10-Q 1 a201510qq3fhlbsf.htm 10-Q 10-Q
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, 2015
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, 2015

Class B Stock, par value $100
27,645,033



Federal Home Loan Bank of San Francisco
Form 10-Q
Index

PART I.
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II.
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 6.
 
 
 
 
 


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,
2015

 
December 31,
2014

Assets:
 
 
 
Cash and due from banks
$
2,201

 
$
3,920

Securities purchased under agreements to resell
10,500

 
1,000

Federal funds sold
2,762

 
7,503

Trading securities(a)
1,659

 
3,524

Available-for-sale (AFS) securities(a)
5,656

 
6,371

Held-to-maturity (HTM) securities (fair values were $11,570 and $13,657, respectively)(b)
11,432

 
13,551

Advances (includes $3,904 and $5,137 at fair value under the fair value option, respectively)
50,793

 
38,986

Mortgage loans held for portfolio, net of allowance for credit losses of $0 and $1, respectively
668

 
708

Accrued interest receivable
55

 
67

Premises, software, and equipment, net
29

 
28

Derivative assets, net
60

 
59

Other assets
84

 
90

Total Assets
$
85,899

 
$
75,807

Liabilities:
 
 
 
Deposits
$
173

 
$
160

Consolidated obligations:
 
 
 
Bonds (includes $5,489 and $6,717 at fair value under the fair value option, respectively)
49,815

 
47,045

Discount notes
30,042

 
21,811

Total consolidated obligations
79,857

 
68,856

Mandatorily redeemable capital stock
514

 
719

Accrued interest payable
143

 
95

Affordable Housing Program (AHP) payable
180

 
147

Derivative liabilities, net
6

 
20

Other liabilities
112

 
117

Total Liabilities
80,985

 
70,114

Commitments and Contingencies (Note 17)



Capital:
 
 
 
Capital stock—Class B—Putable ($100 par value) issued and outstanding:
 
 
 
23 shares and 33 shares, respectively
2,246

 
3,278

Unrestricted retained earnings
618

 
294

Restricted retained earnings
2,009

 
2,065

Total Retained Earnings
2,627

 
2,359

Accumulated other comprehensive income/(loss) (AOCI)
41

 
56

Total Capital
4,914

 
5,693

Total Liabilities and Capital
$
85,899

 
$
75,807


(a)
At September 30, 2015, and December 31, 2014, none of these securities were pledged as collateral that may be repledged.
(b)
At September 30, 2015, none of these securities were pledged as collateral that may be repledged. At December 31, 2014, a de minimis amount 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)
2015

 
2014

 
2015

 
2014

Interest Income:
 
 
 
 
 
 
 
Advances
$
73

 
$
74

 
$
213

 
$
229

Prepayment fees on advances, net
1

 
1

 
9

 
5

Securities purchased under agreements to resell
1

 
—

 
2

 
—

Federal funds sold
2

 
4

 
6

 
9

Trading securities
2

 
2

 
5

 
5

AFS securities
65

 
67

 
199

 
210

HTM securities
70

 
89

 
226

 
278

Mortgage loans held for portfolio
8

 
10

 
25

 
32

Total Interest Income
222

 
247

 
685

 
768

Interest Expense:
 
 
 
 
 
 
 
Consolidated obligations:
 
 
 
 
 
 
 
Bonds
83

 
84

 
239

 
247

Discount notes
13

 
4

 
29

 
16

Mandatorily redeemable capital stock
7

 
26

 
60

 
99

Total Interest Expense
103

 
114

 
328

 
362

Net Interest Income
119

 
133

 
357

 
406

Provision for/(reversal of) credit losses on mortgage loans
—

 
(1
)
 
—

 
—

Net Interest Income After Mortgage Loan Loss Provision
119

 
134

 
357

 
406

Other Income/(Loss):
 
 
 
 
 
 
 
Total other-than-temporary impairment (OTTI) loss
(6
)
 
(1
)
 
(25
)
 
(5
)
Net amount of OTTI loss reclassified to/(from) AOCI
2

 
—

 
13

 
2

Net OTTI loss, credit-related
(4
)
 
(1
)
 
(12
)
 
(3
)
Net gain/(loss) on trading securities
(1
)
 
(1
)
 
(1
)
 
(1
)
Net gain/(loss) on advances and consolidated obligation bonds held under fair value option
3

 
(13
)
 
(30
)
 
(82
)
Net gain/(loss) on derivatives and hedging activities
(33
)
 
—

 
(27
)
 
(34
)
Gains on litigation settlements, net
—

 
—

 
459

 
—

Other
2

 
3

 
8

 
6

Total Other Income/(Loss)
(33
)
 
(12
)
 
397

 
(114
)
Other Expense:
 
 
 
 
 
 
 
Compensation and benefits
16

 
15

 
50

 
47

Other operating expense
16

 
16

 
45

 
47

Federal Housing Finance Agency
1

 
1

 
4

 
5

Office of Finance
1

 
2

 
3

 
4

Total Other Expense
34

 
34

 
102

 
103

Income/(Loss) Before Assessment
52

 
88

 
652

 
189

AHP Assessment
6

 
12

 
71

 
29

Net Income/(Loss)
$
46

 
$
76

 
$
581

 
$
160


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)
2015

 
2014

 
2015

 
2014

Net Income/(Loss)
$
46

 
$
76

 
$
581

 
$
160

Other Comprehensive Income/(Loss):
 
 
 
 
 
 
 
Net change in pension and postretirement benefits
(1
)
 
1

 
—

 
1

Net non-credit-related OTTI gain/(loss) on AFS securities:
 
 
 
 
 
 
 
Net change in fair value of other-than-temporarily impaired securities
(25
)
 
77

 
(7
)
 
237

Net amount of OTTI loss reclassified to/(from) other income/(loss)
(2
)
 
—

 
(13
)
 
(2
)
Total net non-credit-related OTTI gain/(loss) on AFS securities
(27
)
 
77

 
(20
)
 
235

Net non-credit-related OTTI gain/(loss) on HTM securities:
 
 
 
 
 
 
 
Accretion of non-credit-related OTTI loss
1

 
2

 
5

 
5

Total net non-credit-related OTTI gain/(loss) on HTM securities
1

 
2

 
5

 
5

Total other comprehensive income/(loss)
(27
)
 
80

 
(15
)
 
241

Total Comprehensive Income/(Loss)
$
19

 
$
156

 
$
566

 
$
401



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, 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 from/(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

Balance, December 31, 2014
33

 
$
3,278

 
$
2,065

 
$
294

 
$
2,359

 
$
56

 
$
5,693

Issuance of capital stock
7

 
708

 
 
 
 
 
 
 
 
 
708

Repurchase of capital stock
(13
)
 
(1,325
)
 
 
 
 
 
 
 
 
 
(1,325
)
Capital stock reclassified from/(to) mandatorily redeemable capital stock, net
(4
)
 
(415
)
 
 
 
 
 
 
 
 
 
(415
)
Comprehensive income/(loss)
 
 
 
 
94

 
487

 
581

 
(15
)
 
566

Transfers from restricted retained earnings
 
 
 
 
(150
)
 
150

 
—

 
 
 
—

Cash dividends paid on capital stock (13.30%)
 
 
 
 
 
 
(313
)
 
(313
)
 
 
 
(313
)
Balance, September 30, 2015
23

 
$
2,246

 
$
2,009

 
$
618

 
$
2,627

 
$
41

 
$
4,914


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)
2015

 
2014

Cash Flows from Operating Activities:
 
 
 
Net Income /(Loss)
$
581

 
$
160

Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
(63
)
 
(64
)
Change in net fair value of trading securities
1

 
1

Change in net fair value adjustment on advances and consolidated obligation bonds held under the fair value option
30

 
82

Change in net derivatives and hedging activities
(68
)
 
(124
)
Net OTTI loss, credit-related
12

 
3

Net change in:
 
 
 
Accrued interest receivable
16

 
15

Other assets
(2
)
 
—

Accrued interest payable
45

 
47

Other liabilities
27

 
4

Total adjustments
(2
)
 
(36
)
Net cash provided by/(used in) operating activities
579

 
124

Cash Flows from Investing Activities:
 
 
 
Net change in:
 
 
 
Interest-bearing deposits
(314
)
 
(228
)
Securities purchased under agreements to resell
(9,500
)
 
(500
)
Federal funds sold
4,741

 
550

Premises, software, and equipment
(7
)
 
(8
)
Trading securities:
 
 
 
Proceeds from maturities of long-term
1,864

 
331

Purchases of long-term
—

 
(750
)
AFS securities:
 
 
 
Proceeds from maturities of long-term
748

 
703

HTM securities:
 
 
 
Net (increase)/decrease in short-term
—

 
369

Proceeds from maturities of long-term
2,128

 
1,878

Purchases of long-term
—

 
(207
)
Advances:
 
 
 
Principal collected
758,365

 
567,859

Made to members
(770,148
)
 
(564,152
)
Mortgage loans held for portfolio:
 
 
 
Principal collected
140

 
154

Purchases
(100
)
 
(3
)
Proceeds from sales of foreclosed assets
3

 
3

Net cash provided by/(used in) investing activities
(12,080
)
 
5,999

 




5

Federal Home Loan Bank of San Francisco
Statements of Cash Flows (continued)
(Unaudited)

 
Nine Months Ended September 30,
(In millions)
2015

 
2014

Cash Flows from Financing Activities:
 
 
 
Net change in:
 
 
 
Deposits
295

 
288

Net (payments)/proceeds on derivative contracts with financing elements
9

 
6

Net proceeds from issuance of consolidated obligations:
 
 
 
Bonds
29,625

 
28,729

Discount notes
88,511

 
83,632

Payments for matured and retired consolidated obligations:
 

 
Bonds
(26,815
)

(30,966
)
Discount notes
(80,293
)

(83,393
)
Proceeds from issuance of capital stock
708


624

Payments for repurchase/redemption of mandatorily redeemable capital stock
(620
)

(998
)
Payments for repurchase of capital stock
(1,325
)
 
(771
)
Cash dividends paid
(313
)

(178
)
Net cash provided by/(used in) financing activities
9,782


(3,027
)
Net increase/(decrease) in cash and due from banks
(1,719
)

3,096

Cash and due from banks at beginning of the period
3,920

 
4,906

Cash and due from banks at end of the period
$
2,201


$
8,002

Supplemental Disclosures:
 
 
 
Interest paid
$
318

 
$
357

AHP payments
38

 
27

Supplemental Disclosures of Noncash Investing Activities:
 
 
 
Transfers of mortgage loans to real estate owned
2

 
2

Transfers of other-than-temporarily impaired HTM securities to AFS securities
4

 
—


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, 2015. 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, 2014 (2014 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 other-than-temporary impairment (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, 2015, 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)



Gains on Litigation Settlements, Net. Litigation settlement gains, net of related legal expenses, are recorded in Other Income/(Loss) in “Gains on litigation settlements, net” in the Statements of Income. A litigation settlement gain is considered realized and recorded when the Bank receives cash or assets that are readily convertible to known amounts of cash or claims to cash. In addition, a litigation settlement gain is considered realizable and recorded when the Bank enters into a signed agreement that is not subject to appeal, where the counterparty has the ability to pay, and the amount to be received can be reasonably estimated. Prior to being realized or realizable, the Bank considers potential litigation settlement gains to be gain contingencies, and therefore they are not recorded in the Statements of Income. The related legal expenses are contingent-based fees and are only incurred and recorded upon a litigation settlement gain.

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 2014 Form 10-K. Other changes to these policies as of September 30, 2015, are discussed in Note 2 – Recently Issued and Adopted Accounting Guidance.

Note 2 — Recently Issued and Adopted Accounting Guidance

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. On April 15, 2015, the Financial Accounting Standards Board (FASB) issued amendments to clarify a customer’s accounting for fees paid in a cloud computing arrangement. The amendments provide guidance to customers on determining whether a cloud computing arrangement includes a software license that should be accounted for as internal-use software. If the arrangement does not contain a software license, it would be accounted for as a service contract. This guidance becomes effective for the Bank for the interim and annual periods beginning after December 15, 2015, and early adoption is permitted. The Bank can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. The Bank is in the process of evaluating this guidance and its effect on the Bank’s financial condition, results of operations, and cash flows.

Simplifying the Presentation of Debt Issuance Costs. On April 7, 2015, the FASB issued guidance to simplify the presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented on the statement of condition as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt discounts. The adoption of this guidance will result in a reclassification of unamortized debt issuance costs from other assets to consolidated obligations on the Bank’s Statements of Condition. This guidance becomes effective for the Bank for the interim and annual periods beginning after December 15, 2015, and early adoption is permitted for financial statements that have not been previously issued. The guidance is required to be applied on a retrospective basis to each individual period presented on the statement of condition. The Bank is in the process of evaluating this guidance and its effect on the Bank’s financial condition, results of operations, and cash flows.

Amendments to the Consolidation Guidance. On February 18, 2015, the FASB issued guidance intended to enhance consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The new guidance primarily focuses on the following:
•
Placing more emphasis on risk of loss when determining a controlling financial interest. A reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met.
•
Reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a VIE.
•
Changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs.


8
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



This guidance becomes effective for the Bank for interim and annual periods beginning after December 15, 2015, and early adoption is permitted, including adoption in an interim period. This guidance is not expected to affect the Bank’s financial condition, results of operations, and cash flows.

Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. On August 27, 2014, the 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 became effective for the Bank for the interim and annual periods beginning on January 1, 2015, and was adopted prospectively. The adoption of this guidance did not affect the Bank’s financial condition, results of operations, or cash flows.

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 became effective for the Bank for the interim and annual periods beginning on January 1, 2015. The changes in accounting for transactions outstanding on the effective date are required to be presented on a cumulative-effect basis. The adoption of this guidance did not affect the Bank’s financial condition, results of operations, or cash flows.

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

The guidance provides entities with the option of using either of the following adoption methods: a full retrospective method, applied retrospectively to each prior reporting period presented; or a modified retrospective method, with the cumulative effect of retrospectively applying this guidance recognized at the date of initial application. The Bank is in the process of evaluating this guidance and its effect on the Bank’s financial condition, results of operations, and cash flows, but it is not expected to be material.

On August 12, 2015, the FASB issued an amendment to defer the effective date of the guidance issued in May 2014 by one year. The guidance is effective for the Bank for interim and annual periods beginning after December 15, 2017. Early application is permitted only as of the interim and annual reporting periods beginning after December 15, 2016.

9
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)




Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. On January 17, 2014, the FASB issued guidance clarifying when consumer mortgage loans collateralized by real estate should be reclassified to 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 became effective for interim and annual periods beginning on January 1, 2015, and was adopted prospectively. The adoption of this guidance did not affect the Bank’s financial condition, results of operations, or cash flows.

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 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 were implemented on January 1, 2015, and resulted in a $1 charge-off to the Bank’s allowance for credit losses on the mortgage loan portfolio. The adoption of these charge-off provisions did not have a material effect 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, 2015, and December 31, 2014, was as follows:

 
September 30, 2015

 
December 31, 2014

Government-Sponsored Enterprises (GSEs) – Federal Farm Credit Bank (FFCB) bonds
$
1,649

 
$
3,513

MBS – Other U.S. obligations – Ginnie Mae
10

 
11

Total
$
1,659

 
$
3,524


The net unrealized gain/(loss) on trading securities was $(1) for the three months ended September 30, 2015 and 2014. The net unrealized gain/(loss) on trading securities was $(1) for the nine months ended September 30, 2015 and 2014. 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, 2015, and December 31, 2014, were as follows:

10
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



 
September 30, 2015
 
 
 
 
 
 
 
 
 
  
Amortized
Cost(1)

 
OTTI
Recognized in
AOCI

 
Gross
Unrealized
Gains

 
Gross
Unrealized
Losses

 
Estimated Fair Value

PLRMBS:
 
 
 
 
 
 
 
 
 
Prime
$
506

 
$
(1
)
 
$
26

 
$
—

 
$
531

Alt-A, option ARM
965

 
(37
)
 
71

 
(2
)
 
997

Alt-A, other
4,117

 
(133
)
 
153

 
(9
)
 
4,128

Total
$
5,588

 
$
(171
)
 
$
250

 
$
(11
)
 
$
5,656

 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
Amortized
Cost(1)

 
OTTI
Recognized in
AOCI

 
Gross
Unrealized
Gains

 
Gross
Unrealized
Losses

 
Estimated Fair Value

PLRMBS:
 
 
 
 
 
 
 
 
 
Prime
$
565

 
$
(4
)
 
$
31

 
$
—

 
$
592

Alt-A, option ARM
1,031

 
(43
)
 
77

 
—

 
1,065

Alt-A, other
4,687

 
(145
)
 
174

 
(2
)
 
4,714

Total
$
6,283

 
$
(192
)
 
$
282

 
$
(2
)
 
$
6,371

 
(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, 2015, the amortized cost of the Bank’s PLRMBS classified as AFS included credit-related OTTI of $1,063. At December 31, 2014, the amortized cost of the Bank’s PLRMBS classified as AFS included credit-related OTTI of $1,173.

The following table summarizes the AFS securities with unrealized losses as of September 30, 2015, and December 31, 2014. 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, 2015
 
 
 
 
 
 
 
 
 
 
 
  
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
$
—

 
$
—

 
$
26

 
$
1

 
$
26

 
$
1

Alt-A, option ARM
35

 
1

 
398

 
38

 
433

 
39

Alt-A, other
129

 
1

 
1,609

 
141

 
1,738

 
142

Total
$
164

 
$
2

 
$
2,033

 
$
180

 
$
2,197

 
$
182

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
$
71

 
$
3

 
$
36

 
$
1

 
$
107

 
$
4

Alt-A, option ARM
—

 
—

 
580

 
43

 
580

 
43

Alt-A, other
403

 
12

 
1,682

 
135

 
2,085

 
147

Total
$
474

 
$
15

 
$
2,298

 
$
179

 
$
2,772

 
$
194


As indicated in the tables above, as of September 30, 2015, 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, 2015, and December 31, 2014, are shown in the following table:

  
September 30, 2015

 
December 31, 2014

Amortized cost of AFS PLRMBS:
 
 
 
Collateralized mortgage obligations:
 
 
 
Fixed rate
$
1,665

 
$
1,917

Adjustable rate
3,923

 
4,366

Total
$
5,588

 
$
6,283


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, 2015

 
December 31, 2014

Collateralized mortgage obligations:
 
 
 
Converts in 1 year or less
$
53

 
$
71

Converts after 1 year through 5 years
199

 
226

Total
$
252

 
$
297


See Note 6 – Other-Than-Temporary Impairment Analysis for information on the transfers of securities between the AFS portfolio and the 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, 2015
 
 
 
 
 
 
 
 
 
 
 
  
Amortized
Cost(1)

 
OTTI
Recognized
in AOCI(1)

 
Carrying
Value(1)

 
Gross
Unrecognized
Holding
Gains

 
Gross
Unrecognized
Holding
Losses

 
Estimated
Fair Value

Housing finance agency bonds:
 
 
 
 
 
 
 
 
 
 
 
California Housing Finance Agency (CalHFA) bonds
$
282

 
$
—

 
$
282

 
$
—

 
$
(36
)
 
$
246

MBS:
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations – Ginnie Mae
1,289

 
—

 
1,289

 
23

 
—

 
1,312

GSEs:
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
3,870

 
—

 
3,870

 
70

 
(1
)
 
3,939

Fannie Mae
4,402

 
—

 
4,402

 
114

 
(4
)
 
4,512

Subtotal GSEs
8,272

 
—

 
8,272

 
184

 
(5
)
 
8,451

PLRMBS:
 
 
 
 
 
 
 
 
 
 
 
Prime
955

 
—

 
955

 
—

 
(27
)
 
928

Alt-A, option ARM
13

 
—

 
13

 
—

 
(1
)
 
12

Alt-A, other
636

 
(15
)
 
621

 
15

 
(15
)
 
621

Subtotal PLRMBS
1,604

 
(15
)
 
1,589

 
15

 
(43
)
 
1,561

Total MBS
11,165

 
(15
)
 
11,150

 
222

 
(48
)
 
11,324

Total
$
11,447

 
$
(15
)
 
$
11,432

 
$
222

 
$
(84
)
 
$
11,570

 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
  
Amortized
Cost(1)

 
OTTI
Recognized
in AOCI(1)

 
Carrying
Value(1)

 
Gross
Unrecognized
Holding
Gains

 
Gross
Unrecognized
Holding
Losses

 
Estimated
Fair Value

Housing finance agency bonds:
 
 
 
 
 
 
 
 
 
 
 
California Housing Finance Agency (CalHFA) bonds
$
328

 
$
—

 
$
328

 
$
—

 
$
(45
)
 
$
283

MBS:
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations – Ginnie Mae
1,513

 
—

 
1,513

 
15

 
(2
)
 
1,526

GSEs:
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
4,517

 
—

 
4,517

 
61

 
(12
)
 
4,566

Fannie Mae
5,313

 
—

 
5,313

 
121

 
(6
)
 
5,428

Subtotal GSEs
9,830

 
—

 
9,830

 
182

 
(18
)
 
9,994

PLRMBS:
 
 
 
 
 
 
 
 
 
 
 
Prime
1,133

 
—

 
1,133

 
1

 
(27
)
 
1,107

Alt-A, option ARM
14

 
—

 
14

 
—

 
(1
)
 
13

Alt-A, other
753

 
(20
)
 
733

 
19

 
(18
)
 
734

Subtotal PLRMBS
1,900

 
(20
)
 
1,880

 
20

 
(46
)
 
1,854

Total MBS
13,243

 
(20
)
 
13,223

 
217

 
(66
)
 
13,374

Total
$
13,571


$
(20
)

$
13,551


$
217


$
(111
)

$
13,657


(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.


13
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



At September 30, 2015, the amortized cost of the Bank’s MBS classified as HTM included premiums of $41, discounts of $45, and credit-related OTTI of $8. At December 31, 2014, the amortized cost of the Bank’s MBS classified as HTM included premiums of $51, discounts of $55, and credit-related OTTI of $7.

The following tables summarize the HTM securities with unrealized losses as of September 30, 2015, and December 31, 2014. 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, 2015
 
 
 
 
 
 
 
 
 
 
 
 
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
$
—

 
$
—

 
$
246

 
$
36

 
$
246

 
$
36

MBS:
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations – Ginnie Mae
70

 
—

 
2

 
—

 
72

 
—

GSEs:
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
553

 
1

 
21

 
—

 
574

 
1

Fannie Mae
278

 
1

 
123

 
3

 
401

 
4

Subtotal GSEs
831

 
2

 
144

 
3

 
975

 
5

PLRMBS:
 
 
 
 
 
 
 
 
 
 
 
Prime
146

 
1

 
702

 
26

 
848

 
27

Alt-A, option ARM
—

 
—

 
12

 
1

 
12

 
1

Alt-A, other
1

 
—

 
608

 
30

 
609

 
30

Subtotal PLRMBS
147

 
1

 
1,322

 
57

 
1,469

 
58

Total MBS
1,048

 
3

 
1,468

 
60

 
2,516

 
63

Total
$
1,048

 
$
3

 
$
1,714

 
$
96

 
$
2,762

 
$
99

 
December 31, 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

Housing finance agency bonds:
 
 
 
 
 
 
 
 
 
 
 
CalHFA bonds
$
—

 
$
—

 
$
283

 
$
45

 
$
283

 
$
45

MBS:
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations – Ginnie Mae
131

 
—

 
94

 
2

 
225

 
2

GSEs:
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
622

 
1

 
1,044

 
11

 
1,666

 
12

Fannie Mae
286

 
1

 
562

 
5

 
848

 
6

Subtotal GSEs
908

 
2

 
1,606

 
16

 
2,514

 
18

PLRMBS:
 
 
 
 
 
 
 
 
 
 
 
Prime
264

 
2

 
682

 
25

 
946

 
27

Alt-A, option ARM
—

 
—

 
13

 
1

 
13

 
1

Alt-A, other
30

 
—

 
685

 
38

 
715

 
38

Subtotal PLRMBS
294

 
2

 
1,380

 
64

 
1,674

 
66

Total MBS
1,333

 
4

 
3,080

 
82

 
4,413

 
86

Total
$
1,333

 
$
4

 
$
3,363

 
$
127

 
$
4,696

 
$
131


14
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)




As indicated in the tables above, the Bank’s investments classified as HTM had unrealized losses primarily related to CalHFA bonds and MBS. The unrealized losses associated with the CalHFA bonds were mainly due to an illiquid market, credit concerns regarding the underlying mortgage collateral, and credit concerns regarding the monoline insurance providers, causing these investments to be valued at a discount to their acquisition cost. For its agency MBS, the Bank expects to recover the entire amortized cost basis of these securities because the Bank determined that the strength of the issuers’ guarantees through direct obligations or support from the U.S. government is sufficient to protect the Bank from losses. The unrealized losses associated with the PLRMBS were primarily due to illiquidity in the PLRMBS market, 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, 2015, and December 31, 2014, 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.

