UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended JuneSeptember 30, 2009
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-51398
FEDERAL HOME LOAN BANK OF SAN FRANCISCO
(Exact name of registrant as specified in its charter)
Federally chartered corporation | 94-6000630 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. employer identification number) | |
600 California Street San Francisco, CA | 94108 | |
(Address of principal executive offices) |
(Zip code) |
(415) 616-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Shares outstanding as of | ||
Class B Stock, par value $100 |
Federal Home Loan Bank of San Francisco
Form 10-Q
PART I. | FINANCIAL INFORMATION | |||||
Item 1. | Financial Statements | 1 | ||||
1 | ||||||
2 | ||||||
3 | ||||||
4 | ||||||
6 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
90 | ||||||
106 | ||||||
Off-Balance Sheet Arrangements, Guarantees, and Other Commitments | 110 | |||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 111 | ||||
Item 4. | Controls and Procedures | |||||
PART II. | OTHER INFORMATION | |||||
Item 1. | Legal Proceedings | |||||
Item 1A. | Risk Factors | |||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||||
Item 3. | Defaults Upon Senior Securities | |||||
Item 4. | Submission of Matters to a Vote of Security Holders | |||||
Item 5. | Other Information | |||||
Item 6. | Exhibits | 122 | ||||
123 |
i
ITEM 1. | FINANCIAL STATEMENTS |
Federal Home Loan Bank of San Francisco
Statements of Condition
(Unaudited)
(In millions-except par value) | June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | ||||||||||||
Assets | ||||||||||||||||
Cash and due from banks | $ | 811 | $ | 19,632 | $ | 6,115 | $ | 19,632 | ||||||||
Federal funds sold | 16,658 | 9,431 | 7,086 | 9,431 | ||||||||||||
Trading securities(a) | 34 | 35 | 32 | 35 | ||||||||||||
Held-to-maturity securities (fair values were $38,150 and $44,270, respectively)(b) | 42,241 | 51,205 | ||||||||||||||
Advances (includes $34,869 and $38,573 at fair value under the fair value option, respectively) | 174,732 | 235,664 | ||||||||||||||
Held-to-maturity securities (fair values were $37,137 and $44,270, respectively)(b) | 38,825 | 51,205 | ||||||||||||||
Advances (includes $27,381 and $38,573 at fair value under the fair value option, respectively) | 154,962 | 235,664 | ||||||||||||||
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $2 and $1, respectively | 3,357 | 3,712 | 3,172 | 3,712 | ||||||||||||
Accrued interest receivable | 462 | 865 | 371 | 865 | ||||||||||||
Premises and equipment, net | 20 | 20 | 21 | 20 | ||||||||||||
Derivative assets | 452 | 467 | 458 | 467 | ||||||||||||
Receivable from REFCORP | — | 51 | 19 | 51 | ||||||||||||
Other assets | 157 | 162 | 151 | 162 | ||||||||||||
Total Assets | $ | 238,924 | $ | 321,244 | $ | 211,212 | $ | 321,244 | ||||||||
Liabilities and Capital | ||||||||||||||||
Liabilities: | ||||||||||||||||
Deposits: | ||||||||||||||||
Interest-bearing: | ||||||||||||||||
Demand and overnight | $ | 189 | $ | 491 | $ | 174 | $ | 491 | ||||||||
Term | 63 | 103 | 48 | 103 | ||||||||||||
Other | 2 | 8 | 1 | 8 | ||||||||||||
Non-interest-bearing – Other | 3 | 2 | ||||||||||||||
Non-interest-bearing - Other | 2 | 2 | ||||||||||||||
Total deposits | 257 | 604 | 225 | 604 | ||||||||||||
Consolidated obligations, net: | ||||||||||||||||
Bonds (includes $35,157 and $30,286 at fair value under the fair value option, respectively) | 176,200 | 213,114 | ||||||||||||||
Bonds (includes $26,205 and $30,286 at fair value under the fair value option, respectively) | 154,869 | 213,114 | ||||||||||||||
Discount notes | 49,009 | 91,819 | 43,901 | 91,819 | ||||||||||||
Total consolidated obligations | 225,209 | 304,933 | 198,770 | 304,933 | ||||||||||||
Mandatorily redeemable capital stock | 3,165 | 3,747 | 3,159 | 3,747 | ||||||||||||
Accrued interest payable | 1,002 | 1,451 | 878 | 1,451 | ||||||||||||
Affordable Housing Program | 203 | 180 | 180 | 180 | ||||||||||||
Payable to REFCORP | 55 | — | ||||||||||||||
Derivative liabilities | 231 | 437 | 197 | 437 | ||||||||||||
Other liabilities | 94 | 107 | 95 | 107 | ||||||||||||
Total Liabilities | 230,216 | 311,459 | 203,504 | 311,459 | ||||||||||||
Commitments and Contingencies (Note 11) | ||||||||||||||||
Capital (Note 7): | ||||||||||||||||
Capital stock—Class B—Putable ($100 par value) issued and outstanding: | ||||||||||||||||
103 shares and 96 shares, respectively | 10,253 | 9,616 | 10,244 | 9,616 | ||||||||||||
Restricted retained earnings | 1,172 | 176 | 1,065 | 176 | ||||||||||||
Accumulated other comprehensive income/(loss) | (2,717 | ) | (7 | ) | ||||||||||||
Accumulated other comprehensive loss | (3,601 | ) | (7 | ) | ||||||||||||
Total Capital | 8,708 | 9,785 | 7,708 | 9,785 | ||||||||||||
Total Liabilities and Capital | $ | 238,924 | $ | 321,244 | $ | 211,212 | $ | 321,244 |
(a) | At |
(b) | Includes |
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of San Francisco
Statements of Income
(Unaudited)
For the Three Months Ended June 30, | For the Six Months Ended June 30, | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||
(In millions) | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||
Interest Income: | |||||||||||||||||||||||||||||||
Advances | $ | 754 | $ | 1,864 | $ | 1,817 | $ | 4,448 | $ | 546 | $ | 1,841 | $ | 2,363 | $ | 6,289 | |||||||||||||||
Prepayment fees on advances, net | 18 | — | 20 | — | 2 | (10 | ) | 22 | (10 | ) | |||||||||||||||||||||
Federal funds sold | 6 | 77 | 13 | 209 | 5 | 78 | 18 | 287 | |||||||||||||||||||||||
Trading securities | 1 | 1 | 1 | 2 | — | — | 1 | 2 | |||||||||||||||||||||||
Held-to-maturity securities | 369 | 582 | 804 | 1,199 | 358 | 585 | 1,162 | 1,784 | |||||||||||||||||||||||
Mortgage loans held for portfolio | 36 | 48 | 79 | 97 | 39 | 48 | 118 | 145 | |||||||||||||||||||||||
Total Interest Income | 1,184 | 2,572 | 2,734 | 5,955 | 950 | 2,542 | 3,684 | 8,497 | |||||||||||||||||||||||
Interest Expense: | |||||||||||||||||||||||||||||||
Consolidated obligations: | |||||||||||||||||||||||||||||||
Bonds | 588 | 1,683 | 1,448 | 4,031 | 418 | 1,673 | 1,866 | 5,704 | |||||||||||||||||||||||
Discount notes | 112 | 541 | 368 | 1,331 | 67 | 462 | 435 | 1,793 | |||||||||||||||||||||||
Deposits | — | 7 | — | 17 | — | 6 | — | 23 | |||||||||||||||||||||||
Mandatorily redeemable capital stock | — | 3 | — | 6 | 7 | 8 | 7 | 14 | |||||||||||||||||||||||
Total Interest Expense | 700 | 2,234 | 1,816 | 5,385 | 492 | 2,149 | 2,308 | 7,534 | |||||||||||||||||||||||
Net Interest Income | 484 | 338 | 918 | 570 | 458 | 393 | 1,376 | 963 | |||||||||||||||||||||||
Provision for credit losses on mortgage loans | 1 | — | 1 | — | — | — | 1 | — | |||||||||||||||||||||||
Net Interest Income After Mortgage Loan Loss Provision | 483 | 338 | 917 | 570 | 458 | 393 | 1,375 | 963 | |||||||||||||||||||||||
Other (Loss)/Income: | |||||||||||||||||||||||||||||||
Other Loss: | |||||||||||||||||||||||||||||||
Services to members | 1 | — | 1 | — | — | 1 | 1 | 1 | |||||||||||||||||||||||
Net gain on trading securities | — | — | 1 | — | — | — | 1 | — | |||||||||||||||||||||||
Total other-than-temporary impairment loss on held-to-maturity securities | (1,283 | ) | — | (2,439 | ) | — | (1,385 | ) | — | (3,824 | ) | — | |||||||||||||||||||
Portion of loss recognized in other comprehensive income | 1,195 | — | 2,263 | — | 1,069 | — | 3,332 | — | |||||||||||||||||||||||
Net impairment loss on held-to-maturity securities (credit loss) | (88 | ) | — | (176 | ) | — | |||||||||||||||||||||||||
Net other-than-temporary impairment loss on held-to-maturity securities (credit-related loss) | (316 | ) | — | (492 | ) | — | |||||||||||||||||||||||||
Net (loss)/gain on advances and consolidated obligation bonds held at fair value | (178 | ) | (228 | ) | (361 | ) | 46 | (62 | ) | 99 | (423 | ) | 145 | ||||||||||||||||||
Net gain/(loss) on derivatives and hedging activities | 224 | 217 | 258 | 62 | |||||||||||||||||||||||||||
Net (loss)/gain on derivatives and hedging activities | (166 | ) | (326 | ) | 92 | (264 | ) | ||||||||||||||||||||||||
Other | 2 | 1 | 2 | 2 | 1 | 1 | 3 | 3 | |||||||||||||||||||||||
Total Other (Loss)/Income | (39 | ) | (10 | ) | (275 | ) | 110 | ||||||||||||||||||||||||
Total Other Loss | (543 | ) | (225 | ) | (818 | ) | (115 | ) | |||||||||||||||||||||||
Other Expense: | |||||||||||||||||||||||||||||||
Compensation and benefits | 15 | 12 | 30 | 26 | 14 | 13 | 44 | 39 | |||||||||||||||||||||||
Other operating expense | 13 | 8 | 24 | 15 | 12 | 12 | 36 | 27 | |||||||||||||||||||||||
Federal Housing Finance Agency/Federal Housing Finance Board | 2 | 2 | 5 | 4 | 3 | 3 | 8 | 7 | |||||||||||||||||||||||
Office of Finance | 1 | 2 | 3 | 4 | 2 | 1 | 5 | 5 | |||||||||||||||||||||||
Total Other Expense | 31 | 24 | 62 | 49 | 31 | 29 | 93 | 78 | |||||||||||||||||||||||
Income Before Assessments | 413 | 304 | 580 | 631 | |||||||||||||||||||||||||||
(Loss)/Income Before Assessments | (116 | ) | 139 | 464 | 770 | ||||||||||||||||||||||||||
REFCORP | 76 | 56 | 106 | 116 | (21 | ) | 25 | 85 | 141 | ||||||||||||||||||||||
Affordable Housing Program | 34 | 25 | 48 | 52 | (10 | ) | 13 | 38 | 65 | ||||||||||||||||||||||
Total Assessments | 110 | 81 | 154 | 168 | (31 | ) | 38 | 123 | 206 | ||||||||||||||||||||||
Net Income | $ | 303 | $ | 223 | $ | 426 | $ | 463 | |||||||||||||||||||||||
Net (Loss)/Income | $ | (85 | ) | $ | 101 | $ | 341 | $ | 564 | ||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of San Francisco
Statements of Capital Accounts
(Unaudited)
Capital Stock Class B—Putable | Retained Earnings | Accumulated Income/(Loss) | Total Capital | Capital Stock Class B—Putable | Retained Earnings | Accumulated Other Comprehensive Income/(Loss) | Total Capital | |||||||||||||||||||||||||||||||||||||||||||||
(In millions) | Shares | Par Value | Restricted | Unrestricted | Total | Shares | Par Value | Restricted | Unrestricted | Total | ||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2007 | 134 | $ | 13,403 | $ | 227 | $ | — | $ | 227 | $ | (3 | ) | $ | 13,627 | 134 | $ | 13,403 | $ | 227 | $ | — | $ | 227 | $ | (3 | ) | $ | 13,627 | ||||||||||||||||||||||||
Adjustments to opening balance(a) | 16 | 16 | 16 | 16 | 16 | 16 | ||||||||||||||||||||||||||||||||||||||||||||||
Issuance of capital stock | 9 | 882 | 882 | 16 | 1,587 | 1,587 | ||||||||||||||||||||||||||||||||||||||||||||||
Repurchase/redemption of capital stock | (9 | ) | (920 | ) | (920 | ) | (12 | ) | (1,196 | ) | (1,196 | ) | ||||||||||||||||||||||||||||||||||||||||
Capital stock reclassified to mandatorily redeemable capital stock | (2 | ) | (2 | ) | (37 | ) | (3,707 | ) | (3,707 | ) | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 463 | 463 | 463 | 564 | 564 | 564 | ||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net amounts recognized as earnings | 1 | 1 | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||
Additional minimum liability on benefit plans | (1 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | 463 | 565 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Transfers to restricted retained earnings | 79 | (79 | ) | — | — | 53 | (53 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||
Dividends on capital stock (5.96%) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on capital stock (5.24%) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock issued | 4 | 400 | (400 | ) | (400 | ) | — | 5 | 527 | (527 | ) | (527 | ) | — | ||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2008 | 138 | $ | 13,763 | $ | 306 | $ | — | $ | 306 | $ | (3 | ) | $ | 14,066 | ||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2008 | 106 | $ | 10,614 | $ | 280 | $ | — | $ | 280 | $ | (2 | ) | $ | 10,892 | ||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2008 | 96 | $ | 9,616 | $ | 176 | $ | — | $ | 176 | $ | (7 | ) | $ | 9,785 | 96 | $ | 9,616 | $ | 176 | $ | — | $ | 176 | $ | (7 | ) | $ | 9,785 | ||||||||||||||||||||||||
Adjustments to opening balance(b) | 570 | 570 | (570 | ) | — | 570 | 570 | (570 | ) | — | ||||||||||||||||||||||||||||||||||||||||||
Issuance of capital stock | 1 | 55 | 55 | 1 | 56 | 56 | ||||||||||||||||||||||||||||||||||||||||||||||
Capital stock reclassified from mandatorily redeemable capital stock, net | 6 | 582 | 582 | 6 | 572 | 572 | ||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income/(loss): | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 426 | 426 | 426 | 341 | 341 | 341 | ||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income/(loss): | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other-than-temporary impairment loss - noncredit portion | (2,390 | ) | (2,390 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Additional minimum liability on benefit plans | (1 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Other-than-temporary impairment loss related to all other factors | (3,740 | ) | (3,740 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Reclassified to income for previously impaired securities | 127 | 127 | 408 | 408 | ||||||||||||||||||||||||||||||||||||||||||||||||
Accretion of impairment loss | 123 | 123 | 309 | 309 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other-than-temporary impairment loss related to all other factors | (2,140 | ) | (2,140 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Total other-than-temporary impairment loss related to all other factors | (3,023 | ) | (3,023 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income/(loss) | (1,714 | ) | (2,683 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Transfers to restricted retained earnings | 996 | (996 | ) | — | — | 889 | (889 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||
Dividends on capital stock (0.28%) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends paid | — | — | (22 | ) | (22 | ) | (22 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2009 | 103 | $ | 10,253 | $ | 1,172 | $ | — | $ | 1,172 | $ | (2,717 | ) | $ | 8,708 | ||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2009 | 103 | $ | 10,244 | $ | 1,065 | $ | — | $ | 1,065 | $ | (3,601 | ) | $ | 7,708 |
(a) | Adjustments to the opening balance consist of the effects of adopting |
(b) | Adjustments to the opening balance consist of the effects of adopting |
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of San Francisco
Statements of Cash Flows
(Unaudited)
For the Six Months Ended June 30, | For the Nine Months Ended September 30, | |||||||||||||||
(In millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Cash Flows from Operating Activities: | ||||||||||||||||
Net Income | $ | 426 | $ | 463 | $ | 341 | $ | 564 | ||||||||
Adjustments to reconcile net income to net cash provided by/(used in) operating activities: | ||||||||||||||||
Depreciation and amortization | (238 | ) | (170 | ) | (232 | ) | (230 | ) | ||||||||
Provision for credit losses on mortgage loans | 1 | — | 1 | — | ||||||||||||
Non-cash interest on mandatorily redeemable capital stock | — | 6 | — | 14 | ||||||||||||
Change in net fair value adjustment on trading securities | (1 | ) | — | (1 | ) | — | ||||||||||
Change in net fair value adjustment on advances and consolidated obligation bonds held at fair value | 361 | (46 | ) | 423 | (145 | ) | ||||||||||
Change in net fair value adjustment on derivatives and hedging activities | (518 | ) | (559 | ) | (597 | ) | (65 | ) | ||||||||
Other-than-temporary impairment charge on held-to-maturity securities | 176 | — | ||||||||||||||
Net other-than-temporary impairment loss on held-to-maturity securities | 492 | — | ||||||||||||||
Other adjustments | 1 | — | ||||||||||||||
Net change in: | ||||||||||||||||
Accrued interest receivable | 416 | 518 | 547 | 539 | ||||||||||||
Other assets | 11 | (52 | ) | 7 | (67 | ) | ||||||||||
Accrued interest payable | (456 | ) | (536 | ) | (585 | ) | (628 | ) | ||||||||
Other liabilities | 116 | 55 | 20 | 36 | ||||||||||||
Total adjustments | (132 | ) | (784 | ) | 76 | (546 | ) | |||||||||
Net cash provided by/(used in) operating activities | 294 | (321 | ) | |||||||||||||
Net cash provided by operating activities | 417 | 18 | ||||||||||||||
Cash Flows from Investing Activities: | ||||||||||||||||
Net change in: | ||||||||||||||||
Federal funds sold | (7,227 | ) | (4,372 | ) | 2,345 | (3,720 | ) | |||||||||
Premises and equipment | (3 | ) | (6 | ) | (6 | ) | (7 | ) | ||||||||
Trading securities: | ||||||||||||||||
Proceeds from maturities | 3 | 4 | 4 | 21 | ||||||||||||
Held-to-maturity securities: | ||||||||||||||||
Net decrease in short-term | 2,799 | 544 | 3,324 | 6,105 | ||||||||||||
Proceeds from maturities of long-term | 3,827 | 3,236 | 5,933 | 4,646 | ||||||||||||
Purchases of long-term | — | (11,321 | ) | (406 | ) | (12,105 | ) | |||||||||
Advances: | ||||||||||||||||
Principal collected | 596,074 | 783,317 | 835,367 | 1,177,982 | ||||||||||||
Made to members | (535,969 | ) | (778,184 | ) | (755,682 | ) | (1,190,091 | ) | ||||||||
Mortgage loans held for portfolio: | ||||||||||||||||
Principal collected | 345 | 229 | 530 | 336 | ||||||||||||
Net cash provided by/(used in) investing activities | 59,849 | (6,553 | ) | 91,409 | (16,833 | ) | ||||||||||
Federal Home Loan Bank of San Francisco
Statements of Cash Flows (continued)
(Unaudited)
For the Six Months Ended June 30, | For the Nine Months Ended September 30, | |||||||||||||||
(In millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Cash Flows from Financing Activities: | ||||||||||||||||
Net change in: | ||||||||||||||||
Deposits | (830 | ) | 238 | (834 | ) | 428 | ||||||||||
Borrowings from other Federal Home Loan Banks | — | (955 | ) | — | (955 | ) | ||||||||||
Other borrowings | — | (100 | ) | — | (100 | ) | ||||||||||
Net payments on derivative contracts with financing elements | 32 | — | 106 | (116 | ) | |||||||||||
Net proceeds from consolidated obligations: | ||||||||||||||||
Bonds issued | 34,210 | 78,767 | 57,264 | 108,270 | ||||||||||||
Discount notes issued | 89,224 | 393,770 | 126,457 | 657,679 | ||||||||||||
Bonds transferred from other Federal Home Loan Banks | — | 164 | — | 164 | ||||||||||||
Payments for consolidated obligations: | ||||||||||||||||
Bonds matured or retired | (69,861 | ) | (70,709 | ) | (114,199 | ) | (98,085 | ) | ||||||||
Discount notes matured or retired | (131,794 | ) | (394,207 | ) | (174,155 | ) | (648,355 | ) | ||||||||
Proceeds from issuance of capital stock | 55 | 882 | 56 | 1,587 | ||||||||||||
Payments for repurchase/redemption of mandatorily redeemable capital stock | — | (48 | ) | (16 | ) | (52 | ) | |||||||||
Payments for repurchase/redemption of capital stock | — | (920 | ) | — | (1,196 | ) | ||||||||||
Cash dividends paid | (22 | ) | — | |||||||||||||
Net cash (used in)/provided by financing activities | (78,964 | ) | 6,882 | (105,343 | ) | 19,269 | ||||||||||
Net (decrease)/increase in cash and cash equivalents | (18,821 | ) | 8 | (13,517 | ) | 2,454 | ||||||||||
Cash and cash equivalents at beginning of period | 19,632 | 5 | 19,632 | 5 | ||||||||||||
Cash and cash equivalents at end of period | $ | 811 | $ | 13 | $ | 6,115 | $ | 2,459 | ||||||||
Supplemental Disclosures: | ||||||||||||||||
Interest paid during the period | $ | 2,816 | $ | 7,063 | $ | 3,528 | $ | 9,437 | ||||||||
Affordable Housing Program payments during the period | 25 | 17 | 38 | 30 | ||||||||||||
REFCORP payments during the period | — | 118 | 53 | 174 | ||||||||||||
Transfers of mortgage loans to real estate owned | 1 | 1 | 3 | 2 | ||||||||||||
Non-cash dividends on capital stock | — | 400 | — | 527 |
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements
(Unaudited)
(Dollars in millions)
Background Information
On July 30, 2008, the Housing and Economic Recovery Act of 2008 (Housing Act) was enacted and, among other things,enacted. The Housing Act created a new federal agency, the Federal Housing Finance Agency (Finance Agency), which became the new federal regulator of the Federal Home Loan Banks (FHLBanks) effective on the date of enactment of the Housing Act. On October 27, 2008, the Federal Housing Finance Board (Finance Board), the federal regulator of the FHLBanks prior to the creation of the Finance Agency, merged into the Finance Agency. Pursuant to the Housing Act, all regulations, orders, determinations, and resolutions that were issued, made, prescribed, or allowed to become effective by the Finance Board will remain in effect until modified, terminated, set aside, or superseded by the Director of the Finance Agency, any court of competent jurisdiction, or operation of law. References throughout these notes to regulations of the Finance Agency also include the regulations of the Finance Board where they remain applicable.
Note 1 – Summary of Significant Accounting Policies
The information about the Federal Home Loan Bank of San Francisco (Bank) included in these unaudited financial statements reflects all adjustments that, are, in the opinion of management, are necessary for a fair statement of results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed. The results of operations in these interim statements are not necessarily indicative of the results to be expected for any subsequent period or for the entire year ending December 31, 2009. These unaudited financial statements should be read in conjunction with the Bank’s Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K).
Use of Estimates.The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, if applicable, and the reported amounts of income, expenses, gains, and losses during the reporting period. The most significant of these estimates include the fair value of derivatives, investments classified as other-than-temporarily impaired, certain advances, and certain consolidated obligations that are reported at fair value in the Statements of Condition. In addition, significant judgments, estimates, and assumptions were made in the determination of other-than-temporarily impaired securities. Changes in judgments, estimates, and assumptions could potentially affect the Bank’s financial position and results of operations significantly. Although management believes these judgments, estimates, and assumptions to be reasonable, actual results may differ.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Reclassifications. During the third quarter of 2008, on a retrospective basis, the Bank reclassified its investments in certain held-to-maturity negotiable certificates of deposit from “interest-bearing deposits in banks” to “held-to-maturity securities” in its Statements of Condition, Statements of Income, and Statements of Cash Flows based on the definition of a security under Statement of Financial Accounting Standards (SFAS) No. 115,Accounting for Certain Investments in Debt and Equity Securities (SFAS 115). These financial instruments have been reclassified as held-to-maturity securities based on their short-term nature and the Bank’s history of holding them until maturity. This reclassification had no effect on the total assets, net interest income, or net income of the Bank. The effect of the reclassifications on the Bank’s prior period financial statements is presented below:
Before Reclassification | Reclassification | After Reclassification | |||||||||
Statements of Income | |||||||||||
Three months ended June 30, 2008: | |||||||||||
Interest income: Interest-bearing deposits in banks | $ | 91 | $ | (91 | ) | $ | — | ||||
Interest income: Held-to-maturity securities | 491 | 91 | 582 | ||||||||
Six months ended June 30, 2008: | |||||||||||
Interest income: Interest-bearing deposits in banks | 230 | (230 | ) | — | |||||||
Interest income: Held-to-maturity securities | 969 | 230 | 1,199 | ||||||||
Statement of Cash Flows for the Six Months Ended June 30, 2008 | |||||||||||
Investing Activities: | |||||||||||
Net change in interest-bearing deposits in banks | (342 | ) | 342 | — | |||||||
Held-to-maturity securities: Net decrease/(increase) in short-term | 886 | (342 | ) | 544 |
Descriptions of the Bank’s significant accounting policies are included in Note 1 (Summary of Significant Accounting Policies) to the Financial Statements in the Bank’s 2008 Form 10-K. Other changes to these policies as of JuneSeptember 30, 2009, are discussed in Note 2.
Note 2 – Recently Issued and Adopted Accounting Standards and InterpretationsGuidance
SFAS 168.Recently Issued Accounting Guidance
Fair Value Measurements and Disclosures - Measuring Liabilities at Fair Value. On June 30,August 28, 2009, the FASB issued SFAS No. 168,The Statement of Financial Accounting Standards Codification andBoard (FASB) issued an amendment to existing fair value measurement guidance with respect to measuring liabilities in a hypothetical transaction (assuming the Hierarchytransfer of Generally Accepted Accounting Principles, a replacement of SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles(SFAS 168). SFAS 168 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity withliability to a third party), as currently required by U.S. GAAP. SFAS 168 establishesThis guidance reaffirms that fair value measurement of a liability assumes the FASB Accounting Standards Codification (ASC)transfer of a liability to a market participant as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securitiesmeasurement date; that is, the liability is
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
presumed to continue and Exchange Commission (SEC) under authorityis not settled with the counterparty. In addition, this guidance emphasizes that a fair value measurement of federal securities laws are also sources of authoritative GAAP for SEC registrants. The ASCa liability includes nonperformance risk and that such risk does not change current GAAP, but it introducesafter transfer of the liability. In a new structuremanner consistent with this underlying premise (that is, a transfer notion), this guidance requires that organizesan entity should first determine whether a quoted price of an identical liability traded in an active market exists (that is, a Level 1 fair value measurement). This guidance clarifies that the authoritative standards by topicquoted price for the identical liability, when traded as an asset in an active market, is also a Level 1 measurement for that liability when no adjustment to the quoted price is required. In the absence of a quoted price in an active market for the identical liability, an entity must use one place. SFAS 168or more of the following valuation techniques to estimate fair value:
A valuation technique that uses:
The quoted price of an identical liability when traded as an asset.
The quoted price of a similar liability or of a similar liability when traded as an asset.
Another valuation technique that is consistent with the accounting principles for fair value measurements and disclosures, including one of the following:
An income approach, such as a present value technique.
A market approach, such as a technique based on the amount at the measurement date that an entity would pay to transfer an identical liability or would receive to enter into an identical liability.
In addition, this guidance clarifies that when estimating the fair value of a liability, a reporting entity should not include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The guidance is effective for financial statements issued forthe first reporting period (including interim and annual periods endingperiods) beginning after September 15, 2009 (September 30,issuance (October 1, 2009, for the Bank). Entities may also elect to adopt this guidance early if financial statements have not been issued. The Bank does not believe thatexpect the adoption of SFAS 168 willthis guidance to have a material effectimpact on itsthe Bank’s results of operations, financial condition, or cash flows.
SFAS 167.Accounting for Consolidation of Variable Interest Entities.On June 12, 2009, the FASB issued SFAS No. 167,Amendments to FASB Interpretation No. 46(R)(SFAS 167), which is intended to amendguidance for amending certain requirements of FASB Interpretation No. 46 (revised December 2003),Consolidationconsolidation of Variable Interest Entities,variable interest entities. This guidance is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. SFAS 167This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 (January 1, 2010, for the Bank), for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Bank doeshas not believe thatyet determined what effect, if any, the adoption of SFAS 167this guidance will have a material effect on its results of operations, financial condition, or cash flows.
SFAS 166.Accounting for Transfers of Financial Assets.On June 12, 2009, the FASB issued SFAS No. 166,Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140(SFAS 166), which isguidance intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. SFAS 166This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 (January 1, 2010, for the Bank), for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Bank has not yet determined what effect, if any, the adoption of this guidance will have on its results of operations, financial condition, or cash flows.
Employers’ Disclosures About Postretirement Benefit Plan Assets. On December 30, 2008, the FASB issued guidance requiring additional disclosures about plan assets of a defined benefit pension or other
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
postretirement plan. This guidance requires more detailed disclosures about employers’ plan assets, including employers’ investment strategies, major categories of plan assets, concentration of risk within plan assets, and valuation techniques used to measure the fair value of plan assets. This guidance is effective for fiscal years ending after December 15, 2009 (December 31, 2009, for the Bank). In periods after initial adoption, this guidance requires comparative disclosures only for periods ending subsequent to initial adoption and does not require earlier periods to be disclosed for comparative purposes at initial adoption. Because this guidance affects financial statement disclosures only, its adoption will not have a material impact on the Bank’s results of operations, financial condition, or cash flows. Its adoption will result in increased financial statement disclosures.
Recently Adopted Accounting Guidance
Accounting Standards Codification. On June 29, 2009, the FASB issued the FASB Accounting Standards Codification (Codification) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by non-government entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification is not intended to change current U.S. GAAP; rather, its intent is to organize the authoritative accounting literature by topic in one place. The Codification modifies the U.S. GAAP hierarchy to include only two levels of GAAP, authoritative and non-authoritative. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. Following the establishment of the Codification, the FASB will issue new accounting guidance in the form of Accounting Standards Updates (ASU). The ASU will serve only to update the Codification, provide background information about the guidance, and provide the basis for conclusions regarding the changes to the Codification. The Codification is effective for financial statements issued for interim and annual reporting periods thereafter. Earlier application is prohibited.ending after September 15, 2009. The Bank doesadopted the Codification for the interim period ended September 30, 2009. Because the Codification is not believe thatintended to change or alter previous U.S. GAAP, its adoption did not have any impact on the adoption of SFAS 166 will have a material effect on its financial condition,Bank’s results of operations, financial condition, or cash flows.
Adoption of SFAS 165.Subsequent Events.On May 28, 2009, the FASB issued SFAS No. 165,Subsequent Events (SFAS 165), which is intended to establishguidance establishing general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165This guidance sets forth: (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date, including disclosure of the date through which an entity has evaluated subsequent events and whether that represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. SFAS 165This guidance does not apply to subsequent events or transactions that are within the scope of other applicable U.S. GAAP that provide different guidance on the accounting treatment for subsequent events or transactions. SFAS 165This guidance is effective for interim and annual financial periods ending after June 15, 2009 (June 30, 2009, for the Bank).2009. The Bank adopted SFAS 165this guidance for the period ended June 30, 2009. Its adoption resulted in increased financial statement disclosures. Subsequent events have been evaluated until the time of the Form 10-Q filing with the SEC on AugustNovember 12, 2009.
AdoptionFederal Home Loan Bank of SFAS 161. On March 19, 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Bank adopted SFAS 161 on January 1, 2009. Its adoption resulted in increased financial statement disclosures.San Francisco
Notes to Financial Statements (continued)
AdoptionRecognition and Presentation of FSP FAS 115-2 and FAS 124-2.Other-Than-Temporary Impairments.On April 9, 2009, the FASB issued FASB Staff Position (FSP) No. FAS 115-2guidance amending the recognition and FAS 124-2,Recognition and Presentationreporting requirements of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2). FSP FAS 115-2 and FAS 124-2 amends the other-than-temporary impairment (OTTI) guidance in U.S. GAAP for debt securities classified as available-for-sale and held-to-maturity to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP FAS 115-2 and FAS 124-2This OTTI guidance clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired and changes the presentation and calculation of the OTTI on debt securities recognized in earnings in the financial statements. FSP FAS 115-2 and FAS 124-2This OTTI guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS 115-2 and FAS 124-2This OTTI guidance expands and increases the frequency of existing OTTI disclosures for debt and equity securities and requires new disclosures to help users of financial statements understand the significant inputs used in determining a credit loss as well as a rollforward of that amount each period.
For impaired debt securities, FSP FAS 115-2 and FAS 124-2this guidance requires an entity to assess whether (i) it has the intent to sell the debt security, or (ii) it is more likely than not that it will be required to sell the debt security before its anticipated recovery.recovery of the remaining amortized cost basis of the security. If either of these conditions is met, an OTTI on the security must be recognized.
Federal Home Loan Bank of San Francisco
NotesWith respect to Financial Statements (continued)
In instances in which a determination is made thatany debt security, a credit loss (defined by FSP FAS 115-2 and FAS 124-2is defined as the difference betweenamount by which the amortized cost basis exceeds the present value of the cash flows expected to be collected and the amortized cost basis)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 (that is, the amortized cost basis less any current-period credit loss), FSP FAS 115-2 and FAS 124-2the OTTI guidance changes the presentation and amount of the OTTI recognized in the statements of earnings. In these instances, theThe impairment is separated into (i) the amount of the total impairment related to the credit loss, and (ii) the amount of the total impairment related to all other factors. The amount of the total OTTI related to the credit loss is recognized in earnings. The amount of the total impairment related to all other factors is recognized in other comprehensive income and will be accreted prospectively, based on the amount and timing of future estimated cash flows, over the remaining life of the debt security as an increase in the carrying value of the security, with no effect on earnings unless the security is subsequently sold or there are additional decreases in cash flows expected to be collected. The total OTTI is presented in the statements of earnings with an offset for the amount of the total OTTI that is recognized in other comprehensive income. This new presentation provides additional information about the amounts that the entity does not expect to collect related to a debt security.
UponFollowing implementation of FSP FAS 115-2 and FAS 124-2,this OTTI guidance, the present value of the cash flows expected to be collected with respect to any debt security is compared to the amortized cost basis of the security to determine whether a credit loss exists. OnFor securities previously identified as other-than-temporarily impaired, the Bank updates its estimate of future estimated cash flows on a regular basis. If there is no additional impairment on the security, the yield of the security is adjusted on a prospective basis when there is a significant increase in the expected cash flows. This accretion is included in net interest income in the Statements of Income.
FSP FAS 115-2 and FAS 124-2This OTTI guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. EarlierThis OTTI guidance is to be applied to existing and new investments held by an entity as of the beginning of the interim period in which it is adopted. For debt securities held at the beginning of the interim period of adoption for periods ending before March 15, 2009,which an other-than-temporary impairment was previously recognized, if an entity does not intend to sell the security and it is not permitted.more likely than not that the entity will be required to sell the security before recovery of its amortized cost
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
basis, the entity shall recognize the cumulative effect of initially applying this guidance as an adjustment to the opening balance of retained earnings with a corresponding adjustment to accumulated other comprehensive income. If an entity elects to adopt either FSP No. FAS 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4), or FSP No. FAS 107-1 and APB 28-1,Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1) early, the entity is also required to adopt FSP FAS 115-2 and FAS 124-2 early. In addition, if an entity elects to adopt FSP FAS 115-2 and FAS 124-2this OTTI guidance early, it is required tomust also concurrently adopt FSP FAS 157-4 early. FSP FAS 115-2recently issued guidance regarding the determination of fair value when there has been a significant decrease in the volume and FAS 124-2level of activity for an asset or liability or when price quotations are associated with transactions that are not orderly (discussed below). This OTTI guidance does not require disclosures for earlier periods presented for comparative purposes at initial adoption, and in periods after initial adoption, comparative disclosures are required only for periods ending after initial adoption. The Bank adopted FSP FAS 115-2 and FAS 124-2this OTTI guidance as of January 1, 2009, and recognized the effects of applying FSP FAS 115-2 and FAS 124-2 as a change in accounting principle. The Bank recognized the cumulative effect of initially applying FSP FAS 115-2 and FAS 124-2,this OTTI guidance, totaling $570, as an increase in the retained earnings balance at January 1, 2009, with a corresponding change in accumulated other comprehensive income/(loss).loss. This adjustment did not affect either the Bank’s Affordable Housing Program or Resolution Funding Corporation expense or accruals, because these assessments are calculated based on GAAP net income. Had the Bank elected not to adopt FSP FAS 115-2 and FAS 124-2this OTTI guidance early, the Bank would have recognized the entire first quarter 2009 OTTI amount in other income in the first quarter of 2009. The adoption of FSP FAS 115-2 and FAS 124-2this OTTI guidance also increased financial statement disclosures.
AdoptionDetermining Fair Value When the Volume and Level of FSP FAS 157-4.Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.On April 9, 2009, the FASB issued FSP FAS 157-4, which providesguidance providing additional guidance for estimating fair value in accordance with SFAS No. 157,Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4decreased and also includesincluding guidance on identifying circumstances that indicate a transaction is not orderly. This guidance emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement under U.S. GAAP remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current conditions. In addition, the guidance requires enhanced disclosures regarding fair value measurements.
FSP FAS 157-4This guidance is effective for interim and annual reporting periods ending after June 15, 2009, and will be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. Earlier adoption for periods ending before March 15, 2009, is not permitted. If an entity elects to adopt either FSP FAS 115-2 and FAS 124-2 or FSP FAS 107-1 and APB 28-1 early, the entity is also required to adopt FSP FAS 157-4
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
early. In addition, if an entity elects to adopt FSP FAS 157-4this guidance early, it ismust also required toconcurrently adopt FSP FAS 115-2 and FAS 124-2 early. FSP FAS 157-4the new OTTI guidance discussed above. This guidance does not require disclosures for earlier periods presented for comparative purposes at initial adoption, and in periods after initial adoption, comparative disclosures are required only for periods ending after initial adoption. The Bank adopted FSP FAS 157-4this guidance as of January 1, 2009. FSP FAS 157-42009, and the adoption did not have a material impact on the Bank’s results of operations, financial condition, or cash flows.
AdoptionInterim Disclosures About Fair Value of FSP FAS 107-1 and APB 28-1.Financial Instruments.On April 9, 2009, the FASB issued FSP FAS 107-1guidance amending the disclosure requirements for the fair value of financial instruments, including disclosures of the method(s) and APB 28-1, which amends SFAS No. 107,Disclosures about Fair Value of Financial Instruments,significant assumptions used to require disclosures aboutestimate the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP FAS 107-1In addition, the guidance requires disclosure in interim and APB 28-1 also amends APB Opinion No. 28,Interim Financial Reporting,annual financial statements of any changes in the methods and significant assumptions used to require those disclosures in summarizedestimate the fair value of financial information at interim reporting periods. FSP FAS 107-1 and APB 28-1instruments. This guidance is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may adopt FSP FAS 107-1 and APB 28-1this guidance early only if it also elects to adopt FSP FAS 157-4concurrently adopts the new guidance discussed in the preceding paragraphs on OTTI and FSP FAS 115-2 and FAS 124-2 early. FSP FAS 107-1 and APB 28-1fair value. This guidance does not require disclosures for earlier periods presented for comparative purposes at initial adoption, and in periods after initial adoption, comparative disclosures are required only for periods ending after initial adoption. The Bank adopted FSP FAS 107-1 and APB 28-1this guidance as of January 1, 2009. Its adoption resulted in increased financial statement disclosures.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Adoption of FSP FAS 157-2.Enhanced Disclosures about Derivative Instruments and Hedging Activities. On March 19, 2008, the FASB issued guidance requiring enhanced disclosures about an entity’s derivative instruments and hedging activities including: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedged items are accounted for under U.S. GAAP; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with earlier application encouraged. The Bank adopted this guidance on January 1, 2009. Its adoption resulted in increased financial statement disclosures.
Determining Fair Value for Non-Financial Assets and Liabilities.On February 12, 2008, the FASB issued FSP No. FAS 157-2,Effective Date of FASB Statement No. 157 (FSP FAS 157-2), which delayedguidance delaying the effective date of SFAS No. 157,Fair Value Measurements (SFAS 157), until January 1, 2009,fair value measurement guidance for non-financial assets and non-financial liabilities except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Bank adopted FSP FAS 157-2the fair value measurement guidance for these items as of January 1, 2009, and its adoption did not have a material impact on the Bank’s results of operations, financial condition, or cash flows.
FSP FAS 132(R)-1. On December 30, 2008, the FASB issued FSP No. FAS 132(R)-1,Employers’ Disclosures about Postretirement Benefit Plan Assets(FSP FAS 132(R)-1), which amends SFAS 132(R),Employers’ Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88, and 106, to provide guidance on additional disclosures about plan assets of a defined benefit pension or other postretirement plan. FSP FAS 132(R)-1 requires more detailed disclosures about employers’ plan assets, including employers’ investment strategies, major categories of plan assets, concentration of risk within plan assets, and valuation techniques used to measure the fair value of plan assets. FSP FAS 132(R)-1 is effective for fiscal years ending after December 15, 2009 (December 31, 2009, for the Bank). In periods after initial adoption, FSP FAS 132(R)-1 requires comparative disclosures only for periods ending subsequent to initial adoption and does not require earlier periods to be disclosed for comparative purposes at initial adoption. Because FSP FAS 132(R)-1 affects financial statement disclosures only, its adoption will not have a material impact on the Bank’s results of operations, financial condition, or cash flows. Its adoption will result in increased financial statement disclosures.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 3 – Held-to-Maturity Securities
The Bank classifies the following securities as held-to-maturity because the Bank has the positive intent and ability to hold these securities to maturity:
JuneSeptember 30, 2009
Amortized Cost(1) | OTTI Related to All | Carrying Value(1) | Gross Unrecognized Holding Gains | Gross Unrecognized Holding Losses | Estimated Fair Value | Amortized Cost(1) | OTTI Related to All | Carrying Value(1) | Gross Unrecognized Holding Gains(2) | Gross Unrecognized Holding Losses(2) | Estimated Fair Value | |||||||||||||||||||||||||||||
Interest-bearing deposits in banks | $ | 6,303 | $ | — | $ | 6,303 | $ | — | $ | — | $ | 6,303 | $ | 7,029 | $ | — | $ | 7,029 | $ | — | $ | — | $ | 7,029 | ||||||||||||||||
Commercial paper | 2,250 | — | 2,250 | — | — | 2,250 | 1,000 | — | 1,000 | — | — | 1,000 | ||||||||||||||||||||||||||||
Housing finance agency bonds | 777 | — | 777 | — | (35 | ) | 742 | 769 | — | 769 | — | (24 | ) | 745 | ||||||||||||||||||||||||||
Subtotal | 9,330 | — | 9,330 | — | (35 | ) | 9,295 | 8,798 | — | 8,798 | — | (24 | ) | 8,774 | ||||||||||||||||||||||||||
Mortgage-backed securities (MBS): | ||||||||||||||||||||||||||||||||||||||||
Ginnie Mae | 17 | — | 17 | — | — | 17 | 16 | — | 16 | — | — | 16 | ||||||||||||||||||||||||||||
Freddie Mac | 3,891 | — | 3,891 | 120 | (2 | ) | 4,009 | 3,639 | — | 3,639 | 153 | (3 | ) | 3,789 | ||||||||||||||||||||||||||
Fannie Mae | 9,230 | — | 9,230 | 231 | (2 | ) | 9,459 | 9,031 | — | 9,031 | 302 | (15 | ) | 9,318 | ||||||||||||||||||||||||||
Non-agency | 22,483 | (2,710 | ) | 19,773 | 70 | (4,473 | ) | 15,370 | ||||||||||||||||||||||||||||||||
Private-label residential MBS (PLRMBS) | 20,934 | (3,593 | ) | 17,341 | 287 | (2,388 | ) | 15,240 | ||||||||||||||||||||||||||||||||
Total MBS | 35,621 | (2,710 | ) | 32,911 | 421 | (4,477 | ) | 28,855 | 33,620 | (3,593 | ) | 30,027 | 742 | (2,406 | ) | 28,363 | ||||||||||||||||||||||||
Total | $ | 44,951 | $ | (2,710 | ) | $ | 42,241 | $ | 421 | $ | (4,512 | ) | $ | 38,150 | $ | 42,418 | $ | (3,593 | ) | $ | 38,825 | $ | 742 | $ | (2,430 | ) | $ | 37,137 |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
December 31, 2008
Amortized Cost(1) | Gross Unrealized Gains(2) | Gross Unrealized Losses(2) | Estimated Fair | ||||||||||
Interest-bearing deposits in banks | $ | 11,200 | $ | — | $ | — | $ | 11,200 | |||||
Commercial paper | 150 | — | — | 150 | |||||||||
Housing finance agency bonds | 802 | 4 | — | 806 | |||||||||
Subtotal | 12,152 | 4 | — | 12,156 | |||||||||
MBS: | |||||||||||||
Ginnie Mae | 19 | — | (1 | ) | 18 | ||||||||
Freddie Mac | 4,408 | 57 | (8 | ) | 4,457 | ||||||||
Fannie Mae | 10,083 | 99 | (22 | ) | 10,160 | ||||||||
PLRMBS | 24,543 | — | (7,064 | ) | 17,479 | ||||||||
Total MBS | 39,053 | 156 | (7,095 | ) | 32,114 | ||||||||
Total | $ | 51,205 | $ | 160 | $ | (7,095 | ) | $ | 44,270 | ||||
(1) |
December 31, 2008
Amortized Cost(1) | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair | ||||||||||
Interest-bearing deposits in banks | $ | 11,200 | $ | — | $ | — | $ | 11,200 | |||||
Commercial paper | 150 | — | — | 150 | |||||||||
Housing finance agency bonds | 802 | 4 | — | 806 | |||||||||
Subtotal | 12,152 | 4 | — | 12,156 | |||||||||
MBS: | |||||||||||||
Ginnie Mae | 19 | — | (1 | ) | 18 | ||||||||
Freddie Mac | 4,408 | 57 | (8 | ) | 4,457 | ||||||||
Fannie Mae | 10,083 | 99 | (22 | ) | 10,160 | ||||||||
Non-agency | 24,543 | — | (7,064 | ) | 17,479 | ||||||||
Total MBS | 39,053 | 156 | (7,095 | ) | 32,114 | ||||||||
Total | $ | 51,205 | $ | 160 | $ | (7,095 | ) | $ | 44,270 |
At December 31, 2008, amortized cost was equivalent to carrying value. |
(2) | Gross unrecognized holding gains/(losses) represent the difference between estimated fair value and carrying value, while gross unrealized gains/(losses) represent the difference between estimated fair value and amortized cost. |
As of JuneSeptember 30, 2009, all of the interest-bearing deposits in banks had a credit rating of at least A, all of the commercial paper had a credit rating of A, and all of the housing finance agency bonds had a credit rating of at least AA. In addition, as of JuneSeptember 30, 2009, all of the residential agency MBS, which are backed by Ginnie Mae, Freddie Mac, or Fannie Mae, had a credit rating of AAA, and 63%50% of the non-agency MBSPLRMBS were rated above investment grade (28%(15% had a credit rating of AAA based on the amortized cost), withand the remainderremaining 50% were rated below investment grade. Credit ratings of BB and lower are below investment grade. The credit ratings used by the Bank are based on the lowest of Moody’s Investors Service (Moody’s), Standard & Poor’s Rating Services (Standard & Poor’s), or comparable Fitch ratings. All of the Bank’s agency and non-agency MBS are collateralized by residential mortgages.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The following tables summarize the held-to-maturity securities with unrealized losses as of JuneSeptember 30, 2009, and December 31, 2008. 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.
