | | | | | | | 0 | | | (4) | | | 181 | |
| Alt-A | 106 | | | | | | | | | 3 | | | (2) | | | 107 | |
| Subtotal PLRMBS | 291 | | | | | | | | | 3 | | | (6) | | | 288 | |
| | | | | | | | | | | | | |
| Total | $ | 5,081 | | | | | | | | | $ | 44 | | | $ | (10) | | | $ | 5,115 | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | | | | | | |
| Amortized Cost(1) | | OTTI Recognized in AOCI(2) | | Carrying
Value | | Gross Unrecognized Holding Gains(3) | | Gross Unrecognized Holding Losses(3) | | Estimated
Fair Value |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| MBS – Other U.S. obligations – single-family: | | | | | | | | | | | |
| Ginnie Mae | $ | 470 | | | $ | 0 | | | $ | 470 | | | $ | 5 | | | $ | 0 | | | $ | 475 | |
| MBS – GSEs – single-family: | | | | | | | | | | | |
| Freddie Mac | 1,063 | | | 0 | | | 1,063 | | | 8 | | | (1) | | | 1,070 | |
| Fannie Mae | 1,844 | | | 0 | | | 1,844 | | | 20 | | | (1) | | | 1,863 | |
| Subtotal MBS – GSEs – single-family | 2,907 | | | 0 | | | 2,907 | | | 28 | | | (2) | | | 2,933 | |
| MBS – GSEs – multifamily: | | | | | | | | | | | |
| Freddie Mac | 2,625 | | | 0 | | | 2,625 | | | 0 | | | (9) | | | 2,616 | |
| Fannie Mae | 1,159 | | | 0 | | | 1,159 | | | 0 | | | (2) | | | 1,157 | |
| Subtotal MBS – GSEs – multifamily | 3,784 | | | 0 | | | 3,784 | | | 0 | | | (11) | | | 3,773 | |
| Subtotal MBS – GSEs | 6,691 | | | 0 | | | 6,691 | | | 28 | | | (13) | | | 6,706 | |
| PLRMBS: | | | | | | | | | | | |
| Prime | 243 | | | 0 | | | 243 | | | 1 | | | (4) | | | 240 | |
| Alt-A | 142 | | | (1) | | | 141 | | | 6 | | | (2) | | | 145 | |
| Subtotal PLRMBS | 385 | | | (1) | | | 384 | | | 7 | | | (6) | | | 385 | |
| | | | | | | | | | | |
| Total | $ | 7,546 | | | $ | (1) | | | $ | 7,545 | | | $ | 40 | | | $ | (19) | | | $ | 7,566 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | | | | | | | | | | | |
| (In millions) | Amortized Cost(1) | | | | | | | | Gross Unrecognized Holding Gains(2) | | Gross Unrecognized Holding Losses(2) | | Estimated
Fair Value |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| MBS – Other U.S. obligations – single-family | $ | 113 | | | | | | | | | $ | 2 | | | $ | — | | | $ | 115 | |
| MBS – GSEs: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| MBS – GSEs – single-family | 1,011 | | | | | | | | | 16 | | | (1) | | | 1,026 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| MBS – GSEs – multifamily | 1,870 | | | | | | | | | 5 | | | (1) | | | 1,874 | |
| Subtotal MBS – GSEs | 2,881 | | | | | | | | | 21 | | | (2) | | | 2,900 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| PLRMBS | 217 | | | | | | | | | 5 | | | (2) | | | 220 | |
| | | | | | | | | | | | | |
| Total | $ | 3,211 | | | | | | | | | $ | 28 | | | $ | (4) | | | $ | 3,235 | |
(1) Amortized cost includes unpaid principal balance, unamortized premiums and discounts, and net charge offs,charge-offs, and excludes accrued interest receivable of $5 million and $12$2 million at December 31, 20202022 and 2019,2021, respectively.
(2) With the adoption of new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020, the OTTI approach was replaced with an evaluation for an allowance for credit loss; however, OTTI remains for those securities that had credit impairment prior to the adoption date.
(3) Gross unrecognized holding gains/(losses) represent the difference between estimated fair value and net carrying value.
Expected maturities of MBS classified as HTM will differ from contractual maturities because borrowers may have the right to call or prepay the underlying obligations with or without call or prepayment fees.
At December 31, 2020,2022, the amortized cost of the Bank’s MBS classified as HTM included premiums of $5,$3 million, discounts of $6,$4 million, and credit-related OTTI of $6 for HTM securities with an OTTI recognized pursuantno previous credit losses related to the impairment guidance in effect prior to January 1, 2020.methodology of evaluating credit losses for PLRMBS. At December 31, 2019,2021, the amortized cost of the Bank’s MBS classified as HTM included premiums of $8,$3 million, discounts of $11,$4 million, and credit-related OTTIprevious credit losses related to the prior methodology of $7.evaluating credit losses of $6 million for PLRMBS.
Allowance for Credit Losses on AFS and HTM Securities. The Bank adopted new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020. For additional information, see Note 2 – Recently Issued and Adopted Accounting Guidance. For information on the prior methodology for evaluating credit losses, see Note 1 – Summary of Significant Accounting Policies.
The following table presents a rollforward of the allowance for credit losses on investment securities associated with PLRMBS classified as AFS for the yearyears ended December 31, 2022, 2021, and 2020. The Bank recorded no allowance for credit losses associated with HTM securities during the year ended December 31, 2020. Under the previous accounting methodology of security impairment, the Bank recognized credit-related net OTTI loss of $11 during the years ended December 31, 20192022, 2021, and 2018.
| | | | | | | | | | | |
| | | |
| | | | | 2020 | | |
Balance, beginning of the period | | | | | $ | 0 | | | |
(Charge-offs)/recoveries | | | | | (4) | | | |
Provision for/(reversal of) credit losses | | | | | 25 | | | |
Balance, end of the period | | | | | $ | 21 | | | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| (In millions) | | | | | 2022 | | | | 2021 | | 2020 |
| Balance, beginning of the period | | | | | $ | 17 | | | | | $ | 21 | | | $ | — | |
| (Charge-offs)/recoveries | | | | | (2) | | | | | (1) | | | (4) | |
| Provision for/(reversal of) credit losses | | | | | 15 | | | | | (3) | | | 25 | |
| Balance, end of the period | | | | | $ | 30 | | | | | $ | 17 | | | $ | 21 | |
To evaluate investment securities for credit loss at December 31, 2020,2022 and 2021, the Bank employed the following methodologies, based on the type of security.
AFS and HTM Securities (Excluding PLRMBS) – The Bank’s AFS and HTM securities are principally U.S. obligations and MBS issued by Ginnie Mae, Freddie Mac, and Fannie Mae that are backed by single-family or multifamily mortgage loans. The Bank only purchases securities considered investment quality. Excluding PLRMBS investments, at December 31, 2020, approximately 100%2022 and 2021, substantially all of AFS securities and HTM securities, based on amortized cost, were rated A, or above, by an NRSRO, based on the lowest long-term credit rating for each security. These may differ from any internal ratings of the securities by the Bank, if applicable.
At December 31, 2020,2022 and 2021, certain of the Bank’s AFS securities were in an unrealized loss position. These losses are considered temporary as the Bank expects to recover the entire amortized cost basis on these AFS investment securities and neither intends to sell these securities nor considers it more likely than not that it will be required to sell these securities before its anticipated recovery of each security's remaining amortized cost basis. Further, the Bank has not experienced any payment defaults on the instruments. In addition,instruments and substantially all of these
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
securities are highly rated. In the case of U.S. obligations, they carry an implicit or explicit government guarantee. As a result, no allowance for credit losses was recorded on these AFS securities at December 31, 2020.2022 and 2021.
As of December 31, 2020,2022 and 2021, the Bank had not established an allowance for credit losslosses on any of its HTM securities because the securities: (i) were all highly rated or had short remaining terms to maturity and (ii) had not experienced, nor did the Bank expect, any payment default on the instruments, and (iii) in the case of U.S. Treasury, GSE, or other U.S.agency obligations, carry an implicit or explicit government guarantee such that the Bank considersFHLBanks consider the risk of nonpayment to be zero.
Private-Label Residential Mortgage-Backed Securities – The Bank also holds investments in PLRMBS. The Bank has not purchased any PLRMBS since the first quarter of 2008. However, many of these securities have subsequently experienced significant credit deterioration. As of December 31, 2020,2022 and 2021, approximately 6%4% and 5% of PLRMBS (AFS and HTM combined, based on amortized cost) were rated A, or above, by an NRSRO; and the remaining securities were either rated less than A, or were unrated. To determine whether an allowance for credit loss is necessary on these securities, the Bank uses cash flow analyses. For certain PLRMBS where underlying collateral data is not available, alternative procedures as determined by the Bank are used to assess these securities for credit loss measurement.
At each quarter end, the Bank compares the present value of the cash flows expected to be collected on its PLRMBS, using the effective interest rate, to the amortized cost basis of the securities to determine whether a credit loss exists. The expected credit losses are measured using:
•expected housing price changes;
•expected interest rate assumptions;
•the remaining payment terms for the security;
•expected default rates based on underlying loan-level borrower and loan characteristics;
•loss severities on the collateral supporting each unique PLRMBS based on underlying loan-level borrower and loan characteristics; and
•prepayment speeds based on underlying loan-level borrower and loan characteristics.
The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in these assumptions and expectations. The cash flows determined reflectsreflect management’s expectations and includesinclude a base case housing price forecast for near- and long-term horizons.
For all the PLRMBS in its AFS and HTM portfolios, the Bank does not intend to sell any security and it is not more likely than not that the Bank will be required to sell any security before its anticipated recovery of the remaining amortized cost basis.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
For securitiesPLRMBS with an OTTI recognized pursuantprevious credit losses related to the impairment guidance in effect prior to January 1, 2020, asmethodology of December 31, 2020evaluating credit losses (securities for which the Bank determined that it does not expect to recover the entire amortized cost basis), the following table presents a summarymeasurement of the significant inputs used in measuring the fair value of PLRMBS classified as Level 3 as of December 31, 2020,2022, uses significant inputs that include, based on unpaid principal balance, the weighted average percentage of prepayment rates of 10.0%; default rates of 7.7%; and loss severities of 53.1%. The weighted average percentage of the related current credit enhancement for the Bank.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | | | | | | Current |
| Prepayment Rates | | Default Rates | | Loss Severities | | Credit Enhancement |
| Collateral Type at Origination | Weighted Average % (1) | | Weighted Average % (1) | | Weighted Average % (1) | | Weighted Average % (1) |
| Prime | 13.4 | | | 16.7 | | | 22.1 | | | 13.1 | |
| Alt-A | 13.7 | | | 16.4 | | | 37.7 | | | 7.1 | |
| Total | 13.7 | | | 16.5 | | | 36.2 | | | 7.7 | |
(1)Weighted average percentage isthese securities, based on unpaid principal balance.
balance, was 8.7% as of December 31, 2022. Credit enhancement is defined as the percentage of subordinated tranches, excess spread, and over-collateralization, if any, in a security structure that will generally absorb losses before the Bank will experience a loss on the security. The calculated averages represent the dollar-weighted averages of all the PLRMBS investments in each category shown. The classification is based on the model used to run the estimated cash flows for the CUSIP, which may not necessarily be the same as the classification at the time of origination.
The total net accretion recognized in interest income associated with PLRMBS that were other-than-temporarily impairedwith previous credit losses related to the prior to January 1, 2020,methodology of evaluating credit losses totaled $55 million, $70 $78,million, and $81$70 million for the years ended December 31, 2020, 2019,2022, 2021, and 2018,2020, respectively. Accretion of yield adjustments resulting from improvement of expected cash flows that are recognized over the remaining life of the securities totaltotaled $36 million, $51 million, and $59 $61, and $63million for the years ended December 31, 2022, 2021, and 2020, 2019, and 2018, respectively.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
In general, the Bank elects to transfer any PLRMBS that incurred a credit loss during the applicable period from the Bank’s HTM portfolio to its AFS portfolio at their fair values. The Bank previously recognized a credit loss on these HTM PLRMBS, which the Bank believes is evidence of a significant decline in the credit quality of the underlying collateral. The decline in the credit quality of the underlying collateral is the basis for the transfers to the AFS portfolio. These transfers allow the Bank the option to sell these securities prior tobefore maturity in view of changes in interest rates, changes in prepayment risk, or other factors, while recognizing the Bank’s intent to hold these securities for an indefinite period of time. The Bank transferred PLRMBS from its HTM portfolio to its AFS portfolio with an amortized cost of $17 million and fair value of $20 million during the year ended December 31, 2022. The Bank transferred PLRMBS from its HTM portfolio to its AFS portfolio with an amortized cost and fair value of $2 million during the year ended December 31, 2021 and an amortized cost and fair value of $3 $1, and $12million during 2020, 2019, and 2018, respectively.the year ended December 31, 2020.
For the Bank’s PLRMBS, the Bank experiencedrecorded a provision for credit losses of $15 million during the year ended December 31, 2022, largely because of declines in the fair values and the present value of expected cash flows of certain PLRMBS. The Bank recorded a reversal of credit losses of $3 million during the year ended December 31, 2021, primarily resulting from lower default rates as well as improved projected credit performance in part related to a more optimistic economic outlook because of the monetary and fiscal stimulus measures taken by the U.S. government. The Bank recorded a provision for credit losses on its PLRMBS portfolio of $25 million in 2020 primarily resulting from declines in fair value in March 2020 as a result of disruptions in the financial markets combined with illiquidity in the PLRMBS market and decreased expectations of the performance of loan collateral underlying these securities, which caused these assets to be valued at discounts to their amortized cost. The Bank subsequently experienced improvements in fair values, in part because of the monetary and fiscal stimulus measures taken by the U.S. government. As a result of these factors and the adoption of new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020, the Bank recorded a provision for credit losses on its PLRMBS portfolio of $25 in 2020.
Note 5 — Advances
The Bank offers a wide range of fixed and adjustable rate advance products with different maturities, interest rates, payment characteristics, and option features. Fixed rate advances generally have maturities ranging from one day to 30 years. Adjustable rate advances generally have maturities ranging from less than 30 days to 10 years, with the interest rates resetting periodically at a fixed spread to a specified index.
Redemption Terms. The Bank had advances outstanding at interest rates ranging from 0.21% to 8.57% at December 31, 2022, and 0.13% to 8.57% at December 31, 2021, as summarized below.
| | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | 2022 | | 2021 |
| Redemption Term | Amount Outstanding(1) | | Weighted
Average
Interest Rate | | Amount Outstanding(1) | | Weighted
Average
Interest Rate |
| Overdrawn demand and overnight deposit accounts | $ | 2 | | | 4.15 | % | | $ | — | | | — | % |
Within 1 year(2) | 71,050 | | | 4.34 | | | 4,129 | | | 0.85 | |
| After 1 year through 2 years | 7,634 | | | 3.30 | | | 2,744 | | | 1.52 | |
| After 2 years through 3 years | 4,036 | | | 2.22 | | | 3,092 | | | 1.59 | |
| After 3 years through 4 years | 3,391 | | | 2.05 | | | 2,618 | | | 1.31 | |
| After 4 years through 5 years | 2,815 | | | 3.24 | | | 3,063 | | | 1.90 | |
| After 5 years | 1,189 | | | 3.50 | | | 1,212 | | | 2.12 | |
| Total par value | 90,117 | | | 4.03 | % | | 16,858 | | | 1.45 | % |
| Valuation adjustments for hedging activities | (670) | | | | | 103 | | | |
| Valuation adjustments under fair value option | (47) | | | | | 66 | | | |
| | | | | | | |
| Total | $ | 89,400 | | | | | $ | 17,027 | | | |
(1)Carrying amounts exclude accrued interest receivable of $241 million and $5 million at December 31, 2022 and 2021, respectively.
(2)Advances outstanding with redemption terms within three months totaled $46.3 billion and $2.6 billion at December 31, 2022 and 2021, respectively.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Redemption Terms. The Bank had advances outstanding, excluding overdrawn demand deposit accounts, at interest rates ranging from 0.00% to 8.57% at December 31, 2020, and 1.15% to 8.57% at December 31, 2019, as summarized below.
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| Redemption Term | Amount Outstanding(1) | | Weighted
Average
Interest Rate | | Amount Outstanding(1) | | Weighted
Average
Interest Rate |
| | | | | | | |
| Within 1 year | $ | 11,862 | | | 1.65 | % | | $ | 32,351 | | | 1.91 | % |
| After 1 year through 2 years | 6,399 | | | 1.61 | | | 22,380 | | | 2.15 | |
| After 2 years through 3 years | 4,321 | | | 2.10 | | | 4,847 | | | 2.08 | |
| After 3 years through 4 years | 2,704 | | | 1.79 | | | 2,909 | | | 2.97 | |
| After 4 years through 5 years | 3,278 | | | 1.26 | | | 1,461 | | | 2.32 | |
| After 5 years | 1,774 | | | 1.79 | | | 1,140 | | | 2.96 | |
| Total par value | 30,338 | | | 1.68 | % | | 65,088 | | | 2.08 | % |
| Valuation adjustments for hedging activities | 509 | | | | | 203 | | | |
| Valuation adjustments under fair value option | 130 | | | | | 83 | | | |
| Unamortized discounts | (1) | | | | | 0 | | | |
| Total | $ | 30,976 | | | | | $ | 65,374 | | | |
(1)Carrying amounts exclude accrued interest receivable of $6 and $39 at December 31, 2020 and 2019, respectively.
Many of the Bank’s advances are prepayable at the borrower’s option. However, when advances are prepaid, the borrower is generally charged a prepayment fee intended to make the Bank financially indifferent to the prepayment. In addition, for certain advances with full or partial prepayment symmetry, the Bank may charge the borrower a prepayment fee or pay the borrower a prepayment credit depending on certain circumstances, such as movements in interest rates, when the advance is prepaid. In November 2018, the Bank discontinued offering advances with partial prepayment symmetry. The Bank had advances with full prepayment symmetry outstanding totaling $19,919$19.2 billion at December 31, 2020,2022, and $14,059$9.0 billion at December 31, 2019.2021. The Bank had advances with partial prepayment symmetry outstanding totaling $1,817$1.0 billion at December 31, 2020,2022, and $3,513$1.4 billion at December 31, 2019.2021. Some advances may be repaid on pertinent call dates without prepayment fees (callable advances). The Bank had callable advances outstanding totaling $1,100$9.8 billion at December 31, 2020,2022, and $14,024$70 million at December 31, 2019.2021.
The Bank had putable advances totaling $220$800 million at December 31, 2020,2022, and $20$220 million at December 31, 2019.2021. At the Bank’s discretion, the Bank may terminate these advances on predetermined exercise dates and offer replacement funding at prevailing market rates, subject to certain conditions. The Bank would typically exercise such termination rights when interest rates increase relative to contractual rates.
The following table summarizes advances at December 31, 20202022 and 2019,2021, by the earlier of the year of redemption term or next call date for callable advances and by the earlier of the year of redemption term or next put date for putable advances.
| | | Earlier of Redemption
Term or Next Call Date | | Earlier of Redemption
Term or Next Put Date | | Earlier of Redemption
Term or Next Call Date | | Earlier of Redemption
Term or Next Put Date |
| 2020 | | 2019 | | 2020 | | 2019 | |
| | (In millions) | | (In millions) | 2022 | | 2021 | | 2022 | | 2021 |
| Overdrawn demand and overnight deposit accounts | | Overdrawn demand and overnight deposit accounts | $ | 2 | | | $ | — | | | $ | 2 | | | $ | — | |
| Within 1 year | Within 1 year | $ | 12,962 | | | $ | 39,075 | | | $ | 12,082 | | | $ | 32,371 | | Within 1 year | 71,370 | | | 4,199 | | | 71,850 | | | 4,349 | |
| After 1 year through 2 years | After 1 year through 2 years | 5,299 | | | 15,731 | | | 6,399 | | | 22,380 | | After 1 year through 2 years | 7,634 | | | 2,744 | | | 7,634 | | | 2,744 | |
| After 2 years through 3 years | After 2 years through 3 years | 4,321 | | | 4,800 | | | 4,321 | | | 4,847 | | After 2 years through 3 years | 4,046 | | | 3,042 | | | 3,836 | | | 3,092 | |
| After 3 years through 4 years | After 3 years through 4 years | 2,704 | | | 2,895 | | | 2,704 | | | 2,909 | | After 3 years through 4 years | 3,391 | | | 2,618 | | | 3,391 | | | 2,618 | |
| After 4 years through 5 years | After 4 years through 5 years | 3,278 | | | 1,447 | | | 3,278 | | | 1,461 | | After 4 years through 5 years | 2,825 | | | 3,063 | | | 2,215 | | | 3,063 | |
| After 5 years | After 5 years | 1,774 | | | 1,140 | | | 1,554 | | | 1,120 | | After 5 years | 849 | | | 1,192 | | | 1,189 | | | 992 | |
| Total par value | Total par value | $ | 30,338 | | | $ | 65,088 | | | $ | 30,338 | | | $ | 65,088 | | Total par value | $ | 90,117 | | | $ | 16,858 | | | $ | 90,117 | | | $ | 16,858 | |
Concentration Risk. The following tables present the concentration in advances to the top 10 borrowers and their affiliates at December 31, 2022 and 2021. The tables also present the interest income from these advances before the impact of interest rate exchange agreements associated with these advances for the years ended December 31, 2022 and 2021.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Concentration Risk. The following tables present the concentration in advances to the top five borrowers and their affiliates at December 31, 2020 and 2019. The tables also present the interest income from these advances before the impact of interest rate exchange agreements associated with these advances for the years ended December 31, 2020 and 2019. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | |
| | | | | |
| (In millions) | | | | | | | | | | | |
| Name of Borrower | Advances
Outstanding | | Percentage of
Total
Advances
Outstanding | | | | | | Interest
Income from
Advances(1) | | Percentage of
Total Interest
Income from
Advances |
| Silicon Valley Bank | $ | 15,000 | | | 17 | % | | | | | | $ | 170 | | | 14 | % |
| First Republic Bank | 14,000 | | | 16 | | | | | | | 175 | | | 14 | |
| City National Bank | 10,000 | | | 11 | | | | | | | 69 | | | 6 | |
| Bank of the West | 4,300 | | | 5 | | | | | | | 30 | | | 2 | |
MUFG Union Bank, National Association(2) | 4,300 | | | 5 | | | | | | | 129 | | | 11 | |
| Silvergate Bank | 4,300 | | | 5 | | | | | | | 38 | | | 3 | |
| Western Alliance Bank | 4,300 | | | 5 | | | | | | | 67 | | | 5 | |
First Technology Federal Credit Union(3) | 4,195 | | | 5 | | | | | | | 72 | | | 6 | |
| Wells Fargo National Bank West | 2,000 | | | 2 | | | | | | | 24 | | | 2 | |
| Bank of America California, National Association | 1,500 | | | 1 | | | | | | | 8 | | | 1 | |
| Subtotal | 63,895 | | | 72 | | | | | | | 782 | | | 64 | |
| Others | 26,222 | | | 28 | | | | | | | 443 | | | 36 | |
| Total par value | $ | 90,117 | | | 100 | % | | | | | | $ | 1,225 | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | | | | | | | | | | |
| | | | | |
| Name of Borrower | Advances
Outstanding | | Percentage of
Total
Advances
Outstanding | | | | | | Interest
Income from
Advances(1) | | Percentage of
Total Interest
Income from
Advances |
| First Republic Bank | $ | 11,755 | | | 39 | % | | | | | | $ | 254 | | | 29 | % |
| MUFG Union Bank, National Association | 4,575 | | | 15 | | | | | | | 173 | | | 20 | |
| First Technology Federal Credit Union | 1,292 | | | 4 | | | | | | | 43 | | | 5 | |
| CIT Bank, National Association | 1,100 | | | 3 | | | | | | | 23 | | | 3 | |
| Luther Burbank Savings | 807 | | | 3 | | | | | | | 21 | | | 2 | |
| Subtotal | 19,529 | | | 64 | | | | | | | 514 | | | 59 | |
| Others | 10,809 | | | 36 | | | | | | | 353 | | | 41 | |
| Total par value | $ | 30,338 | | | 100 | % | | | | | | $ | 867 | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | | | | | | |
| | | | | |
| Name of Borrower | Advances
Outstanding | | Percentage of
Total
Advances
Outstanding | | | | | | Interest
Income from
Advances(1) | | Percentage of
Total Interest
Income from
Advances |
| MUFG Union Bank, National Association | $ | 12,700 | | | 19 | % | | | | | | $ | 371 | | | 22 | % |
| First Republic Bank | 12,550 | | | 19 | | | | | | | 248 | | | 15 | |
| Wells Fargo & Company | | | | | | | | | | | |
| Wells Fargo Financial National Bank West | 7,500 | | | 12 | | | | | | | 191 | | | 12 | |
Wells Fargo Bank, National Association(2) | 39 | | | 0 | | | | | | | 2 | | | 0 | |
| Subtotal Wells Fargo & Company | 7,539 | | | 12 | | | | | | | 193 | | | 12 | |
| Bank of the West | 6,356 | | | 10 | | | | | | | 155 | | | 9 | |
JPMorgan Chase Bank, National Association(2) | 5,055 | | | 8 | | | | | | | 174 | | | 11 | |
| Subtotal | 44,200 | | | 68 | | | | | | | 1,141 | | | 69 | |
| Others | 20,888 | | | 32 | | | | | | | 518 | | | 31 | |
| Total par value | $ | 65,088 | | | 100 | % | | | | | | $ | 1,659 | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | | | | | | | | | |
| | | | | |
| (In millions) | | | | | | | | | | | |
| Name of Borrower | Advances
Outstanding | | Percentage of
Total
Advances
Outstanding | | | | | | Interest
Income from
Advances(1) | | Percentage of
Total Interest
Income from
Advances |
| First Republic Bank | $ | 3,700 | | | 22 | % | | | | | | $ | 115 | | | 28 | % |
MUFG Union Bank, National Association(2) | 2,050 | | | 12 | | | | | | | 103 | | | 25 | |
First Technology Federal Credit Union(3) | 1,819 | | | 11 | | | | | | | 28 | | | 7 | |
Luther Burbank Savings(3) | 752 | | | 5 | | | | | | | 14 | | | 4 | |
| Pacific Premier Bank | 550 | | | 3 | | | | | | | — | | | — | |
| Banc of California, NA | 481 | | | 3 | | | | | | | 11 | | | 3 | |
Stanford Federal Credit Union(3) | 385 | | | 2 | | | | | | | 7 | | | 2 | |
| CopperPoint Insurance Company | 375 | | | 2 | | | | | | | 4 | | | 1 | |
| Bank of Hope | 300 | | | 2 | | | | | | | 3 | | | 1 | |
| SchoolsFirst Federal Credit Union | 288 | | | 2 | | | | | | | 7 | | | 2 | |
| Subtotal | 10,700 | | | 64 | | | | | | | 292 | | | 73 | |
| Others | 6,158 | | | 36 | | | | | | | 115 | | | 27 | |
| Total par value | $ | 16,858 | | | 100 | % | | | | | | $ | 407 | | | 100 | % |
(1) Interest income amounts exclude the interest effect of interest rate exchange agreements with derivative counterparties; as a result, the total interest income amounts will not agree to the Statements of Income. The amount of interest income from advances can vary depending on the amount outstanding, terms to maturity, interest rates, and repricing characteristics.
(2) Nonmember institution.On December 1, 2022, U.S. Bancorp, a nonmember, announced that it completed its acquisition of MUFG Union Bank, National Association.
The Bank held a security interest in collateral from each(3) An officer or director of the top five advances borrowers and their affiliates sufficient to support their respective advances outstanding, and themember is a Bank does not expect to incur any credit losses on these advances.director.
Credit Risk Exposure and Security Terms. The Bank manages its credit exposure related to advances through an integrated approach that generally provides for a credit limit to be established for each borrower, includes an ongoing review of each borrower’s financial condition, and is coupled with conservative collateral and lending policies to limit the risk of loss while taking into account borrowers’ needs for a reliable funding source.
In addition, the Bank lends to member financial institutions that have a principal place of business in Arizona, California, or Nevada, in accordance with federal law and Finance Agency regulations. Specifically, the Bank is
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
In addition, the Bank lends to member financial institutions that have their principal place of business in Arizona, California, or Nevada, in accordance with federal law and Finance Agency regulations. Specifically, the Bank is required to obtain sufficient collateral to fully secure credit products up to the member’s total credit limit. Borrowers may pledge the following eligible assets to secure advances:
•one-to-four-family first lien residential mortgage loans;
•securities issued, insured, or guaranteed by the U.S. government or any of its agencies, including without limitation MBS backed by Fannie Mae, Freddie Mac, or Ginnie Mae;
•cash or deposits in the Bank;
•certain other real estate-related collateral, such as certain privately issued MBS, multifamily loans, commercial real estate loans, and second lien residential mortgage loans or home equity loans; and
•small business, small farm, and small agribusiness loans that are fully secured by collateral (such as real estate, equipment and vehicles, accounts receivable, and inventory) from members that are community financial institutions.
The Bank has advances outstanding to former members and member successors, which are subject to the security terms above. The Bank requires each borrowing member to execute a written Advances and Security Agreement, which describes the lending relationship between the Bank and the borrower. At December 31, 20202022 and 2019,2021, the Bank had a perfected security interest in collateral pledged by each borrowing member, or by the member's affiliate on behalf of the member, and by each nonmember borrower, with an estimated value in excess of the outstanding credit products for that borrower. Based on the financial condition of the borrower, the Bank may either (i) allow the borrower or the pledging affiliate to retain physical possession of loan collateral pledged to the Bank, provided that the borrower or the pledging affiliate agrees to hold the collateral for the benefit of the Bank, or (ii) require the borrower or the pledging affiliate to deliver physical possession of loan collateral to the Bank or its custodial agent. All securities collateral is required to be delivered to the Bank’s custodial agent. All loan collateral pledged to the Bank is subject to a Uniform Commercial Code-1 financing statement.
Section 10(e) of the FHLBank Act affords any security interest granted to the Bank by a member or any affiliate of the member or any nonmember borrower priority over claims or rights of any other party, except claims or rights that (i) would be entitled to priority under otherwise applicable law and (ii) are held by bona fide purchasers for value or secured parties with perfected security interests.
At December 31, 20202022 and 2019,2021, none of the Bank’s credit products were past due or on nonaccrual status. There were no troubled debt restructurings related to credit products during 2020 or 2019.2022, 2021, and 2020.
Based on the collateral pledged as security for advances, the Bank’s credit analyses of borrowers’ financial condition, repayment history on advances, and the Bank’s credit extension and collateral policies as of December 31, 2020,2022, the Bank expects to collect all amounts due according to the contractual terms. Therefore, no allowance for credit losses on advances was deemed necessary by the Bank as of December 31, 20202022 and 2019.2021.
Interest Rate Payment Terms. Interest rate payment terms for advances at December 31, 20202022 and 2019,2021, are detailed below:
| | | | | | | | | | | |
| 2020 | | 2019 |
| Par value of advances: | | | |
| Fixed rate: | | | |
| Due within 1 year | $ | 11,044 | | | $ | 15,327 | |
| Due after 1 year | 17,126 | | | 21,337 | |
| Total fixed rate | 28,170 | | | 36,664 | |
| Adjustable rate: | | | |
| Due within 1 year | 818 | | | 17,024 | |
| Due after 1 year | 1,350 | | | 11,400 | |
| Total adjustable rate | 2,168 | | | 28,424 | |
| Total par value | $ | 30,338 | | | $ | 65,088 | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | |
| (In millions) | 2022 | | 2021 |
| Par value of advances: | | | |
| Fixed rate: | | | |
| Due within 1 year | $ | 47,621 | | | $ | 2,768 | |
| Due after 1 year | 18,050 | | | 12,729 | |
| Total fixed rate | 65,671 | | | 15,497 | |
| Adjustable rate: | | | |
| Due within 1 year | 23,431 | | | 1,361 | |
| Due after 1 year | 1,015 | | | — | |
| Total adjustable rate | 24,446 | | | 1,361 | |
| Total par value | $ | 90,117 | | | $ | 16,858 | |
The Bank did not have any advances with embedded features that met the requirements to separate the embedded feature from the host contract and designate the embedded feature as a stand-alone derivative at December 31, 20202022 or 2019.2021. The Bank has generally elected to account for certain advances with embedded features under the fair value option, and these advances are carried at fair value on the Statements of Condition. For more information, see Note 14 – Derivatives and Hedging Activities and Note 15 – Fair Value.
Prepayment Fees, Net. The Bank charges borrowers prepayment fees or pays borrowers prepayment credits when the principal on certain advances is paid prior tobefore original maturity. The Bank records prepayment fees net of any associated fair value adjustments related to prepaid advances that were hedged. The net amount of prepayment fees is reflected as advances interest income in the Statements of Income for the years ended December 31, 2020, 2019,2022, 2021, and 2018,2020, as follows:
| | | | 2020 | | 2019 | | 2018 | | |
| (In millions) | | (In millions) | | 2022 | | 2021 | | 2020 | |
| Prepayment fees received/(paid) | Prepayment fees received/(paid) | | $ | 142 | | | $ | 9 | | | $ | (9) | | | Prepayment fees received/(paid) | | $ | (45) | | | $ | 47 | | | $ | 142 | | |
| Fair value adjustments | Fair value adjustments | | (109) | | | (6) | | | 12 | | | Fair value adjustments | | 36 | | | (16) | | | (109) | | |
| Net | Net | | $ | 33 | | | $ | 3 | | | $ | 3 | | | Net | | $ | (9) | | | $ | 31 | | | $ | 33 | | |
| Advance principal prepaid | Advance principal prepaid | | $ | 26,741 | | | $ | 6,760 | | | $ | 7,496 | | | Advance principal prepaid | | $ | 4,389 | | | $ | 9,929 | | | $ | 26,741 | | |
Note 6 — Mortgage Loans Held for Portfolio
The following table presents information as of December 31, 20202022 and 2019,2021, on mortgage loans held for portfolio, all of which are secured by one- to four-unit residential properties and single-unit second homes.
|
| 2020 | | 2019 | |
| (In millions) | | (In millions) | 2022 | | 2021 |
| Fixed rate medium-term mortgage loans | Fixed rate medium-term mortgage loans | $ | 27 | | | $ | 27 | | Fixed rate medium-term mortgage loans | $ | 14 | | | $ | 18 | |
| Fixed rate long-term mortgage loans | Fixed rate long-term mortgage loans | 1,879 | | | 3,199 | | Fixed rate long-term mortgage loans | 761 | | | 936 | |
| Subtotal | Subtotal | 1,906 | | | 3,226 | | Subtotal | 775 | | | 954 | |
| Unamortized premiums | Unamortized premiums | 35 | | | 91 | | Unamortized premiums | 43 | | | 28 | |
| Unamortized discounts | Unamortized discounts | (2) | | | (3) | | Unamortized discounts | (2) | | | (1) | |
Mortgage loans held for portfolio(1) | Mortgage loans held for portfolio(1) | 1,939 | | | 3,314 | | Mortgage loans held for portfolio(1) | 816 | | | 981 | |
| Less: Allowance for credit losses | Less: Allowance for credit losses | (4) | | | 0 | | Less: Allowance for credit losses | (1) | | | (1) | |
| Total mortgage loans held for portfolio, net | Total mortgage loans held for portfolio, net | $ | 1,935 | | | $ | 3,314 | | Total mortgage loans held for portfolio, net | $ | 815 | | | $ | 980 | |
(1)Excludes accrued interest receivable of $10$5 million and $19$6 million at December 31, 20202022 and 2019,2021, respectively.
Medium-term loans have original contractual terms of 15 years or less, and long-term loans have contractual terms of more than 15 years.
Payment Status of Mortgage Loans. Payment status is the key credit quality indicator for conventional mortgage loans and allows the Bank to monitor the migration of past due loans. Past due loans are those where the borrower has failed to make timely payments of principal and/or interest in accordance with the terms of the loan. Other delinquency statistics include nonaccrual loans and loans in process of foreclosure. The following tables present the payment status for mortgage loans and other delinquency statistics for Bank’s mortgage loans at December 31, 2020, and 2019.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | |
| December 31, 2020 | | | | | |
| Origination Year | | |
| Payment Status | <2016 | | 2016 to 2020 | | Amortized Cost(1) |
| 30 – 59 days delinquent | $ | 20 | | | $ | 2 | | | $ | 22 | |
| 60 – 89 days delinquent | 5 | | | 2 | | | 7 | |
| 90 days or more delinquent | 95 | | | 9 | | | 104 | |
| Total past due | 120 | | | 13 | | | 133 | |
| Total current loans | 1,628 | | | 178 | | | 1,806 | |
Total MPF(2) | $ | 1,748 | | | $ | 191 | | | $ | 1,939 | |
In process of foreclosure, included above(3) | | | | | $ | 1 | |
Nonaccrual loans(2)(4) | | | | | $ | 104 | |
| | | | | |
Serious delinquencies as a percentage of total mortgage loans outstanding(2)(5) | | | | | 5.34 | % |
| | | | | |
December 31, 2019 | |
| |
Payment Status | Recorded
Investment(1)
|
30 – 59 days delinquent | $ | 15 | |
60 – 89 days delinquent | 2 | |
90 days or more delinquent | 7 | |
Total past due | 24 | |
Total current loans | 3,310 | |
Total MPF | $ | 3,334 | |
In process of foreclosure, included above(3)
| $ | 0 | |
Nonaccrual loans | $ | 7 | |
| |
Serious delinquencies as a percentage of totalPayment Status of Mortgage Loans. Payment status is the key credit quality indicator for conventional mortgage loans and allows the Bank to monitor the migration of past due loans. A past due loan is one where the borrower has failed to make a scheduled full payment of principal and interest within 30 days of its due date. Other delinquency statistics include nonaccrual loans and loans in process of foreclosure. The following tables present the payment status for mortgage loans and other delinquency statistics for the Bank’s mortgage loans outstanding(5)
| 0.22 | % |
(1) With the adoption of new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020, payment status of mortgage loans is disclosed at amortized cost. The recorded investment at December 31, 2019, in a loan is the unpaid principal balance of the loan, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts,2022 and direct write-downs. The recorded investment is not net of any valuation allowance.2021.
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | |
| (Dollars in millions) | Origination Year | | |
| Payment Status | 2018 to 2022 | | Prior to 2018 | | Amortized Cost(1) |
| 30 – 59 days delinquent | $ | 4 | | | $ | 5 | | | $ | 9 | |
| 60 – 89 days delinquent | 2 | | | 1 | | | 3 | |
| 90 days or more delinquent | 11 | | | 8 | | | 19 | |
| Total past due | 17 | | | 14 | | | 31 | |
| Total current loans | 449 | | | 336 | | | 785 | |
| Total mortgage loans held for portfolio | $ | 466 | | | $ | 350 | | | $ | 816 | |
In process of foreclosure, included above(2) | | | | | $ | 3 | |
Nonaccrual loans(3) | | | | | $ | 19 | |
| | | | | |
Serious delinquencies as a percentage of total mortgage loans outstanding(4) | | | | | 2.30 | % |
| | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | | | |
| (Dollars in millions) | Origination Year | | |
| Payment Status | 2017 to 2021 | | Prior to 2017 | | Amortized Cost(1) |
| 30 – 59 days delinquent | $ | 7 | | | $ | 2 | | | $ | 9 | |
| 60 – 89 days delinquent | 1 | | | 2 | | | 3 | |
| 90 days or more delinquent | 26 | | | 10 | | | 36 | |
| Total past due | 34 | | | 14 | | | 48 | |
| Total current loans | 729 | | | 204 | | | 933 | |
| Total mortgage loans held for portfolio | $ | 763 | | | $ | 218 | | | $ | 981 | |
In process of foreclosure, included above(2) | | | | | $ | 1 | |
Nonaccrual loans(3) | | | | | $ | 36 | |
| | | | | |
Serious delinquencies as a percentage of total mortgage loans outstanding(4) | | | | | 3.64 | % |
(1) The amortized cost at December 31, 2020, in a loan is the unpaid principal balance of the loan, adjusted for net deferred loan fees or costs, unamortized premiums or discounts, and direct write-downs.
(2) At December 31, 2020, unpaid principal balances of conventional mortgage loans held for portfolio that were in a forbearance plan as a result of the COVID-19 pandemic totaled $78. Of that total, $2 were current, $7 were 30 to 59 days past due, $1 were 60 to 90 days past due, and $68 were greater than 90 days past due and in nonaccrual payment status. The conventional mortgage loans in forbearance represent 4% of the Bank’s mortgage loans held for portfolio at December 31, 2020.
(3) Includes loans for which the servicer has reported a decision to foreclose or to pursue a similar alternative, such as deed-in-lieu. Loans in process of foreclosure are included in past due or current loans depending on their delinquency status.
(4)(3) At December 31, 2020, $1032022 and 2021, $7 million and $21 million, respectively, of these mortgage loans on nonaccrual status did not have an associated allowance for credit losses.losses because these loans were either previously charged off to the expected recoverable value or the fair value of the underlying collateral, including any credit enhancements, is greater than the amortized cost of the loans.
(5)(4) Represents loans that are 90 days or more past due or in the process of foreclosure as a percentage of the recorded investment of total mortgage loans outstanding.
Starting in the second quarter of 2020, the Bank elected to apply the TDR relief provisions provided by the CARES Act. As such, all COVID-related modifications meeting the provisions of the CARES Act are excluded from TDR classification and accounting, and the Bank considers these loans to have a current payment status as long as payments are being made in accordance with the new terms. Alternatively, COVID-related modifications that do not meet the provisions of the CARES Act continue to be assessed for TDR classification. The participating members may grant a forbearance period to borrowers who have requested forbearance based on COVID-19 related difficulties regardless of the status of the loan at the time of the request. The accrual status for loans under forbearance will be driven by the past due status of the loan. See Note 1 – Summary of Significant Accounting Policies for additional information on the CARES Act.
Allowance for Credit Losses on MPF Loans.Mortgage Loans Held for Portfolio. MPFMortgage loans held for portfolio are evaluated collectivelyon a loan-level basis for expected credit losses, when similar risk characteristics exist. MPF loans that do not share risk characteristics with other pools are
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
evaluated for expected credit losses on an individual basis, factoring in the credit enhancement structure at the master commitment level. The Bank determines its allowancesallowance for credit losses on MPFmortgage loans held for portfolio through analyses that include consideration of various loan portfolio and collateral related characteristics, such as past performance, current conditions, and reasonable and supportable forecasts of expected economic conditions. The Bank uses models that employ a variety of methods, such as projected cash flows, to estimate expected credit losses over the life of the loans. These models rely on a number of inputs, such as current and forecasted property values and interest rates as well as historical borrower behavior experience. At December 31, 2020,2022, the Bank’s reasonable and supportable forecast of housing prices expects, on average, for prices to depreciate 0.7% over a one-year
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
forecast horizon before reverting to long-term housing price appreciation rates of 4.0% after five additional years in the forecast based on historical averages. At December 31, 2021, the Bank’s reasonable and supportable forecast of housing prices expects, on average, for prices to appreciate 2%8.4% over a one-year forecast horizon before reverting to long-term housing price appreciation rates of 4% over a three-year3.3% after five additional years in the forecast horizon based on historical averages. The Bank also incorporates associated credit enhancements, if any, to determine its estimate of expected credit losses.
Certain MPFmortgage loans held for portfolio may be evaluated for credit losses by the Bank using the practical expedient for collateral-dependent assets. A mortgage loan is considered collateral-dependent if repayment is expected to be provided by the sale of the underlying property, that is, if it is considered likely that the borrower will default. The Bank may estimate the fair value of this collateral by applying an appropriate loss severity rate or using third-party estimates or property valuation models. The expected credit loss of a collateral-dependent mortgage loan is equal to the difference between the amortized cost of the loan and the estimated fair value of the collateral, less estimated selling costs. The Bank will either reserve for these estimated losses or record a direct charge-off of the loan balance, if certain triggering criteria are met. Expected recoveries of prior charge-offs, if any, are included in the allowance for credit loss.
The following table presents a rollforward of the allowance for credit losses on the mortgage loan portfolio for the yearyears ended December 31, 2022, 2021, and 2020. The Bank recorded a de minimis allowance for credit losses on the mortgage loan portfolio for the year ended December 31, 2019. The amount of charge-offs and recoveries of allowance for credit losses on the mortgage loan portfolio were de minimis for the years ended December 31, 2020, 2019,2022, 2021, and 2018.2020.
| | | | | | | | | | | |
| | | |
| | | | | 2020 | | |
Balance, beginning of the period | | | | | $ | 0 | | | |
Adjustment for cumulative effect of accounting change | | | | | 3 | | | |
| | | | | | | |
Provision for/(reversal of) credit losses | | | | | 1 | | | |
Balance, end of the period | | | | | $ | 4 | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | |
| (In millions) | | | | | 2022 | | 2021 | | 2020 |
| Balance, beginning of the period | | | | | $ | 1 | | | $ | 4 | | | $ | — | |
| Adjustment for cumulative effect of accounting change | | | | | — | | | — | | | 3 | |
| | | | | | | | | |
| Provision for/(reversal of) credit losses | | | | | — | | | (3) | | | 1 | |
| Balance, end of the period | | | | | $ | 1 | | | $ | 1 | | | $ | 4 | |
See Note 1 – Summary of Significant Accounting Policies forFor more information on the prior methodology for evaluating credit losses andrelated to the Bank’s accounting policies for mortgage loans held for portfolio.portfolio, see “Note 1 – Summary of Significant Accounting Policies.”
Note 7 — Deposits
The Bank maintains demand deposit accounts that are directly related to the extension of credit to members and offers short-term deposit programs to members and qualifying nonmembers. In addition, a member that services mortgage loans held for portfolio may deposit in the Bank funds collected in connection with the mortgage loans, pending disbursement of these funds to the owners of the mortgage loans. The Bank classifies these types of deposits as non-interest-bearing deposits. Deposits classified as demand, overnight, and other pay interest based on a daily interest rate. Term deposits pay interest based on a fixed rate determined at the issuance of the deposit.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Deposits and interest rate payment terms for deposits as of December 31, 20202022 and 2019,2021, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 |
| Amount
Outstanding | | Weighted
Average
Interest Rate | | Amount
Outstanding | | Weighted
Average
Interest Rate |
| Interest-bearing deposits: | | | | | | | |
| Adjustable rate | $ | 732 | | | 0.01 | % | | $ | 427 | | | 1.30 | % |
| Fixed rate | 16 | | | 0.01 | | | 0 | | | 0 | |
| Total interest-bearing deposits | 748 | | | | | 427 | | | |
| Non-interest-bearing deposits | 139 | | | | | 110 | | | |
| Total | $ | 887 | | | | | $ | 537 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| (Dollars in millions) | Amount
Outstanding | | Weighted
Average
Interest Rate | | Amount
Outstanding | | Weighted
Average
Interest Rate |
| Interest-bearing deposits: | | | | | | | |
| Adjustable rate | $ | 983 | | | 4.15 | % | | $ | 722 | | | 0.01 | % |
| Fixed rate | — | | | — | | | 18 | | | 0.01 | |
| Total interest-bearing deposits | 983 | | | | | 740 | | | |
| Non-interest-bearing deposits | 6 | | | | | 29 | | | |
| Total | $ | 989 | | | | | $ | 769 | | | |
Note 8 — Consolidated Obligations
Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are jointly issued by the FHLBanksFederal Home Loan Banks (FHLBanks) through the Office of Finance, which serves as the FHLBanks’ agent. As provided by the FHLBankFederal Home Loan Bank Act of 1932, as amended (FHLBank Act) or by regulations governing the operations of the FHLBanks, all FHLBanks have joint and several liability for all FHLBank consolidated obligations. For a discussion of the joint and several liability regulation, see Note 16 – Commitments and Contingencies. In connection with each issuance of consolidated obligations, each FHLBank specifies the type, term, and amount of debt it requests to have issued on its behalf. The Office of Finance tracks the amount of debt issued on behalf of each FHLBank. In addition, the Bank separately tracks and records as a liability its specific portion of the consolidated obligations issued and is the primary obligor for that portion of the consolidated obligations issued. The Finance Agency and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance.
Consolidated obligation bonds may be issued to raise short-, intermediate-, and long-term funds for the FHLBanks. The maturity of consolidated obligation bonds generally ranges from 6 months to 15 years, but the maturity is not subject to any statutory or regulatory limits. Consolidated obligation discount notes are primarily used to raise short-term funds. These notes are issued at less than their face amount and redeemed at par value when they mature.
The par value of the outstanding consolidated obligations of the FHLBanks was $746,722$1.2 trillion at December 31, 2020,2022, and $1,025,895$652.9 billion at December 31, 2019.2021. Regulations require the FHLBanks to maintain, for the benefit of investors in consolidated obligations, in the aggregate, unpledged qualifying assets in an amount equal to the consolidated obligations outstanding. Qualifying assets are defined as cash; secured advances; assets with an assessment or credit rating at least equivalent to the current assessment or credit rating of the consolidated obligations; obligations, participations, mortgages, or other securities of or issued by the United States or an agency of the United States; and such securities as fiduciary and trust funds may invest in under the laws of the state in which the FHLBank is located. Any assets subject to a lien or pledge for the benefit of holders of any issue of consolidated obligations are treated as if they were free from lien or pledge for the purposes of compliance with these regulations. At December 31, 2020,2022, the Bank had qualifying assets totaling $68,016,$120.4 billion, and the Bank’s participation in consolidated obligations outstanding was $60,621.$111.7 billion.