September 30, 2015
 
 
 
 
 
Year of Contractual Maturity
Amortized
Cost(1)

 
Carrying
Value(1)

 
Estimated
Fair Value

HTM securities other than MBS:
 
 
 
 
 
Due after 5 years through 10 years
$
61


$
61

 
$
56

Due after 10 years
221

 
221

 
190

Subtotal
282

 
282

 
246

MBS
11,165

 
11,150

 
11,324

Total
$
11,447

 
$
11,432

 
$
11,570

 
December 31, 2014
 
 
 
 
 
Year of Contractual Maturity
Amortized
Cost(1)

 
Carrying
Value(1)

 
Estimated
Fair Value

HTM securities other than MBS:
 
 
 
 
 
Due after 5 years through 10 years
$
78

 
$
78

 
$
70

Due after 10 years
250

 
250

 
213

Subtotal
328

 
328

 
283

MBS
13,243

 
13,223

 
13,374

Total
$
13,571

 
$
13,551

 
$
13,657


(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, 2015, and December 31, 2014, are detailed in the following table:
 

15
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



  
September 30, 2015

 
December 31, 2014

Amortized cost of HTM securities other than MBS:
 
 
 
Adjustable rate
$
282


$
328

Subtotal
282


328

Amortized cost of HTM MBS:
 
 
 
Passthrough securities:
 
 
 
Fixed rate
205


285

Adjustable rate
391


415

Collateralized mortgage obligations:
 
 
 
Fixed rate
7,666


9,249

Adjustable rate
2,903


3,294

Subtotal
11,165


13,243

Total
$
11,447


$
13,571


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, 2015

 
December 31, 2014

Passthrough securities:
 
 
 
Converts in 1 year or less
$
44

 
$
79

Converts after 1 year through 5 years
107

 
140

Converts after 5 years through 10 years
48

 
59

Total
$
199

 
$
278

Collateralized mortgage obligations:
 
 
 
Converts in 1 year or less
$
14

 
$
73

Converts after 1 year through 5 years
14

 
26

Total
$
28

 
$
99


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 OTTI Governance Committee of the Federal Home Loan Banks (FHLBanks) developed a short-term housing price forecast with projected changes ranging from a decrease of 3.0% to an increase of 8.0% over the 12-month period beginning July 1, 2015. For the vast majority of markets, the projected short-term housing price

16
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



changes range from an increase of 2.0% to an increase of 5.0%. 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, 2015 (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 2015, and the related current credit enhancement for the Bank.

September 30, 2015
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
2006
13.2
 
19.6
 
34.6
 
—
Total Prime
13.2
 
19.6
 
34.6
 
—
Alt-A, other
 
 
 
 
 
 
 
2007
10.5
 
29.2
 
37.1
 
11.8
2006
8.5
 
31.5
 
39.3
 
—
2005
13.0
 
14.8
 
37.5
 
6.6
2004 and earlier
16.6
 
4.4
 
30.5
 
26.6
Total Alt-A, other
11.5
 
22.0
 
37.6
 
7.5
Total
11.5
 
22.0
 
37.6
 
7.5

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, 2015 and 2014.
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2015

 
2014

2015

 
2014

Balance, beginning of the period
$
1,284

 
$
1,347

$
1,314

 
$
1,378

Additional charges on securities for which OTTI was previously recognized(1)
4

 
1

12

 
3

Accretion of yield adjustments resulting from improvement of expected cash flows that are recognized over the remaining life of the securities
(18
)
 
(16
)
(56
)
 
(49
)
Balance, end of the period
$
1,270

 
$
1,332

$
1,270

 
$
1,332


(1)
For the three months ended September 30, 2015 and 2014, “securities for which OTTI was previously recognized” represents all securities that were also other-than-temporarily impaired prior to July 1, 2015 and 2014, respectively. For the nine months ended September 30, 2015 and 2014, “securities for which OTTI was previously recognized” represents all securities that were also other-than-temporarily impaired prior to January 1, 2015 and 2014, respectively.


17
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 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, 2015. The amounts shown represent the values when the securities were transferred from the HTM portfolio to the AFS portfolio. 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.

 
Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015
 
Amortized
Cost

 
OTTI
Recognized
in AOCI

 
Gross
Unrecognized
Holding
Gains (Losses)

 
Estimated
Fair Value

 
Amortized
Cost

 
OTTI
Recognized
in AOCI

 
Gross
Unrecognized
Holding
Gains (Losses)

 
Estimated
Fair Value

Other-than-temporarily impaired PLRMBS backed by loans classified at origination as:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prime
$
—

 
$
—

 
$
—

 
$
—

 
$
4

 
$
—

 
$
—

 
$
4

Total
$
—

 
$
—

 
$
—

 
$
—

 
$
4

 
$
—

 
$
—

 
$
4


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, 2015, and December 31, 2014, by loan collateral type:

September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
$
612

 
$
506

 
$
531

 
$
—

 
$
—

 
$
—

 
$
—

Alt-A, option ARM
1,291

 
965

 
997

 
—

 
—

 
—

 
—

Alt-A, other
4,739

 
4,117

 
4,128

 
116

 
112

 
97

 
112

Total
$
6,642

 
$
5,588

 
$
5,656

 
$
116

 
$
112

 
$
97

 
$
112

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
$
682

 
$
565

 
$
592

 
$
—

 
$
—

 
$
—

 
$
—

Alt-A, option ARM
1,391

 
1,031

 
1,065

 
—

 
—

 
—

 
—

Alt-A, other
5,374

 
4,687

 
4,714

 
132

 
128

 
108

 
127

Total
$
7,447

 
$
6,283

 
$
6,371

 
$
132

 
$
128

 
$
108

 
$
127


18
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, 2015, 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, 2015, 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. 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, 2015, 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, 2015, 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 0.16% to 8.57% at September 30, 2015, and 0.14% to 8.57% at December 31, 2014, as summarized below.
 

19
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



 
September 30, 2015
 
December 31, 2014
Contractual Maturity
Amount
Outstanding

 
Weighted
Average
Interest Rate

 
Amount
Outstanding

 
Weighted
Average
Interest Rate

Overdrawn demand and overnight deposit accounts
$
7

 
0.01
%
 
$
—

 
—
%
Within 1 year
20,990

 
0.52

 
21,328

 
0.63

After 1 year through 2 years
7,072

 
0.85

 
7,597

 
1.07

After 2 years through 3 years
6,129

 
0.91

 
3,235

 
1.39

After 3 years through 4 years
7,450

 
0.88

 
3,216

 
1.65

After 4 years through 5 years
2,216

 
1.06

 
1,655

 
1.82

After 5 years
6,749

 
1.05

 
1,799

 
2.81

Total par value
50,613

 
0.76
%
 
38,830

 
1.02
%
Valuation adjustments for hedging activities
105

 
 
 
67

 
 
Valuation adjustments under fair value option
75

 
 
 
89

 
 
Total
$
50,793

 
 
 
$
38,986

 
 

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 $3,691 at September 30, 2015, and $4,915 at December 31, 2014. Some advances may be repaid on pertinent call dates without prepayment fees (callable advances). The Bank had callable advances outstanding totaling $15,213 at September 30, 2015, and $328 at December 31, 2014.

The Bank’s advances at September 30, 2015, and December 31, 2014, included $140 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, 2015, and December 31, 2014, 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, 2015

 
December 31, 2014

 
September 30, 2015

 
December 31, 2014

Overdrawn demand and overnight deposit accounts
$
7

 
$
—

 
$
7

 
$
—

Within 1 year
22,143

 
21,460

 
21,130

 
21,468

After 1 year through 2 years
8,740

 
7,693

 
6,972

 
7,597

After 2 years through 3 years
8,603

 
3,258

 
6,089

 
3,135

After 3 years through 4 years
3,753

 
3,291

 
7,450

 
3,176

After 4 years through 5 years
5,875

 
1,646

 
2,216

 
1,655

After 5 years
1,492

 
1,482

 
6,749

 
1,799

Total par value
$
50,613

 
$
38,830

 
$
50,613

 
$
38,830


Credit and Concentration Risk. The following tables present the concentration in advances to the top five borrowers and their affiliates at September 30, 2015 and 2014. 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, 2015 and 2014.


20
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



 
September 30, 2015
 
Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015
Name of Borrower
Advances
Outstanding

 
Percentage of
Total
Advances
Outstanding

 
Interest
Income from
Advances(1)

 
Percentage of
Total Interest
Income from
Advances

 
Interest
Income from
Advances(1)

 
Percentage of
Total Interest
Income from
Advances

JPMorgan Chase Bank, National Association(2)(3)
$
14,814

 
29
%
 
$
17

 
17
%
 
$
48

 
16
%
Bank of the West
6,112

 
12

 
7

 
7

 
18

 
6

First Republic Bank
4,350

 
9

 
18

 
18

 
58

 
20

CIT Bank, N.A.(4)
3,214

 
6

 
5

 
5

 
13

 
5

Citigroup Inc
 
 
 
 
 
 
 
 
 
 
 
Citibank, N.A.(2)
3,000

 
6

 
1

 
1

 
4

 
1

Banamex USA
—

 
—

 
—

 
—

 
—

 
—

Subtotal Citigroup Inc
3,000

 
6

 
1

 
1

 
4

 
1

     Subtotal
31,490

 
62

 
48

 
48

 
141

 
48

Others
19,123

 
38

 
51

 
52

 
154

 
52

Total par value
$
50,613

 
100
%
 
$
99

 
100
%
 
$
295

 
100
%

 
September 30, 2014
Three Months Ended September 30, 2014
 
Nine Months Ended September 30, 2014
Name of Borrower
Advances
Outstanding

 
Percentage of
Total
Advances
Outstanding

Interest
Income from
Advances(1)

 
Percentage of
Total Interest
Income from
Advances

 
Interest
Income from
Advances(1)

 
Percentage of
Total Interest
Income from
Advances

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(2)
822

 
2

2

 
2

 
6

 
2

     Subtotal JPMorgan Chase & Co.
3,822

 
9

14

 
13

 
49

 
15

OneWest Bank, N.A.(4)
3,414

 
8

6

 
5

 
17

 
5

     Subtotal
23,725

 
58

53

 
50

 
169

 
51

Others
16,755

 
42

52

 
50

 
161

 
49

Total par value
$
40,480

 
100
%
$
105

 
100
%
 
$
330

 
100
%

(1)
Interest income amounts exclude the interest effect of interest rate exchange agreements with derivative counterparties; as a result, the total interest income amounts will not agree to the Statements of Income. The amount of interest income from advances can vary depending on the amount outstanding, terms to maturity, interest rates, and repricing characteristics.
(2)
Nonmember institution.
(3)
Effective August 31, 2015, JPMorgan Bank & Trust Company, National Association (JPMorgan B&T), merged with and into JPMorgan Chase Bank, National Association (JPMorgan Chase). As a result, JPMorgan B&T is no longer a member of the Bank. Upon the merger, all of the Bank capital stock held by JPMorgan B&T was transferred to JPMorgan Chase, a nonmember of the Bank, and reclassified as mandatorily redeemable capital stock, and all advances to JPMorgan B&T were transferred to JPMorgan Chase.
(4)
Effective August 3, 2015, CIT Bank merged with and into OneWest Bank, which was renamed CIT Bank, N.A.

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.


21
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



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, 2015, and December 31, 2014, are detailed below:

  
September 30, 2015

 
December 31, 2014

Par value of advances:
 
 
 
Fixed rate:
 
 
 
Due within 1 year
$
14,172

 
$
15,422

Due after 1 year
10,213

 
12,330

Total fixed rate
24,385

 
27,752

Adjustable rate:
 
 
 
Due within 1 year
6,825

 
5,906

Due after 1 year
19,403

 
5,172

Total adjustable rate
26,228

 
11,078

Total par value
$
50,613

 
$
38,830


The Bank may use derivatives to adjust the repricing and options characteristics of advances to more closely match the characteristics of the Bank’s funding liabilities. In general, whenever a member executes a fixed or variable rate advance with embedded options, the Bank will simultaneously execute an interest rate exchange agreement with terms that offset the terms and embedded options in the advance. The combination of the advance and the interest rate exchange agreement effectively creates a variable rate asset. This type of hedge relationship receives fair value option accounting treatment. In addition, for certain advances for which the Bank has elected the fair value option, the Bank will simultaneously execute an interest rate exchange agreement with terms that economically offset the terms of the advance. However, this type of hedge is treated as an economic hedge because these combinations generally do not meet the requirements for fair value hedge accounting treatment. For more information, see Note 15 – Derivatives and Hedging Activities and Note 16 – Fair Value.

The Bank did not have any advances with embedded features that met the requirements to separate the embedded feature from the host contract and designate the embedded feature as a stand-alone derivative at September 30, 2015, or December 31, 2014. The Bank has generally elected to account for certain advances with embedded features under the fair value option, and these advances are carried at fair value on the Statements of Condition. For more information, see Note 16 – Fair Value.

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

 
Three Months Ended
Nine Months Ended
 
September 30, 2015

 
September 30, 2014

September 30, 2015

 
September 30, 2014

Prepayment fees received
$
1

 
$
1

$
27

 
$
15

Fair value adjustments
—

 
—

(18
)
 
(10
)
Net
1

 
$
1

$
9

 
$
5

Advance principal prepaid
$
272

 
$
911

$
1,517

 
$
1,616



22
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



Note 8 — Mortgage Loans Held for Portfolio

Under the Mortgage Partnership Finance® (MPF®) Program, the Bank may purchase conventional conforming fixed rate mortgage loans and FHA/VA-insured mortgage loans from members for the Bank’s own portfolio under the MPF Original and MPF Government products. In addition, the Bank may facilitate the purchase of conforming fixed rate mortgage loans from members for concurrent sale to Fannie Mae under the MPF Xtra® product and of jumbo fixed rate mortgage loans for concurrent sale to Redwood Trust, Inc., a real estate investment trust, under the MPF Direct product. (“Mortgage Partnership Finance,” “MPF,” and “MPF Xtra” are registered trademarks of the FHLBank of Chicago.) As of September 30, 2015, the Bank had approved seven members as 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 mortgage loans from its participating financial institutions under the MPF Original and MPF Plus products. Participating members originated or purchased the mortgage loans, credit-enhanced them and sold them to the Bank, and generally retained the servicing of the loans.

The following table presents information as of September 30, 2015, and December 31, 2014, on mortgage loans, all of which are secured by one- to four-unit residential properties and single-unit second homes.

  
September 30, 2015

 
December 31, 2014

Fixed rate medium-term mortgage loans
$
115

 
$
160

Fixed rate long-term mortgage loans
553

 
553

Subtotal
668

 
713

Unamortized premiums
9

 
6

Unamortized discounts
(9
)
 
(10
)
Mortgage loans held for portfolio
668

 
709

Less: Allowance for credit losses
—

 
(1
)
Total mortgage loans held for portfolio, net
$
668

 
$
708


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

For information related to the Bank’s credit risk on mortgage loans and allowance methodology for credit losses, see Note 9 – Allowance for Credit Losses.

Note 9 — Allowance for Credit Losses

The Bank has established an allowance methodology for each of its portfolio segments: 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 2014 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, 2015, and December 31, 2014, 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, 2015, or during 2014.


23
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



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, 2015, 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.

No member institutions were placed into receivership during the first nine months of 2015 or from October 1 to October 31, 2015.

Mortgage Loans Held for Portfolio. The following table presents information on delinquent mortgage loans as of September 30, 2015, and December 31, 2014.

 
September 30, 2015

 
December 31, 2014

 
Recorded
Investment(1)

 
Recorded
Investment(1)

30 – 59 days delinquent
$
9

 
$
12

60 – 89 days delinquent
3

 
5

90 days or more delinquent
19

 
22

Total past due
31

 
39

Total current loans
640

 
673

Total mortgage loans
$
671

 
$
712

In process of foreclosure, included above(2)
$
7

 
$
11

Nonaccrual loans
$
19

 
$
22

Serious delinquencies as a percentage of total mortgage loans outstanding(3)
2.76
%
 
3.12
%

(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 allowance for credit losses on the mortgage loan portfolio was as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015

 
September 30, 2014

 
September 30, 2015

 
September 30, 2014

Balance, beginning of the period
$
—

 
$
2

 
$
1

 
$
2

(Charge-offs) /recoveries
—

 
1

 
(1
)
 
—

Provision for/(reversal of) credit losses
—

 
(1
)
 
—

 
—

Balance, end of the period
$
—

 
$
2

 
$
—

 
$
2

Ratio of net charge-offs during the period to average loans outstanding during the period
(0.03
)%
 
(0.01
)%
 
(0.22
)%
 
(0.05
)%

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

24
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



 
September 30, 2015

 
December 31, 2014

Allowance for credit losses, end of period:
 
 
 
Individually evaluated for impairment
$
—

 
$
1

Collectively evaluated for impairment
—

 
—

Total allowance for credit losses
$
—


$
1

Recorded investment, end of period:
 
 
 
Individually evaluated for impairment
$
14

 
$
20

Collectively evaluated for impairment
657

 
692

Total recorded investment
$
671

 
$
712


The recorded investment, unpaid principal balance, and related allowance of impaired loans individually evaluated for impairment are as follows:
 
September 30, 2015
 
December 31, 2014
 
Recorded Investment

 
Unpaid Principal Balance

 
Related Allowance

 
Recorded Investment

 
Unpaid Principal Balance

 
Related Allowance

With no related allowance
$
14

 
$
14

 
$
—

 
$
14

 
$
14

 
$
—

With an allowance
—

 
—

 
—

 
6

 
6

 
1

Total
$
14

 
$
14

 
$
—

 
$
20

 
$
20

 
$
1


The average recorded investment on impaired loans individually evaluated for impairment is as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015

 
September 30, 2014

 
September 30, 2015

 
September 30, 2014

With no related allowance
$
16

 
$
17

 
$
15

 
$
18

With an allowance
—

 
7

 
1

 
7

Total
$
16

 
$
24

 
$
16

 
$
25


The Bank and any participating financial institution share in the credit risk of the loans sold by that institution as specified in a master agreement. Loans purchased under the MPF Program generally have a credit risk exposure at the time of purchase equivalent to assets rated AA, taking into consideration the credit risk sharing structure mandated by the Finance Agency’s acquired member assets (AMA) regulation. The MPF Program structures potential credit losses on conventional MPF loans into layers with respect to each pool of loans purchased by the Bank under a single master commitment, as follows:

1.
The first layer of protection against loss is the liquidation value of the real property securing the loan.
2.
The next layer of protection comes from the primary mortgage insurance that is required for loans with a loan-to-value ratio greater than 80%, if still in place.
3.
Losses that exceed the liquidation value of the real property and any primary mortgage insurance, up to an agreed-upon amount called the first loss account for each master commitment, are incurred by the Bank.
4.
Losses in excess of the first loss account for each master commitment, up to an agreed-upon amount called the credit enhancement amount, are covered by the participating financial institution’s credit enhancement obligation at the time losses are incurred.
5.
Losses in excess of the first loss account and the participating financial institution’s remaining credit enhancement for the master commitment, if any, are incurred by the Bank.

The Bank calculates its estimated allowance for credit losses on mortgage loans acquired under the MPF Original and MPF Plus products as described below. Effective January 1, 2015, the Bank implemented the accounting requirements of regulatory Advisory Bulletin 2012-02. As a result, for any mortgage loans that are more than 180 days past due and that have any outstanding balance in excess of the fair value of the property, less cost to sell, this

25
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



excess is charged off as a loss by the end of the month in which the applicable time period elapses. Likewise, when a borrower is in bankruptcy, loans are written down to the fair value of the collateral, less cost to sell, in general within 60 days of receipt of the notification of filing from the bankruptcy court, unless it can be clearly demonstrated and documented that repayment is likely to occur. As a result of these charge-offs during the first nine months of 2015, the corresponding Allowance for Credit Losses on MPF Loans, which had previously provided for most of these expected losses, was reduced accordingly.

Allowance for Credit Losses on MPF Loans – The Bank evaluates the allowance for credit losses on MPF mortgage loans based on two components. The first component applies to each individual loan that is specifically identified as impaired. The Bank evaluates the exposure on these loans by considering the first layer of loss protection (the liquidation value of the real property securing the loan) and the availability and collectability of credit enhancements under the terms of each master commitment and records a provision for credit losses. For this component, no allowance for credit losses for MPF Original loans was required as of September 30, 2015, and the Bank established an allowance for credit losses for MPF Original loans totaling a de minimis amount as of December 31, 2014. For MPF Plus loans, the Bank established an allowance for credit losses totaling a de minimis amount as of September 30, 2015, and $1 as of December 31, 2014.

The second component applies to loans that are not specifically identified as impaired and is based on the Bank’s estimate of probable credit losses on those loans as of the financial statement date. The Bank evaluates the credit loss exposure on a loan pool basis considering various observable data, such as delinquency statistics, past performance, current performance, loan portfolio characteristics, collateral valuations, industry data, and prevailing economic conditions. The Bank also considers the availability and collectability of credit enhancements from participating financial institutions or from mortgage insurers under the terms of each master commitment. For this component, the Bank established an allowance for credit losses for MPF Original loans totaling a de minimis amount as of September 30, 2015, and December 31, 2014, and for MPF Plus loans totaling a de minimis amount as of September 30, 2015, and December 31, 2014.

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 MPF loans classified as TDRs totaled $2.7 as of September 30, 2015, and $2.3 as of December 31, 2014.

Term Securities Purchased Under Agreements to Resell. Securities purchased under agreements to resell are considered collateralized financing arrangements and effectively represent short-term loans to counterparties that are considered by the Bank to be of investment quality, which are classified as assets in the Statements of Condition. Securities purchased under agreements to resell are held in safekeeping in the name of the Bank by third-party custodians approved by the Bank. In accordance with the terms of these loans, if the market value of the underlying securities decreases below the market value required as collateral, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash. If an agreement to

26
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



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. Based upon the collateral held as security, the Bank determined that no allowance for credit losses was needed for the term securities purchased under agreements to resell at September 30, 2015. The Bank did not have any term securities purchased under agreements to resell at December 31, 2014.

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. The Bank did not have any term Federal funds sold as of September 30, 2015. All investments in Federal funds sold as of December 31, 2014, 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, 2015, and December 31, 2014, were as follows:
 
September 30, 2015

 
December 31, 2014

Interest-bearing deposits:
 
 
 
Demand and overnight
$
171

 
$
159

Total interest-bearing deposits
171

 
159

Non-interest-bearing deposits
2

 
1

Total
$
173

 
$
160


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, 2015, and December 31, 2014, are detailed in the following table:

 
September 30, 2015
 
December 31, 2014
 
Amount
Outstanding

 
Weighted
Average
Interest Rate

 
Amount
Outstanding

 
Weighted
Average
Interest Rate

Interest-bearing deposits – Adjustable rate
$
171

 
0.01
%
 
$
159

 
0.01
%
Non-interest-bearing deposits
2

 
 
 
1

 
 
Total
$
173

 
 
 
$
160

 
 

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 20 – Commitments and Contingencies” in the Bank’s 2014 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.

27
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



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, 2015, and December 31, 2014.

 
September 30, 2015
 
December 31, 2014
Contractual Maturity
Amount
Outstanding

 
Weighted
Average
Interest Rate

 
Amount
Outstanding

 
Weighted
Average
Interest Rate

Within 1 year
$
20,678

 
0.54
%
 
$
21,044

 
0.36
%
After 1 year through 2 years
15,494

 
1.63

 
9,871

 
2.43

After 2 years through 3 years
5,568

 
1.41

 
4,518

 
1.70

After 3 years through 4 years
2,093

 
1.46

 
2,336

 
1.49

After 4 years through 5 years
1,990

 
1.60

 
3,103

 
1.71

After 5 years
3,711

 
2.35

 
5,851

 
2.13

Total par value
49,534

 
1.19
%
 
46,723

 
1.29
%
Unamortized premiums
32

 
 
 
58

 
 
Unamortized discounts
(9
)
 
 
 
(13
)
 
 
Valuation adjustments for hedging activities
259

 
 
 
308

 
 
Fair value option valuation adjustments
(1
)
 
 
 
(31
)
 
 
Total
$
49,815

 
 
 
$
47,045

 
 

The Bank’s participation in consolidated obligation bonds outstanding includes callable bonds of $10,205 at September 30, 2015, and $14,158 at December 31, 2014. When a callable bond for which the Bank is the primary obligor is issued, the Bank may simultaneously enter into an interest rate swap (in which the Bank pays a variable rate and receives a fixed rate) with a call feature that mirrors the call option embedded in the bond (a sold callable swap). The Bank had notional amounts of interest rate exchange agreements hedging callable bonds of $5,885 at September 30, 2015, and $9,573 at December 31, 2014. The combined sold callable swaps and callable bonds enable the Bank to meet its funding needs at costs not otherwise directly attainable solely through the issuance of non-callable debt, while effectively converting the Bank’s net payment to an adjustable rate.

