Index to Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements 36 Executive Summary 38 Economic Conditions 39 Selected Financial Data 40 Results of Operations 42 Financial Condition 46 Liquidity and Capital Resources 55 Critical Accounting Estimates 60 Recent Accounting Developments 61 Legislative and Regulatory Developments 61 Forward-Looking Statements 36 -------------------------------------------------------------------------------- Table of Contents This report includes statements describing anticipated developments, projections, estimates, or predictions of ours that are "forward-looking statements." These statements may involve matters related to, but not limited to, projections of revenues, income, earnings, capital expenditures, dividends, capital structure, or other financial items; repurchases of excess stock, our minimum retained earnings target, or the interest-rate environment in which we do business; statements of management's plans or objectives for future operations; expectations of effects or changes in fiscal and monetary policies and our future economic performance; projections or expectations regarding the COVID-19 pandemic or its effects; or statements of assumptions underlying certain of the foregoing types of statements. These statements may use forward-looking terminology such as, but not limited to, "anticipates," "believes," "continued" "expects," "plans," "intends," "may," "could," "estimates," "assumes," "should," "will," "likely," or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements are subject to a number of risks or uncertainties, including the risk factors set forth in Part I - Item 1A - Risk Factors in the 2021 Annual Report and Part II - Item 1A - Risk Factors of this report, along with the risks set forth below. Actual results could 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. As a result, you are cautioned not to place undue reliance on such statements. These forward-looking statements speak only as of the date they are made, and we do not undertake to update any forward-looking statement herein or that may be made from time to time on our behalf.
Some of the risks and uncertainties that could affect our forecast
statements include the following:
•the effects of economic, financial, credit, and market conditions on our financial and regulatory condition and results of operations, including changes in economic growth, general liquidity conditions, inflation and deflation, employment rates, interest rates, interest rate spreads, interest rate volatility, mortgage originations, prepayment activity, housing prices, asset delinquencies, members' deposit flows, liquidity needs, and loan demand; changes in benchmark interest rates, including but not limited to the cessation of the LIBOR benchmark rate, the development of alternative rates, including the secured overnight financing rate (SOFR), and the adverse consequences these could have for market participants, including the Bank and its members; changes in the general economy, including changes resulting from
U.S.fiscal and monetary policy, actions of the Federal Open Market Committee(FOMC), or changes in credit ratings of the U.S.federal government; the condition of the mortgage and housing markets on our mortgage-related assets; and the condition of the capital markets on our COs; •issues and events across the FHLBank Systemand in the political arena that may lead to executive branch, legislative, regulatory, judicial, or other developments impacting the scope of our business, investor demand for COs, our financial obligations with respect to COs, our ability to access the capital markets, our members, our counterparties, the manner in which we operate, or the organization and structure of the FHLBank System; •the impact of pandemics, such as the COVID-19 pandemic, epidemics, or health emergencies and responses to such events, including, among other things, the effect on the Bank resulting from illness or quarantines of employees or business partners on which we rely or from remote work arrangements; negative effects on our members' businesses and their demands for our products, including demand for advances; and effects on the economy and financial markets from Federal Reservemonetary policy, fiscal stimulus programs (or changes to or cessation of such programs), state and local government restrictions on business activities including, among other things, federal and state vaccine mandates and reactions thereto, or generally;
• our ability to declare and pay dividends in accordance with past practices as well as
that any plan to buy back excess share capital, and any change in our
• competitive forces, including but not limited to other funding sources
available to our members and other entities borrowing funds in the capital
• changes in the value and liquidity of collateral we hold as collateral for
obligations of our members and counterparties;
•the impact of new accounting standards and the application of accounting rules, including the impact of regulatory guidance on our application of such standards and rules? •changes in the fair value and economic value of, impairments of, and risks, including risks related to changes in or cessation of benchmark interest rates such as LIBOR, overnight index swap (OIS), and SOFR, associated with the Bank's investments in mortgage loans and MBS or other assets and the related credit-enhancement protections?
• membership terms and changes, including changes resulting from membership
bankruptcies, mergers or change in financial health, changes due to members
eligibility, changes in members’ primary establishment or
addition of new members;
•external events, such as general economic and financial instabilities, political instability, wars, including hostilities and sanctions related to the war between
Russiaand Ukraine, and natural disasters, including disasters caused by significant climate change, which, among other things, could damage our facilities or the facilities of our members, damage or destroy collateral that members have pledged to secure advances or mortgages that we hold for our portfolio, and which could 37
cause us to suffer losses or expose us to a greater risk than that incurred
the guarantees would be insufficient in the event of default;
•the pace of technological change and our ability to develop and support internal controls, information systems, and other operating technologies that effectively manage the risks we face, including but not limited to, failures, interruptions, or security breaches (cyber-attacks), which could increase as a result of the COVID-19 pandemic related changes in our operating environment; and
• our ability to attract and retain qualified employees, including our principal
These risk factors are not exhaustive. New risk factors emerge from time to time. We cannot predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those implied by any forward-looking statements. The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our interim financial statements and notes, which begin on page three, and the 2021 Annual Report.
Net income for the three months ended
March 31, 2022, was $27.8 million, compared with net income of $20.9 millionfor the same period in 2021. The increase in net income was driven by a decrease of $14.2 millionin net unrealized losses on trading securities and a decline of $3.0 millionin losses on early extinguishment of debt. These increases to net income were partially offset by a $5.4 millionincrease in our voluntary contribution to the Affordable Housing Program, a decrease of $2.5 millionin net interest income after provision for credit losses, and a $1.6 millionincrease in operating expenses, compared to the same period in 2021. In support of our housing and community investment mission, the Bank made a voluntary contribution of $8.5 millionto the Affordable Housing Program in the three months ended March 31, 2022. For 2022, we expect to make voluntary contributions to the Affordable Housing Program such that the combined total of our required and voluntary contributions to the Affordable Housing Program, plus the subsidy expenses for three additional targeted housing and community investment voluntary programs that we have established, Jobs for New England, Helping to House New England, and Housing our Workforce, equals 30 percent of net income before deducting these amounts. Additional information on these targeted housing and community investment programs is provided in the 2021 Annual Report. Our retained earnings grew to $1.6 billionat March 31, 2022, an increase of $22.7 millionfrom December 31, 2021, and equals 4.85 percent of total assets at March 31, 2022. We continue to satisfy all regulatory capital requirements as of March 31, 2022. On April 22, 2022, our board of directors declared a cash dividend that was equivalent to an annual yield of 2.09 percent, the approximate daily average of SOFR for the first quarter of 2022 plus 200 basis points. Our overall results of operations are influenced by the economy and financial markets, and, in particular, by members' demand for advances and our ability to maintain sufficient access to funding at relatively favorable costs. The continued COVID-19 pandemic, which began to affect businesses and the economy in March 2020, and the response of the U.S.government and the Federal Reservethrough changes in monetary policy and implementation of unprecedented fiscal stimulus programs, led to historically low interest rates and substantially elevated deposits reported by member depository institutions. The elevated level of deposits at member depository institutions has been the primary cause of the significant and continued decline in advances balances which began in the second quarter of 2020. These developments impacted our financial condition as of March 31, 2022, and results of operations for the three months ended March 31, 2022. Generally, investor demand for high credit quality, fixed-income investments, including COs, continued to be strong relative to other investments. Moreover, a historically low supply of COs, primarily as a result of lower advances balances throughout the FHLBank Systemhas resulted in elevated relative demand for COs and improved our relative cost of borrowing. Our flexibility in utilizing various funding tools, in combination with a diverse investor base and our status as a government-sponsored enterprise, have helped provide reliable market access and demand for consolidated obligations throughout fluctuating market environments and regulatory changes affecting dealers of and investors in COs. The Bank has continued to meet all funding needs during the three months ended March 31, 2022. Advances Balances 38
-------------------------------------------------------------------------------- Table of Contents We continue to deliver on our primary mission, supplying liquidity to our members. Advances balances totaled
$11.8 billionat March 31, 2022, compared to $12.3 billionat December 31, 2021. The decrease in advances was in variable-rate advances and is primarily due to excess liquidity at member institutions.