General Terms. Consolidated obligations are generally issued with either fixed rate payment terms or adjustable rate payment terms. In addition, to meet the specific needs of certain investors, fixed rate and adjustable rate consolidated obligation bonds may contain certain embedded features, such as call options and complex coupon payment terms. In general, when such consolidated obligation bonds are issued for which the Bank is the primary obligor, the Bank simultaneously enters 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.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
In addition to having fixed rate or simple adjustable rate coupon payment terms, consolidated obligations may, for example, include:
•Callable bonds, which the Bank may call in whole or in part at its option on predetermined call dates according to the terms of the bond offerings;
•Step-up callable bonds, which pay interest at increasing fixed rates for specified intervals over the life of the bond and can generally be called at the Bank’s option on the step-up dates according to the terms of the bond offerings;
•Step-down callable bonds, which pay interest at decreasing fixed rates for specified intervals over the life of the bond and can generally be called at the Bank’s option on the step-down dates according to the terms of the bond offerings;
•Conversion callable bonds, which have coupon rates that convert from fixed to adjustable or from adjustable to fixed on predetermined dates and can generally be called at the Bank’s option on predetermined call dates according to the terms of the bond offerings;
•Range bonds, which have coupons at fixed or variable rates and pay the fixed or variable rate as long as a reference rate is within an established range, but generally pay zero percent or a minimal interest rate if the specified reference rate is outside the established range.
Redemption Terms. The following is a summary of the Bank’s participation in consolidated obligation bonds at December 31, 20202022 and 2019.2021.
| | | 2020 | | 2019 | |
| (Dollars in millions) | | (Dollars in millions) | 2022 | | 2021 |
| Contractual Maturity | Contractual Maturity | Amount
Outstanding | | Weighted
Average
Interest Rate | | Amount
Outstanding | | Weighted
Average
Interest Rate | Contractual Maturity | Amount
Outstanding | | Weighted
Average
Interest Rate | | Amount
Outstanding | | Weighted
Average
Interest Rate |
| Within 1 year | Within 1 year | $ | 34,542 | | | 0.23 | % | | $ | 53,549 | | | 1.68 | % | Within 1 year | $ | 58,301 | | | 4.05 | % | | $ | 7,349 | | | 0.18 | % |
| After 1 year through 2 years | After 1 year through 2 years | 6,923 | | | 0.21 | | | 13,853 | | | 1.67 | | After 1 year through 2 years | 8,268 | | | 2.30 | | | 1,757 | | | 0.67 | |
| After 2 years through 3 years | After 2 years through 3 years | 751 | | | 1.00 | | | 770 | | | 1.93 | | After 2 years through 3 years | 2,317 | | | 1.26 | | | 4,230 | | | 0.63 | |
| After 3 years through 4 years | After 3 years through 4 years | 677 | | | 0.67 | | | 135 | | | 2.74 | | After 3 years through 4 years | 5,473 | | | 0.99 | | | 1,855 | | | 0.72 | |
| After 4 years through 5 years | After 4 years through 5 years | 185 | | | 0.82 | | | 937 | | | 2.08 | | After 4 years through 5 years | 1,255 | | | 1.47 | | | 5,368 | | | 0.89 | |
| After 5 years | After 5 years | 1,311 | | | 2.24 | | | 2,126 | | | 2.94 | | After 5 years | 1,293 | | | 1.73 | | | 2,303 | | | 1.42 | |
| Total par value | Total par value | 44,389 | | | 0.31 | % | | 71,370 | | | 1.73 | % | Total par value | 76,907 | | | 3.47 | % | | 22,862 | | | 0.64 | % |
| Unamortized premiums | Unamortized premiums | 10 | | | | | 1 | | | | Unamortized premiums | 1 | | | | | 3 | | | |
| Unamortized discounts | Unamortized discounts | (5) | | | (10) | | | Unamortized discounts | (5) | | | (4) | | |
| Valuation adjustments for hedging activities | Valuation adjustments for hedging activities | 13 | | | 9 | | | Valuation adjustments for hedging activities | (1,083) | | | (139) | | |
| Fair value option valuation adjustments | Fair value option valuation adjustments | 1 | | | 2 | | | Fair value option valuation adjustments | (52) | | | (6) | | |
| Total | Total | $ | 44,408 | | | $ | 71,372 | | | Total | $ | 75,768 | | | $ | 22,716 | | |
The Bank’s participation in consolidated obligation bonds outstanding includes callable bonds of $3,140$19.7 billion at December 31, 2020,2022, and $6,345$14.6 billion at December 31, 2019.2021. When a callable bond for which the Bank is the primary obligor is issued, the Bank may simultaneously enter into an interest rate swap (in which(wherein the Bank pays a variable rate and receives a fixed rate) with a call feature that mirrors the call option embedded in the bond (a sold callable option in a swap). The Bank had notional amounts of interest rate exchange agreements hedging callable bonds of $930$18.1 billion at December 31, 2020,2022, and $2,085$12.8 billion at December 31, 2019.2021. The combined sold callable swaps and callable bonds enable the Bank to meet its funding needs at lower costs not otherwise directly attainable solely through the issuance ofrelative to similar tenor non-callable debt, while effectively converting the Bank’s net payment to an adjustable rate.
The Bank’s participation in consolidated obligation bonds at December 31, 20202022 and 2019,2021, was as follows:
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | 2020 | | 2019 | |
| (In millions) | | (In millions) | 2022 | | 2021 |
| Par value of consolidated obligation bonds: | Par value of consolidated obligation bonds: | | Par value of consolidated obligation bonds: | |
| Non-callable | Non-callable | $ | 41,249 | | | $ | 65,025 | | Non-callable | $ | 57,164 | | | $ | 8,242 | |
| Callable | Callable | 3,140 | | | 6,345 | | Callable | 19,743 | | | 14,620 | |
| Total par value | Total par value | $ | 44,389 | | | $ | 71,370 | | Total par value | $ | 76,907 | | | $ | 22,862 | |
The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding at December 31, 20202022 and 2019,2021, by the earlier of the year of contractual maturity or next call date.
| | (In millions) | | (In millions) | |
Earlier of Contractual
Maturity or Next Call Date | Earlier of Contractual
Maturity or Next Call Date | 2020 | | 2019 | Earlier of Contractual
Maturity or Next Call Date | 2022 | | 2021 |
| Within 1 year | Within 1 year | $ | 36,667 | | | $ | 58,239 | | Within 1 year | $ | 73,049 | | | $ | 21,770 | |
| After 1 year through 2 years | After 1 year through 2 years | 7,228 | | | 12,768 | | After 1 year through 2 years | 3,310 | | | 969 | |
| After 2 years through 3 years | After 2 years through 3 years | 396 | | | 195 | | After 2 years through 3 years | 187 | | | 72 | |
| After 3 years through 4 years | After 3 years through 4 years | 47 | | | 70 | | After 3 years through 4 years | 313 | | | — | |
| After 4 years through 5 years | After 4 years through 5 years | 0 | | | 47 | | After 4 years through 5 years | — | | | 3 | |
| After 5 years | After 5 years | 51 | | | 51 | | After 5 years | 48 | | | 48 | |
| Total par value | Total par value | $ | 44,389 | | | $ | 71,370 | | Total par value | $ | 76,907 | | | $ | 22,862 | |
Consolidated obligation discount notes are consolidated obligations issued to raise short-term funds. These notes are issued at less than their face value and redeemed at par value when they mature. The Bank’s participation in consolidated obligation discount notes, all of which are due within one year, was as follows:
| | | | 2020 | | 2019 | | 2022 | | 2021 |
| | Amount
Outstanding | | Weighted Average Interest Rate (1) | | Amount
Outstanding | | Weighted Average Interest Rate (1) | |
| (Dollars in millions) | | (Dollars in millions) | Amount
Outstanding | | Weighted Average Interest Rate (1) | | Amount
Outstanding | | Weighted Average Interest Rate (1) |
| Par value | Par value | $ | 16,217 | | | 0.12 | % | | $ | 27,447 | | | 1.61 | % | Par value | $ | 36,159 | | | 4.13 | % | | $ | 23,989 | | | 0.04 | % |
| Unamortized discounts | Unamortized discounts | (4) | | | (71) | | | Unamortized discounts | (230) | | | (2) | | |
| Total | Total | $ | 16,213 | | | $ | 27,376 | | | Total | $ | 35,929 | | | $ | 23,987 | | |
(1)Represents yield to maturity excluding concession fees.
Interest Rate Payment Terms. Interest rate payment terms for consolidated obligations at December 31, 20202022 and 2019,2021, are detailed in the following table.
|
| 2020 | | 2019 | |
| (In millions) | | (In millions) | 2022 | | 2021 |
| Par value of consolidated obligations: | Par value of consolidated obligations: | | Par value of consolidated obligations: | |
| Bonds: | Bonds: | | Bonds: | |
| Fixed rate | Fixed rate | $ | 6,632 | | | $ | 10,993 | | Fixed rate | $ | 25,632 | | | $ | 16,654 | |
| Adjustable rate | Adjustable rate | 37,712 | | | 60,117 | | Adjustable rate | 48,997 | | | 5,575 | |
| Step-up | Step-up | 45 | | | 60 | | Step-up | 2,278 | | | 633 | |
| Step-down | 0 | | | 100 | | |
| | Range bonds | 0 | | | 100 | | |
| | Total bonds, par value | Total bonds, par value | 44,389 | | | 71,370 | | Total bonds, par value | 76,907 | | | 22,862 | |
| Discount notes, par value | Discount notes, par value | 16,217 | | | 27,447 | | Discount notes, par value | 36,159 | | | 23,989 | |
| Total consolidated obligations, par value | Total consolidated obligations, par value | $ | 60,606 | | | $ | 98,817 | | Total consolidated obligations, par value | $ | 113,066 | | | $ | 46,851 | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Bank did not have any bonds with embedded features that met the requirements to separate the embedded feature from the host contract and designate the embedded feature as a stand-alone derivative at December 31, 20202022 or 2019.2021. The Bank has generally elected to account for certain bonds with embedded features under the fair value
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
option, and these bonds are carried at fair value on the Statements of Condition. For more information, see Note 14 – Derivatives and Hedging Activities and Note 15 – Fair Value.
Note 9 — Affordable Housing Program
The FHLBank Act requires each FHLBank to establish an AHP. Each FHLBank provides subsidies to members, which 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. Annually, the FHLBanks must set aside for their AHPs, 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 AHP).
The Bank accrues its AHP assessment monthly based on its net earnings. If the Bank experienced a net loss during a quarter but still had net earnings for the year, the Bank’s obligation to the AHP would be calculated based on the Bank’s year-to-date net earnings. If the Bank had net earnings in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the Bank experienced a net loss for a full year, the amount of the AHP liability would be equal to zero, since each FHLBank’s required annual AHP contribution is limited to its annual net earnings. However, if the result of the aggregate 10% calculation is less than $100 million for the FHLBanks combined, then 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.$100 million. The proration would be made on the basis of an FHLBank’s income in relation to the income of all the FHLBanks for the previous year. There was no AHP shortfall, as described above, in 2020, 2019,2022, 2021, or 2018.2020. If an FHLBank finds that its required AHP assessments are contributing to the financial instability of that FHLBank, it may apply to the Finance Agency for a temporary suspension of its contributions. The Bank did not make such an application in 2020, 2019,2022, 2021, or 2018.2020.
The Bank’s total AHP assessments equaled $36 million, $32 million, and $38 $38,million during 2022, 2021, and $43 during 2020, 2019, and 2018, respectively. These amounts were charged to earnings each year and recognized as a liability. As subsidies are disbursed, the AHP liability is reduced. The AHP liability was as follows:
| | 2020 | | 2019 | | 2018 | |
| (In millions) | | (In millions) | 2022 | | 2021 | | 2020 |
| Balance, beginning of the period | Balance, beginning of the period | $ | 152 | | | $ | 182 | | | $ | 204 | | Balance, beginning of the period | $ | 115 | | | $ | 120 | | | $ | 152 | |
| AHP assessments | AHP assessments | 38 | | | 38 | | | 43 | | AHP assessments | 36 | | | 32 | | | 38 | |
| AHP voluntary contributions | 0 | | | 2 | | | 3 | | |
| | AHP grant payments | AHP grant payments | (70) | | | (70) | | | (68) | | AHP grant payments | (40) | | | (37) | | | (70) | |
| Balance, end of the period | Balance, end of the period | $ | 120 | | | $ | 152 | | | $ | 182 | | Balance, end of the period | $ | 111 | | | $ | 115 | | | $ | 120 | |
All subsidies were distributed in the form of direct grants in 2020, 2019,2022, 2021, and 2018.2020.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 10 — Accumulated Other Comprehensive Income/(Loss)
The following table summarizes the changes in AOCI for the years ended December 31, 2020, 20192022, 2021, and 2018:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Unrealized Gain/(Loss) on AFS Securities | | Net Non-Credit-Related OTTI Loss on AFS Securities | | Net Non-Credit-Related OTTI Loss on HTM Securities | | Pension and Postretirement Benefits | | Total
AOCI |
| Balance, December 31, 2017 | $ | 0 | | | $ | 337 | | | $ | (6) | | | $ | (13) | | | $ | 318 | |
| Other comprehensive income/(loss) before reclassifications: | | | | | | | | | |
| Net change in pension and postretirement benefits | | | | | | | (4) | | | (4) | |
| Non-credit-related OTTI loss | | | (14) | | | 0 | | | | | (14) | |
| Net change in fair value | (32) | | | (38) | | | | | | | (70) | |
| Accretion of non-credit-related OTTI loss | | | | | 3 | | | | | 3 | |
| Reclassification from other comprehensive income/(loss) to net income/(loss): | | | | | | | | | |
| Non-credit-related OTTI to credit-related OTTI | | | 2 | | | 0 | | | | | 2 | |
| Net current period other comprehensive income/(loss) | (32) | | | (50) | | | 3 | | | (4) | | | (83) | |
| Balance, December 31, 2018 | $ | (32) | | | $ | 287 | | | $ | (3) | | | $ | (17) | | | $ | 235 | |
| Other comprehensive income/(loss) before reclassifications: | | | | | | | | | |
| Net change in pension and postretirement benefits | | | | | | | 3 | | | 3 | |
| Non-credit-related OTTI loss | | | (6) | | | 0 | | | | | (6) | |
| Net change in fair value | 53 | | | (16) | | | | | | | 37 | |
| Accretion of non-credit loss | | | | | 2 | | | | | 2 | |
| Reclassification from other comprehensive income/(loss) to net income/(loss): | | | | | | | | | |
| Non-credit-related OTTI to credit-related OTTI | | | 3 | | | 0 | | | | | 3 | |
| Net current period other comprehensive income/(loss) | 53 | | | (19) | | | 2 | | | 3 | | | 39 | |
| Balance, December 31, 2019 | $ | 21 | | | $ | 268 | | | $ | (1) | | | $ | (14) | | | $ | 274 | |
| | | | | | | | | |
| | | | | | | | | |
| Other comprehensive income/(loss) before reclassifications: | | | | | | | | | |
| | | | | | | | | |
| Net change in fair value | (45) | | | 0 | | | | | | | (45) | |
| Accretion of non-credit loss | | | | | 1 | | | | | 1 | |
| | | | | | | | | |
| | | | | | | | | |
| Net current period other comprehensive income/(loss) | (45) | | | 0 | | | 1 | | | 0 | | | (44) | |
Adoption of ASU 2016-13, as amended(1) | 268 | | | (268) | | | | | | | 0 | |
| Balance, December 31, 2020 | $ | 244 | | | $ | 0 | | | $ | 0 | | | $ | (14) | | | $ | 230 | |
(1) With the adoption of changes to accounting standards on measurement of credit losses for financial instruments on January 1, 2020, OTTI assessment was replaced with an evaluation for an allowance for credit loss (see Note 1 – Summary of Significant Accounting Policies and Note 2 – Recently Issued and Adopted Accounting Guidance for further information).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Net Unrealized Gain/(Loss) on AFS Securities | | Net Non-Credit-Related OTTI Loss on AFS Securities | | Net Non-Credit-Related OTTI Loss on HTM Securities | | Pension and Postretirement Benefits | | Total
AOCI |
| Balance, December 31, 2019 | $ | 21 | | | $ | 268 | | | $ | (1) | | | $ | (14) | | | $ | 274 | |
| Other comprehensive income/(loss): | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net change in fair value | (45) | | | — | | | | | | | (45) | |
| Accretion of non-credit loss | | | | | 1 | | | | | 1 | |
| | | | | | | | | |
| | | | | | | | | |
| Net current period other comprehensive income/(loss) | (45) | | | — | | | 1 | | | — | | | (44) | |
Adoption of ASU 2016-13, as amended(1) | 268 | | | (268) | | | — | | | — | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| Balance, December 31, 2020 | $ | 244 | | | $ | — | | | $ | — | | | $ | (14) | | | $ | 230 | |
| Other comprehensive income/(loss): | | | | | | | | | |
| Net change in pension and postretirement benefits | | | | | | | 5 | | | 5 | |
| | | | | | | | | |
| Net change in fair value | 96 | | | — | | | | | | | 96 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net current period other comprehensive income/(loss) | 96 | | | — | | | — | | | 5 | | | 101 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Balance, December 31, 2021 | $ | 340 | | | $ | — | | | $ | — | | | $ | (9) | | | $ | 331 | |
| Other comprehensive income/(loss): | | | | | | | | | |
| Net change in pension and postretirement benefits | | | | | | | (6) | | | (6) | |
| Net change in fair value | (354) | | | — | | | | | | | (354) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net current period other comprehensive income/(loss) | (354) | | | — | | | — | | | (6) | | | (360) | |
| Balance, December 31, 2022 | $ | (14) | | | $ | — | | | $ | — | | | $ | (15) | | | $ | (29) | |
Note 11 — Capital
Capital Requirements. The Bank issues only one class of capital stock, Class B stock, with a par value of one hundred dollars$100 per share, which may be redeemed (subject to certain conditions) upon five years' notice by the member to the Bank. In addition, at its discretion, under certain conditions, the Bank may repurchase excess capital stock at any time. (See “Excess Capital Stock” below for more information.) The capital stock may be issued, redeemed, and repurchased only at its stated par value, subject to certain statutory and regulatory requirements. The Bank may only redeem or repurchase capital stock from a shareholder if, following the redemption or repurchase, the shareholder will continue to meet its minimum capital stock requirement and the Bank will continue to meet its regulatory requirements for total capital, leverage capital, and risk-based capital.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Under the Housing and Economic Recovery Act of 2008, the Director of the Finance Agency is responsible for setting the risk-based capital standards for the FHLBanks. The FHLBank Act and regulations governing the operations of the FHLBanks require that the Bank’s minimum capital stock requirement for shareholders must be sufficient to enable the Bank to meet its regulatory requirements for total capital, leverage capital, and risk-based capital. The Bank must maintain: (i) total regulatory capital in an amount equal to at least 4% of its total assets, (ii) leverage capital in an amount equal to at least 5% of its total assets, and (iii) permanent capital in an amount that is greater than or equal to its risk-based capital requirement.
Beginning in February 2020, theThe Finance Agency issued guidance that augmented existing statutory and regulatory capital requirements to requirerequires each FHLBank to maintain a ratio of at least two percent2% of capital stock to total assets in order to help preserve the cooperative structure incentives that encourage members to remain fully engaged in the oversight of their investment in the FHLBank. The Finance Agency will consider the proportion of capital stock to assets, measured on a daily average basis at monthend, when assessing each FHLBank’s capital management practices. As of December 31, 2020,2022 and 2021, the Bank was in compliancecomplied with this capital guidance.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Because the Bank issues only Class B stock, regulatory capital and permanent capital for the Bank are both composed of retained earnings and Class B stock, including mandatorily redeemable capital stock (which is classified as a liability for financial reporting purposes). Regulatory capital and permanent capital do not include AOCI. Leverage capital is defined as the sum of permanent capital, weighted by a 1.5 multiplier, plus non-permanent capital.
The risk-based capital requirement is equal to the sum of the Bank’s credit risk, market risk, and operationsoperational risk capital requirements, all of which are calculated in accordance with the rules and regulations of the Finance Agency. The Finance Agency may require an FHLBank to maintain a greater amount of permanent capital than is required by the risk-based capital requirement as defined.
As of December 31, 20202022 and 2019,2021, the Bank was in compliancecomplied with these capital rules and requirements as shown in the following table.
| | | 2020 | | 2019 | | 2022 | | 2021 |
| | Required | | Actual | | Required | | Actual | |
| (Dollars in millions) | | (Dollars in millions) | Required | | Actual | | Required | | Actual |
| Risk-based capital | Risk-based capital | $ | 1,404 | | | $ | 5,966 | | | $ | 1,519 | | | $ | 6,605 | | Risk-based capital | $ | 898 | | | $ | 7,757 | | | $ | 1,054 | | | $ | 5,896 | |
| Total regulatory capital | Total regulatory capital | $ | 2,745 | | | $ | 5,966 | | | $ | 4,274 | | | $ | 6,605 | | Total regulatory capital | $ | 4,842 | | | $ | 7,757 | | | $ | 2,165 | | | $ | 5,896 | |
| Total regulatory capital ratio | Total regulatory capital ratio | 4.00 | % | | 8.69 | % | | 4.00 | % | | 6.18 | % | Total regulatory capital ratio | 4.00 | % | | 6.41 | % | | 4.00 | % | | 10.89 | % |
| Leverage capital | Leverage capital | $ | 3,432 | | | $ | 8,949 | | | $ | 5,342 | | | $ | 9,908 | | Leverage capital | $ | 6,053 | | | $ | 11,636 | | | $ | 2,706 | | | $ | 8,844 | |
| Leverage ratio | Leverage ratio | 5.00 | % | | 13.04 | % | | 5.00 | % | | 9.27 | % | Leverage ratio | 5.00 | % | | 9.61 | % | | 5.00 | % | | 16.34 | % |
The Bank’s capital plan requires each member to own capital stock in an amount equal to the greater of its membership capital stock requirement or its activity-based capital stock requirement. The Bank may adjust these requirements from time to time within limitsranges established in the capital plan. Any changes to the capital plan must be approved by the Bank’s Boardboard of Directorsdirectors and the Finance Agency.
A member's membership capital stock requirement is 1.0%1% of its membership asset value. The membership capital stock requirement for a member is capped at $15.$15 million. The Bank may adjust the membership capital stock requirement for all members within a range of 0.5% to 1.5% of a member's membership asset value and may adjust the cap for all members within an authorized range of $10 million to $50.$50 million. A member's membership asset value is determined by multiplying the amount of the member's membership assets by the applicable membership asset factors.factors as determined by the Bank. Membership assets are generally defined as assets (other than Bank capital stock) of a type that could qualify as collateral to secure a member's indebtedness to the Bank under applicable law, whether or not the assets are pledged to the Bank or accepted by the Bank as eligible collateral. The membership asset factors were initially based on the typical borrowing capacity percentages generally assigned by the Bank to the same types of assets when pledged to
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
the Bank (although the factors may differ from the actual borrowing capacities, if any, assigned to particular assets pledged by a specific member at any point in time).
A member's activity-based capital stock requirement is the sum of 2.7% of the member's outstanding advances, plus 0.1% of notional balances for outstanding letters of credit, plus 0.0% of any portion of any mortgage loan purchased and held by the Bank. The Bank may adjust the activity-based capital stock requirement for all members within a rangeranges established in the capital plan of 2.0% to 5.0% of the member's outstanding advances, 0.1% to 1.0% of the member’s notional balances of outstanding letters of credit, and a range of 0.0% to 5.0% of any portion of any mortgage loan purchased and held by the Bank. In November 2020, the Bank amended its capital plan, which resulted in a member’s activity capital stock requirement of 0.1% of notional balances for outstanding letters of credit and an authorized range for the letters of credit activity stock requirement of 0.1% to 1.0%.
Any member may withdraw from membership and, subject to certain statutory and regulatory restrictions, have its capital stock redeemed after giving the required notice. Members that withdraw from membership may not reapply for membership for five years, in accordance with Finance Agency rules.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Mandatorily Redeemable Capital Stock. The Bank reclassifies the capital stock subject to redemption from capital to a liability after a member provides the Bank with a written notice of redemption; gives notice of intention to withdraw from membership; or 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, resulting in the member's shares then meeting the definition of a mandatorily redeemable financial instrument. Shares meeting this definition are reclassified to a liability at fair value. Dividends declared on shares classified as a liability are accrued at the expected dividend rate and reflected as interest expense in the Statements of Income. The repayment of these mandatorily redeemable financial instruments (by repurchase or redemption of the shares) is reflected as a financing cash outflow in the Statements of Cash Flows once settled.
The Bank has a cooperative ownership structure under which members, former members, and certain other nonmembers own the Bank’s capital stock. Former members and certain other nonmembers are required to maintain their investment in the Bank's capital stock until their outstanding transactions are paid off or until their capital stock is redeemed following the relevant five-year redemption period for capital stock or is repurchased by the Bank, in accordance with the Bank's capital requirements. Capital stock cannot be issued, repurchased, redeemed, or transferred except between the Bank and its members (or their affiliates and successors) at the capital stock's par value of one hundred dollars$100 per share. If a member cancels its written notice of redemption or notice of withdrawal or if the Bank allows the transfer of mandatorily redeemable capital stock to a member, the Bank reclassifies mandatorily redeemable capital stock from a liability to capital. After the reclassification, dividends on the capital stock are no longer classified as interest expense.
The Bank will not redeem or repurchase capital stock required to meet the minimum capital stock requirement until five years after the member's membership is terminated or after the Bank receives notice of the member's withdrawal, and the Bank will redeem or repurchase only the amounts that are in excess of the capital stock required to support activity (advances and mortgage loans) that may remain outstanding after the five-year redemption period has expired. In both cases, the Bank will only redeem or repurchase capital stock if certain statutory and regulatory conditions are met. In accordance with the Bank’s current practice, if activity-based capital stock becomes excess capital stock because an activity no longer remains outstanding, the Bank may repurchase the excess activity-based capital stock at its discretion, subject to certain statutory and regulatory conditions.
The Bank had mandatorily redeemable capital stock totaling $2$5 million outstanding to 3three institutions at December 31, 2020,2022, and $138$3 million outstanding to 3three institutions at December 31, 2019.2021. The change in mandatorily redeemable capital stock for the years ended December 31, 2020, 2019,2022, 2021, and 2018,2020 was as follows:
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | 2020 | | 2019 | | 2018 | |
| (In millions) | | (In millions) | | 2022 | | 2021 | | 2020 |
| Balance at the beginning of the period | Balance at the beginning of the period | | $ | 138 | | | $ | 227 | | | $ | 309 | | Balance at the beginning of the period | | $ | 3 | | | $ | 2 | | | $ | 138 | |
| Reclassified from/(to) capital during the period | Reclassified from/(to) capital during the period | | 40 | | | 6 | | | 2 | | Reclassified from/(to) capital during the period | | 46 | | | 25 | | | 40 | |
| | Repurchase of excess mandatorily redeemable capital stock | | (176) | | | (95) | | | (84) | | |
| Repurchase/redemption of mandatorily redeemable capital stock | | Repurchase/redemption of mandatorily redeemable capital stock | | (44) | | | (24) | | | (176) | |
| Balance at the end of the period | Balance at the end of the period | | $ | 2 | | | $ | 138 | | | $ | 227 | | Balance at the end of the period | | $ | 5 | | | $ | 3 | | | $ | 2 | |
Cash dividends on mandatorily redeemable capital stock were recorded as interest expense in the amount of $5, $14, and $24de minimis amounts for the years ended December 31, 2020, 2019,2022 and 2018 respectively.2021, and $5 million for the year ended December 31, 2020.
The following table presents mandatorily redeemable capital stock amounts by contractual redemption period at December 31, 20202022 and 2019.2021.
| | (In millions) | | (In millions) | |
| Contractual Redemption Period | Contractual Redemption Period | 2020 | | 2019 | Contractual Redemption Period | 2022 | | 2021 |
| Within 1 year | $ | 0 | | | $ | 135 | | |
| | After 3 years through 4 years | | After 3 years through 4 years | $ | 1 | | | $ | — | |
| After 4 years through 5 years | | After 4 years through 5 years | 3 | | | 2 | |
Past contractual redemption date because of remaining activity(1) | Past contractual redemption date because of remaining activity(1) | 2 | | | 3 | | Past contractual redemption date because of remaining activity(1) | 1 | | | 1 | |
| Total | Total | $ | 2 | | | $ | 138 | | Total | $ | 5 | | | $ | 3 | |
(1) Represents mandatorily redeemable capital stock that is past the end of the contractual redemption period because of outstanding activity.
A member may cancel its notice of redemption or notice of withdrawal from membership by providing written notice to the Bank prior to the end of the relevant five-year redemption period or the membership termination date. If the Bank receives the notice of cancellation within 30 months following the notice of redemption or notice of withdrawal, the member is charged a fee equal to fifty cents multiplied by the number of shares of capital stock affected. If the Bank receives the notice of cancellation more than 30 months following the notice of redemption or
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
notice of withdrawal (or if the Bank does not redeem the member's capital stock because following the redemption the member would fail to meet its minimum capital stock requirement), the member is charged a fee equal to one dollar multiplied by the number of shares of capital stock affected. In certain cases, the Boardboard of Directorsdirectors may waive a cancellation fee for bona fide business purposes.
The Bank’s capital stock is considered putable by the shareholder. There are significant statutory and regulatory restrictions on the Bank’s obligation or ability to redeem outstanding capital stock, which include the following:
•The Bank may not redeem any capital stock if, following the redemption, the Bank would fail to meet its minimum capital requirements for total capital, leverage capital, and risk-based capital. All of the Bank’s capital stock immediately becomes nonredeemable if the Bank fails to meet its minimum capital requirements.
•The Bank may not be able to redeem any capital stock if either its Boardboard of Directorsdirectors or the Finance Agency determines that it has incurred or is likely to incur losses resulting in or expected to result in a charge against capital that would have any of the following effects: cause the Bank not to comply with its regulatory capital requirements, result in negative retained earnings, or otherwise create an unsafe and unsound condition at the Bank.
•In addition to being able to prohibit capital stock redemptions, the Bank’s Boardboard of Directorsdirectors has a right to call for additional capital stock purchases by its members, as a condition of continuing membership, as needed for the Bank to satisfy its statutory and regulatory capital requirements.
•If, during the period between receipt of a capital stock redemption notice and the actual redemption (a period that could last indefinitely), the Bank becomes insolvent and is either liquidated or merged with another FHLBank, the redemption value of the capital stock will be established either through the liquidation or the merger process. If the Bank is liquidated, after satisfaction of the Bank’s obligations to creditors and to the extent funds are then available, each shareholder will be entitled to receive the par value of its capital stock as well as any retained earnings in an amount proportional to the shareholder's share of the total shares of capital stock, subject to any limitations that may be imposed by the Finance Agency. In
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
the event of a merger or consolidation, the Boardboard of Directorsdirectors will determine the rights and preferences of the Bank's shareholders, subject to any terms and conditions imposed by the Finance Agency.
•The Bank may not redeem any capital stock if the principal or interest due on any consolidated obligations issued by the Office of Finance has not been paid in full.
•The Bank may not redeem any capital stock if the Bank fails to provide the Finance Agency with the quarterly certification required by Finance Agency rules prior to declaring or paying dividends for a quarter.
•The Bank may not redeem any capital stock if the Bank is unable to provide the required quarterly certification, projects that it will fail to comply with statutory or regulatory liquidity requirements or will be unable to fully meet all of its obligations on a timely basis, actually fails to satisfy these requirements or obligations, or negotiates to enter or enters into an agreement with another FHLBank to obtain financial assistance to meet its current obligations.
Mandatorily redeemable capital stock is considered capital for determining the Bank's compliance with its regulatory capital requirements. Based on Finance Agency interpretation, the classification of certain shares of the Bank’s capital stock as mandatorily redeemable does not affect the definition of total capital for purposes of: determining the Bank’s compliance with its regulatory capital requirements, calculating its mortgage-backed securities investment authority (300% of total capital), calculating its unsecured credit exposure to other GSEs (limited to 100% of total capital), or calculating its unsecured credit limits to other counterparties (various percentages of total capital depending on the rating of the counterparty).
Excess Stock Repurchase, Retained Earnings, and Dividend Framework. By Finance Agency regulation, dividends may be paid only out of current net earnings or previously retained earnings. As required by the Finance Agency, the Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework (Framework) summarizes the Bank’s capital management principles and objectives, as well as its policies and practices, with respect to retained earnings, dividend payments, and the repurchase of excess capital stock. The Bank may be restricted
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
from paying dividends if the Bank is not in compliance with any of its minimum capital requirements or if payment would cause the Bank to fail to meet any of its minimum capital requirements. In addition, the Bank may not pay dividends if any principal or interest due on any consolidated obligations has not been paid in full or is not expected to be paid in full, or, under certain circumstances, if the Bank fails to satisfy certain liquidity requirements under applicable Finance Agency regulations.
The Bank’s Boardboard of Directorsdirectors reviews the Framework at least annually and may amend the Framework from time to time. The Framework includes a dividend philosophy to endeavor to pay a quarterly dividend at an annualized rate between 5% and 7%. The decision to declare any dividend and the dividend rate areis at the discretion of the Bank’s Boardboard of Directors,directors, which may choose to follow the dividend philosophy as guidance in the dividend declaration. The Board may also revise or eliminate the dividend policy in the future. The Bank’s historical dividend rates and the dividend philosophy are not indicative of future dividend declarations.
The Bank’s Risk Management Policy limits the payment of dividends if the ratio of the Bank’s estimated market value of total capital to par value of capital stock falls below certain levels. If this ratio at the end of any quarter is less than 100% but greater than or equal to 70%, any dividend would be limited to an annualized rate no greater than the daily average of the Federal funds effective rate for the applicable quarter (subject to certain conditions), and if this ratio is less than 70%, the Bank would be restricted from paying a dividend. The ratio of the Bank’s estimated market value of total capital to par value of capital stock was 280%205% as of December 31, 2020.2022.
In addition, the Bank monitors theits financial condition, of its PLRMBS portfolio, the ratio of the Bank’s estimated market value of totalfinancial performance, its capital to par value of capital stock, itsposition, overall financial performance and retained earnings, developments in the mortgage and credit markets,market conditions, and other relevant information as the basis for determining the payment of dividends and the repurchase of excess capital stock in future quarters.
Retained Earnings – The Bank’s Framework assesses the level and adequacy of retained earnings and establishes amounts to be retained in restricted retained earnings, which are not made available in the current dividend period,
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
and maintains an amount of total retained earnings at least equal to its required retained earnings as described in the Framework. As determined using the Bank’s methodology, the required level of total retained earnings had ranged from $2,400$1.5 billion to $2,500$2.9 billion during 20192021 and continuing through September 2020. In September 2020,2022. The methodology may be revised from time to time, and the required level of required retained earnings under the methodology was revisedmay change due to updating data and resultedassumptions used in athe methodology. In July 2022, the required level of retained earnings of $2,900.was increased from $1.7 billion to $2.6 billion. In January 2021,2023, the methodology was further revised and resulted in a required level of retained earnings was increased from $2.6 billion to $2.7 billion. The Bank’s retained earnings requirement may be changed at any time. The board of $1,900. directors periodically reviews the retained earnings methodology and analysis to determine whether any adjustments are appropriate.
The Bank satisfies its retained earnings requirement with both restricted retained earnings (i.e., amounts related to the Joint Capital Enhancement (JCE) Agreement) and unrestricted retained earnings. The Bank’s retained earnings requirement may be changed at any time. The Board of Directors periodically reviews the retained earnings methodology and analysis to determine whether any adjustments are appropriate.
The JCE Agreement is intended to enhance the capital position of each FHLBank. In accordance with the JCE Agreement, each FHLBank is required to allocatereclassify an amount equal to 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 declineThe JCE Agreement also provides that amounts in consolidated obligations outstanding in 2020, the Bank ceased contributions to restricted retained earnings in excess of 150% of the fourthBank’s restricted retained earnings minimum (i.e., 1% of the Bank’s total consolidated obligations calculated as of the last day of each calendar quarter) may be released from restricted retained earnings.
During the years ended December 31, 2022 and 2021, the Bank reclassified $16 million and $53 million, respectively, from restricted retained earnings to unrestricted retained earnings as a result of exceeding this threshold. As a result of increased consolidated obligations during the third quarter of 2020, in accordance with2022, the JCE Agreement; and no further allocationsBank resumed reclassifying an amount equal to 20% of net income into restricted retained earnings are required until such time asin accordance with the allocation requirement exceeds the balance of restricted retained earnings.JCE Agreement. The Bank’s restricted retained earnings totaled $761$732 million and $713$708 million at December 31, 2020 2022
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
and 2019,2021, respectively. The Bank’s unrestricted retained earnings totaled $2,919$3.3 billion and $2,754$3.1 billion at December 31, 20202022 and 2019,2021, respectively.
Partial Recovery of Prior Capital Distribution to Financing Corporation – The Competitive Equality Banking Act of 1987 was enacted in August 1987, to, among other things, provide for the recapitalization of the Federal Savings and Loan Insurance Corporation through a newly-chartered entity, the Financing Corporation. Capital distributions from the FHLBanks provided the capitalization of the Financing Corporation, in exchange for Financing Corporation nonvoting capital stock. Capital distributions made by the FHLBanks in 1987, 1988, and 1989, aggregated to $680. Upon passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, the Bank’s previous investment in the Financing Corporation’s capital stock was determined to be non-redeemable; the Bank charged off its prior capital distributions to the Financing Corporation directly against retained earnings.
On October 2, 2019, the Financing Corporation commenced the process of dissolution and determined that excess funds aggregating to $200 were available for distribution to its stockholders, the FHLBanks. The Bank’s partial recovery, which was determined based on its share of the $680 originally contributed, approximated $40. The Financing Corporation dissolved on July 6, 2020. The Bank received these funds in the second quarter of 2020 and treated receipt of these funds as a return of the Bank’s investment in Financing Corporation capital stock, and therefore as a partial recovery of the prior capital distributions made by the Bank to the Financing Corporation in 1987, 1988, and 1989. These funds were credited to unrestricted 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 Boardboard of Directorsdirectors declare and pay any dividend. A decision by the Boardboard of Directorsdirectors to declare or not declare a dividend is a discretionary matter and is subject to the requirements and restrictions of the FHLBank Act and applicable requirements under the regulations governing the operations of the FHLBanks.
In addition, Finance Agency rules do not permit the Bank to pay dividends in the form of capital stock if its excess capital stock exceeds 1% of its total assets. Excess capital stock is defined as the aggregate of the capital stock held by each shareholder in excess of its minimum capital stock requirement, as established by the Bank’s capital plan. Excess capital stock totaled $161,$157 million, or 0.23%0.13% of total assets as of December 31, 2020.2022. Excess capital stock totaled $197,$120 million, or 0.18%0.22% of total assets as of December 31, 2019.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
2021.In 2020,2022, the Bank paid dividends at an annualized rate of 5.53%6.30%, totaling $164,$161 million, including $159$161 million in dividends on capital stock and $5a de minimis amount in dividends on mandatorily redeemable capital stock. In 2019,2021, the Bank paid dividends at an annualized rate of 7.00%5.74%, totaling $220,$135 million, including $206$135 million in dividends on capital stock and $14a de minimis amount in dividends on mandatorily redeemable capital stock.
For the periods referenced above, the Bank paid dividends in cash. Dividends on capital stock are recognized as dividends on the Statements of Capital Accounts, and dividends on mandatorily redeemable capital stock are recognized as interest expense on the Statements of Income.
On February 18, 2021,22, 2023, the Bank’s Boardboard of Directorsdirectors declared a quarterly cash dividend on the capital stock outstanding during the fourth quarter of 20202022 at an annualized rate of 5.00%7.00%, totaling $30, including $30 in dividends on capital stock and a de minimis amount in dividends on mandatorily redeemable capital stock.$63 million. The Bank recorded the dividend on February 18, 2021. The Bank22, 2023, and expects to pay the dividend on March 18, 2021. Dividends on mandatorily redeemable capital stock will be recognized as interest expense in the first quarter of 2021.10, 2023.
Excess Capital Stock – The Bank’s capital plan provides that the Bank may repurchase some or all of a shareholder’s excess capital stock, including any excess mandatorily redeemable capital stock at the Bank’s discretion, subject to certain statutory and regulatory requirements. The Bank may also repurchase all of a member’s excess capital stock at a member’s request, at the Bank’s discretion, subject to certain statutory and regulatory requirements. A shareholder’s excess capital stock is defined as any capital stock holdings in excess of the shareholder’s minimum capital stock requirement, as established by the Bank’s capital plan. The Bank’s practice is to repurchase the surplus capital stock of all members and the excess capital stock of all former members on a daily schedule. Surplus capital stock is defined as any stock holdings in excess of 115% of a member’s minimum stock requirement. The Bank calculates the amount of stock to be repurchased each business day based on the shareholder’s capital stock outstanding after all stock transactions are completed for the day, ensuring that each member and former member would continue to meet its minimum capital stock requirement after the repurchase. The Bank may change this practice at any time. The Bank repurchased $1,641$5.0 billion and $1,224$1.6 billion in excess capital stock during 20202022 and 2019,2021, respectively.
The Bank is required to redeem any mandatorily redeemable capital stock that is in excess of a former member’s minimum stock requirement on or after the expiration of the five-year redemption date. During 20202022 and 2019,2021, the Bank redeemed a de minimis amount and $1 million, respectively, in mandatorily redeemable capital stock, for which the five-year redemption period had expired, at its $100 par value.value per share. The stock was redeemed on the scheduled redemption dates or, for stock that was not excess stock on its scheduled redemption date because of outstanding activity with the Bank, on the first available repurchase date after the stock was no longer required to support outstanding activity with the Bank.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Concentration. The following table presents the concentration in capital stock held by institutions whose capital stock ownership represented 10% or more of the Bank’s outstanding capital stock, including mandatorily redeemable capital stock, as of December 31, 20202022 or 2019.2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| Name of Institution | Capital Stock
Outstanding | | Percentage
of Total
Capital Stock
Outstanding | | Capital Stock
Outstanding | | Percentage
of Total
Capital Stock
Outstanding |
| First Republic Bank | $ | 354 | | | 16 | % | | $ | 368 | | | 12 | % |
| | | | | | | |
| MUFG Union Bank, National Association | 142 | | | 6 | | | 394 | | | 12 | |
| | | | | | | |
| | | | | | | |
| Subtotal | 496 | | | 22 | | | 762 | | | 24 | |
| Others | 1,790 | | | 78 | | | 2,376 | | | 76 | |
| Total | $ | 2,286 | | | 100 | % | | $ | 3,138 | | | 100 | % |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued) | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| (Dollars in millions) | Capital Stock Outstanding | | Percentage of Total Capital Stock Outstanding | | Capital Stock Outstanding | | Percentage of Total Capital Stock Outstanding |
| Silicon Valley Bank | $ | 418 | | | 11 | % | | $ | 17 | | | 1 | % |
| First Republic Bank | 379 | | | 10 | | | 115 | | | 6 | |
| Subtotal | 797 | | | 21 | | | 132 | | | 7 | |
| Others | 2,966 | | | 79 | | | 1,932 | | | 93 | |
| Total | $ | 3,763 | | | 100 | % | | $ | 2,064 | | | 100 | % |
Note 12 — Employee Retirement Plans and Incentive Compensation Plans
Defined Benefit Plans
Qualified Defined Benefit Plan. The Bank provides retirement benefits through a Bank-sponsored Cash Balance Plan, a qualified defined benefit plan. The Cash Balance Plan is provided to all employees who have completed six months of Bank service. Under the plan, during the years ended December 31, 20202022 and 2019,2021, each eligible Bank employee accrued benefits annually equal to 6% of the employee's annual compensation, plus 6% interest on the benefits accrued to the employee through the prior yearend. The Cash Balance Plan is funded through a qualified trust established by the Bank.
Non-Qualified Defined Benefit Plans. The Bank sponsors the following non-qualified defined benefit retirement plans:
•Benefit Equalization Plan, a non-qualified retirement plan restoring benefits offered under the Cash Balance Plan that are limited by laws governing the plan. See below for further discussion of the defined contribution portion of the Benefit Equalization Plan.
•Supplemental Executive Retirement Plan (SERP), a non-qualified unfunded retirement benefit plan available to the Bank's eligible senior officers, which generally provides a service-linked supplemental cash balance annual contribution credit to SERP participants and an annual interest credit of 6% on the benefits accrued to the SERP participants through the prior yearend.
•Deferred Compensation Plan, a non-qualified retirement plan available to all eligible Bank employees, which provides make-up pensionretirement benefits that would have been earned under the Cash Balance Plan had the compensation not been deferred. The make-up benefits vest according to the corresponding provisions of the Cash Balance Plan. See below for further discussion of the defined contribution portion of the Deferred Compensation Plan.
Postretirement Health Benefit Plan. The Bank provides a postretirement health benefit plan to employees that meet certain eligibility criteria. Changes in health care cost trend rates will not have a material effect on the Bank's accumulated postretirement benefit obligation or service and interest costs because benefit plan premiums are generally paid by the retirees.
The following table presents the fair value of plan assets as well as the funded status that is recognized in other assets/(liabilities) in the Statements of Condition for the defined benefit Cash Balance Plan, non-qualified defined benefit plans, and postretirement health benefit plan at December 31, 20202022 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 |
| Cash Balance
Plan | | Non-Qualified Defined Benefit Plans | | Post-retirement Health Benefit Plan | | Cash Balance
Plan | | Non-Qualified Defined Benefit Plans | | Post-retirement Health Benefit Plan |
| Fair value of plan assets | $ | 86 | | | $ | 0 | | | $ | 0 | | | $ | 74 | | | $ | 0 | | | $ | 0 | |
| Funded status | 7 | | | (21) | | | (2) | | | 6 | | | (20) | | | (2) | |
Amounts recognized in AOCI at December 31, 2020 and 2019, consist of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 |
| Cash Balance
Plan | | Non-Qualified Defined Benefit Plans | | Post-retirement Health Benefit Plan | | Cash Balance
Plan | | Non-Qualified Defined Benefit Plans | | Post-retirement Health Benefit Plan |
| Net loss/(gain) | $ | 14 | | | $ | 1 | | | $ | (1) | | | $ | 14 | | | $ | 1 | | | $ | (1) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The following table presents information for pension plans with assets in excess of benefit obligations and for pension plans with benefit obligations in excess of plan assets at December 31, 2020 and 2019.2021.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 |
| Cash Balance Plan | | Non-Qualified Defined Benefit Plans | | Post-retirement Health Benefit Plan | | Cash Balance Plan | | Non-Qualified Defined Benefit Plans | | Post-retirement Health Benefit Plan |
| Projected benefit obligation | $ | 79 | | | $ | 21 | | | $ | 2 | | | $ | 68 | | | $ | 20 | | | $ | 2 | |
| Accumulated benefit obligation | 78 | | | 20 | | | 2 | | | 67 | | | 20 | | | 2 | |
| Fair value of plan assets | 86 | | | 0 | | | 0 | | | 74 | | | 0 | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| (In millions) | Cash Balance
Plan | | Non-Qualified Defined Benefit Plans | | Post-retirement Health Benefit Plan | | Cash Balance
Plan | | Non-Qualified Defined Benefit Plans | | Post-retirement Health Benefit Plan |
| Fair value of plan assets | $ | 80 | | | $ | — | | | $ | — | | | $ | 93 | | | $ | — | | | $ | — | |
| Funded status | 6 | | | (15) | | | (1) | | | 12 | | | (17) | | | (2) | |
Amounts recognized in AOCI at December 31, 2022 and 2021, consist of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| (In millions) | Cash Balance
Plan | | Non-Qualified Defined Benefit Plans | | Post-retirement Health Benefit Plan | | Cash Balance
Plan | | Non-Qualified Defined Benefit Plans | | Post-retirement Health Benefit Plan |
| Net loss/(gain) | $ | 16 | | | $ | — | | | $ | (1) | | | $ | 8 | | | $ | 2 | | | $ | (1) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The following table presents information for retirement plans with assets in excess of benefit obligations and for retirement plans with benefit obligations in excess of plan assets at December 31, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| (In millions) | Cash Balance Plan | | Non-Qualified Defined Benefit Plans | | Post-retirement Health Benefit Plan | | Cash Balance Plan | | Non-Qualified Defined Benefit Plans | | Post-retirement Health Benefit Plan |
| Projected benefit obligation | $ | 74 | | | $ | 15 | | | $ | 1 | | | $ | 81 | | | $ | 17 | | | $ | 2 | |
| Accumulated benefit obligation | 74 | | | 15 | | | 1 | | | 81 | | | 16 | | | 2 | |
| Fair value of plan assets | 80 | | | — | | | — | | | 93 | | | — | | | — | |
The Bank uses a discount rate to determine the present value of its future benefit obligations. The discount rate was determined based on the Financial Times Stock Exchange (FTSE) Pension Discount Curve at the measurement date. The FTSE Pension Discount Curve is a yield curve that reflects the market-observed yields for high-quality fixed income securities for each maturity. The projected benefit payments for each year from the plan are discounted using the spot rates on the yield curve to derive a single equivalent discount rate. The discount rate is reset annually on the measurement date. The discount rate used to determine the benefit obligations for the Cash Balance Plan and non-qualified defined benefit plans was 1.75%4.75% for 20202022 and 2.75%2.25% for 2019.2021. The discount rate used to determine the benefit obligations for the post-retirement health benefit plan was 2.25%5.00% for 20202022 and 3.00%2.50% for 2019.2021.