The Bank’s participation in consolidated obligation bonds at September 30, 2015, and December 31, 2014, was as follows:  
  
September 30, 2015

 
December 31, 2014

Par value of consolidated obligation bonds:
 
 
 
Non-callable
$
39,329

 
$
32,565

Callable
10,205

 
14,158

Total par value
$
49,534

 
$
46,723


The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding at September 30, 2015, and December 31, 2014, by the earlier of the year of contractual maturity or next call date.
 

28
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



Earlier of Contractual
Maturity or Next Call Date
September 30, 2015

 
December 31, 2014

Within 1 year
$
29,983

 
$
33,558

After 1 year through 2 years
14,684

 
9,156

After 2 years through 3 years
3,588

 
2,043

After 3 years through 4 years
693

 
1,010

After 4 years through 5 years
410

 
385

After 5 years
176

 
571

Total par value
$
49,534

 
$
46,723


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, 2015
 
December 31, 2014
 
Amount
Outstanding

 
Weighted
Average
Interest Rate

 
Amount
Outstanding

 
Weighted
Average
Interest Rate

Par value
$
30,060

 
0.19
%
 
$
21,815

 
0.09
%
Unamortized discounts
(18
)
 
 
 
(4
)
 
 
Total
$
30,042

 
 
 
$
21,811

 
 

Interest Rate Payment Terms. Interest rate payment terms for consolidated obligations at September 30, 2015, and December 31, 2014, 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 2014 Form 10-K.
 
  
September 30, 2015

 
December 31, 2014

Par value of consolidated obligations:
 
 
 
Bonds:
 
 
 
Fixed rate
$
31,324

 
$
39,324

Adjustable rate
15,910

 
3,678

Step-up
1,335

 
2,654

Step-down
550

 
500

Fixed rate that converts to adjustable rate
315

 
467

Range bonds
100

 
100

Total bonds, par value
49,534

 
46,723

Discount notes, par value
30,060

 
21,815

Total consolidated obligations, par value
$
79,594

 
$
68,538


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, 2015, or December 31, 2014. The Bank has generally elected to account for certain bonds with embedded features under the fair value option, and these bonds are carried at fair value on the Statements of Condition. For more information, see Note 16 – Fair Value.


29
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



Note 12 — Accumulated Other Comprehensive Income/(Loss)

The following table summarizes the changes in AOCI for the three months ended September 30, 2015 and 2014:
 
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, 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

 
 
 
 
 
 
 
 
Balance, June 30, 2015
$
95

 
$
(16
)
 
$
(11
)
 
$
68

Other comprehensive income/(loss) before reclassifications:
 
 
 
 
 
 
 
Net change in pension and postretirement benefits
 
 
 
 
(1
)
 
(1
)
Non-credit-related OTTI loss
(3
)
 
—

 
 
 
(3
)
Net change in fair value
(25
)
 
 
 
 
 
(25
)
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)
(27
)
 
1

 
(1
)
 
(27
)
Balance, September 30, 2015
$
68

 
$
(15
)
 
$
(12
)
 
$
41
























30
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



The following table summarizes the changes in AOCI for the nine months ended September 30, 2015 and 2014:

 
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, 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

 
 
 
 
 
 
 
 
Balance, December 31, 2014
$
88

 
$
(20
)
 
$
(12
)
 
$
56

Other comprehensive income/(loss) before reclassifications:
 
 
 
 
 
 
 
Non-credit-related OTTI loss
(16
)
 
—

 
 
 
(16
)
Net change in fair value
(7
)
 
 
 
 
 
(7
)
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)
(20
)
 
5

 
—

 
(15
)
Balance, September 30, 2015
$
68

 
$
(15
)
 
$
(12
)
 
$
41


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, 2015, and December 31, 2014, the Bank was in compliance with these capital rules and requirements as shown in the following table.

31
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



 
 
September 30, 2015
 
December 31, 2014
 
Required

 
Actual

 
Required

 
Actual

Risk-based capital
$
2,810

 
$
5,387

 
$
3,231

 
$
6,356

Total regulatory capital
$
3,436

 
$
5,387

 
$
3,032

 
$
6,356

Total regulatory capital ratio
4.00
%
 
6.27
%
 
4.00
%
 
8.38
%
Leverage capital
$
4,295

 
$
8,081

 
$
3,790

 
$
9,534

Leverage ratio
5.00
%
 
9.41
%
 
5.00
%
 
12.58
%

Effective August 3, 2015, the Bank reduced its activity-based stock requirements within the ranges authorized by the Bank’s capital plan. The activity-based stock requirement for advances was reduced from 3.0% to 2.7%, and the activity-based stock requirement for mortgage loans purchased from the member and held by the Bank was reduced from 3.0% to 0.0%.

Mandatorily Redeemable Capital Stock. The Bank had mandatorily redeemable capital stock totaling $514 outstanding to 11 institutions at September 30, 2015, and $719 outstanding to 32 institutions at December 31, 2014. The change in mandatorily redeemable capital stock for the three and nine months ended September 30, 2015 and 2014, was as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014

 
September 30, 2015

 
September 30, 2014

Balance at the beginning of the period
$
142

 
$
1,176

 
$
719

 
$
2,071

Reclassified from/(to) capital during the period(1)
403

 
1

 
415

 
3

Redemption of mandatorily redeemable capital stock
(18
)
 
(3
)
 
(52
)
 
(18
)
Repurchase of excess mandatorily redeemable capital stock
(13
)
 
(98
)
 
(568
)
 
(980
)
Balance at the end of the period
$
514

 
$
1,076

 
$
514

 
$
1,076


(1)
The Bank reclassified $403 of capital stock to mandatorily redeemable capital stock (a liability) on September 1, 2015, as a result of the merger of JPMorgan B&T with and into JPMorgan Chase, a nonmember of the Bank.

Cash dividends on mandatorily redeemable capital stock were recorded as interest expense in the amount of $7 and $60 for the three and nine months ended September 30, 2015, respectively, and in the amount of $26 and $99 for the three and nine months ended September 30, 2014, respectively.

The Bank’s mandatorily redeemable capital stock is discussed more fully in “Item 8. Financial Statements and Supplementary Data – Note 15 – Capital” in the Bank’s 2014 Form 10-K.

The following table presents mandatorily redeemable capital stock amounts by contractual redemption period at September 30, 2015, and December 31, 2014.

Contractual Redemption Period
September 30, 2015

 
December 31, 2014

Within 1 year
$
82

 
$
51

After 1 year through 2 years
—

 
582

After 2 years through 3 years
1

 
9

After 3 years through 4 years
—

 
1

After 4 years through 5 years
406

 
2

Past contractual redemption date because of remaining activity(1)
25

 
74

Total
$
514

 
$
719


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

32
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)




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

The Bank’s 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 202% as of September 30, 2015.

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

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, 2015 and 2014:
 
Three Months Ended
 
September 30, 2015
 
September 30, 2014
 
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
$
33

$
1,800

$
337

$
2,170

 
$
49

$
1,800

$
206

$
2,055

Comprehensive income/(loss)
(20
)
—

9

(11
)
 
3

—

15

18

Transfers from restricted retained earnings
—

(150
)
—

(150
)
 
—

—

—

—

Balance at the end of the period
$
13

$
1,650

$
346

$
2,009

 
$
52

$
1,800

$
221

$
2,073


 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
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
$
35

$
1,800

$
230

$
2,065

 
$
88

$
1,800

$
189

$
2,077

Comprehensive income/(loss)
(22
)
—

116

94

 
(36
)
—

32

(4
)
Transfers from restricted retained earnings
—

(150
)
—

(150
)
 
—

—

—

—

Balance at the end of the period
$
13

$
1,650

$
346

$
2,009

 
$
52

$
1,800

$
221

$
2,073



33
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



The Board of Directors previously set the amount for the targeted buildup of restricted retained earnings at $1,800. As of March 31, 2012, restricted retained earnings reached the $1,800 targeted amount. The Bank’s retained earnings target may be changed at any time. The Board of Directors periodically reviews the retained earnings methodology and analysis to determine whether any adjustments are appropriate. As of July 31, 2015, the Board of Directors set the amount for the targeted buildup of restricted retained earnings at $1,650 and transferred $150 to unrestricted retained earnings.

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 15 – Capital” in the Bank’s 2014 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 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, 2015, the Bank’s excess capital stock totaled $393, or 0.46% of total assets.

In the third quarter of 2015, the Bank paid dividends on the capital stock outstanding during the second quarter of 2015 at an annualized rate of 10.01%, totaling $79, including $72 in dividends on capital stock and $7 in dividends on mandatorily redeemable capital stock. In the third quarter of 2014, the Bank paid dividends on the capital stock outstanding during the second quarter of 2014 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 first nine months of 2015, the Bank paid dividends at an annualized rate of 13.30%, totaling $373, of which $145 was related to the special dividend paid in the second quarter of 2015. The total dividends paid included $313 in dividends on capital stock and $60 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.

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 28, 2015, the Bank’s Board of Directors declared a cash dividend on the capital stock outstanding during the third quarter of 2015 at an annualized rate of 8.79%, totaling $62, including $56 in dividends on capital stock and $6 in dividends on mandatorily redeemable capital stock. The Bank recorded the dividend on October 28, 2015. The Bank expects to pay the dividend on or about November 12, 2015. Dividends on mandatorily redeemable capital stock will be recognized as interest expense in the fourth quarter of 2015.

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. The Bank repurchased $750, $847, and $296 in excess

34
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



capital stock in the first, second and third quarters of 2015, respectively, and $750, $750, and $250 in excess capital stock in the first, second and third quarters of 2014, respectively.

During the third quarter of 2015 and 2014, the Bank redeemed $18 and $3, respectively, in mandatorily redeemable capital stock, for which the five-year redemption period had expired, at its $100 par value. The stock was redeemed on the scheduled redemption dates or, for stock that was not excess stock on its scheduled redemption date because of outstanding activity with the Bank, on the first available repurchase date after the stock was no longer required to support outstanding activity with the Bank.

On May 29, 2015, the Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework was revised to reinstate the Bank’s practice of repurchasing the surplus capital stock of all members and the excess capital stock of all nonmember shareholders on a regular quarterly schedule, at the Bank’s discretion and subject to certain statutory and regulatory requirements and to the Bank’s Risk Management Policy and capital plan limitations. Surplus capital stock is defined as any stock holdings in excess of 115% of a member’s minimum stock requirement, and excess capital stock is defined as any stock holdings in excess of a shareholder’s minimum stock requirement. In accordance with the revised Excess Stock Repurchase, Retained Earnings, and Dividend Framework, each quarter, Bank management will evaluate and determine the amount of capital stock to be repurchased in that quarter, if any, giving consideration to certain capital metrics and capital management objectives and strategies, and subject to the requirements and limitations mentioned above. In addition, at the Bank’s discretion, some or all of the excess stock held by a shareholder may be repurchased upon request of the shareholder, subject to the requirements and limitations mentioned above. At least 15 calendar days before any repurchase, the Bank will notify shareholders of its intention to repurchase capital stock and of the scheduled repurchase date. On the scheduled repurchase date, the Bank will calculate the amount of stock to be repurchased to ensure that each member and nonmember shareholder will continue to meet its minimum stock requirement after the repurchase.

On October 29, 2015, the Bank announced that it plans to repurchase the surplus capital stock of all members and the excess capital stock of all nonmember shareholders on November 13, 2015.

Excess capital stock totaled $393 as of September 30, 2015, and $1,118 as of December 31, 2014.

For more information on excess capital stock, see “Item 8. Financial Statements and Supplementary Data – Note 15 – Capital” in the Bank’s 2014 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, 2015, or December 31, 2014.


35
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



 
September 30, 2015
 
December 31, 2014
Name of Institution
Capital Stock
Outstanding

 
Percentage
of Total
Capital Stock
Outstanding

 
Capital Stock
Outstanding

 
Percentage
of Total
Capital Stock
Outstanding

JPMorgan Chase & Co.:
 
 
 
 
 
 
 
JPMorgan Bank & Trust Company, National Association
$
—

 
—
%
 
$
268

 
7
%
JPMorgan Chase Bank, National Association(1)(2)
426

 
16

 
68

 
2

Subtotal JPMorgan Chase & Co.
$
426

 
16
%
 
$
336

 
9
%
Citigroup Inc.:
 
 
 
 
 
 
 
Citibank, N.A.(1)
81

 
3

 
577

 
14

Banamex USA
4

 
—

 
2

 
—

Subtotal Citigroup Inc.
85

 
3

 
579

 
14

Subtotal
511

 
19

 
915

 
23

Others
2,249

 
81

 
3,082

 
77

Total
$
2,760

 
100
%
 
$
3,997

 
100
%

(1)
The capital stock held by these nonmember institutions is classified as mandatorily redeemable capital stock.
(2)
The Bank reclassified $403 of capital stock to mandatorily redeemable capital stock (a liability) on September 1, 2015, as a result of the merger of JPMorgan B&T with and into JPMorgan Chase, a nonmember of the Bank.

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 net settlements from economic hedges that are recorded in “Net gain/(loss) on derivatives and hedging activities” in other income and excludes interest expense that is recorded in “Mandatorily redeemable capital stock.” Other key financial information, such as any credit-related OTTI losses on the Bank’s PLRMBS, other expenses, and assessments, is not included in the segment reporting analysis, but is incorporated into the Bank’s overall assessment of financial performance.

For more information on these operating segments, see “Item 8. Financial Statements and Supplementary Data – Note 17 – Segment Information” in the Bank’s 2014 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, 2015 and 2014.
 
 
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, 2015
$
38

 
$
84

 
$
122

 
$
(3
)
 
$
(1
)
 
$
7

 
$
119

 
$
(33
)
 
$
34

 
$
52

September 30, 2014
46

 
99

 
145

 
(3
)
 
(12
)
 
26

 
134

 
(12
)
 
34

 
88

Nine months ended:
September 30, 2015
120

 
267

 
387

 
(16
)
 
(14
)
 
60

 
357

 
397

 
102

 
652

September 30, 2014
129

 
314

 
443

 
(9
)
 
(53
)
 
99

 
406

 
(114
)
 
103

 
189



36
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



(1)
Does not include credit-related OTTI losses of $4 and $1 for the three months ended September 30, 2015 and 2014, respectively. Does not include credit-related OTTI losses of $12 and $3 for the nine months ended September 30, 2015 and 2014, respectively.
(2)
Represents amortization of amounts deferred for adjusted net interest income purposes only, in accordance with the Bank’s Excess Stock Repurchase, Retained Earnings, and Dividend Framework.
(3)
The Bank includes income and expense associated with net settlements from economic hedges in adjusted net interest income in its analysis of financial performance for its two operating segments. For financial reporting purposes, the Bank does not include these amounts in net interest income in the Statements of Income, but instead records them in other income in “Net gain/(loss) on derivatives and hedging activities.”
(4)
The Bank excludes interest expense on mandatorily redeemable capital stock from adjusted net interest income in its analysis of financial performance for its two operating segments.

The following table presents total assets by operating segment at September 30, 2015, and December 31, 2014.
  
Advances-
Related Business

 
Mortgage-
Related Business

 
Total
Assets

September 30, 2015
$
68,361

 
$
17,538

 
$
85,899

December 31, 2014
55,424

 
20,383

 
75,807


Note 15 — Derivatives and Hedging Activities

General. The Bank may enter into interest rate swaps (including callable, putable, and basis swaps); and cap and floor agreements (collectively, interest rate exchange agreements or derivatives). Most of the Bank’s interest rate exchange agreements are executed in conjunction with the origination of advances 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 uncleared or cleared. In an uncleared derivative transaction, the Bank’s counterparty is the executing bank or broker-dealer. In a cleared derivative transaction, the Bank may execute the transaction either directly with the executing bank or broker-dealer or on a swap execution facility, but in either case, the Bank’s counterparty is a derivatives clearing organization or clearinghouse once the derivative transaction has been accepted for clearing. 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 agreements results in one of the following classifications: (i) a fair value hedge of an underlying financial instrument, (ii) an economic hedge of assets or liabilities, 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.

Interest Rate Caps and Floors – In a cap agreement, additional cash flow is generated if the price or interest rate of an underlying variable rate rises above a certain threshold (or cap) price. In a floor agreement, additional cash flow is generated if the price or interest rate of an underlying variable rate falls below a certain threshold (or floor) price. Caps and floors may be used in conjunction with assets or liabilities. In general, caps and floors are designed as protection against the interest rate on a variable rate asset or liability rising above or falling below a certain level.

37
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)




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 hedge 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 hedge inception and on an ongoing basis) whether the hedging derivatives 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 hedges in future periods. The Bank typically uses regression analyses or other statistical analyses to assess the effectiveness of its hedges. When it is determined that a derivative has not been or is not expected to be effective as a hedge, the Bank discontinues hedge accounting prospectively.

The Bank discontinues hedge accounting prospectively when: (i) it determines that the derivative is no longer effective in offsetting changes in the fair value 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 and Offsetting Derivatives – As an additional service to its members, the Bank has in the past entered into offsetting interest rate exchange agreements, acting as an intermediary between offsetting derivative transactions with members and other counterparties. This intermediation allows members indirect access to the derivatives market. The Bank also enters into derivatives to offset the economic effect of other derivatives that are no longer designated to advances, investments, or consolidated obligations. Neither type of offsetting derivatives receives hedge accounting treatment and both are separately marked to market through earnings. The net result of the accounting for these derivatives does not significantly affect the operating results of the Bank.

The Bank had no interest rate exchange agreements with members or offsetting derivatives with other counterparties at September 30, 2015, and at December 31, 2014.

Investments – The Bank may invest in U.S. Treasury and agency obligations, agency MBS, and the taxable portion of highly rated state or local housing finance agency obligations. In the past, the Bank has also invested in PLRMBS rated AAA at the time of acquisition. The interest rate and prepayment risk associated with these investment securities is managed through a combination of debt issuance and derivatives. The Bank may manage prepayment risk and interest rate risk by funding investment securities with consolidated obligations that have call features or by hedging the prepayment risk with a combination of consolidated obligations and callable swaps. The Bank may execute callable swaps in conjunction with the issuance of certain liabilities to create funding that is economically equivalent to fixed rate callable debt. Although these derivatives are economic hedges against prepayment risk and are designated to individual liabilities, they do not receive either fair value or cash flow hedge accounting treatment. Investment securities may be classified as trading, AFS, or HTM.

The Bank may also manage the risk arising from changing market prices or cash flows of investment securities classified as trading by entering into interest rate exchange agreements (economic hedges) that offset the changes in fair value or cash flows of the securities. The market value changes of both the trading securities and the associated interest rate exchange agreements are included in other income in the Statements of Income.

Advances – The Bank offers a wide 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

38
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



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.

In addition, for certain advances for which the Bank has elected the fair value option, the Bank will simultaneously execute an interest rate exchange agreement with terms that economically offset the terms of the advance.

Mortgage Loans – The Bank’s investment portfolio includes fixed rate mortgage loans. The prepayment options embedded in mortgage loans can result in extensions or 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 in conjunction with the issuance of certain consolidated obligations to create funding that is economically equivalent to fixed rate callable bonds. Although these derivatives are economic hedges against the prepayment risk of specific loan pools and are referenced to individual liabilities, they do not receive either fair value or cash flow hedge accounting treatment.

Consolidated Obligations – Consolidated obligation bonds may be structured to meet the Bank’s or the investors’ needs. Common structures include fixed rate bonds with or without call options and adjustable rate bonds with or without embedded options. In general, when bonds are issued, the Bank simultaneously executes an interest rate exchange agreement with terms that offset the terms and embedded options, if any, of the consolidated obligation bond. This combination of the consolidated obligation bond and the interest rate exchange agreement effectively creates an adjustable rate bond. The cost of this funding combination is generally lower than the cost that would be available through the issuance of an adjustable rate bond alone. These transactions generally receive fair value hedge accounting treatment.

In addition, when certain consolidated obligation bonds for which the Bank has elected the fair value option are issued, the Bank simultaneously executes an interest rate exchange agreement with terms that economically offset the terms of the consolidated obligation bond. However, this type of hedge is treated as an economic hedge because these combinations 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, 2015, or the year ended December 31, 2014.

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 uncleared derivative transactions contain master netting provisions to help mitigate the credit risk exposure to each counterparty. The Bank manages counterparty credit risk through credit analyses and collateral requirements and by following the requirements of the Bank’s risk management policies and credit guidelines and Finance Agency regulations. The Bank also requires credit support agreements with collateral delivery thresholds on all uncleared 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, which may be 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

39
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



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 uncleared 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 a specified rating (ranging from A3/A- to Baa3/BBB-), the Bank’s counterparty would have the right, but not the obligation, to terminate all of its outstanding derivative transactions with the Bank; the Bank’s agreements with its clearing agents for cleared derivative transactions have similar provisions with respect to the debt rating of FHLBank System consolidated bonds. If this occurs, the Bank may choose to enter into replacement hedges, either by transferring the existing transactions to another counterparty or entering into new replacement transactions, based on prevailing market rates. In addition, under some of its credit support agreements for uncleared 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 uncleared derivative instruments with credit-risk-related contingent features that were in a net derivative liability position (before cash collateral and related accrued interest) at September 30, 2015, was $49, for which the Bank had posted collateral with a fair value of $46 in the ordinary course of business. If the Bank’s credit rating at September 30, 2015, had been lowered from its current rating to the next lower rating, that would have triggered additional collateral to be delivered, and the Bank would have been required to deliver up to a total of $2 of additional collateral (at fair value) to its derivative counterparties at September 30, 2015.

The following table summarizes the fair value of derivative instruments including the effect of netting adjustments and cash collateral as of September 30, 2015, and December 31, 2014. For purposes of this disclosure, the derivative values include the fair value of derivatives and related accrued interest.


40
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



 
September 30, 2015
 
December 31, 2014
 
Notional
Amount of
Derivatives

 
Derivative
Assets

 
Derivative
Liabilities

 
Notional
Amount of
Derivatives

 
Derivative
Assets

 
Derivative
Liabilities

Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
29,466

 
$
337

 
$
118

 
$
28,018

 
$
374

 
$
103

Total
29,466

 
337

 
118

 
28,018

 
374

 
103

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
44,084

 
78

 
96

 
31,973

 
72

 
129

Interest rate caps and floors
2,230

 
6

 
1

 
2,306

 
9

 
1

Mortgage delivery commitments
8

 
—

 
—

 
—

 
—

 
—

Total
46,322

 
84

 
97

 
34,279

 
81

 
130

Total derivatives before netting and collateral adjustments
$
75,788

 
421

 
215

 
$
62,297

 
455

 
233

Netting adjustments and cash collateral(1)
 
 
(361
)
 
(209
)
 
 
 
(396
)
 
(213
)
Total derivative assets and total derivative liabilities
 
 
$
60

 
$
6

 
 
 
$
59

 
$
20


(1)
Amounts include the netting of derivative assets and liabilities by counterparty, including cash collateral and related accrued interest, where the netting requirements have been met. Cash collateral posted and related accrued interest was $54 and $65 at September 30, 2015, and December 31, 2014, respectively. Cash collateral received and related accrued interest was $206 and $248 at September 30, 2015, and December 31, 2014, respectively.

The following table presents the components of net gain/(loss) on derivatives and hedging activities as presented in the Statements of Income for the three and nine months ended September 30, 2015 and 2014.
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015

 
September 30, 2014

 
September 30, 2015

 
September 30, 2014

 
Gain/(Loss)

 
Gain/(Loss)

 
Gain/(Loss)

 
Gain/(Loss)

Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swaps
$
(1
)
 
$
(1
)
 
$
(11
)
 
$
(6
)
Total net gain/(loss) related to fair value hedge ineffectiveness
(1
)
 
(1
)
 
(11
)
 
(6
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Economic hedges:
 
 
 
 
 
 
 
Interest rate swaps
(31
)
 
18

 
(1
)
 
38

Interest rate caps and floors
—

 
(5
)
 
(2
)
 
(13
)
Net settlements
(1
)
 
(12
)
 
(14
)
 
(53
)
Mortgage delivery commitments
—

 
—

 
1

 
—

Total net gain/(loss) related to derivatives not designated as hedging instruments
(32
)
 
1

 
(16
)
 
(28
)
Net gain/(loss) on derivatives and hedging activities
$
(33
)
 
$
—

 
$
(27
)
 
$
(34
)

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, 2015 and 2014.


