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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 63 Recent Accounting Developments 63 Legislative and Regulatory Developments 63
Forward-Looking Statements
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
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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 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 38
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•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 ended
compared with net income of
increase in net income was driven by an increase of
interest income after provision for credit losses, an improvement of
million
million
The$32.0 million increase in net interest income after provision for credit losses during the third quarter of 2022 was primarily due to a$22.9 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$16.0 billion , or 109.6 percent, increase in average advances balances, as demand for advances returned among depository members to near pre-pandemic levels. The increase in net income for the quarter endedSeptember 30, 2022 , correspondingly increased the Bank's statutory contributions to the Affordable Housing Program, which were partially offset by the recapture of certain amounts contributed to the program in previous quarters' discretionary contributions when the Bank's net income was significantly lower as advances balances were historically low and short-term interest rates had not yet begun rising. AtSeptember 30, 2022 , the Bank's overall 2022 contributions to the AHP stood at$26.0 million , and we expect to end 2022 at this level. For the quarter endedSeptember 30, 2022 , the Bank contributed$2.6 million to its Jobs forNew England and Helping HouseNew England programs. 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$1.7 billion atSeptember 30, 2022 , an increase of$107.4 million fromDecember 31, 2021 , and equals 2.8 percent of total assets atSeptember 30, 2022 . We continue to satisfy all regulatory capital requirements as ofSeptember 30, 2022 . OnOctober 21, 2022 , our board of directors declared a cash dividend that was equivalent to an annual yield of 5.16 percent, increasing 144 basis points from the prior quarter's dividend. The annual yield of this dividend equals the approximate daily average of SOFR for the third quarter of 2022 plus 300 basis points. Our overall results of operations are influenced by the economy and financial markets, and, in particular, by members' demand for liquidity 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 endingSeptember 30, 2022 , saw a continued increase in demand for advances. During the nine months endedSeptember 30, 2022 , advances balances increased to$33.7 billion , an increase of 172.8 percent from$12.3 billion atDecember 31, 2021 . The significant increase in advances was concentrated in variable-rate advances and short-term fixed-rate advances, and was due to member depository institutions beginning to experience slowing growth or declines of deposit balances, an increase in lending to their customers, and rising interest rates and reduced market liquidity. These developments impacted our financial condition as ofSeptember 30, 2022 , and results of operations for the three months endedSeptember 30, 2022 . Generally, investor demand for high credit quality, fixed-income investments, including COs, continued to be strong relative to other investments. Investor appetite forFHLBank System COs remains relatively strong despite the volume of issuance used to keep pace with advance growth. 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 endedSeptember 30, 2022 .
Net Interest Income, Margin, and Spread
39 -------------------------------------------------------------------------------- Table of Contents For the three months endedSeptember 30, 2022 , net interest margin was 0.58 percent, no change from the same period in 2021, and net interest spread was 0.41 percent for the three months endedSeptember 30, 2022 , a decrease of 15 basis points from the same period in 2021. For the quarter endedSeptember 30, 2022 , average balances of advances and investments increased$16.0 billion and$7.4 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
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) increased at an annual rate of 2.6 percent in the third quarter of 2022, following a 0.6 percent decrease in the second quarter. The expansion in the third quarter was driven mainly by exports, consumer spending, business investment, and government spending. Personal consumption expenditures increased at an annual rate of 1.4 percent, driven by an increase in spending on services, partially offset by a drop in spending on goods. The labor market continued to improve, with job growth averaging 372,000 per month in the third quarter of 2022. InOctober 2022 , employment increased by 261,000 and the unemployment rate was 3.7 percent. The unemployment rate for theNew England region inSeptember 2022 was 3.3 percent, ranging from 2.1 percent inVermont to 4.0 percent inConnecticut .
In
preceding month, representing a year-over-year increase of 7.7 percent. CPI
inflation was driven mainly by the cost of shelter, food, and gasoline.
The FHFA reported that house prices rose 11.9 percent across theU.S. fromAugust 2021 toAugust 2022 . Over the same period, home prices inNew England rose 12.2 percent. The sharp increase in mortgage rates thus far in 2022 has led to slowing of the housing market, as reflected in monthly price declines in eight of the ten census regions from July toAugust 2022 . Over that period, home prices rose 0.4 percent for theNew England census region.
Interest-Rate Environment
OnNovember 2, 2022 , theFOMC raised the target range for the federal funds rate to between 375 and 400 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. As theFederal Reserve continues with a tightening policy stance, short-term rates rose commensurate with the magnitude of the increase in the federal funds rate. The spread between short-term and long-term rates declined in the third quarter of 2022, 40 -------------------------------------------------------------------------------- Table of Contents consistent with expectations of further interest rate hikes in the near term followed by softening economic activity leading to a fall in interest rates over a longer term.