The table below presents the fair values of the Cash Balance Plan's assets as of December 31, 20202022 and 2019,2021, by asset category. See Note 15 – Fair Value for further information regarding the three levels of fair value measurement.
| | | 2020 | | 2019 | | 2022 | | 2021 |
| Fair Value Measurement Using: | | | Fair Value Measurement Using: | | |
| (In millions) | | (In millions) | Fair Value Measurement Using: | | | Fair Value Measurement Using: | |
| Asset Category | Asset Category | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | Asset Category | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash and cash equivalents | Cash and cash equivalents | $ | 1 | | | $ | 0 | | | $ | 0 | | | $ | 1 | | | $ | 2 | | | $ | 0 | | | $ | 0 | | | $ | 2 | | Cash and cash equivalents | $ | 2 | | | $ | — | | | $ | — | | | $ | 2 | | | $ | 1 | | | $ | — | | | $ | — | | | $ | 1 | |
| Equity mutual funds | Equity mutual funds | 55 | | | 0 | | | 0 | | | 55 | | | 46 | | | 0 | | | 0 | | | 46 | | Equity mutual funds | 48 | | | — | | | — | | | 48 | | | 58 | | | — | | | — | | | 58 | |
| Fixed income mutual funds | Fixed income mutual funds | 23 | | | 0 | | | 0 | | | 23 | | | 21 | | | 0 | | | 0 | | | 21 | | Fixed income mutual funds | 25 | | | — | | | — | | | 25 | | | 27 | | | — | | | — | | | 27 | |
| Real estate mutual funds | Real estate mutual funds | 4 | | | 0 | | | 0 | | | 4 | | | 3 | | | 0 | | | 0 | | | 3 | | Real estate mutual funds | 3 | | | — | | | — | | | 3 | | | 4 | | | — | | | — | | | 4 | |
| Other mutual funds | Other mutual funds | 3 | | | 0 | | | 0 | | | 3 | | | 2 | | | 0 | | | 0 | | | 2 | | Other mutual funds | 2 | | | — | | | — | | | 2 | | | 3 | | | — | | | — | | | 3 | |
| Total | Total | $ | 86 | | | $ | 0 | | | $ | 0 | | | $ | 86 | | | $ | 74 | | | $ | 0 | | | $ | 0 | | | $ | 74 | | Total | $ | 80 | | | $ | — | | | $ | — | | | $ | 80 | | | $ | 93 | | | $ | — | | | $ | — | | | $ | 93 | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Cash Balance Plan is administered by the Bank's Retirement Committee, which establishes the plan's Statement of Investment Policy and Objectives. The Retirement Committee has adopted a strategic asset allocation based on a stable distribution of assets among major asset classes. These asset classes include domestic large-, mid-, and small-capitalization equity investments; international equity investments; real return investments; and fixed income investments. The Retirement Committee has set the Cash Balance Plan's target allocation percentages for a mix of 60% equity, 10% real return, and 30% fixed income. The Retirement Committee reviews the performance of the Cash Balance Plan on a regular basis.
The Cash Balance Plan's weighted average asset allocation at December 31, 20202022 and 2019,2021, by asset category was as follows:
| | | | | | | | | | | |
| Asset Category | 2020 | | 2019 |
| Cash and cash equivalents | 2 | % | | 2 | % |
| Equity mutual funds | 64 | | | 63 | |
| Fixed income mutual funds | 27 | | | 28 | |
| Real estate mutual funds | 4 | | | 4 | |
| Other mutual funds | 3 | | | 3 | |
| Total | 100 | % | | 100 | % |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | |
| | | |
| Asset Category | 2022 | | 2021 |
| Cash and cash equivalents | 2 | % | | 1 | % |
| Equity mutual funds | 60 | | | 63 | |
| Fixed income mutual funds | 31 | | | 29 | |
| Real estate mutual funds | 4 | | | 4 | |
| Other mutual funds | 3 | | | 3 | |
| Total | 100 | % | | 100 | % |
The Bank contributedmade contributions of $3 million in 20202022 and expects to contribute $3 million in 20212023 to the Cash Balance Plan. The Bank contributed $2 million in 20202022 and expects to contribute $3$1 million in 20212023 to the non-qualified defined benefit plans and postretirement health benefit plan.
The following are the estimated future benefit payments, which reflect expected future service, as appropriate:
| | (In millions) | | (In millions) | |
| Year | Year | Cash Balance
Plan | | Non-Qualified
Defined Benefit
Plans | | Postretirement
Health Benefit
Plan | Year | Cash Balance
Plan | | Non-Qualified
Defined Benefit
Plans | | Postretirement
Health Benefit
Plan |
| 2021 | $ | 4 | | | $ | 3 | | | $ | 0 | | |
| 2022 | 5 | | | 5 | | | 0 | | |
| 2023 | 2023 | 4 | | | 1 | | | 0 | | 2023 | $ | 4 | | | $ | 1 | | | $ | — | |
| 2024 | 2024 | 4 | | | 3 | | | 0 | | 2024 | 5 | | | 4 | | | — | |
| 2025 | 2025 | 27 | | | 3 | | | 0 | | 2025 | 5 | | | 1 | | | — | |
| 2026 – 2030 | 21 | | | 6 | | | 1 | | |
| 2026 | | 2026 | 5 | | | 1 | | | — | |
| 2027 | | 2027 | 32 | | | 5 | | | — | |
| 2028 – 2032 | | 2028 – 2032 | 24 | | | 6 | | | 1 | |
Defined Contribution Plans
Retirement Savings Plan. The Bank sponsors a qualified defined contribution retirement 401(k) savings plan, the Federal Home Loan Bank of San Francisco Savings Plan (Savings Plan). Contributions to the Savings Plan consist of elective participant contributions of up to 75% of each participant's base compensation and a Bank matching contribution of up to 6% of each participant's base compensation. The Bank contributed approximately $3 $2, and $2million during each of the years ended December 31, 2020, 2019,2022, 2021, and 2018, respectively.2020.
Benefit Equalization Plan. The Bank sponsors a non-qualified retirement plan restoring benefits offered under the Savings Plan that have been limited by laws governing the plan. The Bank made contributions to the plan of $1 million during the year ended December 31, 2022. Contributions made during the years ended December 31, 2021and 2020, 2019, and 2018, were de minimis.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Deferred Compensation Plan. The Bank maintains a deferred compensation plan that is available to all eligible Bank employees. The defined contribution portion of the plan consists of two components: (i) employee or director deferral of current compensation, and (ii) make-up matching contributions for employees that would have been made by the Bank under the Savings Plan had the compensation not been deferred. The make-up benefits under the Deferred Compensation Plan vest according to the corresponding provisions of the Savings Plan. The Deferred Compensation Plan liability consists of the accumulated compensation deferrals and accrued earnings on the deferrals, as well as the make-up matching contributions and any accrued earnings on the contributions. The Bank’s obligation for this plan at December 31, 2022, 2021, and 2020, 2019,was $51 million, $64 million, and 2018, was $57 $49, and $41,million, respectively.
Incentive Compensation Plans
The Bank provides incentive compensation plans for its employees, including senior officers.all employees. Other liabilities include $17$15 million and $17$14 million for incentive compensation at December 31, 20202022 and 2019,2021, respectively.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 13 — 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 2two business segments. For purposes of segment reporting, adjusted net interest income includes income and expense associated with net settlements from economic hedges that are recorded in “Net gain/(loss) on derivatives and hedging activities”derivatives” in other income,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 earnings 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 the Bank’s overall assessment of financial performance.
The advances-related business consists of advances and other credit products, related financing and hedging instruments, other non-MBS investments associated with the Bank’s role as a liquidity provider, and capital. 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 activities 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 the Bank’s 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 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 related income, which is a result of improvement in expected cash flows on certain PLRMBS that were other-than-temporarily impairedwith previous credit losses related to the prior to January 1, 2020,methodology of evaluating credit losses, less the provision for credit losses on mortgage loans and MBS.
The following table presents the Bank’s adjusted net interest income by operating segment and reconciles total adjusted net interest income to income before the AHP assessment for the years ended December 31, 2020, 2019,2022, 2021, and 2018.2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Advances-
Related
Business | | Mortgage- Related Business(1) | | Adjusted
Net
Interest
Income | | Amortization of Basis Adjustments and (Gain)/Loss on Fair Value Hedges(2) | |
Income/(Expense) on Economic Hedges(3) | | Interest Expense on Mandatorily Redeemable Capital Stock(4) | | Net
Interest
Income After Provision for/(Reversal of) Credit Losses | | Other
Income/
(Loss) | | Other
Expense | | Income/(Loss)
Before AHP
Assessment |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
|
| 2020 | $ | 247 | | | $ | 208 | | | $ | 455 | | | $ | 54 | | | $ | (83) | | | $ | 5 | | | $ | 479 | | | $ | 59 | | | $ | 165 | | | $ | 373 | |
| 2019 | 307 | | | 256 | | | 563 | | | 34 | | | (16) | | | 14 | | | 531 | | | 21 | | | 187 | | | 365 | |
| 2018 | 320 | | | 291 | | | 611 | | | (1) | | | (13) | | | 24 | | | 601 | | | (11) | | | 187 | | | 403 | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Advances- Related Business(1) | | Mortgage- Related Business(2) | | Adjusted Net Interest Income(1) | | Amortization of Basis Adjustments and (Gain)/Loss on Fair Value Hedges(1)(3) | |
Income/(Expense) on Economic Hedges(4) | | Interest Expense on Mandatorily Redeemable Capital Stock(5) | | Net
Interest
Income After Provision for/(Reversal of) Credit Losses | | Other
Income/
(Loss) | | Other
Expense | | Income/(Loss)
Before AHP
Assessment |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
|
| 2022 | $ | 292 | | | $ | 233 | | | $ | 525 | | | $ | 15 | | | $ | (42) | | | $ | — | | | $ | 552 | | | $ | (31) | | | $ | 162 | | | $ | 359 | |
| 2021 | 198 | | | 258 | | | 456 | | | (1) | | | (71) | | | — | | | 528 | | | (50) | | | 159 | | | 319 | |
| 2020 | 267 | | | 208 | | | 475 | | | 74 | | | (83) | | | 5 | | | 479 | | | 59 | | | 165 | | | 373 | |
(1) Amounts for 2020 have been corrected to properly disclose the classification of amortization of basis adjustments and certain fees on prepaid advances within adjusted net interest income of the advances-related business segment and within amortization of basis adjustments. The Bank previously disclosed in “Note 10 - Segment Information” in the Bank’s 2020 Form 10-K adjusted net interest income totaling $455 million for the year ended December 31, 2020. This amount should have been disclosed as $475 million. This revision had no effect on total assets, net interest income, or net income of the Bank reported for the affected period.
(2) The mortgage-related business includes total accretion or amortization associated with other-than-temporarily impaired PLRMBS, which are recognized in interest income, totaled $55 million, $70 $78,million, and $81$70 million for the years ended December 31, 2020, 2019,2022, 2021, and 2018,2020 respectively. The mortgage-related business includes a provision for/(reversal of) credit losses oftotaled $15 million, $(6) million and $26 million for the year ended December 31, 2020. The mortgage-related business does not include credit-related OTTI losses of $11 for each of the years ended December 31, 20192022, 2021, and 2018.2020, respectively.
(2)(3) Represents amortization of amounts deferred for adjusted net interest income purposes only and changes in fair value of the derivative hedging instrument and the hedged item attributable to the hedged risk for designated fair value hedges recorded in net interest income.
(3)(4) The Bank includes income and expense associated with net settlements from economic hedges in adjusted net interest income in its analysis of financial performance for its 2two operating segments. For financial reporting purposes, the Bank does not include these amounts in net interest income in the Statements of Income, but instead records them in other incomeincome/(loss) in “Net gain/(loss) on derivatives and hedging activities.derivatives.”
(4)(5) The Bank excludes interest expense on mandatorily redeemable capital stock from adjusted net interest income in its analysis of financial performance for its 2two operating segments.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The following table presents total assets by operating segment at December 31, 2020, 2019,2022, 2021, and 2018.2020.
| | | | | | | | | | | | | | | | | |
| Advances-
Related Business | | Mortgage-
Related Business | | Total
Assets |
| 2020 | $ | 50,876 | | | $ | 17,758 | | | $ | 68,634 | |
| 2019 | 85,709 | | | 21,133 | | | 106,842 | |
| 2018 | 88,272 | | | 21,054 | | | 109,326 | |
| | | | | | | | | | | | | | | | | |
| (In millions) | Advances-
Related Business | | Mortgage-
Related Business | | Total
Assets |
| December 31, 2022 | $ | 109,330 | | | $ | 11,726 | | | $ | 121,056 | |
| December 31, 2021 | 40,064 | | | 14,057 | | | 54,121 | |
| December 31, 2020 | 50,876 | | | 17,758 | | | 68,634 | |
Note 14 — Derivatives and Hedging Activities
General. The Bank may enter into interest rate swaps (including callable, putable, and basis swaps) and cap and floor agreements (collectively, interest rate exchange agreements or derivatives). Most of the Bank’s interest rate exchange agreements are executed in conjunction with the origination of advances or the issuance of consolidated obligations to create variable rate structures. The interest rate exchange agreements are generally executed at the same time the advances and consolidated obligations are transacted and generally have the same maturity dates as the related hedged instrument. The Bank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. Derivatives may be either uncleared or cleared. In an uncleared derivative transaction, the Bank’s counterparty is the executing bank or broker-dealer. In a cleared derivative transaction, the Bank may execute the transaction with an executing bank or broker-dealer, either on or off a swap execution facility, but in either case, the Bank’s counterparty is a derivatives clearing organization (clearinghouse)(clearing house) once the derivative transaction has been accepted for clearing. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit.
Additional uses of interest rate exchange agreements include: (i) offsetting embedded features in assets and liabilities, (ii) hedging anticipated issuance of debt, (iii) matching against consolidated obligation discount notes to create the equivalent of callable or non-callable fixed rate debt, (iv) modifying the repricing frequency of assets and liabilities, (v) matching against certain advances and consolidated obligations for which the Bank elected the fair value option, and (vi) exactly offsetting other derivatives cleared at a clearinghouse.clearing house. The Bank’s use of interest rate
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
exchange agreements results in one of the following classifications: (i) a fair value hedge of an underlying financial instrument or (ii) an economic hedge of assets, liabilities, or other derivatives.
The Bank primarily uses the following interest rate exchange agreement instruments:
Interest Rate Swaps – An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. One of the simplest forms of an interest rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, the party receives cash flows equivalent to the interest on the same notional principal amount at a variable rate for the same period of time. The variable rate received or paid by the Bank in most interest rate exchange agreements is based on a daily repricing index, such as SOFR or the effective Fed Funds rate.
Interest Rate Caps and Floors – In a cap agreement, additional cash flow is generated if the price or interest rate of an underlying variable rate rises above a certain threshold (or cap) price. In a floor agreement, additional cash flow is generated if the price or interest rate of an underlying variable rate falls below a certain threshold (or floor) price. Caps and floors may be used in conjunction with assets or liabilities. In general, caps and floors are designed as protection against the interest rate on a variable rate asset or liability rising above or falling below a certain level.
Hedging Activities. The Bank documents at inception all relationships between derivatives designated as hedging instruments and hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing hedge effectiveness. Derivatives designated as fair value hedges may be transacted to hedge: (i) assets and liabilities on the Statement of Condition, (ii) firm commitments, or (iii) forecasted transactions. The Bank also formally assesses (both at hedge inception and on an ongoing basis) whether the
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
hedging derivatives have been effective in offsetting changes in the fair value of hedged items attributable to the hedged risk and whether those derivatives may be expected to remain effective hedges in future periods. The Bank typically uses regression analyses or other statistical analyses to assess the effectiveness of its hedges. When it is determined that a derivative has not been or is not expected to be effective as a hedge, the Bank discontinues hedge accounting prospectively.
The Bank may have the following types of hedged items:
Investments – The Bank may invest in U.S. Treasury and agency obligations as well as agency MBS. In the past, the Bank has also invested in PLRMBS rated AAA at the time of acquisition. The interest rate and prepayment risk associated with these investment securities is managed through a combination of debt issuance and derivatives. The Bank may manage prepayment risk and interest rate risk by funding investment securities with consolidated obligations that have call features or by hedging the prepayment risk with a combination of consolidated obligations and callable swaps. The Bank may execute callable swaps in conjunction with the issuance of certain liabilities to create funding that is economically equivalent to fixed rate callable debt. Although these derivatives are economic hedges against prepayment risk and are designated to individual liabilities, they do not receive either fair value or cash flow hedge accounting treatment. Investment securities may be classified as trading, AFS, or HTM.
The Bank may also manage the risk arising from changing market prices or cash flows of investment securities classified as trading or AFS by entering into interest rate exchange agreements that offset the changes in fair value or cash flows of the securities. Hedge relationships that involve trading securities are designated as economic hedges, while hedge relationships that involve AFS securities are designated as fair value hedges. For trading securities that have been designated as an economic hedge, the market value changes of both the trading securities and the associated interest rate exchange agreements are included in other incomeincome/(loss) in the Statements of Income.
Beginning January 1, 2019, the
Federal Home Loan Bank adopted hedge accounting guidance, which, among other things, affects the presentation of gains and losses on derivatives and hedging activities for qualifying hedges, including fair value hedges of AFS securities. San Francisco
Notes to Financial Statements (continued)
For AFS securities that have been hedged and qualify as a fair value hedge, the Bank records the portion of the change in the fair value of the investment related to the risk being hedged in interest income together with the related change in the fair value of the derivative, and records the remainder of the change in the fair value of the investment in AOCI as “Net unrealized gain/(loss) on AFS securities.”
Prior to January 1, 2019, for AFS securities that were hedged and qualified as a fair value hedge, the Bank recorded the portion of the change in the fair value of the investment related to the risk being hedged in non-interest income as “Net gain/(loss) on derivatives and hedging activities” together with the related change in the fair value of the derivative, and recorded the remainder of the change in the fair value of the investment in AOCI as “Net unrealized gain/(loss) on AFS securities.”
Advances – The Bank offers a wide range of advances structures to meet members’ funding needs. These advances may have maturities up to 30 years with fixed or adjustable rates and may include early termination features or options. The Bank may use derivatives to adjust the repricing and options characteristics of advances to more closely match the characteristics of the Bank’s funding liabilities. In general, whenever a member executes a fixed rate advance, fixed rate advance with embedded options, or a variable rate advance with embedded options, the Bank will simultaneously execute an interest rate exchange agreement with terms that offset the terms and any embedded options in the advance. The combination of the advance and the interest rate exchange agreement effectively creates a variable rate asset. Fixed rate advances without options that are offset with an interest rate exchange agreement are generally treated as fair value hedges. Advances with embedded options are recorded using the fair value option and are economically hedged using interest rate exchange agreements.
Mortgage Loans – The Bank’s investment portfolio includes fixed rate mortgage loans. The prepayment options embedded in mortgage loans can result in extensions or contractions in the expected repayment of these investments, depending on changes in estimated prepayment speeds. The Bank manages the interest rate risk and
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
prepayment risk associated with fixed rate mortgage loans through a combination of debt issuance and derivatives. The Bank uses both callable and non-callable debt to achieve cash flow patterns and market value sensitivities for liabilities similar to those expected on the mortgage loans. Net income could be reduced if the Bank replaces prepaid mortgage loans with lower-yielding assets and the Bank’s higher funding costs are not reduced accordingly.
The Bank may execute callable swaps in conjunction with the issuance of short-term or adjustable rate consolidated obligations to create funding that is economically equivalent to fixed rate callable bonds. This type of hedge is treated as an economic hedge.
Consolidated Obligations – Consolidated obligation bonds may be structured to meet the Bank’s or the investors’ needs. Common structures include fixed rate bonds with or without call options and adjustable rate bonds with or without embedded options. In general, when bonds are issued, the Bank simultaneously executes an interest rate exchange agreement with terms that offset the terms and embedded options, if any, of the consolidated obligation bond. This combination of the consolidated obligation bond and the interest rate exchange agreement effectively creates an adjustable rate bond. These transactions generally receive fair value hedge accounting treatment.
When the Bank issues consolidated obligation discount notes, it may also simultaneously enter into an interest rate exchange agreement to convert the fixed rate discount note to an adjustable rate discount note. This type of hedge is treated as an economic hedge.
In addition, when certain consolidated obligation bonds for which the Bank has elected the fair value option are issued, the Bank simultaneously executes an interest rate exchange agreement with terms that economically offset the terms of the consolidated obligation bond. However, this type of hedge is treated as an economic hedge because these combinations do not meet the requirements for fair value hedge accounting treatment.
Offsetting Derivatives – The Bank enters into derivatives to offset the economic effect of other derivatives that are no longer designated to advances, investments, or consolidated obligations. Offsetting derivatives do not receive hedge accounting treatment and are separately marked to market through earnings. The net result of the accounting for these derivatives does not significantly affect the operating results of the Bank.
The notional amount of an interest rate exchange agreement serves as a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged nor the overall exposure of the Bank to credit risk and market risk. The risks of derivatives can
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
be measured meaningfully on a portfolio basis by taking into account the counterparties, the types of derivatives, the items being hedged, and any offsets between the derivatives and the items being hedged.
For more information related to the Bank’s accounting policies for derivatives, see Note 1 – Summary of Significant Accounting Policies.
The following table summarizes the notional amount and fair value of derivative instruments, including the effect of netting adjustments and cash collateral as of December 31, 20202022 and 2019.2021. For purposes of this disclosure, the derivative values include the fair value of derivatives and related accrued interest.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | 2020 | | 2019 | | 2022 | | 2021 |
| | Notional
Amount of
Derivatives | | Derivative
Assets | | Derivative
Liabilities | | Notional
Amount of
Derivatives | | Derivative
Assets | | Derivative
Liabilities | |
| (In millions) | | (In millions) | Notional
Amount of
Derivatives | | Derivative
Assets | | Derivative
Liabilities | | Notional
Amount of
Derivatives | | Derivative
Assets | | Derivative
Liabilities |
| Derivatives designated as hedging instruments: | Derivatives designated as hedging instruments: | | Derivatives designated as hedging instruments: | |
| Interest rate swaps | Interest rate swaps | $ | 35,060 | | | $ | 88 | | | $ | 128 | | | $ | 39,622 | | | $ | 31 | | | $ | 370 | | Interest rate swaps | $ | 69,204 | | | $ | 799 | | | $ | 1,062 | | | $ | 31,526 | | | $ | 223 | | | $ | 148 | |
| Total | 35,060 | | | 88 | | | 128 | | | 39,622 | | | 31 | | | 370 | | |
| Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: | | Derivatives not designated as hedging instruments: | |
| Interest rate swaps | Interest rate swaps | 42,804 | | | 4 | | | 16 | | | 60,424 | | | 13 | | | 14 | | Interest rate swaps | 47,589 | | | 50 | | | 133 | | | 31,540 | | | 2 | | | 21 | |
| Interest rate caps and floors | Interest rate caps and floors | 780 | | | 0 | | | 0 | | | 980 | | | 0 | | | 0 | | Interest rate caps and floors | — | | | — | | | — | | | 550 | | | — | | | — | |
| Mortgage delivery commitments | 1 | | | 0 | | | 0 | | | 46 | | | 0 | | | 0 | | |
| | Total | Total | 43,585 | | | 4 | | | 16 | | | 61,450 | | | 13 | | | 14 | | Total | 47,589 | | | 50 | | | 133 | | | 32,090 | | | 2 | | | 21 | |
| Total derivatives before netting and collateral adjustments | Total derivatives before netting and collateral adjustments | $ | 78,645 | | | 92 | | | 144 | | | $ | 101,072 | | | 44 | | | 384 | | Total derivatives before netting and collateral adjustments | $ | 116,793 | | | 849 | | | 1,195 | | | $ | 63,616 | | | 225 | | | 169 | |
Netting adjustments and cash collateral(1) | Netting adjustments and cash collateral(1) | | | (89) | | | (132) | | | | | (11) | | | (384) | | Netting adjustments and cash collateral(1) | | | (823) | | | (1,193) | | | | | (217) | | | (164) | |
| Total derivative assets and total derivative liabilities | Total derivative assets and total derivative liabilities | | $ | 3 | | | $ | 12 | | | $ | 33 | | | $ | 0 | | Total derivative assets and total derivative liabilities | | $ | 26 | | | $ | 2 | | | $ | 8 | | | $ | 5 | |
(1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, and also cash collateral, including accrued interest, held or placed with the same clearing agents and/or counterparty. Cash collateral posted, including accrued interest, was $72$694 million and $378$77 million at December 31, 20202022 and 2019,2021, respectively. Cash collateral received, including accrued interest, was $30$324 million and $5$130 million at December 31, 20202022 and 2019,2021, respectively.
Beginning on January 1, 2019, changes in fair value of the derivative hedging instrument and the hedged item attributable to the hedged risk for designated fair value hedges are recorded in net interest income in the same line as the earnings effect of the hedged item. Prior to January 1, 2019, for fair value hedges, any hedge ineffectiveness (which represented the amount by which the change in the fair value of the derivative differed from the change in the fair value of the hedged item) was recorded in other income as “Net gain/(loss) on derivatives and hedging activities.”
The following tables present, by type of hedged item, the gains and losses on fair value hedging relationships and the impact of those derivatives on the Bank’s Statements of Income for the years ended December 31, 2020, 20192022, 2021, and 2018. Beginning on January 1, 2019, the gains and losses on derivatives include unrealized changes in fair value as well as net interest settlements.2020.
| | | 2020(1) | | 2022 | |
| | | Interest Income/(Expense) | | Interest Income/(Expense) | |
| Advances | | AFS Securities | | Consolidated Obligation Bonds | |
| (In millions) | | (In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | |
| Total interest income/(expense) presented in the Statements of Income | Total interest income/(expense) presented in the Statements of Income | $ | 598 | | | $ | 243 | | | $ | (437) | | Total interest income/(expense) presented in the Statements of Income | $ | 1,235 | | | $ | 408 | | | $ | (715) | | |
| Gain/(loss) on fair value hedging relationships | Gain/(loss) on fair value hedging relationships | | Gain/(loss) on fair value hedging relationships | | |
Derivatives(2)(1) | Derivatives(2)(1) | $ | (687) | | | $ | (866) | | | $ | 27 | | Derivatives(2)(1) | $ | 814 | | | $ | 1,202 | | | $ | (1,038) | | |
| Hedged items | Hedged items | 387 | | | 678 | | | (4) | | Hedged items | (777) | | | (1,142) | | | 944 | | |
| Net gain/(loss) on fair value hedging relationships | Net gain/(loss) on fair value hedging relationships | (300) | | | (188) | | | 23 | | Net gain/(loss) on fair value hedging relationships | 37 | | | 60 | | | (94) | | |
| Net amortization of gain on discontinued fair value hedging relationships | (5) | | | (50) | | | 0 | | |
| Net amortization of basis adjustments on discontinued hedging relationships | | Net amortization of basis adjustments on discontinued hedging relationships | (27) | | | (105) | | | — | | |
| Net gain/(loss) on derivatives and hedging activities recorded in net interest income | Net gain/(loss) on derivatives and hedging activities recorded in net interest income | $ | (305) | | | $ | (238) | | | $ | 23 | | Net gain/(loss) on derivatives and hedging activities recorded in net interest income | $ | 10 | | | $ | (45) | | | $ | (94) | | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | 2019(1) | | 2021 | |
| | | Interest Income/(Expense) | | |
| | Advances | | AFS Securities | | Consolidated Obligation Bonds | | | Interest Income/(Expense) | |
| (In millions) | | (In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | |
| Total interest income/(expense) presented in the Statements of Income | Total interest income/(expense) presented in the Statements of Income | $ | 1,677 | | | $ | 394 | | | $ | (1,631) | | | Total interest income/(expense) presented in the Statements of Income | $ | 193 | | | $ | 220 | | | $ | (62) | | |
| Gain/(loss) on fair value hedging relationships | Gain/(loss) on fair value hedging relationships | | | Gain/(loss) on fair value hedging relationships | | |
Derivatives(2) | $ | (225) | | | $ | (377) | | | $ | 41 | | | |
Derivatives(1) | | Derivatives(1) | $ | 175 | | | $ | 309 | | | $ | (87) | | |
| Hedged items | Hedged items | 240 | | | 341 | | | (57) | | | Hedged items | (368) | | | (374) | | | 152 | | |
| Net gain/(loss) on fair value hedging relationships | | Net gain/(loss) on fair value hedging relationships | (193) | | | (65) | | | 65 | | |
| Net amortization of basis adjustments on discontinued hedging relationships | | Net amortization of basis adjustments on discontinued hedging relationships | (22) | | | (108) | | | — | | |
| Net gain/(loss) on derivatives and hedging activities recorded in net interest income | Net gain/(loss) on derivatives and hedging activities recorded in net interest income | $ | 15 | | | $ | (36) | | | $ | (16) | | | Net gain/(loss) on derivatives and hedging activities recorded in net interest income | $ | (215) | | | $ | (173) | | | $ | 65 | | |
| | | 2018(1) | | 2020 |
| | | Interest Income/(Expense) | | | Interest Income/(Expense) | |
| Advances | | AFS Securities | | Consolidated Obligation Bonds | | Net Gain/(Loss) on Derivatives and Hedging Activities | |
| (In millions) | | (In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | |
| Total interest income/(expense) presented in the Statements of Income | Total interest income/(expense) presented in the Statements of Income | $ | 1,563 | | | $ | 247 | | | $ | (1,393) | | | $ | 5 | | Total interest income/(expense) presented in the Statements of Income | $ | 565 | | | $ | 243 | | | $ | (437) | | |
| Gain/(loss) on fair value hedging relationships | Gain/(loss) on fair value hedging relationships | | Gain/(loss) on fair value hedging relationships | | |
Derivatives(2)(1) | Derivatives(2)(1) | $ | 51 | | | $ | 3 | | | $ | (20) | | | $ | (164) | | Derivatives(2)(1) | $ | (687) | | | $ | (866) | | | $ | 27 | | |
| Hedged items | Hedged items | | 157 | | Hedged items | 387 | | | 678 | | | (4) | | |
| Net gain/(loss) on fair value hedging relationships | $ | 51 | | | $ | 3 | | | $ | (20) | | | $ | (7) | | |
| Net gain/(loss) on derivatives and hedging activities recorded in net interest income | | Net gain/(loss) on derivatives and hedging activities recorded in net interest income | (300) | | | (188) | | | 23 | | |
| Net amortization of basis adjustments on discontinued hedging relationships | | Net amortization of basis adjustments on discontinued hedging relationships | (5) | | | (50) | | | — | | |
| Net gain/(loss) on derivatives and hedging activities recorded in net interest income | | Net gain/(loss) on derivatives and hedging activities recorded in net interest income | $ | (305) | | | $ | (238) | | | $ | 23 | | |
(1)Upon adoption of hedge accounting guidance applied prospectively on January 1, 2019, interest amounts reported for 2020 and 2019 for advances, investment securities, and consolidated obligation bonds include the realized and unrealized gain/(loss) on hedged items and derivatives in qualifying hedge relationships. Other income amounts reported for 2018 include the realized and unrealized gain/(loss) on hedged items and derivatives in qualifying hedge relationships.
(2)Includes net interest settlements.
The following table presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of the hedged items as of December 31, 20202022 and 2019.2021.
| | | 2020 | | 2019 | | 2022 | | 2021 |
| Advances | | AFS Securities | | Consolidated Obligation Bonds | | Advances | | AFS Securities | | Consolidated Obligation Bonds | |
| (In millions) | | (In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | | Advances | | AFS Securities | | Consolidated Obligation Bonds |
Amortized cost of hedged asset/(liability)(1) | Amortized cost of hedged asset/(liability)(1) | $ | 23,605 | | | $ | 11,557 | | | $ | (3,645) | | | $ | 22,900 | | | $ | 12,877 | | | $ | (4,840) | | Amortized cost of hedged asset/(liability)(1) | $ | 34,535 | | | $ | 11,574 | | | $ | (21,976) | | | $ | 13,613 | | | $ | 8,559 | | | $ | (13,557) | |
| Fair value hedging basis adjustments: | Fair value hedging basis adjustments: | | Fair value hedging basis adjustments: | |
| Active hedging relationships included in amortized cost | Active hedging relationships included in amortized cost | $ | 477 | | | $ | 43 | | | $ | (13) | | | $ | 204 | | | $ | 431 | | | $ | (9) | | Active hedging relationships included in amortized cost | $ | (740) | | | $ | (1,410) | | | $ | 1,083 | | | $ | (15) | | | $ | (329) | | | $ | 139 | |
| Discontinued hedging relationships included in amortized cost | Discontinued hedging relationships included in amortized cost | 32 | | | 1,016 | | | 0 | | | 0 | | | 0 | | | 0 | | Discontinued hedging relationships included in amortized cost | 70 | | | 740 | | | — | | | 118 | | | 901 | | | — | |
| Total amount of fair value hedging basis adjustments | Total amount of fair value hedging basis adjustments | $ | 509 | | | $ | 1,059 | | | $ | (13) | | | $ | 204 | | | $ | 431 | | | $ | (9) | | Total amount of fair value hedging basis adjustments | $ | (670) | | | $ | (670) | | | $ | 1,083 | | | $ | 103 | | | $ | 572 | | | $ | 139 | |
(1)Includes only the portion of amortized cost representing the hedged items in fair value hedging relationships.
The following table presents the components of net gain/(loss) on derivatives and hedging activities as presented in the Statements of Income for the years ended December 31, 2020, 2019,2022, 2021, and 2018.2020.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | (In millions) | | (In millions) | | 2022 | | 2021 | | 2020 |
| Derivatives not designated as hedging instruments | | Derivatives not designated as hedging instruments | | Gain/(Loss) | | Gain/(Loss) | | Gain/(Loss) |
| | | | | | 2020 | | 2019 | | 2018 | |
| Derivatives not designated as hedging instruments | | Gain/(Loss) | | Gain/(Loss) | | Gain/(Loss) | |
| Derivatives designated as hedging instruments: | | | |
| Interest rate swaps | | | $ | (7) | | |
| Derivatives not designated as hedging instruments: | | | |
| Economic hedges: | Economic hedges: | | | Economic hedges: | | |
| Interest rate swaps | Interest rate swaps | | $ | (73) | | | $ | (79) | | | 15 | | Interest rate swaps | | $ | 34 | | | $ | 108 | | | $ | (73) | |
| Interest rate caps and floors | | 0 | | | (2) | | | 0 | | |
| Net settlements | | (83) | | | (16) | | | (13) | | |
| | Net interest settlements | | Net interest settlements | | (42) | | | (71) | | | (83) | |
| Mortgage delivery commitments | Mortgage delivery commitments | | 3 | | | 4 | | | 13 | | Mortgage delivery commitments | | — | | | — | | | 3 | |
| Total net gain/(loss) related to derivatives not designated as hedging instruments | Total net gain/(loss) related to derivatives not designated as hedging instruments | | (153) | | | (93) | | | 15 | | Total net gain/(loss) related to derivatives not designated as hedging instruments | | (8) | | | 37 | | | (153) | |
Price alignment amount(1) | Price alignment amount(1) | | 1 | | | 1 | | | (3) | | Price alignment amount(1) | | (1) | | | — | | | 1 | |
| Net gain/(loss) on derivatives and hedging activities | | $ | (152) | | | $ | (92) | | | $ | 5 | | |
| Net gain/(loss) on derivatives | | Net gain/(loss) on derivatives | | $ | (9) | | | $ | 37 | | | $ | (152) | |
(1)Includes only the portion of amortized cost representing the hedged items in fair value hedging relationships.This amount relates to derivatives for which variation margin on cleared derivatives is characterized as a daily settled contract.
Credit Risk–Risk. The Bank is subject to credit risk from potential nonperformance by counterparties to the interest rate exchange agreements. All of the Bank’s agreements governing uncleared derivative transactions contain master netting provisions to help mitigate the credit risk exposure to each counterparty. The Bank manages counterparty credit risk through credit analyses and collateral requirements and by following the requirements of the Bank’s risk management policies, credit guidelines, and Finance Agency and other regulations. The Bank also requires credit support agreements on all uncleared derivatives.
For cleared derivatives, the clearinghouseclearing house is the Bank’s counterparty. The requirement that the Bank post initial and variation margin through a clearing agent to the clearinghouse,clearing house exposes the Bank to institutional credit risk in the event thatif the clearing agent or the clearinghouse fails to meet its obligations. The use of cleared derivatives, however, mitigates the Bank’sa clearing house, or central counterparty, lowers overall credit risk exposure because a centralit employs standard valuation and initial and variation margin processes and is specifically designed to withstand remote but plausible counterparty is substituted for individual counterparties.default credit events. Variation margin and initial margin areis posted or collected for changes in the value of the portfolio, and initial margin is posted for changes in risk profile of cleared derivatives.the portfolio. The Bank has analyzed the enforceability of offsetting rights applicable to its cleared derivative transactions and determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable bankruptcy law and Commodity Futures Trading Commission rules in the event of a clearinghouseclearing house or clearing agent insolvency and under applicable clearinghouseclearing house rules upon a non-insolvency-based event of default of the clearinghouseclearing house or clearing agent. Based on this analysis, the Bank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular clearinghouse.clearing house.
Based on the Bank’s credit analyses and the collateral requirements, the Bank does not expect to incur any credit losses on its derivative transactions.
The Bank’s agreements for uncleared derivative transactions contain provisions that link the Bank’s credit rating from Moody’s Investors Service and S&P Global Ratings to various rights and obligations. Certain of these derivative agreements provide that, if the Bank’s long-term debt rating falls below a specified rating (ranging from A3/A- to Baa3/BBB-), the Bank’s counterparty would have the right, but not the obligation, to terminate all of its outstanding derivative transactions with the Bank; the Bank’s agreements with its clearing agents for cleared derivative transactions have similar provisions with respect to the debt rating of FHLBank System consolidated bonds. If this occurs, the Bank may choose to enter into replacement hedges, either by transferring the existing transactions to another counterparty or entering into new replacement transactions, based on prevailing market rates. The aggregate fair value of all uncleared derivative instruments with credit risk-related contingent features that were in a net derivative liability position (before cash collateral and related accrued interest) at December 31, 2020,2022, was $66,$679 million, for which the Bank had posted cash collateral of $59$678 million in the ordinary course of business.
Uncleared derivative transactions executed on or after September 1, 2022, are subject to two-way initial margin requirements as mandated by regulatory requirements issued in response to the Wall Street Reform and Consumer Protection Act, if the Bank’s average aggregate notional amount of uncleared derivative transactions exceeds a specified threshold. The initial margin is required to be held at a third-party custodian and does not change
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
ownership. Rather, the party in respect of which the initial margin has been posted to the third-party custodian will have a security interest in the amount of initial margin required under the Uncleared Margin Rules and can only take ownership upon the occurrence of certain events, including an event of default due to bankruptcy, insolvency, or similar proceeding.
All uncleared derivative transactions entered into by the Bank on or after March 1, 2017, are fully collateralized, subject to a minimum transfer amount, in accordance with variation margin requirements issued by the U.S. Federal bank regulatory agencies and the U.S. Commodity Futures Trading Commission.
The Bank may present derivative instruments, related cash collateral received or pledged, and associated accrued interest by clearing agent or by counterparty when the netting requirements have been met.
The following tables present separately the fair value of derivative assets and derivative liabilities that have met the netting requirements, including the related collateral received from or pledged to counterparties as of December 31, 20202022 and 2019.2021.
| | | 2020 | | 2022 |
| | Derivative Instruments Meeting Netting Requirements | | | | | | | Derivative Instruments Meeting Netting Requirements | | | | | |
| Amount Recognized | | Gross Amount of Netting Adjustments and Cash Collateral | | | Total Derivative Assets and Total Derivative Liabilities | | Noncash Collateral Not Offset That
Can Be Sold or Repledged | | | Net Amount | |
| (In millions) | | (In millions) | Amount Recognized | | Gross Amount of Netting Adjustments and Cash Collateral | | | Total Derivative Assets and Total Derivative Liabilities | | Noncash Collateral Not Offset That
Can Be Sold or Repledged | | | Net Amount |
| Derivative Assets | Derivative Assets | | | | | | Derivative Assets | | | | | |
| Uncleared | Uncleared | $ | 85 | | | $ | (85) | | | | $ | 0 | | | $ | 0 | | | | $ | 0 | | Uncleared | $ | 834 | | | $ | (829) | | | | $ | 5 | | | $ | — | | | | $ | 5 | |
| Cleared | Cleared | 7 | | | (4) | | | | 3 | | | (379) | | | | 382 | | Cleared | 15 | | | 6 | | | | 21 | | | (435) | | | | 456 | |
| Total | Total | | | $ | 3 | | | | | $ | 382 | | Total | | | $ | 26 | | | | | $ | 461 | |
| Derivative Liabilities | Derivative Liabilities | | | | | | | | Derivative Liabilities | | | | | | | |
| Uncleared | Uncleared | $ | 124 | | | $ | (114) | | | | $ | 10 | | | $ | 0 | | | | $ | 10 | | Uncleared | $ | 1,188 | | | $ | (1,186) | | | | $ | 2 | | | $ | — | | | | $ | 2 | |
| Cleared | Cleared | 20 | | | (18) | | | | 2 | | | 0 | | | | 2 | | Cleared | 7 | | | (7) | | | | — | | | — | | | | — | |
| Total | Total | | | $ | 12 | | | | | $ | 12 | | Total | | | $ | 2 | | | | | $ | 2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 |
| Derivative Instruments Meeting Netting Requirements | | | | | | | | |
| Amount Recognized | | Gross Amount of Netting Adjustments and Cash Collateral | | Total Derivative Assets and Total Derivative Liabilities | | Noncash Collateral Not Offset That
Can Be Sold or Repledged | | | | Net Amount |
| Derivative Assets | | | | | | | | | | | |
| Uncleared | $ | 34 | | | $ | (16) | | | $ | 18 | | | $ | 0 | | | | | $ | 18 | |
| Cleared | 10 | | | 5 | | | 15 | | | (381) | | | | | 396 | |
| Total | | | | | $ | 33 | | | | | | | $ | 414 | |
| Derivative Liabilities | | | | | | | | | | | |
| Uncleared | $ | 382 | | | $ | (382) | | | $ | 0 | | | $ | 0 | | | | | $ | 0 | |
| Cleared | 2 | | | (2) | | | 0 | | | 0 | | | | | 0 | |
| Total | | | | | $ | 0 | | | | | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Derivative Instruments Meeting Netting Requirements | | | | | | | | |
| (In millions) | Amount Recognized | | Gross Amount of Netting Adjustments and Cash Collateral | | Total Derivative Assets and Total Derivative Liabilities | | Noncash Collateral Not Offset That
Can Be Sold or Repledged | | | | Net Amount |
| Derivative Assets | | | | | | | | | | | |
| Uncleared | $ | 224 | | | $ | (224) | | | $ | — | | | $ | — | | | | | $ | — | |
| Cleared | 1 | | | 7 | | | 8 | | | (252) | | | | | 260 | |
| Total | | | | | $ | 8 | | | | | | | $ | 260 | |
| Derivative Liabilities | | | | | | | | | | | |
| Uncleared | $ | 161 | | | $ | (156) | | | $ | 5 | | | $ | — | | | | | $ | 5 | |
| Cleared | 8 | | | (8) | | | — | | | — | | | | | — | |
| Total | | | | | $ | 5 | | | | | | | $ | 5 | |
Note 15 — Fair Value
The following fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank at December 31, 20202022 and 2019.2021. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
methodology. For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases fair values cannot be precisely quantified or verified and may change as economic and market factors and evaluation of those factors change. The Bank continues to refine its valuation methodologies as markets and products develop and the pricing for certain products becomes more or less transparent. While the Bank believes that its valuation methodologies are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a materially different estimate of fair value as of the reporting date. U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). Therefore, the fair values are not necessarily indicative of
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
the amounts that would be realized in current market transactions, although they do reflect the Bank’s judgment as to how a market participant would estimate the fair values. The fair value summary table does not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of total assets and liabilities.
The following tables present the net carrying value or carrying value, as applicable, the estimated fair value, and the fair value hierarchy level of the Bank’s financial instruments at December 31, 20202022 and 2019.2021. The Bank records trading securities, AFS securities, derivative assets, derivative liabilities, certain advances, certain consolidated obligations, and certain other assets at fair value on a recurring basis, and on occasion certain mortgage loans held for portfolio and certain other assets at fair value on a nonrecurring basis. The Bank records all other financial assets and liabilities at amortized cost. Refer to the following tables for further details about the financial assets and liabilities held at fair value on either a recurring or non-recurring basis.
| | | | 2020 | | 2022 |
| Net Carrying
Value | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral(1) | |
| (In millions) | | (In millions) | Carrying Value(1) | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral(2) |
| Assets | Assets | | Assets | |
| Cash and due from banks | Cash and due from banks | $ | 174 | | | $ | 174 | | | $ | 174 | | | $ | 0 | | | $ | 0 | | | $ | — | | Cash and due from banks | $ | 9 | | | $ | 9 | | | $ | 9 | | | $ | — | | | $ | — | | | $ | — | |
| Interest-bearing deposits | Interest-bearing deposits | 1,078 | | | 1,078 | | | 1,078 | | | 0 | | | 0 | | | — | | Interest-bearing deposits | 3,677 | | | 3,677 | | | 3,677 | | | — | | | — | | | — | |
| Securities purchased under agreements to resell | Securities purchased under agreements to resell | 7,250 | | | 7,250 | | | 0 | | | 7,250 | | | 0 | | | — | | Securities purchased under agreements to resell | 7,000 | | | 7,000 | | | — | | | 7,000 | | | — | | | — | |
| Federal funds sold | Federal funds sold | 1,880 | | | 1,880 | | | 0 | | | 1,880 | | | 0 | | | — | | Federal funds sold | 4,719 | | | 4,719 | | | — | | | 4,719 | | | — | | | — | |
| Trading securities | Trading securities | 4,260 | | | 4,260 | | | 0 | | | 4,260 | | | 0 | | | — | | Trading securities | 1 | | | 1 | | | — | | | 1 | | | — | | | — | |
| AFS securities | AFS securities | 15,679 | | | 15,679 | | | 0 | | | 13,644 | | | 2,035 | | | — | | AFS securities | 12,713 | | | 12,713 | | | — | | | 11,531 | | | 1,182 | | | — | |
| HTM securities | HTM securities | 5,081 | | | 5,115 | | | 0 | | | 4,827 | | | 288 | | | — | | HTM securities | 2,181 | | | 2,136 | | | — | | | 1,993 | | | 143 | | | — | |
| Advances | Advances | 30,976 | | | 31,166 | | | 0 | | | 31,166 | | | 0 | | | — | | Advances | 89,400 | | | 89,183 | | | — | | | 89,183 | | | — | | | — | |
| Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans | 1,935 | | | 1,941 | | | 0 | | | 1,941 | | | 0 | | | — | | |
| Mortgage loans held for portfolio | | Mortgage loans held for portfolio | 815 | | | 695 | | | — | | | 695 | | | — | | | — | |
| | Accrued interest receivable | Accrued interest receivable | 82 | | | 82 | | | 0 | | | 82 | | | 0 | | | — | | Accrued interest receivable | 313 | | | 313 | | | — | | | 313 | | | — | | | — | |
Derivative assets, net(1)(2) | Derivative assets, net(1)(2) | 3 | | | 3 | | | 0 | | | 92 | | | 0 | | | (89) | | Derivative assets, net(1)(2) | 26 | | | 26 | | | — | | | 849 | | | — | | | (823) | |
Other assets(2)(3) | Other assets(2)(3) | 22 | | | 22 | | | 22 | | | 0 | | | 0 | | | — | | Other assets(2)(3) | 15 | | | 15 | | | 15 | | | — | | | — | | | — | |
| Liabilities | Liabilities | | Liabilities | |
| Deposits | Deposits | 887 | | | 887 | | | 0 | | | 887 | | | 0 | | | — | | Deposits | 989 | | | 989 | | | — | | | 989 | | | — | | | — | |
| Consolidated obligations: | Consolidated obligations: | | Consolidated obligations: | |
| Bonds | Bonds | 44,408 | | | 44,457 | | | 0 | | | 44,457 | | | 0 | | | — | | Bonds | 75,768 | | | 75,396 | | | — | | | 75,396 | | | — | | | — | |
| Discount notes | Discount notes | 16,213 | | | 16,214 | | | 0 | | | 16,214 | | | 0 | | | — | | Discount notes | 35,929 | | | 35,916 | | | — | | | 35,916 | | | — | | | — | |
| Total consolidated obligations | Total consolidated obligations | 60,621 | | | 60,671 | | | 0 | | | 60,671 | | | 0 | | | — | | Total consolidated obligations | 111,697 | | | 111,312 | | | — | | | 111,312 | | | — | | | — | |
| Mandatorily redeemable capital stock | Mandatorily redeemable capital stock | 2 | | | 2 | | | 2 | | | 0 | | | 0 | | | — | | Mandatorily redeemable capital stock | 5 | | | 5 | | | 5 | | | — | | | — | | | — | |
| | Accrued interest payable | Accrued interest payable | 24 | | | 24 | | | 0 | | | 24 | | | 0 | | | — | | Accrued interest payable | 326 | | | 326 | | | — | | | 326 | | | — | | | — | |
Derivative liabilities, net(1)(2) | Derivative liabilities, net(1)(2) | 12 | | | 12 | | | 0 | | | 144 | | | 0 | | | (132) | | Derivative liabilities, net(1)(2) | 2 | | | 2 | | | — | | | 1,195 | | | — | | | (1,193) | |
| Other | | |
| Standby letters of credit | 36 | | | 36 | | | 0 | | | 36 | | | 0 | | | — | | |
| |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | 2019 | | 2021 |
| Carrying
Value | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral(1) | |
| (In millions) | | (In millions) | Carrying Value(1) | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral(2) |
| Assets | Assets | | Assets | |
| Cash and due from banks | Cash and due from banks | $ | 118 | | | $ | 118 | | | $ | 118 | | | $ | 0 | | | $ | 0 | | | $ | — | | Cash and due from banks | $ | 55 | | | $ | 55 | | | $ | 55 | | | $ | — | | | $ | — | | | $ | — | |
| Interest-bearing deposits | Interest-bearing deposits | 2,269 | | | 2,269 | | | 2,269 | | | 0 | | | 0 | | | — | | Interest-bearing deposits | 1,125 | | | 1,125 | | | 1,125 | | | — | | | — | | | — | |
| Securities purchased under agreements to resell | Securities purchased under agreements to resell | 7,000 | | | 7,000 | | | 0 | | | 7,000 | | | 0 | | | — | | Securities purchased under agreements to resell | 15,500 | | | 15,500 | | | — | | | 15,500 | | | — | | | — | |
| Federal funds sold | Federal funds sold | 3,562 | | | 3,562 | | | 0 | | | 3,562 | | | 0 | | | — | | Federal funds sold | 5,348 | | | 5,348 | | | — | | | 5,348 | | | — | | | — | |
| Trading securities | Trading securities | 1,766 | | | 1,766 | | | 0 | | | 1,766 | | | 0 | | | — | | Trading securities | 252 | | | 252 | | | — | | | 252 | | | — | | | — | |
| AFS securities | AFS securities | 15,495 | | | 15,495 | | | 0 | | | 12,898 | | | 2,597 | | | — | | AFS securities | 10,332 | | | 10,332 | | | — | | | 8,724 | | | 1,608 | | | — | |
| HTM securities | HTM securities | 7,545 | | | 7,566 | | | 0 | | | 7,181 | | | 385 | | | — | | HTM securities | 3,211 | | | 3,235 | | | — | | | 3,015 | | | 220 | | | — | |
| Advances | Advances | 65,374 | | | 65,492 | | | 0 | | | 65,492 | | | 0 | | | — | | Advances | 17,027 | | | 17,072 | | | — | | | 17,072 | | | — | | | — | |
| Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans | 3,314 | | | 3,332 | | | 0 | | | 3,332 | | | 0 | | | — | | |
| Mortgage loans held for portfolio | | Mortgage loans held for portfolio | 980 | | | 981 | | | — | | | 981 | | | — | | | — | |
| Accrued interest receivable | Accrued interest receivable | 139 | | | 139 | | | 0 | | | 139 | | | 0 | | | — | | Accrued interest receivable | 45 | | | 45 | | | — | | | 45 | | | — | | | — | |
Derivative assets, net(1)(2) | Derivative assets, net(1)(2) | 33 | | | 33 | | | 0 | | | 44 | | | 0 | | | (11) | | Derivative assets, net(1)(2) | 8 | | | 8 | | | — | | | 225 | | | — | | | (217) | |
Other assets(2)(3) | Other assets(2)(3) | 19 | | | 19 | | | 19 | | | 0 | | | 0 | | | — | | Other assets(2)(3) | 25 | | | 25 | | | 25 | | | — | | | — | | | — | |
| Liabilities | Liabilities | | Liabilities | |
| Deposits | Deposits | 537 | | | 537 | | | 0 | | | 537 | | | 0 | | | — | | Deposits | 769 | | | 769 | | | — | | | 769 | | | — | | | — | |
| Consolidated obligations: | Consolidated obligations: | | Consolidated obligations: | |
| Bonds | Bonds | 71,372 | | | 71,386 | | | 0 | | | 71,386 | | | 0 | | | — | | Bonds | 22,716 | | | 22,635 | | | — | | | 22,635 | | | — | | | — | |
| Discount notes | Discount notes | 27,376 | | | 27,378 | | | 0 | | | 27,378 | | | 0 | | | — | | Discount notes | 23,987 | | | 23,986 | | | — | | | 23,986 | | | — | | | — | |
| Total consolidated obligations | Total consolidated obligations | 98,748 | | | 98,764 | | | 0 | | | 98,764 | | | 0 | | | — | | Total consolidated obligations | 46,703 | | | 46,621 | | | — | | | 46,621 | | | — | | | — | |
| Mandatorily redeemable capital stock | Mandatorily redeemable capital stock | 138 | | | 138 | | | 138 | | | 0 | | | 0 | | | — | | Mandatorily redeemable capital stock | 3 | | | 3 | | | 3 | | | — | | | — | | | — | |
| | Accrued interest payable | Accrued interest payable | 164 | | | 164 | | | 0 | | | 164 | | | 0 | | | — | | Accrued interest payable | 33 | | | 33 | | | — | | | 33 | | | — | | | — | |
Derivative liabilities, net(1)(2) | Derivative liabilities, net(1)(2) | 0 | | | 0 | | | 0 | | | 384 | | | 0 | | | (384) | | Derivative liabilities, net(1)(2) | 5 | | | 5 | | | — | | | 169 | | | — | | | (164) | |
| Other | | |
| Standby letters of credit | 32 | | | 32 | | | 0 | | | 32 | | | 0 | | | — | | |
| |
(1) For certain financial instruments, the amounts represent net carrying value, which includes an allowance for credit losses.