Net interest income, margin and spread
For the three months ended
March 31, 2022, net interest margin was 0.74 percent, an increase of 6 basis points from 2021, and net interest spread was 0.70 percent for the three months ended March 31, 2022, an increase of 7 basis points from the same period in 2021. The increase in both net interest spread and net interest margin mainly reflects an improvement in funding costs in 2022 relative to 2021, and a reduction in net premium amortization on mortgage-related assets relative to the same period in 2021. The rising interest rate environment in 2022 has decreased refinancing incentives on residential mortgage loans, resulting in decreases of mortgage prepayment activity that resulted in reduced net premium amortization of our agency residential MBS as well as our whole mortgage loans. Other improvements in net interest income after provision for credit losses are described in Results of Operations - Net Interest Income . Average total earning assets declined $3.9 billionto $32.0 billionfor the three months ended March 31, 2022, from $36.0 billionfor the same period in 2021.
Legislative and regulatory developments
Legislation has been proposed or enacted and the FHFA and others with authority over the economy, our industry, and our business activities have taken action during 2022 as described in - Legislative and Regulatory Developments . Such developments affect the way we conduct business and could impact how we satisfy our mission as well as the value of our membership.
Preparations for the LIBOR transition
The Alternative Reference Rates Committee (ARRC), which was established in 2014 by the
Federal Reserveand the Federal Reserve Bank of New Yorkto help ensure a successful transition in the U.S.from LIBOR, recommended SOFR as the alternative reference rate to U.S.dollar LIBOR. For details regarding the Bank's transition from LIBOR to SOFR, the alternative reference rate to U.S.dollar LIBOR recommended by ARRC, see the following Risk Factors in our 2021 Annual Report: Part I - Item 1A - Risk Factors - Market and Liquidity Risks - Changes to and replacement of the LIBOR benchmark interest rate could adversely affect our business, financial condition, and results of operations; and - We use derivatives to manage interest-rate risk, however, we could be unable to enter into effective derivative instruments on acceptable terms. Additional information is provided in the 2021 Annual Report Part II - Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Executive Summary - LIBOR Transition Preparations, Financial Condition - Transition from LIBOR to Alternative Reference Rates and in -
Legislative and regulatory developments – LIBOR transition .
Real gross domestic product (GDP) decreased at an annual rate of 1.4 percent in the first quarter of 2022. The decrease was driven mainly by decreases in inventories which largely reflected supply chain disruptions in the motor vehicles industry and in exports and federal government spending. Personal consumption expenditures and private domestic investment continued to grow in the first quarter of 2022, prompting some commentators to view the GDP contraction in the quarter to be the result of temporary volatility and not the onset of a recession. The labor market has continued to improve, with job growth averaging 562,000 per month in the first quarter of 2022. In
April 2022, employment increased by 428,000 and the unemployment rate was 3.6 percent. In March 2022, the unemployment rate for the New Englandregion was 4.0 percent, ranging from 2.5 percent in New Hampshireto 4.6 percent in Connecticut.
The consumer price index increased by 8.3% in
earlier, driven by the prices of housing, food, plane tickets and new vehicles.
The FHFA reported that house prices rose 19.4 percent across the
U.S.from February 2021to February 2022. Over the same period, home prices in New Englandrose 17.6 percent. At the end of April 2022, rates for 30-year fixed-rate mortgage were above 5.0 percent, more than 2.0 percentage points higher than a year earlier. Whether, and how much, this sharp increase in mortgage rates cools down the housing market remains to be seen. 39 -------------------------------------------------------------------------------- Table of Contents Interest-Rate Environment On May 4, 2022, the FOMCraised the target range for the federal funds rate to 75 to 100 basis points and stated that ongoing increases in the target range will likely be appropriate given elevated rates of inflation. The FOMCalso stated that it expects to begin reducing its holdings of Treasurysecurities, agency debt, and agency mortgage-backed securities on June 1, 2022. Once balance sheet reduction begins, the Federal Reservewill reinvest principal payments from its securities holdings only if they exceed monthly caps. The Federal Reserve'sannouncement of a policy pivot from an easing to a tightening stance, confirmed by the increase in the federal funds rate to a range of 25 to 50 basis points in March 2022, led to a rise in interest rates. Short-term rates rose commensurate with the magnitude of the increase in the federal funds rate. Longer-term rates rose by a larger magnitude reflecting expectations of further rate hikes and commencement of the balance sheet reduction program by the Federal Reserve.
Table 1 – Key rates(1)
Three Month Average Ending Rate March 31, 2022 March 31, 2021 March 31, 2022 December 31, 2021 SOFR 0.09% 0.04% 0.29% 0.05% Federal funds effective rate 0.12% 0.08% 0.33% 0.07% 3-month LIBOR 0.52% 0.20% 0.96% 0.21% 3-month U.S. Treasury yield 0.28% 0.04% 0.51% 0.03% 2-year U.S. Treasury yield 1.45% 0.13% 2.34% 0.73% 5-year U.S. Treasury yield 1.83% 0.61% 2.46% 1.26% 10-year U.S. Treasury yield 1.95% 1.32% 2.34% 1.51% ________________ (1) Source: Bloomberg SELECTED FINANCIAL DATA
The following financial highlights for the inventory and condition
of operations for
Financial state. Quarter-end financial highlights were
taken from our unaudited financial statements.
40 -------------------------------------------------------------------------------- Table of Contents Table 2 - Selected Financial Data (dollars in thousands) As of and for the Three Months Ended March 21, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Statement of Condition Total assets
$ 32,395,662 $ 32,545,292 $ 34,448,917 $ 35,683,602 $ 36,676,723Investments(1) 16,849,318 16,372,499 16,404,424 16,053,111 15,474,566 Advances 11,816,428 12,340,020 14,056,991 15,176,625 16,798,082 Mortgage loans held for portfolio, net(2) 2,998,682 3,120,159 3,283,925 3,470,505 3,726,343 Deposits 803,383 884,032 970,732 970,282 1,088,187 Consolidated obligations: Bonds 26,070,923 26,613,032 25,097,469 23,475,165 22,704,460 Discount notes 2,878,513 2,275,320 5,554,103 8,365,460 9,927,167 Total consolidated obligations 28,949,436 28,888,352 30,651,572 31,840,625
Mandatorily redeemable capital stock 13,418 13,562 13,890 7,432 6,164 Class B capital stock outstanding-putable(3) 929,482 953,638 1,028,177 1,081,057
Unrestricted retained earnings 1,202,685 1,179,986 1,159,509 1,147,279 1,145,756 Restricted retained earnings 368,420 368,420 368,420 368,420 368,420 Total retained earnings 1,571,105 1,548,406 1,527,929 1,515,699 1,514,176 Accumulated other comprehensive (loss) income (88,800) 28,967 40,604 47,645 21,223 Total capital 2,411,787 2,531,011 2,596,710 2,644,401 2,717,064 Results of Operations Net interest income after provision for credit losses
$ 58,942$ 56,412 $ 51,145 $ 43,122 $ 61,484Other income (loss), net 1,066 (7,562) (10,453) (13,104) (15,763) Other expense 29,073 20,061 22,330 23,177 22,513 AHP assessments 3,100 2,887 1,842 687 2,323 Net income $ 27,835$ 25,902 $ 16,520 $ 6,154 $ 20,885Other Information Dividends declared $ 5,137$ 5,425 $ 4,290 $ 4,631 $ 5,351Dividend payout ratio 18.46 % 20.94 % 25.97 % 75.25 % 25.62 % Weighted-average dividend rate(4) 2.05 2.05 1.52 1.54 1.59 Return on average equity(5) 4.50 4.00 2.50 0.92 3.09 Return on average assets 0.35 0.31 0.18 0.07 0.23 Net interest margin(6) 0.74 0.66 0.58 0.48 0.68 Average equity to average assets 7.69 7.65 7.36 7.29 7.46 Total regulatory capital ratio(7) 7.76 7.73 7.46 7.30 7.37 _______________________
(1) Investments include securities available for sale, held to maturity
securities, commercial securities, interest-bearing deposits, securities purchased
under resale agreements and federal funds sold.
(2)The allowance for credit losses for mortgage loans amounted to
$1.6 millionas of March 31, 2022, $1.7 millionas of December 31, 2021, $2.1 millionas of September 30, 2021, $2.1 millionas of June 30, 2021, and $1.9 millionas of March 31, 2021, respectively. (3)Capital stock is putable at the option of a member upon five years' written notice, subject to applicable restrictions. We also initiated daily repurchases of excess stock from members on June 1, 2017.
(4) The weighted average dividend rate corresponds to the amount of the declared dividend divided by the
average daily balance of the share capital eligible for the dividend.
(5)Return on average equity is net income divided by total
daily balance of outstanding Class B share capital, aggregate of other
comprehensive income and total retained earnings.
