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.
Credit enhancement is defined as the percentage of subordinated tranches, excess spread, and over-collateralization, if any, in a security structure that will generally absorb losses before the Bank will experience a loss on the security. The calculated averages represent the dollar-weighted averages of all the PLRMBS investments in each category shown. The classification is based on the model used to run the estimated cash flows for the CUSIP, which may not necessarily be the same as the classification at the time of origination.
The following table presents the credit-related OTTI, which is recognized in earnings, for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016.2019.
(2) Nonmember institution.
The Bank held a security interest in collateral from each of the top five advances borrowers and their affiliates sufficient to support their respective advances outstanding, and the Bank does not expect to incur any credit losses on these advances.
For information related to the Bank’s credit risk on advancesCredit Risk Exposure and allowance methodology for credit losses, see Note 9 – Allowance for Credit Losses.
Interest Rate PaymentSecurity Terms. Interest rate payment terms for advances at September 30, 2017, and December 31, 2016, are detailed below:
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | |
| September 30, 2017 |
| | December 31, 2016 |
|
Par value of advances: | | | |
Fixed rate: | | | |
Due within 1 year | $ | 22,708 |
| | $ | 13,486 |
|
Due after 1 year | 13,053 |
| | 10,845 |
|
Total fixed rate | 35,761 |
| | 24,331 |
|
Adjustable rate: | | | |
Due within 1 year | 10,414 |
| | 9,416 |
|
Due after 1 year | 15,476 |
| | 16,110 |
|
Total adjustable rate | 25,890 |
| | 25,526 |
|
Total par value | $ | 61,651 |
| | $ | 49,857 |
|
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 or variable rate advance with embedded options, the Bank will simultaneously execute an interest rate exchange agreement 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 15 – Derivatives and Hedging Activities and Note 16 – 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 feature as a stand-alone derivative at September 30, 2017, or December 31, 2016. The Bank has generally elected to account for certain advances with embedded features under the fair value option, and these advances are carried at fair value on the Statements of Condition. For more information, see Note 16 – Fair Value.
Prepayment Fees, Net. The Bank charges borrowers prepayment fees or pays borrowers prepayment credits when the principal on certain advances is paid prior to original maturity. The Bank records prepayment fees net of any associated fair value adjustments related to prepaid advances that were hedged. The net amount of prepayment fees is reflected as interest income in the Statements of Income for the three and nine months ended September 30, 2017 and 2016, as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 |
| | September 30, 2016 |
| | September 30, 2017 |
| | September 30, 2016 |
|
Prepayment fees received | $ | 1 |
| | $ | 3 |
| | $ | 1 |
| | $ | 4 |
|
Fair value adjustments | — |
| | — |
| | — |
| | 1 |
|
Net | $ | 1 |
| | $ | 3 |
| | $ | 1 |
| | $ | 5 |
|
Advance principal prepaid | $ | 2,990 |
| | $ | 896 |
| | $ | 5,998 |
| | $ | 2,755 |
|
Note 8 — Mortgage Loans Held for Portfolio
Under the Mortgage Partnership Finance® (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
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
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. As of September 30, 2017, the Bank had approved 21 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 September 30, 2017, and December 31, 2016, on mortgage loans, all of which are secured by one- to four-unit residential properties and single-unit second homes.
|
| | | | | | | |
| September 30, 2017 |
| | December 31, 2016 |
|
Fixed rate medium-term mortgage loans | $ | 37 |
| | $ | 55 |
|
Fixed rate long-term mortgage loans | 1,678 |
| | 759 |
|
Subtotal | 1,715 |
| | 814 |
|
Unamortized premiums | 64 |
| | 18 |
|
Unamortized discounts | (5 | ) | | (6 | ) |
Mortgage loans held for portfolio | 1,774 |
| | 826 |
|
Less: Allowance for credit losses | — |
| | — |
|
Total mortgage loans held for portfolio, net | $ | 1,774 |
| | $ | 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.
For information related to the Bank’s credit risk on mortgage loans and allowance methodology for credit losses, see Note 9 – Allowance for Credit Losses.
Note 9 — Allowance for Credit Losses
The Bank has established an allowance methodology for each of its portfolio segments: advances, letters of credit, and other extensions of credit, collectively referred to as “credit products,” mortgage loans held for portfolio, term securities purchased under agreements to resell, and term Federal funds sold. For more information on these portfolio segments, see “Item 8. Financial Statements and Supplementary Data – Note 10 – Allowance for Credit Losses” in the Bank’s 2016 Form 10-K.
Credit Products.The Bank manages its credit exposure related to credit productsadvances through an integrated approach that generally provides for a credit limit to be established for each borrower, includes an ongoing review of each borrower’s financial condition, and is coupled with conservative collateral and lending policies to limit the risk of loss while taking into account borrowers’ needs for a reliable funding source.
In addition, the Bank lends to eligible borrowers in accordance with federal law and Finance Agency regulations. Specifically, the Bank is required to obtain sufficient collateral to fully secure credit products up to the member’s total credit limit. Borrowers may pledge the following eligible assets to secure advances:
•one-to-four-family first lien residential mortgage loans;
•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;
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
•certain other real estate-related collateral, such as multifamily loans, commercial real estate loans, and second lien residential mortgage loans or home equity loans; and
•small business, small farm, and small agribusiness loans that are fully secured by collateral (such as real estate, equipment and vehicles, accounts receivable, and inventory) from members that are community financial institutions.
At SeptemberJune 30, 2017,2020, and December 31, 2016,2019, none of the Bank’s credit products were past due or on nonaccrual status, or considered impaired.status. There were no troubled debt restructurings related to credit products during the ninesix months ended SeptemberJune 30, 2017,2020, or during 2016.
2019.
Based on the collateral pledged as security for advances, the Bank’s credit analyses of borrowers’ financial condition, repayment history on advances, and the Bank’s credit extension and collateral policies as of SeptemberJune 30, 2017,2020, the Bank expects to collect all amounts due according to the contractual terms. Therefore, no allowance for losses on credit productsadvances was deemed necessary by the Bank.Bank as of June 30, 2020, and December 31, 2019.
For more information on the credit risk exposure and security terms of advances, see “Item 8. Financial Statements and Supplementary Data – Note 10 ��� Allowance for Credit Losses” in the Bank’s 2019 Form 10-K.
Interest Rate Payment Terms. Interest rate payment terms for advances at June 30, 2020, and December 31, 2019, are detailed below:
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Par value of advances: | | | |
Fixed rate: | | | |
Due within 1 year | $ | 15,442 | | | $ | 15,327 | |
Due after 1 year | 24,562 | | | 21,337 | |
Total fixed rate | 40,004 | | | 36,664 | |
Adjustable rate: | | | |
Due within 1 year | 3,909 | | | 17,024 | |
Due after 1 year | 6,100 | | | 11,400 | |
Total adjustable rate | 10,009 | | | 28,424 | |
Total par value | $ | 50,013 | | | $ | 65,088 | |
The Bank did not have any advances with embedded features that met the requirements to separate the embedded feature from the host contract and designate the embedded feature as a stand-alone derivative at June 30, 2020, or December 31, 2019. The Bank has never experiencedgenerally elected to account for certain advances with embedded features under the fair value option, and these advances are carried at fair value on the Statements of Condition. For more information, see Note 11 – Derivatives and Hedging Activities and Note 12 – Fair Value.
Prepayment Fees, Net. The Bank charges borrowers prepayment fees or pays borrowers prepayment credits when the principal on certain advances is paid prior to original maturity. The Bank records prepayment fees net of any credit losses on its credit products.
associated fair value adjustments related to prepaid advances that were hedged. The net amount of prepayment fees is reflected as advances interest income in the Statements of Income for the three and six months ended June 30, 2020 and 2019, as follows:
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | | | |
| June 30, 2020 | | June 30, 2019 | | June 30, 2020 | | June 30, 2019 | | |
Prepayment fees received | $ | 35 | | | $ | — | | | $ | 39 | | | $ | — | | | |
Fair value adjustments | (24) | | | — | | | (27) | | | 1 | | | |
Net | $ | 11 | | | $ | — | | | $ | 12 | | | $ | 1 | | | |
Advance principal prepaid | $ | 14,573 | | | $ | 719 | | | $ | 16,786 | | | $ | 2,731 | | | |
No member institutions were placed into receivership during the first nine months of 2017 or from October 1 to October 31, 2017.
Note 5 — Mortgage Loans Held for Portfolio.Portfolio
The following table presents information as of June 30, 2020, and December 31, 2019, on delinquent mortgage loans, asall of Septemberwhich are secured by one- to four-unit residential properties and single-unit second homes.
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Fixed rate medium-term mortgage loans | $ | 32 | | | $ | 27 | |
Fixed rate long-term mortgage loans | 2,807 | | | 3,199 | |
Subtotal | 2,839 | | | 3,226 | |
Unamortized premiums | 56 | | | 91 | |
Unamortized discounts | (2) | | | (3) | |
Mortgage loans held for portfolio(1) | 2,893 | | | 3,314 | |
Less: Allowance for credit losses | (5) | | | — | |
Total mortgage loans held for portfolio, net | $ | 2,888 | | | $ | 3,314 | |
(1)Excludes accrued interest receivable of $18 and $19 at June 30, 2017,2020, and December 31, 2016.2019, respectively.
Medium-term loans have original contractual terms of 15 years or less, and long-term loans have contractual terms of more than 15 years.
|
| | | | | | | |
| September 30, 2017 |
| | December 31, 2016 |
|
| Recorded Investment(1) |
| | Recorded Investment(1) |
|
30 – 59 days delinquent | $ | 10 |
| | $ | 7 |
|
60 – 89 days delinquent | 1 |
| | 3 |
|
90 days or more delinquent | 13 |
| | 15 |
|
Total past due | 24 |
| | 25 |
|
Total current loans | 1,759 |
| | 805 |
|
Total mortgage loans | $ | 1,783 |
| | $ | 830 |
|
In process of foreclosure, included above(2) | $ | 4 |
| | $ | 5 |
|
Nonaccrual loans | $ | 13 |
| | $ | 15 |
|
Loans past due 90 days or more and still accruing interest | $ | — |
| | $ | — |
|
Serious delinquencies as a percentage of total mortgage loans outstanding(3) | 0.72 | % | | 1.79 | % |
| |
(1) | The recorded investment in a loan is the unpaid principal balancePayment 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 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 loans. 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. |
The amounts of charge-offs and recoveries of allowance for credit losses on the mortgage loan portfolio were de minimis during the three and nine months ended September 30, 2017 and 2016.
The allowance for credit losses and recorded investment by impairment methodology for individually and collectively evaluated impaired loans are as follows:those where the borrower has failed to make timely payments of principal and/or interest in accordance with the terms of the loan. Other delinquency statistics include nonaccrual loans and loans in process of foreclosure. The following tables present the payment status for mortgage loans and other delinquency statistics for Bank’s mortgage loans at June 30, 2020, and December 31, 2019.
22
|
| | | | | | | |
| September 30, 2017 |
| | December 31, 2016 |
|
Allowance for credit losses, end of period: | | | |
Individually evaluated for impairment | $ | — |
| | $ | — |
|
Collectively evaluated for impairment | — |
| | — |
|
Total allowance for credit losses | $ | — |
|
| $ | — |
|
Recorded investment, end of period: | | | |
Individually evaluated for impairment | $ | 9 |
| | $ | 12 |
|
Collectively evaluated for impairment | 1,774 |
| | 818 |
|
Total recorded investment | $ | 1,783 |
| | $ | 830 |
|
The recorded investment, unpaid principal balance, and related allowance of impaired loans individually evaluated for impairment are as follows:
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | |
June 30, 2020 | | | | | |
| Origination Year | | | | |
Payment Status | <2016 | | 2016 to 2020 | | Amortized Cost(1) |
30 – 59 days delinquent | $ | 76 | | | $ | 5 | | | $ | 81 | |
60 – 89 days delinquent | 126 | | | 8 | | | 134 | |
90 days or more delinquent | 9 | | | 5 | | | 14 | |
Total past due | 211 | | | 18 | | | 229 | |
Total current loans | 2,454 | | | 210 | | | 2,664 | |
Total MPF(2) | $ | 2,665 | | | $ | 228 | | | $ | 2,893 | |
In process of foreclosure, included above(3) | | | | | $ | 2 | |
Nonaccrual loans(2)(4) | | | | | $ | 14 | |
| | | | | |
Serious delinquencies as a percentage of total mortgage loans outstanding(5) | | | | | 0.49 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 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:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 |
| | September 30, 2016 |
| | September 30, 2017 |
| | September 30, 2016 |
|
With no related allowance | $ | 9 |
| | $ | 12 |
| | $ | 10 |
| | $ | 12 |
|
With an allowance | — |
| | — |
| | — |
| | — |
|
Total | $ | 9 |
| | $ | 12 |
| | $ | 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 have a credit risk exposure at the time of purchase equivalent to assets rated AA, if purchased prior to April 2017, or to assets rated BBB for loans 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:
| | | | | |
December 31, 2019 | |
| |
1.Payment Status | The first layerRecorded Investment(1) |
30 – 59 days delinquent | $ | 15 | |
60 – 89 days delinquent | 2 | |
90 days or more delinquent | 7 | |
Total past due | 24 | |
Total current loans | 3,310 | |
Total MPF | $ | 3,334 | |
In process of protection against loss is the liquidation value of the real property securing the loan.foreclosure, included above(3) | $ | — | |
Nonaccrual loans | $ | 7 | |
| |
2.Serious delinquencies as a percentage of total mortgage loans outstanding(5) | 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. 0.22 | % |
| |
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. |
Allowance(1) With the adoption of new accounting guidance for Credit Lossesthe measurement of credit losses on MPFfinancial instruments on January 1, 2020, payment status of mortgage loans is disclosed at amortized cost. The recorded investment at December 31, 2019, in a loan is the unpaid principal balance of the loan, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts, and direct write-downs. The recorded investment is not net of any valuation allowance. The amortized cost at June 30, 2020, in a loan is the unpaid principal balance of the loan, adjusted for net deferred loan fees or costs, unamortized premiums or discounts, and direct write-downs.
(2) At June 30, 2020, unpaid principal balances of conventional mortgage loans held in portfolio that were in a forbearance plan as a result of the COVID-19 pandemic totaled $210. Of that total, $13 were current, $65 were 30 to 59 days past due, $125 were 60 to 90 days past due, and $7 were greater than 90 days past due and in nonaccrual payment status. The conventional mortgage loans in forbearance represent 7% of the Bank’s mortgage loans held for portfolio at June 30, 2020.
(3) Includes loans for which the servicer has reported a decision to foreclose or to pursue a similar alternative, such as deed-in-lieu. Loans –The Bank evaluates thein process of foreclosure are included in past due or current loans depending on their delinquency status.
(4) At June 30, 2020, $13 of these mortgage loans on nonaccrual status did not have an associated 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 September 30, 2017, and December 31, 2016.
The second component applies to(5) Represents loans that are not specifically identified90 days or more past due or in the process of foreclosure as impaireda percentage of the recorded investment of total mortgage loans outstanding.
Section 4013 of the CARES Act provides temporary relief from the accounting and is basedreporting requirements for TDR for certain loan modifications related to the COVID-19 pandemic. Specifically, the CARES Act provides that a qualifying financial institution may elect to suspend (i) the requirements under U.S. GAAP for certain loan modifications that would otherwise be categorized as a TDR, and (ii) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. Section 4013 of the CARES Act applies to any modification related to an economic hardship as a result of the COVID-19 pandemic, including an interest rate modification, a repayment plan, or any similar arrangement that defers or delays payment of principal or interest, that occurs during the period beginning on March 1, 2020 and ending on the Bank’s estimateearlier of probable credit losses on those loansDecember 31, 2020, or the date that is 60 days after the declaration of the national emergency related to the COVID-19 pandemic ends for a loan that was not more than 30 days past due as of the financial statement date.December 31, 2019. The Bank evaluateshas elected to suspend TDR accounting for eligible modifications under Section 4013 of 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 September 30, 2017, and December 31, 2016.
CARES Act.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Troubled Debt Restructurings –Troubled debt restructuring (TDR) is considered to have occurred when a concession is grantedUnder the MPF Program, the Bank may purchase from members, for its own portfolio, conventional conforming fixed rate residential mortgage loans under the MPF Original product and mortgage loans insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs from its participating members under the MPF Government Product. Participating members originate or purchase mortgage loans, credit-enhance them and sell them to the debtorBank, and generally retain the servicing of the loans. The participating members may grant a forbearance period to borrowers who have requested forbearance based on COVID-19 related difficulties regardless of the status of the loan at the time of the request. The Bank continues to apply its accounting policy for economic or legal reasons relatedpast due loans and charge-offs to loans during the debtor’s financial difficulties andforbearance period. The accrual status for loans under forbearance will be driven by the past due status of the loan.
Allowance for Credit Losses on MPF Loans. MPF loans are evaluated collectively for expected credit losses when similar risk characteristics exist. MPF loans that concession woulddo not have been considered otherwise. An MPF loan considered a TDR is individuallyshare risk characteristics with other pools are evaluated for impairment when determiningexpected credit losses on an individual basis, factoring in the credit enhancement structure at the master commitment level. The Bank determines its related allowanceallowances for credit losses. Credit loss is measured by factoring inlosses on MPF loans through analyses that include consideration of various loan portfolio and collateral-related characteristics, such as past performance, current conditions, and reasonable and supportable forecasts of expected economic conditions. The Bank uses models that employ a variety of methods, such as projected cash flow shortfalls incurred asflows, to estimate expected credit losses over the life of the reporting dateloans. 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 June 30, 2020, the economic loss attributableBank’s reasonable and supportable forecast of housing prices expects, on average, for prices to delayingappreciate 1% over a one-year forecast horizon before reverting to long-term housing price appreciation rates of 4% over a three-year forecast horizon based on historical averages. The Bank also incorporates associated credit enhancements, if any, to determine its estimate of expected credit losses.
Certain MPF loans may be evaluated for credit losses by the original contractual principal and interest due dates,Bank using the practical expedient for collateral-dependent assets. A mortgage loan is considered collateral-dependent if applicable.
The recorded investmentrepayment is expected to be provided by the sale of the Bank's nonperforming MPFloans classified as TDRs totaled $3 asunderlying property, that is, if it is considered likely that the borrower will default. The Bank may estimate the fair value of September 30, 2017, and $3 asthis collateral by applying an appropriate loss severity rate or using third-party estimates or property valuation models. The expected credit loss of December 31, 2016. During the three and nine months ended September 30, 2017 and 2016,a collateral-dependent mortgage loan is equal to the difference between the pre- and post-modification recorded investment in TDRs that occurred during the year was de minimis. Noneamortized cost of the MPF loans classified as TDRs withinloan and the previous 12 months experienced a payment default.
Term Federal Funds Sold. estimated fair value of the collateral, less estimated selling costs. The Bank investswill 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 Federal funds sold with counterparties that are considered by the Bank to beallowance for credit loss.
The following table presents a rollforward of investment quality, and these investments are evaluated for purposes of anthe allowance for credit losses only ifon the investment is not paidmortgage loan portfolio for the three and six months ended June 30, 2020. The Bank recorded a de minimis allowance for credit losses on the mortgage loan portfolio for the three and six months ended June 30, 2019.
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
| June 30, 2020 | | | | June 30, 2020 | | |
Balance, beginning of the period | $ | 3 | | | | | $ | — | | | |
Adjustment for cumulative effect of accounting change | — | | | | | 3 | | | |
| | | | | | | |
Provision for/(reversal of) credit losses | 2 | | | | | 2 | | | |
Balance, end of the period | $ | 5 | | | | | $ | 5 | | | |
See “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” and “Item 8. Financial Statements and Supplementary Data – Note 10 – Allowance for Credit Losses” in the Bank’s 2019 Form 10-K for information on the prior methodology for evaluating credit losses, as well as a discussion on classes of financing receivables, placing them on nonaccrual status, and charging them off when due. All investments in Federal funds sold as of September 30, 2017, and December 31, 2016, were repaid or are expected to be repaid accordingnecessary. For more information related to the contractual terms.Bank’s accounting policies for collateral-dependent loans, see “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” in the Bank’s 2019 Form 10-K.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 106 — Deposits
The Bank maintains demand deposit accounts that are directly related to the extension of credit to members and offers short-term deposit programs to members and qualifying nonmembers. In addition, a member that services mortgage loans may deposit in the Bank funds collected in connection with the mortgage loans, pending disbursement of these funds to the owners of the mortgage loans. The Bank classifies these types of deposits as non-interest-bearing deposits.
Deposits as of September 30, 2017, and December 31, 2016, were as follows:
|
| | | | | | | |
| September 30, 2017 |
| | December 31, 2016 |
|
Interest-bearing deposits: | | | |
Demand and overnight | $ | 126 |
| | $ | 167 |
|
Total interest-bearing deposits | 126 |
| | 167 |
|
Non-interest-bearing deposits: | | | |
Other | 14 |
| | 2 |
|
Total non-interest-bearing deposits
| 14 |
| | 2 |
|
Total | $ | 140 |
| | $ | 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 Septemberas of June 30, 2017,2020, and December 31, 2016, are detailed in the following table:2019, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | |
| Amount Outstanding | | Weighted Average Interest Rate | | Amount Outstanding | | Weighted Average Interest Rate |
Interest-bearing deposits: | | | | | | | |
Adjustable rate | $ | 778 | | | 0.01 | % | | $ | 427 | | | 1.30 | % |
Fixed rate | 15 | | | 0.01 | | | — | | | — | |
Total interest-bearing deposits | 793 | | | | | 427 | | | |
Non-interest-bearing deposits | 149 | | | | | 110 | | | |
Total | $ | 942 | | | | | $ | 537 | | | |
|
| | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Amount Outstanding |
| | Weighted Average Interest Rate |
| | Amount Outstanding |
| | Weighted Average Interest Rate |
|
Interest-bearing deposit – Adjustable rate | $ | 126 |
| | 0.85 | % | | $ | 167 |
| | 0.01 | % |
Non-interest-bearing deposits | 14 |
| | | | 2 |
| | |
Total | $ | 140 |
| | | | $ | 169 |
| | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 117 — 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 “Item 8. Financial StatementStatements and Supplementary Data – Note 20 – Commitments and Contingencies” in the Bank’s 20162019 Form 10-K. In connection with each issuance of consolidated obligations, each FHLBank specifies the type, term, and amount of debt it requests to have issued on its behalf. The Office of Finance tracks the amount of debt issued on behalf of each FHLBank. In addition, the Bank separately tracks and records as a liability its specific portion of the consolidated obligations issued and is the primary obligor for that portion of the consolidated obligations issued. The Finance Agency and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance.
Redemption Terms. The following is a summary of the Bank’s participation in consolidated obligation bonds at SeptemberJune 30, 2017,2020, and December 31, 2016.
2019.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | September 30, 2017 | | December 31, 2016 | | June 30, 2020 | | | December 31, 2019 | |
Contractual Maturity | Amount Outstanding |
| | Weighted Average Interest Rate |
| | Amount Outstanding |
| | Weighted Average Interest Rate |
| Contractual Maturity | Amount Outstanding | | Weighted Average Interest Rate | | Amount Outstanding | | Weighted Average Interest Rate |
Within 1 year | $ | 54,277 |
| | 1.12 | % | | $ | 33,879 |
| | 0.82 | % | Within 1 year | $ | 55,308 | | | 0.25 | % | | $ | 53,549 | | | 1.68 | % |
After 1 year through 2 years | 10,129 |
| | 1.26 |
| | 10,597 |
| | 0.99 |
| After 1 year through 2 years | 8,091 | | | 0.45 | | | 13,853 | | | 1.67 | |
After 2 years through 3 years | 2,269 |
| | 1.66 |
| | 1,318 |
| | 1.32 |
| After 2 years through 3 years | 456 | | | 1.77 | | | 770 | | | 1.93 | |
After 3 years through 4 years | 1,837 |
| | 1.70 |
| | 1,055 |
| | 1.84 |
| After 3 years through 4 years | 105 | | | 2.59 | | | 135 | | | 2.74 | |
After 4 years through 5 years | 1,622 |
| | 2.02 |
| | 1,350 |
| | 1.59 |
| After 4 years through 5 years | 737 | | | 1.84 | | | 937 | | | 2.08 | |
After 5 years | 2,146 |
| | 2.66 |
| | 2,021 |
| | 2.42 |
| After 5 years | 1,721 | | | 2.71 | | | 2,126 | | | 2.94 | |
Total par value | 72,280 |
| | 1.24 | % | | 50,220 |
| | 0.98 | % | Total par value | 66,418 | | | 0.37 | % | | 71,370 | | | 1.73 | % |
Unamortized premiums | 10 |
| | | | 15 |
| | | Unamortized premiums | 9 | | | | | 1 | | | |
Unamortized discounts | (10 | ) | | | | (9 | ) | | | Unamortized discounts | (7) | | | (10) | | |
Valuation adjustments for hedging activities | (12 | ) | | | | 6 |
| | | Valuation adjustments for hedging activities | 26 | | | 9 | | |
Fair value option valuation adjustments | (2 | ) | | | | (8 | ) | | | Fair value option valuation adjustments | 3 | | | 2 | | |
Total | $ | 72,266 |
| | | | $ | 50,224 |
| | | Total | $ | 66,449 | | | $ | 71,372 | | |
The Bank’s participation in consolidated obligation bonds outstanding includes callable bonds of $8,300$2,635 at SeptemberJune 30, 2017,2020, and $4,670$6,345 at December 31, 2016.2019. When a callable bond for which the Bank is the primary obligor is issued, the Bank may simultaneously enter into an interest rate swap (in which the Bank pays a variable rate and receives a fixed rate) with a call feature that mirrors the call option embedded in the bond (a sold callable swap). The Bank had notional amounts of interest rate exchange agreements hedging callable bonds of $5,414$65 at SeptemberJune 30, 2017,2020, and $2,125$2,085 at December 31, 2016.2019. The combined sold callable swaps and callable bonds enable the Bank to meet its funding needs at costs not otherwise directly attainable solely through the issuance of non-callable debt, while effectively converting the Bank’s net payment to an adjustable rate.
The Bank’s participation in consolidated obligation bonds at SeptemberJune 30, 2017,2020, and December 31, 2016,2019, was as follows:
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Par value of consolidated obligation bonds: | | | |
Non-callable | $ | 63,783 | | | $ | 65,025 | |
Callable | 2,635 | | | 6,345 | |
Total par value | $ | 66,418 | | | $ | 71,370 | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | |
| September 30, 2017 |
| | December 31, 2016 |
|
Par value of consolidated obligation bonds: | | | |
Non-callable | $ | 63,980 |
| | $ | 45,550 |
|
Callable | 8,300 |
| | 4,670 |
|
Total par value | $ | 72,280 |
| | $ | 50,220 |
|
The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding at SeptemberJune 30, 2017,2020, and December 31, 2016,2019, by the earlier of the year of contractual maturity or next call date.
| | Earlier of Contractual Maturity or Next Call Date | September 30, 2017 |
| | December 31, 2016 |
| Earlier of Contractual Maturity or Next Call Date | June 30, 2020 | | December 31, 2019 |
Within 1 year | $ | 61,801 |
| | $ | 38,099 |
| Within 1 year | $ | 57,508 | | | $ | 58,239 | |
After 1 year through 2 years | 9,394 |
| | 10,747 |
| After 1 year through 2 years | 8,331 | | | 12,768 | |
After 2 years through 3 years | 894 |
| | 743 |
| After 2 years through 3 years | 451 | | | 195 | |
After 3 years through 4 years | 85 |
| | 455 |
| After 3 years through 4 years | 40 | | | 70 | |
After 4 years through 5 years | 5 |
| | 85 |
| After 4 years through 5 years | 37 | | | 47 | |
After 5 years | 101 |
| | 91 |
| After 5 years | 51 | | | 51 | |
Total par value | $ | 72,280 |
| | $ | 50,220 |
| Total par value | $ | 66,418 | | | $ | 71,370 | |
Consolidated obligation discount notes are consolidated obligations issued to raise short-term funds. These notes are issued at less than their face value and redeemed at par value when they mature. The Bank’s participation in consolidated obligation discount notes, all of which are due within one year, was as follows:
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | September 30, 2017 | | December 31, 2016 | | June 30, 2020 | | | December 31, 2019 | |
| Amount Outstanding |
| | Weighted Average Interest Rate (1) |
| | Amount Outstanding |
| | Weighted Average Interest Rate (1) |
| | Amount Outstanding | | Weighted Average Interest Rate (1) | | Amount Outstanding | | Weighted Average Interest Rate (1) |
Par value | $ | 29,949 |
| | 1.04 | % | | $ | 33,529 |
| | 0.46 | % | Par value | $ | 19,429 | | | 0.42 | % | | $ | 27,447 | | | 1.61 | % |
Unamortized discounts | (47 | ) | | | | (23 | ) | | | Unamortized discounts | (13) | | | (71) | | |
Total | $ | 29,902 |
| | | | $ | 33,506 |
| | | Total | $ | 19,416 | | | $ | 27,376 | | |
consolidated obligations outstanding, see “Item 8. Financial Statements and Supplementary Data – Note 12 –
27
Note 12 — Accumulated Other Comprehensive Income/(Loss)
The following table summarizes the changes in AOCI for the three months ended September 30, 2017 and 2016: |
| | | | | | | | | | | | | | | |
| Net Non-Credit-Related OTTI Loss on AFS Securities |
| | Net Non-Credit-Related OTTI Loss on HTM Securities |
| | Pension and Postretirement Benefits |
| | Total AOCI |
|
Balance, June 30, 2016 | $ | 39 |
| | $ | (12 | ) | | $ | (13 | ) | | 14 |
|
Other comprehensive income/(loss) before reclassifications: | | | | | | | |
Net change in pension and postretirement benefits | | | | | (2 | ) | | (2 | ) |
Net change in fair value | 68 |
| | | | | | 68 |
|
Accretion of non-credit-related OTTI loss | | | 2 |
| | | | 2 |
|
Reclassification from other comprehensive income/(loss) to net income/(loss): | | | | | | |
|
|
Non-credit-related OTTI to credit-related OTTI | 2 |
| | — |
| | | | 2 |
|
Net current period other comprehensive income/(loss) | 70 |
| | 2 |
| | (2 | ) | | 70 |
|
Balance, September 30, 2016 | $ | 109 |
| | $ | (10 | ) | | $ | (15 | ) | | $ | 84 |
|
| | | | | | | |
Balance, June 30, 2017 | $ | 250 |
| | $ | (7 | ) | | $ | (16 | ) | | $ | 227 |
|
Other comprehensive income/(loss) before reclassifications: | | | | | | | |
Net change in fair value | 75 |
| |
|
| |
|
| | 75 |
|
Accretion of non-credit-related OTTI loss |
|
| | — |
| |
|
| | — |
|
Reclassification from other comprehensive income/(loss) to net income/(loss): | | | | | | | |
Non-credit-related OTTI to credit-related OTTI | 6 |
| | — |
| |
|
| | 6 |
|
Net current period other comprehensive income/(loss) | 81 |
| | — |
| | — |
| | 81 |
|
Balance, September 30, 2017 | $ | 331 |
| | $ | (7 | ) | | $ | (16 | ) | | $ | 308 |
|
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 8 — Accumulated Other Comprehensive Income/(Loss)
The following table summarizes the changes in AOCI for the ninethree months ended SeptemberJune 30, 20172020 and 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Unrealized Gain/(Loss) on AFS Securities | | Net Non-Credit-Related OTTI Loss on AFS Securities | | Net Non-Credit-Related OTTI Loss on HTM Securities | | Pension and Postretirement Benefits | | Total AOCI |
Balance, March 31, 2019 | $ | 6 | | | $ | 301 | | | $ | (3) | | | $ | (17) | | | $ | 287 | |
Other comprehensive income/(loss) before reclassifications: | | | | | | | | | |
| | | | | | | | | |
Non-credit-related OTTI loss | | | (2) | | | — | | | | | (2) | |
Net change in fair value | 9 | | | 2 | | | | | | | 11 | |
Accretion of non-credit loss | | | | | 1 | | | | | 1 | |
Reclassification from other comprehensive income/(loss) to net income/(loss): | | | | | | | | | |
Non-credit-related OTTI to credit-related OTTI | | | 3 | | | — | | | | | 3 | |
| | | | | | | | | |
Net current period other comprehensive income/(loss) | 9 | | | 3 | | | 1 | | | — | | | 13 | |
Balance, June 30, 2019 | $ | 15 | | | $ | 304 | | | $ | (2) | | | $ | (17) | | | $ | 300 | |
| | | | | | | | | |
Balance, March 31, 2020 | $ | (213) | | | $ | — | | | $ | (1) | | | $ | (14) | | | $ | (228) | |
Other comprehensive income/(loss) before reclassifications: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Net change in fair value | 192 | | | — | | | | | | | 192 | |
Accretion of non-credit loss | | | | | 1 | | | | | 1 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Net current period other comprehensive income/(loss) | 192 | | | — | | | 1 | | | — | | | 193 | |
Balance, June 30, 2020 | $ | (21) | | | $ | — | | | $ | — | | | $ | (14) | | | $ | (35) | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | | | | | |
| 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, 2015 | $ | 43 |
| | $ | (14 | ) | | $ | (14 | ) | | 15 |
|
Other comprehensive income/(loss) before reclassifications: | | | | | | | |
Net change in pension and postretirement benefits | | | | | (1 | ) | | (1 | ) |
Non-credit-related OTTI loss | (12 | ) | | — |
| | | | (12 | ) |
Net change in fair value | 71 |
| | | | | | 71 |
|
Accretion of non-credit-related OTTI loss | | | 4 |
| | | | 4 |
|
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) | 66 |
| | 4 |
| | (1 | ) | | 69 |
|
Balance, September 30, 2016 | $ | 109 |
| | $ | (10 | ) | | $ | (15 | ) | | $ | 84 |
|
| | | | | | | |
Balance, December 31, 2016 | $ | 136 |
| | $ | (9 | ) | | $ | (16 | ) | | $ | 111 |
|
Other comprehensive income/(loss) before reclassifications: | | | | | | | |
Non-credit-related OTTI loss | (3 | ) | | — |
| | | | (3 | ) |
Net change in fair value | 188 |
| | | | | | 188 |
|
Accretion of non-credit-related OTTI loss | | | 2 |
| | | | 2 |
|
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) | 195 |
| | 2 |
| | — |
| | 197 |
|
Balance, September 30, 2017 | $ | 331 |
| | $ | (7 | ) | | $ | (16 | ) | | $ | 308 |
|
The following table summarizes the changes in AOCI for the six months ended June 30, 2020 and 2019: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Unrealized Gain/(Loss) on AFS Securities | | Net Non-Credit-Related OTTI Loss on AFS Securities | | Net Non-Credit-Related OTTI Loss on HTM Securities | | Pension and Postretirement Benefits | | Total AOCI |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Balance, December 31, 2018 | $ | (32) | | | $ | 287 | | | $ | (3) | | | $ | (17) | | | $ | 235 | |
Other comprehensive income/(loss) before reclassifications: | | | | | | | | | |
| | | | | | | | | |
Non-credit-related OTTI loss | | | (2) | | | — | | | | | (2) | |
Net change in fair value | 47 | | | 16 | | | | | | | 63 | |
Accretion of non-credit loss | | | | | 1 | | | | | 1 | |
Reclassification from other comprehensive income/(loss) to net income/(loss): | | | | | | | | | |
Non-credit-related OTTI to credit-related OTTI | | | 3 | | | — | | | | | 3 | |
Net current period other comprehensive income/(loss) | 47 | | | 17 | | | 1 | | | — | | | 65 | |
Balance, June 30, 2019 | $ | 15 | | | $ | 304 | | | $ | (2) | | | $ | (17) | | | $ | 300 | |
| | | | | | | | | |
Balance, December 31, 2019 | $ | 21 | | | $ | 268 | | | $ | (1) | | | $ | (14) | | | $ | 274 | |
Other comprehensive income/(loss) before reclassifications: | | | | | | | | | |
| | | | | | | | | |
Net change in fair value | (310) | | | — | | | | | | | (310) | |
Accretion of non-credit loss | | | | | 1 | | | | | 1 | |
| | | | | | | | | |
| | | | | | | | | |
Net current period other comprehensive income/(loss) | (310) | | | — | | | 1 | | | — | | | (309) | |
Adoption of ASU 2016-13, as amended(1) | 268 | | | (268) | | | | | | | — | |
Balance, June 30, 2020 | $ | (21) | | | $ | — | | | $ | — | | | $ | (14) | | | $ | (35) | |
(1) With the adoption of changes to accounting standards on measurement of credit losses for financial instruments on January 1, 2020, OTTI assessment was replaced with an evaluation for an allowance for credit loss (see Note 1 – Basis of Presentation and Note 2 – Recently Issued and Adopted Accounting Guidance for further information).
Note 139 — Capital
Capital Requirements. Under the Housing Act, the Director of the Finance Agency is responsible for setting the risk-based capital standards for the FHLBanks. The FHLBank Act and regulations governing the operations of the FHLBanks require that the Bank’s minimum capital stock requirement for shareholders must be sufficient to enable the Bank to meet its regulatory requirements for total capital, leverage capital, and risk-based capital. The Bank must maintain: (i) total regulatory capital in an amount equal to at least 4% of its total assets, (ii) leverage capital in an amount equal to at least 5% of its total assets, and (iii) permanent capital in an amount that is greater than or equal to its risk-based capital requirement.
