Washington, D.C. 20549
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.
Registrant's capital stock is not publicly traded and is only issued to members of the registrant. Such capital stock is issued and redeemed at par value, $100 per share, subject to certain regulatory and statutory limits. At June 30, 2017,2023, the aggregate par value of the capital stock held by shareholders of the registrant was approximately $3,091$3,443 million. At February 28, 2018,29, 2024, the total shares of capital stock outstanding, including mandatorily redeemable capital stock, totaled 37,340,430.30,134,294.
PART I. FINANCIAL INFORMATION
We are one of 11 regional Federal Home Loan Banks (FHLBanks) that serve the United States as part of the Federal Home Loan Bank System.System (FHLBank System). Each FHLBank operates as a separate federally chartered corporation with its own board of directors, management, and employees. The FHLBanks were organized under the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), and are government-sponsored enterprises (GSEs). The FHLBanks are not government agencies and do not receive financial support from taxpayers. The U.S. government does not guarantee, directly or indirectly, the debt securities or other obligations of the Bank or the FHLBank System. The FHLBanks are regulated by the Federal Housing Finance Agency (Finance Agency), an independent federal agency.
We have a cooperative ownership structure. To access our products and services, a financial institution must be approved for membership and purchase capital stock in the Bank. The member'smember’s capital stock requirement is generally based on its use of Bankour products, subject to a minimum asset-based membership requirement that is intended to reflect the value to the member of having ready access to the Bank as a reliable source of competitively priced funds. BankOur capital stock is issued, transferred, redeemed, and repurchased at its par value of $100 per share, subject to certain regulatory and statutory limits. It is not publicly traded.
Our members may include federally insured and regulated financial depositories, regulated insurance companies that are engaged in residential housing finance, community development financial institutions (CDFIs) that have been certified by the CDFI Fund of the U.S. Treasury Department, and privately insured, state-chartered credit unions. Financial depositories may include commercial banks, credit unions, industrial loan companies, and savings institutions. CDFIs may include community development loan funds, community development venture capital funds, and privately insured, state-chartered credit unions. All members have atheir principal place of business located in Arizona, California, or Nevada, the three states that make up the Eleventh District of the FHLBank System. Our members range in size from $6 million to over $198 billion in assets.
Our primary business is providing competitively priced, collateralized loans, known as advances, to our members and certain qualifying housing associates. Advances may be fixed or adjustable rate, with terms ranging from one day to 30 years. We accept a wide range of collateral types, some of which cannot be readily pledged elsewhere or readily securitized. Members use their access to advances to support their mortgage loan portfolios, lower their funding costs, facilitate asset-liability and liquidity management, reduce on-balance sheet liquidity, offer a wider range of mortgage products to their customers, and improve profitability.
To fund their operations, the FHLBanks issue debt in the form of consolidated obligation bonds and discount notes (jointly referred to as consolidated obligations) through the FHLBanks’ Office of Finance, the fiscal agent for the issuance and servicing of consolidated obligations on behalf of the FHLBanks. Because the FHLBanks’ consolidated obligations are rated Aaa/P-1 by Moody’s Investors Service (Moody’s) and AA+/A-1+ by S&P Global Ratings (S&P) and because of the FHLBanks'FHLBanks’ GSE status, the FHLBanks are generally able to raise funds at rates that are typically at a small to moderate spread above U.S. Treasury security yields. Our cooperative ownership structure allows us to pass along the benefit of these low funding rates to our members.
Members also benefit from our affordable housing and economic development programs, which provide grants and below-market-rate loans that support members’ involvement in creating affordable housing and revitalizing communities.
Our cooperative ownership structure has led us to develop a business model that is different from that of a typical financial services firm. Our business model is based on the premise that we maintain a balance between our objective to promote housing, homeownership, and community and economic development through our activities with members and our objective to provide a return on the private capital provided by our members through their investment in the Bank'sour capital stock. We achieve this balance by delivering low-cost credit to help our members meet the credit needs of their communities while striving to pay members a reasonable return on their investment in the Bank's capital stock.stock, maintaining safety and soundness.
We may also invest in residential mortgage-backed securities (MBS) up to the regulatory policy limit of three times regulatory capital, which is composed of retained earnings and capital stock, including mandatorily redeemable capital stock. Our MBS investments include agency-issued MBS that are guaranteed through the direct obligation of or are supported by the U.S. government and private-label residential MBS (PLRMBS) that were AAA-rated at the time of purchase. We also have a portfolio of residential mortgage loans purchased from members. Earnings on these MBS investments and mortgage assets have historically providedloans provide us with the financial flexibility to continue providing cost-effective
credit and liquidity to our members. While the mortgage assets we hold are intended to increase our
earnings, they also modestly increase our credit and interest rate risk.
Additional information about our investments is provided in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Investments.”
Our financial strategies are designed to enable us to safely expand and contract our assets, liabilities, and capitalbalance sheet as our member base and our members' credit needs change. Our capital increases when members are required to purchase additional capital stock as they increase their advances borrowings, and it contracts when we repurchase excess capital stock from members as their advances decline. As a result of these strategies, we have been able to achieve our mission by meeting member credit needs and maintaining our strong regulatory capitaladequately capitalized position, while paying dividends (including dividends on mandatorily redeemable capital stock) and repurchasing and redeeming excess capital stock. Throughout 2017, the Bank continued to monitor 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 ofInformation regarding our dividends and the repurchase of excess capital stock. Additional information regarding the Bank’s dividends and the repurchase of excess capital stock is provided in “Item 8. Financial Statements and Supplementary Data – Note 1511 – Capital – Excess Stock Repurchase, Retained Earnings, and Dividend Framework.”
We offer both standard and customized advance structures. Standard advances include fixed and adjustable rate advance products with different maturities, interest rates, and payment characteristics. Fixed rate advances generally have maturities ranging from one day to 30 years. Adjustable rate advances generally have maturities ranging from less than 30 daysone day to 10 years, with the interest rates resetting periodically at a fixed spread to the London Interbank Offered Rate (LIBOR) or to anothera specified index. Customized advances may include:
For each customized advance, we typically execute a derivative to enable us to offset the customized features embedded in the advance.
associate’s assets. The amount of financing availability is generally determined by the creditworthiness of the member or housing associate.
We may invest in short-term unsecured interest-bearing deposits, Federal funds sold, negotiable certificates of deposit, and commercial paper. We may also invest in U.S. Treasury obligations as well as short-term secured transactions, such as U.S. Treasury resale agreements. Our investments also include bonds issued by the Federal Farm Credit Banks, all of which are rated Aaa by Moody’s and AA+ by S&P. In addition, we may invest in housing finance agency bonds issued by housing finance agencies located in Arizona, California, and Nevada, the three states that make up the Eleventh District of the FHLBank System. These bonds are federally taxable mortgage revenue bonds, collateralized by pools of first lien residential mortgage loans and credit-enhanced by bond insurance. The bonds we hold are issued by the California Housing Finance Agency.
•Assist local nonprofits and small businesses and advance community-based economic development objectives.
loans and guaranteed by Ginnie Mae under the MPF Government MBS product. (“Mortgage Partnership Finance,” “MPF,” and “MPF Xtra” are registered trademarks of the FHLBank of Chicago.)
The Bank has approved 23 members as participating financial institutions since renewing its participation in the MPF Program in 2013. We previously purchased conventional conforming fixed rate residential mortgage loans from participating financial institutions from May 2002 to October 2006. The MPF Program allows us to further serve the needs of our members by offering them a competitive alternative secondary market channel for their mortgage originations. The MPF Government and MPF Government MBS products also allow us to offer members a new mechanism to help low- and moderate-income homeowners and first-time homebuyers.
Affordable Housing Program.Through our Affordable Housing Program (AHP), we provide subsidies to assist in the purchase, construction, or rehabilitation of housing for households earning up to 80% of the median income for the area in which they live. Each year, to fund the AHP, we are required by law to set aside 10% of theour current year'syear’s net earnings (income before interest expense related to dividends paid on mandatorily redeemable capital stock and the assessment for the AHP), to be awarded in the following year. Since 1990, we have awarded $1.0approximately $1.3 billion in AHP subsidies to support the purchase, development, or rehabilitation of approximately 132,000 affordable homes.
150,000 housing units.
We allocate at least 65%50% of our annual AHP subsidy to our competitive AHP General Fund under which applications for specific owner-occupied and rental housing projects are submitted by members and are evaluated and scored by the Bank in an annual competitive process. In 2023, we introduced a competitive AHP Nevada Targeted Fund to which we can allocate up to 20% of our annual AHP subsidy. All subsidies for the competitive AHP General Fund and Nevada Targeted Fund are funded to affordable housing sponsors or developers through our members in the form of direct subsidies or subsidized advances.
We allocate the remainderup to 35% of our annual AHP subsidy up to 35%, to our two homeownership set-aside programs, the Individual Development and Empowerment Account Program and the Workforce Initiative Subsidy for Homeownership Program.program. Under these programs,this program, members reserve funds from the Bank to be used as matching grants for eligible first-time homebuyers.
Access to Housing and Economic Assistance for Development (AHEAD) Program. AHEAD Program grants, funded annually at the discretion of our Board of Directors, provide funding for targeted economic development projects and non-AHP-eligible housing initiatives that create or preserve jobs, deliver social services, training or education programs, or provide other services and programs that benefit low- and moderate-income communities. AHEAD Program applications are submitted by members working with local community groups, and awards are based on project eligibility and evaluation of the applications. In 2017, the Bank awarded $1.5 million in AHEAD Program grants.
Discounted Credit Programs. We offer members two discounted credit programs available in the form of advances and standby letters of credit. Members may use the Community Investment Program to fund mortgages for low- and moderate-income households, to finance first-time homebuyer programs, to create and maintain affordable housing, and to support other eligible lending activities related to housing or economic development for low- and moderate-income families. Members may use the Advances for Community Enterprise (ACE) Program to fund projects and activities that create or retain jobs or provide services or other benefits for low- and moderate-income people and communities. Members may also use ACE Program funds to support eligible community lending and economic development, including small business, community facilities, and public works projects.
Voluntary Programs
In 2023, the Bank’s board of directors approved plans to voluntarily allocate up to an additional 5% (15% total) of its annual net income to fund economic development and homeownership grant programs that enrich people’s lives and revitalize communities. The amount of voluntary contributions available to be contributed in 2024 based on 2023 income is $32 million. The Bank continues to evaluate funding of other programs meeting community needs for affordable housing, funding for businesses, and community development.
Access to Housing and Economic Assistance for Development (AHEAD) Program. AHEAD Program grants, funded annually at the discretion of the Bank’s board of directors, provide funding for targeted economic development projects and non-AHP-eligible housing initiatives that create or preserve jobs, deliver social services, training, or education programs, or provide other services and programs that benefit low- and moderate-income communities. AHEAD Program applications are submitted by members working with local community groups, and awards are based on project eligibility and evaluation of the applications. In 2023, we awarded $4 million in AHEAD Program grants, and since 2004, we have awarded over $25 million in AHEAD program grants.
Empowering Black Homeownership (EBH). In 2021, the Bank’s board of directors approved a $1 million matching grant program designed to narrow the Black homeownership gap by expanding access to expert housing counseling services. EBH was established to address the historical and continuing racial discrimination in homeownership and expand the capacity of the United States Department of Housing and Urban Development (HUD)-approved housing counseling agencies (HCAs) to serve more aspiring and at-risk homeowners in communities of color. EBH applications were submitted by members working with these agencies, and awards were based on the eligibility and evaluation of the applications. In 2023, the Bank expanded the EBH program by doubling its commitment to a $2 million allocation for matching grants up to $125 thousand per participating member financial institution to support HUD-approved HCAs to deliver homeownership counseling. In 2023, the
Bank disbursed $800 thousand for 36 EBH grants to 16 members that had made donations to 16 HCAs, for a total of $2 million in support for HCAs in Arizona, California, and Nevada. In 2022, the Bank disbursed $1 million for 41 EBH grants to 14 members that had made donations to 22 HCAs, for a total of $2 million in support for HCAs in Arizona, California, and Nevada.
Nevada Capacity Building Program. The purpose of the Nevada Housing Coalition (NHC) is to build capacity for affordable housing development in Nevada and to address the state’s limited infrastructure for its future development. The funds are to be used to improve development resources in the state, grow its affordable housing ecosystem, and better position Nevada to secure and deploy affordable housing dollars from a variety of existing and new sources. Capacity building efforts will include delivering critical training to practitioners on the nuances of securing and applying for affordable housing dollars, increasing the state’s affordable housing project pipeline, and ultimately ensuring more housing options for all Nevadans. In 2023 the Bank’s board of directors approved $350 thousand for the NHC in support of the NHC’s purpose.
Middle-Income Downpayment Assistance. In 2023, the Bank’s board of directors approved a $10 million Middle-Income Downpayment Assistance matching grant pilot program to help put sustainable homeownership within reach for families and individuals. This grant program is intended to help families and individuals who qualify as first-time homebuyers and earn just over 80% up to 140% of area median income (AMI), based on the location of the property to be purchased and adjusted for household size. The goal is to expand access to affordable and sustainable homeownership opportunities for first-time homebuyers. In 2023, the Bank disbursed $10 million through 31 members in support of this pilot program.
Tribal Nations Program. In 2023, the Bank’s board of directors approved $1 million in voluntary grant funding for a Tribal Nations Program to address tribal affordable housing needs identified in the Bank’s Targeted Community Lending Plan. The funding was committed to the California Coalition for Rural Housing (CCRH) in partnership with the Arizona Housing Coalition, the Northern Circle Indian Housing Authority, Pala Housing Resource Center in California, and the Nevada Housing Coalition. It is to be utilized for training and technical assistance to tribes to apply for the Bank’s Affordable Housing Program, as well as federal and state affordable housing funding. In 2023, the Bank disbursed $500 thousand to CCRH.
Funding Sources
We obtain most of our funds from the sale of the FHLBanks'FHLBanks’ debt instruments (consolidated obligations), which consist of consolidated obligation bonds and discount notes. The consolidated obligations are issued through the Office of Finance using authorized securities dealers and are backed only by the financial resources of the FHLBanks. As provided by the FHLBank Act or regulations governing the operations of the FHLBanks, all FHLBanks have joint and several liability for all FHLBank consolidated obligations. The joint and several liability regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The regulations provide a
general framework for addressing the possibility that an FHLBank may be unable to repay the consolidated obligations for which it is the primary obligor. For more information, see “Item 8. Financial Statements and Supplementary Data – Note 2015 – Commitments and Contingencies.” We have never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank, and as of December 31, 2017, and through the date of this report, we do not believe that it is probable that we will be asked to do so.
The Bank’sOur status as a GSE is critical to maintaining its access to the capital markets. Although consolidated obligations are backed only by the financial resources of the FHLBanks and are not guaranteed by the U.S. government, the capital markets have traditionally treated the FHLBanks’ consolidated obligations as comparablea close alternative to federal agency debt, providing the FHLBanks with access to funding at relatively favorable rates. As of DecemberJuly 31, 2017,2023, S&P rated the FHLBanks’ consolidated obligations AA+/A-1+, and as of January 24, 2024, Moody’s rated them Aaa/P-1. As of DecemberJuly 31, 2017,2023, S&P assigned each of the FHLBanks a long-term credit rating of AA+ with a stable outlook,, and as of January 24, 2024, Moody's assigned each of the FHLBanks a long-term credit rating of Aaa with a stable outlook.Aaa. Changes in the long-term credit ratings of individual FHLBanks do not necessarily affect the credit rating of the consolidated obligations issued on behalf of the FHLBanks. Rating agencies may change or withdraw a rating from time to time because of various factors, including operating results or actions taken, business developments, or changes in their opinion regarding, among other factors, the general outlook for a particular industry or the economy.
Regulations govern the issuance of debt on behalf of the FHLBanks and related activities. All new debt is jointly issued by the FHLBanks through the Office of Finance, which serves as their fiscal agent in accordance with the FHLBank Act and applicable regulations. Pursuant to these regulations, the Office of Finance, often in conjunction with the FHLBanks, has adopted policies and procedures for consolidated obligations that may be issued by the FHLBanks. The policies and procedures relate to the frequency and timing of issuance, issue size, minimum denomination, selling concessions, underwriter qualifications and selection, currency of issuance, interest rate change or conversion features, call or put features, principal amortization features, and selection of clearing organizations and outside counsel. The Office of Finance has responsibility for facilitating and approving the issuance of the consolidated obligations in accordance with these policies and procedures. In addition, the Office of Finance has the authority to redirect, limit, or prohibit the FHLBanks'FHLBanks’ requests to issue consolidated obligations that are otherwise allowed by its policies and procedures if it determines that its action is consistent with: (i) the regulatory requirement that consolidated obligations be issued efficiently and at the lowest all-in cost over time, consistent with prudent risk management practices, prudent debt parameters, short- and long-term market conditions, and the FHLBanks'FHLBanks’ status as GSEs; (ii) maintaining reliable access to the short-term and long-term capital markets; and (iii) positioning the issuance of debt to take advantage of current and future capital markets opportunities. The authority of the Office of Finance to redirect, limit, or prohibit the Bank'sour requests for issuance of consolidated obligations has never adversely affected the Bank'sour ability to finance its operations. The Office of Finance also services all outstanding FHLBank debt, serves as a source of information for the FHLBanks on developments in the capital markets, and prepares the FHLBanks'FHLBanks’ quarterly and annual combined financial reports. In addition, it administers the Resolution Funding Corporation, and the Financing Corporation, two corporations established by Congress in the 1980s1989 to provide funding for the resolution and disposition of insolvent savings institutions.
Consolidated Obligation Bonds. Consolidated obligations are generally issued with either fixed rate payment terms or adjustable rate payment terms, which use a variety of indicesthe Secured Overnight Financing Rate for interest rate resets, including LIBOR.resets. In addition, to meet the specific needs of certain investors, fixed rate and adjustable rate consolidated obligation bonds may contain certain embedded features, which may result in call options and complex coupon payment terms. In general, when such consolidated obligation bonds are issued for which the Bank iswe are the primary obligor, we simultaneously enter into interest rate exchange agreements containing offsetting features to, in effect, convert the terms of the bond to the terms of a simple adjustable rate bond (tied to an index, such as those listed above).bond. Typically, the maturities of these securitiesconsolidated obligation bonds range from 6 months to 15 years, but the maturities are not subject to any statutory or regulatory limit. Consolidated obligation bonds may be issued and distributed daily through negotiated or competitively bid transactions with approved underwriters or selling group members.
We receive 100% of the net proceeds of a bond issued through direct negotiation with underwriters of debt when we are the only FHLBank involved in the negotiation. In these cases, the Bank iswe are the sole primary obligor on the consolidated obligation bond. When the Bankwe and one or more other FHLBanks jointly negotiate the issuance of a bond directly with underwriters, we receive the portion of the proceeds of the bond agreed upon with the other FHLBank(s); in those cases, the Bank iswe are the primary obligor for a pro rata portion of the bond, including all customized features and terms, based on the proceeds received.
We may also request specific amounts of specific consolidated obligation bonds to be offered by the Office of Finance for sale in a competitive auction conducted with the underwriters in a bond selling group. One or more other FHLBanks may also request amounts of those same bonds to be offered for sale for their benefit in the same auction. We may receive zero to 100% of the proceeds of the bonds issued in a competitive auction depending on: (i) the amounts of and costs for the consolidated obligation bonds bid by underwriters; (ii) the maximum costs we or other FHLBanks participating in the same issue, if any, are willing to pay for the bonds; and (iii) guidelines for the allocation of bond proceeds among multiple participating FHLBanks administered by the Office of Finance.
Consolidated Obligation Discount Notes. The FHLBanks also issue consolidated obligation discount notes with maturities ranging from one day to one year, which may be offered daily through a consolidated obligation discount note selling group and through other authorized underwriters. Discount notes are issued at a discount and mature at par.
On a daily basis, we may request specific amounts of discount notes with specific maturity dates to be offered by the Office of Finance at a specific cost for sale to underwriters in the discount note selling group. One or more other FHLBanks may also request amounts of discount notes with the same maturities to be offered for sale for their benefit the same day. The Office of Finance commits to issue discount notes on behalf of the participating FHLBanks when underwriters in the selling group submit orders for the specific discount notes offered for sale. We may receive zero to 100% of the proceeds of the discount notes issued through this sales process depending on: (i) the maximum costs we or other FHLBanks participating in the same discount note issuance, if any, are willing to pay for the discount notes; (ii) the order amounts for the discount notes submitted by underwriters; and (iii) guidelines for the allocation of discount note proceeds among multiple participating FHLBanks administered by the Office of Finance.
Twice weekly, we may also request specific amounts of discount notes with fixed terms to maturity ranging from 4 to 26 weeks to be offered by the Office of Finance for sale in a competitive auction conducted with underwriters in the discount note selling group. One or more other FHLBanks may also request amounts of those same discount notes to be offered for sale for their benefit in the same auction. The discount notes offered for sale in a competitive auction are not subject to a limit on the maximum costs the FHLBanks are willing to pay. We may receive zero to 100% of the proceeds of the discount notes issued in a competitive auction depending on: (i) the amounts of and costs for the discount notes bid by underwriters and (ii) guidelines for the allocation of discount note proceeds among multiple participating FHLBanks administered by the Office of Finance.
Debt Investor Base. The FHLBanks’ consolidated obligations have traditionally had a diversified funding base of domestic and foreign investors. Purchasers of the FHLBanks' consolidated obligations include fund managers, commercial banks, pension funds, insurance companies, foreign central banks, state and local governments, and retail investors. These purchasers are also diversified geographically, with a significant portion of investors historically located in the United States, Europe, and Asia.
Segment Information
We use an analysis of the Bank’s financial results based on the financial components and adjusted net interest income of two operating segments, the advances-related business and the mortgage-related business, as well as other financial information, to review and assess financial performance and determine financial management strategies related to the operations of these two business segments. For purposes of segment reporting, adjusted net interest income includes interest income and expenses associated with net settlements from economic hedges that
are recorded in “Net gain/(loss) on derivatives and hedging activities” in other income and excludes interest expense that is recorded in “Mandatorily redeemable capital stock.” Other key financial information, such as any credit-related OTTI charges on our PLRMBS or other expenses and assessments, is not included in the segment reporting analysis, but is incorporated into our overall assessment of financial performance.
The advances-related business consists of advances and other credit products, related financing and hedging instruments, liquidity and other non-MBS investments associated with our role as a liquidity provider, and capital stock. Adjusted net interest income for this segment is derived primarily from the difference, or spread, between the yield on all assets associated with the business activity in this segment and the cost of funding those activities, including the net settlements from associated interest rate exchange agreements, and from earnings on invested capital.
The mortgage-related business consists of MBS investments, mortgage loans acquired through the MPF Program, the consolidated obligations specifically identified as funding those assets, and the related hedging instruments. Adjusted net interest income for this segment is derived primarily from the difference, or spread, between the yield on the MBS and mortgage loans and the cost of the consolidated obligations funding those assets. This includes the net settlements from associated interest rate exchange agreements and net accretion of related income, which is a result of improvement in expected cash flows on certain other-than-temporarily-impaired PLRMBS, less the provision for credit losses on mortgage loans.
Additional information about business segments is provided in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Segment Information” and in “Item 8. Financial Statements and Supplementary Data – Note 17 – Segment Information.”
Use of Interest Rate Exchange Agreements
We use interest rate exchange agreements,swaps, also known as derivatives, in the ordinary course of business as part of our risk management and funding strategies to reduce funding costs and interest rate risk inherent in the ordinary course of business. The types of derivatives we may use include interest rate swaps (including callable, putable, and basis swaps); swaptions; and interest rate cap and floor agreements.
lower funding costs.
The regulations governing the operations of the FHLBanks and the Bank'sour Risk Management Policy establish standards and guidelines for our use of derivatives. These regulationsstandards and guidelines prohibit trading in derivatives for profit and any other speculative purposes and limit the amount of credit risk allowable from derivative counterparties.
We primarily use derivatives to manage our exposure to market risk from changes in interest rates. The goal of our market risk management strategy is not to eliminate market risk, but to manage it within appropriate limits that are consistent with the financial strategies approved by the Boardboard of Directors.directors. One key way we manage market risk is to acquire and maintain a portfolio of assets and liabilities, which, together with their associated derivatives, are conservativelygenerally matched with respect to the expected repricingsrepricing of the assets and the liabilities. We may also use derivatives to adjust the effective repricing frequency or option characteristics ofembedded in certain financial instruments (such as advances and consolidated obligations) to achieve our risk management objectives.
We measure the Bank’sour market risk at the enterprisetotal Bank level, as well as on a portfolio basis, taking into account all financial instruments. The market risk of the derivatives and the hedged items is included in the measurement of our various market risk measures. The Bank’sOur low interest ratemarket risk profile reflects our conservative asset-liability mix, which is supported by integrated use of derivatives in our daily financial management.
Additional information about our interest rate exchange agreements is provided in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Market Risk – Total Bank Market Risk – Interest Rate Exchange Agreements” and in “Item 8. Financial Statements and Supplementary Data – Note 1813 – Derivatives and Hedging Activities.”
Capital
From its enactment in 1932, the FHLBank Act provided for a subscription-based capital structure for the FHLBanks. The amount of capital stock that each FHLBank issued was determined by a statutory formula establishing how much FHLBank capital stock each member was required to purchase. With the enactment of the Gramm-Leach-Bliley Act of 1999, Congress replaced the statutory subscription-based member capital stock
purchase formula with requirements for total capital, leverage capital, and risk-based capital for the FHLBanks and required the FHLBanks to develop new capital plans to replace the previous statutory structure.
We implemented ourOur capital plan on April 1, 2004.has been amended over time to accommodate changes in our business model and financial strategies. The capital plan bases the stock purchase requirement on the level of activity a memberan institution has with the Bank, subject to a minimum membership requirement that is intended to reflect the value to the member of having access to the Bank as a funding source. With the approval of the Boardour board of Directors,directors, we may adjust these requirements from time to time within the ranges established in the capital plan. Any changes to our capital plan must be approved by our Boardboard of Directorsdirectors and the Finance Agency.
BankOur capital stock cannot be publicly traded, and under the capital plan, may be issued, transferred, redeemed, and repurchased only at its par value of $100 per share, subject to certain regulatory and statutory limits. Under the capital plan, a member'smember’s capital stock will be redeemed by the Bank upon five years'years’ notice from the member, subject to certain conditions. In addition, we have the discretion to repurchase excess capital stock from members.
Dividends and Retained Earnings. The Bank’sOur Excess Stock Repurchase, Retained Earnings, and Dividend Framework (Framework) summarizes the Bank’sour capital management principles and objectives, as well as its policies and practices with respect to restricted retained earnings, dividend payments, and the repurchase of excess capital stock.
As required by the regulations governing the operations of the FHLBanks, the Framework is reviewed at least annually by the Bank’s Boardour board of Directors.directors. The Boardboard of Directorsdirectors may amend the Framework from time to time. In January 2017,September 2023, the Board approved an updated Framework was amended and approved bydividend philosophy to reflect changes in the Bank’s Board of Directors to include the Bank’scurrent interest rate environment and business conditions. The Framework includes a dividend philosophy to endeavor to pay a quarterly dividend at an annualized rate between 5%that is equal to or greater than the current market rate for a highly rated investment (e.g., SOFR) and 7%.that is sustainable under current and projected earnings while maintaining appropriate levels of capital. The decision to declare any dividend and the dividend rate are at the discretion of the Bank’s Boardour board of Directors,directors, which may or may not choose to follow the dividend philosophy as guidance in the dividend declaration. The Bank’sOur historical dividend rates and the dividend philosophy are not indicative of future dividend declarations. The Bank’s dividend policyOur Framework may be revised or eliminated in the future, and there can be no assurance as to future dividends.
In accordance with the Framework, the Bank retainswe retain certain amounts in restricted retained earnings, which are not made available for dividends in the current dividend period, and maintainsmaintain an amount of total retained earnings at least equal to itsthe required retained earnings as described in the Framework. The BankWe may be restricted from paying dividends if itthe Bank is not in compliance with any of itsour minimum capital requirements or if payment would cause the Bank to fail to meet any of itsour minimum capital requirements. In addition, the Bankwe may not pay dividends if any principal or interest due on any consolidated obligation has not been paid in full or is not expected to be paid in full, or, under certain circumstances, if the Bank failswe fail to satisfy certain liquidity requirements under applicable regulations.
The regulatory liquidity requirements state that each FHLBank must: (i) maintain eligible high quality assets (advances with a maturity not exceeding five years, U.S. Treasury securities investments, and deposits in banks or trust companies) in an amount equal to or greater than the deposits received from members, and (ii) hold contingent liquidity in an amount sufficient to meet its liquidity needs for at least five business days without access to the consolidated obligations markets. At December 31, 2017, advances maturing within five years totaled $76.6 billion, significantly in excess of the $281 million of member deposits on that date. In addition, as of December 31, 2017, the Bank held estimated total sources of funds in an amount that would have allowed the Bank to meet its liquidity needs for more than five consecutive business days without issuing new consolidated obligations, subject to certain conditions. For more information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk.”
The Bank’sOur Risk Management Policy limits the payment of dividends based on the ratio of the Bank’sour estimated market value of total capital to par value of capital stock. If this ratio at the end of any quarter is less than 100% but greater than or equal to 70%, any dividend would be limited to an annualized rate no greater than the daily average of the three-month London Interbank Offered Rate (LIBOR)Federal funds effective rate for the applicable quarter (subject to certain conditions), and if this ratio is less than 70%, the Bankwe would be restricted from paying a dividend. For more information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Market Risk.”
Restricted Retained Earnings – The Bank’sOur Framework assesses the level and adequacy of retained earnings and establishes amounts to be retained in restricted retained earnings, which are not made available in the current dividend period. Priorperiod, and maintains an amount of total retained earnings at least equal to July 2017,our required retained earnings as described in the Bank’s Framework had three categoriesFramework. The methodology may be revised from time to time, and the level of required retained earnings under the methodology may change due to updating data and assumptions used in the methodology. Our retained earnings requirement may be changed at any time. The board of directors periodically reviews the retained earnings methodology and analysis to determine whether any adjustments are appropriate.
We satisfy our retained earnings requirement with both restricted retained earnings: Valuation Adjustments, Other (which represented a targeted amount)earnings (i.e., andamounts related to the Joint Capital Enhancement (JCE(JCE) Agreement). In 2011, the FHLBanks entered into a and unrestricted retained earnings. The JCE Agreement is intended to enhance the capital position of each FHLBank by allocating a portion of each FHLBank’s earnings to a separate retained earnings account at that FHLBank. In accordance with the JCE Agreement, each FHLBank is required to allocatereclassify an amount equal to 20% of its net income each quarter to a separate restricted retained earnings account until the balance of the account, calculated as of the last day of each calendar quarter, equals at least 1% of that FHLBank’sFHLBank's average balance of outstanding consolidated obligations for the previouscalendar quarter. Under the JCE Agreement, these restricted retained earnings will not be available to pay dividends. Under the Framework, the Bank’s required amount ofThe JCE Agreement also provides that amounts in restricted retained earnings was determined using the Bank’s retained earnings methodology. As determined using the Bank’s methodology, from July 2015 to January 2017, the Bank’sin excess of 150% of our restricted retained earnings requirement was $2,000, andminimum (i.e., 1% of our total consolidated obligations calculated as of the last day of each calendar quarter) may be released from January 2017 to July 2017, the Bank’s restricted retained earnings requirement was $2,300.
In July 2017, the Bank’s Board of Directors approved the transfer of all amounts classified as restricted retained earnings, other than the amounts related to the JCE Agreement, to unrestricted retained earnings. As a conforming change related to the transfer, the Bank’s Board of Directors amended the Framework to eliminate two of the categories of restricted retained earnings (Valuation Adjustments and Other) and approved revisions to the Bank’s retained earnings methodology to provide for a required level of total retained earnings of $2,300 for loss protection, capital compliance, and business growth. In January 2018, the methodology was further revised to provide a required level of total retained earnings of $2,500. The Bank satisfies its retained earnings requirement with both restricted retained earnings (i.e., amounts related to the 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.
Dividend Payments – Finance Agency rules state that FHLBanks may declare and pay dividends only from previously retained earnings or current net earnings and may not declare or pay dividends based on projected or anticipated earnings. There is no requirement that the Boardboard of Directorsdirectors declare and pay any dividend. A decision by the Boardboard of Directorsdirectors to declare or not declare a dividend is a discretionary matter and is subject to the requirements and restrictions of the FHLBank Act and applicable requirements under the regulations governing the operations of the FHLBanks.
In addition, Finance Agency rules do not permit the Bank to pay dividends in the form of capital stock if its excess
capital stock exceeds 1% of its total assets. Excess capital stock is defined as the aggregate of the capital stock held by each shareholder in excess of its minimum capital stock requirement, as established by the Bank’sour capital plan. Additional information about our capital, including dividends and retained earnings, is provided in “Item 8. Financial Statements and Supplementary Data – Note 15 – Capital.”
Competition
Demand for Bankour advances is affected by many factors, including the availability and cost of other sources of funding for members, including retail and brokered deposits. We also compete with our members' other suppliers of wholesale funding, both secured and unsecured. These suppliers may include securities dealers, commercial banks, the Federal Reserve System, and other FHLBanks for members with affiliated institutions that are members of other FHLBanks.
Under the FHLBank Act and regulations governing the operations of the FHLBanks, affiliated institutions in different FHLBank districts may be members of different FHLBanks. Members may have access to alternative funding sources through sales of securities under agreements to resell. Some members, particularly larger members, may have access to many more funding alternatives, including independent access to the national and global credit markets. The availability of alternative funding sources for members can significantly influence the demand for our advances and can vary as a result of many factors, including market conditions, members' creditworthiness, members' strategic objectives, and the availability of collateral.
Our ability to compete successfully for the advances business of our members depends primarily on our advances prices, ability to fund advances through the issuance of consolidated obligations at competitive rates, credit and collateral terms, prepayment terms, product features such as embedded option features, ability to meet members' specific requests on a timely basis, capital stock requirements, retained earnings policy, excess capital stock repurchase policies, and dividends.
In addition, the FHLBanks compete with the U.S. Treasury, Fannie Mae, Freddie Mac, and other GSEs, as well as corporate, sovereign, and supranational entities, for funds raised through the issuance of unsecured debt in the national and global debt markets. Increases in the supply of competing debt products may, in the absence of increases in demand, result in higher debt costs or lower amounts of debt issued at the same cost.
Regulatory Oversight, Audits, and Examinations
The FHLBanks are supervised and regulated by the Finance Agency, an independent agency in the executive branch of the U.S. government. The Finance Agency is also responsible for supervising and regulating Fannie Mae and Freddie Mac. The Finance Agency is supported entirely by assessments from the FHLBanks, Fannie Mae, and Freddie Mac. With respect to the FHLBanks, the Finance Agency is charged with ensuring that the FHLBanks carry out their housing finance mission, remain adequately capitalized and able to raise funds in the capital markets, and operate in a safe and sound manner. The Finance Agency also establishes regulations governing the operations of the FHLBanks.
The Finance Agency has broad supervisory authority over the FHLBanks, including, but not limited to, the power to suspend or remove any entity-affiliated party (including any director, officer, or employee) of an FHLBank who violates certain laws or commits certain other acts; to issue and serve a notice of charges upon an FHLBank or any entity-affiliated party; to obtain a cease and desist order, or a temporary cease and desist order, to stop or prevent any unsafe or unsound practice or violation of law, order, rule, regulation, or condition imposed in writing; to issue civil money penalties against an FHLBank or an entity-affiliated party; to require an FHLBank to take certain actions, or refrain from certain actions, under the prompt corrective action provisions that authorize or require the Finance Agency to take certain supervisory actions, including the appointment of a conservator or receiver for an FHLBank under certain conditions; and to require any one or more of the FHLBanks to repay the primary obligations of another FHLBank on outstanding consolidated obligations.
Pursuant to the Housing Act, the Finance Agency exercises prompt corrective action authority over the FHLBanks. The Capital Classification and Prompt Corrective Action rule establishes the criteria for each of the following capital classifications for the FHLBanks specified in the Housing Act: adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under the rule, unless the Finance Agency has reclassified an FHLBank based on factors other than its capital levels, an FHLBank is adequately capitalized if it has sufficient total and permanent capital to meet or exceed both its risk-based and minimum capital requirements;
is undercapitalized if it fails to meet one or more of its risk-based or minimum capital requirements, but is not significantly undercapitalized; is significantly undercapitalized if its total or permanent capital is less than 75% of what is required to meet any of its requirements, but it is not critically undercapitalized; and is critically undercapitalized if its total capital is equal to or less than 2% of its total assets.
By letter dated December 11, 2017, the Director of the Finance Agency notified the Bank that, based on September 30, 2017, financial information, the Bank met the definition of adequately capitalized under the Finance Agency's Capital Classification and Prompt Corrective Action rule.
The Housing Act and Finance Agency regulations govern capital distributions by an FHLBank, which include cash dividends, capital stock dividends, capital stock repurchases, or any transaction in which the FHLBank purchases or retires any instrument included in its capital. Under the Housing Act and Finance Agency regulations, an FHLBank may not make a capital distribution if after doing so it would not be adequately capitalized or would be reclassified to a lower capital classification, or if such distribution violates any statutory or regulatory restriction, and, in the case of a significantly undercapitalized FHLBank, an FHLBank may not make any capital distribution without approval from the Director of the Finance Agency.
To assess the safety and soundness of the Bank, the Finance Agency conducts an annual on-site examination of the Bank and other periodic reviews of its financial operations. In addition, we are required to submit information on our financial condition and results of operations each month to the Finance Agency.
Finance Agency regulations require that the Bank’s strategic business plan describe how our business activities will achieve our mission, consistent with the Finance Agency’s core mission assets (CMA) guidance. The Finance Agency will assess annually each FHLBank’s core mission achievement by determining the ratio of primary mission assets, which includes the average par balances of advances and mortgage loans acquired from members, to the average par balance of consolidated obligations. Our core mission activities primarily include the issuance of advances. In addition, we acquire member assets through the MPF program. The Bank’s CMA ratio was 74.06% for the year ended December 31, 2017, which exceeded the Finance Agency’s recommended minimum ratio of 70%.
The Bank’s capital stock is registered with the Securities and Exchange Commission (SEC) under Section 12(g)(1) of the Securities Exchange Act of 1934 (1934 Act) and, as a result, we are required to comply with thecertain disclosure and reporting requirements of the 1934 Act and to file annual, quarterly, and current reports with the SEC, as well as meet other SEC requirements.
Our Boardboard of Directorsdirectors has an audit committee, and we have an internal audit department. An independent registered public accounting firm audits our annual financial statements. The independent registered public accounting firm conducts these audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Like other federally chartered corporations, the FHLBanks are subject to general congressional oversight. Each FHLBank must submit annual management reports to Congress, the President, the Office of Management and Budget, and the Comptroller General. These reports include a statement of financial condition, a statement of operations, a statement of cash flows, a statement of internal accounting and administrative control systems, and the report of the independent registered public accounting firm on the financial statements.
The U.S. Commodity Futures Trading Commission (CFTC) has been given regulatory authority over derivative transactions pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the FHLBanks are subject to the rules promulgated by the CFTC with respect to their derivatives activities. These rules affect all aspects of the Bank’s derivatives activities by establishing requirements relating to derivatives recordkeeping and reporting, clearing, execution, and margining of uncleared derivative transactions.
The Comptroller General has authority under the FHLBank Act to audit or examine the Finance Agency and the FHLBanks and to determine the extent to which they fairly and effectively fulfill the purposes of the FHLBank Act.
Furthermore, the Government Corporations Control Act provides that the Comptroller General may review any audit of the financial statements conducted by an independent registered public accounting firm. If the Comptroller General conducts such a review, then he or she must report the results and provide his or her recommendations to Congress, the Office of Management and Budget, and the relevant FHLBank. The Comptroller General may also conduct his or her own audit of any financial statements of an FHLBank.
The U.S. Treasury, or a permitted designee, is authorized under the combined provisions of the Government Corporations Control Act and the FHLBank Act to prescribe: the form, denomination, maturity, interest rate, and conditions to which FHLBank debt will be subject; the way and time FHLBank debt is issued; and the price for which FHLBank debt will be sold. The U.S. Treasury may purchase FHLBank debt up to an aggregate principal amount of $4.0 billion pursuant to the standards and terms of the FHLBank Act.
Human Capital Resources
AllOur human capital significantly contributes to the Bank’s success in achieving strategic business objectives. In managing our human capital, we focus on our workforce profile and the various programs and philosophies described below.
Workforce Profile – Our workforce is primarily comprised of corporate employees, with our principal operations centralized in one location. As of December 31, 2023, we had 319 employees. The Bank supplements its employees with independent contractors as needed. As of December 31, 2023, approximately 47.0% of our workforce identify as female, 52.0% identify as male, and 1.0% declined to state a gender. Approximately 68.0% of our workforce identify as an ethnic minority, and 2.2% declined to state an ethnicity. As of December 31, 2023, the average tenure of our employees was 8.0 years. Due to the stability and longevity of the FHLBanks' financial institution members are subjectBank, coupled with ongoing economic uncertainty, the Bank experienced reduced turnover in 2023 of 11.0% as opposed to federal or state laws14.8% in 2022. We strive to both develop talent within the organization and regulations,to supplement our talent pool with external hires. We believe that developing internal talent results in institutional strength and changes to these laws or regulations or to related policies might adversely or favorably affectcontinuity and promotes engagement and commitment among our employees, which advances and broadens the businessoverall success of the FHLBanks.organization. Attracting new talent contributes to fresh perspectives, new ideas, continuous improvement, and our goal of supporting a diverse and inclusive workforce. There are no collective bargaining agreements with our employees.
Total Rewards – To achieve our strategic business initiatives and enhance business performance, we seek to attract, develop, and retain talented employees. We accomplish this through a combination of development programs and benefits, and by recognizing and rewarding performance. Specifically, our programs include:
•Cash compensation that includes a competitive base salary and performance-based incentives;
•Benefits:
◦Health insurance, life and accidental death and dismemberment insurance, supplemental life insurance, 401(k) retirement savings plan with employer match, pension benefits, healthcare concierge;
◦Wellness program, including a wellness reimbursement, employee assistance program, and interactive education sessions;
◦Time away from work, including time off for vacation, illness, federal holidays, and volunteer opportunities;
•Culture: includes employee resource groups (ERGs), various cultural diversity, equity, and inclusion initiatives, and a mentorship program;
•Work/Life balance: includes paid salary continuation for short-term disability, parental, military, and bereavement leave, and jury duty;
•Development programs and training: leadership development, competency knowledge center learning modules, tuition reimbursement program, internal and external educational and development opportunities, relevant to employees’ job responsibilities; and
•Management succession planning: our board of directors and leadership actively engage in management succession planning, with a review of our senior management team at least annually.
Our performance management framework includes goal setting and an annual performance review process. For 2023, the Board adopted four corporate goals: the Business and Financial goal, the Risk Management goal, the Community Investment goal, and the Diversity, Equity, and Inclusion (DEI) and People goal. The Bank also establishes individual goals for executives consistent with the Bank’s strategic plan. The Bank’s 2023 strategic objectives were to: (i) enhance membership value and business utilization; (ii) continually improve organizational performance; (iii) attract, develop, and retain high performing talent; and (iv) expand community investment impact across the district. Overall annual ratings are calibrated across the leadership team, with base salary and incentive recommendations differentiated based upon employee contributions and overall performance.
We are committed to the health, safety, and wellness of our employees. We continue to monitor the COVID-19 levels within the San Francisco Bay Area, and will follow relevant guidance, safety protocols, and procedures in compliance with government regulations. This includes ensuring all employees are able to work remotely when needed and implementing additional safety measures for employees to perform critical on-site work.
Diversity, Equity, and Inclusion Program – Diversity, Equity, and Inclusion (DEI) is a strategic business priority for the Bank. Our Chief Diversity Officer is a member of the senior management team, reports to the President and Chief Executive Officer, and serves as a liaison to the board of directors. Equity is embedded in the Bank’s workforce management and business activities. We recognize that diversity increases our capacity for innovation and creativity and that inclusion allows us to leverage the unique perspectives of all employees, facilitates a sense of belonging, and strengthens our retention efforts. We operationalize our commitment through the development and execution of a three-year DEI Strategic Plan that includes quantifiable metrics to measure its success, and we report regularly on these metrics to management and the board of directors. Additionally, we offer a range of opportunities for our employees to connect and grow personally and professionally through our Enterprise Diversity Committee, Workforce DEI Plan, and ERGs. We consider learning an important component of our DEI Strategic Plan and regularly offer educational opportunities to our employees and evaluate inclusive behaviors as part of our annual performance management process.
Available Information
The SEC maintains a website at www.sec.gov that contains all electronically filed or furnishedSEC reports, including our annual reports on Form 10-K, our quarterly reports on Form 10-Q, and our current reports on Form 8-K, as well as any amendments. On our website at www.fhlbsf.com, we provide a link to the page on the SEC website that lists all of these reports. These reports may also be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. (Further information about the operation of the Public Reference Room may be obtained at 1-800-SEC-0330.) In addition, we provide direct links from our website to our annual report on Form 10-K and our quarterly reports on Form 10-Q on the SEC website as soon as reasonably practicable after electronically filing or furnishing the reports to the SEC. (Note: The website addresses of the SEC and the Bank have been included as inactive textual references only. Information on those websites is not part of this report.) The Bank is exempt from certain SEC statutes and regulations and the filing of certain reports with the SEC, including proxy statements, otherwise required by public companies whose securities are registered with the SEC.
Employees
We had 287 employees at December 31, 2017. Our employees are not represented by a collective bargaining unit, and we consider our relationship with our employees to be satisfactory.
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ITEM 1A. | ITEM 1A. RISK FACTORS |
The following discussion summarizes certain of the risks and uncertainties that the Federal Home Loan Bank of San Francisco (Bank)(Bank or we) faces. The list is not exhaustive and there may be other risks and uncertainties that are not described below that may also affect our business. Any of these risks or uncertainties, if realized, could negatively affect our financial condition or results of operations or limit our ability to fund advances, pay dividends, or redeem or repurchase capital stock.
Market, Financial, and Economic Risks
Economic weaknessNatural disasters, pandemics, terrorist attacks, or other catastrophic events could adversely affect our operations, business activities, results of operations, and financial condition.
Natural disasters, widespread public health emergencies (such as pandemics), terrorist attacks, civil unrest, geopolitical instability or conflicts (including the ongoing hostilities in Eastern Europe and the Middle East), trade disruptions, economic or other sanctions, or other unanticipated or catastrophic events could create economic and financial disruptions and uncertainties, which may lead to reduced demand for advances and an increased risk of credit losses for the Bank and may adversely affect its cost of funding or access to funding. Negative trends in the global economy and political climate could influence, among other business activities, member borrowing activity and lending and investment patterns. These events may also lead to operational difficulties that could adversely affect the businessability of manythe Bank and the Office of our membersFinance to conduct and manage their businesses. Any of these factors could adversely affect our business activities and results of operations.
Our business and results of operations are sensitive to conditions in the housing and mortgage markets, as well as general business and economic conditions. While economic conditions improved and credit standards eased in 2017, geopolitical instability, trade disruptions, or a sustained capital market correction could weaken consumer and business confidence and depress personal consumption and business investment. These factors could, in turn, adversely affect overall economic and housing market conditions. If economic and housing market conditions deteriorate, the Bank’s business and results of operations could be adversely affected.
Adverse trends in the mortgage lending sector, including declines in housing prices or deterioration in loan performance trends, could trigger a reduction in the value of collateral pledged to the Bank to secure member credit and in the fair value of the Bank’s mortgage-backed securities (MBS) investments.
Changing economic conditions may slow or reverse home price appreciation experienced since 2012 and negatively affect the Bank’s MBS and mortgage loan portfolios, adversely affecting our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
Gains in home price appreciation were led, in part, by highly accommodative global monetary policy and an improving employment market. However, there can be no assurance that these conditions will continue. The rebound in developed market economies may lead global central banks to pull back from negative nominal and real rates. GSE reform could substantially raise the cost of secondary market mortgage financing. Recent tax changes have reduced the tax incentive for home ownership slightly. A significant decline in housing prices could adversely affect the Bank’s private-label residential MBS (PLRMBS) and mortgage loan portfolio, which may adversely affect the Bank’s financial condition, results of operations, ability to pay dividends, and ability to redeem or repurchase capital stock.
Market uncertainty and volatility may adversely affect our business, profitability, or results of operations.
Adverse and volatile conditions in the housing, mortgage, and mortgagefinancial markets or GSE restructuring that weakens the government’s commitment to encourage home ownership as a pillar of financial security, could result in a decrease in the availability of credit and liquidity withinresulting in a disruption in the mortgage industry causing disruptions inor the operationsfuture receivership or failure of mortgage originators,impacted financial institutions, including some of our members. We continue to be subject to potential adverse effects on our financial condition, results of operations, ability to pay dividends, and ability to redeem or repurchase capital stock should economic conditions significantly deteriorate.
Weaknesses in the housing and mortgage markets may undermine the need for wholesale funding and have a negative impact on the demand for advances.
Recent changesA reduction in tax law that reduced the tax advantages to home ownership may reduce mortgage lending ator mortgage assets held by member institutions and may reduce their demand for wholesale funding. This could result in a decline in advance levels and adversely affect our financial condition and results of operations.
Changes in or limits on our ability to access the capital markets could adversely affect our financial condition, results of operations, or ability to fund advances, pay dividends, or redeem or repurchase capital stock.
Our primary source of funds is the sale of Federal Home Loan Bank (FHLBank) System consolidated obligations in the capital markets. Our ability to obtain funds through the sale of consolidated obligations depends in part on prevailing conditions in the capital markets, such as investor demand and liquidity in the financial markets. The sale of FHLBank System consolidated obligations can also be influenced by factors other than conditions in the capital markets, including legislative and regulatory developments and government programs and policies that affect the relative attractiveness of FHLBank System consolidated obligations. In addition, the level of dealer participation and support also affect liquidity in the agency debt markets. Based on these factors, wethe availability of funds may not be able to obtainbecome limited or terms may become less acceptable. If funding on acceptable terms. If we cannot access funding on acceptableor terms when needed,are significantly adversely affected, our ability to support and continue our operations could be adversely affected, which could negatively affect our financial condition, results of operations, or ability to fund advances, pay dividends, or redeem or repurchase capital stock.
Limitations on the payment of dividends and repurchase of excess capital stock may adversely affect the attractiveness to members of the Bank's business model.
Our business model is based on the premise that we maintain a balance between our objective to promote housing, homeownership, and community and economic development through our activities with members and our objective to provide a return on the private capital provided by our members. We achieve this balance by delivering low-cost
credit to help our members meet the credit needs of their communities while striving to pay members a reasonable return on their investment in the Bank’s capital stock. Our financial strategies are designed to enable us to safely expand and contract our assets, liabilities, and capital as our member base and our members' credit needs change. Our capital increases when members are required to purchase additional capital stock as they increase their advances, and it contracts when we repurchase excess capital stock from members as their advances decline. In addition, the Bank manages its retained earnings to ensure compliance with regulatory capital requirements in the event of significant growth in member business. As a result of these strategies, we have historically been able to achieve our mission by meeting member credit needs and maintaining our strong regulatory capital position while paying dividends (including dividends on mandatorily redeemable capital stock) and repurchasing and redeeming excess capital stock. Limitations on the payment of dividends and the repurchase of excess capital stock may diminish the value of membership from the perspective of a member.
Changes in the credit ratings on FHLBank System consolidated obligations may adversely affect the cost of consolidated obligations.
FHLBank System consolidated obligations are rated Aaa/P-1 with a stable outlook by Moody's Investors Service (Moody's) and AA+/A-1+ with a stable outlook by S&P Global Ratings (S&P). Rating agencies may from time to time change a rating or issue negative reports. Because all of the FHLBanks have joint and several liability for all FHLBank consolidated obligations, negative developments at any FHLBank may affect these credit ratings or result in the issuance of a negative report regardless of our own financial condition and results of operations. In addition, because of the FHLBanks' GSE status, the credit ratings of the FHLBank System and the FHLBanks are generally constrained by the long-term sovereign credit rating of the United States, and any downgrade in that sovereign credit rating may result in a corresponding downgrade to the credit ratings of FHLBank System consolidated obligations. Any adverse rating change or negative report may adversely affect our cost of funds and the FHLBanks' ability to issue consolidated obligations on acceptable terms, which could also adversely affect our financial condition or results of operations or limit our ability to make advances on acceptable terms, pay dividends, or redeem or repurchase capital stock.
Changes in federal fiscal and monetary policy could adversely affect our business or results of operations.
Our business and results of operations are significantly affected by the fiscal and monetary policies of the federal government and its agencies, including the Federal Reserve Board, which regulates the supply of money and credit in the United States. The Federal Reserve Board's policies directly and indirectly influence the yield on interest-earning assets and the cost of interest-bearing liabilities, which could adversely affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
Changes in interest rates could adversely affect our financial condition, results of operations, member demand for advances, or ability to fund advances on acceptable terms, pay dividends, or redeem or repurchase capital stock.
We realize income primarily from the spread between interest earned on our outstanding advances and investments and interest paid on our consolidated obligations and other liabilities. Although we use various methods and procedures to monitor and manage our exposure to changes in interest rates, we may experience instances when our interest-bearing liabilities will be significantly more sensitive to changes in interest rates than our interest-earning assets, or vice versa. In either case, interest rate movements contrary to our position could negatively affect our financial condition, results of operations, orour ability to pay dividends or redeem or repurchase capital stock. Moreover,stock, or investor demand for consolidated obligations. During 2023 the U.S. economy continued to experience rising interest rates. The impact of changes in interest rates on mortgage-related assets can be exacerbated by prepayment risks, which areprepayments, with the risk that the assets will be refinanced by the obligor in low interest rate environments and the risk that the assets will remain outstanding longer than expected at below-market yields when interest rates increase. The Federal Reserve Bank’s policies directly and indirectly influence interest rates on the Bank’s assets and liabilities and could adversely affect the demand for advances and therefore adversely impact the Bank’s financial condition and results of operations. Efforts by the Federal Reserve Board to ease inflation, such as continued increases in policy interest rates, have contributed to volatility in the financial markets and uncertainties about the economic outlook.
Our exposure to credit risk could adversely affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
We assume secured and unsecured credit risk associated with the risk that a borrower or counterparty could default, and we could suffer a loss if we were not able to fully recover amounts owed to us on a timely basis. In addition, we have exposure to credit risk because the market value of an obligation may decline as a result of deterioration in the creditworthiness of the obligor or the credit quality of a security instrument. We have a high concentration of credit risk exposure to financial institutions.certain institutions and their affiliates. Significant credit losses or heightened focus on our credit exposure to individual members due to market events could have an adverse effect on our financial condition, reputation, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
We depend on institutional counterparties to provide credit obligations that are critical to our business. Defaults by one or more of these institutional counterparties on their obligations to the Bank could adversely affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
We face the risk that one or more of our institutional counterparties may fail to fulfill contractual obligations to us. The primary exposures to institutional counterparty risk are with unsecured investment counterparties, derivative counterparties, custodians, mortgage servicers that service the loans we hold as collateral for advances, and third-party providers of supplemental or primary mortgage insurance for mortgage loans purchased under the Mortgage Partnership Finance® (MPF®) Program. A default by a counterparty could result in losses to the Bank if our credit exposure to the counterparty was under-collateralized or our credit obligations to the counterparty were over-collateralized, and could also adversely affect our ability to conduct our operations efficiently and at cost-effective rates, which in turn could adversely affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock. (“Mortgage Partnership Finance” and “MPF” are registered trademarks of the FHLBank of Chicago.)
We rely on derivative transactions to reduce our market risk and funding costs, and changes in our credit ratings or the credit ratings of our derivative counterparties or changes in the legislation or the regulations affecting how derivatives are transacted may adversely affect our ability to enter into derivative transactions on acceptable terms.
Our financial strategies are highly dependent on our ability to enter into derivative transactions on acceptable terms to reduce our market risk and funding costs. We currently have a long-term credit rating of Aaa with a stable outlook from Moody's and AA+ with a stable outlook from S&P. All of our derivative counterparties or guarantors currently have investment grade long-term credit ratings from Moody's and S&P. Rating agencies may from time to time change a rating or issue negative reports, or other factors may raise questions regarding the creditworthiness of a counterparty, which may adversely affect our ability to enter into derivative transactions with acceptable counterparties on satisfactory terms in the quantities necessary to manage our interest rate risk and funding costs effectively. Changes in legislation or regulations affecting how derivatives are transacted may also adversely affect our ability to enter into derivative transactions with acceptable counterparties on satisfactory terms. Any of these changes could negatively affect our financial condition, results of operations, or ability to make advances on acceptable terms, pay dividends, or redeem or repurchase capital stock.
Insufficient collateral protection could adversely affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
We require that all outstanding advances be fully collateralized.collateralized by eligible collateral types mostly with a nexus to housing. In addition, for mortgage loans that we purchase under the MPF Program, we require that the participating financial institutions fully collateralize the outstanding credit enhancement obligations not covered through the purchase of supplemental mortgage insurance. We evaluate the types of collateral pledged by borrowers and participating financial institutions and assign borrowing capacities to the collateral based on the risks associated with each type of collateral. If we have insufficient collateral before or after an event of payment default by the borrower, or we are unable to liquidate the collateral for the value we assigned to it in the event of a payment default by a borrower, we could experience a credit loss on advances, which could adversely affect our financial condition, reputation, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
Changes in the credit ratings on FHLBank System consolidated obligations may adversely affect the cost of consolidated obligations.
FHLBank System consolidated obligations are rated AA+/A-1+ by S&P Global Ratings as of July 31, 2023, and Aaa/P-1 by Moody’s Investors Service as of January 24, 2024. Rating agencies may from time to time change a rating or issue negative reports. Because all of the FHLBanks have joint and several liability for all FHLBank consolidated obligations, negative developments at any FHLBank may affect these credit ratings or result in the issuance of a negative report regardless of our own financial condition and results of operations. In addition, because of the FHLBanks’ GSE status, the credit ratings of the FHLBank System and the FHLBanks are generally constrained by the long-term sovereign credit rating of the United States, and any downgrade in that sovereign credit rating may result in a corresponding downgrade to the credit ratings of FHLBank System consolidated obligations. For example, downgrades to the U.S. sovereign credit rating or outlook, which have occurred in the past, may occur again if the U.S. government continues to fail to adequately address, based on the credit rating agencies’ criteria, its fiscal budget deficit or statutory debt limits. Fitch Ratings downgraded the U.S. sovereign credit rating in August 2023, and Moody’s changed the outlook of its rating on the U.S. from stable to negative. Any adverse rating change or negative report may adversely affect our cost of funds and the FHLBanks’ ability to issue consolidated obligations on acceptable terms, which could also adversely affect our financial condition or results of operations or limit our ability to make advances on acceptable terms, pay dividends, or redeem or repurchase capital stock.
WeUnder certain extreme stress conditions, we may not be able to meet our obligations as they come due or meet the credit and liquidity needs of our members in a timely and cost-effective manner.
We seek to be in a position to meet our members'members’ credit and liquidity needs and pay our obligations without maintaining excessive holdings of low-yielding liquid investments or having to incur unnecessarily high borrowing costs. In addition, we maintain a contingency liquidity plan designed to enable us to meet our obligations and the credit and liquidity needs of members in the event of operational disruptions or short-term disruptions in the capital markets. OurUnder certain extreme stress conditions, our efforts to manage our liquidity position, including our contingency liquidity plan, may not enable us to meet our obligations and the credit and liquidity needs of our members, which could have an adverse effect on our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
Strategic Execution Risks
Limitations on the payment of dividends and repurchase of excess stock may adversely affect the attractiveness of our business model to members.
Our business model is based on the premise that we maintain a balance between our objective to promote housing, homeownership, and community and economic development through our activities with members and our objective to provide a return on the private capital provided by our members. We achieve this balance by delivering low-cost credit to help our members meet the credit needs of their communities while striving to pay members a reasonable return on their investment in our capital stock. Our financial strategies are designed to enable us to safely expand and contract our balance sheet as our member base and our members’ credit needs change. In addition, we manage our retained earnings to ensure compliance with regulatory capital requirements in the event of significant growth in member business or in the event of significant Bank financial distress. As a result of these strategies, we have historically been able to achieve our mission by meeting member credit needs and maintaining our adequately capitalized position while paying dividends (including dividends on mandatorily redeemable capital stock) and repurchasing and redeeming excess stock. Limitations on the payment of dividends and the repurchase of excess stock may diminish the value of membership from the perspective of a member.
We face competition for advances and access to funding, which could adversely affect our business.
Our primary business is making advances to our members. We compete with other suppliers of wholesale funding, both secured and unsecured, including investment banks, commercial banks, the Federal Reserve Banks, and, in certain circumstances, other FHLBanks. Our members may have access to alternative funding sources, including independent access to deposits, along with the national and global credit markets. These alternative funding sources may offer more favorable terms than we do on our advances, including more flexible credit or collateral standards. In addition, many of our competitors are not subject to the same regulations as the FHLBanks, which may enable those competitors to offer products and terms that we are not able to offer.
The FHLBanks also compete with the U.S. Treasury, Federal Reserve, Fannie Mae, Freddie Mac, and other GSEs, as well as corporate, sovereign, and supranational entities, for funds raised through the issuance of unsecured debt in the national and global debt markets. Increases in the supply of competing debt products may, in the absence of increases in demand, result in higher debt costs or lower amounts of debt issued at the same cost. Increased competition could adversely affect our ability to access funding, reduce the amount of funding available to us, or increase the cost of funding available to us. Any of these results could adversely affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
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Our efforts to make advances pricing attractive to our members may affect earnings.
A decision to lower advances prices to maintain or gain volume or increase the benefits to borrowing members could result in lower earnings, which could adversely affect the dividends on our capital stock.
If the Bank’s activity stock requirement is below the Bank’s regulatory capital requirements, a significant increase in business growth may require the Bank to increase its activity stock requirement in the future.
An activity stock requirement that is below the Bank’s regulatory capital requirement requires the Bank to maintain a certain level of retained earnings for capital compliance and business growth. Depending on the level of the Bank’s retained earnings and business growth and the Bank’s capital management strategies, the Bank may be required to increase its activity stock requirement in the future.
We have a high concentration of advances and capital with fivecertain institutions and their affiliates, and a loss or change of business activities with any of these institutions, or a material or prolonged decline in demand for advances, could adversely affect our results of operations and financial condition.
Pursuant to our federal charter, membership in the Bank is generally limited to federally-insured depository institutions, insurance companies, and community development financial institutions in our three-state district (see “Item 8. Financial Statements and Supplementary Data – Notes to Financial Statements – Background Information” for more information). Given this limitation to membership eligibility, a loss of members or decreased business activities with members due to withdrawal from membership, acquisition by a nonmember, or liquidation, receivership, or failure could negatively impact our financial condition and results of operations.
The Bank’s ability to fulfill its mission and achieve its business and financial objectives is influenced by its level of membership and advance balances. We currently have a high concentration of advances and capital with certain institutions and their affiliates. For instance, as a result of the receivership and subsequent acquisition of one of our members in May 2023 (see “Item 8. Financial Statements and Supplementary Data – Note 5 – Advances – Concentration Risk” for more information), as of December 31, 2023, a single nonmember accounted for 39% of advances outstanding. Because this borrower is a nonmember, when these advances either mature or are prepaid they cannot be replaced by this borrower, which will adversely affect our level of advance balances in the future.
In addition, mergers and acquisitions have been or could be announced involving certain of the Bank’s members, including some of the Bank’s larger borrowers. The reduction in advance balances and total assets associated with this activity could adversely affect our results of operations, net income, financial condition, and ability to pay dividends. Furthermore, future receiverships or failures of financial institutions may adversely impact our advance levels and our financial condition and results of operations. Although our business model is designed to enable us to expand and contract our balance sheet as our members’ credit needs change, a lack of sufficient advance balances or a prolonged material decline in advances could adversely affect our total assets, net income, financial condition, results of operations, and ability to pay dividends.
A prolonged decline and lack of mortgage-backed securities purchases could adversely affect our results of operations, financial condition, or ability to pay dividends or redeem or repurchase capital stock.
We have a high concentration of advances and capital with five institutions and their affiliates. AllThe primary source of the institutions may prepay or repay advances as they come due. If no other advances or investments are made to replaceBank’s earnings is interest income, which includes interest income on mortgage-backed securities. At the prepaid and repaid advances oftime these institutions, it would result in a significant reduction of our total assets. The reduction in advances could result in a reduction of capital assecurities mature, the Bank repurchases the resulting excess capital stock, at the Bank’s discretion, or redeems the excess capital stock after the expiration of the relevant five-year redemption period. The reduction in assets and capital could reduce the Bank’s net income.
The timing and magnitude of the impact of a reductionmay be limited in the amountpurchase of advancesother mortgage-backed securities due to, these institutions would dependamong other things, regulatory guidance on a number of factors, including:
the amount and period of time over which the advances are prepaid or repaid,
the amount and timing of any corresponding decreases in capital stock,
the profitability of the advances,
the amount and profitability of our investments,
the extent to which consolidated obligations mature as the advances are prepaid or repaid, and
our ability to extinguish consolidated obligations or transfer them to other FHLBanks and the associated costs of extinguishing or transferring the consolidated obligations.
Additional information regarding concentration risk is set forth in “Item 8. Financial Statements and Supplementary Data – Note 8 – Advances – Credit and Concentration Risk.”
A material and prolonged decline in advances could adversely affect our results of operations, financial condition, or ability to pay dividends or redeem or repurchase capital stock.
If members continue to experience high levels of liquidity, we could experience decreases in members’ use of Bank advances. Also, nonmembers (including former members and member successors) are not eligible to borrow new advances from the Bank or renew existing advances as they mature. Although the Bank’s business model is designed to enable us to safely expand and contract our assets, liabilities, and capital as our members’ credit needs change, a prolonged material decline in advances could affect our results of operations, financial condition, or ability to pay dividends or redeem or repurchase capital stock.
Volatile market conditions increase the risk that our financial models will produce unreliable results.
We use market-based information as inputs to our financial models, which we use to inform our operational decisions and to derive estimates for use in our financial reporting processes. While model inputs based on economic conditions and expectations are regularly evaluated and adjusted to changing conditions, sudden significant changes in these conditions may increase the risk that our models could produce unreliable results or estimates that vary widely or prove to be inaccurate.
MBS purchases by FHLBanks.
We may become liable for all or a portion of the consolidated obligations for which other FHLBanks are the primary obligors.
As provided by the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), and regulations governing the operations of the FHLBanks, all FHLBanks have joint and several liability for all FHLBank consolidated obligations, which are backed only by the financial resources of the FHLBanks. The joint and several liability regulation authorizes the Federal Housing Finance Agency (Finance Agency) to require any FHLBank to repay all or any portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor, whether or not the other FHLBank has defaulted in the payment of those obligations and even though the FHLBank making the repayment received none of the proceeds from the issuance of the obligations. The likelihood of triggering the Bank'sour joint and several liability obligation depends on many factors, including the financial condition and financial performance of the other FHLBanks. If we are required by the Finance Agency to repay the principal or interest on consolidated obligations for which another FHLBank is the primary obligor, our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock could be adversely affected.
If the Bank or any other FHLBank has not paid the principal or interest due on all consolidated obligations, we may not be able to pay dividends or redeem or repurchase any shares of our capital stock.
If the principal or interest due on any consolidated obligations has not been paid in full or is not expected to be paid in full, we may not be able to pay dividends on our capital stock or redeem or repurchase any shares of our capital stock. If another FHLBank defaults on its obligation to pay principal or interest on any consolidated obligations, the
regulations governing the operations of the FHLBanks provide that the Finance Agency may allocate outstanding principal and interest payments among one or more of the remaining FHLBanks on a pro rata basis or any other basis the Finance Agency may determine. Our ability to pay dividends or redeem or repurchase capital stock could be affected not only by our own financial condition, but also by the financial condition of one or more of the other FHLBanks.
We are affected by federal laws and regulations, which could change or be applied in a manner detrimental to our operations.
The FHLBanks are GSEs, organized under the authority of and governed by the FHLBank Act, and, as such, are also governed by the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 and other federal laws and regulations. From time to time, Congress has amended the FHLBank Act and adopted other legislation in ways that have significantly affected the FHLBanks and the manner in which the FHLBanks carry out their housing finance mission and business operations. New or modified legislation enacted by Congress or regulations or policies of the Finance Agency could have a negative effect on our ability to conduct business or on our cost of doing business. In addition, new or modified legislation or regulations governing our members may affect our ability to conduct business or our cost of doing business with our members. Because of the recent change in the leadership of the U.S. government administration, there are additional uncertainties in the legislative and regulatory environment as well.
Changes in statutory or regulatory requirements or policies or in their application could result in changes in, among other things, the FHLBanks' cost of funds, capital requirements, accounting policies, liquidity management, debt issuance, permissible business activities, and the size, scope, and nature of the FHLBanks' lending, investment, and mortgage purchase program activities. These changes could negatively affect our financial condition, results of operations, ability to pay dividends, or ability to redeem or repurchase capital stock. In addition, given the Bank's relationship with other FHLBanks, we could be affected by events other than another FHLBank's default on a consolidated obligation. Events that affect other FHLBanks, such as member failures or capital deficiencies at another FHLBank, could lead the Finance Agency to require or request that an FHLBank provide capital or other assistance to another FHLBank, purchase assets from another FHLBank, or impose other forms of resolution affecting one or more of the other FHLBanks. If the Bank were called upon by the Finance Agency to take any of these steps, it could affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
We could change our policies, programs, and agreements affecting our members.
We maycould change our policies, programs, and agreements affecting our members from time to time, including, without limitation, policies, programs, and agreements affecting the availability of and conditions for access to our advances and other credit products, the Affordable Housing Program (AHP), dividends, the repurchase of capital stock, and other programs, products, and services. These changes could cause our members to obtain financing from alternative sources, which could adversely affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock. In addition, changes to our policies, programs, and agreements affecting our members could adversely affect the value of membership from the perspective of a member.
The failure of the FHLBanks to set aside, in the aggregate, at least $100 million annually for the AHP could result in an increase in our AHP contribution, which could adversely affect our results of operations or ability to pay dividends or redeem or repurchase capital stock.
The FHLBank Act requires each FHLBank to establish and fund an AHP. Annually, the FHLBanks are required to set aside, in the aggregate, the greater of $100 million or 10% of their current year's net earnings (income before interest expense related to dividends paid on mandatorily redeemable capital stock and the assessment for the AHP) for their AHPs. If the FHLBanks do not make the minimum $100 million annual AHP contribution in a given year, we could be required to contribute more than 10% of our current year’s net earnings to the AHP. An increase in our
AHP contribution could adversely affect our results of operations or ability to pay dividends or redeem or repurchase capital stock.
Operational Risks
We rely heavily on information systems and other technology. A failure, interruption, or security breach, including events caused by cyberattacks, of our information systems or those of critical vendors and third parties, such as the Federal Reserve Banks, could disrupt our business or adversely affect our financial condition, results of operations, or reputation.
We rely heavily on our information systems, technology vendors, and third parties to conduct and manage our business. If we or one of our critical vendors experience a failure, interruption, or security breach in any information systems or other technology, including events caused by cyberattacks, we may be unable to conduct and manage our business effectively. In addition, such a failure, interruption, or security breach could result in significant losses, a loss of personal and confidential information, or reputational damage. Cyberattacks, in particular those on financial institutions and financial market infrastructures, have become more frequent, sophisticated, and difficult to detect or prevent. In the event of a breach resulting in loss of data, such as personally identifiable information or other such data protected by data privacy or other laws, we may be liable for damages, fines, and penalties for such losses under applicable regulatory frameworks despite not being able to limit our liability or damages in the event of such a loss. Furthermore, there have been recent significant advancements in the development of generative artificial intelligence (AI) and predictive data analytics, such as the creation of large language models and machine-learning techniques. The potential integration of AI by some of the Bank’s third-party vendors, and use of AI by outside parties, including potential threat actors, presents risks and challenges that could affect our business in a multitude of unforeseen ways. While the Bank does not currently utilize AI in its own information systems and technology
infrastructure, the use of AI by outside parties, including some of the Bank’s vendors and suppliers, may result in reputational or competitive harm, disruption of business operations, regulatory action, and/or legal liability to the Bank. In addition, significant initiatives undertaken by the Bank to replace information systems or other technology infrastructures may subject the Bank to a temporary risk of failure or interruption while we are in the process of implementing these new systems or technology infrastructures. Additionally, we maintain two geographically dispersed, colocation data centers which are on electrical grids that are separate from each other and from our principal offices and off-site business continuity facilities. Both data centers are subject to periodic testing to demonstrate adequate operational capability. Although we have implemented a business continuity plan, we may not be able to prevent, swiftly and adequately address, or otherwise mitigate the negative effects of any failure, interruption, or breach. Any failure, interruption, or breach could adversely affect our member business, member relations, risk management, reputation, or profitability, which could then negatively affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
We may fail to identify and manage risks related to a variety of aspects of our business, including operational risk, legal and compliance risk, interest-rate risk, liquidity risk, market risk, and credit risk.
We have adopted policies, procedures, and controls, and use systems and technology, and have a robust risk governance framework, designed to aid in monitoring and managing these risks. However, we cannot provide complete assurance that these controls, procedures, policies, systems, technology, and risk governance framework, are adequate to identify and manage all the risks inherent in the Bank’s business, including, for example, risks that arise as a result of changes in the business. Failed or inadequate controls, risk management practices, systems, and technology, and failure to adhere to applicable policies and procedures, and the overall risk governance framework, could have an adverse effect on our financial condition and results of operations.
The inability to attract and retain skilled key personnel could adversely affect the business, workforce, and operations of the Bank.
We rely on key personnel and a competent, diverse and inclusive workforce to manage our business and conduct our operations. Competition for key skilled personnel has been intense within the financial services industry and businesses outside the financial services industry, including the technology sector. Failure to attract and retain key skilled personnel, maintain a diverse and inclusive workforce, or to develop and implement an effective succession plan, could adversely affect the business and operations of the Bank.
Volatile market conditions increase the risk that our financial models will produce unreliable results.
We use market-based inputs in the financial models that we use to inform our operational decisions and to derive estimates for use in our financial reporting processes. While model inputs based on economic conditions and expectations are regularly evaluated and adjusted to changing conditions, sudden significant changes in these conditions may increase the risk that our models could produce unreliable results or estimates that vary widely or prove to be inaccurate.
Restrictions on the redemption, repurchase, or transfer of our capital stock could reduce our ability to redeem or repurchase a member’s capital stock.
Under the Gramm-Leach-Bliley Act of 1999, Finance Agency regulations, and our capital plan, our capital stock must be redeemed upon the expiration of the relevant five-year redemption period, subject to certain conditions. Capital stock may become subject to redemption following a five-year redemption period after a shareholder provides a written redemption notice to the Bank; gives notice of intention to withdraw from membership; attains nonmember status by merger or acquisition, charter termination, or other involuntary membership termination; or after a receiver or other liquidating agent for a member transfers the member's Bank capital stock to a nonmember entity. Only capital stock that is not required to meet the membership capital stock requirement of a shareholder or to support its outstanding activity with the Bank (excess stock) may be redeemed at the end of the redemption period. In addition, we may elect to repurchase some or all of the excess stock of a shareholder at any time at our sole discretion.
There is no guarantee, however, that we will be able to redeem capital stock held by a shareholder even at the end of the redemption period or to repurchase excess stock. If the redemption or repurchase of the capital stock would cause us to fail to meet our minimum regulatory capital requirements or cause the shareholder to fail to maintain its minimum investment requirement, then the redemption or repurchase is prohibited by Finance Agency regulations and our capital plan. In addition, since our capital stock may only be owned by our members (or, under certain circumstances, former members and certain successor institutions), and our capital plan requires our approval before a shareholder may transfer any of its capital stock to another member or nonmember shareholder, we cannot provide assurance that a shareholder would be allowed to transfer any excess stock to another member or nonmember shareholder at any time.
Regulatory Risks
Changes in federal fiscal and monetary policy could adversely affect our business or results of operations.
Our business and results of operations are significantly affected by the fiscal and monetary policies of the federal government and its agencies, including the Federal Reserve Board, which regulates the supply of money and credit in the United States. The Federal Reserve Board’s policies directly and indirectly influence the yield on interest-earning assets and the cost of interest-bearing liabilities, and could adversely affect demand for advances and for consolidated obligations as well as our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
We rely on derivative transactions to reduce our market risk and funding costs, and changes in our credit ratings or the credit ratings of our derivative counterparties, or changes in the legislation or the regulations affecting derivatives, may adversely affect our ability to enter into derivative transactions on cost-effective terms.
Our financial strategies are highly dependent on our ability to enter into derivative transactions on acceptable terms to reduce our market risk and funding costs. Rating agencies may from time to time change a rating or issue negative reports, which may adversely affect our ability to enter into derivative transactions on satisfactory terms in the quantities necessary to manage our interest rate risk and funding costs effectively. Changes in legislation or regulations affecting derivatives may also adversely affect our ability to enter into derivative transactions with acceptable counterparties on satisfactory terms. Any of these changes could negatively affect our financial condition, results of operations, or ability to make advances on acceptable terms, pay dividends, or redeem or repurchase capital stock.
We are affected by federal and state laws and regulations that could change or be applied in a manner detrimental to our operations, or to the ability or motivation to invest in the Bank or use our products and services.
The FHLBanks are GSEs, organized under the authority of and governed by the FHLBank Act, and, as such, are also governed by the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 and other federal laws and regulations. From time to time, Congress has amended the FHLBank Act and amended or enacted other legislation in ways that have significantly affected the FHLBanks and the manner in which the FHLBanks carry out their housing finance mission and business operations. New or modified legislation enacted by Congress or states and regulations or policies implemented by the Finance Agency could have a negative effect on our ability to conduct business or on our cost of doing business, or affect our members’ ability or motivation to acquire or own our capital stock or use of our products and services. In addition, new or modified legislation or regulations governing our members may affect our ability to conduct business or our cost of doing business with our members.
Changes in statutory or regulatory requirements or policies, or in their application, could result in changes in, among other things, the FHLBanks’ cost of funds, capital requirements, accounting policies, liquidity management, debt issuance, derivative hedging activities, permissible business activities, additional contributions to the Bank’s AHP, membership base, membership eligibility, our members’ access to our products and services (including whether a member meets required tangible capital levels to access advances), and the size, scope, and nature of the FHLBanks’ lending, investment, and mortgage purchase program activities. These changes could negatively affect our financial condition, results of operations, ability to pay dividends, or ability to redeem or repurchase capital
stock. In addition, given the Bank’s relationship with other FHLBanks, events other than another FHLBank’s default on a consolidated obligation can affect us. Events that affect other FHLBanks, such as member failures or capital deficiencies at another FHLBank, could lead the Finance Agency to require or request that one FHLBank provide capital or other assistance to another FHLBank, purchase assets from another FHLBank, or impose other forms of resolution affecting one or more of the other FHLBanks. If we were called upon by the Finance Agency to take any of these steps, it could affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
Following a comprehensive review that began in the fall of 2022, the Finance Agency issued the “FHLBank System at 100: Focusing on the Future” report on November 7, 2023, presenting its review and analysis of the FHLBank System and the actions and recommendations that it plans to pursue over a multi-year effort, in service of its vision for the FHLBank System. The report focused on four broad themes: (1) the mission of the FHLBank System; (2) the FHLBank System as a stable and reliable source of liquidity; (3) housing and community development; and (4) FHLBank System operational efficiency, structure, and governance. Many of the recommendations from the report may be implemented by the Finance Agency through ongoing supervision, guidance, or rulemaking within its existing statutory authority, while other recommendations may require legislative action or further study.
We are not able to predict what actions will ultimately result from the Finance Agency’s recommendations, the timing of any actions, the extent of any changes to the Bank or the FHLBank System, or the ultimate effect on the Bank or the FHLBank System in the future. Potential changes resulting from the Finance Agency’s recommendations (including changes relating to the FHLBanks’ mission, liquidity role, membership and lending requirements, affordable housing contributions and support for community investment, or operations, structure, and governance) could increase our operational costs and expenses, result in heightened scrutiny of the FHLBanks and their mission and activities, and impact our business, which may affect our financial condition, or results of operations, or the value of membership in the FHLBanks. The extent to which the report ultimately results in changes to regulatory requirements or supervisory expectations that impact or limit the use of our advances by members or our ability to lend to members may have a significant negative impact on our financial condition or results of operations.
For more details on this Finance Agency report, see “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Legislative and Regulatory Developments– Finance Agency’s Review and Analysis of the Federal Home Loan Bank System.”
Our members are governed by federal and state laws and regulations whichthat could change in a manner detrimental to their ability or motivation to invest in the Bank or to use our products and services.
Most of our members are highly regulated financial institutions, and the regulatory environment affectingin which our members operate could change in a manner that would negatively affect their ability or motivation to acquire or own our capital stock or use our products and services. Statutory or regulatory changes that make it less attractive to hold our capital stock or use our products and services could negatively affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
Changes in the status, regulation, and perception of the housing GSEs or in policies and programs relating to the housing GSEs may adversely affect our business activities, future advances balances, the cost of debt issuance, or future dividend payments.
Changes in the status of Fannie Mae and Freddie Mac during the next phases of their conservatorships may result in higher funding costs for the FHLBanks, which could negatively affect our business and financial condition. In addition, negative news articles, industry reports, and other announcements pertaining to GSEs, including Fannie Mae, Freddie Mac, and any of the FHLBanks, could create pressure on all GSE debt pricing, as investors may perceive that their debt instruments as bearingbear increased risk.
As a result of these factors, the FHLBank System may have to pay higher rates on consolidated obligations to make them attractive to investors. If we maintain our current approach to pricing advances, an increase in the cost of issuing consolidated obligations could reduce our net interest spread (the difference between the interest rate received on advances and the interest rate paid on consolidated obligations) and cause our advances to be less profitable. If we increase the price of our advances to avoid a decrease in the net interest spread, the advances may
be less attractive to our members, and our outstanding advances balances may decrease. In addition, an increase in the cost of issuing consolidated obligations could reduce our net interest spread on other interest-earning assets. As a result, an increase in the cost of issuing consolidated obligations could negatively affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
General Risk Factors
We rely heavily on information systems and other technology. A failure, interruption, or security breach, includingSignificant climate change events caused by cyber attacks, of our information systems or those of critical vendors and third parties could disrupt the Bank’s business or adversely affect our financial condition, results of operations, or reputation.
We rely heavily on our information systems and other technology to conduct and manage our business, and we rely on vendors and other third parties to perform certain critical services. If we or one of our critical vendors experiences a failure, interruption, or security breach in any information systems or other technology, including events caused by cyber attacks, we may be unable to conduct and manage our business effectively. In addition, such failure or breach could result in significant losses, a loss of personal and confidential information, or reputational damage. In the event of a breach resulting in loss of data, such as personally identifiable information or other such data protected by data privacy or other laws, we may be liable for damages, fines, and penalties for such losses under applicable regulatory frameworks despite not being able to limit our liability or damages in the event of such a loss. In addition, significant initiatives undertaken by the Bank to replace information systems or other technology infrastructures may subject the Bank to a temporary risk of failure or interruption while the Bank is in the process of implementing these new systems or technology infrastructures. Although we have implemented a business continuity plan, we may not be able to prevent, timely and adequately address, or mitigate the negative effects of any failure or interruption. Any failure or interruption could adversely affect the members and business of our member business, member relations, risk management,Bank, and failure to meet investor or other stakeholder expectations regarding climate change and other environmental matters may damage the reputation or profitability,of the Bank.
The region where we operate is subject to natural disasters, including risks from floods, wildfires, drought, and other natural disasters. Climate change is increasing the frequency, intensity, and duration of these events, which could destroy or damage Bank facilities or member properties, including collateral that members have pledged to secure advances or mortgages, disrupt the business of the Bank or our members, increase the probability of power or other outages, negatively affect our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
Restrictions on the redemption, repurchase, or transfer of the Bank's capital stock could significantly reduce the liquiditylivelihood of our shareholders’ capital stock investment.
Under the Gramm-Leach-Bliley Actmembers, or otherwise cause significant economic dislocation in disaster-affected regions. Any of 1999, Finance Agency regulations, and our capital plan, our capital stock must be redeemed upon the expiration of the relevant five-year redemption period, subject to certain conditions. Capital stockthese situations may become subject to redemption following a five-year redemption period after a member provides a written redemption notice to the Bank; gives notice of intention to withdraw from membership; attains nonmember status by merger or acquisition, charter termination, or other involuntary membership termination; or after a receiver or other liquidating agent for a member transfers the member's Bank capital stock to a nonmember entity. Only capital stock that is not required to meet the membership capital stock requirement of a member or nonmember shareholder or to support a member or nonmember shareholder's outstanding activity with the Bank (excess capital stock) may be redeemed at the end of the redemption period. In addition, we may elect to repurchase some or all of the excess capital stock of a shareholder at any time at our sole discretion.
There is no guarantee, however, that we will be able to redeem capital stock held by a shareholder even at the end of the redemption period or to repurchase excess capital stock. If the redemption or repurchase of the capital stock would cause us to fail to meet our minimum regulatory capital requirements or cause the shareholder to fail to maintain its minimum investment requirement, then the redemption or repurchase is prohibited by Finance Agency regulations and our capital plan. In addition, since our capital stock may only be owned by our members (or, under certain circumstances, former members and certain successor institutions), and our capital plan requires our approval before a member or nonmember shareholder may transfer any of its capital stock to another member or nonmember shareholder, we cannot provide assurance that a member or nonmember shareholder would be allowed to transfer any excess capital stock to another member or nonmember shareholder at any time.
Changes to and replacement of the LIBOR benchmark interest rate could adversely affect our business,the financial condition and results of operations.operations of the Bank.
Enhanced governmental, regulatory, and societal attention to climate change, including expanding mandatory and voluntary reporting, diligence, and disclosure on topics such as climate change, carbon emissions, water usage, waste management, and risk oversight, could expand the nature, scope, and complexity of matters that we are required to control, assess, and report. These issues and rapidly changing laws, regulations, policies, interpretations, and expectations may increase the cost of compliance and internal risk management programs for the Bank and alter the environment in which we do business, which could adversely affect the financial condition and results of operations of the Bank. In addition, the shift toward a lower-carbon economy, driven by policy regulations, low-carbon technology advancement, consumer sentiment, or liability risks, may negatively affect the Bank’s or our members’ business models, asset valuations, and operating costs.
In July 2017,
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 1C. CYBERSECURITY
Cybersecurity Risk Management and Strategy
The Bank is subject to cybersecurity risks, which includes intentional and unintentional acts that may affect the United Kingdom's Financial Conduct Authority (FCA),availability, confidentiality, and integrity of our information systems, including any information residing therein, or services. The Bank has, in alignment with industry standards and Finance Agency regulatory guidance, implemented processes, as set forth in its cybersecurity risk management framework, for identifying, assessing, and managing material risks from cybersecurity incidents that may directly or indirectly impact the Bank’s business strategy, results of operations, or financial condition. Please refer to “Item 1.A Risk Factors - Operational Risks” for a regulatordescription of financial services firmspotential cybersecurity threat risks.
The Bank’s cybersecurity risk management framework is designed to protect the confidentiality, integrity, and financial marketsavailability of the Bank’s information technology assets and data. The Bank utilizes the cybersecurity risk management concept of defense-in-depth and deploys multiple layers of controls across operations to manage the multi-faceted nature of cybersecurity risk. Cybersecurity risk management is part of the Bank’s Enterprise Risk Management program which includes pre-established risk appetite statements that outline the various risk indicators and their respective risk tolerance levels for the monitoring, assessing, mitigation, and reporting associated with those risks. The Bank’s Information Security program is designed to evaluate our cybersecurity infrastructure and performance on an on-going basis through regular control assessments, vulnerability scans and remediation, penetration tests, and threat intelligence feeds that enable the program to effectively identify, prioritize, and mitigate
cybersecurity risks. The Bank attempts to mitigate cybersecurity risk using an array of activities, including the Bank’s Information Security Policy, information security training, periodic cybersecurity incident tabletop exercises, adequate cybersecurity insurance coverage levels, the Bank’s Cybersecurity Incident Response Plan, and the Bank’s business continuity management program focusing on the continuance of the Bank’s operations in the U.K., statedevent of a threat or incident.
The Bank’s Enterprise Risk Committee annually reviews and approves the Bank’s Information Security Policy. The Bank’s Information Security Policy establishes administrative, technical, and physical safeguards designed to protect the security, confidentiality, and integrity of Bank information in accordance with Finance Agency regulation, the Gramm-Leach-Bliley Act and the interagency guidelines issued thereunder, and applicable laws. The Bank develops mitigation plans, monitors tactical implementation of the policy, and engages in detailed risk assessments comprising the Bank’s Information Security Program overseen by the Bank’s Enterprise Risk and Technology & Operations Committees. The Bank’s Enterprise Risk and Technology & Operations Committees report to the Board.
The Bank’s Cybersecurity Incident Response Plan determines how cybersecurity incidents are identified, classified, and escalated, including for the purposes of reporting, and providing relevant information to senior management and the Board. The Bank’s Cybersecurity Incident Response Plan also stipulates management assess the materiality of the incident for the purposes of public disclosure.
The business continuity management program is designed to oversee and implement resilience, continuity, and response capabilities to safeguard employees, customers, and products and services and minimize the financial loss to the Bank, ensure employee safety, and continue uninterrupted service to shareholders during a disruption event, which may include a cybersecurity related event. The business continuity management program provides for the restoration of facilities, communications, information technology systems, temporary relocation of personnel, and other components necessary for the continuity of critical Bank processes. The business continuity management program is overseen by the Board.
The Bank retains external consultants to assist in the development and monitoring of those processes for identifying, assessing, and managing cybersecurity incidents and threat risks. The Bank’s Cybersecurity Incident Response Plan also facilitates management of third-party cybersecurity incidents. As part of the Bank’s vendor management process, the Bank undertakes due diligence of third-party systems that theythe Bank will plan for a phase out of regulatoryinteract with, including risk profiling and classification, in addition to requiring data protection covenants in its vendor agreements. The Bank’s vendor risk management program includes regular reviews and oversight of LIBOR interest rate indices.all service providers in accordance with a risk profile classification. The FCA has indicated they will supportBank reviews performance, technologies utilized by vendors, and promotes escalation of any unsatisfactory reviews as part of Bank’s continuous assessment of its vendors.
During the LIBOR indices through 2021period covered by this report, risks from cybersecurity threats did not have a material impact on the Bank’s business strategy, results of operations, or financial condition. The Bank updated its information security strategy during the period covered by this report in response to allow for an orderly transitionthe increasing volume of cybersecurity threats, both to an alternative reference rate. Other financial services regulatorsthe Bank and industry groups, including the International Swaps and Derivatives Association and the Alternative Reference Rates Committee, are evaluating the possible phase-out of LIBOR and the development of alternate interest rate indices or reference rates,to third parties such as suppliers and vendors. The Bank has experienced cybersecurity incidents and threats in the Secured Overnight Financing Rate. Manypast, though none have had a material effect on the Bank’s financial condition or results of operations.
Cybersecurity Governance
The Board, through its Enterprise Risk and Technology & Operations Committees, oversees the Bank’s Information Security and Enterprise Risk Management programs, which include the Information Security Policy. The Board receives reports from the Enterprise Risk and Technology & Operations Committees, which are management committees composed of members of the Bank'sBank’s senior management responsible for management of risk and implementation of the cybersecurity risk management framework within the Risk Management Program as approved by the Board. The Board oversees management’s approach to staffing, policies, processes, and practices to measure and address cybersecurity and information security risk.
The Enterprise Risk Committee is responsible for reviewing and recommending the approval of the Information Security Policy by the Board. The Enterprise Risk Committee provides independent and integrated oversight of the Bank’s Information Security program and security exceptions and violations. The Bank’s Technology & Operations Committee is responsible for reviewing the Bank’s security awareness and physical security procedures and implementation reports, provides guidance and monitors progress on major information security projects, and regulatory changes.
The Bank’s dedicated Information Security Department, led by our Chief Information Security Officer, is comprised of specialized professionals responsible for the processes and procedures to design and implement protective, proactive and reactive measures to protect the Bank against cybersecurity risks, and for developing, documenting, and approving the Bank’s technical information security control standards, guidelines, and procedures designed to preserve the confidentiality, integrity, and availability of the Bank’s information technology assets and liabilities are indexed to LIBOR. Givendata under the large volumeBank’s control. The Chief Information Security Officer’s expertise in cybersecurity includes holding a Bachelor of LIBOR-based mortgagesScience degree in Computer Engineering, a Master of Business Administration degree in Technology Management, and financial instruments,Information Systems Security Professional certification, along with decades of experience in information technology and cybersecurity.
The Bank’s Enterprise Risk and Technology & Operations Committees receive regular, prompt, and periodic information from the basis adjustmentInformation Security Department, which in turn provides periodic, regular, and prompt reporting to the replacement floating rate willEnterprise Risk and Technology & Operations Committees of the Board on topics such as threat intelligence, major cybersecurity risk areas, technologies and best practices, and any cybersecurity incidents that may have impacted the Bank, as well as risk assessment, management, and monitoring updates, as applicable and as needed.
Bank policies and processes are designed such that the Board would receive extraordinary scrutiny, but whetherprompt and timely information from the net impact is positiveInformation Security Department or negative cannot yet be ascertained. The infrastructurethe Enterprise Risk Committee on any cybersecurity or information security incident or threat that may pose significant risk to the Bank and would continue to receive regular reports on any incident until its conclusion. At least quarterly, or more often, as necessary, to manage hedging in the alternative reference rate still needs to be built out,Board discusses cybersecurity and information security risks with the transition in the markets, and adjustments in Bank systems, could be disruptive.Bank’s Chief Information Security Officer.
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
ITEM 2. PROPERTIES
Not applicable.
The Federal Home Loan Bank of San Francisco (Bank) maintains its principal offices in leased premises totaling 109,00896,139 square feet of space at 600 California Street in San Francisco, California, and 580 California333 Bush Street in San Francisco, California. The Bank also leases other offices totaling 9,8586,808 square feet of space at 1155 15th Street NW in Washington, D.C., as well as off-site business continuity facilities located in Rancho Cordova, California. The Bank believes these facilities are adequate for the purposes for which they are currently used and are well maintained.
ITEM 3.LEGAL PROCEEDINGS
The Federal Home Loan Bank of San Francisco (Bank) may be subject to various legal proceedings arising in the normal course of business.
In 2010, the Bank filed two complaints in the Superior Court of the State of California, County of San Francisco (San Francisco Superior Court), relating to the purchase of private-label residential mortgage-backed securities (PLRMBS). The Bank sought rescission and asserted claims for and violations of the California Corporate Securities Act and common law rescission of contract. In January 2017, the Bank entered into a settlement agreement with a defendant for an amount of $119 million (after netting certain legal fees and expenses). The Bank has settled or entered into settlement agreements with all the defendants in connection with the Bank’s PLRMBS litigation.
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.
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ITEM 4. | ITEM 4. MINE SAFETY DISCLOSURES |
Not applicable.
PART II. OTHER INFORMATIONII
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ITEM 5. | ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Federal Home Loan Bank of San Francisco (Bank) has a cooperative ownership structure. The members and certain nonmembers own all the capital stock of the Bank, the majority of the directors of the Bank are officers or directors of members, and the directors are elected by members (or selected by the Boardboard of Directorsdirectors to fill mid-term vacancies). There is no established marketplace for the Bank'sBank’s capital stock. The Bank’s capital stock is not publicly traded. The Bank issues only one class of capital stock, Class B stock, which, under the Bank’s capital plan, may be redeemed at par value, $100 per share, upon five years’ notice from the membershareholder to the Bank, subject to certain statutory and regulatory requirements and to the satisfaction of any ongoing capital stock investment requirements applying to the member.
At the Bank’s discretion and at any time, the Bank may repurchase shares held by a membershareholder in excess of the member’sits required capital stock holdings. The Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework (Framework) summarizes the Bank’s capital management principles and objectives, as well as its policies and practices with respect to restricted retained earnings, dividend payments, and the repurchase of excess capital stock. In January 2017,September 2023, the Board approved an updated Framework was amended and approved bydividend philosophy to reflect changes in the Bank’s Board of Directors to include the Bank’scurrent interest rate environment and business conditions. The Framework includes a dividend philosophy to endeavor to pay a quarterly dividend at an annualized rate between 5%that is equal to or greater than the current market rate for a highly rated investment (e.g., SOFR) and 7%.that is sustainable under current and projected earnings while maintaining appropriate levels of capital. The decision to declare any dividend and the dividend rate are at the discretion of the Bank’s Boardboard of Directors,directors, which may choose to follow the dividend philosophy as guidance in the dividend declaration. The Bank’s historical dividend rates and the dividend philosophy are not indicative of future dividend declarations. The Bank’s dividend policy may be revised or eliminated in the future and there can be no assurance as to future dividends. For information on the Bank’s policies and practices with respect to dividend payments, see “Part I. Financial Information, Item 1. Business – Capital – Dividends and Retained Earnings,” which is herein incorporated by reference.
The information regarding the Bank’s capital requirements is set forth in “Item 8. Financial Statements and Supplementary Data – Note 1511 – Capital.” At February 28, 2018,29, 2024, the Bank had 34,245,25523,489,362 shares of Class B stock held by 334336 members and 3,095,1756,644,932 shares of Class B stock held by 76 nonmembers. Class B stock held by nonmembers is classified as mandatorily redeemable capital stock.
Financial Condition.
Federal Housing Finance Agency (Finance Agency) rules state that FHLBanksFederal Home Loan Banks (FHLBanks) may declare and pay dividends only from previously retained earnings or current net earnings, and may not declare or pay dividends based on projected or anticipated earnings. In addition, Finance Agency rules do not permit the Bank to pay dividends in the form of capital stock if its excess capital stock exceeds 1% of its total assets. Excess capital stock is defined as the aggregate of the capital stock held by each shareholder in excess of its minimum capital stock requirement, as established by the Bank’s capital plan.
There is no requirement that the Boardboard of Directorsdirectors declare and pay any dividend. A decision by the Boardboard of Directorsdirectors to declare or not declare a dividend is a discretionary matter and is subject to the requirements and restrictions of the Federal Home Loan Bank Act and applicable requirements under the regulations governing the operations of the FHLBanks.
The Bank’s dividend rates declared (annualized) and amounts paid during the respective periods indicated are listed in the table below; the rates and amounts are not indicative of dividends to be paid in the future.
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| | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Amount of Cash Dividends | | | | Amount of Cash Dividends | | |
| (Dollars in millions) | Capital Stock – Class B – Putable |
| | Mandatorily Redeemable Capital Stock |
| | Annualized Rate(1) |
| | Capital Stock –
Class B – Putable |
| | Mandatorily Redeemable Capital Stock |
| | Annualized Rate(1) |
|
| First quarter | $ | 54 |
| | $ | 11 |
| | 9.08 | % | | $ | 45 |
| | $ | 10 |
| | 7.99 | % |
| Second quarter | 41 |
| | 7 |
| | 7.00 |
| | 49 |
| | 12 |
| | 8.90 |
|
| Third quarter | 44 |
| | 7 |
| | 7.00 |
| | 52 |
| | 11 |
| | 9.17 |
|
Fourth quarter(2) | 48 |
| | 7 |
| | 7.00 |
| | 138 |
| | 27 |
| | 22.51 |
|
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(1) | Reflects the annualized rate paid on all of the Bank's average capital stock outstanding regardless of its classification for reporting purposes as either capital stock or mandatorily redeemable capital stock (a liability), based on the par value of $100 per share. |
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(2) | In the fourth quarter of 2016, the amount includes a special dividend at an annualized rate of 13.57%, totaling $100 million, including $83 million in dividends on capital stock and $17 million in dividends on mandatorily redeemable capital stock. |
Additional information regarding the Bank’s dividends is set forth in “Item 1. Business” and in “Item 8. Financial Statements and Supplementary Data – Note 1511 – Capital.”
ITEM 6.[RESERVED]
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ITEM 6. | SELECTED FINANCIAL DATA |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following selected financial data of the Federal Home Loan Bank of San Francisco (Bank) should be read in conjunction with the financial statements and notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein.
|
| | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | 2017 |
| | 2016 |
| | 2015 |
| | 2014 |
| | 2013 |
|
| Selected Statement of Condition Data at Yearend | | | | | | | | | |
| Total Assets | $ | 123,385 |
| | $ | 91,941 |
| | $ | 85,698 |
| | $ | 75,807 |
| | $ | 85,774 |
|
| Advances | 77,382 |
| | 49,845 |
| | 50,919 |
| | 38,986 |
| | 44,395 |
|
| Mortgage Loans Held for Portfolio, Net | 2,076 |
| | 826 |
| | 655 |
| | 708 |
| | 905 |
|
Investments(1) | 43,570 |
| | 40,986 |
| | 32,275 |
| | 31,949 |
| | 35,260 |
|
Consolidated Obligations:(2) | | | | | | | | | |
| Bonds | 85,063 |
| | 50,224 |
| | 51,827 |
| | 47,045 |
| | 53,207 |
|
| Discount Notes | 30,440 |
| | 33,506 |
| | 27,647 |
| | 21,811 |
| | 24,194 |
|
| Mandatorily Redeemable Capital Stock | 309 |
| | 457 |
| | 488 |
| | 719 |
| | 2,071 |
|
| Capital Stock —Class B —Putable | 3,243 |
| | 2,370 |
| | 2,253 |
| | 3,278 |
| | 3,460 |
|
| Unrestricted Retained Earnings | 2,670 |
| | 888 |
| | 610 |
| | 294 |
| | 317 |
|
| Restricted Retained Earnings | 575 |
| | 2,168 |
| | 2,018 |
| | 2,065 |
| | 2,077 |
|
| Accumulated Other Comprehensive Income/(Loss) (AOCI) | 318 |
| | 111 |
| | 15 |
| | 56 |
| | (145 | ) |
| Total Capital | 6,806 |
| | 5,537 |
| | 4,896 |
| | 5,693 |
| | 5,709 |
|
| Selected Operating Results for the Year | | | | | | | | | |
| Net Interest Income | $ | 567 |
| | $ | 471 |
| | $ | 477 |
| | $ | 539 |
| | $ | 482 |
|
| Provision for/(Reversal of) Credit Losses on Mortgage Loans | — |
| | — |
| | 1 |
| | — |
| | (1 | ) |
| Other Income/(Loss) | 78 |
| | 485 |
| | 388 |
| | (154 | ) | | 5 |
|
| Other Expense | 224 |
| | 158 |
| | 148 |
| | 144 |
| | 128 |
|
| Assessments | 45 |
| | 86 |
| | 78 |
| | 36 |
| | 52 |
|
| Net Income/(Loss) | $ | 376 |
| | $ | 712 |
| | $ | 638 |
| | $ | 205 |
| | $ | 308 |
|
| Selected Other Data for the Year | | | | | | | | | |
Net Interest Margin(3) | 0.55 | % | | 0.52 | % | | 0.57 | % | | 0.64 | % | | 0.56 | % |
| Operating Expenses as a Percent of Average Assets | 0.14 |
| | 0.16 |
| | 0.16 |
| | 0.16 |
| | 0.13 |
|
| Return on Average Assets | 0.36 |
| | 0.77 |
| | 0.76 |
| | 0.24 |
| | 0.35 |
|
| Return on Average Equity | 6.21 |
| | 13.63 |
| | 11.68 |
| | 3.58 |
| | 5.36 |
|
| Annualized Dividend Rate | 7.50 |
| | 12.33 |
| | 12.39 |
| | 7.02 |
| | 3.99 |
|
Dividend Payout Ratio(4) | 49.59 |
| | 39.98 |
| | 57.81 |
| | 117.29 |
| | 52.29 |
|
| Average Equity to Average Assets Ratio | 5.82 |
| | 5.68 |
| | 6.52 |
| | 6.75 |
| | 6.55 |
|
| Selected Other Data at Yearend | | | | | | | | | |
Regulatory Capital Ratio(5) | 5.51 |
| | 6.40 |
| | 6.26 |
| | 8.38 |
| | 9.24 |
|
| Duration Gap (in months) | 1 |
| | 1 |
| | 1 |
| | — |
| | 1 |
|
| |
(1)
| Investments consist of interest-bearing deposits, securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities. |
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(2)
| As provided by the Federal Home Loan Bank Act of 1932, as amended, or regulations governing the operations of the FHLBanks, all of the FHLBanks have joint and several liability for FHLBank consolidated obligations, which are backed only by the financial resources of the FHLBanks. The joint and several liability regulation authorizes the Federal Housing Finance Agency (Finance Agency) to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank, and as of December 31, 2017, and through the filing date of this report, does not believe that it is probable that it will be asked to do so. The par value of the outstanding consolidated obligations of all FHLBanks at the dates indicated was as follows:
|
|
| | | |
| Yearend | Par Value (In millions) |
|
| 2017 | $ | 1,034,260 |
|
| 2016 | 989,311 |
|
| 2015 | 905,202 |
|
| 2014 | 847,175 |
|
| 2013 | 766,837 |
|
| |
(3) | Net interest margin is net interest income divided by average interest-earning assets. |
| |
(4) | This ratio is calculated as dividends per share divided by net income per share. |
| |
(5) | This ratio is calculated as regulatory capital divided by total assets. Regulatory capital includes retained earnings, Class B capital stock, and mandatorily redeemable capital stock (which is classified as a liability), but excludes AOCI. |
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Statements contained in this annual report on Form 10-K, including statements describing the objectives, projections, estimates, or predictions of the future of the Federal Home Loan Bank of San Francisco (Bank) or the Federal Home Loan Bank System (FHLBank System), are “forward-looking statements.” These statements may use forward-looking terms, such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “probable,” “plan,” “project,” “should,” “will,” “would,” “possible,” or their negatives or other variations on these terms, and include statements related to, among others, gains and losses on derivatives, plans to pay dividends and redeem or repurchase excess capital stock, future other-than-temporary impairmentcredit losses, future classification of securities, and reform legislation. The Bank cautions that by their nature, forward-looking statements involve risk or uncertainty that could cause actual results to differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These risks and uncertainties include, among others, the following:
•changes in economic and market conditions, including inflation and rising interest rates, changes in the credit ratings of the United States, including any effects of downgrades in the sovereign credit rating of the United States, and conditions in the mortgage, housing, and capital markets;
•the volatility of market prices, rates, and indices;
•the timing and volume of market activity;
•natural disasters, pandemics or other widespread public health emergencies, terrorist attacks, civil unrest, geopolitical instability or conflicts (including the ongoing hostilities in Eastern Europe and the Middle East), trade disruptions, economic or other sanctions, or other unanticipated or catastrophic events;
•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 enterprisesenterprise (GSE) legislative reforms, any changes resulting from the Finance Agency’s review and analysis of the FHLBank System, including recommendations published in its “FHLBank System at 100: Focusing on the Future” report, changes in the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), changes in applicable sections of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, or changes in other statutes or regulations applicable to the FHLBanks;
•changes in the Bank’s capital structure and composition;
•changes in the Bank’s capital stock requirements;
•the ability of the Bank to pay dividends or redeem or repurchase capital stock;
•membership changes, including changes resulting from mergers or changes in the principal place of business of Bank members;
•the withdrawal, merger, dissolution, or receivership of one or more large members;
•the soundness of other financial institutions, including Bank members, nonmember borrowers, other counterparties, and the other FHLBanks;
•changes in Bank members’ demand for Bank advances;
•changes in the value or liquidity of collateral underlying advances to Bank members or nonmember borrowers or collateral pledged by the Bank’s derivative counterparties;
•changes in the fair value and economic value of, impairments of, and risks associated with the Bank’s investments in mortgage loans and mortgage-backed securities (MBS) or other assets and the related credit enhancement protections;
•changes in the Bank’s ability or intent to hold MBS and mortgage loans to maturity;
•competitive forces, including the availability of other sources of funding for Bank members;
•the willingness of the Bank’s members to do business with the Bank;
•changes in investor demand for consolidated obligations (including the terms of consolidated obligations) and/or the terms of interest rate exchange or similar agreements;
•the impact of any changes and developments in FHLBank System-wide debt issuance and governance practices;
•the ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the Bank has joint and several liability;
•changes in key Bank personnel;
•technology changes and enhancements, and the Bank’s ability to develop and support technology and information systems sufficient to manage the risks of the Bank’s business effectively;effectively (including cyber-security risks); and
•changes in the FHLBanks’ long-term credit ratings.
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”.Factors.”
Overview
The Bank serves eligible financial institutions in Arizona, California and Nevada, the three states that make up the Eleventh District of the FHLBank System. The Bank’s primary business is providing competitively priced, collateralized loans, known as advances, to its member institutions and certain qualifying housing associates. The Bank's principal source of funds is debt issued in the capital markets. All 11 FHLBanks issue debt in the form of consolidated obligations through the Office of Finance as their agent, and all 11 FHLBanks are jointly and severally liable for the repayment of all consolidated obligations.
The Bank experienced strong earnings in 2017. Net income for the year2023 was $376$539 million, compared with net income of $712$323 million for 2016.2022. The $336$216 million decreaseincrease in net income was primarily reflected a $391 million decrease in gains on settlements relatingattributable to the Bank's private-label residential mortgage-backed securities (PLRMBS) litigation. The decreasean increase in net interest income also reflected voluntary charitable contributions of $60$232 million, madean improvement in other income/(loss) of $38 million, partially offset by the Bank during 2017 for the Quality Jobs Fund, a donor-advised fund established to support quality job growth and small business expansion, as well as voluntary contributionsan increase of $7$38 million to the Affordable Housing Program (AHP) to offset the impact on the AHP assessment of the expense related to the charitable contributions.
in other expense.
The $96$232 million increase in net interest income for 2017 relativewas primarily attributable to the prior year reflected higher average balances and yields on interest-bearing assets compared to 2022, partially offset by higher average balances and costs of interest-earning assets, combined with higher spreads on those assets, and lower dividends paid on mandatorily redeemable capital stock, which are classified asinterest-bearing liabilities. The increase in net interest expense.
Retained earnings grewincome was also attributable to $3.2 billion at December 31, 2017, from $3.1 billion at December 31, 2016, and the Bank paid dividends at an annualized rateincrease of 7.50%, totaling $219 million, including $187$115 million in dividends on capital stock and $32 millionincome resulting from higher net advance prepayment fees, which were elevated in dividends on mandatorily redeemable capital stock during 2017.
During 2017, total assets increased $31.5 billion, to $123.4 billion at December 31, 2017, from $91.9 billion at December 31, 2016, primarily reflecting an increase in period end advance balances, which increased to $77.4 billion at December 31, 2017, from $49.8 billion at December 31, 2016. In addition, investments increased $2.6 billion, to $43.6 billion at December 31, 2017, from $41.0 billion at December 31, 2016, primarily reflecting an increase in Federal funds sold.
Accumulated other comprehensive income increased by $207 million during 2017, to $318 million at December 31, 2017, from$111 million at December 31, 2016,2023, primarily as a result of heightened advance prepayment activity during the year, which are not expected to occur at similar levels in the future.
The $38 million improvement in theother income/(loss) was primarily driven by an increase in fair value on the Bank's fair value option instruments and economic derivatives. Included in other income/(loss) for 2023 was $33 million in net realized losses from economic derivatives hedging prepaid advances. Additionally, the Bank received $28 million in settlement proceeds in 2022 from the final resolution of PLRMBS classified as available-for-sale.litigation of one of the Bank's private-label mortgage-backed securities (PLRMBS); there was no similar activity in 2023.
The $38 million increase in other expense was primarily driven by increases of $11 million in compensation and benefits and $12 million in charitable “mission-oriented” contributions primarily to fund downpayment assistance grants to middle-income homebuyers (delivered by participating member financial institutions).
At December 31, 2023, total assets were $92.8 billion, a decrease of $28.3 billion from $121.1 billion at December 31, 2022. Advances decreased by $28.1 billion to $61.3 billion at December 31, 2023, from $89.4 billion at December 31, 2022. Investments at December 31, 2023, remained unchanged at $30.3 billion compared to December 31, 2022, attributable to an increase of $4.5 billion in mortgage-backed securities that was largely offset by a decrease of $3.4 billion in securities purchased under agreements to resell and $0.9 billion in federal funds sold.
As of December 31, 2023, the Bank exceeded all regulatory capital requirements. The Bank exceeded its 4.0% regulatory requirement with a regulatory capital ratio of 8.0% at December 31, 2023. The increase in the regulatory capital ratio from 6.4% at December 31, 2022, mainly resulted from the decrease in total assets during 2023. The Bank also exceeded its risk-based capital requirement of $1.2 billion with $7.4 billion in permanent capital. Total retained earnings increased to $4.3 billion at December 31, 2023, from $4.0 billion at December 31, 2022.
On February 21, 2018,2024, the Bank’s Boardboard of Directorsdirectors declared a quarterly cash dividend on the average capital stock outstanding during the fourth quarter of 20172023 at an annualized rate of 7.00%. The8.75%, an increase from the 8.25% rate paid for the prior quarter. In 2023, the Board approved an updated framework and dividend will total $59 million, including $6 million in dividends on mandatorily redeemable capital stock that will be reflected as interest expensephilosophy to reflect changes in the firstcurrent interest rate environment and business conditions. Under this approach, the Bank will endeavor to pay a quarterly dividend rate that is equal to or greater than the current market rate for a highly rated investment (e.g., SOFR) and that is sustainable under current and projected earnings while maintaining appropriate levels of capital. The fourth quarter of 2018. The2023 dividend is $69 million, and the Bank recorded the dividend on February 21, 2018, and expects to pay the dividend on or about March 15, 2018.
As of December 31, 2017, the Bank was in compliance with all of its regulatory capital requirements. The Bank’s total regulatory capital ratio was 5.5%, exceeding the 4.0% requirement. The Bank had $6.8 billion in permanent capital, exceeding its risk-based capital requirement of $2.0 billion.
The Bank plans to repurchase the surplus capital stock of all members and the excess capital stock of all nonmember shareholders on March 16, 2018. Surplus capital stock is defined as any stock holdings in excess of 115% of a member’s minimum capital stock requirement.
14, 2024.
The Bank will continue to monitor theits financial condition, of its PLRMBS portfolio, the ratio of the Bank’s estimated market value of totalfinancial performance, its capital to par value of capital stock, itsposition, overall financial performance and retained earnings, developments in the mortgage and credit markets,market conditions, and other relevant information as the basis for determining the payment of dividends and the repurchase of excess capital stock in future quarters.
Hurricanes Harvey and Irma. During 2017, twoEvents affecting the financial services industry during 2023 resulted in significant hurricanes struckchanges in the southeastern coastliquidity of some of the United States. On August 25, 2017, Hurricane Harveylargest regional financial institutions, some of which experienced significant deposit outflows and financial difficulties, resulting in the liquidation or receivership of three of the Bank’s larger borrowers: Silvergate Bank, Silicon Valley Bank, and First Republic Bank. Because of these events, the Bank may experience a reduction in total assets, capital, and net income since these borrowers, and the advances made landfall near Corpus Christi, Texas, causing substantial damageto these borrowers, are not likely to be replaced. As of December 31, 2023, advances outstanding from non-members totaled $26.0 billion. The loss of Bank members, especially its larger borrowers, may also have the effect of reducing the Bank’s opportunity to grow advances and flooding to southeastern Texas, includingmay impact the Houston metropolitan area. On September 10, 2017, Hurricane Irma made landfallBank’s long-term strategic plan and corporate goals. The timing and magnitude of the impact of a decrease in the amount of advances on the Florida mainland near Marco Island, Florida. Hurricane Irma then moved northward through FloridaBank would depend on a number of factors, including, but not limited to: the amount and into Georgia, causing significant damagethe period over which the advances are prepaid or repaid; the amount and timing of any corresponding decreases in the activity-based capital stock requirement; the profitability of the advances; the extent to propertywhich consolidated obligations mature as the advances are prepaid or repaid; and the Bank’s ability to extinguish consolidated obligations or transfer them, with associated costs, to other FHLBanks. A decrease in Florida, Georgia,advances could also affect the rate of dividends paid to the Bank’s shareholders. See “Item 8. Financial Statements and certain other southeastern states.
The Bank has analyzed the potential impact that damage related to Hurricanes Irma and Harvey might haveSupplementary Data - Note 5 – Advances” for more information on the Bank’s advances, letters of credit, mortgage loans,members.
During 2023, the U.S. economy continued to experience inflation and PLRMBS securities. Based on the information currently available,rising interest rates. Prolonged inflation may adversely affect overall economic conditions, and, in turn, result in adverse consequences for the Bank does not expect that the potential losses resulting from the hurricanes will have a material effect onor Bank members’ businesses and impact the Bank’s financial condition, or results of operations. The Bank continuesoperation, or ability to evaluatepay dividends. Additionally, the impactlevel and volatility of the hurricanes on its mortgage loans heldinterest rates affect, among other things, demand for portfolioadvances. For other risks and PLRMBS investments. If additional information becomes available indicatinguncertainties that any of these assets have been impaired and the amount of the loss can be reasonably estimated, the Bank will record appropriate reserves at that time. faces, see “Item 1A. Risk Factors.”
Results of Operations
Selected Financial Data and Financial Ratios
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| Selected Other Data for the Year Ended December 31 | | | | | | | | | |
Net Interest Margin(1) | 0.71 | % | | 0.66 | % | | 0.91 | % | | | | |
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| Return on Average Assets | 0.47 | | | 0.37 | | | 0.49 | | | | | |
| Return on Average Equity | 7.60 | | | 4.67 | | | 4.46 | | | | | |
| Annualized Dividend Rate | 7.49 | | | 6.30 | | | 5.74 | | | | | |
Dividend Payout Ratio(2) | 45.05 | | | 50.17 | | | 46.95 | | | | | |
| Average Equity to Average Assets Ratio | 6.23 | | | 8.02 | | | 11.00 | | | | | |
| Selected Other Data at Yearend | | | | | | | | | |
Regulatory Capital Ratio(3) | 8.02 | | | 6.41 | | | 10.89 | | | | | |
| Duration Gap (in months) | 1.0 | | | 0.9 | | | 0.4 | | | | | |
(1) Net interest margin is calculated as net interest income divided by average interest-earning assets for the year.
(2) This ratio is calculated as dividends paid per share divided by net income per share.
(3) This ratio is calculated as regulatory capital divided by total assets on December 31 of each year. Regulatory capital includes retained earnings, Class B capital stock, and mandatorily redeemable capital stock (which is classified as a liability), but excludes AOCI.
Comparison of 20172023 and 20162022
Net Interest Income. The primary source of the Bank’s earnings is net interest income, which is the interest earnedincome on advances, mortgage loans, and investments. This includes net accretion of related income, which is a result of improvement in expected cash flows on certain other-than-temporarily-impaired PLRMBS,investments, less interest paidexpense 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 years ended December 31, 20172023 and 2016,2022, together with the related interest income and expense. TheyThese tables also present the average rates on total interest-earning assets and the average costs of total funding sources.