Table 1 - Key Interest Rates(1)
Three Month Daily Average Nine Month Daily Average Ending Rate
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
September 30, 2022 December 31, 2021 SOFR 2.15% 0.05% 0.99% 0.04% 2.98% 0.05% Federal funds effective rate 2.20% 0.09% 1.04% 0.08% 3.08% 0.07% 3-month LIBOR 3.00% 0.13% 1.70% 0.16% 3.75% 0.21% 3-monthU.S. Treasury yield 2.63% 0.04% 1.33% 0.03% 3.25% 0.03% 2-yearU.S. Treasury yield 3.38% 0.22% 2.52% 0.17% 4.28% 0.73% 5-yearU.S. Treasury yield 3.23% 0.80% 2.68% 0.75% 4.09% 1.26% 10-yearU.S. Treasury yield 3.10% 1.32% 2.66% 1.41% 3.83% 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
September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021
Statement of Condition
Total assets $ 58,869,539 $ 62,063,994 $ 32,395,662 $ 32,545,292 $ 34,448,917
Investments(1) 21,748,784 28,254,534 16,849,318 16,372,499 16,404,424
Advances 33,665,311 30,318,486 11,816,428 12,340,020 14,056,991
Mortgage loans held for portfolio, net(2) 2,820,696 2,897,373 2,998,682 3,120,159 3,283,925
Deposits 938,551 1,066,459 803,383 884,032 970,732
Consolidated obligations:
Bonds 32,818,095 32,721,605 26,070,923 26,613,032 25,097,469
Discount notes 21,684,635 25,096,230 2,878,513 2,275,320 5,554,103
Total consolidated obligations 54,502,730 57,817,835 28,949,436 28,888,352 30,651,572
Mandatorily redeemable capital stock 10,397 10,703 13,418 13,562 13,890
Class B capital stock outstanding-putable(3) 1,717,748 1,557,243 929,482 953,638 1,028,177
Unrestricted retained earnings 1,267,192 1,230,558 1,202,685 1,179,986 1,159,509
Restricted retained earnings 388,621 376,620 368,420 368,420 368,420
Total retained earnings 1,655,813 1,607,178 1,571,105 1,548,406 1,527,929
Accumulated other comprehensive (loss) income (244,075) (216,409) (88,800) 28,967 40,604
Total capital 3,129,486 2,948,012 2,411,787 2,531,011 2,596,710
Results of Operations
Net interest income after provision for credit
losses $ 83,120 $ 69,416 $ 58,942 $ 56,412 $ 51,145
Other income (loss), net 4,290 3,818 1,066 (7,562) (10,453)
Other expense 20,721 27,667 29,073 20,061 22,330
AHP assessments 6,682 4,567 3,100 2,887 1,842
Net income $ 60,007 $ 41,000 $ 27,835 $ 25,902 $ 16,520
Other Information
Dividends declared $ 11,372 $ 4,927 $ 5,136 $ 5,425 $ 4,290
Dividend payout ratio 18.95 % 12.02 % 18.45 % 20.94 % 25.97 %
Weighted-average dividend rate(4) 3.72 2.09 2.05 2.05 1.52
Return on average equity(5) 7.97 6.13 4.50 4.00 2.50
Return on average assets 0.41 0.35 0.35 0.31 0.18
Net interest margin(6) 0.58 0.60 0.74 0.66 0.58
Average equity to average assets 5.18 5.78 7.69 7.65 7.36
Total regulatory capital ratio(7) 5.75 5.12 7.76 7.73 7.46
_______________________
(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$2.0 million as ofSeptember 30, 2022 ,$1.5 million as ofJune 30, 2022 ,$1.6 million as ofMarch 31, 2022 ,$1.7 million as ofDecember 31, 2021 , and$2.1 million as ofSeptember 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
Third Quarter of 2022 Compared with Third Quarter of 2021
Net income increased to
2022
increase are discussed under - Executive Summary .
Net interest income after provision for credit losses for the three months endedSeptember 30, 2022 , was$83.1 million , compared with$51.1 million for the same period in 2021. The$32.0 million increase in net interest income after provision for credit losses was driven by a$16.0 billion increase in the average balance of advances, a$5.9 billion increase in the average balance of money market investments, a$985.0 million increase in the average balance of mortgage-backed securities, an increase of net accretion of discounts and premiums on mortgage-backed securities and mortgage loans of$12.3 million resulting from significant increases in mortgage rates leading to slower projected principal payments during the third quarter of 2022, an increase of fair value hedge ineffectiveness net gains of$8.3 million , and higher returns from investing the Bank's capital in a higher interest-rate environment. These positive factors were partially offset by a$518.9 million decrease in the average balance of mortgage loans and a$5.3 million decrease in net prepayment fee income. Net interest spread was 0.41 percent for the quarter endedSeptember 30, 2022 , a decrease of 15 basis points from the same period in 2021, and net interest margin was 0.58 percent, unchanged from the same period in 2021.