Beginning in February 2020, the Finance Agency issued guidance that augmented existing statutory and regulatory capital requirements to require each FHLBank to maintain a ratio of at least two percent of capital stock to total assets in order to help preserve the cooperative structure incentives that encourage members to remain fully engaged in the oversight of their investment in the FHLBank. The Finance Agency will consider the proportion of capital stock to assets, measured on a daily average basis at monthend, when assessing each FHLBank’s capital management practices. As of June 30, 2020, the Bank was in compliance with this capital guidance.
Because the Bank issues only Class B stock, regulatory capital and permanent capital for the Bank are both composed of retained earnings and Class B stock, including mandatorily redeemable capital stock (which is classified as a liability for financial reporting purposes). Regulatory capital and permanent capital do not include AOCI. Leverage capital is defined as the sum of permanent capital, weighted by a 1.5 multiplier, plus non-permanent capital.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The risk-based capital requirement is equal to the sum of the Bank’s credit risk, market risk, and operations risk capital requirements, all of which are calculated in accordance with the rules and regulations of the Finance Agency. The Finance Agency may require an FHLBank to maintain a greater amount of permanent capital than is required by the risk-based capital requirement as defined.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
As of SeptemberJune 30, 2017,2020, and December 31, 2016,2019, the Bank was in compliance with these capital rules and requirements as shown in the following table. | | | September 30, 2017 | | December 31, 2016 | | June 30, 2020 | | | December 31, 2019 | |
| Required |
| | Actual |
| | Required |
| | Actual |
| | Required | | Actual | | Required | | Actual |
Risk-based capital | $ | 2,049 |
| | $ | 6,383 |
| | $ | 2,241 |
| | $ | 5,883 |
| Risk-based capital | $ | 1,390 | | | $ | 6,245 | | | $ | 1,519 | | | $ | 6,605 | |
Total regulatory capital | $ | 4,380 |
| | $ | 6,383 |
| | $ | 3,678 |
| | $ | 5,883 |
| Total regulatory capital | $ | 3,738 | | | $ | 6,245 | | | $ | 4,274 | | | $ | 6,605 | |
Total regulatory capital ratio | 4.00 | % | | 5.83 | % | | 4.00 | % | | 6.40 | % | Total regulatory capital ratio | 4.00 | % | | 6.68 | % | | 4.00 | % | | 6.18 | % |
Leverage capital | $ | 5,475 |
| | $ | 9,575 |
| | $ | 4,597 |
| | $ | 8,825 |
| Leverage capital | $ | 4,672 | | | $ | 9,368 | | | $ | 5,342 | | | $ | 9,908 | |
Leverage ratio | 5.00 | % | | 8.74 | % | | 5.00 | % | | 9.60 | % | Leverage ratio | 5.00 | % | | 10.03 | % | | 5.00 | % | | 9.27 | % |
Mandatorily Redeemable Capital Stock. The Bank had mandatorily redeemable capital stock totaling $342$83 outstanding to seven3 institutions at SeptemberJune 30, 2017,2020, and $457$138 outstanding to six3 institutions at December 31, 2016.2019. The change in mandatorily redeemable capital stock for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, was as follows:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | | Six Months Ended | |
| September 30, 2017 |
| | September 30, 2016 |
| | September 30, 2017 |
| | September 30, 2016 |
| | June 30, 2020 | | June 30, 2019 | | June 30, 2020 | | June 30, 2019 | |
Balance at the beginning of the period | $ | 404 |
| | $ | 486 |
| | $ | 457 |
| | $ | 488 |
| Balance at the beginning of the period | $ | 83 | | | $ | 227 | | | $ | 138 | | | $ | 227 | | |
Reclassified from/(to) capital during the period | — |
| | 4 |
| | 2 |
| | 56 |
| Reclassified from/(to) capital during the period | — | | | — | | | 3 | | | — | | |
Redemption of mandatorily redeemable capital stock | (7 | ) | | (1 | ) | | (61 | ) | | (1 | ) | |
| Repurchase of excess mandatorily redeemable capital stock | (55 | ) | | (5 | ) | | (56 | ) | | (59 | ) | Repurchase of excess mandatorily redeemable capital stock | — | | | (89) | | | (58) | | | (89) | | |
Balance at the end of the period | $ | 342 |
| | $ | 484 |
| | $ | 342 |
| | $ | 484 |
| Balance at the end of the period | $ | 83 | | | $ | 138 | | | $ | 83 | | | $ | 138 | | |
Cash dividends on mandatorily redeemable capital stock were recorded as interest expense in the amount of $7$2 and $11$4 for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, and in the amount of $25$4 and $33$8 for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.
The Bank’s mandatorily redeemable capital stock is discussed more fully in “Item 8. Financial Statements and
Supplementary Data – Note 15 – Capital” in the Bank’s 20162019 Form 10-K.
The following table presents mandatorily redeemable capital stock amounts by contractual redemption period at SeptemberJune 30, 2017,2020, and December 31, 2016.2019.
| | | | | | | | | | | |
Contractual Redemption Period | June 30, 2020 | | December 31, 2019 |
Within 1 year | $ | 81 | | | $ | 135 | |
| | | |
| | | |
| | | |
| | | |
Past contractual redemption date because of remaining activity(1) | 2 | | | 3 | |
Total | $ | 83 | | | $ | 138 | |
|
| | | | | | | |
Contractual Redemption Period | September 30, 2017 |
| | December 31, 2016 |
|
After 2 years through 3 years | $ | 325 |
| | $ | — |
|
After 3 years through 4 years | — |
| | 379 |
|
Past contractual redemption date because of remaining activity(1) | 17 |
| | 78 |
|
Total | $ | 342 |
| | $ | 457 |
|
(1) Represents mandatorily redeemable capital stock that is past the end of the contractual redemption period because of outstanding activity.
| |
(1) | Represents mandatorily redeemable capital stock that is past the end of the contractual redemption period because of outstanding activity. |
Excess Stock Repurchase, Retained Earnings, and Dividend Framework. The By Finance Agency regulation, dividends may be paid only out of current net earnings or previously retained earnings. As required by the Finance Agency, the Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework (Framework) summarizes the Bank’s capital management principles and objectives, as well as its policies and practices, with respect to retained earnings, dividend payments, and the repurchase of excess capital stock.The Bank may be
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
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.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Bank’s Board of Directors reviews the Framework at least annually and may amend the Framework from time to time. In January 2017, theThe Framework was amended and approved by the Bank’s Board of Directors to includeincludes 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 Board may also revise or eliminate the dividend policy in the future. The Bank’s historical dividend rates and the dividend philosophy are not indicative of future dividend declarations.
The Bank’s Risk Management Policy limits the payment of dividends if the ratio of the Bank’s estimated market value of total capital to par value of capital stock falls below certain levels. If this ratio at the end of any quarter is less than 100% but greater than or equal to 70%, any dividend would be limited to an annualized rate no greater than the daily average of the three-month LIBORFederal funds effective rate for the applicable quarter (subject to certain conditions), and if this ratio is less than 70%, the Bank would be restricted from paying a dividend. The ratio of the Bank’s estimated market value of total capital to par value of capital stock was 219%234% as of SeptemberJune 30, 2017.
2020.
In addition, the Bank monitors the condition of its PLRMBS portfolio, the ratio of the Bank’s estimated market value of total capital to par value of capital stock, its overall financial performance and retained earnings, developments in the mortgage and credit markets, and other relevant information as the basis for determining the payment of dividends and the repurchase of excess capital stock each quarter.in future quarters.
Retained Earnings – The following tables summarize the activity related to retained earnings for the three and nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Restricted Retained Earnings Related to: | | |
| Unrestricted Retained Earnings |
| | Valuation Adjustments |
| | Other |
| | Joint Capital Enhancement Agreement |
| | Total Restricted Retained Earnings |
| | Total Retained Earnings |
|
Balance, June 30, 2016 | $ | 761 |
| | $ | — |
| | $ | 1,650 |
| | $ | 417 |
| | $ | 2,067 |
| | $ | 2,828 |
|
Net income | 233 |
| — |
| — |
| | — |
| | 58 |
| | 58 |
| | 291 |
|
Cash dividends on capital stock | (52 | ) | | | | | | | | — |
| | (52 | ) |
Balance, September 30, 2016 | $ | 942 |
| | $ | — |
| | $ | 1,650 |
| | $ | 475 |
| | $ | 2,125 |
| | $ | 3,067 |
|
| | | | | | | | | | | |
Balance, June 30, 2017 | $ | 872 |
| | $ | 21 |
| | $ | 1,750 |
| | $ | 546 |
| | $ | 2,317 |
| | $ | 3,189 |
|
Net income | 65 |
| | — |
| | — |
| | 16 |
| | 16 |
| | 81 |
|
Cash dividends on capital stock | (44 | ) | | | | | | | | — |
| | (44 | ) |
Transfers from restricted retained earnings | 1,771 |
| | (21 | ) | | (1,750 | ) | | — |
| | (1,771 | ) | | — |
|
Balance, September 30, 2017 | $ | 2,664 |
| | $ | — |
| | $ | — |
| | $ | 562 |
| | $ | 562 |
| | $ | 3,226 |
|
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | 478 |
| | (10 | ) | | — |
| | 117 |
| | 107 |
| | 585 |
|
Cash dividends on capital stock | (146 | ) | | | | | | | | — |
| | (146 | ) |
Balance, September 30, 2016 | $ | 942 |
| | $ | — |
| | $ | 1,650 |
| | $ | 475 |
| | $ | 2,125 |
| | $ | 3,067 |
|
| | | | | | | | | | | |
Balance, December 31, 2016 | $ | 888 |
| | $ | 18 |
| | $ | 1,650 |
| | $ | 500 |
| | $ | 2,168 |
| | $ | 3,056 |
|
Net income | 144 |
| | 3 |
| | 100 |
| | 62 |
| | 165 |
| | 309 |
|
Cash dividends on capital stock | (139 | ) | | | | | | | | — |
| | (139 | ) |
Transfers from restricted retained earnings | 1,771 |
| | (21 | ) | | (1,750 | ) | | — |
| | (1,771 | ) | | — |
|
Balance, September 30, 2017 | $ | 2,664 |
| | $ | — |
| | $ | — |
| | $ | 562 |
| | $ | 562 |
| | $ | 3,226 |
|
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. Priorperiod, and maintains an amount of total retained earnings at least equal to July 2017,its required retained earnings as described in the Framework. As determined using the Bank’s Framework had three categoriesmethodology, the required level of restricted retained earnings: Valuation Adjustments, Other (which represented a targeted amount), and the Joint Capital Enhancement (JCE Agreement). Under the Framework, the Bank’stotal retained earnings methodology determined the Bank’s required amount of restricted retained earnings. As determined by the Bank’s Framework, from July 2015 to January 2017, the Bank’s restricted retained earnings requirement was $2,000, and$2,500 from January 2017 to2018 through July 2017, the Bank’s restricted retained earnings requirement was $2,300.
2019. In July 2017,2019, 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 Adjustmentsmethodology was further revised and Other) and approved revisions to the Bank’s retained earnings methodology to provide forresulted in a required level of all retained earnings of $2,300 for loss protection, capital compliance,$2,400. In January 2020, the methodology was further revised and business growth.resulted in a required level of retained earnings of $2,500. 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 Bank’s restricted retained earnings totaled $729 and $713 at June 30, 2020, and December 31, 2019, respectively. The Bank’s unrestricted retained earnings totaled $2,765 and $2,754 at June 30, 2020, and December 31, 2019, respectively.
For more information on restricted retained earnings and the Bank’s Framework, see “Item 8. Financial Statements and Supplementary Data – Note 15 – Capital” in the Bank’s 20162019 Form 10-K.
Partial Recovery of Prior Capital Distribution to Financing Corporation – The Competitive Equality Banking Act of 1987 was enacted in August 1987, to, among other things, provide for the recapitalization of the Federal Savings and Loan Insurance Corporation through a newly-chartered entity, the Financing Corporation. Capital distributions from the FHLBanks provided the capitalization of the Financing Corporation, in exchange for Financing Corporation nonvoting capital stock. Capital distributions made by the FHLBanks in 1987, 1988, and 1989, aggregated to $680. Upon passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, the Bank’s previous investment in the Financing Corporation’s capital stock was determined to be non-redeemable; the Bank charged off its prior capital distributions to the Financing Corporation directly against retained earnings.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
On October 2, 2019, the Financing Corporation commenced the process of dissolution and determined that excess funds aggregating to $200 were available for distribution to its stockholders, the FHLBanks. The Bank’s partial recovery, which was determined based on its share of the $680 originally contributed, approximated $40. The Financing Corporation dissolved on July 6, 2020. The Bank received these funds in the second quarter of 2020 and treated receipt of these funds as a return of the Bank’s investment in Financing Corporation capital stock, and therefore as a partial recovery of the prior capital distributions made by the Bank to the Financing Corporation in 1987, 1988, and 1989. These funds have been credited to unrestricted retained earnings.
Dividend Payments – Finance Agency rules state that FHLBanks may declare and pay dividends only from previously retained earnings or current net earnings, and may not declare or pay dividends based on projected or anticipated earnings. There is no requirement that the Board of Directors declare and pay any dividend. A decision by the Board of Directors to declare or not declare a dividend is a discretionary matter and is subject to the requirements and restrictions of the FHLBank Act and applicable requirements under the regulations governing the operations of the FHLBanks.
In addition, Finance Agency rules do not permit the Bank to pay dividends in the form of capital stock if its excess
capital stock exceeds 1% of its total assets. Excess capital stock is defined as the aggregate of the capital stock held by each shareholder in excess of its minimum capital stock requirement, as established by the Bank’s capital plan. As of September 30, 2017, the Bank’s excessExcess capital stock totaled $452,$211, or 0.41%0.23% of total assets.
assets as of June 30, 2020. Excess capital stock totaled $197, or 0.18% of total assets as of December 31, 2019.
In the thirdsecond quarter of 2017,2020, the Bank paid dividends at an annualized rate of 5.00%, totaling $40, including $38 in dividends on capital stock and $2 in dividends on mandatorily redeemable capital stock. In the second quarter of 2019, the Bank paid dividends at an annualized rate of 7.00%, totaling $51,$56, including $44$52 in dividends on capital stock and $7$4 in dividends on mandatorily redeemable capital stock.
In the third quarterfirst six months of 2016,2020, the Bank paid dividends at an annualized rate of 9.17%5.99%, totaling $63,$94, including $52$90 in dividends on capital stock and $11 in dividends on mandatorily redeemable capital stock.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
In the first nine months of 2017, the Bank paid dividends at an annualized rate of 7.69%, totaling $164, including $139 in dividends on capital stock and $25$4 in dividends on mandatorily redeemable capital stock. In the first ninesix months of 2016,2019, the Bank paid dividends at an annualized rate of 8.70%7.00%, totaling $179,$110, including $146$102 in dividends on capital stock and $33$8 in dividends on mandatorily redeemable capital stock.
For the periods referenced above, the Bank paid dividends in cash. Dividends on capital stock are recognized as dividends on the Statements of Capital Accounts, and dividends on mandatorily redeemable capital stock are recognized as interest expense on the Statements of Income.
On October 26, 2017,July 23, 2020, the Bank’s Board of Directors declared a quarterly cash dividend on the capital stock outstanding during the thirdsecond quarter of 20172020 at an annualized rate of 7.00%5.00%, totaling $55,$38, including $48$37 in dividends on capital stock and $7$1 in dividends on mandatorily redeemable capital stock. The Bank recorded the dividend on October 26, 2017.July 23, 2020. The Bank expects to pay the dividend on November 13, 2017.August 11, 2020. Dividends on mandatorily redeemable capital stock will be recognized as interest expense in the fourththird quarter of 2017.2020.
Excess Capital Stock – The Bank’s capital plan provides that the Bank may repurchase some or all of a shareholder’s excess capital stock, including any excess mandatorily redeemable capital stock, at the Bank’s discretion, subject to certain statutory and regulatory requirements. The Bank 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 stock at a member’s request, at the Bank’s discretion, subject to certain statutory and regulatory requirements. A shareholder’s excess capital stock is defined as any capital stock holdings in excess of the shareholder’s minimum capital stock requirement, as established by the Bank’s capital plan. The Bank’s practice is to repurchase the surplus capital stock of all members and the excess capital stock of all former members on a daily schedule. Surplus capital stock is defined as any stock holdings in excess of 115% of a member’s minimum stock requirement. The Bank calculates the amount of stock to be repurchased each business day based on the shareholder’s capital stock outstanding after all stock transactions are completed for the day, ensuring that each member and former member would continue to meet its minimum capital stock requirement after the repurchase.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Bank may change this practice at any time. The Bank repurchased $98$707 and $275$423 in excess capital stock induring the thirdsecond quarter of 20172020 and 2016,2019, respectively, and $331$1,138 and $663$767 in excess capital stock induring the first ninesix months of 20172020 and 2016,2019, respectively.
The Bank is required to redeem any mandatorily redeemable capital stock that is in excess of a former member’s minimum stock requirement on or after the expiration of the five-year redemption date. During the thirdsecond quarter of 20172020 and 2016,2019, the Bank redeemed $7 and $1, respectively,a de minimis amount in mandatorily redeemable capital stock, for which the five-year redemption period had expired, at its $100 par value. The stock was redeemed on the scheduled redemption dates or, for stock that was not excess stock on its scheduled redemption date because of outstanding activity with the Bank, on the first available repurchase date after the stock was no longer required to support outstanding activity with the Bank.
On October 26, 2017,Concentration. The following table presents the Bank announced that it plans to repurchase the surplusconcentration in capital stock of all members and the excessheld by institutions whose capital stock of all nonmember shareholders on November 14, 2017. Surplus capital stock is defined as any stock holdings in excess of 115% of a member’s minimum stock requirement.
Excess capital stock totaled $452 as of September 30, 2017, which included surplus capital stock of $261. Excess capital stock totaled $488 as of December 31, 2016, which included surplus capital stock of $325.
Forownership represented 10% or more information on excess capital stock, see “Item 8. Financial Statements and Supplementary Data �� Note 15
– Capital” in the Bank’s 2016 Form 10-K.
Concentration. JPMorgan Chase Bank, National Association, a nonmember institution, held $339, or 11%, of the Bank’s outstanding capital stock, including mandatorily redeemable capital stock, as of SeptemberJune 30, 2017, and $400, or 14% as of December 31, 2016. No other institution held 10% or more of the Bank’s outstanding capital stock, as of September 30, 2017,2020, or December 31, 2016.2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | |
Name of Institution | Capital Stock Outstanding | | Percentage of Total Capital Stock Outstanding | | Capital Stock Outstanding | | Percentage of Total Capital Stock Outstanding |
First Republic Bank | $ | 478 | | | 17 | % | | $ | 368 | | | 12 | % |
| | | | | | | |
MUFG Union Bank, National Association | 261 | | | 10 | | | 394 | | | 12 | |
| | | | | | | |
| | | | | | | |
Subtotal | 739 | | | 27 | | | 762 | | | 24 | |
Others | 2,012 | | | 73 | | | 2,376 | | | 76 | |
Total | $ | 2,751 | | | 100 | % | | $ | 3,138 | | | 100 | % |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 1410 — 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 two2 business segments. For purposes of segment reporting, adjusted net interest income includes income and expense associated with net settlements from economic hedges that are recorded in “Net gain/(loss) on derivatives and hedging activities” in other income, excludes interest income and expense associated with ineffectiveness from fair value hedges that are recorded in the same line as the earnings effect of the hedged item, and excludes interest expense that is recorded in “Mandatorily redeemable capital stock.” Other key financial information, such as 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 more information on these operating segments, see “Item 8. Financial Statements and Supplementary Data –
Note 17 – Segment Information” in the Bank’s 20162019 Form 10-K.
The following table presents the Bank’s adjusted net interest income by operating segment and reconciles total adjusted net interest income to income before the AHP assessment for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016.2019.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Advances- Related Business |
| | Mortgage- Related Business(1) |
| | Adjusted Net Interest Income |
| | Amortization of Basis Adjustments(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 |
|
Three months ended: |
September 30, 2017 | $ | 62 |
| | $ | 82 |
| | $ | 144 |
| | $ | 1 |
| | $ | (10 | ) | | $ | 7 |
| | $ | 146 |
| | $ | (4 | ) | | $ | 51 |
| | $ | 91 |
|
September 30, 2016 | 42 |
| | 84 |
| | 126 |
| | (1 | ) | | (7 | ) | | 11 |
| | 123 |
| | 241 |
| | 39 |
| | 325 |
|
Nine months ended: |
September 30, 2017 | 167 |
| | 246 |
| | 413 |
| | (1 | ) | | (35 | ) | | 25 |
| | 424 |
| | 92 |
| | 170 |
| | 346 |
|
September 30, 2016 | 115 |
| | 254 |
| | 369 |
| | (5 | ) | | (22 | ) | | 33 |
| | 363 |
| | 403 |
| | 112 |
| | 654 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Advances- Related Business | | Mortgage- Related Business(1) | | Adjusted Net Interest Income | | Amortization of Basis Adjustments and (Gain)/Loss on Fair Value Hedges(2) | |
Income/(Expense) on Economic Hedges(3) | | Interest Expense on Mandatorily Redeemable Capital Stock(4) | | Net Interest Income After Provision for/(Reversal of) Credit Losses | | Other Income/ (Loss) | | Other Expense | | Income/(Loss) Before AHP Assessment |
Three months ended: | | | | | | | | | | | | | | | | | | | |
June 30, 2020 | $ | 69 | | | $ | 75 | | | $ | 144 | | | $ | 3 | | | $ | (10) | | | $ | 2 | | | $ | 149 | | | $ | (9) | | | $ | 43 | | | $ | 97 | |
June 30, 2019 | 79 | | | 58 | | | 137 | | | 23 | | | — | | | 4 | | | 110 | | | (7) | | | 48 | | | 55 | |
Six months ended: | | | | | | | | | | | | | | | | | | | |
June 30, 2020 | $ | 132 | | | $ | 87 | | | $ | 219 | | | $ | 74 | | | $ | (18) | | | $ | 4 | | | $ | 159 | | | $ | 9 | | | $ | 79 | | | $ | 89 | |
June 30, 2019 | 165 | | | 126 | | | 291 | | | 34 | | | (5) | | | 8 | | | 254 | | | 8 | | | 91 | | | 171 | |
| | | | | | | | | | | | | | | | | | | |
| |
(1) | The mortgage-related business includes total accretion or amortization associated with other-than-temporarily impaired PLRMBS, which are recognized in interest income, totaled $24 and $24 for the three months ended September 30, 2017 and 2016; and totaled $70 and $76 for the nine months ended September 30, 2017 and 2016,(1) The mortgage-related business includes total accretion or amortization associated with other-than-temporarily impaired PLRMBS, which are recognized in interest income, totaled $17 and $19 for the three months ended June 30, 2020 and 2019; and totaled $37 for the six months ended June 30, 2020 and 2019. The mortgage-related business includes a provision for/(reversal of) credit losses of $(7) and $32 for the three and six months ended June 30, 2020, respectively. The mortgage-related business does not include credit-related OTTI losses of $5 and $6 for the three and six months ended June 30, 2019, respectively. The mortgage-related business does not include credit-related OTTI losses of $6 and $3 for the three months ended September 30, 2017 and 2016, and $15 and $14 for the nine months ended September 30, 2017 and 2016, 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.
|
(2) Represents amortization of amounts deferred for adjusted net interest income purposes only and changes in fair value of the derivative hedging instrument and the hedged item attributable to the hedged risk for designated fair value hedges recorded in net interest income.
(3) The Bank includes income and expense associated with net settlements from economic hedges in adjusted net interest income in its analysis of financial performance for its 2 operating segments. For financial reporting purposes, the Bank does not include these amounts in net interest income in the Statements of Income, but instead records them in other income in “Net gain/(loss) on derivatives and hedging activities.”
(4) The Bank excludes interest expense on mandatorily redeemable capital stock from adjusted net interest income in its analysis of financial performance for its 2 operating segments.
The following table presents total assets by operating segment at SeptemberJune 30, 2017,2020, and December 31, 2016.2019.
| | | | | | | | | | | | | | | | | |
| Advances- Related Business | | Mortgage- Related Business | | Total Assets |
June 30, 2020 | $ | 73,306 | | | $ | 20,134 | | | $ | 93,440 | |
December 31, 2019 | 85,709 | | | 21,133 | | | 106,842 | |
| | | | | |
|
| | | | | | | | | | | |
| Advances- Related Business |
| | Mortgage- Related Business |
| | Total Assets |
|
September 30, 2017 | $ | 90,265 |
| | $ | 19,238 |
| | $ | 109,503 |
|
December 31, 2016 | 74,018 |
| | 17,923 |
| | 91,941 |
|
Note 1511 — 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 to create variable rate structures. The interest rate exchange agreements are generally executed at
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
the same time the advances and bondsconsolidated obligations 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 the executing bank or broker-dealer or on a swap execution facility, but in either case, the Bank’s counterparty is a derivatives clearing organization or clearinghouse(clearinghouse) once the derivative transaction has been accepted for clearing. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit.
Additional uses of interest rate exchange agreements include: (i) offsetting embedded features in assets and liabilities, (ii) hedging anticipated issuance of debt, (iii) matching against consolidated obligation discount notes 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.clearinghouse. The Bank’s use of interest rate exchange agreements results in one of the following classifications: (i) a fair value hedge of an underlying financial instrument or (ii) an economic hedge of assets, or liabilities, or (iii) an intermediary transaction for members.
The Bank primarily uses the following derivative instruments:
Interest Rate Swaps – An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. One of the simplest forms of an interest rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, the party receives cash flows equivalent to the interest on the same notional principal amount at a variable rate for the same period of time. The variable rate received or paid by the Bank in most interest rate exchange agreements is indexed to LIBOR.
Interest Rate Caps and Floors – In a cap agreement, additional cash flow is generated if the price or interest rate of an underlying variable rate rises above a certain threshold (or cap) price. In a floor agreement, additional cash flow is generated if the price or interest rate of an underlying variable rate falls below a certain threshold (or floor) price. Caps and floors may be used in conjunction with assets or liabilities. In general, caps and floors are designed as protection against the interest rate on a variable rate asset or liability rising above or falling below a certain level.
Hedging Activities. The Bank documents at inception all relationships between derivatives designated as hedging instruments and hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing hedge effectiveness. Derivatives designated as fair value hedges may be transacted to hedge: (i) assets and liabilities on the Statement of Condition, (ii) firm commitments, or (iii) forecasted transactions. The Bank also formally assesses (both at hedge inception and on an ongoing basis) whether the hedging derivatives have been effective in offsetting changes in the fair value of hedged items attributable to the hedged risk and whether those derivatives may be expected to remain effective hedges in future periods. The Bank typically uses regression analyses or other statistical analyses to assess the effectiveness of its hedges. When it is determined that a derivative has not been or is not expected to be effective as a hedge, the Bank discontinues hedge accounting prospectively.
The Bank 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.
derivatives.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Bank may haveFor more information related to the following types of hedged items:
Investments–The Bank may invest in U.S. Treasury and agency obligations, agency MBS, and the taxable portion of highly rated state or local housing finance agency obligations. 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 by entering into interest rate exchange agreements (economic hedges) that offset the changes in fair value or cash flows of the securities. The market value changes of both the trading securities and the associated interest rate exchange agreements are included in other income in the Statements of Income.
Advances– The Bank offers a wide 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 or variable rate advance with embedded options, the Bank will simultaneously execute an interest rate exchange agreement with terms that offset the termsinstruments and embedded optionshedging activities, see “Item 8. Financial Statements and Supplementary Data – Note 18 – Derivatives and Hedging Activities” in the advance. The combinationBank’s 2019 Form 10-K. For more information related to the Bank’s accounting policies for derivatives, see “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of the advance and the interest rate exchange agreement effectively creates a variable rate asset.
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.
Mortgage Loans–The Bank’s investment portfolio includes fixed rate mortgage loans. The prepayment options embedded in mortgage loans can result in extensions or contractionsSignificant Accounting Policies” 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.2019 Form 10-K.
The Bank executes callable swaps in conjunction with the issuance of certain consolidated obligations to create funding that is economically equivalent to fixed rate callable bonds. Although these derivatives are economic hedges against the prepayment risk of specific loan pools and are referenced to individual liabilities, they do not receive either fair value or cash flow hedge accounting treatment.
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.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
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 offsetting derivatives receives 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 $64 and $89, at September 30, 2017, and December 31, 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.
The following table summarizes the notional amount and fair value of derivative instruments, including the effect of netting adjustments and cash collateral as of SeptemberJune 30, 2017,2020, and December 31, 2016.2019. For purposes of this disclosure, the derivative values include the fair value of derivatives and related accrued interest.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | | | December 31, 2019 | | | | |
| Notional Amount of Derivatives | | Derivative Assets | | Derivative Liabilities | | Notional Amount of Derivatives | | Derivative Assets | | Derivative Liabilities |
Derivatives designated as hedging instruments: | | | | | | | | | | | |
Interest rate swaps | $ | 45,324 | | | $ | 13 | | | $ | 792 | | | $ | 39,622 | | | $ | 31 | | | $ | 370 | |
Total | 45,324 | | | 13 | | | 792 | | | 39,622 | | | 31 | | | 370 | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | |
Interest rate swaps | 45,558 | | | 11 | | | 33 | | | 60,424 | | | 13 | | | 14 | |
Interest rate caps and floors | 980 | | | — | | | — | | | 980 | | | — | | | — | |
Mortgage delivery commitments | 20 | | | — | | | — | | | 46 | | | — | | | — | |
Total | 46,558 | | | 11 | | | 33 | | | 61,450 | | | 13 | | | 14 | |
Total derivatives before netting and collateral adjustments | $ | 91,882 | | | 24 | | | 825 | | | $ | 101,072 | | | 44 | | | 384 | |
Netting adjustments and cash collateral(1) | | | 26 | | | (824) | | | | | (11) | | | (384) | |
Total derivative assets and total derivative liabilities | | | $ | 50 | | | $ | 1 | | | | | $ | 33 | | | $ | — | |
(1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, and also cash collateral and related accrued interest held or placed with the same clearing agents and/or counterparty. Cash collateral posted and related accrued interest was $859 and $378 at June 30, 2020, and December 31, 2019, respectively. Cash collateral received and related accrued interest was $10 and $5 at June 30, 2020, and December 31, 2019, respectively.
The following tables present, by type of hedged item, the gains and losses on fair value hedging relationships and the impact of those derivatives on the Bank’s Statements of Income for the three and six months ended June 30, 2020 and 2019.
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | | | |
| Interest Income/(Expense) | | | | |
| Advances | | AFS Securities | | Consolidated Obligation Bonds |
Total interest income/(expense) presented in the Statements of Income | $ | 142 | | | $ | 61 | | | $ | (82) | |
Gain/(loss) on fair value hedging relationships | | | | | |
Derivatives(1) | $ | (86) | | | $ | (81) | | | $ | 2 | |
Hedged items | (12) | | | 22 | | | 6 | |
Net gain/(loss) on fair value hedging relationships | $ | (98) | | | $ | (59) | | | $ | 8 | |
35
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 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 | $ | 22,382 |
| | $ | 61 |
| | $ | 20 |
| | $ | 20,741 |
| | $ | 67 |
| | $ | 32 |
|
Total | 22,382 |
| | 61 |
| | 20 |
| | 20,741 |
| | 67 |
| | 32 |
|
Derivatives not designated as hedging instruments: | | | | | | | | | | | |
Interest rate swaps | 34,771 |
| | 51 |
| | 44 |
| | 42,135 |
| | 67 |
| | 49 |
|
Interest rate caps and floors | 1,563 |
| | 2 |
| | 1 |
| | 2,180 |
| | 6 |
| | — |
|
Mortgage delivery commitments | 10 |
| | — |
| | — |
| | 13 |
| | — |
| | — |
|
Total | 36,344 |
| | 53 |
| | 45 |
| | 44,328 |
| | 73 |
| | 49 |
|
Total derivatives before netting and collateral adjustments | $ | 58,726 |
| | 114 |
| | 65 |
| | $ | 65,069 |
| | 140 |
| | 81 |
|
Netting adjustments and cash collateral(1) | | | (22 | ) | | (62 | ) | | | | (74 | ) | | (79 | ) |
Total derivative assets and total derivative liabilities | | | $ | 92 |
| | $ | 3 |
| | | | $ | 66 |
| | $ | 2 |
|
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| |
(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 $47 and $22 at September 30, 2017, and December 31, 2016, respectively. Cash collateral received and related accrued interest was $7 and $16 at September 30, 2017, and December 31, 2016, respectively.
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | | | |
| Interest Income/(Expense) | | | | |
| Advances | | AFS Securities | | Consolidated Obligation Bonds |
Total interest income/(expense) presented in the Statements of Income | $ | 456 | | | $ | 82 | | | $ | (442) | |
Gain/(loss) on fair value hedging relationships | | | | | |
Derivatives(1) | $ | (174) | | | $ | (242) | | | $ | 22 | |
Hedged items | 185 | | | 226 | | | (29) | |
Net gain/(loss) on fair value hedging relationships | $ | 11 | | | $ | (16) | | | $ | (7) | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| Six Months Ended June 30, 2020 | | | | |
| Interest Income/(Expense) | | | | |
| Advances | | AFS Securities | | Consolidated Obligation Bonds |
Total interest income/(expense) presented in the Statements of Income | $ | 421 | | | $ | 112 | | | $ | (358) | |
Gain/(loss) on fair value hedging relationships | | | | | |
Derivatives(1) | $ | (737) | | | $ | (1,049) | | | $ | 28 | |
Hedged items | 598 | | | 915 | | | (17) | |
Net gain/(loss) on fair value hedging relationships | $ | (139) | | | $ | (134) | | | $ | 11 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Six Months Ended June 30, 2019 | | | | | | |
| Interest Income/(Expense) | | | | | | |
| Advances | | AFS Securities | | Consolidated Obligation Bonds | | |
Total interest income/(expense) presented in the Statements of Income | $ | 954 | | | $ | 161 | | | $ | (897) | | | |
Gain/(loss) on fair value hedging relationships | | | | | | | |
Derivatives(1) | $ | (256) | | | $ | (370) | | | $ | 41 | | | |
Hedged items | 288 | | | 343 | | | (57) | | | |
Net gain/(loss) on fair value hedging relationships | $ | 32 | | | $ | (27) | | | $ | (16) | | | |
(1)Includes net interest settlements.
The following tables present the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of the hedged items as of June 30, 2020, and December 31, 2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | | | |
Hedged Item Type | Amortized Cost of Hedged Asset/(Liability)(1) | | Basis Adjustments for Active Hedging Relationships Included in Amortized Cost | | Basis Adjustments for Discontinued Hedging Relationships Included in Amortized Cost | | Total Amount of Fair Value Hedging Basis Adjustments |
Advances | $ | 31,579 | | | $ | 774 | | | $ | 11 | | | $ | 785 | |
AFS securities | 14,206 | | | 1,058 | | | 288 | | | 1,346 | |
Consolidated obligation bonds | (1,954) | | | (26) | | | — | | | (26) | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | |
Hedged Item Type | Amortized Cost of Hedged Asset/(Liability)(1) | | Basis Adjustments for Active Hedging Relationships Included in Amortized Cost | | | | |
Advances | $ | 22,900 | | | $ | 204 | | | | | |
AFS securities | 12,877 | | | 431 | | | | | |
Consolidated obligation bonds | (4,840) | | | (9) | | | | | |
(1)Includes only the portion of amortized cost representing the hedged items in fair value hedging relationships.
