UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20172019
OR
o☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________ .
Commission file number: 000-51402
FEDERAL HOME LOAN BANK OF BOSTON
(Exact name of registrant as specified in its charter)
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| Federally chartered corporation | | 04-6002575 | |
| (State or other jurisdiction of incorporation or organization) | | 04-6002575
(I.R.S. Employer Identification Number) employer identification number) | |
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| 800 Boylston Street, | Boston Massachusetts | MA | | 02199 | |
| (Address of principal executive offices) | | 02199
(Zip Code) code) | |
(617)292-9600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:None
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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Securities registered pursuant to Section 12(g) of the Act:
Class B Stock, par value $100 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes oNo x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o | | Accelerated filer o | | Non-accelerated filer | x (Do not check if a
smaller reporting company)
| | Smaller reporting company o | ☐ |
| | | | | | | Emerging growth companyo | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o☐ No x
Registrant's stock is not publicly traded and is only issued to members of the registrant. Such stock is issued and redeemed at par value, $100 per share, subject to certain regulatory and statutory limits. As of February 28, 2018,29, 2020, including mandatorily redeemable capital stock, we had zero0 outstanding shares of Class A stock and 24,792,11220,758,802 outstanding shares of Class B stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
FEDERAL HOME LOAN BANK OF BOSTON 20172019 Annual Report on Form 10-K
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PART I
ITEM 1. BUSINESS
General
The Federal Home Loan Bank of Boston is a federally chartered corporation organized by the United States (the U.S.) Congress (Congress) in 1932 pursuant to the Federal Home Loan Bank Act of 1932 (as amended, the FHLBank Act) and is a government-sponsored enterprise (GSE). Unless otherwise indicated or unless the context requires otherwise, all references in this discussion to “the Bank,” "we," "us," "our," or similar references mean the Federal Home Loan Bank of Boston. Our primary regulator is the Federal Housing Finance Agency (the FHFA).
We are a privately capitalized cooperative, and our mission is to provide highly reliable wholesale funding, liquidity, and a competitive return on investment to our members. We develop and deliver competitively priced financial products, services, and expertise that support housing finance, community development, and economic growth, including programs targeted to lower-income households. We serve the residential-mortgage and community-development lending activities of our members and certain nonmember institutions (referred to as housing associates) located in our district. Our district is comprised of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. There are 11 district Federal Home Loan Banks (the FHLBanks or the FHLBank System) located across the United States (the U.S.), each supporting the lending activities of its members within their districts. Each FHLBank is a separate entity with its own board of directors, management, and employees.
We are exempt from ordinary federal, state, and local taxation except for local real estate tax. However, we are required to set aside funds at a 10 percent rate on our income for our Affordable Housing Program (AHP). For additional information, see — AHP Assessment. We also have voluntarily put in place certain subsidized advance and bond purchasing programs including our Jobs for New England (JNE) program and our Helping to House New England (HHNE) program. For additional information, see — Targeted Housing and Community Investment Programs.
We are managed with the primary objectives of enhancing the value of our membership and fulfilling our public purpose. In pursuit of our primary objectives, we have adopted long-term strategic priorities in our strategic business plan, which are to:
position the Bank to compete effectively in the wholesale funding market and support members' and housing associates’ efforts to address the affordable housing and economic needs of their communities in New England;
maintain an appropriate and efficient capital structure considering our risk profile through proactive capital stock management and dividend strategies;
advocate stakeholder interests in policy matters, and effectively monitor and respond to pending GSE reform and other legislative and regulatory initiatives;
acquire, develop and retain the talent required to meet our current and future needs;
leverage the advantages of a diverse and inclusive organization in all aspects of our organizational efforts; and
continue to evolve as a strong and agile organization that responds quickly and effectively to emerging risks and opportunities while upholding our commitment to efficient and effective operations.
We combine private capital and public sponsorship in a way that is intended to enable our members and housing associates to assure the flow of credit and other services for housing finance, community development, and economic growth. We serve the public through our members and housing associates by providing these institutions with a readily available, low-cost source of funds,loan products, called advances, as well as other products and services that are intended to support the availability of residential-mortgage and community-investment credit. In addition, we provide liquidity by enabling members to sell mortgage loans to us or to designate third-party investors through a mortgage loan purchase program. Under this program, we offer participating financial institutions the opportunity to originate mortgage loans for sale to us or to designated third-party investors. Our primary sources of income come from interest on invested capital as well as the spread between interest-earning assets and interest-bearing liabilities. We are generally able to borrow funds at favorable rates due to our GSE status. Our debt is not backed by the U.S. government, but it does represent the joint and several obligation of the 11 FHLBanks.
Our members and housing associates are comprised of institutions located throughout our district. Institutions eligible for membership include savings institutions (savings banks, savings and loan associations, and cooperative banks), commercial banks, credit unions, qualified community development financial institutions (CDFIs), and insurance companies that demonstrate that their home financing policy is consistent with the Bank's housing finance mission. We are also authorized to
lend to housing associates such as state housing-finance agencies located in New England. Members are required to purchase and hold our capital stock as a condition of membership and for advances and certain other business activities transacted with
Federal Housing Finance Agency
The FHFA has broad supervisory authority over the FHLBanks, including, but not limited to, the power to suspend or remove any entity-affiliated party (including any director, officer, or employee) of an FHLBank who violates certain laws or commits certain other acts; to issue and serve a notice of charges upon an FHLBank or any entity-affiliated party; to issue a cease and desist order, or a temporary cease and desist order; to stop or prevent any unsafe or unsound practice or violation of law, order, rule, regulation, or condition imposed in writing; to impose civil money penalties against an FHLBank or an entity-affiliated party; to require an FHLBank to maintain capital levels in excess of usual regulatory requirements; to require an FHLBank to take certain actions, or refrain from certain actions, under the prompt corrective action provisions that authorize or require the FHFA to take certain supervisory actions, including the appointment of a conservator or receiver for an FHLBank under certain conditions; and to require any one or more of the FHLBanks to repay the primary obligations of another FHLBank on outstanding consolidated obligations (COs).
The FHFA conducts an annual onsite examination and other periodic reviews of our operations to assess our safety and soundness as well as our compliance with statutory and regulatory requirements. In addition, we are required to submit information on our financial condition and results of operations each month to the FHFA, and we are required to report other supplemental information to the FHFA on a quarterly basis. We are generally prohibited by FHFA regulations from disclosing the results of the FHFA's examinations and reviews. However, information from those examinations and reviews could become publicly available either through the FHFA or through the FHFA's Office of Inspector General, which can sometimes occur via their reports to Congress.
Additionally, while we arehave been subject to annual stress testing by the FHFA.FHFA, the FHFA has proposed amending its stress testing rule to, among other things, remove the requirements for FHLBanks to conduct stress tests, as discussed under Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Legislative and Regulatory Developments. The results of our most recent annual severely adverse economic conditions stress test were published to our public website, www.fhlbboston.com, on November 16, 2017. We expect to publish the results of our 2018 annual severely adverse economic conditions stress test to our public website between November 15, and 30, 2018.2019.
Office of Finance
The FHLBanks' Office of Finance (the Office of Finance) facilitates the issuing and servicing of FHLBank debt in the form of COs. The FHLBanks, through the Office of Finance as their agent, are the issuers of COs for which they are jointly and severally liable. The Office of Finance also provides the FHLBanks with credit and market data and maintains the FHLBanks' joint relationships with credit-rating agencies.data. The Office of Finance publishes annual and quarterly combined financial reports on the financial condition and performance of the FHLBanks and also publishes certain data concerning debt issues and issuance. The FHLBanks are charged for the costs of operating the Office of Finance, as discussed in Part II — Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 12 — Summary of Significant Accounting Policies — Office of Finance Expenses. The Office of Finance is governed by a board of directors that is constituted of all 11 the FHLBank presidents and five independent directors.
Available Information
Our website, www.fhlbboston.com, provides a link to the section of the Electronic Data Gathering and Reporting (EDGAR) website, as maintained by the U.S. Securities and Exchange Commission (the SEC), containing all reports electronically filed, or furnished, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, and our current reports on Form 8-K as well as any amendments to such reports. These reports are made available free of charge through our website as soon as reasonably practicable after electronically filing or being furnished to the SEC. These reports may also be read and copied at
the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Further information about the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. In addition, the SEC maintains a website that contains reports and other information regarding our electronic filings (located at http://www.sec.gov). The Bank's
and the SEC's website addresses have been included as inactive textual references only. Information on those websites is not part of this report.
Employees
As of February 28, 2018,29, 2020, we had 202194 full-time employees and one part-time employee.employees.
Membership
Table 1 - Number of Members by Institution Type
| Table 1 - Number of Members by Institution Type
| Table 1 - Number of Members by Institution Type
|
| | | | December 31, | | December 31, |
| | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| Commercial banks | | 52 |
| | 52 |
| | 52 |
| | 44 |
| | 46 |
| | 52 |
|
| Credit unions | | 161 |
| | 159 |
| | 159 |
| | 162 |
| | 163 |
| | 161 |
|
| Insurance companies | | 51 |
| | 46 |
| | 41 |
| | 63 |
| | 55 |
| | 51 |
|
| Savings institutions | | 175 |
| | 186 |
| | 190 |
| | 162 |
| | 171 |
| | 175 |
|
| Community development financial institutions (CDFI), non-depository institutions | | 4 |
| | 4 |
| | 4 |
| |
| CDFI, non-depository institutions | | | 4 |
| | 4 |
| | 4 |
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| Total members | | 443 |
| | 447 |
| | 446 |
| | 435 |
| | 439 |
| | 443 |
|
As of December 31, 2019, 2018, and 2017, 2016, and 2015, 70.966.0 percent, 70.574.0 percent, and 72.070.9 percent, respectively, of our members had outstanding advances with us. These usage rates are calculated excluding housing associates and other nonmember borrowers. While eligible to borrow, housing associates are not members and, as such, cannot hold our capital stock. Other nonmember borrowers consist of institutions that are former members or that have acquired former members and assumed the advances held by those former members. These other nonmember borrowers are required to hold capital stock to support outstanding advances with us until those advances either mature or are paid off. In addition, nonmember borrowers are required to deliver all required collateral to us or our safekeeping agent until all outstanding advances either mature or are paid off. Other than housing associates, nonmember borrowers may not request new advances and are not permitted to extend or renew any advances they have assumed.
Our membership includes the majority of Federal Deposit Insurance Corporation (FDIC)-insured institutions and credit unions with more than $100 million in assets in our district that are eligible to become members. We do not anticipate that a substantial number of additional FDIC-insured institutions will become members. There are a number of other institutions that are eligible for membership, such as insurance companies, smaller credit unions, and CDFIs, which could become members in the future. We note that, for a variety of reasons, including merger of members, we could experience a contraction in our membership that could lower overall demand for our products and services.
Economic Conditions
While our membership is limited to institutions with theira principal place of business located in our district, both U.S. national and New England economic conditions, particularly in the housing market, impact our results of operations, financial condition, and future prospects. For example, demand for advances is influenced in part by factors such as the level of our members' deposits, which serve as liquidity alternatives to advances, and demand for residential mortgage loans, which members can generally use as collateral for advances. For information on some of the economic factors that have impacted us in 20172019 and are expected to impact us in 2018,2020, see Part II — Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Economic Conditions.
Business Lines
Our business lines include offering credit products, such as advances, access to the Mortgage Partnership Finance® (MPF®) program, deposit and safekeeping services, and access to the AHP. We also maintain a portfolio of investments for liquidity
purposes and to supplement earnings.
"Mortgage Partnership Finance," "MPF," "eMPF" and "MPF Xtra" are registered trademarks of the Federal Home Loan Bank of Chicago.
program, deposit and safekeeping services, and access to the AHP. We also maintain a portfolio of investments for liquidity
purposes and to supplement earnings.
Advances. We serve as a source of liquidity and make advances to our members and housing associates secured by mortgage loans and other eligible collateral. We offer an array of fixed- and variable-rate advances products, with repayment terms intended to provide funding alternatives to our members in many interest-rate environments and situations. Principal repayment terms may be structured as 1) interest-only to maturity (sometimes referred to as bullet advances) or to an optional early termination date or series of dates or 2) amortizing advances, which are fixed-rate and term structures with equal monthly payments of interest and principal.
We price advances based onto generate a desired profit margin above the estimated marginal cost of raising funding with a similar maturity profile as well as associated operating and administrative costs, while considering market rates for comparable competing wholesale funding alternatives. In accordance with the FHLBank Act and FHFA regulations, we price our advance products in a consistent and nondiscriminatory manner to all members. However, we are permitted to differentially price our products on a differential basis, which can be based on the creditworthiness of the member, volume, or other reasonable criteria applied consistently to all members.
Our major competitors are other sources of liquidity, including retail deposits, investment banks, commercial banks, wholesale/brokered deposits, and, in limited instances, other FHLBanks.
Members that have an approved line of credit with us may from time to time overdraw their demand-deposit account. These overdrawn demand-deposit accounts are reported as advances in the statements of condition. These line of credit advances are fully secured by eligible collateral pledged by the member to us. In cases where the member overdraws its demand-deposit account by an amount that exceeds its approved line of credit, we may assess a penalty fee to the member.
In addition to making advances to members, we are permitted under the FHLBank Act to make advances to housing associates that are approved mortgagees under Title II of the National Housing Act. Housing associates must be chartered under law and have succession, be subject to inspection and supervision by a governmental agency, and lend their own funds as their principal activity in the mortgage field. Housing associates are not subject to capital stock investment requirements, however, they are subject to the same underwriting standards as members, but are more limited in the forms of collateral that they may pledge to secure advances.
Our advance products can also help members in their asset-liability management. For example, we offer advances that members can use to match the cash-flow patterns of their mortgage loans. Such advances can reduce a member's interest-rate risk associated with holding long-term, fixed-rate mortgages. As another example, we also offer advances with interest rates that vary based on changes in the yield curve. We may also offer advances that shift from fixed to floating rates or vice versa after a certain period or upon the occurrence of a certain condition.
Generally, advances may be prepaid at any time. We charge prepayment fees to make us financially indifferent to advance prepayments, except in cases where the prepayment of an advance does not have an adverse financial impact on us.us or where the pricing of the product compensates us for the value of the option to prepay the advance.
We also offer an advance restructuring program under which the prepayment fee on prepaid advances may be satisfied by the member's agreement to pay an interest rate on a new advance sufficient to amortize the prepayment fee by the maturity date of the new advance, rather than paying the fee in funds immediately available to us.
We have never experienced a credit loss on an advance.
Targeted Housing and Community Investment Programs. We offer several solutions that are targeted to meet the affordable housing or economic development needs of communities that our members serve. These programs include the AHP, the Equity Builder Program (EBP), Community Development Advances (CDAs), the New England Fund (NEF), JNE, and HHNE.
The AHP is a statutorily mandated program under which we provide subsidies in the form of direct grants or discounted interest rates on advances (AHP advances) to help fund affordable housing projects that are directly sponsored by members. AHP funds are required to be used for homeownership housing for households with incomes at or below 80 percent of the median income
for the area, or rental housing in which 20 percent of the units are for households with incomes that do not exceed 50 percent of
the median income for the area. Program funds must be used for the direct costs to purchase, construct, or rehabilitate affordable housing.
The EBP offers members grants to provide households with incomes at or below 80 percent of the area median income with down-payment, closing-cost, homebuyer counseling, and rehabilitation assistance. The EBP is funded with a portion of the AHP assessment. For further information about how AHP subsidies are funded, see AHP Assessment below.
CDAs are discounted advances offered at interest rates that are lower than our regular advance products for the purpose of helping our members fund community development efforts, such as supporting the growth of small businesses, and the development or renovation of roads and schools and expanding affordable housing for individuals with incomes at or below defined percentages of area median income.
NEF advances are targeted to support housing and community development initiatives that benefit moderate-income households with incomes at or below 80 percent of the area median income in support of inclusionary zoning efforts in ownership and neighborhoods.rental projects.
JNE a program we first offered in 2016, provides advances to support small businesses in New England that create and/or retain jobs, or otherwise contribute to overall economic development activities. Examples of those activities include using funds to support the working capital, expansion, or financing needs of small businesses. The JNE program provides subsidies that are used to write down interest rates to zero percenta significant discount to market rates on eligible advances that finance qualifying loans to small businesses. ForAt the direction of the board of directors, in 2019, the subsidy amount for the JNE was increased to $7.5 million, including $1.0 million set aside for a pilot program to fund economic development projects that did not meet the traditional JNE’s eligibility criteria. The combined subsidy on JNE advances disbursed during the year ended December 31, 2017, the subsidy expense for this program2019, amounted to $5.0$7.4 million. We plan to provide interest rate subsidies or grants of up to $5 million in 2018.
HHNE which we also introduced in 2016, provides the six New England housing finance agencies (HFAs) with subsidized fundingsubsidies for targeted initiatives serving individuals and families who qualify for loans under the agencies' income guidelines. HHNE program subsidies are used either to write down interest rates to zero percenta significant discount to market rates on eligible advances to HFAs or to purchase bonds from the New England HFAs at deeply discounted yields for the purpose of expanding affordable rental and homeownership initiatives.initiatives, or to provide direct grants to HFAs for these purposes. Examples of uses include, but are not limited to, short-term construction lending, workforce housing, deferred loan programs for homeownership, multifamily loan refinance, and rental housing expansion, particularly in areas with job growth that exceeds the supply of rental units. For the year ended December 31, 2017,2019, the subsidy expense for this program amounted to $497,000 on zero interest-rate advances, while $4.0was allocated as follows: $1.5 million of subsidy was committedapplied to below-market yielding bonds issued by fourtwo HFAs that(which will effectively be realized by the below-market yield over the life of the bond. A grant optionbond); and $3.5 million of subsidy was addedapplied toward grants made to the program in 2017 for HFAs unable to execute an advance or bond. For the year ended December 31, 2017,2019, the subsidy expense for this program amounted to $500,000 in grants. We plan$5.0 million.
In addition to the $5.0 million allocation for the HFAs, the board of directors approved $2.5 million for the establishment of a new HHNE down-payment assistance program, Housing Our Workforce (HOW), and a pilot program. The HOW program was allocated $2.0 million to enable members to provide interest rate subsidies ofdown payment assistance for households with incomes above 80 percent up to $5 million120 percent of the area median income. The pilot program was allocated $500 thousand in 2018.subsidy for members and HFAs to support initiatives that reduce tenant rents or encourage homeownership through a structured partnership with a city or town. The combined subsidy disbursed for all the HHNE programs during the year ended December 31, 2019, amounted to $7.6 million.
Investments. We maintain a portfolio of investments for liquidity purposes and to supplement earnings. To better meet members' potential borrowing needs at times when access to the capital markets is unavailable (either due to requests that follow the end of daily debt issuance activities or due to a market disruption event impacting CO issuance) and in support of certain statutory and regulatory liquidity requirements, as discussed in Part II — Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources, we maintain a portfolio of short-term investments issued by highly-rated institutions, includingprimarily consisting of U.S. Department of the Treasury (U.S. Treasury) securities, federal funds, and securities purchased under agreements to resell (secured by U.S. Department of the Treasury (U.S. Treasury) securities, or Government National Mortgage Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae), or Federal Home Loan Mortgage Corporation (Freddie Mac) securities)., and interest-bearing deposit accounts at banks.
We also leverage our capital to enhance our income and further support our contingent liquidity needs and mission by maintaining a longer-term investment portfolio. This portfolio includes debentures issued or guaranteed by U.S. government agencies and instrumentalities, as well as supranational institutions, and mortgage-backed securities (MBS) that are issued by GSE mortgage agencies or by other private-sector entities, and asset-backed securities (ABS) that are issued by other private-sector entities. All securities must be rated in at least the third highest rating category from a nationally-recognized statistical rating organization (NRSRO) as of the date of purchase. Our ABS holdings are furtherEffective January 1, 2020, the requirement that such securities purchases be limited to those rated in at least the third-highest rating category from an NRSRO was replaced by an internal rating requirement. Such securities backed by loans secured by real estate.purchases starting on January 1, 2020 must be
internally 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. We also purchase securities issued by state or local HFAs that are rated in at least the second-highest rating category from an NRSRO as of the date of purchase. Effective January 1, 2020, this NRSRO rating requirement was also changed to an internal rating requirement in at least the second highest internal rating category. The long-term investment portfolio is intended to provide us with higher returns than those available in the short-term money markets. For a discussion of developments and factors that have impacted and could continue to impact the profitability of our investments, particularly our long-term investment portfolio, see Part II — Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Executive Summary.
Under our regulatory authority to purchase MBS, additional investments in MBS, ABS,asset-backed securities (ABS), and certain securities issued by the Small Business Administration (SBA) are prohibited if our investments in such securities exceed 300 percent of capital.capital at the time of purchase. Capital for this calculation is defined as capital stock, mandatorily redeemable capital stock, and retained earnings. At December 31, 2017,2019, and 2016,2018, our MBS, ABS, and SBA holdings represented 230222 percent and 224166 percent of capital, respectively.
We conduct our investment activities so as to strive to comply with the FHFA’s core mission achievement advisory bulletin, which establishes a ratio by which the FHFA will assess each FHLBank’s core mission achievement. Core mission achievement is determined using a ratio of primary mission assets, which includes advances and acquired member assets (mortgage loans acquired from members), to COs.COs excluding the amount funding U.S. Treasury securities classified as available-for-sale or trading securities. The core mission asset ratio is calculated using annual average par values.
The core mission advisory bulletin provides the FHFA’s expectations about the content of each FHLBank’s strategic plan based on its ratio, as follows:
when the ratio is at least 70 percent, the strategic plan should include an assessment of the FHLBank’s prospects for maintaining this level;
when the ratio is at least 55 percent but less than 70 percent, the strategic plan should explain the FHLBank’s plan to increase the ratio; and
when the ratio is below 55 percent, the strategic plan should include an explanation of the circumstances that caused the ratio to be at that level and detailed plans to increase the ratio. The advisory bulletin provides that if an FHLBank maintains a ratio below 55 percent over the course of several consecutive reviews, the FHLBank’s board of directors should consider possible strategic alternatives.
Our primary core mission achievement ratio for the years ended December 31, 20172019 and 2016,2018, was 74.274.7 percent and 72.675.2 percent, respectively.
Mortgage Loan Finance. We participate in the MPF program, which is a secondary mortgage market structure under which we either invest in or, for fees, facilitate third party investors' investment in eligible mortgage loans (referred to as MPF loans) from FHLBank members, referred to as "participating financial institutions". MPF loans are fixed rate, residential mortgage loans that are either conventional residential, fixed-rate mortgage loans (conventional mortgage loans) or government fixed-rate mortgage loans that are insured or guaranteed by the Federal Housing Administration (the FHA), the U.S. Department of Veterans Affairs (the VA), the Rural Housing Service of the U.S. Department of Agriculture (RHS), or the U.S. Department of Housing and Urban Development (HUD) (government mortgage loans) and are secured by one- to four-family residential properties with original maturities ranging from five years to 30 years or participations in such mortgage loans (government mortgage loans).loans. For information on trends in the growth of the program in 2017,2019, see Part II — Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Mortgage Loans.
A variety of MPF loan products have been developed to meet the differing needs of participating financial institutions. We have offered our members MPF Original, MPF 125, MPF Plus, MPF 35, MPF Government, MPF Direct, MPF Government MBS and MPF Xtra, each being closed-loan products in which we (or a third party investor in the case of MPF Xtra, MPF Direct, or MPF Government MBS) invest in MPF loans that have been acquired or have already been closed by the participating financial institutions with its own funds. The products have different credit-risk-sharing characteristics based upon the different levels for the first loss account and credit enhancementcredit-enhancement and the types of credit-enhancement fees (performance-based, fixed amount, or none). In the case of MPF Xtra, MPF Direct and MPF Government MBS, each product facilitates the investment in MPF loans by third party investors for which we are paid fees and under which the related credit and market risks are transferred to the investors. There are no first loss account, credit enhancement,credit-enhancement, or credit-enhancement fees for MPF Xtra, MPF Direct, and MPF Government MBS because the credit risk for such loans is transferredare sold to third parties.parties that assume the embedded credit risk. For government loans,
participating financial institutions provide the required credit enhancementcredit-enhancement by delivering loans that are guaranteed or insured by a department or agency of the U.S. government.
The participating financial institution performs all of the traditional retail loan origination functions under all of these MPF loan products. A master commitment provides the terms under which the participating financial institution delivers mortgage loans to us. We continue to offer MPF Original, MPF 35, MPF Government, MPF Direct, MPF Government MBS, and MPF Xtra. We do not currently offer our members new master commitments under either MPF 125 or MPF Plus.
The FHLBank of Chicago (in this capacity, the MPF Provider) establishes general eligibility standards under which an FHLBank member may become a participating financial institution, the structure of MPF loan products, and the eligibility rules for MPF loans. In addition, the MPF Provider manages the delivery mechanism for MPF loans and the back-office processing
of MPF loans as master servicer and master custodian. The FHLBanks that participate in the MPF Program, (includingincluding the Bank, the(the MPF Banks) pay fees to the MPF Provider for these services.
The MPF Provider has engaged Wells Fargo Bank N.A. as the vendor for master servicing and as the primary custodian for the MPF program (referred to herein as the master servicer). The MPF Provider also has contracted with other custodians meeting MPF program eligibility standards at the request of certain participating financial institutions. These other custodians are typically affiliates of participating financial institutions, and in some cases a participating financial institution may act as self-custodian.
The MPF Provider publishes and maintains:
the MPF Program Guide;
a Selling Guide for the MPF Direct product; and
a Selling Guide and a Servicing Guide for each of the remaining MPF products we have offered (collectively, the MPF guides), which together detail the requirements participating financial institutions must follow in originating, underwriting, selling and servicing MPF loans.
The MPF Provider also maintains the infrastructure through which MPF Banks may purchase MPF loans through their participating financial institutions.
For conventional mortgage loan products (MPF loan products other than government mortgage loans and products in which we do not invest such as MPF Xtra), participating financial institutions assume or retain a portion of the credit risk on the MPF loans they sell to an MPF Bank by providing credit enhancementcredit-enhancement either through a direct liability to pay credit losses up to a specified amount or through a contractual obligation to provide supplemental mortgage guaranty insurance. As of December 31, 2016, conventional mortgage loans were credit enhanced so that the risk of loss was limited to the losses equivalent to an investor in a double-A rated MBS at the time of purchase. Pursuant to the revisedThe FHFA regulation on Acquired Member Assets (AMA), which went into effect on January 18, 2017, we adjusted our methodology to set the participating financial institution’s credit enhancement amount. The FHFA AMA rule allows each FHLBank to utilize its own model to determine the credit enhancementcredit-enhancement for an AMA asset or pool of loans in lieu of a nationally recognized statistical ratings organization ratings model. Upon effectiveness of the FHFA AMA rule, weWe determined, based on documented analysis, that assets delivered to us had to be credit enhanced to at least a level at which we have a high degree of confidence that we will not bear material losses beyond the losses absorbed by our first loss account, even under reasonably likely adverse changes to expected economic conditions. Loans are assessed by a third party’sparty credit model at acquisition,models, and a credit enhancementcredit-enhancement is calculated based on loancredit attributes and our risk tolerance.of the loans in each master commitment. Credit losses on a loan may only be absorbed by a credit enhancementcredit-enhancement amount stated in the master commitment related to the loan. The participating financial institution's credit enhancementcredit-enhancement covers losses for MPF loans in excess of the MPF Bank's allocated portion of credit losses up to an agreed upon amount, called the first loss account. Participating financial institutions are paid a credit-enhancement fee for providing credit enhancementcredit-enhancement and in some instances all or a portion of the credit-enhancement fee may be adjusted based upon the performance of loans purchased by the MPF Bank. Losses that exceed the amount of the participating financial institutions' credit-enhancement obligation are borne by the MPF Bank that owns the loans.
Participating Financial Institution Eligibility
Members and eligible housing associates may apply to become a participating financial institution. All of the participating financial institution's obligations under the applicable agreement are secured in the same manner as the other obligations of the participating financial institution under its regular advances agreement with us. We have the right to request additional collateral to secure the participating financial institution's obligations.
Repurchases of MPF Loans
When a participating financial institution fails to comply with its representations and warranties concerning its duties and obligations described within applicable agreements, the MPF guides, applicable laws, or terms of mortgage documents, the participating financial institution may be required to repurchase the MPF loans that are impacted by such failure. Reasons that would require a participating financial institution to repurchase an MPF loan may include, but are not limited to, MPF loan ineligibility, failure to deliver documentation to an approved custodian, a servicing breach, fraud, or other misrepresentation. In such instances, we can require that the participating financial institution compensate us for any losses or costs that we incur. Additionally, subject to our approval, participating financial institutions may repurchase delinquent government mortgage loans so that they may comply with loss-mitigation requirements of the applicable government agency to preserve the insurance or guaranty coverage. The repurchase price for each such delinquent loan is equal to the current scheduled principal balance and accrued interest on the government mortgage loan.