JuneSeptember 30, 2009
Less than 12 months | 12 months or more | Total | |||||||||||||||
Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | ||||||||||||
Interest-bearing deposits in banks | $ | 7,029 | — | $ | — | $ | — | $ | 7,029 | $ | — | ||||||
Housing finance agency bonds | 745 | 24 | — | — | 745 | 24 | |||||||||||
Subtotal | 7,774 | 24 | — | — | 7,774 | 24 | |||||||||||
MBS: | |||||||||||||||||
Ginnie Mae | 10 | — | 6 | — | 16 | — | |||||||||||
Freddie Mac | 44 | 2 | 40 | 1 | 84 | 3 | |||||||||||
Fannie Mae | 483 | 11 | 182 | 4 | 665 | 15 | |||||||||||
PLRMBS(1) | 1 | — | 15,239 | 5,981 | 15,240 | 5,981 | |||||||||||
Total | $ | 8,312 | 37 | $ | 15,467 | $ | 5,986 | $ | 23,779 | $ | 6,023 | ||||||
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Less than 12 months | 12 months or more | Total | ||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||
Interest-bearing deposits in banks | $ | 6,303 | $ | — | $ | — | $ | — | $ | 6,303 | $ | — | ||||||
Commercial paper | 1,000 | — | — | — | 1,000 | — | ||||||||||||
Housing finance agency bonds | 742 | 35 | — | — | 742 | 35 | ||||||||||||
Subtotal | 8,045 | 35 | — | — | 8,045 | 35 | ||||||||||||
MBS: | ||||||||||||||||||
Ginnie Mae | 8 | — | 8 | — | 16 | — | ||||||||||||
Freddie Mac | 266 | 1 | 43 | 1 | 309 | 2 | ||||||||||||
Fannie Mae | 30 | 1 | 205 | 1 | 235 | 2 | ||||||||||||
Non-agency(1) | 1 | — | 15,369 | 7,183 | 15,370 | 7,183 | ||||||||||||
Total | $ | 8,350 | $ | 37 | $ | 15,625 | $ | 7,185 | $ | 23,975 | $ | 7,222 | ||||||
December 31, 2008 | ||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||
MBS: | ||||||||||||||||||
Ginnie Mae | $ | 10 | $ | — | $ | 8 | $ | 1 | $ | 18 | $ | 1 | ||||||
Freddie Mac | 707 | 6 | 44 | 2 | 751 | 8 | ||||||||||||
Fannie Mae | 2,230 | 20 | 117 | 2 | 2,347 | 22 | ||||||||||||
Non-agency | 3,708 | 1,145 | 12,847 | 5,919 | 16,555 | 7,064 | ||||||||||||
Total | $ | 6,655 | $ | 1,171 | $ | 13,016 | $ | 5,924 | $ | 19,671 | $ | 7,095 |
December 31, 2008
�� | 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: | ||||||||||||||||||
Ginnie Mae | $ | 10 | $ | — | $ | 8 | $ | 1 | $ | 18 | $ | 1 | ||||||
Freddie Mac | 707 | 6 | 44 | 2 | 751 | 8 | ||||||||||||
Fannie Mae | 2,230 | 20 | 117 | 2 | 2,347 | 22 | ||||||||||||
PLRMBS | 3,708 | 1,145 | 12,847 | 5,919 | 16,555 | 7,064 | ||||||||||||
Total | $ | 6,655 | $ | 1,171 | $ | 13,016 | $ | 5,924 | $ | 19,671 | $ | 7,095 | ||||||
(1) | Includes securities with gross unrecognized holding losses of income/(loss). |
As indicated in the tables above, as of JuneSeptember 30, 2009, the Bank’s investments classified as held-to-maturity had gross unrealized losses totaling $7,222,$6,023, primarily relating to non-agency MBS.PLRMBS. The gross unrealized losses associated with the non-agency MBSPLRMBS were primarily due to extraordinarily high investor yield requirements resulting from an extremely illiquid market, significant uncertainty about the future condition of the mortgage market and the economy, and continued deterioration in the credit performance of loan collateral underlying these securities, causing these assets to be valued at significant discounts to their acquisition cost.
For a discussion of the Bank’s OTTI analysis, see Other-Than-Temporary Impairment section below.
Redemption Terms.The amortized cost, carrying value, and estimated fair value of certain securities by contractual maturity (based on contractual final principal payment) and MBS as of September 30, 2009, and December 31, 2008, are shown below. Expected maturities of certain securities and MBS will differ from contractual maturities because borrowers generally have the right to prepay the underlying obligations without prepayment fees.
September 30, 2009
Year of Contractual Maturity | Amortized Cost(1) | Carrying Value(1) | Estimated Fair Value | Weighted Average Interest Rate | ||||||||
Held-to-maturity securities other than MBS: | ||||||||||||
Due in one year or less | $ | 8,029 | $ | 8,029 | $ | 8,029 | 0.18 | % | ||||
Due after one year through five years | 12 | 12 | 12 | 0.63 | ||||||||
Due after five years through ten years | 27 | 27 | 26 | 0.60 | ||||||||
Due after ten years | 730 | 730 | 707 | 0.72 | ||||||||
Subtotal | 8,798 | 8,798 | 8,774 | 0.22 | ||||||||
MBS: | ||||||||||||
Ginnie Mae | 16 | 16 | 16 | 1.32 | ||||||||
Freddie Mac | 3,639 | 3,639 | 3,789 | 4.84 | ||||||||
Fannie Mae | 9,031 | 9,031 | 9,318 | 4.17 | ||||||||
PLRMBS | 20,934 | 17,341 | 15,240 | 3.85 | ||||||||
Total MBS | 33,620 | 30,027 | 28,363 | 4.04 | ||||||||
Total | $ | 42,418 | $ | 38,825 | $ | 37,137 | 3.26 | % | ||||
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
December 31, 2008
Year of Contractual Maturity | Amortized Cost(1) | Estimated Fair Value | Weighted Average Interest Rate | ||||||
Held-to-maturity securities other than MBS: | |||||||||
Due in one year or less | $ | 11,350 | $ | 11,350 | 0.53 | % | |||
Due one year through five years | 17 | 17 | 3.34 | ||||||
Due after five years through ten years | 28 | 28 | 3.31 | ||||||
Due after ten years | 757 | 761 | 3.40 | ||||||
Subtotal | 12,152 | 12,156 | 0.72 | ||||||
MBS: | |||||||||
Ginnie Mae | 19 | 18 | 2.07 | ||||||
Freddie Mac | 4,408 | 4,457 | 4.95 | ||||||
Fannie Mae | 10,083 | 10,160 | 4.38 | ||||||
PLRMBS | 24,543 | 17,479 | 4.11 | ||||||
Total MBS | 39,053 | 32,114 | 4.27 | ||||||
Total | $ | 51,205 | $ | 44,270 | 3.44 | % | |||
(1) | Amortized cost includes unpaid principal balance, unamortized premiums and discounts, and previous other-than-temporary impairments recognized in earnings (less any cumulative-effect adjustments recognized). The carrying value of held-to-maturity securities represents amortized cost after adjustment for impairment related to all other factors recognized in other comprehensive income/(loss). At December 31, 2008, amortized cost was equivalent to carrying value. |
The carrying value of the Bank’s MBS classified as held-to-maturity included net discounts of $4,133 at September 30, 2009, and net discounts of $597 at December 31, 2008. At September 30, 2009, net discounts included $512 from the OTTI related to credit losses and $3,593 from the OTTI related to all other factors. At December 31, 2008, net discounts included $20 from the OTTI related to credit losses and $570 from the OTTI related to all other factors.
Interest Rate Payment Terms.Interest rate payment terms for held-to-maturity securities at September 30, 2009, and December 31, 2008, are detailed in the following table:
September 30, 2009 | December 31, 2008 | |||||
Amortized cost of held-to-maturity securities other than MBS: | ||||||
Fixed rate | $ | 8,029 | $ | 11,350 | ||
Adjustable rate | 769 | 802 | ||||
Subtotal | 8,798 | 12,152 | ||||
Amortized cost of held-to-maturity MBS: | ||||||
Passthrough securities: | ||||||
Fixed rate | 3,556 | 4,120 | ||||
Adjustable rate | 90 | 100 | ||||
Collateralized mortgage obligations: | ||||||
Fixed rate | 18,712 | 24,604 | ||||
Adjustable rate | 11,262 | 10,229 | ||||
Subtotal | 33,620 | 39,053 | ||||
Total | $ | 42,418 | $ | 51,205 | ||
Certain MBS classified as fixed rate passthrough securities and fixed rate collateralized mortgage obligations have an initial fixed interest rate that subsequently converts to an adjustable interest rate on a specified date.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Bank does not own MBS that are backed by mortgage loans purchased by another FHLBank from either (i) members of the Bank or (ii) members of other FHLBanks.
Other-Than-Temporary Impairment.On a quarterly basis, the Bank evaluates its individual held-to-maturity investment securities in an unrealized loss position becausefor OTTI. As part of factors other than movements in interest rates, such as widening of mortgage asset spreads,this evaluation, the Bank considers whether orit intends to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery of the amortized cost basis. If either of these conditions is met, the Bank recognizes an OTTI charge to earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For securities in an unrealized loss position that meet neither of these conditions, the Bank considers whether it expects to recover the entire amortized cost basis of the security by comparing its best estimate of the present value of the cash flows expected to be collected from the security with the amortized cost basis of the security. The difference betweenIf the Bank’s best estimate of the present value of the cash flows expected to be collected andis less than the amortized cost basis, the difference is considered the credit loss.
For all the securities in its held-to-maturity portfolio, the Bank does not intend to sell any security and it is not more likely than not that the Bank will be required to sell any security before its anticipated recovery of the remaining amortized cost basis.
The Bank has determined that, as of September 30, 2009, all of the gross unrealized losses on its interest-bearing deposits in banks and commercial paper are temporary because the gross unrealized losses were caused by movements in interest rates and not by the deterioration of the issuers’ creditworthiness; the interest-bearing deposits in banks and commercial paper were all with issuers that had credit ratings of at least A at September 30, 2009; and all of the securities had maturity dates within 45 days of September 30, 2009. As a result, the Bank expects to recover the entire amortized cost basis of these securities.
As of September 30, 2009, the Bank’s investments in housing finance agency bonds, which were issued by the California Housing Finance Agency, had gross unrealized losses totaling $24. These gross unrealized losses were mainly due to extraordinarily high investor yield requirements resulting from an illiquid market, causing these investments to be valued at a discount to their acquisition cost. The Bank has determined that, as of September 30, 2009, all of the gross unrealized losses on these bonds are temporary because the strength of the underlying collateral and credit enhancements was sufficient to protect the Bank from losses based on current expectations and the California Housing Finance Agency had a credit rating of AA– at September 30, 2009 (based on the lowest of Moody’s, Standard & Poor’s, or comparable Fitch ratings). As a result, the Bank expects to recover the entire amortized cost basis of these securities.
For its agency MBS, the Bank expects to recover the entire amortized cost basis of these securities because it determined that the strength of the issuers’ guarantees through direct obligations or support from the U.S. government is sufficient to protect the Bank from losses based on current expectations. In addition, the Bank does not intend to sell these securities, it is not more likely than
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
not that the Bank will be required to sell these securities before its anticipated recovery of the remaining amortized cost basis, and the Bank expects to recover the entire amortized cost basis of these securities. As a result, the Bank has determined that, as of JuneSeptember 30, 2009, all of the gross unrealized losses on its agency MBS are temporary.
To assess whether it expects to recover the entire amortized cost basis of its non-agency MBS,PLRMBS, the Bank performed a cash flow analysis for eachall but five of its non-agency MBS that was determined to be other-than-temporarily impaired in a previous reporting period as well as those with adverse risk characteristicsPLRMBS as of JuneSeptember 30, 2009. The adverse risk characteristicsFor the remaining five PLRMBS, for which underlying collateral data is not available, alternative procedures were used to selectassess these securities for cash flow analysis included: the duration and magnitude of the unrealized loss; below investment grade rating agency actions on the security; and criteria related to the credit performance of the underlying collateral, including the ratio of credit enhancement to expected collateral losses and the ratio of seriously delinquent loans to credit enhancement. For these purposes, expected collateral losses are those that are implied by current delinquencies taking into account a default probability based on the state of delinquency and a loss severity assumption based on product and vintage; seriously delinquent loans are those that are 60 or more days past due, including loans in foreclosure and real estate owned.OTTI.
In performing the cash flow analysis for each of these securities,security, the Bank used two third-party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the Bank’s securities,
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
in conjunction with assumptions about future changes in home prices, interest rates, and other assumptions, to project prepayments, default rates, and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core basedcore-based statistical areas (CBSA), which are(CBSAs) based on an assessment of the relevant housing markets. CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget; asBudget. As currently defined, a CBSA must contain at least one urban area of 10,000 or more people. The Bank’s housing price forecast assumed CBSA-level current-to-trough housing price declines ranging from 0 percent to 20 percent over the next 9 to 15 months (resulting in peak-to-trough home price declines of up to 51 percent).months. Thereafter, home prices are projected to increase 10 percent in the first year,six months, 0.5 percent in the next six months, 3 percent in the second year, and 4 percent in each subsequent year. The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, default rates, and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in each securitization structure in accordance with itsthe structure’s prescribed cash flow and loss allocation rules. When the credit enhancement for the senior securities in a securitization is derived from the presence of subordinated securities, losses are generally allocated first to the subordinated securities until their principal balance is reduced to zero. The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations.
Federal Home Loan Bank The scenario of San Francisco
Notes to Financial Statements (continued)
cash flows determined based on the model approach described above reflects a best-estimate scenario and includes a base case current-to-trough housing price forecast and a base case housing price recovery path.
For those securities with OTTIdetermined to be other-than-temporarily impaired as of JuneSeptember 30, 2009 (that is, securities for which the Bank determined that it was more likely than not that the entire amortized cost basis would not be recovered), the following table presents a summary of the significant inputs used to measurein measuring the amount of credit loss recognized in earnings duringin the secondthird quarter of 2009:2009.
Significant Inputs | Current | ||||||||||||||||||||||||||||||||||||||||
Significant Inputs | Current | Prepayment Rates | Default Rates | Loss Severities | Credit Enhancement | ||||||||||||||||||||||||||||||||||||
Prepayment Rates | Default Rates | Loss Severities | Credit Enhancement | ||||||||||||||||||||||||||||||||||||||
Year of Securitization | Number of Securities | Unpaid Principal Balance | Weighted Average % | Range % | Weighted Average % | Range % | Weighted Average % | Range % | Weighted Average % | Range % | Weighted Average % | Range % | Weighted Average % | Range % | Weighted Average % | Range % | Weighted Average % | Range % | |||||||||||||||||||||||
Prime | |||||||||||||||||||||||||||||||||||||||||
2005 | 1 | $ | 24 | 13.8 | 13.8 | 10.1 | 10.1 | 36.7 | 36.7 | 19.4 | 19.4 | ||||||||||||||||||||||||||||||
Alt-A | |||||||||||||||||||||||||||||||||||||||||
2004 and earlier | 16.6 | 13.5 – 18.2 | 17.7 | 12.5 – 28.2 | 18.4 | 11.2 – 33.2 | 17.3 | 14.4 – 23.1 | |||||||||||||||||||||||||||||||||
2005 | 33 | 1,940 | 15.9 | 9.1 – 23.4 | 39.1 | 17.1 – 69.6 | 39.2 | 31.3 – 49.8 | 20.8 | 9.4 – 34.6 | 10.0 | 6.8 – 14.7 | 41.7 | 16.4 – 78.0 | 43.4 | 33.1 – 57.8 | 19.0 | 9.1 – 34.0 | |||||||||||||||||||||||
2006 | 17 | 1,447 | 13.2 | 7.9 – 18.6 | 50.4 | 26.6 – 81.3 | 40.9 | 29.2 – 52.0 | 20.9 | 12.2 – 43.7 | 9.6 | 2.8 – 12.6 | 48.0 | 23.6 – 89.1 | 44.8 | 35.0 – 57.9 | 25.4 | 11.4 – 43.1 | |||||||||||||||||||||||
2007 | 24 | 3,243 | 12.4 | 6.7 – 19.7 | 53.9 | 19.5 – 82.2 | 38.8 | 23.3 – 48.5 | 28.9 | 10.0 –46.7 | 8.5 | 4.9 – 13.0 | 61.5 | 17.5 – 87.8 | 44.2 | 37.5 – 54.2 | 29.8 | 10.0 – 46.2 | |||||||||||||||||||||||
2008 | 1 | 292 | 17.4 | 17.4 | 35.7 | 35.7 | 35.6 | 35.6 | 31.1 | 31.1 | 11.5 | 10.5 – 11.7 | 48.8 | 47.6 – 49.2 | 41.7 | 41.7 | 31.3 | 31.3 | |||||||||||||||||||||||
Total Alt-A | 75 | 6,922 | 13.8 | 6.7 – 23.4 | 48.3 | 17.1 – 82.2 | 39.2 | 23.3 – 52.0 | 25.1 | 9.4 – 46.7 | |||||||||||||||||||||||||||||||
Total | 76 | $ | 6,946 | 13.8 | 6.7 – 23.4 | 48.1 | 10.1 – 82.2 | 39.2 | 23.3 – 52.0 | 25.0 | 9.4 – 46.7 | 9.3 | 2.8 – 18.2 | 52.3 | 12.5 – 89.1 | 43.9 | 11.2 – 57.9 | 25.9 | 9.1 – 46.2 |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Based on these analyses and reviews, the Bank determined that 76 of its non-agency MBS were other-than-temporarily impaired at June 30, 2009, becauseanalysis described above, the Bank determined it was likely that it would not recover the entire amortized cost basis of each of these securities. These securities included the 15 securities that had previously been identified as other-than-temporarily impaired prior to January 1, 2009, and 28 and 33 securities that were first identified as other-than-temporarily impaired in the first and second quarters of 2009, respectively. The Bank recorded OTTI charges for these securities during the three and six months ended June 30, 2009, as follows:
For the Three Months Ended June 30, 2009 | For the Six Months Ended June 30, 2009 | ||||||||||||||||
Identified as Other-Than-Temporarily Impaired | Number of Securities | OTTI Related to Credit Losses | OTTI Related to All Other | Number of Securities | OTTI Related to Credit Losses | OTTI Related to All Other | |||||||||||
Prior to January 1, 2009 | 15 | $ | 40 | $ (1 | ) | 15 | $ | 90 | $ 52 | ||||||||
During the three months ended March 31, 2009 | 28 | 36 | (1 | ) | 28 | 74 | 1,014 | ||||||||||
During the three months ended June 30, 2009 | 33 | 12 | 1,197 | 33 | 12 | 1,197 | |||||||||||
Total | 76 | $ | 88 | $ 1,195 | 76 | $ | 176 | $ 2,263 |
In accordance with FSP FAS 115-2 and FAS 124-2, the impairment related to the credit loss of $88$316 and $176$492 that was reflectedrecognized in “Other (loss)/income”Loss” for the secondthird quarter of 2009 and the first sixnine months of 2009, respectively, and the impairmentrecognized OTTI related to all other factors of $1,195$1,069 and $2,263 was reflected$3,332 in “Other comprehensive income/(loss)” for the secondthird quarter of 2009 and the first sixnine months of 2009, respectively. For each security, the estimated impairment related to all other factors for each security will be accreted prospectively, based on the amount and timing of future estimated cash flows, over the remaining life of the security as an increase in the carrying value of the security (with no effect on earnings unless the security is subsequently sold or there are additional decreases in the cash flows expected to be collected). The Bank does not intend to sell these securities and it is not more likely than not that the Bank will be required to sell these securities before its anticipated recovery of the remaining amortized cost basis. At JuneSeptember 30, 2009, the estimated weighted average life of these securities was approximately threefour years.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The following table presents the OTTI related to credit loss, which is recognized in earnings, and the OTTI related to all other factors, which is recognized in other“Other comprehensive income.income/(loss).”
Three Months Ended September 30, 2009 | Nine Months Ended September 30, 2009 | |||||||||||||||||||||||||||||||||||||||||||
Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 | |||||||||||||||||||||||||||||||||||||||||||
OTTI Related to Credit Loss | OTTI Related to | Total OTTI | OTTI Related to Credit Loss | OTTI Related to | Total OTTI | OTTI Related to Credit Loss | OTTI Related to All Other Factors | Total OTTI | OTTI Related to Credit Loss | OTTI Related to All Other Factors | Total OTTI | |||||||||||||||||||||||||||||||||
Balance, beginning of the period(1) | $ | 108 | $ | 1,608 | $ | 1,716 | $ | 20 | $ | 570 | $ | 590 | $ | 196 | $ | 2,710 | $ | 2,906 | $ | 20 | $ | 570 | $ | 590 | ||||||||||||||||||||
Charges on securities for which OTTI was first recognized after January 1, 2009 | 48 | 1,196 | 1,244 | 86 | 2,211 | 2,297 | ||||||||||||||||||||||||||||||||||||||
Additional charges on securities for which OTTI was first recognized prior to January 1, 2009 | 40 | (1 | ) | 39 | 90 | 52 | 142 | |||||||||||||||||||||||||||||||||||||
Charges on securities for which OTTI was not previously recognized | 34 | 1,219 | 1,253 | 308 | 3,368 | 3,676 | ||||||||||||||||||||||||||||||||||||||
Additional charges on securities for which OTTI was previously recognized(2) | 282 | (150 | ) | 132 | 184 | (36 | ) | 148 | ||||||||||||||||||||||||||||||||||||
Accretion of impairment related to all other factors | — | (93 | ) | (93 | ) | — | (123 | ) | (123 | ) | — | (186 | ) | (186 | ) | — | (309 | ) | (309 | ) | ||||||||||||||||||||||||
Balance, end of the period | $ | 196 | $ | 2,710 | $ | 2,906 | $ | 196 | $ | 2,710 | $ | 2,906 | $ | 512 | $ | 3,593 | $ | 4,105 | $ | 512 | $ | 3,593 | $ | 4,105 | ||||||||||||||||||||
(1) | The Bank adopted |
(2) | For the three months ended September 30, 2009, “securities for which OTTI was previously recognized” represents all securities that were also previously other-than-temporarily impaired prior to July 1, 2009. For the nine months ended September 30, 2009, “securities for which OTTI was previously recognized” represents all securities that were also previously other-than-temporarily impaired prior to January 1, 2009. |
In determiningTo determine the estimated fair value of non-agency MBSPLRMBS at December 31, 2008, March 31, 2009, and June 30, 2009, the Bank used a weighting of its internal price (based on valuation models using market-based inputs obtained from broker-dealer data and price indications) and the price from an external pricing service to determine the estimated fair value that the Bank believesbelieved market participants would use to purchase the non-agency MBS.PLRMBS. In evaluating the resulting estimated fair value of non-agency MBS at June 30, 2009,PLRMBS, the Bank compared the estimated implied yields to a range of broker indications of yields for similar transactions or to a range of yields that brokers reported market participants would use in purchasing non-agency MBS. ThePLRMBS.
Beginning with the quarter ended September 30, 2009, the Bank primarilychanged the methodology used prices from an external pricing service to estimate the fair value of PLRMBS in an effort to achieve consistency among all the FHLBanks in applying a fair value methodology. In this regard, the FHLBanks formed the MBS Pricing Governance Committee with the responsibility for developing a fair value methodology that all FHLBanks could adopt. Under the methodology approved by the MBS Pricing Governance Committee and adopted by the Bank, the Bank requests prices for all mortgage-backed securities from four specific third-party vendors. Depending on the number of prices received for each security, the Bank selects a median or average price as determined by the methodology. The methodology also incorporates variance thresholds to assist in identifying median or average prices that may require further review. In certain limited instances (for example, when prices are outside of variance thresholds or the third-party services do not provide a price), the Bank will obtain a price from securities dealers or internally model a price that is deemed appropriate after consideration of the relevant facts and
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
circumstances that a market participant would consider. Prices for PLRMBS held in common with other FHLBanks are reviewed with those FHLBanks for consistency. In adopting this common methodology, the Bank remains responsible for the selection and application of its agency MBSfair value methodology and the reasonableness of assumptions and inputs used.
This change in fair value methodology did not have a significant impact on the Bank’s estimated fair values of its PLRMBS at JuneSeptember 30, 2009.
Because thereThe following table presents the Bank’s other-than-temporarily impaired PLRMBS that incurred an OTTI charge during the three months ended September 30, 2009, by loan collateral type:
September 30, 2009 | Unpaid Principal Balance | Amortized Cost | Carrying Value | Estimated Fair Value | ||||||||
Other-than-temporarily impaired PLRMBS backed by loans classified at origination as: | ||||||||||||
Prime | $ | 1,396 | $ | 1,357 | $ | 923 | $ | 935 | ||||
Alt-A, option ARM | 2,146 | 1,971 | 986 | 997 | ||||||||
Alt-A, other | 6,142 | 5,835 | 3,915 | 4,124 | ||||||||
Total | $ | 9,684 | $ | 9,163 | $ | 5,824 | $ | 6,056 | ||||
The following table presents the Bank’s total portfolio of other-than-temporarily impaired PLRMBS at September 30, 2009, by loan collateral type:
| ||||||||||||
September 30, 2009 | Unpaid Principal Balance | Amortized Cost | Carrying Value | Estimated Fair Value | ||||||||
Other-than-temporarily impaired PLRMBS backed by loans classified at origination as: | ||||||||||||
Prime | $ | 1,396 | $ | 1,357 | $ | 923 | $ | 935 | ||||
Alt-A, option ARM | 2,146 | 1,971 | 986 | 997 | ||||||||
Alt-A, other | 6,800 | 6,494 | 4,320 | 4,576 | ||||||||
Total | $ | 10,342 | $ | 9,822 | $ | 6,229 | $ | 6,508 | ||||
The following table presents the Bank’s OTTI related to credit loss and OTTI related to all other factors on its other-than-temporarily impaired PLRMBS during the three months and nine months ended September 30, 2009:
Three Months Ended September 30, 2009 | Nine Months Ended September 30, 2009 | |||||||||||||||||
OTTI Related to | OTTI Related to All Other Factors | Total OTTI | OTTI Related to Credit Loss | OTTI Related to All Other Factors | Total OTTI | |||||||||||||
Other-than-temporarily impaired PLRMBS backed by loans classified at origination as: | ||||||||||||||||||
Prime | $ | 26 | $ | 91 | $ | 117 | $ | 41 | $ | 403 | $ | 444 | ||||||
Alt-A, option ARM | 121 | 425 | 546 | 171 | 981 | 1,152 | ||||||||||||
Alt-A, other | 169 | 553 | 722 | 280 | 1,948 | 2,228 | ||||||||||||
Total | $ | 316 | $ | 1,069 | $ | 1,385 | $ | 492 | $ | 3,332 | $ | 3,824 | ||||||
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The following tables present the other-than-temporarily impaired PLRMBS for the three and nine months ended September 30, 2009, by loan collateral type and the length of time that the individual securities were in a continuous loss position prior to the current period write-down:
Three Months Ended September 30, 2009 | |||||||||||||||||||
Gross Unrealized Losses Related to Credit | Gross Unrealized Losses Related to All Other Factors | ||||||||||||||||||
Less than 12 months | 12 months or more | Total | Less than 12 months | 12 months or more | Total | ||||||||||||||
Other-than-temporarily impaired PLRMBS backed by loans classified at origination as: | |||||||||||||||||||
Prime | $ | 8 | $ | 18 | $ | 26 | $ | (8 | ) | $ | 99 | $ | 91 | ||||||
Alt-A, option ARM | — | 121 | 121 | — | 425 | 425 | |||||||||||||
Alt-A, other | — | 169 | 169 | — | 553 | 553 | |||||||||||||
Total | $ | 8 | $ | 308 | $ | 316 | $ | (8 | ) | $ | 1,077 | $ | 1,069 | ||||||
Nine Months Ended September 30, 2009 | |||||||||||||||||||
Gross Unrealized Losses Related to Credit | Gross Unrealized Losses Related to All Other Factors | ||||||||||||||||||
Less than 12 months | 12 months or more | Total | Less than 12 months | 12 months or more | Total | ||||||||||||||
Other-than-temporarily impaired PLRMBS backed by loans classified at origination as: | |||||||||||||||||||
Prime | $ | 17 | $ | 24 | $ | 41 | $ | (9 | ) | $ | 412 | $ | 403 | ||||||
Alt-A, option ARM | — | 171 | 171 | — | 981 | 981 | |||||||||||||
Alt-A, other | — | 280 | 280 | — | 1,948 | 1,948 | |||||||||||||
Total | $ | 17 | $ | 475 | $ | 492 | $ | (9 | ) | $ | 3,341 | $ | 3,332 | ||||||
For the Bank’s PLRMBS that were not other-than-temporarily impaired as of September 30, 2009, the Bank does not intend to sell these securities, it is not more likely than not that the Bank will be required to sell these securities before its anticipated recovery of the remaining amortized cost basis, and the Bank expects to recover the entire amortized cost basis of these securities. As a continuing riskresult, the Bank has determined that, as of September 30, 2009, the gross unrealized losses on these remaining PLRMBS are temporary. Thirty-seven percent of the PLRMBS that were not other-than-temporarily impaired were rated investment grade (10% were rated AAA based on the amortized cost), with the remainder rated below investment grade. These securities were included in the securities that the Bank reviewed and analyzed for OTTI as discussed above, and the analyses performed indicated that these securities were not other-than-temporarily impaired. The credit ratings used by the Bank are based on the lowest of Moody’s, Standard & Poor’s, or comparable Fitch ratings.
At September 30, 2009, PLRMBS representing 43% of the amortized cost of the Bank’s MBS portfolio were labeled Alt-A by the issuer. Alt-A securities are generally collateralized by mortgage loans that are considered less risky than subprime loans, but more risky than prime loans. These loans are generally made to borrowers who have sufficient credit ratings to qualify for a conforming mortgage loan, but the loans may not meet standard guidelines for documentation requirements, property type, or loan-to-value ratios. In addition, the property securing the loan may be non-owner-occupied.
From October 1, 2009, through October 30, 2009, the rating agencies downgraded certain PLRMBS held by the Bank with a carrying value of approximately $159 and an estimated fair value of approximately $141. These downgraded securities were included in the Bank’s OTTI analysis performed as of September 30, 2009, and no additional OTTI charges were required as a result of these downgrades. The Bank does not intend to sell these securities, it is not more likely than not that the Bank will be required to sell these securities before its anticipated recovery of the remaining amortized cost basis, and the Bank expects to recover the entire amortized cost basis of these securities. As a result, the Bank has determined that, as of September 30, 2009, all of the gross unrealized losses on these securities are temporary.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
If current conditions in the mortgage markets and general business and economic conditions continue or deteriorate further, declines in the fair value of the Bank’s MBS may occurdecline further and that the Bank may recordexperience OTTI of additional materialMBS in future periods, as well as further impairment of PLRMBS that were identified as other-than-temporarily impaired as of September 30, 2009. Additional future OTTI charges in future periods,could adversely affect the Bank’s earnings and retained earnings and its ability to pay dividends and repurchase capital stock couldstock. The Bank cannot predict whether it will be adversely affected.required to record additional OTTI charges on its MBS in the future.
Federal and state government authorities, as well as private entities, such as financial institutions and the servicers of residential mortgage loans, have begun or promoted implementation of programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures. These loan modification programs, as well as future legislative, regulatory, or other actions, including amendments to the bankruptcy laws, that result in the modification of outstanding mortgage loans, may adversely affect the value of, and the returns on, these mortgage loans or MBS related to these mortgage loans.
The following tables present the Bank’s other-than-temporarily impaired non-agency MBS by loan collateral type:
June 30, 2009 | Unpaid Principal Balance | Amortized Cost | Gross Unrealized Losses | Fair Value | ||||||||
Other-than-temporarily impaired non-agency MBS backed by loans classified as: | ||||||||||||
Prime | $ | 1,203 | $ | 1,190 | $ | 366 | $ | 824 | ||||
Alt-A, option ARM | 1,166 | 1,114 | 599 | 531 | ||||||||
Alt-A, other | 4,577 | 4,455 | 1,745 | 2,763 | ||||||||
Total | $ | 6,946 | $ | 6,759 | $ | 2,710 | $ | 4,118 | ||||
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 | |||||||||||||||||
OTTI Related to Credit Loss | OTTI Related to All Other Factors | Total OTTI | OTTI Related to Credit Loss | OTTI Related to All Other Factors | Total OTTI | |||||||||||||
Other-than-temporarily impaired non-agency MBS backed by loans classified as: | ||||||||||||||||||
Prime | $ | 15 | $ | 312 | $ | 327 | $ | 15 | $ | 312 | $ | 327 | ||||||
Alt-A, option ARM | 25 | 139 | 164 | 50 | 556 | 606 | ||||||||||||
Alt-A, other | 48 | 744 | 792 | 111 | 1,395 | 1,506 | ||||||||||||
Total | $ | 88 | $ | 1,195 | $ | 1,283 | $ | 176 | $ | 2,263 | $ | 2,439 |
The following tables present the other-than-temporarily impaired non-agency MBS for the three and six months ended June 30, 2009, by loan collateral type and the length of time that the individual securities were in a continuous loss position prior to the current period write-down:
Three Months Ended June 30, 2009 | ||||||||||||||||||||
Gross Unrealized Losses Related to Credit | Gross Unrealized Losses Related to All Other Factors | |||||||||||||||||||
Less than 12 months | 12 months or more | Total | Less than 12 months | 12 months or more | Total | |||||||||||||||
Other-than-temporarily impaired non-agency MBS backed by loans classified as: | ||||||||||||||||||||
Prime | $ | 9 | $ | 6 | $ | 15 | $ | — | $ | 312 | $ | 312 | ||||||||
Alt-A | — | 73 | 73 | — | 883 | 883 | ||||||||||||||
Total | $ | 9 | $ | 79 | $ | 88 | $ | — | $ | 1,195 | $ | 1,195 | ||||||||
Six Months Ended June 30, 2009 | ||||||||||||||||||||
Gross Unrealized Losses Related to Credit | Gross Unrealized Losses Related to All Other Factors | |||||||||||||||||||
Less than 12 months | 12 months or more | Total | Less than 12 months | 12 months or more | Total | |||||||||||||||
Other-than-temporarily impaired non-agency MBS backed by loans classified as: | ||||||||||||||||||||
Prime | $ | 9 | $ | 6 | $ | 15 | $ | — | $ | 312 | $ | 312 | ||||||||
Alt-A | — | 161 | 161 | — | 1,951 | 1,951 | ||||||||||||||
Total | $ | 9 | $ | 167 | $ | 176 | $ | — | $ | 2,263 | $ | 2,263 |
For the Bank’s non-agency MBS that were not other-than-temporarily impaired as of June 30, 2009, the Bank does not intend to sell these securities, it is not more likely than not that the Bank will be required to sell these securities before its anticipated recovery of the remaining amortized cost basis, and the Bank expects to recover the entire amortized cost basis of these securities. As a result, the Bank has determined that, as of June 30, 2009, the unrealized losses on these remaining non-agency MBS are temporary. Fifty-five percent of the non-agency MBS that were not other-than-temporarily impaired were rated investment grade (24% were rated AAA based on the amortized cost), with the remainder rated below investment grade. The securities rated below investment grade were included in the securities with adverse characteristics that the Bank reviewed and analyzed for OTTI as discussed above, and the analyses performed indicated that these securities were not other-than-temporarily impaired. The credit ratings used by the Bank are based on the lowest of Moody’s, Standard & Poor’s, or comparable Fitch ratings.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
If current conditions in the mortgage markets and general business and economic conditions continue or deteriorate further, the fair value of MBS may decline further and the Bank may experience OTTI of additional MBS in future periods, as well as further impairments of securities that were identified as other-than-temporarily impaired as of June 30, 2009. Additional future OTTI charges could adversely affect the Bank’s earnings and retained earnings. The Bank cannot predict whether it will be required to record additional OTTI charges on its MBS in the future.
At June 30, 2009, MBS representing 43% of the amortized cost of the Bank’s MBS portfolio were labeled Alt-A by the issuer. Alt-A securities are generally collateralized by mortgage loans that are considered less risky than subprime loans, but more risky than prime loans. These loans are generally made to borrowers who have sufficient credit ratings to qualify for a conforming mortgage loan, but the loans may not meet standard guidelines for documentation requirements, property type, or loan-to-value ratios. In addition, the property securing the loan may be non-owner-occupied.
From July 1, 2009, through August 7, 2009, the rating agencies downgraded certain non-agency MBS held by the Bank with a carrying value of approximately $3.2 billion and a fair value of approximately $2.7 billion, and placed approximately $3 million of the Bank’s non-agency MBS on negative watch without downgrading them. Following these rating agency actions, the Bank performed OTTI reviews on the two securities that were downgraded to below investment grade status and had not previously been reviewed. The Bank does not intend to sell these securities, it is not more likely than not that the Bank will be required to sell these securities before its anticipated recovery of the remaining amortized cost basis, and the Bank expects to recover the entire amortized cost basis of these securities. As a result, the Bank has determined that, as of June 30, 2009, all of the gross unrealized losses on these securities are temporary.
The Bank has determined that, as of June 30, 2009, all of the gross unrealized losses on its interest-bearing deposits in banks and commercial paper are temporary because: (i) the gross unrealized losses were caused by movements in interest rates and not by the deterioration of the issuers’ creditworthiness, (ii) the interest-bearing deposits in banks and commercial paper were all with issuers that had credit ratings of at least A at June 30, 2009, (iii) all of the securities had maturity dates within 45 days of quarter-end, (iv) the Bank does not intend to sell these securities, (v) it is not more likely than not that the Bank will be required to sell these securities before its anticipated recovery of the remaining amortized cost basis, and (vi) the Bank expects to recover the entire amortized cost basis of these securities.
As of June 30, 2009, the Bank’s investments in housing finance agency bonds, which were issued by the California Housing Finance Agency, had gross unrealized losses totaling $35. These gross unrealized losses were mainly due to extraordinarily high investor yield requirements resulting from an illiquid market, causing these investments to be valued at a discount to their acquisition cost. The Bank has determined that, as of June 30, 2009, all of the gross unrealized losses on these bonds are temporary because: (i) the strength of the underlying collateral and credit enhancements was sufficient to protect the Bank from losses based on current expectations, (ii) the California Housing Finance Agency had a credit rating of AA- at June 30, 2009 (based on the lowest of Moody’s, Standard & Poor’s, or comparable Fitch ratings), (iii) the Bank does not intend to sell these securities, (iv) it is not more likely than not that the Bank will be required to sell these securities before its anticipated recovery of the remaining amortized cost basis, and (v) the Bank expects to recover the entire amortized cost basis of these securities.
Redemption Terms.The amortized cost, carrying value, and estimated fair value of certain securities by contractual maturity (based on contractual final principal payment) and MBS as of June 30, 2009, and December 31, 2008, are shown below. Expected maturities of certain securities and MBS will differ from contractual maturities because borrowers generally have the right to prepay the underlying obligations without prepayment fees.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
June 30, 2009
Year of Contractual Maturity | Amortized Cost | Carrying Value | Estimated Fair Value | Weighted Average Interest Rate | ||||||||
Held-to-maturity securities other than MBS: | ||||||||||||
Due in one year or less | $ | 8,553 | $ | 8,553 | $ | 8,553 | 0.24 | % | ||||
Due after one year through five years | 14 | 14 | 14 | 1.18 | ||||||||
Due after five years through ten years | 27 | 27 | 26 | 1.15 | ||||||||
Due after ten years | 736 | 736 | 702 | 1.28 | ||||||||
Subtotal | 9,330 | 9,330 | 9,295 | 0.33 | ||||||||
MBS: | ||||||||||||
Ginnie Mae | 17 | 17 | 17 | 1.38 | ||||||||
Freddie Mac | 3,891 | 3,891 | 4,009 | 4.86 | ||||||||
Fannie Mae | 9,230 | 9,230 | 9,459 | 4.35 | ||||||||
Non-agency | 22,483 | 19,773 | 15,370 | 3.96 | ||||||||
Total MBS | 35,621 | 32,911 | 28,855 | 4.16 | ||||||||
Total | $ | 44,951 | $ | 42,241 | $ | 38,150 | 3.37 | % | ||||
December 31, 2008
Year of Contractual Maturity | Amortized Cost(1) | Estimated Fair Value | Weighted Average Interest Rate | ||||||
Held-to-maturity securities other than MBS: | |||||||||
Due in one year or less | $ | 11,350 | $ | 11,350 | 0.53 | % | |||
Due one year through five years | 17 | 17 | 3.34 | ||||||
Due after five years through ten years | 28 | 28 | 3.31 | ||||||
Due after ten years | 757 | 761 | 3.40 | ||||||
Subtotal | 12,152 | 12,156 | 0.72 | ||||||
MBS: | |||||||||
Ginnie Mae | 19 | 18 | 2.07 | ||||||
Freddie Mac | 4,408 | 4,457 | 4.95 | ||||||
Fannie Mae | 10,083 | 10,160 | 4.38 | ||||||
Non-agency | 24,543 | 17,479 | 4.11 | ||||||
Total MBS | 39,053 | 32,114 | 4.27 | ||||||
Total | $ | 51,205 | $ | 44,270 | 3.44 | % | |||
The carrying value of the Bank’s MBS classified as held-to-maturity included net discounts of $2,920 at June 30, 2009, and net discounts of $597 at December 31, 2008. At June 30, 2009, net discounts included $196 from the OTTI related to credit losses and $2,710 from the OTTI related to all other factors. At December 31, 2008, net discounts included $20 from the OTTI related to credit losses and $570 from the OTTI related to all other factors.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Interest Rate Payment Terms.Interest rate payment terms for held-to-maturity securities at June 30, 2009, and December 31, 2008, are detailed in the following table:
June 30, 2009 | December 31, 2008 | |||||
Amortized cost of held-to-maturity securities other than MBS: | ||||||
Fixed rate | $ | 8,553 | $ | 11,350 | ||
Adjustable rate | 777 | 802 | ||||
Subtotal | 9,330 | 12,152 | ||||
Amortized cost of held-to-maturity MBS: | ||||||
Passthrough securities: | ||||||
Fixed rate | 3,787 | 4,120 | ||||
Adjustable rate | 94 | 100 | ||||
Collateralized mortgage obligations: | ||||||
Fixed rate | 20,833 | 24,604 | ||||
Adjustable rate | 10,907 | 10,229 | ||||
Subtotal | 35,621 | 39,053 | ||||
Total | $ | 44,951 | $ | 51,205 |
Certain MBS classified as fixed rate passthrough securities and fixed rate collateralized mortgage obligations have an initial fixed interest rate that subsequently converts to an adjustable interest rate on a specified date.
The Bank does not own MBS that are backed by mortgage loans purchased by another FHLBank from either (i) members of the Bank or (ii) members of other FHLBanks.
Note 4 – Advances
Redemption Terms. The Bank had advances outstanding, excluding overdrawn demand deposit accounts, at interest rates ranging from 0.00%0.05% to 8.57% at JuneSeptember 30, 2009, and 0.05% to 8.57% at December 31, 2008, as summarized below.
June 30, 2009 | December 31, 2008 | |||||||||||||
Contractual Maturity | Amount Outstanding | Weighted Average Interest Rate | Amount Outstanding | Weighted Average Interest Rate | ||||||||||
Within 1 year | $ | 101,702 | 1.95 | % | $ | 139,842 | 2.42 | % | ||||||
After 1 year through 2 years | 31,153 | 2.58 | 41,671 | 3.24 | ||||||||||
After 2 years through 3 years | 18,689 | 1.72 | 25,853 | 2.70 | ||||||||||
After 3 years through 4 years | 8,301 | 2.37 | 6,158 | 3.78 | ||||||||||
After 4 years through 5 years | 5,542 | 2.56 | 11,599 | 2.70 | ||||||||||
After 5 years | 7,439 | 2.36 | 7,804 | 2.80 | ||||||||||
Total par amount | 172,826 | 2.10 | % | 232,927 | 2.66 | % | ||||||||
SFAS 133(1) valuation adjustments | 885 | 1,353 | ||||||||||||
SFAS 159(2) valuation adjustments | 953 | 1,299 | ||||||||||||
Net unamortized premiums | 68 | 85 | ||||||||||||
Total | $ | 174,732 | $ | 235,664 | ||||||||||
|
| |||||||||
|
September 30, 2009 | December 31, 2008 | |||||||||||
Contractual Maturity | Amount Outstanding | Weighted Average Interest Rate | Amount Outstanding | Weighted Average Interest Rate | ||||||||
Within 1 year | $ | 94,735 | 1.77 | % | $ | 139,842 | 2.42 | % | ||||
After 1 year through 2 years | 28,908 | 2.05 | 41,671 | 3.24 | ||||||||
After 2 years through 3 years | 11,191 | 2.30 | 25,853 | 2.70 | ||||||||
After 3 years through 4 years | 8,203 | 2.00 | 6,158 | 3.78 | ||||||||
After 4 years through 5 years | 3,068 | 2.84 | 11,599 | 2.70 | ||||||||
After 5 years | 7,136 | 2.18 | 7,804 | 2.80 | ||||||||
Total par amount | 153,241 | 1.91 | % | 232,927 | 2.66 | % | ||||||
Valuation adjustments for hedging activities | 822 | 1,353 | ||||||||||
Valuation adjustments under fair value option | 840 | 1,299 | ||||||||||
Net unamortized premiums | 59 | 85 | ||||||||||
Total | $ | 154,962 | $ | 235,664 | ||||||||
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The following table summarizes advances at JuneSeptember 30, 2009, and December 31, 2008, by the earlier of the year of contractual maturity or next call date for callable advances.
Earlier of Contractual Maturity or Next Call Date | June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | ||||||||
Within 1 year | $ | 101,863 | $ | 140,147 | $ | 94,745 | $ | 140,147 | ||||
After 1 year through 2 years | 31,153 | 41,678 | 28,908 | 41,678 | ||||||||
After 2 years through 3 years | 18,693 | 25,851 | 11,196 | 25,851 | ||||||||
After 3 years through 4 years | 8,141 | 5,858 | 8,193 | 5,858 | ||||||||
After 4 years through 5 years | 5,542 | 11,589 | 3,068 | 11,589 | ||||||||
After 5 years | 7,434 | 7,804 | 7,131 | 7,804 | ||||||||
Total par amount | $ | 172,826 | $ | 232,927 | $ | 153,241 | $ | 232,927 |
The following table summarizes advances at JuneSeptember 30, 2009, and December 31, 2008, by the earlier of the year of contractual maturity or next put date for putable advances.