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| Average Balance Sheets | | | | | |
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| | 2023 | | 2022 | | | | | |
| (Dollars in millions) | Average
Balance | | Interest
Income/
Expense | | Average
Rate | | Average
Balance | | Interest
Income/
Expense | | Average Rate | | | | | |
| Assets | | | | | | | | | | | | | | | | |
| Interest-earning assets: | | | | | | | | | | | | | | | | |
| Interest-bearing deposits | $ | 4,328 | | | $ | 222 | | | 5.12 | % | | $ | 2,319 | | | $ | 55 | | | 2.37 | % | | | | | |
| Securities purchased under agreements to resell | 5,618 | | | 280 | | | 4.99 | | | 5,857 | | | 117 | | | 2.00 | | |
| Federal funds sold | 9,923 | | | 499 | | | 5.03 | | | 11,384 | | | 214 | | | 1.88 | | | | | | |
| Trading securities: | | | | | | | | | | | | | | | | |
| MBS | 1 | | | — | | | 3.05 | | | 1 | | | — | | | 2.04 | | | | | | |
| Other investments | — | | | — | | | — | | | 12 | | | — | | | 2.04 | | | | | | |
AFS securities:(1) | | | | | | | | | | | | | | | | |
MBS(2)(3)(4) | 10,462 | | | 702 | | | 6.71 | | | 8,686 | | | 343 | | | 3.95 | | | | | | |
Other investments(3) | 4,050 | | | 219 | | | 5.41 | | | 2,539 | | | 65 | | | 2.56 | | | | | | |
| HTM securities: | | | | | | | | | | | | | | | | |
| MBS | 1,994 | | | 100 | | | 5.01 | | | 2,647 | | | 56 | | | 2.09 | | | | | | |
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Mortgage loans held for portfolio(5) | 786 | | | 26 | | | 3.33 | | | 875 | | | 46 | | | 5.21 | | | | | | |
Advances(3)(6) | 76,128 | | | 3,999 | | | 5.25 | | | 51,527 | | | 1,226 | | | 2.38 | | | | | | |
| Loans to other FHLBanks | 9 | | | — | | | 4.90 | | | 9 | | | — | | | 1.48 | | | | | | |
| Total interest-earning assets | 113,299 | | | 6,047 | | | 5.34 | | | 85,856 | | | 2,122 | | | 2.47 | | | | | | |
Other assets(7) | 634 | | | — | | | | | 436 | | | — | | | | | | | | |
| Total Assets | $ | 113,933 | | | $ | 6,047 | | | | | $ | 86,292 | | | $ | 2,122 | | | | | | | | |
| Liabilities and Capital | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | |
| Consolidated obligations: | | | | | | | | | | | | | | | | |
Bonds(3) | $ | 78,340 | | | $ | 3,901 | | | 4.98 | % | | $ | 34,086 | | | $ | 715 | | | 2.10 | % | | | | | |
| Discount notes | 25,479 | | | 1,249 | | | 4.90 | | | 43,531 | | | 821 | | | 1.89 | | | | | | |
| Deposits and other borrowings | 1,239 | | | 64 | | | 5.16 | | | 1,114 | | | 18 | | | 1.61 | | | | | | |
| Mandatorily redeemable capital stock | 578 | | | 32 | | | 5.47 | | | 5 | | | — | | | 6.57 | | | | | | |
| Borrowings from other FHLBanks | 39 | | | 2 | | | 4.80 | | | 56 | | | 1 | | | 2.01 | | | | | | |
| Total interest-bearing liabilities | 105,675 | | | 5,248 | | | 4.97 | | | 78,792 | | | 1,555 | | | 1.97 | | | | | | |
Other liabilities(7) | 1,164 | | | — | | | | | 577 | | | — | | | | | | | | |
| Total Liabilities | 106,839 | | | 5,248 | | | | | 79,369 | | | 1,555 | | | | | | | | |
| Total Capital | 7,094 | | | — | | | | | 6,923 | | | — | | | | | | | | |
| Total Liabilities and Capital | $ | 113,933 | | | $ | 5,248 | | | | | $ | 86,292 | | | $ | 1,555 | | | | | | | | |
| Net Interest Income | | | $ | 799 | | | | | | | $ | 567 | | | | | | | | |
Net Interest Spread(8) | | | | | 0.37 | % | | | | | | 0.50 | % | | | | | |
Net Interest Margin(9) | | | | | 0.71 | % | | | | | | 0.66 | % | | | | | |
| Interest-earning Assets/Interest-bearing Liabilities | 107.21 | % | | | | | | 108.97 | % | | | | | | | | | |
(1)The average balances of AFS securities are reflected at amortized cost. As a result, the average rates do not reflect changes in fair value.
(2)Interest income on AFS securities includes total net accretion associated with PLRMBS with previous credit losses related to the prior methodology of evaluating credit losses, totaling $34 million and $55 million for 2023 and 2022, respectively.
(3)Interest income/expense and average rates include the effect of associated interest rate exchange agreements, as follows:
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| 2023 |
| (In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | | Total |
| (Amortization)/accretion of hedging activities | $ | (25) | | | $ | (102) | | | $ | — | | | $ | (127) | |
| Net gain/(loss) on derivatives and hedged items | (215) | | | 1 | | | (5) | | | (219) | |
| Net interest settlements on derivatives | 632 | | | 456 | | | (571) | | | 517 | |
Price alignment amount(10) | (45) | | | (34) | | | — | | | (79) | |
| Total effect on net interest income | $ | 347 | | | $ | 321 | | | $ | (576) | | | $ | 92 | |
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| Average Balance Sheets |
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| | 2017 | | 2016 |
| (Dollars in millions) | Average Balance |
| | Interest Income/ Expense |
| | Average Rate |
| | Average Balance |
| | Interest Income/ Expense |
| | Average Rate |
|
| Assets | | | | | | | | | | | |
| Interest-earning assets: | | | | | | | | | | | |
| Interest-bearing deposits | $ | 727 |
| | $ | 8 |
| | 1.05 | % | | $ | 603 |
| | $ | 2 |
| | 0.38 | % |
| Securities purchased under agreements to resell | 1,008 |
| | 9 |
| | 0.93 |
| | 3,120 |
| | 12 |
| | 0.37 |
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| Federal funds sold | 10,871 |
| | 115 |
| | 1.06 |
| | 7,010 |
| | 29 |
| | 0.41 |
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| Trading securities: | | | | | | | | | | | |
| Mortgage-backed securities (MBS) | 7 |
| | — |
| | 2.24 |
| | 9 |
| | — |
| | 1.91 |
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| Other investments | 1,338 |
| | 17 |
| | 1.23 |
| | 1,537 |
| | 10 |
| | 0.61 |
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Available-for-sale (AFS) securities:(1) | | | | | | | | | | | |
MBS(2) | 3,890 |
| | 239 |
| | 6.14 |
| | 4,839 |
| | 262 |
| | 5.42 |
|
Held-to-maturity (HTM) securities:(1) | | | | | | | | | | | |
| MBS | 12,679 |
| | 274 |
| | 2.16 |
| | 10,756 |
| | 247 |
| | 2.30 |
|
| Other investments | 915 |
| | 11 |
| | 1.22 |
| | 466 |
| | 4 |
| | 0.90 |
|
| Mortgage loans held for portfolio | 1,402 |
| | 52 |
| | 3.74 |
| | 662 |
| | 30 |
| | 4.50 |
|
Advances(3) | 70,169 |
| | 875 |
| | 1.25 |
| | 62,168 |
| | 482 |
| | 0.78 |
|
| Loans to other FHLBanks | 7 |
| | — |
| | 1.11 |
| | 3 |
| | — |
| | 0.40 |
|
| Total interest-earning assets | 103,013 |
| | 1,600 |
| | 1.55 |
| | 91,173 |
| | 1,078 |
| | 1.18 |
|
Other assets(4)(5) | 964 |
| | — |
| | | | 768 |
| | — |
| | |
| Total Assets | $ | 103,977 |
| | $ | 1,600 |
| | | | $ | 91,941 |
| | $ | 1,078 |
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| Liabilities and Capital | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | |
| Consolidated obligations: | | | | | | | | | | | |
Bonds(3) | $ | 62,905 |
| | $ | 713 |
| | 1.13 | % | | $ | 51,606 |
| | $ | 410 |
| | 0.79 | % |
| Discount notes | 33,657 |
| | 285 |
| | 0.85 |
| | 33,504 |
| | 136 |
| | 0.41 |
|
| Deposits and other borrowings | 258 |
| | 3 |
| | 0.96 |
| | 342 |
| | 1 |
| | 0.19 |
|
| Mandatorily redeemable capital stock | 387 |
| | 32 |
| | 8.30 |
| | 494 |
| | 60 |
| | 12.25 |
|
| Borrowings from other FHLBanks | 8 |
| | — |
| | 0.57 |
| | 13 |
| | — |
| | 0.46 |
|
| Total interest-bearing liabilities | 97,215 |
| | 1,033 |
| | 1.06 |
| | 85,959 |
| | 607 |
| | 0.71 |
|
Other liabilities(4) | 709 |
| | — |
| | | | 756 |
| | — |
| | |
| Total Liabilities | 97,924 |
| | 1,033 |
| | | | 86,715 |
| | 607 |
| | |
| Total Capital | 6,053 |
| | — |
| | | | 5,226 |
| | — |
| | |
| Total Liabilities and Capital | $ | 103,977 |
| | $ | 1,033 |
| | | | $ | 91,941 |
| | $ | 607 |
| | |
| Net Interest Income | | | $ | 567 |
| | | | | | $ | 471 |
| | |
Net Interest Spread(6) | | | | | 0.49 | % | | | | | | 0.47 | % |
Net Interest Margin(7) | | | | | 0.55 | % | | | | | | 0.52 | % |
| Interest-earning Assets/Interest-bearing Liabilities | 105.96 | % | | | | | | 106.07 | % | | | | |
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| 2022 |
| (In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | | Total |
| (Amortization)/accretion of hedging activities | $ | (27) | | | $ | (105) | | | $ | — | | | $ | (132) | |
| Net gain/(loss) on derivatives and hedged items | (9) | | | 4 | | | 5 | | | — | |
| Net interest settlements on derivatives | 57 | | | 65 | | | (100) | | | 22 | |
Price alignment amount(10) | (11) | | | (9) | | | 1 | | | (19) | |
| Total effect on net interest income | $ | 10 | | | $ | (45) | | | $ | (94) | | | $ | (129) | |
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(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. |
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(2) | Interest income on AFS securities includes accretion of yield adjustments on other-than-temporarily impaired PLRMBS (resulting from improvement in expected cash flows) totaling $69 million and $81 million in 2017 and 2016, respectively. |
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(3) | Interest income/expense and average rates include the effect of associated interest rate exchange agreements, as follows: |
(4)Interest income includes net prepayment fees received on AFS MBS of $6 million and $24 million in 2023 and 2022, respectively.
(5)Nonperforming mortgage loans are included in average balances used to determine average rate. Interest income from retrospective adjustment of the effective yields was $4 million and $22 million in 2023 and 2022, respectively. Interest income includes amortization of upfront loan costs and delivery commitments of $(5) million and $(8) million in 2023 and 2022, respectively.
(6)Interest income includes net prepayment fees on advances of $106 million and $(9) million in 2023 and 2022, respectively.
(7)Includes forward settling transactions and valuation adjustments for certain cash items received/(paid).
(8)Net interest spread is calculated as the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities.
29(9)Net interest margin is calculated as net interest income for the year divided by average interest-earning assets.
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| | 2017 | | 2016 |
| (In millions) | (Amortization)/ Accretion of Hedging Activities |
| | Net Interest Settlements |
| | Total Net Interest Income/(Expense) |
| | (Amortization)/ Accretion of Hedging Activities |
| | Net Interest Settlements |
| | Total Net Interest Income/(Expense) |
|
| Advances | $ | 1 |
| | $ | (27 | ) | | $ | (26 | ) | | $ | (1 | ) | | $ | (55 | ) | | $ | (56 | ) |
| Consolidated obligation bonds | (1 | ) | | 27 |
| | 26 |
| | 4 |
| | 180 |
| | 184 |
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(4) | Includes forward settling transactions and valuation adjustments for certain cash items. |
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(5) | Includes non-credit-related OTTI losses on AFS and HTM securities. |
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(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. |
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(7) | Net interest margin is net interest income (annualized) divided by average interest-earning assets. |
(10)This amount relates to derivatives for which variation margin on cleared derivatives is characterized as a daily settled contract.
Net interest income in 20172023 was $799 million, a 41% increase from $567 million a 20% increase from $471 million in 2016.2022. The following table details the changes in interest income and interest expense for 20172023 compared to 2016.2022. Changes in both volume and interest rates influence changes in net interest income, net interest spread, and net interest margin.
| Change in Net Interest Income: Rate/Volume Analysis 2023 Compared to 2022 | | Change in Net Interest Income: Rate/Volume Analysis 2023 Compared to 2022 |
| | Change in Net Interest Income: Rate/Volume Analysis 2017 Compared to 2016 | | | | | | | |
| | Increase/ (Decrease) |
| | Attributable to Changes in(1) | Increase/
(Decrease) | | Attributable to Changes in(1) |
| (In millions) | | Average Volume |
| | Average Rate |
| (In millions) | | Volume | | Rate |
| Interest-earning assets: | | | | | |
| Interest income: | |
| Interest-bearing deposits | |
| Interest-bearing deposits | |
| Interest-bearing deposits | $ | 6 |
| | $ | 1 |
| | $ | 5 |
|
| Securities purchased under agreements to resell | (3 | ) | | (12 | ) | | 9 |
|
| Federal funds sold | 86 |
| | 22 |
| | 64 |
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| Trading securities: Other investments | 7 |
| | (1 | ) | | 8 |
|
| | AFS securities: | | | | | |
| MBS | (23 | ) | | (55 | ) | | 32 |
|
| HTM securities: | | | | | |
| MBS | 27 |
| | 42 |
| | (15 | ) |
| Other investments | 7 |
| | 5 |
| | 2 |
|
| | AFS securities: | |
| | AFS securities: | |
MBS(2) | |
MBS(2) | |
MBS(2) | |
Other investments(2) | |
| | HTM securities: MBS | |
| HTM securities: MBS | |
| HTM securities: MBS | |
| | Mortgage loans held for portfolio | |
| Mortgage loans held for portfolio | |
| Mortgage loans held for portfolio | 22 |
| | 28 |
| | (6 | ) |
Advances(2) | 393 |
| | 69 |
| | 324 |
|
| Total interest-earning assets | 522 |
| | 99 |
| | 423 |
|
| Interest-bearing liabilities: | | | | | |
| | Total interest income | |
| Total interest income | |
| Total interest income | |
| Interest expense: | |
| Consolidated obligations: | | | | | |
| Consolidated obligations: | |
| Consolidated obligations: | |
Bonds(2) | |
Bonds(2) | |
Bonds(2) | 303 |
| | 103 |
| | 200 |
|
| Discount notes | 149 |
| | 1 |
| | 148 |
|
| Deposits and other borrowings | 2 |
| | — |
| | 2 |
|
| Borrowings from other FHLBanks | |
| Mandatorily redeemable capital stock | (28 | ) | | (11 | ) | | (17 | ) |
| Total interest-bearing liabilities | 426 |
| | 93 |
| | 333 |
|
| Total interest expense | |
| Net interest income | $ | 96 |
| | $ | 6 |
| | $ | 90 |
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(1)Combined rate/volume variances, a third element of the calculation, are allocated to the rate and volume variances based on their relative sizes.
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(1) | Combined rate/volume variances, a third element of the calculation, are allocated to the rate and volume variances based on their relative sizes. |
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(2) | Interest income/expense and average rates include the interest effect of associated interest rate exchange agreements. |
(2)Interest income/expense and average rates include the interest effect of associated interest rate exchange agreements.
The net interest margin was 5571 basis points for 2017, 32023, 5 basis pointspoint higher than the net interest margin for 2016,2022, which was 5266 basis points. The increase in net interest margin is primarily the result of an increase in the average rate earned on interest-earning assets to 5.34% for 2023 compared to 2.47% for 2022. Although higher interest rates were the primary cause for the interest income increase, the higher average balances of advances and investments were also a contributing factor. These effects were partially offset by an increase in costs of interest-bearing liabilities from higher funding levels. The net interest spread was 4937 basis points for 2017, 22023, 13 basis points higherlower than the net interest spread for 2016,2022, which was 4750 basis points. These increases wereThe decrease in net interest spread was primarily due toa result of higher average balances and costs of interest-earning assets, combined withinterest-bearing liabilities, which were partially offset by higher spreadsaverage balances and yields on thoseinterest-bearing assets.
For securities previously identified as other-than-temporarily impaired,PLRMBS with previous credit losses related to the prior methodology of evaluating credit losses, the Bank updates its estimate of future estimatedexpected cash flows on a regular basis. If there is no additional impairmentallowance for credit losses on the security, any improvement in expected cash flowsthe yield of the security is adjusted on a prospective basis and accreted into interest income.income based on the expected cash flows. As a result of improvements in the estimatedexpected cash flows of
these securities, previously identified as other-than-temporarily impaired, the net accretion of yield adjustmentsincome is likely to continue to be a positive source of net interest income in future periods. (See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – Fair Values – Other-Than-Temporary Impairment for Investment Securities” for further information.)
Member demand for wholesale funding from the Bank can vary greatly depending on a number of factors, including economic and market conditions, competition from other wholesale funding sources, member deposit inflows and outflows, the activity level of the primary and secondary mortgage markets, and strategic decisions made by individual member institutions. In addition, events affecting the financial services industry contributed to the liquidation or receivership of some of the Bank’s larger borrowers during 2023. The loss of Bank members, especially its larger borrowers, may also have the effect of reducing member demand for wholesale funding. As a result, Bank asset levels and operating results may vary significantly from period to period. See “Item 8. Financial Statements and Supplementary Data - Note 5 – Advances” for more information on the Bank’s largest members and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview” for
information on the loss of the Bank’s largest borrowers and its potential effect on the Bank’s opportunity to grow advances.
Other Income/(Loss). The following table presents the components of “Other Income/(Loss)” for the years ended December 31, 20172023 and 2016.2022.
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| (In millions) | 2023 | | 2022 |
| | | |
| | | |
| Net gain/(loss) on advances and consolidated obligation bonds held under fair value option | $ | (1) | | | $ | (65) | |
| Net gain/(loss) on derivatives | (25) | | | (9) | |
| Private-label residential mortgage-backed securities trust settlement | — | | | 28 | |
| Standby letters of credit fees | 20 | | | 17 | |
| Other, net | 13 | | | (2) | |
| Total Other Income/(Loss) | $ | 7 | | | $ | (31) | |
|
| | | | | | | |
| Other Income/(Loss) |
| | |
| (In millions) | 2017 |
| | 2016 |
|
| Other Income/(Loss): | | | |
| Total OTTI loss | $ | (10 | ) | | $ | (26 | ) |
| Net amount of OTTI loss reclassified to/(from) AOCI | (6 | ) | | 10 |
|
| Net OTTI loss, credit-related | (16 | ) | | (16 | ) |
Net gain/(loss) on trading securities(1) | — |
| | 4 |
|
| Net gain/(loss) on advances and consolidated obligation bonds held under fair value option | (31 | ) | | (40 | ) |
| Net gain/(loss) on derivatives and hedging activities | (14 | ) | | 9 |
|
| Gains on litigation settlements, net | 119 |
| | 510 |
|
| Other | 20 |
| | 18 |
|
| Total Other Income/(Loss) | $ | 78 |
| | $ | 485 |
|
(1) The net gain/(loss) on trading securities that were economically hedged totaled $1 million and $1 million in 2017 and 2016, respectively.
Net Other-Than-Temporary Impairment Loss, Credit-Related – Each quarter, the Bank updates its OTTI analysis to reflect current housing market conditions, changes in anticipated housing market conditions, observed and anticipated borrower behavior, and updated information on the loans supporting the Bank’s PLRMBS.
Additional information about the OTTI loss is provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Investments” and in “Item 8. Financial Statements and Supplementary Data – Note 7 – Other-Than-Temporary Impairment Analysis.”
Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option – The following table presents the net gain/(loss) on advances and consolidated obligation bonds held under the fair value option for the years ended December 31, 20172023 and 2016.2022.
|
| | | | | | | |
| Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option |
| | | | |
| (In millions) | 2017 |
| | 2016 |
|
| Advances | $ | (31 | ) | | $ | (27 | ) |
| Consolidated obligation bonds | — |
| | (13 | ) |
| Total | $ | (31 | ) | | $ | (40 | ) |
| | | | | | | | | | | |
|
| | | |
| |
| (In millions) | 2023 | | 2022 |
| Advances | $ | 28 | | | $ | (119) | |
| Consolidated obligation bonds | (29) | | | 54 | |
| Total | $ | (1) | | | $ | (65) | |
Under the fair value option, the Bank has 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)gain/(loss) on advances and consolidated obligation bonds held under the fair value option wereis 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 onand volume of the advances and consolidated obligation bonds during the period.
Additional information about advances and consolidated obligation bonds held under the fair value option is provided in “Item 8. Financial Statements and Supplementary Data – Note 1914 – Fair Value.”
Net Gain/(Loss) on Derivatives and Hedging Activities – Under the accounting for derivative instruments and hedging activities,Accounting guidance requires the Bank is required to carry all of its derivative instruments on the StatementStatements 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 loss or gain on the underlying hedged instrument. The unrealized gain or loss on the “ineffective” portion of all hedges, which represents the amount by which the change in the fair value of the derivative differs from the change in the fair value of the hedged item or the variability in the cash flows of the forecasted transaction, is recognized in current period earnings. In addition, certainCertain derivatives are associated with assets or liabilities but do not qualify as fair value hedges under the accounting for derivative instruments and hedging activities.hedges. These economic hedges are recorded on the StatementStatements of Condition at fair value with the unrealized gain or loss recorded in earnings without any offsetting unrealized lossgain or gainloss from the associated asset or liability.
The following table shows the accounting classification of economic hedges and the categories of hedged items that contributed to the gains and losses on derivatives and hedged items that were recorded in “Net gain/(loss) on derivativesderivatives” for 2023 and hedging activities” in 2017 and 2016.2022.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives and Hedging Activities 2017 Compared to 2016 |
| | | | | | | | | | | | | | | | |
| (In millions) | 2017 | | 2016 |
| | Gain/(Loss) | | Income/ (Expense) on |
| | | | Gain/(Loss) | | Income/ (Expense) on |
| | |
| Hedged Item | Fair Value Hedges, Net |
| | Economic Hedges |
| | Economic Hedges |
| | Total |
| | Fair Value Hedges, Net |
| | Economic Hedges |
| | Economic Hedges |
| | Total |
|
| Advances: | | | | | | | | | | | | | | | |
| Elected for fair value option | $ | — |
| | $ | 33 |
| | $ | (23 | ) | | $ | 10 |
| | $ | — |
| | $ | 44 |
| | $ | (43 | ) | | $ | 1 |
|
| Not elected for fair value option | (3 | ) | | (6 | ) | | 1 |
| | (8 | ) | | 1 |
| | (9 | ) | | 3 |
| | (5 | ) |
| Consolidated obligation bonds: | | | | | | | | | | | | | | | |
| Elected for fair value option | — |
| | — |
| | 3 |
| | 3 |
| | — |
| | (1 | ) | | 13 |
| | 12 |
|
| Not elected for fair value option | 2 |
| | (14 | ) | | 8 |
| | (4 | ) | | (3 | ) | | (18 | ) | | 23 |
| | 2 |
|
| Consolidated obligation discount notes: | | | | | | | | | | | | | | | |
| Not elected for fair value option | — |
| | (5 | ) | | (29 | ) | | (34 | ) | | — |
| | 23 |
| | (28 | ) | | (5 | ) |
| MBS: | | | | | | | | | | | | | | | |
| Not elected for fair value option | — |
| | (5 | ) | | — |
| | (5 | ) | | — |
| | — |
| | — |
| | — |
|
| Non-MBS investments: | | | | | | | | | | | | | | | |
| Not elected for fair value option | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Mortgage delivery commitment: | | | | | | | | | | | | | | | |
| Not elected for fair value option | — |
| | 24 |
| | — |
| | 24 |
| | — |
| | 5 |
| | — |
| | 5 |
|
| Total | $ | (1 | ) | | $ | 27 |
| | $ | (40 | ) | | $ | (14 | ) | | $ | (2 | ) | | $ | 43 |
| | $ | (32 | ) | | $ | 9 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives 2023 Compared to 2022 |
| | | | | | | | | | | |
| |
| (In millions) | 2023 | | 2022 |
| Hedged Item | Gain/(Loss) on Economic
Hedges | | Interest Income/ (Expense) on Economic Hedges | | Net Gain/(Loss) | | Gain/(Loss) on Economic
Hedges | | Interest Income/ (Expense) on Economic Hedges | | Net Gain/(Loss) |
| Advances: | | | | | | | | | | | |
| Elected for fair value option | $ | (33) | | | $ | 48 | | | $ | 15 | | | $ | 104 | | | $ | (14) | | | $ | 90 | |
| Not elected for fair value option | (49) | | | 36 | | | (13) | | | 30 | | | 23 | | | 53 | |
| Consolidated obligation bonds: | | | | | | | | | | | |
| Elected for fair value option | 27 | | | (34) | | | (7) | | | (50) | | | (14) | | | (64) | |
| Not elected for fair value option | 28 | | | (37) | | | (9) | | | (57) | | | (9) | | | (66) | |
| Consolidated obligation discount notes: | | | | | | | | | | | |
| Not elected for fair value option | 1 | | | (8) | | | (7) | | | 3 | | | (28) | | | (25) | |
| MBS: | | | | | | | | | | | |
| Not elected for fair value option | — | | | — | | | — | | | 4 | | | — | | | 4 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Price alignment amount(1) | (4) | | | — | | | (4) | | | (1) | | | — | | | (1) | |
| Total | $ | (30) | | | $ | 5 | | | $ | (25) | | | $ | 33 | | | $ | (42) | | | $ | (9) | |
(1) This amount relates to derivatives for which variation margin on cleared derivatives is characterized as a daily settled contract.
During 2017,2023, net losses on derivatives and hedging activities totaled $14$25 million compared to net gainslosses of $9 million in 2016.2022. These amounts included interest income of $5 million and interest expense of $40 million and expense of $32$42 million resulting from net settlements on derivative instruments used in economic hedges in 20172023 and 2016,2022, respectively. Excluding the impact of interest 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.
The Bank cannot predict the ongoing impact of these valuation adjustments on the Bank cannot be predicted and the effects of these valuation adjustments may lead to significant volatility in future earnings, including earnings available for dividends.
Additional information about derivatives and hedging activities is provided in “Item 8. Financial Statements and Supplementary Data – Note 1813 – Derivatives and Hedging Activities.”
Gains on Litigation Settlements, NetPLRMBS Trust Settlement – During 2017 and 2016,gains relating to settlements with certain defendants in connection withOne of the Bank’s PLRMBS investments is held within a trust that has been the subject of litigation (after netting certain legal fees and expenses) totaled $119 million and $510 million, respectively.
Other Expense. Other expenses were $224 million in 2017 comparedby the trustee since 2012. Upon final resolution of the litigation, to $158 million in 2016, primarily reflecting voluntary charitable contributions forwhich the Quality Jobs Fund in 2017.
Quality Jobs Fund Expenseand Other–Bank was not a party, the trustee was required to transmit settlement proceeds to the trust. In the first quarter of 2017,2022, as a result of the Boarddistribution of Directors approved an allocationthe settlement proceeds to the beneficial owners of $100 million for the Quality Jobs Fund, a donor-advised fund established to support quality jobs growth and small business expansion to be funded bysecurities in the trust, including the Bank, in incremental amounts over the next two year period. During 2017, the Bank made voluntary charitablerecorded settlement proceeds of $28 million as income during 2022. There was no similar activity during 2023.
Other Expense. During 2023, other expenses increased to $200 million, compared to $162 million in 2022. The increase was primarily attributable to an increase in compensation and benefits throughout the Bank’s workforce as a result of a comprehensive compensation study in order to retain talent and an increase in discretionary mission contributions, delivered by participating member financial institutions.
Table of $60 million for the Quality Jobs Fund, as well as voluntary contributions of $7 million to the Affordable Housing Program (AHP) to offset the impact on the AHP assessment of the charitable contribution expense.Contents
Affordable Housing Program. The FHLBank Act requires each FHLBank to establish and fund an AHP.affordable housing program (AHP). Each FHLBank’s AHP provides subsidies to members, whichwho use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households.households earning up to 80% of the median income for the area in which they live. Subsidies may be in the form of direct grants or below-market interest rate advances.
To fund the AHP, the FHLBanks must set aside at least, in the aggregate, the greater of $100 million or 10% of the current year's net earnings (income before interest expense related to dividends paid on mandatorily redeemable capital stock and the assessment for the AHP). To the extent that the aggregate 10% calculation is less than $100 million, the FHLBank Act requires that each FHLBank contribute such prorated sums as may be required to ensure that the aggregate contribution of the FHLBanks equals at least $100 million. The proration would be made on the basis of the income of the FHLBanks for the previous year. In the aggregate, the FHLBanks set aside $384$752 million and $392$355 million for their AHPs in 20172023 and 2016,2022, respectively, and there was no AHP shortfall in anyeither of those years.
The Bank’s total AHP assessments equaled $45$63 million in 2017, compared to $862023 and $36 million in 2016. The decrease in the AHP assessments reflected lower earnings in 2017.2022.
Return on Average Equity.Return on average equity (ROE) was 6.21% in 2017,7.60% for 2023, compared to 13.63% in 2016.4.67% for 2022. The decrease primarilyincrease reflected lowerhigher net income for 2023, which increased 67% to $539 million in 2017, and the2023 from $323 million in 2022, which was partially offset by a relatively smaller increase in average equity to $7.1 billion in 2023 from $5.2$6.9 billion for 2016 to $6.1 billion for 2017.in 2022.
Dividends and Retained Earnings. In 2017,2023, the Bank paid dividends at an annualized rate of 7.50%7.49%, totaling $219$275 million, including $187$243 million in dividends on capital stock and $32 million in dividends on mandatorily redeemable capital stock. In 2016,2022, the Bank paid dividends at an annualized rate of 12.33%6.30%, totaling $344$161 million, including $284$161 million in dividends on capital stock and $60 milliona de minimis amount in dividends on mandatorily redeemable capital stock. The dividends paid in 2016 included four quarterly dividends and a special dividend in the amount of
$100 million, including $83 million in dividends on capital stock and $17 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 February 21, 2018, the Bank’s Board of Directors declared a quarterly cash dividend on the capital stock outstanding during the fourth quarter of 2017 at an annualized rate of 7.00% totaling $59 million, including $53 million in dividends on capital stock and $6 million in dividends on mandatorily redeemable capital stock. The Bank recorded the quarterly dividend on February 21, 2018. The Bank expects to pay the quarterly dividend on March 15, 2018. Dividends on mandatorily redeemable capital stock will be recognized as interest expense in the first quarter of 2018.
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. Prior to July 2017, the Bank’s Framework had three categories of restricted retained earnings: Valuation Adjustments, Other (which represented a targeted amount), and the Joint Capital Enhancement (JCE Agreement). Under the Framework, the Bank’s required amount of restricted retained earnings was determined using the Bank’s retained earnings methodology. As determined using the Bank’s methodology, from July 2015 to January 2017, the Bank’s restricted retained earnings requirement was $2,000, and from January 2017 to July 2017, the Bank’s restricted retained earnings requirement was $2,300.
In July 2017, the Bank’s Board of Directors approved the transfer of all amounts classified as restricted retained earnings, other than the amounts related to the JCE Agreement, to unrestricted retained earnings. As a conforming change related to the transfer, the Bank’s Board of Directors amended the Framework to eliminate two of the categories of restricted retained earnings (Valuation Adjustments and Other) and approved revisions to the Bank’s retained earnings methodology to provide for a required level of total retained earnings of $2,300 for loss protection, capital compliance, and business growth. In January 2018, the methodology was further revised to provide a required level of total retained earnings of $2,500. The Bank satisfies its retained earnings requirement with both restricted retained earnings (i.e., amounts related to the JCE Agreement) and unrestricted retained earnings.
Retained earnings related to the JCE Agreement totaled $575 million and $500 million at December 31, 2017 and 2016, respectively. Additional restricted retained earnings totaled $1.7 billion at December 31, 2016. Total restricted retained earnings were $575 million and $2.2 billion as of December 31, 2017 and 2016, respectively.
The Bank will continue to monitor 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 in future quarters.
For more information, see “Item 1. Business – Capital – Dividends and Retained Earnings”Earnings,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Capital,” and “Item 8. Financial Statements and Supplementary Data – Note 1511 – Capital – Excess Stock Repurchase, Retained Earnings, and Dividend Framework.”
ComparisonFor a comparison of 20162022 and 2015
Net Interest Income. The Average Balance Sheets tables that follow present the average balances2021 results of interest-earning asset categories and the sources that funded those interest-earning assets (liabilities and capital) for the years ended December 31, 2016 and 2015, 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.
|
| | | | | | | | | | | | | | | | | | | | | |
| Average Balance Sheets |
| | | | | | | | | | | | |
| | 2016 | | 2015 |
| (Dollars in millions) | Average Balance |
| | Interest Income/ Expense |
| | Average Rate |
| | Average Balance |
| | Interest Income/ Expense |
| | Average Rate |
|
| Assets | | | | | | | | | | | |
| Interest-earning assets: | | | | | | | | | | | |
| Interest-bearing deposits | $ | 603 |
| | $ | 2 |
| | 0.38 | % | | $ | 719 |
| | $ | — |
| | 0.01 | % |
| Securities purchased under agreements to resell | 3,120 |
| | 12 |
| | 0.37 |
| | 2,513 |
| | 3 |
| | 0.10 |
|
| Federal funds sold | 7,010 |
| | 29 |
| | 0.41 |
| | 6,847 |
| | 9 |
| | 0.13 |
|
| Trading securities: | | | | | | | | | | | |
| Mortgage-backed securities (MBS) | 9 |
| | — |
| | 1.91 |
| | 10 |
| | — |
| | 1.68 |
|
| Other investments | 1,537 |
| | 10 |
| | 0.61 |
| | 2,439 |
| | 5 |
| | 0.21 |
|
Available-for-sale (AFS) securities:(1) | | | | | | | | | | | |
MBS(2) | 4,839 |
| | 262 |
| | 5.42 |
| | 5,809 |
| | 264 |
| | 4.54 |
|
Held-to-maturity (HTM) securities:(1) | | | | | | | | | | | |
| MBS | 10,756 |
| | 247 |
| | 2.30 |
| | 11,783 |
| | 292 |
| | 2.48 |
|
| Other investments | 466 |
| | 4 |
| | 0.90 |
| | 297 |
| | 1 |
| | 0.51 |
|
| Mortgage loans held for portfolio | 662 |
| | 30 |
| | 4.50 |
| | 675 |
| | 33 |
| | 4.91 |
|
Advances(3) | 62,168 |
| | 482 |
| | 0.78 |
| | 51,899 |
| | 299 |
| | 0.58 |
|
| Loans to other FHLBanks | 3 |
| | — |
| | 0.40 |
| | 5 |
| | — |
| | 0.11 |
|
| Total interest-earning assets | 91,173 |
| | 1,078 |
| | 1.18 |
| | 82,996 |
| | 906 |
| | 1.09 |
|
Other assets(4)(5) | 768 |
| | — |
| | | | 829 |
| | — |
| | |
| Total Assets | $ | 91,941 |
| | $ | 1,078 |
| | | | $ | 83,825 |
| | $ | 906 |
| | |
| Liabilities and Capital | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | |
| Consolidated obligations: | | | | | | | | | | | |
Bonds(3) | $ | 51,606 |
| | $ | 410 |
| | 0.79 | % | | $ | 47,481 |
| | $ | 317 |
| | 0.67 | % |
| Discount notes | 33,504 |
| | 136 |
| | 0.41 |
| | 28,853 |
| | 46 |
| | 0.16 |
|
| Deposits and other borrowings | 342 |
| | 1 |
| | 0.19 |
| | 1,107 |
| | 1 |
| | 0.05 |
|
| Mandatorily redeemable capital stock | 494 |
| | 60 |
| | 12.25 |
| | 421 |
| | 65 |
| | 15.49 |
|
| Borrowings from other FHLBanks | 13 |
| | — |
| | 0.46 |
| | 15 |
| | — |
| | 0.11 |
|
| Total interest-bearing liabilities | 85,959 |
| | 607 |
| | 0.71 |
| | 77,877 |
| | 429 |
| | 0.55 |
|
Other liabilities(4) | 756 |
| | — |
| | | | 485 |
| | — |
| | |
| Total Liabilities | 86,715 |
| | 607 |
| | | | 78,362 |
| | 429 |
| | |
| Total Capital | 5,226 |
| | — |
| | | | 5,463 |
| | — |
| | |
| Total Liabilities and Capital | $ | 91,941 |
| | $ | 607 |
| | | | $ | 83,825 |
| | $ | 429 |
| | |
| Net Interest Income | | | $ | 471 |
| | | | | | $ | 477 |
| | |
Net Interest Spread(6) | | | | | 0.47 | % | | | | | | 0.54 | % |
Net Interest Margin(7) | | | | | 0.52 | % | | | | | | 0.57 | % |
| Interest-earning Assets/Interest-bearing Liabilities | 106.07 | % | | | | | | 106.57 | % | | | | |
| |
(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) totaling $81 million and $74 million in 2016 and 2015, respectively. |
| |
(3) | Interest income/expense and average rates include the effect of associated interest rate exchange agreements, as follows: |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2016 | | 2015 |
| (In millions) | (Amortization)/ Accretion of Hedging Activities |
| | Net Interest Settlements |
| | Total Net Interest Income/(Expense) |
| | (Amortization)/ Accretion of Hedging Activities |
| | Net Interest Settlements |
| | Total Net Interest Income/(Expense) |
|
| Advances | $ | (1 | ) | | $ | (55 | ) | | $ | (56 | ) | | $ | (2 | ) | | $ | (106 | ) | | $ | (108 | ) |
| Consolidated obligation bonds | 4 |
| | 180 |
| | 184 |
| | 5 |
| | 257 |
| | 262 |
|
| |
(4) | Includes forward settling transactions and valuation adjustments for certain cash items. |
| |
(5) | Includes non-credit-related OTTI losses on AFS and HTM securities. |
| |
(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 2016 was $471 million, a 1% decrease from $477 million in 2015. The following table details the changes in interest income and interest expense for 2016 compared to 2015. Changes in both volume and interest rates influence changes in net interest income, net interest spread, and net interest margin.
|
| | | | | | | | | | | |
Change in Net Interest Income: Rate/Volume Analysis 2016 Compared to 2015 |
| | | | | | |
| | Increase/ (Decrease) |
| | Attributable to Changes in(1) |
| (In millions) | | Average Volume |
| | Average Rate |
|
| Interest-earning assets: | | | | | |
| Interest-bearing deposits | $ | 2 |
| | $ | — |
| | $ | 2 |
|
| Securities purchased under agreements to resell | 9 |
| | 1 |
| | 8 |
|
| Federal funds sold | 20 |
| | — |
| | 20 |
|
| Trading securities: Other investments | 5 |
| | (2 | ) | | 7 |
|
| AFS securities: | | | | | |
| MBS | (2 | ) | | (48 | ) | | 46 |
|
| HTM securities: | | | | | |
| MBS | (45 | ) | | (25 | ) | | (20 | ) |
| Other investments | 3 |
| | 1 |
| | 2 |
|
| Mortgage loans held for portfolio | (3 | ) | | (1 | ) | | (2 | ) |
Advances(2) | 183 |
| | 66 |
| | 117 |
|
| Total interest-earning assets | 172 |
| | (8 | ) | | 180 |
|
| Interest-bearing liabilities: | | | | | |
| Consolidated obligations: | | | | | |
Bonds(2) | 93 |
| | 29 |
| | 64 |
|
| Discount notes | 90 |
| | 9 |
| | 81 |
|
Deposits and other borrowings
| — |
| | (1 | ) | | 1 |
|
| Mandatorily redeemable capital stock | (5 | ) | | 10 |
| | (15 | ) |
| Total interest-bearing liabilities | 178 |
| | 47 |
| | 131 |
|
| Net interest income | $ | (6 | ) | | $ | (55 | ) | | $ | 49 |
|
| |
(1) | Combined rate/volume variances, a third element of the calculation, are allocated to the rate and volume variances based on their relative sizes. |
| |
(2) | Interest income/expense and average rates include the interest effect of associated interest rate exchange agreements. |
Net interest income included $5 million of advance prepayment fees in 2016 compared to $8 million in 2015.
The net interest margin was 52 basis points for 2016, 5 basis points lower than the net interest margin for 2015, which was 57 basis points. The net interest spread was 47 basis points for 2016, 7 basis points lower than the net interest spread for 2015, which was 54 basis points. These decreases were primarily due to lower average balances of mortgage-related assets, partially offset by lower dividends on mandatorily redeemable capital stock, which are classified as interest expense.
Member demand for wholesale funding from the Bank can vary greatly depending on a number of factors, including economic and market conditions, competition from other wholesale funding sources, member deposit inflows and outflows, the activity level of the primary and secondary mortgage markets, and strategic decisions made by individual member institutions. As a result, Bank asset levels and operating results may vary significantly from period to period.
Other Income/(Loss). The following table presents the components of “Other Income/(Loss)” for the years ended December 31, 2016 and 2015. |
| | | | | | | |
| Other Income/(Loss) |
| | | | |
| (In millions) | 2016 |
| | 2015 |
|
| Other Income/(Loss): | | | |
| Total OTTI loss | $ | (26 | ) | | $ | (31 | ) |
| Net amount of OTTI loss reclassified to/(from) AOCI | 10 |
| | 16 |
|
| Net OTTI loss, credit-related | (16 | ) | | (15 | ) |
Net gain/(loss) on trading securities(1)
| 4 |
| | (2 | ) |
| Net gain/(loss) on advances and consolidated obligation bonds held under fair value option | (40 | ) | | (50 | ) |
| Net gain/(loss) on derivatives and hedging activities | 9 |
| | (16 | ) |
| Gains on litigation settlements, net | 510 |
| | 459 |
|
| Other | 18 |
| | 12 |
|
| Total Other Income/(Loss) | $ | 485 |
| | $ | 388 |
|
(1) The net gain/(loss) on trading securities that were economically hedged totaled $1 million and a de minimis amount in 2016 and 2015, respectively.
Net Other-Than-Temporary Impairment Loss, Credit-Related – Each quarter, the Bank updates its OTTI analysis to reflect current housing market conditions, changes in anticipated housing market conditions, observed and anticipated borrower behavior, and updated information on the loans supporting the Bank’s PLRMBS.
Additional information about the OTTI loss is provided in “Management’soperations, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Investments” and in “Item 8. Financial Statements and Supplementary Data – Note 7 – Other-Than-Temporary Impairment Analysis.”
Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option – The following table presents the net gain/(loss) on advances and consolidated obligation bonds held under the fair value option for the years ended December 31, 2016 and 2015.
|
| | | | | | | |
| Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option |
| | | | |
| (In millions) | 2016 |
| | 2015 |
|
| Advances | $ | (27 | ) | | $ | (31 | ) |
| Consolidated obligation bonds | (13 | ) | | (19 | ) |
| Total | $ | (40 | ) | | $ | (50 | ) |
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 effectsResults of changes in market interest rates, interest rate spreads, interest rate volatility, and
other market factors relative to the actual terms on the advances and consolidated obligation bonds during the period.
Additional information about advances and consolidated obligation bonds held under the fair value option is provided in “Item 8. Financial Statements and Supplementary Data – Note 19 – 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 Statement 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 changesOperations” 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 loss or gain on the underlying hedged instrument. The unrealized gain or loss on the “ineffective” portion of all hedges, which represents the amount by which the change in the fair value of the derivative differs from the change in the fair value of the hedged item or the variability in the cash flows of the forecasted transaction, is recognized in current period earnings. 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 Statement of Condition at fair value with the unrealized gain or loss recorded in earnings without any offsetting unrealized loss or gain from the associated asset or liability.Bank’s 2022 Form 10-K.
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 2016 and 2015.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives and Hedging Activities 2016 Compared to 2015 |
| | | | | | | | | | | | | | | | |
| (In millions) | 2016 | | 2015 |
| | Gain/(Loss) | | Income/ (Expense) on |
| | | | Gain/(Loss) | | Income/ (Expense) on |
| | |
| Hedged Item | Fair Value Hedges, Net |
| | Economic Hedges |
| | Economic Hedges |
| | Total |
| | Fair Value Hedges, Net |
| | Economic Hedges |
| | Economic Hedges |
| | Total |
|
| Advances: | | | | | | | | | | | | | | | |
| Elected for fair value option | $ | — |
| | $ | 44 |
| | $ | (43 | ) | | $ | 1 |
| | $ | — |
| | $ | 19 |
| | $ | (73 | ) | | $ | (54 | ) |
| Not elected for fair value option | 1 |
| | (9 | ) | | 3 |
| | (5 | ) | | (1 | ) | | 1 |
| | 1 |
| | 1 |
|
| Consolidated obligation bonds: | | | | | | | | | | | | | | | |
| Elected for fair value option | — |
| | (1 | ) | | 13 |
| | 12 |
| | — |
| | 8 |
| | 49 |
| | 57 |
|
| Not elected for fair value option | (3 | ) | | (18 | ) | | 23 |
| | 2 |
| | (9 | ) | | (19 | ) | | 35 |
| | 7 |
|
| Consolidated obligation discount notes: | | | | | | | | | | | | | | | |
| Not elected for fair value option | — |
| | 23 |
| | (28 | ) | | (5 | ) | | — |
| | 4 |
| | (30 | ) | | (26 | ) |
| MBS: | | | | | | | | | | | | | | | |
| Not elected for fair value option | — |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
| Non-MBS investments: | | | | | | | | | | | | | | | |
| Not elected for fair value option | — |
| | (1 | ) | | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
|
| Mortgage delivery commitment: | | | | | | | | | | | | | | | |
| Not elected for fair value option | — |
| | 5 |
| | — |
| | 5 |
| | — |
| | 2 |
| | — |
| | 2 |
|
| Total | $ | (2 | ) | | $ | 43 |
| | $ | (32 | ) | | $ | 9 |
| | $ | (10 | ) | | $ | 12 |
| | $ | (18 | ) | | $ | (16 | ) |
During 2016, net gains on derivatives and hedging activities totaled $9 million compared to net losses of $16 million in 2015. These amounts included expense of $32 million and expense of $18 million resulting from net settlements on derivative instruments used in economic hedges in 2016 and 2015, 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.
The ongoing impact of these valuation adjustments on the Bank cannot be predicted and the effects of these valuation adjustments may lead to significant volatility in future earnings, including earnings available for dividends.
Additional information about derivatives and hedging activities is provided in “Item 8. Financial Statements and Supplementary Data – Note 18 – Derivatives and Hedging Activities.”
Gains on Litigation Settlements, Net – During 2016 and 2015,gains relating to settlements with certain defendants in connection with the Bank’s PLRMBS litigation (after netting certain legal fees and expenses) totaled $510 million and $459 million, respectively.
Other Expense. Other expenses were $158 million in 2016 compared to $148 million in 2015, reflecting higher compensation and benefits and operating expenses in 2016.
Affordable Housing Program. The FHLBank Act requires each FHLBank to establish and fund an AHP. Each FHLBank’s AHP provides subsidies to members, which use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Subsidies may be in the form of direct grants or below-market interest rate advances.
The Bank’s total AHP assessments equaled $86 million in 2016, compared to $78 million in 2015. The increase in the AHP assessments reflected higher earnings in 2016.
Return on Average Equity. Return on average equity (ROE) was 13.63% in 2016, compared to 11.68% in 2015. The increase primarily reflected higher net income in 2016, and the decrease in average equity from $5.5 billion for 2015 to $5.2 billion for 2016.
Dividends and Retained Earnings. In 2016, the Bank paid dividends at an annualized rate of 12.33%, totaling $344 million, including $284 million in dividends on capital stock and $60 million in dividends on mandatorily redeemable capital stock. The dividends included four quarterly dividends and a special dividend in the amount of $100 million, including $83 million in dividends on capital stock and $17 million in dividends on mandatorily redeemable capital stock. In 2015, the Bank paid dividends at an annualized rate of 12.39%, totaling $434 million, including $369 million in dividends on capital stock and $65 million in dividends on mandatorily redeemable capital stock. The dividends included four quarterly dividends and a special dividend in the amount of $145 million, including $120 million in dividends on capital stock and $25 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.
Retained earnings related to valuation adjustments totaled $18 million and $10 million at December 31, 2016 and 2015, respectively. Retained earnings related to the JCE Agreement totaled $500 million and $358 million at December 31, 2016 and 2015, respectively. Restricted retained earnings for loss protection and capital compliance were $2.2 billion as of December 31, 2016.
The Bank will continue to monitor 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 in future quarters.
For more information, see “Item 1. Business – Dividends and Retained Earnings” and “Item 8. Financial Statements and Supplementary Data – Note 15 – Capital – Excess Stock Repurchase, Retained Earnings, and Dividend Framework.”
Financial Condition
Total assets were $123.4$92.8 billion at December 31, 2017,2023, compared to $91.9$121.1 billion at December 31, 2016.2022. Advances increaseddecreased by $27.6$28.1 billion, or 55%31%, to $77.4$61.3 billion at December 31, 2017,2023, from $49.8$89.4 billion at December 31, 2016. MBS increased by $0.8 billion, or 5%, to $17.8 billion at December 31, 2017, from $17.0 billion at December 31, 2016. Average total assets were $104.0 billion for 2017, a 13% increase compared to $91.9 billion for 2016.2022. Average advances were $70.2$76.1 billion for 2017,2023, a 13%48% increase from $62.2$51.5 billion for 2016.2022. Average MBS investments were $16.6$12.5 billion for 2017, a 6%2023, an 11% increase from $15.6$11.3 billion for 2016.
2022.
Advances outstanding at December 31, 2017,2023, included net unrealized losses of $104$375 million, of which $88$371 million represented unrealized losses on hedged advances hedged in accordance with the accounting for derivative instruments and hedging activities and $16$4 million represented unrealized losses on economically hedged advances that are carried at fair value in accordance with the fair value option. Advances outstanding at December 31, 2016,2022, included net unrealized losses of $12$717 million, of which $22$670 million represented unrealized losses on advances hedged in accordance with the accounting for derivative instrumentsadvances and hedging activities and $10$47 million represented unrealized gainslosses on economically hedged advances that are carried at fair value in accordance with the fair value option. The overall increasedecrease in the net unrealized losses on the hedged advances and advances carried at fair value from December 31, 2016,2022, to December 31, 2017,2023, was primarily attributable to the
effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors relative to theadvance terms on the Bank’s advancesand volumes during the period.
The Bank invests in interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold. These investments are funded with longer tenor debt to create liquidity.
Total liabilities were $116.6$86.2 billion at December 31, 2017, an increase2023, a decrease of $30.2$27.1 billion from $86.4$113.3 billion at December 31, 2016,2022, primarily reflecting a $31.8$28.2 billion increasedecrease in consolidated obligations outstanding to $115.5$83.5 billion at December 31, 2017,2023, from $83.7$111.7 billion at December 31, 2016, partially offset by a $1.3 billion decrease in borrowings from other FHLBanks. Average total liabilities were $97.9 billion for 2017, a 13% increase compared to $86.7 billion for 2016.2022. Average consolidated obligations were $96.6$103.8 billion for 20172023 and $85.1$77.6 billion for 2016.2022.
The average balances of interest-bearing demand and overnight deposits were $870 million, $817 million, and $925 million, and the weighted average interest rates paid on interest-bearing demand and overnight deposits were 5.01%, 1.38%, and 0.01% in 2023, 2022, and 2021, respectively. The average balances of term deposits were $8 million, $32 million, and $25 million, and the weighted average interest rates paid on term deposits were 4.55%, 2.86%, and 0.01% in 2023, 2022, and 2021, respectively. All Bank deposits are uninsured.
Consolidated obligations outstanding at December 31, 2017,2023, included net unrealized gains of $37$645 million on hedged consolidated obligation bonds hedged in accordance with the accounting for derivative instruments and hedging activities and unrealized gains of $6$29 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, 2016,2022, included net unrealized lossesgains of $6 million$1.1 billion on hedged consolidated obligation bonds hedged in accordance with the accounting for derivative instruments and hedging activities and unrealized gains of $8$52 million on economically hedged consolidated obligation bonds that are carried at fair value in accordance with the fair value option. The increasechange in the net unrealized gains on the hedged consolidated obligation bonds and on the consolidated obligation bonds carried at fair value from December 31, 2016,2022, to December 31, 2017,2023, 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 bondsbond terms and volumes during the period.
As provided by the FHLBank Act or regulations governing the operations of the FHLBanks, all FHLBanks have joint and several liability for all FHLBank consolidated obligations. The joint and several liability regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank, and as of December 31, 2017,2023, and through the filing date of this report, does not believe that it is probable that it will be asked to do so. The par value of the outstanding consolidated obligations of the FHLBanks was $1,034.3 billion$1.2 trillion at both December 31, 2023 and 2022.
For further information and discussion of the Bank’s joint and several liability for FHLBank consolidated obligations, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” and “Item 8. Financial Statements and Supplementary Data – Note 15 – Commitments and Contingencies.”
Accumulated other comprehensive loss was $72 million at December 31, 2017, and $989.3 billion2023, an increase of $43 million compared to $29 million at December 31, 2016.2022, mainly attributable to a decrease in the fair values of investment securities classified as AFS, which primarily reflected higher interest rate spreads during 2023, mostly impacting the Bank’s agency MBS portfolio.
Credit Ratings.On August 29, 2017,July 31, 2023, S&P Global Ratings (S&P) affirmed the long-term issuer credit ratings on all of the FHLBanks at AA+. The outlook for all ratings remained stable.
On November 14, 2017,January 24, 2024, Moody’s Investors Service (Moody’s) affirmed the Aaa long-term ratings of the FHLBank System. The outlook for all ratings remained stable.
Changes in the long-term credit ratings of individual FHLBanks do not necessarily affect the credit rating of the consolidated obligations issued on behalf of the FHLBanks. Rating agencies may change or withdraw a rating from time to time because of various factors, including operating results or actions taken, business developments, or
changes in their opinion regarding, among other factors, the general outlook for a particular industry or the economy.
LIBOR Transition.The Bank does not believe, ascessation of the date of this report, that it is probable thatrepresentative USD LIBOR occurred on June 30, 2023, and the Bank will be required to repay any principal or interest associated with consolidated obligations for which the Bank is not the primary obligor.fully completed its LIBOR transition plan during 2023.
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 and excludes interest expense that is recorded in “Mandatorily redeemable capital stock.” Other key financial information, such as any credit-related OTTI losses on the Bank’s PLRMBS, other expenses, and assessments, is not included in the segment reporting analysis, but is incorporated into the Bank’s overall assessment of financial performance. For a reconciliation of the Bank’s operating segment adjusted net interest income to the Bank’s total net interest income, see “Item 8. Financial Statements and Supplementary Data – Note 17 – Segment Information.”
Advances-Related Business.Products. The advances-related business consistsproducts consist of advances and other credit products, related financing and hedging instruments, liquidity and other non-MBS investments associated withproducts.
The following table presents the Bank’s role as a liquidity provider, and capital. Assets associated with this segment increased $29.4 billion to $103.4 billion (84% of total assets)advances portfolio by product type at December 31, 2017, from $74.0 billion (81%2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | |
| 2023 | | 2022 |
| (Dollars in millions) | Par Value | | Percentage of Total Par Value | | Par Value | | Percentage of Total Par Value |
| | | | | | | |
| | | | | | | |
| Adjustable – SOFR | $ | 2,055 | | | 2 | % | | 2,690 | | | 3 | % |
| Adjustable – SOFR, callable at borrower’s option | 3,000 | | | 5 | | | 9,500 | | | 11 | |
| | | | | | | |
| | | | | | | |
| Subtotal adjustable rate advances | 5,055 | | | 7 | | | 12,190 | | | 14 | |
| Fixed | 10,240 | | | 17 | | | 45,471 | | | 50 | |
| Fixed – amortizing | 47 | | | — | | | 60 | | | — | |
Fixed – with PPS(1) | 209 | | | 1 | | | 965 | | | 1 | |
Fixed – with FPS(1) | 38,144 | | | 62 | | | 18,035 | | | 20 | |
| | | | | | | |
| | | | | | | |
Fixed – callable at borrower’s option with FPS(1) | 340 | | | 1 | | | 340 | | | — | |
| | | | | | | |
| | | | | | | |
Fixed – putable at Bank’s option with FPS(1) | 1,353 | | | 2 | | | 800 | | | 1 | |
| | | | | | | |
| Subtotal fixed rate advances | 50,333 | | | 83 | | | 65,671 | | | 72 | |
| Daily variable rate | 6,322 | | | 10 | | | 12,256 | | | 14 | |
| Total par value | $ | 61,710 | | | 100 | % | | $ | 90,117 | | | 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. In November 2018, the Bank discontinued offering advances with PPS, and any prepayment credit on an advance with PPS would be limited to the lesser of total assets) at December 31, 2016.
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 cost10% of the consolidated obligations funding these assets, includingpar value of the net settlements fromadvance or the gain recognized on the termination of the associated interest rate exchange agreements, and from earnings on capital.swap, which may also include a similar contractual gain limitation.
Adjusted net interest income for this segment was $234 million in 2017, an increase of $80 million, or 52%, compared to $154 million in 2016. The increase was primarily due to an improvement in spreads and higher balances on advances-related assets and higher earnings from an increase in spreads on non-MBS investments, partially offset by lower earnings from advance prepayment fees.
Adjusted net interest income for this segment represented 42%, 31%, and 31% of total adjusted net interest income for 2017, 2016, and 2015, respectively.
Members and nonmember borrowers prepaid $8.5 billiontypes of advances in 2017 compared to $3.5 billion in 2016. Interest income was increased by net prepayment fees of $1 million in 2017 and $5 million in 2016.
Advances – The par value of advances outstanding increased by $27.7 billion, or 56%, to $77.5 billioncontractual maturity at December 31, 2017, from $49.8 billion at December 31, 2016. Average advances outstanding were $70.2 billion in 2017, a 13% increase from $62.2 billion in 2016. Outstanding balances of advances may significantly increase2023, and decrease from period to period because of a member’s liquidity and financial strategies.
As of December 31, 2017, advances outstanding to the Bank’s top five borrowers and their affiliates increased by $16.0 billion, and advances outstanding to the Bank’s other borrowers increased by $11.7 billion. Advances to the top five borrowers increased to $48.4 billion at December 31, 2017, from $32.4 billion at December 31, 2016. (See
“Item 8. Financial Statements and Supplementary Data – Note 8 – Advances – Credit and Concentration Risk” for further information.)
During the fourth quarter of 2017, Charles Schwab Bank increased its advances balance from $5.0 billion as of September 30, 2017 to $15.0 billion as of December 31, 2017. If the advances outstanding to Charles Schwab Bank (and the other top five borrowers) with contractual maturities of one year or less are repaid as they come due and no other advances are made to replace them, the Bank’s assets would decrease significantly in 2018. In addition, as of December 31, 2017, JPMorgan Chase had $11.4 billion in advances outstanding, of which a significant portion is expected to be redeemed during 2018. Because JPMorgan Chase is not a member of the Bank, it is not able to borrow new advances from the Bank or replace outstanding advances as they are repaid or prepaid. (See “Item 8. Financial Statements and Supplementary Data – Note 8 – Advances – Redemption Terms” for further information.)
The $27.7 billion increase in advances outstanding primarily reflected a $20.5 billion increase in fixed rate advances and a $4.9 billion increase in adjustable rate advances, partially offset by a $2.3 billion increase in variable rate advances.
The components of the advances portfolio at December 31, 2017 and 2016,2022, are presented in the following table.
|
| | | | | | | | | | | | | |
| Advances Portfolio by Product Type |
| | | | | | | | |
| | 2017 | | 2016 |
| (Dollar in millions) | Par Value |
| | Percentage of Total Par Value |
| | Par Value |
| | Percentage of Total Par Value |
|
| Adjustable – LIBOR | $ | 6,957 |
| | 9 | % | | $ | 3,232 |
| | 6 | % |
| Adjustable – LIBOR, callable at borrower’s option | 16,495 |
| | 21 |
| | 15,396 |
| | 31 |
|
Adjustable – LIBOR, with caps and/or floors and PPS(1) | 83 |
| | — |
| | 30 |
| | — |
|
| Adjustable – Other Indices | 2 |
| | — |
| | 2 |
| | — |
|
| Subtotal adjustable rate advances | 23,537 |
| | 30 |
| | 18,660 |
| | 37 |
|
| Fixed | 38,242 |
| | 50 |
| | 20,448 |
| | 42 |
|
| Fixed – amortizing | 210 |
| | — |
| | 214 |
| | — |
|
Fixed – with PPS(1) | 4,035 |
| | 5 |
| | 3,060 |
| | 6 |
|
Fixed – with caps and PPS(1) | 425 |
| | 1 |
| | 375 |
| | 1 |
|
| Fixed – callable at borrower’s option | 1,802 |
| | 2 |
| | 2 |
| | — |
|
Fixed – callable at borrower’s option with PPS(1) | 75 |
| | — |
| | 107 |
| | — |
|
| Fixed – putable at Bank’s option | — |
| | — |
| | 50 |
| | — |
|
Fixed – putable at Bank’s option with PPS(1) | — |
| | — |
| | 75 |
| | — |
|
| Subtotal fixed rate advances | 44,789 |
| | 58 |
| | 24,331 |
| | 49 |
|
| Daily variable rate | 9,160 |
| | 12 |
| | 6,866 |
| | 14 |
|
| Total par value | $ | 77,486 |
| | 100 | % | | $ | 49,857 |
| | 100 | % |
| |
(1) | Partial prepayment symmetry (PPS) is a product feature 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. |
| | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | |
| 2023 | | 2022 |
| (Dollars in millions) | Par Value | | Percentage of Total Par Value | | Par Value | | Percentage of Total Par Value |
| Fixed: | | | | | | | |
| Within 1 year | $ | 23,850 | | | 39 | % | | $ | 47,607 | | | 54 | % |
| After 1 year through 3 years | 18,663 | | | 30 | | | 10,428 | | | 12 | |
| After 3 years through 5 years | 5,453 | | | 9 | | | 5,598 | | | 6 | |
| After 5 years through 15 years | 617 | | | 1 | | | 827 | | | 1 | |
| Thereafter | 10 | | | — | | | 10 | | | — | |
| Subtotal fixed rate advances | 48,593 | | | 79 | | | 64,470 | | | 73 | |
| Fixed – callable at borrower’s option: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| After 5 years through 15 years | 340 | | | 1 | | | 340 | | | — | |
| | | | | | | |
| Subtotal fixed – callable at borrower’s option advances | 340 | | | 1 | | | 340 | | | — | |
| Fixed – putable: | | | | | | | |
| | | | | | | |
| After 1 year through 3 years | 289 | | | — | | | 200 | | | — | |
| After 3 years through 5 years | 750 | | | 1 | | | 600 | | | 1 | |
| After 5 years through 15 years | 314 | | | 1 | | | — | | | — | |
| | | | | | | |
| Subtotal fixed rate – putable advances | 1,353 | | | 2 | | | 800 | | | 1 | |
| Fixed – amortizing: | | | | | | | |
| Within 1 year | 15 | | | — | | | 14 | | | — | |
| After 1 year through 3 years | 18 | | | — | | | 27 | | | — | |
| After 3 years through 5 years | 5 | | | — | | | 8 | | | — | |
| After 5 years through 15 years | 9 | | | — | | | 12 | | | — | |
| | | | | | | |
| Subtotal fixed – amortizing advances | 47 | | | — | | | 61 | | | — | |
| Adjustable and variable: | | | | | | | |
| Within 1 year | 8,375 | | | 13 | | | 13,929 | | | 15 | |
| After 1 year through 3 years | — | | | — | | | 1,015 | | | 1 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Subtotal adjustable and variable rate advances | 8,375 | | | 13 | | | 14,944 | | | 16 | |
| Adjustable – callable at borrower’s option: | | | | | | | |
| Within 1 year | 3,000 | | | 5 | | | 9,500 | | | 10 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Subtotal adjustable – callable at borrower’s option advances | 3,000 | | | 5 | | | 9,500 | | | 10 | |
| Overdrawn and overnight deposit accounts | 2 | | | — | | | 2 | | | — | |
| Total par value | $ | 61,710 | | | 100 | % | | $ | 90,117 | | | 100 | % |
For a discussion of advances credit risk, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Advances.”
Non-MBS Investments –The Bank’s non-MBS investment portfolio consists of financial instruments that are used primarily to facilitate the Bank’s role as a cost-effective provider of credit and liquidity to members and to support the operations of the Bank. The Bank’s total non-MBS investment portfolio was $25.7 billion and $23.9 billion as of December 31, 2017 and 2016, respectively. The increase in the total size of the non-MBS investment portfolio
reflects higher balances of Federal funds sold, partially offset by lower balances of securities purchased under agreements to resell, agency securities, and certificates of deposit.
Interest rate payment terms for non-MBS investments classified as HTM at December 31, 2017 and 2016, are detailed in the following table:
|
| | | | | | | |
| Non-MBS Investments: Interest Rate Payment Terms |
| | | | |
| (In millions) | 2017 |
| | 2016 |
|
| Amortized cost of HTM securities other than MBS: | | | |
| Fixed rate | $ | 500 |
|
| $ | 1,350 |
|
| Adjustable rate | 187 |
|
| 225 |
|
| Total | $ | 687 |
|
| $ | 1,575 |
|
Borrowings – Total liabilities (primarily consolidated obligations) funding the advances-related business increased to $96.6 billion at December 31, 2017, from $68.5 billion at December 31, 2016. For further information and discussion of the Bank’s joint and several liability for FHLBank consolidated obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” and “Item 8. Financial Statements and Supplementary Data – Note 20 – 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. This combined financing structure enables the Bank to meet its funding needs at costs not generally attainable solely through the issuance of comparable term non-callable debt.
At December 31, 2017, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $95.5 billion, of which $44.3 billion were hedging advances, $50.4 billion were hedging consolidated obligations, $0.8 billion were economically hedging trading securities, and $14 million were offsetting derivatives. At December 31, 2016, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $59.4 billion, of which $18.7 billion were hedging advances, $39.9 billion were hedging consolidated obligations, $0.7 billion were economically hedging trading securities, and $0.1 billion were offsetting derivatives. The hedges associated with advances and consolidated obligations were primarily used to convert the fixed rate cash flows of the advances and consolidated obligations to adjustable rate cash flows or to manage the interest rate sensitivity and net repricing gaps of assets, liabilities, and interest rate exchange agreements.
FHLBank System consolidated obligation bonds and discount notes, along with similar debt securities issued by other GSEs such as Fannie Mae and Freddie Mac, are generally referred to as agency debt. The costs of debt issued by the FHLBanks and the other GSEs generally rise and fall with increases and decreases in general market interest rates.
The following table presents a comparison of selected market interest rates as of December 31, 2017 and 2016. All selected market interest rates increased in 2017 compared to the prior yearend.
|
| | | | | | | |
| Selected Market Interest Rates |
| | | | | | |
| Market Instrument | 2017 | | 2016 |
| Federal Reserve target range for overnight Federal funds | 1.25-1.50 |
| % | | 0.50-0.75 |
| % |
| 3-month Treasury bill | 1.36 |
| | | 0.50 |
| |
| 3-month LIBOR | 1.69 |
| | | 1.00 |
| |
| 2-year Treasury note | 1.89 |
| | | 1.19 |
| |
| 5-year Treasury note | 2.21 |
| | | 1.93 |
| |
The following table presents a comparison of the average issuance cost of FHLBank System consolidated obligation bonds and discount notes converted to LIBOR-indexed liabilities through interest rate swaps in 2017 and 2016. The average issuance cost relative to LIBOR of bonds improved while the average issuance cost of discount notes deteriorated in 2017 compared to 2016.
|
| | | |
| | Spread to LIBOR of Average Cost of Consolidated Obligations for the Twelve Months Ended |
| (In basis points) | December 31, 2017 | | December 31, 2016 |
| Consolidated obligation bonds | –21.6 | | –14.8 |
| Consolidated obligation discount notes (one month and greater) | –26.1 | | –30.5 |
Mortgage-Related Business. Products. The mortgage-related business consistsproducts consist of MBS investments and mortgage loans acquired through the Mortgage Partnership Finance (MPF) Program,Finance® (MPF®) Program. (“Mortgage Partnership Finance” and the related financing and hedging instruments. Adjusted net interest income for this segment is derived primarily from the difference, or spread, between the yield on the MBS and mortgage loans and the cost“MPF” are registered trademarks of the consolidated obligations funding those assets, including the net settlements from associated interest rate exchange agreements.FHLBank of Chicago.)
At December 31, 2017, assets associated with this segment were $20.0 billion (16% of total assets), an increase of $2.1 billion from $17.9 billion at December 31, 2016 (19% of total assets).
Adjusted net interest income for this segment was $325 million in 2017, a decrease of $13 million, or 4%, from $338 million in 2016. The decrease in adjusted net interest income was due to lower spreads on interest-earning assets, primarily caused by lower spreads on new investments, and lower accretion-related income, which more than offset the impact of higher average balances of MBS investments and mortgage loans.
Adjusted net interest income for this segment represented 58%, 69%, and 69% of total adjusted net interest income for 2017, 2016, and 2015, respectively.
MBS Investments – The Bank’s MBS portfolio was $17.8$15.3 billion at December 31, 2017,2023, compared with $17.0$10.9 billion at December 31, 2016.2022. During 2017,2023, the Bank’s MBS portfolio increased primarily becauseas a result of $4.9$4.7 billion in new MBS investments,purchases and an increase of $190 million in basis adjustments on hedged items designated as fair value relationships, partially offset by $4.1 billion$596 million in principal repayments. Average MBS investments were $16.6$12.5 billion in 2017,2023, an increase of $1.0$1.2 billion from $15.6$11.3 billion in 2016.2022. For a discussion of the composition of the Bank’s MBS portfolio, and the Bank’s OTTI analysis of that portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Investments” and “Item 8. Financial Statements and Supplementary Data – Note 7 – Other-Than-Temporary Impairment Analysis.”
Intermediate-term and long-term fixed rate MBS investments are subject to prepayment risk, and intermediate-term and long-term adjustable rate MBS investments are also subject to interest rate cap risk. The Bank has managed these risks predominately by purchasing intermediate-term fixed rate MBS (rather than long-term fixed rate MBS), funding the fixed rate MBS with a mix of non-callable and callable debt, and using interest rate exchange agreements with interest rate risk characteristics similar to callable debt. The Bank has purchased interest rate caps to hedge some of the interest rate cap risk associated with the long-term adjustable rate MBS investments.
Interest rate payment terms for MBS securities at December 31, 2017 and 2016, are shown in the following table:
|
| | | | | | | |
| MBS Investments: Interest Rate Payment Terms |
| | | | |
| (In millions) | 2017 |
| | 2016 |
|
| Amortized cost of MBS: | | | |
| Passthrough securities: | | | |
| Fixed rate | $ | 26 |
| | $ | 84 |
|
| Adjustable rate | 2,406 |
| | 1,414 |
|
| Subtotal | 2,432 |
| | 1,498 |
|
| Collateralized mortgage obligations: | | | |
| Fixed rate | 4,738 |
| | 6,427 |
|
| Adjustable rate | 10,325 |
| | 8,989 |
|
| Subtotal | 15,063 |
| | 15,416 |
|
| Total | $ | 17,495 |
| | $ | 16,914 |
|
Certain MBS classified as fixed rate passthrough securities and fixed rate collateralized mortgage obligations have an initial fixed interest rate that subsequently converts to an adjustable interest rate on a specified date as follows:
|
| | | | | | | |
| (In millions) | 2017 |
| | 2016 |
|
| Passthrough securities: | | | |
| Converts in 1 year or less | $ | — |
| | $ | 48 |
|
| Converts after 1 year through 5 years | 24 |
| | 32 |
|
| Total | $ | 24 |
| | $ | 80 |
|
| Collateralized mortgage obligations: | | | |
| Converts in 1 year or less | $ | — |
| | $ | 91 |
|
| Total | $ | — |
| | $ | 91 |
|
MPF Program – Under the MPF Program, the Bank may purchase from members, for its own portfolio, conventional conforming fixed rate mortgage loans under the MPF Original product and mortgage loans insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) under the MPF Government product. In addition, the Bank may facilitate the purchase of conforming fixed rate mortgage loans from members for concurrent sale to Fannie Mae under the MPF Xtra product; of jumbo fixed rate mortgage loans for concurrent sale to Redwood Residential Acquisition Corporation, a subsidiary of Redwood Trust, Inc., a real estate investment trust, under the MPF Direct product; and of government-insured or government-guaranteed mortgage loans that will be packaged into securities backed by the mortgage loans and guaranteed by Ginnie Mae under the MPF Government MBS product. When members sell mortgage loans under the MPF Xtra, MPF Direct, and MPF Government MBS products, the loans are sold to a third-party investor and are not recorded on the Bank’s Statements of Condition.
From May 2002 through October 2006, the Bank purchased conventional conforming fixed rate mortgage loans from its participating financial institutions under the MPF Original and MPF Plus products. Participating members originated or purchased the mortgage loans, credit-enhanced them and sold them to the Bank, and generally retained the servicing of the loans.
As of December 31, 2017, 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 MPF Servicing Guide establishes the MPF Program requirements for loan servicing and servicer eligibility. At the time the Bank purchases loans under the MPF Program, the member selling the loans makes representations that all mortgage loans it delivers to the Bank have the characteristics of an investment quality mortgage. An investment quality mortgage is a loan that is made to a borrower from whom repayment of the debt can be expected, is adequately secured by real property, and was originated and is being serviced in accordance with the MPF Origination Guide and MPF Servicing Guide or an approved waiver.
The FHLBank of Chicago, which developed the MPF Program, establishes the minimum eligibility standards for members to participate in the program, the structure of the MPF products, and the standard eligibility criteria for the loans; establishes pricing and manages the delivery mechanism for the loans; publishes and maintains the MPF Origination Guide and the MPF Servicing Guide; and provides operational support for the program. In addition, the FHLBank of Chicago acts as master servicer and as master custodian for the MPF loans held by the Bank and is compensated for these services through fees paid by the Bank. The FHLBank of Chicago is obligated to provide operational support to the Bank for all loans purchased until those loans are fully repaid.
As of December 31, 2017, the Bank had approved 23 members as participating financial institutions since renewing its participation in the MPF Program in 2013. The Bank purchased $1.4 billion in eligible loans under the MPF Original product during 2017.
Mortgage loan balances increased to $2.1 billion at December 31, 2017, from $0.8 billion at December 31, 2016, an increase of $1.3 billion. Average mortgage loans were $1.4 billion in 2017, an increase of $0.7 billion from $0.7 billion in 2016.
At December 31, 2017 and 2016, the Bank held conventional conforming fixed rate mortgage loans purchased under one of two MPF products, MPF Plus or MPF Original, which are described in greater detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – MPF Program.Investments.”
Interest rate payment terms for MBS classified as trading, AFS, and held-to-maturity (HTM) at December 31, 2023 and 2022, are shown in the following table:
| | | | | | | | | | | |
|
| | | |
| (In millions) | 2023 | | 2022 |
| Fair value of trading securities: | | | |
| | | |
| Adjustable rate | $ | — | | | $ | 1 | |
| Total trading securities | $ | — | | | $ | 1 | |
| Amortized cost of AFS securities: | | | |
| Fixed rate | $ | 12,797 | | | $ | 7,881 | |
| Adjustable rate | 778 | | | 864 | |
| Total AFS securities | $ | 13,575 | | | $ | 8,745 | |
| Amortized cost of HTM securities: | | | |
| Fixed rate | $ | 202 | | | $ | 265 | |
| Adjustable rate | 1,645 | | | 1,916 | |
| Total HTM securities | $ | 1,847 | | | $ | 2,181 | |
Mortgage Loans - Mortgage loan balances were $754 million at December 31, 2017 and 2016,2023, a decrease of $61 million from $815 million at December 31, 2022. Average mortgage loans were $786 million in 2023, a decrease of $89 million from $875 million in 2022.
Mortgage loan balances by contractual maturity at December 31, 2023, were as follows:
| | | | | | | |
|
| | | |
| (In millions) | 2023 | | |
| Within 1 year | $ | 26 | | | |
| After 1 year through 5 years | 114 | | | |
| After 5 years through 15 years | 283 | | | |
| Thereafter | 293 | | | |
| Total unpaid principal balance | $ | 716 | | | |
| | | |
| | | |
| | | |
| | | |
|
| | | | | | | |
| Mortgage Loan Balances by MPF Product Type |
| | | | |
| (In millions) | 2017 |
| | 2016 |
|
| MPF Plus | $ | 267 |
| | $ | 354 |
|
| MPF Original | 1,738 |
| | 460 |
|
| Subtotal | 2,005 |
| | 814 |
|
| Unamortized premiums | 76 |
| | 18 |
|
| Unamortized discounts | (5 | ) | | (6 | ) |
| Mortgage loans held for portfolio | 2,076 |
| | 826 |
|
| Less: Allowance for credit losses | — |
| | — |
|
| Mortgage loans held for portfolio, net | $ | 2,076 |
| | $ | 826 |
|
The following table presents the balances of mortgage loans wholly owned by the Bank and mortgage loans with allocated participation interests that were outstanding as of December 31, 20172023 and 2016.2022. Only the FHLBank of Chicago owned participation interests in any of the Bank’s MPF loans.
|
| | | | | | | |
| Balances Outstanding on Mortgage Loans |
| | | | |
| (Dollars in millions) | 2017 |
| | 2016 |
|
| Outstanding amounts wholly owned by the Bank | $ | 1,916 |
| | $ | 688 |
|
| Outstanding amounts with participation interests by FHLBank: | | | |
| San Francisco | 89 |
| | 126 |
|
| Chicago | 62 |
| | 84 |
|
| Total | $ | 2,067 |
| | $ | 898 |
|
| Number of loans outstanding: | | | |
| Number of outstanding loans wholly owned by the Bank | 5,797 |
| | 3,671 |
|
| Number of outstanding loans participated | 2,203 |
| | 3,180 |
|
| Total number of loans outstanding | 8,000 |
| | 6,851 |
|
| | | | | | | | | | | |
|
| | | |
| (in millions) | 2023 | | 2022 |
| Outstanding balances wholly owned by the Bank | $ | 693 | | | $ | 747 | |
| Outstanding balances with participation interests by FHLBank: | | | |
| San Francisco | 23 | | | 28 | |
| Chicago | 17 | | | 20 | |
| Total | $ | 733 | | | $ | 795 | |
| | | |
| | | |
| | | |
| | | |
Under the Bank’s agreement with the FHLBank of Chicago, the credit risk is shared pro rata between the two FHLBanks according to: (i) their respective ownership of the loans in each master commitment for MPF Plus and (ii) their respective participation shares of the first loss account for the master commitment for MPF Original.
The Bank is responsible for credit oversight of the participating financial institution, which consists of monitoring the financial condition of the participating financial institution on a quarterly basis and holding collateral to secure the participating financial institution’s outstanding credit enhancement obligations. Monitoring of the participating financial institution’s financial condition includes an evaluation of its capital, assets, management, earnings, and liquidity.
FHLBanks.
The Bank performs periodic reviews of its mortgage loan portfolio to identify probable credit losses in the portfolio and to determine the likelihood of collection on the loans in the portfolio. For more information on the Bank’s mortgage loan portfolio, see “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies,” “Item 8. Financial Statements and Supplementary Data – Note 6 – Mortgage Loans Held for Portfolio,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – MPF Program” and “Management’s Discussion and AnalysisRisk.”
Table of Financial Condition and ResultsContents
For information on the Bank’s management of Operations – Critical Accounting Policies and Estimates – Allowance for Credit Losses – Mortgage Loans Acquired Under the MPF Program.”
The Bank manages the interest rate risk and prepaymentmarket risk of the mortgage loans by funding these assets with callable and non-callable debt, by entering into certain interest rate swaps, and by limiting the size of the fixed rate mortgage loan portfolio.
Borrowings – Total consolidated obligations fundingrelated to the mortgage-related business, increased $2.1 billion to $20.0 billion at December 31, 2017, from $17.9 billion at December 31, 2016, paralleling the increase in MBS investments. For further information and discussion of the Bank’s joint and several liability for FHLBank consolidated obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” and “Item 8. Financial Statements and Supplementary DataRisk Management – Note 20 – Commitments and Contingencies.Market Risk.”
The notional amount of interest rate exchange agreements associated with the mortgage-related business totaled $4.1 billion at December 31, 2017, of which $2.6 billion were hedging or were associated with consolidated obligations funding the mortgage portfolio and $1.5 billion were associated with MBS. The notional amount of interest rate exchange agreements associated with the mortgage-related business totaled $5.6 billion at December 31, 2016, of which $3.4 billion were hedging or were associated with consolidated obligations funding the mortgage portfolio and $2.2 billion were associated with MBS.
Liquidity and Capital Resources
The Bank’s financial strategies are designed to enable the Bank to expand and contract its assets, liabilities, and capitalbalance sheet as membership composition and member credit needs change. The Bank’s liquidity and capital resources are designed to support its financial strategies. The Bank’s primary source of liquidity is its access to the debt capital markets through consolidated obligation issuance, which is described in “Item 1. Business – Funding Sources.” The Bank’s status as a GSE is critical to maintaining its access to the capital markets. Although consolidated obligations are backed only by the financial resources of the FHLBanks and are not guaranteed by the U.S. government, the capital markets have traditionally treated the FHLBanks’ consolidated obligations as comparable to federal agency debt, providing the FHLBanks with access to funding at relatively favorable rates. The maintenance of the Bank’s capital resources is governed by its capital plan.
Liquidity
The Bank strivesseeks 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 in order to maintain ready access to sufficient liquidavailable funds to meet normal transaction requirements, take advantage of appropriate investment opportunities, and covermanage unforeseen liquidity demands.
The Bank’s ability to expand as member credit needs increase is based, in part, on the capital stock requirements for advances. A member is required to maintain sufficient capital stock to support its advances activity with the Bank. Unless a member already has sufficient excess capital stock, it must increase its capital stock investment in the Bank as its balance of outstanding advances increases. Under the Bank’s Capital Plan, the Bank may also require a member to purchase activity-based stock for mortgage loans purchased and held by the Bank. The activity-based capital stock requirement is currently 2.7% for outstanding advances and 0.0% for mortgage loans purchased and held by the Bank, while the Bank’s minimum regulatory capital-to-assets ratio requirement is currently 4.0%; therefore, the Bank maintains a certain required level of retained earnings to support capital compliance and business growth. For more information, see “Item 1. Business – Dividends and Retained Earnings” and “Item 8. Financial Statements and Supplementary Data – Note 15 – Capital – Excess Stock Repurchase, Retained Earnings, and Dividend Framework.” Because the Bank’s capital plan does not provide for the issuance of Class A stock (non-permanent capital that is redeemable upon six months’ notice), regulatory capital for the Bank is composed of retained earnings and Class B stock, including mandatorily redeemable capital stock (which is classified as a liability for financial reporting purposes), and excludes AOCI.
The Bank is also able to contract its balance sheet as borrowers’ credit needs decrease. As changing borrower credit
needs result in reduced advances, borrowers will have capital stock in excess of the amount required by the Bank’s
capital plan. The Bank’s capital plan allows the Bank to repurchase a borrower’s excess stock, including mandatorily redeemable capital stock, at the Bank’s
discretion. The Framework sets forth the Bank’s practice of repurchasing the surplus capital stock of all members and the excess capital stock of all nonmember shareholders on a regular quarterly basis, at the Bank’s discretion, and subject to certain statutory and regulatory requirements and to the Bank’s Risk Management Policy, Capital Plan, and capital plan limitations.the Framework. Surplus capital stock is defined as any stock holdings in excess of 115% of a member’s or former member’s minimum stock requirement.
The Bank may also allow its consolidated obligations to mature without replacement or repurchase and retire outstanding consolidated obligations, allowing its balance sheet to contract.
The Bank maintained its strong regulatory capital position while repurchasing $414 million and $812 million in excess capital stock during 2017 and 2016, respectively, and redeeming $75 million and $28 million in mandatorily redeemable capital stock in 2017 and 2016, respectively. Total excess capital stock was $493 million as of December 31, 2017, compared to $488 million as of December 31, 2016.
The Bank is not able to predict future trends in member credit needs since they are driven by complex interactions among a number of factors, including members’ mortgage loan growth, other asset portfolio growth, deposit growth, and the attractiveness of advances compared to other wholesale borrowing alternatives. The Bank regularly monitors current trends and anticipates future debt issuance needs with the objective of being prepared to fund its members’ credit needs and appropriate investment opportunities.
Short-term liquidity management practices are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk.” The Bank manages its liquidity needs to enable it to meet all of its contractual obligations on a timely basis, to support its members’ daily liquiditycredit needs, and to pay operating expenditures as they come due. At December 31, 2023, the Bank’s contractual obligations on operating leases were $47 million due through 2028 and $24 million due thereafter.
The Bank maintains contingency liquidity plans to meet its obligations and the liquiditymember credit needs of members in the event of short-term operational disruptions at the Bank or the Office of Finance or short-term disruptions of the capital markets. For further information and discussion of the Bank’s guarantees and other commitments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Off-Balance Sheet Arrangements and Aggregate Contractual Obligations.” For further information and discussion of the Bank’s joint and several liability for FHLBank consolidated obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” and “Item 8. Financial Statements and Supplementary Data – Note 2015 – Commitments and Contingencies.” Additional information with respect to the Bank’s consolidated obligations is presented in “Item 8. Financial Statements and Supplementary Data – Note 8 – Consolidated Obligations” and “Note 15 – Commitments and Contingencies.”
Capital
The Bank may repurchase some or allIn addition, “Item 8. Financial Statements and Supplementary Data – Note 11 – Capital” includes a discussion of a shareholder’s excess capital stock, including any excessthe Bank’s mandatorily redeemable capital stock, atand “Item 8. Financial Statements and Supplementary Data – Note 12 – Employee Retirement Plans and Incentive Compensation Plans” includes a discussion of the Bank’s discretion, subject to certain statutoryretirement plans and regulatory requirements. related expenses and commitments.
The Bank enters into derivative financial instruments, which create contractual obligations, as part of the Bank’s market risk management. “Item 8. Financial Statements and Supplementary Data – Note 13 – Derivatives and Hedging Activities” includes additional information regarding derivative financial instruments.
Capital
The Bank’s ability to expand as member credit needs increase is based, in part, on the capital stock requirements for advances. A member is required to maintain sufficient capital stock to support its advances and letters of credit activity with the Bank. Unless a member already has sufficient excess stock, it must giveincrease its capital stock investment in the shareholder 15 days’ written notice; however,Bank as its balance of outstanding advances increases. The activity-based capital stock requirement is currently 2.7% for outstanding advances and 0.1% of notional balances for outstanding letters of credit. The Bank’s minimum regulatory capital-to-assets ratio requirement is currently 4.0%; therefore, the shareholder may waive this notice period.Bank maintains a certain required level of retained earnings to support capital compliance and business growth. For more information, see “Item 1. Business – Capital – Dividends and Retained Earnings” and “Item 8. Financial Statements and Supplementary Data – Note 11 – Capital – Excess Stock Repurchase, Retained Earnings, and Dividend Framework.” Because the Bank’s capital plan does not provide for the issuance of Class A stock (non-permanent capital that is redeemable upon six months’ notice), regulatory capital for the Bank is composed of retained earnings and Class B stock, including mandatorily redeemable capital stock (which is classified as a liability for financial reporting purposes), and excludes AOCI.
Retained Earnings – The Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework (Framework) assesses the level and adequacy of retained earnings and establishes amounts to be retained in restricted retained earnings, which are not made available in the current dividend period, and maintains an amount of total retained earnings at least equal to its required retained earnings as described in the Framework. The Bank may also repurchase allsatisfies 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 board of directors periodically reviews the retained earnings methodology and analysis to determine whether any adjustments are appropriate.
The JCE Agreement is intended to enhance the capital position of each FHLBank. In accordance with the JCE Agreement, each FHLBank is required to reclassify an amount equal to 20% of its net income each quarter to a member's excess capital stockseparate restricted retained earnings account until the balance of the account, calculated as of the last day of each calendar quarter, equals at a member’s request, atleast 1% of that FHLBank's average balance of outstanding consolidated obligations for the Bank’s discretion, subjectcalendar quarter. Under the JCE Agreement, these restricted retained earnings will not be available to certain statutory and regulatory requirements. Excess capital stock is defined as any capital stock holdingspay dividends. Additionally, the JCE Agreement provides that amounts in restricted retained earnings in excess of 150% of the Bank’s restricted retained earnings minimum (i.e., 1% of the Bank’s total consolidated obligations calculated as of the last day of each calendar quarter) may be released from restricted retained earnings.
Excess Stock – The Bank’s practice is to repurchase the surplus capital stock of all members and the excess stock of all former members on a shareholder'sdaily schedule. The Bank calculates the amount of stock to be repurchased each business day based on the shareholder’s capital stock outstanding after all stock transactions are completed for the day, ensuring that each member and former member would continue to meet its minimum capital stock requirement as established byafter the Bank’s capital plan.
repurchase. The Bank may change this practice at any time.
A member may schedule redemption of its excess capital stock following a five-year redemption period, subject to certain conditions, by providing a written redemption notice to the Bank. Capital stock may also become subject to redemption following a five-year redemption period after a member gives notice of intention to withdraw from membership or attains nonmember status by merger or acquisition, charter termination, or other involuntary membership termination, or after a receiver or other liquidating agent for a member transfers the member’s Bank capital stock to a nonmember entity. Capital stock required to meet a withdrawing member’s membership capital
stock requirement may only be redeemed at the end of the five-year redemption period, subject to statutory and regulatory limits and other conditions.
On a quarterly basis, the Bank determines whether it will repurchase excess capital stock. The Bank maintained its strong regulatory capital position while repurchasing $414 million and $812 million in excess capital stock during 2017 and 2016, respectively.
The Bank's Excess Stock Repurchase, Retained Earnings, and Dividend Framework (Framework) sets forth the Bank’s practice of repurchasing the surplus capital stock of all members and the excess capital stock of all nonmember shareholders on a regular quarterly basis, at the Bank’s discretion and subject to certain statutory and regulatory requirements and to the Bank’s Risk Management Policy and capital plan limitations. Surplus capital stock is defined as any stock holdings in excess of 115% of a member’s minimum stock requirement, and excess capital stock is defined as any stock holdings in excess of a shareholder’s minimum stock requirement. In addition, at the Bank’s discretion, all of the excess stock held by a member may be repurchased upon request of the member, subject to the requirements and limitations mentioned above. In accordance with the Framework, each quarter Bank management evaluates and determines the amount of capital stock to be repurchased in that quarter, if any, giving consideration to certain capital metrics and capital management objectives and strategies, and subject to the requirements and limitations listed above. At least 15 calendar days before any repurchase, the Bank will notify shareholders of its intention to repurchase capital stock and of the scheduled repurchase date. On the scheduled
repurchase date, the Bank will calculate the amount of stock to be repurchased to ensure that each member and former nonmember shareholder will continue to meet its minimum stock requirement after the repurchase.
In accordance with its practice, the Bank plans to repurchase the surplus capital stock of all members and the excess capital stock of all nonmember shareholders on March 16, 2018.
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 2017 and 2016, the Bank redeemed $75 million and $28 million, respectively, in mandatorily redeemable capital stock, for which the five-year redemption period had expired, at its $100 par value. The stock was redeemed on the scheduled redemption dates or, for stock that was not excess stock on its scheduled redemption date because of outstanding activity with the Bank, on the first available repurchase date after the stock was no longer required to support outstanding activity with the Bank.
The Bank will continue to monitor theits financial condition, of its PLRMBS portfolio, the ratio of the Bank’s estimated market value of totalfinancial performance, its capital to par value of capital stock, itsposition, overall financial performance and retained earnings, developments in the mortgage and credit markets,market conditions, and other relevant information as the basis for determining the repurchase of excess capital stock in future quarters.
ExcessOn July 29, 2022, the Bank’s board of directors approved proposed amendments to the Bank’s capital stock totaled $493 million as of December 31, 2017, which included surplusplan. These amendments are subject to review and approval by the Finance Agency. In connection with the Finance Agency’s review, the proposed amendments are subject to change and there can be no assurance that any amendments will be adopted. If approved by the Finance Agency, a revised capital stock of $317 million. Excess capital stock totaled $488 million as of December 31, 2016, which included surplus capital stock of $325 million.
plan will become effective at a future date to be determined by the Bank.
Provisions of the Bank’s capital plan are more fully discussed in “Item 8. Financial Statements and Supplementary Data – Note 1511 – Capital.”
Regulatory Capital Requirements
Under the Housing and Economic Recovery Act of 2008 (Housing Act), the Director of the Finance Agency is responsible for setting the risk-based capital standards for the FHLBanks. The FHLBank Act and Finance Agency regulations specifygoverning the operations of the FHLBanks require that each FHLBankthe Bank’s minimum capital stock requirement for shareholders must be sufficient to enable the Bank to meet certain minimumits regulatory requirements for total capital, standards.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.
The Finance Agency requires each FHLBank to maintain a ratio of at least 2% of capital stock to total assets in order to help preserve the cooperative structure incentives that encourage members to remain fully engaged in the oversight of their investment in the FHLBank. The Finance Agency will consider the proportion of capital stock to assets, measured on a daily average basis at monthend, when assessing each FHLBank’s capital management practices. As of December 31, 2023 and 2022, the Bank complied with this capital guidance.
Because the Bank issues only Class B stock, regulatory capital and permanent capital for the Bank are both composed of retained earnings and Class B stock, including mandatorily redeemable capital stock (which is classified as a liability for financial reporting purposes). Regulatory capital and permanent capital do not include AOCI. Leverage capital is defined as the sum of permanent capital, weighted by a 1.5 multiplier, plus non-permanent capital.
The risk-based capital requirement is equal to the sum of the Bank’s credit risk, market risk, and operationsoperational risk capital requirements, all of which are calculated in accordance with the rules and regulations of the Finance Agency. The Finance Agency may require an FHLBank to maintain a greater amount of permanent capital than is required by the risk-based capital requirement as defined.
The following table shows the Bank’s compliance with the Finance Agency’s capital requirements at December 31, 20172023 and 2016.2022. The Bank’s risk-based capital requirement decreasedincreased to $2.0$1.2 billion at December 31, 2017,2023, from $2.2 billion$898 million at December 31, 2016. 2022. |
| | | | | | | | | | | | | | | |
| Regulatory Capital Requirements |
| | | | | | | | |
| | 2017 | | 2016 |
| (Dollars in millions) | Required |
| | Actual |
| | Required |
| | Actual |
|
| Risk-based capital | $ | 2,023 |
| | $ | 6,797 |
| | $ | 2,241 |
| | $ | 5,883 |
|
| Total regulatory capital | 4,935 |
| | 6,797 |
| | 3,678 |
| | 5,883 |
|
| Total regulatory capital ratio | 4.00 | % | | 5.51 | % | | 4.00 | % | | 6.40 | % |
| Leverage capital | $ | 6,169 |
| | $ | 10,195 |
| | $ | 4,597 |
| | $ | 8,825 |
|
| Leverage ratio | 5.00 | % | | 8.26 | % | | 5.00 | % | | 9.60 | % |
The Bank repurchased $414 million in excess capital stock during 2017. As a result of changes in the Bank’s capital plan in 2015 that reduced the activity-based capital stock requirement to 2.7% for outstanding advances and 0.0% for mortgage loans purchased and held by the Bank, both capital stock and retained earnings are required to support regulatory capital compliance.
| | | | | | | | | | | | | | | | | | | | | | | |
| Regulatory Capital Requirements |
| | | | | | | |
| | 2023 | | 2022 |
| (Dollars in millions) | Required | | Actual | | Required | | Actual |
| Risk-based capital | $ | 1,210 | | | $ | 7,446 | | | $ | 898 | | | $ | 7,757 | |
| Total regulatory capital | $ | 3,713 | | | $ | 7,446 | | | $ | 4,842 | | | $ | 7,757 | |
| Total regulatory capital ratio | 4.00 | % | | 8.02 | % | | 4.00 | % | | 6.41 | % |
| Leverage capital | $ | 4,641 | | | $ | 11,169 | | | $ | 6,053 | | | $ | 11,636 | |
| Leverage ratio | 5.00 | % | | 12.03 | % | | 5.00 | % | | 9.61 | % |
The Bank’s capital requirements are more fully discussed further in “Item 8. Financial Statements and Supplementary Data – Note 1511 – Capital.”
Risk Management
The Bank has an integrated corporate governance and internal control framework designed to support effective management of the Bank’s business activities and the risks inherent in these activities. As part of this framework, the Bank’s Boardboard of Directorsdirectors has adopted a Risk Governance Policy that outlines the key roles and responsibilities of the Boardboard of Directorsdirectors and management and sets forth how the Bank is organized to achieve its risk management objectives, including the implementation of the Bank’s strategic objectives, risk management strategies, corporate governance, and standards of conduct. The policy also establishes the Bank’s risk governance organizational structure and identifies the general roles and responsibilities of the Board of Directors and management in establishing risk management policies, procedures, and guidelines; in overseeing the enterprise risk profile; and in implementing enterprise risk management processes and business strategies. The policy establishes an independent risk oversight function to identify, assess, measure, monitor, and report on the enterprise risk profile in relation to its risk appetite and risk management capabilities of the Bank.
The Bank’s Risk Appetite Framework links risk-taking and risk-mitigating activities to the achievement of the Bank’s strategic objectives and helps bring forth key metrics within the Bank to enable better risk managementinsights and decision making. The framework includes athe Bank’s risk appetite statement, risk policies,statements and related proceduresqualitative statements and guidelinesquantitative risk metrics and tolerances, as established by the Boardboard of Directorsdirectors and performed by management to addressmonitor and manage risk. These include both enterprise-wide risk policiesaccordingly. The Risk Committee and related proceduresthe Board review and guidelines.
approve the Risk Appetite Framework on at least an annual basis.
The Risk Management Policy establishes risk limits, guidelines, and standards for creditthe Bank’s management of financial risk (credit risk, market risk, liquidity risk, operationsand mortgage asset risk), operational risk (people, process, and systems risk), strategic risk, and businesslegal, regulatory, and compliance risk in accordance with Finance Agency regulations and in consideration of industry leading practices, the risk profiletolerances established by the Boardboard of Directors,directors, and other applicable guidelines in connection with the Bank’s overall risk management. The Member Products Policy, which applies to products offered to members and housing associates (nonmember mortgagees approved under Title II of the National Housing Act, to which the Bank is permitted to make advances under the FHLBank Act), addresses the credit risk of secured credit by establishing credit underwriting criteria, appropriate collateralization levels, and collateral valuation methodologies. The Bank also establishes polices for capital management and compliance risk management.practices.
BusinessStrategic Risk
BusinessStrategic risk is defined as the possibility of an adverse impact on the Bank’s ability to fulfill its mission and to meet ongoing business and profitability objectives resultingthat results from external factors that may occur in both the shortshort- and long term.long-term. Such factors may include, but are not limited to, continued financial services industry consolidation; changes in the membership base and in member demand for Bank products; the concentration of borrowing among members;a limited number of borrowers; the introduction of new competing products and services; increased inter-FHLBank and non-FHLBank competition; andor significant adverse changes to the effectiveness and competitiveness of the Bank’s products, services, or business model associated with regulatory and legislative changes.
The identification of businessstrategic risks is an integral part of the Bank’s annual planning process, and the Bank’s strategic plan identifies initiatives and plans to address these risks.
OperationsOperational Risk
OperationsOperational risk is defined as the risk of loss to the Bank resulting from inadequate or failed internal processes, resources, and systems, and from external events. The Bank’s operationsoperational risk is controlled through a system of
internal programs and controls designed to minimize the risk of operational losses. Also,
Legal, Regulatory, and Compliance Risk
Legal risk is the potential for losses arising from legal disputes impacting the Bank. Regulatory and compliance risk is defined as noncompliance with laws, rules, regulations, agreements, prescribed practices, and ethical standards. The board of director's risk management objective is to manage and mitigate the impact of noncompliance with all regulations and laws applicable to the Bank. Additionally, the Bank has establishedwill put in place the necessary processes, controls, and annually tests its business continuity plan under various business disruption scenarios involving offsite recoveryframeworks to comply with legal and regulatory requirements. This includes, but is not limited to, directing resources to compliance programs to train personnel and increase awareness of those regulatory areas that pose the testinghighest level of risk to the Bank.
Financial Risk
Financial risk is defined as the variance of the Bank’s operationsfinancial position or ability to operate due to investment decisions and information systems. In addition, an ongoing internal audit function audits significantfinancial risk areasmanagement practices specifically related to evaluatecapital, credit, market (including hedging and funding), mortgage asset, and liquidity risks. Subsequent sections of this document outline the definitions and management of various risk components of the Bank’s internal controls.financial risk tolerances, as determined by the board of directors.
Concentration Risk
Concentration risk for the Bank is defined as the exposure torisk of economic loss arising from a disproportionately large numbervolume of financial transactions with a limited number of individual customersmembers or counterparties.
Advances. The following tables present the concentration in advances and the interest income (before the impact of interest rate exchange agreements associated with advances) from the advances toIf the Bank’s top five borrowers and their affiliates at December 31, 2017 and 2016.
|
| | | | | | | | | | | | | |
Concentration of Advances and Interest Income from Advances
Top Five Borrowers and Their Affiliates |
| | | | | | | | |
| (Dollars in millions) | | | | | | | |
| December 31, 2017 |
| Name of Borrower | Advances
Outstanding |
| | Percentage of
Total
Advances
Outstanding |
| | Interest
Income from
Advances(1) |
| | Percentage of
Total Interest
Income from
Advances |
|
| Charles Schwab Bank | $ | 15,000 |
| | 19 | % | | $ | 40 |
| | 5 | % |
JPMorgan Chase Bank, National Association(2) | 11,363 |
| | 15 |
| | 174 |
| | 19 |
|
| First Republic Bank | 8,400 |
| | 11 |
| | 112 |
| | 12 |
|
| MUFG Union Bank, National Association | 7,250 |
| | 9 |
| | 48 |
| | 5 |
|
| Bank of the West | 6,409 |
| | 8 |
| | 87 |
| | 10 |
|
| Subtotal | 48,422 |
| | 62 |
| | 461 |
| | 51 |
|
| Others | 29,064 |
| | 38 |
| | 438 |
| | 49 |
|
| Total par value | $ | 77,486 |
| | 100 | % | | $ | 899 |
| | 100 | % |
|
| | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | |
| Name of Borrower | Advances Outstanding |
| | Percentage of Total Advances Outstanding |
| | Interest Income from Advances(1) |
| | Percentage of Total Interest Income from Advances |
|
JPMorgan Chase Bank, National Association(2) | $ | 14,807 |
| | 30 | % | | $ | 119 |
| | 23 | % |
| Bank of the West | 7,305 |
| | 14 |
| | 49 |
| | 9 |
|
| First Republic Bank | 5,900 |
| | 12 |
| | 70 |
| | 13 |
|
| CIT Bank, N.A. | 2,411 |
| | 5 |
| | 28 |
| | 5 |
|
| Star One Credit Union | 2,024 |
| | 4 |
| | 27 |
| | 5 |
|
| Subtotal | 32,447 |
| | 65 |
| | 293 |
| | 55 |
|
| Others | 17,410 |
| | 35 |
| | 240 |
| | 45 |
|
| Total par value | $ | 49,857 |
| | 100 | % | | $ | 533 |
| | 100 | % |
| |
(1) | Interest income amounts exclude the interest effect of interest rate exchange agreements with derivative counterparties; as a result, the total interest income amounts will not agree to the Statements of Income. The amount of interest income from advances can vary depending on the amount outstanding, terms to maturity, interest rates, and repricing characteristics. |
| |
(2) | Nonmember institution. |
Because of this concentration in advances, the Bank may perform more frequent credit and collateral reviews for some of these institutions, including more frequent analysis of detailed data on pledged loan collateral to assess the credit quality and risk-based valuation of the loans. The Bank also analyzes the implications for its financial
management and profitability if it were to lose the advances business of one or more of these institutions or if the advances outstanding to one or more of these institutions were not replaced when repaid.
If these institutions were to prepay thetheir advances (subject to the Bank’s limitations on the amount of advances prepayments from a single borrower in a day or a month) or repay the advances as they came due and no other advances were made to replace them, the Bank’s assets would decrease significantly and income could be adversely affected. In addition, because JPMorgan Chase is not a member of the Bank, it is not able to borrow new advances from the Bank or replace outstanding advances as they are repaid or prepaid, so a decrease in advances outstanding to JPMorgan Chase, if they are not replaced with advances to other members or other assets, will result in lower total assets and may result in lower net income for the Bank. The timing and magnitude of the impact would depend on a number of factors, including: (i) the amount of advances prepaid or repaid and the period over which the advances were prepaid or repaid, (ii) the amount and timing of any decreases in capital, (iii) the profitability of the advances, (iv) the size and profitability of the Bank’s investments, (v) the extent to which debt matured as the advances were prepaid or repaid, and (vi) the ability of the Bank to extinguish debt or transfer it to other FHLBanks and the costs to extinguish or transfer the debt. As discussed in “Item 1. Business – Our Business Model,” theThe Bank’s financial strategies are designed to enable it to expand and contract its assets, liabilities, and capitalbalance sheet in view of changes in membership composition and member credit needs while striving to pay members a reasonable return on their investment in the Bank’s capital stock.needs. Under the Bank’s capital plan, the Bank may not be required to repurchase all of a shareholder’s excess capital stock, including any excess mandatorily redeemable capital stock at the Bank’s discretion, subject to certain statutory and regulatory requirements.
The Bank held a security interest in collateral from each of its top 10 advances borrowers and their affiliates sufficient to support their respective advances outstanding, and the Bank does not expect to incur any credit losses on the advances of its top 10 advances borrowers and their affiliates.
See “Item 8. Financial Statements and Supplementary Data – Note 5 – Advances – Concentration Risk” for more information on the concentration in advances.
MPF Program. The Bank had the following concentration in MPF loans with institutions whose outstanding totalAs of mortgage loans sold to theDecember 31, 2023, Fremont Bank represented 10%$243 million of the outstanding mortgage loan balance, or 34% of the Bank’s total outstanding mortgage loan balance. As of December 31, 2022, Fremont Bank represented $261 million of the outstanding mortgage loan balance, or 34% of the Bank’s total outstanding mortgage loan balance. No other institution represented 20% of more of the Bank’sBank's total outstanding mortgage loans at December 31, 20172023 and 2016.
2022.
|
| | | | | | | | | | | | |
| Concentration of Mortgage Loans |
| | | | | | | | |
| (Dollars in millions) | | | | | | | |
| December 31, 2017 | | | | | | | |
| Name of Institution | Mortgage Loan Balances Outstanding |
| | Percentage of Total Mortgage Loan Balances Outstanding |
| | Number of Mortgage Loans Outstanding |
| | Percentage of Total Number of Mortgage Loans Outstanding |
|
| Fremont Bank | $ | 1,145 |
| | 57 | % | | 2,121 |
| | 27 | % |
JPMorgan Chase Bank, National Association(1) | 249 |
| | 12 |
| | 3,244 |
| | 40 |
|
| Subtotal | 1,394 |
| | 69 |
| | 5,365 |
| | 67 |
|
| Others | 611 |
| | 31 |
| | 2,635 |
| | 33 |
|
| Total | $ | 2,005 |
| | 100 | % | | 8,000 |
| | 100 | % |
|
| | | | | | | | | | | | |
| December 31, 2016 | | | | | | | |
| Name of Institution | Mortgage Loan Balances Outstanding |
| | Percentage of Total Mortgage Loan Balances Outstanding |
| | Number of Mortgage Loans Outstanding |
| | Percentage of Total Number of Mortgage Loans Outstanding |
|
JPMorgan Chase Bank, National Association(1) | $ | 323 |
| | 40 | % | | 4,065 |
| | 59 | % |
Bank of Hope(2) | 132 |
| | 16 |
| | 319 |
| | 5 |
|
| Fremont Bank | 99 |
| | 12 |
| | 211 |
| | 3 |
|
| Kinecta Federal Credit Union | 90 |
| | 11 |
| | 167 |
| | 3 |
|
| Subtotal | 644 |
| | 79 |
| | 4,762 |
| | 70 |
|
| Others | 170 |
| | 21 |
| | 2,089 |
| | 30 |
|
| Total | $ | 814 |
| | 100 | % | | 6,851 |
| | 100 | % |
| |
(1) | Nonmember institution. |
| |
(2) | Effective July 29, 2016, Wilshire Bank merged with and into BBCN Bank, which was renamed Bank of Hope. |
MembersParticipating financial institutions that sellsold mortgage loans to the Bank through the MPF Program make representations and warranties that the loans comply with the MPF underwriting guidelines. In the event a mortgage loan does not comply with the MPF underwriting guidelines, the Bank’s agreement with the participating financial institution provides that the institution is required to repurchase the loan as a result of the breach of the institution’s representations and warranties. The Bank may, at its discretion, choose to retain the loan if the Bank determines that the noncompliance can be cured or mitigated through additional contract assurances from the institution or any successor. In addition, most participating financial institutions have retained the servicing on the mortgage loans purchased by the Bank, and the servicing obligation of any former participating financial institution is held by the successor or another Bank-approved financial institution. The FHLBank of Chicago (the MPF Provider and master servicer) has contracted with Wells Fargo Bank, N.A., to monitormonitors the servicing performed by all participating financial institutions and successors, including JPMorgan Chase, Bank of Hope, Fremont Bank, and Kinecta Federal Credit Union.successors. The Bank obtains a Type II Statement on Standards for Attestation Engagements (SSAE) No. 18 service auditor's report to confirm the effectiveness of the MPF Provider's controls over the services it provides to the Bank, including its monitoring of the participating financial institutions’ servicing. The FHLBank of Chicago outsourced a portion of its infrastructure controls to a third party, and the SSAE No. 18 service auditor’s report addresses the effectiveness of certain controls performed by the third party. The Bank has the right to transfer the servicing at any time, without paying the participating financial institution or any successor a servicing termination fee, in the event a participating financial institution or any successor does not meet the MPF servicing requirements. The Bank may also transfer servicing without cause subject to a servicing transfer fee payable to the participating financial institution or any successor.
Investments. The following table presents the portfolio concentration in the Bank’s investment portfolios at December 31, 2017 and 2016, with U.S. government corporation and GSE issuers and other issuers (at the time of purchase), whose aggregate carrying values represented 10% or more of the Bank’s capital (including mandatorily redeemable capital stock). The amounts include securities issued by the issuer’s holding company, along with its affiliated companies. The Bank’s investment portfolio includes securities classified as trading, AFS, and HTM, and other assets such as securities purchased under agreements to resell, interest-bearing deposits, and Federal funds sold.
Investments: Portfolio Concentration
|
| | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| (In millions) | Carrying Value |
| | Estimated Fair Value |
| | Carrying Value |
| | Estimated Fair Value |
|
| Non-MBS: | | | | | | | |
| Certificates of deposit | | | | | | | |
| Toronto Dominion Bank | $ | — |
| | $ | — |
| | $ | 600 |
| | $ | 600 |
|
Other(1) | 500 |
| | 500 |
| | 750 |
| | 750 |
|
| Total Certificates of deposit | 500 |
| | 500 |
| | 1,350 |
| | 1,350 |
|
| Housing finance agency bonds: | | | | | | | |
| California Housing Finance Agency (CalHFA) bonds | 187 |
| | 178 |
| | 225 |
| | 207 |
|
| GSEs: | | | | | | | |
| Federal Farm Credit Bank (FFCB) bonds | 1,158 |
| | 1,158 |
| | 2,058 |
| | 2,058 |
|
| Total non-MBS | 1,845 |
| | 1,836 |
| | 3,633 |
| | 3,615 |
|
| MBS: | | | | | | | |
| Other U.S. obligations: | | | | | | | |
| Ginnie Mae | 757 |
| | 757 |
| | 959 |
| | 963 |
|
| GSEs: | | | | | | | |
| Freddie Mac | 6,690 |
| | 6,687 |
| | 4,349 |
| | 4,356 |
|
| Fannie Mae | 5,731 |
| | 5,759 |
| | 6,095 |
| | 6,127 |
|
| Total GSEs | 12,421 |
| | 12,446 |
| | 10,444 |
| | 10,483 |
|
Investments: Portfolio Concentration (continued)
|
| | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| (In millions) | Carrying Value |
| | Estimated Fair Value |
| | Carrying Value |
| | Estimated Fair Value |
|
| PLRMBS: | | | | | | | |
| Bank of America Corporation | — |
| | — |
| | 550 |
| | 548 |
|
| Bear Stearns Companies Inc. | — |
| | — |
| | 528 |
| | 528 |
|
| Countrywide Financial Corporation | 665 |
| | 665 |
| | 802 |
| | 801 |
|
| IndyMac Bank, F.S.B. | 697 |
| | 705 |
| | 802 |
| | 811 |
|
| Lehman Brothers Inc. | 701 |
| | 701 |
| | 919 |
| | 916 |
|
| UBS AG | — |
| | — |
| | 529 |
| | 526 |
|
Other(1) | 2,591 |
| | 2,591 |
| | 1,516 |
| | 1,505 |
|
| Total PLRMBS | 4,654 |
| | 4,662 |
| | 5,646 |
| | 5,635 |
|
| Total MBS | 17,832 |
| | 17,865 |
| | 17,049 |
| | 17,081 |
|
| Total securities | 19,677 |
| | 19,701 |
| | 20,682 |
| | 20,696 |
|
Securities purchased under agreements to resell: | | | | | | | |
| Daiwa Capital Markets America, Inc. | 1,500 |
| | 1,500 |
| | — |
| | — |
|
| Federal Reserve Bank of New York | 7,250 |
| | 7,250 |
| | 15,500 |
| | 15,500 |
|
| HSBC Securities (USA), Inc. | 1,000 |
| | 1,000 |
| | — |
| | — |
|
| Nomura Securities International, Inc. | 2,000 |
| | 2,000 |
| | — |
| | — |
|
| Total Securities purchased under agreements to resell | 11,750 |
| | 11,750 |
| | 15,500 |
| | 15,500 |
|
| Federal funds sold: | | | | | | | |
| Australia & New Zealand Bank Group | 1,725 |
| | 1,725 |
| | 1,033 |
| | 1,033 |
|
| The Bank of New York Mellon | 1,033 |
| | 1,033 |
| | — |
| | — |
|
| Bank of Nova Scotia | 1,100 |
| | 1,100 |
| | 688 |
| | 688 |
|
| Bank of Tokyo-Mitsubishi UFJ | 1,108 |
| | 1,108 |
| | — |
| | — |
|
| Nordea Bank Finland | 1,000 |
| | 1,000 |
| | — |
| | — |
|
| Rabobank Nederland | 804 |
| | 804 |
| | — |
| | — |
|
| Societe Generale | — |
| | — |
| | 688 |
| | 688 |
|
Other(1) | 4,258 |
| | 4,259 |
| | 1,805 |
| | 1,805 |
|
| Total Federal funds sold | 11,028 |
| | 11,029 |
| | 4,214 |
| | 4,214 |
|
| Interest-bearing deposits | | | | | | | |
| Citibank, N.A. | 1,075 |
| | 1,075 |
| | 590 |
| | 590 |
|
Other(1) | 40 |
| | 40 |
| | — |
| | — |
|
| Total interest-bearing deposits | 1,115 |
| | 1,115 |
| | 590 |
| | 590 |
|
| Total investments | $ | 43,570 |
| | $ | 43,595 |
| | $ | 40,986 |
| | $ | 41,000 |
|
| |
(1) | Includes issuers of securities that have a carrying value that is less than 10% of total Bank capital (including mandatorily redeemable capital stock). |
Many of the Bank’s members and their affiliates are extensively involved in residential mortgage finance. Accordingly, members or their affiliates may be involved in the sale of MBS to the Bank or in the origination or securitization of the mortgage loans backing the MBS purchased by the Bank.
Capital Stock. The following table presents the concentration in capital stock held by institutions whose capital stock ownership represented 10% or more of the Bank’s outstanding capital stock including mandatorily redeemable capital stock, as of December 31, 20172023 or 2016.2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| (Dollars in millions) | Capital Stock Outstanding | | Percentage of Total Capital Stock Outstanding | | Capital Stock Outstanding | | Percentage of Total Capital Stock Outstanding |
JPMorgan Chase, National Association/First Republic Bank(1) | $ | 643 | | | 20 | % | | $ | 379 | | | 10 | % |
Silicon Valley Bank(2) | — | | | — | | | 418 | | | 11 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1) On May 1, 2023, the California DFPI closed First Republic Bank and appointed the FDIC as receiver. On the same date, the FDIC transferred all of the deposits and substantially all of the assets of First Republic Bank, including the advances outstanding from the Bank, to JPMorgan Chase, National Association, a nonmember. Upon assumption of the advances outstanding by JPMorgan Chase, National Association, the Bank transferred $759 million of capital stock of the Bank, held by First Republic Bank, to JPMorgan Chase, National Association, and reclassified that capital stock to mandatorily redeemable as a liability in the Bank’s Statements of Condition.
55(2) On March 10, 2023, the FDIC was appointed as receiver for Silicon Valley Bank. On March 14, 2023, the FDIC transferred all of the deposits and substantially all of the assets of Silicon Valley Bank to Silicon Valley Bridge Bank, National Association. The FDIC created Silicon Valley Bridge Bank, N.A., whereby all of the deposits and substantially all assets of Silicon Valley Bank were transferred to the bridge bank. On March 26, 2023, the FDIC entered into a purchase and assumption agreement for all the deposits and loans of Silicon Valley Bridge Bank, N.A., with First Citizens Bank and Trust Company. Silicon Valley Bank is no longer a member of the Bank. As of March 31, 2023, Silicon Valley Bridge Bank, N.A., had prepaid all outstanding advances to the Bank.
|
| | | | | | | | | | | | | |
| | 2017 | | 2016 |
| Name of Institution | Capital Stock Outstanding |
| | Percentage of Total Capital Stock Outstanding |
| | Capital Stock Outstanding |
| | Percentage of Total Capital Stock Outstanding |
|
| Charles Schwab Bank | $ | 405 |
| | 11 | % | | $ | 81 |
| | 3 | % |
JPMorgan Chase Bank, National Association(1) | 307 |
| | 9 |
| | 400 |
| | 14 |
|
| Subtotal | 712 |
| | 20 |
| | 481 |
| | 17 |
|
| Others | 2,840 |
| | 80 |
| | 2,346 |
| | 83 |
|
| Total | $ | 3,552 |
| | 100 | % | | $ | 2,827 |
| | 100 | % |
| |
(1) | The capital stock held by this nonmember institution is classified as mandatorily redeemable capital stock. |
Derivative Counterparties. The following table presentsBank currently utilizes an approved clearing house, LCH Ltd, and the concentration in derivativesBank currently has two approved clearing agents. The Bank monitors the clearing agents through its unsecured credit system. The clearing agents are approved by the Bank’s Credit Committee. The clearing agents also have approved counterparty trading limits with derivative counterparties whose outstanding notional balances represented 10% or morethe Bank, subjecting them to annual credit reviews and on-going credit quality surveillance by the Bank’s Credit Department. The parent companies of the clearing agents are monitored through annual reviews, as well as through the Bank’s total notional amount ofdaily monitoring tools, which include reviewing equity triggers, debt triggers, and credit default swap spread triggers. In addition, exposures to the clearing agents are monitored daily on a swap counterparty report. The Bank does not anticipate any credit losses on its cleared derivatives outstanding as of December 31, 2017 and 2016.2023.
|
| | | | | | | | | | | | | | | | | |
| Concentration of Derivative Counterparties |
| | | | | | | | | | | | |
| (Dollars in millions) | 2017 | | 2016 |
| 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 | | $ | 13,900 |
| | 14 | % | | At least BBB | | $ | 10,032 |
| | 15 | % |
| Subtotal uncleared | | | 13,900 |
| | 14 |
| | | | 10,032 |
| | 15 |
|
| Cleared | | | | | | | | | | | |
LCH Ltd(2) | | | | | | | | | | | |
| Credit Suisse Securities (USA) LLC | A | | 54,371 |
| | 55 |
| | A | | 30,548 |
| | 47 |
|
| Morgan Stanley & Co. LLC | A | | 31,322 |
| | 31 |
| | A | | 20,994 |
| | 33 |
|
| Deutsche Bank Securities Inc. |
| | — |
| | — |
| | BBB | | 3,482 |
| | 5 |
|
| Subtotal cleared | | | 85,693 |
| | 86 |
| | | | 55,024 |
| | 85 |
|
Total(3) | | | $ | 99,593 |
| | 100 | % | | | | $ | 65,056 |
| | 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. For purposes of clearing swaps with LCH Ltd, Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. LLC are the Bank’s clearing agents, and Deutsche Bank Securities Incorporated was one of the Bank’s clearing agents until March 2017. LCH Ltd’s parent, LCH Group Holdings Limited, was rated A+ by S&P. On May 31, 2017, S&P lowered the rating to A and withdrew the rating at LCH Group Holdings Limited’s request. LCH Ltd’s ultimate parent, London Stock Exchange Group, plc., is rated A3 by Moody’s and A- by S&P. |
| |
(3) | Total notional amount at December 31, 2017 and 2016, does not include $16 million and $13 million of mortgage delivery commitments with members, respectively. |
Liquidity Risk
Liquidity risk is defined as the risk that the Bank will be unable to meet its obligations as they come due or meet the credit needs of its members and eligible nonmember borrowers in a timely and cost-effective manner. The Bank is required to maintain minimum levels of liquidity for operating needs and for contingency purposes in accordance with Finance Agency regulations and guidelines and with the Bank'sBank’s own Risk Management Policy. The Bank strives to maintain the liquidity necessary to repay maturing consolidated obligations for which it is the primary obligor, meet other obligations and commitments, and meet expected and unexpected member credit demands. The Bank monitors its financial position in order to maintain ready access to sufficient liquid funds to meet normal transaction requirements, take advantage of appropriate investment opportunities, and cover unforeseen liquidity demands.
