Federal Home Loan Bank Of San Francisco 10-Q 2020 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

  ____________________________________

FORM 10-Q

  ______________________________________________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-51398

FEDERAL HOME LOAN BANK OF SAN FRANCISCO

(Exact name of registrant as specified in its charter)

  ___________________________________________

Federally chartered corporation		94-6000630
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification number)
333 Bush Street, Suite 2700
San Francisco,	CA	94104
(Address of principal executive offices)		(Zip code)

(415) 616-1000

(Registrant’s telephone number, including area code)

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
—	—	—

  ___________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

	Shares Outstanding as of October 31, 2020
Class B Stock, par value $100	24,442,936

1

Federal Home Loan Bank of San Francisco

Form 10-Q

Index

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Statements of Condition (Unaudited)	1
	Statements of Income (Unaudited)	2
	Statements of Comprehensive Income (Unaudited)	3
	Statements of Capital Accounts (Unaudited)	4
	Statements of Cash Flows (Unaudited)	5
	Notes to Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	49
	Quarterly Overview	50
	Financial Highlights	52
	Results of Operations	53
	Financial Condition	66
	Liquidity and Capital Resources	75
	Risk Management	77
	Critical Accounting Policies and Estimates	88
	Recently Issued Accounting Standards and Interpretations	89
	Recent Developments	89
	Off-Balance Sheet Arrangements and Other Commitments	89
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	90
Item 4.	Controls and Procedures	95
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	96
Item 1A.	Risk Factors	96
Item 6.	Exhibits	97
Signatures		98

PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

Federal Home Loan Bank of San Francisco

Statements of Condition

(Unaudited)

(In millions-except par value)	September 30, 2020		December 31, 2019
Assets:
Cash and due from banks	$	175	$	118
Interest-bearing deposits	1,478		2,269
Securities purchased under agreements to resell	6,750		7,000
Federal funds sold	2,323		3,562
Trading securities(a)	4,281		1,766
Available-for-sale (AFS) securities, net (amortized cost of $14,543 and $15,206, respectively)(b)	14,671		15,495
Held-to-maturity (HTM) securities (fair values were $5,755 and $7,566, respectively)(a)	5,718		7,545
Advances (includes $3,103 and $4,370 at fair value under the fair value option, respectively)	37,693		65,374
Mortgage loans held for portfolio, net	2,404		3,314
Accrued interest receivable	100		139
Derivative assets, net	56		33
Other assets	221		227
Total Assets	$	75,870	$	106,842
Liabilities:
Deposits	$	1,006	$	537
Consolidated obligations:
Bonds (includes $112 and $337 at fair value under the fair value option, respectively)	54,921		71,372
Discount notes	13,300		27,376
Total consolidated obligations	68,221		98,748
Mandatorily redeemable capital stock	2		138
Accrued interest payable	31		164
Affordable Housing Program (AHP) payable	129		152
Derivative liabilities, net	1		0
Other liabilities	260		362
Total Liabilities	69,650		100,101
Commitments and Contingencies (Note 13)
Capital:
Capital stock—Class B—Putable ($100 par value) issued and outstanding:
25 shares and 30 shares, respectively	2,465		3,000
Unrestricted retained earnings	2,858		2,754
Restricted retained earnings	761		713
Total Retained Earnings	3,619		3,467
Accumulated other comprehensive income/(loss) (AOCI)	136		274
Total Capital	6,220		6,741
Total Liabilities and Capital	$	75,870	$	106,842

(a)At September 30, 2020, and December 31, 2019, none of these securities were pledged as collateral that may be repledged.

(b)At September 30, 2020, $386 of these securities were pledged as collateral that may be repledged. At December 31, 2019, $381 of these securities were pledged as collateral that may be repledged.

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

1

Federal Home Loan Bank of San Francisco

Statements of Income

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions)	2020		2019		2020		2019
Interest Income:
Advances	$	88	$	389	$	509	$	1,343
Interest-bearing deposits	1		14		14		40
Securities purchased under agreements to resell	1		45		20		144
Federal funds sold	1		22		16		99
Trading securities	23		1		61		8
AFS securities	67		100		179		261
HTM securities	19		65		92		219
Mortgage loans held for portfolio	7		18		22		55
Total Interest Income	207		654		913		2,169
Interest Expense:
Consolidated obligations:
Bonds	47		409		405		1,306
Discount notes	12		128		163		480
Deposits	0		2		2		6
Mandatorily redeemable capital stock	1		3		5		11
Total Interest Expense	60		542		575		1,803
Net Interest Income	147		112		338		366
Provision for/(reversal of) credit losses	(2)		0		30		0
Net Interest Income After Provision for/(Reversal of) Credit Losses	149		112		308		366
Other Income/(Loss):
Net gain/(loss) on trading securities	(19)		0		36		(1)
Net gain/(loss) on advances and consolidated obligation bonds held under fair value option	(7)		20		96		111
Net gain/(loss) on derivatives and hedging activities	5		(20)		(156)		(109)
Gain on disgorgement settlement	85		0		85		0
Other, net	6		3		18		10
Total Other Income/(Loss)	70		3		79		11
Other Expense:
Compensation and benefits	23		20		65		61
Other operating expense	14		17		41		50
Federal Housing Finance Agency	2		2		6		5
Office of Finance	1		2		4		5
Quality Jobs Fund expense	0		5		0		15
Other, net	0		1		3		2
Total Other Expense	40		47		119		138
Income/(Loss) Before Assessment	179		68		268		239
AHP Assessment	18		7		27		25
Net Income/(Loss)	$	161	$	61	$	241	$	214

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

2

Federal Home Loan Bank of San Francisco

Statements of Comprehensive Income

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions)	2020		2019		2020		2019
Net Income/(Loss)	$	161	$	61	$	241	$	214
Other Comprehensive Income/(Loss):
Net unrealized gain/(loss) on AFS securities	172		(17)		(138)		30
Net change in pension and postretirement benefits	(1)		0		(1)		0
Net non-credit-related other-than-temporary impairment (OTTI) gain/(loss) on AFS securities	0		(16)		0		1
Net non-credit-related OTTI gain/(loss) on HTM securities	0		0		1		1
Total other comprehensive income/(loss)	171		(33)		(138)		32
Total Comprehensive Income/(Loss)	$	332	$	28	$	103	$	246

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

3

Federal Home Loan Bank of San Francisco

Statements of Capital Accounts

(Unaudited)

	Capital Stock Class B—Putable			Retained Earnings								Total Capital
(In millions)	Shares	Par Value		Restricted		Unrestricted		Total		AOCI
Balance, June 30, 2019	30	$	2,967	$	678	$	2,719	$	3,397	$	300	$	6,664
Comprehensive income/(loss)				12		49		61		(33)		28
Issuance of capital stock	1	141										141
Repurchase of capital stock	(2)	(206)										(206)
Capital stock reclassified from/(to) mandatorily redeemable capital stock, net	0	(4)										(4)
Cash dividends paid on capital stock (7.00%)						(53)		(53)				(53)
Balance, September 30, 2019	29	$	2,898	$	690	$	2,715	$	3,405	$	267	$	6,570
Balance, June 30, 2020	27	$	2,668	$	729	$	2,765	$	3,494	$	(35)	$	6,127
Comprehensive income/(loss)				32		129		161		171		332
Issuance of capital stock	0	30										30
Repurchase of capital stock	(2)	(233)										(233)
Cash dividends paid on capital stock (5.00%)						(36)		(36)				(36)
Balance, September 30, 2020	25	$	2,465	$	761	$	2,858	$	3,619	$	136	$	6,220

	Capital Stock Class B—Putable			Retained Earnings								Total Capital
(In millions)	Shares	Par Value		Restricted		Unrestricted		Total		AOCI
Balance, December 31, 2018	29	$	2,949	$	647	$	2,699	$	3,346	$	235	$	6,530
Comprehensive income/(loss)				43		171		214		32		246
Issuance of capital stock	8	837										837
Repurchase of capital stock	(8)	(884)										(884)
Capital stock reclassified from/(to) mandatorily redeemable capital stock, net	0	(4)										(4)
Cash dividends paid on capital stock (7.00%)						(155)		(155)				(155)
Balance, September 30, 2019	29	$	2,898	$	690	$	2,715	$	3,405	$	267	$	6,570
Balance, December 31, 2019	30	$	3,000	$	713	$	2,754	$	3,467	$	274	$	6,741
Adjustment for cumulative effect of accounting change						(3)		(3)				(3)
Comprehensive income/(loss)				48		193		241		(138)		103
Issuance of capital stock	8	781										781
Repurchase of capital stock	(13)	(1,313)										(1,313)
Capital stock reclassified from/(to) mandatorily redeemable capital stock, net	0	(3)										(3)
Partial recovery of prior capital distribution to Financing Corporation						40		40				40
Cash dividends paid on capital stock (5.68%)						(126)		(126)				(126)
Balance, September 30, 2020	25	$	2,465	$	761	$	2,858	$	3,619	$	136	$	6,220

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

4

Federal Home Loan Bank of San Francisco

Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
(In millions)	2020		2019
Cash Flows from Operating Activities:
Net Income/(Loss)	$	241	$	214
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
Depreciation and amortization	15		(37)
Provision for/(reversal of) credit losses	30		0
Change in net fair value of trading securities	(36)		1
Change in net fair value adjustment on advances and consolidated obligation bonds held under the fair value option	(96)		(111)
Change in net derivatives and hedging activities	(1,180)		(422)
Other adjustments	7		19
Net change in:
Accrued interest receivable	41		1
Other assets	(2)		(13)
Accrued interest payable	(133)		16
Other liabilities	(41)		(20)
Total adjustments	(1,395)		(566)
Net cash provided by/(used in) operating activities	(1,154)		(352)
Cash Flows from Investing Activities:
Net change in:
Interest-bearing deposits	834		223
Securities purchased under agreements to resell	250		(400)
Federal funds sold	1,239		(26)
Trading securities:
Proceeds	1		656
Purchases	(2,480)		0
AFS securities:
Proceeds	1,929		457
Purchases	(525)		(8,126)
HTM securities:
Proceeds	1,830		2,530
Advances:
Repaid	453,774		988,903
Originated	(425,576)		(977,846)
Mortgage loans held for portfolio:
Principal collected	1,295		556
Purchases	(446)		(910)
Other investing activities, net	(2)		(36)
Net cash provided by/(used in) investing activities	32,123		5,981

5

Federal Home Loan Bank of San Francisco

Statements of Cash Flows (continued)

(Unaudited)

	Nine Months Ended September 30,
(In millions)	2020		2019
Cash Flows from Financing Activities:
Net change in deposits and other financing activities	472		375
Net change in borrowings from other Federal Home Loan Banks	0		(250)
Net (payments)/proceeds on derivative contracts with financing elements	(133)		70
Net proceeds from issuance of consolidated obligations:
Bonds	41,669		57,223
Discount notes	98,750		107,298
Payments for matured and retired consolidated obligations:
Bonds	(58,137)		(62,141)
Discount notes	(112,776)		(107,841)
Proceeds from issuance of capital stock	781		837
Payments for repurchase/redemption of mandatorily redeemable capital stock	(139)		(93)
Payments for repurchase of capital stock	(1,313)		(884)
Cash dividends paid	(126)		(155)
Partial recovery of prior capital distribution to Financing Corporation	40		0
Net cash provided by/(used in) financing activities	(30,912)		(5,561)
Net increase/(decrease) in cash and due from banks	57		68
Cash and due from banks at beginning of the period	118		13
Cash and due from banks at end of the period	$	175	$	81
Supplemental Disclosures:
Interest paid	$	706	$	1,807
AHP payments	50		51

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

6

Federal Home Loan Bank of San Francisco

Notes to Financial Statements

(Unaudited)

(Dollars in millions except per share amounts)

Note 1 — Basis of Presentation

The information about the Federal Home Loan Bank of San Francisco (Bank) included in these unaudited financial statements reflects all adjustments that, in the opinion of the Bank, are necessary for a fair statement of results for the periods presented. These adjustments are of a recurring nature, unless otherwise disclosed. The results of operations in these interim statements are not necessarily indicative of the results to be expected for any subsequent period or for the entire year ending December 31, 2020. These unaudited financial statements should be read in conjunction with the Bank’s Annual Report on Form 10-K for the year ended December 31, 2019 (2019 Form  10-K).

There have been no changes to the basis of presentation of the Bank’s financial instruments meeting netting requirements or of the Bank’s investments in variable interest entities disclosed in “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” in the Bank’s 2019 Form 10-K.

Summary of Significant Accounting Policies

Use of Estimates. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make a number of judgments, estimates, and assumptions that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income, expenses, gains, and losses during the reporting period. The most significant of these estimates include:

•accounting for derivatives;

•estimating fair values of investments classified as trading and AFS, derivatives and associated hedged items carried at fair value in accordance with the accounting for derivative instruments and associated hedging activities, and financial instruments carried at fair value under the fair value option; and

•estimating the prepayment speeds on mortgage-backed securities (MBS) and mortgage loans for the accounting of amortization of premiums and accretion of discounts and credit losses previously recorded prior to the adoption of new accounting guidance related to the measurement of credit losses on MBS and mortgage loans.

Actual results could differ significantly from these estimates.

Gain on Disgorgement Settlement. During the third quarter of 2020, the Bank received disgorgement proceeds in the amount of $85 in connection with a Securities and Exchange Commission enforcement action. Disgorgement proceeds are recorded in Other Income/(Loss) in “Gain on disgorgement settlement” in the Statements of Income. Disgorgement proceeds are considered realized and recorded when the Bank receives cash or assets that are readily convertible to known amounts of cash or claims to cash, when the Bank enters into a signed agreement that is not subject to appeal, where the counterparty has the ability to pay, and the amount to be received can be reasonably estimated. Prior to being realized or realizable, the Bank considers potential disgorgement proceeds to be gain contingencies, and therefore they are not recorded in the Statements of Income.

Coronavirus Aid, Relief, and Economic Security Act (Troubled Debt Restructuring Relief). On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) providing optional, temporary relief from accounting for certain loan modifications as troubled debt restructurings (TDRs) was signed into law. Under the CARES Act, TDR relief is available to financial institutions for loan modifications related to the adverse effects of the COVID-19 pandemic (COVID-related modifications) granted to borrowers that were current as of December 31, 2019. TDR relief applies to COVID-related modifications made from March 1, 2020, until the earlier of December 31, 2020, or 60 days following the termination of the national emergency declared by the President of the United States. Starting in the second quarter of 2020, the Bank elected to apply the TDR relief provided by the CARES Act. As such, all COVID-related modifications meeting the provisions of the CARES Act will be excluded

7

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

from TDR classification and accounting. COVID-related modifications that do not meet the provisions of the CARES Act will continue to be assessed for TDR classification.

Update to Significant Accounting Policies - Measurement of Credit Losses on Financial Instruments, as Amended

Beginning January 1, 2020, the Bank adopted new accounting guidance related to the measurement of credit losses on financial instruments that requires a financial asset or group of financial assets measured at amortized cost to be presented at the net amount expected to be collected. The new guidance also requires credit losses relating to these financial instruments as well as available-for-sale (AFS) securities to be recorded through the allowance for credit losses. Key changes as compared to prior accounting guidance are detailed below. Consistent with the modified retrospective method of adoption, the prior period has not been revised to conform to the new basis of accounting. For information on the prior accounting treatment and for descriptions of the Bank’s significant accounting policies, see “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” in the Bank’s 2019 Form 10-K. Other changes to these policies as of September 30, 2020, are discussed in Note 2 – Recently Issued and Adopted Accounting Guidance.

Interest-bearing Deposits, Securities Purchased under Agreements to Resell, and Federal Funds Sold. The Bank invests in interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold. These investments provide short-term liquidity and are carried at cost. Accrued interest receivable is recorded separately on the Statements of Condition.

These investments are evaluated quarterly for expected credit losses. If applicable, an allowance for credit loss is recorded with a corresponding adjustment to the provision for/(reversal of) credit losses. The Bank treats securities purchased under agreements to resell as collateralized financing arrangements because they effectively represent short-term loans to counterparties that are considered by the Bank to be of investment quality, which are classified as assets in the Statements of Condition. Securities purchased under agreements to resell are held in safekeeping in the name of the Bank by third-party custodians approved by the Bank. In accordance with the terms of these loans, if the market value of the underlying securities decreases below the market value required as collateral, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash. Consequently, a credit loss would be recognized if there is a collateral shortfall which the Bank does not believe the counterparty will replenish in accordance with its contractual terms. The credit loss would be limited to the difference between the fair value of the collateral and the investment’s cost. The Bank invests in Federal funds sold with counterparties that are considered by the Bank to be of investment quality.

See Note 3 – Investments for details on the allowance methodologies relating to interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold.

Investment Securities. On a quarterly basis, the Bank evaluates its individual AFS investment securities in an unrealized loss position for impairment. A security is considered impaired when its fair value is less than its amortized cost basis. With respect to any debt security, a credit loss is defined as the amount by which the amortized cost basis exceeds the present value of the cash flows expected to be collected. If a credit loss exists but the entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis (the amortized cost basis less any current-period credit loss), an allowance for credit losses is recorded with a corresponding adjustment to the provision for/(reversal of) credit losses. The allowance is limited by the amount of the unrealized loss. Accrued interest receivable is recorded separately on the Statements of Condition. The allowance for credit losses excludes uncollectible accrued interest receivable, which is measured separately.

If management intends to sell an impaired security classified as AFS, or more likely than not will be required to sell the security before expected recovery of its amortized cost basis, any allowance for credit losses is written off and the amortized cost basis is written down to the security’s fair value at the reporting date with any incremental

8

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

impairment reported in earnings as net unrealized gain/(loss) on AFS securities. If management does not intend to sell an impaired security classified as AFS and it is not more likely than not that management will be required to sell the debt security, then the credit portion of the difference is recognized as an allowance for credit losses and any remaining difference between the security’s fair value and amortized cost is recorded to net unrealized gain/(loss) on AFS securities within other comprehensive income/(loss).

Prior to January 1, 2020, credit losses were recorded as a direct write-down of the AFS security carrying value. For improvements in cash flows of AFS securities, interest income follows the recognition pattern pursuant to the impairment guidance in effect prior to January 1, 2020, and recoveries of amounts previously written off are recorded when received. AFS securities with a credit loss recognized pursuant to the impairment guidance in effect prior to January 1, 2020, continue to follow the prior accounting until maturity or disposition. For improvements in impaired AFS securities with an allowance for credit losses recognized after the adoption of the new guidance, the allowance for credit losses associated with recoveries may be derecognized up to its full amount. Effective January 1, 2020, the net non-credit-related other-than-temporary impairment (OTTI) gain/(loss) on AFS securities was reclassified to net unrealized gain/(loss) on AFS securities within other comprehensive income/(loss).

Held-to-maturity (HTM) securities are carried at cost, adjusted for periodic principal repayments, amortization of premiums and accretion of discounts, and previous credit loss recognized in net income and Accumulated Other Comprehensive Income (AOCI) recorded prior to January 1, 2020. On a quarterly basis, the Bank evaluates its HTM investment securities for expected credit losses on a pool basis unless an individual assessment is deemed necessary because the securities do not possess similar risk characteristics. If necessary, an allowance for credit losses is recorded with a corresponding adjustment to the provision for/(reversal of) credit losses. Prior to January 1, 2020, credit losses were recorded as a direct write-down of the HTM security carrying value. Accrued interest receivable is recorded separately on the Statements of Condition. The allowance for credit losses excludes uncollectible accrued interest receivable, which is measured separately.

For improvements in HTM securities impaired prior to January 1, 2020, interest income continues to follow the recognition pattern pursuant to the impairment guidance in effect prior to January 1, 2020, and recoveries of amounts previously written off are recorded when received. For improvements in impaired HTM securities with an allowance for credit losses recognized after the adoption of the new guidance, the allowance for credit losses associated with recoveries may be derecognized up to its full amount.

See Note 3 – Investments for details on the allowance methodologies relating to AFS and HTM securities.

Advances. The Bank reports advances (loans to members, former members or their successors or housing associates) either at amortized cost or at fair value when the fair value option is elected. Advances carried at amortized cost are reported net of premiums, discounts (including discounts related to the Affordable Housing Program), and hedging adjustments. Accrued interest receivable is recorded separately on the Statements of Condition. The advances carried at amortized cost are evaluated quarterly for expected credit losses. If deemed necessary, an allowance for credit losses is recorded with a corresponding adjustment to the provision for/(reversal of) credit losses. See Note 4 – Advances for details on the allowance methodologies relating to advances.

Mortgage Loans Held for Portfolio. The Bank classifies mortgage loans as held for investment and, accordingly, reports them at their principal amount outstanding net of unamortized premiums, unamortized credit enhancement fees paid as a lump sum at the time loans are purchased, discounts, and unrealized gains and losses from loans initially classified as mortgage loan commitments. The Bank performs a quarterly assessment of its mortgage loans held for portfolio to estimate expected credit losses. An allowance for credit losses is recorded with a corresponding adjustment to the provision for/(reversal of) credit losses.

The Bank measures expected credit losses on mortgage loans on a collective basis, pooling loans with similar risk characteristics. If a mortgage loan no longer shares risk characteristics with other loans, it is removed from the pool and evaluated for expected credit losses on an individual basis.

9

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

When developing the allowance for credit losses, the Bank measures the estimated loss over the remaining life of a mortgage loan, which also considers how the Bank’s credit enhancements mitigate credit losses. The Bank includes estimates of expected recoveries within the allowance for credit losses. If a loan is purchased at a discount, the discount does not offset the allowance for credit losses. Accrued interest receivable is recorded separately on the Statements of Condition. The allowance excludes uncollectible accrued interest receivable, as the Bank writes off accrued interest receivable by reversing interest income if a mortgage loan is placed on nonaccrual status.

The Bank does not purchase mortgage loans with credit deterioration present at the time of purchase. See Note 5 – Mortgage Loans Held for Portfolio for details on the allowance methodologies relating to mortgage loans. For more information related to the Bank’s accounting policies for the Mortgage Partnership Finance® (MPF®) Program, see “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” in the Bank’s 2019 Form 10-K. (“Mortgage Partnership Finance,” “MPF,” and “MPF Xtra” are registered trademarks of the FHLBank of Chicago.)

Off-Balance Sheet Credit Exposures. The Bank evaluates its off-balance sheet credit exposures on a quarterly basis for expected credit losses. If deemed necessary, an allowance for expected credit losses on these off-balance sheet exposures is recorded in other liabilities with a corresponding adjustment to the provision for/(reversal of) credit losses. See Note 13 – Commitments and Contingencies for details on the allowance methodologies relating to off-balance sheet credit exposure.

Note 2 — Recently Issued and Adopted Accounting Guidance

The following table provides a summary of recently issued accounting standards that may have an effect on the financial statements.

Recently Issued and Accounting Guidance, Not Yet Adopted

Accounting Standards Update (ASU)	Description	Effective Date	Effect on the Financial Statements or Other Significant Matters
Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04)	This guidance provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include: • contract modifications, • hedging relationships, and • sale or transfer of debt securities classified as HTM.	This guidance is effective immediately for the Bank, and the Bank may elect to apply the amendments prospectively through December 31, 2022.	The Bank has assessed the guidance and plans to elect some of the optional expedients and exceptions provided; however, the effect on the Bank’s financial condition, results of operations, and cash flows has not yet been determined.
Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14)	This guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans to improve disclosure effectiveness.	This guidance becomes effective for the Bank for the annual period ended December 31, 2020, and the annual periods thereafter. Early adoption is permitted.	The adoption of this guidance will affect the Bank’s disclosures but will not have any effect on the Bank’s financial condition, results of operations, or cash flows.

10

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Recently Adopted Accounting Guidance

ASU	Description	Effective Date	Effect on the Financial Statements or Other Significant Matters
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15)	This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).	This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2020.	The guidance was adopted as of January 1, 2020. The adoption of this guidance did not have any effect on the Bank’s financial condition, results of operations, or cash flows.
Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13)	This guidance modifies the disclosure requirements for fair value measurements to improve disclosure effectiveness.	This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2020.	The guidance was adopted as of January 1, 2020. The adoption of this guidance impacted the Bank’s disclosures but did not have any effect on the Bank’s financial condition, results of operations, or cash flows.
Measurement of Credit Losses on Financial Instruments, as amended (ASU 2016-13)	The guidance replaces the current incurred loss impairment model and requires entities to measure expected credit losses based on consideration of a broad range of relevant information, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The guidance also requires, among other things, credit losses relating to AFS securities to be recorded through an allowance for credit losses and expands disclosure requirements.	This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2020.	This guidance was adopted using a modified retrospective basis as of January 1, 2020. Upon adoption, this guidance had no effect on advances or U.S. obligations and Government-Sponsored Enterprises (GSEs) investments. The adoption of this guidance had an immaterial effect on the remaining investment portfolio given the specific terms, issuer guarantees, and collateralized/securitized nature of these instruments, on mortgage loans, and on the Bank’s financial condition, results of operations, and cash flows.

Note 3 — Investments

The Bank makes short-term investments in interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold, and may make other investments in debt securities, which are classified as either trading, AFS, or HTM.

Interest-Bearing Deposits, Securities Purchased under Agreements to Resell, and Federal Funds Sold. The Bank invests in interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold to provide short-term liquidity. These investments are generally transacted with counterparties that have received an investment grade credit rating of BBB or greater by a nationally recognized statistical rating organization (NRSRO). At September 30, 2020, none of these investments were with counterparties rated below BBB nor with unrated counterparties. These may differ from any internal ratings of the investments by the Bank, if applicable.

Federal funds sold are unsecured loans that are generally transacted on an overnight term. Federal Housing Finance Agency (Finance Agency) regulations include a limit on the amount of unsecured credit the Bank may extend to a counterparty. At September 30, 2020, and December 31, 2019, all investments in interest-bearing deposits and Federal funds sold were repaid or expected to be repaid according to the contractual terms. No allowance for credit losses was recorded for these assets at September 30, 2020, and December 31, 2019. Carrying values of interest-

11

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

bearing deposits and Federal funds sold exclude accrued interest receivable of de minimis amounts as of September 30, 2020, and $3 and a de minimis amount as of December 31, 2019, respectively.

Based upon the collateral held as security and collateral maintenance provisions with its counterparties, the Bank determined that no allowance for credit losses was needed for its securities purchased under agreements to resell at September 30, 2020, and December 31, 2019. The carrying value of securities purchased under agreements excludes de minimis amounts of accrued interest receivable as of September 30, 2020, and December 31, 2019.

Debt Securities

The Bank invests in debt securities, which are classified as either trading, AFS, or HTM. Within these investments, the Bank is primarily subject to credit risk related to private-label residential mortgage-backed securities (PLRMBS) that are supported by underlying mortgage loans. The Bank is prohibited by Finance Agency regulations from purchasing certain higher risk securities, such as equity securities and debt instruments that are not investment quality at time of purchase.

Trading Securities. The estimated fair value of trading securities as of September 30, 2020, and December 31, 2019, was as follows:

	September 30, 2020		December 31, 2019
U.S. obligations – Treasury securities	$	4,278	$	1,762
MBS – Other U.S. obligations – Ginnie Mae	3		4
Total	$	4,281	$	1,766

The net unrealized gain/(loss) on trading securities was $(19) and a de minimis amount for the three months ended September 30, 2020 and 2019, respectively. The net unrealized gain/(loss) on trading securities was $36 and $(1) for the nine months ended September 30, 2020 and 2019, respectively. These amounts represent the changes in the fair value of the securities during the reported periods.

Available-for-Sale Securities. AFS securities by major security type as of September 30, 2020, and December 31, 2019, were as follows:

September 30, 2020
	Amortized Cost(1)		Allowance for Credit Losses(2)		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. obligations – Treasury securities	$	3,797	$	0	$	4	$	0	$	3,801
MBS:
GSEs – multifamily:
Freddie Mac	851		0		3		(1)		853
Fannie Mae	7,894		0		19		(32)		7,881
Subtotal – GSEs – multifamily	8,745		0		22		(33)		8,734
PLRMBS:
Prime	180		(2)		10		0		188
Alt-A	1,821		(22)		171		(22)		1,948
Subtotal PLRMBS	2,001		(24)		181		(22)		2,136
Total MBS	10,746		(24)		203		(55)		10,870
Total	$	14,543	$	(24)	$	207	$	(55)	$	14,671

12

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

December 31, 2019
	Amortized Cost(1)		OTTI Recognized in AOCI(2)		Gross Unrealized Gains(3)		Gross Unrealized Losses		Estimated Fair Value
U.S. obligations – Treasury securities	$	5,281	$	0	$	7	$	0	$	5,288
MBS:
GSEs – multifamily:
Freddie Mac	773		0		4		0		777
Fannie Mae	6,823		0		23		(13)		6,833
Subtotal – GSEs – multifamily	7,596		0		27		(13)		7,610
PLRMBS:
Prime	213		0		17		0		230
Alt-A	2,116		(9)		260		0		2,367
Subtotal PLRMBS	2,329		(9)		277		0		2,597
Total MBS	9,925		(9)		304		(13)		10,207
Total	$	15,206	$	(9)	$	311	$	(13)	$	15,495

(1)    Amortized cost includes unpaid principal balance, unamortized premiums and discounts, net charge-offs, and valuation adjustments for hedging activities, and excludes accrued interest receivable of $48 and $58 at September 30, 2020, and December 31, 2019, respectively.