MPF Servicing
The participating financial institution, or a servicer it engages, generally retains the right and responsibility for servicing MPF loans it delivers, including loan collections and remittances, default management, loss mitigation, foreclosure, and disposition of the real estate acquired through foreclosure or deed in lieu of foreclosure.
If there is a loss on a conventional mortgage loan, the loss is allocated to the master commitment and shared in accordance with the risk-sharing structure for that particular master commitment. The servicer pays any gain on sale of real-estate-owned property (REO) to the related MPF Bank, or in the case of a participation, to us and other MPF Bank(s) based upon their respective interests in the MPF loan. However, the amount of the gain is available to reduce subsequent losses incurred under the master commitment before such losses are allocated between us and the participating financial institution.
Loss Allocation
Credit losses from conventional mortgage loans that are not covered by the borrower's equity in the mortgaged property, property insurance, or primary mortgage insurance are allocated between us and the participating financial institution as follows:
Credit losses are allocated first to us, up to an agreed-upon amount, called the first loss account determined for the MPF product as follows:
MPF Original. The first loss account starts out at zero on the day the first MPF loan under a master commitment is purchased but increases monthly over the life of the master commitment at a rate that ranges from 0.03 percent to 0.06 percent (three to six basis points) per annum based on the month-end outstanding aggregate principal balance of the master commitment. The first loss account is structured so that over time, it should cover expected losses on a master commitment, though losses early in the life of the master commitment could exceed the first loss account and be charged in part to the participating financial institution's credit enhancement.credit-enhancement.
MPF 125. The first loss account is equal to 1.00 percent (100 basis points) of the aggregate principal balance of the MPF loans funded under the master commitment. Once the master commitment is fully funded or expires, the first loss account is expected to cover expected losses on that master commitment, although we may recover a portion of losses incurred under the first loss account by withholding performance credit-enhancement fees payable to the participating financial institution.
MPF Plus. The first loss account is equal to an agreed-upon number of basis points of the aggregate principal balance of the MPF loans funded under the master commitment that is not less than the amount of expected losses on the master commitment. Once the master commitment is fully funded, the first loss account is expected to cover expected losses on that master commitment. We may recover a portion of losses incurred under the first loss account by withholding performance credit-enhancement fees payable to the participating financial institution.
MPF 35. The first loss account is equal to 35 basis points of the aggregate principal balance of the MPF loans funded under the master commitment. We may recover a portion of losses we absorb by withholding performance credit-enhancement fees that would otherwise be payable to the participating financial institution.
Credit losses are allocated second to the participating financial institution under its credit-enhancement obligation for losses in excess of the first loss account, if any, up to the amount of such credit enhancement.credit-enhancement. The credit enhancementcredit-enhancement may consist of a direct liability of the participating financial institution to pay credit losses up to a specified amount, a contractual obligation of the participating financial institution to provide supplemental mortgage guaranty insurance, or a combination of both.
Third, any remaining unallocated losses are absorbed by us.
We may invest in participation interests in MPF loans together with other MPF Banks. For participation interests, MPF loan losses (other than those allocable to the participating financial institution) are allocated among us and the participating MPF Bank(s) pro rata based upon the respective participation interests in the related master commitment.
Other Banking Activities. We engage in other banking activities including, among others:
offering standby letters of credit, which are financial instruments we issue for a fee under which we agree to honor payment demands made by a beneficiary in the event the primary obligor cannot fulfill its obligations; and
acting as a correspondent for deposit, funds transfer, and safekeeping services for which we earn a fee.
Consolidated Obligations
We fund our activities principally through the sale of debt securities known as consolidated obligations, and referred to herein as COs. Our ability to access the money and capital markets through the sale of COs using a variety of debt structures and maturities has historically allowed us to manage our balance sheet effectively and efficiently. The FHLBanks are among the world's most active issuers of debt, issuing on a near-daily basis, including sometimes multiple issuances in a single day. The FHLBanks compete with Fannie Mae, Freddie Mac, and other GSEs for funds raised through the issuance of unsecured debt in the agency debt market.
COs, consisting of bonds and discount notes, represent our primary source of debt to fund advances, mortgage loans, and investments. All COs are issued on behalf of a single FHLBank (as the primary obligor) through the Office of Finance, but all COs are the joint and several obligationobligations of all of the FHLBanks. COs are not obligations of the U.S. government and are not guaranteed by the U.S. government or any government agency. As of February 28, 2018,29, 2020, Moody's Investors Service Inc. (Moody's) rated COs Aaa/P-1, and Standard & Poor’s Financial Services LLC (S&P) rated them AA+/A-1+. The GSE status of the FHLBanks and the ratings of the COs have historically provided the FHLBanks with ready capital market access. For information on the market for COs during the period covered by this report, see Part II — Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity.
CO Bonds. CO bonds may have original maturities of up to 30 years (although there is no statutory or regulatory limit on maturities) and are generally issued to raise intermediate and long-term funds. CO bonds may also contain embedded options that affect the term or yield structure of the bond. Such options include call options under which we can redeem bonds prior to maturity.
CO bonds may be issued with either fixed-rate coupon-payment terms, zero-coupon terms, or variable-rate coupon-payment terms that use a variety of indices for interest-rate resets including the London Interbank Offered Rate (LIBOR), the Federal Funds (Effective) rate (in the aggregate, the FHLBanks may comprise a significant percentage of the federal funds sold market from time to time however, each FHLBank, including the Bank, manages its investment portfolio separately)Secured Overnight Financing Rate (SOFR), and others. Some CO bonds may contain different coupon characteristics at different points in time.
CO bonds can be issued and distributed through negotiated or competitively bid transactions with approved underwriters or selling group members. We frequently participate in these issuances. Each FHLBank requests funding through the Office of Finance, and the Office of Finance endeavors to issue the requested bonds and allocate proceeds in accordance with each FHLBank's requested funding. In some cases, proceeds from partially fulfilled offerings must be allocated among the requesting FHLBanks in accordance with predefined rules that apply to particular issuance programs. Conversely, under certain programs, proceeds from bond offerings that exceed aggregate FHLBank demand will be allocated to the FHLBanks in accordance with predefined rules that apply to particular issuance programs. The Office of Finance also prorates the amounts of fees paid to dealers in connection with the sale of COs to each FHLBank based upon the percentage of debt issued that is assumed by each FHLBank.
The Office of Finance has established an allocation methodology for the proceeds from the issuance of COs if COs cannot be issued in sufficient amounts to satisfy all FHLBank demand for funding during periods of financial distress and when its existing allocation processes are deemed insufficient. In general, this methodology provides that the proceeds in such circumstances will be allocated among the FHLBanks based on relative FHLBank total regulatory capital, with FHLBanks with greater total regulatory capital in absolute terms receiving greater allocations of issuance proceeds. The Office of Finance will use this method in such periods unless it determines that there is an overwhelming reason to adopt a different allocation method. As is the case during any instance of a disruption in our ability to access the capital markets, market conditions or this allocation could adversely impact our ability to finance our operations, financial condition, and results of operations.
CO Discount Notes. CO discount notes are short-term obligations issued at a discount to par with no coupon. Terms range from overnight up to one year. We generally participate in CO discount note issuance on a daily basis as a means of funding short-term assets and managing our short-term funding gaps. Each FHLBank submits commitments to issue CO discount notes in specific amounts with specific terms to the Office of Finance, which in turn, aggregates these commitments into offerings to securities dealers. Such commitments may specify yield limits that we have specified in our commitment, above which we will not accept funding. CO discount notes are sold either at auction on a scheduled basis or through a direct bidding process on an
as-needed basis through a group of dealers known as the selling group, who may turn to other dealers to assist in the ultimate distribution of the securities to investors.
Negative Pledge Requirement. FHFA regulations require that each FHLBank maintain the following types of assets, free from any lien or pledge, in an amount at least equal to the amount of that FHLBank's participation in the total COs outstanding:
cash;
obligations of, or fully guaranteed by, the U.S. government;
secured advances;
mortgages, which have any guaranty, insurance, or commitment from the U.S. government or any agency of the U.S.; and
investments described in Section 16(a) of the FHLBank Act, which, among other items, includes securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located.
Table 3 - Ratio of Non-Pledged Assets to Total Consolidated Obligations (dollars in thousands)
| |
| Table 2 - Ratio of Non-Pledged Assets to Total Consolidated Obligations (dollars in thousands)
| | Table 2 - Ratio of Non-Pledged Assets to Total Consolidated Obligations (dollars in thousands)
|
| | | December 31, | | | | | |
| | | 2017 | | 2016 | | December 31, |
| | | | | | | 2019 | | 2018 |
| Cash and due from banks | | $ | 261,673 |
| | $ | 520,031 |
| | $ | 69,416 |
| | $ | 10,431 |
|
| Advances | | 37,565,967 |
| | 39,099,339 |
| | 34,595,363 |
| | 43,192,222 |
|
Investments (1) | | 17,941,614 |
| | 18,031,331 |
| | 16,144,244 |
| | 15,900,204 |
|
| Mortgage loans, net | | 4,004,737 |
| | 3,693,894 |
| | 4,501,251 |
| | 4,299,402 |
|
| Accrued interest receivable | | 94,100 |
| | 84,653 |
| | 112,163 |
| | 112,751 |
|
| Less: pledged assets | | (287,852 | ) | | (322,031 | ) | | (92 | ) | | (243,220 | ) |
| Total non-pledged assets | | $ | 59,580,239 |
| | $ | 61,107,217 |
| | $ | 55,422,345 |
| | $ | 63,271,790 |
|
| Total consolidated obligations | | $ | 56,065,529 |
| | $ | 57,225,398 |
| | $ | 51,569,662 |
| | $ | 58,978,506 |
|
| Ratio of non-pledged assets to consolidated obligations | | 1.06 |
| | 1.07 |
| | 1.07 |
| | 1.07 |
|
_______________________
| |
| (1) | Investments include interest-bearing deposits, securities purchased under agreements to resell, federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities. |
Joint and Several Liability. Although each FHLBank is primarily liable for the portion of COs corresponding to the proceeds received by that FHLBank, each FHLBank is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all COs. Under FHFA regulations, if the principal or interest on any CO issued on behalf of one of the FHLBanks is not paid in full when due, then the FHLBank primarily responsible for the payment may not pay dividends to, or redeem or repurchase shares of stock from, any member of such FHLBank. The FHFA, in its discretion, may require any FHLBank to make principal or interest payments due on any COs, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation.
To the extent that an FHLBank makes any payment on a CO on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the FHLBank otherwise responsible for the payment. However, if the FHFA determines that an FHLBank is unable to satisfy its obligations, then the FHFA may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank's participation in all COs outstanding, or on any other basis the FHFA may determine.
Neither the FHFA nor any predecessor to it has ever required us to repay obligations in excess of our participation nor have they allocated to us any outstanding liability of any other FHLBank's COs.
Capital Resources
As a cooperative, we are owned by our member institutions, which are required to purchase shares of our capital stock as a condition of membership in us and to support the capital requirements for certain credit products that we provide. All issuances and repurchases/redemptions of our capital stock are effected at a par value of $100 per share. We currently issue one class of
stock, Class B, which shareholders may redeem five years after providing a written redemption request. Our equity capital also includes retained earnings.
Total Stock-Investment Requirement (TSIR). Each member is required to satisfy its TSIR at all times, which is an amount of stock equal to its activity-based stock-investment requirement plus its membership stock-investment requirement. Any stock held by a member in excess of its TSIR is referred to as excess stock. At December 31, 2017,2019, members and nonmembers with capital stock outstanding held excess capital stock totaling $110.7$79.7 million, representing approximately 4.84.3 percent of total capital stock outstanding.
Membership Stock-Investment Requirement (MSIR). TheAs of January 16, 2019, the MSIR is equal to 0.350.20 percent of the value of certain member assets eligible to secure advances subject to a current minimum balance of $10,000 and a current maximum balance of $10.0 million. Prior to January 16, 2019, the MSIR was equal to 0.35 percent of the value of certain member assets eligible to secure advances subject to a minimum balance of $10,000 and a maximum balance of $25.0 million.
Activity-Based Stock-Investment Requirement (ABSIR). Certain activity with us has an associated ABSIR. For example, advances have an ABSIR that varies by term with longer terms typically requiring a higher ABSIR.
Redemption of Excess Stock. Members may submit a written request for redemption of excess stock. The stock subject to the request will be redeemed at par value by us upon expiration of the stock-redemption period, which is five years for Class B stock, provided that the stock is not required to support the member's TSIR. The stock-redemption period also applies (with certain exceptions) to stock held by a member that (1) gives notice of intent to withdraw from membership or (2) becomes a nonmember due to merger or acquisition, charter termination, or involuntary termination of membership. At the end of the stock-redemption period, we must comply with the redemption request unless doing so would cause us to fail to comply with our minimum regulatory capital requirements, cause the member to fail to comply with its TSIR, or violate any other applicable limitation or prohibition.
Repurchase of Excess Stock. Our capital plan provides us with the authority and discretion to repurchase excess stock from any shareholder at par value upon 15 days prior written notice to the member, unless a shorter notice period is agreed to in writing with the member, so long as the repurchase will not cause us to fail to meet any of our regulatory capital requirements or violate any other applicable limitation or prohibition. On July 24, 2015,It is our board of directors authorized management to implement an excess stock management program, under which we were authorizedpractice to repurchase excess stock to maintain excess stock within a targeted range between zero and $200 million. We executed repurchases underdaily the program from time to time to stay within this targeted excess stock range and to ensure a fair distribution of ownership consistent with shareholders’ total stock investment requirements. On May 1, 2017, we provided a notice to our shareholders that we would replace our system of making periodic repurchases of excess capital stock when aggregate excess stock balances exceeded $200 million. We announced that on June 1, 2017, we would begin daily repurchases of excess stock held by any shareholder whose excess stock exceeds the lesser of $10.0 million or 25 percent of the shareholder's total stock investment requirement, subject to a minimum repurchase of $100,000. On July 27, 2017, we announced that on August 11, 2017, we would begin repurchasing excess stock held by any shareholder whose excess stock exceeds the lesser of $10.0 million or 10 percent of the shareholder’s total stock investment requirement,TSIR, subject to a minimum repurchase of $100,000. In addition to these daily repurchases, shareholders may request that we voluntarily repurchase excess stock shares at any time. In either case, we retain sole discretion over any voluntary repurchases of excess stock in accordance with our capital plan. During the year ended December 31, 2017,2019, we repurchased $1.2$2.5 billion of excess capital stock, of which $5.4$26.1 million was mandatorily redeemable capital stock.
Statutory and Regulatory Restrictions on Capital-Stock Redemption and Repurchases. In accordance with the Gramm-Leach-Bliley Act of 1999, as amended (the GLB Act),By law our stock is putable by the member. However, there are significant statutory and regulatory restrictions on theour obligation or right to redeem a member's outstanding stock, including the following:
Our board of directors, or a committee of the board, may decide to suspend redemptions if it reasonably believes that continued redemptions would cause us to fail to meet any of our minimum capital requirements, prevent us from maintaining adequate capital against potential risks that are not adequately reflected in our minimum capital requirements, or otherwise prevent us from operating in a safe and sound manner.
We may not redeem or repurchase any capital stock without the prior written approval of the FHFA if our board of directors or the FHFA determinedetermines that we have incurred or are likely to incur losses that result in or are likely to result in charges against our capital stock while such charges are continuing or expected to continue.
If, during the period between receipt of a stock-redemption notification from a member and the actual redemption, we become insolvent and are either liquidated or forced to merge with another FHLBank, the redemption value of the stock will be established either through the market-liquidation process or through negotiation with a merger partner. In either
case, all senior claims must first be settled, and there are no claims which are subordinated to the rights of FHLBank stockholders.
We can only redeem stock investments that exceed the members' TSIR.
If we are liquidated, after payment in full to our creditors, our stockholders will be entitled to receive the par value of their capital stock as well as any retained earnings in an amount proportional to the stockholder's share of the total shares of capital stock. In the event of a merger or consolidation, our board of directors shall determine the rights and preferences of our stockholders, subject to any terms and conditions imposed by the FHFA.
Additionally, we cannot redeem or repurchase shares of capital stock from any of our members if:
following such redemption, we would fail to satisfy our minimum capital requirements;
we become undercapitalized or our capital would be insufficient to maintain a classification of adequately capitalized after redeeming or repurchasing shares, except, in this latter case, with the permission of the Director of the FHFA's permission;FHFA;
the principal or interest due on any CO issued through the Office of Finance on which we are the primary obligor has not been paid in full when due;
we fail to provide to the FHFA a certain quarterly certification required by the FHFA's regulations prior to declaring or paying dividends for a quarter;
we fail to certify in writing to the FHFA that we will remain in compliance with our liquidity requirements and will remain capable of making full and timely payment of all of our current obligations;
we notify the FHFA that we cannot provide the required certification, project we will fail to comply with statutory or regulatory liquidity requirements, or will be unable to timely and fully meet all of our current obligations; or
we actually fail to comply with statutory or regulatory liquidity requirements or to timely and fully meet all of our current obligations, or negotiate to enter or enter into an agreement with one or more other FHLBanks to obtain financial assistance to meet our current obligations.
Our board of directors also has a statutory obligation to review and adjust member capital stock purchase requirements to comply with our minimum capital requirements, and each member must comply promptly with any such requirement. However, a member may be able to reduce its outstanding business with us as an alternative to purchasing additional capital stock.
Mandatory Purchases of Capital Stock. Our board of directors has a right and an obligation to call for additional capital-stock purchases by our members in accordance with our capital plan, if needed to satisfy statutory and regulatory capital requirements. Our board of directors has never called for any additional capital-stock purchases by members under our capital plan.
Interest-Rate-Exchange Agreements
In general, we use interest-rate-exchange agreements (derivatives) in three ways: 1) as a fair-value hedge of a hedged financial instrument or a firm commitment, 2) as a cash-flow hedge of a hedged financial instrument or a forecasted transaction, or 3) as economic hedges in asset-liability management that are not designated as hedges. In addition to using derivatives to manage mismatches of interest rates between assets and liabilities, we also use derivatives to manage embedded options in assets and liabilities and to hedge the market value of existing assets, liabilities, and anticipated transactions. We may also enter into
derivatives concurrently with the issuance of COs to reduce funding costs. We enter into derivatives directly with principal counterparties and also enter into centrally-cleared derivatives where our counterparty is a derivatives clearing organization
(DCO). FHFA regulations require the documentation of nonspeculative use of these instruments and the establishment of limits to credit risk arising from these instruments.
AHP Assessment
Annually, the FHLBanks collectively must set aside for the AHP the greater of $100 million or 10 percent of the current year's net income before interest expense associated with mandatorily redeemable capital stock and the assessment for AHP. For the year ended December 31, 2017,2019, our AHP assessment was $21.3 million.
If the result of the aggregate 10 percent calculation described above is less than $100 million for all FHLBanks, then each FHLBank would be required to contribute such prorated sums as may be required to assure that the aggregate contributions of the FHLBanks equals $100 million. The shortfall would be allocated among the FHLBanks based upon the ratio of each FHLBank's income before AHP to the sum of the income before AHP of the FHLBanks combined, except that the required annual AHP contribution for an FHLBank cannot exceed its net earnings for the year. Accordingly, the actual amount of each future AHP assessment is dependent upon both our net income before interest expense associated with mandatorily redeemable capital stock and the income of the other FHLBanks. Thus, future AHP assessments are not determinable.
Risk Management
We have a comprehensive risk-governance structure. We have identified the following major risk categories relevant to business activities:
Credit risk, the risk to earnings or capital due to an obligor's failure to meet the terms of any contract with us or otherwise perform as agreed;
Market risk, the risk to earnings or shareholder value due to adverse movements in interest rates, market prices, or interest-rate spreads;
Liquidity risk, the risk that we may be unable to meet our funding requirements, or meet the credit needs of members, at a reasonable cost and in a timely manner;
Leverage risk, the risk that our capital is not sufficient to support the level of assets that can result from a deterioration of our capital base, a deterioration of the assets, or from overbooking assets;
Business risk, the risk to earnings or capital arising from adverse business decisions or improper implementation of those decisions, or from external factors as may occur in both the short- and long-run, including from legislative and regulatory developments;
Operational risk, the risk of unexpected loss resulting from ineffective people, processes or systems, whether emanating internally or externally. Operational risk also includes model risk (the risk of loss resulting from model errors or the incorrect use or application of model output), compliance risk (the risk of non-compliance with the Bank’s obligations and commitments), and the risk of internal or external fraud; and
Reputation risk, the risk to earnings or capital arising from negative public opinion, which can affect our ability to establish new business relationships or maintain existing business relationships.
The board of directors provides risk oversight through the review and approval of our risk-management policy and also evaluates and approves risk tolerances and risk limits. The board of directors' Risk Committee provides additional oversight of the Bank's risk governance structure. The board of directors also reviews the results of an annual risk assessment that we perform for our major business processes.
Management establishes a quantifiable connection between our desired risk profile and our risk tolerances and risk limits as expressed in our risk-management policy. Management is responsible for maintaining internal policies consistent with the risk-management policy and maintains various standing committees intended to assess and manage each of the major risk categories relevant to our business activities. Our chief risk officer is responsible for communicating material changes to these internal policies to the board of directors' Risk Committee. Management is also responsible for monitoring, measuring, and reporting
risk exposures to the board of directors. Additionally, our Internal Audit department may report to the board's Audit Committee the results of internal audit work on the effectiveness of management's risk management processes and controls.
Business Risk
Management's strategies for mitigating business risk include annual and long-term strategic planning exercises; continually monitoring key economic indicators, projections, competitive threats, and our external environment; and developing contingency plans where appropriate.
Operational Risk
We are subject to operational risk which can result from human error, fraud, vendor or third-party failure, unenforceability of legal contracts, or deficiencies in internal controls or information systems.
We have policies and procedures intended to mitigate operational risks. We train our employees for their roles and maintain written policies and procedures for our key functions. We maintain a system of internal controls designed to adequately segregate responsibilities and appropriately monitor and report on our activities to management and the board of directors. Our Internal Audit department, which reports directly to the Audit Committee of the board of directors, regularly monitors our adherence to established policies and procedures. Some operational risks are beyond our control, and the failure of other parties to adequately address their operational risks could adversely impact us.
Operational risk includes risk arising from breaches of our cybersecurity or other cyber incidents that could result in a failure or interruption of our information technology systems. We have not experienced a disruption in our information systems that has had a material adverse impact on us. However, we rely heavily on our information systems to conduct and manage our business, and failures or interruptions of these information systems could have a material adverse impact on our financial condition and results of operations. We take many steps to protect our information systems and data, including operational redundancy and supplier diversity, monitored physical and logical security controls, mandatory staff training and testing on cyber risks, and third party facilitated penetration testing.
Additionally, most of our information systems have either been placed with infrastructure-as-a-service (IaaS) providers or have been co-located with a third-party service provider. Both types of environments are designed to host information systems with specialized environmental controls, certain power, heating and cooling system redundancies, 24-hour onsite staffing, and physical security. We rely on these service providers to continue to provide secure locations and stable operating environments for the systems deployed there. Any failure to provide such stability or security by the third-party service provider could result in failures or interruptions in our ability to conduct business. We take several steps to mitigate the risks of our reliance on these third-party service providers, including physical and/or monitored logical security controls and hosted data along with maintaining redundancy of systems at alternate locations for disaster-recovery and business continuity. Data for critical computer systems is backed up regularly and stored offsite to avoid disruption in the event of a computer failure. Additionally, we review the providers' controls report annually and monitor and meet with providers on a regular basis. We maintain disaster-recovery sites intended to provide continuity of operations in the event that our primary information systems become unavailable, but there can be no complete assurance that those disaster-recovery sites will work as intended in the event of an actual disruption or failure. Moreover, certain of our application vendors host their applications in either a software-as-a-service framework or a hosted service model, either on their own hardware or with a third-party. We have executed contracts with these providers stipulating standards for control intended to mitigate our risks based on loss of access or security breaches. Additionally, we actively manage these service providers through our vendor management program.
Further, our AHP, MPF, and certain collateral activities rely on the secure processing, storage, and transmission of private borrower information, such as names, residential addresses, social security numbers, credit rating data, and other consumer financial information. We take several steps to protect such data, including information technology and security, general computing controls governing access to programs and data, along with physical and logical security. Additionally, we review related third-party service organizations' controls report annually. Despite these steps, this information could be exposed in several ways, including through unauthorized access to our computer systems,systems; computer viruses that attack our computer systems,systems; software or networks,networks; accidental delivery of information to an unauthorized party,party; and loss of storage media containing this information. Any of these events could result in financial losses, legal and regulatory sanctions, and reputational damage.
We are implementing a multi-year strategy to modernize most of our mission critical applications and supporting infrastructure. The pace of change in our information technology increases the risk of failures or interruptions of information systems or other technology, which could have a material adverse impact on our financial condition and results of operations. We have taken
steps to mitigate the risks arising from the pace of change by strictly adhering to our information technology-related policies, guidelines, procedures and industry best practices and engaging third party experts to guide and advise on the strategy as a
whole and on particular components, and we intend to follow these practices during the remainder of the implementation of this program.its implementation. Furthermore, our senior management approves and provides oversight of all major information technology-related investments.
Disaster-Recovery/Business Continuity Provisions. We maintain a business continuity site in Massachusetts to provide continuity of operations in the event that our Boston headquarters becomes unavailable. We also have a reciprocal back-up agreement in place with the FHLBank of Topeka to provide short-term coverage for a limited set of services in the event that our facilities are inoperable.
Insurance Coverage. We have insurance coverage for employee fraud, forgery, alteration, and embezzlement, computer systems fraud, as well as director and officer liability protection for, among other things, breach of duty, negligence, and acts of omission. Additionally, insurance coverage is currently in place for commercial property and general liability, bankers professional liability, employment practices liability, cyber liability, and fiduciary liability. We maintain additional insurance protection as deemed appropriate, including coverage for liability arising from automobiles, and business-travel accidents. In addition to using an insurance broker to place our insurance coverage, we use the services of an independent insurance consultant who periodically conducts a review of our insurance coverage levels and provides other advice about our insurance program.
Reputation Risk
We take several steps to manage reputation risk. We have established a code of ethics and business conduct and operational risk-management procedures intended to ensure ethical behavior among our staff and directors and require all employees annually to certify compliance with our code of ethics. We work to ensure that all communications are presented accurately, consistently, and in a timely way to multiple audiences and stakeholders. In particular, we regularly conduct outreach efforts with our membership and with housing and economic-development advocacy organizations throughout our district. We also maintain relationships with government officials at the federal, state, and municipal levels; key media outlets; nonprofit housing and community-development organizations; and regional and national trade and business associations to foster awareness of our mission, activities, and value to members. We work with the Council of FHLBanks and the Office of Finance to coordinate communications on a broader scale.
ITEM 1A. RISK FACTORS
The following discussion summarizes some of the most important risks that we face. This discussion is not exhaustive, and there may be other risks that we face, which are not described below. The risks described below, if realized, may result in us being prohibited from paying dividends and/or repurchasing and redeeming our capital stock, and could adversely impact our business operations, financial condition, and future results of operations.
BUSINESS AND REPUTATION RISKS
Sustained low advances balances and/or limited opportunities for loan purchases at our offered pricing could adversely impact results of operations.
Our primary business is providing liquidity to our members by making advances to, and purchasing residential mortgage loans from, our members. Many of our competitors are not subject to the same body of regulation applicable to us. This is one factor among several that may enable our competitors to offer wholesale funding or purchase residential mortgage loans on terms that we are not able to offer and that members deem more desirable than the terms we offer on our advances.advances or purchases of residential mortgage loans.
The availability to our members of different products from alternative funding sources, with terms more attractive than the terms of products we offer, as can happen from time-to-time, may significantly decrease the demand for our advances and/or loan purchases. Further, any changes we make in the pricing of our advances or for residential mortgage loans in an effort to compete effectively with these competitive funding sources could decrease the profitability of advances, which could reduce earnings. More generally, a decrease in the demand for advances and/or loan purchases, or a decrease in the profitability of advances and/or mortgage loan investments, could adversely impact our financial condition and results of operations.
The loss of significant members could result in lower demand for our products and services.
At December 31, 2017,2019, our five largest stock-holding members held 25.329.8 percent of our stock and our largest stock-holding member had affiliates with memberships in other FHLBanks, allowing their affiliates the flexibility of borrowing from other FHLBanks.stock. The loss of significant members or a significant reduction in the level of business they conduct with us would likely lower overall demand for our products and services in the future and adversely impact our performance.
Also, consolidations within the financial services industry could reduce the number of current and potential members in our district. Industry consolidation could also cause us to lose multiple members whose business and ownership of our stock are so substantial that their loss could threaten our viability. In turn, we might be forced to consider strategic alternatives, which could include a merger with another FHLBank.