The Bank generally manages operational, contingent, and structural liquidityrefinancing risks using a portfolio of cash and short-term investments, U.S. Treasury securities, and access to the debt capital markets. In addition, the Bank maintains alternate sources of funds, detailed in its contingent liquiditycontingency funding plan, which also includes an explanation of how sources of funds may be allocated under stressed market conditions, such as short-term operational disruptions at the Bank or the Office of Finance or short-term disruptions in the debt capital markets. The Bank maintains short-term, high-quality money market investments and government and agency securities in amounts that may average up to three times the Bank’s capital as a primary source
Table of funds to satisfy these requirements and objectives.Contents
The Bank has a regulatory contingent liquidity requirement to maintain at least 5 business days of liquidity to enable it to meet its obligations without issuance of new consolidated obligations. In addition, the Finance Agency has established base case liquidity guidelines, which may be amended from time to time,thatrequire each FHLBank to maintain sufficient on-balance sheet liquidity in an amount at least equal to its anticipated cash outflows, for two different scenarios. Both scenarios assumeassuming no new consolidated obligation issuance, renewal of all maturing advances, a specified percentage drawdown notional on letters of credit balances, and no reliance on repurchase agreements and permit the sale of certain existingTreasury investments as determined bya source of funds. The Finance Agency’s guidance provides that base case liquidity should generally be maintained for 10 to 30 days. The Bank actively monitors and manages refinancing risk. Finance Agency guidance specifies tolerance levels related to the size of each FHLBank’s funding gaps to measure refinancing risk as the difference between assets and liabilities that are scheduled to mature during a specified period, expressed as a percentage of total assets. The guidance limits three-month and one-year funding gaps between the range of –10% to –20% and –25% to –35%, respectively. Funding gaps are measured at monthend, using the average ratio for the three most recent month ends. The Bank is also required to perform an annual liquidity stress test and to report the results to the Finance Agency. The two scenarios differ only in the treatment of maturing advances. One scenario assumes that the Bank does not renew any maturing advances. For this scenario, the Bank must have sufficient liquidity to meet its obligations for 15 calendar days. The second scenario requires the Bank to renew maturing advances for certain members based on specific criteria established by the Finance Agency. For this scenario, the Bank must have sufficient liquidity to meet its obligations for 5 calendar days.
In addition to the regulatory contingent liquidity requirement and 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).
The Bank actively monitorsAs of December 31, 2023 and manages structural liquidity risks, which2022, the Bank defines as maturity mismatches greater than 90 days for sources and uses of funds, of the advances business segment. Structural liquidity maturity mismatches are identified using maturity gap analysis and valuation sensitivity metrics that quantify the risk associated with the Bank’s structural liquidity position.
The following table shows the Bank’s principal financial obligations due, estimatedheld total sources of funds availablein an amount that would have allowed the Bank to meet thoseits liquidity needs without issuing new consolidated obligations andfor over ten days, in accordance with the net difference between funds available and funds needed forFinance Agency guidance. In addition, the 5-business-day period followingBank’s funding gap positions as of December 31, 20172023 and 2016.
|
| | | | | | | |
| Principal Financial Obligations Due and Funds Available for Selected Period |
| | | | |
| | As of December 31, 2017 | | As of December 31, 2016 |
| (In millions) | 5 Business Days | | 5 Business Days |
| Obligations due: | | | |
| Demand deposits | $ | 299 |
| | $ | 184 |
|
| Loans from other FHLBanks | — |
| | 1,345 |
|
| Discount note and bond maturities and expected exercises of bond call options | 3,950 |
| | 2,412 |
|
| Subtotal obligations due | 4,249 |
| | 3,941 |
|
| Sources of available funds: | | | |
| Maturing investments | 21,613 |
| | 19,175 |
|
| Available cash | 27 |
| | 1 |
|
| Proceeds from scheduled settlements of discount notes and bonds | 635 |
| | 1,346 |
|
| Maturing advances and scheduled prepayments | 7,854 |
| | 7,121 |
|
| Subtotal sources of available funds | 30,129 |
| | 27,643 |
|
| Net funds available | $ | 25,880 |
| | $ | 23,702 |
|
2022, were within the tolerance levels provided by the Finance Agency guidance.
In addition, Section 11(i) of the FHLBank Act authorizes the U.S. Treasury to purchase certain obligations issued by the FHLBanks aggregating not more than $4.0 billion under certain conditions. There were no such purchases by the U.S. Treasury during the two-year periodyears ended December 31, 2017.2023 and 2022.
Credit Risk
Credit risk is defined as the risk that the market value,borrower or estimated fair value if market value is not available, of an obligationcounterparty will declinefail to meet its financial obligations in accordance with agreed upon terms as a result of deterioration in the creditworthiness of the obligor. The Bank further refines the definition ofmanages credit risk as the risk thatby setting credit and collateral terms based on a secured or unsecured borrower is unable to meet its financial obligations and the Bank is inadequately protected by the liquidation value of collateral, if any, which could result in a credit loss to the Bank.borrower’s creditworthiness.
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 associatesinstitutions 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. The Bank reviews and updates its credit and collateral policies and procedures to reflect appropriate risk tolerance thresholds and risk limits on at least an annual basis. These credit and collateral policies balance the Bank’s dual goals of meeting the needs of members and housing associates as a reliable source of liquidity and mitigating credit risk by adjusting credit and collateral terms available to an institution in view of deterioration in the institution’s creditworthiness. The Bank has never experienced a credit loss on an advance.
The Bank determines the maximum amount and maximum term of the advances it will make to a member or housing associate based on the Bank’s credit analysis of the institution’s creditworthiness and eligible collateral pledged in accordance with the Bank’s credit and collateral policies and regulatory requirements. The Bank may review and change the maximum amount and maximum term at any time. The maximum amount a member or housing associate may borrow is also limited by the amount and type of collateral pledged because all advances must be fully collateralized.
To identify the credit strength of each borrower and potential borrower,institution, other than insurance companies, community development financial institutions (CDFIs), and housing associates, the Bank assigns each member and each nonmember borrowerinstitution an internal credit quality rating from one to ten,10, with one as the highest credit quality rating. These ratings are based on results from the
Bank’s credit model, which considersincorporates financial, regulatory, and other qualitative information, including regulatory examination reports. The internal ratings are reviewed on an ongoing basis using current available information and are revised, if necessary, to reflect the institution’s current financial position. Credit and collateral terms may be adjusted based on the results of this credit analysis.
The Bank determines the maximum amount and maximum term of the advances it will make to an insurance company based on an ongoing risk assessment that considers the member's financial and regulatory standing and other qualitative information deemed relevant by the Bank. This evaluation results in the assignment of an internal credit quality rating from one to ten, with one as the highest credit quality rating. Approved terms are designed to meet the needs of the individual member while mitigating the unique credit and collateral risks associated with insurance companies, including risks related to the resolution process for insurance companies, which is significantly different from the resolution processes established for the Bank’s insured depository members.
The Bank determines the maximum amount and maximum term of the advances it will make to a CDFI based on an ongoing risk assessment that considers information from the CDFI’s audited annual financial statements, supplemented by additional information deemed relevant by the Bank. Approved terms are designedThis evaluation results in the assignment of an internal credit quality rating from A to meet the needs of the individual member while mitigating the unique credit and collateral risks of CDFIs, which do not file quarterly regulatory financial reports and are not subject to the same inspection and regulation requirementsE, with A as the Bank’s insured depository members.
highest credit quality rating.
The Bank determines the maximum amount and maximum term of the advances it will make to a housing associate based on an ongoing risk assessment that considers the housing associate’s financial and regulatory standing and other qualitative information deemed relevant by the Bank. Approved terms are designed to meet the needs of the individual housing associate while mitigating the unique credit and collateral risks of housing associates, which do not file quarterly regulatory financial reports and are not subject to the same inspection and regulation requirements as the Bank’s insured depository members.
The Bank underwrites and actively monitors the financial condition and performance of all borrowers and potential borrowers to determine and periodically assess creditworthiness. The Bank uses, to the extent available, financial information provided by the borrower, quarterly financial reports filed by borrowers with their primary regulators, regulatory examination reports and known regulatory enforcement actions, and public information. In determining creditworthiness, the Bank considers available examination findings, performance trends and forward-looking information, the borrower's business model, changes in risk profile, capital adequacy, asset quality, profitability, interest rate risk, supervisory history, the results of periodic collateral field reviews conducted by the Bank, the risk profile of the collateral, and the amount of eligible collateral on the borrower's balance sheet.
In accordance with the FHLBank Act, borrowersan institution may pledge the following eligible assets to secure advances: one- to four-family
•one-to-four-family first lien residential mortgage loans; multifamily mortgage loans; MBS;
•securities issued, insured, or guaranteed by the U.S. government or any of its agencies, including without limitation MBS backed by Fannie Mae, Freddie Mac, or Ginnie Mae;
•cash or deposits in the Bank; and
•certain other real estate-related collateral, such as certain privately issued mortgage-backed securities, multifamily loans, commercial real estate loans, and second lien residential mortgage loans or home equity loans. The Bank may also accept loans; and
•small business, small farm, and small agribusiness loans that are fully secured by collateral (such as real estate, equipment and vehicles, accounts receivable, and inventory) from members that are community financial institutions. The Housing and Economic Recovery Act of 2008 (Housing Act) added secured loans for community development activities as collateral that the Bank may accept from community financial institutions.
The Housing Act defineddefines community financial institutions as depository institutions insured by the Federal Deposit Insurance Corporation with average total assets over the preceding three-year period of $1 billion or less,below a defined threshold, to be adjusted for inflation annually by the Finance Agency. The average total asset cap for 20172023 was $1,148 million.
$1.4 billion.
Under the Bank’s written lending agreements with its borrowers, its credit and collateral policies, and applicable statutory and regulatory provisions, the Bank has the right to take a variety of actions to address credit and collateral concerns, including calling for the borrower to pledge additional or substitute collateral (including ineligible collateral) at any time that advances are outstanding to the borrower, and requiring the delivery of all pledged collateral. In addition, if a borrower fails to repay any advance or is otherwise in default on its obligations to the Bank, the Bank may foreclose on and liquidate the borrower’s collateral and apply the proceeds toward repayment of the borrower’s obligations to the Bank. The Bank’s collateral policies are designed to address changes in the value of collateral and the risks and costs relating to foreclosure and liquidation of collateral, and the Bank periodically adjusts the amount it is willing to lend against various types of collateral to reflect these factors. Market conditions, the volume and condition of the borrower’s collateral at the time of liquidation, and other factors could affect the amount of proceeds the Bank is able to realize from liquidating a borrower’s collateral. In addition, the Bank could sell collateral over an extended period of time, rather than liquidating it immediately, and the Bank would have the right to receive principal and interest payments made on the collateral it continued to hold and apply those proceeds toward repayment of the borrower’s obligations to the Bank.
The Bank perfects its security interest in securities collateral by taking delivery of all securities at the time they are pledged. The Bank perfects its security interest in loan collateral by filing a UCC-1Uniform Commercial Code-1 financing statement for each borrower that pledges loans. The Bank may also require delivery of loan collateral under certain conditions (for example, from a newly formed institution or when a borrower's creditworthiness deteriorates below a certain level). In addition, the FHLBank Act provides that any security interest granted to the Bank by any member or member affiliate has priority over the claims and rights of any other party, including any receiver, conservator, trustee, or similar entity that has the rights of a lien creditor, unless these claims and rights would be entitled to priority under otherwise applicable law or are held by bona fide purchasers for value or by parties that have actual perfected security interests.
Pursuant to the Bank’s lending agreements with its borrowers,members, nonmembers, and housing associates, the Bank limits extensions of credit to an individual borrowersinstitution to a percentage of the market value or unpaid principal balance of the borrower’sinstitution’s pledged collateral, known as the borrowing capacity.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’sinstitution’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’san institution’s pledged eligible collateral must meet or exceed the total amount of the borrower’sits outstanding advances, other extensions of credit, and certain other borrower obligations and liabilities. The Bank monitors each borrower’s aggregate borrowing capacity and collateral requirements on a daily basis by comparing the institution’s borrowing capacity to its obligations to the Bank.
In addition, the total amount of advances made available to each member or housing associateinstitution may be limited by the financing availability assigned by the Bank, which is generally expressed as a percentage of an institution’s assets, which the member’s or housing associate’s assets.Bank can change from time to time. The amount of financing availability is generally determined by the creditworthiness of the member or housing associate.
each institution’s creditworthiness.
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 Bank has a high concentration of advances with certain institutions and their affiliates. Advances outstanding to the Bank’s top 10 borrowers and their affiliates decreased by $20.1 billion to $43.8 billion, or 71% of total advances outstanding at December 31, 2023, from $63.9 billion, or 72% of total advances outstanding at December 31, 2022. (See “Item 8. Financial Statements and Supplementary Data – Note 5 – Advances – Concentration Risk” for further information.)
Several of the Bank’s top 10 advance borrowers and their affiliates at yearend 2022 were involved in voluntary liquidation, or Federal Deposit Insurance Corporation (FDIC) receivership during 2023, or have been acquired by nonmember institutions. The loss of advances outstanding to these borrowers is likely to have an adverse impact on the Bank’s advance balances, and, over time, its financial performance.
On March 8, 2023, Silvergate Capital Corporation, the parent company of Silvergate Bank, announced its intent to voluntarily liquidate Silvergate Bank, and on June 1, 2023, the Federal Reserve Board announced a consent order against Silvergate Capital Corporation and Silvergate Bank to facilitate that voluntary self-liquidation. On November 22, 2023, Silvergate Capital Corporation announced that every depositor of Silvergate Bank had been fully repaid. At December 31, 2023, Silvergate Bank had no advances outstanding from the Bank, a reduction of $4.3 billion from yearend 2022.
On March 10, 2023, Silicon Valley Bank was closed by the California DFPI and FDIC was named as receiver. The FDIC created Silicon Valley Bridge Bank, N.A., whereby all of the deposits and substantially all assets of Silicon Valley Bank were transferred to the bridge bank. On March 26, 2023, the FDIC entered into a purchase and assumption agreement for all the deposits and loans of Silicon Valley Bridge Bank, N.A., with First Citizens Bank and Trust Company. Silicon Valley Bank is no longer a member of the Bank. As of March 31, 2023, Silicon Valley Bridge Bank, N.A., had prepaid all outstanding advances to the Bank.
On May 1, 2023, the California DFPI closed First Republic Bank and appointed the FDIC as receiver, and the FDIC and JPMorgan, a nonmember, entered into a purchase and assumption agreement for all the deposits and substantially all of the assets of First Republic Bank, including $28.1 billion in advances outstanding from the Bank. Upon assumption of the First Republic Bank advances and letters of credit outstanding by JPMorgan, the Bank transferred $759 million of capital stock of the Bank, held by First Republic Bank, to JPMorgan and reclassified that capital stock as mandatorily redeemable as a liability in the Bank’s Statements of Condition. As of December 31, 2023, JPMorgan had $23.8 billion of advances outstanding from the Bank, assumed from First Republic Bank, that represented approximately 39% of the Bank's total advances outstanding. At December 31, 2022, First Republic Bank had $14.0 billion of advances outstanding from the Bank, that represented approximately 16% of the Bank’s total advances outstanding. Additionally, at December 31, 2023, JPMorgan had $68 million in letters of credit outstanding from the Bank, assumed from First Republic Bank. At December 31, 2022, First Republic Bank had $670 million in letters of credit outstanding. At December 31, 2023, JPMorgan held $643 million of the Bank’s capital stock. JPMorgan was the Bank’s largest borrower as of December 31, 2023.
The Bank has a long-term funding arrangement with a borrower that had advances outstanding as of December 31, 2023 and 2022.
The following tables present a summary of the status of the credit outstanding and overall collateral borrowing capacity of the Bank’s member and nonmember borrowers as of December 31, 20172023 and 2016. During 2017, the Bank’s internal credit ratings stayed the same or improved for the majority of members and nonmember borrowers.2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Credit Outstanding and Collateral Borrowing Capacity by Credit Quality Rating |
| | | | | | | | | |
| December 31, 2023 | | | | | | | | | |
| All Borrowers | | Borrowers with Credit Outstanding |
| (Dollars in millions) | | | | | | | Collateral Borrowing Capacity(2) |
| Borrower Credit Quality Rating | Number | | Number | | Credit Outstanding(1) | | Total | | Used |
| 1-3 | 222 | | | 143 | | | $ | 61,418 | | | $ | 164,916 | | | 37 | % |
| 4-6 | 103 | | | 64 | | | 19,518 | | | 57,533 | | | 34 | |
| 7-10 | 8 | | | 4 | | | 94 | | | 309 | | | 30 | |
| Subtotal | 333 | | | 211 | | | 81,030 | | | 222,758 | | | 36 | |
| Community development financial institutions (CDFIs): | | | | | | | | | |
| | | | | | | | | |
| B | 6 | | | 4 | | | 47 | | | 86 | | | 55 | |
| C | 2 | | | 1 | | | 76 | | | 77 | | | 99 | |
| D | 1 | | | 1 | | | 1 | | | 9 | | | 11 | |
| | | | | | | | | |
| Subtotal | 9 | | | 6 | | | 124 | | | 172 | | | 72 | |
| Housing associates | 2 | | | 1 | | | 14 | | | 140 | | | 10 | |
| Total | 344 | | | 218 | | | $ | 81,168 | | | $ | 223,070 | | | 36 | % |
|
| | | | | | | | | | | | | | | | |
Member and Nonmember Credit Outstanding and Collateral Borrowing Capacity by Credit Quality Rating |
| | | | | | | | | | |
| (Dollars in millions) | | | | | | | | | |
| December 31, 2017 | | | | | | | | | |
| 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 | 265 |
| | 155 |
| | $ | 84,257 |
| | $ | 240,247 |
| | 35 | % |
| 4-6 | 58 |
| | 25 |
| | 9,255 |
| | 22,005 |
| | 42 |
|
| 7-10 | 4 |
| | 1 |
| | — |
| | 25 |
| | — |
|
| Subtotal | 327 |
| | 181 |
| | 93,512 |
| | 262,277 |
| | 36 |
|
| CDFIs | 6 |
| | 4 |
| | 78 |
| | 99 |
| | 79 |
|
| Housing associates | 2 |
| | 1 |
| | 107 |
| | 112 |
| | 96 |
|
| Total | 335 |
| | 186 |
| | $ | 93,697 |
| | $ | 262,488 |
| | 36 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | |
| | All Borrowers | | Borrowers with Credit Outstanding |
| (Dollars in millions) | | | | | | | Collateral Borrowing Capacity(2) |
| Borrower Credit Quality Rating | | | Number | | Credit Outstanding(1) | | Total | | Used |
| 1-3 | 257 | | | 172 | | | $ | 98,702 | | | $ | 323,212 | | | 31 | % |
| 4-6 | 65 | | | 33 | | | 13,891 | | | 31,536 | | | 44 | |
| 7-10 | 4 | | | 3 | | | 8 | | | 51 | | | 16 | |
| Subtotal | 326 | | | 208 | | | 112,601 | | | 354,799 | | | 32 | |
| CDFIs: | | | | | | | | | |
| | | | | | | | | |
| B | 5 | | | 4 | | | 49 | | | 84 | | | 58 | |
| C | 1 | | | 1 | | | 47 | | | 59 | | | 80 | |
| D | 1 | | | 1 | | | 4 | | | 8 | | | 50 | |
| | | | | | | | | |
| Subtotal | 7 | | | 6 | | | 100 | | | 151 | | | 66 | |
| Housing associates | 2 | | | 1 | | | 95 | | | 102 | | | 93 | |
| Total | 335 | | | 215 | | | $ | 112,796 | | | $ | 355,052 | | | 32 | % |
(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. |
| | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | |
| | 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 | 266 |
| | 155 |
| | $ | 55,290 |
| | $ | 181,405 |
| | 30 | % |
| 4-6 | 62 |
| | 28 |
| | 9,662 |
| | 22,606 |
| | 43 |
|
| 7-10 | 3 |
| | 2 |
| | 17 |
| | 46 |
| | 37 |
|
| Subtotal | 331 |
| | 185 |
| | 64,969 |
| | 204,057 |
| | 32 |
|
| CDFIs | 6 |
| | 3 |
| | 60 |
| | 82 |
| | 73 |
|
| Housing associates | 2 |
| | 1 |
| | 10 |
| | 16 |
| | 63 |
|
| Total | 339 |
| | 189 |
| | $ | 65,039 |
| | $ | 204,155 |
| | 32 | % |
| |
(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. |
| | | | | | | | | | | | | | | | | |
Borrower Credit Outstanding and Collateral Borrowing Capacity by Unused Borrowing Capacity |
| | | | | |
| | | | | |
| December 31, 2023 | | | | | |
(Dollars in millions) Unused Borrowing Capacity | Number of Borrowers with Credit Outstanding | | Credit Outstanding(1) | | Collateral Borrowing Capacity(2) |
| 0% – 10% | 6 | | | $ | 28,055 | | | $ | 29,699 | |
| 11% – 25% | 8 | | | 3,565 | | | 4,203 | |
| 26% – 50% | 24 | | | 14,557 | | | 25,969 | |
| More than 50% | 180 | | | 34,991 | | | 163,199 | |
| Total | 218 | | | $ | 81,168 | | | $ | 223,070 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | |
(Dollars in millions) Unused Borrowing Capacity | Number of Borrowers
with Credit Outstanding | | Credit Outstanding(1) | | Collateral Borrowing Capacity(2) |
| 0% – 10% | 11 | | | $ | 6,637 | | | $ | 7,319 | |
| 11% – 25% | 11 | | | 5,644 | | | 7,380 | |
| 26% – 50% | 22 | | | 15,509 | | | 24,465 | |
| More than 50% | 171 | | | 85,006 | | | 315,888 | |
| Total | 215 | | | $ | 112,796 | | | $ | 355,052 | |
|
| | | | | | | | | | |
Member and Nonmember Credit Outstanding and Collateral Borrowing Capacity by Unused Borrowing Capacity |
| | | | | | |
| (Dollars in millions) | | | | | |
| December 31, 2017 | | | | | |
| Unused Borrowing Capacity | Number of Members and Nonmembers with Credit Outstanding |
| | Credit Outstanding(1) |
| | Collateral Borrowing Capacity(2) |
|
| 0% – 10% | 4 |
| | $ | 160 |
| | $ | 169 |
|
| 11% – 25% | 4 |
| | 553 |
| | 672 |
|
| 26% – 50% | 35 |
| | 33,571 |
| | 54,487 |
|
| More than 50% | 143 |
| | 59,413 |
| | 207,160 |
|
| Total | 186 |
| | $ | 93,697 |
| | $ | 262,488 |
|
|
| | | | | | | | | | |
| December 31, 2016 | | | | | |
| Unused Borrowing Capacity | Number of Members and Nonmembers with Credit Outstanding |
| | Credit Outstanding(1) |
| | Collateral Borrowing Capacity(2) |
|
| 0% – 10% | 2 |
| | $ | 26 |
| | $ | 27 |
|
| 11% – 25% | 9 |
| | 1,791 |
| | 2,261 |
|
| 26% – 50% | 30 |
| | 33,096 |
| | 52,503 |
|
| More than 50% | 148 |
| | 30,126 |
| | 149,364 |
|
| Total | 189 |
| | $ | 65,039 |
| | $ | 204,155 |
|
| |
(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. |
(2)Collateral borrowing capacity does not represent any commitment to lend on the part of the Bank.
Based on the Bank’s credit and collateral policies, its credit analysis of borrowers’ financial condition and 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.Bank as of December 31, 2023. The Bank has never experienced any credit losses on advances.
Securities pledged as collateral are assigned borrowing capacities that reflect the securities’ pricing volatilitymarket valuations and market liquidityliquidation risks. Securities are delivered to the Bank’s custodian when they are pledged. The Bank prices securities collateral on a daily basis or twice a month, depending on the availability and reliability of external pricing sources. Securities that are normally priced twice a month may be priced more frequently in volatile market conditions. The Bank benchmarks the borrowing capacities for securities collateral to the market on a periodic basis and may review and change the borrowing capacity for any security type at any time. As of December 31, 2017, the
borrowing capacities assigned to U.S. Treasury and agency securities ranged from 75% to 98% of their market value. The borrowing capacities assigned to private-label MBS, which must be rated AAA or AA when initially pledged, generally ranged from 65% to 85% of their market value, depending on the underlying collateral (residential mortgage loans, home equity loans, or commercial real estate loans), the rating, and the subordination structure of the respective securities.
The following table presents the securities collateral pledged by all memberslargely consists of agency pools and by nonmembers with credit outstanding at December 31, 2017collateralized mortgage obligations, agency debt, and 2016.U.S. Treasury securities.
|
| | | | | | | | | | | | | | | |
Composition of Securities Collateral Pledged
by Members and by Nonmembers with Credit Outstanding |
| | | | | | | | |
| (In millions) | 2017 | | 2016 |
| Securities Type with Current Credit Ratings | Current Par |
| | Borrowing Capacity |
| | Current Par |
| | Borrowing Capacity |
|
| U.S. Treasury (bills, notes, bonds) | $ | 1,946 |
| | $ | 1,875 |
| | $ | 2,377 |
| | $ | 2,315 |
|
| Agency (notes, subordinated debt, structured notes, indexed amortization notes, and Small Business Administration pools) | 3,135 |
| | 3,019 |
| | 3,147 |
| | 3,063 |
|
| Agency pools and collateralized mortgage obligations | 34,182 |
| | 32,755 |
| | 8,986 |
| | 8,559 |
|
| PLRMBS – publicly registered investment-grade-rated senior tranches | — |
| | — |
| | 1 |
| | — |
|
| Private-label commercial MBS – publicly registered investment-grade-rated senior tranches | 3 |
| | 2 |
| | — |
| | — |
|
| PLRMBS – private placement investment-grade-rated senior tranches | 68 |
| | 51 |
| | 83 |
| | 62 |
|
| Municipal Bonds – investment-grade-rated | 55 |
| | 49 |
| | 61 |
| | 55 |
|
| Total | $ | 39,389 |
| | $ | 37,751 |
| | $ | 14,655 |
| | $ | 14,054 |
|
With respect to loan collateral, most borrowersMost institutions 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. With a blanket lien, a borrower generally pledges the following loan types, whether or not the individual loans are eligible to receive borrowing capacity: all loans secured by real estate; all loans made for commercial, corporate, or business purposes; and all participations in these loans. Borrowers pledging under a blanket lien may provide a detailed listing of loans or may use a summary reporting method.
The Bank may require certain borrowersde novo institutions (chartered within the last three years), insurance companies, CDFIs and housing associates to deliver pledged loan collateral to the BankBank. Other considerations for one or more reasons, includingdelivery of pledged collateral may include 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 theinstitution’s creditworthiness, satisfactory maintenance of its collateral, orand the status of the Bank’s priority of its security interest. With the exception of insurance companies, CDFIs, and housing associates, borrowers required to deliver loan collateral must pledge those loans under a blanket lien with detailed reporting.
As of December 31, 2017,2023, of the loan collateral pledged to the Bank, 24%26% was pledged by 2721 institutions by specific identification, 52%42% was pledged by 121115 institutions under a blanket lien with detailed reporting, and 24%32% was pledged by 126141 institutions under a blanket lien with summary reporting.
The Bank monitors each borrower’s borrowing capacity and collateral requirements on a daily basis. The borrowing capacities for loan collateral reflect the assignedvalue of the collateral and a margin for the costs and risks of liquidation. The Bank reviews the margins for loan collateral regularly and may adjust them at any time as market conditions change.
The Bank assigns a value to loan collateral using one of two methods. For mortgage loans that are reported to the Bank with detailed information on the individual loans, the Bank uses third-party pricing vendors to price all the loans on a quarterly basis. The third-party vendors use proprietary analytical tools to calculate the value of each loan. The vendors model the future performance of each individual loan and generate the monthly cash flows given the current loan characteristics and applying specific market assumptions. The value of each loan is determined based on the present value of those cash flows after being discounted by the current market yields commonly used by buyers of these types of loans. The current market yields are derived by the third-party pricing vendors from prevailing conditions in the secondary market. For mortgage loans pledged under a blanket lien with summary reporting, the Bank establishes a standard market value for each collateral type based on quarterly pricing results.
For each borrowerinstitution 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 borrowerinstitution and the types of collateral pledged by the borrower. During the borrower's collateral field review, the Bank examines a statistical sample of the borrower's pledged loans to validate loan ownership, confirm the existence of the critical legal documents, identify documentation and servicing deficiencies, and verify eligibility. Based on any loan defects identified in the pool of sample loans, the Bank determines the applicable non-credit secondary market discounts. The Bank also sends the sample loans to a third-party pricing vendor for valuation of the financial and credit-related attributes of the loans. The Bank adjusts the borrower's borrowing capacity for each collateral type in its pledged portfolio based on the pricing of the field review sample loans and the non-credit secondary market discounts identified in the field review.pledged.
As of December 31, 2017,2023, 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: 90%84% for first lien residential mortgage loans, 88%81% for multifamily mortgage loans, 88%81% for commercial mortgage loans, and 77%69% for second lien residential mortgage loans. The maximum borrowing capacity for small business, small agribusiness, and small farm loans was 50% of the unpaid principal balance, although most of these loans are pledged under blanket lien with summary reporting, with a maximum borrowing capacity of 25%. The highest borrowing capacities are available to borrowersinstitutions 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 below presents the mortgage loan collateral pledged by all members and by nonmembers with credit outstanding at December 31, 20172023 and 2016.2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| Composition of Loan Collateral Pledged |
| | | | | | | |
| (In millions) | 2023 | | 2022 |
| Loan Type | Unpaid Principal
Balance | | Borrowing
Capacity | | Unpaid Principal
Balance | | Borrowing
Capacity |
| First lien residential mortgage loans | $ | 162,389 | | | $ | 103,893 | | | $ | 265,972 | | | $ | 180,564 | |
| Second lien residential mortgage loans and home equity lines of credit | 14,112 | | | 6,735 | | | 15,423 | | | 7,381 | |
| Multifamily mortgage loans | 56,957 | | | 34,656 | | | 60,989 | | | 36,809 | |
| Commercial mortgage loans | 83,713 | | | 50,891 | | | 92,413 | | | 54,341 | |
Loan participations(1) | 1,369 | | | 468 | | | 871 | | | 306 | |
| Small business, small farm, and small agribusiness loans | 1,632 | | | 420 | | | 2,180 | | | 523 | |
| Other | — | | | — | | | 2 | | | — | |
| Total | $ | 320,172 | | | $ | 197,063 | | | $ | 437,850 | | | $ | 279,924 | |
(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. |
| | | | | | | | | | | | | | | |
Composition of Loan Collateral Pledged
by Members and by Nonmembers with Credit Outstanding |
| | | | | | | | |
| (In millions) | 2017 | | 2016 |
| Loan Type | Unpaid Principal Balance |
| | Borrowing Capacity |
| | Unpaid Principal Balance |
| | Borrowing Capacity |
|
| First lien residential mortgage loans | $ | 162,740 |
| | $ | 138,937 |
| | $ | 124,257 |
| | $ | 107,775 |
|
| Second lien residential mortgage loans and home equity lines of credit | 22,440 |
| | 12,500 |
| | 23,238 |
| | 13,302 |
|
| Multifamily mortgage loans | 26,143 |
| | 20,098 |
| | 23,191 |
| | 19,082 |
|
| Commercial mortgage loans | 68,703 |
| | 48,759 |
| | 62,586 |
| | 44,802 |
|
Loan participations(1) | 4,793 |
| | 3,487 |
| | 5,450 |
| | 4,375 |
|
| Small business, small farm, and small agribusiness loans | 3,830 |
| | 956 |
| | 3,016 |
| | 765 |
|
| Other | 2 |
| | — |
| | — |
| | — |
|
| Total | $ | 288,651 |
| | $ | 224,737 |
| | $ | 241,738 |
| | $ | 190,101 |
|
| |
(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.collateral by members and by nonmembers. Subprime loans are defined as loans with a borrower FICO score of less than 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.less than 660. At December 31, 20172023 and 2016,2022, the unpaid principal balance of these loans totaled $9$3.7 billion and $9$5.2 billion, respectively. The Bank reviews and assigns borrowing capacities to subprime mortgage loans as it does for all other types of loan collateral, taking into account the known credit attributes in the pricing of the loans. All advances, including those made to borrowers pledging subprime mortgage loans, are required to be fully collateralized. The Bank limits the amount of borrowing capacity that may be supported by subprime collateral.
MPF Program. Under the MPF Program, the Bank may purchase from members, for its own portfolio, conventional conforming fixed rate mortgage loans under the MPF Original product and FHA-insured or VA-guaranteed mortgage loans 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 jumbo fixed rate mortgage loans for concurrent sale to Redwood Residential Acquisition Corporation, a subsidiary of Redwood Trust, Inc., a real estate investment trust, under the MPF Direct product; and of government-insured or government-guaranteed mortgage loans that will be packaged into securities backed by the mortgage loans and guaranteed by Ginnie Mae under the MPF Government MBS product. As of At December 31, 2017,2023 and 2022, the Bank had approved 23 members as participating financial institutions since renewing its participation in the borrowing capacity of these loans totaled $2.1 billion and $2.9 billion, respectively.
MPF Program in 2013.
From May 2002 through October 2006, the Bank purchased conventional conforming fixed rate mortgage loans from its participating financial institutions members under the MPF Original and MPF Plus products. Participating members originated or purchased the mortgage loans, credit-enhanced them and sold them to the Bank, and generally retained the servicing of the loans. Unlike conventional MPF products held for portfolio, under the MPF Xtra, MPF Direct, MPF Government, and MPF Government MBS products, participating financial institutions are not required to provide credit enhancement and do not receive credit enhancement fees. When members sell mortgage loans under the MPF Xtra, MPF Direct, and MPF Government MBS products, the loans are sold to a third-party investor and are not recorded on the Bank’s Statements of Condition.
Program.The Bank and any participating financial institution share in the credit risk of the mortgage loans sold to the Bank by that institution under the MPF Original and MPF Plus products as specified in a master agreement. AsAfter June 30, 2021, the Bank no longer directly purchases, or facilitates the purchase of, December 31, 2017,mortgage loans purchased under the MPF Program generally had a credit risk exposure at the time of purchase that, as determined by the MPF Program methodology, would be expected from an equivalent investment rated AA if purchased prior to April 2017, or rated BBB if purchased since April 2017, taking into consideration the credit risk sharing structure mandated by the Finance Agency’s acquired member assets (AMA) regulation.its members. The MPF Program structures potential credit losses on conventional MPF loans into layers with respect to each pool of loans purchased by the Bank under a single master commitment, as follows:
(1)The first layer of protection against loss is the liquidation value of the real property securing the loan.
| |
1. | The first layer of protection against loss is the liquidation value of the real property securing the loan. |
| |
2. | The next layer of protection comes from the primary mortgage insurance that is required for loans with an initial loan-to-value ratio greater than 80%, if still in place. |
| |
3. | (2)The next layer of protection comes from the primary mortgage insurance that is required for loans with an initial loan-to-value ratio greater than 80%, if still in place. (3)Losses that exceed the liquidation value of the real property and any primary mortgage insurance, up to an agreed-upon amount called the first loss account for each master commitment, are incurred by the Bank. |
| |
4. | Losses in excess of the first loss account for each master commitment, up to an agreed-upon amount called the “credit enhancement amount,” are covered by the participating financial institution's credit enhancement obligation at the time losses are incurred. |
| |
5. | Losses in excess of the first loss account and the participating financial institution's remaining credit enhancement for the master commitment, if any, are incurred by the Bank. |
The first loss account provided by the Bank is a memorandum account, a record-keeping mechanism the Bank uses to track the amount of potential expected losses for which it is liable on each master commitment (before the participating financial institution's credit enhancement is used to cover losses).
As of December 31, 2017, the credit enhancement amount for each master commitment, together with any primary mortgage insurance coverage, was sized to limitare incurred by the Bank’s credit lossesBank.
(4)Losses in excess of the first loss account for each master commitment, up to those that would be expected on an equivalent investment with a long-term credit rating of AA for loans purchased prior to April 2017 and BBB for loans purchased thereafter, as determinedagreed-upon amount called the “credit enhancement amount,” are covered by the MPF Program methodology. By requiringparticipating financial institution's credit enhancement inobligation at the amount determined by the MPF Program methodology, the Bank expects to have the same probability of incurring credittime losses are incurred.
(5)Losses in excess of the first loss account and the participating financial institution's remaining credit enhancement obligation onfor the master commitment, if any, are incurred by the Bank.
The Bank performs a quarterly assessment of its mortgage loans purchased under any master commitment as an investor would have of incurringheld for portfolio to estimate expected credit losses. An allowance for credit losses on an equivalent investmentis recorded with a corresponding long-term credit rating.
Before delivering loans for purchase under the MPF Program, each participating financial institution submits data on the individual loansadjustment to the FHLBank of Chicago, which calculates the loan levelprovision for/(reversal of) credit enhancement needed.losses. The rating agency model used considers many characteristics, such as loan-to-value ratio, property type, loan purpose, borrower credit scores, level of loan documentation, and loan term, to determine the loan level credit enhancement. The resulting credit enhancement amount for each loan purchased is accumulated under a master commitment to establish a pool level credit enhancement amount for the master commitment.
The Bank’s mortgage loan portfolio currently consists of mortgage loans purchased under two MPF products: MPF Original and MPF Plus, which differ from each other in the way the amount of the first loss account is determined, the options available for covering the participating financial institution's credit enhancement obligation, and the fee structure for the credit enhancement fees.
Under MPF Original, the first loss account accumulates over the life of the master commitment. Each month, the outstanding aggregate principal balance of the loans at monthend is multiplied by an agreed-upon percentage (typically 4 basis points per annum), and that amount is added to the first loss account. As credit and special hazard losses are realized that are not covered by the liquidation value of the real property or primary mortgage insurance, they are first charged to the Bank with a corresponding reduction of the first loss account for that master commitment up to the amount accumulated in the first loss account at that time. Over time, the first loss account may cover themeasures expected credit losses on mortgage loans on a master commitment, although losses that are greater than expected or that occur earlyloan-level basis, factoring in the life ofcredit enhancement structure at the master commitment could exceed the amount accumulated in the first loss account. In that case, the excess losses would be charged next to the member's credit enhancement to the extent available. For each master commitment, the Bank considers the credit performance, credit enhancement levels, and the nationally recognized statistical rating organization (NRSRO) rating equivalent as determined under the MPF Program methodology, in the determination of its risk-based capital requirements, and the credit performance, collateral protection, and availability of credit enhancement in the evaluation of appropriate loan loss allowances.
level.
The aggregate first loss accountfollowing tables present the payment status for all participating financial institutions for MPF Original totaled $1 millionmortgage loans and other delinquency statistics for the years endedBank’s mortgage loans at December 31, 2017, 2016,2023 and 2015.2022.
| | | | | | | | | | | |
| (Dollars in millions) | | | |
Payment Status, at Amortized Cost(1) | 2023 | | 2022 |
| 30 – 59 days delinquent | $ | 5 | | | $ | 9 | |
| 60 – 89 days delinquent | 4 | | | 3 | |
| 90 days or more delinquent | 16 | | | 19 | |
| Total past due | 25 | | | 31 | |
| Total current loans | 730 | | | 785 | |
| Total mortgage loans held for portfolio | $ | 755 | | | $ | 816 | |
In process of foreclosure, included above(2) | $ | 2 | | | $ | 3 | |
Nonaccrual loans(3) | $ | 16 | | | $ | 19 | |
| | | |
Serious delinquencies as a percentage of total mortgage loans outstanding(4) | 2.17 | % | | 2.30 | % |
(1) The participating financial institution’s credit enhancement obligation under MPF Original must be collateralized by the participating financial institutionamortized cost in the same way that advances from the Bank are collateralized, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Advances.”For taking on the credit enhancement obligation, the Bank pays the participating financial institution a credit enhancement fee, typically 10 basis points per annum, calculated onloan is the unpaid principal balance of the loan, adjusted for net deferred loan fees or costs, unamortized premiums or discounts, and direct write-downs.
(2) Includes loans for which the servicer has reported a decision to foreclose or to pursue a similar alternative, such as deed-in-lieu. Loans in the master commitment. A participating financial institution may elect to receive credit enhancement fees monthly over the lifeprocess of the loans or in an upfront lump sum amount that isforeclosure are included in the purchase price at the time thepast due or current loans are sold to the Bank. The lump sum amount is approximately equivalent to the present valuedepending on their delinquency status.
(3) At December 31, 2023 and 2022, $5 million and $7 million, respectively, of the monthly credit enhancement fees that the Bank would otherwise be expected to pay over the life of the loans. In both cases, the Bank charges credit enhancement fees to interest income, which
effectively reduces the overall yield earnedmortgage loans on the loans purchased by the Bank. The Bank reduced net interest income for credit enhancement fees that are paid monthly totaling $0.5 million in 2017, $0.2 million in 2016, and $0.1 million in 2015 for MPF Original loans.
Under MPF Plus, the first loss account is equal to a specified percentage of the scheduled principal balance of loans in the pool as of the sale date of each loan. The percentage of the first loss account was negotiated for each master commitment. The participating financial institution provides credit enhancement for loans sold to the Bank under MPF Plus by maintaining a supplemental mortgage insurance (SMI) policy that equals its credit enhancement obligation. The amount of required credit enhancement is recalculated annually. Because the MPF Plus product provides that the requirement may only be reduced (and not increased), the SMI coverage could be reduced as a result of the annual recalculation of the required credit enhancement.
Typically, the amount of the first loss account is equal to the deductible on the SMI policy. However, the SMI policy does not cover special hazard losses or credit losses on loans with a loan-to-value ratio below a certain percentage (usually 50%). As a result, credit losses on loans not covered by the SMI policy and special hazard losses may reduce the amount of the first loss account without reducing the deductible on the SMI policy. If the deductible on the SMI policy has not been met and the pool incurs credit losses that exceed the amount of the first loss account, those losses will be allocated to the Bank until the SMI policy deductible has been met. Once the deductible has been met, the SMI policy will cover credit losses on loans covered by the policy up to the maximum loss coverage provided by the policy. If the SMI provider's claims-paying ability rating falls below a specified level, the participating financial institution has six months to either replace the SMI policy or assume the credit enhancement obligation and fully collateralize the obligation; otherwise the Bank may choose not to pay the participating financial institution its performance-based credit enhancement fee. Finally, the Bank will absorb credit losses that exceed the maximum loss coverage of the SMI policy (or the substitute credit enhancement provided by the participating financial institution), all credit losses on loans not covered by the policy, and all special hazard losses, if any.
Three of the six master commitments (totaling $0.3 billion) continue to rely on SMI coverage for a portion of their credit enhancement obligation, which is provided by two SMI companies and totals $9.4 million after the deductible. The claims-paying ability ratings of these two SMI companies are below the AA rating required for the program; one is rated BB+ and the other is rated BBB-. The participating financial institutions associated with the relevant master commitments have chosen to forego their performance-based credit enhancement fees rather than assume the credit enhancement obligation. The largest of the commitments (totaling$0.2 billion)nonaccrual status did not achieve AA credit equivalency, as determined by the MPF Program methodology, solely because the SMI company was rated BB+.
At December 31, 2017, the deductibles under the SMI policies totaled approximately 35% of the participating financial institutions’ credit enhancement obligation on MPF Plus loans. At December 31, 2016, the deductibles under the SMI policies totaled approximately 35% of the participating financial institutions’ credit enhancement obligation on MPF Plus loans. None of the SMI was provided by participating financial institutions or their affiliates at December 31, 2017 and 2016.
The first loss account for MPF Plus for the years ended December 31, 2017, 2016, and 2015 was as follows:
|
| | | | | | | | | | | |
| First Loss Account for MPF Plus |
| | | | | | |
| (In millions) | 2017 |
| | 2016 |
| | 2015 |
|
| Balance, beginning of the period | $ | 8 |
| | $ | 9 |
| | $ | 10 |
|
| Losses incurred in excess of liquidation value of the real property securing the loan and primary mortgage insurance | — |
| | (1 | ) | | (1 | ) |
| Balance, end of the period | $ | 8 |
| | $ | 8 |
| | $ | 9 |
|
Under MPF Plus, the Bank pays the participating financial institution a credit enhancement fee that is divided into a fixed credit enhancement fee and a performance-based credit enhancement fee. The fixed credit enhancement fee is paid each month beginning with the month after each loan delivery. The performance-based credit enhancement fee accrues monthly beginning with the month after each loan delivery and is paid to the member beginning 12 months later. Performance-based credit enhancement fees payable to the member are reduced byhave an amount equal to loan losses, up to the full amount of the first loss account established for each master commitment. If losses up to the full amount of the first loss account, net of previously withheld performance-based credit enhancement fees, exceed the credit enhancement fee payable in any period, the excess will be carried forward and applied against future performance-based credit enhancement fees. Because loans in the MPF Plus program have experienced a high rate of voluntary prepayments, causing the current balance of each respective master commitment to be significantly reduced since purchase, it is possible that the remaining loans will not generate enough performance-based credit enhancement fees over the remaining life of each master commitment to enable the Bank to collect performance-based credit enhancement fees equal to the full amount of the first loss account established for each MPF Plus master commitment. The amount of performance-based credit enhancement fees expected to be accrued in the future is uncertain and highly dependent on the future rate of principal prepayments of the underlying mortgage loans. The Bank reduced net interest income for credit enhancement fees totaling $0.2 million in 2017, $0.3 million in 2016, and $0.3 million in 2015 for MPF Plus loans. The Bank’s liability for performance-based credit enhancement fees for MPF Plus was de minimis at December 31, 2017 and 2016.
The Bank provides for a loss allowance, net of the credit enhancement, for any impaired loans and for the estimates of other probable losses, and the Bank has policies and procedures in place to monitor the credit risk. The Bank bases theassociated allowance for credit losses forbecause these loans were either previously charged off to the Bank’s mortgage loan portfolio on its estimate of probable credit losses in the portfolio as of the Statements of Condition date.
Effective January 1, 2015, the Bank implemented the accounting requirements of regulatory Advisory Bulletin 2012-02. As a result, for any mortgage loans that are more than 180 days past due and that have any outstanding balance in excess ofexpected recoverable value or the fair value of the property, lessunderlying collateral, including any credit enhancements, is greater than the amortized cost to sell, this excess is charged off as a loss by the end of the month in which the applicable time period elapses. Likewise, when a borrower is in bankruptcy, loans are written down to the fair value of the collateral, less cost to sell, in general within 60 days of receipt of the notification of filing from the bankruptcy court, unless it can be clearly demonstrated and documented that repayment is likely to occur. As a result of these charge-offs, the corresponding Allowance for Credit Losses on MPF Loans, which had previously provided for most of these expected losses, was reduced accordingly.loans.
Mortgage Loans Evaluated at the Individual Master Commitment Level – The credit risk analysis of all conventional MPF loans is performed at the individual master commitment level to determine the credit enhancements available to recover losses on MPF loans under each individual master commitment.
Individually Evaluated Mortgage Loans – Certain conventional mortgage loans, primarily impaired mortgage(4) Represents loans that are considered collateral-dependent, may be specifically identified for purposes90 days or more past due or in the process of calculating the allowance for credit losses. The estimated credit losses on impaired collateral-dependent loans may be separately determined because sufficient information exists to makeforeclosure as a reasonable estimatepercentage of the inherent loss on thoserecorded investment of total mortgage loans on an individual loan basis. The Bank estimates the fair valueoutstanding.
Table of collateral using real estate broker price opinions or automated valuation models based on property characteristics as well as recent market sales and current listings. The resulting incurred loss, if any, is equalContents
Delinquencies amounted to the difference between the carrying value3.30% of the loan and the estimated fair value of the collateral less estimated selling costs.
Collectively Evaluated Mortgage Loans – The credit risk analysis of conventional loans collectively evaluated for impairment considers loan pool-specific attribute data, applies estimated loss severities, and considers the associated credit enhancements to determine the Bank's best estimate of probable incurred losses. The analysis includes estimating projected cash flows that the Bank is likely to collect based on an assessment of all available information, including prepayment speeds, default rates, and loss severity of the mortgage loans based on underlying loan-level borrower and loan characteristics; expected housing price changes; and interest rate assumptions. In performing a detailed cash flow analysis, the Bank develops its best estimate of the cash flows
expected to be collected using a third-party model to project prepayments, default rates, and loss severities based on borrower characteristics and the particular attributes of thetotal mortgage loans in conjunction with assumptions related primarily to future changes in housing pricesthe Bank’s portfolio as of December 31, 2023, and interest rates. The assumptions used as inputs to3.77% of the model, including the forecast of future housing price changes, are consistent with assumptions used for the Bank's evaluation of its PLRMBS for OTTI.
The Bank performs periodic reviews of itstotal mortgage loan portfolio to identify the probable credit losses in the portfolio and to determine the likelihood of collection on the loans in the portfolio. The overall allowance is determined by an analysis that includes considerationBank’s portfolio as of observable data such as delinquency statistics, past performance, current performance, loan portfolio characteristics, collateral valuations, industry data, collectability of credit enhancements from members or from mortgage insurers, and prevailing economic conditions, taking into account the credit enhancement provided by the member under the terms of each master commitment.
December 31, 2022.
The amountsfollowing table presents risk elements and credit ratios for the Bank’s mortgage loans at December 31, 2023 and 2022. The amount of charge-offs and recoveries of allowance for credit losses on the mortgage loan portfolio were de minimis duringfor the years ended December 31, 20172023 and 2016. Net charge-offs of allowance for credit losses on the mortgage loan portfolio were $2 during the year ended December 31, 2015.2022.
| | | | | | | | | | | |
Unpaid Principal Balance (Dollars in millions) | 2023 | | 2022 |
| Average loans outstanding during the period | $ | 746 | | | $ | 840 | |
| Mortgage loans held for portfolio | $ | 716 | | | $ | 775 | |
| Nonaccrual loans | $ | 15 | | | $ | 17 | |
| Allowance for credit losses on mortgage loans held for portfolio | $ | 1 | | | $ | 1 | |
| | | |
| | | |
| Ratio of net charge-offs to average loans outstanding during the period | — | % | | 0.02 | % |
| Ratio of allowance for credit losses to mortgage loans held for portfolio | 0.13 | % | | 0.14 | % |
| Ratio of nonaccrual loans to mortgage loans held for portfolio | 2.12 | % | | 2.25 | % |
| Ratio of allowance for credit losses to nonaccrual loans | 6.18 | % | | 6.45 | % |
The continued decline in the estimated allowance for credit losses during 2017 is primarily due to a decline in the balance of the seasoned portion of mortgage loans, originated between 2002 and 2006, as well as a decline in serious delinquencies in mortgage loans purchased subsequent to 2013 and continuing improvements in the economy and the housing market.
The allowance for credit losses and recorded investment by impairment methodology for individually and collectively evaluated impaired loans are as follows:
|
| | | | | | | |
| (In millions) | 2017 |
| | 2016 |
|
| Allowance for credit losses, end of the period: | | | |
| Individually evaluated for impairment | $ | — |
| | $ | — |
|
| Total allowance for credit losses | $ | — |
| | $ | — |
|
| Recorded investment, end of the period: | | | |
| Individually evaluated for impairment | $ | 9 |
| | $ | 12 |
|
| Collectively evaluated for impairment | 2,078 |
| | 818 |
|
| Total recorded investment | $ | 2,087 |
| | $ | 830 |
|
The recorded investment, unpaid principal balance, and related allowance of impaired loans individually evaluated for impairment are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| (In millions) | Recorded Investment |
| | Unpaid Principal Balance |
| | Related Allowance |
| | Recorded Investment |
| | Unpaid Principal Balance |
| | Related Allowance |
|
| With no related allowance | $ | 9 |
| | $ | 9 |
| | $ | — |
| | $ | 12 |
| | $ | 12 |
| | $ | — |
|
| With an allowance | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 9 |
| | $ | 9 |
| | $ | — |
| | $ | 12 |
| | $ | 12 |
| | $ | — |
|
The average recorded investment on impaired loans individually evaluated for impairment is as follows:
|
| | | | | | | |
| (In millions) | 2017 |
| | 2016 |
|
| With no related allowance | $ | 10 |
| | $ | 12 |
|
| With an allowance | — |
| | — |
|
| Total | $ | 10 |
| | $ | 12 |
|
For the three MPF Plus master commitments that still rely on SMI for a portion of their credit enhancement obligation, the external ratings of the SMI providers have declined since the loans were purchased. Because the relevant participating financial institutions have elected not to assume the credit enhancement obligations as their own, the Bank has discontinued paying the associated performance-based credit enhancement fees, in accordance with the terms of the applicable agreements. Formerly, upon a realized loss, the Bank would have withheld credit enhancement fees up to the amount of the SMI deductible to offset the loss. Because these fees are no longer owed to the participating financial institutions, they cannot be withheld to offset a loss. Instead, the Bank is accounting for the performance-based credit enhancement fees as income and has now begun to directly recognize the potential loan losses in the related loan loss allowance account.
For more information on how the Bank determines its estimated allowance for credit losses on mortgage loans, see “Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – Allowance for Credit Losses – Mortgage Loans Acquired Under the MPF Program” and “Item 8. Financial Statements and Supplementary Data – Note 10 – Allowance for Credit Losses.”
A mortgage loan is considered to be impaired when it is reported 90 days or more past due (nonaccrual) or when it is probable, based on current information and events, that the Bank will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreement.
The following table presents information on delinquent mortgage loans as of December 31, 2017 and 2016.
|
| | | | | | | |
| Mortgage Loan Delinquencies |
| | | | |
| | 2017 |
|
| 2016 |
|
| (Dollars in millions) | Recorded Investment(1) |
| | Recorded Investment(1) |
|
| 30 – 59 days delinquent | $ | 8 |
| | $ | 7 |
|
| 60 – 89 days delinquent | 2 |
| | 3 |
|
| 90 days or more delinquent | 12 |
| | 15 |
|
| Total past due | 22 |
| | 25 |
|
| Total current loans | 2,065 |
| | 805 |
|
| Total mortgage loans | $ | 2,087 |
| | $ | 830 |
|
In process of foreclosure, included above(2) | $ | 3 |
| | $ | 5 |
|
| Nonaccrual loans | $ | 12 |
| | $ | 15 |
|
| Loans past due 90 days or more and still accruing interest | $ | — |
| | $ | — |
|
Serious delinquencies as a percentage of total mortgage loans outstanding(3) | 0.59 | % | | 1.79 | % |
| |
(1) | The recorded investment 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. |
| |
(2) | Includes loans for which the servicer has reported a decision to foreclose or to pursue a similar alternative, such as deed-in-lieu. Loans in process of foreclosure are included in past due or current loans depending on their delinquency status. |
| |
(3) | 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. |
For 2017, 2016, and 2015, the interest on nonaccrual loans that was contractually due and recognized in income was as follows:
|
| | | | | | | | | | | |
| Interest on Nonaccrual Loans |
| | | | | | |
| (In millions) | 2017 |
| | 2016 |
| | 2015 |
|
| Interest contractually due on nonaccrual loans during the period | $ | 1 |
| | $ | 1 |
| | $ | 1 |
|
| Interest recognized in income for nonaccrual loans during the period | — |
| | — |
| | — |
|
| Shortfall | $ | 1 |
| | $ | 1 |
| | $ | 1 |
|
Delinquencies amounted to 1.11% of the total loans in the Bank’s portfolio as of December 31, 2017, and 3.12% of the total loans in the Bank’s portfolio as of December 31, 2016. The decline in the delinquency percentage was due to the purchase of new loans in 2017 as well as declining delinquencies during 2017. The weighted average age of the Bank’s MPF portfolio was 36 months as of December 31, 2017, and 87 months as of December 31, 2016.
Troubled Debt Restructurings –Troubled debt restructuring (TDR) is considered to have occurred when a concession is granted to the debtor for economic or legal reasons related to the debtor's financial difficulties and that concession would not have been considered otherwise. An MPF loan considered a TDR is individually evaluated for impairment when determining its related allowance for credit losses. Credit loss is measured by factoring in expected cash flow shortfalls incurred as of the reporting date as well as the economic loss attributable to delaying the original contractual principal and interest due dates, if applicable.
The Bank’s TDRs of MPF loans primarily involve modifying the borrower's monthly payment for a period of up to 36 months to reflect a housing expense ratio that is no more than 31% of the borrower's qualifying monthly income. The outstanding principal balance is re-amortized to reflect a principal and interest payment for a term not to exceed 40 years from the original note date and a housing expense ratio not to exceed 31%. This would result in a balloon payment at the original maturity date of the loan because the maturity date and number of remaining monthly payments are not adjusted. If the 31% ratio is still not achieved through re-amortization, the interest rate is reduced in 0.125% increments below the original note rate, to a floor rate of 3%, resulting in reduced principal and interest payments, for the temporary payment modification period of up to 36 months, until the 31% housing expense ratio is met.
The recorded investment of the Bank’s nonperforming MPFloans classified as TDRs totaled $3 million as of December 31, 2017, and $3 million as of December 31, 2016. During 2017 and 2016, the difference between the pre- and post-modification recorded investment in TDRs that occurred during the year was de minimis. None of the MPF loans classified as TDRs within the previous 12 months experienced a payment default.
At December 31, 2017, the Bank’s other assets included $1 million of real estate owned (REO) resulting from the foreclosure of 11 mortgage loans held by the Bank. At December 31, 2016, the Bank’s other assets included $1 million of REO resulting from the foreclosure of 12 mortgage loans held by the Bank.
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 best estimateexpectations of the present value of the cash flows expected to be collected from the security with the amortized cost basis of the security. If the Bank’s best estimate of the present value of the cash flows expected 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 decline is other than temporary.security. The Bank recognizes an OTTIallowance for credit losses when it determines that it will be unable to
recover the entire amortized cost basis of the security and the fair value of the investment security is less than its amortized cost. The Bank considers its intent to hold the security and whether it is more likely than not that the Bank will be required to sell the security before its anticipated recovery of the remaining cost basis, and other factors. The Bank generally views changes in the fair value of the securities caused by movements in interest rates to be temporary.
The following tables presenttable presents the Bank’s investment credit exposure at the dates indicated,December 31, 2023, based on the lowest of the long-term credit ratings provided by Moody’s, S&P, or comparable Fitch Ratings (Fitch) ratings.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment Credit Exposure |
| | | | | | | | | | | | | | |
| (In millions) | | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | | | |
| | Carrying Value |
| | Credit Rating(1) | | | | |
| Investment Type | AAA |
| | AA |
| | A |
| | BBB |
| | Below Investment Grade |
| | Unrated |
| | Total |
|
| Non-MBS | | | | | | | | | | | | | |
| Certificates of deposit | $ | — |
| | $ | — |
| | $ | 500 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 500 |
|
| Housing finance agency bonds: | | | | | | | | | | | | | |
| CalHFA bonds | — |
| | — |
| | 187 |
| | — |
| | — |
| | — |
| | 187 |
|
| GSEs: | | | | | | | | | | | | | |
| FFCB bonds | — |
| | 1,158 |
| | — |
| | — |
| | — |
| | — |
| | 1,158 |
|
| Total non-MBS | — |
| | 1,158 |
| | 687 |
| | — |
| | — |
| | — |
| | 1,845 |
|
| MBS: | | | | | | | | | | | | | |
| Other U.S. obligations – single-family: | | | | | | | | | | | | | |
| Ginnie Mae | — |
| | 757 |
| | — |
| | — |
| | — |
| | — |
| | 757 |
|
| GSEs – single-family: | | | | | | | | | | | | | |
| Freddie Mac | — |
| | 2,039 |
| | — |
| | — |
| | — |
| | — |
| | 2,039 |
|
Fannie Mae(2) | — |
| | 3,588 |
| | 7 |
| | — |
| | 5 |
| | — |
| | 3,600 |
|
| Subtotal | — |
| | 5,627 |
| | 7 |
| | — |
| | 5 |
| | — |
| | 5,639 |
|
| GSEs – multifamily: | | | | | | | | | | | | | |
| Freddie Mac | — |
| | 4,651 |
| | — |
| | — |
| | — |
| | — |
| | 4,651 |
|
| Fannie Mae | — |
| | 2,131 |
| | — |
| | — |
| | — |
| | — |
| | 2,131 |
|
| Subtotal | — |
|
| 6,782 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 6,782 |
|
| Total GSEs | — |
| | 12,409 |
| | 7 |
| | — |
| | 5 |
| | — |
| | 12,421 |
|
| PLRMBS: | | | | | | | | | | | | | |
| Prime | — |
| | — |
| | 12 |
| | 200 |
| | 642 |
| | 31 |
| | 885 |
|
| Alt-A, option ARM | — |
| | — |
| | — |
| | — |
| | 834 |
| | — |
| | 834 |
|
| Alt-A, other | 2 |
| | 13 |
| | 12 |
| | 57 |
| | 2,549 |
| | 302 |
| | 2,935 |
|
| Total PLRMBS | 2 |
| | 13 |
| | 24 |
| | 257 |
| | 4,025 |
| | 333 |
| | 4,654 |
|
| Total MBS | 2 |
| | 13,179 |
| | 31 |
| | 257 |
| | 4,030 |
| | 333 |
| | 17,832 |
|
| Total securities | 2 |
| | 14,337 |
| | 718 |
| | 257 |
| | 4,030 |
| | 333 |
| | 19,677 |
|
| Interest-bearing deposits | — |
| | 40 |
| | 1,075 |
| | — |
| | — |
| | — |
| | 1,115 |
|
| Securities purchased under agreements to resell | — |
| | 11,750 |
| | — |
| | — |
| | — |
| | — |
| | 11,750 |
|
Federal funds sold(3) | — |
| | 5,283 |
| | 5,745 |
| | — |
| | — |
| | — |
| | 11,028 |
|
| Total investments | $ | 2 |
| | $ | 31,410 |
| | $ | 7,538 |
| | $ | 257 |
| | $ | 4,030 |
| | $ | 333 |
| | $ | 43,570 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | |
| Carrying Value |
| (In millions) | Credit Rating(1) | | | | |
| Investment Type | AAA | | AA | | A | | BBB | | Below Investment Grade | | Unrated | | Total |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| U.S. obligations – Treasury securities | $ | — | | | $ | 4,534 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,534 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| MBS: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Other U.S. obligations – single-family | — | | | 49 | | | — | | | — | | | — | | | — | | | 49 | |
| MBS – GSEs: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
GSEs – single-family(2) | 4 | | | 598 | | | 2 | | | — | | | 1 | | | — | | | 605 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| GSEs – multifamily | — | | | 13,490 | | | — | | | — | | | — | | | — | | | 13,490 | |
| Total MBS – GSEs | 4 | | | 14,088 | | | 2 | | | — | | | 1 | | | — | | | 14,095 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| PLRMBS | 1 | | | 16 | | | 29 | | | 42 | | | 584 | | | 511 | | | 1,183 | |
| Total MBS | 5 | | | 14,153 | | | 31 | | | 42 | | | 585 | | | 511 | | | 15,327 | |
| Total securities | 5 | | | 18,687 | | | 31 | | | 42 | | | 585 | | | 511 | | | 19,861 | |
| Interest-bearing deposits | — | | | — | | | 2,922 | | | — | | | — | | | — | | | 2,922 | |
Securities purchased under agreements to resell(3) | — | | | 900 | | | — | | | — | | | — | | | 2,750 | | | 3,650 | |
Federal funds sold(4) | — | | | 1,576 | | | 2,195 | | | — | | | — | | | 90 | | | 3,861 | |
| Total investments | $ | 5 | | | $ | 21,163 | | | $ | 5,148 | | | $ | 42 | | | $ | 585 | | | $ | 3,351 | | | $ | 30,294 | |
(1)Credit ratings grades of BB and lower are considered below investment grade. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | | |
| | Carrying Value |
| | Credit Rating(1) | | | |
| Investment Type | AAA |
| | AA |
| | A |
| | BBB |
| | Below Investment Grade |
| | Unrated |
| | Total |
|
| Non-MBS | | | | | | | | | | | | | |
| Certificates of deposit | $ | — |
| | $ | 600 |
| | $ | 750 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,350 |
|
| Housing finance agency bonds: | | | | | | | | | | | | |
|
| CalHFA bonds | — |
| | — |
| | 225 |
| | — |
| | — |
| | — |
| | 225 |
|
| GSEs: | | | | | | | | | | | | | |
| FFCB bonds | — |
| | 2,058 |
| | — |
| | — |
| | — |
| | — |
| | 2,058 |
|
| Total non-MBS | — |
| | 2,658 |
| | 975 |
| | — |
| | — |
| | — |
| | 3,633 |
|
| MBS: | | | | | | | | | | | | | |
| Other U.S. obligations – single-family: | | | | | | | | | | | | | |
| Ginnie Mae | — |
| | 959 |
| | — |
| | — |
| | — |
| | — |
| | 959 |
|
| GSEs – single-family: | | | | | | | | | | | | | |
| Freddie Mac | — |
| | 2,793 |
| | — |
| | — |
| | — |
| | — |
| | 2,793 |
|
Fannie Mae(2) | — |
| | 5,020 |
| | 10 |
| | — |
| | 7 |
| | — |
| | 5,037 |
|
| Subtotal | — |
| | 7,813 |
| | 10 |
| | — |
| | 7 |
| | — |
| | 7,830 |
|
| GSEs – multifamily: | | | | | | | | | | | | | |
| Freddie Mac | — |
| | 1,556 |
| | — |
| | — |
| | — |
| | — |
| | 1,556 |
|
| Fannie Mae | — |
| | 1,058 |
| | — |
| | — |
| | — |
| | — |
| | 1,058 |
|
| Subtotal | — |
| | 2,614 |
| | — |
| | — |
| | — |
| | — |
| | 2,614 |
|
| Total GSEs | — |
| | 10,427 |
| | 10 |
| | — |
| | 7 |
| | — |
| | 10,444 |
|
| PLRMBS: | | | | | | | | | | | | | |
| Prime | — |
| | 1 |
| | 1 |
| | 295 |
| | 842 |
| | 2 |
| | 1,141 |
|
| Alt-A, option ARM | — |
| | — |
| | — |
| | — |
| | 897 |
| | — |
| | 897 |
|
| Alt-A, other | 5 |
| | 15 |
| | 17 |
| | 128 |
| | 3,440 |
| | 3 |
| | 3,608 |
|
| Total PLRMBS | 5 |
| | 16 |
| | 18 |
| | 423 |
| | 5,179 |
| | 5 |
| | 5,646 |
|
| Total MBS | 5 |
| | 11,402 |
| | 28 |
| | 423 |
| | 5,186 |
| | 5 |
| | 17,049 |
|
| Total securities | 5 |
| | 14,060 |
| | 1,003 |
| | 423 |
| | 5,186 |
| | 5 |
| | 20,682 |
|
| Interest-bearing deposits | — |
| | — |
| | 590 |
| | — |
| | — |
| | — |
| | 590 |
|
| Securities purchased under agreements to resell | — |
| | 15,500 |
| | — |
| | — |
| | — |
| | — |
| | 15,500 |
|
Federal funds sold(3) | — |
| | 1,576 |
| | 2,585 |
| | 53 |
| | — |
| | — |
| | 4,214 |
|
| Total investments | $ | 5 |
| | $ | 31,136 |
| | $ | 4,178 |
| | $ | 476 |
| | $ | 5,186 |
| | $ | 5 |
| | $ | 40,986 |
|
| |
(1) | Credit ratings of BB and lower are below investment grade. |
| |
(2) | The Bank has one security guaranteed by Fannie Mae but rated D by S&P(2)The Bank has one security guaranteed by Fannie Mae but rated below investment grade at December 31, 2023, because of extraordinary expenses incurred during bankruptcy of the security's sponsor. |
| |
(3) | Includes $225 million and $130 million at December 31, 2017 and 2016, respectively, 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.security's sponsor in 2008.
(3)Unrated counterparties for these investments were broker-dealers, qualifying for limited trading programs authorized by the Bank.
The Bank invests in short-term(4)Includes unsecured interest-bearing deposits, short-term unsecured Federal funds sold, securities purchased under agreementsinvestment credit exposure to resell, and negotiable certificates of deposit with member and nonmember counterparties, all of which are highly rated.a member.
Bank policies set forth the creditworthiness requirements for member and nonmember counterparties for unsecured credit. All Federal funds counterparties (members and nonmembers) must be federally insured financial institutions or domestic branches of foreign commercial banks. The general unsecured credit policy limitsFinance Agency ratings for members and nonmember counterparties are as follows:
|
| | | | | | | | | | |
| Unsecured Credit Policy Limits |
| | | | | | | | |
| | | | Unsecured Credit Limit Amount (Lower of Percentage of Bank Capital or Percentage of Counterparty Capital) | | |
| | Long-Term Credit Rating(1) | | Maximum Percentage Limit for Outstanding Term(2) |
| | Maximum Percentage Limit for Total Outstanding |
| | Maximum Investment Term (Months) |
|
| Member counterparty | AAA | | 15 | % | | 30 | % | | 3 |
|
| | AA | | 14 |
| | 28 |
| | 3 |
|
| | A | | 9 |
| | 18 |
| | 3 |
|
| | BBB | | — |
| | 6 |
| | Overnight |
|
| Nonmember counterparty | AAA | | 15 |
| | 30 |
| | 3 |
|
| | AA | | 14 |
| | 28 |
| | 3 |
|
| | A | | 9 |
| | 18 |
| | 3 |
|
(1) Long-term credit ratings are based on the lowest of Moody’s, S&P, or comparable Fitch ratings. The Bank also uses other similar standards, such as the
Bank’smapped to equivalent internal credit quality ratings on a rating scale of FHFA 1 through FHFA 7, reflecting progressively lower credit quality. The Bank uses internal credit quality ratings to determine maximum limits to members and nonmembers. If a member is not rated by an NRSRO, theThe Bank will
determine the applicablecounterparty’s credit rating by using the Bank’sprimary sources such as proprietary external ratings, other credit quality rating and may provide overnight unsecured credit to that member.
(2) Term limit applies to unsecured extensions of credit excluding Federal funds transactions with a maturity of one day or lessfixed income research, company reports, and Federal funds subject to a
continuing contract.
market-based indications.
The Bank’s unsecured investment credit limits and terms for member counterparties may be less restrictive than for nonmember counterparties because the Bank has access to more information about members to assist in evaluating the member counterparty credit risk.
The Bank actively monitors its credit exposures and the credit quality of its counterparties, including an assessment of each counterparty’s financial performance, capital adequacy, likelihood of parental or sovereign support, and the current market perceptions of the counterparties. The Bank may also consider general macroeconomic and market conditions and political stability when establishing limits on unsecured investments with U.S. branches and agency offices of foreign commercial banks. As a result of deteriorating financial condition or concerns about adverse economic or market developments, the Bank may reduce limits or terms on unsecured investments or suspend a counterparty.
Finance Agency regulations limit the amount of unsecured credit that an individual FHLBank may extend to a single counterparty. This limit is calculated with reference to a percentage of either the FHLBank’s or the counterparty’s capital and to the counterparty’s overall credit rating. Under these regulations, the lesser of the FHLBank’s total regulatory capital or the counterparty’s Tier 1 capital is multiplied by a percentage specified in the regulation. The percentages used to determine the maximum amount of term extensions of unsecured credit range from 1% to 15%, depending on the counterparty’s overall credit rating. Term extensions of unsecured credit include on-balance sheet transactions, off-balance sheet commitments, and derivative transactions, but exclude overnight Federal funds sales, even if subject to a continuing contract. (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Derivative Counterparties” for additional information related to derivatives exposure.)
Finance Agency regulations also permit the FHLBanks to extend additional unsecured credit to the same single counterparty for overnight sales of Federal funds, even if subject to a continuing contract. However, an FHLBank’s total unsecured credit to a single counterparty (total term plus additional overnight Federal funds unsecured credit) may not exceed twice the regulatory limit for term exposures (2% to 30% of the lesser of the FHLBank’s total regulatory capital or the counterparty’s Tier 1 capital, based on the counterparty’s overall credit rating). In addition, the FHLBanks are prohibited by Finance Agency regulation from investing in financial instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks.
Under Finance Agency regulations, the total amount of unsecured credit that an FHLBank may extend to a group of affiliated counterparties for term extensions of unsecured credit and overnight Federal funds sales, combined, may
not exceed 30% of the FHLBank’s total capital. These limits on affiliated counterparty groups are in addition to the limits on extensions of unsecured credit applicable to any single counterparty within the affiliated group.
The following table presents the unsecured credit exposure with counterparties by investment type at December 31, 20172023 and 2016.2022.
| | | | | | | | | | | | |
| |
| | | | |
| | Carrying Value(1) |
| (In millions) | 2023 | | 2022 | |
| Interest-bearing deposits | $ | 2,922 | | | $ | 3,677 | | |
| | | | |
| | | | |
| Federal funds sold | 3,861 | | | 4,719 | | |
| Total | $ | 6,783 | | | $ | 8,396 | | |
|
| | | | | | | |
| Unsecured Investment Credit Exposure by Investment Type |
| | | | |
| | Carrying Value(1)
|
| (In millions) | 2017 |
| | 2016 |
|
| Interest-bearing deposits | $ | 1,115 |
| | $ | 590 |
|
| Certificates of deposit | 500 |
| | 1,350 |
|
| Federal funds sold | 11,028 |
| | 4,214 |
|
| Total | $ | 12,643 |
| | $ | 6,154 |
|
| |
(1) | Excludes unsecured investment credit exposure to U.S. government agencies and instrumentalities, government-sponsored enterprises, and supranational entities and does not include related accrued interest as of December 31, 2017 and 2016.
|
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 comparable Fitch ratings. This table does not reflect the foreign sovereign government’s credit rating. At December 31, 2017, 42% of the carrying value of unsecured investments held by the Bank were rated AA, and 76%2023, 56% of the Bank’s total unsecured investments were to U.S. branches and agency offices of foreign commercial banks.
|
| | | | | | | | | | | |
| Ratings of Unsecured Investment Credit Exposure by Domicile of Counterparty |
| | | | | | |
| (In millions) | | | | | |
| December 31, 2017 | | | | | |
| | Carrying Value(1) |
| | Credit Rating(2) | |
| Domicile of Counterparty | AA |
| | A |
| | Total |
|
Domestic(3) | $ | 1,298 |
| | $ | 1,763 |
| | $ | 3,061 |
|
| U.S. subsidiaries of foreign commercial banks | — |
| | — |
| | — |
|
| Total domestic and U.S. subsidiaries of foreign commercial banks | 1,298 |
| | 1,763 |
| | 3,061 |
|
| U.S. branches and agency offices of foreign commercial banks: | | | | | |
| Australia | 1,975 |
| | — |
| | 1,975 |
|
| Austria | — |
| | 650 |
| | 650 |
|
| Canada | 550 |
| | 1,350 |
| | 1,900 |
|
| France | — |
| | 100 |
| | 100 |
|
| Japan | — |
| | 1,608 |
| | 1,608 |
|
| Netherlands | — |
| | 804 |
| | 804 |
|
| Norway | — |
| | 345 |
| | 345 |
|
| Singapore | 500 |
| | — |
| | 500 |
|
| Sweden | 1,000 |
| | — |
| | 1,000 |
|
| Switzerland | — |
| | 500 |
| | 500 |
|
| United Kingdom | — |
| | 200 |
| | 200 |
|
| Total U.S. branches and agency offices of foreign commercial banks | 4,025 |
| | 5,557 |
| | 9,582 |
|
| Total unsecured credit exposure | $ | 5,323 |
| | $ | 7,320 |
| | $ | 12,643 |
|
| |
(1) | Excludes unsecured investment credit exposure to U.S. government agencies and instrumentalities, government-sponsored enterprises, and supranational entities and does not include related accrued interest as of December 31, 2017.
|
| |
(2) | Does not reflect changes in ratings, outlook, or watch status occurring after December 31, 2017. These ratings represent the lowest rating available for each unsecured investment owned by the Bank, based on the ratings provided by Moody’s, S&P, or comparable Fitch ratings. The Bank’s internal rating may differ from this rating.
|
| |
(3) | Includes $225 million at December 31, 2017, in Federal funds sold to a member counterparty determined by the Bank to have an internal credit rating equivalent to an AA rating. |
The following table presents the contractual maturity At December 31, 2023, all of the Bank’s unsecured investment credit exposure 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. At December 31, 2017, 76% of the carrying value of unsecured investments held by the Bank had overnight maturities.
| | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Carrying Value(1) |
| (In millions) | Credit Rating(2) | | |
| Domicile of Counterparty | AA | | A | | | | Unrated (3) | | Total |
| Domestic | $ | — | | | $ | 2,572 | | | | | $ | 90 | | | $ | 2,662 | |
| U.S. subsidiaries of foreign commercial banks | — | | | 350 | | | | | — | | | 350 | |
| Total domestic and U.S. subsidiaries of foreign commercial banks | — | | | 2,922 | | | | | 90 | | | 3,012 | |
| U.S. branches and agency offices of foreign commercial banks: | | | | | | | | | |
| Australia | — | | | 995 | | | | | — | | | 995 | |
| | | | | | | | | |
| Canada | 1,276 | | | 200 | | | | | — | | | 1,476 | |
| Finland | 300 | | | — | | | | | — | | | 300 | |
| France | — | | | 200 | | | | | — | | | 200 | |
| Germany | — | | | 300 | | | | | — | | | 300 | |
| | | | | | | | | |
| Netherlands | — | | | 500 | | | | | — | | | 500 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total U.S. branches and agency offices of foreign commercial banks | 1,576 | | | 2,195 | | | | | — | | | 3,771 | |
| Total unsecured credit exposure | $ | 1,576 | | | $ | 5,117 | | | | | $ | 90 | | | $ | 6,783 | |
|
| | | | | | | | | | | | | | | |
| Contractual Maturity of Unsecured Investment Credit Exposure by Domicile of Counterparty |
| | | | | | | | |
| (In millions) | | | | | | | |
| December 31, 2017 | | | | | | | |
| | Carrying Value(1) |
| Domicile of Counterparty | Overnight |
| | Due 2 Days Through 30 Days |
| | Due 31 Days Through 90 Days |
| | Total |
|
| Domestic | $ | 3,061 |
| | $ | — |
| | $ | — |
| | $ | 3,061 |
|
| U.S. subsidiaries of foreign commercial banks | — |
| | — |
| | — |
| | — |
|
| Total domestic and U.S. subsidiaries of foreign commercial banks | 3,061 |
| | — |
| | — |
| | 3,061 |
|
| U.S. branches and agency offices of foreign commercial banks: | | | | | | | |
| Australia | 1,225 |
| | 300 |
| | 450 |
| | 1,975 |
|
| Austria | 400 |
| | — |
| | 250 |
| | 650 |
|
| Canada | 1,400 |
| | — |
| | 500 |
| | 1,900 |
|
| France | 100 |
| | — |
| | — |
| | 100 |
|
| Japan | 1,108 |
| | — |
| | 500 |
| | 1,608 |
|
| Netherlands | 804 |
| | — |
| | — |
| | 804 |
|
| Norway | 345 |
| | — |
| | — |
| | 345 |
|
| Singapore | — |
| | — |
| | 500 |
| | 500 |
|
| Sweden | 1,000 |
| | — |
| | — |
| | 1,000 |
|
| Switzerland | — |
| | — |
| | 500 |
| | 500 |
|
| United Kingdom | 200 |
| | — |
| | — |
| | 200 |
|
| Total U.S. branches and agency offices of foreign commercial banks | 6,582 |
| | 300 |
| | 2,700 |
| | 9,582 |
|
| Total unsecured credit exposure | $ | 9,643 |
| | $ | 300 |
| | $ | 2,700 |
| | $ | 12,643 |
|
| |
(1) | Excludes unsecured investment credit exposure to U.S. government agencies and instrumentalities, government-sponsored enterprises, and supranational entities and does not include related accrued interest as of December 31, 2017.
|
The Bank’s investments may also include housing finance agency bonds issued by housing finance agencies located(2)Does not reflect changes in Arizona, California, and Nevada,ratings, outlook, or watch status occurring after December 31, 2023. These ratings represent the three states that make up the Bank’s district. These bonds are federally taxable mortgage revenue bonds, collateralized by pools of first lien residential mortgage loans and credit-enhanced by bond insurance. The bonds heldlowest rating available for each unsecured investment owned by the Bank, are issuedbased on the ratings provided by the California Housing Finance Agency (CalHFA) and insured by either National Public Financial Guarantee (formerly MBIA Insurance Corporation), or Assured Guaranty Municipal Corporation (formerly Financial Security Assurance Incorporated). At December 31, 2017, all of the bonds were rated at least A by Fitch, Moody’s, or S&P.&P. The Bank’s internal rating may differ from this rating.
For the Bank’s investments in housing finance agency bonds, which were issued by CalHFA, the gross unrealized losses were mainly due(3)Includes unsecured investment credit exposure to an illiquid market, credit concerns regarding the underlying mortgage collateral, and credit concerns regarding the monoline insurance providers, causing these investments to be valued at a discount to their acquisition cost. The Bank independently modeled cash flows for the underlying collateral, using assumptions for default rates and loss severity that a market participant would deem reasonable, and concluded that the available credit support within the CalHFA structure more than offset the projected underlying collateral losses. The Bank determined that, as of December 31, 2017, all of the gross unrealized losses on the CalHFA bonds are temporary because the underlying collateral and credit enhancements were sufficient to protect the Bank from losses. As a
result, the Bank expects to recover the entire amortized cost basis of these securities. If conditions in the housing and mortgage markets and general business and economic conditions deteriorate, the fair value of the CalHFA bonds may decline further and the Bank may experience OTTI in future periods.
member.
The Bank’s MBS investments include PLRMBS, all of which were AAA-rated at the time of purchase, and
agency residential MBS, which are backed by Fannie Mae, Freddie Mac, or Ginnie Mae. Some of the PLRMBS were issued by and/or purchased from members, former members, or their affiliates. The Bank has investment credit limits and terms for these investments that do not differ for members and nonmembers. Regulatory policy limits total MBS investments, to three times the Bank’s regulatory capital at the time of purchase. At December 31, 2017,2023, the Bank’s MBS portfolio was 257%212% of Bank regulatory capital (as determined in accordance with regulations governing the operations of the FHLBanks). The Bank has not purchased any PLRMBS since the first quarter of 2008.
The Bank executes all MBS investments without preference to the status of the counterparty or the issuer of the investment as a nonmember, member, or affiliate of a member. When the Bank executes non-MBS investments with members, the Bank may give consideration to their secured credit availability and the Bank’s advances price levels.
At December 31, 2017,2023, PLRMBS representing 20%7% of the amortized cost of the Bank’s MBS portfolio were labeled Alt-A by the issuer. These PLRMBS are generally collateralized by mortgage loans that are considered less risky than subprime loans but more risky than prime loans. These loans are generally made to borrowers with credit scores that are high enough to qualify for a prime mortgage loan, but the loans may not meet standard underwriting guidelines for documentation requirements, property type, or loan-to-value ratios.
As of December 31, 2017,2023, the Bank’s investment in MBS had gross unrealized losses totaling $77$133 million,, most $28 million of which were related to PLRMBS. These gross unrealized losses related to PLRMBS were primarily dueattributable to illiquidity in the MBS market and market expectations of the credit performance of loan collateral underlying these securities, which caused these assets to be valued at discounts to their amortized cost.
For its agency MBS, the Bank expects to recover the entire amortized cost basis of these securities because the Bank determined that the strength of the issuers’ guarantees through direct obligations or support from the U.S. government is sufficient to protect the Bank from losses. As a result, the Bank determined that, as of December 31, 2017,2023, all of the gross unrealized losses on its agency MBS are temporary.
To assess whether it expects to recover the entire amortized cost basis of its PLRMBS, the Bank performed a cash flow analysis for all of its PLRMBS as of December 31, 2017, using two third-party models. The FHLBanks’ OTTI Committee developed a short-term housing price forecast with projected changes ranging from a decrease of 5.0% to an increase of 12.0% over the 12-month period beginning October 1, 2017. For the vast majority of markets, the projected short-term housing price changes range from an increase of 2.0% to an increase of 6.0%. Thereafter, a unique path is projected for each geographic area based on an internally developed framework derived from historical data.
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 a best-estimate scenario and includes a base case housing price forecast that reflects the expectations for near- and long-term housing price behavior.
In addition to evaluating its PLRMBS under a base case (or best estimate) scenario, the Bank performed a cash flow analysis for each of these securities under a more adverse housing price scenario. This more adverse scenario was primarily based on a short-term housing price forecast that was five percentage points below the base case forecast, followed by a recovery path with annual rates of housing price growth that were 33.0% lower than the base case.
The following table shows the base case scenario and what the credit-related OTTI loss would have been under the more adverse housing price scenario at December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | | |
| OTTI Analysis Under Base Case and Adverse Case Scenarios |
| | | | | | | | | | | | |
| | Housing Price Scenario |
| | Base Case | | Adverse Case |
| (Dollars in millions) | Number of Securities |
| | Unpaid Principal Balance |
| | Credit- Related OTTI(1) |
| | Number of Securities |
| | Unpaid Principal Balance |
| | Credit- Related OTTI(1) |
|
| Other-than-temporarily impaired PLRMBS backed by loans classified at origination as: | | | | | | | | | | | |
| Alt-A, other | 5 |
| | $ | 144 |
| | $ | (1 | ) | | 8 |
| | $ | 186 |
| | $ | (2 | ) |
| Total | 5 |
| | $ | 144 |
| | $ | (1 | ) | | 8 |
| | $ | 186 |
| | $ | (2 | ) |
| |
(1) | Amounts are for the three months ended December 31, 2017.
|
For more information on the Bank’s OTTI analysis and reviews, see “Item 8. Financial Statements and Supplementary Data – Note 7 – Other-Than-Temporary Impairment Analysis.”
The following table presents the ratings of the Bank’s PLRMBS as of December 31, 2017, by collateral type at origination and by year of securitization.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unpaid Principal Balance of PLRMBS by Year of Securitization and Credit Rating |
| | | | | | | | | | | | | | |
| (In millions) | | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | | |
| | Unpaid Principal Balance |
| | Credit Rating(1) | | | |
| Collateral Type at Origination and Year of Securitization | AAA |
| | AA |
| | A |
| | BBB |
| | Below Investment Grade |
| | Unrated |
| | Total |
|
| Prime | | | | | | | | | | | | | |
| 2008 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 110 |
| | $ | — |
| | $ | 110 |
|
| 2007 | — |
| | — |
| | — |
| | — |
| | 244 |
| | 34 |
| | 278 |
|
| 2006 | — |
| | — |
| | — |
| | — |
| | 26 |
| | — |
| | 26 |
|
| 2005 | — |
| | — |
| | — |
| | 14 |
| | 34 |
| | — |
| | 48 |
|
| 2004 and earlier | — |
| | — |
| | 12 |
| | 186 |
| | 264 |
| | 2 |
| | 464 |
|
| Total Prime | — |
| | — |
| | 12 |
| | 200 |
| | 678 |
| | 36 |
| | 926 |
|
| Alt-A, option ARM | | | | | | | | | | | | | |
| 2007 | — |
| | — |
| | — |
| | — |
| | 686 |
| | — |
| | 686 |
|
| 2006 | — |
| | — |
| | — |
| | — |
| | 130 |
| | — |
| | 130 |
|
| 2005 | — |
| | — |
| | — |
| | — |
| | 136 |
| | — |
| | 136 |
|
| Total Alt-A, option ARM | — |
| | — |
| | — |
| | — |
| | 952 |
| | — |
| | 952 |
|
| Alt-A, other | | | | | | | | | | | | | |
| 2008 | — |
| | — |
| | — |
| | — |
| | 76 |
| | — |
| | 76 |
|
| 2007 | — |
| | — |
| | — |
| | — |
| | 740 |
| | 196 |
| | 936 |
|
| 2006 | — |
| | — |
| | — |
| | — |
| | 282 |
| | 101 |
| | 383 |
|
| 2005 | — |
| | 2 |
| | — |
| | — |
| | 1,421 |
| | 48 |
| | 1,471 |
|
| 2004 and earlier | 2 |
| | 12 |
| | 12 |
| | 56 |
| | 281 |
| | 6 |
| | 369 |
|
| Total Alt-A, other | 2 |
| | 14 |
| | 12 |
| | 56 |
| | 2,800 |
| | 351 |
| | 3,235 |
|
| Total par value | $ | 2 |
| | $ | 14 |
| | $ | 24 |
| | $ | 256 |
| | $ | 4,430 |
| | $ | 387 |
| | $ | 5,113 |
|
| |
(1) | The credit ratings used by the Bank are based on the lowest of Moody’s, S&P, or comparable Fitch ratings. Credit ratings of BB and lower are below investment grade.
|
The following table presents the ratings of the Bank’s other-than-temporarily impaired PLRMBS at December 31, 2017, by collateral type at origination and by year of securitization.
|
| | | | | | | | | | | | | | | |
Unpaid Principal Balance of Other-Than-Temporarily Impaired PLRMBS by Year of Securitization and Credit Rating |
| | | | | | | | |
| (In millions) | | | | | | | |
| December 31, 2017 | | | | | | | |
| | Unpaid Principal Balance |
| | Credit Rating(1) | | | | |
| Collateral Type at Origination and Year of Securitization | AA |
| | Below Investment Grade |
| | Unrated |
| | Total |
|
| Prime | | | | | | | |
| 2008 | $ | — |
| | $ | 102 |
| | $ | — |
| | $ | 102 |
|
| 2007 | — |
| | 210 |
| | 34 |
| | 244 |
|
| 2006 | — |
| | 10 |
| | — |
| | 10 |
|
| 2005 | — |
| | 16 |
| | — |
| | 16 |
|
| 2004 and earlier | — |
| | 33 |
| | — |
| | 33 |
|
| Total Prime | — |
| | 371 |
| | 34 |
| | 405 |
|
| Alt-A, option ARM | | | | | | | |
| 2007 | — |
| | 687 |
| | — |
| | 687 |
|
| 2006 | — |
| | 130 |
| | — |
| | 130 |
|
| 2005 | — |
| | 136 |
| | — |
| | 136 |
|
| Total Alt-A, option ARM | — |
| | 953 |
| | — |
| | 953 |
|
| Alt-A, other | | | | | | | |
| 2008 | — |
| | 76 |
| | — |
| | 76 |
|
| 2007 | — |
| | 734 |
| | 196 |
| | 930 |
|
| 2006 | — |
| | 282 |
| | 101 |
| | 383 |
|
| 2005 | — |
| | 1,421 |
| | 48 |
| | 1,469 |
|
| 2004 and earlier | 3 |
| | 126 |
| | 4 |
| | 133 |
|
| Total Alt-A, other | 3 |
| | 2,639 |
| | 349 |
| | 2,991 |
|
| Total par value | $ | 3 |
| | $ | 3,963 |
| | $ | 383 |
| | $ | 4,349 |
|
| |
(1) | The credit ratings used by the Bank are based on the lowest of Moody’s, S&P, or comparable Fitch ratings. Credit ratings of BB and lower are below investment grade.
|
For the Bank’s PLRMBS, the following table shows the amortized cost, estimated fair value, credit- and non-credit-related OTTI, performance of the underlying collateral based on the classification at the time of origination, and credit enhancement statistics by type of collateral and year of securitization. Credit enhancement is defined as the percentage of subordinated tranches and over-collateralization, if any, in a security structure that will absorb losses before the Bank will experience a loss on the security, expressed as a percentage of the underlying collateral balance. The credit enhancement figures include the additional credit enhancement required by the Bank (above the amounts required for an AAA rating by the credit rating agencies) for selected securities starting in late 2004, and for all securities starting in late 2005. The calculated weighted averages represent the dollar-weighted averages of all the PLRMBS in each category shown. The classification (prime or Alt-A) is based on the model used to run the estimated cash flows for the security, which may not necessarily be the same as the classification at the time of origination.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| PLRMBS Credit Characteristics |
| | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Underlying Collateral Performance and Credit Enhancement Statistics |
| Collateral Type at Origination and Year of Securitization | Amortized Cost |
| | Gross Unrealized Losses(2) |
| | Estimated Fair Value |
| | Total OTTI(1) |
| | Non- Credit- Related OTTI(1) |
| | Credit- Related OTTI(1) |
| | Weighted Average 60+ Days Collateral Delinquency Rate |
| | Original Weighted Average Credit Support |
| | Current Weighted Average Credit Support |
|
| Prime | | | | | | | | | | | | | | | | | |
| 2008 | $ | 94 |
| | $ | — |
| | $ | 106 |
| | $ | — |
| | $ | — |
| | $ | — |
| | 13.06 | % | | 30.00 | % | | 10.32 | % |
| 2007 | 230 |
| | (3 | ) | | 239 |
| | (1 | ) | | — |
| | (1 | ) | | 14.27 |
| | 22.91 |
| | 2.18 |
|
| 2006 | 23 |
| | — |
| | 25 |
| | — |
| | — |
| | — |
| | 13.08 |
| | 12.28 |
| | 4.36 |
|
| 2005 | 46 |
| | — |
| | 48 |
| | — |
| | — |
| | — |
| | 10.39 |
| | 11.88 |
| | 15.64 |
|
| 2004 and earlier | 463 |
| | (3 | ) | | 466 |
| | — |
| | — |
| | — |
| | 6.91 |
| | 4.50 |
| | 13.80 |
|
| Total Prime | 856 |
| | (6 | ) | | 884 |
| | (1 | ) | | — |
| | (1 | ) | | 10.20 |
| | 13.64 |
| | 9.73 |
|
| Alt-A, option ARM | | | | | | | | | | | | | | | | | |
| 2007 | 566 |
| | (9 | ) | | 621 |
| | — |
| | — |
| | — |
| | 19.98 |
| | 44.22 |
| | 13.52 |
|
| 2006 | 98 |
| | — |
| | 119 |
| | — |
| | — |
| | — |
| | 16.38 |
| | 44.91 |
| | 3.85 |
|
| 2005 | 50 |
| | (1 | ) | | 94 |
| | — |
| | — |
| | — |
| | 16.28 |
| | 22.82 |
| | 5.12 |
|
| Total Alt-A, option ARM | 714 |
| | (10 | ) | | 834 |
| | — |
| | — |
| | — |
| | 18.96 |
| | 41.26 |
| | 11.00 |
|
| Alt-A, other | | | | | | | | | | | | | | | | | |
| 2008 | 73 |
| | — |
| | 74 |
| | — |
| | — |
| | — |
| | 6.56 |
| | 31.80 |
| | 21.88 |
|
| 2007 | 793 |
| | (14 | ) | | 834 |
| | (8 | ) | | (3 | ) | | (11 | ) | | 18.35 |
| | 26.95 |
| | 8.63 |
|
| 2006 | 273 |
| | — |
| | 335 |
| | — |
| | — |
| | — |
| | 17.67 |
| | 18.44 |
| | 0.58 |
|
| 2005 | 1,249 |
| | (15 | ) | | 1,330 |
| | (1 | ) | | (3 | ) | | (4 | ) | | 12.14 |
| | 14.44 |
| | 4.03 |
|
| 2004 and earlier | 365 |
| | (2 | ) | | 371 |
| | — |
| | — |
| | — |
| | 9.88 |
| | 8.27 |
| | 19.13 |
|
| Total Alt-A, other | 2,753 |
| | (31 | ) | | 2,944 |
| | (9 | ) | | (6 | ) | | (15 | ) | | 14.20 |
| | 18.24 |
| | 7.09 |
|
| Total | $ | 4,323 |
| | $ | (47 | ) | | $ | 4,662 |
| | $ | (10 | ) | | $ | (6 | ) | | $ | (16 | ) | | 14.36 | % | | 21.70 | % | | 8.30 | % |
| |
(1) | Amounts are for the year ended December 31, 2017. |
(2) Represents total gross unrealized losses, including non-credit-related other-than-temporary impairment recognized in AOCI. The unpaid principal
balance of Prime, Alt-A, option ARM, and Alt-A, other in a gross unrealized loss position was $221 million, $176 million, and $643 million, respectively, at December 31, 2017, and the amortized cost of Prime, Alt-A, option ARM, and Alt-A, other in a gross unrealized loss position was $221 million, $154 million, and $589 million, respectively, at December 31, 2017.
The following table presents a summary of the significant inputs used to determine potential OTTI credit losses in the Bank’s PLRMBS portfolio at December 31, 2017.
|
| | | | | | | |
| Significant Inputs to OTTI Credit Analysis for All PLRMBS |
| | | | | | | | |
| December 31, 2017 | | | | | | | |
| | Significant Inputs | | Current |
| | Prepayment Rates | | Default Rates | | Loss Severities | | Credit Enhancement |
| Year of Securitization | Weighted Average % | | Weighted Average % | | Weighted Average % | | Weighted Average % |
| Prime | | | | | | | |
| 2008 | 15.9 | | 9.4 | | 32.4 | | 15.1 |
| 2007 | 12.3 | | 3.1 | | 20.1 | | 8.8 |
| 2006 | 13.2 | | 3.0 | | 22.4 | | 6.8 |
| 2005 | 19.6 | | 4.6 | | 19.7 | | 12.8 |
| 2004 and earlier | 19.8 | | 3.0 | | 21.2 | | 12.9 |
| Total Prime | 18.1 | | 4.8 | | 24.2 | | 13.1 |
| Alt-A, option ARM | | | | | | | |
| 2007 | 8.4 | | 33.5 | | 42.1 | | 13.5 |
| 2006 | 7.7 | | 34.8 | | 37.5 | | 3.9 |
| 2005 | 8.6 | | 23.9 | | 35.2 | | 5.1 |
| Total Alt-A, option ARM | 8.3 | | 32.3 | | 40.5 | | 11.0 |
| Alt-A, other | | | | | | | |
| 2007 | 12.4 | | 22.7 | | 38.6 | | 4.2 |
| 2006 | 11.1 | | 24.1 | | 38.0 | | 7.2 |
| 2005 | 14.6 | | 18.5 | | 34.7 | | 4.3 |
| 2004 and earlier | 18.1 | | 10.2 | | 30.6 | | 19.5 |
| Total Alt-A, other | 13.8 | | 19.7 | | 35.8 | | 6.6 |
| Total | 13.3 | | 20.0 | | 35.2 | | 8.3 |
Credit enhancement is defined as the subordinated tranches and over-collateralization, if any, in a security structure that will generally absorb losses before the Bank will experience a loss on the security, expressed as a percentage of the underlying collateral balance. The calculated averages represent the dollar-weighted averages of all the PLRMBS investments in each category shown. The classification (prime or Alt-A) is based on the model used to run the estimated cash flows for the security, which may not necessarily be the same as the classification at the time of origination.
The following table presents the fair value of the Bank’s PLRMBS as a percentage of the unpaid principal balance by collateral type at origination and year of securitization.
|
| | | | | | | | | | | | | | |
| Fair Value of PLRMBS as a Percentage of Unpaid Principal Balance by Year of Securitization |
| | | | | | | | | | |
| Collateral Type at Origination and Year of Securitization | December 31,
2017 |
| | September 30,
2017 |
| | June 30,
2017 |
| | March 31,
2017 |
| | December 31,
2016 |
|
| Prime | | | | | | | | | |
| 2008 | 96.89 | % | | 96.60 | % | | 92.68 | % | | 92.93 | % | | 92.87 | % |
| 2007 | 86.40 |
| | 86.17 |
| | 83.80 |
| | 84.87 |
| | 83.93 |
|
| 2006 | 93.86 |
| | 93.98 |
| | 93.21 |
| | 92.25 |
| | 92.38 |
|
| 2005 | 100.58 |
| | 100.02 |
| | 99.55 |
| | 99.44 |
| | 98.97 |
|
| 2004 and earlier | 100.47 |
| | 100.21 |
| | 99.70 |
| | 99.09 |
| | 98.68 |
|
| Weighted average of all Prime | 95.65 |
| | 95.44 |
| | 94.14 |
| | 94.15 |
| | 93.71 |
|
| Alt-A, option ARM | | | | | | | | | |
| 2007 | 90.43 |
| | 90.00 |
| | 87.34 |
| | 83.66 |
| | 83.05 |
|
| 2006 | 91.66 |
| | 89.62 |
| | 86.82 |
| | 83.04 |
| | 80.76 |
|
| 2005 | 68.99 |
| | 65.67 |
| | 62.10 |
| | 57.79 |
| | 57.58 |
|
| Weighted average of all Alt-A, option ARM | 87.53 |
| | 86.46 |
| | 83.66 |
| | 79.82 |
| | 79.05 |
|
| Alt-A, other | | | | | | | | | |
| 2008 | 97.22 |
| | 96.70 |
| | 94.73 |
| | 93.62 |
| | 93.31 |
|
| 2007 | 89.07 |
| | 88.80 |
| | 87.38 |
| | 86.49 |
| | 85.88 |
|
| 2006 | 87.40 |
| | 87.02 |
| | 85.55 |
| | 83.63 |
| | 82.57 |
|
| 2005 | 90.44 |
| | 90.35 |
| | 88.96 |
| | 87.31 |
| | 87.11 |
|
| 2004 and earlier | 100.47 |
| | 100.21 |
| | 99.54 |
| | 99.10 |
| | 98.51 |
|
| Weighted average of all Alt-A, other | 90.98 |
| | 90.80 |
| | 89.60 |
| | 88.33 |
| | 87.86 |
|
| Weighted average of all PLRMBS | 91.18 | % | | 90.84 | % | | 89.36 | % | | 87.89 | % | | 87.40 | % |
The Bank determined that, as of December 31, 2017, the gross unrealized losses on the PLRMBS that have not had an OTTI loss are primarily due to illiquidity in the PLRMBS 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. The Bank does not intend to sell these securities, it is not more likely than not that the Bank will be required to sell these securities before its anticipated recovery of the remaining amortized cost basis, and the Bank expects to recover the entire amortized cost basis of these securities. As a result, the Bank determined that, as of December 31, 2017, all of the gross unrealized losses on these securities are temporary. The Bank will continue to monitor and analyze the performance of these securities to assess the likelihood of the recovery of the entire amortized cost basis of these securities as of each balance sheet date.
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 OTTI of additional credit losses on PLRMBS in future periods, as well as further impairment of PLRMBS that were identified as other-than-temporarily impaired as of December 31, 2017.periods. Additional future credit-related OTTIcredit 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 additional credit-related OTTIan allowance for credit losses on its PLRMBS in the future.
The following table presents the maturity (based on contractual final principal payment) and yield characteristics of the Bank’s investment portfolio as of December 31, 2023. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Within One Year | | After One Year But
Within Five Years | | After Five Years But
Within Ten Years | | After Ten Years | | Carrying Value |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| AFS securities: | | | | | | | | | |
| | | | | | | | | |
| U.S. Treasury obligations | $ | 145 | | | $ | 4,389 | | | $ | — | | | $ | — | | | $ | 4,534 | |
| | | | | | | | | |
| | | | | | | | | |
| MBS: | | | | | | | | | |
| GSEs multifamily: | | | | | | | | | |
| Freddie Mac | — | | | — | | | 1,492 | | | — | | | 1,492 | |
| Fannie Mae | — | | | 2,158 | | | 8,558 | | | 213 | | | 10,929 | |
| Subtotal GSEs multifamily | — | | | 2,158 | | | 10,050 | | | 213 | | | 12,421 | |
| PLRMBS | — | | | — | | | 8 | | | 1,051 | | | 1,059 | |
| Total AFS securities | $ | 145 | | | $ | 6,547 | | | $ | 10,058 | | | $ | 1,264 | | | $ | 18,014 | |
Yield on AFS securities(1) | 0.75 | % | | 2.64 | % | | 3.83 | % | | 9.89 | % | | 3.80 | % |
| HTM securities: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| MBS: | | | | | | | | | |
| Other U.S. obligations – single-family – Ginnie Mae | $ | — | | | $ | — | | | $ | — | | | $ | 49 | | | $ | 49 | |
| GSEs single-family: | | | | | | | | | |
| Freddie Mac | — | | | — | | | — | | | 111 | | | 111 | |
| Fannie Mae | — | | | — | | | 19 | | | 475 | | | 494 | |
| Subtotal GSEs single-family | — | | | — | | | 19 | | | 586 | | | 605 | |
| GSEs multifamily: | | | | | | | | | |
| Freddie Mac | 118 | | | 425 | | | — | | | — | | | 543 | |
| Fannie Mae | 36 | | | 490 | | | — | | | — | | | 526 | |
| Subtotal GSEs multifamily | 154 | | | 915 | | | — | | | — | | | 1,069 | |
| PLRMBS | — | | | 4 | | | 35 | | | 85 | | | 124 | |
| Total HTM securities | $ | 154 | | | $ | 919 | | | $ | 54 | | | $ | 720 | | | $ | 1,847 | |
Yield on HTM securities(1) | 5.82 | % | | 5.87 | % | | 4.7 | % | | 4.87 | % | | 5.44 | % |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
(1) The weighted average yields on AFS and HTM securities are calculated as the sum of each debt security using the period end balances multiplied by the coupon rate adjusted by the impact of amortization and accretion of premiums and discounts, divided by the total debt securities in the applicable HTM or AFS portfolio. The result is then multiplied by 100 to express it as a percentage.
Derivative Counterparties. The Bank has also adopted credit policies and exposure limits for uncleared derivatives counterparty credit exposure. Over-the-counter derivativesInterest rate exchange agreements may be either entered into directly withuncleared or cleared at a clearing house.
Uncleared Derivatives –The Bank’s uncleared derivatives activity is subject to uncleared derivatives regulatory requirements mandating the exchange of variation margin and initial margin if exposure to a counterparty (uncleared derivatives) or executed either with an executing dealer or on a swap execution facility and then cleared through a futures commission merchant (clearing agent) with a derivatives clearing organization (cleared derivatives).
Uncleared Derivatives. exceeds certain specified thresholds. The Bank selects only highly rated derivative dealers and major banks (derivative dealer counterparties) that meet the Bank’s eligibility criteria to act as counterparties for its uncleared derivative activities. In addition, for all uncleared derivative transactions, the Bank has entered into master netting agreements and bilateral credit support agreements with all activeits derivative dealer counterparties that provide for delivery of
collateral at specified levels margin 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). All credit exposure from derivative transactions entered into by the Bank with member counterparties that are not derivative dealers (including interest rate swaps, caps, and floors),
Additional information related to uncleared margin rules for which the Bank serves as an intermediary, must be fully secured by eligible collateral, and all suchuncleared derivative transactions are subject to both the Bank’s Advancesincluded in “Item 8. Financial Statements and Security AgreementSupplementary Data - Note 13 – Derivatives and a master netting agreement.Hedging Activities.”
The Bank is subject to the risk of potential nonperformance by the counterparties toits counterparty in a derivative agreements.transaction. A counterparty generally must deliver collateralor return variation margin to the Bank if the total market value of the Bank’sunsecured exposure to that counterparty rises above a specific trigger point. Currently, all ofexceeds the Bank’s active uncleared derivative counterparties have a zero threshold. minimum transfer amount. In addition, if an initial margin threshold is exceeded, the Bank will post and collect initial margin to further protect against potential counterparty nonperformance.
As a result of these risk mitigation initiatives, the Bank does not anticipate any credit losses on its uncleared derivative transactions with counterparties as of December 31, 2017.2023.
Cleared Derivatives. TheDerivatives – In a cleared derivatives transaction, the Bank is subject to nonperformance by the derivatives clearing organizations (clearinghouses)house and its futures commission merchant or clearing agents.agent. The requirement that the Bank post initial margin and settle variation margin through thea clearing agent to the clearinghouse,clearing house exposes the Bank to institutional credit risk in the event that theif its futures commission merchant, or clearing agent, or the clearinghouse fails to meet its obligations. However, theThe use of cleared derivatives mitigates the Bank’sa clearing house, or central counterparty, lowers overall credit risk exposure because a central counterparty is substituted for individual counterpartiesit employs standard valuation and initial and variation margin processes and is posted dailyspecifically designed to withstand remote but plausible futures commission merchant default credit events. Variation margin is settled for changes in the value of cleared derivatives through a clearing agent.the portfolio, and initial margin is posted for changes in risk profile of the portfolio. The Bank does not anticipate any credit losses on its cleared derivatives as of December 31, 2017.
The following table presents the Bank’s credit exposure to its derivative dealer counterparties at the dates indicated.
|
| | | | | | | | | | | | | | | | | | | |
| Credit Exposure to Derivative Dealer Counterparties |
| | | | | | | | | | |
| (In millions) | | | | | | | | | |
| December 31, 2017 | | | | | | | | | |
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 | $ | 4,879 |
| | $ | 7 |
| | $ | (5 | ) | | $ | — |
| | $ | 2 |
|
Cleared derivatives(2) | 85,692 |
| | 83 |
| | (2 | ) | | — |
| | 81 |
|
| Liability positions with credit exposure: | | | | | | | | | |
| Uncleared derivatives | | | | | | | | | |
| AA | 300 |
| | (1 | ) | | 1 |
| | — |
| | — |
|
| A | 638 |
| | — |
| | — |
| | — |
| | — |
|
| BBB | 1,641 |
| | (1 | ) | | 1 |
| | — |
| | — |
|
| Total derivative positions with credit exposure to nonmember counterparties | 93,150 |
| | 88 |
| | (5 | ) | | — |
| | 83 |
|
Member institutions(3) | 16 |
| | — |
| | — |
| | — |
| | — |
|
| Total | 93,166 |
| | $ | 88 |
| | $ | (5 | ) | | $ | — |
| | $ | 83 |
|
| Derivative positions without credit exposure | 6,443 |
| | | | | | | | |
| Total notional | $ | 99,609 |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | |
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 | $ | 2,872 |
| | $ | 9 |
| | $ | (6 | ) | | $ | — |
| | $ | 3 |
|
| BBB | 826 |
| | 2 |
| | (1 | ) | | — |
| | 1 |
|
Cleared derivatives(2) | 55,024 |
| | 54 |
| | 8 |
| | — |
| | 62 |
|
| Total derivative positions with credit exposure to nonmember counterparties | 58,722 |
| | 65 |
| | 1 |
| | — |
| | 66 |
|
Member institutions(3) | 13 |
| | — |
| | — |
| | — |
| | — |
|
| Total | 58,735 |
| | $ | 65 |
| | $ | 1 |
| | $ | — |
| | $ | 66 |
|
| Derivative positions without credit exposure | 6,334 |
| | | | | | | | |
| Total notional | $ | 65,069 |
| | | | | | | | |
| |
(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 is not rated. LCH Ltd’s parent, LCH Group Holdings Limited, was rated A+ by S&P. On May 31, 2017, S&P lowered the rating to A and withdrew the rating at LCH Group Holdings Limited’s request. LCH Ltd’s ultimate parent, London Stock Exchange Group, plc., is rated A3 by Moody’s and A- by S&P. |
| |
(3) | Member institutions include mortgage delivery commitments with members. |
2023.
The increase or decrease in the credit exposure net of cash collateral, from one period to the next, may be affected by changes in several variables, such as interest rates, the size and composition of the portfolio, market values of derivatives, and accrued interest.
Based on the master netting arrangements, its credit analyses, and the collateral requirements in place with each counterparty, the Bank does not expect to incur any credit losses on its derivative agreements.
The following tables present the Bank’s credit exposure to its derivative dealer counterparties at the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | |
| | | | | | | | | |
| December 31, 2023 | | | | | | | | | |
(In millions) 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 | $ | 81 | | | $ | 13 | | | $ | (13) | | | $ | — | | | $ | — | |
| A | 12,727 | | | 125 | | | (120) | | | — | | | 5 | |
| | | | | | | | | |
| | | | | | | | | |
| Liability positions with credit exposure: | | | | | | | | | |
| Uncleared derivatives | | | | | | | | | |
| | | | | | | | | |
| A | 8,858 | | | (129) | | | 133 | | | — | | | 4 | |
| BBB | 9,084 | | | (203) | | | 206 | | | — | | | 3 | |
Cleared derivatives(2) | 82,114 | | | (9) | | | 13 | | | 771 | | | 775 | |
| Total derivative positions with credit exposure to nonmember counterparties | 112,864 | | | $ | (203) | | | $ | 219 | | | $ | 771 | | | $ | 787 | |
| | | | | | | | | |
| | | | | | | | | |
| Derivative positions without credit exposure | 4,573 | | | | | | | | | |
| Total notional | $ | 117,437 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | |
(In millions) Counterparty Credit Rating(1) | Notional Amount | | Net Fair Value of Derivatives Before Collateral | | Cash Collateral Pledged
to/ (from) Counterparty | | Non-cash Collateral Pledged
to/ (from) Counterparty | | Net Credit
Exposure to Counterparties |
| Asset positions with credit exposure: | | | | | | | | | |
| Uncleared derivatives | | | | | | | | | |
| | | | | | | | | |
| A | $ | 6,115 | | | $ | 38 | | | $ | (35) | | | $ | — | | | $ | 3 | |
| | | | | | | | | |
Cleared derivatives(2) | 89,148 | | | 7 | | | 14 | | | 435 | | | 456 | |
| Liability positions with credit exposure: | | | | | | | | | |
| Uncleared derivatives | | | | | | | | | |
| | | | | | | | | |
| A | 11,246 | | | (356) | | | 358 | | | — | | | 2 | |
| | | | | | | | | |
| | | | | | | | | |
| Total derivative positions with credit exposure to nonmember counterparties | 106,509 | | | $ | (311) | | | $ | 337 | | | $ | 435 | | | $ | 461 | |
| | | | | | | | | |
| | | | | | | | | |
| Derivative positions without credit exposure | 10,284 | | | | | | | | | |
| Total notional | $ | 116,793 | | | | | | | | | |
(1)The credit ratings grades used by the Bank are based on the lower of Moody's or S&P ratings.
(2)Represents derivative transactions cleared with LCH Ltd, the Bank’s clearing house, which was rated AA- with a stable outlook by S&P at December 31, 2023 and 2022.
The Bank primarily executes overnight index swap derivatives based on SOFR to manage interest rate risk. The following table presents the notional amount of interest rate swaps by interest rate index broken out by the pay or receive leg at December 31, 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | |
| (In millions) | 2023 | | 2022 |
| Interest Rate Index | Pay Leg | | Receive Leg | | Pay Leg | | Receive Leg |
| Fixed | $ | 62,766 | | | $ | 54,671 | | | $ | 58,910 | | | $ | 57,883 | |
| LIBOR | — | | | — | | | 55 | | | 504 | |
| SOFR | 54,644 | | | 62,124 | | | 57,577 | | | 57,523 | |
| Overnight Index Swap – Effective Federal Funds Rate | 27 | | | 642 | | | 251 | | | 883 | |
| Total notional amount | $ | 117,437 | | | $ | 117,437 | | | $ | 116,793 | | | $ | 116,793 | |
Market Risk
Market risk is defined as the risk to the Bank'sBank’s market value of capital and future earnings (excluding the impact of any cumulative net gains or losses on derivatives and associated hedged items and on financial instruments carried at fair value) as a result of movements in market interest rates, interest rate spreads, interest rate volatility, and other market factors (market rate factors). This profile reflects the Bank’s objective of maintaining a conservative asset-liability mix and its commitment to providing value to its members through products and dividends without subjecting their investments in Bank capital stock to significant market risk.
The Bank’s Risk Management PolicyAppetite Framework includes a market risk management objective aimed at maintaining a relatively low adverse exposure of the market value of capital and future earnings (excluding the impact of any cumulative net gains or losses on derivatives and associated hedged items and on financial instruments carried at fair value) to changes in market rate factors. See “Total Bank Market Risk” below.
Market risk identification and measurement are primarily accomplished through market value of capital sensitivity analyses and projected earnings and adjusted return onnet interest income as a percent of the capital sensitivity analyses. The Risk Management PolicyAppetite Framework approved by the Bank’s Boardboard of Directorsdirectors establishes market risk policy limits and market risk measurement standards at the total Bank level as well as at the business segmentproduct level. Additional guidelines approved by the Bank’s Enterprise Risk Committee apply to the Bank’s two business segments, the advances-related businessproducts and the mortgage-related business.products. These guidelines provide limits that are monitored at the segmentproduct level and are consistent with the Bank’s policy limits.Risk Appetite Framework. Market risk is managed for each business segmentproduct on a daily basis, as discussed below in “Segment“Total
Bank Market Risk.” Compliance with Bank policieslimits and guidelines is reviewed by the Bank’s Boardboard of Directorsdirectors on a regular basis, along with a corrective action plan if applicable.
Total Bank Market Risk
Market Value of Capital Sensitivity – The Bank uses market value of capital sensitivity (the interest rate sensitivity of the net fair value of all assets, liabilities, and interest rate exchange agreements) as an important measure of the Bank’s exposure to changes in interest rates.
The Bank’s market value of capital sensitivity policyrisk limits for the potential adverse impact of an instantaneous parallel shift of a plus or minus 100-basis-point change in interest rates from current rates (base case) tois no worse than –4.0% ofa 3.0% change in the estimated market value of capital. In addition, the policyrisk limits for the potential adverse impact of an instantaneous plus or minus 100-basis-point change in interest rates measured from interest rates that are 200 basis points above or below the base case tois no worse than –6.0%4.0% of the estimated market value of capital. In the case where a market risk sensitivity compliance metric cannot be estimated with a parallel shift in interest rates because of prevailing low interest rates, the sensitivity metric is not reported. The Bank’s measured market value of capital sensitivity was within the policy limits as of December 31, 2017.
2023.
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 ratevaluation methods, discounting 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 below presents the sensitivity of the market value of capital (the market value of all of the Bank’s assets, liabilities, and associated interest rate exchange agreements, with mortgage assets valued using market spreads implied by current market prices) to changes in interest rates. The table presents the estimated percentage change in the Bank’s market value of capital that would be expected to result from changes in interest rates under different interest rate scenarios, using market spread assumptions. assumptions as of December 31, 2023 and 2022.
| | | | | | | | | | | | | | |
Market Value of Capital Sensitivity
Estimated Percentage Change in Market Value of Bank Capital
for Various Changes in Interest Rates |
| | | | |
Interest Rate Scenario(1) | 2023 | | 2022 | |
| +200 basis-point change | –2.3 | % | –2.8 | % |
| +100 basis-point change | –1.1 | | –1.4 | |
–100 basis-point change(2) | +1.0 | | +1.3 | |
–200 basis-point change(2) | +1.8 | | +2.3 | |
(1)Instantaneous change from actual rates at dates indicated. |
| | | | |
Market Value of Capital Sensitivity Estimated Percentage Change in Market Value of Bank Capital for Various Changes in Interest Rates |
| | | | | |
Interest Rate Scenario(1) | 2017 | | 2016 | |
| +200 basis-point change above current rates | –3.8 | % | –4.3 | % |
| +100 basis-point change above current rates | –1.7 | | –2.0 | |
–100 basis-point change below current rates(2) | +2.0 | | +2.5 | |
–200 basis-point change below current rates(2) | +5.0 | | +6.3 | |
| |
(1) | Instantaneous change from actual rates at dates indicated. |
| |
(2)
| Interest rates for each maturity are limited to non-negative interest rates. |
(2)Interest rates for each maturity are limited to non-negative rates.
The Bank’s estimates of the sensitivity of the market value of capital to changes in interest rates as of December 31, 2017,2023, are comparable towith the estimates as of December 31, 2016. LIBOR2022. Compared to December 31, 2022, interest rates as of December 31, 2017, were 712023 have increased 142 basis points higher for the 1-year term, 28one-month Treasury bill, decreased 14 basis points higher for the 5-year term,five-year Treasury note, and 6increased 3 basis points higher for the 10-year term. Because interest rates in the declining rate scenarios are limited to non-negative interest rates and the current interest rate environments as of December 31, 2017 and 2016, were low, the interest rates in the declining rate scenarios may not decrease to the same extent that the interest rates in the rising rate scenarios can increase.
Treasury note.
The Bank'sBank’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'sBank’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 three-month LIBORFederal funds effective rate for the applicable quarter (subject
(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'sBank’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)Bank’s capital plan), limit the acquisition of certain assets, and review the Bank'sBank’s risk policies. A decision by the Boardboard of Directorsdirectors to declare or not declare any dividend or repurchase any excess capital stock is a discretionary matter and is subject to the requirements and restrictions of the FHLBank Act and applicable requirements under the regulations governing the operations of the FHLBanks. The ratio of the Bank'sBank’s estimated market value of total capital to par value of capital stock was 207%233% as of December 31, 2017.2023.
Adjusted Return onNet Interest Income as a Percent of Capital – The adjusted return onnet interest income as a percent of capital is a non-GAAP measure used by the Bank to assess financial performance.the impact of interest rate changes on the Bank’s projected economic earnings. The adjusted return on capitalmeasurement is based on current period economic earnings that exclude the effects of unrealized net gains or losses resulting from the Bank’s derivatives and associated hedged items and from financial instruments carried at fair value, which will generally reverse through changes in future valuations and settlements of contractual interest cash flows over the remaining contractual terms to maturity or by the call or put date of the assets and liabilities held under the fair value option, hedged assets and liabilities, and derivatives.Economic earnings also exclude the interest expense on mandatorily redeemable capital stock and the 20% of net income allocated to the Bank’s restricted retained earnings account in accordance with the FHLBanks’ JCE Agreement. Economic earnings exclude these amounts in order to more accurately reflect the amount of earnings that may be available to be paid as dividends to shareholders.
stock.