(2) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, and also cash collateral and related accrued interest held or placed with the same clearing agents and/or counterparty.
(2)(3) Represents publicly traded mutual funds held in a grantor trust.
Fair Value Hierarchy. The fair value hierarchy is used to prioritize the fair value methodologies and valuation techniques as well as the inputs to the valuation techniques used to measure fair value for assets and liabilities carried at fair value on the Statements of Condition. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of market observability of the fair value measurement for the asset or liability. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). An entity must disclose the level within the fair value hierarchy in which the measurements are classified for all financial assets and liabilities measured on a recurring or non-recurring basis.
The application of the fair value hierarchy to the Bank’s financial assets and financial liabilities that are carried at fair value either on a recurring or non-recurring basis is as follows:
•Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
•Level 2 – Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following:
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
(1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
•Level 3 – Unobservable inputs for the asset or liability. Valuations are derived from techniques that use significant assumptions not observable in the market, which include pricing models, discounted cash flow models, or similar techniques.
A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The following assets and liabilities, including those for which the Bank has elected the fair value option, are carried at fair value on the Statements of Condition as of December 31, 2020:2022:
•Trading securities
•AFS securities
•Certain advances
•Derivative assets and liabilities
•Certain consolidated obligation bonds
•Certain other assets
For instruments carried at fair value, the Bank reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. For the periods presented, the Bank did not have any reclassifications for transfers in or out of level 3 of the fair value hierarchy.
Summary of Valuation Methodologies and Primary Inputs
Inputs.The valuation methodologies and primary inputs used to develop the measurement of fair value for assets and liabilities that are measured at fair value on a recurring or nonrecurring basis in the Statements of Condition are listed below.
Investment Securities – MBS – To value its MBS, the Bank obtains prices from multiple designated third-party pricing vendors when available. The pricing vendors use various proprietary models to price these securities. The inputs to those models are derived from various sources including, but not limited to: benchmark yields, reported trades, dealer estimates, issuer spreads, prices on benchmark securities, bids, offers, and other market-related data. Since many securities do not trade on a daily basis, the pricing vendors use available information as applicable, such as benchmark yield curves, benchmarking of like securities, sector groupings, and matrix pricing, to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all security valuations, which facilitates resolution of price discrepancies identified by the Bank.
At least annually, the Bank conducts reviews of the multiple pricing vendors to update and confirm its understanding of the vendors’ pricing processes, methodologies, and control procedures.
The Bank’s valuation technique for estimating the fair values of its MBS first requires the establishment of a median vendor price for each security. If 3three prices are received, the middle price is the median price; if 2two prices are received, the average of the two prices is the median price; and if 1one price is received, it is the median price (and also the default fair value) subject to additional validation. All vendor prices that are within a specified tolerance threshold of the median price are included in the cluster of vendor prices that are averaged to establish a default fair value. All vendor prices that are outside the threshold (outliers) are subject to further analysis including, but not limited to, comparison to prices provided by an additional third-party valuation service, pricesdealer price estimates for similar securities,
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
and/or dealer estimates, or and the use of internal modelinternally modeled prices, which are deemed to be reflective of all relevant facts and circumstances that a market participant would consider. Such analysis is also applied in those limited instances where no third-party vendor price or only one third-party vendor price is available in order to arrive at an estimated
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price, as appropriate) is used as the fair value rather than the default fair value. If, instead, the analysis confirms that an outlier is (or outliers are) not representative of fair value and the default fair value is the best estimate, then the default fair value is used as the fair value.
If all vendor prices received for a security are outside the tolerance threshold level of the median price, then there is no default fair value, and the fair value is determined by an evaluation of all outlier prices (or the other prices, as appropriate) as described above.
As of December 31, 2020,2022, multiple vendor prices were received for most of the Bank’s MBS, and the fair value estimates for most of those securities were determined in accordance with the Bank’s valuation technique based on these vendor prices. Based on the Bank’s reviews of the pricing methods employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers, the Bank’s additional analyses), the Bank believes that its fair value estimates are reasonable and that the fair value measurements are classified appropriately in the fair value hierarchy. Based on limited market liquidity for PLRMBS, the fair value measurements for these securities were classified as Level 3 within the fair value hierarchy.
Investment Securities – Non-MBS – To determine the estimated fair values of non-MBS investments, the Bank uses a market approach using prices from third-party pricing vendors, generally consistent with the methodologies for MBS. The Bank believes that its methodologies result in fair values that are reasonable and similar in all material respects based on the nature of the financial instruments being measured.
Advances Recorded Under the Fair Value Option – Because quoted prices are not available for advances, the fair values are measured using model-based valuation techniques (such as calculating the present value of future cash flows and reducing the amount for accrued interest receivable).
The Bank’s primary inputs for measuring the fair value of advances recorded under the fair value option are market-based consolidated obligation yield curve (CO Curve) inputs obtained from the Office of Finance. The CO Curve is then adjusted to reflect the rates on replacement advances with similar terms and collateral. These spread adjustments are not market-observable and are evaluated for significance in the overall fair value measurement and the fair value hierarchy level of the advance. The Bank obtains market-observable inputs for complex advances recorded under the fair value option. These inputs may include volatility assumptions, which are market-based expectations of future interest rate volatility implied from current market prices for similar options (swaption volatility and volatility skew). The discount rates used in these calculations are the replacement advance rates for advances with similar terms. Pursuant to the Finance Agency’s advances regulation, advances with an original term to maturity or repricing period greater than six months generally require a prepayment fee sufficient to make the Bank financially indifferent to the borrower’s decision to prepay the advances. The Bank determined that no adjustment is required to the fair value measurement of advances for prepayment fees. In addition, theThe Bank also did not adjust its fair value measurement of advances recorded under the fair value option for creditworthiness primarily because advances were fully collateralized.
Other Assets – The estimated fair value of grantor trust assets is based on quoted market prices.
Derivative Assets and Liabilities – In general, derivative instruments transacted and held by the Bank for risk management activities are traded in over-the-counter markets where quoted market prices are not readily available. These derivatives are interest rate-related. For these derivatives, the Bank measures fair value using internally developed discounted cash flow models that use market-observable inputs, such as swap rates and volatility assumptions, which are market-based expectations of future interest rate volatility implied from current market prices for similar options (swaption volatility and volatility skew), adjusted for counterparty credit risk, as necessary.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
prices for similar options (swaption volatility and volatility skew), adjusted for counterparty credit risk, as necessary.
The Bank is subject to credit risk because of the risk of potential nonperformance by its derivative counterparties. To mitigate this risk, the Bank executes uncleared derivative transactions only with highly rated derivative dealers and major banks (derivative dealer counterparties) that meet the Bank’s eligibility criteria. In addition, the Bank has entered into master netting agreements and bilateral credit support agreements with all active derivative dealer counterparties that provide for delivery of collateralmargin at specified levels to limit the Bank’s net unsecured credit exposure to these counterparties. Under these policies and agreements, the amount of unsecured credit exposure to an individual derivative dealer counterparty is set at zero (subject to a minimum transfer amount). The Bank clears its cleared derivative transactions only through clearing agents that meet the Bank’s eligibility requirements, and the Bank’s credit exposure to the clearinghouseclearing house is secured by variation margin received from the clearinghouse. All credit exposure from derivative transactions entered into by the Bank with member counterparties that are not derivative dealers must be fully secured by eligible collateral.clearing house. The Bank evaluated the potential for the fair value of the instruments to be affected by counterparty credit risk and determined that no adjustments to the overall fair value measurements were required.
The fair values of the derivative assets and liabilities include accrued interest receivable/payable and cash collateral remitted to/received from counterparties. The estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values because of their short-term nature. The fair values of derivatives that met the netting requirements are presented on a net basis. If these netted amounts are positive, they are classified as an asset and, if negative, they are classified as a liability.
Consolidated Obligations Recorded Under the Fair Value Option – Because quoted prices in active markets are not generally available for identical liabilities, the Bank measures fair values using internally developed models that use primarily market-observable inputs. The Bank’s primary input for measuring the fair value of consolidated obligation bonds is a market-based CO Curve obtained from the Office of Finance. The Office of Finance constructs the CO Curve using the Treasury yield curve as a base curve, which is adjusted by indicative consolidated obligation spreads obtained from market-observable sources. These market indications are generally derived from pricing indications from dealers, historical pricing relationships, and market activity for similar liabilities, such as recent GSE issuances or secondary market activity. For consolidated obligation bonds with embedded options, the Bank also obtains market-observable inputs, such as volatility assumptions, which are market-based expectations of future interest rate volatility implied from current market prices for similar options (swaption volatility and volatility skew).
Adjustments may be necessary to reflect the Bank’s credit quality or the credit quality of the FHLBank System when valuing consolidated obligation bonds measured at fair value. The Bank monitors its own creditworthiness and the creditworthiness of the other FHLBanks and the FHLBank System to determine whether any adjustments are necessary for creditworthiness in its fair value measurement of consolidated obligation bonds. The credit ratings of the FHLBank System and any changes to the credit ratings are the basis for the Bank to determine whether the fair values of consolidated obligations recorded under the fair value option have been significantly affected during the reporting period by changes in the instrument-specific credit risk.
Subjectivity of Estimates Related to Fair Values of Financial Instruments. Estimates of the fair value of financial assets and liabilities using the methodologies described above are subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest rate volatility, methods to determine possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments oftenmay have a material effect on the fair value estimates.
Fair Value Measurements. The following tables present the fair value of assets and liabilities, which are recorded on a recurring or nonrecurring basis at December 31, 2022 and 2021, by level within the fair value hierarchy.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Fair Value Measurements. The following tables present the fair value of assets and liabilities, which are recorded on a recurring or nonrecurring basis at December 31, 2020 and 2019, by level within the fair value hierarchy.
| | December 31, 2020 | | |
| December 31, 2022 | | December 31, 2022 | |
| | | Fair Value Measurement Using: | | Netting Adjustments and Cash Collateral(1) | |
| (In millions) | | (In millions) | Level 1 | | Level 2 | | Level 3 | | Total |
| Recurring fair value measurements – Assets: | | Recurring fair value measurements – Assets: | |
| Trading securities: | | Trading securities: | |
| | Fair Value Measurement Using: | | Netting Adjustments and Cash Collateral(1) | | |
| | Level 1 | | Level 2 | | Level 3 | | Total | |
| Recurring fair value measurements – Assets: | | |
| Trading securities: | | |
| MBS – Other U.S. obligations | | MBS – Other U.S. obligations | $ | — | | | $ | 1 | | | $ | — | | | $ | — | | | $ | 1 | |
| | AFS securities: | | AFS securities: | |
| U.S. obligations – Treasury notes | U.S. obligations – Treasury notes | $ | 0 | | | $ | 4,257 | | | $ | 0 | | | $ | — | | | $ | 4,257 | | U.S. obligations – Treasury notes | — | | | 4,024 | | | — | | | — | | | 4,024 | |
| | MBS – Other U.S. obligations – Ginnie Mae | 0 | | | 3 | | | 0 | | | — | | | 3 | | |
| Total trading securities | 0 | | | 4,260 | | | 0 | | | — | | | 4,260 | | |
| AFS securities: | | |
| U.S. obligations – Treasury securities | 0 | | | 4,983 | | | 0 | | | — | | | 4,983 | | |
| MBS: | MBS: | | MBS: | |
| GSEs – multifamily | GSEs – multifamily | 0 | | | 8,661 | | | 0 | | | — | | | 8,661 | | GSEs – multifamily | — | | | 7,507 | | | — | | | — | | | 7,507 | |
| PLRMBS | PLRMBS | 0 | | | 0 | | | 2,035 | | | — | | | 2,035 | | PLRMBS | — | | | — | | | 1,182 | | | — | | | 1,182 | |
| Subtotal MBS | 0 | | | 8,661 | | | 2,035 | | | — | | | 10,696 | | |
| Subtotal AFS MBS | | Subtotal AFS MBS | — | | | 7,507 | | | 1,182 | | | — | | | 8,689 | |
| Total AFS securities | Total AFS securities | 0 | | | 13,644 | | | 2,035 | | | — | | | 15,679 | | Total AFS securities | — | | | 11,531 | | | 1,182 | | | — | | | 12,713 | |
Advances(2) | Advances(2) | 0 | | | 2,147 | | | 0 | | | — | | | 2,147 | | Advances(2) | — | | | 2,059 | | | — | | | — | | | 2,059 | |
| Derivative assets, net: interest rate-related | Derivative assets, net: interest rate-related | 0 | | | 92 | | | 0 | | | (89) | | | 3 | | Derivative assets, net: interest rate-related | — | | | 849 | | | — | | | (823) | | | 26 | |
| | Other assets | Other assets | 22 | | | 0 | | | 0 | | | — | | | 22 | | Other assets | 15 | | | — | | | — | | | — | | | 15 | |
| Total recurring fair value measurements – Assets | Total recurring fair value measurements – Assets | $ | 22 | | | $ | 20,143 | | | $ | 2,035 | | | $ | (89) | | | $ | 22,111 | | Total recurring fair value measurements – Assets | $ | 15 | | | $ | 14,440 | | | $ | 1,182 | | | $ | (823) | | | $ | 14,814 | |
| Recurring fair value measurements – Liabilities: | Recurring fair value measurements – Liabilities: | | Recurring fair value measurements – Liabilities: | |
Consolidated obligation bonds(3) | Consolidated obligation bonds(3) | $ | 0 | | | $ | 111 | | | $ | 0 | | | $ | — | | | $ | 111 | | Consolidated obligation bonds(3) | $ | — | | | $ | 2,226 | | | $ | — | | | $ | — | | | $ | 2,226 | |
| Derivative liabilities, net: interest rate-related | Derivative liabilities, net: interest rate-related | 0 | | | 144 | | | 0 | | | (132) | | | 12 | | Derivative liabilities, net: interest rate-related | — | | | 1,195 | | | — | | | (1,193) | | | 2 | |
| Total recurring fair value measurements – Liabilities | Total recurring fair value measurements – Liabilities | $ | 0 | | | $ | 255 | | | $ | 0 | | | $ | (132) | | | $ | 123 | | Total recurring fair value measurements – Liabilities | $ | — | | | $ | 3,421 | | | $ | — | | | $ | (1,193) | | | $ | 2,228 | |
Nonrecurring fair value measurements – Assets:(4) | Nonrecurring fair value measurements – Assets:(4) | | Nonrecurring fair value measurements – Assets:(4) | |
| | Impaired mortgage loans held for portfolio | Impaired mortgage loans held for portfolio | $ | 0 | | | $ | 0 | | | $ | 18 | | | $ | — | | | $ | 18 | | Impaired mortgage loans held for portfolio | $ | — | | | $ | — | | | $ | 20 | | | $ | — | | | $ | 20 | |
| Total nonrecurring fair value measurements – Assets | Total nonrecurring fair value measurements – Assets | $ | 0 | | | $ | 0 | | | $ | 18 | | | $ | — | | | $ | 18 | | Total nonrecurring fair value measurements – Assets | $ | — | | | $ | — | | | $ | 20 | | | $ | — | | | $ | 20 | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | December 31, 2019 | | |
| December 31, 2021 | | December 31, 2021 | |
| | Fair Value Measurement Using: | | Netting Adjustments and Cash Collateral(1) | | | Fair Value Measurement Using: | | Netting Adjustments and Cash Collateral(1) | |
| Level 1 | | Level 2 | | Level 3 | | Total | |
| (In millions) | | (In millions) | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral(1) | | Total |
| Recurring fair value measurements – Assets: | Recurring fair value measurements – Assets: | | Recurring fair value measurements – Assets: | |
| Trading securities: | Trading securities: | | Trading securities: | |
| U.S. obligations – Treasury notes | U.S. obligations – Treasury notes | $ | 0 | | | $ | 1,762 | | | $ | 0 | | | $ | — | | | $ | 1,762 | | U.S. obligations – Treasury notes | $ | — | | | $ | 250 | | | $ | — | | | $ | — | | | $ | 250 | |
| | MBS – Other U.S. obligations – Ginnie Mae | 0 | | | 4 | | | 0 | | | — | | | 4 | | |
| MBS – Other U.S. obligations | | MBS – Other U.S. obligations | — | | | 2 | | | — | | | — | | | 2 | |
| Total trading securities | Total trading securities | 0 | | | 1,766 | | | 0 | | | — | | | 1,766 | | Total trading securities | — | | | 252 | | | — | | | — | | | 252 | |
| AFS securities: | AFS securities: | | AFS securities: | |
| U.S. obligations – Treasury securities | 0 | | | 5,288 | | | 0 | | | — | | | 5,288 | | |
| U.S. obligations – Treasury notes | | U.S. obligations – Treasury notes | — | | | 504 | | | — | | | — | | | 504 | |
| MBS: | MBS: | | MBS: | |
| GSEs – multifamily | GSEs – multifamily | 0 | | | 7,610 | | | 0 | | | — | | | 7,610 | | GSEs – multifamily | — | | | 8,220 | | | — | | | — | | | 8,220 | |
| PLRMBS | PLRMBS | 0 | | | 0 | | | 2,597 | | | — | | | 2,597 | | PLRMBS | — | | | — | | | 1,608 | | | — | | | 1,608 | |
| Subtotal MBS | 0 | | | 7,610 | | | 2,597 | | | — | | | 10,207 | | |
| Subtotal AFS MBS | | Subtotal AFS MBS | — | | | 8,220 | | | 1,608 | | | — | | | 9,828 | |
| Total AFS securities | Total AFS securities | 0 | | | 12,898 | | | 2,597 | | | — | | | 15,495 | | Total AFS securities | — | | | 8,724 | | | 1,608 | | | — | | | 10,332 | |
Advances(2) | Advances(2) | 0 | | | 4,370 | | | 0 | | | — | | | 4,370 | | Advances(2) | — | | | 1,772 | | | — | | | — | | | 1,772 | |
| Derivative assets, net: interest rate-related | Derivative assets, net: interest rate-related | 0 | | | 44 | | | 0 | | | (11) | | | 33 | | Derivative assets, net: interest rate-related | — | | | 225 | | | — | | | (217) | | | 8 | |
| Other assets | Other assets | 19 | | | 0 | | | 0 | | | — | | | 19 | | Other assets | 25 | | | — | | | — | | | — | | | 25 | |
| Total recurring fair value measurements – Assets | Total recurring fair value measurements – Assets | $ | 19 | | | $ | 19,078 | | | $ | 2,597 | | | $ | (11) | | | $ | 21,683 | | Total recurring fair value measurements – Assets | $ | 25 | | | $ | 10,973 | | | $ | 1,608 | | | $ | (217) | | | $ | 12,389 | |
| Recurring fair value measurements – Liabilities: | Recurring fair value measurements – Liabilities: | | Recurring fair value measurements – Liabilities: | |
Consolidated obligation bonds(3) | Consolidated obligation bonds(3) | $ | 0 | | | $ | 337 | | | $ | 0 | | | $ | — | | | $ | 337 | | Consolidated obligation bonds(3) | $ | — | | | $ | 627 | | | $ | — | | | $ | — | | | $ | 627 | |
| Derivative liabilities, net: interest rate-related | Derivative liabilities, net: interest rate-related | 0 | | | 384 | | | 0 | | | (384) | | | 0 | | Derivative liabilities, net: interest rate-related | — | | | 169 | | | — | | | (164) | | | 5 | |
| Total recurring fair value measurements – Liabilities | Total recurring fair value measurements – Liabilities | $ | 0 | | | $ | 721 | | | $ | 0 | | | $ | (384) | | | $ | 337 | | Total recurring fair value measurements – Liabilities | $ | — | | | $ | 796 | | | $ | — | | | $ | (164) | | | $ | 632 | |
Nonrecurring fair value measurements – Assets:(4) | Nonrecurring fair value measurements – Assets:(4) | | Nonrecurring fair value measurements – Assets:(4) | |
| | Impaired mortgage loans held for portfolio | Impaired mortgage loans held for portfolio | $ | 0 | | | $ | 0 | | | $ | 1 | | | $ | — | | | $ | 1 | | Impaired mortgage loans held for portfolio | $ | — | | | $ | — | | | $ | 23 | | | $ | — | | | $ | 23 | |
| Total nonrecurring fair value measurements – Assets | Total nonrecurring fair value measurements – Assets | $ | 0 | | | $ | 0 | | | $ | 1 | | | $ | — | | | $ | 1 | | Total nonrecurring fair value measurements – Assets | $ | — | | | $ | — | | | $ | 23 | | | $ | — | | | $ | 23 | |
(1)Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, and also cash collateral and related accrued interest held or placed by the Bank, with the same clearing agents and/or counterparty.
(2)Represents advances recorded under the fair value option at December 31, 20202022 and 2019.2021.
(3)Represents consolidated obligation bonds recorded under the fair value option at December 31, 20202022 and 2019.2021.
(4)The fair value information presented is as of the date the fair value adjustment was recorded during the years ended December 31, 20202022 and 2019.2021.
The following table presents a reconciliation of the Bank’s AFS PLRMBS that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2020, 2019,2022, 2021, and 2018.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | 2020 | | 2019 | | 2018 | |
| (In millions) | | (In millions) | 2022 | | 2021 | | 2020 |
| Balance, beginning of the period | Balance, beginning of the period | $ | 2,597 | | | $ | 3,157 | | | $ | 3,833 | | Balance, beginning of the period | $ | 1,608 | | | $ | 2,035 | | | $ | 2,597 | |
| Total gain/(loss) realized and unrealized included in: | Total gain/(loss) realized and unrealized included in: | | Total gain/(loss) realized and unrealized included in: | |
| Interest income | Interest income | 70 | | | 78 | | | 81 | | Interest income | 55 | | | 69 | | | 70 | |
| (Provision for)/reversal of credit losses | (Provision for)/reversal of credit losses | (25) | | | 0 | | 0 | (Provision for)/reversal of credit losses | (14) | | | 3 | | | (25) | |
| Other income, net | 0 | | | (14) | | | (23) | | |
| Other income/(loss) | | Other income/(loss) | 28 | | | — | | | — | |
| Unrealized gain/(loss) included in AOCI | Unrealized gain/(loss) included in AOCI | (111) | | | (16) | | | (38) | | Unrealized gain/(loss) included in AOCI | (146) | | | 18 | | | (111) | |
| Settlements | Settlements | (499) | | | (609) | | | (708) | | Settlements | (366) | | | (519) | | | (499) | |
| Transfers of HTM securities to AFS securities | Transfers of HTM securities to AFS securities | 3 | | | 1 | | | 12 | | Transfers of HTM securities to AFS securities | 17 | | | 2 | | | 3 | |
| Balance, end of the period | Balance, end of the period | $ | 2,035 | | | $ | 2,597 | | | $ | 3,157 | | Balance, end of the period | $ | 1,182 | | | $ | 1,608 | | | $ | 2,035 | |
| | Total amount of gain/(loss) for the period included in earnings attributable to the change in unrealized gains/losses relating to assets and liabilities still held at the end of the period | $ | 45 | | | $ | 62 | | | $ | 70 | | |
| Total amount of unrealized gain/(loss) for the period included in AOCI relating to assets held at the end of the period | | Total amount of unrealized gain/(loss) for the period included in AOCI relating to assets held at the end of the period | $ | (146) | | | $ | 19 | | | $ | (111) | |
| Total amount of gain/(loss) for the period included in earnings attributable to the change in unrealized gains/losses relating to assets held at the end of the period | | Total amount of gain/(loss) for the period included in earnings attributable to the change in unrealized gains/losses relating to assets held at the end of the period | $ | 41 | | | $ | 71 | | | $ | 45 | |
Fair Value Option. The fair value option provides an entity with an irrevocable option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value. It requires an entity to display the fair value of those assets and liabilities for which the entity has chosen to use fair value on the face of the Statements of Condition. Fair value is used for both the initial and subsequent measurement of the designated assets, liabilities, and commitments, with the changes in fair value recognized in net income. Interest income and interest expense on advances and consolidated bonds carried at fair value are recognized solely on the contractual amount of interest due or unpaid. Any transaction fees or costs are immediately recognized in non-interest incomeother income/(loss) or non-interestother expense.
The Bank elected the fair value option for certain financial instruments as follows:
•Adjustable rate advances with embedded caps and floorsfloors;
•Callable fixed rate advancesadvances;
•Putable fixed rate advancesadvances;
•Fixed rate advances with partial prepayment symmetrysymmetry;
•Callable or non-callable floating rate consolidated obligation bonds with embedded capscaps;
•Convertible consolidated obligation bondsbonds;
•Adjustable or fixed rate range accrual consolidated obligation bondsbonds;
•Ratchet consolidated obligation bondsbonds;
•Adjustable rate advances indexed to certain indices such as the Prime Rate, U.S. Treasury bill, and Effective Federal funds RateFunds Rate;
•Adjustable rate consolidated obligation bonds indexed to certain indices like the Prime Rate and U.S. Treasury billbill;
•Step-up callable bonds, which pay interest at increasing fixed rates for specified intervals over the life of the bond and can generally be called at the Bank’s option on the step-up dates according to the terms of the bond offerings; and
•Step-down callable bonds, which pay interest at decreasing fixed rates for specified intervals over the life of the bond and can generally be called at the Bank’s option on the step-down dates according to the terms of the bond offerings.
The Bank has elected the fair value option for certain financial instruments to assist in mitigating potential earnings volatility that can arise from economic hedging relationships in which the carrying value of the hedged item is not adjusted for changes in fair value. The potential earnings volatility associated with recording fair value changes of only the hedging derivative is the Bank’s primary reason for electing the fair value option for financial assets and
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
liabilities that do not qualify for hedge accounting or that have not previously met or may be at risk for not meeting the hedge effectiveness requirements.
The following table summarizes the activity related to financial assets and liabilities for which the Bank elected the fair value option during the years ended December 31, 2020, 2019,2022, 2021, and 2018:2020:
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | 2020 | | 2019 | | 2018 | | 2022 | | 2021 | | 2020 |
| Advances | | Consolidated
Obligation Bonds | | Advances | | Consolidated
Obligation Bonds | | Advances | | Consolidated
Obligation Bonds | |
| (In millions) | | (In millions) | Advances | | Consolidated
Obligation Bonds | | Advances | | Consolidated
Obligation Bonds | | Advances | | Consolidated
Obligation Bonds |
| Balance, beginning of the period | Balance, beginning of the period | $ | 4,370 | | | $ | 337 | | | $ | 5,133 | | | $ | 2,019 | | | $ | 6,431 | | | $ | 949 | | Balance, beginning of the period | $ | 1,772 | | | $ | 627 | | | $ | 2,147 | | | $ | 111 | | | $ | 4,370 | | | $ | 337 | |
| New transactions elected for fair value option | New transactions elected for fair value option | 7,070 | | | 0 | | | 2,324 | | | 0 | | | 1,918 | | | 1,313 | | New transactions elected for fair value option | 1,120 | | | 1,660 | | | 670 | | | 723 | | | 7,070 | | | — | |
| Maturities and terminations | Maturities and terminations | (9,373) | | | (225) | | | (3,200) | | | (1,688) | | | (3,192) | | | (245) | | Maturities and terminations | (715) | | | (15) | | | (982) | | | (200) | | | (9,373) | | | (225) | |
| Net gain/(loss) on advances and net (gain)/loss on consolidated obligation bonds from changes in fair value recognized in earnings | Net gain/(loss) on advances and net (gain)/loss on consolidated obligation bonds from changes in fair value recognized in earnings | 85 | | | 0 | | | 116 | | | 15 | | | (25) | | | (4) | | Net gain/(loss) on advances and net (gain)/loss on consolidated obligation bonds from changes in fair value recognized in earnings | (119) | | | (54) | | | (62) | | | (8) | | | 85 | | | — | |
| Change in accrued interest | Change in accrued interest | (5) | | | (1) | | | (3) | | | (9) | | | 1 | | | 6 | | Change in accrued interest | 1 | | | 8 | | | (1) | | | 1 | | | (5) | | | (1) | |
| Balance, end of the period | Balance, end of the period | $ | 2,147 | | | $ | 111 | | | $ | 4,370 | | | $ | 337 | | | $ | 5,133 | | | $ | 2,019 | | Balance, end of the period | $ | 2,059 | | | $ | 2,226 | | | $ | 1,772 | | | $ | 627 | | | $ | 2,147 | | | $ | 111 | |
For instruments for which the fair value option has been elected, the related contractual interest income and contractual interest expense are recorded as part of net interest income on the Statements of Income. The remaining changes in fair value for instruments for which the fair value option has been elected are recorded as net gains/ (losses) on financial instruments held under the fair value option in the Statements of Income, except for changes in fair value related to instrument-specific credit risk, which are recorded in AOCI on the Statements of Condition.Income. For advances and consolidated obligations recorded under the fair value option, the Bank determined that none of the remaining changes in fair value were related to instrument-specific credit risk for the years ended December 31, 2020, 2019,2022, 2021, and 2018.2020. In determining that there has been no change in instrument-specific credit risk period to period, the Bank primarily considered the following factors:
•The Bank is a federally chartered GSE, and as a result of this status, the consolidated obligations have historically received the same credit ratings as the government bond credit rating of the United States, even though they are not obligations of the United States and are not guaranteed by the United States.
•The Bank is jointly and severally liable with the other FHLBanks for the payment of principal and interest on all consolidated obligations of each of the FHLBanks.
The following table presents the difference between the aggregate remaining contractual principal balance outstanding and aggregate fair value of advances and consolidated obligation bonds for which the Bank elected the fair value option at December 31, 20202022 and 2019:2021:
| | | 2020 | | 2019 | | 2022 | | 2021 |
| Principal Balance | | Fair Value | | Fair Value
Over/(Under)
Principal Balance | | Principal Balance | | Fair Value | | Fair Value
Over/(Under)
Principal Balance | |
| (In millions) | | (In millions) | Principal Balance | | Fair Value | | Fair Value
Over/(Under)
Principal Balance | | Principal Balance | | Fair Value | | Fair Value
Over/(Under)
Principal Balance |
Advances(1) | Advances(1) | $ | 2,017 | | | $ | 2,147 | | | $ | 130 | | | $ | 4,287 | | | $ | 4,370 | | | $ | 83 | | Advances(1) | $ | 2,106 | | | $ | 2,059 | | | $ | (47) | | | $ | 1,706 | | | $ | 1,772 | | | $ | 66 | |
| Consolidated obligation bonds | Consolidated obligation bonds | 110 | | | 111 | | | 1 | | | 335 | | | 337 | | | 2 | | Consolidated obligation bonds | 2,278 | | | 2,226 | | | (52) | | | 633 | | | 627 | | | (6) | |
(1) At December 31, 20202022 and 2019,2021, none of these advances were 90 days or more past due or had been placed on nonaccrual status.
Note 16 — Commitments and Contingencies
As provided by the FHLBank Act or regulations governing the operations of the FHLBanks, all FHLBanks have joint and several liability for all FHLBank consolidated obligations, which are backed only by the financial resources of the FHLBanks. The joint and several liability regulation authorizes the Finance Agency to require any
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The regulations provide a general framework for addressing the possibility that an FHLBank may be unable to repay the consolidated obligations for which it is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank, and as of December 31, 2020,2022, 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
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
was $746,722$1.2 trillion at December 31, 2020,2022, and $1,025,895$652.9 billion at December 31, 2019.2021. The par value of the Bank’s participation in consolidated obligations was $60,606$113.1 billion at December 31, 2020,2022, and $98,817$46.9 billion at December 31, 2019.2021.
The joint and several liability regulation provides a general framework for addressing the possibility that an FHLBank may be unable to repay its participation in the consolidated obligations for which it is the primary obligor. In accordance with this regulation, the president of each FHLBank is required to provide a quarterly certification that, among other things, the FHLBank will remain capable of making full and timely payment of all its current obligations, including direct obligations.
In addition, the regulation requires that an FHLBank must provide written notice to the Finance Agency if at any time the FHLBank is unable to provide the quarterly certification; projects that it will be unable to fully meet all of its current obligations, including direct obligations, on a timely basis during the quarter; or negotiates or enters into an agreement with another FHLBank for financial assistance to meet its obligations. If an FHLBank gives any one of these notices (other than in a case of a temporary interruption in the FHLBank’s debt servicing operations resulting from an external event such as a natural disaster or a power failure), it must promptly file a consolidated obligations payment plan for Finance Agency approval specifying the measures the FHLBank will undertake to make full and timely payments of all its current obligations.
Notwithstanding any other provisions in the regulation, the regulation provides that the Finance Agency in its discretion may at any time order any FHLBank to make any principal or interest payment due on any consolidated obligation. To the extent an FHLBank makes any payment on any consolidated obligation on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the FHLBank that is the primary obligor, which will have a corresponding obligation to reimburse the FHLBank for the payment and associated costs, including interest.
The regulation also provides that the Finance Agency may allocate the outstanding liability of an FHLBank for consolidated obligations among the other FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding or in any other manner it may determine to ensure that the FHLBanks operate in a safe and sound manner.
Off-balance sheet commitments as of December 31, 20202022 and 2019,2021, were as follows:
| | | 2020 | | 2019 | | 2022 | | 2021 |
| Expire Within
One Year | | Expire After
One Year | | Total | | Expire Within
One Year | | Expire After
One Year | | Total | |
| (In millions) | | (In millions) | Expire Within
One Year | | Expire After
One Year | | Total | | Expire Within
One Year | | Expire After
One Year | | Total |
| Standby letters of credit outstanding | Standby letters of credit outstanding | $ | 14,838 | | | $ | 4,551 | | | $ | 19,389 | | | $ | 16,898 | | | $ | 4,658 | | | $ | 21,556 | | Standby letters of credit outstanding | $ | 16,591 | | | $ | 6,049 | | | $ | 22,640 | | | $ | 11,842 | | | $ | 4,848 | | | $ | 16,690 | |
| | Commitments to issue consolidated obligation discount notes, par | Commitments to issue consolidated obligation discount notes, par | 0 | | | 0 | | | 0 | | | 805 | | | 0 | | | 805 | | Commitments to issue consolidated obligation discount notes, par | 300 | | | — | | | 300 | | | — | | | — | | | — | |
| Commitments to issue consolidated obligation bonds, par | | Commitments to issue consolidated obligation bonds, par | 2,385 | | | — | | | 2,385 | | | — | | | — | | | — | |
| | Commitments to purchase mortgage loans | 1 | | | 0 | | | 1 | | | 46 | | | 0 | | | 46 | | |
Standby letters of credit are generally issued for a fee on behalf of members to support their obligations to third parties. If the Bank is required to make a payment for a beneficiary’s drawing under a letter of credit, the amount is immediately due and payable by the member to the Bank and is charged to the member’s demand deposit account with the Bank. At December 31, 2020,2022, the original terms of these standby letters of credit range from 43 days to 15
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
years, including a final expiration in 2035.2037. The Bank monitors the creditworthiness of members that have standby letters of credit. The value of the Bank’s obligations related to standby letters of credit is recorded in other liabilities and amounted to $36 and $32$34 million at both December 31, 20202022 and 2019, respectively.2021. Standby letters of credit are fully collateralized at the time of issuance. Based on the Bank’s credit analyses of members’ financial condition and collateral requirements, the Bank deemed it unnecessary to record any additional liability for credit losses on the letters of credit outstanding or other off-balance sheet commitments as of December 31, 20202022 and 2019.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
2021.There were no commitments to fund advances at December 31, 20202022 and 2019.2021. Advances funded under advance commitments are fully collateralized at the time of funding.
The Bank had previously entered into commitments that unconditionally obligate it to purchase mortgage loans from its members. Commitments are generally for periods not exceeding 60 days. Delivery commitments are recorded at fair value as derivative assets or derivative liabilities in the Statements of Condition.
The Bank has pledged securities as collateral related to its cleared and uncleared derivatives. See Note 14 – Derivatives and Hedging Activities for additional information about the Bank’s pledged collateral and other credit risk-related contingent features. As of December 31, 2020,2022, the Bank had pledged total collateral of $451,$1.1 billion, including securities with a carrying value of $379,$435 million, all of which may be repledged, and cash collateral, and relatedincluding accrued interest, of $72$694 million to counterparties and the clearinghouseclearing house that had market risk exposure to the Bank related to derivatives. As of December 31, 2019,2021, the Bank had pledged total collateral of $759,$329 million, including securities with a carrying value of $381,$252 million, all of which may be repledged, and cash collateral, and relatedincluding accrued interest, of $378$77 million to counterparties and the clearinghouseclearing house that had market risk exposure to the Bank related to derivatives.
The Bank may be subject to various pending legal proceedings that may arise in the ordinary course of business. After consultation with legal counsel, the Bank does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on its financial condition or results of operations.
Other commitments and contingencies are discussed in Note 1 – Summary of Significant Accounting Policies, Note 5 – Advances, Note 6 – Mortgage Loans Held for Portfolio, Note 8 – Consolidated Obligations, Note 9 – Affordable Housing Program, Note 11 – Capital, Note 12 – Employee Retirement Plans and Incentive Compensation Plans, and Note 14 – Derivatives and Hedging Activities.
Note 17 — Transactions with Certain Members, Certain Nonmembers, and Other FHLBanks
Transactions with Members and Nonmembers. The Bank has a cooperative ownership structure under which current member institutions, certain former members, and certain other nonmembers own the capital stock of the Bank. Former members and nonmembers that have outstanding transactions with the Bank are required to maintain their investment in the Bank’s capital stock until their outstanding transactions mature or are paid off or until their capital stock is redeemed following the five-year redemption period for capital stock or is repurchased by the Bank, in accordance with the Bank’s capital requirements. (For further information on concentration risk, see Note 11 – Capital and Note 5 – Advances.)
Under the FHLBank Act and Finance Agency regulations, each member eligible to vote is entitled to cast by ballot one vote for each share of stock that it was required to hold as of the record date, which is December 31, of the year prior to each election, subject to the limitation that no member may cast more votes than the average number of shares of the Bank’s stock that are required to be held by all members located in such member's state. All transactions with members, nonmembers, and their affiliates are entered into in the ordinary course of business. As of and for the three-year period ended December 31, 2020,2022, no shareholder owned 10% or more of the total voting interests in the Bank because of this statutory limit on members' voting rights.
All advances are made to members, and all mortgage loans held for portfolio were purchased from members. The Bank also maintains deposit accounts for members, certain former members, and certain other nonmembers primarily to facilitate settlement activities that are directly related to advances and mortgage loan purchases. All transactions with members and their affiliates are entered into in the ordinary course of business.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Bank may invest in Federal funds sold, interest-bearing deposits, commercial paper, and MBS and executes derivative transactions with members or their affiliates. The Bank purchases MBS through securities brokers or dealers and executes all MBS investments without preference to the status of the counterparty or the issuer of the investment as a nonmember, member, or affiliate of a member. When the Bank executes non-MBS investments with a member, the Bank may give consideration to the member’s secured credit and the Bank’s advances pricing.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
pricingAs an additional service to its members, the Bank has in the past entered into offsetting interest rate exchange agreements, acting as an intermediary between exactly offsetting derivative transactions with members and other counterparties. These transactions were executed at market rates.
The FHLBank Act requires the Bank to establish an AHP. TheThrough the AHP, the Bank provides subsidies to members, whichwho 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. Only Bank members, along with their nonmember AHP project sponsors, may submit AHP applications. All AHP subsidies are made in the ordinary course of business.
The FHLBank Act also requires the Bank to establish a Community Investment Program and authorizes the Bank to offer additional Community Investment Cash Advance (CICA) programs. Under these programs, the Bank provides subsidies in the form of grants and below-market interest rate advances to members or standby letters of credit forto members for community lending and economic development projects. Only Bank members may submit applications for CICA subsidies. All CICA subsidies are made in the ordinary course of business.
In instances where the member has an officer or director serving on the Bank’s Boardboard of Directors,directors, all of the aforementioned transactions with the member are subject to the same eligibility and credit criteria, as well as the same conditions, as comparable transactions with all other members, in accordance with regulations governing the operations of the FHLBanks.
The following tables set forth information at the dates and for the periods indicated with respect to transactions with members that have an officer or director serving on the Bank’s Boardboard of Directors.directors.
|
| December 31, 2020 | | December 31, 2019 | |
| (In millions) | | (In millions) | December 31, 2022 | | December 31, 2021 |
| Assets: | Assets: | | Assets: | |
| Advances | Advances | $ | 2,650 | | | $ | 3,697 | | Advances | $ | 7,269 | | | $ | 3,107 | |
| Mortgage loans held for portfolio | Mortgage loans held for portfolio | 0 | | | 8 | | Mortgage loans held for portfolio | 80 | | | — | |
| Accrued interest receivable | Accrued interest receivable | 3 | | | 6 | | Accrued interest receivable | 9 | | | 2 | |
| Liabilities: | Liabilities: | | Liabilities: | |
| Deposits | Deposits | $ | 27 | | | $ | 22 | | Deposits | $ | 11 | | | $ | 34 | |
| Capital: | Capital: | | Capital: | |
| Capital Stock | Capital Stock | $ | 103 | | | $ | 132 | | Capital Stock | $ | 215 | | | $ | 117 | |
| | | | | For the Years Ended December 31, | | | For the Years Ended December 31, |
| | | 2020 | | 2019 | | 2018 | |
| (In millions) | | (In millions) | | 2022 | | 2021 | | 2020 |
| Interest Income: | Interest Income: | | | Interest Income: | | |
| | Advances | Advances | | $ | 75 | | | $ | 87 | | | $ | 81 | | Advances | | $ | 114 | | | $ | 51 | | | $ | 75 | |
| Mortgage loans held for portfolio | Mortgage loans held for portfolio | | 0 | | | 0 | | | 1 | | Mortgage loans held for portfolio | | 1 | | | — | | | — | |
Transactions with Other FHLBanks. The Bank may occasionally enter into transactions with other FHLBanks. These transactions are summarized below.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Deposits with other FHLBanks. The Bank may, from time to time, maintain deposits with other FHLBanks. Deposits with other FHLBanks totaled $1de minimis amounts at December 31, 20202022 and 2019,2021, and were recorded as “Interest-bearing deposits” in the Statements of Condition.
Overnight Funds. The Bank may borrow or lend unsecured overnight funds from or to other FHLBanks. All such transactions are at current market rates. Interest income and interest expense related to these transactions with other FHLBanks are included in interest income and interest expense in the Statements of Income. Balances outstanding at period end with other FHLBanks, if any, are identified in the Bank’s financial statements. During 2022, the years ended December 31,Bank extended overnight loans to other FHLBanks for $2.4 billion. During 2021, the Bank extended no overnight loans to other FHLBanks. During 2020, 2019, and 2018, the Bank extended overnight loans to other FHLBanks for $925 $1,450,million. During 2022, 2021, and
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
$780, respectively. During the years ended December 31, 2020, 2019, and 2018 the Bank borrowed $10.4 billion, $140 million and $895 $2,245, and $2,020,million, respectively, from other FHLBanks. The impact to net interest income related to these transactions was $(1) million for the year ended December 31, 2022 and was de minimis for all periods in this report.the years ended December 31, 2021 and 2020.
MPF Mortgage Loans. The Bank pays a membershiptransaction services fee to the FHLBank of Chicago for its participation in the MPF Program and a transaction services fee that is assessed monthly based on the amount of mortgage loans in which the Bank invested and which remain outstanding on its Statements of Condition. Prior to 2022, the Bank paid a membership fee to the FHLBank of Chicago for its participation in the MPF Program. For the year ended December 31, 2022, the Bank recorded $1 million in transaction services fee expense to the FHLBank Chicago, which was recorded in the Statements of Income as other expense. For the years ended December 31, 2020, 2019,2021 and 2018,2020, the Bank recorded $2, $3,$1 million and $2 million, respectively, in MPF membership fee expense and transaction services fee expense to the FHLBank of Chicago, which were recorded in the Statements of Income as other expense.
In addition, the Bank receives a counterparty fee from the FHLBank of Chicago for facilitating the sale of loans under the MPF Program. For the years ended December 31, 2020, 2019, and 2018, the Bank recorded de minimis amounts in MPF counterparty fee income from the FHLBank of Chicago, which were recorded in the Statements of Income as other income.
Consolidated Obligations. The Bank may, from time to time, transfer to or assume from another FHLBank the outstanding primary liability for FHLBank consolidated obligations. During the years ended December 31, 2020, 2019, and 2018, the Bank did not transfer any debt to other FHLBanks or assume any debt from other FHLBanks.
Transactions with the Office of Finance. The Bank’s proportionate share of the cost of operating the Office of Finance is identified in the Statements of Income.
Note 18 — Other
The table below discloses the categories included in other operating expense for the years ended December 31, 2020, 2019,2022, 2021, and 2018.2020.