We are subject to a complex body of laws and regulations, as well as U.S. government monetary policies, which could change in a manner detrimental to our business operations and/or financial condition.
The FHLBanks are GSEs, organized under the authority of the FHLBank Act, and as such, are governed by federal laws and by regulations promulgated, adopted, and applied by the FHFA, an independent agency in the executive branch of the U.S. government that regulates the FHLBanks, Fannie Mae, and Freddie Mac. Congress may amend the FHLBank Act or other statutes in ways that significantly affect 1) the rights and obligations of the FHLBanks and 2) the manner in which the FHLBanks carry out their mission and business operations. New or modified legislation enacted by Congress or regulations adopted by the FHFA or other financial services regulators could adversely impact our ability to conduct business or the cost of doing business.
For example, we note that, from time to time, the executive branch, Congress, and various independent federal agencies have advanced plans to reform the federal support of U.S. housing finance, specifically targeting Fannie Mae and Freddie Mac. If implemented, these plans are likely to also directly and indirectly impact other GSEs that support the U.S. housing market, including the FHLBanks. In addition, recent tax changes have reduced the tax incentive for home ownership slightly. Any such changes or reforms that are implemented could adversely impact the profitability of the FHLBanks or limit future growth opportunities.
We cannot predict what regulations will be issued or revised or what legislation will be enacted or repealed, and we cannot predict the effect of any such regulations or legislation on our business operations and/or financial condition. Changes in regulatory or statutory requirements could result in, for example, an increase in the FHLBanks' cost of funding, a change in permissible business activities, change in our membership, limitations on advances made to our members, or a decrease in the size, scope, or nature of the FHLBanks' lending, investment, or mortgage-financing activities, all and any of which could adversely impact our financial condition and results of operations.
The businesses and results of operations of the FHLBanks are significantly affected by the monetary policies of the U.S. government and its agencies, including the Federal Reserve. The Federal Reserve Board of Governors' policies directly and indirectly influence the yield on interest-earning assets and the yield on interest-bearing liabilities and could adversely affect the demand for advances and for COs. These policies could also adversely affect the FHLBanks through lower yields on our investments, higher yields on our debt, or both, which could then adversely affect our financial condition and results of operations. In addition, the FHLBanks currently play a predominant role as lenders in the federal funds market; therefore, any disruption in the federal funds market or any related regulatory or policy change may adversely affect the FHLBanks’ cash management activities, results of operations, and reputation.
Our dividend practices could decrease demand for our products that require capital stock purchases and/or result in withdrawals from membership.
Historically, our board of directors has varied dividend declarations based on our financial condition, performance, outlook and economic environment. If our financial performance or condition were to deteriorate significantly in the future, our board of directors could determine to reduce or eliminate dividends.
Should the board of directors determine to suspend or lower dividend declarations, we could experience decreased member demand for our products requiring capital stock purchases, reduced ability to add new members, and/or withdrawals from membership that could adversely impact our business operations and financial condition.
Limiting or ending repurchases of excess stock from members could decrease demand for advance products and increase membership withdrawals.
From December 8, 2008, until January 1, 2015, we maintainedA period of financial distress could cause the Bank to impose a general moratorium on shareholder-initiated excess stock repurchases although we completed several Bank-initiated partial repurchases of excess stock, during the latter part of that period. We rescinded the moratorium; however, that period of constrained excess stock repurchases and the potential for another such periodwhich could provide an incentive for members to limit certain of their business with us to avoid associated stock purchase requirements and a disincentive to prospective members from becoming members, either of which could adversely impact our business operations and financial condition.
An NRSRO's downgrade of the U.S. federal government's credit ratings could adversely impact our funding costs and/or access to the capital markets, and/or adversely impact demand for certain of our products.
Certain NRSROs have indicated that the credit ratings of the FHLBanks are constrained by the credit ratings of the U.S. federal government. Accordingly, a downgrade of the U.S. federal government's credit rating by an NRSRO is likely to be followed by a similar downgrade of the FHLBanks. Prolonged or repeated shutdowns of the U.S. federal government, such as that experienced in early 2019, among other things, could be followed by a downgrade of the credit ratings of the U.S. federal government. Downgrades of the U.S. federal government's credit rating (and, in turn, the FHLBanks' credit rating) are possible, and any resulting downgrades to our credit ratings could adversely impact our funding costs and/or access to the capital markets. Further, member and housing associate demand for certain of our products, such as letters of credit, is influenced by our credit ratings, and downgrade of our credit ratings could weaken or eliminate demand for such products. To the extent that we cannot access funding when needed on acceptable terms to effectively manage our cost of funds or demand for our products falls, our financial condition and results of operations could be adversely impacted.
Negative information about the FHLBanks or housing GSEs in general could adversely impact our cost and availability of financing, or could limit membership growth.
Negative information about us or any other FHLBank, such as material losses or increased risk of losses, could also adversely impact our cost of funds. More broadly, negative information about housing GSEs, in general, could adversely impact us. Potential sources of negative information about the FHLBanks include, but are not necessarily limited to, NRSROs, the FHFA, and its Office of Inspector General. Further, an FHFA rule annually requires us, and the other FHLBanks, to perform stress tests under various scenarios and make the results of a severely adverse economic conditions test publicly available. The results of the stress test, or the public’s reaction to the results, could adversely impact the Bank.
The housing GSEs Fannie Mae, Freddie Mac, and the FHLBanks issue highly rated agency debt to fund their operations. From time to time negativeNegative announcements by any of the housing GSEs concerning topics such as accounting problems, risk-management issues, and regulatory enforcement actions have createdmay create pressure on debt pricing for all GSEs, as investors have perceived such instruments as bearing increased risk.
Given the FHLBanks’ status as GSEs, the scope, timing, and effect of any regulatory reform affecting the GSEs, including the ultimate resolution to the conservatorship of Fannie Mae and Freddie Mac and resulting changes in the regulation or status of the GSEs, could have a substantial effect on the FHLBank System. While there are significant differences between the FHLBank System and Fannie Mae and Freddie Mac, including the FHLBanks’ focus on secured lending in the form of advances as opposed to guaranteeing mortgages and the FHLBanks' distinctive cooperative business model, legislation or other regulatory reform affecting GSEs could inadequately account for these differences, which could negatively change the perception of the risks associated with the GSEs and their debt securities. Any such change in the perception of risk could adversely affect the FHLBanks’ funding costs, access to funding, competitive position, and the financial condition and results of operations of an FHLBank and the FHLBanks on a combined basis.
Any negative information or other factors could result in the FHLBanks having to pay a higher rate of interest on COs to make them attractive to investors. If we maintain our existing pricing on our advances products and other services notwithstanding increases in CO interest rates, the spreads we earn would fall and our results of operations would be adversely impacted. If, in response to this decrease in spreads, we change the pricing of our advances, the advances may be less attractive to members, and the amount of new advances and our outstanding advance balances may decrease. In either case, the increased cost of issuing COs could adversely impact our financial condition and results of operations. Moreover, such negative information could deter prospective members from becoming members and could adversely impact our financial condition and results of operations.
We could fail to meet our minimum regulatory capital requirements and/or maintain a capital classification of "adequately capitalized," or we could be subject to enforcement action, any of which could result in prohibitions on dividends, excess stock repurchases, or capital stock redemptions, and additional regulatory prohibitions.prohibitions, and/or could adversely impact our results of operations.
We are required to satisfy certain minimum regulatory capital requirements, including risk-based capital requirements and certain regulatory capital and leverage ratios, and are subject to the FHFA's regulation on FHLBank capital classification and critical capital levels (the Capital Rule), as described in Part II — Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital. Any failure to satisfy these requirements would result in our becoming subject to certain capital restoration requirements and being prohibited from paying dividends and redeeming or repurchasing capital stock without the prior approval of the FHFA.FHFA, which could adversely affect our members' investment in our capital.
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. An adequately capitalized FHLBank is one that has sufficient permanent and total capital to satisfy its risk-based and minimum capital requirements. We satisfied these requirements at December 31, 2017.2019. However, pursuant to the Capital Rule, the FHFA has discretion to reclassify an FHLBank and modify or add to corrective action requirements for a particular capital classification. If we become classified into a capital classification other than adequately capitalized, we would be subject to the corrective action requirements for that capital classification in addition to being subject to prohibitions on declaring dividends and redeeming or repurchasing capital stock.
We could be subject to enforcement action byFinally, the FHFA that could result in prohibitions on dividends, excess stock repurchases, and capital stock redemptions and/or adversely impact our results of operations.
The FHFA is the FHLBank System's safety and soundness regulator and has broad powers, including enforcement powers, to cause us to take or refrain from taking certain actions including, but not limited to, paying dividends, repurchasing excess stock, redeeming capital stock, increasing or decreasing our total assets, and curtailing our investing activities.
Our efforts to maintain adequate capital levels could impede our ability to generate asset growth including, but not limited to, meeting member advance requests.
We are mandated to maintain minimum regulatory capital thresholds including, but not limited to, a minimum regulatory capital ratio of 4.0 percent, which is a percentage equal to permanent capital divided by total assets. Moreover, we have a policy that requires us to maintain a minimum regulatory capital amount equal to 4.0 percent of total assets plus our calculated economic capital requirement. As a condition for borrowing advances from us, members are required to invest in capital stock, and members are permitted to leverage their stock investment to borrow at multiples of that stock investment. In certain scenarios, members seeking to leverage their excess stock availability may be unable to borrow at the fullest capacity if overall asset growth causes our total regulatory capital ratio to fall below 4.0 percent, even after discretionary assets, including, but not limited to, short-term investments, are disposed.
We could become primarily liable for all or a portion of the COs of one or more other FHLBanks, which could adversely impact our financial condition and results of operations.
Each of the FHLBanks relies upon the issuance of COs as a primary source of funds. COs are the joint and several obligations of all of the FHLBanks, backed only by the financial resources of the FHLBanks. Accordingly, we are jointly and severally liable with the other FHLBanks for the COs issued by the FHLBanks through the Office of Finance, regardless of whether we receive all or any portion of the proceeds from any particular issuance of COs. The FHFA, at its discretion, may require any FHLBank to make principal or interest payments due on any COs, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. Accordingly, we could incur significant liability beyond our primary obligation under COs due to the failure of other FHLBanks to meet their obligations, which could adversely impact our financial condition and results of operations.
Compliance with regulatory contingency liquidity requirements could adversely impact our results of operations.
We are required to maintain sufficient liquidity through short-term investments in an amount at least equal toaccordance with the FHLBank Act, FHFA regulations and guidance, and policies established by our cash outflows under two different scenarios,management and board of directors, as discussed in Part II — Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources. The requirement is designed to enhance our protection against temporary disruptions in access to the capital markets resulting from a rise in capital markets volatility. To satisfy this requirement, we maintain balances in shorter-term investments, which could earn lower interest rates than alternate investment options and could, in turn, adversely impact net interest income. In certain circumstances, we may need to fund overnight or shorter-term advances with short-term discount notes that have maturities beyond the maturities of the related advances, thus increasing our short-term advance pricing or reducing net income through lower net interest spread. To the extent these increased prices make our advances less competitive, advance levels and, therefore, our net interest income could be adversely impacted. Moreover, any changes in regulatory liquidity requirements could adversely affect our financial condition and results of operations.
Natural or man-made disasters, including health emergencies related to the COVID-19 (coronavirus) pandemic, could have a material adverse effect on the Bank’s results of operations or financial condition.
The occurrence of natural disasters, political unrest or instability, acts of terrorism, and health emergencies, including the spread of infectious diseases or a pandemic, the effects of climate change, or other unexpected or disastrous conditions, events, or emergencies could adversely affect our business, including demand for the Bank’s products and services and the value of our assets and member-pledged collateral. The effects of disasters or emergencies could disrupt general economic conditions and financial markets and interfere with our employees, our workplace, our vendors and service providers, the businesses of our members, and our counterparties and thus could impair our ability to manage our business, as well as our results of operations and financial condition.
The full effects of the COVID-19 pandemic are evolving and unknown. The timeliness and effectiveness of actions taken or not taken to contain and mitigate effects of COVID-19 both in the U.S. and internationally by federal, state, and local governments and agencies; central banks, including the Federal Reserve System; hospitals; pharmaceutical companies; medical manufacturers; and other businesses, as well as actions taken or not taken by individuals, could greatly affect outcomes. There are many current and potential issues, and we cannot predict them all or the extent to which they will affect the Bank and its business. It appears probable that large numbers of people will become ill, have illness in their households, or will be required to stay away from their workplaces, and will not be able to work for extended periods of time, which could further negatively affect household incomes and their ability to stay current on obligations, including mortgage payments, businesses, and the economy. COVID-19 threatens the health of our employees and their families and could impair our ability to conduct business. By March 13, 2020, the majority of our employees were working remotely with only operationally critical employees working
at our headquarters in Boston or at a business continuity site we maintain. An extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business. Our investments in mortgages and MBS could be negatively affected by delays or failures of borrowers to make payments of principal and interest when due or delays in foreclosures, resulting from COVID-19. Our other investments could also be negatively affected by extreme price volatility caused by uncertainties stemming from COVID-19. On March 3, 2020 the Federal Reserve lowered the target range for the federal funds rate to a range from 1.00 to 1.25 percent citing evolving risks to economic activity from the coronavirus, and on March 15, 2020, the Federal Reserve further lowered the target range for the federal funds rate to a range from 0 to 0.25 percent citing related concerns about the disruption to economic activity and stress in the energy sector. A prolonged period of very low interest rates could reduce our net interest income and have a material adverse impact on our results of operations or financial condition. The rapid and diffuse spread of COVID-19 has had severe negative impacts on, among other things, financial markets, liquidity, economic conditions, commercial contracts, and trade and could continue to do so or could worsen these and other conditions for an unknown period of time, which could have a material adverse impact on our results of operations or financial condition.
MARKET AND LIQUIDITY RISKS
Changes in interest rates could adversely impact our financial condition and results of operations.
Like many financial institutions, we realize a significant portion of our income from the spread between interest earned on our outstanding loans and investments and interest paid on our borrowings and other liabilities, as measured by our net interest spread. Although we use various methods and procedures to monitor and manage exposures due to changes in interest rates, we could experience instances when either our interest-bearing liabilities will be more sensitive to changes in interest rates than our interest-earning assets, or vice versa. These impacts could be exacerbated by prepayment risk, which is the risk that mortgage-related assets will be refinanced and prepaid in low interest-rate environments. The realization of such risk could require us to reinvest the proceeds of prepaid assets at lower, and possibly negative, spreads, or such assets will remain outstanding at below-market yields when interest rates increase. Moreover, accelerated prepayments in a low interest-rate environment could result in elevated levels of premium expense recognition due to the fact that the majoritya substantial portion of our mortgage assets were purchased at premium prices.
Any inability or curtailment of our ability to access the capital markets could adversely impact our business operations, financial condition, and results of operations.
Our primary source of funds is the issuance of COs in the capital markets. Our ability to obtain funds through the sale of COs depends in part on prevailing conditions in the capital markets at that time, which are beyond our control. Accordingly, we cannot make any assurance that we will be able to obtain funding on terms acceptable to us, if at all. If we cannot access
funding when needed, our ability to support and continue our operations would be adversely impacted, which would thereby adversely impact our financial condition and results of operations.
Changes to and replacement of the LIBOR benchmark interest rate could adversely affect our business, financial condition, and results of operations.
In July 2017, the United Kingdom’s Financial Conduct Authority (FCA), which regulates LIBOR, announced its intention to stop persuading or compelling the group of major banks that sustains LIBOR to submit rate quotations after 2021. The FCA hasand the submitting LIBOR banks have indicated that they will support the LIBOR indices through 2021 to allow for an orderly transition to an alternative reference rate(s). Otherrates. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR, whether LIBOR rates will cease to be published or supported before or after 2021, or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. There is no assurance that LIBOR will continue to be accepted or used by the markets generally or by any issuers, investors, or counterparties at any time, even if LIBOR continues to be available. In September 2019, the FHFA issued a supervisory letter (Supervisory Letter) to the FHLBanks relating to their planning for the LIBOR phase-out. Under the Supervisory Letter, with limited exceptions, each FHLBank must, by December 31, 2019, stop purchasing investments that reference LIBOR and mature after December 31, 2021, and should, by March 31, 2020, no longer enter into any other new financial services regulatorsassets, liabilities, and industry groups, includingderivatives that reference LIBOR and mature after December 31, 2021. As a result of the International Swapslimitations introduced by the Supervisory Letter, we and Derivatives Association (ISDA)the other FHLBanks may experience less flexibility in our access to funding, higher funding costs, or lower overall demand or increased costs for advances; which may, in turn, negatively affect the future composition of our balance sheets, capital stock levels, primary mission assets, ratios, and net income. If, as a result of the Supervisory Letter, we are not permitted to continue to use instruments that reference LIBOR for hedging and risk-mitigating purposes, we will have to alter our hedging strategies and interest-rate risk management, which may have a negative effect on our financial condition and results of operations.
In April 2018, the Federal Reserve Bank of New York began publishing SOFR, which the Alternative Reference Rates Committee, are evaluatinga private-market committee convened by the possible phase-outFederal Reserve Board of LIBORGovernors and the developmentFederal Reserve Bank of New York, recommended as the alternative interestreference rate indices or reference rates.to U.S. dollar LIBOR. Since 2018, market activity in SOFR-linked financial instruments has continued to develop. Since November 2018, the FHLBank System has offered SOFR-linked COs. The Bank began to offer a SOFR-linked advance product in October 2019. As noted throughout this Form 10-K, many of ourreport, we have assets and liabilities, areincluding derivative assets and derivative liabilities, and member-pledged collateral indexed to LIBOR. We continue to evaluate the potential impact of the eventual replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement. Alternatives may or may not be developed with additional complications. The market transition away from LIBOR and towards SOFR or other alternative reference rates, which will include the development of term and credit adjustments to accommodate differences between LIBOR and SOFR or other alternative reference rates, is expected to continue to be complicated. Transition in the markets and in our systems could be disruptive. During the market transition away from LIBOR, LIBOR may experience increased volatility or become less representative, and the overnight U.S. Treasury repurchase market underlying SOFR may also experience disruptions from time to time, which may result in unexpected fluctuations in SOFR. Given the large volume of LIBOR-based mortgages and financial instruments, the basis adjustment to the replacement floating rate will receive extraordinary scrutiny, but whether the net impact is positive or negative cannot yet be ascertained. The infrastructure necessaryRisks relating to manage hedgingthe effect of changes in the alternative referencelegacy contractual interest rate still needs to be built out,terms on our financial assets and liabilities and the transition inability to renegotiate contractual terms, as well as risks relating to the markets,market demand for our products and adjustments in ourdebt, the market value of pledged collateral, and critical vendors being able to adjust systems could be disruptive.to properly process and account for an alternative rate are additional examples of the risks. We are not able to predict whether or when LIBOR publication will be discontinued, whether the proposedan alternative or replacement ratesrate, such as SOFR, will become market standards,a widely accepted reference rate in place of LIBOR, or what impact such athe transition from LIBOR may have on our or our members’ business, financial condition, and results of operations. Additional information is in Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Transition from LIBOR to Alternative Reference Rates.
CREDIT RISKS
We are subject to credit-risk exposures related to the loans that back our investments. Increased delinquency rates and credit losses beyond those currently expected could adversely impact the yield on or value of those investments.
We invested in private-label MBS until the third quarter of 2007. These investments are backed by prime, subprime, and/or Alt-A hybrid and pay-option adjustable-rate mortgage loans. Many of these investments have sustained and may sustain further credit losses under current modeling assumptions, and have been downgraded by various NRSROs. Other-than-temporary-impairment (OTTI) assessment is a subjective and complex determination by management. The assumptions we made for our other-than-temporary-impairment assessments of our private-label MBS resulted in projected future credit losses, thereby causing other-than-temporary-impairment losses from certain of these securities. We incurred credit losses of $1.5$1.2 million for private-label MBS that we determined were other-than-temporarily impaired for the year ended December 31, 2017.2019. If macroeconomic trends or collateral credit performance within our private-label MBS portfolio deteriorate further than currently anticipated, or if foreclosures or similar activity are delayed or impeded, we may use even more stressful assumptions, including, but not limited to, lower house prices, higher loan-default rates, and higher loan-loss severities in future other-than-temporary impairmentcredit loss assessments.
Declines in U.S. home prices or in activity in the U.S. housing market or rising delinquency or default rates on mortgage loans could result in credit losses and adversely impact our business operations and/or financial condition.
A deterioration of the U.S. housing market and national decline in home prices could adversely impact the financial condition of a number of our borrowers, particularly those whose businesses are concentrated in the mortgage industry. One or more of our borrowers may default on their obligations to us for a number of reasons, such as changes in financial condition, a reduction in liquidity, operational failures, or insolvency. In addition, the value of residential mortgage loans pledged to us as collateral may decrease. If a borrower defaults, and we are unable to obtain additional collateral to make up for the reduced value of such residential mortgage loan collateral, we could incur losses. A default by a borrower lacking sufficient collateral to cover its obligations to us could result in significant financial losses, which would adversely impact our results of operations and financial condition.
Further our methodology for determining our allowance for loan losses is determined based on our investments in MPF loans and considers factors relevant to those investments. Important factors in determining this allowance are the delinquency rates and trends in the delinquency rates on our investments in conventional mortgage loans. If delinquency or default rates rise for these investments or other factors in determining the allowance worsen, we may determine to increase our allowance for loan losses, which would adversely impact our results of operations and financial condition.
We have geographic concentrations that could adversely impact our business operations and/or financial condition.
We, by nature of our charter and our business operations, are exposed to credit risk resultant from limited geographic diversity. Our advances business is generally limited to operations within our district. While we employ conservative credit rating and
collateral practices to limit exposure, a decline in our district's economic conditions could create a credit exposure to our members' advances obligations in excess of collateral held.
We have concentrations of mortgage loans in some geographic areas based on our investments in MPF loans and private-label MBS and on our receipt of collateral pledged for advances. See Part II — Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Mortgage Loans for additional information on these concentrations. To the extent that any of these geographic areas experience significant declines in the local housing markets, declining economic conditions, or a natural disaster,disasters, the nature and severity of which may be impacted by climate change, we could experience increased losses on our investments in the MPF loans or the related MBS or be exposed to a greater risk that the pledged collateral securing related advances would be inadequate in the event of default on such an advance.
Counterparty credit risk could adversely impact us.
We assume counterparty credit risk through our money-market and derivatives transactions. Our counterparties include major domestic and international financial institutions. The insolvency or other inability of a significant counterparty to perform its obligations under such transactions or other agreements could have an adverse impact on our financial condition and results of operations.
OPERATIONAL RISKS
The inability to retain key personnel could adversely impact our operations.
We rely on key personnel for many of our functions and have a relatively small workforce, given the size and complexity of our business. Our ability to retain such personnel is important for us to conduct our operations and measure and maintain risk and financial controls. Our ability to retain key personnel could be challenged as the U.S. employment market improves, particularly in, and the Boston area.area in particular, continues to experience a very low unemployment rate.
We rely heavily upon information systems and other technology and any disruption or failure of such information systems or other technology could adversely impact our reputation, financial condition, and results of operations.
We rely heavily on our information systems and other technology to conduct and manage our business. We take steps to mitigate the risks of such reliance, as discussed under Item 1 — Business — Risk Management — Operational Risk, however failures or interruptions of these information systems or other technology could have a material adverse impact on our financial condition and results of operations. Additionally, most of our information systems have been co-located with a third-party service provider, or are hosted with IaaS providers, on which we are reliant to provide a secure location and a stable operating environment for these systems. Any failure to provide such stability or security by the third-party service provider, or IaaS providers, could result in failures or interruptions in our ability to conduct business. Further, our AHP, MPF, and certain collateral activities rely on the secure processing, storage, and transmission of private borrower information, such as names, residential addresses, social security numbers, credit rating data, and other consumer financial information. This information could be exposed in several ways, including through unauthorized access to our computer systems, computer viruses that attack our computer systems, software or networks, accidental delivery of information to an unauthorized party, and loss of encrypted media containing this information. Any of these events could result in financial losses, legal and regulatory sanctions, and reputational damage.
We are implementing a multi-year strategy to modernize most of our mission critical applications and supporting infrastructure. The increased pace of change to our information technology environment can elevate the risk of failures or interruptions of information systems or other technology, which could have a material adverse impact on our financial condition and results of operations.
We rely on third parties for certain important services and could be adversely impacted by disruptions in those services.
For example, in participating in the MPF program, we rely on the FHLBank of Chicago in its capacity as the MPF Provider. Our investments in mortgage loans through the MPF program account for 6.68.1 percent of our total assets as of December 31, 2017,2019, and 13.310.2 percent of interest income for the year ended December 31, 2017.2019. If the FHLBank of Chicago changes, or
ceases to operate the MPF program or experiences a failure or interruption in its information systems and other technology in its operation of the MPF program, our mortgage-investment businessactivities could be adversely impacted, and we could experience a related decrease in net interest margin, financial condition, and profitability. In the same way, we could be adversely impacted if any of the FHLBank of Chicago's third-party vendors engaged in the operation of the MPF program were to experience operational or technological difficulties.
As another example, we rely on the Office of Finance for, among other things, the placement of COs, our primary source of funds. A disruption in this service would disrupt our access to these funds, as also discussed under — Market and Liquidity Risks — Any inability or curtailment of our ability to access the capital markets could adversely impact our business operations, financial condition, and results of operations.
We rely on models for many of our business operations and changes in the assumptions used could have a significant effect on our financial position, results of operations, and assessments of risk exposure.
For example, we use models to assist in our determination of the fair values of financial instruments. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that are actively traded and have quoted market prices or parameters readily available, there is little to no subjectivity in determining fair value. If market quotes are not available, fair values are based on discounted cash flows using market estimates of interest rates and volatility or on dealer prices or prices of similar instruments. Pricing models and changes in their underlying assumptions are based on our best estimates for discount rates, prepayments, market volatility, and other factors. These assumptions could have a significant effect on the reported fair values of assets and liabilities, including derivatives, the related income and expense, and the expected future behavior of assets and liabilities. While the models we use to value instruments and measure risk exposures are subject to periodic validation by our staff and by independent parties, rapid changes in market conditions in the interim could impact our financial position. The use of different models and assumptions, as well as changes in market conditions, could significantly impact our financial condition and results of operations.
We use derivatives to manage our interest-rate risk, however, we could be unable to enter into effective derivative instruments on acceptable terms.
We use derivatives to manage our interest-rate risk. If, due to an absence of creditworthy swap dealers or guarantors, or to a decline in our own creditworthiness, we are unable to manage our hedging positions properly, or we are unable to enter into hedging instruments upon acceptable terms, we could be unable to effectively manage our interest-rate and other risks without altering our business strategies, which could adversely impact our financial condition and results of operations. In addition, while we are no longer entering into LIBOR-based derivatives, we do have outstanding derivatives based on LIBOR. Any failure by market participants to successfully transition away from LIBOR to a replacement benchmark and to implement transitional contractual arrangements for legacy LIBOR-based derivatives could adversely affect the trading or market value of derivatives. If we are unable to manage our hedging positions properly or are unable to enter into hedging instruments upon acceptable terms, the effectiveness of our management of interest-rate and other risks may be adversely affected, or we may be required to change our investment strategies and advance product offerings, which could adversely affect our financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We occupy approximately 54,000 rentable square feet in the Prudential Tower, 800 Boylston Street, Boston, Massachusetts 02199 that serves as our headquarters. We also maintain 7,461 square feet of leased property for a business continuity site in Massachusetts.
We believe our properties are adequate to meet our requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Private-label MBS Complaint
On April 20, 2011, we filed a complaint (the original complaint) in the Superior Court Department of the Commonwealth of Massachusetts in Suffolk County (the Massachusetts Superior Court) against various securities dealers, underwriters, control persons, issuers/depositors, and credit rating agencies based on our investments in certain private-label MBS issued by 115 securitization trusts for which we originally paid approximately $5.8 billion. Since the originalThe complaint was filed, the defendants filed certain notices of removal to remove the case to the United States District Court for the District of Massachusetts (the Massachusetts District Court). On March 9, 2012, our motion to remand the matter to the Massachusetts Superior Court was denied.
On June 29, 2012, we filed an amended complaint (the amended complaint) in the Massachusetts District Court against various securities dealers, underwriters, control persons, issuers/depositors, and credit rating agencies based on our investments in certain private-label MBS issued by 111 securitization trusts for which we originally paid approximately $5.7 billion. The amended complaint asserts, as the original complaint had asserted, claims based on untrue or misleading statements in the sale of securities, signing or circulating securities documents that contained material misrepresentations and omissions, negligent
misrepresentation, unfair or deceptive trade practices, fraud by the rating agencies, and controlling person liability. We are seekingsought various forms of relief including rescission, recovery of damages, recovery of purchase consideration plus interest (less income received to date), and recovery of reasonable attorneys' fees and costs of suit.