(2)    Effective January 1, 2020, the Bank completes an analysis on a quarterly basis to determine whether to record an allowance for credit losses for expected credit losses on AFS securities. Prior to January 1, 2020, credit losses were recorded as a direct write-down to the AFS security carrying value. OTTI recognized in AOCI excludes subsequent unrealized gains/(losses) in fair value of previously other-than-temporarily impaired AFS securities at December 31, 2019, which is included in net non-credit-related OTTI on AFS securities.

(3)    Includes $277 in subsequent unrealized gains in fair value of previously other-than-temporarily impaired AFS securities at December 31, 2019.

At September 30, 2020, the amortized cost of the Bank’s MBS classified as AFS included premiums of $67, discounts of $48, and credit-related OTTI of $506 for AFS securities with an OTTI recognized pursuant to the impairment guidance in effect prior to January 1, 2020. At December 31, 2019, the amortized cost of the Bank’s MBS classified as AFS included premiums of $65, discounts of $52, and credit-related OTTI of $574.

The following tables summarize the AFS securities with unrealized losses as of September 30, 2020, and December 31, 2019. The unrealized losses are aggregated by major security type and the length of time that individual securities have been in a continuous unrealized loss position. At December 31, 2019, total unrealized losses in the following table will not agree to total gross unrealized losses in the table above. The unrealized losses in the following table as of December 31, 2019, also include non-credit-related OTTI losses recognized in AOCI.

September 30, 2020
	Less Than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
MBS – GSEs – multifamily:
Freddie Mac	$	321	$	1	$	0	$	0	$	321	$	1
Fannie Mae	3,690		26		479		6		4,169		32
Subtotal MBS – GSEs – multifamily	4,011		27		479		6		4,490		33
PLRMBS:
Prime	3		0		7		0		10		0
Alt-A	206		7		154		15		360		22
Subtotal PLRMBS	209		7		161		15		370		22
Total	$	4,220	$	34	$	640	$	21	$	4,860	$	55

13

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

December 31, 2019
	Less Than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
MBS – GSEs – multifamily:
Freddie Mac	$	211	$	0	$	0	$	0	$	211	$	0
Fannie Mae	2,433		9		623		4		3,056		13
Subtotal MBS – GSEs – multifamily	2,644		9		623		4		3,267		13
PLRMBS:
Prime	4		0		8		0		12		0
Alt-A	75		0		193		9		268		9
Subtotal PLRMBS	79		0		201		9		280		9
Total	$	2,723	$	9	$	824	$	13	$	3,547	$	22

Redemption Terms. The amortized cost and estimated fair value of non-MBS investments by contractual maturity (based on contractual final principal payment) and of MBS as of September 30, 2020, and December 31, 2019, are shown below. Expected maturities of MBS will differ from contractual maturities because borrowers may have the right to call or prepay the underlying obligations with or without call or prepayment fees.

September 30, 2020
Year of Contractual Maturity	Amortized Cost		Estimated Fair Value
AFS securities other than MBS:
Due in 1 year or less	$	2,924	$	2,926
Due after 1 year through 5 years	873		875
Subtotal	3,797		3,801
MBS	10,746		10,870
Total	$	14,543	$	14,671

December 31, 2019
Year of Contractual Maturity	Amortized Cost		Estimated Fair Value
AFS securities other than MBS:
Due in 1 year or less	$	2,309	$	2,312
Due after 1 year through 5 years	2,972		2,976
Subtotal	5,281		5,288
MBS	9,925		10,207
Total	$	15,206	$	15,495

Held-to-Maturity Securities. The Bank classifies the following securities as HTM because the Bank has the positive intent and ability to hold these securities to maturity:  

14

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

September 30, 2020
	Amortized Cost(1)		Gross Unrecognized Holding Gains(3)		Gross Unrecognized Holding Losses(3)		Estimated Fair Value
MBS – Other U.S. obligations – single-family:
Ginnie Mae	$	319	$	9	$	0	$	328
MBS – GSEs – single-family:
Freddie Mac	654		14		0		668
Fannie Mae	1,373		24		(1)		1,396
Subtotal MBS – GSEs – single-family	2,027		38		(1)		2,064
MBS – GSEs – multifamily:
Freddie Mac	2,110		1		(3)		2,108
Fannie Mae	946		0		(2)		944
Subtotal MBS – GSEs – multifamily	3,056		1		(5)		3,052
Subtotal MBS – GSEs	5,083		39		(6)		5,116
PLRMBS:
Prime	203		0		(6)		197
Alt-A	113		4		(3)		114
Subtotal PLRMBS	316		4		(9)		311
Total	$	5,718	$	52	$	(15)	$	5,755

December 31, 2019
	Amortized Cost(1)		OTTI Recognized in AOCI(2)		Carrying Value		Gross Unrecognized Holding Gains(3)		Gross Unrecognized Holding Losses(3)		Estimated Fair Value
MBS – Other U.S. obligations – single-family:
Ginnie Mae	$	470	$	0	$	470	$	5	$	0	$	475
MBS – GSEs – single-family:
Freddie Mac	1,063		0		1,063		8		(1)		1,070
Fannie Mae	1,844		0		1,844		20		(1)		1,863
Subtotal MBS – GSEs – single-family	2,907		0		2,907		28		(2)		2,933
MBS – GSEs – multifamily:
Freddie Mac	2,625		0		2,625		0		(9)		2,616
Fannie Mae	1,159		0		1,159		0		(2)		1,157
Subtotal MBS – GSEs – multifamily	3,784		0		3,784		0		(11)		3,773
Subtotal MBS – GSEs	6,691		0		6,691		28		(13)		6,706
PLRMBS:
Prime	243		0		243		1		(4)		240
Alt-A	142		(1)		141		6		(2)		145
Subtotal PLRMBS	385		(1)		384		7		(6)		385
Total	$	7,546	$	(1)	$	7,545	$	40	$	(19)	$	7,566

(1)    Amortized cost includes unpaid principal balance, unamortized premiums and discounts, and net charge offs, and excludes accrued interest receivable of $5 and $12 at September 30, 2020, and December 31, 2019, respectively.

(2)    With the adoption of new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020, the OTTI approach was replaced with an evaluation for an allowance for credit loss; however, OTTI remains for those securities that had credit impairment prior to the adoption date.

(3)    Gross unrecognized gains/(losses) represent the difference between estimated fair value and net carrying value.

15

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Expected maturities of MBS classified as HTM will differ from contractual maturities because borrowers may have the right to call or prepay the underlying obligations with or without call or prepayment fees.

At September 30, 2020, the amortized cost of the Bank’s MBS classified as HTM included premiums of $5, discounts of $7, and credit-related OTTI of $6 for HTM securities with an OTTI recognized pursuant to the impairment guidance in effect prior to January 1, 2020. At December 31, 2019, the amortized cost of the Bank’s MBS classified as HTM included premiums of $8, discounts of $11, and credit-related OTTI of $7.

Allowance for Credit Losses on AFS and HTM Securities. The Bank adopted new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020. For additional information, see Note 2 – Recently Issued and Adopted Accounting Guidance. For information on the prior methodology for evaluating credit losses, see “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” in the Bank’s 2019 Form 10-K.

The following table presents a rollforward of the allowance for credit losses on investment securities associated with PLRMBS classified as AFS for the three and nine months ended September 30, 2020. The Bank recorded no allowance for credit losses associated with HTM securities during the nine months ended September 30, 2020. Under the previous accounting methodology of security impairment, the Bank recognized credit-related net OTTI loss of $2 and $8 during the three and nine months ended September 30, 2019, respectively.

	Three Months Ended		Nine Months Ended
	September 30, 2020			September 30, 2020
Balance, beginning of the period	$	29		$	0
(Charge-offs)/recoveries	(1)			(2)
Provision for/(reversal of) credit losses	(4)			26
Balance, end of the period	$	24		$	24

To evaluate investment securities for credit loss at September 30, 2020, the Bank employed the following methodologies, based on the type of security.

AFS and HTM Securities (Excluding PLRMBS) – The Bank’s AFS and HTM securities are principally U.S. obligations and MBS issued by Ginnie Mae, Freddie Mac, and Fannie Mae that are backed by single-family or multifamily mortgage loans. The Bank only purchases securities considered investment quality. Excluding PLRMBS investments, at September 30, 2020, approximately 100% of AFS securities and HTM securities, based on amortized cost, were rated A, or above, by an NRSRO, based on the lowest long-term credit rating for each security. These may differ from any internal ratings of the securities by the Bank, if applicable.

At September 30, 2020, certain of the Bank’s AFS securities were in an unrealized loss position. These losses are considered temporary as the Bank expects to recover the entire amortized cost basis on these AFS investment securities and neither intends to sell these securities nor considers it more likely than not that it will be required to sell these securities before its anticipated recovery of each security's remaining amortized cost basis. Further, the Bank has not experienced any payment defaults on the instruments. In addition, substantially all of these securities carry an implicit or explicit government guarantee. As a result, no allowance for credit losses was recorded on these AFS securities at September 30, 2020.

As of September 30, 2020, the Bank had not established an allowance for credit loss on any of its HTM securities because the securities: (i) were all highly rated or had short remaining terms to maturity, (ii) had not experienced, nor did the Bank expect, any payment default on the instruments, and (iii) in the case of GSE or other U.S. obligations, carry an implicit or explicit government guarantee such that the Bank considers the risk of nonpayment to be zero.

16

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Private-Label Residential Mortgage-Backed Securities – The Bank also holds investments in PLRMBS. The Bank has not purchased any PLRMBS since the first quarter of 2008. However, many of these securities have subsequently experienced significant credit deterioration. As of September 30, 2020, approximately 6% of PLRMBS (AFS and HTM combined, based on amortized cost) were rated A, or above, by an NRSRO; and the remaining securities were either rated less than A, or were unrated. To determine whether an allowance for credit loss is necessary on these securities, the Bank uses cash flow analyses. For certain PLRMBS where underlying collateral data is not available, alternative procedures as determined by the Bank are used to assess these securities for credit loss measurement.

At each quarter end, the Bank compares the present value of the cash flows expected to be collected on its PLRMBS, using the effective interest rate, to the amortized cost basis of the securities to determine whether a credit loss exists. The expected credit losses are measured using:

•the remaining payment terms for the security;

•prepayment speeds based on underlying loan-level borrower and loan characteristics;

•expected default rates based on underlying loan-level borrower and loan characteristics;

•expected housing price changes;

•expected interest rate assumptions; and

•loss severities on the collateral supporting each unique PLRMBS based on underlying loan-level borrower and loan characteristics.

The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined reflects management’s expectations and includes a base case housing price forecast for near- and long-term horizons.

For all the PLRMBS in its AFS and HTM portfolios, the Bank does not intend to sell any security and it is not more likely than not that the Bank will be required to sell any security before its anticipated recovery of the remaining amortized cost basis.

For securities with an OTTI recognized pursuant to the impairment guidance in effect prior to January 1, 2020, as of September 30, 2020 (securities for which the Bank determined that it does not expect to recover the entire amortized cost basis), the following table presents a summary of the significant inputs used in measuring the fair value of PLRMBS classified as Level 3 as of September 30, 2020, and the related current credit enhancement for the Bank.

September 30, 2020
	Significant Inputs for Other-Than-Temporarily Impaired PLRMBS			Current
	Prepayment Rates	Default Rates	Loss Severities	Credit Enhancement
Collateral Type at Origination	Weighted Average % (1)	Weighted Average % (1)	Weighted Average % (1)	Weighted Average % (1)
Prime	10.4	17.3	20.2	22.5
Alt-A	13.3	20.5	40.9	2.8
Total	13.3	20.5	40.8	2.9

(1)Weighted average percentage is based on unpaid principal balance.

Credit enhancement is defined as the percentage of subordinated tranches, excess spread, and over-collateralization, if any, in a security structure that will generally absorb losses before the Bank will experience a loss on the security. The calculated averages represent the dollar-weighted averages of all the PLRMBS investments in each category shown. The classification is based on the model used to run the estimated cash flows for the CUSIP, which may not necessarily be the same as the classification at the time of origination.

The following table presents the credit-related OTTI, which is recognized in earnings, for the three and nine months ended September 30, 2020 and 2019.

17

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Balance, beginning of the period	$	990	$	1,050	$	1,021	$	1,077
Additional charges on securities for which OTTI was previously recognized(1)	0		2		0		8
Securities matured during the period(2)	0		(3)		0		(5)
Accretion of yield adjustments resulting from improvement of expected cash flows that are recognized over the remaining life of the securities(3)	(14)		(15)		(45)		(46)
Balance, end of the period	$	976	$	1,034	$	976	$	1,034

(1)For the three and nine months ended September 30, 2019, “securities for which OTTI was previously recognized” represents all securities that were also other-than-temporarily impaired prior to January 1, 2020.

(2)Represents reductions related to securities that, having reached final maturity during the period, are therefore are no longer held by the Bank at the end of the period.

(3)The total net accretion/(amortization) associated with PLRMBS that were other-than-temporarily impaired prior to January 1, 2020, (amount recognized in interest income) totaled $17 and $21 for the three months ended September 30, 2020 and 2019, respectively. The total net accretion/(amortization) associated with PLRMBS that were other-than-temporarily impaired prior to January 1, 2020, (amount recognized in interest income) totaled $54 and $58 for the nine months ended September 30, 2020 and 2019, respectively.

In general, the Bank elects to transfer any PLRMBS that incurred a credit loss during the applicable period from the Bank’s HTM portfolio to its AFS portfolio at their fair values. The Bank recognized a credit loss on these HTM PLRMBS, which the Bank believes is evidence of a significant decline in the credit quality of the underlying collateral. The decline in the credit quality of the underlying collateral is the basis for the transfers to the AFS portfolio. These transfers allow the Bank the option to sell these securities prior to maturity in view of changes in interest rates, changes in prepayment risk, or other factors, while recognizing the Bank’s intent to hold these securities for an indefinite period of time.

The Bank transferred PLRMBS from its HTM portfolio to its AFS portfolio with an amortized cost and fair value of $1 during the nine months ended September 30, 2020. The Bank did not transfer any PLRMBS from its HTM portfolio to its AFS portfolio during the three months ended September 30, 2020, nor during the three and nine months ended September 30, 2019.

For the Bank’s PLRMBS, the Bank experienced declines in fair value in March 2020 as a result of disruptions in the financial markets combined with illiquidity in the PLRMBS market and decreased expectations of the performance of loan collateral underlying these securities, which caused these assets to be valued at discounts to their amortized cost. As a result of these factors and the adoption of new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020, the Bank recorded a provision for credit losses on its PLRMBS portfolio of $39 in the first quarter of 2020. Subsequent improvement in the Bank’s PLRMBS fair values during the three months ended September 30, 2020, resulted in the Bank’s recognition of a reversal of credit losses totaling $4 on its PLRMBS portfolio. During the nine months ended September 30, 2020, the Bank recorded a provision for credit losses on its PLRMBS portfolio classified as AFS of $26.

Note 4 — Advances

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

Redemption Terms. The Bank had advances outstanding, excluding overdrawn demand deposit accounts, at interest rates ranging from 0.00% to 8.57% at September 30, 2020, and 1.15% to 8.57% at December 31, 2019, as summarized below.

18

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	September 30, 2020				December 31, 2019
Redemption Term	Amount Outstanding(1)		Weighted Average Interest Rate		Amount Outstanding(1)		Weighted Average Interest Rate
Overdrawn demand and overnight deposit accounts	$	1	0.01	%	$	0	0	%
Within 1 year	13,115		1.29		32,351		1.91
After 1 year through 2 years	12,031		1.65		22,380		2.15
After 2 years through 3 years	2,764		2.16		4,847		2.08
After 3 years through 4 years	3,546		2.48		2,909		2.97
After 4 years through 5 years	3,988		1.38		1,461		2.32
After 5 years	1,445		2.20		1,140		2.96
Total par value	36,890		1.63	%	65,088		2.08	%
Valuation adjustments for hedging activities	639				203
Valuation adjustments under fair value option	165				83
Unamortized discounts	(1)				0
Total	$	37,693			$	65,374

(1)Carrying amounts exclude accrued interest receivable of $7 and $39 at September 30, 2020, and December 31, 2019, respectively.

Many of the Bank’s advances are prepayable at the borrower’s option. However, when advances are prepaid, the borrower is generally charged a prepayment fee intended to make the Bank financially indifferent to the prepayment. In addition, for certain advances with full or partial prepayment symmetry, the Bank may charge the borrower a prepayment fee or pay the borrower a prepayment credit depending on certain circumstances, such as movements in interest rates, when the advance is prepaid. The Bank had advances with full prepayment symmetry outstanding totaling $21,195 at September 30, 2020, and $14,059 at December 31, 2019. The Bank had advances with partial prepayment symmetry outstanding totaling $2,738 at September 30, 2020, and $3,513 at December 31, 2019. Some advances may be repaid on pertinent call dates without prepayment fees (callable advances). The Bank had callable advances outstanding totaling $2,670 at September 30, 2020, and $14,024 at December 31, 2019.

The Bank had putable advances totaling $220 at September 30, 2020, and $20 at December 31, 2019. At the Bank’s discretion, the Bank may terminate these advances on predetermined exercise dates and offer replacement funding at prevailing market rates, subject to certain conditions. The Bank would typically exercise such termination rights when interest rates increase relative to contractual rates.

The following table summarizes advances at September 30, 2020, and December 31, 2019, by the earlier of the year of redemption term or next call date for callable advances and by the earlier of the year of redemption term or next put date for putable advances.

	Earlier of Redemption Term or Next Call Date				Earlier of Redemption Term or Next Put Date
	September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Overdrawn demand and overnight deposit accounts	$	1	$	0	$	1	$	0
Within 1 year	15,685		39,075		13,335		32,371
After 1 year through 2 years	9,481		15,731		12,031		22,380
After 2 years through 3 years	2,764		4,800		2,764		4,847
After 3 years through 4 years	3,546		2,895		3,546		2,909
After 4 years through 5 years	3,968		1,447		3,988		1,461
After 5 years	1,445		1,140		1,225		1,120
Total par value	$	36,890	$	65,088	$	36,890	$	65,088

Concentration Risk. The following tables present the concentration in advances to the top five borrowers and their affiliates at September 30, 2020 and 2019. The tables also present the interest income from these advances before

19

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

the impact of interest rate exchange agreements associated with these advances for the three and nine months ended September 30, 2020 and 2019.

	September 30, 2020				Three Months Ended September 30, 2020				Nine Months Ended September 30, 2020
Name of Borrower	Advances Outstanding		Percentage of Total Advances Outstanding		Interest Income from Advances(1)		Percentage of Total Interest Income from Advances		Interest Income from Advances(1)		Percentage of Total Interest Income from Advances
First Republic Bank	$	13,510	37	%	$	62	35	%	$	201	28	%
MUFG Union Bank, National Association	4,925		13		36		21		141		19
CIT Bank, National Association	2,550		7		4		2		20		3
First Technology Federal Credit Union	1,975		5		11		6		34		5
Luther Burbank Savings	962		3		5		3		16		2
Subtotal	23,922		65		118		67		412		57
Others	12,968		35		57		33		310		43
Total par value	$	36,890	100	%	$	175	100	%	$	722	100	%

	September 30, 2019				Three Months Ended September 30, 2019				Nine Months Ended September 30, 2019
Name of Borrower	Advances Outstanding		Percentage of Total Advances Outstanding		Interest Income from Advances(1)		Percentage of Total Interest Income from Advances		Interest Income from Advances(1)		Percentage of Total Interest Income from Advances
MUFG Union Bank, National Association	$	14,100	22	%	$	92	24	%	$	287	22	%
First Republic Bank	11,200		18		62		16		175		13
Wells Fargo & Company
Wells Fargo Financial National Bank West	8,000		13		49		13		150		12
Wells Fargo Bank, National Association(2)	41		0		1		0		2		0
Subtotal Wells Fargo & Company	8,041		13		50		13		152		12
Bank of the West	5,556		9		41		10		124		9
JPMorgan Chase Bank, National Association(2)	5,056		8		33		9		144		11
Subtotal	43,953		70		278		72		882		67
Others	18,486		30		110		28		427		33
Total par value	$	62,439	100	%	$	388	100	%	$	1,309	100	%

(1)    Interest income amounts exclude the interest effect of interest rate exchange agreements with derivative counterparties; as a result, the total interest income amounts will not agree to the Statements of Income. The amount of interest income from advances can vary depending on the amount outstanding, terms to maturity, interest rates, and repricing characteristics.

(2)    Nonmember institution.

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

Credit Risk Exposure and Security Terms. The Bank manages its credit exposure related to advances through an integrated approach that generally provides for a credit limit to be established for each borrower, includes an ongoing review of each borrower’s financial condition, and is coupled with conservative collateral and lending policies to limit the risk of loss while taking into account borrowers’ needs for a reliable funding source.

In addition, the Bank lends to eligible borrowers in accordance with federal law and Finance Agency regulations. Specifically, the Bank is required to obtain sufficient collateral to fully secure credit products up to the member’s total credit limit. Borrowers may pledge the following eligible assets to secure advances:

•one-to-four-family first lien residential mortgage loans;

20

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

•securities issued, insured, or guaranteed by the U.S. government or any of its agencies, including without limitation MBS backed by Fannie Mae, Freddie Mac, or Ginnie Mae;

•cash or deposits in the Bank;

•certain other real estate-related collateral, such as multifamily loans, commercial real estate loans, and second lien residential mortgage loans or home equity loans; and

•small business, small farm, and small agribusiness loans that are fully secured by collateral (such as real estate, equipment and vehicles, accounts receivable, and inventory) from members that are community financial institutions.

At September 30, 2020, and December 31, 2019, none of the Bank’s credit products were past due or on nonaccrual status. There were no troubled debt restructurings related to credit products during the nine months ended September 30, 2020, or during 2019.

Based on the collateral pledged as security for advances, the Bank’s credit analyses of borrowers’ financial condition, repayment history on advances, and the Bank’s credit extension and collateral policies as of September 30, 2020, the Bank expects to collect all amounts due according to the contractual terms. Therefore, no allowance for losses on advances was deemed necessary by the Bank as of September 30, 2020, and December 31, 2019.

For more information on the credit risk exposure and security terms of advances, see “Item 8. Financial Statements and Supplementary Data – Note 10 – Allowance for Credit Losses” in the Bank’s 2019 Form 10-K.

Interest Rate Payment Terms. Interest rate payment terms for advances at September 30, 2020, and December 31, 2019, are detailed below:

	September 30, 2020		December 31, 2019
Par value of advances:
Fixed rate:
Due within 1 year	$	12,343	$	15,327
Due after 1 year	20,975		21,337
Total fixed rate	33,318		36,664
Adjustable rate:
Due within 1 year	772		17,024
Due after 1 year	2,800		11,400
Total adjustable rate	3,572		28,424
Total par value	$	36,890	$	65,088

The Bank did not have any advances with embedded features that met the requirements to separate the embedded feature from the host contract and designate the embedded feature as a stand-alone derivative at September 30, 2020, or December 31, 2019. The Bank has generally elected to account for certain advances with embedded features under the fair value option, and these advances are carried at fair value on the Statements of Condition. For more information, see Note 11 – Derivatives and Hedging Activities and Note 12 – Fair Value.

Prepayment Fees, Net. The Bank charges borrowers prepayment fees or pays borrowers prepayment credits when the principal on certain advances is paid prior to original maturity. The Bank records prepayment fees net of any associated fair value adjustments related to prepaid advances that were hedged. The net amount of prepayment fees is reflected as advances interest income in the Statements of Income for the three and nine months ended September 30, 2020 and 2019, as follows:

21

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Prepayment fees received	$	38	$	0	$	77	$	0
Fair value adjustments	(35)		0		(62)		1
Net	$	3	$	0	$	15	$	1
Advance principal prepaid	$	5,018	$	775	$	21,804	$	3,506

Note 5 — Mortgage Loans Held for Portfolio

The following table presents information as of September 30, 2020, and December 31, 2019, on mortgage loans, all of which are secured by one- to four-unit residential properties and single-unit second homes.

	September 30, 2020		December 31, 2019
Fixed rate medium-term mortgage loans	$	33	$	27
Fixed rate long-term mortgage loans	2,338		3,199
Subtotal	2,371		3,226
Unamortized premiums	42		91
Unamortized discounts	(2)		(3)
Mortgage loans held for portfolio(1)	2,411		3,314
Less: Allowance for credit losses	(7)		0
Total mortgage loans held for portfolio, net	$	2,404	$	3,314

(1)Excludes accrued interest receivable of $13 and $19 at September 30, 2020, and December 31, 2019, respectively.

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

Payment Status of Mortgage Loans. Payment status is the key credit quality indicator for conventional mortgage loans and allows the Bank to monitor the migration of past due loans. Past due loans are those where the borrower has failed to make timely payments of principal and/or interest in accordance with the terms of the loan. Other delinquency statistics include nonaccrual loans and loans in process of foreclosure. The following tables present the payment status for mortgage loans and other delinquency statistics for Bank’s mortgage loans at September 30, 2020, and December 31, 2019.

22

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

September 30, 2020
	Origination Year
Payment Status	<2016		2016 to 2020		Amortized Cost(1)
30 – 59 days delinquent	$	19	$	2	$	21
60 – 89 days delinquent	16		1		17
90 days or more delinquent	116		10		126
Total past due	151		13		164
Total current loans	2,051		196		2,247
Total MPF(2)	$	2,202	$	209	$	2,411
In process of foreclosure, included above(3)					$	1
Nonaccrual loans(2)(4)					$	126
Serious delinquencies as a percentage of total mortgage loans outstanding(2)(5)					5.23		%

December 31, 2019
Payment Status	Recorded Investment(1)
30 – 59 days delinquent	$	15
60 – 89 days delinquent	2
90 days or more delinquent	7
Total past due	24
Total current loans	3,310
Total MPF	$	3,334
In process of foreclosure, included above(3)	$	0
Nonaccrual loans	$	7
Serious delinquencies as a percentage of total mortgage loans outstanding(5)	0.22		%

(1)    With the adoption of new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020, payment status of mortgage loans is disclosed at amortized cost. The recorded investment at December 31, 2019, in a loan is the unpaid principal balance of the loan, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts, and direct write-downs. The recorded investment is not net of any valuation allowance. The amortized cost at September 30, 2020, in a loan is the unpaid principal balance of the loan, adjusted for net deferred loan fees or costs, unamortized premiums or discounts, and direct write-downs.

(2)    At September 30, 2020, unpaid principal balances of conventional mortgage loans held in portfolio that were in a forbearance plan as a result of the COVID-19 pandemic totaled $143. Of that total, $12 were current, $6 were 30 to 59 days past due, $13 were 60 to 90 days past due, and $112 were greater than 90 days past due and in nonaccrual payment status. The conventional mortgage loans in forbearance represent 6% of the Bank’s mortgage loans held for portfolio at September 30, 2020.

(3)    Includes loans for which the servicer has reported a decision to foreclose or to pursue a similar alternative, such as deed-in-lieu. Loans in process of foreclosure are included in past due or current loans depending on their delinquency status.

(4)    At September 30, 2020, $125 of these mortgage loans on nonaccrual status did not have an associated allowance for credit losses.

(5)    Represents loans that are 90 days or more past due or in the process of foreclosure as a percentage of the recorded investment of total mortgage loans outstanding.

