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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 37
Executive Summary 39
Economic Conditions 40
Selected Financial Data 41
Results of Operations 43
Financial Condition 48
Liquidity and Capital Resources 57
Critical Accounting Estimates 62
Recent Accounting Developments 63
Legislative and Regulatory Developments 63
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, 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 38
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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 and other 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 endedJune 30, 2022 , was$41.0 million , compared with net income of$6.2 million for the same period in 2021. The increase in net income was driven by an increase of$26.3 million in net interest income after provision for credit losses, a decrease of$14.3 million in net losses on trading securities and a decline of$1.5 million in losses on early extinguishment of debt. These increases to net income were partially offset by a$7.6 million increase in contributions to the Affordable Housing Program, compared to the same period in 2021. The$26.3 million increase in net interest income after provision for credit losses during the second quarter of 2022 was due to a$9.9 billion increase in average total earning assets and a significant increase in interest rates due to aggressive monetary policy tightening by theFederal Reserve . The increase in average earning assets was driven primarily by a$5.7 billion increase in average advances balances, as demand for advances returned among depository members to near pre-pandemic levels. Additionally, the increase in net interest income after provision for credit losses was in part attributable to the correction of an error related to changes in fair value of certain available-for-sale securities that are in fair-value hedge relationships. As a result of this error, cumulatively from the second quarter of 2019 through the first quarter of 2022, net interest income after provision for credit losses was understated by$6.2 million . We determined the error did not have a material effect on our financial condition, results of operations, or cash flows for the impacted periods, and a correcting adjustment was recorded in interest income from available-for-sale securities in the second quarter of 2022. In support of our housing and community investment mission, the Bank made a voluntary contribution of$5.5 million to the Affordable Housing Program in the three months endedJune 30, 2022 . The increase in net income for the quarter endedJune 30, 2022 , correspondingly increased the Bank's statutory contributions to the Affordable Housing Program to a more meaningful level in the opinion of management compared to originally expected amounts. If this trend continues, the Bank expects that additional voluntary contributions to the Affordable Housing Program may be reduced or eliminated for the remainder of the year, but total contributions to AHP are expected to be significantly increased from the amount contributed in 2021. Additional information on this and other targeted affordable housing and community investment programs is provided in the 2021 Annual Report. Our retained earnings grew to$1.6 billion atJune 30, 2022 , an increase of$58.8 million fromDecember 31, 2021 , and equals 2.6 percent of total assets atJune 30, 2022 . We continue to satisfy all regulatory capital requirements as ofJune 30, 2022 . OnJuly 22, 2022 , our board of directors declared a cash dividend that was equivalent to an annual yield of 3.72 percent, increasing 163 basis points from the prior quarter's dividend. The annual yield of this dividend equals the approximate daily average of SOFR for the second quarter of 2022 plus 300 basis points, which is increased by 100 basis points from the prior quarter's dividend. 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. While the effects of high inflation and theFederal Reserve's aggressive monetary policy response, combined with weakening economic growth as measured by gross domestic product, present uncertainties about the future of the economy, the quarter endingJune 30, 2022 saw a sharp increase in demand for advances. During the first two quarters of 2022, advances balances increased to$30.3 billion atJune 30, 2022 , an increase of 145.7 percent from$12.3 billion atDecember 31, 2021 . This increase in advances was due to member depository institutions beginning to experience slowing growth or declines of deposit balances, an increase in 39 -------------------------------------------------------------------------------- Table of Contents lending by members to their customers, and rising interest rates and reduced market liquidity. These developments impacted our financial condition as ofJune 30, 2022 , and results of operations for the three months endedJune 30, 2022 . Generally, investor demand for high credit quality, fixed-income investments, including COs, continued to be strong relative to other investments. Significant growth in outstanding COs to fund advances growth throughout theFHLBank System has not diminished relative demand for COs. 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 endedJune 30, 2022 .
Advances Balances
We continue to deliver on our primary mission, supplying liquidity to our members. Advances balances totaled$30.3 billion atJune 30, 2022 , compared to$12.3 billion atDecember 31, 2021 . The significant increase in advances was concentrated in variable-rate advances and short-term fixed-rate advances, reflecting rising demand for wholesale funding at member institutions.
Net Interest Income, Margin, and Spread
For the three months endedJune 30, 2022 , net interest margin was 0.60 percent, an increase of 12 basis points from the same period in 2021, and net interest spread was 0.52 percent for the three months endedJune 30, 2022 , an increase of 8 basis points from the same period in 2021. The increases in net interest spread and net interest margin mainly reflect the impacts of increases in advances and investments and a rising rate environment. For the quarter endedJune 30, 2022 , average balances of advances and investments increased$5.7 billion and$4.8 billion , respectively, compared to the same period in 2021. Additionally, 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 increased$9.9 billion to$46.1 billion for the three months endedJune 30, 2022 , from$36.3 billion for the same period in 2021.
Legislative and Regulatory Developments
Legislation has been proposed 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 could affect the way we conduct business or could impact how we satisfy our mission as well as the value of our membership.