OnAlthough the case was removed by the defendants to the United States District Court for the District of Massachusetts (Massachusetts District Court), and was pending there for several years, in 2017 it was remanded to the Massachusetts Superior Court, based upon a January 2017 U.S. Supreme Court decision (Lightfoot v. Cendant Mortgage Corp.). We have resolved our claims against most of the originally named defendants, and the case remains pending in the Massachusetts Superior Court against Credit Suisse (USA), Inc. and certain of its affiliates (the securities defendants).
While the case was pending in the Massachusetts District Court, we filed an amended complaint (in June 2012) that reduced the number of MBS in the case to 111 securitizations for which we originally paid approximately $5.7 billion. The amended complaint asserts, as the original complaint had asserted, claims against the securities defendants based on untrue or misleading statements in the sale of securities, signing or circulating securities documents that contained material misrepresentations and
omissions, negligent misrepresentation, unfair or deceptive trade practices, and controlling person liability. In September 30, 2013, the Massachusetts District Court issued orders granting and denyingruled upon the defendants’ motions to dismiss, filed bydenying such motions with respect to certain of our claims, and granting such motions with respect to certain other claims. On August 20, 2019, the defendants. More specifically, the court:
upheld claims based on negligent misrepresentationMassachusetts Superior Court denied Credit Suisse’s motion for summary judgment with respect to all of our Massachusetts Uniform Securities Act Claims and our unfair or deceptive trade practices against non-rating agency defendants;
upheld claims, based on fraud but dismissed claims based onand with respect to some of our negligent misrepresentation and unfair or deceptive trade practicesclaims. The Court granted such motion with respect to our negligent misrepresentation claims relating to one securitization, based upon Credit Suisse’s role.
Our original (and amended) complaint also asserted fraud claims against certain rating agency defendants;
upheld claims based ondefendants. However, in January 2017, while the case was pending in the Massachusetts Uniform Securities Act against underwriter and corporate seller defendants, but dismissed such claims against issuer/depositor defendants and control person defendants (with respectDistrict Court, the court, upon our motion (following our successful appeal to claims that were premised solely on controlthe United States Court of Appeals for the First Circuit of an issuer/depositor); and
dismissed the claims against DB Structured Products, Inc. that were solely premised on a claim of its successor liability.
On January 28, 2014, Moody's Investors Service, Inc.earlier adverse ruling dismissing our claims), Moody's Corporation (together Moody's), McGraw Hill Financial, Inc. and Standard & Poor's Financial Services LLC (the credit rating agency defendants) filed renewed motions for reconsideration of their previously denied motions to dismiss the claims against these defendants based on lack of jurisdiction or, alternatively, for leave to make an immediate appeal. We simultaneously filed a separate motion to sever and transfer thesevered our claims against the credit rating agency defendants that remained in the litigation at that time (Moody's Investors Service, Inc. and Moody's Corporation; collectively referred to as Moody's), and transferred the severed claims to the U.S.United States District Court for the Southern District of New York (S.D.N.Y.).
On September 30, 2014, the Massachusetts District Court dismissed our claims against the credit rating agency defendants, holding that it lacked personal jurisdiction over our claims against the credit rating agency defendants and declined to grant our motion to transfer those claims to another federal district court that does have personal jurisdiction. The court certified the ruling for immediate appeal. To preserve our rights with respect to a permissive appeal, on October 10, 2014, we sought permission from the United States Court of Appeals for the First Circuit (the First Circuit) to appeal. Later that same month, we filed a notice of appeal to preserve our right to appeal under a separate grant of appellate jurisdiction.
On October 14, 2014, we also entered into tolling agreements with the credit rating agency defendants regarding the claims we had asserted against them in the Massachusetts District Court.
On May 2, 2016, the First Circuit ruled favorably on our appeal of the dismissal of our claims against Moody’s. The First Circuit vacated the Massachusetts District Court's ruling that federal law does not permit the transfer of cases from one federal court to another where the first court is found to lack personal jurisdiction. The First Circuit remanded the case to the Massachusetts District Court to determine whether transfer of our claims to the S.D.N.Y. would be in the interest of justice. On August 1, 2016, Moody's filed a petition for writ of certiorari to Shortly thereafter, based upon the Supreme Court ofCourt’s Lightfoot v. Cendant Mortgage Corp. decision, the United States (the Supreme Court), asking the Supreme Court to review the First Circuit’s decision. On October 11, 2016, the Supreme Court denied Moody’s petition. Then on January 6, 2017, the Massachusetts District Court ruled that transfer of our claims against Moody’s to the S.D.N.Y. would be in the interests of justice and ordered that those claims be severed and transferred. On May 19, 2017, the S.D.N.Y dismissed our claims against Moody’s on jurisdictional grounds, in lightfor lack of the U.S. Supreme Court’s January 18, 2017, decision in Lightfoot v. Cendant Mortgage Corp.federal jurisdiction. On November 2, 2017, we refiled our complaint against Moody’s in the Supreme Court of New York, and subsequently amended such complaint on February 5, 2018. On FebruaryIn that action, on March 26, 2018, Moody’s filed a2019, an order of the New York Supreme Court was entered granting in part and denying in part the defendants’ motion to dismiss ourdismiss. The defendants appealed, and on October 17, 2019, the New York state complaint, and suchSupreme Court Appellate Division (Appellate Division) affirmed the order of the New York Supreme Court denying the defendants’ motion is currently pending.
In addition to our claims against Moody’s, we continue to pursue claims in this litigation againstdismiss. On January 30, 2020, the following and/or their affiliates and subsidiaries and/or entities under their control or controlled by affiliates or subsidiaries thereof: Credit Suisse (USA), Inc.; Impac Mortgage Holdings, Inc.; Morgan Stanley; Nomura Holding America, Inc.; and RBS Holdings USA Inc. (collectively the securities defendants).
On February 3, 2017, we, along with the securities defendants, filed a jointAppellate Division denied defendants’ motion for remand of our remaining claims againstreargument or for leave to appeal, a ruling that ends the securities defendants toappeal but not the Massachusetts Superior Court in light of the U.S. Supreme Court’s January 18, 2017, decision in Lightfoot v. Cendant Mortgage Corp. On February 7, 2017, the joint motion to remand was granted.litigation as a whole.
Over the past sixeight years, we have agreed with certain defendants in our private-label MBS litigation to settle our claims against them for an aggregate amount of $322.5$364.6 million (which amount is net of legal fees and expenses). Of that amount, $20.8$29.4 million represents net settlements during the year ended December 31, 2017.2019.
Other Legal Proceedings
From time to time, we are subject to various pending legal proceedings arising in the normal course of business. After consultation with legal counsel, we do not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on our financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The par value of our capital stock is $100 per share. Our stock is not publicly traded and can be purchased only by our members at par. As of February 28, 2018, 44429, 2020, 431 members and seven nonmembers held a total of 24.820.8 million shares of our Class B stock. Our capital plan provides us with the authority to issue Class A capital stock, $100 par value per share (Class A stock). However, we have not issued and do not intend to issue Class A stock at this time.
Dividends are solely within the discretion of our board of directors. The board of directors declared dividends during 2017, 2016,2019, 2018, and 20152017 as set forth in Table 43 below. Dividend rates are quoted in the form of an interest rate, which is then applied to each stockholder's average capital-stock-balance outstanding during the preceding calendar quarter to determine the dollar amount of the dividend that each stockholder will receive. The dividend rate was based upon a spread to average short-term interest rates experienced during the quarter.
Table 4 - Quarterly Dividends Declared (dollars in thousands)
| |
Table 3 - Quarterly Dividends Declared (dollars in thousands)
| | Table 3 - Quarterly Dividends Declared (dollars in thousands)
|
| | | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| Dividends Declared in the Quarter Ending | | Average
Capital Stock (1) during preceding quarter | | Dividend
Amount (2) | | Annualized
Dividend Rate | | Average
Capital Stock (1) during preceding quarter | | Dividend Amount (2) | | Annualized Dividend Rate | | Average
Capital Stock (1) during preceding quarter | | Dividend Amount (2) | | Annualized Dividend Rate | | Average
Capital Stock (1) during preceding quarter | | Dividend
Amount (2) | | Annualized
Dividend Rate | | Average
Capital Stock (1) during preceding quarter | | Dividend Amount (2) | | Annualized Dividend Rate | | Average
Capital Stock (1) during preceding quarter | | Dividend Amount (2) | | Annualized Dividend Rate |
| March 31 | | $ | 2,384,803 |
| | $ | 23,619 |
| | 3.94 | % | | $ | 2,265,359 |
| | $ | 19,529 |
| | 3.42 | % | | $ | 2,390,541 |
| | $ | 10,484 |
| | 1.74 | % | | $ | 2,396,636 |
| | $ | 37,272 |
| | 6.17 | % | | $ | 2,216,994 |
| | $ | 27,884 |
| | 4.99 | % | | $ | 2,384,803 |
| | $ | 23,619 |
| | 3.94 | % |
| June 30 | | 2,467,425 |
| | 24,822 |
| | 4.08 |
| | 2,343,265 |
| | 21,148 |
| | 3.63 |
| | 2,425,312 |
| | 10,525 |
| | 1.76 |
| | 2,064,694 |
| | 31,666 |
| | 6.22 |
| | 2,370,734 |
| | 31,917 |
| | 5.46 |
| | 2,467,425 |
| | 24,822 |
| | 4.08 |
|
| September 30 | | 2,436,766 |
| | 25,637 |
| | 4.22 |
| | 2,377,314 |
| | 21,574 |
| | 3.65 |
| | 2,461,879 |
| | 20,132 |
| | 3.28 |
| | 1,851,474 |
| | 27,881 |
| | 6.04 |
| | 2,401,299 |
| | 35,143 |
| | 5.87 |
| | 2,436,766 |
| | 25,637 |
| | 4.22 |
|
| December 31 | | 2,268,722 |
| | 24,762 |
| | 4.33 |
| | 2,388,743 |
| | 22,818 |
| | 3.80 |
| | 2,507,938 |
| | 20,987 |
| | 3.32 |
| | 1,796,954 |
| | 25,953 |
| | 5.73 |
| | 2,376,532 |
| | 35,162 |
| | 5.87 |
| | 2,268,722 |
| | 24,762 |
| | 4.33 |
|
_________________________
| |
| (1) | Average capital stock amounts do not include average balances of mandatorily redeemable stock. |
| |
| (2) | The dividend amounts do not include the interest expense on mandatorily redeemable stock. |
On February 15, 2018,13, 2020, our board of directors declared a cash dividend that was equivalent to an annual yield of 4.995.46 percent,, the approximate daily average three-month LIBOR for the fourth quarter of 20172019 plus 350 basis points. The dividend amount, based on average daily balances of Class B shares outstanding for the fourth quarter of 20172019 totaled $27.9$24.1 million and was paid on March 2, 2018.3, 2020. In declaring the dividend, the board stated that it expects to follow this formula for declaring cash dividends through 2018,2020, though a quarterly loss or a significant adverse event or trend could cause a dividend to be reduced or suspended.
Dividends are declared and paid in accordance with a schedule adopted by the board of directors that enables our board of directors to declare each quarterly dividend after net income is known, rather than basing the dividend on estimated net income. For example, in 2017,2019, quarterly dividends were declared in February, April, July, and October based on the immediately preceding quarter's net income and were paid on the second business day of the month that followed the month of declaration. We expect to continue this approach through 2018.2020.
Dividends may be paid only from current net earnings or previously retained earnings. In accordance with the FHLBank Act and FHFA regulations, we may not declare a dividend if we are not in compliance with our minimum capital requirements or if we would fall below our minimum capital requirements or would not be adequately capitalized as a result of a dividend except, in this latter case, with the Director of the FHFA's permission. Further, we may not pay dividends if the principal and interest due on any CO issued through the Office of Finance on which we are the primary obligor has not been paid in full when due, or under certain circumstances, if we become a noncomplying FHLBank as that term is defined in FHFA regulations as a result of any inability to either comply with regulatory liquidity requirements or satisfy our current obligations.
We maintain a policy providing that if our minimum retained earnings target exceeds the level of our retained earnings, the quarterly dividend payout cannot exceed 40 percent of our net income for the quarter. Our minimum retained earnings target was $700.0 million as of December 31, 2017,2019, compared with $1.3$1.5 billion in retained earnings at December 31, 2017.2019.
We may not pay dividends in the form of capital stock or issue new excess stock to members if our excess stock exceeds 1.0 percent of our total assets or if the issuance of excess stock would cause our excess stock to exceed 1.0 percent of our total assets. At December 31, 2017,2019, we had excess stock outstanding totaling $110.7$79.7 million or 0.20.1 percent of our total assets.
Should we determine to issue Class A stock, dividends declared on Class A stock may differ from dividends declared on Class B stock but may not exceed dividends declared on Class B stock.
We maintain a policy establishing a minimum capital level in excess of regulatory requirements to provide further protection for our capital base. This adopted minimum capital level provides that we will maintain a minimum capital level equal to 4.0 percent of total assets plus an amount we measure as our risk exposure with 99 percent confidence using our economic capital model, an amount equal to $3.0$2.8 billion at December 31, 2017.2019. Our permanent capital level was $3.6$3.3 billion at December 31, 2017,2019, so we were in excess of this requirement by $671.5$550.6 million on that date. If necessary to satisfy this adopted minimum capital level, however, we will take steps to control asset growth and/or maintain capital levels, the latter of which may limit future dividends.
ITEM 6. SELECTED FINANCIAL DATA
We derived the selected results of operations for the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, and the selected statement of condition data as of December 31, 20172019 and 2016,2018, from financial statements included elsewhere herein. We derived the selected results of operations for the years ended December 31, 20142016 and 2013,2015, and the selected statement of condition data as of December 31, 2015, 2014,2017, 2016, and 2013,2015, from financial statements not included herein. This selected financial data should be read in conjunction with the financial statements and the related notes appearing in this report.
Table 5 - Selected Financial Data (dollars in thousands)
| |
Table 4 - Selected Financial Data (dollars in thousands)
| | Table 4 - Selected Financial Data (dollars in thousands)
|
| | | | December 31, | | December 31, |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Statement of Condition | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 60,361,946 |
| | $ | 61,545,586 |
| | $ | 58,108,801 |
| | $ | 55,106,677 |
| | $ | 44,638,076 |
| | $ | 55,662,811 |
| | $ | 63,593,317 |
| | $ | 60,361,946 |
| | $ | 61,545,586 |
| | $ | 58,102,669 |
|
Investments(1) | | 17,941,614 |
| | 18,031,331 |
| | 18,019,181 |
| | 16,879,299 |
| | 12,981,340 |
| | 16,144,244 |
| | 15,900,204 |
| | 17,941,614 |
| | 18,031,331 |
| | 18,019,181 |
|
| Advances | | 37,565,967 |
| | 39,099,339 |
| | 36,076,167 |
| | 33,482,074 |
| | 27,516,678 |
| | 34,595,363 |
| | 43,192,222 |
| | 37,565,967 |
| | 39,099,339 |
| | 36,076,167 |
|
Mortgage loans held for portfolio, net(2) | | 4,004,737 |
| | 3,693,894 |
| | 3,581,788 |
| | 3,483,948 |
| | 3,368,476 |
| | 4,501,251 |
| | 4,299,402 |
| | 4,004,737 |
| | 3,693,894 |
| | 3,581,788 |
|
| Deposits and other borrowings | | 477,069 |
| | 482,163 |
| | 482,602 |
| | 369,331 |
| | 517,565 |
| | 674,309 |
| | 474,878 |
| | 477,069 |
| | 482,163 |
| | 482,602 |
|
| Consolidated obligations: | | | | | | | | | | | | | | | | | | | | |
| Bonds | | 28,344,623 |
| | 27,171,434 |
| | 25,433,409 |
| | 25,505,774 |
| | 23,465,906 |
| | 23,888,493 |
| | 25,912,684 |
| | 28,344,623 |
| | 27,171,434 |
| | 25,427,277 |
|
| Discount notes | | 27,720,906 |
| | 30,053,964 |
| | 28,479,097 |
| | 25,309,608 |
| | 16,060,781 |
| | 27,681,169 |
| | 33,065,822 |
| | 27,720,906 |
| | 30,053,964 |
| | 28,479,097 |
|
| Total consolidated obligations | | 56,065,529 |
| | 57,225,398 |
| | 53,912,506 |
| | 50,815,382 |
| | 39,526,687 |
| | 51,569,662 |
| | 58,978,506 |
| | 56,065,529 |
| | 57,225,398 |
| | 53,906,374 |
|
| Mandatorily redeemable capital stock | | 35,923 |
| | 32,687 |
| | 41,989 |
| | 298,599 |
| | 977,348 |
| | 5,806 |
| | 31,868 |
| | 35,923 |
| | 32,687 |
| | 41,989 |
|
Class B capital stock outstanding-putable(3) | | 2,283,721 |
| | 2,411,306 |
| | 2,336,662 |
| | 2,413,114 |
| | 2,530,471 |
| | 1,869,130 |
| | 2,528,854 |
| | 2,283,721 |
| | 2,411,306 |
| | 2,336,662 |
|
| Unrestricted retained earnings | | 1,041,033 |
| | 987,711 |
| | 934,214 |
| | 764,888 |
| | 681,978 |
| | 1,114,337 |
| | 1,084,342 |
| | 1,041,033 |
| | 987,711 |
| | 934,214 |
|
| Restricted retained earnings | | 267,316 |
| | 229,275 |
| | 194,634 |
| | 136,770 |
| | 106,812 |
| | 348,817 |
| | 310,670 |
| | 267,316 |
| | 229,275 |
| | 194,634 |
|
| Total retained earnings | | 1,308,349 |
| | 1,216,986 |
| | 1,128,848 |
| | 901,658 |
| | 788,790 |
| | 1,463,154 |
| | 1,395,012 |
| | 1,308,349 |
| | 1,216,986 |
| | 1,128,848 |
|
| Accumulated other comprehensive loss | | (326,940 | ) | | (383,514 | ) | | (442,597 | ) | | (436,986 | ) | | (481,516 | ) | | (186,972 | ) | | (316,507 | ) | | (326,940 | ) | | (383,514 | ) | | (442,597 | ) |
| Total capital | | 3,265,130 |
| | 3,244,778 |
| | 3,022,913 |
| | 2,877,786 |
| | 2,837,745 |
| | 3,145,312 |
| | 3,607,359 |
| | 3,265,130 |
| | 3,244,778 |
| | 3,022,913 |
|
| Results of Operations | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | $ | 277,003 |
| | $ | 251,749 |
| | $ | 225,697 |
| | $ | 213,292 |
| | $ | 255,855 |
| |
| Reduction of provision for credit losses | | (96 | ) | | (277 | ) | | (330 | ) | | 61 |
| | (1,954 | ) | |
| Net interest income after provision for credit losses | | | $ | 268,941 |
| | $ | 312,144 |
| | $ | 277,099 |
| | $ | 252,026 |
| | $ | 226,027 |
|
| Net impairment losses on held-to-maturity securities recognized in earnings | | (1,454 | ) | | (3,310 | ) | | (4,059 | ) | | (1,579 | ) | | (2,566 | ) | | (1,212 | ) | | (532 | ) | | (1,454 | ) | | (3,310 | ) | | (4,059 | ) |
| Litigation settlements | | 20,761 |
| | 39,211 |
| | 184,879 |
| | 22,000 |
| | 53,305 |
| | 29,361 |
| | 12,769 |
| | 20,761 |
| | 39,211 |
| | 184,879 |
|
| Other gains (losses), net | | 3,605 |
| | (6,577 | ) | | (8,819 | ) | | (586 | ) | | (7,295 | ) | |
| Other income (loss), net | | | 12,835 |
| | 8,589 |
| | 3,605 |
| | (6,577 | ) | | (8,819 | ) |
| Other expense | | 88,501 |
| | 88,746 |
| | 76,382 |
| | 65,655 |
| | 64,717 |
| | 97,884 |
| | 91,902 |
| | 88,501 |
| | 88,746 |
| | 76,382 |
|
| AHP assessments | | 21,307 |
| | 19,397 |
| | 32,328 |
| | 17,623 |
| | 24,229 |
| | 21,302 |
| | 24,299 |
| | 21,307 |
| | 19,397 |
| | 32,328 |
|
| Net income | | $ | 190,203 |
| | $ | 173,207 |
| | $ | 289,318 |
| | $ | 149,788 |
| | $ | 212,307 |
| | $ | 190,739 |
| | $ | 216,769 |
| | $ | 190,203 |
| | $ | 173,207 |
| | $ | 289,318 |
|
| Other Information | |
| |
| |
|
|
| |
| |
| |
| |
|
|
| |
|
| Dividends declared | | $ | 98,840 |
| | $ | 85,069 |
| | $ | 62,128 |
| | $ | 36,920 |
| | $ | 11,071 |
| | $ | 122,772 |
| | $ | 130,106 |
| | $ | 98,840 |
| | $ | 85,069 |
| | $ | 62,128 |
|
| Dividend payout ratio | | 51.97 | % | | 49.11 | % | | 21.47 | % | | 24.65 | % | | 5.21 | % | | 64.37 | % | | 60.02 | % | | 51.97 | % | | 49.11 | % | | 21.47 | % |
Weighted-average dividend rate(4) | | 4.14 |
| | 3.63 |
| | 2.54 |
| | 1.49 |
| | 0.38 |
| | 6.05 |
| | 5.56 |
| | 4.14 |
| | 3.63 |
| | 2.54 |
|
Return on average equity(5) | | 5.83 |
| | 5.49 |
| | 9.54 |
| | 5.24 |
| | 7.40 |
| | 6.29 |
| | 6.38 |
| | 5.83 |
| | 5.49 |
| | 9.54 |
|
| Return on average assets | | 0.32 |
| | 0.29 |
| | 0.52 |
| | 0.29 |
| | 0.54 |
| | 0.35 |
| | 0.35 |
| | 0.32 |
| | 0.29 |
| | 0.52 |
|
Net interest margin(6) | | 0.47 |
| | 0.43 |
| | 0.41 |
| | 0.41 |
| | 0.65 |
| | 0.49 |
| | 0.51 |
| | 0.47 |
| | 0.43 |
| | 0.41 |
|
| Average equity to average assets | | 5.49 |
| | 5.35 |
| | 5.45 |
| | 5.50 |
| | 7.26 |
| | 5.51 |
| | 5.49 |
| | 5.49 |
| | 5.35 |
| | 5.45 |
|
Total regulatory capital ratio(7) | | 6.01 |
| | 5.95 |
| | 6.04 |
| | 6.56 |
| | 9.63 |
| | 6.00 |
| | 6.22 |
| | 6.01 |
| | 5.95 |
| | 6.04 |
|
_______________________
| |
| (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 amounted to $500,000500 thousand, $650,000500 thousand, $500 thousand,, $1.0 million, $2.0 million,650 thousand, and $2.2$1.0 million, as of December 31, 2019, 2018, 2017, 2016, 2015, 2014, and 2013,2015, respectively. |
| |
| (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 loss and total retained earnings. |
| |
| (6) | Net interest margin is net interest income before provision for credit losses as a percentage of average earning assets. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This report includes statements describing anticipated developments, projections, estimates, or future 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 future economic performance; 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,” “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 and the risks set forth below. Accordingly, we caution that actualActual results could differ materially from those expressed or implied in these forward-looking statements or could impactaffect 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.
Forward-lookingSome of the risks and uncertainties that could affect our forward-looking statements in this report may include among others, our expectations for:the following:
income, retained earnings,the effects of economic, financial, credit, and dividend payouts;
repurchasesmarket conditions on our financial and regulatory condition and results of stock in excess of a shareholder’s total stock investment requirement (excess stock);
credit losses on advances and investments in mortgage loans and ABS, particularly private-label MBS;
balance-sheet changes and components thereof, such asoperations, including changes in advances balanceseconomic growth, general liquidity conditions, inflation and the size of our portfolio of investmentsdeflation, 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 mortgage loans;
our minimum retained earnings target; and
the interest-rate environment in which we do business.
Actual results may differ from forward-looking statements for many reasons,benchmark interest rates, including but not limited to:
to the anticipated cessation of the LIBOR benchmark rate, the development of alternative rates, including SOFR, and the adverse consequences these could have for market participants, including the Bank and its members; changes in interest rates, the rate of inflation (or deflation), housing prices, employment rates, and the general economy, including changes resulting from changes in U.S. fiscal policy or ratings of the U.S. federal government;
changes in demand for the condition of the mortgage and housing markets on our advances and other products;
mortgage-related assets; the willingnesscondition of the capital markets on our members to do business with us;COs;
changes in the financial health of our members;
changes in borrower defaults on mortgage loans;
changes in the credit performance and loss severities of our investments;
changes in prepayment rates on advances and investments;
| |
• | the value of collateral we hold as security for obligations of our members and counterparties;
|
issues and events across the FHLBank 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 the FHLBank System;
our ability to declare and pay dividends consistent with past practices as well as any plans to repurchase excess capital stock;
competitive forces including, without limitation, other sources of funding available to our members and other entities borrowing funds in the capital markets,markets;
changes in the value and liquidity of collateral we hold as security for obligations of our abilitymembers 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 attractchanges in or cessation of benchmark interest rates, associated with the Bank’s investments in mortgage loans and retain skilled employees;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 and natural disaster, 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 impact of the coronavirus or other pandemics, epidemics, or health emergencies, including the effect on the Bank resulting from illness or quarantines of employees or business partners on which we rely; negative effects on our members’ businesses and their demands for our products, and effects generally on the economy and financial markets;
the pace of technological change and our ability to develop and support technology andinternal controls, information systems, sufficient toand other operating technologies that effectively manage the risks of our business effectively;
the addition of new members;
| |
• | the loss of members due to, among other ways, member withdrawals, mergerswe face, including but not limited to, failures, interruptions, or security breaches (cyber-attacks); and acquisitions;
|
| |
• | changes in investor demand for COs;
|
changes in the terms or availability of derivatives and other agreements we enter into in support of our business operations;
the timing and volume of market activity;
the volatility of reported results due to changes in the fair value of certain assets and liabilities;
our ability to introduce new (or adequately adapt current) productsattract and services and successfully manage the risks associated with our products and services, including new types of collateral used to secure advances;retain skilled employees.
losses arising from litigation filed against us or one or more of the other FHLBanks;
gains resulting from legal claims we have;
losses arising from our joint and several liability on COs;
significant business disruptions resulting from vendor or third-party failure, natural or other disasters, cyberincidents, acts of war, or terrorism; and
| |
• | new accounting standards.
|
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.
EXECUTIVE SUMMARY
For the year ended December 31, 2017,2019, net income increaseddecreased to $190.2$190.7 million, from $173.2$216.8 million for the year ended December 31, 2016, largely the result2018. The decrease in net income was primarily due to a decrease of an increase of $25.1$43.2 million in net interest income after provision for credit losses and a $9.1 million decrease in net losses on derivatives and hedging activities, which were offset in part by a decrease of $18.5$16.6 million increase in litigation settlement income. Our return on average equity was 5.83 percentNet interest income after provision for credit losses for the year endedending December 31, 2017,2019, was $268.9 million, compared with 5.49 percent$312.1 million for the year ended December 31, 2016, an increase of 34 basis points.2018. The increase in return on average equity was largely a result of the aforementioned increase$43.2 million decrease in net interest income after provision for credit losses.losses was mainly a result of a $6.9 billion decrease in average earning assets, a $520.8 million decrease in average capital stock, as well as higher premium amortization on U.S. Agency mortgage-backed securities resulting from an expected increase in mortgage refinancing activity following a significant drop in mortgage rates during 2019. The decrease in average earning assets primarily consisted of a $5.8 billion decrease in average advances and a $1.4 billion decline in average investments. Offsetting these decreases in part was an increase in prepayment fees on advancesfrom $216 thousand in 2018 to $35.0 million for the year ending December 31, 2019. Our return on average equity was 6.29 percent for the year ended December 31, 2019, compared with 6.38 percent for the year ended December 31, 2018, a decrease of nine basis points. Our business model is designed to allow for variability in demand for advances and changes in interest rates. While the decrease in advances balances and lower interest rates contributed to reduced net income, our financial condition continued to strengthen with retained earnings growing to $1.3 billion at December 31, 2017, from $1.2of $1.5 billion at December 31, 2016,2019, a surplus of $608.3$763.2 million over our minimum retained earnings target, as we continuecontinued to satisfy all regulatory capital requirements as of December 31, 2017.2019. We also provided a dividend spread of 300350 basis points over the daily average three-month LIBOR in 2017.2019.
