PART I.
At the Federal Home Loan Bank of San Francisco (Bank), our purpose is to enhance the availability of credit for residential mortgages and economic development by providing a readily available, competitively priced source of funds for housing and community lenders. We are a wholesale bank—we link our customers to the global capital markets and seek to manage our own liquidity so that funds are available when our customers need them. By providing needed liquidity and financial risk management tools, our credit programs enhance competition in the mortgage market and benefit homebuyers and communities.
We are one of 12 regional Federal Home Loan Banks (FHLBanks) that serve the United States as part of the Federal Home Loan Bank System. Each FHLBank is a separate entity with its own board of directors, management, and employees. The FHLBanks operate under federal charters and are government-sponsored enterprises (GSEs). The FHLBanks are not government agencies and do not receive financial support from taxpayers. The U.S. government does not guarantee, directly or indirectly, the debt securities or other obligations of the Bank or the FHLBank System. The FHLBanks are regulated by the Federal Housing Finance Agency (Finance Agency), an independent federal agency.
We have a cooperative ownership structure. To access our products and services, a financial institution must be approved for membership and purchase capital stock in the Bank. The member's stock requirement is generally based on its use of Bank products, subject to a minimum asset-based membership requirement that is intended to reflect the value to the member of having ready access to the Bank as a reliable source of competitively priced funds. Bank stock is issued, transferred, redeemed, and repurchased at its par value of $100 per share, subject to certain regulatory and statutory limits. It is not publicly traded.
Our members may include federally insured and regulated financial depositories and regulated insurance companies that are engaged in residential housing finance, and community development financial institutions (CDFIs) that have been certified by the CDFI Fund of the U.S. Treasury Department. Financial depositories include commercial banks, credit unions, industrial loan companies, and savings institutions. CDFIs include community development loan funds, community development venture capital funds, and privately insured, state-chartered credit unions. All members have a principal place of business located in Arizona, California, or Nevada, the three states that make up the Eleventh District of the FHLBank System, and some members, including our largest members, also operate in other parts of the country. Our members range in size from less than $10 million to over $80 billion in assets.
Our primary business is providing competitively priced, collateralized loans, known as advances, to our members and certain qualifying nonmembers (housing associates, which may be state or local housing agencies and tribal housing authorities). Advances may be fixed or adjustable rate, with terms ranging from one day to 30 years. We accept a wide range of collateral types, some of which cannot be readily pledged elsewhere or readily securitized. Members use their access to advances to support their mortgage loan portfolios, lower their funding costs, facilitate asset-liability management, reduce on-balance sheet liquidity, offer a wider range of mortgage products to their customers, and improve profitability.
At December 31, 2011, we had 375 members and one housing associate eligible to borrow from us. In addition, we had 53 nonmember institutions that owned capital stock but were not eligible to borrow new advances, including 10 nonmember institutions with advances outstanding. Nonmember institutions may be former members or may have acquired the advances and capital stock of a former member. Capital stock held by nonmember shareholders is classified as mandatorily redeemable capital stock. Nonmember shareholders with advances outstanding are required to meet all of the Bank's credit, collateral, and capital stock requirements, including requirements regarding creditworthiness and collateral borrowing capacity.
As of December 31, 2011, we had advances and capital stock, including mandatorily redeemable capital stock, outstanding to the following types of institutions:
Advances
Capital Stock
(Dollars in millions)
Total Number of Institutions
Number of Institutions
Par Amount of Advances Outstanding
Capital Stock Outstanding
Commercial banks
241
123
$
37,669
3,688
Savings institutions
18
11
5,402
540
Credit unions
103
41
2,957
488
Industrial loan companies
7
780
42
Insurance companies
4
—
36
Community development financial institutions
2
21
1
Total member institutions
375
184
46,829
4,795
Housing associates eligible to borrow
Other nonmember institutions
53
10
20,607
5,578
Total
429
194
67,436
428
10,373
To fund their operations, the FHLBanks issue debt in the form of consolidated obligation bonds and discount notes (jointly referred to as consolidated obligations) through the FHLBanks' Office of Finance, the fiscal agent for the issuance and servicing of consolidated obligations on behalf of the 12 FHLBanks. Because the FHLBanks' consolidated obligations are rated Aaa/P-1 with a negative outlook by Moody's Investors Service (Moody's) and AA+/A-1+ with a negative outlook by Standard & Poor's Rating Services (Standard & Poor's) and because of the FHLBanks' GSE status, the FHLBanks are generally able to raise funds at rates that are typically at a small to moderate spread above U.S. Treasury security yields. Our cooperative ownership structure allows us to pass along the benefit of these low funding rates to our members.