Section 4013 of the CARES Act provides temporary relief from the accounting and reporting requirements for TDR for certain loan modifications related to the COVID-19 pandemic. Specifically, the CARES Act provides that a qualifying financial institution may elect to suspend (i) the requirements under U.S. GAAP for certain loan modifications that would otherwise be categorized as a TDR, and (ii) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. Section 4013 of the CARES Act applies to any modification related to an economic hardship as a result of the COVID-19 pandemic, including an interest rate modification, a repayment plan, or any similar arrangement that defers or delays payment of principal or interest, that occurs during the period beginning on March 1, 2020 and ending on the earlier of December 31, 2020, or the date that is 60 days after the declaration of the national emergency related to the COVID-19 pandemic ends for a loan that was not more than 30 days past due as of December 31, 2019. The Bank has elected to suspend TDR accounting for eligible modifications under Section 4013 of the CARES Act.

23

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Under the MPF Program, the Bank may purchase from members, for its own portfolio, conventional conforming fixed rate residential mortgage loans under the MPF Original product and mortgage loans insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs from its participating members under the MPF Government Product. Participating members originate or purchase mortgage loans, credit-enhance them and sell them to the Bank, and generally retain the servicing of the loans. The participating members may grant a forbearance period to borrowers who have requested forbearance based on COVID-19 related difficulties regardless of the status of the loan at the time of the request. The Bank continues to apply its accounting policy for past due loans and charge-offs to loans during the forbearance period. The accrual status for loans under forbearance will be driven by the past due status of the loan.

Allowance for Credit Losses on MPF Loans. MPF loans are evaluated collectively for expected credit losses when similar risk characteristics exist. MPF loans that do not share risk characteristics with other pools are evaluated for expected credit losses on an individual basis, factoring in the credit enhancement structure at the master commitment level. The Bank determines its allowances for credit losses on MPF loans through analyses that include consideration of various loan portfolio and collateral-related characteristics, such as past performance, current conditions, and reasonable and supportable forecasts of expected economic conditions. The Bank uses models that employ a variety of methods, such as projected cash flows, to estimate expected credit losses over the life of the loans. These models rely on a number of inputs, such as current and forecasted property values and interest rates as well as historical borrower behavior experience. At September 30, 2020, the Bank’s reasonable and supportable forecast of housing prices expects, on average, for prices to appreciate 1% over a one-year forecast horizon before reverting to long-term housing price appreciation rates of 4% over a three-year forecast horizon based on historical averages. The Bank also incorporates associated credit enhancements, if any, to determine its estimate of expected credit losses.

Certain MPF loans may be evaluated for credit losses by the Bank using the practical expedient for collateral-dependent assets. A mortgage loan is considered collateral-dependent if repayment is expected to be provided by the sale of the underlying property, that is, if it is considered likely that the borrower will default. The Bank may estimate the fair value of this collateral by applying an appropriate loss severity rate or using third-party estimates or property valuation models. The expected credit loss of a collateral-dependent mortgage loan is equal to the difference between the amortized cost of the loan and the estimated fair value of the collateral, less estimated selling costs. The Bank will either reserve for these estimated losses or record a direct charge-off of the loan balance, if certain triggering criteria are met. Expected recoveries of prior charge-offs, if any, are included in the allowance for credit loss.

The following table presents a rollforward of the allowance for credit losses on the mortgage loan portfolio for the three and nine months ended September 30, 2020. The Bank recorded a de minimis allowance for credit losses on the mortgage loan portfolio for the three and nine months ended September 30, 2019.

	Three Months Ended		Nine Months Ended
	September 30, 2020			September 30, 2020
Balance, beginning of the period	$	5		$	0
Adjustment for cumulative effect of accounting change	0			3
Provision for/(reversal of) credit losses	2			4
Balance, end of the period	$	7		$	7

See “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” and “Item 8. Financial Statements and Supplementary Data – Note 10 – Allowance for Credit Losses” in the Bank’s 2019 Form 10-K for information on the prior methodology for evaluating credit losses, as well as a discussion on classes of financing receivables, placing them on nonaccrual status, and charging them off when necessary. For more information related to the Bank’s accounting policies for collateral-dependent loans, see “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” in the Bank’s 2019 Form 10-K.

24

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Note 6 — Deposits

The Bank maintains demand deposit accounts that are directly related to the extension of credit to members and offers short-term deposit programs to members and qualifying nonmembers. In addition, a member that services mortgage loans may deposit in the Bank funds collected in connection with the mortgage loans, pending disbursement of these funds to the owners of the mortgage loans. The Bank classifies these types of deposits as non-interest-bearing deposits. Deposits classified as demand, overnight, and other pay interest based on a daily interest rate. Term deposits pay interest based on a fixed rate determined at the issuance of the deposit.

Deposits and interest rate payment terms for deposits as of September 30, 2020, and December 31, 2019, were as follows:

	September 30, 2020				December 31, 2019
	Amount Outstanding		Weighted Average Interest Rate		Amount Outstanding		Weighted Average Interest Rate
Interest-bearing deposits:
Adjustable rate	$	816	0.01	%	$	427	1.30	%
Fixed rate	20		0.01		0		0
Total interest-bearing deposits	836				427
Non-interest-bearing deposits	170				110
Total	$	1,006			$	537

Note 7 — Consolidated Obligations

Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are jointly issued by the Federal Home Loan Banks (FHLBanks) through the Office of Finance, which serves as the FHLBanks’ agent. As provided by the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act) or by regulations governing the operations of the FHLBanks, all FHLBanks have joint and several liability for all FHLBank consolidated obligations. For a discussion of the joint and several liability regulation, see “Item 8. Financial Statements and Supplementary Data – Note 20 – Commitments and Contingencies” in the Bank’s 2019 Form 10-K. In connection with each issuance of consolidated obligations, each FHLBank specifies the type, term, and amount of debt it requests to have issued on its behalf. The Office of Finance tracks the amount of debt issued on behalf of each FHLBank. In addition, the Bank separately tracks and records as a liability its specific portion of the consolidated obligations issued and is the primary obligor for that portion of the consolidated obligations issued. The Finance Agency and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance.

Redemption Terms. The following is a summary of the Bank’s participation in consolidated obligation bonds at September 30, 2020, and December 31, 2019.

25

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	September 30, 2020				December 31, 2019
Contractual Maturity	Amount Outstanding		Weighted Average Interest Rate		Amount Outstanding		Weighted Average Interest Rate
Within 1 year	$	50,491	0.19	%	$	53,549	1.68	%
After 1 year through 2 years	1,798		0.93		13,853		1.67
After 2 years through 3 years	506		1.38		770		1.93
After 3 years through 4 years	357		1.13		135		2.74
After 4 years through 5 years	360		1.46		937		2.08
After 5 years	1,386		2.60		2,126		2.94
Total par value	54,898		0.30	%	71,370		1.73	%
Unamortized premiums	8				1
Unamortized discounts	(5)				(10)
Valuation adjustments for hedging activities	18				9
Fair value option valuation adjustments	2				2
Total	$	54,921			$	71,372

The Bank’s participation in consolidated obligation bonds outstanding includes callable bonds of $2,325 at September 30, 2020, and $6,345 at December 31, 2019. When a callable bond for which the Bank is the primary obligor is issued, the Bank may simultaneously enter into an interest rate swap (in which the Bank pays a variable rate and receives a fixed rate) with a call feature that mirrors the call option embedded in the bond (a sold callable swap). The Bank had notional amounts of interest rate exchange agreements hedging callable bonds of $65 at September 30, 2020, and $2,085 at December 31, 2019. The combined sold callable swaps and callable bonds enable the Bank to meet its funding needs at costs not otherwise directly attainable solely through the issuance of non-callable debt, while effectively converting the Bank’s net payment to an adjustable rate.

The Bank’s participation in consolidated obligation bonds at September 30, 2020, and December 31, 2019, was as follows:

	September 30, 2020		December 31, 2019
Par value of consolidated obligation bonds:
Non-callable	$	52,573	$	65,025
Callable	2,325		6,345
Total par value	$	54,898	$	71,370

The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding at September 30, 2020, and December 31, 2019, by the earlier of the year of contractual maturity or next call date.

Earlier of Contractual Maturity or Next Call Date	September 30, 2020		December 31, 2019
Within 1 year	$	52,366	$	58,239
After 1 year through 2 years	1,953		12,768
After 2 years through 3 years	451		195
After 3 years through 4 years	77		70
After 4 years through 5 years	0		47
After 5 years	51		51
Total par value	$	54,898	$	71,370

Consolidated obligation discount notes are consolidated obligations issued to raise short-term funds. These notes are issued at less than their face value and redeemed at par value when they mature. The Bank’s participation in consolidated obligation discount notes, all of which are due within one year, was as follows:

26

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	September 30, 2020				December 31, 2019
	Amount Outstanding		Weighted Average Interest Rate (1)		Amount Outstanding		Weighted Average Interest Rate (1)
Par value	$	13,306	0.19	%	$	27,447	1.61	%
Unamortized discounts	(6)				(71)
Total	$	13,300			$	27,376

(1)Represents yield to maturity excluding concession fees.

Interest Rate Payment Terms. Interest rate payment terms for consolidated obligations at September 30, 2020, and December 31, 2019, are detailed in the following table. For information on the general terms and types of consolidated obligations outstanding, see “Item 8. Financial Statements and Supplementary Data – Note 12 – Consolidated Obligations” in the Bank’s 2019 Form 10-K.

	September 30, 2020		December 31, 2019
Par value of consolidated obligations:
Bonds:
Fixed rate	$	5,590	$	10,993
Adjustable rate	49,263		60,117
Step-up	45		60
Step-down	0		100
Range bonds	0		100
Total bonds, par value	54,898		71,370
Discount notes, par value	13,306		27,447
Total consolidated obligations, par value	$	68,204	$	98,817

The Bank did not have any bonds with embedded features that met the requirements to separate the embedded feature from the host contract and designate the embedded feature as a stand-alone derivative at September 30, 2020, or December 31, 2019. The Bank has generally elected to account for certain bonds with embedded features under the fair value option, and these bonds are carried at fair value on the Statements of Condition. For more information, see Note 11 – Derivatives and Hedging Activities and Note 12 – Fair Value.

27

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Note 8 — Accumulated Other Comprehensive Income/(Loss)

The following table summarizes the changes in AOCI for the three months ended September 30, 2020 and 2019:

	Net Unrealized Gain/(Loss) on AFS Securities		Net Non-Credit-Related OTTI Loss on AFS Securities		Net Non-Credit-Related OTTI Loss on HTM Securities		Pension and Postretirement Benefits		Total AOCI
Balance, June 30, 2019	$	15	$	304	$	(2)	$	(17)	$	300
Other comprehensive income/(loss) before reclassifications:
Non-credit-related OTTI loss			(1)		0				(1)
Net change in fair value	(17)		(15)						(32)
Net current period other comprehensive income/(loss)	(17)		(16)		0		0		(33)
Balance, September 30, 2019	$	(2)	$	288	$	(2)	$	(17)	$	267
Balance, June 30, 2020	$	(21)	$	0	$	0	$	(14)	$	(35)
Other comprehensive income/(loss) before reclassifications:
Net change in pension and postretirement benefits							(1)		(1)
Net change in fair value	172		0						172
Net current period other comprehensive income/(loss)	172		0		0		(1)		171
Balance, September 30, 2020	$	151	$	0	$	0	$	(15)	$	136

28

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

The following table summarizes the changes in AOCI for the nine months ended September 30, 2020 and 2019:

	Net Unrealized Gain/(Loss) on AFS Securities		Net Non-Credit-Related OTTI Loss on AFS Securities		Net Non-Credit-Related OTTI Loss on HTM Securities		Pension and Postretirement Benefits		Total AOCI
Balance, December 31, 2018	$	(32)	$	287	$	(3)	$	(17)	$	235
Other comprehensive income/(loss) before reclassifications:
Non-credit-related OTTI loss			(3)		0				(3)
Net change in fair value	30		1						31
Accretion of non-credit loss					1				1
Reclassification from other comprehensive income/(loss) to net income/(loss):
Non-credit-related OTTI to credit-related OTTI			3		0				3
Net current period other comprehensive income/(loss)	30		1		1		0		32
Balance, September 30, 2019	$	(2)	$	288	$	(2)	$	(17)	$	267
Balance, December 31, 2019	$	21	$	268	$	(1)	$	(14)	$	274
Other comprehensive income/(loss) before reclassifications:
Net change in pension and postretirement benefits							(1)		(1)
Net change in fair value	(138)		0						(138)
Accretion of non-credit loss					1				1
Net current period other comprehensive income/(loss)	(138)		0		1		(1)		(138)
Adoption of ASU 2016-13, as amended(1)	268		(268)						0
Balance, September 30, 2020	$	151	$	0	$	0	$	(15)	$	136

(1)    With the adoption of changes to accounting standards on measurement of credit losses for financial instruments on January 1, 2020, OTTI assessment was replaced with an evaluation for an allowance for credit loss (see Note 1 – Basis of Presentation and Note 2 – Recently Issued and Adopted Accounting Guidance for further information).

Note 9 — Capital

Capital Requirements. Under the Housing Act, the Director of the Finance Agency is responsible for setting the risk-based capital standards for the FHLBanks. The FHLBank Act and regulations governing the operations of the FHLBanks require that the Bank’s minimum capital stock requirement for shareholders must be sufficient to enable the Bank to meet its regulatory requirements for total capital, leverage capital, and risk-based capital. The Bank must maintain: (i) total regulatory capital in an amount equal to at least 4% of its total assets, (ii) leverage capital in an amount equal to at least 5% of its total assets, and (iii) permanent capital in an amount that is greater than or equal to its risk-based capital requirement.

Beginning in February 2020, the Finance Agency issued guidance that augmented existing statutory and regulatory capital requirements to require each FHLBank to maintain a ratio of at least two percent of capital stock to total assets in order to help preserve the cooperative structure incentives that encourage members to remain fully engaged in the oversight of their investment in the FHLBank. The Finance Agency will consider the proportion of capital stock to assets, measured on a daily average basis at monthend, when assessing each FHLBank’s capital management practices. As of September 30, 2020, the Bank was in compliance with this capital guidance.

Because the Bank issues only Class B stock, regulatory capital and permanent capital for the Bank are both composed of retained earnings and Class B stock, including mandatorily redeemable capital stock (which is classified as a liability for financial reporting purposes). Regulatory capital and permanent capital do not include

29

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

AOCI. Leverage capital is defined as the sum of permanent capital, weighted by a 1.5 multiplier, plus non-permanent capital.

The risk-based capital requirement is equal to the sum of the Bank’s credit risk, market risk, and operations risk capital requirements, all of which are calculated in accordance with the rules and regulations of the Finance Agency. The Finance Agency may require an FHLBank to maintain a greater amount of permanent capital than is required by the risk-based capital requirement as defined.

As of September 30, 2020, and December 31, 2019, the Bank was in compliance with these capital rules and requirements as shown in the following table.

	September 30, 2020						December 31, 2019
	Required			Actual			Required			Actual
Risk-based capital	$	1,403		$	6,086		$	1,519		$	6,605
Total regulatory capital	$	3,035		$	6,086		$	4,274		$	6,605
Total regulatory capital ratio	4.00		%	8.02		%	4.00		%	6.18		%
Leverage capital	$	3,793		$	9,129		$	5,342		$	9,908
Leverage ratio	5.00		%	12.03		%	5.00		%	9.27		%

Mandatorily Redeemable Capital Stock. The Bank had mandatorily redeemable capital stock totaling $2 outstanding to 3 institutions at September 30, 2020, and $138 outstanding to 3 institutions at December 31, 2019. The change in mandatorily redeemable capital stock for three and nine months ended September 30, 2020 and 2019, was as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Balance at the beginning of the period	$	83	$	138	$	138	$	227
Reclassified from/(to) capital during the period	0		4		3		4
Repurchase of excess mandatorily redeemable capital stock	(81)		(4)		(139)		(93)
Balance at the end of the period	$	2	$	138	$	2	$	138

Cash dividends on mandatorily redeemable capital stock were recorded as interest expense in the amount of $1 and $3 for the three months ended September 30, 2020 and 2019, respectively, and in the amount of $5 and $11 for the nine months ended September 30, 2020 and 2019, respectively.

The Bank’s mandatorily redeemable capital stock is discussed more fully in “Item 8. Financial Statements and Supplementary Data – Note 15 – Capital” in the Bank’s 2019 Form 10-K.

The following table presents mandatorily redeemable capital stock amounts by contractual redemption period at September 30, 2020, and December 31, 2019.

Contractual Redemption Period	September 30, 2020		December 31, 2019
Within 1 year	$	0	$	135
Past contractual redemption date because of remaining activity(1)	2		3
Total	$	2	$	138

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

Excess Stock Repurchase, Retained Earnings, and Dividend Framework. By Finance Agency regulation, dividends may be paid only out of current net earnings or previously retained earnings. As required by the Finance

30

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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

The Bank’s Board of Directors reviews the Framework at least annually and may amend the Framework from time to time. The Framework includes a dividend philosophy to endeavor to pay a quarterly dividend at an annualized rate between 5% and 7%. The decision to declare any dividend and the dividend rate are at the discretion of the Bank’s Board of Directors, which may choose to follow the dividend philosophy as guidance in the dividend declaration. The Board may also revise or eliminate the dividend policy in the future. The Bank’s historical dividend rates and the dividend philosophy are not indicative of future dividend declarations.

The Bank’s Risk Management Policy limits the payment of dividends if the ratio of the Bank’s estimated market value of total capital to par value of capital stock falls below certain levels. If this ratio at the end of any quarter is less than 100% but greater than or equal to 70%, any dividend would be limited to an annualized rate no greater than the daily average of the Federal funds effective rate for the applicable quarter (subject to certain conditions), and if this ratio is less than 70%, the Bank would be restricted from paying a dividend. The ratio of the Bank’s estimated market value of total capital to par value of capital stock was 260% as of September 30, 2020.

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

Retained Earnings – The Bank’s Framework assesses the level and adequacy of retained earnings and establishes amounts to be retained in restricted retained earnings, which are not made available in the current dividend period, and maintains an amount of total retained earnings at least equal to its required retained earnings as described in the Framework. As determined using the Bank’s methodology, the required level of total retained earnings had ranged from $2,400 to $2,500 during all of 2019 and continuing through September 2020. On September 30, 2020, the methodology was further revised and resulted in a required level of retained earnings of $2,900. The Bank satisfies its retained earnings requirement with both restricted retained earnings (i.e., amounts related to the Joint Capital Enhancement (JCE) Agreement) and unrestricted retained earnings. The Bank’s retained earnings requirement may be changed at any time. The Board of Directors periodically reviews the retained earnings methodology and analysis to determine whether any adjustments are appropriate. The Bank’s restricted retained earnings totaled $761 and $713 at September 30, 2020, and December 31, 2019, respectively. The Bank’s unrestricted retained earnings totaled $2,858 and $2,754 at September 30, 2020, and December 31, 2019, respectively.

For more information on restricted retained earnings and the Bank’s Framework, see “Item 8. Financial Statements and Supplementary Data – Note 15 – Capital” in the Bank’s 2019 Form 10-K.

Partial Recovery of Prior Capital Distribution to Financing Corporation – The Competitive Equality Banking Act of 1987 was enacted in August 1987, to, among other things, provide for the recapitalization of the Federal Savings and Loan Insurance Corporation through a newly-chartered entity, the Financing Corporation. Capital distributions from the FHLBanks provided the capitalization of the Financing Corporation, in exchange for Financing Corporation nonvoting capital stock. Capital distributions made by the FHLBanks in 1987, 1988, and 1989, aggregated to $680. Upon passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, the Bank’s previous investment in the Financing Corporation’s capital stock was determined to be non-redeemable; the Bank charged off its prior capital distributions to the Financing Corporation directly against retained earnings.

31

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

On October 2, 2019, the Financing Corporation commenced the process of dissolution and determined that excess funds aggregating to $200 were available for distribution to its stockholders, the FHLBanks. The Bank’s partial recovery, which was determined based on its share of the $680 originally contributed, approximated $40. The Financing Corporation dissolved on July 6, 2020. The Bank received these funds in the second quarter of 2020 and treated receipt of these funds as a return of the Bank’s investment in Financing Corporation capital stock, and therefore as a partial recovery of the prior capital distributions made by the Bank to the Financing Corporation in 1987, 1988, and 1989. These funds were credited to unrestricted retained earnings.

Dividend Payments – Finance Agency rules state that FHLBanks may declare and pay dividends only from previously retained earnings or current net earnings, and may not declare or pay dividends based on projected or anticipated earnings. There is no requirement that the Board of Directors declare and pay any dividend. A decision by the Board of Directors to declare or not declare a dividend is a discretionary matter and is subject to the requirements and restrictions of the FHLBank Act and applicable requirements under the regulations governing the operations of the FHLBanks.

In addition, Finance Agency rules do not permit the Bank to pay dividends in the form of capital stock if its excess capital stock exceeds 1% of its total assets. Excess capital stock is defined as the aggregate of the capital stock held by each shareholder in excess of its minimum capital stock requirement, as established by the Bank’s capital plan. Excess capital stock totaled $197, or 0.26% of total assets as of September 30, 2020. Excess capital stock totaled $197, or 0.18% of total assets as of December 31, 2019.

In the third quarter of 2020, the Bank paid dividends at an annualized rate of 5.00%, totaling $37, including $36 in dividends on capital stock and $1 in dividends on mandatorily redeemable capital stock. In the third quarter of 2019, the Bank paid dividends at an annualized rate of 7.00%, totaling $56, including $53 in dividends on capital stock and $3 in dividends on mandatorily redeemable capital stock.

In the first nine months of 2020, the Bank paid dividends at an annualized rate of 5.68%, totaling $131, including $126 in dividends on capital stock and $5 in dividends on mandatorily redeemable capital stock. In the first nine months of 2019, the Bank paid dividends at an annualized rate of 7.00%, totaling $166, including $155 in dividends on capital stock and $11 in dividends on mandatorily redeemable capital stock.

For the periods referenced above, the Bank paid dividends in cash. Dividends on capital stock are recognized as dividends on the Statements of Capital Accounts, and dividends on mandatorily redeemable capital stock are recognized as interest expense on the Statements of Income.

On October 29, 2020, the Bank’s Board of Directors declared a quarterly cash dividend on the capital stock outstanding during the third quarter of 2020 at an annualized rate of 5.00%, totaling $33, including $33 in dividends on capital stock and a de minimis amount in dividends on mandatorily redeemable capital stock. The Bank recorded the dividend on October 29, 2020. The Bank expects to pay the dividend on November 12, 2020. Dividends on mandatorily redeemable capital stock will be recognized as interest expense in the fourth quarter of 2020.

Excess Capital Stock – The Bank’s capital plan provides that the Bank may repurchase some or all of a shareholder’s excess capital stock, including any excess mandatorily redeemable capital stock, at the Bank’s discretion, subject to certain statutory and regulatory requirements. The Bank may also repurchase all of a member’s excess capital stock at a member’s request, at the Bank’s discretion, subject to certain statutory and regulatory requirements. A shareholder’s excess capital stock is defined as any capital stock holdings in excess of the shareholder’s minimum capital stock requirement, as established by the Bank’s capital plan. The Bank’s practice is to repurchase the surplus capital stock of all members and the excess capital stock of all former members on a daily schedule. Surplus capital stock is defined as any stock holdings in excess of 115% of a member’s minimum stock requirement. The Bank calculates the amount of stock to be repurchased each business day based on the shareholder’s capital stock outstanding after all stock transactions are completed for the day, ensuring that each member and former member would continue to meet its minimum capital stock requirement after the repurchase.

32

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

The Bank may change this practice at any time. The Bank repurchased $314 and $210 in excess capital stock during the third quarter of 2020 and 2019, respectively, and $1,452 and $977 in excess capital stock during the first nine months of 2020 and 2019, respectively.

The Bank is required to redeem any mandatorily redeemable capital stock that is in excess of a former member’s minimum stock requirement on or after the expiration of the five-year redemption date. During the third quarter of 2020 and 2019, the Bank redeemed a de minimis amount in mandatorily redeemable capital stock, for which the five-year redemption period had expired, at its $100 par value. The stock was redeemed on the scheduled redemption dates or, for stock that was not excess stock on its scheduled redemption date because of outstanding activity with the Bank, on the first available repurchase date after the stock was no longer required to support outstanding activity with the Bank.

Concentration. The following table presents the concentration in capital stock held by institutions whose capital stock ownership represented 10% or more of the Bank’s outstanding capital stock, including mandatorily redeemable capital stock, as of September 30, 2020, or December 31, 2019.

	September 30, 2020				December 31, 2019
Name of Institution	Capital Stock Outstanding		Percentage of Total Capital Stock Outstanding		Capital Stock Outstanding		Percentage of Total Capital Stock Outstanding
First Republic Bank	$	419	17	%	$	368	12	%
MUFG Union Bank, National Association	153		6		394		12
Subtotal	572		23		762		24
Others	1,895		77		2,376		76
Total	$	2,467	100	%	$	3,138	100	%

Note 10 — Segment Information

The Bank uses an analysis of financial results based on the financial components and adjusted net interest income of two operating segments, the advances-related business and the mortgage-related business, as well as other financial information, to review and assess financial performance and determine financial management strategies related to the operations of these 2 business segments. For purposes of segment reporting, adjusted net interest income includes income and expense associated with net settlements from economic hedges that are recorded in “Net gain/(loss) on derivatives and hedging activities” in other income, excludes interest income and expense associated with ineffectiveness from fair value hedges that are recorded in the same line as the earnings effect of the hedged item, and excludes interest expense that is recorded in “Mandatorily redeemable capital stock.” Other key financial information, such as assessments, is not included in the segment reporting analysis, but is incorporated into the Bank’s overall assessment of financial performance.

For more information on these operating segments, see “Item 8. Financial Statements and Supplementary Data – Note 17 – Segment Information” in the Bank’s 2019 Form 10-K.

The following table presents the Bank’s adjusted net interest income by operating segment and reconciles total adjusted net interest income to income before the AHP assessment for the three and nine months ended September 30, 2020 and 2019.

33

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	Advances- Related Business		Mortgage- Related Business(1)		Adjusted Net Interest Income		Amortization of Basis Adjustments and (Gain)/Loss on Fair Value Hedges(2)		Income/(Expense) on Economic Hedges(3)		Interest Expense on Mandatorily Redeemable Capital Stock(4)		Net Interest Income After Provision for/(Reversal of) Credit Losses		Other Income/ (Loss)		Other Expense		Income/(Loss) Before AHP Assessment
Three months ended:
September 30, 2020	$	50	$	53	$	103	$	(13)	$	(34)	$	1	$	149	$	70	$	40	$	179
September 30, 2019	72		60		132		20		(3)		3		112		3		47		68
Nine months ended:
September 30, 2020	$	182	$	140	$	322	$	61	$	(52)	$	5	$	308	$	79	$	119	$	268
September 30, 2019	237		186		423		54		(8)		11		366		11		138		239

(1)    The mortgage-related business includes total accretion or amortization associated with other-than-temporarily impaired PLRMBS, which are recognized in interest income, totaled $17 and $21 for the three months ended September 30, 2020 and 2019; and totaled $54 and $58 for the nine months ended September 30, 2020 and 2019, respectively. The mortgage-related business includes a provision for/(reversal of) credit losses of $(2) and $30 for the three and nine months ended September 30, 2020, respectively. The mortgage-related business does not include credit-related OTTI losses of $2 and $8 for the three and nine months ended September 30, 2019, respectively.

(2)    Represents amortization of amounts deferred for adjusted net interest income purposes only and changes in fair value of the derivative hedging instrument and the hedged item attributable to the hedged risk for designated fair value hedges recorded in net interest income.

(3)    The Bank includes income and expense associated with net settlements from economic hedges in adjusted net interest income in its analysis of financial performance for its 2 operating segments. For financial reporting purposes, the Bank does not include these amounts in net interest income in the Statements of Income, but instead records them in other income in “Net gain/(loss) on derivatives and hedging activities.”

(4)    The Bank excludes interest expense on mandatorily redeemable capital stock from adjusted net interest income in its analysis of financial performance for its 2 operating segments.

The following table presents total assets by operating segment at September 30, 2020, and December 31, 2019.

	Advances- Related Business		Mortgage- Related Business		Total Assets
September 30, 2020	$	56,829	$	19,041	$	75,870
December 31, 2019	85,709		21,133		106,842

Note 11 — Derivatives and Hedging Activities

General. The Bank may enter into interest rate swaps (including callable, putable, and basis swaps); and cap and floor agreements (collectively, interest rate exchange agreements or derivatives). Most of the Bank’s interest rate exchange agreements are executed in conjunction with the origination of advances or the issuance of consolidated obligations to create variable rate structures. The interest rate exchange agreements are generally executed at the same time the advances and consolidated obligations are transacted and generally have the same maturity dates as the related hedged instrument. The Bank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. Derivatives may be either uncleared or cleared. In an uncleared derivative transaction, the Bank’s counterparty is the executing bank or broker-dealer. In a cleared derivative transaction, the Bank may execute the transaction either directly with the executing bank or broker-dealer or on a swap execution facility, but in either case, the Bank’s counterparty is a derivatives clearing organization (clearinghouse) once the derivative transaction has been accepted for clearing. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit.