Earlier of Contractual Maturity or Next Put Date | June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | ||||||||
Within 1 year | $ | 104,497 | $ | 143,424 | $ | 97,416 | $ | 143,424 | ||||
After 1 year through 2 years | 31,261 | 41,200 | 29,078 | 41,200 | ||||||||
After 2 years through 3 years | 18,070 | 25,755 | 10,299 | 25,755 | ||||||||
After 3 years through 4 years | 7,688 | 5,099 | 7,875 | 5,099 | ||||||||
After 4 years through 5 years | 5,336 | 11,189 | 2,800 | 11,189 | ||||||||
After 5 years | 5,974 | 6,260 | 5,773 | 6,260 | ||||||||
Total par amount | $ | 172,826 | $ | 232,927 | $ | 153,241 | $ | 232,927 |
Security Terms. The Bank lends to member financial institutions that have a principal place of business in Arizona, California, or Nevada. The Bank is required by the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), to obtain sufficient collateral for advances to protect against losses and to accept as collateral for advances only certain U.S. government or government agency securities, residential mortgage loans or MBS, other eligible real estate-related assets, and cash or deposits in the Bank. The capital stock of the Bank owned by each borrowing member is pledged as additional collateral for the member’s indebtedness to the Bank. The Bank may also accept small business, small farm, and small agribusiness loans fully secured by collateral other than real estate or securities representing a whole interest in such loans as collateral from members that qualify as community financial institutions. The Housing Act added secured loans for community development activities as a permitted purpose and as eligible collateral that the Bank may accept from community financial institutions. The Housing Act definesdefined community financial institutions for 2008 as FDIC-insured depository institutions with average total assets over the preceding three-year period of $1,000 or less. The Finance Agency adjusts the average total asset cap for inflation annually. Effective January 1, 2009, the cap was $1,011. In addition, the Bank has advances outstanding to former members and member successors, which are also subject to these security terms. For more information on security terms, see Note 6 to the Financial Statements in the Bank’s 2008 Form 10-K.
Credit and Concentration Risk.The Bank’s potential credit risk from advances is concentrated in three institutions whose advances outstanding represented 10% or more of the Bank’s total par amount of advances outstanding. The following tables present the concentration in advances to these three institutions as of JuneSeptember 30, 2009, and December 31, 2008. The tables also present the interest income from these advances before the impact of interest rate exchange agreements associated with these advances for the secondthird quarter of 2009 and 2008 and for the first sixnine months of 2009 and 2008.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Concentration of Advances
June 30, 2009 | December 31, 2008 | |||||||||||
Name of Borrower | Advances Outstanding(1) | Percentage of Total Advances Outstanding | Advances Outstanding(1) | Percentage of Total Advances Outstanding | ||||||||
Citibank, N.A. | $ | 55,988 | 32 | % | $ | 80,026 | 34 | % | ||||
JPMorgan Chase Bank, National Association(2) | 39,124 | 23 | 57,528 | 25 | ||||||||
Wachovia Mortgage, FSB(3) | 17,250 | 10 | 24,015 | 10 | ||||||||
Subtotal | 112,362 | 65 | 161,569 | 69 | ||||||||
Others | 60,464 | 35 | 71,358 | 31 | ||||||||
Total par amount | $ | 172,826 | 100 | % | $ | 232,927 | 100 | % |
Concentration of Interest Income from Advances
Three Months Ended | ||||||||||||||||||||||||
June 30, 2009 | June 30, 2008 | September 30, 2009 | December 31, 2008 | |||||||||||||||||||||
Name of Borrower | Interest Income from | Percentage of Total Interest Income from Advances | Interest Income from Advances(4) | Percentage of Total Interest Income from Advances | Advances Outstanding(1) | Percentage of Total Advances Outstanding | Advances Outstanding(1) | Percentage of Total Advances Outstanding | ||||||||||||||||
Citibank, N.A. | $ | 124 | 12 | % | $ | 632 | 31 | % | $ | 49,025 | 32 | % | $ | 80,026 | 34 | % | ||||||||
JPMorgan Chase Bank, National Association(2) | 344 | 34 | 401 | 20 | 29,123 | 19 | 57,528 | 25 | ||||||||||||||||
Wachovia Mortgage, FSB(3) | 61 | 6 | 236 | 12 | 16,231 | 11 | 24,015 | 10 | ||||||||||||||||
Subtotal | 94,379 | 62 | 161,569 | 69 | ||||||||||||||||||||
Others | 58,862 | 38 | 71,358 | 31 | ||||||||||||||||||||
Total par amount | $ | 153,241 | 100 | % | $ | 232,927 | 100 | % | ||||||||||||||||
Concentration of Interest Income from Advances
| Concentration of Interest Income from Advances
|
| ||||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||||||||||
Name of Borrower | Interest Income from | Percentage of Income from | Interest Income from Advances(4) | Percentage of Total Interest Income from Advances | ||||||||||||||||||||
Citibank, N.A. | $ | 57 | 7 | % | $ | 568 | 28 | % | ||||||||||||||||
JPMorgan Chase Bank, National Association(2) | 299 | 36 | 447 | 22 | ||||||||||||||||||||
Wachovia Mortgage, FSB(3) | 45 | 5 | 232 | 12 | ||||||||||||||||||||
Subtotal | 529 | 52 | 1,269 | 63 | 401 | 48 | 1,247 | 62 | ||||||||||||||||
Others | 478 | 48 | 738 | 37 | 439 | 52 | 748 | 38 | ||||||||||||||||
Total | $ | 1,007 | 100 | % | $ | 2,007 | 100 | % | $ | 840 | 100 | % | $ | 1,995 | 100 | % | ||||||||
Six Months Ended | ||||||||||||||||||||||||
June 30, 2009 | June 30, 2008 | Nine Months Ended | ||||||||||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||||||||||
Name of Borrower | Interest Income from | Percentage of Total Interest Income from Advances | Interest Income from Advances(4) | Percentage of Total Interest Income from Advances | Interest Income from | Percentage of Total Interest Income from Advances | Interest Income from Advances(4) | Percentage of Total Interest Income from Advances | ||||||||||||||||
Citibank, N.A. | $ | 357 | 16 | % | $ | 1,579 | 34 | % | $ | 414 | 13 | % | $ | 2,147 | 33 | % | ||||||||
JPMorgan Chase Bank, National Association(2) | 741 | 32 | 967 | 21 | 1,040 | 33 | 1,414 | 21 | ||||||||||||||||
Wachovia Mortgage, FSB(3) | 163 | 7 | 487 | 11 | 208 | 7 | 719 | 11 | ||||||||||||||||
Subtotal | 1,261 | 55 | 3,033 | 66 | 1,662 | 53 | 4,280 | 65 | ||||||||||||||||
Others | 1,027 | 45 | 1,574 | 34 | 1,466 | 47 | 2,322 | 35 | ||||||||||||||||
Total | $ | 2,288 | 100 | % | $ | 4,607 | 100 | % | $ | 3,128 | 100 | % | $ | 6,602 | 100 | % |
(1) | Borrower advance amounts and total advance amounts are at par value and total advance amounts will not agree to carrying value amounts shown in the Statements of Condition. The differences between the par and carrying value amounts primarily relate to unrealized gains or losses associated with hedged advances resulting from |
(2) | On September 25, 2008, the Office of Thrift Supervision (OTS) closed Washington Mutual Bank and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver for Washington Mutual Bank. On the same day, JPMorgan Chase Bank, National Association, a nonmember, assumed Washington Mutual Bank’s outstanding Bank advances and acquired the associated Bank capital stock. JPMorgan Chase Bank, National Association, remains obligated for all of Washington Mutual Bank’s outstanding advances and continues to hold some of the Bank capital stock it acquired from the FDIC as receiver for Washington Mutual Bank. |
(3) | On December 31, 2008, Wells Fargo & Company, a nonmember, acquired Wachovia Corporation, the parent company of Wachovia Mortgage, FSB. Wachovia Mortgage, FSB, |
(4) | Interest income amounts exclude the interest effect of interest rate exchange agreements with derivatives counterparties; as a result, the total interest income amounts will not agree to the Statements of Income. The amount of interest income from advances can vary depending on the amount outstanding, terms to maturity, interest rates, and repricing characteristics. |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Bank held a security interest in collateral from each of its three largest advances borrowers sufficient to support their respective advances outstanding, and the Bank does not expect to incur any credit losses on these advances. As of JuneSeptember 30, 2009, and December 31, 2008, the Bank’s three largest advances borrowers (Citibank, N.A.; JPMorgan Chase Bank, National Association; and Wachovia Mortgage, FSB) each owned more than 10% of the Bank’s outstanding capital stock, including mandatorily redeemable capital stock.
On July 11, 2008, the OTS closed IndyMac Bank, F.S.B., and appointed the FDIC as receiver for IndyMac Bank, F.S.B. In connection with the receivership, the OTS chartered IndyMac Federal Bank, FSB, and appointed the FDIC as conservator for IndyMac Federal Bank, FSB. IndyMac Federal Bank, FSB, assumed the outstanding Bank advances of IndyMac Bank, F.S.B., and acquired the associated Bank capital stock. Bank capital stock acquired by IndyMac Federal Bank, FSB, was classified as mandatorily redeemable capital stock (a liability). On March 19, 2009, OneWest Bank, FSB, became a member of the Bank, assumed the outstanding advances of IndyMac Federal Bank, FSB, and acquired the associated Bank capital stock. Bank capital stock acquired by OneWest Bank, FSB, is no longer classified as mandatorily redeemable capital stock (a liability). However, the residual capital stock remaining with IndyMac Federal Bank, FSB, totaling $49, remains classified as mandatorily redeemable capital stock (a liability).
During the first sixnine months of 2009, eight16 member institutions were placed into receivership. Onereceivership or liquidation. Three of these institutions had no advances outstanding at the time it wasthey were placed into receivership.receivership or liquidation. The advances outstanding to three of the other 13 institutions were either repaid prior to JuneSeptember 30, 2009, or assumed by other institutions, and no losses were incurred by the Bank. The advances of a fifth institution were assumed by a nonmember institution. Bank capital stock held by these five11 of the 16 institutions totaling $36$46 was classified as mandatorily redeemable capital stock (a liability). The advances and capital stock of the other threefive institutions were assumed bywas transferred to other member institutions.
From JulyOctober 1, 2009, to August 7,October 30, 2009, twofive member institutions were placed into receivership. The outstanding advances outstanding to one institutionfour institutions were assumed by a nonmember institution, and the Bank capital stock held by the institutioninstitutions totaling $6$115 was classified as mandatorily redeemable capital stock (a liability). The outstanding advances and capital stock of the secondother institution were assumed by another member institution.
The Bank has policies and procedures in place to manage the credit risk of advances. Based on the collateral pledged as security for advances, management’s credit analyses of members’ financial condition, and prior repayment history, the Bank expects to collect all amounts due according to the contractual terms of the advances. Therefore, no allowance for losses on advances is deemed necessary by management. The Bank has never experienced any credit losses on advances to a member.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Interest Rate Payment Terms.Interest rate payment terms for advances at JuneSeptember 30, 2009, and December 31, 2008, are detailed below:
June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | |||||||||||
Par amount of advances: | ||||||||||||||
Fixed rate | $ | 91,585 | $ | 115,681 | $ | 82,383 | $ | 115,681 | ||||||
Adjustable rate | 81,241 | 117,246 | 70,858 | 117,246 | ||||||||||
Total par amount | $ | 172,826 | $ | 232,927 | $ | 153,241 | $ | 232,927 |
Note 5 – Mortgage Loans Held for Portfolio
Under the Mortgage Partnership Finance® (MPF®) Program, the Bank purchased conventional fixed rate residential mortgage loans directly from its participating members from May 2002 through October 2006. (“Mortgage Partnership Finance” and “MPF” are registered trademarks of the Federal Home Loan Bank of Chicago.) The mortgage loans are held-for-portfolio loans. Participating members originated or purchased the mortgage loans, credit-enhanced them and sold them to the Bank, and generally retained the servicing of the loans.
The following table presents information as of JuneSeptember 30, 2009, and December 31, 2008, on mortgage loans, all of which are on one- to four-unit residential properties and single-unit second homes.
June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | |||||||||||||
Fixed rate medium-term mortgage loans | $ | 1,049 | $ | 1,172 | $ | 982 | $ | 1,172 | ||||||||
Fixed rate long-term mortgage loans | 2,328 | 2,551 | 2,210 | 2,551 | ||||||||||||
Subtotal | 3,377 | 3,723 | 3,192 | 3,723 | ||||||||||||
Net unamortized discounts | (18 | ) | (10 | ) | (18 | ) | (10 | ) | ||||||||
Mortgage loans held for portfolio | 3,359 | 3,713 | 3,174 | 3,713 | ||||||||||||
Less: Allowance for credit losses | (2 | ) | (1 | ) | (2 | ) | (1 | ) | ||||||||
Total mortgage loans held for portfolio | $ | 3,357 | $ | 3,712 | $ | 3,172 | $ | 3,712 |
Medium-term loans have original contractual terms of 15 years or less, and long-term loans have contractual terms of more than 15 years.
For taking on the credit enhancement obligation, the Bank pays the participating member or any successor a credit enhancement fee, which is calculated on the remaining unpaid principal balance of the mortgage loans. The Bank records credit enhancement fees as a reduction to interest income. In the secondthird quarter of 2009 and 2008, the Bank reduced net interest income for credit enhancement fees totaling $1 and $1, respectively. In the first sixnine months of 2009 and 2008, the Bank reduced net interest income for credit enhancement fees totaling $2 and $2,$3, respectively.
Concentration Risk.The Bank had the following concentration in MPF loans with institutions whose outstanding total of mortgage loans sold to the Bank represented 10% or more of the Bank’s total outstanding mortgage loans at JuneSeptember 30, 2009, and December 31, 2008.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Concentration of Mortgage Loans
JuneSeptember 30, 2009
Name of Institution | Mortgage Loan Balances Outstanding | Percentage of Total Loan Balances | Number of Mortgage Loans Outstanding | Percentage of Total Number of Mortgage Loans Outstanding | |||||||
JPMorgan Chase Bank, National Association(1) | $ | 2,629 | 78 | % | 19,999 | 73 | % | ||||
OneWest Bank, FSB(2) | 459 | 14 | 5,242 | 19 | |||||||
Subtotal | 3,088 | 92 | 25,241 | 92 | |||||||
Others | 289 | 8 | 2,324 | 8 | |||||||
Total | $ | 3,377 | 100 | % | 27,565 | 100 | % |
December 31, 2008
Name of Institution | Mortgage Loan Balances Outstanding | Percentage of Total Loan Balances | Number of Mortgage Loans Outstanding | Percentage of Total Number of Mortgage Loans Outstanding | ||||||||||||||||||
JPMorgan Chase Bank, National Association(1) | $ | 2,489 | 78 | % | 19,160 | 73 | % | |||||||||||||||
OneWest Bank, FSB(2) | 432 | 14 | 5,046 | 19 | ||||||||||||||||||
Subtotal | 2,921 | 92 | 24,206 | 92 | ||||||||||||||||||
Others | 271 | 8 | 2,197 | 8 | ||||||||||||||||||
Total | $ | 3,192 | 100 | % | 26,403 | 100 | % | |||||||||||||||
December 31, 2008
| ||||||||||||||||||||||
Name of Institution | Mortgage Loan Balances Outstanding | Percentage of Total Loan Balances | Number of Mortgage Loans Outstanding | Percentage of Total Number of Mortgage Loans Outstanding | Mortgage Loan Balances Outstanding | Percentage of Total Mortgage Loan Balances Outstanding | Number of Mortgage Loans Outstanding | Percentage of Total Number of Mortgage Loans Outstanding | ||||||||||||||
JPMorgan Chase Bank, National Association(1) | $ | 2,879 | 77 | % | 21,435 | 72 | % | $ | 2,879 | 77 | % | 21,435 | 72 | % | ||||||||
IndyMac Federal Bank, FSB(2) | 509 | 14 | 5,532 | 19 | 509 | 14 | 5,532 | 19 | ||||||||||||||
Subtotal | 3,388 | 91 | 26,967 | 91 | 3,388 | 91 | 26,967 | 91 | ||||||||||||||
Others | 335 | 9 | 2,601 | 9 | 335 | 9 | 2,601 | 9 | ||||||||||||||
Total | $ | 3,723 | 100 | % | 29,568 | 100 | % | $ | 3,723 | 100 | % | 29,568 | 100 | % |
(1) | On September 25, 2008, the OTS closed Washington Mutual Bank and appointed the FDIC as receiver for Washington Mutual Bank. On the same day, JPMorgan Chase Bank, National Association, a nonmember, assumed Washington Mutual Bank’s obligations with respect to mortgage loans the Bank had purchased from Washington Mutual Bank. JPMorgan Chase Bank, National Association, continues to fulfill its servicing obligations under its participating financial institution agreement with the Bank and to provide |
(2) | On July 11, 2008, the OTS closed IndyMac Bank, F.S.B., and appointed the FDIC as receiver for IndyMac Bank F.S.B. In connection with the receivership, the OTS chartered IndyMac Federal Bank, FSB, and appointed the FDIC as conservator. IndyMac Federal Bank, FSB, assumed the obligations of IndyMac Bank, F.S.B., with respect to mortgage loans the Bank had purchased from IndyMac Bank, F.S.B. On March 19, 2009, OneWest Bank, FSB, became a member of the Bank, assumed the obligations of IndyMac Federal Bank, FSB, with respect to mortgage loans the Bank had purchased from IndyMac Bank, F.S.B., and agreed to fulfill its obligations to provide credit enhancement to the Bank and to service the mortgage loans as required. |
Credit Risk. A mortgage loan is considered to be impaired when it is reported 90 days or more past due (nonaccrual) or when it is probable, based on current information and events, that the Bank will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreement.
The following table presents information on delinquent mortgage loans as of JuneSeptember 30, 2009, and December 31, 2008.
June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | |||||||||||||||||
Days Past Due | Number of Loans | Mortgage Loan Balance | Number of Loans | Mortgage Loan Balance | Number of Loans | Mortgage Loan Balance | Number of Loans | Mortgage Loan Balance | ||||||||||||
Between 31 and 59 days | 215 | $ | 27 | 235 | $ | 29 | ||||||||||||||
Between 30 and 59 days | 195 | $ | 23 | 235 | $ | 29 | ||||||||||||||
Between 60 and 89 days | 73 | 8 | 44 | 5 | 79 | 9 | 44 | 5 | ||||||||||||
Over 90 days | 130 | 16 | 84 | 9 | 159 | 20 | 84 | 9 | ||||||||||||
Total | 418 | $ | 51 | 363 | $ | 43 | 433 | $ | 52 | 363 | $ | 43 | ||||||||
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
At JuneSeptember 30, 2009, the Bank had 418433 loans that were 30 days or more delinquent totaling $51,$52, of which 130159 loans totaling $16$20 were classified as nonaccrual or impaired. For 82111 of these loans, totaling $9,$13, the loan was in foreclosure or the borrower of the loan was in bankruptcy. At December 31, 2008, the Bank had 363 loans that were 30 days or more delinquent totaling $43, of which 84 loans totaling $9 were classified as nonaccrual or impaired. For 51 of these loans, totaling $5, the loan was in foreclosure or the borrower of the loan was in bankruptcy.
The allowance for credit losses on the mortgage loan portfolio was as follows:
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
June 30, 2009 | June 30, 2008 | June 30, 2009 | June 30, 2008 | September 30, 2009 | September 30, 2008 | September 30, 2009 | September 30, 2008 | ||||||||||||||||||
Balance, beginning of the period | $ | 1.1 | $ | 0.9 | $ | 1.0 | $ | 0.9 | $ | 2.0 | $ | 0.9 | $ | 1.0 | $ | 0.9 | |||||||||
Chargeoffs | — | — | — | — | — | — | — | — | |||||||||||||||||
Recoveries | — | — | — | — | — | — | — | — | |||||||||||||||||
Provision for credit losses | 0.9 | — | 1.0 | — | |||||||||||||||||||||
Provision for/(recovery of) credit losses | (0.1 | ) | 0.1 | 0.9 | 0.1 | ||||||||||||||||||||
Balance, end of the period | $ | 2.0 | $ | 0.9 | $ | 2.0 | $ | 0.9 | $ | 1.9 | $ | 1.0 | $ | 1.9 | $ | 1.0 | |||||||||
For more information on how the Bank determines its estimated allowance for credit losses on mortgage loans, see Note 7 to the Financial Statements in the Bank’s 2008 Form 10-K.
The Bank’s average recorded investment in impaired loans totaled $15$17 for the secondthird quarter of 2009 and $7$6 for the secondthird quarter of 2008. The Bank’s average recorded investment in impaired loans totaled $12$13 and $6 for the sixnine months ended JuneSeptember 30, 2009 and 2008, respectively. The Bank did not recognize any interest income for impaired loans in the secondthird quarter of 2009 and 2008 and in the first sixnine months of 2009 and 2008.
At JuneSeptember 30, 2009, the Bank’s other assets included $2 of real estate owned resulting from the foreclosure of 1320 mortgage loans held by the Bank. At December 31, 2008, the Bank’s other assets included $1 of real estate owned resulting from the foreclosure of 7 mortgage loans held by the Bank.
Note 6 – Consolidated Obligations
Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are jointly issued by the FHLBanks through the Office of Finance, which serves as the FHLBanks’ agent. As provided by the FHLBank Act or the regulations governing the operations of the FHLBanks, all FHLBanks have joint and several liability for all FHLBank consolidated obligations. For a discussion of the joint and several liability regulation, see Note 18 to the Financial Statements in the Bank’s 2008 Form 10-K. In connection with each debt issuance, each FHLBank specifies the type, term, and amount of debt it requests to have issued on its behalf. The Office of Finance tracks the amount of debt issued on behalf of each FHLBank. In addition, the Bank separately tracks and records as a liability its specific portion of the consolidated obligations issued and is the primary obligor for that portion of the consolidated obligations issued. The Finance Agency, the successor agency to the Finance Board, and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Redemption Terms. The following is a summary of the Bank’s participation in consolidated obligation bonds at JuneSeptember 30, 2009, and December 31, 2008.
June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | |||||||||||||||||||||
Contractual Maturity | Amount Outstanding | Weighted Average Interest Rate | Amount Outstanding | Weighted Average Interest Rate | Amount Outstanding | Weighted Average Interest Rate | Amount Outstanding | Weighted Average Interest Rate | ||||||||||||||||
Within 1 year | $ | 103,581 | 1.55 | % | $ | 116,069 | 2.29 | % | $ | 78,243 | 1.41 | % | $ | 116,069 | 2.29 | % | ||||||||
After 1 year through 2 years | 26,475 | 3.05 | 37,803 | 2.88 | 33,905 | 2.69 | 37,803 | 2.88 | ||||||||||||||||
After 2 years through 3 years | 16,539 | 4.28 | 21,270 | 4.37 | 13,631 | 3.53 | 21,270 | 4.37 | ||||||||||||||||
After 3 years through 4 years | 7,275 | 4.11 | 3,862 | 4.67 | 10,131 | 4.16 | 3,862 | 4.67 | ||||||||||||||||
After 4 years through 5 years | 8,077 | 4.32 | 14,195 | 4.24 | 5,470 | 3.87 | 14,195 | 4.24 | ||||||||||||||||
After 5 years | 11,443 | 5.01 | 15,840 | 5.14 | 10,725 | 4.90 | 15,840 | 5.14 | ||||||||||||||||
Index amortizing notes | 7 | 4.61 | 8 | 4.61 | 6 | 4.61 | 8 | 4.61 | ||||||||||||||||
Total par amount | 173,397 | 2.50 | % | 209,047 | 3.00 | % | 152,111 | 2.40 | % | 209,047 | 3.00 | % | ||||||||||||
Unamortized premiums/(discounts) | 311 | 154 | 281 | 154 | ||||||||||||||||||||
SFAS 133 valuation adjustments | 2,410 | 3,863 | ||||||||||||||||||||||
SFAS 159 valuation adjustments | 82 | 50 | ||||||||||||||||||||||
Valuation adjustments for hedging activities | 2,409 | 3,863 | ||||||||||||||||||||||
Fair value option valuation adjustments | 68 | 50 | ||||||||||||||||||||||
Total | $ | 176,200 | $ | 213,114 | $ | 154,869 | $ | 213,114 | ||||||||||||||||
The Bank’s participation in consolidated obligation bonds outstanding includes callable bonds of $15,637$20,504 at JuneSeptember 30, 2009, and $24,429 at December 31, 2008. Contemporaneous with the issuance of a callable bond for which the Bank is the primary obligor, the Bank routinely enters into an interest rate swap (in which the Bank pays a variable rate and receives a fixed rate) with a call feature that mirrors the call option embedded in the bond (a sold callable swap). The Bank had notional amounts of interest rate exchange agreements hedging callable bonds of $4,932$13,769 at JuneSeptember 30, 2009, and $8,484 at December 31, 2008. The combined sold callable swap and callable bond enable the Bank to meet its funding needs at costs not otherwise directly attainable solely through the issuance of non-callable debt, while effectively converting the Bank’s net payment to an adjustable rate.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Bank’s participation in consolidated obligation bonds was as follows:
June 30, 2009 | December 31, 2008 | |||||||||||
September 30, 2009 | December 31, 2008 | |||||||||||
Par amount of consolidated obligation bonds: | ||||||||||||
Non-callable | $ | 157,760 | $ | 184,618 | $ | 131,607 | $ | 184,618 | ||||
Callable | 15,637 | 24,429 | 20,504 | 24,429 | ||||||||
Total par amount | $ | 173,397 | $ | 209,047 | $ | 152,111 | $ | 209,047 | ||||
The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding at JuneSeptember 30, 2009, and December 31, 2008, by the earlier of the year of contractual maturity or next call date.
Earlier of Contractual Maturity or Next Call Date | June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | ||||||||
Within 1 year | $ | 115,518 | $ | 131,783 | $ | 95,047 | $ | 131,783 | ||||
After 1 year through 2 years | 29,165 | 43,003 | 33,535 | 43,003 | ||||||||
After 2 years through 3 years | 14,704 | 19,795 | 9,551 | 19,795 | ||||||||
After 3 years through 4 years | 3,775 | 819 | 6,521 | 819 | ||||||||
After 4 years through 5 years | 5,767 | 8,755 | 3,010 | 8,755 | ||||||||
After 5 years | 4,461 | 4,884 | 4,441 | 4,884 | ||||||||
Index amortizing notes | 7 | 8 | 6 | 8 | ||||||||
Total par amount | $ | 173,397 | $ | 209,047 | $ | 152,111 | $ | 209,047 | ||||
Consolidated obligation discount notes are consolidated obligations issued to raise short-term funds; discount notes have original maturities up to one year. These notes are issued at less than their face amount and
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
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:
June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | |||||||||||||||||||||||||
Amount Outstanding | Weighted Average Interest Rate | Amount Outstanding | Weighted Average Interest Rate | Amount Outstanding | Weighted Average Interest Rate | Amount Outstanding | Weighted Average Interest Rate | |||||||||||||||||||||
Par amount | $ | 49,105 | 0.56 | % | $ | 92,155 | 1.49 | % | $ | 43,945 | 0.50 | % | $ | 92,155 | 1.49 | % | ||||||||||||
Unamortized discounts | (96 | ) | (336 | ) | (44 | ) | (336 | ) | ||||||||||||||||||||
Total | $ | 49,009 | $ | 91,819 | $ | 43,901 | $ | 91,819 | ||||||||||||||||||||
Interest Rate Payment Terms. Interest rate payment terms for consolidated obligations at JuneSeptember 30, 2009, and December 31, 2008, are detailed in the following table. For information on the general terms and types of consolidated obligations outstanding, see Note 10 to the Financial Statements in the Bank’s 2008 Form 10-K.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
June 30, 2009 | December 31, 2008 | |||||||||||
September 30, 2009 | December 31, 2008 | |||||||||||
Par amount of consolidated obligations: | ||||||||||||
Bonds: | ||||||||||||
Fixed rate | $ | 94,896 | $ | 112,952 | $ | 96,694 | $ | 112,952 | ||||
Adjustable rate | 77,884 | 95,570 | 51,934 | 95,570 | ||||||||
Step-up | 80 | 196 | 3,265 | 196 | ||||||||
Step-down | — | 18 | — | 18 | ||||||||
Adjustable rate that converts to fixed rate | 480 | 100 | 125 | 100 | ||||||||
Range bonds | 50 | 203 | 87 | 203 | ||||||||
Index amortizing notes | 7 | 8 | 6 | 8 | ||||||||
Total bonds, par | 173,397 | 209,047 | 152,111 | 209,047 | ||||||||
Discount notes, par | 49,105 | 92,155 | 43,945 | 92,155 | ||||||||
Total consolidated obligations, par | $ | 222,502 | $ | 301,202 | $ | 196,056 | $ | 301,202 | ||||
Note 7 – Capital
Capital Requirements.The BankUnder the Housing Act, the director of the Finance Agency is subject toresponsible for setting the risk-based capital standards for the FHLBanks. The FHLBank Act and the regulations governing the operations of the FHLBanks require that the minimum stock requirement for members must be sufficient to enable the Bank to meet its regulatory requirements for total capital, leverage capital, and risk-based capital. Regulatory capital and permanent capital are defined as retained earnings and Class B stock, which includes mandatorily redeemable capital stock that is classified as a liability for financial reporting purposes. Regulatory capital and permanent capital do not include accumulated other comprehensive income/(loss).
The risk-based capital requirements must be met with permanent capital. Permanent capital, is defined as Class B stock and retained earnings, which must be at least equal to the sum of the Bank’s credit risk, market risk, and operations risk capital requirements, all of which are calculated in accordance with the rules of the Finance Agency. The Finance Agency may require an FHLBank to maintain a greater amount of permanent capital than is required by the risk-based capital requirements as defined. In addition, the Bank is subject to a 5% minimum leverage capital ratio with a 1.5 weighting factor for permanent capital, and a 4% minimum total capital-to-assets ratio calculated without reference to the 1.5 weighting factor. As of JuneSeptember 30, 2009, and December 31, 2008, the Bank was in compliance with these capital rules and requirements. The FHLBank Act and the regulations governing the operations of the FHLBanks require that the minimum stock requirement for members must be sufficient to enable the Bank to meet its regulatory requirements for total capital, leverage capital, and risk-based capital. Regulatory capital and permanent capital are defined as retained earnings and total capital stock, which includes mandatorily redeemable capital stock that is classified as a liability for financial reporting purposes under SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150). Regulatory capital and permanent capital do not include accumulated other comprehensive income/(loss). Under the Housing Act, the director of the Finance Agency is responsible for setting the risk-based capital standards for the FHLBanks.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The following table shows the Bank’s compliance with the Finance Agency’s capital requirements at JuneSeptember 30, 2009, and December 31, 2008.
Regulatory Capital Requirements
June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | |||||||||||||||||||||||||||||
Required | Actual | Required | Actual | Required | Actual | Required | Actual | |||||||||||||||||||||||||
Risk-based capital | $ | 8,226 | $ | 14,590 | $ | 8,635 | $ | 13,539 | $ | 7,309 | $ | 14,468 | $ | 8,635 | $ | 13,539 | ||||||||||||||||
Total regulatory capital | $ | 9,557 | $ | 14,590 | $ | 12,850 | $ | 13,539 | $ | 8,448 | $ | 14,468 | $ | 12,850 | $ | 13,539 | ||||||||||||||||
Total capital-to-assets ratio | 4.00 | % | 6.11 | % | 4.00 | % | 4.21 | % | 4.00 | % | 6.85 | % | 4.00 | % | 4.21 | % | ||||||||||||||||
Leverage capital | $ | 11,946 | $ | 21,844 | $ | 16,062 | $ | 20,308 | $ | 10,561 | $ | 21,701 | $ | 16,062 | $ | 20,308 | ||||||||||||||||
Leverage ratio | 5.00 | % | 9.16 | % | 5.00 | % | 6.32 | % | 5.00 | % | 10.27 | % | 5.00 | % | 6.32 | % |
The Bank’s total capital-to-assets ratio increased to 6.11%6.85% at JuneSeptember 30, 2009, from 4.21% at December 31, 2008, primarily because of increased excess capital stock resulting from the decline in advances outstanding coupled with the Bank’s decision not to repurchase excess capital stock, as noted below.
On September 9, 2008, each of the FHLBanks, including the Bank, entered into a lending agreement with the U.S. Treasury. Pursuant to that lending agreement between the Bank and the U.S. Treasury, the Bank must notify the U.S. Treasury promptly if the Bank fails or is about to fail to meet applicable regulatory capital requirements. The Bank’s capital requirements are discussed more fully in Note 13 to the Financial Statements in the Bank’s 2008 Form 10-K.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Mandatorily Redeemable Capital Stock.The Bank had mandatorily redeemable capital stock totaling $3,165$3,159 at JuneSeptember 30, 2009, and $3,747 at December 31, 2008. The decrease in mandatorily redeemable capital stock is primarily due to members’ acquisition of mandatorily redeemable capital stock held by nonmembers.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The changes in mandatorily redeemable capital stock for the three and sixnine months ended JuneSeptember 30, 2009 and 2008, were as follows:
Three Months Ended | Three Months Ended | ||||||||||||||||||||||||||
June 30, 2009 | June 30, 2008 | September 30, 2009 | September 30, 2008 | ||||||||||||||||||||||||
Number of Institutions | Amount | Number of Institutions | Amount | Number of Institutions | Amount | Number of Institutions | Amount | ||||||||||||||||||||
Balance at the beginning of the period | 33 | $ | 3,145 | 18 | $ | 213 | 34 | $ | 3,165 | 19 | $ | 189 | |||||||||||||||
Reclassified from capital during the period: | |||||||||||||||||||||||||||
Reclassified from/(to) capital during the period: | |||||||||||||||||||||||||||
Termination of membership | 2 | 20 | — | — | 6 | 10 | 6 | 3,702 | |||||||||||||||||||
Withdrawal from membership | — | 1 | — | — | — | 1 | 3 | ||||||||||||||||||||
Merger of nonmember institution | (1 | ) | — | — | — | 1 | — | (1 | ) | — | |||||||||||||||||
Repurchase of mandatorily redeemable capital stock | — | — | — | (27 | ) | ||||||||||||||||||||||
Redemption of mandatorily redeemable capital stock | (2 | ) | (16 | ) | — | — | |||||||||||||||||||||
Repurchase of excess mandatorily redeemable capital stock | — | — | — | (4 | ) | ||||||||||||||||||||||
Dividends accrued on mandatorily redeemable capital stock | — | — | — | 3 | — | — | — | 8 | |||||||||||||||||||
Balance at the end of the period | 34 | $ | 3,165 | 19 | $ | 189 | 39 | $ | 3,159 | 25 | $ | 3,898 | |||||||||||||||
Six Months Ended | Nine Months Ended | ||||||||||||||||||||||||||
June 30, 2009 | June 30, 2008 | September 30, 2009 | September 30, 2008 | ||||||||||||||||||||||||
Number of Institutions | Amount | Number of Institutions | Amount | Number of Institutions | Amount | Number of Institutions | Amount | ||||||||||||||||||||
Balance at the beginning of the period | 30 | $ | 3,747 | 16 | $ | 229 | 30 | $ | 3,747 | 16 | $ | 229 | |||||||||||||||
Reclassified from capital during the period: | |||||||||||||||||||||||||||
Reclassified from/(to) capital during the period: | |||||||||||||||||||||||||||
Termination of membership | 4 | 36 | — | — | 10 | 46 | 6 | 3,702 | |||||||||||||||||||
Withdrawal from membership | — | — | 3 | 2 | — | — | 4 | 5 | |||||||||||||||||||
Reclassified to capital during the period | — | (618 | )(1) | — | — | ||||||||||||||||||||||
Repurchase of mandatorily redeemable capital stock | — | — | — | (48 | ) | ||||||||||||||||||||||
Acquired by/transferred to new members | — | (618 | )(1) | — | — | ||||||||||||||||||||||
Merger of nonmember institution | 1 | — | (1 | ) | — | ||||||||||||||||||||||
Redemption of mandatorily redeemable capital stock | (2 | ) | (16 | ) | — | — | |||||||||||||||||||||
Repurchase of excess mandatorily redeemable capital stock | — | — | — | (52 | ) | ||||||||||||||||||||||
Dividends accrued on mandatorily redeemable capital stock | — | — | — | 6 | — | — | — | 14 | |||||||||||||||||||
Balance at the end of the period | 34 | $ | 3,165 | 19 | $ | 189 | 39 | $ | 3,159 | 25 | $ | 3,898 |
(1) | On March 19, 2009, OneWest Bank, FSB, became a member of the Bank, assumed the outstanding advances of IndyMac Federal Bank, FSB, a nonmember, and acquired the associated Bank capital stock totaling $318. Bank capital stock acquired by OneWest Bank, FSB, is no longer classified as mandatorily redeemable capital stock (a liability). However, the |
During 2008, JPMorgan Chase Bank, National Association, a nonmember, assumed Washington Mutual Bank’s outstanding Bank advances and acquired the associated Bank capital stock. JPMorgan Bank and Trust Company, National Association, an affiliate of JPMorgan Chase Bank, National Association, became a member of the Bank. During the first quarter of 2009, the Bank allowed the transfer of excess stock totaling $300 from JPMorgan Chase Bank, National Association, to JPMorgan Bank and Trust Company, National Association, to enable JPMorgan Bank and Trust Company, National Association, to satisfy its activity-based stock requirement. The capital stock transferred is no longer classified as mandatorily redeemable capital stock (a liability). However, the residual capital stock remaining with JPMorgan Chase Bank, National Association, totaling $2,695, remains classified as mandatorily redeemable capital stock (a liability).
During 2008, JPMorgan Chase Bank, National Association, a nonmember, assumed Washington Mutual Bank’s outstanding Bank advances and acquired the associated Bank capital stock. JPMorgan Bank and Trust Company, National Association, an affiliate of JPMorgan Chase Bank, National Association, became a member of the Bank. During the first quarter of 2009, the Bank allowed the transfer of excess stock totaling $300 from JPMorgan Chase Bank, National Association, to JPMorgan Bank and Trust Company, National Association, to enable JPMorgan Bank and Trust Company, National Association, to satisfy its activity-based stock requirement. The capital stock transferred is no longer classified as mandatorily redeemable capital stock (a liability). However, the capital stock remaining with JPMorgan Chase Bank, National Association, totaling $2,695, remains classified as mandatorily redeemable capital stock (a liability). |
The Bank’s mandatorily redeemable capital stock is discussed more fully in Note 13 to the Financial Statements in the Bank’s 2008 Form 10-K.
The following table presents mandatorily redeemable capital stock amounts by contractual redemption period at June 30, 2009, and December 31, 2008.
Contractual Redemption Period | June 30, 2009 | December 31, 2008 | ||||
Within 1 year | $ | 19 | $ | 17 | ||
After 1 year through 2 years | 30 | 3 | ||||
After 2 years through 3 years | 42 | 63 | ||||
After 3 years through 4 years | 85 | 91 | ||||
After 4 years through 5 years | 2,989 | 3,573 | ||||
Total | $ | 3,165 | $ | 3,747 | ||
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
During July 2009, the Bank redeemed $4 ofThe following table presents mandatorily redeemable capital stock heldamounts by two institutions. Following the redemption, the Bank continued to meet its regulatory requirements for total capital, leverage capital, and risk-based capital.
In September 2009, thecontractual redemption period for $13 of mandatorily redeemable capital stock held by one institution will end,at September 30, 2009, and the Bank will redeem the stock provided that all the conditions specified in the Bank’s capital plan are met.December 31, 2008.
Contractual Redemption Period | September 30, 2009 | December 31, 2008 | ||||
Within 1 year | $ | 3 | $ | 17 | ||
After 1 year through 2 years | 55 | 3 | ||||
After 2 years through 3 years | 85 | 63 | ||||
After 3 years through 4 years | 2,776 | 91 | ||||
After 4 years through 5 years | 240 | 3,573 | ||||
Total | $ | 3,159 | $ | 3,747 |
Retained Earnings and Dividend Policy. The Bank’s Retained Earnings and Dividend Policy establishes amounts to be retained in restricted retained earnings, which are not made available for dividends in the current dividend period.
Retained Earnings Related to SFAS 133 and SFAS 159Valuation Adjustments– In accordance with the Retained Earnings and Dividend Policy, the Bank retains in restricted retained earnings any cumulative net gains in earnings (net of applicable assessments) resulting from the application of SFAS 133gains or losses on derivatives and SFAS 159.associated hedged items and financial instruments carried at fair value (valuation adjustments). As the SFAS 133- and SFAS 159-related cumulative net gains are reversed by SFAS 133- and SFAS 159-related periodic net losses and settlements of contractual interest cash flows, the amount of cumulative net gains decreases. The amount of retained earnings required by this provision of the policy is therefore decreased, and that portion of the previously restricted retained earnings becomes unrestricted and may be made available for dividends. Retained earnings restricted in accordance with these provisions totaled $170$116 at JuneSeptember 30, 2009, and $52 at December 31, 2008. In accordance with this provision, the amount increased by $118$64 in the first sixnine months of 2009 as a result of net unrealized gains resulting from SFAS 133 and SFAS 159valuation adjustments during the second quarter of 2009.this period.
Other Retained Earnings–Targeted Buildup – In addition to any cumulative net gains resulting from the application of SFAS 133 and SFAS 159,valuation adjustments, the Bank holds an additional amount in restricted retained earnings intended to protect members’ paid-in capital from the effects of an extremely adverse credit event, an extremely adverse operations risk event, and/or an extremely adverse SFAS 133 or SFAS 159 quarterly result, combined with an extremely lowhigh level of pre-SFAS 133quarterly losses related to the Bank’s derivatives and pre-SFAS 159associated hedged items and financial instruments carried at fair value, and the risk of higher-than-anticipated credit losses related to other-than-temporary impairment of PLRMBS, especially in periods of extremely low net income resulting from an adverse interest rate environment, as well asenvironment. In September 2009, the riskBoard of a write-downDirectors increased the targeted amount to $1,800. Most of the increase in the target was due to an increase in the projected losses on MBS with unrealized losses if the losses were determined to be other than temporary.collateral underlying the Bank’s PLRMBS under stress case assumptions about housing market conditions. The retained earnings restricted in accordance with this provision of the Retained Earnings and Dividend Policy totaled $1,002$949 at JuneSeptember 30, 2009, and $124 at December 31, 2008.
For more information on these two categories of restricted retained earnings and the Bank’s Retained Earnings and Dividend Policy, see Note 13 to the Financial Statements in the Bank’s 2008 Form 10-K. In addition, on May 29, 2009, the Bank’s Board of Directors amended the Bank’s Retained Earnings and Dividend Policy to change the way the Bank determines the amount of earnings to be restricted for the targeted buildup. Instead of retaining a fixed percentage of earnings toward the retained earnings target each quarter, the Bank will designate any earnings not restricted for other reasons or not paid out in dividends as restricted retained earnings for the purpose of meeting the target.
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.
On July 30, 2009, the Bank’s Board of Directors declared a cash dividend for the second quarter of 2009 at an annualized rate of 0.84%. The total amount of the dividend is $28. The Bank did not pay a dividend for the first quarter of 2009. The Bank’s dividend rate was 6.19% (annualized) for the second quarter of 2008 and 5.96% (annualized) for the first six months of 2008.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
TheOn October 29, 2009, the Bank announced that it would not pay a dividend for the secondthird quarter of 2009 will be paid in cash rather than in shares of Class B capital stock to comply with Finance Agency rules. Under Finance Agency rules, an FHLBank mayand would not pay dividends in the form of capital stock or issue excess stock to members if the FHLBank’s excess stock exceeds 1% of its total assets or if the issuance of stock would cause the FHLBank’s excess stock to exceed 1% of its total assets. At June 30, 2009, the Bank’srepurchase excess capital stock totaled $4,586, or 2%during the fourth quarter of total assets.2009. The Bank continues to face a number of uncertainties in the current economic environment. Market conditions continue to be volatile, particularly in the MBS market, which could result in additional OTTI charges on the Bank’s PLRMBS. In light of these and other uncertainties in the Bank’s operating environment, the Bank determined that it is essential to preserve the Bank’s capital. The Bank will continue to monitor the condition of the Bank’s MBS portfolio, its overall financial performance and retained earnings, developments in the mortgage and credit markets, and other relevant information as the basis for determining the status of dividends and capital stock repurchases in future quarters.
Excess and Surplus Capital Stock. The Bank may repurchase some or all of a member’s excess capital stock and any excess mandatorily redeemable capital stock, at the Bank’s discretion and subject to certain statutory and regulatory requirements. The Bank must give the member 15 days’ written notice; however, the member may waive this notice period. The Bank may also repurchase some or all of a member’s excess capital stock at the member’s request, at the Bank’s discretion and subject to certain statutory and regulatory requirements. Excess capital stock is defined as any stock holdings in excess of a member’s minimum capital stock requirement, as established by the Bank’s capital plan.
The Bank’s surplus capital stock repurchase policy provides for the Bank to repurchase excess stock that constitutes surplus stock, at the Bank’s discretion and subject to certain statutory and regulatory requirements, if a member has surplus capital stock as of the last business day of the quarter. A member’s surplus capital stock is defined as any stock holdings in excess of 115% of the member’s minimum capital stock requirement, generally excluding stock dividends earned and credited for the current year.
On a quarterly basis, the Bank determines whether it will repurchase excess capital stock, including surplus capital stock. Prior to January 2009,Although the Bank generally repurchased capitalcontinues to redeem stock approximately one month after the end of each quarter. The repurchase date was subject to change at the discretionupon expiration of the Bank. When a member submits a request for the repurchase of all excess capital stock, the amount of excess stock to be repurchased, if any, will be calculated on the last business day of the quarter, rather than on the repurchase date (the last business day of the following month). On the scheduled repurchase date, iffive-year redemption period, the Bank has determined that it will repurchasenot repurchased excess stock since the Bank will recalculate the amountfourth quarter of stock to be repurchased to ensure that each member will continue to meet its minimum stock requirement after the stock repurchase.
On July 14, 2009, the Bank notified members that it would not repurchase excess capital stock on July 31, 2009, in order2008 to preserve the Bank’s capital in light ofcapital. As noted above, the ongoing potential for additional OTTI charges because of uncertainty regarding future conditions in the mortgage and capital markets. The Bank will continuedoes not intend to monitor the condition of its MBS portfolio, its overall financial performance and retained earnings, developments in the mortgage and credit markets, and other relevant information in determining the status ofrepurchase any excess capital stock repurchases in future quarters.during the fourth quarter of 2009.
InFor the first and second quarters ofnine months ended September 30, 2009, the Bank did not repurchase any capital stock. In the first and second quartersnine months of 2008, the Bank repurchased surplus capital stock totaling $97$727 and $459 respectively. The Bank also repurchased excess capital stock that was not surplus capital stock totaling $21 and $391 in the first and second quarters of 2008, respectively.$521.
Excess capital stock totaled $4,586$5,467 as of JuneSeptember 30, 2009, which included surplus capital stock of $2,615.$4,605.
For more information on excess and surplus capital stock, see Note 13 to the Financial Statements in the Bank’s 2008 Form 10-K.