LIBOR Transition Preparations
For details regarding the Bank's transition from LIBOR to SOFR, the alternative reference rate toU.S. dollar LIBOR recommended by Alternative Reference Rates Committee (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 0.9 percent in
the second quarter of 2022, following a 1.6 percent decrease in the first
quarter. The contraction in the second quarter was driven mainly by decreases in
private inventory investment, residential fixed investment, and federal
government spending. Personal consumption expenditures increased at an annual
rate of 1.0 percent, driven by an increase in spending on services, partially
offset by a drop in spending on goods.
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The labor market continued to improve, with job growth averaging 375,000 per
month in the second quarter of 2022. In July 2022 , employment increased by
528,000 and the unemployment rate was 3.5 percent. The unemployment rate for the
New England region in June 2022 was 3.5 percent, ranging from 2.0 percent in New
Hampshire to 4.0 percent in Connecticut .
In July 2022 , the Consumer Price Index was unchanged from the preceding month
after rising 1.0 percent and 1.3 percent in May and June 2022 , respectively. A
decline in gasoline prices offset increases in food and shelter prices in July,
resulting in a zero net change. Compared to a year earlier, the July 2022 CPI
was higher by 8.5 percent, driven by prices of gasoline, shelter and food.
The FHFA reported that house prices rose 18.3 percent across the U.S. from May
2021 to May 2022 . Over the same period, home prices in New England rose 17.1
percent. At the end of June 2022 , rates for 30-year fixed-rate mortgage were
above 5.7 percent, approximately 2.7 percentage points higher than a year
earlier.
Interest-Rate Environment
OnJuly 27, 2022 , theFOMC raised the target range for the federal funds rate to between 225 and 250 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 would continue reducing its holdings ofTreasury securities, agency debt, and agency mortgage-backed securities by reinvesting principal payments from its securities holdings only if they exceed monthly caps. TheFederal Reserve's policy pivot from an easing to a tightening stance led to a rise in interest rates. Short-term rates rose commensurate with the magnitude of the increase in the federal funds rate. The spread between short-term and longer-term rates fluctuated during the second quarter reflecting expectations of further rate hikes, tempered by concern about rising risks of an economic downturn and possible reversal of monetary policy back to an easing stance.
Table 1 - Key Interest Rates(1)
Three Month Daily Average Six Month Daily Average
Ending Rate
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 June 30, 2022 December 31, 2021
SOFR 0.71% 0.02% 0.40% 0.03% 1.50% 0.05%
Federal funds effective
rate 0.76% 0.07% 0.44% 0.07% 1.58% 0.07%
3-month LIBOR 1.53% 0.16% 1.02% 0.18% 2.29% 0.21%
3-month U.S. Treasury
yield 1.05% 0.01% 0.67% 0.03% 1.63% 0.03%
2-year U.S. Treasury
yield 2.71% 0.17% 2.09% 0.15% 2.95% 0.73%
5-year U.S. Treasury
yield 2.95% 0.83% 2.39% 0.72% 3.04% 1.26%
10-year U.S. Treasury
yield 2.92% 1.58% 2.44% 1.45% 3.01% 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
June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021
Statement of Condition
Total assets $ 62,063,994 $ 32,395,662 $ 32,545,292 $ 34,448,917 $ 35,683,602
Investments(1) 28,254,534 16,849,318 16,372,499 16,404,424 16,053,111
Advances 30,318,486 11,816,428 12,340,020 14,056,991 15,176,625
Mortgage loans held for portfolio, net(2) 2,897,373 2,998,682 3,120,159 3,283,925 3,470,505
Deposits 1,066,459 803,383 884,032 970,732 970,282
Consolidated obligations:
Bonds 32,721,605 26,070,923 26,613,032 25,097,469 23,475,165
Discount notes 25,096,230 2,878,513 2,275,320 5,554,103 8,365,460
Total consolidated obligations 57,817,835 28,949,436 28,888,352 30,651,572
31,840,625
Mandatorily redeemable capital stock 10,703 13,418 13,562 13,890
7,432
Class B capital stock outstanding-putable(3) 1,557,243 929,482 953,638 1,028,177
1,081,057
Unrestricted retained earnings 1,230,558 1,202,685 1,179,986 1,159,509 1,147,279 Restricted retained earnings 376,620 368,420 368,420 368,420 368,420 Total retained earnings 1,607,178 1,571,105 1,548,406 1,527,929 1,515,699 Accumulated other comprehensive (loss) income (216,409) (88,800) 28,967 40,604 47,645 Total capital 2,948,012 2,411,787 2,531,011 2,596,710 2,644,401 Results of Operations Net interest income after provision for credit losses$ 69,416 $ 58,942 $ 56,412 $ 51,145$ 43,122 Other income (loss), net 3,818 1,066 (7,562) (10,453) (13,104) Other expense 27,667 29,073 20,061 22,330 23,177 AHP assessments 4,567 3,100 2,887 1,842 687 Net income$ 41,000 $ 27,835 $ 25,902 $ 16,520$ 6,154 Other Information Dividends declared$ 4,927 $ 5,136 $ 5,425 $ 4,290$ 4,631 Dividend payout ratio 12.02 % 18.45 % 20.94 % 25.97 % 75.25 % Weighted-average dividend rate(4) 2.09 2.05 2.05 1.52 1.54 Return on average equity(5) 6.13 4.50 4.00 2.50 0.92 Return on average assets 0.35 0.35 0.31 0.18 0.07 Net interest margin(6) 0.60 0.74 0.66 0.58 0.48 Average equity to average assets 5.78 7.69 7.65 7.36 7.29 Total regulatory capital ratio(7) 5.12 7.76 7.73 7.46 7.30 _______________________
(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$1.5 million as ofJune 30, 2022 ,$1.6 million as ofMarch 31, 2022 ,$1.7 million as ofDecember 31, 2021 ,$2.1 million as ofSeptember 30, 2021 , and$2.1 million as ofJune 30, 2021 , respectively. (3)Capital stock is putable at the option of a member upon five years' written notice, subject to applicable restrictions. We also conduct daily repurchases of certain excess stock from shareholders.