41
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



 
Three Months Ended
 
September 30, 2015
 
September 30, 2014
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
$
(38
)
 
$
38

 
$
—

 
$
(27
)
 
$
56

 
$
(55
)
 
$
1

 
$
(32
)
Consolidated obligation bonds
7

 
(8
)
 
(1
)
 
67

 
(77
)
 
75

 
(2
)
 
65

Total
$
(31
)
 
$
30

 
$
(1
)
 
$
40

 
$
(21
)
 
$
20

 
$
(1
)
 
$
33


 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
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
$
(44
)
 
$
44

 
$
—

 
$
(82
)
 
$
43

 
$
(42
)
 
$
1

 
$
(98
)
Consolidated obligation bonds
(57
)
 
46

 
(11
)
 
196

 
(153
)
 
146

 
(7
)
 
197

Total
$
(101
)
 
$
90

 
$
(11
)
 
$
114

 
$
(110
)

$
104


$
(6
)

$
99


(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, 2015, and December 31, 2014.


42
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



 
September 30, 2015
 
December 31, 2014
 
Derivative
Assets

 
Derivative
Liabilities

 
Derivative
Assets

 
Derivative
Liabilities

Derivative instruments meeting netting requirements
 
 
 
 
 
 
 
Gross recognized amount
 
 
 
 
 
 
 
Uncleared derivatives
$
253

 
$
137

 
$
352

 
$
199

Cleared derivatives
168

 
78

 
103

 
34

Total gross recognized amount
421

 
215

 
455

 
233

Gross amounts of netting adjustments and cash collateral
 
 
 
 
 
 
 
Uncleared derivatives
(229
)
 
(131
)
 
(324
)
 
(179
)
Cleared derivatives
(132
)
 
(78
)
 
(72
)
 
(34
)
Total gross amount of netting adjustments and cash collateral
(361
)
 
(209
)
 
(396
)
 
(213
)
Total derivative assets and total derivative liabilities
 
 
 
 
 
 
 
Uncleared derivatives
24

 
6

 
28

 
20

Cleared derivatives
36

 
—

 
31

 
—

Total derivative assets and derivative liabilities presented in the Statements of Condition
60

 
6

 
59

 
20

Non-cash collateral received or pledged not offset
 
 
 
 
 
 
 
Can be sold or repledged - Uncleared derivatives
19

 
—

 
25

 
—

Net unsecured amount
 
 
 
 
 
 
 
Uncleared derivatives
5

 
6

 
3

 
20

Cleared derivatives
36

 
—

 
31

 
—

Total net unsecured amount
$
41

 
$
6

 
$
34

 
$
20


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, 2015, and December 31, 2014. 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, 2015, and December 31, 2014.


43
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



 
September 30, 2015
  
Carrying
Value

 
Estimated Fair Value

 
Level 1

 
Level 2

 
Level 3

 
Netting Adjustments(1)

Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
2,201

 
$
2,201


$
2,201


$
—

 
$
—

 
$
—

Securities purchased under agreements to resell
10,500

 
10,500

 
—

 
10,500

 
—

 
—

Federal funds sold
2,762

 
2,762

 
—

 
2,762

 
—

 
—

Trading securities
1,659

 
1,659

 
—

 
1,659

 
—

 
—

AFS securities
5,656

 
5,656

 
—

 
—

 
5,656

 
—

HTM securities
11,432

 
11,570

 
—

 
9,763

 
1,807

 
—

Advances
50,793

 
50,728

 
—

 
50,728

 
—

 
—

Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans
668

 
712

 
—

 
712

 
—

 
—

Accrued interest receivable
55

 
55

 
—

 
55

 
—

 
—

Derivative assets, net(1)
60

 
60

 
—

 
421

 
—

 
(361
)
Other assets(2)
10

 
10

 
10

 
—

 
—

 
—

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Deposits
173

 
173

 
—

 
173

 
—

 
—

Consolidated obligations:
 
 
 
 
 
 
 
 
 
 
 
Bonds
49,815

 
49,820

 
—

 
49,820

 
—

 
—

Discount notes
30,042

 
30,044

 
—

 
30,044

 
—

 
—

Total consolidated obligations
79,857

 
79,864

 
—

 
79,864

 
—

 
—

Mandatorily redeemable capital stock
514

 
514


514


—

 
—

 
—

Accrued interest payable
143


143


—


143

 
—

 
—

Derivative liabilities, net(1)
6

 
6

 
—

 
215

 
—

 
(209
)
Other
 
 
 
 
 
 
 
 
 
 
 
Standby letters of credit
15

 
15


—


15

 
—

 
—

Commitments to fund advances(3)
—

 
1

 
—

 
1

 
—

 
—

Commitments to issue consolidated obligation bonds(3)
—

 
1

 
—

 
1

 
—

 
—



44
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



 
December 31, 2014
 
Carrying
Value

 
Estimated Fair Value

 
Level 1

 
Level 2

 
Level 3

 
Netting Adjustments(1)

Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
3,920

 
$
3,920

 
$
3,920

 
$
—

 
$
—

 
$
—

Securities purchased under agreements to resell
1,000

 
1,000

 
—

 
1,000

 
—

 
—

Federal funds sold
7,503

 
7,503

 
—

 
7,503

 
—

 
—

Trading securities
3,524

 
3,524

 
—

 
3,524

 
—

 
—

AFS securities
6,371

 
6,371

 
—

 
—

 
6,371

 
—

HTM securities
13,551

 
13,657

 
—

 
11,521

 
2,136

 
—

Advances
38,986

 
39,060

 
—

 
39,060

 
—

 
—

Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans
708

 
769

 
—

 
769

 
—

 
—

Accrued interest receivable
67

 
67

 
—

 
67

 
—

 
—

Derivative assets, net(1)
59

 
59

 
—

 
455

 
—

 
(396
)
Other assets(2)
11

 
11

 
11

 
—

 
—

 
—

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Deposits
160

 
160

 
—

 
160

 
—

 
—

Consolidated obligations:
 
 
 
 
 
 
 
 
 
 
 
Bonds
47,045

 
47,021

 
—

 
47,021

 
—

 
—

Discount notes
21,811

 
21,811

 
—

 
21,811

 
—

 
—

Total consolidated obligations
68,856

 
68,832

 
—

 
68,832

 
—

 
—

Mandatorily redeemable capital stock
719

 
719

 
719

 
—

 
—

 
—

Accrued interest payable
95

 
95

 
—

 
95

 
—

 
—

Derivative liabilities, net(1)
20

 
20

 
—

 
233

 
—

 
(213
)
Other
 
 
 
 
 
 
 
 
 
 
 
Standby letters of credit
12

 
12

 
—

 
12

 
—

 
—

Commitments to fund advances(3)
—

 
2

 
—

 
2

 
—

 
—


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

45
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



assets or liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
•
Level 3 – Unobservable inputs for the asset or liability.

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

The following assets and liabilities, including those for which the Bank has elected the fair value option, are carried at fair value on the Statements of Condition as of September 30, 2015:
•
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.

At least annually, the Bank conducts 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, 2015, 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, 2015, 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

47
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



Agency’s advances regulation, advances with an original term to maturity or repricing period greater than six months generally require a prepayment fee sufficient to make the Bank financially indifferent to the borrower’s decision to prepay the advances. The Bank determined that no adjustment is required to the fair value measurement of advances for prepayment fees. In addition, the Bank did not adjust its fair value measurement of advances for creditworthiness primarily because advances were fully collateralized.

Mortgage Loans Held for Portfolio – The estimated fair value for seasoned mortgage loans represents modeled prices based on observable market prices for seasoned agency mortgage-backed passthrough securities adjusted for differences in coupon, average loan rate, credit, and cash flow remittance between the Bank’s mortgage loans and the referenced instruments, while the estimated fair value for newly originated mortgage loans represents modeled prices based on MPF commitment rates. Market prices are highly dependent on the underlying prepayment assumptions. Changes in the prepayment speeds often have a material effect on the fair value estimates. These underlying prepayment assumptions are susceptible to material changes in the near term because they are made at a specific point in time.

Loans to Other FHLBanks – Because these are overnight transactions, the estimated fair value approximates the recorded carrying value.

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

Other Assets – The estimated fair value of grantor trust assets is based on quoted market prices.

Derivative Assets and Liabilities – In general, derivative instruments transacted and held by the Bank for risk management activities are traded in over-the-counter markets where quoted market prices are not readily available. These derivatives are interest rate-related. For these derivatives, the Bank measures fair value using internally developed discounted cash flow models that use market-observable inputs, such as the overnight index swap (OIS) curve; 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 uncleared derivative transactions only with highly rated derivative dealers and major banks (derivative dealer counterparties) that meet the Bank’s eligibility criteria. In addition, the Bank has entered into master netting agreements and bilateral credit support agreements with all active derivative dealer counterparties that provide for delivery of collateral at specified levels to limit the Bank’s net unsecured credit exposure to these counterparties. Under these policies and agreements, the amount of unsecured credit exposure to an individual derivative dealer counterparty is either (i) limited to an absolute dollar credit exposure limit according to the counterparty’s long-term debt or deposit credit rating, as determined by rating agencies or (ii) set at zero (subject to a minimum transfer amount). The Bank clears its cleared derivative transactions only through clearing agents that meet the Bank’s eligibility requirements, and the Bank’s credit exposure to the clearinghouse is secured by variation margin received from the clearinghouse. All credit exposure from derivative transactions entered into by the Bank with member counterparties that are not derivative dealers must be fully secured by eligible collateral. The Bank evaluated the potential for the fair value of the instruments to be affected by counterparty credit risk and determined that no adjustments to the overall fair value measurements were required.

The fair values of the derivative assets and liabilities include accrued interest receivable/payable and cash collateral remitted to/received from counterparties. The estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values because of their short-term nature. The fair values of derivatives that met the netting requirements are presented on a net basis. If these netted amounts are positive, they are classified as an asset and, if negative, they are classified as a liability.


48
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



Deposits – The fair value of deposits is generally equal to the carrying value of the deposits because the deposits are primarily overnight deposits or due on demand. The Bank determines the fair values of term deposits by calculating the present value of expected future cash flows from the deposits and reducing the amount for accrued interest payable. The discount rates used in these calculations are the cost of deposits with similar terms.

Consolidated Obligations – 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 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 value as indicated by contemporaneous purchases, redemptions, and repurchases at par value. Fair value includes estimated dividends earned at the time of reclassification from capital to liabilities, until such amount is paid, and any subsequently declared capital stock dividend. The Bank’s capital stock can only be acquired by members at par value and redeemed or repurchased at par value, subject to statutory and regulatory requirements. The Bank’s capital stock is not traded, and no market mechanism exists for the exchange of Bank capital stock outside the cooperative ownership structure.

Commitments – The estimated fair value of standby letters of credit is based on the present value of fees currently charged for similar agreements and is recorded in other liabilities. The estimated fair value of off-balance sheet fixed rate commitments to fund advances and commitments to issue consolidated obligations takes into account the difference between current and committed interest rates.

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

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, 2015, and December 31, 2014, by level within the fair value hierarchy.



49
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



September 30, 2015
 
 
 
 
 
 
 
 
 
 
Fair Value Measurement Using:
 
Netting

 
 
 
Level 1

 
Level 2

 
Level 3

 
Adjustments(1)

 
Total

Recurring fair value measurements – Assets:
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
GSEs – FFCB bonds
$
—

 
$
1,649

 
$
—

 
$
—

 
$
1,649

MBS:
 
 
 
 
 
 
 
 
 
Other U.S. obligations – Ginnie Mae
—

 
10

 
—

 
—

 
10

Total trading securities
—

 
1,659

 
—

 
—

 
1,659

AFS securities:
 
 
 
 
 
 
 
 
 
PLRMBS
—

 
—

 
5,656

 
—

 
5,656

Total AFS securities
—

 
—

 
5,656

 
—

 
5,656

Advances(2)
—

 
3,904

 
—

 
—

 
3,904

Derivative assets, net: interest rate-related
—

 
421

 
—

 
(361
)
 
60

Other assets
10

 
—

 
—

 
—

 
10

Total recurring fair value measurements – Assets
$
10

 
$
5,984

 
$
5,656

 
$
(361
)
 
$
11,289

Recurring fair value measurements – Liabilities:
 
 
 
 
 
 
 
 
 
Consolidated obligation bonds(3)
$
—

 
$
5,489

 
$
—

 
$
—

 
$
5,489

Derivative liabilities, net: interest rate-related
—

 
215

 
—

 
(209
)
 
6

Total recurring fair value measurements – Liabilities
$
—

 
$
5,704

 
$
—

 
$
(209
)
 
$
5,495

Nonrecurring fair value measurements – Assets:(4)
 
 
 
 
 
 
 
 
 
REO
$
—

 
$
—

 
$
1

 
 
 
$
1

Impaired mortgage loans held for portfolio
—

 
—

 
4

 

 
4

Total nonrecurring fair value measurements – Assets
$
—

 
$
—

 
$
5

 

 
$
5


December 31, 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
$
—

 
$
3,513

 
$
—

 
$
—

 
$
3,513

MBS:
 
 
 
 
 
 
 
 
 
Other U.S. obligations – Ginnie Mae
—

 
11

 
—

 
—

 
11

Total trading securities
—

 
3,524

 
—

 
—

 
3,524

AFS securities:
 
 
 
 
 
 
 
 
 
PLRMBS
—

 
—

 
6,371

 
—

 
6,371

Total AFS securities
—

 
—

 
6,371

 
—

 
6,371

Advances(2)
—

 
5,137

 
—

 
—

 
5,137

Derivative assets, net: interest rate-related
—

 
455

 
—

 
(396
)
 
59

Other assets
11

 
—

 
—

 
—

 
11

Total recurring fair value measurements – Assets
$
11

 
$
9,116

 
$
6,371

 
$
(396
)
 
$
15,102

Recurring fair value measurements – Liabilities:
 
 
 
 
 
 
 
 
 
Consolidated obligation bonds(3)
$
—

 
$
6,717

 
$
—

 
$
—

 
$
6,717

Derivative liabilities, net: interest rate-related
—

 
233

 
—

 
(213
)
 
20

Total recurring fair value measurements – Liabilities
$
—

 
$
6,950

 
$
—

 
$
(213
)
 
$
6,737

Nonrecurring fair value measurements – Assets:
 
 
 
 
 
 
 
 
 
REO
$
—

 
$
—

 
$
1

 
 
 
$
1


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

50
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



(2)
Represents advances recorded under the fair value option at September 30, 2015, and December 31, 2014.
(3)
Represents consolidated obligation bonds recorded under the fair value option at September 30, 2015, and December 31, 2014.
(4)
The fair value information presented is as of the date the fair value adjustment was recorded during the nine months ended September 30, 2015.

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, 2015 and 2014.
 
Three Months Ended
 
September 30, 2015

 
September 30, 2014

Balance, beginning of the period
$
5,950

 
$
6,776

Total gain/(loss) realized and unrealized included in:
 
 
 
Interest income
20

 
17

Net OTTI loss, credit-related
(4
)
 
(1
)
Unrealized gain/(loss) of other-than-temporarily impaired securities included in AOCI
(25
)
 
77

Net amount of OTTI loss reclassified to/(from) other income/(loss)
(2
)
 
—

Settlements
(283
)
 
(245
)
Transfers of HTM securities to AFS securities
—

 
—

Balance, end of the period
$
5,656

 
$
6,624

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
$
16

 
$
15


 
Nine Months Ended
 
September 30, 2015

 
September 30, 2014

Balance, beginning of the period
$
6,371

 
$
7,047

Total gain/(loss) realized and unrealized included in:
 
 
 
Interest income
61

 
47

Net OTTI loss, credit-related
(12
)
 
(3
)
Unrealized gain/(loss) of other-than-temporarily impaired securities included in AOCI
(7
)
 
237

Net amount of OTTI loss reclassified to/(from) other income/(loss)
(13
)
 
(2
)
Settlements
(748
)
 
(702
)
Transfers of HTM securities to AFS securities
4

 
—

Balance, end of the period
$
5,656

 
$
6,624

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
$
49

 
$
44


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

For more information on the Bank’s election of the fair value option, see “Item 8. Financial Statements and Supplementary Data – Note 19 – Fair Values” in the Bank’s 2014 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, 2015 and 2014:
 
Three Months Ended
 
September 30, 2015
 
September 30, 2014
 
Advances

 
Consolidated
Obligation Bonds

 
Advances

 
Consolidated
Obligation Bonds

Balance, beginning of the period
$
4,978

 
$
6,203

 
$
6,341

 
$
7,080

New transactions elected for fair value option
502

 
600

 
235

 
641

Maturities and terminations
(1,592
)
 
(1,331
)
 
(1,399
)
 
(568
)
Net gain/(loss) on advances and net (gain)/loss on consolidated obligation bonds held under fair value option
19

 
16

 
(25
)
 
(12
)
Change in accrued interest
(3
)
 
1

 
(3
)
 
4

Balance, end of the period
$
3,904

 
$
5,489

 
$
5,149

 
$
7,145


 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
Advances

 
Consolidated
Obligation Bonds

 
Advances

 
Consolidated
Obligation Bonds

Balance, beginning of the period
$
5,137

 
$
6,717

 
$
7,069

 
$
10,115

New transactions elected for fair value option
948

 
2,405

 
583

 
2,819

Maturities and terminations
(2,180
)
 
(3,664
)
 
(2,486
)
 
(5,863
)
Net gain/(loss) on advances and net (gain)/loss on consolidated obligation bonds held under fair value option
3

 
33

 
(13
)
 
69

Change in accrued interest
(4
)
 
(2
)
 
(4
)
 
5

Balance, end of the period
$
3,904

 
$
5,489

 
$
5,149

 
$
7,145


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, 2015 and 2014.

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, 2015, and December 31, 2014:

52
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



 
September 30, 2015
 
December 31, 2014
 
Principal Balance

 
Fair Value

 
Fair Value
Over/(Under)
Principal Balance

 
Principal Balance

 
Fair Value

 
Fair Value
Over/(Under)
Principal Balance

Advances(1)
$
3,829

 
$
3,904

 
$
75

 
$
5,048

 
$
5,137

 
$
89

Consolidated obligation bonds
5,490

 
5,489

 
(1
)
 
6,748

 
6,717

 
(31
)

(1)
At September 30, 2015, and December 31, 2014, 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, 2015, and through the filing date of this report, does not believe that it is probable that it will be asked to do so. The par value of the outstanding consolidated obligations of the FHLBanks was $856,511 at September 30, 2015, and $847,175 at December 31, 2014. The par value of the Bank’s participation in consolidated obligations was $79,594 at September 30, 2015, and $68,538 at December 31, 2014. For more information on the joint and several liability regulation, see “Item 8. Financial Statements and Supplementary Data – Note 20 – Commitments and Contingencies” in the Bank’s 2014 Form 10-K.

Off-balance sheet commitments as of September 30, 2015, and December 31, 2014, were as follows:
 
September 30, 2015
 
December 31, 2014
 
Expire Within
One Year

 
Expire After
One Year

 
Total

 
Expire Within
One Year

 
Expire After
One Year

 
Total

Standby letters of credit outstanding
$
7,878

 
$
3,324

 
$
11,202

 
$
2,699

 
$
2,711

 
$
5,410

Commitments to fund additional advances(1)
13

 
6

 
19

 
121

 
5

 
126

Commitments to issue consolidated obligation discount notes, par
—

 
—

 
—

 
3

 
—

 
3

Commitments to issue consolidated obligation bonds, par(2)
80

 
—

 
80

 
—

 
—

 
—

Commitments to purchase mortgage loans
8

 
—

 
8

 
—

 
—

 
—


(1)
At September 30, 2015, none of the commitments to fund additional advances were hedged with associated interest rate swaps. At December 31, 2014, $100 of the commitments to fund additional advances were hedged with associated interest rate swaps.
(2)
At September 30, 2015, all 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 9 days to 15 years, including a final expiration in 2030. The Bank monitors the creditworthiness of members that have standby letters of credit. The value of the Bank’s obligations related to standby letters of credit is recorded in other liabilities and amounted to $15 at September 30, 2015, and $12 at December 31, 2014. Letters of credit are fully collateralized at the time of issuance. Based on the Bank’s credit analyses of members’ financial condition and collateral requirements, the Bank deemed it unnecessary to record any additional liability on the letters of credit outstanding as of September 30, 2015, and December 31, 2014.


53
Federal Home Loan Bank of San Francisco
Notes to Financial Statements (continued)



Commitments to fund advances totaled $19 at September 30, 2015, and $126 at December 31, 2014. 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, 2015, and December 31, 2014.

The Bank may enter into commitments that unconditionally obligate it to purchase mortgage loans from its members. Commitments are generally for periods not exceeding 45 days. Delivery commitments are recorded at fair value as derivative assets or derivative liabilities in the Statements of Condition.

The Bank executes over-the-counter uncleared 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 and into bilateral credit support agreements with all active derivative dealer counterparties. All member counterparty master agreements, excluding those with derivative dealers, are subject to the terms of the Bank’s Advances and Security Agreement with members, and all member counterparties (except for those that are derivative dealers) must fully collateralize the Bank’s net credit exposure. For cleared derivatives, the clearinghouse is the Bank’s counterparty, and the Bank has clearing agreements with clearing agents that provide for delivery of initial margin to, and exchange of variation margin with, the clearinghouse. See Note 15 – Derivatives and Hedging Activities for additional information about the Bank’s pledged collateral and other credit-risk-related contingent features.

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

Note 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 above, and their respective affiliates are entered into in the ordinary course of business. The tables include securities transactions where the foregoing 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 the foregoing 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 foregoing 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, 2015

 
December 31, 2014

Assets:
 
 
 
Investments(1)
$
330

 
$
139

Advances
17,378

 
5,081

Mortgage loans held for portfolio
490

 
33

Accrued interest receivable
13

 
6

Other assets
—

 
18

Derivative assets, net
3

 
—

Total Assets
$
18,214

 
$
5,277

Liabilities:
 
 
 
Deposits
$
6

 
$
3

Mandatorily redeemable capital stock
426

 
577

Derivative liabilities, net
—

 
18

Total Liabilities
$
432

 
$
598

Notional amount of derivatives
$
5,492

 
$
2,858

Standby letters of credit
82

 
21


(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, 2015

 
September 30, 2014

 
September 30, 2015

 
September 30, 2014

Interest Income:
 
 
 
 
 
 
 
Investments(1)
$
2

 
$
2

 
$
7

 
$
20

Advances(2) 
24

 
8

 
68

 
47

Mortgage loans held for portfolio
6

 
1

 
20

 
10

Total Interest Income
$
32

 
$
11

 
$
95

 
$
77

Interest Expense:
 
 
 
 
 
 
 
Mandatorily redeemable capital stock
$
1

 
$
16

 
$
6

 
$
62

Consolidated obligations(2)
(29
)
 
(2
)
 
(85
)
 
(40
)
Total Interest Expense
$
(28
)
 
$
14

 
$
(79
)
 
$
22

Other Income/(Loss):
 
 
 
 
 
 
 
Net gain/(loss) on derivatives and hedging activities
$
(48
)
 
$
20

 
$
(99
)
 
$
(285
)
Total Other Income/(Loss)
$
(48
)
 
$
20

 
$
(99
)
 
$
(285
)

(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

There were no material subsequent events identified, subsequent to September 30, 2015, until the time of the Form 10-Q filing with the Securities and Exchange Commission.

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 other statutes or regulations applicable to the FHLBanks;
•
changes in the Bank’s capital structure;
•
the ability of the Bank to pay dividends or redeem or repurchase capital stock;
•
membership changes, including changes resulting from mergers or changes in the principal place of business of Bank members;
•
the soundness of other financial institutions, including Bank members, nonmember borrowers, other counterparties, and the other FHLBanks;
•
changes in Bank members’ demand for Bank advances;
•
changes in the value or liquidity of collateral underlying advances to Bank members or nonmember borrowers or collateral pledged by the Bank’s derivative counterparties;
•
changes in the fair value and economic value of, impairments of, and risks associated with the Bank’s investments in mortgage loans and mortgage-backed securities (MBS) or other assets and the related credit enhancement protections;
•
changes in the Bank’s ability or intent to hold MBS and mortgage loans to maturity;
•
competitive forces, including the availability of other sources of funding for Bank members;
•
the willingness of the Bank’s members to do business with the Bank;
•
changes in investor demand for consolidated obligations 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;
•
technology changes and enhancements, and the Bank’s ability to develop and support technology and information systems sufficient to manage the risks of the Bank’s business effectively; and
•
changes in the FHLBanks’ long-term credit ratings.

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, 2014 (2014 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 2014 Form 10-K.

Quarterly Overview

Net income for the third quarter of 2015 was $46 million, compared with net income of $76 million for the third quarter of 2014. The $30 million decrease in net income for the third quarter of 2015 relative to the prior-year period primarily reflected an increase in net fair value losses associated with derivatives, hedged items, and financial instruments carried at fair value and a decline in net interest income.

