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FEDERAL HOME LOAN BANK OF BOSTON – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
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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 forward-looking
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 fromU.S. fiscal and monetary policy, actions of theFederal Open Market Committee (FOMC), or changes in credit ratings of theU.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 theFHLBank System and 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 theFHLBank 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 fromFederal Reserve monetary 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 consistent with past practices as well
as any plans to repurchase excess capital stock, and any amendments to our
capital plan;
•competitive forces including, without limitation, other sources of funding
available to our members and other entities borrowing funds in the capital
markets;
•changes in the value and liquidity of collateral we hold as security 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 conditions and changes, including changes resulting from member
failures, mergers or changing financial health, changes due to member
eligibility, changes in the principal place of business of members, or the
addition of new members;
•external events, such as general economic and financial instabilities, political instability, wars, including hostilities and sanctions related to the war betweenRussia andUkraine , 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
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cause us to experience losses or be exposed to a greater risk that pledged
collateral would be inadequate in the event of a 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 skilled employees, including our key
personnel.
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.
EXECUTIVE SUMMARY
Net income for the three months endedMarch 31, 2022 , was$27.8 million , compared with net income of$20.9 million for the same period in 2021. The increase in net income was driven by a decrease of$14.2 million in net unrealized losses on trading securities and a decline of$3.0 million in losses on early extinguishment of debt. These increases to net income were partially offset by a$5.4 million increase in our voluntary contribution to the Affordable Housing Program, a decrease of$2.5 million in net interest income after provision for credit losses, and a$1.6 million increase 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 million to the Affordable Housing Program in the three months endedMarch 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 forNew England , Helping to HouseNew 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 billion atMarch 31, 2022 , an increase of$22.7 million fromDecember 31, 2021 , and equals 4.85 percent of total assets atMarch 31, 2022 . We continue to satisfy all regulatory capital requirements as ofMarch 31, 2022 . OnApril 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 inMarch 2020 , and the response of theU.S. government and theFederal Reserve through 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 ofMarch 31, 2022 , and results of operations for the three months endedMarch 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 theFHLBank System has 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 endedMarch 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 billion atMarch 31, 2022 , compared to$12.3 billion atDecember 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 endedMarch 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 endedMarch 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 billion to$32.0 billion for the three months endedMarch 31, 2022 , from$36.0 billion for 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.
LIBOR Transition Preparations
The Alternative Reference Rates Committee (ARRC), which was established in 2014 by theFederal Reserve and theFederal Reserve Bank of New York to help ensure a successful transition in theU.S. from LIBOR, recommended SOFR as the alternative reference rate toU.S. dollar LIBOR. For details regarding the Bank's transition from LIBOR to SOFR, the alternative reference rate toU.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 .
ECONOMIC CONDITIONS
Economic Environment
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. InApril 2022 , employment increased by 428,000 and the unemployment rate was 3.6 percent. InMarch 2022 , the unemployment rate for theNew England region was 4.0 percent, ranging from 2.5 percent inNew Hampshire to 4.6 percent inConnecticut .
The Consumer Price Index increased 8.3 percent in
earlier, driven by prices of shelter, food, airline fares, and new vehicles.
The FHFA reported that house prices rose 19.4 percent across theU.S. fromFebruary 2021 toFebruary 2022 . Over the same period, home prices inNew England rose 17.6 percent. At the end ofApril 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 OnMay 4, 2022 , theFOMC raised 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. TheFOMC also stated that it expects to begin reducing its holdings ofTreasury securities, agency debt, and agency mortgage-backed securities onJune 1, 2022 . Once balance sheet reduction begins, theFederal Reserve will reinvest principal payments from its securities holdings only if they exceed monthly caps. TheFederal Reserve's announcement 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 inMarch 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 theFederal Reserve .
Table 1 - Key Interest 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 statement of condition and statement
of operations for
financial statements. Financial highlights for the quarter-ends have been
derived from our unaudited financial statements.
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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 $ 36,676,723
Investments(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
32,631,627
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
1,181,665
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 $ 61,484 Other 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 $ 20,885 Other Information Dividends declared$ 5,137 $ 5,425 $ 4,290$ 4,631 $ 5,351 Dividend 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 available-for-sale securities, held-to-maturity
securities, trading securities, interest-bearing deposits, securities purchased
under agreements to resell and federal funds sold.