(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.
42 -------------------------------------------------------------------------------- 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
Second Quarter of 2022 Compared with Second Quarter of 2021
Net income increased to$41.0 million for the three months endedJune 30, 2022 , from$6.2 million for the same period in 2021. The reasons for the increase are discussed under - Executive Summary . Net interest income after provision for credit losses for the three months endedJune 30, 2022 , was$69.4 million , compared with$43.1 million for the same period in 2021. The$26.3 million increase in net interest income after provision for credit losses was driven by a$5.7 billion increase in the average balance of advances, a$2.4 billion increase in the average balance of securities purchased under agreements to resell, a$1.6 billion increase in the average balance of mortgage-backed securities, an increase of fair value hedge ineffectiveness net gains of$20.6 million , an increase of net accretion of discounts and premiums on mortgage-backed securities and mortgage loans of$13.7 million resulting from significant increases in mortgage rates during the second quarter of 2022, and higher returns from investing the Bank's capital in a higher interest-rate environment. These positive factors were partially offset by a$635.7 million decrease in the average balance of mortgage loans and a$1.9 million decrease in net prepayment fee income. Additionally, certainUS Treasury securities, which were acquired prior to the significant interest rate reductions in early 2020, matured during the latter half of 2021, resulting in a reduction of interest income of$6.2 million as these securities were replaced with investments having lower yields. As a result, net interest spread was 0.52 percent for the quarter endedJune 30, 2022 , an increase of 8 basis points from the same period in 2021, and net interest margin was 0.60 percent, an increase of 12 basis points from the same period in 2021.
Six Months Ended
Net income increased to$68.8 million for the six months endedJune 30, 2022 , from$27.0 million for the same period in 2021. The increase in net income was driven by a decrease of$28.6 million in net losses on trading securities, an increase of$23.8 million in net interest income after provision for credit losses, and a decline of$4.5 million in losses on early extinguishment of debt. These increases to net income were partially offset by a$9.2 million increase in our voluntary contribution to the Affordable Housing Program, compared to the same period in 2021. Net interest income after provision for credit losses for the six months endedJune 30, 2022 , was$128.4 million , compared with$104.6 million for the same period in 2021. The$23.8 million increase in net interest income after provision for credit losses was driven by a$1.7 billion increase in the average balance of mortgage-backed securities, an increase of fair value hedge ineffectiveness net gains of$27.8 million , an increase of net accretion of discounts and premiums on mortgage-backed securities and mortgage loans of$30.3 million resulting from significant increases in mortgage rates during the first half of 2022, and higher returns from investing the Bank's capital in a higher interest-rate environment. These positive factors were partially offset by a$710.2 million decrease in the average balance of mortgage loans and a$8.7 million decrease in net prepayment fee income. As a result, net interest spread was 0.59 percent for the six months endedJune 30, 2022 , an increase of 6 basis points from the same period in 2021, and net interest margin was 0.66 percent, an increase of 8 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.
Table 3 - Net Interest Spread and Margin
(dollars in thousands)
For the Three Months Ended June 30,
2022 2021
Interest Interest
Average Income / Average Average Income / Average
Balance Expense Yield/Rate(1) Balance Expense Yield/Rate(1)
Assets
Advances $ 21,603,313 $ 71,641 1.33 % $ 15,880,582 $ 47,462 1.20 %
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Table of Contents Interest-bearing deposits 1,100,763 2,369 0.86 653,971 10 0.01 Securities purchased under agreements to resell 3,313,187 9,109 1.10 925,846 168 0.07 Federal funds sold 3,219,637 6,758 0.84 2,813,088 482 0.07 Investment securities(2) 13,964,590 63,105 1.81 12,396,086 26,614 0.86 Mortgage loans (2)(3) 2,946,838 21,419 2.92 3,582,506 23,007 2.58 Total interest-earning assets 46,148,328 174,401 1.52 36,252,079 97,743
1.08
Other non-interest-earning assets 1,045,205 174,445 Fair-value adjustments on investment securities (739,856) 365,244 Total assets$ 46,453,677 $ 174,401 1.51 %$ 36,791,768 $ 97,743 1.07 % Liabilities and capital Consolidated obligations Discount notes$ 12,500,939 $ 26,109 0.84 %$ 10,490,710 $ 683 0.03 % Bonds 28,809,891 78,242 1.09 22,470,044 53,684 0.96 Other interest-bearing liabilities 883,627 733 0.33 989,592 55
0.02