Net interest income for the third quarter of 2015 was $119 million, down from $133 million for the third quarter of 2014. The decrease was primarily due to the decline in earnings on interest-earning assets and a decrease in earnings on invested capital because of lower average capital balances, partially offset by lower dividends on mandatorily redeemable capital stock, which are classified as interest expense.

Other income/(loss) for the third quarter of 2015, was a loss of $33 million, compared with a loss of $12 million for the third quarter of 2014. The change reflected net fair value losses associated with derivatives, hedged items, and financial instruments carried at fair value of $30 million, compared with net fair value losses of $2 million for the third quarter of 2014. The change in net fair value losses was primarily due to more adverse effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors during the period compared to the third quarter of 2014. This change was partially offset by the impact of expense on derivative instruments used in economic hedges of $1 million (compared with expense of $12 million for the third quarter of 2014). Income/expense on derivative instruments used in economic hedges is generally offset by interest expense/income on the economically hedged assets and liabilities.

During the first nine months of 2015, total assets increased $10.1 billion, to $85.9 billion at September 30, 2015, from $75.8 billion at December 31, 2014. Advances increased $11.8 billion, or 30%, to $50.8 billion at September 30, 2015, from $39.0 billion at December 31, 2014.

Accumulated other comprehensive income/(loss) decreased by $15 million during the first nine months of 2015, to income of $41 million at September 30, 2015, from income of $56 million at December 31, 2014, primarily as a result of a decline in the fair value of PLRMBS classified as available-for-sale (AFS).

Additional information about investments and other-than-temporary impairment (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 28, 2015, the Bank’s Board of Directors declared a cash dividend on the capital stock outstanding during the third quarter of 2015 at an annualized rate of 8.79%. The dividend will total $62 million, including $6 million in dividends on mandatorily redeemable capital stock that will be reflected as interest expense in the fourth quarter of 2015. The Bank recorded the dividend on October 28, 2015, and expects to pay the dividend on or about November 12, 2015.

As of September 30, 2015, the Bank was in compliance with all of its regulatory capital requirements. The Bank’s total regulatory capital ratio was 6.3%, exceeding the 4.0% requirement. The Bank had $5.4 billion in permanent capital, exceeding its risk-based capital requirement of $2.8 billion. Total retained earnings as of September 30, 2015, were $2.6 billion.

Effective August 3, 2015, the Bank reduced its activity-based stock requirements within the ranges authorized by the Bank’s capital plan. The activity-based stock requirement for advances was reduced from 3.0% to 2.7%, and the

57

activity-based stock requirement for mortgage loans purchased from the member and held by the Bank was reduced from 3.0% to 0.0%.

The Bank plans to repurchase the surplus capital stock of all members and the excess capital stock of all nonmember shareholders on November 13, 2015. Surplus capital stock is defined as any stock holdings in excess of 115% of a member’s minimum capital stock requirement.

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

As previously disclosed, effective August 31, 2015, JPMorgan Bank & Trust Company, National Association (JPMorgan B&T), merged with and into JPMorgan Chase Bank, National Association (JPMorgan Chase). As a result, JPMorgan B&T is no longer a member of the Bank. Upon the merger, $403 million of the Bank’s capital stock held by JPMorgan B&T was transferred to JPMorgan Chase, a nonmember of the Bank, and reclassified as mandatorily redeemable capital stock. In addition, all advances to JPMorgan B&T were transferred to JPMorgan Chase, and, as a result, JPMorgan Chase will be one of the Bank’s largest borrowers and shareholders. Because it is not a member of the Bank, JPMorgan Chase is not able to take out new advances from the Bank or replace outstanding advances as they are repaid or prepaid, so a decrease in advances outstanding to JPMorgan Chase, if they are not replaced with advances to other members or other assets, will result in lower total assets and may result in lower net income for the Bank.





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,
2015

 
June 30,
2015

 
March 31,
2015

 
December 31,
2014

 
September 30,
2014

Selected Balance Sheet Items at Quarter End
 
 
 
 
 
 
 
 
 
Total Assets
$
85,899

 
$
85,962

 
$
78,235

 
$
75,807

 
$
82,789

Advances
50,793

 
50,188

 
43,757

 
38,986

 
40,615

Mortgage Loans Held for Portfolio, Net
668

 
671

 
680

 
708

 
754

Investments(1)
32,009

 
33,480

 
31,522

 
31,949

 
33,164

Consolidated Obligations:(2)
 
 
 
 
 
 
 
 
 
Bonds
49,815

 
45,597

 
43,459

 
47,045

 
50,871

Discount Notes
30,042

 
33,859

 
27,794

 
21,811

 
24,431

Mandatorily Redeemable Capital Stock
514

 
142

 
383

 
719

 
1,076

Capital Stock —Class B —Putable
2,246

 
2,751

 
3,092

 
3,278

 
3,310

Unrestricted Retained Earnings
618

 
483

 
624

 
294

 
303

Restricted Retained Earnings
2,009

 
2,170

 
2,150

 
2,065

 
2,073

Accumulated Other Comprehensive Income/(Loss) (AOCI)
41

 
68

 
76

 
56

 
96

Total Capital
4,914

 
5,472

 
5,942

 
5,693

 
5,782

Selected Operating Results for the Quarter
 
 
 
 
 
 
 
 
 
Net Interest Income
$
119

 
$
108

 
$
130

 
$
133

 
$
133

Provision for/(Reversal of) Credit Losses on Mortgage Loans
—

 
—

 
—

 
—

 
(1
)
Other Income/(Loss)
(33
)
 
(2
)
 
432

 
(40
)
 
(12
)
Other Expense
34

 
34

 
34

 
41

 
34

Affordable Housing Program Assessment
6

 
11

 
54

 
7

 
12

Net Income/(Loss)
$
46

 
$
61

 
$
474

 
$
45

 
$
76

Selected Other Data for the Quarter
 
 
 
 
 
 
 
 
 
Net Interest Margin(3)
0.54
%
 
0.53
%
 
0.70
%
 
0.67
%
 
0.62
%
Operating Expenses as a Percent of Average Assets
0.15

 
0.15

 
0.17

 
0.19

 
0.14

Return on Average Assets
0.21

 
0.29

 
2.51

 
0.22

 
0.35

Return on Average Equity
3.47

 
4.27

 
31.87

 
3.14

 
5.25

Annualized Dividend Rate
10.01

 
22.65

 
7.11

 
7.40

 
7.35

Dividend Payout Ratio(4)
155.62

 
299.30

 
12.43

 
137.57

 
80.39

Average Equity to Average Assets Ratio
6.01

 
6.86

 
7.88

 
7.16

 
6.72

Selected Other Data at Quarter End
 
 
 
 
 
 
 
 
 
Regulatory Capital Ratio(5)
6.27

 
6.45

 
7.99

 
8.38

 
8.17

Duration Gap (in months)
1

 
—

 
—

 
—

 
1


(1)
Investments consist of securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale securities and held-to-maturity securities.
(2)
As provided by the FHLBank Act or regulations governing the operations of the FHLBanks, all of the FHLBanks have joint and several liability for FHLBank consolidated obligations, which are backed only by the financial resources of the FHLBanks. The joint and several liability regulation authorizes the 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, 2015, and through the filing date of this report, does not believe that it is probable that it will be asked to do so. The par value of the outstanding consolidated obligations of all FHLBanks at the dates indicated was as follows:


59

 
Par Value
(In millions)

September 30, 2015
$
856,511

June 30, 2015
852,783

March 31, 2015
812,197

December 31, 2014
847,175

September 30, 2014
816,950


(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 Sheets tables that follow present the average balances of interest-earning asset categories and the sources that funded those interest-earning assets (liabilities and capital) for the three and nine months ended September 30, 2015 and 2014, 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.


60

Third Quarter of 2015 Compared to Third Quarter of 2014

Average Balance Sheets
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
September 30, 2015
 
September 30, 2014
(Dollars in millions)
Average
Balance

 
Interest
Income/
Expense

 
Average
Rate

 
Average
Balance

 
Interest
Income/
Expense

 
Average
Rate

Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
777

 
$
—

 
0.01
%
 
$
359

 
$
—

 
0.01
%
Securities purchased under agreements to resell
2,887

 
1

 
0.11

 
1,422

 
—

 
0.06

Federal funds sold
6,366

 
2

 
0.13

 
10,437

 
4

 
0.12

Trading securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities (MBS)
10

 
—

 
1.67

 
12

 
—

 
1.62

Other investments
1,940

 
2

 
0.22

 
3,695

 
2

 
0.18

Available-for-sale (AFS) securities:(1)
 
 
 
 
 
 
 
 
 
 
 
MBS(2)
5,693

 
65

 
4.55

 
6,596

 
67

 
4.02

Held-to-maturity (HTM) securities:(1)
 
 
 
 
 
 
 
 
 
 
 
MBS
11,405

 
70

 
2.43

 
14,092

 
88

 
2.49

Other investments
287

 
—

 
0.53

 
1,533

 
1

 
0.23

Mortgage loans held for portfolio
669

 
8

 
4.87

 
783

 
10

 
5.18

Advances(3)
56,693

 
74

 
0.52

 
45,643

 
75

 
0.66

Loans to other FHLBanks
4

 
—

 
0.12

 
2

 
—

 
0.06

Total interest-earning assets
86,731

 
222

 
1.01

 
84,574

 
247

 
1.16

Other assets(4)(5)
795

 
—

 
—

 
913

 
—

 
—

Total Assets
$
87,526

 
$
222

 
1.00
%
 
$
85,487

 
$
247

 
1.15
%
Liabilities and Capital
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligations:
 
 
 
 
 
 
 
 
 
 
 
Bonds(3)
$
49,022

 
$
83

 
0.67
%
 
$
55,229

 
$
84

 
0.61
%
Discount notes
31,408

 
13

 
0.17

 
22,074

 
4

 
0.08

Deposits and other borrowings
1,132

 
—

 
0.06

 
859

 
—

 
0.05

Mandatorily redeemable capital stock
257

 
7

 
9.92

 
1,125

 
26

 
9.09

Total interest-bearing liabilities
81,819

 
103

 
0.50

 
79,287

 
114

 
0.57

Other liabilities(4)
448

 
—

 
—

 
454

 
—

 
—

Total Liabilities
82,267

 
103

 
0.49

 
79,741

 
114

 
0.57

Total Capital
5,259

 
—

 
—

 
5,746

 
—

 
—

Total Liabilities and Capital
$
87,526

 
$
103

 
0.47
%
 
$
85,487

 
$
114

 
0.53
%
Net Interest Income
 
 
$
119

 
 
 
 
 
$
133

 
 
Net Interest Spread(6)
 
 
 
 
0.51
%
 
 
 
 
 
0.59
%
Net Interest Margin(7)
 
 
 
 
0.54
%
 
 
 
 
 
0.62
%
Interest-earning Assets/Interest-bearing Liabilities
106.00
%
 
 
 
 
 
106.67
%
 
 
 
 

(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 $18 million and $16 million for the third quarter of 2015 and 2014, respectively.
(3)
Interest income/expense and average rates include the effect of associated interest rate exchange agreements, as follows:


61

 
Three Months Ended
 
September 30, 2015
 
September 30, 2014
(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
$
—

 
$
(27
)
 
$
(27
)
 
$
—

 
$
(32
)
 
$
(32
)
Consolidated obligation bonds
1

 
67

 
68

 
1

 
65

 
66


(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 2015 was $119 million, a 11% decrease from $133 million in the third quarter of 2014. The following table details the changes in interest income and interest expense for the third quarter of 2015 compared to the third quarter of 2014. 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, 2015, Compared to Three Months Ended September 30, 2014
 
 
 
 
 
 
 
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
(2
)
 
(2
)
 
$
—

Trading securities: Other investments
—

 
(1
)
 
1

AFS securities:
 
 
 
 
 
MBS
(2
)
 
(10
)
 
8

HTM securities:
 
 
 
 
 
MBS
(18
)
 
(16
)
 
(2
)
Other investments
(1
)
 
(1
)
 
—

Mortgage loans held for portfolio
(2
)
 
(1
)
 
(1
)
Advances(2) 
(1
)
 
17

 
(18
)
Total interest-earning assets
(25
)
 
(13
)
 
(12
)
Interest-bearing liabilities:
 
 
 
 
 
Consolidated obligations:
 
 
 
 
 
Bonds(2)
(1
)
 
(10
)
 
9

Discount notes
9

 
3

 
6

Mandatorily redeemable capital stock
(19
)
 
(21
)
 
2

Total interest-bearing liabilities
(11
)
 
(28
)
 
17

Net interest income
$
(14
)
 
$
15

 
$
(29
)

(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 2015 compared to $1 million in the third quarter of 2014.

The net interest margin was 54 basis points for third quarter of 2015, 8 basis points lower than the net interest margin for third quarter of 2014, which was 62 basis points. The net interest spread was 51 basis points for third quarter of 2015, 8 basis points lower than the net interest spread for third quarter of 2014, which was 59 basis points. These decreases were primarily due to the decline in earnings on interest-earning assets, partially offset by

62

lower dividends on mandatorily redeemable capital stock, which are classified as interest expense. This decrease in interest expense was partially offset by the accretion of yield adjustments on certain other-than-temporarily impaired PLRMBS resulting from improvement in expected cash flows.

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

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

Other Income/(Loss). The following table presents the components of “Other Income/(Loss)” for the three months ended September 30, 2015 and 2014.
 
Other Income/(Loss)
 
 
 
 
 
Three Months Ended
(In millions)
September 30, 2015

 
September 30, 2014

Other Income/(Loss):
 
 
 
Total OTTI loss
$
(6
)
 
$
(1
)
Net amount of OTTI loss reclassified to/(from) AOCI
2

 
—

Net OTTI loss, credit-related
(4
)
 
(1
)
Net gain/(loss) on trading securities(1)

(1
)
 
(1
)
Net gain/(loss) on advances and consolidated obligation bonds held under fair value option
3

 
(13
)
Net gain/(loss) on derivatives and hedging activities
(33
)
 
—

Other
2

 
3

Total Other Income/(Loss)
$
(33
)
 
$
(12
)

(1) The net gain/(loss) on trading securities that were economically hedged totaled a de minimis amount and $(1) million for the three months ended September 30, 2015 and 2014, 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, 2015 and 2014.

63

 
Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option
 
 
 
 
 
Three Months Ended
(In millions)
September 30, 2015

 
September 30, 2014

Advances
$
19

 
$
(25
)
Consolidated obligation bonds
(16
)
 
12

Total
$
3

 
$
(13
)

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

The unrealized net fair value gains/(losses) on advances and 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 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 2015 and 2014.

Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives and Hedging Activities
Three Months Ended September 30, 2015, Compared to Three Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
(In millions)
September 30, 2015
 
September 30, 2014
 
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
$
—

 
$
(36
)
 
$
(17
)
 
$
(53
)
 
$
—

 
$
29

 
$
(23
)
 
$
6

Not elected for fair value option
—

 
3

 
—

 
3

 
1

 
2

 
(1
)
 
2

Consolidated obligation bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Elected for fair value option
—

 
15

 
12

 
27

 
—

 
(17
)
 
17

 
—

Not elected for fair value option
(1
)
 
(1
)
 
9

 
7

 
(2
)
 
(2
)
 
8

 
4

Consolidated obligation discount notes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Not elected for fair value option
—

 
(13
)
 
(5
)
 
(18
)
 
—

 
6

 
(12
)
 
(6
)
MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Not elected for fair value option
—

 
1

 
—

 
1

 
—

 
(5
)
 
—

 
(5
)
Non-MBS investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Not elected for fair value option
—

 
—

 
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Total
$
(1
)
 
$
(31
)
 
$
(1
)
 
$
(33
)
 
$
(1
)
 
$
13

 
$
(12
)
 
$
—


During the third quarter of 2015, net losses on derivatives and hedging activities totaled $33 million compared to net gains of a de minimis amount in the third quarter of 2014. These amounts included expense of $1 million and expense of $12 million resulting from net settlements on derivative instruments used in economic hedges in the third quarter of 2015 and 2014, respectively. Excluding the impact of income or expense from net settlements on

64

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.”






65

Nine Months Ended September 30, 2015, Compared to Nine Months Ended September 30, 2014

Average Balance Sheets
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
(Dollars in millions)
Average
Balance

 
Interest
Income/
Expense

 
Average
Rate

 
Average
Balance

 
Interest
Income/
Expense

 
Average
Rate

Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
669

 
$
—

 
0.01
%
 
$
282

 
$
—

 
0.01
%
Securities purchased under agreements to resell
2,312

 
2

 
0.10

 
1,226

 
—

 
0.05

Federal funds sold
6,562

 
6

 
0.12

 
9,926

 
9

 
0.12

Trading securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities (MBS)
11

 
—

 
1.66

 
13

 
—

 
1.64

Other investments
2,839

 
5

 
0.21

 
3,413

 
5

 
0.18

Available-for-sale (AFS) securities:(1)
 
 
 
 
 
 
 
 
 
 
 
MBS(2)
5,930

 
199

 
4.50

 
6,813

 
210

 
4.11

Held-to-maturity (HTM) securities:(1)
 
 
 
 
 
 
 
 
 
 
 
MBS
12,127

 
225

 
2.48

 
14,636

 
275

 
2.51

Other investments
303

 
1

 
0.50

 
2,506

 
3

 
0.19

Mortgage loans held for portfolio
679

 
25

 
4.97

 
831

 
32

 
5.19

Advances(3)
50,121

 
222

 
0.59

 
45,876

 
234

 
0.68

Loans to other FHLBanks
3

 
—

 
0.10

 
4

 
—

 
0.07

Total interest-earning assets
81,556

 
685

 
1.12

 
85,526

 
768

 
1.20

Other assets(4)(5)
841

 
—

 
—

 
910

 
—

 
—

Total Assets
$
82,397

 
$
685

 
1.11
%
 
$
86,436

 
$
768

 
1.19
%
Liabilities and Capital
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligations:
 
 
 
 
 
 
 
 
 
 
 
Bonds(3)
$
46,291

 
$
239

 
0.69
%
 
$
54,076

 
$
247

 
0.61
%
Discount notes
28,483

 
29

 
0.14

 
23,822

 
16

 
0.09

Deposits and other borrowings
1,097

 
—

 
0.05

 
781

 
—

 
0.05

Mandatorily redeemable capital stock
395

 
60

 
20.17

 
1,513

 
99

 
8.73

Total interest-bearing liabilities
76,266

 
328

 
0.57

 
80,192

 
362

 
0.60

Other liabilities(4)
472

 
—

 
—

 
516

 
—

 
—

Total Liabilities
76,738

 
328

 
0.57

 
80,708

 
362

 
0.60

Total Capital
5,659

 
—

 
—

 
5,728

 
—

 
—

Total Liabilities and Capital
$
82,397

 
$
328

 
0.53
%
 
$
86,436

 
$
362

 
0.56
%
Net Interest Income
 
 
$
357

 
 
 
 
 
$
406

 
 
Net Interest Spread(6)
 
 
 
 
0.55
%
 
 
 
 
 
0.60
%
Net Interest Margin(7)
 
 
 
 
0.59
%
 
 
 
 
 
0.63
%
Interest-earning Assets/Interest-bearing Liabilities
106.94
%
 
 
 
 
 
106.65
%
 
 
 
 

(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 $56 million and $49 million for the nine months ended September 30, 2015 and 2014, respectively.
(3)
Interest income/expense and average rates include the effect of associated interest rate exchange agreements, as follows:





66

 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
(In millions)
(Amortization)/
Accretion of
Hedging
Activities

 
Net Interest
Settlements

 
Total Net Interest
Income/(Expense)

 
(Amortization)/
Accretion of
Hedging
Activities

 
Net Interest
Settlements

 
Total Net Interest
Income/(Expense)

Advances
$
(1
)
 
$
(82
)
 
$
(83
)
 
$
(3
)
 
$
(98
)
 
$
(101
)
Consolidated obligation bonds
4

 
196

 
200

 
4

 
197

 
201


(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 first nine months of 2015 was $357 million, a 12% decrease from $406 million in the first nine months of 2014. The following table details the changes in interest income and interest expense for the first nine months of 2015 compared to first nine months of 2014. 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, 2015, Compared to Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
Increase/
(Decrease)

 
Attributable to Changes in(1)
(In millions)
 
Average Volume

 
Average Rate

Interest-earning assets:
 
 
 
 
 
Securities purchased under agreements to resell
$
2

 
$
1

 
$
1

Federal funds sold
(3
)
 
(3
)
 
—

AFS securities:
 
 
 
 
 
MBS
(11
)
 
(29
)
 
18

HTM securities:
 
 
 
 
 
MBS
(50
)
 
(47
)
 
(3
)
Other investments
(2
)
 
(5
)
 
3

Mortgage loans held for portfolio
(7
)
 
(6
)
 
(1
)
Advances(2) 
(12
)
 
21

 
(33
)
Total interest-earning assets
(83
)
 
(68
)
 
(15
)
Interest-bearing liabilities:
 
 
 
 
 
Consolidated obligations:
 
 
 
 
 
Bonds(2)
(8
)
 
(37
)
 
29

Discount notes
13

 
3

 
10

Mandatorily redeemable capital stock
(39
)
 
(107
)
 
68

Total interest-bearing liabilities
(34
)
 
(141
)
 
107

Net interest income
$
(49
)
 
$
73

 
$
(122
)

(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 $9 million of advance prepayment fees in the first nine months of 2015 compared to $5 million in the first nine months of 2014.

The net interest margin was 59 basis points for the first nine months of 2015, 4 basis points lower than the net interest margin for the first nine months of 2014, which was 63 basis points. The net interest spread was 55 basis points for the first nine months of 2015, 5 basis points lower than the net interest spread for the first nine months of 2014, which was 60 basis points. These decreases were primarily due to dividends on mandatorily redeemable capital stock, which are classified as interest expense. Although the average balance of mandatorily redeemable

67

capital stock was significantly lower in the first nine months of 2015 than in the year-earlier period, the average dividend rate paid on all capital stock, including mandatorily redeemable capital stock, was higher, which had an offsetting impact on the reduction in interest expense associated with the decline in the average balance of mandatorily redeemable capital stock. Net interest income was favorably affected by the accretion of yield adjustments on certain other-than-temporarily impaired PLRMBS resulting from improvement in expected cash flows.

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

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

Other Income/(Loss). The following table presents the components of “Other Income/(Loss)” for the nine months ended September 30, 2015 and 2014.
 
Other Income/(Loss)
 
 
 
 
 
Nine Months Ended
(In millions)
September 30, 2015

 
September 30, 2014

Other Income/(Loss):
 
 
 
Total OTTI loss
$
(25
)
 
$
(5
)
Net amount of OTTI loss reclassified to/(from) AOCI
13

 
2

Net OTTI loss, credit-related
(12
)
 
(3
)
Net gain/(loss) on trading securities(1)

(1
)
 
(1
)
Net gain/(loss) on advances and consolidated obligation bonds held under fair value option
(30
)
 
(82
)
Net gain/(loss) on derivatives and hedging activities
(27
)
 
(34
)
Gains on litigation settlements, net
459

 
—

Other
8

 
6

Total Other Income/(Loss)
$
397

 
$
(114
)

(1) The net gain/(loss) on trading securities that were economically hedged totaled a de minimis amount and $(1) million for the nine months ended September 30, 2015 and 2014, 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.”


68

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, 2015 and 2014.
 
Net Gain/(Loss) on Advances and Consolidated Obligation Bonds Held Under Fair Value Option
 
 
 
 
 
Nine Months Ended
(In millions)
September 30, 2015

 
September 30, 2014

Advances
$
3

 
$
(13
)
Consolidated obligation bonds
(33
)
 
(69
)
Total
$
(30
)
 
$
(82
)

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

The unrealized net fair value gains/(losses) on advances and 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 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 2015 and 2014.
Sources of Gains/(Losses) Recorded in Net Gain/(Loss) on Derivatives and Hedging Activities
Nine Months Ended September 30, 2015, Compared to Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
September 30, 2015
 
September 30, 2014
 
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
$
—

 
$
(19
)
 
$
(58
)
 
$
(77
)
 
$
—

 
$
29

 
$
(77
)
 
$
(48
)
Not elected for fair value option
—

 
3

 
—

 
3

 
1

 
7

 
(7
)
 
1

Consolidated obligation bonds:
 
 
 
 
 
 
 
 
 
 

 

 
 
Elected for fair value option
—

 
21

 
40

 
61

 
—

 
25

 
43

 
68

Not elected for fair value option
(11
)
 
(7
)
 
28

 
10

 
(7
)
 
(19
)
 
17

 
(9
)
Consolidated obligation discount notes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Not elected for fair value option
—

 
1

 
(24
)
 
(23
)
 
—

 
(4
)
 
(28
)
 
(32
)
MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Not elected for fair value option
—

 
(2
)
 
—

 
(2
)
 
—

 
(14
)
 
—

 
(14
)
Non-MBS investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Not elected for fair value option
—

 
—

 
—

 
—

 
—

 
1

 
(1
)
 
—

Mortgage delivery commitment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Not elected for fair value option
—

 
1

 
—

 
1

 
—

 
—

 
—

 
—

Total
$
(11
)
 
$
(2
)
 
$
(14
)
 
$
(27
)
 
$
(6
)
 
$
25

 
$
(53
)
 
$
(34
)

69


During the first nine months of 2015, net losses on derivatives and hedging activities totaled $27 million compared to net losses of $34 million in the first nine months of 2014. These amounts included expense of $14 million and expense of $53 million resulting from net settlements on derivative instruments used in economic hedges in the first nine months of 2015 and 2014, respectively. Excluding the impact of income or expense from net settlements on derivative instruments used in economic hedges, the net gains or losses on fair value and economic hedges were primarily associated with the effects of changes in market interest rates, interest rate spreads, interest rate volatility, and other market factors during the period.