Net Interest Margin
In 20172019, net interest margin was 0.470.49 percent, an increasea decrease of fourtwo basis points from the year ended December 31, 2016.2018. The improvement ofdecrease in net interest margin benefited from improvement in net interest spread and modest increase inreflects the negative impact of higher premium amortization on U.S. Agency mortgage-backed securities as long-term interest rates though interest rates remained low compared to historical standards as discussed under — Economic Conditions — Interest-Rate Environment.dropped, after having risen during the prior-year period.
Advances Balances
We continue to deliver on our primary mission, supplying liquidity to our members. Advances balances totaled $37.6$34.6 billion at December 31, 2017,2019, compared to $39.1$43.2 billion at December 31, 2016.2018. The decrease in advances was primarily in variable-rate advances and fixed-rate putable advances, partially offset by increases in both short-term and long-term fixed-rateovernight advances along with variable-rate advances.
Accretable yields from investments in private-label MBS
For the years ended December 31, 20172019 and 2016,2018, we recognized $33.7$27.2 million and $38.0$32.5 million, respectively, in interest income resulting from the increased accretable yields of certain private-label MBS for which we had previously recognized credit losses. For a discussion of this accounting treatment, see Item 8 — Financial Statements and Supplementary Data —
The amortized cost of our total investments in private-label MBS and ABS backed by home-equity loans has declined to $842.9$408.6 million at December 31, 2017.2019. Other-than-temporary impairment credit losses were $1.5$1.2 million for the year ending December 31, 2017.2019.
Regulatory Developments
The FHFA and other regulators with authority over us or our way of doing business have issued or proposed multiple regulations and issued guidance during the year and into 20182020 as described in — Legislative and Regulatory Developments. Such developments affect the way we conduct business and could impact the way we satisfy our mission as well as the value of our membership.
LIBOR Transition Preparations
In July 2017, the United Kingdom’s FCA, which regulates LIBOR, announced its intention to stop persuading or compelling the major banks that sustain LIBOR to submit rate quotations after 2021. We recognize that the discontinuance of LIBOR as an interest rate benchmark and the transition to alternative reference rates, including SOFR, present significant risks and challenges that could affect our business. Many of our assets and liabilities are indexed to LIBOR, and we continue to assess legacy contracts across products and monitor risks to determine the effect of LIBOR discontinuance. Under a steering committee comprised of members of senior management and a working group of representatives from departments across the Bank, we have developed and continue to implement a multi-year plan and initiative to transition from LIBOR. We are also working with the other FHLBanks and the Office of Finance as we transition our floating-rate note issuance from LIBOR. In October 2019 we began to offer a SOFR-based advance. We are updating our operational processes and models to support new alternative reference rate activity. For further details see 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, as well as, Operational Risks — 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 — Legislative and Regulatory Developments as well as in Financial Condition — Transition from LIBOR to Alternative Reference Rates.
Coronavirus Pandemic: COVID-19
The recent outbreak of the coronavirus, which originated in Wuhan, Hubei Province, China and has now spread globally, including within the United States, has resulted in the declaration of the COVID-19 pandemic. The effects of COVID-19 are rapidly evolving, and the full impact and duration of the virus are unknown. Managing COVID-19 has strained and is expected to severely tax healthcare systems and businesses worldwide. The effects of COVID-19 and the response to the virus have negatively impacted financial markets and overall economic conditions. In response to these developments, the Federal Reserve has responded with a series of monetary policy adjustments in March 2020 including reductions to the targeted federal funds rate totaling 1.50 percent, an increase in its daily repurchase agreement offerings, announced purchases of U.S. Treasury securities and U.S. Agency mortgage-backed securities, and the establishment of the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Money Market Mutual Fund Liquidity Facility. On March 12, 2020, the Bank asked employees who are not operationally critical to work remotely. For further details of the potential impact of these events on the Bank, see Part I — Item 1A — Risk Factors — Natural or man-made disasters, including health emergencies related to the COVID-19 (coronavirus) pandemic, could have a material adverse effect on the Bank’s results of operations or financial condition. Additional information is provided in Economic Conditions.
ECONOMIC CONDITIONS
Economic Environment
The U.S. economy grew in 20172019 at an annualized rate of 2.3 percent, up 0.8down 0.6 percent from the 2016 growth rate of 1.5 percent.2018. The labor market continued to improve and was considered by many economists and Federal Reserve officials to be at or near full employment.strong. The unemployment rate in January 2018February 2020 stood at 4.13.5 percent, down 0.70.3 percent year-over-year. Alternative broader gaugesyear over year. The economy added an average of unemployment also showed steady improvement.175,000 jobs per month in 2019. The New England region’s unemployment rate was 3.0 percent in January 2020, 0.6 percent lower than for the New England region as a whole was steady, with the December 2017 unemployment rate at 3.7U.S., and 0.2 percent up 0.1 percent year-over-year.
The gradual recovery in the housing market continued in 2017.2019. The FHFA reported that house prices were up 6.75.1 percent in the fourth quarter of 2017 compared to2019 from a year prior.earlier. Year-over-year changes in house prices in the fourth quarter of 2017 were positive in each of the largest 100 metropolitan areas in the U.S. and all nine census regions,50 states, reflecting a broad housing market recovery across the nation.recovery. The housing market provided a significant boost to the New England economy in 2017,2019 with rising prices and construction activity.
According to recent forecasts,Financial markets experienced substantial volatility in February and March 2020 as the U.S. and New England economies appear likely to continue to grow at a modest pace in 2018. The recently passed federal tax reform may provide a modest boost tocoronavirus pandemic spread across various parts of the economy in the near term.world.
Interest-Rate Environment
On January 31, 2018,March 3, 2020, the Federal Open Market Committee (FOMC) maintained(FOMC) lowered the target range for the federal funds rate atto 1.00 percent to 1.25 percent, citing evolving risks to 1.50 percent. Theeconomic activity from the coronavirus. On March 15, 2020, citing related concerns about the disruption to economic activity and stress in the energy sector, the FOMC stated that it expects the economy to expand at a modest pace and labor market conditions to remain strong. Projections by FOMC participants in December 2017 suggest a further increase inlowered the target range for the federal funds rate to 0 to 0.25 percent. The FOMC also announced that it would increase its holdings of 75 basis pointsU.S. Treasury securities by the end of 2018.$500 billion and agency mortgage-backed securities by $200 billion over coming months.
Even with the increase in the targeted federal funds rate andFor part of 2019, long-term interest rates were lower than short-term interest rates remain low by historical standards, compressing the yields and margins that we can earn on our liquidity investments and short-term advances because our funding costs effectively have a floor at or near zero percent. Long-term interest rates remained relatively anchored for much of 2017 even as short-term rates increased with the federal funds rate, resulting in a flatteningan inverted yield curve and further margin compression.presenting a challenging operational environment for many financial institutions including the Bank. Long-term rates increased more than short-term rates in the final months of 2019 such that the yield curve was no longer inverted at 2019 year-end. However, all interest rates declined again in early 2020 as economic uncertainty increased due to the novel coronavirus pandemic and its possible impact on the global economy.
Longer-term interest rates have risen slightly since the beginning of 2018 and reached multi-year highs on expectations that the continuing economic expansion may result in stronger inflation.
Table 6 - Key Interest Rates
| |
Table 5 - Key Interest Rates
| | Table 5 - Key Interest Rates
|
| | | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| | Ending | | Average | | Ending | | Average | | Ending | | Average | Ending | | Average | | Ending | | Average | | Ending | | Average |
| Federal funds effective rate | 1.33% | | 1.00% | | 0.55% | | 0.39% | | 0.20% | | 0.13% | 1.55% | | 2.16% | | 2.40% | | 1.83% | | 1.33% | | 1.00% |
| 3-month LIBOR | 1.69% | | 1.26% | | 1.00% | | 0.74% | | 0.61% | | 0.32% | 1.91% | | 2.33% | | 2.81% | | 2.31% | | 1.69% | | 1.26% |
| 3-month U.S. Treasury yield | 1.38% | | 0.94% | | 0.50% | | 0.31% | | 0.16% | | 0.04% | 1.55% | | 2.08% | | 2.37% | | 1.96% | | 1.38% | | 0.94% |
| 2-year U.S. Treasury yield | 1.88% | | 1.39% | | 1.19% | | 0.83% | | 1.05% | | 0.67% | 1.57% | | 1.97% | | 2.49% | | 2.52% | | 1.88% | | 1.39% |
| 5-year U.S. Treasury yield | 2.21% | | 1.91% | | 1.93% | | 1.33% | | 1.76% | | 1.52% | 1.69% | | 1.95% | | 2.51% | | 2.75% | | 2.21% | | 1.91% |
| 10-year U.S. Treasury yield | 2.41% | | 2.33% | | 2.44% | | 1.84% | | 2.27% | | 2.13% | 1.92% | | 2.14% | | 2.69% | | 2.91% | | 2.41% | | 2.33% |
Source: Bloomberg
RESULTS OF OPERATIONS
Comparison of the year ended December 31, 2017,2019, versus the year ended December 31, 20162018
Net income increaseddecreased to $190.2190.7 million for the year ended December 31, 20172019, from $173.2216.8 million for the year ended December 31, 2016.2018. The reasons for the increasedecrease are discussed under — Executive Summary.
Net Interest Income
Net interest income after provision for credit losses for the year ending December 31, 2017,2019, was $277.1$268.9 million, compared with $252.0$312.1 million for 2016.2018. The $25.1$43.2 million increasedecrease in net interest income after provision for credit losses was primarily attributable to higher interest rates,mainly a two basis point increase in our net interest spread, and an increaseresult of net interest income resulting from an increase of $421.7 milliona $6.9 billion decrease in average earning assets as well as higher premium amortization on U.S. Agency mortgage-backed securities resulting from $58.6 billion for 2016, to $59.0 billion for 2017.a significant drop in mortgage rates during the year ending December 31, 2019. The increasedecrease in
average earning assets was driven byprimarily consisted of a $900.5 million increase$5.8 billion decrease in average advances balances,and a $1.4 billion decline in average investments. This decrease in net interest income after provision for credit losses was partially offset by a $659.8an increase in prepayment fees on advances from $216 thousand in the year ending December 31, 2018 to $35.0 million decreasefor the same period in average investments balances.2019. For additional information see — Rate and Volume Analysis. Offsetting the increase to net interest income after provision for credit losses was a $3.1 milliondecrease in net prepayment fees from advances and investments from $4.2 million in the year ending December 31, 2016, to $1.1 million in the year ending December 31, 2017.
Net interest spread was 0.400.36 percent for the year ended December 31, 2017,2019, a two basis point increasedecrease from 2016,2018, and net interest margin was 0.470.49 percent, a fourtwo basis point increasedecrease from 2016.2018. The increasedecrease in net interest spread reflects a 3833 basis point increase in the average yield on earning assets and a 3635 basis point increase in the average yield on interest-bearing liabilities. The decrease in both net interest spread and net interest margin mainly reflect the negative impact of higher premium amortization on U.S. Agency mortgage-backed securities, partially offset by the increase in prepayment fee income on advances discussed above.
Table 76 presents major categories of average balances, related interest income/expense, and average yields 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 7 - Net Interest Spread and Margin (dollars in thousands)
| |
Table 6 - Net Interest Spread and Margin (dollars in thousands)
| | Table 6 - Net Interest Spread and Margin (dollars in thousands)
|
| | | | For the Year Ended December 31, | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| | | Average Balance | | Interest Income / Expense | | Average Yield | | Average Balance | | Interest Income / Expense | | Average
Yield | | Average Balance | | Interest Income / Expense | | Average
Yield | | Average Balance | | Interest Income / Expense | | Average Yield | | Average Balance | | Interest Income / Expense | | Average
Yield | | Average Balance | | Interest Income / Expense | | Average
Yield |
| Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Advances | | $ | 36,943,396 |
| | $ | 515,074 |
| | 1.39 | % | | $ | 36,042,906 |
| | $ | 340,903 |
| | 0.95 | % | | $ | 32,330,089 |
| | $ | 247,002 |
| | 0.76 | % | | $ | 33,128,806 |
| | $ | 889,610 |
| | 2.69 | % | | $ | 38,964,665 |
| | $ | 867,431 |
| | 2.23 | % | | $ | 36,943,396 |
| | $ | 515,074 |
| | 1.39 | % |
| Interest-bearing deposits | | | 1,033,450 |
| | 22,390 |
| | 2.17 |
| | 276,767 |
| | 5,433 |
| | 1.96 |
| | 206,220 |
| | 2,045 |
| | 0.99 |
|
| Securities purchased under agreements to resell | | 3,038,178 |
| | 27,486 |
| | 0.90 |
| | 3,394,038 |
| | 11,474 |
| | 0.34 |
| | 4,815,227 |
| | 4,825 |
| | 0.10 |
| | 5,491,663 |
| | 123,438 |
| | 2.25 |
| | 4,025,447 |
| | 77,718 |
| | 1.93 |
| | 3,038,178 |
| | 27,486 |
| | 0.90 |
|
| Federal funds sold | | 5,757,038 |
| | 58,642 |
| | 1.02 |
| | 5,707,301 |
| | 22,562 |
| | 0.40 |
| | 5,343,833 |
| | 6,481 |
| | 0.12 |
| | 2,635,165 |
| | 58,015 |
| | 2.20 |
| | 5,919,666 |
| | 108,144 |
| | 1.83 |
| | 5,757,038 |
| | 58,642 |
| | 1.02 |
|
Investment securities(1) | | 9,255,905 |
| | 208,597 |
| | 2.25 |
| | 9,641,477 |
| | 212,777 |
| | 2.21 |
| | 9,140,609 |
| | 203,837 |
| | 2.23 |
| | 8,072,471 |
| | 203,737 |
| | 2.52 |
| | 8,390,634 |
| | 230,633 |
| | 2.75 |
| | 9,255,905 |
| | 208,597 |
| | 2.25 |
|
| Mortgage loans | | 3,818,639 |
| | 125,002 |
| | 3.27 |
| | 3,637,645 |
| | 119,910 |
| | 3.30 |
| | 3,557,110 |
| | 122,704 |
| | 3.45 |
| | 4,417,474 |
| | 147,885 |
| | 3.35 |
| | 4,108,704 |
| | 136,672 |
| | 3.33 |
| | 3,818,639 |
| | 125,002 |
| | 3.27 |
|
| Other earning assets | | 209,508 |
| | 2,088 |
| | 1.00 |
| | 177,628 |
| | 538 |
| | 0.30 |
| | 79,148 |
| | 73 |
| | 0.09 |
| | 1,164 |
| | 25 |
| | 2.15 |
| | 1,575 |
| | 22 |
| | 1.40 |
| | 3,288 |
| | 43 |
| | 1.31 |
|
| Total interest-earning assets | | 59,022,664 |
| | 936,889 |
| | 1.59 |
| | 58,600,995 |
| | 708,164 |
| | 1.21 |
| | 55,266,016 |
| | 584,922 |
| | 1.06 |
| | 54,780,193 |
| | 1,445,100 |
| | 2.64 |
| | 61,687,458 |
| | 1,426,053 |
| | 2.31 |
| | 59,022,664 |
| | 936,889 |
| | 1.59 |
|
| Other non-interest-earning assets | | 342,940 |
| | | | | | 338,118 |
| | | | | | 384,947 |
| | | | | | 236,032 |
| | | | | | 274,422 |
| | | | | | 342,940 |
| | | | |
| Fair-value adjustments on investment securities | | (22,728 | ) | | | | | | 26,624 |
| | | | | | (31,331 | ) | | | | | | 43,176 |
| | | | | | (111,902 | ) | | | | | | (22,728 | ) | | | | |
| Total assets | | $ | 59,342,876 |
| | $ | 936,889 |
| | 1.58 | % | | $ | 58,965,737 |
| | $ | 708,164 |
| | 1.20 | % | | $ | 55,619,632 |
| | $ | 584,922 |
| | 1.05 | % | | $ | 55,059,401 |
| | $ | 1,445,100 |
| | 2.62 | % | | $ | 61,849,978 |
| | $ | 1,426,053 |
| | 2.31 | % | | $ | 59,342,876 |
| | $ | 936,889 |
| | 1.58 | % |
| Liabilities and capital | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated obligations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Discount notes | | $ | 26,489,602 |
| | $ | 233,081 |
| | 0.88 | % | | $ | 26,979,622 |
| | $ | 93,362 |
| | 0.35 | % | | $ | 25,243,798 |
| | $ | 28,221 |
| | 0.11 | % | | $ | 25,489,068 |
| | $ | 569,896 |
| | 2.24 | % | | $ | 30,078,903 |
| | $ | 561,443 |
| | 1.87 | % | | $ | 26,489,602 |
| | $ | 233,081 |
| | 0.88 | % |
| Bonds | | 28,414,427 |
| | 421,622 |
| | 1.48 |
| | 27,487,501 |
| | 361,006 |
| | 1.31 |
| | 26,048,777 |
| | 329,285 |
| | 1.26 |
| | 25,526,458 |
| | 598,585 |
| | 2.34 |
| | 27,216,512 |
| | 545,228 |
| | 2.00 |
| | 28,414,427 |
| | 421,622 |
| | 1.48 |
|
| Deposits | | 473,134 |
| | 3,615 |
| | 0.76 |
| | 490,359 |
| | 679 |
| | 0.14 |
| | 417,278 |
| | 77 |
| | 0.02 |
| | 566,210 |
| | 6,582 |
| | 1.16 |
| | 497,418 |
| | 5,311 |
| | 1.07 |
| | 473,134 |
| | 3,615 |
| | 0.76 |
|
| Mandatorily redeemable capital stock | | 35,292 |
| | 1,558 |
| | 4.41 |
| | 36,397 |
| | 1,364 |
| | 3.75 |
| | 58,092 |
| | 1,636 |
| | 2.82 |
| | 16,481 |
| | 974 |
| | 5.91 |
| | 32,966 |
| | 1,923 |
| | 5.83 |
| | 35,292 |
| | 1,558 |
| | 4.41 |
|
| Other borrowings | | 995 |
| | 10 |
| | 1.01 |
| | 654 |
| | 4 |
| | 0.61 |
| | 3,583 |
| | 6 |
| | 0.17 |
| | 1,230 |
| | 37 |
| | 3.01 |
| | 2,260 |
| | 38 |
| | 1.68 |
| | 995 |
| | 10 |
| | 1.01 |
|
| Total interest-bearing liabilities | | 55,413,450 |
| | 659,886 |
| | 1.19 |
| | 54,994,533 |
| | 456,415 |
| | 0.83 |
| | 51,771,528 |
| | 359,225 |
| | 0.69 |
| | 51,599,447 |
| | 1,176,074 |
| | 2.28 |
| | 57,828,059 |
| | 1,113,943 |
| | 1.93 |
| | 55,413,450 |
| | 659,886 |
| | 1.19 |
|
| Other non-interest-bearing liabilities | | 669,030 |
| | | | | | 818,814 |
| | | | | | 816,042 |
| | | | | | 428,082 |
| | | | | | 625,472 |
| | | | | | 669,030 |
| | | | |
| Total capital | | 3,260,396 |
| | | | | | 3,152,390 |
| | | | | | 3,032,062 |
| | | | | | 3,031,872 |
| | | | | | 3,396,447 |
| | | | | | 3,260,396 |
| | | | |
| Total liabilities and capital | | $ | 59,342,876 |
| | $ | 659,886 |
| | 1.11 | % | | $ | 58,965,737 |
| | $ | 456,415 |
| | 0.77 | % | | $ | 55,619,632 |
| | $ | 359,225 |
| | 0.65 | % | | $ | 55,059,401 |
| | $ | 1,176,074 |
| | 2.14 | % | | $ | 61,849,978 |
| | $ | 1,113,943 |
| | 1.80 | % | | $ | 59,342,876 |
| | $ | 659,886 |
| | 1.11 | % |
| Net interest income | | |
| | $ | 277,003 |
| | | | |
| | $ | 251,749 |
| | | | |
| | $ | 225,697 |
| | | | |
| | $ | 269,026 |
| | | | |
| | $ | 312,110 |
| | | | |
| | $ | 277,003 |
| | |
| Net interest spread | | |
| | |
| | 0.40 | % | | |
| | |
| | 0.38 | % | | |
| | |
| | 0.37 | % | | |
| | |
| | 0.36 | % | | |
| | |
| | 0.38 | % | | |
| | |
| | 0.40 | % |
| Net interest margin | | |
| | |
| | 0.47 | % | | |
| | |
| | 0.43 | % | | |
| | |
| | 0.41 | % | | |
| | |
| | 0.49 | % | | |
| | |
| | 0.51 | % | | |
| | |
| | 0.47 | % |
_________________________
| |
| (1) | The average balances of held-to-maturity securities and available-for-sale securities are reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized other-than-temporary impairment reflected in accumulated other comprehensive loss. |
Rate and Volume Analysis
Changes in both average balances (volume) and interest rates influence changes in net interest income and net interest margin. Table 87 summarizes changes in interest income and interest expense for the years ended December 31, 20172019 and 20162018. 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 8 - Rate and Volume Analysis (dollars in thousands)
| |
Table 7 - Rate and Volume Analysis (dollars in thousands)
| | Table 7 - Rate and Volume Analysis (dollars in thousands)
|
| | | | | For the Year Ended December 31, 2017 vs. 2016 | | For the Year Ended December 31, 2016 vs. 2015 | | For the Year Ended December 31, 2019 vs. 2018 | | For the Year Ended December 31, 2018 vs. 2017 |
| | | Increase (Decrease) due to | | Increase (Decrease) due to | | Increase (Decrease) due to | | Increase (Decrease) due to |
| | | Volume | | Rate | | Total | | Volume | | Rate | | Total | | Volume | | Rate | | Total | | Volume | | Rate | | Total |
| Interest income | | | | | | | | |
| | |
| | |
| | | | | | | | |
| | |
| | |
|
| Advances | | $ | 8,719 |
| | $ | 165,452 |
| | $ | 174,171 |
| | $ | 30,564 |
| | $ | 63,337 |
| | $ | 93,901 |
| | $ | (141,190 | ) | | $ | 163,369 |
| | $ | 22,179 |
| | $ | 29,593 |
| | $ | 322,764 |
| | $ | 352,357 |
|
| Interest-bearing deposits | | | 16,338 |
| | 619 |
| | 16,957 |
| | 878 |
| | 2,510 |
| | 3,388 |
|
| Securities purchased under agreements to resell | | (1,322 | ) | | 17,334 |
| | 16,012 |
| | (1,798 | ) | | 8,447 |
| | 6,649 |
| | 31,512 |
| | 14,208 |
| | 45,720 |
| | 11,188 |
| | 39,044 |
| | 50,232 |
|
| Federal funds sold | | 198 |
| | 35,882 |
| | 36,080 |
| | 470 |
| | 15,611 |
| | 16,081 |
| | (68,989 | ) | | 18,860 |
| | (50,129 | ) | | 1,702 |
| | 47,800 |
| | 49,502 |
|
| Investment securities | | (8,627 | ) | | 4,447 |
| | (4,180 | ) | | 11,072 |
| | (2,132 | ) | | 8,940 |
| | (8,519 | ) | | (18,377 | ) | | (26,896 | ) | | (20,779 | ) | | 42,815 |
| | 22,036 |
|
| Mortgage loans | | 5,930 |
| | (838 | ) | | 5,092 |
| | 2,736 |
| | (5,530 | ) | | (2,794 | ) | | 10,332 |
| | 881 |
| | 11,213 |
| | 9,622 |
| | 2,048 |
| | 11,670 |
|
| Other earning assets | | 113 |
| | 1,437 |
| | 1,550 |
| | 164 |
| | 301 |
| | 465 |
| | (7 | ) | | 10 |
| | 3 |
| | (24 | ) | | 3 |
| | (21 | ) |
| Total interest income | | 5,011 |
| | 223,714 |
| | 228,725 |
| | 43,208 |
| | 80,034 |
| | 123,242 |
| | (160,523 | ) | | 179,570 |
| | 19,047 |
| | 32,180 |
| | 456,984 |
| | 489,164 |
|
| Interest expense | | | | | | | | |
| | |
| | |
| | | | | | | | |
| | |
| | |
|
| Consolidated obligations | | | | | | | | |
| | |
| | |
| | | | | | | | |
| | |
| | |
|
| Discount notes | | (1,727 | ) | | 141,446 |
| | 139,719 |
| | 2,070 |
| | 63,071 |
| | 65,141 |
| | (93,053 | ) | | 101,506 |
| | 8,453 |
| | 35,400 |
| | 292,962 |
| | 328,362 |
|
| Bonds | | 12,500 |
| | 48,116 |
| | 60,616 |
| | 18,602 |
| | 13,119 |
| | 31,721 |
| | (35,398 | ) | | 88,755 |
| | 53,357 |
| | (18,444 | ) | | 142,050 |
| | 123,606 |
|
| Deposits | | (25 | ) | | 2,961 |
| | 2,936 |
| | 16 |
| | 586 |
| | 602 |
| | 774 |
| | 497 |
| | 1,271 |
| | 194 |
| | 1,502 |
| | 1,696 |
|
| Mandatorily redeemable capital stock | | (42 | ) | | 236 |
| | 194 |
| | (718 | ) | | 446 |
| | (272 | ) | | (974 | ) | | 25 |
| | (949 | ) | | (108 | ) | | 473 |
| | 365 |
|
| Other borrowings | | 3 |
| | 3 |
| | 6 |
| | (8 | ) | | 6 |
| | (2 | ) | | (22 | ) | | 21 |
| | (1 | ) | | 18 |
| | 10 |
| | 28 |
|
| Total interest expense | | 10,709 |
| | 192,762 |
| | 203,471 |
| | 19,962 |
| | 77,228 |
| | 97,190 |
| | (128,673 | ) | | 190,804 |
| | 62,131 |
| | 17,060 |
| | 436,997 |
| | 454,057 |
|
| Change in net interest income | | $ | (5,698 | ) | | $ | 30,952 |
| | $ | 25,254 |
| | $ | 23,246 |
| | $ | 2,806 |
| | $ | 26,052 |
| | $ | (31,850 | ) | | $ | (11,234 | ) | | $ | (43,084 | ) | | $ | 15,120 |
| | $ | 19,987 |
| | $ | 35,107 |
|
Average Balance of Advances Outstanding
The average balance of total advances increased $900.5 million,decreased $5.8 billion, or 2.515.0 percent, for the year ended December 31, 20172019, compared with the same period in 20162018, with short-term fixed-rate advances and fixed-rate overnight advances as the most significant contributors.. We cannot predict whether this trend will continue.
Table 9 - Average Balance of Advances Outstanding by Product Type (dollars in thousands)
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Fixed-rate advances—par value | | | | | | |
| Long-term | | $ | 13,698,841 |
| | $ | 13,469,835 |
| | $ | 12,975,786 |
|
| Short-term | | 11,983,431 |
| | 11,304,530 |
| | 9,721,359 |
|
| Putable | | 2,013,438 |
| | 2,350,279 |
| | 2,069,459 |
|
| Overnight | | 1,395,268 |
| | 840,878 |
| | 918,740 |
|
| Amortizing | | 904,323 |
| | 862,266 |
| | 875,163 |
|
| All other fixed-rate advances | | 35,753 |
| | 70,136 |
| | 78,677 |
|
| | | 30,031,054 |
| | 28,897,924 |
| | 26,639,184 |
|
| | | | | | | |
| Variable-rate indexed advances—par value | | | | | | |
Simple variable (1) | | 6,197,984 |
| | 6,501,997 |
| | 5,408,571 |
|
| Putable | | 706,069 |
| | 462,976 |
| | 45,158 |
|
| All other variable-rate indexed advances | | 39,997 |
| | 40,115 |
| | 48,655 |
|
| | | 6,944,050 |
| | 7,005,088 |
| | 5,502,384 |
|
| Total average par value | | 36,975,104 |
| | 35,903,012 |
| | 32,141,568 |
|
| Net (discounts) premiums | | (9,483 | ) | | 3,820 |
| | 11,754 |
|
| Market value of bifurcated derivatives | | 669 |
| | 4,122 |
| | 2,227 |
|
| Hedging adjustments | | (22,894 | ) | | 131,952 |
| | 174,540 |
|
| Total average balance of advances | | $ | 36,943,396 |
| | $ | 36,042,906 |
| | $ | 32,330,089 |
|
_____________________
| |
(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. |
In addition, the average balance of fixed-rate advances that were hedged with interest-rate swaps to yield an effective floating rate totaled $8.4 billion for the year endedDecember 31, 2017. Therefore, a significant portion of our advances, including overnight advances, short-term fixed-rate advances, fixed-rate putable advances, certain fixed-rate bullet advances, and variable-rate advances, either earn a short-term interest rate or are swapped to a short-term index, resulting in yields that closely follow short-term market interest-rate trends. The average balance of all such advances totaled $28.7 billion for the year endedDecember 31, 2017, representing 77.7 percent of the total average balance of advances outstanding during the year endedDecember 31, 2017. The average balance of all such advances totaled $28.3 billion forFor the year ended December 31, 2016, representing 78.6 percent of the total average balance of advances outstanding during the year ended December 31, 2016.