The Bank limitsBank’s Risk Appetite Framework incorporates a limit on the adverse sensitivity of projected financial performance throughnet interest income as a Boardpercent of Directors policy limit on projected adverse changes in the adjusted return on capital. The Bank’s adjusted returnnet interest income on capital sensitivity policy limitslimit to the potential adverse impact of an instantaneous parallel shift of a plus or minus 200-basis-point200 basis-point change in interest rates from current rates (base case) to no worse than –120 basis pointsa -210 basis-points change from the base casebase-case projected adjusted returnnet interest income on capital. With the indicated interest rate shifts, the adjusted returnnet interest income on capital for the projected 12-month horizon would be expectedis projected to decrease by 28 basis points in the –200 basis points scenario, wellremain within the policy limit of –120 basis points.-210 basis-points.
Duration Gap – Duration gap is the difference between the estimated durations (market value sensitivity) of assets and liabilities (including the impact of interest rate exchange agreements) and reflects the extent to which estimated maturity and repricing cash flows for assets and liabilities are matched. The Bank monitors duration gap analysis at the total Bank level and does not have a policyrisk limit. TheIn 2023 and 2022, the Bank’s durationassets durations exceeded its liabilities durations, as shown in the following table.
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Bank Duration Gap Analysis |
| | | | | | | |
| | 2023 | | 2022 |
| (Dollars in millions) | Amount
(In millions) | | Duration Gap(1) (In months) | | Amount
(In millions) | | Duration Gap(1) (In months) |
| Assets | $ | 92,828 | | | 1.8 | | | $ | 121,056 | | | 1.8 | |
| Liabilities | 86,160 | | | 0.8 | | | 113,333 | | | 0.9 | |
| Net | $ | 6,668 | | | 1.0 | | | $ | 7,723 | | | 0.9 | |
(1)Duration gap was one month at December 31, 2017, and one month at December 31, 2016.values include the impact of interest rate exchange agreements.
|
| | | | | | | | | | | | | |
| Total Bank Duration Gap Analysis |
| | | | | | | | |
| | 2017 | | 2016 |
| Amount (In millions) |
| | Duration Gap(1) (In months) |
| | Amount (In millions) |
| | Duration Gap(1)(2) (In months) |
|
| Assets | $ | 123,385 |
| | 4 |
| | $ | 91,941 |
| | 6 |
|
| Liabilities | 116,579 |
| | 3 |
| | 86,404 |
| | 5 |
|
| Net | $ | 6,806 |
| | 1 |
| | $ | 5,537 |
| | 1 |
|
| |
(1) | Duration gap values include the impact of interest rate exchange agreements. |
| |
(2)
| Because of the low interest rate environment, the duration gap is estimated using an instantaneous, one-sided parallel change upward of 100 basis points from base case interest rates. |
Segment Market Risk. The financial performance and interest rate risks of each business segmentthe Bank 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 offsettingto 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 non-MBS agencyTreasury securities, generally with terms of less than threeup to four years. These fixed rate investments may beare swapped to variable rate or fixed rate, and the interest rate risk resulting from the fixed rate coupon is hedged with an interest rate swap or fixed rate debt.
investments.
The interest rate risk in the advances-related business is primarily associated with the Bank’s strategy for investing capital (capital stock, including mandatorily redeemable capital stock, and retained earnings).capital. The Bank’s strategy is generally to invest 50% of capital in short-term investments (maturities of three months or less) and 50% in intermediate-term investments (a laddered portfolio of investments with(laddered maturities of up to four years). However, this strategy may be altered from time to time depending on market conditions. The strategy to invest 50% of capital in short-term assets is intended to mitigate the market value of capital risks associated with the potential repurchase or redemption of excess capital stock. Excess capital stock usually results from a decline in a borrower’s outstanding advances or by a membership termination. Under the Bank’s capital plan, capital stock, when repurchased or redeemed, is required to be repurchased or redeemed at its par value of $100 per share, subject to certain regulatory and statutory limits. The strategy to invest 50% of capital in a laddered portfolio of investments with short to intermediate maturities is intended to take advantage of the higher earnings available from a generally positively sloped yield curve, when intermediate-term investments generally have higher yields than short-term investments.
The Bank updates the repricing and maturity gaps for actual asset, liability, and derivative transactions that occur in the advances-related segment each day.business regularly. The Bank regularly compares the targeted repricing and maturity gaps to the actual repricing and maturity gaps to identify rebalancing needs for the targeted gaps. On a weekly basis, the Bank evaluates the projected impact of expected maturities and scheduled repricingsrepricing of assets, liabilities, and interest rate exchange agreements on the interest rate risk of the advances-related segment. The analyses are prepared under base case and alternate interest rate scenarios to assess the effect of options embedded in the advances, related financing, and hedges.business. These analyses are also 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.business.
Mortgage-Related Business– The Bank’s mortgage assets include MBS, most of which are classified as held-to-maturity (HTM)HTM or available-for-sale (AFS),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 impacteffect of mortgage prepaymentsprepayments.
The Bank manages the interest rate risk and market risk of the existencemortgage-related business through selected funding and hedging strategies. The total carrying value of MBS and mortgage loans at December 31, 2023, was $16.1 billion, including $15.3 billion in MBS and $755 million in mortgage loans. The total carrying value of MBS and mortgage loans at December 31, 2022, was $11.7 billion, including $10.9 billion in MBS and $816 million in mortgage loans. Floating rate securities, and fixed rate multifamily securities that have been converted to floating rate through the use of interest rate caps on certain adjustable rate MBS.
Historically, the Bank purchased a mixMBS and mortgage loans at December 31, 2023, and $10.3 billion, or 88%, of intermediate-term fixed rateMBS and adjustable rate MBS. The last purchase of a fixed rate MBS was in March 2014. Since March 2014, all MBS purchases were agency adjustable rate MBS. MPFmortgage loans that have been acquired are medium- orat December 31, 2022. Intermediate and long-term fixed rate mortgage assets. This results in a mortgage portfolio that has a diversified set ofassets, whose interest rate risk attributes.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 $1.2 billion, or 8%, of MBS and mortgage loans, at December 31, 2023, and $1.4 billion, or 12%, of MBS and mortgage loans at December 31, 2022.
The estimated market risk of the mortgage-related business is managed both at the time an asset is purchased and on an ongoing basis for the total portfolio. At the time of purchase (for all significant mortgage asset acquisitions), the Bank analyzes the estimated earnings sensitivity and estimated market value sensitivity, taking into consideration the estimated mortgage prepayment sensitivity of the mortgage assets and anticipated funding and hedging activities under various interest rate scenarios. The related funding and hedging transactions are executed at or close to the time of purchase of a mortgage asset.
At least monthly, the Bank reviews the estimated market risk profile of the entire portfolio of mortgage assets and related funding and hedging transactions. The Bank then considers rebalancing strategies to modify the estimated mortgage portfolio market risk profile. Periodically, the Bank performs more in-depth analyses, which include an analysis of the impacts of non-parallel shifts in the yield curve and assessments of the impacts of unanticipated mortgage prepayment behavior. Based on these analyses, the Bank may take actions to rebalance the mortgage portfolio’s market risk profile. These rebalancing strategies may include entering into new funding and hedging transactions, forgoing or modifying certain funding or hedging transactions normally executed with new mortgage purchases, or terminating certain funding and hedging transactions for the mortgage asset portfolio.
The Bank manages the estimated interest rate risk associated with mortgage assets, including mortgage prepayment risk, through a combination of debt issuance and derivatives. The Bank may obtain funding through callable and non-callable FHLBank System debt and may execute derivative transactions to achieve principal cash flow patterns and market value sensitivities for the liabilities and derivatives that provide a significant offset to the interest rate and mortgage prepayment risks associated with the mortgage assets. Debt issued to finance mortgage assets may be fixed rate debt, callable fixed rate debt, adjustable rate debt, or callable adjustable rate debt. Derivatives may be used as temporary hedges of anticipated debt issuance or long-term hedges of debt used to finance the mortgage assets. The derivatives used to hedge the interest rate risk of fixed rate mortgage assets generally may be callable and non-callable pay-fixed interest rate swaps. Derivatives may also be used to offset the interest rate cap risk embedded in adjustable rate MBS.
As discussed above in “Total Bank Market Risk – Market Value of Capital Sensitivity”Sensitivity,” the Bank uses market value of capital sensitivity as a primary market value metric for measuring the Bank’s exposure to interest rates. The Bank’s interest rate risk policieslimits and guidelines for the mortgage-related business address the market value of capital sensitivity of the assets, liabilities, and derivatives of the mortgage-related business.
The following table presents results of the estimated market value of capital sensitivity analysis attributable to the mortgage-related business as of December 31, 20172023 and 2016.2022.
| | | | | | | | | | | | | | |
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) | 2023 | | 2022 | |
| +200 basis-point change | –0.3 | % | –0.5 | % |
| +100 basis-point change | –0.1 | | –0.2 | |
–100 basis-point change(2) | +0.1 | | +0.1 | |
–200 basis-point change(2) | 0.0 | | +0.1 | |
(1)Instantaneous change from actual rates at dates indicated. |
| | | | |
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) | 2017 | | 2016 | |
| +200 basis-point change | –1.7 | % | –2.2 | % |
| +100 basis-point change | –0.7 | | –1.0 | |
–100 basis-point change(2) | +1.1 | | +1.3 | |
–200 basis-point change(2) | +3.2 | | +3.8 | |
| |
(1) | Instantaneous change from actual rates at dates indicated. |
| |
(2)
| Interest rates for each maturity are limited to non-negative interest rates. |
For the mortgage-related business, the Bank’sThe mortgage portfolio’s estimates of the sensitivity of the market value of capital to changes in interest rates as of December 31, 2017,2023, are comparable towith the estimates as of December 31, 2016. LIBOR interest rates as2022.
Table of December 31, 2017, were 71 basis points higher for the 1-year term, 28 basis points higher for the 5-year term, and 6 basis points higher for the 10-year term. Because interest rates in the declining rate scenarios are limited to non-negative interest rates and the current interest rate environments as of December 31, 2017 and 2016, were low, the interest rates in the declining rate scenarios may not decrease to the same extent that the interest rates in the rising rate scenarios can increase.Contents
Interest Rate Exchange Agreements
A derivative transaction or interest rate exchange agreement is a financial contract whose fair value is generally derived from changes in the value of an underlying asset or liability. The Bank uses interest rate swaps; interest rate cap and floor agreements; and callable and putable interest rate swaps (collectively, interest rate exchange agreements) to manage its exposure to market risks inherent in its ordinary course of business, including its lending, investment, and funding activities.
The Bank uses interest rate exchange agreements to implement the following hedging strategies for addressing market risk:
•To convert fixed rate advances to adjustable rate structures, which reduces the Bank’s exposure to fixed interest rates.
•To convert certain adjustable rate indexed advances to other adjustable rate structures, which reduces the Bank’s exposure to basis risk.
•To convert fixed rate consolidated obligations to adjustable rate structures, which reduces the Bank’s exposure to fixed interest rates. (A combined structure of the callable derivative and callable debt instrument is usually lower in cost than a comparable adjustable rate debt instrument, allowing the Bank to reduce its funding costs.)
•To convert certain adjustable rate indexed consolidated obligations to other adjustable rate structures, which reduces the Bank’s exposure to basis risk.
•To reduce the interest rate sensitivity and modify the repricing frequency of assets and liabilities.
•To obtain callable fixed rate equivalent funding by entering into a callable pay-fixed interest rate swap in connection with the issuance of a short-term discount note. The callable fixed rate equivalent funding is used to reduce the Bank’s exposure to prepayment of mortgage assets.
•To offset an embedded option in an advance.
The following table summarizes the Bank’s interest rate exchange agreements by type of hedged item, hedging instrument, associated hedging strategy, accounting designation as specified under the accounting for derivative instruments and hedging activities, and notional amount as of December 31, 20172023 and 2016.
2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest Rate Exchange Agreements |
| | | | | | | | |
| (In millions) | | | | | | Notional Amount |
| Hedging Instrument | | Hedging Strategy | | Hedge Designation | | 2023 | | 2022 |
| Hedged Item: Advances | | | | | | | | |
| Pay fixed, receive adjustable interest rate swap | | Fixed rate advance converted to an adjustable rate | | Fair Value Hedge | | $ | 37,696 | | | $ | 33,793 | |
| | | | | | | | |
| | | | | | | | |
| Received fixed, pay adjustable interest rate swap | | Adjustable rate advance converted to a fixed rate | | Economic Hedge(1) | | 1,710 | | | 2,260 | |
| Pay fixed, receive adjustable interest rate swap | | Fixed rate advance converted to an adjustable rate | | Economic Hedge(1) | | 4,217 | | | 9,800 | |
| Pay fixed, receive adjustable interest rate swap; swap may be callable at the Bank’s option or putable at the counterparty’s option | | Fixed rate advance (with or without an embedded cap) converted to an adjustable rate; advance and swap may be callable or putable; matched to advance accounted for under the fair value option | | Economic Hedge(1) | | 1,902 | | | 2,105 | |
| | | | | | | | |
Subtotal Economic Hedges(1) | | | | | | 7,829 | | | 14,165 | |
| Total | | | | | | 45,525 | | | 47,958 | |
| Hedged Item: Non-Callable Bonds | | | | | | | | |
| Receive fixed, pay adjustable interest rate swap | | Fixed rate non-callable bond converted to an adjustable rate | | Fair Value Hedge | | 11,013 | | | 6,216 | |
| Receive fixed, pay adjustable interest rate swap | | Fixed rate non-callable bond converted to an adjustable rate | | Economic Hedge(1) | | 565 | | | 30 | |
| Receive fixed or structured, pay adjustable interest rate swap | | Fixed rate or structured rate non-callable bond converted to an adjustable rate; matched to non-callable bond accounted for under the fair value option | | Economic Hedge(1) | | 225 | | | 1,845 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Subtotal Economic Hedges(1) | | | | | | 790 | | | 1,875 | |
| Total | | | | | | 11,803 | | | 8,091 | |
| Hedged Item: Callable Bonds | | | | | | | | |
| Receive fixed, pay adjustable interest rate swap with an option to call at the counterparty’s option | | Fixed rate callable bond converted to an adjustable rate; swap is callable | | Fair Value Hedge | | 23,699 | | | 16,730 | |
| Receive fixed, pay adjustable interest rate swap with an option to call at the counterparty’s option | | Fixed rate callable bond converted to an adjustable rate; swap is callable | | Economic Hedge(1) | | 655 | | | 960 | |
| Receive fixed or structured, pay adjustable interest rate swap with an option to call at the counterparty’s option | | Fixed or structured rate callable bond converted to an adjustable rate; swap is callable; matched to callable bond accounted for under the fair value option | | Economic Hedge(1) | | 408 | | | 433 | |
Subtotal Economic Hedges(1) | | | | | | 1,063 | | | 1,393 | |
| Total | | | | | | 24,762 | | | 18,123 | |
| Hedged Item: Discount Notes | | | | | | | | |
| Pay fixed, receive adjustable callable interest rate swap | | Discount note, which may have been previously converted to an adjustable rate, converted to fixed rate callable debt that offsets the prepayment risk of mortgage assets | | Economic Hedge(1) | | 50 | | | 50 | |
| Receive fixed, pay adjustable interest rate swap | | Discount note converted to short-term adjustable rate to hedge repricing gaps | | Economic Hedge(1) | | 15,174 | | | 28,714 | |
| | | | | | | | |
| Total | | | | | | 15,224 | | | 28,764 | |
|
| | | | | | | | | | | | |
| Interest Rate Exchange Agreements |
| | | | | | | | | |
| (In millions) | | | | | | Notional Amount |
| Hedging Instrument | | Hedging Strategy | | Accounting Designation | | 2017 |
| | 2016 |
|
| Hedged Item: Advances | | | | | | | | |
| Pay fixed, receive adjustable interest rate swap | | Fixed rate advance converted to an adjustable rate | | Fair Value Hedge | | $ | 16,713 |
| | $ | 11,880 |
|
| Basis swap | | Adjustable rate advance converted to another adjustable rate index to reduce interest rate sensitivity and repricing gaps | | Economic Hedge(1) | | 2 |
| | 2 |
|
| Received fixed, pay adjustable interest rate swap | | Adjustable rate advance converted to a fixed rate | | Economic Hedge(1) | | 1,972 |
| | 1,432 |
|
| Pay fixed, receive adjustable interest rate swap | | Fixed rate advance converted to an adjustable rate | | Economic Hedge(1) | | 19,401 |
| | 1,681 |
|
| Pay fixed, receive adjustable interest rate swap; swap may be callable at the Bank’s option or putable at the counterparty’s option | | Fixed rate advance (with or without an embedded cap) converted to an adjustable rate; advance and swap may be callable or putable; matched to advance accounted for under the fair value option | | Economic Hedge(1) | | 6,163 |
| | 3,677 |
|
| Interest rate cap or floor | | Interest rate cap or floor embedded in an adjustable rate advance; matched to advance accounted for under the fair value option | | Economic Hedge(1) | | 83 |
| | 30 |
|
Subtotal Economic Hedges(1) | | | | | | 27,621 |
| | 6,822 |
|
| Total | | | | | | 44,334 |
| | 18,702 |
|
| Hedged Item: Non-Callable Bonds | | | | | | | | |
| Receive fixed or structured, pay adjustable interest rate swap | | Fixed rate or structured rate non-callable bond converted to an adjustable rate | | Fair Value Hedge | | 5,373 |
| | 8,371 |
|
| Receive fixed or structured, pay adjustable interest rate swap | | Fixed rate or structured rate non-callable bond converted to an adjustable rate | | Economic Hedge(1) | | 1,106 |
| | 6,550 |
|
| Receive fixed or structured, pay adjustable interest rate swap | | Fixed rate or structured rate non-callable bond converted to an adjustable rate; matched to non-callable bond accounted for under the fair value option | | Economic Hedge(1) | | 90 |
| | 590 |
|
| Basis swap | | Fixed rate or adjustable rate non-callable bond previously converted to an adjustable rate index, converted to another adjustable rate index to reduce interest rate sensitivity and repricing gaps | | Economic Hedge(1) | | 7,050 |
| | 500 |
|
| Pay fixed, receive adjustable interest rate swap | | Fixed rate or adjustable rate non-callable bond, which may have been previously converted to an adjustable rate, converted to fixed rate debt that offsets the interest rate risk of mortgage assets | | Economic Hedge(1) | | 4,620 |
| | — |
|
Subtotal Economic Hedges(1) | | | | | | 12,866 |
| | 7,640 |
|
| Total | | | | | | 18,239 |
| | 16,011 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest Rate Exchange Agreements (continued) |
| | | | | | | | |
| (In millions) | | | | | | Notional Amount |
| Hedging Instrument | | Hedging Strategy | | Hedge Designation | | 2023 | | 2022 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Hedged Item: Investment Securities | | | | | | |
| Pay fixed, receive adjustable interest rate swap | | Fixed rate investment securities converted to an adjustable rate | | Fair Value Hedge | | 17,680 | | | 12,465 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Hedged Item: Offsetting Derivatives | | | | | | |
| Pay fixed, receive adjustable interest rate swap and receive fixed, pay adjustable interest rate swap | | Interest rate swap used to offset the economic effect of interest rate swap that is no longer designated to advances, investments, or consolidated obligations | | Economic Hedge(1) | | 2,443 | | | 1,392 | |
| | | | | | | | |
| Total Notional Amount | | | | | | $ | 117,437 | | | $ | 116,793 | |
|
| | | | | | | | | | | | |
| Interest Rate Exchange Agreements (continued) |
| | | | | | | | | |
| (In millions) | | | | | | Notional Amount |
| Hedging Instrument | | Hedging Strategy | | Accounting Designation | | 2017 |
| | 2016 |
|
| Hedged Item: Callable Bonds | | | | | | | | |
| Receive fixed or structured, pay adjustable interest rate swap with an option to call at the counterparty’s option | | Fixed or structured rate callable bond converted to an adjustable rate; swap is callable | | Fair Value Hedge | | 2,184 |
| | 490 |
|
| Receive fixed or structured, pay adjustable interest rate swap with an option to call at the counterparty’s option | | Fixed or structured rate callable bond converted to an adjustable rate; swap is callable | | Economic Hedge(1) | | 3,357 |
| | 685 |
|
| Receive fixed or structured, pay adjustable interest rate swap with an option to call at the counterparty’s option | | Fixed or structured rate callable bond converted to an adjustable rate; swap is callable; matched to callable bond accounted for under the fair value option | | Economic Hedge(1) | | 865 |
| | 950 |
|
Subtotal Economic Hedges(1) | | | | | | 4,222 |
| | 1,635 |
|
| Total | | | | | | 6,406 |
| | 2,125 |
|
| Hedged Item: Discount Notes | | | | | | | | |
| Pay fixed, receive adjustable callable interest rate swap | | Discount note, which may have been previously converted to an adjustable rate, converted to fixed rate callable debt that offsets the prepayment risk of mortgage assets | | Economic Hedge(1) | | 1,535 |
| | 1,535 |
|
| Basis swap or receive fixed, pay adjustable interest rate swap | | Discount note converted to short-term adjustable rate to hedge repricing gaps | | Economic Hedge(1) | | 26,435 |
| | 23,244 |
|
| Pay fixed, receive adjustable non-callable interest rate swap | | Discount note, which may have been previously converted to an adjustable rate, converted to fixed rate non-callable debt that offsets the interest rate risk of mortgage assets | | Economic Hedge(1) | | 400 |
| | 450 |
|
| Total | | | | | | 28,370 |
| | 25,229 |
|
| Hedged Item: Trading Securities | | | | | | | | |
| Basis swap | | Basis swap hedging adjustable rate Federal Farm Credit Bank (FFCB) bonds | | Economic Hedge(1) | | 750 |
| | 750 |
|
| Interest rate cap | | Interest rate cap used to offset cap risk embedded in floating rate MBS | | Economic Hedge(1) | | 1,480 |
| | 2,150 |
|
| Total | | | | | | 2,230 |
| | 2,900 |
|
| Hedged Item: Intermediary Positions and Offsetting Derivatives | | | | | | |
| Pay fixed, receive adjustable interest rate swap and receive fixed, pay adjustable interest rate swap | | Interest rate swap used to offset the economic effect of interest rate swap that is no longer designated to advances, investments, or consolidated obligations | | Economic Hedge(1) | | 14 |
| | 89 |
|
| Total | | | | | | 14 |
| | 89 |
|
| Stand-Alone Derivatives | | | | | | | | |
| Mortgage delivery commitments | | N/A | | N/A | | 16 |
| | 13 |
|
| Total | | | | | | 16 |
| | 13 |
|
| Total Notional Amount | | | | | | $ | 99,609 |
| | $ | 65,069 |
|
| |
(1) | Economic hedges are derivatives that are matched to balance sheet instruments or other derivatives that do not meet the requirements for hedge accounting under the accounting for derivative instruments and hedging activities. |
(1)Economic hedges are derivatives that are matched to balance sheet instruments or other derivatives that do not meet the requirements for hedge accounting under the accounting for derivative instruments and hedging activities.
Although the Bank uses interest rate exchange agreements to achieve the specific financial objectives described above, certain transactions do not qualify for hedge accounting (economic hedges). An economic hedge introduces the potential for earnings variability caused by changes in the fair value of the derivatives that are recorded in the Bank’s income but are not offset by corresponding changes in the value of the economically hedged assets and liabilities. Finance Agency regulations and the Bank’s Risk Management Policy prohibit the speculative use of interest rate exchange agreements, and the Bank does not trade derivatives for profit.
It is the Bank’s policy to use interest rate exchange agreements only to reduce the market risk exposures inherent in the otherwise unhedged asset and funding positions of the Bank and to achieve other financial objectives of the Bank, such as obtaining low-cost funding for advances and mortgage assets. The primary objective of the financial management practices of the Bank is to preserve and enhance the long-term economic performance and risk management of the Bank. In accordance with the accounting for derivative instruments and hedging activities, reported net income and other comprehensive income will likely exhibit period-to-period volatility, which may be significant.
The following tables categorize the notional amounts and estimated fair values of the Bank’s interest rate exchange agreements, unrealized gains and losses from the related hedged items, and estimated fair value gains and losses from financial instruments carried at fair value by type of accounting treatment and product as of December 31, 2017 and 2016.
|
| | | | | | | | | | | | | | | | | | | |
Interest Rate Exchange Agreements Notional Amounts and Estimated Fair Values |
| | | | | | | | | |
| December 31, 2017 | | | | | | | | | |
| (In millions) | Notional Amount |
| | Fair Value of Derivatives |
| | Unrealized Gain/(Loss) on Hedged Items |
| | Financial Instruments Carried at Fair Value |
| | Difference |
|
| Fair value hedges: | | | | | | | | | |
| Advances | $ | 16,713 |
| | $ | 85 |
| | $ | (88 | ) | | $ | — |
| | $ | (3 | ) |
| Non-callable bonds | 5,373 |
| | (23 | ) | | 24 |
| | — |
| | 1 |
|
| Callable bonds | 2,184 |
| | (12 | ) | | 13 |
| | — |
| | 1 |
|
| Subtotal | 24,270 |
| | 50 |
| | (51 | ) | | — |
| | (1 | ) |
| Not qualifying for hedge accounting: | | | | | | | | |
| Advances | 27,621 |
| | 27 |
| | — |
| | (28 | ) | | (1 | ) |
| Non-callable bonds | 12,866 |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Callable bonds | 4,222 |
| | (29 | ) | | — |
| | 10 |
| | (19 | ) |
| Discount notes | 28,370 |
| | 23 |
| | — |
| | — |
| | 23 |
|
| FFCB bonds | 750 |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
| MBS | 1,480 |
| | 1 |
| | — |
| | — |
| | 1 |
|
| Mortgage delivery commitments | 16 |
| | — |
| | — |
| | — |
| | — |
|
| Offsetting derivatives | 14 |
| | — |
| | — |
| | — |
| | — |
|
| Subtotal | 75,339 |
| | 21 |
| | — |
| | (19 | ) | | 2 |
|
| Total excluding accrued interest | 99,609 |
| | 71 |
| | (51 | ) | | (19 | ) | | 1 |
|
| Accrued interest | — |
| | 18 |
| | (15 | ) | | 9 |
| | 12 |
|
| Total | $ | 99,609 |
| | $ | 89 |
| | $ | (66 | ) | | $ | (10 | ) | | $ | 13 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | |
| (In millions) | Notional Amount |
| | Fair Value of Derivatives |
| | Unrealized Gain/(Loss) on Hedged Items |
| | Financial Instruments Carried at Fair Value |
| | Difference |
|
| Fair value hedges: | | | | | | | | | |
| Advances | $ | 11,880 |
| | $ | 23 |
| | $ | (22 | ) | | $ | — |
| | $ | 1 |
|
| Non-callable bonds | 8,371 |
| | 7 |
| | (8 | ) | | — |
| | (1 | ) |
| Callable bonds | 490 |
| | (1 | ) | | 2 |
| | — |
| | 1 |
|
| Subtotal | 20,741 |
| | 29 |
| | (28 | ) | | — |
| | 1 |
|
| Not qualifying for hedge accounting: | | | | | | | | |
| Advances | 6,822 |
| | — |
| | — |
| | 2 |
| | 2 |
|
| Non-callable bonds | 7,640 |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Callable bonds | 1,635 |
| | (16 | ) | | — |
| | 10 |
| | (6 | ) |
| Discount notes | 25,229 |
| | 29 |
| | — |
| | — |
| | 29 |
|
| FFCB bonds | 750 |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
| MBS | 2,150 |
| | 6 |
| | — |
| | — |
| | 6 |
|
| Mortgage delivery commitments | 13 |
| | — |
| | — |
| | — |
| | — |
|
| Offsetting derivatives | 89 |
| | — |
| | — |
| | — |
| | — |
|
| Subtotal | 44,328 |
| | 18 |
| | — |
| | 11 |
| | 29 |
|
| Total excluding accrued interest | 65,069 |
| | 47 |
| | (28 | ) | | 11 |
| | 30 |
|
| Accrued interest | — |
| | 12 |
| | (10 | ) | | 6 |
| | 8 |
|
| Total | $ | 65,069 |
| | $ | 59 |
| | $ | (38 | ) | | $ | 17 |
| | $ | 38 |
|
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, if applicable, and the reported amounts of income, expenses, gains, and losses during the reporting period. Changes in these judgments, estimates, and assumptions could potentially affect the Bank’s financial position and results of operations significantly. Although the Bank believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ.
The Bank has identified the following accounting policies and estimates as critical because they require the Bank to make subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies and estimates are: estimating the allowance for credit losses on the advances and mortgage loan portfolios;
•accounting for derivatives; and
•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 accounting for other-than-temporary impairment for investment securities; and estimating the prepayment speeds on MBS and mortgage loans for the accounting of amortization of premiums and accretion of discounts on MBS and mortgage loans. option.
These policies and the judgments, estimates, and assumptions are also described in “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies.”
Allowance for Credit Losses
The Bank has developed and documented a systematic methodology for determining an allowance for credit losses, where applicable, for:
advances, letters of credit, and other extensions of credit, collectively referred to as “credit products,”
MPF loans held for portfolio,
term securities purchased under agreements to resell, and
term Federal funds sold.
The allowance for credit losses for credit products and mortgage loans acquired under the MPF Program represents the Bank’s estimate of the probable credit losses inherent in these two portfolios. Determining the amount of the allowance for credit losses is considered a critical accounting estimate because the Bank’s evaluation of the adequacy of the provision is inherently subjective and requires significant estimates, including the amounts and timing of estimated future cash flows, estimated losses based on historical loss experience, and consideration of current economic trends, all of which are subject to change. The Bank’s assumptions and judgments in estimating its allowance for credit losses are based on information available as of the date of the financial statements. Actual results could differ from these estimates.
Credit Products. In determining the allowance for credit losses on credit products, the Bank evaluates its exposure to credit loss taking into consideration: (i) the Bank's judgment as to the creditworthiness of the borrowers to which the Bank lends funds, and (ii) review and valuation of the collateral pledged by borrowers.
The Bank has policies and procedures in place to manage its credit risk on credit products. These include:
Monitoring the creditworthiness and financial condition of the borrowers.
Assessing the quality and value of collateral pledged by borrowers to secure advances.
Establishing borrowing capacities based on collateral value and type for each borrower, including assessment of margin requirements based on factors such as the cost to liquidate and inherent risk exposure based on collateral type.
Evaluating historical loss experience.
The Bank is required by the FHLBank Act and Finance Agency regulations to obtain sufficient collateral on credit products and to accept only certain collateral for credit products, such as one- to four-family first lien residential mortgage loans, multifamily mortgage loans, MBS, U.S. government and agency securities, deposits in the Bank, and certain other real estate-related collateral, such as commercial real estate loans and second lien residential mortgage loans. The Bank may also accept 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) as eligible collateral from members that are community financial institutions. The Housing Act added secured loans for community development activities as a type of collateral that the Bank may accept from community financial institutions.
At December 31, 2017, the Bank had $77.4 billion of advances outstanding and collateral pledged with an estimated borrowing capacity of $262.5 billion. At December 31, 2016, the Bank had $49.8 billion of advances outstanding and collateral pledged with an estimated borrowing capacity of $204.2 billion.
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 as of December 31, 2017, the Bank expects to collect all amounts due according to the contractual terms. Therefore, no allowance for losses on credit products was deemed necessary by the Bank. The Bank has never experienced a credit loss on any of its credit products.
Significant changes to any of the factors described above could materially affect the Bank’s allowance for losses on credit products. For example, the Bank’s current assumptions about the financial strength of any borrower may change because of various circumstances, such as new information becoming available regarding the borrower’s financial strength or changes in the national or regional economy. New information may cause the Bank to: place a
borrower on credit watch, require the borrower to pledge additional collateral, require the borrower to deliver collateral, adjust the borrowing capacity of the borrower's collateral, require prepayment of the credit products, or provide for losses on the credit products.
Mortgage Loans Acquired Under the MPF Program. In determining the allowance for credit losses on mortgage loans, the Bank evaluates its exposure to credit loss taking into consideration: (i) the Bank’s judgment as to the eligibility of participating financial institutions to continue to service and credit-enhance the loans sold to the Bank, (ii) evaluation of credit exposure on purchased loans, (iii) valuation of available credit enhancements, and (iv) estimation of loss exposure and historical loss experience.
The Bank has policies and procedures in place to manage its credit risk. These include:
Monitoring the creditworthiness and financial condition of the institutions that sold the mortgage loans to the Bank or their successors (both considered to be participating financial institutions) and their ability to meet servicing obligations.
Determining required credit enhancements to be provided by participating financial institutions and assessing the availability of other credit enhancements.
Estimating loss exposure and historical loss experience to establish an adequate level of allowance for credit losses.
The Bank maintains an allowance for credit losses, net of credit enhancements, on mortgage loans acquired under the MPF Program at levels that it believes to be adequate to absorb estimated losses identified and inherent in the total mortgage portfolio. Setting the level of allowance for credit losses requires significant judgment and regular evaluation by the Bank. Many factors, including delinquency statistics, past performance, current performance, loan portfolio characteristics, collateral valuations, industry data, collectability of credit enhancements from institutions or from mortgage insurers, and prevailing economic conditions, are important in estimating mortgage loan losses, taking into account the available credit enhancement. The use of different estimates or assumptions as well as changes in external factors could produce materially different allowance levels.
The Bank calculates its estimated allowance for credit losses for MPF Original and MPF Plus loans as described below.
The Bank has a process in place for monitoring and identifying loans that are deemed impaired. The Bank also uses a credit model to estimate credit losses. A loan is considered impaired when it is reported 90 days or more past due (nonaccrual) or when it is probable, based on current information and events, that the Bank will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreement.
Allowance for Credit Losses on MPF Loans –The Bank evaluates the allowance for credit losses on MPF mortgage loans based on two components. The first component applies to each individual loan that is specifically identified as impaired. The Bank evaluates the exposure on these loans by considering the first layer of loss protection (the liquidation value of the real property securing the loan) and the availability and collectability of credit enhancements under the terms of each master commitment, and then records a provision for credit losses. For this component, the Bank established a de minimis allowance for credit losses for MPF Original loans as of December 31, 2017 and 2016. For MPF Plus loans, the Bank established an allowance for credit losses totaling de minimis amounts as of December 31, 2017 and 2016.
The second component applies to loans that are not specifically identified as impaired and is based on the Bank’s estimate of probable credit losses on those loans as of the financial statement date. The Bank evaluates the credit loss exposure on a loan pool basis considering various observable data, such as delinquency statistics, past performance, current performance, loan portfolio characteristics, collateral valuations, industry data, and prevailing economic conditions. The Bank also considers the availability and collectability of credit enhancements from participating financial institutions or from mortgage insurers under the terms of each master commitment. For this component, the Bank established an allowance for credit losses for MPF Original loans totaling de minimis amounts
as of December 31, 2017 and 2016, and for MPF Plus loans totaling de minimis amounts as of December 31, 2017 and 2016.
Significant changes in any of the factors described above could materially affect the Bank’s allowance for credit losses on mortgage loans. In addition, as the Bank’s mortgage loan portfolio ages and becomes sufficiently seasoned and additional loss history is obtained, the Bank may have to adjust its methods of estimating its allowance for credit losses and make additional provisions for credit losses in the future.
Term Securities Purchased Under Agreements to Resell. Securities purchased under agreements to resell are considered collateralized financing arrangements and 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. If an agreement to resell is deemed to be impaired, the difference between the fair value of the collateral and the amortized cost of the agreement is charged to earnings. The Bank did not have any term securities purchased under agreements to resell at December 31, 2017 and 2016.
Term Federal Funds Sold. The Bank invests in Federal funds sold with counterparties that are considered by the Bank to be of investment quality, and these investments are evaluated for purposes of an allowance for credit losses if the investment is not paid when due. All investments in Federal funds sold as of December 31, 2017 and 2016, were repaid or are expected to be repaid according to the contractual terms.
Accounting for Derivatives
Accounting for derivatives includes the following assumptions and estimates by the Bank: (i) assessing whether the hedging relationship qualifies for hedge accounting, (ii) assessing whether an embedded derivative should be bifurcated, (iii) calculating the estimated effectiveness of the hedging relationship, (iv) evaluating exposure associated with counterparty credit risk, and (v) estimating the fair value of the derivatives. The judgments and assumptions that are most critical to the application of this accounting policy are those affecting whether a hedging relationship qualifies for hedge accounting under the requirements of U.S. GAAP and the estimation of fair value of the derivatives (which is(as discussed in “Fair Values” below). The Bank’s assumptions and judgments include subjective calculations and estimates based, which have a significant impact on information available as of the date of the financial statements and could be materially different based on different assumptions, calculations, and estimates.
actual results being reported.
For additional discussion of the Bank’s accounting for derivatives, see “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” and “Note 18“Item 8. Financial Statements and Supplementary Data – Note 13 – Derivatives and Hedging Activities.”
Assessment of Effectiveness. Highly effective hedging relationships that use interest rate swaps as the hedging instrument and that meet certain criteria under the accounting for derivative instruments and hedging activities may qualify for the “short-cut” method of assessing effectiveness. The short-cut method allows the Bank to make the assumption of no ineffectiveness, which means that the change in fair value of the hedged item can be assumed to be equal to the change in fair value of the derivative. No further evaluation of effectiveness is performed for these hedging relationships unless a critical term is changed. Included in these hedging relationships may be hedged items for which the settlement of the hedged item occurs within the shortest period of time possible for the type of instrument based on market settlement conventions. The Bank defines market settlement conventions to be 5 business days or less for advances and 30 calendar days, using a next business day convention, for consolidated obligations. The Bank designates the hedged item in a qualifying hedging relationship as of its trade date. Although the hedged item will not be recognized in the financial statements until the settlement date, in certain circumstances when the fair value of the hedging instrument is zero on the trade date, the Bank believes that it meets a condition that allows the use of the short-cut method. The Bank then records the changes in fair value of the derivative and the hedged item beginning on the trade date.
For a hedging relationship that does not qualify for the short-cut method, the Bank measures its effectiveness for its fair value hedge relationships using the “long-haul”long-haul method, in which the change in fair value of the hedged item must be measured separately from the change in fair value of the derivative. The Bank designs effectiveness testing criteria based on its knowledge of the hedged item and hedging instrument that were employed to create the hedging relationship. The Bank uses regression analyses or other statistical analysesanalysis to evaluate effectiveness results, which must fall within established tolerances. Effectiveness testing is performed at inception and on at least a quarterlyweekly basis for both prospective considerations and retrospective evaluations.
Hedge Discontinuance.When a hedging relationship fails the effectiveness test, the Bank immediately discontinues hedge accounting for that relationship. In addition, the Bank discontinues hedge accounting when it is no longer probable that a forecasted transaction will occur in the original expected time period and when a hedged firm commitment no longer meets the required criteria of a firm commitment. The Bank treats modifications ofHedge discontinuance may also occur for certain other changes to hedged items (suchsuch as a reduction in par value, changechanges in maturity date,dates or change in strike rates) as a termination of a hedge relationship.rates.
Accounting for Hedge Ineffectiveness. The Bank quantifies and records in other income the ineffective portion of its hedging relationships. Ineffectiveness for fair value hedging relationships is calculated as the difference between the change in fair value of the hedging instrument and the change in fair value of the hedged item. Ineffectiveness for anticipatory hedge relationships is recorded when the change in the forecasted fair value of the hedging instrument exceeds the change in the fair value of the anticipated hedged item.
Credit Risk for Counterparties.The Bank is subject to credit risk as a result of potential nonperformance by counterparties to the derivative agreements. All uncleared derivatives with counterparties that are members of the Bank and that are not derivative dealers, in which the Bank serves as an intermediary, are fully secured by eligible collateral and are subject to both the Bank'sBank’s Advances and Security Agreement and a master netting agreement. For all derivative dealer counterparties, the Bank selects only highly rated derivative dealers and major banks that meet the Bank's eligibility requirements. In addition, the Bank enters into master netting agreements and bilateral security agreements with all active derivative dealer and major bank counterparties that provide for delivery of collateral at specified levels tied to counterparty credit rating to limit the Bank’s net unsecured credit exposure to these counterparties. The Bank makes judgments on each counterparty’s creditworthiness and estimates of collateral values in analyzing its credit risk for nonperformance by counterparties. In addition, the Bank is subject to nonperformance by the clearinghouse(s)clearing house(s) and clearing agents. The requirement that the Bank post initial margin and settle variation margin through the clearing agent to the clearinghouseclearing house exposes the Bank to institutional credit risk in the event that the clearing agent or the clearinghouseclearing house fails to meet its obligations. However, the use of cleared derivatives mitigates the Bank’s overall credit risk exposure because a central counterparty is substituted for individual counterparties and variation margin is postedsettled daily for changes in the value of cleared derivatives through a clearing agent. See additional discussion of credit exposure to derivatives counterparties in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Derivative Counterparties.”
Sensitivity. To assess potential fair value sensitivity related to hedging activities on GAAP net income, the Bank performs scenarios analysis. For example, an instantaneous parallel decrease of 100 basis points in interest rates would result in an increase of approximately $19 million in the fair value of derivatives and associated hedged items at December 31, 2023. Conversely, an instantaneous parallel increase of 100 basis points in interest rates would result in a decrease of approximately $24 million in the fair value of derivatives and associated hedged items at December 31, 2023.
Fair Values
Fair Value Measurements. Fair value measurement guidance defines fair value, establishes a framework for measuring fair value under U.S. GAAP, and stipulates disclosures about fair value measurements. This guidance applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. The Bank uses fair value measurements to record fair value adjustments for certain assets and liabilities and to determine fair value disclosures.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is a market-based measurement, and the price used to measure fair value is an exit price considered from the perspective of the market participant that holds the asset or owes the liability.
This guidance establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation technique used to measure fair value. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
•Level 1 – Inputs to the valuation methodology are quotedQuoted prices (unadjusted) for identical assets or liabilities in an active markets.market that the reporting entity can access on the measurement date. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
•Level 2 – Inputs toother than quoted prices within Level 1 that are observable inputs for the valuation methodologyasset 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 andor liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets andthat are not active; (3) inputs other than quoted prices that are observable for the asset or liability either directly(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 indirectly, for substantially the full term of the financial instrument.corroborated by observable market data by correlation or other means.
•Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs for the asset or liability. Valuations are supported by littlederived from techniques that use significant assumptions not observable in the market, which include pricing models, discounted cash flow models, or no market activity or by the Bank’s own assumptions.
similar techniques.
A financial instrument's categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The use of fair value to measure the Bank'sBank’s financial instruments is fundamental to the Bank'sBank’s financial statements and is a critical accounting estimate because a significant portion of the Bank'sBank’s assets and liabilities are carried at fair value.
The following assets and liabilities, including those for which the Bank has elected the fair value option, are carried at fair value on the Statements of Condition as of December 31, 2017:2023:
•Trading securities
•AFS securities
•Certain advances
•Derivative assets and liabilities
•Certain consolidated obligation bonds
•Certain other assets
In general, these items carried at fair value are categorized within Level 2 of the fair value hierarchy and are valued primarily using inputs that are observable in the marketplace or can be substantially derived from observable market data. The fair values of interest rate-related derivatives and hedged items are estimated using internally developed discounted cash flow models that use market-observable inputs, such as swap rates and volatility assumptions.
Certain assets and liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustment in certain circumstances (for example, when there is evidence of impairment).circumstances. At December 31, 2017,2023, the Bank measured its REO and certain impaired mortgage loans held for portfolio on a nonrecurring basis at Level 3 of the fair value hierarchy.
The Bank monitors and evaluates the inputs into its fair value measurements to ensure that the asset or liability is properly categorized in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. Because items classified as Level 3 are generally based on unobservable inputs, the process to determine the fair value of such items is generally more subjective and involves a higher degree of judgment and assumptions by the Bank.
The Bank employs internal control processes to validate the fair value of its financial instruments. These control processes are designed to ensure that the fair value measurements used for financial reporting are based on observable inputs wherever possible. In the event that observable market-based inputs are not available, the control processes are designed to ensure that the valuation approach used is appropriate and consistently applied and that the assumptions and judgments made are reasonable. The Bank’s control processes provide for segregation of duties and oversight of the fair value methodologies and valuations by the Bank. Valuation models are regularly reviewed by the Bank and are subject to an independent model validation process. Any changes to the valuation methodology or the models are also reviewed to confirm that the changes are appropriate.
The assumptions and judgments applied by the Bank may have a significant effect on its estimates of fair value, and the use of different assumptions as well as changes in market conditions could have a material effect on the Bank’s results of operations or financial condition. See “Item 8. Financial Statements and Supplementary Data – Note 1914 – Fair Value” for further information regarding the fair value measurement guidance (including the classification within the fair value hierarchy) and the summary of valuation methodologies and primary inputs used to measure fair value for all the Bank’s assets and liabilities carried at fair value.
The Bank continues to refine its valuation methodologies as markets and products develop and the pricing for certain products becomes more or less transparent. While the Bank believes that its valuation methodologies are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a materially different estimate of fair value as of the reporting date. These fair values may not represent the actual values of the financial instruments that could have been realized as of yearend or that will be realized in the future. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology.
Other-Than-Temporary Impairment for Investment Securities. A security is considered impaired when its fair value is less than its amortized cost basis. For impaired debt securities, an entity is required to assess whether: (i) it has the intent to sell the debt security; (ii) it is more likely than not that it will be required to sell the debt security before its anticipated recovery of the remaining amortized cost basis of the security; or (iii) it does not expect to recover the entire amortized cost basis of the impaired debt security. If any of these conditions is met, an OTTI on the security must be recognized.
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), the carrying value of the debt security is adjusted to its fair value. However, instead of recognizing the entire difference between the amortized cost basis and fair value in earnings, only the amount of the impairment representing the credit loss is recognized in earnings, while the amount of non-credit-related impairment is recognized in AOCI. The total OTTI is presented in the Statements of Income with an offset for the amount of the total OTTI that is recognized in AOCI. This presentation provides additional information about the amounts that the entity does not expect to collect related to a debt security. The credit loss on a debt security is limited to the amount of that security's unrealized losses.
For subsequent accounting of other-than-temporarily impaired securities, if the present value of cash flows expected to be collected is less than the amortized cost basis, the Bank records an additional OTTI. The amount of total OTTI for a security that was previously impaired is calculated as the difference between its amortized cost less the amount of OTTI recognized in AOCI prior to the determination of OTTI and its fair value. For an other-than-temporarily impaired security that was previously impaired and has subsequently incurred an additional OTTI related to credit loss (limited to that security's unrealized losses), this additional credit-related OTTI, up to the amount in AOCI, would be reclassified out of non-credit-related OTTI in AOCI and charged to earnings. Any credit loss in excess of the related AOCI is charged to earnings.
Subsequent related increases and decreases (if not an OTTI) in the fair value of AFS securities will be netted against the non-credit component of OTTI previously recognized in AOCI.
For securities classified as HTM, the OTTI recognized in AOCI is accreted to the carrying value of each security on a prospective basis, based on the amount and timing of future estimated cash flows (with no effect on earnings unless the security is subsequently sold or there are additional decreases in cash flows expected to be collected). For securities classified as AFS, the Bank does not accrete the OTTI recognized in AOCI to the carrying value because the subsequent measurement basis for these securities is fair value.
For securities previously identified as other-than-temporarily impaired, the Bank recognizes accretion or amortization of OTTI credit charges along with the net interest income associated with the securities’ effective yield in net interest income in the Statement of Income. The total accretion or amortization associated with OTTI credit charges was $93 million, $101 million, and $82 million for the years ended December 31, 2017, 2016, and 2015, respectively. The Bank updates its estimate of future expected cash flows for previously other-than-temporarily impaired securities on a regular basis. If there is no additional impairment on the security, any improvement in expected cash flows is accreted into interest income. This accretion, included in the total accretion or amortization amounts above, totaled $69 million, $81 million, and $74 million for the years ended December 31, 2017, 2016, and 2015, respectively.
As of December 31, 2017, on a cumulative basis, the Bank had recognized $1.5 billion in credit-related OTTI in its Statements of Income. Each reporting period, these losses were based on the Bank’s then-current best estimates of lifetime losses on each security determined to be other-than-temporarily impaired. As housing prices, mortgage credit conditions, and other key inputs into the Bank’s OTTI assumptions and estimates have improved, the Bank has seen significant increases in expected cash flows on previously other-than-temporarily-impaired securities. Based on the Bank’s current assumptions and estimates, the Bank’s estimate of lifetime losses on its other-than-temporarily-impaired securities as of December 31, 2017, is $829 million. As a result of the improvements in expected cash flows and resulting decreases in estimated lifetime losses, the Bank has recognized significant amounts of accretion-related income since 2015. As of December 31, 2017, the Bank estimates that it will accrete approximately $335 million of additional interest income associated with the reduction in OTTI losses over the life of the securities. This estimate of accretion of additional interest income is a forward-looking statement. The Bank updates its estimates on an ongoing basis, and actual results may differ materially from the Bank’s current estimation.
The Bank closely monitors the performance of its investment securities classified as AFS or HTM on at least a quarterly basis to evaluate its exposure to the risk of loss on these investments in order to determine whether a loss is other-than-temporary.
Each FHLBank is responsible for making its own determination of impairment and of the reasonableness of the assumptions, inputs, and methodologies used and for performing the required present value calculations using appropriate historical cost bases and yields. FHLBanks that hold the same private-label MBS are required to consult with one another to ensure that any decision that a commonly held private-label MBS is other-than-temporarily impaired, including the determination of fair value and the credit loss component of the unrealized loss, is consistent among those FHLBanks.
In performing the cash flow analysis for each security, the Bank uses two third-party models. The first model projects prepayments, default rates, and loss severities on the underlying collateral based on borrower characteristics and the particular attributes of the loans underlying the Bank's securities, in conjunction with assumptions related primarily to future changes in housing prices and interest rates. Another significant input to the first model is the forecast of future housing price changes for the relevant states and CBSAs, which are based on an assessment of the regional housing markets. CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the U.S. Office of Management and Budget. As currently defined, a CBSA must contain at least one urban area with a population of 10,000 or more people. The FHLBanks’ OTTI Committee developed a short-term housing price forecast with projected changes ranging from a decrease of 5.0% to an increase of 12.0% over the 12-month period beginning October 1, 2017. For the vast majority of markets, the projected short-term housing price changes range from an increase of 2.0% to an increase of 6.0%. Thereafter, a unique path is projected for each geographic area based on an internally developed framework derived from historical data.
The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, default rates, and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in each securitization structure in accordance with the structure's prescribed cash flow and loss allocation rules. When the credit enhancement for the senior securities in a securitization is derived from the presence of subordinated securities, losses are generally allocated first to the
subordinated securities until their principal balance is reduced to zero. The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined based on the model approach described above reflects a best-estimate scenario and includes a base case housing price forecast that reflects the expectations for near- and long-term housing price behavior.
At each quarter end, the Bank compares the present value of the cash flows expected to be collected on its PLRMBS to the amortized cost basis of the securities to determine whether a credit loss exists. For the Bank's variable rate and hybrid PLRMBS, the Bank uses the effective interest rate derived from a variable rate index (for example, the one-month LIBOR) plus the contractual spread, plus or minus a fixed spread adjustment when there is an existing discount or premium on the security. As the implied forward rates of the index change over time, the effective interest rates derived from that index will also change over time. The Bank then uses the effective interest rate for the security prior to impairment for determining the present value of the future estimated cash flows. For all securities, including securities previously identified as other-than-temporarily impaired, the Bank updates its estimate of future estimated cash flows on a quarterly basis.
For the years ended December 31, 2017, 2016, and 2015, the Bank recorded a credit-related OTTI charge of $16 million, $16 million, and $15 million, respectively.
Because there is a risk that the Bank may record additional material OTTI charges in future periods, the Bank's earnings and retained earnings and its ability to pay dividends and repurchase excess capital stock could be adversely affected in future periods.
Additional information about OTTI charges associated with the Bank’s PLRMBS is provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Investments” and in “Item 8. Financial Statements and Supplementary Data – Note 7 – Other-Than-Temporary Impairment Analysis.”
Amortization of Premiums and Accretion of Discounts on MBS and Purchased Mortgage Loans
When the Bank purchases MBS and mortgage loans, it does not necessarily pay the seller the par value of the MBS or the exact amount of the unpaid principal balance of the mortgage loans. If the Bank pays more than the par value or the unpaid principal balance, purchasing the asset at a premium, the premium reduces the yield the Bank recognizes on the asset below the coupon rate. Conversely, if the Bank pays less than the par value or the unpaid principal balance, purchasing the asset at a discount, the discount increases the yield above the coupon rate.
The Bank amortizes premiums and accretes discounts from the acquisition dates of the MBS and mortgage loans. The Bank applies the level-yield method on a retrospective basis over the estimated life of the MBS and purchased mortgage loans for which prepayments reasonably can be expected and estimated. This method requires a retrospective adjustment of the effective yield each time the Bank changes the estimated life as if the new estimate had been known since the original acquisition date of the securities. Use of the retrospective method may increase volatility of reported earnings during periods of changing interest rates, and the use of different estimates or assumptions as well as changes in external factors could produce significantly different results.
Recently Issued Accounting Guidance and Interpretations
See “Item 8. Financial Statements and Supplementary Data – Note 2 – Recently Issued and Adopted Accounting Guidance” for a discussion of recently issued accounting standards and interpretations.
RecentLegislative and Regulatory Developments
Finance Agency’s Review and Analysis of the Federal Home Loan Bank System. Commencing in the fall of 2022, and over a period of several months, the Finance Agency undertook a review and analysis of the FHLBank System, in part through a series of public listening sessions, regional roundtable discussions, and receipt of comments from stakeholders and the public. This review covered such areas as the FHLBanks’ mission and purpose in a changing marketplace; their organization, operational efficiency, and effectiveness; their role in promoting affordable, sustainable, equitable, and resilient housing and community investment; their role in addressing the unique needs of rural and financially vulnerable communities; member products, services, collateral requirements; and membership eligibility and requirements.
There are no recent developmentsOn November 7, 2023, the Finance Agency issued a written report titled “FHLBank System at 100: Focusing on the Future”, presenting its review and analysis of the FHLBank System and the actions and recommendations that it
plans to pursue in service of its vision for the fourth quarter 2017future of the FHLBank System. The report focused on four broad themes: (1) the mission of the FHLBank System; (2) the FHLBank System as a stable and reliable source of liquidity; (3) housing and community development; and (4) FHLBank System operational efficiency, structure, and governance. The Finance Agency expects its initiative to continue as a multi-year, collaborative effort with the FHLBanks, their member institutions, and other stakeholders to address the recommended actions in the report and has stated that it can implement some of the recommendations from the report through ongoing supervision, guidance, or rulemaking, as well as through statutory changes by proposing specific requests for Congressional action.
Among other things, the Finance Agency has indicated that it plans to:
•Update and clarify its regulatory statement of the FHLBanks’ mission to explicitly incorporate its view of the core objectives of the FHLBanks’ mission, which are expected(1) providing stable and reliable liquidity to havemembers, and (2) supporting housing and community development;
•Clarify the FHLBanks’ liquidity role and take steps that the Finance Agency believes will better position the FHLBanks to perform their liquidity function, including enhancing Finance Agency oversight of FHLBank credit risk evaluation of their members and establishing protocols for large depository members to borrow from the Federal Reserve discount window;
•Expand the FHLBanks’ housing and community development focus by requiring the establishment of mission-oriented collateral programs, re-evaluating the definition of long-term advances, exploring revisions to the Community Support Requirements, and reviewing the Affordable Housing Programs (AHP), Community Investment Programs, and Community Investment Cash Advance Programs to encourage greater use in a materialsafe and sound manner. The Finance Agency will also recommend that Congress consider amending the FHLBank Act to at least double the statutory minimum required annual AHP contributions by the FHLBanks; and
•Review the FHLBanks’ operational efficiencies through encouraging collaboration among the FHLBanks, evaluating the size and structure of FHLBank boards, considering the structure of FHLBank districts and composition of their membership, and studying whether realignment or consolidation are necessary for the efficiency of the FHLBank System.
The Bank is continuing to evaluate the report and is not able to predict what actions will ultimately result from the Finance Agency’s recommendations in the report, the timing of these actions, the extent of any changes to the Bank or the FHLBank System, or the ultimate effect on the Bank or the FHLBank System in the future. We plan to continue to engage with the Finance Agency and other stakeholders to ensure that the FHLBank System remains well positioned to serve our members and their communities. For a further discussion of related risks, see “Part I. Item 1A. Risk Factors”.
Office of the Comptroller of the Currency, Federal Reserve, and Federal Deposit Insurance Corporation Joint Proposed Rule to Revise Capital Requirements for Certain Large Banking Organizations. On September 18, 2023, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve, and the Federal Deposit Insurance Corporation published a joint notice of proposed rulemaking that would substantially revise the regulatory capital requirements applicable to certain large banking organizations and banking organizations with significant trading activity (Covered Banks), generally consistent with changes to international capital standards issued by the Basel Committee on Banking Supervision, known as Basel III. The proposed rulemaking will amend the calculation of risk-based capital requirements in an attempt to better reflect the risks of these banking organizations’ exposures, reduce the complexity of the framework, enhance the consistency of requirements across these banking organizations, and facilitate more effective supervisory and market assessments of capital adequacy. For certain collateralized transactions under existing capital requirements, debt securities issued by a government-sponsored enterprise (GSE) such as the FHLBanks are afforded a lower market price volatility haircut than higher risk non-GSE investment-grade securities. The proposed rules would increase the market price volatility haircuts applicable to debt securities of the GSEs (including the FHLBanks) by applying to these debt securities the same haircuts as non-GSE investment-grade securities. The Bank continues to evaluate the potential impact of the proposed rulemaking on its financial condition orand results of operations or that are otherwise materialoperations. The proposed change to the Bank.
Off-Balance Sheet Arrangements and Aggregate Contractual Commitments
Off-Balance Sheet Arrangements and Other Commitments
In accordance with regulations governing the operationsmarket price volatility haircuts applicable to debt securities of the FHLBanks each may harm liquidity for
FHLBank includingdebt securities in the Bank, is jointlymarket, impact general demand for FHLBank debt securities, and severally liableincrease the FHLBanks’ cost of funding due to potential higher interest rates as a result of the foregoing. The proposal was open for public comment through January 16, 2024, and 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 orSystem submitted a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor.comment letter.
The par value of the outstanding consolidated obligations of the FHLBanks was $1,034.3 billion at December 31, 2017, and $989.3 billion at December 31, 2016. The par value of the Bank’s participation in consolidated obligations was $115.6 billion at December 31, 2017, and $83.7 billion at December 31, 2016. The Bank had committed to the issuance of $729 million and $1.5 billion in consolidated obligations at December 31, 2017 and 2016, 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 Statement of Condition or may be recorded on the Bank’s Statement of Condition in amounts that are different from the full contract or notional amount of the transactions. For example, the Bank routinely enters into commitments to extend advances and issues standby letters of credit. These commitments and standby letters of credit may represent future cash requirements of the Bank, although the standby letters of credit usually expire without being drawn upon. Standby letters of credit are subject to the same underwriting and collateral requirements as advances made by the Bank. At December 31, 2017, the Bank had $1 million in advance commitments and $16.2 billion in standby letters of credit outstanding. At December 31, 2016, the Bank had $6 million in advance commitments and $15.2 billion in standby letters of credit outstanding.
For additional information, see “Item 8. Financial Statements and Supplementary Data – Note 20 – Commitments and Contingencies.”
Contractual Obligations
The following table summarizes the Bank’s contractual obligations as of December 31, 2017, except for obligations associated with short-term discount notes. Additional information with respect to the Bank’s consolidated obligations is presented in “Item 8. Financial Statements and Supplementary Data – Note 12 – Consolidated Obligations” and “Note 20 – Commitments and Contingencies.”
In addition, “Item 8. Financial Statements and Supplementary Data – Note 15 – Capital” includes a discussion of the Bank’s mandatorily redeemable capital stock, and “Item 8. Financial Statements and Supplementary Data – Note 16 – Employee Retirement Plans and Incentive Compensation Plans” includes a discussion of the Bank’s pension and retirement expenses and commitments.
The Bank enters into derivative financial instruments, which create contractual obligations, as part of the Bank’s market risk management. “Item 8. Financial Statements and Supplementary Data – Note 18 – Derivatives and Hedging Activities” includes additional information regarding derivative financial instruments.
|
| | | | | | | | | | | | | | | | | | | |
| Contractual Obligations |
| | | | | | | | | | |
| (In millions) | | | | | | | | | |
| December 31, 2017 | | | | | | | | | |
| | Payments Due By Period |
| Contractual Obligations | < 1 Year |
| | 1 to < 3 Years |
| | 3 to < 5 Years |
| | ≥ 5 Years |
| | Total |
|
| Long-term debt | $ | 69,734 |
| | $ | 9,246 |
| | $ | 4,052 |
| | $ | 2,076 |
| | $ | 85,108 |
|
| Mandatorily redeemable capital stock | — |
| | 306 |
| | — |
| | 3 |
| | 309 |
|
| Capital leases | 2 |
| | 4 |
| | 3 |
| | — |
| | 9 |
|
| Operating leases | 5 |
| | 6 |
| | — |
| | — |
| | 11 |
|
| Pension and post-retirement contributions | 3 |
| | 5 |
| | 7 |
| | 15 |
| | 30 |
|
| Commitments to fund/purchase mortgage loans | 16 |
| | — |
| | — |
| | — |
| | 16 |
|
| Total contractual obligations | $ | 69,760 |
| | $ | 9,567 |
| | $ | 4,062 |
| | $ | 2,094 |
| | $ | 85,483 |
|
| |
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition – Risk Management – Market Risk.”
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Supplementary Data
| | | | | | | | | | | | | | |
| Financial Statements: | | | | |
| Financial Statements: | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Supplementary Data: | |
| | | | |
Management's Report on Internal Control Over Financial Reporting
The management of the Federal Home Loan Bank of San Francisco (Bank) is responsible for establishing and maintaining adequate internal control over the Bank's financial reporting. The Bank’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There are inherent limitations in the ability of internal control over financial reporting to provide absolute assurance of achieving financial reporting objectives. These inherent limitations include the possibility of human error and the circumvention or overriding of controls. Accordingly, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. These inherent limitations are known features of the financial reporting process, however, and it is possible to design into the process safeguards to reduce, although not eliminate, this risk.
Management assessed the effectiveness of the Bank'sBank’s internal control over financial reporting as of December 31, 2017.2023. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concludes that, as of December 31, 2017,2023, the Bank maintained effective internal control over financial reporting. The effectiveness of the Bank's internal control over financial reporting as of December 31, 2017,2023, has been audited by PricewaterhouseCoopers LLP, the Bank's independent registered public accounting firm, as stated in its report appearing on the following page, which expressed an unqualified opinion on the effectiveness of the Bank'sBank’s internal control over financial reporting as of December 31, 2017.
2023.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of the Federal Home Loan Bank of San Francisco:
Francisco
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying statements of condition of the Federal Home Loan Bank of San Francisco (the “FHLBank”) as of December 31, 20172023 and 2016,2022, and the related statements of income, of comprehensive income,income/(loss), of capital accounts, and of cash flows for each of the three years in the period ended December 31, 2017,2023, including the related notes (collectively referred to as the “financial statements”). We also have audited the FHLBank’s internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the FHLBank as of December 31, 20172023 and 2016,2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20172023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the FHLBank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The FHLBank’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control overOver Financial Reporting. Our responsibility is to express opinions on the FHLBank’s financial statements and on the FHLBank’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the FHLBank in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Interest Rate-Related Derivatives and Hedged Items
As described in Notes 13 and 14 to the financial statements, the FHLBank uses derivatives to reduce funding costs and to manage its exposure to interest rate risks. The total notional amount of derivatives as of December 31, 2023 was $117 billion, of which 77% were designated as hedging instruments, and the fair value of derivative assets and liabilities as of December 31, 2023 was $16 million and $2 million, respectively. The fair values of interest rate-related derivatives and hedged items are estimated using internally developed discounted cash flow models that use market-observable inputs, such as swap rates and volatility assumptions.
The principal considerations for our determination that performing procedures relating to the valuation of interest rate-related derivatives and hedged items is a critical audit matter are the significant audit effort in evaluating the swap rates and volatility assumptions used to fair value these derivatives and hedged items, and the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included testing the effectiveness of controls relating to the valuation of interest rate-related derivatives and hedged items, including controls over the models, data, and assumptions. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent range of prices for a sample of interest rate-related derivatives and hedged items and comparison of management’s estimate to the independently developed ranges. Developing the independent range of prices involved testing the completeness and accuracy of data provided by management and independently developing the swap rates and volatility assumptions.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 9, 2018
8, 2024
We have served as the FHLBank’s auditor since 1990.
Federal Home Loan Bank of San Francisco
Statements of Condition
| | | | | | | | | | | |
| (In millions-except par value) | December 31,
2023 | | December 31,
2022 |
| Assets: | | | |
| Cash and due from banks | $ | 5 | | | $ | 9 | |
| Interest-bearing deposits | 2,922 | | | 3,677 | |
| Securities purchased under agreements to resell | 3,650 | | | 7,000 | |
| Federal funds sold | 3,861 | | | 4,719 | |
| Trading securities | — | | | 1 | |
Available-for-sale (AFS) securities, net of allowance for credit losses of $31 and $30, respectively (amortized cost of $18,105 and $12,757, respectively)(a) | 18,014 | | | 12,713 | |
| Held-to-maturity (HTM) securities (fair values of $1,818 and $2,136, respectively) | 1,847 | | | 2,181 | |
| Advances (includes $1,898 and $2,059 at fair value under the fair value option, respectively) | 61,335 | | | 89,400 | |
| Mortgage loans held for portfolio, net of allowance for credit losses of $1 and $1, respectively | 754 | | | 815 | |
| | | |
| Accrued interest receivable | 184 | | | 313 | |
| Derivative assets, net | 16 | | | 26 | |
| Other assets | 240 | | | 202 | |
| Total Assets | $ | 92,828 | | | $ | 121,056 | |
| Liabilities: | | | |
| Deposits | $ | 962 | | | $ | 989 | |
| Consolidated obligations: | | | |
| Bonds (includes $604 and $2,226 at fair value under the fair value option, respectively) | 64,297 | | | 75,768 | |
| Discount notes | 19,187 | | | 35,929 | |
| Total consolidated obligations | 83,484 | | | 111,697 | |
| Mandatorily redeemable capital stock | 706 | | | 5 | |
| | | |
| Accrued interest payable | 520 | | | 326 | |
| Affordable Housing Program (AHP) payable | 133 | | | 111 | |
| Derivative liabilities, net | 2 | | | 2 | |
| Other liabilities | 353 | | | 203 | |
| Total Liabilities | 86,160 | | | 113,333 | |
| Commitments and Contingencies (Note 13) | | | |
| Capital: | | | |
| Capital stock—Class B—Putable ($100 par value) issued and outstanding: | | | |
| 25 shares and 38 shares, respectively | 2,450 | | | 3,758 | |
| Unrestricted retained earnings | 3,475 | | | 3,262 | |
| Restricted retained earnings | 815 | | | 732 | |
| Total Retained Earnings | 4,290 | | | 3,994 | |
| Accumulated other comprehensive income/(loss) (AOCI) | (72) | | | (29) | |
| Total Capital | 6,668 | | | 7,723 | |
| Total Liabilities and Capital | $ | 92,828 | | | $ | 121,056 | |
|
| | | | | | | |
| (In millions-except par value) | December 31,
2017 |
| | December 31,
2016 |
|
| Assets: | | | |
| Cash and due from banks | $ | 31 |
| | $ | 2 |
|
| Interest-bearing deposits | 1,115 |
| | 590 |
|
| Securities purchased under agreements to resell | 11,750 |
| | 15,500 |
|
| Federal funds sold | 11,028 |
| | 4,214 |
|
Trading securities(a) | 1,164 |
| | 2,066 |
|
Available-for-sale (AFS) securities(a) | 3,833 |
| | 4,489 |
|
Held-to-maturity (HTM) securities (fair values were $14,704 and $14,141, respectively)(a) | 14,680 |
| | 14,127 |
|
| Advances (includes $6,431 and $3,719 at fair value under the fair value option, respectively) | 77,382 |
| | 49,845 |
|
| Mortgage loans held for portfolio, net of allowance for credit losses of $0 and $0, respectively | 2,076 |
| | 826 |
|
| Accrued interest receivable | 119 |
| | 79 |
|
| Premises, software, and equipment, net | 29 |
| | 33 |
|
| Derivative assets, net | 83 |
| | 66 |
|
| Other assets | 95 |
| | 104 |
|
| Total Assets | $ | 123,385 |
| | $ | 91,941 |
|
| Liabilities: | | | |
| Deposits | $ | 281 |
| | $ | 169 |
|
| Consolidated obligations: | | | |
| Bonds (includes $949 and $1,507 at fair value under the fair value option, respectively) | 85,063 |
| | 50,224 |
|
| Discount notes | 30,440 |
| | 33,506 |
|
| Total consolidated obligations | 115,503 |
| | 83,730 |
|
| Mandatorily redeemable capital stock | 309 |
| | 457 |
|
| Borrowings from other Federal Home Loan Banks (FHLBanks) | — |
| | 1,345 |
|
| Accrued interest payable | 116 |
| | 67 |
|
| Affordable Housing Program (AHP) payable | 204 |
| | 205 |
|
| Derivative liabilities, net | 1 |
| | 2 |
|
| Other liabilities | 165 |
| | 429 |
|
| Total Liabilities | 116,579 |
| | 86,404 |
|
| Commitments and Contingencies (Note 20) |
|
|
|
| Capital: | | | |
| Capital stock—Class B—Putable ($100 par value) issued and outstanding: | | | |
| 32 shares and 24 shares, respectively | 3,243 |
| | 2,370 |
|
| Unrestricted retained earnings | 2,670 |
| | 888 |
|
| Restricted retained earnings | 575 |
| | 2,168 |
|
| Total Retained Earnings | 3,245 |
| | 3,056 |
|
| Accumulated other comprehensive income/(loss) (AOCI) | 318 |
| | 111 |
|
| Total Capital | 6,806 |
| | 5,537 |
|
| Total Liabilities and Capital | $ | 123,385 |
| | $ | 91,941 |
|
| |
(a) | At December 31, 2017 and 2016, none(a) At December 31, 2023 and 2022, $771 million and $435 million, respectively, of these securities were pledged as collateral that may be repledged. |
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of San Francisco
Statements of Income
| | | | For the Years Ended December 31, | |
| | | For the Years Ended December 31, | |
| | | For the Years Ended December 31, | |
| | (In millions) | |
| (In millions) | |
| (In millions) | | | | | | 2023 | | 2022 | | 2021 |
| Interest Income: | |
| | | Advances | |
| | For the Years Ended December 31, |
| (In millions) | 2017 |
| | 2016 |
| | 2015 |
|
| Interest Income: | | | | | |
| | Advances | $ | 874 |
| | $ | 477 |
| | $ | 291 |
|
| Prepayment fees on advances, net | 1 |
| | 5 |
| | 8 |
|
| | Advances | |
| Interest-bearing deposits | 8 |
| | 2 |
| | — |
|
| Securities purchased under agreements to resell | 9 |
| | 12 |
| | 3 |
|
| Federal funds sold | 115 |
| | 29 |
| | 9 |
|
| Trading securities | 17 |
| | 10 |
| | 5 |
|
| AFS securities | 239 |
| | 262 |
| | 264 |
|
| HTM securities | 285 |
| | 251 |
| | 293 |
|
| Mortgage loans held for portfolio | 52 |
| | 30 |
| | 33 |
|
| Total Interest Income | 1,600 |
| | 1,078 |
| | 906 |
|
| Interest Expense: | | | | | |
| Consolidated obligations: | | | | | |
| Consolidated obligations: | |
| Consolidated obligations: | |
| Bonds | |
| Bonds | |
| Bonds | 713 |
| | 410 |
| | 317 |
|
| Discount notes | 285 |
| | 136 |
| | 46 |
|
| Deposits | 3 |
| | 1 |
| | 1 |
|
| Borrowings from other FHLBanks | |
| Mandatorily redeemable capital stock | 32 |
| | 60 |
| | 65 |
|
| Total Interest Expense | 1,033 |
| | 607 |
| | 429 |
|
| Net Interest Income | 567 |
| | 471 |
| | 477 |
|
| Provision for/(reversal of) credit losses on mortgage loans | — |
| | — |
| | 1 |
|
| Net Interest Income After Mortgage Loan Loss Provision | 567 |
| | 471 |
| | 476 |
|
| Provision for/(reversal of) credit losses | |
| Net Interest Income After Provision for/(Reversal of) Credit Losses | |
| Other Income/(Loss): | | | | | |
| Total other-than-temporary impairment (OTTI) loss | (10 | ) | | (26 | ) | | (31 | ) |
| Net amount of OTTI loss reclassified to/(from) AOCI | (6 | ) | | 10 |
| | 16 |
|
| Net OTTI loss, credit-related | (16 | ) | | (16 | ) | | (15 | ) |
| Net gain/(loss) on trading securities | |
| Net gain/(loss) on trading securities | |
| Net gain/(loss) on trading securities | — |
| | 4 |
| | (2 | ) |
| Net gain/(loss) on advances and consolidated obligation bonds held under fair value option | (31 | ) | | (40 | ) | | (50 | ) |
| Net gain/(loss) on derivatives and hedging activities | (14 | ) | | 9 |
| | (16 | ) |
| Gains on litigation settlements, net | 119 |
| | 510 |
| | 459 |
|
| Other | 20 |
| | 18 |
| | 12 |
|
| Net gain/(loss) on derivatives | |
| Private-label residential mortgage-backed securities (PLRMBS) trust settlement | |
| | Standby letters of credit fees | |
| Standby letters of credit fees | |
| Standby letters of credit fees | |
| Other, net | |
| Total Other Income/(Loss) | 78 |
| | 485 |
| | 388 |
|
| Other Expense: | | | | | |
| Compensation and benefits | |
| Compensation and benefits | |
| Compensation and benefits | 76 |
| | 74 |
| | 67 |
|
| Other operating expense | 70 |
| | 74 |
| | 71 |
|
| Federal Housing Finance Agency | 6 |
| | 6 |
| | 6 |
|
| Office of Finance | 5 |
| | 4 |
| | 4 |
|
| Quality Jobs Fund expense | 60 |
| | — |
| | — |
|
| Other | 7 |
| | — |
| | — |
|
| | Other, net | |
| Other, net | |
| Other, net | |
| Total Other Expense | 224 |
| | 158 |
| | 148 |
|
| Income/(Loss) Before Assessment | 421 |
| | 798 |
| | 716 |
|
| AHP Assessment | 45 |
| | 86 |
| | 78 |
|
| AHP assessment | |
| Net Income/(Loss) | $ | 376 |
| | $ | 712 |
| | $ | 638 |
|
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of San Francisco
Statements of Comprehensive IncomeIncome/(Loss)
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (In millions) | 2017 |
| | 2016 |
| | 2015 |
|
| Net Income/(Loss) | $ | 376 |
| | $ | 712 |
| | $ | 638 |
|
| Other Comprehensive Income/(Loss): | | | | | |
| Net change in pension and postretirement benefits | 3 |
| | (2 | ) | | (2 | ) |
| Net non-credit-related OTTI gain/(loss) on AFS securities: | | | | | |
| Non-credit-related OTTI loss transferred from HTM securities | — |
| | — |
| | (1 | ) |
| Net change in fair value of other-than-temporarily impaired securities | 195 |
| | 103 |
| | (29 | ) |
| Net amount of OTTI loss reclassified to/(from) other income/(loss) | 6 |
| | (10 | ) | | (15 | ) |
| Total net non-credit-related OTTI gain/(loss) on AFS securities | 201 |
| | 93 |
| | (45 | ) |
| Net non-credit-related OTTI gain/(loss) on HTM securities: | | | | | |
| Net amount of OTTI loss reclassified to/(from) other income/(loss) | — |
| | — |
| | (1 | ) |
| Accretion of non-credit-related OTTI loss | 3 |
| | 5 |
| | 6 |
|
| Non-credit-related OTTI loss transferred to AFS securities | — |
| | — |
| | 1 |
|
| Total net non-credit-related OTTI gain/(loss) on HTM securities | 3 |
| | 5 |
| | 6 |
|
| Total other comprehensive income/(loss) | 207 |
| | 96 |
| | (41 | ) |
| Total Comprehensive Income/(Loss) | $ | 583 |
| | $ | 808 |
| | $ | 597 |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| | | |
| (In millions) | | | | | 2023 | | 2022 | | 2021 |
| Net Income/(Loss) | | | | | $ | 539 | | | $ | 323 | | | $ | 287 | |
| Other Comprehensive Income/(Loss): | | | | | | | | | |
| Net unrealized gain/(loss) on AFS securities | | | | | (47) | | | (354) | | | 96 | |
| Net change in pension and postretirement benefits | | | | | 4 | | | (6) | | | 5 | |
| | | | | | | | | |
| | | | | | | | | |
| Total other comprehensive income/(loss) | | | | | (43) | | | (360) | | | 101 | |
| Total Comprehensive Income/(Loss) | | | | | $ | 496 | | | $ | (37) | | | $ | 388 | |
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of San Francisco
Statements of Capital Accounts
| | Capital Stock
Class B—Putable | | | Capital Stock
Class B—Putable | | Retained Earnings | | | | Total
Capital |
| (In millions) | |
| Balance, December 31, 2020 | |
| Balance, December 31, 2020 | |
| Balance, December 31, 2020 | |
| | | Capital Stock Class B—Putable | | Retained Earnings | | | | Total Capital |
|
| (In millions) | Shares |
| | Par Value |
| | Restricted |
| | Unrestricted |
| | Total |
| | AOCI |
| |
| Balance, December 31, 2014 | 33 |
| | $ | 3,278 |
| | $ | 2,065 |
| | $ | 294 |
| | $ | 2,359 |
| | $ | 56 |
| | $ | 5,693 |
|
| Comprehensive income/(loss) | |
| Comprehensive income/(loss) | |
| Comprehensive income/(loss) | | | | | 103 |
| | 535 |
| | 638 |
| | (41 | ) | | 597 |
|
| Issuance of capital stock | 8 |
| | 829 |
| | | | | | | | | | 829 |
|
| Repurchase of capital stock | (14 | ) | | (1,439 | ) | | | | | | | | | | (1,439 | ) |
| Capital stock reclassified from/(to) mandatorily redeemable capital stock, net | (4 | ) | | (415 | ) | | | | | | | | | | (415 | ) |
| Transfers from restricted retained earnings | | | | | (150 | ) | | 150 |
| | — |
| | | | — |
|
| Cash dividends paid on capital stock (12.39%) | | | | | | | (369 | ) | | (369 | ) | | | | (369 | ) |
| Balance, December 31, 2015 | 23 |
| | $ | 2,253 |
| | $ | 2,018 |
| | $ | 610 |
| | $ | 2,628 |
| | $ | 15 |
| | $ | 4,896 |
|
| Comprehensive income/(loss) | | | | | 150 |
| | 562 |
| | 712 |
| | 96 |
| | 808 |
|
| Issuance of capital stock | 9 |
| | 926 |
| | | | | | | | | | 926 |
|
| Repurchase of capital stock | (7 | ) | | (753 | ) | | | | | | | | | | (753 | ) |
| Capital stock reclassified from/(to) mandatorily redeemable capital stock, net | (1 | ) | | (56 | ) | | | | | | | | | | (56 | ) |
| Cash dividends paid on capital stock (12.33%) | | | | | | | (284 | ) | | (284 | ) | | | | (284 | ) |
| Balance, December 31, 2016 | 24 |
| | $ | 2,370 |
| | $ | 2,168 |
| | $ | 888 |
| | $ | 3,056 |
| | $ | 111 |
| | $ | 5,537 |
|
| | Cash dividends paid on capital stock (5.74%) | |
| Cash dividends paid on capital stock (5.74%) | |
| Cash dividends paid on capital stock (5.74%) | |
| Balance, December 31, 2021 | |
| Comprehensive income/(loss) |
|
| |
|
| | 178 |
| | 198 |
| | 376 |
| | 207 |
| | 583 |
|
| Issuance of capital stock | 12 |
| | 1,214 |
| |
| |
| | | |
| | 1,214 |
|
| Repurchase of capital stock | (4 | ) | | (339 | ) | |
| |
| | | |
| | (339 | ) |
| Capital stock reclassified from/(to) mandatorily redeemable capital stock, net | — |
| | (2 | ) | |
|
| |
|
| | | |
|
| | (2 | ) |
| Transfers from restricted retained earnings |
| |
|
| | (1,771 | ) | | 1,771 |
| | — |
| |
| | — |
|
| Cash dividends paid on capital stock (7.50%) |
| |
|
| |
| | (187 | ) | | (187 | ) | |
| | (187 | ) |
| Balance, December 31, 2017 | 32 |
| | $ | 3,243 |
| | $ | 575 |
| | $ | 2,670 |
| | $ | 3,245 |
| | $ | 318 |
| | $ | 6,806 |
|
| Cash dividends paid on capital stock (6.30%) | |
| | Balance, December 31, 2022 | |
| | Balance, December 31, 2022 | |
| | Balance, December 31, 2022 | |
| | Comprehensive income/(loss) | |
| | Comprehensive income/(loss) | |
| | Comprehensive income/(loss) | |
| Issuance of capital stock | |
| Repurchase of capital stock | |
| Capital stock reclassified from/(to) mandatorily redeemable capital stock, net | |
| | Cash dividends paid on capital stock (7.49%) | |
| Cash dividends paid on capital stock (7.49%) | |
| Cash dividends paid on capital stock (7.49%) | |
| Balance, December 31, 2023 | |
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of San Francisco
Statements of Cash Flows
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| |
| (In millions) | 2023 | | 2022 | | 2021 |
| Cash Flows from Operating Activities: | | | | | |
| Net Income/(Loss) | $ | 539 | | | $ | 323 | | | $ | 287 | |
| Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: | | | | | |
| Depreciation and amortization/(accretion) | 21 | | | 270 | | | 79 | |
| Provision for/(reversal of) credit losses | 4 | | | 15 | | | (6) | |
| Change in net fair value of trading securities | — | | | — | | | 57 | |
| Change in net fair value adjustment on advances and consolidated obligation bonds held under the fair value option | 1 | | | 65 | | | 54 | |
| Change in net derivatives and hedging activities | (652) | | | 1,302 | | | 531 | |
| PLRMBS trust settlement | — | | | (28) | | | — | |
| Other adjustments, net | 5 | | | 6 | | | 7 | |
| Net change in: | | | | | |
| Accrued interest receivable | 127 | | | (272) | | | 39 | |
| Other assets | (43) | | | 27 | | | (12) | |
| Accrued interest payable | 188 | | | 302 | | | 9 | |
| Other liabilities | 56 | | | (33) | | | (4) | |
| PLRMBS contingent liability | — | | | (41) | | | — | |
| Total adjustments | (293) | | | 1,613 | | | 754 | |
| Net cash provided by/(used in) operating activities | 246 | | | 1,936 | | | 1,041 | |
| Cash Flows from Investing Activities: | | | | | |
| Net change in: | | | | | |
| Interest-bearing deposits | 1,096 | | | (3,167) | | | (52) | |
| Securities purchased under agreements to resell | 3,350 | | | 8,500 | | | (8,250) | |
| Federal funds sold | 858 | | | 629 | | | (3,468) | |
| | | | | |
| Trading securities: | | | | | |
| Proceeds from maturities and paydowns | 1 | | | 251 | | | 3,951 | |
| | | | | |
| AFS securities: | | | | | |
| Proceeds from sales | — | | | 28 | | | — | |
| Proceeds from maturities and paydowns | 260 | | | 1,270 | | | 8,797 | |
| Purchases | (5,152) | | | (5,159) | | | (4,275) | |
| HTM securities: | | | | | |
| Proceeds from maturities and paydowns | 332 | | | 1,015 | | | 1,868 | |
| | | | | |
| Advances: | | | | | |
| Repaid | 1,368,658 | | | 1,704,744 | | | 257,403 | |
| Originated | (1,340,253) | | | (1,778,003) | | | (243,923) | |
| Mortgage loans held for portfolio: | | | | | |
| Principal collected | 59 | | | 179 | | | 958 | |
| Purchases | — | | | — | | | (7) | |
| Other investing activities, net | (2) | | | (2) | | | — | |
| Net cash provided by/(used in) investing activities | 29,207 | | | (69,715) | | | 13,002 | |
79
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (In millions) | 2017 |
| | 2016 |
| | 2015 |
|
| Cash Flows from Operating Activities: | | | | | |
| Net Income/(Loss) | $ | 376 |
| | $ | 712 |
| | $ | 638 |
|
| Adjustments to reconcile net income/(loss) to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | (62 | ) | | (82 | ) | | (80 | ) |
| Provision for/(reversal of) credit losses on mortgage loans | — |
| | — |
| | 1 |
|
| Change in net fair value of trading securities | — |
| | (4 | ) | | 2 |
|
| Change in net fair value adjustment on advances and consolidated obligation bonds held under the fair value option | 31 |
| | 40 |
| | 50 |
|
| Change in net derivatives and hedging activities | (8 | ) | | (24 | ) | | (33 | ) |
| Net OTTI loss, credit-related | 16 |
| | 16 |
| | 15 |
|
| Net change in: | | | | | |
| Accrued interest receivable | (45 | ) | | (22 | ) | | 16 |
|
| Other assets | 6 |
| | (21 | ) | | (9 | ) |
| Accrued interest payable | 50 |
| | (17 | ) | | (20 | ) |
| Other liabilities | (22 | ) | | (16 | ) | | 109 |
|
| Total adjustments | (34 | ) | | (130 | ) | | 51 |
|
| Net cash provided by/(used in) operating activities | 342 |
| | 582 |
| | 689 |
|
| Cash Flows from Investing Activities: | | | | | |
| Net change in: | | | | | |
| Interest-bearing deposits | (514 | ) | | 294 |
| | (404 | ) |
| Securities purchased under agreements to resell | 3,750 |
| | (5,500 | ) | | (9,000 | ) |
| Federal funds sold | (6,814 | ) | | 412 |
| | 2,877 |
|
| Premises, software, and equipment | (12 | ) | | (13 | ) | | (12 | ) |
| Trading securities: | | | | | |
| Proceeds from maturities of long-term | 902 |
| | 277 |
| | 2,339 |
|
| Purchases of long-term | — |
| | (1,155 | ) | | — |
|
| AFS securities: | | | | | |
| Proceeds from maturities of long-term | 933 |
| | 1,104 |
| | 996 |
|
| HTM securities: | | | | | |
| Net (increase)/decrease in short-term | 850 |
| | (1,350 | ) | | — |
|
| Proceeds from maturities of long-term | 3,240 |
| | 2,927 |
| | 2,746 |
|
| Purchases of long-term | (4,901 | ) | | (4,639 | ) | | — |
|
| Advances: | | | | | |
| Repaid | 1,575,597 |
| | 1,414,120 |
| | 1,057,469 |
|
| Originated | (1,603,226 | ) | | (1,413,136 | ) | | (1,069,480 | ) |
| Mortgage loans held for portfolio: | | | | | |
| Principal collected | 184 |
| | 175 |
| | 184 |
|
| Purchases | (1,413 | ) | | (343 | ) | | (131 | ) |
| Proceeds from sales of foreclosed assets | 3 |
| | 3 |
| | 4 |
|
| Net cash provided by/(used in) investing activities | (31,421 | ) | | (6,824 | ) | | (12,412 | ) |
Federal Home Loan Bank of San Francisco
Statements of Cash Flows (continued)
| | For the Years Ended December 31, | | | For the Years Ended December 31, |
| | | For the Years Ended December 31, |
| (In millions) | |
| (In millions) | |
| (In millions) | 2017 |
| | 2016 |
| | 2015 |
| 2023 | | 2022 | | 2021 |
| Cash Flows from Financing Activities: | | | | | |
| Net change in deposits and other financing activities | 114 |
| | (923 | ) | | 262 |
|
| Borrowings from other FHLBanks | (1,345 | ) | | 1,345 |
| | — |
|
| Net (payments)/proceeds on derivative contracts with financing elements | — |
| | 9 |
| | 17 |
|
| Net change in deposits and other financing activities | |
| Net change in deposits and other financing activities | |
| | Net proceeds/(payments) on derivative contracts with financing elements | |
| Net proceeds/(payments) on derivative contracts with financing elements | |
| Net proceeds/(payments) on derivative contracts with financing elements | |
| Net proceeds from issuance of consolidated obligations: | | | | | |
| Bonds | |
| Bonds | |
| Bonds | 80,506 |
| | 40,041 |
| | 38,935 |
|
| Discount notes | 165,408 |
| | 136,608 |
| | 106,536 |
|
| Payments for matured and retired consolidated obligations: | |
| | | |
| Bonds | |
| Bonds | |
| Bonds | (45,622 | ) |
| (41,514 | ) | | (33,968 | ) |
| Discount notes | (168,491 | ) |
| (130,761 | ) | | (100,717 | ) |
| Proceeds from issuance of capital stock | 1,214 |
|
| 926 |
| | 829 |
|
| Payments for repurchase/redemption of mandatorily redeemable capital stock | (150 | ) |
| (87 | ) | | (646 | ) |
| Payments for repurchase of capital stock | (339 | ) | | (753 | ) | | (1,439 | ) |
| Cash dividends paid | (187 | ) |
| (284 | ) | | (369 | ) |
| | Net cash provided by/(used in) financing activities | |
| Net cash provided by/(used in) financing activities | |
| Net cash provided by/(used in) financing activities | 31,108 |
|
| 4,607 |
| | 9,440 |
|
| Net increase/(decrease) in cash and due from banks | 29 |
|
| (1,635 | ) | | (2,283 | ) |
| Cash and due from banks at beginning of the period | 2 |
| | 1,637 |
| | 3,920 |
|
| Cash and due from banks at end of the period | $ | 31 |
|
| $ | 2 |
| | $ | 1,637 |
|
| Supplemental Disclosures: | | | | | |
| Interest paid | $ | 990 |
| | $ | 578 |
| | $ | 412 |
|
| AHP payments | 53 |
| | 53 |
| | 53 |
|
| Interest paid | |
| Interest paid | |
| AHP payments, net | |
| Supplemental Disclosures of Noncash Investing and Financing Activities: | | | | | |
| Transfers of mortgage loans to real estate owned | 1 |
| | 1 |
| | 2 |
|
| Transfers of other-than-temporarily impaired HTM securities to AFS securities | — |
| | — |
| | 15 |
|
| | Transfers of HTM securities to AFS securities | |
| | Transfers of HTM securities to AFS securities | |
| | Transfers of HTM securities to AFS securities | |
| Transfers of capital stock to mandatorily redeemable capital stock | 2 |
| | 56 |
| | 415 |
|
The accompanying notes are an integral part of these financial statements.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements
(Dollars in millions except per share amounts)
Background Information
The Federal Home Loan Bank of San Francisco (Bank), a federally chartered corporation exempt from ordinary federal, state, and local taxation except real property taxes, is one of 11 regional Federal Home Loan Banks (FHLBanks). The FHLBanks are government-sponsored enterprises (GSEs) that serve the public by enhancing the availability of credit for residential mortgages and targeted community development by providing a readily available, competitively priced source of funds to their member institutions. Each FHLBank is operated as a separate entity with its own management, employees, and board of directors. The Bank does not have any special purpose entities or any other type of off-balance sheet conduits. The Bank has a cooperative ownership structure. Regulated financial depositories and insurance companies engaged in residential housing finance, with principal places of business located in Arizona, California, and Nevada, are eligible to apply for membership. In addition, authorized community development financial institutions are eligible to be members of the Bank. All members and former members are required to purchasehold shares of capital stock in the Bank.Bank sufficient to meet their minimum stock requirement. State and local housing authorities that meet certain statutory criteria may also borrow from the Bank. While eligible to borrow, these housing authorities are not members of the Bank, and, as such, are not required to hold capital stock. To access the Bank'sBank’s products and services, a financial institution must be approved for membership and purchase capital stock in the Bank. The member'sminimum capital stock requirement is generally based on its use of Bank products, subject to a minimum asset-based membership requirement that is intended to reflect the value to the member of having ready access to the Bank as a reliable source of competitively priced funds. Bank capital stock is issued, transferred, redeemed, and repurchased at its par value of $100 per share, subject to certain regulatory and statutory limits. It is not publicly traded. All shareholders may receive dividends on their capital stock, to the extent declared by the Bank's BoardBank’s board of Directors.directors.
The Bank conducts business with its members and nonmembers in the ordinary course of business. See Note 2116 – Transactions with Certain Members, Certain Nonmembers, and Other FHLBanks for more information.
The Federal Housing Finance Agency (Finance Agency), an independent federal agency in the executive branch of the United States government, supervises and regulates the FHLBanks and the FHLBanks'FHLBanks’ Office of Finance.
The Office of Finance is a joint office of the FHLBanks that facilitates the issuance and servicing of the debt instruments (consolidated obligations) of the FHLBanks and prepares the combined quarterly and annual financial reports of the FHLBanks.
The primary source of funds for the FHLBanks is the proceeds from the sale to the public of the FHLBanks'FHLBanks’ consolidated obligations through the Office of Finance using authorized securities dealers. As provided by the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), or regulations governing the operations of the FHLBanks, all the FHLBanks have joint and several liability for all FHLBank consolidated obligations. Other funds are provided by deposits, other borrowings, and the issuance of capital stock to members.stock. The Bank primarily uses these funds to provide advancesadvances.
Federal Home Loan Bank of San Francisco
Notes to members.Financial Statements (continued)
Note 1 — Summary of Significant Accounting Policies
Use of Estimates. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make a number of judgments, estimates, and assumptions that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income, expenses, gains, and losses during the reporting period. The most significant of these estimates include estimating the allowance for credit losses on the advances and mortgage loan portfolios; include:
•accounting for derivatives; and
•estimating fair values of investments classified as trading and available-for-sale (AFS), derivatives and associated hedged items carried at fair value in accordance with the accounting for derivative instruments and associated hedging activities, and financial instruments carried at fair value under the fair value option, and accounting for other-than-temporary impairment (OTTI) for investmentoption.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
securities; and estimating the prepayment speeds on mortgage-backed securities (MBS) and mortgage loans for the accounting of amortization of premiums and accretion of discounts on MBS and mortgage loans. Actual results could differ significantly from these estimates.
Estimated Fair Values. ManyA portion of the Bank'sBank’s financial instruments lack an available liquid trading market as characterized by frequent exchange transactions between a willing buyer and willing seller. Therefore, the Bank uses financial models employing significant assumptions and present value calculations for the purpose of determining estimated fair values. Thus, the fair values may not represent the actual values of the financial instruments that could have been realized as of yearend or that will be realized in the future.
Fair values for certain financial instruments are based on quoted prices, market rates, or replacement rates for similar financial instruments as of the last business day of the year. The estimated fair values of the Bank'sBank’s financial instruments and related assumptions are detailed in Note 1914 – Fair Value.
Interest-bearing Deposits, Securities Purchased under Agreements to Resell. These investments provide short-term liquidityResell, and are carried at cost. Federal Funds Sold. The Bank treatsinvests in interest-bearing deposits, 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. If an agreement to resell is deemed to be impaired, the difference between the fair value of the collateral and the amortized cost of the agreement is charged to earnings.
Federal Funds Sold.funds sold. These investments provide short-term liquidity and are carried at cost. The Bank invests in Federal fundsFunds sold with counterparties that are considered by the Bank to be of investment quality.
Interest-bearing Deposits. This investment provides short-term liquidity and is carried at cost. Interest-bearing deposits includeinterest-bearing deposits in banks not meeting the definition of a security. Interest income on interest-bearing depositsthese investments is accrued as earned and recorded in interest income on the Statements of Income. Accrued interest receivable is recorded separately on the Statements of Condition.
These investments are evaluated quarterly for expected credit losses. If applicable, an allowance for credit loss is recorded with a corresponding adjustment to the provision for/(reversal of) credit losses. The Bank treats securities purchased under agreements to resell as collateralized financing arrangements. 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 amortized cost.
See Note 4 – Investments for details on the allowance methodologies relating to interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold.
Investment Securities. The Bank classifies investments as trading, available-for-sale (AFS),AFS, or held-to-maturity (HTM) at the date of acquisition. Purchases and sales of securities are recorded on a trade date basis.
The Bank classifies certain investments as trading. These securities are held for liquidity purposes and carried at fair value with changes in the fair value of these investments recorded in other income.income/(loss). The Bank does not participate in speculative trading practices and holds these investments indefinitely as the Bank periodically evaluates its liquidity needs.
The Bank classifies certain securities as AFS and carries these securities at their fair value. Unrealized gains and losses on these securities are recognized in accumulated other comprehensive income (AOCI).
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
HTM securities are carried at cost, adjusted for periodic principal repayments;repayments, amortization of premiums and accretion of discounts; and previous OTTI recognized in net income and AOCI.discounts. The Bank classifies these investments as HTM securities because the Bank has the positive intent and ability to hold these securities until maturity.
Certain changes in circumstances may cause the Bank to change its intent to hold a certain security to maturity without calling into question its intent to hold other debt securities to maturity in the future. Thus, the sale or transfer of an HTM security because of certain changes in circumstances, such as evidence of significant deterioration in the issuer's creditworthiness or changes in regulatory requirements, is not considered to be inconsistent with its original classification. Other events that are isolated, nonrecurring, and unusual for the Bank
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
that could not have been reasonably anticipated may cause the Bank to sell or transfer an HTM security without necessarily calling into question its intent to hold other debt securities to maturity. In addition, sales of debt securities that meet either of the following two conditions may be considered as maturities for purposes of the classification of securities: (i) the sale occurs near enough to its maturity date (or call date if exercise of the call is probable) that interest rate risk is substantially eliminated as a pricing factor and changes in market interest rates would not have a significant effect on the security's fair value, or (ii) the sale occurs after the Bank has already collected a substantial portion (at least 85%) of the principal outstanding at acquisition because of prepayments on the debt security or scheduled payments on a debt security payable in equal installments (both principal and interest) over its term.
The Bank calculates the amortization of purchase premiums and accretion of purchase discounts on investments using the level-yield method on a retrospective basis over the estimated life of the securities. This method requires a retrospective adjustment of the effective yield each time the Bank changes the estimated life as if the new estimate had been known since the original acquisition date of the securities. The Bank uses nationally recognized, market-based, third-party prepayment models to project estimated lives.
On a quarterly basis, the Bank evaluates its individual AFS and HTM investment securities in an unrealized loss position for OTTI.impairment. A security is considered impaired when its fair value is less than its amortized cost basis. For impaired debt securities, an entity is required to assess whether: (i) it has the intent to sell the debt security; (ii) it is more likely than not that it will be required to sell the debt security before its anticipated recovery of the remaining amortized cost basis of the security; or (iii) it does not expect to recover the entire amortized cost basis of the impaired debt security. If any of these conditions is met, an OTTI on the security must be recognized.
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 carrying valueprovision for/(reversal of) credit losses. The allowance is limited by the amount of the debtunrealized loss. Accrued interest receivable is recorded separately on the Statements of Condition.
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 adjusted to its fair value. However, instead of recognizing the entire difference betweenwritten off and the amortized cost basis andis written down to the security’s fair value at the reporting date with any incremental impairment reported in earnings onlyas 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 amountdebt security, then the credit portion of the impairment representing the credit lossdifference 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).
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. For improvements in earnings, whileimpaired HTM securities with an allowance for credit losses, the amount of non-credit-related impairmentallowance for credit losses associated with recoveries may be derecognized up to its full amount. Accrued interest receivable is recognized in AOCI. The total OTTI is presented inrecorded separately on the Statements of Income with an offsetCondition. The allowance for the amount of the total OTTI thatcredit losses excludes uncollectible accrued interest receivable, which is recognized in AOCI. This presentation provides additional information about the amounts that the entity does not expect to collect related to a debt security. The credit loss on a debt security is limited to the amount of that security's unrealized losses.
For subsequent accounting of other-than-temporarily impaired securities, if the present value of cash flows expected to be collected is less than the amortized cost basis, the Bank records an additional OTTI. The amount of total OTTI for a security that was previously impaired is calculated as the difference between its amortized cost less the amount of OTTI recognized in AOCI prior to the determination of OTTI and its fair value. For an other-than-temporarily impaired security that was previously impaired and has subsequently incurred an additional OTTI related to credit loss (limited to that security's unrealized losses), this additional credit-related OTTI, up to the amount in AOCI, would be reclassified out of non-credit-related OTTI in AOCI and charged to earnings. Any credit loss in excess of the related AOCI is charged to earnings.
Subsequent related increases and decreases (if not an OTTI) in the fair value of AFS securities will be netted against the non-credit component of OTTI previously recognized in AOCI.
For securities classified as HTM, the OTTI recognized in AOCI is accreted to the carrying value of each security on a prospective basis, based on the amount and timing of future estimated cash flows (with no effect on earnings unless the security is subsequently sold or there are additional decreases in cash flows expected to be collected). For securities classified as AFS, the Bank does not accrete the OTTI recognized in AOCI to the carrying value because the subsequent measurement basis for these securities is fair value.
measured separately.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
For securities previously identified as other-than-temporarily impaired, the Bank updates its estimate of future estimated cash flows on a regular basis. If there is no additional impairmentSee Note 4 – Investments for details on the security, any improvement in expected cash flows is accreted into interest income in the Statements of Income.allowance methodologies relating to AFS and HTM securities.
Financial Instruments Meeting Netting Requirements. The Bank presents certain financial instruments, including derivative instruments and securities purchased under agreements to resell, on a net basis when they have a legal right of offset and all other requirements for netting are met (collectively referred to as the netting requirements). The Bank has elected to offset its derivative asset and liability positions, as well as cash collateral received or pledged, when the netting requirements are met. The Bank did not have any offsetting liabilities related to its securities purchased under agreements to resell for the periods presented.
The net exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. For derivative instruments that meet the netting requirements, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset. Additional information regarding these agreements is provided in Note 1813 – Derivatives and Hedging Activities. Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented.
Variable Interest Entities. The Bank’s investments in variable interest entities (VIEs) are limitedrelate to private-label residential mortgage-backed securities (PLRMBS). On an ongoing basis, the Bank performs a quarterly evaluation
to determine whether it is the primary beneficiary in any VIE. The Bank evaluated its investments in VIEs as of December 31, 2017, to determine whether it is a primary beneficiary of any of these investments. The primary beneficiary is required to consolidate a VIE. The Bank determined that consolidation accounting is not required becauseAs the Bank is not the primary beneficiary of these VIEs for the periods presented. The Bank does not have the power to significantly affect the economic performance of these investments, the Bank determined that it is not a primary beneficiary of any of these investments because it doesVIEs and concluded that consolidation accounting is not actrequired as a key decision maker nor does it have the unilateral ability to replace a key decision maker.of December 31, 2023. In addition, the Bank does not design, sponsor, transfer, service, or provide credit or liquidity support in any of its investments in VIEs. The Bank’s maximum loss exposure for these investments is limited to the carrying value.
Advances. The Bank reports advances (loans to members, former members or their successors or housing associates) either at amortized cost or at fair value when the fair value option is elected. Advances carried at amortized cost are evaluated quarterly for expected credit losses and reported net of premiums, discounts (including discounts related to the Affordable Housing Program), and hedging adjustments. The Bank amortizes premiums and accretes discounts and recognizes hedging adjustments resulting from the discontinuation of a hedging relationship to interest income using a level-yield methodology. Interest on advances is credited to income as earned. For advances carried at fair value, the Bank recognizes contractual interest in interest income. Accrued interest receivable is recorded separately on the Statements of Condition. The advances carried at amortized cost are evaluated quarterly for expected credit losses. If deemed necessary, an allowance for credit losses is recorded with a corresponding adjustment to the provision for/(reversal of) credit losses.
See Note 5 – Advances for details on the allowance methodologies relating to advances.
Advance Modifications. In cases in which the Bank funds an advance concurrent with or within a short period of time before or after the prepayment of a previous advance to the same member, the Bank evaluates whetherat market rates, the subsequent advance meets the accounting criteria to qualifyis accounted for as a new advance. The Bank does not issue advances at non-market rates. If a member makes a request for a modification ofto an existing advance, or whether it constitutes a new advance. Thethe Bank compares the present value of the cash flows on the subsequentmodified advance to the present value of the cash flows remaining on the previousoriginal advance. If there is at least a 10% difference in the present value of the cash flows or if the Bank concludes that the difference between the advances is more than minor based on a qualitative assessment of the modifications made to the previous advance'soriginal contractual terms, then the subsequent advance is accounted for as a new advance. In all other instances, the subsequentnew advance is accounted for as a modification. Modification requests with a difference in cash flows that is more than minor are not accepted by the Bank.
Prepayment Fees. When a borrower prepays certain advances prior to the original maturity, the Bank may charge the borrower a prepayment fee. For certain advances with full or partial prepayment symmetry, the Bank may charge the
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
borrower a prepayment fee or pay the borrower a prepayment credit, depending on certain circumstances, such as movements in interest rates, when the advance is prepaid. In November 2018, the Bank discontinued offering advances with partial prepayment symmetry.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
For prepaid advances that are hedged and meet the hedge accounting requirements, the Bank terminates the hedging relationship upon prepayment and records the associated fair value gains and losses, adjusted for the prepayment fees, in interest income. If a new advance represents a modification of an original hedged advance, the fair value gains or losses on the advance and the prepayment fees are included in the carrying amount of the modified advance, and gains or losses and prepayment fees are amortized in interest income over the life of the modified advance using the level-yield method. If the modified advance is also hedged and the hedge meets the hedge accounting requirements, the modified advance is marked to fair value after the modification, and subsequent fair value changes are recorded in other income.interest income on advances. If the prepayment represents an extinguishment of the original hedged advance, the prepayment fee and any fair value gain or loss are immediately recognized in interest income.
For prepaid advances that are not hedged or that are hedged but do not meet the hedge accounting requirements, the Bank records prepayment fees in interest income unless the Bank determines that the new advance represents a modification of the original advance. If the new advance represents a modification of the original advance, the prepayment fee on the original advance is deferred, recorded in the basis of the modified advance, and amortized over the life of the modified advance using the level-yield method. This amortization is recorded in interest income.
Mortgage Loans Held infor Portfolio. Under the Mortgage Partnership Finance® (MPF®) Program, the Bank may purchasepurchased 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 (FHA)product. After June 30, 2021, we no longer directly purchase, or guaranteed by the Department of Veterans Affairs (VA) from its participating members under the MPF Government product. (“Mortgage Partnership Finance” and “MPF” are registered trademarks of the FHLBank of Chicago.) Participating members originate or purchase the mortgage loans, credit-enhance them and sell them to the Bank, and generally retain the servicing of the loans. The Bank manages the interest rate risk, prepayment risk, and liquidity risk of each loan in its portfolio. The Bank and the participating financial institution (either the original participating member that sold the loans to the Bank or a successor to that member) share in the credit risk of the loans, with the Bank assuming the first loss obligation limited by the first loss account, and the participating financial institution assuming credit losses in excess of the first loss account, up to the amount of the credit enhancement obligation specified in the master agreement. The amount of the credit enhancement is calculated so that any Bank credit losses (excluding special hazard losses) in excess of the first loss account are limited to those that would be expected from an equivalent investment with a long-term credit rating of AA for loans purchased prior to April 2017 and BBB for loans purchased thereafter, as determined by the MPF Program methodology.
In addition, the Bank may facilitate the purchase of, conforming fixed rate mortgage loans from members for concurrent sale to Fannie Mae under the MPF Xtra® product; of jumbo fixed rate mortgage loans for concurrent sale to Redwood Residential Acquisition Corporation, a subsidiary of Redwood Trust, Inc., a real estate investment trust, under the MPF Direct product; and of government-insured or government-guaranteed mortgage loans that will be packaged into securities backed by the mortgage loans and guaranteed by Ginnie Mae under the MPF Government MBS product. When members sell mortgage loans under the MPF Xtra, MPF Direct, and MPF Government MBS products, the loans are sold to a third-party investor and are not recorded on the Bank’s Statements of Condition. (“MPF Xtra” is a registered trademark of the FHLBank of Chicago.)
For taking on the credit enhancement obligation, the Bank pays the participating financial institution a credit enhancement fee, which is calculated on the remaining unpaid principal balance of the mortgage loans. Depending on the specific MPF product, all or a portion of the credit enhancement fee is typically paid monthly beginning with the month after each delivery of loans. The MPF Original product provides participating financial institutions the option to receive credit enhancement fees on a monthly basis or in an upfront lump sum amount that is included in the purchase price at the time loans are sold to the Bank. The lump sum amount is approximately equivalent to the present value of the monthly credit enhancement fees that the Bank would otherwise be expected to pay over the life of the loans. The MPF Plus product provides for a performance-based credit enhancement fee, which accrues
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
monthly, beginning with the month after each delivery of loans, and is paid to the participating financial institution beginning 12 months later. The performance-based credit enhancement fee will be reduced by an amount equivalent to loan losses up to the amount of the first loss account established for each master commitment. The participating financial institutions obtain supplemental mortgage insurance (SMI) to cover their credit enhancement obligations under this product. If the SMI provider's claims-paying ability rating falls below a specified level, the participating financial institution has six months to either replace the SMI policy or assume the credit enhancement obligation and fully collateralize the obligation; otherwise the Bank may choose not to pay the participating financial institution its performance-based credit enhancement fee.
our members.
The Bank classifies mortgage loans as held for investmentportfolio and, accordingly, reports them at their principal amount outstanding net of unamortized premiums, unamortized credit enhancement fees paid as a lump sum at the time loans are purchased, discounts, and unrealized gains and losses from loans initially classified as mortgage loan commitments. The Bank defers and amortizes these amounts as interest income using the level-yield method on a retrospective basis over the estimated life of the related mortgage loan. Actual prepayment experience and estimates of future principal prepayments are used in calculating the estimated life of the mortgage loans. The Bank aggregates the mortgage loans by similar characteristics (type, maturity, noteinterest rate, and acquisition date) in determining prepayment estimates. A retrospective adjustment is required each time the Bank changes the estimated amounts as if the new estimate had been known since the original acquisition date of the assets. The Bank uses nationally recognized, market-based, third-party prepayment models to project estimated lives.
The Bank recordsperforms a quarterly assessment of its mortgage loans held for portfolio to estimate expected credit enhancement fees as a reduction to interest income.
Allowance for Credit Losses. losses. An allowance for credit losses is recorded with a valuation allowance separately established for each identified portfolio segment, if it is probable that impairment has occurredcorresponding adjustment to the provision for/(reversal of) credit losses. The Bank measures expected credit losses on mortgage loans on a loan-level basis, factoring in the Bank's portfolio as ofcredit enhancement structure at the Statements of Condition date andmaster commitment level.
When developing the amount of loss can be reasonably estimated. To the extent necessary, an allowance for credit losses, for off-balance sheetthe Bank measures the estimated loss over the remaining life of a mortgage loan, which also considers how the Bank’s credit exposures is recorded as a liability.
Portfolio Segments.A portfolio segment is defined asenhancements mitigate credit losses. The Bank includes estimates of expected recoveries within the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. The Bank has developed and documentedIf a systematic methodology for determining anloan is purchased at a discount, the discount does not offset the allowance for credit losses for each applicable portfolio segment.
See Note 10 – Allowance for Credit Losses for more information.
Impairment Methodologylosses. Accrued interest receivable is recorded separately on Mortgage Loans. Athe 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 considered impaired when, basedplaced on current informationnonaccrual status.
A past due loan is one where the borrower has failed to make a scheduled full payment of principal and events, it is probable that the Bank will be unable to collect all amountsinterest within 30 days of its due according to the contractual terms of the mortgage loan agreement.
Loans that are on non-accrual status and that are considered collateral-dependent are measured for impairment based on the fair value of the underlying property less estimated selling costs. Loans are considered collateral-dependent if repayment is expected to be provided solely by the sale of the underlying property, that is, there is no other available and reliable source of repayment. Collateral-dependent loans are impaired if the fair value of the underlying collateral less estimated selling costs is insufficient to recover the unpaid principal balance on the loan. Interest income on impaired loans is recognized in the same manner as interest income on non-accrual loans noted below.
date. The Bank places a mortgage loan on nonaccrual status when the collection of the contractual principal or interest from the participating financial institution is doubtful, when the collection of the contractual principal or interest from the participating financial institution is reported 90 days or more past due, or when the loan is in foreclosure. foreclosure, except when the loan is well-secured (e.g., through credit enhancements) and in the process of collection. Loans that are on nonaccrual status and that are considered collateral-dependent are measured for credit losses based on the fair value of the underlying property less estimated selling costs. Loans are considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
substantially through the sale of the underlying collateral; that is, if it is considered likely that the borrower will default and there is no credit enhancement to offset losses under the master commitment, or the collectability or availability of credit enhancement is deemed to be uncertain. Collateral-dependent loans are credit deteriorated if the fair value of the underlying collateral less estimated selling costs is insufficient to recover the unpaid principal balance on the loan.
When a mortgage loan is placed on nonaccrual status, accrued but uncollected interest is reversed against interest income. The Bank records cash payments received on nonaccrual loans first as interest income and then as a reduction of principal as specified in the contractual agreement, unless the collection of the remaining principal amount due is considered doubtful. If the collection of the remaining principal amount due is considered doubtful, then cash payments received would be applied first solely to principal until the remaining principal amount due is
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
expected to be collected and then as a recovery of any charge-off, if applicable, followed by recording interest income. A loan on non-accrualnonaccrual status may be restored to accrual when (1) none of its contractual principal and interest is due and unpaid, and the Bank expects repayment of the remaining contractual interest and principal, or (2) it otherwise becomes well secured and in the process of collection.
Effective January 1, 2023, the Bank adopted ASU 2022-02, which eliminated TDR accounting prospectively for all restructurings occurring on or after January 1, 2023. Subsequent to adoption, all loan modifications are evaluated under ASC 310-20 to determine whether a modification made to a borrower results in a new loan or is a continuation of the existing loan.
An MPF loan that shares similar risk characteristics with other loans is evaluated for credit losses on a collective basis. MPF loans that do not share risk characteristics with other loans are individually evaluated for credit losses. MPF loans that are identified for individual evaluation are either delinquent or classified as nonaccrual, in process of foreclosing on the collateral, or have been modified in response to a borrower’s financial difficulty. Credit loss is measured by factoring in expected cash flow shortfalls incurred as of the reporting date, as well as the economic loss attributable to delaying the original contractual principal and interest due dates, if applicable.
For anyall mortgage loans that are more than 180 days past due and that have any outstanding balance in excess of the fair value of the property, less costcosts to sell, thisthe excess is charged off as a loss byat the end of the month in which the applicable time period elapses. Likewise, when a borrower is in bankruptcy,month.
The Bank did not purchase mortgage loans are written down to the fair value of the collateral, less cost to sell, in general within 60 days of receipt of the notification of filing from the bankruptcy court, unless it can be clearly demonstrated and documented that repayment is likely to occur.
Real Estate Owned. Real estate owned (REO) includes assets that have been received in satisfaction of debt through foreclosures. REO is initially recorded at fair value less estimated selling costs and is subsequently carriedwith credit deterioration present at the lowertime of that amount or current fair value less estimated selling costs. The Bank recognizes a charge-off topurchase. See Note 6 – Mortgage Loans Held for Portfolio for details on the allowance for credit losses if the fair value of the REO less estimated selling costs is less than the recorded investment in the loan at the date of transfer from loansmethodologies relating to REO. Any subsequent realized gains, realized or unrealized losses, and carrying costs are included in other non-interest expense in the Statements of Income. REO is recorded in “Other assets” in the Statements of Condition. At December 31, 2017, the Bank’s other assets included $1 of REO resulting from foreclosure of 11 mortgage loans held by the Bank. At December 31, 2016, the Bank’s other assets included $1 of REO resulting from foreclosure of 12 mortgage loans held by the Bank.loans.
Other Fees. Letter of credit fees are recorded as other incomeincome/(loss) over the term of the letter of credit.
Derivatives.Derivatives and Hedging Activities. All derivatives are recognized on the Statements of Condition at their fair value. The Bank has elected to report derivative assets and derivative liabilitiesvalues, including accrued interest, net of cash collateral including initial and variation margin, and accrued interest received from or pledged to futures commission merchants (clearing agents)clearing agents or counterparties.counterparties, including accrued interest, and are reported as either derivative assets or derivative liabilities. The fair values of derivatives are netted by clearing agent or counterparty when the netting requirements have been met. If these netted amounts are positive, they are classified as an asset, and if negative, they are classified as a liability. Cash flows associated with derivatives are reflected as cash flows from operating activities in the Statements of Cash Flows unless the derivative meets the criteria to be a financing derivative.
The Bank uses London Clearing House (LCH) Ltd for all cleared derivative transactions. The rulebook of LCH Ltd characterizes variation margin as daily settlement payments, and initial margin is considered cash collateral.
Each derivative is designated as one of the following:
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(1) | a qualifying hedge of the change in fair value of (i) a recognized asset or liability or (ii) an unrecognized firm commitment (a fair value hedge); |
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(2) | a qualifying hedge of (i) a forecasted transaction or (ii) the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a cash flow hedge); |
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(3) | a non-qualifying hedge of an asset or liability for asset-liability management purposes or of certain advances and consolidated obligation bonds for which the Bank elected the fair value option (an economic hedge); or |
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(4) | a non-qualifying hedge of another derivative (an intermediation hedge) that is offered as a product to members or used to offset other derivatives with nonmember counterparties. |
(1)a qualifying hedge of the change in fair value of (i) a recognized asset or liability or (ii) an unrecognized firm commitment (a fair value hedge); or
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
(2)a non-qualifying hedge of an asset or liability for asset-liability management purposes or of certain advances and consolidated obligation bonds for which the Bank elected the fair value option (an economic hedge).
If hedging relationships meet certain criteria, including but not limited to formal documentation of the hedging relationship and an expectation to be hedge effective, they are eligible for hedge accounting, and the offsetting changes in fair value of the hedged items attributable to the hedged risk may be recorded in earnings. The application of hedge accounting generally requires the Bank to evaluate the effectiveness of the hedging relationships at inception and on an ongoing basis and to calculate the changes in fair value of the derivatives and the related hedged items independently. This is known as the “long-haul”long-haul method of hedge accounting. Transactions that meet certain criteria qualify for the “short-cut” method of hedge accounting, in which an assumption can be made that the change in the fair value of a hedged item, because of changes in the benchmark rate, exactly offsets the change in the value of the related derivative. Under the shortcut method, the entire change in fair value of the interest rate swap is considered to be effective at achieving offsetting changes in fair values or cash flows of the hedged asset or liability.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Derivatives are typically executed at the same time as the hedged item, and the Bank designates the hedged item in a qualifying hedge relationship as of the trade date. In many hedging relationships, the Bank may designate the hedging relationship upon its commitment to disburse an advance or trade a consolidated obligation in which settlement occurs within the shortest period of time possible for the type of instrument based on market settlement conventions. The Bank records the changes in the fair value of the derivatives and the hedged item beginning on the trade date.
Changes in the fair value of a derivative that qualifies as a fair value hedge and is designated as a fair value hedge, along with changes in the fair value of the hedged asset or liability (hedged item) that are attributable to the hedged risk (including changes that reflect lossesgains or gainslosses on firm commitments), are recorded in othernet interest income in the same line as “Net gain/(loss)the earnings effect of the hedged item. Net gains and losses on derivatives and hedging activities.”
Changesactivities for qualifying hedges recorded in thenet interest income include unrealized and realized gains and losses, which include net interest settlements. For AFS securities that have been hedged and qualify as a fair value of a derivative that qualifies as a cash flow hedge, and is designated as a cash flow hedge, to the extent thatBank records the hedge is effective, are recorded in AOCI, a componentportion of capital, until earnings are affected by the variability of the cash flows of the hedged transaction (until the periodic recognition of interest on a variable rate asset or liability is recorded in earnings).
For both fair value and cash flow hedges, any hedge ineffectiveness (which represents the amount by which the change in the fair value of the investment related to the risk being hedged in interest income together with the related change in the fair value of the derivative, differs fromand records the remainder of the change in the fair value of the hedged item orinvestment in Accumulated Other Comprehensive Income (AOCI) as “Net unrealized gain/(loss) on AFS securities.” The Bank hedges the variability in thebenchmark risk component of cash flows of the forecasted transaction) is recorded in other income as “Net gain/(loss) on derivatives and hedging activities.”
a fair value hedge.