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

Additional information about derivatives and hedging activities is provided in “Item 1. Financial Statements – Note 15 – Derivatives and Hedging Activities.”

Gains on litigation settlements, net – During the first nine months of 2015, gains relating to settlements with certain defendants in connection with the Bank’s PLRMBS litigation totaled $459 million (after netting certain legal fees and expenses).

Return on Average Equity

Return on average equity (ROE) was 3.47% (annualized) for the third quarter of 2015, compared to 5.25% (annualized) for the third quarter of 2014. This decrease reflected the decrease in net income in the third quarter of 2015, which declined 39%, from $76 million in the third quarter of 2014 to $46 million in the third quarter of 2015.

ROE was 13.72% (annualized) for the first nine months of 2015, compared to 3.73% (annualized) for the first nine months of 2014. The increase reflected the increase in net income in the first nine months of 2015 resulting from a $459 million gain (after netting certain legal fees and expenses) relating to settlements with certain defendants in connection with Bank’s PLRMBS litigation in the first quarter of 2015.

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, 2015, advances maturing within five years totaled $43.9 billion, significantly in excess of the $173 million of member deposits on that date. At December 31, 2014, advances maturing within five years totaled $37.0 billion, also significantly in excess of the $160 million of member deposits on that date. In addition, as of September 30, 2015, and December 31, 2014, the Bank held estimated total sources

70

of funds in an amount that would have allowed the Bank to meet its liquidity needs for more than 5 consecutive business days without issuing new consolidated obligations, 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 2014 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 202% as of September 30, 2015. 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 2014 Form 10-K.

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 $13 million and $35 million at September 30, 2015, and December 31, 2014, 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, and to maintain capital compliance.

The Board of Directors previously set the amount for the targeted buildup of restricted retained earnings at $1.8 billion. As of March 31, 2012, restricted retained earnings reached the $1.8 billion targeted amount. The Bank’s retained earnings target may be changed at any time. The Board of Directors periodically reviews the retained earnings methodology and analysis to determine whether any adjustments are appropriate. As of July 31, 2015, the Board of Directors set the amount for the targeted buildup of restricted retained earnings at $1.65 billion and transferred $150 million to unrestricted retained earnings.


71

Joint Capital Enhancement Agreement – In 2011, the FHLBanks entered into a Joint Capital Enhancement Agreement, as amended (JCE Agreement), intended to enhance the capital position of each FHLBank by allocating a portion of each FHLBank’s earnings to a separate retained earnings account at that FHLBank. In accordance with the JCE Agreement, each FHLBank is required to 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 JCE Agreement, these restricted retained earnings will not be available to pay dividends.

Retained earnings related to the JCE Agreement totaled $346 million and $230 million at September 30, 2015, and December 31, 2014, respectively.

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 15 – Capital” in the Bank’s 2014 Form 10-K.

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

In addition, Finance Agency rules do not permit the Bank to pay dividends in the form of capital stock if its excess
capital stock exceeds 1% of its total assets. Excess capital stock is defined as the aggregate of the capital stock held by each shareholder in excess of its minimum capital stock requirement, as established by the Bank’s capital plan. As of September 30, 2015, the Bank’s excess capital stock totaled $393 million, or 0.46% of total assets.

In the third quarter of 2015, the Bank paid dividends on the capital stock outstanding during the second quarter of 2015 at an annualized rate of 10.01%, totaling $79 million, including $72 million in dividends on capital stock and $7 million in dividends on mandatorily redeemable capital stock. In the third quarter of 2014, the Bank paid dividends on the capital stock outstanding during the second quarter of 2014 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 first nine months of 2015, the Bank paid dividends at an annualized rate of 13.30%, totaling $373 million, of which $145 million was related to the special dividend. The total dividends paid included $313 million in dividends on capital stock and $60 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.

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

On October 28, 2015, the Bank’s Board of Directors declared a cash dividend on the capital stock outstanding during the third quarter of 2015 at an annualized rate of 8.79% totaling $62 million, including $56 million in dividends on capital stock and $6 million in dividends on mandatorily redeemable capital stock. The Bank recorded the dividend on October 28, 2015. The Bank expects to pay the dividend on or about November 12, 2015. Dividends on mandatorily redeemable capital stock will be recognized as interest expense in the fourth quarter of 2015.

The Bank will continue to monitor the condition of its PLRMBS portfolio, the ratio of the Bank’s estimated market value of total capital to par value of capital stock, its overall financial performance and retained earnings,

72

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 2014 to 2013 – Dividends and Retained Earnings” in the Bank’s 2014 Form 10-K.

Financial Condition

Total assets were $85.9 billion at September 30, 2015, compared to $75.8 billion at December 31, 2014. Advances increased by $11.8 billion, or 30%, to $50.8 billion at September 30, 2015, from $39.0 billion at December 31, 2014. MBS decreased by $2.8 billion, or 14%, to $16.8 billion at September 30, 2015, from $19.6 billion at December 31, 2014. Cash and due from banks decreased by $1.7 billion, or 44%, to $2.2 billion at September 30, 2015, from $3.9 billion at December 31, 2014. Average total assets were $87.5 billion for the third quarter of 2015, a 2% increase compared to $85.5 billion for the third quarter of 2014. Average total assets were $82.4 billion for the first nine months of 2015, a 5% decrease compared to $86.4 billion for the first nine months of 2014. Average advances were $56.7 billion for the third quarter of 2015, a 24% increase from $45.6 billion for the third quarter of 2014. Average advances were $50.1 billion for the first nine months of 2015, a 9% increase from $45.9 billion for the first nine months of 2014. Average MBS were $17.1 billion for the third quarter of 2015, a 17% decrease from $20.7 billion for the third quarter of 2014. Average MBS were $18.1 billion for the first nine months of 2015, a 16% decrease from $21.5 billion for the first nine months of 2014.

Advances outstanding at September 30, 2015, included unrealized gains of $180 million, of which $105 million represented unrealized gains on advances hedged in accordance with the accounting for derivative instruments and hedging activities and $75 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, 2014, included unrealized gains of $156 million, of which $67 million represented unrealized gains on advances hedged in accordance with the accounting for derivative instruments and hedging activities and $89 million represented unrealized gains on economically hedged advances that are carried at fair value in accordance with the fair value option. The overall increase in the unrealized gains on the hedged advances and advances carried at fair value from December 31, 2014, to September 30, 2015, 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 $81.0 billion at September 30, 2015, an increase of $10.9 billion from $70.1 billion at December 31, 2014, reflecting an increase in consolidated obligations outstanding from $68.9 billion at December 31, 2014, to $79.9 billion at September 30, 2015, partially offset by a decrease in mandatorily redeemable capital stock from $0.7 billion at December 31, 2014, to $0.5 billion at September 30, 2015. The decrease in mandatorily redeemable capital stock was primarily attributable to the Bank’s repurchase of excess capital stock during the first nine months of 2015. Average total liabilities were $82.3 billion for the third quarter of 2015, a 3% increase compared to $79.7 billion for the third quarter of 2014. Average total liabilities were $76.7 billion for the first nine months of 2015, a 5% decrease compared to $80.7 billion for the first nine months of 2014. Average consolidated obligations were $80.4 billion for the third quarter of 2015 and $77.3 billion for the third quarter of 2014. Average consolidated obligations were $74.8 billion for the first nine months of 2015 and $77.9 billion for the first nine months of 2014. Average mandatorily redeemable capital stock was $0.3 billion for the third quarter of 2015, and $1.1 billion for the third quarter of 2014. Average mandatorily redeemable capital stock was $0.4 billion for the first nine months of 2015 and $1.5 billion for the first nine months of 2014.

Consolidated obligations outstanding at September 30, 2015, included unrealized losses of $259 million on consolidated obligation bonds hedged in accordance with the accounting for derivative instruments and hedging activities and unrealized gains of $1 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, 2014, included unrealized losses of $308 million on consolidated obligation bonds hedged in accordance with the

73

accounting for derivative instruments and hedging activities and unrealized gains of $31 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, 2014, to September 30, 2015, 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, 2015, and through the filing date of this report, does not believe that it is probable that it will be asked to do so. The par value of the outstanding consolidated obligations of the FHLBanks was $856.5 billion at September 30, 2015, and $847.2 billion at December 31, 2014.

Changes in the long-term credit ratings of individual FHLBanks do not necessarily affect the credit rating of the consolidated obligations issued on behalf of the FHLBanks. Rating agencies may change or withdraw a rating from time to time because of various factors, including operating results or actions taken, business developments, or changes in their opinion regarding, among other factors, the general outlook for a particular industry or the economy.

The Bank evaluated the publicly disclosed FHLBank regulatory actions and long-term credit ratings of the other FHLBanks as of September 30, 2015, 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 net settlements from economic hedges that are recorded in “Net gain/(loss) on derivatives and hedging activities” in other income and excludes interest expense that is recorded in “Mandatorily redeemable capital stock.” Other key financial information, such as any credit-related OTTI losses on the Bank’s PLRMBS, other expenses, and assessments, is not included in the segment reporting analysis, but is incorporated into the Bank’s overall assessment of financial performance. For a reconciliation of the Bank’s operating segment adjusted net interest income to the Bank’s total net interest income, see “Item 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, and liquidity and other non-MBS investments associated with the Bank’s role as a liquidity provider, and capital. Assets associated with this segment increased $13.0 billion, or 24%, to $68.4 billion (80% of total assets) at September 30, 2015, from $55.4 billion (73% of total assets) at December 31, 2014.

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


74

Adjusted net interest income for this segment was $38 million in the third quarter of 2015, a decrease of $8 million, or 17%, compared with $46 million in the third quarter of 2014. In the first nine months of 2015, adjusted net interest income for this segment was $120 million, a decrease of $9 million, or 7%, compared to $129 million in the first nine months of 2014. The decreases in adjusted net interest income for the third quarter of 2015 and for the first nine months of 2015 were primarily due to a decline in spreads on advances-related assets and a decline in earnings on invested capital because of lower average capital balances, partially offset by an increase in earnings because of higher advances balances.

Adjusted net interest income for this segment represented 31% and 32% of total adjusted net interest income for the third quarter of 2015 and 2014, and 31% and 29% of total adjusted net interest income for the first nine months of 2015 and 2014, respectively.

Members and nonmember borrowers prepaid $272 million of advances in the third quarter of 2015 compared to $911 million in the third quarter of 2014. Interest income was increased by net prepayment fees of $1 million in the third quarter of 2015 and $1 million in the third quarter of 2014. Members and nonmember borrowers
prepaid $1.5 billion of advances in the first nine months of 2015 compared to $1.6 billion in the first nine months of 2014. Interest income was increased by net prepayment fees of $9 million in the first nine months of 2015 and $5
million in the first nine months of 2014.

Advances – The par value of advances outstanding increased by $11.8 billion, or 30%, to $50.6 billion at September 30, 2015, from $38.8 billion at December 31, 2014. Average advances outstanding were $56.7 billion in the third quarter of 2015, a 24% increase from $45.6 billion in the third quarter of 2014. Average advances outstanding were $50.1 billion in the first nine months of 2015, a 9% increase from $45.9 billion in the first nine months of 2014.

The increase in advances outstanding was primarily attributable to a $10.1 billion net increase in advances outstanding to the Bank’s top five borrowers and their affiliates, including JPMorgan Chase, whose advances and capital stock exceeded 10% of the Bank’s total advances and capital stock, respectively, as of September 30, 2015. (See “Item 1. Financial Statements – Note 7 – Advances – Credit and Concentration Risk” and “Item 1. Financial Statements – Note 13 – Capital – Concentration” for further information.) Advances to the top five borrowers increased to $31.5 billion at September 30, 2015, from $21.4 billion at December 31, 2014. Two of the top five borrowers increased their borrowings from the Bank during the first nine months of 2015, while the remaining three borrowers decreased their borrowings from the Bank during the first nine months of 2015. The increase was also attributable to a $1.7 billion increase 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.)

The $11.8 billion increase in advances outstanding primarily reflected a $13.6 billion increase in adjustable rate advances and a $1.6 billion increase in variable rate advances, partially offset by a $3.4 billion decrease in fixed rate advances.

The components of the advances portfolio at September 30, 2015, and December 31, 2014, are presented in the following table.

75

Advances Portfolio by Product Type
 
 
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
(Dollar in millions)
Par Value

 
Percentage of Total Par Value

 
Par Value

 
Percentage of Total Par Value

Adjustable – LIBOR
$
5,822

 
12
%
 
$
7,068

 
19
%
Adjustable – LIBOR, callable at borrower’s option
14,900

 
29

 
—

 
—

Adjustable – LIBOR, with caps and/or floors
50

 
—

 
56

 
—

Adjustable – LIBOR, with caps and/or floors and PPS(1)
30

 
—

 
100

 
—

Adjustable – Other Indices
2

 
—

 
—

 
—

Subtotal adjustable rate advances
20,804

 
41

 
7,224

 
19

Fixed
20,418

 
40

 
22,626

 
58

Fixed – amortizing
227

 
—

 
242

 
1

Fixed – with PPS(1)
3,012

 
6

 
3,991

 
10

Fixed – with caps and PPS(1)
275

 
1

 
425

 
1

Fixed – callable at borrower’s option
14

 
—

 
4

 
—

Fixed – callable at borrower’s option with PPS(1)
299

 
1

 
324

 
1

Fixed – putable at Bank’s option
65

 
—

 
65

 
—

Fixed – putable at Bank’s option with PPS(1)
75

 
—

 
75

 
—

Subtotal fixed rate advances
24,385

 
48

 
27,752

 
71

Daily variable rate
5,424

 
11

 
3,854

 
10

Total par value
$
50,613

 
100
%
 
$
38,830

 
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 – Credit Risk – Advances.”

Non-MBS Investments – The Bank’s non-MBS investment portfolio consists of financial instruments that are used primarily to facilitate the Bank’s role as a cost-effective provider of credit and liquidity to members and to support the operations of the Bank. The Bank’s total non-MBS investment portfolio was $15.2 billion and $12.3 billion as of September 30, 2015, and December 31, 2014, respectively. The increase in the total size of the non-MBS investment portfolio reflects higher balances of short-term securities purchased under agreements to resell, partially offset by lower balances of Federal funds sold and agency debentures.

Cash and Due from Banks – Cash and due from banks was $2.2 billion at September 30, 2015, a $1.7 billion decrease compared to December 31, 2014. Cash and due from banks is largely composed of cash held at the Federal Reserve Bank of San Francisco and can increase or decrease depending on the availability of other investment opportunities.

Borrowings – Total liabilities (primarily consolidated obligations) funding the advances-related business increased to $63.4 billion at September 30, 2015, from $49.7 billion at December 31, 2014. 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.”


76

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, 2015, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $68.1 billion, of which $17.4 billion were hedging advances, $50.0 billion were hedging consolidated obligations, and $0.7 billion were economically hedging trading securities. At December 31, 2014, the notional amount of interest rate exchange agreements associated with the advances-related business totaled $55.2 billion, of which $17.8 billion were hedging advances, $35.0 billion were hedging consolidated obligations, and $2.4 billion were economically hedging trading securities. 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 2014 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, 2015, rates on 3-month U.S. Treasury bills and 2-year and 5-year U.S. Treasury notes declined, while 3-month LIBOR increased, compared with December 31, 2014.
 
Selected Market Interest Rates
 
 
 
 
 
 
 
 
 
 
 
 
Market Instrument
September 30, 2015
 
December 31, 2014
 
September 30, 2014
 
December 31, 2013
Federal Reserve target rate for overnight Federal funds
0-0.25

%
 
0-0.25

%
 
0-0.25

%
 
0-0.25

%
3-month Treasury bill
0.00

 
 
0.03

 
 
0.02

 
 
0.06

 
3-month LIBOR
0.33

 
 
0.26

 
 
0.24

 
 
0.25

 
2-year Treasury note
0.63

 
 
0.67

 
 
0.57

 
 
0.38

 
5-year Treasury note
1.36

 
 
1.65

 
 
1.76

 
 
1.74

 

The following table presents a comparison of the average issuance cost of FHLBank System consolidated obligation bonds and discount notes converted to 3-month LIBOR-indexed liabilities through interest rate swaps in the first nine months of 2015 and 2014. Increased investor demand in the first nine months of 2015 compared to the same period in 2014 contributed to more attractive relative borrowing costs 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, 2015
 
September 30, 2014
Consolidated obligation bonds
–13.1
 
–12.5
Consolidated obligation discount notes (one month and greater)
–16.1
 
–15.1


77

Mortgage-Related Business. The mortgage-related business consists of MBS investments, mortgage loans acquired through the Mortgage Partnership Finance (MPF) Program, and the related financing and hedging instruments. 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 net settlements from associated interest rate exchange agreements.

At September 30, 2015, assets associated with this segment were $17.5 billion (20% of total assets), a decrease of $2.9 billion from $20.4 billion at December 31, 2014 (27% of total assets).

Adjusted net interest income for this segment was $84 million in the third quarter of 2015, a decrease of $15 million, or 15%, from $99 million in the third quarter of 2014. In the first nine months of 2015, adjusted net interest income for this segment was $267 million, a decrease of $47 million, or 15%, from $314 million in the first nine months of 2014. These decreases were primarily due to lower average unpaid principal balances of MBS and mortgage loans and reduced spreads on mortgage-related assets, 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 69% and 68% of total adjusted net interest income for the third quarter of 2015 and 2014, and 69% and 71% of total adjusted net interest income for the first nine months of 2015 and 2014, respectively.

MBS Investments – The Bank’s MBS portfolio was $16.8 billion at September 30, 2015, compared with $19.6 billion at December 31, 2014. During the first nine months of 2015, the Bank’s MBS portfolio decreased primarily because of principal repayments totaling $2.8 billion. In the third quarter of 2015, average MBS investments were $17.1 billion, a decrease of $3.6 billion from $20.7 billion in the third quarter of 2014. Average MBS investments were $18.1 billion in the first nine months of 2015, a decrease of $3.4 billion from $21.5 billion in the first nine months of 2014. 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 may purchase conventional conforming fixed rate mortgage loans and FHA/VA-insured mortgage loans from members for the Bank’s own portfolio under the MPF Original and MPF Government products. In addition, the Bank may facilitate the purchase of conforming fixed rate mortgage loans from members for concurrent sale to Fannie Mae under the MPF Xtra product and of jumbo fixed rate mortgage loans for concurrent sale to Redwood Trust, Inc., a real estate investment trust, under the MPF Direct product. As of September 30, 2015, the Bank had approved seven members as 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 mortgage loans from its participating financial institutions under the MPF Original and MPF Plus products. Participating members originated or purchased the mortgage loans, credit-enhanced them and sold them to the Bank, and generally retained the servicing of the loans.

Mortgage loan balances decreased to $668 million at September 30, 2015, from $708 million at December 31, 2014, a decrease of $40 million. Average mortgage loans were $669 million in the third quarter of 2015, a decrease

78

of $114 million from $783 million in the third quarter of 2014. Average mortgage loans were $679 million in the first nine months of 2015, a decrease of $152 million from $831 million in the first nine months of 2014.

At September 30, 2015, and December 31, 2014, the Bank held conventional conforming fixed rate mortgage loans purchased under one of two MPF products, MPF Plus or MPF Original, which are described in greater detail in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – MPF Program” in the Bank’s 2014 Form 10-K. The Bank purchased $100 million in eligible loans under the MPF Original product in the first nine months of 2015. Mortgage loan balances at September 30, 2015, and December 31, 2014, were as follows:

Mortgage Loan Balances by MPF Product Type
 
 
 
 
(In millions)
September 30, 2015

 
December 31, 2014

MPF Plus
$
524

 
$
653

MPF Original
144

 
60

Subtotal
668

 
713

Unamortized premiums
9

 
6

Unamortized discounts
(9
)
 
(10
)
Mortgage loans held for portfolio
668

 
709

Less: Allowance for credit losses
—

 
(1
)
Mortgage loans held for portfolio, net
$
668

 
$
708


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 2014 Form 10-K.

Borrowings – Total consolidated obligations funding the mortgage-related business decreased $2.9 billion to $17.5 billion at September 30, 2015, from $20.4 billion at December 31, 2014, 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 $7.7 billion at September 30, 2015, of which $5.6 billion were hedging or were associated with consolidated obligations funding the mortgage portfolio and $2.1 billion were associated with MBS. The notional amount of interest rate exchange agreements associated with the mortgage-related business totaled $7.1 billion at December 31, 2014, of which $4.9 billion were hedging or were associated with consolidated obligations funding the mortgage portfolio and $2.2 billion were associated with MBS.

Interest Rate Exchange Agreements

A derivative transaction or interest rate exchange agreement is a financial contract whose fair value is generally derived from changes in the value of an underlying asset or liability. The Bank uses interest rate swaps; interest rate cap and floor agreements; and callable and putable interest rate swaps (collectively, interest rate exchange agreements) to manage its exposure to interest rate risks inherent in its ordinary course of business, including its lending, investment, and funding activities. For more information on the primary strategies that the Bank employs for using interest rate exchange agreements and the associated market risks, see “Item 7. Management’s Discussion

79

and Analysis of Financial Condition and Results of Operations – Risk Management – Market Risk – Interest Rate Exchange Agreements” in the Bank’s 2014 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, 2015, and December 31, 2014.

Interest Rate Exchange Agreements
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
Notional Amount
Hedging Instrument
 
Hedging Strategy
 
Accounting Designation
 
September 30,
2015

 
December 31,
2014

Hedged Item: Advances
 
 
 
 
 
 
 
 
Pay fixed, receive adjustable interest rate swap
 
Fixed rate advance converted to a LIBOR adjustable rate
 
Fair Value Hedge
 
$
11,615

 
$
9,883

Basis swap
  
Adjustable rate advance converted to another adjustable rate index to reduce interest rate sensitivity and repricing gaps
  
Economic Hedge(1)
 
2

 
—

Received fixed, pay adjustable interest rate swap
 
LIBOR adjustable rate advance converted to a fixed rate
 
Economic Hedge(1)
 
382

 
200

Pay fixed, receive adjustable interest rate swap
 
Fixed rate advance converted to a LIBOR adjustable rate
 
Economic Hedge(1)
 
1,534

 
2,716

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)
 
3,748

 
4,892

Interest rate cap or floor
 
Interest rate cap or floor embedded in an adjustable rate advance; matched to advance accounted for under the fair value option
 
Economic Hedge(1)
 
80

 
156

Subtotal Economic Hedges(1)
 
 
 
 
 
5,746

 
7,964

Total
 
 
 
 
 
17,361

 
17,847

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
 
17,121

 
15,885

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)
 
1,519

 
6,340

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)
 
1,915

 
1,425

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)
 
875

 
1,175

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)
 
8,898

 
1,400

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)
 
765

 
255

Subtotal Economic Hedges(1)
 
 
 
 
 
13,972

 
10,595

Total
 
 
 
 
 
31,093

 
26,480



80

Interest Rate Exchange Agreements (continued)
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
Notional Amount
Hedging Instrument
 
Hedging Strategy
 
Accounting Designation
 
September 30,
2015

 
December 31,
2014

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
 
730

 
2,250

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)
 
2,350

 
3,175

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)
 
2,805

 
4,148

Subtotal Economic Hedges(1)
 
 
 
 
 
5,155

 
7,323

Total
 
 
 
 
 
5,885

 
9,573

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)
 
1,290

 
1,670

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)
 
17,251

 
1,899

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

Total
 
 
 
 
 
18,541

 
3,884

Hedged Item: Trading Securities
 
 
 
 
 
 
 
 
Basis swap
 
Basis swap hedging adjustable rate Federal Farm Credit Bank (FFCB) bonds
 
Economic Hedge(1)
 
750

 
2,363

Interest rate cap
 
Stand-alone interest rate cap used to offset cap risk embedded in floating rate MBS
 
Economic Hedge(1)
 
2,150

 
2,150

Total
 
 
 
 
 
2,900

 
4,513

Stand-Alone Derivatives
 
 
 
 
 
 
 
 
Mortgage delivery commitments
 
To offset the fair value risk associated with fixed rate mortgage purchase commitments.
 