Total interest-bearing liabilities 42,194,457 105,084 1.00 33,950,346 54,422 0.64 Other non-interest-bearing liabilities 1,574,763 160,798 Total capital 2,684,457 2,680,624 Total liabilities and capital$ 46,453,677 $ 105,084 0.91 %$ 36,791,768 $ 54,422 0.59 % Net interest income$ 69,317 $ 43,321 Net interest spread 0.52 % 0.44 % Net interest margin 0.60 % 0.48 % For the Six Months Ended June 30, 2022 2021 Interest Interest Average Income / Average Average Income / Average Balance Expense Yield(1) Balance Expense Yield(1) Assets Advances$ 17,029,474 $ 106,548 1.26 %$ 16,755,115 $ 104,747 1.26 % Interest-bearing deposits 760,103 2,529 0.67 612,285 94
0.03
Securities purchased under agreements to resell 1,937,580 9,280 0.97 819,072 292 0.07 Federal funds sold 2,677,276 7,572 0.57 2,993,519 1,096 0.07 Investment securities(2) 13,730,852 108,968 1.60 11,229,805 67,684 1.22 Mortgage loans 2,997,353 42,947 2.89 3,707,510 48,144 2.62 Total interest-earning assets 39,132,638 277,844 1.43 36,117,306 222,057
1.24
Other non-interest-earning assets 759,297 246,026 Fair-value adjustments on investment securities (333,424) 420,492 Total assets$ 39,558,511 $ 277,844 1.42 %$ 36,783,824 $ 222,057 1.22 % Liabilities and capital Consolidated obligations Discount notes$ 7,430,874 $ 26,716 0.73 %$ 10,892,499 $ 3,085 0.06 % Bonds 27,673,026 122,142 0.89 21,936,539 115,285 1.06 Other interest-bearing liabilities 844,392 827 0.20 1,001,800 108
0.02
Total interest-bearing liabilities 35,948,292 149,685 0.84 33,830,838 118,478 0.71 Other non-interest-bearing liabilities 1,014,557 240,431 Total capital 2,595,662 2,712,555 Total liabilities and capital$ 39,558,511 $ 149,685 0.76 %$ 36,783,824 $ 118,478 0.65 % Net interest income$ 128,159 $ 103,579 Net interest spread 0.59 % 0.53 % Net interest margin 0.66 % 0.58 % _________________________ (1) Yields are annualized. (2) Average balances are reflected at amortized cost. 44 -------------------------------------------------------------------------------- Table of Contents (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 and six months endedJune 30, 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. Table 4 - Rate and Volume Analysis (dollars in thousands) For the Three Months Ended For the Six Months Ended June 30, 2022 vs. 2021 June 30, 2022 vs. 2021 Increase (Decrease) due to Increase (Decrease) due to Volume Rate Total Volume Rate Total Interest income Advances$ 18,541 $ 5,638 $ 24,179 $ 1,718 $ 83 $ 1,801 Interest-bearing deposits 11 2,348 2,359 28 2,407 2,435 Securities purchased under agreements to resell 1,378 7,563 8,941 889 8,099 8,988 Federal funds sold 80 6,196 6,276 (128) 6,604 6,476 Investment securities 3,750 32,741 36,491 17,045 24,239 41,284 Mortgage loans (4,391) 2,803 (1,588) (9,841) 4,644 (5,197) Total interest income 19,369 57,289 76,658 9,711 46,076 55,787 Interest expense Consolidated obligations Discount notes 156 25,270 25,426 (1,283) 24,914 23,631 Bonds 16,542 8,016 24,558 27,153 (20,296) 6,857 Other interest-bearing liabilities (7) 685 678 (20) 739 719 Total interest expense 16,691 33,971 50,662 25,850 5,357 31,207 Change in net interest income$ 2,678 $ 23,318 $ 25,996 $ (16,139) $ 40,719 $ 24,580
Average Balance of Advances Outstanding
The average balance of total advances increased$274.4 million , or 1.6 percent, for the six months endedJune 30, 2022 compared with the same period in 2021. We cannot predict future member demand for advances. For the six months endedJune 30, 2022 and 2021, net prepayment fees on advances were$3.3 million and$12.0 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, increased$950.1 million , or 21.5 percent, for the six months endedJune 30, 2022 , compared with the same period in 2021, as liquidity needs were greater in 2022 compared to 2021 due to increased 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 0.07 percent during the six months endedJune 30, 2021 , to 0.57 percent during the six months endedJune 30, 2022 , while average yields on securities purchased under agreements to resell increased from 0.07 percent for the six months endedJune 30, 2021 , to 0.97 percent for the six months endedJune 30, 2022 . These investments are used for liquidity management. 45
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Average investment-securities balances increased$2.5 billion , or 22.3 percent for the six months endedJune 30, 2022 , compared with the same period in 2021, an increase consisting primarily of$1.7 billion in MBS and$833.6 million inU.S. Treasury obligations. Average Balance of COs Average CO balances increased$2.3 billion , or 6.9 percent, for the six months endedJune 30, 2022 , compared with the same period in 2021, resulting from our increased funding needs principally due to the increase in our average advances balances. This overall increase consisted of a$5.7 billion increase in CO bonds offset by a decline of$3.5 billion in CO discount notes. The average balance of CO discount notes represented approximately 21.2 percent of total average COs during the six months endedJune 30, 2022 , compared with 33.2 percent of total average COs during the six months endedJune 30, 2021 . The average balance of CO bonds represented 78.8 percent and 66.8 percent of total average COs outstanding during the six months endedJune 30, 2022 and 2021, respectively.
