UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________

FORM 10-Q

____________________________________

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

For the quarterly period ended September 30, 2014

OR

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

Commission File Number: 000-51398

FEDERAL HOME LOAN BANK OF SAN FRANCISCO

(Exact name of registrant as specified in its charter)

____________________________________

Federally chartered corporation	94-6000630
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification number)
600 California Street San Francisco, CA	94108
(Address of principal executive offices)	(Zip code)

(415) 616-1000

(Registrant’s telephone number, including area code)

____________________________________

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    o  No

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

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	x  (Do not check if a smaller reporting company)	Smaller reporting company	o

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

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

	Shares Outstanding as of October 31, 2014
Class B Stock, par value $100	44,159,369

Federal Home Loan Bank of San Francisco

Form 10-Q

Index

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Statements of Condition (Unaudited)	1
	Statements of Income (Unaudited)	2
	Statements of Comprehensive Income (Unaudited)	3
	Statements of Capital Accounts (Unaudited)	4
	Statements of Cash Flows (Unaudited)	5
	Notes to Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	56
	Quarterly Overview	57
	Financial Highlights	58
	Results of Operations	60
	Financial Condition	72
	Liquidity and Capital Resources	84
	Risk Management	86
	Critical Accounting Policies and Estimates	105
	Recently Issued Accounting Standards and Interpretations	105
	Recent Developments	105
	Off-Balance Sheet Arrangements and Other Commitments	108
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	109
Item 4.	Controls and Procedures	115
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	116
Item 1A.	Risk Factors	117
Item 6.	Exhibits	117
Signatures		118

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Federal Home Loan Bank of San Francisco

Statements of Condition

(Unaudited)

(In millions-except par value)	September 30, 2014		December 31, 2013
Assets:
Cash and due from banks	$	8,002	$	4,906
Securities purchased under agreements to resell	500		—
Federal funds sold	6,948		7,498
Trading securities(a)	3,625		3,208
Available-for-sale (AFS) securities(a)	6,624		7,047
Held-to-maturity (HTM) securities (fair values were $15,519 and $17,352, respectively)(b)	15,467		17,507
Advances (includes $5,149 and $7,069 at fair value under the fair value option, respectively)	40,615		44,395
Mortgage loans held for portfolio, net of allowance for credit losses of $2 and $2, respectively	754		905
Accrued interest receivable	71		81
Premises, software, and equipment, net	27		25
Derivative assets, net	69		116
Other assets	87		86
Total Assets	$	82,789	$	85,774
Liabilities:
Deposits	$	202	$	193
Consolidated obligations:
Bonds (includes $7,145 and $10,115 at fair value under the fair value option, respectively)	50,871		53,207
Discount notes	24,431		24,194
Total consolidated obligations	75,302		77,401
Mandatorily redeemable capital stock	1,076		2,071
Accrued interest payable	138		95
Affordable Housing Program (AHP) payable	153		151
Derivative liabilities, net	27		47
Other liabilities	109		107
Total Liabilities	77,007		80,065
Commitments and Contingencies (Note 17)
Capital:
Capital stock—Class B—Putable ($100 par value) issued and outstanding:
33 shares and 35 shares, respectively	3,310		3,460
Unrestricted retained earnings	303		317
Restricted retained earnings	2,073		2,077
Total Retained Earnings	2,376		2,394
Accumulated other comprehensive income/(loss) (AOCI)	96		(145		)
Total Capital	5,782		5,709
Total Liabilities and Capital	$	82,789	$	85,774

(a) At September 30, 2014, and December 31, 2013, none of these securities were pledged as collateral that may be repledged.

(b) At September 30, 2014, $2 of these securities were pledged as collateral that may be repledged. At December 31, 2013, none of these securities were pledged as collateral that may be repledged.

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

1

Federal Home Loan Bank of San Francisco

Statements of Income

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2014			2013			2014			2013
Interest Income:
Advances	$	74		$	84		$	229		$	260
Prepayment fees on advances, net	1			—			5			2
Securities purchased under agreements to resell	—			—			—			1
Federal funds sold	4			4			9			12
Trading securities	2			1			5			5
AFS securities	67			69			210			206
HTM securities	89			97			278			293
Mortgage loans held for portfolio	10			12			32			38
Total Interest Income	247			267			768			817
Interest Expense:
Consolidated obligations:
Bonds	84			102			247			342
Discount notes	4			4			16			11
Mandatorily redeemable capital stock	26			47			99			109
Total Interest Expense	114			153			362			462
Net Interest Income	133			114			406			355
Provision for/(reversal of) credit losses on mortgage loans	(1		)	—			—			—
Net Interest Income After Mortgage Loan Loss Provision	134			114			406			355
Other Income/(Loss):
Net gain/(loss) on trading securities	(1		)	(2		)	(1		)	1
Total other-than-temporary impairment (OTTI) loss	(1		)	(5		)	(5		)	(13		)
Net amount of OTTI loss reclassified to/(from) AOCI	—			2			2			7
Net OTTI loss, credit-related	(1		)	(3		)	(3		)	(6		)
Net gain/(loss) on advances and consolidated obligation bonds held under fair value option	(13		)	(17		)	(82		)	(6		)
Net gain/(loss) on derivatives and hedging activities	—			(2		)	(34		)	16
Other	3			2			6			5
Total Other Income/(Loss)	(12		)	(22		)	(114		)	10
Other Expense:
Compensation and benefits	15			16			47			48
Other operating expense	16			14			47			36
Federal Housing Finance Agency	1			1			5			4
Office of Finance	2			1			4			4
Other	—			—			—			1
Total Other Expense	34			32			103			93
Income/(Loss) Before Assessment	88			60			189			272
AHP Assessment	12			11			29			38
Net Income/(Loss)	$	76		$	49		$	160		$	234

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

2

Federal Home Loan Bank of San Francisco

Statements of Comprehensive Income

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
(In millions)	2014		2013			2014			2013
Net Income/(Loss)	$	76	$	49		$	160		$	234
Other Comprehensive Income/(Loss):
Net change in pension and postretirement benefits	1		(2		)	1			(1		)
Net non-credit-related OTTI gain/(loss) on AFS securities:
Non-credit-related OTTI loss transferred from HTM securities	—		(1		)	—			(4		)
Net change in fair value of other-than-temporarily impaired securities	77		82			237			522
Reclassification of non-credit-related OTTI loss included in net income/(loss)	—		(1		)	(2		)	(3		)
Total net non-credit-related OTTI gain/(loss) on AFS securities	77		80			235			515
Net non-credit-related OTTI gain/(loss) on HTM securities:
Non-credit-related OTTI loss	—		(1		)	—			(4		)
Accretion of non-credit-related OTTI loss	2		1			5			5
Non-credit-related OTTI loss transferred to AFS securities	—		1			—			4
Total net non-credit-related OTTI gain/(loss) on HTM securities	2		1			5			5
Total other comprehensive income/(loss)	80		79			241			519
Total Comprehensive Income/(Loss)	$	156	$	128		$	401		$	753

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

3

Federal Home Loan Bank of San Francisco

Statements of Capital Accounts

(Unaudited)

	Capital Stock Class B—Putable					Retained Earnings												Total Capital
(In millions)	Shares		Par Value			Restricted			Unrestricted			Total			AOCI
Balance, December 31, 2012	42		$	4,160		$	2,001		$	246		$	2,247		$	(794	)	$	5,613
Issuance of capital stock	2		298															298
Repurchase of capital stock	(9	)	(929		)													(929		)
Capital stock reclassified from/(to) mandatorily redeemable capital stock, net	—		(3		)													(3		)
Comprehensive income/(loss)						55			179			234			519			753
Cash dividends paid on capital stock (3.52%)									(109		)	(109		)				(109		)
Balance, September 30, 2013	35		$	3,526		$	2,056		$	316		$	2,372		$	(275	)	$	5,623
Balance, December 31, 2013	35		$	3,460		$	2,077		$	317		$	2,394		$	(145	)	$	5,709
Issuance of capital stock	6		624															624
Repurchase of capital stock	(8	)	(771		)													(771		)
Capital stock reclassified to mandatorily redeemable capital stock, net	—		(3		)													(3		)
Comprehensive income/(loss)						(4		)	164			160			241			401
Cash dividends paid on capital stock (6.91%)									(178		)	(178		)				(178		)
Balance, September 30, 2014	33		$	3,310		$	2,073		$	303		$	2,376		$	96		$	5,782

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

4

Federal Home Loan Bank of San Francisco

Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
(In millions)	2014			2013
Cash Flows from Operating Activities:
Net Income/(Loss)	$	160		$	234
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Depreciation and amortization	(64		)	(51		)
Change in net fair value adjustment on trading securities	1			(1		)
Change in net fair value adjustment on advances and consolidated obligation bonds held under the fair value option	82			6
Change in net derivatives and hedging activities	(124		)	(61		)
Net OTTI loss, credit-related	3			6
Net change in:
Accrued interest receivable	15			21
Other assets	—			(1		)
Accrued interest payable	47			14
Other liabilities	4			16
Total adjustments	(36		)	(51		)
Net cash provided by/(used in) operating activities	124			183
Cash Flows from Investing Activities:
Net change in:
Interest-bearing deposits	(228		)	(66		)
Securities purchased under agreements to resell	(500		)	1,500
Federal funds sold	550			3,037
Premises, software, and equipment	(8		)	(6		)
Trading securities:
Proceeds from maturities of long-term	331			235
Purchases of long-term	(750		)	(525		)
AFS securities:
Proceeds from maturities of long-term	703			1,001
HTM securities:
Net (increase)/decrease in short-term	369			(1,543		)
Proceeds from maturities of long-term	1,878			3,264
Purchases of long-term	(207		)	(3,506		)
Advances:
Principal collected	567,859			367,726
Made to members	(564,152		)	(368,483		)
Mortgage loans held for portfolio:
Principal collected	154			317
Purchases	(3		)	—
Proceeds from sales of foreclosed assets	3			3
Net cash provided by/(used in) investing activities	5,999			2,954

5

Federal Home Loan Bank of San Francisco

Statements of Cash Flows (continued)

(Unaudited)

	Nine Months Ended September 30,
(In millions)	2014			2013
Cash Flows from Financing Activities:
Net change in:
Deposits	288			347
Net (payments)/proceeds on derivative contracts with financing elements	6			59
Net proceeds from issuance of consolidated obligations:
Bonds	28,729			19,103
Discount notes	83,632			91,095
Bonds transferred from another Federal Home Loan Bank	—			122
Payments for matured and retired consolidated obligations:
Bonds	(30,966		)	(32,922		)
Discount notes	(83,393		)	(74,487		)
Proceeds from issuance of capital stock	624			298
Payments for repurchase/redemption of mandatorily redeemable capital stock	(998		)	(1,758		)
Payments for repurchase of capital stock	(771		)	(929		)
Cash dividends paid	(178		)	(109		)
Net cash provided by/(used in) financing activities	(3,027		)	819
Net increase/(decrease) in cash and due from banks	3,096			3,956
Cash and due from banks at beginning of the period	4,906			104
Cash and due from banks at end of the period	$	8,002		$	4,060
Supplemental Disclosures:
Interest paid	$	357		$	387
AHP payments	27			26
Supplemental Disclosures of Noncash Investing Activities:
Transfers of mortgage loans to real estate owned	2			3
Transfers of other-than-temporarily impaired HTM securities to AFS securities	—			56

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

6

Federal Home Loan Bank of San Francisco

Notes to Financial Statements

(Unaudited)

(Dollars in millions except per share amounts)

Note 1 — Basis of Presentation

The information about the Federal Home Loan Bank of San Francisco (Bank) included in these unaudited financial statements reflects all adjustments that, in the opinion of the Bank, are necessary for a fair statement of results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed. The results of operations in these interim statements are not necessarily indicative of the results to be expected for any subsequent period or for the entire year ending December 31, 2014. These unaudited financial statements should be read in conjunction with the Bank’s Annual Report on Form 10-K for the year ended December 31, 2013 (2013 Form 10‑K).

Use of Estimates. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make a number of judgments, estimates, and assumptions that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income, expenses, gains, and losses during the reporting period. The most significant of these estimates include estimating the allowance for credit losses on the advances and mortgage loan portfolios; accounting for derivatives; estimating fair values of investments classified as trading and available-for-sale, derivatives and associated hedged items carried at fair value in accordance with the accounting for derivative instruments and associated hedging activities, and financial instruments carried at fair value under the fair value option, and accounting for OTTI for investment securities; and estimating the prepayment speeds on mortgage-backed securities (MBS) and mortgage loans for the accounting of amortization of premiums and accretion of discounts on MBS and mortgage loans. Actual results could differ significantly from these estimates.

Financial Instruments Meeting Netting Requirements. The Bank presents certain financial instruments, including derivative instruments and securities purchased under agreements to resell, on a net basis when they have a legal right of offset and all other requirements for netting are met (collectively referred to as the netting requirements). The Bank has elected to offset its derivative asset and liability positions, as well as cash collateral received or pledged, when the netting requirements are met. The Bank did not have any offsetting liabilities related to its securities purchased under agreements to resell for the periods presented.

The net exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. For derivative instruments that meet the netting requirements, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset. Additional information regarding these agreements is provided in Note 15 – Derivatives and Hedging Activities. Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented.

Variable Interest Entities. The Bank’s investments in variable interest entities (VIEs) are limited to private-label residential mortgage-backed securities (PLRMBS). On an ongoing basis, the Bank performs a quarterly evaluation

to determine whether it is the primary beneficiary in any VIE. The Bank evaluated its investments in VIEs as of September 30, 2014, to determine whether it is a primary beneficiary of any of these investments. The primary beneficiary is required to consolidate a VIE. The Bank determined that consolidation accounting is not required because the Bank is not the primary beneficiary of these VIEs for the periods presented. The Bank does not have the power to significantly affect the economic performance of any of these investments because it does not act as a key decision maker nor does it have the unilateral ability to replace a key decision maker. In addition, the Bank does not design, sponsor, transfer, service, or provide credit or liquidity support in any of its investments in VIEs. The Bank’s maximum loss exposure for these investments is limited to the carrying value.

7

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Descriptions of the Bank’s significant accounting policies are included in “Item 8. Financial Statements and Supplementary Data – Note 1 – Summary of Significant Accounting Policies” in the Bank’s 2013 Form 10-K. Other changes to these policies as of September 30, 2014, are discussed in Note 2 – Recently Issued and Adopted Accounting Guidance.

Note 2 — Recently Issued and Adopted Accounting Guidance

Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.On August 27, 2014, the Financial Accounting Standards Board (FASB) issued guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This guidance requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year after the date the financial statements are issued or within one year after the financial statements are available to be issued, when applicable. Substantial doubt exists if it is probable that the entity will be unable to meet its obligations for the assessed period. This guidance becomes effective for the Bank for the interim and annual periods ending after December 15, 2016, and early application is permitted. This guidance is not expected to affect the Bank’s financial condition, results of operations, and cash flows.

Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.On August 8, 2014, the FASB issued amended guidance relating to the classification and measurement of certain government-guaranteed mortgage loans upon foreclosure. The amendments in this guidance require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. This guidance becomes effective for the Bank for the interim and annual periods beginning after December 15, 2014, and may be adopted using either the modified retrospective transition method or the prospective transition method. The Bank is in the process of evaluating the effect of this guidance on the Bank’s financial condition, results of operations, and cash flows, but it is not expected to be material.

Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.On June 12, 2014, the FASB issued amended guidance for repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings. Specifically, this guidance requires entities to account for (1) repurchase-to-maturity transactions as secured borrowings rather than as sales with forward repurchase agreements; and (2) repurchase agreements executed contemporaneously with the initial transfer of the underlying financial asset with the same counterparty as separate transactions only. In addition, this guidance requires a transferor to disclose additional information about certain transactions, including those in which it retains substantially all of the exposure to the economic returns of the underlying transferred asset over the transaction’s term. This guidance becomes effective for the Bank for the first interim or annual period beginning after December 15, 2014. The changes in accounting for transactions outstanding on the effective date are required to be presented on a cumulative-effect basis. The Bank is in the process of evaluating the effect of this guidance on the Bank’s financial condition, results of operations, and cash flows, but it is not expected to be material.

Revenue from Contracts with Customers. On May 28, 2014, the FASB issued its guidance on revenue from contracts with customers. This guidance outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. In addition, this guidance amends the existing requirements for the recognition of a gain or loss on the transfer of non-financial assets that are not in a contract with a customer. This guidance applies to all contracts with customers except those that are within the scope of certain other standards, such as financial instruments, certain guarantees, insurance contracts, or lease contracts.

This guidance becomes effective for the interim and annual reporting periods beginning after December 15, 2016, and early application is not permitted. The guidance provides the entities with the option of using the following two methods upon adoption: a full retrospective method, applied retrospectively to each prior reporting period presented; or a transition method, with the cumulative effect of retrospectively applying this guidance recognized at

8

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

the date of initial application. The Bank is in the process of evaluating the effect of this guidance on the Bank’s financial condition, results of operations, and cash flows, but it is not expected to be material.

Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. On January 17, 2014, theFASB issued guidance clarifying when consumer mortgage loans collateralized by real estate should be reclassified to real estate owned (REO). Specifically, these collateralized mortgage loans should be reclassified to REO when either the creditor obtains legal title to the residential real estate property upon completion of a foreclosure or the borrower conveys all interest in the residential real estate property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The guidance is effective for interim and annual periods beginning on or after December 15, 2014, and may be adopted under either the modified retrospective transition method or the prospective transition method. The Bank is in the process of evaluating the effect of this guidance on the Bank’s financial condition, results of operations, and cash flows, but it is not expected to be material.

Joint and Several Liability Arrangements. On February 28, 2013, the FASB issued guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date. The guidance requires an entity to measure these obligations as the sum of (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. In addition, the guidance requires an entity to disclose the nature and amount of the obligations as well as other information about the obligations. The guidance became effective for interim and annual periods beginning on January 1, 2014, and was applied retrospectively to obligations with joint and several liabilities existing at January 1, 2014. The adoption of this guidance did not affect the Bank’s financial condition, results of operations, or cash flows.

Recently Issued Regulatory Guidance

Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention.On April 9, 2012, the Federal Housing Finance Agency (Finance Agency) issued Advisory Bulletin 2012-02, Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention (AB 2012-02). The guidance establishes a standard and uniform methodology for classifying loans, other real estate owned, and certain other assets (excluding investment securities) and prescribes the timing of asset charge-offs based on these classifications. The guidance is generally consistent with the Uniform Retail Credit Classification and Account Management Policy issued by the federal banking regulators in June 2000. The Bank implemented the asset classification provisions as of January 1, 2014, and this adoption did not have any impact on the Bank’s financial condition, results of operations, or cash flows. The charge-off provisions are to be implemented no later than January 1, 2015, and the adoption of those provisions is not expected to have a significant impact on the Bank’s financial condition, results of operations, or cash flows.

Note 3 — Trading Securities

The estimated fair value of trading securities as of September 30, 2014, and December 31, 2013, was as follows:

	September 30, 2014		December 31, 2013
Government-sponsored enterprises (GSEs) – Federal Farm Credit Bank (FFCB) bonds	$	3,613	$	3,194
MBS – Other U.S. obligations – Ginnie Mae	12		14
Total	$	3,625	$	3,208

Redemption Terms. The estimated fair value of non-MBS by contractual maturity (based on contractual final principal payment) and of MBS as of September 30, 2014, and December 31, 2013, is shown below. Expected

9

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

maturities of MBS will differ from contractual maturities because borrowers generally have the right to prepay the underlying obligations without prepayment fees.

Year of Contractual Maturity	September 30, 2014		December 31, 2013
Trading securities other than MBS:
Due in 1 year or less	$	2,113	$	580
Due after 1 year through 5 years	1,500		2,614
Subtotal	3,613		3,194
MBS – Other U.S. obligations – Ginnie Mae	12		14
Total	$	3,625	$	3,208

Interest Rate Payment Terms. Interest rate payment terms for trading securities at September 30, 2014, and December 31, 2013, are detailed in the following table:

	September 30, 2014		December 31, 2013
Estimated fair value of trading securities other than MBS:
Adjustable rate	$	3,613	$	3,194
Estimated fair value of trading MBS:
Passthrough securities – Adjustable rate	12		14
Total	$	3,625	$	3,208

The net unrealized gain/(loss) on trading securities was $(1) and $(2) for the three months ended September 30, 2014 and 2013, respectively. The net unrealized gain/(loss) on trading securities was $(1) and $1 for the nine months ended September 30, 2014 and 2013, respectively. These amounts represent the changes in the fair value of the securities during the reported periods.

Note 4 — Available-for-Sale Securities

Available-for-sale (AFS) securities by major security type as of September 30, 2014, and December 31, 2013, were as follows:

10

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

September 30, 2014
	Amortized Cost(1)		OTTI Recognized in AOCI			Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
PLRMBS:
Prime	$	584	$	(1	)	$	41	$	—		$	624
Alt-A, option ARM	1,051		(47		)	85		—			1,089
Alt-A, other	4,865		(143		)	189		—			4,911
Total	$	6,500	$	(191	)	$	315	$	—		$	6,624
December 31, 2013
	Amortized Cost(1)		OTTI Recognized in AOCI			Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
PLRMBS:
Prime	$	661	$	(11	)	27		$	—		$	677
Alt-A, option ARM	1,122		(74		)	51		—			1,099
Alt-A, other	5,376		(239		)	142		(8		)	5,271
Total	$	7,159	$	(324	)	$	220	$	(8	)	$	7,047

(1) Amortized cost includes unpaid principal balance, unamortized premiums and discounts, and previous OTTI recognized in earnings.

Expected maturities of PLRMBS will differ from contractual maturities because borrowers generally have the right to prepay the underlying obligations without prepayment fees.

At September 30, 2014, the amortized cost of the Bank’s PLRMBS classified as AFS included credit-related OTTI of $1,209. At December 31, 2013, the amortized cost of the Bank’s PLRMBS classified as AFS included credit-related OTTI of $1,312.

The following table summarizes the AFS securities with unrealized losses as of September 30, 2014, and December 31, 2013. The unrealized losses are aggregated by major security type and the length of time that individual securities have been in a continuous unrealized loss position. Total unrealized losses in the following table will not agree to total gross unrealized losses in the table above. The unrealized losses in the following table also include non-credit-related OTTI losses recognized in AOCI. For OTTI analysis of AFS securities, see Note 6 – Other-Than-Temporary Impairment Analysis.

11

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

September 30, 2014
	Less Than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
PLRMBS:
Prime	$	9	$	—	$	37	$	1	$	46	$	1
Alt-A, option ARM	—		—		629		47		629		47
Alt-A, other	345		9		1,796		134		2,141		143
Total	$	354	$	9	$	2,462	$	182	$	2,816	$	191
December 31, 2013
	Less Than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
PLRMBS:
Prime	$	28	$	—	$	287	$	11	$	315	$	11
Alt-A, option ARM	—		—		674		74		674		74
Alt-A, other	677		10		2,351		237		3,028		247
Total	$	705	$	10	$	3,312	$	322	$	4,017	$	332

As indicated in the tables above, as of September 30, 2014, the Bank’s investments classified as AFS had unrealized losses related to PLRMBS, which were primarily due to illiquidity in the PLRMBS market, uncertainty about the future condition of the housing and mortgage markets and the economy, and market expectations of the credit performance of loan collateral underlying these securities, which caused these assets to be valued at discounts to their acquisition cost.

Interest Rate Payment Terms. Interest rate payment terms for AFS securities at September 30, 2014, and December 31, 2013, are shown in the following table:

	September 30, 2014		December 31, 2013
Amortized cost of AFS PLRMBS:
Collateralized mortgage obligations:
Fixed rate	$	2,026	$	2,450
Adjustable rate	4,474		4,709
Total	$	6,500	$	7,159

Certain MBS classified as fixed rate collateralized mortgage obligations have an initial fixed interest rate that subsequently converts to an adjustable interest rate on a specified date as follows:

	September 30, 2014		December 31, 2013
Collateralized mortgage obligations:
Converts in 1 year or less	$	28	$	191
Converts after 1 year through 5 years	310		364
Total	$	338	$	555

See Note 6 – Other-Than-Temporary Impairment Analysis for information on the transfers of securities between the AFS portfolio and the held-to-maturity (HTM) portfolio.

12

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Note 5 — Held-to-Maturity Securities

The Bank classifies the following securities as HTM because the Bank has the positive intent and ability to hold these securities to maturity:

September 30, 2014
	Amortized Cost(1)		OTTI Recognized in AOCI(1)			Carrying Value(1)		Gross Unrecognized Holding Gains(2)		Gross Unrecognized Holding Losses(2)			Estimated Fair Value
Certificates of deposit	$	1,291	$	—		$	1,291	$	—	$	—		$	1,291
Housing finance agency bonds:
California Housing Finance Agency (CalHFA) bonds	345		—			345		—		(47		)	298
Subtotal	1,636		—			1,636		—		(47		)	1,589
MBS:
Other U.S. obligations – Ginnie Mae	1,569		—			1,569		6		(11		)	1,564
GSEs:
Freddie Mac	4,698		—			4,698		58		(35		)	4,721
Fannie Mae	5,593		—			5,593		115		(15		)	5,693
Subtotal GSEs	10,291		—			10,291		173		(50		)	10,414
PLRMBS:
Prime	1,186		—			1,186		2		(23		)	1,165
Alt-A, option ARM	14		—			14		—		(1		)	13
Alt-A, other	793		(22		)	771		20		(17		)	774
Subtotal PLRMBS	1,993		(22		)	1,971		22		(41		)	1,952
Total MBS	13,853		(22		)	13,831		201		(102		)	13,930
Total	$	15,489	$	(22	)	$	15,467	$	201	$	(149	)	$	15,519

December 31, 2013
	Amortized Cost(1)		OTTI Recognized in AOCI(1)			Carrying Value(1)		Gross Unrecognized Holding Gains(2)		Gross Unrecognized Holding Losses(2)			Estimated Fair Value
Certificates of deposit	$	1,660	$	—		$	1,660	$	—	$	—		$	1,660
Housing finance agency bonds:
CalHFA bonds	416		—			416		—		(100		)	316
Subtotal	2,076		—			2,076		—		(100		)	1,976
MBS:
Other U.S. obligations – Ginnie Mae	1,575		—			1,575		3		(45		)	1,533
GSEs:
Freddie Mac	5,250		—			5,250		53		(90		)	5,213
Fannie Mae	6,331		—			6,331		109		(45		)	6,395
Subtotal GSEs	11,581		—			11,581		162		(135		)	11,608
PLRMBS:
Prime	1,380		—			1,380		1		(37		)	1,344
Alt-A, option ARM	16		—			16		—		(2		)	14
Alt-A, other	906		(27		)	879		24		(26		)	877
Subtotal PLRMBS	2,302		(27		)	2,275		25		(65		)	2,235
Total MBS	15,458		(27		)	15,431		190		(245		)	15,376
Total	$	17,534	$	(27	)	$	17,507	$	190	$	(345	)	$	17,352

13

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

(1) Amortized cost includes unpaid principal balance, unamortized premiums and discounts, and previous OTTI recognized in earnings. The carrying value of HTM securities represents amortized cost after adjustment for non-credit-related OTTI recognized in AOCI.

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

At September 30, 2014, the amortized cost of the Bank’s MBS classified as HTM included premiums of $56, discounts of $60, and credit-related OTTI of $7. At December 31, 2013, the amortized cost of the Bank’s MBS classified as HTM included premiums of $71, discounts of $70, and credit-related OTTI of $6.

The following tables summarize the HTM securities with unrealized losses as of September 30, 2014, and December 31, 2013. The unrealized losses are aggregated by major security type and the length of time that individual securities have been in a continuous unrealized loss position. Total unrealized losses in the following table will not agree to the total gross unrecognized holding losses in the table above. The unrealized losses in the following table also include non-credit-related OTTI losses recognized in AOCI. For OTTI analysis of HTM securities, see Note 6 – Other-Than-Temporary Impairment Analysis.

September 30, 2014
	Less Than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Certificates of deposit	$	250	$	—	$	—	$	—	$	250	$	—
Housing finance agency bonds:
CalHFA bonds	—		—		282		47		282		47
MBS:
Other U.S. obligations – Ginnie Mae	926		6		276		5		1,202		11
GSEs:
Freddie Mac	992		9		1,340		26		2,332		35
Fannie Mae	839		6		489		9		1,328		15
Subtotal GSEs	1,831		15		1,829		35		3,660		50
PLRMBS:
Prime	158		1		705		22		863		23
Alt-A, option ARM	—		—		13		1		13		1
Alt-A, other	83		1		662		38		745		39
Subtotal PLRMBS	241		2		1,380		61		1,621		63
Total MBS	2,998		23		3,485		101		6,483		124
Total	$	3,248	$	23	$	3,767	$	148	$	7,015	$	171

14

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

December 31, 2013
	Less Than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Housing finance agency bonds:
CalHFA bonds	$	—	$	—	$	316	$	100	$	316	$	100
MBS:
Other U.S. obligations – Ginnie Mae	1,187		45		2		—		1,189		45
GSEs:
Freddie Mac	2,918		89		66		1		2,984		90
Fannie Mae	2,069		40		126		5		2,195		45
Subtotal GSEs	4,987		129		192		6		5,179		135
PLRMBS:
Prime	481		5		693		32		1,174		37
Alt-A, option ARM	—		—		14		2		14		2
Alt-A, other	159		2		688		51		847		53
Subtotal PLRMBS	640		7		1,395		85		2,035		92
Total MBS	6,814		181		1,589		91		8,403		272
Total	$	6,814	$	181	$	1,905	$	191	$	8,719	$	372

As indicated in the tables above, the Bank’s investments classified as HTM had unrealized losses primarily related to CalHFA bonds and MBS. The Bank also had unrealized losses associated with certificates of deposit that were de minimis, which were caused by movements in interest rates and not a deterioration of the issuers’ creditworthiness. The unrealized losses associated with the CalHFA bonds were mainly due to an illiquid market, credit concerns regarding the underlying mortgage collateral, and credit concerns regarding the monoline insurance providers, causing these investments to be valued at a discount to their acquisition cost. For its agency MBS, the Bank expects to recover the entire amortized cost basis of these securities because the Bank determined that the strength of the issuers’ guarantees through direct obligations or support from the U.S. government is sufficient to protect the Bank from losses. The unrealized losses associated with the PLRMBS were primarily due to illiquidity in the PLRMBS market, uncertainty about the future condition of the housing and mortgage markets and the economy, and market expectations of the credit performance of the loan collateral underlying these securities, which caused these assets to be valued at discounts to their acquisition cost.