Changes in the fair value of a derivative designated as an economic hedge or an intermediation hedge are recorded in current period earnings with no fair value adjustment to an asset or liability. An economic hedge is defined as a derivative hedging certain advances and consolidated obligation bonds for which the Bank elected the fair value option, or hedging specific or non-specific underlying assets, liabilities, or firm commitments, that does not qualify or was not designated for fair value or cash flow hedge accounting, but is an acceptable hedging strategy under the Bank's risk management program. These economic hedging strategies also comply with Finance Agency regulatory requirements prohibiting speculative hedge transactions. An economic hedge introduces the potential for earnings variability caused by the changes in fair value of the derivatives that are recorded in the Bank's income but are not offset by corresponding changes in the value of the economically hedged assets, liabilities, or firm commitments. The derivatives used in intermediary activities do not qualify for hedge accounting treatment and are separately marked to market through earnings. The net result of the accounting for these derivatives does not significantly affect the operating results of the Bank. Changes in the fair value of these non-qualifying hedges are recorded in other incomeincome/(loss) as “Net gain/(loss) on derivatives and hedging activities.derivatives.” In addition, the net settlements associated with these non-qualifying hedges are recorded in other incomeincome/(loss) as “Net gain/(loss) on derivatives and hedging activities.derivatives.” Cash flows associated with these stand-alone derivatives are reflected as cash flows from operating activities in the Statements of Cash Flows unless the derivative meets the criteria to be designated as a financing derivative.
The net settlements of interest receivables and payables on derivatives designated as fair value or cash flow hedges are recognized as adjustments to the interest income or interest expense of the designated underlying hedged item. The net settlements of interest receivables and payables on intermediated derivatives for members and other economic hedges are recognized in other incomeincome/(loss) as “Net gain/(loss) on derivatives and hedging activities.derivatives.”
The Bank discontinues hedge accounting prospectively when: (i) it determines that the derivative is no longer highly effective in offsetting changes in the fair value or cash flows of a hedged item (including hedged items such as firm commitments
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
or forecasted transactions); (ii) the derivative and/or the hedged item expires or is sold, terminated, or exercised; (iii) it is no longer probable that the forecasted transaction will occur in the originally expected period; (iv) a hedged firm commitment no longer meets the definition of a firm commitment; (v) it determines that
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
designating the derivative as a hedging instrument is no longer appropriate; (vi) a critical term on the hedged item changes; or (vi)(vii) it decides to use the derivative to offset changes in the fair value of other derivatives or instruments carried at fair value.
When hedge accounting is discontinued, the Bank either terminates the derivative or continues to carry the derivative on the Statements of Condition at its fair value, ceases to adjust the hedged asset or liability for changes in fair value, and amortizes the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using a level-yield methodology.
When hedge accounting is discontinued because the Bank determines that the derivative no longer qualifies as an effective cash flow hedge of an existing hedged item, the Bank continues to carry the derivative on the Statements of Condition at its fair value and reclassifies the AOCI adjustment into earnings when earnings are affected by the existing hedged item (the original forecasted transaction).
Under limited circumstances, when the Bank discontinues cash flow hedge accounting because it is no longer probable that the forecasted transaction will occur by the end of the originally specified time period, or within the following two months, but it is probable the transaction will still occur in the future, the gain or loss on the derivative remains in AOCI and is recognized in earnings when the forecasted transaction affects earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within the following two months, the gains and losses that were recorded in AOCI are recognized immediately in earnings.
When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Bank continues to carry the derivative on the Statements of Condition at its fair value, removing from the Statements of Condition any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.
The Bank may be the primary obligor on consolidated obligations and may make advances in which derivative instruments are embedded. Upon execution of these transactions, the Bank assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the advance or debt (the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that: (i) the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (ii) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as a stand-alone derivative instrument equivalent to an economic hedge. However, the entire contract is carried on the Statements of Condition at fair value and no portion of the contract is designated as a hedging instrument if the entire contract (the host contract and the embedded derivative) is to be measured at fair value, with changes in fair value reported in current period earnings (such as an investment security classified as trading, as well as hybrid financial instruments that are eligible for the fair value option), or if the Bank cannot reliably identify and measure the embedded derivative for purposes of separating the derivative from its host contract.
Premises, Software, and Equipment. Premises, software, and equipment are included in other assets on the Statements of Condition. The Bank records premises, software, and equipment at cost less accumulated depreciation and amortization.The Bank'sAt December 31, 2023 and 2022, premises, software, and equipment were $26 million and $29 million, respectively, which was net of accumulated depreciation and amortization related to premises, software,of $76 million and equipment totaled $74 and $61 at December 31, 2017 and 2016,$75 million, respectively. Improvements and major renewals are capitalized; ordinary maintenance and repairs are expensed as incurred. Depreciation is computed on the straight-line method over the estimated useful lives of assets ranging from 3 to 10 years, and leasehold improvements are amortized on the straight-line method over the estimated useful life of the improvement or the remaining term of the lease, whichever is shorter. Depreciation and amortization expense was $16$5 million for 2017, $122023, $6 million for 2016,2022, and $8$7 million for 2015.2021.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The cost of computer software developed or obtained for internal use is capitalized and depreciated over future periods. At December 31, 2017 and 2016, the Bank had $10 and $17 in unamortized computer software costs respectively. Depreciation of computer software costs charged to expense was $9, $8, and $6 in 2017, 2016, and 2015, respectively.
Consolidated Obligations. Consolidated obligations are recorded at amortized cost unless the Bank has elected the fair value option, in which case the consolidated obligations are carried at fair value.
Concessions on Consolidated Obligations. Concessions are paid to dealers in connection with the issuance of consolidated obligations for which the Bank is the primary obligor. The amount of the concession is allocated to the Bank by the Office of Finance based on the percentage of the debt issued for which the Bank is the primary obligor. Concessions paid on consolidated obligations designated under the fair value option are expensed as incurred in non-interest expense. Concessions paid on consolidated obligations not designated under the fair value option are deferred and amortized to expense using the level-yield method over the remaining contractual life or on a retrospective basis over the estimated life of the consolidated obligations. Amortization of concessions is included in consolidated obligation interest expense and totaled $6, $13, and $7, in 2017, 2016, and 2015, respectively.
Discounts and Premiums on Consolidated Obligations. The discounts on consolidated obligation discount notes for which the Bank is the primary obligor are amortized to expense using the level-yield method over the term to maturity. The discounts and premiums on consolidated obligation bonds for which the Bank is the primary obligor are amortized to expense using the level-yield method over the remaining contractual life or on a retrospective basis over the estimated life of the consolidated obligation bonds.
Mandatorily Redeemable Capital Stock. The Bank reclassifies the capital stock subject to redemption from capital to a liability after a member provides the Bank with a written notice of redemption; gives notice of intention to withdraw from membership; or attains nonmember status by merger or acquisition, charter termination, or other involuntary membership termination; or after a receiver or other liquidating agent for a member transfers the member's Bank capital stock to a nonmember entity, resulting in the member's shares then meeting the definition of a mandatorily redeemable financial instrument. Shares meeting this definition are reclassified to a liability at fair
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
value. Dividends declared on shares classified as a liability are accrued at the expected dividend rate and reflected as interest expense in the Statements of Income. The repayment of these mandatorily redeemable financial instruments (by repurchase or redemption of the shares) is reflected as a financing cash outflow in the Statements of Cash Flows once settled. See Note 1511 – Capital for more information.
If a member cancels its written notice of redemption or notice of withdrawal or if the Bank allows the transfer of mandatorily redeemable capital stock to a member, the Bank reclassifies mandatorily redeemable capital stock from a liability to capital. After the reclassification, dividends on the capital stock are no longer classified as interest expense.
Off-Balance Sheet Credit Exposures. The Bank evaluates its off-balance sheet credit exposures on a quarterly basis for expected credit losses. If deemed necessary, an allowance for expected credit losses on these off-balance sheet exposures is recorded in other liabilities with a corresponding adjustment to the provision for/(reversal of) credit losses. See Note 15 – Commitments and Contingencies for details on the allowance methodologies relating to off-balance sheet credit exposure.
Finance Agency Expenses. The FHLBanks fund a portion of the costs of operating the Finance Agency, and each FHLBank is assessed a proportionate share of those costs. The Finance Agency allocates its expenses and working capital fund among the FHLBanks based on the ratio between each FHLBank's minimum required regulatory capital and the aggregate minimum required regulatory capital of all the FHLBanks.
Office of Finance Expenses. Each FHLBank is assessed a proportionate share of the cost of operating the Office of Finance, which facilitates the issuance and servicing of consolidated obligations. The Office of Finance allocates its operating and capital expenditures among the FHLBanks as follows: (1) two-thirds of the assessment is based on each FHLBank'sFHLBank’s share of total consolidated obligations outstanding, and (2) one-third of the assessment is based on an equal pro rata allocation.
Affordable Housing Program. As more fully discussed in Note 139 – Affordable Housing Program, the FHLBank Act requires each FHLBank to establish and fund an Affordable Housing Program (AHP). The Bank charges the
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
required funding for the AHP to earnings and establishes a liability. The AHP funds provide subsidies to members to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households.households earning up to 80% of the median income for the area in which they live. Subsidies may be in the form of direct grants or below-market interest rate advances.
Gains on Litigation Settlements, Net. Litigation settlement gains, netSegment Reporting. In the fourth quarter of related legal expenses, are recorded in Other Income/(Loss) in “Gains on litigation settlements, net” in the Statements of Income. A litigation settlement gain is considered realized and recorded when2023, the Bank receives cash or assets that are readily convertibleupdated its internal reporting to known amounts of cash or claims to cash. In addition,reflect how the chief operating decision makers manage the business on a litigation settlement gain is considered realizable and recorded whenBank-wide basis. As such, the Bank enters intobegan disclosing its operating results on a signed agreement that isBank-wide basis rather than providing separate segment information for the mortgage-related business and advances-related business. Specifically, the Bank manages its business on a Bank-wide basis and not subjectthrough multiple segments as its portfolio of amortizing mortgage loans has decreased in size following its decision in 2020 to appeal, whereno longer directly purchase, or facilitate the counterparty haspurchase of, mortgage loans from its members. Therefore, the ability to pay,Bank will no longer present separate segment information for the mortgage-related business and the amount to be received can be reasonably estimated. Prior to being realized or realizable,advances-related business. This change has been reflected retrospectively within the Bank considers potential litigation settlement gains to be gain contingencies, and therefore they are not recorded in the Statements of Income. The related legal expenses are contingent-based fees and are only incurred and recorded upon a litigation settlement gain.Bank’s financial statements.
Note 2 — Recently Issued and Adopted Accounting Guidance
Targeted Improvements to Accounting for Hedging Activities. On August 28, 2017, the Financial Accounting Standards Board (FASB)The following table provides a summary of recently issued amended guidance to improve the financial reporting of hedging relationships to better portray the economic results ofand adopted accounting standards that may have an entity’s risk management activities in its financial statements. This guidance requires that, for fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness be presented in the same income statement line that is used to present the earnings effect of the hedged item. For cash flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness must be recorded in other comprehensive income. In addition, the amendments include certain targeted improvements to the assessment of hedge effectiveness and permit, among other things, the following:
Measurement of the change in fair value of the hedged item on the basis of the benchmark rate component of the contractual coupon cash flows determined at hedge inception.
Measurement of the hedged item in a partial-term fair value hedge of interest rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged.
Consideration only of how changes in the benchmark interest rate affect a decision to settle a prepayable instrument before its scheduled maturity in calculating the change in the fair value of the hedged item attributable to interest rate risk.
For a cash flow hedge of interest rate risk of a variable-rate financial instrument, an entity could designate as the hedged risk the variability in cash flows attributable to the contractually specified interest rate.
This guidance becomes effective for the Bank for interim and annual periods beginning on January 1, 2019, and early adoption is permitted. The amended presentation and disclosure guidance is required only prospectively. The Bank does not intend to adopt this guidance early. The Bank is in the process of evaluating this guidance, and its effect on the Bank’s financial condition, results of operations, cash flows, and financial statement disclosures has not yet been determined.
Premium Amortization on Purchased Callable Debt Securities. On March 30, 2017, the FASB issued amended guidance to shorten the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This guidance affects all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). This guidance is effective for the Bank for interim and annual periods beginning on January 1, 2019, and early adoption is permitted. This guidance should be applied using a modified retrospective method through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of this guidance is not expected to have any effect on the Bank’s financial condition, results of operations, or cash flows.
statements.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | |
| Accounting Standards Update (ASU) | | Description | | Effective Date | | Effect on the Financial Statements or Other Significant Matters |
| Facilitation of the Effects of Reference Rate Reform on Financial Reporting, as amended (ASU 2020-04) | | This update 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 became effective beginning March 2020 through December 31, 2024. | | The Bank has assessed the guidance and has elected some of the optional expedients and exceptions provided related to the discounting transition for uncleared derivative transactions on a prospective basis since 2021, which did not have a material effect on the Bank’s financial condition, results of operations, cash flows, and financial statement disclosures. |
Troubled Debt Restructurings and Vintage Disclosures (ASU 2022-02) | | This guidance eliminates the accounting guidance for troubled debt restructurings by creditors that have adopted the current expected credit losses methodology while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors made to borrowers experiencing financial difficulty. Additionally, this guidance requires disclosure of current-period gross write-offs by year of origination for financing receivables and net investment in leases. | | The guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2023. | | The Bank adopted all elements of this guidance prospectively as of January 1, 2023. The adoption of this guidance did not have a material effect on the Bank’s financial condition, results of operations, cash flows, and financial statement disclosures. |
Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07)
| | This guidance improves reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses, including if an entity only has a single reportable segment. | | This guidance becomes effective for the Bank for the annual period ending December 31, 2024, and for interim and annual periods thereafter. | | While the adoption of this guidance will not have any effect on the Bank’s financial condition, results of operations, or cash flows, the Bank is in the process of evaluating the impact of this guidance and its effect on the Bank’s disclosures. |
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. On March 10, 2017, the FASB issued amended guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments require that employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the Statements of Income. This guidance became effective for the Bank for interim and annual periods beginning on January 1, 2018, and was adopted retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the Statements of Income. The adoption of this guidance did not have a material effect on the Bank’s financial condition, results of operations, cash flows, and financial statement disclosures.
Classification of Certain Cash Receipts and Cash Payments. On August 26, 2016, the FASB issued amendments to clarify guidance on the classification of certain cash receipts and payments in the Statements of Cash Flows. This guidance is intended to reduce existing diversity in practice in how certain cash receipts and cash payments are presented and classified on the Statements of Cash Flows. This guidance became effective for the Bank for interim and annual periods beginning on January 1, 2018. The adoption of this guidance did not have any effect on the Bank’s financial condition, results of operations, or cash flows.
Measurement of Credit Losses on Financial Instruments. On June 16, 2016, the FASB issued amended guidance for the accounting for credit losses on financial instruments. The amendments require entities to measure expected credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate under the circumstances. In addition, under the new guidance, a financial asset, or a group of financial assets, is required to be measured at its amortized cost to be presented at the net amount expected to be collected over the contractual term of the financial assets. Among other things, the guidance also requires:
The Statement of Income to reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.
The entities to determine the allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost basis in a similar manner to other financial assets measured at amortized cost basis. The initial allowance for credit losses is required to be added to the purchase price.
Credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses. The amendments limit the allowance for credit losses to the amount by which fair value is below amortized cost.
Public entities to further disaggregate the current disclosure of credit quality indicators in relation to the amortized cost of financing receivables by the year of origination (i.e., vintage).
The guidance is effective for the Bank for interim and annual periods beginning on January 1, 2020. Early application is permitted as of the interim and annual reporting periods beginning after December 15, 2018. The guidance should be applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In addition, the entities are required to use a prospective transition approach for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination and for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Bank does not intend to adopt the guidance early. The Bank is in the process of evaluating this guidance and expects the adoption of the guidance may result in an increase in the allowance for credit losses given the requirement to assess losses for the entire estimated life of the financial asset, including an allowance for debt securities. The effect on the Bank’s financial condition, results of operations, and cash flows will depend on the composition of financial assets held by the Bank at the adoption date, as well as on economic conditions and forecasts at that time.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Contingent Put and Call Options in Debt Instruments. On March 14, 2016, the FASB issued amendments to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The guidance requires entities to apply only the four-step decision sequence when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2017. The adoption of this guidance had no effect on the Bank’s financial condition, results of operations, and cash flows.
Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. On March 10, 2016, the FASB issued amendments to clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under U.S. GAAP does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2017, and early adoption was permitted. The amendments provide entities with the option to apply the guidance using either a prospective approach or a modified retrospective approach, retrospectively applied to all derivative instruments that meet the specific conditions. The Bank elected to early adopt the guidance prospectively on January 1, 2016. The adoption of this guidance had no effect on the Bank’s financial condition, results of operations, and cash flows.
Recognition of Lease Assets and Lease Liabilities. On February 25, 2016, the FASB issued guidance that requires recognition of lease assets and lease liabilities on the Statements of Condition and disclosure of key information about leasing arrangements. In particular, this guidance requires a lessee of operating or finance leases to recognize on the Statements of Condition a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. However, for leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. Under previous U.S. GAAP, a lessee was not required to recognize lease assets and lease liabilities arising from operating leases on the Statements of Condition. While this guidance does not fundamentally change lessor accounting, some changes have been made to align that guidance with the lessee guidance and other areas within U.S. GAAP.
The guidance becomes effective for the Bank for the interim and annual periods beginning on January 1, 2019, and early application is permitted. The guidance requires lessors and lessees to recognize and measure leases at the beginning of the earliest period presented in the financial statements using a modified retrospective approach. The Bank does not intend to adopt this guidance early. Upon adoption, the Bank expects to report higher assets and liabilities as a result of recording right-of-use assets and lease liabilities for its existing leases on the Statements of Condition. The Bank is in the process of evaluating this guidance, but its effect on the Bank’s financial condition, results of operations, and cash flows is not expected to be material.
Recognition and Measurement of Financial Assets and Financial Liabilities. On January 5, 2016, the FASB issued amended guidance on certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance includes, but is not limited to, the following:
Requires equity investments (with certain exceptions) to be measured at fair value with changes in fair value recognized in net income;
Requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments;
Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the Statement of Condition or in the accompanying notes to the financial statements;
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Eliminates the requirement for public entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the Statement of Condition.
The guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2018. The adoption of this guidance affected the Bank’s disclosures. However, the requirement to present the instrument-specific credit risk in other comprehensive income did not have any effect on the Bank’s financial condition, results of operations, and cash flows.
Revenue from Contracts with Customers. On May 28, 2014, the FASB issued its guidance on revenue from contracts with customers. This guidance outlines a comprehensive model for recognizing revenue arising from contracts with customers and supersedes most current revenue recognition guidance. In addition, this guidance amends the existing requirements for the recognition of a gain or loss on the transfer of non-financial assets that are not in a contract with a customer. This guidance applies to all contracts with customers except those that are within the scope of certain other standards, such as financial instruments, certain guarantees, insurance contracts, and lease contracts.
The guidance provides entities with the option of using either of the following adoption methods: a full retrospective method, applied retrospectively to each prior reporting period presented; or a modified retrospective method, with the cumulative effect of retrospectively applying this guidance recognized at the date of initial application.
On August 12, 2015, the FASB issued an amendment to defer the effective date of the guidance issued in May 2014 by one year. In 2016 and 2017, the FASB issued additional amendments to clarify certain aspects of the new revenue guidance. However, the amendments do not change the core principle in the new revenue standard. The guidance became effective for the Bank for interim and annual periods beginning on January 1, 2018. Given that the majority of the Bank’s financial instruments and other contractual rights that generate revenue are covered by other accounting guidance under U.S. GAAP, the effect of this guidance on the Bank’s financial condition, results of operations, and cash flows was not material.
Note 3 — Cash and Due from Banks
Cash on hand, cash items in the process of collection, and amounts due from correspondent banks and the Federal Reserve Bank are included in Cash and due from banks on the Statements of Condition.
Cash and due from banks includes certain compensating balances, wherethe Bank maintains collected cash balances with commercial banks in consideration for certain services. There are no legal restrictions under these agreements on the withdrawal of these funds. The average collected cash balances were approximately $30$10 million for 20172023 and $44$34 million for 2016.
2022.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 4 — Investments
The Bank makes short-term investments in interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold, and may make other investments in debt securities, which are classified as 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.
Federal funds sold are unsecured loans that are generally transacted on an overnight term. Finance Agency regulations include a limit on the amount of unsecured credit the Bank may extend to a counterparty. At December 31, 2023 and 2022, all investments in interest-bearing deposits and Federal funds sold were repaid or expected to be repaid according to the relevant contractual terms. No allowance for credit losses was recorded for these assets at December 31, 2023 and 2022. Carrying values of interest-bearing deposits and Federal funds sold exclude accrued interest receivable of $16 million and $2 million, respectively, as of December 31, 2023, and $13 million and $1 million, respectively, as of December 31, 2022.
Based upon the collateral held as security and collateral maintenance provisions with its counterparties, the Bank determined that no allowance for credit losses was needed for its securities purchased under agreements to resell at December 31, 2023 and 2022. The carrying value of securities purchased under agreements to resell excludes $2 million of accrued interest receivable as of December 31, 2023 and 2022.
Debt Securities
The Bank invests in debt securities, which are classified as trading, AFS, or HTM. Within these investments, the Bank is primarily subject to credit risk related to PLRMBS that are supported by underlying mortgage loans. The Bank is prohibited by Finance Agency regulations from purchasing certain higher risk securities, such as equity securities and debt instruments that are not investment quality at the time of purchase.
Trading Securities
Securities. The estimated fair value of trading securities that were MBS - other U.S. obligations was a de minimis amount and $1 million as of December 31, 20172023 and 2016, was as follows:
|
| | | | | | | |
| | December 31, 2017 |
| | December 31, 2016 |
|
| Government-Sponsored Enterprises (GSEs) – Federal Farm Credit Bank (FFCB) bonds | $ | 1,158 |
| | $ | 2,058 |
|
| MBS – Other U.S. obligations – Ginnie Mae | 6 |
| | 8 |
|
| Total | $ | 1,164 |
| | $ | 2,066 |
|
2022, respectively. The unrealized net unrealized gain/(loss) on trading securities washeld at December 31, 2023 and 2022, were de minimis $4,amounts.
Available-for-Sale Securities. The amortized cost and $(2) for the years ended December 31, 2017, and 2016, and 2015, respectively. These amounts represent the changes in the fair value of the securities during the reported periods.
Note 5 — Available-for-Sale Securities
Available-for-sale (AFS)AFS securities by major security type as of December 31, 20172023 and 2016,2022, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | | | | | | | | |
| (In millions) | Amortized Cost(1) | | Allowance for Credit Losses | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated Fair Value |
| | | | | | | | | |
| U.S. Treasury obligations | $ | 4,530 | | | $ | — | | | $ | 4 | | | $ | — | | | $ | 4,534 | |
| | | | | | | | | |
| | | | | | | | | |
| MBS: | | | | | | | | | |
| Government Sponsored Enterprises (GSEs) – multifamily | 12,500 | | | — | | | 4 | | | (83) | | | 12,421 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| PLRMBS | 1,075 | | | (31) | | | 35 | | | (20) | | | 1,059 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total MBS | 13,575 | | | (31) | | | 39 | | | (103) | | | 13,480 | |
| Total | $ | 18,105 | | | $ | (31) | | | $ | 43 | | | $ | (103) | | | $ | 18,014 | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | |
| Amortized Cost(1) |
| | OTTI Recognized in AOCI |
| | Gross Unrealized Gains |
| | Gross Unrealized Losses |
| | Estimated Fair Value |
|
| PLRMBS: | | | | | | | | | |
| Prime | $ | 335 |
| | $ | — |
| | $ | 29 |
| | $ | — |
| | $ | 364 |
|
| Alt-A, option ARM | 714 |
| | (10 | ) | | 130 |
| | — |
| | 834 |
|
| Alt-A, other | 2,447 |
| | (23 | ) | | 211 |
| | — |
| | 2,635 |
|
| Total | $ | 3,496 |
| | $ | (33 | ) | | $ | 370 |
| | $ | — |
| | $ | 3,833 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | |
| (In millions) | Amortized Cost(1) | | Allowance for Credit Losses | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated Fair Value |
| | | | | | | | | |
| U.S. Treasury obligations | $ | 4,012 | | | $ | — | | | $ | 12 | | | $ | — | | | $ | 4,024 | |
| | | | | | | | | |
| | | | | | | | | |
| MBS: | | | | | | | | | |
| GSEs – multifamily | 7,562 | | | — | | | 2 | | | (57) | | | 7,507 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| PLRMBS | 1,183 | | | (30) | | | 54 | | | (25) | | | 1,182 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total MBS | 8,745 | | | (30) | | | 56 | | | (82) | | | 8,689 | |
| Total | $ | 12,757 | | | $ | (30) | | | $ | 68 | | | $ | (82) | | | $ | 12,713 | |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | |
| | Amortized Cost(1) |
| | OTTI Recognized in AOCI |
| | Gross Unrealized Gains |
| | Gross Unrealized Losses |
| | Estimated Fair Value |
|
| PLRMBS: | | | | | | | | | |
| Prime | $ | 413 |
| | $ | (1 | ) | | $ | 22 |
| | $ | — |
| | $ | 434 |
|
| Alt-A, option ARM | 853 |
| | (31 | ) | | 77 |
| | (2 | ) | | 897 |
|
| Alt-A, other | 3,087 |
| | (82 | ) | | 154 |
| | (1 | ) | | 3,158 |
|
| Total | $ | 4,353 |
| | $ | (114 | ) | | $ | 253 |
| | $ | (3 | ) | | $ | 4,489 |
|
| |
(1) | Amortized cost includes unpaid principal balance, unamortized premiums and discounts, and previous OTTI recognized in earnings.
|
Expected maturities(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 PLRMBS will differ from contractual maturities because borrowers generally have the right to prepay the underlying obligations without prepayment fees.
At $68 million and $46 million at December 31, 2017,2023 and 2022, respectively.
At December 31, 2023, the amortized cost of the Bank’s PLRMBSMBS classified as AFS included credit-related OTTIpremiums of $801.$58 million, discounts of $191 million, and previous credit losses related to the prior methodology of evaluating credit losses of $312 million for PLRMBS. At December 31, 2016,2022, the amortized cost of the Bank’s PLRMBSMBS classified as AFS included credit-related OTTIpremiums of $941.$52 million, discounts of $113 million, and previous credit losses related to the prior methodology of evaluating credit losses of $351 million for PLRMBS.
The following table summarizestables summarize the AFS securities with unrealized losses as of December 31, 20172023 and 2016.2022. 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. Total unrealized losses in
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | | | | | | | | | | |
| | Less Than 12 Months | | 12 Months or More | | Total |
| (In millions) | Estimated
Fair Value | | Gross Unrealized
Losses | | Estimated
Fair Value | | Gross Unrealized
Losses | | Estimated
Fair Value | | Gross Unrealized
Losses |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| MBS – GSEs – multifamily | $ | 7,517 | | | $ | 45 | | | $ | 3,525 | | | $ | 38 | | | $ | 11,042 | | | $ | 83 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| PLRMBS | 30 | | | 1 | | | 283 | | | 19 | | | 313 | | | 20 | |
| | | | | | | | | | | |
| Total | $ | 7,547 | | | $ | 46 | | | $ | 3,808 | | | $ | 57 | | | $ | 11,355 | | | $ | 103 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | |
| Less Than 12 Months | | 12 Months or More | | Total |
| (In millions) | Estimated
Fair Value | | Gross
Unrealized
Losses | | Estimated
Fair Value | | Gross Unrealized
Losses | | Estimated
Fair Value | | Gross Unrealized
Losses |
| | | | | | | | | | | |
| MBS – GSEs – multifamily | $ | 6,635 | | | $ | 57 | | | $ | — | | | $ | — | | | $ | 6,635 | | | $ | 57 | |
| PLRMBS | 292 | | | 17 | | | 68 | | | 8 | | | 360 | | | 25 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total | $ | 6,927 | | | $ | 74 | | | $ | 68 | | | $ | 8 | | | $ | 6,995 | | | $ | 82 | |
Redemption Terms – The amortized cost and estimated fair value of U.S. Treasury securities classified as AFS by contractual maturity (based on contractual final principal payment) and of MBS classified as AFS as of December 31, 2023 and 2022, are shown below. Expected maturities of MBS classified as AFS will differ from contractual maturities because borrowers may have the following table will not agreeright to total gross unrealized losses incall or prepay the table above. The unrealized losses in the following table also include non-credit-related
underlying obligations with or without call or prepayment fees.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | |
| December 31, 2023 | | | |
| (In millions) | | | |
| Year of Contractual Maturity | Amortized
Cost | | Estimated
Fair Value |
| U.S. Treasury obligations: | | | |
| Due in 1 year or less | $ | 145 | | | $ | 145 | |
| Due after 1 year through 5 years | 4,385 | | | 4,389 | |
| | | |
| | | |
| Total U.S. Treasury obligations | $ | 4,530 | | | $ | 4,534 | |
| MBS | 13,575 | | | 13,480 | |
| Total | $ | 18,105 | | | $ | 18,014 | |
OTTI losses recognized in AOCI. For OTTI analysis of AFS securities, see Note 7 – Other-Than-Temporary Impairment Analysis. | | | | | | | | | | | |
| December 31, 2022 | | | |
| (In millions) | | | |
| Year of Contractual Maturity | Amortized
Cost | | Estimated
Fair Value |
| | | |
| | | |
| U.S. Treasury obligations – Due after 1 year through 5 years | $ | 4,012 | | | $ | 4,024 | |
| | | |
| | | |
| | | |
| MBS | 8,745 | | | 8,689 | |
| Total | $ | 12,757 | | | $ | 12,713 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | |
| Less Than 12 Months | | 12 Months or More | | Total |
| Estimated Fair Value |
| | Unrealized Losses |
| | Estimated Fair Value |
| | Unrealized Losses |
| | Estimated Fair Value |
| | Unrealized Losses |
|
| PLRMBS: | | | | | | | | | | | |
| Prime | $ | — |
| | $ | — |
| | $ | 11 |
| | $ | — |
| | $ | 11 |
| | $ | — |
|
| Alt-A, option ARM | — |
| | — |
| | 144 |
| | 10 |
| | 144 |
| | 10 |
|
| Alt-A, other | 5 |
| | — |
| | 356 |
| | 23 |
| | 361 |
| | 23 |
|
| Total | $ | 5 |
| | $ | — |
| | $ | 511 |
| | $ | 33 |
| | $ | 516 |
| | $ | 33 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | |
| | Less Than 12 Months | | 12 Months or More | | Total |
| | Estimated Fair Value |
| | Unrealized Losses |
| | Estimated Fair Value |
| | Unrealized Losses |
| | Estimated Fair Value |
| | Unrealized Losses |
|
| PLRMBS: | | | | | | | | | | | |
| Prime | $ | — |
| | $ | — |
| | $ | 14 |
| | $ | 1 |
| | $ | 14 |
| | $ | 1 |
|
| Alt-A, option ARM | 14 |
| | — |
| | 249 |
| | 33 |
| | 263 |
| | 33 |
|
| Alt-A, other | 57 |
| | — |
| | 1,048 |
| | 83 |
| | 1,105 |
| | 83 |
|
| Total | $ | 71 |
| | $ | — |
| | $ | 1,311 |
| | $ | 117 |
| | $ | 1,382 |
| | $ | 117 |
|
As indicated in the tables above, as of December 31, 2017, the Bank’s investments classified as AFS had unrealized losses related to PLRMBS, which were primarily due to illiquidity in the PLRMBS 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.
See Note 7 – Other-Than-Temporary Impairment Analysis for information on the transfers of securities between the AFS portfolio and the HTM portfolio.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 6 — Held-to-Maturity Securities
Securities. The Bank classifies the following securities as HTM because the Bank has the positive intent and ability to hold these securities to maturity:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | | | | | | | | | | | | |
| (In millions) | Amortized Cost(1) | | | | | | | | Gross Unrecognized Holding Gains(2) | | Gross Unrecognized Holding Losses(2) | | Estimated
Fair Value |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| MBS – Other U.S. obligations – single-family | $ | 49 | | | | | | | | | $ | — | | | $ | (1) | | | $ | 48 | |
| MBS – GSEs: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| MBS – GSEs – single-family | 605 | | | | | | | | | 1 | | | (16) | | | 590 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| MBS – GSEs – multifamily | 1,069 | | | | | | | | | — | | | (5) | | | 1,064 | |
| Subtotal MBS – GSEs | 1,674 | | | | | | | | | 1 | | | (21) | | | 1,654 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| PLRMBS | 124 | | | | | | | | | — | | | (8) | | | 116 | |
| | | | | | | | | | | | | |
| Total | $ | 1,847 | | | | | | | | | $ | 1 | | | $ | (30) | | | $ | 1,818 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | | | |
| (In millions) | Amortized Cost(1) | | | | | | | | Gross Unrecognized Holding Gains(2) | | Gross Unrecognized Holding Losses(2) | | Estimated
Fair Value |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| MBS – Other U.S. obligations – single-family | $ | 72 | | | | | | | | | $ | — | | | $ | (2) | | | $ | 70 | |
| MBS – GSEs: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| MBS – GSEs – single-family | 745 | | | | | | | | | 1 | | | (22) | | | 724 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| MBS – GSEs – multifamily | 1,209 | | | | | | | | | — | | | (10) | | | 1,199 | |
| Subtotal MBS – GSEs | 1,954 | | | | | | | | | 1 | | | (32) | | | 1,923 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| PLRMBS | 155 | | | | | | | | | — | | | (12) | | | 143 | |
| | | | | | | | | | | | | |
| Total | $ | 2,181 | | | | | | | | | $ | 1 | | | $ | (46) | | | $ | 2,136 | |
(1) Amortized cost includes unpaid principal balance, unamortized premiums and discounts, and net charge-offs, and excludes accrued interest receivable of $6 million and $5 million at December 31, 2023 and 2022, respectively.
(2) Gross unrecognized holding gains/(losses) represent the difference between estimated fair value and net carrying value.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | |
| Amortized Cost(1) |
| | OTTI Recognized in AOCI(1) |
| | Carrying Value(1) |
| | Gross Unrecognized Holding Gains |
| | Gross Unrecognized Holding Losses |
| | Estimated Fair Value |
|
| Certificates of deposit | $ | 500 |
| | $ | — |
| | $ | 500 |
| | $ | — |
| | $ | — |
| | $ | 500 |
|
| Housing finance agency bonds: | | | | | | | | | | | |
| California Housing Finance Agency (CalHFA) bonds | 187 |
| | — |
| | 187 |
| | — |
| | (9 | ) | | 178 |
|
| MBS: | | | | | | | | | | | |
| Other U.S. obligations – single-family: | | | | | | | | | | | |
| Ginnie Mae | 751 |
| | — |
| | 751 |
| | 1 |
| | (1 | ) | | 751 |
|
| GSEs – single-family: | | | | | | | | | | | |
| Freddie Mac | 2,039 |
| | — |
| | 2,039 |
| | 12 |
| | (15 | ) | | 2,036 |
|
| Fannie Mae | 3,600 |
| | — |
| | 3,600 |
| | 34 |
| | (8 | ) | | 3,626 |
|
| Subtotal GSEs – single-family | 5,639 |
| | — |
| | 5,639 |
| | 46 |
| | (23 | ) | | 5,662 |
|
GSEs – multifamily:
| | | | | | | | | | | |
| Freddie Mac | 4,651 |
| | — |
| | 4,651 |
| | 6 |
| | (6 | ) | | 4,651 |
|
| Fannie Mae | 2,131 |
| | — |
| | 2,131 |
| | 2 |
| | — |
| | 2,133 |
|
Subtotal GSEs – multifamily
| 6,782 |
| | — |
| | 6,782 |
| | 8 |
| | (6 | ) | | 6,784 |
|
| Subtotal GSEs | 12,421 |
| | — |
| | 12,421 |
| | 54 |
| | (29 | ) | | 12,446 |
|
| PLRMBS: | | | | | | | | | | | |
| Prime | 521 |
| | — |
| | 521 |
| | 5 |
| | (6 | ) | | 520 |
|
| Alt-A, other | 306 |
| | (6 | ) | | 300 |
| | 11 |
| | (2 | ) | | 309 |
|
| Subtotal PLRMBS | 827 |
| | (6 | ) | | 821 |
| | 16 |
| | (8 | ) | | 829 |
|
| Total MBS | 13,999 |
| | (6 | ) | | 13,993 |
| | 71 |
| | (38 | ) | | 14,026 |
|
| Total | $ | 14,686 |
| | $ | (6 | ) | | $ | 14,680 |
| | $ | 71 |
| | $ | (47 | ) | | $ | 14,704 |
|
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.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | |
| Amortized Cost(1) |
| | OTTI Recognized in AOCI(1) |
| | Carrying Value(1) |
| | Gross Unrecognized Holding Gains |
| | Gross Unrecognized Holding Losses |
| | Estimated Fair Value |
|
| Certificates of deposit | $ | 1,350 |
| | $ | — |
| | $ | 1,350 |
| | $ | — |
| | $ | — |
| | $ | 1,350 |
|
| Housing finance agency bonds: | | | | | | | | | | | |
| California Housing Finance Agency (CalHFA) bonds | 225 |
| | — |
| | 225 |
| | — |
| | (18 | ) | | 207 |
|
| MBS: | | | | | | | | | | | |
| Other U.S. obligations – single-family: | | | | | | | �� | | | | |
| Ginnie Mae | 951 |
| | — |
| | 951 |
| | 5 |
| | (1 | ) | | 955 |
|
| GSEs – single-family: | | | | | | | | | | | |
| Freddie Mac | 2,793 |
| | — |
| | 2,793 |
| | 23 |
| | (15 | ) | | 2,801 |
|
| Fannie Mae | 5,037 |
| | — |
| | 5,037 |
| | 47 |
| | (14 | ) | | 5,070 |
|
| Subtotal GSEs – single-family | 7,830 |
| | — |
| | 7,830 |
| | 70 |
| | (29 | ) | | 7,871 |
|
| GSEs – multifamily: | | | | | | | | | | | |
| Freddie Mac | 1,556 |
| | — |
| | 1,556 |
| | — |
| | (1 | ) | | 1,555 |
|
| Fannie Mae | 1,058 |
| | — |
| | 1,058 |
| | — |
| | (1 | ) | | 1,057 |
|
| Subtotal GSEs – multifamily | 2,614 |
| | — |
| | 2,614 |
| | — |
| | (2 | ) | | 2,612 |
|
| Subtotal GSEs | 10,444 |
| | — |
| | 10,444 |
| | 70 |
| | (31 | ) | | 10,483 |
|
| PLRMBS: | | | | | | | | | | | |
| Prime | 707 |
| | — |
| | 707 |
| | 2 |
| | (15 | ) | | 694 |
|
| Alt-A, other | 459 |
| | (9 | ) | | 450 |
| | 11 |
| | (9 | ) | | 452 |
|
| Subtotal PLRMBS | 1,166 |
| | (9 | ) | | 1,157 |
| | 13 |
| | (24 | ) | | 1,146 |
|
| Total MBS | 12,561 |
| | (9 | ) | | 12,552 |
| | 88 |
| | (56 | ) | | 12,584 |
|
| Total | $ | 14,136 |
|
| $ | (9 | ) |
| $ | 14,127 |
|
| $ | 88 |
|
| $ | (74 | ) |
| $ | 14,141 |
|
| |
(1) | Amortized cost includes unpaid principal balance, unamortized premiums and discounts, and previous OTTI recognized in earnings. The carrying value of HTM securities represents amortized cost after adjustment for non-credit-related OTTI recognized in AOCI. |
At December 31, 2017,2023, the amortized cost of the Bank’s MBS classified as HTM included premiums of $19,$2 million and discounts of $24, and credit-related OTTI of $7.$3 million. At December 31, 2016,2022, the amortized cost of the Bank’s MBS classified as HTM included premiums of $29,$3 million and discounts of $34,$4 million.
Allowance for Credit Losses on AFS and credit-related OTTI of $8.
HTM Securities. The following tables summarizetable presents a rollforward of the allowance for credit losses on PLRMBS classified as AFS for the years ended December 31, 2023, 2022, and 2021. The Bank recorded no allowance for credit losses associated with HTM securities with unrealized losses as of during the years ended December 31, 20172023, 2022, and 2016.2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| (In millions) | | | | | 2023 | | | | 2022 | | 2021 |
| Balance, beginning of the period | | | | | $ | 30 | | | | | $ | 17 | | | $ | 21 | |
| (Charge-offs)/recoveries | | | | | (3) | | | | | (2) | | | (1) | |
| Provision for/(reversal of) credit losses | | | | | 4 | | | | | 15 | | | (3) | |
| Balance, end of the period | | | | | $ | 31 | | | | | $ | 30 | | | $ | 17 | |
To evaluate investment securities for credit loss at December 31, 2023 and 2022, the Bank employed the following methodologies, based on the type of security.
AFS and HTM Securities (Excluding PLRMBS) – The unrealized lossesBank’s AFS and HTM securities are aggregatedprincipally U.S. obligations and MBS issued by major security typeGinnie Mae, Freddie Mac, and Fannie Mae that are backed by single-family or multifamily mortgage loans. The Bank only purchases securities considered investment quality. Excluding PLRMBS investments, at December 31, 2023 and 2022, substantially all of AFS securities and HTM securities, based on amortized cost, were rated A, or above, by an NRSRO, based on the lengthlowest long-term credit rating for each security. These may differ from any internal ratings of time that individualthe securities have beenby the Bank, if applicable.
At December 31, 2023 and 2022, certain of the Bank’s AFS and HTM securities were in a continuousan unrealized loss position. Total unrealizedThese losses are considered temporary as the Bank expects to recover the entire amortized cost basis on these 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 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 following table willcase of U.S. Treasury, GSE, or other agency obligations, carry an implicit or explicit government guarantee such that the Bank considers the risk of nonpayment to be zero. As a result, no allowance for credit losses was recorded on these AFS or HTM securities at December 31, 2023 and 2022.
Private-Label Residential Mortgage-Backed Securities – The Bank also holds investments in PLRMBS. The Bank has not agreepurchased any PLRMBS since the first quarter of 2008. However, many of these securities have subsequently experienced significant credit deterioration. As of December 31, 2023 and 2022, approximately 4% 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.
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 total gross unrecognized holdingamortized cost basis of the securities to determine whether a credit loss exists. The expected credit losses in are measured using:
•expected housing price changes;
•expected interest rate assumptions;
•the table above. The unrealized losses inremaining payment terms for the following table also include non-credit-related OTTI losses recognized in AOCI. For OTTI analysis of HTM securities, see Note 7 – Other-Than-Temporary Impairment Analysis.
security;
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
•expected default rates based on underlying loan-level borrower and loan characteristics;
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | |
| | Less Than 12 Months | | 12 Months or More | | Total |
| | Estimated Fair Value |
| | Unrealized Losses |
| | Estimated Fair Value |
| | Unrealized Losses |
| | Estimated Fair Value |
| | Unrealized Losses |
|
| Housing finance agency bonds: | | | | | | | | | | | |
| CalHFA bonds | $ | — |
| | $ | — |
| | $ | 178 |
| | $ | 9 |
| | $ | 178 |
| | $ | 9 |
|
| MBS: | | | | | | | | | | | |
| Other U.S. obligations – single-family: | | | | | | | | | | | |
| Ginnie Mae | 406 |
| | 1 |
| | — |
| | — |
| | 406 |
| | 1 |
|
| GSEs – single-family: | | | | | | | | | | | |
| Freddie Mac | 895 |
| | 9 |
| | 323 |
| | 6 |
| | 1,218 |
| | 15 |
|
| Fannie Mae | 702 |
| | 4 |
| | 205 |
| | 4 |
| | 907 |
| | 8 |
|
| Subtotal GSEs – single-family | 1,597 |
| | 13 |
| | 528 |
| | 10 |
| | 2,125 |
| | 23 |
|
| GSEs – multifamily: | | | | | | | | | | | |
| Freddie Mac | 1,058 |
| | 6 |
| | — |
| | — |
| | 1,058 |
| | 6 |
|
| Fannie Mae | 456 |
| | — |
| | — |
| | — |
| | 456 |
| | — |
|
Subtotal GSEs – multifamily
| 1,514 |
| | 6 |
| | — |
| | — |
| | 1,514 |
| | 6 |
|
| Subtotal GSEs | 3,111 |
| | 19 |
| | 528 |
| | 10 |
| | 3,639 |
| | 29 |
|
| PLRMBS: | | | | | | | | | | | |
| Prime | 2 |
| | — |
| | 202 |
| | 6 |
| | 204 |
| | 6 |
|
| Alt-A, other | 15 |
| | — |
| | 191 |
| | 8 |
| | 206 |
| | 8 |
|
| Subtotal PLRMBS | 17 |
| | — |
| | 393 |
| | 14 |
| | 410 |
| | 14 |
|
| Total MBS | 3,534 |
| | 20 |
| | 921 |
| | 24 |
| | 4,455 |
| | 44 |
|
| Total | $ | 3,534 |
| | $ | 20 |
| | $ | 1,099 |
| | $ | 33 |
| | $ | 4,633 |
| | $ | 53 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | |
| | Less Than 12 Months | | 12 Months or More | | Total |
| | Estimated Fair Value |
| | Unrealized Losses |
| | Estimated Fair Value |
| | Unrealized Losses |
| | Estimated Fair Value |
| | Unrealized Losses |
|
| Housing finance agency bonds: | | | | | | | | | | | |
| CalHFA bonds | $ | — |
| | $ | — |
| | $ | 193 |
| | $ | 18 |
| | $ | 193 |
| | $ | 18 |
|
| MBS: | | | | | | | | | | | |
| Other U.S. obligations – single-family: | | | | | | | | | | | |
| Ginnie Mae | 190 |
| | 1 |
| | — |
| | — |
| | 190 |
| | 1 |
|
| GSEs – single-family: | | | | | | | | | | | |
| Freddie Mac | 1,498 |
| | 15 |
| | 3 |
| | — |
| | 1,501 |
| | 15 |
|
| Fannie Mae | 2,665 |
| | 12 |
| | 96 |
| | 2 |
| | 2,761 |
| | 14 |
|
| Subtotal GSEs – single-family | 4,163 |
| | 27 |
| | 99 |
| | 2 |
| | 4,262 |
| | 29 |
|
| GSEs – multifamily: | | | | | | | | | | | |
| Freddie Mac | 1,007 |
| | 1 |
| | — |
| | — |
| | 1,007 |
| | 1 |
|
| Fannie Mae | 387 |
| | 1 |
| | — |
| | — |
| | 387 |
| | 1 |
|
| Subtotal GSEs – multifamily | 1,394 |
| | 2 |
| | — |
| | — |
| | 1,394 |
| | 2 |
|
| Subtotal GSEs | 5,557 |
| | 29 |
| | 99 |
| | 2 |
| | 5,656 |
| | 31 |
|
| PLRMBS: | | | | | | | | | | | |
| Prime | 1 |
| | — |
| | 517 |
| | 15 |
| | 518 |
| | 15 |
|
| Alt-A, other | — |
| | — |
| | 452 |
| | 18 |
| | 452 |
| | 18 |
|
| Subtotal PLRMBS | 1 |
| | — |
| | 969 |
| | 33 |
| | 970 |
| | 33 |
|
| Total MBS | 5,748 |
| | 30 |
| | 1,068 |
| | 35 |
| | 6,816 |
| | 65 |
|
| Total | $ | 5,748 |
| | $ | 30 |
| | $ | 1,261 |
| | $ | 53 |
| | $ | 7,009 |
| | $ | 83 |
|
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
As indicated in the tables above, the Bank’s investments classified as HTM had unrealized losses on CalHFA bonds and MBS. The unrealized losses associated with the CalHFA bonds were mainly due to an illiquid market, credit concerns regarding the underlying mortgage collateral, and credit concerns regarding the monoline insurance providers, causing these investments to be valued at a discount to their acquisition 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. The unrealized losses associated with the PLRMBS were primarily due to illiquidity in the PLRMBS 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.
Redemption Terms. The amortized cost, carrying value, and estimated fair value of non-MBS securities by contractual maturity (based on contractual final principal payment) and of MBS as of December 31, 2017 and 2016, are shown below. Expected maturities of MBS will differ from contractual maturities because borrowers generally have the right to prepay the underlying obligations without prepayment fees.
|
| | | | | | | | | | | |
| December 31, 2017 | | | | | |
| Year of Contractual Maturity | Amortized Cost(1) |
| | Carrying Value(1) |
| | Estimated Fair Value |
|
| HTM securities other than MBS: | | | | | |
| Due in 1 year or less | $ | 500 |
| | $ | 500 |
| | $ | 500 |
|
| Due after 5 years through 10 years | 12 |
| | 12 |
| | 12 |
|
| Due after 10 years | 175 |
| | 175 |
| | 166 |
|
| Subtotal | 687 |
| | 687 |
| | 678 |
|
| MBS | 13,999 |
| | 13,993 |
| | 14,026 |
|
| Total | $ | 14,686 |
| | $ | 14,680 |
| | $ | 14,704 |
|
|
| | | | | | | | | | | |
| December 31, 2016 | | | | | |
| Year of Contractual Maturity | Amortized Cost(1) |
| | Carrying Value(1) |
| | Estimated Fair Value |
|
| HTM securities other than MBS: | | | | | |
| Due in 1 year or less | $ | 1,350 |
| | $ | 1,350 |
| | $ | 1,350 |
|
| Due after 5 years through 10 years | 35 |
| | 35 |
| | 34 |
|
| Due after 10 years | 190 |
| | 190 |
| | 173 |
|
| Subtotal | 1,575 |
| | 1,575 |
| | 1,557 |
|
| MBS | 12,561 |
| | 12,552 |
| | 12,584 |
|
| Total | $ | 14,136 |
| | $ | 14,127 |
| | $ | 14,141 |
|
| |
(1) | Amortized cost includes unpaid principal balance, unamortized premiums and discounts, and previous OTTI recognized in earnings. The carrying value of HTM securities represents amortized cost after adjustment for non-credit-related OTTI recognized in AOCI. |
See Note 7 – Other-Than-Temporary Impairment Analysis for information•loss severities on the transfers of securities between the AFS portfolio and the HTM portfolio.
Note 7 — Other-Than-Temporary Impairment Analysis
On a quarterly basis, the Bank evaluates its individual AFS and HTM investment securities in an unrealized loss position for OTTI.
PLRMBS. To assess whether it expects to recover the entire amortized cost basis of itscollateral supporting each unique PLRMBS the Bank performed a cash flow analysis for all of its PLRMBS as of December 31, 2017, using two third-party models. The OTTI Governance Committee of the Federal Home Loan Banks (FHLBanks) developed a short-term housing price
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
forecast with projected changes ranging from a decrease of 5.0% to an increase of 12.0% over the 12-month period beginning October 1, 2017. For the vast majority of markets, the projected short-term housing price changes range from an increase of 2.0% to an increase of 6.0%. Thereafter, a unique path is projected for each geographic area based on an internally developed framework derived from historical data.underlying loan-level borrower and loan characteristics; and
•prepayment speeds based on underlying loan-level borrower and loan characteristics.
The projectedexpected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in these assumptions and expectations. The scenario of cash flows determined reflects a best-estimate scenarioreflect management’s expectations and includesinclude a base case housing price forecast that reflects the expectations for near- and long-term housing price behavior.
At each quarter end, the Bank compares the present value of the cash flows expected to be collected on its PLRMBS to the amortized cost basis of the securities to determine whether a credit loss exists. The Bank then uses the effective interest rate for the security prior to impairment for determining the present value of the future estimated cash flows.
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 determinedPLRMBS with previous credit losses related to be other-than-temporarily impaired asthe prior methodology of December 31, 2017evaluating credit losses (securities for which the Bank determined that it does not expect to recover the entire amortized cost basis), the following table presents a summarymeasurement of the credit loss amount for PLRMBS classified as Level 3 as of December 31, 2023, uses significant inputs used in measuringand assumptions that include, based on unpaid principal balance, the amountweighted average percentage of creditprepayment rates of 10.3%; default rates of 7.5%; and loss recognized in earnings during the year ended December 31, 2017, andseverities of 51.7%. The weighted average percentage of the related current credit enhancement for the Bank.
|
| | | | | | | |
| December 31, 2017 | | | | | | | |
| | Significant Inputs for Other-Than-Temporarily Impaired PLRMBS | | Current |
| | Prepayment Rates | | Default Rates | | Loss Severities | | Credit Enhancement |
| Year of Securitization | Weighted Average % (1) | | Weighted Average % (1) | | Weighted Average % (1) | | Weighted Average % (1) |
| Alt-A, other | | | | | | | |
| 2007 | 10.4 | | 29.5 | | 39.4 | | 0.7 |
| 2006 | 10.8 | | 20.2 | | 39.2 | | 25.0 |
| 2005 | 13.5 | | 17.8 | | 34.6 | | 2.9 |
| 2004 and earlier | 14.0 | | 1.7 | | 31.4 | | 9.3 |
| Total Alt-A, other | 11.5 | | 23.4 | | 37.8 | | 7.5 |
| Total | 11.5 | | 23.4 | | 37.8 | | 7.5 |
(1) Weighted average percentage isthese securities, based on unpaid principal balance.
balance, was 8.6% as of December 31, 2023. 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 years ended December 31, 2017, 2016, and 2015.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | |
| | 2017 |
| | 2016 |
| | 2015 |
|
| Balance, beginning of the period | $ | 1,183 |
| | $ | 1,255 |
| | $ | 1,314 |
|
Additional charges on securities for which OTTI was previously recognized(1) | 16 |
| | 16 |
| | 15 |
|
Securities matured during the period(2) | (1 | ) | | (7 | ) | | — |
|
Accretion of yield adjustments resulting from improvement of expected cash flows that are recognized over the remaining life of the securities(3) | (69 | ) | | (81 | ) | | (74 | ) |
| Balance, end of the period | $ | 1,129 |
| | $ | 1,183 |
| | $ | 1,255 |
|
| |
(1) | For the years ended December 31, 2017, 2016, and 2015, “securities for which OTTI was previously recognized” represents all securities that were also other-than-temporarily impaired prior to January 1, 2017, 2016, and 2015, respectively.
|
| |
(2) | Represents reductions related to securities having reached final maturity during the period, which therefore are no longer held by the Bank at the end of the period. |
| |
(3) | The total net accretion/(amortization) associated with other-than-temporarily impaired PLRMBS (amount recognized in interest income) totaled $93, $101, and $82 for the years ended December 31, 2017, 2016, and 2015, respectively.
|
Changes in circumstances may causeIn general, the Bank to change its intent to hold a certain security to maturity without calling into question its intent to hold other debt securities to maturity in the future. The sale or transfer of an HTM security because of certain changes in circumstances, such as evidence of significant deterioration in the issuers’ creditworthiness, is not considered to be inconsistent with its original classification. In addition, other events that are isolated, nonrecurring, or unusual for the Bank that could not have been reasonably anticipated may cause the Bank to sell or transfer an HTM security without necessarily calling into question its intent to hold other debt securities to maturity.
The Bank electedelects to transfer any PLRMBS that incurred a credit-related OTTI chargecredit loss during the applicable period from the Bank’s held-to-maturityHTM portfolio to its available-for-saleAFS portfolio at their fair values. The Bank recognized an OTTI credit loss on these held-to-maturity PLRMBS, which the Bank believes is evidence of a significant decline in the issuers’ creditworthiness. The decline in the issuers’ creditworthiness is the basis for the transfers to the available-for-sale 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 does not intend to sell its other-than-temporarily impaired securities 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 did not transfer anytransferred PLRMBS from its HTM portfolio to its AFS portfolio with an amortized cost and fair value at the time of the transfer of $2 million during the year ended December 31, 2023. The fair value of the transferred PLRMBS was lower than their amortized cost by a de minimis amount. The Bank transferred PLRMBS from its HTM portfolio to its AFS portfolio with an amortized cost of $17 million and fair value of $20 million at the time of the transfer during the year ended December 31, 2022, and with an amortized cost and fair value of $2 million during the year ended December 31, 2021.
For the Bank’s PLRMBS, the Bank recorded a provision for credit losses of $4 million and $15 million during the years ended December 31, 20172023 and 2016.
2022, respectively. The following tables present the Bank’s AFS and HTM PLRMBS that incurred OTTI losses anytime during the life of the securities at December 31, 2017 and 2016, by loan collateral type:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | | | |
| | Available-for-Sale Securities | | Held-to-Maturity Securities |
| | Unpaid Principal Balance |
| | Amortized Cost |
| | Estimated Fair Value |
| | Unpaid Principal Balance |
| | Amortized Cost |
| | Carrying Value |
| | Estimated Fair Value |
|
| Other-than-temporarily impaired PLRMBS backed by loans classified at origination as: | | | | | | | | | | | | | |
| Prime | $ | 405 |
| | $ | 335 |
| | $ | 364 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Alt-A, option ARM | 953 |
| | 714 |
| | 834 |
| | — |
| | — |
| | — |
| | — |
|
| Alt-A, other | 2,927 |
| | 2,447 |
| | 2,635 |
| | 64 |
| | 59 |
| | 53 |
| | 63 |
|
| Total | $ | 4,285 |
| | $ | 3,496 |
| | $ | 3,833 |
| | $ | 64 |
| | $ | 59 |
| | $ | 53 |
| | $ | 63 |
|
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | | |
| | Available-for-Sale Securities | | Held-to-Maturity Securities |
| | Unpaid Principal Balance |
| | Amortized Cost |
| | Estimated Fair Value |
| | Unpaid Principal Balance |
| | Amortized Cost |
| | Carrying Value |
| | Estimated Fair Value |
|
| Other-than-temporarily impaired PLRMBS backed by loans classified at origination as: | | | | | | | | | | | | | |
| Prime | $ | 498 |
| | $ | 413 |
| | $ | 434 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Alt-A, option ARM | 1,134 |
| | 853 |
| | 897 |
| | — |
| | — |
| | — |
| | — |
|
| Alt-A, other | 3,650 |
| | 3,087 |
| | 3,158 |
| | 93 |
| | 88 |
| | 79 |
| | 91 |
|
| Total | $ | 5,282 |
| | $ | 4,353 |
| | $ | 4,489 |
| | $ | 93 |
| | $ | 88 |
| | $ | 79 |
| | $ | 91 |
|
For the Bank’s PLRMBS thatprovisions were not other-than-temporarily impaired as of December 31, 2017, the Bank has experienced net unrealized losses primarilyrecorded largely because of illiquiditydeclines in the fair values on its PLRMBS, marketthe present value of expected cash flows of certain PLRMBS affected by higher interest rates, and marketdecreased expectations of the credit performance of loan collateral underlying these securities, which caused these assets to be valued at discounts to their amortized cost.securities. The Bank does not intendrecorded a reversal of credit losses of $3 million during the year ended December 31, 2021, primarily resulting from lower default rates as well as improved projected credit performance in part related to sell these securities, it is nota more likely than not that the Bank will be required to sell these securities before its anticipated recoveryoptimistic economic outlook because of the remaining amortized cost basis,monetary and fiscal stimulus measures taken by the Bank expectsU.S. government.
The total net accretion recognized in interest income associated with PLRMBS with previous credit losses related to recover the entire amortized cost basisprior methodology of these securities. As a result,evaluating credit losses totaled $34 million, $55 million, and $70 million for the Bank determined that, as of years ended December 31, 2017, all of the gross unrealized losses on these PLRMBS are temporary. These securities were included in the securities that the Bank reviewed2023, 2022, and analyzed for OTTI as discussed above, and the analyses performed indicated that these securities were not other-than-temporarily impaired.2021, respectively.
All Other Available-for-Sale and Held-to-Maturity Investments. For the Bank’s investments in housing finance agency bonds, which were issued by CalHFA, the gross unrealized losses were mainly due to an illiquid market, credit concerns regarding the underlying mortgage collateral, and credit concerns regarding the monoline insurance providers, causing these investments to be valued at a discount to their acquisition cost. The Bank independently modeled cash flows for the underlying collateral, using assumptions for default rates and loss severity that a market participant would deem reasonable, and concluded that the available credit support within the CalHFA structure more than offset the projected underlying collateral losses. The Bank determined that, as of December 31, 2017, all of the gross unrealized losses on the bonds are temporary because the underlying collateral and credit enhancements were sufficient to protect the Bank from losses. As a result, the Bank expects to recover the entire amortized cost basis of these securities.
For its agency MBS, the Bank expects to recover the entire amortized cost basis of these securities because the Bank determined that the strength of the issuers’ guarantees through direct obligations or support from the U.S. government is sufficient to protect the Bank from losses. As a result, the Bank determined that, as of December 31, 2017, all of the gross unrealized losses on its agency MBS are temporary.
Note 85 — 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 daysone day to 10 years, with the interest rates resetting periodically at a fixed spread to LIBOR or to anothera specified index.
Redemption Terms. The Bank had advances outstanding, excluding overdrawn demand deposit accounts, at interest rates ranging from 0.79% to 8.57% at December 31, 2017, and 0.43% to 8.57% at December 31, 2016, as summarized below.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Redemption Terms. The following table presents advances outstanding by redemption term and weighted-average interest rate at December 31, 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | 2023 | | 2022 |
| Redemption Term | Amount Outstanding(1) | | Weighted
Average
Interest Rate | | Amount Outstanding(1) | | Weighted
Average
Interest Rate |
| Overdrawn demand and overnight deposit accounts | $ | 2 | | | 5.15 | % | | $ | 2 | | | 4.15 | % |
Within 1 year(2) | 35,241 | | | 4.87 | | | 71,050 | | | 4.34 | |
| After 1 year through 2 years | 12,532 | | | 3.88 | | | 7,634 | | | 3.30 | |
| After 2 years through 3 years | 6,437 | | | 3.23 | | | 4,036 | | | 2.22 | |
| After 3 years through 4 years | 2,548 | | | 3.62 | | | 3,391 | | | 2.05 | |
| After 4 years through 5 years | 3,660 | | | 4.07 | | | 2,815 | | | 3.24 | |
| After 5 years | 1,290 | | | 3.71 | | | 1,189 | | | 3.50 | |
| Total par value | 61,710 | | | 4.38 | % | | 90,117 | | | 4.03 | % |
| Valuation adjustments for hedging activities | (371) | | | | | (670) | | | |
| Valuation adjustments under fair value option | (4) | | | | | (47) | | | |
| | | | | | | |
| Total | $ | 61,335 | | | | | $ | 89,400 | | | |
|
| | | | | | | | | | | | | |
| | 2017 | | 2016 |
| Contractual Maturity | Amount Outstanding |
| | Weighted Average Interest Rate |
| | Amount Outstanding |
| | Weighted Average Interest Rate |
|
| Within 1 year | $ | 46,403 |
| | 1.46 | % | | $ | 22,902 |
| | 0.78 | % |
| After 1 year through 2 years | 16,287 |
| | 1.61 |
| | 7,608 |
| | 1.36 |
|
| After 2 years through 3 years | 5,423 |
| | 1.73 |
| | 9,410 |
| | 1.22 |
|
| After 3 years through 4 years | 6,719 |
| | 1.69 |
| | 2,083 |
| | 1.39 |
|
| After 4 years through 5 years | 1,741 |
| | 2.10 |
| | 6,423 |
| | 1.24 |
|
| After 5 years | 913 |
| | 3.13 |
| | 1,431 |
| | 2.60 |
|
| Total par value | 77,486 |
| | 1.57 | % | | 49,857 |
| | 1.09 | % |
| Valuation adjustments for hedging activities | (88 | ) | | | | (22 | ) | | |
| Valuation adjustments under fair value option | (16 | ) | | | | 10 |
| | |
| Total | $ | 77,382 |
| | | | $ | 49,845 |
| | |
(2)Advances outstanding with redemption terms within three months totaled $16.8 billion and $46.3 billion at December 31, 2023 and 2022, respectively.
ManyAll 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.borrower’s decision to repay the advance prior to its maturity date, which is required by Finance Agency regulations. In addition, for certain advances with full or partial prepayment symmetry, the Bank may charge the borrower a prepayment fee or pay the borrower a prepayment credit depending on certain circumstances, such as movements in interest rates, when the advance is prepaid. In November 2018, the Bank discontinued offering advances with partial prepayment symmetry. The Bank had advances with full prepayment symmetry outstanding totaling $39.8 billion at December 31, 2023, and $19.2 billion at December 31, 2022. The Bank had advances with partial prepayment symmetry outstanding totaling $4,619$209 million at December 31, 2017,2023, and $3,647$1.0 billion at December 31, 2016.2022. Some advances may be repaid on pertinentspecified call dates without prepayment fees (callable advances). The Bank had callable advances outstanding totaling $18,373$3.3 billion at December 31, 2017,2023, and $15,505$9.8 billion at December 31, 2016.2022.
The Bank’sBank had putable advances totaling $1.4 billion at December 31, 20172023, and 2016, included $0 and $125 of putable advances, respectively.$800 million at December 31, 2022. At the Bank’s discretion, the Bank may terminate these advances on predetermined exercise dates and offer replacement funding at prevailing market rates, subject to certain conditions. The Bank would typically exercise such termination rights when interest rates increase relative to contractual rates.
The following table summarizes advances at December 31, 20172023 and 2016,2022, by the earlier of the year of contractual maturityredemption term or next call date for callable advances and by the earlier of the year of contractual maturityredemption term or next put date for putable advances.
|
| | | | | | | | | | | | | | | |
| | Earlier of Contractual Maturity or Next Call Date | | Earlier of Contractual Maturity or Next Put Date |
| | 2017 |
| | 2016 |
| | 2017 |
| | 2016 |
|
| Within 1 year | $ | 52,624 |
| | $ | 25,784 |
| | $ | 46,403 |
| | $ | 22,927 |
|
| After 1 year through 2 years | 12,593 |
| | 11,078 |
| | 16,287 |
| | 7,583 |
|
| After 2 years through 3 years | 7,973 |
| | 4,465 |
| | 5,423 |
| | 9,410 |
|
| After 3 years through 4 years | 1,719 |
| | 5,782 |
| | 6,719 |
| | 2,083 |
|
| After 4 years through 5 years | 1,729 |
| | 1,421 |
| | 1,741 |
| | 6,423 |
|
| After 5 years | 848 |
| | 1,327 |
| | 913 |
| | 1,431 |
|
| Total par value | $ | 77,486 |
| | $ | 49,857 |
| | $ | 77,486 |
| | $ | 49,857 |
|
Credit and Concentration Risk. The following tables present the concentration in advances to the top five borrowers and their affiliates at December 31, 2017 and 2016. The tables also present the interest income from
these advances before the impact of interest rate exchange agreements associated with these advances for the years ended December 31, 2017 and 2016.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| Earlier of Redemption
Term or Next Call Date | | Earlier of Redemption
Term or Next Put Date |
| (In millions) | 2023 | | 2022 | | 2023 | | 2022 |
| Overdrawn demand and overnight deposit accounts | $ | 2 | | | $ | 2 | | | $ | 2 | | | $ | 2 | |
| Within 1 year | 35,561 | | | 71,370 | | | 36,115 | | | 71,850 | |
| After 1 year through 2 years | 12,542 | | | 7,634 | | | 13,000 | | | 7,634 | |
| After 2 years through 3 years | 6,437 | | | 4,046 | | | 6,149 | | | 3,836 | |
| After 3 years through 4 years | 2,558 | | | 3,391 | | | 2,551 | | | 3,391 | |
| After 4 years through 5 years | 3,660 | | | 2,825 | | | 2,917 | | | 2,215 | |
| After 5 years | 950 | | | 849 | | | 976 | | | 1,189 | |
| Total par value | $ | 61,710 | | | $ | 90,117 | | | $ | 61,710 | | | $ | 90,117 | |
December 31, 2017
|
| | | | | | | | | | | | | |
| Name of Borrower | Advances
Outstanding |
| | Percentage of
Total
Advances
Outstanding |
| | Interest
Income from
Advances(1) |
| | Percentage of
Total Interest
Income from
Advances |
|
| Charles Schwab Bank | $ | 15,000 |
| | 19 | % | | $ | 40 |
| | 5 | % |
JPMorgan Chase Bank, National Association(2) | 11,363 |
| | 15 |
| | 174 |
| | 19 |
|
| First Republic Bank | 8,400 |
| | 11 |
| | 112 |
| | 12 |
|
| MUFG Union Bank, National Association | 7,250 |
| | 9 |
| | 48 |
| | 5 |
|
| Bank of the West | 6,409 |
| | 8 |
| | 87 |
| | 10 |
|
| Subtotal | 48,422 |
| | 62 |
| | 461 |
| | 51 |
|
| Others | 29,064 |
| | 38 |
| | 438 |
| | 49 |
|
| Total par value | $ | 77,486 |
| | 100 | % | | $ | 899 |
| | 100 | % |
|
| | | | | | | | | | | | | |
| Name of Borrower | Advances Outstanding |
| | Percentage of Total Advances Outstanding |
| | Interest Income from Advances(1) |
| | Percentage of Total Interest Income from Advances |
|
JPMorgan Chase Bank, National Association(2) | $ | 14,807 |
| | 30 | % | | $ | 119 |
| | 23 | % |
| Bank of the West | 7,305 |
| | 14 |
| | 49 |
| | 9 |
|
| First Republic Bank | 5,900 |
| | 12 |
| | 70 |
| | 13 |
|
| CIT Bank, N.A. | 2,411 |
| | 5 |
| | 28 |
| | 5 |
|
| Star One Credit Union | 2,024 |
| | 4 |
| | 27 |
| | 5 |
|
| Subtotal | 32,447 |
| | 65 |
| | 293 |
| | 55 |
|
| Others | 17,410 |
| | 35 |
| | 240 |
| | 45 |
|
| Total par value | $ | 49,857 |
| | 100 | % | | $ | 533 |
| | 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 agreeConcentration Risk. The following tables present the concentration in advances 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 advances10 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.
For information related to the Bank’s credit risk on advances and allowance methodology for credit losses, see Note 10 – Allowance for Credit Losses.
Interest Rate Payment Terms. Interest rate payment terms for advances at December 31, 20172023 and 2016, are detailed below:2022. The tables also present the interest income from these advances before the impact of interest rate exchange agreements hedging these advances for the years ended December 31, 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | | | | | | | | | | |
| | | | | |
| | | | | | | | | | | |
(Dollars in millions) Name of Borrower | Advances
Outstanding | | Percentage of
Total
Advances
Outstanding | | | | | | Interest
Income from
Advances(1) | | Percentage of
Total Interest
Income from
Advances |
JPMorgan Chase, National Association(2) | $ | 23,833 | | | 39 | % | | | | | | $ | 1,018 | | | 31 | % |
| Western Alliance Bank | 6,200 | | | 10 | | | | | | | 199 | | | 6 | |
| City National Bank | 3,000 | | | 5 | | | | | | | 353 | | | 11 | |
First Technology Federal Credit Union(3) | 2,414 | | | 4 | | | | | | | 132 | | | 4 | |
MUFG Union Bank, National Association(4) | 2,052 | | | 3 | | | | | | | 153 | | | 5 | |
| SchoolsFirst Federal Credit Union | 1,823 | | | 3 | | | | | | | 48 | | | 1 | |
| Bank of America California, National Association | 1,450 | | | 2 | | | | | | | 68 | | | 2 | |
Luther Burbank Savings(3)(5) | 1,152 | | | 2 | | | | | | | 44 | | | 1 | |
| Wells Fargo National Bank West | 1,000 | | | 2 | | | | | | | 78 | | | 2 | |
| First Foundation Bank | 900 | | | 1 | | | | | | | 46 | | | 1 | |
| Subtotal | 43,824 | | | 71 | | | | | | | 2,139 | | | 64 | |
| Others | 17,886 | | | 29 | | | | | | | 1,187 | | | 36 | |
| Total par value | $ | 61,710 | | | 100 | % | | | | | | $ | 3,326 | | | 100 | % |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | |
| | | | | |
| | | | | | | | | | | |
(Dollars in millions) Name of Borrower | Advances
Outstanding | | Percentage of
Total
Advances
Outstanding | | | | | | Interest
Income from
Advances(1) | | Percentage of
Total Interest
Income from
Advances |
Silicon Valley Bank(6) | $ | 15,000 | | | 17 | % | | | | | | $ | 170 | | | 14 | % |
First Republic Bank (subsequently acquired by JPMorgan Chase, National Association)(2) | 14,000 | | | 16 | | | | | | | 175 | | | 14 | |
| City National Bank | 10,000 | | | 11 | | | | | | | 69 | | | 6 | |
Bank of the West(7) | 4,300 | | | 5 | | | | | | | 30 | | | 2 | |
MUFG Union Bank, National Association(4) | 4,300 | | | 5 | | | | | | | 129 | | | 11 | |
| Silvergate Bank | 4,300 | | | 5 | | | | | | | 38 | | | 3 | |
| Western Alliance Bank | 4,300 | | | 5 | | | | | | | 67 | | | 5 | |
First Technology Federal Credit Union(3) | 4,195 | | | 5 | | | | | | | 72 | | | 6 | |
| Wells Fargo National Bank West | 2,000 | | | 2 | | | | | | | 24 | | | 2 | |
| Bank of California, National Association | 1,500 | | | 1 | | | | | | | 8 | | | 1 | |
| Subtotal | 63,895 | | | 72 | | | | | | | 782 | | | 64 | |
| Others | 26,222 | | | 28 | | | | | | | 443 | | | 36 | |
| Total par value | $ | 90,117 | | | 100 | % | | | | | | $ | 1,225 | | | 100 | % |
|
| | | | | | | |
| 2017 |
| | 2016 |
|
| Par value of advances: | | | |
| Fixed rate: | | | |
| Due within 1 year | $ | 31,767 |
| | $ | 13,486 |
|
| Due after 1 year | 13,022 |
| | 10,845 |
|
| Total fixed rate | 44,789 |
| | 24,331 |
|
| Adjustable rate: | | | |
| Due within 1 year | 14,636 |
| | 9,416 |
|
| Due after 1 year | 18,061 |
| | 16,110 |
|
| Total adjustable rate | 32,697 |
| | 25,526 |
|
| Total par value | $ | 77,486 |
| | $ | 49,857 |
|
The Bank may use derivatives to adjust(1) Interest income amounts exclude the repricing and options characteristicsinterest effect of advances to more closely match the characteristics of the Bank’s funding liabilities. In general, whenever a member executes a fixed or variable rate advance with embedded options, the Bank will simultaneously execute an interest rate exchange agreementagreements with terms that offset the terms and embedded options in the advance. The combination of the advance and the interest rate exchange agreement effectively creates a variable rate asset. This type of hedge relationship receives fair value option accounting treatment. In addition, for certain advances for which the Bank has elected the fair value option, the Bank will simultaneously execute an interest rate exchange agreement with terms that economically offset the terms of the advance. However, this type of hedge is treated as an economic hedge because these combinations generally do not meet the requirements for fair value hedge accounting treatment. For more information, see Note 18 – Derivatives and Hedging Activities and Note 19 – Fair Value.
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 featurederivative counterparties; as a stand-alone derivative at December 31, 2017 or 2016. The Bank has generally electedresult, the total interest income amounts will not agree 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 19 – Fair Value.Income. The amount of interest income from advances can vary depending on the amount outstanding, terms to maturity, interest rates, and repricing characteristics.
(2) On May 1, 2023, the California Department of Financial Protection and Innovation (DFPI) closed First Republic Bank and appointed the FDIC as receiver. On the same date, the FDIC transferred all of the deposits and substantially all of the assets of First Republic Bank, including $28.1 billion in advances outstanding from the Bank, to JPMorgan Chase, National Association, a nonmember. These advances outstanding are fully collateralized and are not expected to result in any credit loss to the Bank.
Prepayment Fees, Net. (3) An officer or director of the member was a Bank director during 2023 and 2022.
(4) On December 1, 2022, U.S. Bancorp, a nonmember, announced that it completed its acquisition of MUFG Union Bank, National Association.
(5) On November 14, 2022, Luther Burbank Savings and Washington Federal Bank (a nonmember bank) announced the signing of a definitive merger agreement pursuant to which Washington Federal Bank will acquire Luther Burbank Savings, subject to receipt of regulatory and shareholder approval. On May 5, 2023, it was announced that merger approval was received from shareholders of both banks. On February 29, 2024, it was announced that the merger was completed. On the same date, Washington Federal Bank assumed all of the assets and liabilities of Luther Burbank Savings, including $1.2 billion in advances outstanding from the Bank. These advances outstanding are fully collateralized and are not expected to result in any credit loss to the Bank.
(6) On March 10, 2023, Silicon Valley Bank was closed by the California DFPI and the FDIC was named as receiver. The FDIC created Silicon Valley Bridge Bank, N.A., whereby all of the deposits and substantially all assets of Silicon Valley Bank were transferred to the bridge bank. On March 26, 2023, the FDIC entered into a purchase and assumption agreement for all the deposits and loans of Silicon Valley Bridge Bank, N.A., with First Citizens Bank and Trust Company. Silicon Valley Bank is no longer a member of the Bank. As of March 31, 2023, Silicon Valley Bridge Bank, N.A., had prepaid all outstanding advances to the Bank.
(7) On February 1, 2023, BMO Harris, a nonmember, announced that it completed its acquisition of Bank of the West.
Credit Risk Exposure and Security Terms. 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 adjustmentsmanages its credit exposure related to prepaid advances through an integrated approach that were hedged. The net amountprovides for a credit limit to be established for each borrower, includes an ongoing review of prepayment feeseach borrower’s financial condition, and is reflected as interest income incoupled with conservative collateral and lending policies to limit the Statementsrisk of Income for the years ended December 31, 2017, 2016, and 2015, as follows:loss.
|
| | | | | | | | | | | |
| | 2017 |
| | 2016 |
| | 2015 |
|
| Prepayment fees received | $ | 1 |
| | $ | 6 |
| | $ | 28 |
|
| Fair value adjustments | — |
| | (1 | ) | | (20 | ) |
| Net | $ | 1 |
| | $ | 5 |
| | $ | 8 |
|
| Advance principal prepaid | $ | 8,469 |
| | $ | 3,459 |
| | $ | 2,229 |
|
Note 9 — Mortgage Loans Held for Portfolio
Under the MPF® Program,In addition, the Bank lends to member financial institutions that have their principal place of business in Arizona, California, or Nevada, in accordance with federal law and Finance Agency regulations. Specifically, the Bank is required to obtain sufficient collateral to fully secure credit products up to the member’s total credit limit. Borrowers may purchase from members, for its own portfolio, conventional conforming fixed ratepledge the following eligible assets to secure advances:
•one-to-four-family first lien residential mortgage loans under the MPF Original product and mortgage loansloans;
•securities issued, insured, by the FHA or guaranteed by the DepartmentU.S. government or any of 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 toits agencies, including without limitation MBS backed by Fannie Mae, underFreddie Mac, or Ginnie Mae;
•cash or deposits in the MPF Xtra® product; of jumbo fixed rate mortgage loans for concurrent sale to Redwood Residential Acquisition Corporation, a subsidiary of Redwood Trust, Inc., a real estate investment trust, under the MPF Direct product; and of government-insured or government-guaranteed mortgage loans that will be packaged into securities backed by the mortgage
Bank;
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
•certain other real estate-related collateral, such as certain privately issued MBS, multifamily loans, commercial real estate loans, and guaranteed by Ginnie Mae under the MPF Government MBS product. When members sell mortgage loans under the MPF Xtra, MPF Direct, and MPF Government MBS products, the loans are sold to a third-party investor and are not recorded on the Bank’s Statements of Condition. As of December 31, 2017, the Bank had approved 23 members as participating financial institutions since renewing its participation in the MPF Program in 2013.
From May 2002 through October 2006, the Bank purchased conventional conforming fixed rate mortgage loans from its participating financial institutions under the MPF Original and MPF Plus products. Participating members originated or purchased the mortgage loans, credit-enhanced them and sold them to the Bank, and generally retained the servicing of the loans.
The following table presents information as of December 31, 2017 and 2016, on mortgage loans, all of which are secured by one- to four-unit residential properties and single-unit second homes.
|
| | | | | | | |
| 2017 |
| | 2016 |
|
| Fixed rate medium-term mortgage loans | $ | 32 |
| | $ | 55 |
|
| Fixed rate long-term mortgage loans | 1,973 |
| | 759 |
|
| Subtotal | 2,005 |
| | 814 |
|
| Unamortized premiums | 76 |
| | 18 |
|
| Unamortized discounts | (5 | ) | | (6 | ) |
| Mortgage loans held for portfolio | 2,076 |
| | 826 |
|
| Less: Allowance for credit losses | — |
| | — |
|
| Total mortgage loans held for portfolio, net | $ | 2,076 |
| | $ | 826 |
|
Medium-term loans have original contractual terms of 15 years or less, and long-term loans have contractual terms of more than 15 years.
The participating financial institution and the Bank share the risk of credit losses on conventional MPF loan products by structuring potential losses on conventional MPF loans into layers with respect to each master commitment. After any primary mortgage insurance, the Bank is obligated to incur the first layer or portion of credit losses not absorbed by the liquidation value of the real property securing the loan. Under the MPF Program, the participating financial institution’s credit enhancement protection consists of the credit enhancement amount, which may be a direct obligation of the participating financial institution or may be a supplemental mortgage insurance policy paid for by the participating financial institution, and may include a contingent performance-based credit enhancement fee payable to the participating financial institution. The participating financial institution is required to pledge collateral to secure any portion of its credit enhancement amount that is a direct obligation.
For taking on the credit enhancement obligation, the Bank pays the participating financial institution or any successor a credit enhancement fee, typically 10 basis points per annum, which is calculated on the remaining unpaid principal balance of the mortgage loans. A participating financial institution may elect to receive the credit enhancement fees monthly over the life of the loans or as an upfront lump sum amount that is included in the purchase price at the time loans are sold to the Bank. The lump sum amount is approximately equivalent to the present value of the monthly credit enhancement fees that the Bank would otherwise be expected to pay over the life of the loans. The Bank records credit enhancement fees as a reduction to interest income. The Bank reduced net interest income for credit enhancement fees totaling $1 million in 2017 and de minimis amounts in 2016 and 2015.
For information related to the Bank’s credit risk on mortgage loans and allowance methodology for credit losses, see Note 10 – Allowance for Credit Losses.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 10 — Allowance for Credit Losses
An allowance for credit losses is a valuation allowance separately established for each identified portfolio segment, if it is probable that impairment has occurred in the Bank's portfolio as of the Statements of Condition date and the amount of loss can be reasonably estimated. To the extent necessary, an allowance for credit losses for off-balance sheet credit exposures is recorded as a liability.
Portfolio Segments.A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. The Bank has developed and documented a systematic methodology for determining an allowance for credit losses for each of the following portfolio segments:
advances, letters of credit, and other extensions of credit, collectively referred to as “credit products,”
MPF loans held for portfolio,
term securities purchased under agreements to resell, and
term Federal funds sold.
Classes of Financing Receivables.Classes of financing receivables generally are a disaggregation of a portfolio segment to the extent needed to understand the exposure to credit risk arising from these financing receivables. The Bank determined that no further disaggregation of the portfolio segments identified above is needed because the credit risk arising from these financing receivables is assessed and measured by the Bank at the portfolio segment level.
Credit Products. The Bank lends to member financial institutions that have a principal place of business in Arizona, California, or Nevada. Under the FHLBank Act, the Bank is required to obtain sufficient collateral for credit products to protect the Bank from credit losses. Collateral eligible to secure credit products includes certain investment securities,lien residential mortgage loans cash or deposits with the Bank,home equity loans; and other eligible real estate-related assets. The capital stock of the Bank owned by each borrowing member is pledged as additional collateral for the member's indebtedness to the Bank. The Bank may also accept secured
•small business, small farm, and small agribusiness loans that are fully secured by collateral (such as real estate, equipment and securities representing a whole interest in such secured loans, as collateralvehicles, accounts receivable, and inventory) from members that are community financial institutions.
The Housing and Economic Recovery Act of 2008 (Housing Act) added secured loans for community development activities as collateral that the Bank may accept from community financial institutions. In addition, the Bank has advances outstanding to former members and member successors, which are also subject to thesethe security terms.
terms above. The Bank requires each borrowing member to execute a written Advances and Security Agreement, which describes the lending relationship between the Bank and the borrower. At December 31, 20172023 and 2016,2022, the Bank had a perfected security interest in collateral pledged by each borrowing member, or by the member's affiliate on behalf of the member, and by each nonmember borrower, with an estimated value in excess of the outstanding credit products for that borrower. Based on the financial condition of the borrower, the Bank may either (i) allow the borrower or the pledging affiliate to retain physical possession of loan collateral pledged to the Bank, provided that the borrower or the pledging affiliate agrees to hold the collateral for the benefit of the Bank, or (ii) require the borrower or the pledging affiliate to deliver physical possession of loan collateral to the Bank or its custodial agent. All securities collateral is required to be delivered to the Bank'sBank’s custodial agent. All loan collateral pledged to the Bank is subject to a UCC-1Uniform Commercial Code-1 financing statement.
Section 10(e) of the FHLBank Act affords any security interest granted to the Bank by a member or any affiliate of the member or any nonmember borrower priority over claims or rights of any other party, except claims or rights that (i) would be entitled to priority under otherwise applicable law and (ii) are held by bona fide purchasers for value or secured parties with perfected security interests.
The Bank classifies as impaired any advance with respect to which it is probable that all principal and interest due will not be collected according to its contractual terms. Impaired advances are valued using the present value of expected future cash flows discounted at the advance's effective interest rate, the advance's observable market price
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
or, if collateral-dependent, the fair value of the advance's underlying collateral. When an advance is classified as impaired, the accrual of interest is discontinued and unpaid accrued interest is reversed. Advances do not return to accrual status until they are brought current with respect to both principal and interest and until the future principal payments are no longer in doubt. No advances were classified as impaired during the periods presented.
The Bank manages its credit exposure related to credit products 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. At December 31, 20172023 and 2016,2022, none of the Bank’s credit products were past due or on nonaccrual status, or considered impaired.status. There were no troubled debt restructurings relatedmodifications to credit products related to borrowers experiencing financial difficulty during the years ended December 31, 20172023 and 2016.
2022.
Based on the collateral pledged as security for advances, the Bank’s credit analyses of borrowers’ financial condition, repayment history on advances, and the Bank’s credit extension and collateral policies as of December 31, 2017,2023, the Bank expects to collect all amounts due according to the contractual terms. Therefore, no allowance for credit losses on credit productsadvances was deemed necessary by the Bank. The Bank has never experienced any credit losses on its credit products.as of December 31, 2023 and 2022.
Interest Rate Payment Terms. Interest rate payment terms for advances at December 31, 2023 and 2022, are detailed below:
No member institutions were placed into receivership during 2017 or from January 1, 2018 | | | | | | | | | | | |
| (In millions) | 2023 | | 2022 |
| Par value of advances: | | | |
| Fixed rate: | | | |
| Due within 1 year | $ | 23,866 | | | $ | 47,621 | |
| Due after 1 year | 26,467 | | | 18,050 | |
| Total fixed rate | 50,333 | | | 65,671 | |
| Adjustable rate: | | | |
| Due within 1 year | 11,377 | | | 23,431 | |
| Due after 1 year | — | | | 1,015 | |
| Total adjustable rate | 11,377 | | | 24,446 | |
| Total par value | $ | 61,710 | | | $ | 90,117 | |
Federal Home Loan Bank of San Francisco
Notes to February 28, 2018.Financial Statements (continued)
Note 6 — Mortgage Loans Held for Portfolio.Portfolio
Mortgage loans held for portfolio consist of single-family mortgage loans purchased from participating financial institutions under the MPF program. The following table presents information as of December 31, 2023 and 2022, on mortgage loans held for portfolio, all of which are secured by one- to four-unit residential properties and single-unit homes.
| | | | | | | | | | | |
| (In millions) | 2023 | | 2022 |
| Fixed rate medium-term mortgage loans | $ | 12 | | | $ | 14 | |
| Fixed rate long-term mortgage loans | 704 | | | 761 | |
| Subtotal | 716 | | | 775 | |
| Unamortized premiums | 41 | | | 43 | |
| Unamortized discounts | (2) | | | (2) | |
Mortgage loans held for portfolio(1) | 755 | | | 816 | |
| Less: Allowance for credit losses | (1) | | | (1) | |
| Total mortgage loans held for portfolio, net | $ | 754 | | | $ | 815 | |
(1)Excludes accrued interest receivable of $5 million at December 31, 2023 and 2022.
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. A mortgagepast due loan is consideredone where the borrower has failed to be impaired when itmake a scheduled full payment of principal and interest within 30 days of its due date. Other delinquency statistics include nonaccrual loans and loans in process of foreclosure. The following tables present the payment status for mortgage loans and other delinquency statistics for the Bank’s mortgage loans at December 31, 2023 and 2022.
| | | | | | | | | | | |
| (Dollars in millions) | | | |
Payment Status, at Amortized Cost(1) | 2023 | | 2022 |
| 30 – 59 days delinquent | $ | 5 | | | $ | 9 | |
| 60 – 89 days delinquent | 4 | | | 3 | |
| 90 days or more delinquent | 16 | | | 19 | |
| Total past due | 25 | | | 31 | |
| Total current loans | 730 | | | 785 | |
| Total mortgage loans held for portfolio | $ | 755 | | | $ | 816 | |
In process of foreclosure, included above(2) | $ | 2 | | | $ | 3 | |
Nonaccrual loans(3) | $ | 16 | | | $ | 19 | |
| | | |
Serious delinquencies as a percentage of total mortgage loans outstanding(4) | 2.17 | % | | 2.30 | % |
(1) The amortized cost in a loan is the unpaid principal balance of the loan, adjusted for net deferred loan fees or costs, unamortized premiums or discounts, and direct write-downs.
(2) Includes loans for which the servicer has reported a decision to foreclose or to pursue a similar alternative, such as deed-in-lieu. Loans in process of foreclosure are included in past due or current loans depending on their delinquency status.
(3) At December 31, 2023 and 2022, $5 million and $7 million, respectively, of mortgage loans on nonaccrual status did not have an associated allowance for credit losses because these loans were either previously charged off to the expected recoverable value or the fair value of the underlying collateral, including any credit enhancements, is greater than the amortized cost of the loans.
(4) Represents loans that are 90 days or more past due (nonaccrual) or when it is probable,in the process of foreclosure as a percentage of the recorded investment of total mortgage loans outstanding.
Allowance for Credit Losses on Mortgage Loans Held for Portfolio. Mortgage loans held for portfolio are evaluated on a loan-level basis for expected credit losses, factoring in the credit enhancement structure at the master
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
commitment level. The Bank determines its allowance for credit losses on mortgage loans held for portfolio through analyses that include consideration of various loan portfolio and collateral related characteristics, such as past performance, current conditions, and reasonable and supportable forecasts of expected economic conditions. The Bank uses models that employ a variety of methods, such as projected cash flows, to estimate expected credit losses over the life of the loans. These models rely on a number of inputs, such as current and forecasted property values and interest rates as well as historical borrower behavior experience. At December 31, 2023, the Bank’s reasonable and supportable forecast of housing prices expects, on average, for prices to appreciate 1.3% over a one-year forecast horizon before reverting to long-term housing price appreciation rates of 4.0% after five additional years in the forecast based on current informationhistorical averages. At December 31, 2022, the Bank’s reasonable and events, thatsupportable forecast of housing prices expected, on average, for prices to depreciate 0.7% over a one-year forecast horizon before reverting to long-term housing price appreciation rates of 4.0% after five additional years in the forecast based on historical averages. The Bank also incorporates associated credit enhancements, if any, to determine its estimate of expected credit losses.
Certain mortgage loans held for portfolio may be evaluated for credit losses by the Bank will be unable to collect all principal and interest amounts due according tousing the contractual terms of thepractical expedient for collateral-dependent assets. A mortgage loan agreement.
Loans that are on nonaccrual status and that are considered collateral-dependent are measured for impairment based on the fair value of the underlying property less estimated selling costs. Loans areis considered collateral-dependent if repayment is expected to be provided solely by the sale of the underlying property, that is, if it is considered likely that the borrower will default and there is no credit enhancement to offset losses under the master commitment, or the collectability or availability of credit enhancement is deemed to be uncertain. Collateral-dependent loans are impaired ifdefault. The Bank may estimate the fair value of the underlyingthis collateral less estimated selling costs is insufficient to recover the unpaid principal balance on the loan. Interest income on impaired loans is recognized in the same manner as interest income on nonaccrual loans, as noted below.
by applying an appropriate loss severity rate or using third-party estimates or property valuation models. The Bank placesexpected credit loss of a collateral-dependent mortgage loan on nonaccrual status when the collection of the contractual principal or interest from the participating financial institution is reported 90 days or more past due or when the loan is in foreclosure. When a mortgage loan is placed on nonaccrual status, accrued but uncollected interest is reversed against interest income. The Bank records cash payments received on nonaccrual loans first as interest income and then as a reduction of principal as specified in the contractual agreement, unless the collection of the remaining principal amount due is considered doubtful.
The following table presents information on delinquent mortgage loans as of December 31, 2017 and 2016.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | |
| | 2017 |
| | 2016 |
|
| | Recorded Investment(1) |
| | Recorded Investment(1) |
|
| 30 – 59 days delinquent | $ | 8 |
| | $ | 7 |
|
| 60 – 89 days delinquent | 2 |
| | 3 |
|
| 90 days or more delinquent | 12 |
| | 15 |
|
| Total past due | 22 |
| | 25 |
|
| Total current loans | 2,065 |
| | 805 |
|
| Total mortgage loans | $ | 2,087 |
| | $ | 830 |
|
In process of foreclosure, included above(2) | $ | 3 |
| | $ | 5 |
|
| Nonaccrual loans | $ | 12 |
| | $ | 15 |
|
| Loans past due 90 days or more and still accruing interest | $ | — |
| | $ | — |
|
Serious delinquencies as a percentage of total mortgage loans outstanding(3) | 0.59 | % | | 1.79 | % |
| |
(1) | The recorded investment 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. |
| |
(2) | Includes loans for which the servicer has reported a decision to foreclose or to pursue a similar alternative, such as deed-in-lieu. Loans in process of foreclosure are included in past due or current loans depending on their delinquency status. |
| |
(3) | 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. |
Mortgage Loans Evaluated at the Individual Master Commitment Level – The credit risk analysis of all conventional MPF loans is performed at the individual master commitment level to determine the credit enhancements available to recover losses on MPF loans under each individual master commitment.
Individually Evaluated Mortgage Loans – Certain conventional mortgage loans, primarily impaired mortgage loans that are considered collateral-dependent, may be specifically identified for purposes of calculating the allowance for credit losses. The estimated credit losses on impaired collateral-dependent loans may be separately determined because sufficient information exists to make a reasonable estimate of the inherent loss on those loans on an individual loan basis. The Bank estimates the fair value of collateral using real estate broker price opinions or automated valuation models (AVMs) based on property characteristics as well as recent market sales and current listings. The resulting incurred loss, if any, is equal to the difference between the carrying valueamortized 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.
Collectively Evaluated Mortgage Loans – TheAt both December 31, 2023 and 2022, the allowance for credit risk analysis of conventional loans collectively evaluated for impairment considers loan pool-specific attribute data, applies estimated loss severities, and considers the associated credit enhancements to determine the Bank's best estimate of probable incurred losses. The analysis includes estimating projected cash flows that the Bank is likely to collect basedlosses on an assessment of all available information, including prepayment speeds, default rates, and loss severity for the mortgage loans based on underlying loan-level borrower and loan characteristics; expected housing price changes; and interest rate assumptions. In performing a detailed cash flow analysis, the Bank develops its best estimate of the cash flows expected to be collected using a third-party model to project prepayments, default rates, and loss severities based on borrower characteristics and the particular attributes of the mortgage loans, in conjunction with assumptions related primarily to future changes in housing prices and interest rates.portfolio was $1 million. The assumptions used as inputs to the model, including the forecast of future housing price changes, are consistent with assumptions used for the Bank's evaluation of its PLRMBS for OTTI.
The amountsamount of charge-offs and recoveries of allowance for credit losses on the mortgage loan portfolio were de minimis duringfor the years ended December 31, 20172023, 2022, and 2016. Net charge-offs of allowance for credit losses on the mortgage loan portfolio were $2 during the year ended December 31, 2015.2021.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The allowance for credit losses and recorded investment by impairment methodology for individually and collectively evaluated impaired loans are as follows:
|
| | | | | | | |
| (In millions) | 2017 |
| | 2016 |
|
| Allowance for credit losses, end of the period: | | | |
| Individually evaluated for impairment | $ | — |
| | $ | — |
|
| Collectively evaluated for impairment | — |
| | — |
|
| Total allowance for credit losses | $ | — |
| | $ | — |
|
| Recorded investment, end of the period: | | | |
| Individually evaluated for impairment | $ | 9 |
| | $ | 12 |
|
| Collectively evaluated for impairment | 2,078 |
| | 818 |
|
| Total recorded investment | $ | 2,087 |
| | $ | 830 |
|
The recorded investment, unpaid principal balance, and related allowance of impaired loans individually evaluated for impairment are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Recorded Investment |
| | Unpaid Principal Balance |
| | Related Allowance |
| | Recorded Investment |
| | Unpaid Principal Balance |
| | Related Allowance |
|
| With no related allowance | $ | 9 |
| | $ | 9 |
| | $ | — |
| | $ | 12 |
| | $ | 12 |
| | $ | — |
|
| With an allowance | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 9 |
| | $ | 9 |
| | $ | — |
| | $ | 12 |
| | $ | 12 |
| | $ | — |
|
The average recorded investment on impaired loans individually evaluated for impairment is as follows:
|
| | | | | | | |
| | 2017 |
| | 2016 |
|
| With no related allowance | $ | 10 |
| | $ | 12 |
|
| With an allowance | — |
| | — |
|
| Total | $ | 10 |
| | $ | 12 |
|
The Bank and any participating financial institution share in the credit risk of the loans sold by that institution as specified in a master agreement. Loans purchased under the MPF Program generally had a credit risk exposure at the time of purchase that, as determined by the MPF Program methodology, would be expected from an equivalent investment rated AA if purchased prior to April 2017, or rated BBB if purchased since April 2017, taking into consideration the credit risk sharing structure mandated by the Finance Agency’s acquired member assets (AMA) regulation. The MPF Program structures potential credit losses on conventional MPF loans into layers with respect to each pool of loans purchased by the Bank under a single master commitment, as follows:
| |
1. | The first layer of protection against loss is the liquidation value of the real property securing the loan. |
| |
2. | The next layer of protection comes from the primary mortgage insurance that is required for loans with a loan-to-value ratio greater than 80%, if still in place.
|
| |
3. | Losses that exceed the liquidation value of the real property and any primary mortgage insurance, up to an agreed-upon amount called the first loss account for each master commitment, are incurred by the Bank. |
| |
4. | Losses in excess of the first loss account for each master commitment, up to an agreed-upon amount called the credit enhancement amount, are covered by the participating financial institution’s credit enhancement obligation at the time losses are incurred. |
| |
5. | Losses in excess of the first loss account and the participating financial institution’s remaining credit enhancement for the master commitment, if any, are incurred by the Bank. |
The Bank calculates its estimated allowance for credit losses on mortgage loans acquired under the MPF Original and MPF Plus products as described below. Effective January 1, 2015, the Bank implemented the accounting
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
requirements of regulatory Advisory Bulletin 2012-02. As a result, for any mortgage loans that areFor more than 180 days past due and that have any outstanding balance in excess of the fair value of the property, less cost to sell, this excess is charged off as a loss by the end of the month in which the applicable time period elapses. Likewise, when a borrower is in bankruptcy, loans are written down to the fair value of the collateral, less cost to sell, in general within 60 days of receipt of the notification of filing from the bankruptcy court, unless it can be clearly demonstrated and documented that repayment is likely to occur. As a result of these charge-offs, corresponding Allowance for Credit Losses on MPF Loans, which had previously provided for most of these expected losses, was reduced accordingly.
Allowance for Credit Losses on MPF Loans –The Bank evaluates the allowance for credit losses on MPF mortgage loans based on two components. The first component applies to each individual loan that is specifically identified as impaired. The Bank evaluates the exposure on these loans by considering the first layer of loss protection (the liquidation value of the real property securing the loan) and the availability and collectability of credit enhancements under the terms of each master commitment and records a provision for credit losses. For this component, the Bank established a de minimis allowance for credit losses for MPF Original and MPF Plus loans as of December 31, 2017 and 2016.
The second component applies to loans that are not specifically identified as impaired and is based on the Bank’s estimate of probable credit losses on those loans as of the financial statement date. The Bank evaluates the credit loss exposure on a loan pool basis considering various observable data, such as delinquency statistics, past performance, current performance, loan portfolio characteristics, collateral valuations, industry data, and prevailing economic conditions. The Bank also considers the availability and collectability of credit enhancements from participating financial institutions or from mortgage insurers under the terms of each master commitment. For this component, the Bank established an allowance for credit losses for MPF Original and MPF Plus loans totaling de minimis amounts as of December 31, 2017 and 2016.
Troubled Debt Restructurings –Troubled debt restructuring (TDR) is considered to have occurred when a concession is granted to the debtor for economic or legal reasonsinformation related to the debtor’s financial difficulties and that concession would not have been considered otherwise. An MPF loan considered a TDR is individually evaluatedBank’s accounting policies for impairment when determining its related allowancemortgage loans held for credit losses. Credit loss is measured by factoring in expected cash flow shortfalls incurred asportfolio, see “Note 1 – Summary of the reporting date as well as the economic loss attributable to delaying the original contractual principal and interest due dates, if applicable.Significant Accounting Policies.”
The recorded investment of the Bank's nonperforming MPFloans classified as TDRs totaled $3 as of December 31, 2017, and $3 as of December 31, 2016. During 2017 and 2016, the difference between the pre- and post-modification recorded investment in TDRs that occurred during the year was de minimis. None of the MPF loans classified as TDRs within the previous 12 months experienced a payment default.
Term Federal Funds Sold. The Bank invests in Federal funds sold with counterparties that are considered by the Bank to be of investment quality, and these investments are evaluated for purposes of an allowance for credit losses only if the investment is not paid when due. All investments in Federal funds sold as of December 31, 2017 and 2016, were repaid or are expected to be repaid according to the contractual terms.
Note 117 — Deposits
The Bank maintains demand deposit accounts that are directly related to the extension of credit to members and offers short-term deposit programs to members and qualifying nonmembers. In addition, a member that services mortgage loans held for portfolio may deposit in the Bank funds collected in connection with the mortgage loans, pending disbursement of these funds to the owners of the mortgage loans. The Bank classifies these types of deposits as non-interest-bearing deposits.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Deposits as of December 31, 2017 and 2016, were as follows:
|
| | | | | | | |
| | 2017 |
| | 2016 |
|
| Interest-bearing deposits: | | | |
| Demand and overnight | $ | 263 |
| | $ | 167 |
|
| Total interest-bearing deposits | 263 |
| | 167 |
|
| Non-interest-bearing deposits | 18 |
| | 2 |
|
| Total | $ | 281 |
| | $ | 169 |
|
Interest Rate Payment Terms. 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. Interest
Deposits and interest rate payment terms for deposits at as of December 31, 20172023 and 2016, are detailed in the following table:2022, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| (Dollars in millions) | Amount
Outstanding | | Weighted
Average
Interest Rate | | Amount
Outstanding | | Weighted
Average
Interest Rate |
| | | | | | | |
| Interest-bearing deposits (adjustable rate) | $ | 957 | | | 5.15 | % | | $ | 983 | | | 4.15 | % |
| | | | | | | |
| | | | | | | |
| Non-interest-bearing deposits | 5 | | | | | 6 | | | |
| Total | $ | 962 | | | | | $ | 989 | | | |
|
| | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Amount Outstanding |
| | Weighted Average Interest Rate |
| | Amount Outstanding |
| | Weighted Average Interest Rate |
|
| Interest-bearing deposit – Adjustable rate | $ | 263 |
| | 1.10 | % | | $ | 167 |
| | 0.01 | % |
| Non-interest-bearing deposits | 18 |
| | | | 2 |
| | |
| Total | $ | 281 |
| | | | $ | 169 |
| | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 128 — Consolidated Obligations
Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are jointly issued by the FHLBanksFederal Home Loan Banks (FHLBanks) through the Office of Finance, which serves as the FHLBanks’ agent. As provided by the FHLBankFederal Home Loan Bank Act of 1932, as amended (FHLBank Act) or by regulations governing the operations of the FHLBanks, all FHLBanks have joint and several liability for all FHLBank consolidated obligations. For a discussion of the joint and several liability regulation, see Note 20“Note 15 – Commitments and Contingencies.” In connection with each issuance of consolidated obligations, each FHLBank specifies the type, term, and amount of debt it requests to have issued on its behalf. The Office of Finance tracks the amount of debt issued on behalf of each FHLBank. In addition, the Bank separately tracks and records as a liability its specific portion of the consolidated obligations issued and is the primary obligor for that portion of the consolidated obligations issued. The Finance Agency and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance.
Consolidated obligation bonds may be issued to raise short-, intermediate-, and long-term funds for the FHLBanks. The maturity of consolidated obligation bonds generally ranges from 6 months to 15 years, but the maturity is not subject to any statutory or regulatory limits. Consolidated obligation discount notes are primarily used to raise short-term funds. These notes are issued at less than their face amount and redeemed at par value when they mature.
The par value of the outstanding consolidated obligations of the FHLBanks was $1,034,260 at December 31, 2017, and $989,311 at December 31, 2016. Regulations require the FHLBanks to maintain, for the benefit of investors in consolidated obligations, in the aggregate, unpledged qualifying assets in an amount equal to the consolidated obligations outstanding. Qualifying assets are defined as cash; secured advances; assets with an assessment or credit rating at least equivalent to the current assessment or credit rating of the consolidated obligations; obligations, participations, mortgages, or other securities of or issued by the United States or an agency of the United States; and such securities as fiduciary and trust funds may invest in under the laws of the state in which the FHLBank is located. Any assets subject to a lien or pledge for the benefit of holders of any issue of consolidated obligations are treated as if they were free from lien or pledge for the purposes of compliance with these regulations. At December 31, 2017,2023, the Bank had qualifying assets totaling $123,177,$91.8 billion, and the Bank'sBank’s participation in consolidated obligations outstanding was $115,503.$83.5 billion.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
General Terms. Consolidated obligations are generally issued with either fixed rate payment terms or adjustable rate payment terms. In addition, to meet the specific needs of certain investors, fixed rate and adjustable rate consolidated obligation bonds may contain certain embedded features, such as call options and complex coupon payment terms. In general, when such consolidated obligation bonds are issued for which the Bank is the primary obligor, the Bank simultaneously enters into interest rate exchange agreements containing offsetting features to, in effect, convert the terms of the bond to the terms of a simple adjustable rate bond.
In addition to having fixed rate or simple adjustable rate coupon payment terms, consolidated obligations may, for example, include:
•Callable bonds, which the Bank may call in whole or in part at its option on predetermined call dates according to the terms of the bond offerings;
•Step-up callable bonds, which pay interest at increasing fixed rates for specified intervals over the life of the bond and can generally be called at the Bank'sBank’s option on the step-up dates according to the terms of the bond offerings;
•Step-down callable bonds, which pay interest at decreasing fixed rates for specified intervals over the life of the bond and can generally be called at the Bank'sBank’s option on the step-down dates according to the terms of the bond offerings;
•Conversion callable bonds, which have coupon rates that convert from fixed to adjustable or from adjustable to fixed on predetermined dates and can generally be called at the Bank’s option on predetermined call dates according to the terms of the bond offerings;offerings.
Range bonds, which have coupons at fixed or variable rates and pay the fixed or variable rate as long as a reference rate is within an established range, but generally pay zero percent or a minimal interest rate if the specified reference rate is outside the established range.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Redemption Terms. The following is a summary of the Bank’s participation in consolidated obligation bonds at December 31, 20172023 and 2016.2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | 2023 | | 2022 |
| Contractual Maturity | Amount
Outstanding | | Weighted
Average
Interest Rate | | Amount
Outstanding | | Weighted
Average
Interest Rate |
| Within 1 year | $ | 42,821 | | | 4.84 | % | | $ | 58,301 | | | 4.05 | % |
| After 1 year through 2 years | 13,105 | | | 4.70 | | | 8,268 | | | 2.30 | |
| After 2 years through 3 years | 5,938 | | | 1.34 | | | 2,317 | | | 1.26 | |
| After 3 years through 4 years | 1,345 | | | 1.75 | | | 5,473 | | | 0.99 | |
| After 4 years through 5 years | 942 | | | 2.98 | | | 1,255 | | | 1.47 | |
| After 5 years | 826 | | | 2.35 | | | 1,293 | | | 1.73 | |
| Total par value | 64,977 | | | 4.37 | % | | 76,907 | | | 3.47 | % |
| Unamortized premiums | — | | | | | 1 | | | |
| Unamortized discounts | (6) | | | | | (5) | | | |
| Valuation adjustments for hedging activities | (645) | | | | | (1,083) | | | |
| Fair value option valuation adjustments | (29) | | | | | (52) | | | |
| Total | $ | 64,297 | | | | | $ | 75,768 | | | |
|
| | | | | | | | | | | | | |
| | 2017 | | 2016 |
| Contractual Maturity | Amount Outstanding |
| | Weighted Average Interest Rate |
| | Amount Outstanding |
| | Weighted Average Interest Rate |
|
| Within 1 year | $ | 69,734 |
| | 1.33 | % | | $ | 33,879 |
| | 0.82 | % |
| After 1 year through 2 years | 6,461 |
| | 1.42 |
| | 10,597 |
| | 0.99 |
|
| After 2 years through 3 years | 2,785 |
| | 1.74 |
| | 1,318 |
| | 1.32 |
|
| After 3 years through 4 years | 2,058 |
| | 1.78 |
| | 1,055 |
| | 1.84 |
|
| After 4 years through 5 years | 1,994 |
| | 2.15 |
| | 1,350 |
| | 1.59 |
|
| After 5 years | 2,076 |
| | 2.80 |
| | 2,021 |
| | 2.42 |
|
| Total par value | 85,108 |
| | 1.41 | % | | 50,220 |
| | 0.98 | % |
| Unamortized premiums | 9 |
| | | | 15 |
| | |
| Unamortized discounts | (11 | ) | | | | (9 | ) | | |
| Valuation adjustments for hedging activities | (37 | ) | | | | 6 |
| | |
| Fair value option valuation adjustments | (6 | ) | | | | (8 | ) | | |
| Total | $ | 85,063 |
| | | | $ | 50,224 |
| | |
The Bank’s participation in consolidated obligation bonds outstanding includes callable bonds of $9,612 at December 31, 2017, and $4,670 at December 31, 2016.bonds. When a callable bond for which the Bank is the primary obligor is issued, the Bank may simultaneously enter into an interest rate swap (in which(wherein the Bank pays a variable rate and receives a fixed rate) with a call feature that mirrors the call option embedded in the bond (a sold callable option in a swap). The Bank had notional amounts of interest rate exchange agreements hedging callable bonds of $6,406 at December 31, 2017, and $2,125 at December 31, 2016. The combined sold callable swaps and callable bonds enable
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
the Bank to meet its funding needs at lower costs not otherwise directly attainable solely through the issuance ofrelative to similar tenor non-callable debt, while effectively converting the Bank’s net payment to an adjustable rate.
The Bank’s participation in consolidated obligation bonds at December 31, 20172023 and 2016,2022, was as follows: | | | 2017 |
| | 2016 |
|
| (In millions) | | (In millions) | 2023 | | 2022 |
| Par value of consolidated obligation bonds: | | | |
| Non-callable | |
| Non-callable | |
| Non-callable | $ | 75,496 |
| | $ | 45,550 |
|
| Callable | 9,612 |
| | 4,670 |
|
| Total par value | $ | 85,108 |
| | $ | 50,220 |
|
The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding at December 31, 20172023 and 2016,2022, by the earlier of the year of contractual maturity or next call date.
| | | | | | | | | | | |
| (In millions) | | | |
Earlier of Contractual
Maturity or Next Call Date | 2023 | | 2022 |
| Within 1 year | $ | 55,291 | | | $ | 73,049 | |
| After 1 year through 2 years | 9,160 | | | 3,310 | |
| After 2 years through 3 years | 378 | | | 187 | |
| After 3 years through 4 years | 100 | | | 313 | |
| After 4 years through 5 years | 12 | | | — | |
| After 5 years | 36 | | | 48 | |
| Total par value | $ | 64,977 | | | $ | 76,907 | |
|
| | | | | | | |
Earlier of Contractual Maturity or Next Call Date | 2017 |
| | 2016 |
|
| Within 1 year | $ | 78,606 |
| | $ | 38,099 |
|
| After 1 year through 2 years | 5,326 |
| | 10,747 |
|
| After 2 years through 3 years | 935 |
| | 743 |
|
| After 3 years through 4 years | 85 |
| | 455 |
|
| After 4 years through 5 years | 55 |
| | 85 |
|
| After 5 years | 101 |
| | 91 |
|
| Total par value | $ | 85,108 |
| | $ | 50,220 |
|
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:
|
| | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Amount Outstanding |
| | Weighted Average Interest Rate (1) |
| | Amount Outstanding |
| | Weighted Average Interest Rate (1) |
|
| Par value | $ | 30,494 |
| | 1.24 | % | | $ | 33,529 |
| | 0.46 | % |
| Unamortized discounts | (54 | ) | | | | (23 | ) | | |
| Total | $ | 30,440 |
| | | | $ | 33,506 |
| | |
(1) Represents yield to maturity excluding concession fees.
Interest Rate Payment Terms. Interest rate payment terms for consolidated obligations at December 31, 2017 and 2016, are detailed in the following table.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 |
| (Dollars in millions) | Amount
Outstanding | | Weighted Average Interest Rate (1) | | Amount
Outstanding | | Weighted Average Interest Rate (1) |
| Par value | $ | 19,321 | | | 5.23 | % | | $ | 36,159 | | | 4.13 | % |
| Unamortized discounts | (134) | | | | | (230) | | | |
| Total | $ | 19,187 | | | | | $ | 35,929 | | | |
(1)Represents yield to maturity excluding concession fees. |
| | | | | | | |
| 2017 |
| | 2016 |
|
| Par value of consolidated obligations: | | | |
| Bonds: | | | |
| Fixed rate | $ | 17,967 |
| | $ | 15,960 |
|
| Adjustable rate | 66,276 |
| | 33,435 |
|
| Step-up | 565 |
| | 515 |
|
| Step-down | 200 |
| | 200 |
|
| Fixed rate that converts to adjustable rate | — |
| | 10 |
|
| Range bonds | 100 |
| | 100 |
|
| Total bonds, par value | 85,108 |
| | 50,220 |
|
| Discount notes, par value | 30,494 |
| | 33,529 |
|
| Total consolidated obligations, par value | $ | 115,602 |
| | $ | 83,749 |
|
Consolidated obligation bonds may be structured to meet the Bank's or the investors' needs. Common structures include fixedInterest Rate Payment Terms. Interest rate bonds with or without call options and adjustable rate bonds with or without embedded options. In general, when bonds are issued, the Bank simultaneously executes an interest rate exchange agreement withpayment terms that offset the terms and embedded options, if any, of the consolidated obligation bond. This combination of the consolidated obligation bond and the interest rate exchange agreement effectively creates an adjustable rate bond. The cost of this funding combination is generally lower than the cost that would be available through the issuance of an adjustable rate bond alone. These transactions generally receive fair value hedge accounting treatment. In addition, when certainfor consolidated obligation bonds for which the Bank has elected the fair value option are issued, the Bank simultaneously executes an interest rate exchange agreement with terms that economically offset the terms of the consolidated obligation bond. However, this type of hedge is treated as an economic hedge because these combinations generally do not meet the requirements for fair value hedge accounting treatment. For more information, see Note 18 – Derivatives and Hedging Activities and Note 19 – Fair Value.
The Bank did not have any bonds with embedded features that met the requirements to separate the embedded feature from the host contract and designate the embedded feature as a stand-alone derivative at December 31, 2017 or 2016. The Bank has generally elected to account for certain bonds with embedded features under2023 and 2022, are detailed in the fair value option, and these bonds are carried at fair value on the Statements of Condition. For more information, see following table.
| | | | | | | | | | | |
| (In millions) | 2023 | | 2022 |
| | | |
| Par value of consolidated obligation bonds: | | | |
| Fixed rate | $ | 37,464 | | | $ | 25,632 | |
| Adjustable rate | 26,880 | | | 48,997 | |
| Step-up | 633 | | | 2,278 | |
| | | |
| | | |
| | | |
| Total consolidated obligation bonds, par value | $ | 64,977 | | | $ | 76,907 | |
| | | |
| | | |
Note 19 – Fair Value.
Note 139 — Affordable Housing Program
The FHLBank Act requires each FHLBank to establish an Affordable Housing Program (AHP).AHP. Each FHLBank provides subsidies to members, which use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households.households earning up to 80% of the median income for the area in which they live. Subsidies may be in the form of direct grants or below-market interest rate advances. Annually, the FHLBanks must set aside for their AHPs, in the aggregate, the greater of $100 million or 10% of the current year's net earnings (income before interest expense related to dividends paid on mandatorily redeemable capital stock and the assessment for AHP).
The Bank accrues its AHP assessment monthly based on its net earnings. If the Bank experienced a net loss during a quarter but still had net earnings for the year, the Bank'sBank’s obligation to the AHP would be calculated based on the Bank'sBank’s year-to-date net earnings. If the Bank had net earnings in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the Bank experienced a net loss for a full year, the amount of the AHP liability would be equal to zero, since each FHLBank'sFHLBank’s required annual AHP contribution is limited to its annual net earnings. However, if the result of the aggregate 10% calculation is less than $100 million for the FHLBanks combined, then the FHLBank Act requires that each FHLBank contribute such prorated sums as may be required to ensure that the aggregate contribution of the FHLBanks equals $100.$100 million. The proration would be made on the basis of an FHLBank'sFHLBank’s income in relation to the income of all the FHLBanks for the previous
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
year. There was no AHP shortfall, as described above, in 2017, 2016,2023, 2022, or 2015.2021. If an FHLBank finds that its required AHP assessments are contributing to the financial instability of that FHLBank, it may apply to the Finance Agency for a temporary suspension of its contributions. The Bank did not make such an application in 2017, 2016,2023, 2022, or 2015.2021.
The Bank'sBank’s total AHP assessments equaled $45, $86, and $78 during 2017, 2016, and 2015, respectively. These amounts wereare charged to earnings each year and recognized as a liability. As subsidies are disbursed, the AHP liability is reduced. The AHP liability was as follows:
| | | | | | | | | | | | | | | | | |
| (In millions) | 2023 | | 2022 | | 2021 |
| Balance, beginning of the period | $ | 111 | | | $ | 115 | | | $ | 120 | |
| AHP assessments | 63 | | | 36 | | | 32 | |
| | | | | |
| AHP grant payments | (41) | | | (40) | | | (37) | |
| Balance, end of the period | $ | 133 | | | $ | 111 | | | $ | 115 | |
|
| | | | | | | | | | | |
| | 2017 |
| | 2016 |
| | 2015 |
|
| Balance, beginning of the period | $ | 205 |
| | $ | 172 |
| | $ | 147 |
|
| AHP assessments | 45 |
| | 86 |
| | 78 |
|
| AHP voluntary contributions | 7 |
| | — |
| | — |
|
| AHP grant payments | (53 | ) | | (53 | ) | | (53 | ) |
| Balance, end of the period | $ | 204 |
| | $ | 205 |
| | $ | 172 |
|
All subsidies were distributed in the form of direct grants in 2017, 2016, and 2015.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
All subsidies were distributed in the form of direct grants in 2023, 2022, and 2021.