Nine Months Ended
30, 2021
Net income increased to$128.8 million for the nine months endedSeptember 30, 2022 , from$43.6 million for the same period in 2021. The increase in net income was driven by an increase of$55.7 million in net interest income after provision for credit losses, a decrease of$39.8 million in net losses on trading securities, and a decline of$6.2 million in losses on early extinguishment of debt. These increases to net income were partially offset by a$15.1 million increase in our overall contribution to theAffordable Housing Program, compared to the same period in 2021. Net interest income after provision for credit losses for the nine months endedSeptember 30, 2022 , was$211.5 million , compared with$155.8 million for the same period in 2021. The$55.7 million increase in net interest income after provision for credit losses was driven by a$5.6 billion increase in the average balance of advances, a$2.6 billion increase in the average balance of money market investments, a$1.5 billion increase in the average balance of mortgage-backed securities, an increase of net accretion of discounts and premiums on mortgage-backed securities and mortgage loans of$42.5 million resulting from significant increases in mortgage rates during the first nine months of 2022, an increase of fair value hedge ineffectiveness net gains of$36.1 million , and higher returns from investing the Bank's capital in a higher interest-rate environment. These positive factors were partially offset by a$645.7 million decrease in the average balance of mortgage loans and a$14.0 million decrease in net prepayment fee income. Net interest spread was 0.51 percent for the nine months endedSeptember 30, 2022 , a decrease of three basis points from the same period in 2021, and net interest margin was 0.62 percent, an increase of four 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 September 30,
2022 2021
Interest Interest
Average Income / Average Average Income / Average
Balance Expense Yield/Rate(1) Balance Expense Yield/Rate(1)
Assets
Advances $ 30,622,874 $ 180,829 2.34 % $ 14,609,839 $ 46,174 1.25 %
Interest-bearing deposits 1,608,143 9,138 2.25 55,953 13 0.09
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Securities purchased under agreements to resell 2,566,033 11,683 1.81 298,913 68 0.09 Federal funds sold 5,137,641 28,694 2.22 3,024,544 672 0.09 Investment securities(2) 14,697,646 110,542 2.98 13,271,856 31,001 0.93 Mortgage loans (2)(3) 2,861,365 21,323 2.96 3,380,302 22,984 2.70 Other earning assets 4,348 34 3.10 - - - Total interest-earning assets 57,498,050 362,243 2.50 34,641,407 100,912
1.16
Other non-interest-earning assets 1,104,248 465,337 Fair-value adjustments on investment securities (951,160) 514,343 Total assets$ 57,651,138 $ 362,243 2.49 %$ 35,621,087 $ 100,912 1.12 % Liabilities and capital Consolidated obligations Discount notes$ 17,888,560 $ 90,096 2.00 %$ 8,390,753 $ 904 0.04 % Bonds 34,211,913 186,249 2.16 23,606,437 48,861 0.82 Other interest-bearing liabilities 728,885 2,278 1.24 933,293 82
0.03
Total interest-bearing liabilities 52,829,358 278,623 2.09 32,930,483 49,847 0.60 Other non-interest-bearing liabilities 1,835,708 69,751 Total capital 2,986,072 2,620,853 Total liabilities and capital$ 57,651,138 $ 278,623 1.92 %$ 35,621,087 $ 49,847 0.56 % Net interest income$ 83,620 $ 51,065 Net interest spread 0.41 % 0.56 % Net interest margin 0.58 % 0.58 % For the Nine Months Ended September 30, 2022 2021 Interest Interest Average Income / Average Average Income / Average Balance Expense Yield(1) Balance Expense Yield(1) Assets Advances$ 21,610,400 $ 287,377 1.78 %$ 16,032,165 $ 150,921 1.26 % Interest-bearing deposits 1,045,889 11,667 1.49 424,804 107
0.03
Securities purchased under agreements to resell 2,149,366 20,963 1.30 643,780 360 0.07 Federal funds sold 3,506,410 36,266 1.38 3,003,974 1,768 0.08 Investment securities(2) 14,056,658 219,510 2.09 11,917,968 98,685 1.11 Mortgage loans 2,951,526 64,270 2.91 3,597,242 71,128 2.64 Other earning assets 1,465 34 3.10 - - - Total interest-earning assets 45,321,714 640,087 1.89 35,619,933 322,969
1.21
Other non-interest-earning assets 875,545 319,933 Fair-value adjustments on investment securities (541,599) 452,120 Total assets$ 45,655,660 $ 640,087 1.87 %$ 36,391,986 $ 322,969 1.19 % Liabilities and capital Consolidated obligations Discount notes$ 10,955,076 $ 116,812 1.43 %$ 10,049,420 $ 3,989 0.05 % Bonds 29,876,607 308,391 1.38 22,499,288 164,146 0.98 Other interest-bearing liabilities 805,466 3,105 0.52 978,714 190
0.03
Total interest-bearing liabilities 41,637,149 428,308 1.38 33,527,422 168,325 0.67 Other non-interest-bearing liabilities 1,291,282 182,912 Total capital 2,727,229 2,681,652 Total liabilities and capital$ 45,655,660 $ 428,308 1.25 %$ 36,391,986 $ 168,325 0.62 % Net interest income$ 211,779 $ 154,644 Net interest spread 0.51 % 0.54 % Net interest margin 0.62 % 0.58 % _________________________
(1) Yields are annualized.