41 -------------------------------------------------------------------------------- Table of Contents (6)Net interest margin is net interest income before provision for credit losses as a percentage of average earning assets. (7)Total regulatory capital ratio is capital stock (including mandatorily redeemable capital stock) plus total retained earnings as a percentage of total assets. See Item 8 - Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 12 - Capital .
RESULTS OF OPERATIONS
Net income increased to
$27.8 millionfor the three months ended March 31, 2022, from $20.9 millionfor the same period in 2021. The reasons for the increase are discussed under - Executive Summary .
Net interest income
Net interest income after provision for credit losses for the three months ended
March 31, 2022, was $58.9 million, compared with $61.5 millionfor the same period in 2021. The $2.5 milliondecrease in net interest income after provision for credit losses was driven by a $6.8 milliondecrease in net prepayment fee income, a $5.2 billiondecrease in the average balance of advances and a $785.5 milliondecrease in the average balance of mortgage loans. These negative factors were partially offset by an increase of net accretion of discounts and premiums on mortgage-backed securities (MBS) and mortgage loans of $16.5 million, resulting from significant increases in mortgage rates during the first quarter of 2022, an increase of fair value hedge ineffectiveness net gains of $7.2 million, a $1.9 billionincrease in the average balance of mortgage backed securities, a $1.6 billionincrease in the average balance of U.S. Treasurysecurities, and an improvement in funding costs relative to the same period in 2021. As a result, net interest spread was 0.70 percent for the three months ended March 31, 2022, an increase of 7 basis points from the same period in 2021, and net interest margin was 0.74 percent, an increase of 6 basis points from the same period in 2021.
Table 3 presents the main categories of average balances, interest linked
income/expenses, and average yields/rates of interest-earning assets and
interest-bearing liabilities. Our main source of income is net interest
income, i.e. interest earned on advances, mortgages and
investments less interest paid on COs, deposits and other sources of funds.
42 -------------------------------------------------------------------------------- Table of Contents Table 3 - Net Interest Spread and Margin (dollars in thousands) For the Three Months Ended March 31, 2022 2021 Interest Interest Average Income / Average Average Income / Average Balance Expense Yield/Rate(1) Balance Expense Yield/Rate(1) Assets Advances
$ 12,404,813 $ 34,9071.14 % $ 17,639,366 $ 57,2851.32 % Interest-bearing deposits 415,657 160 0.16 570,137 84 0.06 Securities purchased under agreements to resell 546,689 171 0.13 711,111 124 0.07 Federal funds sold 2,128,889 814 0.16 3,175,955 614 0.08 Investment securities(2) 13,494,518 45,863 1.38 10,050,564 41,070 1.66 Mortgage loans (2)(3) 3,048,429 21,528 2.86 3,833,903 25,137 2.66 Total interest-earning assets 32,038,995 103,443 1.31 35,981,036 124,314 1.40 Other non-interest-earning assets 470,213 318,402 Fair-value adjustments on investment securities 77,524 476,354 Total assets $ 32,586,732 $ 103,4431.29 % $ 36,775,792 $ 124,3141.37 % Liabilities and capital Consolidated obligations Discount notes $ 2,304,476 $ 6070.11 % $ 11,298,752 $ 2,4020.09 % Bonds 26,523,530 43,900 0.67 21,397,106 61,601 1.17 Other interest-bearing liabilities 804,721 94 0.05 1,014,144 53 0.02 Total interest-bearing liabilities 29,632,727 44,601 0.61 33,710,002 64,056 0.77 Other non-interest-bearing liabilities 448,126 320,949 Total capital 2,505,879 2,744,841 Total liabilities and capital $ 32,586,732 $ 44,6010.56 % $ 36,775,792 $ 64,0560.71 % Net interest income $ 58,842 $ 60,258Net interest spread 0.70 % 0.63 % Net interest margin 0.74 % 0.68 %
(1) Yields are annualized. (2) Average balances are reflected at amortized cost. (3) Nonaccrual loans are included in the average balances used to determine average yield. Rate and Volume Analysis Changes in both average balances (volume) and interest rates influence changes in net interest income and net interest margin. Table 4 summarizes changes in interest income and interest expense for the three months ended
March 31, 2022and 2021. Changes in interest income and interest expense that are not identifiable as either volume-related or rate-related, but are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes. 43 -------------------------------------------------------------------------------- Table of Contents Table 4 - Rate and Volume Analysis (dollars in thousands) For the
Three months completed
Increase (Decrease) due to Volume Rate Total Interest income Advances
$ (15,435) $ (6,943) $ (22,378)Interest-bearing deposits (28) 104 76 Securities purchased under agreements to resell (34) 81 47 Federal funds sold (252) 452 200 Investment securities 12,485 (7,692) 4,793 Mortgage loans (5,438) 1,829 (3,609) Total interest income (8,702) (12,169) (20,871) Interest expense Consolidated obligations Discount notes (2,263) 468 (1,795) Bonds 12,497 (30,198) (17,701) Other interest-bearing liabilities (13) 54 41 Total interest expense 10,221 (29,676) (19,455) Change in net interest income $ (18,923) $ 17,507 $ (1,416)
Average balance of outstanding advances
The average balance of total advances decreased
$5.2 billion, or 29.7 percent, for the three months ended March 31, 2022compared with the same period in 2021, as members paid off advances, in many cases prior to maturity. We cannot predict future member demand for advances. For the three months ended March 31, 2022and 2021, net prepayment fees on advances were $914 thousandand $7.7 million, respectively. Prepayment-fee income is unpredictable and inconsistent from period to period, occurring only when advances and investments are prepaid prior to the scheduled maturity or repricing dates, and generally when prevailing reinvestment yields are lower than those of the prepaid advances. For additional information see Item 8 - Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 2 - Summary of Significant Accounting Policies - Advances in the 2021 Annual Report.
Average investment balance
Average short-term money-market investments, consisting of interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold, decreased
$1.4 billion, or 30.6 percent, for the three months ended March 31, 2022, compared with the same period in 2021, as liquidity needs were sharply lower in 2022 compared to 2021 amid lower advances borrowing activity. The yield earned on short-term money-market investments is highly correlated to short-term market interest rates. As a result of the FOMC'sincrease in the target range for the federal funds rate, average yields on overnight federal funds sold increased from 0.08 percent during the three months ended March 31, 2021, to 0.16 percent during the three months ended March 31, 2022, while average yields on securities purchased under agreements to resell increased from 0.07 percent for the three months ended March 31, 2021, to 0.13 percent for the three months ended March 31, 2022. These investments are used for liquidity management. Average investment-securities balances increased $3.4 billion, or 34.3 percent for the three months ended March 31, 2022, compared with the same period in 2021, an increase consisting primarily of $1.9 billionin MBS and $1.6 billionin U.S. Treasuryobligations.
Average CO balance
Average CO balances decreased
$3.9 billion, or 11.8 percent, for the three months ended March 31, 2022, compared with the same period in 2021, resulting from our decreased funding needs principally due to the decrease in our average advances balances. This overall decrease consisted of a decline of $9.0 billionin CO discount notes offset by a $5.1 billionincrease in CO bonds. 44
The average balance of CO discount notes represented approximately 8.0 percent of total average COs during the three months ended
March 31, 2022, compared with 34.6 percent of total average COs during the three months ended March 31, 2021. The average balance of CO bonds represented 92.0 percent and 65.4 percent of total average COs outstanding during the three months ended March 31, 2022and 2021, respectively.
Impact of derivatives and hedging activities
Net interest income includes interest accrued on interest-rate-exchange agreements that are associated with advances, investments, and debt instruments that qualify for hedge accounting. The fair value gains and losses of derivatives and hedged items designated in fair-value hedge relationships are also recognized as interest income or interest expense. We enter into derivatives to manage the interest-rate-risk exposures inherent in otherwise unhedged assets and liabilities and to achieve our risk-management objectives. We generally use derivative instruments that qualify for hedge accounting as interest-rate risk-management tools. These derivatives serve to stabilize net income when interest rates fluctuate. Accordingly, the impact of derivatives on net interest income and net interest margin, as well as other income, should be viewed in the overall context of our risk-management strategy.
Table 5 below provides a summary of the impact of derivatives and hedging
activities on our income.