(2)The allowance for credit losses for mortgage loans amounted to$1.6 million as ofMarch 31, 2022 ,$1.7 million as ofDecember 31, 2021 ,$2.1 million as ofSeptember 30, 2021 ,$2.1 million as ofJune 30, 2021 , and$1.9 million as ofMarch 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 onJune 1, 2017 .
(4)Weighted-average dividend rate is the dividend amount declared divided by the
average daily balance of capital stock eligible for dividends.
(5)Return on average equity is net income divided by the total of the average
daily balance of outstanding Class B capital stock, accumulated 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 million for the three months endedMarch 31, 2022 , from$20.9 million for 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 endedMarch 31, 2022 , was$58.9 million , compared with$61.5 million for the same period in 2021. The$2.5 million decrease in net interest income after provision for credit losses was driven by a$6.8 million decrease in net prepayment fee income, a$5.2 billion decrease in the average balance of advances and a$785.5 million decrease 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 billion increase in the average balance of mortgage backed securities, a$1.6 billion increase in the average balance ofU.S. Treasury securities, 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 endedMarch 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 major categories of average balances, related interest
income/expense, and average yields/rates for interest-earning assets and
interest-bearing liabilities. Our primary source of earnings is net interest
income, which is the interest earned on advances, mortgage loans, and
investments less interest paid on COs, deposits, and other sources of funds.
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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 $ 34,907 1.14 % $ 17,639,366 $ 57,285 1.32 %
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 $ 103,443 1.29 % $ 36,775,792 $ 124,314 1.37 %
Liabilities and capital
Consolidated obligations
Discount notes $ 2,304,476 $ 607 0.11 % $ 11,298,752 $ 2,402 0.09 %
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 $ 44,601 0.56 % $ 36,775,792 $ 64,056 0.71 %
Net interest income $ 58,842 $ 60,258
Net interest spread 0.70 % 0.63 %
Net interest margin 0.74 % 0.68 %
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(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 endedMarch 31, 2022 and 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 Ended
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 Advances Outstanding
The average balance of total advances decreased$5.2 billion , or 29.7 percent, for the three months endedMarch 31, 2022 compared 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 endedMarch 31, 2022 and 2021, net prepayment fees on advances were$914 thousand and$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 Balance of Investments
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 endedMarch 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 theFOMC's increase 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 endedMarch 31, 2021 , to 0.16 percent during the three months endedMarch 31, 2022 , while average yields on securities purchased under agreements to resell increased from 0.07 percent for the three months endedMarch 31, 2021 , to 0.13 percent for the three months endedMarch 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 endedMarch 31, 2022 , compared with the same period in 2021, an increase consisting primarily of$1.9 billion in MBS and$1.6 billion inU.S. Treasury obligations.
Average Balance of COs
Average CO balances decreased$3.9 billion , or 11.8 percent, for the three months endedMarch 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 billion in CO discount notes offset by a$5.1 billion increase in CO bonds. 44
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The average balance of CO discount notes represented approximately 8.0 percent of total average COs during the three months endedMarch 31, 2022 , compared with 34.6 percent of total average COs during the three months endedMarch 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 endedMarch 31, 2022 and 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 earnings.
Table 5 - Effect of Derivative 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) - -
(673)
Net gains (losses) on derivatives and hedging activities 1 (1) (673) - -
(673)
Net losses on trading securities - (425) - - -
(425)
Total net effect of derivatives and hedging activities$ (8,857) $ (23,526) $ (829)$ 26,334 $ -$ (6,878) 45
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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) $ - $
(1,825)
Gains on designated fair-value hedges 1,018 7,613 - 233 -
8,864
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)
(848)
Net losses on trading securities - (14,861) - - -
(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
income.
(3) Represents the amount for derivatives for which variation margin, or
payments made for the changes in the market value of the transaction, is
characterized as a daily settlement amount.