44 -------------------------------------------------------------------------------- Table of Contents (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 and nine months endedSeptember 30, 2022 and 2021. Changes in interest income and interest expense that are not identifiable as either volume- 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 Nine Months Ended September 30, 2022 vs. 2021 September 30, 2022 vs. 2021 Increase (Decrease) due to Increase (Decrease) due to Volume Rate Total Volume Rate Total Interest income Advances$ 75,130 $ 59,525 $ 134,655 $ 62,423 $ 74,033 $ 136,456 Interest-bearing deposits 4,944 4,181 9,125 378 11,182 11,560 Securities purchased under agreements to resell 3,312 8,303 11,615 2,566 18,037 20,603 Federal funds sold 788 27,234 28,022 345 34,153 34,498 Investment securities 3,672 75,869 79,541 20,352 100,473 120,825 Mortgage loans (3,737) 2,076 (1,661) (13,594) 6,736 (6,858) Other earning assets - 34 34 - 34 34 Total interest income 84,109 177,222 261,331 72,470 244,648 317,118 Interest expense Consolidated obligations Discount notes 2,153 87,039 89,192 392 112,431 112,823 Bonds 29,683 107,705 137,388 63,679 80,566 144,245 Other interest-bearing liabilities (22) 2,218 2,196 (40) 2,955 2,915 Total interest expense 31,814 196,962 228,776 64,031 195,952 259,983 Change in net interest income$ 52,295 $ (19,740) $ 32,555 $ 8,439 $ 48,696 $ 57,135
Average Balance of Advances Outstanding
The average balance of total advances increased$5.6 billion , or 34.8 percent, for the nine months endedSeptember 30, 2022 , compared with the same period in 2021. We cannot predict future member demand for advances. For the nine months endedSeptember 30, 2022 and 2021, net prepayment fees on advances were$3.3 million and$17.3 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$2.6 billion , or 64.6 percent, for the nine months endedSeptember 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 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 nine months endedSeptember 30, 2021 , to 1.38 percent during the nine months ended 45
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agreements to resell increased from 0.07 percent for the nine months ended
2022
Average investment-securities balances increased$2.1 billion , or 17.9 percent for the nine months endedSeptember 30, 2022 , compared with the same period in 2021, an increase consisting primarily of$1.5 billion in MBS and$706.8 million inU.S. Treasury obligations.
Average Balance of COs
Average CO balances increased$8.3 billion , or 25.4 percent, for the nine months endedSeptember 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$7.4 billion increase in CO bonds and a$905.7 million increase in CO discount notes. The average balance of CO discount notes represented approximately 26.8 percent of total average COs during the nine months endedSeptember 30, 2022 , compared with 30.9 percent of total average COs during the nine months endedSeptember 30, 2021 . The average balance of CO bonds represented 73.2 percent and 69.1 percent of total average COs outstanding during the nine months endedSeptember 30, 2022 and 2021, respectively.
Impact of Derivatives and Hedging Activities
Net interest income includes interest accrued on interest-rate-exchange agreements that are associated with advances, investments, and debt instruments that qualify for hedge accounting. The fair value gains and losses of derivatives and hedged items designated in fair-value hedge relationships are also recognized as interest income or interest expense. We enter into derivatives to manage the interest-rate-risk exposures inherent in otherwise unhedged assets and liabilities and to achieve our risk-management objectives. We generally use derivative instruments that qualify for hedge accounting as interest-rate risk-management tools. These derivatives serve to stabilize net income when interest rates fluctuate. Accordingly, the impact of derivatives on net interest income and net interest margin, as well as other income, should be viewed in the overall context of our risk-management strategy.