The following table presents the components of net gain/(loss) on derivatives and hedging activities as presented in the Statements of Income for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016.2019.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | | | |
| June 30, 2020 | | June 30, 2019 | | June 30, 2020 | | June 30, 2019 | | |
Derivatives not designated as hedging instruments | Gain/(Loss) | | Gain/(Loss) | | Gain/(Loss) | | Gain/(Loss) | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Economic hedges: | | | | | | | | | |
Interest rate swaps | $ | (3) | | | $ | (62) | | | $ | (146) | | | $ | (85) | | | |
Interest rate caps and floors | — | | | — | | | — | | | (1) | | | |
Net settlements | (10) | | | — | | | (18) | | | (5) | | | |
Mortgage delivery commitments | (1) | | | 1 | | | 3 | | | 2 | | | |
| | | | | | | | | |
| | | | | | | | | |
Net gain/(loss) on derivatives and hedging activities | $ | (14) | | | $ | (61) | | | $ | (161) | | | $ | (89) | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 |
| | September 30, 2016 |
| | September 30, 2017 |
| | September 30, 2016 |
|
| Gain/(Loss) |
| | Gain/(Loss) |
| | Gain/(Loss) |
| | Gain/(Loss) |
|
Derivatives designated as hedging instruments: | | | | | | | |
Interest rate swaps | $ | 1 |
| | $ | — |
| | $ | (1 | ) | | $ | (4 | ) |
Total net gain/(loss) related to fair value hedge ineffectiveness | 1 |
| | — |
| | (1 | ) | | (4 | ) |
Derivatives not designated as hedging instruments: | | | | | | | |
Economic hedges: | | | | | | | |
Interest rate swaps | 5 |
| | 21 |
| | (3 | ) | | (43 | ) |
Interest rate caps and floors | — |
| | — |
| | (5 | ) | | (6 | ) |
Net settlements | (10 | ) | | (7 | ) | | (35 | ) | | (22 | ) |
Mortgage delivery commitments | 6 |
| | 1 |
| | 18 |
| | 2 |
|
Total net gain/(loss) related to derivatives not designated as hedging instruments | 1 |
| | 15 |
| | (25 | ) | | (69 | ) |
Net gain/(loss) on derivatives and hedging activities | $ | 2 |
| | $ | 15 |
| | $ | (26 | ) | | $ | (73 | ) |
The following tables present, by type of hedged item, the gains and losses on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income for the three and nine months ended September 30, 2017 and 2016.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2017 | | September 30, 2016 |
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) |
| | Gain/(Loss) on Derivatives |
| | Gain /(Loss) on Hedged Item |
| | Net Fair Value Hedge Ineffectiveness |
| | Effect of Derivatives on Net Interest Income(1) |
|
Advances | $ | 13 |
| | $ | (11 | ) | | $ | 2 |
| | $ | (5 | ) | | $ | 44 |
| | $ | (43 | ) | | $ | 1 |
| | $ | (13 | ) |
Consolidated obligation bonds | (9 | ) | | 8 |
| | (1 | ) | | 6 |
| | (70 | ) | | 69 |
| | (1 | ) | | 46 |
|
Total | $ | 4 |
| | $ | (3 | ) | | $ | 1 |
| | $ | 1 |
| | $ | (26 | ) | | $ | 26 |
| | $ | — |
| | $ | 33 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2017 | | September 30, 2016 |
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) |
| | Gain/(Loss) on Derivatives |
| | Gain /(Loss) on Hedged Item |
| | Net Fair Value Hedge Ineffectiveness |
| | Effect of Derivatives on Net Interest Income(1) |
|
Advances | $ | 17 |
| | $ | (17 | ) | | $ | — |
| | $ | (22 | ) | | $ | (23 | ) | | $ | 23 |
| | $ | — |
| | $ | (46 | ) |
Consolidated obligation bonds | (19 | ) | | 18 |
| | (1 | ) | | 21 |
| | (87 | ) | | 83 |
| | (4 | ) | | 149 |
|
Total | $ | (2 | ) | | $ | 1 |
| | $ | (1 | ) | | $ | (1 | ) | | $ | (110 | ) |
| $ | 106 |
|
| $ | (4 | ) |
| $ | 103 |
|
| |
(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.
|
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
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 clearinghouse is the Bank’s counterparty. The requirement that the Bank post initial and variation margin through a clearing agent, to the clearinghouse, exposes the Bank to institutional credit risk in the event that the clearing agent or the clearinghouse fails to meet its obligations. The use of cleared derivatives, however, mitigates the Bank’s overall credit risk exposure because a central counterparty is substituted for individual counterpartiescounterparties. Variation margin and variationinitial margin isare posted daily for changes in the value and risk profile of cleared derivatives through a clearing agent.derivatives. The Bank has analyzed the enforceability of offsetting rights applicable to its cleared derivative transactions and determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable bankruptcy law and Commodity Futures Trading Commission rules in the event of a clearinghouse or clearing agent insolvency and under applicable clearinghouse rules upon a non-insolvency-based event of default of the clearinghouse or clearing agent. Based on this analysis, the Bank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular clearinghouse.
Based on the Bank’s credit analyses and the collateral requirements, the Bank does not expect to incur any credit losses on its derivative transactions.
The Bank’s agreements for uncleared derivative transactions contain provisions that link the Bank’s credit rating from Moody’s Investors Service and S&P Global Ratings to various rights and obligations. Certain of these derivative agreements provide that, if the Bank’s long-term debt rating falls below a specified rating (ranging from A3/A- to Baa3/BBB-), the Bank’s counterparty would have the right, but not the obligation, to terminate all of its outstanding derivative transactions with the Bank; the Bank’s agreements with its clearing agents for cleared
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
derivative transactions have similar provisions with respect to the debt rating of FHLBank System consolidated bonds. If this occurs, the Bank may choose to enter into replacement hedges, either by transferring the existing transactions to another counterparty or entering into new replacement transactions, based on prevailing market rates. The aggregate fair value of all uncleared derivative instruments with credit risk-related contingent features that were in a net derivative liability position (before cash collateral and related accrued interest) at SeptemberJune 30, 2017,2020, was $5,$817, for which the Bank had posted cash collateral of $6$851 in the ordinary course of business.
The Bank may present derivative instruments, related cash collateral received or pledged, and associated accrued interest by clearing agent or by counterparty when the netting requirements have been met.
The following table presentstables present separately the fair value of derivative assets and derivative liabilities that have met the netting requirements, including the related collateral received from or pledged to counterparties as of SeptemberJune 30, 2017,2020, and December 31, 2016.2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | | | | | | | | | |
| Derivative Instruments Meeting Netting Requirements | | | | | | | | | | | | |
| Amount Recognized | | Gross Amount of Netting Adjustments and Cash Collateral | | | | Total Derivative Assets and Total Derivative Liabilities | | Noncash Collateral Not Offset That Can Be Sold or Repledged | | | | Net Amount |
Derivative Assets | | | | | | | | | | | | | |
Uncleared | $ | 15 | | | $ | 21 | | | | | $ | 36 | | | $ | — | | | | | $ | 36 | |
Cleared | 9 | | | 5 | | | | | 14 | | | (521) | | | | | 535 | |
Total | | | | | | | $ | 50 | | | | | | | $ | 571 | |
Derivative Liabilities | | | | | | | | | | | | | |
Uncleared | $ | 821 | | | $ | (820) | | | | | $ | 1 | | | $ | — | | | | | $ | 1 | |
Cleared | 4 | | | (4) | | | | | — | | | — | | | | | — | |
Total | | | | | | | $ | 1 | | | | | | | $ | 1 | |
42 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | | | | | |
| Derivative Instruments Meeting Netting Requirements | | | | | | | | | | |
| Amount Recognized | | Gross Amount of Netting Adjustments and Cash Collateral | | Total Derivative Assets and Total Derivative Liabilities | | Noncash Collateral Not Offset That Can Be Sold or Repledged | | | | Net Amount |
Derivative Assets | | | | | | | | | | | |
Uncleared | $ | 34 | | | $ | (16) | | | $ | 18 | | | $ | — | | | | | $ | 18 | |
Cleared | 10 | | | 5 | | | 15 | | | (381) | | | | | 396 | |
Total | | | | | $ | 33 | | | | | | | $ | 414 | |
Derivative Liabilities | | | | | | | | | | | |
Uncleared | $ | 382 | | | $ | (382) | | | $ | — | | | $ | — | | | | | $ | — | |
Cleared | 2 | | | (2) | | | — | | | — | | | | | — | |
Total | | | | | $ | — | | | | | | | $ | — | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Derivative Assets |
| | Derivative Liabilities |
| | Derivative Assets |
| | Derivative Liabilities |
|
Derivative instruments meeting netting requirements | | | | | | | |
Gross recognized amount | | | | | | | |
Uncleared derivatives | $ | 24 |
| | $ | 22 |
| | $ | 41 |
| | $ | 37 |
|
Cleared derivatives | 90 |
| | 43 |
| | 99 |
| | 44 |
|
Total gross recognized amount | 114 |
| | 65 |
| | 140 |
| | 81 |
|
Gross amounts of netting adjustments and cash collateral | | | | | | | |
Uncleared derivatives | (20 | ) | | (19 | ) | | (37 | ) | | (35 | ) |
Cleared derivatives | (2 | ) | | (43 | ) | | (37 | ) | | (44 | ) |
Total gross amount of netting adjustments and cash collateral | (22 | ) | | (62 | ) | | (74 | ) | | (79 | ) |
Total derivative assets and total derivative liabilities | | | | | | | |
Uncleared derivatives | 4 |
| | 3 |
| | 4 |
| | 2 |
|
Cleared derivatives | 88 |
| | — |
| | 62 |
| | — |
|
Total derivative assets and derivative liabilities presented in the Statements of Condition | 92 |
| | 3 |
| | 66 |
| | 2 |
|
Non-cash collateral received or pledged not offset | | | | | | | |
Can be sold or repledged - Uncleared derivatives | — |
| | — |
| | — |
| | — |
|
Net unsecured amount | | | | | | | |
Uncleared derivatives | 4 |
| | 3 |
| | 4 |
| | 2 |
|
Cleared derivatives | 88 |
| | — |
| | 62 |
| | — |
|
Total net unsecured amount | $ | 92 |
| | $ | 3 |
| | $ | 66 |
| | $ | 2 |
|
Note 1612 — 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 SeptemberJune 30, 2017,2020, and December 31, 2016.2019. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases fair values cannot be precisely quantified or verified and may change as
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
economic and market factors and evaluation of those factors change. The Bank continues to refine its valuation methodologies as markets and products develop and the pricing for certain products becomes more or less transparent. While the Bank believes that its valuation methodologies are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a materially different estimate of fair value as of the reporting date. U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). Therefore, the fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect the Bank’s judgment as to how a market participant would estimate the fair values. The fair value summary table does not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of total assets and liabilities.
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 SeptemberJune 30, 2017,2020, and December 31, 2016.2019. The Bank records trading securities, AFS securities, derivative assets, derivative liabilities, certain advances, certain consolidated obligations, and certain other assets at fair value on a recurring basis, and on occasion certain mortgage loans held for portfolio and certain other assets at fair value on a nonrecurring basis. The Bank records all other financial assets and liabilities at amortized cost. Refer to the following tables for further details about the financial assets and liabilities held at fair value on either a recurring or non-recurring basis.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | | | | | | | |
| Net Carrying Value | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral(1) |
Assets | | | | | | | | | | | |
Cash and due from banks | $ | 173 | | | $ | 173 | | | $ | 173 | | | $ | — | | | $ | — | | | $ | — | |
Interest-bearing deposits | 2,615 | | | 2,615 | | | 2,615 | | | — | | | — | | | — | |
Securities purchased under agreements to resell | 5,000 | | | 5,000 | | | — | | | 5,000 | | | — | | | — | |
Federal funds sold | 4,598 | | | 4,598 | | | — | | | 4,598 | | | — | | | — | |
Trading securities | 4,301 | | | 4,301 | | | — | | | 4,301 | | | — | | | — | |
AFS securities | 16,282 | | | 16,282 | | | — | | | 14,057 | | | 2,225 | | | — | |
HTM securities | 6,233 | | | 6,266 | | | — | | | 5,940 | | | 326 | | | — | |
Advances | 50,970 | | | 51,114 | | | — | | | 51,114 | | | — | | | — | |
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans | 2,888 | | | 2,988 | | | — | | | 2,988 | | | — | | | — | |
| | | | | | | | | | | |
Accrued interest receivable | 111 | | | 111 | | | — | | | 111 | | | — | | | — | |
Derivative assets, net(1) | 50 | | | 50 | | | — | | | 24 | | | — | | | 26 | |
Other assets(2) | 19 | | | 19 | | | 19 | | | — | | | — | | | — | |
Liabilities | | | | | | | | | | | |
Deposits | 942 | | | 942 | | | — | | | 942 | | | — | | | — | |
Consolidated obligations: | | | | | | | | | | | |
Bonds | 66,449 | | | 66,511 | | | — | | | 66,511 | | | — | | | — | |
Discount notes | 19,416 | | | 19,423 | | | — | | | 19,423 | | | — | | | — | |
Total consolidated obligations | 85,865 | | | 85,934 | | | — | | | 85,934 | | | — | | | — | |
Mandatorily redeemable capital stock | 83 | | | 83 | | | 83 | | | — | | | — | | | — | |
| | | | | | | | | | | |
Accrued interest payable | 44 | | | 44 | | | — | | | 44 | | | — | | | — | |
Derivative liabilities, net(1) | 1 | | | 1 | | | — | | | 825 | | | — | | | (824) | |
Other | | | | | | | | | | | |
Standby letters of credit | 32 | | | 32 | | | — | | | 32 | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | | | | | |
| Carrying Value | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral(1) |
Assets | | | | | | | | | | | |
Cash and due from banks | $ | 118 | | | $ | 118 | | | $ | 118 | | | $ | — | | | $ | — | | | $ | — | |
Interest-bearing deposits | 2,269 | | | 2,269 | | | 2,269 | | | — | | | — | | | — | |
Securities purchased under agreements to resell | 7,000 | | | 7,000 | | | — | | | 7,000 | | | — | | | — | |
Federal funds sold | 3,562 | | | 3,562 | | | — | | | 3,562 | | | — | | | — | |
Trading securities | 1,766 | | | 1,766 | | | — | | | 1,766 | | | — | | | — | |
AFS securities | 15,495 | | | 15,495 | | | — | | | 12,898 | | | 2,597 | | | — | |
HTM securities | 7,545 | | | 7,566 | | | — | | | 7,181 | | | 385 | | | — | |
Advances | 65,374 | | | 65,492 | | | — | | | 65,492 | | | — | | | — | |
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans | 3,314 | | | 3,332 | | | — | | | 3,332 | | | — | | | — | |
Accrued interest receivable | 139 | | | 139 | | | — | | | 139 | | | — | | | — | |
Derivative assets, net(1) | 33 | | | 33 | | | — | | | 44 | | | — | | | (11) | |
Other assets(2) | 19 | | | 19 | | | 19 | | | — | | | — | | | — | |
Liabilities | | | | | | | | | | | |
Deposits | 537 | | | 537 | | | — | | | 537 | | | — | | | — | |
Consolidated obligations: | | | | | | | | | | | |
Bonds | 71,372 | | | 71,386 | | | — | | | 71,386 | | | — | | | — | |
Discount notes | 27,376 | | | 27,378 | | | — | | | 27,378 | | | — | | | — | |
Total consolidated obligations | 98,748 | | | 98,764 | | | — | | | 98,764 | | | — | | | — | |
Mandatorily redeemable capital stock | 138 | | | 138 | | | 138 | | | — | | | — | | | — | |
| | | | | | | | | | | |
Accrued interest payable | 164 | | | 164 | | | — | | | 164 | | | — | | | — | |
Derivative liabilities, net(1) | — | | | — | | | — | | | 384 | | | — | | | (384) | |
Other | | | | | | | | | | | |
Standby letters of credit | 32 | | | 32 | | | — | | | 32 | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
(1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, and also cash collateral and related accrued interest held or placed with the same clearing agents and/or counterparty. |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 |
| Carrying Value |
| | Estimated Fair Value |
| | Level 1 |
| | Level 2 |
| | Level 3 |
| | Netting Adjustments(1) |
|
Assets | | | | | | | | | | | |
Cash and due from banks | $ | 7 |
| | $ | 7 |
|
| $ | 7 |
|
| $ | — |
| | $ | — |
| | $ | — |
|
Interest-bearing deposits | 699 |
| | 699 |
| | 699 |
| | — |
| | — |
| | — |
|
Securities purchased under agreements to resell | 13,975 |
| | 13,975 |
| | — |
| | 13,975 |
| | — |
| | — |
|
Federal funds sold | 11,826 |
| | 11,826 |
| | — |
| | 11,826 |
| | — |
| | — |
|
Trading securities | 1,165 |
| | 1,165 |
| | — |
| | 1,165 |
| | — |
| | — |
|
AFS securities | 4,015 |
| | 4,015 |
| | — |
| | — |
| | 4,015 |
| | — |
|
HTM securities | 14,095 |
| | 14,155 |
| | — |
| | 13,078 |
| | 1,077 |
| | — |
|
Advances | 61,629 |
| | 61,712 |
| | — |
| | 61,712 |
| | — |
| | — |
|
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans | 1,774 |
| | 1,786 |
| | — |
| | 1,786 |
| | — |
| | — |
|
Accrued interest receivable | 106 |
| | 106 |
| | — |
| | 106 |
| | — |
| | — |
|
Derivative assets, net(1) | 92 |
| | 92 |
| | — |
| | 114 |
| | — |
| | (22 | ) |
Other assets(2) | 9 |
| | 9 |
| | 9 |
| | — |
| | — |
| | — |
|
Liabilities | | | | | | | | | | | |
Deposits | 140 |
| | 140 |
| | — |
| | 140 |
| | — |
| | — |
|
Consolidated obligations: | | | | | | | | | | | |
Bonds | 72,266 |
| | 72,214 |
| | — |
| | 72,214 |
| | — |
| | — |
|
Discount notes | 29,902 |
| | 29,903 |
| | — |
| | 29,903 |
| | — |
| | — |
|
Total consolidated obligations | 102,168 |
| | 102,117 |
| | — |
| | 102,117 |
| | — |
| | — |
|
Mandatorily redeemable capital stock | 342 |
| | 342 |
|
| 342 |
|
| — |
| | — |
| | — |
|
Accrued interest payable | 106 |
|
| 106 |
|
| — |
|
| 106 |
| | — |
| | — |
|
Derivative liabilities, net(1) | 3 |
| | 3 |
| | — |
| | 65 |
| | — |
| | (62 | ) |
Other | | | | | | | | | | | |
Standby letters of credit | 22 |
| | 22 |
|
| — |
|
| 22 |
| | — |
| | — |
|
Commitments to issue consolidated obligation bonds(3) | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | — |
|
(2) 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. |
| |
(3) | Estimated fair values of these commitments are presented as a net gain or (loss). For more information regarding these commitments, see Note 17 – Commitments and Contingencies. |
Fair Value Hierarchy. The fair value hierarchy is used to prioritize the fair value methodologies and valuation techniques as well as the inputs to the valuation techniques used to measure fair value for assets and liabilities carried at fair value on the Statements of Condition. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of market observability of the fair value measurement for the asset or liability. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). An entity must disclose the level within the fair value hierarchy in which the measurements are classified for all financial assets and liabilities measured on a recurring or non-recurring basis.
The application of the fair value hierarchy to the Bank’s financial assets and financial liabilities that are carried at fair value either on a recurring or non-recurring basis is as follows:
•Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
•Level 2 – Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following:
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
(1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
•Level 3 – Unobservable inputs for the asset or liability.
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 SeptemberJune 30, 2017:2020:
•Trading securities
•AFS securities
•Certain advances
•Derivative assets and liabilities
•Certain consolidated obligation bonds
•Certain other assets
For instruments carried at fair value, the Bank reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. 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 and Due from Banks–The estimated fair value equals the carrying value.
Federal Funds Sold and Securities Purchased Under Agreements to Resell – The estimated fair value 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 calculations are the replacement rates for comparable instruments with similar terms.
Interest-Bearing Deposits –The fair value of deposits is generally equal For information related 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.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
At least annually, the Bank conducts reviews of the multiple pricing vendors to update and confirm its understanding of the vendors’ pricing processes,valuation methodologies and control procedures.
The Bank’s valuation technique for estimatingprimary inputs used to develop 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, prices for similar securities and/or dealer estimates, or use of internal model 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 fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimatemeasurement 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 September 30, 2017, 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 –The Bank estimates the fair values of these securities using the methodology described above for Investment Securities – MBS.
Advances –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 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. 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, the Bank did not adjust its fair value measurement of advances for creditworthiness primarily because advances were fully collateralized.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
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 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) curve 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.
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 collateral at specified levels to limit the Bank’s net unsecured credit exposure to these counterparties. Under these policies and agreements, the amount of unsecured credit exposure to an individual derivative dealer counterparty is 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 clearinghouse 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. 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.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Consolidated Obligations –Because quoted prices in active markets are not generally available for identical liabilities, the Bank measures fair values using internally developed models that use primarily market-observable inputs. The Bank’s primary input for measuring the fair value of consolidated obligation bonds is a market-based CO Curve obtained from the Office of Finance. The Office of Finance constructs the CO Curve using the Treasury yield curve as a base curve, which is adjusted by indicative consolidated obligation spreads obtained from market-observable sources. These market indications are generally derived from pricing indications from dealers, historical pricing relationships, and market activity for similar liabilities, such as recent GSE issuances or secondary market activity. For consolidated obligation bonds with embedded options, the Bank also obtains market-observable inputs, such as volatility assumptions, which are market-based expectations of future interest rate volatility implied from current market prices for similar options (swaption volatility and volatility skew).
Adjustments may be necessary to reflect the Bank’s credit quality or the credit quality of the FHLBank System when valuing consolidated obligation bonds measured at fair value. The Bank monitors its own creditworthinessvalue on a recurring or nonrecurring basis in the Statements of Condition, see “Item 8. Financial Statements and Supplementary Data – Note 19 – Fair Value” in the 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 obligationsBank’s 2019 Form 10-K. There have been significantly affectedno significant changes in these valuation methodologies and primary inputs during the reporting period by changes in the instrument-specific credit risk.six months ended June 30, 2020.
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 often have a material effect on the fair value estimates.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
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 SeptemberJune 30, 2017,2020, and December 31, 2016,2019, by level within the fair value hierarchy.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2020 | | | | | | | | | |
| Fair Value Measurement Using: | | | | | | Netting Adjustments and Cash Collateral(1) | | |
| Level 1 | | Level 2 | | Level 3 | | | | Total |
Recurring fair value measurements – Assets: | | | | | | | | | |
Trading securities: | | | | | | | | | |
U.S. obligations – Treasury securities | $ | — | | | $ | 4,298 | | | $ | — | | | $ | — | | | $ | 4,298 | |
| | | | | | | | | |
MBS – Other U.S. obligations – Ginnie Mae | — | | | 3 | | | — | | | — | | | 3 | |
Total trading securities | — | | | 4,301 | | | — | | | — | | | 4,301 | |
AFS securities: | | | | | | | | | |
U.S. obligations – Treasury securities | — | | | 5,326 | | | — | | | — | | | 5,326 | |
MBS: | | | | | | | | | |
GSEs – multifamily | — | | | 8,731 | | | — | | | — | | | 8,731 | |
PLRMBS | — | | | — | | | 2,225 | | | — | | | 2,225 | |
Subtotal MBS | — | | | 8,731 | | | 2,225 | | | — | | | 10,956 | |
Total AFS securities | — | | | 14,057 | | | 2,225 | | | — | | | 16,282 | |
Advances(2) | — | | | 3,478 | | | — | | | — | | | 3,478 | |
Derivative assets, net: interest rate-related | — | | | 24 | | | — | | | 26 | | | 50 | |
| | | | | | | | | |
Other assets | 19 | | | — | | | — | | | — | | | 19 | |
Total recurring fair value measurements – Assets | $ | 19 | | | $ | 21,860 | | | $ | 2,225 | | | $ | 26 | | | $ | 24,130 | |
Recurring fair value measurements – Liabilities: | | | | | | | | | |
Consolidated obligation bonds(3) | $ | — | | | $ | 128 | | | $ | — | | | $ | — | | | $ | 128 | |
Derivative liabilities, net: interest rate-related | — | | | 825 | | | — | | | (824) | | | 1 | |
Total recurring fair value measurements – Liabilities | $ | — | | | $ | 953 | | | $ | — | | | $ | (824) | | | $ | 129 | |
Nonrecurring fair value measurements – Assets:(4) | | | | | | | | | |
| | | | | | | | | |
Impaired mortgage loans held for portfolio | $ | — | | | $ | — | | | $ | 4 | | | $ | — | | | $ | 4 | |
Total nonrecurring fair value measurements – Assets | $ | — | | | $ | — | | | $ | 4 | | | $ | — | | | $ | 4 | |
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | |
| Fair Value Measurement Using: | | | | | | Netting Adjustments and Cash Collateral(1) | | |
| Level 1 | | Level 2 | | Level 3 | | | | Total |
Recurring fair value measurements – Assets: | | | | | | | | | |
Trading securities: | | | | | | | | | |
U.S. obligations – Treasury securities | $ | — | | | $ | 1,762 | | | $ | — | | | $ | — | | | $ | 1,762 | |
| | | | | | | | | |
MBS – Other U.S. obligations – Ginnie Mae | — | | | 4 | | | — | | | — | | | 4 | |
Total trading securities | — | | | 1,766 | | | — | | | — | | | 1,766 | |
AFS securities: | | | | | | | | | |
U.S. obligations – Treasury securities | — | | | 5,288 | | | — | | | — | | | 5,288 | |
MBS: | | | | | | | | | |
GSEs – multifamily | — | | | 7,610 | | | — | | | — | | | 7,610 | |
PLRMBS | — | | | — | | | 2,597 | | | — | | | 2,597 | |
Subtotal MBS | — | | | 7,610 | | | 2,597 | | | — | | | 10,207 | |
Total AFS securities | — | | | 12,898 | | | 2,597 | | | — | | | 15,495 | |
Advances(2) | — | | | 4,370 | | | — | | | — | | | 4,370 | |
Derivative assets, net: interest rate-related | — | | | 44 | | | — | | | (11) | | | 33 | |
Other assets | 19 | | | — | | | — | | | — | | | 19 | |
Total recurring fair value measurements – Assets | $ | 19 | | | $ | 19,078 | | | $ | 2,597 | | | $ | (11) | | | $ | 21,683 | |
Recurring fair value measurements – Liabilities: | | | | | | | | | |
Consolidated obligation bonds(3) | $ | — | | | $ | 337 | | | $ | — | | | $ | — | | | $ | 337 | |
Derivative liabilities, net: interest rate-related | — | | | 384 | | | — | | | (384) | | | — | |
Total recurring fair value measurements – Liabilities | $ | — | | | $ | 721 | | | $ | — | | | $ | (384) | | | $ | 337 | |
Nonrecurring fair value measurements – Assets:(4) | | | | | | | | | |
| | | | | | | | | |
Impaired mortgage loans held for portfolio | $ | — | | | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | |
Total nonrecurring fair value measurements – Assets | $ | — | | | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | |
(1)Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, and also cash collateral and related accrued interest held or placed by the Bank, with the same clearing agents and/or counterparty. |
| | | | | | | | | | | | | | | | | | | |
September 30, 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 | — |
| | 7 |
| | — |
| | — |
| | 7 |
|
Total trading securities | — |
| | 1,165 |
| | — |
| | — |
| | 1,165 |
|
AFS securities: | | | | | | | | | |
PLRMBS | — |
| | — |
| | 4,015 |
| | — |
| | 4,015 |
|
Total AFS securities | — |
| | — |
| | 4,015 |
| | — |
| | 4,015 |
|
Advances(2) | — |
| | 5,678 |
| | — |
| | — |
| | 5,678 |
|
Derivative assets, net: interest rate-related | — |
| | 114 |
| | — |
| | (22 | ) | | 92 |
|
Other assets | 9 |
| | — |
| | — |
| | — |
| | 9 |
|
Total recurring fair value measurements – Assets | $ | 9 |
| | $ | 6,957 |
| | $ | 4,015 |
| | $ | (22 | ) | | $ | 10,959 |
|
Recurring fair value measurements – Liabilities: | | | | | | | | | |
Consolidated obligation bonds(3) | $ | — |
| | $ | 968 |
| | $ | — |
| | $ | — |
| | $ | 968 |
|
Derivative liabilities, net: interest rate-related | — |
| | 65 |
| | — |
| | (62 | ) | | 3 |
|
Total recurring fair value measurements – Liabilities | $ | — |
| | $ | 1,033 |
| | $ | — |
| | $ | (62 | ) | | $ | 971 |
|
Nonrecurring fair value measurements – Assets:(4) | | | | | | | | | |
REO | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Impaired mortgage loans held for portfolio | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
Total nonrecurring fair value measurements – Assets | $ | — |
| | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | 3 |
|
(2)Represents advances recorded under the fair value option at June 30, 2020, and December 31, 2019.
(3)Represents consolidated obligation bonds recorded under the fair value option at June 30, 2020, and December 31, 2019.
(4)The fair value information presented is as of the date the fair value adjustment was recorded during the six months ended June 30, 2020, and the year ended December 31, 2019.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
|
| | | | | | | | | | | | | | | | | | | |
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) | | | | | | | | | |
REO | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
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. |
| |
(2) | Represents advances recorded under the fair value option at September 30, 2017, and December 31, 2016.
|
| |
(3) | Represents consolidated obligation bonds recorded under the fair value option at September 30, 2017, and December 31, 2016.
|
| |
(4) | The fair value information presented is as of the date the fair value adjustment was recorded during the nine months ended September 30, 2017, and the year ended December 31, 2016.
|
The following tables present a reconciliation of the Bank’s AFS PLRMBS that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016.
2019.
43
|
| | | | | | | |
| Three Months Ended |
| September 30, 2017 |
| | September 30, 2016 |
|
Balance, beginning of the period | $ | 4,164 |
| | $ | 4,864 |
|
Total gain/(loss) realized and unrealized included in: | | | |
Interest income | 22 |
| | 25 |
|
Net OTTI loss, credit-related | (6 | ) | | (3 | ) |
Unrealized gain/(loss) of other-than-temporarily impaired securities included in AOCI | 75 |
| | 68 |
|
Net amount of OTTI loss reclassified to/(from) other income/(loss) | 6 |
| | 2 |
|
Settlements | (246 | ) | | (266 | ) |
Balance, end of the period | $ | 4,015 |
| | $ | 4,690 |
|
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 | $ | 17 |
| | $ | 22 |
|
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | |
| Three Months Ended | | |
| June 30, 2020 | | June 30, 2019 |
Balance, beginning of the period | $ | 2,226 | | | $ | 3,055 | |
Total gain/(loss) realized and unrealized included in: | | | |
Interest income | 17 | | | 19 | |
(Provision for)/reversal of credit losses | 10 | | | — | |
Other income, net | — | | | (4) | |
Unrealized gain/(loss) included in AOCI | 94 | | | 2 | |
Settlements | (122) | | | (143) | |
| | | |
Balance, end of the period | $ | 2,225 | | | $ | 2,929 | |
| | | |
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 | $ | 26 | | | $ | 13 | |
| | | Nine Months Ended | | Six Months Ended | |
| September 30, 2017 |
| | September 30, 2016 |
| | June 30, 2020 | | June 30, 2019 | |
Balance, beginning of the period | $ | 4,489 |
| | $ | 5,414 |
| Balance, beginning of the period | $ | 2,597 | | | $ | 3,157 | | |
Total gain/(loss) realized and unrealized included in: | | | | Total gain/(loss) realized and unrealized included in: | | |
Interest income | 68 |
| | 77 |
| |
Net OTTI loss, credit-related | (15 | ) | | (14 | ) | |
Unrealized gain/(loss) of other-than-temporarily impaired securities included in AOCI | 188 |
| | 71 |
| |
Net amount of OTTI loss reclassified to/(from) other income/(loss) | 7 |
| | (5 | ) | |
Interest income/(loss) | | Interest income/(loss) | 36 | | | 37 | | |
(Provision for)/reversal of credit losses | | (Provision for)/reversal of credit losses | (29) | | | — | | |
Other income, net | | Other income, net | — | | | (5) | | |
Unrealized gain/(loss) included in AOCI | | Unrealized gain/(loss) included in AOCI | (140) | | | 16 | | |
Settlements | (722 | ) | | (853 | ) | Settlements | (240) | | | (276) | | |
Transfers of HTM securities to AFS securities | | Transfers of HTM securities to AFS securities | 1 | | | — | | |
Balance, end of the period | $ | 4,015 |
| | $ | 4,690 |
| Balance, end of the period | $ | 2,225 | | | $ | 2,929 | | |
| 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 | $ | 53 |
| | $ | 63 |
| 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 | $ | 7 | | | $ | 30 | | |
Fair Value Option. The fair value option provides an entity with an irrevocable option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value. It requires an entity to display the fair value of those assets and liabilities for which the entity has chosen to use fair value on the face of the Statements of Condition. Fair value is used for both the initial and subsequent measurement of the designated assets, liabilities, and commitments, with the changes in fair value recognized in net income. Interest income and interest expense on advances and consolidated bonds carried at fair value are recognized solely on the contractual amount of interest due or unpaid. Any transaction fees or costs are immediately recognized in non-interest income or non-interest expense.
For more information on the Bank’s election of the fair value option, see “Item 8. Financial Statements and Supplementary Data – Note 19 – Fair Values” in the Bank’s 20162019 Form 10-K.
The Bank has elected the fair value option for certain financial instruments to assist in mitigating potential earnings volatility that can arise from economic hedging relationships in which the carrying value of the hedged item is not adjusted for changes in fair value. The potential earnings volatility associated with using fair value only for the derivative is the Bank’s primary reason for electing the fair value option for financial assets and liabilities that do not qualify for hedge accounting or that have not previously met or may be at risk for not meeting the hedge effectiveness requirements.
The following tables summarize the activity related to financial assets and liabilities for which the Bank elected the fair value option during the three and ninesix months ended SeptemberJune 30, 20172020 and 2016:
2019:
44
|
| | | | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2017 | | September 30, 2016 |
| Advances |
| | Consolidated Obligation Bonds |
| | Advances |
| | Consolidated Obligation Bonds |
|
Balance, beginning of the period | $ | 5,490 |
| | $ | 1,118 |
| | $ | 3,752 |
| | $ | 2,925 |
|
New transactions elected for fair value option | 450 |
| | 255 |
| | 227 |
| | 40 |
|
Maturities and terminations | (259 | ) | | (405 | ) | | (165 | ) | | (1,485 | ) |
Net gain/(loss) on advances and net (gain)/loss on consolidated obligation bonds held under fair value option | (5 | ) | | — |
| | (18 | ) | | — |
|
Change in accrued interest | 2 |
| | — |
| | — |
| | (3 | ) |
Balance, end of the period | $ | 5,678 |
| | $ | 968 |
| | $ | 3,796 |
| | $ | 1,477 |
|
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| June 30, 2020 | | | | June 30, 2019 | | |
| Advances | | Consolidated Obligation Bonds | | Advances | | Consolidated Obligation Bonds |
Balance, beginning of the period | $ | 4,334 | | | $ | 254 | | | $ | 5,053 | | | $ | 1,191 | |
New transactions elected for fair value option | — | | | — | | | 74 | | | — | |
Maturities and terminations | (868) | | | (125) | | | (655) | | | (253) | |
Net gain/(loss) on advances and net (gain)/loss on consolidated obligation bonds from changes in fair value recognized in earnings | 14 | | | — | | | 57 | | | 5 | |
Change in accrued interest | (2) | | | (1) | | | — | | | — | |
Balance, end of the period | $ | 3,478 | | | $ | 128 | | | $ | 4,529 | | | $ | 943 | |
| | | Nine Months Ended | | Six Months Ended | |
| September 30, 2017 | | September 30, 2016 | | June 30, 2020 | | | June 30, 2019 | |
| Advances |
| | Consolidated Obligation Bonds |
| | 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 |
| Balance, beginning of the period | $ | 4,370 | | | $ | 337 | | | $ | 5,133 | | | $ | 2,019 | | |
New transactions elected for fair value option | 2,510 |
| | 1,090 |
| | 658 |
| | 490 |
| New transactions elected for fair value option | 7,070 | | | — | | | 74 | | | — | | |
Maturities and terminations | (558 | ) | | (1,635 | ) | | (584 | ) | | (3,265 | ) | Maturities and terminations | (8,065) | | | (210) | | | (780) | | | (1,083) | | |
Net gain/(loss) on advances and net (gain)/loss on consolidated obligation bonds held under fair value option | 4 |
| | 5 |
| | 45 |
| | 23 |
| |
Net gain/(loss) on advances and net (gain)/loss on consolidated obligation bonds from changes in fair value recognized in earnings | | Net gain/(loss) on advances and net (gain)/loss on consolidated obligation bonds from changes in fair value recognized in earnings | 105 | | | 2 | | | 103 | | | 12 | | |
Change in accrued interest | 3 |
| | 1 |
| | — |
| | (4 | ) | Change in accrued interest | (2) | | | (1) | | | (1) | | | (5) | | |
Balance, end of the period | $ | 5,678 |
| | $ | 968 |
| | $ | 3,796 |
| | $ | 1,477 |
| Balance, end of the period | $ | 3,478 | | | $ | 128 | | | $ | 4,529 | | | $ | 943 | | |
For instruments for which the fair value option has been elected, the related contractual interest income and contractual interest expense are recorded as part of net interest income on the Statements of Income. The remaining changes in fair value for instruments for which the fair value option has been elected are recorded as net gains/ (losses) on financial instruments held under the fair value option in the Statements of Income. The changeIncome, except for changes in fair value does not include changes inrelated to instrument-specific credit risk.risk, which are recorded in AOCI on the Statements of Condition. For advances and consolidated obligations recorded under the fair value option, the Bank determined that 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 three and ninesix months ended SeptemberJune 30, 20172020 and 2016.2019. In determining that there has been no change in instrument-specific credit risk period to period, the Bank primarily considered the following factors:
•The Bank is a federally chartered GSE, and as a result of this status, the consolidated obligations have historically received the same credit ratings as the government bond credit rating of the United States, even though they are not obligations of the United States and are not guaranteed by the United States.
•The Bank is jointly and severally liable with the other FHLBanks for the payment of principal and interest on all consolidated obligations of each of the FHLBanks.