Table 5 – Effect of derivatives and hedging activities
(dollars in thousands)
For the Three Months Ended March 31, 2022 Net Effect of Derivatives and Hedging Activities Advances Investments Mortgage Loans CO Bonds Other Total Net interest income Amortization / accretion of hedging activities (1)
$ (263)$ - $ (156) $ (936)$ - $ (1,355)Gains on designated fair-value hedges 1,331 14,291 - 479 - 16,101 Net interest settlements on derivatives(2) (9,926) (37,391) - 26,791 - (20,526) Total net interest income (8,858) (23,100) (156) 26,334 - (5,780) Net gains (losses) on derivatives and hedging activities Gains (losses) on derivatives not receiving hedge accounting 1 (1) - (521) - (521) CO bond firm commitments - - - 521 - 521 Mortgage delivery commitments - - (673) - -
Net gains (losses) on derivatives and hedging activities 1 (1) (673) - -
Net losses on trading securities - (425) - - -
Total net effect of derivatives and hedging activities
$ (8,857) $ (23,526)$ (829) $ 26,334$ - $ (6,878)45
For the Three Months Ended March 31, 2021 Net Effect of Derivatives and Mortgage Hedging Activities Advances Investments Loans CO Bonds Other Total Net interest income Amortization / accretion of hedging activities in net interest income (1)
$ (699)$ - $ (481) $ (645)$ - $
Gains on designated fair-value hedges 1,018 7,613 - 233 -
Net interest settlements included in net interest income (2) (15,825) (21,937) - 7,470 - (30,292) Total net interest income (15,506) (14,324) (481) 7,058 - (23,253) Net gains (losses) on derivatives and hedging activities Gains (losses) on derivatives not receiving hedge accounting 6 (25) - (19) (148) (186) CO bond firm commitments - - - 19 - 19 Mortgage delivery commitments - - (686) - - (686) Price alignment amount (3) - - - - 5 5 Net gains (losses) on derivatives and hedging activities 6 (25) (686) - (143)
Net losses on trading securities - (14,861) - - -
Total net effect of derivatives and hedging activities
$ (15,500) $ (29,210) $ (1,167) $ 7,058 $ (143) $ (38,962)________________________ (1) Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive income.
(2) Represents interest income/expense on derivatives included in net interest
(3) Represents the amount of derivatives for which the variation margin, or
payments made for changes in the market value of the transaction, is
characterized as a daily settlement amount.
FINANCIAL CONDITION Advances At
March 31, 2022, the advances portfolio totaled $11.8 billion, a decrease of $523.6 millionfrom $12.3 billionat December 31, 2021. The demand for advances experienced further reduction during the quarter, as member deposit levels continued to be elevated. 46 -------------------------------------------------------------------------------- Table of Contents Table 6 - Advances Outstanding by Product Type (dollars in thousands) March 31, 2022 December 31, 2021 Par Value Percent of Total Par Value Percent of Total Fixed-rate advances Long-term $ 6,849,62657.4 % $ 6,511,70652.7 % Short-term 1,532,799 12.8 1,531,550 12.4 Putable 1,091,750 9.2 1,178,425 9.6 Amortizing 520,810 4.4 551,163 4.5 Overnight 202,980 1.7 225,922 1.8 10,197,965 85.5 9,998,766 81.0 Variable-rate advances Simple variable (1) 1,726,875 14.5 2,348,875 19.0 All other variable-rate indexed advances - - 64 - 1,726,875 14.5 2,348,939 19.0 Total par value $ 11,924,840100.0 % $ 12,347,705100.0 % ________________________
(1) Includes variable rate advances that may be contractually
the Borrower on a Floating Rate Reset Date without incurring prepayment or
See Item 1 – Financial statements – Notes to the financial statements
Statements – Note 4 – Advances for Reimbursement Disclosures
terms of the loan portfolio.
Advances Credit risk
We endeavor to minimize credit risk on advances by monitoring the financial condition of our borrowers and by holding sufficient collateral to protect the Bank from credit losses. All pledged collateral is subject to collateral discounts, or haircuts, to the market value or unpaid principal balance, as applicable, based on our opinion of the risk that such collateral presents. We are prohibited by Section 10(a) of the
FHLBank Actfrom making advances without sufficient collateral. We have never experienced a credit loss on an advance.
We assign each non-insurer borrower to one of the following three categories
credit status categories based on our assessment of the entire borrower
financial situation and other factors:
Category-1: Members whose financial situation is generally satisfactory;
Category-2: Members that exhibit financial weakness or weakening financial trends
in key financial indices and/or regulatory findings; and
Category-3: Members with financial weaknesses who exhibit a high level of
We monitor the financial condition of our insurance company members quarterly. We lend to them based on our assessment of their financial condition and their pledge of sufficient amounts of eligible collateral. 47
Table 7 – Outstanding Advances by Borrower Credit Status Category
(dollars in thousands)
As of March 31, 2022 Par Value of Ratio of Discounted Advances Discounted Collateral Number of Borrowers Outstanding Collateral to Advances Category-1 195
$ 6,891,373 $ 86,371,1601,253.3 % Category-2 14 303,057 887,027 292.7 Category-3 12 228,372 381,503 167.1 Insurance companies 25 4,502,038 6,010,913 133.5 Total 246 $ 11,924,840 $ 93,650,603785.3 % The method by which a borrower pledges collateral depends upon the type of borrower (depository vs. non-depository), the category to which the borrower is assigned, and the type of collateral that the borrower pledges. Moreover, borrowers in Category-1 are eligible to specifically list and identify single-family owner-occupied residential mortgage loans at a lower discount than is allowed if the collateral is not specifically listed and identified.
The Bank may adjust a member’s credit status category from time to time
based on the member’s financial reviews and other circumstances.
We have not recorded any allowance for credit losses on advances at March 31, 2022, and December 31, 2021, for the reasons discussed in Item 1 - Financial Statements - Notes to the Financial Statements - Note 4 - Advances. Table 8 - Top Five Advance-Borrowing Institutions (dollars in thousands) March 31, 2022 Par Value of Percent of Total Par Name Advances
Value of advances Weighted average rate (1)
$ 2,100,00017.6 % 1.78 % Voya Retirement Insurance and Annuity Company 925,000 7.8 0.83 Hingham Institution for Savings 865,000 7.2 0.36 Workers Federal Credit Union 474,000 4.0 2.05 Institution for Savings in Newburyportand its Vicinity 400,837 3.4 1.75
Total top five advance lenders
December 31, 2021Par Value of Percent of Total Par NameAdvances
Value of advances Weighted average rate (1)
$ 1,500,00012.1 % 1.62 % Voya Retirement Insurance and Annuity Company 925,000 7.5 0.48 Hingham Institution for Savings 665,000 5.4 0.28 Salem Five CentsSavings Bank 580,392 4.7 0.27 Peoples United Bank 562,750 4.6 0.39
Total top five advance lenders
(1) Weighted average rates are based on the contractual rate of each advance
regardless of interest rate effects
agreements that we may use as hedging instruments.
48 -------------------------------------------------------------------------------- Table of Contents At
March 31, 2022, investment securities and short-term money-market instruments totaled $16.8 billion, an increase of $476.8 millionfrom $16.4 billionat December 31, 2021. Short-term money-market investments increased $782.0 millionto $3.6 billionat March 31, 2022, compared with December 31, 2021. The increase was attributable to increases of $600.0 millionin securities purchased under agreements to resell and $222.0 millionin federal funds sold offset by a decrease of $40.0 millionin interest bearing deposits. Investment securities declined $305.2 millionto $13.2 billionat March 31, 2022, compared with $13.5 billionat December 31, 2021. This was attributable to decreases of $163.8 millionin MBS and $73.2 millionin U.S. Treasuryobligations.