Concentration.The following table presents the concentration in capital stock held by institutions whose capital stock ownership represented 10% or more of the Bank’s outstanding capital stock, including mandatorily redeemable capital stock, as of JuneSeptember 30, 2009, or December 31, 2008.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Concentration of Capital Stock
Including Mandatorily Redeemable Capital Stock
June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | |||||||||||||||||||||
Name of Institution | Capital Stock Outstanding | Percentage of Total Capital Stock Outstanding | Capital Stock Outstanding | Percentage of Total Capital Stock Outstanding | Capital Stock Outstanding | Percentage of Total | Capital Stock Outstanding | Percentage of Total | ||||||||||||||||
Citibank, N.A. | $ | 3,877 | 29 | % | $ | 3,877 | 29 | % | $ | 3,877 | 29 | % | $ | 3,877 | 29 | % | ||||||||
JPMorgan Chase Bank, National Association(1) | 2,695 | 20 | 2,995 | 22 | 2,695 | 20 | 2,995 | 22 | ||||||||||||||||
Wachovia Mortgage, FSB(2) | 1,572 | 12 | 1,572 | 12 | 1,572 | 12 | 1,572 | 12 | ||||||||||||||||
Subtotal | 8,144 | 61 | 8,444 | 63 | 8,144 | 61 | 8,444 | 63 | ||||||||||||||||
Others | 5,274 | 39 | 4,919 | 37 | 5,259 | 39 | 4,919 | 37 | ||||||||||||||||
Total | $ | 13,418 | 100 | % | $ | 13,363 | 100 | % | $ | 13,403 | 100 | % | $ | 13,363 | 100 | % | ||||||||
(1) | On September 25, 2008, the OTS closed Washington Mutual Bank and appointed the FDIC as receiver for Washington Mutual Bank. On the same day, JPMorgan Chase Bank, National Association, a nonmember, assumed Washington Mutual Bank’s outstanding Bank advances and acquired the associated Bank capital stock. The capital stock held by JPMorgan Chase Bank, National Association, is classified as mandatorily redeemable capital stock (a liability). JPMorgan Chase Bank, National Association, remains obligated for all of Washington Mutual Bank’s outstanding advances and continues to hold some of the Bank capital stock it acquired from the FDIC as receiver for Washington Mutual Bank. JPMorgan Bank and Trust Company, National Association, an affiliate of JPMorgan Chase Bank, National Association, became a member of the Bank. During the first quarter of 2009, the Bank allowed the transfer of excess stock totaling $300 from JPMorgan Chase Bank, National Association, to JPMorgan Bank and Trust Company, National Association, to enable JPMorgan Bank and Trust Company, National Association, to satisfy its activity-based stock requirement. The capital stock transferred is no longer classified as mandatorily redeemable capital stock (a liability). However, the |
(2) | On December 31, 2008, Wells Fargo & Company, a nonmember, acquired Wachovia Corporation, the parent company of Wachovia Mortgage, FSB. Wachovia Mortgage, FSB, |
Note 8 – Segment Information
The Bank analyzesuses an analysis of financial performance based on the balances and adjusted net interest income of two operating segments, the advances-related business and the mortgage-related business, based onas well as other financial information, to review and assess financial performance and to determine the Bank’s methodallocation of internal reporting.resources to these two major business segments. For purposes of segment reporting, adjusted net interest income includes interest income and expenses associated with economic hedges that are recorded in “Net gain/(loss) on derivatives and hedging activities” in other income and excludes interest expense that is recorded in “Mandatorily redeemable capital stock.” It is at the adjusted net interest income level thatOther key financial information, such as any OTTI loss on the Bank’s chief operating decision maker reviewsheld-to-maturity PLRMBS, other expenses, and analyzesassessments, are not included in the segment reporting analysis, but are incorporated into management’s overall assessment of financial performance and determines the allocation of resources to the two operating segments. Except for the interest income and expenses associated with economic hedges, the Bank does not allocate other income, other expense, or assessments to its operating segments.performance.
For more information on these operating segments, see Note 15 to the Financial Statements in the Bank’s 2008 Form 10-K.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The following table presents the Bank’s adjusted net interest income by operating segment and reconciles total adjusted net interest income to (loss)/income before assessments for the three and sixnine months ended JuneSeptember 30, 2009 and 2008.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Reconciliation of Adjusted Net Interest Income and (Loss)/Income Before Assessments
Advances- Related Business | Mortgage- Related Business | Adjusted Net Interest Income | Amortization of Basis Adjustments(3) | Net Interest (Expense) on | Interest Expense on Mandatorily Redeemable Capital Stock(2) | Net Interest Income | Other (Loss)/ | Other Expense | Income Before Assessments | ||||||||||||||||||||||||
Three months ended: | |||||||||||||||||||||||||||||||||
June 30, 2009 | $ | 189 | $ | 118 | $ | 307 | $ | (36 | ) | $ | (140 | ) | $ | — | $ | 483 | $ | (39 | ) | $ | 31 | $ | 413 | ||||||||||
June 30, 2008 | 223 | 117 | 340 | 3 | (4 | ) | 3 | 338 | (10 | ) | 24 | 304 | |||||||||||||||||||||
Six months ended: | |||||||||||||||||||||||||||||||||
June 30, 2009 | $ | 393 | $ | 254 | $ | 647 | $ | (45 | ) | $ | (225 | ) | $ | — | $ | 917 | $ | (275 | ) | $ | 62 | $ | 580 | ||||||||||
June 30, 2008 | 449 | 207 | 656 | 17 | 63 | 6 | 570 | 110 | 49 | 631 |
Advances- Related Business | Mortgage- Related Business | Adjusted Net Interest Income | Amortization of Deferred Gains/(Losses)(1) | Net Interest (Expense) on | Interest Expense on Mandatorily Redeemable Capital Stock(3) | Net Interest Income | Other Loss | Other Expense | (Loss)/ Income Before Assessments | |||||||||||||||||||||||||
Three months ended: | ||||||||||||||||||||||||||||||||||
September 30, 2009 | $ | 159 | $ | 151 | $ | 310 | $ | (21 | ) | $ | (134 | ) | $ | 7 | $ | 458 | $ | (543 | ) | $ | 31 | $ | (116 | ) | ||||||||||
September 30, 2008 | 232 | 122 | 354 | 1 | (48 | ) | 8 | 393 | (225 | ) | 29 | 139 | ||||||||||||||||||||||
Nine months ended: | ||||||||||||||||||||||||||||||||||
September 30, 2009 | 552 | 405 | 957 | (66 | ) | (359 | ) | 7 | 1,375 | (818 | ) | 93 | 464 | |||||||||||||||||||||
September 30, 2008 | 681 | 329 | 1,010 | 18 | 15 | 14 | 963 | (115 | ) | 78 | 770 |
(1) | Represents amortization of amounts deferred for adjusted net interest income purposes only in accordance with the Bank’s Retained Earnings and Dividend Policy. |
(2) | The Bank includes interest income and interest expense associated with economic hedges in adjusted net interest income in its |
The Bank excludes interest expense on mandatorily redeemable capital stock from adjusted net interest income in its |
The following table presents total assets by operating segment at JuneSeptember 30, 2009, and December 31, 2008.
Total Assets
Advances- Related Business | Mortgage- Related Business | Total Assets | Advances- Related Business | Mortgage- Related Business | Total Assets | |||||||||||||
June 30, 2009 | $ | 202,406 | $ | 36,518 | $ | 238,924 | ||||||||||||
September 30, 2009 | $ | 177,784 | $ | 33,428 | $ | 211,212 | ||||||||||||
December 31, 2008 | 278,221 | 43,023 | 321,244 | 278,221 | 43,023 | 321,244 |
Note 9 – Derivatives and Hedging Activities
General.The Bank may enter into interest rate swaps (including callable, putable, and basis swaps); swaptions; and cap, floor, corridor, and collar agreements (collectively, interest rate exchange agreements or derivatives). Most of the Bank’s interest rate exchange agreements are executed in conjunction with the origination of advances and the issuance of consolidated obligation bonds to create variable rate structures. The interest rate exchange agreements are generally executed at the same time as the advances and bonds are transacted and generally have the same maturity dates as the related advances and bonds.
Additional active uses of interest rate exchange agreements include: (i) offsetting interest rate caps, floors, corridors, or collars embedded in adjustable rate advances made to members, (ii) hedging the anticipated issuance of debt, (iii) matching against consolidated obligation discount notes or bonds to create the equivalent of callable fixed rate debt, (iv) modifying the repricing intervals between variable rate assets and
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
variable rate liabilities, and (v) exactly offsetting other derivatives executed with members (with the Bank serving as an intermediary). The Bank’s use of interest rate exchange agreements results in one of the following classifications: (i) a fair value hedge of an underlying financial instrument, (ii) a forecasted transaction, (iii) a cash flow hedge of an underlying financial instrument, (iv) an economic hedge for specific asset and liability management purposes, (a non-SFAS 133-qualifying economic hedge), or (v) an intermediary transaction for members.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
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, this party receives cash flows equivalent to the interest on the same notional principal amount at a variable rate index for the same period of time. The variable rate received or paid by the Bank in most interest rate exchange agreements is the London Inter-Bank Offered Rate.
Swaptions – A swaption is an option on a swap that gives the buyer the right to enter into a specified interest rate swap at a certain time in the future. When used as a hedge, a swaption can protect the Bank against future interest rate changes when it is planning to lend or borrow funds in the future. The Bank purchases receiver swaptions. A receiver swaption is the option to receive fixed interest payments at a later date.
Interest Rate Caps and Floors –In a cap agreement, a cash flow is generated if the price or rate of an underlying variable rate rises above a certain threshold (or cap) price. In a floor agreement, a cash flow is generated if the price or rate of an underlying variable falls below a certain threshold (or floor) price. Caps may be used in conjunction with liabilities and floors may be used in conjunction with assets. Caps and floors are designed as protection against the interest rate on a variable rate asset or liability rising above or falling below a certain level.
Hedging Activities.The Bank documents all relationships between derivative hedging instruments and hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value or cash flow hedges to (i) assets and liabilities on the balance sheet, (ii) firm commitments, or (iii) forecasted transactions. The Bank also formally assesses (both at the hedge’s inception and at least quarterly on an ongoing basis) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain effective in future periods. The Bank typically uses regression analyses or other statistical analyses to assess the effectiveness of its hedges. When it is determined that a derivative has not been or is not expected to be effective as a hedge, the Bank discontinues hedge accounting prospectively.
The Bank discontinues hedge accounting prospectively when (i) it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (ii) the derivative and/or the hedged item expires or is sold, terminated, or exercised; (iii) it is no longer probable that the forecasted transaction will occur in the originally expected period; (iv) a hedged firm commitment no longer meets the definition of a firm commitment; or (v) management determines that designating the derivative as a hedging instrument in accordance with SFAS 133 is no longer appropriate.appropriate; or (vi) management decides to use the derivative to offset changes in the fair value of other derivatives or instruments carried at fair value.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Intermediation– As an additional service to its members, the Bank enters into offsetting interest rate exchange agreements, acting as an intermediary between exactly offsetting derivatives transactions with members and other counterparties. This intermediation allows members indirect access to the derivatives market. Derivatives in which the Bank is an intermediary may also arise when the Bank enters into derivatives to offset the economic effect of other derivatives that are no longer designated to advances, investments, or consolidated obligations. The offsetting derivatives used in intermediary activities do not receive SFAS 133 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. These amounts are recorded in other income and presented as “Net gain/(loss) on derivatives and hedging activities.”
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Derivatives in which the Bank is an intermediary may arise when the Bank (i) enters into derivatives with members and offsetting derivatives with other counterparties to meet the needs of its members, and (ii) enters into derivatives to offset the economic effect of other derivatives that are no longer designated to advances, investments, or consolidated obligations. The notional principal of the interest rate exchange agreements arising from the Bank entering intoassociated with derivatives with members and offsetting derivatives with other counterparties was $426$606 at JuneSeptember 30, 2009, and $346 at December 31, 2008. The Bank did not have any interest rate exchange agreements outstanding at JuneSeptember 30, 2009, and December 31, 2008, that were used to offset the economic effect of other derivatives that were no longer designated to advances, investments, or consolidated obligations.
Investments– The Bank may invest in U.S. Treasury and agency obligations, MBS rated AAA at the time of acquisition, and the taxable portion of highly rated state or local housing finance agency obligations. The interest rate risk and prepayment risk associated with these investment securities isare managed through a combination of debt issuance and derivatives. The Bank may manage prepayment risk and interest rate risk by funding investment securities with consolidated obligations that have call features or by hedging the prepayment risk with a combination of consolidated obligations and callable swaps or swaptions. The Bank executes callable swaps and purchases swaptions in conjunction with the issuance of certain liabilities to create funding 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. The derivatives are marked to market through earnings and cause modest income volatility. Investment securities may be classified as held-to-maturity or trading.
The Bank may also manage the risk arising from changing market prices or cash flows of investment securities classified as trading by entering into interest rate exchange agreements (economic hedges) that offset the changes in fair value or cash flows of the securities. The market value changes of both the trading securities and the associated interest rate exchange agreements are included in other income in the Statements of Income.
Advances– The Bank offers a wide array of advance structures to meet members’ funding needs. These advances may have maturities up to 30 years with variablefixed or fixedadjustable interest rates and may include early termination features or options. The Bank may use derivatives to adjust the repricing and/or options characteristics of advances to more closely match the characteristics of the Bank’s funding liabilities. In general, whenever a member executes a fixed rate advance or a variablean adjustable rate advance with embedded options, the Bank will simultaneously execute an interest rate exchange agreement with terms that offset the terms and embedded options, if any, in the advance. The combination of the advance and the interest rate exchange agreement effectively creates a variable rate asset. This type of hedge is treated as a fair value hedge in accordance with SFAS 133.hedge.
Mortgage Loans – The Bank’s investment portfolio includes fixed rate mortgage loans. The prepayment options embedded in mortgage loans can result in extensions or contractions in the expected repayment of these investments, depending on changes in estimated prepayment speeds. The Bank manages the interest rate risk and prepayment risk associated with fixed rate mortgage loans through a combination of debt issuance and
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
derivatives. The Bank uses both callable and non-callable debt to achieve cash flow patterns and market value sensitivities for liabilities similar to those expected on the mortgage loans. Net income could be reduced if the Bank replaces prepaid mortgages with lower-yielding assets and the Bank’s higher funding costs are not reduced accordingly.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Bank executes callable swaps and purchases swaptions in conjunction with the issuance of certain consolidated obligations to create funding equivalent to fixed rate callable bonds. Although these derivatives are economic hedges against the prepayment risk of specific loan pools and are referenced to individual liabilities, they do not receive either fair value or cash flow hedge accounting treatment. The derivatives are marked to market through earnings and are presented as “Net gain/(loss) on derivatives and hedging activities.”
Consolidated Obligations– Although 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, FHLBanks individually are counterparties to interest rate exchange agreements associated with specific debt issues. The Office of Finance acts as agent of the FHLBanks in the debt issuance process. In connection with each debt issuance, each FHLBank specifies the terms and the 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 consolidated obligations and is the primary obligor for its specific portion of consolidated obligations issued. Because the Bank knows the amount and structure of consolidated obligations issued on its behalf, it has the ability to structure hedging instruments to match its specific debt. The hedge transactions may be executed on or after the date of issuance of the consolidated obligations and are accounted for based on SFAS 133.the accounting for derivative instruments and hedging activities.
Consolidated obligation bonds are structured to meet the Bank’s and/or investors’ needs. Common structures include fixed rate bonds with or without call options and variableadjustable rate bonds with or without embedded options. In general, when bonds with these structures are issued, the Bank will simultaneously execute an interest rate exchange agreement with terms that offset the terms and embedded options, if any, of the consolidated obligation bond. This combination of the consolidated obligation bond and the interest rate exchange agreement effectively creates a variablean adjustable rate bond. The cost of this funding combination is generally lower than the cost that would be available through the issuance of just a variablean adjustable rate bond. These transactions generally receive fair value hedge accounting treatment under SFAS 133.treatment.
The Bank did not have any consolidated obligations denominated in currencies other than U.S. dollars outstanding during the sixnine months ended JuneSeptember 30, 2009, or the twelve months ended December 31, 2008.
Firm Commitments– In accordance with SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149), which amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities under SFAS 133, aA firm commitment for a forward starting advance hedged through the use of an offsetting forward starting interest rate swap is considered a derivative. In this case, the interest rate swap functions as the hedging instrument for both the firm commitment and the subsequent advance. When the commitment is terminated and the advance is made, the current market value associated with the firm commitment is included with the basis of the advance. The basis adjustment is then amortized into interest income over the life of the advance.
Anticipated Debt Issuance– The Bank may enter into interest rate swaps for the anticipated issuances of fixed rate bonds to hedge the cost of funding. These hedges are designated and accounted for as cash flow hedges.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The interest rate swap is terminated upon issuance of the fixed rate bond, with the effective portion of the realized gain or loss on the interest rate swap recorded in other comprehensive income. Realized gains and losses reported in accumulated other comprehensive income are recognized as earnings in the periods in which earnings are affected by the cash flows of the fixed rate bonds.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Credit Risk –The Bank is subject to credit risk as a result of the risk of nonperformance by counterparties to the derivative agreements. All of the Bank’s derivative agreements contain master netting provisions to help mitigate the credit risk exposure to each counterparty. The Bank manages counterparty credit risk through credit analyses and collateral requirements and by following the requirements of the Bank’s risk management policies and credit guidelines. Based on the master netting provisions in each agreement, credit analyses, and the collateral requirements in place with each counterparty, management of the Bank does not anticipateexpect to incur any credit losses on derivative agreements.
The notional amount of an interest rate exchange agreement serves as a basis for calculating periodic interest payments or cash flows and is not a measure of the amount of credit risk from that transaction. The Bank had notional amounts outstanding of $281,723$261,907 and $331,643 at JuneSeptember 30, 2009, and December 31, 2008, respectively. The notional amount does not represent the exposure to credit loss. The amount potentially subject to credit loss is the estimated cost of replacing an interest rate exchange agreement that has a net positive market value if the counterparty defaults; this amount is substantially less than the notional amount.
Maximum credit risk is defined as the estimated cost of replacing all interest rate exchange agreements the Bank has transacted with counterparties where the Bank is in a net favorable position (has a net unrealized gain) if the counterparties all defaulted and the related collateral proved to be of no value to the Bank. At JuneSeptember 30, 2009, the Bank’s maximum credit risk, as defined above, was estimated at $1,983,$2,055, including $497$541 of net accrued interest and fees receivable. At December 31, 2008, the Bank’s maximum credit risk was estimated at $2,493, including $493 of net accrued interest and fees receivable. Accrued interest and fees receivable and payable and the legal right to offset assets and liabilities by counterparty (under which amounts recognized for individual transactions may be offset against amounts recognized for other derivatives transactions with the same counterparty) are considered in determining the maximum credit risk. The Bank held cash, investment grade securities, and mortgage loans valued at $1,998$2,057 and $2,508 as collateral from counterparties as of JuneSeptember 30, 2009, and December 31, 2008, respectively. This collateral has not been sold or repledged. A significant number of the Bank’s interest rate exchange agreements are transacted with financial institutions such as major banks and highly rated derivatives dealers. Some of these financial institutions or their broker-dealer affiliates buy, sell, and distribute consolidated obligations. Assets pledged as collateral by the Bank to these counterparties are more fully discussed in Note 11.
Certain of the Bank’s derivatives agreements contain provisions that link the Bank’s credit rating from each of the major credit rating agencies to various rights and obligations. In several of the Bank’s derivatives agreements, if the Bank’s debt rating falls below A, the Bank’s counterparty would have the right, but not the obligation, to terminate all of its outstanding derivatives transactions with the Bank. In addition, the amount of collateral that the Bank is required to deliver to a counterparty depends on the Bank’s credit rating. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net derivative liability position (before cash collateral and related accrued interest) at JuneSeptember 30, 2009, was $184,$187, for which the Bank had posted collateral of $139$118 in the normal course of business. If the credit rating of the Bank’s debt had been lowered to AAA/AA, then the Bank would have been required to deliver up to an additional $38$54 of collateral to its derivatives counterparties at JuneSeptember 30, 2009. The Bank’s credit ratings continue to be AAA/AAA.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The following table summarizes the fair value of derivative instruments without the effect of netting arrangements or collateral as of JuneSeptember 30, 2009, and December 31, 2008. For purposes of this disclosure, the derivativederivatives values include the fair value of derivatives and related accrued interest.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Fair Values of Derivative Instruments
June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | |||||||||||||||||||||||||||||||||||||||||
Notional Amount of Derivatives | Derivative Assets | Derivative Liabilities | Notional Amount of Derivatives | Derivative Assets | Derivative Liabilities | Notional Amount of Derivatives | Derivative Assets | Derivative Liabilities | Notional Amount of Derivatives | Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||||||||||||
Derivatives designated as hedging instruments under SFAS 133: | ||||||||||||||||||||||||||||||||||||||||||||
Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | 107,890 | $ | 2,974 | $ | 1,027 | $ | 114,374 | $ | 4,216 | $ | 1,340 | $ | 112,677 | $ | 2,986 | $ | 977 | $ | 114,374 | $ | 4,216 | $ | 1,340 | ||||||||||||||||||||
Total | 107,890 | 2,974 | 1,027 | 114,374 | 4,216 | 1,340 | 112,677 | 2,986 | 977 | 114,374 | 4,216 | 1,340 | ||||||||||||||||||||||||||||||||
Derivatives not designated as hedging instruments under SFAS 133: | ||||||||||||||||||||||||||||||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | 171,868 | 939 | 1,087 | 215,374 | 923 | 1,699 | 147,585 | 865 | 1,007 | 215,374 | 923 | 1,699 | ||||||||||||||||||||||||||||||||
Interest rate caps. floors, corridors, and/or collars | 1,965 | 8 | 17 | 1,895 | 1 | 20 | 1,645 | 10 | 19 | 1,895 | 1 | 20 | ||||||||||||||||||||||||||||||||
Total | 173,833 | 947 | 1,104 | 217,269 | 924 | 1,719 | 149,230 | 875 | 1,026 | 217,269 | 924 | 1,719 | ||||||||||||||||||||||||||||||||
Total derivatives before netting and collateral adjustments | $ | 281,723 | 3,921 | 2,131 | $ | 331,643 | 5,140 | 3,059 | $ | 261,907 | 3,861 | 2,003 | $ | 331,643 | 5,140 | 3,059 | ||||||||||||||||||||||||||||
Netting adjustments by counterparty | (1,939 | ) | (1,939 | ) | (2,647 | ) | (2,647 | ) | (1,806 | ) | (1,806 | ) | (2,647 | ) | (2,647 | ) | ||||||||||||||||||||||||||||
Cash collateral and related accrued interest | (1,530 | ) | 39 | (2,026 | ) | 25 | (1,597 | ) | — | (2,026 | ) | 25 | ||||||||||||||||||||||||||||||||
Total collateral and netting adjustments(1) | (3,469 | ) | (1,900 | ) | (4,673 | ) | (2,622 | ) | (3,403 | ) | (1,806 | ) | (4,673 | ) | (2,622 | ) | ||||||||||||||||||||||||||||
Derivative assets and derivative liabilities as reported on the Statements of Condition | $ | 452 | $ | 231 | $ | 467 | $ | 437 | $ | 458 | $ | 197 | $ | 467 | $ | 437 | ||||||||||||||||||||||||||||
(1) | Amounts represent the effect of legally enforceable master netting agreements that allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same counterparty. |
The following table presents the components of net gain/(loss) on derivatives and hedging activities as presented in the Statements of Income for the three and sixnine months ended JuneSeptember 30, 2009 and 2008.
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
June 30, 2009 | June 30, 2008 | June 30, 2009 | June 30, 2008 | September 30, 2009 | September 30, 2008 | September 30, 2009 | September 30, 2008 | |||||||||||||||||||||||||
Gain/(Loss) | Gain/(Loss) | Gain/(Loss) | Gain/(Loss) | Gain/(Loss) | Gain/(Loss) | Gain/(Loss) | Gain/(Loss) | |||||||||||||||||||||||||
Derivatives and hedged items in SFAS 133 fair value hedging relationships – hedge ineffectiveness by derivative type: | ||||||||||||||||||||||||||||||||
Derivatives and hedged items in fair value hedging relationships – hedge ineffectiveness by derivative type: | ||||||||||||||||||||||||||||||||
Interest rate swaps | $ | 8 | $ | 24 | $ | 24 | $ | 44 | $ | (10 | ) | $ | (1 | ) | $ | 14 | $ | 43 | ||||||||||||||
Total net gain/(loss) related to fair value hedge ineffectiveness | 8 | 24 | 24 | 44 | (10 | ) | (1 | ) | 14 | 43 | ||||||||||||||||||||||
Derivatives not designated as hedging instruments under SFAS 133: | ||||||||||||||||||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||||||||
Economic hedges: | ||||||||||||||||||||||||||||||||
Interest rate swaps | 348 | 189 | 449 | (22 | ) | (21 | ) | (276 | ) | 428 | (298 | ) | ||||||||||||||||||||
Interest rate swaptions | — | (2 | ) | — | (20 | ) | — | — | — | (20 | ) | |||||||||||||||||||||
Interest rate caps, floors, corridors, and/or collars | 8 | 10 | 10 | (3 | ) | (1 | ) | (1 | ) | 9 | (4 | ) | ||||||||||||||||||||
Net interest settlements | (140 | ) | (4 | ) | (225 | ) | 63 | (134 | ) | (48 | ) | (359 | ) | 15 | ||||||||||||||||||
Total net gain/(loss) related to derivatives not designated as hedging instruments under SFAS 133 | 216 | 193 | 234 | 18 | ||||||||||||||||||||||||||||
Total net gain/(loss) related to derivatives not designated as hedging instruments | (156 | ) | (325 | ) | 78 | (307 | ) | |||||||||||||||||||||||||
Net gain/(loss) on derivatives and hedging activities | $ | 224 | $ | 217 | $ | 258 | $ | 62 | $ | (166 | ) | $ | (326 | ) | $ | 92 | $ | (264 | ) | |||||||||||||
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The following tables present, by type of hedged item, the gains and losses on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income for the three and sixnine months ended JuneSeptember 30, 2009 and 2008.
Three Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
June 30, 2009 | June 30, 2008 | September 30, 2009 | September 30, 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hedged Item Type | Gain/ (Loss) on | Gain/ (Loss) on | Net Fair Value Hedge | Effect of Derivatives on Net Interest Income(1) | Gain/ (Loss) on Derivative | Gain/ (Loss) on | Net Fair Value Hedge | Effect of Derivatives on Net Interest Income(1) | Gain/ (Loss) on | Gain/ (Loss) on | Net Fair Value Hedge | Effect of Derivatives on Net Interest Income(1) | Gain/ (Loss) on | Gain/ (Loss) on | Net Fair Value Hedge | Effect of Derivatives on Net Interest Income(1) | |||||||||||||||||||||||||||||||||||||||||||||||
Advances | $ | 261 | $ | (253 | ) | $ | 8 | $ | (237 | ) | $ | 756 | $ | (754 | ) | $ | 2 | $ | (141 | ) | $ | 44 | $ | (56 | ) | $ | (12 | ) | $ | (281 | ) | $ | 2 | $ | (77 | ) | $ | (75 | ) | $ | (151 | ) | |||||||||||||||||||||
Consolidated obligation bonds | (772 | ) | 772 | — | 532 | (1,935 | ) | 1,957 | 22 | 565 | 2 | — | 2 | 556 | (48 | ) | 122 | 74 | 502 | ||||||||||||||||||||||||||||||||||||||||||||
Total | $ | (511 | ) | $ | 519 | $ | 8 | $ | 295 | $ | (1,179 | ) | $ | 1,203 | $ | 24 | $ | 424 | $ | 46 | $ | (56 | ) | $ | (10 | ) | $ | 275 | $ | (46 | ) | $ | 45 | $ | (1 | ) | $ | 351 | |||||||||||||||||||||||||
Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
June 30, 2009 | June 30, 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hedged Item Type | Gain/ (Loss) on | Gain/ (Loss) on | Net Fair Value Hedge | Effect of Derivatives on Net Interest Income(1) | Gain/ (Loss) on Derivative | Gain/ (Loss) on | Net Fair Value Hedge | Effect of Derivatives on Net Interest Income(1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Advances | $ | 393 | $ | (421 | ) | $ | (28 | ) | $ | (428 | ) | $ | (26 | ) | $ | 23 | $ | (3 | ) | $ | (154 | ) | |||||||||||||||||||||||||||||||||||||||||
Consolidated obligation bonds | (1,175 | ) | 1,227 | 52 | 1,022 | (52 | ) | 99 | 47 | 752 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | (782 | ) | $ | 806 | $ | 24 | $ | 594 | $ | (78 | ) | $ | 122 | $ | 44 | $ | 598 | |||||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended | ||||||||||||||||||||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||||||||||||||||||
Hedged Item Type | Gain/ (Loss) on | Gain/ (Loss) on | Net Fair Value Hedge | Effect of Derivatives on Net Interest Income(1) | Gain/ (Loss) on | Gain/ (Loss) on | Net Fair Value Hedge | Effect of Derivatives on Net Interest Income(1) | ||||||||||||||||||||||||
Advances | $ | 437 | $ | (477 | ) | $ | (40 | ) | $ | (709 | ) | $ | (24 | ) | $ | (54 | ) | $ | (78 | ) | $ | (305 | ) | |||||||||
Consolidated obligation bonds | (1,173 | ) | 1,227 | 54 | 1,578 | (100 | ) | 221 | 121 | 1,254 | ||||||||||||||||||||||
Total | $ | (736 | ) | $ | 750 | $ | 14 | $ | 869 | $ | (124 | ) | $ | 167 | $ | 43 | $ | 949 | ||||||||||||||
(1) | The net interest on derivatives in fair value hedge relationships is presented in the interest income/expense line item of the respective hedged item. |
For the three and sixnine months ended JuneSeptember 30, 2009 and 2008, there were no reclassifications from other comprehensive income/(loss) into earnings as a result of the discontinuance of cash flow hedges because the original forecasted transactions occurred by the end of the originally specified time period or within a two-month period thereafter.
As of JuneSeptember 30, 2009, the amount of unrecognized net losses on derivative instruments accumulated in other comprehensive income expected to be reclassified to earnings during the next 12 months was immaterial. The maximum length of time over which the Bank is hedging its exposure to the variability in future cash flows for forecasted transactions, excluding those forecasted transactions related to the payment of variable interest on existing financial instruments, is less than three months.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The following table presents outstanding notional balances and estimated fair values of the derivatives outstanding at JuneSeptember 30, 2009, and December 31, 2008.
June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | |||||||||||||||||||||||||
Type of Derivative and Hedge Classification | Notional | Estimated Fair Value | Notional | Estimated Fair Value | Notional Amount of Derivatives | Estimated Fair Value | Notional Amount of Derivatives | Estimated Fair Value | ||||||||||||||||||||
Interest rate swaps: | ||||||||||||||||||||||||||||
Fair value | $ | 107,890 | $ | 1,526 | $ | 114,374 | $ | 2,486 | $ | 112,677 | $ | 1,578 | $ | 114,374 | $ | 2,486 | ||||||||||||
Economic | 171,868 | (213 | ) | 215,374 | (907 | ) | 147,585 | (235 | ) | 215,374 | (907 | ) | ||||||||||||||||
Interest rate caps, floors, corridors, and/or collars: | ||||||||||||||||||||||||||||
Economic | 1,965 | (8 | ) | 1,895 | (18 | ) | 1,645 | (9 | ) | 1,895 | (18 | ) | ||||||||||||||||
Total | $ | 281,723 | $ | 1,305 | $ | 331,643 | $ | 1,561 | $ | 261,907 | $ | 1,334 | $ | 331,643 | $ | 1,561 | ||||||||||||
Total derivatives excluding accrued interest | $ | 1,305 | $ | 1,561 | $ | 1,334 | $ | 1,561 | ||||||||||||||||||||
Accrued interest, net | 485 | 520 | 524 | 520 | ||||||||||||||||||||||||
Cash collateral held from counterparties – liabilities(1) | (1,569 | ) | (2,051 | ) | (1,597 | ) | (2,051 | ) | ||||||||||||||||||||
Net derivative balances | $ | 221 | $ | 30 | $ | 261 | $ | 30 | ||||||||||||||||||||
Derivative assets | $ | 452 | $ | 467 | $ | 458 | $ | 467 | ||||||||||||||||||||
Derivative liabilities | (231 | ) | (437 | ) | (197 | ) | (437 | ) | ||||||||||||||||||||
Net derivative balances | $ | 221 | $ | 30 | $ | 261 | $ | 30 | ||||||||||||||||||||
(1) |
Embedded derivatives are bifurcated, and their estimated fair values are accounted for in accordance with SFAS 133.the accounting for derivative instruments and hedging activities. The estimated fair values of the embedded derivatives are included as valuation adjustments to the host contract and are not included in the table above. The estimated fair values of these embedded derivatives were immaterial as of JuneSeptember 30, 2009, and December 31, 2008.
Note 10 – Fair Values
Fair Value Measurement. The Bank adopted SFAS 157 on January 1, 2008. SFAS 157Fair value measurement guidance defines fair value, establishes a framework for measuring fair value under U.S. GAAP, and expands disclosures about fair value measurements. SFAS 157The Bank adopted the fair value measurement guidance on January 1, 2008. 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 financial 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.
SFAS 157This guidance establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation techniques 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 – Inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. 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 to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are supported by little or no market activity or by the Bank’s own assumptions.
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.
In general, fair values are based on quoted or market list prices in the principal market when they are available. If listed prices or quotes are not available, fair values are based on dealer prices and prices of similar instruments. If dealer prices and prices of similar instruments are not available, fair value is based on internally developed models that use primarily market-based or independently sourced inputs, including interest rate yield curves and option volatilities. Adjustments may be made to fair value measurements to ensure that financial instruments are recorded at fair value.
The following assets and liabilities, including those for which the Bank has elected the fair value option, in accordance with SFAS 159, are carried at fair value on the Statements of Condition as of JuneSeptember 30, 2009:
Trading securities
Certain advances
Derivative assets and liabilities
Certain consolidated obligation bonds
These assets and liabilities are measured at fair value on a recurring basis and are summarized in the following table by SFAS 157 valuationfair value hierarchy (as described above).
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
JuneSeptember 30, 2009
Fair Value Measurement Using: | Netting | Fair Value Measurement Using: | Netting | |||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Adjustments(1) | Total | Level 1 | Level 2 | Level 3 | Adjustments(1) | Total | |||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Trading securities | $ | — | $ | 34 | $ | — | $ | — | $ | 34 | $ | — | $ 32 | $ | — | $ | — | $ | 32 | |||||||||||||
Advances(2) | — | 37,063 | — | — | 37,063 | — | 29,415 | — | — | 29,415 | ||||||||||||||||||||||
Derivative assets | — | 3,921 | — | (3,469 | ) | 452 | — | 3,861 | — | (3,403 | ) | 458 | ||||||||||||||||||||
Total assets | $ | — | $ | 41,018 | $ | — | $ | (3,469 | ) | $ | 37,549 | $ | — | $33,308 | $ | — | $ | (3,403 | ) | $ | 29,905 | |||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Consolidated obligation bonds(3) | $ | — | $ | 36,664 | $ | — | $ | — | $ | 36,664 | ||||||||||||||||||||||
Consolidated obligation bonds(3) | $ | — | $28,231 | $ | — | $ | — | $ | 28,231 | |||||||||||||||||||||||
Derivative liabilities | — | 2,131 | — | (1,900 | ) | 231 | — | 2,003 | — | (1,806 | ) | 197 | ||||||||||||||||||||
Total liabilities | $ | — | $ | 38,795 | $ | — | $ | (1,900 | ) | $ | 36,895 | $ | — | $30,234 | $ | — | $ | (1,806 | ) | $ | 28,428 | |||||||||||
December 31, 2008
| ||||||||||||||||||||||||||||||||
Fair Value Measurement Using: | Netting | |||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Adjustments(1) | Total | ||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Trading securities | $ | — | $ | 35 | $ | — | $ | — | $ | 35 | ||||||||||||||||||||||
Advances(2) | — | 41,599 | — | — | 41,599 | |||||||||||||||||||||||||||
Derivative assets | — | 5,140 | — | (4,673 | ) | 467 | ||||||||||||||||||||||||||
Total assets | $ | — | $ | 46,774 | $ | — | $ | (4,673 | ) | $ | 42,101 | |||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Consolidated obligation bonds(3) | $ | — | $ | 32,243 | $ | — | $ | — | $ | 32,243 | ||||||||||||||||||||||
Derivative liabilities | — | 3,059 | — | (2,622 | ) | 437 | ||||||||||||||||||||||||||
Total liabilities | $ | — | $ | 35,302 | $ | — | $ | (2,622 | ) | $ | 32,680 | |||||||||||||||||||||
December 31, 2008
Fair Value Measurement Using: | Netting | |||||||||||||||
Level 1 | Level 2 | Level 3 | Adjustments(1) | Total | ||||||||||||
Assets: | ||||||||||||||||
Trading securities | $ | — | $ 35 | $ | — | $ | — | $ | 35 | |||||||
Advances(2) | — | 41,599 | — | — | 41,599 | |||||||||||
Derivative assets | — | 5,140 | — | (4,673 | ) | 467 | ||||||||||
Total assets | $ | — | $46,774 | $ | — | $ | (4,673 | ) | $ | 42,101 | ||||||
Liabilities: | ||||||||||||||||
Consolidated obligation bonds(3) | $ | — | $32,243 | $ | — | $ | — | $ | 32,243 | |||||||
Derivative liabilities | — | 3,059 | — | (2,622 | ) | 437 | ||||||||||
Total liabilities | $ | — | $35,302 | $ | — | $ | (2,622 | ) | $ | 32,680 |
(1) | Amounts represent the netting of derivative assets and liabilities by counterparty, including cash collateral, where the Bank has the legal right to do so under its master netting agreement with each |
(2) | Includes |
(3) | Includes |
The following is a description of the Bank’s valuation methodologies for assets and liabilities measured at fair value. These valuation methodologies were applied to all of the assets and liabilities carried at fair value, whether as a result of electing the fair value option in accordance with SFAS 159 or because they were previously carried at fair value.
Trading Securities – The Bank’s trading securities portfolio currently consists of agency MBS investments collateralized by residential mortgages. These securities are recorded at fair value on a recurring basis. Fair value measurement is based on pricing modelsprices from four specific third-party vendors. Depending on the number of prices received for each security, the Bank selects a median or other model-based valuation techniques, such as the present value of future cash flows adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions.average price. Because quoted prices are not available for these securities, the Bank has primarily relied on market observablethe pricing vendors’ use of market-observable inputs and model-based valuation techniques for the fair value measurements, and the Bank classifies these investments as Level 2 within the valuation hierarchy.
The contractual interest income on the trading securities is recorded as part of net interest income on the Statements of Income. The remaining changes in the fair values of the trading securities are included in the other income section on the Statements of Income.
Advances –Certain advances either elected for the fair value option or accounted for in a qualifying full fair value hedging relationship are recorded at fair value on a recurring basis. Because quoted prices are not
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Advances –Certain advances either elected for the fair value option in accordance with SFAS 159 or accounted for in an SFAS 133-qualifying full fair value hedging relationship are recorded at fair value on a recurring basis. Because quoted prices are not available for advances, the fair values are measured using model-based valuation techniques (such as the present value of future cash flows), creditworthiness of members, advance collateral type,types, prepayment assumptions, and other factors, such as credit loss assumptions, as necessary.
Because no principal market exists for the sale of advances, the Bank has defined the most advantageous market as a hypothetical market in which an advance sale could occur with a hypothetical financial institution. The Bank’s primary inputs for measuring the fair value of advances are market-based consolidated obligation yield curve (CO Curve) inputs obtained from the Office of Finance and provided to the Bank. The CO Curve is then adjusted to reflect the rates on replacement advances with similar terms and collateral. These adjustments are not market observable and are evaluated for significance in the overall fair value measurement and fair value hierarchy level of the advance. In addition, the Bank obtains market observablemarket-observable inputs from derivatives dealers for complex advances. 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, and the Bank has determined that no adjustment is required to the fair value measurement of advances for prepayment fees. The inputs used in the Bank’s fair value measurement of these advances are primarily market observable, and the Bank classifies these advances as Level 2 within the valuation hierarchy.
The contractual interest income on advances is recorded as part of net interest income on the Statements of Income. The remaining changes in fair values of the advances are included in the other income section on the Statements of Income.
Derivative Assets and Derivative Liabilities –In general, derivative instruments held by the Bank for risk management activities are traded in over-the-counter markets where quoted market prices are not readily available. For these derivatives, the Bank measures fair value using internally developed models that use primarily market observablemarket-observable inputs, such as yield curves and option volatilities adjusted for counterparty credit risk, as necessary.
The Bank is subject to credit risk in derivatives transactions because of potential nonperformance by the derivatives counterparties. To mitigate this risk, the Bank only executes transactions with highly rated derivatives dealers and major banks (derivatives dealer counterparties) that meet the Bank’s eligibility criteria. In addition, the Bank has entered into master netting agreements and bilateral security agreements with all active derivatives dealer counterparties that provide for delivery of collateral at specified levels tied to counterparty credit ratings 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 derivatives dealer counterparty is limited to the lesser of (i) a percentage of the counterparty’s capital, or (ii) an absolute credit exposure limit, both according to the counterparty’s credit rating, as determined by rating agency long-term credit ratings of the counterparty’s debt securities or deposits. All credit exposure from derivatives transactions entered into by the Bank with member counterparties that are not derivatives dealers must be fully secured by eligible collateral. The Bank has evaluated the potential for the fair value of the instruments to be affected by counterparty credit risk and has determined that no adjustments were significant to the overall fair value measurements.
The inputs used in the Bank’s fair value measurement of these derivative instruments are primarily market observable, and the Bank classifies these derivatives as Level 2 within the valuation hierarchy. The fair values are netted by counterparty where such legal right of offset exists. If these netted amounts are positive, they are classified as an asset and, if negative, as a liability.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Bank accounts for derivatives in accordance with SFAS 133, which requires thatrecords all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in net gain/(loss) on derivatives and hedging activities or other comprehensive income, depending on whether or not a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The gains and losses on derivative instruments that are reported in
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
other comprehensive income are recognized as earnings in the periods in which earnings are affected by the variability of the cash flows of the hedged item. The difference between the gains or losses on derivatives and on the related hedged items that qualify asfor fair value hedges under SFAS 133hedge accounting represents hedge ineffectiveness and is recognized in net gain/(loss) on derivatives and hedging activities. Changes in the fair value of a derivative instrument that does not qualify as a hedge of an asset or liability under SFAS 133 for asset/liability management (economic hedge) are also recorded each period in net gain/(loss) on derivatives and hedging activities. For additional information, see Note 9.
Consolidated Obligation Bonds –Certain consolidated obligation bonds either elected for the fair value option in accordance with SFAS 159 or accounted for in an SFAS 133-qualifyinga qualifying full fair value hedging relationship are recorded at fair value on a recurring basis. 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 observablemarket-observable inputs. The Bank’s primary inputs for measuring the fair value of consolidated obligation bonds are market-based inputs obtained from the Office of Finance and provided to the Bank. For consolidated obligation bonds with embedded options, the Bank also obtains market observablemarket-observable quotes and inputs from derivativederivatives dealers. For example, the Bank uses swaption volatilities as an input.
Adjustments may be necessary to reflect the Bank’s credit quality or the credit quality of the FHLBank System when valuing consolidated obligation bonds measured at fair value. The Bank monitors its own creditworthiness and the creditworthiness of the other 11 FHLBanks and the FHLBank System to determine whether any adjustments are necessary for creditworthiness in its fair value measurement of consolidated obligation bonds. The credit ratings of the FHLBank System and any changes to thethose credit ratings are the basis for the Bank to determine whether the fair values of consolidated obligations have been significantly affected during the reporting period by changes in the instrument-specific credit risk.
The inputs used in the Bank’s fair value measurement of these consolidated obligation bonds are primarily market observable, and the Bank classifies these consolidated obligation bonds as Level 2 within the valuation hierarchy. For complex transactions, market observablemarket-observable inputs may not be available and the inputs are evaluated to determine whether they may result in a Level 3 classification in the fair value hierarchy.
The contractual interest expense on the consolidated obligation bonds is recorded as net interest income on the Statements of Income. The remaining changes in fair values of the consolidated obligation bonds are included in the other income section on the Statements of Income.
Nonrecurring Fair Value Measurements –Certain assets and liabilities are measured at fair value on a nonrecurring basis – 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 (for example, when there is evidence of impairment). At JuneSeptember 30, 2009, and December 31, 2008, the Bank measured certain of its held-to-maturity investment securities (non-agency MBS) at fair value on a nonrecurring basis. The following tables present the investment securities as of JuneSeptember 30, 2009, and December 31, 2008, for which a nonrecurring change in fair value was recorded during the secondthird quarter of 2009 and during the fourth quarter of 2008, by level within the SFAS 157 valuationfair value hierarchy.
September 30, 2009
Three Months Ended September 30, 2009 | ||||||||||||||||||
Fair Value Measurement Using: | OTTI Related to Credit Loss | OTTI Related to All Other Factors | Total OTTI | |||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||
Assets: | ||||||||||||||||||
Held-to-maturity securities – PLRMBS | $ | — | $ | — | $3,575 | $ | 141 | $ | 1,244 | $ | 1,385 |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
June 30, 2009
Three Months Ended June 30, 2009 | ||||||||||||||||||
Fair Value Measurement Using: | OTTI Related to Credit Loss | OTTI Related to All Other Factors | Total OTTI | |||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||
Assets: | ||||||||||||||||||
Held-to-maturity securities | $ | — | $ | — | $ | 4,049 | $ | 88 | $ | 1,195 | $ | 1,283 |
Held-to-maturity investment securities (non-agency MBS collateralized by residential mortgages)PLRMBS with a carrying value of $5,332$4,960 were written down to their fair value of $4,049,$3,575, resulting in an OTTI charge taken in the secondthird quarter of 2009 of $88$141 for the OTTI related to the credit losses, which was recordedrecognized in “Other (loss)/income,” and $1,195$1,244 for the OTTI related to all other factors, which was recordedrecognized in “Other comprehensive income/(loss).”
December 31, 2008
Three Months Ended December 31, 2008 | Three Months Ended December 31, 2008 | |||||||||||||||||||||||||||||||||||
Fair Value Measurement Using: | OTTI Related to Credit Loss | OTTI Related to All Other Factors | Total OTTI | Fair Value Measurement Using: | OTTI Related to Credit Loss | OTTI Related to All Other Factors | Total OTTI | |||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Held-to-maturity securities | $ | — | $ | — | $ | 924 | $ | 20 | $ | 570 | $ | 590 | ||||||||||||||||||||||||
Held-to-maturity securities – PLRMBS | $ | — | $ | — | $ | 924 | $ | 20 | $ | 570 | $ | 590 |
Held-to-maturity investment securities (non-agency MBS collateralized by residential mortgages)PLRMBS with a carrying amountvalue of $1,514 were written down to their fair value of $924, resulting in an OTTI charge taken in the fourth quarter of 2008 of $590, which was recorded in “Other (loss)/income.Loss.” The Bank adopted FSP FAS 115-2 and FAS 124-2OTTI guidance as of January 1, 2009, and recognized the cumulative effect of initially applying FSP FAS 115-2 and FAS 124-2,this OTTI guidance, totaling $570, as an increase in the retained earnings balance at January 1, 2009, with a corresponding change in accumulated other comprehensive income/(loss).loss.
In determiningTo determine the estimated fair value of non-agency MBSPLRMBS at December 31, 2008, March 31, 2009, and June 30, 2009, the Bank used a weighting of its internal price (based on valuation models using market-based inputs obtained from broker-dealer data and price indications) and the price from an external pricing service to determine the estimated fair value that the Bank believesbelieved market participants would use to purchase the non-agency MBS.PLRMBS. The divergence among prices obtained from third-party broker/dealers and pricing services, which were derived from third parties’ proprietary models, led the Bank to conclude that the prices received were reflective of significant unobservable inputs. Because of the significant unobservable inputs used by the pricing services, the Bank considered these to be Level 3 inputs.