Table 5 below provides a summary of the impact of derivatives and hedging
activities on our earnings.
Table 5 - Effect of Derivative and Hedging Activities
(dollars in thousands)
For the Three Months Ended September 30, 2022
Net Effect of Derivatives and Hedging
Activities Advances Investments Mortgage Loans CO Bonds
Total
Net interest income Amortization / accretion of hedging activities (1)$ (302) $ - $ (76)$ (876) $
(1,254)
Gains on designated fair-value hedges 901 9,883 - 647
11,431
Net interest settlements on derivatives(2) 4,973 22,216 - (40,221) (13,032) Total net interest income 5,572 32,099 (76) (40,450) (2,855) Net gains (losses) on derivatives and hedging activities Gains (losses) on derivatives not receiving hedge accounting 5 (1) - -
4
Mortgage delivery commitments - - 47 -
47
Net gains (losses) on derivatives and hedging activities(4) 5 (1) 47 -
51
Total net effect of derivatives and hedging activities$ 5,577 $ 32,098 $ (29)$ (40,450) $ (2,804) 46
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For the Three Months Ended September 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) $ (363) $ - $ (248) $ (847) $ - $ (1,458)
Gains on designated fair-value
hedges 167 2,832 - 168 -
3,167
Net interest settlements included in net interest income (2) (15,531) (32,980) - 20,442 - (28,069) Total net interest income (15,727) (30,148) (248) 19,763 - (26,360) Net (losses) gains on derivatives and hedging activities Losses on derivatives not receiving hedge accounting (420) (55) - (310) - (785) CO bond firm commitments - - - 302 - 302 Mortgage delivery commitments - - 94 - - 94 Price alignment amount (3) - - - - 2 2 Net (losses) gains on derivatives and hedging activities(4) (420) (55) 94 (8) 2
(387)
Net losses on trading securities - (11,091) - - -
(11,091)
Total net effect of derivatives and hedging activities$ (16,147) $ (41,294) $ (154)$ 19,755 $ 2 $ (37,838) For the Nine Months Ended September 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)$ (838) $ -$ (376) $ (2,757) $ (3,971) Gains on designated fair-value hedges 2,950 39,506 - 1,385 43,841 Net interest settlements on derivatives(2) (10,158) (36,431) - 1,619 (44,970) Total net interest income (8,046) 3,075 (376) 247 (5,100) Net gains (losses) on derivatives and hedging activities Gains (losses) on derivatives not receiving hedge accounting 10 (2) - (520) (512) CO bond firm commitments - - - 520 520 Mortgage delivery commitments - - (744) - (744) Net gains (losses) on derivatives and hedging activities(4) 10 (2) (744) - (736) Net losses on trading securities - (425) - - (425) Total net effect of derivatives and hedging activities$ (8,036) $ 2,648 $ (1,120) $ 247 $ (6,261) 47
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For the Nine Months Ended September 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) $ (1,767) $ - $ (1,076) $ (2,249) $ - $
(5,092)
Gains on designated fair-value hedges 940 6,347 - 467 - 7,754 Net interest settlements on derivatives(2) (47,398) (84,764) - 43,912 - (88,250) Total net interest income (48,225) (78,417) (1,076) 42,130 - (85,588) Net gains (losses) on derivatives and hedging activities (Losses) gains on derivatives not receiving hedge accounting (384) 83 - (329) (148) (778) CO bond firm commitments - - - 321 - 321 Mortgage delivery commitments - - (339) - - (339) Price alignment amount (3) - - - - 8 8 Net (losses) gains on derivatives and hedging activities(4) (384) 83 (339) (8) (140)
(788)
Net losses on trading securities - (40,568) - - -
(40,568)
Total net effect of derivatives and hedging activities$ (48,609) $ (118,902) $ (1,415) $ 42,122 $ (140) $ (126,944) ________________________ (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.
(4) Recorded in Other, net in the statements of operations.