Note 1410 — Accumulated Other Comprehensive Income/(Loss)
The following table summarizes the changes in AOCI for the years ended December 31, 2017, 2016,2023, 2022, and 2015:2021:
| | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Net Unrealized Gain/(Loss) on AFS Securities | | | | | | Pension and Postretirement Benefits | | Total
AOCI |
| Balance, December 31, 2020 | $ | 244 | | | | | | | $ | (14) | | | $ | 230 | |
| Other comprehensive income/(loss): | | | | | | | | | |
| Net change in pension and postretirement benefits | | | | | | | 5 | | | 5 | |
| | | | | | | | | |
| Net change in fair value | 96 | | | | | | | | | 96 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net current period other comprehensive income/(loss) | 96 | | | | | | | 5 | | | 101 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Balance, December 31, 2021 | $ | 340 | | | | | | | $ | (9) | | | $ | 331 | |
| Other comprehensive income/(loss): | | | | | | | | | |
| Net change in pension and postretirement benefits | | | | | | | (6) | | | (6) | |
| | | | | | | | | |
| Net change in fair value | (354) | | | | | | | | | (354) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net current period other comprehensive income/(loss) | (354) | | | | | | | (6) | | | (360) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Balance, December 31, 2022 | $ | (14) | | | | | | | $ | (15) | | | $ | (29) | |
| Other comprehensive income/(loss): | | | | | | | | | |
| Net change in pension and postretirement benefits | | | | | | | 4 | | | 4 | |
| Net change in fair value | (47) | | | | | | | | | (47) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net current period other comprehensive income/(loss) | (47) | | | | | | | 4 | | | (43) | |
| Balance, December 31, 2023 | $ | (61) | | | | | | | $ | (11) | | | $ | (72) | |
|
| | | | | | | | | | | | | | | |
| | 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, 2014 | $ | 88 |
| | $ | (20 | ) | | $ | (12 | ) | | 56 |
|
| Other comprehensive income/(loss) before reclassifications: | | | | | | | |
| Net change in pension and postretirement benefits | | | | | (2 | ) | | (2 | ) |
| Non-credit-related OTTI loss | (18 | ) | | (1 | ) | | | | (19 | ) |
| Non-credit-related OTTI loss transferred | (1 | ) | | 1 |
| | | | — |
|
| Net change in fair value | (29 | ) | | | | | | (29 | ) |
| Accretion of non-credit-related OTTI loss | | | 6 |
| | | | 6 |
|
| Reclassification from other comprehensive income/(loss) to net income/(loss): | | | | | | | |
| Non-credit-related OTTI to credit-related OTTI | 3 |
| | — |
| | | | 3 |
|
| Net current period other comprehensive income/(loss) | (45 | ) | | 6 |
| | (2 | ) | | (41 | ) |
| Balance, December 31, 2015 | $ | 43 |
| | $ | (14 | ) | | $ | (14 | ) | | 15 |
|
| Other comprehensive income/(loss) before reclassifications: | | | | | | | |
| Net change in pension and postretirement benefits | | | | | (2 | ) | | (2 | ) |
| Non-credit-related OTTI loss | (17 | ) | | — |
| | | | (17 | ) |
| Net change in fair value | 103 |
| | | | | | 103 |
|
| Accretion of non-credit-related OTTI loss | | | 5 |
| | | | 5 |
|
| Reclassification from other comprehensive income/(loss) to net income/(loss): | | | | | | | |
| Non-credit-related OTTI to credit-related OTTI | 7 |
| | — |
| | | | 7 |
|
| Net current period other comprehensive income/(loss) | 93 |
| | 5 |
| | (2 | ) | | 96 |
|
| Balance, December 31, 2016 | $ | 136 |
| | $ | (9 | ) | | $ | (16 | ) | | $ | 111 |
|
| Other comprehensive income/(loss) before reclassifications: | | | | | | | |
| Net change in pension and postretirement benefits | | | | | 3 |
| | 3 |
|
| Non-credit-related OTTI loss | (4 | ) | | — |
| | | | (4 | ) |
| Net change in fair value | 195 |
| | | | | | 195 |
|
| Accretion of non-credit-related OTTI loss | | | 3 |
| | | | 3 |
|
| Reclassification from other comprehensive income/(loss) to net income/(loss): | | | | | | | |
| Non-credit-related OTTI to credit-related OTTI | 10 |
| | — |
| | | | 10 |
|
| Net current period other comprehensive income/(loss) | 201 |
| | 3 |
| | 3 |
| | 207 |
|
| Balance, December 31, 2017 | $ | 337 |
| | $ | (6 | ) | | $ | (13 | ) | | $ | 318 |
|
Note 15 — Capital
Capital Requirements. The Bank issues only onea single class of capital stock, Class B stock, with a par value of one hundred dollars$100 per share, which may be redeemed (subject to certain conditions) upon five years' notice by the member to the Bank. In addition, at its discretion, under certain conditions, the Bank may repurchase excess capital stock at any time. (See “Excess Capital Stock” below for more information.) The Bank’s capital stock may be issued, redeemed, and repurchased only at its stated par value, subject to certain statutory and regulatory requirements. The Bank may only redeem or repurchase capital stock from a shareholder if, following the redemption or repurchase,
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
the shareholder will continue to meet its minimum capital stock requirement and the Bank will continue to meet its regulatory requirements for total capital, leverage capital, and risk-based capital.
Under the Housing and Economic Recovery Act of 2008, the Director of the Finance Agency is responsible for setting the risk-based capital standards for the FHLBanks. The FHLBank Act and regulations governing the operations of the FHLBanks require that the Bank’s minimum capital stock requirement for shareholders must be sufficient to enable the Bank to meet its regulatory requirements for total capital, leverage capital, and risk-based capital. The Bank must maintain: (i) total regulatory capital in an amount equal to at least 4% of its total assets, (ii) leverage capital in an amount equal to at least 5% of its total assets, and (iii) permanent capital in an amount that is greater than or equal to its risk-based capital requirement.
The Finance Agency requires each FHLBank to maintain a ratio of at least 2% 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
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
assets, measured on a daily average basis at monthend, when assessing each FHLBank’s capital management practices. As of December 31, 2023 and 2022, the Bank complied with this capital guidance.
Because the Bank issues only Class B stock, regulatory capital and permanent capital for the Bank are both composed of retained earnings and Class B stock, including mandatorily redeemable capital stock (which is classified as a liability for financial reporting purposes). Regulatory capital and permanent capital do not include AOCI. Leverage capital is defined as the sum of permanent capital, weighted by a 1.5 multiplier, plus non-permanent capital.
The risk-based capital requirement is equal to the sum of the Bank’s credit risk, market risk, and operationsoperational risk capital requirements, all of which are calculated in accordance with the rules and regulations of the Finance Agency. The Finance Agency may require an FHLBank to maintain a greater amount of permanent capital than is required by the risk-based capital requirement as defined.
As of December 31, 20172023 and 2016,2022, the Bank was in compliancecomplied with these capital rules and requirements as shown in the following table. | | | | 2017 | | 2016 |
| | Required |
| | Actual |
| | Required |
| | Actual |
|
| 2023 | | | 2023 | | 2022 |
| (Dollars in millions) | | (Dollars in millions) | Required | | Actual | | Required | | Actual |
| Risk-based capital | $ | 2,023 |
| | $ | 6,797 |
| | $ | 2,241 |
| | $ | 5,883 |
|
| Total regulatory capital | $ | 4,935 |
| | $ | 6,797 |
| | $ | 3,678 |
| | $ | 5,883 |
|
| Total regulatory capital ratio | 4.00 | % | | 5.51 | % | | 4.00 | % | | 6.40 | % | Total regulatory capital ratio | 4.00 | % | | 8.02 | % | | 4.00 | % | | 6.41 | % |
| Leverage capital | $ | 6,169 |
| | $ | 10,195 |
| | $ | 4,597 |
| | $ | 8,825 |
|
| Leverage ratio | 5.00 | % | | 8.26 | % | | 5.00 | % | | 9.60 | % | Leverage ratio | 5.00 | % | | 12.03 | % | | 5.00 | % | | 9.61 | % |
The Bank'sBank’s capital plan requires each membershareholder to own capital stock in an amount equal to the greater of its membership capital stock requirement or its activity-based capital stock requirement. The Bank may adjust these requirements from time to time within limitsranges established in the capital plan. Any changes to the capital plan must be approved by the Bank's BoardBank’s board of Directorsdirectors (Board) and the Finance Agency.
A member's membership capital stock requirement is 1.0%1% of its membership asset value. The membership capital stock requirement for a member is capped at $15.$15 million. The Bank may adjust the membership capital stock requirement for all members within a range of 0.5% to 1.5% of a member's membership asset value and may adjust the cap for all members within an authorized range of $10 million to $50.$50 million. A member's membership asset value is determined by multiplying the amount of the member's membership assets by the applicable membership asset factors.factors as determined by the Bank. Membership assets are generally defined as assets (other than Bank capital stock) of a type that could qualify as collateral to secure a member's indebtedness to the Bank under applicable law, whether or not the assets are pledged to the Bank or accepted by the Bank as eligible collateral. The membership asset factors were initially based on the typical borrowing capacity percentages generally assigned by the Bank to the same types of assets when pledged to the Bank (although the factors may differ from the actual borrowing capacities, if any, assigned to particular assets pledged by a specific member at any point in time).
A member'sThe activity-based capital stock requirement is the sum of 2.7% of the member's outstanding advances, plus 0.1% of notional balances for outstanding letters of credit, plus 0.0% of any portion of any mortgage loan purchased and held by the Bank. The Bank may adjust the activity-based capital stock requirement for all members within a rangeranges established in the capital plan of 2.0% to 5.0% of the member's outstanding advances, 0.1% to 1.0% of the member’s notional balances of outstanding letters of credit, and a range of 0.0% to 5.0% of any portion of any mortgage loan purchased and held by the Bank.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Any member may withdraw from membership and, subject to certain statutory and regulatory restrictions, have its capital stock redeemed after giving the required notice. Members that withdraw from membership may not reapply for membership for five years, in accordance with Finance Agency rules.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Mandatorily Redeemable Capital Stock. The Bank reclassifies the capital stock subject to redemption from capital to a liability after a member provides the Bank with a written notice of redemption; gives notice of intention to withdraw from membership; or attains nonmember status by merger or acquisition, charter termination, or other involuntary membership termination; or after a receiver or other liquidating agent for a member transfers the member's Bank capital stock to a nonmember entity, resulting in the member's shares then meeting the definition of a mandatorily redeemable financial instrument. Shares meeting this definition are reclassified to a liability at fair value. Dividends declared on shares classified as a liability are accrued at the expected dividend rate and reflected as interest expense in the Statements of Income. The repayment of these mandatorily redeemable financial instruments (by repurchase or redemption of the shares) is reflected as a financing cash outflow in the Statements of Cash Flows once settled.
The Bank has a cooperative ownership structure under which members, former members, and certain other nonmembers own the Bank'sBank’s capital stock. Former members and certain other nonmembers are required to maintain their investment in the Bank's capital stock until their outstanding transactions are paid off or until their capital stock is redeemed following the relevant five-year redemption period for capital stock or is repurchased by the Bank, in accordance with the Bank's capital requirements. Capital stock cannot be issued, repurchased, redeemed, or transferred except between the Bank and its members (or their affiliates and successors) at the capital stock's par value of one hundred dollars$100 per share. If a member cancels its written notice of redemption or notice of withdrawal or if the Bank allows the transfer of mandatorily redeemable capital stock to a member, the Bank reclassifies mandatorily redeemable capital stock from a liability to capital. After the reclassification, dividends on the capital stock are no longer classified as interest expense.
The Bank will not redeem or repurchase capital stock required to meet the minimum capital stock requirement until five years after the member's membership is terminated or after the Bank receives notice of the member's withdrawal, and the Bank will redeem or repurchase only the amounts that are in excess of the capital stock required to support activity (advances and mortgage loans)letters of credit) that may remain outstanding after the five-year redemption period has expired. In both cases, the Bank will only redeem or repurchase capital stock if certain statutory and regulatory conditions are met. In accordance with the Bank'sBank’s current practice, if activity-based capital stock becomes excess capital stock because an activity no longer remains outstanding, the Bank may repurchase the excess activity-based capital stock at its discretion, subject to certain statutory and regulatory conditions, on a scheduled quarterly basis.conditions. See Note 1 – Summary of Significant Accounting Policies for more information.
The Bank had mandatorily redeemable capital stock totaling $309 outstanding to seven institutions at December 31, 2017, and $457$706 million outstanding to six institutions at December 31, 2016.2023, and $5 million outstanding to three institutions at December 31, 2022. These amounts have been classified as a liability on the Bank’s Statements of Condition. The changechanges in mandatorily redeemable capital stock for the years ended December 31, 2017, 2016,2023, 2022, and 2015, was2021 were as follows:
|
| | | | | | | | | | | |
| | 2017 |
| | 2016 |
| | 2015 |
|
| Balance at the beginning of the period | $ | 457 |
| | $ | 488 |
| | $ | 719 |
|
Reclassified from/(to) capital during the period(1) | 2 |
| | 56 |
| | 415 |
|
| Redemption of mandatorily redeemable capital stock | (75 | ) | | (28 | ) | | (53 | ) |
| Repurchase of excess mandatorily redeemable capital stock | (75 | ) | | (59 | ) | | (593 | ) |
| Balance at the end of the period | $ | 309 |
| | $ | 457 |
| | $ | 488 |
|
| |
(1) | The Bank reclassified $403 of capital stock to mandatorily redeemable capital stock (a liability) on September 1, 2015, as a result of the merger of JPMorgan B&T with an into JPMorgan Chase, a nonmember of the Bank. |
| | | | | | | | | | | | | | | | | | | | | |
| | | |
| (In millions) | | | | | 2023 | | 2022 | | 2021 |
| Balance at the beginning of the period | | | | | $ | 5 | | | $ | 3 | | | $ | 2 | |
| Reclassified from/(to) capital during the period | | | | | 1,252 | | | 46 | | | 25 | |
| Repurchase/redemption | | | | | (551) | | | (44) | | | (24) | |
| Balance at the end of the period | | | | | $ | 706 | | | $ | 5 | | | $ | 3 | |
Cash dividends on mandatorily redeemable capital stock were recorded as interest expense in the amount of $32 $60,million for the year ended December 31, 2023, and $65de minimis amounts for the years ended December 31, 2017, 2016,2022 and 2015, respectively.2021.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The following table presents mandatorily redeemable capital stock amounts by contractual year of redemption at December 31, 2023 and 2022.
| | | | | | | | | | | |
| (In millions) | | | |
| Contractual Year of Redemption | 2023 | | 2022 |
| | | |
| | | |
| Year 3 | $ | 1 | | | $ | — | |
| Year 4 | 2 | | | 1 | |
| Year 5 | 702 | | | 3 | |
Past contractual redemption date because of remaining activity(1) | 1 | | | 1 | |
| Total | $ | 706 | | | $ | 5 | |
(1) Represents mandatorily redeemable capital stock that is past the end of the contractual redemption period at December 31, 2017 and 2016.
|
| | | | | | | |
| Contractual Redemption Period | 2017 |
| | 2016 |
|
| After 2 years through 3 years | $ | 306 |
| | $ | — |
|
| After 3 years through 4 years | — |
| | 379 |
|
Past contractual redemption date because of remaining activity(1) | 3 |
| | 78 |
|
| Total | $ | 309 |
| | $ | 457 |
|
| |
(1) | Represents mandatorily redeemable capital stock that is past the end of the contractual redemption period because of outstanding activity. |
because there is activity outstanding to which the mandatorily redeemable capital stock relates.
A member may cancel its notice of redemption or notice of withdrawal from membership by providing written notice to the Bank prior to the end of the relevant five-year redemption period or the membership termination date. If the Bank receives the notice of cancellation within 30 months following the notice of redemption or notice of withdrawal, the member is charged a fee equal to fifty cents multiplied by the number of shares of capital stock affected. If the Bank receives the notice of cancellation more than 30 months following the notice of redemption or
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
notice of withdrawal (or if the Bank does not redeem the member's capital stock because following the redemption the member would fail to meet its minimum capital stock requirement), the member is charged a fee equal to one dollar multiplied by the number of shares of capital stock affected. In certain cases, the Boardboard of Directorsdirectors may waive a cancellation fee for bona fide business purposes.
The Bank'sBank’s capital stock is considered putable by the shareholder. There are significant statutory and regulatory restrictions on the Bank'sBank’s obligation or ability to redeem outstanding capital stock, which include the following:
•The Bank may not redeem any capital stock if, following the redemption, the Bank would fail to meet its minimum capital requirements for total capital, leverage capital, and risk-based capital. All of the Bank'sBank’s capital stock immediately becomes nonredeemable if the Bank fails to meet its minimum capital requirements.
•The Bank may not be able to redeem any capital stock if either its Boardboard of Directorsdirectors or the Finance Agency determines that it has incurred or is likely to incur losses resulting in or expected to result in a charge against capital that would have any of the following effects: cause the Bank not to comply with its regulatory capital requirements, result in negative retained earnings, or otherwise create an unsafe and unsound condition at the Bank.
•In addition to being able to prohibit capital stock redemptions, the Bank's BoardBank’s board of Directorsdirectors has a right to call for additional capital stock purchases by its members, as a condition of continuing membership, as needed for the Bank to satisfy its statutory and regulatory capital requirements.
•If, during the period between receipt of a capital stock redemption notice and the actual redemption (a period that could last indefinitely), the Bank becomes insolvent and is either liquidated or merged with another FHLBank, the redemption value of the capital stock will be established either through the liquidation or the merger process. If the Bank is liquidated, after satisfaction of the Bank'sBank’s obligations to creditors and to the extent funds are then available, each shareholder will be entitled to receive the par value of its capital stock as well as any retained earnings in an amount proportional to the shareholder's share of the total shares of capital stock, subject to any limitations that may be imposed by the Finance Agency. In the event of a merger or consolidation, the Boardboard of Directorsdirectors will determine the rights and preferences of the Bank's shareholders, subject to any terms and conditions imposed by the Finance Agency.
•The Bank may not redeem any capital stock if the principal or interest due on any consolidated obligations issued by the Office of Finance has not been paid in full.
•The Bank may not redeem any capital stock if the Bank fails to provide the Finance Agency with the quarterly certification required by Finance Agency rules prior to declaring or paying dividends for a quarter.
•The Bank may not redeem any capital stock if the Bank is unable to provide the required quarterly certification, projects that it will fail to comply with statutory or regulatory liquidity requirements or will be unable to fully meet all of its obligations on a timely basis, actually fails to satisfy these requirements or
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
obligations, or negotiates to enter or enters into an agreement with another FHLBank to obtain financial assistance to meet its current obligations.
Mandatorily redeemable capital stock is considered capital for determining the Bank's compliance with its regulatory capital requirements. Based on Finance Agency interpretation, the classification of certain shares of the Bank'sBank’s capital stock as mandatorily redeemable does not affect the definition of total capital for purposes of: determining the Bank'sBank’s compliance with its regulatory capital requirements, calculating its mortgage-backed securities investment authority (300% of total capital), calculating its unsecured credit exposure to other GSEs (limited to 100% of total capital), or calculating its unsecured credit limits to other counterparties (various percentages of total capital depending on the rating of the counterparty).
Excess Stock Repurchase, Retained Earnings, and Dividend Framework. By Finance Agency regulation, dividends may be paid only out of current net earnings or previously retained earnings. As required by the Finance Agency, the 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. In January 2017, the Framework was amended and approved by the Bank’s Board of Directors to include a dividend philosophy to endeavor to pay a quarterly dividend at an annualized rate between 5% and 7%, which was intended to be considered by the Bank’s Board of Directors beginning with the Bank’s second quarter 2017 dividend declaration. The decision to declare any dividend and the dividend rate are at the discretion of the Bank’s Board of Directors, which may choose to follow the dividend philosophy as guidance in the dividend declaration.
The Bank’s 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 three-month LIBOR 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 207% as of December 31, 2017.
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 each quarter.
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. PriorThe methodology may be revised from time to July 2017, the Bank’s Framework had three categories of restricted retained earnings: Valuation Adjustments, Other (which represented a targeted amount),time, and the Joint Capital Enhancement (JCE Agreement). Under the Framework, the Bank’s required amount of restricted retained earnings was determined using the Bank’s retained earnings methodology. As determined using the Bank’s methodology, from July 2015 to January 2017, the Bank’s restricted retained earnings requirement was $2,000, and from January 2017 to July 2017, the Bank’s restricted retained earnings requirement was $2,300.
level
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
of required retained earnings under the methodology may change due to updating data and assumptions used in the methodology. In January 2024, the required level of retained earnings was decreased from $2.6 billion to $1.6 billion attributable to lower non-MBS investments and projected advance balances. The Bank’s retained earnings requirement may be changed at any time. The Board periodically reviews the retained earnings methodology and analysis to determine whether any adjustments are appropriate.
In July 2017,September 2023, the Board approved an updated Framework and dividend philosophy to reflect changes in the current interest rate environment and business conditions. The Framework includes a dividend philosophy to endeavor to pay a quarterly dividend rate that is equal to or greater than the current market rate for a highly rated investment (e.g., SOFR) and that is sustainable under current and projected earnings while maintaining appropriate levels of capital. The decision to declare any dividend and the dividend rate is at the discretion of the Bank’s Board, which may choose to follow or not follow the dividend philosophy as guidance in the dividend declaration. The Board may also revise or eliminate the dividend philosophy in the future. The Bank’s historical dividend rates and the dividend philosophy are not indicative of Directors approved the transfer of all amounts classified as restricted retained earnings, other than the amounts related to the JCE Agreement, to unrestricted retained earnings. As a conforming change related to the transfer, the Bank’s Board of Directors amended the Framework to eliminate two of the categories of restricted retained earnings (Valuation Adjustments and Other) and approved revisions to the Bank’s retained earnings methodology to provide for a required level of total retained earnings of $2,300 for loss protection, capital compliance, and business growth. In January 2018, the methodology was further revised to provide a required level of total retained earnings of $2,500. future dividend declarations.
The Bank satisfies its retained earnings requirement with both restricted retained earnings (i.e., amounts related to the JCEJoint Capital Enhancement (JCE) Agreement) and unrestricted retained earnings.
The Bank’s retained earnings requirement may be changed at any time. The Board of Directors periodically reviews the retained earnings methodology and analysis to determine whether any adjustments are appropriate.
The JCE Agreement is intended to enhance the capital position of each FHLBank. In accordance with the JCE Agreement, each FHLBank is required to allocatereclassify an amount equal to 20% of its net income each quarter to a separate restricted retained earnings account until the balance of the account, calculated as of the last day of each calendar quarter, equals at least 1% of that FHLBank's average balance of outstanding consolidated obligations for the previouscalendar quarter. Under the JCE Agreement, these restricted retained earnings will not be available to pay dividends.
The following tables summarize the activity related toJCE Agreement also provides that amounts in restricted retained earnings forin excess of 150% of the years ended December 31, 2017 and 2016:Bank’s restricted retained earnings minimum may be released from restricted retained earnings.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Restricted Retained Earnings Related to: | | |
| | Unrestricted Retained Earnings |
| | Valuation Adjustments |
| | Other |
| | Joint Capital Enhancement Agreement |
| | Total Restricted Retained Earnings |
| | Total Retained Earnings |
|
| Balance, December 31, 2015 | $ | 610 |
| | $ | 10 |
| | $ | 1,650 |
| | $ | 358 |
| | $ | 2,018 |
| | $ | 2,628 |
|
| Net income | 562 |
| | 8 |
| | — |
| | 142 |
| | 150 |
| | 712 |
|
| Cash dividends on capital stock | (284 | ) | | | | | | | |
|
| | (284 | ) |
| Balance, December 31, 2016 | $ | 888 |
| | $ | 18 |
| | $ | 1,650 |
| | $ | 500 |
| | $ | 2,168 |
| | $ | 3,056 |
|
| Net income | 198 |
| | 3 |
| | 100 |
| | 75 |
| | 178 |
| | 376 |
|
| Cash dividends on capital stock | (187 | ) | | | | | | | |
|
| | (187 | ) |
| Transfers from restricted retained earnings | 1,771 |
| | (21 | ) | | (1,750 | ) | | — |
| | (1,771 | ) | | — |
|
| Balance, December 31, 2017 | $ | 2,670 |
| | $ | — |
| | $ | — |
| | $ | 575 |
| | $ | 575 |
| | $ | 3,245 |
|
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. AsExcess stock totaled $118 million, or 0.13% of total assets as of December 31, 2017, the Bank’s excess capital2023. Excess stock totaled $493,$157 million, or 0.40%0.13% of total assets.
assets as of December 31, 2022.
In 2017,2023, the Bank paid dividends at an annualized rate of 7.50%7.49%, totaling $219,$275 million, including $187$243 million in dividends on capital stock and $32 million in dividends on mandatorily redeemable capital stock. In 2016,2022 and 2021, the Bank paid dividends on capital stock at an annualized rate of 12.33%6.30%, totaling $344, including $284 in$161 million, and 5.74%, totaling $135 million, respectively. A de minimis amount of dividends on capital stock and $60 in dividendswere paid on mandatorily redeemable capital stock. The dividends paidstock in 2016 included four quarterly dividends2022 and a special
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
dividend in the amount of $100, including $83 on capital stock and $17 in dividends on mandatorily redeemable capital stock.
2021.
For the periods referenced above, the Bank paid dividends in cash. Dividends on capital stock are recognized as dividends on the Statements of Capital Accounts, and dividends on mandatorily redeemable capital stock are recognized as interest expense on the Statements of Income.
On February 21, 2018,2024, the Bank’s Boardboard of Directorsdirectors declared a quarterly cash dividend on the capital stock outstanding during the fourth quarter of 20172023 at an annualized rate of 7.00%8.75%, totaling $59, including $53 in dividends on capital stock and $6 in dividends on mandatorily redeemable capital stock. The Bank recorded the dividend on February 21, 2018.$69 million. The Bank expects to pay the dividend on March 15, 2018. Dividends on mandatorily redeemable14, 2024.
Excess Stock – The Bank’s capital stock will be recognized as interest expense inplan provides that the first quarter of 2018.
Excess Capital Stock – 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 must give the shareholder 15 days’ written notice; however, the shareholder may waive this notice period. The Bank may also repurchase all of a member’s excess capital stockat a member’s request, at the Bank’s discretion, subjectto certain statutoryand 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 stock of all former members
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
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 shareholder would continue to meet its minimum capital stock requirement after the repurchase. The Bank may change this practice at any time. The Bank repurchased $414$3.8 billion, $5.0 billion, and $812$1.6 billion in excess capital stock during 20172023, 2022, and 2016,2021, respectively.
The Bank is required to redeem any mandatorily redeemable capital stock that is in excess of a former member’s minimum stock requirement on or after the expiration of the five-year redemption date. During 20172023 and 2016,2022, the Bank redeemed $75 and $28, respectively,a de minimis amount in mandatorily redeemable capital stock, for which the five-year redemption period had expired, at its $100 par value.value per share. During 2021, the Bank redeemed $1 million of mandatorily redeemable capital stock, for which the five-year redemption period had expired, at its $100 par value per share. The stock was redeemed on the scheduled redemption dates or, for stock that was not excess stock on its scheduled redemption date because of outstanding activity with the Bank, on the first available repurchase date after the stock was no longer required to support outstanding activity with the Bank.
The Framework sets forth the Bank’s practice of repurchasing the surplus capital stock of all members and the excess capital stock of all nonmember shareholders on a regular quarterly basis, at the Bank’s discretion and subject to certain statutory and regulatory requirements and to the Bank’s Risk Management Policy and capital plan limitations. Surplus capital stock is defined as any stock holdings in excess of 115% of a member’s minimum stock requirement. In addition, at the Bank’s discretion, all of the excess stock held by a member may be repurchased upon request of a member, subject to the requirements and limitations mentioned above. In accordance with the Framework, each quarter Bank management evaluates and determines the amount of capital stock to be repurchased in that quarter, if any, giving consideration to certain capital metrics and capital management objectives and strategies, and subject to the requirements and limitations mentioned above. At least 15 calendar days before any repurchase, the Bank will notify shareholders of its intention to repurchase capital stock and of the scheduled repurchase date. On the scheduled repurchase date, the Bank will calculate the amount of stock to be repurchased to ensure that each member and nonmember shareholder will continue to meet its minimum stock requirement after the repurchase.
On February 21, 2018, the Bank announced that it plans to repurchase the surplus capital stock of all members and the excess capital stock of all nonmember shareholders on March 16, 2018.
Excess capital stock totaled $493 as of December 31, 2017, which included surplus capital stock of $317. Excess capital stock totaled $488 as of December 31, 2016, which included surplus capital stock of $325.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Concentration. The following table presents the concentration in capital stock held by institutions whose capital stock ownership represented 10% or more of the Bank’s outstanding capital stock, including mandatorily redeemable capital stock, as of December 31, 20172023 or 2016.2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| (Dollars in millions) | Capital Stock Outstanding | | Percentage of Total Capital Stock Outstanding | | Capital Stock Outstanding | | Percentage of Total Capital Stock Outstanding |
JPMorgan Chase, National Association/First Republic Bank(1) | $ | 643 | | | 20 | % | | $ | 379 | | | 10 | % |
Silicon Valley Bank(2) | — | | | — | | | 418 | | | 11 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1) On May 1, 2023, the California DFPI closed First Republic Bank and appointed the FDIC as receiver. On the same date, the FDIC transferred all of the deposits and substantially all of the assets of First Republic Bank, including the advances outstanding from the Bank, to JPMorgan Chase, National Association, a nonmember. Upon assumption of the advances outstanding by JPMorgan Chase, National Association, the Bank transferred $759 million of capital stock of the Bank, held by First Republic Bank, to JPMorgan Chase, National Association, and reclassified that capital stock to mandatorily redeemable as a liability in the Bank’s Statements of Condition.
(2) On March 10, 2023, the FDIC was appointed as receiver for Silicon Valley Bank. On March 14, 2023, the FDIC transferred all of the deposits and substantially all of the assets of Silicon Valley Bank to Silicon Valley Bridge Bank, National Association. The FDIC created Silicon Valley Bridge Bank, N.A., whereby all of the deposits and substantially all assets of Silicon Valley Bank were transferred to the bridge bank. On March 26, 2023, the FDIC entered into a purchase and assumption agreement for all the deposits and loans of Silicon Valley Bridge Bank, N.A., with First Citizens Bank and Trust Company. Silicon Valley Bank is no longer a member of the Bank. As of March 31, 2023, Silicon Valley Bridge Bank, N.A., had prepaid all outstanding advances to the Bank.
|
| | | | | | | | | | | | | |
| | 2017 | | 2016 |
| Name of Institution | Capital Stock Outstanding |
| | Percentage of Total Capital Stock Outstanding |
| | Capital Stock Outstanding |
| | Percentage of Total Capital Stock Outstanding |
|
| Charles Schwab Bank | $ | 405 |
| | 11 | % | | $ | 81 |
| | 3 | % |
JPMorgan Chase Bank, National Association(1) | 307 |
| | 9 |
| | 400 |
| | 14 |
|
| Subtotal | 712 |
| | 20 |
| | 481 |
| | 17 |
|
| Others | 2,840 |
| | 80 |
| | 2,346 |
| | 83 |
|
| Total | $ | 3,552 |
| | 100 | % | | $ | 2,827 |
| | 100 | % |
| |
(1) | The capital stock held by this nonmember institution is classified as mandatorily redeemable capital stock. |
Note 1612 — Employee Retirement Plans and Incentive Compensation Plans
Defined Benefit Plans
Qualified Defined Benefit Plan. The Bank provides retirement benefits through a Bank-sponsored Cash Balance Plan, a qualified defined benefit plan. The Cash Balance Plan is provided to all employees who have completed six months of Bank service. Under the plan, during the years ended December 31, 2023 and 2022, each eligible Bank employee accruesaccrued benefits annually equal to 6% of the employee's annual compensation, plus 6% interest on the benefits accrued to the employee through the prior yearend. The Cash Balance Plan is funded through a qualified trust established by the Bank.
Non-Qualified Defined Benefit Plans. The Bank sponsors the following non-qualified defined benefit retirement plans:
•Benefit Equalization Plan, a non-qualified retirement plan restoring benefits offered under the Cash Balance Plan that are limited by laws governing the plan. See below for further discussion of the defined contribution portion of the Benefit Equalization Plan.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
•Supplemental Executive Retirement Plan (SERP),a non-qualified unfunded retirement benefit plan available to the Bank's eligible senior officers, which generally provides a service-linked supplemental cash balance annual contribution credit to SERP participants and an annual interest credit of 6% on the benefits accrued to the SERP participants through the prior yearend.
•Deferred Compensation Plan, a non-qualified retirement plan available to all eligible Bank officers,employees, which provides make-up pensionretirement benefits that would have been earned under the Cash Balance Plan had the compensation not been deferred. The make-up benefits vest according to the corresponding provisions of the Cash Balance Plan. See below for further discussion of the defined contribution portion of the Deferred Compensation Plan.
Postretirement Health Benefit Plan. The Bank provides a postretirement health benefit plan to employees hired before January 1, 2003. The Bank's costs are capped at 1998 health care premium amounts. As a result, changesthat meet certain eligibility criteria. Changes in health care cost trend rates will not have noa material effect on the Bank's accumulated postretirement benefit obligation or service and interest costs.costs because benefit plan premiums are generally paid by the retirees.
The following table summarizes the changesAmounts recognized in the benefit obligations, plan assets, and funded status ofAOCI for the defined benefit Cash Balance Plan non-qualified defined benefit plans, and postretirement health benefit plan for the years ended December 31, 2017 and 2016.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Cash Balance Plan |
| | Non-Qualified Defined Benefit Plans |
| | Post-retirement Health Benefit Plan |
| | Cash Balance Plan |
| | Non-Qualified Defined Benefit Plans |
| | Post-retirement Health Benefit Plan |
|
| Change in benefit obligation | | | | | | | | | | | |
| Benefit obligation, beginning of the period | $ | 51 |
| | $ | 21 |
| | $ | 2 |
| | $ | 46 |
| | $ | 24 |
| | $ | 2 |
|
| Service cost | 3 |
| | 2 |
| | — |
| | 3 |
| | 1 |
| | — |
|
| Interest cost | 2 |
| | 1 |
| | — |
| | 1 |
| | 1 |
| | — |
|
| Actuarial (gain)/loss | 2 |
| | — |
| | — |
| | 2 |
| | 1 |
| | — |
|
| Settlements | — |
| | (3 | ) | | — |
| | — |
| | (6 | ) | | — |
|
| Benefits paid | (1 | ) | | — |
| | — |
| | (1 | ) | | — |
| | — |
|
| Benefit obligation, end of the period | 57 |
| | 21 |
| | 2 |
| | 51 |
| | 21 |
| | 2 |
|
| Change in plan assets | | | | | | | | | | | |
| Fair value of plan assets, beginning of the period | 53 |
| | — |
| | — |
| | 43 |
| | — |
| | — |
|
| Actual return on plan assets | 9 |
| | — |
| | — |
| | 3 |
| | — |
| | — |
|
| Settlements | — |
| | (3 | ) | | — |
| | — |
| | (6 | ) | | — |
|
| Employer contributions | 2 |
| | 3 |
| | — |
| | 8 |
| | 6 |
| | — |
|
| Benefits paid | (1 | ) | | — |
| | — |
| | (1 | ) | | — |
| | — |
|
| Fair value of plan assets, end of the period | 63 |
| | — |
| | — |
| | 53 |
| | — |
| | — |
|
| Funded status at the end of the period | $ | 6 |
| | $ | (21 | ) | | $ | (2 | ) | | $ | 2 |
| | $ | (21 | ) | | $ | (2 | ) |
Amounts recognized in the Statements of Condition at December 31, 20172023 and 2016,2022, consist of:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Cash Balance Plan |
| | Non-Qualified Defined Benefit Plans |
| | Post-retirement Health Benefit Plan |
| | Cash Balance Plan |
| | Non-Qualified Defined Benefit Plans |
| | Post-retirement Health Benefit Plan |
|
| Other assets/(liabilities) | $ | 6 |
| | $ | (21 | ) | | $ | (2 | ) | | $ | 2 |
| | $ | (21 | ) | | $ | (2 | ) |
Amounts recognized in AOCI at December 31, 2017 and 2016, consist of:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Cash Balance Plan |
| | Non-Qualified Defined Benefit Plans |
| | Post-retirement Health Benefit Plan |
| | Cash Balance Plan |
| | Non-Qualified Defined Benefit Plans |
| | Post-retirement Health Benefit Plan |
|
| Net loss/(gain) | $ | 11 |
| | $ | 3 |
| | $ | (1 | ) | | $ | 14 |
| | $ | 3 |
| | $ | (1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| (In millions) | Cash Balance
Plan | | | | Post-retirement Health Benefit Plan | | Cash Balance
Plan | | | | Post-retirement Health Benefit Plan |
| Net loss/(gain) | $ | 12 | | | | | $ | (1) | | | $ | 16 | | | | | $ | (1) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The following table presents information for pension plans with assets in excess of benefit obligations and for pensionfunded status of retirement plans with benefit obligations in excess of plan assets at December 31, 20172023 and 2016.2022.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Cash Balance Plan |
| | Non-Qualified Defined Benefit Plans |
| | Post-retirement Health Benefit Plan |
| | Cash Balance Plan |
| | Non-Qualified Defined Benefit Plans |
| | Post-retirement Health Benefit Plan |
|
| Projected benefit obligation | $ | 57 |
| | $ | 21 |
| | $ | 2 |
| | $ | 51 |
| | $ | 21 |
| | $ | 2 |
|
| Accumulated benefit obligation | 56 |
| | 20 |
| | 2 |
| | 50 |
| | 21 |
| | 2 |
|
| Fair value of plan assets | 63 |
| | — |
| | — |
| | 53 |
| | — |
| | — |
|
Components of the net periodic benefit costs and other amounts recognized in other comprehensive income for the years ended December 31, 2017, 2016, and 2015, were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | Cash Balance Plan |
| | Non-Qualified Defined Benefit Plans |
| | Post-retirement Health Benefit Plan |
| | Cash Balance Plan |
| | Non-Qualified Defined Benefit Plans |
| | Post-retirement Health Benefit Plan |
| | Cash Balance Plan |
| | Non-Qualified Defined Benefit Plans |
| | Post-retirement Health Benefit Plan |
|
| Net periodic benefit cost/(income) | | | | | | | | | | | | | | | | | |
| Service cost | $ | 3 |
| | $ | 2 |
| | $ | — |
| | $ | 3 |
| | $ | 1 |
| | $ | — |
| | $ | 3 |
| | $ | 1 |
| | $ | — |
|
| Interest cost | 2 |
| | 1 |
| | — |
| | 1 |
| | 1 |
| | — |
| | 2 |
| | 1 |
| | — |
|
| Expected return on plan assets | (4 | ) | | — |
| | — |
| | (3 | ) | | — |
| | — |
| | (3 | ) | | — |
| | — |
|
| Amortization of net loss/(gain) | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | (1 | ) |
| Settlement loss | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
| Net periodic benefit cost | 2 |
| | 3 |
| | — |
| | 2 |
| | 3 |
| | — |
| | 2 |
| | 3 |
| | (1 | ) |
| Other changes in plan assets and benefit obligations recognized in other comprehensive income | | | | | | | | | | | | | | | | | |
| Net loss/(gain) | (2 | ) | | — |
| | — |
| | 3 |
| | 1 |
| | — |
| | 3 |
| | (1 | ) | | — |
|
| Amortization of net loss/(gain) | (1 | ) | | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | | 1 |
|
| Prior service cost recognized due to settlement loss | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
|
| Total recognized in other comprehensive income | (3 | ) |
| — |
|
| — |
| | 2 |
| | — |
| | — |
| | 3 |
| | (2 | ) | | 1 |
|
| Total recognized in net periodic benefit cost and other comprehensive income | $ | (1 | ) | | $ | 3 |
| | $ | — |
| | $ | 4 |
| | $ | 3 |
| | $ | — |
| | $ | 5 |
| | $ | 1 |
| | $ | — |
|
The amounts in AOCI expected to be recognized as components of net periodic benefit cost in 2018 are de minimis.
Weighted average assumptions used to determine the benefit obligations at December 31, 2017 and 2016, for the Cash Balance Plan, non-qualified defined benefit plans, and postretirement health benefit plan were as follows:
|
| | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Cash Balance Plan |
| | Non-Qualified Defined Benefit Plans |
| | Post- retirement Health Benefit Plan |
| | Cash Balance Plan |
| | Non-Qualified Defined Benefit Plans |
| | Post-retirement Health Benefit Plan |
|
| Discount rate | 3.25 | % | | 3.25 | % | | 3.50 | % | | 3.50 | % | | 3.50 | % | | 4.00 | % |
| Rate of salary increase | 3.00% through 2018, 4.00% thereafter |
| | 3.00% through 2018, 4.00% thereafter |
| | — |
| | 3.00% through 2017
4.00% thereafter |
| | 3.00% through 2017
4.00% thereafter |
| | — |
|
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Weighted average assumptions used to determine the net periodic benefit costs for the years ended December 31, 2017, 2016, and 2015, for the Cash Balance Plan, non-qualified defined benefit plans, and postretirement health benefit plan were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | Cash Balance Plan |
| | Non-Qualified Defined Benefit Plans |
| | Post-retirement Health Benefit Plan |
| | Cash Balance Plan |
| | Non-Qualified Defined Benefit Plans |
| | Post-retirement Health Benefit Plan |
| | Cash Balance Plan |
| | Non-Qualified Defined Benefit Plans |
| | Post-retirement Health Benefit Plan |
|
| Discount rate | 3.50 | % | | 3.50 | % | | 4.00 | % | | 3.75 | % | | 3.75 | % | | 4.00 | % | | 3.50 | % | | 3.50 | % | | 3.75 | % |
| Rate of salary increase | 3.00% through 2017, 4.00% thereafter | | 3.00% through 2017, 4.00% thereafter | | — |
| | 3.00% through 2016 4.00% thereafter | | 3.00% through 2016 4.00% thereafter | | — |
| | 3.00% through 2015 4.00% thereafter |
| | 3.00% through 2015 4.00% thereafter |
| | — |
|
| Expected return on plan assets | 7.75 | % | | — |
| | — |
| | 7.75 | % | | — |
| | — |
| | 8.00 | % | | — |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| (In millions) | Cash Balance Plan | | Non-Qualified Defined Benefit Plans | | Post-retirement Health Benefit Plan | | Cash Balance Plan | | Non-Qualified Defined Benefit Plans | | Post-retirement Health Benefit Plan |
| Projected benefit obligation | $ | 80 | | | $ | 15 | | | $ | 1 | | | $ | 74 | | | $ | 15 | | | $ | 1 | |
| Accumulated benefit obligation | 80 | | | 15 | | | 1 | | | 74 | | | 15 | | | 1 | |
| Fair value of plan assets | 96 | | | — | | | — | | | 80 | | | — | | | — | |
| Funded status | 16 | | | (15) | | | (1) | | | 6 | | | (15) | | | (1) | |
The Bank uses a discount rate to determine the present value of its future benefit obligations. The discount rate was determined based on the CitigroupFinancial Times Stock Exchange (FTSE) Pension Discount Curve at the measurement date. The CitigroupFTSE Pension Discount Curve is a yield curve that reflects the market-observed yields for high-quality fixed income securities for each maturity. The projected benefit payments for each year from the plan are discounted using the spot rates on the yield curve to derive a single equivalent discount rate. The discount rate is reset annually on the measurement date.
The expected return ondiscount rate used to determine the benefit obligations for the Cash Balance Plan and non-qualified defined benefit plans was 4.50% for 2023 and 4.75% for 2022. The discount rate used to determine the benefit obligations for the post-retirement health benefit plan assets was determined based on: (i) the historical returns4.75% for each asset class, (ii) the expected future long-term returns2023 and 5.00% for these asset classes, and (iii) the plan's target asset allocation.
2022.
The table below presents the fair values of the Cash Balance Plan's assets as of December 31, 20172023 and 2016,2022, by asset category. See Note 1914 – Fair Value for further information regarding the three levels of fair value measurement.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | 2017 | | 2016 |
| | Fair Value Measurement Using: | | | | Fair Value Measurement Using: | | |
| 2023 | | | 2023 | | 2022 |
| (In millions) | |
| Asset Category | |
| Asset Category | |
| Asset Category | Level 1 |
| | Level 2 |
| | Level 3 |
| | Total |
| | Level 1 |
| | Level 2 |
| | Level 3 |
| | Total |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash and cash equivalents | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Equity mutual funds | 40 |
| | — |
| | — |
| | 40 |
| | 32 |
| | — |
| | — |
| | 32 |
|
| Fixed income mutual funds | 18 |
| | — |
| | — |
| | 18 |
| | 16 |
| | — |
| | — |
| | 16 |
|
| Real estate mutual funds | 2 |
| | — |
| | — |
| | 2 |
| | 2 |
| | — |
| | — |
| | 2 |
|
| Other mutual funds | 2 |
| | — |
| | — |
| | 2 |
| | 2 |
| | — |
| | — |
| | 2 |
|
| Total | $ | 63 |
| | $ | — |
| | $ | — |
| | $ | 63 |
| | $ | 53 |
| | $ | — |
| | $ | — |
| | $ | 53 |
|
The Cash Balance Plan is administered by the Bank's Retirement Committee, which establishes the plan's Statement of Investment Policy and Objectives. The Retirement Committee has adopted a strategic asset allocation based on a stable distribution of assets among major asset classes. These asset classes include domestic large-, mid-, and small-capitalization equity investments; international equity investments; real return investments; and fixed income investments. The Retirement Committee has set the Cash Balance Plan's target allocation percentages for a mix of 60% equity, 10% real return, and 30% fixed income. The Retirement Committee reviews the performance of the Cash Balance Plan on a regular basis.
The Cash Balance Plan's weighted average asset allocation at December 31, 20172023 and 2016,2022, by asset category was as follows:
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | Asset Category | |
| Asset Category | |
| Asset Category | 2017 |
| | 2016 |
| 2023 | | 2022 |
| Cash and cash equivalents | 2 | % | | 3 | % | Cash and cash equivalents | 1 | % | | 2 | % |
| Equity mutual funds | 63 |
| | 61 |
|
| Fixed income mutual funds | 28 |
| | 29 |
|
| Real estate mutual funds | 4 |
| | 4 |
|
| Other mutual funds | 3 |
| | 3 |
|
| Total | 100 | % | | 100 | % | Total | 100 | % | | 100 | % |
The Bank contributed $2$8 million in 20172023 and expects to contribute $3 million in 20182024 to the Cash Balance Plan. The Bank contributed $3$2 million in 20172023 and expects to contribute a de minimis amountamounts in 20182024 to the non-qualified defined benefit plans and postretirement health benefit plan.
The following are the estimated future benefit payments, which reflect expected future service, as appropriate:
| | | | | | | | | | | | | |
| (In millions) | | | | | |
| Year | Cash Balance
Plan | | Non-Qualified
Defined Benefit
Plans | | |
| 2024 | $ | 4 | | | $ | — | | | |
| 2025 | 5 | | | 2 | | | |
| 2026 | 5 | | | 1 | | | |
| 2027 | 5 | | | 1 | | | |
| 2028 | 37 | | | 5 | | | |
| 2029 – 2033 | 25 | | | 8 | | | |
|
| | | | | | | | | | | |
| Year | Cash Balance Plan |
| | Non-Qualified Defined Benefit Plans |
| | Postretirement Health Benefit Plan |
|
| 2018 | $ | 4 |
| | $ | — |
| | $ | — |
|
| 2019 | 4 |
| | 5 |
| | — |
|
| 2020 | 4 |
| | — |
| | — |
|
| 2021 | 4 |
| | 1 |
| | — |
|
| 2022 | 16 |
| | 6 |
| | — |
|
| 2023 – 2027 | 20 |
| | 14 |
| | 1 |
|
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Defined Contribution Plans
Retirement Savings Plan. The Bank sponsors a qualified defined contribution retirement 401(k) savings plan, the Federal Home Loan Bank of San Francisco Savings Plan (Savings Plan). Contributions to the Savings Plan consist of elective participant contributions of up to 20%75% of each participant's base compensation and a Bank matching contribution of up to 6% of each participant's base compensation. The Bank contributed approximately $2, $2, and $2$3 million during each of the years ended December 31, 2017, 2016,2023, 2022, and 2015, respectively.2021.
Benefit Equalization Plan. The Bank sponsors a non-qualified retirement plan restoring benefits offered under the Savings Plan that have been limited by laws governing the plan. Contributions made to the plan during the years ended December 31, 2017, 2016,2023, 2022, and 2015,2021, were de minimis.
Deferred Compensation Plan. The Bank maintains a deferred compensation plan that is available to all eligible Bank officers.employees. The defined contribution portion of the plan is comprisedconsists of two components: (i) officeremployee or director deferral of current compensation, and (ii) make-up matching contributions for officersemployees that would have been made by the Bank under the Savings Plan had the compensation not been deferred. The make-up benefits under the Deferred Compensation Plan vest according to the corresponding provisions of the Savings Plan. The Deferred Compensation Plan liability consists of the accumulated compensation deferrals and accrued earnings on the deferrals, as well as the make-up matching contributions and any accrued earnings on the contributions. The Bank'sBank’s obligation for this plan at December 31, 2017, 2016,2023 and 2015,2022, was $44, $37,$58 million and $35,$51 million, respectively.
Incentive Compensation Plans
The Bank provides incentive compensation plans for many of its employees, including senior officers.all employees. Other liabilities include $13$16 million and $13$15 million for incentive compensation at December 31, 20172023 and 2016,2022, respectively.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 17 — 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 and excludes interest expense that is recorded in “Mandatorily redeemable capital stock.” Other key financial information, such as any credit-related OTTI losses on the Bank’s PLRMBS, other expenses, and assessments, is not included in the segment reporting analysis, but is incorporated into the Bank’s overall assessment of financial performance.
The advances-related business consists of advances and other credit products, related financing and hedging
instruments, other non-MBS investments associated with the Bank's role as a liquidity provider, and capital.
Adjusted net interest income for this segment is derived primarily from the difference, or spread, between the yield
on all assets associated with the business activities in this segment and the cost of funding those activities, including
the net settlements from associated interest rate exchange agreements, and from earnings on invested capital.
The mortgage-related business consists of MBS investments, mortgage loans acquired through the MPF Program,
the consolidated obligations specifically identified as funding those assets, and related hedging instruments.
Adjusted net interest income for this segment is derived primarily from the difference, or spread, between the yield
on the MBS and mortgage loans and the cost of the consolidated obligations funding those assets. This includes the net settlements from associated interest rate exchange agreements and net accretion related income, which is a result of improvement in expected cash flows on certain other-than-temporarily-impaired PLRMBS, less the provision for credit losses on mortgage loans.
The following table presents the Bank’s adjusted net interest income by operating segment and reconciles total adjusted net interest income to income before the AHP assessment for the years ended December 31, 2017, 2016, and 2015.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Advances- Related Business |
| | Mortgage- Related Business(1) |
| | Adjusted Net Interest Income |
| | Amortization of Basis Adjustments(2) |
| |
Income/(Expense) on Economic Hedges(3) |
| | Interest Expense on Mandatorily Redeemable Capital Stock(4) |
| | Net Interest Income After Mortgage Loan Loss Provision |
| | Other Income/ (Loss) |
| | Other Expense |
| | Income Before AHP Assessment |
|
| 2017 | $ | 234 |
| | $ | 325 |
| | $ | 559 |
| | $ | — |
| | $ | (40 | ) | | $ | 32 |
| | $ | 567 |
| | $ | 78 |
| | $ | 224 |
| | $ | 421 |
|
| 2016 | 154 |
| | 338 |
| | 492 |
| | (7 | ) | | (32 | ) | | 60 |
| | 471 |
| | 485 |
| | 158 |
| | 798 |
|
| 2015 | 155 |
| | 351 |
| | 506 |
| | (17 | ) | | (18 | ) | | 65 |
| | 476 |
| | 388 |
| | 148 |
| | 716 |
|
| |
(1) | The mortgage-related business includes total accretion or amortization associated with other-than-temporarily impaired PLRMBS, which are recognized in interest income, totaled $93, $101, and $82 for the years ended December 31, 2017, 2016, and 2015, respectively. The mortgage-related business does not include credit-related OTTI losses of $16, $16, and $15 for the years ended December 31, 2017, 2016, and 2015, respectively. |
| |
(2) | Represents amortization of amounts deferred for adjusted net interest income purposes only, in accordance with the Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework.
|
| |
(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 two 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 two operating segments.
|
The following table presents total assets by operating segment at December 31, 2017, 2016, and 2015.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | |
| Advances- Related Business |
| | Mortgage- Related Business |
| | Total Assets |
|
| 2017 | $ | 103,426 |
| | $ | 19,959 |
| | $ | 123,385 |
|
| 2016 | 74,018 |
| | 17,923 |
| | 91,941 |
|
| 2015 | 69,047 |
| | 16,651 |
| | 85,698 |
|
Note 1813 — 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 obligation bondsobligations, or the investment in fixed rate assets to create variable rate structures. The interest rate exchange agreements are generally executed at the same time the advances, consolidated obligations, and bondsinvestments are transacted and generally have the same maturity dates as the related advances and bonds.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. Over-the-counter derivativesDerivatives 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 thean executing bank or broker-dealer, either on or onoff a swap execution facility, but in either case, the Bank’s counterparty is a derivatives clearing organization or clearinghouse(clearing house) once the derivative transaction has been accepted for clearing. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit.
Additional uses of interest rate exchange agreements include: (i) offsetting embedded features in assets and liabilities, (ii) hedging anticipated issuance of debt, (iii) matching against consolidated obligation discount notes or bonds to create the equivalent of callable or non-callable fixed rate debt, (iv) modifying the repricing frequency of assets and liabilities, (v) matching against certain advances and consolidated obligations for which the Bank elected the fair value option, and (vi) exactly offsetting other derivatives cleared at a derivatives clearing organization.house. The Bank’s use of interest rate
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
exchange agreements results in one of the following classifications: (i) a fair value hedge of an underlying financial instrument or (ii) an economic hedge of assets, or liabilities, or (iii) an intermediary transaction for members.
other derivatives.
The Bank primarily uses the following derivative instruments:
Interest Rate Swaps – An interest rate swap is an agreementswaps, which are agreements between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. One of the simplest forms of an interest rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, the party receives cash flows equivalent to the interest on the same notional principal amount at a variable rate for the same period of time. The variable rate received or paid by the Bank in most interest rate exchange agreements is either indexed to LIBOR or to the overnight index swap rate.
Interest Rate Caps and Floors – In a cap agreement, additional cash flow is generated if the price or interest rate of an underlying variable rate rises above a certain threshold (or cap) price. In a floor agreement, additional cash flow is generated if the price or interest rate of an underlying variable rate falls below a certain threshold (or floor) price. Caps and floors may be used in conjunction with assets or liabilities. In general, caps and floors are designed as protection against the interest ratebased on a variable rate assetdaily repricing index, such as SOFR or liability rising above or falling below a certain level.the effective Federal funds rate.
Hedging Activities. The Bank documents at inception all relationships between derivatives designated as hedging instruments and hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing hedge effectiveness. Derivatives designated as fair value hedges may be transacted to hedge: (i) assets and liabilities on the StatementStatements of Condition, (ii) firm commitments, or (iii) forecasted transactions. The Bank also formally assesses (both at hedge inception and on an ongoing basis) whether the hedging
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
derivatives have been effective in offsetting changes in the fair value of hedged items attributable to the hedged risk and whether those derivatives may be expected to remain effective hedges in future periods. The Bank typically uses regression analyses or other statistical analyses to assess the effectiveness of its hedges. When it is determined that a derivative has not been or is not expected to be effective as a hedge, the Bank discontinues hedge accounting prospectively.
The Bank discontinues hedge accounting prospectively when: (i) it determines that the derivative is no longer effective in offsetting changes in the fair value of a hedged item (including hedged items such as firm commitments or forecasted transactions); (ii) the derivative and/or the hedged item expires or is sold, terminated, or exercised; (iii) it is no longer probable that the forecasted transaction will occur in the originally expected period; (iv) a hedged firm commitment no longer meets the definition of a firm commitment; (v) it determines that designating the derivative as a hedging instrument is no longer appropriate; or (vi) it decides to use the derivative to offset changes in the fair value of other derivatives or instruments carried at fair value.
The Bank may have the following types of hedged items:
Investments–The Bank may invest in U.S. Treasury and agency obligations as well as agency MBS, and the taxable portion of highly rated state or local housing finance agency obligations.MBS. In the past, the Bank has also invested in PLRMBS rated AAA at the time of acquisition. The interest rate and prepayment risk associated with these investment securities is managed through a combination of debt issuance and derivatives. The Bank may manage prepayment risk and interest rate risk by funding investment securities with consolidated obligations that have call features or by hedging the prepayment risk with a combination of consolidated obligations and callable swaps. The Bank may execute callable swaps in conjunction with the issuance of certain liabilities to create funding that is economically equivalent to fixed rate callable debt. Although these derivatives are economic hedges against prepayment risk and are designated to individual liabilities, they do not receive either fair value or cash flow hedge accounting treatment. Investment securities may be classified as trading, AFS, or HTM.
The Bank may also manage the risk arising from changing market prices or cash flows of investment securities classified as trading or AFS by entering into interest rate exchange agreements (economic hedges) that offset the changes in fair value or cash flows of the securities. The marketHedge relationships that involve AFS securities are designated as fair value changeshedges.
For AFS securities that have been hedged and qualify as a fair value hedge, the Bank records the portion of both the trading securities and the associated interest rate exchange agreements are included in other incomechange in the Statementsfair value of Income.the investment related to the risk being hedged in interest income together with the related change in the fair value of the derivative, and records the remainder of the change in the fair value of the investment in AOCI as “Net unrealized gain/(loss) on AFS securities.”
Advances– The Bank offers a wide range of advances structures to meet members’ funding needs. These advances may have maturities up to 30 years with fixed or adjustable rates and may include early termination features or options. The Bank may use derivatives to adjust the repricing and options characteristics of advances to more closely match the characteristics of the Bank’s funding liabilities. In general, whenever a member executes a fixed rate advance, fixed rate advance with embedded options, or a variable rate advance with embedded options, the Bank will simultaneously execute an interest rate exchange agreement with terms that offset the terms and any embedded options in the advance. The combination of the advance and the interest rate exchange agreement effectively creates a variable rate asset. Fixed rate advances without options that are offset with an interest rate
In addition, for certain advances for which theFederal Home Loan Bank has electedof San Francisco
Notes to Financial Statements (continued)
exchange agreement are generally treated as fair value hedges. Advances with embedded options are recorded using the fair value option the Bank will simultaneously execute anand are economically hedged using interest rate exchange agreement with terms that economically offsetagreements.
Mortgage Loans–Prior to June 30, 2021, the terms of the advance.
Mortgage Loans–The Bank’s investment portfolio includesBank invested in fixed rate mortgage loans. The prepayment options embedded in mortgage loans can result in extensions or contractions in the expected repayment of these investments, depending on changes in estimated prepayment speeds. The Bank manages the interest rate risk and prepayment risk associated with fixed rate mortgage loans through a combination of debt issuance and derivatives. The Bank uses both callable and non-callable debt to achieve cash flow patterns and market value sensitivities for liabilities similar to those expected on the mortgage loans. Net income could be reduced if the Bank replaces prepaid mortgage loans with lower-yielding assets and the Bank’s higher funding costs are not reduced accordingly.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Bank executesmay execute callable swaps in conjunction with the issuance of certainshort-term or adjustable rate consolidated obligations to create funding that is economically equivalent to fixed rate callable bonds. Although these derivatives areThis type of hedge is treated as an economic hedges against the prepayment risk of specific loan pools and are referenced to individual liabilities, they do not receive either fair value or cash flow hedge accounting treatment.hedge.
Consolidated Obligations – Consolidated obligation bonds may be structured to meet the Bank’s or the investors’ needs. Common structures include fixed rate bonds with or without call options and adjustable rate bonds with or without embedded options. In general, when bonds are issued, the Bank simultaneously executes an interest rate exchange agreement with terms that offset the terms and embedded options, if any, of the consolidated obligation bond. This combination of the consolidated obligation bond and the interest rate exchange agreement effectively creates an adjustable rate bond. The cost of this funding combination is generally lower than the cost that would be available through the issuance of an adjustable rate bond alone. These transactions generally receive fair value hedge accounting treatment.
When the Bank issues consolidated obligation discount notes, it may also simultaneously enter into an interest rate exchange agreement to convert the fixed rate discount note to an adjustable rate discount note. This type of hedge is treated as an economic hedge.
In addition, when certain consolidated obligation bonds for which the Bank has elected the fair value option are issued, the Bank simultaneously executes an interest rate exchange agreement with terms that economically offset the terms of the consolidated obligation bond. However, this type of hedge is treated as an economic hedge because these combinations do not meet the requirements for fair value hedge accounting treatment.
Intermediation and Offsetting Derivatives– As an additional service to its members, the Bank has in the past entered into offsetting interest rate exchange agreements, acting as an intermediary between offsetting derivative transactions with members and other counterparties. This intermediation allows members indirect access to the derivatives market. The Bank also enters into derivatives to offset the economic effect of other derivatives that are no longer designated to advances, investments, or consolidated obligations. Neither type of offsettingOffsetting derivatives receivesdo not receive hedge accounting treatment and both are separately marked to market through earnings. The net result of the accounting for these derivatives does not significantly affect the operating results of the Bank.
The notional principal of the interest rate exchange agreements associated with derivatives with members or offsetting derivatives with other counterparties was $14 and $89, at December 31, 2017 and 2016, respectively.
The notional amount of an interest rate exchange agreement serves as a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged nor the overall exposure of the Bank to credit risk and market risk. The risks of derivatives can be measured meaningfully on a portfolio basis by taking into account the counterparties, the types of derivatives, the items being hedged, and any offsets between the derivatives and the items being hedged.
For more information related to the Bank’s accounting policies for derivatives, see Note 1 – Summary of Significant Accounting Policies.
The following table summarizes the notional amount and fair value of derivative instruments, including the effect of netting adjustments and cash collateral as of December 31, 20172023 and 2016.2022. For purposes of this disclosure, the derivative values include the fair value of derivatives and related accrued interest.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 |
| (In millions) | Notional
Amount of
Derivatives | | Derivative
Assets | | Derivative
Liabilities | | Notional
Amount of
Derivatives | | Derivative
Assets | | Derivative
Liabilities |
| Derivatives designated as hedging instruments: | | | | | | | | | | | |
| Interest rate swaps | $ | 90,088 | | | $ | 795 | | | $ | 705 | | | $ | 69,204 | | | $ | 799 | | | $ | 1,062 | |
| Derivatives not designated as hedging instruments: | | | | | | | | | | | |
| Interest rate swaps | 27,349 | | | 36 | | | 87 | | | 47,589 | | | 50 | | | 133 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total derivatives before netting and collateral adjustments | $ | 117,437 | | | 831 | | | 792 | | | $ | 116,793 | | | 849 | | | 1,195 | |
Netting adjustments and cash collateral(1) | | | (815) | | | (790) | | | | | (823) | | | (1,193) | |
| Total derivative assets and total derivative liabilities | | | $ | 16 | | | $ | 2 | | | | | $ | 26 | | | $ | 2 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Notional Amount of Derivatives |
| | Derivative Assets |
| | Derivative Liabilities |
| | Notional Amount of Derivatives |
| | Derivative Assets |
| | Derivative Liabilities |
|
| Derivatives designated as hedging instruments: | | | | | | | | | | | |
| Interest rate swaps | $ | 24,270 |
| | $ | 92 |
| | $ | 27 |
| | $ | 20,741 |
| | $ | 67 |
| | $ | 32 |
|
| Total | 24,270 |
| | 92 |
| | 27 |
| | 20,741 |
| | 67 |
| | 32 |
|
| Derivatives not designated as hedging instruments: | | | | | | | | | | | |
| Interest rate swaps | 73,760 |
| | 81 |
| | 57 |
| | 42,135 |
| | 67 |
| | 49 |
|
| Interest rate caps and floors | 1,563 |
| | 1 |
| | 1 |
| | 2,180 |
| | 6 |
| | — |
|
| Mortgage delivery commitments | 16 |
| | — |
| | — |
| | 13 |
| | — |
| | — |
|
| Total | 75,339 |
| | 82 |
| | 58 |
| | 44,328 |
| | 73 |
| | 49 |
|
| Total derivatives before netting and collateral adjustments | $ | 99,609 |
| | 174 |
| | 85 |
| | $ | 65,069 |
| | 140 |
| | 81 |
|
Netting adjustments and cash collateral(1) | | | (91 | ) | | (84 | ) | | | | (74 | ) | | (79 | ) |
| Total derivative assets and total derivative liabilities | | | $ | 83 |
| | $ | 1 |
| | | | $ | 66 |
| | $ | 2 |
|
| |
(1) | Amounts include the netting of derivative assets and liabilities by counterparty, including cash collateral and related accrued interest, where the netting requirements have been met. Cash collateral posted and related accrued interest was $10 and $22(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 or counterparty. Cash collateral posted, including accrued interest, was $353 million and $694 million at December 31, 2017 and 2016, respectively. Cash collateral received and related accrued interest was $18 and $16 at December 31, 2017 and 2016, respectively.
|
The following table presents the components of net gain/(loss) on derivatives and hedging activities as presented in the Statements of Income for the years ended December 31, 2017, 2016,2023 and 2015.2022, respectively. Cash collateral received, including accrued interest, was $378 million and $324 million at December 31, 2023 and 2022, respectively.
|
| | | | | | | | | | | |
| | 2017 |
| | 2016 |
| | 2015 |
|
| | Gain/(Loss) |
| | Gain/(Loss) |
| | Gain/(Loss) |
|
| Derivatives designated as hedging instruments: | | | | | |
| Interest rate swaps | $ | (1 | ) | | $ | (2 | ) | | $ | (10 | ) |
| Total net gain/(loss) related to fair value hedge ineffectiveness | (1 | ) | | (2 | ) | | (10 | ) |
| Derivatives not designated as hedging instruments: | | | | | |
| Economic hedges: | | | | | |
| Interest rate swaps | 8 |
| | 39 |
| | 13 |
|
| Interest rate caps and floors | (5 | ) | | (1 | ) | | (3 | ) |
| Net settlements | (40 | ) | | (32 | ) | | (18 | ) |
| Mortgage delivery commitments | 24 |
| | 5 |
| | 2 |
|
| Total net gain/(loss) related to derivatives not designated as hedging instruments | (13 | ) | | 11 |
| | (6 | ) |
| Net gain/(loss) on derivatives and hedging activities | $ | (14 | ) | | $ | 9 |
| | $ | (16 | ) |
The following tables present, by type of hedged item, the gains and losses on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Bank’s net interest incomeStatements of Income for the years ended December 31, 2017, 2016,2023, 2022, and 2015.
2021. | | | | | | | | | | | | | | | | | | | |
| 2023 | | |
| |
| Interest Income/(Expense) | | |
| (In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | | |
| Total interest income/(expense) presented in the Statements of Income | $ | 3,999 | | | $ | 921 | | | $ | (3,901) | | | |
| Gain/(loss) on fair value hedging relationships | | | | | | | |
Derivatives(1) | $ | 117 | | | $ | 91 | | | $ | (138) | | | |
| Hedged items | 230 | | | 230 | | | (438) | | | |
| Net gain/(loss) on derivatives and hedging activities recorded in net interest income | 347 | | | 321 | | | (576) | | | |
| | | | | | | |
| | | | | | | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | |
| 2022 | | |
| | | |
| Interest Income/(Expense) | | |
| (In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | | |
| Total interest income/(expense) presented in the Statements of Income | $ | 1,226 | | | $ | 408 | | | $ | (715) | | | |
| Gain/(loss) on fair value hedging relationships | | | | | | | |
Derivatives(1) | $ | 814 | | | $ | 1,202 | | | $ | (1,038) | | | |
| Hedged items | (804) | | | (1,247) | | | 944 | | | |
| Net gain/(loss) on derivatives and hedging activities recorded in net interest income | 10 | | | (45) | | | (94) | | | |
| | | | | | | | | | | | | | | | | | | |
| 2021 |
| | | |
| Interest Income/(Expense) | | |
| (In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | | |
| Total interest income/(expense) presented in the Statements of Income | $ | 224 | | | $ | 220 | | | $ | (62) | | | |
| Gain/(loss) on fair value hedging relationships | | | | | | | |
Derivatives(1) | $ | 175 | | | $ | 309 | | | $ | (87) | | | |
| Hedged items | (390) | | | (482) | | | 152 | | | |
| Net gain/(loss) on derivatives and hedging activities recorded in net interest income | (215) | | | (173) | | | 65 | | | |
| | | | | | | |
| | | | | | | |
(1)Includes net interest settlements.
The following table presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of the hedged items as of December 31, 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| (In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | | Advances | | AFS Securities | | Consolidated Obligation Bonds |
Amortized cost of hedged asset/(liability)(1) | $ | 38,338 | | | $ | 17,029 | | | $ | (34,121) | | | $ | 34,535 | | | $ | 11,574 | | | $ | (21,976) | |
| Fair value hedging basis adjustments: | | | | | | | | | | | |
| Active hedging relationships included in amortized cost | $ | (427) | | | $ | (1,053) | | | $ | 645 | | | $ | (740) | | | $ | (1,410) | | | $ | 1,083 | |
| Discontinued hedging relationships included in amortized cost | 56 | | | 621 | | | — | | | 70 | | | 740 | | | — | |
| Total amount of fair value hedging basis adjustments | $ | (371) | | | $ | (432) | | | $ | 645 | | | $ | (670) | | | $ | (670) | | | $ | 1,083 | |
(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 as presented in the Statements of Income for the years ended December 31, 2023, 2022, and 2021.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | | | | | |
| Hedged Item Type | Gain/(Loss) on Derivatives |
| | Gain /(Loss) on Hedged Item |
| | Net Fair Value Hedge Ineffectiveness |
| | Effect of Derivatives on Net Interest Income(1) |
|
| Year ended December 31, 2017: | | | | | | | |
| Advances | $ | 63 |
| | $ | (66 | ) | | $ | (3 | ) | | $ | (27 | ) |
| Consolidated obligation bonds | (41 | ) | | 43 |
| | 2 |
| | 27 |
|
| Total | $ | 22 |
| | $ | (23 | ) | | $ | (1 | ) | | $ | — |
|
| Year ended December 31, 2016: | | | | | | | |
| Advances | $ | 63 |
| | $ | (62 | ) | | $ | 1 |
| | $ | (55 | ) |
| Consolidated obligation bonds | (135 | ) | | 132 |
| | (3 | ) | | 180 |
|
| Total | $ | (72 | ) | | $ | 70 |
| | $ | (2 | ) | | $ | 125 |
|
| Year ended December 31, 2015: | | | | | | | |
| Advances | $ | 19 |
| | $ | (20 | ) | | $ | (1 | ) | | $ | (106 | ) |
| Consolidated obligation bonds | (170 | ) | | 161 |
| | (9 | ) | | 257 |
|
| Total | $ | (151 | ) | | $ | 141 |
| | $ | (10 | ) | | $ | 151 |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | |
| (In millions) | | | | | 2023 | | 2022 | | 2021 |
| Derivatives not designated as hedging instruments | | | | | Gain/(Loss) | | Gain/(Loss) | | Gain/(Loss) |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Economic hedges: | | | | | | | | | |
| Interest rate swaps | | | | | $ | (26) | | | $ | 34 | | | $ | 108 | |
| | | | | | | | | |
| Net interest settlements | | | | | 5 | | | (42) | | | (71) | |
| | | | | | | | | |
| Total net gain/(loss) related to derivatives not designated as hedging instruments | | | | | (21) | | | (8) | | | 37 | |
Price alignment amount(1) | | | | | (4) | | | (1) | | | — | |
| Net gain/(loss) on derivatives | | | | | $ | (25) | | | $ | (9) | | | $ | 37 | |
| |
(1) | The net interest on derivatives in fair value hedge relationships is presented in the interest income/expense line item of the respective hedged item.
|
(1) This amount relates to derivatives for which variation margin on cleared derivatives is characterized as a daily settled contract.
Credit Risk – Risk. The Bank is subject to credit risk as a result offrom potential nonperformance by counterparties to the interest rate exchange agreements. All of the Bank’s agreements governing uncleared derivative transactions contain master netting provisions to help mitigate the credit risk exposure to each counterparty. The Bank manages counterparty credit risk through credit analyses and collateral requirements and by following the requirements of the Bank’s risk management policies, credit guidelines, and Finance Agency and other regulations. The Bank also requires credit support agreements on all uncleared derivatives.
For cleared derivatives, the clearinghouseclearing house is the Bank’s counterparty. The requirement that the Bank post initial margin and settle variation margin through a clearing agent to the clearinghouse,clearing house exposes the Bank to institutional credit risk in the event that theif its futures commission merchant, or clearing agent, or the clearinghouse fails to meet its obligations. The use of cleared derivatives, however, mitigates the Bank’sa clearing house, or central counterparty, lowers overall credit risk exposure because a central counterparty is substituted for individual counterpartiesit employs standard valuation and initial and variation margin processes and is posted dailyspecifically designed to withstand remote but plausible futures commission merchant default credit events. Variation margin is settled for changes in the value of cleared derivatives through a clearing agent.the portfolio, and initial margin is posted for changes in risk profile of the portfolio. The Bank has analyzed the enforceability of offsetting rights applicable to its cleared derivative transactions and determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable bankruptcy law and Commodity Futures Trading Commission rules in the event of a clearinghouseclearing house or clearing agent insolvency and under applicable clearinghouseclearing house rules upon a non-insolvency-based event of default of the clearinghouseclearing house or clearing agent. Based on this analysis, the Bank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular clearinghouse.
clearing house.
Based on the Bank’s credit analyses and the collateral requirements, the Bank does not expect to incur any credit losses on its derivative transactions.
The Bank’s agreements for uncleared derivative transactions contain provisions that link the Bank’s credit rating from Moody’s Investors Service and S&P Global Ratings to various rights and obligations. Certain of these derivative agreements provide that, if the Bank’s long-term debt rating falls below a specified rating (ranging from A3/A- to Baa3/BBB-), the Bank’s counterparty would have the right, but not the obligation, to terminate all of its outstanding derivative transactions with the Bank; the Bank’s agreements with its clearing agents for cleared derivative transactions have similar provisions with respect to the debt rating of FHLBank System consolidated bonds. If this occurs, the Bank may choose to enter into replacement hedges, either by transferring the existing transactions to another counterparty or entering into new replacement transactions, based on prevailing market rates. The aggregate fair value of all uncleared derivative instruments with credit risk-related contingent features that were
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
in a net derivative liability position (before cash collateral and related accrued interest) at December 31, 2017,2023, was $6,$333 million, for which the Bank had posted cash collateral of $6$338 million 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 on a net basis when the netting requirements have been met.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The following table presents separately the fair value of derivative assets and derivative liabilities that have met the netting requirements, including the related collateral received from or pledged to counterparties as of December 31, 20172023 and 2016.2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | | | 2022 | | |
| (In millions) | Derivative Assets | | Derivative Liabilities | | | | Derivative Assets | | Derivative Liabilities | | |
| Derivative instruments meeting netting requirements | | | | | | | | | | | |
| Gross recognized amount | | | | | | | | | | | |
| Uncleared | $ | 826 | | | $ | 778 | | | | | $ | 834 | | | $ | 1,188 | | | |
| Cleared | 5 | | | 14 | | | | | 15 | | | 7 | | | |
| Total gross recognized amount | 831 | | | 792 | | | | | 849 | | | 1,195 | | | |
| Gross amount of netting adjustments and cash collateral | | | | | | | | | | | |
| Uncleared | (814) | | | (776) | | | | | (829) | | | (1,186) | | | |
| Cleared | (1) | | | (14) | | | | | 6 | | | (7) | | | |
| Total gross amounts of netting adjustments and cash collateral | (815) | | | (790) | | | | | (823) | | | (1,193) | | | |
| Total derivative assets and total derivative liabilities | $ | 16 | | | $ | 2 | | | | | $ | 26 | | | $ | 2 | | | |
| | | | | | | | | | | |
| Non-cash collateral received or pledged that can be sold or repledged | | | | | | | | | | | |
| | | | | | | | | | | |
| Cleared | — | | | — | | | | | (435) | | | — | | | |
| Total net amount of non-cash collateral received or pledged | $ | — | | | $ | — | | | | | $ | (435) | | | $ | — | | | |
| | | | | | | | | | | |
Net amount(1) | | | | | | | | | | | |
| Uncleared | $ | 12 | | | $ | 2 | | | | | $ | 5 | | | $ | 2 | | | |
| Cleared | 4 | | | — | | | | | 456 | | | — | | | |
| Total net amount | $ | 16 | | | $ | 2 | | | | | $ | 461 | | | $ | 2 | | | |
(1) Any over-collateralization at the Bank’s individual clearing agent and/or counterparty level is not included in the determination of the net amount. At December 31, 2023, the Bank had additional net credit exposure of $771 million due to instances where non-cash collateral to a counterparty exceeded the Bank’s net derivative position. There was no such additional net credit exposure at December 31, 2022.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | Derivative Instruments Meeting Netting Requirements | | | | Derivative Instruments Meeting Netting Requirements | | |
| | Gross Recognized Amount | | Gross Amounts of Netting Adjustments and Cash Collateral | | Total Derivative Assets and Total Derivative Liabilities | | Gross Recognized Amount | | Gross Amounts of Netting Adjustments and Cash Collateral | | Total Derivative Assets and Total Derivative Liabilities |
| | | | | | | | | | | | |
| Derivative Assets | | | | | | | | | | | |
| Uncleared | $ | 35 |
| | $ | (33 | ) | | $ | 2 |
| | $ | 41 |
| | $ | (37 | ) | | $ | 4 |
|
| Cleared | 139 |
| | (58 | ) | | 81 |
| | 99 |
| | (37 | ) | | 62 |
|
| Total | | | | | $ | 83 |
| | | | | | $ | 66 |
|
| Derivative Liabilities | | | | | | | | | | | |
| Uncleared | $ | 29 |
| | $ | (28 | ) | | $ | 1 |
| | $ | 37 |
| | $ | (35 | ) | | $ | 2 |
|
| Cleared | 56 |
| | (56 | ) | | — |
| | 44 |
| | (44 | ) | | — |
|
| Total | | | | | $ | 1 |
| | | | | | $ | 2 |
|
Note 1914 — Fair Value
The following fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank at December 31, 20172023 and 2016.2022. 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
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of total assets and liabilities.
The following tables present the net carrying value or carrying value, as applicable, the estimated fair value, and the fair value hierarchy level of the Bank’s financial instruments at December 31, 20172023 and 2016.2022. 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 |
| (In millions) | Carrying Value(1) | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral(2) |
| Assets | | | | | | | | | | | |
| Cash and due from banks | $ | 5 | | | $ | 5 | | | $ | 5 | | | $ | — | | | $ | — | | | $ | — | |
| Interest-bearing deposits | 2,922 | | | 2,922 | | | 2,922 | | | — | | | — | | | — | |
| Securities purchased under agreements to resell | 3,650 | | | 3,650 | | | — | | | 3,650 | | | — | | | — | |
| Federal funds sold | 3,861 | | | 3,861 | | | — | | | 3,861 | | | — | | | — | |
| | | | | | | | | | | |
| AFS securities | 18,014 | | | 18,014 | | | — | | | 16,955 | | | 1,059 | | | — | |
| HTM securities | 1,847 | | | 1,818 | | | — | | | 1,702 | | | 116 | | | — | |
| Advances | 61,335 | | | 61,216 | | | — | | | 61,216 | | | — | | | — | |
| Mortgage loans held for portfolio | 754 | | | 634 | | | — | | | 634 | | | — | | | — | |
| | | | | | | | | | | |
| Accrued interest receivable | 184 | | | 184 | | | — | | | 184 | | | — | | | — | |
Derivative assets, net(2) | 16 | | | 16 | | | — | | | 831 | | | — | | | (815) | |
Other assets(3) | 17 | | | 17 | | | 17 | | | — | | | — | | | — | |
| Liabilities | | | | | | | | | | | |
| Deposits | 962 | | | 962 | | | — | | | 962 | | | — | | | — | |
| Consolidated obligations: | | | | | | | | | | | |
| Bonds | 64,297 | | | 64,037 | | | — | | | 64,037 | | | — | | | — | |
| Discount notes | 19,187 | | | 19,182 | | | — | | | 19,182 | | | — | | | — | |
| Total consolidated obligations | 83,484 | | | 83,219 | | | — | | | 83,219 | | | — | | | — | |
| Mandatorily redeemable capital stock | 706 | | | 706 | | | 706 | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Accrued interest payable | 520 | | | 520 | | | — | | | 520 | | | — | | | — | |
Derivative liabilities, net(2) | 2 | | | 2 | | | — | | | 792 | | | — | | | (790) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| (In millions) | Carrying Value(1) | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral(2) |
| Assets | | | | | | | | | | | |
| Cash and due from banks | $ | 9 | | | $ | 9 | | | $ | 9 | | | $ | — | | | $ | — | | | $ | — | |
| Interest-bearing deposits | 3,677 | | | 3,677 | | | 3,677 | | | — | | | — | | | — | |
| Securities purchased under agreements to resell | 7,000 | | | 7,000 | | | — | | | 7,000 | | | — | | | — | |
| Federal funds sold | 4,719 | | | 4,719 | | | — | | | 4,719 | | | — | | | — | |
| Trading securities | 1 | | | 1 | | | — | | | 1 | | | — | | | — | |
| AFS securities | 12,713 | | | 12,713 | | | — | | | 11,531 | | | 1,182 | | | — | |
| HTM securities | 2,181 | | | 2,136 | | | — | | | 1,993 | | | 143 | | | — | |
| Advances | 89,400 | | | 89,183 | | | — | | | 89,183 | | | — | | | — | |
| Mortgage loans held for portfolio | 815 | | | 695 | | | — | | | 695 | | | — | | | — | |
| Accrued interest receivable | 313 | | | 313 | | | — | | | 313 | | | — | | | — | |
Derivative assets, net(2) | 26 | | | 26 | | | — | | | 849 | | | — | | | (823) | |
Other assets(3) | 15 | | | 15 | | | 15 | | | — | | | — | | | — | |
| Liabilities | | | | | | | | | | | |
| Deposits | 989 | | | 989 | | | — | | | 989 | | | — | | | — | |
| Consolidated obligations: | | | | | | | | | | | |
| Bonds | 75,768 | | | 75,396 | | | — | | | 75,396 | | | — | | | — | |
| Discount notes | 35,929 | | | 35,916 | | | — | | | 35,916 | | | — | | | — | |
| Total consolidated obligations | 111,697 | | | 111,312 | | | — | | | 111,312 | | | — | | | — | |
| Mandatorily redeemable capital stock | 5 | | | 5 | | | 5 | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Accrued interest payable | 326 | | | 326 | | | — | | | 326 | | | — | | | — | |
Derivative liabilities, net(2) | 2 | | | 2 | | | — | | | 1,195 | | | — | | | (1,193) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
(1) For certain financial instruments, the amounts represent net carrying value, which includes an allowance for credit losses. |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| Carrying Value |
| | Estimated Fair Value |
| | Level 1 |
| | Level 2 |
| | Level 3 |
| | Netting Adjustments(1) |
|
| Assets | | | | | | | | | | | |
| Cash and due from banks | $ | 31 |
| | $ | 31 |
|
| $ | 31 |
|
| $ | — |
| | $ | — |
| | $ | — |
|
| Interest-bearing deposits | 1,115 |
| | 1,115 |
| | 1,115 |
| | — |
| | — |
| | — |
|
| Securities purchased under agreements to resell | 11,750 |
| | 11,750 |
| | — |
| | 11,750 |
| | — |
| | — |
|
| Federal funds sold | 11,028 |
| | 11,029 |
| | — |
| | 11,029 |
| | — |
| | — |
|
| Trading securities | 1,164 |
| | 1,164 |
| | — |
| | 1,164 |
| | — |
| | — |
|
| AFS securities | 3,833 |
| | 3,833 |
| | — |
| | — |
| | 3,833 |
| | — |
|
| HTM securities | 14,680 |
| | 14,704 |
| | — |
| | 13,697 |
| | 1,007 |
| | — |
|
| Advances | 77,382 |
| | 77,437 |
| | — |
| | 77,437 |
| | — |
| | — |
|
| Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans | 2,076 |
| | 2,075 |
| | — |
| | 2,075 |
| | — |
| | — |
|
| Accrued interest receivable | 119 |
| | 119 |
| | — |
| | 119 |
| | — |
| | — |
|
Derivative assets, net(1) | 83 |
| | 83 |
| | — |
| | 174 |
| | — |
| | (91 | ) |
Other assets(2) | 9 |
| | 9 |
| | 9 |
| | — |
| | — |
| | — |
|
| Liabilities | | | | | | | | | | | |
| Deposits | 281 |
| | 281 |
| | — |
| | 281 |
| | — |
| | — |
|
| Consolidated obligations: | | | | | | | | | | | |
| Bonds | 85,063 |
| | 84,938 |
| | — |
| | 84,938 |
| | — |
| | — |
|
| Discount notes | 30,440 |
| | 30,437 |
| | — |
| | 30,437 |
| | — |
| | — |
|
| Total consolidated obligations | 115,503 |
| | 115,375 |
| | — |
| | 115,375 |
| | — |
| | — |
|
| Mandatorily redeemable capital stock | 309 |
| | 309 |
|
| 309 |
|
| — |
| | — |
| | — |
|
| Accrued interest payable | 116 |
|
| 116 |
|
| — |
|
| 116 |
| | — |
| | — |
|
Derivative liabilities, net(1) | 1 |
| | 1 |
| | — |
| | 85 |
| | — |
| | (84 | ) |
| Other | | | | | | | | | | | |
| Standby letters of credit | 19 |
| | 19 |
|
| — |
|
| 19 |
| | — |
| | — |
|
(3) Represents publicly traded mutual funds held in a grantor trust.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Carrying Value |
| | Estimated Fair Value |
| | Level 1 |
| | Level 2 |
| | Level 3 |
| | Netting Adjustments(1) |
|
| Assets | | | | | | | | | | | |
| Cash and due from banks | $ | 2 |
| | $ | 2 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Interest-bearing deposits | 590 |
| | 590 |
| | 590 |
| | — |
| | — |
| | — |
|
| Securities purchased under agreements to resell | 15,500 |
| | 15,500 |
| | — |
| | 15,500 |
| | — |
| | — |
|
| Federal funds sold | 4,214 |
| | 4,214 |
| | — |
| | 4,214 |
| | — |
| | — |
|
| Trading securities | 2,066 |
| | 2,066 |
| | — |
| | 2,066 |
| | — |
| | — |
|
| AFS securities | 4,489 |
| | 4,489 |
| | — |
| | — |
| | 4,489 |
| | — |
|
| HTM securities | 14,127 |
| | 14,141 |
| | — |
| | 12,788 |
| | 1,353 |
| | — |
|
| Advances | 49,845 |
| | 49,921 |
| | — |
| | 49,921 |
| | — |
| | — |
|
| Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans | 826 |
| | 845 |
| | — |
| | 845 |
| | — |
| | — |
|
| Accrued interest receivable | 79 |
| | 79 |
| | — |
| | 79 |
| | — |
| | — |
|
Derivative assets, net(1) | 66 |
| | 66 |
| | — |
| | 140 |
| | — |
| | (74 | ) |
Other assets(2) | 11 |
| | 11 |
| | 11 |
| | — |
| | — |
| | — |
|
| Liabilities | | | | | | | | | | | |
| Deposits | 169 |
| | 169 |
| | — |
| | 169 |
| | — |
| | — |
|
| Consolidated obligations: | | | | | | | | | | | |
| Bonds | 50,224 |
| | 50,188 |
| | — |
| | 50,188 |
| | — |
| | — |
|
| Discount notes | 33,506 |
| | 33,505 |
| | — |
| | 33,505 |
| | — |
| | — |
|
| Total consolidated obligations | 83,730 |
| | 83,693 |
| | — |
| | 83,693 |
| | — |
| | — |
|
| Mandatorily redeemable capital stock | 457 |
| | 457 |
| | 457 |
| | — |
| | — |
| | — |
|
| Borrowings from other FHLBanks | 1,345 |
| | 1,345 |
| | — |
| | 1,345 |
| | — |
| | — |
|
| Accrued interest payable | 67 |
| | 67 |
| | — |
| | 67 |
| | — |
| | — |
|
Derivative liabilities, net(1) | 2 |
| | 2 |
| | — |
| | 81 |
| | — |
| | (79 | ) |
| Other | | | | | | | | | | | |
| Standby letters of credit | 24 |
| | 24 |
| | — |
| | 24 |
| | — |
| | — |
|
| |
(1) | Amounts include the netting of derivative assets and liabilities by counterparty, including cash collateral and related accrued interest, where the netting requirements have been met.
|
| |
(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.
•Level 2 – Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following:
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
(1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
•Level 3 – Unobservable inputs for the asset or liability.
Valuations are derived from techniques that use significant assumptions not observable in the market, which include pricing models, discounted cash flow models, or similar techniques.
A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The following assets and liabilities, including those for which the Bank has elected the fair value option, are carried at fair value on the Statements of Condition as of December 31, 2017:2023:
•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. Such reclassifications are reported as transfers in or out as of the beginning of the quarter in which the changes occur. For the periods presented, the Bank did not have any reclassifications for transfers in or out of level 3 of the fair value hierarchy levels.hierarchy.
Summary of Valuation Methodologies and Primary Inputs.
Cash The valuation methodologies and Due from Banks–The estimatedprimary inputs used to develop the measurement of fair value equals the carrying value.
Federal Funds Soldfor assets and Securities Purchased Under Agreements to Resell – The estimatedliabilities that are measured at fair value on a recurring or nonrecurring basis in the Statements of overnight Federal funds sold and securities purchased under agreements to resell approximates the carrying value. The estimated fair value of term Federal funds sold and term securities purchased under agreements to resell has been determined by calculating the present value of expected cash flows for the instruments and reducing the amount for accrued interest receivable. The discount rates used in these calculationsCondition are the replacement rates for comparable instruments with similar terms.listed below.
Interest-Bearing Deposits –The fair value of deposits is generally equal to the carrying value of the deposits because the deposits are primarily overnight deposits or due on demand. The Bank determines the fair values of term deposits by calculating the present value of expected future cash flows from the deposits and reducing the amount for accrued interest receivable. The discount rates used in these calculations are the cost of deposits with similar terms.
Investment Securities – MBS – To value its MBS, the Bank obtains prices from multiple designated third-party pricing vendors when available. The pricing vendors use various proprietary models to price these securities. The inputs to those models are derived from various sources including, but not limited to: benchmark yields, reported trades, dealer estimates, issuer spreads, prices on benchmark securities, bids, offers, and other market-related data. Since many securities do not trade on a daily basis, the pricing vendors use available information as applicable, such as benchmark yield curves, benchmarking of like securities, sector groupings, and matrix pricing, to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all security valuations, which facilitates resolution of price discrepancies identified by the Bank.
At least annually, the Bank conducts reviews of the multiple pricing vendors to update and confirm its understanding of the vendors’ pricing processes, methodologies, and control procedures.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Bank’s valuation technique for estimating the fair values of its MBS first requires the establishment of a median vendor price for each security. If three prices are received, the middle price is the median price; if two prices are received, the average of the two prices is the median price; and if one price is received, it is the median price (and also the default fair value) subject to additional validation. All vendor prices that are within a specified tolerance threshold of the median price are included in the cluster of vendor prices that are averaged to establish a default fair value. All vendor prices that are outside the threshold (outliers) are subject to further analysis including, but not limited to, comparison to prices provided by an additional third-party valuation service, pricesdealer price estimates for similar securities, and/or dealer estimates, orand the use of internal modelinternally modeled prices, which are deemed to be reflective of all relevant facts and circumstances that a market participant would consider. Such analysis is also applied in those limited instances where no third-party vendor price or only one third-party vendor price is available in order to arrive at an estimated
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price, as appropriate) is used as the fair value rather than the default fair value. If, instead, the analysis confirms that an outlier is (or outliers are) not representative of fair value and the default fair value is the best estimate, then the default fair value is used as the fair value.
If all vendor prices received for a security are outside the tolerance threshold level of the median price, then there is no default fair value, and the fair value is determined by an evaluation of all outlier prices (or the other prices, as appropriate) as described above.
As of December 31, 2017,2023, multiple vendor prices were received for most of the Bank’s MBS, and the fair value estimates for most of those securities were determined in accordance with the Bank’s valuation technique based on these vendor prices. Based on the Bank’s reviews of the pricing methods employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers, the Bank’s additional analyses), the Bank believes that its fair value estimates are reasonable and that the fair value measurements are classified appropriately in the fair value hierarchy. Based on limited market liquidity for PLRMBS, the fair value measurements for these securities were classified as Level 3 within the fair value hierarchy.
Investment Securities – FFCB Bonds and CalHFA Bonds Non-MBS –The Bank estimatesTo determine the estimated fair values of these securitiesnon-MBS investments, the Bank uses a market approach using prices from third-party pricing vendors, generally consistent with the methodology described abovemethodologies for Investment Securities – MBS.MBS. The Bank believes that its methodologies result in fair values that are reasonable and similar in all material respects based on the nature of the financial instruments being measured.
Advances Recorded Under the Fair Value Option –Because quoted prices are not available for advances, the fair values are measured using model-based valuation techniques (such as calculating the present value of future cash flows and reducing the amount for accrued interest receivable).
The Bank’s primary inputs for measuring the fair value of advances recorded under the fair value option are market-based consolidated obligation yield curve (CO Curve) inputs obtained from the Office of Finance. The CO Curve is then adjusted to reflect the rates on replacement advances with similar terms and collateral. These spread adjustments are not market-observable and are evaluated for significance in the overall fair value measurement and the fair value hierarchy level of the advance. The Bank obtains market-observable inputs for complex advances.advances recorded under the fair value option. These inputs may include volatility assumptions, which are market-based expectations of future interest rate volatility implied from current market prices for similar options (swaption volatility and volatility skew). The discount rates used in these calculations are the replacement advance rates for advances with similar terms. Pursuant to the Finance Agency’s advances regulation, advances with an original term to maturity or repricing period greater than six months generally require a prepayment fee sufficient to make the Bank financially indifferent to the borrower’s decision to prepay the advances. The Bank determined that no adjustment is required to the fair value measurement of advances for prepayment fees. In addition, theThe Bank also did not adjust its fair value measurement of advances recorded under the fair value option for creditworthiness primarily because advances were fully collateralized.
Mortgage Loans Held for Portfolio – The estimated fair value for seasoned mortgage loans represents modeled prices based on observable market prices for seasoned agency mortgage-backed passthrough securities adjusted for differences in coupon, average loan rate, credit, and cash flow remittance between the Bank’s mortgage loans and
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
the referenced instruments, while the estimated fair value for newly originated mortgage loans represents modeled prices based on MPF commitment rates. Market prices are highly dependent on the underlying prepayment assumptions. Changes in the prepayment speeds often have a material effect on the fair value estimates. These underlying prepayment assumptions are susceptible to material changes in the near term because they are made at a specific point in time.
Loans to and from Other FHLBanks –Because these are overnight transactions, the estimated fair value approximates the recorded carrying value.
Accrued Interest Receivable and Payable – The estimated fair value approximates the carrying value of accrued interest receivable and accrued interest payable.
Other Assets – The estimated fair value of grantor trust assets is based on quoted market prices.
Derivative Assets and Liabilities –In general, derivative instruments transacted and held by the Bank for risk management activities are traded in over-the-counter markets where quoted market prices are not readily available. These derivatives are interest rate-related. For these derivatives, the Bank measures fair value using internally developed discounted cash flow models that use market-observable inputs, such as the overnight index swap (OIS) curverates and volatility assumptions, which are market-based expectations of future interest rate volatility implied from current market prices for similar options (swaption volatility and volatility skew), adjusted for counterparty credit risk, as necessary.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Bank is subject to credit risk because of the risk of potential nonperformance by its derivative counterparties. To mitigate this risk, the Bank executes uncleared derivative transactions only with highly rated derivative dealers and major banks (derivative dealer counterparties) that meet the Bank’s eligibility criteria. In addition, the Bank has entered into master netting agreements and bilateral credit support agreements with all active derivative dealer counterparties that provide for delivery of collateralmargin at specified levels to limit the Bank’s net unsecured credit exposure to these counterparties. Under these policies and agreements, the amount of unsecured credit exposure to an individual derivative dealer counterparty is either (i) limited to an absolute dollar credit exposure limit according to the counterparty’s long-term debt or deposit credit rating, as determined by rating agencies or (ii) set at zero (subject to a minimum transfer amount). The Bank clears its cleared derivative transactions only through clearing agents that meet the Bank’s eligibility requirements, and the Bank’s credit exposure to the clearinghouseclearing house is secured by variation margin received from the clearinghouse. All credit exposure from derivative transactions entered into by the Bank with member counterparties that are not derivative dealers must be fully secured by eligible collateral. clearing house. The Bank evaluated the potential for the fair value of the instruments to be affected by counterparty credit risk and determined that no adjustments to the overall fair value measurements were required.
The fair values of the derivative assets and liabilities include accrued interest receivable/payable and cash collateral remitted to/received from counterparties. The estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values because of their short-term nature. The fair values of derivatives that met the netting requirements are presented on a net basis. If these netted amounts are positive, they are classified as an asset and, if negative, they are classified as a liability.
Deposits –The fair value of deposits is generally equal to the carrying value of the deposits because the deposits are primarily overnight deposits or due on demand. The Bank determines the fair values of term deposits by calculating the present value of expected future cash flows from the deposits and reducing the amount for accrued interest payable. The discount rates used in these calculations are the cost of deposits with similar terms.
Consolidated Obligations Recorded Under the Fair Value Option –Because quoted prices in active markets are not generally available for identical liabilities, the Bank measures fair values using internally developed models that use primarily market-observable inputs. The Bank’s primary input for measuring the fair value of consolidated obligation bonds is a market-based CO Curve obtained from the Office of Finance. The Office of Finance constructs the CO Curve using the Treasury
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
yield curve as a base curve, which is adjusted by indicative consolidated obligation spreads obtained from market-observable sources. These market indications are generally derived from pricing indications from dealers, historical pricing relationships, and market activity for similar liabilities, such as recent GSE issuances or secondary market activity. For consolidated obligation bonds with embedded options, the Bank also obtains market-observable inputs, such as volatility assumptions, which are market-based expectations of future interest rate volatility implied from current market prices for similar options (swaption volatility and volatility skew).
Adjustments may be necessary to reflect the Bank’s credit quality or the credit quality of the FHLBank System when valuing consolidated obligation bonds measured at fair value. The Bank monitors its own creditworthiness and the creditworthiness of the other FHLBanks and the FHLBank System to determine whether any adjustments are necessary for creditworthiness in its fair value measurement of consolidated obligation bonds. The credit ratings of the FHLBank System and any changes to the credit ratings are the basis for the Bank to determine whether the fair values of consolidated obligations recorded under the fair value option have been significantly affected during the reporting period by changes in the instrument-specific credit risk.
Mandatorily Redeemable Capital Stock –The estimated fair value of capital stock subject to mandatory redemption is generally at par value as indicated by contemporaneous purchases, redemptions, and repurchases at par value. Fair value includes estimated dividends earned at the time of reclassification from capital to liabilities, until such amount is paid, and any subsequently declared capital stock dividend. The Bank’s capital stock can only be acquired by members at par value and redeemed or repurchased at par value, subject to statutory and regulatory requirements. The Bank’s capital stock is not traded, and no market mechanism exists for the exchange of Bank capital stock outside the cooperative ownership structure.
Commitments – The estimated fair value of standby letters of credit is based on the present value of fees currently charged for similar agreements and is recorded in other liabilities. The estimated fair value of off-balance sheet fixed rate commitments to fund advances and commitments to issue consolidated obligations takes into account the difference between current and committed interest rates.
Subjectivity of Estimates Related to Fair Values of Financial Instruments. Estimates of the fair value of financial assets and liabilities using the methodologies described above are subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest rate volatility, methods to determine possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments oftenmay have a material effect on the fair value estimates.
Fair Value Measurements. The following tables below present the fair value of assets and liabilities, which are recorded on a recurring or nonrecurring basis at December 31, 20172023 and 2016,2022, by level within the fair value hierarchy.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | | | | | | | | |
| Fair Value Measurement Using: | | Netting Adjustments and Cash Collateral(1) | | |
| (In millions) | Level 1 | | Level 2 | | Level 3 | | | Total |
| Recurring fair value measurements – Assets: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| AFS securities: | | | | | | | | | |
| U.S. Treasury obligations | $ | — | | | $ | 4,534 | | | $ | — | | | $ | — | | | $ | 4,534 | |
| MBS: | | | | | | | | | |
| GSEs – multifamily | — | | | 12,421 | | | — | | | — | | | 12,421 | |
| PLRMBS | — | | | — | | | 1,059 | | | — | | | 1,059 | |
| Subtotal AFS MBS | — | | | 12,421 | | | 1,059 | | | — | | | 13,480 | |
| Total AFS securities | — | | | 16,955 | | | 1,059 | | | — | | | 18,014 | |
Advances(2) | — | | | 1,898 | | | — | | | — | | | 1,898 | |
| Derivative assets, net: interest rate-related | — | | | 831 | | | — | | | (815) | | | 16 | |
| | | | | | | | | |
| Other assets | 17 | | | — | | | — | | | — | | | 17 | |
| Total recurring fair value measurements – Assets | $ | 17 | | | $ | 19,684 | | | $ | 1,059 | | | $ | (815) | | | $ | 19,945 | |
| Recurring fair value measurements – Liabilities: | | | | | | | | | |
Consolidated obligation bonds(3) | $ | — | | | $ | 604 | | | $ | — | | | $ | — | | | $ | 604 | |
| Derivative liabilities, net: interest rate-related | — | | | 792 | | | — | | | (790) | | | 2 | |
| Total recurring fair value measurements – Liabilities | $ | — | | | $ | 1,396 | | | $ | — | | | $ | (790) | | | $ | 606 | |
Nonrecurring fair value measurements – Assets:(4) | | | | | | | | | |
| | | | | | | | | |
| Impaired mortgage loans held for portfolio | $ | — | | | $ | — | | | $ | 22 | | | $ | — | | | $ | 22 | |
| Total nonrecurring fair value measurements – Assets | $ | — | | | $ | — | | | $ | 22 | | | $ | — | | | $ | 22 | |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | |
| | Fair Value Measurement Using: | | Netting |
| | |
| | Level 1 |
| | Level 2 |
| | Level 3 |
| | Adjustments(1) |
| | Total |
|
| Recurring fair value measurements – Assets: | | | | | | | | | |
| Trading securities: | | | | | | | | | |
| GSEs – FFCB bonds | $ | — |
| | $ | 1,158 |
| | $ | — |
| | $ | — |
| | $ | 1,158 |
|
| MBS: | | | | | | | | | |
| Other U.S. obligations – Ginnie Mae | — |
| | 6 |
| | — |
| | — |
| | 6 |
|
| Total trading securities | — |
| | 1,164 |
| | — |
| | — |
| | 1,164 |
|
| AFS securities: | | | | | | | | | |
| PLRMBS | — |
| | — |
| | 3,833 |
| | — |
| | 3,833 |
|
| Total AFS securities | — |
| | — |
| | 3,833 |
| | — |
| | 3,833 |
|
Advances(2) | — |
| | 6,431 |
| | — |
| | — |
| | 6,431 |
|
| Derivative assets, net: interest rate-related | — |
| | 174 |
| | — |
| | (91 | ) | | 83 |
|
| Other assets | 9 |
| | — |
| | — |
| | — |
| | 9 |
|
| Total recurring fair value measurements – Assets | $ | 9 |
| | $ | 7,769 |
| | $ | 3,833 |
| | $ | (91 | ) | | $ | 11,520 |
|
| Recurring fair value measurements – Liabilities: | | | | | | | | | |
Consolidated obligation bonds(3) | $ | — |
| | $ | 949 |
| | $ | — |
| | $ | — |
| | $ | 949 |
|
| Derivative liabilities, net: interest rate-related | — |
| | 85 |
| | — |
| | (84 | ) | | 1 |
|
| Total recurring fair value measurements – Liabilities | $ | — |
| | $ | 1,034 |
| | $ | — |
| | $ | (84 | ) | | $ | 950 |
|
Nonrecurring fair value measurements – Assets:(4) | | | | | | | | | |
| Impaired mortgage loans held for portfolio | $ | — |
| | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | 3 |
|
| Total nonrecurring fair value measurements – Assets | $ | — |
| | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | 3 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | |
| | Fair Value Measurement Using: | | Netting |
| | |
| | Level 1 |
| | Level 2 |
| | Level 3 |
| | Adjustments(1) |
| | Total |
|
| Recurring fair value measurements – Assets: | | | | | | | | | |
| Trading securities: | | | | | | | | | |
| GSEs – FFCB bonds | $ | — |
| | $ | 2,058 |
| | $ | — |
| | $ | — |
| | $ | 2,058 |
|
| MBS: | | | | | | | | | |
| Other U.S. obligations – Ginnie Mae | — |
| | 8 |
| | — |
| | — |
| | 8 |
|
| Total trading securities | — |
| | 2,066 |
| | — |
| | �� |
| | 2,066 |
|
| AFS securities: | | | | | | | | | |
| PLRMBS | — |
| | — |
| | 4,489 |
| | — |
| | 4,489 |
|
| Total AFS securities | — |
| | — |
| | 4,489 |
| | — |
| | 4,489 |
|
Advances(2) | — |
| | 3,719 |
| | — |
| | — |
| | 3,719 |
|
| Derivative assets, net: interest rate-related | — |
| | 140 |
| | — |
| | (74 | ) | | 66 |
|
| Other assets | 11 |
| | — |
| | — |
| | — |
| | 11 |
|
| Total recurring fair value measurements – Assets | $ | 11 |
| | $ | 5,925 |
| | $ | 4,489 |
| | $ | (74 | ) | | $ | 10,351 |
|
| Recurring fair value measurements – Liabilities: | | | | | | | | | |
Consolidated obligation bonds(3) | $ | — |
| | $ | 1,507 |
| | $ | — |
| | $ | — |
| | $ | 1,507 |
|
| Derivative liabilities, net: interest rate-related | — |
| | 81 |
| | — |
| | (79 | ) | | 2 |
|
| Total recurring fair value measurements – Liabilities | $ | — |
| | $ | 1,588 |
| | $ | — |
| | $ | (79 | ) | | $ | 1,509 |
|
Nonrecurring fair value measurements – Assets:(4) | | | | | | | | | |
| Impaired mortgage loans held for portfolio | $ | — |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | 5 |
|
| Total nonrecurring fair value measurements – Assets | $ | — |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | 5 |
|
| |
(1) | Amounts represent the netting of derivative assets and liabilities by counterparty, including cash collateral, where the netting requirements have been met. |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| |
(2) | Represents advances recorded under the fair value option at December 31, 2017 and 2016.
|
| |
(3) | Represents consolidated obligation bonds recorded under the fair value option at December 31, 2017 and 2016.
|
| |
(4) | The fair value information presented is as of the date the fair value adjustment was recorded during the years ended December 31, 2017 and 2016.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | |
| Fair Value Measurement Using: | | Netting Adjustments and Cash Collateral(1) | | |
| (In millions) | Level 1 | | Level 2 | | Level 3 | | | Total |
| Recurring fair value measurements – Assets: | | | | | | | | | |
| Trading securities: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| MBS – Other U.S. obligations | $ | — | | | $ | 1 | | | $ | — | | | $ | — | | | $ | 1 | |
| | | | | | | | | |
| AFS securities: | | | | | | | | | |
| U.S. Treasury obligations | — | | | 4,024 | | | — | | | — | | | 4,024 | |
| MBS: | | | | | | | | | |
| GSEs – multifamily | — | | | 7,507 | | | — | | | — | | | 7,507 | |
| PLRMBS | — | | | — | | | 1,182 | | | — | | | 1,182 | |
| Subtotal AFS MBS | — | | | 7,507 | | | 1,182 | | | — | | | 8,689 | |
| Total AFS securities | — | | | 11,531 | | | 1,182 | | | — | | | 12,713 | |
Advances(2) | — | | | 2,059 | | | — | | | — | | | 2,059 | |
| Derivative assets, net: interest rate-related | — | | | 849 | | | — | | | (823) | | | 26 | |
| Other assets | 15 | | | — | | | — | | | — | | | 15 | |
| Total recurring fair value measurements – Assets | $ | 15 | | | $ | 14,440 | | | $ | 1,182 | | | $ | (823) | | | $ | 14,814 | |
| Recurring fair value measurements – Liabilities: | | | | | | | | | |
Consolidated obligation bonds(3) | $ | — | | | $ | 2,226 | | | $ | — | | | $ | — | | | $ | 2,226 | |
| Derivative liabilities, net: interest rate-related | — | | | 1,195 | | | — | | | (1,193) | | | 2 | |
| Total recurring fair value measurements – Liabilities | $ | — | | | $ | 3,421 | | | $ | — | | | $ | (1,193) | | | $ | 2,228 | |
Nonrecurring fair value measurements – Assets:(4) | | | | | | | | | |
| | | | | | | | | |
| Impaired mortgage loans held for portfolio | $ | — | | | $ | — | | | $ | 20 | | | $ | — | | | $ | 20 | |
| Total nonrecurring fair value measurements – Assets | $ | — | | | $ | — | | | $ | 20 | | | $ | — | | | $ | 20 | |
(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 or counterparty.
(2)Represents advances recorded under the fair value option at December 31, 2023 and 2022.
(3)Represents consolidated obligation bonds recorded under the fair value option at December 31, 2023 and 2022.
(4)The fair value information presented is as of the date the fair value adjustment was recorded during the years ended December 31, 2023 and 2022.
The following tables presenttable presents a reconciliation of the Bank’s AFS PLRMBS that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2017, 2016,2023, 2022, and 2015.2021.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | 2017 |
| | 2016 |
| | 2015 |
|
| (In millions) | |
| (In millions) | |
| (In millions) | | 2023 | | 2022 | | 2021 |
| Balance, beginning of the period | $ | 4,489 |
| | $ | 5,414 |
| | $ | 6,371 |
|
| Total gain/(loss) realized and unrealized included in: | | | | | |
| Interest income | 92 |
| | 102 |
| | 83 |
|
| Net OTTI loss, credit-related | (16 | ) | | (16 | ) | | (15 | ) |
| Unrealized gain/(loss) of other-than-temporarily impaired securities included in AOCI | 195 |
| | 103 |
| | (29 | ) |
| Net amount of OTTI loss reclassified to/(from) other income/(loss) | 6 |
| | (10 | ) | | (15 | ) |
| Interest income | |
| Interest income | |
| (Provision for)/reversal of credit losses | |
| Other income/(loss) | |
| Unrealized gain/(loss) included in AOCI | |
| Settlements | (933 | ) | | (1,104 | ) | | (996 | ) |
| Transfers of HTM securities to AFS securities | — |
| | — |
| | 15 |
|
| Balance, end of the period | $ | 3,833 |
| | $ | 4,489 |
| | $ | 5,414 |
|
| 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 | $ | 75 |
| | $ | 84 |
| | $ | 68 |
|
| Total amount of unrealized gain/(loss) for the period included in AOCI relating to assets held at the end of the period | |
| Total amount of gain/(loss) for the period included in earnings attributable to the change in unrealized gains/(losses) relating to assets held at the end of the period | |
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 obligation bonds carried at fair value are recognized solely on the contractual amount of interest due or unpaid. Any transactionconsolidated obligation bond underwriting fees or costs areconcessions will be immediately recognized in non-interest incomeother income/(loss) or non-interestother expense.
The Bank elected the fair value option for certain financial instruments as follows:
•Adjustable rate advances with embedded options (excluding callcaps and put options)floors;
•Callable fixed rate advancesadvances;
•Putable fixed rate advancesadvances;
Putable fixed rate advances with embedded options
•Fixed rate advances with partial prepayment symmetrysymmetry;
•Callable or non-callable capped floaterfloating rate consolidated obligation bonds with embedded caps;
•Convertible consolidated obligation bondsbonds;
•Adjustable or fixed rate range accrual consolidated obligation bondsbonds;
•Ratchet consolidated obligation bondsbonds;
•Adjustable rate advances indexed to non-LIBORcertain indices such as the Prime Rate, U.S. Treasury bill, and Effective Federal funds effective rateFunds Rate;
•Adjustable rate consolidated obligation bonds indexed to non-LIBORcertain indices such aslike the Prime Rate and U.S. Treasury billbill;
•Step-up callable bonds, which pay interest at increasing fixed rates for specified intervals over the life of the bond and can generally be called at the Bank'sBank’s option on the step-up dates according to the terms of the bond offerings; and
•Step-down callable bonds, which pay interest at decreasing fixed rates for specified intervals over the life of the bond and can generally be called at the Bank'sBank’s option on the step-down dates
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
the bond offerings.
The Bank has elected the fair value option for certain financial instruments to assist in mitigating potential earnings volatility that can arise from economic hedging relationships in which the carrying value of the hedged item is not adjusted for changes in fair value. The potential earnings volatility associated with usingrecording fair value changes of
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
only for the hedging 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 summarizetable presents the activity related to financial assetsnet gain/(loss) recognized in earnings on advances and liabilities for which the Bank elected theconsolidated obligation bonds held under fair value option duringfor the years ended December 31, 2017, 2016,2023, 2022, and 2015:2021:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | Advances |
| | Consolidated Obligation Bonds |
| | Advances |
| | Consolidated Obligation Bonds |
| | Advances |
| | Consolidated
Obligation Bonds |
|
| Balance, beginning of the period | $ | 3,719 |
| | $ | 1,507 |
| | $ | 3,677 |
| | $ | 4,233 |
| | $ | 5,137 |
| | $ | 6,717 |
|
| New transactions elected for fair value option | 3,657 |
| | 1,185 |
| | 947 |
| | 685 |
| | 1,018 |
| | 2,585 |
|
| Maturities and terminations | (918 | ) | | (1,745 | ) | | (878 | ) | | (3,420 | ) | | (2,442 | ) | | (5,083 | ) |
| Net gain/(loss) on advances and net (gain)/loss on consolidated obligation bonds held under fair value option | (31 | ) | | — |
| | (27 | ) | | 13 |
| | (31 | ) | | 19 |
|
| Change in accrued interest | 4 |
| | 2 |
| | — |
| | (4 | ) | | (5 | ) | | (5 | ) |
| Balance, end of the period | $ | 6,431 |
| | $ | 949 |
| | $ | 3,719 |
| | $ | 1,507 |
| | $ | 3,677 |
| | $ | 4,233 |
|
| | | | | | | | | | | | | | | | | |
| | | |
| (In millions) | 2023 | | 2022 | | 2021 |
| Advances | $ | 28 | | | $ | (119) | | | $ | (62) | |
| Consolidated obligation bonds | (29) | | | 54 | | | 8 | |
| Total | $ | (1) | | | $ | (65) | | | $ | (54) | |
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)gain/ (loss) on financial instruments held under the fair value option in the Statements of Income. The change in fair value does not include changes in instrument-specific credit risk. For advances and consolidated obligations recorded under the fair value option, the Bank determined that no adjustmentsnone of the remaining changes in fair value were related to the fair values of these instruments for instrument-specific credit risk were necessary for the years ended December 31, 2017, 2016,2023, 2022, and 2015.2021. In determining that there has been no change in instrument-specific credit risk period to period, the Bank primarily considered the following factors:
•The Bank is a federally chartered GSE, and as a result of this status, the consolidated obligations have historically received the same credit ratings as the government bond credit rating of the United States, even though they are not obligations of the United States and are not guaranteed by the United States.
•The Bank is jointly and severally liable with the other FHLBanks for the payment of principal and interest on all consolidated obligations of each of the FHLBanks.
The following table presents the difference between the aggregate remaining contractual principal balance outstanding and aggregate fair value of advances and consolidated obligation bonds for which the Bank elected the fair value option at December 31, 20172023 and 2016:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| (In millions) | Principal Balance | | Fair Value | | Fair Value
Over/(Under)
Principal Balance | | Principal Balance | | Fair Value | | Fair Value
Over/(Under)
Principal Balance |
Advances(1) | $ | 1,902 | | | $ | 1,898 | | | $ | (4) | | | $ | 2,106 | | | $ | 2,059 | | | $ | (47) | |
| Consolidated obligation bonds | 633 | | | 604 | | | (29) | | | 2,278 | | | 2,226 | | | (52) | |
(1) At December 31, 2023 and 2022, none of these advances were 90 days or more past due or had been placed on nonaccrual status.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Principal Balance |
| | Fair Value |
| | Fair Value Over/(Under) Principal Balance |
| | Principal Balance |
| | Fair Value |
| | Fair Value Over/(Under) Principal Balance |
|
Advances(1) | $ | 6,447 |
| | $ | 6,431 |
| | $ | (16 | ) | | $ | 3,709 |
| | $ | 3,719 |
| | $ | 10 |
|
| Consolidated obligation bonds | 955 |
| | 949 |
| | (6 | ) | | 1,515 |
| | 1,507 |
| | (8 | ) |
| |
(1) | At December 31, 2017 and 2016, none of these advances were 90 days or more past due or had been placed on nonaccrual status.
|
Note 2015 — 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
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank, and as of December 31, 2017,2023, and through the filing date of this report, does not believe that it is probable that it will be asked to do so.
The par value of the outstanding consolidated obligations of the FHLBanks
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
was $1,034,260$1.2 trillion at December 31, 2017,2023 and $989,311 at December 31, 2016.2022. The par value of the Bank’s participation in consolidated obligations was $115,602$84.3 billion at December 31, 2017,2023, and $83,749$113.1 billion at December 31, 2016.
2022.
The joint and several liability regulation provides a general framework for addressing the possibility that an FHLBank may be unable to repay its participation in the consolidated obligations for which it is the primary obligor. In accordance with this regulation, the president of each FHLBank is required to provide a quarterly certification that, among other things, the FHLBank will remain capable of making full and timely payment of all its current obligations, including direct obligations.
In addition, the regulation requires that an FHLBank must provide written notice to the Finance Agency if at any time the FHLBank is unable to provide the quarterly certification; projects that it will be unable to fully meet all of its current obligations, including direct obligations, on a timely basis during the quarter; or negotiates or enters into an agreement with another FHLBank for financial assistance to meet its obligations. If an FHLBank gives any one of these notices (other than in a case of a temporary interruption in the FHLBank'sFHLBank’s debt servicing operations resulting from an external event such as a natural disaster or a power failure), it must promptly file a consolidated obligations payment plan for Finance Agency approval specifying the measures the FHLBank will undertake to make full and timely payments of all its current obligations.
Notwithstanding any other provisions in the regulation, the regulation provides that the Finance Agency in its discretion may at any time order any FHLBank to make any principal or interest payment due on any consolidated obligation. To the extent an FHLBank makes any payment on any consolidated obligation on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the FHLBank that is the primary obligor, which will have a corresponding obligation to reimburse the FHLBank for the payment and associated costs, including interest.
The regulation also provides that the Finance Agency may allocate the outstanding liability of an FHLBank for consolidated obligations among the other FHLBanks on a pro rata basis in proportion to each FHLBank'sFHLBank’s participation in all consolidated obligations outstanding or in any other manner it may determine to ensure that the FHLBanks operate in a safe and sound manner.
Off-balance sheet commitments as of December 31, 20172023 and 2016,2022, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | | | | | 2022 |
| (In millions) | Expire Within
One Year | | Expire After
One Year | | Total | | | | | | Total |
| Standby letters of credit outstanding | $ | 10,547 | | | $ | 8,871 | | | $ | 19,418 | | | | | | | $ | 22,640 | |
| | | | | | | | | | | |
| Commitments to issue consolidated obligation discount notes, par | — | | | — | | | — | | | | | | | 300 | |
| Commitments to issue consolidated obligation bonds, par | — | | | — | | | — | | | | | | | 2,385 | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Expire Within One Year |
| | Expire After One Year |
| | Total |
| | Expire Within One Year |
| | Expire After One Year |
| | Total |
|
| Standby letters of credit outstanding | $ | 12,910 |
| | $ | 3,240 |
| | $ | 16,150 |
| | $ | 11,094 |
| | $ | 4,066 |
| | $ | 15,160 |
|
| Commitments to fund additional advances | 1 |
| | — |
| | 1 |
| | 5 |
| | 1 |
| | 6 |
|
| Commitments to issue consolidated obligation discount notes, par | 134 |
| | — |
| | 134 |
| | 846 |
| | — |
| | 846 |
|
| Commitments to issue consolidated obligation bonds, par | 595 |
| | — |
| | 595 |
| | 655 |
| | — |
| | 655 |
|
| Commitments to purchase mortgage loans | 16 |
| | — |
| | 16 |
| | 13 |
| | — |
| | 13 |
|
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. The original terms of these standby letters of credit range from 14 days to 15 years, including a final expiration in 2032. The Bank monitors the creditworthiness of members that have standby letters of credit. The
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
value of the Bank’s obligations related to standby letters of credit is recorded in other liabilities on the Statements of Condition and amounted to $19$57 million and $34 million at December 31, 2017,2023 and $24 at December 31, 2016.2022, 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 todoes not anticipate any credit losses and did not record any additional liability for credit losses on the letters of credit outstanding or other off-balance sheet commitments as of December 31, 20172023 and 2016.2022.