Members also benefit from our affordable housing and economic development programs, which provide grants and below-market-rate loans that support members' involvement in creating affordable housing and revitalizing communities.
Our Business Model
Our cooperative ownership structure has led us to develop a business model that is different from that of a typical financial services firm. Our business model is based on the premise that we maintain a balance between our obligation to achieve our public policy mission—to promote housing, homeownership, and community development through our activities with members—and our objective to provide an adequate return on the private capital provided by our members. We achieve this balance by delivering low-cost credit to help our members meet the credit needs of their communities while striving to pay members a market-rate dividend.
As a cooperatively owned wholesale bank, we require our members to purchase capital stock to support their activities with the Bank. We leverage this capital by using our GSE status to borrow funds in the capital markets at rates that are generally at a small to moderate spread above U.S. Treasury security yields. We lend these funds to our members at rates that are competitive with the cost of most wholesale borrowing alternatives available to our largest members.
We also invest in residential mortgage-backed securities (MBS) up to the current Bank policy limit of three times capital. These MBS include private-label residential MBS (PLRMBS) that were AAA-rated at the time of purchase or agency-issued MBS that are guaranteed through the direct obligation of or are supported by the U.S. government. We also have a portfolio of residential mortgage loans purchased from members. While the mortgage assets we hold are intended to increase our earnings, they also modestly increase our interest rate risk. In addition, as a result of the distressed housing and mortgage markets, the PLRMBS we hold have significantly increased our credit risk exposure. These mortgage assets have historically provided us with the financial flexibility to continue providing cost-effective credit and liquidity to our members and have also enhanced our earnings. As a result of the other-than-temporary impairment (OTTI) charges on certain PLRMBS during 2009, 2010, and 2011, these mortgage
assets have had a negative impact on our ability to pay dividends and repurchase excess capital stock.
Additional information about our investments and the OTTI charges associated with our PLRMBS is provided in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk – Investments” and in “Item 8. Financial Statements and Supplementary Data – Note 7 – Other-Than-Temporary Impairment Analysis.”
The Bank's business model, approved by our Board of Directors, is intended to balance the trade-off between the price we charge for credit and the dividend yield on Bank stock. We seek to keep advances prices low, and we assess the effectiveness of our low-cost credit policy by comparing our members' total borrowings from the Bank to their use of other wholesale credit sources. We also strive to pay a market-rate return on our members' investment in the Bank's capital, and we assess the effectiveness of our market-rate return objective by comparing our potential dividend rate to a benchmark calculated as the combined average of: (i) the daily average of the overnight Federal funds effective rate and (ii) the four-year moving average of the U.S. Treasury note yield (calculated as the average of the three-year and five-year U.S. Treasury note yields). The benchmark is consistent with our interest rate risk and capital management goals. In particular, investing a portion of our capital in short-term investments is intended to support our ability to repurchase excess capital stock, while investing in intermediate-term fixed rate investments is intended to contribute to higher and more stable earnings. Throughout 2011, in response to the possibility of future OTTI charges on our PLRMBS portfolio, we focused on preserving capital by limiting repurchases of excess capital stock and by building retained earnings while paying nominal dividends. We continued to use the dividend rate benchmark to measure our financial results based on the earnings that would have been available for dividends, but that were primarily used to build retained earnings instead.