FINANCIAL CONDITION Advances AtSeptember 30, 2022 , the advances portfolio totaled$33.7 billion , an increase of$21.3 billion from$12.3 billion atDecember 31, 2021 . The significant increase in advances was concentrated in variable-rate advances and short-term fixed-rate advances, reflecting rising demand for wholesale funding at member institutions. 48 -------------------------------------------------------------------------------- Table of Contents Table 6 - Advances Outstanding by Product Type (dollars in thousands) September 30, 2022 December 31, 2021 Par Value Percent of Total Par Value Percent of Total Fixed-rate advances Short-term$ 12,065,164 35.6 %$ 1,531,550 12.4 % Long-term 6,526,493 19.2 6,511,706 52.7 Overnight 2,796,801 8.2 225,922 1.8 Putable 967,400 2.9 1,178,425 9.6 Amortizing 525,736 1.6 551,163 4.5 22,881,594 67.5 9,998,766 81.0 Variable-rate advances Simple variable (1) 10,707,065 31.6 2,348,875 19.0 Callable 250,000 0.7 - - Putable 70,000 0.2 - - All other variable-rate indexed advances 150 - 64 - 11,027,215 32.5 2,348,939 19.0 Total par value$ 33,908,809 100.0 %$ 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 September 30, 2022
Par Value of Ratio of Discounted
Advances Discounted Collateral
Number of Borrowers Outstanding Collateral to Advances
Category-1 217 $ 29,158,535 $ 101,243,923 347.2 %
Category-2 14 340,029 880,113 258.8
Category-3 16 196,844 402,835 204.6
Insurance companies 24 4,213,401 5,591,358 132.7
Total 271 $ 33,908,809 $ 108,118,229 318.8 %
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
- Financial Statements - Notes to the Financial Statements - Note 4 -
Advances.
Table 8 - Top Five Advance-Borrowing Institutions
(dollars in thousands)
September 30, 2022
Par Value of Percent of Total Par
Name Advances Value of Advances Weighted-Average Rate (1)
Citizens Bank, N.A. $ 9,769,076 28.8 % 3.10 %
Webster Bank, N.A. 3,510,717 10.3 3.03
Massachusetts Mutual Life Insurance Company 2,100,000 6.2 1.78
Hingham Institution for Savings 1,075,000 3.2 2.83
Cambridge Savings Bank 805,310 2.4 3.04
Total of top five advance-borrowing institutions
50.9 %
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
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At
instruments totaled
billion
Short-term money-market investments increased$5.8 billion to$8.6 billion atSeptember 30, 2022 , compared withDecember 31, 2021 . The increase was attributable to increases of$3.6 billion in federal funds sold,$1.7 billion in securities purchased under agreements to resell, and$508.2 million in interest bearing deposits. Investment securities declined$399.9 million to$13.1 billion atSeptember 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 ofSeptember 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 September 30, 2022
Long-Term Credit Rating
Investment Category Triple-A Double-A Single-A Unrated
Money-market instruments: (1)
Interest-bearing deposits $ - $ 150 $ 593,165 $ -
Securities purchased under agreements to
resell - 2,500,000 - -
Federal funds sold - 273,000 5,239,000 -
Total money-market instruments - 2,773,150 5,832,165 -
Investment securities:(2)
Non-MBS:
U.S. Treasury obligations - 5,668,041 - -
Corporate bonds - - - 1,101
U.S. government-owned corporations - 232,051 - -
GSE - 99,066 - -
Supranational institutions 350,382 - - -
HFA securities 32,973 27,467 - -
Total non-MBS 383,355 6,026,625 - 1,101
MBS:
U.S. government guaranteed - single-family - 20,531 - -
U.S. government guaranteed - multifamily - 513,852 - -
GSE - single-family - 921,096 - -
GSE - multifamily - 5,276,909 - -
Total MBS - 6,732,388 - -
Total investment securities 383,355 12,759,013 - 1,101
Total investments $ 383,355 $ 15,532,163 $ 5,832,165 $ 1,101
_______________________
(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 ofSeptember 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
September 30, 2022 December 31, 2021
Interest bearing deposits $ 593,315 $ 85,153
Federal funds sold 5,512,000 1,944,000
Supranational institutions 350,382 403,765
U.S. government-owned corporations 232,051 306,864
GSEs 99,066 126,472
Corporate bonds 1,101 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 ofSeptember 30, 2022 , our mortgage loan investment portfolio totaled$2.8 billion , a decrease of$299.5 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. Mortgage loan purchase volumes were significantly lower during the first nine months of 2022, compared to earlier periods, primarily due to rising interest rates which has resulted in a reduction of home purchases and reduced mortgage loan refinancing activity in general. In addition, prepayment activity in the nine months endedSeptember 30, 2022 , 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 ofSeptember 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
September 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
Nine Months Ended
2022 2021
Average par value of mortgage loans outstanding during the
period ending
$ 2,906,839 $ 3,539,477 Net (charge-offs) recoveries (1) 62 Net charge-offs to average loans outstanding during the period ending - % - % As of September 30, As of December 31, 2022 2021 Mortgage loans held for portfolio, par value$ 2,781,414 $ 3,072,075 Nonaccrual loans, par value 13,870 21,384 Allowance for credit losses on mortgage loans 2,000 1,700
Allowance for credit losses to mortgage loans held for
portfolio