CommitmentsFederal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
There were no commitments to fund advances totaled $1at December 31, 2017,2023 and $6 at December 31, 2016.2022. Advances funded under advance commitments are fully collateralized at the time of funding (see Note 10 – Allowance for Credit Losses). Based on the Bank’s credit analyses of members’ financial condition and collateral requirements, the Bank deemed it unnecessary to record any additional liability on the advance commitments outstanding as of December 31, 2017 and 2016.
funding.
The Bank may enter into commitments that unconditionally obligate ithas pledged securities as collateral related 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 executes over-the-countercleared and uncleared interest rate exchange agreements with major banks and derivative entities affiliated with broker-dealers and has executed uncleared interest rate exchange agreements in the past with the Bank’s members. The Bank enters into master agreements with netting provisions and into bilateral credit support agreements with all active derivative dealer counterparties. All member counterparty master agreements, excluding those with derivative dealers, are subject to the terms of the Bank’s Advances and Security Agreement with members, and all member counterparties (except for those that are derivative dealers) must fully collateralize the Bank’s net credit exposure. For cleared derivatives, the clearinghouse is the Bank’s counterparty, and the Bank has clearing agreements with clearing agents that provide for delivery of initial margin to, and exchange of variation margin with, the clearinghouse.derivatives. See Note 1813 – Derivatives and Hedging Activities for additional information about the Bank’s pledged collateral and other credit-risk-relatedcredit risk-related contingent features.
The Bank charged operating expenses for net rental and related costs As of approximately $7, $6, and $5 for the years ended December 31, 2017, 2016,2023, the Bank had pledged total collateral of $1.1 billion, including securities with a carrying value of $771 million, all of which may be repledged, and 2015, respectively. Future minimum rentals at cash collateral, including accrued interest, of $353 million to counterparties and the clearing house that had market risk exposure to the Bank related to derivatives. As of December 31, 2017, were as follows:
|
| | | | | | | |
| Year | Equipment Capital Leases |
| | Premises Operating Leases |
|
| 2018 | $ | 2 |
| | $ | 5 |
|
| 2019 | 2 |
| | 4 |
|
| 2020 | 2 |
| | 2 |
|
| 2021 | 2 |
| | — |
|
| 2022 | 1 |
| | — |
|
| Total | $ | 9 |
| | $ | 11 |
|
Lease agreements for2022, the Bank premises generally provide for increases inhad pledged total collateral of $1.1 billion, including securities with a carrying value of $435 million, all of which may be repledged, and cash collateral, including accrued interest, of $694 million to counterparties and the basic rentals resulting from increases in property taxes and maintenance expenses. Such increases are not expectedclearing house that had market risk exposure to have a material effect on the Bank's financial condition or results of operations.
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.
operations, or cash flows.
Other commitments and contingencies are discussed in Note 1 – Summary of Significant Accounting Policies, Note 85 – Advances, Note 9 – Mortgage Loans Held for Portfolio, Note 128 – Consolidated Obligations, Note 139 –
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Affordable Housing Program, Note 1511 – Capital, Note 1612 – Employee Retirement Plans and Incentive Compensation Plans, and Note 1813 – Derivatives and Hedging Activities.
Note 2116 — Transactions with Certain Members, Certain Nonmembers, and Other FHLBanks
Transactions with Members and Nonmembers. The Bank has a cooperative ownership structure under which current member institutions, certain former members, and certain other nonmembers own the capital stock of the Bank. Former members and nonmembers that have outstanding transactions with the Bank are required to maintain their investment in the Bank'sBank’s capital stock until their outstanding transactions mature or are paid off or until their capital stock is redeemed following the five-year redemption period for capital stock or is repurchased by the Bank, in accordance with the Bank'sBank’s capital requirements. (For further information on concentration risk, see Note 1511 – Capital and Note 85 – Advances).Advances.)
Under the FHLBank Act and Finance Agency regulations, each member eligible to vote is entitled to cast by ballot one vote for each share of stock that it was required to hold as of the record date, which is December 31, of the year prior to each election, subject to the limitation that no member may cast more votes than the average number of shares of the Bank’s stock that are required to be held by all members located in such member's state. All transactions with members, nonmembers, and their affiliates are entered into in the ordinary course of business. As of and for the three-year period ending ended December 31, 2017,2023, no shareholder owned 10% or more of the total voting interests in the Bank because of this statutory limit on members' voting rights.
All advances are made to members, and all mortgage loans held for portfolio were purchased from members. The Bank also maintains deposit accounts for members, certain former members, and certain other nonmembers primarily to facilitate settlement activities that are directly related to advances and mortgage loan purchases. All transactions with members and their affiliates are entered into in the ordinary course of business.
The Bank may invest in Federal funds sold, interest-bearing deposits, commercial paper, and MBS and executes derivative transactions with members or their affiliates. The Bank purchases MBS through securities brokers or dealers and executes all MBS investments without preference to the status of the counterparty or the issuer of the investment as a nonmember, member, or affiliate of a member. When the Bank executes non-MBS investments with a member, the Bank may give consideration to the member’s secured credit and the Bank'sBank’s advances pricing.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
As an additional service to its members, the Bank has in the past entered into offsetting interest rate exchange agreements, acting as an intermediary between exactly offsetting derivative transactions with members and other counterparties. These transactions were executed at market rates.
The FHLBank Act requires the Bank to establish an AHP. TheThrough the AHP, the Bank provides subsidies to members, whichwho use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households.households earning up to 80% of the median income for the area in which they live. Subsidies may be in the form of direct grants or below-market interest rate advances. Only Bank members, along with their nonmember AHP project sponsors, may submit AHP applications. All AHP subsidies are made in the ordinary course of business.
The FHLBank Act also requires the Bank to establish a Community Investment Program (CIP) and authorizes the Bank to offer additional Community Investment Cash Advance (CICA) programs. Under these programs, the Bank provides subsidies in the form of grants and below-market interest rate advances to members or standby letters of credit forto members for community lending and economic development projects. Only Bank members may submit applications for CICA subsidies. All CICA subsidies are made in the ordinary course of business.
In instances where the member has an officer or director serving on the Bank’s Boardboard of Directors,directors, all of the aforementioned transactions with the member are subject to the same eligibility and credit criteria, as well as the same conditions, as comparable transactions with all other members, in accordance with regulations governing the operations of the FHLBanks.
The following tables set forth information at the dates and for the periods indicated with respect to transactions with members that have an officer or director serving on the Bank’s Boardboard of Directors.directors.
| | | | | | | | | | | | | |
| (In millions) | December 31, 2023 | | December 31, 2022 | | |
| Assets: | | | | | |
| Advances | $ | 5,762 | | | $ | 7,269 | | | |
| Mortgage loans held for portfolio | 74 | | | 80 | | | |
| Accrued interest receivable | 5 | | | 9 | | | |
| Liabilities: | | | | | |
| Deposits | $ | 34 | | | $ | 11 | | | |
| Capital: | | | | | |
| Capital Stock | $ | 191 | | | $ | 215 | | | |
180 | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | | | |
| (In millions) | | | | | 2023 | | 2022 | | 2021 |
| Interest Income: | | | | | | | | | |
| | | | | | | | | |
| Advances | | | | | $ | 271 | | | $ | 114 | | | $ | 51 | |
| Mortgage loans held for portfolio | | | | | 3 | | | 1 | | | — | |
| Interest Expense: | | | | | | | | | |
| Deposits | | | | | 1 | | | — | | | — | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | |
| December 31, 2017 |
| | December 31, 2016 |
|
| Assets: | | | |
| Advances | $ | 3,072 |
| | $ | 3,756 |
|
| Mortgage loans held for portfolio | 13 |
| | 17 |
|
| Accrued interest receivable | 5 |
| | 4 |
|
| Liabilities: | | | |
| Deposits | $ | 3 |
| | $ | 3 |
|
| Capital: | | | |
| Capital Stock | $ | 126 |
| | $ | 129 |
|
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 |
| | 2016 |
| | 2015 |
|
| Interest Income: | | | | | |
| Advances | $ | 41 |
| | $ | 35 |
| | $ | 35 |
|
| Mortgage loans held for portfolio | 1 |
| | 1 |
| | 1 |
|
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 de minimis amounts at December 31, 20172023 and 2016, which2022, and were recorded as “Interest-bearing deposits” in the Statements of Condition in the Cash and due from banks line item.Condition.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
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 other interest income and interest expense from other borrowings 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 years ended December 31, 2017, 2016,2023 and 2015,2022, the Bank extended overnight loans to other FHLBanks for $1,505, $505,$2.6 billion and $1,805$2.4 billion, respectively. During 2021, the Bank extended no overnight loans to other FHLBanks. The amount of interest income for these advances was de minimis for the years ended December 31, 2023, 2022, and 2021. During the years ended December 31, 2017, 2016,2023, 2022, and 2015,2021, the Bank borrowed $240, $2,490,$5.5 billion, $10.4 billion, and $4,812$140 million, respectively, from other FHLBanks. The impact to net interest incomeInterest expense related to these transactionsborrowings was $2 million and $1 million for the years ended December 31, 2023 and 2022, respectively, and was de minimis in any period in this report.for the year ended December 31, 2021.
MPF Mortgage Loans. The Bank pays a transaction services fee to the FHLBank of Chicago for its participation in the MPF program. This feethat is assessed monthly and is based on the amount of mortgage loans in which the Bank invested and which remain outstanding on its Statements of Condition. For the years ended December 31, 20172023, 2022, and 2016,2021, the Bank recorded a de minimis amount, $1 million, and $1 million, respectively, in MPF transaction services fee expense to the FHLBank of Chicago, which was recorded in the Statements of Income as other expense. For the year ended December 31, 2015, the Bank recorded de minimis amounts in MPF 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 years ended December 31, 2017 and 2016, the Bank recorded a de minimis amount in MPF counterparty fee income from the FHLBank of Chicago, which was recorded in the Statements of Income as other income. For the year ended December 31, 2015, the Bank had no MPF counterparty fee income from the FHLBank of Chicago.
Consolidated Obligations. The Bank may, from time to time, transfer to or assume from another FHLBank the outstanding primary liability for FHLBank consolidated obligations. During the years ended December 31, 2017 and 2016, the Bank did not transfer any debt to other FHLBanks or assume any debt from other FHLBanks.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
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 2217 — Other
The table below discloses the categories included in other operating expense for the years ended December 31, 2017, 2016,2023, 2022, and 2015.2021.
| | | | | | | | | | | | | | | | | |
| (In millions) | 2023 | | 2022 | | 2021 |
| Professional and contract services | $ | 35 | | | $ | 28 | | | $ | 28 | |
| Occupancy | 11 | | | 11 | | | 11 | |
| Equipment | 5 | | | 6 | | | 7 | |
| Other | 17 | | | 13 | | | 8 | |
| Total | $ | 68 | | | $ | 58 | | | $ | 54 | |
|
| | | | | | | | | | | |
| | 2017 |
| | 2016 |
| | 2015 |
|
| Professional and contract services | $ | 39 |
| | $ | 47 |
| | $ | 50 |
|
| Travel | 2 |
| | 2 |
| | 2 |
|
| Occupancy | 7 |
| | 6 |
| | 5 |
|
| Equipment | 16 |
| | 13 |
| | 10 |
|
| Other | 6 |
| | 6 |
| | 4 |
|
| Total | $ | 70 |
| | $ | 74 |
| | $ | 71 |
|
Note 23 — Subsequent Events
There were no material subsequent events identified, subsequent to December 31, 2017, until the time of the Form 10-K filing with the Securities and Exchange Commission.
Supplementary Financial Data (Unaudited)
Supplementary financial data for each full quarter in the years ended December 31, 2017 and 2016, are included in the following tables (dollars in millions except per share amounts).
|
| | | | | | | | | | | | | | | |
| | Three Months Ended |
| | December 31, 2017 |
| | September 30, 2017 |
| | June 30, 2017 |
| | March 31, 2017 |
|
| Interest income | $ | 485 |
| | $ | 434 |
| | $ | 366 |
| | $ | 315 |
|
| Interest expense | 342 |
| | 288 |
| | 222 |
| | 181 |
|
| Net interest income | 143 |
| | 146 |
| | 144 |
| | 134 |
|
| Provision for/(reversal of) credit losses on mortgage loans | — |
| | — |
| | — |
| | — |
|
| Other income/(loss) | (14 | ) | | (4 | ) | | (16 | ) | | 112 |
|
| Other expense | 54 |
| | 51 |
| | 39 |
| | 80 |
|
| Assessments | 8 |
| | 10 |
| | 9 |
| | 18 |
|
| Net income/(loss) | $ | 67 |
| | $ | 81 |
| | $ | 80 |
| | $ | 148 |
|
| Dividends declared per share | $ | 1.76 |
| | $ | 1.75 |
| | $ | 1.73 |
| | $ | 2.28 |
|
| Annualized dividend rate | 7.00 | % | | 7.00 | % | | 7.00 | % | | 9.08 | % |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended |
| | December 31, 2016 |
| | September 30, 2016 |
| | June 30, 2016 |
| | March 31, 2016 |
|
| Interest income | $ | 283 |
| | $ | 274 |
| | $ | 265 |
| | $ | 256 |
|
| Interest expense | 175 |
| | 151 |
| | 148 |
| | 133 |
|
| Net interest income | 108 |
| | 123 |
| | 117 |
| | 123 |
|
| Provision for/(reversal of) credit losses on mortgage loans | — |
| | — |
| | — |
| | — |
|
| Other income/(loss) | 82 |
| | 241 |
| | (9 | ) | | 171 |
|
| Other expense | 46 |
| | 39 |
| | 37 |
| | 36 |
|
| Assessments | 17 |
| | 34 |
| | 8 |
| | 27 |
|
| Net income/(loss) | $ | 127 |
| | $ | 291 |
| | $ | 63 |
| | $ | 231 |
|
Dividends declared per share(1) | $ | 5.66 |
| | $ | 2.28 |
| | $ | 2.21 |
| | $ | 2.01 |
|
Annualized dividend rate(1) | 22.51 | % | | 9.17 | % | | 8.90 | % | | 7.99 | % |
| |
(1) | In the fourth quarter of 2016, the amount of dividends declared per share includes a special dividend of $3.41 at an annualized dividend rate of 13.57%. |
Investments
Supplementary financial data on the carrying values of the Bank’s investments as of December 31, 2017, 2016, and 2015, are included in the tables below.
|
| | | | | | | | | | | |
| (In millions) | 2017 |
| | 2016 |
| | 2015 |
|
| Trading securities: | | | | | |
| U.S. government corporations and GSEs – FFCB bonds | $ | 1,158 |
| | $ | 2,058 |
| | $ | 1,424 |
|
| MBS: |
| | | | |
| Other U.S. obligations – Ginnie Mae | 6 |
| | 8 |
| | 9 |
|
| Total trading securities | 1,164 |
| | 2,066 |
| | 1,433 |
|
| AFS securities: |
|
| | | | |
| MBS: |
| | | | |
| PLRMBS | 3,833 |
| | 4,489 |
| | 5,414 |
|
| Total AFS securities | 3,833 |
| | 4,489 |
| | 5,414 |
|
| HTM securities: |
| | | | |
| Certificates of deposits | 500 |
| | 1,350 |
| | — |
|
| States and political subdivisions: |
| | | | |
| Housing finance agency bonds – CalHFA bonds | 187 |
| | 225 |
| | 275 |
|
| U.S. government corporations and GSEs: |
| | | | |
| MBS: |
| | | | |
| Other U.S. obligations – Ginnie Mae | 751 |
| | 951 |
| | 1,227 |
|
| GSEs: |
| | | | |
| Freddie Mac | 6,690 |
| | 4,349 |
| | 3,677 |
|
| Fannie Mae | 5,731 |
| | 6,095 |
| | 4,136 |
|
| PLRMBS | 821 |
| | 1,157 |
| | 1,487 |
|
| Total HTM securities | 14,680 |
| | 14,127 |
| | 10,802 |
|
| Total securities | 19,677 |
| | 20,682 |
| | 17,649 |
|
| Securities purchased under agreements to resell | 11,750 |
| | 15,500 |
| | 10,000 |
|
| Federal funds sold | 11,028 |
| | 4,214 |
| | 4,626 |
|
| Interest-bearing deposits | 1,115 |
| | 590 |
| | — |
|
| Total investments | $ | 43,570 |
| | $ | 40,986 |
| | $ | 32,275 |
|
As of December 31, 2017, the Bank’s investments had the following maturity (based on contractual final principal payment) and yield characteristics.
|
| | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Within One Year |
| | After One Year But Within Five Years |
| | After Five Years But Within Ten Years |
| | After Ten Years |
| | Carrying Value |
|
| Trading securities: | | | | | | | | | |
| U.S. government corporations and GSEs – FFCB bonds | $ | 500 |
| | $ | 658 |
| | $ | — |
| | $ | — |
| | $ | 1,158 |
|
| MBS: | | | | | | | | | |
| Other U.S. obligations – Ginnie Mae | — |
| | 1 |
| | 5 |
| | — |
| | 6 |
|
| Total trading securities | 500 |
| | 659 |
|
| 5 |
|
| — |
|
| 1,164 |
|
| Yield on trading securities | 1.45 | % | | 1.61 | % | | 2.52 | % | | — | % | | 1.55 | % |
| AFS securities: | | | | | | | | | |
| MBS: | | | | | | | | | |
| PLRMBS | — |
| | — |
| | — |
| | 3,833 |
| | 3,833 |
|
| Total AFS securities | — |
| | — |
| | — |
| | 3,833 |
| | 3,833 |
|
| Yield on AFS securities | — | % | | — | % | | — | % | | 6.54 | % | | 6.54 | % |
| HTM securities: | | | | | | | | | |
| Certificates of deposits | 500 |
| | — |
| | — |
| | — |
| | 500 |
|
| States and political subdivisions: | | | | | | | | | |
| Housing finance agency bonds – CalHFA bonds | — |
| | — |
| | 12 |
| | 175 |
| | 187 |
|
| U.S. government corporations and GSEs: | | | | | | | | | |
| MBS: | | | | | | | | | |
| Other U.S. obligations – single-family – Ginnie Mae | — |
| | — |
| | — |
| | 751 |
| | 751 |
|
| GSEs single-family: | | | | | | | | | |
| Freddie Mac | — |
| | 1 |
| | 3 |
| | 2,035 |
| | 2,039 |
|
| Fannie Mae | — |
| | 2 |
| | 6 |
| | 3,592 |
| | 3,600 |
|
| Subtotal GSEs single-family | — |
| | 3 |
| | 9 |
| | 5,627 |
| | 5,639 |
|
| GSEs multifamily: | | | | | | | | | |
| Freddie Mac | — |
| | — |
| | 4,651 |
| | — |
| | 4,651 |
|
| Fannie Mae | — |
| | — |
| | 2,131 |
| | — |
| | 2,131 |
|
| Subtotal GSEs multifamily | — |
| | — |
| | 6,782 |
| | — |
| | 6,782 |
|
| PLRMBS |
| |
| | 10 |
| | 811 |
| | 821 |
|
| Total HTM securities | 500 |
|
| 3 |
|
| 6,813 |
|
| 7,364 |
| | 14,680 |
|
| Yield on HTM securities | 1.49 | % | | 5.79 | % | | 1.79 | % | | 2.52 | % | | 2.15 | % |
| Total securities | 1,000 |
|
| 662 |
|
| 6,818 |
|
| 11,197 |
|
| 19,677 |
|
| Yield on total securities | 1.47 | % | | 1.63 | % | | 1.79 | % | | 3.81 | % | | 2.90 | % |
| Securities purchased under agreements to resell | 11,750 |
| | — |
| | — |
| | — |
| | 11,750 |
|
| Federal funds sold | 11,028 |
| | — |
| | — |
| | — |
| | 11,028 |
|
| Interest-bearing deposits | 1,115 |
| | — |
| | — |
| | — |
| | 1,115 |
|
| Total investments | $ | 24,893 |
|
| $ | 662 |
|
| $ | 6,818 |
|
| $ | 11,197 |
|
| $ | 43,570 |
|
Mortgage Loan Data
The unpaid principal balances of delinquent mortgage loans for the past five years were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | 2017 |
| | 2016 |
| | 2015 |
| | 2014 |
| | 2013 |
|
| 30 - 59 days delinquent | $ | 8 |
| | $ | 7 |
| | $ | 10 |
| | $ | 12 |
| | $ | 14 |
|
| 60 - 89 days delinquent | 2 |
| | 3 |
| | 5 |
| | 5 |
| | 7 |
|
| 90 days or more delinquent | 12 |
| | 15 |
| | 18 |
| | 22 |
| | 27 |
|
| Total past due | 22 |
| | 25 |
| | 33 |
| | 39 |
| | 48 |
|
| Total current loans | 1,983 |
| | 789 |
| | 620 |
| | 674 |
| | 865 |
|
| Total mortgage loans | $ | 2,005 |
| | $ | 814 |
| | $ | 653 |
| | $ | 713 |
| | $ | 913 |
|
In process of foreclosure, included above(1) | $ | 3 |
| | $ | 5 |
| | $ | 7 |
| | $ | 11 |
| | $ | 15 |
|
| Nonaccrual loans | $ | 12 |
| | $ | 15 |
| | $ | 18 |
| | $ | 22 |
| | $ | 27 |
|
| Loans past due 90 days or more and still accruing interest | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Delinquencies as a percentage of total mortgage loans outstanding | 1.11 | % | | 3.12 | % | | 5.05 | % | | 5.47 | % | | 5.26 | % |
Serious delinquencies as a percentage of total mortgage loans outstanding(2) | 0.61 | % | | 1.83 | % | | 2.79 | % | | 3.13 | % | | 3.00 | % |
| |
(1) | Includes loans for which the servicer has reported a decision to foreclose or to pursue a similar alternative, such as deed-in-lieu. Loans in process of foreclosure are included in past due or current loans depending on their delinquency status.
|
| |
(2) | Represents loans that are 90 days or more past due or in the process of foreclosure as a percentage of the unpaid principal balance of total mortgage loans outstanding. |
The allowance for credit losses on the mortgage loan portfolio was as follows:
|
| | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | 2017 |
| | 2016 |
| | 2015 |
| | 2014 |
| | 2013 |
|
| Balance, beginning of the period | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 2 |
| | $ | 3 |
|
| (Charge-offs)/recoveries | — |
| | — |
| | (2 | ) | | (1 | ) | | — |
|
| Provision for/(recovery of) credit losses | — |
| | — |
| | 1 |
| | — |
| | (1 | ) |
| Balance, end of the period | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 2 |
|
| Ratio of net charge-offs during the period to average loans outstanding during the period | — | % | | (0.03 | )% | | (0.24 | )% | | (0.05 | )% | | (0.07 | )% |
For the past five years, the interest on nonaccrual loans that was contractually due and recognized in income was as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Interest on Nonaccrual Loans |
| | | | | | | | | | |
| (In millions) | 2017 |
| | 2016 |
| | 2015 |
| | 2014 |
| | 2013 |
|
| Interest contractually due on nonaccrual loans during the period | $ | 1 |
| | $ | 1 |
| | $ | 1 |
| | $ | 1 |
| | $ | 1 |
|
| Interest recognized in income for nonaccrual loans during the period | — |
| | — |
| | — |
| | — |
| | — |
|
| Shortfall | $ | 1 |
| | $ | 1 |
| | $ | 1 |
| | $ | 1 |
| | $ | 1 |
|
Geographic Concentration of Mortgage Loans(1)
|
| | | | | |
| | December 31, 2017 |
| | December 31, 2016 |
|
| California | 86.39 | % | | 66.07 | % |
| Arizona | 1.52 |
| | 2.80 |
|
| New York | 1.33 |
| | 4.19 |
|
| Illinois | 1.16 |
| | 3.68 |
|
| Texas | 1.07 |
| | 1.18 |
|
All others(2) | 8.53 |
| | 22.08 |
|
| Total | 100.00 | % | | 100.00 | % |
| |
(1) | Percentages calculated based on the unpaid principal balance at the end of each period. |
| |
(2) | None of the remaining states represented more than 0.78% and 2.34% of the portfolio at December 31, 2017 and 2016, respectively. |
Short-Term Borrowings
Borrowings with original maturities of one year or less are classified as short-term. The following is a summary of short-term borrowings for the years ended December 31, 2017, 2016, and 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Consolidated Obligation Discount Notes | | Consolidated Obligation Bonds With Original Maturities of One Year or Less |
| (Dollars in millions) | 2017 |
| | 2016 |
| | 2015 |
| | 2017 |
| | 2016 |
| | 2015 |
|
| Outstanding at end of the period | $ | 30,440 |
| | $ | 33,506 |
| | $ | 27,647 |
| | $ | 46,047 |
| | $ | 19,190 |
| | $ | 18,273 |
|
| Weighted average rate at end of the period | 1.24 | % | | 0.46 | % | | 0.25 | % | | 1.23 | % | | 0.67 | % | | 0.25 | % |
| Daily average outstanding for the period | $ | 33,657 |
| | $ | 33,504 |
| | $ | 28,853 |
| | $ | 25,927 |
| | $ | 18,536 |
| | $ | 11,085 |
|
| Weighted average rate for the period | 0.85 | % | | 0.41 | % | | 0.16 | % | | 0.94 | % | | 0.53 | % | | 0.17 | % |
| Highest outstanding at any monthend | $ | 38,632 |
| | $ | 42,244 |
| | $ | 33,859 |
| | $ | 46,047 |
| | $ | 22,913 |
| | $ | 18,273 |
|
| |
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
| |
ITEM 9A. | CONTROLS AND PROCEDURES |
ITEM 9A.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The senior management of the Federal Home Loan Bank of San Francisco (Bank) is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports filed or submitted under the Securities Exchange Act of 1934 (1934 Act) is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The Bank’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports that it files or submits under the 1934 Act is accumulated and communicated to the Bank’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the Bank’s disclosure controls and procedures, the Bank’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Bank’s management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.
Management of the Bank has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with the participation of the president and chief executive officer and seniorexecutive 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 seniorexecutive vice president and chief financial officer have concluded that the Bank’s disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.
Internal Control Over Financial Reporting
Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the 1934 Act as a process designed by, or under the supervision of, the Bank'sBank’s principal executive and principal financial officers and effected by the Bank's BoardBank’s board of Directors,directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and includes those policies and procedures that:
•pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Bank;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Bank are being made only in accordance with authorizations of management and directors of the Bank; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
During the three months ended December 31, 2017,2023, there were no changes in the Bank’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting. For management’s assessment of the Bank’s internal control over financial reporting, refer to “Item 8. Financial Statements and Supplementary Data – Management’s Report on Internal Control Over Financial Reporting.”
Consolidated Obligations
The Bank’s disclosure controls and procedures include controls and procedures for accumulating and communicating information in compliance with the Bank’s disclosure and financial reporting requirements relating to the joint and several liability for the consolidated obligations of the Federal Home Loan Banks (FHLBanks). Because the FHLBanks are independently managed and operated, the Bank’s management relies on information that is provided or disseminated by the Federal Housing Finance Agency (Finance Agency), the Office of Finance, and the other FHLBanks, as well as on published FHLBank credit ratings, in determining whether the joint and several liability regulation is reasonably likely to result in a direct obligation for the Bank or whether it is reasonably possible that the Bank will accrue a direct liability.
The Bank’s management also relies on the operation of the joint and several liability regulation. The joint and several liability regulation requires that each FHLBank file with the Finance Agency a quarterly certification that it will remain capable of making full and timely payment of all of its current obligations, including direct obligations, coming due during the next quarter. In addition, if an FHLBank cannot make such a certification or if it projects that it may be unable to meet its current obligations during the next quarter on a timely basis, it must file a notice with the Finance Agency. Under the joint and several liability regulation, the Finance Agency may order any FHLBank to make principal and interest payments on any consolidated obligations of any other FHLBank, or allocate the outstanding liability of an FHLBank among all remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding or on any other basis.
ITEM 9B.OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
| |
ITEM 9B. | OTHER INFORMATION |
PART III
PricewaterhouseCoopers LLP (PwC) serves as the independent registered public accounting firm for the Bank. Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the Loan Rule) prohibits an accounting firm, such as PwC, from having certain financial relationships with its audit clients and affiliated entities. Specifically, the Loan Rule, in relevant part, provides that an accounting firm generally would not be independent if it or a covered person in the firm received a loan from a lender that is a “record or beneficial owner of more than ten percent of the audit client’s equity securities.” A covered person in the firm includes personnel on the audit engagement team, personnel in the chain of command, partners and managers who provide ten or more hours of non-audit services to the audit client, and partners in the office where the lead engagement partner practices in connection with the client.
PwC has advised the Bank that PwC covered persons had lending relationships with two Bank shareholders (referred to below as the “Lenders”) that owned more than ten percent of the Bank’s capital stock during 2017. Under the Loan Rule, these lending relationships could call into question PwC’s independence with respect to the Bank. The Bank is providing this disclosure to explain the facts and circumstances, as well as PwC’s and the Audit Committee’s conclusions, concerning PwC’s objectivity and impartiality with respect to the audit of the Bank.
PwC advised the Audit Committee of the Bank that it believes that based on its analysis, PwC remains objective and impartial despite matters that may ultimately be determined to be inconsistent with the criteria set out in the rules and regulations of the SEC related to the Loan Rule, and therefore believes that it can continue to serve as the Bank’s independent registered public accounting firm. PwC also advised the Audit Committee that it believes that in light of its analysis, a reasonable investor possessing all the facts regarding the lending relationships described above and PwC audit relationships would conclude that PwC is able to exhibit the requisite objectivity and impartiality to report on the financial statements of the Bank as the independent registered public accounting firm. PwC has advised the Audit Committee that their views and conclusions are based in part on the following considerations:
the features of the holdings of the more than 10% shareholders, such as limited voting rights, demonstrate that their ownership of Bank capital stock does not call into question PwC’s objectivity and impartiality;
the covered persons do not play an active role in the conduct of the audit;
PwC professionals are required to disclose any relationships that may raise issues about objectivity, confidentiality, independence, conflicts of interest, or favoritism; and
the lead audit partner has no reason to believe that the Lenders have made any attempt to influence the conduct of the Bank’s audit or the objectivity and impartiality of any member of Pw C’s audit engagement team.
In addition, PwC identified no aspects of the lending relationships involving the covered persons that would impact PwC’s objectivity and impartiality.
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Bank’s Audit Committee evaluated the information provided by PwC regarding the Loan Rule and in lightboard of this information, assessed PwC’s ability to perform an objective and impartial audit, including consideration of the ownership structure of the Bank, the limited voting rights of the Bank’s members, and the composition of the Bank’s Board of Director’s. In addition to the considerations listed above, the Audit Committee considered the following:
as of December 31, 2017, and as of the date of the filing of this Form 10-K, no officer or director of the Lenders served on the Bank’s Board of Directors;
only one of the Lenders will be eligible to vote in 2018, and only in the at-large independent directorship election; and
the Lenders are subject to the same terms and conditions for conducting business with the Bank as any other borrower.
Based on this evaluation, the Audit Committee concluded that PwC’s ability to exercise objective and impartial judgment on all issues encompassed within PwC’s audit engagement has not been impaired.
PART III.
| |
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The Board of Directorsdirectors (Board) of the Federal Home Loan Bank of San Francisco (Bank) is composed of member directors and nonmember independent directors. Each year the Federal Housing Finance Agency (Finance Agency) designates the total number of director positions for the Bank for the following year. Member director positions are allocated to each of the three states in the Bank'sBank’s district. The allocation is based on the number of shares of capital stock required to be held by the members in each of the three states as of December 31 of the preceding calendar year (the record date), with at least one member director position allocated to each state and at least three member director positions allocated to California. Of the eight member director positions designated by the Finance Agency for 20172023 and 2018,2024, one was allocated to Arizona, six were allocated to California, and one was allocated to Nevada. The nonmember independent director positions on the Board must be at least two-fifths of the number of member director positions and at least two of them must be public interest director positions. The Finance Agency designated seven nonmember independent director positions for 20172023 and 2018,2024, two of which were public interest director positions.
The Bank holds elections each year for the director positions with terms ending at yearend, with new terms beginning the following January 1. For member director positions, members located in the relevant states as of the record date are eligible to participate in the election for the state in which they are located. For nonmember independent director positions, all members located in the district as of the record date are eligible to participate in the election. For each director position to be filled, an eligible institution may cast one vote for each share of capital stock it was required to hold as of the record date (according to the requirements of the Bank'sBank’s capital plan), except that an eligible institution's votes for each director position to be filled may not exceed the average number of shares of capital stock required to be held by all of the members in that state as of the record date. In the case of an election to fill more than one member director position for a state, an eligible institution may not cumulate or divide its block of eligible votes. Interim vacancies in director positions are filled by the Board. The Board does not solicit proxies, nor are eligible institutions permitted to solicit or use proxies to cast their votes in an election.
Candidates for member director positions are not nominated by the Bank'sBank’s Board. As provided for in the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), member director candidates are nominated by the institutions eligible to participate in the election in the relevant state. Candidates for nonmember independent director positions are nominated by the Board, following consultation with the Bank'sBank’s Affordable Housing Advisory Council, and are reviewed by the Finance Agency. The Bank'sBank’s Governance Committee performs certain functions that are similar to the functions of a nominating committee with respect to the nomination of nonmember independent directors. If only one individual is nominated by the Board for each open nonmember independent director position, that individual must receive at least 20% of the eligible votes to be declared elected; and if two or more individuals are nominated by the Board for any single open nonmember independent director position, the individual receiving the highest number of votes cast in the election must be declared elected by the Bank.
Each member director must be a citizen of the United States and must be an officer or director of a member of the Bank (located in the state to which the director position has been allocated) that meets all minimum capital requirements established by the member's appropriate Federal banking agency or appropriate state regulator. There are no other eligibility or qualification requirements in the FHLBank Act or the regulations governing the Federal Home Loan Banks (FHLBanks) for member directors. Each nonmember independent director must be a United States citizen and must maintain a principal residence in a state in the Bank’s district (or own or lease a residence in the district and be employed in the district). In addition, the individual may not be an officer of any FHLBank or a director, officer, or employee of any member of the Bank or of any recipient of advances from the Bank. Each nonmember independent director who serves as a public interest director must have more than four years of personal experience in representing consumer or community interests in banking services, credit needs, housing, or financial consumer protection. Each nonmember independent director other than a public interest director must have knowledge of, or experience in, financial management, auditing or accounting, risk management practices, derivatives, project development, organizational management, or law.
The term for each director position is four years (unless a shorter term is assigned by the Finance Agency for staggering purposes), and directors are subject to a limit on the number of consecutive terms they may serve. A director elected to three consecutive full terms on the Board is not eligible for election to a term that begins earlier than two years after the expiration of the third consecutive term. On an annual basis, the Bank'sBank’s Board performs a Board assessment that includes consideration of the directors' backgrounds, experience, expertise, Board service, and other factors. Also on an annual basis, each director certifies to the Bank that he or she continues to meet all applicable statutory and regulatory eligibility and qualification requirements. In connection with the election or appointment of a nonmember independent director, the nonmember independent director completes an application form providing information to demonstrate his or her eligibility and qualifications to serve on the Board. As of the filing date of this Form 10-K, nothing has come to the attention of the Board or management to indicate that any of the current Board members do not continue to possess the necessary experience, qualifications, attributes, or skills expected of the directors to serve on the Bank'sBank’s Board, as described in each director's biography below.
Information regarding the current directors and executive officers of the Bank is provided below. There are no family relationships among the directors or executive officers of the Bank. The Bank'sBank’s Code of Conduct for Senior Officers, which applies to the president, andexecutive vice presidents, certain senior vice presidents, and such other employees serving in a financial reporting oversight role as determined from time to time by the chief financial officer, and any amendments or waivers to the code are disclosed on the Bank'sBank’s website located at www.fhlbsf.com.
The charter of the Audit Committee of the Bank'sBank’s Board is available on the Bank'sBank’s website at www.fhlbsf.com.
Board of Directors
The following table sets forth information (ages as of February 28, 2018)29, 2024) regarding each of the Bank'sBank’s directors.
| | | | | | | | | | | | | | | | | |
| Name | Age | | Director
Since | | Expiration of
Current Term |
F. Daniel Siciliano, Chair(1)(9) | 53 | | | 2017 | | 2024 |
Brian M. Riley, Vice Chair(2)(7)(9) | 59 | | | 2015 | | 2026 |
David Adame(1)(8) | 60 | | | 2022 | | 2025 |
Banafsheh Akhlaghi(1)(8)(10) | 55 | | | 2022 | | 2025 |
Laura Archuleta(1)(7) | 59 | | | 2024 | | 2027 |
Jeffrey K. Ball(3)(7) | 59 | | | 2018 | | 2024 |
Marangal (Marito) Domingo(4) | 63 | | | 2018 | | 2025 |
Ana E. Fonseca(5)(8)(9) | 58 | | | 2022 | | 2027 |
Lori R. Gay(1) | 61 | | | 2021 | | 2024 |
Matthew Hendricksen(6)(8)(10) | 44 | | | 2020 | | 2027 |
Simone Lagomarsino(4)(7) | 62 | | | 2013 | | 2024 |
Chang M. Liu(4) | 57 | | | 2023 | | 2026 |
Joan C. Opp(4)(7)(9)(10) | 57 | | | 2018 | | 2025 |
Silvio Tavares(1)(7)(8) | 52 | | | 2024 | | 2027 |
Gary L. Trujillo(1)(7)(9) | 63 | | | 2023 | | 2026 |
(1) Elected as a nonmember independent director by the Bank members eligible to vote.
(2) Elected by the Bank’s Arizona members eligible to vote.
(3) Mr. Ball was elected by the Bank’s California members eligible to vote, for a four-year term beginning January 1, 2021. Previously, Mr. Ball was selected by the Board to fill a vacant California member director position and served from January 1, 2018, to December 31, 2020.
(4) Elected by the Bank’s California members eligible to vote.
(5) Ms. Fonseca was elected by the Bank’s California members eligible to vote, for a four-year term beginning January 1, 2024. Previously, Ms. Fonseca was elected by the Board to fill a vacant California member director position effective July 28, 2022.
(6) Elected by the Bank’s Nevada members eligible to vote.
(7) Member of the Audit Committee in 2024.
(8) Member of the Compensation and Human Resources Committee in 2024.
(9) Member of the Audit Committee in 2023.
(10) Member of the Compensation and Human Resources Committee in 2023. Former Directors Melinda Guzman and Kevin Murray were also on the Compensation and Human Resources Committee in 2023.
|
| | | | | | |
| Name | Age |
| | Director Since | | Expiration of Current Term |
John F. (Jack) Luikart, Chair(1)(8) | 68 |
| | 2007 | | 2021 |
Brian M. Riley, Vice Chair(2)(6)(8) | 53 |
| | 2015 | | 2018 |
Jeffrey K. Ball(3)(6) | 53 |
| | 2018 | | 2020 |
Bradley W. Beal(4)(7)(9) | 64 |
| | 2014 | | 2019 |
Craig G. Blunden(5) | 70 |
| | 2012 | | 2019 |
Marangal (Marito) Domingo(5) | 57 |
| | 2018 | | 2021 |
Melinda Guzman(1)(7) | 54 |
| | 2009 | | 2019 |
Simone Lagomarsino(5)(6)(8)(9) | 56 |
| | 2013 | | 2020 |
Kevin Murray(1) | 57 |
| | 2008 | | 2019 |
Robert F. Nielsen(1) | 71 |
| | 2009 | | 2020 |
Joan Opp(5)(6)(7) | 51 |
| | 2018 | | 2021 |
John F. Robinson(5)(8)(9) | 71 |
| | 2011 | | 2018 |
F. Daniel Siciliano(1)(6)(9) | 47 |
| | 2017 | | 2020 |
Scott C. Syphax(1)(7)(8)(9) | 54 |
| | 2002 | | 2018 |
John T. Wasley(1)(7)(8)(9) | 56 |
| | 2007 | | 2021 |
| |
(1) | Elected as a nonmember independent director by the Bank members eligible to vote. Ms. Guzman also served as an appointive director from April 19, 2007, to December 31, 2008. Mr. Nielsen also served as an appointive director from April 19, 2007, to December 31, 2008, and from 1999 to 2001. Mr. Wasley also served as an appointive director from 2003 to 2005. With the enactment of the Housing and Economic Recovery Act of 2008 on July 30, 2008, the director positions previously appointed by the Federal Housing Finance Board (appointive director positions) became known as nonmember independent director positions, and the method for filling these positions was changed to election by the Bank members eligible to vote. |
| |
(2) | Elected by the Bank’s Arizona members eligible to vote. |
| |
(3) | Mr. Ball was selected by the Board to fill a vacant California member director position effective January 1, 2018. |
| |
(4) | Mr. Beal was declared elected by the Board as a Nevada director, for a four-year term beginning January 1, 2016. Previously, Mr. Beal was selected by the Board to fill the vacant Nevada director position and served from May 1, 2014 to December 31, 2015. |
| |
(5) | Elected by the Bank's California members eligible to vote. Mr. Blunden also served as a California director from January 28, 1999, to December 31, 2006. Mr. Robinson also served as a California director from January 1, 2004, to September 11, 2005, and as a Nevada director from January 25, 2007, to October 9, 2008. |
| |
(6) | Member of the Audit Committee in 2018. |
| |
(7) | Member of the Compensation and Human Resources Committee in 2018. |
| |
(8) | Member of the Audit Committee in 2017. Former director Richard A. Heldebrant served on the Audit Committee in 2017. |
| |
(9) | Member of the Compensation and Human Resources Committee in 2017. |
The Board has determined that Ms.Audit Committee Chair Joan C. Opp, Audit Committee Vice Chair Jeffrey K. Ball, and Audit Committee members Brian M. Riley, Simone Lagomarsino, is anSilvio Tavares, and Gary L. Trujillo are “audit committee financial expert”experts” within the meaning of the Securities and Exchange Commission (SEC) rules. For information concerning the experience through which these individuals acquired the attributes required to be deemed audit committee financial experts, refer to the biographical information below. The Bank is required by SEC rules to disclose whether Ms. Lagomarsino isthe audit committee financial experts are independent and is required to use a definition of independence from a national securities exchange or national securities association. The Bank has elected to use the National Association of Securities Dealers Automated Quotations (NASDAQ) definition of independence, and under that definition, Ms. Lagomarsino isall of the Bank’s audit committee financial experts are independent. In addition, Ms. Lagomarsino isall of the Bank’s audit committee financial experts are independent according to the rules governing the FHLBanks applicable to members of the audit committees of the boards of directors of the FHLBanks and the independence rules under Section 10A(m) of the Securities Exchange Act of 1934.
John F. (Jack) Luikart,Daniel Siciliano, Chair
John F. (Jack) LuikartDaniel Siciliano is a Stanford Law School fellow (CodeX) and co-founder of Stanford’s Rock Center for Corporate Governance. He has previously served as professor of the practice of law, faculty director of the Rock Center for Corporate Governance, and associate dean for executive education and special programs at Stanford Law School, Stanford, California. Mr. Siciliano is currently president and CEO of Nikkl, Inc., a fintech start-up that helps individuals and companies access and deploy capital to optimize returns in previously inefficient markets. Mr. Siciliano is the chair of the board of both the American Immigration Council and the Silicon Valley Directors’ Exchange, and serves on the board and as chair of audit for the Latino Corporate Directors Education Foundation. As of 2011, he has been president of Bethany Advisors LLC, San Francisco, California, since February 2007. He has also been a trustee of four asbestos trusts, including the Western Asbestos Settlement Trust, since 2004 and aan advisory board member and visiting professor for the Corporate Governance Center and Law School of Wells Fargo Real Estate Investment Trust and Ohio Wesleyan University since 2014. He was senior advisor to the CEO of Red Capital Group from July 2011 to July 2012 and was chairman of Wedbush Securities Inc., Los Angeles, California, from 2006 to 2010.Pontificia Universidad Católica de Chile. Previously, he was president and chief operating officer of Tucker Anthony Sutro from 2001 to 2002 and chairman andco-founder, chief executive officer, and executive chair of Sutro & Co.LawLogix Group, Inc., a privately held software technology company from 19962000 to 2002. He joined Sutro & Co. in 1988 as executive vice president of capital marketsOctober 2015. Mr. Siciliano’s current and became president in 1990. Mr. Luikart'sprevious positions as a law professor and director or principalat Stanford’s Rock Center for Corporate Governance, his previous experience as an executive officer of investment banking firms (or their affiliates), and his experience in investment management, capital markets, corporate finance, securitization, and mortgage financea software technology company; and his involvement in and knowledge of corporate governance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management, as indicated by his background, support Mr. Luikart'sSiciliano’s qualifications to serve on the Bank'sBank’s Board.
Brian M. Riley, Vice Chair
BrianM.RileyhasbeenadirectorofOxfordLifeInsuranceCompany,Phoenix,Arizona,sinceNovember2019.He has also been the president and chief executive officer of Mohave StateFoothills Bank Lake Havasu City, Arizona,(a division of Glacier Bank, Kalispell, Montana) since March 2009. He has also served as director,2020. Previously, Mr. Riley was the president and chief executive officer of State Bank Corp., the holding company forof Arizona (formerly Mohave State Bank), Lake Havasu City, Arizona, from March 2009 to February 2020. He also servedasdirector,president,and chief executive officer ofStateBankCorp.,theholdingcompanyforStateBankof Arizona, from March 2009 to February 2020. Mr. Riley has also served as a director of Clearinghouse CDFI, Lake Forest, California, since March 2009.August 2018. He was the chief financial officer of Mohave State Bank from April 2008 to March 2009. Prior to that, he was chief executive officer of Harbor Bank and Trust, a financial institution in organization in Southport, Connecticut. Mr. Riley has over 30 years of experience in banking, including serving as presidentandchiefexecutiveofficerofPriVestBank,CostaMesa,California,andholdingotherexecutivepositions with Provident Savings Bank, Riverside, California, and Metro Commerce Bank, San Rafael, California. Mr. Riley isa director of the Arizona BankersAssociation. Mr. Riley’scurrent position positionsas thea director of a Bank member and a principal executive officer of a Bank member,financial institution, his previous executive positions with other financialinstitutions, and his involvement in and knowledge of corporate governance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management, as indicated by his background, support Mr. Riley’s qualifications to serve on the Bank'sBank’s Board.
Jeffrey K. BallDavid Adame
Jeffrey K. BallDavid Adame has beenserved as president and chief executive officer of Chicanos Por La Causa (CPLC), one of the nation’s largest community development corporations from 2015 until 2023. Mr. Adame served as chief operating
officer and chief financial officer from 2008 to 2015, before taking on the position of president and chief executive officer. Previously, Mr. Adame was vice president of Arizona operations for McCormack Baron & Salazar, responsible for overseeing the firm’s role in Henson Village, a HOPE VI project in Phoenix. He served as senior deputy director of Friendly Hills Bank, Whittier, California, since it was founded in September 2006.Fannie Mae’s Arizona partnership office from 1997 to 2003. Prior to that, he was an Executive Vice President with Far East Nationalworked at JPMorgan Chase & Co. (then called Bank One Arizona) for eight years. Mr. Adame previously served on the Bank’s Affordable Housing Advisory Council from 2016 to 2021. Mr. Adame’s experience in Los Angeles, California.representing community interests in housing, health and human services, education, economic development, and advocacy, and his management skills, as indicated by his background, support Mr. Ball servesAdame’s qualifications to serve as a public interest director on the Bank’s Board.
Banafsheh Akhlaghi
Banafsheh Akhlaghi is president and chief executive committee member forofficer of Akhlaghi Law, Mill Valley, California, an international private law practice founded in 2010. She has over 20 years of experience as founder of a civil rights nonprofit, consultant to the American Bankers AssociationUnited Nations, and chairs their Government Relations Council. He is past Regional Director with Amnesty International. Her expertise includes Environmental, Social, Governance (ESG), Risk Management, Legal and Business Strategy, Diversity & Inclusion, and Public Policy.Shehasbeenamembersince2010andwaspreviouslychairof,theLegalServicesTrustFundCommission of the State Bar of California, Bankers Association where he servesfocusing on legal advocacy for underserved and underrepresented populations and homelessness prevention. Ms. Akhlaghi’s current position as a principal in a law firm, her expertise in governance and risk management, and her management skills, as indicated by her background, support Ms. Akhlaghi’s qualifications to serve on the boardBank’s Board.
Laura Archuleta
Laura Archuleta is president and CEO of directorsJamboree Housing Corporation, Irvine, California, a nonprofit housing development company. Ms. Archuleta leads the development, acquisition, renovation, and chairs its Federal Government Relations Committee. Mr. Ballmanagement of affordable housing across California. Under her visionary leadership for over two decades, Jamboree's portfolio has expanded to a substantial $3.2 billion, providing homes for over 20,000 residents, including low-income families, seniors, transitional age youth, and individuals with special needs. Her commitment to bridging diverse interests and fostering collaboration is evident in her ability to unite stakeholders from all walks of life, achieving common goals and creating innovative solutions to address California's pressing housing demand. She also brings decades of experience serving on numerous boards, including the boardCal State Fullerton Philanthropic Foundation Board of directorsGovernors, California Housing Consortium, and audit committee chair for Data Center, Inc.,California Building Industry Association (CBIA). She is a financial technology company serving banks and credit unions. He is alsofounding member of UC Irvine's Livable Cities Lab, which leverages academic expertise to study the founder andimpact of affordable housing. Ms. Archuleta’s current Board Chair of Kinetic Academy, a K-8 California public charter school, which includes financial education in its core curriculum. Mr. Ball’s current
position as the principal executive officer of a developer of affordable housing properties in California, and her management skills, as indicated by her background, support Ms. Archuleta’s qualifications to serve on the Bank’s Board.
Jeffrey (Jeff) K. Ball
Jeffrey (Jeff) K. Ball is the president and chief executive officer of the Orange County Business Council where he represents the interests of local businesses and organizations in promoting the region’s economic prosperity. He is the founder of First Pacific Bank (formerly Friendly Hills Bank), Whittier, California, where he previously served as president and chief executive officer and is currently vice chair. He also currently serves on the board of directors for Mobility21, and Data Center, Inc., as chair of the audit committee. Prior to opening First Pacific Bank he held several office positions with Bank of America Corporation focused on both commercial and investment banking. Mr. Ball is a leading advocate for the importance of financial education in all communities and was the lead petitioner in the establishment of Kinetic Academy, a K-8 charter school in Huntington Beach, California where he currently serves as chair. Mr. Ball is a past chair of the California Bankers Association, past president of the Whittier Host Lions Club, and past founding chair of the Whittier Union High School District Foundation. Mr. Ball is also a member by appointment of the Legal Services Trust Fund Commission of the California State Bar which he previously chaired, is a public member of the Accrediting Commission for Community and Junior Colleges and serves on the board of governors of the Los Angeles Area Chamber of Commerce. Mr. Ball frequently guest lectures on financial and economic principles at high schools and universities across the nation. Mr. Ball’s current position as a director and previous service as an executive officer of a Bank member, his current position and experience as a board member and audit committee chairman of aprevious officer positions with other financial technology company,institutions, and his involvement in and knowledge of corporate governance, finance, auditing,
accounting, internal controls, risk management, financial reporting, and financial management, as indicated by his background, support Mr. Ball’s qualifications to serve on the Bank'sBank’s Board.
Bradley W. Beal
Bradley W. Beal has been a director of One Nevada Credit Union, Las Vegas, Nevada, since September 2017. He also served as president and chief executive officer of One Nevada Credit Union from February 1990 to March 2018. Prior to that, Mr. Beal was senior vice president operations, Nevada Federal Credit Union (now One Nevada Credit Union) since 1987, and prior to that, president of Nevada State Employees Federal Credit Union, Carson City, Nevada. Mr. Beal is a member of the American Institute of Certified Public Accountants, the Nevada CPA Society, and a former board member and chairman of the National Association of Federal Credit Unions. Mr. Beal's current position as a director of a Bank member, and his previous position as the principal executive officer of a Bank member and his involvement in and knowledge of corporate governance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management, as indicated by his background, support Mr. Beal's qualifications to serve on the Bank's Board.
Craig G. Blunden
Craig G. Blunden has been chairman and chief executive officer of Provident Savings Bank and Provident Financial Holdings, Inc., Riverside, California, since 1991 and 1996, respectively. Mr. Blunden served as president of Provident Savings Bank and Provident Financial Holdings, Inc., from 1991 to June 2011 and from 1996 to June 2011, respectively. He previously served on the Bank's Board from 1999 to 2006. He is currently on the board of directors of the Western Bankers Association. Mr. Blunden is a past chairman of the Western League of Savings Institutions and served on the Thrift Institutions Advisory Council of the Federal Reserve System for two years. Mr. Blunden's current position as the principal executive officer of a Bank member and its holding company and his involvement in and knowledge of corporate governance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management, as indicated by his background, support Mr. Blunden's qualifications to serve on the Bank's Board.
Marangal (Marito) Domingo
Marangal (Marito) Domingo has been the chief investment officer and chief credit officer ofjoined First Technology Federal Credit Union, Mountain View,San Jose, California, sincein March 2013.2013, and currently serves as chief financial officer and chief credit officer. Prior to that, he was executive vice president and chief financial officer of Pacific Trust Bank from 2011 to 2012. Mr. Domingo has over 20 years of experience in banking, including serving as chief financial officer for Doral Bank, senior vice president of finance offor Treasury Bank, chief executive officer of Downey Savings, head of capital markets for Washington Mutual Bank, and treasurer for American Savings. He has also served on the Mortgage Bankers Association’s Residential Board of GovernorsandasamemberoftheboardofdirectorsfortheNationalEquityFund (affordable (affordablehousing),GreaterLos Angeles Chamber of Commerce, and the Beaverton Education Foundation.Foundation, and SMART Reading. Mr. Domingo’s current position as an executive officer of a Bank member, his previous executive positions with other financial institutions, and his involvement in and knowledge of corporate governance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management, as indicated by his background, support Mr. Domingo’s qualifications to serve on the Bank'sBank’s Board.
Melinda GuzmanAna E. Fonseca
Melinda GuzmanAna E. Fonseca has 37 years’ experience in the financial services industry and has been athe president and chief executive officer of Melinda Guzman Professional Corporation, Sacramento,Logix Federal Credit Union, Valencia, California, since 2009. She was a partner with Freeman & Guzman, LLP, a law firm in Sacramento, California, from 1999 to 2015. Prior to that, she was a partner with Diepenbrock, Wulff, Plant & Hannegan, LLP, also a law firm in Sacramento. Ms. Guzman's practice focuses on tort, labor, insurance, and commercial matters. She
previously served on the Bank's Board of Directors fromJanuary 2019. From April 20072002 through December 2008.2018, she held leadership roles including executive vice president/chief operating officer and executive vice president/chief financial officer. She is experienced in developing and executing strategies to achieve long term profitable growth, sustain high levels of customer delight, and build high performing teams and has overseen fiscal operations, sales and revenue growth, customer service/experience, lending, risk management, facilities management, information technology, data and financial analytics and business operations. Ms. Guzman'sFonseca’s current position as the principal executive officer of a Bank member, and her involvement in and experience in representing community and consumer interests with respect to banking services, in credit needs, in housing and consumer financial protections, and inknowledge of corporate governance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management, as indicated by her background, and her management skills derived from her various legislative appointments and her service from 2002 to 2003 as chair of the Nehemiah Corporation of America (a community development corporation), her service from 2001 to 2004 as chairman of the California Hispanic Chamber of Commerce, and her service with other community-based organizations support Ms. Guzman'sFonseca’s qualifications to serve on the Bank'sBank’s Board.
Lori R. Gay
Lori R. Gay has been president and chief executive officer of Neighborhood Housing Services of Los Angeles County (NHS) since 1990. NHS serves as a community development financial institution and full-service real estate firm. Ms. Gay has served on numerous boards of directors, including the Federal Reserve Bank of San Francisco, Los Angeles Branch, the California Organized Investment Network, and the California Housing Finance Agency. Ms. Gay’s current position as the principal executive officer of an affordable homeownership services provider responsible for reaching families with financial counseling and affordable lending and redevelopment services and her management skills, and her involvement in and knowledge of corporate governance, finance, auditing, internal controls, risk management, financial reporting, and financial management, as indicated by her background, support Ms. Gay’s qualifications to serve as a public interest director on the Bank’s Board.
Matthew Hendricksen
Mr. Hendricksen is a senior vice president with Employers Holdings, Inc. (EMPLOYERS®), overseeing the treasury and investment operations of Employers Insurance Company of Nevada, Employers Compensation Insurance Company, Employers Preferred Insurance Company, Employers Assurance Company, and Cerity Insurance Company. During his 20-plus year career, Mr. Hendricksen has specialized in investments, derivatives, collateral operations, risk management, and insurance regulations. Mr. Hendricksen’s current position as an officer of a Bank member and his involvement in and knowledge of finance, accounting, internal controls, risk management, and financial management, as indicated by his background, support Mr. Hendricksen’s qualifications to serve on the Bank’s Board.
Simone Lagomarsino
Simone Lagomarsino, has been a director since November 2018, currently serves as community impact officer of Pacific Premier Bank, Irvine, California, and was previously a director of Pacific Premier Bank and its holding company, Pacific Premier Bancorp, sincefrom April 2017.2017 through November 2018. Beginning in January of 2022, she joined the board of directors of the Federal Reserve Bank of San Francisco head office. Formerly, Ms. Lagomarsino served as president and chief executive officer of Luther Burbank Corporation, and its subsidiary Luther Burbank Savings, Santa Rosa, California, from January 2019 until its merger with Washington Federal Bank (a nonmember bank), which was completed on February 29, 2024. From July 2019 to June 2022, Ms. Lagomarsino was on the board of Hannon Armstrong, a real estate investment trust that provides capital to leading companies in the energy efficiency, renewable energy, and other sustainable infrastructure markets. Ms. Lagomarsino has also been the president and chief executive officer of the Western Bankers Association (formerly California Bankers Association) sincefrom April 2017.2017 through December 2018. Prior to that she was chief executive officer and a director of Heritage Oaks Bank and president of Heritage Oaks Bancorp, Paso Robles, California, from September 2011, until its merger with Pacific Premier Bank and Pacific Premier Bancorp in April 2017. She also held the position of president of Heritage Oaks Bank from January 2012 through December 2014. Prior to that, Ms. Lagomarsino was president and chief executive officer of Kinecta Federal Credit Union from June 2006 through January 2010. She is a financial services professional with more than 30 years of experience in executive positions. Ms. Lagomarsino'sLagomarsino’s current position as a directoran officer of a Bank member, her previous positions as chiefdirector and executive officer or chief financial officer ofpositions with Bank members orand other financial institutions, and her involvement in and knowledge of corporate governance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management, as indicated by her background, support Ms. Lagomarsino'sLagomarsino’s qualifications to serve on the Bank'sBank’s Board.
Kevin MurrayChang M. Liu
Kevin Murray has been a principal in The Murray Group, a legal and consulting firm, since its founding in December 2006. Since May 2011, Mr. Murray has served as theChang M. Liu is president and chief executive officer of Cathay Bank and its holding company Cathay General Bancorp, where he servesonbothentities’boardofdirectors.Mr.Liuhasover31yearsofexperienceinthe Weingart Center Association.financialservicesindustry. Mr. Murray was Liu joined Cathay Bank in 2014 assenior vice president and assistant chief lending officer. He hasheld various leadership positions of increasing responsibilities, including executive vice president and chief lending officer in 2016 and chief operating officer in 2018. Before being named president, Mr. Liu was responsible for managing and overseeing all commercial and real estate lending, business development, and various operations. Mr. Liu also serves as a member of the William Morris Agency, Beverly Hills, California, from January 2007 to June 2009, working primarily inWestern Bankers Association board of directors and the company's corporate consulting division. Mr. Murray served as a California State Senator from December 1998 until November 2006,American Cancer Society’s CEOs Against Cancer group, on the board of advisors for the UCLA Anderson Forecast, and serves on the board of directorsofFoothillFamilyService.Mr.Liu’scurrentpositionastheprincipalexecutiveofficerofa California State Assembly Bankmember, from December 1994 until November 1998. Prior to serving andhisinvolvementin the California State Legislature, Mr. Murray practiced law. Mr. Murray's involvement in legislative matters relating to, among other things, the bankingandknowledgeofcorporategovernance,finance,auditing,accounting,internalcontrols,risk management, financial reporting, and insurance industries, his experience in law and corporate governance practices, and hisfinancial management, skills, as indicated by his background, support Mr. Murray'sLiu’s qualifications to serve on the Bank'sBank’s Board.
Robert F. Nielsen
Robert F. Nielsen has been president of Shelter Properties, Inc., a real estate development and management company based in Reno, Nevada, since 1979. Mr. Nielsen is a member of the National Association of Home Builders and was its chairman in 2011. He is also a past chairman of the State of Nevada Housing Division Advisory Committee. He previously served on the Bank's Board of Directors from 1999 to 2001 and from April 2007 through December 2008. Mr. Nielsen's involvement and experience in representing community interests in affordable housing development and his management skills, as indicated by his background, and his role with the Affordable Housing Resource Council (a former nonprofit organization designed to provide technical assistance in affordable housing) and the Neighborhood Development Collaborative (owner and manager of affordable housing rental properties) support Mr. Nielsen's qualifications to serve as a public interest director on the Bank's Board. Mr. Nielsen is a principal shareholder and president of IDN1 Inc., which was created to invest in a multifamily tax credit property in Reno, Nevada. This property is owned by Northwest Partners, L.P., whose general partners are Santorini Corp., IDN1 Inc., and Community Services Agency Development Corporation, a nonprofit corporation under Internal Revenue Code Section 501(c)(3). Northwest Partners, L.P., filed a petition for protection under Chapter 11 of the U.S. Bankruptcy Code on November 17, 2011. A plan of reorganization was confirmed by the court on February 25, 2013. Mr. Nielsen is also a managing member of Karen Partners, LLC, a Nevada limited liability
company, which was created to invest in a multifamily tax credit property in Las Vegas, Nevada. This property was owned by Karen Partners, L.P., whose general partners are Karen Partners, LLC, and Community Services Agency Development Corporation. Karen Partners, L.P., filed a petition for protection under Chapter 11 of the U.S. Bankruptcy Code on December 19, 2011. On November 26, 2012, the automatic stay was rescinded, and this property was foreclosed upon on December 19, 2012. Mr. Nielsen is also a manager of Ridge Seniors, LLC, a Nevada limited liability company, which was created to invest in a multifamily tax credit program in Henderson, Nevada. This property is owned by Ridge Partners L.P., whose general partners are Ridge Seniors, LLC, and Silver Sage Manor, Inc. On March 15, 2012, Ridge Partners L.P. filed a petition for protection under Chapter 11 of the U.S. Bankruptcy Code. A plan of reorganization was confirmed by the court on December 5, 2013. Mr. Nielsen is also principal shareholder and president of SUP III, Inc., which is a general partner in a multifamily tax credit property in Las Vegas, Nevada. This property was owned by East Freemont II L.P., whose general partners are SUP III, Inc., and SPE 2, LLC. East Freemont II L.P. filed a petition for protection under Chapter 11 of the U.S. Bankruptcy Code on June 21, 2012. The automatic stay was rescinded and this property was foreclosed upon on October 21, 2013.
Joan C. Opp
Joan C. Opp has been the president and chief executive officer of Stanford Federal Credit Union, Palo Alto, California,sinceMay2010.FromFebruary2002toApril2010,shewasexecutivevicepresidentandchieffinancial officer for Texas Trust Credit Union overseeing accounting, information technology, marketing and business services, as well as three credit union service organizations. Prior to that, Ms. Opp was a partner with the CPA firm of Clifton Gunderson, LLP, and is a Certified Public Accountant. Ms. Opp serves on the board of directors of CO-OPCO- OP Financial. Ms. Opp’s current position as the principal executive officer of a Bank member, her previous executive positions with other financial institutions, and her involvement in and knowledge of corporategovernance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management, as indicated by her background, support Ms. Opp’s qualifications to serve on the Bank'sBank’s Board.
John F. RobinsonSilvio Tavares
John F. RobinsonSilvio Tavares has been a directorpresident and CEO of Silicon Valley Bank (SVB), Santa Clara,VantageScore, South San Francisco, California and its holding company, SVB Financial Group, since July 2010. He chairs the SVB board’s audit committee and2001. VantageScore is a chartered financial analyst. From 2002 to 2008, he was executive vice president of Washington Mutual Bank. From 1987 to 2002, he served in several senior bank regulatory roles, including Deputy Comptrollerone of the Currency formost widely used credit scores in North America and was used over 19 billion times in 2022, including by over 200 million U.S. consumers. Under his leadership, VantageScore is now used by nine of the Western Districttop 10 banks in the U.S. and Assistant Director for Policyby more than 3,000 banks and Western Region Director for the Office of Thrift Supervision. Mr. Robinson previouslyfin-techs overall. Silvio is an experienced financial services public company board director, chief executive officer, and executive and has served on several public company boards including as Audit Committee Chair and Compensation Committee Chair. Mr. Tavares also previously held senior executive roles at several Fortune 500 financial services technology companies, including Visa and Fiserv’s First Data business. He holds a J.D. degree from the Bank's BoardBoston University School of DirectorsLaw; an M.B.A. degree from 2004 to 2005the Boston College Carroll School of Management; and 2007 to 2008. From 2002 to 2013, he was a member of the national boardB.S. degree in Electrical Engineering from Tufts University. He has invented or co-invented over 15 patents in financial data technology, risk management and executive board for Operation HOPE, an international nonprofit organization focused on financial literacy and empowerment.machine learning technologies. Mr. Robinson'sTavares’s current position as the director of a Bank member, previous positionsexperience as an executive officer of a Bank member and a senior bank regulator,leading credit modeling company, his previous experience as an executive officer in financial services, and his involvement in and knowledge of corporate governance, finance, auditing, accounting, internal controls, risk management, financial reporting, and financial management, as indicated by his background, support Mr. Robinson'sTavares’ qualifications to serve on the Bank'sBank’s Board.
F. Daniel SicilianoGary L. Trujillo
F. Daniel SicilianoGary L. Trujillo is the co-founder of Stanford’s Rock Center for Corporate Governancefounder and is the current co-director of the Rock Center’s Directors’ College. He has previously servedserves as professor of the practice of law, faculty director of the Rock Center for Corporate Governance,president and associate dean for executive education and special programs at Stanford Law School, Stanford, California. Mr. Siciliano is currently the chair of the board of trustees of the American Immigration Council and Co-Chair of the We Robot Conference on AI, Robotics, and Public Policy. As of 2011, he has been an advisory board member and visiting professor for the Corporate Governance Center and Law School of Pontificia Universidad Católica de Chile. Previously, he was co-founder, chief executive officer of Southwest Harvard Group, LLC, an investment firm and family office in Phoenix, Arizona. He is also executive chairman of LawLogix Group,the Standard Printing Company, Inc., Mr. Trujillo has been a serial entrepreneur for over 30 years with significant experience as a chief executive officer, financier, founder, operator, and independent corporate board member, including serving on three publicly traded company boards and multiple privately held softwareowned company boards in the technology, company from 2000 to October 2015.healthcare, auto, real estate, and financial services industries. Mr. Siciliano’sTrujillo is also recognized nationally as a dedicated community leader, having co-founded the Be A Leader Foundation in 2002, an education-focused nonprofit serving more than 14,000 students per year. Mr. Trujillo’s current and previous positions as a law professor and director
at Stanford’s Rock Center for Corporate Governance, his previous experience as an executive officer of a software technology company;an investment firm and other companies, andhisinvolvementinandknowledgeofcorporategovernance,finance,auditing,accounting,internalcontrols,risk management, financial reporting, and financial management, as indicated by his background, support Mr. Siciliano’sTrujillo’s qualifications to serve on the Bank'sBank’s Board.
Scott C. Syphax
Scott C. Syphax has been the CEO of Syphax Strategic Inc., a management consulting and business development firm focused on the real estate development and community finance sector, since February 2017 and has served as chairman of Nehemiah Corporation of America, a community development corporation in Sacramento, California, since 2011. He previously held the position of chief executive officer of Nehemiah Corporation of America and its affiliates from 2001 to 2017, and was president from 2001 through June 2015. Mr. Syphax has also been a member of the Board of Directors of the Greenlining Institute since 2017. From 1999 to 2001, Mr. Syphax was a manager of public affairs for Eli Lilly & Company. He was vice chair of the Bank's Board of Directors from January 2010 through January 2012. Mr. Syphax's involvement and experience in representing community interests in housing and his management skills, as indicated by his background, support Mr. Syphax's qualifications to serve as a public interest director on the Bank's Board.
John T. Wasley
John T. Wasley has been a consultant with Spencer Stuart, a global retained executive search firm, in their Los Angeles, California office, since 2017. Prior to that, he was a managing partner with Caldwell Partners, Los Angeles, California, from 2013 to 2017, and was a managing partner with Heidrick & Struggles, Los Angeles, California from June 2005 to 2013. Mr. Wasley joined Heidrick & Struggles as a partner in 2001. Previously, he was an executive director with Russell Reynolds Associates and a senior vice president of People's Bank of California. He previously served on the Bank's Board of Directors from 2003 to 2005. Mr. Wasley's involvement in and knowledge of human resources, compensation practices, and corporate governance practices, and his management skills, as indicated by his background above, along with his previous position as an executive officer of a financial institution with which Mr. Wasley had involvement in or knowledge of corporate governance practices, bank relations, financial operations, treasury functions, and financial management, support Mr. Wasley's qualifications to serve on the Bank's Board.
Executive Officers
Teresa Bryce Bazemore
J. Gregory Seibly
J. Gregory Seibly, 54,Teresa Bryce Bazemore, 64, is currently serving as president and chief executive officer. She has beenheld the position of president and chief executive officer since May 2016.March 2021. Prior to joining the Bank, heMs. Bazemore served as the president of consumer banking at Umpqua BankRadian Guaranty from itsJuly 2008 until her retirement in April 2014 merger with Sterling2017, where she oversaw the strategic planning, business development, and operations of the mortgage insurance business line. Prior to being appointed as the president of Radian Guaranty, Ms. Bazemore served as executive vice president, general counsel, and corporate secretary from October 2006 to July 2008, and added the role of chief risk officer of Radian Group in February 2007. Before joining the Radian Group, Ms. Bazemore was the vice president, general counsel, and secretary for Nexstar Financial Corporation (Sterling) untilfrom June 2000 to May 2016. From October 20092006, and before that she was the general counsel of the mortgage banking line of business at Bank of America from March 1997 to April 2014, heMay 2000. Following her retirement from Radian Guaranty, Ms. Bazemore served as president and chief executive officer of Sterling and as a member of the board of directors. Before joining Sterling in 2007, he was presidentdirectors of U.S. Bank –FHLBank of Pittsburgh from August 2017 until March 2019, when she relocated to California. With 30 yearsIn addition, Ms. Bazemore currently is a member of industry experience, Mr. Seibly has also held executive-level positions in commercial banking at Wells Fargo Bank and in healthcare finance at Bank of America. He currently serves on the board of directors of T. Rowe Price Funds where she served as the Pacific Coast Bankers School.audit committee chair until October 2023. She is also a member of the board of directors of First Industrial Realty Trust, Inc., and serves as the audit committee chair since May 3, 2023. She previously served as a member of the board of directors of Chimera Investment Corporation from November 2017 to February 2021. Professional appointments she has held include: Federal Reserve Bank of Philadelphia Economic Advisory Council, Fannie Mae National Advisory Council, and Consumer Advisory Council of the Federal Reserve.
Joseph E. Amato
Elena Andreadakis, 56, has been senior vice president, chief administrative officer since March 2017. Previously, Ms. Andreadakis was seniorJoseph E. Amato, 65, is currently serving as executive vice president and chief informationfinancial officer. He has held the position of executive vice president and chief financial officer since May 13, 2021. Mr. Amato joined the Bank as executive vice president and senior financial officer on October 9, 2020, and served as the Bank’s interim chief financial officer from May 2011 to March 2017.January 4, 2021, until his appointment as the Bank’s chief financial officer. Prior to joining the Bank, sheMr. Amato was achief financial officer at the Federal Home Loan Bank of Des Moines from May 2016 to June 2019. Prior to that, Mr. Amato served in various capacities at Freddie Mac from 2001 until 2016, most recently serving as senior vice president and CFO, investments and financial planning.
Arlene Coyle
Arlene Coyle, 51, is currently serving as executive vice president and chief audit executive. She has held the position of chief audit executive since May 2019. Ms. Coyle joined the Bank in February 2016 as assistant vice president, internal audit, and was promoted to vice president in February 2017. Ms. Coyle has over 25 years of internal audit and regulatory experience in the financial services industry. Before joining the Bank, she worked at Fidelity Investments,TIAA in their Internal Audit function. Prior to TIAA, she worked as a bank examiner for the Federal Reserve System, supporting community and regional banks. She has a Certification in Risk Management Assurance and is a Certified Internal Auditor, a Certified Financial Services Auditor, and a Certified Diversity Professional.
Kwame Fields
Kwame Fields, 48, is currently serving as senior vice president, chief information security officer, and chief diversity officer. Mr. Fields has held the positions of chief information security officer since December 2017 and chief diversity officer since July 2021. Previously, he was acting chief diversity officer from July 2020 to July 2021. Mr. Fields has over 25 years of information security and risk management experience across multiple industries. Prior to joining the Bank, he was a vice president at E*TRADE, where shehe had worked since 1992. She most recently2014. He led the servicetechnology and program management group for Fidelity's enterprise infrastructure organization.security oversight and governance organization and was a principal in the creation of their diversity and inclusion council. Prior to that, Ms. AndreadakisMr. Fields held a number of other senior-level businessmanagement roles and information technologyoversight positions with responsibility for managing a wide range of systemsinformation security, business continuity, information technology risk management, and diversity initiatives. Mr. Fields is a Certified Information Systems Security Professional and a Certified Diversity Professional.
Kelly Gear
Kelly Gear, 51, is currently serving as senior vice president, chief strategy officer. She has held the position of chief strategy officer since January 2022. Ms. Gear joined the Bank in August 2011 as vice president of IT planning and program services. Ms. Gear has over 25 years of management consulting and organizational leadership experience across highly regulated industries, including financial services, pharmaceuticals, and aerospace and defense. Prior to joining the Bank, Ms. Gear served on several executive committees overseeing large-scale global business initiatives.transformations and strategic initiatives for PricewaterhouseCoopers and Johns Manville, a Berkshire Hathaway company. She is Certified Lean Six Sigma Black Belt and a Certified Diversity Professional.
Anne Segrest McCulloch
Anne Segrest McCulloch, 65, is currently serving as executive vice president, chief legal officer, and corporate secretary. She has held the positions of chief legal officer and corporate secretary since November 2021. She provides legal counsel to the Bank’s management and board of directors on legal and regulatory matters affecting the development and execution of the Bank’s business strategies, policies, and practices. She also directs and manages the Bank’s legal staff, outside counsel, and public affairs team. Ms. McCulloch is a seasoned financial services and housing industry executive and regulatory attorney. Prior to joining the Bank, Ms. McCulloch was president and chief executive office of Housing Partnership Equity Trust from April 2017 through November 17, 2021. Previously, she held several senior positions in the housing sector, including senior vice president, credit and housing access, for Fannie Mae through March 2017.
Mani Massoomi
Kevin A. Gong
Kevin A. Gong, 58, has been seniorMani Massoomi, 46, is currently serving as executive vice president and chief corporate securities counselrisk officer. He has held the position of chief risk officer since April 2005.November 2022. He oversees the Bank’s risk management, compliance, model risk, market risk, member and counterparty credit, and related governance frameworks. Previously, Mr. Gong joinedMassoomi served as senior vice president, enterprise risk officer from August 2019 to October 2022. He has over 20 years of experience in risk management, internal audit, banking, capital markets, and technology. Before joining the Bank, Mr. Massoomi was the head of operational and enterprise risk at SoFi in 1997San Francisco. Prior to his tenure at SoFi, he was the audit executive for the domestic and international asset management and enterprise risk management functions at TIAA. His experience also includes positions at Royal Bank of Canada Capital Markets, Millennium Management Hedge Fund, General Motors, and Morgan Stanley. He is a Certified Fraud Examiner, Certified Financial Services Auditor, and Certified Investment and Derivatives Auditor, and holds a Certification in Risk Management Assurance.
Maxine Moir
Maxine Moir, 53, is currently serving as executive vice president and associate general counsel. Hechief human resources officer and head of internal communications. She has previous experience as a senior attorney withheld the Officeposition of Thrift Supervision, as an attorney in private practice, and as an attorney with the SEC in both the Division of Corporation Finance and the Division of Market Regulation.
Janet (Jan) Homan
Janet (Jan) Homan, 58, has been senior vice president, chief human resources officer since February 2017. Ms. Homan was also the Bank’s office of minority2020, and women inclusion officer from February 2017 to June 2017. Prior to joining the Bank, she served as head of human resources of MACH Energy from 2007 to 2015. From 2000 to 2007,internal communications since November 2022. Previously, Ms. Homan served as senior human resources business partner and principal of Barclays Global Investor, and from 1991 to 2000 sheMoir was senior vice president personnel executive for Bankand director of America.
Kenneth C. Miller
Kenneth C. Miller, 65, has been senior vice president and chief financial officer since August 2011. Previously, Mr. Miller was senior vice president, financial risk management and strategic planning, from 2001 to August 2011. Mr. Miller joined the Bank in July 1994 as vice president, financial risk management. Previously, Mr. Miller held the position of senior vice president, asset liability management, at First Nationwide Bank.
Lawrence H. Parks
Lawrence H. Parks, 56, has been senior vice president, external, legislative, and regulatory affairs since March 2017. Previously, he was senior vice president, external and legislative affairs, from 1997 to March 2017.
Mr. Parks had previous experience at the U.S. Department of Commerce as senior policy advisor to the Secretary, with the Mortgage Bankers Association as associate legislative counsel/director, and with the U.S. Senate Banking Committee as legislative counsel.
Patricia M. Remch
Patricia M. Remch, 65, has been senior vice president, sales, marketing, and business development since March 2017. Previously, Ms. Remch was senior vice president, sales and marketing, from August 2011 to March 2017, and was senior vice president, mortgage finance sales and product development, from February 2005 to August 2011. She joined the Bank as an economist in 1982, was promoted to capital markets specialist, and became vice president, sales manager, in 1998.
Suzanne Titus-Johnson
Suzanne Titus-Johnson, 60, has been senior vice president and general counsel since April 2005, and she has also served as corporate secretary since October 2007. Ms. Titus-Johnson joined the Bank as a staff attorney in 1986, was promoted to assistant vice president and associate general counsel in 1992, to vice president and associate general counsel in 1997, and to vice president and assistant general counsel in 2003.
Stephen P. Traynor
Stephen P. Traynor, 61, has been senior vice president, chief banking officer since March 2017. Previously, Mr. Traynor was senior vice president, member financial services and community investment,human resources from July 20042017 to March 2017. He joined the Bank in 1995 as assistant treasurer and was promoted to senior vice president, sales and marketing, in October 1999. Before joining the Bank, Mr. Traynor held vice president positions at Morgan Stanley & Co. and at Homestead Savings in the areas of mortgage banking, fixed income securities, derivatives, and capital markets.
Lisa Violet
Lisa Violet, 49, has been senior vice president and chief risk officer since April 2017.February 2020. Prior to joining the Bank, Ms. Violet wasMoir served as director, global human resources business partner, at BlackRock, where she provided human resources support for the chief auditiShares business. Her experience also includes 17 years of progressively more complex human resources executive responsibilities at Hitachi Data Systems from 2014 to 2017. Prior to her tenure at Hitachi Data Systems, she served in a number of senior positions in the banking industry, at institutions including Wells Fargo & Company and MUFG Union Bank, and was chief risk officer at the Bank of America, where she led regional and national teams. Ms. Moir holds a Senior Certified Professional credential from the Orient. Ms. Violet is a Chartered Accountant.
Society of Human Resources Management.
Gregory A. Ward
Gregory A. Ward, 48, has been senior vice president, chief audit54, is currently serving as executive since July 2017. Previously, Mr. Ward was senior vice president and director, internal audit, from January 2017 to July 2017.chief operating officer. He has held the position of chief operating officer since November 2022. He is responsible for the Bank’s operations, information technology, information security, procurement, corporate services, and community investment departments. Mr. Ward joined the Bank in November 2013 as vice president, internal audit, and was promoted to deputy director in June 2016.2016 and to director in January 2017, and has held various positions with increasing responsibilities during his tenure, most recently as chief risk officer from May 2019 to October 2022. Before joining the Bank, he worked with Ernst & Young LLP for 12 years in its Financial Services Advisory Practice. Prior to his tenure at Ernst & Young, Mr. Ward worked in the captive insurance industry in Bermuda and for Price Waterhouse in the United Kingdom in its external audit practice. He is a Chartered Accountant, Certified Internal Auditor, Certified Anti-Money Laundering Specialist, and Project Management Professional.
Anthony (Tony) T. Wong
Anthony T. Wong, 58, is currently serving as executive vice president and chief banking officer. He has held the position of chief banking officer since April 2020. Previously, Mr. Wong was senior vice president, member financial services, and chief marketing officer. He joined the Bank in 1995 and has held various positions with increasing responsibilities during his tenure. Prior to joining the Bank, he worked in the capital markets group at Barclays Global Investors (formerly Wells Fargo Nikko Investment Advisors). He is a Certified Mortgage Banker, Accredited Mortgage Professional, and Certified Internal Auditor.Diversity Professional.
ITEM 11.EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
This section provides information on the compensation program of the Federal Home Loan Bank of San Francisco (Bank) for our named executive officers for 2017.2023. Our named executive officers for 2023 are individuals who served as our principal executive officers,officer, our principal financial officer, and our other three most highly compensated executive officers.
Compensation and Human Resources Committee
and Regulatory Oversight
The Compensation and Human Resources Committee (Compensation Committee) of the Bank's BoardBank’s board of Directorsdirectors (Board) is responsible for, among other things, reviewing and making recommendations to the full Board regarding compensation and incentive plan awards for the Bank'sBank’s eligible senior executive officers (the president and each executive vice president, and any senior vice presidents, other than the Chief Audit Executive, for whom compensation is established by the Audit Committee)president serving as such as of December 31, 2018). The Compensation Committee is also responsible for reviewingFor 2024 and making recommendations regarding compensation for the directors. For 2018,2023, the Compensation Committee consists of five members of the Board. In 2017, the Compensation Committee consisted of six members of the Board. The Compensation Committee acts pursuant to a Board-approved charter and may rely on the assistance, advice, and recommendations of the Bank'sBank’s management and other advisors and may refer specific matters to other committees of the Board. In addition, the Risk Committee of the Board is responsible for oversight of the Bank'sBank’s enterprise-wide risk management framework, including overseeing an annual executive incentive compensation risk assessment of the Bank'sBank’s compensation policies and practices for the Bank's employees.
Bank’s senior executive officers.
Certain members of senior management assist the Compensation Committee in its responsibilities by providing compensation and performance information regarding our executive officers.
With respect to the compensation of the named executive officers of a Federal Home Loan Bank (FHLBank), the Federal Housing Finance Agency (Finance Agency) provides certain oversight of FHLBanks, including the Bank executive officer compensation, and requires that an FHLBank, including the Bank, provide the Finance Agency with copies of all materials related to the compensation decisions of the FHLBank's board of directorsFHLBank’s Board for its review prior to the compensation decisions taking effect.
The Finance Agency’s Advisory Bulletin 2009-AB-02 outlines several principles for sound incentive compensation practices to which the FHLBanks are expected to adhere in setting executive compensation policies and practices. The Finance Agency’sAgency has issued a rule setting forth requirements and processes with respect to compensation provided to certain executive officers by FHLBanks, andincluding the Office of FinanceBank. The rule addresses the authority of the Director of the Finance Agency Director toto: (i) approve disapprove, prohibit, or withhold compensation of certainnamed executive officers of the FHLBanks and the Office of Finance. The rule also addresses the Director’s authority to approve, in advance,officer agreements or
contracts of certain executive officers that provide for compensation in connection with termination of employment. The rule prohibitsemployment and (ii) review the compensation arrangements of named executive officer of the FHLBanks and to prohibit an FHLBank or the Office of Finance from payingproviding compensation to certainany named executive officersofficer that the Director of the Finance Agency determines is not reasonable and comparable towith compensation paid byfor employment in other similar businesses forinvolving similar duties and responsibilities.
Our Executive Compensation Philosophy and Executive Compensation Program
The Bank has a Board-approved Executive Compensation Philosophy that forms the basis of our executive compensation program. In accordance withThe goal of our Executive Compensation Philosophy, we believe thatexecutive compensation program is to set compensation at a level which allows us to attract, motivate, and retain outstandingtalented executives we must be able to provide an executive compensation package that is competitivewho can enhance our business performance and appropriately motivates and rewards the executive officers who make contributions of special importance to the success of the Bank's business.help us fulfill our mission. Our executive compensation program provides total remuneration, which includes base salary, short- and long-term cash incentive compensation, and retirement benefits.
and other benefits which reflect total compensation that is consistent with individual performance, business results, job responsibility levels and the competitive market.
The Bank'sBank’s Executive Compensation Philosophy states that total compensation is intended to align the interests of the executives and key employees with the short-term and long-term interests of the Bank,Bank; to ensure an appropriate level of competitiveness within the marketplace from which the Bank recruits executive talent,talent; and to encourage the executives and other key employees to remain employed withby the Bank. The Bank'sBank’s Executive Compensation Philosophy provides that total remuneration (base salary, short- and long-term cash incentives, and retirement benefits) is also intended to motivate executives to deliver exceptional performance without encouraging unnecessary or excessive risk-taking.
Total Compensation is Intended to Reward ContributionContributions to the Bank'sBank’s Corporate Goals and Performance Targets and Achievement of Individual Performance Goals. We have structured our executive compensation program to reward contributions by executives in support of the Bank'sBank’s corporate goals and performance targets, including those set forth in the Bank'sBank’s strategic plan, and achievement of individual performance goals. In addition to base salary, our cash incentive compensation plans create an award program for executives who contribute to and influence the achievement of the Bank'sBank’s mission and other key objectives contained in the Bank'sBank’s strategic plans, and who are responsible for the Bank'sBank’s performance. The Bank'sBank’s overall executive compensation programs reward sustained performance through the balanced use of short- and long-term incentives, which represent a substantial portion of pay at-risk,pay-at-risk, and through competitive retirement benefits, which promote the alignment of executive and Bank interests over the long term.
Beginning with 2017, the Board replaced the Bank’s traditional short- and long-term executive incentive plans as part of the Bank’s overall compensation program and effectively combined short-term and long-term executive incentive programs into one omnibus incentive plan for all senior executive officers (the Executive Incentive Plan, “EIP”). See “Executive Incentive Plan” below for a discussion of the EIP for 2017. For information regarding the Bank’s traditional short-term executive incentive plans (e.g., the 2016 President’s Incentive Plan and the 2016 Executive Incentive Plan) and traditional long-term executive incentive plan (e.g., the 2016 Executive Performance Unit Plan), see the discussion in “Item 11. Executive Compensation – Compensation Discussion and Analysis – Elements of Our Executive Compensation Program – Short-Term Cash Incentive Plans: President's Incentive Plan and Executive Incentive Plan” and “Long-Term Cash Incentive Plan: Executive Performance Unit Plan” in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2016.
Each Year, the Bank Establishes Specific Corporate Goals Consistent with the Bank'sBank’s Strategic Plan. For 2017,2023, the Board adopted four corporate goals: the Risk ManagementBusiness and Financial goal, the Franchise EnhancementRisk Management goal, the Community Investment goal, and the Organizational Health/Diversity, Equity, and Inclusion goal.
For 2017, the Risk Management goal focused management on the Bank’s Technology Resiliency initiative with the objective of implementing critical business process applications(DEI) and mitigating certain physical location risks. In addition, the Risk Management goal focused management on business continuity and crisis management by continuing to enhance the Bank’s recovery resilience by further maturing the enterprise crisis management framework through increased crisis team member preparedness, along with continued integration of the Bank’s
information services disaster recovery and information security incident response protocols to ensure a cohesive recovery.
People goal.
The Franchise EnhancementBusiness and Financial Goal
The Business and Financial goal for 2017 had three components. 2023 was comprised of four goal components: (i) Financial Performance – Adjusted Return on Capital (AROC) Spread; (ii) Operating Efficiency – Operating Expense Management; (iii) Member Business – Advances and Letters of Credit Volume; and (iv) Member Business – Product Utilization.
The first was a financial performance goal component, measuring the adjusted return on capital spread to a designated benchmark. ThisFinancial Performance goal component recognized that among the many attributes of Bank membership, an adequate financial return on the private capital that members contribute to the cooperativeBank is important to the members as shareholders. The financial performance goal componentshareholders and was expressed as a target adjusted return on capitalpercentage of AROC spread, (AROCS), which is the adjusted return on capital less the benchmark yield on capital. ThisThe Target Range (100%) level of achievement was set equal to 3.50% to 4.25% or 1.24% to 1.99% above the 2023 base case financial projections in the Bank’s 2023-2025 Strategic Plan (Plan). The Maximum goal was 5.00%, reflecting the Plan optimistic scenario plus an add-on to increase its stretch.
The Operating Efficiency goal component was based onincentivizes operating at or below the 2017 financial plan. AchievementBank’s approved 2023 operating expense budget of $168 million and demonstrates the Meetsimportance of cost management and operating efficiency. The Target Range (100% of target)) level of 3.06% AROCS requiredachievement was set at the 2023 operating expense budget to $2 million below budget, or $168 million, to $166 million. Minimum achievement level was set equal to 2023 operating expenses that the Bank:
price advances such that balances are maintained without diluting financial return;
generate $280$3 million, in spread earnings from the Bank’s portfolio of mortgage-backed securities and mortgage loans; and
manage operating costs within 2017 budget levels while continuing to meet all strategic and operating objectives.
This goal component was designed to be reasonably challenging to accomplish because, among other things, it required the Bank to generate pre-assessment net income (excluding the impact of other-than-temporary impairment charges and gains on litigation settlements) significantlyor 2.0%, higher than 2017 projections to reach and exceed the target levels. Given the limited options the Bank has to increase earnings while staying within the Bank’s risk tolerances, the achievement levels above target represented significant stretch objectives.
The second component of the Franchise Enhancement goal was to implement the Bank’s operating cost efficiency initiative, which required the Bank to perform analyses and develop preliminary objectives and operational plans leading to improved operating efficiency and meaningful and sustainable long-term annual run-rate2023 operating expense reductions, relativebudget, while the Maximum level of achievement was set equal to 2023 operating expenses that are $10 million, or 6.0% lower than the 20162023 operating expense budget.
The third componentMember Business – Advances and Letters of the 2017 Franchise EnhancementCredit Volume goal was designed to focus management on member business by: (i) achievingand measure how well the Bank maintained and increased the volume of advances and letters of credit targeted volumes;outstanding to members, which is a key to enhancing the Bank’s member business franchise and (ii) increasing member engagement.fulfilling the Bank’s mission. The Board set the targetTarget Range level of achievement levels for the targeted advances and letters of credit volumes based on various assumptions, such as economic forecasts, member information, potential member business, historical goal performance, industry trends and events, and current market environment and conditions, such that the relative difficulty of achieving the target levelTarget volume levels was commensurate with extending credit to members in a safe and sound manner. The Target Range for the advances and letters of credit volume goal was set equal $90 billion to $100 billion, significantly above the 2023 base case in the Plan of $80.9 billion. The Maximum level of achievement for this goal component was $125 billion, reflecting the Plan optimistic scenario plus an add-on to increase stretch. The Minimum achievement level was set equal to the Plan pessimistic scenario of $55.3 billion.
The Member Business – Product Utilization goal was designed to focus management on member business and measure how well the Bank increased member engagement by encouraging members that did not use advances or letters of credit products in 2022 to use these products in 2023. The Target level of achievement was set equal to the average conversion rate from 2019 to 2022, or 40%. The Minimum and Maximum levels, 30% and 60% respectively, were informed by the high and low conversion rates over the prior three years.
The Risk Management Goal
The Risk Management goal was comprised of three components: (i) Climate Risk Management; (ii) Consolidated Supplier Cyber Risk Management; and (iii) Information Security Risk Management.
The first Risk Management goal component was intended to create and implement a Climate Change Risk Framework that will outline the Bank’s governing principles around associated risks and help operationalize identification, measurement, monitoring, and management of these risks. The Climate Risk Management goal component was an initiative goal and consisted of three distinct independent goal Targets. Each goal Target was equally weighted, and achievement was measured based on the number of goal Targets fully completed in 2023.
The Consolidated Supplier Cyber Risk Management goal component was designed to enhance capabilities to better equip the Bank to monitor and evaluate cyber related risks, including enabling management to respond more efficiently to supplier cyber breaches and reduce the potential negative impact on Bank operations. The Consolidated Supplier Cyber Risk Management goal component was an initiative goal and consisted of three distinct independent goal Targets. Each goal Target was equally weighted, and achievement was measured based on the number of goal Targets fully completed in 2023.
The Information Security Risk Management goal was designed to improve the Bank’s information security first line of defense by incentivizing the workforce to participate in optional training and test taking, in addition to the Bank’s required training courses, and the successful identification of simulated and real phishing attempts. As employees increase their knowledge of information security concepts, practices, and resources they will become better equipped to identify, report, and appropriately react to information security attacks that may directly or indirectly target them. The levels of achievement were informed by the number of 2022 Security Champions (30% of workforce). The Target level of achievement was 40%, or 10% higher than 2022 and the Minimum and Maximum levels of achievement were set equal to 30% and 60%, respectively.
The Community Investment Goal
The Community Investment goal for 2023 was comprised of two components: (i) the Nevada Targeted Program; and (ii) Community Investment Program (CIP), Advances for Community Enterprise (ACE) Program, Letters of Credit, and Access to Housing and Economic Assistance for Development (AHEAD) Program Product Utilization.
For the first Community Investment goal component, the Bank committed to take steps to increase the participation of Nevada sponsors and members in Community Investment Programs (CIP), and more specifically, in the Affordable Housing Program (AHP) General Fund. As a result, the Bank sought to launch, receive applications, and award funds for its Nevada AHP Targeted Fund in 2023. The Community Investment Nevada Targeted Program goal component was an initiative goal and consisted of three distinct independent goal Targets. Each goal Target was equally weighted, and achievement was measured based on the number of goal Targets fully completed in 2023.
Consistent with the Bank'sBank’s public policy purposes,purpose, the second Community Investment goal for 2017component focused management on meeting the Bank'sBank’s objective to make availableof making advances and credit programs that promote and assist housing and community economic development activities andavailable to provide resources and assistance to membersmembers. Achievement in achieving their community lending goals. These efforts both complement and constitute elementsthis area is a key element of the Bank's core businessBank’s mission objectives, and mission endeavors. The Community Investmentthe participation of Bank members is critical. This goal for 2017 included achievement levels forfor: (i) the number of unique members that used an advance or letter of credit under the Community InvestmentCIP or ACE Program (CIP) or Advances for Community Enterprise (ACE) Program and (ii) the number of unique members that participatedreceived an award in the Access to Housing and Economic Assistance for Development (AHEAD)AHEAD Program during 2017.
2023.
The Organizational Health/Diversity, Equity, and Inclusion (DEI) and People Goal
The DEI and People goal recognized that organizational health and culture play an important role in maximizingfor 2023 comprised of a single goal designed to enhance DEI data management, increase the long-term performance and successpercentage of the Bankworkforce that achieves Diversity Champion status, and improve employee retention. The DEI data management goal incentivizes new or enhanced tools and improved processes that promotingminimize opportunity for human error, improve quality controls, and reduces manual effort for management and regulatory reporting of DEI data and trends. Like the Security Champions goal, the Diversity Champions goal incents the Bank’s workforce to achieve Diversity Champions status to deepen individual understanding and adoption of diversity and inclusion is integral to achieving this objective. This goal specifically recognizedinclusive behaviors that placing a high value on the individual skills, talents, ideas, viewpoints, and experiences ofreinforces the Bank’s team members helps the Bank gain a broader perspective when it comescommitment to meeting the diverse and changing needs of our members and the communities the Bank serves and that promoting vendor and supplier diversity at all levels of the Bank directly contributes to the Bank’s mission of fostering strong and vibrant communities through economic development opportunities. For 2017, this goal focused the Bank on:DEI while providing diversity and inclusion training to all employees, developing and implementing a formal supplier diversity program, presenting a “Leadership Series” for key groups of women and m
an environment where each employee has
a sense of belonging. The workforce turnover incentivizes management to provide people managers with additional tools, training, and resources to retain and develop critical team members by aiming to keep voluntary turnover below 10%. The DEI and Talent goal is an initiative goal and consists of three distinct independent goal Targets. Each goal Target is equally weighted, and achievement was measured based on the number of goal Targets fully completed in 2023.
inorities in Bank leadership positions (Women in Leadership Series and Minorities in Leadership Series), and developing and implementing a formal minority, women, and disabled internship program.
Each Year, the Bank Establishes Individual Goals for Executives Consistent with the Bank'sBank’s Strategic Plan. The individual performance goals established for executive officers are generally based on the Bank's strategic planBank’s Strategic Plan and reflect the strategic objectives that will enable the Bank to successfully achieve its mission. The Bank’s 2023 strategic objectives for 2017 were intended to: strengthen(i) enhance membership value and business utilization; (ii) continually improve organizational performance; (iii) attract, develop, inspire, and retain high performing talent; and (iv) expand community investment impact across the Bank's financial and member services franchise; reduce thedistrict.
The Bank’s core operating expenses relative to the 2016 Budget to a sustainable and scale-appropriate level while retaining and enhancing the Bank’s ability to efficiently and effectively deliver value to members, manage risks, and satisfy compliance obligations; promote and enhance the effectiveness of the Bank’s Affordable Housing Program and Community Investment Programs; strengthen the Bank’s organizational effectiveness by enhancing the Bank’s working environment and advancing diversity and inclusion; and position the Bankas a proactive thought-leader for members and the FHLBank System.
The Bank's Executive Incentive Compensation Plans were Designed to Calculate Executive Officers' Achievement Levels on a Weighted Basis to Ensure a Proper Balance in Achieving the Bank'sBank’s Mission in a Safe and Sound Manner. With respect to each of the named executive officers for 2017,2023, the achievement levels of each of the four Bank corporate goals (the Risk ManagementBusiness and Financial goal, the Franchise EnhancementRisk Management goal, the Community Investment goal, and the Organizational Health/DiversityDEI and InclusionPeople goal) were weighted for each officer type (president, executive vice president, senior vice president, and senior vice president and chief risk officer) based on their respective roles and areas of oversight. The four Bank corporate goals were weighted at 90%80% in the aggregate andwith the individual goal weighted at 10%20% of the total weighted achievement level for each officer. See “Elements of Our Executive Compensation Program – Executive Incentive Plan” below for the individual corporate goal weights.
The weightings of the Bank'sBank’s corporate goals were approved by the Board and were designed to appropriately focus senior management on accomplishing the Bank'sBank’s mission and strategic plan. See “Executive Incentive Plan” below for a discussion of the relative weights given to corporate goals and individual goals for each component of the Executive Incentive Plan (EIP) for 20172023 for the named executive officers.
Our Executive Compensation Program is Designed to Enable the Bank to Compete for Highly Qualified Executive Talent. Our members are best served when we attract and retain talented executives with competitive and fair compensation packages. In 2017, our objective was to create an executive compensation program that delivered2023, the Bank evaluated total compensation packages that generally fellremuneration around the median (50th percentile)50th percentile of the total remuneration in the financial services marketplace from which the Bank recruits executive talent, which may includeincluding regional and community banks and diversified financial institutions, while maintaining an appropriate alignment with the practices of other FHLBanks.
The Compensation Committee recognized that comparing our compensation practices to a group of other financial services and banking firms that are similar in total assets presents some challenges because of the special nature of our business and our cooperative ownership structure. We believe that the executive roles of our named executive officers are somewhat comparable to those in the comparison group, although the Bank may have a narrower business focus.
Our named executive officers are required to have the same depth of knowledge and experience that is required by comparable financial services and banking firms require, but, unlike some of these comparable companies with multiple lines of business, our lines of business are limited. For example, in certain areas of the Bank our focus is more like that of a specific subsidiary, division, or business unit of comparable financial institutions with multiple lines of business.
For purposes of developing comparative compensation information, the companies with comparable positions were financial services and banking firms with similar business sophistication and complexity. In supporting compensation decisions, the Compensation Committee uses and considers compensation information about the comparable positions at these companies. Each element of compensation may vary somewhat above or below the market median offor the related comparisons.positions in the comparison groups. Furthermore, compensation levels for individual levelspositions may also be adjusted to recognize
additional factors, such as regional salary differences, recruitment or retention, special duties or responsibilities, sustained performance results, leadership succession planning, and/orand internal equity considerations.
Since 2014, the Compensation Committee has engaged McLagan Partners, Inc. (McLagan), a leading global management consulting firm providing consulting and benchmarking services for the financial services industry, for
the purpose of providing the Compensation Committee with annual competitive market compensation reference and comparative information. During 2017, McLagan also provided advice to the Compensation Committee on amendments to the Bank’s Supplemental Executive Retirement Plan and on director compensation. McLagan does not currently provide any other services to the Bank. In September 2017,2023, McLagan assessed the Bank’s competitive market position with respect to its executive compensation program. McLagan used market data collected from its compensation surveys and publicly available proxy data. McLagan used standardized peer group data from three groups: commercial banks with incumbents located in metro San Francisco and metro New York; metro Federal Home Loan Banks (Atlanta, Chicago, and New York);the other FHLBanks; and public proxy peers with assets between $10 billion and $20 billion. When comparing Bank executives usingwith those at commercial banks, specific job positionsthe closest comparable roles/realistic employment opportunities were used. When comparing Bank executives to executive roles at other Federal Home Loan Banks,FHLBanks, overall functional heads were used. When using the $10 billion to $20 billion peer group a directfor comparison, of top paid executivesactual functional roles or salary rank was made regardless of position.used. The Compensation Committee used the McLagan market data as a reference point for evaluating 20172023 executive compensation levels and to check, evaluate, and compare the reasonableness and appropriateness of the levels of compensation provided to our senior executives.
Allocation of Short-Term Cash Incentive Compensation and Long-Term Cash Incentive Compensation. Our objective is to compensate our senior executives, including our named executive officers, with a balanced combination of base salary and short- and long-term cash incentive compensation.
We believe that a balanced approach in delivering short- and long-term cash incentive compensation is most appropriate for the Bank because we believe our executives should be focused on achievement of both short- and long-term goals. Consistent with the Bank'sBank’s three-year strategic plans and its Executive Compensation Philosophy, long-term cash incentive compensation helps provide a competitive total cash compensation package and enhances the Bank'sBank’s ability to attract and retain key executives.
The Bank’s short-term cash incentive compensation component of the EIP rewards the named executive officers and other executive officers for the Bank'sBank’s achievement of its annual corporate goals and performance targets and for the officer's achievement of his or her individual goals. The Bank’s long-term cash incentive compensation rewards the named executive officers and other executive officers for the Bank's achievementcomponent of its goals and performance targets over a three-year period.
Beginning in 2017 under the EIP we restructured the traditional long-term cash incentive component of our compensation program to tieties long-term cash incentive rewards to the sustainability of goal achievements over a long-term period, rather than to the achievement of goals over a prospective three-year period. This change was madestructure is designed to promote the Bank’s long-term health by deterring behavior or inappropriate risk-taking that could lead to material financial loss at the Bank. This approach and design for long-term compensation is consistent with developing practices to better recognize risk outcomes in incentive-based compensation decision making and to better balance risk and reward.
Elements of Our Executive Compensation Program
Base Salary Compensation
Base salary compensation is a key component of the Bank'sBank’s executive compensation program and helps the Bank successfully attract and retain executive talent. Base salary for the named executive officers is based on a combination of factors, including comparative salary information from industry salary surveys that include the financial institutions in the Bank'sBank’s peer groups. Other factors include the named executive officer's relevant experience and accomplishments and level of responsibility at the Bank and perceived market competition for
executives with comparable levels of experience. The Board considers any base salary adjustments for the named executive officers, ateffective as of the beginning of each year, based on the individual's performance and contributions to the Bank'sBank’s achievements or to help more appropriately align total remuneration with comparable positions in the financial services marketplace.
Base salary adjustments for the named executive officers are subject to review and non-objection from the Finance Agency. For the base salaries of the current named executive officers, see the discussion in “Compensation Tables – Narrative to Summary Compensation Table and Grants of Non-Equity Incentive Plan-Based Awards Table – At Will Employees.”
Executive Incentive Plan
Beginning with 2017, theThe Board adopted the Executive Incentive Plan (EIP),EIP, which provides for an annual total incentive award (Annual Award) for a one-year performance period. Fifty percent (50%) of the Annual Award is earned and vested after the last day of the one-year performance period (Year-End Award). The remaining fifty percent (50%) of the Annual Award is deferred for a three-year performance period (Deferred Award). The EIP also provides for a one-time incentive award to address a payment gap in long-term executive incentive compensation in 2020 for the performance period from 2017-2019 (Gap Year Award), which arises because of the discontinuation in 2017 of the Bank’s traditional long-term executive incentive plan. The EIP replaces the Bank’s traditional short-term and long-term executive incentive plans as part of the Bank’s overall compensation program and effectively combines short-term and long-term executive incentive programs into one omnibus incentive plan for all senior executive officers.
The EIP is designed to attract and retain senior executive officers and to motivate and focus their efforts on achieving the Bank’s business plan and accomplishing its goals and objectives while
maintaining the safety and soundness of the Bank. The EIP is a cash-based incentive plan that provides award opportunities based on achievement of performance goals and the satisfaction of certain qualifiers.
The EIP provides for an annual total incentive award (Annual Award) for a one-year performance period. Fifty percent (50%) of the Annual Award is earned and vested after the last day of the one-year performance period (Year-End Award). The remaining fifty percent (50%) is deferred (Deferred Award) for a three-year period (“Deferral Performance Period”) during which payment is conditioned upon the Bank's seniorsatisfaction of certain “qualifiers” (discussed below) that recognize the risk outcomes of executive officers (specifically for 2017,decision making. Deferred Awards may be reduced or subject to forfeiture if qualifiers are not met during the president, executive vice president, and each senior vice president, excluding the Chief Audit Executive, who participates in the Bank's Audit Executive Incentive Plan).
Deferral Performance Period. The deferral component of the EIP ties long-term cash incentive rewards to the sustainability of goal achievements, over a three-year period, which is intended to, among other things, promote the Bank’s long-term health by deterring behavior or inappropriate risk-taking that could lead to material financial loss to the Bank. Under the Deferred Award provisions of the EIP, payment of fifty percent (50%) of the total Annual Award is deferred for a three-year period, during which payment is conditioned upon the satisfaction of certain “qualifiers” that recognize the risk outcomes of executive decision making. Deferred Awards may be reduced or subject to forfeiture if qualifiers are not met during the Deferral Performance Period (defined below).
The EIP provides that the Board will establish award levels prior to each of the performance periods for the Annual Awards and Deferred Awards. A performance period for an Annual Award is the one-calendar-year period over which fifty percent (50%) of the Annual Award can be earned and vested, i.e., the Year-End Award, (Annual Performance Period). The related Deferred Award can vest following the three-calendar-year performance period (Deferral Performance Period). For the Gap Year Award, the performance period is the three-year period beginning on January 1, 2017, and ending on December 31, 2019 (Gap Year Performance Period).
Performance goals and qualifiers are the factors established by the Board for each performance period and are taken into consideration in determining the amount of an award. Under the EIP for 2023, the Board established the following 2023 performance goals for the Annual Award: the business and financial goal; risk management goal, community investment goal, and DEI and people goal. The Board will define “Threshold,defined “Minimum,” “Meets,” “Exceeds,” and “Far Exceeds”“Maximum” achievement levels for each performance goal to determine the amount of the award. Performance goal measures range from 75% of Target (Minimum) to 150% of Target (Maximum). The Board may adjust the performance goals and qualifiers for any performance period to ensure the purposes of the EIP are served. The EIP provides that inIn determining the appropriate performance goals and qualifiers the Board will, among other things:
•balance risk and financial results in a manner that does not encourage participants to expose the Bank to imprudent risks;
•make such a determination in a manner designed to ensure that a participant’s overall compensation is balanced and not excessive in amount and that the awards are consistent with the Bank’s policies regarding compensation arrangements; and
• monitor the success of the performance goals and qualifiers, taking into account weighting established in prior years and making appropriate adjustments in the future, as needed, so that payments appropriately incentivize participants, appropriately reflect risk, and align with regulatory guidance.
Under the EIP for 2017, the Board established 2017 performance goals for the Annual Award which are the: Risk Management goal, Franchise Enhancement goal, Community Investment goal, and Organizational Health/Diversity and Inclusion goal.
For the 20172023 performance goals, the following table shows the goal weights for different categories of officers.
|
| | | | | | | | | | | |
| | CEO/EVP/SVPs | | SVP, Chief Risk Officer |
| | Corporate Goal Weight |
| | Goal Weight (includes individual goals) |
| | Corporate Goal Weight |
| | Goal Weight (includes individual goals) |
|
| Individual | N/A |
| | 10.0 | % | | N/A |
| | 10.0 | % |
| Risk Management | 20.0 | % | | 18.0 | % | | 50.0 | % | | 45.0 | % |
| Franchise Enhancement | 40.0 | % | | 36.0 | % | | 30.0 | % | | 27.0 | % |
| Community Investment | 20.0 | % | | 18.0 | % | | 10.0 | % | | 9.0 | % |
| Organizational Health/Diversity and Inclusion | 20.0 | % | | 18.0 | % | | 10.0 | % | | 9.0 | % |
| Total | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
For the Gap Year Award, executives are rewarded for the achievement of performance goals over a three-year performance period like the Bank’s traditional long-term cash incentive plans (i.e., the Bank’s Executive Performance Unit Plan or EPUP). For the Gap Year Award, the Gap Year Performance Period is from January 1, 2017,senior executive officers eligible to December 31, 2019. The Gap Year Award performance goals, which are weighted and measured based on a 3-year average, relate to the (AROCS) and risk management.
The following table shows the performance goals and goal weights for the Gap Year Award.
|
| | | | | | | | | | | | | | |
| Goals | Goal Weight |
| | Threshold |
| | Meets (Target) |
| | Exceeds |
| | Far Exceeds |
|
| AROCS Goal (3-Year Average Spread Over Benchmark) | 30 | % | | 2.18 | % | | 2.43 | % | | 2.68 | % | | 2.93 | % |
| Risk Management | 70 | % | | Based on the 3-year average of the actual Risk Management goal achievement levels
for 2017, 2018, and 2019 |
Forparticipate in the EIP for 2017, performance goal measures range from 75% of target (threshold) to 150% of target (far exceeds)(including the named executive officers and the chief risk officer).
| | | | | | | | | | | | | | | | | | | | | | | |
| Senior Executive Officers (other than the Chief Risk Officer) | | Chief Risk Officer |
| Corporate Goal Weight | | Goal Weight (includes individual goals) | | Corporate Goal Weight | | Goal Weight (includes individual goals) |
| Individual | N/A | | 20.0 | % | | N/A | | 20.0 | % |
| Business and Financial | 45.0 | % | | 36.0 | % | | 28.0 | % | | 22.0 | % |
| Risk Management | 20.0 | % | | 16.0 | % | | 50.0 | % | | 40.0 | % |
| Community Investment | 15.0 | % | | 12.0 | % | | 9.0 | % | | 8.0 | % |
| DEI and People | 20.0 | % | | 16.0 | % | | 13.0 | % | | 10.0 | % |
| Total | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
The target achievement levels in the EIP for 20172023 were designed to reward senior executive officers for achievement of the Bank'sBank’s corporate goals and objectives as described above, based on a targetTarget level of achievement for all corporate goals and the officer's individual goal(s). The exceeds and far exceedsMaximum achievement levels werelevel was designed to reward senior executive officers when the Bank and the individual officer achievements far exceed the targetTarget level. The exceedsMaximum achievement level is an optimistic achievement level relative to the target level, and the far exceeds achievement level as the most optimistic achievement level based on reasonable business, market, and economic assumptions and conditions.
The performance goal measures and plan design were intended to appropriately motivate and reward the Bank’s senior executive officers based on the total achievement of all goals, taking into accountconsidering each senior executive officer’s role in the Bank'sBank’s performance. Setting the performance goal measure ranges based on a percentage of base salary for 2017
2023 is intended to be consistent with our Executive Compensation Philosophy of deliveringevaluating total cash compensation at target levels generally remunerationaround the median (5050th percentile) percentile of the total remuneration in the financial services marketplace from which the Bank recruits executive talent.
The total incentive awards under the EIP, i.e., the Annual Awards, are determined by multiplying the percentage of achievement for each goal by the respective performance goal weights to arrive at each participating officer's total weighted achievement level. Each participating officer's total weighted achievement level is then used to determine each participating officer's cash incentive compensation award under the EIP.
The following table shows the total incentive award opportunitieslevels for the Annual Awards and the allocation of the Annual Award opportunities between the Year-End Awards and the Deferred Awards for 2017.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Annual Award as % of Compensation (Base Salary) | | Year-End Award as % of Compensation (Base Salary) | | Deferred Award as % of Compensation (Base Salary) |
| | Threshold |
| Meets (Target) |
| Exceeds |
| Far Exceeds |
| | Threshold |
| Meets (Target) |
| Exceeds |
| Far Exceeds |
| | Threshold |
| Meets (Target) |
| Exceeds |
| Far Exceeds |
|
| CEO/EVP/SVPs | 40 | % | 80 | % | 96 | % | 100 | % | | 20 | % | 40 | % | 48 | % | 50 | % | | 20 | % | 40 | % | 48 | % | 50 | % |
The following table shows2023 under the total incentive award opportunitiesEIP for the Gap Year Award.eligible senior executive officers.
|
| | | | | | | | |
| | Long-Term Incentive Award as a % of Compensation (Base Salary effective February 1, 2017) |
| Position | Threshold |
| Meets (Target) |
| Exceeds |
| Far Exceeds |
|
| CEO/EVP/SVPs | 20 | % | 40 | % | 48 | % | 50 | % |
Fifty percent (50%) of the Annual Award, i.e., the Year-End Award, will become vested on the last day of the Annual Performance Period (as mentioned above) and the remaining fifty percent (50%) of the Annual Award that is treated as the Deferred Award will become vested on the last day of the Deferral Performance Period, provided that the Board determines that the performance goals for the Annual Award are achieved and the qualifiers for the Annual Performance Period are satisfied; and with respect to the Deferred Award only, the qualifiers for the Deferral Performance Period are satisfied. The Gap Year Award will become vested over a three-year Gap Year Performance Period (i.e., beginning on January 1, 2017, and ending on December 31, 2019), to the extent the Board determines the performance goals for the Gap Year Award are achieved and the qualifiers are satisfied.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Annual Award as % of Base Salary | | Year-End Award as % of Base Salary | | Deferred Award as % of Base Salary |
| Title | Minimum | Meets | Maximum | | Minimum | Meets | Maximum | | Minimum | Meets | Maximum |
| CEO | 50.0 | % | 80.0 | % | 100.0 | % | | 25.0 | % | 40.0 | % | 50.0 | % | | 25.0 | % | 40.0 | % | 50.0 | % |
| Senior Executive Officers (other than the CEO) | 40.0 | % | 65.0 | % | 85.0 | % | | 20.0 | % | 32.5 | % | 42.5 | % | | 20.0 | % | 32.5 | % | 42.5 | % |
Vesting of any award is subject to the participant receiving a satisfactory performance rating and being actively employed on the last day of the relevant performance period, except in certain cases, such as termination because of death or disability, retirement, reduction in force, department reorganization, or substantial job modification, or termination for “Good Reason”Good Reason or without “Cause.”Cause, or “Change in Control” (as defined in the EIP), and subject to certain conditions being met. In the case of termination of employment because of death or disability,such cases, the EIP provides that a Deferred Award will be treated as fully vested as of the date of termination and the relevant pro rata portion of the Annual Award or Gap Year Award will be treated as vested for that portion of the relevant performance period based on the assumption that the Bank would have achieved the applicable performance goals at the targetTarget level and satisfied the qualifiers for the relevant performance period. In all other such cases of termination of employment, the EIP provides that a Deferred Award will be treated as fully vested as of the date of termination of employment and the relevant pro rata portion of the Annual Award or Gap Year Award will be treated as vested for that portion of the relevant performance period to the extent determined by the Board that the applicable performance goals are achieved and the qualifiers are satisfied.
If a “Change in Control” occurs prior to the date of vesting of an award, then an Annual Award or Gap Year Award will be paid on a pro rata basis based on the assumption the Bank would have achieved the applicable performance goals at the target level and satisfied the qualifiers for the relevant performance period, while any Deferred Award will be treated as vested effective as of the date of the Change in Control.
The following are the performance qualifiers for 20172023 for any awards under the EIP: (i) no submission of material information to a regulatory or a reporting agency is significantly past due; (ii) the Bank makes sufficient progress, as determined by the Board, in the timely remediation of significant examination, monitoring, and other supervisory findings; (iii) no material risk management deficiency exists at the Bank; (iv) no operational errors or omissions result in material revisions to the financial results, information submitted to the Finance Agency, or data used to determine incentive payouts; and (v) the Bank has sufficient capital to pay dividends and the ability to repurchase or redeem capital stock.
The EIP provides that awards may be reduced, eliminated, or forfeited in certain circumstances. Under the EIP, the Board may reduce or eliminate any award not yet paid if the Board finds that a serious, material safety and
soundness issue or a serious, material risk management deficiency exists at the Bank, or if: (i) errors or omissions result in material revisions to the Bank’s financial results, information submitted to a regulatory or a reporting agency, or information used to determine incentive compensation payouts; (ii) information submitted to a regulatory or a reporting agency is untimely; or, (iii) the Bank does not make appropriate progress, as determined by the Board, in the timely remediation of examination, monitoring, or other supervisory findings and matters requiring attention.
In addition, if the Bank realizes actual losses during the Deferral Performance Period, or other measures or aspects of performance related to the annualAnnual Performance Period or Deferral Performance Period are realized that would have caused a reduction in the amount of the final award (i.e., the amount of the earned and vested award that, after any adjustments, is approved by the Board for payment)Annual Award and Deferred Award) calculated for the Annual Performance Period or Deferral Performance Period, then the remaining amount of the final award to be paid at the end of the Deferral Performance Period may be reduced to reflect this additional information. Furthermore, if a participant breaches the terms of a non-solicitation and non-disclosure agreement with the Bank executed as a condition to participating in the EIP, all of the participant’s unpaid vested and unvested awards may be forfeited.
Finally, if during the most recent examination of the Bank by the Finance Agency, the Finance Agency identifies an unsafe or unsound practice or condition that is material to the financial operation of the Bank within the participant’s area(s) of responsibility, and such unsafe or unsound practice or condition is not subsequently resolved to the satisfaction of the Board, then all or a portion of a participant’s unpaid award (vested and unvested) may be forfeited as determined in the sole discretion of the Board. Any future payments for a vested award will cease, and the Bank will have no further obligation to make such payments.
The amount of any award will be determined at the sole discretion of the Board. If the qualifiers are satisfied, an annual compounding interest rate of 6% is applied to any Deferred Awards. Awards, if any, under the EIP are to be paid in accordance with the terms of the EIP following Board approval and completion of any required regulatoryFinance Agency review.
The EIP for 2023 also includes a “cap” on the total incentive award payout for any particular year where the sum of the Year-End Award plus the Deferred Award vesting after three years and the interest earned on such Deferred Award does not exceed the senior executive officers’ base salary for that calendar year.
The amount of any earned and vested Annual Award Deferred Award, or Gap YearDeferred Award may be modified at the Board’s discretion to account for performance that is not captured in the relevant performance goals and qualifiers. The Board, in its discretion, may also consider “extraordinary occurrences”“Extraordinary Occurrences” when assessing performance results and determining any of the awards. “Extraordinary Occurrences” mean those events that, in the opinion and discretion of the Board, are outside the significant influence of the participant or the Bank and are likely to have a significant unanticipated effect, whether positive or negative, on the Bank’s operating or financial results.
The EIP for 2023 also provides that the Board may apply a “multiplier” to an individual’s Annual Award to account for individual performance not captured in his or her individual performance goals, positive or negative, but not to result in an award level below Minimum or above Maximum.
For additional information regarding awards granted under the EIP for 2017,2023, see the discussion in “Compensation Tables – Narrative to Summary Compensation Table and Grants of Non-Equity Incentive Plan-Based Awards Table – Non-Equity Incentive PaymentsCompensation and Non-Equity Long-Term Incentive Payouts,” which discussion is herein incorporated by reference.