Average Balance of InvestmentsNet Interest Income
Average short-term money-market investments, consistingNet interest income after provision for credit losses for the year ending December 31, 2019, was $268.9 million, compared with $312.1 million for 2018. The $43.2 million decrease in net interest income after provision for credit losses was mainly a result of interest-bearing deposits,a $6.9 billion decrease in average earning assets as well as higher premium amortization on U.S. Agency mortgage-backed securities purchased under agreementsresulting from a significant drop in mortgage rates during the year ending December 31, 2019. The decrease in
average earning assets primarily consisted of a $5.8 billion decrease in average advances and a $1.4 billion decline in average investments. This decrease in net interest income after provision for credit losses was partially offset by an increase in prepayment fees on advances from $216 thousand in the year ending December 31, 2018 to resell,$35.0 million for the same period in 2019. For additional information see — Rate and federal funds sold, decreased $274.2 million, or 3.0Volume Analysis.
Net interest spread was 0.36 percent for the year ended December 31, 2019, a two basis point decrease from 2018, and net interest margin was 0.49 percent, a two basis point decrease from 2018. The decrease in net interest spread reflects a 33 basis point increase in the average yield on earning assets and a 35 basis point increase in the average yield on interest-bearing liabilities. The decrease in both net interest spread and net interest margin mainly reflect the negative impact of higher premium amortization on U.S. Agency mortgage-backed securities, partially offset by the increase in prepayment fee income on advances discussed above.
Table 6 presents major categories of average balances, related interest income/expense, and average yields 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 6 - Net Interest Spread and Margin (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | Average Balance | | Interest Income / Expense | | Average Yield | | Average Balance | | Interest Income / Expense | | Average
Yield | | Average Balance | | Interest Income / Expense | | Average
Yield |
| Assets | | | | | | | | | | | | | | | | | | |
| Advances | | $ | 33,128,806 |
| | $ | 889,610 |
| | 2.69 | % | | $ | 38,964,665 |
| | $ | 867,431 |
| | 2.23 | % | | $ | 36,943,396 |
| | $ | 515,074 |
| | 1.39 | % |
| Interest-bearing deposits | | 1,033,450 |
| | 22,390 |
| | 2.17 |
| | 276,767 |
| | 5,433 |
| | 1.96 |
| | 206,220 |
| | 2,045 |
| | 0.99 |
|
| Securities purchased under agreements to resell | | 5,491,663 |
| | 123,438 |
| | 2.25 |
| | 4,025,447 |
| | 77,718 |
| | 1.93 |
| | 3,038,178 |
| | 27,486 |
| | 0.90 |
|
| Federal funds sold | | 2,635,165 |
| | 58,015 |
| | 2.20 |
| | 5,919,666 |
| | 108,144 |
| | 1.83 |
| | 5,757,038 |
| | 58,642 |
| | 1.02 |
|
Investment securities(1) | | 8,072,471 |
| | 203,737 |
| | 2.52 |
| | 8,390,634 |
| | 230,633 |
| | 2.75 |
| | 9,255,905 |
| | 208,597 |
| | 2.25 |
|
| Mortgage loans | | 4,417,474 |
| | 147,885 |
| | 3.35 |
| | 4,108,704 |
| | 136,672 |
| | 3.33 |
| | 3,818,639 |
| | 125,002 |
| | 3.27 |
|
| Other earning assets | | 1,164 |
| | 25 |
| | 2.15 |
| | 1,575 |
| | 22 |
| | 1.40 |
| | 3,288 |
| | 43 |
| | 1.31 |
|
| Total interest-earning assets | | 54,780,193 |
| | 1,445,100 |
| | 2.64 |
| | 61,687,458 |
| | 1,426,053 |
| | 2.31 |
| | 59,022,664 |
| | 936,889 |
| | 1.59 |
|
| Other non-interest-earning assets | | 236,032 |
| | | | | | 274,422 |
| | | | | | 342,940 |
| | | | |
| Fair-value adjustments on investment securities | | 43,176 |
| | | | | | (111,902 | ) | | | | | | (22,728 | ) | | | | |
| Total assets | | $ | 55,059,401 |
| | $ | 1,445,100 |
| | 2.62 | % | | $ | 61,849,978 |
| | $ | 1,426,053 |
| | 2.31 | % | | $ | 59,342,876 |
| | $ | 936,889 |
| | 1.58 | % |
| Liabilities and capital | | | | | | | | | | | | | | | | | | |
| Consolidated obligations | | | | | | | | | | | | | | | | | | |
| Discount notes | | $ | 25,489,068 |
| | $ | 569,896 |
| | 2.24 | % | | $ | 30,078,903 |
| | $ | 561,443 |
| | 1.87 | % | | $ | 26,489,602 |
| | $ | 233,081 |
| | 0.88 | % |
| Bonds | | 25,526,458 |
| | 598,585 |
| | 2.34 |
| | 27,216,512 |
| | 545,228 |
| | 2.00 |
| | 28,414,427 |
| | 421,622 |
| | 1.48 |
|
| Deposits | | 566,210 |
| | 6,582 |
| | 1.16 |
| | 497,418 |
| | 5,311 |
| | 1.07 |
| | 473,134 |
| | 3,615 |
| | 0.76 |
|
| Mandatorily redeemable capital stock | | 16,481 |
| | 974 |
| | 5.91 |
| | 32,966 |
| | 1,923 |
| | 5.83 |
| | 35,292 |
| | 1,558 |
| | 4.41 |
|
| Other borrowings | | 1,230 |
| | 37 |
| | 3.01 |
| | 2,260 |
| | 38 |
| | 1.68 |
| | 995 |
| | 10 |
| | 1.01 |
|
| Total interest-bearing liabilities | | 51,599,447 |
| | 1,176,074 |
| | 2.28 |
| | 57,828,059 |
| | 1,113,943 |
| | 1.93 |
| | 55,413,450 |
| | 659,886 |
| | 1.19 |
|
| Other non-interest-bearing liabilities | | 428,082 |
| | | | | | 625,472 |
| | | | | | 669,030 |
| | | | |
| Total capital | | 3,031,872 |
| | | | | | 3,396,447 |
| | | | | | 3,260,396 |
| | | | |
| Total liabilities and capital | | $ | 55,059,401 |
| | $ | 1,176,074 |
| | 2.14 | % | | $ | 61,849,978 |
| | $ | 1,113,943 |
| | 1.80 | % | | $ | 59,342,876 |
| | $ | 659,886 |
| | 1.11 | % |
| Net interest income | | |
| | $ | 269,026 |
| | | | |
| | $ | 312,110 |
| | | | |
| | $ | 277,003 |
| | |
| Net interest spread | | |
| | |
| | 0.36 | % | | |
| | |
| | 0.38 | % | | |
| | |
| | 0.40 | % |
| Net interest margin | | |
| | |
| | 0.49 | % | | |
| | |
| | 0.51 | % | | |
| | |
| | 0.47 | % |
_________________________
| |
| (1) | The average balances of held-to-maturity securities and available-for-sale securities are reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized other-than-temporary impairment reflected in accumulated other comprehensive loss. |
Rate and Volume Analysis
Changes in both average balances (volume) and interest rates influence changes in net interest income and net interest margin. Table 7 summarizes changes in interest income and interest expense for the years endedDecember 31, 20172019 and 2018. 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 7 - Rate and Volume Analysis (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | For the Year Ended December 31, 2019 vs. 2018 | | For the Year Ended December 31, 2018 vs. 2017 |
| | | Increase (Decrease) due to | | Increase (Decrease) due to |
| | | Volume | | Rate | | Total | | Volume | | Rate | | Total |
| Interest income | | | | | | | | |
| | |
| | |
|
| Advances | | $ | (141,190 | ) | | $ | 163,369 |
| | $ | 22,179 |
| | $ | 29,593 |
| | $ | 322,764 |
| | $ | 352,357 |
|
| Interest-bearing deposits | | 16,338 |
| | 619 |
| | 16,957 |
| | 878 |
| | 2,510 |
| | 3,388 |
|
| Securities purchased under agreements to resell | | 31,512 |
| | 14,208 |
| | 45,720 |
| | 11,188 |
| | 39,044 |
| | 50,232 |
|
| Federal funds sold | | (68,989 | ) | | 18,860 |
| | (50,129 | ) | | 1,702 |
| | 47,800 |
| | 49,502 |
|
| Investment securities | | (8,519 | ) | | (18,377 | ) | | (26,896 | ) | | (20,779 | ) | | 42,815 |
| | 22,036 |
|
| Mortgage loans | | 10,332 |
| | 881 |
| | 11,213 |
| | 9,622 |
| | 2,048 |
| | 11,670 |
|
| Other earning assets | | (7 | ) | | 10 |
| | 3 |
| | (24 | ) | | 3 |
| | (21 | ) |
| Total interest income | | (160,523 | ) | | 179,570 |
| | 19,047 |
| | 32,180 |
| | 456,984 |
| | 489,164 |
|
| Interest expense | | | | | | | | |
| | |
| | |
|
| Consolidated obligations | | | | | | | | |
| | |
| | |
|
| Discount notes | | (93,053 | ) | | 101,506 |
| | 8,453 |
| | 35,400 |
| | 292,962 |
| | 328,362 |
|
| Bonds | | (35,398 | ) | | 88,755 |
| | 53,357 |
| | (18,444 | ) | | 142,050 |
| | 123,606 |
|
| Deposits | | 774 |
| | 497 |
| | 1,271 |
| | 194 |
| | 1,502 |
| | 1,696 |
|
| Mandatorily redeemable capital stock | | (974 | ) | | 25 |
| | (949 | ) | | (108 | ) | | 473 |
| | 365 |
|
| Other borrowings | | (22 | ) | | 21 |
| | (1 | ) | | 18 |
| | 10 |
| | 28 |
|
| Total interest expense | | (128,673 | ) | | 190,804 |
| | 62,131 |
| | 17,060 |
| | 436,997 |
| | 454,057 |
|
| Change in net interest income | | $ | (31,850 | ) | | $ | (11,234 | ) | | $ | (43,084 | ) | | $ | 15,120 |
| | $ | 19,987 |
| | $ | 35,107 |
|
Average Balance of Advances Outstanding
The average balance of total advances decreased $5.8 billion, or 15.0 percent, for the year endedDecember 31, 2019, compared with the same period in 20162018. The yield earned on short-term money-market investments is highly correlated to short-term market interest rates. As a result of the FOMC’s target range for the federal funds rate, average yields on overnight federal funds sold increased from 0.40 percent during the year ended December 31, 2016 to 1.02 percent during the year ended December 31, 2017, while average yields on securities purchased under agreements to resell increased from 0.34 percent for the year ended December 31, 2016 to 0.90 percent for the year ended December 31, 2017. These investments are used for liquidity management and to manage our leverage ratio in response to fluctuations in other asset balances. For the year ended December 31, 2017, average balances of federal funds sold increased $49.7 million and average balances of securities purchased under agreements to resell decreased $355.9 million in comparison to the year ended December 31, 2016.
Average investment-securities balances decreased $385.6 million, or 4.0 percent for the year ended December 31, 2017, compared with the same period in 2016, a decrease consisting primarily of a $595.3 million decrease in MBS and a $206.8 million increase in U.S. Treasury obligations.We cannot predict whether this trend will continue.
Average Balance of COs
Average CO balances increased $436.9 million, or 0.8 percent, for the year ended December 31, 2017, compared with the same period in 2016, resulting from our increased funding needs principally due to the increase in our average advances balances. This overall increase consisted of an increase of $926.9 million in CO bonds and a decrease of $490.0 million in CO discount notes.
The average balance of CO discount notes represented approximately 48.2 percent of total average COs during the year ended December 31, 2017, compared with 49.5 percent of total average COs during the year ended December 31, 2016. The average balance of CO bonds represented 51.8 percent and 50.5 percent of total average COs outstanding during the years ended December 31, 2017 and 2016, 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. We generally use derivative instruments that qualify for hedge accounting as interest-rate risk-management tools. These derivatives serve to stabilize net interest income and net interest margin when interest rates fluctuate. Accordingly, the impact of derivatives on net interest income and net interest margin should be viewed in the overall context of our risk-management strategy.
Table 10 - Effect of Derivative and Hedging Activities (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2017 | |
| Net Effect of Derivatives and Hedging Activities | | Advances | | Investments | | Mortgage Loans | | CO Bonds | | Total | |
| Net interest income | | | | | | | | | | | |
Amortization / accretion of hedging activities in net interest income (1) | | $ | (2,176 | ) | | $ | — |
| | $ | (277 | ) | | $ | 1,903 |
| | $ | (550 | ) | |
Net interest settlements included in net interest income (2) | | (24,663 | ) | | (32,053 | ) | | — |
| | 6,694 |
| | (50,022 | ) | |
| Total net interest income | | (26,839 | ) | | (32,053 | ) | | (277 | ) | | 8,597 |
| | (50,572 | ) | |
| | | | | | | | | | | | |
| Net gains (losses) on derivatives and hedging activities | | | | | | | | | | | |
| (Losses) gains on fair-value hedges | | (568 | ) | | 1,736 |
| | — |
| | (3,406 | ) | | (2,238 | ) | |
| Gains on cash-flow hedges | | — |
| | — |
| | — |
| | 587 |
| | 587 |
| |
| (Losses) gains on derivatives not receiving hedge accounting | | (4 | ) | | 434 |
| | — |
| | 4 |
| | 434 |
| |
| Mortgage delivery commitments | | — |
| | — |
| | 1,768 |
| | — |
| | 1,768 |
| |
| Net (losses) gains on derivatives and hedging activities | | (572 | ) | | 2,170 |
| | 1,768 |
| | (2,815 | ) | | 551 |
| |
| | | | | | | | | | | | |
| Subtotal | | (27,411 | ) | | (29,883 | ) | | 1,491 |
| | 5,782 |
| | (50,021 | ) | |
| | | | | | | | | | | | |
| Net losses on trading securities | | — |
| | (6,078 | ) | | — |
| | — |
| | (6,078 | ) | |
| Total net effect of derivatives and hedging activities | | $ | (27,411 | ) | | $ | (35,961 | ) | | $ | 1,491 |
| | $ | 5,782 |
| | $ | (56,099 | ) | |
_____________________
| |
(1) | Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss. |
| |
(2) | Represents interest income/expense on derivatives included in net interest income. |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2016 | |
| Net Effect of Derivatives and Hedging Activities | | Advances | | Investments | | Mortgage Loans | | CO Bonds | | Total | |
| Net interest income | | | | | | | | | | | |
Amortization / accretion of hedging activities in net interest income (1) | | $ | (2,692 | ) | | $ | — |
| | $ | (651 | ) | | $ | (5,682 | ) | | $ | (9,025 | ) | |
Net interest settlements included in net interest income (2) | | (96,079 | ) | | (35,203 | ) | | — |
| | 27,182 |
| | (104,100 | ) | |
| Total net interest income | | (98,771 | ) | | (35,203 | ) | | (651 | ) | | 21,500 |
| | (113,125 | ) | |
| | | | | | | | | | | | |
| Net (losses) gains on derivatives and hedging activities | | | | | | | | | | | |
| Gains (losses) on fair-value hedges | | 1,592 |
| | 1,819 |
| | — |
| | (10,409 | ) | | (6,998 | ) | |
| Gains on cash-flow hedges | | — |
| | — |
| | — |
| | 29 |
| | 29 |
| |
| (Losses) gains on derivatives not receiving hedge accounting | | (12 | ) | | (1,379 | ) | | — |
| | 39 |
| | (1,352 | ) | |
| Mortgage delivery commitments | | — |
| | — |
| | (270 | ) | | — |
| | (270 | ) | |
| Net gain (losses) on derivatives and hedging activities | | 1,580 |
| | 440 |
| | (270 | ) | | (10,341 | ) | | (8,591 | ) | |
| | | | | | | | | | | | |
| Subtotal | | (97,191 | ) | | (34,763 | ) | | (921 | ) | | 11,159 |
| | (121,716 | ) | |
| | | | | | | | | | | | |
| Net losses on trading securities | | — |
| | (4,410 | ) | | — |
| | — |
| | (4,410 | ) | |
| Total net effect of derivatives and hedging activities | | $ | (97,191 | ) | | $ | (39,173 | ) | | $ | (921 | ) | | $ | 11,159 |
| | $ | (126,126 | ) | |
_____________________
| |
(1) | Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss. |
| |
(2) | Represents interest income/expense on derivatives included in net interest income. |
|
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2015 |
| Net Effect of Derivatives and Hedging Activities | | Advances | | Investments | | Mortgage Loans | | CO Bonds | | Total |
| Net interest income | | | | | | | | | | |
Amortization / accretion of hedging activities in net interest income (1) | | $ | (4,852 | ) | | $ | — |
| | $ | (534 | ) | | $ | (5,292 | ) | | $ | (10,678 | ) |
Net interest settlements included in net interest income (2) | | (131,019 | ) | | (37,657 | ) | | — |
| | 63,390 |
| | (105,286 | ) |
| Total net interest income | | (135,871 | ) | | (37,657 | ) | | (534 | ) | | 58,098 |
| | (115,964 | ) |
| | | | | | | | | | | |
| Net (losses) gains on derivatives and hedging activities | | | | | | | | | | |
| (Losses) gains on fair-value hedges | | (391 | ) | | 1,510 |
| | — |
| | (8,308 | ) | | (7,189 | ) |
| Losses on cash-flow hedges | | — |
| | — |
| | — |
| | (127 | ) | | (127 | ) |
| (Losses) gains on derivatives not receiving hedge accounting | | — |
| | (4,288 | ) | | — |
| | 118 |
| | (4,170 | ) |
| Mortgage delivery commitments | | — |
| | — |
| | 226 |
| | — |
| | 226 |
|
| Net (losses) gains on derivatives and hedging activities | | (391 | ) | | (2,778 | ) | | 226 |
| | (8,317 | ) | | (11,260 | ) |
| | | | | | | | | | | |
| Subtotal | | (136,262 | ) | | (40,435 | ) | | (308 | ) | | 49,781 |
| | (127,224 | ) |
| | | | | | | | | | | |
| Net losses on trading securities | | — |
| | (4,890 | ) | | — |
| | — |
| | (4,890 | ) |
| Total net effect of derivatives and hedging activities | | $ | (136,262 | ) | | $ | (45,325 | ) | | $ | (308 | ) | | $ | 49,781 |
| | $ | (132,114 | ) |
_____________________
| |
(1) | Represents the amortization/accretion of hedging fair-value adjustments. |
| |
(2) | Represents interest income/expense on derivatives included in net interest income. |
Net interest margin was 0.47 percent and 0.43 percent for the years endedDecember 31, 2017 and 2016, respectively. If derivatives had not been used as hedges to mitigate the impact of interest-rate fluctuations, net interest margin would have been 0.55 percent and 0.61 percent, respectively.
Interest paid and received on interest-rate-exchange agreements that are economic hedges is classified as net losses on derivatives and hedging activities in other income. As shown under — Other Income (Loss) below, interest accruals on derivatives classified as economic hedges totaled a net expense of $4.7 million and $5.9 million for the years endedDecember 31, 2017 and 2016, respectively.
Other Income (Loss)
Table 11 - Other Income (Loss) (dollars in thousands)
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Gains (losses) on derivatives and hedging activities: | | | | | | |
| Net losses related to fair-value hedge ineffectiveness | | $ | (2,238 | ) | | $ | (6,998 | ) | | $ | (7,189 | ) |
| Net gains (losses) related to cash-flow hedge ineffectiveness | | 587 |
| | 29 |
| | (127 | ) |
| Net unrealized gains (losses) related to derivatives not receiving hedge accounting associated with: | | | | | | |
| Advances | | (3 | ) | | (12 | ) | | — |
|
| Trading securities | | 5,096 |
| | 4,477 |
| | 2,721 |
|
| CO Bonds | | 29 |
| | 33 |
| | 17 |
|
| Mortgage delivery commitments | | 1,768 |
| | (270 | ) | | 226 |
|
| Net interest-accruals related to derivatives not receiving hedge accounting | | (4,688 | ) | | (5,850 | ) | | (6,908 | ) |
| Net gains (losses) on derivatives and hedging activities | | 551 |
| | (8,591 | ) | | (11,260 | ) |
| Net other-than-temporary impairment credit losses on held-to-maturity securities recognized in income | | (1,454 | ) | | (3,310 | ) | | (4,059 | ) |
| Litigation settlements | | 20,761 |
| | 39,211 |
| | 184,879 |
|
| Service-fee income | | 8,697 |
| | 7,701 |
| | 8,050 |
|
| Net unrealized losses on trading securities | | (6,078 | ) | | (4,410 | ) | | (4,890 | ) |
| Other | | 435 |
| | (1,277 | ) | | (719 | ) |
| Total other income | | $ | 22,912 |
| | $ | 29,324 |
| | $ | 172,001 |
|
Litigation settlement income declined in 2017 and is expected to decline in future years as the remainder of our private-label MBS claims are either settled or resolved through litigation. Apart from litigation settlement income, as evident in Table 11 above, accounting for derivatives and hedged items results in the potential for considerable timing differences between income recognition from assets or liabilities and income effects of hedging instruments entered into in order to mitigate interest-rate risk and cash-flow activity.
Changes in the fair value of trading securities are recorded in other income (loss). For the years ended December 31, 2017 and 2016, we recorded net unrealized losses on trading securities of $6.1 million and $4.4 million, respectively. Changes in the fair value of the associated economic hedges amounted to net gains of $5.1 million and $4.5 million for the years endedDecember 31, 2017 and 2016, respectively. In addition to the changes in fair value are interest accruals on these economic hedges, which resulted in net expenses of $4.7 million and $5.9 million for the years endedDecember 31, 2017 and 2016, respectively, and are included in other income (loss).
Operating Expenses
Comparison of the year ended December 31, 2016, versus the year ended December 31, 2015
For the year ended December 31, 2016 net income decreased to $173.2 million, from $289.3 million for the year ended December 31, 2015, largely due to a $145.7 million decrease in litigation settlement income related to private-label MBS. The Bank had the highest annual net income in its history in 2015, largely due to $184.9 million in litigation settlement income that declined to $39.2 million for the year ended December 31, 2016. Our return on average equity was 5.49 percent for the year ended December 31, 2016, compared with 9.54 percent for the year ended December 31, 2015, a decrease of 405 basis points. The decrease in return on average equity was largely a result of the aforementioned significant decrease in litigation settlement income related to private-label MBS. Offsetting the decline in litigation settlement income in part was a $26.1 million increase in net interest income. Retained earnings grew to $1.2 billion at December 31, 2016, from $1.1 billion at December 31, 2015, a surplus of $517.0 million over our minimum retained earnings target, and we satisfied all regulatory capital requirements as of December 31, 2016.
Net Interest Income
Net interest income after provision for credit losses for the year ending December 31, 2016,2019, was $252.0$268.9 million, compared with $226.0$312.1 million for 2015.2018. The $26.0$43.2 million increasedecrease in net interest income after provision for credit losses was primarily attributable tomainly a $3.3result of a $6.9 billion increasedecrease in average earning assets as well as higher premium amortization on U.S. Agency mortgage-backed securities resulting from $55.3 billion for 2015, to $58.6 billion for 2016.a significant drop in mortgage rates during the year ending December 31, 2019. The increasedecrease in
average earning assets was driven byprimarily consisted of a $3.7$5.8 billion increasedecrease in average advances balances partially offset byand a $458.4 million decrease$1.4 billion decline in average investments balances. Offsetting the increase toinvestments. This decrease in net interest income after provision for credit losses was a $4.1 million decreasepartially offset by an increase in net prepayment fees on advances from advances and investments from $8.3 million$216 thousand in the year ending December 31, 2015,2018 to $4.2$35.0 million for the same period in the year ending December 31, 2016.2019. For additional information see — Rate and Volume Analysis.
Net interest spread was 0.380.36 percent for the year ended December 31, 2016,2019, a onetwo basis point increasedecrease from 2015,2018, and net interest margin was 0.430.49 percent, a two basis point increasedecrease from 2015.2018. The increasedecrease in net interest spread reflects a 1533 basis point increase in the average yield on earning assets and a 1435 basis point increase in the average yield on interest-bearing liabilities. The decrease in both net interest spread and net interest margin mainly reflect the negative impact of higher premium amortization on U.S. Agency mortgage-backed securities, partially offset by the increase in prepayment fee income on advances discussed above.