Investments Credit risk
We are subject to credit risk on unsecured investments consisting primarily of short-term (meaning one year and under to maturity) money-market instruments issued by high-quality financial institutions and long-term (original maturity in excess of one year) debentures issued or guaranteed by
U.S.agencies, U.Sgovernment-owned corporations, GSEs, and supranational institutions. We place short-term funds with large, high-quality financial institutions that must be rated in at least the third-highest internal rating category on a rating scale of FHFA1 through FHFA7, reflecting progressively lower credit quality. The internal rating categories of FHFA1 through FHFA4 are considered to be investment quality. As of March 31, 2022, all of these placements either expired within 60 days or were payable upon demand. See Part 1 - Item 1 - Business - Business Lines - Investments in the 2021 Annual Report for additional information. In addition to these unsecured investments, we also make secured investments in the form of securities purchased under agreements to resell secured by U.S. Treasury, U.S.government guaranteed, or agency obligations, with current terms to maturity up to 95 days and in MBS and HFA securities that are directly or indirectly supported by underlying mortgage loans. We actively monitor our investment credit exposures and the credit quality of our counterparties, including assessments of each counterparty's financial performance, capital adequacy, sovereign support, and collateral quality and performance, as well as related market signals such as securities prices and credit default swap spreads. We may reduce or suspend credit limits and/or seek to reduce existing exposures, as appropriate, as a result of these monitoring activities. 49
Table of Contents Table 9 - Credit Ratings of Investments at Carrying Value (dollars in thousands) As of March 31, 2022 Long-Term Credit Rating Investment Category Triple-A Double-A Single-A Unrated Money-market instruments: (1) Interest-bearing deposits $ -
$ 150 $ 45,010$ - Securities purchased under agreements to resell - 900,000 500,000 - Federal funds sold - 176,000 1,990,000 - Total money-market instruments - 1,076,150 2,535,010 - Investment securities:(2) Non-MBS: U.S. Treasury obligations - 5,511,796 - - Corporate bonds - - - 1,232 U.S. government-owned corporations - 275,474 - - GSE - 114,117 - - Supranational institutions 380,282 - - - HFA securities 33,984 27,460 - - Total non-MBS 414,266 5,928,847 - 1,232 MBS: U.S. government guaranteed - single-family - 24,100 - - U.S. government guaranteed - multifamily - 536,893 - - GSE - single-family - 1,104,678 - - GSE - multifamily - 5,228,142 - - Total MBS - 6,893,813 - - Total investment securities 414,266 12,822,660 - 1,232 Total investments $ 414,266 $ 13,898,810 $ 2,535,010 $ 1,232
(1) The counterparty NRSRO rating is used for money-market instruments. Counterparty ratings are obtained from Moody's,
Fitch, Inc.(Fitch), and S&P and are each as of March 31, 2022. If there is a split rating, the lowest rating is used. In certain instances where a counterparty is unrated, the Bank may assign a deemed rating to the counterparty and that deemed rating is used.
(2) The issue rating is used for investment securities. The problem ratings are
obtained from Moody’s, Fitch and S&P. If there is a split quote, the lowest
notation is used.
FHFA regulations include limits on the amount of unsecured credit we may extend to a counterparty or to a group of affiliated counterparties based on a percentage of regulatory capital and an internal credit rating determined by each FHLBank. See Part 1 - Item 1 - Business - Business Lines - Investments in the 2021 Annual Report for additional information. Under these regulations, the level of regulatory capital is determined as the lesser of our total regulatory capital or the regulatory capital of the counterparty. The applicable regulatory capital is then multiplied by a specified percentage for each counterparty, which product is the maximum amount of unsecured credit exposure we may extend to that counterparty. The percentage that we may offer for extensions of unsecured credit other than overnight sales of federal funds ranges from one to 15 percent based on the counterparty's credit rating. From time to time, we may establish internal credit limits lower than those permitted by regulation for individual counterparties. 50 -------------------------------------------------------------------------------- Table of Contents Table 10 - Unsecured Credit Related to Money-Market Instruments and Debentures by Carrying Value (dollars in thousands) Carrying Value
March 31, 2022 December 31, 2021
Interest bearing deposits
Federal funds sold 2,166,000
Supranational institutions 380,282 403,765 U.S. government-owned corporations 275,474 306,864 GSEs 114,117 126,472 Mortgage Loans
We invest in mortgages through the MPF program. The MPF program is also
described under – Credit risk relating to mortgage loans and in Part I – Item 1 – Company –
Business Lines – Mortgage Loan Finance in the 2021 Annual Report.
March 31, 2022, our mortgage loan investment portfolio totaled $3.0 billion, a decrease of $121.5 millionfrom December 31, 2021. We have experienced continued competition from Fannie Mae and Freddie Mac, as well as from private mortgage loan acquirers, for loan investment opportunities. In addition, prepayment activity in the three months ended March 31, 2022, has been elevated and has outpaced our purchases of mortgage loans.
Credit risk related to mortgage loans
We are subject to credit risk from the mortgage loans in which we invest due to our exposure to the credit risk of the underlying borrowers and the credit risk of the participating financial institutions when the participating financial institutions retain credit-enhancement and/or servicing obligations. For additional information on the credit risks arising from our participation in the MPF program, see Part II - Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Mortgage Loans - Mortgage Loans Credit Risk in the 2021 Annual Report. For information on the credit performance of our mortgage loan portfolio as of
March 31, 2022, see Item I - Financial Statements - Note 5 - Mortgage Loans Held for Portfolio in this report.
Although our mortgage loan portfolio includes life cycle loans
concentrations of 5% or more of the outstanding principal balance of
our portfolio of conventional mortgages are shown in Table 12.
Table 11 – Concentrations of states by outstanding principal balance
Percentage of Total Principal Balance Outstanding
March 31, 2022 December 31, 2021 Massachusetts 62 % 63 % Maine 10 10 Connecticut 9 8 Vermont 5 5 All others 14 14 Total 100 % 100 % We place conventional mortgage loans on nonaccrual status when the collection of interest or principal is doubtful or contractual principal or interest is 90 days or more past due. Accrued interest on nonaccrual loans is excluded from interest income. We monitor the delinquency levels of the mortgage loan portfolio on a monthly basis. 51
Table 12 – Mortgage Loans – Elements of Risk and Credit Losses
(dollars in thousands)
Three months completed
Average nominal value of outstanding mortgage loans during the
End of period
$ 3,000,274 $ 3,772,228Net recoveries (charge-offs) - 26 Net charge-offs to average loans outstanding during the year ending - % - % As of December 31, As of March 31, 2022 2021 Mortgage loans held for portfolio, par value $ 2,955,167 $ 3,072,075Nonaccrual loans, par value 17,004 21,384 Allowance for credit losses on mortgage loans 1,600 1,700
Allowance for credit losses on mortgages held for
0.05 % 0.06 % Nonaccrual loans to mortgage loans held for portfolio 0.58 0.70 Allowance for credit losses to nonaccrual loans 9.41 7.95 Mortgage Insurance Companies. We are exposed to credit risk from primary mortgage insurance coverage (PMI) on individual loans. As of
March 31, 2022, we were the beneficiary of PMI coverage of $65.8 millionon $251.6 millionof conventional mortgage loans. These amounts relate to loans originated with PMI and for which current loan-to-value ratios exceed 78 percent (determined by recalculating the original loan-to-value ratio using the current unpaid principal balance divided by the appraised home value at the time of loan origination). We have analyzed our potential loss exposure to all of the mortgage insurance companies and do not expect incremental losses based on these exposures at this time. Consolidated Obligations
See – Liquidity and Capital Resources for more information on our COs.