The following table presents the difference between the aggregate remaining contractual principal balance outstanding and aggregate fair value of advances and consolidated obligation bonds for which the Bank elected the fair value option at SeptemberJune 30, 2017,2020, and December 31, 2016:
2019:
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
| | | September 30, 2017 | | December 31, 2016 | | June 30, 2020 | | | December 31, 2019 | |
| Principal Balance |
| | Fair Value |
| | Fair Value Over/(Under) Principal Balance |
| | Principal Balance |
| | Fair Value |
| | Fair Value Over/(Under) Principal Balance |
| | Principal Balance | | Fair Value | | Fair Value Over/(Under) Principal Balance | | Principal Balance | | Fair Value | | Fair Value Over/(Under) Principal Balance |
Advances(1) | $ | 5,661 |
| | $ | 5,678 |
| | $ | 17 |
| | $ | 3,709 |
| | $ | 3,719 |
| | $ | 10 |
| Advances(1) | $ | 3,303 | | | $ | 3,478 | | | $ | 175 | | | $ | 4,287 | | | $ | 4,370 | | | $ | 83 | |
Consolidated obligation bonds | 970 |
| | 968 |
| | (2 | ) | | 1,515 |
| | 1,507 |
| | (8 | ) | Consolidated obligation bonds | 125 | | | 128 | | | 3 | | | 335 | | | 337 | | | 2 | |
| |
(1) | At September 30, 2017, and December 31, 2016, (1) At June 30, 2020, and December 31, 2019, none of these advances were 90 days or more past due or had been placed on nonaccrual status.
|
Note 1713 — Commitments and Contingencies
As provided by the FHLBank Act or regulations governing the operations of the FHLBanks, all FHLBanks have joint and several liability for all FHLBank consolidated obligations, which are backed only by the financial resources of the FHLBanks. The joint and several liability regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The regulations provide a general framework for addressing the possibility that an FHLBank may be unable to repay the consolidated obligations for which it is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank, and as of SeptemberJune 30, 2017,2020, and through the filing date of this report, does not believe that it is probable that it will be asked to do so. The par value of the outstanding consolidated obligations of the FHLBanks was $1,028,710$915,753 at SeptemberJune 30, 2017,2020, and $989,311$1,025,895 at December 31, 2016.2019. The par value of the Bank’s participation in consolidated obligations was $102,229$85,847 at SeptemberJune 30, 2017,2020, and $83,749$98,817 at December 31, 2016.2019. For more information on the joint and several liability regulation, see “Item 8. Financial Statements and Supplementary Data – Note 20 – Commitments and Contingencies” in the Bank’s 20162019 Form 10-K.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Off-balance sheet commitments as of SeptemberJune 30, 2017,2020, and December 31, 2016,2019, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | | | December 31, 2019 | | | | |
| Expire Within One Year | | Expire After One Year | | Total | | Expire Within One Year | | Expire After One Year | | Total |
Standby letters of credit outstanding | $ | 18,874 | | | $ | 4,853 | | | $ | 23,727 | | | $ | 16,898 | | | $ | 4,658 | | | $ | 21,556 | |
| | | | | | | | | | | |
Commitments to issue consolidated obligation discount notes, par | 31 | | | — | | | 31 | | | 805 | | | — | | | 805 | |
| | | | | | | | | | | |
Commitments to purchase mortgage loans | 20 | | | — | | | 20 | | | 46 | | | — | | | 46 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Expire Within One Year |
| | Expire After One Year |
| | Total |
| | Expire Within One Year |
| | Expire After One Year |
| | Total |
|
Standby letters of credit outstanding | $ | 8,285 |
| | $ | 7,177 |
| | $ | 15,462 |
| | $ | 11,094 |
| | $ | 4,066 |
| | $ | 15,160 |
|
Commitments to fund additional advances | 1 |
| | — |
| | 1 |
| | 5 |
| | 1 |
| | 6 |
|
Commitments to issue consolidated obligation discount notes, par | 703 |
| | — |
| | 703 |
| | 846 |
| | — |
| | 846 |
|
Commitments to issue consolidated obligation bonds, par | 424 |
| | — |
| | 424 |
| | 655 |
| | — |
| | 655 |
|
Commitments to purchase mortgage loans | 10 |
| | — |
| | 10 |
| | 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. TheAt June 30, 2020, the original terms of these standby letters of credit range from 337 days to 15 years,, including a final expiration in 2032.2035. The Bank monitors the creditworthiness of members that have standby letters of credit. The value of the Bank’s obligations related to standby letters of credit is recorded in other liabilities and amounted to $22$32 at SeptemberJune 30, 2017,2020, and $24 at December 31, 2016.2019. Standby letters of credit are fully collateralized at the time of issuance. Based on the Bank’s credit analyses of members’ financial condition and collateral requirements, the Bank deemed it unnecessary to record any additional liability for credit losses on the letters of credit outstanding or other off-balance sheet commitments as of SeptemberJune 30, 2017,2020, and December 31, 2016.2019.
CommitmentsThere were no commitments to fund advances totaled $1at SeptemberJune 30, 2017,2020, and $6 at December 31, 2016.2019. Advances funded under advance commitments are fully collateralized at the time of funding (see Note 9 – 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 September 30, 2017, and December 31, 2016.
funding.
The Bank may enter into commitments that unconditionally obligate it to purchase mortgage loans from its members. Commitments are generally for periods not exceeding 60 days. Delivery commitments are recorded at fair value as derivative assets or derivative liabilities in the Statements of Condition.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
The Bank executes over-the-counter 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 subjectpledged securities as collateral related 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 1511 – Derivatives and Hedging Activities for additional information about the Bank’s pledged collateral and other credit-risk-related contingent features.
As of June 30, 2020, the Bank had pledged total collateral of $1,380, including securities with a carrying value of $521, all of which may be repledged, and cash collateral and related accrued interest of $859 to counterparties and the clearinghouse that had market risk exposure to the Bank related to derivatives. As of December 31, 2019, the Bank had pledged total collateral of $759, including securities with a carrying value of $381, all of which may be repledged, and cash collateral and related accrued interest of $378 to counterparties and the clearinghouse that had market risk exposure to the Bank related to derivatives.
The Bank may be subject to various pending legal proceedings that may arise in the ordinary course of business. After consultation with legal counsel, the Bank does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on its financial condition or results of operations.
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
Note 1814 — Transactions with Certain Members, Certain Nonmembers, and Other FHLBanks
Transactions with Members and Nonmembers. The following tables set forth information at the dates and for the periods indicated with respect to transactions with members that have an officer or director serving on the Bank’s Board of Directors.
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Assets: | | | |
Advances | $ | 4,022 | | | $ | 3,697 | |
Mortgage loans held for portfolio | — | | | 8 | |
Accrued interest receivable | 5 | | | 6 | |
Liabilities: | | | |
Deposits | $ | 18 | | | $ | 22 | |
Capital: | | | |
Capital Stock | $ | 135 | | | $ | 132 | |
|
| | | | | | | |
| September 30, 2017 |
| | December 31, 2016 |
|
Assets: | | | |
Advances | $ | 2,641 |
| | $ | 3,756 |
|
Mortgage loans held for portfolio | 14 |
| | 17 |
|
Accrued interest receivable | 4 |
| | 4 |
|
Liabilities: | | | |
Deposits | $ | 3 |
| | $ | 3 |
|
Capital: | | | |
Capital Stock | $ | 121 |
| | $ | 129 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | | | |
| | | | | | | | | |
| June 30, 2020 | | June 30, 2019 | | June 30, 2020 | | June 30, 2019 | | |
Interest Income: | | | | | | | | | |
| | | | | | | | | |
Advances | $ | 20 | | | $ | 22 | | | $ | 40 | | | $ | 44 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 |
| | September 30, 2016 |
| | September 30, 2017 |
| | September 30, 2016 |
|
Interest Income: | | | | | | | |
Advances | $ | 10 |
| | $ | 9 |
| | 29 |
| | $ | 26 |
|
Mortgage loans held for portfolio | 1 |
| | — |
| | 1 |
| | 1 |
|
All transactions with members, nonmembers, and their affiliates are entered into in the ordinary course of business. As of SeptemberJune 30, 2017,2020, and December 31, 2016,2019, no shareholder owned more than 10% of the total voting interests in the Bank because of the statutory limit on members' voting rights. For more information on transactions with members and nonmembers, see “Item 8. Financial Statements and Supplementary Data – Note 21 – Transactions with Certain Members, Certain Nonmembers, and Other FHLBanks” in the Bank’s 20162019 Form 10-K.
Transactions with Other FHLBanks. The Bank may occasionally enter into transactions with other FHLBanks. These transactions are summarized below.
Deposits with other FHLBanks. The Bank may, from time to time, maintain deposits with other FHLBanks. Deposits with other FHLBanks totaled $2 and $1 at June 30, 2020, and a de minimis amount at September 30, 2017, and December 31, 2016,2019, respectively, whichand were recorded in the Statements of Condition in the Cash and due from banksInterest-bearing deposits line item.
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
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
at period end with other FHLBanks, if any, are identified in the Bank’s financial statements. During the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the Bank extended overnight loans to other FHLBanks for $1,005$900 and $205,$1,450, respectively. During the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the Bank borrowed $215$860 and $1,125,$1,525, respectively, from other FHLBanks. The impact to net interest income related to these transactions was de minimis during bothfor all periods in this report.
MPF Mortgage Loans. The Bank pays a transaction servicesmembership fee to the FHLBank of Chicago for its participation in the MPF program. ThisProgram and a transaction services fee that 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 three and nine months ended SeptemberJune 30, 2017,2020 and 2019, the Bank recorded a de minimis amount and $1, respectively,amounts in MPF membership fee expense and transaction services fee expense to the FHLBank of Chicago, which waswere recorded in the Statements of Income as other expense. For the
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)
three and nine six months ended SeptemberJune 30, 2016,2020 and 2019, the Bank recorded a de minimis amount$1 and $1, respectively, in MPF membership fee expense and transaction services fee expense to the FHLBank of Chicago.
In addition, the Bank receives a counterparty fee from the FHLBank of Chicago for facilitating the sale of loans under the MPF program.Program. For the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the Bank recorded a de minimis amountamounts in MPF counterparty fee income from the FHLBank of Chicago, which waswere recorded in the Statements of Income as other income.
Consolidated Obligations. The Bank may, from time to time, transfer to or assume from another FHLBank the outstanding primary liability for FHLBank consolidated obligations. During the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the Bank did not transfer any debt to other FHLBanks or assume any debt from other FHLBanks.
Transactions with the Office of Finance. The Bank’s proportionate share of the cost of operating the Office of Finance is identified in the Statements of Income.
Note 1915 — Subsequent Events
On April 6, 2020, the Bank filed a proof of claim as a “potentially eligible claimant” to share in disgorgement proceeds paid into a distribution fund in connection with a Securities and Exchange Commission enforcement action. On July 31, 2020, the Bank received payment of disgorgement proceeds in the amount of $85 and recorded the proceeds in other income in the third quarter of 2020.
There were no other material subsequent events identified, subsequent to SeptemberJune 30, 2017,2020, until the time of the Form 10-Q filing with the Securities and Exchange Commission.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Statements contained in this quarterly report on Form 10-Q, including statements describing the objectives, projections, estimates, or predictions of the future of the Federal Home Loan Bank of San Francisco (Bank) or the Federal Home Loan Bank System (FHLBank System), are “forward-looking statements.” These statements may use forward-looking terms, such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “probable,” “project,” “should,” “will,” or their negatives or other variations on these terms, and include statements related to, among others, gains and losses on derivatives, plans to pay dividends and redeem or repurchase excess capital stock, future other-than-temporary impairment losses, future classification of securities, and reform legislation. The Bank cautions that by their nature, forward-looking statements involve risk or uncertainty that could cause actual results to differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These risks and uncertainties include, among others, the following:
•changes in economic and market conditions, including conditions in the mortgage, housing, and capital markets;
•the volatility of market prices, rates, and indices;
•the timing and volume of market activity;
•political events, including legislative, regulatory, judicial, or other developments that affect the Bank, its members, counterparties, or investors in the consolidated obligations of the Federal Home Loan Banks (FHLBanks), such as the impact of any government-sponsored enterprises (GSE) legislative reforms, changes in the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), changes in applicable sections of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, or changes in other statutes or regulations applicable to the FHLBanks;
•changes in the Bank’s capital structure;structure and composition;
•the ability of the Bank to pay dividends or redeem or repurchase capital stock;
•membership changes, including changes resulting from mergers or changes in the principal place of business of Bank members;
•the soundness of other financial institutions, including Bank members, nonmember borrowers, other counterparties, and the other FHLBanks;
•changes in Bank members’ demand for Bank advances;
•changes in the value or liquidity of collateral underlying advances to Bank members or nonmember borrowers or collateral pledged by the Bank’s derivative counterparties;
•changes in the fair value and economic value of, impairments of, and risks associated with the Bank’s investments in mortgage loans and mortgage-backed securities (MBS) or other assets and the related credit enhancement protections;
•changes in the Bank’s ability or intent to hold MBS and mortgage loans to maturity;
•competitive forces, including the availability of other sources of funding for Bank members;
•the willingness of the Bank’s members to do business with the Bank;
•changes in investor demand for consolidated obligations (including the terms of consolidated obligations) and/or the terms of interest rate exchange or similar agreements;
•the impact of any changes and developments in FHLBank System-wide debt issuance and governance practices;
•the ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the Bank has joint and several liability;
•changes in key Bank personnel;
•technology changes and enhancements, and the Bank’s ability to develop and support technology and information systems sufficient to manage the risks of the Bank’s business effectively; and
•changes in the FHLBanks’ long-term credit ratings.ratings;
•the impending discontinuance of the London Interbank Offered Rate (LIBOR) or any other interest rate benchmark and the adverse consequences it could have for market participants, including the Bank; and
•natural disasters, pandemics, or other widespread health emergencies (such as the outbreak of COVID-19), terrorist attacks, or other unanticipated or catastrophic events.
Readers of this report should not rely solely on the forward-looking statements and should consider all risks and uncertainties addressed throughout this report, as well as those discussed under “Item 1A. Risk Factors” in the
Bank’s Form 10-Q for the quarter ended March 31, 2020, in this report, and in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2016 (20162019 (2019 Form 10-K).
Quarterly 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.
Net income for the second quarter of 2020 was $81$88 million, compared with net income of $291$49 million for the thirdsecond quarter of 2016. 2019. The $39 million increase in net income relative to the prior-year period primarily reflected a $32 million increase in net interest income, from $110 million for the second quarter of 2019 to $142 million for the second quarter of 2020, and a reversal of current expected credit losses of $7 million for the second quarter of 2020. The increase in net interest income was primarily attributable to an increase of $27 million in net fair value gains on designated fair value hedges, from a loss of $16 million for the second quarter of 2019 to a gain of $11 million for the second quarter of 2020, as well as higher spreads on interest-earning assets.
Retained earnings grew to $3.2was $3.5 billion at SeptemberJune 30, 2017, from $3.1 billion at2020, and December 31, 2016,2019. Net income in the first six months of 2020 was $80 million, and the Bank received a credit to unrestricted retained earnings related to the partial recovery of the investment in the Financing Corporation of $40 million. These increases to retained earnings were partially offset by cash dividends of $90 million paid dividends at an annualized rate of 7.00%, totaling $51 million, including $44 million in dividends on capital stock and $7 million in dividends on mandatorily redeemable capital stock5.99% during the third quarter of 2017.six months ended June 30, 2020.
Net interest income increased by $23 million compared to the prior year period. The increase reflected higher average balances of interest-earningTotal assets combined with a higher net interest margin. Other income decreased by $245 million, primarily because other income in the third quarter of 2016 included a gain on settlements of $240 million (after netting certain legal fees and expenses) relating to the Bank's private-label residential mortgage-backed securities (PLRMBS) litigation. The decrease in other income also reflected a voluntary charitable contribution of $10 million made by the Bank$13.4 billion during the third quarter of 2017 for the Quality Jobs Fund as well as a voluntary contribution of $1 million to the Affordable Housing Program (AHP) to offset the impact on the AHP assessment of the charitable contribution expense. In the first quarter of 2017, the Board of Directors approved an allocation of $100 million for the Quality Jobs Fund, a donor-advised fund established to support quality jobs growth and small business expansion, which is being funded by the Bank in incremental amounts over a two-year period.
During the first ninesix months of 2017, total assets increased $17.6 billion,2020, to $109.5$93.4 billion at SeptemberJune 30, 2017,2020, from $91.9$106.8 billion at December 31, 2016, primarily reflecting an increase in period end advance balances, which increased2019. Total advances decreased $14.4 billion, to $61.6$51.0 billion at SeptemberJune 30, 2017,2020, from $49.8$65.4 billion at December 31, 2016. In addition,2019. The decrease in advances primarily reflected reduced member liquidity needs as a result of the impact of the COVID-19 pandemic on the economy and on our members. The decrease in advances was partially offset by an increase in investments increased $4.8of $1.4 billion, to $45.8$39.0 billion at SeptemberJune 30, 2017,2020, from $41.0$37.6 billion at December 31, 2016, primarily reflecting an increase in Federal funds sold.2019.
Accumulated other comprehensive income increasedincome/(loss) (AOCI) decreased by $197$309 million during the first ninesix months of 2017,2020, to $308accumulated other comprehensive loss of $35 million at SeptemberJune 30, 2017,2020, from$111 accumulated other comprehensive income of $274 million at December 31, 2016,2019. The decrease in AOCI during the first six months of 2020 primarily as a resultreflected lower fair values of improvement in the fair value of PLRMBSmortgage-backed securities classified as available-for-sale.
On October 26, 2017,July 23, 2020, the Bank’s Board of Directors declared a quarterly cash dividend on the capital stock outstanding during the thirdsecond quarter of 20172020 at an annualized rate of 7.00%5.00%. The dividend will total $55$38 million, including $7$1 million in dividends on mandatorily redeemable capital stock that will be reflected as interest expense in the fourththird quarter of 2017.2020. The Bank recorded the dividend on October 26, 2017,July 23, 2020, and expects to pay the dividend on or about November 13, 2017.
August 11, 2020. As a result of the COVID-19 pandemic and the measures taken to contain the spread of the virus, U.S. and global economies face great challenges and ongoing uncertainty. To preserve capital in this uncertain environment, the Bank’s Board of Directors has decided to pay a quarterly dividend rate at the low end of the range stated in the Bank's dividend philosophy.
As of SeptemberJune 30, 2017,2020, the Bank was in compliance with all of its regulatory capital requirements. The Bank’s total regulatory capital ratio was 5.8%6.7%, exceeding the 4.0% requirement. The Bank had $6.4$6.2 billion in permanent capital, exceeding its risk-based capital requirement of $2.0$1.4 billion.
The Bank plans to repurchase the surplus capital stock of all members and the excess capital stock of all nonmember shareholders on November 14, 2017. Surplus capital stock is defined as any stock holdings in excess of 115% of a member’s minimum capital stock requirement.
The Bank will continue to monitor the condition of its PLRMBS portfolio, the ratio of the Bank’s estimated market value of totalbalance sheet, its financial 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 In addition, management will continue to monitor the third quarter of 2017, two significant hurricanes struck the southeastern coast of the United States. On August 25, 2017, Hurricane Harvey made landfall near Corpus Christi, Texas, causing substantial damage and flooding to southeastern Texas, including the Houston metropolitan area. On September 10, 2017, Hurricane Irma made landfall on the Florida mainland near Marco Island, Florida. Hurricane Irma then moved northward through Florida and into Georgia, causing significant damage to property in Florida, Georgia, and certain other southeastern states.
The Bank has analyzed the potentialCOVID-19 pandemic’s impact that damage related to Hurricanes Irma and Harvey might have on the Bank’s advances, letters of credit, mortgage loans, and PLRMBS securities. Based on the information currently available, the Bank does not expect that the potential losses resulting from the hurricanes will have a material effect on the Bank’s financial condition or resultsand operations, including the Bank’s liquidity, advance levels, funding spreads, and workforce effectiveness.
On July 6, 2020, the Financing Corporation, formed pursuant to the Federal Savings and Loan Insurance Corporation Recapitalization Act of 1987 to provide financing for the resolution of failed savings and loan associations, was dissolved. In connection with the dissolution of the Financing Corporation the Bank received approximately $40 million as a partial recovery of its investment in the Financing Corporation, with the amount determined based on its share of the $680 million originally contributed. The Bank continuestreated receipt of these funds as a return of the Bank’s investment in Financing Corporation capital stock, and therefore as a partial recovery of the prior capital distributions made by the Bank to evaluate the Financing Corporation in 1987, 1988, and 1989. These funds have been credited to unrestricted retained earnings during the second quarter of 2020.
On April 6, 2020, the Bank filed a proof of claim as a “potentially eligible claimant” to share in disgorgement proceeds paid into a distribution fund in connection with a Securities and Exchange Commission enforcement action. On July 31, 2020, the Bank received payment of disgorgement proceeds in the amount of $85 million.
COVID-19 Pandemic Impact. In the second quarter of 2020, the COVID-19 pandemic continued to impact the financial markets, and created substantial uncertainty about future economic activity and the Bank’s operating environment. In particular, the Federal Reserve committed to using its full range of tools to support the economy and indicated that quantitative easing would continue. At the end of the second quarter, the Federal Reserve maintained the Federal funds target range and said it would maintain its quantitative easing, repurchase agreement, and overnight lending programs to keep credit available to the financial markets. The emergency actions that the Federal Reserve took helped facilitate liquidity and supported stability in the fixed income markets, but contributed to the significant reduction in advances demand from members.
The Bank’s operations in the second quarter of 2020 continued to be affected by the COVID-19 pandemic. The Bank’s staff began working remotely in mid-March 2020. During the second quarter of 2020, the Bank experienced an increase in operational incidents compared to the prior quarter. However, the Bank has not experienced any significant adverse impact on its operations or on the effectiveness of its internal control over financial reporting as a result of the increase in operational incidents. The ultimate impact of the hurricanesdisruption caused by the outbreak is uncertain. Possible adverse impacts as a result of the Bank’s workforce working remotely may include, but are not limited to, increased risk of operational incidents and cyber-security threats, along with operational challenges that could affect the Bank’s ability to conduct business or increase the risk of operational errors.
The Bank relies on vendors and other third parties to perform certain critical services. If one of our critical vendors or third parties experiences a failure or any interruption to their business due to the COVID-19 pandemic, the Bank may be unable to conduct and manage its business effectively.
To address the operational impact of the pandemic, the Bank maintains a Board-approved Business Continuity Management Program, along with a Crisis Management Plan and Business Continuity Plans, that are updated and tested annually. For a discussion of the Bank’s Business Continuity Management Program, see “Part 1. Item 2. Management’s Discussion and Analysis of Financial Statements and Results of Operations – Quarterly Overview” in the Bank’s Form 10-Q for the quarter ended March 31, 2020.
The Bank continued to meet its funding needs throughout the second quarter of 2020. As a consequence of the Federal Reserve’s response to market disruptions caused by the COVID-19 pandemic, interest rates declined significantly, funding markets stabilized, and investor demand for System consolidated obligations improved.
The effects of the COVID-19 pandemic, and of governmental and public actions taken in response, on the global and U.S. economy and on the Bank are continuing to evolve, and the full duration and impact of the pandemic, including a second outbreak of the pandemic, and subsequent governmental and public actions are uncertain.
During the COVID-19 pandemic, future demand for advances lettersmay continue to decrease because of further government intervention, lower interest rates, and reduced member asset activity. The risk of credit mortgage loans held for portfolio, and PLRMBS investments. If additional information becomes available indicating that any of these assets have been impaired andlosses is likely to increase. In addition, other possible effects from the amount of the loss can be reasonably estimated,COVID-19 pandemic on the Bank will record appropriate reserves at that time.
may include, but are not limited to, further disruption to the Bank’s members, uncertainties in the credit markets, and a decline in the fair value of assets.
Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) temporary relief from accounting for certain loan modifications as troubled debt restructurings (TDRs) is available to financial institutions for loan modifications related to the adverse effects of the COVID-19 pandemic. In the second quarter of 2020, the Bank elected to apply the TDR relief provided by the CARES Act. For more information related to the CARES Act, see “Item 1. Financial Statements – Note 1 – Basis of Presentation” and “Item 1. Financial Statements – Note 5 – Mortgage Loans Held for Portfolio.”
The Bank has implemented certain relief measures to help members serve customers affected by the COVID-19 pandemic, such as accommodating forbearance and modifications to pledged loan collateral and allowing electronic signatures on loan documentation in specific circumstances. For a discussion of the Bank’s relief measures, see “Part 1. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quarterly Overview” in the Bank’s Form 10-Q for the quarter ended March 31, 2020.
Financial Highlights
The following table presents a summary of certain financial information for the Bank for the periods indicated.
Financial Highlights
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | June 30, 2019 |
Selected Balance Sheet Items at Quarter End | | | | | | | | | |
Total Assets | $ | 93,440 | | | $ | 124,870 | | | $ | 106,842 | | | $ | 104,153 | | | $ | 106,762 | |
Advances | 50,970 | | | 77,872 | | | 65,374 | | | 62,826 | | | 67,189 | |
Mortgage Loans Held for Portfolio, Net | 2,888 | | | 3,239 | | | 3,314 | | | 3,382 | | | 3,327 | |
Investments(1) | 39,029 | | | 43,016 | | | 37,637 | | | 37,490 | | | 35,180 | |
Consolidated Obligations:(2) | | | | | | | | | |
Bonds | 66,449 | | | 77,937 | | | 71,372 | | | 67,431 | | | 73,915 | |
Discount Notes | 19,416 | | | 39,102 | | | 27,376 | | | 28,605 | | | 24,901 | |
Mandatorily Redeemable Capital Stock | 83 | | | 83 | | | 138 | | | 138 | | | 138 | |
Capital Stock —Class B —Putable | 2,668 | | | 3,231 | | | 3,000 | | | 2,898 | | | 2,967 | |
Unrestricted Retained Earnings | 2,765 | | | 2,691 | | | 2,754 | | | 2,715 | | | 2,719 | |
Restricted Retained Earnings | 729 | | | 713 | | | 713 | | | 690 | | | 678 | |
Accumulated Other Comprehensive Income/(Loss) (AOCI) | (35) | | | (228) | | | 274 | | | 267 | | | 300 | |
Total Capital | 6,127 | | | 6,407 | | | 6,741 | | | 6,570 | | | 6,664 | |
Selected Operating Results for the Quarter | | | | | | | | | |
Net Interest Income | $ | 142 | | | $ | 49 | | | $ | 165 | | | $ | 112 | | | $ | 110 | |
Provision for/(Reversal of) Credit Losses | (7) | | | 39 | | | — | | | — | | | — | |
Other Income/(Loss) | (9) | | | 18 | | | 10 | | | 3 | | | (7) | |
Other Expense | 43 | | | 36 | | | 49 | | | 47 | | | 48 | |
Affordable Housing Program Assessment | 9 | | | — | | | 13 | | | 7 | | | 6 | |
Net Income/(Loss) | $ | 88 | | | $ | (8) | | | $ | 113 | | | $ | 61 | | | $ | 49 | |
Selected Other Data for the Quarter | | | | | | | | | |
Net Interest Margin(3) | 0.51 | % | | 0.18 | % | | 0.63 | % | | 0.44 | % | | 0.41 | % |
Operating Expenses as a Percent of Average Assets | 0.13 | | | 0.12 | | | 0.17 | | | 0.15 | | | 0.15 | |
Return on Average Assets | 0.32 | | | (0.03) | | | 0.43 | | | 0.24 | | | 0.18 | |
Return on Average Equity | 5.66 | | | (0.46) | | | 6.82 | | | 3.65 | | | 2.91 | |
Annualized Dividend Rate | 5.00 | | | 7.00 | | | 7.00 | | | 7.00 | | | 7.00 | |
Dividend Payout Ratio(4) | 42.93 | | | — | | | 45.18 | | | 86.78 | | | 108.09 | |
Average Equity to Average Assets Ratio | 5.64 | | | 6.09 | | | 6.37 | | | 6.47 | | | 6.16 | |
Selected Other Data at Quarter End | | | | | | | | | |
Regulatory Capital Ratio(5) | 6.68 | | | 5.38 | | | 6.18 | | | 6.18 | | | 6.09 | |
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.
(2)As provided by the FHLBank Act or regulations governing the operations of the FHLBanks, all of the FHLBanks have joint and several liability for FHLBank consolidated obligations, which are backed only by the financial resources of the FHLBanks. The joint and several liability regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank, and as of June 30, 2020, and through the filing date of this report, does not believe that it is probable that it will be asked to do so. The par value of the outstanding consolidated obligations of all FHLBanks at the dates indicated was as follows:
|
| | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | September 30, 2017 |
| | June 30, 2017 |
| | March 31, 2017 |
| | December 31, 2016 |
| | September 30, 2016 |
|
Selected Balance Sheet Items at Quarter End | | | | | | | | | |
Total Assets | $ | 109,503 |
| | $ | 101,923 |
| | $ | 91,290 |
| | $ | 91,941 |
| | $ | 95,612 |
|
Advances | 61,629 |
| | 55,179 |
| | 49,052 |
| | 49,845 |
| | 55,888 |
|
Mortgage Loans Held for Portfolio, Net | 1,774 |
| | 1,383 |
| | 966 |
| | 826 |
| | 677 |
|
Investments(1) | 45,775 |
| | 45,035 |
| | 40,983 |
| | 40,986 |
| | 38,773 |
|
Consolidated Obligations:(2) | | | | | | | | | |
Bonds | 72,266 |
| | 60,966 |
| | 49,493 |
| | 50,244 |
| | 50,021 |
|
Discount Notes | 29,902 |
| | 33,335 |
| | 35,028 |
| | 33,506 |
| | 38,230 |
|
Mandatorily Redeemable Capital Stock | 342 |
| | 404 |
| | 403 |
| | 457 |
| | 484 |
|
Capital Stock —Class B —Putable | 2,815 |
| | 2,687 |
| | 2,280 |
| | 2,370 |
| | 2,399 |
|
Unrestricted Retained Earnings | 2,664 |
| | 872 |
| | 850 |
| | 888 |
| | 942 |
|
Restricted Retained Earnings | 562 |
| | 2,317 |
| | 2,300 |
| | 2,168 |
| | 2,125 |
|
Accumulated Other Comprehensive Income/(Loss) (AOCI) | 308 |
| | 227 |
| | 143 |
| | 111 |
| | 84 |
|
Total Capital | 6,349 |
| | 6,103 |
| | 5,573 |
| | 5,537 |
| | 5,550 |
|
Selected Operating Results for the Quarter | | | | | | | | | |
Net Interest Income | $ | 146 |
| | $ | 144 |
| | $ | 134 |
| | $ | 108 |
| | $ | 123 |
|
Provision for/(Reversal of) Credit Losses on Mortgage Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Other Income/(Loss) | (4 | ) | | (16 | ) | | 112 |
| | 82 |
| | 241 |
|
Other Expense | 51 |
| | 39 |
| | 80 |
| | 46 |
| | 39 |
|
Affordable Housing Program Assessment | 10 |
| | 9 |
| | 18 |
| | 17 |
| | 34 |
|
Net Income/(Loss) | $ | 81 |
| | $ | 80 |
| | $ | 148 |
| | $ | 127 |
| | $ | 291 |
|
Selected Other Data for the Quarter | | | | | | | | | |
Net Interest Margin(3) | 0.55 | % | | 0.59 | % | | 0.58 | % | | 0.46 | % | | 0.51 | % |
Operating Expenses as a Percent of Average Assets | 0.14 |
| | 0.15 |
| | 0.14 |
| | 0.18 |
| | 0.15 |
|
Return on Average Assets | 0.30 |
| | 0.33 |
| | 0.63 |
| | 0.54 |
| | 1.20 |
|
Return on Average Equity | 5.19 |
| | 5.56 |
| | 10.59 |
| | 9.27 |
| | 21.05 |
|
Annualized Dividend Rate | 7.00 |
| | 7.00 |
| | 9.08 |
| | 22.51 |
| | 9.17 |
|
Dividend Payout Ratio(4) | 53.39 |
| | 51.21 |
| | 36.45 |
| | 108.38 |
| | 17.99 |
|
Average Equity to Average Assets Ratio | 5.84 |
| | 5.87 |
| | 5.97 |
| | 5.83 |
| | 5.71 |
|
Selected Other Data at Quarter End | | | | | | | | | |
Regulatory Capital Ratio(5) | 5.83 |
| | 6.16 |
| | 6.39 |
| | 6.40 |
| | 6.22 |
|
Duration Gap (in months) | 1 |
| | 1 |
| | 1 |
| | 1 |
| | 1 |
|
| | | | | |
(1) | Investments consist of interest-bearing deposits, securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities. |
| Par Value (In millions) |
(2)June 30, 2020 | As provided by the FHLBank Act or regulations governing the operations of the FHLBanks, all of the FHLBanks have joint and several liability for FHLBank consolidated obligations, which are backed only by the financial resources of the FHLBanks. The joint and several liability regulation authorizes the 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 $
| 915,753 | |
March 31, 2020 | 1,174,670 | |
December 31, 2019 | 1,025,895 | |
September 30, 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: |
|
| | | |
| Par Value (In millions) |
|
September 30, 2017 | $ | 1,028,710 |
|
June 30, 2017 | 1,011,526 |
|
March 31, 2017 | 959,280 |
|
December 31, 2016 | 989,311 |
|
September 30, 2016 | 967,728 |
|
2019 | 1,010,271 | |
(3)June 30, 2019 | Net interest margin is net interest income (annualized) divided by average interest-earning assets.1,048,412 | |
| |
(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. |
(3)Net interest margin is net interest income (annualized) divided by average interest-earning assets. (4)This ratio is calculated as dividends per share divided by net income per share.
(5)This ratio is calculated as regulatory capital divided by total assets. Regulatory capital includes retained earnings, Class B capital stock, and mandatorily redeemable capital stock (which is classified as a liability), but excludes AOCI.
Results of Operations
Net Interest Income. The primary source of the Bank’s earnings is net interest income, which is the interest earned on advances, mortgage loans, and investments, including net accretion of related income from improvement in expected cash flows on certain other-than-temporarily-impaired PLRMBS, less interest paid on consolidated obligations, deposits, mandatorily redeemable capital stock, and other borrowings. The Average Balance Sheets tables that follow present the average balances of interest-earning asset categories and the sources that funded those interest-earning assets (liabilities and capital) for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, together with the related interest income and expense. They also present the average rates on total interest-earning assets and the average costs of total funding sources.
ThirdSecond Quarter of 20172020 Compared to ThirdSecond Quarter of 20162019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Average Balance Sheets | | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | |
| June 30, 2020 | | | | | | June 30, 2019 | | | | |
(Dollars in millions) | Average Balance | | Interest Income/ Expense | | Average Rate | | Average Balance | | Interest Income/ Expense | | Average Rate |
Assets | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | |
Interest-bearing deposits | $ | 4,351 | | | $ | 1 | | | 0.15 | % | | $ | 1,975 | | | $ | 12 | | | 2.49 | % |
Securities purchased under agreements to resell | 5,410 | | | 1 | | | 0.06 | | | 8,895 | | | 54 | | | 2.45 | |
Federal funds sold | 6,513 | | | 1 | | | 0.06 | | | 5,650 | | | 36 | | | 2.54 | |
Trading securities: | | | | | | | | | | | |
Mortgage-backed securities (MBS) | 3 | | | — | | | 3.24 | | | 4 | | | — | | | 3.81 | |
Other investments | 4,310 | | | 22 | | | 2.08 | | | 361 | | | 3 | | | 2.69 | |
Available-for-sale (AFS) securities:(1) | | | | | | | | | | | |
MBS(2)(3) | 11,021 | | | 57 | | | 2.08 | | | 8,133 | | | 82 | | | 4.06 | |
Other investments(3) | 5,339 | | | 4 | | | 0.27 | | | — | | | — | | | — | |
Held-to-maturity (HTM) securities:(1) | | | | | | | | | | | |
MBS | 6,459 | | | 29 | | | 1.82 | | | 9,936 | | | 75 | | | 3.01 | |
Other investments | — | | | — | | | — | | | 55 | | | — | | | 2.86 | |
Mortgage loans held for portfolio | 3,091 | | | 16 | | | 2.04 | | | 3,254 | | | 11 | | | 1.36 | |
Advances(3) | 64,129 | | | 142 | | | 0.89 | | | 69,665 | | | 456 | | | 2.63 | |
Loans to other FHLBanks | — | | | — | | | — | | | 13 | | | — | | | 2.43 | |
Total interest-earning assets | 110,626 | | | 273 | | | 0.99 | | | 107,941 | | | 729 | | | 2.71 | |
Other assets(4)(5) | (537) | | | — | | | | | 1,051 | | | — | | | |
Total Assets | $ | 110,089 | | | $ | 273 | | | | | $ | 108,992 | | | $ | 729 | | | |
Liabilities and Capital | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Consolidated obligations: | | | | | | | | | | | |
Bonds(3) | $ | 73,927 | | | $ | 82 | | | 0.45 | % | | $ | 72,667 | | | $ | 442 | | | 2.44 | % |
Discount notes | 28,317 | | | 47 | | | 0.67 | | | 28,065 | | | 171 | | | 2.45 | |
Deposits and other borrowings | 919 | | | — | | | 0.16 | | | 289 | | | 2 | | | 2.38 | |
Mandatorily redeemable capital stock | 83 | | | 2 | | | 7.81 | | | 200 | | | 4 | | | 7.86 | |
Borrowings from other FHLBanks | — | | | — | | | — | | | 16 | | | — | | | 2.44 | |
Total interest-bearing liabilities | 103,246 | | | 131 | | | 0.51 | | | 101,237 | | | 619 | | | 2.45 | |
Other liabilities(4) | 638 | | | — | | | | | 1,042 | | | — | | | |
Total Liabilities | 103,884 | | | 131 | | | | | 102,279 | | | 619 | | | |
Total Capital | 6,205 | | | — | | | | | 6,713 | | | — | | | |
Total Liabilities and Capital | $ | 110,089 | | | $ | 131 | | | | | $ | 108,992 | | | $ | 619 | | | |
Net Interest Income | | | $ | 142 | | | | | | | $ | 110 | | | |
Net Interest Spread(6) | | | | | 0.48 | % | | | | | | 0.26 | % |
Net Interest Margin(7) | | | | | 0.51 | % | | | | | | 0.41 | % |
Interest-earning Assets/Interest-bearing Liabilities | 107.15 | % | | | | | | 106.62 | % | | | | |
(1)The average balances of AFS securities and HTM securities are reflected at amortized cost. As a result, the average rates do not reflect changes in fair value or non-credit-related OTTI losses.
(2)Interest income on AFS securities includes accretion of yield adjustments on other-than-temporarily impaired PLRMBS (resulting from improvement in expected cash flows) recognized pursuant to the impairment guidance in effect prior to January 1, 2020, totaling $14 million and $16 million for the three months ended June 30, 2020 and 2019, respectively.