FINANCIAL CONDITION Advances AtMarch 31, 2022 , the advances portfolio totaled$11.8 billion , a decrease of$523.6 million from$12.3 billion atDecember 31, 2021 . The demand for advances experienced further reduction during the quarter, as member deposit levels continued to be elevated. 46 -------------------------------------------------------------------------------- Table of Contents Table 6 - Advances Outstanding by Product Type (dollars in thousands) March 31, 2022 December 31, 2021 Par Value Percent of Total Par Value Percent of Total Fixed-rate advances Long-term$ 6,849,626 57.4 %$ 6,511,706 52.7 % 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$ 11,924,840 100.0 %$ 12,347,705 100.0 % ________________________
(1) Includes floating-rate advances that may be contractually prepaid by the
borrower on a floating-rate reset date without incurring prepayment or
termination fees.
See Item 1 - Financial Statements - Notes to the Financial
Statements - Note 4 - Advances for disclosures relating to redemption
terms of the advances 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 theFHLBank Act from making advances without sufficient collateral. We have never experienced a credit loss on an advance.
We assign each non-insurance company borrower to one of the following three
credit status categories based on our assessment of the borrower's overall
financial condition and other factors:
Category-1: Members that are generally in satisfactory financial condition;
Category-2: Members that show financial weakness or weakening financial trends
in key financial indices and/or regulatory findings; and
Category-3: Members with financial weaknesses that present an elevated level of
concern.
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.
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Table 7 - Advances Outstanding 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 $ 86,371,160 1,253.3 %
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 $ 93,650,603 785.3 %
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 the credit status category of a member from time to time
based on the financial reviews and other circumstances of the member.
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)
$ 2,100,000 17.6 % 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 inNewburyport and its Vicinity 400,837 3.4 1.75
Total of top five advance-borrowing institutions
40.0 %
December 31, 2021
Par Value of Percent of Total Par
Name Advances
Value of Advances Weighted-Average Rate (1)
$ 1,500,000 12.1 % 1.62 % Voya Retirement Insurance and Annuity Company 925,000 7.5 0.48 Hingham Institution for Savings 665,000 5.4 0.28 SalemFive Cents Savings Bank 580,392 4.7 0.27 Peoples United Bank 562,750 4.6 0.39
Total of top five advance-borrowing institutions
34.3 %
_______________________
(1) Weighted-average rates are based on the contract rate of each advance
without taking into consideration the effects of interest-rate-exchange
agreements that we may use as hedging instruments.
Investments
48 -------------------------------------------------------------------------------- Table of Contents AtMarch 31, 2022 , investment securities and short-term money-market instruments totaled$16.8 billion , an increase of$476.8 million from$16.4 billion atDecember 31, 2021 . Short-term money-market investments increased$782.0 million to$3.6 billion atMarch 31, 2022 , compared withDecember 31, 2021 . The increase was attributable to increases of$600.0 million in securities purchased under agreements to resell and$222.0 million in federal funds sold offset by a decrease of$40.0 million in interest bearing deposits. Investment securities declined$305.2 million to$13.2 billion atMarch 31, 2022 , compared with$13.5 billion atDecember 31, 2021 . This was attributable to decreases of$163.8 million in MBS and$73.2 million inU.S. Treasury obligations.
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 byU.S. agencies,U.S government-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 ofMarch 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 byU.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
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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 ofMarch 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. Issue ratings are
obtained from Moody's, Fitch, and S&P. If there is a split rating, the lowest
rating 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.
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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$ 45,160 $
85,153
Federal funds sold 2,166,000
1,944,000
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 further
described under - Mortgage Loans Credit Risk and in Part I - Item 1 - Business -
Business Lines - Mortgage Loan Finance in the 2021 Annual Report.
As ofMarch 31, 2022 , our mortgage loan investment portfolio totaled$3.0 billion , a decrease of$121.5 million fromDecember 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 endedMarch 31, 2022 , has been elevated and has outpaced our purchases of mortgage loans.
Mortgage Loans Credit Risk
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 ofMarch 31, 2022 , see Item I - Financial Statements - Note 5 - Mortgage Loans Held for Portfolio in this report.
Although our mortgage loan portfolio includes loans throughout the
concentrations of 5 percent or greater of the outstanding principal balance of
our conventional mortgage loan portfolio are shown in Table 12.