Redemption Terms. The amortized cost, carrying value, and estimated fair value of non-MBS securities by contractual maturity (based on contractual final principal payment) and of MBS as of September 30, 2014, and December 31, 2013, are shown below. Expected maturities of MBS will differ from contractual maturities because borrowers generally have the right to prepay the underlying obligations without prepayment fees.

15

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

September 30, 2014
Year of Contractual Maturity	Amortized Cost(1)		Carrying Value(1)		Estimated Fair Value
HTM securities other than MBS:
Due in 1 year or less	$	1,291	$	1,291	$	1,291
Due after 5 years through 10 years	79		79		70
Due after 10 years	266		266		228
Subtotal	1,636		1,636		1,589
MBS:
Other U.S. obligations – Ginnie Mae	1,569		1,569		1,564
GSEs:
Freddie Mac	4,698		4,698		4,721
Fannie Mae	5,593		5,593		5,693
Subtotal GSEs	10,291		10,291		10,414
PLRMBS:
Prime	1,186		1,186		1,165
Alt-A, option ARM	14		14		13
Alt-A, other	793		771		774
Subtotal PLRMBS	1,993		1,971		1,952
Total MBS	13,853		13,831		13,930
Total	$	15,489	$	15,467	$	15,519

December 31, 2013
Year of Contractual Maturity	Amortized Cost(1)		Carrying Value(1)		Estimated Fair Value
HTM securities other than MBS:
Due in 1 year or less	$	1,660	$	1,660	$	1,660
Due after 5 years through 10 years	62		62		49
Due after 10 years	354		354		267
Subtotal	2,076		2,076		1,976
MBS:
Other U.S. obligations – Ginnie Mae	1,575		1,575		1,533
GSEs:
Freddie Mac	5,250		5,250		5,213
Fannie Mae	6,331		6,331		6,395
Subtotal GSEs	11,581		11,581		11,608
PLRMBS:
Prime	1,380		1,380		1,344
Alt-A, option ARM	16		16		14
Alt-A, other	906		879		877
Subtotal PLRMBS	2,302		2,275		2,235
Total MBS	15,458		15,431		15,376
Total	$	17,534	$	17,507	$	17,352

(1) Amortized cost includes unpaid principal balance, unamortized premiums and discounts, and previous OTTI recognized in earnings. The carrying value of HTM securities represents amortized cost after adjustment for non-credit-related OTTI recognized in AOCI.

Interest Rate Payment Terms. Interest rate payment terms for HTM securities at September 30, 2014, and December 31, 2013, are detailed in the following table:

16

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	September 30, 2014		December 31, 2013
Amortized cost of HTM securities other than MBS:
Fixed rate	$	1,291	$	1,660
Adjustable rate	345		416
Subtotal	1,636		2,076
Amortized cost of HTM MBS:
Passthrough securities:
Fixed rate	333		461
Adjustable rate	410		430
Collateralized mortgage obligations:
Fixed rate	9,680		10,820
Adjustable rate	3,430		3,747
Subtotal	13,853		15,458
Total	$	15,489	$	17,534

Certain MBS classified as fixed rate passthrough securities and fixed rate collateralized mortgage obligations have an initial fixed interest rate that subsequently converts to an adjustable interest rate on a specified date as follows:

	September 30, 2014		December 31, 2013
Passthrough securities:
Converts in 1 year or less	$	44	$	62
Converts after 1 year through 5 years	218		316
Converts after 5 years through 10 years	62		72
Total	$	324	$	450
Collateralized mortgage obligations:
Converts in 1 year or less	$	78	$	185
Converts after 1 year through 5 years	34		133
Total	$	112	$	318

See Note 6 – Other-Than-Temporary Impairment Analysis for information on the transfers of securities between the AFS portfolio and the HTM portfolio.

Note 6 — Other-Than-Temporary Impairment Analysis

On a quarterly basis, the Bank evaluates its individual AFS and HTM investment securities in an unrealized loss position for OTTI. As part of this evaluation, the Bank considers whether it intends to sell each debt security and whether it is more likely than not that it will be required to sell the debt security before its anticipated recovery of the amortized cost basis. If either of these conditions is met, the Bank recognizes an OTTI charge to earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the statement of condition date. For securities in an unrealized loss position that meet neither of these conditions, the Bank considers whether it expects to recover the entire amortized cost basis of the security by comparing its best estimate of the present value of the cash flows expected to be collected from the security with the amortized cost basis of the security. If the Bank’s best estimate of the present value of the cash flows expected to be collected is less than the amortized cost basis, the difference is considered the credit loss.

PLRMBS. A significant input to the Bank’s cash flow analysis of its PLRMBS is the forecast of future housing price changes. The FHLBanks’ OTTI Governance Committee developed a short-term housing price forecast with projected changes ranging from a decrease of 3.0% to an increase of 9.0% over the 12-month period beginning July 1, 2014. For the vast majority of markets, the projected short-term housing price changes range from 0.0% to

17

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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.

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

For securities determined to be other-than-temporarily impaired as of September 30, 2014 (securities for which the Bank determined that it does not expect to recover the entire amortized cost basis), the following table presents a summary of the significant inputs used in measuring the amount of credit loss recognized in earnings in the third quarter of 2014, and the related current credit enhancement for the Bank.

September 30, 2014
	Significant Inputs for Other-Than-Temporarily Impaired PLRMBS			Current
	Prepayment Rates	Default Rates	Loss Severities	Credit Enhancement
Year of Securitization	Weighted Average %	Weighted Average %	Weighted Average %	Weighted Average %
Prime
2007	12.7	4.3	31.3	19.2
2006	16.9	11.3	38.8	2.8
Total Prime	12.8	4.4	31.5	18.8
Alt-A, option ARM
2005	7.8	34.3	43.7	2.3
Total Alt-A, option ARM	7.8	34.3	43.7	2.3
Alt-A, other
2007	12.5	27.1	37.5	14.7
2004 and earlier	15.8	9.1	32.0	13.5
Total Alt-A, other	14.4	16.6	34.3	14.0
Total	13.8	17.0	34.8	13.5

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 (Prime; Alt-A, option ARM; and Alt-A, other) is based on the model used to run the estimated cash flows for the CUSIP, which may not necessarily be the same as the classification at the time of origination.

The following table presents the credit-related OTTI, which is recognized in earnings, for the three and nine months ended September 30, 2014 and 2013.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Balance, beginning of the period	$	1,347		$	1,395		$	1,378		$	1,397
Additional charges on securities for which OTTI was previously recognized(1)	1			3			3			6
Accretion of yield adjustments resulting from improvement of expected cash flows that are recognized over the remaining life of the securities	(16		)	(8		)	(49		)	(13		)
Balance, end of the period	$	1,332		$	1,390		$	1,332		$	1,390

(1) For the three months ended September 30, 2014 and 2013, “securities for which OTTI was previously recognized” represents all securities that were also other-than-temporarily impaired prior to July 1, 2014 and 2013, respectively. For the nine months ended September 30, 2014 and 2013, “securities for which OTTI was previously recognized” represents all securities that were also other-than-temporarily impaired prior to January 1, 2014 and 2013, respectively.

18

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Changes in circumstances may cause the Bank to change its intent to hold a certain security to maturity without calling into question its intent to hold other debt securities to maturity in the future. The sale or transfer of an HTM security because of certain changes in circumstances, such as evidence of significant deterioration in the issuers’ creditworthiness, is not considered to be inconsistent with its original classification. In addition, other events that are isolated, nonrecurring, or unusual for the Bank that could not have been reasonably anticipated may cause the Bank to sell or transfer an HTM security without necessarily calling into question its intent to hold other debt securities to maturity.

The Bank did not transfer any PLRMBS from its HTM portfolio to its AFS portfolio during the three and nine months ended September 30, 2014. The following table summarizes the PLRMBS transferred from the Bank’s HTM portfolio to its AFS portfolio during the three and nine months ended September 30, 2013. The amounts shown represent the values when the securities were transferred from the HTM portfolio to the AFS portfolio.

	Three Months Ended September 30, 2013									Nine Months Ended September 30, 2013
	Amortized Cost		OTTI Recognized in AOCI			Gross Unrecognized Holding Gains		Estimated Fair Value		Amortized Cost		OTTI Recognized in AOCI			Gross Unrecognized Holding Gains		Estimated Fair Value
Other-than-temporarily impaired PLRMBS backed by loans classified at origination as:
Alt-A, option ARM	$	—	$	—		$	—	$	—	$	22	$	(3	)	$	—	$	19
Alt-A, other	37		(1		)	—		36		38		(1		)	—		37
Total	$	37	$	(1	)	$	—	$	36	$	60	$	(4	)	$	—	$	56

The following tables present the Bank’s AFS and HTM PLRMBS that incurred OTTI losses anytime during the life of the securities at September 30, 2014, and December 31, 2013, by loan collateral type:

September 30, 2014
	Available-for-Sale Securities						Held-to-Maturity Securities
	Unpaid Principal Balance		Amortized Cost		Estimated Fair Value		Unpaid Principal Balance		Amortized Cost		Carrying Value		Estimated Fair Value
Other-than-temporarily impaired PLRMBS backed by loans classified at origination as:
Prime	$	705	$	584	$	624	$	—	$	—	$	—	$	—
Alt-A, option ARM	1,420		1,051		1,089		—		—		—		—
Alt-A, other	5,575		4,865		4,911		137		134		112		132
Total	$	7,700	$	6,500	$	6,624	$	137	$	134	$	112	$	132
December 31, 2013
	Available-for-Sale Securities						Held-to-Maturity Securities
	Unpaid Principal Balance		Amortized Cost		Estimated Fair Value		Unpaid Principal Balance		Amortized Cost		Carrying Value		Estimated Fair Value
Other-than-temporarily impaired PLRMBS backed by loans classified at origination as:
Prime	$	795	$	661	$	677	$	—	$	—	$	—	$	—
Alt-A, option ARM	1,516		1,122		1,099		—		—		—		—
Alt-A, other	6,151		5,376		5,271		150		147		120		144
Total	$	8,462	$	7,159	$	7,047	$	150	$	147	$	120	$	144

19

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

For the Bank’s PLRMBS that were not other-than-temporarily impaired as of September 30, 2014, the Bank has experienced net unrealized losses primarily because of illiquidity in the PLRMBS market, uncertainty about the future condition of the housing and mortgage markets and the economy, and market expectations of the credit performance of loan collateral underlying these securities, which caused these assets to be valued at discounts to their acquisition 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, 2014, all of the gross unrealized losses on these PLRMBS are temporary. These securities were included in the securities that the Bank reviewed and analyzed for OTTI as discussed above, and the analyses performed indicated that these securities were not other-than-temporarily impaired.

All Other Available-for-Sale and Held-to-Maturity Investments. The Bank determined that, as of September 30, 2014, the de minimis gross unrealized losses on its certificates of deposit were temporary because the gross unrealized losses were caused by movements in interest rates and not by the deterioration of the issuers’ creditworthiness.

For the Bank’s investments in housing finance agency bonds, which were issued by CalHFA, the gross unrealized losses were mainly due to an illiquid market, credit concerns regarding the underlying mortgage collateral, and credit concerns regarding the monoline insurance providers, causing these investments to be valued at a discount to their acquisition cost. The Bank independently modeled cash flows for the underlying collateral, using assumptions for default rates and loss severity that a market participant would deem reasonable, and concluded that the available credit support within the CalHFA structure more than offset the projected underlying collateral losses. The Bank determined that, as of September 30, 2014, all of the gross unrealized losses on the bonds are temporary because the underlying collateral and credit enhancements were sufficient to protect the Bank from losses. As a result, the Bank expects to recover the entire amortized cost basis of these securities.

For its agency MBS, the Bank expects to recover the entire amortized cost basis of these securities because the Bank determined that the strength of the issuers’ guarantees through direct obligations or support from the U.S. government is sufficient to protect the Bank from losses. As a result, the Bank determined that, as of September 30, 2014, all of the gross unrealized losses on its agency MBS are temporary.

Note 7 — Advances

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

Redemption Terms. The Bank had advances outstanding, excluding overdrawn demand deposit accounts, at interest rates ranging from 0.07% to 8.57% at September 30, 2014, and 0.06% to 8.57% at December 31, 2013, as summarized below.

20

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	September 30, 2014				December 31, 2013
Contractual Maturity	Amount Outstanding		Weighted Average Interest Rate		Amount Outstanding		Weighted Average Interest Rate
Within 1 year	$	23,014	0.57	%	$	22,556	0.50	%
After 1 year through 2 years	4,032		1.49		6,838		1.48
After 2 years through 3 years	6,010		1.04		6,754		1.24
After 3 years through 4 years	3,390		1.28		3,208		1.43
After 4 years through 5 years	2,228		1.91		2,825		1.79
After 5 years	1,806		2.79		2,006		2.41
Total par value	40,480		0.96	%	44,187		1.00	%
Valuation adjustments for hedging activities	49				95
Valuation adjustments under fair value option	86				113
Total	$	40,615			$	44,395

Many of the Bank’s advances are prepayable at the borrower’s option. However, when advances are prepaid, the borrower is generally charged a prepayment fee intended to make the Bank financially indifferent to the prepayment. In addition, for certain advances with partial prepayment symmetry, the Bank may charge the borrower a prepayment fee or pay the borrower a prepayment credit depending on certain circumstances, such as movements in interest rates, when the advance is prepaid. The Bank had advances with partial prepayment symmetry outstanding totaling $4,913 at September 30, 2014, and $6,833 at December 31, 2013. Some advances may be repaid on pertinent call dates without prepayment fees (callable advances). The Bank had callable advances outstanding totaling $333 at September 30, 2014, and $235 at December 31, 2013.

The Bank’s advances at September 30, 2014, and December 31, 2013, included $140 and $182, respectively, of putable advances. At the Bank’s discretion, the Bank may terminate these advances on predetermined exercise dates and offer replacement funding at prevailing market rates, subject to certain conditions. The Bank would typically exercise such termination rights when interest rates increase.

The following table summarizes advances at September 30, 2014, and December 31, 2013, by the earlier of the year of contractual maturity or next call date for callable advances and by the earlier of the year of contractual maturity or next put date for putable advances.

	Earlier of Contractual Maturity or Next Call Date				Earlier of Contractual Maturity or Next Put Date
	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
Within 1 year	$	23,147	$	22,609	$	23,154	$	22,696
After 1 year through 2 years	4,087		6,843		4,032		6,838
After 2 years through 3 years	6,077		6,850		5,910		6,754
After 3 years through 4 years	3,464		3,208		3,350		3,108
After 4 years through 5 years	2,232		2,901		2,228		2,785
After 5 years	1,473		1,776		1,806		2,006
Total par value	$	40,480	$	44,187	$	40,480	$	44,187

Credit and Concentration Risk. The following tables present the concentration in advances to the top five borrowers and their affiliates at September 30, 2014 and 2013. The tables also present the interest income from these advances before the impact of interest rate exchange agreements associated with these advances for the three and nine months ended September 30, 2014 and 2013.

21

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	September 30, 2014				Three Months Ended September 30, 2014				Nine Months Ended September 30, 2014
Name of Borrower	Advances Outstanding(1)		Percentage of Total Advances Outstanding		Interest Income from Advances(2)		Percentage of Total Interest Income from Advances		Interest Income from Advances(2)		Percentage of Total Interest Income from Advances
Bank of America California, N.A.	$	6,500	16	%	$	4	4	%	$	15	4	%
First Republic Bank	5,275		13		22		21		65		20
Bank of the West	4,714		12		7		7		23		7
JPMorgan Chase & Co.:
JPMorgan Bank & Trust Company, National Association	3,000		7		12		11		43		13
JPMorgan Chase Bank, National Association(3)	822		2		2		2		6		2
Subtotal JPMorgan Chase & Co.	3,822		9		14		13		49		15
OneWest Bank, N.A.	3,414		8		6		5		17		5
Subtotal	23,725		58		53		50		169		51
Others	16,755		42		52		50		161		49
Total	$	40,480	100	%	$	105	100	%	$	330	100	%

	September 30, 2013				Three Months Ended September 30, 2013				Nine Months Ended September 30, 2013
Name of Borrower	Advances Outstanding(1)		Percentage of Total Advances Outstanding		Interest Income from Advances(2)		Percentage of Total Interest Income from Advances		Interest Income from Advances(2)		Percentage of Total Interest Income from Advances
JPMorgan Chase & Co.:
JPMorgan Bank & Trust Company, National Association	$	8,225	19	%	$	18	15	%	$	60	17	%
JPMorgan Chase Bank, National Association(3)	837		2		2		2		6		2
Subtotal JPMorgan Chase & Co.	9,062		21		20		17		66		19
Bank of America California, N.A.	6,250		14		4		3		10		3
First Republic Bank	5,150		12		19		16		50		14
Bank of the West	4,282		10		8		7		22		6
Citibank, N.A.(3)	4,001		9		3		2		11		3
Subtotal	28,745		66		54		45		159		45
Others	15,193		34		64		55		200		55
Total	$	43,938	100	%	$	118	100	%	$	359	100	%

(1) Borrower advance amounts and total advance amounts are at par value, and total advance amounts will not agree to carrying value amounts shown in the Statements of Condition. The differences between the par and carrying value amounts primarily relate to unrealized gains or losses associated with hedged advances resulting from valuation adjustments related to hedging activities and valuation adjustments under the fair value option.

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

(3) 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 advances and allowance methodology for credit losses, see Note 9 – Allowance for Credit Losses.

Interest Rate Payment Terms. Interest rate payment terms for advances at September 30, 2014, and December 31, 2013, are detailed below:

22

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	September 30, 2014		December 31, 2013
Par value of advances:
Fixed rate:
Due within 1 year	$	17,136	$	17,998
Due after 1 year	12,294		16,453
Total fixed rate	29,430		34,451
Adjustable rate:
Due within 1 year	5,878		4,558
Due after 1 year	5,172		5,178
Total adjustable rate	11,050		9,736
Total par value	$	40,480	$	44,187

The Bank may use derivatives to adjust the repricing and/or options characteristics of advances to more closely match the characteristics of the Bank’s funding liabilities. In general, whenever a member executes a fixed rate advance or a 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, if any, in the advance. The combination of the advance and the interest rate exchange agreement effectively creates a variable rate asset. This type of hedge is treated as a fair value hedge. In 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, 2014, and December 31, 2013.

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, as follows:

	Three Months Ended					Nine Months Ended
	September 30, 2014		September 30, 2013			September 30, 2014			September 30, 2013
Prepayment fees received	$	1	$	2		$	15		$	8
Fair value adjustments	—		(2		)	(10		)	(6		)
Net	$	1	$	—		$	5		$	2
Advance principal prepaid	$	911	$	56		$	1,616		$	255

Note 8 — Mortgage Loans Held for Portfolio

Under the Mortgage Partnership Finance® (MPF®) Program, the Bank purchases conventional conforming fixed rate mortgage loans and FHA/VA-insured mortgage loans from members for the Bank’s own portfolio under the Original MPF and MPF Government products. In addition, the Bank facilitates the purchase of fixed rate mortgage loans from members for concurrent sale to Fannie Mae under the MPF Xtra® product. (“Mortgage Partnership Finance,” “MPF,” and “MPF Xtra” are registered trademarks of the FHLBank of Chicago.) The Bank has approved three participating financial institutions since renewing its participation in the MPF Program in the fourth quarter of 2013.

23

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

From May 2002 through October 2006, the Bank purchased conventional conforming fixed rate residential mortgage loans from its participating members under the Original MPF 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, 2014, and December 31, 2013, on mortgage loans, all of which are secured by one- to four-unit residential properties and single-unit second homes.

	September 30, 2014			December 31, 2013
Fixed rate medium-term mortgage loans	$	177		$	238
Fixed rate long-term mortgage loans	583			675
Subtotal	760			913
Unamortized premiums	8			10
Unamortized discounts	(12		)	(16		)
Mortgage loans held for portfolio	756			907
Less: Allowance for credit losses	(2		)	(2		)
Total mortgage loans held for portfolio, net	$	754		$	905

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

Concentration Risk. The Bank had the following concentration in MPF loans with institutions whose outstanding total of mortgage loans sold to the Bank represented 10% or more of the Bank’s total outstanding mortgage loans at September 30, 2014, and December 31, 2013.

September 30, 2014
Name of Institution	Mortgage Loan Balances Outstanding		Percentage of  Total Mortgage Loan Balances Outstanding		Number of Mortgage Loans Outstanding	Percentage of Total Number of Mortgage  Loans Outstanding
JPMorgan Chase Bank, National Association(1)	$	605	80	%	6,534	69	%
OneWest Bank, N.A.	92		12		2,209	23
Subtotal	697		92		8,743	92
Others	63		8		761	8
Total	$	760	100	%	9,504	100	%
December 31, 2013
Name of Institution	Mortgage Loan Balances Outstanding		Percentage of  Total Mortgage Loan Balances Outstanding		Number of Mortgage Loans Outstanding	Percentage of Total Number of Mortgage  Loans Outstanding
JPMorgan Chase Bank, National Association(1)	$	715	78	%	7,355	69	%
OneWest Bank, FSB	120		13		2,510	23
Subtotal	835		91		9,865	92
Others	78		9		883	8
Total	$	913	100	%	10,748	100	%

(1) Nonmember institution.

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.

24

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

Note 9 — Allowance for Credit Losses

The Bank has established an allowance methodology for each of its portfolio segments: 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 2013 Form 10-K.

Credit Products. The Bank manages its credit exposure related to credit products through an integrated approach that generally provides for a credit limit to be established for each borrower, includes an ongoing review of each borrower’s financial condition, and is coupled with conservative collateral and lending policies to limit the risk of loss while taking into account borrowers’ needs for a reliable funding source. At September 30, 2014, and December 31, 2013, none of the Bank’s credit products were past due, on nonaccrual status, or considered impaired. There were no troubled debt restructurings related to credit products during the nine months ended September 30, 2014, or during 2013.

Based on the collateral pledged as security for advances, the Bank’s credit analyses of borrowers’ financial condition, and the Bank’s credit extension and collateral policies as of September 30, 2014, the Bank expects to collect all amounts due according to the contractual terms. Therefore, no allowance for losses on credit products was deemed necessary by the Bank. The Bank has never experienced any credit losses on its credit products.

Nomember institutions were placed into receivershipduring the first nine months of 2014 or from October 1 to October 31, 2014.

Mortgage Loans Held for Portfolio. The following table presents information on delinquent mortgage loans as of September 30, 2014, and December 31, 2013.

	September 30, 2014			December 31, 2013
	Recorded Investment(1)			Recorded Investment(1)
30 – 59 days delinquent	$	12		$	14
60 – 89 days delinquent	4			7
90 days or more delinquent	24			27
Total past due	40			48
Total current loans	719			863
Total mortgage loans	$	759		$	911
In process of foreclosure, included above(2)	$	11		$	17
Nonaccrual loans	$	24		$	27
Serious delinquencies as a percentage of total mortgage loans outstanding(3)	3.15		%	3.00		%

(1) The recorded investment in a loan is the unpaid principal balance of the loan, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts, and direct write-downs. The recorded investment is not net of any valuation allowance.

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

(3) Represents loans that are 90 days or more past due or in the process of foreclosure as a percentage of the recorded investment of total mortgage loans outstanding. The ratio increased primarily because of the decline in the recorded investment of the Bank’s mortgage loans.

The allowance for credit losses on the mortgage loan portfolio was as follows:

25

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	Three Months Ended						Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014		September 30, 2013
Balance, beginning of the period	$	2		$	3		$	2	$	3
(Charge-offs)/recoveries	1			(1		)	—		(1		)
Provision for/(reversal of) credit losses	(1		)	—			—		—
Balance, end of the period	$	2		$	2		$	2	$	2

The allowance for credit losses and recorded investment by impairment methodology for individually and collectively evaluated impaired loans are as follows:

	September 30, 2014		December 31, 2013
Allowance for credit losses, end of period:
Individually evaluated for impairment	$	2	$	2
Recorded investment, end of period:
Individually evaluated for impairment	$	22	$	27
Collectively evaluated for impairment	737		884
Total recorded investment	$	759	$	911

The recorded investment, unpaid principal balance, and related allowance of impaired loans individually evaluated for impairment are as follows:

	September 30, 2014						December 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance	$	16	$	16	$	—	$	20	$	20	$	—
With an allowance	6		6		2		7		7		2
Total	$	22	$	22	$	2	$	27	$	27	$	2

The average recorded investment on impaired loans individually evaluated for impairment is as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2014		September 30, 2013		September 30, 2014		September 30, 2013
With no related allowance	$	17	$	19	$	18	$	19
With an allowance	7		10		7		11
Total	$	24	$	29	$	25	$	30

The Bank and any participating financial institution share in the credit risk of the loans sold by that institution as specified in a master agreement. Loans purchased under the MPF Program generally had a credit risk exposure at the time of purchase equivalent to AA-rated assets taking into consideration the credit risk sharing structure mandated by the Finance Agency’s acquired member assets (AMA) regulation. The Bank holds additional risk-based capital when it determines that purchased loans do not have a credit risk exposure equivalent to AA-rated assets. 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 for the member selling the loans, as follows:

1. The first layer of protection against loss is the liquidation value of the real property securing the loan.

26

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

2. The next layer of protection comes from the primary mortgage insurance that is required for loans with a loan-to-value ratio greater than 80%, if still in place.

3. Losses that exceed the liquidation value of the real property and any primary mortgage insurance, up to an agreed-upon amount called the first loss account for each master commitment, are incurred by the Bank.

4. Losses in excess of the first loss account for each master commitment, up to an agreed-upon amount called the credit enhancement amount, are covered by the participating institution’s credit enhancement obligation at the time losses are incurred.

5. Losses in excess of the first loss account and the participating institution’s remaining credit enhancement for the master commitment, if any, are incurred by the Bank.

The Bank calculates its estimated allowance for credit losses on mortgage loans acquired under the Original MPF and MPF Plus products as described below.

Allowance for Credit Losses on MPF Loans –The Bank evaluates the allowance for credit losses on MPF mortgage loans based on two components. The first component applies to each individual loan that is specifically identified as impaired. The Bank evaluates the exposure on these loans by considering the first layer of loss protection (the liquidation value of the real property securing the loan) and the availability and collectability of credit enhancements under the terms of each master commitment and records a provision for credit losses. For this component, the Bank established an allowance for credit losses for Original MPF loans totaling de minimis amounts as of September 30, 2014, and December 31, 2013, and for MPF Plus loans totaling $2 as of September 30, 2014, and $2 as of December 31, 2013.

The second component applies to loans that are not specifically identified as impaired and is based on the Bank’s estimate of probable credit losses on those loans as of the financial statement date. The Bank evaluates the credit loss exposure on a loan pool basis considering various observable data, such as delinquency statistics, past performance, current performance, loan portfolio characteristics, collateral valuations, industry data, and prevailing economic conditions. The Bank also considers the availability and collectability of credit enhancements from institutions or from mortgage insurers under the terms of each master commitment. For this component, the Bank established an allowance for credit losses for Original MPF loans totaling de minimis amounts as of September 30, 2014, and December 31, 2013, and for MPF Plus loans totaling de minimis amounts as of September 30, 2014, and December 31, 2013.

Troubled Debt Restructurings –Troubled debt restructuring (TDR) is considered to have occurred when a concession is granted to the debtor for economic or legal reasons related to the debtor’s financial difficulties and that concession would not have been considered otherwise. An MPF loan considered a TDR is individually evaluated for impairment when determining its related allowance for credit losses. Credit loss is measured by factoring in expected cash flow shortfalls incurred as of the reporting date as well as the economic loss attributable to delaying the original contractual principal and interest due dates, if applicable.

The Bank’s TDRs of MPF loans primarily involve modifying the borrower’s monthly payment for a period of up to 36 months to reflect a housing expense ratio that is no more than 31% of the borrower’s qualifying monthly income. The outstanding principal balance is re-amortized to reflect a principal and interest payment for a term not to exceed 40 years from the original note date and a housing expense ratio not to exceed 31%. This would result in a balloon payment at the original maturity date of the loan because the maturity date and number of remaining monthly payments are not adjusted. If the 31% ratio is still not achieved through re-amortization, the interest rate is reduced in 0.125% increments below the original note rate, to a floor rate of 3.00%, resulting in reduced principal and interest payments, for the temporary payment modification period of up to 36 months, until the 31% housing expense ratio is met. 

The recorded investment of the Bank's nonperforming MPFloans classified as TDRs totaled $2.0 as of September 30, 2014, and $0.8 as of December 31, 2013. Duringthe nine months endedSeptember 30, 2014 and 2013, the amount of the difference between the pre- and post-modification recorded investment in TDRs that

27

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

occurred during the year was de minimis.None of the MPF loans classified as TDRs within the previous 12 months experienced a payment default.

Term Securities Purchased Under Agreements to Resell. Securities purchased under agreements to resell are considered collateralized financing arrangements and effectively represent short-term loans with counterparties that are considered by the Bank to be of investment quality, which are classified as assets in the Statements of Condition. Securities purchased under agreements to resell are held in safekeeping in the name of the Bank by third-party custodians approved by the Bank. In accordance with the terms of these loans, if the market value of the underlying securities decreases below the market value required as collateral, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash. If an agreement to resell is deemed to be impaired, the difference between the fair value of the collateral and the amortized cost of the agreement is charged to earnings. The Bank did not have any term securities purchased under agreements to resell at September 30, 2014, and December 31, 2013.