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| Professional and contract services | $ | 36 | | | $ | 38 | | | $ | 37 | |
| Travel | 0 | | | 2 | | | 2 | |
| Occupancy | 11 | | | 15 | | | 10 | |
| Equipment | 6 | | | 8 | | | 12 | |
| Other | 7 | | | 10 | | | 6 | |
| Total | $ | 60 | | | $ | 73 | | | $ | 67 | |
| | | | | | | | | | | | | | | | | |
| (In millions) | 2022 | | 2021 | | 2020 |
| Professional and contract services | $ | 28 | | | $ | 28 | | | $ | 36 | |
| Travel | 2 | | | — | | | — | |
| Occupancy | 11 | | | 11 | | | 11 | |
| Equipment | 6 | | | 7 | | | 6 | |
| Other | 11 | | | 8 | | | 7 | |
| Total | $ | 58 | | | $ | 54 | | | $ | 60 | |
Note 19 — Subsequent Events
There were no material events identified, subsequent to December 31, 2020, until the time of the Form 10-K filing with the Securities and Exchange Commission.
Supplementary Financial Data (Unaudited)
Supplementary financial data for each full quarter in the years ended December 31, 2020 and 2019, are included in the following tables (dollars in millions except per share amounts).
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| December 31, 2020 | | September 30, 2020 | | June 30,
2020 | | March 31,
2020 |
| Interest income | $ | 206 | | | $ | 207 | | | $ | 273 | | | $ | 433 | |
| Interest expense | 39 | | | 60 | | | 131 | | | 384 | |
| Net interest income | 167 | | | 147 | | | 142 | | | 49 | |
| Provision for/(reversal of) credit losses on mortgage loans | (4) | | | (2) | | | (7) | | | 39 | |
| Other income/(loss) | (20) | | | 70 | | | (9) | | | 18 | |
| Other expense | 46 | | | 40 | | | 43 | | | 36 | |
| Assessments | 11 | | | 18 | | | 9 | | | — | |
| Net income/(loss) | $ | 94 | | | $ | 161 | | | $ | 88 | | | $ | (8) | |
| Dividends paid per share | $ | 1.26 | | | $ | 1.24 | | | $ | 1.24 | | | $ | 1.76 | |
| Annualized dividend rate | 5.00 | % | | 5.00 | % | | 5.00 | % | | 7.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| December 31, 2019 | | September 30, 2019 | | June 30,
2019 | | March 31,
2019 |
| Interest income | $ | 613 | | | $ | 654 | | | $ | 729 | | | $ | 786 | |
| Interest expense | 448 | | | 542 | | | 619 | | | 642 | |
| Net interest income | 165 | | | 112 | | | 110 | | | 144 | |
| Provision for/(reversal of) credit losses on mortgage loans | — | | | — | | | — | | | — | |
| Other income/(loss) | 10 | | | 3 | | | (7) | | | 15 | |
| Other expense | 49 | | | 47 | | | 48 | | | 43 | |
| Assessments | 13 | | | 7 | | | 6 | | | 12 | |
| Net income/(loss) | $ | 113 | | | $ | 61 | | | $ | 49 | | | $ | 104 | |
| Dividends paid per share | $ | 1.76 | | | $ | 1.75 | | | $ | 1.73 | | | $ | 1.76 | |
| Annualized dividend rate | 7.00 | % | | 7.00 | % | | 7.00 | % | | 7.00 | % |
Investments
Supplementary financial data on the carrying values of the Bank’s investments as of December 31, 2020, 2019, and 2018, are included in the tables below.
| | | | | | | | | | | | | | | | | |
| (In millions) | 2020 | | 2019 | | 2018 |
| Trading securities: | | | | | |
| U.S. government corporations and GSEs – FFCB bonds | $ | — | | | $ | — | | | $ | 656 | |
| U.S. obligations – Treasury notes | 4,257 | | | 1,762 | | | — | |
| | | | | |
| MBS – Other U.S. obligations – Ginnie Mae | 3 | | | 4 | | | 5 | |
| | | | | |
| Total trading securities | 4,260 | | | 1,766 | | | 661 | |
| AFS securities: | | | | | |
| U.S. obligations – Treasury securities | | | | | |
| U.S. Treasury notes | 2,983 | | | 5,288 | | | — | |
| U.S. Treasury bills | 2,000 | | | — | | | — | |
| MBS: | | | | | |
| GSEs: | | | | | |
| Freddie Mac | 851 | | | 777 | | | 407 | |
| Fannie Mae | 7,810 | | | 6,833 | | | 3,367 | |
| PLRMBS | 2,035 | | | 2,597 | | | 3,157 | |
| Total AFS securities | 15,679 | | | 15,495 | | | 6,931 | |
| HTM securities: | | | | | |
| | | | | |
| States and political subdivisions: | | | | | |
| Housing finance agency bonds – CalHFA bonds | — | | | — | | | 100 | |
| | | | | |
| | | | | |
| | | | | |
| MBS: | | | | | |
| Other U.S. obligations – Ginnie Mae | 261 | | | 470 | | | 609 | |
| GSEs: | | | | | |
| Freddie Mac | 2,355 | | | 3,688 | | | 5,450 | |
| Fannie Mae | 2,174 | | | 3,003 | | | 4,341 | |
| PLRMBS | 291 | | | 384 | | | 589 | |
| Total HTM securities | 5,081 | | | 7,545 | | | 11,089 | |
| Total securities | 25,020 | | | 24,806 | | | 18,681 | |
| Securities purchased under agreements to resell | 7,250 | | | 7,000 | | | 7,300 | |
| Federal funds sold | 1,880 | | | 3,562 | | | 3,845 | |
| Interest-bearing deposits | 1,078 | | | 2,269 | | | 2,555 | |
| Total investments | $ | 35,228 | | | $ | 37,637 | | | $ | 32,381 | |
As of December 31, 2020, the Bank’s investments had the following maturity (based on contractual final principal payment) and yield characteristics.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Within One Year | | After One Year But
Within Five Years | | After Five Years But
Within Ten Years | | After Ten Years | | Carrying Value |
| Trading securities: | | | | | | | | | |
| | | | | | | | | |
| U.S. obligations – Treasury notes | $ | 4,001 | | | $ | 256 | | | $ | — | | | $ | — | | | $ | 4,257 | |
| | | | | | | | | |
| MBS – Other U.S. obligations – Ginnie Mae | — | | | 2 | | | 1 | | | — | | | 3 | |
| Total trading securities | 4,001 | | | 258 | | | 1 | | | — | | | 4,260 | |
| Yield on trading securities | 2.08 | % | | 2.44 | % | | 2.57 | % | | — | % | | 2.10 | % |
| AFS securities: | | | | | | | | | |
| U.S. obligations – Treasury securities: | | | | | | | | | |
| U.S. Treasury notes | 2,470 | | | 513 | | | — | | | — | | | 2,983 | |
| U.S. Treasury bills | 2,000 | | | — | | | — | | | — | | | 2,000 | |
| Subtotal U.S. obligations – Treasury securities | 4,470 | | | 513 | | | — | | | — | | | 4,983 | |
| MBS: | | | | | | | | | |
| GSEs multifamily: | | | | | | | | | |
| Freddie Mac | — | | | — | | | 684 | | | 167 | | | 851 | |
| Fannie Mae | — | | | — | | | 6,041 | | | 1,769 | | | 7,810 | |
| Subtotal GSEs multifamily | — | | | — | | | 6,725 | | | 1,936 | | | 8,661 | |
| PLRMBS | — | | | — | | | — | | | 2,035 | | | 2,035 | |
| Total AFS securities | 4,470 | | | 513 | | | 6,725 | | | 3,971 | | | 15,679 | |
| Yield on AFS securities | 1.26 | % | | 1.88 | % | | 3.26 | % | | 5.39 | % | | 3.16 | % |
| HTM securities: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| MBS: | | | | | | | | | |
| Other U.S. obligations – single-family – Ginnie Mae | — | | | — | | | — | | | 261 | | | 261 | |
| GSEs single-family: | | | | | | | | | |
| Freddie Mac | — | | | — | | | 7 | | | 504 | | | 511 | |
| Fannie Mae | — | | | — | | | 1 | | | 1,228 | | | 1,229 | |
| Subtotal GSEs single-family | — | | | — | | | 8 | | | 1,732 | | | 1,740 | |
| GSEs multifamily: | | | | | | | | | |
| Freddie Mac | — | | | 770 | | | 1,074 | | | — | | | 1,844 | |
| Fannie Mae | — | | | 87 | | | 858 | | | — | | | 945 | |
| Subtotal GSEs multifamily | — | | | 857 | | | 1,932 | | | — | | | 2,789 | |
| PLRMBS | — | | | — | | | 20 | | | 271 | | | 291 | |
| Total HTM securities | — | | | 857 | | | 1,960 | | | 2,264 | | | 5,081 | |
| Yield on HTM securities | — | % | | 0.54 | % | | 0.58 | % | | 2.01 | % | | 1.21 | % |
| Total securities | 8,471 | | | 1,628 | | | 8,686 | | | 6,235 | | | 25,020 | |
| Yield on total securities | 1.65 | % | | 1.26 | % | | 2.65 | % | | 4.13 | % | | 2.58 | % |
| Securities purchased under agreements to resell | 7,250 | | | — | | | — | | | — | | | 7,250 | |
| Federal funds sold | 1,880 | | | — | | | — | | | — | | | 1,880 | |
| Interest-bearing deposits | 1,078 | | | — | | | — | | | — | | | 1,078 | |
| Total investments | $ | 18,679 | | | $ | 1,628 | | | $ | 8,686 | | | $ | 6,235 | | | $ | 35,228 | |
Mortgage Loan Data
The unpaid principal balances of delinquent mortgage loans for the past five years were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| 30 - 59 days delinquent | $ | 21 | | | $ | 14 | | | $ | 15 | | | $ | 8 | | | $ | 7 | |
| 60 - 89 days delinquent | 7 | | | 2 | | | 2 | | | 2 | | | 3 | |
| 90 days or more delinquent | 102 | | | 7 | | | 9 | | | 12 | | | 15 | |
| Total past due | 130 | | | 23 | | | 26 | | | 22 | | | 25 | |
| Total current loans | 1,776 | | | 3,203 | | | 2,941 | | | 1,983 | | | 789 | |
| Total mortgage loans | $ | 1,906 | | | $ | 3,226 | | | $ | 2,967 | | | $ | 2,005 | | | $ | 814 | |
In process of foreclosure, included above(1) | $ | 1 | | | $ | — | | | $ | 3 | | | $ | 3 | | | $ | 5 | |
| Nonaccrual loans | $ | 102 | | | $ | 7 | | | $ | 9 | | | $ | 12 | | | $ | 15 | |
| | | | | | | | | |
| Delinquencies as a percentage of total mortgage loans outstanding | 6.82 | % | | 0.73 | % | | 0.86 | % | | 1.11 | % | | 3.12 | % |
Serious delinquencies as a percentage of total mortgage loans outstanding(2) | 5.33 | % | | 0.22 | % | | 0.32 | % | | 0.61 | % | | 1.83 | % |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
(1)Includes loans for which the servicer has reported a decision to foreclose or to pursue a similar alternative, such as deed-in-lieu. Loans in process of foreclosure are included in past due or current loans depending on their delinquency status.
(2) Represents loans that are 90 days or more past due or in the process of foreclosure as a percentage of the unpaid principal balance of total mortgage loans outstanding.
For the year ended December, 31, 2020, the provision for credit losses on mortgage loans was $1. The net charge-offs and interest on nonaccrual loans that was contractually due and recognized in income for the year ended December, 31, 2020, were immaterial. For the years ended December 31, 2019, 2018, 2017, and 2016, the provision for credit losses, net charge-offs, and interest on nonaccrual loans that was contractually due and recognized in income were immaterial.
Geographic Concentration of Mortgage Loans(1)
| | | | | | | | | | | |
| 2020 | | 2019 |
| California | 90.94 | % | | 92.61 | % |
| Arizona | 1.14 | | | 0.98 | |
| New York | 1.01 | | | 0.69 | |
| Texas | 0.81 | | | 0.71 | |
| Illinois | 0.66 | | | 0.46 | |
All others(2) | 5.44 | | | 4.55 | |
| Total | 100.00 | % | | 100.00 | % |
(1) Percentages calculated based on the unpaid principal balance at the end of each period.
(2) None of the remaining states represented more than 0.62% and 0.50% of the portfolio at December 31, 2020 and 2019, respectively.
Short-Term Borrowings
Borrowings with original maturities of one year or less are classified as short-term. The following is a summary of short-term borrowings for the years ended December 31, 2020, 2019, and 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated Obligation Discount Notes | | Consolidated Obligation Bonds With Original
Maturities of One Year or Less |
| (Dollars in millions) | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
| Outstanding at end of the period | $ | 16,213 | | | $ | 27,376 | | | $ | 29,182 | | | $ | 16,045 | | | $ | 24,598 | | | $ | 41,704 | |
| Weighted average rate at end of the period | 0.12 | % | | 1.61 | % | | 2.32 | % | | 0.13 | % | | 1.64 | % | | 2.28 | % |
| Daily average outstanding for the period | $ | 22,137 | | | $ | 26,714 | | | $ | 29,644 | | | $ | 33,952 | | | $ | 34,127 | | | $ | 40,349 | |
| Weighted average rate for the period | 0.76 | % | | 2.24 | % | | 1.81 | % | | 0.51 | % | | 2.17 | % | | 1.85 | % |
| Highest outstanding at any monthend | $ | 39,102 | | | $ | 32,983 | | | $ | 42,509 | | | $ | 45,305 | | | $ | 45,649 | | | $ | 42,845 | |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The senior management of the Federal Home Loan Bank of San Francisco (Bank) is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports filed or submitted under the Securities Exchange Act of 1934 (1934 Act) is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The Bank’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports that it files or submits under the 1934 Act is accumulated and communicated to the Bank’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the Bank’s disclosure controls and procedures, the Bank’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Bank’s management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.
Management of the Bank has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with the participation of the president and chief executive officer and executive vice president and chief financial officer as of the end of the period covered by this report. Based on that evaluation, the Bank’s president and chief executive officer and executive vice president and chief financial officer have concluded that the Bank’s disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.
Internal Control Over Financial Reporting
Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the 1934 Act as a process designed by, or under the supervision of, the Bank’s principal executive and principal financial officers and effected by the Bank’s Boardboard of Directors,directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and includes those policies and procedures that:
•pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Bank;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Bank are being made only in accordance with authorizations of management and directors of the Bank; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
During the three months ended December 31, 2020,2022, there were no changes in the Bank’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting. For management’s assessment of the Bank’s internal control over financial reporting, refer to “Item 8. Financial Statements and Supplementary Data – Management’s Report on Internal Control Over Financial Reporting.”
Consolidated Obligations
The Bank’s disclosure controls and procedures include controls and procedures for accumulating and communicating information in compliance with the Bank’s disclosure and financial reporting requirements relating to the joint and several liability for the consolidated obligations of the Federal Home Loan Banks (FHLBanks). Because the FHLBanks are independently managed and operated, the Bank’s management relies on information that is provided or disseminated by the Federal Housing Finance Agency (Finance Agency), the Office of Finance, and the other FHLBanks, as well as on published FHLBank credit ratings, in determining whether the joint and several liability regulation is reasonably likely to result in a direct obligation for the Bank or whether it is reasonably possible that the Bank will accrue a direct liability.
The Bank’s management also relies on the operation of the joint and several liability regulation. The joint and several liability regulation requires that each FHLBank file with the Finance Agency a quarterly certification that it will remain capable of making full and timely payment of all of its current obligations, including direct obligations, coming due during the next quarter. In addition, if an FHLBank cannot make such a certification or if it projects that it may be unable to meet its current obligations during the next quarter on a timely basis, it must file a notice with the Finance Agency. Under the joint and several liability regulation, the Finance Agency may order any FHLBank to make principal and interest payments on any consolidated obligations of any other FHLBank, or allocate the outstanding liability of an FHLBank among all remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding or on any other basis.
ITEM 9B. OTHER INFORMATION
On February 23, 2021, the Federal Home Loan Bank of San Francisco (Bank) announced the appointment of Teresa Bryce Bazemore as president and chief executive officer of the Bank, effective March 15, 2021, and upon this date, Stephen P. Traynor will no longer serve as acting president and chief executive officer.
On March 5, 2021, Stefanie Reynolds, Senior Vice President and Controller (principal accounting officer), notified the Bank that she will resign from the Bank effective March 26, 2021. The Bank appointed Ludmila (Lucy) Sheftel as Acting Controller effective upon the resignation of Ms. Reynolds.None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III.III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Boardboard of Directorsdirectors (Board) of the Federal Home Loan Bank of San Francisco (Bank) is composed of member directors and nonmember independent directors. Each year the Federal Housing Finance Agency (Finance Agency) designates the total number of director positions for the Bank for the following year. Member director positions are allocated to each of the three states in the Bank’s district. The allocation is based on the number of shares of capital stock required to be held by the members in each of the three states as of December 31 of the preceding calendar year (the record date), with at least one member director position allocated to each state and at least three member director positions allocated to California. Of the eight member director positions designated by the Finance Agency for 20202022 and 2021,2023, one was allocated to Arizona, six were allocated to California, and one was allocated to Nevada. The nonmember independent director positions on the Board must be at least two-fifths of the number of member director positions and at least two of them must be public interest director positions. The Finance Agency designated seven nonmember independent director positions for 20202022 and 2021,2023, two of which were public interest director positions.
The Bank holds elections each year for the director positions with terms ending at yearend, with new terms beginning the following January 1. For member director positions, members located in the relevant states as of the record date are eligible to participate in the election for the state in which they are located. For nonmember independent director positions, all members located in the district as of the record date are eligible to participate in the election. For each director position to be filled, an eligible institution may cast one vote for each share of capital stock it was required to hold as of the record date (according to the requirements of the Bank’s capital plan), except that an eligible institution's votes for each director position to be filled may not exceed the average number of shares of capital stock required to be held by all of the members in that state as of the record date. In the case of an election to fill more than one member director position for a state, an eligible institution may not cumulate or divide its block of eligible votes. Interim vacancies in director positions are filled by the Board. The Board does not solicit proxies, nor are eligible institutions permitted to solicit or use proxies to cast their votes in an election.
Candidates for member director positions are not nominated by the Bank’s Board. As provided for in the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), member director candidates are nominated by the institutions eligible to participate in the election in the relevant state. Candidates for nonmember independent director positions are nominated by the Board, following consultation with the Bank’s Affordable Housing Advisory Council, and are reviewed by the Finance Agency. The Bank’s Governance Committee performs certain functions that are similar to the functions of a nominating committee with respect to the nomination of nonmember independent directors. If only one individual is nominated by the Board for each open nonmember independent director position, that individual must receive at least 20% of the eligible votes to be declared elected; and if two or more individuals are nominated by the Board for any single open nonmember independent director position, the individual receiving the highest number of votes cast in the election must be declared elected by the Bank.
Each member director must be a citizen of the United States and must be an officer or director of a member of the Bank (located in the state to which the director position has been allocated) that meets all minimum capital requirements established by the member's appropriate Federal banking agency or appropriate state regulator. There are no other eligibility or qualification requirements in the FHLBank Act or the regulations governing the Federal Home Loan Banks (FHLBanks) for member directors. Each nonmember independent director must be a United States citizen and must maintain a principal residence in a state in the Bank’s district (or own or lease a residence in the district and be employed in the district). In addition, the individual may not be an officer of any FHLBank or a director, officer, or employee of any member of the Bank or of any recipient of advances from the Bank. Each nonmember independent director who serves as a public interest director must have more than four years of personal experience in representing consumer or community interests in banking services, credit needs, housing, or financial consumer protection. Each nonmember independent director other than a public interest director must have knowledge of, or experience in, financial management, auditing or accounting, risk management practices, derivatives, project development, organizational management, or law.
The term for each director position is four years (unless a shorter term is assigned by the Finance Agency for staggering purposes), and directors are subject to a limit on the number of consecutive terms they may serve. A director elected to three consecutive full terms on the Board is not eligible for election to a term that begins earlier than two years after the expiration of the third consecutive term. On an annual basis, the Bank’s Board performs a Board assessment that includes consideration of the directors' backgrounds, experience, expertise, Board service, and other factors. Also on an annual basis, each director certifies to the Bank that he or she continues to meet all applicable statutory and regulatory eligibility and qualification requirements. In connection with the election or appointment of a nonmember independent director, the nonmember independent director completes an application form providing information to demonstrate his or her eligibility and qualifications to serve on the Board. As of the filing date of this Form 10-K, nothing has come to the attention of the Board or management to indicate that any of the current Board members do not continue to possess the necessary experience, qualifications, attributes, or skills expected of the directors to serve on the Bank’s Board, as described in each director's biography below.
Information regarding the current directors and executive officers of the Bank is provided below. There are no family relationships among the directors or executive officers of the Bank. The Bank’s Code of Conduct for Senior Officers, which applies to the president, executive vice presidents, certain senior vice presidents, and such other employees serving in a financial reporting oversight role as determined from time to time by the chief financial officer, and any amendments or waivers to the code are disclosed on the Bank’s website located at www.fhlbsf.com.
The charter of the Audit Committee of the Bank’s Board is available on the Bank’s website at www.fhlbsf.com.
Board of Directors
The following table sets forth information (ages as of February 28, 2021)2023) regarding each of the Bank’s directors.
| | | | | | | | | | | | | | | | | |
| Name | Age | | Director
Since | | Expiration of
Current Term |
F. Daniel Siciliano, Chair(1) | 50 | | | 2017 | | 2024 |
Simone Lagomarsino, Vice Chair(2)(6)(8) | 59 | | | 2013 | | 2024 |
Jeffrey K. Ball(3)(6) | 56 | | | 2018 | | 2024 |
Marangal (Marito) Domingo(2)(7)(9) | 60 | | | 2018 | | 2021 |
Lori R. Gay(1) | 58 | | | 2021 | | 2024 |
Melinda Guzman(1)(7)(9) | 57 | | | 2009 | | 2023 |
Matthew Hendricksen(4)(7)(8) | 41 | | | 2020 | | 2023 |
John F. (Jack) Luikart(1)(6)(8)(9) | 71 | | | 2007 | | 2021 |
Shruti Miyashiro(2)(6)(8) | 50 | | | 2020 | | 2023 |
Kevin Murray(1) | 60 | | | 2008 | | 2023 |
Joan Opp(2)(6)(8) | 54 | | | 2018 | | 2021 |
Brian M. Riley(5) | 56 | | | 2015 | | 2022 |
Scott C. Syphax(1)(7)(9) | 57 | | | 2002 | | 2022 |
Virginia A. Varela(2) | 61 | | | 2019 | | 2022 |
John T. Wasley(1)(7)(9) | 59 | | | 2007 | | 2021 |
| | | | | | | | | | | | | | | | | |
| Name | Age | | Director
Since | | Expiration of
Current Term |
Simone Lagomarsino, Chair(1) | 61 | | | 2013 | | 2024 |
F. Daniel Siciliano, Vice Chair(2)(7)(9) | 52 | | | 2017 | | 2024 |
David Adame(2)(9) | 59 | | | 2022 | | 2025 |
Banafsheh Akhlaghi(2)(8)(10) | 54 | | | 2022 | | 2025 |
Jeffrey K. Ball(3) | 58 | | | 2018 | | 2024 |
Marangal (Marito) Domingo(1)(10) | 62 | | | 2018 | | 2025 |
Ana E. Fonseca(4)(7)(9) | 57 | | | 2022 | | 2023 |
Lori R. Gay(2) | 60 | | | 2021 | | 2024 |
Melinda Guzman(2)(8)(10) | 59 | | | 2009 | | 2023 |
Matthew Hendricksen(5)(8)(10) | 43 | | | 2020 | | 2023 |
Chang M. Liu(1) | 56 | | | 2023 | | 2026 |
Kevin Murray(2)(8) | 62 | | | 2008 | | 2023 |
Joan C. Opp(1)(7)(8)(9) | 56 | | | 2018 | | 2025 |
Brian M. Riley(6)(7)(9) | 58 | | | 2015 | | 2026 |
Gary L. Trujillo(2)(7) | 62 | | | 2023 | | 2026 |
(1) Elected by the Bank’s California members eligible to vote.
(2) Elected as a nonmember independent director by the Bank members eligible to vote. Ms. Guzman also served as an appointive director from April 19, 2007, to December 31, 2008. Mr. Wasley also served as an appointive director from 2003 through 2005. With the enactment of the Housing and Economic Recovery Act of 2008 on July 30, 2008, the director positions previously appointed by the Federal Housing Finance Board (appointive director positions) became known as nonmember independent director positions, and the method for filling these positions was changed to election by the Bank members eligible to vote.
(2) Elected by the Bank’s California members eligible to vote.
(3) Mr. Ball was elected by the Bank’s California members eligible to vote, for a four-year term beginning January 1, 2021. Previously, Mr. Ball was selected by the Board to fill a vacant California member director position and served from January 1, 2018, to December 31, 2020.
(4) Ms. Fonseca was selected by the Board to fill a vacant California member director position effective July 28, 2022.
(5) Elected by the Bank’s Nevada members eligible to vote.
(5)(6) Elected by the Bank’s Arizona members eligible to vote.
(6)(7) Member of the Audit Committee in 2021.2023.
(7)(8) Member of the Compensation and Human Resources Committee in 2021.2023.
(8)(9) Member of the Audit Committee in 2020.2022. Former director Shruti Miyashiro, who resigned from the Board effective June 30, 2022, was also on the Audit Committee in 2022.
(10) Member of the Compensation and Human Resources Committee in 2020.
Table of Contents2022. Former director Scott C. Syphax was also on the Compensation and Human Resources Committee in 2022.
The Board has determined that Ms.all Audit Committee members (Audit Committee Chair Joan C. Opp, is anAudit Committee Vice-Chair F. Daniel Siciliano, and Audit Committee members Ana E. Fonseca, Brian M. Riley, and Gary L. Trujillo), and Board Chair Simone Lagomarsino are “audit committee financial expert”experts” within the meaning of the Securities and Exchange Commission (SEC) rules. For information concerning the experience through which these individuals acquired the attributes required to be deemed audit committee financial experts, refer to the biographical information below. The Bank is required by SEC rules to disclose whether Ms. Opp isthe audit committee financial experts are independent and is required to use a definition of independence from a national securities exchange or national securities association. The Bank has elected to use the National Association of Securities Dealers Automated Quotations (NASDAQ) definition of independence, and under that definition, Ms. Opp isall of the Bank’s audit committee financial experts are independent. In addition, Ms. Opp isall of the Bank’s audit committee financial experts are independent according to the rules governing the FHLBanks applicable to members of the audit committees of the boards of directors of the FHLBanks and the independence rules under Section 10A(m) of the Securities Exchange Act of 1934.
F. Daniel Siciliano, Chair
F. Daniel Siciliano is a Stanford Law School fellow (CodeX) and was the co-founder of Stanford’s Rock Center for Corporate Governance. He has previously served as professor of the practice of law, faculty director of the Rock Center for Corporate Governance, and associate dean for executive education and special programs at Stanford Law School, Stanford, California. Mr. Siciliano is the chair of the board of both the American Immigration Council and the Silicon Valley Directors’ Exchange, and serves on the board of the Latino Corporate Directors Education Foundation. As of 2011, he has been an advisory board member and visiting professor for the Corporate Governance Center and Law School of Pontificia Universidad Católica de Chile. Previously, he was co-founder, chief executive officer, and executive chairman of LawLogix Group, Inc., a privately held software technology company from 2000 to October 2015. Mr. Siciliano’s current and previous positions as a law professor and director at Stanford’s Rock Center for Corporate Governance, his previous experience as an executive officer of a software technology company; and his involvement in and knowledge of corporate governance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management as indicated by his background, support Mr. Siciliano’s qualifications to serve on the Bank’s Board.
Simone Lagomarsino, Vice Chair
Simone Lagomarsino has been president and chief executive officer of Luther Burbank Corporation, and its subsidiary Luther Burbank Savings, Santa Rosa, California, since January 2019, and a director since November 2018. She is also currentlyBeginning in January of 2022, she joined the board of directors of the Federal Reserve Bank of San Francisco head office. From July 2019 to June 2022, Ms. Lagomarsino was on the board of Hannon Armstrong, a REITreal estate investment trust that provides capital to leading companies in the energy efficiency, renewable energy, and other sustainable infrastructure markets. Previously, she was a director of Pacific Premier Bank, Irvine, California, and its holding company, Pacific Premier Bancorp, from April 2017 through November 2018. Ms. Lagomarsino has also been the president and chief executive officer of the Western Bankers Association (formerly California Bankers Association) sincebeginning in April 2017.2017 through December 2018. Prior to that she was chief executive officer and a director of Heritage Oaks Bank and president of Heritage Oaks Bancorp, Paso Robles, California, from September 2011, until its merger with Pacific Premier Bank and Pacific Premier Bancorp in April 2017. She also held the position of president of Heritage Oaks Bank from January 2012 through December 2014. Prior to that, Ms. Lagomarsino was president and chief executive officer of Kinecta Federal Credit Union from June 2006 through January 2010. She is a financial services professional with more than 30 years of experience in executive positions. Ms. Lagomarsino'sLagomarsino’s current position as the principal executive officer of a Bank member, her previous director and executive officer positions with other financial institutions, and her involvement in and knowledge of corporate governance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management, as indicated by her background, support Ms. Lagomarsino'sLagomarsino’s qualifications to serve on the Bank'sBank’s Board.
Jeffrey K. BallF. Daniel Siciliano, Vice Chair
Jeffrey K. BallF. Daniel Siciliano is a Stanford Law School fellow (CodeX) and co-founder of Stanford’s Rock Center for Corporate Governance. He has previously served as professor of the practice of law, faculty director of the Rock Center for Corporate Governance, and associate dean for executive education and special programs at Stanford Law School, Stanford, California. Mr. Siciliano is currently president and CEO of Nikkl, Inc, a fintech start-up that helps individuals and companies access and deploy capital to optimize returns in previously inefficient markets. Mr. Siciliano is the founderchair of Friendly Hills Bank, Whittier, California,the board of both the American Immigration Council and the Silicon Valley Directors’ Exchange, and serves on the board and as chair of audit for the Latino Corporate Directors Education Foundation. As of 2011, he has been its president, itsan advisory board member and visiting professor for the Corporate Governance Center and Law School of Pontificia Universidad Católica de Chile. Previously, he was co-founder, chief executive officer, and executive chair of LawLogix Group, Inc., a privately held software technology company from 2000 to October 2015. Mr. Siciliano’s current and previous positions as a law professor and director since 2006. He is also currentlyat Stanford’s Rock Center for Corporate Governance; his previous experience as an executive officer of a software technology company; and his involvement in and knowledge of corporate governance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management, as indicated by his background, support Mr. Siciliano’s qualifications to serve on the board of Data Center, Inc., a bank technology company based in Hutchinson, Kansas, where he serves as chairman of the Audit Committee. Mr. Ball previously was a member of the executive committee and board of directors of the American Bankers Association, where he served as chairman of the Government Relations Council Administrative Committee and as a member of the Grassroots Committee. He is a past chairman of the Western Bankers Association (formerly California Bankers Association), where he currently serves on the board of directors and is chairman of the Federal Government Relations Committee. He was the lead petitioner for the establishment of the Kinetic Academy Charter School inBank’s Board.
David Adame
David Adame has served as president and chief executive officer of Chicanos Por La Causa (CPLC), one of the nation’s largest community development corporations since 2015. Mr. Adame served as chief operating officer and chief financial officer from 2008 to 2015, before taking on the position of president and chief executive officer. Previously, Mr. Adame was vice president of Arizona operations for McCormack Baron & Salazar, responsible for overseeing the firm’s role in Henson Village, a HOPE VI project in Phoenix. He served as senior deputy director of Fannie Mae’s Arizona partnership office from 1997 to 2003. Prior to that, he worked at JPMorgan Chase & Co. (then called Bank One Arizona) for eight years. Mr. Adame previously served on the Bank’s Affordable Housing Advisory Council from 2016 to 2021. Mr. Adame's current position as the principal executive officer of an affordable housing and community services provider; his experience in representing community interests in housing, health and human services, education, economic development, and advocacy, and his management skills, as indicated by his background, support Mr. Adame’s qualifications to serve on the Bank’s Board.
Banafsheh Akhlaghi
Jeffrey (Jeff) K. Ball
Jeffrey (Jeff) K. Ball is the president and chief executive officer of the Orange County Business Council where he represents the interests of local businesses and organizations in promoting the region’s economic prosperity. He is the founder of First Pacific Bank (formerly Friendly Hills Bank), Whittier, California, where he previously served as president and chief executive officer and is currently vice chair. He also currently serves on the board of directors for Mobility21, and Data Center, Inc., as chair of the audit committee. Prior to opening First Pacific Bank he held several office positions with Bank of America Corporation focused on both commercial and investment banking. Mr. Ball is a leading advocate for the importance of financial education in all communities and was the lead petitioner in the establishment of Kinetic Academy, a K-8 charter school located in Huntington Beach, California where he currently serves as board vice chair. Mr. Ball is a past chair of the California Bankers Association and Kinetic Academy, past president of the Whittier Host Lions Club and past founding chair of the Whittier Union High School District Foundation. Mr. Ball is also servesa member by appointment onof the Legal Services Trust Fund Commission of the California State Bar of California for which he previously served as co-chairman.chaired, is a public member of the Accrediting Commission for Community and Junior Colleges and serves on the board of governors of the Los Angeles Area Chamber of Commerce. Mr. Ball frequently guest lectures on financial and economic principles at high schools and universities across the nation. Mr. Ball’s current position as the principala director and previous service as an executive officer of a Bank member, his current position and experience as a board member and audit committee chairman of aprevious officer positions with other financial technology company,institutions, and his involvement in and knowledge of corporate governance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management, as indicated by his background, support Mr. Ball’s qualifications to serve on the Bank’s Board.
Marangal (Marito) Domingo
Marangal (Marito) Domingo joined First Technology Federal Credit Union, San Jose, California, in March 2013, and currently serves as chief financial officer and chief credit officer. Prior to that, he was executive vice president and chief financial officer of Pacific Trust Bank from 2011 to 2012. Mr. Domingo has over 20 years of experience in banking, including serving as chief financial officer for Doral Bank, senior vice president of finance offor Treasury Bank, chief executive officer of Downey Savings, head of capital markets for Washington Mutual Bank, and treasurer for American Savings. He has also served on the Mortgage Bankers Association’s Residential Board of
Governors and as a member of the board of directors for the National Equity Fund (affordable housing), Greater Los Angeles Chamber of Commerce, the Beaverton Education Foundation, and SMART Reading. Mr. Domingo’s current position as an executive officer of a Bank member, his previous executive positions with other financial institutions, and his involvement in and knowledge of corporate governance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management, as indicated by his background, support Mr. Domingo’s qualifications to serve on the Bank’s Board.
Ana E. Fonseca
Ana E. Fonseca has 36 years’ experience in the financial services industry and has been the president and chief executive officer of Logix Federal Credit Union, Valencia, California, since January 2019. From April 2002 through December 2018, she held leadership roles including executive vice president/chief operating officer and executive vice president/chief financial officer. She is experienced in developing and executing strategies to achieve long term profitable growth, sustain high levels of customer delight, and build high performing teams and has overseen fiscal operations, sales and revenue growth, customer service/experience, lending, risk management, facilities management, information technology, data and financial analytics and business operations. Ms. Fonseca’s current position as the principal executive officer of a Bank member, and her involvement in and knowledge of corporate governance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management, as indicated by her background, support Ms. Fonseca’s qualifications to serve on the Bank’s Board.
Lori R. Gay
Lori R. Gay has been president and chief executive officer ofthe Neighborhood Housing Services of Los Angeles County (NHS) since 1990. NHS serves as a community development financial institution and full service real estate firm. Ms. Gay has served on numerous boards of directors, including the Federal Reserve Bank of San Francisco, Los Angeles Branch, the California Organized Investment Network, and the California Housing Finance Agency. Ms. Gay’s current position as the principal executive officer of an affordable homeownership services provider responsible for reaching families with financial counseling and affordable lending and redevelopment services and her management skills, as indicated by her background, support Ms. Gay’s qualifications to serve as a public interest director on the Bank’s Board.
Melinda Guzman
Melinda Guzman has been a chief executive officer of Melinda Guzman Professional Corporation, Sacramento, California, since 2009. She was a partner with Freeman & Guzman, LLP, a law firm in Sacramento, California, from 1999 to 2015. Prior to that, she was a partner with Diepenbrock, Wulff, Plant & Hannegan, LLP, also a law firm in Sacramento. Ms. Guzman's practice focuses on tort, labor, insurance, and commercial matters. She previously served on the Bank’s Boardboard of Directorsdirectors from April 2007 through December 2008. Ms. Guzman's involvement and experience in representing community and consumer interests with respect to banking services, in credit needs, in housing and consumer financial protections, and in corporate governance, as indicated by her background, and her management skills derived from her various legislative appointments and her service from 2002 to 2003 as chair of the Nehemiah Corporation of America (a community development corporation), her service from 2001 to 2004 as chairman of the California Hispanic Chamber of Commerce, and her service with other community-based organizations support Ms. Guzman's qualifications to serve on the Bank’s Board.
Matthew Hendricksen
Matthew Hendricksen joined Employers Insurance Company of Nevada, Reno, Nevada, and the Employers Insurance Group, Inc., in May 2012, and currently serves as senior vice president Treasury &and Investments. Prior to that, he was a Portfolio Managerportfolio manager at AIG from 2003 to 2012. During his 18-year career, Mr. Hendricksen has specialized in investments, derivatives, risk management, and insurance regulations. Mr. Hendricksen’s current position as an officer of a Bank member and his involvement in and knowledge of finance, accounting, internal
controls, risk management, and financial management, as indicated by his background, support Mr. Hendricksen’s qualifications to serve on the Bank’s Board.
John F. (Jack) LuikartChang M. Liu
Chang M. Liu is president and CEO of Cathay Bank and its holding company Cathay General Bancorp, where he serves on both entities’ board of directors. Mr. Liu has beenover 31 years of experience in the financial services industry. Mr. Liu joined Cathay Bank in 2014 as senior vice president and assistant chief lending officer. He has held various leadership positions of Bethany Advisors LLC, San Francisco, California, since February 2007. He is the managing trustee of four asbestos trusts,increasing responsibilities, including the Western Asbestos Settlement Trust,executive vice president and has been a trustee since 2004, and a trustee of Ohio Wesleyan University since 2014. He was a director of Wells Fargo Real Estate Investment Trust from 2014 through 2019, chairman of Wedbush Securities Inc., Los Angeles, California, from 2006 to 2010, and a trustee of the Graduate Theological Union, Berkeley, California from 2004 to 2010. Previously, he was presidentchief lending officer in 2016 and chief operating officer in 2018. Before being named president, Mr. Liu was responsible for managing and overseeing all commercial and real estate lending, business development, and various operations. Mr. Liu also serves as a member of Tucker Anthony Sutro from 2001 to 2002the Western Bankers Association board of directors and chairmanthe American Cancer Society’s CEOs Against Cancer group, on the board of advisors for the UCLA Anderson Forecast, and chief executive officerserves on the board of Sutro & Co. from 1996 to 2002. He joined Sutro & Co. in 1988directors of Foothill Family Service. Mr. Liu’s current position as executive vice president of capital markets and became president in 1990. Mr. Luikart's positions as director orthe principal executive officer of investment banking firms (or their affiliates), and his experience in investment management, capital markets, corporate finance, securitization, and mortgage financea Bank member, and his involvement in and knowledge of corporate governance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management, as indicated by his background, support Mr. Luikart's qualifications to serve on the Bank’s Board.
Shruti Miyashiro
Shruti Miyashiro has been president and chief executive officer of Orange County’s Credit Union, Santa Ana, California since 2007. Prior to that, she was president and chief executive officer of Pasadena Federal Credit Union, and Orange County Group, Inc., which provided wealth management to consumers. Ms. Miyashiro has over 20 years of multi-faceted executive level roles leading branches, lending, collections, human resources, enterprise risk management, facilities, and digital banking. She is currently serving on the board of Jack Henry & Associates, Inc., a technology provider to financial institutions. She has also been appointed to the State of California’s Department of Business Oversight Credit Union Advisory Committee. Ms. Miyashiro’s current position as the principal executive officer of a Bank member, her previous executive positions with other financial institutions, and her involvement in and knowledge of corporate governance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management, as indicated by her background, support Ms. Miyashiro’sLiu’s qualifications to serve on the Bank’s Board.
Kevin Murray
Kevin Murray has been a principal in The Murray Group, a legal and consulting firm, since its founding in December 2006. Since May 2011, Mr. Murray has served as the president and chief executive officer of the Weingart Center Association. Mr. Murray was senior vice president of the William Morris Agency, Beverly Hills, California, from January 2007 to June 2009, working primarily in the company's corporate consulting division. Mr. Murray served as a California State Senator from December 1998 until November 2006, and as a California State Assembly member from December 1994 until November 1998. Prior to serving in the California State Legislature, Mr. Murray practiced law. Mr. Murray's involvement in legislative matters relating to, among other things, the banking and insurance industries, his experience in law and corporate governance practices, and his management skills, as indicated by his background, support Mr. Murray's qualifications to serve on the Bank’s Board.
Joan C. Opp
Joan C. Opp has been the president and chief executive officer of Stanford Federal Credit Union, Palo Alto, California, since May 2010. From February 2002 to April 2010, she was executive vice president and chief financial officer for Texas Trust Credit Union overseeing accounting, information technology, marketing and business services, as well as three credit union service organizations. Prior to that, Ms. Opp was a partner with the CPA firm of Clifton Gunderson, LLP, and is a Certified Public Accountant. Ms. Opp serves on the board of directors of CO-OP Financial. Ms. Opp’s current position as the principal executive officer of a Bank member, her previous executive positions with other financial institutions, and her involvement in and knowledge of corporate
governance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management, as indicated by her background, support Ms. Opp’s qualifications to serve on the Bank’s Board.
Brian M. Riley
Brian M. Riley has been a director of Oxford Life Insurance Company, Phoenix, Arizona, since November 2019. He has also been the president and chief executive officer of Foothills Bank (a division of Glacier Bank, Kalispell, Montana), since March 2020. Previously, Mr. Riley was the president and chief executive officer of State Bank of Arizona (formerly Mohave State Bank), Lake Havasu City, Arizona, from March 2009 to February 2020. He also served as director, president, and chief executive officer of State Bank Corp., the holding company for State Bank of Arizona, from March 2009 to February 2020. Mr. Riley has also served as a director of Clearinghouse CDFI, Lake Forest, California, since August 2018. He was the chief financial officer of Mohave State Bank from April 2008 to March 2009. Prior to that, he was chief executive officer of Harbor Bank and Trust, a financial institution in organization in Southport, Connecticut. Mr. Riley has over 30 years of experience in banking, including serving as president and chief executive officer of PriVest Bank, Costa Mesa, California, and holding other executive positions with Provident Savings Bank, Riverside, California, and Metro Commerce Bank, San Rafael, California. Mr. Riley is a director of the Arizona Bankers Association. Mr. Riley’s current positions as a director of a Bank member and a principal executive officer of a financial institution, his previous executive positions with other financial institutions, and his involvement in and knowledge of corporate governance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management, as indicated by his background, support Mr. Riley’s qualifications to serve on the Bank’s Board.
Scott C. SyphaxGary L. Trujillo
Scott C. SyphaxGary L. Trujillo is the founder and serves as president and CEO of Southwest Harvard Group, LLC, an investment firm and family office in Phoenix, Arizona. He is also executive chairman of the Standard Printing Company, Inc. Mr. Trujillo has been a serial entrepreneur for over 30 years with significant experience as a CEO, financier, founder, operator, and independent corporate board member, including serving on three publicly traded company boards and multiple privately owned company boards in the CEO of Syphax Strategic Inc., a management consulting and business development firm focused on thetechnology, healthcare, auto, real estate, development, healthcare, and financial services industries. Mr. Trujillo is also recognized nationally as a dedicated community finance sectors, since February 2017.leader, having co-founded the Be A Leader Foundation in 2002, an education-focused nonprofit serving more than 14,000 students per year. Mr. Syphax servedTrujillo’s current and previous experience as chairman of Nehemiah Corporation of America, a community development corporation in Sacramento, California, from 2011 to 2019. He previously held the position of chiefan executive officer of Nehemiah Corporation of Americaan investment firm and its affiliates from 2001 to 2017. Mr. Syphax has served as a board member of the Sacramento Regional Community Foundation since 2016,other companies, and served as a director on the Board of the Greenlining Institute from 2016 to 2019. From 1999 to 2001, Mr. Syphax was a manager of public affairs for Eli Lilly & Company. He was vice chair of the Bank’s Board of Directors from January 2010 through January 2012. Mr. Syphax's involvement and experience in representing community interests in housing and his management skills, as indicated by his background, support Mr. Syphax's qualifications to serve as a public interest director on the Bank’s Board.
Virginia A. Varela
Virginia A. Varela has been president and chief executive officer and a director of Golden Pacific Bank, Sacramento, California, and a director of its holding company, Golden Pacific Bancorp, since November 2013. Previously, Ms. Varela was chief operating officer of Bank of the Orient from June 2012 to August 2013, chief executive officer, president and a director of Bank of Rio Vista from December 2010 to July 2012, and president, chief operating officer, and a director of San Luis Trust Bank from September 2009 to November 2010. Ms. Varela has more than 30 years of experience within the banking industry, both as a community bank executive and as a former regulator. She has served as senior examiner for the Federal Reserve Bank of San Francisco and as assistant regional director in the Washington, D.C. headquarters for the Office of Thrift Supervision. Ms. Varela currently serves as a director of the Western Bankers Association. Ms. Varela’s current position as the principal executive officer of a Bank member, her previous executive positions with other financial institutions, and her involvement in and knowledge of corporate governance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management, as indicated by herhis background, support Ms. Varela’s qualifications to serve on the Bank's Board.
John T. Wasley
John T. Wasley was a consultant with Spencer Stuart, a global retained executive search firm, in their Los Angeles, California office, from 2017 through 2020. Prior to that, he was a managing partner with Caldwell Partners, Los Angeles, California, from 2013 to 2017, and was a managing partner with Heidrick & Struggles, Los Angeles, California from June 2005 to 2013. Mr. Wasley joined Heidrick & Struggles as a partner in 2001. Previously, he was an executive director with Russell Reynolds Associates and a senior vice president of People's Bank of California. He previously served on the Bank’s Board of Directors from 2003 to 2005. Mr. Wasley's involvement in and knowledge of human resources, compensation practices, and corporate governance practices, and his management skills, as indicated by his background above, along with his previous position as an executive officer of a financial institution with which Mr. Wasley had involvement in or knowledge of corporate governance practices, bank relations, financial operations, treasury functions, and financial management, support Mr. Wasley'sTrujillo’s qualifications to serve on the Bank’s Board.
Executive Officers
Stephen P. TraynorTeresa Bryce Bazemore
Stephen P. Traynor, 64,Teresa Bryce Bazemore, 63, is currently serving as acting president and chief executive officer. HeShe has held the position of acting president and chief executive officer since February 28, 2020,March 2021. Prior to joining the Bank, Ms. Bazemore served as the president of Radian Guaranty from July 2008 until her retirement in April 2017, where she oversaw the strategic planning, business development, and has beenoperations of the mortgage insurance business line. Prior to being appointed as the president of Radian Guaranty, Ms. Bazemore served as executive vice president, general counsel, and corporate secretary from October 2006 to July 2008, and added the role of chief bankingrisk officer since March 2017. Previously, Mr. Traynor was senior vice president, member financial services and community investment, from July 2004 to March 2017. He joined the Bankof Radian Group in 1995 as assistant treasurer and was promoted to senior vice president, sales and marketing, in October 1999.February 2007. Before joining the Bank, Mr. Traynor heldRadian Group, Ms. Bazemore was the vice president, positions at Morgan Stanley & Co.general counsel, and at Homestead Savings insecretary for Nexstar Financial Corporation, from June 2000 to May 2006, and before that she was the areasgeneral counsel of the mortgage banking fixed income securities, derivatives,line of business at Bank of America from March 1997 to May 2000. Following her retirement from Radian Guaranty, Ms. Bazemore served as a member of the board of directors of FHLBank of Pittsburgh from August 2017 until March 2019, when she relocated to California. In addition, Ms. Bazemore currently is a member of the board of directors of First Industrial Realty Trust, Inc., and capital markets.the T. Rowe Price Funds where she serves as the audit committee chair. She previously served as a member of the board of directors of Chimera Investment Corporation from November 2017 to February 2021. Professional appointments she has held include: Federal Reserve Bank of Philadelphia Economic Advisory Council, Fannie Mae National Advisory Council, and Consumer Advisory Council of the Federal Reserve.
Joseph E. Amato
Joseph E. Amato, 62,64, is currently serving as executive vice president and interim chief financial officer. He has held the position of executive vice president and interim chief financial officer since January 4,May 13, 2021. Mr. Amato joined the Bank as executive vice president and senior financial officer on October 9, 2020.2020, and served as the Bank’s interim chief financial officer from January 4, 2021, until his appointment as the Bank’s chief financial officer. Prior to joining the Bank, Mr. Amato was chief financial officer at the Federal Home Loan Bank of Des Moines from May 2016 to June 7, 2019. Prior to that, Mr. Amato served in various capacities at Freddie Mac from 2001 until 2016, most recently serving as senior vice president and CFO, investments and financial planning.
Elena Andreadakis
Elena Andreadakis, 59, is currently serving as executive vice president and chief administrative officer. She has held the position of chief administrative officer since March 2017. Previously, Ms. Andreadakis was senior vice president and chief information officer from May 2011 to March 2017. Prior to joining the Bank, she was a senior vice president at Fidelity Investments, where she had worked since 1992. She most recently led the service and program management group for Fidelity's enterprise infrastructure organization. Prior to that, Ms. Andreadakis held a number of other senior-level business and information technology positions, with responsibility for managing a wide range of systems and business initiatives.