Table 11 - State Concentrations by Outstanding Principal Balance
Percentage of Total Outstanding Principal Balance
of Conventional Mortgage Loans
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.
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Table 12 - Mortgage Loans - Risk Elements and Credit Losses
(dollars in thousands)
For the
Three Months Ended
2022 2021
Average par value of mortgage loans outstanding during the
period ending
$ 3,000,274 $ 3,772,228 Net 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 $ 3,072,075 Nonaccrual loans, par value 17,004 21,384 Allowance for credit losses on mortgage loans 1,600 1,700
Allowance for credit losses to mortgage loans held for
portfolio
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 ofMarch 31, 2022 , we were the beneficiary of PMI coverage of$65.8 million on$251.6 million of 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 information regarding our COs.
Derivative Instruments
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 million and$378.5 million as ofMarch 31, 2022 , andDecember 31, 2021 , respectively. Derivative liabilities' net fair value, net of cash collateral and accrued interest, totaled$29.3 million and$38.9 million as ofMarch 31, 2022 , andDecember 31, 2021 , respectively. The following table presents a summary of the notional amounts and estimated fair values of our outstanding derivatives, excluding accrued interest, and related hedged item by product and type of accounting treatment as ofMarch 31, 2022 , andDecember 31, 2021 . The notional amount represents the hypothetical principal basis used to determine periodic interest payments received and paid. However, the notional amount does not represent an actual amount exchanged or our overall exposure to credit and market risk. 52
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Table 13 - Hedged Item and Hedge-Accounting Treatment
(dollars in thousands)
March 31, 2022 December 31, 2021
Notional Fair Notional Fair
Hedged Item Derivative Designation(2) Amount Value
Amount Value Advances (1) Swaps Fair value$ 3,183,770 $ 4,992 $ 2,693,195 $ 1,800 Swaps 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 $ 339,588 Derivative asset$ 410,500 $ 378,532 Derivative liability (29,273) (38,944) Net derivatives$ 381,227 $ 339,588
_______________________
(1) As ofMarch 31, 2022 andDecember 31, 2021 , embedded derivatives separated from certain advance contracts with notional amounts of$329.8 million and$345.4 million , respectively, and fair values of$5.0 million and$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 Derivatives 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 information on our approach to the credit risks arising from our use of
derivatives, see Part II - Item 7 - Management's Discussion and Analysis and
Results of Operations - Financial Condition - Derivative Instruments -
Derivative Instruments Credit Risk in the 2021 Annual Report.
Transition from LIBOR to Alternative Reference Rates
OnMarch 5, 2021 , theUnited Kingdom's FCA confirmed that the publication of the principal tenors ofU.S. dollar LIBOR (i.e., overnight, one-month, three-month, six-month and 12-month LIBOR) will cease immediately following a final publication onJune 30, 2023 . As ofJanuary 1, 2022 , the one-week and two-monthU.S. dollar LIBOR settings and all non-U.S. dollar LIBOR settings ceased to be provided by any administrator. Although theFCA has indicated that it does not expect the remainingU.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 toU.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 afterJune 30, 2023 . Table 15 presents our exposure to LIBOR-indexed investment securities and LIBOR-indexed derivatives, atMarch 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
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Table of Contents Table 15 - Financial Instruments with LIBOR Exposure atMarch 31, 2022 (dollars in thousands) Terminates in Due/Terminates in Due/Terminates after 2022 2023, through June 30 June 30, 2023 Total
Assets with LIBOR exposure
Investment securities, par amount by contractual maturity Non-MBS $ - $ - $ 12,210$ 12,210 MBS(1) - - 468,058 468,058 Total investment securities $ - $
- $ 480,268
LIBOR-indexed interest-rate swaps, notional amount Receive leg Cleared$ 33,000 $ 12,000 $ 25,750$ 70,750 Uncleared 155,000 231,600 350,900 737,500
Total interest-rate swaps, receive leg
243,600 $ 376,650$ 808,250 Pay leg Cleared$ 137,220 $ - $ -$ 137,220 _______________________
(1)Balances are presented according to contractual maturity date and do not
reflect scheduled or unscheduled principal repayments of underlying mortgage
loans.
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
LIQUIDITY 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.