Additional uses of interest rate exchange agreements include: (i) offsetting embedded features in assets and liabilities, (ii) hedging anticipated issuance of debt, (iii) matching against consolidated obligation discount notes to create the equivalent of callable or non-callable fixed rate debt, (iv) modifying the repricing frequency of assets and liabilities, (v) matching against certain advances and consolidated obligations for which the Bank elected the fair value option, and (vi) exactly offsetting other derivatives cleared at a clearinghouse. The Bank’s use of interest rate exchange agreements results in one of the following classifications: (i) a fair value hedge of an underlying financial instrument or (ii) an economic hedge of assets, liabilities, or other derivatives.

34

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

For more information related to the Bank’s interest rate exchange agreement instruments and hedging activities, see “Item 8. Financial Statements and Supplementary Data – Note 18 – Derivatives and Hedging Activities” in the Bank’s 2019 Form 10-K. For more information related to the Bank’s accounting policies for derivatives, see “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” in the Bank’s 2019 Form 10-K.

The following table summarizes the notional amount and fair value of derivative instruments, including the effect of netting adjustments and cash collateral as of September 30, 2020, and December 31, 2019. For purposes of this disclosure, the derivative values include the fair value of derivatives and related accrued interest.

	September 30, 2020						December 31, 2019
	Notional Amount of Derivatives		Derivative Assets		Derivative Liabilities		Notional Amount of Derivatives		Derivative Assets		Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate swaps	$	38,608	$	48	$	303	$	39,622	$	31	$	370
Total	38,608		48		303		39,622		31		370
Derivatives not designated as hedging instruments:
Interest rate swaps	40,937		10		27		60,424		13		14
Interest rate caps and floors	980		0		0		980		0		0
Mortgage delivery commitments	6		0		0		46		0		0
Total	41,923		10		27		61,450		13		14
Total derivatives before netting and collateral adjustments	$	80,531	58		330		$	101,072	44		384
Netting adjustments and cash collateral(1)			(2)		(329)				(11)		(384)
Total derivative assets and total derivative liabilities			$	56	$	1			$	33	$	0

(1)    Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, and also cash collateral, including accrued interest, held or placed with the same clearing agents and/or counterparty. Cash collateral posted, including accrued interest, was $335 and $378 at September 30, 2020, and December 31, 2019, respectively. Cash collateral received, including accrued interest, was $8 and $5 at September 30, 2020, and December 31, 2019, respectively.

The following tables present, by type of hedged item, the gains and losses on fair value hedging relationships and the impact of those derivatives on the Bank’s Statements of Income for the three and nine months ended September 30, 2020 and 2019.

	Three Months Ended September 30, 2020
	Interest Income/(Expense)
	Advances		AFS Securities		Consolidated Obligation Bonds
Total interest income/(expense) presented in the Statements of Income	$	88	$	67	$	(47)
Gain/(loss) on fair value hedging relationships
Derivatives(1)	$	22	$	54	$	(1)
Hedged items	(112)		(112)		8
Net gain/(loss) on fair value hedging relationships	$	(90)	$	(58)	$	7

35

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	Three Months Ended September 30, 2019
	Interest Income/(Expense)
	Advances		AFS Securities		Consolidated Obligation Bonds
Total interest income/(expense) presented in the Statements of Income	$	389	$	100	$	(409)
Gain/(loss) on fair value hedging relationships
Derivatives(1)	$	(36)	$	(224)	$	2
Hedged items	37		209		(4)
Net gain/(loss) on fair value hedging relationships	$	1	$	(15)	$	(2)

	Nine Months Ended September 30, 2020
	Interest Income/(Expense)
	Advances		AFS Securities		Consolidated Obligation Bonds
Total interest income/(expense) presented in the Statements of Income	$	509	$	179	$	(405)
Gain/(loss) on fair value hedging relationships
Derivatives(1)	$	(715)	$	(995)	$	27
Hedged items	486		803		(9)
Net gain/(loss) on fair value hedging relationships	$	(229)	$	(192)	$	18

	Nine Months Ended September 30, 2019
	Interest Income/(Expense)
	Advances		AFS Securities		Consolidated Obligation Bonds
Total interest income/(expense) presented in the Statements of Income	$	1,343	$	261	$	(1,306)
Gain/(loss) on fair value hedging relationships
Derivatives(1)	$	(292)	$	(594)	$	43
Hedged items	325		552		(61)
Net gain/(loss) on fair value hedging relationships	$	33	$	(42)	$	(18)

(1)Includes net interest settlements.

The following tables present the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of the hedged items as of September 30, 2020, and December 31, 2019.

	September 30, 2020						December 31, 2019
	Advances		AFS Securities		Consolidated Obligation Bonds		Advances		AFS Securities		Consolidated Obligation Bonds
Amortized cost of hedged asset/(liability)(1)	$	25,815	$	12,541	$	(2,541)	$	22,900	$	12,877	$	(4,840)
Fair value hedging basis adjustments:
Active hedging relationships included in amortized cost	$	619	$	318	$	(19)	$	204	$	431	$	(9)
Discontinued hedging relationships included in amortized cost	20		916		0		0		0		0
Total amount of fair value hedging basis adjustments	$	639	$	1,234	$	(19)	$	204	$	431	$	(9)

(1)Includes only the portion of amortized cost representing the hedged items in fair value hedging relationships.

The following table presents the components of net gain/(loss) on derivatives and hedging activities as presented in the Statements of Income for the three and nine months ended September 30, 2020 and 2019.

36

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Derivatives not designated as hedging instruments	Gain/(Loss)		Gain/(Loss)		Gain/(Loss)		Gain/(Loss)
Economic hedges:
Interest rate swaps	$	39	$	(17)	$	(107)	$	(102)
Interest rate caps and floors	0		(1)		0		(2)
Net settlements	(34)		(3)		(52)		(8)
Mortgage delivery commitments	0		1		3		3
Net gain/(loss) on derivatives and hedging activities	$	5	$	(20)	$	(156)	$	(109)

Credit Risk. The Bank is subject to credit risk from potential nonperformance by counterparties to the interest rate exchange agreements. All of the Bank’s agreements governing uncleared derivative transactions contain master netting provisions to help mitigate the credit risk exposure to each counterparty. The Bank manages counterparty credit risk through credit analyses and collateral requirements and by following the requirements of the Bank’s risk management policies, credit guidelines, and Finance Agency and other regulations. The Bank also requires credit support agreements on all uncleared derivatives.

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

Based on the Bank’s credit analyses and the collateral requirements, the Bank does not expect to incur any credit losses on its derivative transactions.

The Bank’s agreements for uncleared derivative transactions contain provisions that link the Bank’s credit rating from Moody’s Investors Service and S&P Global Ratings to various rights and obligations. Certain of these derivative agreements provide that, if the Bank’s long-term debt rating falls below a specified rating (ranging from A3/A- to Baa3/BBB-), the Bank’s counterparty would have the right, but not the obligation, to terminate all of its outstanding derivative transactions with the Bank; the Bank’s agreements with its clearing agents for cleared derivative transactions have similar provisions with respect to the debt rating of FHLBank System consolidated bonds. If this occurs, the Bank may choose to enter into replacement hedges, either by transferring the existing transactions to another counterparty or entering into new replacement transactions, based on prevailing market rates. The aggregate fair value of all uncleared derivative instruments with credit risk-related contingent features that were in a net derivative liability position (before cash collateral and related accrued interest) at September 30, 2020, was $290, for which the Bank had posted cash collateral of $329 in the ordinary course of business.

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

The following tables present separately the fair value of derivative assets and derivative liabilities that have met the netting requirements, including the related collateral received from or pledged to counterparties as of September 30, 2020, and December 31, 2019.

37

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	September 30, 2020
	Derivative Instruments Meeting Netting Requirements
	Amount Recognized		Gross Amount of Netting Adjustments and Cash Collateral		Total Derivative Assets and Total Derivative Liabilities		Noncash Collateral Not Offset That Can Be Sold or Repledged		Net Amount
Derivative Assets
Uncleared	$	33	$	7	$	40	$	0	$	40
Cleared	25		(9)		16		(386)		402
Total					$	56			$	442
Derivative Liabilities
Uncleared	$	315	$	(314)	$	1	$	0	$	1
Cleared	15		(15)		0		0		0
Total					$	1			$	1

	December 31, 2019
	Derivative Instruments Meeting Netting Requirements
	Amount Recognized		Gross Amount of Netting Adjustments and Cash Collateral		Total Derivative Assets and Total Derivative Liabilities		Noncash Collateral Not Offset That Can Be Sold or Repledged		Net Amount
Derivative Assets
Uncleared	$	34	$	(16)	$	18	$	0	$	18
Cleared	10		5		15		(381)		396
Total					$	33			$	414
Derivative Liabilities
Uncleared	$	382	$	(382)	$	0	$	0	$	0
Cleared	2		(2)		0		0		0
Total					$	0			$	0

Note 12 — Fair Value

The following fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank at September 30, 2020, and December 31, 2019. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases fair values cannot be precisely quantified or verified and may change as economic and market factors and evaluation of those factors change. The Bank continues to refine its valuation methodologies as markets and products develop and the pricing for certain products becomes more or less transparent. While the Bank believes that its valuation methodologies are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a materially different estimate of fair value as of the reporting date. U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). Therefore, the fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect the Bank’s judgment as to how a market participant would estimate the fair values. The fair value summary table does not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of total assets and liabilities.

38

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

The following tables present the net carrying value or carrying value, as applicable, the estimated fair value, and the fair value hierarchy level of the Bank’s financial instruments at September 30, 2020, and December 31, 2019. The Bank records trading securities, AFS securities, derivative assets, derivative liabilities, certain advances, certain consolidated obligations, and certain other assets at fair value on a recurring basis, and on occasion certain mortgage loans held for portfolio and certain other assets at fair value on a nonrecurring basis. The Bank records all other financial assets and liabilities at amortized cost. Refer to the following tables for further details about the financial assets and liabilities held at fair value on either a recurring or non-recurring basis.

	September 30, 2020
	Net Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3		Netting Adjustments and Cash Collateral(1)
Assets
Cash and due from banks	$	175	$	175	$	175	$	0	$	0	$	—
Interest-bearing deposits	1,478		1,478		1,478		0		0		—
Securities purchased under agreements to resell	6,750		6,750		0		6,750		0		—
Federal funds sold	2,323		2,323		0		2,323		0		—
Trading securities	4,281		4,281		0		4,281		0		—
AFS securities	14,671		14,671		0		12,535		2,136		—
HTM securities	5,718		5,755		0		5,444		311		—
Advances	37,693		37,887		0		37,887		0		—
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans	2,404		2,418		0		2,418		0		—
Accrued interest receivable	100		100		0		100		0		—
Derivative assets, net(1)	56		56		0		58		0		(2)
Other assets(2)	20		20		20		0		0		—
Liabilities
Deposits	1,006		1,006		0		1,006		0		—
Consolidated obligations:
Bonds	54,921		54,984		0		54,984		0		—
Discount notes	13,300		13,302		0		13,302		0		—
Total consolidated obligations	68,221		68,286		0		68,286		0		—
Mandatorily redeemable capital stock	2		2		2		0		0		—
Accrued interest payable	31		31		0		31		0		—
Derivative liabilities, net(1)	1		1		0		330		0		(329)
Other
Standby letters of credit	33		33		0		33		0		—

39

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	December 31, 2019
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3		Netting Adjustments and Cash Collateral(1)
Assets
Cash and due from banks	$	118	$	118	$	118	$	0	$	0	$	—
Interest-bearing deposits	2,269		2,269		2,269		0		0		—
Securities purchased under agreements to resell	7,000		7,000		0		7,000		0		—
Federal funds sold	3,562		3,562		0		3,562		0		—
Trading securities	1,766		1,766		0		1,766		0		—
AFS securities	15,495		15,495		0		12,898		2,597		—
HTM securities	7,545		7,566		0		7,181		385		—
Advances	65,374		65,492		0		65,492		0		—
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans	3,314		3,332		0		3,332		0		—
Accrued interest receivable	139		139		0		139		0		—
Derivative assets, net(1)	33		33		0		44		0		(11)
Other assets(2)	19		19		19		0		0		—
Liabilities
Deposits	537		537		0		537		0		—
Consolidated obligations:
Bonds	71,372		71,386		0		71,386		0		—
Discount notes	27,376		27,378		0		27,378		0		—
Total consolidated obligations	98,748		98,764		0		98,764		0		—
Mandatorily redeemable capital stock	138		138		138		0		0		—
Accrued interest payable	164		164		0		164		0		—
Derivative liabilities, net(1)	0		0		0		384		0		(384)
Other
Standby letters of credit	32		32		0		32		0		—

(1)    Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, and also cash collateral and related accrued interest held or placed with the same clearing agents and/or counterparty.

(2)    Represents publicly traded mutual funds held in a grantor trust.

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

The application of the fair value hierarchy to the Bank’s financial assets and financial liabilities that are carried at fair value either on a recurring or non-recurring basis is as follows:

•Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

40

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

•Level 2 – Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•Level 3 – Unobservable inputs for the asset or liability.

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

The following assets and liabilities, including those for which the Bank has elected the fair value option, are carried at fair value on the Statements of Condition as of September 30, 2020:

•Trading securities

•AFS securities

•Certain advances

•Derivative assets and liabilities

•Certain consolidated obligation bonds

•Certain other assets

For instruments carried at fair value, the Bank reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. For the periods presented, the Bank did not have any reclassifications for transfers in or out of level 3 of the fair value hierarchy.

Summary of Valuation Methodologies and Primary Inputs. For information related to the valuation methodologies and primary inputs used to develop the measurement of fair value for assets and liabilities that are measured at fair value on a recurring or nonrecurring basis in the Statements of Condition, see “Item 8. Financial Statements and Supplementary Data – Note 19 – Fair Value” in the Bank’s 2019 Form 10-K. There have been no significant changes in these valuation methodologies and primary inputs during the nine months ended September 30, 2020.

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

41

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Fair Value Measurements. The following tables present the fair value of assets and liabilities, which are recorded on a recurring or nonrecurring basis at September 30, 2020, and December 31, 2019, by level within the fair value hierarchy.

September 30, 2020
	Fair Value Measurement Using:						Netting Adjustments  and Cash Collateral(1)
	Level 1		Level 2		Level 3				Total
Recurring fair value measurements – Assets:
Trading securities:
U.S. obligations – Treasury securities	$	0	$	4,278	$	0	$	—	$	4,278
MBS – Other U.S. obligations – Ginnie Mae	0		3		0		—		3
Total trading securities	0		4,281		0		—		4,281
AFS securities:
U.S. obligations – Treasury securities	0		3,801		0		—		3,801
MBS:
GSEs – multifamily	0		8,734		0		—		8,734
PLRMBS	0		0		2,136		—		2,136
Subtotal MBS	0		8,734		2,136		—		10,870
Total AFS securities	0		12,535		2,136		—		14,671
Advances(2)	0		3,103		0		—		3,103
Derivative assets, net: interest rate-related	0		58		0		(2)		56
Other assets	20		0		0		—		20
Total recurring fair value measurements – Assets	$	20	$	19,977	$	2,136	$	(2)	$	22,131
Recurring fair value measurements – Liabilities:
Consolidated obligation bonds(3)	$	0	$	112	$	0	$	—	$	112
Derivative liabilities, net: interest rate-related	0		330		0		(329)		1
Total recurring fair value measurements – Liabilities	$	0	$	442	$	0	$	(329)	$	113
Nonrecurring fair value measurements – Assets:(4)
Impaired mortgage loans held for portfolio	$	0	$	0	$	24	$	—	$	24
Total nonrecurring fair value measurements – Assets	$	0	$	0	$	24	$	—	$	24

42

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

December 31, 2019
	Fair Value Measurement Using:						Netting Adjustments  and Cash Collateral(1)
	Level 1		Level 2		Level 3				Total
Recurring fair value measurements – Assets:
Trading securities:
U.S. obligations – Treasury securities	$	0	$	1,762	$	0	$	—	$	1,762
MBS – Other U.S. obligations – Ginnie Mae	0		4		0		—		4
Total trading securities	0		1,766		0		—		1,766
AFS securities:
U.S. obligations – Treasury securities	0		5,288		0		—		5,288
MBS:
GSEs – multifamily	0		7,610		0		—		7,610
PLRMBS	0		0		2,597		—		2,597
Subtotal MBS	0		7,610		2,597		—		10,207
Total AFS securities	0		12,898		2,597		—		15,495
Advances(2)	0		4,370		0		—		4,370
Derivative assets, net: interest rate-related	0		44		0		(11)		33
Other assets	19		0		0		—		19
Total recurring fair value measurements – Assets	$	19	$	19,078	$	2,597	$	(11)	$	21,683
Recurring fair value measurements – Liabilities:
Consolidated obligation bonds(3)	$	0	$	337	$	0	$	—	$	337
Derivative liabilities, net: interest rate-related	0		384		0		(384)		0
Total recurring fair value measurements – Liabilities	$	0	$	721	$	0	$	(384)	$	337
Nonrecurring fair value measurements – Assets:(4)
Impaired mortgage loans held for portfolio	$	0	$	0	$	1	$	—	$	1
Total nonrecurring fair value measurements – Assets	$	0	$	0	$	1	$	—	$	1

(1)Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, and also cash collateral and related accrued interest held or placed by the Bank, with the same clearing agents and/or counterparty.

(2)Represents advances recorded under the fair value option at September 30, 2020, and December 31, 2019.

(3)Represents consolidated obligation bonds recorded under the fair value option at September 30, 2020, and December 31, 2019.

(4)The fair value information presented is as of the date the fair value adjustment was recorded during the nine months ended September 30, 2020, and the year ended December 31, 2019.

The following tables present a reconciliation of the Bank’s AFS PLRMBS that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2020 and 2019.

43

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	Three Months Ended
	September 30, 2020		September 30, 2019
Balance, beginning of the period	$	2,225	$	2,929
Total gain/(loss) realized and unrealized included in:
Interest income	17		20
(Provision for)/reversal of credit losses	4		0
Other income, net	0		(3)
Unrealized gain/(loss) included in AOCI	29		(15)
Settlements	(139)		(176)
Balance, end of the period	$	2,136	$	2,755
Total amount of gain/(loss) for the period included in earnings attributable to the change in unrealized gains/losses relating to assets and liabilities still held at the end of the period	$	20	$	16

	Nine Months Ended
	September 30, 2020		September 30, 2019
Balance, beginning of the period	$	2,597	$	3,157
Total gain/(loss) realized and unrealized included in:
Interest income	53		57
(Provision for)/reversal of credit losses	(26)		0
Other income, net	0		(8)
Unrealized gain/(loss) included in AOCI	(111)		1
Settlements	(378)		(452)
Transfers of HTM securities to AFS securities	1		0
Balance, end of the period	$	2,136	$	2,755
Total amount of gain/(loss) for the period included in earnings attributable to the change in unrealized gains/losses relating to assets and liabilities still held at the end of the period	$	27	$	46

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

For more information on the Bank’s election of the fair value option, see “Item 8. Financial Statements and Supplementary Data – Note 19 – Fair Values” in the Bank’s 2019 Form 10-K.

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

The following tables summarize the activity related to financial assets and liabilities for which the Bank elected the fair value option during the three and nine months ended September 30, 2020 and 2019:

44

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	Three Months Ended
	September 30, 2020				September 30, 2019
	Advances		Consolidated Obligation Bonds		Advances		Consolidated Obligation Bonds
Balance, beginning of the period	$	3,478	$	128	$	4,529	$	943
Maturities and terminations	(367)		(15)		(583)		(365)
Net gain/(loss) on advances and net (gain)/loss on consolidated obligation bonds from changes in fair value recognized in earnings	(8)		(1)		22		2
Change in accrued interest	0		0		(1)		(3)
Balance, end of the period	$	3,103	$	112	$	3,967	$	577

	Nine Months Ended
	September 30, 2020				September 30, 2019
	Advances		Consolidated Obligation Bonds		Advances		Consolidated Obligation Bonds
Balance, beginning of the period	$	4,370	$	337	$	5,133	$	2,019
New transactions elected for fair value option	7,070		0		74		0
Maturities and terminations	(8,432)		(225)		(1,363)		(1,448)
Net gain/(loss) on advances and net (gain)/loss on consolidated obligation bonds from changes in fair value recognized in earnings	97		1		125		14
Change in accrued interest	(2)		(1)		(2)		(8)
Balance, end of the period	$	3,103	$	112	$	3,967	$	577

For instruments for which the fair value option has been elected, the related contractual interest income and contractual interest expense are recorded as part of net interest income on the Statements of Income. The remaining changes in fair value for instruments for which the fair value option has been elected are recorded as net gains/ (losses) on financial instruments held under the fair value option in the Statements of Income, except for changes in fair value related to instrument-specific credit risk, which are recorded in AOCI on the Statements of Condition. For advances and consolidated obligations recorded under the fair value option, the Bank determined that none of the remaining changes in fair value were related to instrument-specific credit risk for the three and nine months ended September 30, 2020 and 2019. In determining that there has been no change in instrument-specific credit risk period to period, the Bank primarily considered the following factors:

•The Bank is a federally chartered GSE, and as a result of this status, the consolidated obligations have historically received the same credit ratings as the government bond credit rating of the United States, even though they are not obligations of the United States and are not guaranteed by the United States.

•The Bank is jointly and severally liable with the other FHLBanks for the payment of principal and interest on all consolidated obligations of each of the FHLBanks.

The following table presents the difference between the aggregate remaining contractual principal balance outstanding and aggregate fair value of advances and consolidated obligation bonds for which the Bank elected the fair value option at September 30, 2020, and December 31, 2019:

	September 30, 2020						December 31, 2019
	Principal Balance		Fair Value		Fair Value Over/(Under) Principal Balance		Principal Balance		Fair Value		Fair Value Over/(Under) Principal Balance
Advances(1)	$	2,938	$	3,103	$	165	$	4,287	$	4,370	$	83
Consolidated obligation bonds	110		112		2		335		337		2

(1)    At September 30, 2020, and December 31, 2019, none of these advances were 90 days or more past due or had been placed on nonaccrual status.

45

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Note 13 — Commitments and Contingencies

As provided by the FHLBank Act or regulations governing the operations of the FHLBanks, all FHLBanks have joint and several liability for all FHLBank consolidated obligations, which are backed only by the financial resources of the FHLBanks. The joint and several liability regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The regulations provide a general framework for addressing the possibility that an FHLBank may be unable to repay the consolidated obligations for which it is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank, and as of September 30, 2020, and through the filing date of this report, does not believe that it is probable that it will be asked to do so. The par value of the outstanding consolidated obligations of the FHLBanks was $819,863 at September 30, 2020, and $1,025,895 at December 31, 2019. The par value of the Bank’s participation in consolidated obligations was $68,204 at September 30, 2020, and $98,817 at December 31, 2019. For more information on the joint and several liability regulation, see “Item 8. Financial Statements and Supplementary Data – Note 20 – Commitments and Contingencies” in the Bank’s 2019 Form 10-K.

Off-balance sheet commitments as of September 30, 2020, and December 31, 2019, were as follows:

	September 30, 2020						December 31, 2019
	Expire Within One Year		Expire After One Year		Total		Expire Within One Year		Expire After One Year		Total
Standby letters of credit outstanding	$	12,980	$	4,723	$	17,703	$	16,898	$	4,658	$	21,556
Commitments to issue consolidated obligation discount notes, par	0		0		0		805		0		805
Commitments to issue consolidated obligation bonds, par	170		0		170		0		0		0
Commitments to purchase mortgage loans	6		0		6		46		0		46

Standby letters of credit are generally issued for a fee on behalf of members to support their obligations to third parties. If the Bank is required to make a payment for a beneficiary’s drawing under a letter of credit, the amount is immediately due and payable by the member to the Bank and is charged to the member’s demand deposit account with the Bank. At September 30, 2020, the original terms of these standby letters of credit range from 8 days to 15 years, including a final expiration in 2035. The Bank monitors the creditworthiness of members that have standby letters of credit. The value of the Bank’s obligations related to standby letters of credit is recorded in other liabilities and amounted to $33 and $32 at September 30, 2020, and December 31, 2019, respectively. Standby letters of credit are fully collateralized at the time of issuance. Based on the Bank’s credit analyses of members’ financial condition and collateral requirements, the Bank deemed it unnecessary to record any additional liability for credit losses on the letters of credit outstanding or other off-balance sheet commitments as of September 30, 2020, and December 31, 2019.

There were no commitments to fund advances at September 30, 2020, and December 31, 2019. Advances funded under advance commitments are fully collateralized at the time of funding.

The Bank may enter into commitments that unconditionally obligate it to purchase mortgage loans from its members. Commitments are generally for periods not exceeding 60 days. Delivery commitments are recorded at fair value as derivative assets or derivative liabilities in the Statements of Condition.

The Bank has pledged securities as collateral related to derivatives. See Note 11 – Derivatives and Hedging Activities for additional information about the Bank’s pledged collateral and other credit-risk-related contingent features. As of September 30, 2020, the Bank had pledged total collateral of $721, including securities with a carrying value of $386, all of which may be repledged, and cash collateral and related accrued interest of $335 to

46

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

counterparties and the clearinghouse that had market risk exposure to the Bank related to derivatives. As of December 31, 2019, the Bank had pledged total collateral of $759, including securities with a carrying value of $381, all of which may be repledged, and cash collateral and related accrued interest of $378 to counterparties and the clearinghouse that had market risk exposure to the Bank related to derivatives.

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

Note 14 — Transactions with Certain Members, Certain Nonmembers, and Other FHLBanks

Transactions with Members and Nonmembers. The following tables set forth information at the dates and for the periods indicated with respect to transactions with members that have an officer or director serving on the Bank’s Board of Directors.

	September 30, 2020		December 31, 2019
Assets:
Advances	$	3,514	$	3,697
Mortgage loans held for portfolio	0		8
Accrued interest receivable	5		6
Liabilities:
Deposits	$	26	$	22
Capital:
Capital Stock	$	129	$	132

	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Interest Income:
Advances	$	19	$	22	$	59	$	66

All transactions with members, nonmembers, and their affiliates are entered into in the ordinary course of business. As of September 30, 2020, and December 31, 2019, no shareholder owned more than 10% of the total voting interests in the Bank because of the statutory limit on members' voting rights. For more information on transactions with members and nonmembers, see “Item 8. Financial Statements and Supplementary Data – Note 21 – Transactions with Certain Members, Certain Nonmembers, and Other FHLBanks” in the Bank’s 2019 Form 10-K.

Transactions with Other FHLBanks. The Bank may occasionally enter into transactions with other FHLBanks. These transactions are summarized below.

Deposits with other FHLBanks. The Bank may, from time to time, maintain deposits with other FHLBanks. Deposits with other FHLBanks totaled $1 and $1 at September 30, 2020, and December 31, 2019, respectively, and were recorded as “Interest-bearing deposits” in the Statements of Condition.

Overnight Funds. The Bank may borrow or lend unsecured overnight funds from or to other FHLBanks. All such transactions are at current market rates. Interest income and interest expense related to these transactions with other FHLBanks are included in interest income and interest expense in the Statements of Income. Balances outstanding at period end with other FHLBanks, if any, are identified in the Bank’s financial statements. During the nine months ended September 30, 2020 and 2019, the Bank extended overnight loans to other FHLBanks for $925 and $1,450, respectively. During the nine months ended September 30, 2020 and 2019, the Bank borrowed $885 and $1,545,

47

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

respectively, from other FHLBanks. The impact to net interest income related to these transactions was de minimis for all periods in this report.

MPF Mortgage Loans. The Bank pays a membership fee to the FHLBank of Chicago for its participation in the MPF Program and a transaction services fee that is assessed monthly based on the amount of mortgage loans in which the Bank invested and which remain outstanding on its Statements of Condition. For the three months ended September 30, 2020 and 2019, the Bank recorded $1 and $1, respectively, in MPF membership fee expense and transaction services fee expense to the FHLBank of Chicago, which were recorded in the Statements of Income as other expense. For the nine months ended September 30, 2020 and 2019, the Bank recorded $2 and $2, respectively, in MPF membership fee expense and transaction services fee expense to the FHLBank of Chicago.