Beginning with the quarter ended September 30, 2009, the Bank changed the methodology used to estimate the fair value of PLRMBS. In an effort to achieve consistency among all the FHLBanks in applying a fair value methodology, the FHLBanks formed the MBS Pricing Governance Committee with the responsibility for developing a fair value methodology that all FHLBanks could adopt. Under the methodology approved by the MBS Pricing Governance Committee and adopted by the Bank, the Bank requests prices for all mortgage-backed securities from four specific third-party vendors. Depending on the number of prices received for each security, the Bank selects a median or average price as determined by the methodology. The methodology also incorporates variance thresholds to assist in identifying median or average prices that may require further review. In certain limited instances (for example, when prices are outside of variance thresholds or the third-party services do not provide a price), the Bank will obtain a price from securities dealers or internally model a price that is deemed appropriate after consideration of the relevant facts and circumstances that a market participant would consider. Prices for PLRMBS held in common with other FHLBanks are reviewed with those FHLBanks for consistency. In adopting this common methodology, the Bank remains responsible for the selection and application of its fair value methodology and the reasonableness of assumptions and inputs used.
This change in fair value methodology did not have a significant impact on the Bank’s estimated fair values of its PLRMBS at September 30, 2009.
Fair Value Option.The Bank adopted SFAS 159 on January 1, 2008. SFAS 159 providesfair value option permits an optionentity 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. The Bank elected the fair value option in accordance with SFAS 159 for certain financial instruments on the adoption date.January 1, 2008.
Federal Home Loan Bank of San Francisco
SFAS 159Notes to Financial Statements (continued)
The fair value option requires entities to display the fair value of those assets and liabilities for which the companyentity has chosen to use fair value on the face of the balance sheet. Under SFAS 159,the fair value option, 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 other income and presented as “Net (loss)/gain on advances and consolidated obligation bonds held at fair value.”
For more information, see Note 2 and Note 17 to the Financial Statements in the Bank’s 2008 Form 10-K.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The following tables summarize the activity related to financial assets and liabilities for which the Bank elected the fair value option in accordance with SFAS 159 during the three and sixnine months ended JuneSeptember 30, 2009 and 2008:
Three Months Ended | ||||||||||||||||||||||||||||||||
Three Months Ended | September 30, 2009 | September 30, 2008 | ||||||||||||||||||||||||||||||
June 30, 2009 | June 30, 2008 | Advances | Consolidated Obligation Bonds | Advances | Consolidated Obligation Bonds | |||||||||||||||||||||||||||
Advances | Consolidated Obligation Bonds | Advances | Consolidated Obligation Bonds | |||||||||||||||||||||||||||||
Balance, beginning of the period | $ | 35,676 | $ | 36,262 | $ | 19,990 | $ | 20,141 | $ | 34,869 | $ | 35,157 | $ | 22,497 | $ | 26,406 | ||||||||||||||||
New transactions elected for fair value option | 150 | 4,925 | 3,722 | 6,728 | 50 | 2,737 | 18,463 | 3,854 | ||||||||||||||||||||||||
Maturities and terminations | (828 | ) | (6,075 | ) | (956 | ) | (439 | ) | (7,426 | ) | (11,675 | ) | (2,223 | ) | (370 | ) | ||||||||||||||||
Net (loss)/gain on advances and net loss/(gain) on consolidated obligation bonds held at fair value | (130 | ) | 48 | (256 | ) | (28 | ) | (72 | ) | (10 | ) | (143 | ) | (242 | ) | |||||||||||||||||
Change in accrued interest | 1 | (3 | ) | (3 | ) | 4 | (40 | ) | (4 | ) | 72 | 10 | ||||||||||||||||||||
Balance, end of the period | $ | 34,869 | $ | 35,157 | $ | 22,497 | $ | 26,406 | $ | 27,381 | $ | 26,205 | $ | 38,666 | $ | 29,658 | ||||||||||||||||
Nine Months Ended | ||||||||||||||||||||||||||||||||
Six Months Ended | September 30, 2009 | September 30, 2008 | ||||||||||||||||||||||||||||||
June 30, 2009 | June 30, 2008 | Advances | Consolidated Obligation Bonds | Advances | Consolidated Obligation Bonds | |||||||||||||||||||||||||||
Advances | Consolidated Obligation Bonds | Advances | Consolidated Obligation Bonds | |||||||||||||||||||||||||||||
Balance, beginning of the period | $ | 38,573 | $ | 30,286 | $ | 15,985 | $ | 1,247 | $ | 38,573 | $ | 30,286 | $ | 15,985 | $ | 1,247 | ||||||||||||||||
New transactions elected for fair value option | 193 | 18,585 | 8,961 | 26,625 | 243 | 21,322 | 27,424 | 30,479 | ||||||||||||||||||||||||
Maturities and terminations | (3,563 | ) | (13,746 | ) | (2,432 | ) | (1,453 | ) | (10,989 | ) | (25,421 | ) | (4,655 | ) | (1,823 | ) | ||||||||||||||||
Net (loss)/gain on advances and net loss/(gain) on consolidated obligation bonds held at fair value | (321 | ) | 40 | (17 | ) | (63 | ) | (393 | ) | 30 | (160 | ) | (305 | ) | ||||||||||||||||||
Change in accrued interest | (13 | ) | (8 | ) | — | 50 | (53 | ) | (12 | ) | 72 | 60 | ||||||||||||||||||||
Balance, end of the period | $ | 34,869 | $ | 35,157 | $ | 22,497 | $ | 26,406 | $ | 27,381 | $ | 26,205 | $ | 38,666 | $ | 29,658 | ||||||||||||||||
For advances and consolidated obligations recorded under the fair value option, in accordance with SFAS 159, the estimated impact of changes in credit risk for the three and sixnine months ended JuneSeptember 30, 2009 and 2008, was not material.
The following tables present the changes in fair value included in the Statements of Income for each item for which the fair value option has been elected in accordance with SFAS 159:elected:
Three Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
June 30, 2009 | June 30, 2008 | September 30, 2009 | September 30, 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest Income on Advances | Interest Expense on Consolidated Obligation Bonds | Net (Loss)/ Gain on Advances and Consolidated Obligation Bonds Held at Fair Value | Total Changes in Fair Value Included in Current Period Earnings | Interest Income on Advances | Interest Expense on Consolidated Obligation Bonds | Net (Loss)/ Gain on Advances and Consolidated Obligation Bonds Held at Fair Value | Total Changes in Fair Value Included in Current Period Earnings | Interest Income on Advances | Interest Expense on Consolidated Obligation Bonds | Net (Loss)/ Gain on Advances and Consolidated Obligation Bonds Held at Fair Value | Total Changes in Fair Value Included in Current Period Earnings | Interest Income on Advances | Interest Expense on Consolidated Obligation Bonds | Net (Loss)/ Gain on Advances and Consolidated Obligation Bonds Held at Fair Value | Total Changes in Fair Value Included in Current Period Earnings | ||||||||||||||||||||||||||||||||||||||||||||
Advances | $ | 302 | $ | — | $ | (130 | ) | $ | 172 | $ | 191 | $ | — | $ | (256 | ) | $ | (65 | ) | $ | 257 | $ | — | $ | (72 | ) | $ | 185 | $ | 286 | $ | — | $ | (143 | ) | $ | 143 | ||||||||||||||||||||||
Consolidated obligation bonds | — | (49 | ) | (48 | ) | (97 | ) | — | (142 | ) | 28 | (114 | ) | — | (45 | ) | 10 | (35 | ) | — | (168 | ) | 242 | 74 | |||||||||||||||||||||||||||||||||||
Total | $ | 302 | $ | (49 | ) | $ | (178 | ) | $ | 75 | $ | 191 | $ | (142 | ) | $ | (228 | ) | $ | (179 | ) | $ | 257 | $ | (45 | ) | $ | (62 | ) | $ | 150 | $ | 286 | $ | (168 | ) | $ | 99 | $ | 217 | |||||||||||||||||||
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Six Months Ended | September 30, 2009 | September 30, 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
June 30, 2009 | June 30, 2008 | Interest Income on Advances | Interest Expense on Consolidated Obligation Bonds | Net (Loss)/ Gain on Advances and Consolidated Obligation Bonds Held at Fair Value | Total Changes in Fair Value Included in Current Period Earnings | Interest Income on Advances | Interest Expense on Consolidated Obligation Bonds | Net (Loss)/ Gain on Advances and Consolidated Obligation Bonds Held at Fair Value | Total Changes in Fair Value Included in Current Period Earnings | |||||||||||||||||||||||||||||||||||||||||||||||||||
Interest Income on Advances | Interest Expense on Consolidated Obligation Bonds | Net (Loss)/ Gain on Advances and Consolidated Obligation Bonds Held at Fair Value | Total Changes in Fair Value Included in Current Period Earnings | Interest Income on Advances | Interest Expense on Consolidated Obligation Bonds | Net (Loss)/ Gain on Advances and Consolidated Obligation Bonds Held at Fair Value | Total Changes in Fair Value Included in Current Period Earnings | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Advances | $ | 621 | $ | — | $ | (321 | ) | $ | 300 | $ | 381 | $ | — | $ | (17 | ) | $ | 364 | $ | 878 | $ | — | $ | (393 | ) | $ | 485 | $ | 667 | $ | — | $ | (160 | ) | $ | 507 | ||||||||||||||||||||||||
Consolidated obligation bonds | — | (95 | ) | (40 | ) | (135 | ) | — | (210 | ) | 63 | (147 | ) | — | (140 | ) | (30 | ) | (170 | ) | — | (378 | ) | 305 | (73 | ) | ||||||||||||||||||||||||||||||||||
Total | $ | 621 | $ | (95 | ) | $ | (361 | ) | $ | 165 | $ | 381 | $ | (210 | ) | $ | 46 | $ | 217 | $ | 878 | $ | (140 | ) | $ | (423 | ) | $ | 315 | $ | 667 | $ | (378 | ) | $ | 145 | $ | 434 | ||||||||||||||||||||||
The following table presents the difference between the aggregate fair value and aggregate remaining contractual principal balance outstanding of advances and consolidated obligation bonds for which the fair value option has been elected in accordance with SFAS 159:elected:
At June 30, 2009 | At December 31, 2008 | At September 30, 2009 | At December 31, 2008 | |||||||||||||||||||||||||||||||||
Principal Balance | Fair Value | Fair Value Over/(Under) Principal Balance | Principal Balance | Fair Value | Fair Value Over/(Under) Principal Balance | Principal Balance | Fair Value | Fair Value Over/(Under) Principal Balance | Principal Balance | Fair Value | Fair Value Over/(Under) Principal Balance | |||||||||||||||||||||||||
Advances(1) | $ | 33,916 | $ | 34,869 | $ | 953 | $ | 37,274 | $ | 38,573 | $ | 1,299 | $ | 26,541 | $ | 27,381 | $ | 840 | $ | 37,274 | $ | 38,573 | $ | 1,299 | ||||||||||||
Consolidated obligation bonds | 35,075 | 35,157 | 82 | 30,236 | 30,286 | 50 | 26,137 | 26,205 | 68 | 30,236 | 30,286 | 50 | ||||||||||||||||||||||||
(1) At June 30, 2009, and December 31, 2008, none of these advances were 90 days or more past due or had been placed on nonaccrual status. |
(1) | At September 30, 2009, and December 31, 2008, none of these advances were 90 days or more past due or had been placed on nonaccrual status. |
Estimated Fair Values of Financial Instruments.The tables below show the estimated fair values of the Bank’s financial instruments at JuneSeptember 30, 2009, and December 31, 2008. These estimates are based on pertinent information available to the Bank as of JuneSeptember 30, 2009, and December 31, 2008. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases fair values are not subject to precise quantification or verification and may change as economic and market factors, and evaluation of those factors, change. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect the Bank’s judgment of how market participants would estimate fair values. The fair value summary tables do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Subjectivity of Estimates Related to Fair Values of Financial Instruments. Estimates of the fair value of advances with options, mortgage instruments, derivatives with embedded options, and consolidated obligation bonds with options using the methods described below and other methods are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest rate volatility, methods to determine possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair value estimates. Since these estimates are made as of a specific date, they are susceptible to material near term changes.
The assumptions used in estimating the fair values of the Bank’s financial instruments at JuneSeptember 30, 2009, and at December 31, 2008, are discussed below.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Cash and Due from Banks– The estimated fair value approximates the recorded carrying value.
Federal Funds Sold– The estimated fair value of these instruments has been determined based on quoted prices or by calculating the present value of expected cash flows for the instruments excluding accrued interest. The discount rates used in these calculations are the replacement rates for comparable instruments with similar terms.
Trading and Held-to-Maturity Securities– The estimated fair value of interest-bearing deposits in banks has been determined based on quoted prices or by calculating the present value of expected cash flows for the instruments excluding accrued interest. The discount rates used in these calculations are the replacement rates for comparable instruments with similar terms. The estimated fair value of all other instruments has been determined by calculating the present value of expected cash flows using market observablemarket-observable inputs as of the last business day of the quarter excluding accrued interest, or by using industry standard analytical models and certain actual and estimated market information. The discount rates used in these calculations are the replacement rates for securities with similar terms. The estimated fair value of trading securities is measured as described in “Fair Value Measurement – Trading Securities” above and the estimated fair value of held-to-maturity MBS is measured as described in Note 3.
Advances– The estimated fair value of these instruments is measured as described in “Fair Value Measurement – Advances” above.
Mortgage Loans Held for Portfolio– The estimated fair value for mortgage loans represents modeled prices based on observable market spreads for agency passthrough MBS adjusted for differences in credit, coupon, average loan rate, and seasoning. Market prices are highly dependent on the underlying prepayment assumptions. Changes in the prepayment ratesspeeds often have a material effect on the fair value estimates.
Accrued Interest Receivable and Payable– The estimated fair value approximates the recorded carrying value of accrued interest receivable and accrued interest payable.
Derivative Assets and Liabilities– The estimated fair value of these instruments is measured as described in “Fair Value Measurement – Derivative Assets and Derivative Liabilities” above.
Deposits and Other Borrowings– For deposits and other borrowings, the estimated fair value has been determined by calculating the present value of expected future cash flows from the deposits and other borrowings excluding accrued interest. The discount rates used in these calculations are the cost of deposits and borrowings with similar terms.
Consolidated Obligations– The estimated fair value of these instruments is measured as described in “Fair Value Measurement – Consolidated Obligation Bonds” above.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Mandatorily Redeemable Capital Stock– The fair value of capital stock subject to mandatory redemption is generally at par value. Fair value includes estimated dividends earned at the time of reclassification from capital to liabilities, until such amount is paid, and any subsequently declared stock dividend. The Bank’s stock can only be acquired by members at par value and redeemed at par value, subject to statutory and regulatory requirements. The Bank’s stock is not traded, and no market mechanism exists for the exchange of Bank stock outside the cooperative ownership structure.
Commitments– The estimated fair value of the Bank’s commitments to extend credit, including letters of credit, was immaterial at JuneSeptember 30, 2009, and December 31, 2008.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Fair Value of Financial Instruments
June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | |||||||||||||||||||||
Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | |||||||||||||||||
Assets | ||||||||||||||||||||||||
Cash and due from banks | $ | 811 | $ | 811 | $ | 19,632 | $ | 19,632 | $ | 6,115 | $ | 6,115 | $ | 19,632 | $ | 19,632 | ||||||||
Federal funds sold | 16,658 | 16,658 | 9,431 | 9,431 | 7,086 | 7,086 | 9,431 | 9,431 | ||||||||||||||||
Trading securities | 34 | 34 | 35 | 35 | 32 | 32 | 35 | 35 | ||||||||||||||||
Held-to-maturity securities | 42,241 | 38,150 | 51,205 | 44,270 | 38,825 | 37,137 | 51,205 | 44,270 | ||||||||||||||||
Advances (includes $34,869 and $38,573 at fair value under the fair value option, respectively) | 174,732 | 174,823 | 235,664 | 235,626 | ||||||||||||||||||||
Advances (includes $27,381 and $38,573 at fair value under the fair value option, respectively) | 154,962 | 155,190 | 235,664 | 235,626 | ||||||||||||||||||||
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans | 3,357 | 3,360 | 3,712 | 3,755 | 3,172 | 3,258 | 3,712 | 3,755 | ||||||||||||||||
Accrued interest receivable | 462 | 462 | 865 | 865 | 371 | 371 | 865 | 865 | ||||||||||||||||
Derivative assets(1) | 452 | 452 | 467 | 467 | 458 | 458 | 467 | 467 | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Deposits | $ | 257 | $ | 257 | $ | 604 | $ | 604 | $ | 225 | $ | 225 | $ | 604 | $ | 604 | ||||||||
Consolidated obligations: | ||||||||||||||||||||||||
Bonds (includes $35,157 and $30,286 at fair value under the fair value option, respectively) | 176,200 | 176,313 | 213,114 | 213,047 | ||||||||||||||||||||
Bonds (includes $26,205 and $30,286 at fair value under the fair value option, respectively) | 154,869 | 155,226 | 213,114 | 213,047 | ||||||||||||||||||||
Discount notes | 49,009 | 49,064 | 91,819 | 92,096 | 43,901 | 43,934 | 91,819 | 92,096 | ||||||||||||||||
Mandatorily redeemable capital stock | 3,165 | 3,165 | 3,747 | 3,747 | 3,159 | 3,159 | 3,747 | 3,747 | ||||||||||||||||
Accrued interest payable | 1,002 | 1,002 | 1,451 | 1,451 | 878 | 878 | 1,451 | 1,451 | ||||||||||||||||
Derivative liabilities(1) | 231 | 231 | 437 | 437 | 197 | 197 | 437 | 437 |
(1) | Amounts include the netting of derivative assets and liabilities by counterparty, including cash collateral, where the Bank has the legal right to do so under its master netting agreement with each |
As of JuneSeptember 30, 2009, the Bank’s investment in held-to-maturity securities had net unrecognized holding losses totaling $4,091.$1,688. These net unrecognized holding losses were primarily in MBS and were mainly due to extraordinarily high investor yield requirements resulting from an extremely illiquid market, significant uncertainty about the future condition of the mortgage market and the economy, and continued deterioration in the credit performance of loan collateral underlying these securities, causing these assets to be valued at significant discounts to their acquisition cost. For more information, see Note 3.
As of December 31, 2008, the Bank’s investment in held-to-maturity securities had net unrealized losses totaling $6,935. These net unrealized losses were primarily in MBS and were mainly due to extraordinarily high investor yield requirements resulting from an extremely illiquid market and significant uncertainty about the future condition of the mortgage market and the economy, causing these assets to be valued at significant discounts to their acquisition cost. For more information, see Note 5 to the Financial Statements in the Bank’s 2008 Form 10-K.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 11 – Commitments and Contingencies
As provided by the FHLBank Act or regulations governing the operations of the FHLBanks, all FHLBanks have joint and several liability for all FHLBank consolidated obligations, which are backed only by the financial resources of the FHLBanks. The joint and several liability regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The 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 JuneSeptember 30, 2009, and through the filing date of this report, does not believe that is probable that it will be asked to do so. The par amount of the outstanding consolidated obligations of all 12 FHLBanks was $1,055,863$973,579 at JuneSeptember 30, 2009, and $1,251,542 at December 31, 2008. The par value of the Bank’s participation in consolidated obligations
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
was $222,502$196,056 at JuneSeptember 30, 2009, and $301,202 at December 31, 2008. For more information on the joint and several liability regulation, see Note 18 to the Financial Statements in the Bank’s 2008 Form 10-K.
In 2008, the Bank entered into a Lending Agreement with the U.S. Treasury in connection with the U.S. Treasury’s Government-Sponsored Enterprise Credit Facility (GSE Credit Facility), as authorized by the Housing Act. The GSE Credit Facility is designed to serve as a contingent source of liquidity for the housing government-sponsored enterprises, including the FHLBanks. Any borrowings by one or more of the FHLBanks under the GSE Credit Facility are considered consolidated obligations with the same joint and several liability as all other consolidated obligations. The terms of any borrowings are to be agreed to at the time of the borrowing. Loans under the Lending Agreement are to be secured by collateral acceptable to the U.S. Treasury, which may consist of FHLBank member advances that have been collateralized in accordance with regulatory standards or MBS issued by Fannie Mae or Freddie Mac. Each FHLBank is required to submit to the Federal Reserve Bank of New York, acting as fiscal agent of the U.S. Treasury, a listing of eligible collateral, updated on a weekly basis, that could be used as security in the event of a borrowing. As of JuneSeptember 30, 2009, the Bank gave the U.S. Treasury a collateral listing of advances collateral totaling $35,890, which would provide for a maximum possible borrowing of $31,224, if needed. The amount of collateral can be increased or decreased (subject to approval of the U.S. Treasury) at any time through theby delivery of an updated listing of collateral. As of JuneSeptember 30, 2009, and through August 7,October 30, 2009, none of the FHLBanks had drawn on the GSE Credit Facility. The Lending Agreement will terminate on December 31, 2009, but will remain in effect as to any loan outstanding on that date.
Commitments that legally obligate the Bank for additional advances totaled $600$1,250 at JuneSeptember 30, 2009, and $470 at December 31, 2008. Advance commitments are generally for periods up to 12 months. Standby letters of credit are generally issued for a fee on behalf of members to support their obligations to third parties. A standby letter of credit is a financing agreement between the Bank and its member. If the Bank is required to make payment for a beneficiary’s drawing under a letter of credit, the amount is charged to the member’s demand deposit account with the Bank. The Bank’s outstanding standby letters of credit were as follows:
June 30, 2009 | December 31, 2008 | |||||||
September 30, 2009 | December 31, 2008 | |||||||
Outstanding notional | $5,751 | $5,723 | $5,170 | $5,723 | ||||
Original terms | 23 days to 10 years | 23 days to 10 years | 23 days to 10 years | 23 days to 10 years | ||||
Final expiration year | 2019 | 2018 | 2019 | 2018 |
The value of the guarantees related to standby letters of credit is recorded in other liabilities and amounted to $33$28 at JuneSeptember 30, 2009, and $39 at December 31, 2008. Based on management’s credit analyses of members’ financial condition and collateral requirements, no allowance for losses is deemed necessary by management on these advance commitments and letters of credit. Advances funded under these advance commitments and letters of credit are fully collateralized at the time of funding or issuance (see Note 4). The estimated fair value of advance commitments and letters of credit was immaterial to the balance sheet as of JuneSeptember 30, 2009, and December 31, 2008.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Bank executes interest rate exchange agreements with major banks and derivatives entities affiliated with broker-dealers that have, or are supported by, guarantees from related entities that have long-term credit ratings equivalent to single-A or better from both Standard & Poor’s and Moody’s. The Bank also executes interest rate exchange agreements with its members. The Bank enters into master agreements with netting provisions with all counterparties and into bilateral security agreements with all active derivatives dealer counterparties. All member counterparty master agreements, excluding those with derivatives dealers, are subject to the terms of the Bank’s Advances and Security Agreement with members, and all member counterparties (except for those that are derivatives dealers) must fully collateralize the Bank’s net credit exposure. As of JuneSeptember 30, 2009, the Bank had pledged as collateral securities with a carrying value of $139,$118, all of which $24 may not be sold or repledged and $115 may be sold or repledged, to counterparties that had market risk exposure from the Bank related to derivatives. As of December 31, 2008, the Bank had pledged as collateral securities with a carrying value of $307, all of which may be sold or repledged, to counterparties that had market risk exposure from the Bank related to derivatives.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Bank may be subject to various pending legal proceedings that may arise in the normal course of business. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the Bank’s financial condition or results of operations.
At JuneSeptember 30, 2009, the Bank had committed to the issuance of $1,085$2,540 in consolidated obligation bonds, all of which $1,000 were hedged with associated interest rate swaps. At December 31, 2008, the Bank had committed to the issuance of $960 in consolidated obligation bonds, of which $500 were hedged with associated interest rate swaps.
The Bank entered into interest rate exchange agreements that had traded but not yet settled with notional amounts totaling $1,000$2,540 at JuneSeptember 30, 2009, and $1,230 at December 31, 2008.
Other commitments and contingencies are discussed in Notes 4, 5, 6, 7, and 9.
Note 12 – Transactions with Certain Members, Certain Nonmembers, and Other FHLBanks
Transactions with Certain Members and Certain Nonmembers.The following tables set forth information at the dates and for the periods indicated with respect to transactions with (i) members and nonmembers holding more than 10% of the outstanding shares of the Bank’s capital stock, including mandatorily redeemable capital stock, at each respective period end, (ii) members that had an officer or director serving on the Bank’s Board of Directors at any time during the periods indicated, and (iii) affiliates of the foregoing members and nonmembers. All transactions with members, the nonmembers described in the preceding sentence, and their respective affiliates are entered into in the normal course of business.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
June 30, 2009 | December 31, 2008 | |||||||||||
September 30, 2009 | December 31, 2008 | |||||||||||
Assets: | ||||||||||||
Cash and due from banks | $ | 1 | $ | 1 | $ | — | $ | 1 | ||||
Federal funds sold | 2,302 | 460 | 1,333 | 460 | ||||||||
Held-to-maturity securities(1) | 4,183 | 4,268 | 2,853 | 4,268 | ||||||||
Advances | 117,125 | 164,349 | 99,395 | 164,349 | ||||||||
Mortgage loans held for portfolio | 2,631 | 2,880 | 2,492 | 2,880 | ||||||||
Accrued interest receivable | 325 | 537 | 150 | 537 | ||||||||
Derivative assets | 1,015 | 1,350 | 1,043 | 1,350 | ||||||||
Total | $ | 127,582 | $ | 173,845 | $ | 107,266 | $ | 173,845 | ||||
Liabilities: | ||||||||||||
Deposits | $ | 1,053 | $ | 1,384 | $ | 1,039 | $ | 1,384 | ||||
Mandatorily redeemable capital stock | 2,720 | 3,021 | 2,720 | 3,021 | ||||||||
Derivative liabilities | — | 39 | — | 39 | ||||||||
Total | $ | 3,773 | $ | 4,444 | $ | 3,759 | $ | 4,444 | ||||
Notional amount of derivatives | $ | 56,453 | $ | 62,819 | $ | 57,364 | $ | 62,819 | ||||
Letters of credit | 4,488 | 4,579 | 3,885 | 4,579 |
(1) | Held-to-maturity securities include MBS securities issued by and/or purchased from the members or nonmembers described in this section or their affiliates. |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
June 30, 2009 | June 30, 2008 | June 30, 2009 | June 30, 2008 | September 30, 2009 | September 30, 2008 | September 30, 2009 | September 30, 2008 | |||||||||||||||||||||||||
Interest Income: | ||||||||||||||||||||||||||||||||
Federal funds sold | $ | 1 | $ | — | $ | 1 | $ | 1 | $ | 1 | $ | 1 | $ | 2 | $ | 2 | ||||||||||||||||
Held-to-maturity securities | 38 | 38 | 82 | 84 | 32 | 34 | 114 | 118 | ||||||||||||||||||||||||
Advances(1) | 526 | 1,294 | 1,250 | 3,089 | 382 | 1,270 | 1,632 | 4,359 | ||||||||||||||||||||||||
Mortgage loans held for portfolio | 33 | 37 | 68 | 76 | 31 | 37 | 99 | 113 | ||||||||||||||||||||||||
Total | $ | 598 | $ | 1,369 | $ | 1,401 | $ | 3,250 | $ | 446 | $ | 1,342 | $ | 1,847 | $ | 4,592 | ||||||||||||||||
Interest Expense: | ||||||||||||||||||||||||||||||||
Deposits | $ | — | $ | — | $ | — | $ | 1 | $ | — | $ | 1 | $ | — | $ | 2 | ||||||||||||||||
Mandatorily redeemable capital stock | 6 | 2 | 6 | 2 | ||||||||||||||||||||||||||||
Consolidated obligations(1) | (161 | ) | (11 | ) | (305 | ) | (12 | ) | (179 | ) | (10 | ) | (484 | ) | (22 | ) | ||||||||||||||||
Total | $ | (161 | ) | $ | (11 | ) | $ | (305 | ) | $ | (11 | ) | $ | (173 | ) | $ | (7 | ) | $ | (478 | ) | $ | (18 | ) | ||||||||
Other (Loss)/Income: | ||||||||||||||||||||||||||||||||
Net (loss)/gain on derivatives and hedging activities | $ | (249 | ) | $ | (67 | ) | $ | (322 | ) | $ | (14 | ) | $ | 26 | $ | (41 | ) | $ | (296 | ) | $ | (55 | ) | |||||||||
Other income | 1 | 1 | 2 | 1 | 1 | 1 | 3 | 2 | ||||||||||||||||||||||||
Total | $ | (248 | ) | $ | (66 | ) | $ | (320 | ) | $ | (13 | ) | $ | 27 | $ | (40 | ) | $ | (293 | ) | $ | (53 | ) | |||||||||
(1) | Includes the effect of associated derivatives with the members or nonmembers described in this section or their affiliates. |
Transactions with Other FHLBanks.Transactions with other FHLBanks are identified on the face of the Bank’s financial statements, which begin on page 1.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 13 – Subsequent Events
The Bank has evaluated events subsequent to JuneSeptember 30, 2009, until the time of the Form 10-Q filing with the SEC on AugustNovember 12, 2009, and no material subsequent events were identified, other than those discussed below.
On July 30,December 31, 2008, Wells Fargo & Company, a nonmember, acquired Wachovia Corporation, the parent company of Wachovia Mortgage, FSB. Wachovia Mortgage, FSB, continued to operate as a separate entity and continued to be a member of the Bank. Effective November 1, 2009, Wells Fargo Financial National Bank, an affiliate of Wells Fargo & Company, became a member of the Bank’s BoardBank, and the Bank allowed the transfer of Directors declared a cash dividend for the second quarter of 2009 at an annualized rate of 0.84%. The dividend will be paid in cash rather than in shares of Class Bexcess capital stock totaling $5 from Wachovia Mortgage, FSB, to comply with Finance Agency rules.Wells Fargo Financial National Bank to enable Wells Fargo Financial National Bank to satisfy its initial membership stock requirement. Also effective November 1, 2009, Wachovia Mortgage, FSB, merged into Wells Fargo Bank, N.A., a subsidiary of Wells Fargo & Company. As a result of the merger, Wells Fargo Bank, N.A., assumed all outstanding Bank advances and the remaining Bank capital stock of Wachovia Mortgage, FSB. The Bank expectshas reclassified the capital stock transferred to pay the second quarter dividend of $28 in August 2009.Wells Fargo Bank, N.A., totaling $1,567, to mandatorily redeemable capital stock (a liability).
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Statements contained in this quarterly report on Form 10-Q, including statements describing the objectives, projections, estimates, or predictions of the future of the Federal Home Loan Bank of San Francisco (Bank) or the Federal Home Loan Bank System, are “forward-looking statements.” These statements may use forward-looking terms, such as “anticipates,“anticipate,” “believes,“believe,” “could,” “estimates,“estimate,” “expect,” “intend,” “likely,” “may,” “probable,” “project,” “should,” “will,” or their negatives or other variations on these terms. The Bank cautions that by their nature, forward-looking statements involve risk or uncertainty that could cause actual results to differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These risks and uncertainties include, among others, the following:
• | changes in economic and market conditions, including conditions in the mortgage, housing, and capital markets; |
• | the volatility of market prices, rates, and indices; |
• | 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 changes in the Federal Home Loan Bank Act or regulations applicable to the FHLBanks; |
• | changes in the Bank’s capital structure; |
• | the ability of the Bank to pay dividends or redeem or repurchase capital stock; |
• | membership changes, including changes resulting from mergers or changes in the principal place of business of Bank members; |
• | soundness of other financial institutions, including Bank members and the other Federal Home Loan Banks; |
• | changes in the demand by Bank members for Bank advances; |
• | changes in the value or liquidity of collateral underlying advances to Bank members or collateral pledged by the Bank’s derivatives 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) 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 and/or the terms of interest rate exchange or similar agreements; |
• | the ability of the Bank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services; |
• | 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; |
• | the pace of technological change and the Bank’s ability to develop and support technology and information systems sufficient to manage the risks of the Bank’s business effectively; and |
• | timing and volume of market activity. |
Readers of this report should not rely solely on the forward-looking statements and should consider all risks and uncertainties throughout this report, as well as those discussed under “Item 1A. Risk Factors” in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K).
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Bank’s interim financial statements and notes, which begin on page 1, and the Bank’s 2008 Form 10-K.
On July 30, 2008, the Housing and Economic Recovery Act of 2008 (Housing Act) was enacted and, among other things,enacted. The Housing Act created a new federal agency, the Federal Housing Finance Agency (Finance Agency), which became the new federal regulator of the FHLBanks effective on the date of enactment of the Housing Act. On October 27, 2008, the Federal Housing Finance Board (Finance Board), the federal regulator of the FHLBanks prior to the creation of the Finance Agency, merged into the Finance Agency. Pursuant to the Housing Act, all regulations, orders, determinations, and resolutions that were issued, made, prescribed, or allowed to become effective by the Finance Board will remain in effect until modified, terminated, set aside, or superseded by the Director of the Finance Agency, any court of competent jurisdiction, or operation of law. References throughout this report to regulations of the Finance Agency also include the regulations of the Finance Board where they remain applicable.
HousingFinancial and financialhousing markets have been in tremendous turmoil since the middle of 2007,for over two years, with repercussions throughout the U.S. and global economies. As a result of the extensive efforts of the U.S. government and other governments around the world to stimulate economic activity, support companies close to failure, and provide liquidity to the capital markets, the U.S. and world economies have been stabilizing. The U.S. economy is in aappears to be emerging from its recession, and according to many observers, the current economic crisis isU.S. gross national product reportedly grew by 3.5% during the deepest the nation has experienced since the 1930s. Limited liquidity in the credit markets, increasing mortgage delinquencies and foreclosures, falling real estate values, the collapsethird quarter of the secondary market for mortgage-backed securities (MBS), loss of investor confidence, a highly volatile stock market, fluctuations in short- and long-term interest rates, rising2009. However, unemployment and underemployment are at high levels and still rising. In addition, many government programs that support the failure offinancial and housing markets remain in place, and there may be risks to the economy as these programs wind down and the government withdraws its support from a number of largemarkets and small financial institutions—allinstitutions.
The housing market continues to be weak, with great variations in market performance from region to region throughout the country. Housing prices are symptomslow and still falling in many areas, although there are signs of increasing stability in other areas. Delinquency and foreclosure rates have continued to rise. While the severe economic crisis facingagency mortgage-backed securities (MBS) market is active in funding new mortgage originations, the U.S. andprivate-label MBS market has not recovered. In addition, the rest of the world.commercial real estate market is still trending downwards.
These economic conditions, particularly in the housing and financial markets, combined with ongoing uncertainty about the depth and duration of the financial crisis and the recession, continued to affect the Federal Home Loan Bank of San Francisco’s (Bank) business and results of operations and the Bank’s members in the secondthird quarter of 2009 and may continue to exert a significant negative effect in the immediate future. Nevertheless,
For the third quarter of 2009, the Bank continueshad a net loss of $85 million, compared with net income of $101 million in the third quarter of 2008. The loss in the third quarter of 2009 was primarily due to fulfill its mission of providing liquidity to members while taking action to maintaincredit-related other-than-temporary impairment (OTTI) losses on certain private-label residential MBS (PLRMBS) in the Bank’s safetyheld-to-maturity securities portfolio and soundnessto net losses associated with derivatives, hedged items, and protectfinancial instruments carried at fair value.
Net interest income for the members’ collective investmentthird quarter of 2009 rose $65 million, or 17%, to $458 million from $393 million for the third quarter of 2008. Most of the increase in net interest income was related to economically hedged assets and liabilities. Net interest income on economically hedged assets and liabilities is generally offset by
net interest expense on derivative instruments used in economic hedges, which is reflected in other income. Net interest income for the third quarter of 2009 also reflected lower earnings on the Bank’s invested capital, which declined relative to the same period in 2008 because of the lower interest rate environment in the Bank.third quarter of 2009.
Ongoing weaknessOther income for the third quarter of 2009 was a net loss of $543 million, compared to a net loss of $225 million for the third quarter of 2008. The losses in other income for the third quarter of 2009 reflected a credit-related OTTI charge of $316 million on certain PLRMBS; a net loss of $94 million associated with derivatives, hedged items, and financial instruments carried at fair value; and net interest expense of $134 million on derivative instruments used in economic hedges, which was generally offset by net interest income on the economically hedged assets and liabilities.
The $94 million net loss associated with derivatives, hedged items, and financial instruments carried at fair value for the third quarter of 2009 was less than the $179 million net loss for the third quarter of 2008. This decrease was primarily driven by changes in overall interest rate spreads and an increase in swaption volatilities. Net gains and losses on these financial instruments are primarily a matter of timing and will generally reverse through changes in future valuations and settlements of contractual interest cash flows over the remaining contractual terms to maturity, or by the exercised call or put dates. As of June 30, 2009, cumulative net gains associated with derivatives, hedged items, and financial instruments carried at fair value totaled $232 million. Most of the losses in the third quarter of 2009 reflected reversals of prior-period net gains.
The credit-related OTTI charge of $316 million resulted from an increase in projected losses on the loan collateral underlying the Bank’s PLRMBS. Each quarter, the Bank updates its OTTI analysis to reflect current and anticipated housing marketsmarket conditions and updated information on the loans supporting the Bank’s PLRMBS and revises the assumptions in its collateral loss projection models based on more recent information. The increase in projected collateral loss rates in the Bank’s OTTI analysis for the third quarter of 2009 was caused by increases in projected loan defaults and in the projected severity of losses on defaulted loans. Several factors contributed to these increases, including lower forecasted housing prices, andgreater-than-expected deterioration in the expectation that this weakness will persist for at least the near term based on current observations of the regional and national economies, continued to affect the current and projected credit quality of the loan collateral, underlying certain MBS inand changes to the Bank’s held-to-maturity portfolio. Changescollateral loss projection model assumptions that resulted in the external environment also led the Bankslower projected prepayment speeds–leading to assume more moderate rates of housing price recoveryan increase in projected loan defaults–and higher projected losses on defaulted loans.
Based on the cash flow models used to analyze these MBS as of June 30, 2009. All of these factors contributed to higher projected loss ratesanalysis performed on the collateral supporting some of the Bank’s non-agency MBS, which required the Bank to write down the securities to fair value. The continuing severe lack of liquidity in the MBS market also adversely affected the valuation of MBS.
Based on analyses and reviews of the Bank’s non-agency MBS,PLRMBS, the Bank determined that 76105 of its non-agency MBSPLRMBS were other-than-temporarily impaired at JuneSeptember 30, 2009, because the Bank determined it was likely that it would not recover the entire amortized cost basis of each of these securities. These securities included the 15 securitiesPLRMBS that had previously been identified as other-than-temporarily impaired prior to January 1, 2009, and the 28, 33, and 33 securities29 PLRMBS that were first identified as other-than-temporarily impaired inat the end of the first, second, and secondthird quarters of 2009, respectively.
Nine of these securities did not have additional impairment in the third quarter of 2009. The Bank recorded other-than-temporary impairment (OTTI)OTTI charges for 96 of these securities during the three months ended JuneSeptember 30, 2009, as follows:
(Dollars in millions) | For the Three Months Ended June 30, 2009 | For the Three Months Ended September 30, 2009 | ||||||||||||||||
Identified as Other-Than-Temporarily Impaired | Number of Securities | OTTI Related to | OTTI Related to All Other | |||||||||||||||
First Identified as Other-Than-Temporarily Impaired | Number of Securities | OTTI Credit Losses | OTTI All Other | |||||||||||||||
Prior to January 1, 2009 | 15 | $ | 40 | $ | (1 | ) | 15 | $ | 94 | $ | (88 | ) | ||||||
During the three months ended March 31, 2009 | 28 | 36 | (1 | ) | ||||||||||||||
During the three months ended June 30, 2009 | 33 | 12 | 1,197 | |||||||||||||||
At March 31, 2009 | 25 | 129 | (70 | ) | ||||||||||||||
At June 30, 2009 | 27 | 59 | 8 | |||||||||||||||
At September 30, 2009 | 29 | 34 | 1,219 | |||||||||||||||
Total | 76 | $ | 88 | $ | 1,195 | 96 | $ | 316 | $ | 1,069 | ||||||||
In early 2009, the FASB issued additional guidance related to the recognition and presentation of other-than-temporary impairments (OTTI guidance). In accordance with FASB Staff Position (FSP) No. FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2),the OTTI guidance, for the secondthird quarter of 2009, the impairmentOTTI related to the credit loss of $88$316 million was reflectedrecognized in “Other (loss)/income”Loss” and the impairmentOTTI related to all other factors of $1,195$1,069 million was reflectedrecognized in “Other comprehensive income/(loss).” The non-credit-related charge was primarily related to securities that were identified as other-than-temporarily impaired for the first time in the third quarter of 2009 as a result of the updated OTTI analysis. The continued severe lack of liquidity in the PLRMBS market adversely affected the valuation of these PLRMBS, contributing to the large non-credit-related OTTI charge recorded in accumulated other comprehensive income.
For each security, the amount of the non-credit-related impairment will be accreted prospectively, based on the amount and timing of future estimated cash flows, over the remaining life of the security as an increase in the carrying value of the security, with no effect on earnings unless the security is subsequently sold or there are additional decreases in the cash flows expected to be collected. The Bank does not intend to sell these securities and it is not more likely than not that the Bank will be required to sell these securities before its anticipated recovery of the remaining amortized cost basis. At JuneSeptember 30, 2009, the estimated weighted average life of thesethe affected securities was approximately threefour years.
Because there is a continuing risk that further declines in the fair value of the Bank’s MBS may occur and that the Bank may record additional material OTTI charges in future periods, the Bank’s earnings and retained earnings and its ability to pay dividends and repurchase or redeem capital stock could be adversely affected. To preserve the Bank’s capital, the Bank did not pay a dividend for the third quarter of 2009 and will not repurchase excess capital stock during the fourth quarter of 2009. The Bank will continue to monitor the condition of the Bank’s MBS portfolio, its overall financial performance and retained earnings, developments in the mortgage and credit markets, and other relevant information as the basis for determining the status of dividends and capital stock repurchases in future quarters.
As of JuneSeptember 30, 2009, the Bank was in compliance with all of its regulatory capital requirements. The Bank’s total regulatory capital-to-assets ratio was 6.11%6.85%, exceeding the 4.00% requirement, and its risk-based capital was $14.6$14.5 billion, exceeding its $8.2$7.3 billion requirement.
On July 30, 2009, the Bank’s Board of Directors declared a cash dividend for the second quarter of 2009 at an annualized rate of 0.84%. The total amount of the dividend is $28 million. The second quarter dividend will be paid in cash rather than in shares of Class B capital stock to comply with Federal Housing Finance Agency (Finance Agency) rules. Under Finance Agency rules, an FHLBank may not pay dividends in the form of capital stock or issue excess stock to members if the FHLBank’s excess stock exceeds 1% of its total assets or if the issuance of stock would cause the FHLBank’s excess stock to exceed 1% of its total assets. At June 30, 2009, the Bank’s excess capital stock totaled $4,586 million, or 2% of total assets.
Net income for the second quarter of 2009 rose $80 million, or 36%, to $303 million from $223 million in the second quarter of 2008. The increase primarily reflected net gains associated with derivatives, hedged items, and financial instruments carried at fair value, partially offset by OTTI losses on certain MBS in the Bank’s held-to-maturity portfolio.
Net interest income for the second quarter of 2009 rose $146 million, or 43%, to $484 million from $338 million for the second quarter of 2008. Most of the increase in net interest income was related to economically hedged assets and liabilities and was offset by net interest expense on derivative instruments used in economic hedges (reflected in other income), which totaled $140 million for the second quarter of 2009, compared to $4 million for the second quarter of 2008.
Other income for the second quarter of 2009 was a net loss of $39 million, compared to a net loss of $10 million for the second quarter of 2008. In addition to the increase in net interest expense on derivative instruments used in economic hedges, the decrease in other income reflected a credit impairment charge of $88 million related to certain non-agency MBS. The losses in other income were partially offset by a net gain of $186 million for the second quarter of 2009 associated with derivatives, hedged items, and financial instruments carried at fair value in accordance with Statement of Financial Accounting Standards (SFAS) No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138,Accounting for Certain Derivative Instruments and Certain Hedging Activities; SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities; and SFAS No. 155,Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140 (together referred to as SFAS 133), and SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115(SFAS 159), compared to a net loss of $7 million for the second quarter of 2008. The large difference between the amount of the net gain and the net loss in these periods was primarily driven by changes in overall interest rate spreads and an increase in swaption volatilities. In general, net gains or losses on these financial instruments are primarily a matter of timing and will generally reverse through changes in future valuations and settlements of contractual interest cash flows over the remaining contractual terms to maturity, or by the exercised call or put dates.
During the first sixnine months of 2009, total assets decreased $82.3$110 billion, or 26%34%, to $238.9$211.2 billion from $321.2 billion at December 31, 2008, primarily as a result of a decline in advances, which decreased by $61.0$80.7 billion, or 26%34%, to $174.7$155.0 billion at JuneSeptember 30, 2009, from $235.7 billion at December 31, 2008. Members decreased their use of Bank advances during the first sixnine months of 2009 for a variety of reasons, including increases in core deposits, reduced lending activity, the use of Troubled Asset Relief Program funds, active Temporary Liquidity Guarantee Program issuances, access to the Federal Reserve Bank discount window, and reductions in the borrowing capacity of collateral pledged to the Bank. In additionHeld-to-maturity securities decreased to $38.8 billion at September 30, 2009, from $51.2 billion at December 31, 2008, primarily because of lower investment balances in the declineMBS portfolio resulting from run-off (paydowns, prepayments, and maturities) in advances, cashthe portfolio, OTTI recognized on the PLRMBS, and a substantial reduction in the purchase of new MBS investments. During the first nine months of 2009, the Bank purchased $0.4 billion of MBS, all of which were residential agency MBS. Cash and due from banks decreased to $0.8$6.1 billion at JuneSeptember 30, 2009, from $19.6 billion at December 31, 2008. The decrease was primarily in cash held at the Federal Reserve Bank of San Francisco (FRBSF), reflecting a reduction in the Bank’s short-term liquidity needs.
All advances made by the Bank are required to be fully collateralized in accordance with the Bank’s credit and collateral requirements. The Bank monitors the creditworthiness of its members on an ongoing basis. In addition, the Bank has a comprehensive process for assigning values to collateral and determining how much it will lend against the collateral pledged. During the secondthird quarter of 2009, the Bank continued to review and adjust its general lending parameters based on market conditions and to require additional collateral, when necessary, to ensure that advances remained fully collateralized. Based on the Bank’s risk assessments of mortgage market conditions and of individual members and their collateral, the Bank also continued to adjust collateral terms for individual members during the secondthird quarter of 2009.
FourEight member institutions were placed into receivership or liquidation during the secondthird quarter of 2009. Two of these institutions had no advances outstanding as of the date of the receivership or liquidation. The advances outstanding to one institutionthe other six institutions were either repaid prior to JuneSeptember 30, 2009, or assumed by other institutions, and no losses were incurred by the Bank. The Bank capital stock held by this institution and by a second institution with no advances outstanding atsix of the time of receivership, which totaled $19eight institutions totaling $10 million was classified as mandatorilymandatory redeemable capital stock (a liability). The advances and capital stock of the third institution and the capital stock of the fourth institution, which had no advances outstanding at the time of receivership, were assumed byother two institutions was transferred to other member institutions.
From JulyOctober 1, 2009, to August 7,October 30, 2009, twofive member institutions were placed into receivership. The advances outstanding to one institutionfour institutions were assumed by a nonmember institution, and the Bank capital stock held by the institutionfour institutions totaling $6$115 million was classified as mandatorily redeemable capital stock (a liability). The outstanding advances and capital stock of the secondother institution were assumed by a member institution.