Arlene Coyle
Arlene Coyle, 48,50, is currently serving as senior vice president and chief audit executive. She has held the position of chief audit executive since May 2019. Ms. Coyle joined the Bank in February 2016 as Assistant Vice President, Internal Audit,assistant vice president, internal audit, and was promoted to Vice Presidentvice president in February 2017. Ms. Coyle has over 2025 years of internal audit and regulatory experience in the financial services industry. Before joining the Bank, she worked at TIAA in their Internal Audit function. Prior to TIAA, she worked as a bank examiner for the Federal Reserve System, supporting community and regional banks. She has a Certification in Risk Management Assurance and is a Certified Internal Auditor, a Certified Financial Services Auditor, and a Certified Diversity Professional.
Kwame Fields
Kwame Fields, 45,47, is currently serving as senior vice president, chief information security officer, and acting chief diversity officer. HeMr. Fields has served asheld the positions of chief information security officer since December 2017 and acting chief diversity officer since July 2020.2021. Previously, he was acting chief diversity officer from July 2020 to July 2021. Mr. Fields has over 25 years of information security and risk management experience across multiple industries. Prior to joining the Bank, he was a vice president at E*TRADE, where he had worked since 2014. He led the technology and security oversight and governance organization and was a principal in the creation of their diversity and inclusion council. Prior to that, Mr. Fields held a number of other management roles and oversight positions with responsibility for managing a wide range of information security, business continuity, information technology risk management, and diversity initiatives. Mr. Fields is a Certified Information Systems Security Professional and a Certified Diversity Professional.
Kevin A. GongKelly Gear
Kevin A. Gong, 61,Kelly Gear, 50, is currently serving as senior vice president, chief of staff. She has held the position of chief of staff and corporate services since January 2022. Ms. Gear joined the Bank in August 2011 as vice president of IT planning and program services. Ms. Gear has over 25 years of management consulting and organizational leadership experience across highly regulated industries, including financial services, pharmaceuticals, and aerospace and defense. Prior to joining the Bank, Ms. Gear served on several executive committees overseeing large-scale global business transformations and strategic initiatives for PricewaterhouseCoopers and Johns Manville, a Berkshire Hathaway company. She is Certified Lean Six Sigma Black Belt and a Certified Diversity Professional.
Anne Segrest McCulloch
Anne Segrest McCulloch, 64, is currently serving as executive vice president, chief legal officer, and corporate secretary. She has held the positions of chief legal officer and corporate secretary since November 2021. She provides legal counsel to the Bank’s management and board of directors on legal and regulatory matters affecting the development and execution of the Bank’s business strategies, policies, and practices. She also directs and manages the Bank’s legal staff, outside counsel, and public affairs team. Ms. McCulloch is a seasoned financial services and housing industry executive and regulatory attorney. Prior to joining the Bank, Ms. McCulloch was president and chief corporate securities counsel.executive office of Housing Partnership Equity Trust from April 2017 through November 17, 2021. Previously, she held several senior positions in the housing sector, including senior vice president, credit and housing access, for Fannie Mae through March 2017.
Mani Massoomi
Mani Massoomi, 45, is currently serving as executive vice president and chief risk officer. He has held the position of chief corporate securities counselrisk officer since April 2005.November 2022. He oversees the Bank’s risk management, compliance, model risk, market risk, member and counterparty credit, and related governance frameworks. Previously, Mr. Gong joinedMassoomi served as senior vice president, enterprise risk officer from August 2019 to October 2022. He has over 20 years of experience in risk management, internal audit, banking, capital markets, and technology. Before joining the Bank, Mr. Massoomi was the head of operational and enterprise risk at SoFi in 1997 as vice presidentSan Francisco. Prior to his tenure at SoFi, he was the audit executive for the domestic and associate general counsel.international asset management and enterprise risk management functions at TIAA. His experience also includes positions at Royal Bank of Canada Capital Markets, Millennium Management Hedge Fund, General Motors, and Morgan Stanley. He has previous experience asis a senior attorney with the Office of Thrift Supervision, as an attorneyCertified Fraud Examiner, Certified Financial Services Auditor, and Certified Investment and Derivatives Auditor, and holds a Certification in private practice, and as an attorney with the SEC in both the Division of Corporation Finance and the Division of Market Regulation.Risk Management Assurance.
Maxine Moir
Maxine Moir, 50,52, is currently serving as senior vice president and chief human resources officer. She becamehas held the position of chief human resources officer insince February 2020. Previously, Ms. Moir was senior vice president and director of human resources from April 2018July 2017 to February 2020. Prior to joining the Bank, Ms. Moir served as director, global human resources business partner, at BlackRock, where she provided human resources support for the iShares business. Her experience also includes 17 years of progressively more complex human resources executive responsibilities at Bank of America, where she led regional and national teams. Ms. Moir holds a Senior Certified Professional credential from the Society of Human Resources Management.
Suzanne Titus-JohnsonGregory A. Ward
Suzanne Titus-Johnson, 63,Gregory A. Ward, 53, is currently serving as executive vice president and chief legaloperating officer. She becameHe has held the position of chief operating officer since November 2022. He is responsible for the Bank’s general counsel in April 2005. Ms. Titus-Johnson is also serving as Corporate Secretary, since April 2020. She previously served asoperations, information technology, information security, procurement, corporate secretary from October 2007 to June 2019. Ms. Titus-Johnsonservices, and community investment departments. Mr. Ward joined the Bank as a staff attorney in 1986, was promoted to assistant vice president and associate general counsel in 1992, to vice president and associate general counsel in 1997, and to vice president and assistant general counsel in 2003.
Gregory A. Ward
Gregory A. Ward, 51, is currently serving as executive vice president and chief risk officer. He became chief risk officer in May 2019. Previously, Mr. Ward served as chief audit executive from July 2017 to April 2019. Prior to his position as chief audit executive, Mr. Ward served as senior vice president and director, internal audit, from January 2017 to July 2017. He joined the Bank in November 2013 as vice president, internal audit, and was promoted to deputy director in June 2016.2016 and to director in January 2017, and has held various positions with increasing responsibilities during his tenure, most recently as chief risk officer from May 2019 to October 2022. Before joining the Bank, he worked with Ernst & Young LLP for 12 years in its Financial Services Advisory Practice. Prior to his tenure at Ernst & Young, Mr. Ward worked in the captive insurance industry in Bermuda and for Price Waterhouse in the United Kingdom in its external audit practice. He is a Chartered Accountant, and Certified Internal Auditor.
Anthony T. WongAuditor, Certified Anti-Money Laundering Specialist, and Project Management Professional.
Anthony (Tony) T. Wong
Anthony T. Wong, 55,57, is currently serving as seniorexecutive vice president and acting chief banking officer. He has served as actingheld the position of chief banking officer since April 10, 2020. Previously, Mr. Wong was senior vice president, member financial services, and chief marketing officer. He joined the Bank in 1995 and has held various positions with
increasing responsibilities during his tenure. Prior to joining the Bank, he worked in the capital markets group at Wells Fargo Nikko Investment Advisors. He is a Certified Mortgage Banker, Accredited Mortgage Professional, and a Certified Diversity Professional.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
This section provides information on the compensation program of the Federal Home Loan Bank of San Francisco (Bank) for our named executive officers for 2020.2022. Our named executive officers for 20202022 are individuals who served as our principal executive officer(s), our principal financial officer(s), and our other three most highly compensated executive officers.
Compensation and Human Resources Committee
The Compensation and Human Resources Committee (Compensation Committee) of the Bank’s Boardboard of Directorsdirectors (Board) is responsible for, among other things, reviewing and making recommendations to the full Board regarding compensation and incentive plan awards for the Bank’s eligible senior executive officers (the president and each executive vice president, (other than the interim chief financial officer), and any senior vice president as of December 31, 2018). TheFor 2022, the Compensation Committee iswas also responsible for reviewing and making recommendations regarding compensation for the directors. For 20212023, the Governance Committee is responsible for reviewing and 2020,making recommendations regarding compensation for the directors. For 2023 and 2022, the Compensation Committee consists of five members of the Board. The Compensation Committee acts pursuant to a Board-approved charter and may rely on the assistance, advice, and recommendations of the Bank’s management and other advisors and may refer specific matters to other committees of the Board. In addition, the Risk Committee of the Board is responsible for oversight of the Bank’s enterprise-wide risk management framework, including overseeing an annual executive incentive compensation risk assessment of the Bank’s compensation policies and practices for the Bank’s employees.senior executive officers.
Certain members of management assist the Compensation Committee in its responsibilities by providing compensation and performance information regarding our executive officers.
With respect to the compensation of the named executive officers of a Federal Home Loan Bank (FHLBank), the Federal Housing Finance Agency (Finance Agency) requires that an FHLBank provide the Finance Agency with copies of all materials related to the compensation decisions of the FHLBank’s Board of Directors for its review prior to the compensation decisions taking effect.
The Finance Agency’s Advisory Bulletin 2009-AB-02 outlines several principles for sound incentive compensation practices to which the FHLBanks are expected to adhere in setting executive compensation policies and practices. The Finance Agency’s rule setting forth requirements and processes with respect to compensation provided to certain executive officers by FHLBanks and the Office of Finance addresses the authority of the Finance Agency Director to approve, disapprove, prohibit, or withhold the compensation of certain FHLBanks and Office of Finance executive officers. The rule also addresses the Director’s authority to approve, in advance, agreements or contracts of certain executive officers that provide compensation in connection with termination of employment. The rule prohibits an FHLBank or the Office of Finance from paying compensation to certain executive officers that is not reasonable and comparable to compensation paid by similar businesses for similar duties and responsibilities. In this regard, the Finance Agency issued a Supervisory Letter in December 2020 that outlines 3 points of guidance related to the Finance Agency’s perspective on FHLBank executive compensation and is intended to provide greater clarity about the factors the Finance Agency considers relevant in making compensation-related determinations. The Compensation Committee has taken into account the guidance of the Finance Agency in determining the Bank’s Executive Compensation Philosophy and executive compensation program.
Our Executive Compensation Philosophy and Executive Compensation Program
The Bank has a Board-approved Executive Compensation Philosophy that forms the basis of our executive compensation program. In accordance with our Executive Compensation Philosophy, we believe that to attract and retain outstanding executives we must be able to provide an executive compensation package that is competitive and appropriately motivates and rewards the executive officers who make contributions of special importance to the success of the Bank’s business. Our executive compensation program provides total remuneration, which includes base salary, short- and long-term cash incentive compensation, and retirement benefits.
The Bank’s Executive Compensation Philosophy states that total compensation is intended to align the interests of the executives and key employees with the short-term and long-term interests of the Bank; to ensure an appropriate level of competitiveness within the marketplace from which the Bank recruits executive talent; and to encourage the executives and other key employees to remain employed by the Bank. The Bank’s Executive Compensation Philosophy provides that total remuneration (base salary, short- and long-term cash incentives, and retirement benefits) is also intended to motivate executives to deliver exceptional performance without encouraging unnecessary or excessive risk-taking.
Total Compensation is Intended to Reward Contributions to the Bank’s Corporate Goals and Performance Targets and Achievement of Individual Performance Goals. We have structured our executive compensation program to reward contributions by executives in support of the Bank’s corporate goals and performance targets, including those set forth in the Bank’s strategic plan, and achievement of individual performance goals. In addition to base salary, our cash incentive compensation plans create an award program for executives who contribute to and influence achievement of the Bank’s mission and other key objectives contained in the Bank’s strategic plans, and who are responsible for the Bank’s performance. The Bank’s overall executive compensation programs reward sustained performance through the balanced use of short- and long-term incentives, which represent a substantial portion of pay at-risk,pay-at-risk, and through competitive retirement benefits, which promote the alignment of executive and Bank interests over the long term.
Each Year, the Bank Establishes Specific Corporate Goals Consistent with the Bank’s Strategic Plan. For 2020,2022, the Board adopted four corporate goals: the Risk ManagementBusiness and Financial goal, the Franchise EnhancementRisk Management goal, the Community Investment goal, and the Diversity, Equity, and Inclusion (D&I)(DEI) and People goal.
The Risk Management goal was comprised of four components: (i) Cyber-security – Strengthen Access Management to Bank Information; (ii) Credit Risk Management – Improve EfficiencyBusiness and Quality of Underwriting; (iii) Compliance Risk Management – Strengthen Enterprise-Wide Compliance Framework; and (iv) London Interbank Offered Rate (LIBOR) – Execute LIBOR Phase Out Transition Plan (Transition Plan).
For the cyber-security goal component, cyber-security threats targeting Bank team members and their access to Bank non-public data represent significant risks to the Bank and to our members. To address this prevailing concern, this goal component was designed to strengthen access management to Bank information by transitioning from a traditional password method to advanced methods that use biometrics and enhancing other identity and access management controls.
The credit risk management goal component was intended to modernize credit underwriting approaches and tools to support the Bank’s strategy of enhancing organizational efficiency and effectiveness. This goal component was also intended to position the Bank for the future by improving underwriting efficiency and quality to help sustain the Bank’s efforts in addressing regulatory guidance on credit risk assessment and governance.
The compliance risk management goal component was intended to enhance compliance risk management practices and strengthen the Bank’s enterprise-wide compliance framework by focusing on, among other things, creating common nomenclature and definitions and the proper identification and cataloguing of risks, controls, and regulatory expectations.
The purpose of the Transition Plan execution goal component was to continue to prepare for the discontinuation of LIBOR by: improving fallback provisions in outstanding derivatives contracts; enhancing measurement and reporting of LIBOR exposure related to member collateral; performing a LIBOR transition risk assessment; and enhancing systems and processes to support financial products with embedded options that reference a non-LIBOR benchmark rate.
The Franchise EnhancementFinancial goal for 2020 was2022 comprised of fivethree goal components: (i) Financial Performance – Adjusted Return on Capital (AROC) Spread; (ii) TalentOperating Efficiency – Talent Development;Operating Expense Management; and (iii) Member Business – Advances and Letters of Credit Volume; (iv) Member Business – Member Engagement; and (v) Prioritization – Bankwide Prioritization and Process Improvement.
The financial performance goal component recognized that among the many attributes of Bank membership, an adequate financial return on the private capital that members contribute to the cooperative is important to the members as shareholders. The weighting of this goal acknowledged that the return on members’ capital investment was only one of many aspects of the value of membership. The financial performance goal component was expressed as a target percentage of AROC spread.spread, which is the adjusted return on capital less the benchmark yield on capital. The goal targets for this component were based ontarget (100%) level of achievement was set equal to the 2022 base case financial projections in the Bank’s 2020-20222022-2024 Strategic Plan. Achievement ofPlan, or 1.29%.
The maximum goal was 1.66%, reflecting the Meets (100% of target) level of 2.20% AROC spread required that the Bank:
•price advances such that balances are maintained without diluting financial return;
•generate $251 million in spread earnings from the Bank’s portfolio of mortgage-backed securities and mortgage loans; and
•manage operating costs within 2020 budget levels while continuingoptimistic scenario plus an add-on to meet all strategic and operating objectives.
This goal component was designed to be reasonably challenging to accomplish because, among other things, it required the Bank to generate significantly higher earnings than the 2020 financial plan’s “base case” projected earnings. Given the limited options the Bank has for increasing earnings while staying within the Bank’s risk tolerances, achievement of levels above target represented significant stretch objectives.increase its stretch.
For the talent developmentoperating efficiency goal component, the purpose was to foster an exceptional workplace by investing in our people through development, training, education, and opportunity. The focus of the talent development goal wascreate incentives to provideoperate at or below the Bank’s leaders with training and feedback aligned with the Bank’s competencies,approved 2022 operating expense budget of $157.2 million and to establish action plans for developingdemonstrate the skillsimportance of cost management and behaviors requiredoperating efficiency. Minimum achievement was set equal to be successful leaders at2022 operating expenses that are 2.0% higher than the Bank.2022 operating expense budget, while the maximum level of achievement was set equal to 2022 operating expenses that are 3.0% lower than the 2022 operating expense budget.
The third goal component of the Franchise EnhancementBusiness and Financial goal was designed to focus management on member business. The purpose of this goal component was tobusiness and measure how well the Bank maintained and increased the volume of advances and letters of credit outstanding to members.members, which is a key to enhancing the Bank’s member business franchise and fulfilling the Bank’s mission. The Board set the target achievement levels for the targeted volumes of advances and letters of credit volumes based on various assumptions, such as economic forecasts, member information, potential member business, historical goal performance, industry trends and events, and current market environment and conditions, such that the relative difficulty of achieving the target levelvolume levels was commensurate with extending credit to members in a safe and sound manner. The target level of achievement for the advances and letters of credit volume goal is set equal to the 2022 base case in the Bank’s 2022-2024 Strategic Plan, or $27.8 billion. The maximum level of achievement for this third goal component is $35.4 billion, reflecting the optimistic scenario plus an add-on to increase stretch.
The fourth goal component of the Franchise EnhancementRisk Management goal was designed to focus management on proactive engagement with member financial institutions. comprised of two components goals: (i) Operational Risk Management – Enhance Operational Adaptability and Resilience; and (ii) Information Security Risk Management – Enhance Active Directory Security Configuration and Monitoring.
The purpose of thisfirst Risk Management goal component was intended to foster relationships with memberssupport and enhancestrengthen the Bank’s role as a valuable resource and business partner by increasing engagement with members, prospective members, and housing associatesoperational resiliency through Bank-sponsored events, sponsorships at members’ trade association conferences, and individual meetings.
The objective offurther enhancements to the Bankwide prioritization and process improvementoperational risk management framework. This goal component was put in place to build upon the momentum of various operational risk management program enrichments and harmonize the Bank’s operational risk and business process taxonomies while considering the current and emerging risk landscape confronting the Bank. This goal component also specified the initiation of deeper technology-focused risk assessments in congruence to industry leading practices, improving the cataloging of risks and associated
controls, and building a glidepath to maximizing operational synergies for the Bank to continue its focus on enterprise-level operating efficiencyvarious Governance, Risk and effectivenessCompliance (GRC) processes and to expand the enterprise-wide prioritization framework to include a broader set of improvement ideas fromGRC-like systems used by various business units across the Bank. Specific focus areas
The second Risk Management goal component was intended to minimize cyber security exposure to Bank operations due to insecure configuration of core technology that supports layered architecture components.
The Community Investment goal for 2022 comprised of three component goals: (i) the Nevada Targeted Program; (ii) Community Investment Program (CIP), Advances for Community Enterprise (ACE) Program, Letters of Credit, and Access to Housing and Economic Assistance for Development (AHEAD) Program Product Utilization; and (iii) the Homeownership Counseling Program.
For the first Community Investment goal component, the Bank has committed to take steps to increase the participation of Nevada sponsors and members in the Bank’s Affordable Housing Program (AHP) in 2023. This goal component included robotics process automation, process improvement (withoutoffering a technology component),voluntary program in 2022 to develop sponsor capacity in Nevada and smaller work efforts.establish a framework for an “AHP Targeted Fund” for Nevada in 2023. The purpose wasvoluntary program includes providing training that will support the creation of a pipeline of Nevada project sponsors and members to provide greater visibility intoapply to the initiatives underway and to ensure efforts with the highest value are being allocated the necessary resources.“AHP General Fund or Targeted Fund.”
Consistent with the Bank’s public policy purposes,purpose, the second Community Investment goal component focused management on meeting the Bank’s objective to make availableof making advances and credit programs that promote and assist housing and community economic development activities.activities available to members. Achievement in this area is a key element of the Bank’s mission objectives, and the participation of Bank members in using the various programs is critical. This goal included achievement levels for: (i) the number of unique members that used an advance or letter of credit under the Community Investment Program (CIP)CIP or Advances for Community Enterprise (ACE)ACE Program and (ii) the number of unique members that received an award in the Access to Housing and Economic Assistance for Development (AHEAD)AHEAD Program during 2020.2022.
Under the third Community Investment goal component, as part of the Bank’s Strategic Homeownership Initiative, the Bank offered a homeownership counseling program which included grants as well as a member matching contribution component to help expand the capacity of HUD-approved housing counseling agencies to serve more aspiring and at-risk homeowners in communities of color.
The Bank’s D&IDEI and People goal represented an integral partfor 2022 comprised of a high performing organization. Placing a high value onthree components goals: (i) DEI – Supplier Diversity; (ii) DEI – Workplace Diversity; and (iii) Talent.
For the individual skills, talents, ideas, viewpoints,first DEI and experiencesPeople goal component, the purpose was to increase addressable spend by providing additional opportunities to maintain or increase spend with people of our team members helpscolor or diverse suppliers including increasing bid opportunities for people of color or diverse suppliers. This goal component also required additional people of color and diverse supplier sourcing, outreach, and supplier development.
The second DEI and People goal component was intended to increase participation from diverse employees in leadership development programs by expanding participation in employee development programs such as the Bank gain a broader perspective when it comesMcKinsey Leadership Development and Platinum Exchange Programs. To achieve the highest level of target participation, management was required to meetingidentify potential participants that were not in the diverse and changing needspool of our members andprogram participants from prior years, which would complement the communities the
Bank serves. Promoting diversity across all business activities and financial transactions at all levels of the Bank directly contributestalent reviews to the Bank’s missiondirector level which will aid in the identification of fostering strongleadership development candidates.
Under the third DEI and vibrant communities through economic development opportunities.People goal component, management would identify key talent and build a diverse talent pipeline. This goal complementedcomponent included expanding the Bank’s three-year D&I Strategic Plan goalstalent review process by conducting cross-functional talent reviews through director level and objectives to: (i) create a climate of cultural diversityexpanding succession planning efforts to include executive vice presidents, senior vice presidents and respect at all levels of the Bank; (ii) communicate the Bank’s D&I commitment and D&I program progress with team members, the Board of Directors, and external stakeholders; (iii) engage in diverse outreach to create partnerships that enhance our workforce, supplier, financial transaction, and business activities; and (iv) drive accountability for D&I performance and outcomes to team members at all levels.managing directors.
Each Year, the Bank Establishes Individual Goals for Executives Consistent with the Bank’s Strategic Plan. The individual performance goals established for executive officers are generally based on the Bank’s strategic planStrategic Plan and reflect the strategic objectives that will enable the Bank to successfully achieve its mission. The Bank’s 20202022 strategic objectives were to: (i) maximize theenhance membership value of membership by providing a best-in-class, all-in value of membership, so that every entity that can be a member, chooses to be a member;and business utilization; (ii) foster an exceptional workplace by cultivating a great place to work where diverse backgrounds are valued,continually improve organizational performance; (iii) attract, develop, and team members are inspired to do their best work in support of the mission; (iii) build a resilient and flexible Bank that can adapt to the changing needs of members and communities;retain high performing talent; and (iv) strengthenexpand community investment impact across the community by providing members with financial resources and technical expertise to promote affordable housing and economic development.district.
The Bank’s Executive Incentive Compensation Plans were Designed to Calculate Executive Officers' Achievement Levels on a Weighted Basis to Ensure a Proper Balance in Achieving the Bank’s Mission in a Safe and Sound Manner. With respect to each of the named executive officers for 2020,2022, the achievement levels of each of the four Bank corporate goals (the Risk ManagementBusiness and Financial goal, the Franchise EnhancementRisk Management goal, the Community Investment goal, and the D&IDEI and People goal) were weighted at 80% in the aggregate andwith the individual goal weighted at 20% of the total weighted achievement level for each officer. See “Elements of Our Executive Compensation Program – Executive Incentive Plan” below for the individual corporate goal weights.
The weightings of the Bank’s corporate goals were approved by the Board and were designed to appropriately focus senior management on accomplishing the Bank’s mission and strategic plan. See “Executive Incentive Plan” below for a discussion of the relative weights given to corporate goals and individual goals for each component of the Executive Incentive Plan (EIP) for 20202022 for the named executive officers.
Our Executive Compensation Program is Designed to Enable the Bank to Compete for Highly Qualified Executive Talent. Our members are best served when we attract and retain talented executives with competitive and fair compensation packages. In 2020,2022, the Bank evaluated total remuneration around the median 50th percentile of the financial services marketplace from which the Bank recruits executive talent, including regional and community banks and diversified financial institutions, while maintaining an appropriate alignment with the practices of other FHLBanks.
The Compensation Committee recognized that comparing our compensation practices to a group of other financial services and banking firms that are similar in total assets presents some challenges because of the special nature of our business and our cooperative ownership structure. We believe that the executive roles of our named executive officers are somewhat comparable to those in the comparison group, although the Bank may have a narrower business focus.
Our named executive officers are required to have the same depth of knowledge and experience that is required by comparable financial services and banking firms require, but, unlike some of these comparable companies with multiple lines of business, our lines of business are limited. For example, in certain areas of the Bank our focus is more like that of a specific subsidiary, division, or business unit of comparable financial institutions with multiple lines of business.
For purposes of developing comparative compensation information, the companies with comparable positions were financial services and banking firms with similar business sophistication and complexity. In supporting compensation decisions, the Compensation Committee uses and considers compensation information about the comparable positions at these companies. Each element of compensation may vary somewhat above or below the
market median for the related positions in the comparison groups. Furthermore, compensation levels for individual positions may also be adjusted to recognize additional factors, such as regional salary differences, recruitment or retention, special duties or responsibilities, sustained performance results, leadership succession planning, and internal equity considerations.
Since 2014, the Compensation Committee has engaged McLagan Partners, Inc. (McLagan), a leading global management consulting firm providing consulting and benchmarking services for the financial services industry, for the purpose of providing the Compensation Committee with annual competitive market compensation reference and comparative information. McLagan does not currently provide any other services to the Bank. In 2020,2022, McLagan assessed the Bank’s competitive market position with respect to its executive compensation program. McLagan used market data collected from its compensation surveys and publicly available proxy data. McLagan used standardized peer group data from three groups: commercial banks with incumbents located in metro San Francisco and metro New York; the other FHLBanks; and public proxy peers with assets between $10 billion and $20 billion. When comparing Bank executives usingwith those at commercial banks, the closest comparable roles/realistic employment opportunities were used. When comparing Bank executives to executive roles at other FHLBanks, overall functional heads were used. When using the $10 billion to $20 billion peer group for comparison, actual functional roles or salary rank was used. The Compensation Committee used the McLagan market data as a reference point for evaluating 20202022 executive compensation levels and to check, evaluate, and compare the reasonableness and appropriateness of the levels of compensation provided to our senior executives.
Allocation of Short-Term Cash Incentive Compensation and Long-Term Cash Incentive Compensation. Our objective is to compensate our senior executives, including our named executive officers, with a balanced combination of base salary and short- and long-term cash incentive compensation.
We believe that a balanced approach in delivering short- and long-term cash incentive compensation is most appropriate for the Bank because we believe our executives should be focused on achievement of both short- and long-term goals. Consistent with the Bank’s three-year strategic plans and its Executive Compensation Philosophy, long-term cash incentive compensation helps provide a competitive total cash compensation package and enhances the Bank’s ability to attract and retain key executives.
The Bank’s short-term cash incentive compensation component of the EIP rewards the named executive officers and other executive officers for the Bank’s achievement of its annual corporate goals and performance targets and for the officer's achievement of his or her individual goals. The Bank’s long-term cash incentive compensation component of the EIP ties long-term cash incentive rewards to the sustainability of goal achievements over a long-term period, rather than to the achievement of goals over a prospective three-year period. This structure is designed to promote the Bank’s long-term health by deterring behavior or inappropriate risk-taking that could lead to material financial loss at the Bank. This approach for long-term compensation is consistent with developing practices to better recognize risk outcomes in incentive-based compensation decision making and to better balance risk and reward.
Elements of Our Executive Compensation Program
Base Salary Compensation
Base salary compensation is a key component of the Bank’s executive compensation program and helps the Bank successfully attract and retain executive talent. Base salary for the named executive officers is based on a combination of factors, including comparative salary information from industry salary surveys that include the financial institutions in the Bank’s peer groups. Other factors include the named executive officer's relevant experience and accomplishments and level of responsibility at the Bank and perceived market competition for executives with comparable levels of experience. The Board considers any base salary adjustments for the named executive officers, ateffective as of the beginning of each year, based on the individual's performance and contributions to the Bank’s achievements or to help more appropriately align total remuneration with comparable positions in the financial services marketplace. ForBase salary adjustments for the named executive officers 2021 base salaries remainedare subject to review and non-objection from the same relative to 2020 base salaries.Federal Housing Finance Agency. For the base salaries of the current named executive officers, see the discussion in
“Compensation “Compensation Tables – Narrative to Summary Compensation Table and Grants of Non-Equity Incentive Plan-Based Awards Table – At Will Employees,” which discussion is herein incorporated by reference.
Executive Incentive Plan
Beginning with 2017, theThe Board adopted the EIP, which provides for an annual total incentive award (Annual Award) for a one-year performance period. Fifty percent (50%) of the Annual Award is earned and vested after the last day of the one-year performance period (Year-End Award). The remaining fifty percent (50%) is deferred for a three-year period (Deferred Award). The EIP replaces the Bank’s traditional short-term and long-term executive incentive plans as part of the Bank’s overall compensation program and effectively combines short-term and long-term executive incentive programs into one omnibus incentive plan for senior executive officers.
The EIP is designed to attract and retain senior executive officers and to motivate and focus their efforts on achieving the Bank’s business plan and accomplishing its goals and objectives while maintaining the safety and soundness of the Bank. The EIP is a cash-based incentive plan that provides award opportunities based on achievement of performance goals and the satisfaction of certain qualifiers.
The deferral component of the EIP ties long-term cash incentive rewards to the sustainability of goal achievements over a three-year period, which is intended to, among other things, promote the Bank’s long-term health by deterring behavior or inappropriate risk-taking that could lead to material financial loss to the Bank. Under the Deferred Award provisions of the EIP, payment of fifty percent (50%) of the total Annual Award is deferred for a three-year period, during which payment is conditioned upon the satisfaction of certain “qualifiers” (discussed
below) that recognize the risk outcomes of executive decision making. Deferred Awards may be reduced or subject to forfeiture if qualifiers are not met during the Deferral Performance Period (defined below).
The EIP provides that the Board will establish award levels prior to each of the performance periods for the total Annual AwardsAward, the Year-End Award, and the Deferred Awards.Award. A performance period for an Annualthe Year-End Award, is the one-calendar-year period over which fifty percent (50%) of the Annual Award can be earned and vested i.e., the Year-End Award, (Annual Performance Period). The related Deferred Award can vest at completion of the following three-calendar-year performance period (Deferral Performance Period).
Performance goals and qualifiers are the factors established by the Board for each performance period and are taken into consideration in determining the amount of an award. Under the EIP for 2022, the Board will define “Threshold,defined “Minimum,” “Meets,” “Exceeds,” and “Far Exceeds”“Maximum” achievement levels for each performance goal to determine the amount of the award. The Board may adjust the performance goals and qualifiers for any performance period to ensure the purposes of the EIP are served. The EIP provides that in determining the appropriate performance goals and qualifiers the Board will, among other things: balance risk and financial results in a manner that does not encourage participants to expose the Bank to imprudent risks; make such a determination in a manner designed to ensure that a participant’s overall compensation is balanced and not excessive in amount and that the awards are consistent with the Bank’s policies regarding compensation arrangements; and monitor the success of the performance goals and qualifiers, taking into account weighting established in prior years and making appropriate adjustments in the future, as needed, so that payments appropriately incentivize participants, appropriately reflect risk, and align with regulatory guidance.
Under the EIP for 2020,2022, the Board established 20202022 performance goals for the Annual Award, which, as discussed above, were the Business and Financial goal, Risk Management goal, Franchise Enhancement goal, Community Investment goal, and D&IDEI and People goal.
For the 20202022 performance goals, the following table shows the goal weights for the senior executive officers eligible to participate in the EIP (including the named executive officers and the chief risk officer).
| | | Senior Executive Officers | | Chief Risk Officer | | Senior Executive Officers | | Chief Risk Officer |
| | Corporate Goal Weight | | Goal Weight (includes individual goals) | | Corporate Goal Weight | | Goal Weight (includes individual goals) | | Corporate Goal Weight | | Goal Weight (includes individual goals) | | Corporate Goal Weight | | Goal Weight (includes individual goals) |
| Individual | Individual | N/A | | 20.0 | % | | N/A | | 20.0 | % | Individual | N/A | | 20.0 | % | | N/A | | 20.0 | % |
| Business and Financial | | Business and Financial | 40.0 | % | | 32.0 | % | | 20.0 | % | | 16.0 | % |
| Risk Management | Risk Management | 30.0 | % | | 24.0 | % | | 50.0 | % | | 40.0 | % | Risk Management | 20.0 | % | | 16.0 | % | | 50.0 | % | | 40.0 | % |
| Franchise Enhancement | 40.0 | % | | 32.0 | % | | 25.0 | % | | 20.0 | % | |
| Community Investment | Community Investment | 15.0 | % | | 12.0 | % | | 10.0 | % | | 8.0 | % | Community Investment | 20.0 | % | | 16.0 | % | | 10.0 | % | | 8.0 | % |
| D&I | 15.0 | % | | 12.0 | % | | 15.0 | % | | 12.0 | % | |
| DEI and People | | DEI and People | 20.0 | % | | 16.0 | % | | 20.0 | % | | 16.0 | % |
| Total | Total | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Total | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
For the EIP for 2020,2022, performance goal measures range from 75% of target (threshold)(Minimum) to 150% of target (far exceeds)(Maximum).
The achievement levels in the EIP for 20202022 were designed to reward senior executive officers for achievement of the Bank’s corporate goals and objectives as described above, based on a target level of achievement for all corporate goals and the officer's individual goal(s). The exceeds and far exceedsMaximum achievement levels werelevel was designed to reward senior executive officers when the Bank and the individual officer achievements far exceed the target level. The exceeds achievement level is an optimistic achievement level relative to the target level, and the far exceedsMaximum achievement level is the most optimistic achievement level based on reasonable business, market, and economic assumptions and conditions.
The performance goal measures and plan design were intended to appropriately motivate and reward the Bank’s senior executive officers based on the total achievement of all goals, taking into accountconsidering each senior executive officer’s role in the Bank’s performance. Setting the performance goal measure ranges based on a percentage of base salary for 20202022 is intended to be consistent with our Executive Compensation Philosophy of evaluating total remuneration
around the median 50th percentile of the total remuneration in the financial services marketplace from which the Bank recruits executive talent.
The total incentive awards under the EIP, i.e., the Annual Awards, are determined by multiplying the percentage of achievement for each goal by the respective performance goal weights to arrive at each participating officer's total weighted achievement level. Each participating officer's total weighted achievement level is then used to determine each participating officer's cash incentive compensation award under the EIP.
The following table shows the total incentive award opportunitieslevels for the Annual Awards and the allocation of the Annual Award opportunities between the Year-End Awards and the Deferred Awards for 20202022 under the EIP for the eligible senior executive officers.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Annual Award as % of Compensation
(Base Salary) | | Year-End Award as % of Compensation
(Base Salary) | | Deferred Award as % of Compensation
(Base Salary) |
| Threshold | Meets (Target) | Exceeds | Far Exceeds | | Threshold | Meets (Target) | Exceeds | Far Exceeds | | Threshold | Meets (Target) | Exceeds | Far Exceeds |
| 40 | % | 80 | % | 96 | % | 100 | % | | 20 | % | 40 | % | 48 | % | 50 | % | | 20 | % | 40 | % | 48 | % | 50 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Annual Award as % of Base Salary | | Year-End Award as % of Base Salary | | Deferred Award as % of Base Salary |
| Title | Minimum | Meets | Maximum | | Minimum | Meets | Maximum | | Minimum | Meets | Maximum |
| CEO | 50.0 | % | 80.0 | % | 100.0 | % | | 25.0 | % | 40.0 | % | 50.0 | % | | 25.0 | % | 40.0 | % | 50.0 | % |
| EVP/SVP | 40.0 | % | 65.0 | % | 85.0 | % | | 20.0 | % | 32.5 | % | 42.5 | % | | 20.0 | % | 32.5 | % | 42.5 | % |
Fifty percent (50%) of the Annual Award, i.e., the Year-End Award, will become vested on the last day of the Annual Performance Period (as mentioned above), and the remaining fifty percent (50%) of the Annual Award that is treated as the Deferred Award will become vested on the last day of the Deferral Performance Period, provided that the Board determines that the performance goals for the Annual Award are achieved and the qualifiers for the Annual Performance Period are satisfied;satisfied and, with respect to the Deferred Award only, that the qualifiers for the Deferral Performance Period are satisfied.
Vesting of any award is subject to the participant receiving a satisfactory performance rating and being actively employed on the last day of the relevant performance period, except in certain cases, such as termination because of
death or disability, retirement, reduction in force, department reorganization, substantial job modification, or termination for “Good Reason”Good Reason or without “Cause,”Cause, and subject to certain conditions being met. In the case of termination of employment because of death or disability, the EIP provides that a Deferred Award will be treated as fully vested as of the date of termination and the relevant pro rata portion of the Annual Award will be treated as vested for that portion of the relevant performance period based on the assumption that the Bank would have achieved the applicable performance goals at the target level and satisfied the qualifiers for the relevant performance period. In all such other certain cases of termination of employment (referenced above), and subject to certain conditions being met, the EIP provides that a Deferred Award will be treated as fully vested as of the date of termination of employment and the relevant pro rata portion of the Annual Award will be treated as vested for that portion of the relevant performance period to the extent determined by the Board determined that the applicable performance goals are achieved and the qualifiers are satisfied.
If a “Change in Control” (as defined in the EIP) occurs prior to the date of vesting of an award, then an Annual Award will be paid on a pro rata basis based on the assumption the Bank would have achieved the applicable performance goals at the target level and satisfied the qualifiers for the relevant performance period, while any Deferred Award will be treated as vested effective as of the date of the Change in Control.
The following are the performance qualifiers for 20202022 for any awards under the EIP: (i) no submission of material information to a regulatory or a reporting agency is significantly past due; (ii) the Bank makes sufficient progress, as determined by the Board, in the timely remediation of significant examination, monitoring, and other supervisory findings; (iii) no material risk management deficiency exists at the Bank; (iv) no operational errors or omissions result in material revisions to the financial results, information submitted to the Finance Agency, or data used to determine incentive payouts; and (v) the Bank has sufficient capital to pay dividends and the ability to repurchase or redeem capital stock.
The EIP provides that awards may be reduced, eliminated, or forfeited in certain circumstances. Under the EIP, the Board may reduce or eliminate any award not yet paid if the Board finds that a serious, material safety and soundness issue or a serious, material risk management deficiency exists at the Bank, or if: (i) errors or omissions result in material revisions to the Bank’s financial results, information submitted to a regulatory or a reporting agency, or information used to determine incentive compensation payouts; (ii) information submitted to a regulatory or a reporting agency is untimely; or, (iii) the Bank does not make appropriate progress, as determined by the Board, in the timely remediation of examination, monitoring, or other supervisory findings and matters requiring attention.
In addition, if the Bank realizes actual losses during the Deferral Performance Period, or other measures or aspects of performance related to the annual Performance Period or Deferral Performance Period are realized that would have caused a reduction in the amount of the final award (i.e., the amount of the earned and vested Annual Award and Deferred Award) calculated for the Annual Performance Period or Deferral Performance Period, then the remaining amount of the final award to be paid at the end of the Deferral Performance Period may be reduced to reflect this additional information. Furthermore, if a participant breaches the terms of a non-solicitation and non-disclosure agreement with the Bank executed as a condition to participating in the EIP, all of the participant’s unpaid vested and unvested awards may be forfeited.
Finally, if during the most recent examination of the Bank by the Finance Agency, the Finance Agency identifies an unsafe or unsound practice or condition that is material to the financial operation of the Bank within the participant’s area(s) of responsibility, and such unsafe or unsound practice or condition is not subsequently resolved to the satisfaction of the Board, then all or a portion of a participant’s unpaid award (vested and unvested) may be forfeited as determined in the sole discretion of the Board. Any future payments for a vested award will cease, and the Bank will have no further obligation to make such payments.
The amount of any award will be determined at the sole discretion of the Board. If the qualifiers are satisfied, an annual compounding interest rate of 6% is applied to any Deferred Awards. Awards, if any, under the EIP are to be paid in accordance with the terms of the EIP following Board approval and completion of any required regulatory review.
the Year-End Award plus the Deferred Award vesting after three years and the interest earned on such Deferred Award does not exceed the senior executive officers’ base salary for that calendar year.The amount of any earned and vested Annual Award or Deferred Award may be modified at the Board’s discretion to account for performance that is not captured in the relevant performance goals and qualifiers. The Board, in its discretion, may also consider “Extraordinary Occurrences” when assessing performance results and determining any of the awards. “Extraordinary Occurrences” mean those events that, in the opinion and discretion of the Board, are outside the significant influence of the participant or the Bank and are likely to have a significant unanticipated effect, whether positive or negative, on the Bank’s operating or financial results. The EIP for 2022 also provides that the Board may apply a “multiplier” to an individual’s Annual Award to account for individual performance not captured in his or her individual performance goals, positive or negative, but not to result in an award level below Minimum or above Maximum.
For additional information regarding awards granted under the EIP for 2020,2022, see the discussion in “Compensation Tables – Narrative to Summary Compensation Table and Grants of Non-Equity Incentive Plan-Based Awards Table – Non-Equity Incentive Compensation and Non-Equity Long-Term Incentive Payouts,” which discussion is herein incorporated by reference.
Savings Plan
The Bank’s Savings 401(k) Plan (Savings Plan) is a tax-qualified defined contribution 401(k) retirement benefit plan that is available to all eligible employees, including the named executive officers. Each eligible employee may contribute between 2% and 75% of base salary to the Savings Plan. For employees who have completed six months of service, the Bank matches the employee's contribution up to 6% of base salary. Employees are always fully vested in employer matching contributions.
For 2020,2022, the maximum annual before-tax employee contribution to the Savings Plan was limited to $19,500$20,500 (or $26,000$27,000 for participants age 50 and over), and not more than $285,000$305,000 of an employee’s annual compensation could be taken into accountconsidered in computing the employee's benefits under the Savings Plan.
Cash Balance Plan and the Financial Institutions Retirement Fund
The Bank began offering benefits under the Cash Balance Plan on January 1, 1996. The Cash Balance Plan is a tax-qualified defined benefit pension plan that covers employees who have completed a minimum of six months of service, including the named executive officers. Each year, eligible employees accrue benefits equal to 6% of their total annual compensation (which includes base salary and short-term cash incentive compensation) plus interest equal to 6% of their account balances accrued through the prior year, referred to as the annual benefit component of the Cash Balance Plan. For 2020,2022, the Internal Revenue Code (IRC) limited the amount of annual compensation that could be considered in calculating an employee's benefits under the Cash Balance Plan to $285,000.$305,000.
The benefits under the Cash Balance Plan annual benefit component are fully vested after an employee completes three years of service. Vested amounts are generally payable in a lump sum or as an annuity when the employee leaves the Bank.
Prior to offering benefits under the Cash Balance Plan, the Bank participated in the Financial Institutions Retirement Fund (FIRF). The FIRF is a multiple-employer tax-qualified defined benefit pension plan. The Bank withdrew from the FIRF on December 31, 1995.
When the Bank withdrew from the FIRF, benefits earned under the FIRF as of December 31, 1995, were fully vested and the value of those benefits was then frozen. As of December 31, 1995, the FIRF calculated each participant's FIRF benefit based on the participant's then-highest three consecutive years' average pay multiplied by the participant's years of service multiplied by 2%, referred to as the frozen FIRF benefit. Upon retirement, participants will be eligible to receive their frozen FIRF benefits.
In addition, to preserve some of the value of the participant's frozen FIRF benefit, the Bank maintains the ratio of each participant's frozen FIRF age 65 annuity to the participant's highest three consecutive years' average pay as of December 31, 1995 (annuity ratio), which the Bank refers to as the net transition benefit component of the Cash Balance Plan. Upon retirement, each participant with a frozen FIRF benefit will receive a net transition benefit under the Cash Balance Plan that equals his or her highest three consecutive years' average pay at retirement multiplied by his or her annuity ratio minus the frozen FIRF benefit.
Benefit Equalization Plan
The Benefit Equalization Plan (BEP) is an unfunded and non-tax-qualified plan that is designed to restore retirement benefits lost under the Savings Plan and Cash Balance Plan because of compensation and benefits limitations imposed on the Savings Plan and the Cash Balance Plan under the IRC.
Annual compensation is determined based on the definition of compensation provided in the respective tax-qualified plans. Participation in the BEP is available to all employees, including the named executive officers, whose benefits under the tax-qualified plans are restricted because of the IRC limitations discussed above.
An employee's benefits that would have been credited under the Cash Balance Plan but for the limitations imposed on the plan under the IRC are credited as Supplemental Cash Balance Benefits under the BEP and the credits accrue interest at an annual rate of 6% until distributed. Each year, employees may also elect to defer compensation earned over the IRC compensation limits to the BEP. For each year that a participant makes deferrals to the BEP, if the amount of the Bank’s matching contribution to a participant's account under the Savings Plan is limited because of the IRC compensation limitations, then the Bank will credit to the participant's BEP account an amount equal to the lost matching contribution (up to a maximum of 6% of base salary in the aggregate) under the Savings Plan (participant deferrals and Bank matching contributions are referred to herein as Supplemental BEP Savings
Benefits). The make-up benefits under the BEP vest according to the corresponding provisions of the Savings Plan and the Cash Balance Plan.
Effective January 1, 2005, in response to IRC Section 409A, the Bank froze the then-existing BEP (now referred to as the Original BEP) and implemented a new BEP conforming to IRC Section 409A and applicable notices and regulations, which changed the participant election process relating to the time and form of benefit payments (referred to herein as the New BEP).
Under the New BEP, a participant's Supplemental Cash Balance Benefits are payable in the form of a lump sum, single life annuity, 50% survivor annuity, or 75% survivor annuity upon termination of employment, a set date or age after termination of employment, becoming disabled after termination of employment, or death. Under the New BEP, a participant's Supplemental BEP Savings Benefits are payable in a lump sum or two to ten annual installments, and payments may commence at termination of employment, retirement, disability, death, or a specific date after termination of employment. For participants and former participants in the SERP (including the named executive officers), Supplemental BEP Savings Benefits may be payable in equal installments for a period of ten years, or a lump sum payment of one-half of the account balance with the remaining half paid pursuant to a schedule of equal annual installment payments for a period of ten years. In addition, a participant's elections with respect to the time and form of benefit payments are irrevocable unless the election is made 12 months prior to the scheduled distribution date and the new scheduled distribution date is delayed at least five years. If a participant does not elect the time or form of payment, his or her distribution will be a lump sum at termination of employment.
Under the Original BEP, a participant's Supplemental Cash Balance Benefits are paid in a single life annuity commencing at the later of age 65 or termination of employment, unless the participant elects an optional time and form of payment. The optional forms of payment are a lump sum, or any other optional form then permitted under the Cash Balance Plan. Under the Original BEP, a participant's Supplemental BEP Savings Benefits are payable in a lump sum or two to ten installments upon retirement, termination of employment, death, or a specific date after termination of employment. Also, a participant can change the time and form of payment for the Supplemental Cash Balance Benefit at any time, but if the election provides for payment prior to age 65, then payment will not be made until 12 months after the date the Bank receives the new written election unless the participant elects an immediate lump sum distribution subject to forfeiture of 10% of the lump sum payment. Similarly, a participant may elect at any time to change the payout schedule of one or more of the participant's Supplemental BEP Savings Benefit accounts, provided that no payments will be made according to the new election until 12 months after the date the Bank receives the new written election, unless the participant elects an immediate lump sum distribution subject to forfeiture of 10% of the lump sum payment.
Prior to 2020, participants were permitted to make up to five separate payout elections (a payout date and form of payment) with respect to the Supplemental BEP Savings Benefit under the Original BEP and under the New BEP. Beginning in 2020, participants are permitted each calendar year to elect a different time and form of distribution for deferrals made in that calendar year.
Notwithstanding a participant’s election of a form of payment, the Bank may instead, in its sole discretion, pay a participant’s entire account balance in a single lump sum payment, so long as the participant’s account balance is less than the applicable dollar limit under IRC Section 402(g), which in 20212022 is $19,500.$20,500. Such payment is known as a limited cashout and applies to a participant’s Supplemental Cash Balance Benefit and Supplemental BEP Savings Benefit, including excess contributions and matching contributions.
Deferred Compensation Plan
Our Deferred Compensation Plan (DCP) is an unfunded and non-tax-qualified deferred compensation plan, consisting of three components for employees: (1) employee deferral of current compensation; (2) make-up matching contributions that would have been made by the Bank under the Savings Plan had the base salary compensation not been deferred; and (3) make-up pensionretirement benefits that would have been earned under the Cash Balance Plan had any amount of total annual compensation (base salary and short-term cash incentive compensation) not been deferred. See discussion in “Compensation Tables – Narrative to Non-Qualified Deferred Compensation Table.”
Prior to 2020, the DCP was available only to officers of the Bank, including the named executive officers. Beginning in 2020, the DCP iswas made available to all Bank employees. Directors are also able to defer their director fees under the DCP. The make-up benefits for employee participants under the DCP vest according to the corresponding provisions of the Savings Plan and the Cash Balance Plan.
Effective January 1, 2005, in response to IRC Section 409A, the Bank froze the then-existing DCP (now referred to as the Original DCP) and implemented a new DCP, conforming to IRC Section 409A, which changed the participant election process related to the time and form of benefit payments (referred to herein as the New DCP).