All derivatives are recorded on the statement of condition at fair value and classified as either derivative assets or derivative liabilities. Bilateral and cleared derivatives outstanding are classified as assets or liabilities according to the net fair value of derivatives aggregated by each counterparty. Derivative assets' net fair value, net of cash collateral and accrued interest, totaled
$410.5 millionand $378.5 millionas of March 31, 2022, and December 31, 2021, respectively. Derivative liabilities' net fair value, net of cash collateral and accrued interest, totaled $29.3 millionand $38.9 millionas of March 31, 2022, and December 31, 2021, respectively. The following table presents a summary of the notional amounts and estimated fair values of our outstanding derivatives, excluding accrued interest, and related hedged item by product and type of accounting treatment as of March 31, 2022, and December 31, 2021. The notional amount represents the hypothetical principal basis used to determine periodic interest payments received and paid. However, the notional amount does not represent an actual amount exchanged or our overall exposure to credit and market risk. 52
Table of Contents Table 13 - Hedged Item and Hedge-Accounting Treatment (dollars in thousands) March 31, 2022 December 31, 2021 Notional Fair Notional Fair Hedged Item Derivative Designation(2) Amount Value
Amount Value Advances (1) Swaps Fair value
$ 3,183,770 $ 4,992 $ 2,693,195 $ 1,800Swaps Economic 329,800 (4,989) 345,425 (11,761) Total associated with advances 3,513,570 3 3,038,620 (9,961) Available-for-sale securities Swaps Fair value 12,077,159 38,913 10,795,541 56,831 Trading securities Swaps Economic - - 500,000 3,087 COs Swaps Fair value 15,277,220 (730,625) 13,101,220 (173,243) Swaps Economic - - 55,000 (24) Forward starting swaps Cash Flow 1,391,000 (1,701) 1,391,000 (380) Total associated with COs 16,668,220 (732,326) 14,547,220 (173,647) Total 32,258,949 (693,410) 28,881,381 (123,690) CO bond firm commitments 35,000 133 55,000 24 Mortgage delivery commitments 9,889 72 3,164 68 Total derivatives $ 32,303,838(693,205) $ 28,939,545(123,598) Accrued interest (53,751) (50,008) Cash collateral, including related accrued interest 1,128,183 513,194 Net derivatives $ 381,227 $ 339,588Derivative asset $ 410,500 $ 378,532Derivative liability (29,273) (38,944) Net derivatives $ 381,227 $ 339,588
(1) As of
March 31, 2022and December 31, 2021, embedded derivatives separated from certain advance contracts with notional amounts of $329.8 millionand $345.4 million, respectively, and fair values of $5.0 millionand $11.9 million, respectively, are not included in the table. (2) The hedge designation "fair value" represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge changes in fair value attributable to changes in the designated benchmark interest rate. The hedge designation "cash flow" represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge the exposure to variability in expected future cash flows. The hedge designation "economic" represents derivatives hedging specific or nonspecific assets, liabilities, or firm commitments that do not qualify or were not documented as fair-value or cash-flow hedges but are documented as serving a non-speculative use and are hedging strategies under our risk-management policy. Derivative Instruments Credit Risk. We are subject to credit risk on derivatives. This risk arises from the risk of counterparty default on the derivative contract. The amount of unsecured credit exposure to derivative counterparty default is the amount by which the replacement cost of the defaulted derivative contract exceeds the value of any collateral held by us (if the counterparty is the net obligor on the derivative contract) or is exceeded by the value of collateral pledged by us to counterparties (if we are the net obligor on the derivative contract). We accept cash and securities collateral in accordance with the terms of the applicable master netting agreement for uncleared derivatives (principal-to-principal derivatives that are not centrally cleared) from counterparties with whom we are in a current positive fair-value position. We pledge cash and securities collateral in accordance with the terms of the applicable master netting agreement for uncleared derivatives to counterparties with whom we are in a current negative fair-value position. From time to time, due to timing differences or derivatives valuation differences between our calculated derivatives values and those of our counterparties, and to the contractual haircuts applied to securities, we pledge to counterparties cash or securities collateral whose fair value is greater than the current net negative fair-value of derivative positions outstanding with them. 53 -------------------------------------------------------------------------------- Table of Contents Similarly, from time to time, due to timing differences or derivatives valuation differences, we receive from counterparties cash or securities collateral whose fair value is less than the current net positive fair-value of derivatives positions outstanding with them. We currently pledge only cash collateral, including initial and variation margin, for cleared derivatives, but may also pledge securities for initial margin as allowed by the applicable DCO and clearing member.
Table 14 – Credit exposure to derivative counterparties
(dollars in thousands)
As of March 31, 2022 Net Derivatives Cash Collateral Non-cash Collateral Fair Value Before Pledged to Pledged to Net Credit Exposure Credit Rating (1) Notional Amount Collateral Counterparty Counterparty to Counterparties Liability positions with credit exposure: Uncleared derivatives Single-A
$ 15,734,250 $ (711,517) $ 702,664$ 32,588 $ 23,735 Cleared derivatives 16,524,699 (35,645) 425,519 - 389,874 Total interest-rate swap positions with nonmember counterparties to which we had credit exposure 32,258,949 (747,162) 1,128,183 32,588 413,609 CO Bond firm commitments 35,000 133 - - 133 Mortgage delivery commitments (2) 9,889 86 - - 86 Total $ 32,303,838 $ (746,943) $ 1,128,183$ 32,588 $ 413,828
(1) Uncleared derivatives counterparty ratings are obtained from Moody's, Fitch, and S&P. Each rating classification includes all rating levels within that category. If there is a split rating, the lowest rating is used. In the case where the obligations are unconditionally and irrevocably guaranteed, the rating of the guarantor or the counterparty is used. (2) Total fair-value exposures related to commitments to invest in mortgage loans are offset by certain pair-off fees. Commitments to invest in mortgage loans are reflected as derivatives. We do not collateralize these commitments. However, should the participating financial institution fail to deliver the mortgage loans as agreed, the participating financial institution is charged a fee to compensate us for the nonperformance.
For more information on our approach to credit risks arising from our use of
derivatives, see Part II – Heading 7 – Management report and
Results of operations – Financial position – Derivative instruments –
Credit risk of derivatives in the 2021 annual report.
Transition from LIBOR to alternative benchmark rates
March 5, 2021, the United Kingdom's FCAconfirmed that the publication of the principal tenors of U.S.dollar LIBOR (i.e., overnight, one-month, three-month, six-month and 12-month LIBOR) will cease immediately following a final publication on June 30, 2023. As of January 1, 2022, the one-week and two-month U.S.dollar LIBOR settings and all non- U.S.dollar LIBOR settings ceased to be provided by any administrator. Although the FCAhas indicated that it does not expect the remaining U.S.dollar LIBOR settings to become unrepresentative before the cessation date, there is no assurance that any of them will continue to be published or be representative through any particular date. We have exposures to investment securities and derivatives with interest rates indexed to U.S.dollar LIBOR. All of our LIBOR-indexed financial instruments utilize a LIBOR tenor that will either cease to be published or will no longer be representative after June 30, 2023. Table 15 presents our exposure to LIBOR-indexed investment securities and LIBOR-indexed derivatives, at March 31, 2022. For further details see the following Risk Factors in our 2021 Annual Report: Part I - Item 1A - Risk Factors - Market and Liquidity Risks - Changes to and replacement of the LIBOR benchmark interest rate could adversely affect our business, financial condition, and results of operations; and - We use derivatives to manage interest-rate risk, however, we could be unable to enter into effective derivative instruments on acceptable terms. 54
Table of Contents Table 15 - Financial Instruments with LIBOR Exposure at
March 31, 2022(dollars in thousands) Terminates in Due/Terminates in Due/Terminates after 2022 2023, through June 30 June 30, 2023 Total
Assets exposed to LIBOR
Investment securities, par amount by contractual maturity Non-MBS $ - $ - $ 12,210
$ 12,210MBS(1) - - 468,058 468,058 Total investment securities $ - $
LIBOR-indexed interest-rate swaps, notional amount Receive leg Cleared
$ 33,000$ 12,000 $ 25,750 $ 70,750Uncleared 155,000 231,600 350,900 737,500
Total interest rate swaps, receiving leg
243,600 $ 376,650
$ 808,250Pay leg Cleared $ 137,220$ - $ - $ 137,220_______________________
(1)Balances are presented according to the contractual maturity date and do not
reflect scheduled or unscheduled principal repayments of the underlying mortgage
Table 16 - Variable Rate Financial Instruments by Interest-Rate Index (dollars in thousands) Par Value of Par Value of Par Value of Par Value of Advances Non-MBS MBS CO Bonds LIBOR $ -
$ 12,210 $ 468,058$ - SOFR 312,500 - 948,563 3,903,000 FHLBank discount note auction rate 1,414,375 - - - Constant Maturity Treasury - - 34,399 - Total $ 1,726,875 $ 12,210 $ 1,451,020 $ 3,903,000
CASH AND CAPITAL RESOURCES
Our financial structure is designed to enable us to expand and contract our assets, liabilities, and capital in response to changes in membership composition and member credit needs. Our primary source of liquidity is our access to the capital markets through CO issuance, which is described in Part I - Item 1 - Business - Consolidated Obligations of the 2021 Annual Report. Outstanding COs and the condition of the market for COs are discussed below under - Debt Financing - Consolidated Obligations. Our equity capital resources are governed by our capital plan, certain portions of which are described under - Capital below as well as by applicable legal and regulatory requirements.