Term Federal Funds Sold. The Bank invests in Federal funds sold with counterparties that are considered by the Bank to be of investment quality, and these investments are evaluated for purposes of an allowance for credit losses only if the investment is not paid when due. All investments in Federal funds sold as of September 30, 2014, and December 31, 2013, were repaid or are expected to be repaid according to the contractual terms.

Note 10 — 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, 2014, and December 31, 2013, were as follows:

	September 30, 2014		December 31, 2013
Interest-bearing deposits:
Demand and overnight	$	201	$	190
Term	—		1
Other	—		1
Total interest-bearing deposits	201		192
Non-interest-bearing deposits	1		1
Total	$	202	$	193

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 rate payment terms for deposits at September 30, 2014, and December 31, 2013, are detailed in the following table:

28

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	September 30, 2014				December 31, 2013
	Amount Outstanding		Weighted Average Interest Rate		Amount Outstanding		Weighted Average Interest Rate
Interest-bearing deposits:
Fixed rate	$	—	—	%	$	1	0.01	%
Adjustable rate	201		0.01		191		0.01
Total interest-bearing deposits	201		0.01		192		0.01
Non-interest-bearing deposits	1		—		1		—
Total	$	202	0.01	%	$	193	0.01	%

The aggregate amount of time deposits with a denomination of $0.1 or more was zero at September 30, 2014. The aggregate amount of time deposits with a denomination of $0.1 or more was $1 at December 31, 2013, and these time deposits were scheduled to mature within three months.

Note 11 — Consolidated Obligations

Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are jointly issued by the FHLBanks through the Office of Finance, which serves as the FHLBanks’ agent. As provided by the FHLBank Act or by regulations governing the operations of the FHLBanks, all FHLBanks have joint and several liability for all FHLBank consolidated obligations. For a discussion of the joint and several liability regulation, see “Item 8. Financial Statements and Supplementary Data – Note 21 – Commitments and Contingencies” in the Bank’s 2013 Form 10-K. In connection with each issuance of consolidated obligations, each FHLBank specifies the type, term, and amount of debt it requests to have issued on its behalf. The Office of Finance tracks the amount of debt issued on behalf of each FHLBank. In addition, the Bank separately tracks and records as a liability its specific portion of the consolidated obligations issued and is the primary obligor for that portion of the consolidated obligations issued. The Finance Agency and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance.

Redemption Terms. The following is a summary of the Bank’s participation in consolidated obligation bonds at September 30, 2014, and December 31, 2013.

	September 30, 2014					December 31, 2013
Contractual Maturity	Amount Outstanding			Weighted Average Interest Rate		Amount Outstanding			Weighted Average Interest Rate
Within 1 year	$	22,852		0.33	%	$	26,161		0.40	%
After 1 year through 2 years	7,218			1.09		7,101			0.80
After 2 years through 3 years	7,830			2.85		7,740			2.94
After 3 years through 4 years	2,905			1.79		1,963			2.50
After 4 years through 5 years	3,178			1.69		2,420			1.49
After 5 years	6,533			2.04		7,384			1.99
Total par value	50,516			1.22	%	52,769			1.17	%
Unamortized premiums	70					78
Unamortized discounts	(15		)			(16		)
Valuation adjustments for hedging activities	341					491
Fair value option valuation adjustments	(41		)			(115		)
Total	$	50,871				$	53,207

The Bank’s participation in consolidated obligation bonds outstanding includes callable bonds of $14,730 at September 30, 2014, and $13,042 at December 31, 2013. When a callable bond for which the Bank is the primary

29

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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 $10,518 at September 30, 2014, and $9,997 at December 31, 2013. 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 was as follows:

	September 30, 2014		December 31, 2013
Par value of consolidated obligation bonds:
Non-callable	$	35,786	$	39,727
Callable	14,730		13,042
Total par value	$	50,516	$	52,769

The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding at September 30, 2014, and December 31, 2013, by the earlier of the year of contractual maturity or next call date.

Earlier of Contractual Maturity or Next Call Date	September 30, 2014		December 31, 2013
Within 1 year	$	35,672	$	36,093
After 1 year through 2 years	6,929		6,046
After 2 years through 3 years	5,614		7,550
After 3 years through 4 years	1,260		1,478
After 4 years through 5 years	470		830
After 5 years	571		772
Total par value	$	50,516	$	52,769

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:

	September 30, 2014					December 31, 2013
	Amount Outstanding			Weighted Average Interest Rate		Amount Outstanding			Weighted Average Interest Rate
Par value	$	24,434		0.07	%	$	24,199		0.10	%
Unamortized discounts	(3		)			(5		)
Total	$	24,431				$	24,194

Interest Rate Payment Terms. Interest rate payment terms for consolidated obligations at September 30, 2014, and December 31, 2013, are detailed in the following table. For information on the general terms and types of consolidated obligations outstanding, see “Item 8. Financial Statements and Supplementary Data – Note 12 – Consolidated Obligations” in the Bank’s 2013 Form 10-K.

30

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	September 30, 2014		December 31, 2013
Par value of consolidated obligations:
Bonds:
Fixed rate	$	40,729	$	38,489
Adjustable rate	5,590		11,218
Step-up	3,345		2,460
Step-down	450		340
Fixed rate that converts to adjustable rate	402		262
Total bonds, par value	50,516		52,769
Discount notes, par value	24,434		24,199
Total consolidated obligations, par value	$	74,950	$	76,968

The Bank did not have any bonds with embedded features that met the requirements to separate the embedded feature from the host contract and designate the embedded feature as a stand-alone derivative at September 30, 2014, or December 31, 2013. In general, the Bank has elected to account for bonds with embedded features under the fair value option, and these bonds are carried at fair value on the Statements of Condition. For more information, see Note 16 – Fair Value.

Note 12 — Accumulated Other Comprehensive Income/(Loss)

The following table summarizes the changes in AOCI for the three months ended September 30, 2014 and 2013:

	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, 2013	$	(313	)	$	(30	)	$	(11	)	$	(354	)
Other comprehensive income/(loss) before reclassifications:
Net change in pension and postretirement benefits							(2		)	(2		)
Non-credit-related OTTI loss	—			(1		)				(1		)
Non-credit-related OTTI loss transferred	(1		)	1						—
Net change in fair value	82									82
Accretion of non-credit-related OTTI loss	—			1						1
Reclassification from other comprehensive income/(loss) to net income/(loss):
Non-credit-related OTTI to credit-related OTTI	(1		)	—						(1		)
Net current period other comprehensive income/(loss)	80			1			(2		)	79
Balance, September 30, 2013	$	(233	)	$	(29	)	$	(13	)	$	(275	)
Balance, June 30, 2014	$	47		$	(24	)	$	(7	)	$	16
Other comprehensive income/(loss) before reclassifications:
Net change in pension and postretirement benefits							1			1
Net change in fair value	77			—						77
Accretion of non-credit-related OTTI loss	—			2						2
Net current period other comprehensive income/(loss)	77			2			1			80
Balance, September 30, 2014	$	124		$	(22	)	$	(6	)	$	96

The following table summarizes the changes in AOCI for the nine months ended September 30, 2014 and 2013:

31

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, 2012	$	(748	)	$	(34	)	$	(12	)	$	(794	)
Other comprehensive income/(loss) before reclassifications:
Net change in pension and postretirement benefits							(1		)	(1		)
Non-credit-related OTTI loss	—			(4		)				(4		)
Non-credit-related OTTI loss transferred	(4		)	4						—
Net change in fair value	522									522
Accretion of non-credit-related OTTI loss	—			5						5
Reclassification from other comprehensive income/(loss) to net income/(loss):
Non-credit-related OTTI to credit-related OTTI	(3		)	—						(3		)
Net current period other comprehensive income/(loss)	515			5			(1		)	519
Balance, September 30, 2013	$	(233	)	$	(29	)	$	(13	)	$	(275	)
Balance, December 31, 2013	$	(111	)	$	(27	)	$	(7	)	$	(145	)
Other comprehensive income/(loss) before reclassifications:
Net change in pension and postretirement benefits							1			1
Net change in fair value	237									237
Accretion of non-credit-related OTTI loss	—			5						5
Reclassification from other comprehensive income/(loss) to net income/(loss):
Non-credit-related OTTI to credit-related OTTI	(2		)	—						(2		)
Net current period other comprehensive income/(loss)	235			5			1			241
Balance, September 30, 2014	$	124		$	(22	)	$	(6	)	$	96

Note 13 — 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. 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 Finance Agency may require an FHLBank to maintain a greater amount of permanent capital than is required by the risk-based capital requirement as defined.

As of September 30, 2014, and December 31, 2013, the Bank was in compliance with these capital rules and requirements as shown in the following table.

32

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	September 30, 2014						December 31, 2013
	Required			Actual			Required			Actual
Risk-based capital	$	3,425		$	6,762		$	3,912		$	7,925
Total regulatory capital	$	3,312		$	6,762		$	3,431		$	7,925
Total regulatory capital ratio	4.00		%	8.17		%	4.00		%	9.24		%
Leverage capital	$	4,139		$	10,143		$	4,289		$	11,888
Leverage ratio	5.00		%	12.25		%	5.00		%	13.86		%

Mandatorily Redeemable Capital Stock. The Bank had mandatorily redeemable capital stock totaling $1,076 outstanding to 34 institutions at September 30, 2014, and $2,071 outstanding to 44 institutions at December 31, 2013. The change in mandatorily redeemable capital stock for the three and nine months ended September 30, 2014 and 2013, was as follows:

	Three Months Ended						Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Balance at the beginning of the period	$	1,176		$	3,464		$	2,071		$	4,343
Reclassified from capital during the period	1			2			3			3
Redemption of mandatorily redeemable capital stock	(3		)	(436		)	(18		)	(437		)
Repurchase of excess mandatorily redeemable capital stock	(98		)	(442		)	(980		)	(1,321		)
Balance at the end of the period	$	1,076		$	2,588		$	1,076		$	2,588

Cash dividends on mandatorily redeemable capital stock were recorded as interest expense in the amount of $26 and $99 for the three and nine months ended September 30, 2014, respectively, and in the amount of $47 and $109 for the three and nine months ended September 30, 2013, respectively.

The Bank’s mandatorily redeemable capital stock is discussed more fully in “Item 8. Financial Statements and Supplementary Data – Note 16 – Capital” in the Bank’s 2013 Form 10-K.

The following table presents mandatorily redeemable capital stock amounts by contractual redemption period at September 30, 2014, and December 31, 2013.

Contractual Redemption Period	September 30, 2014		December 31, 2013
Within 1 year	$	290	$	571
After 1 year through 2 years	702		111
After 2 years through 3 years	2		1,289
After 3 years through 4 years	9		20
After 4 years through 5 years	3		3
Past contractual redemption date because of remaining activity(1)	70		77
Total	$	1,076	$	2,071

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

33

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

under certain circumstances, if the Bank fails to satisfy certain liquidity requirements under applicable Finance Agency regulations.

The Bank’s Risk Management Policy limits the payment of dividends if the ratio of the Bank’s estimated market value of total capital to par value of capital stock falls below certain levels. If this ratio at the end of any quarter is less than 100% but greater than or equal to 70%, any dividend would be limited to an annualized rate no greater than the daily average of the three-month LIBOR for the applicable quarter (subject to certain conditions), and if this ratio is less than 70%, the Bank would be restricted from paying a dividend. The ratio of the Bank’s estimated market value of total capital to par value of capital stock was 163% as of September 30, 2014.

In addition, the Bank monitors the condition of its PLRMBS portfolio, the ratio of the estimated market value of the Bank’s capital to the par value of the Bank’s 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.

Retained Earnings - The Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework establishes amounts to be retained in restricted retained earnings, which are not made available in the current dividend period.

The following table summarizes the activity related to restricted retained earnings for the three and nine months ended September 30, 2014 and 2013:

	Three Months Ended
	September 30, 2014								September 30, 2013
	Restricted Retained Earnings Related to:								Restricted Retained Earnings Related to:
	Valuation Adjustments		Targeted Buildup		Joint Capital Enhancement Agreement		Total		Valuation Adjustments			Targeted Buildup		Joint Capital Enhancement Agreement		Total
Balance at the beginning of the period	$	49	$	1,800	$	206	$	2,055	$	92		$	1,800	$	164	$	2,056
Transfers to/(from) restricted retained earnings	3		—		15		18		(10		)	—		10		—
Balance at the end of the period	$	52	$	1,800	$	221	$	2,073	$	82		$	1,800	$	174	$	2,056

	Nine Months Ended
	September 30, 2014										September 30, 2013
	Restricted Retained Earnings Related to:										Restricted Retained Earnings Related to:
	Valuation Adjustments			Targeted Buildup		Joint Capital Enhancement Agreement		Total			Valuation Adjustments		Targeted Buildup		Joint Capital Enhancement Agreement		Total
Balance at the beginning of the period	$	88		$	1,800	$	189	$	2,077		$	73	$	1,800	$	128	$	2,001
Transfers to/(from) restricted retained earnings	(36		)	—		32		(4		)	9		—		46		55
Balance at the end of the period	$	52		$	1,800	$	221	$	2,073		$	82	$	1,800	$	174	$	2,056

For more information on these three categories of restricted retained earnings and the Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework, see “Item 8. Financial Statements and Supplementary Data – Note 16 – Capital” in the Bank’s 2013 Form 10-K.

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

34

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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, 2014, the Bank’s excess capital stock totaled $1,449, or 1.75% of total assets.

In the third quarter of 2014, the Bank paid dividends at an annualized rate of 7.35%, totaling $87, including $61 in dividends on capital stock and $26 in dividends on mandatorily redeemable capital stock. In the third quarter of 2013, the Bank paid dividends at an annualized rate of 5.14%, totaling $96, including $49 in dividends on capital stock and $47 in dividends on mandatorily redeemable capital stock.

In the first nine months of 2014, the Bank paid dividends at an annualized rate of 6.91%, totaling $277, including $178 in dividends on capital stock and $99 in dividends on mandatorily redeemable capital stock. In the first nine months of 2013, the Bank paid dividends at an annualized rate of 3.52%, totaling $218, including $109 in dividends on capital stock and $109 in dividends on mandatorily redeemable capital stock.

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

On October 29, 2014, the Bank’s Board of Directors declared a cash dividend on the capital stock outstanding during the third quarter of 2014 at an annualized rate of 7.40%, totaling $83, including $62 in dividends on capital stock and $21 in dividends on mandatorily redeemable capital stock. The Bank recorded the dividend on October 29, 2014, the day it was declared by the Board of Directors. The Bank expects to pay the dividend on or about November 17, 2014. Dividends on mandatorily redeemable capital stock will be recognized as interest expense in the fourth quarter of 2014.

Excess Capital Stock – The Bank may repurchase some or all of a shareholder’s excess capital stock, including any excess mandatorily redeemable capital stock, at the Bank’s discretion, subject to certain statutory and regulatory requirements. The Bank must give the shareholder 15 days’ written notice; however, the shareholder may waive this notice period. The Bank may also repurchase some or all of a shareholder’s excess capital stock at the shareholder’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.

On a quarterly basis, the Bank determines whether it will repurchase excess capital stock. The Bank repurchased $750, $750, and $250 in excess capital stock in the first, second, and third quarters of 2014, respectively. The Bank repurchased $750 in excess capital stock in the first, second, and third quarters of 2013.

During the third quarter of 2014, the five-year redemption period for $3 in mandatorily redeemable capital stock expired, and the Bank redeemed the capital stock at its $100 par value on the relevant scheduled redemption date.

On October 29, 2014, the Bank announced that it plans to repurchase $250 in excess capital stock on November 18, 2014. The amount of excess capital stock to be repurchased from each shareholder will be based on the total amount of capital stock (including mandatorily redeemable capital stock) outstanding to all shareholders on the repurchase date. The Bank will repurchase an equal percentage of each shareholder’s total capital stock to the extent that the shareholder has sufficient excess capital stock.

Excess capital stock totaled $1,449 as of September 30, 2014, and $2,446 as of December 31, 2013.

35

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

For more information on excess capital stock, see “Item 8. Financial Statements and Supplementary Data – Note 16 – Capital” in the Bank’s 2013 Form 10-K.

Concentration. The following table presents the concentration in capital stock held by institutions whose capital stock ownership represented 10% or more of the Bank’s outstanding capital stock, including mandatorily redeemable capital stock, as of September 30, 2014, or December 31, 2013.

	September 30, 2014				December 31, 2013
Name of Institution	Capital Stock Outstanding		Percentage of Total Capital Stock Outstanding		Capital Stock Outstanding		Percentage of Total Capital Stock Outstanding
Citigroup Inc.:
Citibank, N.A.(1)	$	648	15	%	$	1,279	23	%
Banamex USA	2		—		1		—
Subtotal Citigroup Inc.	650		15		1,280		23
JPMorgan Chase & Co.:
JPMorgan Bank & Trust Company, National Association	301		7		594		11
JPMorgan Chase Bank, National Association(1)	70		1		77		1
Subtotal JPMorgan Chase & Co.	371		8		671		12
Subtotal	1,021		23		1,951		35
Others	3,365		77		3,580		65
Total	$	4,386	100	%	$	5,531	100	%

(1) The capital stock held by these nonmember institutions is classified as mandatorily redeemable capital stock.

Note 14 — Segment Information

The Bank uses an analysis of financial performance based on the balances and adjusted net interest income of two operating segments, the advances-related business and the mortgage-related business, as well as other financial information, to review and assess financial performance and to determine the allocation of resources to these two major business segments. For purposes of segment reporting, adjusted net interest income includes income and expense associated with cash flow settlements from economic hedges that are recorded in “Net gain/(loss) on derivatives and hedging activities” in other income and excludes interest expense that is recorded in “Mandatorily redeemable capital stock.” Other key financial information, such as any credit-related OTTI losses on the Bank’s PLRMBS, other expenses, and assessments, is not included in the segment reporting analysis, but is incorporated into the Bank’s overall assessment of financial performance.

For more information on these operating segments, see “Item 8. Financial Statements and Supplementary Data – Note 18 – Segment Information” in the Bank’s 2013 Form 10-K.

The following table presents the Bank’s adjusted net interest income by operating segment and reconciles total adjusted net interest income to income before the AHP assessment for the three and nine months ended September 30, 2014 and 2013.

36

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, 2014	$	46	$	99	$	145	$	(3	)	$	(12	)	$	26	$	134	$	(12	)	$	34	$	88
September 30, 2013	41		113		154		(11		)	4			47		114		(22		)	32		60
Nine months ended:
September 30, 2014	129		314		443		(9		)	(53		)	99		406		(114		)	103		189
September 30, 2013	129		335		464		(44		)	44			109		355		10			93		272

(1) Does not include credit-related OTTI losses of $1 and $3 for the three months ended September 30, 2014 and 2013, respectively. Does not include credit-related OTTI losses of $3 and $6 for the nine months ended September 30, 2014 and 2013, 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 cash flow settlements from economic hedges in adjusted net interest income in its analysis of financial performance for its two operating segments. For financial reporting purposes, the Bank does not include these amounts in net interest income in the Statements of Income, but instead records them in other income in “Net gain/(loss) on derivatives and hedging activities.”

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

The following table presents total assets by operating segment at September 30, 2014, and December 31, 2013.

	Advances- Related Business		Mortgage- Related Business		Total Assets
September 30, 2014	$	61,495	$	21,294	$	82,789
December 31, 2013	62,297		23,477		85,774

Note 15 — Derivatives and Hedging Activities

General. The Bank may enter into interest rate swaps (including callable, putable, and basis swaps); swaptions; and cap, floor, corridor, and collar agreements (collectively, interest rate exchange agreements or derivatives). Most of the Bank’s interest rate exchange agreements are executed in conjunction with the origination of advances and the issuance of consolidated obligation bonds to create variable rate structures. The interest rate exchange agreements are generally executed at the same time the advances and bonds are transacted and generally have the same maturity dates as the related advances and bonds. 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 derivatives may be either transacted with a counterparty (bilateral derivatives) or cleared after execution through a clearing agent with a derivative clearing organization (cleared derivatives). Once a derivative transaction has been accepted for clearing by a derivative clearing organization (clearinghouse), the derivative transaction is novated and the executing counterparty is replaced with the clearinghouse. The clearinghouse notifies the clearing agent of the required initial and variation margin, and the clearing agent notifies the Bank and transmits the required initial and variation margin from the Bank to the clearinghouse. The Bank is not a derivative 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 that may be executed with members (with the Bank serving as an intermediary) or cleared at a derivatives clearing organization. The Bank’s use of interest rate exchange

37

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

agreements results in one of the following classifications: (i) a fair value hedge of an underlying financial instrument, (ii) an economic hedge of a specific asset or liability, or (iii) an intermediary transaction for members.

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.

Swaptions – A swaption is an option on a swap that gives the buyer the right to enter into a specified interest rate swap at a certain time in the future. When used as a hedge, for example, a swaption can protect the Bank against future interest rate changes when it is planning to lend or borrow funds in the future.

Interest Rate Caps and Floors – In a cap agreement, additional cash flow is generated if the price or interest rate of an underlying variable 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 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 all relationships between derivative hedging instruments and hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value or cash flow hedges to: (i) assets and liabilities on the balance sheet, (ii) firm commitments, or (iii) forecasted transactions. The Bank also formally assesses (both at the hedge’s inception and at least quarterly on an ongoing basis) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value or cash flows of hedged items attributable to the hedged risk and whether those derivatives may be expected to remain effective in future periods. The Bank typically uses regression analyses or other statistical analyses to assess the effectiveness of its hedges. When it is determined that a derivative has not been or is not expected to be effective as a hedge, the Bank discontinues hedge accounting prospectively.

The Bank discontinues hedge accounting prospectively when: (i) it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (ii) the derivative and/or the hedged item expires or is sold, terminated, or exercised; (iii) it is no longer probable that the forecasted transaction will occur in the originally expected period; (iv) a hedged firm commitment no longer meets the definition of a firm commitment; (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.

Intermediation– 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. Derivatives in which the Bank is an intermediary may also arise when the Bank enters into derivatives to offset the economic effect of other derivatives that are no longer designated to advances, investments, or consolidated obligations. The offsetting derivatives used in intermediary activities do not receive hedge accounting treatment and are separately marked to market through earnings. The net result of the accounting for these derivatives does not significantly affect the operating results of the Bank.

The notional principal of the interest rate exchange agreements resulting from intermediation was $530 at September 30, 2014, and $330 at December 31, 2013.

38

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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 or swaptions. The Bank may execute callable swaps and purchase swaptions 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 array 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 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.

Mortgage Loans–The Bank’s investment portfolio includes fixed rate mortgage loans. The prepayment options embedded in mortgage loans can result in extensions or contractions in the expected repayment of these investments, depending on changes in estimated prepayment speeds. The Bank manages the interest rate risk and prepayment risk associated with fixed rate mortgage loans through a combination of debt issuance and derivatives. The Bank uses both callable and non-callable debt to achieve cash flow patterns and market value sensitivities for liabilities similar to those expected on the mortgage loans. Net income could be reduced if the Bank replaces prepaid mortgages with lower-yielding assets and the Bank’s higher funding costs are not reduced accordingly.

The Bank executes callable swaps and purchases swaptions 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 are structured to meet the Bank’s and/or 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 with these structures are issued, the Bank will simultaneously execute an interest rate exchange agreement with terms that offset the terms and embedded options, if any, of the consolidated obligation bond. This combination of the consolidated obligation bond and the interest rate exchange agreement effectively creates 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. The Bank will generally elect fair value hedge accounting treatment for these hedging relationships.

39

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

In addition, for certain consolidated obligation bonds 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 consolidated obligation bond. However, this type of hedge is treated as an economic hedge because these combinations generally do not meet the requirements for fair value hedge accounting treatment.

The Bank did not have any consolidated obligations denominated in currencies other than U.S. dollars outstanding during the nine months ended September 30, 2014, or the year ended December 31, 2013.

Credit Risk – The Bank is subject to credit risk as a result of the risk of potential nonperformance by counterparties to the derivative agreements. All of the Bank’s agreements governing bilateral 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 and credit guidelines and Finance Agency regulations. The Bank also requires collateral agreements with collateral delivery thresholds on all bilateral derivatives. In addition, collateral related to derivative transactions with member institutions includes collateral pledged to the Bank, as evidenced by the Advances and Security Agreement, and held by the member institution for the benefit of the Bank.

For cleared derivatives, the clearinghouse is the Bank’s counterparty. The requirement that the Bank post initial and variation margin through the clearing agent, to the clearinghouse, exposes the Bank to institutional credit risk in the event that the clearing agent or the clearinghouse fails to meet its obligations. The use of cleared derivatives, however, mitigates the Bank’s overall credit risk exposure because a central counterparty is substituted for individual counterparties and variation margin is posted daily for changes in the value of cleared derivatives through a clearing agent. 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 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 Bank’s agreements for bilateral derivative transactions contain provisions that link the Bank’s credit rating from Moody’s and Standard & Poor’s to various rights and obligations. Certain of these derivative agreements provide that, if the Bank’s long-term debt rating falls below A3/A- (and in one agreement, below A2/A), the Bank’s counterparty would have the right, but not the obligation, to terminate all of its outstanding derivative transactions with the Bank; the Bank’s agreements with its clearing agents for cleared derivative transactions have similar provisions with respect to the debt rating of FHLBank System consolidated bonds. If this occurs, the Bank may choose to enter into replacement hedges, either by transferring the existing transactions to another counterparty or entering into new replacement transactions, based on prevailing market rates. In addition, under some of its agreements for bilateral derivative transactions, the amount of collateral that the Bank is required to deliver to a counterparty depends on the Bank’s credit rating. The aggregate fair value of all bilateral derivative instruments with credit-risk-related contingent features that were in a net derivative liability position (before cash collateral and related accrued interest) at September 30, 2014, was $54, for which the Bank had posted collateral with a fair value of $33 in the normal course of business. If the Bank’s credit rating at September 30, 2014, had been Aa/AA (the next lower rating that might require an increase in collateral to be delivered by the Bank) instead of Aaa/AA+ (the Bank’s

40

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

current rating), then the Bank would have been required to deliver up to a total of $10 of collateral (at fair value) to its derivative counterparties at September 30, 2014.

The following table summarizes the fair value of derivative instruments including the effect of netting adjustments and cash collateral as of September 30, 2014, and December 31, 2013. For purposes of this disclosure, the derivative values include the fair value of derivatives and related accrued interest.

	September 30, 2014								December 31, 2013
	Notional Amount of Derivatives		Derivative Assets			Derivative Liabilities			Notional Amount of Derivatives		Derivative Assets			Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate swaps	$	33,682	$	466		$	99		$	31,395	$	572		$	156
Total	33,682		466			99			31,395		572			156
Derivatives not designated as hedging instruments:
Interest rate swaps	33,090		97			131			49,715		146			242
Interest rate caps, floors, corridors, and/or collars	2,636		11			2			460		2			4
Total	35,726		108			133			50,175		148			246
Total derivatives before netting and collateral adjustments	$	69,408	574			232			$	81,570	720			402
Netting adjustments by counterparty			(177		)	(177		)			(313		)	(313		)
Cash collateral and related accrued interest			(328		)	(28		)			(291		)	(42		)
Total collateral and netting adjustments(1)			(505		)	(205		)			(604		)	(355		)
Total derivative assets and total derivative liabilities			$	69		$	27				$	116		$	47

(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.

The following table presents the components of net gain/(loss) on derivatives and hedging activities as presented in the Statements of Income for the three and nine months ended September 30, 2014 and 2013.

	Three Months Ended						Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
	Gain/(Loss)			Gain/(Loss)			Gain/(Loss)			Gain/(Loss)
Derivatives and hedged items in fair value hedging relationships – hedge ineffectiveness by derivative type:
Interest rate swaps	$	(1	)	$	(1	)	$	(6	)	$	(2	)
Total net gain/(loss) related to fair value hedge ineffectiveness	(1		)	(1		)	(6		)	(2		)
Derivatives not designated as hedging instruments:
Economic hedges:
Interest rate swaps	18			(6		)	38			(28		)
Interest rate caps, floors, corridors and/or collars	(5		)	1			(13		)	2
Net cash flow settlements	(12		)	4			(53		)	44
Total net gain/(loss) related to derivatives not designated as hedging instruments	1			(1		)	(28		)	18
Net gain/(loss) on derivatives and hedging activities	$	—		$	(2	)	$	(34	)	$	16

41

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

The following table presents, 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, 2014 and 2013.

	Three Months Ended
	September 30, 2014												September 30, 2013
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	$	56		$	(55	)	$	1		$	(32	)	$	(16	)	$	16	$	—		$	(33	)
Consolidated obligation bonds	(77		)	75			(2		)	65			(40		)	39		(1		)	86
Total	$	(21	)	$	20		$	(1	)	$	33		$	(56	)	$	55	$	(1	)	$	53

	Nine Months Ended
	September 30, 2014												September 30, 2013
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	$	43		$	(42	)	$	1		$	(98	)	$	143		$	(141	)	$	2		$	(94	)
Consolidated obligation bonds	(153		)	146			(7		)	197			(315		)	311			(4		)	299
Total	$	(110	)	$	104		$	(6	)	$	99		$	(172	)	$	170		$	(2	)	$	205

(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.

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 presents separately the fair value of derivative assets and derivative liabilities that have met the netting requirements, including the related collateral received from or pledged to counterparties as of September 30, 2014, and December 31, 2013.