Under the New DCP, participants' make-up Cash Balance Plan benefits are payable in the form of a lump sum, single life annuity, 50% survivor annuity, or 75% survivor annuity upon termination of employment, a set date or age after termination of employment, becoming disabled after termination of employment, or death. If a participant does not elect a time or form of payment, the benefit is paid in a lump sum upon termination of employment. However, if the participant elects to receive his or her distribution at death and survives to the later of age 70½ or termination of employment, the benefit is paid upon the later of the two events in the form of a lump sum. Only a single time and form of distribution may be elected with respect to both the make-up Cash Balance Plan benefits under the New DCP and the make-up Cash Balance Plan benefits under the New BEP.
A participant's deferred compensation and the Bank’s make-up Savings Plan matching contributions credited under the New DCP (including earnings on such amounts) are payable in a lump sum or two to ten annual installments, and payments may commence at termination of employment, retirement, disability, death, or a specific date no earlier than one year from the end of the deferral period. Participant elections with respect to the time and form of Savings Plan-related benefit payments from the New DCP are irrevocable unless the election is made 12 months prior to the scheduled distribution date and the new scheduled distribution date is delayed at least five years. If a participant does not elect the time or form of payment, his or her distribution will be a lump sum at termination of employment.
For participant-deferred compensation and make-up Bank matching contributions credited under the Original DCP, a participant may elect at any time to change the payout schedule of one or more of the participant's accounts, provided that no payments will be made according to the new election until 12 months after the date the Bank receives the new written election, unless the participant elects an immediate lump sum distribution subject to forfeiture of 10% of the lump sum payment.
Prior to 2020, participants were permitted to make up to five separate payout elections (a payout date and form of payment) under each of the New DCP and the Original DCP for distribution of participant deferrals and Bank matching contribution credits. Beginning in 2020, participants are permitted each calendar year to elect a different time and form of distribution for deferrals made in that calendar year.
Notwithstanding a participant’s election of a form of payment, the Bank may instead, in its sole discretion, pay a participant’s entire account balance in a single lump sum payment, so long as the participant’s account balance is less than the applicable dollar limit under IRC Section 402(g), which in 20212022 is $19,500.$20,500. Such payment is known as a limited cashout and applies to a participant’s make-up Cash Balance Plan benefits, including participant deferrals and the Bank’s contributions.
Under the Original DCP, participants' make-up Cash Balance Plan benefits are payable in the same form and at the same time as the participants' related benefits under the Cash Balance Plan.
Supplemental Executive Retirement Plan
Effective January 1, 2003, the Bank began providing a Supplemental Executive Retirement Plan (SERP) to the Bank’s eligible senior executive officers, including the named executive officers.officers (other than Mr. Amato). This plan is an unfunded and non-tax-qualified retirement benefit plan that provides a cash balance stylebalance-style benefit to the Bank’s senior executive officers (including the named executive officers) that is in addition to the tax-qualified benefits under the Cash Balance Plan.
The SERP supplements the Cash Balance Plan benefits to provide a competitive postretirement compensation package that is intended to help the Bank attract and retain key senior executive officers who are critical to the success of the Bank.
Benefits under the SERP are based on total annual compensation (base salary and short-term cash incentive compensation, including any deferrals under the Savings Plan, BEP, or DCP) and years of credited service as presented in the table below for years prior to 2018.below.
| | | | | | | | | | | |
Years of Credited Service
(As Defined in the Plan) | Amount of Contribution for President (Percentage of Total Annual Compensation) | | Amount of Contribution for Other Participants (Percentage of Total Annual Compensation) |
| Fewer than 10 | 10 | % | | 8 | % |
| 10 or more but less than 15 | 15 | % | | 12 | % |
| 15 or more | 20 | % | | 16 | % |
| | | | | | | | | | | |
Years of Credited Service
(As Defined in the Plan) | Amount of Contribution for President (Percentage of Total Annual Compensation) | | Amount of Contribution for Other Participants (Percentage of Total Annual Compensation) |
| Fewer than 5 | 25 | % | | 20 | % |
| 5 or more | 35 | % | | 25 | % |
Participants accrue annual interest equal to 6% of balances accrued through the prior yearend. In addition, SERP benefits are limited to the extent that any participant's total pension retirement income exceeds fifty percent (50%) of the participant's final average pay. Final average pay is defined as a participant's highest average annual compensation during any three consecutive years during which he or she is a participant in the SERP. Annual benefits accrued under the SERP for any plan year that commenced beforecommencing after January 1, 2018, will vest at the earlier of three years after they are earned, five years of employment with the Bank from the date the senior executive officer became a participant in the SERP, or when the participant reaches age 62.
The normal form and time of payment of benefits under the SERP is a lump sum upon the earlier of termination of employment, disability, or death. Upon a timely election, a participant may elect optional forms of payment to commence after termination of employment as specified in the plan.
If a participant's employment is terminated for cause (as defined in the plan), only the unvested portion of the participant’s SERP account would be forfeited.
The SERP was amended in January 2018 to, among other things, revise: (1) Schedule A to the SERP to provide that beginning with 2018, the amounts of the contribution (Contribution Credit) to be credited to the account of a participant covered by Schedule A to the SERP will be 20% of a participant’s total annual compensation for fewer
than five years of credited service (Credited Service) and 25% of a participant’s total annual compensation for five years or more of Credited Service; and (2) Schedule C to the SERP to provide that beginning with 2018, the amounts of the Contribution Credit to be credited to the account of a participant in Schedule C will be 25% of a participant’s total annual compensation for fewer than five years of Credited Service and 35% of a participant’s total annual compensation for five years or more of Credited Service. Annual benefits accrued under the SERP for any plan year commencing after January 1, 2018, will vest at the earlier of five years of employment with the Bank from the date the senior executive officer became a participant in the SERP, or when the participant reaches age 62. The Bank’s eligible senior executive officers, including the named executive officers (other than Mr. Amato), are participants in Schedule A and the former president and chief executive officer wasis a participant in Schedule C. See the table below.D.
| | | | | | | | | | | |
Years of Credited Service
(As Defined in the Plan) | Amount of Contribution for Former President (Percentage of Total Annual Compensation) | | Amount of Contribution for Other Participants (Percentage of Total Annual Compensation) |
| Fewer than 5 | 25 | % | | 20 | % |
| 5 or more | 35 | % | | 25 | % |
The SERP provides the Board with discretionary authority for approving special contribution credits (Special Contribution Credits), which are additional credits to a participant’s account in an amount that may not exceed the participant’s target annualized compensation plus target Deferred Award and Gap Year Award under the EIP and any other long-term incentive compensation (the “pay limitation”) for the applicable calendar year. At any time, no more than three Special Contribution Credits may be approved for a single participant, and the pay limitation for each participant is adjusted annually for annual increases in the participant’s target compensation and long-term incentive pay. The Special Contribution Credits are not subject to the SERP’s total retirement income limitation described above.
Other Elements of Compensation
The Bank provides to all employees, including the named executive officers, health, dental, and vision insurance and an employee assistance program for the employees and their spouses/partners and children, for which the Bank pays approximately 80% of the premiums and the employee pays approximately 20%. In addition, the Bank provides long-term disability and basic life insurance coverage to all employees at no cost to the employees.
The Bank makes available limited retiree health carehealthcare benefits for eligible employees who retire from the Bank. To be classified as a Bank retiree eligible to enroll for retiree health carehealthcare benefits, a Bank employee must be 55 years of age with a minimum of 10 years of Bank service on the date that his or her employment with the Bank terminates.
Perquisites
On occasion, the Bank may pay for resort activities for employees, including our named executive officers, in connection with business-related meetings; and in some cases, the Bank may pay the expenses for spouses/partners accompanying employees to these meetings or other Bank-sponsored events. Perquisites are valued at the actual amounts paid to the provider of the perquisites.
COMPENSATION COMMITTEE REPORT
The Compensation and Human Resources Committee (Compensation Committee) acts as the compensation committee on behalf of the Bank’s Board of Directors.Board. In fulfilling its oversight responsibilities, the Compensation Committee reviewed and discussed with management the Compensation Discussion and Analysis set forth in this annual report on Form 10-K.
Based on the Compensation Committee's review of the Compensation Discussion and Analysis and the discussions the Compensation Committee has had with management, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this annual report on Form 10-K, which will be filed with the Securities and Exchange Commission.
Compensation and Human Resources Committee
ScottMatthew Hendricksen, Chair
Joan C. Syphax, Chair
Matthew Hendricksen,Opp, Vice Chair
Marangal DomingoBanafsheh Akhlaghi
Melinda Guzman
John T. WasleyKevin Murray
COMPENSATION TABLES
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| Summary Compensation Table |
| | | | | | | | | | | | |
| (In whole dollars) | | | | | | | | | | | | |
| Name and Principal Position | Year | Salary | | Bonus | | Non-Equity Incentive Compensation(1) | Non-Equity LTIP Payout(2) | Change in Pension Value and Non-Qualified Deferred Compensation(3) | | All Other(4)(5) Compensation | | Total |
Stephen P. Traynor(6) | 2020 | $ | 470,000 | | | $ | — | | | $ | 487,746 | | $ | — | | $ | 344,850 | | | $ | 39,439 | | | $ | 1,342,035 | |
| Acting President and | 2019 | 453,404 | | | — | | | 221,250 | | 200,700 | | 382,894 | | | 38,211 | | | 1,296,459 | |
| Chief Executive Officer | 2018 | 434,788 | | | — | | | 212,850 | | 195,300 | | 255,744 | | | 29,742 | | | 1,128,424 | |
| | | | | | | | | | | | |
J. Gregory Seibly(7) | 2020 | 338,105 | | (8) | — | | | — | | — | | — | | (9) | 9,599 | | | 347,704 | |
| Former President and | 2019 | 961,301 | | (10) | — | | | 461,400 | | 420,200 | | 795,043 | | | 55,009 | | | 2,692,953 | |
| Chief Executive Officer | 2018 | 900,000 | | | 300,000 | | (11) | 443,100 | | 349,000 | | 848,901 | | | 34,634 | | | 2,875,635 | |
| | | | | | | | | | | | |
Kenneth C. Miller(12) | 2020 | 495,000 | | | — | | | 522,715 | | — | | 466,648 | | | 24,504 | | | 1,508,867 | |
| Former Executive Vice | 2019 | 494,714 | | | — | | | 238,500 | | 231,000 | | 432,414 | | | 37,228 | | | 1,433,856 | |
| President and Chief | 2018 | 480,151 | | | — | | | 234,100 | | 227,000 | | 360,164 | | | 38,292 | | | 1,339,707 | |
| Chief Financial Officer | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Suzanne Titus-Johnson | 2020 | 450,000 | | | — | | | 469,815 | | — | | 172,332 | | | 40,566 | | | 1,132,713 | |
| Executive Vice President and | 2019 | 438,963 | | | — | | | 213,100 | | 205,200 | | 199,922 | | | 39,285 | | | 1,096,470 | |
| Chief Legal Officer and | 2018 | 443,370 | | (13) | — | | | 209,650 | | 201,700 | | 40,927 | | | 35,079 | | | 930,726 | |
| Corporate Secretary | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Elena Andreadakis | 2020 | 470,000 | | | — | | | 490,425 | | — | | 370,918 | | | 41,180 | | | 1,372,523 | |
| Executive Vice President and | 2019 | 452,500 | | | — | | | 221,250 | | 188,500 | | 338,259 | | | 47,249 | | | 1,247,758 | |
| Chief Administrative Officer | 2018 | 418,694 | | | 7,400 | | (14) | 202,950 | | 181,600 | | 217,682 | | | 33,346 | | | 1,061,672 | |
| | | | | | | | | | | | |
Greg Ward(15) | 2020 | 415,000 | | | 100,000 | | (16) | 427,218 | | — | | 486,728 | | | 35,372 | | | 1,464,318 | |
| Executive Vice President and | | | | | | | | | | | | |
| Chief Risk Officer | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Summary Compensation Table |
| | | | | | | | | | | | | | |
| (In whole dollars) | | | | | | | | | | | | | | |
| Name and Principal Position | Year | Salary | | Bonus | | Non-Equity Incentive Compensation(1) | | | Change in Pension Value and Non-Qualified Deferred Compensation(\2) | | | All Other(3)(4) Compensation | | Total |
Teresa Bazemore(5) | 2022 | $ | 910,000 | | | $ | — | | | $ | 904,200 | | | | $ | 415,827 | | | | $ | 178,381 | | (6) | $ | 2,408,408 | |
| President and | 2021 | $ | 696,023 | | | $ | 100,000 | | (7) | $ | 662,500 | | | | $ | 205,378 | | | | $ | 160,950 | | (8) | $ | 1,824,851 | |
| Chief Executive Officer | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Joseph Amato(9) | 2022 | 500,000 | | | 177,418 | | (10) | 421,800 | | | | 49,204 | | | | 30,368 | | | 1,178,790 | |
| Executive Vice President | 2021 | 319,178 | | | 175,000 | | (11) | 260,600 | | | | 96,122 | | | | 31,590 | | | 882,490 | |
| and Chief Financial Officer | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Greg Ward(12) | 2022 | 485,000 | | | — | | | 448,044 | | (13) | | — | | | (14) | 32,494 | | | 965,538 | |
| Executive Vice President | 2021 | 460,000 | | | — | | | 421,983 | | | | 270,113 | | | | 27,789 | | | 1,179,885 | |
| and Chief Risk Officer | 2020 | 415,000 | | | 100,000 | | (15) | 427,218 | | | | 486,728 | | | | 35,372 | | | 1,464,318 | |
| | | | | | | | | | | | | | |
Anne Segrest McCulloch(16) | 2022 | 476,649 | | | 112,500 | | (17) | 400,700 | | | | 160,413 | | | | 104,386 | | (18) | 1,254,648 | |
| Executive Vice President | | | | | | | | | | | | | | |
| and Chief Legal Officer | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Tony Wong(19) | 2022 | 417,000 | | | — | | | 343,400 | | | | 29,708 | | | | 27,874 | | | 817,982 | |
| Executive Vice President | 2021 | 373,309 | | | — | | | 253,700 | | (20) | | 118,726 | | | | 27,309 | | | 773,044 | |
| and Chief Banking Officer | | | | | | | | | | | | | | |
(1)The amounts for 2020 reflect the total Annual Awards under the EIPEIPs for 2022, 2021 and 2020, as applicable, for services performed during the fiscal year ended December 31, 2020.2022, December 31, 2021, and December 31, 2020, respectively. Fifty percent (50%) of the total Annual Award isAwards are earned and vested after the last day of the one-year performance period, i.e., the Year-End Award. The remaining fifty percent (50%) of the total Annual Award isAwards are deferred for a three-year performance period, i.e., the Deferred Award. Any payout of the Deferred Awards under the EIP for 2020EIPs is subject to the satisfaction of certain requirements and qualifiers, and completion of regulatory review. The amount for 2020amounts also reflectsreflect interest for theany vested Deferred AwardAwards under the EIP for 2017 and vesting at the end of 2020. The amounts for 2019 and 2018 represent the Year-End Award for 2019 earned and vested under the EIP for 2019 and the Year-End Award for 2018 earned and vested under the EIP for 2018, respectively.EIPs. For the total Annual Award for 20202022 under the EIP for 2020,2022, see the discussion in “Narrative to Summary Compensation Table and Grants of Non-Equity Incentive Plan-Based Awards Table – Non-Equity Incentive Compensation and Non-Equity Long-Term Incentive Payouts.”
(2)The amounts for 2019 represent the GAP Year Awards under the EIP for 2017, and the amounts for 2018 represent awards earned under the 2016 Executive Performance Unit Plan (the Bank’s former traditional long-term cash incentive plan). For a discussion of the Gap Year Awards included for 2019 under the EIP for 2017, see “Elements of Our Executive Compensation Program – Executive Incentive Plan” in Compensation Discussion and Analysis and the “Grants of Non-Equity Incentive Plan-Based Awards” table in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2017. For a discussion of the awards granted under the 2016 Executive Performance Unit Plan, see “Elements of Our Executive Compensation Program – Traditional Long-Term Cash Incentive Plan: Executive Performance Unit Plan” in Compensation Discussion and Analysis and the “Grants of Non-Equity Incentive Plan-Based Awards” table in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2016.
(3)Represents the aggregate change in actuarial present value of each of the named executive officers' accumulated benefits under the Bank’s qualified and non-qualified defined benefit pension plans (Cashto the extent applicable (i.e., Cash Balance Plan; frozen FIRF, if applicable;FIRF; restored pension benefitbenefits under the Benefit Equalization Plan (BEP); make-up pension benefitretirement benefits under the Deferred Compensation Plan (DCP); and Supplemental Executive Retirement Plan). There are no above-market or preferential earnings on the named executive officers' DCP accounts.
(4)(3)Includes perquisites and premiums for disability and life insurance paid by the Bank. On occasion, the Bank pays for resort activities for employees in connection with Board meetings and other business-related meetings; and, in some cases, the Bank may pay the expenses for spouses accompanying employees to these meetings or other Bank-sponsored events. Perquisites are valued at the actual amounts paid to the provider of the perquisites. The value of some perquisites is not reasonably quantifiable but is known to be de minimis.
(5)(4)Includes the Bank’s matching contributions under the Savings Plan and the Bank’s restored and make-up matching amounts credited under the BEP and DCP.
(6)(5)Mr. Traynor, who previously served as senior vice president, member financial services and community investment,Ms. Bazemore became chief banking officer in March 2019, and effective upon Mr. Seibly’s resignation, became acting president and chief executive officer. For serving as acting president and chief executive officer, Mr. Traynor is accruing a special award at a rate of $45,833.33 per month, beginning March 1, 2020, and continuing through the last
business day prior to the date on which a permanent chief executive officer commences employment at the Bank. To be eligible for the award, Mr. Traynor must satisfy certain service requirements. See “Narrative to Summary Compensation Table and Grants of Non-Equity Incentive Plan-Based Awards Table – Employee Agreements and Arrangements.” On February 23, 2021, the Bank announced the appointment of Teresa Bryce Bazemore as the Bank’s president and chief executive officer effective March 15, 2021, and upon2021.
(6)Of this date, Mr. Traynor will no longer serve as acting president and chief executive officer. See “Part II – Item 9B. Other Information.”amount, $120,000 represents reimbursement of relocation costs to Ms. Bazemore.
(7)Mr. Seibly resigned as the Bank’s president and chief executive officer effective February 28, 2020.Represents payment of a sign-on payment in accordance with Ms. Bazemore’s employment agreement.
(8)Of this amount, $180,605$112,903 represents a vacation cash-out payment.reimbursement of relocation costs to Ms. Bazemore.
(9)Mr. Amato became the interim chief financial officer effective January 5, 2021, and the chief financial officer effective May 13, 2021.
(10)Represents a payment of a special award in recognition of his service as chief financial officer.
(11)Represents a payment of a special award in recognition of his service as interim chief financial officer.
(12)Mr. Ward, who previously served as chief audit executive, became chief risk officer in May 2019 and chief operating officer effective November 1, 2022.
(13)This amount represents an award earned by Mr. Ward in the amount of $336,900 under the Bank’s EIP for 2022 as the Bank’s chief risk officer, $75,300 under the EIP for 2022 as the Bank’s chief operating officer, and $35,844 in interest for the Deferred Award under the EIP for 2018.
(14)In accordance with the Securities and Exchange Commission (SEC) rules, negative changes in pension value are not included in this table. The negative change in pension value for Mr. SeiblyWard is $1,292,135.$70,498.
(10)Of this amount, $16,301 represents a vacation cash-out payment.
(11)The amounts for Mr. Seibly in 2018 represent payment of a sign-on bonus in accordance with his employment agreement.
(12)Mr. Miller retired from the Bank effective January 4, 2021.
(13)Of this amount, $16,855 represents a vacation cash-out payment.
(14)(15)This amount represents a discretionary cash incentive compensation award.
(15)(16)Greg Ward,Ms. McCulloch became the chief legal officer effective November 18, 2021.
(17)Represents a payment of a sign-on payment.
(18)Of this amount, $75,924 represents reimbursement of relocation costs to Ms. McCulloch.
(19)Mr. Wong, who previously served as chief audit executive, becamemarketing officer and acting chief riskbanking officer, was appointed chief banking officer in May 2019.2021.
(16)(20)ThisIn addition to the Annual Award under the EIP for 2021 prorated, the amount representsincludes a discretionary cash incentive compensation award.prorated award earned by Mr. Wong in the amount of $42,600 under the Bank’s Team Member Incentive Plan earned prior to Mr. Wong becoming eligible for the EIP for 2021 in May 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grants of Non-Equity Incentive Plan-Based Awards |
| | | | | | | | | | | |
| (In whole dollars) | | | | | | | Estimated Payout Ranges(1) |
| Name | EIP for 2020 | | Plan Period | | Payout Date | | Threshold | | Target | | Maximum |
| Stephen P. Traynor | Year-End Award | | 2020 | | February 2021 | | $ | 94,000 | | | $ | 188,000 | | | $ | 235,000 | |
| Deferred Award | | 2021-2023 | | February 2024 | | 94,000 | | | 188,000 | | | 235,000 | |
| J. Gregory Seibly | Year-End Award | | 2020 | | February 2021 | | N/A | | N/A | | N/A |
| Deferred Award | | 2021-2023 | | February 2024 | | N/A | | N/A | | N/A |
| Kenneth C. Miller | Year-End Award | | 2020 | | February 2021 | | 99,000 | | | 198,000 | | | 247,500 | |
| Deferred Award | | 2021-2023 | | February 2024 | | 99,000 | | | 198,000 | | | 247,500 | |
| Suzanne Titus-Johnson | Year-End Award | | 2020 | | February 2021 | | 90,000 | | | 180,000 | | | 225,000 | |
| Deferred Award | | 2021-2023 | | February 2024 | | 90,000 | | | 180,000 | | | 225,000 | |
| Elena Andreadakis | Year-End Award | | 2020 | | February 2021 | | 94,000 | | | 188,000 | | | 235,000 | |
| Deferred Award | | 2021-2023 | | February 2024 | | 94,000 | | | 188,000 | | | 235,000 | |
| Greg Ward | Year-End Award | | 2020 | | February 2021 | | 83,000 | | | 166,000 | | | 207,500 | |
| Deferred Award | | 2021-2023 | | February 2024 | | 83,000 | | | 166,000 | | | 207,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grants of Non-Equity Incentive Plan-Based Awards |
| | | | | | | | | | | |
| (In whole dollars) | | | | | | | Estimated Payout Ranges(1) |
| Name | EIP for 2022 | | Plan Period | | Payout Date | | Threshold | | Target | | Maximum |
| Teresa Bazemore | Year-End Award | | 2022 | | February 2023 | | $ | 227,500 | | | $ | 364,000 | | | $ | 455,000 | |
| Deferred Award | | 2023-2025 | | February 2026 | | 227,500 | | | 364,000 | | | 455,000 | |
| Joseph Amato | Year-End Award | | 2022 | | February 2023 | | 100,000 | | | 162,500 | | | 212,500 | |
| Deferred Award | | 2023-2025 | | February 2026 | | 100,000 | | | 162,500 | | | 212,500 | |
| Greg Ward | Year-End Award | | 2022 | | February 2023 | | 97,000 | | | 157,650 | | | 206,150 | |
| Deferred Award | | 2023-2025 | | February 2026 | | 97,000 | | | 157,650 | | | 206,150 | |
| Anne Segrest McCulloch | Year-End Award | | 2022 | | February 2023 | | 95,000 | | | 154,400 | | | 201,900 | |
| Deferred Award | | 2023-2025 | | February 2026 | | 95,000 | | | 154,400 | | | 201,900 | |
| Tony Wong | Year-End Award | | 2022 | | February 2023 | | 83,400 | | | 135,550 | | | 177,250 | |
| Deferred Award | | 2023-2025 | | February 2026 | | 83,400 | | | 135,550 | | | 177,250 | |
(1)The estimated payouts for the Year-End Award and the Deferred Award each represent 50% of the total Annual Awards under the EIP for 20202022 that could have been earned by the respective executive officers for 2020.2022. Actual amounts of both the Year-End Award and Deferred Award under the EIP for 20202022 for each named executive officer are included in the Summary Compensation Table. Any payout of the Deferred Awards under the EIP for 20202022 is subject to the satisfaction of certain requirements and qualifiers, and completion of regulatory review. See the discussion in “Compensation Discussion and Analysis – Elements of our Executive Compensation Program – Executive Incentive Plan.” Mr. Ward’s estimated payout ranges are prorated under the EIP for his service as the chief risk officer and as the chief operating officer.
Narrative to Summary Compensation Table and Grants of Non-Equity Incentive Plan-Based Awards Table
At Will Employees
All employees of the Bank are “at will” employees, including the named executive officers. The named executive officers may resign at any time, and the Bank may terminate their employment at any time, for any reason or no reason, with or without cause and with or without notice.notice, subject to contractual obligations, if any.
The 20202022 annual base salaries as of December 31, 2020,2022, for the 20202022 named executive officers servingwho served as of December 31, 2020,2022, were as follows: Stephen P. Traynor, $470,000; Kenneth C. Miller, $495,000; Suzanne Titus-Johnson, $450,000; Elena Andreadakis, $470,000; andTeresa Bryce Bazemore, $910,000; Joseph Amato, $500,000; Anne Segrest McCulloch, $475,000; Greg Ward, $415,000. For 2021, base salaries for these officers did not change.$530,000; and Tony Wong, $417,000.
Corporate Senior Officer Severance Policy. The Corporate Senior Officer Severance Policy (Senior Officers' Policy) is applicable to the president, executive vice presidents (other than the interim chief financial officer)Mr. Amato), and any senior vice president as of December 31, 2018, who are defined in the Senior Officers’ Policy as “Corporate Senior Officer.” The Senior Officers' Policy provides severance benefits in the event thatif the employee's employment is terminated because the employee's job or position is eliminated or because the job or position is
substantially modified so that the employee is no longer qualified or cannot perform the revised job. For these officers, severance under the Senior Officers' Policy is equal to the greater of (i) 12 weeks of the officer's base salary, or (ii) the sum of three weeks of the officer's base salary, plus three weeks of the officer's base salary for each full year of service and three weeks of base salary prorated for each partial year of service at the Bank to a maximum of 52 weeks of base salary. The Senior Officers' Policy also provides one month of continued health and life insurance benefits and, at the Bank’s discretion, outplacement assistance.
The Senior Officers' Policy provides that in the event a Corporate Senior Officer is involuntarily terminated without “Cause” under certain circumstances or voluntarily terminated with “Good Reason” (as defined by the Senior Officers' Policy) in connection with a Change in Control, upon the Bank’s timely receipt of a separation agreement and release, these executive officers will receive severance pay in a lump sum equal to one year of base salary.
In addition, under the Senior Officers' Policy, in the event of a qualifying termination in connection with a Change in Control, each Corporate Senior Officer will be entitled to continued health and life insurance coverage under the Bank’s group health and life insurance policies, at the Bank’s expense, for a period of 12 months immediately
following the effective date of separation. However, the Bank will immediately cease paying such premiums prior to the end of the 12-month period if the executive officer accepts employment with another employer that provides comparable benefits in terms of cost and scope of coverage during the 12-month period. If the Bank is not in compliance with any applicable regulatory capital or regulatory leverage requirement or if any of the payments required to be made to a Corporate Senior Officer pursuant to the Senior Officers' Policy would cause the Bank to fall below such applicable regulatory requirements, such payment will be delayed until the Bank achieves compliance with its regulatory capital requirements.
The Board believes that the level of severance benefits for each named executive officer who is a Senior Corporate Officer under the Senior Officers’ Policy is appropriate because it is reasonable to believe that finding a comparable position at another institution at a comparable compensation level could take up to one year, and possibly longer, depending on the economic environment at the time, and that the distraction of this uncertainty may have a detrimental impact on the executive's performance. If the employment of any of the 20202022 named executive officers who are eligible under the Senior Officers’ Policy currently serving had been terminated on December 31, 2020,2022, because the employee's job or position had been eliminated or because the job or position had been substantially modified so that the employee was no longer qualified or could not perform the revised job, the approximate value of the severance benefits payable to the executive (subject to Finance Agency regulatory review) applying the Senior Officers’ Policy would have been as follows: Stephen P. Traynor, $473,568; Kenneth C. Miller, $498,583; Suzanne Titus-Johnson, $452,428; Elena Andreadakis, $290,130; andAnne Segrest McCulloch, $109,822; Greg Ward, $195,641.$311,045; and Tony Wong, $417,329.
Employment Agreements and Arrangements
On February 6, 2020, theBazemore Employment Agreement. The Bank announced that Greg Seibly gave notice of his resignation as the Bank’s president and chief executive officer effective February 28, 2020. Mr. Seibly had entered into an employment agreement with Teresa Bryce Bazemore dated February 19, 2021, with an initial term of three years and one-year terms thereafter, unless terminated at any time by either the Bank effective May 12, 2016. Foror Ms. Bazemore. Under the terms of the agreement, Ms. Bazemore will initially receive a discussionbase annual salary of Mr. Seibly’s$875,000 and a sign-on payment of $100,000 paid in the following installments: $50,000 shall be paid 30 days from the start of her employment, and $50,000 shall be paid six months from the start of her employment, which installments are subject to clawbacks in certain circumstances.
The employment agreement see “Item 11. Executive Compensation – Narrativeprovides for a severance payment equal to Summary Compensation Table(i) two times her Salary (as defined in her employment agreement); and Grants(ii) two times her Annual Incentive Amounts (as defined in her employment agreement) and continued benefits if Ms. Bazemore’s employment is terminated under certain circumstances in connection with a Change in Control (as defined in her employment agreement) of Non-Equity Incentive Plan-Based Awards Table– At Will Employees – Employment Agreement”the Bank. Had Ms. Bazemore’s employment been terminated in connection with a Change in Control on December 31, 2022, the approximate value of the benefits payable to Ms. Bazemore would have been $2,277,354, excluding amounts of any outplacement services.
Ms. Bazemore will also be eligible to participate in the Bank’s Annual Report on Form 10-Kvarious executive incentive and employee benefit plans, including the Bank’s Executive Incentive Plan (EIP) and Supplemental Executive Retirement Plan (SERP). Under Ms. Bazemore’s employment agreement, the amount of Bank annual contribution credits under the SERP will be as follows: 25% of total annual compensation for less than 5 years of credited service and 35% of total annual compensation for 5 or more years of credited service. Under Ms. Bazemore’s employment agreement, the Bank will provide reimbursement of her relocation costs up to $250,000.
The employment agreement also provides that if Ms. Bazemore’s employment is terminated due to the expiration of the initial three-year term and the Board decided not to extend her employment for any additional term, Ms. Bazemore would be entitled to all Accrued Benefits (as defined in her employment agreement) and to receive a severance payment equal to twelve (12) months of base salary and a pro-rata portion of the EIP award for the year endedin which the termination occurs; and all Deferred Awards will be treated as fully vested (Severance Payment).
The employment agreement further provides that if Ms. Bazemore was terminated without Cause (as defined in her employment agreement) or if she terminated her employment for Good Reason (as defined in her employment agreement) at any time, Ms. Bazemore would be entitled to receive severance payments equal to the Severance Payment and all Accrued Benefits. Had Ms. Bazemore been terminated under these circumstances on December 31, 2019.
The Board named Stephen P. Traynor, executive vice president and chief banking officer, as the Bank’s acting president and chief executive officer, effective upon Mr. Seibly’s resignation. Pursuant to the compensation arrangement relating to Mr. Traynor’s service as acting president and chief executive officer, Mr. Traynor accrues a special award at a rate of $45,833.33 per month (in addition to his base salary of $470,000 for 2020), beginning March 1, 2020, and continuing through the last business day prior to the date on which a permanent chief executive officer commences employment at the Bank (the “CEO Employment Date”). The accrual amount will be pro-rated for any partial month of service by Mr. Traynor as acting president and chief executive officer. Mr. Traynor will receive the special award in two equal installments: the first as soon as administratively feasible following the CEO Employment Date; and the second as soon as administratively feasible following the 60th calendar day following the CEO Employment Date. To be eligible to receive the award, Mr. Traynor must continue his service as the acting
2022, the approximate value of the benefits, payable to Ms. Bazemore, excluding amounts of any Accrued Benefits, would have been $213,649.
The employment agreement also provided that Mr. Amato acknowledges and agrees that notwithstanding any terms to the contrary in the Bank’s EIP, SERP, and Corporate Senior Officer Severance Policy, such plans and policy would not apply to him in connection with his employment under the employment contract; and the Special Award is in lieu of any and all payments or rights that might otherwise have been available to him under such plans and policy.
presidentOn July 7, 2021, the Bank entered into an amendment to Mr. Amato’s employment agreement (Amendment No. 1) to extend the term of his employment to March 31, 2023, and, effective May 13, 2021, to serve as the Bank’s chief executivefinancial officer through the CEO Employment Date(CFO) for the first installment and continue his employmentextended term (Second Term). In connection with the Bank throughextension of Mr. Amato’s term of employment, Mr. Amato served for one Automatic One Month Extension Term. Amendment No. 1 provides an option to mutually elect to extend his Second Term for another year, until March 31, 2024 (Mutual Extension).
Amendment No. 1 provides that Mr. Amato will be eligible for a second special award of up to $354,835 in recognition of his service as the 60th calendar day followingBank’s CFO (Second Special Award). Unless Mr. Amato is terminated for Cause or resigns without Good Reason prior to March 31, 2022, he will be eligible for up to the CEO Employment Date for the second installment, except in certain termination events as follows: in a performance-based termination, termination for “cause,” or a voluntary termination, all unpaid portionsfirst 50% of the special awardSecond Special Award ($177,418), which shall accrue and, if approved by the Bank’s President and Chief Executive Officer, will be forfeited; and in an involuntary termination (other than a performance-based termination or for “cause”), death, or long-term disability, all accrued and unpaid portions of the special award will be payablepaid as soon as administratively feasible. practicable following March 31, 2022. Eligibility for up to the second 50% of the Second Special Award ($177,417) shall accrue and, if approved by the Bank’s President and Chief Executive Officer, will be paid as soon as administratively practicable following March 31, 2023, unless Mr. Amato is terminated for Cause or resigns without Good Reason prior to such date.
Additionally, Amendment No. 1 provides that beginning with the Second Term, Mr. Amato will also be eligible to participate in the Bank’s EIP. For the Second Term, Mr. Amato continues to acknowledge that the SERP and the Corporate Senior Officer Severance Policy will not apply to him during the Second Term or any Mutual Extension.
Amendment No. 1 also provides that, upon the expiration of the Second Term or any Mutual Extension, Mr. Amato shall be entitled to receive a severance payment equal to the EIP Annual Award (defined in the EIP to include both the short-term incentive component and the long-term incentive component) as set forth in the Bank’s EIP, which will be treated as vested, on a pro rata basis for the performance period of the year when the expiration of his employment agreement occurs, and any Deferred Awards (as defined in the EIP) will be treated as fully vested, all of which is to be paid out as and when due in accordance with the EIP (Severance Payment).
On February 23, 2021,October 18, 2022, in accordance with the Mutual Extension, the Bank announcedand Mr. Amato entered into an amendment to his employment agreement to mutually extend the appointmentterm of Teresa Bryce Bazemorehis employment following the expiration of the Second Term to March 31, 2024 (Amendment No. 2).
Under the terms of Amendment No. 2, in recognition of Mr. Amato’s extended service as the Bank’s presidentExecutive Vice President and chief executive officer effective March 15, 2021,CFO, Mr. Amato will be eligible for a fully discretionary “Third Special Award” of up to an
amount equal to the actual foregone benefits under the Bank’s SERP and upon thisCash Balance Plan (and related Benefit Equalization Plan) for the 2020 to 2024 plan years reduced by any payments made under the Second Special Award (as defined in Amendment No. 1) and further reduced by any benefits under the Bank’s Cash Balance Plan (and related Benefit Equalization Plan) that become fully vested in recognition of his service as CFO and based on his performance in connection with his duties and responsibilities as the Bank’s principal financial officer.
If Mr. Amato’s employment is terminated at any time by the Bank without Cause or if he terminates his employment for Good Reason, then Mr. Amato shall be entitled to receive an amount equal to his remaining salary, as well as all Accrued Benefits. In addition, Mr. Amato will be entitled to any earned but unpaid amount of the fully discretionary Second Special Award on a pro rata basis for the period up to the date the termination occurs and shall be entitled to receive the Severance Payment (but if Mr. Traynor willAmato is otherwise entitled to any EIP Awards by operation of the EIP and receives such amount(s), then Mr. Amato would receive the greater of such EIP Awards or the EIP Awards calculated as Severance Payment, but in no longer serve as acting president and chief executive officer. See “Part II – Item 9B. Other Information.”event shall Mr. Amato receive both). Had Mr. Amato been terminated under these circumstances on December 31, 2022, the approximate value of the benefits, payable to Mr. Amato, excluding amounts of any Accrued Benefits, would have been $147,847.
Non-Equity Incentive Compensation and Non-Equity Long-Term Incentive Payouts
For 2020, Mr. Traynor,2022, Ms. Bazemore, as acting president and chief executive officer, was awarded an Annual Award under the EIP of $449,600. Mr. Traynor’s$904,200. Ms. Bazemore’s award was based on the Bank’s 20202022 overall achievement level of 124.5%148.0%, which was comprised of the following achievement levels for the Bank’s four corporate goals: 128.8%150% for the Business and Financial goal;150% for the Risk Management goal; 111.5% for the Franchise Enhancement goal; and 150%140% for the Community Investment goal; and 125%150% for the D&IDEI and People goal, along with his 2020her 2022 achievement level for hisher individual goal.
Based on the achievement levels for the Bank’s four corporate goals and the achievement levels of the other 20202022 named executive officers for their respective individual goals, the following Annual Awards under the EIP for 20202022 were awarded: Kenneth C. Miller, $478,800; Suzanne Titus-Johnson, $430,800; Elena Andreadakis, $454,600; andJoseph Amato, $421,800; Greg Ward, $398,900.$412,200; Anne Segrest McCulloch, $400,700; and Tony Wong, $343,400.
The total Annual Award for each named executive officer represents the amount for their Year-End Award and the amount for their Deferred Award, each of which is fifty percent (50%) of their Annual Award approved by the Board under the EIP for 2020.2021. The payment of the their Deferred Award is deferred for the three-year performance period and is subject to applicable requirements and qualifiers as described in “Compensation Discussion and Analysis – Elements of Our Executive Compensation Program – Executive Incentive Plan,” which discussion is herein incorporated by reference.
The following table shows the two components of the total Annual Awards for the named executive officers approved by the Board under the EIP for 2020.2022.
| | | | | | | | | | | | | | | | | |
| EIP for 2020 |
| Named Executive Officers | Year-End Awards(1) | | Deferred Awards(2) | | Annual Awards |
| Stephen P. Traynor | $ | 224,800 | | | $ | 224,800 | | | $ | 449,600 | |
| | | | | |
| Kenneth C. Miller | 239,400 | | | 239,400 | | | 478,800 | |
| Suzanne Titus-Johnson | 215,400 | | | 215,400 | | | 430,800 | |
| Elena Andreadakis | 227,300 | | | 227,300 | | | 454,600 | |
| Greg Ward | 199,450 | | | 199,450 | | | 398,900 | |
| Total | | | | | $ | 2,212,700 | |
| | | | | | | | | | | | | | | | | |
| (In whole dollars) | EIP for 2022 |
| Named Executive Officers | Year-End Awards(1) | | Deferred Awards(2) | | Annual Awards |
| Teresa Bazemore | $ | 452,100 | | | $ | 452,100 | | | $ | 904,200 | |
| Joseph Amato | 210,900 | | | 210,900 | | | 421,800 | |
Greg Ward(3) | 206,100 | | | 206,100 | | | 412,200 | |
| Anne Segrest McCulloch | 200,350 | | | 200,350 | | | 400,700 | |
| Tony Wong | 171,700 | | | 171,700 | | | 343,400 | |
| Total | | | | | $ | 2,482,300 | |
(1)The Year-End Award is 50 percent of the total Annual Award and is included in the Summary Compensation Table.
(2)The Deferred Award is 50 percent of the total Annual Award and remains subject to the satisfaction of applicable qualifiers and will not be paid until 2024.2026. The Deferred Awards are also subject to modification and forfeiture under the terms of the EIP.
(3)The Annual Award under the EIP for 2022 for Mr. Ward represents the prorated amount under the EIP for his service as the chief risk officer and as the chief operating officer.
In reviewing the Bank’s 20202022 performance, the Board recognized the acting president’s leadership and the other named executive officers' management in addressing risk management, business, financial, operational efficiency, and regulatory challenges and issues, while achieving performance goals and objectives at a very high levellevel. The Board recognized Ms. Bazemore’s achievements and during a period of a global pandemic. With respect to Mr. Traynorher efforts, in particular, the Board recognized Mr. Traynor’s achievements with respect to his efforts in establishing a fully remote workforce in response to the pandemic and ensuring the Bank’s stability and accessibility for members during a period of capital markets uncertainty. Additionally, Mr. Traynor ledher leading the Bank through impacts relateda continued period of economic uncertainty and leadership transition. Additionally, in support of employee engagement, Ms. Bazemore led the Bank’s workforce through a transition from being fully remote to external environmental factors, such as wildfires, community and school closures, and social justice issues.
participating in the Bank’s hybrid work program.With respect to the achievement level of the cyber-security goal component of the Risk Management goal, management successfully deployed password-less secure authentication technology for the Bank’s Outlook Mobile solution for access to the Bank’s email platform. Management also successfully onboarded key applications to SailPoint, which is the Bank’s primary “identity and access management” governance tool that facilitates access control reviews, access segregation of duties management, and business-language descriptions of application entitlements. To enable a sustainable process for the business to maintain entitlement descriptions in SailPoint, management also deployed a new self-service portal for application owners to enter and manage entitlement descriptions.
With respect to the achievement level of the credit risk management goal component of the Risk Management goal, the Bank responded to regulatory changes and the COVID-19 pandemic by prioritizing the introduction of new and improved protocols and analytical approaches incorporating market-implied ratings as forward-looking benchmarks and potential drivers of internal rating actions for counterparties. The member credit monitoring process was also redesigned so that the credit review frequency would be commensurate with the risk profile for each member. Other achievements under this goal were the development and deployment of many new portfolio level analytical tools to support the analysts’ ability to more efficiently cope with the unique risk arising for member financial profiles from the COVID-19 pandemic crisis.
To support the achievement level of the compliance management risk goal component of the Risk Management goal, management met deliverables by completing an inventory of the regulations and regulatory guidance within the “Readiness Library” of the Bank’s governance risk and control platform - Logic Manager. In addition, the “Compliance Risk Taxonomy” was developed and incorporated into the Bank’s Compliance Policy. Management also performed “roll-forward” gap assessments of the regulations to identify process and control activities for each regulation.
To support the achievement level of the LIBOR transition goal component of the Risk Management goal, management participated in industry efforts to finalize the International Swaps and Derivatives Association, Inc. (ISDA) solution for amending legacy derivatives contracts that reference LIBOR and adhered to the ISDA 2020 Interbank Offered Rate Fallback Protocol during the escrow period. All the Bank’s uncleared bilateral counterparties adhered to the protocol, resulting in improved fallback provision in legacy derivatives contracts. The LIBOR certification process for member collateral was implemented in March 2020 with certifications obtained by the required due date from members. Management also implanted a process to update mortgage collateral data maps to include the successor index. In addition, management created a collateral discount methodology for LIBOR-indexed collateral during the year and provided an updated LIBOR transition financial risk assessment and system enhancements and process improvements to support hedging member and funding products with non-LIBOR derivatives with embedded options.
To support the achievement level of the financial performance goal component of the Franchise EnhancementBusiness and Financial goal for 2022, the full year AROC spread was 3.53%. After an adjustment for a favorable financial performance driver that was not reflected in goal achievement, the Bank achieved a spread of 2.56% (net of SEC disgorgement income)2.89%.
To support the achievement level for the talent developmentoperating efficiency goal component of the Franchise EnhancementBusiness and Financial goal management completed the overall “HR and Talent Management” framework and strategy. In addition,for 2022, full year operating expenses were $151 million, which was below the Bank’s executive management participated in a 360-performance review process, which provided each executive officer with anonymous feedback across multiple key stakeholders that2022 operating expense budget.
To support the executive officers leveraged to build and complete their individual development plan. Management also rolled out competency workshops across the Bank for all employees to attend and learn more about the applicability of each competency and understand the Bank’s commitment to leveraging the competencies across the Bank.
With respect to the first partachievement level of the member business goal component of the Franchise EnhancementBusiness and Financial goal for 2022, which measured how well the Bank maintained and increased the volume of advances and letters of credit outstanding to members, the Bank’s average daily balance for advances and letters of credit for 20202022 was $49.78$51.5 billion and $19.87$17.0 billion, respectively, for a total of $69.65$68.5 billion. Based upon these results,performance against
For the accomplishments relating to the Business and Financial goal targets listed is below the Thresholdfor 2022 discussed above, management received an overall achievement level of $70 billion.150%.
To support the achievement level of the first goal component of the Risk Management goal for 2022, management successfully surpassed its Operational Risk Assessment plan objectives, developed a holistic process taxonomy for the Bank, completed a detailed mapping of risk and controls to various Information Technology industry standard frameworks/regulations, and formulated a Governance Risk and Compliance (GRC) platform roadmap outlining a glidepath to help identify operational synergies.
To support the achievement level of the second goal component of the Risk Management goal for 2022, which was intended to minimize cyber security exposure to Bank operations, management defined an “active directory” baseline based on leading industry guidance, identified and acquired tools and processes to implement configuration settings for “active directory,” and implemented the configuration settings for the “active directory.”
For the accomplishments relating to the Risk Management goal for 2022 discussed above, management received an overall achievement level of 150%.
For the first goal component of the Community Investment goal for 2022, the Bank executed an agreement with the Nevada Housing Coalition to administer the “Voluntary Capacity Building Program,” established a framework for the new Nevada AHP Target Fund (which includes technology, governance, and programmatic components) and obtained board approval to offer the Nevada Targeted Fund in 2023.
With respect to the second goal component of the Community Investment goal for 2022 to make advances and credit programs that promote and assist housing and community economic development activities available to members, the Bank met the target goal level in 2022.
For the third goal component of the Community Investment goal for 2022, as part of the Bank’s Strategic Homeownership Initiative, fourteen (14) Bank members participated in the Bank’s newly created matching grant homeownership counseling program focused on increasing sustainable home ownership.
For the accomplishments relating to the Community Investment goal for 2022 mentioned above, management received an overall achievement level of 140%.
The DEI and People goal for 2022 comprised of three components goals: (i) DEI – Supplier Diversity; (ii) DEI – Workplace Diversity; and (iii) Talent.
With respect toFor the second part of the member businessfirst DEI and People goal component, management worked with new and existing partners to identify diverse suppliers with the purpose of the Franchise Enhancement goal, which focused management on fostering relationshipsincreasing addressable spend by providing additional opportunities to maintain or increase spend with members and enhancing the Bank’s role as a valuable resource and business partner, the Bank’s relationship managers and specialists had 149 significant interactions with members and the Bank hosted 19 member engagement events during 2020.
For the Bankwide prioritization and process improvement goal componentpeople of the Franchise Enhancement goal, the Bankwide prioritization process was expanded to include both technology and information security portfolios, as well as process improvement ideas generated by the lean initiatives. Several idea generation sessions were held in 2020, including one with a subset of voters to improve the scoring process of pitches to include a regulatory component and one with lean change agents to inform the Bank’s Return-to-Office strategy. In addition, there were improvements in the contractor on- and off-boarding processes, which resulted in reduction of missed contractor termination actions by managers and supported the reduction of Operation Event Reports in this area.
With respect to the Community Investment goal, the Board noted the Bank’s strong performance in far exceeding the goal for the number of members using the CIP and ACE Programcolor or receiving awards in the AHEAD Program.diverse suppliers. As a result, the percentage of contracts where a diverse supplier was considered was 87% of the COVID-19 pandemic,Bank’s total vendor contracts.
To support the Boardachievement level of the second DEI and People goal component, management increased overall fundingparticipation from diverse employees in leadership development programs to 88 employees, a meaningful increase from 2021.
Under the third DEI and People goal component for AHEAD from $1.5 million to $3.5 million,2022, management completed talent reviews for EVPs, SVPs, MDs, Senior Directors, and Directors, team calibrations, and Leadership Team composition in order identify key talent and build a diverse talent pipeline and succession planning. For the Bank received 362 applications from 68 unique members for the AHEAD program. The additional $2 million in funding contributed to 65 members receiving an AHEAD award. There were 84 unique members using the Bank's community investment programs in 2020.
With respectaccomplishments relating to the D&IDEI and People goal for 2022 mentioned above, management met certain deliverables in continuing to support the Bank’s three-year D&I Strategic Plan goals and objectives, including hosting manager training workshops on accountability and valuing difference, partnering with other FHLBanks in hosting a diverse dealer event, and facilitating professional diverse supplier certification for five vendors.received an overall achievement level of 150%.