Funding and Liquidity
The U.S. government’s continuedongoing support of the Agencyagency debt markets has improved the FHLBanks’ ability to issue term debt.debt in 2009. On November 25, 2008, the Federal Reserve announced it would initiate a program to
purchase the direct obligations of Fannie Mae, Freddie Mac, and the FHLBanks and MBS backed by Fannie Mae, Freddie Mac, and Ginnie Mae. The Federal Reserve stated that this action was taken to reduce the cost and increase the availability of credit for the purchase of homes, which in turn was expected to support housing markets and foster improved conditions in financial markets more generally. The Federal Reserve indicated that purchases of up to $100 billion in government-sponsored enterprise (GSE) direct obligations under the program would be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions and would begin in early December 2008. Furthermore, on March 18,The Federal Reserve subsequently increased the total purchase capacity to $200 billion. On November 4, 2009, the Federal Reserve reaffirmedannounced that it will purchase a total of about $175 billion of GSE debt. The Federal Reserve stated that it will gradually slow the pace of its intentpurchases and anticipates that these transactions will be executed by expanding the GSE direct obligation purchase program by up to $100 billion, bringingend of the total purchase capacity up to $200 billion in 2009.first quarter of 2010. During the first sixnine months of 2009, the Federal Reserve purchased $81.9$116.1 billion in agency term obligations, including $19.5$25.5 billion in FHLBank consolidated obligation bonds. The combination of declining FHLBFHLBank funding needs, Federal Reserve purchases of FHLBFHLBank direct obligations, and a monthly debt issuance calendar for global bonds has generally improved the FHLBanks’ ability to issue debt at reasonable costs. During the first sixnine months of 2009, the FHLBanks issued $48.1$69.4 billion in global bonds and over $226$440 billion in auctioned discount notes.
The following table presents a summary of certain financial information for the Bank for the periods indicated.
Financial Highlights
(Unaudited)
(Dollars in millions) | June 30, 2009 | March 31, 2009 | December 31, 2008 | September 30, 2008 | June 30, 2008 | September 30, 2009 | June 30, 2009 | March 31, 2009 | December 31, 2008 | September 30, 2008 | ||||||||||||||||||||||||||||||
Selected Balance Sheet Items at Quarter End | ||||||||||||||||||||||||||||||||||||||||
Total Assets(1) | $ | 238,924 | $ | 270,287 | $ | 321,244 | $ | 341,429 | $ | 328,474 | ||||||||||||||||||||||||||||||
Total Assets | $ | 211,212 | $ | 238,924 | $ | 270,287 | $ | 321,244 | $ | 341,429 | ||||||||||||||||||||||||||||||
Advances | 174,732 | 203,904 | 235,664 | 263,045 | 246,008 | 154,962 | 174,732 | 203,904 | 235,664 | 263,045 | ||||||||||||||||||||||||||||||
Held-to-Maturity Securities(2) | 42,241 | 47,183 | 51,205 | 53,830 | 60,484 | |||||||||||||||||||||||||||||||||||
Held-to-Maturity Securities | 38,825 | 42,241 | 47,183 | 51,205 | 53,830 | |||||||||||||||||||||||||||||||||||
Federal Funds Sold | 16,658 | 12,384 | 9,431 | 16,360 | 16,052 | 7,086 | 16,658 | 12,384 | 9,431 | 16,360 | ||||||||||||||||||||||||||||||
Consolidated Obligations:(3) | ||||||||||||||||||||||||||||||||||||||||
Consolidated Obligations:(1) | ||||||||||||||||||||||||||||||||||||||||
Bonds | 176,200 | 189,382 | 213,114 | 235,290 | 233,510 | 154,869 | 176,200 | 189,382 | 213,114 | 235,290 | ||||||||||||||||||||||||||||||
Discount Notes | 49,009 | 66,239 | 91,819 | 87,455 | 77,753 | 43,901 | 49,009 | 66,239 | 91,819 | 87,455 | ||||||||||||||||||||||||||||||
Mandatorily Redeemable Capital Stock(4) | 3,165 | 3,145 | 3,747 | 3,898 | 189 | |||||||||||||||||||||||||||||||||||
Capital Stock – Class B – Putable(4) | 10,253 | 10,238 | 9,616 | 10,614 | 13,763 | |||||||||||||||||||||||||||||||||||
Mandatorily Redeemable Capital Stock | 3,159 | 3,165 | 3,145 | 3,747 | 3,898 | |||||||||||||||||||||||||||||||||||
Capital Stock – Class B – Putable | 10,244 | 10,253 | 10,238 | 9,616 | 10,614 | |||||||||||||||||||||||||||||||||||
Retained Earnings | 1,172 | 869 | 176 | 280 | 306 | 1,065 | 1,172 | 869 | 176 | 280 | ||||||||||||||||||||||||||||||
Accumulated Other Comprehensive Income/(Loss) | (2,717 | ) | (1,615 | ) | (7 | ) | (2 | ) | (3 | ) | ||||||||||||||||||||||||||||||
Total Capital(4) | 8,708 | 9,492 | 9,785 | 10,892 | 14,066 | |||||||||||||||||||||||||||||||||||
Accumulated Other Comprehensive Loss | (3,601 | ) | (2,717 | ) | (1,615 | ) | (7 | ) | (2 | ) | ||||||||||||||||||||||||||||||
Total Capital | 7,708 | 8,708 | 9,492 | 9,785 | 10,892 | |||||||||||||||||||||||||||||||||||
Selected Operating Results for the Quarter | ||||||||||||||||||||||||||||||||||||||||
Net Interest Income | $ | 484 | $ | 434 | $ | 468 | $ | 393 | $ | 338 | $ | 458 | $ | 484 | $ | 434 | $ | 468 | $ | 393 | ||||||||||||||||||||
Provision for Credit Losses on Mortgage Loans | 1 | — | — | — | — | — | 1 | — | — | — | ||||||||||||||||||||||||||||||
Other (Loss)/Income | (39 | ) | (236 | ) | (575 | ) | (225 | ) | (10 | ) | ||||||||||||||||||||||||||||||
Other Loss | (543 | ) | (39 | ) | (236 | ) | (575 | ) | (225 | ) | ||||||||||||||||||||||||||||||
Other Expense | 31 | 31 | 34 | 29 | 24 | 31 | 31 | 31 | 34 | 29 | ||||||||||||||||||||||||||||||
Assessments | 110 | 44 | (38 | ) | 38 | 81 | (31 | ) | 110 | 44 | (38 | ) | 38 | |||||||||||||||||||||||||||
Net Income | $ | 303 | $ | 123 | $ | (103 | ) | $ | 101 | $ | 223 | |||||||||||||||||||||||||||||
Net (Loss)/Income | $ | (85 | ) | $ | 303 | $ | 123 | $ | (103 | ) | $ | 101 | ||||||||||||||||||||||||||||
Selected Other Data for the Quarter | ||||||||||||||||||||||||||||||||||||||||
Net Interest Margin(5) | 0.77 | % | 0.60 | % | 0.58 | % | 0.48 | % | 0.42 | % | ||||||||||||||||||||||||||||||
Net Interest Margin(2) | 0.81 | % | 0.77 | % | 0.60 | % | 0.58 | % | 0.48 | % | ||||||||||||||||||||||||||||||
Operating Expenses as a Percent of Average Assets | 0.04 | 0.03 | 0.04 | 0.03 | 0.02 | 0.05 | 0.04 | 0.03 | 0.04 | 0.03 | ||||||||||||||||||||||||||||||
Return on Assets | 0.47 | 0.17 | (0.13 | ) | 0.12 | 0.27 | (0.15 | ) | 0.47 | 0.17 | (0.13 | ) | 0.12 | |||||||||||||||||||||||||||
Return on Equity | 12.49 | 4.95 | (3.99 | ) | 2.96 | 6.37 | (3.84 | ) | 12.49 | 4.95 | (3.99 | ) | 2.96 | |||||||||||||||||||||||||||
Annualized Dividend Rate(6) | 0.84 | — | — | 3.85 | 6.19 | |||||||||||||||||||||||||||||||||||
Spread of Dividend Rate to Dividend Benchmark(6)(7) | (1.93 | ) | (2.00 | ) | (2.24 | ) | 0.87 | 3.13 | ||||||||||||||||||||||||||||||||
Dividend Payout Ratio(6)(8) | 7.08 | — | — | 125.29 | 93.69 | |||||||||||||||||||||||||||||||||||
Annualized Dividend Rate(3) | — | 0.84 | — | — | 3.85 | |||||||||||||||||||||||||||||||||||
Spread of Dividend Rate to Dividend Benchmark(3)(4) | (1.86 | ) | (1.93 | ) | (2.00 | ) | (2.24 | ) | 0.87 | |||||||||||||||||||||||||||||||
Dividend Payout Ratio (3)(5) | — | 7.08 | — | — | 125.29 | |||||||||||||||||||||||||||||||||||
Selected Other Data at Quarter End | ||||||||||||||||||||||||||||||||||||||||
Capital to Assets Ratio(1)(9) | 6.11 | 5.27 | 4.21 | 4.33 | 4.34 | |||||||||||||||||||||||||||||||||||
Capital to Assets Ratio (6) | 6.85 | 6.11 | 5.27 | 4.21 | 4.33 | |||||||||||||||||||||||||||||||||||
Duration Gap (in months) | 2 | 4 | 3 | 2 | 3 | 4 | 2 | 4 | 3 | 2 | ||||||||||||||||||||||||||||||
(1) |
As provided by the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), or the 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 regulations authorize 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 |
Par amount | |||
June 30, 2009 | $ | 1,055,863 | |
March 31, 2009 | 1,135,379 | ||
December 31, 2008 | 1,251,542 | ||
September 30, 2008 | 1,327,904 | ||
June 30, 2008 | 1,255,475 |
Par amount | |||
September 30, 2009 | $ | 973,579 | |
June 30, 2009 | 1,055,863 | ||
March 31, 2009 | 1,135,379 | ||
December 31, 2008 | 1,251,542 | ||
September 30, 2008 | 1,327,904 |
Net interest margin is net interest income (annualized) divided by average interest-earning assets. |
On July 30, 2009, the Bank’s Board of Directors declared a cash dividend for the second quarter of 2009, |
The dividend benchmark is calculated as the combined average of (i) the daily average of the overnight Federal funds effective rate, and (ii) the four-year moving average of the U.S. Treasury note yield calculated as the average of the three-year and five-year U.S. Treasury note yields. |
This ratio is calculated as dividends declared per share divided by net income per share. |
This ratio is based on regulatory capital, which includes mandatorily redeemable capital stock (which is classified as a liability) and excludes other comprehensive income. |
The primary source of Bank earnings is net interest income, which is the interest earned on advances, mortgage loans, and investments, less the interest paid on consolidated obligations, deposits, and other borrowings. The following Average Balance Sheets table presents average balances of earning asset categories and the sources that fund those earning assets (liabilities and capital) for the three and sixnine months ended JuneSeptember 30, 2009 and 2008, together with the related interest income and expense. They also present the average rates on total earning assets and the average costs of total funding sources. The Change in Net Interest Income table details the changes in interest income and interest expense for the secondthird quarter of 2009 compared to the secondthird quarter of 2008 and for the first sixnine months of 2009 compared to the first sixnine months of 2008. Changes in both volume and interest rates influence changes in net interest income and the net interest margin.
SecondThird Quarter of 2009 Compared to SecondThird Quarter of 2008
Average Balance Sheets
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||||||
June 30, 2009 | June 30, 2008 | September 30, 2009 | September 30, 2008 | |||||||||||||||||||||||||||||||||||||
(Dollars in millions) | Average Balance | Interest Income/ Expense | Average Rate | Average Balance | Interest Income/ Expense | Average Rate | Average Balance | Interest Income/ Expense | Average Rate | Average Balance | Interest Income/ Expense | Average Rate | ||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||
Resale agreements | $ | 24 | $ | — | 0.17 | % | $ | $ | — | — | % | |||||||||||||||||||||||||||||
Federal funds sold | $ | 12,702 | $ | 6 | 0.19 | % | $ | 12,770 | $ | 77 | 2.43 | % | 13,874 | 5 | 0.14 | 13,764 | 78 | 2.25 | ||||||||||||||||||||||
Trading securities: | ||||||||||||||||||||||||||||||||||||||||
MBS | 33 | 1 | 12.15 | 54 | 1 | 7.45 | 32 | — | 4.45 | 38 | — | 5.17 | ||||||||||||||||||||||||||||
Held-to-maturity securities: | ||||||||||||||||||||||||||||||||||||||||
MBS | 36,557 | 361 | 3.96 | 40,017 | 470 | 4.72 | 34,583 | 353 | 4.05 | 40,933 | 485 | 4.71 | ||||||||||||||||||||||||||||
Other investments(1) | 9,633 | 8 | 0.33 | 17,245 | 112 | 2.61 | ||||||||||||||||||||||||||||||||||
Other investments | 9,053 | 5 | 0.22 | 15,034 | 100 | 2.65 | ||||||||||||||||||||||||||||||||||
Mortgage loans | 3,485 | 36 | 4.14 | 3,965 | 48 | 4.87 | 3,259 | 39 | 4.75 | 3,848 | 48 | 4.96 | ||||||||||||||||||||||||||||
Advances(2) | 190,531 | 772 | 1.63 | 252,890 | 1,864 | 2.96 | ||||||||||||||||||||||||||||||||||
Advances(1) | 164,187 | 548 | 1.32 | 253,195 | 1,831 | 2.88 | ||||||||||||||||||||||||||||||||||
Loans to other FHLBanks | 366 | — | 0.12 | 14 | — | 2.08 | 193 | — | 0.11 | 20 | — | 2.08 | ||||||||||||||||||||||||||||
Total interest-earning assets | 253,307 | 1,184 | 1.87 | 326,955 | 2,572 | 3.16 | 225,205 | 950 | 1.67 | 326,832 | 2,542 | 3.09 | ||||||||||||||||||||||||||||
Other assets(3)(4)(5) | 4,625 | — | — | 7,810 | — | — | ||||||||||||||||||||||||||||||||||
Other assets(2)(3)(4) | 2,894 | — | — | 5,575 | — | — | ||||||||||||||||||||||||||||||||||
Total Assets | $ | 257,932 | $ | 1,184 | 1.84 | % | $ | 334,765 | $ | 2,572 | 3.09 | % | $ | 228,099 | $ | 950 | 1.65 | % | $ | 332,407 | $ | 2,542 | 3.04 | % | ||||||||||||||||
Liabilities and Capital | ||||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||
Consolidated obligations: | ||||||||||||||||||||||||||||||||||||||||
Bonds(2) | $ | 177,312 | $ | 588 | 1.33 | % | $ | 230,264 | $ | 1,683 | 2.94 | % | ||||||||||||||||||||||||||||
Bonds(1) | $ | 163,394 | $ | 418 | 1.01 | % | $ | 235,671 | $ | 1,673 | 2.82 | % | ||||||||||||||||||||||||||||
Discount notes | 60,502 | 112 | 0.74 | 81,329 | 541 | 2.68 | 46,278 | 67 | 0.57 | 75,457 | 462 | 2.44 | ||||||||||||||||||||||||||||
Deposits(3) | 1,954 | — | 0.05 | 1,356 | 7 | 2.08 | ||||||||||||||||||||||||||||||||||
Deposits(2) | 1,880 | — | 0.03 | 1,436 | 6 | 1.66 | ||||||||||||||||||||||||||||||||||
Borrowings from other FHLBanks | 15 | — | 0.14 | 22 | — | 2.09 | 3 | — | 0.15 | 42 | — | 0.77 | ||||||||||||||||||||||||||||
Mandatorily redeemable capital stock | 3,160 | — | — | 195 | 3 | 6.19 | 3,164 | 7 | 0.84 | 811 | 8 | 3.85 | ||||||||||||||||||||||||||||
Other borrowings | 7 | — | 0.11 | 9 | — | 2.40 | — | — | — | 28 | — | 1.79 | ||||||||||||||||||||||||||||
Total interest-bearing liabilities | 242,950 | 700 | 1.16 | 313,175 | 2,234 | 2.87 | 214,719 | 492 | 0.91 | 313,445 | 2,149 | 2.73 | ||||||||||||||||||||||||||||
Other liabilities(3)(4) | 5,249 | — | — | 7,486 | — | — | ||||||||||||||||||||||||||||||||||
Other liabilities(2)(3) | 4,533 | — | — | 5,352 | — | — | ||||||||||||||||||||||||||||||||||
Total Liabilities | 248,199 | 700 | 1.13 | 320,661 | 2,234 | 2.80 | 219,252 | 492 | 0.89 | 318,797 | 2,149 | 2.68 | ||||||||||||||||||||||||||||
Total Capital | 9,733 | — | — | 14,104 | — | — | 8,847 | — | — | 13,610 | — | — | ||||||||||||||||||||||||||||
Total Liabilities and Capital | $ | 257,932 | $ | 700 | 1.09 | $ | 334,765 | $ | 2,234 | 2.68 | % | $ | 228,099 | $ | 492 | 0.86 | $ | 332,407 | $ | 2,149 | 2.57 | % | ||||||||||||||||||
Net Interest Income | $ | 484 | $ | 338 | $ | 458 | $ | 393 | ||||||||||||||||||||||||||||||||
Net Interest Spread(6) | 0.71 | % | 0.29 | % | ||||||||||||||||||||||||||||||||||||
Net Interest Spread(5) | 0.76 | % | 0.36 | % | ||||||||||||||||||||||||||||||||||||
Net Interest Margin(7) | 0.77 | % | 0.42 | % | ||||||||||||||||||||||||||||||||||||
Net Interest Margin(6) | 0.81 | % | 0.48 | % | ||||||||||||||||||||||||||||||||||||
Interest-earning Assets/Interest-bearing Liabilities | 104.26 | % | 104.40 | % | ||||||||||||||||||||||||||||||||||||
Interest-earning Assets/ Interest-bearing Liabilities | 104.88 | % | 104.27 | % | ||||||||||||||||||||||||||||||||||||
Total Average Assets/Capital Ratio(8) | 20.0 | x | 23.4 | x | ||||||||||||||||||||||||||||||||||||
Total Average Assets/Capital Ratio(7) | 19.0 | x | 23.1 | x | ||||||||||||||||||||||||||||||||||||
(1) |
Interest income/expense and average rates include the effect of associated interest rate exchange agreements. Interest income on advances includes net interest expense on interest rate exchange agreements of |
Average balances do not reflect the effect of reclassifications of cash |
Includes forward settling transactions |
Includes OTTI losses on held-to-maturity securities related to all other factors. |
Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. |
Net interest margin is net interest income (annualized) divided by average interest-earning assets. |
For this purpose, capital includes mandatorily redeemable capital stock and excludes other comprehensive income. |
Change in Net Interest Income: Rate/Volume Analysis
Three Months Ended JuneSeptember 30, 2009, Compared to Three Months Ended JuneSeptember 30, 2008
Increase/ | Attributable to Changes in(1) | |||||||||||||||||||||||
Increase/ | Attributable to Changes in(1) | |||||||||||||||||||||||
(In millions) | (Decrease) | Average Volume | Average Rate | Average Volume | Average Rate | |||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Federal funds sold | $ | (71 | ) | $ | — | $ | (71 | ) | $ | (73 | ) | $ | 1 | $ | (74 | ) | ||||||||
Trading securities: | ||||||||||||||||||||||||
MBS | — | — | — | — | — | — | ||||||||||||||||||
Held-to-maturity securities: | ||||||||||||||||||||||||
MBS | (109 | ) | (38 | ) | (71 | ) | (132 | ) | (69 | ) | (63 | ) | ||||||||||||
Other investments(2) | (104 | ) | (35 | ) | (69 | ) | ||||||||||||||||||
Other investments | (95 | ) | (29 | ) | (66 | ) | ||||||||||||||||||
Mortgage loans | (12 | ) | (5 | ) | (7 | ) | (9 | ) | (7 | ) | (2 | ) | ||||||||||||
Advances(3) | (1,092 | ) | (386 | ) | (706 | ) | ||||||||||||||||||
Advances(2) | (1,283 | ) | (506 | ) | (777 | ) | ||||||||||||||||||
Total interest-earning assets | (1,388 | ) | (464 | ) | (924 | ) | (1,592 | ) | (610 | ) | (982 | ) | ||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Consolidated obligations: | ||||||||||||||||||||||||
Bonds(3) | (1,095 | ) | (324 | ) | (771 | ) | ||||||||||||||||||
Bonds(2) | (1,255 | ) | (406 | ) | (849 | ) | ||||||||||||||||||
Discount notes | (429 | ) | (112 | ) | (317 | ) | (395 | ) | (133 | ) | (262 | ) | ||||||||||||
Deposits | (7 | ) | 2 | (9 | ) | (6 | ) | 1 | (7 | ) | ||||||||||||||
Mandatorily redeemable capital stock | (3 | ) | 3 | (6 | ) | (1 | ) | 9 | (10 | ) | ||||||||||||||
Total interest-bearing liabilities | (1,534 | ) | (431 | ) | (1,103 | ) | (1,657 | ) | (529 | ) | (1,128 | ) | ||||||||||||
Net interest income | $ | 146 | $ | (33 | ) | $ | 179 | $ | 65 | $ | (81 | ) | $ | 146 | ||||||||||
(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. |
Net Interest Income
Net interest income in the secondthird quarter of 2009 was $484$458 million, a 43%17% increase from $338$393 million in the secondthird quarter of 2008. This increase was driven primarily by the following:
Interest income on non-MBS investments decreased $175$168 million in the secondthird quarter of 2009 compared to the secondthird quarter of 2008. The decrease consisted of a $140 million decrease attributable to lower average yields on non-MBS investments and a $35$28 million decrease attributable to a 26%20% decrease in average non-MBS investment balances.
|
Interest income from advancesthe mortgage portfolio decreased $1.1 billion$141 million in the secondthird quarter of 2009 compared to the secondthird quarter of 2008. The decrease consisted of a $0.7$65 million decrease attributable to lower average yields on MBS investments and mortgage loans, a $69 million decrease attributable to a 16% decrease in average MBS outstanding, and a $7 million decrease attributable to a 15% decrease in average mortgage loans outstanding. Interest income from the mortgage portfolio includes the impact of cumulative retrospective adjustments for the amortization of net purchase discounts from the acquisition dates of the MBS and mortgage loans, which increased interest income by an immaterial amount in the third quarter of 2009 and increased interest income by $5 million in the third quarter of 2008. This decrease was primarily due to slower projected prepayment speeds during 2009.
Interest income from advances decreased $1.3 billion in the third quarter of 2009 compared to the third quarter of 2008. The decrease consisted of a $0.8 billion decrease attributable to lower average yields and a $0.4$0.5 billion decrease attributable to a 25%35% decrease in average advances outstanding, reflecting lower member demand during the secondthird quarter of 2009 relative to the secondthird quarter of 2008. Interest income from advances also includes the impact of advance prepayments, which increased interest income by $2 million in the third quarter of 2009 and reduced interest income by $10 million in the third quarter of 2008. The increase in the third quarter of 2009 primarily reflects prepayment fees received on the advances, partially offset by net losses on the interest rate exchange agreements hedging the prepaid advances.
Interest expense on consolidated obligations (bonds and discount notes) decreased $1.5$1.6 billion in the secondthird quarter of 2009 compared to the secondthird quarter of 2008. The decrease consisted of a $1.1 billion decrease attributable to lower interest rates on consolidated obligations and a $0.4$0.5 billion decrease attributable to lower average consolidated obligation balances, which paralleled the decline in advances and MBS investments. Lower interest rates provided the Bank with the opportunity to call fixed rate callable debt and refinance that debt with new callable debt at a lower cost.
Interest expense on mandatorily redeemable capital stock decreased $3 million because no dividends on mandatorily redeemable capital stock were declared and recorded in the second quarter of 2009. Additional information about mandatorily redeemable capital stock is provided in Note 7 to the Financial Statements.
As a result of these factors, the net interest margin was 7781 basis points for the secondthird quarter of 2009, 3533 basis points higher than the net interest margin for the secondthird quarter of 2008, which was 4248 basis points. The net interest spread was 7176 basis points for the secondthird quarter of 2009, 4240 basis points higher than the net interest spread for the secondthird quarter of 2008, which was 2936 basis points. The increase primarily reflected a higher net interest spread on the Bank’s fixed rate advances accounted for in accordance with SFAS 159the fair value option and the fixed rate mortgage portfolio resulting from the favorable impact of lower interest rates on the associated adjustable rate funding. This increase was partially offset by lower yields on the Bank’s invested capital during the third quarter of 2009 relative to the same period in 2008 because of the lower interest rate environment in the third quarter of 2009.
The increase in net interest income was also partially offset by the increase in net interest expense on derivative instruments used in economic hedges, as notedrecognized in “Other (Loss)/Income.” The increase reflected economic hedges used to hedge fixed rate assets with interest rate swaps having a fixed rate pay leg and an adjustable rate receive leg. The decrease in the London Inter-Bank Offered Rate (LIBOR) rates throughout —the second quarter of 2009rate received on the adjustable rate legleg—throughout the third quarter of 2009 significantly increased the interest rate swaps’ net interest expense.
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 (Loss)/IncomeLoss
The following table presents the components of other (loss)/income“Other Loss” for the three months ended JuneSeptember 30, 2009 and 2008.
Three Months Ended | ||||||||
(In millions) | June 30, 2009 | June 30, 2008 | ||||||
Other (Loss)/Income: | ||||||||
Services to members | $ | 1 | $ | — | ||||
Net gain on trading securities | — | — | ||||||
Total OTTI losses on held-to-maturity securities | (1,283 | ) | — | |||||
Portion of loss recognized in other comprehensive income/(loss) | 1,195 | — | ||||||
Net impairment losses on held-to-maturity securities (credit losses) | (88 | ) | — | |||||
Net loss on advances and consolidation obligation bonds held at fair value | (178 | ) | (228 | ) | ||||
Net gain on derivatives and hedging activities | 224 | 217 | ||||||
Other | 2 | 1 | ||||||
Total Other Loss | $ | (39 | ) | $ | (10 | ) | ||
Three Months Ended | ||||||||
(In millions) | September 30, 2009 | September 30, 2008 | ||||||
Other Loss: | ||||||||
Services to members | $ | — | $ | 1 | ||||
Total other-than-temporary impairment loss on held-to-maturity securities | (1,385 | ) | — | |||||
Portion of loss recognized in other comprehensive income/(loss) | 1,069 | — | ||||||
Net other-than-temporary impairment loss on held-to-maturity securities (credit-related loss) | (316 | ) | — | |||||
Net (loss)/gain on advances and consolidation obligation bonds held at fair value | (62 | ) | 99 | |||||
Net loss on derivatives and hedging activities | (166 | ) | (326 | ) | ||||
Other | 1 | 1 | ||||||
Total Other Loss | $ | (543 | ) | $ | (225 | ) | ||
Net Other-Than-Temporary Impairment LossesLoss on Held-to-Maturity Securities (Credit Losses)(Credit-Related Loss) –The Bank realized an $88recognized a $316 million OTTI charge related to credit loss on non-agency MBSPLRMBS during the secondthird quarter of 2009. Additional information about the OTTI charge is provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Investments” and in Note 3 to the Financial Statements.
Net Loss(Loss)/Gain on Advances and Consolidated Obligation Bonds Held at Fair Value – Fair value adjustments on advances and consolidated obligation bonds carried at fair value in accordance with SFAS 159the fair value option were unrealized fair value losses of $178$62 million for the secondthird quarter of 2009 compared to unrealized fair value lossesgains of $228$99 million for the secondthird quarter of 2008. For the secondthird quarter of 2009, the $178$62 million in unrealized fair value losses, primarily driven by the increasedecrease in market rates in the secondthird quarter of 2009 relative to the firstsecond quarter of 2009, consisted of $130$72 million in unrealized fair value losses on $34.9 billion of advances carried at fair value and $48$10 million in unrealized fair value lossesgains on $35.2 billion of consolidated obligation bonds carried at fair value. For the secondthird quarter of 2008, the $228$99 million in unrealized fair value losses,gains, primarily driven by the increase in market rates in the secondthird quarter of 2008 relative to the firstsecond quarter of 2008, consisted of $256$242 million in unrealized fair value gains on consolidated obligation bonds carried at fair value, partially offset by $143 million in unrealized fair value losses on $22.5 billion of advances carried at fair value, partially offset by $28 million in unrealized fair value gains on $26.4 billion of consolidated obligation bonds carried at fair value. In general, transactions elected for the fair value option in accordance with SFAS 159 are in economic hedge relationships.
Net (Loss)/Gain on Derivatives and Hedging Activities –The following table shows the accounting classification of hedges and the categories of hedged items that contributed to the gains and losses on derivatives and hedged items that were recorded in “Net (loss)/gain on derivatives and hedging activities” in the secondthird quarter of 2009 and 2008.
Sources of Gains/(Losses) Recorded in Net (Loss)/Gain on Derivatives and Hedging Activities
Three Months Ended JuneSeptember 30, 2009, Compared to Three Months Ended JuneSeptember 30, 2008
(In millions) | Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
June 30, 2009 | June 30, 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gain/(Loss) | Net Interest Income/ (Expense) on | Gain/(Loss) | Net Interest (Expense) on | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hedged Item | September 30, 2009 | September 30, 2008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gain/(Loss) | Net Interest Income/ (Expense) on | Total | Gain/(Loss) | Net Interest Income/ (Expense) on | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Hedges, net | Cash Flow Hedges | Economic Hedges | Economic Hedges | Total | Fair Value Hedges, net | Cash Flow Hedges | Economic Hedges | Economic Hedges | Total | Fair Value Hedges, Net | Economic Hedges | Economic Hedges | Fair Value Hedges, Net | Economic Hedges | Economic Hedges | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Advances: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Elected for fair value option | $ | — | $ | — | $ | 220 | $ | (193 | ) | $ | 27 | $ | — | $ | — | $ | 309 | $ | (51 | ) | $ | 258 | $ | — | $ | 51 | $ | (201 | ) | $ | (150 | ) | $ | — | $ | 10 | $ | (60 | ) | $ | (50 | ) | |||||||||||||||||||||||||
Not elected for fair value option | 8 | — | 60 | (39 | ) | 29 | 2 | — | (3 | ) | 4 | 3 | (12 | ) | 7 | (35 | ) | (40 | ) | (75 | ) | 4 | 2 | (69 | ) | ||||||||||||||||||||||||||||||||||||||||||
Consolidated obligations: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Elected for fair value option | — | — | 88 | (29 | ) | 59 | — | — | (49 | ) | (18 | ) | (67 | ) | — | 13 | 13 | 26 | — | (176 | ) | (23 | ) | (199 | ) | ||||||||||||||||||||||||||||||||||||||||||
Not elected for fair value option | — | — | (12 | ) | 121 | 109 | 22 | — | (60 | ) | 61 | 23 | 2 | (93 | ) | 89 | (2 | ) | 74 | (115 | ) | 33 | (8 | ) | |||||||||||||||||||||||||||||||||||||||||||
Total | $ | 8 | $ | — | $ | 356 | $ | (140 | ) | $ | 224 | $ | 24 | $ | — | $ | 197 | $ | (4 | ) | $ | 217 | $ | (10 | ) | $ | (22 | ) | $ | (134 | ) | $ | (166 | ) | $ | (1 | ) | $ | (277 | ) | $ | (48 | ) | $ | (326 | ) | |||||||||||||||||||||
During the secondthird quarter of 2009, net gainslosses on derivatives and hedging activities totaled $224$166 million compared to net gainslosses of $217$326 million in the secondthird quarter of 2008. These amounts included net interest
expense on derivative instruments used in economic hedges of $140$134 million in the secondthird quarter of 2009, compared to net interest expense on derivative instruments used in economic hedges of $4$48 million in the secondthird quarter of 2008.
Excluding the $140$134 million impact from net interest expense on derivative instruments used in economic hedges, net gainslosses for the secondthird quarter of 2009 totaled $364$32 million. The $364$32 million in net gainslosses were primarily attributable to changes in overall interest rate spreads and an increase in swaption volatilities during the secondthird quarter of 2009. These net gainslosses consisted of net gainslosses of $220$5 million attributable to the hedges related to advances and net losses of $91 million attributable to the hedges related to consolidated obligations accounted for under the fair value option in accordance with SFAS 159,accounting for derivative instruments and hedging activities, partially offset by net gains of $88$51 million attributable to the hedges related to advances and net gains of $13 million attributable to the hedges related to consolidated obligations accounted for under the fair value option in accordance with SFAS 159, and net gains of $68 million attributable to the hedges related to advances under SFAS 133, partially offset by net losses of $12 million attributable to the hedges related to consolidated obligations under SFAS 133. Most of the economic hedges matched to advances were associated with the advances accounted for under the fair value option in accordance with SFAS 159. Most of the economic hedges matched to consolidated obligations were associated with consolidated obligation bonds and discount notes in hedge relationships that do not qualify as fair value or cash flow hedges under SFAS 133.option.
The $140$134 million of net interest expense on derivative instruments used in economic hedges for the secondthird quarter of 2009 consisted of $193$201 million of net interest expense primarily attributable to interest rate swaps associated with advances accounted for under the fair value option in accordance with SFAS 159, $39and $35 million of net interest expense attributable to interest rate swaps associated with advances in hedge relationships that do not qualify as fair value or cash flow hedges under SFAS 133,the accounting for derivative instruments and $29hedging activities. These amounts were partially offset by $89 million of net interest expenseincome attributable to interest rate swaps associated with consolidated obligation bonds and discount notes in hedge relationships that do not qualify as fair value or cash flow hedges under the accounting for derivative instruments and hedging activities and $13 million of net interest income attributable to interest rate swaps associated with consolidated obligation bonds accounted for under the fair value option in accordance with SFAS 159. These amounts were partially offset by $121 million of net interest income attributable to interest rate swaps associated with consolidated obligation bonds and discounts notes in hedge relationships that do not qualify as fair value or cash flow hedges under SFAS 133. The net interest expense attributable to interest rate swaps associated with advances and the net interest income attributable to interest rate swaps associated with consolidated obligations were primarily due to the impact of the decrease in the LIBOR rates throughout the second quarter of 2009 on the floating leg of the interest rate swaps.
Excluding the $4 million impact from net interest expense on derivative instruments used in economic hedges, net gains for the second quarter of 2008 totaled $221 million. The $221 million in net gains were primarily attributable to an increase in interest rates and a decrease in swaption volatility levels during the second quarter of 2008. These net gains consisted of net gains of $309 million attributable to the hedges related to advances accounted for under the fair value option in accordance with SFAS 159, partially offset by net losses of $49 million attributable to the hedges related to consolidated obligations accounted for under the fair value option in accordance with SFAS 159, net losses of $38 million attributable to the hedges related to consolidated obligations under SFAS 133, and net losses of $1 million attributable to advances under SFAS 133. Most of the economic hedges matched to advances were associated with the advances accounted for under the fair value option in accordance with SFAS 159. Most of the economic hedges matched to consolidated obligations were associated with consolidated obligation bonds and discounts notes in hedge relationships that do not qualify as fair value or cash flow hedges under SFAS 133.
The $4 million of net interest expense on derivative instruments used in economic hedges for the second quarter of 2008 consisted of $51 million of net interest expense attributable to interest rate swaps associated with advances accounted for under the fair value option in accordance with SFAS 159 and $18 million of net interest expense attributable to interest rate swaps associated with consolidated obligation bonds accounted for under the fair value option in accordance with SFAS 159. These amounts were partially offset by $61 million of net interest income attributable to interest rate swaps associated with consolidated obligation bonds and discounts notes in hedge relationships that do not qualify as fair value or cash flow hedges under SFAS 133 and $4 million of net interest income attributable to interest rate swaps associated with advances in hedge relationships that do not qualify as fair value or cash flow hedges under SFAS 133.option. The net interest expense attributable to interest rate swaps associated with advances and the net interest income attributable to interest rate swaps associated with consolidated obligations were primarily due to the impact of the decrease in LIBOR throughout the third quarter of 2009 on the floating leg of the interest rate swaps.
Excluding the $48 million impact from net interest expense on derivative instruments used in economic hedges, net losses for the third quarter of 2008 totaled $278 million. The $278 million in net losses were primarily attributable to significant increases in short-term interest rates toward the end of the third quarter of 2008. These net losses consisted of net losses of $176 million attributable to the hedges related to consolidated obligations accounted for under the fair value option, net losses of $71 million attributable to the hedges related to advances, and net losses of $41 million attributable to the hedges related to consolidated obligations under the accounting for derivative instruments and hedging activities, partially offset by net gains of $10 million attributable to the hedges related to advances accounted for under the fair value option.
The $48 million of net interest expense on derivative instruments used in earlyeconomic hedges for the third quarter of 2008 consisted of $60 million and $23 million of net interest expense attributable to interest rate swaps associated with advances and with consolidated obligation bonds, respectively, accounted for under the fair value option. These amounts were partially offset by $33 million and $2 million of net interest income attributable to interest rate swaps associated with consolidated obligation bonds and discount notes and with advances, respectively, in hedge relationships that do not qualify as fair value or cash flow hedges under the accounting for derivative instruments and hedging activities. The net interest expense attributable to interest rate swaps associated with advances and the net interest income attributable to interest rate swaps associated with consolidated obligations were primarily due to the impact of the decrease in LIBOR throughout most of 2008 on the floating leg of the interest rate swaps.
SFAS 133-The hedging and SFAS 159-related income effectsfair value option valuation adjustments during the secondthird quarter of 2009 were primarily driven by (i) changes in overall interest rate spreads; (ii) the reversal of prior period gains and losses; and (iii) increases in swaption volatilities. The positive fair value impact resulted in primarily unrealized net gains. These gains are generally expected to reverse through changes in future valuations and settlements of contractual interest cash flows over the remaining term to maturity.
The ongoing impact of SFAS 133 and SFAS 159these valuation adjustments on the Bank cannot be predicted, and the Bank’s retained earnings in the future may not be sufficient to fully offset the impact of SFAS 133 and SFAS 159.these valuation adjustments. The effects of SFAS 133 and SFAS 159these valuation adjustments may lead to significant volatility in future earnings, other comprehensive income, andincluding earnings available for dividends.
SixNine Months Ended JuneSeptember 30, 2009, Compared to SixNine Months Ended JuneSeptember 30, 2008
Average Balance Sheets
Six Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||
June 30, 2009 | June 30, 2008 | September 30, 2009 | September 30, 2008 | |||||||||||||||||||||||||||||||||||||
(In millions) | Average Balance | Interest Income/ | Average Rate | Average Balance | Interest Income/ | Average Rate | Average Balance | Interest Income/ Expense | Average Rate | Average Balance | Interest Income/ Expense | Average Rate | ||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||
Resale agreements | $ | 8 | $ | — | 0.17 | % | $ | — | $ | — | — | % | ||||||||||||||||||||||||||||
Federal funds sold | $ | 14,226 | $ | 13 | 0.18 | % | $ | 14,451 | $ | 209 | 2.91 | % | 14,107 | 18 | 0.17 | 14,221 | 287 | 2.70 | ||||||||||||||||||||||
Trading securities: | ||||||||||||||||||||||||||||||||||||||||
MBS | 34 | 1 | 5.93 | 55 | 2 | 7.31 | 33 | 1 | 4.05 | 49 | 2 | 5.45 | ||||||||||||||||||||||||||||
Held-to-maturity securities: | ||||||||||||||||||||||||||||||||||||||||
MBS | 37,640 | 783 | 4.19 | 37,063 | 910 | 4.94 | 36,610 | 1,136 | 4.15 | 38,362 | 1,395 | 4.86 | ||||||||||||||||||||||||||||
Other investments(1) | 11,452 | 21 | 0.37 | 18,320 | 289 | 3.17 | ||||||||||||||||||||||||||||||||||
Other investments | 10,644 | 26 | 0.33 | 17,217 | 389 | 3.02 | ||||||||||||||||||||||||||||||||||
Mortgage loans | 3,573 | 79 | 4.46 | 4,023 | 97 | 4.85 | 3,467 | 118 | 4.55 | 3,965 | 145 | 4.88 | ||||||||||||||||||||||||||||
Advances(2) | 206,095 | 1,837 | 1.80 | 250,217 | 4,448 | 3.57 | ||||||||||||||||||||||||||||||||||
Advances(1) | 191,972 | 2,385 | 1.66 | 251,217 | 6,279 | 3.34 | ||||||||||||||||||||||||||||||||||
Loans to other FHLBanks | 341 | — | 0.11 | 16 | — | 2.77 | 291 | — | 0.11 | 17 | — | 2.50 | ||||||||||||||||||||||||||||
Total interest-earning assets | 273,361 | 2,734 | 2.02 | 324,145 | 5,955 | 3.69 | 257,132 | 3,684 | 1.92 | 325,048 | 8,497 | 3.49 | ||||||||||||||||||||||||||||
Other assets(3)(4)(5) | 6,391 | — | — | 8,792 | — | — | ||||||||||||||||||||||||||||||||||
Other assets(2)(3)(4) | 5,213 | — | — | 7,711 | — | — | ||||||||||||||||||||||||||||||||||
Total Assets | $ | 279,752 | $ | 2,734 | 1.97 | % | $ | 332,937 | $ | 5,955 | 3.60 | % | $ | 262,345 | $ | 3,684 | 1.88 | % | $ | 332,759 | $ | 8,497 | 3.41 | % | ||||||||||||||||
Liabilities and Capital | ||||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||
Consolidated obligations: | ||||||||||||||||||||||||||||||||||||||||
Bonds(2) | $ | 188,994 | $ | 1,448 | 1.55 | % | $ | 227,117 | $ | 4,031 | 3.57 | % | ||||||||||||||||||||||||||||
Bonds(1) | $ | 180,367 | $ | 1,866 | 1.38 | % | $ | 229,989 | $ | 5,704 | 3.31 | % | ||||||||||||||||||||||||||||
Discount notes | 69,485 | 368 | 1.07 | 81,512 | 1,331 | 3.28 | 61,664 | 435 | 0.94 | 79,479 | 1,793 | 3.01 | ||||||||||||||||||||||||||||
Deposits(3) | 2,286 | — | 0.06 | 1,374 | 17 | 2.49 | ||||||||||||||||||||||||||||||||||
Deposits(2) | 2,149 | — | 0.05 | 1,395 | 23 | 2.20 | ||||||||||||||||||||||||||||||||||
Borrowings from other FHLBanks | 10 | — | 0.16 | 16 | — | 1.45 | 8 | — | 0.16 | 25 | — | 1.06 | ||||||||||||||||||||||||||||
Mandatorily redeemable capital stock | 3,358 | — | — | 206 | 6 | 5.96 | 3,292 | 7 | 0.28 | 409 | 14 | 5.24 | ||||||||||||||||||||||||||||
Other borrowings | 13 | — | 0.08 | 8 | — | 3.10 | 9 | — | 0.08 | 15 | — | 2.27 | ||||||||||||||||||||||||||||
Total interest-bearing liabilities | 264,146 | 1,816 | 1.39 | 310,233 | 5,385 | 3.49 | 247,489 | 2,308 | 1.25 | 311,312 | 7,534 | 3.23 | ||||||||||||||||||||||||||||
Other liabilities(3)(4) | 5,703 | — | — | 8,684 | — | — | ||||||||||||||||||||||||||||||||||
Other liabilities(2)(3) | 5,309 | — | — | 7,565 | — | — | ||||||||||||||||||||||||||||||||||
Total Liabilities | 269,849 | 1,816 | 1.36 | 318,917 | 5,385 | 3.40 | 252,798 | 2,308 | 1.22 | 318,877 | 7,534 | 3.16 | ||||||||||||||||||||||||||||
Total Capital | 9,903 | — | — | 14,020 | — | — | 9,547 | — | — | 13,882 | — | — | ||||||||||||||||||||||||||||
Total Liabilities and Capital | $ | 279,752 | $ | 1,816 | 1.31 | % | $ | 332,937 | $ | 5,385 | 3.25 | % | $ | 262,345 | $ | 2,308 | 1.18 | % | $ | 332,759 | $ | 7,534 | 3.02 | % | ||||||||||||||||
Net Interest Income | $ | 918 | $ | 570 | $ | 1,376 | $ | 963 | ||||||||||||||||||||||||||||||||
Net Interest Spread(6) | 0.63 | % | 0.20 | % | ||||||||||||||||||||||||||||||||||||
Net Interest Spread(5) | 0.67 | % | 0.26 | % | ||||||||||||||||||||||||||||||||||||
Net Interest Margin(7) | 0.68 | % | 0.35 | % | ||||||||||||||||||||||||||||||||||||
Net Interest Margin(6) | 0.72 | % | 0.40 | % | ||||||||||||||||||||||||||||||||||||
Interest-earning Assets/ Interest-bearing Liabilities | 103.49 | % | 104.48 | % | 103.90 | % | 104.41 | % | ||||||||||||||||||||||||||||||||
Total Average Assets/Capital Ratio(8) | 21.1 | x | 23.4 | x | ||||||||||||||||||||||||||||||||||||
Total Average Assets/Capital Ratio(7) | 20.4 | x | 23.3 | x | ||||||||||||||||||||||||||||||||||||
(1) |
Interest income/expense and average rates include the effect of associated interest rate exchange agreements. Interest income on advances includes net interest expense on interest rate exchange agreements of |
Average balances do not reflect the effect of reclassifications of cash |
Includes forward settling transactions |
Includes OTTI losses on held-to-maturity securities related to all other factors. |
Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. |
Net interest margin is net interest income (annualized) divided by average interest-earning assets. |
For this purpose, capital includes mandatorily redeemable capital stock and excludes other comprehensive income. |
Change in Net Interest Income: Rate/Volume Analysis
SixNine Months Ended JuneSeptember 30, 2009, Compared to SixNine Months Ended JuneSeptember 30, 2008
Increase/ (Decrease) | Attributable to Changes in(1) | |||||||||||||||||||||||
Increase/ | Attributable to Changes in(1) | |||||||||||||||||||||||
(In millions) | (Decrease) | Average Volume | Average Rate | Average Volume | Average Rate | |||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Federal funds sold | $ | (196 | ) | $ | (3 | ) | $ | (193 | ) | $ | (269 | ) | $ | (2 | ) | $ | (267 | ) | ||||||
Trading securities: | ||||||||||||||||||||||||
MBS | (1 | ) | (1 | ) | — | (1 | ) | (1 | ) | — | ||||||||||||||
Held-to-maturity securities: | ||||||||||||||||||||||||
MBS | (127 | ) | 14 | (141 | ) | (259 | ) | (62 | ) | (197 | ) | |||||||||||||
Other investments(2) | (268 | ) | (80 | ) | (188 | ) | ||||||||||||||||||
Other investments | (363 | ) | (109 | ) | (254 | ) | ||||||||||||||||||
Mortgage loans | (18 | ) | (10 | ) | (8 | ) | (27 | ) | (17 | ) | (10 | ) | ||||||||||||
Advances(3) | (2,611 | ) | (684 | ) | (1,927 | ) | ||||||||||||||||||
Advances(2) | (3,894 | ) | (1,244 | ) | (2,650 | ) | ||||||||||||||||||
Loans to other FHLBanks | — | 1 | (1 | ) | ||||||||||||||||||||
Total interest-earning assets | (3,221 | ) | (764 | ) | (2,457 | ) | (4,813 | ) | (1,434 | ) | (3,379 | ) | ||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Consolidated obligations: | ||||||||||||||||||||||||
Bonds(3) | (2,583 | ) | (590 | ) | (1,993 | ) | ||||||||||||||||||
Bonds(2) | (3,838 | ) | (1,037 | ) | (2,801 | ) | ||||||||||||||||||
Discount notes | (963 | ) | (173 | ) | (790 | ) | (1,358 | ) | (334 | ) | (1,024 | ) | ||||||||||||
Deposits | (17 | ) | 7 | (24 | ) | (23 | ) | 8 | (31 | ) | ||||||||||||||
Mandatorily redeemable capital stock | (6 | ) | 6 | (12 | ) | (7 | ) | 20 | (27 | ) | ||||||||||||||
Total interest-bearing liabilities | (3,569 | ) | (750 | ) | (2,819 | ) | (5,226 | ) | (1,343 | ) | (3,883 | ) | ||||||||||||
Net interest income | $ | 348 | $ | (14 | ) | $ | 362 | $ | 413 | $ | (91 | ) | $ | 504 | ||||||||||
(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. |
Net Interest Income
Net interest income in the first sixnine months of 2009 was $918$1,376 million, a 61%43% increase from $570$963 million in the first sixnine months of 2008. The increase was driven primarily by the following:
Interest income on non-MBS investments decreased $464$632 million in the first sixnine months of 2009 compared to the first sixnine months of 2008. The decrease consisted of a $381$521 million decrease attributable to lower average yields on non-MBS investments and a $83an $111 million decrease attributable to a 22%21% decrease in average non-MBS investment balances.