In addition, the Bank receives a counterparty fee from the FHLBank of Chicago for facilitating the sale of loans under the MPF Program. For the three and nine months ended September 30, 2020 and 2019, the Bank recorded de minimis amounts in MPF counterparty fee income from the FHLBank of Chicago, which were recorded in the Statements of Income as other income.

Consolidated Obligations. The Bank may, from time to time, transfer to or assume from another FHLBank the outstanding primary liability for FHLBank consolidated obligations. During the nine months ended September 30, 2020 and 2019, the Bank did not transfer any debt to other FHLBanks or assume any debt from other FHLBanks.

Transactions with the Office of Finance. The Bank’s proportionate share of the cost of operating the Office of Finance is identified in the Statements of Income.

Note 15 — Subsequent Events

There were no material subsequent events identified, subsequent to September 30, 2020, until the time of the Form 10-Q filing with the Securities and Exchange Commission.

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

Statements contained in this quarterly report on Form 10-Q, including statements describing the objectives, projections, estimates, or predictions of the future of the Federal Home Loan Bank of San Francisco (Bank) or the Federal Home Loan Bank System (FHLBank System), are “forward-looking statements.” These statements may use forward-looking terms, such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “probable,” “project,” “should,” “will,” or their negatives or other variations on these terms, and include statements related to, among others, gains and losses on derivatives, plans to pay dividends and redeem or repurchase excess capital stock, future other-than-temporary impairment losses, future classification of securities, and reform legislation. The Bank cautions that by their nature, forward-looking statements involve risk or uncertainty that could cause actual results to differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These risks and uncertainties include, among others, the following:

•changes in economic and market conditions, including conditions in the mortgage, housing, and capital markets;

•the volatility of market prices, rates, and indices;

•the timing and volume of market activity;

•political events, including legislative, regulatory, judicial, or other developments that affect the Bank, its members, counterparties, or investors in the consolidated obligations of the Federal Home Loan Banks (FHLBanks), such as the impact of any government-sponsored enterprises (GSE) legislative reforms, changes in the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), changes in applicable sections of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, or changes in other statutes or regulations applicable to the FHLBanks;

•changes in the Bank’s capital structure and composition;

•the ability of the Bank to pay dividends or redeem or repurchase capital stock;

•membership changes, including changes resulting from mergers or changes in the principal place of business of Bank members;

•the soundness of other financial institutions, including Bank members, nonmember borrowers, other counterparties, and the other FHLBanks;

•changes in Bank members’ demand for Bank advances;

•changes in the value or liquidity of collateral underlying advances to Bank members or nonmember borrowers or collateral pledged by the Bank’s derivative counterparties;

•changes in the fair value and economic value of, impairments of, and risks associated with the Bank’s investments in mortgage loans and mortgage-backed securities (MBS) or other assets and the related credit enhancement protections;

•changes in the Bank’s ability or intent to hold MBS and mortgage loans to maturity;

•competitive forces, including the availability of other sources of funding for Bank members;

•the willingness of the Bank’s members to do business with the Bank;

•changes in investor demand for consolidated obligations (including the terms of consolidated obligations) and/or the terms of interest rate exchange or similar agreements;

•the impact of any changes and developments in FHLBank System-wide debt issuance and governance practices;

•the ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the Bank has joint and several liability;

•changes in key Bank personnel;

•technology changes and enhancements, and the Bank’s ability to develop and support technology and information systems sufficient to manage the risks of the Bank’s business effectively;

•changes in the FHLBanks’ long-term credit ratings;

•the impending discontinuance of the London Interbank Offered Rate (LIBOR) or any other interest rate benchmark and the adverse consequences it could have for market participants, including the Bank; and

•natural disasters, pandemics, or other widespread health emergencies (such as the outbreak of COVID-19), terrorist attacks, or other unanticipated or catastrophic events.

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Readers of this report should not rely solely on the forward-looking statements and should consider all risks and uncertainties addressed throughout this report, as well as those discussed under “Item 1A. Risk Factors” in this report and in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2019 (2019 Form 10-K).

Quarterly Overview

Net income for the third quarter of 2020 was $161 million, compared with net income of $61 million for the third quarter of 2019. The $100 million increase in net income relative to the prior-year period primarily reflected the Bank’s receipt of disgorgement proceeds in connection with a Securities and Exchange Commission enforcement action, in the amount of $85 million, in the third quarter of 2020. The increase also reflected a $35 million increase in net interest income, from $112 million for the third quarter of 2019 to $147 million for the third quarter of 2020. The increase in net interest income was primarily attributable to an increase of $25 million in net fair value gains on designated fair value hedges, from a loss of $11 million for the third quarter of 2019 to a gain of $14 million for the third quarter of 2020, as well as higher spreads on interest-earning assets. These gains were partially offset by an increase in net fair value losses associated with derivatives and financial instruments carried at fair value for the third quarter of 2020 and an $11 million increase in the Affordable Housing Program assessment, which reflected the increase in pre-assessment net income.

Retained earnings were $3.6 billion at September 30, 2020, and $3.5 billion at December 31, 2019. Net income in the first nine months of 2020 was $241 million, and the Bank received a credit to unrestricted retained earnings related to the partial recovery of the investment in the Financing Corporation of $40 million. These increases to retained earnings were partially offset by cash dividends of $126 million paid at an annualized rate of 5.68% during the nine months ended September 30, 2020.

Total assets decreased $30.9 billion during the first nine months of 2020, to $75.9 billion at September 30, 2020, from $106.8 billion at December 31, 2019. Total advances decreased $27.7 billion, to $37.7 billion at September 30, 2020, from $65.4 billion at December 31, 2019. The decrease in advances primarily reflected reduced member liquidity needs related to the impact of the COVID-19 pandemic on the economy and on our members. In addition, investments decreased $2.4 billion, to $35.2 billion at September 30, 2020, from $37.6 billion at December 31, 2019.

Accumulated other comprehensive income/(loss) (AOCI) decreased by $138 million during the first nine months of 2020, to $136 million at September 30, 2020, from $274 million at December 31, 2019. The decrease in AOCI during the first nine months of 2020 primarily reflected lower fair values of mortgage-backed securities classified as available-for-sale.

On October 29, 2020, the Bank’s Board of Directors declared a quarterly cash dividend on the capital stock outstanding during the third quarter of 2020 at an annualized rate of 5.00%. The dividend will total $33 million, including a de minimis amount in dividends on mandatorily redeemable capital stock that will be reflected as interest expense in the fourth quarter of 2020. The Bank recorded the dividend on October 29, 2020, and expects to pay the dividend on November 12, 2020. As a result of the COVID-19 pandemic and the measures taken to contain the spread of the virus, U.S. and global economies face great challenges and ongoing uncertainty. To preserve capital in this uncertain environment, the Bank’s Board of Directors has decided to pay a quarterly dividend rate at the low end of the range stated in the Bank's dividend philosophy.

As of September 30, 2020, the Bank was in compliance with all of its regulatory capital requirements. The Bank’s total regulatory capital ratio was 8.0%, exceeding the 4.0% requirement. The Bank had $6.1 billion in permanent capital, exceeding its risk-based capital requirement of $1.4 billion.

The Bank will continue to monitor the condition of its balance sheet, its financial performance, its capital position, overall financial market conditions, and other relevant information as the basis for determining the payment of dividends in future quarters. In addition, management will continue to monitor the COVID-19 pandemic’s impact

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on the Bank’s financial condition and operations, including the Bank’s liquidity, advance levels, funding spreads, and workforce effectiveness.

COVID-19 Pandemic Impact. In the third quarter of 2020, the COVID-19 pandemic continued to impact the financial markets, and created substantial uncertainty about future economic activity and the Bank’s operating environment. The Federal Reserve continued using its full range of tools to support the economy, including quantitative easing. At the end of the third quarter, the Federal Reserve maintained the Federal funds target range. The emergency actions that the Federal Reserve has taken have helped facilitate liquidity and supported stability in the fixed income markets, but contributed to the significant reduction in advances demand from members.

During the third quarter of 2020, the Bank continued to operate effectively with the Bank’s staff working remotely. The ultimate impact of the disruption caused by the outbreak continues to be uncertain. Possible adverse impacts as a result of the Bank’s workforce working remotely may include, but are not limited to, increased risk of operational incidents and cyber-security threats, along with operational challenges that could affect the Bank’s ability to conduct business or increase the risk of operational errors.

The Bank relies on vendors and other third parties to perform certain critical services. If one of our critical vendors or third parties experiences a failure or any interruption to their business due to the COVID-19 pandemic, the Bank may be unable to conduct and effectively manage certain parts of its business.

To reduce the risk of the operational impact of the pandemic, the Bank maintains a Board-approved Business Continuity Management Program, along with a Crisis Management Plan and Business Continuity Plans, that are updated and tested annually. For a discussion of the Bank’s Business Continuity Management Program, see “Part 1. Item 2. Management’s Discussion and Analysis of Financial Statements and Results of Operations – Quarterly Overview” in the Bank’s Form 10-Q for the quarter ended March 31, 2020.

The Bank continued to meet its funding needs throughout the third quarter of 2020. Interest rates continued to decline, funding markets continued to stabilize, and investor demand for System consolidated obligations normalized during the third quarter, as a consequence of the Federal Reserve’s response to economic disruptions caused by the COVID-19 pandemic.

The effects of the COVID-19 pandemic, and of governmental and public actions taken in response, on the global and U.S. economy and on the Bank are continuing to evolve, and the full duration and impact of the pandemic, including a second outbreak of the pandemic, and subsequent governmental and public actions are uncertain.

During the COVID-19 pandemic, future demand for advances may continue to decrease because of further government intervention, lower interest rates, and reduced member asset activity. The risk of credit losses is likely to increase. The Bank believes that lower demand from the Bank’s members for advances will likely continue into the foreseeable future and will impact the Bank’s net income for 2020. In addition, other possible effects from the COVID-19 pandemic on the Bank may include, but are not limited to, further disruption to the Bank’s members, uncertainties in the credit markets, and a decline in the fair value of assets or an increase in the write-down of investments.

The Bank has implemented certain relief measures to help members serve customers affected by the COVID-19 pandemic, such as accommodating forbearance and modifications to pledged loan collateral and allowing electronic signatures on loan documentation in specific circumstances. For a discussion of the Bank’s relief measures, see “Part 1. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quarterly Overview” in the Bank’s Form 10-Q for the quarter ended March 31, 2020.

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Financial Highlights

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

Financial Highlights

(Unaudited)

(Dollars in millions)	September 30, 2020			June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019
Selected Balance Sheet Items at Quarter End
Total Assets	$	75,870		$	93,440		$	124,870		$	106,842		$	104,153
Advances	37,693			50,970			77,872			65,374			62,826
Mortgage Loans Held for Portfolio, Net	2,404			2,888			3,239			3,314			3,382
Investments(1)	35,221			39,029			43,016			37,637			37,490
Consolidated Obligations:(2)
Bonds	54,921			66,449			77,937			71,372			67,431
Discount Notes	13,300			19,416			39,102			27,376			28,605
Mandatorily Redeemable Capital Stock	2			83			83			138			138
Capital Stock —Class B —Putable	2,465			2,668			3,231			3,000			2,898
Unrestricted Retained Earnings	2,858			2,765			2,691			2,754			2,715
Restricted Retained Earnings	761			729			713			713			690
Accumulated Other Comprehensive Income/(Loss) (AOCI)	136			(35)			(228)			274			267
Total Capital	6,220			6,127			6,407			6,741			6,570
Selected Operating Results for the Quarter
Net Interest Income	$	147		$	142		$	49		$	165		$	112
Provision for/(Reversal of) Credit Losses	(2)			(7)			39			—			—
Other Income/(Loss)	70			(9)			18			10			3
Other Expense	40			43			36			49			47
Affordable Housing Program Assessment	18			9			—			13			7
Net Income/(Loss)	$	161		$	88		$	(8)		$	113		$	61
Selected Other Data for the Quarter
Net Interest Margin(3)	0.69		%	0.51		%	0.18		%	0.63		%	0.44		%
Operating Expenses as a Percent of Average Assets	0.17			0.13			0.12			0.17			0.15
Return on Average Assets	0.76			0.32			(0.03)			0.43			0.24
Return on Average Equity	10.59			5.66			(0.46)			6.82			3.65
Annualized Dividend Rate	5.00			5.00			7.00			7.00			7.00
Dividend Payout Ratio(4)	22.81			42.93			—			45.18			86.78
Average Equity to Average Assets Ratio	7.16			5.64			6.09			6.37			6.47
Selected Other Data at Quarter End
Regulatory Capital Ratio(5)	8.02			6.68			5.38			6.18			6.18
Duration Gap (in months)	2			1			—			1			1

(1)Investments consist of interest-bearing deposits, securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities.

(2)As provided by the FHLBank Act or regulations governing the operations of the FHLBanks, all of the FHLBanks have joint and several liability for FHLBank consolidated obligations, which are backed only by the financial resources of the FHLBanks. The joint and several liability regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank, and as of September 30, 2020, and through the filing date of this report, does not believe that it is probable that it will be asked to do so. The par value of the outstanding consolidated obligations of all FHLBanks at the dates indicated was as follows:

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	Par Value (In millions)
September 30, 2020	$	819,863
June 30, 2020	915,753
March 31, 2020	1,174,670
December 31, 2019	1,025,895
September 30, 2019	1,010,271

(3)Net interest margin is net interest income (annualized) divided by average interest-earning assets.

(4)This ratio is calculated as dividends per share divided by net income per share.

(5)This ratio is calculated as regulatory capital divided by total assets. Regulatory capital includes retained earnings, Class B capital stock, and mandatorily redeemable capital stock (which is classified as a liability), but excludes AOCI.

Results of Operations

Net Interest Income. The primary source of the Bank’s earnings is net interest income, which is the interest earned on advances, mortgage loans, and investments, including net accretion of related income from improvement in expected cash flows on certain other-than-temporarily-impaired PLRMBS, less interest paid on consolidated obligations, deposits, mandatorily redeemable capital stock, and other borrowings. The Average Balance Sheets tables that follow present the average balances of interest-earning asset categories and the sources that funded those interest-earning assets (liabilities and capital) for the three and nine months ended September 30, 2020 and 2019, together with the related interest income and expense. They also present the average rates on total interest-earning assets and the average costs of total funding sources.

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Third Quarter of 2020 Compared to Third Quarter of 2019

Average Balance Sheets
	Three Months Ended
	September 30, 2020							September 30, 2019
(Dollars in millions)	Average Balance			Interest Income/ Expense		Average Rate		Average Balance			Interest Income/ Expense		Average Rate
Assets
Interest-earning assets:
Interest-bearing deposits	$	2,956		$	1	0.16	%	$	2,458		$	14	2.27	%
Securities purchased under agreements to resell	4,740			1		0.09		7,712			45		2.29
Federal funds sold	3,380			1		0.09		3,834			22		2.28
Trading securities:
Mortgage-backed securities (MBS)	3			—		2.99		4			—		3.81
Other investments	4,291			23		2.08		249			1		2.50
Available-for-sale (AFS) securities:(1)
MBS(2)(3)	10,909			63		2.31		9,113			85		3.68
Other investments(3)	4,966			4		0.31		2,533			15		2.39
Held-to-maturity (HTM) securities:(1)
MBS	5,915			19		1.28		9,014			65		2.84
Other investments	—			—		—		38			—		2.62
Mortgage loans held for portfolio	2,670			7		0.98		3,369			18		2.09
Advances(3)	44,932			88		0.78		62,788			389		2.46
Total interest-earning assets	84,762			207		0.97		101,112			654		2.57
Other assets(4)(5)	(29)			—				816			—
Total Assets	$	84,733		$	207			$	101,928		$	654
Liabilities and Capital
Interest-bearing liabilities:
Consolidated obligations:
Bonds(3)	$	61,660		$	47	0.30	%	$	70,841		$	409	2.29	%
Discount notes	15,458			12		0.29		22,956			128		2.21
Deposits and other borrowings	918			—		0.12		344			2		2.18
Mandatorily redeemable capital stock	31			1		13.17		139			3		9.96
Total interest-bearing liabilities	78,067			60		0.30		94,280			542		2.28
Other liabilities(4)	599			—				1,056			—
Total Liabilities	78,666			60				95,336			542
Total Capital	6,067			—				6,592			—
Total Liabilities and Capital	$	84,733		$	60			$	101,928		$	542
Net Interest Income				$	147						$	112
Net Interest Spread(6)						0.67	%						0.29	%
Net Interest Margin(7)						0.69	%						0.44	%
Interest-earning Assets/Interest-bearing Liabilities	108.58		%					107.25		%

(1)The average balances of AFS securities and HTM securities are reflected at amortized cost. As a result, the average rates do not reflect changes in fair value or non-credit-related OTTI losses.

(2)Interest income on AFS securities includes accretion of yield adjustments on other-than-temporarily impaired PLRMBS (resulting from improvement in expected cash flows) recognized pursuant to the impairment guidance in effect prior to January 1, 2020, totaling $14 million and $15 million for the three months ended September 30, 2020 and 2019, respectively.

(3)Interest income/expense and average rates include the effect of associated interest rate exchange agreements, as follows:

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	Three Months Ended
	September 30, 2020
(In millions)	Advances		AFS Securities		Consolidated Obligation Bonds		Total
(Amortization)/accretion of hedging activities	$	(1)	$	(23)	$	—	$	(24)
Net gain/(loss) on derivatives and hedged items	2		12		—		14
Net interest settlements on derivatives	(91)		(47)		7		(131)
Total net interest income/(expense)	$	(90)	$	(58)	$	7	$	(141)

	Three Months Ended
	September 30, 2019
(In millions)	Advances		AFS Securities		Consolidated Obligation Bonds		Total
Net gain/(loss) on derivatives and hedged items	$	—	$	(11)	$	—	$	(11)
Net interest settlements on derivatives	1		(4)		(2)		(5)
Total net interest income/(expense)	$	1	$	(15)	$	(2)	$	(16)

(4)Includes forward settling transactions and valuation adjustments for certain cash items.

(5)Includes non-credit-related OTTI losses on HTM securities for the third quarter of 2020. Includes non-credit-related OTTI losses on AFS and HTM securities for the third quarter of 2019.

(6)Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities.

(7)Net interest margin is net interest income (annualized) divided by average interest-earning assets.

Net interest income in the third quarter of 2020 was $147 million, a 31% increase from $112 million in the third quarter of 2019. The following table details the changes in interest income and interest expense for the third quarter of 2020 compared to the third quarter of 2019. Changes in both volume and interest rates influence changes in net interest income, net interest spread, and net interest margin.

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Change in Net Interest Income: Rate/Volume Analysis Three Months Ended September 30, 2020, Compared to Three Months Ended September 30, 2019
	Increase/ (Decrease)		Attributable to Changes in(1)
(In millions)			Average Volume		Average Rate
Interest-earning assets:
Interest-bearing deposits	$	(13)	$	2	$	(15)
Securities purchased under agreements to resell	(44)		(13)		(31)
Federal funds sold	(21)		(2)		(19)
Trading securities: Other investments	22		22		—
AFS securities:
MBS(2)	(22)		14		(36)
Other investments(2)	(11)		8		(19)
HTM securities: MBS	(46)		(18)		(28)
Mortgage loans held for portfolio	(11)		(3)		(8)
Advances(2)	(301)		(88)		(213)
Total interest-earning assets	(447)		(78)		(369)
Interest-bearing liabilities:
Consolidated obligations:
Bonds(2)	(362)		(47)		(315)
Discount notes	(116)		(32)		(84)
Deposits and other borrowings	(2)		1		(3)
Mandatorily redeemable capital stock	(2)		(3)		1
Total interest-bearing liabilities	(482)		(81)		(401)
Net interest income	$	35	$	3	$	32

(1)Combined rate/volume variances, a third element of the calculation, are allocated to the rate and volume variances based on their relative sizes.

(2)Interest income/expense and average rates include the interest effect of associated interest rate exchange agreements.

The net interest margin was 69 basis points for the third quarter of 2020, 25 basis points higher than the net interest margin for the third quarter of 2019, which was 44 basis points. The net interest spread was 67 basis points for the third quarter of 2020, 38 basis points higher than the net interest spread for the third quarter of 2019, which was 29 basis points. These increases were primarily a result of the effects of changes in market interest rates, interest rate volatility, and other market factors during the period.

For securities previously identified as other-than-temporarily impaired pursuant to the impairment guidance in effect prior to January 1, 2020, the Bank updates its estimate of future estimated cash flows on a regular basis. If there is no additional credit loss on the security, the yield of the security is adjusted upward on a prospective basis and accreted into interest income when there is a significant increase in the expected cash flows. As a result of improvements in the estimated cash flows of securities previously identified as other-than-temporarily impaired, the net accretion of income is likely to continue to be a positive source of net interest income in future periods.

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

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Other Income/(Loss). The following table presents the components of “Other Income/(Loss)” for the three months ended September 30, 2020 and 2019.

Other Income/(Loss)
	Three Months Ended
(In millions)	September 30, 2020		September 30, 2019
Other Income/(Loss):
Net gain/(loss) on trading securities(1)	$	(19)	$	—
Net gain/(loss) on advances and consolidated obligation bonds held under fair value option	(7)		20
Net gain/(loss) on derivatives and hedging activities	5		(20)
Gain on disgorgement settlement	85		—
Other, net	6		3
Total Other Income/(Loss)	$	70	$	3

(1)The net gain/(loss) on trading securities that were economically hedged totaled $(19) million and a de minimis amount for the three months ended September 30, 2020 and 2019, respectively.

Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option – The following table presents the net gain/(loss) recognized in earnings on advances and consolidated obligation bonds held under the fair value option for the three months ended September 30, 2020 and 2019.

Net Gain/(Loss) on Advances and Consolidated Obligations Bonds Held Under Fair Value Option
	Three Months Ended
(In millions)	September 30, 2020		September 30, 2019
Advances	$	(8)	$	22
Consolidated obligation bonds	1		(2)
Total	$	(7)	$	20

Under the fair value option, the Bank elected to carry certain assets and liabilities at fair value. In general, transactions elected for the fair value option are in economic hedge relationships. Gains or losses on these transactions are generally offset by losses or gains on the derivatives that economically hedge these instruments.

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

Additional information about advances and consolidated obligation bonds held under the fair value option is provided in “Item 1. Financial Statements – Note 12 – Fair Value.”

Net Gain/(Loss) on Derivatives and Hedging Activities – Under the accounting for derivative instruments and hedging activities, the Bank is required to carry all of its derivative instruments on the Statements of Condition at fair value. If derivatives meet the hedging criteria, including effectiveness measures, the carrying value of the underlying hedged instruments may also be adjusted to reflect changes in the fair value attributable to the risk being hedged so that some or all of the unrealized gain or loss recognized on the derivative is offset by a corresponding unrealized gain or loss on the underlying hedged instrument. In addition, certain derivatives are associated with assets or liabilities but do not qualify as fair value hedges under the accounting for derivative instruments and hedging activities. These economic hedges are recorded on the Statements of Condition at fair value with the

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unrealized gain or loss recorded in earnings without any offsetting unrealized gain or loss from the associated asset or liability.

The following table shows the accounting classification of hedges and the categories of hedged items that contributed to the gains and losses on derivatives and hedged items that were recorded in “Net gain/(loss) on derivatives and hedging activities” in the third quarter of 2020 and 2019.

Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives and Hedging Activities Three Months Ended September 30, 2020, Compared to Three Months Ended September 30, 2019
	Three Months Ended
(In millions)	September 30, 2020						September 30, 2019
Hedged Item	Gain/(Loss) on Economic Hedges		Income/ (Expense) on Economic Hedges		Total		Gain/(Loss) on Economic Hedges		Income/ (Expense) on Economic Hedges		Total
Advances:
Elected for fair value option	$	25	$	(14)	$	11	$	(21)	$	2	$	(19)
Not elected for fair value option	—		(5)		(5)		2		(2)		—
Consolidated obligation bonds:
Elected for fair value option	(1)		1		—		1		—		1
Not elected for fair value option	(5)		2		(3)		4		(2)		2
Consolidated obligation discount notes:
Not elected for fair value option	2		(2)		—		(3)		(1)		(4)
MBS:
Not elected for fair value option	—		—		—		(1)		—		(1)
Non-MBS investments:
Not elected for fair value option	18		(16)		2		—		—		—
Mortgage delivery commitment:
Not elected for fair value option	—		—		—		1		—		1
Total	$	39	$	(34)	$	5	$	(17)	$	(3)	$	(20)

During the third quarter of 2020, net gains on derivatives and hedging activities totaled $5 million compared to net losses of $20 million in the third quarter of 2019. These amounts included expense of $34 million and expense of $3 million resulting from net settlements on derivative instruments used in economic hedges in the third quarter of 2020 and 2019, respectively. Excluding the impact of income or expense from net settlements on derivative instruments used in economic hedges, the net gains or losses on economic hedges were primarily associated with the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors during the period.

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

Additional information about derivatives and hedging activities is provided in “Item 1. Financial Statements – Note 11 – Derivatives and Hedging Activities.”

Gain on disgorgement settlement – During the third quarter of 2020, the Bank received disgorgement proceeds in the amount of $85 million in connection with a Securities and Exchange Commission enforcement action. The Bank had no gains on disgorgement settlements in the third quarter of 2019.

Other Expense. During the third quarter of 2020, other expenses totaled $40 million, compared to $47 million in the third quarter of 2019, primarily reflecting the decrease in voluntary charitable contributions made during the third quarter of 2019.

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Quality Jobs Fund Expense and Other – During the third quarter of 2019, the Bank made a voluntary charitable contribution of $5 million for the Quality Jobs Fund as well as a voluntary contribution of $1 million to the AHP to offset the impact on the AHP assessment of the charitable contribution expense. The Bank did not make any charitable contributions to the Quality Jobs Fund in the third quarter of 2020.

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Nine Months Ended September 30, 2020, Compared to Nine Months Ended September 30, 2019

Average Balance Sheets
	Nine Months Ended
	September 30, 2020							September 30, 2019
(Dollars in millions)	Average Balance			Interest Income/ Expense		Average Rate		Average Balance			Interest Income/ Expense		Average Rate
Assets
Interest-earning assets:
Interest-bearing deposits	$	3,577		$	14	0.54	%	$	2,222		$	40	2.41	%
Securities purchased under agreements to resell	5,020			20		0.52		8,021			144		2.40
Federal funds sold	5,039			16		0.43		5,263			99		2.51
Trading securities:
MBS	3			—		3.26		4			—		3.77
Other investments	3,880			61		2.08		406			8		2.65
AFS securities:(1)
MBS(2)(3)	10,712			152		1.90		8,061			246		4.08
Other investments(3)	5,199			27		0.69		854			15		2.39
HTM securities:(1)
MBS	6,499			92		1.89		9,838			218		2.95
Other investments	—			—		—		56			1		2.81
Mortgage loans held for portfolio	3,023			22		0.96		3,247			55		2.24
Advances(4)	58,622			509		1.16		69,233			1,343		2.59
Loans to other FHLBanks	—			—		—		9			—		2.95
Total interest-earning assets	101,574			913		1.20		107,214			2,169		2.71
Other assets(4)(5)	215			—				984			—
Total Assets	$	101,789		$	913			$	108,198		$	2,169
Liabilities and Capital
Interest-bearing liabilities:
Consolidated obligations:
Bonds(3)	$	69,743		$	405	0.78	%	$	73,014		$	1,306	2.39	%
Discount notes	24,077			163		0.90		26,993			480		2.38
Deposits and other borrowings	799			2		0.37		301			6		2.30
Mandatorily redeemable capital stock	82			5		8.34		188			11		8.10
Borrowings from other FHLBanks	1			—		8.70		7			—		2.43
Total interest-bearing liabilities	94,702			575		0.81		100,503			1,803		2.40
Other liabilities(4)	749			—				1,033			—
Total Liabilities	95,451			575				101,536			1,803
Total Capital	6,338			—				6,662			—
Total Liabilities and Capital	$	101,789		$	575			$	108,198		$	1,803
Net Interest Income				$	338						$	366
Net Interest Spread(6)						0.39	%						0.31	%
Net Interest Margin(7)						0.44	%						0.46	%
Interest-earning Assets/Interest-bearing Liabilities	107.26		%					106.68		%

(1)The average balances of AFS securities and HTM securities are reflected at amortized cost. As a result, the average rates do not reflect changes in fair value or non-credit-related OTTI losses.