42

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	September 30, 2014						December 31, 2013
	Derivative Assets			Derivative Liabilities			Derivative Assets			Derivative Liabilities
Derivative instruments meeting netting requirements
Gross recognized amount
Bilateral derivatives	$	448		$	212		$	699		$	395
Cleared derivatives	126			20			21			7
Total gross recognized amount	574			232			720			402
Gross amounts of netting adjustments and cash collateral
Bilateral derivatives	(407		)	(185		)	(604		)	(348		)
Cleared derivatives	(98		)	(20		)	—			(7		)
Total gross amount of netting adjustments and cash collateral	(505		)	(205		)	(604		)	(355		)
Total derivative assets and total derivative liabilities
Bilateral derivatives	41			27			95			47
Cleared derivatives	28			—			21			—
Total derivative assets and derivative liabilities presented in the Statements of Condition	69			27			116			47
Non-cash collateral received or pledged not offset
Can be sold or repledged - Bilateral derivatives	38			—			89			—
Net unsecured amount
Bilateral derivatives	3			27			6			47
Cleared derivatives	28			—			21			—
Total net unsecured amount	$	31		$	27		$	27		$	47

Note 16 — Fair Value

The following fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank at September 30, 2014, and December 31, 2013. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases fair values cannot be precisely quantified or verified and may change as economic and market factors and evaluation of those factors change. The Bank continues to refine its valuation methodologies as markets and products develop and the pricing for certain products becomes more or less transparent. While the Bank believes that its valuation methodologies are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a materially different estimate of fair value as of the reporting date. 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 carrying value, the estimated fair value, and the fair value hierarchy level of the Bank’s financial instruments at September 30, 2014, and December 31, 2013.

43

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	September 30, 2014
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3		Netting Adjustments(1)
Assets
Cash and due from banks	$	8,002	$	8,002	$	8,002	$	—	$	—	$	—
Securities purchased under agreements to resell	500		500		—		500		—		—
Federal funds sold	6,948		6,948		—		6,948		—		—
Trading securities	3,625		3,625		—		3,625		—		—
AFS securities	6,624		6,624		—		—		6,624		—
HTM securities	15,467		15,519		—		13,268		2,251		—
Advances	40,615		40,706		—		40,706		—		—
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans	754		815		—		815		—		—
Accrued interest receivable	71		71		—		71		—		—
Derivative assets, net(1)	69		69		—		574		—		(505		)
Other assets(2)	11		11		11		—		—		—
Liabilities
Deposits	202		202		—		202		—		—
Consolidated obligations:
Bonds	50,871		50,804		—		50,804		—		—
Discount notes	24,431		24,432		—		24,432		—		—
Total consolidated obligations	75,302		75,236		—		75,236		—		—
Mandatorily redeemable capital stock	1,076		1,076		1,076		—		—		—
Accrued interest payable	138		138		—		138		—		—
Derivative liabilities, net(1)	27		27		—		232		—		(205		)
Other
Standby letters of credit	12		12		—		12		—		—
Commitments to issue consolidated obligation bonds(3)	—		1		—		1		—		—

44

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	December 31, 2013
	Carrying Value		Estimated Fair Value			Level 1		Level 2			Level 3		Netting Adjustments(1)
Assets
Cash and due from banks	$	4,906	$	4,906		$	4,906	$	—		$	—	$	—
Federal funds sold	7,498		7,498			—		7,498			—		—
Trading securities	3,208		3,208			—		3,208			—		—
AFS securities	7,047		7,047			—		—			7,047		—
HTM securities	17,507		17,352			—		14,802			2,550		—
Advances	44,395		44,457			—		44,457			—		—
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans	905		956			—		956			—		—
Accrued interest receivable	81		81			—		81			—		—
Derivative assets, net(1)	116		116			—		720			—		(604		)
Other assets(2)	10		10			10		—			—		—
Liabilities
Deposits	193		193			—		193			—		—
Consolidated obligations:
Bonds	53,207		52,940			—		52,940			—		—
Discount notes	24,194		24,195			—		24,195			—		—
Total consolidated obligations	77,401		77,135			—		77,135			—		—
Mandatorily redeemable capital stock	2,071		2,071			2,071		—			—		—
Accrued interest payable	95		95			—		95			—		—
Derivative liabilities, net(1)	47		47			—		402			—		(355		)
Other
Standby letters of credit	12		12			—		12			—		—
Commitments to fund advances(3)	—		(1		)	—		(1		)	—		—

(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.

• Level 2 – Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for

45

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

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

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

The following assets and liabilities, including those for which the Bank has elected the fair value option, are carried at fair value on the Statements of Condition as of September 30, 2014:

• 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 the fair value hierarchy levels.

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.

Investment Securities – Certificates of Deposit –The estimated fair values of these investments are determined by calculating the present value of expected cash flows and reducing the amount for accrued interest receivable, using market-observable inputs as of the last business day of the period or using industry standard analytical models and certain actual and estimated market information. The discount rates used in these calculations are the replacement rates for comparable instruments with similar terms.

Investment Securities – MBS – To value its MBS, the Bank obtains prices from four 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.

In January 2014, the Bank conducted reviews of the four pricing vendors to update and confirm its understanding of the vendors’ pricing processes, methodologies, and control procedures.

46

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

The Bank’s valuation technique for estimating the fair values of its MBS first requires the establishment of a median vendor price for each security. If four vendor prices are received, the average of the middle two prices is the median price; 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 estimate of fair value, then the outlier (or the other price, as appropriate) is used as the fair value rather than the default fair value. If, instead, the analysis confirms that an outlier is (or outliers are) not representative of fair value and the default fair value is the best estimate, then the default fair value is used as the fair value.

If all vendor prices received for a security are outside the tolerance threshold level of the median price, then there is no default fair value, and the fair value is determined by an evaluation of all outlier prices (or the other prices, as appropriate) as described above.

As of September 30, 2014, four vendor prices were received for most of the Bank’s MBS, and the fair value estimates for most of those securities were determined by averaging the four 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 or significant yield variances, 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.

As an additional step, the Bank reviewed the fair value estimates of its PLRMBS as of September 30, 2014, for reasonableness using a market-implied yield test. The Bank calculated a market-implied yield for each of its PLRMBS using the estimated fair value derived from the process described above and the security’s projected cash flows from the Bank’s OTTI process and compared the market-implied yield to the yields for comparable securities according to dealers and other third-party sources to the extent comparable market yield data was available. This analysis did not indicate that any adjustments to the fair value estimates were necessary.

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 from derivative dealers 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

47

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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.

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.

Accrued Interest Receivable and Payable – The estimated fair value approximates the carrying value of accrued interest receivable and accrued interest payable.

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; 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; and prepayment assumptions.

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 bilateral 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 security 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 limited to an absolute dollar credit exposure limit according to the counterparty’s credit rating, as determined by rating agency long-term credit ratings of the counterparty’s debt securities or deposits. The Bank clears its cleared derivative transactions only through clearing agents that meet the Bank’s strict 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.

48

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 inputs for measuring the fair value of consolidated obligation bonds are market-based CO Curve inputs obtained from the Office of Finance. The Office of Finance constructs the CO Curve using the Treasury yield curve as a base curve, which may be adjusted by indicative 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 trades or secondary market activity. For consolidated obligation bonds with embedded options, the Bank also obtains market-observable quotes and inputs from derivative dealers. 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).

Adjustments may be necessary to reflect the Bank’s credit quality or the credit quality of the FHLBank System when valuing consolidated obligation bonds measured at fair value. The Bank monitors its own creditworthiness and the creditworthiness of the other 11 FHLBanks and the FHLBank System to determine whether any adjustments are necessary for creditworthiness in its fair value measurement of consolidated obligation bonds. The credit ratings of the FHLBank System and any changes to the credit ratings are the basis for the Bank to determine whether the fair values of consolidated obligations have been significantly affected during the reporting period by changes in the instrument-specific credit risk.

Mandatorily Redeemable Capital Stock –The estimated fair value of capital stock subject to mandatory redemption is generally at par valueas 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.

Fair Value Measurements. The tables below present the fair value of assets and liabilities, which are recorded on a recurring or nonrecurring basis at September 30, 2014, and December 31, 2013, by level within the fair value hierarchy.

49

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

September 30, 2014
	Fair Value Measurement Using:						Netting
	Level 1		Level 2		Level 3		Adjustments(1)			Total
Recurring fair value measurements – Assets:
Trading securities:
GSEs – FFCB bonds	$	—	$	3,613	$	—	$	—		$	3,613
MBS:
Other U.S. obligations – Ginnie Mae	—		12		—		—			12
Total trading securities	—		3,625		—		—			3,625
AFS securities:
PLRMBS	—		—		6,624		—			6,624
Total AFS securities	—		—		6,624		—			6,624
Advances(2)	—		5,149		—		—			5,149
Derivative assets, net: interest rate-related	—		574		—		(505		)	69
Other assets	11		—		—		—			11
Total recurring fair value measurements – Assets	$	11	$	9,348	$	6,624	$	(505	)	$	15,478
Recurring fair value measurements – Liabilities:
Consolidated obligation bonds(3)	$	—	$	7,145	$	—	$	—		$	7,145
Derivative liabilities, net: interest rate-related	—		232		—		(205		)	27
Total recurring fair value measurements – Liabilities	$	—	$	7,377	$	—	$	(205	)	$	7,172
Nonrecurring fair value measurements – Assets:
REO	$	—	$	—	$	1				$	1

December 31, 2013
	Fair Value Measurement Using:						Netting
	Level 1		Level 2		Level 3		Adjustments(1)			Total
Recurring fair value measurements – Assets:
Trading securities:
GSEs – FFCB bonds	$	—	$	3,194	$	—	$	—		$	3,194
MBS:
Other U.S. obligations – Ginnie Mae	—		14		—		—			14
Total trading securities	—		3,208		—		—			3,208
AFS securities:
PLRMBS	—		—		7,047		—			7,047
Total AFS securities	—		—		7,047		—			7,047
Advances(2)	—		7,069		—		—			7,069
Derivative assets, net: interest rate-related	—		720		—		(604		)	116
Other assets	10		—		—		—			10
Total recurring fair value measurements – Assets	$	10	$	10,997	$	7,047	$	(604	)	$	17,450
Recurring fair value measurements – Liabilities:
Consolidated obligation bonds(3)	$	—	$	10,115	$	—	$	—		$	10,115
Derivative liabilities, net: interest rate-related	—		402		—		(355		)	47
Total recurring fair value measurements – Liabilities	$	—	$	10,517	$	—	$	(355	)	$	10,162
Nonrecurring fair value measurements – Assets:
REO	$	—	$	—	$	2				$	2

(1) Amounts represent the netting of derivative assets and liabilities by counterparty, including cash collateral, where the netting requirements have been met.

(2) Includes $5,149 and $7,069 of advances recorded under the fair value option at September 30, 2014, and December 31, 2013, respectively. There were no advances recorded at fair value at September 30, 2014, or December 31, 2013, where the exposure to overall changes in fair value was hedged in accordance with the accounting for derivative instruments and hedging activities.

50

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

(3) Includes $7,145 and $10,115 of consolidated obligation bonds recorded under the fair value option at September 30, 2014, and December 31, 2013, respectively. There were no consolidated obligation bonds recorded at fair value at September 30, 2014, or December 31, 2013, where the exposure to overall changes in fair value was hedged in accordance with the accounting for derivative instruments and hedging activities.

The following table presents a reconciliation of the Bank’s AFS PLRMBS that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2014 and 2013.

	Three Months Ended
	September 30, 2014			September 30, 2013
Balance, beginning of the period	$	6,776		$	7,404
Total gain/(loss) realized and unrealized included in:
Interest income	17			7
Net OTTI loss, credit-related	(1		)	(3		)
Unrealized gain/(loss) of other-than-temporarily impaired securities included in AOCI	77			82
Reclassification of non-credit-related OTTI included in net income/(loss)	—			(1		)
Settlements	(245		)	(344		)
Transfers of HTM securities to AFS securities	—			36
Balance, end of the period	$	6,624		$	7,181
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	$	15		$	4

	Nine Months Ended
	September 30, 2014			September 30, 2013
Balance, beginning of the period	$	7,047		$	7,604
Total gain/(loss) realized and unrealized included in:
Interest income	47			10
Net OTTI loss, credit-related	(3		)	(6		)
Unrealized gain/(loss) of other-than-temporarily impaired securities included in AOCI	237			522
Reclassification of non-credit-related OTTI included in net income/(loss)	(2		)	(3		)
Settlements	(702		)	(1,002		)
Transfers of HTM securities to AFS securities	—			56
Balance, end of the period	$	6,624		$	7,181
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	$	44		$	4

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 20 – Fair Values” in the Bank’s 2013 Form 10-K.

51

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

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 table summarizes the activity related to financial assets and liabilities for which the Bank elected the fair value option during the three and nine months ended September 30, 2014 and 2013:

	Three Months Ended
	September 30, 2014						September 30, 2013
	Advances			Consolidated Obligation Bonds			Advances			Consolidated Obligation Bonds
Balance, beginning of the period	$	6,341		$	7,080		$	7,436		$	24,286
New transactions elected for fair value option	235			641			103			540
Maturities and terminations	(1,399		)	(568		)	(615		)	(8,860		)
Net gain/(loss) on advances and net (gain)/loss on consolidated obligation bonds held under fair value option	(25		)	(12		)	(9		)	8
Change in accrued interest	(3		)	4			(1		)	(2		)
Balance, end of the period	$	5,149		$	7,145		$	6,914		$	15,972

	Nine Months Ended
	September 30, 2014						September 30, 2013
	Advances			Consolidated Obligation Bonds			Advances			Consolidated Obligation Bonds
Balance, beginning of the period	$	7,069		$	10,115		$	7,390		$	27,884
New transactions elected for fair value option	583			2,819			470			2,600
Maturities and terminations	(2,486		)	(5,863		)	(804		)	(14,375		)
Net gain/(loss) on advances and net (gain)/loss on consolidated obligation bonds held under fair value option	(13		)	69			(141		)	(135		)
Change in accrued interest	(4		)	5			(1		)	(2		)
Balance, end of the period	$	5,149		$	7,145		$	6,914		$	15,972

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 change in fair value does not include changes in instrument-specific credit risk. For advances and consolidated obligations recorded under the fair value option, the Bank determined that no adjustments to the fair values of these instruments for instrument-specific credit risk were necessary for the three and nine months ended September 30, 2014 and 2013.

The following table presents the difference between the aggregate remaining contractual principal balance outstanding and aggregate fair value of advances and consolidated obligation bonds for which the Bank elected the fair value option at September 30, 2014, and December 31, 2013:

52

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	At September 30, 2014							At December 31, 2013
	Principal Balance		Fair Value		Fair Value Over/(Under) Principal Balance			Principal Balance		Fair Value		Fair Value Over/(Under) Principal Balance
Advances(1)	$	5,063	$	5,149	$	86		$	6,956	$	7,069	$	113
Consolidated obligation bonds	7,186		7,145		(41		)	10,230		10,115		(115		)

(1) At September 30, 2014, and December 31, 2013, none of these advances were 90 days or more past due or had been placed on nonaccrual status.

Note 17 — Commitments and Contingencies

As provided by the FHLBank Act or regulations governing the operations of the FHLBanks, all FHLBanks have joint and several liability for all FHLBank consolidated obligations, which are backed only by the financial resources of the FHLBanks. The joint and several liability regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The regulations provide a general framework for addressing the possibility that an FHLBank may be unable to repay the consolidated obligations for which it is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank, and as of September 30, 2014, 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 12 FHLBanks was $816,950 at September 30, 2014, and $766,837 at December 31, 2013. The par value of the Bank’s participation in consolidated obligations was $74,950 at September 30, 2014, and $76,968 at December 31, 2013. For more information on the joint and several liability regulation, see “Item 8. Financial Statements and Supplementary Data – Note 21 – Commitments and Contingencies” in the Bank’s 2013 Form 10-K.

Off-balance sheet commitments as of September 30, 2014, and December 31, 2013, were as follows:

	September 30, 2014						December 31, 2013
	Expire Within One Year		Expire After One Year		Total		Expire Within One Year		Expire After One Year		Total
Standby letters of credit outstanding	$	2,496	$	2,580	$	5,076	$	1,031	$	2,572	$	3,603
Commitments to fund advances(1)	114		11		125		4		4		8
Commitments to issue consolidated obligation discount notes, par	350		—		350		—		—		—
Commitments to issue consolidated obligation bonds, par(2)	373		—		373		1,640		—		1,640

(1) AtSeptember 30, 2014, $102 of the commitments to fund additional advances were hedged with associated interest rate swaps. AtDecember 31, 2013, none of the commitments to fund additional advances were hedged with associated interest rate swaps.

(2) AtSeptember 30, 2014, and December 31, 2013, $373 and $1,640, respectively, of the unsettled consolidated obligation bonds were hedged with associated interest rate swaps.

Standby letters of credit are generally issued for a fee on behalf of members to support their obligations to third parties. If the Bank is required to make a payment for a beneficiary’s drawing under a letter of credit, the amount is immediately due and payable by the member to the Bank and is charged to the member’s demand deposit account with the Bank. The original terms of these standby letters of credit range from 15 days to 10 years, including a final expiration in 2024. The Bank monitors the creditworthiness of members that have standby letters of credit. In addition, standby letters of credit are fully collateralized. As a result, the Bank determined that it was not necessary to record any allowance for losses on these commitments.

The value of the Bank’s obligations related to standby letters of credit is recorded in other liabilities and amounted to $12 at September 30, 2014, and $12 at December 31, 2013. 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

53

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

deemed it unnecessary to record any additional liability on the letters of credit outstanding as of September 30, 2014, and December 31, 2013.

Commitments to fund advances totaled $125 at September 30, 2014, and $8 at December 31, 2013. 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, 2014, and December 31, 2013.

The Bank executes over-the-counter bilateral interest rate exchange agreements with major banks and derivative entities affiliated with broker-dealers and with its members. The Bank enters into master agreements with netting provisions with all bilateral swap counterparties and into bilateral security agreements with all active derivative dealer counterparties. All member counterparty master agreements, excluding those with derivative dealers, are subject to the terms of the Bank’s Advances and Security Agreement with members, and all member counterparties (except for those that are derivative dealers) must fully collateralize the Bank’s net credit exposure. For cleared derivatives, the clearinghouse is the Bank’s counterparty, and the Bank has clearing agreements with clearing agents that provide for delivery of initial margin to, and exchange of variation margin with, the clearinghouse. See Note 15 – Derivatives and Hedging Activities for additional information about the Bank’s pledged collateral and other credit-risk-related contingent features. As of September 30, 2014, the Bank had pledged total collateral of $380, including securities with a carrying value of $2, all of which may be sold or repledged, and cash collateral of $378 to counterparties and the clearing house that had market risk exposure to the Bank related to derivatives. As of December 31, 2013, the Bank had pledged cash collateral of $149 to counterparties and the clearing house that had market risk exposure to the Bank related to derivatives.

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

Note 18 — Transactions with Certain Members, Certain Nonmembers, and Other FHLBanks

Transactions with Certain Members and Certain Nonmembers. The following tables set forth information at the dates and for the periods indicated with respect to transactions with: (i) members and nonmembers that held more than 10% of the outstanding shares of the Bank’s capital stock, including mandatorily redeemable capital stock, at any time during the periods indicated, (ii) members that had an officer or director serving on the Bank’s Board of Directors at any time during the periods indicated, and (iii) affiliates of the foregoing members and nonmembers. All transactions with members, the nonmembers described in the preceding sentence, and their respective affiliates are entered into in the normal course of business. The tables include securities transactions where certain members, nonmembers, and their affiliates (as described above) are the issuers or obligors of the securities, but do not include securities purchased, sold or issued through, or otherwise underwritten by, affiliates of certain members and nonmembers. The tables also do not include any AHP or Community Investment Cash Advance (CICA) grants. Securities purchased, sold or issued through, or otherwise underwritten by, and AHP or CICA grants provided to, the affiliates of certain members and nonmembers are in the ordinary course of the Bank’s business.

54

Federal Home Loan Bank of San Francisco

Notes to Financial Statements (continued)

	September 30, 2014		December 31, 2013
Assets:
Investments(1)	$	605	$	1,176
Advances	4,868		11,268
Mortgage loans held for portfolio	35		760
Accrued interest receivable	7		25
Other assets	19		37
Derivative assets, net	—		257
Total Assets	$	5,534	$	13,523
Liabilities:
Deposits	$	3	$	260
Mandatorily redeemable capital stock	648		1,356
Derivative liabilities, net	18		37
Total Liabilities	$	669	$	1,653
Notional amount of derivatives	$	2,878	$	12,256
Standby letters of credit	21		205

(1) Investments consist of securities purchased under agreements to resell, Federal funds sold, AFS securities, and HTM securities issued by and/or purchased from the members or nonmembers described in this section or their affiliates.

	Three Months Ended						Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Interest Income:
Investments(1)	$	2		$	7		$	20		$	23
Advances(2)	8			32			47			107
Mortgage loans held for portfolio	1			10			10			34
Total Interest Income	$	11		$	49		$	77		$	164
Interest Expense:
Mandatorily redeemable capital stock	$	16		$	42		$	62		$	97
Consolidated obligations(2)	(2		)	(40		)	(40		)	(128		)
Total Interest Expense	$	14		$	2		$	22		$	(31	)
Other Income/(Loss):
Net gain/(loss) on derivatives and hedging activities	$	20		$	(35	)	$	(285	)	$	(91	)
Total Other Income/(Loss)	$	20		$	(35	)	$	(285	)	$	(91	)

(1) Investments consist of securities purchased under agreements to resell, Federal funds sold, AFS securities, and HTM securities issued by and/or purchased from the members or nonmembers described in this section or their affiliates.

(2) Reflects the effect of associated derivatives with the members or nonmembers described in this section or their affiliates.

Transactions with Other FHLBanks. Transactions with other FHLBanks are identified on the face of the Bank’s financial statements.

Note 19 — Subsequent Events

The Bank evaluated events subsequent to September 30, 2014, until the time of the Form 10-Q filing with the Securities and Exchange Commission, and no material subsequent events were identified.

55

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 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 regulations applicable to the FHLBanks;

• changes in the Bank’s capital structure;

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

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

• 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 whether or not the Bank is paying dividends or repurchasing excess capital stock;

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

• 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;

• designation of the Bank for Federal Reserve Board supervision by the Financial Stability Oversight Council;

• technological 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.

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 Annual Report on Form 10-K for the year ended December 31, 2013 (2013 Form 10-K).

56

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Bank’s interim financial statements and notes and the Bank’s 2013 Form 10-K.

Quarterly Overview

Net income for the third quarter of 2014 was $76 million, compared with net income of $49 million for the third quarter of 2013. The $27 millionincrease in net income primarily reflected higher net interest income combined with a lower fair value loss associated with derivatives, hedged items, and financial instruments carried at fair value, partially offset by higher expense on derivative instruments used in economic hedges.

Other income/(loss) for the third quarter of 2014 was a loss of $12 million, compared with loss of $22 million for the third quarter of 2013. This change primarily reflected a $2 million fair value loss associated with derivatives, hedged items, and financial instruments carried at fair value compared with a $25 million fair value loss for the third quarter of 2013, which was chiefly due to the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors during the period. As of September 30, 2014, the Bank's restricted retained earnings included a cumulative net gain of $52 million associated with derivatives, hedged items, and financial instruments carried at fair value.

The change in other income/(loss) also reflected expense on derivative instruments used in economic hedges of $12 million (compared with income of $4 million for the third quarter of 2013). Income/expense on derivative instruments used in economic hedges is generally offset by interest expense/income on the economically hedged assets and liabilities.

Net interest income for the third quarter of 2014 was $133 million, up from $114 million for the third quarter of 2013. The increase was primarily due to a decline in mandatorily redeemable capital stock balances, which resulted in a decrease in the amount of dividends paid on that stock (which are classified as interest expense). The increase also reflected the accretion of yield adjustments on certain other-than-temporarily impaired private-label residential mortgage-backed securities (PLRMBS) resulting from improvement in expected cash flows. The increase was partially offset by a decrease in earnings on invested capital because of lower average capital balances and the lower interest rate environment. Dividends on mandatorily redeemable capital stock totaled $26 million, a decrease of $21 million, or 45%, compared with the third quarter of 2013.

During the first nine months of 2014, total assets decreased$3.0 billion, or 3%, to $82.8 billion at September 30, 2014, from $85.8 billion at December 31, 2013. Advances decreased$3.8 billion, or 9%, to $40.6 billion at September 30, 2014, from $44.4 billion at December 31, 2013. In total, 70 members increased their use of advances during the first nine months of 2014, while 66 institutions reduced their advances borrowings.

Accumulated other comprehensive income/(loss) increased by $241 million during the first nine months of 2014, to income of $96 million at September 30, 2014, from a loss of $145 millionatDecember 31, 2013, primarily as a result of improvement in the fair value of PLRMBS classified as available-for-sale (AFS).

Additional information about investments and OTTI losses associated with the Bank’s PLRMBS 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.” Additional information about the Bank’s PLRMBS is also provided in “Part II. Item 1. Legal Proceedings.”

On October 29, 2014, the Bank’s Board of Directors declared a cash dividend on the capital stock outstanding during the third quarter of 2014 at an annualized rate of 7.40%. The dividend will total $83 million, including $21 million in dividends on mandatorily redeemable capital stock that will be reflected as interest expense in the fourth quarter of 2014. The Bank recorded the dividend on October 29, 2014, the day it was declared by the Board of Directors. The Bank expects to pay the dividend on or about November 17, 2014.

57

As of September 30, 2014, the Bank was in compliance with all of its regulatory capital requirements. The Bank’s total regulatory capital ratio was 8.2%, exceeding the 4.0% requirement. The Bank had $6.8 billion in permanent capital, exceeding its risk-based capital requirement of $3.4 billion. Total retained earnings were $2.4 billion as of September 30, 2014.

As of September 30, 2014, the Bank’s excess capital stock totaled $1.4 billion. The Bank plans to repurchase $250 million in excess capital stock on November 18, 2014. This repurchase, combined with the estimated redemption of up to $278 million in mandatorily redeemable capital stock during the fourth quarter of 2014, will reduce the Bank’s excess capital stock by up to $528 million.

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

58

Financial Highlights

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

Financial Highlights

(Unaudited)

(Dollars in millions)	September 30, 2014			June 30, 2014			March 31, 2014			December 31, 2013			September 30, 2013
Selected Balance Sheet Items at Quarter End
Total Assets	$	82,789		$	87,226		$	86,185		$	85,774		$	87,661
Advances	40,615			46,595			45,552			44,395			44,213
Mortgage Loans Held for Portfolio, Net	754			805			852			905			967
Investments(1)	33,164			34,085			34,918			35,260			38,072
Consolidated Obligations:(2)
Bonds	50,871			56,242			53,184			53,207			56,102
Discount Notes	24,431			23,492			24,863			24,194			21,821
Mandatorily Redeemable Capital Stock	1,076			1,176			1,644			2,071			2,588
Capital Stock —Class B —Putable	3,310			3,385			3,325			3,460			3,526
Unrestricted Retained Earnings	303			306			312			317			316
Restricted Retained Earnings	2,073			2,055			2,069			2,077			2,056
Accumulated Other Comprehensive Income/(Loss) (AOCI)	96			16			(64		)	(145		)	(275		)
Total Capital	5,782			5,762			5,642			5,709			5,623
Selected Operating Results for the Quarter
Net Interest Income	$	133		$	138		$	135		$	127		$	114
Provision for/(Reversal of) Credit Losses on Mortgage Loans	(1		)	—			1			(1		)	—
Other Income/(Loss)	(12		)	(54		)	(48		)	(5		)	(22		)
Other Expense	34			37			32			35			32
Affordable Housing Program Assessment	12			8			9			14			11
Net Income/(Loss)	$	76		$	39		$	45		$	74		$	49
Selected Other Data for the Quarter
Net Interest Margin(3)	0.62		%	0.64		%	0.64		%	0.59		%	0.53		%
Operating Expenses as a Percent of Average Assets	0.14			0.16			0.14			0.15			0.13
Return on Average Assets	0.35			0.18			0.21			0.34			0.23
Return on Average Equity	5.25			2.80			3.11			5.20			3.48
Annualized Dividend Rate	7.35			6.80			6.67			5.65			5.14
Dividend Payout Ratio(4)	80.39			149.46			131.28			70.31			99.57
Average Equity to Average Assets Ratio	6.72			6.42			6.74			6.46			6.49
Selected Other Data at Quarter End
Regulatory Capital Ratio(5)	8.17			7.94			8.53			9.24			9.68
Duration Gap (in months)	1			1			1			1			1

(1) Investments consist of securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale securities, held-to-maturity securities, and loans to other Federal Home Loan Banks (FHLBanks).

(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 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 September 30, 2014, 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 12 FHLBanks at the dates indicated was as follows:

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	Par Value (In millions)
September 30, 2014	$	816,950
June 30, 2014	799,979
March 31, 2014	753,941
December 31, 2013	766,837
September 30, 2013	720,725

(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

The primary source of the Bank's earnings is net interest income, which is the interest earned on advances, mortgage loans, and investments, less interest paid on consolidated obligations, deposits, mandatorily redeemable capital stock, and other borrowings. The Average Balance Sheet tables that follow present the average balances of interest-earning asset categories and the sources that funded those interest-earning assets (liabilities and capital) for the three and nine months ended September 30, 2014 and 2013, together with the related interest income and expense. They also present the average rates on total interest-earning assets and the average costs of total funding sources.