N/A
 
8

 
—

Total
 
 
 
 
 
8

 
—

Total Notional Amount
 
 
 
 
 
$
75,788

 
$
62,297


(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.


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, 2015, and December 31, 2014.


81

Interest Rate Exchange Agreements
Notional Amounts and Estimated Fair Values

 
 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
 
 
(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
$
11,615

 
$
(105
)
 
$
104

 
$
—

 
$
(1
)
Non-callable bonds
17,121

 
251

 
(253
)
 
—

 
(2
)
Callable bonds
730

 
3

 
(1
)
 
—

 
2

Subtotal
29,466

 
149

 
(150
)
 
—

 
(1
)
Not qualifying for hedge accounting (economic hedges):
 
 
 
 
 
 
 
 
Advances
5,746

 
(73
)
 
—

 
66

 
(7
)
Non-callable bonds
13,972

 
26

 
—

 
(7
)
 
19

Callable bonds
5,155

 
—

 
—

 
16

 
16

Discount notes
18,541

 
2

 
—

 
—

 
2

FFCB bonds
750

 
—

 
—

 
—

 
—

MBS
2,150

 
6

 
—

 
—

 
6

Mortgage delivery commitments
8

 
—

 
—

 
—

 
—

Subtotal
46,322

 
(39
)
 
—

 
75

 
36

Total excluding accrued interest
75,788

 
110

 
(150
)
 
75

 
35

Accrued interest
—

 
95

 
(92
)
 
—

 
3

Total
$
75,788

 
$
205

 
$
(242
)
 
$
75

 
$
38


 
 
 
 
 
 
 
 
 
 
December 31, 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
$
9,883

 
$
(62
)
 
$
62

 
$
—

 
$
—

Non-callable bonds
15,885

 
307

 
(309
)
 
—

 
(2
)
Callable bonds
2,250

 
4

 
9

 
—

 
13

Subtotal
28,018

 
249

 
(238
)
 
—

 
11

Not qualifying for hedge accounting (economic hedges):
 
 
 
 
 
 
 
 
Advances
7,964

 
(69
)
 
—

 
76

 
7

Non-callable bonds
10,595

 
43

 
—

 
(12
)
 
31

Callable bonds
7,323

 
(31
)
 
—

 
54

 
23

Discount notes
3,884

 
1

 
—

 
—

 
1

FFCB bonds
2,363

 
—

 
—

 
—

 
—

MBS
2,150

 
9

 
—

 
—

 
9

Subtotal
34,279

 
(47
)
 
—

 
118

 
71

Total excluding accrued interest
62,297

 
202

 
(238
)
 
118

 
82

Accrued interest
—

 
20

 
(38
)
 
2

 
(16
)
Total
$
62,297

 
$
222

 
$
(276
)
 
$
120

 
$
66


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.”


82

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, 2015, and December 31, 2014. 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 of Derivative Counterparties
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
September 30, 2015
 
December 31, 2014
Derivative Counterparty
Credit  
Rating(1)  
 
Notional
Amount

 
Percentage of
Total
Notional Amount

 
Credit  
Rating(1)  
 
Notional
Amount

 
Percentage of
Total
Notional Amount

Uncleared
 
 
 
 
 
 
 
 
 
 
 
JPMorgan Chase Bank, National Association
A
 
$
5,492

 
7
%
 
A
 
$
7,439

 
12
%
Morgan Stanley Capital Services
A
 
3,157

 
4

 
BBB
 
6,957

 
11

Subtotal
 
 
8,649

 
11

 
 
 
14,396

 
23

Others
At least BBB
 
17,538

 
23

 
At least BBB
 
22,982

 
37

Subtotal uncleared
 
 
26,187

 
34

 
 
 
37,378

 
60

Cleared
 
 
 
 
 
 
 
 
 
 
 
LCH Clearnet(2)
 
 
 
 
 
 
 
 
 
 
 
Credit Suisse Securities (USA) LLC
A
 
41,041

 
54

 
A
 
14,290

 
23

Deutsche Bank Securities Inc.
BBB
 
8,552

 
12

 
A
 
10,629

 
17

Subtotal cleared
 
 
49,593

 
66

 
 
 
24,919

 
40

Total(3)
 
 
$
75,780

 
100
%
 
 
 
$
62,297

 
100
%

(1)
The credit ratings used by the Bank are based on the lower of Moody's or Standard & Poor's ratings. 
(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 Standard &Poor’s.
(3)
Total notional amount at September 30, 2015, does not include $8 million of mortgage delivery commitments with members.

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 repay maturing consolidated obligations for which it is the primary obligor, meet other obligations and commitments, and meet expected and unexpected member credit demands. The Bank monitors its financial position in 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 may 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

83

includes an explanation of how sources of funds may be allocated under stressed market conditions, such as short-term operational disruptions at the Bank or the Office of Finance or short-term disruptions in the debt capital markets. The Bank maintains short-term, high-quality money market investments and government and agency securities in amounts that may average up to three times the Bank’s capital as a primary source of funds to satisfy these requirements and objectives.

The Bank has a regulatory contingent liquidity requirement to maintain at least 5 business days of liquidity to enable it to meet its obligations without issuance of new consolidated obligations. In addition, the Finance Agency has established liquidity guidelines that require 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 new consolidated obligation issuance and no reliance on repurchase agreements and permit the sale of certain existing investments as determined by the Finance Agency. The two scenarios differ only in the treatment of maturing advances. One scenario assumes that the Bank does not renew any maturing advances. For this scenario, the Bank must have sufficient liquidity to meet its obligations for 15 calendar days. The second scenario requires the Bank to renew maturing advances for certain members based on specific criteria established by the Finance Agency. For this scenario, the Bank must have sufficient liquidity to meet its obligations for 5 calendar days.

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

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

The following table shows the Bank’s principal financial obligations due, estimated sources of funds available to meet those obligations, and the net difference between funds available and funds needed for the 5-business-day period following September 30, 2015, and December 31, 2014.

Principal Financial Obligations Due and Funds Available for Selected Period
 
 
 
 
 
As of September 30, 2015
 
As of December 31, 2014
(In millions)
5 Business Days
 
5 Business Days
Obligations due:
 
 
 
Demand deposits
$
1,141

 
$
845

Discount note and bond maturities and expected exercises of bond call options
3,005

 
2,420

Subtotal obligations due
4,146

 
3,265

Sources of available funds:
 
 
 
Maturing investments
14,078

 
8,155

Cash at Federal Reserve Bank of San Francisco
1,998

 
3,919

Proceeds from scheduled settlements of discount notes and bonds
—

 
3

Maturing advances and scheduled prepayments
5,327

 
4,837

Subtotal sources of available funds
21,403

 
16,914

Net funds available
$
17,257

 
$
13,649

 


84

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 2014 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 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, 2015, and December 31, 2014. The Bank’s risk-based capital requirement decreased to $2.8 billion at September 30, 2015, from $3.2 billion at December 31, 2014.  
Regulatory Capital Requirements
 
 
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
(Dollars in millions)
Required

 
Actual

 
Required

 
Actual

Risk-based capital
$
2,810

 
$
5,387

 
$
3,231

 
$
6,356

Total regulatory capital
$
3,436

 
$
5,387

 
$
3,032

 
$
6,356

Total regulatory capital ratio
4.00
%
 
6.27
%
 
4.00
%
 
8.38
%
Leverage capital
$
4,295

 
$
8,081

 
$
3,790

 
$
9,534

Leverage ratio
5.00
%
 
9.41
%
 
5.00
%
 
12.58
%

The Bank’s total regulatory capital ratio decreased to 6.27% at September 30, 2015, from 8.38% at December 31, 2014, primarily because of the decrease in regulatory capital resulting from the Bank’s excess capital stock repurchase activity. The Bank repurchased $1.9 billion in excess capital stock during the first nine months of 2015.

On May 29, 2015, the Bank's Excess Stock Repurchase, Retained Earnings, and Dividend Framework was revised to reinstate the Bank’s practice of repurchasing the surplus capital stock of all members and the excess capital stock of all nonmember shareholders on a regular quarterly schedule, at the Bank’s discretion and subject to certain statutory and regulatory requirements and to the Bank’s Risk Management Policy and capital plan limitations. Surplus capital stock is defined as any stock holdings in excess of 115% of a member’s minimum stock requirement, and excess capital stock is defined as any stock holdings in excess of a shareholder’s minimum stock requirement. In accordance with the revised Excess Stock Repurchase, Retained Earnings, and Dividend Framework, each quarter, Bank management will evaluate and determine the amount of capital stock to be repurchased in that quarter, if any, giving consideration to certain capital metrics and capital management objectives and strategies, and subject to the requirements and limitations mentioned above. In addition, at the Bank’s discretion, some or all of the excess stock held by a shareholder may be repurchased upon request of the shareholder, subject to the requirements and limitations mentioned above. At least 15 calendar days before any repurchase, the Bank will notify shareholders of its intention to repurchase capital stock and of the scheduled repurchase date. On the scheduled repurchase date, the Bank will calculate the amount of stock to be repurchased to ensure that each member and former nonmember shareholder will continue to meet its minimum stock requirement after the repurchase.

85


The Bank plans to repurchase the surplus capital stock of all members and the excess capital stock of all nonmember shareholders on November 13, 2015.

The Bank’s capital requirements are more fully discussed in “Item 8. Financial Statements and Supplementary Data – Note 15 – Capital” in the Bank’s 2014 Form 10-K.

Risk Management

The Bank has an integrated corporate governance and internal control framework designed to support effective management of the Bank’s business activities and the risks inherent in these activities. As part of this framework, the Bank’s Board of Directors has adopted a Risk Governance Policy that outlines the key roles and responsibilities of the Board of Directors and management and sets forth how the Bank is organized to achieve its risk management objectives, including the implementation of the Bank’s strategic objectives, risk management strategies, corporate governance, and standards of conduct. The policy also establishes the Bank’s risk governance organizational structure and identifies the general roles and responsibilities of the Board of Directors and management in establishing risk management policies, procedures, and guidelines; in overseeing the enterprise risk profile; and in implementing enterprise risk management processes and business strategies. The policy establishes an independent risk oversight function to identify, assess, measure, monitor, and report on the enterprise risk profile and risk management capabilities of the Bank. For more information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management” in the Bank’s 2014 Form 10-K.

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

86


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 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, 2015, and December 31, 2014. During the nine months ended September 30, 2015, the Bank’s internal credit ratings stayed the same or improved for the majority of members and nonmember borrowers.


87

Member and Nonmember Credit Outstanding and Collateral Borrowing Capacity
by Credit Quality Rating
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
 
 
  
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
273

 
162

 
$
56,931

 
$
174,909

 
33
%
4-6
62

 
28

 
4,791

 
12,148

 
39

7-10
7

 
3

 
27

 
84

 
32

Subtotal
342

 
193

 
61,749

 
187,141

 
33

CDFIs
5

 
3

 
73

 
80

 
91

Total
347

 
196

 
$
61,822

 
$
187,221

 
33
%
 
 
 
 
 
 
 
 
 
 
December 31, 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
254

 
157

 
$
38,375

 
$
166,407

 
23
%
4-6
85

 
38

 
5,746

 
19,753

 
29

7-10
10

 
4

 
46

 
71

 
65

Subtotal
349

 
199

 
44,167

 
186,231

 
24

CDFIs
5

 
3

 
77

 
92

 
84

Total
354

 
202

 
$
44,244

 
$
186,323

 
24
%
 
(1)
Includes advances, letters of credit, the market value of swaps, estimated prepayment fees for certain borrowers, and the credit enhancement obligation on MPF loans.
(2)
Collateral borrowing capacity does not represent any commitment to lend on the part of the Bank.

Member and Nonmember Credit Outstanding and Collateral Borrowing Capacity
by Unused Borrowing Capacity
 
 
 
 
 
 
(Dollars in millions)
 
 
 
 
 
September 30, 2015
 
 
 
 
 
Unused Borrowing Capacity
Number of Members and Nonmembers with
Credit Outstanding

 
Credit
Outstanding(1)

 
Collateral
Borrowing
Capacity(2)

0% – 10%
10

 
$
3,971

 
$
4,178

11% – 25%
5

 
79

 
97

26% – 50%
23

 
31,133

 
53,299

More than 50%
158

 
26,639

 
129,647

Total
196

 
$
61,822

 
$
187,221

 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
Unused Borrowing Capacity
Number of Members and Nonmembers with
Credit Outstanding

 
Credit
Outstanding(1)

 
Collateral
Borrowing
Capacity(2)

0% – 10%
10

 
$
3,178

 
$
3,331

11% – 25%
7

 
181

 
226

26% – 50%
18

 
11,693

 
21,584

More than 50%
167

 
29,192

 
161,182

Total
202

 
$
44,244

 
$
186,323


88

 
(1)
Includes advances, letters of credit, the market value of swaps, estimated prepayment fees for certain borrowers, and the credit enhancement obligation on MPF loans.
(2)
Collateral borrowing capacity does not represent any commitment to lend on the part of the Bank.

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

Securities pledged as collateral are assigned borrowing capacities that reflect the securities’ 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, 2015, 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, 2015, and December 31, 2014.
 
Composition of Securities Collateral Pledged
by Members and by Nonmembers with Credit Outstanding
 
 
 
 
 
 
 
 
(In millions)
September 30, 2015
 
December 31, 2014
Securities Type with Current Credit Ratings
Current Par

 
Borrowing
Capacity

 
Current Par

 
Borrowing
Capacity

U.S. Treasury (bills, notes, bonds)
$
429

 
$
433

 
$
461

 
$
472

Agency (notes, subordinated debt, structured notes, indexed amortization notes, and Small Business Administration pools)
4,015

 
3,933

 
3,541

 
3,474

Agency pools and collateralized mortgage obligations
6,190

 
6,017

 
8,696

 
8,379

PLRMBS – publicly registered investment-grade-rated senior tranches
36

 
29

 
2

 
1

Total
$
10,670

 
$
10,412

 
$
12,700

 
$
12,326


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.

89


As of September 30, 2015, of the loan collateral pledged to the Bank, 36% was pledged by 31 institutions by specific identification, 44% was pledged by 134 institutions under a blanket lien with detailed reporting, and 20% was pledged by 113 institutions under a blanket lien with summary reporting.

As of September 30, 2015, 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.

The table below presents the mortgage loan collateral pledged by all members and by nonmembers with credit outstanding at September 30, 2015, and December 31, 2014.
 
Composition of Loan Collateral Pledged
by Members and by Nonmembers with Credit Outstanding
 
 
 
 
 
 
 
 
(In millions)
September 30, 2015
 
December 31, 2014
Loan Type
Unpaid Principal
Balance

 
Borrowing
Capacity

 
Unpaid Principal
Balance

 
Borrowing
Capacity

First lien residential mortgage loans
$
109,888

 
$
94,724

 
$
106,467

 
$
90,942

Second lien residential mortgage loans and home equity lines of credit
26,113

 
14,716

 
29,133

 
14,997

Multifamily mortgage loans
21,978

 
18,523

 
20,820

 
17,366

Commercial mortgage loans
57,169

 
41,842

 
54,707

 
39,144

Loan participations(1)
7,817

 
6,249

 
13,141

 
10,698

Small business, small farm, and small agribusiness loans
3,051

 
752

 
3,123

 
776

Other
4

 
3

 
106

 
74

Total
$
226,020

 
$
176,809

 
$
227,497

 
$
173,997


(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, 2015, and December 31, 2014, the unpaid principal balance of these loans totaled $13 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.


90

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.

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 (Fitch) ratings.

Investment Credit Exposure
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Carrying Value
 
Credit Rating(1)
 
 
 
 
Investment Type
AAA

 
AA

 
A

 
BBB

 
Below Investment Grade

 
Unrated

 
Total

Non-MBS
 
 
 
 
 
 
 
 
 
 
 
 
 
Housing finance agency bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
CalHFA bonds
$
—

 
$
—

 
$
282

 
$
—

 
$
—

 
$
—

 
$
282

GSEs:
 
 
 
 
 
 
 
 
 
 
 
 
 
FFCB bonds
—

 
1,649

 
—

 
—

 
—

 
—

 
1,649

Total non-MBS
—

 
1,649

 
282

 
—

 
—

 
—

 
1,931

MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
Ginnie Mae
—

 
1,299

 
—

 
—

 
—

 
—

 
1,299

GSEs:
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
—

 
3,870

 
—

 
—

 
—

 
—

 
3,870

Fannie Mae
—

 
4,377

 
15

 
—

 
10

 
—

 
4,402

Total GSEs
—

 
8,247

 
15

 
—

 
10

 
—

 
8,272

PLRMBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
Prime
—

 
—

 
2

 
378

 
1,104

 
2

 
1,486

Alt-A, option ARM
—

 
—

 
—

 
—

 
1,010

 
—

 
1,010

Alt-A, other
9

 
10

 
52

 
160

 
4,516

 
2

 
4,749

Total PLRMBS
9

 
10

 
54

 
538

 
6,630

 
4

 
7,245

Total MBS
9

 
9,556

 
69

 
538

 
6,640

 
4

 
16,816

Total securities
9

 
11,205

 
351

 
538

 
6,640

 
4

 
18,747

Securities purchased under agreements to resell
—

 
10,500

 
—

 
—

 
—

 
—

 
10,500

Federal funds sold
—

 
934

 
1,828

 
—

 
—

 
—

 
2,762

Total investments
$
9

 
$
22,639

 
$
2,179

 
$
538

 
$
6,640

 
$
4

 
$
32,009




91

(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Carrying Value
 
Credit Rating(1)
 
 
 
Investment Type
AAA

 
AA

 
A

 
BBB

 
Below Investment Grade

 
Unrated

 
Total

Non-MBS
 
 
 
 
 
 
 
 
 
 
 
 
 
Housing finance agency bonds:
 
 
 
 
 
 
 
 
 
 
 
 

CalHFA bonds
$
—

 
$
—

 
$
303

 
$
25

 
$
—

 
$
—

 
$
328

GSEs:
 
 
 
 
 
 
 
 
 
 
 
 
 
FFCB bonds
—

 
3,513

 
—

 
—

 
—

 
—

 
3,513

Total non-MBS
—

 
3,513

 
303

 
25

 
—

 
—

 
3,841

MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
Ginnie Mae
—

 
1,524

 
—

 
—

 
—

 
—

 
1,524

GSEs:
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
—

 
4,517

 
—

 
—

 
—

 
—

 
4,517

Fannie Mae
—

 
5,282

 
19

 
—

 
12

 
—

 
5,313

Total GSEs
—

 
9,799

 
19

 
—

 
12

 
—

 
9,830

PLRMBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
Prime
—

 
—

 
3

 
384

 
1,336

 
2

 
1,725

Alt-A, option ARM
—

 
—

 
—

 
—

 
1,079

 
—

 
1,079

Alt-A, other
10

 
1

 
76

 
187

 
5,171

 
2

 
5,447

Total PLRMBS
10

 
1

 
79

 
571

 
7,586

 
4

 
8,251

Total MBS
10

 
11,324

 
98

 
571

 
7,598

 
4

 
19,605

Total securities
10

 
14,837

 
401

 
596

 
7,598

 
4

 
23,446

Securities purchased under agreements to resell
—

 
1,000

 
—

 
—

 
—

 
—

 
1,000

Federal funds sold(2)
—

 
3,528

 
3,929

 
46

 
—

 
—

 
7,503

Total investments
$
10

 
$
19,365

 
$
4,330

 
$
642

 
$
7,598

 
$
4

 
$
31,949


(1)
Credit ratings of BB and lower are below investment grade.
(2)
Includes $300 million at December 31, 2014, in Federal funds sold to a member counterparty determined by the Bank to have an internal credit rating equivalent to an AA+ rating.

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

The Bank invests in short-term unsecured 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

92

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, 2015, the Bank’s unsecured investment credit exposure to U.S. branches and agency offices of foreign commercial banks was limited to Federal funds sold, which represented 100% of the Bank’s total unsecured investment credit exposure in Federal funds sold.

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, 2015, 34% 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, 2015
 
 
 
 
 
  
Carrying Value(1)
 
Credit Rating(2)
 
 
Domicile of Counterparty
AA

 
A

  
Total

Domestic
$
—

 
$
—

  
$
—

U.S. subsidiaries of foreign commercial banks
—

 
—

  
—

Total domestic and U.S. subsidiaries of foreign commercial banks
—

 
—

 
—

U.S. branches and agency offices of foreign commercial banks:
 
 
 
  
 
Canada
—

 
874

  
874

Finland
934

 
—

 
934

France
—

 
332

 
332

Netherlands
—

 
622

 
622

Total U.S. branches and agency offices of foreign commercial banks
934

 
1,828

 
2,762

Total unsecured credit exposure
$
934

 
$
1,828

  
$
2,762


(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, 2015.
(2)
Does not reflect changes in ratings, outlook, or watch status occurring after September 30, 2015. These ratings represent the lowest rating available for each unsecured investment 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.

As of September 30, 2015, all of the Bank’s unsecured investments had overnight maturities.

93


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, 2015, all of the bonds were rated at least A 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 determined that, as of September 30, 2015, 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 has investment credit limits and terms for these investments that do not differ for members and nonmembers. Regulatory policy limits total MBS investments to three times the Bank’s capital at the time of purchase. At September 30, 2015, the Bank’s MBS portfolio was 311% 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 portfolio declines below 300% of Bank capital, but the Bank is 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, 2015, PLRMBS representing 34% of the amortized cost of the Bank’s MBS portfolio were labeled Alt-A by the issuer. These PLRMBS are generally collateralized by mortgage loans that are considered less risky than subprime loans but more risky than prime loans. These loans are generally made to borrowers with credit scores that are high enough to qualify for a prime mortgage loan, but the loans may not meet standard underwriting guidelines for documentation requirements, property type, or loan-to-value ratios.

As of September 30, 2015, the Bank’s investment in MBS had gross unrealized losses totaling $245 million, most of which were related to PLRMBS. These gross unrealized losses were primarily due to illiquidity in the MBS 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.

94

government is sufficient to protect the Bank from losses. As a result, the Bank determined that, as of September 30, 2015, 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, 2015, using two third-party models. The first model projects prepayments, default rates, and loss severities on the underlying collateral based on borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions related primarily to future changes in housing prices and interest rates. A significant input to the first model is the forecast of future housing price changes for the relevant states and core-based statistical areas (CBSAs), which are based on an assessment of the regional housing markets. CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the U.S. Office of Management and Budget. As currently defined, a CBSA must contain at least one urban area with a population of 10,000 or more people.

The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, default rates, and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in each securitization structure in accordance with the structure’s prescribed cash flow and loss allocation rules. When the credit enhancement for the senior securities in a securitization is derived from the presence of subordinated securities, losses are generally allocated first to the subordinated securities until their principal balance is reduced to zero. The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined based on the model approach described above reflects a best-estimate scenario and includes a base case housing price forecast that reflects the expectations for near- and long-term housing price behavior.

The FHLBanks’ OTTI Committee developed a short-term housing price forecast with projected changes ranging from a decrease of 3.0% to an increase of 8.0% over the 12-month period beginning July 1, 2015. For the vast majority of markets, the projected short-term housing price changes range from an increase of 2.0% to an increase of 5.0%. 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, 2015:
 
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
2

 
$
81

 
$
(2
)
 
2

 
$
81

 
$
(2
)
Alt-A, option ARM
—

 
—

 
—

 
1

 
71

 
—

Alt-A, other
15

 
453

 
(2
)
 
18

 
601

 
(5
)
Total
17

 
$
534

 
$
(4
)
 
21

 
$
753

 
$
(7
)

(1)
Amounts are for the three months ended September 30, 2015.

95


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, 2015, by collateral type at origination and by year of securitization.

Unpaid Principal Balance of PLRMBS by Year of Securitization and Credit Rating
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
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
$
—

 
$
—

 
$
—

 
$
—

 
$
163

 
$
—

 
$
163

2007
—

 
—

 
—

 
—

 
407

 
—

 
407

2006
—

 
—

 
—

 
—

 
59

 
—

 
59

2005
—

 
—

 
—

 
22

 
55

 
—

 
77

2004 and earlier
—

 
—

 
2

 
353

 
503

 
2

 
860

Total Prime
—

 
—

 
2

 
375

 
1,187

 
2

 
1,566

Alt-A, option ARM
 
 
 
 
 
 
 
 
 
 
 
 
 
2007
—

 
—

 
—

 
—

 
941

 
—

 
941

2006
—

 
—

 
—

 
—

 
166

 
—

 
166

2005
—

 
—

 
—

 
—

 
197

 
—

 
197

Total Alt-A, option ARM
—

 
—

 
—

 
—

 
1,304

 
—

 
1,304

Alt-A, other
 
 
 
 
 
 
 
 
 
 
 
 
 
2008
—

 
—

 
—

 
—

 
115

 
—

 
115

2007
—

 
—

 
—

 
—

 
1,477

 
—

 
1,477

2006
—

 
—

 
16

 
—

 
606

 
—

 
622

2005
—

 
9

 
3

 
—

 
2,444

 
—

 
2,456

2004 and earlier
9

 
1

 
33

 
160

 
499

 
2

 
704

Total Alt-A, other
9

 
10

 
52

 
160

 
5,141

 
2

 
5,374

Total par value
$
9

 
$
10

 
$
54

 
$
535

 
$
7,632

 
$
4

 
$
8,244


(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.
The following table presents the ratings of the Bank’s other-than-temporarily impaired PLRMBS at September 30, 2015, by collateral type at origination and by year of securitization.
 

