Federal Home Loan Bank of San Francisco Reports First Quarter Operating Results

Business Wire,  May 2, 2008  

• E-mail
• Print
• Link

SAN FRANCISCO -- The Federal Home Loan Bank of San Francisco today announced that its first quarter 2008 net income rose $98 million, or 69%, to $240 million from $142 million in the first quarter of 2007. The increase reflected growth in net interest income and other income, partially offset by increased assessments for the Resolution Funding Corporation (REFCORP) and the Affordable Housing Program (AHP).

Net interest income for the first quarter of 2008 rose $27 million, or 13%, to $232 million from $205 million for the first quarter of 2007. The increase in net interest income was primarily driven by a higher net interest spread on the Bank's mortgage portfolio (mortgage-backed securities and mortgage loans), along with the effect of higher average capital, advances, and investment balances. In particular, the impact of cumulative retrospective adjustments for the amortization of purchase premiums and discounts from the acquisition dates of the mortgage-backed securities and mortgage loans increased interest income by $9 million in the first quarter of 2008 and decreased interest income by $14 million in the first quarter of 2007.

Other income for the first quarter of 2008 rose $108 million, to $120 million from $12 million for the first quarter of 2007. This increase was primarily due to an increase in net interest income on derivative instruments used in economic hedges, which consisted of $67 million for the first quarter of 2008, compared to net interest expense of $2 million for the first quarter of 2007. This shift reflected the abrupt and significant decrease in interest rates that occurred early in the first quarter of 2008, which had a favorable effect on certain LIBOR-based interest rate swaps. In addition, the increase in other income was due to fair value adjustments, primarily associated with derivatives, hedged items, and financial instruments carried at fair value, which resulted in net fair value gains of $52 million in the first quarter of 2008, compared to net fair value gains of $13 million in the first quarter of 2007.

Nearly all of the Bank's derivatives, hedged instruments, and certain assets and liabilities that are carried at fair value are held to the maturity, call, or put date. For these financial instruments, net unrealized fair value gains or losses are primarily a matter of timing and will generally reverse over the remaining contractual terms to maturity or by the exercised call or put dates. In accordance with the Bank's Retained Earnings and Dividend Policy, the Bank retains the net unrealized fair value gains on these financial instruments, after REFCORP and AHP assessments, in restricted retained earnings. The Bank retained $39 million in net fair value gains after assessments in the first quarter of 2008 and $10 million in net fair value gains after assessments in the first quarter of 2007. As of March 31, 2008, the cumulative effect of these unrealized fair value adjustments on the Bank's derivatives, hedged instruments, and certain assets and liabilities that are carried at fair value was a net unrealized gain of $91 million, which has been retained in restricted retained earnings.

As a result of the combined increases in net interest income and other income, the Bank's REFCORP and AHP assessments in the first quarter of 2008 increased $36 million, or 71%, to $87 million from $51 million in the first quarter of 2007.

During the first quarter of 2008, total assets grew $10.0 billion, or 3%, to $332.5 billion from $322.5 billion at yearend 2007, primarily as a result of growth in investments in Federal funds sold, which increased by $7.9 billion, or 68%, to $19.6 billion at March 31, 2008, from $11.7 billion at December 31, 2007. In addition, investments in held-to-maturity securities increased $5.2 billion, or 13%, to $43.8 billion at March 31, 2008, from $38.6 billion at December 31, 2007. The increases were partially offset by a decrease in advances, which fell $2.6 billion, or 1%, to $248.4 billion at March 31, 2008, from $251.0 billion at December 31, 2007. During the first quarter of 2008, 108 institutions decreased their advances, while 143 institutions increased their advances. The Bank increased its investments in Federal Funds sold to maintain financial leverage until the repurchase of capital stock that had been supporting advances. The Bank increased its investments in held-to-maturity securities because of the growth in capital and the availability of mortgage-backed securities that met the Bank's risk-adjusted spreads and credit enhancement requirements in the first quarter of 2008 relative to the first quarter of 2007.

The Bank's dividend rate for the first quarter of 2008 is 5.73% (annualized), compared to 4.89% (annualized) for the first quarter of 2007. The increase in the dividend rate for the first quarter of 2008 compared to the same period in 2007 reflects a higher net interest spread on the Bank's mortgage portfolio and higher net interest spreads on investments and advances, partially offset by a lower yield on invested capital during the first quarter of 2008 compared to the same period in 2007.