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Third Quarter of 2014 Compared to Third Quarter of 2013

Average Balance Sheets
	Three Months Ended
	September 30, 2014							September 30, 2013
(Dollars in millions)	Average Balance			Interest Income/ Expense		Average Rate		Average Balance			Interest Income/ Expense		Average Rate
Assets
Interest-earning assets:
Interest-bearing deposits	$	359		$	—	0.01	%	$	62		$	—	0.04	%
Securities purchased under agreements to resell	1,422			—		0.06		110			—		0.05
Federal funds sold	10,437			4		0.12		10,334			4		0.13
Trading securities:
Mortgage-backed securities (MBS)	12			—		1.62		14			—		1.64
Other investments	3,695			2		0.18		3,197			1		0.21
AFS securities:(1)
MBS (2)	6,596			67		4.02		7,510			69		3.66
Held-to-maturity (HTM) securities:(1)
MBS	14,092			88		2.49		14,941			96		2.55
Other investments	1,533			1		0.23		2,141			1		0.22
Mortgage loans held for portfolio	783			10		5.18		1,021			12		4.60
Advances(3)	45,643			75		0.66		46,852			84		0.71
Loans to other FHLBanks	2			—		0.06		24			—		0.06
Total interest-earning assets	84,574			247		1.16		86,206			267		1.23
Other assets(4)(5)	913			—		—		1,161			—		—
Total Assets	$	85,487		$	247	1.15	%	$	87,367		$	267	1.21	%
Liabilities and Capital
Interest-bearing liabilities:
Consolidated obligations:
Bonds(3)	$	55,229		$	84	0.61	%	$	58,774		$	102	0.69	%
Discount notes	22,074			4		0.08		18,180			4		0.10
Mandatorily redeemable capital stock	1,125			26		9.09		3,197			47		5.87
Deposits and other borrowings	859			—		0.05		304			—		0.13
Total interest-bearing liabilities	79,287			114		0.57		80,455			153		0.76
Other liabilities(4)	454			—		—		1,242			—		—
Total Liabilities	79,741			114		0.57		81,697			153		0.75
Total Capital	5,746			—		—		5,670			—		—
Total Liabilities and Capital	$	85,487		$	114	0.53	%	$	87,367		$	153	0.70	%
Net Interest Income				$	133						$	114
Net Interest Spread(6)						0.59	%						0.47	%
Net Interest Margin(7)						0.62	%						0.53	%
Interest-earning Assets/Interest-bearing Liabilities	106.67		%					107.15		%

(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 $16 and $8 for the third quarter of 2014 and 2013, respectively.

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

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	Three Months Ended
	September 30, 2014								September 30, 2013
(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	$	—	$	(32	)	$	(32	)	$	(2	)	$	(33	)	$	(35	)
Consolidated obligation bonds	1		65			66			10			86			96

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

(5) Includes non-credit-related OTTI losses on AFS and HTM securities.

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

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

Net interest income in the third quarter of 2014 was $133 million, a 17%increase from $114 million in the third quarter of 2013. The following table details the changes in interest income and interest expense for the third quarter of 2014 compared to the third quarter of 2013. 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, 2014, Compared to Three Months Ended September 30, 2013
	Increase/ (Decrease)			Attributable to Changes in(1)
(In millions)				Average Volume			Average Rate
Interest-earning assets:
Trading securities: Other investments	$	1		$	1		$	—
AFS securities:
MBS	(2		)	(9		)	7
HTM securities:
MBS	(8		)	(6		)	(2		)
Mortgage loans held for portfolio	(2		)	(3		)	1
Advances(2)	(9		)	(2		)	(7		)
Total interest-earning assets	(20		)	(19		)	(1		)
Interest-bearing liabilities:
Consolidated obligations:
Bonds(2)	(18		)	(6		)	(12		)
Discount notes	—			1			(1		)
Mandatorily redeemable capital stock	(21		)	(39		)	18
Total interest-bearing liabilities	(39		)	(44		)	5
Net interest income	$	19		$	25		$	(6	)

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

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

Net interest income included $1 million of advance prepayment fees in the third quarter of 2014 compared to a de minimis amount in the third quarter of 2013.

The net interest margin was 62 basis points for the third quarter of 2014, 9 basis points higher than the net interest margin for the third quarter of 2013, which was 53 basis points. The net interest spread was 59 basis points for the third quarter of 2014, 12 basis points higher than the net interest spread for the third quarter of 2013, which was 47 basis points. These increases were primarily due to a decline in mandatorily redeemable capital stock balances, which resulted in a decrease in the amount of dividends paid on that stock (which are classified as interest expense). The increase also reflected the accretion of yield adjustments on certain other-than-temporarily impaired PLRMBS

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resulting from improvement in expected cash flows. The increase was partially offset by a decrease in earnings on invested capital because of lower average capital balances and the lower interest rate environment.

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 when there is a significant increase in the expected cash flows and accreted into interest income. As long as there continue to be 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 three months ended September 30, 2014 and 2013.

Other Income/(Loss)
	Three Months Ended
(In millions)	September 30, 2014			September 30, 2013
Other Income/(Loss):
Net gain/(loss) on trading securities(1)	$	(1	)	$	(2	)
Total OTTI loss	(1		)	(5		)
Net amount of OTTI loss reclassified to/(from) AOCI	—			2
Net OTTI loss, credit-related	(1		)	(3		)
Net gain/(loss) on advances and consolidated obligation bonds held under fair value option	(13		)	(17		)
Net gain/(loss) on derivatives and hedging activities	—			(2		)
Other	3			2
Total Other Income/(Loss)	$	(12	)	$	(22	)

(1) The net gain/(loss) on trading securities that were economically hedged totaled $(1) million and $(1) million for the three months ended September 30, 2014 and 2013, 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 three months ended September 30, 2014 and 2013.

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Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option
	Three Months Ended
(In millions)	September 30, 2014			September 30, 2013
Advances	$	(25	)	$	(9	)
Consolidated obligation bonds	12			(8		)
Total	$	(13	)	$	(17	)

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 unrealized net fair value gains/(losses) on advances and on consolidated obligation bonds were primarily driven by the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors relative to the actual terms on the Bank's 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 third quarter of 2014 and 2013.

Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives and Hedging Activities Three Months Ended September 30, 2014, Compared to Three Months Ended September 30, 2013
	Three Months Ended
(In millions)	September 30, 2014												September 30, 2013
	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	$	—		$	29		$	(23	)	$	6		$	—		$	6		$	(28	)	$	(22	)
Not elected for fair value option	1			2			(1		)	2			—			3			(3		)	—
Consolidated obligation bonds:
Elected for fair value option	—			(17		)	17			—			—			9			16			25
Not elected for fair value option	(2		)	(2		)	8			4			(1		)	(28		)	26			(3		)
Consolidated obligation discount notes:
Not elected for fair value option	—			6			(12		)	(6		)	—			5			(6		)	(1		)
MBS:
Not elected for fair value option	—			(5		)	—			(5		)	—			—			—			—
Non-MBS investments:
Not elected for fair value option	—			—			(1		)	(1		)	—			—			(1		)	(1		)
Total	$	(1	)	$	13		$	(12	)	$	—		$	(1	)	$	(5	)	$	4		$	(2	)

During the third quarter of 2014, net gains on derivatives and hedging activities totaled a de minimis amount compared to net losses of $2 million in the third quarter of 2013. These amounts included expense of $12 million and income of $4 million resulting from cash flow settlements on derivative instruments used in economic hedges in the third quarter of 2014 and 2013, respectively. Excluding the impact of income or expense from cash flow

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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.”

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Nine Months Ended September 30,2014, Compared to Nine Months Ended September 30,2013

Average Balance Sheets
	Nine Months Ended
	September 30, 2014							September 30, 2013
(Dollars in millions)	Average Balance			Interest Income/ Expense		Average Rate		Average Balance			Interest Income/ Expense		Average Rate
Assets
Interest-earning assets:
Interest-bearing deposits	$	282		$	—	0.01	%	$	32		$	—	0.06	%
Securities purchased under agreements to resell	1,226			—		0.05		1,072			1		0.12
Federal funds sold	9,926			9		0.12		10,318			12		0.15
Trading securities:
MBS	13			—		1.64		15			—		1.68
Other investments	3,413			5		0.18		3,314			5		0.22
Available-for-sale securities:(1)
MBS(2)	6,813			210		4.11		7,842			206		3.52
Held-to-maturity securities:(1)
MBS	14,636			275		2.51		14,654			289		2.64
Other investments	2,506			3		0.19		2,212			4		0.24
Mortgage loans held for portfolio	831			32		5.19		1,127			38		4.51
Advances(3)	45,876			234		0.68		46,341			262		0.76
Loans to other FHLBanks	4			—		0.07		10			—		0.07
Total interest-earning assets	85,526			768		1.20		86,937			817		1.26
Other assets(4)(5)	910			—		—		1,061			—		—
Total Assets	$	86,436		$	768	1.19	%	$	87,998		$	817	1.24	%
Liabilities and Capital
Interest-bearing liabilities:
Consolidated obligations:
Bonds(3)	$	54,076		$	247	0.61	%	$	63,256		$	342	0.72	%
Discount notes	23,822			16		0.09		13,803			11		0.11
Mandatorily redeemable capital stock	1,513			99		8.73		3,729			109		3.92
Deposits and other borrowings	781			—		0.05		294			—		0.12
Total interest-bearing liabilities	80,192			362		0.60		81,082			462		0.76
Other liabilities(4)	516			—		—		1,121			—		—
Total Liabilities	80,708			362		0.60		82,203			462		0.75
Total Capital	5,728			—		—		5,795			—		—
Total Liabilities and Capital	$	86,436		$	362	0.56	%	$	87,998		$	462	0.70	%
Net Interest Income				$	406						$	355
Net Interest Spread(6)						0.60	%						0.50	%
Net Interest Margin(7)						0.63	%						0.55	%
Interest-earning Assets/Interest-bearing Liabilities	106.65		%					107.22		%

(1) The average balances of available-for-sale securities and held-to-maturity securities are reflected at amortized cost. As a result, the average rates do not reflect changes in fair value or non-credit-related OTTI charges.

(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 $49 and $13 for the nine months ended September 30, 2014 and 2013, respectively.

(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, 2014									September 30, 2013
(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	$	(3	)	$	(98	)	$	(101	)	$	(6	)	$	(94	)	$	(100	)
Consolidated obligation bonds	4			197			201			43			299			342

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

(5) Includes non-credit-related OTTI charges on available-for-sale and held-to-maturity securities.

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

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

Net interest income in the first nine months of 2014 was $406 million, a 14%increase from $355 million in the first nine months of 2013. The following table details the changes in interest income and interest expense for the first nine months of 2014 compared to the first nine months of 2013. 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 Nine Months Ended September 30, 2014, Compared to Nine Months Ended September 30, 2013
	Increase/ (Decrease)			Attributable to Changes in(1)
(In millions)				Average Volume			Average Rate
Interest-earning assets:
Securities purchased under agreements to resell	$	(1	)	$	—		$	(1	)
Federal funds sold	(3		)	—			(3		)
Available-for-sale securities:
MBS	4			(29		)	33
Held-to-maturity securities:
MBS	(14		)	—			(14		)
Other investments	(1		)	—			(1		)
Mortgage loans held for portfolio	(6		)	(11		)	5
Advances(2)	(28		)	(3		)	(25		)
Total interest-earning assets	(49		)	(43		)	(6		)
Interest-bearing liabilities:
Consolidated obligations:
Bonds(2)	(95		)	(46		)	(49		)
Discount notes	5			7			(2		)
Mandatorily redeemable capital stock	(10		)	(91		)	81
Total interest-bearing liabilities	(100		)	(130		)	30
Net interest income	$	51		$	87		$	(36	)

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

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

Net interest income included advance prepayment fees of $5 million in the first nine months of 2014 compared to $2 million in the first nine months of 2013.

The net interest margin was 63 basis points for the first nine months of 2014, 8 basis points higher than the net interest margin for the first nine months of 2013, which was 55 basis points. The net interest spread was 60 basis points for the first nine months of 2014, 10 basis points higher than the net interest spread for the first nine months of 2013, which was 50 basis points. These increases were primarily due to improved spreads on interest earnings assets, including the accretion of yield adjustments on certain other-than-temporarily impaired PLRMBS resulting

67

from improvement in expected cash flows, lower dividends on mandatorily redeemable capital stock (which are classified as interest expense), partially offset by a decrease in earnings on invested capital because of lower average capital balances and the lower interest rate environment.

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 when there is a significant increase in the expected cash flows and accreted into interest income. As long as there continue to be 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, 2014 and 2013.

Other Income/(Loss)
	Nine Months Ended
(In millions)	September 30, 2014			September 30, 2013
Other Income/(Loss):
Net gain/(loss) on trading securities(1)	$	(1	)	$	1
Total OTTI loss	(5		)	(13		)
Net amount of OTTI loss reclassified to/(from) AOCI	2			7
Net OTTI loss, credit-related	(3		)	(6		)
Net gain/(loss) on advances and consolidated obligation bonds held under fair value option	(82		)	(6		)
Net gain/(loss) on derivatives and hedging activities	(34		)	16
Other	6			5
Total Other Income/(Loss)	$	(114	)	$	10

(1) The net gain/(loss) on trading securities that were economically hedged totaled $(1) million and $1 million for the nine months ended September 30, 2014 and 2013, 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, 2014 and 2013.

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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, 2014			September 30, 2013
Advances	$	(13	)	$	(141	)
Consolidated obligation bonds	(69		)	135
Total	$	(82	)	$	(6	)

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 derivatives that economically hedge these instruments.

The unrealized net fair value gains/(losses) on advances and on consolidated obligation bonds were primarily driven by the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors relative to the actual terms on the Bank’s 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 2014 and 2013.

Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives and Hedging Activities Nine Months Ended September 30, 2014, Compared to Nine Months Ended September 30, 2013
(In millions)	September 30, 2014												September 30, 2013
	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	$	—		$	29		$	(77	)	$	(48	)	$	—		$	122		$	(85	)	$	37
Not elected for fair value option	1			7			(7		)	1			2			14			(12		)	4
Consolidated obligation bonds:
Elected for fair value option	—			25			43			68			—			(87		)	50			(37		)
Not elected for fair value option	(7		)	(19		)	17			(9		)	(4		)	(101		)	107			2
Consolidated obligation discount notes:
Not elected for fair value option	—			(4		)	(28		)	(32		)	—			25			(15		)	10
MBS investments:
Not elected for fair value option	—			(14		)	—			(14		)	—			—			—			—
Non-MBS investments:
Not elected for fair value option	—			1			(1		)	—			—			1			(1		)	—
Total	$	(6	)	$	25		$	(53	)	$	(34	)	$	(2	)	$	(26	)	$	44		$	16

During the first nine months of 2014, net losses on derivatives and hedging activities totaled $34 million compared to net gains of $16 million in the first nine months of 2013. These amounts included expense of $53 million and income of $44 million resulting from cash flow settlements on derivative instruments used in economic hedges in the first nine months of 2014 and 2013, respectively. Excluding the impact of income or expense from cash flow settlements on derivative instruments used in economic hedges, the net gains or losses on fair value and economic

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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.”

Return on Average Equity

Return on average equity (ROE) was 5.25% (annualized) for the third quarter of 2014, compared to 3.48% (annualized) for the third quarter of 2013, and 3.73% (annualized) for the first nine months of 2014, compared to 5.41% (annualized) for the first nine months of 2013. The changes in ROE reflected the increase or decrease in net income for the applicable periods in 2014.

Dividends and Retained Earnings

Under regulations governing the operations of the FHLBanks, dividends may be paid only out of current net earnings or previously retained earnings. As required by the regulations, the Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework is reviewed at least annually by the Bank’s Board of Directors. The Board of Directors may amend the Excess Stock Repurchase, Retained Earnings, and Dividend Framework from time to time. In accordance with the Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend 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, 2014, advances maturing within five years totaled $38.7 billion, significantly in excess of the $202 million of member deposits on that date. At December 31, 2013, advances maturing within five years totaled $42.2 billion, also significantly in excess of the $193 million of member deposits on that date. In addition, as of September 30, 2014, and December 31, 2013, the Bank’s estimated total sources of funds obtainable from liquidity investments, repurchase agreement borrowings collateralized by the Bank’s marketable securities, and advance repayments would have allowed the Bank to meet its liquidity needs for more than 90 days without access to the consolidated obligations markets, subject to certain conditions. For more information, see “Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition – Risk Management – Liquidity Risk” in the Bank’s 2013 Form 10-K.

The Bank’s Risk Management Policy limits the payment of dividends based on the ratio of the Bank’s estimated market value of total capital to par value of capital stock. If this ratio at the end of any quarter is less than 100% but greater than or equal to 70%, any dividend would be limited to an annualized rate no greater than the daily average of the three-month London Interbank Offered Rate (LIBOR) 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 163% as of September 30, 2014. For more information, see “Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition – Risk Management – Market Risk” in the Bank’s 2013 Form 10-K.

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Retained Earnings Related to Valuation Adjustments –In accordance with the Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework, the Bank retains in restricted retained earnings any cumulative net gains in earnings (net of applicable assessments) resulting from valuation adjustments.

In general, the Bank’s derivatives and hedged instruments, as well as certain assets and liabilities that are carried at fair value, are held to the maturity, call, or put date. For these financial instruments, net valuation gains or losses are primarily a matter of timing and will generally reverse through changes in future valuations and settlements of contractual interest cash flows over the remaining contractual terms to maturity, or by the exercised call or put dates. However, the Bank may have instances in which hedging relationships are terminated prior to maturity or prior to the call or put dates. Terminating the hedging relationship may result in a realized gain or loss. In addition, the Bank may have instances in which it may sell trading securities prior to maturity, which may also result in a realized gain or loss.

The purpose of retaining cumulative net gains in earnings resulting from valuation adjustments as restricted retained earnings is to provide sufficient retained earnings to offset future net losses that result from the reversal of cumulative net gains, so that potential dividend payouts in future periods are not necessarily affected by the reversals of these gains. Although restricting retained earnings in this way may preserve the Bank’s ability to pay dividends, the reversal of cumulative net gains in any given period may result in a net loss if the reversal exceeds net earnings before the impact of valuation adjustments for that period.

Retained earnings related to valuation adjustments totaled $52 million and $88 million at September 30, 2014, and December 31, 2013, respectively.

Other Retained Earnings – Targeted Buildup –In addition to any cumulative net gains resulting from valuation adjustments, the Bank holds an additional amount in restricted retained earnings intended to protect paid-in capital from the effects of an extremely adverse credit event, an extremely adverse operations risk event, a cumulative net loss related to the Bank’s derivatives and associated hedged items and financial instruments carried at fair value, an extremely adverse change in the market value of the Bank’s capital, a significant amount of additional credit-related OTTI on PLRMBS, or some combination of these effects, especially in periods of extremely low net income resulting from an adverse interest rate environment.

The Board of Directors set the targeted amount of restricted retained earnings at $1.8 billion, and the Bank reached this target as of March 31, 2012. The Bank’s retained earnings target may be changed at any time. The Board of Directors periodically reviews the methodology and analysis to determine whether any adjustments are appropriate. As of September 30, 2014, the amount of restricted retained earnings in the Bank's targeted buildup account was $1.8 billion.

Joint Capital Enhancement Agreement – In 2011, the 12 FHLBanks entered into a Joint Capital Enhancement Agreement, as amended, intended to enhance the capital position of each FHLBank by allocating that portion of each FHLBank’s earnings historically paid to satisfy its Resolution Funding Corporation (REFCORP) obligation to a separate retained earnings account at that FHLBank.

On August 5, 2011, the Federal Housing Finance Agency (Finance Agency) certified that the FHLBanks had fully satisfied their REFCORP obligation. In accordance with the Agreement, starting in the third quarter of 2011, each FHLBank is required to allocate 20% of its net income each quarter to a separate restricted retained earnings account until the balance of the account equals at least 1% of that FHLBank’s average balance of outstanding consolidated obligations for the previous quarter. Under the Agreement, these restricted retained earnings will not be available to pay dividends.

Retained earnings related to the Joint Capital Enhancement Agreement totaled $221 million and $189 million at September 30, 2014, and December 31, 2013, respectively.

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For more information on these three categories of restricted retained earnings and the Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework, see “Item 1. Financial Statements – Note 13 – Capital” and “Item 8. Financial Statements and Supplementary Data – Note 16 – Capital” in the Bank’s 2013 Form 10-K.

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 the Bank’s excess capital stock (defined as any capital stock holdings in excess of a shareholder’s minimum capital stock requirement, as established by the Bank’s capital plan) exceeds 1% of its total assets. As of September 30, 2014, the Bank’s excess capital stock totaled $1.4 billion, or 1.7% of total assets.

In the third quarter of 2014, the Bank paid dividends at an annualized rate of 7.35%, totaling $87 million, including $61 million in dividends on capital stock and $26 million in dividends on mandatorily redeemable capital stock. In the third quarter of 2013, the Bank paid dividends at an annualized rate of 5.14%, totaling $96 million, including $49 million in dividends on capital stock and $47 million in dividends on mandatorily redeemable capital stock.

In the first nine months of 2014, the Bank paid dividends at an annualized rate of 6.91%, totaling $277 million, including $178 million in dividends on capital stock and $99 million in dividends on mandatorily redeemable capital stock. In the first nine months of 2013, the Bank paid dividends at an annualized rate of 3.52%, totaling $218 million, including $109 million in dividends on capital stock and $109 million in dividends on mandatorily redeemable capital stock.

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

On October 29, 2014, the Bank's Board of Directors declared a cash dividend on the capital stock outstanding during the third quarter of 2014 at an annualized rate of 7.40% totaling $83 million, including $62 million in dividends on capital stock and $21 million in dividends on mandatorily redeemable capital stock. The Bank recorded the dividend on October 29, 2014, the day it was declared by the Board of Directors. The Bank expects to pay the dividend on or about November 17, 2014. Dividends on mandatorily redeemable capital stock will be recognized as interest expense in the fourth quarter of 2014.

The Bank will continue to monitor the condition of its PLRMBS portfolio, the ratio of the estimated market value of the Bank's capital to the par value of the Bank's capital stock, its overall financial performance and retained earnings, developments in the mortgage and credit markets, and other relevant information as the basis for determining the payment of dividends in future quarters.

For more information on the Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Comparison of 2013 to 2012 – Dividends and Retained Earnings” in the Bank’s 2013 Form 10-K.

Financial Condition

Total assets were $82.8 billion at September 30, 2014, compared to $85.8 billion at December 31, 2013. Advances decreased by $3.8 billion, or 9%, to $40.6 billion at September 30, 2014, from $44.4 billion at December 31, 2013. Average total assets were $85.5 billion for the third quarter of 2014, a 2%decrease compared to $87.4 billion for the third quarter of 2013. Average total assets were $86.4 billion for the first nine months of 2014, a 2%decrease

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compared to $88.0 billion for the first nine months of 2013. Average advances were $45.6 billion for the third quarter of 2014, a 3%decrease from $46.9 billion for the third quarter of 2013. Average advances were $45.9 billion for the first nine months of 2014, a 1%decrease from $46.3 billion for the first nine months of 2013.

Advances outstanding at September 30, 2014, included unrealized gains of $135 million, of which $49 million represented unrealized gains on advances hedged in accordance with the accounting for derivative instruments and hedging activities and $86 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, 2013, included unrealized gains of $208 million, of which $95 million represented unrealized gains on advances hedged in accordance with the accounting for derivative instruments and hedging activities and $113 million represented unrealized gains on economically hedged advances that are carried at fair value in accordance with the fair value option. The overall decrease in the unrealized gains of the hedged advances and advances carried at fair value from December 31, 2013, to September 30, 2014, 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 $77.0 billion at September 30, 2014, a decrease of $3.1 billion from $80.1 billion at December 31, 2013, reflecting a decrease in consolidated obligations outstanding from $77.4 billion at December 31, 2013, to $75.3 billion at September 30, 2014, and the decrease in mandatory redeemable capital stock from $2.1 billion at December 31, 2013, to $1.1 billion at September 30, 2014. The decrease in mandatorily redeemable capital stock was primarily attributable to the Bank’s redemption and repurchase of excess capital stock during the first nine months of 2014. Average total liabilities were $79.7 billion for the third quarter of 2014, a 2%decrease compared to $81.7 billion for the third quarter of 2013. Average total liabilities were $80.7 billion for the first nine months of 2014, a 2%decrease compared to $82.2 billion for the first nine months of 2013. These decreases in average liabilities reflected a decrease in average mandatorily redeemable capital stock, partially offset by an increase in average consolidated obligations.

Consolidated obligations outstanding at September 30, 2014, included unrealized losses of $341 million on consolidated obligation bonds hedged in accordance with the accounting for derivative instruments and hedging activities and unrealized gains of $41 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, 2013, included unrealized losses of $491 million on consolidated obligation bonds hedged in accordance with the accounting for derivative instruments and hedging activities and unrealized gains of $115 million on economically hedged consolidated obligation bonds that are carried at fair value in accordance with the fair value option. The decrease in the unrealized losses on the hedged consolidated obligation bonds and the decrease in the unrealized gains on the consolidated obligation bonds carried at fair value from December 31, 2013, to September 30, 2014, were primarily attributable to the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors relative to the actual terms on the Bank's consolidated obligation bonds during the period.

As provided by the FHLBank Act or regulations governing the operations of the FHLBanks, all FHLBanks have joint and several liability for all FHLBank consolidated obligations. The joint and several liability regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on consolidated obligations for which another FHLBank is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank, and as of September 30, 2014, 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 12 FHLBanks was $817.0 billion at September 30, 2014, and $766.8 billion at December 31, 2013.

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.

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The Bank evaluated the publicly disclosed FHLBank regulatory actions and long-term credit ratings of the other FHLBanks as of September 30, 2014, 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.

The Bank’s financial condition is further discussed under “Segment Information.”

Segment Information

The Bank uses an analysis of financial performance based on the balances and adjusted net interest income of two operating segments, the advances-related business and the mortgage-related business, as well as other financial information, to review and assess financial performance and to determine the allocation of resources to these two major business segments. For purposes of segment reporting, adjusted net interest income includes income and expense associated with cash flow settlements from economic hedges that are recorded in “Net gain/(loss) on derivatives and hedging activities” in other income and excludes interest expense that is recorded in “Mandatorily redeemable capital stock.” Other key financial information, such as any credit-related OTTI losses on the Bank’s PLRMBS, other expenses, and assessments, is not included in the segment reporting analysis, but is incorporated into the Bank’s overall assessment of financial performance. For a reconciliation of the Bank’s operating segment adjusted net interest income to the Bank’s total net interest income, see “Item 1. Financial Statements – Note 14 – Segment Information.”

Advances-Related Business. The advances-related business consists of advances and other credit products, related financing and hedging instruments, liquidity and other non-MBS investments associated with the Bank’s role as a liquidity provider, and capital stock. Assets associated with this segment decreased$0.8 billion, or 1%, to $61.5 billion (74% of total assets) at September 30, 2014, from $62.3 billion (73% of total assets) at December 31, 2013.

Adjusted net interest income for this segment is derived primarily from the difference, or spread, between the yield on advances and non-MBS investments and the cost of the consolidated obligations funding these assets, including the cash flow settlements from associated interest rate exchange agreements.

Adjusted net interest income for this segment was $46 million in the third quarter of 2014, an increase of $5 million, or 12%, compared with $41 million in the third quarter of 2013. The increase was primarily due to improved spreads on advances-related assets, partially offset by a decline in earnings on invested capital because of lower average capital balances and the lower interest rate environment. In the first nine months of 2014 and 2013, adjusted net interest income for this segment was $129 million.

Adjusted net interest income for this segment represented 32% and 27% of total adjusted net interest income for the third quarter of 2014 and 2013 respectively, and 29% and 28% of total adjusted net interest income for the first nine months of 2014 and 2013, respectively.

Members and nonmember borrowers prepaid $911 million of advances in the third quarter of 2014 compared to $56 million in the third quarter of 2013. Interest income was increased by net prepayment fees of $1 million in the third quarter of 2014 and by a de minimis amount in the third quarter of 2013. Members and nonmember borrowers prepaid $1.6 billion of advances in the first nine months of 2014 compared to $255 million in the first nine months of 2013. Interest income was increased by net prepayment fees of $5 million in the first nine months of 2014 and $2 million in the first nine months of 2013.

Advances – The par value of advances outstanding decreased by $3.7 billion, or 8%, to $40.5 billion at September 30, 2014, from $44.2 billion at December 31, 2013. Average advances outstanding were $45.6 billion in the third quarter of 2014, a 3%decrease from $46.9 billion in the third quarter of 2013. Average advances outstanding were $45.9 billion in the first nine months of 2014, a 1%decrease from $46.3 billion in the first nine months of 2013.

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The decrease in advances outstanding was primarily attributable to a $4.6 billion net decrease in advances outstanding to the Bank’s top five borrowers and their affiliates. Advances to the top five borrowers declined to $23.7 billion at September 30, 2014, from $28.3 billion at December 31, 2013. The decrease was offset by a $0.9 billionincrease in total advances outstanding to the Bank’s other borrowers of varying asset sizes and charter types. (See “Item 1. Financial Statements – Note 7 – Advances” for further information.) In total, 70 members increased their use of advances during the first nine months of 2014, while 66 borrowers decreased their advances borrowings.

The $3.7 billiondecrease in advances outstanding primarily reflected a $5.0 billiondecrease in fixed rate advances, partially offset by a $0.7 billionincrease in adjustable rate advances and a $0.6 billionincrease in variable rate advances.

The components of the advances portfolio at September 30, 2014, and December 31, 2013, are presented in the following table.

Advances Portfolio by Product Type
	September 30, 2014				December 31, 2013
(Dollar in millions)	Par Value		Percentage of Total Par Value		Par Value		Percentage of Total Par Value
Adjustable – LIBOR	$	7,123	18	%	$	6,378	15	%
Adjustable – LIBOR, with caps and/or floors and PPS(1)	100		—		124		—
Subtotal adjustable rate advances	7,223		18		6,502		15
Fixed	24,297		60		27,365		62
Fixed – amortizing	251		1		276		1
Fixed – with PPS(1)	4,059		10		6,193		14
Fixed – with caps and PPS(1)	350		1		200		—
Fixed – callable at borrower’s option	4		—		4		—
Fixed – callable at borrower’s option with PPS(1)	329		1		231		1
Fixed – putable at Bank’s option	65		—		97		—
Fixed – putable at Bank’s option with PPS(1)	75		—		85		—
Subtotal fixed rate advances	29,430		73		34,451		78
Daily variable rate	3,827		9		3,234		7
Total par value	$	40,480	100	%	$	44,187	100	%

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

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

Non-MBS Investments –The Bank’s non-MBS investment portfolio consists of financial instruments that are used primarily to facilitate the Bank’s role as a cost-effective provider of credit and liquidity to members and to support the operations of the Bank. The Bank’s total non-MBS investment portfolio was $12.7 billion and $12.8 billion as of September 30, 2014, and December 31, 2013 respectively. Although the total size of the non-MBS investment portfolio was about the same, the composition changed slightly. As of September 30, 2014, there were higher balances of short-term securities purchased under agreements to resell and agency debentures, which were offset by lower balances of Federal funds sold and certificates of deposits.