0.07 % 0.06 % Nonaccrual loans to mortgage loans held for portfolio 0.50 0.70 Allowance for credit losses to nonaccrual loans 14.42 % 7.95 % Mortgage Insurance Companies. We are exposed to credit risk from primary mortgage insurance coverage (PMI) on individual loans. As ofSeptember 30, 2022 , we were the beneficiary of PMI coverage of$62.4 million on$237.7 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$457.1 million and$378.5 million as ofSeptember 30, 2022 , andDecember 31, 2021 , respectively. Derivative liabilities' net fair value, net of cash collateral and accrued interest, totaled$34.4 million and$38.9 million as ofSeptember 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 ofSeptember 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)
September 30, 2022 December 31, 2021
Notional Fair Notional Fair
Hedged Item Derivative Designation(2) Amount Value Amount Value
Advances (1) Swaps Fair value $ 3,222,610 $ 8,172 $ 2,693,195 $ 1,800
Swaps Economic 330,000 34 345,425 (11,761)
Total associated with advances 3,552,610 8,206 3,038,620 (9,961)
Available-for-sale securities Swaps Fair value 12,577,159 64,186 10,795,541 56,831
Trading securities Swaps Economic - - 500,000 3,087
COs Swaps Fair value 22,202,750 (1,435,735) 13,101,220 (173,243)
Swaps Economic - - 55,000 (24)
Forward starting
swaps Cash Flow 1,391,000 2,814 1,391,000 (380)
Total associated with COs 23,593,750 (1,432,921) 14,547,220 (173,647)
Total 39,723,519 (1,360,529) 28,881,381 (123,690)
CO bond firm commitments 65,000 195 55,000 24
Mortgage delivery commitments 4,421 49 3,164 68
Total derivatives $ 39,792,940 (1,360,285) $ 28,939,545 (123,598)
Accrued interest (1,989) (50,008)
Cash collateral, including related accrued
interest 1,784,971 513,194
Net derivatives $ 422,697 $ 339,588
Derivative asset $ 457,083 $ 378,532
Derivative liability (34,386) (38,944)
Net derivatives $ 422,697 $ 339,588
_______________________
(1) As ofSeptember 30, 2022 , andDecember 31, 2021 , embedded derivatives separated from certain advance contracts with notional amounts of$330.0 million and$345.4 million , respectively, and fair values of$(32) thousand 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
55 -------------------------------------------------------------------------------- Table of Contents collateral whose fair value is greater than the current net negative fair-value of derivative positions outstanding with them (variation margin). In addition, our average daily aggregate notional amount for uncleared derivatives transactions betweenJune 2021 andAugust 2021 exceeded$8 billion and, as a result, as ofSeptember 1, 2022 , we became subject to two-way initial margin obligations as required by the Wall Street Reform and Consumer Protection Act. For uncleared derivatives transactions executed on or afterSeptember 1, 2022 , a party whose initial margin requirement for such derivatives transactions exceeds a specified threshold would be required to deliver collateral in the amount by which the initial margin requirement exceeds such specified threshold. Initial margin is required to be held at a third-party custodian for the benefit of the secured party, which can only assert ownership of such collateral upon the occurrence of certain events, including an event of default due to bankruptcy, insolvency, or similar proceeding. As ofSeptember 30, 2022 , all initial margin requirements owed to our counterparties by us or owed to us by our counterparties were less than specified delivery thresholds. Similarly, from time to time, due to timing or derivatives-valuation differences, we receive from counterparties cash or securities collateral whose fair value is less than the current net positive fair-value of derivatives positions outstanding with them. We currently pledge only cash collateral, including initial and variation margin, for cleared derivatives, but may also pledge securities for initial margin as allowed by the applicable DCO and clearing member. Table 14 - Credit Exposure to Derivatives Counterparties (dollars in thousands) As of September 30, 2022 Net Derivatives Cash Collateral Fair Value Before Pledged to Net Credit Exposure Credit Rating (1) Notional Amount Collateral Counterparty to Counterparties Liability positions with credit exposure: Cleared derivatives$ 16,636,369 $ 44,019$ 412,815 $ 456,834 CO Bond firm commitments 65,000 195 - 195 Mortgage delivery commitments (2) 4,421 54 - 54 Total$ 16,705,790 $ 44,268$ 412,815 $ 457,083 _______________________ (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, atSeptember 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 atSeptember 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) - - 398,230 398,230 Total investment securities $ - $ - $ 409,580$ 409,580 LIBOR-indexed interest-rate swaps, notional amount Receive leg Cleared$ 4,500 $ - $ 19,750$ 24,250 Uncleared(1) - 68,000 219,900 287,900
Total interest-rate swaps, receive leg
68,000 $ 239,650
_______________________
(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 $ 398,230 $ -
SOFR 367,500 - 1,532,121 5,315,000
FHLBank discount note auction rate 10,659,565 - - -
Constant Maturity Treasury - - 29 -
Other 150 - - -
Total $ 11,027,215 $ 11,350 $ 1,930,380 $ 5,315,000