(2)Interest income on AFS securities includes accretion of yield adjustments on other-than-temporarily impaired PLRMBS (resulting from improvement in expected cash flows) recognized pursuant to the impairment guidance in effect prior to January 1, 2020, totaling $45 million and $46 million for the nine months ended September 30, 2020 and 2019.

(3)Interest income/expense and average rates include the effect of associated interest rate exchange agreements, as follows:

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	Nine Months Ended
	September 30, 2020
(In millions)	Advances		AFS Securities		Consolidated Obligation Bonds		Total
(Amortization)/accretion of hedging activities	$	(2)	$	(25)	$	—	$	(27)
Net gain/(loss) on derivatives and hedged items	(4)		(24)		—		(28)
Net interest settlements on derivatives	(223)		(143)		18		(348)
Total net interest income/(expense)	$	(229)	$	(192)	$	18	$	(403)

	Nine Months Ended
	September 30, 2019
(In millions)	Advances		AFS Securities		Consolidated Obligation Bonds		Total
Net gain/(loss) on derivatives and hedged items	$	(2)	$	(33)	$	(1)	$	(36)
Net interest settlements on derivatives	35		(9)		(17)		9
Total net interest income/(expense)	$	33	$	(42)	$	(18)	$	(27)

(4)Includes forward settling transactions and valuation adjustments for certain cash items.

(5)Includes non-credit-related OTTI losses on AFS and HTM securities for the first nine months of 2020. Includes non-credit-related OTTI losses on AFS and HTM securities for the first nine months of 2019.

(6)Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities.

(7)Net interest margin is net interest income (annualized) divided by average interest-earning assets.

Net interest income in the first nine months of 2020 was $338 million, an 8% decrease from $366 million in the first nine months of 2019. The following table details the changes in interest income and interest expense for the first nine months of 2020 compared to the first nine months of 2019. Changes in both volume and interest rates influence changes in net interest income, net interest spread, and net interest margin.

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Change in Net Interest Income: Rate/Volume Analysis Nine Months Ended September 30, 2020, Compared to Nine Months Ended September 30, 2019
	Increase/ (Decrease)		Attributable to Changes in(1)
(In millions)			Average Volume		Average Rate
Interest-earning assets:
Interest-bearing deposits	$	(26)	$	16	$	(42)
Securities purchased under agreements to resell	(124)		(40)		(84)
Federal funds sold	(83)		(4)		(79)
Trading securities: Other investments	53		55		(2)
AFS securities:
MBS(2)	(94)		64		(158)
Other investments(2)	12		30		(18)
HTM securities:
MBS	(126)		(61)		(65)
Other investments	(1)		(1)		—
Mortgage loans held for portfolio	(33)		(4)		(29)
Advances(2)	(834)		(181)		(653)
Total interest-earning assets	(1,256)		(126)		(1,130)
Interest-bearing liabilities:
Consolidated obligations:
Bonds(2)	(901)		(56)		(845)
Discount notes	(317)		(47)		(270)
Deposits and other borrowings	(4)		3		(7)
Mandatorily redeemable capital stock	(6)		(6)		—
Total interest-bearing liabilities	(1,228)		(106)		(1,122)
Net interest income	$	(28)	$	(20)	$	(8)

(1)Combined rate/volume variances, a third element of the calculation, are allocated to the rate and volume variances based on their relative sizes.

(2)Interest income/expense and average rates include the interest effect of associated interest rate exchange agreements.

The net interest margin was 44 basis points for the first nine months of 2020, 2 basis points lower than the net interest margin for the first nine months of 2019, which was 46 basis points. The net interest spread was 39 basis points for the first nine months of 2020, 8 basis point higher than the net interest spread for the first nine months of 2019, which was 31 basis points. The decrease in net interest margin and increase in net interest spread were primarily a result of the effects of changes in market interest rates, interest rate volatility, and other market factors during the period.

Other Income/(Loss). The following table presents the components of “Other Income/(Loss)” for the nine months ended September 30, 2020 and 2019.

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Other Income/(Loss)
	Nine Months Ended
(In millions)	September 30, 2020		September 30, 2019
Other Income/(Loss):
Net gain/(loss) on trading securities(1)	$	36	$	(1)
Net gain/(loss) on advances and consolidated obligation bonds held under fair value option	96		111
Net gain/(loss) on derivatives and hedging activities	(156)		(109)
Gain on disgorgement settlement	85		—
Other, net	18		10
Total Other Income/(Loss)	$	79	$	11

(1)The net gain/(loss) on trading securities that were economically hedged totaled $36 million and $(1) million for the nine months ended September 30, 2020 and 2019, respectively.

Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option – The following table presents the net gain/(loss) on advances and consolidated obligation bonds held under the fair value option for the nine months ended September 30, 2020 and 2019.

Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option
	Nine Months Ended
(In millions)	September 30, 2020		September 30, 2019
Advances	$	97	$	125
Consolidated obligation bonds	(1)		(14)
Total	$	96	$	111

Under the fair value option, the Bank elected to carry certain assets and liabilities at fair value. In general, transactions elected for the fair value option are in economic hedge relationships. Gains or losses on these transactions are generally offset by losses or gains on the derivatives that economically hedge these instruments.

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

Additional information about advances and consolidated obligation bonds held under the fair value option is provided in “Item 1. Financial Statements – Note 12 – Fair Value.”

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Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives and Hedging Activities Nine Months Ended September 30, 2020, Compared to Nine Months Ended September 30, 2019
	Nine Months Ended
(In millions)	September 30, 2020						September 30, 2019
Hedged Item	Gain/(Loss) on Economic Hedges		Income/ (Expense) onEconomic Hedges		Total		Gain/(Loss) on Economic Hedges		Income/ (Expense) onEconomic Hedges		Total
Advances:
Elected for fair value option	$	(89)	$	(24)	$	(113)	$	(127)	$	17	$	(110)
Not elected for fair value option	30		(27)		3		12		(7)		5
Consolidated obligation bonds:
Elected for fair value option	1		1		2		12		(3)		9
Not elected for fair value option	—		9		9		45		(15)		30
Consolidated obligation discount notes:
Not elected for fair value option	(3)		24		21		(45)		—		(45)
MBS:
Not elected for fair value option	—		—		—		(1)		—		(1)
Non-MBS investments:
Not elected for fair value option	(46)		(35)		(81)		—		—		—
Mortgage delivery commitment:
Not elected for fair value option	3		—		3		3		—		3
Total	$	(104)	$	(52)	$	(156)	$	(101)	$	(8)	$	(109)

During the first nine months of 2020, net losses on derivatives and hedging activities totaled $156 million compared to net losses of $109 million in the first nine months of 2019. These amounts included expense of $52 million and expense of $8 million resulting from net settlements on derivative instruments used in economic hedges in the first nine months of 2020 and 2019, respectively. Excluding the impact of income or expense from net settlements on derivative instruments used in economic hedges, the net gains or losses on fair value and economic hedges were primarily associated with the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors during the period.

Additional information about derivatives and hedging activities is provided in “Item 1. Financial Statements – Note 11 – Derivatives and Hedging Activities.”

Gain on disgorgement settlement – During the first nine months of 2020, the Bank received disgorgement proceeds in the amount of $85 million in connection with a Securities and Exchange Commission enforcement action. The Bank had no gains on disgorgement settlements during the first nine months of 2019.

Other Expense. During the first nine months of 2020, other expenses totaled $119 million, compared to $138 million in the first nine months of 2019, primarily reflecting the decrease in voluntary charitable contributions and reduction in operating expenses related to the relocation of the Bank’s premises during the second quarter of 2019. The decrease was partially offset by subsidies associated with Recovery Advances to help members serve customers affected by the COVID-19 pandemic offered during the second quarter of 2020.

Quality Jobs Fund Expense and Other – During the first nine months of 2019, the Bank made a voluntary charitable contribution of $15 million for the Quality Jobs Fund as well as a voluntary contribution of $2 million to the AHP to offset the impact on the AHP assessment of the charitable contribution expense. The Bank did not make any charitable contributions to the Quality Jobs Fund in the first nine months of 2020.

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Return on Average Equity

Return on average equity (ROE) was 10.59% (annualized) for the third quarter of 2020, compared to 3.65% (annualized) for the third quarter of 2019. The increase primarily reflected higher net income for the third quarter of 2020, which increased 164%, from $61 million in the third quarter of 2019 to $161 million in the third quarter of 2020, and the decrease in average equity from $6.6 billion in the third quarter of 2019 to $6.1 billion in the third quarter of 2020.

ROE was 5.08% (annualized) for the first nine months of 2020, compared to 4.29% (annualized) for the first nine months of 2019. The increase primarily reflected higher net income for the first nine months of 2020, which increased 13%, from $214 million in the first nine months of 2019 to $241 million in the first nine months of 2020, and the decrease in average equity from $6.7 billion in the first nine months of 2019 to $6.3 billion in the first nine months of 2020.

Dividends and Retained Earnings

In the third quarter of 2020, the Bank paid dividends at an annualized rate of 5.00%, totaling $37 million, including $36 million in dividends on capital stock and $1 million in dividends on mandatorily redeemable capital stock. In the third quarter of 2019, the Bank paid dividends at an annualized rate of 7.00%, totaling $56 million, including $53 million in dividends on capital stock and $3 million in dividends on mandatorily redeemable capital stock.

In the first nine months of 2020, the Bank paid dividends at an annualized rate of 5.68%, totaling $131 million, including $126 million in dividends on capital stock and $5 million in dividends on mandatorily redeemable capital stock. In the first nine months of 2019, the Bank paid dividends at an annualized rate of 7.00%, totaling $166 million, including $155 million in dividends on capital stock and $11 million in dividends on mandatorily redeemable capital stock.

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

On October 29, 2020, the Bank’s Board of Directors declared a cash dividend on the capital stock outstanding during the third quarter of 2020 at an annualized rate of 5.00%, totaling $33 million, including $33 million in dividends on capital stock and a de minimis amount in dividends on mandatorily redeemable capital stock. The Bank recorded the dividend on October 29, 2020. The Bank expects to pay the dividend on November 12, 2020. Dividends on mandatorily redeemable capital stock will be recognized as interest expense in the fourth quarter of 2020.

The Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework (Framework) assesses the level and adequacy of retained earnings and establishes amounts to be retained in restricted retained earnings, which are not made available in the current dividend period, and maintains an amount of total retained earnings at least equal to its required retained earnings as described in the Framework. As determined using the Bank’s methodology, the required level of total retained earnings had ranged from $2.4 billion to $2.5 billion during all of 2019 and continuing through September 2020. On September 30, 2020, the methodology was further revised and resulted in a required level of retained earnings of $2.9 billion. The Bank satisfies its retained earnings requirement with both restricted retained earnings (i.e., amounts related to the Joint Capital Enhancement Agreement) and unrestricted retained earnings. The Bank’s retained earnings requirement may be changed at any time. The Board of Directors periodically reviews the retained earnings methodology and analysis to determine whether any adjustments are appropriate. Total restricted retained earnings were $761 million and $713 million as of September 30, 2020, and December 31, 2019, respectively.

The Bank will continue to monitor the condition of its balance sheet, its financial performance, its capital position, overall financial market conditions, and other relevant information as the basis for determining the payment of dividends in future quarters.

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For more information, see “Item 1. Financial Statements – Note 9 – Capital” in this report and see “Item 1. Business – Dividends and Retained Earnings,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk,” and “Item 8. Financial Statements and Supplementary Data – Note 15 – Capital – Excess Stock Repurchase, Retained Earnings, and Dividend Framework” in the Bank’s 2019 Form 10-K.

Financial Condition

Total assets were $75.9 billion at September 30, 2020, compared to $106.8 billion at December 31, 2019. Advances decreased by $27.7 billion, or 42%, to $37.7 billion at September 30, 2020, from $65.4 billion at December 31, 2019. MBS investments decreased by $1.2 billion, or 7%, to $16.6 billion at September 30, 2020, from $17.8 billion at December 31, 2019. Average total assets were $84.7 billion for the third quarter of 2020, a 17% decrease compared to $101.9 billion for the third quarter of 2019. Average total assets were $101.8 billion for the first nine months of 2020, a 6% decrease compared to $108.2 billion for the first nine months of 2019. Average advances were $44.9 billion for the third quarter of 2020, a 28% decrease from $62.8 billion for the third quarter of 2019. Average advances were $58.6 billion for the first nine months of 2020, a 15% decrease from $69.2 billion for the first nine months of 2019. Average MBS investments were $16.8 billion for the third quarter of 2020, a 7% decrease from $18.1 billion for the third quarter of 2019. Average MBS investments were $17.2 billion for the first nine months of 2020, a 4% decrease from $17.9 billion for the first nine months of 2019.

Advances outstanding at September 30, 2020, included unrealized gains of $804 million, of which $639 million represented unrealized gains on advances hedged in accordance with the accounting for derivative instruments and hedging activities and $165 million represented unrealized gains on economically hedged advances that are carried at fair value in accordance with the fair value option. Advances outstanding at December 31, 2019, included unrealized gains of $286 million, of which $203 million represented unrealized gains on advances hedged in accordance with the accounting for derivative instruments and hedging activities and $83 million represented unrealized gains on economically hedged advances that are carried at fair value in accordance with the fair value option. The change in the net unrealized gains on the hedged advances and advances carried at fair value from December 31, 2019, to September 30, 2020, was primarily attributable to the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors relative to the terms on the Bank’s advances during the period.

Total liabilities were $69.7 billion at September 30, 2020, a decrease of $30.4 billion from $100.1 billion at December 31, 2019, primarily reflecting a $30.5 billion decrease in consolidated obligations outstanding to $68.2 billion at September 30, 2020, from $98.7 billion at December 31, 2019. Average total liabilities were $78.7 billion for the third quarter of 2020, a 17% decrease compared to $95.3 billion for the third quarter of 2019. Average total liabilities were $95.5 billion for the first nine months of 2020, 6% decrease compared to $101.5 billion for the first nine months of 2019. Average consolidated obligations were $77.1 billion for the third quarter of 2020 and $93.8 billion for the third quarter of 2019. Average consolidated obligations were $93.8 billion for the first nine months of 2020 and $100.0 billion for the first nine months of 2019.

Consolidated obligations outstanding at September 30, 2020, included unrealized losses of $18 million on consolidated obligation bonds hedged in accordance with the accounting for derivative instruments and hedging activities and unrealized losses of $2 million on economically hedged consolidated obligation bonds that are carried at fair value in accordance with the fair value option. Consolidated obligations outstanding at December 31, 2019, included unrealized losses of $9 million on consolidated obligation bonds hedged in accordance with the accounting for derivative instruments and hedging activities and unrealized losses of $2 million on economically hedged consolidated obligation bonds that are carried at fair value in accordance with the fair value option. The change in the net unrealized losses on the hedged consolidated obligation bonds and on the consolidated obligation bonds carried at fair value from December 31, 2019, to September 30, 2020, were primarily attributable to the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors relative to the actual terms on the Bank’s consolidated obligation bonds during the period.

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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 September 30, 2020, and through the filing date of this report, does not believe that it is probable that it will be asked to do so. The par value of the outstanding consolidated obligations of the FHLBanks was $819.9 billion at September 30, 2020, and $1,025.9 billion at December 31, 2019.

Changes in the long-term credit ratings of individual FHLBanks do not necessarily affect the credit rating of the consolidated obligations issued on behalf of the FHLBanks. Rating agencies may change or withdraw a rating from time to time because of various factors, including operating results or actions taken, business developments, or changes in their opinion regarding, among other factors, the general outlook for a particular industry or the economy. The Bank does not believe, as of the date of this report, that it is probable that the Bank will be required to repay any principal or interest associated with consolidated obligations for which the Bank is not the primary obligor.

Certain Bank assets, liabilities, and derivatives are indexed to LIBOR. The Bank recognizes that the impending discontinuation of LIBOR presents risks and challenges that could have an impact on the Bank’s business. For information about the risks to the Bank from discontinuation of LIBOR, see “Item 1A. Risk Factors” in the Bank’s 2019 Form 10-K. Accordingly, the Bank has established the LIBOR Transition Working Group, led by the Chief Financial Officer, and developed a LIBOR Phase Out Transition Plan (Transition Plan). Among other things, the Transition Plan addresses three key strategies to mitigate the risks to the Bank associated with the discontinuation of LIBOR: (i) execute hedging strategies that permit alternative reference rates, including the Secured Overnight Financing Rate (SOFR), (ii) transact SOFR-indexed advances and bonds, and (iii) where practicable, implement improved fallback provisions for the discontinuation of LIBOR in new and legacy contracts. In addition, the Transition Plan limits new LIBOR transactions with maturities beyond the end of 2021 consistent with the limits set by the Finance Agency’s Supervisory Letter issued on September 27, 2019. The Transition Plan states that the Bank’s Asset and Liability Management Committee has primary responsibility for driving the transition from LIBOR to SOFR and that the Bank’s Business Development Committee is responsible for advance product development to facilitate our members’ transition from LIBOR to an alternative index.

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The following table presents LIBOR-indexed variable rate financial instruments by due date or termination date at September 30, 2020.

LIBOR-Indexed Financial Instruments
(In millions)	2020		2021		2022 and Thereafter		Total
Assets indexed to LIBOR:
Par value of advances by redemption term	$	100	$	1,250	$	260	$	1,610
Unpaid principal balance of investment securities by contractual maturity
MBS(1)	—		—		6,196		6,196
Notional amount of receive leg LIBOR interest rate swaps by termination date
Cleared	6,863		7,557		2,375		16,795
Uncleared	25		213		622		860
Total	$	6,988	$	9,020	$	9,453	$	25,461
Liabilities indexed to LIBOR:
Par value of consolidated obligation bonds by contractual maturity	$	9,555	$	6,798	$	—	$	16,353
Notional amount of pay leg LIBOR interest rate swaps by termination date
Cleared	304		1,510		260		2,074
Uncleared	130		253		160		543
Total	$	9,989	$	8,561	$	420	$	18,970

(1)Certain MBS with multiple indices where LIBOR is the majority index are included in this amount.

Interest rate caps and floors indexed to LIBOR totaling $430 million terminate in 2021 and totaling $550 million terminate in 2022 and thereafter.

Market activity in SOFR-indexed financial instruments continues to increase. In total, the Bank has issued $67.7 billion in SOFR-indexed consolidated obligation bonds. The table below presents the par value of variable rate consolidated obligation bonds by interest rate index.

Variable Rate Consolidated Obligation Bonds by Interest Rate Index
(In millions)
September 30, 2020
Interest Rate Index	Amount Outstanding
LIBOR	$	16,353
SOFR	32,910
Total par value	$	49,263

For more information on LIBOR-indexed advances, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.” For more information on LIBOR-indexed investments and derivatives, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management.”

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Segment Information

The Bank uses an analysis of financial results based on the financial components and adjusted net interest income of two operating segments, the advances-related business and the mortgage-related business, as well as other financial information, to review and assess financial performance and determine financial management strategies related to the operations of these two business segments. For purposes of segment reporting, adjusted net interest income includes income and expense associated with net settlements from economic hedges that are recorded in “Net gain/(loss) on derivatives and hedging activities” in other income, excludes interest income and expense associated with changes in fair value of the derivative hedging instrument and the hedged item attributable to the hedged risk for designated fair value hedges that are recorded in net interest income, and excludes interest expense that is recorded in “Mandatorily redeemable capital stock.” Other key financial information, such as assessments, is not included in the segment reporting analysis, but is incorporated into the Bank’s overall assessment of financial performance. For a reconciliation of the Bank’s operating segment adjusted net interest income to the Bank’s total net interest income, see “Item 1. Financial Statements – Note 10 – Segment Information.”

Advances-Related Business. The advances-related business consists of advances and other credit products, related financing and hedging instruments, liquidity and other non-MBS investments associated with the Bank’s role as a liquidity provider, and capital. Assets associated with this segment decreased $28.9 billion to $56.8 billion (75% of total assets) at September 30, 2020, from $85.7 billion (80% of total assets) at December 31, 2019.

Adjusted net interest income for this segment is derived primarily from the difference, or spread, between the yield on advances and non-MBS investments and the cost of the consolidated obligations funding these assets, including the net settlements from associated interest rate exchange agreements, and from earnings attributed to the Bank’s capital stock and retained earnings. Adjusted net interest income for this segment was $50 million in the third quarter of 2020, a decrease of $22 million, or 31% compared with $72 million in the third quarter of 2019. Adjusted net interest income for this segment was $182 million in the first nine months of 2020, a decrease of $55 million, or 23%, compared to $237 million in the first nine months of 2019. These decreases were primarily due to a decline in spreads on advances-related assets due to lower rates and lower balances of advances and other credit products. Adjusted net interest income for this segment represented 49% and 55% of total adjusted net interest income for the third quarter of 2020 and 2019, respectively, and 57% and 56% of total adjusted net interest income for the first nine months of 2020 and 2019, respectively.

Advances – The par value of advances outstanding decreased by $28.2 billion, or 43%, to $36.9 billion at September 30, 2020, from $65.1 billion at December 31, 2019. Average advances were $44.9 billion for the third quarter of 2020, a 28% decrease from $62.8 billion for the third quarter of 2019. Average advances outstanding were $58.6 billion for the first nine months of 2020, a 15% decrease from $69.2 billion for the first nine months of 2019. Outstanding balances of advances may significantly increase and decrease from period to period because of a member’s liquidity and financial strategies.

As of September 30, 2020, advances outstanding to the Bank’s top five borrowers and their affiliates decreased by $20.3 billion from the Bank’s top five borrowers and their affiliates as of December 31, 2019, and advances outstanding to the Bank’s other borrowers decreased by $7.9 billion. Advances to the top five borrowers decreased to $23.9 billion at September 30, 2020, from $44.2 billion at December 31, 2019, including First Republic Bank, whose advances and capital stock exceeded 10% of the Bank’s total advances and capital stock, respectively, as of September 30, 2020, as presented in “Item 1. Financial Statements – Note 4 – Advances – Concentration Risk” and “Item 1. Financial Statements – Note 9 – Capital – Concentration.”

The Bank has a significant long-term funding arrangement with a borrower that contributed to the level of outstanding advances, and prepayments or repayments of advances or any changes to this arrangement could have a significant adverse impact on the Bank’s level of advances. Any prepayments or termination of this arrangement may result in prepayment fees or a termination fee. The borrower prepaid $9 billion of its outstanding advances during the second quarter of 2020, which resulted in prepayment fees of $10 million.

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The $28.2 billion decrease in advances outstanding reflected a $20.0 billion decrease in adjustable rate advances, a $4.8 billion decrease in variable rate advances, and a $3.4 billion decrease in fixed rate advances. In 2019, the Bank began to offer SOFR-indexed advances to its members.

The components of the advances portfolio at September 30, 2020, and December 31, 2019, are presented in the following table.

Advances Portfolio by Product Type
	September 30, 2020				December 31, 2019
(Dollar in millions)	Par Value		Percentage of Total Par Value		Par Value		Percentage of Total Par Value
Adjustable – LIBOR	$	250	1	%	$	8,260	13	%
Adjustable – LIBOR, callable at borrower’s option	1,250		3		13,950		21
Adjustable – SOFR	—		—		5		—
Adjustable – SOFR, callable at borrower’s option	1,400		4		—		—
Adjustable – other indices	—		—		700		1
Subtotal adjustable rate advances	2,900		8		22,915		35
Fixed	8,986		24		18,784		29
Fixed – amortizing	199		1		234		1
Fixed – with PPS(1)	2,588		7		3,283		5
Fixed – with FPS(1)	21,195		57		14,059		22
Fixed – with caps and PPS(1)	110		—		210		—
Fixed – callable at borrower’s option	—		—		74		—
Fixed – callable at borrower’s option with PPS(1)	20		—		—		—
Fixed – putable at Bank’s option	200		1		—		—
Fixed – putable at Bank’s option with PPS(1)	20		—		20		—
Subtotal fixed rate advances	33,318		90		36,664		57
Daily variable rate	672		2		5,509		8
Total par value	$	36,890	100	%	$	65,088	100	%

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

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The following table presents the par value of LIBOR-indexed advances by redemption term at September 30, 2020.

LIBOR-Indexed Advances by Redemption Term
(In millions)
September 30, 2020
Redemption Term	Par Value
Due in 2020	$	100
Due in 2021	1,250
Due in 2022 and thereafter(1)	260
Total LIBOR-Indexed Advances(2)	$	1,610

(1)For more information on the Bank’s Transition Plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.”

(2)Total LIBOR-indexed advances include fixed rate advances with caps and PPS.

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

Non-MBS Investments – The Bank’s non-MBS investment portfolio consists of financial instruments that are used primarily to facilitate the Bank’s role as a cost-effective provider of credit and liquidity to members and to support the operations of the Bank. The Bank’s total non-MBS investment portfolio was $18.6 billion and $19.9 billion as of September 30, 2020, and December 31, 2019, respectively. The decrease in the total size of the non-MBS investment portfolio reflects reduced liquidity requirements, as a result of a smaller balance sheet.

Interest rate payment terms for non-MBS investments classified as trading and AFS at September 30, 2020, and December 31, 2019, are detailed in the following table:

Non-MBS Investments: Interest Rate Payment Terms
(In millions)	September 30, 2020		December 31, 2019
Fair value of fixed rate trading securities	$	4,278	$	1,762
Amortized cost of fixed rate AFS securities	3,797		5,281

Borrowings – Total liabilities (primarily consolidated obligations) funding the advances-related business decreased to $50.6 billion at September 30, 2020, from $79.0 billion at December 31, 2019. For further information and discussion of the Bank’s joint and several liability for FHLBank consolidated obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” and “Item 1. Financial Statements – Note 13 – Commitments and Contingencies.”

To meet the specific needs of certain investors, fixed and adjustable rate consolidated obligation bonds may contain embedded call options or other features that result in complex coupon payment terms. When these consolidated obligation bonds are issued on behalf of the Bank, typically the Bank simultaneously enters into interest rate exchange agreements with features that offset the complex features of the bonds and, in effect, convert the bonds to adjustable rate instruments. For example, the Bank uses fixed rate callable bonds that are typically offset with interest rate exchange agreements with call features that offset the call options embedded in the callable bonds.

At September 30, 2020, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $68.8 billion, of which $32.5 billion were hedging advances, $21.7 billion were hedging consolidated obligations, $8.0 billion were economically hedging non-MBS investments, and $6.6 billion were offsetting derivatives. At December 31, 2019, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $84.4 billion, of which $41.2 billion were hedging advances, $36.2 billion were hedging consolidated obligations, $7.0 billion were economically hedging trading securities, and $40 million were offsetting derivatives. The hedges associated with advances and consolidated obligations were

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primarily used to convert the fixed rate cash flows of the advances and consolidated obligations to adjustable rate cash flows or to manage the interest rate sensitivity and net repricing gaps of assets, liabilities, and interest rate exchange agreements.

FHLBank System consolidated obligation bonds and discount notes, along with similar debt securities issued by other GSEs such as Fannie Mae and Freddie Mac, are generally referred to as agency debt. The costs of debt issued by the FHLBanks and the other GSEs generally rise and fall with increases and decreases in general market interest rates.

In early March 2020, the Federal Open Market Committee (FOMC) stated that the COVID-19 outbreak presents evolving risks to economic activity. Consequently, the FOMC decided to lower the target range for the Federal funds rate by 50 basis points, to a target range of 1.00% to 1.25%, noting that it would closely monitor developments and their implications for the economic outlook and would act as appropriate to support the economy. On March 15, 2020, the FOMC again lowered the Federal funds rate, to a target range of 0.00% to 0.25%, noting that the COVID-19 outbreak had harmed communities and disrupted economic activity in many countries, including the United States, and had significantly affected global financial conditions. In the weeks before and after the early March Federal funds target rate cut, interest rates declined significantly. Since the end of the first quarter, financial conditions have improved, in part because of the monetary and fiscal stimulus measures taken, and the Bank continues to be able to meet its funding needs. The following table presents a comparison of selected market interest rates as of September 30, 2020, and December 31, 2019.