(3)Interest income/expense and average rates include the effect of associated interest rate exchange agreements, as follows:
55
|
| | | | | | | | | | | | | | | | | | | | | |
Average Balance Sheets |
| | | | | | | | | | | |
| Three Months Ended |
| September 30, 2017 | | September 30, 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 | $ | 800 |
| | $ | 2 |
| | 1.16 | % | | $ | 690 |
| | $ | — |
| | 0.43 | % |
Securities purchased under agreements to resell | 1,061 |
| | 3 |
| | 1.05 |
| | 3,702 |
| | 4 |
| | 0.39 |
|
Federal funds sold | 11,037 |
| | 33 |
| | 1.19 |
| | 7,276 |
| | 7 |
| | 0.40 |
|
Trading securities: | | | | | | | | | | | |
Mortgage-backed securities (MBS) | 7 |
| | — |
| | 2.26 |
| | 8 |
| | — |
| | 1.96 |
|
Other investments | 1,188 |
| | 4 |
| | 1.40 |
| | 1,550 |
| | 3 |
| | 0.62 |
|
Available-for-sale (AFS) securities:(1) | | | | | | | | | | | |
MBS(2) | 3,778 |
| | 60 |
| | 6.27 |
| | 4,677 |
| | 63 |
| | 5.39 |
|
Held-to-maturity (HTM) securities:(1) | | | | | | | | | | | |
MBS | 13,024 |
| | 73 |
| | 2.19 |
| | 10,985 |
| | 61 |
| | 2.22 |
|
Other investments | 1,045 |
| | 3 |
| | 1.31 |
| | 243 |
| | 1 |
| | 0.95 |
|
Mortgage loans held for portfolio | 1,592 |
| | 15 |
| | 3.68 |
| | 644 |
| | 7 |
| | 4.32 |
|
Advances(3) | 71,245 |
| | 241 |
| | 1.34 |
| | 65,586 |
| | 128 |
| | 0.78 |
|
Total interest-earning assets | 104,777 |
| | 434 |
| | 1.64 |
| | 95,361 |
| | 274 |
| | 1.15 |
|
Other assets(4)(5) | 958 |
| | — |
| | | | 913 |
| | — |
| | |
Total Assets | $ | 105,735 |
| | $ | 434 |
| | | | $ | 96,274 |
| | $ | 274 |
| | |
Liabilities and Capital | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Consolidated obligations: | | | | | | | | | | | |
Bonds(3) | $ | 68,930 |
| | $ | 205 |
| | 1.18 | % | | $ | 46,875 |
| | $ | 95 |
| | 0.80 | % |
Discount notes | 29,256 |
| | 75 |
| | 1.01 |
| | 42,259 |
| | 45 |
| | 0.43 |
|
Deposits and other borrowings | 298 |
| | 1 |
| | 1.06 |
| | 227 |
| | — |
| | 0.20 |
|
Mandatorily redeemable capital stock | 372 |
| | 7 |
| | 7.51 |
| | 487 |
| | 11 |
| | 9.05 |
|
Borrowings from other FHLBanks | 2 |
| | — |
| | 1.18 |
| | 1 |
| | — |
| | 0.41 |
|
Total interest-bearing liabilities | 98,858 |
| | 288 |
| | 1.15 |
| | 89,849 |
| | 151 |
| | 0.67 |
|
Other liabilities(4) | 701 |
| | — |
| | | | 925 |
| | — |
| | |
Total Liabilities | 99,559 |
| | 288 |
| | | | 90,774 |
| | 151 |
| | |
Total Capital | 6,176 |
| | — |
| | | | 5,500 |
| | — |
| | |
Total Liabilities and Capital | $ | 105,735 |
| | $ | 288 |
| | | | $ | 96,274 |
| | $ | 151 |
| | |
Net Interest Income | | | $ | 146 |
| | | | | | $ | 123 |
| | |
Net Interest Spread(6) | | | | | 0.49 | % | | | | | | 0.48 | % |
Net Interest Margin(7) | | | | | 0.55 | % | | | | | | 0.51 | % |
Interest-earning Assets/Interest-bearing Liabilities | 105.99 | % | | | | | | 106.13 | % | | | | |
| |
(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 $17 million and $19 million for the three months ended September 30, 2017 and 2016, respectively. |
| |
(3) | Interest income/expense and average rates include the effect of associated interest rate exchange agreements, as follows: |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| June 30, 2020 | | | | | | |
(In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | | Total |
(Amortization)/accretion of hedging activities | $ | (1) | | | $ | (2) | | | $ | — | | | $ | (3) | |
Net gain/(loss) on derivatives and hedged items | 2 | | | 9 | | | — | | | 11 | |
Net interest settlements on derivatives | (99) | | | (66) | | | 8 | | | (157) | |
Total net interest income/(expense) | $ | (98) | | | $ | (59) | | | $ | 8 | | | $ | (149) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| June 30, 2019 | | | | | | |
(In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | | Total |
| | | | | | | |
Net gain/(loss) on derivatives and hedged items | $ | (2) | | | $ | (13) | | | $ | (1) | | | $ | (16) | |
Net interest settlements on derivatives | 13 | | | (3) | | | (6) | | | 4 | |
Total net interest income/(expense) | $ | 11 | | | $ | (16) | | | $ | (7) | | | $ | (12) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2017 | | September 30, 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 |
| | $ | (5 | ) | | $ | (4 | ) | | $ | — |
| | $ | (13 | ) | | $ | (13 | ) |
Consolidated obligation bonds | (1 | ) | | 6 |
| | 5 |
| | 1 |
| | 46 |
| | 47 |
|
(4)Includes forward settling transactions and valuation adjustments for certain cash items.
(5)Includes non-credit-related OTTI losses on HTM securities for the second quarter of 2020. Includes non-credit-related OTTI losses on AFS and HTM securities for the second quarter of 2019.
| |
(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. |
(6)Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities.
(7)Net interest margin is net interest income (annualized) divided by average interest-earning assets.
Net interest income in the thirdsecond quarter of 20172020 was $146$142 million, a 19%29% increase from $123$110 million in the thirdsecond quarter of 2016.2019. The following table details the changes in interest income and interest expense for the thirdsecond quarter of 20172020 compared to the thirdsecond quarter of 2016.2019. 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 Three Months Ended September 30, 2017, Compared to Three Months Ended September 30, 2016 | |
Change in Net Interest Income: Rate/Volume Analysis Three Months Ended June 30, 2020, Compared to Three Months Ended June 30, 2019 | | Change in Net Interest Income: Rate/Volume Analysis Three Months Ended June 30, 2020, Compared to Three Months Ended June 30, 2019 | |
| | | | | | |
| Increase/ (Decrease) |
| | Attributable to Changes in(1) | | Increase/ (Decrease) | | Attributable to Changes in(1) | |
(In millions) | | Average Volume |
| | Average Rate |
| (In millions) | | | Average Volume | | Average Rate |
Interest-earning assets: | | | | | | Interest-earning assets: | |
Interest-bearing deposits | $ | 2 |
| | $ | — |
| | $ | 2 |
| Interest-bearing deposits | $ | (11) | | | $ | 7 | | | $ | (18) | |
Securities purchased under agreements to resell | (1 | ) | | (4 | ) | | 3 |
| Securities purchased under agreements to resell | (53) | | | (15) | | | (38) | |
Federal funds sold | 26 |
| | 5 |
| | 21 |
| Federal funds sold | (35) | | | 5 | | | (40) | |
Trading securities: Other investments | 1 |
| | (1 | ) | | 2 |
| Trading securities: Other investments | 19 | | | 20 | | | (1) | |
| AFS securities: | | | | | | AFS securities: | |
MBS | (3 | ) | | (13 | ) | | 10 |
| |
HTM securities: | | | | | | |
MBS | 12 |
| | 13 |
| | (1 | ) | |
Other investments | 2 |
| | 2 |
| | — |
| |
MBS(2) | | MBS(2) | (25) | | | 23 | | | (48) | |
Other investments(2) | | Other investments(2) | 4 | | | 4 | | | — | |
| HTM securities: MBS | | HTM securities: MBS | (46) | | | (22) | | | (24) | |
| Mortgage loans held for portfolio | 8 |
| | 9 |
| | (1 | ) | Mortgage loans held for portfolio | 5 | | | (1) | | | 6 | |
Advances(2) | 113 |
| | 12 |
| | 101 |
| Advances(2) | (314) | | | (34) | | | (280) | |
Total interest-earning assets | 160 |
| | 23 |
| | 137 |
| Total interest-earning assets | (456) | | | (13) | | | (443) | |
Interest-bearing liabilities: | | | | | | Interest-bearing liabilities: | |
Consolidated obligations: | | | | | | Consolidated obligations: | |
Bonds(2) | 110 |
| | 55 |
| | 55 |
| Bonds(2) | (360) | | | 7 | | | (367) | |
Discount notes | 30 |
| | (17 | ) | | 47 |
| Discount notes | (124) | | | 2 | | | (126) | |
Deposits and other borrowings | 1 |
| | — |
| | 1 |
| Deposits and other borrowings | (2) | | | 1 | | | (3) | |
Mandatorily redeemable capital stock | (4 | ) | | (2 | ) | | (2 | ) | Mandatorily redeemable capital stock | (2) | | | (2) | | | — | |
Total interest-bearing liabilities | 137 |
| | 36 |
| | 101 |
| Total interest-bearing liabilities | (488) | | | 8 | | | (496) | |
Net interest income | $ | 23 |
| | $ | (13 | ) | | $ | 36 |
| Net interest income | $ | 32 | | | $ | (21) | | | $ | 53 | |
(1)Combined rate/volume variances, a third element of the calculation, are allocated to the rate and volume variances based on their relative sizes.
| |
(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. |
(2)Interest income/expense and average rates include the interest effect of associated interest rate exchange agreements.
The net interest margin was 5551 basis points for the thirdsecond quarter of 2017, 42020, 10 basis points higher than the net interest margin for the thirdsecond quarter of 2016,2019, which was 5141 basis points. The net interest spread was 4948 basis points for the thirdsecond quarter of 2017, 12020, 22 basis pointpoints higher than the net interest spread for the thirdsecond quarter of 2016,2019, which was 4826 basis points. These increases were primarily relateddue to higher average balancesthe effects of interest-earning assets, combined with higher spreads on those assets.
changes in market interest rates, interest rate volatility, and other market factors during the period.
For securities previously identified as other-than-temporarily impaired pursuant to the impairment guidance in effect prior to January 1, 2020, the Bank updates its estimate of future
estimated cash flows on a regular basis. If there is no additional impairmentcredit loss on the security, the yield of the security
is adjusted upward on a prospective basis and accreted into interest income when there is a significant increase in
the expected cash flows. As a result of improvements in the estimated cash flows of securities previously identified as other-than-temporarily impaired, the net accretion of yield adjustmentsincome is likely to continue to be a positive source of net interest income in future periods.
Member demand for wholesale funding from the Bank can vary greatly depending on a number of factors, including economic and market conditions, competition from other wholesale funding sources, member deposit inflows and outflows, the activity level of the primary and secondary mortgage markets, and strategic decisions made by individual member institutions. As a result, Bank asset levels and operating results may vary significantly from period to period.
Other Income/(Loss). The following table presents the components of “Other Income/(Loss)” for the three months ended SeptemberJune 30, 20172020 and 2016.2019. | | Other Income/(Loss) | Other Income/(Loss) | Other Income/(Loss) | |
| | | | |
| Three Months Ended | | Three Months Ended | |
(In millions) | September 30, 2017 |
| | September 30, 2016 |
| (In millions) | June 30, 2020 | | June 30, 2019 |
Other Income/(Loss): | | | | Other Income/(Loss): | |
Total OTTI loss | $ | — |
| | $ | (1 | ) | |
Net amount of OTTI loss reclassified to/(from) AOCI | (6 | ) | | (2 | ) | |
Net OTTI loss, credit-related | (6 | ) | | (3 | ) | |
Net gain/(loss) on trading securities(1)
| — |
| | 1 |
| Net gain/(loss) on trading securities(1) | $ | (18) | | | $ | — | |
Net gain/(loss) on advances and consolidated obligation bonds held under fair value option | (5 | ) | | (18 | ) | Net gain/(loss) on advances and consolidated obligation bonds held under fair value option | 14 | | | 52 | |
Net gain/(loss) on derivatives and hedging activities | 2 |
| | 15 |
| Net gain/(loss) on derivatives and hedging activities | (14) | | | (61) | |
Gains on litigation settlements, net | — |
| | 240 |
| |
Other | 5 |
| | 6 |
| |
Other, net | | Other, net | 9 | | | 2 | |
Total Other Income/(Loss) | $ | (4 | ) | | $ | 241 |
| Total Other Income/(Loss) | $ | (9) | | | $ | (7) | |
(1)The net gain/(loss) on trading securities that were economically hedged totaled $(18) million and a de minimis amount for the three months ended SeptemberJune 30, 20172020 and 2016,2019, 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 1. Financial Statements – Note 6 – 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) recognized in earnings on advances and consolidated obligation bonds held under the fair value option for the three months ended SeptemberJune 30, 20172020 and 2016.2019.
| | Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option | |
Net Gain/(Loss) on Advances and Consolidated Obligations Bonds Held Under Fair Value Option | | Net Gain/(Loss) on Advances and Consolidated Obligations Bonds Held Under Fair Value Option | |
| | | | |
| Three Months Ended | | Three Months Ended | |
(In millions) | September 30, 2017 |
| | September 30, 2016 |
| (In millions) | June 30, 2020 | | June 30, 2019 |
Advances | $ | (5 | ) | | $ | (18 | ) | Advances | $ | 14 | | | $ | 57 | |
Consolidated obligation bonds | — |
| | — |
| Consolidated obligation bonds | — | | | (5) | |
Total | $ | (5 | ) | | $ | (18 | ) | Total | $ | 14 | | | $ | 52 | |
Under the fair value option, the Bank elected to carry certain assets and liabilities at fair value. In general, transactions elected for the fair value option are in economic hedge relationships. Gains or losses on these transactions are generally offset by losses or gains on the derivatives that economically hedge these instruments.
The net gains/(losses) on advances and consolidated obligation bonds held under the fair value option were primarily driven by the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors relative to the actual terms on the advances and consolidated obligation bonds during the period.
Additional information about advances and consolidated obligation bonds held under the fair value option is provided in “Item 1. Financial Statements– Statements – Note 1612 – Fair Value.”
Net Gain/(Loss) on Derivatives and Hedging Activities – Under the accounting for derivative instruments and hedging activities, the Bank is required to carry all of its derivative instruments on the Statements of Condition at fair value. If derivatives meet the hedging criteria, including effectiveness measures, the carrying value of the underlying hedged instruments may also be adjusted to reflect changes in the fair value attributable to the risk being hedged so that some or all of the unrealized gain or loss recognized on the derivative is offset by a corresponding unrealized gain or loss on the underlying hedged instrument. In addition, certain derivatives are associated with assets or liabilities but do not qualify as fair value hedges under the accounting for derivative instruments and hedging activities. These economic hedges are recorded on the Statements of Condition at fair value with the unrealized gain or loss recorded in earnings without any offsetting unrealized gain or loss from the associated asset or liability.
The following table shows the accounting classification of hedges and the categories of hedged items that contributed to the gains and losses on derivatives and hedged items that were recorded in “Net gain/(loss) on derivatives and hedging activities” in the thirdsecond quarter of 20172020 and 2016.2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives and Hedging Activities Three Months Ended June 30, 2020, Compared to Three Months Ended June 30, 2019 | | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | |
(In millions) | June 30, 2020 | | | | | | June 30, 2019 | | | | |
Hedged Item | Gain/(Loss) on Economic Hedges | | Income/ (Expense) on Economic Hedges | | Total | | Gain/(Loss) on Economic Hedges | | Income/ (Expense) on Economic Hedges | | Total |
Advances: | | | | | | | | | | | |
Elected for fair value option | $ | (5) | | | $ | (8) | | | $ | (13) | | | $ | (65) | | | $ | 7 | | | $ | (58) | |
Not elected for fair value option | 21 | | | (11) | | | 10 | | | (1) | | | (2) | | | (3) | |
Consolidated obligation bonds: | | | | | | | | | | | |
Elected for fair value option | — | | | — | | | — | | | 5 | | | (1) | | | 4 | |
Not elected for fair value option | (13) | | | 7 | | | (6) | | | 18 | | | (5) | | | 13 | |
Consolidated obligation discount notes: | | | | | | | | | | | |
Not elected for fair value option | (18) | | | 17 | | | (1) | | | (19) | | | 1 | | | (18) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Non-MBS investments: | | | | | | | | | | | |
Not elected for fair value option | 12 | | | (15) | | | (3) | | | — | | | — | | | — | |
Mortgage delivery commitment: | | | | | | | | | | | |
Not elected for fair value option | (1) | | | — | | | (1) | | | 1 | | | — | | | 1 | |
| | | | | | | | | | | |
Total | $ | (4) | | | $ | (10) | | | $ | (14) | | | $ | (61) | | | $ | — | | | $ | (61) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives and Hedging Activities Three Months Ended September 30, 2017, Compared to Three Months Ended September 30, 2016 |
| | | | | | | | | | | | | | | |
| Three Months Ended |
(In millions) | September 30, 2017 | | September 30, 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 | $ | — |
| | $ | 8 |
| | $ | (5 | ) | | $ | 3 |
| | $ | — |
| | $ | 29 |
| | $ | (11 | ) | | $ | 18 |
|
Not elected for fair value option | 2 |
| | (2 | ) | | — |
| | — |
| | 1 |
| | (5 | ) | | 1 |
| | (3 | ) |
Consolidated obligation bonds: | | | | | | | | |
| |
| |
| | |
Elected for fair value option | — |
| | (1 | ) | | 1 |
| | — |
| | — |
| | (2 | ) | | 2 |
| | — |
|
Not elected for fair value option | (1 | ) | | (3 | ) | | 2 |
| | (2 | ) | | (1 | ) | | (6 | ) | | 6 |
| | (1 | ) |
Consolidated obligation discount notes: | | | | | | | | | | | | | | | |
Not elected for fair value option | — |
| | 2 |
| | (8 | ) | | (6 | ) | | — |
| | 5 |
| | (5 | ) | | — |
|
Non-MBS investments: | | | | | | | | | | | | | | | |
Not elected for fair value option | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
Mortgage delivery commitment: | | | | | | | | | | | | | | | |
Not elected for fair value option | — |
| | 6 |
| | — |
| | 6 |
| | — |
| | 1 |
| | — |
| | 1 |
|
Total | $ | 1 |
| | $ | 11 |
| | $ | (10 | ) | | $ | 2 |
| | $ | — |
| | $ | 22 |
| | $ | (7 | ) | | $ | 15 |
|
During the thirdsecond quarter of 2017,2020, net gainslosses on derivatives and hedging activities totaled $2$14 million compared to net gainslosses of $15$61 million in the thirdsecond quarter of 2016.2019. These amounts included expense of $10 million and expense of $7a de minimis amount resulting from net settlements on derivative instruments used in economic hedges in the second quarter of 2020 and 2019, respectively. Excluding the impact of income or expense from net settlements on derivative instruments used in economic hedges, the net gains or losses on economic hedges were primarily associated with the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors during the period.
The ongoing impact of these valuation adjustments on the Bank cannot be predicted and the effects of these valuation adjustments may lead to significant volatility in future earnings, including earnings available for dividends.
Additional information about derivatives and hedging activities is provided in “Item 1. Financial Statements – Note 11 – Derivatives and Hedging Activities.”
Other Expense. During the second quarter of 2020, other expenses totaled $43 million, compared to $48 million in the second quarter of 2019, primarily reflecting the decrease in voluntary charitable contributions and reduction in operating expenses related to the relocation of the Bank’s premises during the second quarter of 2019. The decrease was partially offset by subsidies associated with Recovery Advances to help members serve customers affected by the COVID-19 pandemic offered during the second quarter of 2020.
Quality Jobs Fund Expenseand Other– During the second quarter of 2019, the Bank made a voluntary charitable contribution of $5 million for the Quality Jobs Fund as well as a voluntary contribution of a de minimis amount to the AHP to offset the impact on the AHP assessment of the charitable contribution expense. The Bank did not make any charitable contributions to the Quality Jobs Fund in the second quarter of 2020.
Six Months Ended June 30, 2020, Compared to Six Months Ended June 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Average Balance Sheets | | | | | | | | | | | |
| | | | | | | | | | | |
| Six Months Ended | | | | | | | | | | |
| June 30, 2020 | | | | | | June 30, 2019 | | | | |
(Dollars in millions) | Average Balance | | Interest Income/ Expense | | Average Rate | | Average Balance | | Interest Income/ Expense | | Average Rate |
Assets | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | |
Interest-bearing deposits | $ | 3,890 | | | $ | 13 | | | 0.69 | % | | $ | 2,102 | | | $ | 26 | | | 2.49 | % |
Securities purchased under agreements to resell | 5,161 | | | 19 | | | 0.72 | | | 8,178 | | | 99 | | | 2.46 | |
Federal funds sold | 5,877 | | | 15 | | | 0.53 | | | 5,989 | | | 77 | | | 2.59 | |
Trading securities: | | | | | | | | | | | |
MBS | 3 | | | — | | | 3.37 | | | 5 | | | — | | | 3.75 | |
Other investments | 3,672 | | | 38 | | | 2.09 | | | 486 | | | 7 | | | 2.69 | |
AFS securities:(1) | | | | | | | | | | | |
MBS(2)(3) | 10,613 | | | 89 | | | 1.69 | | | 7,526 | | | 161 | | | 4.32 | |
Other investments(3) | 5,317 | | | 23 | | | 0.87 | | | — | | | — | | | — | |
HTM securities:(1) | | | | | | | | | | | |
MBS | 6,794 | | | 73 | | | 2.16 | | | 10,256 | | | 153 | | | 3.00 | |
Other investments | — | | | — | | | — | | | 66 | | | 1 | | | 2.87 | |
Mortgage loans held for portfolio | 3,201 | | | 15 | | | 0.95 | | | 3,184 | | | 37 | | | 2.33 | |
Advances(4) | 65,542 | | | 421 | | | 1.29 | | | 72,509 | | | 954 | | | 2.66 | |
Loans to other FHLBanks | — | | | — | | | — | | | 13 | | | — | | | 2.95 | |
Total interest-earning assets | 110,070 | | | 706 | | | 1.29 | | | 110,314 | | | 1,515 | | | 2.77 | |
Other assets(4)(5) | 340 | | | — | | | | | 1,071 | | | — | | | |
Total Assets | $ | 110,410 | | | $ | 706 | | | | | $ | 111,385 | | | $ | 1,515 | | | |
Liabilities and Capital | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Consolidated obligations: | | | | | | | | | | | |
Bonds(3) | $ | 73,829 | | | $ | 358 | | | 0.98 | % | | $ | 74,119 | | | $ | 897 | | | 2.44 | % |
Discount notes | 28,433 | | | 151 | | | 1.07 | | | 29,045 | | | 352 | | | 2.45 | |
Deposits and other borrowings | 739 | | | 2 | | | 0.52 | | | 279 | | | 4 | | | 2.38 | |
Mandatorily redeemable capital stock | 107 | | | 4 | | | 7.63 | | | 213 | | | 8 | | | 7.49 | |
Borrowings from other FHLBanks | 1 | | | — | | | 9.52 | | | 10 | | | — | | | 2.44 | |
Total interest-bearing liabilities | 103,109 | | | 515 | | | 1.01 | | | 103,666 | | | 1,261 | | | 2.45 | |
Other liabilities(4) | 826 | | | — | | | | | 1,022 | | | — | | | |
Total Liabilities | 103,935 | | | 515 | | | | | 104,688 | | | 1,261 | | | |
Total Capital | 6,475 | | | — | | | | | 6,697 | | | — | | | |
Total Liabilities and Capital | $ | 110,410 | | | $ | 515 | | | | | $ | 111,385 | | | $ | 1,261 | | | |
Net Interest Income | | | $ | 191 | | | | | | | $ | 254 | | | |
Net Interest Spread(6) | | | | | 0.28 | % | | | | | | 0.32 | % |
Net Interest Margin(7) | | | | | 0.35 | % | | | | | | 0.47 | % |
Interest-earning Assets/Interest-bearing Liabilities | 106.75 | % | | | | | | 106.41 | % | | | | |
(1)The average balances of AFS securities and HTM securities are reflected at amortized cost. As a result, the average rates do not reflect changes in fair value or non-credit-related OTTI losses.
(2)Interest income on AFS securities includes accretion of yield adjustments on other-than-temporarily impaired PLRMBS (resulting from improvement in expected cash flows) recognized pursuant to the impairment guidance in effect prior to January 1, 2020, totaling $31 million for the six months ended June 30, 2020 and 2019.
(3)Interest income/expense and average rates include the effect of associated interest rate exchange agreements, as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | | | |
| June 30, 2020 | | | | | | |
(In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | | Total |
(Amortization)/accretion of hedging activities | $ | (1) | | | $ | (2) | | | $ | — | | | $ | (3) | |
Net gain/(loss) on derivatives and hedged items | (6) | | | (36) | | | — | | | (42) | |
Net interest settlements on derivatives | (132) | | | (96) | | | 11 | | | (217) | |
Total net interest income/(expense) | $ | (139) | | | $ | (134) | | | $ | 11 | | | $ | (262) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | | | |
| June 30, 2019 | | | | | | |
(In millions) | Advances | | AFS Securities | | Consolidated Obligation Bonds | | Total |
Net gain/(loss) on derivatives and hedged items | $ | (2) | | | $ | (22) | | | $ | (1) | | | $ | (25) | |
Net interest settlements on derivatives | 34 | | | (5) | | | (15) | | | 14 | |
Total net interest income/(expense) | $ | 32 | | | $ | (27) | | | $ | (16) | | | $ | (11) | |
(4)Includes forward settling transactions and valuation adjustments for certain cash items.
(5)Includes non-credit-related OTTI losses on AFS and HTM securities for the first six months of 2020. Includes non-credit-related OTTI losses on AFS and HTM securities for the first six months of 2019.
(6)Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities.
(7)Net interest margin is net interest income (annualized) divided by average interest-earning assets.
Net interest income in the first six months of 2020 was $191 million, a 25% decrease from $254 million in the first six months of 2019. The following table details the changes in interest income and interest expense for the first six months of 2020 compared to the first six months of 2019. 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 Six Months Ended June 30, 2020, Compared to Six Months Ended June 30, 2019 | | | | | |
| | | | | |
| Increase/ (Decrease) | | Attributable to Changes in(1) | | |
(In millions) | | | Average Volume | | Average Rate |
Interest-earning assets: | | | | | |
Interest-bearing deposits | $ | (13) | | | $ | 13 | | | $ | (26) | |
Securities purchased under agreements to resell | (80) | | | (27) | | | (53) | |
Federal funds sold | (62) | | | (1) | | | (61) | |
Trading securities: Other investments | 31 | | | 33 | | | (2) | |
| | | | | |
AFS securities: | | | | | |
MBS(2) | (72) | | | 50 | | | (122) | |
Other investments(2) | 23 | | | 23 | | | — | |
HTM securities: | | | | | |
MBS | (80) | | | (44) | | | (36) | |
Other investments | (1) | | | (1) | | | — | |
Mortgage loans held for portfolio | (22) | | | — | | | (22) | |
Advances(2) | (533) | | | (84) | | | (449) | |
Total interest-earning assets | (809) | | | (38) | | | (771) | |
Interest-bearing liabilities: | | | | | |
Consolidated obligations: | | | | | |
Bonds(2) | (539) | | | (3) | | | (536) | |
Discount notes | (201) | | | (7) | | | (194) | |
Deposits and other borrowings | (2) | | | 2 | | | (4) | |
Mandatorily redeemable capital stock | (4) | | | (4) | | | — | |
Total interest-bearing liabilities | (746) | | | (12) | | | (734) | |
Net interest income | $ | (63) | | | $ | (26) | | | $ | (37) | |
(1)Combined rate/volume variances, a third element of the calculation, are allocated to the rate and volume variances based on their relative sizes.
(2)Interest income/expense and average rates include the interest effect of associated interest rate exchange agreements.
The net interest margin was 35 basis points for the first six months of 2020, 12 basis points lower than the net interest margin for the first six months of 2019, which was 47 basis points. The net interest spread was 28 basis points for the first six months of 2020, 4 basis point lower than the net interest spread for the first six months of 2019, which was 32 basis points. These decreases were primarily due to the effects of changes in market interest rates, interest rate volatility, and other market factors during the period.
Other Income/(Loss). The following table presents the components of “Other Income/(Loss)” for the six months ended June 30, 2020 and 2019.
| | | | | | | | | | | |
Other Income/(Loss) | | | |
| | | |
| Six Months Ended | | |
(In millions) | June 30, 2020 | | June 30, 2019 |
Other Income/(Loss): | | | |
Net gain/(loss) on trading securities(1) | $ | 55 | | | $ | (1) | |
Net gain/(loss) on advances and consolidated obligation bonds held under fair value option | 103 | | | 91 | |
Net gain/(loss) on derivatives and hedging activities | (161) | | | (89) | |
Other, net | 12 | | | 7 | |
Total Other Income/(Loss) | $ | 9 | | | $ | 8 | |
(1)The net gain/(loss) on trading securities that were economically hedged totaled $55 million and a de minimis amount for the six months ended June 30, 2020 and 2019, respectively.
Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option – The following table presents the net gain/(loss) on advances and consolidated obligation bonds held under the fair value option for the six months ended June 30, 2020 and 2019.
| | | | | | | | | | | |
Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option | | | |
| | | |
| Six Months Ended | | |
(In millions) | June 30, 2020 | | June 30, 2019 |
Advances | $ | 105 | | | $ | 103 | |
Consolidated obligation bonds | (2) | | | (12) | |
Total | $ | 103 | | | $ | 91 | |
Under the fair value option, the Bank elected to carry certain assets and liabilities at fair value. In general, transactions elected for the fair value option are in economic hedge relationships. Gains or losses on these transactions are generally offset by losses or gains on the derivatives that economically hedge these instruments.
The net gains/(losses) on advances and consolidated obligation bonds held under the fair value option were primarily driven by the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors relative to the actual terms on the advances and consolidated obligation bonds during the period.
Additional information about advances and consolidated obligation bonds held under the fair value option is provided in “Item 1. Financial Statements – Note 12 – Fair Value.”
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives and Hedging Activities Six Months Ended June 30, 2020, Compared to Six Months Ended June 30, 2019 | | | | | | | | | | | |
| | | | | | | | | | | |
| Six Months Ended | | | | | | | | | | |
(In millions) | June 30, 2020 | | | | | | June 30, 2019 | | | | |
Hedged Item | Gain/(Loss) on Economic Hedges | | Income/ (Expense) onEconomic Hedges | | Total | | Gain/(Loss) on Economic Hedges | | Income/ (Expense) onEconomic Hedges | | Total |
Advances: | | | | | | | | | | | |
Elected for fair value option | $ | (114) | | | $ | (10) | | | $ | (124) | | | $ | (106) | | | $ | 15 | | | $ | (91) | |
Not elected for fair value option | 30 | | | (22) | | | 8 | | | 10 | | | (5) | | | 5 | |
Consolidated obligation bonds: | | | | | | | | | | | |
Elected for fair value option | 2 | | | — | | | 2 | | | 11 | | | (3) | | | 8 | |
Not elected for fair value option | 5 | | | 7 | | | 12 | | | 41 | | | (13) | | | 28 | |
Consolidated obligation discount notes: | | | | | | | | | | | |
Not elected for fair value option | (5) | | | 26 | | | 21 | | | (42) | | | 1 | | | (41) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Non-MBS investments: | | | | | | | | | | | |
Not elected for fair value option | (64) | | | (19) | | | (83) | | | — | | | — | | | — | |
Mortgage delivery commitment: | | | | | | | | | | | |
Not elected for fair value option | 3 | | | — | | | 3 | | | 2 | | | — | | | 2 | |
| | | | | | | | | | | |
Total | $ | (143) | | | $ | (18) | | | $ | (161) | | | $ | (84) | | | $ | (5) | | | $ | (89) | |
During the first six months of 2020, net losses on derivatives and hedging activities totaled $161 million compared to net losses of $89 million in the first six months of 2019. These amounts included expense of $18 million and expense of $5 million resulting from net settlements on derivative instruments used in economic hedges in the third quarterfirst six months of
2017 2020 and 2016,2019, respectively. Excluding the impact of income or expense from net settlements on derivative instruments used in economic hedges, the net gains or losses on fair value and economic hedges were primarily associated with the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors during the period.
The ongoing impact of these valuation adjustments on the Bank cannot be predicted and the effects of these valuation adjustments may lead to significant volatility in future earnings, including earnings available for dividends.
Additional information about derivatives and hedging activities is provided in “Item 1. Financial Statements–Statements – Note 1511 – Derivatives and Hedging Activities.”
Other Expense. During the third quarterfirst six months of 2017,2020, other expenses totaled $51$79 million, compared to $39$91 million in the third quarterfirst six months of 2016,2019, primarily reflecting the decrease in voluntary charitable contributions madeand reduction in operating expenses related to the relocation of the Bank’s premises during the thirdsecond quarter of 2017.2019. The decrease was partially offset by subsidies associated with Recovery Advances to help members serve customers affected by the COVID-19 pandemic offered during the second quarter of 2020.
Quality Jobs Fund Expenseand Other– In During the first quartersix months of 2017, the Board of Directors approved an allocation 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 by the Bank in incremental amounts over the next two years. During the third quarter of 2017,2019, the Bank made a voluntary charitable contribution of $10 million for the Quality Jobs Fund as well as a voluntary contribution of $1 million to the Affordable Housing Program (AHP)AHP to offset the impact on the AHP assessment of the charitable contribution expense.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016
|
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Average Balance Sheets |
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2017 | | September 30, 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 | $ | 708 |
| | $ | 5 |
| | 0.95 | % | | $ | 590 |
| | $ | 1 |
| | 0.36 | % |
Securities purchased under agreements to resell | 1,034 |
| | 7 |
| | 0.85 |
| | 3,228 |
| | 9 |
| | 0.36 |
|
Federal funds sold | 10,653 |
| | 78 |
| | 0.99 |
| | 6,705 |
| | 19 |
| | 0.38 |
|
Trading securities: | | | | | | | | | | | |
Mortgage-backed securities (MBS) | 7 |
| | — |
| | 2.18 |
| | 9 |
| | — |
| | 1.89 |
|
Other investments | 1,398 |
| | 12 |
| | 1.16 |
| | 1,364 |
| | 6 |
| | 0.57 |
|
Available-for-sale (AFS) securities:(1) | | | | | | | | | | | |
MBS(2) | 3,997 |
| | 181 |
| | 6.04 |
| | 4,972 |
| | 199 |
| | 5.35 |
|
Held-to-maturity (HTM) securities:(1) | | | | | | | | | | | |
MBS | 12,422 |
| | 201 |
| | 2.16 |
| | 10,379 |
| | 186 |
| | 2.39 |
|
Other investments | 1,017 |
| | 9 |
| | 1.17 |
| | 259 |
| | 2 |
| | 0.86 |
|
Mortgage loans held for portfolio | 1,213 |
| | 35 |
| | 3.86 |
| | 637 |
| | 22 |
| | 4.63 |
|
Advances(3) | 66,440 |
| | 587 |
| | 1.18 |
| | 62,447 |
| | 351 |
| | 0.75 |
|
Loans to other FHLBanks | 2 |
| | — |
| | 0.86 |
| | 1 |
| | — |
| | 0.38 |
|
Total interest-earning assets | 98,891 |
| | 1,115 |
| | 1.51 |
| | 90,591 |
| | 795 |
| | 1.17 |
|
Other assets(4)(5) | 943 |
| | — |
| | | | 711 |
| | — |
| | |
Total Assets | $ | 99,834 |
| | $ | 1,115 |
| | | | $ | 91,302 |
| | $ | 795 |
| | |
Liabilities and Capital | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Consolidated obligations: | | | | | | | | | | | |
Bonds(3) | $ | 58,163 |
| | $ | 468 |
| | 1.08 | % | | $ | 52,453 |
| | $ | 303 |
| | 0.77 | % |
Discount notes | 34,381 |
| | 196 |
| | 0.76 |
| | 32,119 |
| | 96 |
| | 0.40 |
|
Deposits and other borrowings | 266 |
| | 2 |
| | 0.83 |
| | 361 |
| | — |
| | 0.18 |
|
Mandatorily redeemable capital stock | 408 |
| | 25 |
| | 8.37 |
| | 501 |
| | 33 |
| | 8.77 |
|
Borrowings from other FHLBanks | 11 |
| | — |
| | 0.56 |
| | 7 |
| | — |
| | 0.37 |
|
Total interest-bearing liabilities | 93,229 |
| | 691 |
| | 0.99 |
| | 85,441 |
| | 432 |
| | 0.68 |
|
Other liabilities(4) | 722 |
| | — |
| | | | 718 |
| | — |
| | |
Total Liabilities | 93,951 |
| | 691 |
| | | | 86,159 |
| | 432 |
| | |
Total Capital | 5,883 |
| | — |
| | | | 5,143 |
| | — |
| | |
Total Liabilities and Capital | $ | 99,834 |
| | $ | 691 |
| | | | $ | 91,302 |
| | $ | 432 |
| | |
Net Interest Income | | | $ | 424 |
| | | | | | $ | 363 |
| | |
Net Interest Spread(6) | | | | | 0.52 | % | | | | | | 0.49 | % |
Net Interest Margin(7) | | | | | 0.57 | % | | | | | | 0.54 | % |
Interest-earning Assets/Interest-bearing Liabilities | 106.07 | % | | | | | | 106.03 | % | | | | |
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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 $51 million and $61 million for the nine months ended September 30, 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: |
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| Nine Months Ended |
| September 30, 2017 | | September 30, 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 |
| | $ | (22 | ) | | $ | (21 | ) | | $ | — |
| | $ | (46 | ) | | $ | (46 | ) |
Consolidated obligation bonds | (1 | ) | | 21 |
| | 20 |
| | 4 |
| | 149 |
| | 153 |
|
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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. |
Net interest income in the first nine months of 2017 was $424 million, a 17% increase from $363 million in the first nine months of 2016. The following table details the changes in interest income and interest expense for the first nine months of 2017 compared to the first nine months of 2016. Changes in both volume and interest rates influence changes in net interest income, net interest spread, and net interest margin.