Impact of Derivatives and Hedging Activities
Net interest income includes interest accrued on interest-rate-exchange agreements that are associated with advances, investments, and debt instruments that qualify for hedge accounting. The fair value gains and losses of derivatives and hedged items designated in fair-value hedge relationships are also recognized as interest income or interest expense. We enter into derivatives to manage the interest-rate-risk exposures inherent in otherwise unhedged assets and liabilities and to achieve our risk-management objectives. We generally use derivative instruments that qualify for hedge accounting as interest-rate risk-management tools. These derivatives serve to stabilize net income when interest rates fluctuate. Accordingly, the impact of derivatives on net interest income and net interest margin, as well as other income, should be viewed in the overall context of our risk-management strategy.
Table 5 below provides a summary of the impact of derivatives and hedging
activities on our earnings.
Table 5 - Effect of Derivative and Hedging Activities
(dollars in thousands)
For the Three Months Ended June 30, 2022
Net Effect of Derivatives and Hedging
Activities Advances Investments Mortgage Loans CO Bonds
Total
Net interest income Amortization / accretion of hedging activities (1)$ (273) $ - $ (144)$ (945) $
(1,362)
Gains on designated fair-value hedges 718 15,332 - 259 16,309 Net interest settlements on derivatives(2) (5,205) (21,256) - 15,049 (11,412) Total net interest income (4,760) (5,924) (144) 14,363 3,535 Net gains (losses) on derivatives and hedging activities Gains on derivatives not receiving hedge accounting 4 - - 1 5 CO bond firm commitments - - - (1) (1) Mortgage delivery commitments - - (118) -
(118)
Net gains (losses) on derivatives and hedging activities 4 - (118) -
(114)
Net losses on trading securities - - - -
-
Total net effect of derivatives and hedging activities$ (4,756) $ (5,924) $ (262)$ 14,363 $ 3,421 46
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For the Three Months Ended June 30, 2021
Net Effect of Derivatives and
Hedging Activities Advances Investments Mortgage Loans CO Bonds Other Total
Net interest income
Amortization / accretion of hedging
activities in net interest income
(1) $ (705) $ - $ (347) $ (757) $ - $ (1,809)
(Losses) gains on designated
fair-value hedges (245) (4,098) - 66 - (4,277)
Net interest settlements included
in net interest income (2) (16,042) (29,847) - 16,000 - (29,889)
Total net interest income (16,992) (33,945) (347) 15,309 - (35,975)
Net gains on derivatives and
hedging activities
Gains on derivatives not receiving
hedge accounting 30 163 - - - 193
CO bond firm commitments - - - - - -
Mortgage delivery commitments - - 253 - - 253
Price alignment amount (3) - - - - 1 1
Net gains on derivatives and
hedging activities 30 163 253 - 1 447
Net losses on trading securities - (14,616) - - -
(14,616)
Total net effect of derivatives and hedging activities$ (16,962) $ (48,398) $ (94)$ 15,309 $ 1 $ (50,144) For the Six Months Ended June 30, 2022 Net Effect of Derivatives and Hedging Mortgage Activities Advances Investments Loans CO Bonds
Total
Net interest income Amortization / accretion of hedging activities (1)$ (536) $ -$ (300) $ (1,881) $ (2,717) Gains on designated fair-value hedges 2,049 29,623 - 738 32,410 Net interest settlements on derivatives(2) (15,131) (58,647) - 41,840 (31,938) Total net interest income (13,618) (29,024) (300) 40,697 (2,245) Net gains (losses) on derivatives and hedging activities Gains (losses) on derivatives not receiving hedge accounting 5 (1) - (520) (516) CO bond firm commitments - - - 520 520 Mortgage delivery commitments - - (791) - (791) Net gains (losses) on derivatives and hedging activities 5 (1) (791) - (787) Net losses on trading securities - (425) - - (425) Total net effect of derivatives and hedging activities$ (13,613) $ (29,450) $ (1,091) $ 40,697 $ (3,457) 47
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For the Six Months Ended June 30, 2021
Net Effect of Derivatives and
Mortgage
Hedging Activities Advances Investments Loans CO Bonds Other Total Net interest income Amortization / accretion of hedging activities (1)$ (1,404) $ -$ (828) $ (1,402) $ - $
(3,634)
Gains on designated fair-value hedges 773 3,515 - 299 - 4,587 Net interest settlements on derivatives(2) (31,867) (51,784) - 23,470 - (60,181) Total net interest income (32,498) (48,269) (828) 22,367 - (59,228) Net gains (losses) on derivatives and hedging activities Gains (losses) on derivatives not receiving hedge accounting 36 138 - (19) (148) 7 CO bond firm commitments - - - 19 - 19 Mortgage delivery commitments - - (433) - - (433) Price alignment amount (3) - - - - 6 6 Net gains (losses) on derivatives and hedging activities 36 138 (433) - (142)
(401)
Net losses on trading securities - (29,477) - - -
(29,477)
