The social value of the Federal Home Loan Banks is directly and inextricably linked to the social value of the lenders we serve. Our members—banks, credit unions, savings institutions, insurance companies, and community development financial institutions—have a direct stake in the economic health and vitality of their local communities because they invest in those communities on a daily basis. They provide the essential credit that individuals and families of all income levels, and businesses large and small, need to pursue a wide range of activities, including the construction and purchase of homes, apartment buildings, and commercial space; the expansion of existing businesses and the start-up of new ones; and the acquisition of new skills through training and education. In providing this credit, our members create opportunity in neighborhoods and towns throughout the country and promote economic stability and growth across our nation. In 2013, the Federal Home Loan Bank of San Francisco continued to help its member financial institutions in Arizona, California, and Nevada perform this critical function of investing in their communities.
Fulfilling Our Mission Through Our Members
In general, the financial health of our members continued to recover in 2013, as their earnings increased and the credit quality of their balance sheets improved. Although members continued to experience high levels of liquidity and a challenging lending environment, the Bank’s total advances increased $0.6 billion, or 1%, to $44.4 billion at December 31, 2013, from $43.8 billion at December 31, 2012. More importantly, advances to current members (excluding former members and member successors) grew by $9.0 billion on a par value basis in 2013, from $31.1 billion to $40.1 billion, an increase of 29%. In all, 83 members increased their use of advances during 2013, while 74 institutions reduced their advances borrowings.
It is not the size of a Federal Home Loan Bank’s advances portfolio, however, that is the primary indicator of success—it is the FHLBank’s readiness to lend. Stable, reliable access to credit in all phases of the economic cycle is the key benefit of FHLBank membership. The flexible, low-cost funding options available from the Bank help members reduce interest rate risk, manage liquidity, and provide the products and services needed by their customers and communities. Eleven financial institutions joined the Federal Home Loan Bank of San Francisco in 2013, giving them access to these versatile financial tools. Although the total number of members declined from 363 members to 354 members during the year as a result of mergers, relocations, and receiverships, the number of credit union, insurance company, and community development financial institution members increased. As of December 31, 2013, our members included 214 banks, 110 credit unions, 16 savings institutions, 5 industrial loan companies, 5 insurance companies, and 4 community development financial institutions.
To provide an additional way to meet the funding needs of our members and support homebuyers, in 2013 we decided to offer our members a price-competitive alternative secondary market channel for their mortgage originations by renewing our participation in the Mortgage Partnership Finance® (MPF®) Program. (“Mortgage Partnership Finance” and “MPF” are registered trademarks of the FHLBank of Chicago.) During 2014, we expect to begin purchasing conventional conforming fixed rate mortgage loans and FHA/VA-insured fixed rate mortgage loans from members for our own portfolio under the MPF Original and MPF Government products. We also intend to facilitate the purchase of conventional conforming fixed rate mortgage loans from members for concurrent sale to Fannie Mae under the MPF Xtra® product. (“MPF Xtra” is a registered trademark of the FHLBank of Chicago.) In addition to enabling us to offer another valuable financial management tool to our members, our participation in the MPF Program will allow us to increase our core mission assets and offer a new way, through the MPF Government product, to help low-income and moderate-income homeowners and first-time homebuyers.
Capital Strength and Financial Performance
The Bank has successfully adjusted to the significant reduction in its balance sheet over the last six years, continuing to produce strong financial results while increasing capital strength, maintaining and improving risk management practices, and enhancing information systems and infrastructure.
Our capital position continues to be robust. As of December 31, 2013, our total regulatory capital-to-assets ratio was 9.24%, far exceeding the 4.00% requirement. We had $7.9 billion in permanent capital, well in excess of our $3.9 billion risk-based capital requirement. Our total retained earnings were $2.4 billion, and the ratio of our estimated market value of total capital to par value of capital stock was 145%.
We continued to repurchase excess capital stock throughout the year, repurchasing $3.0 billion in 2013, compared with $2.1 billion in 2012. Excess capital stock totaled $2.4 billion as of December 31, 2013, compared with $5.5 billion as of December 31, 2012.
Our net income for 2013 was $308 million, compared with $491 million for 2012. The decrease in net income was due to a variety of factors, including the reduction in the Bank’s balance sheet, which reflected lower average balances of advances, mortgage-backed securities, and mortgage loans, and reduced earnings on invested capital because of lower average capital balances and a lower interest rate environment. The factor with the greatest impact, however, was the increase in dividends on mandatorily redeemable capital stock, which accounted for $104 million of the decrease in net income. (Mandatorily redeemable capital stock is stock that is held by a former member or member successor. This type of stock is classified as a liability and dividends on this stock are classified as interest expense.)
Based on our capital strength and financial results, in 2013 we paid dividends at an annualized rate of 3.99%, totaling $316 million, including $161 million in dividends on capital stock and $155 million in dividends on mandatorily redeemable capital stock. In 2012, we paid dividends at an annualized rate of 0.97%, totaling $98 million. During the first quarter of 2014, we paid dividends at an annualized rate of 6.67% on the capital stock outstanding during the fourth quarter of 2013. The dividends totaled $97 million, including $58 million in dividends on capital stock and $39 million in dividends on mandatorily redeemable capital stock.
Transforming Lives and Revitalizing Communities
As home prices have recovered in many areas of the country while incomes have remained stagnant, housing affordability for first-time homebuyers and for renters has suffered. The need for affordable housing is greater than ever and is still growing, particularly in the states that make up the Bank’s district—Arizona, California, and Nevada.