Pension Benefits Table
The following table provides the present value of accumulated pensionretirement and pension-related benefits payable as of December 31, 2020,2022, to each of the named executive officers upon the normal retirement age of 65 under the Bank’s qualified and non-qualified defined benefit pension plans.
| | | | | | | | | | | | | | | | | | | | | | | |
| (In whole dollars) | | | | | | | |
| Name | Plan Name | | Years of
Credited
Service | | Present Value of Accumulated Benefits(1) | | Payments
During Last
Fiscal Year |
| Stephen P. Traynor | Cash Balance Plan | | 25.250 | | | $ | 736,162 | | | $ | — | |
| Financial Institutions Retirement Fund | | 0.250 | | | 6,015 | | | — | |
| Benefit Equalization Plan | | 25.250 | | | 278,719 | | | — | |
| Deferred Compensation Plan | | 25.250 | | | 249,398 | | | — | |
| Supplemental Executive Retirement Plan(2) | | 18.000 | | | 2,253,342 | | | — | |
| | | | | | | |
| J. Gregory Seibly | Cash Balance Plan | | 3.167 | | | 105,683 | | | — | |
| Financial Institutions Retirement Fund | | N/A | | — | | | — | |
| Benefit Equalization Plan | | 3.167 | | | — | | | (265,808) | |
| Deferred Compensation Plan | | 3.167 | | | — | | | — | |
| Supplemental Executive Retirement Plan(2) | | 3.750 | | | — | | | (906,899) | |
| | | | | | | |
| Kenneth C. Miller | Cash Balance Plan | | 25.917 | | | 776,325 | | | — | |
| Financial Institutions Retirement Fund | | 0.917 | | | 24,664 | | | — | |
| Benefit Equalization Plan | | 25.917 | | | 600,026 | | | — | |
| Deferred Compensation Plan | | 25.917 | | | 26,969 | | | — | |
| Supplemental Executive Retirement Plan(2) | | 18.000 | | | 2,422,821 | | | — | |
| | | | | | | |
| Suzanne Titus-Johnson | Cash Balance Plan | | 34.333 | | | 1,113,706 | | | — | |
| Financial Institutions Retirement Fund | | 9.333 | | | 167,940 | | | — | |
| Benefit Equalization Plan | | 34.333 | | | 1,005,529 | | | — | |
| Deferred Compensation Plan | | 34.333 | | | 216,898 | | | — | |
| Supplemental Executive Retirement Plan(2) | | 15.750 | | | 1,180,583 | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Elena Andreadakis | Cash Balance Plan | | 9.083 | | | 231,215 | | | — | |
| Financial Institutions Retirement Fund | | N/A | | — | | | — | |
| Benefit Equalization Plan | | 9.083 | | | 204,743 | | | — | |
| Deferred Compensation Plan | | 9.083 | | | 39,075 | | | — | |
| Supplemental Executive Retirement Plan(2) | | 9.583 | | | 1,114,323 | | | — | |
| | | | | | | |
| Greg Ward | Cash Balance Plan | | 6.667 | | | 215,731 | | | — | |
| Financial Institutions Retirement Fund | | N/A | | — | | | — | |
| Benefit Equalization Plan | | 6.667 | | | 120,832 | | | — | |
| Deferred Compensation Plan | | 6.667 | | | — | | | — | |
| Supplemental Executive Retirement Plan(2) | | 4.000 | | | 804,358 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| (In whole dollars) | | | | | | | |
| Name | Plan Name | | Years of
Credited
Service | | Present Value of Accumulated Benefits(1) | | Payments
During Last
Fiscal Year |
| Teresa Bazemore | Cash Balance Plan | | 1.250 | | | $ | 31,244 | | | $ | — | |
| Financial Institutions Retirement Fund | | N/A | | — | | | — | |
| Benefit Equalization Plan | | 1.250 | | | 58,819 | | | — | |
| Deferred Compensation Plan | | 1.250 | | | — | | | — | |
| Supplemental Executive Retirement Plan(2) | | 1.750 | | | 531,142 | | | — | |
| | | | | | | |
| Joseph Amato | Cash Balance Plan | | 1.667 | | | 36,217 | | | — | |
| Financial Institutions Retirement Fund | | N/A | | — | | | — | |
| Benefit Equalization Plan | | 1.667 | | | 28,266 | | | — | |
| Deferred Compensation Plan | | 1.667 | | | 7,620 | | | — | |
| Supplemental Executive Retirement Plan(3) | | N/A | | — | | | — | |
| | | | | | | |
| Greg Ward | Cash Balance Plan | | 8.667 | | | 203,058 | | | — | |
| Financial Institutions Retirement Fund | | N/A | | — | | | — | |
| Benefit Equalization Plan | | 8.667 | | | 142,813 | | | — | |
| Deferred Compensation Plan | | 8.667 | | | — | | | — | |
| Supplemental Executive Retirement Plan(2) | | 6.000 | | | 994,665 | | | — | |
| | | | | | | |
| Anne Segrest McCulloch | Cash Balance Plan | | 0.583 | | | 10,570 | | | — | |
| Financial Institutions Retirement Fund | | N/A | | — | | | — | |
| Benefit Equalization Plan | | 0.583 | | | 6,253 | | | — | |
| Deferred Compensation Plan | | 0.583 | | | — | | | — | |
| Supplemental Executive Retirement Plan(2) | | 1.083 | | | 154,982 | | | — | |
| | | | | | | |
| Tony Wong | Cash Balance Plan | | 27.250 | | | 771,646 | | | — | |
| Financial Institutions Retirement Fund | | 0.250 | | | 1,960 | | | — | |
| Benefit Equalization Plan | | 27.250 | | | 106,832 | | | — | |
| Deferred Compensation Plan | | 27.250 | | | 28,655 | | | — | |
| Supplemental Executive Retirement Plan(2) | | 1.667 | | | 235,660 | | | — | |
(1)For purposes of this table, the present value of accumulated benefits as of December 31, 20202022 (measured December 31, 2020)2022) was calculated using a discount rate of 1.75%4.75%, which is consistent with the assumptions used in the Bank’s financial statements. Actual benefit payments under each plan may differ based on the applicable discount rate under the terms of the relevant plan. The Bank withdrew from the FIRF, a multiple-employer tax-qualified defined benefit plan, on December 31, 1995. Prior to the Bank withdrawing from the FIRF, Mr. Wong was a participant in the plan. Amounts under the BEP and the DCP represent the present value of only the pension-related benefits accumulated for the named executive officer.
(2)For the purposes of this table, the years of credited service for the SERP represent the years of participation since the inception of the SERP in 2003 or the first year in which the participant initially became active in the SERP. For purposes of determining the amount of Bank contribution in the SERP table, the years of credited service are defined in the SERP.
(3)In accordance with Mr. Amato’s employment agreement, the SERP will not apply to him while he is employed under his employment agreement.
Narrative to Pension Benefits Table
For information regarding the plans in the table, see the discussion in our Compensation Discussion and Analysis under “Cash Balance Plan and the Financial Institutions Retirement Fund,” “Benefit Equalization Plan,” “Deferred Compensation Plan,” and “Supplemental Executive Retirement Plan.” The valuation method and material assumptions used in quantifying the present value of the current accrued benefits in the table are consistent with the assumptions used in the Bank’s financial statements. See the discussion in “Item 8. Financial Statements and Supplementary Data – Note 12 – Employee Retirement Plans and Incentive Compensation Plans.”
Non-Qualified Deferred Compensation Table
The following table reflects the non-qualified Deferred Compensation Plan balances as of December 31, 2020,2022, for the named executive officers.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In whole dollars) | | | | | | | | | | | | | |
| Name and Principal Position | Last Fiscal Year | | Beginning of
Year Balance | | 2020 Executive Contributions(1) | | 2020 Bank Contributions(2) | | Aggregate
Earnings/
(Losses) | | Aggregate
(Withdrawals)/
Distributions | | Yearend 2020 Aggregate Balance(3) |
| Stephen P. Traynor | 2020 | | $ | 3,647,700 | | | $ | 626,150 | | | $ | 12,960 | | | $ | 175,090 | | | $ | (213,381) | | | $ | 4,248,519 | |
| Acting President and | | | | | | | | | | | | | |
| Chief Executive Officer | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| J. Gregory Seibly | 2020 | | — | | | — | | | — | | | — | | | — | | | — | |
| Former President and | | | | | | | | | | | | | |
| Chief Executive Officer | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Kenneth C. Miller | 2020 | | — | | | — | | | — | | | — | | | — | | | — | |
| Former Executive Vice | | | | | | | | | | | | | |
| President and Chief Financial Officer | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Suzanne Titus-Johnson | 2020 | | 1,130,546 | | | 428,641 | | | 7,200 | | | 65,256 | | | (137,735) | | | 1,493,908 | |
| Executive Vice President and | | | | | | | | | | | | | |
| Chief Legal Officer and Corporate Secretary | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Elena Andreadakis | 2020 | | 460,342 | | | 201,600 | | | 12,096 | | | 62,531 | | | — | | | 736,569 | |
| Executive Vice President and | | | | | | | | | | | | | |
| Chief Administrative Officer | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Greg Ward | 2020 | | — | | | — | | | — | | | — | | | — | | | — | |
| Executive Vice President and | | | | | | | | | | | | | |
| Chief Risk Officer | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In whole dollars) | | | | | | | | | | | | | |
| Name and Principal Position | Last Fiscal Year | | Beginning of
Year Balance | | 2022 Executive Contributions(1) | | 2022 Bank
Contributions | | Aggregate
Earnings/
(Losses) | | Aggregate
(Withdrawals)/
Distributions | | Yearend 2022
Aggregate Balance |
| Teresa Bazemore | 2022 | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| President and | | | | | | | | | | | | | |
| Chief Executive Officer | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Joseph Amato | 2022 | | — | | | 125 | | | — | | | (5) | | | — | | | 120 | |
| Executive Vice President and | | | | | | | | | | | | | |
| Chief Financial Officer | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Greg Ward | 2022 | | — | | | — | | | — | | | — | | | — | | | — | |
| Executive Vice President and | | | | | | | | | | | | | |
| Chief Operating Officer | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Anne Segrest McCulloch | 2022 | | — | | | — | | | — | | | — | | | — | | | — | |
| Executive Vice President and | | | | | | | | | | | | | |
| Chief Legal Officer | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Tony Wong | 2022 | | — | | | 141 | | | — | | | (9) | | | — | | | 132 | |
| Executive Vice President and | | | | | | | | | | | | | |
| Chief Banking Officer | | | | | | | | | | | | | |
(1)The 20202022 executive contributions made by Ms. AndreadakisMr. Amato and Mr. Wong are included in the "Salary" column in the Summary Compensation Table (SCT); the 2020 executive contributions made by Ms. Titus-Johnson are included in the "Salary" and "Non-Equity Incentive Compensation" columns in the SCT; and the 2020 executive contributions for Mr. Traynor are included in the “Salary” and “Non-Equity Incentive Compensation”Payment” columns in the SCT.
(2)Represents make-up Bank matching contributions lost under the Savings Plan as a result of deferring compensation. The 2020 Bank contributions made to Ms. Andreadakis, Ms. Titus-Johnson, and Mr. Traynor are included in the “All Other Compensation" column for 2020 in the SCT.
(3)The yearend aggregate balance for Ms. Andreadakis includes $201,600 reported in the "Salary" column for 2020 in the SCT and includes $12,096 reported in the "All Other Compensation" column for 2020 in the SCT. The yearend 2020 aggregate balance for Ms. Titus-Johnson includes $120,000 reported in the “Salary” column for 2020 in the SCT and includes $7,200 reported in the "All Other Compensation" column for 2020 in the SCT. The yearend 2020 aggregate balance for Mr. Traynor includes $216,000 reported in the "Salary" column for 2020 in the SCT and includes $12,960 reported in the "All Other Compensation" column for 2020 in the SCT.
Narrative to Non-Qualified Deferred Compensation Table
The Non-Qualified Deferred Compensation Table presents information about our DCP, which is designed to allow Bank officers to defer up to 100% of base salary and short- and long-term incentive cash compensation awards, as applicable. Directors may also participate in the DCP to defer up to 100% of their director fees.
The Bank’s matching contribution under the Savings Plan is calculated based on an officer's base salary after deferring base salary compensation under the DCP. As a result, an officer who defers base salary compensation forgoes the Bank’s matching contribution on the portion of compensation that is deferred. To compensate for this, the Bank makes a contribution credit to the officer's DCP balance to restore the benefit under the Savings Plan that would otherwise be lost as a result of deferring base salary compensation, and these “make up matching contributions” are also reflected in the table.
Participants may direct the investments of deferred amounts into core mutual funds or into a brokerage account. Participants may change these investment directions at any time. All investment earnings accumulate to the benefit of the participants on a tax-deferred basis. Brokerage fees relating to purchases and sales are charged against the
value of the participant's deferred balance in the plan. The Bank pays all set-up and annual account administration fees.
Income taxes are deferred until a participant receives payment of funds from the plan. Participants may elect payouts in a lump sum or over a payout period from 2 to 10 years. A participant may change any previously elected payment schedule by submitting a written election. Any written election to change the payment schedule must be made at least 12 months prior to the original payout date, and the new payout date, in most cases, must be at least 5 years from the original payout date.
CHIEF EXECUTIVE OFFICER PAY RATIO
For the year ended December 31, 2020,2022, the ratio of the Bank’s chief executive officer’s total compensation for 20202022 to the Bank’s median of the annual total compensation for 20202022 of all our employees, except the chief executive officer (Median Employee) is 5.66:1.10.71:1. For total compensation for the Bank’s acting chief executive officer and the Median Employee, the Bank used the same elements of compensation presented in the Summary Compensation Table and calculated total compensation in the same manner total compensation is calculated for the Summary Compensation Table for both employees, which includes among other things,employees. The calculation also included amounts attributable to the change in pension value, which will vary among employees based upon their tenure at the Bank. For 2020,2022, the total annualized compensation of the Median Employee was $237,241,$224,913, and the total annualized compensation of the CEO, as reported in the Total Compensation column in the Summary Compensation Table,chief executive officer was $1,342,035.$2,408,408.
The Bank identified the Median Employee by calculating the 20202022 total compensation (using the same elements of compensation in the Summary Compensation Table and in the same manner total compensation is calculated for the Summary Compensation Table) for each of the employees who were employed by the Bank on December 31, 2020,2022 and ranking the 20202022 total compensation for all such employees (a list of 304295 employees) from lowest to highest, excluding the chief executive officer. The employees in the calculation included all full-time and part-time employees, and the Bank annualized compensation for all such employees.
For 2020, the Bank had two non-concurrent principal executive officers. As previously disclosed, Mr. Seibly resigned as the Bank’s president and chief executive officer effective February 28, 2020; upon his resignation, Mr. Traynor, executive vice president and chief banking officer, became acting president and chief executive officer. Since Mr. Traynor has been employed with the Bank for all of 2020 and is entitled to receive a special award for his role as acting president and chief executive officer, the Bank has elected to use Mr. Traynor’s 2020 total compensation for the chief executive officer pay ratio disclosure, rather than to combine the 2020 total compensation of the two principal executive officers.
DIRECTOR COMPENSATION
We provide our directors with compensation for the performance of their duties as members of the Boardboard of Directorsdirectors and for the amount of time spent on the Bank’s business.
| | | | | |
Director Compensation Table
For the Year Ended December 31, 20202022 |
| |
| (In whole dollars) | |
Name of Directors serving during 20202022 | Fees Earned
or Paid in Cash |
F. Daniel SicilianoSimone Lagomarsino(1)(3)
| $ | 140,000150,000 | |
Simone LagomarsinoF. Daniel Siciliano(2)(3)
| 135,000136,500 | |
| David Adame | 123,000 | |
| Banafsheh Akhlaghi | 123,000 | |
Jeffrey K.K Ball | 120,000130,000 | |
| Marangal L. Domingo | 130,000 | |
Marangal L. DomingoAna F. Fonseca(3)
| 120,00062,064 | |
| Lori Gay | 123,000 | |
| Melinda Guzman | 120,000130,000 | |
| Matthew Hendricksen | 123,000 | |
Matthew HendricksenShruti Miyashiro(3)(4)
| 115,000 | |
John F. Luikart(3)
| 115,000 | |
Shruti Miyashiro | 115,00067,000 | |
| Kevin G. Murray | 120,000130,000 | |
Robert F. Nielsen(3)(4)
| 120,000 | |
Joan C. Opp(3) | 125,000132,500 | |
| Brian M. Riley | 120,000132,500 | |
Scott C. Syphax(3)(5) | 115,000 | |
Virginia A. Varela | 115,000132,500 | |
John T. WasleyVirginia A. Varela(3)(5)
| 120,000130,000 | |
| |
| |
| Total | $ | 1,815,0001,955,064 | |
(1)Mr. SicilianoMs. Lagomarsino served as Chair during 2020.2022 and is serving as Chair for 2023.
(2)Ms. LagomarsinoMr. Siciliano served as Vice Chair during 2020.2022 and is serving as Vice Chair for 2023.
(3)The Bank offersMs. Fonseca began serving as a matching gift program to all employees and directors wherebymember of the Bank will match charitable donations to eligible nonprofits up to $2,000. For the year ended 2020, the Bank made $2,000 matching contributions on behalf of directors Domingo, Hendricksen, Lagomarsino, Luikart, Nielsen, Opp, Siciliano, Syphax, and Wasley.Board effective July 28, 2022.
(4)Ms. Miyashiro resigned as a member of the Board effective June 30, 2022.
(5)Mr. Nielsen’s termSyphax and Ms. Varela’s terms as directormembers of the Board expired oneffective December 31, 2020.
On occasion, the Bank pays for resort activities for directors in connection with Board meetings and other business-related meetings, and, in some cases, the Bank may pay the expenses for spouses accompanying directors to these meetings or other Bank-sponsored events. The value of these perquisites is considered de minimis and not included in the table above.
The Boardboard of Directorsdirectors Compensation and Expense Reimbursement Policy for 2020 (20202022 (2022 Directors Compensation Policy) provided the directors with compensation for the performance of their duties as members of the Boardboard of Directorsdirectors and the amount of time spent on official Bank business, as set forth below.
| | (In whole dollars) | (In whole dollars) | | (In whole dollars) | |
| Position | Position | Maximum Annual
Service Fee | | Maximum Annual
Meeting Fees | | Total
Maximum Annual
Compensation | Position | Maximum Annual
Service Fee | | Maximum Annual
Meeting Fees | | Total
Maximum Annual
Compensation |
| Chair | Chair | $ | 90,000 | | | $ | 50,000 | | | $ | 140,000 | | Chair | $ | 95,000 | | | $ | 55,000 | | | $ | 150,000 | |
| Vice Chair | Vice Chair | 85,000 | | | 50,000 | | | 135,000 | | Vice Chair | 81,500 | | | 55,000 | | | 136,500 | |
| Audit and Risk Committee Chairs | 75,000 | | | 50,000 | | | 125,000 | | |
| Audit, Compensation and HR, and Risk Committee Chairs | | Audit, Compensation and HR, and Risk Committee Chairs | 77,500 | | | 55,000 | | | 132,500 | |
| All Other Committee Chairs | All Other Committee Chairs | 70,000 | | | 50,000 | | | 120,000 | | All Other Committee Chairs | 75,000 | | | 55,000 | | | 130,000 | |
| | Other Directors | Other Directors | 65,000 | | | 50,000 | | | 115,000 | | Other Directors | 68,000 | | | 55,000 | | | 123,000 | |
Under the 20202022 Directors Compensation Policy, service fees for the above positions were paid for serving as a director during and between regularly scheduled meetings of the Board.board of directors. The maximum annual service fee was prorated and paid with the meeting fee, if applicable, at the conclusion of each two-month service period on the Boardboard of Directors (monthenddirectors (month end February, April, June, August, October, and December). In addition, each director received a fee of $10,000$11,000 for attending any portion of five of the six regularly scheduled two-day Boardboard of director meetings, subject to the annual maximum of $50,000.$55,000.
The 20202022 Directors Compensation Policy provided that a director could receive a meeting fee for participation in one regularly scheduled Board meeting by telephone. No other fee was paid for participation in meetings of the Boardboard of directors or committees by telephone or participation in other Bank or FHLBank System activities. The president of the Bank was authorized to interpret the 20202022 Directors Compensation Policy, as necessary, according to applicable statutory, regulatory, and policy limits. For 2022, the Board permitted optional meeting attendance by video conferencing in lieu of in-person meeting attendance.
Under the 20202022 Directors Compensation Policy, the final prorated service fee was to be withheld if a director did not attend at least 75% of all regular and special meetings of the Boardboard of directors and the director's assigned committees for the year, or if the Boardboard of directors determined a director had consistently demonstrated a lack of engagement and participation in meetings attended. In addition, the meeting fee attendance requirement provided that a director would receive a meeting fee only if he or she attended the regular Boardboard of director meeting, as well as at least one assigned committee meeting during the Board'sboard of directors’ regularly scheduled two-day meetings.
Under the 20202022 Directors Compensation Policy, the Bank reimbursed directors for necessary and reasonable travel, subsistence, and other related expenses incurred in connection with the performance of their official duties, which may have included participation in meetings or activities for which no fee was paid.
For expense reimbursement purposes, directors' official duties included:
•Meetings of the Boardboard of directors and Boardboard committees,
•Meetings requested by the Finance Agency and FHLBank System committees,
•Meetings of the Council of FHLBanks and its committees,
•Meetings of the Bank’s Affordable Housing Advisory Council,
•Events attended on behalf of the Bank when requested by the president in consultation with the chair,
•Other events attended on behalf of the Bank with the prior approval of the chair,
•Director education events attended that are consistent with the Bank’s Director Education Guidelines, and with the prior approval of the chair (and in the case of the chair, the chair of the Governance Committee), and
•National Association of Corporate Directors Annual Meeting.
The 20202022 Directors Compensation Policy also provides that directors may receive up to an additional $1,500 in compensation in the form of expense reimbursement for meals and travel for a spouse or significant other. The 20202022 Directors Compensation Policy also provides that directors are provided the opportunity to participate in the Bank’s Charitable Contribution Matching Gift Program.
The Board adopted a Boardboard of Directorsdirectors Compensation and Expense Reimbursement Policy for 2021,2023, which is substantially similar to the 20202022 Directors Compensation Policy, with no increases in director fees for 2020.2023.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information about those stockholders that are beneficial owners of more than 5% of the Federal Home Loan Bank of San Francisco’s outstanding capital stock, including mandatorily redeemable capital stock, as of February 28, 2021.2023.
| | Name and Address of Beneficial Owner | Name and Address of Beneficial Owner | Number of
Shares Held | | Percentage of
Outstanding
Shares | Name and Address of Beneficial Owner | Number of
Shares Held | | Percentage of
Outstanding
Shares |
| Silicon Valley Bank | | Silicon Valley Bank | 5,400,000 | | | 13.7 | % |
| 3003 Tasman Drive | | 3003 Tasman Drive | |
| Santa Clara, CA 95054 | | Santa Clara, CA 95054 | |
| | First Republic Bank | First Republic Bank | 3,512,343 | | | 15.4 | % | First Republic Bank | 5,298,839 | | | 13.4 | |
| 111 Pine Street | 111 Pine Street | | 111 Pine Street | |
| San Francisco, CA 94111 | San Francisco, CA 94111 | | San Francisco, CA 94111 | |
| | MUFG Union Bank, National Association | 1,420,538 | | | 6.2 | | |
| 445 South Figueroa Street, 9th Floor | | |
| City National Bank | | City National Bank | 2,903,190 | | | 7.4 | |
| 555 South Flower Street | | 555 South Flower Street | |
| Los Angeles, CA 90071 | Los Angeles, CA 90071 | | Los Angeles, CA 90071 | |
| | Total | Total | 4,932,881 | | | 21.6 | % | Total | 13,602,029 | | | 34.5 | % |
The following table sets forth information about those members (or their holding companies) with officers or directors serving as directors of the Federal Home Loan Bank of San Francisco as of February 28, 2021.2023.
| | Director Name | Director Name | Name of Institution | | City | | State | | Number of
Shares Held | | Percentage of
Outstanding
Shares | Director Name | Name of Institution | | City | | State | | Number of
Shares Held | | Percentage of
Outstanding
Shares |
| Jeffrey K. Ball | Jeffrey K. Ball | Friendly Hills Bank | | Whittier | | CA | | 9,931 | | | — | % | Jeffrey K. Ball | First Pacific Bank | | Whittier | | CA | | 15,445 | | | — | % |
| Marangal (Marito) Domingo | Marangal (Marito) Domingo | First Technology Federal Credit Union | | San Jose | | CA | | 401,322 | | | 1.8 | | Marangal (Marito) Domingo | First Technology Federal Credit Union | | San Jose | | CA | | 1,289,668 | | | 3.3 | |
| Ana E. Fonseca | | Ana E. Fonseca | Logix Federal Credit Union | | Valencia | | CA | | 307,260 | | | 0.8 | |
| Matthew Hendricksen | | Matthew Hendricksen | Employers Insurance Company of Nevada | | Reno | | NV | | 8,370 | | | — | |
| Matthew Hendricksen | Matthew Hendricksen | Employers Insurance Company of Nevada | | Reno | | NV | | 11,782 | | | 0.1 | | Matthew Hendricksen | Employers Assurance Company | | Reno | | NV | | 12,589 | | | — | |
| Matthew Hendricksen | Matthew Hendricksen | Employers Assurance Company | | Reno | | NV | | 10,347 | | | — | | Matthew Hendricksen | Employers Compensation Insurance Company | | Reno | | NV | | 17,795 | | | — | |
| Matthew Hendricksen | Matthew Hendricksen | Employers Compensation Insurance Company | | Reno | | NV | | 23,197 | | | 0.1 | | Matthew Hendricksen | Employers Preferred Insurance Company | | Reno | | NV | | 23,806 | | | 0.1 | |
| Matthew Hendricksen | Matthew Hendricksen | Employers Preferred Insurance Company | | Reno | | NV | | 22,053 | | | 0.1 | | Matthew Hendricksen | Cerity Insurance Company | | Reno | | NV | | 4,149 | | | — | |
| Simone Lagomarsino | Simone Lagomarsino | Luther Burbank Savings | | Santa Rosa | | CA | | 251,217 | | | 1.1 | | Simone Lagomarsino | Luther Burbank Savings | | Santa Rosa | | CA | | 345,025 | | | 0.9 | |
| Shruti Miyashiro | Orange County's Credit Union | | Santa Ana | | CA | | 78,839 | | | 0.3 | | |
| Chang M. Liu | | Chang M. Liu | Cathay Bank | | Los Angeles | | CA | | 172,500 | | | 0.4 | |
| Joan C. Opp | Joan C. Opp | Stanford Federal Credit Union | | Palo Alto | | CA | | 150,000 | | | 0.7 | | Joan C. Opp | Stanford Federal Credit Union | | Palo Alto | | CA | | 162,000 | | | 0.4 | |
| Brian M. Riley | Brian M. Riley | Clearinghouse CDFI | | Lake Forest | | CA | | 20,812 | | | 0.1 | | Brian M. Riley | Clearinghouse CDFI | | Lake Forest | | CA | | 23,322 | | | 0.1 | |
| Brian M. Riley | Brian M. Riley | Oxford Life Insurance Company | | Phoenix | | AZ | | 45,302 | | | 0.2 | | Brian M. Riley | Oxford Life Insurance Company | | Phoenix | | AZ | | 56,486 | | | 0.1 | |
| | Virginia A. Varela | Golden Pacific Bank, National Association | | Sacramento | | CA | | 5,953 | | | — | | |
| Total | Total | | 1,030,755 | | | 4.5 | % | Total | | 2,438,415 | | | 6.1 | % |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Capital stock ownership is a prerequisite to transacting any member business with the Federal Home Loan Bank of San Francisco (Bank). The members, former members, and certain other 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 Bank conducts its advances and purchased mortgage loan business almost exclusively with members or member successors. The Bank extends credit in the ordinary course of business to members with officers or directors who serve as directors of the Bank and to members owning more than 5% of the Bank’s capital stock (5% shareholders) on market terms that are no more favorable to them than the terms of comparable transactions with other members. In addition, the Bank may transact short-term investments, Federal funds sold, and mortgage-backed securities (MBS) with members and their affiliates that have officers or directors who serve as directors of the Bank or with 5% shareholders. All investments are market rate transactions, and all MBS are purchased through securities brokers or dealers. The Bank may also be the primary obligor on debt issued in the form of Federal Home Loan Bank (FHLBank) System consolidated obligations using underwriters and dealers, and may enter into interest rate exchange agreements with counterparties, that may be affiliates of Bank members with officers or directors who serve as directors of the Bank or affiliates of members and nonmembers owning more than 5% of the Bank’s capital stock, which are transactions in the ordinary course of the Bank’s business and are market rate transactions.
The FHLBank Act requires the Bank to establish an Affordable Housing Program (AHP). The Bank provides subsidies to members, which 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. Only Bank members, along with their nonmember AHP project sponsors, may submit AHP applications. All AHP subsidies are made in the ordinary course of business.
The FHLBank Act also requires the Bank to establish a Community Investment Program and authorizes the Bank to offer additional Community Investment Cash Advance (CICA) programs. Under these programs, the Bank provides subsidies in the form of grants and below-market interest rate advances or standby letters of credit to members for community lending and economic development projects. Only Bank members may submit applications for these credit program subsidies. All CICA subsidies are made in the ordinary course of business.
In instances where an AHP or CICA transaction involves a member that owns more than 5% of the Bank’s capital stock (or an affiliate of such a member), a member with an officer or director who is a director of the Bank, or an entity with an executive officer, director, controlling shareholder, or general partner who serves as a director of the Bank (and that has a direct or indirect interest in the subsidy), the transaction is subject to the same eligibility and other program criteria and requirements as all other comparable transactions and to the regulations governing the operations of the relevant program.
The Bank may also use members that have officers or directors who serve as directors of the Bank or 5% shareholders or their affiliates as securities custodians and derivative dealer counterparties. These financial relationships are conducted in the ordinary course of business on terms and conditions similar to those that would be available for comparable services if provided by unaffiliated entities.
The Bank does not have a written policy to have the Boardboard of Directorsdirectors (Board) review, approve, or ratify transactions with members that are outside the ordinary course of business because such transactions rarely occur. However, it has been the Bank’s practice to report to the Board all transactions between the Bank and its members that are outside the ordinary course of business, and, on a case-by-case basis, seek Board approval or ratification.
Director Independence
General
Under the rules of the Securities and Exchange Commission (SEC), the Bank is required to identify directors who are independent, and members of the Board’s Audit Committee and Compensation and Human Resources Committee and any committee performing similar functions to a nominating committee who are not independent, using the independence definition of a national securities exchange or automated quotation system. The Bank’s capital stock is not listed on a national securities exchange or automated quotation system, and the Bank’s Boardboard of Directorsdirectors is not subject to the independence requirement of any such exchange or automated quotation system. The Bank is subject to the independence standards for directors serving on the Bank’s Audit Committee set forth in the rules of the Federal Housing Finance Agency (Finance Agency), and looks to the Finance AgencyAgency’s independence standards to determine independence for all directors, whether or not they serve on the Audit Committee. In addition, for purposes of compliance with the SEC’s disclosure rules only, the Board has evaluated director independence using the definition of independence articulated in the rules of the National Association of Securities Dealers Automated Quotations (NASDAQ).
In addition to the independence rules and standards above, the FHLBanks are required to comply with the rules issued by the SEC under Section 10A(m) of the Securities Exchange Act of 1934, which includes a substantive independence rule prohibiting a director from being a member of the Audit Committee if he or she, other than in his or her capacity as a member of the Audit Committee, the Bank’s Boardboard of Directors,directors, or any other Board committee, accepts any consulting, advisory, or other compensatory fee from the Bank or is an “affiliated person” of the Bank as defined by the SEC rules (the person controls, is controlled by, or is under common control with the Bank).
Director Independence under the Finance Agency Regulations
The Finance Agency director independence rule provides that a director is sufficiently independent to serve as a member of the Bank’s Audit Committee if that director does not have a disqualifying relationship with the Bank or its management that would interfere with the exercise of that director’s independent judgment. Disqualifying relationships under the Finance AgencyAgency’s independence standards include, but are not limited to: (i) employment with the Bank at any time during the last five years; (ii) acceptance of compensation from the Bank other than for service as a director; (iii) being a consultant, advisor, promoter, underwriter, or legal counsel for the Bank at any time within the last five years; andor (iv) being an immediate family member of an individual who is or who has been a Bank executive officer within the past five years.
Although the Finance Agency’s independence standard only applies by regulation to members of the Bank’s Audit Committee, the Bank’s Board looks to this standard for purposes of determining independence of all Bank directors.
The independence standard imposed on the Audit Committee under the Finance Agency regulations takes into account the fact that the Bank was created by Congress; the Bank has a cooperative ownership structure; the Bank is statutorily required to have member directors who are either an officer or director of a Bank member; the Bank was created to provide its members with products and services; and the Bank’s Boardboard of Directorsdirectors is statutorily required to administer the affairs of the Bank fairly and impartially and without discrimination in favor of or against any member borrower. The Finance Agency’s independence standards do not include as a disqualifying relationship any business relationships between a director’s member institution and the Bank. Consistent with the rule, the Bank’s Board does not believe that the statutorily prescribed business relationships between a director’s member institution and the Bank interfere with the director’s exercise of his or her independent judgment. The national securities exchanges’ independence definition,definitions, including those of the NASDAQ, do not generally take into account the cooperative nature of the Bank. Accordingly, the Bank’s Board believes that the appropriate standard for measuring director independence is the Finance Agency’s independence standards.
Applying the Finance Agency independence standards, the Board has determined that all directors who served in 20202022 were, and all current directors are, independent.
Director Independence under the NASDAQ Rules
IfFor purposes of compliance with the Bank usesSEC’s disclosure rules only, the Board has evaluated director independence using the definition of independence articulated in the NASDAQ rules. The NASDAQ standard for purposes of complying with the SEC disclosure rules,requires the Board mustto make an affirmative determination that the director does not have a relationship with the Bank that would impair his or her independence. “Independent director” under the NASDAQ rules means a person other than an executive officer or employee of the company or any other individual having a relationship which, in the opinion of the issuer’scompany’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
In addition, the NASDAQ rules set forth seven relationships that automatically preclude a determination of director independence. Among other things, a director is not considered to be independent if the director is, or has a family member who is, a partner in, or a controlling shareholder or an executive officer of, any organization to which the Bank made, or from which the Bank received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenues for that year, or $200,000 (the payment and revenue relationship test), whichever is more.
Using the NASDAQ rules, the Board affirmatively determined that in its opinion Mr. Adame, Ms. Akhlaghi, Ms. Gay, Ms. Guzman, Mr. Luikart, Mr. Siciliano, Mr. Syphax, and Mr. Wasley,Trujillo, who are current nonmember directors and are not employed by and do not serve as a director of any member institution, are independent and, to the extent they served as nonmember directors in 2020,2022, were independent in 20202022 under the NASDAQ rules because they have no relationship with the Bank that would interfere with their exercise of independent judgment in carrying out their responsibilities. Using the NASDAQ rules, the following former non-member director who served in 2022 was considered independent by the Board because he had no relationship with the Bank that would interfere with his exercise of independent judgment in carrying out his responsibilities as a director: Mr. Syphax.
Using the NASDAQ rules, the Board affirmatively determined that in its opinion the following current member directors are independent and, to the extent they served as member directors in 2020,2022, were independent in 20202022 under the NASDAQ rules because they have no relationship with the Bank that would interfere with their exercise of independent judgment in carrying out their responsibilities as directors: Mr. Ball, Mr. Domingo,Ms. Fonseca, Mr. Hendricksen, Ms. Lagomarsino, Ms. Miyashiro,Mr. Liu, Ms. Opp, and Mr. Riley,Riley. Using the NASDAQ rules, the following former member directors who served in 2022 were considered independent by the Board because they had no relationship with the Bank that would interfere with their exercise of independent judgment in carrying out their responsibilities as directors: Ms. Miyashiro and Ms. Varela.
In making these determinations, the Board recognized that during their directorships the member directors were employed by or served as a director of a member institution that may have conducted business with the Bank in the ordinary course of the Bank’s and the member institution’s respective businesses. The Board determined that these ordinary course customer relationships with the member institutions that had or have member directors on the Board would not interfere with the member directors’ exercise of independent judgment or their independence from management under the NASDAQ rules. This determination is based on the fact that the Bank was created by Congress, the Bank has a cooperative ownership structure, the Bank is statutorily required to have member directors who are either an officer or director of a Bank member, the Bank was created to provide its members with products and services, and the Board is statutorily required to administer the affairs of the Bank fairly and impartially and without discrimination in favor of or against any member borrower.
Audit Committee Independence
The Board has an Audit Committee. Under the Finance Agency’s independence standards and NASDAQ rules, all Audit Committee members who served in 20202022 were independent and all current Audit Committee members are independent.
All Audit Committee members who served in 20202022 and all current Audit Committee members met the substantive independence rules under Section 10A(m) of the 1934 Act.
Compensation and Human Resources Committee Independence
The Board has a Compensation and Human Resources Committee. Using the Finance Agency’s director independence standards, and under the NASDAQ rules, all Compensation and Human Resources Committee members who served in 20202022 were independent, and all current Compensation and Human Resources Committee members are independent.
Under the NASDAQ rules, to be considered an independent compensation committee member, a director must meet the definition under the general NASDAQ independence rules, and the board of directors must affirmatively determine the independence of any director who will serve on the company’s compensation committee and must consider all factors specifically relevant to determining whether such a director has a relationship to the company that is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member. Relevant factors must include the source of compensation of directors, including any consulting, advisory, or other compensatory fee paid by the company to the directors and whether the director is affiliated with the company.
Using the NASDAQ rules, the following director who served on the Compensation and Human Resources Committee in 2022 was not considered independent because his member institution exceeded the limits of the payment and revenue relationship test in 2021: Mr. Domingo. Using the NASDAQ rules, the following director who is serving on the Compensation and Human Resources Committee in 2023 is not considered independent because his organization exceeded the limits of the payment and revenue relationship test in 2020: Mr. Murray.
Governance Committee
The Board has a Governance Committee that performs certain functions that are similar to those of a nominating committee with respect to the nomination of nonmember independent directors. Using the Finance Agency’s director independence standards, all Governance Committee members who served in 20202022 were independent and all current Governance Committee members are independent.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees billed to the Federal Home Loan Bank of San Francisco (Bank) for the years ended December 31, 20202022 and 2019,2021, by its external accounting firm, PricewaterhouseCoopers LLP.
| | (In millions) | (In millions) | 2020 | | 2019 | (In millions) | 2022 | | 2021 |
| Audit fees | Audit fees | $ | 1.3 | | | $ | 1.0 | | Audit fees | $ | 1.4 | | | $ | 1.3 | |
| All other fees | All other fees | — | | | — | | All other fees | — | | | — | |
| Total | Total | $ | 1.3 | | | $ | 1.0 | | Total | $ | 1.4 | | | $ | 1.3 | |
Audit Fees. Audit fees during 20202022 and 20192021 were for professional services rendered in connection with the audits of the Bank’s annual financial statements, the review of the Bank’s quarterly financial statements included in each Quarterly Report on Form 10-Q, and the audit of the Bank’s internal control over financial reporting.
All Other Fees. All other fees for 20202022 and 20192021 were for consulting and advisory services. The Bank is exempt from all federal, state, and local taxation, and no tax consulting fees were paid during 20202022 and 2019.2021.
Audit Committee Pre-Approval Policy
In accordance with the Securities and Exchange Commission rules and regulations implementing the Securities Exchange Act of 1934 (SEC rules), all audit, audit-related, and non-audit services proposed to be performed by the Bank’s independent auditor must be pre-approved by the Audit Committee to ensure that they do not impair the auditor’s independence. The SEC rules require that proposed services either be specifically pre-approved on a case-by-case basis (specific pre-approval services) or be pre-approved without case-by-case review under policies and procedures established by the Audit Committee that are detailed as to the particular service and do not delegate Audit Committee responsibilities to management (general pre-approval services).
The Bank’s Audit Committee has adopted a policy, the Independent Auditor Services Pre-Approval Policy (Policy), setting forth the procedures and conditions pursuant to which services proposed to be performed by the Bank’s independent auditor may be approved. Under the Policy, unless services to be provided by the independent auditor have received general pre-approval, they require specific pre-approval by the Audit Committee. Any proposed
services exceeding the pre-approved maximum fee amounts set forth in the appendices to the Policy will also require specific pre-approval by the Audit Committee.
The Policy is designed to be detailed as to the particular services that may be provided by the independent auditor and to provide for the Audit Committee to be informed of each service provided by the independent auditor. The Policy is also intended to ensure that the Audit Committee does not delegate to management its responsibilities in connection with the approval of services to be provided by the independent auditor.
For both specific pre-approval and general pre-approval of services, the Audit Committee considers whether the proposed services are consistent with the SEC rules on auditor independence and whether the provision of the services by the independent auditor would impair the independent auditor’s independence. The Audit Committee also considers (i) whether the independent auditor is positioned to provide effective and efficient services, given its familiarity with the Bank’s business, management, culture, accounting systems, risk profile, and other factors, and (ii) whether having the independent auditor provide the service may enhance the Bank’s ability to manage or control risk or improve audit quality. The Audit Committee also considers the total amounts of fees for audit, audit-related, and non-audit services for a given calendar year in deciding whether to pre-approve any such services and may choose to determine, for a particular calendar year, the appropriate ratio between the total amount of fees for audit and audit-related services and the total amount of fees for permissible non-audit services.
The Audit Committee annually reviews and pre-approves the services that may be provided by the independent auditor during a given calendar year without specific pre-approval from the Audit Committee.
The Audit Committee has delegated to its chair and vice chair individually specific pre-approval authority for additional audit or audit-related services to be provided by the independent auditor, provided that the estimated fee for each type of proposed service does not exceed $50,000 and the total aggregated fees for all services pre-approved by each individual under this delegated authority do not exceed $100,000 in a calendar year. The chair or vice chair, as the case may be, is required to report to the Audit Committee any services pre-approved under the delegated authority.
In 20202022 and 2019,2021, 100% of the audit-related fees and all other fees were pre-approved by the Audit Committee.
PART IV.IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
The financial statements included as part of this Form 10-K are identified in the Index to Audited Financial Statements appearing in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.
(2) Financial Statement Schedules
All financial statement schedules are omitted because they are either not applicable or the required information is shown in the financial statements or the notes thereto.
(b) Exhibits
| | | | | | | | |
| Exhibit No. | | Description |
| | Organization Certificate and resolutions relating to the organization of the Federal Home Loan Bank of San Francisco, incorporated by reference to Exhibit 3.1 to the Bank's Registration Statement on Form 10 filed with the Securities and Exchange Commission on June 30, 2005 (Commission File No. 000-51398) |
| | |
| | Bylaws of the Federal Home Loan Bank of San Francisco, as amended and restated on January 29, 202125, 2022, incorporated by reference to Exhibit 3.2 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 4, 2022 (Commission File No. 000-51398) |
| | |
| | Description of Registered Securities |
| | |
| | Capital Plan, as amended and restated effective December 14, 2020, incorporated by reference to Exhibit 4.2 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2021 (Commission File No. 000-51398) |
| | |
| | Summary Sheet: Terms of Employment for Named Executive Officers for 20212023 |
| | |
| | Form of Director Indemnification Agreement, incorporated by reference to Exhibit 10.2 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2017 (Commission File No. 000-51398) |
| | |
| | Form of Director Indemnification Agreement, effective November 5, 2018, incorporated by reference to Exhibit 10.3 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 8, 2019 (Commission File No. 000-51398) |
| | |
| | Form of Director Indemnification Agreement, effective May 15, 2021, incorporated by reference to Exhibit 10.1 to the Bank’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 7, 2021 (Commission File No. 000-51398) |
| | |
| | Form of Director Indemnification Agreement, effective July 28, 2022 |
| | |
| | Form of Senior Officer Indemnification Agreement, incorporated by reference to Exhibit 10.3 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2017 (Commission File No. 000-51398) |
| | |
| | EmploymentForm of Senior Officer Indemnification Agreement, by and among the Federal Home Loan Bank of San Francisco and John Gregory Seibly, dated April 26, 2016, as amended,effective June 9, 2021, incorporated by reference to Exhibit 10.1 to the Bank's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 4, 2016 (Commission File No. 000-51398) |
| | |
| | Memorandum Agreement dated May 12, 2020 between the Federal Home Loan Bank of San Francisco and
Stephen Traynor for Special Award for Service as Acting President and Chief Executive Officer, incorporated by reference to Exhibit 10.110.2 to the Bank’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on AugustMay 7, 20202021 (Commission File No. 000-51398) |
| | |
| | Employment Agreement by and among the Federal Home Loan Bank of San Francisco and Joseph E. Amato, dated October 7, 2020, as amended, incorporated by reference to Exhibit 10.1 to the Bank's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 9, 202024, 2022 (Commission File No. 000-51398) |
| | |
| | Employment Agreement by and among the Federal Home Loan Bank of San Francisco and Teresa Bryce Bazemore, dated February 19, 2021, as amended, incorporated by reference to Exhibit 10.1 to the Bank's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 23, 2021 (Commission File No. 000-51398) |
| | |
| | Board Resolution for 20212023 Board of Directors Compensation and Expense Reimbursement Policy |
| | |
| | | | | | | | |
| | Executive Incentive Plan, as amended and restated March 29, 2019; Appendices I-III, as approved December 23, 2016; Appendix IV, as approved December 1, 2017; Appendix V, as approved December 7, 2018; and Appendix VI, as approved January 31, 20202020; Appendix VII, as approved May 28, 2021; and Appendix VIII, as approved December 10, 2021, incorporated by reference to Exhibit 10.11 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 4, 2022 (Commission File No. 000-51398) |
| | |
| | Supplemental Executive Retirement Plan, as amended and restated effective January 29, 2021, incorporated by reference to Exhibit 10.10 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2021 (Commission File No. 000-51398) |
| | |
| | Original Deferred Compensation Plan, as restated, incorporated by reference to Exhibit 10.13 to Bank's Registration Statement on Form 10 filed with the Securities and Exchange Commission on June 30, 2005 (Commission File No. 000-51398) |
| | |
| | | | | | | | |
| | Deferred Compensation Plan, as amended and restated effective January 1, 2020, incorporated by reference to Exhibit 10.10 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 6, 2020 (Commission File No. 000-51398) |
| | |
| | Corporate Senior Officer Severance Policy, as amended and restated on March 4, 2020,July 30, 2021, incorporated by reference to Exhibit 10.1110.1 to the Bank’s AnnualQuarterly Report on Form 10-K10-Q filed with the Securities and Exchange Commission on March 6, 2020November 5, 2021 (Commission File No. 000-51398) |
| | |
| | Amended and Restated Federal Home Loan Bank P&I Funding and Contingency Plan Agreement, effective as of January 1, 2017, by and among the Office of Finance and each of the Federal Home Loan Banks, incorporated by reference to Exhibit 10.23 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2017 (Commission File No. 000-51398) |
| | |
| | Joint Capital Enhancement Agreement, as amended August 5, 2011, with the other 11 Federal Home Loan Banks, incorporated by reference to Exhibit 99.1 to the Bank's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 5, 2011 (Commission File No. 000-51398) |
| | |
| | Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| | Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| | Audit Committee Report |
| | |
| 101.INS | | Inline XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
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| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
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| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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| 104 | | | Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
++ The report contained in Exhibit 99.1 is being furnished and will not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 12, 2021.10, 2023.
| | | | | |
FEDERAL HOME LOAN BANK OF SAN FRANCISCO | |
| |
/S/ STTEPHENERESA P. TB. BRAYNORAZEMORE | |
Stephen P. TraynorTeresa B. Bazemore
Acting President and Chief Executive Officer | |
March 12, 202110, 2023 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 12, 2021.10, 2023.
| | | | | |
/S/ STTEPHENERESA P. TB. BRAYNORAZEMORE | |
Stephen P. TraynorTeresa B. Bazemore
Acting President and Chief Executive Officer
(Principal executive officer) | |
| |
/S/ JOSEPH E. AMATO | |
Joseph E. Amato
Executive Vice President and Interim Chief Financial Officer
(Principal financial officer) | |
| |
/S/ SKTEFANIEITTY RPEYNOLDSAYNE | |
Stefanie ReynoldsKitty Payne
Senior Vice President and Controller
(Principal accounting officer) | |
| |
/S/ SIMONE LAGOMARSINO | |
Simone Lagomarsino
Chair of the Board of Directors | |
| |
/S/ F. DANIEL SICILIANO | |
F. Daniel Siciliano
Vice Chair of the Board of Directors | |
| |
/S/ SDIMONEAVID LAAGOMARSINODAME | |
Simone LagomarsinoDavid Adame
Vice Chair of the Board of DirectorsDirector | |
| |
/S/ BANAFSHEH AKHLAGHI | |
Banafsheh Akhlaghi
Director | |
| |
/S/ JEFFREY K. BALL | |
Jeffrey K. Ball
Director | |
| |
| | | | | |
/S/ MARANGAL I. DOMINGO | |
Marangal I. Domingo
Director | |
| |
/S/ ANA E. FONSECA | |
Ana E. Fonseca
Director | |
| |
/S/ LORI R. GAY | |
Lori R. Gay
Director | |
| |
| | | | | |
/S/ MELINDA GUZMAN | |
Melinda Guzman
Director | |
| |
/S/ MATTHEW HENDRICKSEN | |
Matthew Hendricksen
Director | |
| |
/S/ JCOHNHANG F.M. LUIKARTIU | |
John F. LuikartChang M. Liu
Director | |
| |
/S/ SHRUTI MIYASHIRO
| |
Shruti Miyashiro
Director | |
| |
/S/ KEVIN MURRAY | |
Kevin Murray
Director | |
| |
/S/ JOAN C. OPP | |
Joan C. Opp
Director | |
| |
/S/ BRIAN M. RILEY | |
Brian M. Riley
Director | |
| |
/S/ SGCOTTARY C. SL. TYPHAXRUJILLO | |
Scott C. SyphaxGary L. Trujillo
Director | |
| |
/S/ VIRGINIA A. VARELA
| |
Virginia A. Varela
Director | |
| |
/S/ JOHN T. WASLEY
| |
John T. Wasley
Director | |
| |