Total net effect of derivatives and hedging activities$ (32,462) $ (77,608) $ (1,261) $ 22,367 $ (142) $ (89,106) ________________________ (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 AtJune 30, 2022 , the advances portfolio totaled$30.3 billion , an increase of$18.0 billion from$12.3 billion atDecember 31, 2021 . The significant increase in advances was concentrated in variable-rate advances and short-term fixed-rate advances, reflecting rising demand for wholesale funding at member institutions. 48 -------------------------------------------------------------------------------- Table of Contents Table 6 - Advances Outstanding by Product Type (dollars in thousands) June 30, 2022 December 31, 2021 Par Value Percent of Total Par Value Percent of Total Fixed-rate advances Short-term$ 7,344,326 24.1 %$ 1,531,550 12.4 % Long-term 6,498,333 21.3 6,511,706 52.7 Overnight 1,945,147 6.4 225,922 1.8 Putable 587,500 1.9 1,178,425 9.6 Amortizing 550,031 1.8 551,163 4.5 16,925,337 55.5 9,998,766 81.0 Variable-rate advances Simple variable (1) 13,552,395 44.5 2,348,875 19.0 All other variable-rate indexed advances 126 - 64 - 13,552,521 44.5 2,348,939 19.0 Total par value$ 30,477,858 100.0 %$ 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 par value, 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 June 30, 2022
Par Value of Ratio of Discounted
Advances Discounted Collateral
Number of Borrowers Outstanding Collateral to Advances
Category-1 204 $ 25,558,562 $ 96,672,411 378.2 %
Category-2 13 233,856 756,117 323.3
Category-3 15 217,420 412,166 189.6
Insurance companies 25 4,468,020 6,066,732 135.8
Total 257 $ 30,477,858 $ 103,907,426 340.9 %
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 June 30,
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)
June 30, 2022
Par Value of Percent of Total Par
Name Advances Value of Advances Weighted-Average Rate (1)
Citizens Bank, N.A $ 12,019,143 39.4 % 1.60 %
Webster Bank, N.A. 2,510,810 8.2 1.60
Massachusetts Mutual Life Insurance Company 2,100,000 6.9 1.78
Hingham Institution for Savings 1,140,000 3.8 1.18
Voya Retirement Insurance and Annuity Company 925,000 3.0 1.74
Total of top five advance-borrowing institutions
61.3 %
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
50 -------------------------------------------------------------------------------- Table of Contents AtJune 30, 2022 , investment securities and short-term money-market instruments totaled$28.3 billion , an increase of$11.9 billion from$16.4 billion atDecember 31, 2021 . Short-term money-market investments increased$11.8 billion to$14.6 billion atJune 30, 2022 , compared withDecember 31, 2021 . The increase was attributable to increases of$10.5 billion in securities purchased under agreements to resell,$1.1 billion in federal funds sold and$310.1 million in interest bearing deposits. Investment securities increased$68.0 million to$13.6 billion atJune 30, 2022 , compared with$13.5 billion atDecember 31, 2021 .
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 ofJune 30, 2022 , all of these placements either expired within one day 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. 51
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Table 9 - Credit Ratings of Investments at Carrying Value
(dollars in thousands)
As of June 30, 2022
Long-Term Credit Rating
Investment Category Triple-A Double-A Single-A Unrated
Money-market instruments: (1)
Interest-bearing deposits $ - $ 150 $ 395,080 $ -
Securities purchased under agreements to
resell - 10,750,000 500,000 -
Federal funds sold - 295,000 2,703,000 -
Total money-market instruments - 11,045,150 3,598,080 -
Investment securities:(2)
Non-MBS:
U.S. Treasury obligations - 5,889,613 - -
Corporate bonds - - - 980
U.S. government-owned corporations - 249,179 - -
GSE - 106,506 - -
Supranational institutions 369,247 - - -
HFA securities 33,089 27,444 - -
Total non-MBS 402,336 6,272,742 - 980
MBS:
U.S. government guaranteed - single-family - 21,885 - -
U.S. government guaranteed - multifamily - 518,612 - -
GSE - single-family - 993,207 - -
GSE - multifamily - 5,401,542 - -
Total MBS - 6,935,246 - -
Total investment securities 402,336 13,207,988 - 980
Total investments $ 402,336 $ 24,253,138 $ 3,598,080 $ 980
_______________________
(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 ofJune 30, 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
June 30, 2022 December 31, 2021
Interest bearing deposits$ 395,230 $
85,153
Federal funds sold 2,998,000
1,944,000
Supranational institutions 369,247 403,765
U.S. government-owned corporations 249,179 306,864
GSEs 106,506 126,472
Corporate bonds 980 1,442
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 ofJune 30, 2022 , our mortgage loan investment portfolio totaled$2.9 billion , a decrease of$222.8 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 six months endedJune 30, 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 ofJune 30, 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 par value of our conventional
mortgage loan portfolio are shown in Table 11.