Selected Market Interest Rates
Market Instrument	September 30, 2020		December 31, 2019		September 30, 2019		December 31, 2018
Federal Reserve target range for overnight Federal funds	0.00-0.25	%	1.50-1.75	%	1.75-2.00	%	2.25-2.50	%
Secured Overnight Financing Rate	0.08		1.55		2.35		3.00
3-month Treasury bill	0.10		1.55		1.78		2.36
3-month LIBOR	0.23		1.91		2.09		2.81
2-year Treasury note	0.13		1.57		1.62		2.49
5-year Treasury note	0.28		1.69		1.55		2.51

Mortgage-Related Business. The mortgage-related business consists of MBS investments, mortgage loans acquired through the Mortgage Partnership Finance® (MPF®) Program, and the related financing and hedging instruments. (“Mortgage Partnership Finance,” “MPF,” and “MPF Xtra” are registered trademarks of the FHLBank of Chicago.) Adjusted net interest income for this segment is derived primarily from the difference, or spread, between the yield on the MBS investments and mortgage loans and the cost of the consolidated obligations funding those assets, including the net settlements from associated interest rate exchange agreements. Assets associated with this segment were $19.0 billion (25% of total assets) at September 30, 2020, and $21.1 billion at December 31, 2019 (20% of total assets).

Adjusted net interest income for this segment was $53 million in the third quarter of 2020, a decrease of $7 million, or 12%, compared with $60 million in the third quarter of 2019. Adjusted net interest income for this segment was $140 million in the first nine months of 2020, a decrease of $46 million, or 25%, from $186 million in the first nine months of 2019. The third quarter decrease in adjusted net interest income was primarily due to lower volume and lower income from reversal of prior period credit losses, partially offset by higher spreads from lower funding costs. The decrease in adjusted net interest income in the first nine months of 2020 was a result of current expected credit losses, lower balances of MBS investments, higher premium amortization expense, and lower income from reversals of prior period credit losses. Adjusted net interest income for this segment represented 51% and 45% of total adjusted net interest income for the third quarter of 2020 and 2019, respectively, and 43% and 44% of total adjusted net interest income for the first nine months of 2020 and 2019, respectively.

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MBS Investments – The Bank’s MBS portfolio was $16.6 billion at September 30, 2020, compared with $17.8 billion at December 31, 2019. During the first nine months of 2020, the Bank’s MBS portfolio decreased with $2.3 billion in principal repayments and $0.1 billion of fair value losses, partially offset by a $0.8 billion increase in basis adjustments and $0.5 billion in new agency MBS investment purchases. Average MBS investments were $16.8 billion for the third quarter of 2020, a 7% decrease from $18.1 billion for the third quarter of 2019. Average MBS investments were $17.2 billion in the first nine months of 2020, a decrease of $0.7 billion from $17.9 billion in the first nine months of 2019. For a discussion of the composition of the Bank’s MBS portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Investments.”

Interest rate payment terms for MBS investments classified as trading, AFS, and HTM at September 30, 2020, and December 31, 2019, are shown in the following table:

MBS Investments: Interest Rate Payment Terms
(In millions)	September 30, 2020		December 31, 2019
Fair value of trading securities:
Adjustable rate	$	3	$	4
Total trading securities	$	3	$	4
Amortized cost of AFS securities:
Fixed rate	$	9,241	$	8,156
Adjustable rate	1,505		1,769
Total AFS securities	$	10,746	$	9,925
Amortized cost of HTM securities:
Fixed rate	$	1,289	$	2,082
Adjustable rate	4,429		5,464
Total HTM securities	$	5,718	$	7,546

MPF Program – Under the MPF Program, the Bank may purchase from members, for its own portfolio, conventional conforming fixed rate mortgage loans under the MPF Original product and mortgage loans insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) under the MPF Government product. In addition, the Bank may facilitate the purchase of conforming fixed rate mortgage loans from members for concurrent sale to Fannie Mae under the MPF Xtra product and of government-insured or government-guaranteed mortgage loans that will be packaged into securities backed by the mortgage loans and guaranteed by Ginnie Mae under the MPF Government MBS product. When members sell mortgage loans under the MPF Xtra and MPF Government MBS products, the loans are sold to a third-party investor and are not recorded on the Bank’s Statements of Condition. The MPF Program suspended the MPF Direct product during the second quarter of 2020.

As of September 30, 2020, all mortgage loans purchased by the Bank under the MPF Program were qualifying conventional conforming fixed rate, first lien mortgage loans with fully amortizing loan terms of up to 30 years. A conventional loan is one that is not insured by the federal government or any of its agencies. Conforming loan size, which is established annually as required by Finance Agency regulations, may not exceed the loan limits set by the Finance Agency each year. All MPF loans are secured by owner-occupied, one- to four-unit residential properties or single-unit second homes. The Bank purchased $446 million in eligible loans under the MPF Original product during the first nine months of 2020.

Mortgage loan balances decreased to $2.4 billion at September 30, 2020, from $3.3 billion at December 31, 2019, a decrease of $0.9 billion. Average mortgage loans were $2.7 billion in the third quarter of 2020, a decrease of $0.7 billion from $3.4 billion in the third quarter of 2019. Average mortgage loans were $3.0 billion in the first nine months of 2020, a decrease of $0.2 billion from $3.2 billion in the first nine months of 2019.

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At September 30, 2020, and December 31, 2019, the Bank held conventional conforming fixed rate mortgage loans purchased under one of two MPF products, MPF Plus or MPF Original, which are described in greater detail in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – MPF Program” in the Bank’s 2019 Form 10-K. Mortgage loan balances at September 30, 2020, and December 31, 2019, were as follows:

Mortgage Loan Balances by MPF Product Type
(In millions)	September 30, 2020		December 31, 2019
MPF Plus	$	149	$	177
MPF Original	2,222		3,049
Subtotal	2,371		3,226
Unamortized premiums	42		91
Unamortized discounts	(2)		(3)
Mortgage loans held for portfolio	2,411		3,314
Less: Allowance for credit losses	(7)		—
Mortgage loans held for portfolio, net	$	2,404	$	3,314

The Bank performs periodic reviews of its mortgage loan portfolio to identify probable credit losses in the portfolio and to determine the likelihood of collection on the loans in the portfolio. For more information on the Bank’s mortgage loan portfolio, see “Item 1. Financial Statements – Note 1 – Basis of Presentation” and “Item 1. Financial Statements – Note 5 – Mortgage Loans Held for Portfolio” in this report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – MPF Program” in the Bank’s 2019 Form 10-K.

Borrowings – Total consolidated obligations funding the mortgage-related business decreased $2.1 billion to $19.0 billion at September 30, 2020, from $21.1 billion at December 31, 2019. For further information and discussion of the Bank’s joint and several liability for FHLBank consolidated obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” and “Item 1. Financial Statements – Note 13 – Commitments and Contingencies.”

The notional amount of derivative instruments associated with the mortgage-related business totaled $11.7 billion at September 30, 2020, of which $8.5 billion were associated with MBS, $2.3 billion were hedging or were associated with consolidated obligations funding the mortgage portfolio, and $0.9 billion were offsetting derivatives. The notional amount of derivative instruments associated with the mortgage-related business totaled $16.6 billion at December 31, 2019, of which $8.5 billion were hedging or were associated with consolidated obligations funding the mortgage portfolio and $8.1 billion were associated with MBS.

For information on the Bank’s management of interest rate risk and market risk related to the mortgage-related business segment, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations –Risk Management – Market Risk.”

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Interest Rate Exchange Agreements

A derivative transaction or interest rate exchange agreement is a financial contract whose fair value is generally derived from changes in the value of an underlying asset or liability. The Bank uses interest rate swaps; interest rate cap and floor agreements; and callable and putable interest rate swaps (collectively, interest rate exchange agreements) to manage its exposure to market risks inherent in its ordinary course of business, including its lending, investment, and funding activities. For more information on the Bank’s interest rate exchange agreements by type of hedged item, hedging instrument, associated hedging strategy, accounting designation as specified under the accounting for derivative instruments and hedging activities, and notional amount, and the primary strategies that the Bank employs for using interest rate exchange agreements and the associated market risks, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Market Risk – Interest Rate Exchange Agreements” in the Bank’s 2019 Form 10-K.

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

Derivative Counterparties. The following table presents the concentration in derivatives with derivative counterparties whose outstanding notional balances represented 10% or more of the Bank’s total notional amount of derivatives outstanding as of September 30, 2020, and December 31, 2019.

Concentration of Derivative Counterparties
(Dollars in millions)	September 30, 2020					December 31, 2019
Derivative Counterparty	Credit   Rating(1)	Notional Amount		Percentage of Total Notional Amount		Credit   Rating(1)	Notional Amount		Percentage of Total Notional Amount
Uncleared
Others	At least BBB	$	7,929	10	%	At least BBB	$	11,476	11	%
Subtotal uncleared		7,929		10			11,476		11
Cleared
LCH Ltd(2)
Credit Suisse Securities (USA) LLC	A	27,129		34		A	61,067		61
Morgan Stanley & Co. LLC	A	45,467		56		A	28,483		28
Subtotal cleared		72,596		90			89,550		89
Total(3)		$	80,525	100	%		$	101,026	100	%

(1)The credit ratings used by the Bank are based on the lower of Moody’s Investors Service (Moody’s) or S&P Global Ratings (S&P) ratings. 

(2)London Clearing House (LCH) Ltd is the Bank’s counterparty for all of its cleared swaps and was rated AA- with a Negative CreditWatch by S&P at September 30, 2020, and December 31, 2019. For purposes of clearing swaps with LCH Ltd, Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. LLC are the Bank’s clearing agents.

(3)Total notional amount at September 30, 2020, and December 31, 2019, does not include $6 million and $46 million of mortgage delivery commitments with members, respectively.

Liquidity and Capital Resources

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

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Liquidity

The Bank seeks to maintain the liquidity necessary to repay maturing consolidated obligations for which it is the primary obligor, meet other obligations and commitments, and meet expected and unexpected member credit demands. The Bank monitors its financial position to maintain ready access to available funds to meet normal transaction requirements, take advantage of appropriate investment opportunities, and manage unforeseen liquidity demands.

The Bank generally manages operational, contingent, and refinancing risks using a portfolio of cash and short-term investments and access to the debt capital markets. In addition, the Bank maintains alternate sources of funds, detailed in its contingent liquidity plan, which also includes an explanation of how sources of funds may be allocated under stressed market conditions, such as short-term operational disruptions at the Bank or the Office of Finance or short-term disruptions in the debt capital markets.

The Finance Agency has established base case liquidity guidelines that each FHLBank maintain sufficient liquidity at least equal to its anticipated cash outflows, assuming no new consolidated obligation issuance, renewal of all maturing advances, a specified percentage drawdown on letters of credit balances, and certain Treasury investments as a source of funds. The Finance Agency’s guidance provides that base case liquidity should generally be maintained for 10 to 30 days. The Bank actively monitors and manages refinancing risk. Finance Agency guidance specifies tolerance levels related to the size of each FHLBank’s funding gaps to measure refinancing risk as the difference between assets and liabilities that are scheduled to mature during a specified period, expressed as a percentage of total assets. The guidance limits three-month and one-year funding gaps generally between the range of –10% to –20% and –25% to –35%, respectively. Funding gaps are measured at monthend, using the average ratio for the three most recent monthends.

In addition to the Finance Agency’s guidelines on contingent liquidity, the Bank models its cash commitments and expected cash flows on a daily basis to determine its projected liquidity position. If a market or operational disruption occurred that prevented the issuance of new consolidated obligations, the Bank could meet its obligations by: (i) allowing short-term liquid investments to mature, (ii) using eligible securities as collateral for repurchase agreement borrowings, and (iii) if necessary, allowing advances to mature without renewal. In addition, the Bank may be able to borrow on a short-term unsecured basis from other financial institutions (Federal funds purchased) or other FHLBanks (inter-FHLBank borrowings).

As of September 30, 2020, and December 31, 2019, the Bank held total sources of funds in an amount that would have allowed the Bank to meet its liquidity needs without issuing new consolidated obligations for over ten days, in accordance with the Finance Agency guidance. In addition, the Bank’s funding gap positions as of September 30, 2020, and December 31, 2019, were within the tolerance levels provided by the Finance Agency guidance.

For more information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Liquidity” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk” in the Bank’s 2019 Form  10-K.

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Regulatory Capital Requirements

The FHLBank Act and Finance Agency regulations specify that each FHLBank must meet certain minimum regulatory capital standards. The Bank must maintain: (i) total regulatory capital in an amount equal to at least 4% of its total assets, (ii) leverage capital in an amount equal to at least 5% of its total assets, and (iii) permanent capital in an amount that is greater than or equal to its risk-based capital requirement. Because the Bank issues only Class B stock, regulatory capital and permanent capital for the Bank are both composed of retained earnings and Class B stock, including mandatorily redeemable capital stock (which is classified as a liability for financial reporting purposes). Regulatory capital and permanent capital do not include AOCI. Leverage capital is defined as the sum of permanent capital weighted by a 1.5 multiplier plus non-permanent capital. The risk-based capital requirement is equal to the sum of the Bank’s credit risk, market risk, and operations risk capital requirements, all of which are calculated in accordance with the rules and regulations of the Finance Agency.

The following table shows the Bank’s compliance with the Finance Agency’s capital requirements at September 30, 2020, and December 31, 2019. The Bank’s risk-based capital requirement decreased to $1.4 billion at September 30, 2020, from $1.5 billion at December 31, 2019.

Regulatory Capital Requirements
	September 30, 2020						December 31, 2019
(Dollars in millions)	Required			Actual			Required			Actual
Risk-based capital	$	1,403		$	6,086		$	1,519		$	6,605
Total regulatory capital	$	3,035		$	6,086		$	4,274		$	6,605
Total regulatory capital ratio	4.00		%	8.02		%	4.00		%	6.18		%
Leverage capital	$	3,793		$	9,129		$	5,342		$	9,908
Leverage ratio	5.00		%	12.03		%	5.00		%	9.27		%

The Bank’s capital requirements are more fully discussed in “Item 8. Financial Statements and Supplementary Data – Note 15 – Capital” in the Bank’s 2019 Form 10-K.

Risk Management

The Bank has an integrated corporate governance and internal control framework designed to support effective management of the Bank’s business activities and the risks inherent in these activities. As part of this framework, the Bank’s Board of Directors has adopted a Risk Governance Policy that outlines the key roles and responsibilities of the Board of Directors and management and sets forth how the Bank is organized to achieve its risk management objectives, including the implementation of the Bank’s strategic objectives, risk management strategies, corporate governance, and standards of conduct. The policy also establishes the Bank’s risk governance organizational structure and identifies the general roles and responsibilities of the Board of Directors and management in establishing risk management policies, procedures, and guidelines; in overseeing the enterprise risk profile; and in implementing enterprise risk management processes and business strategies. The policy establishes an independent risk oversight function to identify, assess, measure, monitor, and report on the enterprise risk profile and risk management capabilities of the Bank. For more information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management” in the Bank’s 2019 Form 10-K.

Advances. The Bank manages the credit risk of advances and other credit products by setting the credit and collateral terms available to individual members and housing associates based on their creditworthiness and on the quality and value of the assets they pledge as collateral. The Bank also has procedures to assess the mortgage loan quality and documentation standards of institutions that pledge mortgage loan collateral. In addition, the Bank has collateral policies and restricted lending procedures in place to help manage its exposure to institutions that experience difficulty in meeting their capital requirements or other standards of creditworthiness. These credit and collateral policies balance the Bank’s dual goals of meeting the needs of members and housing associates as a

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reliable source of liquidity and mitigating credit risk by adjusting credit and collateral terms in view of deterioration in creditworthiness. The Bank has never experienced a credit loss on an advance.

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

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

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

The following tables present a summary of the status of the credit outstanding and overall collateral borrowing capacity of the Bank’s member and nonmember borrowers as of September 30, 2020, and December 31, 2019. During the nine months ended September 30, 2020, the Bank’s internal credit ratings stayed the same or slightly declined for the majority of members and nonmember borrowers.

Member and Nonmember Credit Outstanding and Collateral Borrowing Capacity by Credit Quality Rating
(Dollars in millions)
September 30, 2020
	All Members and Nonmembers	Members and Nonmembers with Credit Outstanding
					Collateral Borrowing Capacity(2)
Member or Nonmember Credit Quality Rating	Number	Number	Credit Outstanding(1)		Total		Used
1-3	250	179	$	40,325	$	195,049	21	%
4-6	81	51	14,244		51,747		28
7-10	5	4	59		66		89
Subtotal	336	234	54,628		246,862		22
Community development financial institutions (CDFIs)	7	7	106		115		92
Housing associates	2	—	—		—		—
Total	345	241	$	54,734	$	246,977	22	%

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December 31, 2019
	All Members and Nonmembers	Members and Nonmembers with Credit Outstanding
					Collateral Borrowing Capacity(2)
Member or Nonmember Credit Quality Rating	Number	Number	Credit Outstanding(1)		Total		Used
1-3	271	151	$	67,982	$	204,970	33	%
4-6	54	33	18,654		50,732		37
7-10	5	4	41		65		63
Subtotal	330	188	86,677		255,767		34
CDFIs	7	5	102		112		91
Housing associates	2	—	—		—		—
Total	339	193	$	86,779	$	255,879	34	%

(1)Includes advances, letters of credit, the market value of swaps, estimated prepayment fees for certain borrowers, and the credit enhancement obligation on MPF loans.

(2)Collateral borrowing capacity does not represent any commitment to lend on the part of the Bank.

Member and Nonmember Credit Outstanding and Collateral Borrowing Capacity by Unused Borrowing Capacity
(Dollars in millions)
September 30, 2020
Unused Borrowing Capacity	Number of Members and Nonmembers with Credit Outstanding	Credit Outstanding(1)		Collateral Borrowing Capacity(2)
0% – 10%	18	$	931	$	967
11% – 25%	16	1,570		1,913
26% – 50%	29	4,013		6,821
More than 50%	178	48,220		237,276
Total	241	$	54,734	$	246,977

December 31, 2019
Unused Borrowing Capacity	Number of Members and Nonmembers with Credit Outstanding	Credit Outstanding(1)		Collateral Borrowing Capacity(2)
0% – 10%	7	$	1,352	$	1,419
11% – 25%	9	754		903
26% – 50%	24	21,955		34,221
More than 50%	153	62,718		219,336
Total	193	$	86,779	$	255,879

(1)Includes advances, letters of credit, the market value of swaps, estimated prepayment fees for certain borrowers, and the credit enhancement obligation on MPF loans.

(2)Collateral borrowing capacity does not represent any commitment to lend on the part of the Bank.

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

Securities pledged as collateral are assigned borrowing capacities that reflect the securities’ market valuations and market liquidation risks. The following table presents the securities collateral pledged by all members and by nonmembers with credit outstanding at September 30, 2020, and December 31, 2019.

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Composition of Securities Collateral Pledged by Members and by Nonmembers with Credit Outstanding
(In millions)	September 30, 2020				December 31, 2019
Securities Type with Current Credit Ratings	Current Par		Borrowing Capacity		Current Par		Borrowing Capacity
U.S. Treasury (bills, notes, bonds)	$	254	$	250	$	183	$	176
Agency (notes, subordinated debt, structured notes, indexed amortization notes, and Small Business Administration pools)	4,056		3,967		2,897		2,846
Agency pools and collateralized mortgage obligations	16,518		15,891		8,576		8,287
Private-label commercial MBS – publicly registered investment-grade-rated senior tranches	3		3		5		5
PLRMBS – private label investment-grade-rated senior tranches	26		17		45		34
Term deposits with the Bank	20		20		—		—
Other	204		15		—		—
Total	$	21,081	$	20,163	$	11,706	$	11,348

With respect to loan collateral, most borrowers may choose to pledge loan collateral by specific identification or under a blanket lien. Insurance companies, CDFIs, and housing associates are required to pledge loan collateral by specific identification with monthly reporting. All other borrowers pledging by specific identification must provide a detailed listing of all the loans pledged to the Bank on a monthly basis.

The Bank may require certain borrowers to deliver pledged loan collateral to the Bank for one or more reasons, including the following: the borrower is a de novo institution (chartered within the last three years), an insurance company, a CDFI, or a housing associate; the Bank is concerned about the borrower’s creditworthiness; or the Bank is concerned about the maintenance of its collateral or the priority of its security interest.

As of September 30, 2020, of the loan collateral pledged to the Bank, 19% was pledged by 26 institutions by specific identification, 53% was pledged by 117 institutions under a blanket lien with detailed reporting, and 28% was pledged by 132 institutions under a blanket lien with summary reporting. For each borrower that pledges loan collateral, the Bank conducts loan collateral field reviews once every six months or every one, two, or three years, depending on the risk profile of the borrower and the types of collateral pledged by the borrower.

As of September 30, 2020, the Bank’s maximum borrowing capacities as a percentage of the assigned market value of mortgage loan collateral pledged under a blanket lien with detailed reporting were as follows: 85% for first lien residential mortgage loans, 81% for multifamily mortgage loans, 81% for commercial mortgage loans, and 70% for second lien residential mortgage loans. The maximum borrowing capacity for small business, small agribusiness, and small farm loans was 25% of the unpaid principal balance, although most of these loans are pledged under blanket lien with summary reporting, with a maximum borrowing capacity of 25%. The highest borrowing capacities are available to borrowers that pledge under a blanket lien with detailed reporting because the detailed loan information allows the Bank to assess the value of the collateral more precisely and because additional collateral is pledged under the blanket lien that may not receive borrowing capacity but may be liquidated to repay advances in the event of default. The Bank may review and change the maximum borrowing capacity for any type of loan collateral at any time.

The following table presents the mortgage loan collateral pledged by all members and by nonmembers with credit outstanding at September 30, 2020, and December 31, 2019.

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Composition of Loan Collateral Pledged by Members and by Nonmembers with Credit Outstanding
(In millions)	September 30, 2020				December 31, 2019
Loan Type	Unpaid Principal Balance		Borrowing Capacity		Unpaid Principal Balance		Borrowing Capacity
First lien residential mortgage loans	$	168,064	$	132,306	$	174,580	$	152,960
Second lien residential mortgage loans and home equity lines of credit	16,354		6,847		17,469		9,437
Multifamily mortgage loans	44,109		30,881		32,652		25,321
Commercial mortgage loans	79,060		52,103		72,118		52,329
Loan participations(1)	4,594		3,034		4,610		3,496
Small business, small farm, and small agribusiness loans	6,820		1,643		4,010		988
Other	12		—		2		—
Total	$	319,013	$	226,814	$	305,441	$	244,531

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

The Bank holds a security interest in subprime residential mortgage loans pledged as collateral. Subprime loans are defined as loans with a borrower FICO score of 660 or less at origination, or if the original FICO score is not available, as loans with a current borrower FICO score of 660 or less. At September 30, 2020, and December 31, 2019, the unpaid principal balance of these loans totaled $5 billion and $6 billion, respectively. The Bank reviews and assigns borrowing capacities to subprime mortgage loans as it does for all other types of loan collateral, taking into account the known credit attributes in the pricing of the loans. All advances, including those made to borrowers pledging subprime mortgage loans, are required to be fully collateralized. The Bank limits the amount of borrowing capacity that may be supported by subprime collateral.

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

The Bank monitors its investments for substantive changes in relevant market conditions and any declines in fair value. For securities in an unrealized loss position because of factors other than movements in interest rates, such as widening of mortgage asset spreads, the Bank considers whether it expects to recover the entire amortized cost basis of the security by comparing the expectations of the present value of the cash flows to be collected from the security with the amortized cost basis of the security. If the Bank’s expectations of the present value of the cash flows to be collected is less than the amortized cost basis, the difference is considered the credit loss.

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

The following tables present the Bank’s investment credit exposure at the dates indicated, based on the lowest of the long-term credit ratings provided by Moody’s, S&P, or Fitch Ratings (Fitch) ratings.

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Investment Credit Exposure
(In millions)
September 30, 2020
	Carrying Value
	Credit Rating(1)
Investment Type	AA		A		BBB		Below Investment Grade		Unrated		Total
U.S. obligations – Treasury securities	$	8,079	$	—	$	—	$	—	$	—	$	8,079
MBS:
Other U.S. obligations – single-family:
Ginnie Mae	322		—		—		—		—		322
GSEs – single-family:
Freddie Mac	654		—		—		—		—		654
Fannie Mae(2)	1,365		5		—		3		—		1,373
Subtotal	2,019		5		—		3		—		2,027
GSEs – multifamily:
Freddie Mac	2,963		—		—		—		—		2,963
Fannie Mae	8,827		—		—		—		—		8,827
Subtotal	11,790		—		—		—		—		11,790
Total GSEs	13,809		5		—		3		—		13,817
PLRMBS:
Prime	23		31		63		168		106		391
Alt-A	43		46		35		1,369		568		2,061
Total PLRMBS	66		77		98		1,537		674		2,452
Total MBS	14,197		82		98		1,540		674		16,591
Total securities	22,276		82		98		1,540		674		24,670
Interest-bearing deposits	1		1,477		—		—		—		1,478
Securities purchased under agreements to resell	5,250		1,500		—		—		—		6,750
Federal funds sold	900		1,423		—		—		—		2,323
Total investments	$	28,427	$	4,482	$	98	$	1,540	$	674	$	35,221

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(In millions)
December 31, 2019
	Carrying Value
	Credit Rating(1)
Investment Type	AA		A		BBB		Below Investment Grade		Unrated		Total
U.S. obligations – Treasury securities	$	7,050	$	—	$	—	$	—	$	—	$	7,050
MBS:
Other U.S. obligations – single-family:
Ginnie Mae	474		—		—		—		—		474
GSEs – single-family:
Freddie Mac	1,063		—		—		—		—		1,063
Fannie Mae(2)	1,836		5		—		3		—		1,844
Subtotal	2,899		5		—		3		—		2,907
GSEs – multifamily:
Freddie Mac	3,402		—		—		—		—		3,402
Fannie Mae	7,992		—		—		—		—		7,992
Subtotal	11,394		—		—		—		—		11,394
Total GSEs	14,293		5		—		3		—		14,301
PLRMBS:
Prime	35		39		71		201		127		473
Alt-A	58		53		60		1,667		670		2,508
Total PLRMBS	93		92		131		1,868		797		2,981
Total MBS	14,860		97		131		1,871		797		17,756
Total securities	21,910		97		131		1,871		797		24,806
Interest-bearing deposits	—		2,269		—		—		—		2,269
Securities purchased under agreements to resell	7,000		—		—		—		—		7,000
Federal funds sold(3)	441		3,121		—		—		—		3,562
Total investments	$	29,351	$	5,487	$	131	$	1,871	$	797	$	37,637

(1)Credit ratings of BB and lower are below investment grade.

(2)The Bank has one security guaranteed by Fannie Mae but rated BB at September 30, 2020, and December 31, 2019, by S&P because of extraordinary expenses incurred during bankruptcy of the security's sponsor.

(3)Includes $141 million at December 31, 2019, in Federal funds sold to a member counterparty determined by the Bank to have an internal credit rating equivalent to an AA rating.

For all securities in its AFS and HTM portfolios, for Federal funds sold, and for securities purchased under agreements to resell, the Bank does not intend to sell any security and it is not more likely than not that the Bank will be required to sell any security before its anticipated recovery of the remaining amortized cost basis.

The Bank invests in short-term unsecured interest-bearing deposits, short-term unsecured Federal funds sold, securities purchased under agreements to resell, and negotiable certificates of deposit with member and nonmember counterparties, all of which are highly rated.

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

Finance Agency regulations limit the amount of unsecured credit that an individual FHLBank may extend to a single counterparty. In addition, the FHLBanks are prohibited by Finance Agency regulation from investing in

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financial instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks.

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

The following table presents the unsecured credit exposure with counterparties by investment type at September 30, 2020, and December 31, 2019.

Unsecured Investment Credit Exposure by Investment Type
	Carrying Value(1)
(In millions)	September 30, 2020		December 31, 2019
Interest-bearing deposits	$	1,477	$	2,269
Federal funds sold	2,323		3,562
Total	$	3,800	$	5,831

(1)Excludes unsecured investment credit exposure to U.S. government agencies and instrumentalities, government-sponsored enterprises, and supranational entities and does not include related accrued interest as of September 30, 2020, and December 31, 2019.

The following table presents the credit ratings of the unsecured investment credit exposures presented by the domicile of the counterparty or the domicile of the counterparty’s parent for U.S. branches and agency offices of foreign commercial banks, based on the lowest of the credit ratings provided by Moody’s, S&P, or Fitch ratings. This table does not reflect the foreign sovereign government’s credit rating. At September 30, 2020, 24% of the carrying value of unsecured investments held by the Bank were rated AA, and 61% of the Bank’s total unsecured investments were to U.S. branches and agency offices of foreign commercial banks. At September 30, 2020, all of the unsecured investments held by the Bank had overnight maturities.