Liquidity
We are required to maintain liquidity in accordance with theFHLBank 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 endedMarch 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 theFHLBank Act , theU.S. Treasury may purchase up to$4 billion ofFHLBank COs . The terms, conditions, and interest rates in such a purchase would be determined by theU.S. Treasury . This authority may be exercised at the discretion of theU.S. Treasury with 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 theU.S. Treasury during the quarter endedMarch 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 forFHLBank COs , see below - Debt Financing - Consolidated Obligations.
Internal Liquidity Sources / 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 flow and
contingent obligations.
ProjectedNet 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 endedMarch 31, 2022 . 56 -------------------------------------------------------------------------------- Table of Contents Table 17 - ProjectedNet 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
4,383,585
Committed liability settlements
384,912
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 AB provides 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, theLiquidity Guidance AB provides guidance related to asset/liability maturity funding gap limits. Under theLiquidity 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 AB also 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
during the three months ended
Balance Sheet FundingGap 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 ContentsLiquidity Guidance AB , the Bank has instituted a limit and management action trigger framework around these metrics as follows:
Table 18 - Funding Gap Metric
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 metric is a positive value when maturing liabilities exceed
maturing assets, as defined, within the given time period. Compliance with
Limits and Management Action Triggers are evaluated against the rolling
three-month average of the 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 theOffice of Finance on 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 Obligations
At bothMarch 31, 2022 , andDecember 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 atMarch 31, 2022 , andDecember 31, 2021 , include issued callable bonds totaling$14.6 billion and$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 atMarch 31, 2022 , andDecember 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 endedMarch 31, 2022 and 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-termU.S. Treasury securities. 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 theU.S. Treasury debt ceiling raise the potential for defaults onU.S. Treasury debt, which could have impacts on demand for and pricing of CO debt. TheFederal Reserve's recent signaling of inflation concerns and potential changes to its repurchase agreement offerings, purchases ofU.S. Treasury securities andU.S. Agency mortgage-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 inU.S. Treasury security 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
year-end 2021.
Capital stock decreased by$24.2 million during the three months endedMarch 31, 2022 , resulting from capital stock repurchases of$146.0 million offset by the issuance of$121.9 million of capital stock. 58 -------------------------------------------------------------------------------- Table of ContentsThe FHLBank Act and 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
30
Due after two years through three years 435
-
Due after three years through four years 836
581
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.
Capital Rule
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 datedMarch 29, 2022 , the Director of the FHFA notified us that, based onDecember 31, 2021 financial 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.
Internal Minimum Capital Requirement in Excess of 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 ofMarch 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
AtMarch 31, 2022 , we had total retained earnings of$1.6 billion compared 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 ofEquity Securities in the 2021 Annual Report.
Repurchases of Excess Stock
We have the authority, but are not obliged, to repurchase excess stock, as
discussed under Part I - Item 1 - Business - Capital Resources - Repurchase of
Excess Stock in the 2021 Annual Report.
59
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Table of Contents
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 $ 177,739
December 31, 2021 429,353 505,264 934,638 967,200 32,562
_______________________
(1) Pursuant to our Capital Plan of theFederal Home Loan Bank of Boston Amended and Restated as ofDecember 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) Total stock investment requirement is rounded up to the nearest
individual member basis.
(3) Class B capital stock outstanding includes mandatorily redeemable capital
stock.
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 million or 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
AtMarch 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 Aggregate Contractual Obligations
Our significant off-balance-sheet arrangements consist of the following:
• commitments that obligate us for additional advances;
• standby letters of credit;
• commitments for unused lines-of-credit advances; and
• unsettled COs.
Off-balance-sheet arrangements are more fully discussed in Item 1 - Financial
Statements - Notes to the Financial Statements - Note 13 - Commitments and
Contingencies .
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 DEVELOPMENTS
We summarize certain significant legislative and regulatory actions and related
developments for the period covered by this report below.
SEC Proposed Rule on Climate-related Disclosures. OnMarch 21, 2022 , theSEC issued 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 ourSEC reporting. 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 theSEC will 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. OnFebruary 25, 2022 , theFinancial 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 untilOctober 26, 2022 . OnApril 14, 2022 , theSEC granted 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. OnMarch 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 theFederal Reserve Board based 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.
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