Table 11 - State Concentrations by Par Value
Percentage of Total Par Value of Conventional
Mortgage Loans
June 30, 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
Six Months Ended
2022 2021
Average par value of mortgage loans outstanding during the
period ending
$ 2,951,330 $ 3,647,949 Net (charge-offs) recoveries (1) 52
Net charge-offs to average loans outstanding during the
period ending
- % - %
As of December 31,
As of June 30, 2022 2021
Mortgage loans held for portfolio, par value $ 2,856,026 $ 3,072,075
Nonaccrual loans, par value 16,696 21,384
Allowance for credit losses on mortgage loans 1,500 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 8.98 7.95 Mortgage Insurance Companies. We are exposed to credit risk from primary mortgage insurance coverage (PMI) on individual loans. As ofJune 30, 2022 , we were the beneficiary of PMI coverage of$65.1 million on$248.1 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 par value 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$389.2 million and$378.5 million as ofJune 30, 2022 , andDecember 31, 2021 , respectively. Derivative liabilities' net fair value, net of cash collateral and accrued interest, totaled$0.0 million and$38.9 million as ofJune 30, 2022 , andDecember 31, 2021 , respectively. The following table presents a summary of the notional amounts and estimated fair values of our outstanding derivatives, excluding accrued interest, and related hedged item by product and type of accounting treatment as ofJune 30, 2022 , andDecember 31, 2021 . The notional amount represents the hypothetical principal basis used to determine periodic interest payments received and paid. However, the notional amount does not represent an actual amount exchanged or our overall exposure to credit and market risk. 54
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Table 13 - Hedged Item and Hedge-Accounting Treatment
(dollars in thousands)
June 30, 2022 December 31, 2021
Notional Fair Notional Fair
Hedged Item Derivative Designation(2) Amount Value
Amount Value Advances (1) Swaps Fair value$ 2,614,770 $ (6,781) $ 2,693,195 $ 1,800 Swaps Economic 329,800 (1,582) 345,425 (11,761) Total associated with advances 2,944,570 (8,363) 3,038,620 (9,961) Available-for-sale securities Swaps Fair value 12,577,160 (15,791) 10,795,541 56,831 Trading securities Swaps Economic - - 500,000 3,087 COs Swaps Fair value 20,715,970 (963,971) 13,101,220 (173,243) Swaps Economic - - 55,000 (24) Forward starting swaps Cash Flow 1,391,000 (3,923) 1,391,000 (380) Total associated with COs 22,106,970 (967,894) 14,547,220 (173,647) Total 37,628,700 (992,048) 28,881,381 (123,690) CO bond firm commitments 20,000 28 55,000 24 Mortgage delivery commitments 6,864 108 3,164 68 Total derivatives$ 37,655,564 (991,912)$ 28,939,545 (123,598) Accrued interest (51,321) (50,008) Cash collateral, including related accrued interest 1,432,472 513,194 Net derivatives$ 389,239 $ 339,588 Derivative asset$ 389,239 $ 378,532 Derivative liability - (38,944) Net derivatives$ 389,239 $ 339,588 _______________________ (1) As ofJune 30, 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$1.6 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. 55 -------------------------------------------------------------------------------- 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 June 30, 2022
Non-cash
Net Derivatives Cash Collateral 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 $ 21,041,250 $ (941,514) $ 1,003,094 $ - $ 61,580
Cleared derivatives 16,587,450 (101,856) 429,378 - 327,522
Total interest-rate swap
positions with nonmember
counterparties to which we had
credit exposure 37,628,700 (1,043,370) 1,432,472 - 389,102
CO Bond firm commitments 20,000 28 - - 28
Mortgage delivery commitments
(2) 6,864 108 - - 108
Total $ 37,655,564 $ (1,043,234) $ 1,432,472 $ - $ 389,238
_______________________
(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
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, atJune 30, 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. 56
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Table of Contents Table 15 - Financial Instruments with LIBOR Exposure atJune 30, 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 $ - $ - $ 11,350$ 11,350 MBS(1) - - 430,851 430,851 Total investment securities $ - $
- $ 442,201
LIBOR-indexed interest-rate swaps, notional amount Receive leg Cleared$ 5,500 $ 12,000 $ 25,750$ 43,250 Uncleared(1) 62,500 231,600 241,900 536,000
Total interest-rate swaps, receive leg
243,600 $ 267,650$ 579,250 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 for MBS and do not reflect potential early termination option exercises for uncleared interest-rate swaps. Table 16 - Variable Rate Financial Instruments by Interest-Rate Index (dollars in thousands) Par Value of Par Value of Non-MBS Par Value of Par Value of Advances Investments MBS CO Bonds LIBOR $ -$ 11,350 $ 430,851 $ - SOFR 3,906,500 - 1,380,509 5,507,000 FHLBank discount note auction rate 9,646,021 - - - Constant Maturity Treasury - - 30,400 - Total$ 13,552,521 $ 11,350 $ 1,841,760 $ 5,507,000
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. 57
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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 six months endedJune 30, 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 six months endedJune 30, 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 six months endedJune 30, 2022 . 58 -------------------------------------------------------------------------------- Table of Contents Table 17 - ProjectedNet Cash Flow (dollars in thousands) As of June 30, 2022 21 Days Uses of funds Interest payable $ 19,592 Maturing liabilities 17,314,643 Committed asset settlements 174,000 Capital outflow 26,921 MPF delivery commitments 6,864 Other 104,284 Gross uses of funds 17,646,304 Sources of funds Interest receivable 55,062 Maturing or projected amortization of assets
20,493,169
Committed liability settlements
1,762,905
Cash and due from banks and interest bearing deposits 460,803 Gross sources of funds 22,771,939 Projected net cash flow $ 5,125,635 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.