Interest income from the mortgage portfolio decreased $146$287 million in the first sixnine months of 2009 compared to the first sixnine months of 2008. The decrease consisted of a $149$207 million decrease attributable to lower average yields on MBS investments and mortgage loans, and a $10$63 million decrease attributable to an 11%a 5% decrease in average MBS investments outstanding, and a $17 million decrease attributable to a 13% decrease in average mortgage loans outstanding, partially offset by a $13 million increase attributable to a 1% increase in average MBS investments outstanding. Interest income from the mortgage portfolio includes the impact of cumulative retrospective adjustments for the amortization of net purchase discounts from the acquisition dates of the MBS and mortgage loans, in accordance with SFAS 91, which decreased interest income by $23 million in the first sixnine months of 2009 and increased interest income by $2$7 million in the first sixnine months of 2008. This decrease was primarily due to a higher mortgage rate environment during 2009, resulting in slower projected prepayment rates.speeds during 2009.
Interest income from advances decreased $2.6$3.9 billion in the first sixnine months of 2009 compared to the first sixnine months of 2008. The decrease consisted of a $1.9$2.7 billion decrease attributable to lower average yields and a $0.7$1.2 billion decrease attributable to an 18%a 24% decrease in average advances outstanding, reflecting lower member demand during the first sixnine months of 2009 relative to the first sixnine months of 2008. Interest income from advances also includes the impact of advance prepayments, which increased interest income by $22 million in the first nine months of 2009. In the first nine months of 2008, interest income was decreased by prepayment credits of $10 million. The increase in the first nine months of 2009 primarily reflects prepayment fees received on the advances, partially offset by net losses on the interest rate exchange agreements hedging the prepaid advances.
Interest expense on consolidated obligations (bonds and discount notes) decreased $3.5$5.2 billion in the first sixnine months of 2009 compared to the first sixnine months of 2008. The decrease consisted of a $2.8$3.8 billion decrease attributable to lower interest rates on consolidated obligations and a $0.7$1.4 billion decrease attributable to lower average consolidated obligation balances, which paralleled the decline in advances and MBS investments. Lower interest rates provided the Bank with the opportunity to call fixed rate callable debt and refinance that debt with new callable debt at a lower cost.
Interest expense on mandatorily redeemable capital stock decreased $6 million because no dividends on mandatorily redeemable capital stock were declared and recorded in the first six months of 2009. Additional information about mandatorily redeemable capital stock is provided in Note 7 to the Financial Statements.
As a result of these factors, the net interest margin was 6872 basis points for the first sixnine months of 2009, 3332 basis points higher than the net interest margin for the first sixnine months of 2008, which was 3540 basis points. The net interest spread was 6367 basis points for the first sixnine months of 2009, 4341 basis points higher than the net interest spread for the first sixnine months of 2008, which was 2026 basis points. The increase primarily reflected a higher net interest spread on the Bank’s fixed rate advances accounted for in accordance with SFAS 159 and the fixed rate mortgage portfolio resulting from the favorable impact of lower interest rates on the associated adjustable rate funding. This increase was primarily offset by lower yields on the Bank’s invested capital during the first nine months of 2009 relative to the same period in 2008 because of the lower interest rate environment in the first nine months of 2009.
The increase in net interest income was partially offset by the increase in net interest expense on derivative instruments used in economic hedges, as notedrecognized in “Other (Loss)/Income.” The increase reflected economic hedges used to hedge fixed rate assetsadvances and MBS with interest rate swaps having a fixed rate pay leg and an adjustable rate receive leg. The decrease in LIBOR—the LIBOR rates throughout the first six months of 2009rate received on the adjustable rate legleg—throughout the first nine months of 2009 significantly increased the interest rate swaps’ net interest expense.
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 (Loss)/IncomeLoss
The following table presents the various components of other (loss)/income“Other Loss” for the sixnine months ended JuneSeptember 30, 2009 and 2008.
Six Months Ended | Nine Months Ended | ||||||||||||||
(In millions) | June 30, 2009 | June 30, 2008 | September 30, 2009 | September 30, 2008 | |||||||||||
Other (Loss)/Income: | |||||||||||||||
Other Loss: | |||||||||||||||
Services to members | $ | 1 | $ | — | $ | 1 | $ | 1 | |||||||
Net gain on trading securities | 1 | — | 1 | — | |||||||||||
Total OTTI losses on held-to-maturity securities | (2,439 | ) | — | ||||||||||||
Total other-than-temporary impairment loss on held-to-maturity securities | (3,824 | ) | — | ||||||||||||
Portion of loss recognized in other comprehensive income/(loss) | 2,263 | — | 3,332 | — | |||||||||||
Net impairment losses on held-to-maturity securities (credit losses) | (176 | ) | — | ||||||||||||
Net other-than-temporary impairment loss on held-to-maturity securities (credit-related loss) | (492 | ) | — | ||||||||||||
Net (loss)/gain on advances and consolidation obligation bonds held at fair value | (361 | ) | 46 | (423 | ) | 145 | |||||||||
Net gain on derivatives and hedging activities | 258 | 62 | |||||||||||||
Net gain/(loss) on derivatives and hedging activities | 92 | (264 | ) | ||||||||||||
Other | 2 | 2 | 3 | 3 | |||||||||||
Total Other (Loss)/Income | $ | (275 | ) | $ | 110 | ||||||||||
Total Other Loss | $ | (818 | ) | $ | (115 | ) | |||||||||
Net Other-Than-Temporary Impairment LossesLoss on Held-to-Maturity Securities (Credit Losses)(Credit-Related Loss) –The Bank realized a $176$492 million OTTI charge related to credit loss on non-agency MBSPLRMBS during the first sixnine months of 2009. Additional information about the OTTI charge is provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Investments” and in Note 3 to the Financial Statements.
Net (Loss)/Gain on Advances and Consolidated Obligation Bonds Held at Fair Value – Fair value adjustments on advances and consolidated obligation bonds carried at fair value in accordance with SFAS 159the fair value option were unrealized net fair value losses of $361$423 million for the first sixnine months of 2009 compared to unrealized net fair value gains of $46$145 million for the first sixnine months of 2008. For the first sixnine months of 2009, the $361$423 million unrealized net fair value losses were primarily driven by the decline in interest rates and an increase in swaption volatility, and consisted of $393 million in unrealized fair value losses on advances carried at fair value and $30 million in unrealized fair value losses on consolidated obligation bonds carried at fair value. For the first nine months of 2008, the $145 million unrealized net fair value gains, primarily driven by the decline in interest rates and an increase in swaption volatility during the first six months of 2009 consisted of $321 million in unrealized fair value losses on $34.9 billion of advances carried at fair value and $40 million in unrealized fair value losses on $35.2 billion of consolidated obligation bonds carried at fair value. For the first six months of 2008, the $46 million unrealized net fair value gains, primarily driven by the sharp decline in interest rates and an increase in swaption volatility during the first sixnine months of 2008, consisted of $63$305 million in unrealized fair value gains of $26.4 billion ofon consolidated obligation bonds carried at fair value, partially offset by $17$160 million in unrealized fair value losses on $22.5 billion of advances carried at fair value. In general, transactions elected for the fair value option in accordance with SFAS 159 are in economic hedge relationships.
Net (Loss)/Gain on Derivatives and Hedging Activities –The following table shows the accounting classification of hedges and the categories of hedged items that contributed to the gains and losses on derivatives and hedged items that were recorded in “Net (loss)/gain on derivatives and hedging activities” in the first sixnine months of 2009 and 2008.
Sources of Gains/(Losses) Recorded in Net (Loss)/Gain on Derivatives and Hedging Activities
SixNine Months Ended JuneSeptember 30, 2009, Compared to SixNine Months Ended JuneSeptember 30, 2008
(In millions) | Six Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
June 30, 2009 | June 30, 2008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gain/(Loss) | Net Interest (Expense) on | Gain/(Loss) | Net Interest (Expense) on | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hedged Item | September 30, 2009 | September 30, 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gain/(Loss) | Net Interest Income/ (Expense) on | Total | Gain/(Loss) | Net Interest Income/ (Expense) on | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Hedges, net | Cash Flow Hedges | Economic Hedges | Economic Hedges | Total | Fair Value Hedges, net | Cash Flow Hedges | Economic Hedges | Economic Hedges | Total | Fair Value Hedges, Net | Economic Hedges | Economic Hedges | Fair Value Hedges, Net | Economic Hedges | Economic Hedges | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Advances: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Elected for | $ | — | $ | — | $ | 353 | $ | (342 | ) | $ | 11 | $ | — | $ | — | $ | 18 | $ | (57 | ) | $ | (39 | ) | $ | — | $ | 404 | $ | (543 | ) | $ | (139 | ) | $ | — | $ | 28 | $ | (118 | ) | $ | (90 | ) | |||||||||||||||||||||||||||
Not elected | (28 | ) | — | 102 | (86 | ) | (12 | ) | (3 | ) | — | — | 9 | 6 | (40 | ) | 109 | (121 | ) | (52 | ) | (78 | ) | 4 | 12 | (62 | ) | |||||||||||||||||||||||||||||||||||||||||||
Consolidated obligations: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Elected for | — | — | 130 | (109 | ) | 21 | — | — | (63 | ) | (20 | ) | (83 | ) | — | 143 | (96 | ) | 47 | — | (238 | ) | (43 | ) | (281 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Not elected | 52 | — | (126 | ) | 312 | 238 | 47 | — | — | 131 | 178 | 54 | (219 | ) | 401 | 236 | 121 | (116 | ) | 164 | 169 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 24 | $ | — | $ | 459 | $ | (225 | ) | $ | 258 | $ | 44 | $ | — | $ | (45 | ) | $ | 63 | $ | 62 | $ | 14 | $ | 437 | $ | (359 | ) | $ | 92 | $ | 43 | $ | (322 | ) | $ | 15 | $ | (264 | ) | |||||||||||||||||||||||||||||
During the first sixnine months of 2009, net gains on derivatives and hedging activities totaled $258$92 million compared to net gainslosses of $62$264 million in the first sixnine months of 2008. These amounts included net interest expense on derivative instruments used in economic hedges of $225$359 million in the first sixnine months of 2009, compared to net interest income on derivative instruments used in economic hedges of $63$15 million in the first sixnine months of 2008.
Excluding the $225$359 million impact from net interest expense on derivative instruments used in economic hedges, net gains for the first sixnine months of 2009 totaled $483$451 million. The $483$451 million in net gains were primarily attributable to changes in overall interest rate spreads and an increase in swaption volatilities during the first sixnine months of 2009. These net gains consisted of net gains of $353$404 million attributable to the hedges related to advances accounted for under the fair value option in accordance with SFAS 159,and net gains of $130$143 million attributable to the hedges related to consolidated obligations accounted for under the fair value option, in accordance with SFAS 159, and net gains of $74$109 million attributable to the hedges related to advances accounted for under SFAS 133,the accounting for derivative instruments and hedging activities. These amounts were partially offset by net losses of $74$219 million attributable to the hedges related to consolidated obligations under SFAS 133. Most of the economic hedges matched to advances were associated with the advances accountedaccounting for under the fair value option in accordance with SFAS 159. The economic hedges matched to consolidated obligations were associated with consolidated obligation bondsderivative instruments and discount notes in hedge relationships that do not qualify as fair value or cash flow hedges under SFAS 133, as well as consolidated obligation bonds accounted for under the fair value option in accordance with SFAS 159.hedging activities.
The $225$359 million of net interest expense on derivative instruments used in economic hedges for the first sixnine months of 2009 consisted of $342$543 million of net interest expense attributable to interest rate swaps associated with advances accounted for under the fair value option, in accordance with SFAS 159, $109$96 million of net interest expense attributable to interest rate swaps associated with consolidated obligation bonds accounted for under the fair value option, in accordance with SFAS 159, and $86$121 million of net interest expense attributable to interest rate swaps associated with advances in hedge relationships that do not qualify as fair value or cash flow hedges under SFAS 133.the accounting for derivative instruments and hedging activities. These amounts were partially offset by $312$401 million of net interest income attributable to interest rate swaps associated with consolidated obligation bonds and discount notes in hedge relationships that do not qualify as fair value or cash flow hedges under SFAS 133.the accounting for derivative instruments and hedging activities. The net interest expense attributable to interest rate swaps associated with advances and the net interest income attributable to interest rate swaps associated with consolidated obligations were primarily due to the impact of the decrease in the LIBOR rates throughout the first sixnine months of 2009 on the floating leg of the interest rate swaps.
Excluding the $63$15 million impact from net interest income on derivative instruments used in economic hedges, net losses for the first sixnine months of 2008 totaled $1$279 million. The $1$279 million in net losses, primarily attributable to the sharp decline in interest rates during the latter half of 2007 through the first sixnine months of 2008, consisted of net losses of $63$238 million attributable to the hedges related to consolidated obligations accounted for under the fair value option in accordance with SFAS 159,and net losses of $3$74 million attributable to the hedges related to advances under SFAS 133,the accounting for derivative instruments and hedging activities, partially offset by net gains of $47$28 million attributable to the hedges related to consolidated obligations under SFAS 133 and net gains of $18 million attributable to hedges related to advances accounted for under the fair value option in accordance with SFAS 159. Mostand net gains of $5 million attributable to the economic hedges matched to advances were associated with the advances accounted for under the fair value option in accordance with SFAS 159. The economic hedges matchedrelated to consolidated obligations were associated with consolidated obligation bonds and discount notes in hedge relationships that do not qualify as fair value or cash flow hedges under SFAS 133, as well as consolidated obligation bonds accounted for under the fair value option in accordance with SFAS 159.accounting for derivative instruments and hedging activities.
The $63$15 million of net interest income on derivative instruments used in economic hedges for the first sixnine months of 2008 consisted of $131$164 million and $12 million of net interest income attributable to interest rate swaps associated with consolidated obligation bonds and discountsdiscount notes in hedge relationships that do not qualify as fair value
or cash flow hedges under SFAS 133 and $9 million of net interest income attributable to interest rate swaps associated with advances, respectively, in hedge relationships that do not qualify as fair value or cash flow hedges under SFAS 133.the accounting for derivative instruments and hedging activities. These amounts were partially offset by $57$118 million and $43 million of net interest expense attributable to interest rate swaps associated with advances and consolidated obligation bonds, respectively, accounted for under the fair value option in accordance with SFAS 159 and $20 million of net interest expense attributable to interest rate swaps associated with consolidated obligation bonds accounted for under the fair value option in accordance with SFAS 159.option. The net interest income on derivative instruments used in economic hedges for the first sixnine months of 2008 was primarily due to the abrupt and significant decrease in interest rates that occurred in earlyduring 2008, which had
a favorable effect on certain LIBOR-based interest rate swaps that effectively converted the repricing frequency of the interest rate swaps from three months to one month. The favorable effect resulted from the one-month leg of the interest rate swaps repricing at the lower interest rates more quickly than the three-month leg of the interest rate swaps.
SFAS 133-The hedging and SFAS 159-related income effectsfair value option valuation adjustments during the first sixnine months of 2009 were primarily driven by (i) changes in overall interest rate spreads; (ii) the reversal of prior period gains and losses; and (iii) increases in swaption volatilities. The positive fair value impact resulted in primarily unrealized net gains. These gains are generally expected to reverse through changes in future valuations and settlements of contractual interest cash flows over the remaining term to maturity.
The ongoing impact of SFAS 133 and SFAS 159these valuation adjustments on the Bank cannot be predicted, and the Bank’s retained earnings in the future may not be sufficient to fully offset the impact of SFAS 133 and SFAS 159.these valuation adjustments. The effects of SFAS 133 and SFAS 159these valuation adjustments may lead to significant volatility in future earnings, other comprehensive income, andincluding earnings available for dividends.
Return on Equity
Return on equity (ROE) was 12.49%(3.84)% (annualized) for the secondthird quarter of 2009, an increasea decrease of 612680 basis points from the secondthird quarter of 2008. This increasedecrease primarily reflected the increasedecrease in net income in the secondthird quarter of 2009 coupled with a decrease in average equity compared to the same period in 2008.
ROE was 8.68%4.77% (annualized) for the first sixnine months of 2009, an increasea decrease of 20367 basis points fromcompared to the first sixnine months of 2008. This increasedecrease reflected the decreasedecline in average equity, which decreased 29%32%, to $9.9$9.5 billion in the first sixnine months of 2009 from $14.0$13.9 billion in the first sixnine months of 2008.2008, coupled with a decrease in net income in the first nine months of 2009.
Dividends and Retained Earnings
By regulations governing the operations of the FHLBanks, dividends may be paid only out of current net earnings or previously retained earnings. As required by the regulations, the Bank has a formal retained earnings policyRetained Earnings and Dividend Policy that is reviewed at least annually by the Bank’s Board of Directors. The Board of Directors may amend the Retained Earnings and Dividend Policy from time to time. The Bank’s Retained Earnings and Dividend Policy establishes amounts to be retained in restricted retained earnings, which are not made available for dividends in the current dividend period. The Bank may be restricted from paying dividends if it is not in compliance with any of its minimum capital requirements or if payment would cause the Bank to fail to meet any of its minimum capital requirements. In addition, the Bank may not pay dividends if any principal or interest due on any consolidated obligationsobligation has not been paid in full or is not expected to be paid in full, or, under certain circumstances, if the Bank fails to satisfy certain liquidity requirements under applicable regulations.
The regulatory liquidity requirements state that each FHLBank must (i) maintain eligible high quality assets (advances with a maturity not exceeding five years, U.S. Treasury securities investments, and deposits in banks or trust companies) in an amount equal to or greater than the deposits received from members, and (ii) hold contingency liquidity in an amount sufficient to meet its liquidity needs for at least five business days
without access to the consolidated obligations markets. At JuneSeptember 30, 2009, advances maturing within five years totaled $165.4$146.1 billion, significantly in excess of the $0.3$0.2 billion of member deposits on that date. At December 31, 2008, advances maturing within five years totaled $225.1 billion, also significantly in excess of the $0.6 billion of member deposits on that date. In addition, as of JuneSeptember 30, 2009, and December 31, 2008, the Bank’s estimated total sources of funds obtainable from liquidity investments, repurchase agreement borrowings collateralized by the Bank’s marketable securities, and advance repayments would have allowed the Bank to meet its liquidity needs for more than 90 days without access to the consolidated obligations markets.
Retained Earnings Related to SFAS 133 and SFAS 159Valuation Adjustments –In accordance with the Bank’s Retained Earnings and Dividend Policy, the Bank retains in restricted retained earnings any cumulative net gains in earnings (net of applicable assessments) resulting from SFAS 133. Effective January 1, 2008, the Bank’s Retained Earningsaccounting for derivative instruments and Dividend Policy was amended to also include in restricted retained earningshedging activities and any cumulative net gains resulting from the transition impact of adopting SFAS 159the fair value option and the ongoing impact from the application of SFAS 159.the fair value option. As SFAS 133- and SFAS 159-relatedthe cumulative net gains are reversed by periodic SFAS 133- and SFAS 159-related net losses and settlements of contractual interest cash flows, the amount of the cumulative net gains decreases. The amount of retained earnings required by this provision of the policy is therefore decreased, and that portion of the previously restricted retained earnings becomes unrestricted and may be made available for dividends. The retained earnings restricted in accordance with this provision of the Bank’s Retained Earnings and Dividend Policy totaled $170$116 million at JuneSeptember 30, 2009, and $52 million at December 31, 2008.
Other Retained Earnings – Targeted Buildup –In addition to any cumulative net gains resulting from the application of SFAS 133 and SFAS 159,valuation adjustments, the Bank holds an additional amount of otherin restricted retained earnings intended to protect members’ paid-in capital from the effects of an extremely adverse credit event, an extremely adverse operations risk event, and/or an extremely adverse SFAS 133 or SFAS 159 quarterly result, combined with an extremely lowhigh level of pre-SFAS 133quarterly losses related to the Bank’s derivatives and pre-SFAS 159associated hedged items and financial instruments carried at fair value, and the risk of higher-than-anticipated credit losses related to other-than-temporary impairment of PLRMBS, especially in periods of extremely low net income resulting from an adverse interest rate environment, as well as the risk of a write-down on MBS with unrealized losses if the losses were determined to be other than temporary.environment. The retained earnings restricted in accordance with this provision of the Retained Earnings and Dividend Policy totaled $1,002$949 million at JuneSeptember 30, 2009, and $124 million at December 31, 2008. The Bank’s current target is $1.2 billion. On May 29, 2009, the Bank’s Board of Directors amended the Bank’s Retained Earnings and Dividend Policy to change the way the Bank determines the amount of earnings to be restricted for the targeted buildup. Instead of retaining a fixed percentage of earnings toward the retained earnings target each quarter, the Bank will designate any earnings not restricted for other reasons or not paid out in dividends as restricted retained earnings for the purpose of meeting the target. In September 2009, the Board of Directors increased the targeted amount to $1.8 billion. Most of the increase in the target was due to an increase in the projected losses on the collateral underlying the Bank’s PLRMBS under stress case assumptions about housing market conditions.
Dividends –On July 30,October 29, 2009, the Bank’s Board of Directors declared a cash dividend for the second quarter of 2009 at an annualized rate of 0.84%. The total amount of the dividend is $28 million. The Bank didannounced that it would not pay a dividend for the first quarter of 2009. The Bank’s dividend rate was 6.19% (annualized) for the second quarter of 2008 and 5.96% (annualized) for the first six months of 2008.
The dividend for the secondthird quarter of 2009 will be paid in cash rather than in shares of Class B capital stock to comply with Finance Agency rules. Under Finance Agency rules, an FHLBank may not pay dividends in the form of capital stock or issue excess stock to members if the FHLBank’s excess stock exceeds 1% of its total assets or if the issuance of stock would cause the FHLBank’s excess stock to exceed 1% of its total assets. At June 30, 2009, the Bank’s excess capital stock totaled $4.6 billion, or 2% of total assets.
On July 14, 2009, the Bank notified members that itand would not repurchase excess capital stock during the fourth quarter of 2009. The Bank continues to focus on July 31, 2009, in order to preserve the Bank’spreserving capital in light ofresponse to the ongoing potential for additional OTTI charges because of uncertainty regarding future conditionschallenges in the housing and mortgage markets and capital markets.the possibility of future OTTI charges. The Bank will continue to monitor the condition of its MBS portfolio, its overall financial performance and retained earnings, developments in the mortgage and credit markets, and other relevant information in determining the status of dividends and excess capital stock repurchases in future quarters. The Bank’s dividend rate was 3.85% (annualized) for the third quarter of 2008 and 5.24% (annualized) for the first nine months of 2008.
For more information on the Bank’s Retained Earnings and Dividend Policy, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Comparison of 2008 to 2007 – Dividends” in the Bank’s 2008 Form 10-K.
Total assets were $238.9$211.2 billion at JuneSeptember 30, 2009, a 26%34% decrease from $321.2 billion at December 31, 2008, primarily as a result of decline in advances, which decreased by $61.0$80.7 billion or 26%34%, to $174.7$155.0 billion at JuneSeptember 30, 2009, from $235.7 billion at December 31, 2008. In addition to the decline in advances, cash and due from banks decreased to $0.8$6.1 billion at JuneSeptember 30, 2009, from $19.6 billion at December 31, 2008, and held-to-maturity securities decreased to $38.8 billion at September 30, 2009, from $51.2 billion at December 31, 2008. Average total assets were $257.9$228.1 billion for the secondthird quarter of 2009, a 23%31% decrease compared to $334.8$332.4 billion for the secondthird quarter of 2008. Average total assets were $279.8$262.3 billion for the first sixnine months of 2009, a 16%21% decrease compared to $332.9$332.8 billion for the first sixnine months of 2008. Average advances were $190.5$164.2 billion for the secondthird quarter of 2009, a 25%35% decrease from $252.9$253.2 billion in the secondthird quarter of 2008. Average advances were $206.1$192.0 billion for the first sixnine months of 2009, an 18%a 24% decrease from $250.2$251.2 billion in the first sixnine months of 2008.
Members decreased their use of Bank advances during the first sixnine months of 2009 for a variety of reasons, including increases in core deposits, reduced lending activity, the use of Troubled Asset Relief Program funds, active Temporary Liquidity Guarantee Program issuances, access to the Federal Reserve Bank discount window, and reductions in the borrowing capacity of collateral pledged to the Bank. Held-to-maturity securities decreased primarily because of lower investment balances in the MBS portfolio resulting from run-off (paydowns, prepayments, and maturities) in the portfolio, OTTI recognized on the PLRMBS, and a substantial reduction in purchases of new MBS. The decrease in cash and due from banks was primarily in cash held at the FRBSF, reflecting a reduction in the Bank’s short-term liquidity needs.
Advances outstanding at JuneSeptember 30, 2009, included unrealized gains of $1.8$1.7 billion, of which $885$822 million represented unrealized gains on advances hedged in accordance with SFAS 133the accounting for derivative instruments and $953hedging activities and $840 million represented unrealized gains on economically hedged advances that are carried at fair value in accordance with SFAS 159.the fair value option. Advances outstanding at December 31, 2008, included unrealized gains of $2.7 billion, of which $1.4 billion represented unrealized gains on advances hedged in accordance with SFAS 133the accounting for derivative instruments and hedging activities and $1.3 billion represented unrealized gains on economically hedged advances that are carried at fair value in accordance with SFAS 159.the fair value option. The overall decrease in the unrealized gains of the hedged advances and advances carried at fair value from December 31, 2008, to JuneSeptember 30, 2009, was primarily attributable to lower interest rates on advances during the first sixnine months of 2009.
Total liabilities were $230.2$203.5 billion at JuneSeptember 30, 2009, a 26%35% decrease from $311.5 billion at December 31, 2008, reflecting decreases in consolidated obligations outstanding from $304.9 billion at December 31, 2008, to $225.2$198.8 billion at JuneSeptember 30, 2009. The decrease in consolidated obligations outstanding paralleled the decrease in assets during the first sixnine months of 2009. Average total liabilities were $248.2$219.2 billion for the secondthird quarter of 2009, a 23%31% decrease compared to $320.7$318.8 billion for the secondthird quarter of 2008. Average total liabilities were $269.8$252.8 billion for the first sixnine months of 2009, a 15%21% decrease compared to $318.9 billion for the first sixnine months of 2008. The decrease in average liabilities reflects decreases in average consolidated obligations, paralleling the decline in average assets. Average consolidated obligations were $237.8$209.6 billion in the secondthird quarter of 2009 and $311.6$311.1 billion in the secondthird quarter of 2008. Average consolidated obligations were $258.5$242.0 billion in the first sixnine months of 2009 and $308.6$309.5 billion in the first sixnine months of 2008.
Consolidated obligations outstanding at JuneSeptember 30, 2009, included unrealized losses of $2.4 billion on consolidated obligation bonds hedged in accordance with SFAS 133the accounting for derivative instruments and $82hedging activities and $68 million on economically hedged consolidated obligation bonds that are carried at fair value in accordance with SFAS 159.the fair value option. Consolidated obligations outstanding at December 31, 2008, included unrealized losses of $3.9 billion on consolidated
obligation bonds hedged in accordance with SFAS 133the accounting for derivative instruments and hedging activities and $50 million on economically hedged consolidated obligation bonds that are carried at fair value in accordance with SFAS 159.the fair value option. The overall decrease in the unrealized losses on the hedged consolidated obligation bonds and the consolidated obligation bonds carried at fair value from December 31, 2008, to JuneSeptember 30, 2009, was primarily attributable to higher interest rates during the first six monthsreversal of 2009.prior period losses.
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 JuneSeptember 30, 2009, 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 amount of the outstanding consolidated obligations of all 12 FHLBanks was $1,055.9$973.6 billion at JuneSeptember 30, 2009, and $1,251.5 billion at December 31, 2008.
As of JuneSeptember 30, 2009, Standard & Poor’s Rating Services (Standard & Poor’s) rated the FHLBanks’ consolidated obligations AAA/A-1+, and Moody’s Investors Service (Moody’s) rated them Aaa/P-1. As of JuneSeptember 30, 2009, Standard & Poor’s assigned ten FHLBanks, including the Bank, a long-term credit rating of AAA, the FHLBank of Seattle a long-term credit rating of AA+, and the FHLBank of Chicago a long-term credit rating of AA.AA+. As of JuneSeptember 30, 2009, Moody’s continued to assign all the FHLBanks a long-term credit rating of Aaa. 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 a rating from time to time because of various factors, including operating results or actions taken, business developments, or changes in their opinion regarding, among other factors, the general outlook for a particular industry or the economy.
The Bank evaluated the publicly disclosed FHLBank regulatory actions and long-term credit ratings of other FHLBanks as of JuneSeptember 30, 2009, and as of each period end presented, and determined that they have not materially increased the likelihood that the Bank will be required by the Finance Agency to repay any principal or interest associated with consolidated obligations for which the Bank is not the primary obligor.
Financial condition is further discussed under “Segment Information.”
Segment Information
The Bank analyzes itsuses an analysis of financial performance based on the balances and adjusted net interest income of two operating segments:segments, the advances-related business and the mortgage-related business.business, as well as other financial information, to review and assess financial performance and to determine the allocation of resources to these two major business segments. For purposes of segment reporting, adjusted net interest income includes net interest expense on derivative instruments used inincome and expenses associated with economic hedges that are recorded in “Net gain/(loss) on derivatives and hedging activities” in other income and excludes interest expense that is recorded in “Mandatorily redeemable capital stock.” Other key financial information, such as any OTTI loss on the Bank’s held-to-maturity PLRMBS, other expenses, and assessments, are not included in the segment reporting analysis, but are incorporated into management’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 Note 8 to the Financial Statements.
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 stock.
Assets associated with this segment decreased to $202.4$177.8 billion (85%(84% of total assets) at JuneSeptember 30, 2009, from $278.2 billion (87% of total assets) at December 31, 2008, representing a decrease of $75.8$100.4 billion, or 27%36%. The decrease primarily reflected lower demand for advances by the Bank’s members.
Adjusted net interest income for this segment is derived primarily from the difference, or spread, between the yield on advances and non-MBS investments and the cost of the consolidated obligations funding these assets, including the cash flows from associated interest rate exchange agreements.
Adjusted net interest income for this segment was $189$159 million in the secondthird quarter of 2009, a decrease of $34$73 million, or 15%31%, compared to $223$232 million in the secondthird quarter of 2008. In the first sixnine months of 2009, adjusted net interest income for this segment was $393$552 million, a decrease of $56$129 million, or 12%19%, compared to $449$681 million in the first sixnine months of 2008. The declines were primarily attributable to the lower yield on invested capital due tobecause of the lower interest rate environment during 2009, lower net interest spreads on the non-MBS investment portfolio, and lower average balances of advances. These decreases were partially offset by a higher spread on advances, which was due, in part, to the refinancing of certain short-term and callable debt at lower interest rate levels. Members and nonmember borrowers prepaid $11.4 billion$391 million of advances in the secondthird quarter of 2009 compared to $0.4$2.0 billion in the secondthird quarter of 2008. Members and nonmember borrowers prepaid $14.1$14.5 billion of advances in the first sixnine months of 2009 compared to $1.2$3.1 billion in the first sixnine months of 2008. Advance prepayment fees totaled $18Interest income from advances also includes the impact of advance prepayments, which increased interest income by $2 million in the secondthird quarter of 2009 and were immaterial in2009. In the secondthird quarter of 2008. Advance2008, interest income was decreased by prepayment fees totaled $20credits of $10 million. Interest income from advances also includes the impact of advance prepayments, which increased interest income by $22 million in the first sixnine months of 2009 and totaled $0.5 million in2009. In the first sixnine months of 2008.2008, interest income was decreased by prepayment credits of $10 million. The increase in advance prepayments in the first sixnine months of 2009 reflected members’ reduced liquidity needs, as described below.
Adjusted net interest income for this segment represented 62%51% and 66% of total adjusted net interest income for the secondthird quarter of 2009 and 2008, respectively, and 61%58% and 68%67% of total adjusted net interest income for the first sixnine months of 2009 and 2008, respectively. The decrease was primarily the result of lower earnings from the Bank’s invested capital.
Advances –The par amount of advances outstanding decreased by $60.1$79.7 billion, or 26%34%, to $172.8$153.2 billion at JuneSeptember 30, 2009, from $232.9 billion at December 31, 2008. The decrease reflects a $24.1$33.3 billion decrease in fixed rate advances, and a $36.0$46.3 billion decrease in adjustable rate advances, partially offset byand a $16$52 million increasedecrease in daily variable rate advances.
Advances outstanding to the Bank’s three largest borrowers totaled $112.4$94.4 billion at JuneSeptember 30, 2009, a net decrease of $49.2$67.2 billion from $161.6 billion at December 31, 2008. The remaining $10.9$12.5 billion decrease in total advances outstanding was attributable to a net decrease in advances to other members of varying asset sizes and charter types. In total, 6158 institutions increased their advances during the first sixnine months of 2009, while 221233 institutions decreased their advances.
Average advances were $190.5$164.2 billion in the secondthird quarter of 2009, a 25%35% decrease from $252.9$253.2 billion in the secondthird quarter of 2008. Average advances were $206.1$192.0 billion in the first sixnine months of 2009, an 18%a 24% decrease from $250.2$251.2 billion in the first sixnine months of 2008. Members decreased their use of Bank advances during the first sixnine months of 2009 for a variety of reasons, including increases in core deposits, including reduced lending activity, the use of Troubled Asset Relief Program funds, active Temporary Liquidity Guarantee Program issuances, access to the Federal Reserve Bank discount window, and reductions in the borrowing capacity of collateral pledged to the Bank.
The components of the advances portfolio at JuneSeptember 30, 2009, and December 31, 2008, are presented in the following table.
Advances Portfolio by Product Type
(In millions) | June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | ||||||||
Standard advances: | ||||||||||||
Adjustable – LIBOR | $ | 75,745 | $ | 111,603 | $ | 65,933 | $ | 111,603 | ||||
Adjustable – other indices | 291 | 444 | 288 | 444 | ||||||||
Fixed | 59,244 | 80,035 | 56,915 | 80,035 | ||||||||
Daily variable rate | 3,580 | 3,564 | 3,512 | 3,564 | ||||||||
Subtotal | 138,860 | 195,646 | 126,648 | 195,646 | ||||||||
Customized advances: | ||||||||||||
Adjustable – LIBOR, with caps and/or floors | — | 10 | — | 10 | ||||||||
Adjustable – LIBOR, with caps and/or floors and partial prepayment symmetry (PPS)(1) | 1,625 | 1,625 | 1,125 | 1,625 | ||||||||
Fixed – amortizing | 516 | 578 | 504 | 578 | ||||||||
Fixed with PPS(1) | 27,259 | 30,156 | 20,590 | 30,156 | ||||||||
Fixed – callable at member’s option | 270 | 315 | 169 | 315 | ||||||||
Fixed – putable at Bank’s option | 3,793 | 4,009 | 3,702 | 4,009 | ||||||||
Fixed – putable at Bank’s option with PPS(1) | 503 | 588 | 503 | 588 | ||||||||
Subtotal | 33,966 | 37,281 | 26,593 | 37,281 | ||||||||
Total par value | 172,826 | 232,927 | 153,241 | 232,927 | ||||||||
SFAS 133 valuation adjustments | 885 | 1,353 | ||||||||||
SFAS 159 valuation adjustments | 953 | 1,299 | ||||||||||
Hedging valuation adjustments | 822 | 1,353 | ||||||||||
Fair value option valuation adjustments | 840 | 1,299 | ||||||||||
Net unamortized premiums | 68 | 85 | 59 | 85 | ||||||||
Total | $ | 174,732 | $ | 235,664 | $ | 154,962 | $ | 235,664 | ||||
(1) | PPS means that the Bank may charge the borrower a prepayment fee or pay the borrower a prepayment credit, depending on certain circumstances, such as movements in interest rates, when the advance is prepaid. Any prepayment credit on an advance with PPS would be limited to the lesser of 10% of the par value of the advance or the gain recognized on the termination of the associated interest rate swap, which may also include a similar contractual gain limitation. |
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. These investments are also used as a source of liquidity to meet the Bank’s financial obligations on a timely basis, which may supplement or reduce earnings. The Bank’s total non-MBS investment portfolio was $26.0$15.9 billion as of JuneSeptember 30, 2009, an increasea decrease of $4.4$5.7 billion, or 20%26%, from $21.6 billion as of December 31, 2008. During the first sixnine months of 2009, Federal funds sold increased $7.2decreased $2.3 billion and commercial paper increased $2.1 billion, while interest-bearing deposits in banks decreased $4.9$4.2 billion, while commercial paper increased $0.8 billion.
The weighted average maturity of non-MBS investments other than housing finance agency bonds shortened to 17 days as of JuneSeptember 30, 2009, from 21 days as of December 31, 2008. As of JuneFrom December 31, 2008, to September 30, 2009, the Bank funded a greater percentageproportion of the portfolio for short-term (under one month) non-MBS investments for cash management purposes insteadincreased relative to the proportion of match-fundingnon-MBS investments with one-month to three-month maturities.
Cash and Due from Banks– Cash and due from banks decreased to $0.8$6.1 billion at JuneSeptember 30, 2009, from $19.6 billion at December 31, 2008. The decrease was primarily in cash held at the Federal Reserve Bank of San Francisco (FRBSF),FRBSF, reflecting a reduction in the Bank’s short-term liquidity needs.
Borrowings –Consistent with the decrease in advances, total liabilities (primarily consolidated obligations) funding the advances-related business decreased $74.7$98.3 billion, or 28%37%, from $268.4 billion at December 31, 2008, to $193.7$170.1 billion at JuneSeptember 30, 2009. 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.”
To meet the specific needs of certain investors, fixed and adjustable rate consolidated obligation bonds may contain embedded call options or other features that result in complex coupon payment terms. When these consolidated obligation bonds are issued on behalf of the Bank, typically the Bank simultaneously enters into interest rate exchange agreements with features that offset the complex features of the bonds and, in effect, convert the bonds to adjustable rate instruments tied to an index, primarily LIBOR. For example, the Bank uses fixed rate callable bonds that are typically offset with interest rate exchange agreements with call features that offset the call options embedded in the callable bonds. This combined financing structure enables the Bank to meet its funding needs at costs not generally attainable solely through the issuance of comparable term non-callable debt.
At JuneSeptember 30, 2009, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $261.2$242.1 billion, of which $176.2$73.6 billion were hedging advances, $167.9 billion were hedging consolidated obligations, $84.6 billion were hedging advances, and $0.4$0.6 billion were interest rate exchange agreements that the Bank entered into as an intermediary between exactly offsetting derivatives transactions with members and other counterparties. At December 31, 2008, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $308.9 billion, of which $87.9 billion were hedging advances, $220.7 billion were hedging consolidated obligations, and $0.3 billion were interest rate exchange agreements that the Bank entered into as an intermediary between exactly offsetting derivatives transactions with members and other counterparties. The hedges associated with advances and consolidated obligations were primarily used to convert the fixed rate cash flows and non-LIBOR-indexed cash flows of the advances and consolidated obligations to adjustable rate LIBOR-indexed cash flows or to manage the interest rate sensitivity and net repricing gaps of assets, liabilities, and interest rate exchange agreements.
FHLBank System consolidated obligation bonds and discount notes, along with similar debt securities issued by other GSEs such as Fannie Mae and Freddie Mac, are generally referred to as agency debt. The agency debt market is a large sector of the debt capital markets. The costs of fixed rate debt issued by the FHLBanks and the other GSEs generally rise and fall with increases and decreases in general market interest rates. However, starting in the third quarter of 2008, market conditions significantly increased volatility in GSE debt pricing and funding costs compared to recent historical levels. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quarterly Overview.”
Since December 16, 2008, the Federal Open Market Committee has not changed the target Federal funds rate. During the first sixnine months of 2009, rates on short-term and long-term U.S. Treasury securities increased because of market expectations of increased Treasury issuance and investor concern about inflation. Since December 31, 2008, 3-month LIBOR declined from 1.43% to 0.29% as conditions in the short-term interbank lending market improved. The following table provides selected market interest rates as of the dates shown.
Market Instrument | June 30, 2009 | December 31, 2008 | June 30, 2008 | December 31, 2007 | September 30, 2009 | December 31, 2008 | September 30, 2008 | December 31, 2007 | ||||||||||||||||
Federal Reserve target rate for | 0-0.25 | % | 0-0.25 | % | 2.00 | % | 4.25 | % | 0-0.25 | % | 0-0.25 | % | 2.00 | % | 4.25 | % | ||||||||
3-month Treasury bill | 0.19 | 0.13 | 1.72 | 3.24 | 0.13 | 0.13 | 0.91 | 3.24 | ||||||||||||||||
3-month LIBOR | 0.60 | 1.43 | 2.78 | 4.70 | 0.29 | 1.43 | 4.05 | 4.70 | ||||||||||||||||
2-year Treasury note | 1.12 | 0.77 | 2.63 | 3.06 | 0.95 | 0.77 | 1.97 | 3.06 | ||||||||||||||||
5-year Treasury note | 2.56 | 1.55 | 3.34 | 3.46 | 2.31 | 1.55 | 2.97 | 3.46 |
The average cost of fixed rate FHLBank System consolidated obligation bonds and discount notes was lower in the first sixnine months of 2009 than in the first sixnine months of 2008 as a result of the general decline in market interest rates and the purchase of GSE debt by the Federal Reserve.
The following table presents a comparison of the average cost of FHLBank System consolidated obligation bonds relative to 3-month LIBOR and discount notes relative to comparable term LIBOR rates in the first sixnine months of 2009 and 2008. ContinuedLower issuance and strong investor demand for short-term GSE debt resulted in lowered borrowing costs on the FHLBank System’sSystem bonds and discount notes relative to LIBOR compared to a year ago. However, lower investor demand for longer-term GSE debt increased the System’s bond costs relative to LIBOR compared to a year ago.
Spread to LIBOR of Average Cost of Consolidated Obligations for the Six Months Ended | Spread to LIBOR of Average Cost of Consolidated Obligations for the Nine Months Ended | |||||||
(In basis points) | June 30, 2009 | June 30, 2008 | September 30, 2009 | September 30, 2008 | ||||
Consolidated obligation bonds | –16.4 | –19.4 | –18.3 | –17.3 | ||||
Consolidated obligation discount notes (one month and greater) | –61.5 | –47.7 | –48.6 | –46.5 |
At JuneSeptember 30, 2009, the Bank had $142.4$122.5 billion of swapped non-callable bonds, $28.9$32.4 billion of swapped discountsdiscount notes, and $4.9$13.0 billion of swapped callable bonds that primarily funded advances and non-MBS investments. The swapped non-callable and callable bonds combined represented 84%88% of the Bank’s total consolidated obligation bonds outstanding. At December 31, 2008, the Bank had $157.6 billion of swapped non-callable bonds and $8.5 billion of swapped callable bonds that primarily funded advances and non-MBS investments. These swapped non-callable and callable bonds combined represented 78% of the Bank’s total consolidated obligation bonds outstanding.
These swapped callable and non-callable bonds are used in part to fund the Bank’s advances portfolio. In general, the Bank does not match-fund advances with consolidated obligations. Instead, the Bank uses interest rate exchange agreements, in effect, to convert the advances to floating rate LIBOR-indexed assets (except overnight advances and adjustable rate advances that are already indexed to LIBOR) and, in effect, to convert the consolidated obligation bonds to floating rate LIBOR-indexed liabilities.
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” and “MPF” are registered trademarks of the Federal Home Loan Bank of Chicago.) Adjusted net interest income for this segment is derived primarily from the difference, or spread, between the yield on the MBS and mortgage loans and the cost of the consolidated obligations funding those assets, including the cash flows from associated interest rate exchange agreements, less the provision for credit losses on mortgage loans.
At JuneSeptember 30, 2009, assets associated with this segment were $36.5$33.4 billion (15%(16% of total assets), a decrease of $6.5$9.6 billion, or 15%22%, from $43.0 billion at December 31, 2008 (13% of total assets). The decrease was due to lower investment balances in the MBS portfolio primarily because of run-off (paydowns, prepayments, and maturities) in the portfolio, OTTI recognized on the portfolioPLRMBS, and OTTI write-downs and becausea substantial reduction in the purchase of new MBS investments. During the first nine months of 2009, the Bank did not purchase any additionalpurchased $0.4 billion of MBS, during the first six monthsall of 2009.which were residential agency MBS. The MBS portfolio decreased $6.2$9.0 billion to $32.9$30.1 billion at JuneSeptember 30, 2009, from $39.1 billion at December 31, 2008, and mortgage loan balances decreased $0.3$0.5 billion to $3.4$3.2 billion at JuneSeptember 30, 2009, from $3.7 billion at December 31, 2008.
In the secondthird quarter of 2009, average MBS investments were $36.6$34.6 billion, a decrease of $3.5$6.4 billion compared to $40.1$41.0 billion in the secondthird quarter of 2008. In the first sixnine months of 2009, average MBS investments increased $0.6decreased $1.8 billion to $37.7$36.6 billion compared to $37.1$38.4 billion in the first sixnine months of 2008. This increase was due to the growth in capital and the availability of MBS that met the Bank’s risk-adjusted spread and credit enhancement requirements during 2008. There were no purchases of MBS investments in the first six months of 2009.
Average mortgage loans were $3.5$3.3 billion in the secondthird quarter of 2009, a decrease of $0.5 billion from $4.0$3.8 billion in the secondthird quarter of 2008. Average mortgage loans decreased $0.4$0.5 billion to $3.6$3.5 billion in the first sixnine months of 2009 from $4.0 billion in the first sixnine months of 2008.
Adjusted net interest income for this segment was $118$151 million in the secondthird quarter of 2009, an increase of $1$29 million, or 1%24%, from $117$122 million in the secondthird quarter of 2008. InThe increase was primarily the second quarterresult of 2009,a rise in the average profit spread on the mortgage portfolio, reflecting the favorable impact of lower interest rates and a steeper yield curve were substantially offset bycurve. Lower interest rates provided the unfavorable $32 million retrospective SFAS 91 adjustment inBank with the second quarter of 2009 from the amortization of MBSopportunity to call fixed rate callable debt and net discounts onrefinance that debt with new callable debt at a lower cost. In addition, hybrid adjustable rate mortgage loans and by the impact of lower investment balances in thehave been converting to adjustable rate mortgage portfolio. The unfavorable $32 million retrospective SFAS 91 adjustment was primarily due to a higher mortgage rate environment during 2009, resulting in slower projected prepayment rates.loans with attractive spreads.