We are required to maintain liquidity in accordance with the
FHLBank Act, FHFA regulations and guidance, and policies established by our management and board of directors. We seek to be in a position to meet the credit and liquidity needs of our members and to meet all current and future financial commitments by managing liquidity positions to maintain stable, reliable, and cost-effective sources of funds while taking into account market conditions, member demand, and the maturity profile of our assets and liabilities. 55 -------------------------------------------------------------------------------- Table of Contents We may not be able to predict future trends in member credit needs because they are driven by complex interactions among a number of factors, including members' asset growth or reductions, deposit growth or reductions, and the attractiveness of advances compared to other wholesale borrowing alternatives. We regularly monitor current trends, anticipate future debt issuance needs and maintain a portfolio of highly liquid assets in an effort to be prepared to fund our members' credit needs and our investment opportunities. We are generally able to expand our CO debt issuance in response to our members' increased credit needs for advances and to increase our acquisitions of mortgage loans. Alternatively, in response to reduced member credit needs, we may allow our COs to mature without replacement, transfer debt to another FHLBank, or repurchase and retire outstanding COs, or redeem callable COs on eligible redemption dates, allowing our balance sheet to shrink. Sources and Uses of Liquidity. Our primary sources of liquidity are proceeds from the issuance of COs and advance repayments, and maturing short-term investments, as well as cash and investment holdings that are primarily high-quality, short- and intermediate-term financial instruments. During the three months ended March 31, 2022, we maintained continual access to funding and adapted our debt issuance to meet the needs of our members. Our primary uses of liquidity are advance originations and consolidated obligation payments. Other uses of liquidity are mortgage loan and investment purchases, dividend payments, general operating expenses, and other contractual payments. We also maintain liquidity to redeem or repurchase excess capital stock, through our daily excess stock repurchases, upon the request of a member or as required under our capital plan. Secondary sources of liquidity include payments collected on mortgage loans, proceeds from the issuance of capital stock, and deposits from members. In addition, under the FHLBank Act, the U.S. Treasurymay purchase up to $4 billionof FHLBank COs. The terms, conditions, and interest rates in such a purchase would be determined by the U.S. Treasury. This authority may be exercised at the discretion of the U.S. Treasurywith the agreement of the FHFA only if alternative means cannot be effectively employed to permit members of the FHLBanks to continue to supply reasonable amounts of funds to the mortgage market, and the ability to supply such funds is substantially impaired because of monetary stringency and a high level of interest rates. There were no such purchases by the U.S. Treasuryduring the quarter ended March 31, 2022. For information and discussion of our guarantees and other commitments we may have, see below - Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations. For further information and discussion of the joint and several liability for FHLBank COs, see below - Debt Financing - Consolidated Obligations.
Internal sources of liquidity / Liquidity management
We have developed a methodology and policies by which we measure and manage
The Bank’s short-term liquidity needs based on projected net cash flows and
Net Cash Flow. We define projected net cash flow as projected sources of funds less projected uses of funds based on contractual maturities or expected option exercise periods, and settlement of committed assets and liabilities, as applicable. For mortgage-related cash flows and callable debt, we incorporate projected prepayments and call exercise. Liquidity Management Action Trigger. We maintain a liquidity management action trigger pertaining to projected net cash flow: if projected net cash flow falls below zero on or before the 21st day following the measurement date, then management of the Bank is notified and determines whether any corrective action is necessary. We did not exceed this threshold at any time during the three months ended March 31, 2022. 56 -------------------------------------------------------------------------------- Table of Contents Table 17 - Projected Net Cash Flow(dollars in thousands) As of March 31, 2022 21 Days Uses of funds Interest payable $ 10,738 Maturing liabilities 2,038,000 Committed asset settlements 204,800 Capital outflow 177,739 MPF delivery commitments 9,889 Other 31,676 Gross uses of funds 2,472,842 Sources of funds Interest receivable 30,261 Maturing or projected amortization of assets
Committed liability settlements
Cash and due from banks and interest bearing deposits 247,855 Gross sources of funds 5,046,613 Projected net cash flow $ 2,573,771 Base Case Liquidity Requirement. The Bank is subject to FHFA guidance on liquidity, Advisory Bulletin 2018-07 (
Liquidity Guidance AB), which communicates the FHFA's expectations with respect to the maintenance of sufficient liquidity to enable us to provide advances and letters of credit for members for a specified time without access to the capital markets or other unsecured funding sources. The Liquidity Guidance ABprovides guidance on the level of on-balance sheet liquid assets related to base case liquidity. As part of the base case liquidity measure, the guidance also includes a separate provision covering off-balance sheet commitments from standby letters of credit. In addition, the Liquidity Guidance ABprovides guidance related to asset/liability maturity funding gap limits. Under the Liquidity Guidance AB, FHLBanks are required to hold positive cash flow while rolling over maturing advances to all members and assuming no access to capital markets for a period of time between 10 and 30 calendar days, with a specific measurement period set forth in a supervisory letter. The Liquidity Guidance ABalso sets forth the initial cash flow assumptions and formula to calculate base case liquidity. With respect to standby letters of credit, the guidance states that FHLBanks should maintain a liquidity reserve of between one percent and 20 percent of its outstanding standby letters of credit commitments, as specified in a supervisory letter.
We were in compliance with the base case liquidity requirement at all times
in the three months ended
Balance Sheet Funding
Gap Policy. We may use a portion of the short-term COs issued to fund assets with longer terms, including longer-term floating-rate assets. Funding longer-term floating-rate assets with shorter-term liabilities generally does not expose us to significant interest-rate risk because the interest rates on both the floating-rate assets and liabilities typically reset similarly (either through rate resets or re-issuance of the obligations). However, deviations in the cost of our short-term liabilities relative to resetting assets can cause fluctuations in our net interest margin. Additionally, the Bank is exposed to refinancing risk since, over certain time horizons, it has more liabilities than assets maturing. In order to manage the Bank's refinancing risk, we maintain a policy that limits the potential difference between the amount of financial assets and the amount of financial liabilities expected to mature within three-month and one-year time horizons inclusive of projected mortgage-related prepayment activity. We measure this difference, or gap, as a percentage of total assets under two different measurement horizons - three months and one year. In conformity with the provisions of the 57 -------------------------------------------------------------------------------- Table of Contents Liquidity Guidance AB, the Bank has instituted a limit and management action trigger framework around these metrics as follows:
Table 18 – Measure of financing gap
Three-Month Average Three-Month Average Funding Gap Metric (1) Limit Management Action Trigger March 31, 2022 December 31, 2021 3-month Funding Gap 15% 13% (7.4) % (8.2) % 1-year Funding Gap 30% 25% (0.3) % (0.5) % _______________________
(1) The funding gap measure is a positive value when maturing liabilities exceed
maturing assets, as defined, during the given period. Compliance with
Limits and triggers for management action are assessed against the
three-month average of month-end funding gaps.
External sources of liquidity
Amended and Restated FHLBanks P&I Funding Contingency Plan Agreement. We have a source of emergency external liquidity through the Amended and Restated FHLBanks P&I Funding Contingency Plan Agreement. Under the terms of that agreement, in the event we do not fund principal and interest payments due with respect to any CO for which issuance proceeds were allocated to us within deadlines established in the agreement, the other FHLBanks will be obligated to fund any shortfall to the extent that any of the other FHLBanks has a net positive settlement balance (that is, the amount by which end-of-day proceeds received by such FHLBank from the sale of COs on that day exceeds payments by such FHLBank on COs on the same day) in its account with the
Office of Financeon the day the shortfall occurs. We would then be required to repay the funding to the other FHLBanks. We have never drawn funding under this agreement, nor have we ever been required to provide funding to another FHLBank under this agreement.
Debt Financing – Consolidated Bonds
March 31, 2022, and December 31, 2021, outstanding COs for which we are primarily liable, including both CO bonds and CO discount notes, totaled $28.9 billion. CO bonds outstanding for which we are primarily liable at March 31, 2022, and December 31, 2021, include issued callable bonds totaling $14.6 billionand $12.8 billion, respectively. CO discount notes comprised 9.9 percent and 7.9 percent of the outstanding COs for which we are primarily liable at March 31, 2022, and December 31, 2021, respectively, but accounted for 94.5 percent and 94.4 percent of the proceeds from the issuance of such COs during the three months ended March 31, 2022and 2021, respectively. Overall, we continued to experience strong demand for COs among investors. We have been able to issue debt in the amounts and structures required to meet our funding and risk-management needs. For most of the period covered by this report, COs were issued at yields that were historically competitive versus those of comparable-term U.S. Treasurysecurities. COs continue to be issued at yields that are at or lower than SOFR for comparable short-term maturities. However, periodic threats of Congressional failure to raise the U.S. Treasurydebt ceiling raise the potential for defaults on U.S. Treasurydebt, which could have impacts on demand for and pricing of CO debt. The Federal Reserve'srecent signaling of inflation concerns and potential changes to its repurchase agreement offerings, purchases of U.S. Treasurysecurities and U.S. Agencymortgage-backed securities, as well as the previous establishment of liquidity facilities, are potentially important factors that could continue to shape investor demand for debt, including COs. Moreover, increases in U.S. Treasurysecurity issuance in response to higher fiscal deficits following fiscal stimulus programs underlying the CARES Act, American Rescue Plan Act, and any similar future legislation or any change or roll back of regulations governing money market investors may also have an impact on our funding costs. Capital
Total capital at
end of year 2021.