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. 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 57 -------------------------------------------------------------------------------- Table of Contents 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 nine months endedSeptember 30, 2022 , we maintained continuous 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 of 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 nine months endedSeptember 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 nine months endedSeptember 30, 2022 . 58 -------------------------------------------------------------------------------- Table of Contents Table 17 - ProjectedNet Cash Flow (dollars in thousands) As of September 30, 2022 21 Days Uses of funds Interest payable $ 62,460 Maturing liabilities 11,595,009 Committed asset settlements 67,112 Capital outflow 58,286 MPF delivery commitments 4,421 Gross uses of funds 11,787,288 Sources of funds Interest receivable 104,632 Maturing or projected amortization of assets
18,908,877
Committed liability settlements
299,992
Cash and due from banks and interest bearing deposits 628,883 Other 45,543 Gross sources of funds 19,987,927 Projected net cash flow $ 8,200,639 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 nine months endedSeptember 30, 2022 , we were out of compliance with the 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 September 30, 2022 December 31, 2021 3-month Funding Gap 15% 13% 2.0% (8.2)% 1-year Funding Gap 30% 25% 15.0% (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
AtSeptember 30, 2022 , andDecember 31, 2021 , outstanding COs for which we are primarily liable, including both CO bonds and CO discount notes, totaled$54.5 billion and$28.9 billion , respectively. CO bonds outstanding for which we are primarily liable atSeptember 30, 2022 , andDecember 31, 2021 , include issued callable bonds totaling$20.3 billion and$12.8 billion , respectively. CO discount notes comprised 39.8 percent and 7.9 percent of the outstanding COs for which we are primarily liable atSeptember 30, 2022 , andDecember 31, 2021 , respectively, but accounted for 90.7 percent and 93.1 percent of the proceeds from the issuance of such COs during the nine months endedSeptember 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 high 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
at year-end 2021.
Capital stock increased by
offset by capital stock repurchases of
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 September 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) September 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 6,128 9,721 Total $ 10,397 $ 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 datedSeptember 15, 2022 , the Director of the FHFA notified us that based onJune 30, 2022 , 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 ofSeptember 30, 2022 , this internal minimum capital requirement equaled$2.9 billion , which was satisfied by our actual regulatory capital of$3.4 billion .
Minimum Retained Earnings Target
AtSeptember 30, 2022 , we had total retained earnings of$1.7 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.
61
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Table of Contents
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
September 30, 2022 $ 316,280 $ 1,353,558 $ 1,669,859 $ 1,728,145 $ 58,286
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 adjust 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
At
retained earnings account was
contribution of
consolidated obligations during the quarter ended
contributed
retained earnings.
Contractual Obligations
During the third quarter of 2022, the Bank entered into a lease modification agreement for its existing headquarters in thePrudential Tower inBoston, MA , and concurrently entered into a lease for new office space within the same building. The new office space lease commences onJanuary 1, 2023 , and the Bank intends to relocate from our existing office space to the new office space in 2023. The new lease will terminate onDecember 31, 2038 . Additionally, during the third quarter of 2022 the Bank entered into a lease modification agreement for its business continuity site, which extends the term of the lease by four years and two months, which will terminate onApril 30, 2027 . As a result of these lease agreements and lease modifications, the Bank's future minimum lease payments for operating leases are the following, as ofSeptember 30, 2022 : Table 21 - Operating Lease Future Minimum Lease Payments (dollars in thousands) Operating lease obligations As of September 30, 2022 Less than one year $ 2,085 One to three years 4,750 Three to five years 4,922 Thereafter 29,814 Total $ 41,571
Off-Balance-Sheet Arrangements
Our significant off-balance-sheet arrangements consist of the following:
• commitments that obligate us for additional advances;
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• 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 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
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.
Amendments to FINRA Rule 4210: Margining of Covered Agency Transactions. OnAugust 15, 2022 , theSEC published amendments toFinancial Industries Regulatory Authority (FINRA) Rule 4210 that delayed the effectiveness of margining requirements for covered agency transactions fromOctober 26, 2022 , until at leastApril 24, 2023 . These amendments became effective uponFINRA's filing with theSEC onJuly 29, 2022 . 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.
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