Table 6 presents major categories of average balances, related interest income/expense, and average yields 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 6 - Net Interest Spread and Margin (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | Average Balance | | Interest Income / Expense | | Average Yield | | Average Balance | | Interest Income / Expense | | Average
Yield | | Average Balance | | Interest Income / Expense | | Average
Yield |
| Assets | | | | | | | | | | | | | | | | | | |
| Advances | | $ | 33,128,806 |
| | $ | 889,610 |
| | 2.69 | % | | $ | 38,964,665 |
| | $ | 867,431 |
| | 2.23 | % | | $ | 36,943,396 |
| | $ | 515,074 |
| | 1.39 | % |
| Interest-bearing deposits | | 1,033,450 |
| | 22,390 |
| | 2.17 |
| | 276,767 |
| | 5,433 |
| | 1.96 |
| | 206,220 |
| | 2,045 |
| | 0.99 |
|
| Securities purchased under agreements to resell | | 5,491,663 |
| | 123,438 |
| | 2.25 |
| | 4,025,447 |
| | 77,718 |
| | 1.93 |
| | 3,038,178 |
| | 27,486 |
| | 0.90 |
|
| Federal funds sold | | 2,635,165 |
| | 58,015 |
| | 2.20 |
| | 5,919,666 |
| | 108,144 |
| | 1.83 |
| | 5,757,038 |
| | 58,642 |
| | 1.02 |
|
Investment securities(1) | | 8,072,471 |
| | 203,737 |
| | 2.52 |
| | 8,390,634 |
| | 230,633 |
| | 2.75 |
| | 9,255,905 |
| | 208,597 |
| | 2.25 |
|
| Mortgage loans | | 4,417,474 |
| | 147,885 |
| | 3.35 |
| | 4,108,704 |
| | 136,672 |
| | 3.33 |
| | 3,818,639 |
| | 125,002 |
| | 3.27 |
|
| Other earning assets | | 1,164 |
| | 25 |
| | 2.15 |
| | 1,575 |
| | 22 |
| | 1.40 |
| | 3,288 |
| | 43 |
| | 1.31 |
|
| Total interest-earning assets | | 54,780,193 |
| | 1,445,100 |
| | 2.64 |
| | 61,687,458 |
| | 1,426,053 |
| | 2.31 |
| | 59,022,664 |
| | 936,889 |
| | 1.59 |
|
| Other non-interest-earning assets | | 236,032 |
| | | | | | 274,422 |
| | | | | | 342,940 |
| | | | |
| Fair-value adjustments on investment securities | | 43,176 |
| | | | | | (111,902 | ) | | | | | | (22,728 | ) | | | | |
| Total assets | | $ | 55,059,401 |
| | $ | 1,445,100 |
| | 2.62 | % | | $ | 61,849,978 |
| | $ | 1,426,053 |
| | 2.31 | % | | $ | 59,342,876 |
| | $ | 936,889 |
| | 1.58 | % |
| Liabilities and capital | | | | | | | | | | | | | | | | | | |
| Consolidated obligations | | | | | | | | | | | | | | | | | | |
| Discount notes | | $ | 25,489,068 |
| | $ | 569,896 |
| | 2.24 | % | | $ | 30,078,903 |
| | $ | 561,443 |
| | 1.87 | % | | $ | 26,489,602 |
| | $ | 233,081 |
| | 0.88 | % |
| Bonds | | 25,526,458 |
| | 598,585 |
| | 2.34 |
| | 27,216,512 |
| | 545,228 |
| | 2.00 |
| | 28,414,427 |
| | 421,622 |
| | 1.48 |
|
| Deposits | | 566,210 |
| | 6,582 |
| | 1.16 |
| | 497,418 |
| | 5,311 |
| | 1.07 |
| | 473,134 |
| | 3,615 |
| | 0.76 |
|
| Mandatorily redeemable capital stock | | 16,481 |
| | 974 |
| | 5.91 |
| | 32,966 |
| | 1,923 |
| | 5.83 |
| | 35,292 |
| | 1,558 |
| | 4.41 |
|
| Other borrowings | | 1,230 |
| | 37 |
| | 3.01 |
| | 2,260 |
| | 38 |
| | 1.68 |
| | 995 |
| | 10 |
| | 1.01 |
|
| Total interest-bearing liabilities | | 51,599,447 |
| | 1,176,074 |
| | 2.28 |
| | 57,828,059 |
| | 1,113,943 |
| | 1.93 |
| | 55,413,450 |
| | 659,886 |
| | 1.19 |
|
| Other non-interest-bearing liabilities | | 428,082 |
| | | | | | 625,472 |
| | | | | | 669,030 |
| | | | |
| Total capital | | 3,031,872 |
| | | | | | 3,396,447 |
| | | | | | 3,260,396 |
| | | | |
| Total liabilities and capital | | $ | 55,059,401 |
| | $ | 1,176,074 |
| | 2.14 | % | | $ | 61,849,978 |
| | $ | 1,113,943 |
| | 1.80 | % | | $ | 59,342,876 |
| | $ | 659,886 |
| | 1.11 | % |
| Net interest income | | |
| | $ | 269,026 |
| | | | |
| | $ | 312,110 |
| | | | |
| | $ | 277,003 |
| | |
| Net interest spread | | |
| | |
| | 0.36 | % | | |
| | |
| | 0.38 | % | | |
| | |
| | 0.40 | % |
| Net interest margin | | |
| | |
| | 0.49 | % | | |
| | |
| | 0.51 | % | | |
| | |
| | 0.47 | % |
_________________________
| |
| (1) | The average balances of held-to-maturity securities and available-for-sale securities are reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized other-than-temporary impairment reflected in accumulated other comprehensive loss. |
Rate and Volume Analysis
Changes in both average balances (volume) and interest rates influence changes in net interest income and net interest margin. Table 7 summarizes changes in interest income and interest expense for the years endedDecember 31, 2019 and 2018. 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 7 - Rate and Volume Analysis (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | For the Year Ended December 31, 2019 vs. 2018 | | For the Year Ended December 31, 2018 vs. 2017 |
| | | Increase (Decrease) due to | | Increase (Decrease) due to |
| | | Volume | | Rate | | Total | | Volume | | Rate | | Total |
| Interest income | | | | | | | | |
| | |
| | |
|
| Advances | | $ | (141,190 | ) | | $ | 163,369 |
| | $ | 22,179 |
| | $ | 29,593 |
| | $ | 322,764 |
| | $ | 352,357 |
|
| Interest-bearing deposits | | 16,338 |
| | 619 |
| | 16,957 |
| | 878 |
| | 2,510 |
| | 3,388 |
|
| Securities purchased under agreements to resell | | 31,512 |
| | 14,208 |
| | 45,720 |
| | 11,188 |
| | 39,044 |
| | 50,232 |
|
| Federal funds sold | | (68,989 | ) | | 18,860 |
| | (50,129 | ) | | 1,702 |
| | 47,800 |
| | 49,502 |
|
| Investment securities | | (8,519 | ) | | (18,377 | ) | | (26,896 | ) | | (20,779 | ) | | 42,815 |
| | 22,036 |
|
| Mortgage loans | | 10,332 |
| | 881 |
| | 11,213 |
| | 9,622 |
| | 2,048 |
| | 11,670 |
|
| Other earning assets | | (7 | ) | | 10 |
| | 3 |
| | (24 | ) | | 3 |
| | (21 | ) |
| Total interest income | | (160,523 | ) | | 179,570 |
| | 19,047 |
| | 32,180 |
| | 456,984 |
| | 489,164 |
|
| Interest expense | | | | | | | | |
| | |
| | |
|
| Consolidated obligations | | | | | | | | |
| | |
| | |
|
| Discount notes | | (93,053 | ) | | 101,506 |
| | 8,453 |
| | 35,400 |
| | 292,962 |
| | 328,362 |
|
| Bonds | | (35,398 | ) | | 88,755 |
| | 53,357 |
| | (18,444 | ) | | 142,050 |
| | 123,606 |
|
| Deposits | | 774 |
| | 497 |
| | 1,271 |
| | 194 |
| | 1,502 |
| | 1,696 |
|
| Mandatorily redeemable capital stock | | (974 | ) | | 25 |
| | (949 | ) | | (108 | ) | | 473 |
| | 365 |
|
| Other borrowings | | (22 | ) | | 21 |
| | (1 | ) | | 18 |
| | 10 |
| | 28 |
|
| Total interest expense | | (128,673 | ) | | 190,804 |
| | 62,131 |
| | 17,060 |
| | 436,997 |
| | 454,057 |
|
| Change in net interest income | | $ | (31,850 | ) | | $ | (11,234 | ) | | $ | (43,084 | ) | | $ | 15,120 |
| | $ | 19,987 |
| | $ | 35,107 |
|
Average Balance of Advances Outstanding
The average balance of total advances decreased $5.8 billion, or 15.0 percent, for the year endedDecember 31, 2019, compared with the same period in 2018. We cannot predict whether this trend will continue.
Average Balance of Investments
Average short-term money-market investments, consisting of interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold, decreased $1.1 billion, or 10.4 percent, for the year ended December 31, 2019, compared with the same period in 2018. The yield earned on short-term money-market investments is highly correlated to short-term market interest rates. As a result of the FOMC’s target range for the federal funds rate, average yields on overnight federal funds sold increased from 1.83 percent during the year ended December 31, 2018 to 2.20 percent during the year ended December 31, 2019, while average yields on securities purchased under agreements to resell increased from 1.93 percent for the year ended December 31, 2018 to 2.25 percent for the year ended December 31, 2019. These investments are used for liquidity management.
Average investment-securities balances decreased $318.2 million, or 3.8 percent for the year ended December 31, 2019, compared with the same period in 2018, a decrease consisting primarily of a $1.1 billion decline in MBS offset by a $785.8 million increase in U.S. Treasury obligations.
Average Balance of COs
Average CO balances decreased $6.3 billion, or 11.0 percent, for the year ended December 31, 2019, compared with the same period in 2018, resulting from our decreased funding needs principally due to the decrease in our average advances and $8.3 million,investments balances. This overall decrease consisted of declines of $4.6 billion in CO discount notes and $1.7 billion in CO bonds.
The average balance of CO discount notes represented approximately 50.0 percent of total average COs during the year ended December 31, 2019, compared with 52.5 percent of total average COs during the year ended December 31, 2018. The average balance of CO bonds represented 50.0 percent and 47.5 percent of total average COs outstanding during the years ended December 31, 2019 and 2018, 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. Beginning January 1, 2019, 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. Prior to January 1, 2019, the portion of fair value gains and losses of derivatives and hedged items representing hedge ineffectiveness were recorded in non-interest income. 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 interest income and net interest margin was 0.43 percent and 0.41 percent for the years ended December 31, 2016 and 2015, respectively. If derivatives had not been used as hedges to mitigatewhen interest rates fluctuate. Accordingly, the impact of interest-rate fluctuations,derivatives on net interest income and net interest margin would have been 0.61 percent and 0.60 percent, respectively.should be viewed in the overall context of our risk-management strategy.
Other Income (Loss) and Operating Expenses
Table 8 - Effect of Derivative and Hedging Activities (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2019 |
| Net Effect of Derivatives and Hedging Activities | | Advances | | Investments | | Mortgage Loans | | CO Bonds | | Other | | Total |
| Net interest income | | | | | | | | | | | | |
Amortization / accretion of hedging activities (1) | | $ | (1,934 | ) | | $ | — |
| | $ | (752 | ) | | $ | (2,567 | ) | | $ | — |
| | $ | (5,253 | ) |
| Gains (losses) on designated fair-value hedges | | 2,358 |
| | 824 |
| | — |
| | (1,100 | ) | | — |
| | 2,082 |
|
Net interest settlements on derivatives(2) | | 39,085 |
| | (22,249 | ) | | — |
| | (17,482 | ) | | — |
| | (646 | ) |
| Total net interest income | | 39,509 |
| | (21,425 | ) | | (752 | ) | | (21,149 | ) | | — |
| | (3,817 | ) |
| | | | | | | | | | | | | |
| Net gains (losses) on derivatives and hedging activities | | | | | | | | | | | | |
| (Losses) gains on derivatives not receiving hedge accounting | | (1,266 | ) | | 652 |
| | — |
| | — |
| | — |
| | (614 | ) |
| Mortgage delivery commitments | | — |
| | — |
| | 1,945 |
| | — |
| | — |
| | 1,945 |
|
Price alignment amount(3) | | — |
| | — |
| | — |
| | — |
| | 88 |
| | 88 |
|
| Net (losses) gains on derivatives and hedging activities | | (1,266 | ) | | 652 |
| | 1,945 |
| | — |
| | 88 |
| | 1,419 |
|
| | | | | | | | | | | | | |
| Subtotal | | 38,243 |
| | (20,773 | ) | | 1,193 |
| | (21,149 | ) | | 88 |
| | (2,398 | ) |
| | | | | | | | | | | | | |
Net losses on trading securities(4) | | — |
| | (864 | ) | | — |
| | — |
| | — |
| | (864 | ) |
| Total net effect of derivatives and hedging activities | | $ | 38,243 |
| | $ | (21,637 | ) | | $ | 1,193 |
| | $ | (21,149 | ) | | $ | 88 |
| | $ | (3,262 | ) |
Changes in the fair value of trading securities are recorded in other income (loss). For the years ended December 31, 2016 and 2015, we recorded net unrealized losses on trading securities of $4.4 million and $4.9 million, respectively. Changes in the fair value of the associated economic hedges amounted to net gains of $4.5 million and $2.7 million for the years ended December 31, 2016 and 2015, respectively. In addition to the changes in fair value are interest accruals on these economic hedges, which resulted in net expenses of $5.9 million and $7.0 million for the years ended December 31, 2016 and 2015, respectively.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2018 | |
| 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) | | $ | (1,475 | ) | | $ | — |
| | $ | (399 | ) | | $ | 945 |
| | $ | — |
| | $ | (929 | ) | |
Net interest settlements included in net interest income (2) | | 51,522 |
| | (26,040 | ) | | — |
| | (27,895 | ) | | — |
| | (2,413 | ) | |
| Total net interest income | | 50,047 |
| | (26,040 | ) | | (399 | ) | | (26,950 | ) | | — |
| | (3,342 | ) | |
| | | | | | | | | | | | | | |
| Net (losses) gains on derivatives and hedging activities | | | | | | | | | | | | | |
| Gains (losses) on fair-value hedges | | 704 |
| | 1,749 |
| | — |
| | (426 | ) | | — |
| | 2,027 |
| |
| Gains on cash-flow hedges | | — |
| | — |
| | — |
| | 227 |
| | — |
| | 227 |
| |
| (Losses) gains on derivatives not receiving hedge accounting | | (72 | ) | | 754 |
| | — |
| | — |
| | — |
| | 682 |
| |
| Mortgage delivery commitments | | — |
| | — |
| | 421 |
| | — |
| | — |
| | 421 |
| |
Price alignment amount(3) | | — |
| | — |
| | — |
| | — |
| | (1,021 | ) | | (1,021 | ) | |
| Net gains (losses) on derivatives and hedging activities | | 632 |
| | 2,503 |
| | 421 |
| | (199 | ) | | (1,021 | ) | | 2,336 |
| |
| | | | | | | | | | | | | | |
| Subtotal | | 50,679 |
| | (23,537 | ) | | 22 |
| | (27,149 | ) | | (1,021 | ) | | (1,006 | ) | |
| | | | | | | | | | | | | | |
Net losses on trading securities(4) | | — |
| | (4,465 | ) | | — |
| | — |
| | — |
| | (4,465 | ) | |
| Total net effect of derivatives and hedging activities | | $ | 50,679 |
| | $ | (28,002 | ) | | $ | 22 |
| | $ | (27,149 | ) | | $ | (1,021 | ) | | $ | (5,471 | ) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2017 |
| 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) | | $ | (2,176 | ) | | $ | — |
| | $ | (277 | ) | | $ | 1,903 |
| | $ | — |
| | $ | (550 | ) |
Net interest settlements included in net interest income (2) | | (24,663 | ) | | (32,053 | ) | | — |
| | 6,694 |
| | — |
| | (50,022 | ) |
| Total net interest income | | (26,839 | ) | | (32,053 | ) | | (277 | ) | | 8,597 |
| | — |
| | (50,572 | ) |
| | | | | | | | | | | | | |
| Net gains (losses) on derivatives and hedging activities | | | | | | | | | | | | |
| (Losses) gains on fair-value hedges | | (578 | ) | | 1,736 |
| | — |
| | (3,466 | ) | | — |
| | (2,308 | ) |
| Gains on cash-flow hedges | | — |
| | — |
| | — |
| | 280 |
| | — |
| | 280 |
|
| (Losses) gains on derivatives not receiving hedge accounting | | (4 | ) | | 434 |
| | — |
| | 4 |
| | — |
| | 434 |
|
| Mortgage delivery commitments | | — |
| | — |
| | 1,768 |
| | — |
| | — |
| | 1,768 |
|
Price alignment amount(3) | | — |
| | — |
| | — |
| | — |
| | 377 |
| | 377 |
|
| Net (losses) gains on derivatives and hedging activities | | (582 | ) | | 2,170 |
| | 1,768 |
| | (3,182 | ) | | 377 |
| | 551 |
|
| | | | | | | | | | | | | |
| Subtotal | | (27,421 | ) | | (29,883 | ) | | 1,491 |
| | 5,415 |
| | 377 |
| | (50,021 | ) |
| | | | | | | | | | | | | |
Net losses on trading securities(4) | | — |
| | (6,089 | ) | | — |
| | — |
| | — |
| | (6,089 | ) |
| Total net effect of derivatives and hedging activities | | $ | (27,421 | ) | | $ | (35,972 | ) | | $ | 1,491 |
| | $ | 5,415 |
| | $ | 377 |
| | $ | (56,110 | ) |
_____________________
| |
| (1) | Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss. |
| |
| (2) | Represents interest income/expense on derivatives included in net interest income. |
| |
| (3) | Represents the amount for derivatives for which variation margin is characterized as a daily settlement amount. |
| |
| (4) | Includes only those gains (losses) on trading securities that have an assigned economic derivative. |
ForComparison of the year ended December 31, 2016, compensation and benefits expense and other operating expenses totaled $70.1 million, representing an increase of $3.1 million from the total of $67.0 million for2018, versus the year ended December 31, 2015. The increase was primarily driven by a $2.1 million increase2017
For discussion and analysis of our results of operations for 2018 compared to 2017, see the Results of Operations section in other operating expensesthe Management's Discussion and a $1.0 million increase in compensationAnalysis of Financial Condition and benefits expense.Results of Operations of our 2018 Annual Report on Form 10-K.
FINANCIAL CONDITION
Advances
At December 31, 20172019, the advances portfolio totaled $37.634.6 billion, a decrease of $1.58.6 billion compared with $39.143.2 billion at December 31, 20162018.
Table 12 - Advances Outstanding by Product Type (dollars in thousands)
| |
Table 9 - Advances Outstanding by Product Type (dollars in thousands)
| | Table 9 - Advances Outstanding by Product Type (dollars in thousands)
|
| | | December 31, 2017 | | December 31, 2016 | December 31, 2019 | | December 31, 2018 |
| | Par Value | | Percent of Total | | Par Value | | Percent of Total | Par Value | | Percent of Total | | Par Value | | Percent of Total |
| Fixed-rate advances | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Long-term | $ | 14,188,347 |
| | 37.7 | % | | $ | 13,051,558 |
| | 33.4 | % | $ | 12,428,285 |
| | 35.9 | % | | $ | 13,415,001 |
| | 31.0 | % |
| Short-term | 13,533,417 |
| | 35.9 |
| | 12,260,502 |
| | 31.3 |
| 12,126,389 |
| | 35.1 |
| | 15,325,612 |
| | 35.4 |
|
| Overnight | 1,717,823 |
| | 4.6 |
| | 1,577,162 |
| | 4.0 |
| 1,409,017 |
| | 4.1 |
| | 3,075,277 |
| | 7.1 |
|
| Putable | 1,242,750 |
| | 3.3 |
| | 2,735,050 |
| | 7.0 |
| 1,349,500 |
| | 3.9 |
| | 791,700 |
| | 1.9 |
|
| Amortizing | 943,956 |
| | 2.5 |
| | 861,920 |
| | 2.2 |
| 783,400 |
| | 2.3 |
| | 920,088 |
| | 2.1 |
|
| All other fixed-rate advances | 32,000 |
| | 0.1 |
| | 40,000 |
| | 0.1 |
| 10,000 |
| | — |
| | 42,600 |
| | 0.1 |
|
| | 31,658,293 |
| | 84.1 |
| | 30,526,192 |
| | 78.0 |
| 28,106,591 |
| | 81.3 |
| | 33,570,278 |
| | 77.6 |
|
| | | | | | | | | | | | | | | |
| Variable-rate advances | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Simple variable (1) | 5,143,175 |
| | 13.7 |
| | 7,895,783 |
| | 20.2 |
| 6,379,495 |
| | 18.4 |
| | 8,908,875 |
| | 20.6 |
|
| Putable | 775,400 |
| | 2.0 |
| | 616,000 |
| | 1.6 |
| 34,000 |
| | 0.1 |
| | 733,300 |
| | 1.7 |
|
| All other variable-rate indexed advances | 70,298 |
| | 0.2 |
| | 76,880 |
| | 0.2 |
| 63,801 |
| | 0.2 |
| | 55,932 |
| | 0.1 |
|
| | 5,988,873 |
| | 15.9 |
| | 8,588,663 |
| | 22.0 |
| 6,477,296 |
| | 18.7 |
| | 9,698,107 |
| | 22.4 |
|
| Total par value | $ | 37,647,166 |
| | 100.0 | % | | $ | 39,114,855 |
| | 100.0 | % | $ | 34,583,887 |
| | 100.0 | % | | $ | 43,268,385 |
| | 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. |
Advances Credit Risk
We endeavor to minimize credit risk on advances by monitoring the financial condition of our borrowers and by holding sufficient collateral to protect the Bank from credit losses. All pledged collateral is subject to collateral discounts, or haircuts, to the market value or unpaid principal balance, of the collateral, as applicable, based on our opinion of the risk that such collateral presents. We are prohibited by Section 10(a) of the FHLBank Act from making advances without sufficient collateral to secure the advance.collateral. We have never experienced a credit loss on an advance.
We monitor the financial condition of all members and housing associates by reviewing available financial data, such as regulatory call reports filed by depository institution members, regulatory financial statements filed with the appropriate state insurance department by insurance company members, audited financial statements of housing associates, SEC filings, and rating-agency reports to ensure that potentially troubled members are identified as soon as possible. In addition, we have access to most members' regulatory examination reports. We analyze this information on a regular basis.
Over the past year, our members continued to show modest improvementexhibited stability in key financial metrics. Aggregate nonperforming assets for depository institution members declined by 5.0 percent in absolute termswere not materially changed over the year ending September 30, 2017,2019, and as a percentage of assets were 0.360.35 percent at both September 30, 2017 compared to 0.39 percent as of2019 and September 30, 2016.2018. September 30, 2017,2019, is the date of our most recent data on our membership for this report. The aggregate ratio of tangible capital to assets among the membership increased to 10.04 percent of assets as of September 30, 2017, from 9.86 percent as of September 30, 2016. All the Bank’s members had positive tangible capital at September 30, 2017. Three small depository institution members with total assets of approximately $106 million were less than “well-capitalized” by regulatory standards as of September 30, 2017. There were no advances outstanding to these members at December 31, 2017.2019. There were no member failures during 2017.2019. All of our extensions of credit to members are secured by eligible collateral as noted herein. However, we could incur losses if a member were to default, if the value of the collateral pledged by the member declined to a
point such that we were unable to realize sufficient value from the pledged collateral to cover the member’s obligations, and we were unable to obtain additional collateral to make up for the reduction in value of such collateral.
We assign each non-insurance company borrower to one of the following three credit status categories based primarily 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 also place housing associates and nonmember borrowers in Category-3.
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.
Each credit status category reflects our increasing level of control over the collateral pledged by the borrower as its financial condition weakens.borrower.
Category-1 borrowers retain possession of all mortgage loan collateral pledged to us, provided the borrower executes a written security agreement and agrees to hold such collateral for our benefit. Category-1 borrowers must specifically list with us all mortgage loan collateral other than loans secured by first-mortgage loans on owner-occupied one- to four-family residential property.
Category-2 borrowers retain possession of eligible mortgage loan collateral, however, we require such borrowers to specifically list all loan collateral pledged to us.
Category-3 borrowers are required to place physical possession of all pledged eligible collateral with us or an approved safekeeping agent, with which we have a control agreement.
All securities pledged to us by our borrowers must be delivered to us, delivered to an approved safekeeping agent, or held by the borrower's securities corporation in a custodial account with us. We have control agreements with approved safekeeping agents which are intended to give us appropriate control over the related collateral.
Our agreements with our borrowers require each borrower to have sufficient eligible collateral pledged to us to fully secure all outstanding extensions of credit, including advances, accrued interest receivable, standby letters of credit, MPF credit-enhancement obligations, and lines of credit (collectively, extensions of credit) at all times. We generally accept the following types of assets as collateral:
fully disbursed, first-mortgage loans on improved residential property (provided that the borrower is not in arrears by two or more payments), or securities representing a whole interest in such mortgages;
securities issued, insured, or guaranteed by the U.S. government or any agency thereof (including without limitation, MBS issued or guaranteed by Freddie Mac, Fannie Mae, and Ginnie Mae);
cash or deposits in a collateral account with us; and
other real-estate-related collateral acceptable to us if such collateral has a readily ascertainable value and we can perfect our security interest in the collateral.
In addition, in the case of any community financial institution, as defined in accordance with the FHLBank Act, we may accept as collateral secured loans for small business and agriculture, or securities representing a whole interest in such secured loans.
To mitigate the credit risk, market risk, liquidity risk, model, and operational risk associated with collateral, we discount the book value or market value of pledged collateral to establish the lending value. Collateral that we have determined to contain a low level of risk, such as U.S. government obligations, is discounted at a lower rate than collateral that carries a higher level of risk, such as commercial real estate mortgage loans. We periodically analyze the discounts applied to all eligible collateral types to verify that current discounts are sufficient to fully secure us against losses in the event of a borrower default. Our agreements with our borrowers grant us authority, in our sole discretion, to adjust the discounts applied to collateral at any time based on our assessment of the borrower's financial condition, the quality of collateral pledged, or the overall volatility of the value of the collateral.
We generally require our members and housing associates to execute a security agreement that grants us a blanket lien on all unencumbered assets of such borrower that consist of, among other types of collateral:things: fully disbursed whole first-mortgage loans and deeds of trust constituting first liens against real property; U.S. federal, state, and municipal obligations; GSE securities; corporate debt obligations; commercial paper; funds placed in deposit accounts with us,us; such as other items or property that are offered to us by the borrower as collateral; and all proceeds of all of the foregoing. In the case of insurance companies, housing associates, and CDFIs, in some instances we establish a specific lien instead of a blanket lien subject to our receipt of additional safeguards from such members including, among other things, larger haircuts on collateral. We protect our security interest in pledged assets by filing a Uniform Commercial Code (UCC) financing statement in the appropriate jurisdiction.jurisdiction, or by taking possession or control of such collateral, or by taking other appropriate steps. We conduct onsite reviews of loan collateral pledged by borrowers to confirm the existence of such pledged collateral, to
determine that the pledged collateral conforms to our eligibility requirements, and to adjust, if warranted, the lendable value of loan collateral pledged. We may conduct an onsite collateral review at any time.
Our agreements with borrowers allow us, at our sole discretion, to refuse to make extensions of credit against any collateral, restrict the maturity on the extension of credit, require substitution of collateral, or adjust the discounts applied to collateral at any time. We also may require members to pledge additional collateral regardless of whether the collateral would be eligible to originate a new extension of credit. Our agreements with borrowers also afford us the right, at our sole discretion, to declare any borrower to be in default if we deem ourselves to be insecure.
Beyond our practice of taking security interests in collateral, Section 10(e) of the FHLBank Act affords any security interest granted to us by a federally-insured depository institution member or such a member's affiliate to us priority over the claims or rights of any other party, including any receiver, conservator, trustee, or similar entity that has the rights of a lien creditor, unless these claims and rights would be entitled to priority under otherwise applicable law and are held by actual purchasers or by parties that are secured by actual perfected security interests. In this regard, the priority granted to our security interests under Section 10(e) may not apply when lending to insurance company members due to the anti-preemption provision contained in the McCarran-Ferguson Act in which Congress declared that federal law would not preempt state insurance law unless the federal law expressly regulates the business of insurance. Thus, if state law conflicts with Section 10(e) of the FHLBank Act, the protection afforded by this provision may not be available to us. However, we protect our security interests in the collateral pledged by our borrowers, including insurance company members, by filing UCC financing statements, or by taking possession or control of such collateral, or by taking other appropriate steps. We have not experienced any rehabilitation, conservatorship, receivership, liquidation or other insolvency event for an insurance company member and therefore have continuing uncertainty on the potential inapplicability of Section 10(e). Additionally, we note that the relevant state insolvency authority could take actions that could impede our ability to sell collateral that any such insolvent member has pledged to us. To protect ourselves from the potential inapplicability of Section 10(e), we require the delivery of collateral from non-depository members which currently encompass insurance companies, nonmember housing associates and CDFIs.
Table 13 - Advances Outstanding by Borrower Credit Status Category (dollars in thousands)
| |
Table 10 - Advances Outstanding by Borrower Credit Status Category (dollars in thousands)
| | Table 10 - Advances Outstanding by Borrower Credit Status Category (dollars in thousands)
|
| | | As of December 31, 2017 | As of December 31, 2019 |
| | Number of Borrowers | | Par Value of Advances Outstanding | | Discounted Collateral | | Ratio of Discounted Collateral to Advances | Number of Borrowers | | Par Value of Advances Outstanding | | Discounted Collateral | | Ratio of Discounted Collateral to Advances |
| Category-1 | 269 |
| | $ | 33,948,090 |
| | $ | 88,189,520 |
| | 259.8 | % | 245 |
| | $ | 30,069,340 |
| | $ | 98,660,892 |
| | 328.1 | % |
| Category-2 | 12 |
| | 462,032 |
| | 859,826 |
| | 186.1 |
| 13 |
| | 306,932 |
| | 800,711 |
| | 260.9 |
|
| Category-3 | 21 |
| | 530,897 |
| | 842,789 |
| | 158.7 |
| 18 |
| | 403,266 |
| | 569,613 |
| | 141.2 |
|
| Insurance companies | 21 |
| | 2,706,147 |
| | 3,758,562 |
| | 138.9 |
| 20 |
| | 3,804,349 |
| | 4,643,399 |
| | 122.1 |
|
| Total | 323 |
| | $ | 37,647,166 |
| | $ | 93,650,697 |
| | 248.8 | % | 296 |
| | $ | 34,583,887 |
| | $ | 104,674,615 |
| | 302.7 | % |
The method by which a borrower pledges collateral is dependent upon the type of borrower (depository vs. non-depository), the category to which itthe borrower is assigned, and on the type of collateral that the borrower pledges. Moreover, borrowers in Category-1 are permittedeligible 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 conditions of the members. Due to their weaker profile, theThe Bank requires Category-3 members (as well as all non-depository members) to deliver collateral to the Bank
or its custodian. Table 14 shows the total potential lending valuecustodian, and all securities collateral is delivered, regardless of the collateral that borrowers have pledged, based upon the method by which borrowers pledge collateral to us, net of our collateral valuation discounts as of December 31, 2017.
Table 14 - Collateral by Pledge Type (dollars in thousands)
|
| | | |
| | Discounted Collateral |
| Collateral not specifically listed and identified | $ | 28,248,961 |
|
| Collateral specifically listed and identified | 59,312,265 |
|
| Collateral delivered to us | 11,739,552 |
|
We accept nontraditional and subprime loans that are underwritten in accordance with applicable regulatory guidance as eligible collateral for our advances. However, we do not accept as eligible collateral any mortgage loan that allows for negative amortization, including, but not limited to, pay-option adjustable-rate mortgage loans. We recognize that nontraditional and subprime loans may present incremental credit risk to us. Therefore, we have monitoring and review procedures in place to measure the incremental risk presented by this collateral and to mitigate this incremental credit risk, for example by imposing higher discounts. Borrowers in Category-1 also have the option of providing loan level data for their owner-occupied subprime and nontraditional residential mortgage loans to potentially obtain a more favorable valuation based on the credit risk profile of the pledged loan portfolio. In addition, we limit the amount of borrowing capacity that a member may derive from subprime loan collateral to the lower of two times the pledging member's most recently reported capital as determined in accordance with generally accepted accounting principles (GAAP) or one-half of its total borrowing capacity. Additionally, private-label MBS issued or acquired and residential mortgage loans originated or acquired by our members after July 10, 2007, are not eligible collateral unless it can be documented that all loans, including all loans in MBS pools, are in compliance with regulatory underwriting standards on subprime or nontraditional lending, as applicable.
At both December 31, 2017 and 2016, the amount of pledged nontraditional and subprime loan collateral was 10 percent and nine percent, respectively, of total member discounted collateral.category.