Fortunately, the financial strength and performance of the Bank directly translates to the strength and performance of its community programs. In 2013, the Bank awarded $57 million in Affordable Housing Program (AHP) grants through 24 members to help create over 5,700 homes affordable to very low- and low-income families and individuals in our district and in five other states where our members do business. The 94 winning projects, most of which were rental projects, will not only help low-income families, seniors, veterans, the formerly homeless, people with special needs, and other at-risk households, but will also create jobs, generate tax revenue, and improve the quality of life in the neighborhoods where they are located, both for the residents and for others in the surrounding community.
To help low- and moderate-income households ready to make the transition from renting to owning, the Bank provides matching grants of up to $15,000 to first-time homebuyers through its Workforce Initiative Subsidy for Homeownership (WISH) and Individual Development and Empowerment Account (IDEA) AHP set-aside programs. In 2013, we allocated $7.8 million in WISH funds to 27 members and $2.2 million in IDEA funds to 11 members.
Since the inception of the AHP in 1989, the Bank has provided over $796 million in grants through the competitive and set-aside programs to support the development, rehabilitation, or purchase of approximately 112,000 affordable homes in Arizona, California, Nevada, and other localities served by our members.
In 2013, the Bank also awarded $1 million in grants through the Access to Housing and Economic Assistance for Development (AHEAD) Program for economic and community development projects and programs that benefit low- and moderate-income communities by creating or preserving jobs, facilitating public or private infrastructure improvements, or delivering social services, training and educational programs, or other services and programs.
Also in 2013, members borrowed $385 million in Advances for Community Enterprise (ACE), primarily to support loans to small businesses and SBA-insured lending. Based on the ACE applications, we estimate that these advances will help create or retain more than 1,500 jobs around the country. In addition, one member used an ACE Letter of Credit in the amount of $7.3 million to provide credit enhancement for a retail construction project that will create 25 permanent jobs in a disadvantaged area.
Members borrowed $315 million in Community Investment Program (CIP) advances in 2013, primarily to fund home mortgage and first-time homebuyer programs. The Bank also issued $191 million in CIP Standby Letters of Credit on behalf of 13 members to credit-enhance tax-exempt financing for multifamily rental projects.
The Future of Housing Finance
The future shape of housing finance in the United States remains uncertain. As proposed reforms to the housing finance system continue to be the subject of keen debate among legislators and policymakers, it is essential to keep in mind the ultimate goal of any reform: creating a stronger, more stable housing finance system that not only protects taxpayers, but also meets the needs of the nation’s homebuyers and renters, regardless of where they live or how much they earn.
The Federal Home Loan Bank System is strong and stable—as of December 31, 2013, regulatory capital totaled $50.1 billion, advances totaled $498.6 billion, and assets totaled $834.2 billion. For the last four years, all 12 of the FHLBanks have been profitable each year. In the history of the FHLBank System, none of the FHLBanks has ever sustained a credit loss on an advance.
The Federal Home Loan Bank System is also structured to serve the broadest range of households and communities. Nationwide, the FHLBanks have 7,500 member financial institutions. The benefits of FHLBank membership flow through these members to homebuyers, renters, businesses, and neighborhoods—financing residential, multifamily, and commercial mortgages loans; providing credit for first-time homebuyers and long-time homeowners; funding affordable housing; and spurring economic development.
To sustain the strength and resilience of the FHLBank System, any housing finance reform legislation must take into account and protect the business model that makes the FHLBank System unique and successful. This model is based on certain key attributes:
- A network of independent regional banks, responsive to the needs of local lenders and communities.
- A cooperative ownership structure that allows each FHLBank to balance the needs of its individual borrowing members with the interests of all of its members as the owners of its capital stock.
- A self-capitalizing structure that allows each FHLBank to expand and contract its balance sheet safely and soundly in response to changes in membership composition and member advance demand, supporting the achievement of stronger financial results in all economic cycles.
- A lending model that requires all advances to be fully collateralized, which protects members’ investment in their FHLBank and supports their portfolio lending activities.
- An implicit government guarantee on FHLBank System debt, which, in combination with the FHLBanks’ financial strength, conservative risk management, and the joint and several obligation of all FHLBanks for the FHLBank System’s consolidated obligations, enables the FHLBanks to access low-cost funding in the capital markets.
- A broad and diverse membership base of regulated financial institutions, including members of all sizes and charter types, which enables the FHLBanks to offer low-cost funding to all members, spurs product innovation, and expands the reach of the FHLBanks’ products and services into more communities nationwide.
While the FHLBank System is not the main subject of the current legislative proposals, it is apparent that any overhaul of the nation’s housing finance system will have a significant impact on the FHLBanks and on their members and other stakeholders. Our priority is to ensure that whatever legislation is finally enacted does not impair our ability to meet the needs of our members and achieve our mission of promoting access to quality housing and homeownership for families and individuals of all income levels.
A Cooperative That Works
Everything the Bank achieves is accomplished with and through our member financial institutions. We thank you for the work you do in serving your communities and your community partners and for using the Bank’s products and services to achieve your goals. As a cooperative, we depend on your participation to succeed, whether that means using advances to fund your loan portfolio and manage interest rate risk and liquidity or taking advantage of our community programs to extend your outreach to low-income households and support community economic development in your region.
We also thank our Board of Directors, Affordable Housing Advisory Council, management, and staff for their sustained and focused efforts, day in and day out, to maintain and enhance the Bank’s programs and activities for your benefit, as shareholders and customers of the Bank, and for the benefit of the people and communities you serve.
John F. Luikart
Chairman of the Board
Douglas H. (Tad) Lowrey
Vice Chairman of the Board
President and Chief Executive Officer