96

Unpaid Principal Balance of Other-Than-Temporarily Impaired PLRMBS
by Year of Securitization and Credit Rating
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
Unpaid Principal Balance
 
Credit Rating(1)
 
 
Collateral Type at Origination and Year of Securitization
A

 
BBB

 
Below Investment Grade

 
Total

Prime
 
 
 
 
 
 
 
2008
$
—

 
$
—

 
$
149

 
$
149

2007
—

 
—

 
350

 
350

2006
—

 
—

 
27

 
27

2005
—

 
—

 
24

 
24

2004 and earlier
—

 
—

 
62

 
62

Total Prime
—

 
—

 
612

 
612

Alt-A, option ARM
 
 
 
 
 
 
 
2007
—

 
—

 
942

 
942

2006
—

 
—

 
166

 
166

2005
—

 
—

 
184

 
184

Total Alt-A, option ARM
—

 
—

 
1,292

 
1,292

Alt-A, other
 
 
 
 
 
 
 
2008
—

 
—

 
115

 
115

2007
—

 
—

 
1,417

 
1,417

2006
16

 
—

 
606

 
622

2005
—

 
—

 
2,436

 
2,436

2004 and earlier
2

 
21

 
242

 
265

Total Alt-A, other
18

 
21

 
4,816

 
4,855

Total par value
$
18

 
$
21

 
$
6,720

 
$
6,759

 

(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.


97

PLRMBS Credit Characteristics
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underlying Collateral Performance and
Credit Enhancement Statistics
Collateral Type at Origination and Year of Securitization
Amortized
Cost

 
Gross
Unrealized
Losses(2)

 
Estimated
Fair
Value

 
Total
OTTI(1)

 
Non-
Credit-
Related
OTTI(1)

 
Credit-
Related
OTTI(1)

 
Weighted
Average
60+ Days
Collateral
Delinquency
Rate

 
Original
Weighted
Average
Credit
Support

 
Current
Weighted
Average
Credit
Support

Prime
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2008
$
141

 
$
—

 
$
152

 
$
—

 
$
—

 
$
—

 
15.21
%
 
30.00
%
 
14.45
%
2007
334

 
(6
)
 
337

 
(4
)
 
—

 
(4
)
 
14.47

 
22.42

 
3.31

2006
51

 
—

 
54

 
—

 
—

 
—

 
15.00

 
12.75

 
3.86

2005
75

 
(2
)
 
75

 
—

 
—

 
—

 
11.72

 
11.87

 
15.29

2004 and earlier
860

 
(20
)
 
841

 
—

 
—

 
—

 
6.86

 
4.45

 
12.40

Total Prime
1,461

 
(28
)
 
1,459

 
(4
)
 
—

 
(4
)
 
10.25

 
12.45

 
10.08

Alt-A, option ARM
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2007
772

 
(31
)
 
764

 
—

 
—

 
—

 
23.95

 
44.17

 
15.61

2006
119

 
(7
)
 
129

 
(1
)
 
—

 
(1
)
 
22.37

 
44.90

 
7.19

2005
87

 
(2
)
 
116

 
—

 
—

 
—

 
19.26

 
22.73

 
4.94

Total Alt-A, option ARM
978

 
(40
)
 
1,009

 
(1
)
 
—

 
(1
)
 
23.04

 
41.03

 
12.93

Alt-A, other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2008
113

 
(10
)
 
102

 
—

 
—

 
—

 
9.73

 
31.80

 
23.69

2007
1,280

 
(60
)
 
1,271

 
(12
)
 
8

 
(4
)
 
20.37

 
27.12

 
11.45

2006
466

 
—

 
524

 
(3
)
 
2

 
(1
)
 
18.56

 
18.43

 
1.61

2005
2,195

 
(83
)
 
2,163

 
(5
)
 
3

 
(2
)
 
14.59

 
14.21

 
5.64

2004 and earlier
699

 
(19
)
 
689

 
—

 
—

 
—

 
11.49

 
8.14

 
17.32

Total Alt-A, other
4,753

 
(172
)
 
4,749

 
(20
)
 
13

 
(7
)
 
16.13

 
17.83

 
8.69

Total
$
7,192

 
$
(240
)
 
$
7,217

 
$
(25
)
 
$
13

 
$
(12
)
 
16.10
%
 
20.48
%
 
9.62
%

(1)
Amounts are for the nine months ended September 30, 2015.
(2) Represents total gross unrealized losses, including non-credit-related other-than-temporary impairment recognized in AOCI. The unpaid principal
balance of Prime, Alt-A, option ARM, and Alt-A, other in a gross unrealized loss position was $900 million, $563 million, and $2.7 billion, respectively, at September 30, 2015, and the amortized cost of Prime, Alt-A, option ARM, and Alt-A, other in a gross unrealized loss position was $902 million, $485 million, and $2.5 billion, respectively, at September 30, 2015.

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, 2015.


98

Significant Inputs to OTTI Credit Analysis for All PLRMBS
 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
 
Significant Inputs
 
Current
 
Prepayment Rates
 
Default Rates
 
Loss Severities
 
Credit Enhancement
Year of Securitization
Weighted Average %
 
Weighted Average %
 
Weighted Average %
 
Weighted Average %
Prime
 
 
 
 
 
 
 
2008
12.4
 
13.6
 
28.2
 
18.3
2007
9.5
 
4.9
 
22.4
 
9.8
2006
10.6
 
10.3
 
25.9
 
11.7
2005
15.5
 
6.8
 
26.1
 
13.0
2004 and earlier
16.5
 
4.3
 
21.3
 
11.7
Total Prime
14.9
 
6.8
 
23.3
 
13.2
Alt-A, option ARM
 
 
 
 
 
 
 
2007
6.3
 
34.9
 
39.8
 
15.7
2006
5.7
 
37.2
 
39.0
 
7.5
2005
6.8
 
24.7
 
36.6
 
5.0
Total Alt-A, option ARM
6.3
 
33.6
 
39.2
 
13.0
Alt-A, other
 
 
 
 
 
 
 
2007
10.6
 
25.9
 
36.9
 
6.8
2006
10.3
 
23.8
 
38.8
 
8.7
2005
12.8
 
16.0
 
36.2
 
6.0
2004 and earlier
14.3
 
12.1
 
31.5
 
17.4
Total Alt-A, other
12.0
 
19.3
 
36.2
 
8.2
Total
11.5
 
19.7
 
34.8
 
9.7

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 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.


99

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,
2015

 
June 30,
2015

 
March 31,
2015

 
December 31,
2014

 
September 30,
2014

Prime
 
 
 
 
 
 
 
 
 
2008
93.00
%
 
93.09
%
 
93.52
%
 
92.36
%
 
92.22
%
2007
83.03

 
83.73

 
83.70

 
83.38

 
86.00

2006
92.03

 
92.65

 
92.10

 
91.51

 
91.82

2005
97.61

 
96.90

 
97.64

 
97.78

 
98.23

2004 and earlier
97.74

 
98.18

 
98.25

 
98.24

 
98.75

Weighted average of all Prime
93.21

 
93.68

 
93.85

 
93.70

 
94.67

Alt-A, option ARM
 
 
 
 
 
 
 
 
 
2007
81.13

 
82.19

 
81.63

 
80.82

 
81.14

2006
77.49

 
78.54

 
79.33

 
79.83

 
79.33

2005
59.24

 
60.14

 
58.98

 
56.16

 
56.01

Weighted average of all Alt-A, option ARM
77.37

 
78.30

 
77.73

 
76.72

 
76.84

Alt-A, other
 
 
 
 
 
 
 
 
 
2008
88.74

 
89.64

 
92.47

 
96.33

 
93.86

2007
85.94

 
86.12

 
87.12

 
86.85

 
87.08

2006
84.23

 
84.75

 
84.85

 
84.45

 
84.70

2005
88.09

 
88.35

 
88.24

 
88.29

 
88.90

2004 and earlier
97.98

 
98.34

 
98.52

 
98.31

 
98.56

Weighted average of all Alt-A, other
88.36

 
88.67

 
88.99

 
88.95

 
89.33

Weighted average of all PLRMBS
87.54
%
 
88.02
%
 
88.21
%
 
88.03
%
 
88.52
%

The Bank determined that, as of September 30, 2015, 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, 2015, 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, 2015. 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 uncleared derivatives credit exposure. Over-the-counter derivatives may be either entered into directly with a counterparty (uncleared derivatives) or executed either with an executing dealer or on a swap execution facility and then cleared through a futures commission merchant (clearing agent) with a derivatives clearing organization (cleared derivatives).

Uncleared Derivatives. The Bank selects only highly rated derivative dealers and major banks (derivative dealer counterparties) that meet the Bank’s eligibility criteria to act as counterparties for its uncleared derivative activities. In addition, the Bank has entered into master netting agreements and bilateral credit support agreements with all
active derivative dealer counterparties that provide for delivery of collateral at specified levels to limit the Bank’s net unsecured credit exposure to these counterparties. Under these policies and agreements, the amount of unsecured credit exposure to an individual derivative dealer counterparty is either (i) limited to an absolute dollar credit exposure according to the counterparty’s long-term debt or deposit credit rating, as determined by the rating agencies, or (ii) set at zero (subject to a minimum transfer amount). All credit exposure from derivative transactions entered into by the Bank with member counterparties that are not derivative dealers (including interest rate swaps, caps, and floors), for which the Bank serves as an intermediary, must be fully secured by eligible collateral, and all such derivative transactions are subject to both the Bank’s Advances and Security Agreement and a master netting agreement.

The Bank is subject to the risk of potential nonperformance by the counterparties to derivative agreements. 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 uncleared derivative transactions with counterparties as of September 30, 2015.

Cleared Derivatives. The Bank is subject to nonperformance by the derivatives clearing organizations (clearinghouses) and clearing agents. The requirement that the Bank post initial and variation margin through 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, 2015.

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


100

Credit Exposure to Derivative Dealer Counterparties
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
 
 
Counterparty Credit Rating(1)
Notional Amount

 
Net Fair Value of Derivatives Before Collateral

 
Cash Collateral Pledged
to/ (from) Counterparty

 
Non-cash Collateral Pledged
to/ (from) Counterparty

 
Net Credit
Exposure to Counterparties

Asset positions with credit exposure:
 
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
 
A
$
5,492

 
$
132

 
$
(128
)
 
$
—

 
$
4

Cleared derivatives(2)
49,593

 
90

 
(54
)
 
—

 
36

Liability positions with credit exposure:
 
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
 
AA
727

 
(1
)
 
1

 
—

 
—

A
4,482

 
(19
)
 
20

 
—

 
1

Total derivative positions with credit exposure to nonmember counterparties
60,294

 
202

 
(161
)
 
—

 
41

Member institutions(3)
8

 
—

 
—

 
—

 
—

Total
60,302

 
$
202

 
$
(161
)
 
$
—

 
$
41

Derivative positions without credit exposure
15,486

 
 
 
 
 
 
 
 
Total notional
$
75,788

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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:
 
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
 
AA
$
148

 
$
1

 
$
—

 
$
—

 
$
1

A
7,439

 
166

 
(164
)
 
—

 
2

Cleared derivatives(2)
10,629

 
79

 
(65
)
 
—

 
14

Liability positions with credit exposure:
 
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
 
A
50

 
—

 
—

 
—

 
—

Cleared derivatives(2)
14,290

 
(10
)
 
27

 
—

 
17

Total derivative positions with credit exposure to nonmember counterparties
32,556

 
$
236

 
$
(202
)
 
$
—

 
$
34

Derivative positions without credit exposure
29,741

 
 
 
 
 
 
 
 
Total notional
$
62,297

 
 
 
 
 
 
 
 

(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 LCH Clearnet, the Bank’s clearinghouse, which is not rated. LCH Clearnet’s parent, LCH Clearnet Group, Ltd., is rated A+ by Standard & Poor’s.
(3)
Member institutions include mortgage delivery commitments with members.

The increase or decrease in the credit exposure net of cash collateral, from one period to the next, may be affected by changes in several variables, such as the size and composition of the portfolio, market values of derivatives, and accrued interest.

Based on the master netting arrangements, its credit analyses, and the collateral requirements in place with each counterparty, the Bank does not expect to incur any credit losses on its derivative agreements.

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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 2014 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 2015 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 2014 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

Core Mission Achievement Advisory Bulletin. On July 14, 2015, the Finance Agency issued an advisory bulletin establishing a ratio by which the Finance Agency will assess each FHLBank’s core mission achievement. Core mission achievement is determined using a ratio of primary mission assets, which include advances and acquired member assets (mortgage loans acquired from members), to consolidated obligations. The ratio will be determined at yearend and will be calculated using annual average par values.
 
The advisory bulletin provides the Finance Agency’s expectations about the content of each FHLBank’s strategic plan based on its ratio, as follows:

•
when the ratio is 70% or higher, the strategic plan should include an assessment of the FHLBank’s prospects for maintaining this level;
•
when the ratio is between 55% and 70%, the strategic plan should explain the FHLBank’s plan to increase the ratio; and
•
when the ratio is below 55%, the strategic plan should include an explanation of the circumstances that caused the ratio to be at that level and detailed plans to increase the ratio. The advisory bulletin provides that if an FHLBank maintains a ratio below 55% over the course of several consecutive reviews, then the FHLBank’s board of directors should consider possible strategic alternatives.

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The advisory bulletin is not expected to have a material impact on the Bank.

Joint Final Rules on Margin and Capital Requirements for Covered Swap Entities. In October 2015, 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 adopted final rules to establish minimum margin and capital requirements for swap entities (registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants) that are subject to the jurisdiction of one of the agencies listed above.

When they take effect, the final margin rules will subject non-cleared swaps and non-cleared security-based swaps between swap entities covered by the rules and financial end users that have “material swaps exposure” (an average daily aggregate notional of $8 billion or more in non-cleared swaps), to a mandatory two-way initial margin requirement. The amount of the initial margin requirement will be calculated by the swap entity using either a standardized schedule set forth in the rules or an internal margin model conforming to the requirements of the rules. The final margin rules specify the types of collateral that may be posted or collected as initial margin and haircuts for certain collateral asset classes. Initial margin must be segregated with an independent, third-party custodian and, generally, may not be rehypothecated.

The final margin rules also require variation margin to be exchanged daily for non-cleared swaps and non-cleared security-based swaps between covered swap entities and all financial end users and impose limits on the types of eligible collateral.

The new variation margin requirement will become effective for the Bank on March 1, 2017; it is not expected to have a material impact on the Bank’s costs.

The new initial margin requirement is expected to become effective for the Bank on September 1, 2020. Although the Bank is not a swap dealer, major swap participant, or other covered swap entity under the final margin rules, the Bank is a financial end user and will likely be subject to the initial margin requirements of the final rules when those requirements become effective (assuming that the Bank’s daily aggregate notional amount of outstanding swaps with all counterparties for June, July, and August of the previous year exceeds $8 billion). The Bank anticipates that the initial margin requirements will increase its cost of engaging in non-cleared swaps.

Off-Balance Sheet Arrangements and Other Commitments

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

The Bank’s joint and several contingent liability is a guarantee, but is excluded from initial recognition and measurement provisions because the joint and several obligations are mandated by the FHLBank Act or Finance Agency regulation and are not the result of arms-length transactions among the FHLBanks. The Bank has no control over the amount of the guarantee or the determination of how each FHLBank would perform under the joint and several obligations. The valuation of this contingent liability is therefore not recorded on the balance sheet of any FHLBank. The par value of the outstanding consolidated obligations of the FHLBanks was $856.5 billion at September 30, 2015, and $847.2 billion at December 31, 2014. The par value of the Bank’s participation in consolidated obligations was $79.6 billion at September 30, 2015, and $68.5 billion at December 31, 2014. The Bank had committed to the issuance of $80 million and $3 million in consolidated obligations at September 30, 2015, and December 31, 2014, respectively.


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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 collateral requirements as advances made by the Bank. At September 30, 2015, the Bank had $19 million in advance commitments and $11.2 billion in standby letters of credit outstanding. At December 31, 2014, the Bank had $126 million in advance commitments and $5.4 billion in standby letters of credit outstanding.

For additional information, see “Item 1. Financial Statements – Note 17 – Commitments and Contingencies.”

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is defined as the risk to the Bank's market value and 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) as a result of movements in market interest rates, interest rate spreads, interest rate volatility, and other market factors (market rate factors). This profile reflects the Bank’s objective of maintaining a conservative asset-liability mix and its commitment to providing value to its members through products and dividends without subjecting their investments in Bank capital stock to significant market risk.

The Bank’s Risk Management Policy includes a market risk management objective aimed at maintaining a relatively low adverse exposure of the 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.” Compliance with Bank policies and guidelines is reviewed by the Bank’s Board of Directors on a regular basis, along with a corrective action plan if applicable.

Total Bank Market Risk

Market Value of Capital Sensitivity 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

104

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 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 –4.0% 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 –6.0% 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, 2015.

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, 2015
 
December 31, 2014
 
+200 basis-point change above current rates
–4.1
%
–2.7
%
+100 basis-point change above current rates
–1.9
 
–1.2
 
–100 basis-point change below current rates(2)
+3.7
 
+2.6
 
–200 basis-point change below current rates(2)
+10.2
 
+6.4
 

(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, 2015, are comparable in rising rate scenarios and exhibit greater favorable sensitivity in declining rate scenarios compared to the estimates as of December 31, 2014. The change in sensitivity in the declining rate scenarios is

105

primarily related to the current low interest rate environment, in which interest rates in declining rate scenarios cannot decrease to the same extent as interest rates in rising rate scenarios can increase. As of September 30, 2015, interest rates could decrease less in a declining rate scenario relative to the measurements as of December 31, 2014. LIBOR interest rates as of September 30, 2015, were 6 basis points higher for the 1-year term, 38 basis points lower for the 5-year term, and 28 basis points lower for the 10-year term.

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 sensitivity of the net portfolio value of capital to changes in interest rates as of September 30, 2015, are comparable in rising rate scenarios and exhibit greater favorable sensitivity in declining rate scenarios compared to the estimates as of December 31, 2014. The change in sensitivity in the declining rate scenarios is primarily related to the current low interest rate environment, in which interest rates in declining rate scenarios cannot decrease to the same extent as interest rates in rising rate scenarios can increase. As of September 30, 2015, interest rates could decrease less in a declining rate scenario relative to the measurements as of December 31, 2014. LIBOR interest rates as of September 30, 2015, were 6 basis points higher for the 1-year term, 38 basis points lower for the 5-year term, and 28 basis points lower for the 10-year term.

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, 2015
 
December 31, 2014
 
+200 basis-point change above current rates
–3.8
%
–2.7
%
+100 basis-point change above current rates
–1.7
 
–1.1
 
–100 basis-point change below current rates(2)
+2.7
 
+1.9
 
–200 basis-point change below current rates(2)
+7.3
 
+4.3
 

(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 Risk Management Policy provides guidelines for the payment of dividends and the repurchase of excess capital stock based on the ratio of the Bank's estimated market value of total capital to par value of capital stock. If this ratio at the end of any quarter is: (i) less than 100% but greater than or equal to 90%, any dividend would be limited to an annualized rate no greater than the daily average of the three-month LIBOR for the applicable quarter (subject to certain conditions), and any excess capital stock repurchases would not exceed $500 million (subject to certain conditions); (ii) less than 90% but greater than or equal to 70%, any dividend and any excess capital stock repurchases would be subject to the same limitations and conditions as in (i) above, except that any excess capital stock repurchases would not exceed 4% of the Bank's outstanding capital stock as of the repurchase date; and (iii) less than 70%, the Bank would not pay a dividend, not repurchase excess capital stock (but continue to redeem excess capital stock as provided in the Bank's Capital Plan), limit the acquisition of certain assets, and review the Bank's risk policies. A decision by the Board of Directors to declare or not declare any dividend or repurchase any excess capital stock is a discretionary matter and is subject to the requirements and restrictions of the FHLBank Act and applicable requirements under the regulations governing the operations of the FHLBanks. The ratio of the Bank's estimated market value of total capital to par value of capital stock was 202% as of September 30, 2015.

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

106

value, which will generally reverse through changes in future valuations and settlements of contractual interest cash flows over the remaining contractual terms to maturity or by the call or put date of the assets and liabilities held under the fair value option, hedged assets and liabilities, and derivatives. Economic earnings also exclude the interest expense on mandatorily redeemable capital stock and the 20% of net income allocated to the Bank’s restricted retained earnings account in accordance with the FHLBanks’ JCE Agreement. Economic earnings exclude these amounts in order to more accurately reflect the amount of earnings that may be available to be paid as dividends to shareholders.

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, 2015, and less than one month at December 31, 2014.

Total Bank Duration Gap Analysis
 
 
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
  
Amount
(In millions)

 
Duration Gap(1)(2)
(In months)

 
Amount
(In millions)

 
Duration Gap(1)(2)
(In months) 

Assets
$
85,899

 
8

 
$
75,807

 
10

Liabilities
80,985

 
7

 
70,114

 
10

Net
$
4,914

 
1

 
$
5,693

 
—


(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

107

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 one month or less. 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.

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

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

Because of the short-term and variable rate nature of the assets, liabilities, and derivatives of the advances-related business, the Bank’s interest rate risk guidelines address the amounts of net assets that are expected to mature or reprice in a given period. 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 held-to-maturity (HTM) or available-for-sale (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.


108

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 portfolio’s market risk profile. These rebalancing strategies may include entering into new funding and hedging transactions, forgoing or modifying certain funding or hedging transactions normally executed with new mortgage purchases, or terminating certain funding and hedging transactions for the mortgage asset portfolio.

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

As discussed above in “Total Bank Market Risk – Market Value of Capital Sensitivity 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, 2015, and December 31, 2014.

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, 2015
 
December 31, 2014
 
+200 basis-point change
–2.4
%
–1.6
%
+100 basis-point change
–1.2
 
–0.7
 
–100 basis-point change(2)
+2.7
 
+2.0
 
–200 basis-point change(2)
+5.4
 
+5.0
 

(1)
Instantaneous change from actual rates at dates indicated.
(2)
Interest rates for each maturity are limited to non-negative interest rates.


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For the mortgage-related business, the Bank’s estimates of the sensitivity of the market value of capital to changes in interest rates as of September 30, 2015, are comparable to the estimates as of December 31, 2014. LIBOR interest rates as of September 30, 2015, were 6 basis points higher for the 1-year term, 38 basis points lower for the 5-year term, and 28 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.

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, 2015, and December 31, 2014. 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, 2015, are comparable to the estimates as of December 31, 2014. LIBOR interest rates as of September 30, 2015, were 6 basis points higher for the 1-year term, 38 basis points lower for the 5-year term, and 28 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.

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, 2015
 
December 31, 2014
 
+200 basis-point change above current rates
–2.3
%
–1.7
%
+100 basis-point change above current rates
–1.0
 
–0.7
 
–100 basis-point change below current rates(2)
+1.8
 
+1.3
 
–200 basis-point change below current rates(2)
+3.0
 
+3.1
 

(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 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.

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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, 2015, 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 (PLRMBS). The Bank seeks rescission, and asserts claims for and violations of the California Corporate Securities Act and common law rescission of contract.

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, 2014.

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

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ITEM 1A.
RISK FACTORS

For a discussion of risk factors, see “Part I. Item 1A. Risk Factors” in the Bank’s 2014 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 2014 Form 10-K.


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ITEM 6.    EXHIBITS

Exhibit No.
 
Description
10.1

 
Board Resolution for 2016 Board of Directors Compensation and Expense Reimbursement Policy
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, 2015, is formatted in XBRL interactive data files: (i) Statements of Condition at September 30, 2015, and December 31, 2014; (ii) Statements of Income for the Nine Months Ended September 30, 2015 and 2014; (iii) Statements of Comprehensive Income for the Nine Months Ended September 30, 2015 and 2014; (iv) Statements of Capital Accounts for the Nine Months Ended September 30, 2015 and 2014; (v) Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014; 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 6, 2015.
 
 
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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