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Change in Net Interest Income: Rate/Volume Analysis Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016 |
| | | | | |
| Increase/ (Decrease) |
| | Attributable to Changes in(1) |
(In millions) | | Average Volume |
| | Average Rate |
|
Interest-earning assets: | | | | | |
Interest-bearing deposits | $ | 4 |
| | $ | — |
| | $ | 4 |
|
Securities purchased under agreements to resell | (2 | ) | | (9 | ) | | 7 |
|
Federal funds sold | 59 |
| | 16 |
| | 43 |
|
Trading securities: Other investments | 6 |
| | — |
| | 6 |
|
AFS securities: | | | | | |
MBS | (18 | ) | | (42 | ) | | 24 |
|
HTM securities: | | | | | |
MBS | 15 |
| | 34 |
| | (19 | ) |
Other investments | 7 |
| | 6 |
| | 1 |
|
Mortgage loans held for portfolio | 13 |
| | 17 |
| | (4 | ) |
Advances(2) | 236 |
| | 24 |
| | 212 |
|
Total interest-earning assets | 320 |
| | 46 |
| | 274 |
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Interest-bearing liabilities: | | | | | |
Consolidated obligations: | | | | | |
Bonds(2) | 165 |
| | 35 |
| | 130 |
|
Discount notes | 100 |
| | 7 |
| | 93 |
|
Deposits and other borrowings | 2 |
| | — |
| | 2 |
|
Mandatorily redeemable capital stock | (8 | ) | | (6 | ) | | (2 | ) |
Total interest-bearing liabilities | 259 |
| | 36 |
| | 223 |
|
Net interest income | $ | 61 |
| | $ | 10 |
| | $ | 51 |
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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. |
The net interest margin was 57 basis points for the first nine months of 2017, 3 basis points higher than the net interest margin for the first nine months of 2016, which was 54 basis points. The net interest spread was 52 basis points for the first nine months of 2017, 3 basis points higher than the net interest spread for the first nine months of 2016, which was 49 basis points. These increases were primarily related to higher average balances of interest-earning assets, combined with higher spreads on those assets.
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 impairment on the security, the yield of the security is adjusted upward on a prospective basis and accreted into interest income when there is a significant increase in the expected cash flows. As a result of improvements in the estimated cash flows of securities previously identified as other-than-temporarily impaired, the accretion of yield adjustments is likely to continue to be a positive source of net interest income in future periods.
Member demand for wholesale funding from the Bank can vary greatly depending on a number of factors, including economic and market conditions, competition from other wholesale funding sources, member deposit inflows and outflows, the activity level of the primary and secondary mortgage markets, and strategic decisions made by individual member institutions. As a result, Bank asset levels and operating results may vary significantly from period to period.
Other Income/(Loss). The following table presents the components of “Other Income/(Loss)” for the nine months ended September 30, 2017 and 2016.
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Other Income/(Loss) |
| |
| Nine Months Ended |
(In millions) | September 30, 2017 |
| | September 30, 2016 |
|
Other Income/(Loss): | | | |
Total OTTI loss | $ | (8 | ) | | $ | (19 | ) |
Net amount of OTTI loss reclassified to/(from) AOCI | (7 | ) | | 5 |
|
Net OTTI loss, credit-related | (15 | ) | | (14 | ) |
Net gain/(loss) on trading securities(1) | — |
| | 3 |
|
Net gain/(loss) on advances and consolidated obligation bonds held under fair value option | (1 | ) | | 22 |
|
Net gain/(loss) on derivatives and hedging activities | (26 | ) | | (73 | ) |
Gains on litigation settlements, net | 119 |
| | 451 |
|
Other | 15 |
| | 14 |
|
Total Other Income/(Loss) | $ | 92 |
| | $ | 403 |
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(1) | The net gain/(loss) on trading securities that were economically hedged totaled $1 million for the nine months ended September 30, 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 1. Financial Statements– Note 6 – 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 nine months ended September 30, 2017 and 2016.
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Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option |
| | | |
| Nine Months Ended |
(In millions) | September 30, 2017 |
| | September 30, 2016 |
|
Advances | $ | 4 |
| | $ | 45 |
|
Consolidated obligation bonds | (5 | ) | | (23 | ) |
Total | $ | (1 | ) | | $ | 22 |
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Under the fair value option, the Bank elected to carry certain assets and liabilities at fair value. In general, transactions elected for the fair value option are in economic hedge relationships. Gains or losses on these transactions are generally offset by losses or gains on the derivatives that economically hedge these instruments.
The net gains/(losses) on advances and consolidated obligation bonds held under the fair value option were primarily driven by the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors relative to the actual terms on the advances and consolidated obligation bonds during the period.
Additional information about advances and consolidated obligation bonds held under the fair value option is provided in “Item 1. Financial Statements– Note 16 – Fair Value.”
Net Gain/(Loss) on Derivatives and Hedging Activities – The following table shows the accounting classification of hedges and the categories of hedged items that contributed to the gains and losses on derivatives and hedged items that were recorded in “Net gain/(loss) on derivatives and hedging activities” in the first nine months of 2017 and 2016.
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Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives and Hedging Activities Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 |
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| Nine Months Ended |
(In millions) | September 30, 2017 | | September 30, 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 | $ | — |
| | $ | 4 |
| | $ | (18 | ) | | $ | (14 | ) | | $ | — |
| | $ | (31 | ) | | $ | (35 | ) | | $ | (66 | ) |
Not elected for fair value option | (1 | ) | | — |
| | 1 |
| | — |
| | — |
| | 5 |
| | 2 |
| | 7 |
|
Consolidated obligation bonds: | | | | | | | | | | | | | | |
|
|
Elected for fair value option | — |
| | 3 |
| | 3 |
| | 6 |
| | — |
| | 7 |
| | 13 |
| | 20 |
|
Not elected for fair value option | — |
| | — |
| | 5 |
| | 5 |
| | (4 | ) | | (8 | ) | | 20 |
| | 8 |
|
Consolidated obligation discount notes: | | | | | | | | | | | | | | |
|
|
Not elected for fair value option | — |
| | (11 | ) | | (26 | ) | | (37 | ) | | — |
| | (18 | ) | | (22 | ) | | (40 | ) |
MBS: | | | | | | | | | | | | | | |
|
|
Not elected for fair value option | — |
| | (4 | ) | | — |
| | (4 | ) | | — |
| | (4 | ) | | — |
| | (4 | ) |
Mortgage delivery commitment: | | | | | | | | | | | | | | | |
Not elected for fair value option | — |
| | 18 |
| | — |
| | 18 |
| | — |
| | 2 |
| | — |
| | 2 |
|
Total | $ | (1 | ) | | $ | 10 |
| | $ | (35 | ) | | $ | (26 | ) | | $ | (4 | ) | | $ | (47 | ) | | $ | (22 | ) | | $ | (73 | ) |
During the first nine months of 2017, net losses on derivatives and hedging activities totaled $26 million compared to net losses of $73 million in the first nine months of 2016. These amounts included expense of $35 million and
expense of $22 million resulting from net settlements on derivative instruments used in economic hedges in the first nine months of 2017 and 2016, 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 1. Financial Statements– Note 15 – Derivatives and Hedging Activities.”
Gains on Litigation Settlements, Net – During the first nine months of 2017 and 2016,gains relating to settlements with certain defendants in connection with the Bank’s PLRMBS litigation (after netting certain legal fees and expenses) totaled $119 million and $451 million, respectively.
Other Expense. During the first nine months of 2017, other expenses totaled $170 million, compared to $112 million in the first nine months of 2016, reflecting the voluntarydid not make any charitable contributions made during the first nine months of 2017.
Quality Jobs Fund Expenseand Other– In the first quarter of 2017, the Board of Directors approved an allocation of $100 million forto the Quality Jobs Fund a donor-advised fund established to support quality jobs growth and small business expansion to be funded by the Bank in incremental amounts over the next two years. During the first ninesix months of 2017, the Bank made voluntary charitable contributions of $50 million for the Quality Jobs Fund, as well as voluntary contributions of $6 million to the Affordable Housing Program (AHP) to offset the impact on the AHP assessment of the charitable contribution expense.2020.
Return on Average Equity
Return on average equity (ROE) was 5.19%5.66% (annualized) for the thirdsecond quarter of 2017,2020, compared to 21.05%2.91% (annualized) for the thirdsecond quarter of 2016.2019. The decreaseincrease primarily reflected lowerhigher net income for the thirdsecond quarter of 2017,2020, which decreased 72%increased 80%, from $291$49 million in the thirdsecond quarter of 20162019 to $81$88 million in the thirdsecond quarter of 2017. The decrease in net income primarily reflected a gain on settlements of $240 million (after netting certain legal fees2020, and expenses) in the prior-year period relating to the Bank's PLRMBS litigation. In addition, the decrease in net income reflectedaverage equity from $6.7 billion in the voluntary charitable contributions made during the thirdsecond quarter of 2017.2019 to $6.2 billion in the second quarter of 2020.
Return on average equity (ROE)ROE was 7.03%2.47% (annualized) for the first ninesix months of 2017,2020, compared to 15.19%4.61% (annualized) for the first ninesix months of 2016.2019. The decrease primarily reflected lower net income for the first ninesix months of 2017 resulting primarily2020, which decreased 48%, from lower gains on settlements relating to the Bank’s PLRMBS litigation (after netting certain legal fees and expenses) for$153 million in the first ninesix months of 2017 and from the voluntary charitable contributions made during2019 to $80 million in the first ninesix months of 2017.
2020.
Dividends and Retained Earnings
The Bank’s Excess Stock Repurchase, Retained Earnings,In the second quarter of 2020, the Bank paid dividends at an annualized rate of 5.00%, totaling $40 million, including $38 million in dividends on capital stock 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$2 million in dividends on mandatorily redeemable capital stock. As required by the regulations governing the operations of the FHLBanks, the Framework is reviewed at least annually by the Bank’s Board of Directors. The Board of Directors may amend the Framework from time to time.
In accordance with the Framework, the Bank retains certain amounts in restricted retained earnings, which are not made available for dividends in the current dividend period. The Bank may be restricted from paying dividends if it
is not in compliance with any of its minimum capital requirements or if payment would cause the Bank to fail to meet any of its minimum capital requirements. In addition, the Bank may not pay dividends if any principal or interest due on any consolidated obligation has not been paid in full or is not expected to be paid in full, or, under certain circumstances, if the Bank fails to satisfy certain liquidity requirements under applicable regulations.
The regulatory liquidity requirements state that each FHLBank must: (i) maintain eligible high quality assets (advances with a maturity not exceeding five years, U.S. Treasury securities investments, and deposits in banks or trust companies) in an amount equal to or greater than the deposits received from members, and (ii) hold 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 September 30, 2017, advances maturing within five years totaled $60.6 billion, significantly in excess of the $140 million of member deposits on that date. At December 31, 2016, advances maturing within five years totaled $48.4 billion, significantly in excess of the $169 million of member deposits on that date.
As of September 30, 2017, and December 31, 2016, 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” in the Bank’s 2016 Form 10-K.
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. As of September 30, 2017, the Bank’s excess capital stock totaled $452 million, or 0.41% of total assets.
In the thirdsecond quarter of 2017,2019, the Bank paid dividends at an annualized rate of 7.00%, totaling $51 million, including $44 million in dividends on capital stock and $7 million in dividends on mandatorily redeemable capital stock. In the third quarter of 2016, the Bank paid dividends at an annualized rate of 9.17%, totaling $63$56 million, including $52 million in dividends on capital stock and $11$4 million in dividends on mandatorily redeemable capital stock.
In the first ninesix months of 2017,2020, the Bank paid dividends at an annualized rate of 7.69%5.99%, totaling $164$94 million, including $139$90 million in dividends on capital stock and $25$4 million in dividends on mandatorily redeemable capital stock. In the first ninesix months of 2016,2019, the Bank paid dividends at an annualized rate of 8.70%7.00%, totaling $179$110 million, including $146$102 million in dividends on capital stock and $33$8 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.
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.
On October 26, 2017,July 23, 2020, the Bank’s Board of Directors declared a cash dividend on the capital stock outstanding during the thirdsecond quarter of 20172020 at an annualized rate of 7.00%5.00%, totaling $55$38 million, including $48$37 million in dividends on capital stock and $7$1 million in dividends on mandatorily redeemable capital stock. The Bank recorded the dividend on October 26, 2017.July 23, 2020. The Bank expects to pay the dividend on November 13, 2017.August 11, 2020. Dividends on mandatorily redeemable capital stock will be recognized as interest expense in the fourththird quarter of 2017.
2020.
The Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework (Framework) assesses the level and adequacy of retained earnings and establishes amounts to be retained in restricted retained earnings, which are not made available in the current dividend period. Priorperiod, and maintains an amount of total retained earnings at least equal to July 2017,its required retained earnings as described in the Framework. As determined using the Bank’s Framework had three categoriesmethodology, the required level of restricted retained earnings: Valuation Adjustments, Other (which represented a targeted amount), and the Joint Capital Enhancement (JCE Agreement). Under the Framework, the Bank’stotal retained earnings methodology determined the Bank’s required amount of restricted retained earnings. As determined by the Bank’s Framework, from July 2015 to January 2017, the Bank’s restricted retained earnings requirement was $2,000, and$2.5 billion from January 2017 to2018 through July 2017, the Bank’s restricted retained earnings requirement was $2,300.
2019. In July 2017,2019, 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 Adjustmentsmethodology was further revised and Other) and approved revisions to the Bank’s retained earnings methodology to provide forresulted in a required level of all retained earnings of $2,300 for loss protection, capital compliance,$2.4 billion. In January 2020, the methodology was further revised and business growth.resulted in a required level of retained earnings of $2.5 billion. The Bank satisfies its retained earnings requirement with both restricted retained earnings (i.e., amounts related to the JCEJoint Capital Enhancement Agreement) and unrestricted retained earnings.
Retained earnings related to the JCE Agreement totaled $562 million and $500 million at September 30, 2017, and December 31, 2016, respectively. Additional restricted The Bank’s retained earnings totaled $1.7 billionrequirement may be changed at December 31, 2016.any time. The Board of Directors periodically reviews the retained earnings methodology and analysis to determine whether any adjustments are appropriate. Total restricted retained earnings were $562$729 million and $2.2 billion$713 million as of SeptemberJune 30, 2017,2020, and December 31, 2016,2019, respectively.
The Bank will continue to monitor the condition of its PLRMBS portfolio, the ratio of the Bank’s estimated market value of totalbalance sheet, its financial 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 in future quarters.
For more information, see “Item 1. Financial Statements – Note 139 – Capital” in this report and see “Item 1. Business – Dividends and Retained Earnings”Earnings,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk,” and “Item 8. Financial Statements and Supplementary Data – Note 15 – Capital – Excess Stock Repurchase, Retained Earnings, and Dividend Framework.”Framework” in the Bank’s 20162019 Form 10-K.
Form 10–K.
Financial Condition
Total assets were $109.5$93.4 billion at SeptemberJune 30, 2017,2020, compared to $91.9$106.8 billion at December 31, 2016.2019. Advances increaseddecreased by $11.8$14.4 billion, or 24%22%, to $61.6$51.0 billion at SeptemberJune 30, 2017,2020, from $49.8$65.4 billion at December 31, 2016.2019. MBS investments decreased by $0.6 billion, or 3%, to $17.2 billion at June 30, 2020, from $17.8 billion at December 31, 2019. Average total assets were $105.7$110.1 billion for the thirdsecond quarter of 2017,2020, a 10%1% increase compared to $96.3$109.0 billion for the thirdsecond quarter of 2016.2019. Average total assets were $99.8$110.4 billion for the first ninesix months of 2017, a 9% increase compared to $91.32020 and were $111.4 billion for the first ninesix months of 2016.2019. Average advances were $71.2 billion for the third quarter of 2017, a 9%increase from $65.6$64.1 billion for the thirdsecond quarter of 2016.2020, an 8% decrease from $69.7 billion for the second quarter of 2019. Average advances were $66.4$65.5 billion for the first ninesix months of 2017,2020, a 6% increase10% decrease from $62.4$72.5 billion for the first ninesix months of 2016.2019. Average non-MBSMBS investments were $15.1$17.5 billion for the thirdsecond quarter of 2017,2020, a 12% increase3% decrease from $13.5$18.1 billion for the thirdsecond quarter of 2016.2019. Average non-MBSMBS investments were $14.8$17.4 billion for the first ninesix months of 2017,2020, a 22% increase2% decrease from $12.1$17.8 billion for the first ninesix months of 2016.
2019.
Advances outstanding at SeptemberJune 30, 2017,2020, included net unrealized lossesgains of $22$960 million, of which $39$785 million represented unrealized lossesgains on advances hedged in accordance with the accounting for derivative instruments and hedging activities and $17$175 million represented unrealized gains on economically hedged advances that are carried at fair value in accordance with the fair value option. Advances outstanding at December 31, 2016,2019, included unrealized lossesgains of $12$286 million, of which $22$203 million represented unrealized lossesgains on advances hedged in accordance with the accounting for derivative instruments and hedging activities and $10$83 million represented unrealized gains on economically hedged advances that are carried at fair value in accordance with the fair value
option. The overall increasechange in the net unrealized lossesgains on the hedged advances and advances carried at fair value from December 31, 2016,2019, to SeptemberJune 30, 2017,2020, was primarily attributable to the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors relative to the terms on the Bank’s advances during the period.
Total liabilities were $103.2$87.3 billion at SeptemberJune 30, 2017, an increase2020, a decrease of $16.8$12.8 billion from $86.4$100.1 billion at December 31, 2016,2019, primarily reflecting a $18.5$12.8 billion increasedecrease in consolidated obligations outstanding to $102.2$85.9 billion at SeptemberJune 30, 2017,2020, from $83.7$98.7 billion at December 31, 2016, partially offset by a $1.3 billion decrease in borrowings from other FHLBanks.2019. Average total liabilities were $99.6$103.9 billion for the thirdsecond quarter of 2017,2020, a 10%2% increase compared to $90.8$102.3 billion for the thirdsecond quarter of 2016.2019. Average total liabilities were $94.0$103.9 billion for the first ninesix months of 2017, a 9% increase compared to $86.22020 and were $104.7 billion for the first ninesix months of 2016.2019. Average consolidated obligations were $98.2$102.2 billion for the thirdsecond quarter of 20172020 and $89.1$100.7 billion for the thirdsecond quarter of 2016.2019. Average consolidated obligations were $92.5$102.3 billion for the first ninesix months of 20172020 and $84.6$103.2 billion for the first ninesix months of 2016.
2019.
Consolidated obligations outstanding at SeptemberJune 30, 2017,2020, included unrealized gainslosses of $12$26 million on consolidated obligation bonds hedged in accordance with the accounting for derivative instruments and hedging activities and unrealized gainslosses of $2$3 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, 2016,2019, included unrealized losses of $6$9 million on consolidated obligation bonds hedged in accordance with the accounting for derivative instruments and hedging activities and unrealized gainslosses of $8$2 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 gainslosses on the hedged consolidated obligation bonds and on the consolidated obligation bonds carried at fair value from December 31, 2016,2019, to SeptemberJune 30, 2017,2020, were primarily attributable to the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors relative to the actual terms on the Bank'sBank’s consolidated obligation bonds during the period.
As provided by the FHLBank Act or regulations governing the operations of the FHLBanks, all FHLBanks have joint and several liability for all FHLBank consolidated obligations. The joint and several liability regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank, and as of SeptemberJune 30, 2017,2020, and through the filing date of this report, does not believe that it is probable that it will be asked to
do so. The par value of the outstanding consolidated obligations of the FHLBanks was $1,028.7$915.8 billion at SeptemberJune 30, 2017,2020, and $989.3$1,025.9 billion at December 31, 2016.
2019.
Changes in the long-term credit ratings of individual FHLBanks do not necessarily affect the credit rating of the consolidated obligations issued on behalf of the FHLBanks. Rating agencies may change or withdraw a rating from time to time because of various factors, including operating results or actions taken, business developments, or changes in their opinion regarding, among other factors, the general outlook for a particular industry or the economy.
The Bank evaluated the publicly disclosed FHLBank regulatory actions and long-term credit ratings of the other FHLBanks as of September 30, 2017, and as of each period end presented, and does not believe, as of the date of this report, that it is probable that the Bank will be required to repay any principal or interest associated with consolidated obligations for which the Bank is not the primary obligor.
Certain Bank assets, liabilities, and derivatives are indexed to LIBOR. The Bank recognizes that the impending discontinuation of LIBOR presents risks and challenges that could have an impact on the Bank’s business. For information about the risks to the Bank from discontinuation of LIBOR, see “Item 1A. Risk Factors” in the Bank’s 2019 Form 10-K. Accordingly, the Bank has established the LIBOR Transition Working Group, led by the Chief Financial Officer, and developed a LIBOR Phase Out Transition Plan (Transition Plan). Among other things, the Transition Plan addresses three key strategies to mitigate the risks to the Bank associated with the discontinuation of LIBOR: (i) execute hedging strategies that permit alternative reference rates, including the Secured Overnight Financing Rate (SOFR), (ii) transact SOFR-indexed advances and bonds, and (iii) where practicable, implement improved fallback provisions for the discontinuation of LIBOR in new and legacy contracts. In addition, the Transition Plan limits new LIBOR transactions with maturities beyond the end of 2021 consistent with the limits set by the Finance Agency’s Supervisory Letter issued on September 27, 2019. The Transition Plan states that the Bank’s Asset and Liability Management Committee has primary responsibility for driving the transition from LIBOR to SOFR and that the Bank’s Business Development Committee is responsible for advance product development to facilitate our members’ transition from LIBOR to an alternative index.
The following table presents LIBOR-indexed variable rate financial instruments by due date or termination date at June 30, 2020.
| | | | | | | | | | | | | | | | | | | | | | | |
LIBOR-Indexed Financial Instruments | | | | | | | |
| | | | | | | |
June 30, 2020 | | | | | | | |
(In millions) | 2020 | | 2021 | | 2022 and Thereafter | | Total |
Assets indexed to LIBOR: | | | | | | | |
Par value of advances by redemption term | $ | 2,800 | | | $ | 4,550 | | | $ | 260 | | | $ | 7,610 | |
Unpaid principal balance of investment securities by contractual maturity | | | | | | | |
| | | | | | | |
MBS(1) | — | | | — | | | 6,509 | | | 6,509 | |
| | | | | | | |
Notional amount of receive leg LIBOR interest rate swaps by termination date | | | | | | | |
Cleared | 11,863 | | | 7,809 | | | 2,558 | | | 22,230 | |
Uncleared | 62 | | | 268 | | | 756 | | | 1,086 | |
Total | $ | 14,725 | | | $ | 12,627 | | | $ | 10,083 | | | $ | 37,435 | |
| | | | | | | |
Liabilities indexed to LIBOR: | | | | | | | |
Par value of consolidated obligation bonds by contractual maturity | $ | 15,485 | | | $ | 6,798 | | | $ | — | | | $ | 22,283 | |
Notional amount of pay leg LIBOR interest rate swaps by termination date | | | | | | | |
Cleared | 3,910 | | | 929 | | | 376 | | | 5,215 | |
Uncleared | 300 | | | 252 | | | 160 | | | 712 | |
Total | $ | 19,695 | | | $ | 7,979 | | | $ | 536 | | | $ | 28,210 | |
(1)Certain MBS with multiple indices where LIBOR is the majority index are included in this amount.
Interest rate caps and floors indexed to LIBOR totaling $430 million terminate in 2021 and totaling $550 million terminate in 2022 and thereafter.
Market activity in SOFR-indexed financial instruments continues to increase. In total, the Bank has issued $57.3 billion in SOFR-indexed consolidated obligation bonds. The table below presents the par value of variable rate consolidated obligation bonds by interest rate index.
| | | | | |
Variable Rate Consolidated Obligation Bonds by Interest Rate Index | |
(In millions) | |
June 30, 2020 | |
Interest Rate Index | Amount Outstanding |
LIBOR | $ | 22,283 | |
SOFR | 38,585 | |
| |
Total par value | $ | 60,868 | |
For more information on LIBOR-indexed advances, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.” For more information on LIBOR-indexed investments and derivatives, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management.”
Segment Information
The Bank uses an analysis of financial results based on the financial components and adjusted net interest income of two operating segments, the advances-related business and the mortgage-related business, as well as other financial information, to review and assess financial performance and determine financial management strategies related to the operations of these two business segments. For purposes of segment reporting, adjusted net interest income
includes income and expense associated with net settlements from economic hedges that are recorded in “Net gain/(loss) on derivatives and hedging activities” in other income, excludes interest income and expense associated with changes in fair value of the derivative hedging instrument and the hedged item attributable to the hedged risk for designated fair value hedges that are recorded in net interest income, and excludes interest expense that is recorded in “Mandatorily redeemable capital stock.” Other key financial information, such as 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 1. Financial Statements – Note 1410 – Segment Information.”
Advances-Related Business. The advances-related business consists of advances and other credit products, related financing and hedging instruments, and liquidity and other non-MBS investments associated with the Bank’s role as a liquidity provider, and capital. Assets associated with this segment increased $16.3decreased $12.4 billion to $90.3$73.3 billion (82%(78% of total assets) at SeptemberJune 30, 2017,2020, from $74.0$85.7 billion (81%(80% of total assets) at December 31, 2016.
2019.
Adjusted net interest income for this segment is derived primarily from the difference, or spread, between the yield on advances and non-MBS investments and the cost of the consolidated obligations funding these assets, including the net settlements from associated interest rate exchange agreements, and from earnings on capital.attributed to the Bank’s capital stock and retained earnings.
Adjusted net interest income for this segment was $62$69 million in the thirdsecond quarter of 2017, an increase2020, a decrease of $20$10 million, or 48%,13% compared to $42with $79 million in the thirdsecond quarter of 2016. In the first nine months of 2017, adjusted2019. Adjusted net interest income for this segment was $167$132 million an increasein the first six months of $522020, a decrease of $33 million, or 45%20%, compared to $115$165 million in the first ninesix months of 2016. The increase was2019. These decreases were primarily due to an improvementa decline in spreads and higher balances on advances-related assets and higher earnings from an increase in spreads on non-MBS investments, partially offset bydue to lower earnings from advance prepayment fees.rates.
Adjusted net interest income for this segment represented 43%48% and 33%58% of total adjusted net interest income for the thirdsecond quarter of 2017,2020 and 2016,2019, respectively, and 40%60% and 31%57% of total adjusted net interest income for the first ninesix months of 20172020 and 2016,2019, respectively.
Members and nonmember borrowers prepaid $3.0 billion of advances in the third quarter of 2017 compared to $896 million in the third quarter of 2016. Interest income was increased by net prepayment fees of $1 million and $3 million in the third quarter of 2017 and 2016, respectively. Members and nonmember borrowers prepaid $6.0 billion of advances in the first nine months of 2017 compared to $2.8 billion in the first nine months of 2016. Interest income was increased by net prepayment fees of $1 million in the first nine months of 2017 and $5 million in the first nine months of 2016.
Advances – The par value of advances outstanding increaseddecreased by $11.9$15.1 billion, or 24%23%, to $61.7$50.0 billion at SeptemberJune 30, 2017,2020, from $49.8$65.1 billion at December 31, 2016.2019. Average advances were $64.1 billion for the second quarter of 2020, an 8% decrease from $69.7 billion for the second quarter of 2019. Average advances outstanding were $71.2$65.5 billion in the third quarter of 2017, a 9% increase from $65.6 billion in the third quarter of 2016. Average advances outstanding were $66.4 billion infor the first ninesix months of 2017,2020, a 6% increase10% decrease from $62.4$72.5 billion infor the first ninesix months of 2016.
2019. Outstanding balances of advances may significantly increase and decrease from period to period because of a member’s liquidity and financial strategies.
As of SeptemberJune 30, 2017,2020, advances outstanding to the Bank’s top five borrowers and their affiliates increaseddecreased by $6.6$12.0 billion from the Bank’s top five borrowers and their affiliates as of December 31, 2019, and advances outstanding to the Bank’s other borrowers increaseddecreased by $5.3$3.1 billion. Advances to the top five borrowers increaseddecreased to $39.0$32.2 billion at SeptemberJune 30, 2017,2020, from $32.4$44.2 billion at December 31, 2016. (See2019, including First Republic Bank and MUFG Union Bank, National Association, who each had 10% or more of the Bank’s total advances and capital stock, respectively, as of June 30, 2020, as presented in “Item 1. Financial Statements – Note 84 – Advances– Credit andAdvances – Concentration Risk” for further information.)
and “Item 1. Financial Statements – Note 9 – Capital – Concentration.”
The $11.9Bank has a significant long-term funding arrangement with a borrower that contributed to the level of outstanding advances, and prepayments or repayments of advances or any changes to this arrangement could have a significant adverse impact on the Bank’s level of advances. Any prepayments or termination of this arrangement
may result in prepayment fees or a termination fee. The borrower prepaid $9 billion increaseof its outstanding advances during the second quarter of 2020, which resulted in prepayment fees of $10 million.
The $15.1 billion decrease in advances outstanding primarily reflected a $11.5$14.0 billion increasedecrease in fixedadjustable rate advances and a $1.1$4.4 billion increasedecrease in adjustablevariable rate advances, partially offset by a $0.7$3.3 billion decreaseincrease in variablefixed rate advances. In 2019, the Bank began to offer SOFR-indexed advances to its members.
The components of the advances portfolio at SeptemberJune 30, 2017,2020, and December 31, 2016,2019, are presented in the following table.
| | | | | | | | | | | | | | | | | | | | | | | |
Advances Portfolio by Product Type | | | | | | | |
| | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | |
(Dollar in millions) | Par Value | | Percentage of Total Par Value | | Par Value | | Percentage of Total Par Value |
Adjustable – LIBOR | $ | 250 | | | 1 | % | | $ | 8,260 | | | 13 | % |
Adjustable – LIBOR, callable at borrower’s option | 7,250 | | | 15 | | | 13,950 | | | 21 | |
Adjustable – SOFR | — | | | — | | | 5 | | | — | |
Adjustable – SOFR, callable at borrower’s option | 1,400 | | | 3 | | | — | | | — | |
Adjustable – other indices | — | | | — | | | 700 | | | 1 | |
| | | | | | | |
Subtotal adjustable rate advances | 8,900 | | | 19 | | | 22,915 | | | 35 | |
Fixed | 13,538 | | | 27 | | | 18,784 | | | 29 | |
Fixed – amortizing | 216 | | | — | | | 234 | | | 1 | |
Fixed – with PPS(1) | 2,953 | | | 6 | | | 3,283 | | | 5 | |
Fixed – with FPS(1) | 22,947 | | | 46 | | | 14,059 | | | 22 | |
Fixed – with caps and PPS(1) | 110 | | | — | | | 210 | | | — | |
Fixed – callable at borrower’s option | — | | | — | | | 74 | | | — | |
Fixed – callable at borrower’s option with PPS(1) | 20 | | | — | | | — | | | — | |
Fixed – putable at Bank’s option | 200 | | | — | | | — | | | — | |
Fixed – putable at Bank’s option with PPS(1) | 20 | | | — | | | 20 | | | — | |
Subtotal fixed rate advances | 40,004 | | | 79 | | | 36,664 | | | 57 | |
Daily variable rate | 1,109 | | | 2 | | | 5,509 | | | 8 | |
Total par value | $ | 50,013 | | | 100 | % | | $ | 65,088 | | | 100 | % |
(1)Partial prepayment symmetry (PPS) and full prepayment symmetry (FPS) are product features under which the Bank may charge the borrower a prepayment fee or pay the borrower a prepayment credit, depending on certain circumstances, such as movements in interest rates, when the advance is prepaid. Any prepayment credit on an advance with PPS would be limited to the lesser of 10% of the par value of the advance or the gain recognized on the termination of the associated interest rate swap, which may also include a similar contractual gain limitation.
The following table presents the par value of LIBOR-indexed advances by redemption term at June 30, 2020.
|
| | | | | | | | | | | | | |
Advances Portfolio by Product Type |
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
(Dollar in millions) | Par Value |
| | Percentage of Total Par Value |
| | Par Value |
| | Percentage of Total Par Value |
|
Adjustable – LIBOR | $ | 3,157 |
| | 5 | % | | $ | 3,232 |
| | 6 | % |
Adjustable – LIBOR, callable at borrower’s option | 16,495 |
| | 27 |
| | 15,396 |
| | 31 |
|
Adjustable – LIBOR, with caps and/or floors and PPS(1) | 83 |
| | — |
| | 30 |
| | — |
|
Adjustable – Other Indices | 2 |
| | — |
| | 2 |
| | — |
|
Subtotal adjustable rate advances | 19,737 |
| | 32 |
| | 18,660 |
| | 37 |
|
Fixed | 29,977 |
| | 49 |
| | 20,448 |
| | 42 |
|
Fixed – amortizing | 215 |
| | — |
| | 214 |
| | — |
|
Fixed – with PPS(1) | 3,711 |
| | 6 |
| | 3,060 |
| | 6 |
|
Fixed – with caps and PPS(1) | 425 |
| | 1 |
| | 375 |
| | 1 |
|
Fixed – callable at borrower’s option | 1,302 |
| | 2 |
| | 2 |
| | — |
|
Fixed – callable at borrower’s option with PPS(1) | 106 |
| | — |
| | 107 |
| | — |
|
Fixed – putable at Bank’s option | 25 |
| | — |
| | 50 |
| | — |
|
Fixed – putable at Bank’s option with PPS(1) | — |
| | — |
| | 75 |
| | — |
|
Subtotal fixed rate advances | 35,761 |
| | 58 |
| | 24,331 |
| | 49 |
|
Daily variable rate | 6,153 |
| | 10 |
| | 6,866 |
| | 14 |
|
Total par value | $ | 61,651 |
| | 100 | % | | $ | 49,857 |
| | 100 | % |
| | | | | |
LIBOR-Indexed Advances by Redemption Term | |
(In millions) | |
June 30, 2020 | |
Redemption Term | Par Value |
| |
(1)Due in 2020 | 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$ | 2,800 | |
Due 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.2021 | 4,550 | |
Due in 2022 and thereafter(1) | 260 | |
Total LIBOR-Indexed Advances(2) | $ | 7,610 | |
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.”
To meet the specific needs of certain investors, fixed and adjustable rate consolidated obligation bonds may contain embedded call options or other features that result in complex coupon payment terms. When these consolidated obligation bonds are issued on behalf of the Bank, typically the Bank simultaneously enters into interest rate exchange agreements with features that offset the complex features of the bonds and, in effect, convert the bonds to adjustable rate instruments tied to an index, primarily LIBOR.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.
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 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 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – MPF Program” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – Allowance for Credit Losses – Mortgage Loans Acquired Under the MPF Program” in the Bank’s 20162019 Form 10-K.
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 interest ratemarket risks inherent in its ordinary course of business, including its lending, investment, and funding activities. For more information on the primary strategies that the Bank employs
Financial Condition and Results of Operations – Risk Management – Derivative Counterparties.”
The Bank’s financial strategies are designed to enable the Bank to expand and contract its assets, liabilities, and
capital as membership composition and member credit needs change. The Bank’s liquidity and capital resources are
designed to support its financial strategies. The Bank’s primary source of liquidity is its access to the debt capital
markets through consolidated obligation issuance. The maintenance of the Bank’s capital resources is governed by
its capital plan.
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 cover
For more information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources – Liquidity” and “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Risk Management – Liquidity Risk” in the Bank’s 20162019 Form
10-K.
The FHLBank Act and Finance Agency regulations specify that each FHLBank must meet certain minimum regulatory capital standards. The Bank must maintain: (i) total regulatory capital in an amount equal to at least 4% of its total assets, (ii) leverage capital in an amount equal to at least 5% of its total assets, and (iii) permanent capital in an amount that is greater than or equal to its risk-based capital requirement. Because the Bank issues only Class B stock, regulatory capital and permanent capital for the Bank are both composed of retained earnings and Class B stock, including mandatorily redeemable capital stock (which is classified as a liability for financial reporting purposes). Regulatory capital and permanent capital do not include AOCI. Leverage capital is defined as the sum of permanent capital weighted by a 1.5 multiplier plus non-permanent capital. The risk-based capital requirement is equal to the sum of the Bank’s credit risk, market risk, and operations risk capital requirements, all of which are calculated in accordance with the rules and regulations of the Finance Agency.
The Bank’s capital requirements are more fully discussed in “Item 8. Financial Statements and Supplementary Data – Note 15 – Capital” in the Bank’s 20162019 Form 10-K.
The Bank has an integrated corporate governance and internal control framework designed to support effective management of the Bank’s business activities and the risks inherent in these activities. As part of this framework, the Bank’s Board of Directors has adopted a Risk Governance Policy that outlines the key roles and responsibilities of the Board of Directors and management and sets forth how the Bank is organized to achieve its risk management objectives, including the implementation of the Bank’s strategic objectives, risk management strategies, corporate governance, and standards of conduct. The policy also establishes the Bank’s risk governance organizational structure and identifies the general roles and responsibilities of the Board of Directors and management in establishing risk management policies, procedures, and guidelines; in overseeing the enterprise risk profile; and in implementing enterprise risk management processes and business strategies. The policy establishes an independent risk oversight function to identify, assess, measure, monitor, and report on the enterprise risk profile and risk management capabilities of the Bank. For more information, see “Item 7. Management’s Discussion and Analysis of
reliable source of liquidity and mitigating credit risk by adjusting credit and collateral terms in view of deterioration in creditworthiness. The Bank has never experienced a credit loss on an advance.
