News Release

San Francisco, October 27, 2011 - The Federal Home Loan Bank of San Francisco today announced that its net income for the third quarter of 2011 was $36 million, compared with net income of $137 million for the third quarter of 2010.

The decrease in net income for the third quarter of 2011 compared to the third quarter of 2010 primarily reflected higher other-than-temporary impairment (OTTI) credit charges on private-label residential mortgage-backed securities (PLRMBS), higher net 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 2011 was $268 million, down from $306 million for the third quarter of 2010. The decrease in net interest income was due, in part, to lower earnings on invested capital (resulting from the lower interest rate environment and lower balances), lower advances and MBS balances, and lower advance prepayment fees. In addition, net interest income on economically hedged assets and liabilities was lower in the third quarter of 2011 relative to the year-earlier period. (This income is generally offset by net interest expense on derivative instruments used in economic hedges, reflected in other income.) These factors were partially offset by increased spreads on the Bank's portfolio of MBS and mortgage loans.

Other income/(loss) for the third quarter of 2011 was a loss of $197 million, compared to a loss of $86 million for the third quarter of 2010. The loss for the third quarter of 2011 reflected a credit-related OTTI charge of $101 million on certain PLRMBS, compared to a credit-related OTTI charge of $56 million for the third quarter of 2010. The net loss associated with derivatives, hedged items, and financial instruments carried at fair value was $94 million for the third quarter of 2011, compared to a net loss of $0.4 million for the third quarter of 2010. In addition, net interest expense on derivative instruments used in economic hedges, which was generally offset by net interest income on the economically hedged assets and liabilities, totaled $2 million in the third quarter of 2011, compared to $32 million in the third quarter of 2010.

The credit-related OTTI charge of $101 million for the third quarter of 2011 reflected the impact of additional projected losses on loan collateral underlying certain of the Bank's PLRMBS. 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. This process includes updating key aspects of the Bank's loss projection models. Additional projected losses on the PLRMBS loan collateral as of the end of the third quarter of 2011 primarily reflected increased projected default rates on Alt-A fixed rate collateral. The projected cumulative default rates for other collateral types were relatively stable compared to the prior quarter. 

The PLRMBS that experienced credit-related OTTI during the third quarter of 2011 were reclassified from held-to-maturity to available-for-sale at their fair values as of September 30, 2011. The Bank does not currently intend to sell any of the securities in its available-for-sale portfolio or in its held-to maturity portfolio. Accumulated other comprehensive loss declined $1.1 billion during the first nine months of 2011, from $2.9 billion at December 31, 2010, to $1.8 billion at September 30, 2011, primarily because of two factors. As a result of improvement in the fair value of PLRMBS classified as available-for-sale, accumulated other comprehensive loss was reduced by $746 million. In addition, the Bank accreted $263 million from accumulated other comprehensive loss for PLRMBS classified as held-to-maturity that had experienced OTTI in prior quarters. For PLRMBS classified as held-to-maturity, the amount of the non-credit related impairment is accreted prospectively, based on the amount and timing of future estimated cash flows, over the remaining life of the security as an increase in the carrying value of the security, with no effect on earnings unless the security is subsequently sold or there are additional decreases in the cash flows expected to be collected.

The $94 million net loss associated with derivatives, hedged items, and financial instruments carried at fair value for the third quarter of 2011 reflected lower valuations primarily associated with the effects of changes in interest rates and spreads. Net gains and losses on these financial instruments 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. In anticipation of the subsequent reversal of any net gains on these financial instruments, the Bank retains in restricted retained earnings any cumulative net gains in earnings (net of applicable assessments) resulting from gains or losses on these instruments. As of September 30, 2011, the Bank's restricted retained earnings included a cumulative net gain of $86 million associated with derivatives, hedged items, and financial instruments carried at fair value.

During the first nine months of 2011, total assets decreased $24.1 billion, or 16%, to $128.3 billion at September 30, 2011, from $152.4 billion at December 31, 2010. Total advances declined $17.1 billion, or 18%, to $78.5 billion at September 30, 2011, from $95.6 billion at December 31, 2010. The continued decrease in member advance demand reflected general economic conditions and conditions in the mortgage and credit markets. Member liquidity remained high and lending activity remained subdued.

Mandatorily redeemable capital stock increased $2.2 billion, or 56%, to $5.9 billion at September 30, 2011, from $3.7 billion at December 31, 2010. The Bank reclassified $3.2 billion of capital stock to mandatorily redeemable capital stock on June 28, 2011, as a result of the membership termination of Citibank, N.A., which became ineligible for membership in the Bank when it became a member of another Federal Home Loan Bank in connection with its planned merger with an affiliate outside the Bank's district.

Today, the Bank's Board of Directors declared a cash dividend for the third quarter of 2011 at an annualized dividend rate of 0.30%. The Bank will pay the dividend in cash rather than stock form to comply with Federal Housing Finance Agency rules, which do not permit the Bank to pay dividends in the form of capital stock if the Bank's excess capital stock exceeds 1% of its total assets. As of September 30, 2011, the Bank's excess capital stock totaled $6.2 billion, or 4.8% of total assets. The Bank expects to pay the dividend (including dividends on mandatorily redeemable capital stock), which will total $8 million, on or about November 10, 2011.

As of September 30, 2011, the Bank was in compliance with all of its regulatory capital requirements. The Bank's total regulatory capital ratio was 9.73%, exceeding the 4.00% requirement. The Bank had $12.5 billion in regulatory capital, exceeding its risk-based capital requirement.