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Cash and Due from Banks – Cash and due from banks was $8.0 billion at September 30, 2014, a $3.1 billionincrease from December 31, 2013. Cash and due from banks is largely comprised of cash held at the Federal Reserve Bank of San Francisco and increased because many of the Bank’s Federal funds and repurchase agreement counterparties had low demand for funds on September 30, 2014.

Borrowings – Total liabilities (primarily consolidated obligations) funding the advances-related business decreased to $55.7 billion at September 30, 2014, from $56.6 billion at December 31, 2013. For further information and discussion of the Bank’s joint and several liability for FHLBank consolidated obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” and “Item 1. Financial Statements – Note 17 – Commitments and Contingencies.”

To meet the specific needs of certain investors, fixed and adjustable rate consolidated obligation bonds may contain embedded call options or other features that result in complex coupon payment terms. When these consolidated obligation bonds are issued on behalf of the Bank, typically the Bank simultaneously enters into interest rate exchange agreements with features that offset the complex features of the bonds and, in effect, convert the bonds to adjustable rate instruments tied to an index, primarily LIBOR. For example, the Bank uses fixed rate callable bonds that are typically offset with interest rate exchange agreements with call features that offset the call options embedded in the callable bonds. This combined financing structure enables the Bank to meet its funding needs at costs not generally attainable solely through the issuance of comparable term non-callable debt.

At September 30, 2014, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $60.9 billion, of which $20.0 billion were hedging advances, $38.0 billion were hedging consolidated obligations, $2.4 billion were economically hedging trading securities, $0.3 billion were interest rate exchange agreements that the Bank entered into as an intermediary between offsetting derivative transactions with members and other counterparties, and $0.2 billion were economically offsetting derivatives. At December 31, 2013, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $72.8 billion, of which $21.3 billion were hedging advances, $48.2 billion were hedging consolidated obligations, $2.9 billion were economically hedging trading securities, and $0.4 billion were interest rate exchange agreements that the Bank entered into as an intermediary between offsetting derivative transactions with members and other counterparties. The hedges associated with advances and consolidated obligations were primarily used to convert the fixed rate cash flows and non-LIBOR-indexed cash flows of the advances and consolidated obligations to adjustable rate LIBOR-indexed cash flows or to manage the interest rate sensitivity and net repricing gaps of assets, liabilities, and interest rate exchange agreements.

FHLBank System consolidated obligation bonds and discount notes, along with similar debt securities issued by other GSEs such as Fannie Mae and Freddie Mac, are generally referred to as agency debt. The costs of debt issued by the FHLBanks and the other GSEs generally rise and fall with increases and decreases in general market interest rates. For more information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in the Bank’s 2013 Form 10-K.

The Federal Open Market Committee (FOMC) has not changed the target Federal funds rate since December 16, 2008. As of September 30, 2014, rates on 3-month U.S. Treasury bills and 3-month LIBOR declined while rates on 2-year and 5-year U.S. Treasury notes increased compared with December 31, 2013.

Selected Market Interest Rates
Market Instrument	September 30, 2014		December 31, 2013		September 30, 2013		December 31, 2012
Federal Reserve target rate for overnight Federal funds	0-0.25	%	0-0.25	%	0-0.25	%	0-0.25	%
3-month Treasury bill	0.02		0.06		0.01		0.04
3-month LIBOR	0.24		0.25		0.25		0.31
2-year Treasury note	0.57		0.38		0.32		0.25
5-year Treasury note	1.76		1.74		1.38		0.72

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The following table presents a comparison of the average issuance cost of FHLBank System consolidated obligation bonds relative to 3-month LIBOR and discount notes relative to 3-month LIBOR, or comparable term LIBOR if the discount term was less than 3 months, in the first nine months of 2014 and 2013. Lower 3-month LIBOR rates during the first nine months of 2014 compared to the same period in 2013 contributed to higher borrowing costs relative to LIBOR for FHLBank System consolidated obligation bonds and discount notes.

	Spread to LIBOR of Average Cost of Consolidated Obligations for the Nine Months Ended
(In basis points)	September 30, 2014	September 30, 2013
Consolidated obligation bonds	–12.5	–15.7
Consolidated obligation discount notes (one month and greater)	–15.1	–19.4

Mortgage-Related Business. The mortgage-related business consists of mortgage-backed securities (MBS)

investments, mortgage loans acquired through the Mortgage Partnership Finance® (MPF®) Program, and the related financing and hedging instruments. (“Mortgage Partnership Finance” and “MPF” are registered trademarks of the FHLBank of Chicago.) Adjusted net interest income for this segment is derived primarily from the difference, or spread, between the yield on the MBS and mortgage loans and the cost of the consolidated obligations funding those assets, including the cash flow settlements from associated interest rate exchange agreements.

At September 30, 2014, assets associated with this segment were $21.3 billion (26% of total assets), a decrease of $2.2 billion from $23.5 billion at December 31, 2013 (27% of total assets).

Adjusted net interest income for this segment was $99 million in the third quarter of 2014, a decrease of $14 million, or 12%, from $113 million in the third quarter of 2013. In the first nine months of 2014, adjusted net interest income for this segment was $314 million, a decrease of $21 million, or 6%, from $335 million in the first nine months of 2013. These decreases were primarily due to lower average unpaid principal balances of MBS and mortgage loans, partially offset by the accretion of yield adjustments on certain other-than-temporarily impaired PLRMBS resulting from improvement in expected cash flows.

Adjusted net interest income for this segment represented 68% and 73%of total adjusted net interest income for the third quarter of 2014 and 2013 respectively, and 71% and 72% of total adjusted net interest income for the first nine months of 2014 and 2013, respectively.

MBS Investments – The Bank’s MBS portfolio was $20.5 billion at September 30, 2014, compared with $22.5 billion at December 31, 2013. During the first nine months of 2014, the Bank’s MBS portfolio decreased primarily because of principal repayments totaling $2.5 billion, partially offset by purchases of $0.2 billion of agency residential MBS and a $0.2 billion improvement in the fair value of PLRMBS classified as AFS. In the third quarter of 2014, average MBS investments were $20.7 billion, a decrease of $1.8 billion from $22.5 billion in the third quarter of 2013. Average MBS investments were $21.5 billion in the first nine months of 2014, a decrease of $1.0 billion from $22.5 billion in the first nine months of 2013. For a discussion of the composition of the Bank’s MBS portfolio and the Bank’s OTTI analysis of that portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Investments” and “Item 1. Financial Statements – Note 6 – Other-Than-Temporary Impairment Analysis.”

Intermediate-term and long-term fixed rate MBS investments are subject to prepayment risk, and intermediate-term and long-term adjustable rate MBS investments are also subject to interest rate cap risk. The Bank has managed these risks predominately by purchasing intermediate-term fixed rate MBS (rather than long-term fixed rate MBS), funding the fixed rate MBS with a mix of non-callable and callable debt, and using interest rate exchange agreements with interest rate risk characteristics similar to callable debt.

MPF Program – Under the MPF Program, the Bank purchases conventional conforming fixed rate mortgage loans and FHA/VA-insured mortgage loans from members for the Bank’s own portfolio under the Original MPF and MPF

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Government products. In addition, the Bank facilitates the purchase of fixed rate mortgage loans from members for concurrent sale to Fannie Mae under the MPF Xtra® product. (“MPF Xtra” is a registered trademark of the FHLBank of Chicago.) The Bank has approved three participating financial institutions since renewing its participation in the MPF Program in the fourth quarter of 2013.

From May 2002 through October 2006, the Bank purchased conventional conforming fixed rate residential mortgage loans from its participating members under the Original MPF 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.

Mortgage loan balances declined to $0.8 billion at September 30, 2014, from $0.9 billion at December 31, 2013, a decline of $0.1 billion. Average mortgage loans were $0.8 billion in the third quarter of 2014, a decrease of $0.2 billion from $1.0 billion in the third quarter of 2013. Average mortgage loans were $0.8 billion in the first nine months of 2014, a decrease of $0.3 billion from $1.1 billion in the first nine months of 2013.

At September 30, 2014, and December 31, 2013, the Bank held conventional conforming fixed rate mortgage loans purchased under one of two MPF products, MPF Plus or Original MPF, which are described in greater detail in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – MPF Program” in the Bank’s 2013 Form 10-K. Mortgage loan balances at September 30, 2014, and December 31, 2013, were as follows:

Mortgage Loan Balances by MPF Product Type
(In millions)	September 30, 2014			December 31, 2013
MPF Plus	$	696		$	835
Original MPF	64			78
Subtotal	760			913
Unamortized premiums	8			10
Unamortized discounts	(12		)	(16		)
Mortgage loans held for portfolio	756			907
Less: Allowance for credit losses	(2		)	(2		)
Mortgage loans held for portfolio, net	$	754		$	905

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 of 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 2013 Form 10-K.

Borrowings – Total consolidated obligations funding the mortgage-related business decreased$2.2 billion to $21.3 billion at September 30, 2014, from $23.5 billion at December 31, 2013, paralleling the decrease in mortgage portfolio assets. For further information and discussion of the Bank’s joint and several liability for FHLBank consolidated obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” and “Item 1. Financial Statements – Note 17 – Commitments and Contingencies.”

The notional amount of interest rate exchange agreements associated with the mortgage-related business totaled $8.5 billion at September 30, 2014, of which $6.4 billion were hedged or were associated with consolidated obligations funding the mortgage portfolio and $2.1 billion were associated with MBS. The notional amount of interest rate agreements associated with the mortgage-related business, all of which hedged or were associated with consolidated obligations funding the mortgage portfolio, totaled $8.8 billion at December 31, 2013.

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Interest Rate Exchange Agreements

A derivative transaction or interest rate exchange agreement is a financial contract whose fair value is generally derived from changes in the value of an underlying asset or liability. The Bank uses interest rate swaps; options to enter into interest rate swaps (swaptions); interest rate cap, floor, corridor, and collar agreements; and callable and putable interest rate swaps (collectively, interest rate exchange agreements) to manage its exposure to interest rate risks inherent in its normal course of business, including its lending, investment, and funding activities. For more information on the primary strategies that the Bank employs for using interest rate exchange agreements and the associated market risks, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Market Risk – Interest Rate Exchange Agreements” in the Bank’s 2013 Form 10-K.

The following table summarizes the Bank’s interest rate exchange agreements by type of hedged item, hedging instrument, associated hedging strategy, accounting designation as specified under the accounting for derivative instruments and hedging activities, and notional amount as of September 30, 2014, and December 31, 2013.

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Interest Rate Exchange Agreements
(In millions)			Notional Amount
Hedging Instrument	Hedging Strategy	Accounting Designation	September 30, 2014		December 31, 2013
Hedged Item: Advances
Pay fixed, receive adjustable interest rate swap	Fixed rate advance converted to a LIBOR adjustable rate	Fair Value Hedge	$	11,817	$	12,448
Receive fixed, pay adjustable interest rate swap	LIBOR adjustable rate advance converted to a fixed rate	Economic Hedge(1)	200		—
Pay fixed, receive adjustable interest rate swap	Fixed rate advance converted to a LIBOR adjustable rate	Economic Hedge(1)	2,938		1,926
Pay fixed, receive adjustable interest rate swap; swap may be callable at the Bank’s option or putable at the counterparty’s option	Fixed rate advance (with or without an embedded cap) converted to a LIBOR adjustable rate; advance and swap may be callable or putable; matched to advance accounted for under the fair value option	Economic Hedge(1)	4,909		6,826
Interest rate cap, floor, corridor, and/or collar	Interest rate cap, floor, corridor, and/or collar embedded in an adjustable rate advance; matched to advance accounted for under the fair value option	Economic Hedge(1)	156		130
Subtotal Economic Hedges(1)			8,203		8,882
Total			20,020		21,330
Hedged Item: Non-Callable Bonds
Receive fixed or structured, pay adjustable interest rate swap	Fixed rate or structured rate non-callable bond converted to a LIBOR adjustable rate	Fair Value Hedge	19,201		17,877
Receive fixed or structured, pay adjustable interest rate swap	Fixed rate or structured rate non-callable bond converted to a LIBOR adjustable rate	Economic Hedge(1)	3,215		1,163
Receive fixed or structured, pay adjustable interest rate swap	Fixed rate or structured rate non-callable bond converted to a LIBOR adjustable rate; matched to non-callable bond accounted for under the fair value option	Economic Hedge(1)	1,425		1,350
Basis swap	Non-LIBOR adjustable rate non-callable bond converted to a LIBOR adjustable rate; matched to non-callable bond accounted for under the fair value option	Economic Hedge(1)	1,175		5,823
Basis swap	Fixed rate or adjustable rate non-callable bond previously converted to an adjustable rate index, converted to another adjustable rate to reduce interest rate sensitivity and repricing gaps	Economic Hedge(1)	1,400		3,545
Pay fixed, receive adjustable interest rate swap	Fixed rate or adjustable rate non-callable bond, which may have been previously converted to LIBOR, converted to fixed rate debt that offsets the interest rate risk of mortgage assets	Economic Hedge(1)	255		860
Subtotal Economic Hedges(1)			7,470		12,741
Total			26,671		30,618

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Interest Rate Exchange Agreements (continued)
(In millions)			Notional Amount
Hedging Instrument	Hedging Strategy	Accounting Designation	September 30, 2014		December 31, 2013
Hedged Item: Callable Bonds
Receive fixed or structured, pay adjustable interest rate swap with an option to call at the counterparty’s option	Fixed or structured rate callable bond converted to a LIBOR adjustable rate; swap is callable	Fair Value Hedge	2,664		1,070
Receive fixed or structured, pay adjustable interest rate swap with an option to call at the counterparty’s option	Fixed or structured rate callable bond converted to a LIBOR adjustable rate; swap is callable	Economic Hedge(1)	2,945		5,830
Receive fixed or structured, pay adjustable interest rate swap with an option to call at the counterparty’s option	Fixed or structured rate callable bond converted to a LIBOR adjustable rate; swap is callable; matched to callable bond accounted for under the fair value option	Economic Hedge(1)	4,909		3,097
Subtotal Economic Hedges(1)			7,854		8,927
Total			10,518		9,997
Hedged Item: Discount Notes
Pay fixed, receive adjustable callable interest rate swap	Discount note, which may have been previously converted to LIBOR, converted to fixed rate callable debt that offsets the prepayment risk of mortgage assets	Economic Hedge(1)	1,650		1,025
Basis swap or receive fixed, pay adjustable interest rate swap	Discount note converted to one-month LIBOR or other short-term adjustable rate to hedge repricing gaps	Economic Hedge(1)	5,191		15,048
Pay fixed, receive adjustable non-callable interest rate swap	Discount note, which may have been previously converted to LIBOR, converted to fixed rate non-callable debt that offsets the interest rate risk of mortgage assets	Economic Hedge(1)	315		280
Total			7,156		16,353
Hedged Item: Trading Securities
Basis swap	Basis swap hedging adjustable rate FFCB bonds	Economic Hedge(1)	2,363		2,942
Interest rate cap	Stand-alone interest rate cap used to offset cap risk embedded in floating rate MBS	Economic Hedge(1)	2,150		—
Total			4,513		2,942
Hedged Item: Intermediary Positions
Pay fixed, receive adjustable interest rate swap and receive fixed, pay adjustable interest rate swap	Interest rate swap used to offset the economic effect of interest rate swap that is no longer designated to advances, investments, or consolidated obligations	Economic Hedge(1)	200		—
Interest rate cap/floor	Stand-alone interest rate cap and/or floor executed with a member offset by executing an interest rate cap and/or floor with derivative dealer counterparties	Economic Hedge(1)	330		330
Total			530		330
Total Notional Amount			$	69,408	$	81,570

(1) Economic hedges are derivatives that are matched to balance sheet instruments or other derivatives that do not meet the requirements for hedge accounting under the accounting for derivative instruments and hedging activities.

At September 30, 2014, the total notional amount of interest rate exchange agreements outstanding was $69.4 billion, compared with $81.6 billion at December 31, 2013. The $12.2 billiondecrease in the notional amount of derivatives during the first nine months of 2014 was primarily due to a $9.2 billiondecrease in interest rate exchange agreements hedging discount notes, a $1.3 billiondecrease in interest rate exchange agreements hedging advances, a $3.4 billiondecrease in interest rate exchange agreements hedging consolidated obligation bonds, partially offset by a $1.6 billionincrease in interest rate exchange agreements hedging MBS investments. The

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notional amount serves as a basis for calculating periodic interest payments or cash flows received and paid and is not a basis for measuring the amount of credit risk in the transaction.

The following tables categorize the notional amounts and estimated fair values of the Bank’s interest rate exchange agreements, unrealized gains and losses from the related hedged items, and estimated fair value gains and losses from financial instruments carried at fair value by type of accounting treatment and product as of September 30, 2014, and December 31, 2013.

Interest Rate Exchange Agreements Notional Amounts and Estimated Fair Values
September 30, 2014
(In millions)	Notional Amount		Fair Value of Derivatives			Unrealized Gain/(Loss) on Hedged Items			Financial Instruments Carried at Fair Value			Difference
Fair value hedges:
Advances	$	11,817	$	(42	)	$	42		$	—		$	—
Non-callable bonds	19,201		342			(344		)	—			(2		)
Callable bonds	2,664		5			13			—			18
Subtotal	33,682		305			(289		)	—			16
Not qualifying for hedge accounting (economic hedges):
Advances	8,203		(58		)	—			73			15
Non-callable bonds	7,470		48			—			(15		)	33
Callable bonds	7,854		(43		)	—			71			28
Discount notes	7,156		9			—			—			9
FFCB bonds	2,363		—			—			—			—
MBS	2,150		10			—			—			10
Intermediated	530		—			—			—			—
Subtotal	35,726		(34		)	—			129			95
Total excluding accrued interest	69,408		271			(289		)	129			111
Accrued interest	—		71			(75		)	(2		)	(6		)
Total	$	69,408	$	342		$	(364	)	$	127		$	105

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December 31, 2013
(In millions)	Notional Amount		Fair Value of Derivatives			Unrealized Gain/(Loss) on Hedged Items			Financial Instruments Carried at Fair Value			Difference
Fair value hedges:
Advances	$	12,448	$	(87	)	$	87		$	—		$	—
Non-callable bonds	17,877		490			(491		)	—			(1		)
Callable bonds	1,070		(8		)	13			—			5
Subtotal	31,395		395			(391		)	—			4
Not qualifying for hedge accounting (economic hedges):
Advances	8,882		(107		)	—			96			(11		)
Non-callable bonds	12,741		73			—			(17		)	56
Callable bonds	8,927		(74		)	—			142			68
Discount notes	16,353		13			—			—			13
FFCB bonds	2,942		(1		)	—			—			(1		)
Intermediated	330		—			—			—			—
Subtotal	50,175		(96		)	—			221			125
Total excluding accrued interest	81,570		299			(391		)	221			129
Accrued interest	—		19			(33		)	7			(7		)
Total	$	81,570	$	318		$	(424	)	$	228		$	122

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

Concentration Risk. The following table presents the concentration in derivatives with derivative counterparties whose outstanding notional balances represented 10% or more of the Bank’s total notional amount of derivatives outstanding as of September 30, 2014, or December 31, 2013.

Concentration of Derivative Counterparties
(Dollars in millions)	September 30, 2014					December 31, 2013
Derivative Counterparty	Credit   Rating(1)	Notional Amount		Percentage of Total Notional Amount		Credit   Rating(1)	Notional Amount		Percentage of Total Notional Amount
Morgan Stanley Capital Services	BBB	$	7,477	11	%	BBB	$	8,362	10	%
JPMorgan Chase Bank, National Association	A	7,252		10		A	7,852		10
BNP Paribas	A	4,550		7		A	7,808		10
Subtotal		19,279		28			24,022		30
Others	At least BBB	19,602		28		At least A	26,466		32
LCH Clearnet(2)
Credit Suisse Securities (USA) LLC	A	19,724		28		A	20,414		25
Deutsche Bank Securities Inc.	A	10,803		16		A	10,668		13
Subtotal		30,527		44			31,082		38
Total		$	69,408	100	%		$	81,570	100	%

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

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(2) London Clearing House (LCH) Clearnet is the Bank’s counterparty for all of its cleared swaps. Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Incorporated are the Bank’s clearing agents for purposes of clearing swaps with LCH Clearnet. LCH Clearnet’s parent, LCH Clearnet Group, Ltd., is rated A+ by S&P.

Liquidity and Capital Resources

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

Liquidity

The Bank strives to maintain the liquidity necessary to meet member credit demands, repay maturing consolidated obligations for which it is the primary obligor, and meet other obligations and commitments. The Bank monitors its financial position in an effort to ensure that it has ready access to sufficient liquid funds to meet normal transaction requirements, take advantage of appropriate investment opportunities, and cover unforeseen liquidity demands.

The Bank generally manages operational, contingent, and structural liquidity risks using a portfolio of cash and short-term investments—which include commercial paper, certificates of deposit, securities purchased under agreements to resell, and Federal funds sold to highly rated counterparties—and access to the debt capital markets. In addition, the Bank maintains alternate sources of funds, detailed in its contingent liquidity plan, which also includes an explanation of how sources of funds may be allocated under stressed market conditions. The Bank maintains short-term, high-quality money market investments and government and agency securities in amounts that may average up to three times the Bank’s capital as a primary source of funds to satisfy these requirements and objectives.

The Bank maintains a contingent liquidity plan to meet its obligations and the liquidity needs of members and housing associates in the event of short-term operational disruptions at the Bank or the Office of Finance or short-term disruptions in the debt capital markets. The Finance Agency has established liquidity guidelinesthatrequire each FHLBank to maintain sufficient on-balance sheet liquidity in an amount at least equal to its anticipated cash outflows for two different scenarios, both of which assume no capital markets access and no reliance on repurchase agreements or the sale of existing HTM and AFS investments. The two scenarios differ only in the treatment of maturing advances. One scenario assumes that the Bank does not renew any maturing advances. For this scenario, the Bank must have sufficient liquidity to meet its obligations for 15 calendar days. The second scenario requires the Bank to renew maturing advances for certain members based on specific criteria established by the Finance Agency. For this scenario, the Bank must have sufficient liquidity to meet its obligations for 5 calendar days.

The Bank has a regulatory contingency liquidity requirement to maintain at least 5 business days of liquidity to enable it to meet its obligations without issuance of new consolidated obligations. In addition to the regulatory requirement and the Finance Agency’s guidelines on contingent liquidity, the Bank’s asset-liability management committee has established an operational guideline for the Bank to maintain at least 90 days of liquidity to enable the Bank to meet its obligations in the event of a longer-term consolidated obligations market disruption. This operational guideline assumes that the Bank can obtain funds by using MBS and other eligible debt securities as collateral in the repurchase agreement markets. Under this guideline, the Bank maintained at least 90 days of liquidity at all times during the first nine months of 2014 and 2013. On a daily basis, the Bank models its cash commitments and expected cash flows for the next 90 days to determine its projected liquidity position. If a market or operational disruption occurred that prevented the issuance of new consolidated obligation bonds or discount notes through the capital markets, the Bank could meet its obligations by: (i) allowing short-term liquid investments to mature, (ii) using eligible securities as collateral for repurchase agreement borrowings, and (iii) if necessary, allowing advances to mature without renewal. In addition, the Bank may be able to borrow on a short-term unsecured basis from financial institutions (Federal funds purchased) or other FHLBanks (inter-FHLBank borrowings).

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The Bank actively monitors and manages the structural liquidity risks of the advances business segment, which the Bank defines as maturity mismatches greater than 90 days for sources and uses of funds. Structural liquidity maturity mismatches are identified using maturity gap analysis and valuation sensitivity metrics that quantify the risk associated with the Bank’s structural liquidity position.

The following table shows the Bank’s principal financial obligations due, estimated sources of funds available to meet those obligations, and the net difference between funds available and funds needed for the 5-business-day and 90-day periods following September 30, 2014, and December 31, 2013. Also shown are additional contingent sources of funds from on-balance sheet collateral available for repurchase agreement borrowings.

Principal Financial Obligations Due and Funds Available for Selected Periods
	As of September 30, 2014				As of December 31, 2013
(In millions)	5 Business Days		90 Days		5 Business Days		90 Days
Obligations due:
Commitments for new advances	$	2	$	2	$	—	$	—
Demand deposits	879		879		590		590
Maturing member term deposits	—		—		—		1
Discount note and bond maturities and expected exercises of bond call options	2,020		26,195		4,203		23,509
Subtotal obligations due	2,901		27,076		4,793		24,100
Sources of available funds:
Maturing investments	2,886		9,367		3,577		9,387
Cash at Federal Reserve Bank of San Francisco	7,999		7,999		4,905		4,905
Proceeds from scheduled settlements of discount notes and bonds	475		723		1,625		1,640
Maturing advances and scheduled prepayments	4,505		11,803		4,974		11,191
Subtotal sources of available funds	15,865		29,892		15,081		27,123
Net funds available	12,964		2,816		10,288		3,023
Additional contingent sources of funds:(1)
Estimated borrowing capacity of securities available for repurchase agreement borrowings:
MBS	—		17,348		—		19,574
FFCB bonds	3,296		3,296		3,130		3,052
Subtotal contingent sources of funds	3,296		20,644		3,130		22,626
Total contingent funds available	$	16,260	$	23,460	$	13,418	$	25,649

(1) The estimated amount of repurchase agreement borrowings obtainable from authorized securities dealers is subject to market conditions and the ability of securities dealers to obtain financing for the securities transactions entered into with the Bank. The estimated maximum amount of repurchase agreement borrowings obtainable is based on the current par amount and estimated market value of MBS and other investments (not included in above figures) that are not pledged at the beginning of the period and is subject to estimated collateral discounts taken by securities dealers.

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 2013 Form

10-K.

Regulatory Capital Requirements

The FHLBank Act and Finance Agency regulations specify that each FHLBank must meet certain minimum regulatory capital standards. The Bank must maintain: (i) total regulatory capital in an amount equal to at least 4% of its total assets, (ii) leverage capital in an amount equal to at least 5% of its total assets, and (iii) permanent capital

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in an amount that is greater than or equal to its risk-based capital requirement. Because the Bank issues only Class B stock, regulatory capital and permanent capital for the Bank are both composed of retained earnings and Class B stock, including mandatorily redeemable capital stock (which is classified as a liability for financial reporting purposes). Regulatory capital and permanent capital do not include AOCI. Leverage capital is defined as the sum of permanent capital weighted by a 1.5 multiplier plus non-permanent capital. The risk-based capital requirement is equal to the sum of the Bank’s credit risk, market risk, and operations risk capital requirements, all of which are calculated in accordance with the rules and regulations of the Finance Agency.

The following table shows the Bank’s compliance with the Finance Agency’s capital requirements at September 30, 2014, and December 31, 2013. The Bank's risk-based capital requirement decreased to $3.4 billion at September 30, 2014, from $3.9 billion at December 31, 2013.  

Regulatory Capital Requirements
	September 30, 2014						December 31, 2013
(Dollars in millions)	Required			Actual			Required			Actual
Risk-based capital	$	3,425		$	6,762		$	3,912		$	7,925
Total regulatory capital	$	3,312		$	6,762		$	3,431		$	7,925
Total regulatory capital ratio	4.00		%	8.17		%	4.00		%	9.24		%
Leverage capital	$	4,139		$	10,143		$	4,289		$	11,888
Leverage ratio	5.00		%	12.25		%	5.00		%	13.86		%

The Bank's total regulatory capital ratio decreased to 8.17% at September 30, 2014, from 9.24% at December 31, 2013, primarily because of the decrease in regulatory capital resulting from the Bank’s excess capital stock repurchase activity. The Bank repurchased $250 million in excess capital stock in the third quarter of 2014.

In light of the Bank’s strong regulatory capital position, the Bank plans to repurchase $250 million in excess capital stock on November 18, 2014. This repurchase, combined with the estimated redemption of up to $278 million in mandatorily redeemable capital stock during the fourth quarter of 2014, will reduce the Bank’s excess capital stock by up to $528 million. (Approximately $257 million of the mandatorily redeemable excess stock scheduled for redemption in the fourth quarter of 2014 is held by Wells Fargo Bank, N.A., and after the redemption, its stock ownership will be reduced to less than 5% of the Bank’s total outstanding capital stock as of that date.) The amount of excess capital stock to be repurchased from each shareholder will be based on the total amount of capital stock (including mandatorily redeemable capital stock) outstanding to all shareholders on the repurchase date. The Bank will repurchase an equal percentage of each shareholder’s total capital stock to the extent that the shareholder has sufficient excess capital stock.

The Bank’s capital requirements are more fully discussed in “Item 8. Financial Statements and Supplementary Data – Note 16 – Capital” in the Bank’s 2013 Form 10-K.

Risk Management

The Bank has an integrated corporate governance and internal control framework designed to support effective management of the Bank’s business activities and the risks inherent in these activities. As part of this framework, the Bank’s Board of Directors has adopted a Risk Management Policy and a Member Products Policy, which are reviewed regularly and reapproved at least annually. The Risk Management Policy establishes risk guidelines, limits (if applicable), and standards for credit risk, market risk, liquidity risk, operations risk, concentration risk, and business risk in accordance with Finance Agency regulations, the risk profile established by the Board of Directors, and other applicable guidelines in connection with the Bank’s capital plan and overall risk management. For more detailed information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management” in the Bank’s 2013 Form 10‑K.