Pursuant to the Bank’s lending agreements with its borrowers, the Bank limits extensions of credit to individual borrowers to a percentage of the market value or unpaid principal balance of the borrower’s pledged collateral, known as the borrowing capacity.capacity, which the Bank can change from time to time. The borrowing capacity percentage varies according to several factors, including the charter type of the institution, the collateral type, the value assigned to the collateral, the results of the Bank’s collateral field review of the borrower’s collateral, the pledging method used for loan collateral (specific identification or blanket lien), the amount of loan data provided (detailed or summary reporting), the data reporting frequency (monthly or quarterly), the borrower’s financial strength and condition, and any institution-specific
collateral risks. Under the terms of the Bank’s lending agreements, the aggregate borrowing capacity of a borrower’s pledged eligible collateral must meet or exceed the total amount of the borrower’s outstanding advances, other extensions of credit, and certain other borrower obligations and liabilities. 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 associate may be limited by the financing availability assigned by the Bank, which is generally expressed as a percentage of the member’s or housing associate’s assets.assets, which the Bank can change from time to time. The amount of financing availability is generally determined by the creditworthiness of the member or housing associate.
When a nonmember financial institution acquires some or all of the assets and liabilities of a member, including outstanding advances and Bank capital stock, the Bank may allow the advances to remain outstanding, at its discretion. The nonmember borrower is required to meet the Bank’s applicable credit, collateral, and capital stock requirements, including requirements regarding creditworthiness and collateral borrowing capacity.
The 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 estimateexpectations 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 present the Bank’s investment credit exposure at the dates indicated, based on the lowest of the long-term credit ratings provided by Moody’s, S&P, or comparable Fitch Ratings (Fitch) ratings.
81
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment Credit Exposure | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
(In millions) | | | | | | | | | | | | | |
June 30, 2020 | | | | | | | | | | | | | |
| | | Carrying Value | | | | | | | | | | |
| | | Credit Rating(1) | | | | | | | | | | |
Investment Type | | | AA | | A | | BBB | | Below Investment Grade | | Unrated | | Total |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
U.S. obligations – Treasury securities | | | $ | 9,624 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 9,624 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
MBS: | | | | | | | | | | | | | |
Other U.S. obligations – single-family: | | | | | | | | | | | | | |
Ginnie Mae | | | 404 | | | — | | | — | | | — | | | — | | | 404 | |
GSEs – single-family: | | | | | | | | | | | | | |
Freddie Mac | | | 815 | | | — | | | — | | | — | | | — | | | 815 | |
Fannie Mae(2) | | | 1,517 | | | 5 | | | — | | | 3 | | | — | | | 1,525 | |
Subtotal | | | 2,332 | | | 5 | | | — | | | 3 | | | — | | | 2,340 | |
GSEs – multifamily: | | | | | | | | | | | | | |
Freddie Mac | | | 3,059 | | | — | | | — | | | — | | | — | | | 3,059 | |
Fannie Mae | | | 8,825 | | | — | | | — | | | — | | | — | | | 8,825 | |
Subtotal | | | 11,884 | | | — | | | — | | | — | | | — | | | 11,884 | |
Total GSEs | | | 14,216 | | | 5 | | | — | | | 3 | | | — | | | 14,224 | |
PLRMBS: | | | | | | | | | | | | | |
Prime | | | 32 | | | 27 | | | 71 | | | 177 | | | 110 | | | 417 | |
Alt-A | | | 51 | | | 48 | | | 47 | | | 1,433 | | | 568 | | | 2,147 | |
Total PLRMBS | | | 83 | | | 75 | | | 118 | | | 1,610 | | | 678 | | | 2,564 | |
Total MBS | | | 14,703 | | | 80 | | | 118 | | | 1,613 | | | 678 | | | 17,192 | |
Total securities | | | 24,327 | | | 80 | | | 118 | | | 1,613 | | | 678 | | | 26,816 | |
Interest-bearing deposits | | | 255 | | | 2,360 | | | — | | | — | | | — | | | 2,615 | |
Securities purchased under agreements to resell | | | 4,250 | | | 750 | | | — | | | — | | | — | | | 5,000 | |
Federal funds sold | | | 1,400 | | | 3,198 | | | — | | | — | | | — | | | 4,598 | |
Total investments | | | $ | 30,232 | | | $ | 6,388 | | | $ | 118 | | | $ | 1,613 | | | $ | 678 | | | $ | 39,029 | |
82
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment Credit Exposure |
| | | | | | | | | | | | | |
(In millions) | | | | | | | | | | | | | |
September 30, 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 | — |
| | — |
| | 202 |
| | — |
| | — |
| | — |
| | 202 |
|
GSEs: | | | | | | | | | | | | | |
FFCB bonds | — |
| | 1,158 |
| | — |
| | — |
| |
| | — |
| | 1,158 |
|
Total non-MBS | — |
| | 1,158 |
| | 702 |
| | — |
| | — |
| | — |
| | 1,860 |
|
MBS: | | | | | | | | | | | | | |
Other U.S. obligations – single-family: | | | | | | | | | | | | | |
Ginnie Mae | — |
| | 800 |
| | — |
| | — |
| | — |
| | — |
| | 800 |
|
GSEs – single-family: | | | | | | | | | | | | | |
Freddie Mac | — |
| | 2,209 |
| | — |
| | — |
| | — |
| | — |
| | 2,209 |
|
Fannie Mae(2) | — |
| | 3,916 |
| | 8 |
| | — |
| | 6 |
| | — |
| | 3,930 |
|
Subtotal | — |
| | 6,125 |
| | 8 |
| | — |
| | 6 |
| | — |
| | 6,139 |
|
GSEs – multifamily: | | | | | | | | | | | | | |
Freddie Mac | — |
| | 3,379 |
| | — |
| | — |
| | — |
| | — |
| | 3,379 |
|
Fannie Mae | — |
| | 2,201 |
| | — |
| | — |
| | — |
| | — |
| | 2,201 |
|
Subtotal | — |
|
| 5,580 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 5,580 |
|
Total GSEs | — |
| | 11,705 |
| | 8 |
| | — |
| | 6 |
| | — |
| | 11,719 |
|
PLRMBS: | | | | | | | | | | | | | |
Prime | — |
| | — |
| | 12 |
| | 216 |
| | 684 |
| | 32 |
| | 944 |
|
Alt-A, option ARM | — |
| | — |
| | — |
| | — |
| | 867 |
| | — |
| | 867 |
|
Alt-A, other | 3 |
| | 9 |
| | 13 |
| | 65 |
| | 2,685 |
| | 310 |
| | 3,085 |
|
Total PLRMBS | 3 |
| | 9 |
| | 25 |
| | 281 |
| | 4,236 |
| | 342 |
| | 4,896 |
|
Total MBS | 3 |
| | 12,514 |
| | 33 |
| | 281 |
| | 4,242 |
| | 342 |
| | 17,415 |
|
Total securities | 3 |
| | 13,672 |
| | 735 |
| | 281 |
| | 4,242 |
| | 342 |
| | 19,275 |
|
Interest-bearing deposits | — |
| | 50 |
| | 649 |
| | — |
| |
|
| | — |
| | 699 |
|
Securities purchased under agreements to resell | — |
| | 13,975 |
| | — |
| | — |
| | — |
| | — |
| | 13,975 |
|
Federal funds sold(3) | — |
| | 3,018 |
| | 8,308 |
| | 500 |
| | — |
| | — |
| | 11,826 |
|
Total investments | $ | 3 |
| | $ | 30,715 |
| | $ | 9,692 |
| | $ | 781 |
| | $ | 4,242 |
| | $ | 342 |
| | $ | 45,775 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | | | |
| | | Carrying Value | | | | | | | | | | |
| | | Credit Rating(1) | | | | | | | | | | |
Investment Type | | | AA | | A | | BBB | | Below Investment Grade | | Unrated | | Total |
| | | | | | | | | | | | | |
U.S. obligations – Treasury securities | | | $ | 7,050 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 7,050 | |
| | | | | | | | | | | | | |
MBS: | | | | | | | | | | | | | |
Other U.S. obligations – single-family: | | | | | | | | | | | | | |
Ginnie Mae | | | 474 | | | — | | | — | | | — | | | — | | | 474 | |
GSEs – single-family: | | | | | | | | | | | | | |
Freddie Mac | | | 1,063 | | | — | | | — | | | — | | | — | | | 1,063 | |
Fannie Mae(2) | | | 1,836 | | | 5 | | | — | | | 3 | | | — | | | 1,844 | |
Subtotal | | | 2,899 | | | 5 | | | — | | | 3 | | | — | | | 2,907 | |
GSEs – multifamily: | | | | | | | | | | | | | |
Freddie Mac | | | 3,402 | | | — | | | — | | | — | | | — | | | 3,402 | |
Fannie Mae | | | 7,992 | | | — | | | — | | | — | | | — | | | 7,992 | |
Subtotal | | | 11,394 | | | — | | | — | | | — | | | — | | | 11,394 | |
Total GSEs | | | 14,293 | | | 5 | | | — | | | 3 | | | — | | | 14,301 | |
PLRMBS: | | | | | | | | | | | | | |
Prime | | | 35 | | | 39 | | | 71 | | | 201 | | | 127 | | | 473 | |
Alt-A | | | 58 | | | 53 | | | 60 | | | 1,667 | | | 670 | | | 2,508 | |
Total PLRMBS | | | 93 | | | 92 | | | 131 | | | 1,868 | | | 797 | | | 2,981 | |
Total MBS | | | 14,860 | | | 97 | | | 131 | | | 1,871 | | | 797 | | | 17,756 | |
Total securities | | | 21,910 | | | 97 | | | 131 | | | 1,871 | | | 797 | | | 24,806 | |
Interest-bearing deposits | | | — | | | 2,269 | | | — | | | — | | | — | | | 2,269 | |
Securities purchased under agreements to resell | | | 7,000 | | | — | | | — | | | — | | | — | | | 7,000 | |
Federal funds sold(3) | | | 441 | | | 3,121 | | | — | | | — | | | — | | | 3,562 | |
Total investments | | | $ | 29,351 | | | $ | 5,487 | | | $ | 131 | | | $ | 1,871 | | | $ | 797 | | | $ | 37,637 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 BB at June 30, 2020, and December 31, 2019, by S&P because of extraordinary expenses incurred during bankruptcy of the security's sponsor.
| |
(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 because of extraordinary expenses incurred during bankruptcy of the security's sponsor. |
| |
(3) | Includes $135 million and $130 million at September 30, 2017, and December 31, 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. |
(3)Includes $141 million at December 31, 2019, in Federal funds sold to a member counterparty determined by the Bank to have an internal credit rating equivalent to an AA rating.
For all securities in its AFS and HTM portfolios, for Federal funds sold, and for securities purchased under agreements to resell, the Bank does not intend to sell any security and it is not more likely than not that the Bank will be required to sell any security before its anticipated recovery of the remaining amortized cost basis.
The Bank invests in short-term unsecured interest-bearing deposits, short-term unsecured Federal funds sold, securities purchased under agreements to resell, and negotiable certificates of deposit with member and nonmember counterparties, all of which are highly rated.
The Bank actively monitors its credit exposures and the credit quality of its counterparties, including an assessment of each counterparty’s financial performance, capital adequacy, likelihood of parental or sovereign support, and the current market perceptions of the counterparties. The Bank may also consider general macroeconomic and market
conditions and political stability when establishing limits on unsecured investments with U.S. branches and agency offices of foreign commercial banks. As a result of deteriorating financial condition or concerns about adverse economic or market developments, the Bank may reduce limits or terms on unsecured investments or suspend a counterparty.
Finance Agency regulations limit the amount of unsecured credit that an individual FHLBank may extend to a single counterparty. 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 SeptemberJune 30, 2017,2020, and December 31, 2016.2019.
| | | | | | | | | | | | |
Unsecured Investment Credit Exposure by Investment Type | | | | |
| | | | |
| Carrying Value(1) | | | |
(In millions) | June 30, 2020 | | December 31, 2019 | |
Interest-bearing deposits | $ | 2,613 | | | $ | 2,269 | | |
| | | | |
| | | | |
Federal funds sold | 4,598 | | | 3,562 | | |
Total | $ | 7,211 | | | $ | 5,831 | | |
|
| | | | | | | |
Unsecured Investment Credit Exposure by Investment Type |
| | | |
| Carrying Value(1)
|
(In millions) | September 30, 2017 |
| | December 31, 2016 |
|
Interest-bearing deposits | $ | 699 |
| | $ | 590 |
|
Certificates of deposit | 500 |
| | 1,350 |
|
Federal funds sold | 11,826 |
| | 4,214 |
|
Total | $ | 13,025 |
| | $ | 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 September 30, 2017, and December 31, 2016.
|
(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 June 30, 2020, and December 31, 2019.
The following table presents the credit ratings of the unsecured investment credit exposures presented by the domicile of the counterparty or the domicile of the counterparty’s parent for U.S. branches and agency offices of foreign commercial banks, based on the lowest of the credit ratings provided by Moody’s, S&P, or comparable Fitch ratings. This table does not reflect the foreign sovereign government’s credit rating. At SeptemberJune 30, 2017, 24%2020, 23% of the carrying value of unsecured investments held by the Bank were rated AA, and 83%64% 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) | | | | | | | |
September 30, 2017 | | | | | | | |
| Carrying Value(1) |
| Credit Rating(2) | | |
Domicile of Counterparty | AA |
| | A |
| | BBB |
| | Total |
|
Domestic(3) | $ | 185 |
| | $ | 2,075 |
| | $ | — |
| | $ | 2,260 |
|
U.S. subsidiaries of foreign commercial banks | — |
| | — |
| | — |
| | — |
|
Total domestic and U.S. subsidiaries of foreign commercial banks | 185 |
| | 2,075 |
| | — |
| | 2,260 |
|
U.S. branches and agency offices of foreign commercial banks: | | | | | | | |
Australia | 1,033 |
| | — |
| | — |
| | 1,033 |
|
Canada | 500 |
| | 1,626 |
| | — |
| | 2,126 |
|
France | — |
| | 1,138 |
| | — |
| | 1,138 |
|
Germany | — |
| | — |
| | 500 |
| | 500 |
|
Japan | — |
| | 1,876 |
| | — |
| | 1,876 |
|
Netherlands | — |
| | 688 |
| | — |
| | 688 |
|
Norway | — |
| | 688 |
| | — |
| | 688 |
|
Sweden | 1,350 |
| | 688 |
| | — |
| | 2,038 |
|
United Kingdom | — |
| | 678 |
| | — |
| | 678 |
|
Total U.S. branches and agency offices of foreign commercial banks | 2,883 |
| | 7,382 |
| | 500 |
| | 10,765 |
|
Total unsecured credit exposure | $ | 3,068 |
| | $ | 9,457 |
| | $ | 500 |
| | $ | 13,025 |
|
| |
(1) | Excludes unsecured investment credit exposure to U.S. government agencies and instrumentalities, government-sponsored enterprises, and supranational entities and does not include related accrued interest as of September 30, 2017.
|
| |
(2) | Does not reflect changes in ratings, outlook, or watch status occurring after September 30, 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 $135 million at September 30, 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 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 September 30, 2017, 81% of the carrying value of unsecured investments held by the Bank had overnight maturities.
| | | | | | | | | | | | | | | | | | | |
Ratings of Unsecured Investment Credit Exposure by Domicile of Counterparty | | | | | | | |
| | | | | | | |
(In millions) | | | | | | | |
June 30, 2020 | | | | | | | |
| Carrying Value(1) | | | | | | |
| Credit Rating(2) | | | | | | |
Domicile of Counterparty | AA | | A | | | | Total |
Domestic | $ | 253 | | | $ | 1,768 | | | | | $ | 2,021 | |
U.S. subsidiaries of foreign commercial banks | — | | | 592 | | | | | 592 | |
Total domestic and U.S. subsidiaries of foreign commercial banks | 253 | | | 2,360 | | | | | 2,613 | |
U.S. branches and agency offices of foreign commercial banks: | | | | | | | |
Australia | — | | | 500 | | | | | 500 | |
| | | | | | | |
Canada | 900 | | | 1,350 | | | | | 2,250 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Japan | — | | | 500 | | | | | 500 | |
Netherlands | — | | | 348 | | | | | 348 | |
| | | | | | | |
| | | | | | | |
Sweden | 500 | | | 500 | | | | | 1,000 | |
| | | | | | | |
| | | | | | | |
Total U.S. branches and agency offices of foreign commercial banks | 1,400 | | | 3,198�� | | | | | 4,598 | |
Total unsecured credit exposure | $ | 1,653 | | | $ | 5,558 | | | | | $ | 7,211 | |
(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 June 30, 2020. |
| | | | | | | | | | | | | | | |
Contractual Maturity of Unsecured Investment Credit Exposure by Domicile of Counterparty |
| | | | | | | |
(In millions) | | | | | | | |
September 30, 2017 | | | | | | | |
| Carrying Value(1) |
Domicile of Counterparty | Overnight |
| | Due 2 Days Through 30 Days |
| | Due 31 Days Through 90 Days |
| | Total |
|
Domestic | $ | 2,260 |
| | $ | — |
| | $ | — |
| | $ | 2,260 |
|
U.S. subsidiaries of foreign commercial banks | — |
| | — |
| | — |
| | — |
|
Total domestic and U.S. subsidiaries of foreign commercial banks | 2,260 |
| | — |
| | — |
| | 2,260 |
|
U.S. branches and agency offices of foreign commercial banks: | | | | | | | |
Australia | 483 |
| | 300 |
| | 250 |
| | 1,033 |
|
Canada | 1,376 |
| | — |
| | 750 |
| | 2,126 |
|
France | 1,138 |
| | — |
| | — |
| | 1,138 |
|
Germany | — |
| | 500 |
| | — |
| | 500 |
|
Japan | 1,176 |
| | — |
| | 700 |
| | 1,876 |
|
Netherlands | 688 |
| | — |
| | — |
| | 688 |
|
Norway | 688 |
| | — |
| | — |
| | 688 |
|
Sweden | 2,038 |
| | — |
| | — |
| | 2,038 |
|
United Kingdom | 678 |
| | — |
| | — |
| | 678 |
|
Total U.S. branches and agency offices of foreign commercial banks | 8,265 |
| | 800 |
| | 1,700 |
| | 10,765 |
|
Total unsecured credit exposure | $ | 10,525 |
| | $ | 800 |
| | $ | 1,700 |
| | $ | 13,025 |
|
| |
(1) | Excludes unsecured investment credit exposure to U.S. government agencies and instrumentalities, government-sponsored enterprises, and supranational entities and does not include related accrued interest as of September 30, 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 June 30, 2020. 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 September 30, 2017, all of the bonds were rated at least A by Fitch, Moody’s, or S&P.
For the&P. 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 September 30, 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 Bankinternal rating may differ 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.
this rating.
The Bank’s MBS investments include PLRMBS, all of which were AAA-rated at the time of purchase, and
agency residential MBS, which are backed by Fannie Mae, Freddie Mac, or Ginnie Mae. Some of the PLRMBS were issued by and/or purchased from members, former members, or their affiliates. The Bank has investment credit limits and terms for these investments that do not differ for members and nonmembers. Regulatory policy limits total MBS investments to three times the Bank’s regulatory capital at the time of purchase. At SeptemberJune 30, 2017,2020, the
Bank’s MBS portfolio was 268%276% 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 SeptemberJune 30, 2017,2020, PLRMBS representing 21%12% of the amortized cost of the Bank’s MBS portfolio were labeled Alt-A by the issuer. These PLRMBS are generally collateralized by mortgage loans that are considered less risky than subprime loans but more risky than prime loans. These loans are generally made to borrowers with credit scores that are high enough to qualify for a prime mortgage loan, but the loans may not meet standard underwriting guidelines for documentation requirements, property type, or loan-to-value ratios.
As of SeptemberJune 30, 2017,2020, the Bank’s investment in MBS had gross unrealized losses totaling $61$214 million,, most $49 million of which were related to PLRMBS. These gross unrealized losses were primarily due to illiquidity in the MBS market and market expectations of the credit performance of loan collateral underlying these securities, which caused these assets to be valued at discounts to their amortized cost.
For its agency MBS, the Bank expects to recover the entire amortized cost basis of these securities because the Bank determined that the strength of the issuers’ guarantees through direct obligations or support from the U.S. government is sufficient to protect the Bank from losses. As a result, the Bank determined that, as of SeptemberJune 30, 2017,2020, 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 September 30, 2017, using 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. A significant input to the first model is the forecast of future housing price changes for the relevant states and core-based statistical areas (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 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.
The FHLBanks’ OTTI Committee developed a short-term housing price forecast with projected changes ranging from a decrease of 6.0% to an increase of 13.0% over the 12-month period beginning July 1, 2017. For the vast majority of markets, the projected short-term housing price changes range from an increase of 1.0% 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.
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 September 30, 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 | 9 |
| | $ | 173 |
| | $ | (6 | ) | | 10 |
| | $ | 187 |
| | $ | (8 | ) |
Total | 9 |
| | $ | 173 |
| | $ | (6 | ) | | 10 |
| | $ | 187 |
| | $ | (8 | ) |
| |
(1) | Amounts are for the three months ended September 30, 2017.
|
For more information on the Bank’s OTTI analysis and reviews, see “Item 1. Financial Statements – Note 6 – Other-Than-Temporary Impairment Analysis.”
The following table presents the ratings of the Bank’s PLRMBS as of September 30, 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) | | | | | | | | | | | | | |
September 30, 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 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 119 |
| | $ | — |
| | $ | 119 |
|
2007 | — |
| | — |
| | — |
| | — |
| | 256 |
| | 35 |
| | 291 |
|
2006 | — |
| | — |
| | — |
| | — |
| | 29 |
| | — |
| | 29 |
|
2005 | — |
| | — |
| | — |
| | 14 |
| | 36 |
| | — |
| | 50 |
|
2004 and earlier | — |
| | — |
| | 12 |
| | 201 |
| | 283 |
| | 2 |
| | 498 |
|
Total Prime | — |
| | — |
| | 12 |
| | 215 |
| | 723 |
| | 37 |
| | 987 |
|
Alt-A, option ARM | | | | | | | | | | | | | |
2007 | — |
| | — |
| | — |
| | — |
| | 725 |
| | — |
| | 725 |
|
2006 | — |
| | — |
| | — |
| | — |
| | 134 |
| | — |
| | 134 |
|
2005 | — |
| | — |
| | — |
| | — |
| | 144 |
| | — |
| | 144 |
|
Total Alt-A, option ARM | — |
| | — |
| | — |
| | — |
| | 1,003 |
| | — |
| | 1,003 |
|
Alt-A, other | | | | | | | | | | | | | |
2008 | — |
| | — |
| | — |
| | — |
| | 80 |
| | — |
| | 80 |
|
2007 | — |
| | — |
| | — |
| | — |
| | 780 |
| | 204 |
| | 984 |
|
2006 | — |
| | — |
| | — |
| | — |
| | 293 |
| | 108 |
| | 401 |
|
2005 | — |
| | 2 |
| | — |
| | — |
| | 1,496 |
| | 52 |
| | 1,550 |
|
2004 and earlier | 3 |
| | 7 |
| | 13 |
| | 64 |
| | 304 |
| | 2 |
| | 393 |
|
Total Alt-A, other | 3 |
| | 9 |
| | 13 |
| | 64 |
| | 2,953 |
| | 366 |
| | 3,408 |
|
Total par value | $ | 3 |
| | $ | 9 |
| | $ | 25 |
| | $ | 279 |
| | $ | 4,679 |
| | $ | 403 |
| | $ | 5,398 |
|
| |
(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 September 30, 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) | | | | | | | |
September 30, 2017 | | | | | | | |
| Unpaid Principal Balance |
| Credit Rating(1) | | | | |
Collateral Type at Origination and Year of Securitization | AA |
| | Below Investment Grade |
| | Unrated |
| | Total |
|
Prime | | | | | | | |
2008 | $ | — |
| | $ | 111 |
| | $ | — |
| | $ | 111 |
|
2007 | — |
| | 221 |
| | 35 |
| | 256 |
|
2006 | — |
| | 11 |
| | — |
| | 11 |
|
2005 | — |
| | 17 |
| | — |
| | 17 |
|
2004 and earlier | — |
| | 36 |
| | — |
| | 36 |
|
Total Prime | — |
| | 396 |
| | 35 |
| | 431 |
|
Alt-A, option ARM | | | | | | | |
2007 | — |
| | 725 |
| | — |
| | 725 |
|
2006 | — |
| | 134 |
| | — |
| | 134 |
|
2005 | — |
| | 144 |
| | — |
| | 144 |
|
Total Alt-A, option ARM | — |
| | 1,003 |
| | — |
| | 1,003 |
|
Alt-A, other | | | | | | | |
2008 | — |
| | 80 |
| | — |
| | 80 |
|
2007 | — |
| | 767 |
| | 204 |
| | 971 |
|
2006 | — |
| | 293 |
| | 108 |
| | 401 |
|
2005 | — |
| | 1,496 |
| | 52 |
| | 1,548 |
|
2004 and earlier | 3 |
| | 138 |
| | — |
| | 141 |
|
Total Alt-A, other | 3 |
| | 2,774 |
| | 364 |
| | 3,141 |
|
Total par value | $ | 3 |
| | $ | 4,173 |
| | $ | 399 |
| | $ | 4,575 |
|
| |
(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) | | | | | | | | | | | | | | | | | |
September 30, 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 | $ | 103 |
| | $ | — |
| | $ | 115 |
| | $ | — |
| | $ | — |
| | $ | — |
| | 12.78 | % | | 30.00 | % | | 10.35 | % |
2007 | 241 |
| | (2 | ) | | 251 |
| | (1 | ) | | 1 |
| | — |
| | 13.03 |
| | 22.90 |
| | 2.32 |
|
2006 | 24 |
| | — |
| | 27 |
| | — |
| | — |
| | — |
| | 13.99 |
| | 12.37 |
| | 4.27 |
|
2005 | 49 |
| | — |
| | 50 |
| | — |
| | — |
| | — |
| | 11.78 |
| | 11.94 |
| | 15.53 |
|
2004 and earlier | 497 |
| | (4 | ) | | 500 |
| | — |
| | — |
| | — |
| | 6.43 |
| | 4.50 |
| | 13.63 |
|
Total Prime | 914 |
| | (6 | ) | | 943 |
| | (1 | ) | | 1 |
| | — |
| | 9.63 |
| | 13.61 |
| | 9.72 |
|
Alt-A, option ARM | | | | | | | | | | | | | | | | | |
2007 | 599 |
| | (8 | ) | | 652 |
| | — |
| | — |
| | — |
| | 18.77 |
| | 44.20 |
| | 13.58 |
|
2006 | 100 |
| | — |
| | 120 |
| | — |
| | — |
| | — |
| | 16.28 |
| | 44.91 |
| | 3.95 |
|
2005 | 54 |
| | (1 | ) | | 95 |
| | — |
| | — |
| | — |
| | 15.26 |
| | 22.81 |
| | 5.20 |
|
Total Alt-A, option ARM | 753 |
| | (9 | ) | | 867 |
| | — |
| | — |
| | — |
| | 17.93 |
| | 41.23 |
| | 11.09 |
|
Alt-A, other | | | | | | | | | | | | | | | | | |
2008 | 77 |
| | — |
| | 77 |
| | — |
| | — |
| | — |
| | 5.58 |
| | 31.80 |
| | 22.11 |
|
2007 | 835 |
| | (15 | ) | | 874 |
| | (6 | ) | | (5 | ) | | (11 | ) | | 17.58 |
| | 27.00 |
| | 9.29 |
|
2006 | 283 |
| | — |
| | 348 |
| | — |
| | — |
| | — |
| | 17.73 |
| | 18.45 |
| | 0.57 |
|
2005 | 1,322 |
| | (18 | ) | | 1,401 |
| | (1 | ) | | (3 | ) | | (4 | ) | | 11.54 |
| | 14.44 |
| | 4.19 |
|
2004 and earlier | 388 |
| | (3 | ) | | 393 |
| | — |
| | — |
| | — |
| | 9.58 |
| | 8.26 |
| | 19.01 |
|
Total Alt-A, other | 2,905 |
| | (36 | ) | | 3,093 |
| | (7 | ) | | (8 | ) | | (15 | ) | | 13.65 |
| | 18.23 |
| | 7.37 |
|
Total | $ | 4,572 |
| | $ | (51 | ) | | $ | 4,903 |
| | $ | (8 | ) | | $ | (7 | ) | | $ | (15 | ) | | 13.71 | % | | 21.66 | % | | 8.49 | % |
| |
(1) | Amounts are for the nine months ended September 30, 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 $259 million, $185 million, and $853 million, respectively, at September 30, 2017, and the amortized cost of Prime, Alt-A, option ARM, and Alt-A, other in a gross unrealized loss position was $260 million, $162 million, and $779 million, respectively, at September 30, 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 September 30, 2017.
|
| | | | | | | |
Significant Inputs to OTTI Credit Analysis for All PLRMBS |
| | | | | | | |
September 30, 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 | 15.0 | | 9.6 | | 31.7 | | 15.2 |
2007 | 11.0 | | 2.9 | | 20.9 | | 8.7 |
2006 | 12.4 | | 3.0 | | 23.4 | | 6.8 |
2005 | 18.2 | | 4.5 | | 19.9 | | 12.6 |
2004 and earlier | 18.5 | | 3.2 | | 21.6 | | 12.7 |
Total Prime | 16.9 | | 4.9 | | 24.3 | | 13.0 |
Alt-A, option ARM | | | | | | | |
2007 | 8.0 | | 34.5 | | 43.5 | | 13.7 |
2006 | 7.3 | | 36.3 | | 38.6 | | 3.9 |
2005 | 8.0 | | 25.0 | | 35.6 | | 5.2 |
Total Alt-A, option ARM | 7.9 | | 33.4 | | 41.7 | | 11.2 |
Alt-A, other | | | | | | | |
2007 | 12.0 | | 23.2 | | 39.4 | | 4.8 |
2006 | 10.6 | | 25.5 | | 39.0 | | 7.5 |
2005 | 13.9 | | 19.3 | | 35.3 | | 4.4 |
2004 and earlier | 16.5 | | 10.7 | | 30.9 | | 19.2 |
Total Alt-A, other | 13.1 | | 20.4 | | 36.5 | | 6.9 |
Total | 12.7 | | 20.7 | | 35.8 | | 8.5 |
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 | September 30, 2017 |
| | June 30, 2017 |
| | March 31, 2017 |
| | December 31, 2016 |
| | September 30, 2016 |
|
Prime | | | | | | | | | |
2008 | 96.60 | % | | 92.68 | % | | 92.93 | % | | 92.87 | % | | 92.11 | % |
2007 | 86.17 |
| | 83.80 |
| | 84.87 |
| | 83.93 |
| | 82.68 |
|
2006 | 93.98 |
| | 93.21 |
| | 92.25 |
| | 92.38 |
| | 91.84 |
|
2005 | 100.02 |
| | 99.55 |
| | 99.44 |
| | 98.97 |
| | 98.37 |
|
2004 and earlier | 100.21 |
| | 99.70 |
| | 99.09 |
| | 98.68 |
| | 97.75 |
|
Weighted average of all Prime | 95.44 |
| | 94.14 |
| | 94.15 |
| | 93.71 |
| | 92.80 |
|
Alt-A, option ARM | | | | | | | | | |
2007 | 90.00 |
| | 87.34 |
| | 83.66 |
| | 83.05 |
| | 81.85 |
|
2006 | 89.62 |
| | 86.82 |
| | 83.04 |
| | 80.76 |
| | 80.08 |
|
2005 | 65.67 |
| | 62.10 |
| | 57.79 |
| | 57.58 |
| | 56.73 |
|
Weighted average of all Alt-A, option ARM | 86.46 |
| | 83.66 |
| | 79.82 |
| | 79.05 |
| | 77.92 |
|
Alt-A, other | | | | | | | | | |
2008 | 96.70 |
| | 94.73 |
| | 93.62 |
| | 93.31 |
| | 91.83 |
|
2007 | 88.80 |
| | 87.38 |
| | 86.49 |
| | 85.88 |
| | 86.23 |
|
2006 | 87.02 |
| | 85.55 |
| | 83.63 |
| | 82.57 |
| | 82.78 |
|
2005 | 90.35 |
| | 88.96 |
| | 87.31 |
| | 87.11 |
| | 86.71 |
|
2004 and earlier | 100.21 |
| | 99.54 |
| | 99.10 |
| | 98.51 |
| | 97.90 |
|
Weighted average of all Alt-A, other | 90.80 |
| | 89.60 |
| | 88.33 |
| | 87.86 |
| | 87.69 |
|
Weighted average of all PLRMBS | 90.84 | % | | 89.36 | % | | 87.89 | % | | 87.40 | % | | 86.96 | % |
The Bank determined that, as of September 30, 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 September 30, 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 ofcredit losses on additional PLRMBS in future
periods, as well as further impairment of PLRMBS that were identified as other-than-temporarily impaired as of September 30, 2017.prior to January 1, 2020. 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.
Derivative Counterparties. The Bank has alsoexposure to investment securities with interest rates indexed to LIBOR. The following table presents the unpaid principal balance of adjustable rate investment securities by interest rate index at June 30, 2020. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” for more information on the LIBOR transition and on SOFR as an alternative market benchmark.
| | | | | | | | | |
Adjustable Rate Investment Securities by Interest Rate Index | | | | | |
(In millions) | | | | | |
June 30, 2020 | | | | | |
Interest Rate Index | | | MBS | | |
LIBOR(1) | | | $ | 6,509 | | | |
| | | | | |
Constant maturity Treasury | | | 116 | | | |
Other | | | 1 | | | |
Total adjustable rate investment securities(2) | | | $ | 6,626 | | | |
(1)Certain MBS with multiple indices where LIBOR is the majority index are included in this amount. A de minimis amount of LIBOR-indexed MBS are due in 2020 and 2021. LIBOR-indexed MBS of $6.5 billion are due in 2022 and thereafter.
(2)For more information on the Bank’s Transition Plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.”
Derivative Counterparties. The Bank has adopted credit policies and exposure limits for uncleared derivatives credit exposure. Over-the-counter derivatives may be either entered into directly with a counterparty (uncleared derivatives) or executed either with an executing dealer or on a swap execution facility and then cleared through a futures commission merchant (clearing agent) with a derivatives clearing organization (cleared derivatives).
Uncleared Derivatives. The Bank selects only highly rated derivative dealers and major banks (derivative dealer counterparties) that meet the Bank’s eligibility criteria to act as counterparties for its uncleared derivative activities. In addition, for all uncleared derivative transactions, the Bank has entered into master netting agreements and bilateral credit support agreements with all active derivative dealer counterparties that provide for delivery of collateral at specified levels to limit the Bank’s
net unsecured credit exposure to these counterparties. Under these policies and agreements, the amount of unsecured credit exposure to an individual derivative dealer counterparty is set at zero (subject to a minimum transfer amount). 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), for which the Bank serves as an intermediary, must be fully secured by eligible collateral, and all such derivative transactions are subject to both the Bank’s Advances and Security Agreement and a master netting agreement.
The Bank is subject to the risk of potential nonperformance by the counterparties to derivative agreements. A counterparty generally must deliver collateral to the Bank if the total market value of the Bank’s exposure to that counterparty rises above a specific trigger point. Currently, all of the Bank’s active uncleared derivative counterparties have a zero threshold. As a result of these risk mitigation initiatives, the Bank does not anticipate any credit losses on its uncleared derivative transactions with counterparties as of SeptemberJune 30, 2017.2020.
Cleared Derivatives. The Bank is subject to nonperformance by the derivatives clearing organizations (clearinghouses) and clearing agents. The requirement that the Bank post initial and variation margin through thea clearing agent, to the clearinghouse, exposes the Bank to institutional credit risk in the event that the clearing agent or the clearinghouse fails to meet its obligations. However, theThe use of cleared derivatives, however, mitigates the Bank’s overall credit risk exposure because a central counterparty is substituted for individual counterpartiescounterparties. Variation margin and variationinitial margin isare posted daily for changes in the value and risk profile of cleared derivatives. Due to declines in market values of cleared derivatives through a clearing agent.during the first six months of 2020, there was an increase in variation margin posted on cleared derivatives to the clearinghouses resulting in an increase in net cash used in operating activities reported on the Statements of Cash Flows during the period. The Bank does not anticipate any credit losses on its cleared derivatives as of SeptemberJune 30, 2017.2020.