During the six months ended
Base Case Liquidity Requirement for one day and in compliance each other day.
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 59 -------------------------------------------------------------------------------- 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 June 30, 2022 December 31, 2021 3-month Funding Gap 15% 13% 3.4 % (8.2) % 1-year Funding Gap 30% 25% 9.4 % (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
AtJune 30, 2022 , andDecember 31, 2021 , outstanding COs for which we are primarily liable, including both CO bonds and CO discount notes, totaled$57.8 billion and$28.9 billion , respectively. CO bonds outstanding for which we are primarily liable atJune 30, 2022 , andDecember 31, 2021 , include issued callable bonds totaling$20.7 billion and$12.8 billion , respectively. CO discount notes comprised 43.4 percent and 7.9 percent of the outstanding COs for which we are primarily liable atJune 30, 2022 , andDecember 31, 2021 , respectively, but accounted for 92.1 percent and 93.9 percent of the proceeds from the issuance of such COs during the six months endedJune 30, 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 increased by$603.6 million during the six months endedJune 30, 2022 , resulting from the issuance of$2.1 billion of capital stock offset by capital stock repurchases of$1.4 billion . 60 -------------------------------------------------------------------------------- Table of ContentsThe FHLBank Act and FHFA regulations specify that each FHLBank is required to satisfy certain minimum regulatory capital requirements. We were in compliance with these requirements at June 30, 2022, as discussed in Part 1- Item 1 - Notes to the Financial Statements - Note 10 - Capital. Table 19 - Mandatorily Redeemable Capital Stock by Expiry of Redemption Notice Period (dollars in thousands) June 30, 2022 December 31, 2021 Past redemption date (1)$ 3,086 $ 3,138 Due in one year or less - 92 Due after one year through two years 59
30
Due after two years through three years 435
-
Due after three years through four years 689
581
Due after four years through five years 6,434 9,721 Total$ 10,703 $ 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 ofJune 30, 2022 , this internal minimum capital requirement equaled$3.0 billion , which was satisfied by our actual regulatory capital of$3.2 billion .
Minimum Retained Earnings Target
AtJune 30, 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.
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Table 20 - Capital Stock Requirements and Excess Capital Stock
(dollars in thousands)
Outstanding Excess
Membership Stock Activity-Based Total Stock Class B Class B
Investment Stock Investment Investment Capital Stock Capital
Requirement(1) Requirement Requirement (2) (3) Stock
June 30, 2022 $ 316,280 $ 1,224,724 $ 1,541,026 $ 1,567,947 $ 26,921
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
AtJune 30, 2022 , our total required contribution to the restricted retained earnings account was$421.4 million compared with our total contribution of$376.6 million . Due to the increase in the average balance of consolidated obligations during the quarter endedJune 30, 2022 , we contributed$8.2 million of second quarter 2022 net income to restricted retained earnings. No allocation of net income was made to restricted retained earnings in the first quarter of 2022.
Off-Balance-Sheet Arrangements
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
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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 June 30, 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. FHFA Director's Testimony toHouse Committee on Financial Services . OnJuly 20, 2022 , FHFA DirectorSandra Thompson gave testimony to theHouse Financial Services Committee indicating that the FHFA intends to review theFHLBank System . Director Thompson's testimony indicated that the FHFA plans to engage a variety of stakeholders in addition to holding public listening sessions throughout the country as part of the review. The Director's testimony also indicated that the review would examine matters ranging from the System's membership base, operational efficiency, and effectiveness to more foundational questions about its mission, purpose, and organization. At this time, it is not possible to determine when these events will occur, whether any actions will result from them, and how they will ultimately impact us or theFHLBank System as a whole. Amendments to FINRA Rule 4210: Margining of Covered Agency Transactions. OnJuly 29, 2022 , theFinancial Industries Regulatory Authority (FINRA) filed a proposed rule with theSEC that would extend the implementation date of its amendments to FINRA Rule 4210 delaying the effectiveness of margining requirements for covered agency transactions fromOctober 26, 2022 until at leastApril 24, 2023 . Once the margining requirements are effective, we may be required to collateralize our 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. We do not expect this rule to have a material effect on our financial condition or results of operations.
LIBOR Transition
Proposed Rule Implementing the Adjustable Interest Rate (LIBOR) Act. OnJuly 28, 2022 , theBoard of Governors of theFederal Reserve System (the Board) published a proposed rule with a comment deadline ofAugust 29, 2022 , that would implement the Adjustable Interest Rate (LIBOR) Act (the Act). The proposed rule would provide default rules for certain contracts (covered contracts) that: reference LIBOR, are governed byU.S. law, do not mature on or before the LIBOR replacement date ofJune 30, 2023 , and lack adequate provisions to identify a replacement rate for LIBOR. The proposed rule identifies separate Board-selected replacement rates for derivatives transactions, covered GSE contracts, and all other covered contracts. The proposed rule defines covered GSE contracts to include FHLBank advances. Accordingly, we continue to take steps to mitigate the risks that arise from the phase out of LIBOR, which includes reviewing the proposed rule, but are not yet able to predict the extent to which the proposed rule would impact our financial condition or results of operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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