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Advances. The Bank manages the credit risk of advances and other credit products by setting the credit and collateral terms available to individual members and housing associates based on their creditworthiness and on the quality and value of the assets they pledge as collateral. The Bank also has procedures to assess the mortgage loan quality and documentation standards of institutions that pledge mortgage loan collateral. In addition, the Bank has collateral policies and restricted lending procedures in place to help manage its exposure to institutions that experience difficulty in meeting their capital requirements or other standards of creditworthiness. These credit and collateral policies balance the Bank’s dual goals of meeting the needs of members and housing associates as a reliable source of liquidity and mitigating credit risk by adjusting credit and collateral terms in view of deterioration in creditworthiness. The Bank has never experienced a credit loss on an advance.

The Bank determines the maximum amount and maximum term of the advances it will make to a member or housing associate based on the institution’s creditworthiness and eligible collateral pledged in accordance with the Bank’s credit and collateral policies and regulatory requirements. The Bank may review and change the maximum amount and maximum term at any time. The maximum amount a member or housing associate may borrow is also limited by the amount and type of collateral pledged because all advances must be fully collateralized.

To identify the credit strength of each borrower and potential borrower, other than insurance companies, community development financial institutions (CDFIs), and housing associates, the Bank assigns each member and each nonmember borrower an internal credit quality rating from one to ten, with one as the highest credit quality rating. These ratings are based on results from the Bank’s credit model, which considers financial, regulatory, and other qualitative information, including regulatory examination reports. The internal ratings are reviewed on an ongoing basis using current available information and are revised, if necessary, to reflect the institution’s current financial position. Credit and collateral terms may be adjusted based on the results of this credit analysis.

The Bank determines the maximum amount and maximum term of the advances it will make to an insurance company based on an ongoing risk assessment that considers the member's financial and regulatory standing and other qualitative information deemed relevant by the Bank. This evaluation results in the assignment of an internal credit quality rating from one to ten, with one as the highest credit quality rating. Approved terms are designed to meet the needs of the individual member while mitigating the unique credit and collateral risks associated with insurance companies, including risks related to the resolution process for insurance companies, which is significantly different from the one established for the Bank’s insured depository members.

The Bank determines the maximum amount and maximum term of the advances it will make to a CDFI based on an ongoing risk assessment that considers information from the CDFI’s audited annual financial statements, supplemented by additional information deemed relevant by the Bank. Approved terms are designed to meet the needs of the individual member while mitigating the unique credit and collateral risks of CDFIs, which do not file quarterly regulatory financial reports and are not subject to the same inspection and regulation requirements as the Bank’s insured depository members.

The Bank determines the maximum amount and maximum term of the advances it will make to a housing associate based on an ongoing risk assessment that considers the housing associate’s financial and regulatory standing and other qualitative information deemed relevant by the Bank. Approved terms are designed to meet the needs of the individual housing associate while mitigating the unique credit and collateral risks of housing associates, which do not file quarterly regulatory financial reports and are not subject to the same inspection and regulation requirements as the Bank’s insured depository members.

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. 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

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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. The amount of financing availability is generally determined by the creditworthiness of the member or housing associate.

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

The following tables present a summary of the status of the credit outstanding and overall collateral borrowing capacity of the Bank’s member and nonmember borrowers as of September 30, 2014, and December 31, 2013. During the nine months ended September 30, 2014, the Bank's internal credit ratings stayed the same or improved for the majority of members and nonmember borrowers.

Member and Nonmember Credit Outstanding and Collateral Borrowing Capacity by Credit Quality Rating
(Dollars in millions)
September 30, 2014
	All Members and Nonmembers	Members and Nonmembers with Credit Outstanding
					Collateral Borrowing Capacity(2)
Member or Nonmember Credit Quality Rating	Number	Number	Credit Outstanding(1)		Total		Used
1-3	250	151	$	36,528	$	163,449	22	%
4-6	88	41	8,918		20,809		43
7-10	10	2	54		62		87
Subtotal	348	194	45,500		184,320		25
CDFIs	5	3	61		78		78
Total	353	197	$	45,561	$	184,398	25	%
December 31, 2013
	All Members and Nonmembers	Members and Nonmembers with Credit Outstanding
					Collateral Borrowing Capacity(2)
Member or Nonmember Credit Quality Rating	Number	Number	Credit Outstanding(1)		Total		Used
1-3	224	135	$	37,451	$	141,076	27	%
4-6	119	60	10,269		21,969		47
7-10	17	5	44		133		33
Total	360	200	47,764		163,178		29
CDFIs	4	2	30		37		81
Total	364	202	$	47,794	$	163,215	29	%

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

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

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Member and Nonmember Credit Outstanding and Collateral Borrowing Capacity by Unused Borrowing Capacity
(Dollars in millions)
September 30, 2014
Unused Borrowing Capacity	Number of Members and Nonmembers with Credit Outstanding	Credit Outstanding(1)		Collateral Borrowing Capacity(2)
0% – 10%	9	$	3,189	$	3,371
11% – 25%	11	327		425
26% – 50%	15	12,138		21,309
More than 50%	162	29,907		159,293
Total	197	$	45,561	$	184,398
December 31, 2013
Unused Borrowing Capacity	Number of Members and Nonmembers with Credit Outstanding	Credit Outstanding(1)		Collateral Borrowing Capacity(2)
0% – 10%	3	$	42	$	44
11% – 25%	13	4,805		5,983
26% – 50%	23	13,862		21,433
More than 50%	163	29,085		135,755
Total	202	$	47,794	$	163,215

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

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

Total collateral borrowing capacity increased in the third quarter of 2014 because of improvement in collateral values and member credit quality. Based on the collateral pledged as security for advances, the Bank's credit analyses of borrowers' financial condition, and the Bank's credit extension and collateral policies, the Bank expects to collect all amounts due according to the contractual terms of the advances. Therefore, no allowance for credit losses on advances is deemed necessary by the Bank. The Bank has never experienced any credit losses on advances.

Securities pledged as collateral are assigned borrowing capacities that reflect the securities’ pricing volatility and market liquidity risks. Securities are delivered to the Bank’s custodian when they are pledged. The Bank prices securities collateral on a daily basis or twice a month, depending on the availability and reliability of external pricing sources. Securities that are normally priced twice a month may be priced more frequently in volatile market conditions. The Bank benchmarks the borrowing capacities for securities collateral to the market on a periodic basis and may review and change the borrowing capacity for any security type at any time. As of September 30, 2014, the borrowing capacities assigned to U.S. Treasury and agency securities ranged from 55% to 99% of their market value. The borrowing capacities assigned to private-label MBS, which must be rated AAA or AA when initially pledged, generally ranged from 55% to 80% of their market value, depending on the underlying collateral (residential mortgage loans, home equity loans, or commercial real estate loans), the rating, and the subordination structure of the respective securities.

The following table presents the securities collateral pledged by all members and by nonmembers with credit outstanding at September 30, 2014, and December 31, 2013.

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Composition of Securities Collateral Pledged by Members and by Nonmembers with Credit Outstanding
(In millions)	September 30, 2014				December 31, 2013
Securities Type with Current Credit Ratings	Current Par		Borrowing Capacity		Current Par		Borrowing Capacity
U.S. Treasury (bills, notes, bonds)	$	454	$	455	$	484	$	481
Agency (notes, subordinated debt, structured notes, indexed amortization notes, and Small Business Administration pools)	3,321		3,240		3,156		3,059
Agency pools and collateralized mortgage obligations	8,938		8,566		10,029		9,543
PLRMBS – publicly registered investment-grade-rated senior tranches	2		1		4		1
Private-label commercial MBS – publicly registered AAA-rated subordinated tranches	—		—		83		68
Term deposits with the Bank	—		—		1		1
Total	$	12,715	$	12,262	$	13,757	$	13,153

With respect to loan collateral, most borrowers may choose to pledge loan collateral by specific identification or under a blanket lien. Insurance companies, CDFIs, and housing associates are required to pledge loan collateral by specific identification with monthly reporting. All other borrowers pledging by specific identification must provide a detailed listing of all the loans pledged to the Bank on a monthly or quarterly basis. With a blanket lien, a borrower generally pledges the following loan types, whether or not the individual loans are eligible to receive borrowing capacity: all loans secured by real estate; all loans made for commercial, corporate, or business purposes; and all participations in these loans. Borrowers pledging under a blanket lien may provide a detailed listing of loans or may use a summary reporting method.

The Bank may require certain borrowers to deliver pledged loan collateral to the Bank for one or more reasons, including the following: the borrower is a de novo institution (chartered within the last three years), an insurance company, a CDFI, or a housing associate; the Bank is concerned about the borrower’s creditworthiness; or the Bank is concerned about the maintenance of its collateral or the priority of its security interest. With the exception of insurance companies, CDFIs, and housing associates, borrowers required to deliver loan collateral must pledge those loans under a blanket lien with detailed reporting. The Bank’s largest borrowers are required to report detailed data on a monthly basis and may pledge loan collateral using either the specific identification method or the blanket lien method with detailed reporting.

As of September 30, 2014, of the loan collateral pledged to the Bank, 40% was pledged by 34 institutions by specific identification, 43% was pledged by 146 institutions under a blanket lien with detailed reporting, and 17% was pledged by 104 institutions under a blanket lien with summary reporting.

As of September 30, 2014, the Bank’s maximum borrowing capacities as a percentage of the assigned market value of mortgage loan collateral pledged under a blanket lien with detailed reporting were as follows: 92% for first lien residential mortgage loans, 91% for multifamily mortgage loans, 88% for commercial mortgage loans, and 82% for second lien residential mortgage loans. The maximum borrowing capacity for small business, small agribusiness, and small farm loans was 50% of the unpaid principal balance, although most of these loans are pledged under blanket lien with summary reporting, with a maximum borrowing capacity of 25%. The highest borrowing capacities are available to borrowers that pledge under a blanket lien with detailed reporting because the detailed loan information allows the Bank to assess the value of the collateral more precisely and because additional collateral is pledged under the blanket lien that may not receive borrowing capacity but may be liquidated to repay advances in the event of default. The Bank may review and change the maximum borrowing capacity for any type of loan collateral at any time.

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The table below presents the mortgage loan collateral pledged by all members and by nonmembers with credit outstanding at September 30, 2014, and December 31, 2013.

Composition of Loan Collateral Pledged by Members and by Nonmembers with Credit Outstanding
(In millions)	September 30, 2014				December 31, 2013
Loan Type	Unpaid Principal Balance		Borrowing Capacity		Unpaid Principal Balance		Borrowing Capacity
First lien residential mortgage loans	$	107,130	$	90,372	$	98,377	$	78,992
Second lien residential mortgage loans and home equity lines of credit	29,501		15,424		31,344		8,968
Multifamily mortgage loans	20,351		17,016		21,162		17,131
Commercial mortgage loans	52,985		37,004		47,780		32,326
Loan participations(1)	14,133		11,515		16,540		11,843
Small business, small farm, and small agribusiness loans	2,994		736		2,956		709
Other	99		69		135		93
Total	$	227,193	$	172,136	$	218,294	$	150,062

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

The Bank holds a security interest in subprime residential mortgage loans pledged as collateral. Subprime loans are defined as loans with a borrower FICO score of 660 or less at origination, or if the original FICO score is not available, as loans with a current borrower FICO score of 660 or less. At September 30, 2014, and December 31, 2013, the unpaid principal balance of these loans totaled $14 billion and $14 billion respectively. The Bank reviews and assigns borrowing capacities to subprime mortgage loans as it does for all other types of loan collateral, taking into account the known credit attributes in the pricing of the loans. All advances, including those made to borrowers pledging subprime mortgage loans, are required to be fully collateralized. The Bank limits the amount of borrowing capacity that may be supported by subprime collateral.

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

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

When the fair value of an individual investment security falls below its amortized cost, the Bank evaluates whether the decline is other than temporary. The Bank recognizes an OTTI 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.

On November 8, 2013, the Finance Agency issued a final rule implementing Section 939A of the Dodd-Frank Act, which requires Federal agencies to remove provisions from their regulations that require the use of ratings issued by nationally recognized statistical rating organizations. The final rule requires the Bank to make a determination of

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credit quality with respect to its investments, but does not prevent the Bank from using nationally recognized statistical rating organization ratings or other third-party analysis in its credit determinations. The final rule became effective on May 7, 2014.

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, Standard & Poor’s, or comparable Fitch ratings.

Investment Credit Exposure
(In millions)
September 30, 2014
	Carrying Value
	Credit Rating(1)
Investment Type	AAA		AA		A		BBB		Below Investment Grade		Unrated		Total
Non-MBS
Certificates of deposit	$	—	$	235	$	1,056	$	—	$	—	$	—	$	1,291
Housing finance agency bonds:
CalHFA bonds	—		—		320		25		—		—		345
GSEs:
FFCB bonds	—		3,613		—		—		—		—		3,613
Total non-MBS	—		3,848		1,376		25		—		—		5,249
MBS:
Other U.S. obligations:
Ginnie Mae	—		1,581		—		—		—		—		1,581
GSEs:
Freddie Mac	—		4,698		—		—		—		—		4,698
Fannie Mae	—		5,559		21		—		13		—		5,593
Total GSEs	—		10,257		21		—		13		—		10,291
PLRMBS:
Prime	—		—		3		404		1,401		2		1,810
Alt-A, option ARM	—		—		—		—		1,103		—		1,103
Alt-A, other	11		1		85		251		5,332		2		5,682
Total PLRMBS	11		1		88		655		7,836		4		8,595
Total MBS	11		11,839		109		655		7,849		4		20,467
Total securities	11		15,687		1,485		680		7,849		4		25,716
Securities purchased under agreements to resell	—		500		—		—		—		—		500
Federal funds sold(2)	—		4,232		2,716		—		—		—		6,948
Total investments	$	11	$	20,419	$	4,201	$	680	$	7,849	$	4	$	33,164

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(In millions)
December 31, 2013
	Carrying Value
	Credit Rating(1)
Investment Type	AAA		AA		A		BBB		Below Investment Grade		Unrated		Total
Non-MBS
Certificates of deposit	$	—	$	360	$	1,300	$	—	$	—	$	—	$	1,660
Housing finance agency bonds:
CalHFA bonds	—		—		110		306		—		—		416
GSEs:
FFCB bonds	—		3,194		—		—		—		—		3,194
Total non-MBS	—		3,554		1,410		306		—		—		5,270
MBS:
Other U.S. obligations:
Ginnie Mae	—		1,589		—		—		—		—		1,589
GSEs:
Freddie Mac	—		5,250		—		—		—		—		5,250
Fannie Mae	—		6,286		27		—		18		—		6,331
Total GSEs	—		11,536		27		—		18		—		11,581
PLRMBS:
Prime	—		—		3		498		1,554		2		2,057
Alt-A, option ARM	—		—		—		—		1,115		—		1,115
Alt-A, other	12		2		116		311		5,707		2		6,150
Total PLRMBS	12		2		119		809		8,376		4		9,322
Total MBS	12		13,127		146		809		8,394		4		22,492
Total securities	12		16,681		1,556		1,115		8,394		4		27,762
Federal funds sold(2)	—		3,773		3,686		39		—		—		7,498
Total investments	$	12	$	20,454	$	5,242	$	1,154	$	8,394	$	4	$	35,260

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

(2) Includes $300 million and $100 million at September 30, 2014, and December 31, 2013, respectively, in Federal funds sold to a member counterparty determined by the Bank to have an internal credit rating equivalent to AA.

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 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

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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 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.

As of September 30, 2014, the Bank’s unsecured investment credit exposure to U.S. branches and agency offices of foreign commercial banks was limited to Federal funds sold and certificates of deposit, which represented 96% and 46%, respectively, of the Bank’s total unsecured investment credit exposure in Federal funds sold and certificates of deposit.

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, Standard & Poor’s, or comparable Fitch ratings. This table does not reflect the foreign sovereign government’s credit rating. At September 30, 2014, 54% of the carrying value of unsecured investments held by the Bank were rated AA.

Ratings of Unsecured Investment Credit Exposure by Domicile of Counterparty
(In millions)
September 30, 2014
	Carrying Value(1)
	Credit Rating(2)
Domicile of Counterparty	AA		A		Total
Domestic(3)	$	535	$	460	$	995
U.S. subsidiaries of foreign commercial banks	—		—		—
Total domestic and U.S. subsidiaries of foreign commercial banks	535		460		995
U.S. branches and agency offices of foreign commercial banks:
Australia	1,347		—		1,347
Canada	928		1,391		2,319
Japan	—		1,325		1,325
Netherlands	928		—		928
Sweden	729		—		729
Switzerland	—		596		596
Total U.S. branches and agency offices of foreign commercial banks	3,932		3,312		7,244
Total unsecured credit exposure	$	4,467	$	3,772	$	8,239

(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, 2014.

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(2) Does not reflect changes in ratings, outlook, or watch status occurring after September 30, 2014. These ratings represent the lowest rating available for each security owned by the Bank, based on the ratings provided by Moody’s, Standard & Poor’s, or comparable Fitch ratings. The Bank’s internal rating may differ from this rating.

(3) Includes $300 million in Federal funds sold to a member counterparty determined by the Bank to have an internal credit rating equivalent to AA.

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.

Contractual Maturity of Unsecured Investment Credit Exposure by Domicile of Counterparty
(In millions)
September 30, 2014
	Carrying Value(1)
Domicile of Counterparty	Overnight		Due 2 Days Through 30 Days		Due 31 Days Through 90 Days		Total
Domestic	$	300	$	250	$	445	$	995
U.S. subsidiaries of foreign commercial banks	—		—		—		—
Total domestic and U.S. subsidiaries of foreign commercial banks	300		250		445		995
U.S. branches and agency offices of foreign commercial banks:
Australia	171		—		1,176		1,347
Canada	199		750		1,370		2,319
Japan	389		936		—		1,325
Netherlands	199		729		—		928
Sweden	—		729		—		729
Switzerland	—		—		596		596
Total U.S. branches and agency offices of foreign commercial banks	958		3,144		3,142		7,244
Total unsecured credit exposure	$	1,258	$	3,394	$	3,587	$	8,239

(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, 2014.

The Bank determined that, as of September 30, 2014, the de minimis gross unrealized losses on its certificates of deposit were temporary because the gross unrealized losses were caused by movements in interest rates and not by the deterioration of the issuers’ creditworthiness. The certificates of deposit were all with issuers that had credit ratings of at least A at September 30, 2014. As a result, the Bank expects to recover the entire amortized cost basis of these securities.

The Bank’s investments may also include housing finance agency bonds issued by housing finance agencies located in Arizona, California, and Nevada, the three states that make up the Bank’s district. These bonds are mortgage revenue bonds (federally taxable), are collateralized by pools of first lien residential mortgage loans, and are credit-enhanced by bond insurance. The bonds held by the Bank are issued by the California Housing Finance Agency (CalHFA) and insured by either Ambac Assurance Corporation (Ambac), National Public Financial Guarantee (formerly MBIA Insurance Corporation), or Assured Guaranty Municipal Corporation (formerly Financial Security Assurance Incorporated). At September 30, 2014, all of the bonds were rated at least BBB by Moody’s or Standard & Poor’s.

For the Bank’s investments in housing finance agency bonds, which were issued by CalHFA, the gross unrealized losses were mainly due to an illiquid market, credit concerns regarding the underlying mortgage collateral, and credit concerns regarding the monoline insurance providers, causing these investments to be valued at a discount to their acquisition cost. The Bank independently modeled cash flows for the underlying collateral, using assumptions for default rates and loss severity that a market participant would deem reasonable, and concluded that the available credit support within the CalHFA structure more than offset the projected underlying collateral losses. The Bank

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determined that, as of September 30, 2014, all of the gross unrealized losses on the CalHFA bonds are temporary because the underlying collateral and credit enhancements were sufficient to protect the Bank from losses. As a result, the Bank expects to recover the entire amortized cost basis of these securities. If conditions in the housing and mortgage markets and general business and economic conditions deteriorate, the fair value of the CalHFA bonds may decline further and the Bank may experience OTTI in future periods.

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 does not have investment credit limits and terms for these investments that differ for members and nonmembers. Bank policy limits total MBS investments to three times the Bank’s capital. At September 30, 2014, the Bank’s MBS portfolio was 301% of Bank capital (as determined in accordance with regulations governing the operations of the FHLBanks). The Bank is precluded from purchasing additional MBS investments until its MBS ratio declines below 300%. The Bank was not required to sell any previously purchased MBS. The Bank was in compliance with the regulatory limit at the time of its MBS purchases.

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.

The Bank has not purchased any PLRMBS since the first quarter of 2008, and current Bank policy prohibits the purchase of PLRMBS.

At September 30, 2014, PLRMBS representing 33% 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 that have sufficient credit ratings to qualify for a prime mortgage loan, but the loans may not meet standard underwriting guidelines for documentation requirements, property type, or loan-to-value ratios.

As of September 30, 2014, the Bank’s investment in MBS had gross unrealized losses totaling $315 million, most of which were related to PLRMBS. These gross unrealized losses were primarily due to illiquidity in the PLRMBS market, uncertainty about the future condition of the housing and mortgage markets and the economy, and market expectations of the credit performance of loan collateral underlying these securities, causing these assets to be valued at discounts to their acquisition cost.

For its agency MBS, the Bank expects to recover the entire amortized cost basis of these securities because the Bank determined that the strength of the issuers’ guarantees through direct obligations or support from the U.S. government is sufficient to protect the Bank from losses. As a result, the Bank determined that, as of September 30, 2014, 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, 2014, 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 home 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 United States 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

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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 Governance Committee developed a short-term housing price forecast with projected changes ranging from a decrease of 3.0% to an increase of 9.0% over the 12-month period beginning July 1, 2014. For the vast majority of markets, the projected short-term housing price changes range from 0.0% 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, 2014:

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:
Prime	3	$	16	$	(1	)	3	$	16	$	(1	)
Alt-A, option ARM	1	15		—			1	15		—
Alt-A, other	9	185		—			16	338		(1		)
Total	13	$	216	$	(1	)	20	$	369	$	(2	)

(1) Amounts are for the three months ended September 30, 2014.

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, 2014, by collateral type at origination and by year of securitization.

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Unpaid Principal Balance of PLRMBS by Year of Securitization and Credit Rating
(In millions)
September 30, 2014
	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	$	—	$	—	$	—	$	—	$	185	$	—	$	185
2007	—		—		—		—		462		—		462
2006	—		—		—		—		80		—		80
2005	—		—		—		27		68		—		95
2004 and earlier	—		—		3		375		687		2		1,067
Total Prime	—		—		3		402		1,482		2		1,889
Alt-A, option ARM
2007	—		—		—		—		1,023		—		1,023
2006	—		—		—		—		179		—		179
2005	—		—		—		—		233		—		233
Total Alt-A, option ARM	—		—		—		—		1,435		—		1,435
Alt-A, other
2008	—		—		—		—		133		—		133
2007	—		—		—		—		1,697		—		1,697
2006	—		—		31		—		715		—		746
2005	—		—		18		—		2,913		—		2,931
2004 and earlier	11		1		35		250		558		2		857
Total Alt-A, other	11		1		84		250		6,016		2		6,364
Total par value	$	11	$	1	$	87	$	652	$	8,933	$	4	$	9,688

(1) The credit ratings used by the Bank are based on the lowest of Moody’s, Standard & Poor’s, or comparable Fitch ratings. Credit ratings of BB and lower are below investment grade.

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The following table presents the ratings of the Bank’s other-than-temporarily impaired PLRMBS at September 30, 2014, 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, 2014
	Unpaid Principal Balance
	Credit Rating(1)
Collateral Type at Origination and Year of Securitization	A		BBB		Below Investment Grade		Total
Prime
2008	$	—	$	—	$	170	$	170
2007	—		—		399		399
2006	—		—		33		33
2005	—		—		30		30
2004 and earlier	—		—		73		73
Total Prime	—		—		705		705
Alt-A, option ARM
2007	—		—		1,023		1,023
2006	—		—		179		179
2005	—		—		218		218
Total Alt-A, option ARM	—		—		1,420		1,420
Alt-A, other
2008	—		—		133		133
2007	—		—		1,613		1,613
2006	31		—		715		746
2005	—		—		2,903		2,903
2004 and earlier	5		71		241		317
Total Alt-A, other	36		71		5,605		5,712
Total par value	$	36	$	71	$	7,730	$	7,837

(1) The credit ratings used by the Bank are based on the lowest of Moody’s, Standard & Poor’s, 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.

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PLRMBS Credit Characteristics
(In millions)
September 30, 2014
															Underlying Collateral Performance and Credit Enhancement Statistics
Collateral Type at Origination and Year of Securitization	Amortized Cost		Gross Unrealized Losses		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	$	159	$	—	$	171	$	—		$	—	$	—		17.10	%	30.00	%	16.25	%
2007	381		5		397		—			—		—			16.45		22.58		4.78
2006	70		1		73		(1		)	—		(1		)	14.80		12.51		4.14
2005	94		1		94		—			—		—			12.31		11.91		14.89
2004 and earlier	1,066		17		1,054		—			—		—			7.94		4.45		11.65
Total Prime	1,770		24		1,789		(1		)	—		(1		)	11.43		12.10		10.27
Alt-A, option ARM
2007	842		40		830		—			—		—			28.08		44.15		18.71
2006	126		6		142		—			—		—			25.16		44.88		9.85
2005	97		2		130		—			—		—			24.49		22.78		6.55
Total Alt-A, option ARM	1,065		48		1,102		—			—		—			27.13		40.78		15.63
Alt-A, other
2008	130		5		125		—			—		—			13.48		31.80		24.34
2007	1,469		51		1,478		(3		)	1		(2		)	23.33		27.05		12.57
2006	557		1		632		—			—		—			22.30		18.47		2.52
2005	2,647		104		2,606		(1		)	1		—			15.14		14.06		6.87
2004 and earlier	855		21		844		—			—		—			12.31		8.09		16.75
Total Alt-A, other	5,658		182		5,685		(4		)	2		(2		)	17.74		17.61		9.58
Total	$	8,493	$	254	$	8,576	$	(5	)	$	2	$	(3	)	17.90	%	19.96	%	10.61	%

(1) Amounts are for the nine months ended September 30, 2014.

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, 2014.

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Significant Inputs to OTTI Credit Analysis for All PLRMBS
(In millions)
September 30, 2014
	Significant Inputs			Current
	Prepayment Rates	Default Rates	Loss Severities	Credit Enhancement
Year of Securitization	Weighted Average %	Weighted Average %	Weighted Average %	Weighted Average %
Prime
2008	13.9	14.8	33.4	19.9
2007	10.5	3.7	31.6	9.8
2006	12.6	12.5	35.6	12.1
2005	16.2	4.4	31.0	13.0
2004 and earlier	18.0	3.8	30.4	11.1
Total Prime	16.4	6.7	31.4	13.0
Alt-A, option ARM
2007	5.7	42.1	40.7	19.6
2006	5.2	43.1	41.9	9.8
2005	6.8	28.3	37.3	6.7
Total Alt-A, option ARM	5.8	40.0	40.3	16.3
Alt-A, other
2007	13.5	28.0	37.8	7.8
2006	12.6	25.4	42.2	9.7
2005	14.5	15.2	37.9	7.1
2004 and earlier	15.9	11.7	32.1	16.7
Total Alt-A, other	14.1	19.5	37.8	9.1
Total	13.3	20.6	37.2	10.7

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 PLRMBS in a loss position at September 30, 2014.

PLRMBS in a Loss Position at September 30, 2014
(In millions)
Collateral Type at Origination:	Unpaid Principal Balance		Amortized Cost		Carrying Value		Gross Unrealized Losses		Weighted Average 60+ Days Collateral Delinquency Rate
Prime	$	932	$	933	$	931	$	24	9.36	%
Alt-A, option ARM	792		691		644		48		26.46
Alt-A, other	3,232		3,048		2,884		182		16.31
Total	$	4,956	$	4,672	$	4,459	$	254	16.62	%

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.

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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, 2014		June 30, 2014		March 31, 2014		December 31, 2013		September 30, 2013
Prime
2008	92.22	%	92.82	%	93.56	%	91.67	%	88.46	%
2007	86.00		84.32		81.17		80.36		80.06
2006	91.82		94.26		93.97		92.56		93.71
2005	98.23		97.72		97.26		97.01		96.88
2004 and earlier	98.75		98.83		98.52		98.14		97.81
Weighted average of all Prime	94.67		94.48		93.64		93.01		92.53
Alt-A, option ARM
2007	81.14		80.00		78.53		77.90		74.73
2006	79.33		79.29		77.30		75.71		70.78
2005	56.01		52.24		50.35		47.44		46.38
Weighted average of all Alt-A, option ARM	76.84		75.39		73.78		72.66		69.63
Alt-A, other
2008	93.86		94.47		95.42		93.74		92.58
2007	87.08		84.69		85.01		83.76		83.24
2006	84.70		84.92		83.68		82.84		82.12
2005	88.90		88.45		87.36		86.80		85.94
2004 and earlier	98.56		98.83		98.09		97.60		97.47
Weighted average of all Alt-A, other	89.33		88.57		87.94		87.17		86.52
Weighted average of all PLRMBS	88.52	%	87.81	%	87.04	%	86.28	%	85.39	%

The Bank determined that, as of September 30, 2014, the gross unrealized losses on the PLRMBS that have not had an OTTI loss are primarily due to illiquidity in the PLRMBS market, uncertainty about the future condition of the housing and mortgage markets and the economy, and market expectations of the credit performance of loan collateral underlying these securities, which caused these assets to be valued at discounts to their acquisition 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, 2014, all of the gross unrealized losses on these securities are temporary. The Bank will continue to monitor and analyze the performance of these securities to assess the likelihood of the recovery of the entire amortized cost basis of these securities as of each balance sheet date.