Capital stock decreased by
$24.2 millionduring the three months ended March 31, 2022, resulting from capital stock repurchases of $146.0 millionoffset by the issuance of $121.9 millionof capital stock. 58 -------------------------------------------------------------------------------- Table of Contents The FHLBank Actand FHFA regulations specify that each FHLBank is required to satisfy certain minimum regulatory capital requirements. We were in compliance with these requirements at March 31, 2022, as discussed in Part 1- Item 1 - Notes to the Financial Statements - Note 10 - Capital. Table 19 - Mandatorily Redeemable Capital Stock by Expiry of Redemption Notice Period (dollars in thousands) March 31, 2022 December 31, 2021 Past redemption date (1) $ 2,994 $ 3,138 Due in one year or less 112 92 Due after one year through two years 10
Due after two years through three years 435
Due after three years through four years 836
Due after four years through five years 9,031 9,721 Total
$ 13,418$ 13,562 _______________________ (1) Amount represents mandatorily redeemable capital stock that has reached the end of the five-year redemption-notice period but the member-related activity (for example, advances) remains outstanding. Accordingly, these shares of stock will not be redeemed until the activity is no longer outstanding.
The FHFA's regulation on FHLBank capital classification and critical capital levels (the Capital Rule), among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. The Capital Rule requires the Director of the FHFA to determine on no less than a quarterly basis the capital classification of each FHLBank. By letter dated
March 29, 2022, the Director of the FHFA notified us that, based on December 31, 2021financial information, we met the definition of adequately capitalized under the Capital Rule.
Internal capital practices and policies
We also take steps as we believe prudent beyond legal or regulatory requirements in an effort to ensure capital adequacy, reflected in our internal minimum capital requirement, which exceeds regulatory requirements, our minimum retained earnings target, and limitations on our dividends.
Minimum Internal Required Capital Exceeding Regulatory Requirements
To provide protection for our capital base, we maintain an internal minimum capital requirement whereby the amount of paid-in capital stock and retained earnings (together, our actual regulatory capital) must be at least equal to the sum of 4 percent of our total assets plus an amount we measure as our risk exposure with 99 percent confidence using our economic capital model (together, our internal minimum capital requirement). As of
March 31, 2022, this internal minimum capital requirement equaled $1.8 billion, which was satisfied by our actual regulatory capital of $2.5 billion.
Minimum retained earnings target
March 31, 2022, we had total retained earnings of $1.6 billioncompared with our minimum retained earnings target of $700.0 million. We generally view our minimum retained earnings target as a floor for retained earnings rather than as a retained earnings limit and expect to continue to grow our retained earnings modestly even though we exceed the target. For information on limitations on dividends, including limitations when we are under our minimum retained earnings target, see Part II - Item 5 - Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securitiesin the 2021 Annual Report.
Redemption of excess inventory
We have the authority, but are not obligated, to repurchase excess inventory, such as
referred to in Part I – Item 1 – Businesses – Capital Resources – Redemption of
Excess stock in the 2021 annual report.
Table 20 - Capital Stock Requirements and Excess Capital Stock (dollars in thousands) Outstanding Membership Stock Activity-Based Total Stock Class B Investment Stock Investment Investment Capital Stock Excess Class B Requirement(1) Requirement Requirement (2) (3) Capital Stock March 31, 2022 $ 316,072 $ 449,068
$ 765,162 $ 942,901 $ 177,739December 31, 2021 429,353 505,264 934,638 967,200 32,562
(1) Pursuant to our Capital Plan of the
Federal Home Loan Bank of BostonAmended and Restated as of December 31, 2021, the membership stock investment requirement changed from 0.20 percent of the Membership Stock Investment Base to 0.05 percent of total assets. The change was intended to reduce the aggregate membership stock investment requirement.
(2) The total equity investment requirement is rounded to the nearest
individual member basis.
(3) Outstanding Class B share capital includes mandatory redeemable capital
To facilitate our ability to maintain a prudent level of capitalization and an efficient capital structure, while providing for an equitable allocation of excess stock ownership among members, we conduct daily repurchases of excess stock from any shareholder whose excess stock exceeds the lesser of
$3 millionor 3 percent of the shareholder's total stock investment requirement, subject to the minimum repurchase of $100,000. We plan to continue with this practice, subject to regulatory requirements and our anticipated liquidity or capital management needs, although continued repurchases remain at our sole discretion, and we retain authority to make adjustments to our excess stock repurchase practices subject to notice requirements defined in our Capital Plan, or to suspend repurchases of excess stock from any shareholder or all shareholders without prior notice.
Restricted retained earnings
March 31, 2022, our restricted retained earnings amount was $368.4 million, which exceeds the required contribution to the restricted retained earnings account of $291.0 million. No allocation of net income was made to restricted retained earnings in 2021 and no further allocations of net income into restricted retained earnings are required until such time as the contribution requirement exceeds the balance of restricted retained earnings.
Off-balance sheet arrangements and global contractual obligations
Our principal off-balance sheet arrangements include the following:
• commitments that require us to make additional advances;
• standby letters of credit;
• advance commitments on unused credit lines; and
• CO not regulated.
Off-balance sheet arrangements are discussed in more detail in Section 1 – Financial
Financial statements – Notes to the financial statements – Note 13 – Commitments and
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with 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 and expenses during the reported periods. Although management believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ. We have identified three accounting estimates that we believe are critical because they require us 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 estimates include accounting for derivatives, the use of fair-value estimates, and accounting for deferred premiums and discounts on prepayable assets. The Audit Committee of our board of directors has reviewed these estimates. The assumptions involved in applying these policies are discussed in 60 -------------------------------------------------------------------------------- Table of Contents Part II - Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates in the 2021 Annual Report. As of
March 31, 2022, we have not made any significant changes to the estimates and assumptions used in applying our critical accounting policies and estimates from those used to prepare our audited financial statements.
RECENT ACCOUNTING DEVELOPMENTS
See Item 1 - Financial Statements - Notes to the Financial Statements - Note 2 - Recently Issued and Adopted Accounting Guidance for a discussion of recent accounting developments impacting or that could impact us.
LEGISLATIVE AND REGULATORY CHANGES
We summarize some important legislative and regulatory measures and
developments for the period covered by this report below.
SEC Proposed Rule on Climate-related Disclosures. On
March 21, 2022, the SECissued a proposed rule on climate-related disclosures that would require the Bank to disclose its: (i) direct and certain indirect greenhouse gas emissions; (ii) if applicable, climate transition plan, climate-related targets and progress toward such plan or targets; (iii) climate-related risks over various time horizons and their impacts on the Bank's business; (iv) climate-related risks in qualitative and quantitative terms in the notes to the Bank's financial statements; and (v) corporate governance of climate-related risks and risk management processes. If the proposed rule is finalized without change, the Bank would be subject to certain disclosure requirements for its annual report for fiscal year 2024 and additional disclosure requirements for its annual report for fiscal year 2025. We continue to review the proposed rule, but we expect that it would result in increased costs and complexity associated with our SECreporting. While we are unable to quantify the anticipated costs at this time, we expect that compliance would require operational enhancements impacting many aspects of our business. The Bank is unable to predict at this time whether the SECwill finalize the proposed rule, or the extent to which any final rule will deviate from the proposed rule. Amendment to FINRA Rule 4210: Margining of Covered Agency Transactions. On February 25, 2022, the Financial Industries Regulatory Authority(FINRA) extended the implementation date of its amendments to FINRA Rule 4210 delaying the effectiveness of margining requirements for covered agency transactions until October 26, 2022. On April 14, 2022, the SECgranted a petition for review of the amendments thereby staying the effectiveness of the amendments until the petition is resolved. Once the margining requirements are effective, the Bank may be required to collateralize its transactions that are covered agency transactions, which include to be announced transactions (TBAs). These collateralization requirements could have the effect of reducing the overall profitability of engaging in covered agency transactions, including TBAs. Further, any collateralization requirements would expose us to credit risk from our counterparties to such transactions. We do not expect this amended rule to have a material effect on our financial condition or results of operations. LIBOR Transition. On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act was signed into law. This law provides a statutory fallback mechanism and safe harbor that apply on a nationwide basis to replace LIBOR with a benchmark rate selected by the Federal Reserve Boardbased on SOFR for certain contracts that reference LIBOR and contain no or insufficient fallback provisions, including fallback rates that are in any way based on LIBOR. This law will also pre-empt state LIBOR statutes, such as Article 18-C of the New York General Obligations Law. We do not expect this rule to have a material effect on our financial condition or results of operations.