The following table presentstables present the Bank’s credit exposure to its derivative dealer counterparties at the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Credit Exposure to Derivative Dealer Counterparties | | | | | | | | | |
| | | | | | | | | |
(In millions) | | | | | | | | | |
June 30, 2020 | | | | | | | | | |
Counterparty Credit Rating(1) | Notional Amount | | Net Fair Value of Derivatives Before Collateral | | Cash Collateral Pledged to/ (from) Counterparty | | Noncash Collateral Pledged to/ (from) Counterparty | | Net Credit Exposure to Counterparties |
Asset positions with credit exposure: | | | | | | | | | |
Uncleared derivatives | | | | | | | | | |
AA | $ | 122 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
A | 421 | | | 8 | | | (8) | | | — | | | — | |
BBB | 298 | | | 2 | | | (2) | | | — | | | — | |
Cleared derivatives(2) | 83,467 | | | 6 | | | 8 | | | 521 | | | 535 | |
Liability positions with credit exposure: | | | | | | | | | |
Uncleared derivatives | | | | | | | | | |
| | | | | | | | | |
A | 6,404 | | | (723) | | | 741 | | | — | | | 18 | |
BBB | 636 | | | (71) | | | 89 | | | — | | | 18 | |
| | | | | | | | | |
Total derivative positions with credit exposure to nonmember counterparties | 91,348 | | | (778) | | | 828 | | | 521 | | | 571 | |
Member institutions(3) | 20 | | | — | | | — | | | — | | | — | |
Total | 91,368 | | | $ | (778) | | | $ | 828 | | | $ | 521 | | | $ | 571 | |
Derivative positions without credit exposure | 514 | | | | | | | | | |
Total notional | $ | 91,882 | | | | | | | | | |
| | Credit Exposure to Derivative Dealer Counterparties | |
| | | | | | | | | | |
(In millions) | | | | | | | | | | |
September 30, 2017 | | | | | | | | | | |
December 31, 2019 | | December 31, 2019 | |
Counterparty Credit Rating(1) | Notional Amount |
| | Net Fair Value of Derivatives Before Collateral |
| | Cash Collateral Pledged to/ (from) Counterparty |
| | Non-cash Collateral Pledged to/ (from) Counterparty |
| | Net Credit Exposure to Counterparties |
| 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: | | | | | | | | | | Asset positions with credit exposure: | |
Uncleared derivatives | | | | | | | | | | Uncleared derivatives | |
| A | $ | 1,987 |
| | $ | 2 |
| | $ | 2 |
| | $ | — |
| | $ | 4 |
| A | $ | 488 | | | $ | 2 | | | $ | (2) | | | $ | — | | | $ | — | |
BBB | 3,059 |
| | 4 |
| | (4 | ) | | — |
| | — |
| BBB | 493 | | | 1 | | | (1) | | | — | | | — | |
Cleared derivatives(2) | 46,139 |
| | 47 |
| | 41 |
| | — |
| | 88 |
| Cleared derivatives(2) | 89,550 | | | 8 | | | 7 | | | 381 | | | 396 | |
Liability positions with credit exposure: | | | | | | | | | | Liability positions with credit exposure: | |
Uncleared derivatives | | | | | | | | | | Uncleared derivatives | |
AA | | AA | 1,263 | | | (46) | | | 49 | | | — | | | 3 | |
A | 1,306 |
| | — |
| | — |
| | — |
| | — |
| A | 8,296 | | | (266) | | | 279 | | | — | | | 13 | |
BBB | | BBB | 713 | | | (41) | | | 43 | | | — | | | 2 | |
| Total derivative positions with credit exposure to nonmember counterparties | 52,491 |
| | 53 |
| | 39 |
| | — |
| | 92 |
| Total derivative positions with credit exposure to nonmember counterparties | 100,803 | | | (342) | | | 375 | | | 381 | | | 414 | |
Member institutions(3) | 10 |
| | — |
| | — |
| | — |
| | — |
| Member institutions(3) | 46 | | | — | | | — | | | — | | | — | |
Total | 52,501 |
| | $ | 53 |
| | $ | 39 |
| | $ | — |
| | $ | 92 |
| Total | 100,849 | | | $ | (342) | | | $ | 375 | | | $ | 381 | | | $ | 414 | |
Derivative positions without credit exposure | 6,225 |
| | | | | | | | | Derivative positions without credit exposure | 223 | | | |
Total notional | $ | 58,726 |
| | | | | | | | | Total notional | $ | 101,072 | | |
(1)The credit ratings used by the Bank are based on the lower of Moody's or S&P ratings.
(2)Represents derivative transactions cleared with LCH Ltd, the Bank’s clearinghouse, which was rated AA- by S&P with a Negative CreditWatch at June 30, 2020, and December 31, 2019.
(3)Member institutions include mortgage delivery commitments with members.
|
| | | | | | | | | | | | | | | | | | | |
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. |
The increase or decrease in the credit exposure net of cash collateral, from one period to the next, may be affected by changes in several variables, such as the size and composition of the portfolio, market values of derivatives, and accrued interest.
Based on the master netting arrangements, its credit analyses, and the collateral requirements in place with each counterparty, the Bank does not expect to incur any credit losses on its derivative agreements.
The Bank primarily executes derivatives indexed to the Overnight Index Swap (OIS) rate and SOFR to manage interest rate risk and monitors marketwide efforts to address fallback language related to LIBOR-indexed derivative transactions.
The following table presents the notional amount of interest rate swaps by interest rate index broken out by the pay or receive leg at June 30, 2020. | | | | | | | | | | | |
LIBOR-Indexed Interest Rate Swaps by Termination Date by Interest Rate Index | | | |
(In millions) | | | |
June 30, 2020 | | | |
Interest Rate Index | Pay Leg | | Receive Leg |
Fixed | $ | 56,465 | | | $ | 16,519 | |
LIBOR | 5,927 | | | 23,316 | |
SOFR | 19,481 | | | 35,021 | |
OIS | 9,009 | | | 16,026 | |
Total notional amount | $ | 90,882 | | | $ | 90,882 | |
The following table presents the notional amount of interest rate swaps with LIBOR exposure by termination date broken out by the pay or receive leg and further bifurcated by cleared and uncleared derivative transactions at June 30, 2020. Interest rate caps and floors indexed to LIBOR totaling $430 million terminate in 2021 and totaling $550 million terminate in 2022 and thereafter. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” for more information on the LIBOR transition and on SOFR as an alternative market benchmark.
| | | | | | | | | | | | | | | | | | | | | | | |
LIBOR-Indexed Interest Rate Swaps by Termination Date | | | | | | | |
(In millions) | | | | | | | |
June 30, 2020 | | | | | | | |
| Pay Leg | | | | Receive Leg | | |
Termination Date | Cleared | | Uncleared | | Cleared | | Uncleared |
Terminates in 2020 | $ | 3,910 | | | $ | 300 | | | $ | 11,863 | | | $ | 62 | |
Terminates in 2021 | 929 | | | 252 | | | 7,809 | | | 268 | |
Terminates in 2022 and thereafter(1) | 376 | | | 160 | | | 2,558 | | | 756 | |
Total Notional Amount | $ | 5,215 | | | $ | 712 | | | $ | 22,230 | | | $ | 1,086 | |
(1)For more information on the Bank’s Transition Plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.”
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, if applicable, and the reported amounts of income, expenses, gains, and losses during the reporting period. Changes in these judgments, estimates, and assumptions could potentially affect the Bank’s financial position and results of
operations significantly. Although the Bank believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ.
In the Bank’s 20162019 Form 10-K, the following accounting policies and estimates were identified as critical because they require the Bank to make subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies and estimates are: estimating the allowance for credit losses on the advances and mortgage loan portfolios; accounting for derivatives; estimating fair values of investments classified as trading and AFS, derivatives and associated hedged items carried at fair value in accordance with the accounting for derivative instruments and associated hedging activities, and financial instruments carried at fair value under the fair value option; accounting for OTTI for investment securities; and estimating the prepayment speeds on MBS and mortgage loans for the accounting of amortization of premiums and accretion of discounts and credit losses previously recorded prior to the adoption of new accounting guidance related to the measurement of credit losses on MBS and mortgage loans.
There have been no significant changes in the judgments and assumptions made during the first ninesix months of 20172020 in applying the Bank’s critical accounting policies. These policies and the judgments, estimates, and assumptions are also described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” and “Item 8. Financial Statements and
Supplementary Data – Note 1 – Summary of Significant Accounting Policies” in the Bank’s 20162019 Form 10-K and in “Item 1. Financial Statements–Statements – Note 1612 – Fair Value.”
Recently Issued Accounting Guidance and Interpretations
See “Item 1. Financial Statements – Note 2 – Recently Issued and Adopted Accounting Guidance” for a discussion of recently issued accounting standards and interpretations.
Recent Developments
FHLBank Capital Requirements.Annual Designation of Member Director and Independent Director Positions. On July 3, 2017,June 10, 2020, the Finance Agency published a proposed rule to adopt, with amendments,designated one member director position for Arizona, six for California, and one for Nevada, effective January 1, 2021, the regulationssame allocation of the Federal Housing Finance Board (predecessor to the Finance Agency) pertaining to the capital requirementspositions as for the FHLBanks. The proposed rule would carry over most of the existing regulations without material change but would substantively revise the credit risk component of the risk-based capital requirement, as well as the limitations on extensions of unsecured credit. The main revisions would remove requirements that the FHLBanks calculate credit risk capital charges and unsecured credit limits based on ratings issued by a nationally recognized statistical rating organization, and instead require that the FHLBanks establish and use their own internal rating methodology. With respect to derivatives, the proposed rule would impose a new capital charge for cleared derivatives, which under the existing rule do not carry a capital charge, to align with the Dodd-Frank Act’s clearing mandate. The proposed rule also would revise the percentages used in the regulation’s tables to calculate credit risk capital charges for advances and for non-mortgage assets. The Finance Agency proposes to retain for now the percentages used in the tables to calculate capital charges for mortgage-related assets, and to address the methodology for residential mortgage assets at a later date. While a March 2009 regulatory directive pertaining to certain liquidity matters will continue to remain in place,2020. In addition, the Finance Agency also proposes to rescind certain minimum regulatory liquidity requirementsdesignated seven independent director positions for the FHLBanksBank for 2021, the same number of positions as for 2020. Two of the California member director positions, and address these liquidity requirementstwo of the independent director positions (one of which is designated as a public interest director position), all with current terms ending on December 31, 2020, will be filled through an election of the members located in California (for the California member director position), and an election of all members of the Bank (for the two independent director positions). The elections will be held in the fourth quarter of 2020. The California member director positions and the two independent director positions will each have a separate rulemaking.four-year term that begins on January 1, 2021.
The Bank submitted a joint comment letter with the other FHLBanksFinance Agency Final Rule on August 31, 2017. The Bank is continuing to evaluate the proposed rule but does not currently expect this rule, if adopted in final form, to materially affect its financial condition or results of operations.
FHLBank Membership for Non-Federally-Insured Credit Unions.Housing Goals Amendments.On June 5, 2017,3, 2020, the Finance Agency issued a final rule, effective July 5, 2017, governing FHLBank membership that would implement statutory amendments to the Federal Home Loan Bank Act authorizing FHLBanks to accept applications for membership from state-chartered credit unions without federal share insurance, provided that certain prerequisites have been met. The new rule generally treats these credit unions the same as other depository institutions with an additional requirement that they obtain: (1) an affirmative statement from their state regulator that they meet the requirements for federal insurance asAugust 24, 2020. Enforcement of the datefinal rule will phase in over three years. The final rule replaces the four existing retrospective housing goals with a single prospective mortgage purchase housing goal target in which 20% of their application for FHLBank membership; (2)Acquired Member Asset (AMA) mortgages purchased in a written statement from the state regulator that it cannotyear must be comprised of loans to low-income or will not make any determination regarding eligibility for federal insurance;very low-income families, or (3) if the regulator fails or refuses to respond to the credit union’s request within six months, confirmationfamilies in low-income areas. The final rule also establishes a separate small member participation housing goal with a target level in which 50% of the failuremembers selling AMA loans in a calendar year must be small members. The final rule provides that an FHLBank may request Finance Agency approval of alternative target levels for either or both of the goals. The final rule also establishes that housing goals apply to receiveeach FHLBank that acquires any AMA mortgages during a response.
year, eliminating the existing $2.5 billion volume threshold that triggered the application of housing goals for each FHLBank previously.
The Bank does not expect this rule to materially affect itsis in the process of evaluating the final rule. Its effect on the Bank’s financial condition, or results of operation.
operations, and cash flows has not yet been determined.
Minority and Women Inclusion. Finance Agency Supervisory Letter.On July 25, 2017,September 27, 2019, the Finance Agency publishedissued a final rule, effective August 24, 2017, amending its Minority and Women Inclusion regulationsSupervisory Letter to clarify the scope ofFHLBanks that the FHLBanks’ obligation to promote diversity and ensure inclusion. The final rule updates the existing Finance Agency regulations aimed at promoting diversitystated is designed to ensure the FHLBanks will be able to identify and prudently manage the inclusionrisks associated with the termination of LIBOR in a safe and use of minorities, women,sound manner. The Supervisory Letter provides among other things that, by March 31, 2020, the FHLBanks should limit and individualscease entering into new LIBOR-indexed financial assets, liabilities, and derivatives with disabilities,maturities beyond December 31, 2021, for all product types except investments. With respect to investments, the FHLBanks must, by December 31, 2019, stop purchasing investments that reference LIBOR and the businesses they own (MWDOB) in all FHLBank business and activities, including management, employment, and contracting.mature after December 31, 2021. The final rule will:
requireSupervisory Letter also directs the FHLBanks to develop standalone diversity and inclusion strategic plans or incorporate diversity and inclusionupdate their pledged collateral certification reporting requirements by March 31, 2020, in an effort to encourage members to distinguish LIBOR-indexed collateral maturing after December 31, 2021. The FHLBanks are expected to cease entering into their existing strategic planning processes and adopt strategies for promoting diversity and ensuring inclusion;
encourageLIBOR-indexed financial instruments maturing after December 31, 2021, by the FHLBanksdeadlines specified in the Supervisory Letter, subject to expand contracting opportunities for minorities, women, and individuals with disabilities through subcontracting arrangements;
require the FHLBanks to develop policies that address reasonable accommodations for employees to observe their religious beliefs;
require the FHLBanks to provide information in their annual reports tolimited exceptions granted by the Finance Agency about their effortsunder the Supervisor Letter for LIBOR-indexed products serving compelling mission, risk mitigating, and/or hedging purposes that do not currently have readily available alternatives.
As a result of the Supervisory Letter, the Bank’s Transition Plan was revised to advance diversity and inclusion through financiallimit new LIBOR transactions identificationwith maturities beyond the end of ways in which FHLBanks might be able to improve MWDOB business2021 consistent with the FHLBanklimits set by enhancing customer access by MWDOB businesses, including through its affordable housing and community investment programs and strategies for promoting the diversitySupervisory Letter. On March 16, 2020, in light of supervisors and managers; andmarket volatility, the Finance Agency extended the Bank’s ability to enter into LIBOR-indexed instruments that mature after December 31, 2021, from March 31, 2020, to June 30, 2020.
require the FHLBanks to classify and provide additional data in their annual reports about the number of and amounts paid under its contracts with MWDOB.
The Bank does not expect this final rule to materially affect its financial condition or results of operations, but anticipates that it may result in increased compliance costs and substantially increase the amount of tracking, monitoring, and reporting that would be required of the Bank.
Off-Balance Sheet Arrangements Guarantees,and Aggregate Contractual Commitments
Off-Balance Sheet Arrangements and Other Commitments
In accordance with regulations governing the operations of the FHLBanks, each FHLBank, including the Bank, is jointly and severally liable for the FHLBank System’s consolidated obligations issued under Section 11(a) of the FHLBank Act, and in accordance with the FHLBank Act, each FHLBank, including the Bank, is jointly and severally liable for consolidated obligations issued under Section 11(c) of the FHLBank Act. The joint and several liability regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor.
The Bank determined that it was not necessary to recognize a liability for the fair value of the Bank's joint and
several liability for all consolidated obligations. The joint and several obligations are mandated by the FHLBank
Act or regulations governing the operations of the FHLBanks and are not the result of arms-length transactions
among the FHLBanks. The FHLBanks have no control over the amount of the guarantee or the determination of
how each FHLBank would perform under the joint and several obligations. Because the FHLBanks are subject to
the authority of the Finance Agency as it relates to decisions involving the allocation of the joint and several
liability for the FHLBanks' consolidated obligations, the FHLBanks' joint and several obligations are excluded from
the initial recognition and measurement provisions. Accordingly, the Bank has not recognized a liability for its joint
and several obligations related to other FHLBanks' participations in the consolidated obligations. The par value of the outstanding consolidated obligations of the FHLBanks was $1,028.7$915.8 billion at SeptemberJune 30, 2017,2020, and $989.3$1,025.9 billion at December 31, 2016.2019. The par value of the Bank’s participation in consolidated obligations was $102.2$85.8 billion at SeptemberJune 30, 2017,2020, and $83.7$98.8 billion at December 31, 2016.2019. The Bank had committed to the issuance of $1.1 billion$31 million and $1.5 billion$805 million in consolidated obligations at SeptemberJune 30, 2017,2020, and December 31, 2016,2019, respectively.
In addition, in the ordinary course of business, the Bank engages in financial transactions that, in accordance with U.S. GAAP, are not recorded on the Bank’s StatementStatements of Condition or may be recorded on the Bank’s StatementStatements 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 SeptemberJune 30, 2017,2020, the Bank had $1 million inno advance commitments and $15.5$23.7 billion in standby letters of credit outstanding. At December 31, 2016,2019, the Bank had $6 million inno advance commitments and $15.2$21.6 billion in standby letters of credit outstanding.
For additional information, see “Item 1. Financial Statements – Note 1713 – Commitments and Contingencies.”
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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-liabilityasset-
liability mix and its commitment to providing value to its members through products and dividends without subjecting their investments in Bank capital stock to significant market risk.
The Bank’s Risk Management Policy includes a market risk management objective aimed at maintaining a relatively low adverse exposure of the market value of capital and future earnings (excluding the impact of any cumulative net gains or losses on derivatives and associated hedged items and on financial instruments carried at fair value) to changes in market rate factors. See “Total Bank Market Risk” below.
Market risk identification and measurement are primarily accomplished through market value of capital sensitivity analyses and projected earnings and adjusted return on capital sensitivity analyses. The Risk Management Policy approved by the Bank’s Board of Directors establishes market risk policy limits and market risk measurement standards at the total Bank level as well as at the business segment level. Additional guidelines approved by the Bank’s Enterprise Risk Committee apply to the Bank’s two business segments, the advances-related business and the mortgage-related business. These guidelines provide limits that are monitored at the segment level and are consistent with the Bank’s policy limits. Market risk is managed for each business segment on a daily basis, as discussed below in “Segment Market Risk.” Compliance with Bank policies and guidelines is reviewed by the Bank’s Board of Directors on a regular basis, along with a corrective action plan if applicable.
Total Bank Market Risk
Market Value of Capital Sensitivity
– The Bank uses market value of capital sensitivity (the interest rate sensitivity of the net fair value of all assets, liabilities, and interest rate exchange agreements) as an important measure of the Bank’s exposure to changes in interest rates.
The Bank’s market value of capital sensitivity policy limits the potential adverse impact of an instantaneous parallel shift of a plus or minus 100-basis-point change in interest rates from current rates (base case) to no worse than –4.0%4.0% of the estimated market value of capital. In addition, the policy limits the potential adverse impact of an instantaneous plus or minus 100-basis-point change in interest rates measured from interest rates that are 200 basis points above or below the base case to no worse than –6.0%6.0% of the estimated market value of capital. In the case where a market risk sensitivity compliance metric cannot be estimated with a parallel shift in interest rates because of prevailing low interest rates, the sensitivity metric is not reported. The Bank’s measured market value of capital sensitivity was within the policy limits as of SeptemberJune 30, 2017.
2020.
To determine the Bank’s estimated risk sensitivities to interest rates for the market value of capital sensitivity, the Bank uses a third-party proprietary asset and liability system to calculate estimated market values under alternative interest rate scenarios. The system analyzes all of the Bank’s financial instruments, including derivatives, on a transaction-level basis using sophisticated valuation models with consistent and appropriate behavioral assumptions and current position data. The system also includes a third-party mortgage prepayment model.
At least annually, the Bank reexamines the major assumptions and methodologies used in the model, including interest rate curves, spreads for discounting, and mortgage prepayment assumptions. The Bank also compares the mortgage prepayment assumptions in the third-party model to other sources, including actual mortgage prepayment history.
The following table 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.
| | Market Value of Capital Sensitivity Estimated Percentage Change in Market Value of Bank Capital for Various Changes in Interest Rates | Market Value of Capital Sensitivity Estimated Percentage Change in Market Value of Bank Capital for Various Changes in Interest Rates | Market Value of Capital Sensitivity Estimated Percentage Change in Market Value of Bank Capital for Various Changes in Interest Rates | |
| | |
Interest Rate Scenario(1) | September 30, 2017 | | December 31, 2016 | | Interest Rate Scenario(1) | June 30, 2020 | | December 31, 2019 | |
+200 basis-point change above current rates | –3.8 | % | –4.3 | % | +200 basis-point change above current rates | –0.3 | % | –2.4 | % |
+100 basis-point change above current rates | –1.8 | | –2.0 | | +100 basis-point change above current rates | +0.3 | | –1.1 | |
–100 basis-point change below current rates(2) | +2.4 | | +2.5 | | –100 basis-point change below current rates(2) | +6.0 | | +1.1 | |
–200 basis-point change below current rates(2) | +6.3 | | +6.3 | | –200 basis-point change below current rates(2) | +6.3 | | +6.9 | |
(1)Instantaneous change from actual rates at dates indicated.
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(1) | Instantaneous change from actual rates at dates indicated. |
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(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 SeptemberJune 30, 2017, are comparable to2020, show less adverse sensitivity in rising rate scenarios compared with the estimates as of December 31, 2016. LIBOR2019. As a result of the uncertainty associated with the COVID-19 pandemic, there have been significant changes in interest rate levels. In March 2020, the ten-year Treasury reached an all-time low of 0.54%. Interest rates continue to remain at historically low levels, ranging from 12 basis points for the one-month Treasury bill to 65 basis points for the ten-year Treasury note. In addition to the material changes in interest rates, asprice changes in two segments of September 30, 2017, were 38 basis points higherthe Bank’s mortgage portfolio materially impacted the Bank’s market value sensitivity profile. Prices on the Bank’s fixed rate mortgage loans purchased under the MPF Program increased, resulting in the asset spread relative to pricing benchmark to materially decline. The favorable spread change improves the market value of the Bank’s mortgage loans. If interest rates increase, these loans will remain outstanding for a longer period of time, and the favorable spread difference will exist for a longer period of time resulting in a less detrimental impact on the Bank’s projected market value. The Bank investment portfolio also includes fixed rate multifamily MBS that are swapped to overnight assets at time of trade. Given the prepayment protection provisions embedded in these securities, the MBS cashflows are consistent across alternative interest rate scenarios. For these securities, the asset spread to the pricing benchmark increased, which caused the decline in prices in rising rate scenarios to lessen. The change in the sensitivity profile for the 1-year term, 3 basis points higher fordeclining 100 basis-point scenario value is driven by the 5-year term, and 5 basis points lower forhistorically low interest rate environment. Given the 10-year term. Becausesignificant decline in interest rates induring the declining rate scenarios are limited to non-negativefirst half of 2020, interest rates andon a subset of the current interestBank’s floating rate environment is so low, the interest rates in the declining rate scenariosinstruments cannot decrease to the same extent that the interest rates in the rising rate scenarios can increase.
increase because of embedded interest rate floors.
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 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 Board of Directors to declare or not declare any dividend or repurchase any excess capital stock is a discretionary matter and is subject to the requirements and restrictions of the FHLBank Act and applicable requirements under the regulations governing the operations of the FHLBanks. The ratio of the Bank'sBank’s estimated market value of total capital to par value of capital stock was 219%234% as of SeptemberJune 30, 2017.2020.
Adjusted Return on Capital – The adjusted return on capital is a measure used by the Bank to assess financial performance. The adjusted return on capital is based on current period economic earnings that exclude the effects of unrealized net gains or losses resulting from the Bank’s derivatives and associated hedged items and from financial instruments carried at fair value, which will generally reverse through changes in future valuations and settlements
of contractual interest cash flows over the remaining contractual terms to maturity or by the call or put date of the assets and liabilities held under the fair value option, hedged assets and liabilities, and derivatives.Economic earnings also exclude the interest expense on mandatorily redeemable capital stock and the 20% of net income allocated to the Bank’s restricted retained earnings account in accordance with the FHLBanks’ JCEJoint Capital Enhancement Agreement. Economic earnings exclude these amounts in order to more accurately reflect the amount of earnings that may be available to be paid as dividends to shareholders.
The Bank limits the sensitivity of projected financial performance through a Board of Directors policy limit on projected adverse changes in the adjusted return on capital. The Bank’s adjusted return on capital sensitivity policy limits the potential adverse impact of an instantaneous parallel shift of a plus or minus 200-basis-point change in interest rates from current rates (base case) to no worse than –120 basis points from the base case projected adjusted return on capital. Given the current low interest rate environment, in the downward shift interest rates were limited to non-negative rates. With the indicated interest rate shifts, the adjusted return on capital for the projected 12-month horizon would be expected to decrease by 1410 basis points in the –200 basis pointsbasis-points scenario, well within the policy limit of –120 basis points.
Duration Gap – Duration gap is the difference between the estimated durations (market value sensitivity) of assets and liabilities (including the impact of interest rate exchange agreements) and reflects the extent to which estimated maturity and repricing cash flows for assets and liabilities are matched. The Bank monitors duration gap analysis at the total Bank level and does not have a policy limit. The Bank’s duration
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Total Bank Duration Gap Analysis | | | | | | | |
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| June 30, 2020 | | | | December 31, 2019 | | |
| Amount (In millions) | | Duration Gap(1) (In months) | | Amount (In millions) | | Duration Gap(1) (In months) |
Assets | $ | 93,440 | | | 2 | | | $ | 106,842 | | | 3 | |
Liabilities | 87,313 | | | 1 | | | 100,101 | | | 2 | |
Net | $ | 6,127 | | | 1 | | | $ | 6,741 | | | 1 | |
(1)Duration gap was one month at September 30, 2017, and one month at December 31, 2016.values include the impact of interest rate exchange agreements.
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Total Bank Duration Gap Analysis |
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| September 30, 2017 | | December 31, 2016 |
| Amount (In millions) |
| | Duration Gap(1) (In months) |
| | Amount (In millions) |
| | Duration Gap(1)(2) (In months) |
|
Assets | $ | 109,503 |
| | 5 |
| | $ | 91,941 |
| | 6 |
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Liabilities | 103,154 |
| | 4 |
| | 86,404 |
| | 5 |
|
Net | $ | 6,349 |
| | 1 |
| | $ | 5,537 |
| | 1 |
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(1) | Duration gap values include the impact of interest rate exchange agreements. |
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(2)
| Because of the current 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 segment are managed within prescribed guidelines and policy limits.
Advances-Related Business – Interest rate risk arises from the advances-related business primarily through the use of shareholder-contributed capital and retained earnings to fund fixed rate investments of targeted amounts and maturities. In general, advances result in very little net interest rate risk for the Bank because most fixed rate advances with original maturities greater than three months and all advances with embedded options are simultaneously hedged with an interest rate swap or option with terms 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 three 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). 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 maturities of up to four years). However, this strategy may be altered from time to time depending on market conditions. The strategy to invest 50% of capital in short-term assets is intended to mitigate the market value of capital risks associated with the potential repurchase
or redemption of excess capital stock. Excess capital stock usually results from a decline in a borrower’s outstanding advances or by a membership termination. Under the Bank’s capital plan, capital stock, when repurchased or redeemed, is required to be repurchased or redeemed at its par value of $100 per share, subject to
certain regulatory and statutory limits. The strategy to invest 50% of capital in a laddered portfolio of investments with short to intermediate maturities is intended to take advantage of the higher earnings available from a generally positively sloped yield curve, when intermediate-term investments generally have higher yields than short-term investments.
The Bank updates the repricing and maturity gaps for actual asset, liability, and derivative transactions that occur in the advances-related segment each day. The Bank regularly compares the targeted repricing and maturity gaps to the actual repricing and maturity gaps to identify rebalancing needs for the targeted gaps. On a weekly basis, the Bank evaluates the projected impact of expected maturities and scheduled repricings of assets, liabilities, and interest rate exchange agreements on the interest rate risk of the advances-related segment. 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. 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.
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 prepayments and the existence of interest rate caps on certain adjustable rate MBS.
Historically,The Bank manages the Bank purchased a mixinterest rate risk and market risk of intermediate-termthe mortgage-related segment through its investment in low risk assets and selected funding and hedging strategies. The total carrying value of MBS and mortgage loans at June 30, 2020, was $20.1 billion, including $17.2 billion in MBS and $2.9 billion in mortgage loans. The total carrying value of MBS and mortgage loans at December 31, 2019, was $21.1 billion, including $17.8 billion in MBS and $3.3 billion in mortgage loans. Floating rate securities, and fixed rate 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. MPF loansmultifamily securities that have been acquired are medium-converted to floating rate through the use of interest rate swaps, were $15.0 billion, or 75%, of MBS and mortgage loans at June 30, 2020, and $15.1 billion, or 72%, of MBS and mortgage loans at December 31, 2019. 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 non-callable debt, fixed rate callable debt, and certain interest rate swaps whose characteristics mimic that of fixed rate callable debt, were $5.1 billion, or 25%, of MBS and mortgage loans, at June 30, 2020, and $6.0 billion, or 28%, of MBS and mortgage loans at December 31, 2019.
The estimated market risk of the mortgage-related business is managed both at the time an asset is purchased and on an ongoing basis for the total portfolio. At the time of purchase (for all significant mortgage asset acquisitions), the Bank analyzes the estimated earnings sensitivity and estimated market value sensitivity, taking into consideration the estimated mortgage prepayment sensitivity of the mortgage assets and anticipated funding and hedging activities under various interest rate scenarios. The related funding and hedging transactions are executed at or close to the time of purchase of a mortgage asset.
At least monthly, the Bank reviews the estimated market risk profile of the entire portfolio of mortgage assets and related funding and hedging transactions. The Bank then considers rebalancing strategies to modify the estimated mortgage portfolio market risk profile. Periodically, the Bank performs more in-depth analyses, which include an analysis of the impacts of non-parallel shifts in the yield curve and assessments of the impacts of unanticipated mortgage prepayment behavior. Based on these analyses, the Bank may take actions to rebalance the mortgage portfolio’s market risk profile. These rebalancing strategies may include entering into new funding and hedging
transactions, forgoing or modifying certain funding or hedging transactions normally executed with new mortgage purchases, or terminating certain funding and hedging transactions for the mortgage asset portfolio.
The Bank manages the estimated interest rate risk associated with mortgage assets, including mortgage prepayment risk, through a combination of debt issuance and derivatives. The Bank may obtain funding through callable and non-callable FHLBank System debt and may execute derivative transactions to achieve principal cash flow patterns and market value sensitivities for the liabilities and derivatives that provide a significant offset to the interest rate and mortgage prepayment risks associated with the mortgage assets. Debt issued to finance mortgage assets may be
fixed rate debt, callable fixed rate debt, or adjustable rate debt. Derivatives may be used as temporary hedges of anticipated debt issuance or long-term hedges of debt used to finance the mortgage assets. The derivatives used to hedge the interest rate risk of fixed rate mortgage assets generally may be callable and non-callable pay-fixed interest rate swaps. Derivatives may also be used to offset the interest rate cap risk embedded in adjustable rate MBS.
As discussed above in “Total Bank Market Risk – Market Value of Capital Sensitivity”Sensitivity,” the Bank uses market value of capital sensitivity as a primary market value metric for measuring the Bank’s exposure to interest rates. The Bank’s interest rate risk policies and guidelines for the mortgage-related business address the market value of capital sensitivity of the assets, liabilities, and derivatives of the mortgage-related business.
The following table presents results of the estimated market value of capital sensitivity analysis attributable to the mortgage-related business as of SeptemberJune 30, 2017,2020, and December 31, 2016.2019.
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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 |
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Interest Rate Scenario(1) | September 30, 2017 | | December 31, 2016 | |
+200 basis-point change | –1.9 | % | –2.2 | % |
+100 basis-point change | –0.9 | | –1.0 | |
–100 basis-point change(2) | +1.5 | | +1.3 | |
–200 basis-point change(2) | +4.0 | | +3.8 | |
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(1)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 | Instantaneous change from actual rates at dates indicated. | | | |
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(2)Interest Rate Scenario(1)
| Interest rates for each maturity are limited to non-negative interest rates.June 30, 2020 | | December 31, 2019 | |
+200 basis-point change | +1.7 | % | –0.6 | % |
+100 basis-point change | +1.2 | | –0.2 | |
–100 basis-point change(2) | +1.8 | | +0.2 | |
–200 basis-point change(2) | +1.7 | | +3.2 | |
For(1)Instantaneous change from actual rates at dates indicated.
(2)Interest rates for each maturity are limited to non-negative rates.
The explanations for the mortgage-related business, thechanges in Bank’s estimates of the sensitivity of the market value of capital to changes in interest rates as of September 30, 2017, are comparableattributable to the estimates as ofmortgage-related business from December 31, 2016. LIBOR interest rates2019, to June 30, 2020, are the same as of September 30, 2017, were 38 basis points higherthe explanations for the 1-year term, 3 basis points higher forsensitivity of the 5-year term,market value of capital attributable to all of the Bank’s assets, liabilities, and 5 basis points lower for the 10-year term. Because interest rates in the declining rate scenarios are limited to non-negative interest rates and the currentassociated interest rate environment is so low, the interest rates in the declining rate scenarios cannot decrease to the same extent that the interest rates in the rising rate scenarios can increase.exchange agreements.
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ITEM 4. | CONTROLS AND PROCEDURES |
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The senior management of the Federal Home Loan Bank of San Francisco (Bank) is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports filed or submitted under the Securities Exchange Act of 1934 (1934 Act) is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The Bank’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports that it files or submits under the 1934 Act is accumulated and communicated to the Bank’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the Bank’s disclosure controls and procedures, the Bank’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Bank’s management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.
Management of the Bank has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with the participation of the president and chief executive officer and 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
During the three months ended SeptemberJune 30, 2017,2020, there were no changes in the Bank’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.
Consolidated Obligations
The Bank’s disclosure controls and procedures include controls and procedures for accumulating and communicating information in compliance with the Bank’s disclosure and financial reporting requirements relating to the joint and several liability for the consolidated obligations of the Federal Home Loan Banks (FHLBanks). Because the FHLBanks are independently managed and operated, the Bank’s management relies on information that is provided or disseminated by the Federal Housing Finance Agency (Finance Agency), the Office of Finance, and the other FHLBanks, as well as on published FHLBank credit ratings, in determining whether the joint and several liability regulation is reasonably likely to result in a direct obligation for the Bank or whether it is reasonably possible that the Bank will accrue a direct liability.
The Bank’s management also relies on the operation of the joint and several liability regulation. The joint and several liability regulation requires that each FHLBank file with the Finance Agency a quarterly certification that it will remain capable of making full and timely payment of all of its current obligations, including direct obligations, coming due during the next quarter. In addition, if an FHLBank cannot make such a certification or if it projects that it may be unable to meet its current obligations during the next quarter on a timely basis, it must file a notice with the Finance Agency. Under the joint and several liability regulation, the Finance Agency may order any FHLBank to make principal and interest payments on any consolidated obligations of any other FHLBank, or allocate the outstanding liability of an FHLBank among all remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding or on any other basis.
PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
The Federal Home Loan Bank of San Francisco (Bank) may be subject to various legal proceedings arising in the normal course of business.
For information regarding the two lawsuits filed by former Bank officer, Lawrence H. Parks, and another former officer of the Bank, against the Bank, certain of the Bank’s current and former directors, the Bank’s former chief executive officer, one current employee, and one former employee, see “Part I. Item 3. Legal Proceedings” in the Bank’s 2019 Form 10-K.
After consultation with legal counsel, the Bank is not aware of any other legal proceedings that are expected to have a material effect on its financial condition or results of operations or that are otherwise material to the Bank.
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ITEM 1A. | ITEM 1A. RISK FACTORS |
For a discussion of risk factors, see “Part I. Item 1A. Risk Factors” in the Bank’s 2016 Form 10-K. There have been no material changes from10-Q for the risk factors disclosedquarter ended March 31, 2020 and in the “Part I. Item 1A. Risk Factors” section of the Bank’s 20162019 Form 10-K.
ITEM 6. EXHIBITS
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Exhibit No. | | Description |
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| | Memorandum Agreement dated May 12, 2020 between the Federal Home Loan Bank of San Francisco and Stephen Traynor for Special Award for Service as Acting President and Chief Executive Officer |
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| | Supplemental Executive Retirement Plan, as amended and restated effective September 27, 2019 |
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| | Certification of the Acting 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 Acting President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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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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101101.INS |
| | Pursuant to Rule 405 of Regulation S-T,Inline XBRL Instance Document - The instance document does not appear in the following financial information from the Bank's quarterly report on Form 10-Q for the period ended September 30, 2017, is formatted in XBRL interactive data files: (i) Statements of Condition at September 30, 2017, and December 31, 2016; (ii) Statements of Income forfile because its XBRL tags are embedded within the Three and Nine Months Ended September 30, 2017 and 2016; (iii) Statements of Comprehensive Income forinline XBRL document.
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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 | | Inline 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 file does not appear in the Three and Nine Months Ended September 30, 2017 and 2016; (iv) Statements of Capital Accounts forInteractive Data File because its XBRL tags are embedded within the Nine Months Ended September 30, 2017 and 2016; (v) Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016; and (vi) Notes to Financial Statements.Inline XBRL document. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 3, 2017.August 7, 2020.
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| Federal Home Loan Bank of San Francisco |
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| /S/ J. GREGORYSEIBLYTEPHEN P. TRAYNOR |
| J. Gregory SeiblyStephen P. Traynor
Acting President and Chief Executive Officer |
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| /S/ KENNETH C. MILLER |
| Kenneth C. Miller Senior |
| Executive Vice President and Chief Financial Officer (Principal Financial Officer)
|