In the first sixnine months of 2009, adjusted net interest income for this segment was $254$405 million, an increase of $47$76 million, or 23%, from $207$329 million in the first sixnine months of 2008. The increase for the first sixnine months of 2009 was primarily the result of a rise in the average profit spread on the mortgage portfolio, reflecting the favorable impact of lower interest rates and a steeper yield curve. Lower interest rates provided the Bank with the opportunity to call fixed rate callable debt and refinance that debt with new callable debt at a lower cost. The steeper yield curve further reduced the cost of financing the Bank’s investment in MBS and mortgage loans. These factors were partially offset by the unfavorable $23 million retrospective SFAS 91 adjustment.In addition, hybrid adjustable rate mortgage loans have been converting to adjustable rate mortgage loans with attractive spreads.
Adjusted net interest income for this segment represented 38%49% and 34% of total adjusted net interest income for the secondthird quarter of 2009 and 2008, respectively, and 39%42% and 32%33% of total adjusted net interest income for the first sixnine months of 2009 and 2008, respectively.
MPF Program –Under the MPF Program, the Bank purchased conventional fixed rate conforming residential mortgage loans directly from eligible members. 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. For each loan, the Bank manages the interest rate risk, prepayment risk, and liquidity risk of the loan. The Bank and the member that sold the loan share in the credit risk of the loans.loan. For more information regarding credit risk, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – MPF Program” in the Bank’s 2008 Form 10-K.
At JuneSeptember 30, 2009, and December 31, 2008, the Bank held conventional fixed rate conforming mortgage loans purchased under one of two MPF products, MPF Plus or Original MPF, 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” in the Bank’s 2008 Form 10-K. Mortgage loan balances at JuneSeptember 30, 2009, and December 31, 2008, were as follows:
(In millions) | June 30, 2009 | December 31, 2008 | ||||||
MPF Plus | $ | 3,088 | $ | 3,387 | ||||
Original MPF | 289 | 336 | ||||||
Subtotal | 3,377 | 3,723 | ||||||
Net unamortized discounts | (18 | ) | (10 | ) | ||||
Mortgage loans held for portfolio | 3,359 | 3,713 | ||||||
Less: Allowance for credit losses | (2 | ) | (1 | ) | ||||
Mortgage loans held for portfolio, net | $ | 3,357 | $ | 3,712 | ||||
MPF Plus Original MPF Subtotal Net unamortized discounts Mortgage loans held for portfolio Less: Allowance for credit losses Mortgage loans held for portfolio, net(In millions) September 30, 2009 December 31, 2008 $ 2,921 $ 3,387 271 336 3,192 3,723 (18 ) (10 ) 3,174 3,713 (2 ) (1 ) $ 3,172 $ 3,712
The Bank periodically reviews its mortgage loan portfolio to identify probable credit losses in the portfolio and to determine the likelihood of collection of the loans in the portfolio. The Bank maintains an allowance for credit losses, net of credit enhancements, on mortgage loans acquired under the MPF Program at levels management believes to be adequate to absorb estimated probable losses inherent in the total mortgage loan portfolio. The Bank established an allowance for credit losses on mortgage loans totaling $2 million at June
September 30, 2009, and $1 million at December 31, 2008. For more information on how the Bank determines its estimated allowance for credit losses on mortgage loans, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – Allowance for Credit Losses – Mortgage Loans Acquired Under the MPF Program” in the Bank’s 2008 Form 10-K.
A mortgage loan is considered to be impaired when it is reported 90 days or more past due (nonaccrual) or when it is probable, based on current information and events, that the Bank will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreement.
The following table presents information on delinquent mortgage loans as of JuneSeptember 30, 2009, and December 31, 2008.
(Dollars in millions) | June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | ||||||||||||||||
Days Past Due | Number of Loans | Mortgage Loan Balance | Number of Loans | Mortgage Loan Balance | Number of Loans | Mortgage Loan Balance | Number of Loans | Mortgage Loan Balance | ||||||||||||
Between 31 and 59 days | 215 | $ | 27 | 235 | $ | 29 | ||||||||||||||
Between 30 and 59 days | 195 | $ | 23 | 235 | $ | 29 | ||||||||||||||
Between 60 and 89 days | 73 | 8 | 44 | 5 | 79 | 9 | 44 | 5 | ||||||||||||
Over 90 days | 130 | 16 | 84 | 9 | 159 | 20 | 84 | 9 | ||||||||||||
Total | 418 | $ | 51 | 363 | $ | 43 | 433 | $ | 52 | 363 | $ | 43 | ||||||||
At JuneSeptember 30, 2009, the Bank had 418433 loans that were 30 days or more delinquent totaling $51$52 million, of which 130159 loans totaling $16$20 million were classified as nonaccrual or impaired. For 82111 of these loans, totaling $9$13 million, the loan was in foreclosure or the borrower of the loan was in bankruptcy. At December 31, 2008, the Bank had 363 loans that were 30 days or more delinquent totaling $43 million, of which 84 loans totaling $9 million were classified as nonaccrual or impaired. For 51 of these loans, totaling $5 million, the loan was in foreclosure or the borrower of the loan was in bankruptcy.
At JuneSeptember 30, 2009, the Bank’s other assets included $2 million of real estate owned resulting from the foreclosure of 1320 mortgage loans held by the Bank. At December 31, 2008, the Bank’s other assets included $1 million of real estate owned resulting from the foreclosure of 7 mortgage loans held by the Bank.
The Bank manages the interest rate risk and prepayment risk of the mortgage loans by funding these assets with callable and non-callable debt and by limiting the size of the fixed rate mortgage loan portfolio.
MBS Investments –The Bank’s MBS portfolio was $32.9$30.1 billion, or 226%208% of Bank capital (as determined in accordance with regulations governing the operations of the FHLBanks), at JuneSeptember 30, 2009, compared to $39.1 billion, or 289% of Bank capital, at December 31, 2008. TheDuring the first nine months of 2009, the Bank’s MBS portfolio decreased primarily because of run-off (paydowns, prepayments, and maturities) in the portfolio, OTTI recognized on the portfolioPLRMBS, and OTTI write-downs and becausea substantial reduction in the purchase of new MBS investments. The Bank did not purchase any additionalpurchased $0.4 billion of MBS, all of which were residential agency MBS, during the first sixnine months of 2009. For a discussion of the composition of the Bank’s MBS portfolio and the Bank’s OTTI analysis of that portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Investments.–Investments.”
Intermediate-term and long-term fixed rate MBS investments are subject to prepayment risk, and long-term adjustable rate MBS investments are subject to interest rate cap risk. The Bank has managed these risks by predominately purchasing intermediate-term fixed rate MBS (rather than long-term fixed rate MBS), funding
the fixed rate MBS with a mix of non-callable and callable debt, and using interest rate exchange agreements with interest rate risk characteristics similar to callable debt.
Borrowings –Total consolidated obligations funding the mortgage-related business decreased $6.5$9.6 billion, or 15%22%, from $43.0 billion at December 31, 2008, to $36.5$33.4 billion at JuneSeptember 30, 2009, paralleling the decrease in mortgage portfolio assets. For further information and discussion of the Bank’s joint and several liability for FHLBank consolidated obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.”
At JuneSeptember 30, 2009, the notional amount of interest rate exchange agreements associated with the mortgage-related business totaled $20.5$19.8 billion, almost all of which hedged or was associated with consolidated obligations funding the mortgage portfolio.
At December 31, 2008, the notional amount of interest rate exchange agreements associated with the mortgage-related business totaled $22.7 billion, of which $21.9 billion were economic hedges associated with consolidated obligations and $0.8 billion were fair value hedges associated with consolidated obligations.
Interest Rate Exchange Agreements
A derivatives transaction or interest rate exchange agreement is a financial contract whose fair value is generally derived from changes in the value of an underlying asset or liability. The Bank uses interest rate swaps; options to enter into interest rate swaps (swaptions); interest rate cap, floor, corridor, and collar agreements; and callable and putable interest rate swaps (collectively, interest rate exchange agreements) to manage its exposure to interest rate risks inherent in its normal course of business – lending, investment, and funding activities. For more information on the primary strategies that the Bank employs for using interest rate exchange agreements and the associated market risks, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Market Risk – Interest Rate Exchange Agreements” in the Bank’s 2008 Form 10-K.
The following table summarizes the Bank’s interest rate exchange agreements by type of hedged item, hedging instrument, associated hedging strategy, accounting designation as specified under SFAS 133,the accounting for derivative instruments and hedging activities, and notional amount as of JuneSeptember 30, 2009, and December 31, 2008.
(In millions) | (In millions) | |||||||||||||||||||
Notional Amount | Notional Amount | |||||||||||||||||||
Hedging Instrument | Hedging Strategy | Accounting Designation | June 30, 2009 | December 31, 2008 | Hedging Strategy | Accounting Designation | September 30, 2009 | December 31, 2008 | ||||||||||||
Hedged Item: Advances | Hedged Item: Advances | |||||||||||||||||||
Pay fixed, receive floating interest rate swap | Fixed rate advance converted to a LIBOR floating rate | Fair Value Hedge | $ | 43,038 | $ | 36,106 | Fixed rate advance converted to a LIBOR floating rate | Fair Value Hedge | $ | 40,798 | $ | 36,106 | ||||||||
Basis swap | Adjustable rate advance converted to a LIBOR floating rate | Economic Hedge(1) | 3,500 | 2,000 | Adjustable rate advance converted to a LIBOR floating rate | Economic Hedge(1) | 4,000 | 2,000 | ||||||||||||
Receive fixed, pay floating interest rate swap | LIBOR index rate advance converted to a fixed rate | Economic Hedge(1) | 150 | 150 | LIBOR floating rate advance converted to a fixed rate | Economic Hedge(1) | 150 | 150 | ||||||||||||
Basis swap | Floating rate index advance converted to another floating rate index to reduce interest rate sensitivity and repricing gaps | Economic Hedge(1) | 161 | 314 | Floating rate index advance converted to another floating rate index to reduce interest rate sensitivity and repricing gaps | Economic Hedge(1) | 158 | 314 | ||||||||||||
Pay fixed, receive floating interest rate swap | Fixed rate advance converted to a LIBOR floating rate | Economic Hedge(1) | 3,956 | 12,342 | Fixed rate advance converted to a LIBOR floating rate | Economic Hedge(1) | 2,067 | 12,342 | ||||||||||||
Pay fixed, receive floating interest rate swap; swap may be callable at the Bank’s option or putable at the counterparty’s option | Fixed rate advance converted to a LIBOR floating rate; advance and swap may be callable or putable; matched to advance accounted for under the fair value option in accordance with SFAS 159 | Economic Hedge(1) | 32,132 | 35,357 | Fixed rate advance converted to a LIBOR floating rate; advance and swap may be callable or putable; matched to advance accounted for under the fair value option | Economic Hedge(1) | 25,254 | 35,357 |
(In millions) | (In millions) | |||||||||||||||
Notional Amount | Notional Amount | |||||||||||||||
Hedging Instrument | Hedging Strategy | Accounting Designation | June 30, 2009 | December 31, 2008 | Hedging Strategy | Accounting Designation | September 30, 2009 | December 31, 2008 | ||||||||
Interest rate cap, floor, corridor, and/or collar | Interest rate cap, floor, corridor, and/or collar embedded in an adjustable rate advance; matched to advance accounted for under the fair value option in accordance with SFAS 159 | Economic Hedge(1) | 1,625 | 1,635 | Interest rate cap, floor, corridor, and/or collar embedded in an adjustable rate advance; matched to advance accounted for under the fair value option | Economic Hedge(1) | 1,125 | 1,635 | ||||||||
Subtotal Economic Hedges(1) | Subtotal Economic Hedges(1) | 41,524 | 51,798 | Subtotal Economic Hedges(1) | 32,754 | 51,798 | ||||||||||
Total | 84,562 | 87,904 | 73,552 | 87,904 | ||||||||||||
Hedged Item: Non-Callable Bonds | Hedged Item: Non-Callable Bonds | Hedged Item: Non-Callable Bonds | ||||||||||||||
Receive fixed or structured, pay floating interest rate swap | Fixed rate or structured rate non-callable bond converted to a LIBOR floating rate | Fair Value Hedge | 60,430 | 71,071 | Fixed rate or structured rate non-callable bond converted to a LIBOR floating rate | Fair Value Hedge | 62,332 | 71,071 | ||||||||
Receive fixed or structured, pay floating interest rate swap | Fixed rate or structured rate non-callable bond converted to a LIBOR floating rate | Economic Hedge(1) | 9,836 | 9,988 | Fixed rate or structured rate non-callable bond converted to a LIBOR floating rate | Economic Hedge(1) | 12,230 | 9,988 | ||||||||
Receive fixed or structured, pay floating interest rate swap | Fixed rate or structured rate non-callable bond converted to a LIBOR floating rate; matched to non-callable bond accounted for under the fair value option in accordance with SFAS 159 | Economic Hedge(1) | 495 | 15 | Fixed rate or structured rate non-callable bond converted to a LIBOR floating rate; matched to non-callable bond accounted for under the fair value option | Economic Hedge(1) | 495 | 15 | ||||||||
Basis swap | Non-LIBOR index non-callable bond converted to a LIBOR floating rate | Economic Hedge(1) | 300 | 4,730 | Non-LIBOR index non-callable bond converted to a LIBOR floating rate | Economic Hedge(1) | — | 4,730 | ||||||||
Basis swap | Non-LIBOR index non-callable bond converted to a LIBOR floating rate; matched to non-callable bond accounted for under the fair value option in accordance with SFAS 159 | Economic Hedge(1) | 34,530 | 29,978 | Non-LIBOR index non-callable bond converted to a LIBOR floating rate; matched to non-callable bond accounted for under the fair value option | Economic Hedge(1) | 25,430 | 29,978 | ||||||||
Basis swap | Floating rate index non-callable bond converted to another floating rate index to reduce interest rate sensitivity and repricing gaps | Economic Hedge(1) | 42,245 | 44,993 | Floating rate index non-callable bond converted to another floating rate index to reduce interest rate sensitivity and repricing gaps | Economic Hedge(1) | 29,121 | 44,993 | ||||||||
Pay fixed, receive floating interest rate swap | Floating rate bond converted to fixed rate non-callable debt that offsets the interest rate risk of mortgage assets | Economic Hedge(1) | 3,385 | 1,810 | Floating rate bond converted to fixed rate non-callable debt that offsets the interest rate risk of mortgage assets | Economic Hedge(1) | 3,480 | 1,810 | ||||||||
Subtotal Economic Hedges(1) | Subtotal Economic Hedges(1) | 90,791 | 91,514 | Subtotal Economic Hedges(1) | 70,756 | 91,514 | ||||||||||
Total | 151,221 | 162,585 | 133,088 | 162,585 | ||||||||||||
Hedged Item: Callable Bonds | Hedged Item: Callable Bonds | Hedged Item: Callable Bonds | ||||||||||||||
Receive fixed or structured, pay floating interest rate swap with an option to call at the counterparty’s option | Fixed or structured rate callable bond converted to a LIBOR floating rate; swap is callable | Fair Value Hedge | 4,422 | 7,197 | Fixed or structured rate callable bond converted to a LIBOR floating rate; swap is callable | Fair Value Hedge | 9,547 | 7,197 | ||||||||
Receive fixed or structured, pay floating interest rate swap with an option to call at the counterparty’s option | Fixed or structured rate callable bond converted to a LIBOR floating rate; swap is callable | Economic Hedge(1) | 460 | 1,044 | Fixed or structured rate callable bond converted to a LIBOR floating rate; swap is callable | Economic Hedge(1) | 3,960 | 1,044 | ||||||||
Receive fixed or structured, pay floating interest rate swap with an option to call at the counterparty’s option | Fixed or structured rate callable bond converted to a LIBOR floating rate; swap is callable; matched to callable bond accounted for under the fair value option in accordance with SFAS 159 | Economic Hedge(1) | 50 | 243 | Fixed or structured rate callable bond converted to a LIBOR floating rate; swap is callable; matched to callable bond accounted for under the fair value option | Economic Hedge(1) | 262 | 243 | ||||||||
Subtotal Economic Hedges(1) | Subtotal Economic Hedges(1) | 510 | 1,287 | Subtotal Economic Hedges(1) | 4,222 | 1,287 | ||||||||||
Total | 13,769 | 8,484 | ||||||||||||||
Hedged Item: Discount Notes | Hedged Item: Discount Notes | |||||||||||||||
Pay fixed, receive floating callable interest rate swap | Discount note converted to fixed rate callable debt that offsets the prepayment risk of mortgage assets | Economic Hedge(1) | 1,950 | 4,000 |
(In millions) | (In millions) | |||||||||||||||||||
Notional Amount | Notional Amount | |||||||||||||||||||
Hedging Instrument | Hedging Strategy | Accounting Designation | June 30, 2009 | December 31, 2008 | Hedging Strategy | Accounting Designation | September 30, 2009 | December 31, 2008 | ||||||||||||
Total | 4,932 | 8,484 | ||||||||||||||||||
Hedged Item: Discount Notes | ||||||||||||||||||||
Pay fixed, receive floating callable interest rate swap | Discount note converted to fixed rate callable debt that offsets the prepayment risk of mortgage assets | Economic Hedge(1) | 2,045 | 4,000 | ||||||||||||||||
Basis swap or receive fixed, pay floating interest rate swap | Discount note converted to one-month LIBOR or other short-term floating rate to hedge repricing gaps | Economic Hedge(1) | 38,198 | 68,014 | Discount note converted to one-month LIBOR or other short-term floating rate to hedge repricing gaps | Economic Hedge(1) | 38,603 | 68,014 | ||||||||||||
Pay fixed, receive floating non-callable interest rate swap | Discount note converted to fixed rate non-callable debt that offsets the interest rate risk of mortgage assets | Economic Hedge(1) | 330 | 300 | Discount note converted to fixed rate non-callable debt that offsets the interest rate risk of mortgage assets | Economic Hedge(1) | 330 | 300 | ||||||||||||
Total | 40,573 | 72,314 | 40,883 | 72,314 | ||||||||||||||||
Hedged Item: Trading Securities | Hedged Item: Trading Securities | Hedged Item: Trading Securities | ||||||||||||||||||
Pay MBS rate, receive floating interest rate swap | MBS rate converted to a LIBOR floating rate | Economic Hedge(1) | 9 | 10 | MBS rate converted to a LIBOR floating rate | Economic Hedge(1) | 9 | 10 | ||||||||||||
Hedged Item: Intermediary Positions | Hedged Item: Intermediary Positions | Hedged Item: Intermediary Positions | ||||||||||||||||||
Pay fixed, receive floating interest rate swap, and receive fixed, pay floating interest rate swap | Interest rate swaps executed with members offset by executing interest rate swaps with derivatives dealer counterparties | Economic Hedge(1) | 86 | 86 | Interest rate swaps executed with members offset by executing interest rate swaps with derivatives dealer counterparties | Economic Hedge(1) | 86 | 86 | ||||||||||||
Interest rate cap/floor | Stand-alone interest rate cap and/or floor executed with a member offset by executing an interest rate cap and/or floor with derivatives dealer counterparties | Economic Hedge(1) | 340 | 260 | Stand-alone interest rate cap and/or floor executed with a member offset by executing an interest rate cap and/or floor with derivatives dealer counterparties | Economic Hedge(1) | 520 | 260 | ||||||||||||
Total | 426 | 346 | 606 | 346 | ||||||||||||||||
Total Notional Amount | Total Notional Amount | $ | 281,723 | $ | 331,643 | Total Notional Amount | $ | 261,907 | $ | 331,643 |
(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 |
At JuneSeptember 30, 2009, the total notional amount of interest rate exchange agreements outstanding was $281.7$261.9 billion, compared with $331.6 billion at December 31, 2008. The $49.9$69.7 billion decrease in the notional amount of derivatives during the first sixnine months of 2009 was primarily due to a net $31.7$31.4 billion decrease in interest rate exchange agreements hedging consolidated obligation discount notes, a net $14.9$24.2 billion decrease in interest rate exchange agreements hedging consolidated obligation bonds, and a net $3.3$14.4 billion decrease in interest rate exchange agreements hedging the market risk of fixed rate advances.advances, partially offset by a net $0.3 billion increase in interest rate exchange agreements hedging intermediary positions. The decrease in interest rate exchange agreements hedging consolidated obligation discount notes reflected decreased use of interest rate exchange agreements that effectively converted the repricing frequency from three months to one month, and is consistent with the decline in the amount of discount notes outstanding at JuneSeptember 30, 2009, relative to December 31, 2008. By category, the Bank experienced large changes in the levels of interest rate exchange agreements, which reflected the January 1, 2008, transition of certain hedging instruments from a fair value hedge classification under SFAS 133the accounting for derivative instruments and hedging activities to an economic hedge classification under SFAS 159.the fair value option. The notional amount serves as a basis for calculating periodic interest payments or cash flows received and paid.
The following tables categorize the notional amounts and estimated fair values of the Bank’s interest rate exchange agreements, unrealized gains and losses from the related hedged items, and estimated fair value gains and losses from financial instruments carried at fair value by product and type of accounting treatment as of JuneSeptember 30, 2009, and December 31, 2008.
Fair value hedges: Advances Non-callable bonds Callable bonds Subtotal Not qualifying for hedge accounting (economic hedges): Advances Non-callable bonds Non-callable bonds with embedded derivatives Callable bonds Discount notes MBS – trading Intermediated Subtotal Total excluding accrued interest Accrued interest Total(In millions)(In millions) September 30, 2009 Notional
Amount Fair Value of
Derivatives Unrealized
Gain/(Loss)
on Hedged
Items Financial
Instruments
Carried at
Fair Value Difference $ 40,798 $ (817 ) $ 822 $ — $ 5 62,332 2,309 (2,324 ) — (15 ) 9,547 86 (84 ) — 2 112,677 1,578 (1,586 ) — (8 ) 32,754 (823 ) — 733 (90 ) 70,572 544 — (53 ) 491 184 1 — — 1 4,222 7 — 3 10 40,883 27 — — 27 9 — — — — 606 — — — — 149,230 (244 ) — 683 439 261,907 1,334 (1,586 ) 683 431 — 524 (500 ) 89 113 $ 261,907 $ 1,858 $ (2,086 ) $ 772 $ 544
June 30, 2009
Notional Amount | Fair Value of Derivatives | Unrealized Gain/(Loss) on Hedged Items | Financial Instruments Carried at Fair Value | Difference | |||||||||||||||
Fair value hedges: | |||||||||||||||||||
Advances | $ | 43,038 | $ | (867 | ) | $ | 885 | $ | — | $ | 18 | ||||||||
Non-callable bonds | 60,430 | 2,285 | (2,301 | ) | — | (16 | ) | ||||||||||||
Callable bonds | 4,422 | 108 | (107 | ) | — | 1 | |||||||||||||
Subtotal | 107,890 | 1,526 | (1,523 | ) | — | 3 | |||||||||||||
Not qualifying for hedge accounting (economic hedges): | |||||||||||||||||||
Advances | 41,524 | (884 | ) | — | 807 | (77 | ) | ||||||||||||
Non-callable bonds | 90,607 | 584 | — | (63 | ) | 521 | |||||||||||||
Non-callable bonds with embedded derivatives | 184 | 2 | — | — | 2 | ||||||||||||||
Callable bonds | 510 | 9 | — | 2 | 11 | ||||||||||||||
Discount notes | 40,573 | 68 | — | — | 68 | ||||||||||||||
MBS – trading | 9 | — | — | — | — | ||||||||||||||
Intermediated | 426 | — | — | — | — | ||||||||||||||
Subtotal | 173,833 | (221 | ) | — | 746 | 525 | |||||||||||||
Total excluding accrued interest | 281,723 | 1,305 | (1,523 | ) | 746 | 528 | |||||||||||||
Accrued interest | — | 485 | (499 | ) | 125 | 111 | |||||||||||||
Total | $ | 281,723 | $ | 1,790 | $ | (2,022 | ) | $ | 871 | $ | 639 | ||||||||
(In millions)
December 31, 2008
(In millions) | ||||||||||||||||||||||||||||||||||||||
December 31, 2008 | ||||||||||||||||||||||||||||||||||||||
Notional Amount | Fair Value of Derivatives | Unrealized Gain/(Loss) on Hedged Items | Financial Instruments Carried at Fair Value | Difference | Notional Amount | Fair Value of Derivatives | Unrealized Gain/(Loss) on Hedged Items | Financial Instruments Carried at Fair Value | Difference | |||||||||||||||||||||||||||||
Fair value hedges: | ||||||||||||||||||||||||||||||||||||||
Advances | $ | 36,106 | $ | (1,304 | ) | $ | 1,353 | $ | — | $ | 49 | $ | 36,106 | $ | (1,304 | ) | $ | 1,353 | $ | — | $ | 49 | ||||||||||||||||
Non-callable bonds | 71,071 | 3,589 | (3,651 | ) | — | (62 | ) | 71,071 | 3,589 | (3,651 | ) | — | (62 | ) | ||||||||||||||||||||||||
Callable bonds | 7,197 | 201 | (211 | ) | — | (10 | ) | 7,197 | 201 | (211 | ) | — | (10 | ) | ||||||||||||||||||||||||
Subtotal | 114,374 | 2,486 | (2,509 | ) | — | (23 | ) | 114,374 | 2,486 | (2,509 | ) | — | (23 | ) | ||||||||||||||||||||||||
Not qualifying for hedge accounting (economic hedges): | ||||||||||||||||||||||||||||||||||||||
Advances | 51,798 | (1,361 | ) | — | 1,139 | (222 | ) | 51,798 | (1,361 | ) | — | 1,139 | (222 | ) | ||||||||||||||||||||||||
Non-callable bonds | 91,330 | 366 | — | (23 | ) | 343 | 91,330 | 366 | — | (23 | ) | 343 | ||||||||||||||||||||||||||
Non-callable bonds with embedded derivatives | 184 | 1 | — | — | 1 | 184 | 1 | — | — | 1 | ||||||||||||||||||||||||||||
Callable bonds | 1,287 | 16 | — | 2 | 18 | 1,287 | 16 | — | 2 | 18 | ||||||||||||||||||||||||||||
Discount notes | 72,314 | 53 | — | — | 53 | 72,314 | 53 | — | — | 53 | ||||||||||||||||||||||||||||
MBS – trading | 10 | — | — | — | — | 10 | — | — | — | — | ||||||||||||||||||||||||||||
Intermediated | 346 | — | — | — | — | 346 | — | — | — | — | ||||||||||||||||||||||||||||
Subtotal | 217,269 | (925 | ) | — | 1,118 | 193 | 217,269 | (925 | ) | — | 1,118 | 193 | ||||||||||||||||||||||||||
Total excluding accrued interest | 331,643 | 1,561 | (2,509 | ) | 1,118 | 170 | 331,643 | 1,561 | (2,509 | ) | 1,118 | 170 | ||||||||||||||||||||||||||
Accrued interest | — | 520 | (704 | ) | 130 | (54 | ) | — | 520 | (704 | ) | 130 | (54 | ) | ||||||||||||||||||||||||
Total | $ | 331,643 | $ | 2,081 | $ | (3,213 | ) | $ | 1,248 | $ | 116 | $ | 331,643 | $ | 2,081 | $ | (3,213 | ) | $ | 1,248 | $ | 116 | ||||||||||||||||
Embedded derivatives are bifurcated, and their estimated fair values are accounted for in accordance with SFAS 133.the accounting for derivative instruments and hedging activities. The estimated fair values of the embedded derivatives are included as valuation adjustments to the host contract and are not included in the above table. The estimated fair values of these embedded derivatives were immaterial as of JuneSeptember 30, 2009, and December 31, 2008.
Because the periodic and cumulative net gains or losses on the Bank’s derivatives, hedged instruments, and certain assets and liabilities that are carried at fair value are primarily a matter of timing, the net gains or losses will generally reverse through changes in future valuations and settlements of contractual interest cash flows over the remaining contractual term to maturity, call date, or put date of the hedged financial instruments, associated interest rate exchange agreements, and financial instruments carried at fair value. However, the Bank may have instances in which the financial instruments or hedging relationships are terminated prior to maturity or prior to the call or put date. Terminating the financial instruments or hedging relationship may result in a realized gain or loss. In addition, the Bank may have instances in which it may sell trading securities prior to maturity, which may also result in a realized gain or loss.
SFAS 133-The hedging and SFAS 159-related income effectsfair value option valuation adjustments during the first sixnine months of 2009 were primarily driven by (i) changes in overall interest rate spreads; (ii) reversal of prior period gains and losses; and (iii) increases in swaption volatilities. The positive fair value impact resulted in primarily unrealized net gains. These gains are generally expected to reverse through changes in future valuations and settlements of contractual interest cash flows over the remaining term to maturity.
The ongoing impact of SFAS 133 and SFAS 159these valuation adjustments on the Bank cannot be predicted, and the Bank’s retained earnings in the future may not be sufficient to offset the impact of SFAS 133 and SFAS 159.these valuation adjustments. The effects of SFAS 133 and SFAS 159these valuation adjustments may lead to significant volatility in future earnings, other comprehensive income, andincluding earnings available for dividends.
Credit Risk. For a discussion of derivatives credit exposure, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Derivatives Counterparties.”
Concentration Risk. The following table presents the concentration in derivatives with derivatives dealer counterparties whose outstanding notional balances represented 10% or more of the Bank’s total notional amount of derivatives outstanding as of JuneSeptember 30, 2009, and December 31, 2008.
Concentration of Derivatives Counterparties
(Dollars in millions) | June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | ||||||||||||||||||||||||
Derivatives Counterparty | Credit Rating(1) | Notional Amount | Percentage of Total Notional | Notional Amount | Percentage of Total Notional | Credit Rating(1) | Notional Amount | Percentage of Total Notional Amount | Notional Amount | Percentage of Total Notional Amount | ||||||||||||||||||
Deutsche Bank AG | A | $ | 48,572 | 17 | % | $ | 75,316 | 23 | % | A | $ | 41,505 | 16 | % | $ | 75,316 | 23 | % | ||||||||||
JPMorgan Chase Bank, National Association | AA | 47,016 | 17 | 51,287 | 15 | AA | 40,435 | 15 | 51,287 | 15 | ||||||||||||||||||
Barclays Bank PLC | AA | 42,270 | 15 | 50,015 | 15 | AA | 35,759 | 14 | 50,015 | 15 | ||||||||||||||||||
Subtotal | 137,858 | 49 | 176,618 | 53 | 117,699 | 45 | 176,618 | 53 | ||||||||||||||||||||
Others | At least A | 143,865 | 51 | 155,025 | 47 | At least A | 144,208 | 55 | 155,025 | 47 | ||||||||||||||||||
Total | $ | 281,723 | 100 | % | $ | 331,643 | 100 | % | $ | 261,907 | 100 | % | $ | 331,643 | 100 | % | ||||||||||||
(1) | The credit ratings are based on the lowest of Moody’s, Standard & Poor’s, or comparable Fitch ratings. |
Liquidity and Capital Resources
The Bank’s financial strategies are designed to enable the Bank to expand and contract its assets, liabilities, and capital in response to changes in membership composition and member credit needs. The Bank’s liquidity and capital resources are designed to support these financial strategies. The Bank’s primary source of liquidity is its access to the capital markets through consolidated obligation issuance. The Bank’s equity capital resources are governed by the Bank’s capital plan. For more information, see “Management’s Discussion and Analysis and Results of Operations – Quarterly Overview – Funding and Liquidity.”
Liquidity
The Bank strives to maintain the liquidity necessary to meet member credit demands, repay maturing consolidated obligations for which it is the primary obligor, meet other obligations and commitments, and respond to significant changes in membership composition. The Bank monitors its financial position in an effort to ensure that it has ready access to sufficient liquid funds to meet normal transaction requirements, take advantage of investment opportunities, and cover unforeseen liquidity demands.
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. Finance Agency guidelines require each FHLBank to maintain sufficient liquidity, through short-term investments, in an amount at least equal to its anticipated cash outflows under two different scenarios. One scenario assumes that the Bank can notFHLBank cannot access the capital markets for a targeted period of 15 days and that during that time members do not renew any maturing, prepaid, and called advances. The second scenario assumes that the Bank can notFHLBank cannot access the capital markets for a targeted period of five days and that during that period the Bank will automatically renew maturing and called advances for all members except very large, highly rated members. As early as the second quarter of 2008, Bank management
had already implemented similar contingent liquidity guidelines, which were easily adapted to satisfy the Finance Agency’s final guidelines released in March 2009.
The Bank has a regulatory contingency liquidity requirement to maintain at least five days of liquidity to enable it to meet its obligations without issuance of new consolidated obligations. The regulatory requirement
does not stipulate that the Bank renew any maturing advances during the five-day timeframe. In addition to the regulatory requirement and Finance Agency guidelines on contingency liquidity, the Bank’s asset-liability management committee has a formal guideline to maintain at least three months of liquidity to enable the Bank to meet its obligations in the event of a longer-term consolidated obligations marketsmarket disruption. This guideline allows the Bank to consider its mortgage assets as a source of funds by using those assets as collateral in the repurchase agreement markets. TheUnder this guideline, the Bank maintained at least three months of liquidity at all times during the first sixnine months of 2009 and during 2008. On a daily basis, the Bank models its cash commitments and expected cash flows for the next 90 days to determine the Bank’Bank’s projected liquidity position.
The following table shows the Bank’s principal financial obligations due, estimated sources of funds available to meet those obligations, and the net difference of funds available and funds needed for the five-business-day and 90-day periods following JuneSeptember 30, 2009, and December 31, 2008. Also shown are additional contingent sources of funds from on-balance sheet collateral available for repurchase agreement borrowings.
Principal Financial Obligations Due and Funds Available for Selected Periods
As of June 30, 2009 | As of December 31, 2008 | As of September 30, 2009 | As of December 31, 2008 | ||||||||||||||||||||||||
(In millions) | 5 Business Days | 90 Days | 5 Business Days | 90 Days | 5 Business Days | 90 Days | 5 Business Days | 90 Days | |||||||||||||||||||
Obligations due: | |||||||||||||||||||||||||||
Commitments for new advances | $ | 600 | $ | 600 | $ | 470 | $ | 470 | $ | 1,250 | $ | 1,250 | $ | 470 | $ | 470 | |||||||||||
Demand deposits | 1,763 | 1,763 | 2,552 | 2,552 | 1,774 | 1,774 | 2,552 | 2,552 | |||||||||||||||||||
Maturing member term deposits | 15 | 56 | 63 | 103 | 6 | 48 | 63 | 103 | |||||||||||||||||||
Discount note and bond maturities and expected exercises of bond call options | 4,809 | 69,048 | 14,686 | 101,157 | 5,911 | 51,467 | 14,686 | 101,157 | |||||||||||||||||||
Subtotal obligations | 7,187 | 71,467 | 17,771 | 104,282 | 8,941 | 54,539 | 17,771 | 104,282 | |||||||||||||||||||
Sources of available funds: | |||||||||||||||||||||||||||
Maturing investments | 12,688 | 24,211 | 10,986 | 20,781 | 8,156 | 15,115 | 10,986 | 20,781 | |||||||||||||||||||
Cash at FRBSF | 810 | 810 | 19,630 | 19,630 | 6,114 | 6,114 | 19,630 | 19,630 | |||||||||||||||||||
Proceeds from scheduled settlements of discount notes and bonds | 1,075 | 1,085 | 960 | 960 | 165 | 2,540 | 960 | 960 | |||||||||||||||||||
Maturing advances and scheduled prepayments | 6,104 | 44,237 | 6,349 | 62,727 | 4,823 | 45,542 | 6,349 | 62,727 | |||||||||||||||||||
Subtotal sources | 20,677 | 70,343 | 37,925 | 104,098 | 19,258 | 69,311 | 37,925 | 104,098 | |||||||||||||||||||
Net funds available | 13,490 | (1,124 | ) | 20,154 | (184 | ) | 10,317 | 14,772 | 20,154 | (184 | ) | ||||||||||||||||
Additional contingent sources of funds:(1) | |||||||||||||||||||||||||||
Estimated borrowing capacity of securities available for repurchase agreement borrowings: | |||||||||||||||||||||||||||
MBS | — | 25,008 | — | 27,567 | — | 23,852 | — | 27,567 | |||||||||||||||||||
Housing finance agency bonds | — | 544 | — | 561 | — | 538 | — | 561 | |||||||||||||||||||
Marketable money market investments | 4,868 | — | 5,909 | — | 4,350 | — | 5,909 | — | |||||||||||||||||||
Subtotal contingent sources | 4,868 | 25,552 | 5,909 | 28,128 | 4,350 | 24,390 | 5,909 | 28,128 | |||||||||||||||||||
Total contingent funds available | $ | 18,358 | $ | 24,428 | $ | 26,063 | $ | 27,944 | $ | 14,667 | $ | 39,162 | $ | 26,063 | $ | 27,944 | |||||||||||
(1) | The estimated amount of repurchase agreement borrowings obtainable from authorized securities dealers is subject to market conditions and the ability of securities dealers to obtain financing for the securities and transactions entered into with the Bank. The estimated maximum amount of repurchase agreement borrowings obtainable is based on the current par amount and estimated market value of MBS and other investments (not included in above figures) that are not pledged at the beginning of the period and subject to estimated collateral discounts taken by securities dealers. |
For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview – Funding and Liquidity,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Liquidity,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk” in the Bank’s 2008 Form 10-K.
Capital
Total capital as of JuneSeptember 30, 2009, was $8.7$7.7 billion, an 11%a 21% decrease from $9.8 billion as of December 31, 2008. The decrease was primarily due to the impairment loss related to all other factors recorded in other comprehensive income in the first sixnine months of 2009 on the Bank’s non-agency MBS,PLRMBS, partially offset by an increase in retained earnings and the acquisition by members of mandatorily redeemable capital stock previously held by nonmembers. Bank capital stock acquired by members from nonmembers is reclassified from mandatorily redeemable capital stock (a liability) to capital stock.
The FHLBank Act and Finance Agency regulations specify that each FHLBank must meet certain minimum regulatory capital standards. The Bank must maintain (i) total regulatory capital in an amount equal to at least 4% of its total assets, (ii) leverage capital in an amount equal to at least 5% of its total assets, and (iii) permanent capital in an amount at least equal to its regulatory risk-based capital requirement. Regulatory capital and permanent capital are both defined as total capital stock outstanding, including mandatorily redeemable capital stock, and retained earnings. Regulatory capital and permanent capital do not include accumulated other comprehensive income/(loss). Leverage capital is defined as the sum of permanent capital, weighted by a 1.5 multiplier, plus non-permanent capital. (Non-permanent capital consists of Class A capital stock, which is redeemable upon six months’ notice. The Bank’s capital plan does not provide for the issuance of Class A capital stock.) The risk-based capital requirements must be met with permanent capital, which must be at least equal to the sum of the Bank’s credit risk, market risk, and operations risk capital requirements, all of which are calculated in accordance with the rules of the Finance Agency.
The following table shows the Bank’s compliance with the Finance Agency’s capital requirements at JuneSeptember 30, 2009, and December 31, 2008. During the first sixnine months of 2009, the Bank’s required risk-based capital decreased from $8.6 billion at December 31, 2008, to $8.2$7.3 billion at JuneSeptember 30, 2009. The decrease was due to lower market risk capital requirements, reflecting the improvement in the Bank’s market value of capital relative to its book value of capital.
Regulatory Capital Requirements
June 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | |||||||||||||||||||||||||||||
(Dollars in millions) | Required | Actual | Required | Actual | Required | Actual | Required | Actual | ||||||||||||||||||||||||
Risk-based capital | $ | 8,226 | $ | 14,590 | $ | 8,635 | $ | 13,539 | $ | 7,309 | $ | 14,468 | $ | 8,635 | $ | 13,539 | ||||||||||||||||
Total regulatory capital | $ | 9,557 | $ | 14,590 | $ | 12,850 | $ | 13,539 | $ | 8,448 | $ | 14,468 | $ | 12,850 | $ | 13,539 | ||||||||||||||||
Total capital-to-assets ratio | 4.00 | % | 6.11 | % | 4.00 | % | 4.21 | % | 4.00 | % | 6.85 | % | 4.00 | % | 4.21 | % | ||||||||||||||||
Leverage capital | $ | 11,946 | $ | 21,884 | $ | 16,062 | $ | 20,308 | $ | 10,561 | $ | 21,701 | $ | 16,062 | $ | 20,308 | ||||||||||||||||
Leverage ratio | 5.00 | % | 9.16 | % | 5.00 | % | 6.32 | % | 5.00 | % | 10.27 | % | 5.00 | % | 6.32 | % |
The Bank’s total capital-to-assets ratio increased to 6.11%6.85% at JuneSeptember 30, 2009, from 4.21% at December 31, 2008, primarily because of increased excess capital stock resulting from the decline in advances outstanding, coupled with the Bank’s decision not to repurchase excess capital stock, as noted previously.
The Bank’s capital requirements are more fully discussed in the Bank’s 2008 Form 10-K in Note 13 to the Financial Statements and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Capital.”
The Bank has an integrated corporate governance and internal control framework designed to support effective management of the Bank’s business activities and the risks inherent in these activities. As part of this framework, the Bank’s Board of Directors has adopted a Risk Management Policy and a Member Products
Policy, which are reviewed regularly and reapproved at least annually. The Risk Management Policy establishes risk guidelines, limits (if applicable), and standards for credit risk, market risk, liquidity risk, operations risk, and business risk in accordance with Finance Agency regulations, the risk profile established by the Board of Directors, and other applicable guidelines in connection with the Bank’s capital plan and overall risk management. For more detailed information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management” in the Bank’s 2008 Form 10-K.
Advances.The Bank manages the credit risk associated with lending to members by monitoring the creditworthiness of the members and the quality and value of the assets that they pledge as collateral. Creditworthiness is determined and periodically assessed using the financial information provided by the member,members, quarterly financial reports filed by members with their primary regulators, regulatory examination reports and known regulatory enforcement actions, and public information.
Pursuant to the Bank’s lending agreements with its members, the Bank limits the amount it will lend to a specified percentage of the value assigned to pledged collateral. This percentage, known as the “borrowing capacity,” varies according to several factors, including the collateral type, the results of the Bank’s collateral field review of the member’s collateral, the pledging method used for loan collateral (specific identification or blanket lien), data reporting frequency (monthly or quarterly), the member’s financial strength and condition, and the concentration of collateral type. Under the terms of the Bank’s lending agreements, the aggregate borrowing capacity of a member’s pledged eligible collateral must meet or exceed the total amount of the member’s outstanding advances, other extensions of credit, and certain other member obligations and liabilities. The Bank monitors each member’s aggregate borrowing capacity and collateral requirements on a daily basis, by comparing the member’s borrowing capacity to its outstanding credit.obligations to the Bank, as required.
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 all the Bank’s credit and collateral 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 JuneSeptember 30, 2009, and December 31, 2008. During the first sixnine months of 2009, the Bank’s internal credit ratings reflected continued financial deterioration of some members and nonmember borrowers resulting from market conditions and other factors. Credit quality ratings are determined based on results from the Bank’s credit model and on other qualitative information, including regulatory examination reports. The Bank assigns each member and nonmember borrower an internal rating from one to ten, with one as the highest rating. Changes in the number of members and nonmember borrowers in each of the credit quality rating categories may occur because of the addition of new Bank members as well as changes to the credit quality ratings of the institutions based on the analysis discussed above.
Member and Nonmember Credit Outstanding and Collateral Borrowing Capacity
by Credit Quality Rating
(Dollars in millions)
JuneSeptember 30, 2009
All Members and Nonmembers | Members and Nonmembers with Credit Outstanding | ||||||||||||
Collateral Borrowing Capacity(2) | |||||||||||||
Member or Nonmember Credit Quality Rating | Number | Number | Credit Outstanding(1) | Total | Used | ||||||||
1-3 | 80 | 62 | $ | 18,866 | $ | 33,908 | 56 | % | |||||
4-6 | 218 | 152 | 147,489 | 206,935 | 71 | ||||||||
7-10 | 141 | 113 | 12,228 | 22,584 | 54 | ||||||||
Total | 439 | 327 | $ | 178,583 | $ | 263,427 | 68 | % | |||||
December 31, 2008
All Members and Nonmembers | Members and Nonmembers with Credit Outstanding | All Members and Nonmembers | Members and Nonmembers with Credit Outstanding | |||||||||||||||||||||||
Collateral Borrowing Capacity(2) | Collateral Borrowing Capacity(2) | |||||||||||||||||||||||||
Member or Nonmember Credit Quality Rating | Number | Number | Credit Outstanding(1) | Total | Used | Number | Number | Credit Outstanding(1) | Total | Used | ||||||||||||||||
1-3 | 124 | 104 | $ | 24,128 | $ | 49,077 | 49 | % | 73 | 52 | $ | 24,855 | $ | 33,026 | 75 | % | ||||||||||
4-6 | 268 | 203 | 201,726 | 224,398 | 90 | 217 | 148 | 120,710 | 190,215 | 63 | ||||||||||||||||
7-10 | 49 | 40 | 12,802 | 16,144 | 79 | 140 | 111 | 12,852 | 19,240 | 67 | ||||||||||||||||
Total | 441 | 347 | $ | 238,656 | $ | 289,619 | 82 | % | 430 | 311 | $ | 158,417 | $ | 242,481 | 65 | % | ||||||||||
December 31, 2008 | December 31, 2008 | |||||||||||||||||||||||||
All Members and Nonmembers | Members and Nonmembers with Credit Outstanding | |||||||||||||||||||||||||
Collateral Borrowing Capacity(2) | ||||||||||||||||||||||||||
Member or Nonmember Credit Quality Rating | Number | Number | Credit Outstanding(1) | Total | Used | |||||||||||||||||||||
1-3 | 124 | 104 | $ | 24,128 | $ | 49,077 | 49 | % | ||||||||||||||||||
4-6 | 268 | 203 | 201,726 | 224,398 | 90 | |||||||||||||||||||||
7-10 | 49 | 40 | 12,802 | 16,144 | 79 | |||||||||||||||||||||
Total | 441 | 347 | $ | 238,656 | $ | 289,619 | 82 | % | ||||||||||||||||||
(1) | Includes secured advances, letters of credit, the market value of swaps, estimated prepayment fees for certain borrowers, and the credit enhancement obligation on MPF loans. |
(2) | Collateral borrowing capacity does not represent any commitment to lend on the part of the Bank. |
Member and Nonmember Credit Outstanding and Collateral Borrowing Capacity
by Unused Borrowing Capacity
(Dollars in millions)
June 30, 2009 | ||||||||
Unused Borrowing Capacity | Number of Members and Nonmembers with Credit Outstanding | Credit Outstanding(1) | Collateral Capacity(2) | |||||
0% - 10% | 37 | $ | 66,392 | $ | 67,661 | |||
11% - 25% | 35 | 20,948 | 25,395 | |||||
26% - 50% | 93 | 77,893 | 115,831 | |||||
More than 50% | 162 | 13,350 | 54,540 | |||||
Total | 327 | $ | 178,583 | $ | 263,427 | |||
December 31, 2008
| ||||||||
Unused Borrowing Capacity | Number of Members and Nonmembers with Credit Outstanding | Credit Outstanding(1) | Collateral Capacity(2) | |||||
0% - 10% | 71 | $ | 195,344 | $ | 200,892 | |||
11% - 25% | 51 | 20,814 | 25,232 | |||||
26% - 50% | 81 | 11,051 | 17,308 | |||||
More than 50% | 144 | 11,447 | 46,187 | |||||
Total | 347 | $ | 238,656 | $ | 289,619 | |||