If conditions in the housing and mortgage markets and general business and economic conditions deteriorate, the fair value of MBS may decline further and the Bank may experience OTTI of additional PLRMBS in future periods, as well as further impairment of PLRMBS that were identified as other-than-temporarily impaired as of September 30, 2014. Additional future credit-related OTTI 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 OTTI losses on its PLRMBS in the future.

Derivative Counterparties. The Bank has also adopted credit policies and exposure limits for bilateral derivatives credit exposure. Over-the-counter derivatives may be either transacted with a counterparty (bilateral derivatives) or cleared after execution through a futures commission merchant (clearing agent) with a derivative clearing organization (cleared derivatives). All credit exposure from derivative transactions entered into by the Bank with member counterparties that are not derivative dealers (including interest rate swaps, caps, floors, corridors, and collars), 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.

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Bilateral 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 bilateral derivative activities. In addition, the Bank has entered into master netting agreements and bilateral security 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 credit rating, as determined by rating agency long-term credit ratings of the counterparty’s debt securities or deposits, or (ii) set at zero (subject to a minimum transfer amount).

The Bank is subject to the risk of potential nonperformance by the counterparties to derivative agreements. Unless the collateral delivery threshold is set at zero, the amount of net unsecured credit exposure that is permissible with respect to each counterparty depends on the credit rating of that counterparty. 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. As a result of these risk mitigation initiatives, the Bank does not anticipate any credit losses on its bilateral derivative agreements with counterparties as of September 30, 2014.

Cleared Derivatives. The Bank is subject to nonperformance by the derivative clearing organizations (clearinghouses) and clearing agents. The requirement that the Bank post initial and variation margin through the 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, the use of cleared derivatives mitigates the Bank’s overall credit risk exposure because a central counterparty is substituted for individual counterparties and variation margin is posted daily for changes in the value of cleared derivatives through a clearing agent. The Bank does not anticipate any credit losses on its cleared derivatives as of September 30, 2014.

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

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Credit Exposure to Derivative Dealer Counterparties
(In millions)
September 30, 2014
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:
Bilateral derivatives
AA	$	1,112	$	—		$	—		$	2		$	2
A	10,640		13			(12		)	—			1
Cleared derivatives(2)	30,527		105			(78		)	—			27
Liability positions with credit exposure:
Bilateral derivatives
A	5,459		(26		)	27			—			1
Total derivative positions with credit exposure to nonmember counterparties	47,738		$	92		$	(63	)	$	2		$	31
Derivative positions without credit exposure	21,670
Total notional	$	69,408
December 31, 2013
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:
Bilateral derivatives
AA	$	8	$	—		$	—		$	—		$	—
A	12,739		332			(255		)	(71		)	6
Cleared derivatives(2)	31,082		14			7			—			21
Liability positions with credit exposure:
Bilateral derivatives
A	4,404		(36		)	37			—			1
Total derivative positions with credit exposure to nonmember counterparties	48,233		$	310		$	(211	)	$	(71	)	$	28
Derivative positions without credit exposure	33,337
Total notional	$	81,570

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

(2) Represents derivative transactions cleared with clearinghouses, which are not rated.

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.

For more information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Derivative Counterparties” in the Bank’s 2013 Form 10-K.

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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 2013 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, and 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 on MBS and mortgage loans.

There have been no significant changes in the judgments and assumptions made during the first nine months of 2014 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 2013 Form 10-K and in “Item 1. Financial Statements – Note 16 – 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

Proposed Rule on FHLBank Membership.On September 12, 2014, the Finance Agency issued a proposed rule that would:

• Impose a new test on all FHLBank members that requires them to maintain at least 1% of their assets in first lien residential mortgage loans with original maturities of five years or more, or MBS backed by those loans, on an ongoing basis to maintain their FHLBank membership. The proposal also states that the Finance Agency will consider whether to establish the standard at some higher percentage, such as 2% or as high as 5%.

• Require all insured depository members (other than community financial institutions) to maintain at least 10% of their assets in a broader range of residential mortgage loans, or MBS backed by those loans, on an ongoing basis to maintain their FHLBank membership.

• Exclude all currently eligible captive insurance companies from FHLBank membership. Current captive insurance company members would have their membership terminated five years after the rule is effective, and there would be restrictions on the level and maturity of advances that FHLBanks could make to these members during the five-year period. Under the proposed rule, a “captive” insurance company is a company that is authorized under state law to conduct an insurance business but whose primary business is not the underwriting of insurance for nonaffiliated persons or entities.

• Clarify how an FHLBank should determine the “principal place of business” of certain insurance companies or community development financial institutions for purposes of membership. The proposed

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rule would also change the way the principal place of business is determined for an institution that becomes a member of an FHLBank after issuance of a final rule. Current rules define an institution’s “principal place of business” as the state in which it maintains its home office. The proposal would add a second component requiring an institution to conduct business operations from the home office for that state to be considered its principal place of business. The changes would apply prospectively.

Comments on the proposed rule are due by January 12, 2015. The future impact of the proposed rule on the Bank’s membership is unknown. The Bank is continuing to evaluate the proposed rule.

Basel Committee on Bank Supervision – Final Rule on the Liquidity Coverage Ratio. On September 3, 2014, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation finalized the liquidity coverage ratio (LCR) rule, applicable to: (i) U.S. banking organizations with $250 billion or more in consolidated total assets or $10 billion or more in total on-balance sheet foreign exposure, and their consolidated subsidiary depository institutions with $10 billion or more in total consolidated assets; and (ii) certain other U.S. bank or savings and loan holding companies having at least $50 billion in total consolidated assets (which will be subject to less stringent requirements under the LCR rule). The LCR rule requires such covered companies to maintain an amount of “high quality liquid assets” (HQLA) that is no less than 100% of their total net cash outflows over a prospective 30-day stress period. Among other things, the final rule defines the various categories of HQLA, called Levels 1, 2A, or 2B. The treatment of HQLAs for the LCR is most favorable under the Level 1 category, less favorable under the Level 2A category, and least favorable under the Level 2B category.

Under the final rule, collateral pledged to the FHLBanks but not securing existing borrowings may be considered eligible HQLA to the extent the collateral itself qualifies as eligible HQLA; qualifying FHLBank System consolidated obligations are categorized as Level 2A HQLAs; and the amount of a covered company’s funding that is assumed to run off includes 25% of FHLBank advances maturing within 30 days, to the extent these advances are not secured by Level 1 or Level 2A HQLA, for which 0% and 15% run-off assumptions apply, respectively. At this time, the impact of the final rule is uncertain. The final rule requires that all covered companies be fully compliant by January 1, 2017.

Joint Proposed Rule on Margin and Capital Requirements for Covered Swap Entities. On September 3, 2014, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the Finance Agency jointly proposed a rule to establish minimum margin and capital requirements for registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants (swap entities) that are subject to the jurisdiction of one of the agencies. In addition, the proposed rule affords the agencies discretion to subject other persons to the proposed rule’s requirements (such persons, together with swap entities, “covered swap entities”). Comments on the proposed rule are due by November 24, 2014.

The proposed rule would subject non-cleared swaps and non-cleared security-based swaps between covered swap entities and between covered swap entities and financial end users that have material swaps exposure (an average daily aggregate notional of $3.0 billion or more in uncleared swaps) to a mandatory two-way initial margin requirement. The amount of initial margin required to be collected or posted would be either the amount calculated using a standardized schedule set forth in the proposed rule, which provides the gross initial margin (as a percentage of total notional exposure) for certain asset classes, or an internal margin model conforming to the requirements of the proposed rule that is approved by the relevant agency. The proposed rule specifies the types of collateral that may be posted by either side as initial margin (generally, cash, certain government securities, certain liquid debt, certain equity securities and gold) and sets forth haircuts for certain collateral asset classes. Initial margins must be segregated with an independent, third-party custodian and may not be rehypothecated.

The proposed rule would require variation margin to be exchanged daily for non-cleared swaps and non-cleared security-based swaps between covered swap entities and between covered swap entities and all financial end users (without regard to the swaps exposure of the particular financial end user). The variation margin amount is the daily

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mark-to-market change in the value of the swap to the covered swap entity, taking into account variation margin previously paid or collected. Variation margin may only be paid or collected in cash, is not required to be segregated with an independent, third-party custodian, and may, if permitted by contract, be rehypothecated.

Under the proposed rule, the variation margin requirement would become effective on December 1, 2015, and the initial margin requirement would be phased in over a four-year period commencing on that date. For entities that have less than a $1 trillion notional amount of non-cleared derivatives, the proposed rule’s initial margin requirement would not come into effect until December 1, 2019.

Under the proposed rule, the Bank would not be a covered swap entity (although the Finance Agency has discretion to designate the Bank a covered swap entity); rather, the Bank would be a financial end-user under the proposed rule and would likely have material swaps exposure as of the effective date of the proposed rule’s initial margin requirement.

Because the Bank currently posts and collects variation margin on its non-cleared swaps, it is not anticipated that the proposed rule’s variation margin requirement, if adopted, would have a material impact on the Bank’s costs. However, if the proposed rule’s initial margin requirement is adopted, it is anticipated that the Bank’s cost of engaging in non-cleared swaps would increase.

In addition, on September 17, 2014, the Commodity Futures Trading Commission (CFTC) published its version of the proposed rule that is generally similar to the one issued by the agencies. The CFTC’s proposed rule will only apply to a limited number of registered swap dealers and major swap participants that are not subject to the jurisdiction of one of the agencies. Comments on the CFTC’s proposed rule are due by December 2, 2014.

Money Market Mutual Fund Reform. On June 19, 2013, the SEC proposed two alternatives for amending rules that govern money market mutual funds under the Investment Company Act of 1940. On July 23, 2014, the SEC approved final regulations governing money market mutual funds. Among other things, the final regulations will:

• Require institutional prime money market funds (including institutional municipal money market funds) to sell and redeem shares based on their floating net asset value , which would result in the daily share prices of these money market funds fluctuating along with changes in the market-based value of the funds’ investments.

• Allow money market fund boards of directors to directly address a run on a fund by imposing liquidity fees or suspending redemptions temporarily.

• Include enhanced diversification, disclosure, and stress testing requirements as well as provide updated reporting by money market funds and private funds that operate like money market funds.

The final regulations do not change the existing regulatory treatment of FHLBanks’ consolidated obligations as liquid assets. FHLBank consolidated discount notes continue to be included in the definition of “daily liquid assets,” and the definition of “weekly liquid assets” continues to include FHLBank consolidated discount notes with a remaining maturity up to 60 days. At this time, the future impact of these regulations on demand for FHLBank consolidated obligations is unknown.

Proposed Rule on Capital Stock and Capital Plans. On October 8, 2014, the Finance Agency issued a proposed rule that would transfer existing parts 931 and 933 of the Federal Housing Finance Board regulations, which address requirements for FHLBanks’ capital stock and capital plans, to new Part 1277 of the Finance Agency regulations. The proposed rule would not make any substantive changes to these requirements, but would delete certain provisions that applied only to the one-time conversion of FHLBank stock to the new capital structure required by the Gramm-Leach-Bliley Act. The proposed rule would also make certain clarifying changes so that the rules would more precisely reflect long-standing practices and requirements with regard to transactions in FHLBank stock. The proposed rule would add appropriate references to ‘‘former members’’ to clarify when former FHLBank members can be required to maintain investment in FHLBank capital stock after withdrawal from the FHLBank. The Bank is currently evaluating the proposed rule. Comments on the proposed rule are due by December 8, 2014.

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Joint Final Rule on Credit Risk Retention for Asset-Backed Securities. On October 22, 2014, the Finance Agency and other U.S. federal regulators jointly approved a final rule requiring sponsors of asset-backed securities (ABS) to retain credit risk in those transactions. The final rule largely retains the risk retention framework contained in the proposal issued by the agencies in August 2013 and generally requires sponsors of ABS to retain a minimum 5% economic interest in a portion of the credit risk of the assets collateralizing the ABS, unless all the securitized assets satisfy specified qualifications. The final rule specifies criteria for qualified residential mortgage (QRM), commercial real estate, auto, and commercial loans that would make them exempt from the risk retention requirement. The definition of QRM is aligned with the definition of “qualified mortgage” (QM) as provided in Section 129C of the Truth in Lending Act and its implementing regulations, as adopted by the Consumer Financial Protection Bureau. The QM definition requires, among other things, full documentation and verification of consumers’ debt and income and a debt-to-income ratio that does not exceed 43 percent, and generally restricts the use of certain product features, such as negative amortization and interest-only and balloon payments.

Other exemptions from the credit risk requirement include certain mortgage loans secured by three- to four-unit residential, owner-occupied properties that meet the criteria for QM and certain types of community-focused residential mortgages (including extensions of credit made by community development financial institutions). The final rule also includes a provision that requires the agencies to periodically review the definition of QRM, the exemption for certain community-focused residential mortgages, and the exemption for certain three- to four-unit residential mortgage loans, and consider whether they should be modified.

The final rule exempts agency MBS from the risk retention requirements as long as the sponsoring agency is operating under the conservatorship or receivership of the Finance Agency with capital support from the United States and fully guarantees the timely payment of principal and interest on all assets in the issued security. Further, MBS issued by any limited-life regulated entity succeeding to either Fannie Mae or Freddie Mac operating with capital support from the United States would be exempt from the risk retention requirements. The final rule will be effective one year after publication in the Federal Register for residential mortgage-backed securitizations and two years after publication for all other securitization types. The Bank is currently assessing the impact of the final rule and has not yet determined the effect, if any, that this rule may have on the Bank’s operations.

Off-Balance Sheet Arrangements and Other Commitments

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

The par value of the outstanding consolidated obligations of all 12 FHLBanks was $817.0 billion at September 30, 2014, and $766.8 billion at December 31, 2013. The par value of the Bank’s participation in consolidated obligations was $75.0 billion at September 30, 2014, and $77.0 billion at December 31, 2013. At September 30, 2014, the Bank had committed to the issuance of $0.4 billion in consolidated obligations, all of which were hedged with associated interest rate swaps. At December 31, 2013, the Bank had committed to the issuance of $1.6 billion in consolidated obligations, all of which were hedged with associated interest rate swaps. For additional information on the Bank’s joint and several contingent liability obligation, see “Item 8. Financial Statements and Supplementary Data – Note 21 – Commitments and Contingencies” in the Bank’s 2013 Form 10-K.

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 balance sheet or may be recorded on the Bank’s balance sheet 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

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collateral requirements as advances made by the Bank. At September 30, 2014, the Bank had $125 million in advance commitments and $5.1 billion in standby letters of credit outstanding. At December 31, 2013, the Bank had $8 million in advance commitments and $3.6 billion in standby letters of credit outstanding. The estimated fair value of the advance commitments was de minimis at September 30, 2014, and $(1) million at December 31, 2013. The estimated fair value of the letters of credit was $12 million and $12 million at September 30, 2014, and December 31, 2013, respectively.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The market risk management objective of the Federal Home Loan Bank of San Francisco (Bank) is to maintain a relatively low exposure of the 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. This profile reflects the Bank’s objective of maintaining a conservative asset-liability mix and its commitment to providing value to its members through products and dividends without subjecting their investments in Bank capital stock to significant market risk.

The Bank’s Risk Management Policy includes a market risk management objective aimed at maintaining a relatively low exposure of the net portfolio 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, net portfolio 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.” At least monthly, compliance with Bank policies and guidelines is presented to the Bank’s Enterprise Risk Committee, the Asset-Liability Management Committee, or the Board of Directors, along with a corrective action plan if applicable.

Total Bank Market Risk

Market Value of Capital Sensitivity and Net Portfolio 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. As explained below, the Bank measures, monitors, and reports on market value of capital sensitivity but does not have a policy limit for this measure.

Since 2008, the Bank has used net portfolio value of capital sensitivity as the primary market value metric for measuring the Bank’s exposure to changes in interest rates and has established a policy limit on net portfolio value of capital sensitivity. This approach uses valuation methods that estimate the value of mortgage-backed securities (MBS) and mortgage loans in alternative interest rate environments based on valuation spreads that existed at the time the Bank acquired the MBS and mortgage loans (acquisition spreads), rather than valuation spreads implied by the current market prices of MBS and mortgage loans (market spreads). Risk metrics based on spreads existing at the time of acquisition of mortgage assets better reflect the market risk of the Bank because the Bank does not intend to sell its mortgage assets and the use of market spreads calculated from estimates of current market prices (which may include large embedded liquidity spreads) would not reflect the actual risks faced by the Bank.

Beginning in the third quarter of 2009, in the case of specific private-label residential mortgage-backed securities (PLRMBS) for which the Bank expects loss of principal in future periods, the par value of the other-than-temporarily impaired security is reduced by the amount of the projected principal shortfall and the asset price is

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calculated based on the acquisition spread. This approach directly takes into consideration the impact of projected principal (credit) losses from PLRMBS on the net portfolio value of capital, but eliminates the impact of large liquidity spreads inherent in the prior treatment of other-than-temporarily impaired securities.

The Bank’s net portfolio 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 –3% of the estimated net portfolio 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 –4% of the estimated net portfolio 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 net portfolio value of capital sensitivity was within the policy limits as of September 30, 2014.

To determine the Bank’s estimated risk sensitivities to interest rates for both the market value of capital sensitivity and the net portfolio value of capital sensitivity, the Bank uses a third-party proprietary asset and liability system to calculate estimated net portfolio 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 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
Interest Rate Scenario(1)	September 30, 2014		December 31, 2013
+200 basis-point change above current rates	–3.0	%	–3.7	%
+100 basis-point change above current rates	–1.3		–1.7
–100 basis-point change below current rates(2)	+2.6		+1.5
–200 basis-point change below current rates(2)	+6.4		+3.1

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

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

The Bank’s estimates of the sensitivity of the market value of capital to changes in interest rates as of September 30, 2014, show a small decrease in adverse sensitivity in the rising rate scenarios and greater sensitivity in the declining rate scenarios compared with the estimates as of December 31, 2013. The change in sensitivity in the declining rate scenarios is primarily related to the impact of slower projected mortgage prepayment speeds and increased leverage. The slower mortgage prepayment speeds are primarily related to slower estimates of mortgage prepayments by borrowers that have experienced past opportunities to refinance, but have not. These types of borrowers are now considered less likely to prepay in the future. The effect of excess capital stock repurchases also increased sensitivity because sensitivities are expressed as a percentage of capital and the level of capital declined. The impact of the slower mortgage prepayment speeds and increased leverage were mitigated in the rising rate scenarios as a

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result of rebalancing actions implemented in the mortgage portfolio. In addition, the decrease in long-term interest rates contributed to the decrease in adverse sensitivity in the rising rate scenarios. LIBOR interest rates as of September 30, 2014, were 5 basis points higher for the 1-year term, 16 basis points higher for the 5-year term, and 42 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 current 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. As of September 30, 2014, interest rates could decrease less in a declining rate scenario relative to the measurements as of December 31, 2013.

The table below presents the sensitivity of the net portfolio value of capital (the net value of the Bank’s assets, liabilities, and hedges, with mortgage assets valued using acquisition valuation spreads) to changes in interest rates. The table presents the estimated percentage change in the Bank’s net portfolio value of capital that would be expected to result from changes in interest rates under different interest rate scenarios based on pricing mortgage assets at spreads that existed at the time of purchase rather than at current market spreads. The Bank’s estimates of the net portfolio value of capital sensitivity to changes in interest rates as of September 30, 2014, show a small decrease in adverse sensitivity in the rising rate scenarios and greater sensitivity in the declining rate scenarios compared with the estimates as of December 31, 2013. The change in sensitivity in the declining rate scenarios is primarily related to the impact of slower projected mortgage prepayment speeds and increased leverage. The slower mortgage prepayment speeds are primarily related to slower estimates of mortgage prepayments by borrowers that have experienced past opportunities to refinance, but have not. These types of borrowers are now considered less likely to prepay in the future. The effect of excess capital stock repurchases also increased sensitivity because sensitivities are expressed as a percentage of capital and the level of capital declined. The impact of the slower mortgage prepayment speeds and increased leverage were mitigated in the rising rate scenarios as a result of rebalancing actions implemented in the mortgage portfolio. In addition, the decrease in long-term interest rates contributed to the decrease in adverse sensitivity in the rising rate scenarios.

Net Portfolio Value of Capital Sensitivity Estimated Percentage Change in Net Portfolio Value of Bank Capital for Various Changes in Interest Rates Based on Acquisition Spreads
Interest Rate Scenario(1)	September 30, 2014		December 31, 2013
+200 basis-point change above current rates	–3.2	%	–3.7	%
+100 basis-point change above current rates	–1.3		–1.6
–100 basis-point change below current rates(2)	+2.0		+0.7
–200 basis-point change below current rates(2)	+4.6		+0.6

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

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

Adjusted Return on Capital

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

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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. In both the upward and downward shift scenarios, the adjusted return on capital for the projected 12-month horizon is not expected to deteriorate relative to the base case environment.

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 gap was one month at September 30, 2014, and one month at December 31, 2013.

Total Bank Duration Gap Analysis
	September 30, 2014			December 31, 2013
	Amount (In millions)		Duration Gap(1)(2) (In months)	Amount (In millions)		Duration Gap(1)(2) (In months)
Assets	$	82,789	10	$	85,774	11
Liabilities	77,007		9	80,065		10
Net	$	5,782	1	$	5,709	1

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

(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.

Since duration gap is a measure of market value sensitivity, the impact of large embedded mortgage liquidity spreads on duration gap is the same as described in the analysis in “Total Bank Market Risk – Market Value of Capital Sensitivity and Net Portfolio Value of Capital Sensitivity” above. As a result of the liquidity premium investors require for these assets and the Bank’s intent and ability to hold its mortgage assets to maturity, the Bank does not believe that market value-based sensitivity risk measures provide a fundamental indication of risk.

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 offsetting 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 less than three months. In addition, the Bank invests in non-MBS agency securities, generally with terms of less than three years. These investments may be 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.

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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 instruments 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. Net market value sensitivity analyses and net interest income simulations are also used to identify and measure risk and variances to the target interest rate risk exposure in the advances-related segment.

Mortgage-Related Business

The Bank’s mortgage assets include MBS, most of which are classified as HTM or as 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 impact of mortgage prepayments and the existence of interest rate caps on certain adjustable rate MBS.

The Bank purchases a mix of intermediate-term fixed rate and adjustable rate MBS. Generally, purchases of long-term fixed rate MBS have been relatively limited. Any MPF loans that have been acquired are medium- or long-term fixed rate mortgage assets. This results in a mortgage portfolio that has a diversified set of interest rate risk attributes.

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 net 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

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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 options to enter into interest rate swaps (swaptions) or 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 and Net Portfolio Value of Capital Sensitivity,” the Bank uses net portfolio 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 net portfolio value of capital sensitivity of the assets, liabilities, and derivatives of the mortgage-related business. In addition, the Bank continues to use 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 measures, monitors, and reports on both the net portfolio value of capital sensitivity and the market value of capital sensitivity attributable to the mortgage-related business.

The following table presents results of the estimated market value of capital sensitivity analysis attributable to the mortgage-related business as of September 30, 2014, and December 31, 2013.

Market Value of Capital Sensitivity Estimated Percentage Change in Market Value of Bank Capital Attributable to the Mortgage-Related Business for Various Changes in Interest Rates
Interest Rate Scenario(1)	September 30, 2014		December 31, 2013
+200 basis-point change	–1.7	%	–2.1	%
+100 basis-point change	–0.8		–1.0
–100 basis-point change(2)	+1.9		+1.0
–200 basis-point change(2)	+5.1		+2.1

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

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

The Bank’s estimates of the sensitivity of the market value of capital to changes in interest rates as of September 30, 2014, generally show a small decrease in adverse sensitivity in the rising rate scenarios and greater sensitivity in the declining rate scenarios compared with the estimates as of December 31, 2013. The change in sensitivity in the declining rate scenarios is primarily related to the impact of slower projected mortgage prepayment speeds and increased leverage. The slower mortgage prepayment speeds are primarily related to slower estimates of mortgage prepayments by borrowers that have experienced past opportunities to refinance, but have not. These types of borrowers are now considered less likely to prepay in the future. The effect of excess capital stock repurchases also increased sensitivity because sensitivities are expressed as a percentage of capital and the level of capital declined. The impact of the slower mortgage prepayment speeds and increased leverage were mitigated in the rising rate scenarios as a result of rebalancing actions implemented in the mortgage portfolio. In addition, the decrease in long-term interest rates contributed to the decrease in adverse sensitivity in the rising rate scenarios. LIBOR interest rates as of September 30, 2014, were 5 basis point higher for the 1-year term, 16 basis points higher for the 5-year term,

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and 42 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 current 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. As of September 30, 2014, interest rates could decrease less in a declining rate scenario relative to the measurements as of December 31, 2013.

The Bank’s interest rate risk policies and guidelines for the mortgage-related business address the net portfolio value of capital sensitivity of the assets, liabilities, and derivatives of the mortgage-related business. The following table presents results of the estimated net portfolio value of capital sensitivity analysis attributable to the mortgage-related business as of September 30, 2014, and December 31, 2013. The table presents the estimated percentage change in the value of Bank capital attributable to the mortgage-related business that would be expected to result from changes in interest rates under different interest rate scenarios based on pricing mortgage assets at spreads that existed at the time of purchase rather than current market spreads. The Bank’s estimates of the net portfolio value of capital sensitivity to changes in interest rates as of September 30, 2014, show a small decrease in adverse sensitivity in the rising rate scenarios and show greater sensitivity in declining rate scenarios compared with the estimates as of December 31, 2013. The change in sensitivity in the declining rate scenarios is primarily related to the impact of slower projected mortgage prepayment speeds and increased leverage. The slower mortgage prepayment speeds are primarily related to slower estimates of mortgage prepayments by borrowers that have experienced past opportunities to refinance, but have not. These types of borrowers are now considered less likely to prepay in the future. The effect of excess capital stock repurchases also increased sensitivity because sensitivities are expressed as a percentage of capital and the level of capital declined. The impact of the slower mortgage prepayment speeds and increased leverage were offset in the rising rate scenarios primarily as a result of rebalancing actions implemented in the mortgage portfolio. In addition, the decrease in long-term interest rates contributed to the decrease in adverse sensitivity in rising rate scenarios. Because interest rates in the declining rate scenarios are limited to non-negative interest rates and the current 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. As of September 30, 2014, interest rates could decrease less in a declining rate scenario relative to the measurements as of December 31, 2013.

Net Portfolio Value of Capital Sensitivity Estimated Percentage Change in Net Portfolio Value of Bank Capital Attributable to the Mortgage-Related Business for Various Changes in Interest Rates Based on Acquisition Spreads
Interest Rate Scenario(1)	September 30, 2014		December 31, 2013
+200 basis-point change above current rates	–2.0	%	–2.3	%
+100 basis-point change above current rates	–0.8		–1.0
–100 basis-point change below current rates(2)	+1.3		+0.2
–200 basis-point change below current rates(2)	+3.3		–0.2

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

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

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

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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, executive vice president and chief operating officer, and senior 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, executive vice president and chief operating officer, and senior vice president and chief financial officer have concluded that the Bank’s disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.

Internal Control Over Financial Reporting

During the three months ended September 30, 2014, 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.

In 2010, the Bank filed two complaints in the Superior Court of the State of California, County of San Francisco (San Francisco Superior Court), relating to the purchase of private-label residential mortgage-backed securities

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(PLRMBS). The Bank seeks rescission and damages and asserts claims for and violations of the California Corporate Securities Act and rescission of contract.

The Bank's PLRMBS litigation is now in the discovery phase, and a bellwether trial relating to a subset of the defendants and the PLRMBS has been scheduled for January 20, 2015.

In May 2014, the bellwether defendants – Countrywide Securities Corporation, UBS Securities LLC, and Deutsche Bank Securities Inc. – filed a motion for summary adjudication on the ground that all claims by the Bank regarding the bellwether PLRMBS are barred by the applicable two-year statute of limitations. On the same day, the Bank filed a motion for summary adjudication against defendants Countrywide Securities Corporation and UBS Securities LLC, seeking judgment on defendants’ affirmative statute of limitations defenses for the same PLRMBS, on the ground that the running of the statute of limitations was tolled during the pendency of a class action lawsuit filed by other parties in November 2007. The Court denied both motions on October 15, 2014.

In 2010, the Bank also filed a complaint in San Francisco Superior Court against Bank of America Corporation (BAC) seeking a determination that BAC or its subsidiaries are successors to the liabilities of Countrywide Financial Corporation (CFC) and other Countrywide entities that are defendants in the Bank's PLRMBS litigation. On January 28, 2014, the parties stipulated to and the Court ordered a stay of the Bank's claim against BAC until November 30, 2014.

For a further discussion of this litigation, see “Part I. Item 3. Legal Proceedings” in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2013.

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

ITEM 1A. RISK FACTORS

For a discussion of risk factors, see “Part I. Item 1A. Risk Factors” in the 2013 Form 10-K. There have been no material changes from the risk factors disclosed in the “Part I. Item 1A. Risk Factors” section of the Bank’s 2013 Form 10-K.

ITEM 6. EXHIBITS

Exhibit No.	Description
31.1	Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Operating Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of the Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.3	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	Pursuant to Rule 405 of Regulation S-T, the following financial information from the Bank's quarterly report on Form 10-Q for the period ended September 30, 2014, is formatted in XBRL interactive data files: (i) Statements of Condition at September 30, 2014, and December 31, 2013; (ii) Statements of Income for the Three and Nine Months Ended September 30, 2014 and 2013; (iii) Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013; (iv) Statements of Capital Accounts for the Nine Months Ended September 30, 2014 and 2013; (v) Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013; and (vi) Notes to Financial Statements.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 7, 2014.

Federal Home Loan Bank of San Francisco

/S/ DEAN SCHULTZ

Dean Schultz
President and Chief Executive Officer

/S/ LISA B. MACMILLEN

Lisa B. MacMillen

Executive Vice President and Chief Operating Officer

/S/ KENNETH C. MILLER

Kenneth C. Miller Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

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