Traditional Long-Term Cash Incentive Plan: Executive Performance Unit Plan
The Bank’s traditional long-term cash incentive plan is the Executive Performance Unit Plan (EPUP). For 2017, the 2015 EPUP for the performance period 2015 through 2017 and the 2016 EPUP for the performance period 2016 through 2018 were in effect. For 2018, the 2016 EPUP remains in effect. As discussed above, beginning in 2017, the Bank discontinued offering its traditional long-term executive incentive plan (i.e., the EPUPs) and instead included the long-term cash incentive component of the Bank’s compensation program in the EIP.
The EPUPs were designed to reward our senior executives who are substantially responsible for the Bank's overall long-term performance and who significantly contribute to and influence the Bank's long-term goal achievements, which directly support the Bank's three-year strategic plans. The purpose of the EPUP was also to attract and retain outstanding executives as part of a competitive total compensation program.
The EPUP awards are based on the total weighted achievement level of the three-year average achievement levels of two annual Bank corporate goals during the relevant three-year performance period based on a scale of 0% to 150%, with 100% as the target achievement level. The Bank's corporate goals for the 2016 and 2015 EPUPs include the adjusted return on capital spread goal (weighted at 30%) and the Risk Management goal (weighted at 70%).
The 2016 and 2015 EPUPs identified specific adjusted return on capital spread goal targets for each achievement level and provide that the adjusted return on capital spread goal achievement levels will be based on a comparison of the actual three-year average results with the three-year projected results from the Bank's 2016 and 2015 Strategic Plans, respectively. They also provide that the Risk Management goal achievement levels will be based on the three-year average of the actual Risk Management goal achievement levels under each of the three annual executive incentive plans in effect during the performance period, and will be measured at the end of the performance period.
To calculate an EPUP award, the total weighted achievement level for the two Bank corporate goals is multiplied by the officer's target award percentage (the range of awards as a percentage of base salary, discussed below), which is then multiplied by the officer's base salary in the first year of the three-year performance period.
For the 2016 and 2015 EPUPs, total weighted achievement levels range from 75% of target (threshold) to 150% of target (far exceeds), and the awards as a percentage of base salary for the president, executive vice president, and senior vice presidents, based on the total weighted achievement level of Bank goals, are as follows: achievement level 150% of target: 50% of base salary; achievement level 125% of target: 48% of base salary; achievement level 100% of target: 40% of base salary; and achievement level 75% of target: 20% of base salary.
Under the 2016 and 2015 EPUPs, performance below the aggregate threshold achievement level normally will not result in an incentive award. The Board has discretion to modify any and all goal achievement levels, award determinations, and incentive payments to account for matters not specifically addressed in the plan. Under the 2016 and 2015 EPUPs, incentive compensation reductions may be made in, but are not limited to, the following circumstances: (i) if errors or omissions result in material revisions to the Bank's financial results, information submitted to a regulatory or reporting agency, or information used to determine incentive compensation payouts; (ii) if information submitted to a regulatory or reporting agency is untimely; or (iii) if the Bank does not make appropriate progress in the timely remediation of examination, monitoring, or other supervisory findings and matters requiring attention.
The actual achievement of Bank goals for the 2016 and 2015 EPUPs is subject to adjustment for changes in financial strategies or policies, any significant change in Bank membership, and other factors determined by the Board.
The 2016 and 2015 EPUPs provide that the impacts of credit-related other-than-temporary impairment charges are excluded from the adjusted return on capital spread goal target, but the impacts of actual credit-related other-than-temporary impairment charges are included in the adjusted return on capital spread goal performance measurement, and the impacts of dividend benchmark variances-to-plan are excluded from the adjusted return on capital spread goal performance measurement.
The potential target award ranges as a percentage of base salary are intended to be consistent with delivering total compensation packages at target levels generally around the median (50th percentile) of the total remuneration in the financial services marketplace from which the Bank recruits executive talent.
The awards under the EPUPs are designed to be based in large part on the executive's ability to affect the Bank's long-term performance. For additional information, see discussion in “Compensation Tables – Narrative to Summary Compensation Table and Grants of Non-Equity Incentive Plan-Based Awards Table – Non-Equity Incentive Payments and Non-Equity Long-Term Incentive Payouts,” which discussion is herein incorporated by reference.
The EPUPs provide that executive officers whose Bank employment is terminated because of voluntary normal retirement, disability, or death may receive a prorated award. In January 2017, the 2016 and 2015 EPUPs were amended to allow a pro rata portion of any award to be paid upon termination of employment during the relevant performance period due to: (a) “Retirement;” (b) a termination by participant for “Good Reason;” (c) a termination by the Bank without “Cause" due to the elimination of an individual job or position; (d) the elimination of one or more jobs or positions as a result of a reduction in force or department reorganization; or (e) a substantial job modification resulting in the incumbent being, in the judgment of the Bank, unqualified for or unable to perform the revised job. A pro rata portion of a plan award may be paid for the portion of the relevant performance period during which the participant was employed to the extent determined by the Board that the applicable performance metrics are satisfied. The amendments also provide that if a participant incurs a termination of employment during a performance period due to death or disability, a plan award will be paid for the portion of the relevant performance period during which the participant was employed based on the assumption the Bank would have achieved the “Meets” achievement level for the relevant performance period. The amendments further provide that if a “Change in Control” of the Bank occurs prior to the payment date of a plan award, then a final award will be paid on a prorated basis based on the assumption the Bank would have achieved the performance metrics at the “Meets” achievement level for the relevant performance period. The terms “Retirement,” “Good Reason,” “Meets” and “Change in Control” all have the meanings set forth in the EIP.
Except for payments in the case of death, disability or change in control, any awards are paid following Board approval after the end of the three-year performance period and any required regulatory review period.
Savings Plan
The Bank'sBank’s Savings 401(k) Plan (Savings Plan) is a tax-qualified defined contribution 401(k) retirement benefit plan that is available to all eligible employees, including the named executive officers. Each eligible employee may contribute between 2% and 20%75% of base salary to the Savings Plan. For employees who have completed at least six months of service, the Bank matches a portion of the employee's contribution (50% for employees with less than three years of service, 75% for employees with at least three years of service but less than five years of service, and 100% for employees following five years of service), up to a maximum of 6% of base salary. Employees are always fully vested in employer matching contributions at all times.
contributions.
For 2017,2023, the maximum annual before-tax employee contribution to the Savings Plan was limited to $18,000$22,500 (or $24,000$30,000 for participants age 50 and over), and nonot more than $270,000$330,000 of an employee’s annual compensation could be taken into accountconsidered in computing anthe employee's benefits under the Savings Plan.
Cash Balance Plan and the Financial Institutions Retirement Fund
We began offering benefits under the Cash Balance Plan on January 1, 1996. The Cash Balance Plan is a tax-qualified defined benefit pension plan that covers employees who have completed a minimum of six months of service, including the named executive officers. Each year, eligible employees accrue benefits equal to 6% of their total annual compensation (which includes base salary and short-term cash incentive compensation) plus interest equal to 6% of their account balances accrued through the prior year, referred to as the annual benefit component of the Cash Balance Plan. For 2017,2023, the Internal Revenue Code (IRC) limited the amount of annual compensation that could be considered in calculating an employee's benefits under the Cash Balance Plan to $270,000.
$330,000.
The benefits under the Cash Balance Plan annual benefit component are fully vested after an employee completes three years of service.service, or when the participant reaches age 65. Vested amounts are generally payable in a lump sum or as an annuity when the employee leaves the Bank.
Prior to offering benefits under the Cash Balance Plan, we participated in the Financial Institutions Retirement Fund (FIRF). The FIRF is a multiple-employer tax-qualified defined benefit pension plan. We withdrew from the FIRF on December 31, 1995.
When we withdrew from the FIRF, benefits earned under the FIRF as of December 31, 1995, were fully vested and the value of those benefits was then frozen. As of December 31, 1995, the FIRF calculated each participant's FIRF benefit based on the participant's then-highest three consecutive years' average pay multiplied by the participant's years of service multiplied by 2%, referred to as the frozen FIRF benefit. Upon retirement, participants will be eligible to receive their frozen FIRF benefits.
In addition, to preserve some of the value of the participant's frozen FIRF benefit, we maintain the ratio of each participant's frozen FIRF age 65 annuity to the participant's highest three consecutive years' average pay as of December 31, 1995 (annuity ratio), which we refer to as the net transition benefit component of the Cash Balance Plan. Upon retirement, each participant with a frozen FIRF benefit will receive a net transition benefit under the Cash Balance Plan that equals his or her highest three consecutive years' average pay at retirement multiplied by his or her annuity ratio minus the frozen FIRF benefit.
Benefit Equalization Plan
The Benefit Equalization Plan (BEP) is an unfunded and non-tax-qualified plan that is designed to restore retirement benefits lost under the Savings Plan and Cash Balance Plan because of compensation and benefits limitations imposed on the Savings Plan and the Cash Balance Plan under the IRC.
Annual compensation is determined based on the definition of compensation provided in the respective tax-qualified plans. Participation in the BEP is available to all employees, including the named executive officers, whose benefits under the tax-qualified plans are restricted because of the IRC limitations discussed above.
An employee's benefits that would have been credited under the Cash Balance Plan but for the limitations imposed on the plan under the IRC are credited as Supplemental Cash Balance Benefits under the BEP and the credits accrue interest at an annual rate of 6% until distributed. Each year, employees may also elect to defer compensation earned over the IRC compensation limits to the BEP. For each year that a participant makes deferrals to the BEP, if the amount of the Bank's matching contribution to a participant's account under the Savings Plan is limited because of the IRC compensation limitations, then the Bank will credit to the participant's BEP account an amount equal to the lost matching contribution (up to a maximum of 6% of base salary in the aggregate) under the Savings Plan (participant deferrals and Bank matching contributions are referred to herein as Supplemental BEP Savings Benefits). are credited to the participant’s BEP account. The make-up benefits under the BEP vest according to the corresponding provisions of the Savings Plan and the Cash Balance Plan.
Effective January 1, 2005, in response to IRC Section 409A, we froze the then-existing BEP (now referred to as the Original BEP) and implemented a new BEP conforming to IRC Section 409A and applicable notices and regulations, which changed the participant election process relating to the time and form of benefit payments (referred to herein as the New BEP).
Under the New BEP, a participant's Supplemental Cash Balance Benefits are payable in the form of a lump sum, single life annuity, 50% survivor annuity, or 75% survivor annuity upon termination of employment, a set date or age after termination of employment, becoming disabled after termination of employment, or death. Under the New BEP, a participant's Supplemental BEP Savings Benefits are payable in a lump sum or two to ten annual installments, and payments may commence at termination of employment, retirement, disability, death, or a specific date after termination of employment. In addition, a participant's elections with respect to the time and form of benefit payments are irrevocable unless the election is made 12 months prior to the scheduled distribution date and the new scheduled distribution date is delayed at least five years. If a participant does not elect the time or form of payment, his or her distribution will be a lump sum at termination of employment.
Under the Original BEP,Participants are permitted each calendar year to elect a participant's Supplemental Cash Balance Benefits are paid in a single life annuity commencing at the later of age 65 or termination of employment, unless the participant elects an optionaldifferent time and form of payment. The optional formsdistribution for deferrals made in that calendar year.
Notwithstanding a participant’s election of payment are a lump sum or any other optional form then permitted under the Cash Balance Plan. Under the Original BEP, a participant's Supplemental BEP Savings Benefits are payable in a
lump sum or two to ten installments upon retirement, termination of employment, death, or a specific date after termination of employment. Also, a participant can change the time and form of payment, for the Bank may instead, in its sole discretion, pay a participant’s entire account balance in a single lump sum payment, so long as the participant’s account balance is less than the applicable dollar limit under IRC Section 402(g), which in 2023 is $22,500.Such payment is known as a limited cash out and applies to a participant’s Supplemental Cash Balance Benefit at any time, but if the election provides for payment prior to age 65, then payment will not be made until 12 months after the date the Bank receives the new written election unless the participant elects an immediate lump sum distribution subject to forfeiture of 10% of the lump sum payment. Similarly, a participant may elect at any time to change the payout schedule of one or more of the participant'sand Supplemental BEP Savings Benefit, accounts, provided that no payments will be made according to the new election until 12 months after the date the Bank receives the new written election, unless the participant elects an immediate lump sum distribution subject to forfeiture of 10% of the lump sum payment.
Participants are permitted to make five separate payout elections (a payout dateincluding excess contributions and form of payment) with respect to the Supplemental BEP Savings Benefit under the Original BEP and under the New BEP.
matching contributions.
Deferred Compensation Plan
Our Deferred Compensation Plan (DCP) is an unfunded and non-tax-qualified deferred compensation plan, consisting of three components for employees: (1) employee deferral of current compensation; (2) make-up matching contributions that would have been made by the Bank under the Savings Plan had the base salary compensation not been deferred; and (3) make-up pensionretirement benefits that would have been earned under the Cash Balance Plan had any amount of total annual compensation (base salary and short-term cash incentive compensation) not been deferred. See discussion in “Compensation Tables – Narrative to Non-Qualified Deferred Compensation Table.”
The DCP is made available to all officers of the Bank employees including the named executive officers. Directors are also ableofficers and directors as to defer their director fees under the DCP. The make-up benefits for employee participants under the DCP vest according to the corresponding provisions of the Savings Plan and the Cash Balance Plan.
Effective January 1, 2005, in response to IRC Section 409A, we froze the then-existing DCP (now referred to as the Original DCP) and implemented a new DCP, conforming to IRC Section 409A, which changed the participant election process related to the time and form of benefit payments (referred to herein as the New DCP).
fees.
Under the New DCP, participants' make-up Cash Balance Plan benefits are payable in the form of a lump sum, single life annuity, 50% survivor annuity, or 75% survivor annuity upon termination of employment, a set date or age after termination of employment, becoming disabled after termination of employment, or death. If a participant does not elect a time or form of payment, the benefit is paid in a lump sum upon termination of employment. However, if the participant elects to receive his or her distribution at death and survives to the later
A participant's deferred compensation and the Bank'sBank’s make-up Savings Plan matching contributions credited under the New DCP (including earnings on such amounts) are payable in a lump sum or two to ten annual installments, and payments may commence at termination of employment, retirement, disability, death, or a specific date no earlier than one year from the end of the deferral period. Participant elections with respect toregarding the time and form of Savings Plan-related benefit payments from the New DCPpayment are generally irrevocable unless the election is made 12 months prior to the scheduled distribution date and the new scheduled distribution date is delayed at least five years.certain conditions are met. If a participant does not elect the time or form of payment, his or her distribution will be a lump sum at termination of employment.
For participant-deferred compensation and make-upNotwithstanding a participant’s election of a form of payment, the Bank matching contributions credited under the Original DCP,may instead, in its sole discretion, pay a participant may elect at any time to change the payout schedule of one or more of the participant's accounts, provided that no payments will be made according to the new election until 12 months after the date the Bank
receives the new written election unless the participant elects an immediateparticipant’s entire account balance in a single lump sum distribution subjectpayment, so long as the participant’s account balance is less than the applicable dollar limit under IRC Section 402(g), which in 2023 is $22,500.Such payment is known as a limited cash out and applies to forfeiture of 10% of the lump sum payment.
Participants are permitted to make five separate payout elections (a payout date and form of payment) under each of the New DCP and the Original DCP for distribution of participant deferrals and Bank matching contribution credits.
Under the Original DCP, participants'a participant’s make-up Cash Balance Plan benefits, are payable inincluding participant deferrals and the same form and at the same time as the participants' related benefits under the Cash Balance Plan.Bank’s contributions.
Supplemental Executive Retirement Plan
Effective January 1, 2003, wethe Bank began providing a Supplemental Executive Retirement Plan (SERP) to the Bank'sBank’s eligible senior executive officers, including the named executive officers.officers (other than Mr. Amato). This plan is an unfunded and non-tax-qualified retirement benefit plan that provides a cash balance stylebalance-style benefit to the Bank's senior officers (including the named executive officers) that is in addition to the tax-qualified benefits under the Cash Balance Plan.
The SERP supplements the Cash Balance Plan benefits to provide a competitive postretirement compensation package that is intended to help the Bank attract and retain key senior executive officers who are critical to the success of the Bank.
Benefits under the SERP are based on total annual compensation (base salary and short-term cash incentive compensation, including any deferrals under the Savings Plan, BEP, or DCP) and years of credited service as presented in the table below. In addition, participants
| | | | | | | | | | | |
Years of Credited Service
(As Defined in the Plan) | Amount of Contribution for President (Percentage of Total Annual Compensation) | | Amount of Contribution for Other Participants (Percentage of Total Annual Compensation) |
| Fewer than 5 | 25 | % | | 20 | % |
| 5 or more | 35 | % | | 25 | % |
Participants accrue annual interest equal to 6% of balances accrued through the prior yearend. In addition, SERP benefits are limited to the extent that any participant's total pension retirement income exceeds fifty percent (50%) of the participant's final average pay. Final average pay is defined as a participant's highest average annual compensation during any three consecutive years during which he or she is a participantof participation in the SERP. Annual benefits accrued under the SERP for any plan year that commenced beforecommencing after January 1, 2018, will vest at the earlier of three years after they are earned, five years of employment with the Bank from the date the senior executive officer became a participant in the SERP, or when the participant reaches age 62.
|
| | | | | |
Years of Credited Service (As Defined in the Plan) | Amount of Contribution for President (Percentage of Total Annual Compensation) |
| | Amount of Contribution for Other Participants (Percentage of Total Annual Compensation) |
|
| Fewer than 10 | 10 | % | | 8 | % |
| 10 or more but less than 15 | 15 | % | | 12 | % |
| 15 or more | 20 | % | | 16 | % |
The normal form and time of payment of benefits under the SERP is a lump sum upon the earlier of termination of employment, disability, or death. Upon a timely election, a participant may elect optional forms of payment to commence after termination of employment as specified in the plan.SERP.
No benefits are paid under the SERP ifIf a participant's employment is terminated for cause (as defined in the plan). In January 2018, the SERP was amended to provide that in the event of termination for cause,, only the unvested portion of the participant’s SERP account would be forfeited.
The SERP was also amended in January 2018 to revise: (1) Schedule A to the SERP to provide that beginning with 2018, the amounts of the contribution (Contribution Credit) to be credited to the account of a participant covered by Schedule A to the SERP will be 20% of a participant’s total annual compensation for fewer than five years of credited service (Credited Service) and 25% of a participant’s total annual compensation for five years or more of Credited Service; and (2) Schedule C to the SERP to provide that beginning with 2018, the amounts of the Contribution Credit to be credited to the account of a participant in Schedule C will be 25% of a participant’s total annual compensation for fewer than five years of Credited Service and 35% of a participant’s total annual compensation for five years or more of Credited Service. Annual benefits accrued under the SERP for any plan year
commencing after January 1, 2018, will vest at the earlier of five years of employment with the Bank or when the participant reaches age 62. The Bank’s senior officers, including the named executive officers, are participants in Schedule A and the president and chief executive officer is a participant in Schedule C. At the same time, the SERP was also amended to provide the Board with discretionary authority for approving special contribution credits (Special Contribution Credits), which are additional credits to a participant’s account in an amount that may not exceed the participant’s target annualized compensation plus target Deferred Award and Gap Year Award under the EIP and any other long-term incentive compensation (the “pay limitation”) for the applicable calendar year. At any time, no more than three Special Contribution Credits may be approved for a single participant, and the pay limitation for each participant is adjusted annually for annual increases in the participant’s target compensation and long-term incentive pay. The Special Contribution Credits are not subject to the SERP’s total retirement income limitation described above.
Other Elements of Compensation
We provideThe Bank provides to all employees, including the named executive officers, health, dental, and vision insurance and an employee assistance program for the employees and their spouses/partners and children, for which we paythe Bank pays approximately 80% of the premiums and the employee pays approximately 20%. In addition, we providethe Bank provides long-term disability and basic life insurance coverage to all employees at no cost to the employees.
The Bank makes available limited retiree health carehealthcare benefits for eligible employees who retire from the Bank. To be classified as a Bank retiree eligible to enroll for retiree health carehealthcare benefits, a Bank employee must be 55 years of age with a minimum of 10 years of Bank service on the date that his or her employment with the Bank terminates.
Perquisites
On occasion, the Bank may pay for resort activities for employees, including our named executive officers, in connection with business-related meetings; and in some cases, the Bank may pay the expenses for spouses/partners accompanying employees to these meetings or other Bank-sponsored events. The president and chief executive officer receives use of a designated building parking space. Perquisites are valued at the actual amounts paid to the provider of the perquisites.
COMPENSATION COMMITTEE REPORT
The Compensation and Human Resources Committee (Compensation Committee) acts as the compensation committee on behalf of the Bank's Board of Directors.Bank’s Board. In fulfilling its oversight responsibilities, the Compensation Committee reviewed and discussed with management the Compensation Discussion and Analysis set forth in this annual report on Form 10-K.
Based on the Compensation Committee's review of the Compensation Discussion and Analysis and the discussions the Compensation Committee has had with management, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this annual report on Form 10-K, which will be filed with the Securities and Exchange Commission.
Compensation and Human Resources Committee
John T. Wasley,Matthew Hendricksen, Chair
Bradley W. Beal,Banafsheh Akhlaghi, Vice Chair
Melinda GuzmanDavid Adame
Joan C. OppAna Fonseca
Scott C. Syphax
Silvio Tavares
COMPENSATION TABLES
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| Summary Compensation Table |
| | | | | | | | | | | | | | |
| (In whole dollars) | | | | | | | | | | | | | | |
| Name and Principal Position | Year | Base Salary | | Bonus | | Non-Equity Incentive Compensation(1) | | | Change in Pension Value and Non-Qualified Deferred Compensation(2) | | | All Other(3)(4) Compensation | | Total |
Teresa Bazemore(5) | 2023 | $ | 964,600 | | | $ | — | | | $ | 874,300 | | | | $ | 479,772 | | | | $ | 62,357 | | | $ | 2,381,029 | |
| President and CEO | 2022 | 910,000 | | | — | | | 904,200 | | | | 415,827 | | | | 178,381 | | (6) | 2,408,408 | |
| 2021 | 696,023 | | | 100,000 | | (7) | 662,500 | | | | 205,378 | | | | 160,950 | | (8) | 1,824,851 | |
| | | | | | | | | | | | | | |
Joseph Amato(9) | 2023 | 500,000 | | | 177,417 | | (10) | 378,200 | | | | 47,001 | | | | 31,357 | | | 1,133,975 | |
| EVP and CFO | 2022 | 500,000 | | | 177,418 | | (10) | 421,800 | | | | 49,204 | | | | 30,368 | | | 1,178,790 | |
| 2021 | 319,178 | | | 175,000 | | (11) | 260,600 | | | | 96,122 | | | | 31,590 | | | 882,490 | |
| | | | | | | | | | | | | | |
Greg Ward(12) | 2023 | 530,000 | | | — | | | 438,998 | | | | 362,570 | | | | 35,531 | | | 1,367,099 | |
| EVP and | 2022 | 485,000 | | | — | | | 448,044 | | (13) | | — | | | (14) | 32,494 | | | 965,538 | |
| Chief Operating Officer | 2021 | 460,000 | | | — | | | 421,983 | | | | 270,113 | | | | 27,789 | | | 1,179,885 | |
| | | | | | | | | | | | | | |
Anne Segrest McCulloch(15) | 2023 | 498,750 | | | — | | | 377,300 | | | | 195,118 | | | | 33,087 | | | 1,104,255 | |
| EVP and | 2022 | 476,649 | | | 112,500 | | (16) | 400,700 | | | | 160,413 | | | | 104,386 | | (17) | 1,254,648 | |
| Chief Legal Officer | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Tony Wong(18) | 2023 | 437,000 | | | — | | | 330,500 | | | | 281,494 | | | | 29,122 | | | 1,078,116 | |
| EVP and | 2022 | 417,000 | | | — | | | 343,400 | | | | 29,708 | | | | 27,874 | | | 817,982 | |
| Chief Banking Officer | 2021 | 373,309 | | | — | | | 253,700 | | (19) | | 118,726 | | | | 27,309 | | | 773,044 | |
(1)The amounts reflect the total Annual Awards earned under the EIP for services performed during the respective fiscal year. Fifty percent (50%) of the total Annual Awards are vested after the last day of the one-year performance period, i.e., the Year-End Award. The remaining fifty percent (50%) of the total Annual Awards are deferred and vested on the last day of a three-year performance period, i.e., the Deferred Award. Any payout of the Deferred Awards under the EIP is subject to the satisfaction of certain requirements and qualifiers, and completion of Finance Agency review. The amounts also reflect interest for any vested Deferred Awards under the EIP. For the total Annual Award for 2023 under the EIP for 2023, see the discussion in “Narrative to Summary Compensation Table and Grants of Non-Equity Incentive Plan-Based Awards Table – Non-Equity Incentive Compensation and Non-Equity Long-Term Incentive Payouts.”
(2)Represents the aggregate change in actuarial present value of each of the named executive officers' accumulated benefits under the Bank’s qualified and non-qualified defined benefit plans to the extent applicable (i.e., Cash Balance Plan; frozen FIRF; restored benefits under the Benefit Equalization Plan (BEP); make-up retirement benefits under the Deferred Compensation Plan (DCP); and Supplemental Executive Retirement Plan (SERP)). There are no above-market or preferential earnings on the named executive officers' DCP accounts.
(3)Includes perquisites and premiums for disability and life insurance paid by the Bank. On occasion, the Bank pays for resort activities for employees in connection with Board meetings and other business-related meetings; and, in some cases, the Bank may pay the expenses for spouses accompanying employees to these meetings or other Bank-sponsored events. Perquisites are valued at the actual amounts paid to the provider of the perquisites. The value of some perquisites is not reasonably quantifiable but is known to be de minimis.
(4)Includes the Bank’s matching contributions under the Savings Plan and the Bank’s restored and make-up matching amounts credited under the BEP and DCP.
(5)Ms. Bazemore became president and CEO effective March 15, 2021.
(6)Of this amount, $120,000 represents reimbursement of relocation costs to Ms. Bazemore.
(7)Represents payment of a sign-on payment in accordance with Ms. Bazemore’s employment agreement.
(8)Of this amount, $112,903 represents reimbursement of relocation costs to Ms. Bazemore.
(9)Mr. Amato became the interim CFO effective January 5, 2021, and the CFO effective May 13, 2021.
(10)Represents payment of a discretionary special award in recognition of service as CFO.
(11)Represents payment of a special award in recognition of service as interim CFO.
(12)Mr. Ward, who previously served as chief risk officer, became chief operating officer effective November 1, 2022.
(13)This amount represents an award earned by Mr. Ward in the amount of $336,900 under the Bank’s EIP for 2022 as the Bank’s chief risk officer, $75,300 under the EIP for 2022 as the Bank’s chief operating officer, and $35,844 in interest for the Deferred Award under the EIP for 2018.
(14)In accordance with the Securities and Exchange Commission (SEC) rules, negative changes in pension value are not included in this table. The negative change in pension value for Mr. Ward is $70,498.
(15)Ms. McCulloch became the chief legal officer effective November 18, 2021.
(16)Represents a sign-on payment.
(17)Of this amount, $75,924 represents reimbursement of relocation costs to Ms. McCulloch.
(18)Mr. Wong, who previously served as chief marketing officer and acting chief banking officer, became chief banking officer in May 2021.
(19)In addition to the Annual Award under the EIP for 2021 prorated, the amount includes a prorated award earned by Mr. Wong in the amount of $42,600 under the Bank’s Team Member Incentive Plan earned prior to Mr. Wong becoming eligible for the EIP for 2021 in May 2021.
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Summary Compensation Table |
| | | | | | | | | | | | | |
| (In whole dollars) | | | | | | | | | | | | |
| Name and Principal Position | Year | | Salary |
| | Bonus (1) |
| Non-Equity Incentive Payment(2) |
| Non-Equity LTIP Payout(3) |
| Change in Pension Value and Non-Qualified Deferred Compensation(4) |
| | All Other(5)(6) Compensation |
| | Total |
|
J. Gregory Seibly(7) | 2017 | | $ | 850,000 |
| | $ | 300,000 |
| $ | 418,900 |
| $ | 217,800 |
| $ | 590,814 |
| | $ | 29,149 |
| | $ | 2,406,663 |
|
| President and | 2016 | | 506,665 |
| | — |
| 297,600 |
| 99,100 |
| 335,768 |
| | 447,105 |
| (8) | 1,686,238 |
|
| Chief Executive Officer | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Lisa B. MacMillen(9) | 2017 | | 188,541 |
| (10) | — |
| 67,150 |
| 197,900 |
| — |
| (11) | 567,813 |
| (12) | 1,021,404 |
|
| Executive Vice President and | 2016 | | 557,200 |
| | — |
| 275,200 |
| 262,800 |
| 193,400 |
| | 39,893 |
| | 1,328,493 |
|
| Chief Operating Officer | 2015 | | 546,300 |
| | 22,763 |
| 270,100 |
| 256,300 |
| 49,211 |
| | 40,295 |
| | 1,184,969 |
|
| | | | | | | | | | | | |
|
|
| Kenneth C. Miller | 2017 | | 466,533 |
| | — |
| 229,900 |
| 214,900 |
| 293,857 |
| | 37,017 |
| | 1,242,207 |
|
| Senior Vice President and | 2016 | | 458,100 |
| | — |
| 227,200 |
| 214,000 |
| 236,083 |
| | 37,239 |
| | 1,172,622 |
|
| Chief Financial Officer | 2015 | | 444,800 |
| | 18,533 |
| 219,900 |
| 208,600 |
| 202,885 |
| | 35,534 |
| | 1,130,252 |
|
| | | | | | | | | | | | |
|
|
| Lawrence H. Parks | 2017 | | 484,605 |
| (13) | — |
| 227,850 |
| 213,000 |
| 322,988 |
| | 34,047 |
| | 1,282,490 |
|
| Senior Vice President, | 2016 | | 478,009 |
| (14) | — |
| 225,200 |
| 212,100 |
| 169,090 |
| | 33,601 |
| | 1,118,000 |
|
| External and Legislative Affairs | 2015 | | 461,376 |
| (15) | 18,367 |
| 217,900 |
| 206,800 |
| 184,575 |
| | 32,703 |
| | 1,121,721 |
|
| | | | | | | | | | | | |
|
|
| Suzanne Titus-Johnson | 2017 | | 454,337 |
| (16) | — |
| 204,250 |
| 190,900 |
| 382,333 |
| | 33,063 |
| | 1,264,883 |
|
| Senior Vice President and | 2016 | | 422,653 |
| (17) | — |
| 201,900 |
| 190,100 |
| 233,358 |
| | 33,092 |
| | 1,081,103 |
|
| General Counsel and | 2015 | | 395,100 |
| | 116,463 |
| 195,300 |
| 185,300 |
| 122,730 |
| | 31,914 |
| | 1,046,807 |
|
| Corporate Secretary | | | | | | | | | | | | |
| | | | | | | | | | | | |
|
|
Stephen P. Traynor(18) | 2017 | | 419,292 |
| | — |
| 199,700 |
| 190,400 |
| 255,726 |
| | 32,952 |
| | 1,098,070 |
|
| Senior Vice President and | | | | | | | | | | | |
|
|
| Chief Banking Officer | | | | | | | | | | | |
|
|
| |
(1) | The amount for Mr. Seibly in 2017 represents payment of a sign-on bonus in accordance with his employment agreement. The amounts in 2015 represent a Board-approved special award, consisting of an amount equal to one additional semi-monthly paycheck for all Bank employees to recognize Bankwide teamwork and its contribution to the Bank’s exceptional overall performance in 2015. In addition, the amount for Ms. Titus-Johnson in 2015 represents a $100,000 discretionary cash incentive compensation award under the 2015 EIP. |
| |
(2) | Represents the Year-End Awards in 2017 earned and vested under the EIP for 2017, awards in 2016 earned under the 2016 President’s Incentive Plan and 2016 Executive Incentive Plan, and awards earned in 2015 under the 2015 Executive Incentive Plan. For the Year-End Awards in 2017 under the EIP for 2017, see the discussion in “Narrative to Summary Compensation Table and Grants of Non-Equity Incentive Plan-Based Awards Table – Non-Equity Incentive Payments and Non-Equity Long-Term Incentive Payouts.” |
| |
(3) | Represents awards earned under the 2015, 2014, and 2013 EPUPs. For the awards in 2017 under the 2015 EPUP, see the discussion in “Narrative to Summary Compensation Table and Grants of Non-Equity Incentive Plan-Based Awards Table – Non-Equity Incentive Payments and Non-Equity Long-Term Incentive Payouts.” |
| |
(4) | Represents the aggregate change in actuarial present value of each of the named executive officers' accumulated benefits under the Bank's qualified and non-qualified defined benefit pension plans (Cash Balance Plan; frozen FIRF, if applicable; restored pension benefit under the Benefit Equalization Plan (BEP); make-up pension benefit under the Deferred Compensation Plan (DCP); and Supplemental Executive Retirement Plan (SERP)). There are no above-market or preferential earnings on the named executive officers' DCP accounts. |
| |
(5) | Includes perquisites and premiums for disability and life insurance paid by the Bank. On occasion, the Bank pays for resort activities for employees in connection with Board meetings and other business-related meetings; and, in some cases, the Bank may pay the expenses for spouses accompanying employees to these meetings or other Bank-sponsored events. Perquisites are valued at the actual amounts paid to the provider of the perquisites. The value of some perquisites is not reasonably quantifiable, but is known to be de minimis. |
| |
(6) | Includes the Bank’s matching contributions under the Savings Plan and the Bank’s restored and make-up matching amounts credited under the BEP and DCP. |
| |
(7) | Mr. Seibly became president and chief executive officer effective May 12, 2016. |
| |
(8) | Of this amount, $224,791 represents reimbursement of relocation costs to Mr. Seibly, and $217,135 represents the related tax gross-ups to Mr. Seibly. |
| |
(9) | Ms. MacMillen served as chief operating officer until March 31, 2017. |
| |
(10) | Of this amount, $49,241 represents a vacation cash-out payment. |
| |
(11) | In accordance with SEC rules, negative changes in pension value are not included in this table. The negative change in pension value for Ms. MacMillen is $188,233 which primarily results from payments from the BEP, DCP and the SERP. |
| |
(12) | Of this amount, $557,200 represents a severance payment. |
| |
(13) | Of this amount, $22,264 represents a vacation cash-out payment. |
| |
(14) | Of this amount, $24,009 represents a vacation cash-out payment. |
| |
(15) | Of this amount, $20,576 represents a vacation cash-out payment. |
| |
(16) | Of this amount, $39,912 represents a vacation cash-out payment. |
| |
(17) | Of this amount, $15,653 represents a vacation cash-out payment. |
| |
(18) | Mr. Traynor who previously served as Senior Vice President, Member Financial Services and Community Investment, became Chief Banking Officer in March 2017. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grants of Non-Equity Incentive Plan-Based Awards |
| | | | | | | | | | | |
| (In whole dollars) | | | | | | | Estimated Payout Ranges(1) |
| Name | EIP for 2023 | | Plan Period | | Payout Date | | Minimum | | Meets | | Maximum |
| Teresa Bazemore | Year-End Award | | 2023 | | February 2024 | | $ | 241,150 | | | $ | 385,850 | | | $ | 482,300 | |
| Deferred Award | | 2024-2026 | | February 2027 | | 241,150 | | | 385,850 | | | 482,300 | |
| Joseph Amato | Year-End Award | | 2023 | | February 2024 | | 100,000 | | | 162,500 | | | 212,500 | |
| Deferred Award | | 2024-2026 | | February 2027 | | 100,000 | | | 162,500 | | | 212,500 | |
| Greg Ward | Year-End Award | | 2023 | | February 2024 | | 106,000 | | | 172,250 | | | 225,250 | |
| Deferred Award | | 2024-2026 | | February 2027 | | 106,000 | | | 172,250 | | | 225,250 | |
| Anne Segrest McCulloch | Year-End Award | | 2023 | | February 2024 | | 99,750 | | | 162,100 | | | 211,950 | |
| Deferred Award | | 2024-2026 | | February 2027 | | 99,750 | | | 162,100 | | | 211,950 | |
| Tony Wong | Year-End Award | | 2023 | | February 2024 | | 87,400 | | | 142,050 | | | 185,750 | |
| Deferred Award | | 2024-2026 | | February 2027 | | 87,400 | | | 142,050 | | | 185,750 | |
|
| | | | | | | | | | | | | | | | | |
| Grants of Non-Equity Incentive Plan-Based Awards |
| | | | | | | | | | | | |
| (In whole dollars) | | | | | | | Estimated Payout Ranges(1) |
| Name | EIP for 2017 | | Plan Period | | Payout Date | | Threshold |
| | Target |
| | Maximum |
|
J. Gregory Seibly
| Year-End Award | | 2017 | | February 2018 | | $ | 170,000 |
| | $ | 340,000 |
| | $ | 425,000 |
|
| | Deferred Award | | 2018-2020 | | February 2021 | | 170,000 |
| | 340,000 |
| | 425,000 |
|
| | Gap Year Award | | 2017-2019 | | February 2020 | | 170,000 |
| | 340,000 |
| | 425,000 |
|
Lisa B. MacMillen(2) | Year-End Award | | 2017 | | February 2018 | | 27,478 |
| | 54,957 |
| | 68,696 |
|
| | Deferred Award | | 2018-2020 | | February 2021 | | 27,478 |
| | 54,957 |
| | 68,696 |
|
| | Gap Year Award | | 2017-2019 | | February 2020 | | 9,159 |
| | 18,319 |
| | 22,899 |
|
| Kenneth C. Miller | Year-End Award | | 2017 | | February 2018 | | 93,460 |
| | 186,920 |
| | 233,650 |
|
| | Deferred Award | | 2018-2020 | | February 2021 | | 93,460 |
| | 186,920 |
| | 233,650 |
|
| | Gap Year Award | | 2017-2019 | | February 2020 | | 93,460 |
| | 186,920 |
| | 233,650 |
|
| Lawrence H. Parks | Year-End Award | | 2017 | | February 2018 | | 92,620 |
| | 185,240 |
| | 231,550 |
|
| | Deferred Award | | 2018-2020 | | February 2021 | | 92,620 |
| | 185,240 |
| | 231,550 |
|
| | Gap Year Award | | 2017-2019 | | February 2020 | | 92,620 |
| | 185,240 |
| | 231,550 |
|
| Suzanne Titus-Johnson | Year-End Award | | 2017 | | February 2018 | | 83,020 |
| | 166,040 |
| | 207,550 |
|
| | Deferred Award | | 2018-2020 | | February 2021 | | 83,020 |
| | 166,040 |
| | 207,550 |
|
| | Gap Year Award | | 2017-2019 | | February 2020 | | 83,020 |
| | 166,040 |
| | 207,550 |
|
| Stephen P. Traynor | Year-End Award | | 2017 | | February 2018 | | 81,180 |
| | 162,360 |
| | 202,950 |
|
| | Deferred Award | | 2018-2020 | | February 2021 | | 81,180 |
| | 162,360 |
| | 202,950 |
|
| | Gap Year Award | | 2017-2019 | | February 2020 | | 81,180 |
| | 162,360 |
| | 202,950 |
|
| |
(1) | The estimated payouts for the 2017 Year-End Awards represent 50% of the Annual Award under the EIP for 2017 that could have been earned by the respective executive officers for 2017. Actual amounts of the Year-End Awards earned and vested under the EIP for 2017 are included in the Summary Compensation Table. Estimated payouts for the Deferred Awards represent 50% of the Annual Award under the EIP for 2017 that could be vested by the respective executive officers at the end of the three-year deferral performance period. Estimated payouts for the Gap Year Award under the EIP are what could be earned at the end of the three-year performance period and are calculated using the base salaries in effect at the beginning of the three-year performance period. Any Gap Year Award is subject to the achievement of performance goals and satisfaction of certain qualifiers, and any Deferred Award under the EIP is subject to the satisfaction of certain qualifiers. Both of the Deferred Award and Gap Year Award are payable following the completion of regulatory review. See discussion in “Compensation Discussion and Analysis – Elements of our Executive Compensation Program – Executive Incentive Plan.” |
| |
(2) | Year-End Awards, Deferred Awards, and Gap Year Awards, if any, for Ms. MacMillen are prorated. |
(1)The estimated payouts for the Year-End Award and the Deferred Award each represent 50% of the total Annual Awards under the EIP for 2023 that could have been earned by the respective executive officers for 2023. Actual amounts of both the Year-End Award and Deferred Award under the EIP for 2023 for each named executive officer are included in the Summary Compensation Table. Any payout of the Deferred Awards under the EIP for 2023 is subject to the satisfaction of certain requirements and qualifiers, and completion of Finance Agency review. See the discussion in “Compensation Discussion and Analysis – Elements of our Executive Compensation Program – Executive Incentive Plan.”
Narrative to Summary Compensation Table and Grants of Non-Equity Incentive Plan-Based Awards Table
At Will Employees
All employees of the Bank are “at will” employees, including the named executive officers. The named executive officers may resign at any time, and the Bank may terminate their employment at any time for any reason or no reason, with or without cause and with or without notice.
notice, subject to contractual obligations, if any.
The 20172023 annual base salaries as of December 31, 2017,2023, for the current2023 named executive officers who served as of December 31, 2023, were as follows: J. Gregory Seibly, $850,000; Kenneth C. Miller, $467,300; Lawrence H. Parks, $463,100; Suzanne Titus-Johnson, $415,100;Teresa Bryce Bazemore, $964,600; Joseph Amato, $500,000; Anne Segrest McCulloch, $498,750; Greg Ward, $530,000; and Stephen P. Traynor, $423,151. For 2018, the base salaries of the current named executive officers areTony Wong, $437,000.
as follows: J. Gregory Seibly, $900,000; Kenneth C. Miller, $481,319; Lawrence H. Parks, $476,993; Suzanne Titus-Johnson, $427,553; and Stephen P. Traynor, $435,846.
Corporate Senior Officer Severance Policy. The Corporate Senior Officer Severance Policy (Senior Officers' Policy) is applicable to the president, executive vice president,presidents (other than Mr. Amato), and any senior vice presidents. president as of December 31, 2018, who are defined in the Senior Officers’ Policy as “Corporate Senior Officer.”
The Senior Officers' Policy provides severance benefits in the event thatif the employee's employment is terminated because the employee's job or position is eliminated or because the job or position is substantially modified so that the employee is no longer qualified or cannot perform the revised job. For these officers, severance under the Senior Officers' Policy is equal to the greater of (i) 12 weeks of the officer's base salary, or (ii) the sum of three weeks of the officer's base salary, plus three weeks of the officer's base salary for each full year of service and three weeks of base salary prorated for each partial year of service at the Bank to a maximum of 52 weeks of base salary. The Senior Officers' PolicyThese officers also providesreceive one month of continued health and life insurance benefits and, at the Bank'sBank’s discretion, outplacement assistance.
The Senior Officers' Policy provides that inIn the event a senior vice presidentCorporate Senior Officer is involuntarily terminated without “Cause” under certain circumstances or voluntarily terminated with “Good Reason” (as defined by the Senior Officers' Policy) in connection with a Change in Control, upon the Bank'sBank’s timely receipt of a separation agreement and release, these executive officersthe officer will receive severance pay in a lump sum equal to one year of base salary.
In addition, under the Senior Officers' Policy, in the event of a qualifying termination in connection with a Change in Control, each senior vice presidentCorporate Senior Officer will be entitled to continued health and life insurance coverage under the Bank'sBank’s group health and life insurance policies, at the Bank'sBank’s expense, for a period of 12 months immediately following the effective date of separation. However, the Bank will immediately cease paying such premiums prior to the end of the 12-month
period if the executive officer accepts employment with another employer that provides comparable benefits in terms of cost and scope of coverage during the 12-month period. If the Bank is not in compliance with any applicable regulatory capital or regulatory leverage requirement or if any of the payments required to be made to senior vice presidentsa Corporate Senior Officer pursuant to the Senior Officers' Policy would cause the Bank to fall below such applicable regulatory requirements, such payment will be delayed until the Bank achieves compliance with its regulatory capital requirements.
The Senior Officers' Policy also provides that, in the event the former executive vice president experienced a termination of employment in connection with a Change in Control, severance and benefits would have been payable pursuant to a Change in Control Severance Agreement, described below.
The Board believes that the level of severance benefits for each named executive officer who is a Senior Corporate Officer under the Senior Officers’ Policy is appropriate because it is reasonable to believe that finding a comparable position at another institution at a comparable compensation level could take up to one year, and possibly longer, depending on the economic environment at the time, and that the distraction of this uncertainty may have a detrimental impact on the executive's performance. If the employment of any of the current2023 named executive officers who are eligible under the Senior Officers’ Policy currently serving had been terminated on December 31, 2017,2023, because the employee's job or position had been eliminated or because the job or position had been substantially modified so that the employee was no longer qualified or could not perform the revised job, the approximate value of the severance benefits payable to the executive (subject to Finance Agency regulatory review) applying the Senior Officers’ Policy would have been as follows: J. Gregory Seibly, $199,273; Kenneth C. Miller, $470,465; Lawrence H. Parks, $464,242; Suzanne Titus-Johnson, $418,255;Anne Segrest McCulloch, $115,288; Greg Ward, $341,621; and Stephen P. Traynor, $426,289.Tony Wong, $437,332.
Employment Agreements and Arrangements
Change in Control Agreement.Bazemore Employment Agreement. The Board had approved a Change in Control Severance Agreement for the former executive vice president and chief operating officer, Lisa B. MacMillen. This agreement provided for a severance payment and continued benefits if the executive terminated her employment for “Good Reason” (as defined in the agreement) in connection with a “Change in Control” (as defined in the agreement) of the Bank. In particular, she would have been entitled to receive, in lieu of any severance benefits to which the executive may otherwise be entitled under any severance plan or program of the Bank, the following: (i) the executive's fully earned but unpaid base salary through the date of termination (together with all other amounts and benefits to which the executive was entitled under any benefit plan or practice of the Bank other than the Bank's Senior Officers' Policy); (ii) severance
pay in an amount equal to the sum of two times the executive's annual base salary plus two times the executive's “Annual Incentive Amounts” (as defined in the agreement); (iii) continued health and life insurance coverage for up to 180 days after the first anniversary of the date of termination of the executive's employment (or if earlier, the date the executive accepts employment from an employer with comparable benefits); and (iv) executive-level outplacement services at the Bank's expense, not to exceed $25,000.
Employment Agreement. In April 2016, the Bank entered into an employment agreement with Mr. SeiblyTeresa Bryce Bazemore dated February 19, 2021, with an initial term of three years and one-year terms thereafter, unless terminated at any time by either the Bank or Mr. Seibly.Ms. Bazemore. Under the terms of the agreement, Mr. SeiblyMs. Bazemore will initially receivedreceive a base annual salary of $800,000$875,000 and a sign-on payment of $600,000 to$100,000 paid in the following installments: $50,000 shall be received in two equal installments withinpaid 30 days from the start of eachher employment, and $50,000 shall be paid six months from the start of the first and second anniversaries of Mr. Seibly’sher employment, start date, andwhich installments are subject to clawbackclawbacks in certain circumstances. The base annual salary is subject to review at the Board’s discretion.
The employment agreement provides for a severance payment equal to (i) two times his “Base Salary”Ms. Bazemore’s Salary (as defined in histhe employment agreement); and (ii) two times his “AnnualMs. Bazemore’s Annual Incentive Amounts”Amounts (as defined in histhe employment agreement) and continued benefits if Mr. Seibly’sMs. Bazemore’s employment is terminated under certain circumstances in connection with a “ChangeChange in Control”Control (as defined in histhe employment agreement) of the Bank. Had Mr. Seibly’ sMs. Bazemore’s employment been terminated in connection with a Change in Control on December 31, 2017,2023, the approximate value of the benefits payable to Ms. Bazemore would have been $2,808,526, excluding amounts of any outplacement services, payable to Mr. Seibly would have been $2,561,241.services.
Mr. Seibly isMs. Bazemore will also be eligible to participate in the Bank’s various executive incentive and employee benefit plans, including the Bank’s SERP, 2016 President’sExecutive Incentive Plan (EIP) and the 2014-2016, 2015-2017, and 2016-2018 EPUPs.Supplemental Executive Retirement Plan (SERP). Under Mr. Seibly’sMs. Bazemore’s employment agreement, the years of credited service and the amount of Bank annual contribution credits under the SERP prior to its amendment effective January 2018, werewill be as follows: 10%25% of total annual compensation for less than 45 years of credited service; 15%service and 35% of total annual compensation for 4 or more years but less than 9 years of credited service; and 20% of total annual compensation for 95 or more years of credited service. In addition, Mr. Seibly’sUnder Ms. Bazemore’s employment agreement, provides that hethe Bank will receive a supplemental SERP contribution credit in the amount of $600,000, to be credited in three equal installments over two years, with the first installment credited at the time his employment began and the second and third installments credited on the first and second anniversaries of his employment commencement, respectively. These supplemental SERP contribution credits will vest immediately when credited. Mr. Seibly’s employment agreement also provides forprovide reimbursement of his relocation costcosts up to $250,000 and payment to the appropriate taxing authorities of up to $220,000 of any relocation tax obligations.
$250,000.
The employment agreement also provides that if Mr. Seibly’sMs. Bazemore’s employment is terminated due to the expiration of the initial three-year term and the Board decidesdecided not to extend hisher employment for any additional term, Mr. Seibly shallMs. Bazemore would be entitled to all Accrued Benefits (as defined in her employment agreement) and to receive a severance payment equal to twelve (12) months of base salary and a pro-rata portion of the president’s incentive planEIP award for the year in which the termination occurs; and all Deferred Awards will be treated as fully vested (Severance Payment).
The employment agreement further provides that if Ms. Bazemore was terminated without Cause (as defined in her employment agreement) or for Good Reason (as defined in her employment agreement) at any time, Ms. Bazemore would be entitled to receive severance payments equal to the Severance Payment and all Accrued Benefits. Had Ms. Bazemore been terminated under these circumstances on December 31, 2023, the approximate value of the benefits, payable to Ms. Bazemore, excluding amounts of any Accrued Benefits, would have been $1,780,053.
As previously reported on Form 8-K filed on August 3, 2023, on July 28, 2023, the Board determined not to renew Ms. Bazemore’s employment agreement at the end of the original three-year term on March 14, 2024.
The Board has formed a search committee of the Board, as previously disclosed, to conduct a search for Ms. Bazemore’s successor and to evaluate and propose qualified candidates for approval to the Board. As previously reported on Form 8-K on February 29, 2024, the Board has identified an external candidate and is in the final stages of the recruitment process, which includes non-objection by the Finance Agency and other requirements and conditions.
Due to the ongoing recruitment process, on February 29, 2024, the Bank and Ms. Bazemore entered into an amendment to her employment agreement (Amendment No. 1) to mutually extend the term of her employment to June 30, 2024.
Amato Employment Agreement. The Bank entered into an employment agreement with Joseph Amato dated October 7, 2020, for an initial term of six (6) months (Initial Term) and six (6) automatic extensions of one-month terms thereafter (each referred to as an Automatic One Month Extension Term). Mr. SeiblyAmato’s initial employment agreement provided that Mr. Amato would receive a base annual salary of $500,000 and a sign-on payment of $50,000, which is subject to a repayment if Mr. Amato’s employment is terminated without “Cause”for Cause or Without Good Reason (as defined in his employment agreement) during the term of his employment agreement. Additionally, Mr. Amato’s employment agreement provided that he would be eligible for a fully discretionary Special Award of up to $300,000 to be received in two parts in recognition of his service as Interim CFO and based on his performance in connection with his duties and responsibilities as the Bank’s principal financial officer. The first 50% of the Special Award ($150,000) was paid at the end of the Initial Term and eligibility for up to the second 50% of the Special Award ($150,000) shall accrue on a pro rata basis over the course of any subsequent Automatic One Month Extension Term.
The initial employment agreement also provided that Mr. Amato acknowledges and agrees that notwithstanding any terms to the contrary in the Bank’s EIP, SERP, and Corporate Senior Officer Severance Policy, such plans and policy would not apply to him in connection with his employment under the employment contract; and the Special Award is in lieu of any and all payments or rights that might otherwise have been available to him under such plans and policy.
On July 7, 2021, the Bank entered into an amendment to Mr. Amato’s employment agreement (Amendment No. 1) to extend the term of his employment to March 31, 2023, and, effective May 13, 2021, to serve as the Bank’s chief financial officer (CFO) for the extended term (Second Term). In connection with the extension of Mr. Amato’s term of employment, Mr. Amato served for one Automatic One Month Extension Term. Amendment No. 1 provides an option to mutually elect to extend his Second Term for another year, until March 31, 2024 (Mutual Extension).
Amendment No. 1 provided that Mr. Amato will be eligible for a second special award of up to $354,835 in recognition of his service as the Bank’s CFO (Second Special Award). The first 50% of the Second Special Award ($177,418) was paid in 2022. The second 50% of the Second Special Award ($177,417) was paid in 2023.
Additionally, Amendment No. 1 provided that beginning with the Second Term, Mr. Amato will also be eligible to participate in the Bank’s EIP. For the Second Term, Mr. Amato continued to acknowledge that the SERP and the Corporate Senior Officer Severance Policy will not apply to him during the Second Term or any Mutual Extension.
Amendment No. 1 also provided that, upon the expiration of the Second Term or any Mutual Extension, Mr. Amato shall be entitled to receive a severance payment equal to the EIP Annual Award (defined in the EIP to include both the short-term incentive component and the long-term incentive component) as set forth in the Bank’s EIP, which will be treated as vested, on a pro rata basis for the performance period of the year when the expiration of his employment agreement occurs, and any Deferred Awards (as defined in the EIP) will be treated as fully vested, all of which is to be paid out as and when due in accordance with the EIP (Severance Payment).
On October 19, 2022, in accordance with the Mutual Extension, the Bank and Mr. Amato entered into an amendment to his employment agreement to mutually extend the term of his employment following the expiration of the Second Term to March 31, 2024 (Amendment No. 2).
On October 30, 2023, the Bank and Mr. Amato entered into a third amendment to his employment agreement (Amendment No. 3) to mutually extend the term of his employment to September 30, 2024 (Third Term), with an automatic extension until March 31, 2025, unless a non-renewal notice is provided by either the Bank or Mr. Amato at least one month prior to the end of the Third Term or any automatic extension thereof. Amendment No. 3 also amended Mr. Amato’s base annual salary to $540,000, effective January 1, 2024.
Under the terms of Amendment No. 2, as amended by Amendment No. 3, in recognition of Mr. Amato’s extended service as the Bank’s Executive Vice President and CFO, Mr. Amato will be eligible for a fully discretionary “Third Special Award” of up to an amount equal to the actual foregone benefits under the Bank’s SERP and Cash Balance Plan (and related Benefit Equalization Plan) for the 2020 to 2025 plan years reduced by any payments made under the Second Special Award (as defined in Amendment No. 1) and the Third Special Award (as defined in Amendment No.2) and further reduced by any benefits under the Bank’s Cash Balance Plan (and related Benefit Equalization Plan) that become fully vested in recognition of his service as CFO and based on his performance in connection with his duties and responsibilities as the Bank’s principal financial officer.
If Mr. Amato’s employment is terminated at any time by the Bank without Cause or if he terminates his employment for “Good Reason” (as defined in his employment agreement) any time during the initial three-year term,Good Reason, then Mr. SeiblyAmato shall be entitled to receive severance paymentsan amount equal to:to his remaining salary, as well as all Accrued Benefits. In addition, Mr. Amato will be entitled to any earned but unpaid amount of the fully discretionary Third Special Award on a pro rata basis for the period up to the date the termination occurs and shall be entitled to receive the Severance Payment; all “Accrued Benefits” (as definedPayment (but if Mr. Amato is otherwise entitled to any EIP Awards by operation of the EIP and receives such amount(s), then Mr. Amato would receive the greater of such EIP Awards or the EIP Awards calculated as Severance Payment, but in his employment agreement); and all unpaid sign-on benefits.no event shall Mr. Amato receive both). Had Mr. SeiblyAmato been terminated his employment under these circumstances on December 31, 2017,2023, the approximate value of the benefits, payable to Mr. Seibly,Amato, excluding amounts of any Accrued Benefits, would have been $1,568,900. In the event Mr. Seibly receives any severance benefits under the Senior Officers’ Policy, any severance payments to be payable to Mr. Seibly under his employment agreement shall be reduced by such severance benefits received under the Senior Officers’ Policy.
$59,495.
Non-Equity Incentive PaymentsCompensation and Non-Equity Long-Term Incentive Payouts
For 2017, J. Gregory Seibly,2023, Ms. Bazemore, as president and chief executive officer, was awarded a Year-Endan Annual Award under the Executive Incentive Plan (EIP)EIP of $418,900. Mr. Seibly’s$874,300. Ms. Bazemore’s award was based on the Bank's 2017Bank’s 2023 overall achievement level of: 138%of 127.0%, which comprised the following achievement levels for the Bank’s four corporate goals: 110.3% for the Business and Financial goal; 149.95% for the Risk Management goal; 144% for the Franchise Enhancement goal; 150.0%116.1% for the Community Investment goal; and 125%150% for the Organizational Health/DiversityDEI and InclusionPeople goal, and his 2017along with her 2023 achievement level for hisher individual goal.
Based on the achievement levels for the Bank'sBank’s four corporate goals and the achievement levels of the other 2023 named executive officers for their respective individual goals, the following Year-EndAnnual Awards under the EIP for 20172023 were made: Lisa B. MacMillen, $67,150 (prorated from January 1, 2017, to March 31, 2017); Kenneth C. Miller, $229,900; Lawrence H. Parks, $227,850; Suzanne Titus-Johnson, $204,250;awarded: Joseph Amato, $378,200; Greg Ward, $400,900; Anne Segrest McCulloch, $377,300; and Stephen P. Traynor $199,700.
Tony Wong, $330,500.
The total Annual Award for each named executive officer represents the amount for their Year-End award amounts above reflectAward and the amount for their Deferred Award, each of which is fifty percent (50%) of the totaltheir Annual AwardsAward approved by the Board under the EIP for 2017.2021. The payment of the other fifty percent (50%) of the total Annual Award, i.e., thetheir Deferred Award is deferred for the three-year performance period and is subject to applicable requirements and qualifiers as described in “Compensation Discussion and Analysis – Elements of Our Executive Compensation Program – Executive Incentive Plan,” which discussion is herein incorporated by reference.
The following table shows the two components of the total Annual Awards for the named executive officers approved by the Board under the EIP for 2017.
2023.
|
| | | | | | | | | | | |
| | EIP for 2017 |
| Named Executive Officers | Yearend Awards(1) |
| | Deferred Awards(2) |
| | Annual Awards |
|
| J. Gregory Seibly | $ | 418,900 |
| | $ | 418,900 |
| | $ | 837,800 |
|
Lisa B. MacMillen(3) | 67,150 |
| | 67,150 |
| | 134,300 |
|
| Kenneth C. Miller | 229,900 |
| | 229,900 |
| | 459,800 |
|
| Lawrence H. Parks | 227,850 |
| | 227,850 |
| | 455,700 |
|
| Suzanne Titus-Johnson | 204,250 |
| | 204,250 |
| | 408,500 |
|
| Stephen P. Traynor | 199,700 |
| | 199,700 |
| | 399,400 |
|
| Total | | | | | $ | 2,695,500 |
|
| | | | | | | | | | | | | | | | | |
| (In whole dollars) | EIP for 2023 |
| Named Executive Officers | Year-End Awards(1) | | Deferred Awards(2) | | Annual Awards |
| Teresa Bazemore | $ | 437,150 | | | $ | 437,150 | | | $ | 874,300 | |
| Joseph Amato | 189,100 | | 189,100 | | 378,200 | |
| Greg Ward | 200,450 | | 200,450 | | 400,900 | |
| Anne Segrest McCulloch | 188,650 | | 188,650 | | 377,300 | |
| Tony Wong | 165,250 | | 165,250 | | 330,500 | |
| Total | | | | | $ | 2,361,200 | |
(1)The Year-End Award is 50 percent of the total Annual Award and is included in the Summary Compensation Table.
| |
(1) | The Year-End Award is 50 percent of the Annual Award and included in the Summary Compensation Table. |
| |
(2) | The Deferred Award is 50 percent of the Annual Award and remain subject to the satisfaction of applicable qualifiers and will not be paid until 2021. The Deferred Awards are also subject to modification and forfeiture under the terms of the EIP. |
| |
(3) | Ms. MacMillen’s awards are prorated. |
(2)The Deferred Award is 50 percent of the total Annual Award and remains subject to the satisfaction of applicable qualifiers and will not be paid until 2027. The Deferred Awards are also subject to modification and forfeiture under the terms of the EIP.
In reviewing the Bank's 2017Bank’s 2023 performance, the Board recognized the president’s leadership and the other named executive officers' management in addressing risk management, business, financial, operational efficiency, and regulatory challenges and issues, while achieving all performance goals and objectives at a very high level. With respect to Mr. SeiblyThe Board recognized Ms. Bazemore’s achievements and her efforts, in particular, the Board recognized the president’s achievements with respect to his effortsher leading the Bank through a continued period of economic uncertainty and leadership transition. Additionally, in connection with enhancing constituent relations,support of employee engagement, Ms. Bazemore led the commitmentBank’s workforce through a transition from being fully remote to safeparticipating in the Bank’s hybrid work program.
To support the achievement level of the Business and sound practices,Financial goal for 2023, the financial performance goal as measured by full year AROC spread was 3.61%, the operating efficiency goal as measured by full year operating expenses was $168.7 million (above the Bank’s 2023 operating expense budget), the member business volume goal as measured by the average daily balance for advances and letters of credit outstanding during 2023 was $76.9 billion and $20.1 billion, respectively, for a total of $97.0 billion, and the member business product utilization goal as measured by the conversion of rate to active members was 77%.
For the accomplishments relating to the Business and Financial goal for 2023 discussed above, management practices,received an overall achievement level between Target and employee engagement. Last,Maximum, or 110.3%.
To support the Board acknowledgedachievement level of the president’s efforts in creating a Bank culture committed to operational and financial efficiency and effectiveness.
Thefirst goal component of the Risk Management goal which consistedfor 2023, management successfully surpassed its Climate Risk Management objectives by developing a Climate Change Risk Framework, creating an inventory of two goal components (technology resiliencythe Bank’s current climate risk controls, and business continuity/crisis management), was measured at an aggregateproducing quantitative measures of the Bank’s climate risk exposure.
To support the achievement level of 138%. In determining the level of achievement for the first component, the Board recognized management's accomplishments and achievements in migrating the Bank’s environment to the new data centers and efforts in rolling out the Bank’s end-user computing modernization initiative in a safe and sound manner. With respect to the second goal component achievement was based onof the Risk Management goal for 2023, management enhancingsurpassed its Consolidated Supplier Cyber Risk Management objectives by creating a Supplier Risk Dashboard with a consolidated cyber risk score and embedding the Bank’s recovery resilience by further maturingdashboard supplier relationship management to improve processes and reduce supplier risk.
To support the Bank’s enterprise crisis management framework through increased crisis team member preparedness, along with continued integration of Information Services Disaster Recovery and Information Security incident response protocols to ensure a cohesive recovery. In particular, the Board recognized the Bank’s level of achievement through completion of crisis management team exercises and cyber response team exercises.
The Bank's Franchise Enhancement goal, which consisted of three goal components, was measured at an aggregate achievement level of 144%. The Board recognized the Bank's financial performance in 2017 for the financial performancethird goal component (which excludedof the impactRisk Management goal for 2023, the Information Security Risk Management goal as measured by the percent of other-than-temporary impairment charges, litigation settlements gains, and contributions made in connection with the Bank’s Quality Jobs Initiative), andworkforce that became a Security Champion was 65.1%.
For the
achievements accomplishments relating to the Bank’s operating cost efficiency and the member businessRisk Management goal components. With respect to the financial performance goal component, the adjusted return on capital spread goal target level for 2017 was 3.06% and the Bank achieved a spread of 3.95% (net of adjustments). For the operating cost efficiency goal component, the Bank took several organizational actions to reduce run-rate operating expenses and improve organizational and operational efficiency, including significant restructuring of the Bank’s leadership team and reporting structure to broaden leadership span-of-control and sharpen role clarity. Regarding the member business goal component, the Board noted the Bank’s achievements in slowing the pace of advances runoff as well as increasing the use of Bank credit to help offset maturing advances to large and former members; and the Bank’s implementation of a program to elevate and expand the level of contact with members and prospective members, which has helped promote the Bank as a valued business partner.
The Board further noted the Bank's strong performance on its Community Investment goal, which was measured at2023 discussed above, management received an overall achievement level of 150.0% for 2017. The Bank far exceeded150%.
For the first goal component of the Community Investment goal focusedfor 2023, the Bank launched the Nevada Targeted Fund in January 2023 and educated its stakeholders on the number of members usingnew program. The Bank received eight applications for the CIPNevada Targeted Fund and ACE Program or participating inawarded funding to six projects.
To support the AHEAD Program.
The Organizational Health and Diversity/Inclusion goal was measured at an achievement level of 125%. The Board noted the Bank’s achievements in workforcesecond goal component of the Community Investment goal for 2023, the community investment product utilization goal as measured by the percent of members that used advances, letters of
credit, and supplier diversity trainingcredit programs that promote and theassist housing and community economic development and implementation of a supplier program, and successfully planning and holding diversity events and activities during 2017.was 19.7%.
For the 2015 EPUP, covering the three-year period 2015 through 2017, long-term cash incentive compensation awardsaccomplishments relating to the named executive officers were based on the achievement levelsCommunity Investment goal for the Bank's adjusted return on capital spread goal and Risk Management goal over the three-year performance period from 2015 through 2017. The2023 mentioned above, management received an overall achievement level of 116.1%.
To support the achievement level of the DEI and People goal for 2023, management automated DEI data management, quality assurance, and reporting across DEI workforce, procurement, and capital markets pillars, increased employee participation in the goals over this period was 147%, reflectingvoluntary Diversity Champion program that deepened individual understanding and adoption of diversity, inclusion, and belonging to reinforce the effect of above-target performance onBank’s commitment to DEI, and progressed talent management strategies by achieving a voluntary employee turnover rate below Target.
For the adjusted return on capital spreadaccomplishments relating to the DEI and People goal in 2015, 2016, and 2017. The target level for the three-year period 2015 through 2017 was 2.84%, and the Bank achieved a spread of 3.72% (net of adjustments), which represents 150% achievement. The2023 mentioned above, management received an overall achievement level also reflected an achievement level for the Risk Management goal component of 146%, which was the average150%.
The awards approved by the Board under the 2015 EPUP were as follows: J. Gregory Seibly, $217,800 (prorated); Lisa B. MacMillen, $197,900 (prorated); Kenneth C. Miller, $214,900; Lawrence H. Parks, $213,000; Suzanne Titus-Johnson, $190,900; and Stephen P. Traynor, $190,400.
Pension Benefits Table
The following table provides the present value of accumulated pensionretirement and pension-related benefits payable as of December 31, 2017,2023, to each of the named executive officers upon the normal retirement age of 65 under the Bank'sBank’s qualified and non-qualified defined benefit pension plans.
| | | | | | | | | | | | | | | | | | | | | | | |
| (In whole dollars) | | | | | | | |
| Name | Plan Name | | Years of
Credited
Service | | Present Value of Accumulated Benefits(1) | | Payments
During Last
Fiscal Year |
| Teresa Bazemore | Cash Balance Plan | | 2.250 | | | $ | 53,053 | | | $ | — | |
| Financial Institutions Retirement Fund | | N/A | | — | | | — | |
| Benefit Equalization Plan | | 2.250 | | | 128,204 | | | — | |
| Deferred Compensation Plan | | 2.250 | | | — | | | — | |
| Supplemental Executive Retirement Plan(2) | | 2.750 | | | 919,720 | | | — | |
| | | | | | | |
| Joseph Amato | Cash Balance Plan | | 2.667 | | | 56,856 | | | — | |
| Financial Institutions Retirement Fund | | N/A | | — | | | — | |
| Benefit Equalization Plan | | 2.667 | | | 29,459 | | | — | |
| Deferred Compensation Plan | | 2.667 | | | 20,408 | | | — | |
| Supplemental Executive Retirement Plan(3) | | N/A | | — | | | — | |
| | | | | | | |
| Greg Ward | Cash Balance Plan | | 9.667 | | | 240,891 | | | — | |
| Financial Institutions Retirement Fund | | N/A | | — | | | — | |
| Benefit Equalization Plan | | 9.667 | | | 181,504 | | | — | |
| Deferred Compensation Plan | | 9.667 | | | — | | | — | |
| Supplemental Executive Retirement Plan(2) | | 7.000 | | | 1,280,711 | | | — | |
| | | | | | | |
| Anne Segrest McCulloch | Cash Balance Plan | | 1.583 | | | 31,315 | | | — | |
| Financial Institutions Retirement Fund | | N/A | | — | | | — | |
| Benefit Equalization Plan | | 1.583 | | | 29,108 | | | — | |
| Deferred Compensation Plan | | 1.583 | | | — | | | — | |
| Supplemental Executive Retirement Plan(2) | | 2.083 | | | 306,500 | | | — | |
| | | | | | | |
| Tony Wong | Cash Balance Plan | | 28.250 | | | 843,212 | | | — | |
| Financial Institutions Retirement Fund | | 0.250 | | | 2,065 | | | — | |
| Benefit Equalization Plan | | 28.250 | | | 120,564 | | | — | |
| Deferred Compensation Plan | | 28.250 | | | 42,745 | | | — | |
| Supplemental Executive Retirement Plan(2) | | 2.667 | | | 417,661 | | | — | |
(1)For purposes of this table, the present value of accumulated benefits as of December 31, 2023 (measured December 31, 2023) was calculated using a discount rate of 4.50%, which is consistent with the assumptions used in the Bank’s financial statements. Actual benefit payments under each plan may differ based on the applicable discount rate under the terms of the relevant plan. The Bank withdrew from the FIRF, a multiple-employer tax-qualified defined benefit plan, on December 31, 1995. Prior to the Bank withdrawing from the FIRF, Mr. Wong was a participant in the plan. Amounts under the BEP and the DCP represent the present value of only the pension-related benefits accumulated for the named executive officer.
(2)For the purposes of this table, the years of credited service for the SERP represent the years of participation since the inception of the SERP in 2003 or the first year in which the participant initially became active in the SERP. For purposes of determining the amount of Bank contribution in the SERP table, the years of credited service are defined in the SERP.
(3)In accordance with Mr. Amato’s employment agreement, the SERP will not apply to him while he is employed under his employment agreement.
|
| | | | | | | | | | | | |
| (In whole dollars) | | | | | | | |
| Name | Plan Name | | Years of Credited Service |
| | Present Value of Accumulated Benefits(1) |
| | Payments During Last Fiscal Year |
|
J. Gregory Seibly
| Cash Balance Plan | | 1.083 |
| | $ | 26,660 |
| | $ | — |
|
| | Financial Institutions Retirement Fund | | N/A |
| | — |
| | — |
|
| | Benefit Equalization Plan | | 1.083 |
| | 93,654 |
| | — |
|
| | Deferred Compensation Plan | | 1.083 |
| | — |
| | — |
|
| | Supplemental Executive Retirement Plan(2) | | 1.583 |
| | 806,268 |
| | — |
|
| | | | | | | | |
Lisa B. MacMillen(3) | Cash Balance Plan | | 30.667 |
| | 713,941 |
| | — |
|
| | Financial Institutions Retirement Fund | | 9.417 |
| | 143,256 |
| | — |
|
| | Benefit Equalization Plan | | 30.667 |
| | — |
| | 642,885 |
|
| | Deferred Compensation Plan | | 30.667 |
| | 775,067 |
| | 136,823 |
|
| | Supplemental Executive Retirement Plan(2) | | 14.250 |
| | — |
| | 871,249 |
|
| | | | | | | | |
| Kenneth C. Miller | Cash Balance Plan | | 22.917 |
| | 600,318 |
| | — |
|
| | Financial Institutions Retirement Fund | | 0.917 |
| | 26,244 |
| | — |
|
| | Benefit Equalization Plan | | 22.917 |
| | 434,932 |
| | — |
|
| | Deferred Compensation Plan | | 22.917 |
| | 22,315 |
| | — |
|
| | Supplemental Executive Retirement Plan(2) | | 15.000 |
| | 1,507,771 |
| | — |
|
| | | | | | | | |
| Lawrence H. Parks | Cash Balance Plan | | 20.333 |
| | 630,000 |
| | — |
|
| | Financial Institutions Retirement Fund | | N/A |
| | — |
| | — |
|
| | Benefit Equalization Plan | | 20.333 |
| | 535,462 |
| | — |
|
| | Deferred Compensation Plan | | 20.333 |
| | 127,836 |
| | — |
|
| | Supplemental Executive Retirement Plan(2) | | 15.000 |
| | 1,695,835 |
| | — |
|
| | | | | | | | |
| Suzanne Titus-Johnson | Cash Balance Plan | | 31.333 |
| | 918,724 |
| | — |
|
| | Financial Institutions Retirement Fund | | 9.333 |
| | 150,373 |
| | — |
|
| | Benefit Equalization Plan | | 31.333 |
| | 890,021 |
| | — |
|
| | Deferred Compensation Plan | | 31.333 |
| | 150,200 |
| | — |
|
| | Supplemental Executive Retirement Plan(2) | | 12.750 |
| | 1,162,157 |
| | — |
|
| | | | | | | | |
| Stephen P. Traynor | Cash Balance Plan | | 22.250 |
| | 610,143 |
| | — |
|
| | Financial Institutions Retirement Fund | | 0.250 |
| | 5,412 |
| | — |
|
| | Benefit Equalization Plan | | 22.250 |
| | 238,107 |
| | — |
|
| | Deferred Compensation Plan | | 22.250 |
| | 161,619 |
| | — |
|
| | Supplemental Executive Retirement Plan(2) | | 15.000 |
| | 1,524,867 |
| | — |
|
| |
(1) | For purposes of this table, the present value of accumulated benefits as of December 31, 2017 (measured December 31, 2017) was calculated using a discount rate of 3.25%, which is consistent with the assumptions used in the Bank's financial statements. Actual benefit payments under each plan may differ based on the applicable discount rate under the terms of the relevant plan. The Bank withdrew from the FIRF, a multiple-employer tax-qualified defined benefit plan, on December 31, 1995. Amounts under the BEP and the DCP represent the present value of only the pension-related benefits accumulated for the named executive officer. |
| |
(2) | For the purposes of this table, the years of credited service for the SERP represent the years of participation since the inception of the SERP in 2003 or the first year in which the participant initially became active in the SERP. For purposes of determining the amount of Bank contribution in the SERP table, the years of credited service are defined in the SERP. |
| |
(3) | Ms. MacMillen served as chief operating officer until March 31, 2017. |
Narrative to Pension Benefits Table
For information regarding the plans in the table, see the discussion in our Compensation Discussion and Analysis under “Cash Balance Plan, and the Financial Institutions Retirement Fund,” “Benefit Equalization Plan,” “Deferred Compensation Plan,” and “Supplemental Executive Retirement Plan.” The valuation method and material assumptions used in quantifying the present value of the current accrued benefits in the table are consistent with the assumptions used in the Bank'sBank’s financial statements. See the discussion in “Item 8. Financial Statements and Supplementary Data – Note 1612 – Employee Retirement Plans and Incentive Compensation Plans.”
Non-Qualified Deferred Compensation Table
The following table reflects the non-qualified Deferred Compensation Plan balances as of December 31, 2017,2023, for the named executive officers.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In whole dollars) | | | | | | | | | | | | | |
| Name and Principal Position | Last Fiscal Year | | Beginning of
Year Balance | | 2023 Executive Contributions(1) | | 2023 Bank Contributions | | Aggregate
Earnings/
(Losses) | | Aggregate
(Withdrawals)/
Distributions | | Yearend 2023 Aggregate Balance |
| Teresa Bazemore | 2023 | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| President and CEO | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Joseph Amato | 2023 | | 120,495 | | | 202,279 | | | — | | | 42,733 | | | — | | | 365,507 | |
| EVP and CFO | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Greg Ward | 2023 | | — | | | — | | | — | | | — | | | — | | | — | |
| EVP and | | | | | | | | | | | | | |
| Chief Operating Officer | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Anne Segrest McCulloch | 2023 | | — | | | — | | | — | | | — | | | — | | | — | |
| EVP and | | | | | | | | | | | | | |
| Chief Legal Officer | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Tony Wong | 2023 | | 132,441 | | | 162,687 | | | — | | | 39,494 | | | — | | | 334,622 | |
| EVP and | | | | | | | | | | | | | |
| Chief Banking Officer | | | | | | | | | | | | | |
(1)The 2023 executive contributions made by Mr. Amato and Mr. Wong are included in the “Non-Equity Incentive Payment” column in the Summary Compensation Table.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In whole dollars) | | | | | | | | | | | | | |
| Name and Principal Position | Last Fiscal Year | | Beginning of Year Balance |
| | 2017 Executive Contributions(1) |
| | 2017 Bank Contributions(2) |
| | Aggregate Earnings/ (Losses) in 2017 |
| | Aggregate (Withdrawals)/ Distributions in 2017 |
| | Yearend 2017 Aggregate Balance(3) |
|
J. Gregory Seibly
| 2017 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| President and | | | | | | | | | | | | | |
| Chief Executive Officer | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Lisa B. MacMillen | 2017 | | 5,762,930 |
| | 515,037 |
| | — |
| | 920,785 |
| | — |
| | 7,198,752 |
|
| Executive Vice President and | | | | | | | | | | | | | |
| Chief Operating Officer | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Kenneth C. Miller | 2017 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Senior Vice President and | | | | | | | | | | | | | |
| Chief Financial Officer | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Lawrence H. Parks | 2017 | | 560,029 |
| | 102,000 |
| | 6,120 |
| | 417 |
| — |
| — |
| | 668,566 |
|
| Senior Vice President, | | | | | | | | | | | | | |
| External and Legislative Affairs | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Suzanne Titus-Johnson | 2017 | | 132,590 |
| | 216,190 |
| | — |
| | 52,147 |
| | — |
| | 400,927 |
|
| Senior Vice President and | | | | | | | | | | | | | |
| General Counsel and Corporate Secretary | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Stephen P. Traynor | 2017 | | 2,291,417 |
| | 479,700 |
| | 7,200 |
| | 279,631 |
| | (87,321 | ) | | 2,970,627 |
|
| Senior Vice President and | | | | | | | | | | | | | |
| Chief Banking Officer | | | | | | | | | | | | | |
| |
(1) | The 2017 executive contributions made by Ms. MacMillen and Ms. Titus-Johnson are included in the "Non-Equity Incentive Payment" and "Non-Equity LTIP Payout" columns in the Summary Compensation Table (SCT); the 2017 executive contributions made by Mr. Parks are included in the "Salary" column for 2017 in the SCT; and the 2017 executive contributions for Mr. Traynor include $120,000 reported in the “Salary” column for 2017 in the SCT. |
| |
(2) | Represents make-up Bank matching contributions lost under the Savings Plan as a result of deferring compensation. The 2017 Bank contribution made to Mr. Parks and Mr. Traynor are included in the “All Other Compensation" column for 2017 in the SCT. |
| |
(3) | The yearend 2017 aggregate balance for Mr. Parks includes $96,000 and $90,000 reported in the "Salary" Column for 2016 and 2015 in the SCT, respectively, and includes $5,760 and $5,400 reported in the "All Other Compensation" column for 2016 and 2015 in the SCT, respectively. The yearend 2017 aggregate balance for Ms. Titus-Johnson includes $120,000 in the "Salary" column for 2016 in the SCT, and includes $7,200 reported in the "All Other Compensation" column for 2016 in the SCT. The yearend 2017 aggregate balance for Ms. MacMillen includes $260,000 and $244,666 reported in the “Non-Equity Incentive Payment” and “Non-Equity LTIP Payout” columns, respectively, for 2016 in the SCT. |
Narrative to Non-Qualified Deferred Compensation Table
The Non-Qualified Deferred Compensation Table presents information about our Deferred Compensation Plan (DCP),DCP, which is designed to allow Bank officers to defer up to 100% of base salary and short- and long-term incentive cash compensation awards, as applicable. Directors may also participate in the DCP to defer up to 100% of their director fees.
In addition, since one of the factors involved in determining benefits under the Bank's Savings Plan is an officer's annual base salary compensation, this table also presents make-up matching contributions that would have been made by the Bank under the Savings Plan had the annual base salary compensation not been deferred.
The Bank'sBank’s matching contribution under the Savings Plan is calculated based on the basis of an officer's base salary after deferring base salary compensation under the DCP. As a result, an officer who defers base salary compensation forgoes the Bank'sBank’s matching contribution on the portion of compensation that is deferred. To compensate for this, the Bank makes a contribution credit to the officer's DCP balance to restore the benefit under the Savings Plan that would otherwise be lost as a result of deferring base salary compensation.
compensation, and these “make up matching contributions” are also reflected in the table.
Participants may direct the investments of deferred amounts into core mutual funds or into a brokerage account. Participants may change these investment directions at any time. All investment earnings accumulate to the benefit
of the participants on a tax-deferred basis. Brokerage fees relating to purchases and sales are charged against the value of the participant's deferred balance in the plan. The Bank pays all set-up and annual account administration fees.
Income taxes are deferred until a participant receives payment of funds from the plan. Participants may elect payouts in a lump sum or over a payout period from 2 to 10 years. A participant may change any previously elected payment schedule by submitting a written election. Any written election to change the payment schedule must be made at least 12 months prior to the original payout date, and the new payout date, in most cases, must be at least 5 years from the original payout date.
CHIEF EXECUTIVE OFFICER (CEO) PAY RATIO
For the year ended December 31, 2017,2023, the ratio of the Bank’s chief executive officer’sCEO’s total compensation for 20172023 to the Bank’s median of the annual total compensation for 20172023 of all our employees, except the chief executive officerCEO (Median Employee) is 12.86:9.34:1. For total compensation for the Bank’s chief executive officerCEO and the Median Employee, wethe Bank used the same elements of compensation presented in the Summary Compensation Table and calculated total compensation in the same manner total compensation is calculated for the Summary Compensation Table for both employees, which includes among other things,employees. The calculation also included amounts attributable to the change in pension value, which will vary among employees based upon their tenure at the Bank. For 2017,2023, the total annualized compensation of the Median Employee was $187,108,$255,057, and the total annualized compensation of the CEO as reported in the Total Compensation column in the Summary Compensation Table, was $2,406,663.$2,381,029.
WeThe Bank identified the Median Employee by calculating the 20172023 total compensation (using the same elements of compensation in the Summary Compensation Table and in the same manner total compensation is calculated for the Summary Compensation Table) for each of the employees who were employed by the Bank on December 31, 2017,2023 and ranking the 20172023 total compensation for all such employees (a list of 285318 employees) from lowest to highest, excluding the chief executive officer.CEO. The employees in the calculation included all full-time and part-time employees, and wethe Bank annualized compensation for all such employees.
DIRECTOR COMPENSATION
We provide our directors with compensation for the performance of their duties as members of the Board of Directors and for the amount of time spent on the Bank’s business.
|
| | | |
Director Compensation Table
For the Year Ended December 31, 2017 |
| | |
| (In whole dollars) | |
| Name of Directors serving during 2017 | Fees Earned
or Paid in Cash |
|
Douglas H. (Tad) Lowrey(1) | $ | 125,000 |
|
Melinda Guzman(2) | 120,000 |
|
| Bradley W. Beal | 105,000 |
|
| Craig G. Blunden | 95,000 |
|
Steven R. Gardner(3) | 95,000 |
|
Richard A. Heldebrant(4) | 105,000 |
|
| Simone Lagomarsino | 110,000 |
|
| John F. Luikart | 105,000 |
|
| Kevin Murray | 110,000 |
|
| Robert F. Nielsen | 95,000 |
|
| Brian M. Riley | 105,000 |
|
| John F. Robinson | 105,000 |
|
| F. Daniel Siciliano | 95,000 |
|
| Scott C. Syphax | 105,000 |
|
| John T. Wasley | 105,000 |
|
| Total | $ | 1,580,000 |
|
| | | | | |
Director Compensation Table
For the Year Ended December 31, 2023 |
| (1) |
| (In whole dollars) | | Mr. Lowrey served as Chair
Name of Directors serving during 2017. Mr. Lowrey’s term as director expired December 31, 2017. |
| 2023 | Fees Earned
or Paid in Cash |
(2)Simone Lagomarsino(1) | Ms. Guzman served as Vice Chair during 2017. |
| $ | 150,000 | |
(3)F. Daniel Siciliano(2) | Mr. Gardner’s term as director expired December 31, 2017. |
| 136,500 | |
(4)Brian M. Riley(3) | Mr. Heldebrant resigned as director from the Board effective December 31, 2017, upon his retirement from Star One Credit Union.132,500 | |
| David Adame | 123,000 | |
| Banafsheh Akhlaghi | 130,000 | |
| Jeffrey K Ball | 130,000 | |
| Marangal L. Domingo | 130,000 | |
| Ana F. Fonseca | 123,000 | |
| Lori Gay | 123,000 | |
Melinda Guzman(4) | 130,000 | |
| Matthew Hendricksen | 132,500 | |
| Chang M. Liu | 123,000 | |
Kevin G. Murray(4) | 130,000 | |
| Joan C. Opp | 132,500 | |
| Gary L. Trujillo | 123,000 | |
| Total | $ | 1,949,000 | |
(1)Ms. Lagomarsino served as Chair during 2023.
(2)Mr. Siciliano served as Vice Chair during 2023 and is serving as Chair for 2024.
(3)Mr. Riley began serving as Vice Chair in 2024.
(4)Mr. Murray’s and Ms. Guzman’s terms as directors expired on December 31, 2023.
On occasion, the Bank pays for resort activities for directors in connection with Board meetings and other business-related meetings, and, in some cases, the Bank may pay the expenses for spouses accompanying directors to these meetings or other Bank-sponsored events. The value of these perquisites areis considered de minimis and not included in the table above.
The 2023 Board of Directors Compensation and Expense Reimbursement Policy for 2017 (2017(2023 Directors Compensation Policy) provided the directors with compensation for the performance of their duties as members of the Board of Directors and the amount of time spent on official Bank business, as set forth below.
| | | (In whole dollars) | | | | | |
| Position | Maximum Annual Service Fee |
| | Maximum Annual Meeting Fees |
| | Total Maximum Annual Compensation |
|
| Position | |
| Position | | Maximum Annual
Service Fee | | Maximum Annual
Meeting Fees | | Total
Maximum Annual
Compensation |
| Chair | $ | 77,500 |
| | $ | 47,500 |
| | $ | 125,000 |
|
| Vice Chair | 72,500 |
| | 47,500 |
| | 120,000 |
|
| Audit and Risk Committee Chairs | 62,500 |
| | 47,500 |
| | 110,000 |
|
| Audit, Compensation and HR, and Risk Committee Chairs | |
| All Other Committee Chairs | 57,500 |
| | 47,500 |
| | 105,000 |
|
| Directors on Audit Committee | 52,500 |
| | 47,500 |
| | 100,000 |
|
| | Other Directors | 47,500 |
| | 47,500 |
| | 95,000 |
|
| Other Directors | |
| Other Directors | |
Under the 20172023 Directors Compensation Policy, service fees for the above positions were paid for serving as a director during and between regularly scheduled meetings of the Board. The maximum annual service fee was prorated and paid with the meeting fee, if applicable, at the conclusion of each two-month service period on the Board of Directors (monthend(month end February, April, June, August, October, and December). In addition, each director received a fee of $9,500$11,000 for attending any portion of five of the six regularly scheduled two-day Board meetings, subject to the annual maximum of $47,500.
$55,000.
The 20172023 Directors Compensation Policy provided that a director couldmay receive a meeting fee for participation in one regularly scheduled Board meeting by telephone.telephone or virtually. No other fee was paid for participation in meetings of the Board or Board committees by telephone or virtually or participation in other Bank or FHLBank System activities. The president of the Bank was authorized to interpret the 20172023 Directors Compensation Policy, as necessary, according to applicable statutory, regulatory, and policy limits.
Under the 20172023 Directors Compensation Policy, the final prorated service fee was to be withheld if a director did not attend (in person, by telephone, or virtually) at least 75% of all regular and special meetings of the Board and the director's assigned committees for the year, or if the Board determined a director had consistently demonstrated a lack of engagement and participation in meetings attended. In addition, the meeting fee attendance requirement provided that a director would receive a meeting fee only if he or shethe director attended the regular Board meeting, as well as at least one assigned committee meeting during the Board'sBoard’s regularly scheduled two-day meetings.
Under the 2017 Directors Compensation Policy, theThe Bank reimbursed directors for necessary and reasonable travel, subsistence, and other related expenses incurred in connection with the performance of their official duties, which may have included participation in meetings or activities for which no fee was paid.
For expense reimbursement purposes, directors' official duties included:
•Meetings of the Board and Board committees,
•Meetings requested by the Finance Agency and FHLBank System committees,
•Meetings of the Council of FHLBanks and its committees,
•Meetings of the Bank'sBank’s Affordable Housing Advisory Council,
•Events attended on behalf of the Bank when requested by the president in consultation with the Board chair,
•Other events attended on behalf of the Bank with the prior approval of the Board chair,
•Director education events attended that are consistent with the Bank’s Director Education Guidelines, and with the prior approval of the Board chair (and in the case of the Board chair, the chair of the Governance Committee), and
•National Association of Corporate Directors Annual Meeting.
The 20172023 Directors Compensation Policy also provides that directors may receive up to an additional $1,500 in compensation in the form of expense reimbursement for meals and travel for a spouse or significant other.
The 2023 Directors Compensation Policy also provided the opportunity to participate in the Bank’s Charitable Contribution Matching Gift Program.
The Board adopted a Board of Directors Compensation and Expense Reimbursement Policy for 2018,2024, which is substantially similar to the 20172023 Directors Compensation Policy, except that the maximum total servicewith no increases in director fees were increased by $10,000 for all director positions on the Board, including Board Chair and Vice Chair, all committee chairs, and all other directors, such that the total maximum compensation for 2018 was increased by $10,000 for all
2024.
directors. Director fees were increased to more closely align with relevant market benchmarks for director compensation and trends at other FHLBanks.
| |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information about those stockholders that are beneficial owners of more than 5% of the Federal Home Loan Bank of San Francisco’s outstanding capital stock, including mandatorily redeemable capital stock, as of February 28, 2018.29, 2024.
|
| | | | | |
| Name and Address of Beneficial Owner | Number of Shares Held |
| | Percentage of Outstanding Shares |
|
| Charles Schwab Bank | 4,050,000 |
| | 10.8 | % |
| 2360 Corporate Circle | | | |
| Henderson, NV 89074 | | | |
| | | | |
| MUFG Union Bank, NA | 3,240,000 |
| | 8.7 |
|
| 400 California Street | | | |
| San Francisco, CA 94104 | | | |
| | | | |
JPMorgan Chase Bank, National Association(1) | 3,068,088 |
| | 8.2 |
|
| 1111 Polaris Parkway | | | |
| Columbus, OH 43240 | | | |
| | | | |
| First Republic Bank | 2,848,500 |
| | 7.6 |
|
| 111 Pine Street | | | |
| San Francisco, CA 94111 | | | |
| | | | |
| Bank of the West | 2,331,550 |
| | 6.2 |
|
| 180 Montgomery Street | | | |
| San Francisco, CA 94104 | | | |
| Total | 15,538,138 |
| | 41.5 | % |
| |
(1) | Nonmember institution. |
| | | | | | | | | | | |
| Name and Address of Beneficial Owner | Number of
Shares Held | | Percentage of
Outstanding
Shares |
| JPMorgan Chase, National Association | 6,014,742 | | | 20.0 | % |
| 383 Madison Avenue | | | |
| New York, New York 10179 | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
The following table sets forth information about those members (or their holding companies) with officers or directors serving as directors of the Federal Home Loan Bank of San Francisco as of February 28, 2018.29, 2024.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Director Name | Name of Institution | | City | | State | | Number of
Shares Held | | Percentage of
Outstanding
Shares |
| Jeffrey K. Ball | First Pacific Bank | | Whittier | | CA | | 18,903 | | | 0.1 | % |
| Marangal (Marito) Domingo | First Technology Federal Credit Union | | San Jose | | CA | | 697,064 | | | 2.3 | |
| Ana E. Fonseca | Logix Federal Credit Union | | Valencia | | CA | | 263,925 | | | 0.9 | |
| Matthew Hendricksen | Employers Insurance Company of Nevada | | Reno | | NV | | 8,370 | | | — | |
| Matthew Hendricksen | Employers Assurance Company | | Reno | | NV | | 12,164 | | | — | |
| Matthew Hendricksen | Employers Compensation Insurance Company | | Reno | | NV | | 14,964 | | | — | |
| Matthew Hendricksen | Employers Preferred Insurance Company | | Reno | | NV | | 20,208 | | | 0.1 | |
| Matthew Hendricksen | Cerity Insurance Company | | Reno | | NV | | 4,681 | | | — | |
Simone Lagomarsino(1) | Pacific Premier Bank | | Irvine | | CA | | 194,080 | | | 0.6 | |
| Chang M. Liu | Cathay Bank | | Los Angeles | | CA | | 172,500 | | | 0.6 | |
| Joan C. Opp | Stanford Federal Credit Union | | Palo Alto | | CA | | 180,900 | | | 0.6 | |
| Brian M. Riley | Clearinghouse CDFI | | Lake Forest | | CA | | 28,376 | | | 0.1 | |
| Brian M. Riley | Oxford Life Insurance Company | | Phoenix | | AZ | | 60,664 | | | 0.2 | |
| Total | | | | | | | 1,676,799 | | | 5.5 | % |
(1)Formerly, Ms. Lagomarsino served as president and chief executive officer of Luther Burbank Corporation, and its subsidiary Luther Burbank Savings, Santa Rosa, California, which was a member in 2023, from January 2019 until its merger with Washington Federal Bank (a nonmember bank), which was completed on February 29, 2024.
|
| | | | | | | | | | | |
| Director Name | Name of Institution | | City | | State | | Number of Shares Held |
| | Percentage of Outstanding Shares |
|
| Jeffrey K. Ball | Friendly Hills Bank | | Whittier | | CA | | 8,346 |
| | — | % |
| Bradley W. Beal | One Nevada Credit Union | | Las Vegas | | NV | | 14,561 |
| | — |
|
| Craig G. Blunden | Provident Savings Bank | | Riverside | | CA | | 81,078 |
| | 0.2 |
|
| Marangal (Marito) Domingo | First Technology Federal Credit Union | | Mountain View | | CA | | 667,316 |
| | 1.8 |
|
| Simone Lagomarsino | Pacific Premier Bank | | Irvine | | CA | | 172,500 |
| | 0.5 |
|
| Joan C. Opp | Stanford Federal Credit Union | | Palo Alto | | CA | | 142,616 |
| | 0.4 |
|
| Brian M. Riley | Mohave State Bank | | Lake Havasu City | | AZ | | 29,674 |
| | 0.1 |
|
| John F. Robinson | Silicon Valley Bank | | Santa Clara | | CA | | 189,000 |
| | 0.5 |
|
| Total | | | | | | | 1,305,091 |
| | 3.5 | % |
| |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Capital stock ownership is a prerequisite to transacting any member business with the Federal Home Loan Bank of San Francisco (Bank). The members, former members, and certain other nonmembers own all the capital stock of the Bank, the majority of the directors of the Bank are officers or directors of members, and the Bank conducts its advances and purchased mortgage loan business almost exclusively with members or member successors. The Bank extends credit in the ordinary course of business to members with officers or directors who serve as directors of the Bank and to members owning more than 5% of the Bank'sBank’s capital stock (5% shareholders) on market terms that are no more favorable to them than the terms of comparable transactions with other members. In addition, the Bank may transact short-term investments, Federal funds sold, and mortgage-backed securities (MBS) with members and their affiliates that have officers or directors who serve as directors of the Bank or with 5% shareholders. All investments are market rate transactions, and all MBS are purchased through securities brokers or dealers. The Bank may also be the primary obligor on debt issued in the form of Federal Home Loan Bank (FHLBank) System consolidated obligations using underwriters and dealers, and may enter into interest rate exchange agreements with counterparties, that may be affiliates of Bank members with officers or directors who serve as directors of the Bank or affiliates of members and nonmembers owning more than 5% of the Bank'sBank’s capital stock, which are transactions in the ordinary course of the Bank'sBank’s business and are market rate transactions.
The FHLBank Act requires the Bank to establish an Affordable Housing Program (AHP). The Bank provides subsidies to members, which use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households.households earning up to 80% of the median income for the area in which they live. Subsidies may be in the form of direct grants or below-market interest rate advances. Only Bank members, along with their nonmember AHP project sponsors, may submit AHP applications. All AHP subsidies are made in the ordinary course of business.
The FHLBank Act also requires the Bank to establish a Community Investment Program (CIP) and authorizes the Bank to offer additional Community Investment Cash Advance (CICA) programs. Under these programs, the Bank provides subsidies in the form of grants and below-market interest rate advances or standby letters of credit to members for community lending and economic development projects. Only Bank members may submit applications for these credit program subsidies. All CICA subsidies are made in the ordinary course of business.
In instances where an AHP or CICA transaction involves a member that owns more than 5% of the Bank'sBank’s capital stock (or an affiliate of such a member), a member with an officer or director who is a director of the Bank, or an entity with an executive officer, director, controlling shareholder, or general partner who serves as a director of the Bank (and that has a direct or indirect interest in the subsidy), the transaction is subject to the same eligibility and other program criteria and requirements as all other comparable transactions and to the regulations governing the operations of the relevant program.
The Bank may also use members that have officers or directors who serve as directors of the Bank or 5% shareholders or their affiliates as securities custodians and derivative dealer counterparties. These financial relationships are conducted in the ordinary course of business on terms and conditions similar to those that would be available for comparable services if provided by unaffiliated entities.
The Bank does not have a written policy to have the Boardboard of Directorsdirectors (Board) review, approve, or ratify transactions with members that are outside the ordinary course of business because such transactions rarely occur. However, it has been the Bank'sBank’s practice to report to the Board all transactions between the Bank and its members that are outside the ordinary course of business, and, on a case-by-case basis, seek Board approval or ratification.
Director Independence
General
Under the rules of the Securities and Exchange Commission (SEC), the Bank is required to identify directors who are independent, and members of the Board'sBoard’s Audit Committee and Compensation and Human Resources Committee and any committee performing similar functions to a nominating committee who are not independent, using the independence definition of a national securities exchange or automated quotation system. The Bank'sBank’s capital stock is not listed on a national securities exchange or automated quotation system, and the Bank's BoardBank’s board of Directorsdirectors is not subject to the independence requirement of any such exchange or automated quotation system. The Bank is subject to the independence standards for directors serving on the Bank's Audit Committee set forth in the rules of the Federal Housing Finance Agency (Finance Agency), and looks to the Finance AgencyAgency’s independence standards to determine independence for all directors, whether or not they serve on the Audit Committee. In addition, for purposes of compliance with the SEC'sSEC’s disclosure rules only, the Board has evaluated director independence using the definition of independence articulated in the rules of the National Association of Securities Dealers Automated Quotations (NASDAQ).
In addition to the independence rules and standards above, the FHLBanks are required to comply with the rules issued by the SEC under Section 10A(m) of the Securities Exchange Act of 1934, which includes a substantive independence rule prohibiting a director from being a member of the Audit Committee if he or she, other than in his or her capacity as a member of the Audit Committee, the Bank's BoardBank’s board of Directors,directors, or any other Board committee, accepts any consulting, advisory, or other compensatory fee from the Bank or is an “affiliated person” of the Bank as defined by the SEC rules (the person controls, is controlled by, or is under common control with the Bank).
Director Independence under the Finance Agency Regulations
The Finance Agency director independence rule provides that a director is sufficiently independent to serve as a member of the Bank's Audit Committee if that director does not have a disqualifying relationship with the Bank or its management that would interfere with the exercise of that director'sdirector’s independent judgment. Disqualifying relationships under the Finance AgencyAgency’s independence standards include, but are not limited to: (i) employment with the Bank at any time during the last five years; (ii) acceptance of compensation from the Bank other than for service as a director; (iii) being a consultant, advisor, promoter, underwriter, or legal counsel for the Bank at any time within the last five years; andor (iv) being an immediate family member of an individual who is or who has been a Bank executive officer within the past five years.
Although the Finance Agency'sAgency’s independence standard only applies by regulation to members of the Bank's Audit Committee, the Bank'sBank’s Board looks to this standard for purposes of determining independence of all Bank directors.
The independence standard imposed on the Audit Committee under the Finance Agency regulations takes into account the fact that the Bank was created by Congress; the Bank has a cooperative ownership structure; the Bank is statutorily required to have member directors who are either an officer or director of a Bank member; the Bank was created to provide its members with products and services; and the Bank's BoardBank’s board of Directorsdirectors is statutorily required to administer the affairs of the Bank fairly and impartially and without discrimination in favor of or against any member borrower. The Finance Agency'sAgency’s independence standards do not include as a disqualifying relationship any business relationships between a director'sdirector’s member institution and the Bank. Consistent with the rule, the Bank'sBank’s Board does not believe that the statutorily prescribed business relationships between a director'sdirector’s member institution and the Bank interfere with the director'sdirector’s exercise of his or her independent judgment. The national securities exchanges'exchanges’ independence definition,definitions, including those of the NASDAQ, do not generally take into account the cooperative nature of the Bank. Accordingly, the Bank'sBank’s Board believes that the appropriate standard for measuring director independence is the Finance Agency'sAgency’s independence standards.
Applying the Finance Agency independence standards, the Board has determined that all directors who served in 20172023 were, and all current directors are, independent.
Director Independence under the NASDAQ Rules
IfFor purposes of compliance with the Bank usesSEC’s disclosure rules only, the Board has evaluated director independence using the definition of independence articulated in the NASDAQ rules. The NASDAQ standard for purposes of complying with the SEC disclosure rules,requires the Board mustto make an affirmative determination that the director does not have a relationship with the Bank that would impair his or her independence.“Independent director” under the NASDAQ rules means a person other than an executive officer or employee of the company or any other individual having a relationship which, in the opinion of the issuer'scompany’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
In addition, the NASDAQ rules set forth seven relationships that automatically preclude a determination of director independence. Among other things, a director is not considered to be independent if the director is, or has a family member who is, a partner in, or a controlling shareholder or an executive officer of, any organization to which the Bank made, or from which the Bank received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient'srecipient’s consolidated gross revenues for that year, or $200,000 (the payment and revenue relationship test), whichever is more. This particular relationship is referred to below as the payments/revenues relationship.
Using the NASDAQ rules, the Board affirmatively determined that in its opinion Mr. Adame, Ms. Guzman, Mr. Luikart, Mr. Murray, Mr. Nielsen,Akhlaghi, Ms. Archuleta, Mr. Siciliano, Mr. Syphax,Tavares, and Mr. Wasley,Trujillo, who are current nonmember directors and are not employed by and do not serve as a director of any member institution, are independent and, to the extent they served as nonmember directors in 2017,2023, were independent in 20172023 under the NASDAQ rules because they have no relationship with the Bank that would interfere with their exercise of independent judgment in carrying out their responsibilities.
Using the NASDAQ rules, the following former non-member director who served in 2023 was considered independent by the Board because she had no relationship with the Bank that would interfere with her exercise of independent judgment in carrying out her responsibilities as a director: Ms. Guzman.
Using the NASDAQ rules, the Board affirmatively determined that in its opinion the following current member directors are independent and, to the extent they served as member directors in 2017,2023, were independent in 20172023 under the NASDAQ rules because they have no relationship with the Bank that would interfere with their exercise of independent judgment in carrying out their responsibilities as directors: Mr. Ball, Ms. Fonseca, Mr. Beal, Mr. Blunden, Mr. Domingo,Hendricksen, Ms. Lagomarsino, Mr. Liu, Ms. Opp, Mr. Riley, and Mr. Robinson.
Riley.
In making these determinations, the Board recognized that during their directorships the member directors were employed by or served as a director of a member institution that may have conducted business with the Bank in the ordinary course of the Bank'sBank’s and the member institution’s respective businesses. The Board determined that these ordinary course customer relationships with the member institutions that had or have member directors on the Board would not interfere with the member directors'directors’ exercise of independent judgment or their independence from management under the NASDAQ rules. This determination is based on the fact that the Bank was created by Congress, the Bank has a cooperative ownership structure, the Bank is statutorily required to have member directors who are either an officer or director of a Bank member, the Bank was created to provide its members with products and services, and the Board is statutorily required to administer the affairs of the Bank fairly and impartially and without discrimination in favor of or against any member borrower.
Audit Committee Independence
The Board has an Audit Committee. Under the Finance Agency'sAgency’s independence standards and NASDAQ rules, all Audit Committee members who served in 20172023 were independent and all current Audit Committee members are independent.
All Audit Committee members who served in 20172023 and all current Audit Committee members met the substantive independence rules under Section 10A(m) of the 1934 Act.
Compensation and Human Resources Committee Independence
The Board has a Compensation and Human Resources Committee. Using the Finance Agency'sAgency’s director independence standards, and under the NASDAQ rules, allfollowing Compensation and Human Resources Committee membersmembers: Ms. Akhlaghi, Ms. Fonseca, Mr. Hendricksen, and Ms. Opp who served in 20172023 were independent, and all current Compensation and Human Resources Committee members are independent.
Under the NASDAQ rules, to be considered an independent compensation committee member, a director must meet the definition under the general NASDAQ independence rules, and the board of directors must affirmatively determine the independence of any director who will serve on the company’s compensation committee and must consider all factors specifically relevant to determining whether such a director has a relationship to the company that is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member. Relevant factors must include the source of compensation of directors, including any consulting, advisory, or other compensatory fee paid by the company to the directors and whether the director is affiliated with the company.
Using the NASDAQ rules, the following director who served on the Compensation and Human Resources Committee in 2023 was not considered independent because his organization exceeded the limits of the payment and revenue relationship test in 2020: Mr. Murray.
Governance Committee
The Board has a Governance Committee that performs certain functions that are similar to those of a nominating committee with respect to the nomination of nonmember independent directors. Using the Finance Agency’s director independence standards, all Governance Committee members who served in 20172023 were independent and all current Governance Committee members are independent.
| |
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees billed to the Federal Home Loan Bank of San Francisco (Bank) for the years ended December 31, 20172023 and 2016,2022, by its external accounting firm, PricewaterhouseCoopers LLP.
| | | | | | | | | | | |
| (In millions) | 2023 | | 2022 |
| Audit fees | $ | 1.4 | | | $ | 1.4 | |
| All other fees | — | | | — | |
| Total | $ | 1.4 | | | $ | 1.4 | |
|
| | | | | | | |
| (In millions) | 2017 |
| | 2016 |
|
| Audit fees | $ | 1.0 |
| | $ | 1.0 |
|
| All other fees | — |
| | — |
|
| Total | $ | 1.0 |
| | $ | 1.0 |
|
Audit Fees. Audit fees during 20172023 and 20162022 were for professional services rendered in connection with the audits of the Bank'sBank’s annual financial statements, the review of the Bank'sBank’s quarterly financial statements included in each Quarterly Report on Form 10-Q, and the audit of the Bank'sBank’s internal control over financial reporting.
All Other Fees. All other fees for 20172023 and 20162022 were for consulting and advisory services. The Bank is exempt from all federal, state, and local taxation, and no tax consulting fees were paid during 20172023 and 2016.
2022.
Audit Committee Pre-Approval Policy
In accordance with the Securities and Exchange Commission rules and regulations implementing the Securities Exchange Act of 1934 (SEC rules), all audit, audit-related, and non-audit services proposed to be performed by the Bank'sBank’s independent auditor must be pre-approved by the Audit Committee to ensure that they do not impair the auditor'sauditor’s independence. The SEC rules require that proposed services either be specifically pre-approved on a case-by-case basis (specific pre-approval services) or be pre-approved without case-by-case review under policies and procedures established by the Audit Committee that are detailed as to the particular service and do not delegate Audit Committee responsibilities to management (general pre-approval services).
The Bank'sBank’s Audit Committee has adopted a policy, the Independent Auditor Services Pre-Approval Policy (Policy), setting forth the procedures and conditions pursuant to which services proposed to be performed by the Bank's
Bank’s independent auditor may be approved. Under the Policy, unless services to be provided by the independent auditor have received general pre-approval, they require specific pre-approval by the Audit Committee. Any proposed services exceeding the pre-approved maximum fee amounts set forth in the appendices to the Policy will also require specific pre-approval by the Audit Committee.
The Policy is designed to be detailed as to the particular services that may be provided by the independent auditor and to provide for the Audit Committee to be informed of each service provided by the independent auditor. The Policy is also intended to ensure that the Audit Committee does not delegate to management its responsibilities in connection with the approval of services to be provided by the independent auditor.
For both specific pre-approval and general pre-approval of services, the Audit Committee considers whether the proposed services are consistent with the SEC rules on auditor independence and whether the provision of the services by the independent auditor would impair the independent auditor'sauditor’s independence. The Audit Committee also considers (i) whether the independent auditor is positioned to provide effective and efficient services, given its familiarity with the Bank'sBank’s business, management, culture, accounting systems, risk profile, and other factors, and (ii) whether having the independent auditor provide the service may enhance the Bank'sBank’s ability to manage or control risk or improve audit quality. The Audit Committee also considers the total amounts of fees for audit, audit-related, and non-audit services for a given calendar year in deciding whether to pre-approve any such services and may choose to determine, for a particular calendar year, the appropriate ratio between the total amount of fees for audit and audit-related services and the total amount of fees for permissible non-audit services.
The Audit Committee annually reviews and pre-approves the services that may be provided by the independent auditor during a given calendar year without specific pre-approval from the Audit Committee.
The Audit Committee has delegated to its chair and vice chair individually specific pre-approval authority for additional audit or audit-related services to be provided by the independent auditor, provided that the estimated fee for each type of proposed service does not exceed $50,000 and the total aggregated fees for all services pre-approved by each individual under this delegated authority do not exceed $100,000 in a calendar year. The chair or vice chair, as the case may be, is required to report to the Audit Committee any services pre-approved under the delegated authority.
In 20172023 and 2016,2022, 100% of the audit-related fees and all other fees were pre-approved by the Audit Committee.
PART IV.IV
| |
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| |
(a) (1) | Financial Statements |
(a) (1)Financial Statements
The financial statements included as part of this Form 10-K are identified in the Index to Audited Financial Statements appearing in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K, which is incorporated in this Item 15 by reference.10-K.
| |
(2) | Financial Statement Schedules(2)Financial Statement Schedules |
All financial statement schedules are omitted because they are either not applicable or the required information is shown in the financial statements or the notes thereto.
| | | | | | | | |
| | | |
| Exhibit No. | | Description |
| |
| Organization Certificate and resolutions relating to the organization of the Federal Home Loan Bank of San Francisco, incorporated by reference to Exhibit 3.1 to the Bank's Registration Statement on Form 10 filed with the Securities and Exchange Commission on June 30, 2005 (Commission File No. 000-51398) |
| | |
|
| | | |
| |
| Bylaws of the Federal Home Loan Bank of San Francisco, as amended and restated on January 26, 2018 |
| | |
|
| | Capital Plan, as amended and restated effective April 1, 2015, and updated August 3, 2015, to reflect adjustments to activity-based stock requirements,25, 2022, incorporated by reference to Exhibit 4.13.2 to the Bank'sBank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 20164, 2022 (Commission File No. 000-51398) |
| | |
| | Description of Registered Securities |
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| | Capital Plan, as amended and restated effective December 14, 2020, incorporated by reference to Exhibit 4.2 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2021 (Commission File No. 000-51398) |
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| Summary Sheet: Terms of Employment for Named Executive Officers for 20182024 |
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| Form of Director Indemnification Agreement, incorporated by reference to Exhibit 10.2 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2017 (Commission File No. 000-51398) |
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| | Form of Director Indemnification Agreement, effective November 5, 2018, incorporated by reference to Exhibit 10.3 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 8, 2019 (Commission File No. 000-51398) |
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Form of Director Indemnification Agreement, effective May 15, 2021, incorporated by reference to Exhibit 10.1 to the Bank’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 7, 2021 (Commission File No. 000-51398) |
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| | Form of Director Indemnification Agreement, effective July 28, 2022, incorporated by reference to Exhibit 10.5 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2023 (Commission File No. 000-51398) |
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| | Form of Senior Officer Indemnification Agreement, incorporated by reference to Exhibit 10.3 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2017 (Commission File No. 000-51398) |
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| | Form of Senior Officer Indemnification Agreement, effective June 9, 2021, incorporated by reference to Exhibit 10.2 to the Bank’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 7, 2021 (Commission File No. 000-51398) |
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| Employment Agreement by and among the Federal Home Loan Bank of San Francisco and John Gregory Seibly,Joseph E. Amato, dated April 26, 2016,October 7, 2020, as amended, incorporated by reference to Exhibit 10.1 to the Bank's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 4, 20163, 2023 (Commission File No. 000-51398) |
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| Change in Control SeveranceEmployment Agreement for Lisa B. MacMillen,by and among the Federal Home Loan Bank of San Francisco and Teresa Bryce Bazemore, dated February 19, 2021, incorporated by reference to Exhibit 99.210.1 to the Bank's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 7, 2011February 23, 2021 (Commission File No. 000-51398) |
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| | Amendment No. 1 to Employment Agreement by and among the Federal Home Loan Bank of San Francisco and Teresa Bryce Bazemore, dated February 29, 2024, incorporated by reference to Exhibit 10.1 to the Bank's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 29, 2024 (Commission File No. 000-51398) |
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| Board Resolution for 20182024 Board of Directors Compensation and Expense Reimbursement Policy |
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| Executive Incentive Plan, as amended and restated May 28, 2021; Appendices I-III, as approved December 23, 2016 and2016; Appendix IV, as approved December 1, 2017 |
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| | 2016 Executive Performance Unit Plan,2017; Appendix V, as amended,approved December 7, 2018; Appendix VI, as approved January 31, 2020; Appendix VII, as approved May 28, 2021; Appendix VIII, as approved December 10, 2021; and Appendix IX, as approved March 31, 2023. incorporated by reference to Exhibit 10.1310.1 to the Bank’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 5, 2023 (Commission File No. 000-51398) |
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| | Supplemental Executive Retirement Plan, as amended and restated effective January 29, 2021, incorporated by reference to Exhibit 10.10 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 201712, 2021 (Commission File No. 000-51398) |
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| 2016 Executive Performance Unit Plan Summary Description, as amended, incorporated by reference to Exhibit 10.14 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2017 (Commission File No. 000-51398) |
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| | 2015 Executive Performance Unit Plan, as amended, incorporated by reference to Exhibit 10.15 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2017 (Commission File No. 000-51398) |
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| | 2015 Executive Performance Unit Plan Summary Description, as amended, incorporated by reference to Exhibit 10.16 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2017 (Commission File No. 000-51398) |
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| | Supplemental Executive Retirement Plan, as amended and restated effective January 1, 2018 |
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| | Executive Benefit Plan, incorporated by reference to Exhibit 10.11 to the Bank's Registration Statement on Form 10 filed with the Securities and Exchange Commission on June 30, 2005 (Commission File No. 000-51398) |
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| | Original Deferred Compensation Plan, as restated, incorporated by reference to Exhibit 10.13 to Bank's Registration Statement on Form 10 filed with the Securities and Exchange Commission on June 30, 2005 (Commission File No. 000-51398) |
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| Deferred Compensation Plan, Amendedas amended and Restated Effectiverestated effective January 1, 2009,2020, incorporated by reference to Exhibit 10.14 to the Bank's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 23, 2011 (Commission File No. 000-51398) |
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| | Corporate Senior Officer Severance Policy, as amended and restated on August 14, 2013, incorporated by reference to Exhibit 10.1610.10 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 20146, 2020 (Commission File No. 000-51398) |
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| | Corporate Senior Officer Severance Policy, as amended and restated on July 30, 2021, incorporated by reference to Exhibit 10.1 to the Bank’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 5, 2021 (Commission File No. 000-51398) |
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| Amended and Restated Federal Home Loan Bank P&I Funding and Contingency Plan Agreement, effective as of January 1, 2017, by and among the Office of Finance and each of the Federal Home Loan Banks, incorporated by reference to Exhibit 10.23 to the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2017 (Commission File No. 000-51398) |
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| Joint Capital Enhancement Agreement, as amended August 5, 2011, with the other 11 Federal Home Loan Banks, incorporated by reference to Exhibit 99.1 to the Bank's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 5, 2011 (Commission File No. 000-51398) |
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| | Computation of Ratio of Earnings to Fixed Charges – December 31, 2017 |
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| | Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| | Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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| | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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| Audit Committee Report |
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| 101.INS | | Inline XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
| 101 | |
| 101.SCH | |
Inline XBRL Taxonomy Extension Schema Document |
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| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF | | Pursuant to Rule 405 of Regulation S-T, the following financial information from the Bank's annual report on Form 10-K for the period ended December 31, 2016, is formatted inInline XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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| 104 | | | Cover Page Interactive Data File - The cover page interactive data files: (i) Statements of Condition at December 31, 2017 and 2016; (ii) Statements of Income forfile does not appear in the Years Ended December 31, 2017, 2016, and 2015; (iii) Statements of Comprehensive Income forInteractive Data File because its XBRL tags are embedded within the Years Ended December 31, 2017, 2016, and 2015; (iv) Statements of Capital Accounts for the Years Ended December 31, 2017, 2016, and 2015; (v) Statements of Cash Flows for the Years Ended December 31, 2017, 2016, and 2015; and (vi) Notes to Financial Statements.Inline XBRL document. |
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++ | ++ The report contained in Exhibit 99.1 is being furnished and will not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |
ITEM 16. FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 9, 2018.8, 2024.
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FEDERAL HOME LOAN BANK OF SAN FRANCISCO | |
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/S/ J. GREGORY SEIBLY
TERESA B. BAZEMORE
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J. Gregory Seibly
Teresa B. Bazemore
President and Chief Executive Officer | |
March 9, 20188, 2024 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 9, 2018.8, 2024.
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/S/ J. GREGORY SEIBLY
TERESA B. BAZEMORE
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J. Gregory SeiblyTeresa B. Bazemore
President and Chief Executive Officer (Principal executive officer) | |
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/S/ KENNETH C. MILLERJOSEPH E. AMATO | |
Kenneth C. Miller
SeniorJoseph E. Amato
Executive Vice President and Chief Financial Officer
(Principal financial officerofficer)
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/S/ KITTY PAYNE | |
Kitty Payne
Senior Vice President and Controller
(Principal accounting officer) | |
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/S/ JOHNF. LUIKART DANIEL SICILIANO | |
John F. LuikartDaniel Siciliano
Chair of the Board of Directors | |
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/S/ BRIAN M. RILEY | |
Brian M. Riley Vice Chair of the Board of Directors | |
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/S/ JEFFREY K. BALLDAVID ADAME | |
David Adame
Director | |
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Jeffrey K. Ball/S/ BANAFSHEH AKHLAGHI
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Banafsheh Akhlaghi
Director | |
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/S/ LAURA ARCHULETA | |
Laura Archuleta Director | |
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/S/ BRADLEY W. BEAL
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Bradley W. Beal
Director
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/S/ CRAIG G. BLUNDEN
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Craig G. Blunden Director | |
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/S/ MARANGAL I. DOMINGO
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Marangal I. Domingo
Director
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/S/ MELINDA GUZMANJEFFREY K. BALL | |
Jeffrey K. Ball
Director | |
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Melinda Guzman
Director/S/ MARANGAL I. DOMINGO
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Marangal I. Domingo
Director | |
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/S/ ANA E. FONSECA | |
Ana E. Fonseca
Director | |
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/S/ LORI R. GAY | |
Lori R. Gay
Director | |
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/S/ MATTHEW HENDRICKSEN | |
Matthew Hendricksen
Director | |
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/S/ SIMONE LAGOMARSINO | |
Simone Lagomarsino Director | |
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/S/ KEVIN MURRAYCHANG M. LIU | |
Chang M. Liu
Director | |
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Kevin Murray/S/ JOAN C. OPP
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Joan C. Opp
Director | |
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/S/ SILVIO TAVARES | |
Silvio Tavares Director | |
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/S/ ROBERT F. NIELSENGARY L. TRUJILLO | |
Robert F. Nielsen
Gary L. Trujillo
Director | |
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| /S/ JOAN C. OPP
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| Joan C. Opp
Director
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/S/ JOHN F. ROBINSON
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John F. Robinson
Director
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/S/ F. DANIEL SICILIANO
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F. Daniel Siciliano
Director
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/S/ SCOTT C. SYPHAX
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Scott C. Syphax
Director
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/S/ JOHN T. WASLEY
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John T. Wasley
Director
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