Ratings of Unsecured Investment Credit Exposure by Domicile of Counterparty
(In millions)
September 30, 2020
	Carrying Value(1)
	Credit Rating(2)
Domicile of Counterparty	AA		A		Total
Domestic	$	—	$	1,077	$	1,077
U.S. subsidiaries of foreign commercial banks	—		400		400
Total domestic and U.S. subsidiaries of foreign commercial banks	—		1,477		1,477
U.S. branches and agency offices of foreign commercial banks:
Australia	—		500		500
Canada	900		—		900
Netherlands	—		923		923
Total U.S. branches and agency offices of foreign commercial banks	900		1,423		2,323
Total unsecured credit exposure	$	900	$	2,900	$	3,800

(1)Excludes unsecured investment credit exposure to U.S. government agencies and instrumentalities, government-sponsored enterprises, and supranational entities and does not include related accrued interest as of September 30, 2020.

(2)Does not reflect changes in ratings, outlook, or watch status occurring after September 30, 2020. These ratings represent the lowest rating available for each unsecured investment owned by the Bank, based on the ratings provided by Fitch, Moody’s, or S&P. The Bank’s internal rating may differ from this rating.

The Bank’s MBS investments include PLRMBS, all of which were AAA-rated at the time of purchase, and agency residential MBS, which are backed by Fannie Mae, Freddie Mac, or Ginnie Mae. Some of the PLRMBS were issued by and/or purchased from members, former members, or their affiliates. The Bank has investment credit limits and

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terms for these investments that do not differ for members and nonmembers. Regulatory policy limits total MBS investments to three times the Bank’s regulatory capital at the time of purchase. At September 30, 2020, the Bank’s MBS portfolio was 271% of Bank regulatory capital (as determined in accordance with regulations governing the operations of the FHLBanks). The Bank has not purchased any PLRMBS since the first quarter of 2008.

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

At September 30, 2020, PLRMBS representing 12% of the amortized cost of the Bank’s MBS portfolio were labeled Alt-A by the issuer. These PLRMBS are generally collateralized by mortgage loans that are considered less risky than subprime loans but more risky than prime loans. These loans are generally made to borrowers with credit scores that are high enough to qualify for a prime mortgage loan, but the loans may not meet standard underwriting guidelines for documentation requirements, property type, or loan-to-value ratios.

As of September 30, 2020, the Bank’s investment in MBS had gross unrealized losses totaling $70 million, $31 million of which were related to PLRMBS. These gross unrealized losses were primarily due to illiquidity in the MBS market and market expectations of the credit performance of loan collateral underlying these securities, which caused these assets to be valued at discounts to their amortized cost.

For its agency MBS, the Bank expects to recover the entire amortized cost basis of these securities because the Bank determined that the strength of the issuers’ guarantees through direct obligations or support from the U.S. government is sufficient to protect the Bank from losses. As a result, the Bank determined that, as of September 30, 2020, all of the gross unrealized losses on its agency MBS are temporary.

If conditions in the housing and mortgage markets and general business and economic conditions deteriorate, the fair value of MBS may decline further, and the Bank may experience credit losses on additional PLRMBS in future periods, as well as further impairment of PLRMBS that were identified as other-than-temporarily impaired prior to January 1, 2020. Additional credit losses could adversely affect the Bank’s earnings and retained earnings and its ability to pay dividends and repurchase capital stock. The Bank cannot predict whether it will be required to record an allowance for credit losses on its PLRMBS in the future.

The Bank has exposure to investment securities with interest rates indexed to LIBOR. The following table presents the unpaid principal balance of adjustable rate investment securities by interest rate index at September 30, 2020. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” for more information on the LIBOR transition and on SOFR as an alternative market benchmark.

Adjustable Rate Investment Securities by Interest Rate Index
(In millions)
September 30, 2020
Interest Rate Index	MBS
LIBOR(1)	$	6,196
Constant maturity Treasury	108
Other	1
Total adjustable rate investment securities(2)	$	6,305

(1)Certain MBS with multiple indices where LIBOR is the majority index are included in this amount. A de minimis amount of LIBOR-indexed MBS are due in 2020. LIBOR-indexed MBS of $6.2 billion are due in 2022 and thereafter.

(2)For more information on the Bank’s Transition Plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.”

Derivative Counterparties. The Bank has adopted credit policies and exposure limits for uncleared derivatives credit exposure. Over-the-counter derivatives may be either entered into directly with a counterparty (uncleared

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derivatives) or executed either with an executing dealer or on a swap execution facility and then cleared through a futures commission merchant (clearing agent) with a derivatives clearing organization (cleared derivatives).

Uncleared Derivatives. The Bank selects only highly rated derivative dealers and major banks (derivative dealer counterparties) that meet the Bank’s eligibility criteria to act as counterparties for its uncleared derivative activities. In addition, for all uncleared derivative transactions, the Bank has entered into master netting agreements and bilateral credit support agreements with all active derivative dealer counterparties that provide for delivery of collateral at specified levels to limit the Bank’s net unsecured credit exposure to these counterparties. Under these policies and agreements, the amount of unsecured credit exposure to an individual derivative dealer counterparty is set at zero (subject to a minimum transfer amount).

The Bank is subject to the risk of potential nonperformance by the counterparties to derivative agreements. A counterparty generally must deliver collateral to the Bank if the total market value of the Bank’s exposure to that counterparty rises above a specific trigger point. Currently, all of the Bank’s active uncleared derivative counterparties have a zero threshold. As a result of these risk mitigation initiatives, the Bank does not anticipate any credit losses on its uncleared derivative transactions with counterparties as of September 30, 2020.

Cleared Derivatives. The Bank is subject to nonperformance by the derivatives clearing organizations (clearinghouses) and clearing agents. The requirement that the Bank post initial and variation margin through a clearing agent, to the clearinghouse, exposes the Bank to institutional credit risk in the event that the clearing agent or the clearinghouse fails to meet its obligations. The use of cleared derivatives, however, mitigates the Bank’s overall credit risk exposure because a central counterparty is substituted for individual counterparties. Variation margin and initial margin are posted for changes in the value and risk profile of cleared derivatives. Due to declines in market values of cleared derivatives during the first nine months of 2020, there was an increase in variation margin posted on cleared derivatives to the clearinghouses resulting in an increase in net cash used in operating activities reported on the Statements of Cash Flows during the period. The Bank does not anticipate any credit losses on its cleared derivatives as of September 30, 2020. The increase or decrease in the credit exposure net of cash collateral, from one period to the next, may be affected by changes in several variables, such as the size and composition of the portfolio, market values of derivatives, and accrued interest. Based on the master netting arrangements, its credit analyses, and the collateral requirements in place with each counterparty, the Bank does not currently expect to incur any credit losses on its derivative agreements.

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

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Credit Exposure to Derivative Dealer Counterparties
(In millions)
September 30, 2020
Counterparty Credit Rating(1)	Notional Amount		Net Fair Value of Derivatives Before Collateral		Cash Collateral Pledged to/ (from) Counterparty		Noncash Collateral Pledged to/ (from) Counterparty		Net Credit Exposure to Counterparties
Asset positions with credit exposure:
Uncleared derivatives
AA	$	122	$	—	$	—	$	—	$	—
A	157		2		(2)		—		—
BBB	253		1		(1)		—		—
Cleared derivatives(2)	72,596		10		6		386		402
Liability positions with credit exposure:
Uncleared derivatives
A	6,269		(261)		299		—		38
BBB	578		(23)		25		—		2
Total derivative positions with credit exposure to nonmember counterparties	79,975		(271)		327		386		442
Member institutions(3)	6		—		—		—		—
Total	79,981		$	(271)	$	327	$	386	$	442
Derivative positions without credit exposure	550
Total notional	$	80,531

December 31, 2019
Counterparty Credit Rating(1)	Notional Amount		Net Fair Value of Derivatives Before Collateral		Cash Collateral Pledged to/ (from) Counterparty		Non-cash Collateral Pledged to/ (from) Counterparty		Net Credit Exposure to Counterparties
Asset positions with credit exposure:
Uncleared derivatives
A	$	488	$	2	$	(2)	$	—	$	—
BBB	493		1		(1)		—		—
Cleared derivatives(2)	89,550		8		7		381		396
Liability positions with credit exposure:
Uncleared derivatives
AA	1,263		(46)		49		—		3
A	8,296		(266)		279		—		13
BBB	713		(41)		43		—		2
Total derivative positions with credit exposure to nonmember counterparties	100,803		(342)		375		381		414
Member institutions(3)	46		—		—		—		—
Total	100,849		$	(342)	$	375	$	381	$	414
Derivative positions without credit exposure	223
Total notional	$	101,072

(1)The credit ratings used by the Bank are based on the lower of Moody's or S&P ratings.

(2)Represents derivative transactions cleared with LCH Ltd, the Bank’s clearinghouse, which was rated AA- by S&P with a Negative CreditWatch at September 30, 2020, and December 31, 2019.

(3)Member institutions include mortgage delivery commitments with members.

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The Bank primarily executes derivatives indexed to the Overnight Index Swap (OIS) rate and SOFR to manage interest rate risk and monitors marketwide efforts to address fallback language related to LIBOR-indexed derivative transactions. The following table presents the notional amount of interest rate swaps by interest rate index broken out by the pay or receive leg at September 30, 2020.

LIBOR-Indexed Interest Rate Swaps by Interest Rate Index
(In millions)
September 30, 2020
Interest Rate Index	Pay Leg		Receive Leg
Fixed	$	50,482	$	17,715
LIBOR	2,617		17,655
SOFR	20,610		31,568
OIS	5,836		12,607
Total notional amount	$	79,545	$	79,545

The following table presents the notional amount of interest rate swaps with LIBOR exposure by termination date broken out by the pay or receive leg and further bifurcated by cleared and uncleared derivative transactions at September 30, 2020. Interest rate caps and floors indexed to LIBOR totaling $430 million terminate in 2021 and totaling $550 million terminate in 2022 and thereafter. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” for more information on the LIBOR transition and on SOFR as an alternative market benchmark.

LIBOR-Indexed Interest Rate Swaps by Termination Date
(In millions)
September 30, 2020
	Pay Leg				Receive Leg
Termination Date	Cleared		Uncleared		Cleared		Uncleared
Terminates in 2020	$	304	$	130	$	6,863	$	25
Terminates in 2021	1,510		253		7,557		213
Terminates in 2022 and thereafter(1)	260		160		2,375		622
Total Notional Amount	$	2,074	$	543	$	16,795	$	860

(1)For more information on the Bank’s Transition Plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.”

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, if applicable, and the reported amounts of income, expenses, gains, and losses during the reporting period. Changes in these judgments, estimates, and assumptions could potentially affect the Bank’s financial position and results of operations significantly. Although the Bank believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ.

In the Bank’s 2019 Form 10-K, the following accounting policies and estimates were identified as critical because they require the Bank to make subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies and estimates are: accounting for derivatives; estimating fair values of investments classified as trading and AFS, derivatives and associated hedged items carried at fair value in accordance with the accounting for derivative instruments and associated hedging activities, and financial

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instruments carried at fair value under the fair value option; and estimating the prepayment speeds on MBS and mortgage loans for the accounting of amortization of premiums and accretion of discounts and credit losses previously recorded prior to the adoption of new accounting guidance related to the measurement of credit losses on MBS and mortgage loans.

There have been no significant changes in the judgments and assumptions made during the first nine months of 2020 in applying the Bank’s critical accounting policies. These policies and the judgments, estimates, and assumptions are also described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” and “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” in the Bank’s 2019 Form 10-K and in “Item 1. Financial Statements – Note 12 – Fair Value.”

Recently Issued Accounting Guidance and Interpretations

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

Recent Developments

LIBOR Transition – International Swaps and Derivatives Association, Inc. (ISDA) 2020 Interbank Offered Rate (IBOR) Fallbacks Protocol and Supplement to the 2006 ISDA Definitions. On October 23, 2020, the ISDA launched the Supplement to the 2006 ISDA Definitions (Supplement) and the ISDA 2020 IBOR Fallbacks Protocol (Protocol). Both the Supplement and the Protocol will take effect on January 25, 2021. On that date, all legacy bilateral derivatives transactions subject to Protocol-covered agreements (including ISDA agreements) that incorporate certain covered ISDA definitional booklets and reference a covered IBOR, including U.S. Dollar LIBOR, will be amended to apply the new ISDA-recommended IBOR fallbacks in the event of the relevant IBOR’s cessation. Both an FHLBank and its relevant counterparty must have adhered to the Protocol in order to effectively amend legacy derivative contracts, or the parties must bilaterally agree to include amended legacy contracts to address LIBOR fallbacks. The Protocol will remain open for adherence after this effective date. As of January 25, 2021, new and future derivative contracts will be subject to the relevant IBOR fallbacks set forth in the Supplement.

On October 21, 2020, the Finance Agency issued a Supervisory Letter to the FHLBanks that requires each FHLBank to adhere to the Protocol by no later than December 31, 2020, and to the extent necessary, to amend any bilateral agreements regarding the adoption of the Protocol by December 15, 2020.

As a part of its LIBOR Transition efforts, the Bank has adhered to the Protocol and will work with its counterparties, as necessary, to address its over-the-counter derivative agreements referencing U.S. Dollar LIBOR as a part of its LIBOR Transition efforts.

Off-Balance Sheet Arrangements and Aggregate Contractual Commitments

Off-Balance Sheet Arrangements and Other Commitments

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

The par value of the outstanding consolidated obligations of the FHLBanks was $819.9 billion at September 30, 2020, and $1,025.9 billion at December 31, 2019. The par value of the Bank’s participation in consolidated obligations was $68.2 billion at September 30, 2020, and $98.8 billion at December 31, 2019. The Bank had

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committed to the issuance of $170 million and $805 million in consolidated obligations at September 30, 2020, and December 31, 2019, respectively.

In addition, in the ordinary course of business, the Bank engages in financial transactions that, in accordance with U.S. GAAP, are not recorded on the Bank’s Statements of Condition or may be recorded on the Bank’s Statements of Condition in amounts that are different from the full contract or notional amount of the transactions. For example, the Bank routinely enters into commitments to extend advances and issues standby letters of credit. These commitments and standby letters of credit may represent future cash requirements of the Bank, although the standby letters of credit usually expire without being drawn upon. Standby letters of credit are subject to the same underwriting and collateral requirements as advances made by the Bank. At September 30, 2020, the Bank had no advance commitments and $17.7 billion in standby letters of credit outstanding. At December 31, 2019, the Bank had no advance commitments and $21.6 billion in standby letters of credit outstanding.

For additional information, see “Item 1. Financial Statements – Note 13 – Commitments and Contingencies.”

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is defined as the risk to the Bank’s market value of capital and future earnings (excluding the impact of any cumulative net gains or losses on derivatives and associated hedged items and on financial instruments carried at fair value) as a result of movements in market interest rates, interest rate spreads, interest rate volatility, and other market factors (market rate factors). This profile reflects the Bank’s objective of maintaining a conservative asset-liability mix and its commitment to providing value to its members through products and dividends without subjecting their investments in Bank capital stock to significant market risk.

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

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

Total Bank Market Risk

Market Value of Capital Sensitivity – The Bank uses market value of capital sensitivity (the interest rate sensitivity of the net fair value of all assets, liabilities, and interest rate exchange agreements) as an important measure of the Bank’s exposure to changes in interest rates.

The Bank’s market value of capital sensitivity policy limits the potential adverse impact of an instantaneous parallel shift of a plus or minus 100-basis-point change in interest rates from current rates (base case) to no worse than 4.0% of the estimated market value of capital. In addition, the policy limits the potential adverse impact of an instantaneous plus or minus 100-basis-point change in interest rates measured from interest rates that are 200 basis points above or below the base case to no worse than 6.0% of the estimated market value of capital. In the case where a market risk sensitivity compliance metric cannot be estimated with a parallel shift in interest rates because of prevailing low interest rates, the sensitivity metric is not reported. The Bank’s measured market value of capital sensitivity was within the policy limits as of September 30, 2020.

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

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

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

Market Value of Capital Sensitivity Estimated Percentage Change in Market Value of Bank Capital for Various Changes in Interest Rates
Interest Rate Scenario(1)	September 30, 2020		December 31, 2019
+200 basis-point change above current rates	–3.0	%	–2.4	%
+100 basis-point change above current rates	–1.3		–1.1
–100 basis-point change below current rates(2)	+5.9		+1.1
–200 basis-point change below current rates(2)	+6.0		+6.9

(1)Instantaneous change from actual rates at dates indicated.

(2)Interest rates for each maturity are limited to non-negative rates.

The Bank’s estimates of the sensitivity of the market value of capital to changes in interest rates as of September 30, 2020, are comparable with the estimates as of December 31, 2019, with the exception of the down 100 basis-point scenario. Given the significant decline in interest rates in 2020, interest rates on a subset of the Bank’s floating rate instruments cannot decrease to the same extent that interest rates in the rising rate scenarios can increase because of embedded interest rate floors in both declining scenarios. As of December 31, 2019, interest rates could decline in a parallel fashion in the down 100 basis-point scenario but could not decline a full 200 basis points. Interest rates continue to remain at historically low levels, ranging from 12 basis points for the one-month Treasury bill to 68 basis points for the ten-year Treasury note.

The Bank’s Risk Management Policy provides guidelines for the payment of dividends and the repurchase of excess capital stock based on the ratio of the Bank’s estimated market value of total capital to par value of capital stock. If this ratio at the end of any quarter is: (i) less than 100% but greater than or equal to 90%, any dividend would be limited to an annualized rate no greater than the daily average of the Federal funds effective rate for the applicable quarter (subject to certain conditions), and any excess capital stock repurchases would not exceed $500 million (subject to certain conditions); (ii) less than 90% but greater than or equal to 70%, any dividend and any excess capital stock repurchases would be subject to the same limitations and conditions as in (i) above, except that any excess capital stock repurchases would not exceed 4% of the Bank’s outstanding capital stock as of the repurchase date; and (iii) less than 70%, the Bank would not pay a dividend, not repurchase excess capital stock (but continue to redeem excess capital stock as provided in the Bank’s capital plan), limit the acquisition of certain assets, and review the Bank’s risk policies. A decision by the Board of Directors to declare or not declare any dividend or repurchase any excess capital stock is a discretionary matter and is subject to the requirements and restrictions of the FHLBank Act and applicable requirements under the regulations governing the operations of the FHLBanks. The ratio of the Bank’s estimated market value of total capital to par value of capital stock was 260% as of September 30, 2020.

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

The Bank limits the sensitivity of projected financial performance through a Board of Directors policy limit on projected adverse changes in the adjusted return on capital. The Bank’s adjusted return on capital sensitivity policy limits the potential adverse impact of an instantaneous parallel shift of a plus or minus 200-basis-point change in interest rates from current rates (base case) to no worse than –120 basis points from the base case projected adjusted return on capital. Given the current low interest rate environment, in the downward shift interest rates were limited to non-negative rates. With the indicated interest rate shifts, the adjusted return on capital for the projected 12-month horizon would be expected to decrease by 10 basis points in the –200 basis-points scenario, well within the policy limit of –120 basis points.

Duration Gap – Duration gap is the difference between the estimated durations (market value sensitivity) of assets and liabilities (including the impact of interest rate exchange agreements) and reflects the extent to which estimated maturity and repricing cash flows for assets and liabilities are matched. The Bank monitors duration gap analysis at the total Bank level and does not have a policy limit.

Total Bank Duration Gap Analysis
	September 30, 2020			December 31, 2019
	Amount (In millions)		Duration Gap(1) (In months)	Amount (In millions)		Duration Gap(1) (In months)
Assets	$	75,870	4	$	106,842	3
Liabilities	69,650		2	100,101		2
Net	$	6,220	2	$	6,741	1

(1)Duration gap values include the impact of interest rate exchange agreements.

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

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

Money market investments used for liquidity management generally have maturities of one month or less. In addition, to increase the Bank’s liquidity position, the Bank invests in Treasury securities, generally with terms of less than three years. These fixed rate investments are swapped to variable rate investments.

The interest rate risk in the advances-related business is primarily associated with the Bank’s strategy for investing capital (capital stock, including mandatorily redeemable capital stock, and retained earnings). The Bank’s strategy is

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

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

Because of the short-term and variable rate nature of the assets, liabilities, and derivatives of the advances-related business, the Bank’s interest rate risk guidelines address the amounts of net assets that are expected to mature or reprice in a given period. The market value sensitivity analyses and net interest income simulations are also used to identify and measure risk and variances to the target interest rate risk exposure in the advances-related segment.

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

The Bank manages the interest rate risk and market risk of the mortgage-related segment through its investment in low risk assets and selected funding and hedging strategies. The total carrying value of MBS and mortgage loans at September 30, 2020, was $19.0 billion, including $16.6 billion in MBS and $2.4 billion in mortgage loans. The total carrying value of MBS and mortgage loans at December 31, 2019, was $21.1 billion, including $17.8 billion in MBS and $3.3 billion in mortgage loans. Floating rate securities, and fixed rate multifamily securities that have been converted to floating rate through the use of interest rate swaps, were $14.8 billion, or 78%, of MBS and mortgage loans at September 30, 2020, and $15.1 billion, or 72%, of MBS and mortgage loans at December 31, 2019. Intermediate and long-term fixed rate assets, whose interest rate and market risks have been partially offset through the use of fixed rate callable debt, fixed rate non-callable debt, and certain interest rate swaps, were $4.2 billion, or 22%, of MBS and mortgage loans, at September 30, 2020, and $6.0 billion, or 28%, of MBS and mortgage loans at December 31, 2019.

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

At least monthly, the Bank reviews the estimated market risk profile of the entire portfolio of mortgage assets and related funding and hedging transactions. The Bank then considers rebalancing strategies to modify the estimated

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

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

As discussed above in “Total Bank Market Risk – Market Value of Capital Sensitivity,” the Bank uses market value of capital sensitivity as a primary market value metric for measuring the Bank’s exposure to interest rates. The Bank’s interest rate risk policies and guidelines for the mortgage-related business address the market value of capital sensitivity of the assets, liabilities, and derivatives of the mortgage-related business.

The following table presents results of the estimated market value of capital sensitivity analysis attributable to the mortgage-related business as of September 30, 2020, and December 31, 2019.

Market Value of Capital Sensitivity Estimated Percentage Change in Market Value of Bank Capital Attributable to the Mortgage-Related Business for Various Changes in Interest Rates
Interest Rate Scenario(1)	September 30, 2020		December 31, 2019
+200 basis-point change	–1.1	%	–0.6	%
+100 basis-point change	–0.4		–0.2
–100 basis-point change(2)	+2.8		+0.2
–200 basis-point change(2)	+2.8		+3.2

(1)Instantaneous change from actual rates at dates indicated.

(2)Interest rates for each maturity are limited to non-negative rates.

The explanations for the changes in Bank’s estimates of the sensitivity of the market value of capital to changes in interest rates attributable to the mortgage-related business from December 31, 2019, to September 30, 2020, are the same as the explanations for the sensitivity of the market value of capital attributable to all of the Bank’s assets, liabilities, and associated interest rate exchange agreements.

For a discussion of risk factors related to the COVID-19 pandemic, see “Part I. Item 1A. Risk Factors.”

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ITEM 4.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The senior management of the Federal Home Loan Bank of San Francisco (Bank) is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports filed or submitted under the Securities Exchange Act of 1934 (1934 Act) is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The Bank’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports that it files or submits under the 1934 Act is accumulated and communicated to the Bank’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the Bank’s disclosure controls and procedures, the Bank’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Bank’s management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.

Management of the Bank has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with the participation of the president and chief executive officer and executive vice president and chief financial officer as of the end of the period covered by this report. Based on that evaluation, the Bank’s president and chief executive officer and executive vice president and chief financial officer have concluded that the Bank’s disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.

Internal Control Over Financial Reporting

During the three months ended September 30, 2020, there were no changes in the Bank’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.

Consolidated Obligations

The Bank’s disclosure controls and procedures include controls and procedures for accumulating and communicating information in compliance with the Bank’s disclosure and financial reporting requirements relating to the joint and several liability for the consolidated obligations of the Federal Home Loan Banks (FHLBanks). Because the FHLBanks are independently managed and operated, the Bank’s management relies on information that is provided or disseminated by the Federal Housing Finance Agency (Finance Agency), the Office of Finance, and the other FHLBanks, as well as on published FHLBank credit ratings, in determining whether the joint and several liability regulation is reasonably likely to result in a direct obligation for the Bank or whether it is reasonably possible that the Bank will accrue a direct liability.

The Bank’s management also relies on the operation of the joint and several liability regulation. The joint and several liability regulation requires that each FHLBank file with the Finance Agency a quarterly certification that it will remain capable of making full and timely payment of all of its current obligations, including direct obligations, coming due during the next quarter. In addition, if an FHLBank cannot make such a certification or if it projects that it may be unable to meet its current obligations during the next quarter on a timely basis, it must file a notice with the Finance Agency. Under the joint and several liability regulation, the Finance Agency may order any FHLBank to make principal and interest payments on any consolidated obligations of any other FHLBank, or allocate the outstanding liability of an FHLBank among all remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding or on any other basis.

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PART II. OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

The Federal Home Loan Bank of San Francisco (Bank) may be subject to various legal proceedings arising in the normal course of business. For information regarding the two lawsuits filed by former Bank officer, Lawrence H. Parks, and another former officer of the Bank, against the Bank, certain of the Bank’s current and former directors, the Bank’s former chief executive officer, one current employee, and one former employee, see “Part I. Item 3. Legal Proceedings” in the Bank’s 2019 Form 10-K.

After consultation with legal counsel, the Bank is not aware of any other legal proceedings that are expected to have a material effect on its financial condition or results of operations or that are otherwise material to the Bank.

ITEM 1A.    RISK FACTORS

Natural disasters, pandemics, terrorist attacks, or other catastrophic events could adversely affect the Bank’s operations, business activities, results of operations and financial condition.

Natural disasters, pandemics, or other widespread health emergencies (such as the recent outbreak of COVID-19), terrorist attacks, or other unanticipated or catastrophic events could create economic and financial disruptions and uncertainties, which may lead to reduced demand for advances and an increased risk of credit losses for the Bank and may adversely affect its cost of funding or access to funding. These events may also lead to operational difficulties that could adversely affect the ability of the Bank and the Office of Finance to conduct and manage their businesses. Any of these factors could adversely affect the Bank’s business activities and results of operations.

In particular, the current COVID-19 pandemic has disrupted the credit markets in which the Bank operates, and the decline in interest rates has adversely affected the fair values of the Bank’s assets, the valuation of collateral, and the Bank’s net income and capital. In addition, because of changing economic and market conditions affecting the Bank’s investments, the Bank may be required to recognize further impairments on securities held, which may result in additional provision for credit losses or write-downs on private label residential mortgage-backed securities or reduced comprehensive income, depending on the classification of the investment. A prolonged COVID-19 pandemic may continue to have adverse effects on the Bank’s profitability and financial condition. Market volatility and economic stress during a prolonged COVID-19 pandemic may adversely affect the Bank’s access to the debt markets and possibly affect the Bank’s liquidity. The Bank’s decision to have all employees work remotely in accordance with local “stay-at-home” orders may create additional cybersecurity risks and operational challenges that could affect the Bank’s ability to conduct business or increase the risk of operational incidents and errors. In addition, the Bank relies on vendors and other third parties to perform certain critical services, and if one of our critical vendors or third parties experiences a failure or any interruption to their business because of the COVID-19 pandemic, the Bank may be unable to effectively conduct and manage its business. The outlook remains uncertain, and there is a possibility that if the Federal Reserve keeps interest rates low or even uses negative interest rates, this could significantly affect the Bank’s business and profitability.

For a discussion of other risk factors, see “Part I. Item 1A. Risk Factors” in the Bank’s 2019 Form 10-K.

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ITEM 6.    EXHIBITS

Exhibit No.	Description
10.1	Employment Agreement by and among the Federal Home Loan Bank of San Francisco and Joseph Amato, dated October 7, 2020, incorporated by reference to Exhibit 10.1 to the Bank's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 9, 2020 (Commission File No. 000-51398)
31.1	Certification of the Acting President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of the Acting President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	Inline XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 6, 2020.

Federal Home Loan Bank of San Francisco

/S/ STEPHEN P. TRAYNOR

Stephen P. Traynor
Acting President and Chief Executive Officer

/S/ KENNETH C. MILLER

Kenneth C. Miller

Executive Vice President and Chief Financial Officer
(Principal Financial Officer)

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