Table 15 - Top Five Advance-Borrowing Institutions (dollars in thousands)
| |
Table 11 - Top Five Advance-Borrowing Institutions (dollars in thousands)
| | Table 11 - Top Five Advance-Borrowing Institutions (dollars in thousands)
|
| | | | December 31, 2017 | | | | December 31, 2019 | | |
| Name | | Par Value of Advances | | Percent of Total Par Value of Advances | | Weighted-Average Rate (1) | | Advances Interest Income for the Year Ended December 31, 2017 | | Par Value of Advances | | Percent of Total Par Value of Advances | | Weighted-Average Rate (1) | | Advances Interest Income for the Year Ended December 31, 2019 |
| Citizens Bank, N.A. | | $ | 4,858,591 |
| | 12.9 | % | | 1.60 | % | | $ | 63,569 |
| | $ | 5,005,773 |
| | 14.5 | % | | 2.01 | % | | $ | 95,692 |
|
| People's United Bank, N.A. | | 2,505,821 |
| | 6.7 |
| | 1.50 |
| | 26,884 |
| | 3,111,088 |
| | 9.0 |
| | 1.79 |
| | 51,142 |
|
| Webster Bank, N.A. | | 1,677,105 |
| | 4.4 |
| | 1.61 |
| | 23,533 |
| | 1,948,476 |
| | 5.6 |
| | 1.87 |
| | 27,630 |
|
| Massachusetts Mutual Life Insurance Co. | | 1,050,000 |
| | 2.8 |
| | 2.10 |
| | 23,906 |
| |
| United Bank | | 1,045,954 |
| | 2.8 |
| | 1.56 |
| | 12,529 |
| |
| Washington Trust Company | | | 1,141,464 |
| | 3.3 |
| | 2.17 |
| | 26,388 |
|
| Massachusetts Mutual Life Insurance Company | | | 1,100,000 |
| | 3.2 |
| | 2.51 |
| | 26,767 |
|
| Total of top five advance-borrowing institutions | | $ | 11,137,471 |
| | 29.6 | % | | | | $ | 150,421 |
| | $ | 12,306,801 |
| | 35.6 | % | | | | $ | 227,619 |
|
_______________________
| |
| (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
At December 31, 20172019, investment securities and short-term money-market instruments totaled $17.916.1 billion, a slight decreasean increase from $18.0$15.9 billion at December 31, 20162018.
Short-term money-market investments increased $100.0 milliondecreased $3.0 billion to $8.85.6 billion at December 31, 20172019, compared with December 31, 2016.2018. The increasedecrease was attributable to a $750.0$3.0 billion decrease in securities purchased under agreements to resell and a $640.0 million increasedecrease in federal funds sold offset by a $650.0$660.7 million decreaseincrease in securities purchased under agreements to resell.interest bearing deposits.
Investment securities declined $189.7 millionincreased $3.2 billion to $9.1$10.5 billion at December 31, 2017,2019, compared with December 31, 2016. The decrease2018. This was attributable to a declinean increase of $399.5 million$2.2 billion in U.S. Treasury obligations offset byand a $177.9$941.7 million increase in MBS.
Held-to-Maturity Securities
Certain investments for which we have both the ability and intent to hold to maturity are classified as held-to-maturity.
Table 16 - Held-to-Maturity Securities (dollars in thousands)
| |
Table 12 - Held-to-Maturity Securities (dollars in thousands)
| | Table 12 - Held-to-Maturity Securities (dollars in thousands)
|
| | | | December 31, | | December 31, |
| | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| | | Due in one year or less | Due after one year through five years | Due after five years through ten years | Due after ten years | Total Carrying Value | | Total Carrying Value | | Total Carrying Value | | Due in one year or less | Due after one year through five years | Due after five years through ten years | Due after ten years | Total Carrying Value | | Total Carrying Value | | Total Carrying Value |
| Non-MBS | | | | | | | | | | | | |
| U.S. agency obligations | | $ | 264 |
| $ | 778 |
| $ | — |
| $ | — |
| $ | 1,042 |
| | $ | 2,159 |
| | $ | 3,605 |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| | $ | 208 |
| | $ | 1,042 |
|
State or local housing-finance-agency obligations (HFA securities) (1) | | — |
| 10,835 |
| 18,245 |
| 117,330 |
| 146,410 |
| | 162,568 |
| | 170,928 |
| | 3,090 |
| — |
| 15,405 |
| 68,755 |
| 87,250 |
| | 104,465 |
| | 146,410 |
|
| Total non-MBS | | 264 |
| 11,613 |
| 18,245 |
| 117,330 |
| 147,452 |
| | 164,727 |
| | 174,533 |
| | 3,090 |
| — |
| 15,405 |
| 68,755 |
| 87,250 |
| | 104,673 |
| | 147,452 |
|
MBS (1) | | | | | | | | | | | | |
| U.S. government guaranteed - single-family | | — |
| — |
| 269 |
| 9,828 |
| 10,097 |
| | 12,719 |
| | 15,999 |
| | — |
| 117 |
| — |
| 6,870 |
| 6,987 |
| | 8,173 |
| | 10,097 |
|
| U.S. government guaranteed - multifamily | | — |
| — |
| — |
| 280 |
| 280 |
| | 1,532 |
| | 17,794 |
| | — |
| — |
| — |
| — |
| — |
| | — |
| | 280 |
|
| GSEs - single-family | | 1,559 |
| 6,095 |
| 33,899 |
| 527,395 |
| 568,948 |
| | 812,836 |
| | 1,093,124 |
| | 46 |
| 747 |
| 21,526 |
| 281,285 |
| 303,604 |
| | 412,639 |
| | 568,948 |
|
| GSEs - multifamily | | — |
| 214,641 |
| — |
| — |
| 214,641 |
| | 318,667 |
| | 386,635 |
| | 126,658 |
| 14,003 |
| — |
| — |
| 140,661 |
| | 209,786 |
| | 214,641 |
|
| Private-label - residential | | — |
| — |
| 946 |
| 675,930 |
| 676,876 |
| | 807,345 |
| | 951,544 |
| |
| Private-label | | | — |
| — |
| 2,578 |
| 330,027 |
| 332,605 |
| | 552,989 |
| | 676,876 |
|
| ABS backed by home equity loans | | — |
| — |
| — |
| 7,828 |
| 7,828 |
| | 12,941 |
| | 14,936 |
| | — |
| — |
| — |
| — |
| — |
| | 6,763 |
| | 7,828 |
|
| Total MBS | | 1,559 |
| 220,736 |
| 35,114 |
| 1,221,261 |
| 1,478,670 |
| | 1,966,040 |
| | 2,480,032 |
| | 126,704 |
| 14,867 |
| 24,104 |
| 618,182 |
| 783,857 |
| | 1,190,350 |
| | 1,478,670 |
|
| Total held-to-maturity securities | | $ | 1,823 |
| $ | 232,349 |
| $ | 53,359 |
| $ | 1,338,591 |
| $ | 1,626,122 |
| | $ | 2,130,767 |
| | $ | 2,654,565 |
| | $ | 129,794 |
| $ | 14,867 |
| $ | 39,509 |
| $ | 686,937 |
| $ | 871,107 |
| | $ | 1,295,023 |
| | $ | 1,626,122 |
|
| Yield on held-to-maturity securities | | 5.17 | % | 3.66 | % | 4.11 | % | 4.33 | % | | | | | | | 3.56 | % | 5.2 | % | 2.93 | % | 4.61 | % | | | | | |
________________________
| |
| (1) | Maturity ranges are based on the contractual final maturity of the security. |
Available-for-Sale Securities
We classify certain investment securities as available-for-sale to enable liquidation at a future date or to enable the application of hedge accounting using interest-rate swaps. By classifying investments as available-for-sale, we can consider these securities to be a source of short-term liquidity, if needed. We own certain securities that were hedged by matched-term interest rate swaps to achieve a LIBOR-basedan Overnight Index Swap (OIS)-based variable yield, particularly when we can earn a wider interest spread between the swapped yield on the investment and short-term debt instruments than we can earn between the bond's fixed yield and comparable-term fixed-rate debt. We classify these investments as available-for-sale because an interest-rate swap can only be designated as a hedge of an available-for-sale investment security.
Table 17 - Available-for-Sale Securities (dollars in thousands)
| |
Table 13 - Available-for-Sale Securities (dollars in thousands)
| | Table 13 - Available-for-Sale Securities (dollars in thousands)
|
| | | | December 31, | | December 31, |
| | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| | | Due in one year or less | Due after one year through five years | Due after five years through ten years | Due after ten years | Total Carrying Value | | Total Carrying Value | | Total Carrying Value | | Due in one year or less | Due after one year through five years | Due after five years through ten years | Due after ten years | Total Carrying Value | | Total Carrying Value | | Total Carrying Value |
| Non-MBS | | | | | | | | | | | | |
| HFA securities | | $ | — |
| $ | 37,683 |
| $ | — |
| $ | — |
| $ | 37,683 |
| | $ | 8,146 |
| | $ | — |
| | $ | 7,563 |
| $ | 57,089 |
| $ | — |
| $ | — |
| $ | 64,652 |
| | $ | 49,601 |
| | $ | 37,683 |
|
| Supranational institutions | | — |
| — |
| 418,285 |
| — |
| 418,285 |
| | 422,620 |
| | 438,913 |
| | — |
| — |
| 416,429 |
| — |
| 416,429 |
| | 405,155 |
| | 418,285 |
|
| U.S. government corporations | | — |
| — |
| — |
| 292,077 |
| 292,077 |
| | 271,957 |
| | 265,968 |
| | — |
| — |
| — |
| 296,761 |
| 296,761 |
| | 273,169 |
| | 292,077 |
|
| GSEs | | — |
| — |
| — |
| 121,343 |
| 121,343 |
| | 117,468 |
| | 117,792 |
| | — |
| — |
| 47,036 |
| 76,750 |
| 123,786 |
| | 115,627 |
| | 121,343 |
|
| Total non-MBS | | — |
| 37,683 |
| 418,285 |
| 413,420 |
| 869,388 |
| | 820,191 |
| | 822,673 |
| | 7,563 |
| 57,089 |
| 463,465 |
| 373,511 |
| 901,628 |
| | 843,552 |
| | 869,388 |
|
MBS (1) | | | | | | | | | | | | |
| U.S. government guaranteed - single-family | | — |
| 23,048 |
| — |
| 72,729 |
| 95,777 |
| | 124,727 |
| | 156,642 |
| | 10,885 |
| — |
| — |
| 46,829 |
| 57,714 |
| | 75,658 |
| | 95,777 |
|
| U.S. government guaranteed - multifamily | | — |
| — |
| — |
| 443,373 |
| 443,373 |
| | 563,361 |
| | 744,762 |
| | — |
| — |
| — |
| 282,617 |
| 282,617 |
| | 361,134 |
| | 443,373 |
|
| GSEs - single-family | | — |
| — |
| 286,135 |
| 4,276,857 |
| 4,562,992 |
| | 4,403,855 |
| | 4,590,208 |
| | — |
| — |
| 171,026 |
| 2,419,245 |
| 2,590,271 |
| | 3,562,159 |
| | 4,562,992 |
|
| GSEs - multifamily | | — |
| 320,614 |
| 1,032,592 |
| — |
| 1,353,206 |
| | 676,530 |
| | — |
| | — |
| — |
| 3,311,260 |
| 265,510 |
| 3,576,770 |
| | 1,007,441 |
| | 1,353,206 |
|
| Total MBS | | — |
| 343,662 |
| 1,318,727 |
| 4,792,959 |
| 6,455,348 |
| | 5,768,473 |
| | 5,491,612 |
| | 10,885 |
| — |
| 3,482,286 |
| 3,014,201 |
| 6,507,372 |
| | 5,006,392 |
| | 6,455,348 |
|
| Total available-for-sale securities | | $ | — |
| $ | 381,345 |
| $ | 1,737,012 |
| $ | 5,206,379 |
| $ | 7,324,736 |
| | $ | 6,588,664 |
| | $ | 6,314,285 |
| | $ | 18,448 |
| $ | 57,089 |
| $ | 3,945,751 |
| $ | 3,387,712 |
| $ | 7,409,000 |
| | $ | 5,849,944 |
| | $ | 7,324,736 |
|
| Yield on available-for-sale securities | | — | % | 1.80 | % | 2.64 | % | 1.98 | % | | | | | | | 1.32 | % | — | % | 2.66 | % | 2.46 | % | | | | | |
________________________
| |
| (1) | MBS maturity ranges are based on the contractual final maturity of the security. |
Trading Securities
We classify certain investments acquired for purposes of meeting short-term contingency liquidity needs and asset/liability management as trading securities and carry them at fair value. However, we do not participate in speculative trading practices and we hold these investments indefinitely as we periodically evaluate our liquidity needs.
Table 18 - Trading Securities (dollars in thousands)
| |
Table 14 - Trading Securities (dollars in thousands)
| | Table 14 - Trading Securities (dollars in thousands)
|
| | | | December 31, | | December 31, |
| | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| | | Due in one year or less | Due after one year through five years | Due after five years through ten years | Due after ten years | Total Carrying Value | | Total Carrying Value | | Total Carrying Value | | Due in one year or less | Due after one year through five years | Due after five years through ten years | Due after ten years | Total Carrying Value | | Total Carrying Value | | Total Carrying Value |
| Non-MBS | | | | | | | | | | | | |
| Corporate bonds | | | $ | 1,594 |
| $ | 4,302 |
| $ | — |
| $ | — |
| $ | 5,896 |
| | $ | 6,102 |
| | $ | — |
|
| U.S. Treasury obligations | | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| | $ | 399,521 |
| | $ | — |
| | 929,929 |
| 1,310,307 |
| — |
| — |
| 2,240,236 |
| | — |
| | — |
|
| Total Non-MBS | | | 931,523 |
| 1,314,609 |
| — |
| — |
| 2,246,132 |
| | 6,102 |
| | — |
|
| | | | | | | | |
MBS (1) | | | | | | | | | | | | |
| U.S. government guaranteed - single-family | | — |
| 150 |
| 6,657 |
| — |
| 6,807 |
| | 8,494 |
| | 10,296 |
| | 2 |
| 1,835 |
| 2,210 |
| — |
| 4,047 |
| | 5,344 |
| | 6,807 |
|
| GSEs - single-family | | 6 |
| 218 |
| 65 |
| 57 |
| 346 |
| | 768 |
| | 1,449 |
| | 3 |
| 38 |
| 3 |
| 41 |
| 85 |
| | 148 |
| | 346 |
|
| GSEs - multifamily | | — |
| 184,357 |
| — |
| — |
| 184,357 |
| | 203,839 |
| | 218,389 |
| | — |
| — |
| — |
| — |
| — |
| | 151,444 |
| | 184,357 |
|
| Total MBS | | 6 |
| 184,725 |
| 6,722 |
| 57 |
| 191,510 |
| | 213,101 |
| | 230,134 |
| | 5 |
| 1,873 |
| 2,213 |
| 41 |
| 4,132 |
| | 156,936 |
| | 191,510 |
|
| Total trading securities | | $ | 6 |
| $ | 184,725 |
| $ | 6,722 |
| $ | 57 |
| $ | 191,510 |
| | $ | 612,622 |
| | $ | 230,134 |
| | $ | 931,528 |
| $ | 1,316,482 |
| $ | 2,213 |
| $ | 41 |
| $ | 2,250,264 |
| | $ | 163,038 |
| | $ | 191,510 |
|
| Yield on trading securities | | 3.10 | % | 4.16 | % | 2.46 | % | 3.99 | % | | | | | | | 2.28 | % | 2.26 | % | 3.75 | % | 4.53 | % | | | | | |
________________________
| |
| (1) | MBS maturity ranges are based on the contractual final maturity of the security. |
Certain Investment Concentrations
Table 19 - Securities from issuers which Represent Total Carrying Value Greater than 10 Percent of Total Capital (dollars in thousands)
| |
Table 15 - Securities from issuers which Represent Total Carrying Value Greater than 10 Percent of Our Total Capital (dollars in thousands)
| | Table 15 - Securities from issuers which Represent Total Carrying Value Greater than 10 Percent of Our Total Capital (dollars in thousands)
|
| | | | As of December 31, 2017 | | As of December 31, 2019 |
| Name of Issuer | | Carrying Value(1) | | Fair Value | | Carrying Value(1) | | Fair Value |
| Non-MBS: | | | | | | | | |
| GSEs | | | | | |
| U.S. Treasury | | | $ | 2,240,236 |
| | $ | 2,240,236 |
|
| Inter-American Development Bank | | | 416,429 |
| | 416,429 |
|
| Fannie Mae | | $ | 121,343 |
| | $ | 121,343 |
| | 123,786 |
| | 123,786 |
|
| | | | | | |
| Supranational institution | | | | | |
| Inter-American Development Bank | | 418,285 |
| | 418,285 |
| |
| | | | | | | | | |
| MBS: | | | | | | | | |
| Freddie Mac | | 3,658,529 |
| | 3,667,126 |
| | 3,545,989 |
| | 3,548,577 |
|
| Fannie Mae | | 3,225,962 |
| | 3,233,915 |
| | 3,065,401 |
| | 3,068,375 |
|
| Ginnie Mae | | 533,287 |
| | 533,476 |
| | 340,480 |
| | 340,609 |
|
_______________________
| |
| (1) | Carrying value for trading securities and available-for-sale securities represents fair value. |
Table 20 - Mortgage-Backed Securities (percentage based on carrying value)
|
| | | | | |
| | December 31, 2017 | | December 31, 2016 |
| Single-family MBS - U.S. government-guaranteed and GSE | 64.6 | % | | 67.5 | % |
| Multifamily MBS - U.S. government-guaranteed and GSE | 27.0 |
| | 22.2 |
|
| Private-label residential MBS | 8.3 |
| | 10.1 |
|
| ABS backed by home-equity loans | 0.1 |
| | 0.2 |
|
| Total MBS | 100.0 | % | | 100.0 | % |
Investments Credit Risk
We are subject to credit risk on unsecured investments consisting primarily of short-term (meaning under one year and under to maturity and currently only consisting of overnight risk) money-market instruments issued by high-quality financial institutions and long-term (original maturity in excess of one year) debentures issued or guaranteed by U.S. agencies, U.S government-owned corporations, GSEs, and supranational institutions. Currently we place short-term funds with large, high-quality financial institutions with NRSRO long-term credit ratings no lower than single-A (or equivalent) on an unsecured basis. All of these placements currently either expire within one day.day or are payable upon demand. Effective January 1, 2020, we have
In addition to these unsecured short-term investments, we also make secured investments in the form of securities purchased under agreements to resell secured by U.S. Treasury and agency obligations, whose terms to maturity are up to 35 days. We have also invested in and are subject to secured credit risk related to MBS ABS, and HFA securities that are directly or indirectly supported by underlying mortgage loans.
We actively monitor our investments' credit exposures and the credit quality of our counterparties, including assessments of each counterparty's financial performance, capital adequacy, and sovereign support as well as related market signals such as credit default swap spreads. We endeavor tomay reduce or suspend credit limits and/or seek to reduce existing exposures, as appropriate, as a result of these monitoring activities.
Table 21 - Credit Ratings of Investments at Carrying Value (dollars in thousands)
| |
Table 16 - Credit Ratings of Investments at Carrying Value (dollars in thousands)
| | Table 16 - Credit Ratings of Investments at Carrying Value (dollars in thousands)
|
| | | | As of December 31, 2017 | | As of December 31, 2019 |
| | | Long-Term Credit Rating (1) | | Long-Term Credit Rating |
| Investment Category | | Triple-A | | Double-A | | Single-A | | Triple-B | | Below Triple-B | | Unrated | | Triple-A | | Double-A | | Single-A | | Triple-B | | Below Triple-B | | Unrated |
Money-market instruments: (2)(1) | | |
| | |
| | |
| | |
| | |
| | | | |
| | |
| | |
| | |
| | |
| | |
| Interest-bearing deposits | | $ | — |
| | $ | 246 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 169 |
| | $ | 1,253,704 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Securities purchased under agreements to resell | | — |
| | 2,350,000 |
| | 1,000,000 |
| | 1,999,000 |
| | — |
| | — |
| | — |
| | 500,000 |
| | 3,000,000 |
| | — |
| | — |
| | — |
|
| Federal funds sold | | — |
| | 900,000 |
| | 2,550,000 |
| | — |
| | — |
| | — |
| | — |
| | 150,000 |
| | 710,000 |
| | — |
| | — |
| | — |
|
| Loans to other FHLBanks | | — |
| | 400,000 |
| | — |
| | — |
| | — |
| | — |
| |
| Total money-market instruments | | — |
| | 3,650,246 |
| | 3,550,000 |
| | 1,999,000 |
| | — |
| | — |
| | — |
| | 650,169 |
| | 4,963,704 |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment securities: | | | | | | | | | | | | | |
Investment securities:(2) | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-MBS: | | |
| | |
| | |
| | |
| | |
| | | | |
| | |
| | |
| | |
| | |
| | |
| U.S. agency obligations | | — |
| | 1,042 |
| | — |
| | — |
| | — |
| | — |
| |
| U.S. Treasury obligations | | | — |
| | 2,240,236 |
| | — |
| | — |
| | — |
| | — |
|
| Corporate bonds | | | — |
| | — |
| | — |
| | — |
| | — |
| | 5,896 |
|
| U.S. government-owned corporations | | — |
| | 292,077 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 296,761 |
| | — |
| | — |
| | — |
| | — |
|
| GSEs | | — |
| | 121,343 |
| | — |
| | — |
| | — |
| | — |
| |
| GSE | | | — |
| | 123,786 |
| | — |
| | — |
| | — |
| | — |
|
| Supranational institutions | | 418,285 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 416,429 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| HFA securities | | 33,068 |
| | 55,356 |
| | 95,669 |
| | — |
| | — |
| | — |
| | 45,220 |
| | 59,597 |
| | 11,920 |
| | 35,165 |
| | — |
| | — |
|
| Total non-MBS | | 451,353 |
| | 469,818 |
| | 95,669 |
| | — |
| | — |
| | — |
| | 461,649 |
| | 2,720,380 |
| | 11,920 |
| | 35,165 |
| | — |
| | 5,896 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| MBS: | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government guaranteed - single-family (2) | | — |
| | 112,681 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 68,748 |
| | — |
| | — |
| | — |
| | — |
|
U.S. government guaranteed - multifamily(2) | | — |
| | 443,653 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 282,617 |
| | — |
| | — |
| | — |
| | — |
|
GSE – single-family (2) | | — |
| | 5,132,286 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,893,960 |
| | — |
| | — |
| | — |
| | — |
|
GSE – multifamily (2) | | — |
| | 1,752,204 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,717,431 |
| | — |
| | — |
| | — |
| | — |
|
| Private-label – residential | | — |
| | 3,542 |
| | 10,437 |
| | 57,405 |
| | 589,146 |
| | 16,346 |
| |
| ABS backed by home-equity loans | | 598 |
| | 1,136 |
| | 3,583 |
| | 1,569 |
| | 942 |
| | — |
| |
| Private-label | | | — |
| | 1,256 |
| | 3,161 |
| | 13,186 |
| | 281,625 |
| | 33,377 |
|
| Total MBS | | 598 |
| | 7,445,502 |
| | 14,020 |
| | 58,974 |
| | 590,088 |
| | 16,346 |
| | — |
| | 6,964,012 |
| | 3,161 |
| | 13,186 |
| | 281,625 |
| | 33,377 |
|
| |
|
| |
|
| | | | | | | | | |
|
| |
|
| | | | | | | | |
| Total investment securities | | 451,951 |
| | 7,915,320 |
| | 109,689 |
| | 58,974 |
| | 590,088 |
| | 16,346 |
| | 461,649 |
| | 9,684,392 |
| | 15,081 |
| | 48,351 |
| | 281,625 |
| | 39,273 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total investments | | $ | 451,951 |
| | $ | 11,565,566 |
| | $ | 3,659,689 |
| | $ | 2,057,974 |
| | $ | 590,088 |
| | $ | 16,346 |
| | $ | 461,649 |
| | $ | 10,334,561 |
| | $ | 4,978,785 |
| | $ | 48,351 |
| | $ | 281,625 |
| | $ | 39,273 |
|
_______________________
| |
| (1) | RatingsThe counterparty NRSRO rating is used for money-market instruments. Counterparty ratings are obtained from Moody's, Fitch, Inc. (Fitch), and S&P and are each as of December 31, 2017.2019. If there is a split rating, the lowest rating is used.
|
| |
(2) | The issuer rating is used for these investments, and if a rating is on negative credit watch, the rating in the next lower rating category is used and thensubstituted. If there is a split rating, the lowest rating is determined.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. This limit is based on a percentage of regulatory capital and the counterparty's long-term unsecured NRSRO credit rating. Effective January 1, 2020, the applicable FHFA regulation replaced this reference to NRSRO ratings with a reference to internal ratings determined by each FHLBank. See Part 1 — Item 1 — Business — Business Lines — Investments
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. See — Derivative Instruments Credit Risk for additional information related to derivatives exposure.
FHFA regulations allow additional unsecured credit for sales of overnight federal funds. The specified percentage of regulatory capital used for determining the maximum amount of unsecured credit exposure we may offer to a counterparty for overnight sales of federal funds is twice the amount that we may extend to that counterparty for extensions of credit other than overnight sales of federal funds reduced by the amount of any other unsecured credit exposure attributable to other than overnight sales of federal funds.
We are generally prohibited by FHFA regulations from investing in financial instruments issued by non-U.S. entities, other than those issued by U.S. branches and agency offices of foreign commercial banks. We are also prohibited by FHFA regulations from investing in financial instruments issued by foreign sovereign governments. Our unsecured money-market credit risk to U.S. branches and agency offices of foreign commercial banks includes, among other things, the risk that, as a result of political or economic conditions in a country, the counterparty may be unable to meet their contractual repayment obligations. Notwithstanding the foregoing credit limits based on FHFA regulations, from time to time, we impose internal limits on all or specific individual counterparties that are lower than the maximum credit limits allowed by regulation.
Table 22 - Unsecured Money-Market Instruments and Debentures by Carrying Value (dollars in thousands)
| |
Table 17 - Unsecured Credit Related to Money-Market Instruments and Debentures by Carrying Value (dollars in thousands)
| | Table 17 - Unsecured Credit Related to Money-Market Instruments and Debentures by Carrying Value (dollars in thousands)
|
| | | | Carrying Value | | Carrying Value |
| | | December 31, 2017 | | December 31, 2016 | | December 31, 2019 | | December 31, 2018 |
| Interest bearing deposits | | | $ | 1,253,873 |
| | $ | 593,199 |
|
| Federal funds sold | | $ | 3,450,000 |
| | $ | 2,700,000 |
| | 860,000 |
| | 1,500,000 |
|
| Supranational institutions | | 418,285 |
| | 422,620 |
| | 416,429 |
| | 405,155 |
|
| Loans to other FHLBanks | | 400,000 |
| | — |
| |
| U.S. government-owned corporations | | 292,077 |
| | 271,957 |
| | 296,761 |
| | 273,169 |
|
| GSEs | | 121,343 |
| | 117,468 |
| | 123,786 |
| | 115,627 |
|
| U.S. agency obligations | | 1,042 |
| | 2,159 |
| | — |
| | 208 |
|
Table 2318 - Issuers / Counterparties Representing Greater Than 10 Percent of Total Unsecured Credit Related to Money-Market Instruments and to Debentures
|
| | | |
| Issuer / counterparty | | As of December 31, 20172019 |
Issuer / counterpartyBank of Nova Scotia | | Percent |
Australia and New Zealand Bank (1)
| | 14.917.2 | % |
Inter-American Development Bank of Nova Scotia (1) | | 11.714.2 |
|
Bank of Tokyo-Mitsubishi UFJ, LTD (1)
Tennessee Valley Authority | | 11.7 |
|
Northern Trust Company (1)
| | 11.7 |
|
Cooperatieve Rabobank U.A.(1)
| | 10.610.2 |
|
_______________________
| |
(1) | Consists of overnight federal funds sold. We sold federal funds to either the U.S. branch or agency office of the named commercial bank. |
Private-Label MBS
Table 24 - Unpaid Principal Balance of Private-Label MBS and ABS Backed by Home Equity Loans (dollars in thousands) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
Private-label MBS(1) | Fixed Rate (2) | | Variable Rate (2) | | Total | | Fixed Rate (2) | | Variable Rate (2) | | Total |
| Private-label residential MBS | |
| | |
| | |
| | |
| | |
| | |
|
| Prime | $ | 7,363 |
| | $ | 79,424 |
| | $ | 86,787 |
| | $ | 8,780 |
| | $ | 102,747 |
| | $ | 111,527 |
|
| Alt-A | 15,473 |
| | 982,860 |
| | 998,333 |
| | 18,808 |
| | 1,161,415 |
| | 1,180,223 |
|
| Total private-label residential MBS | 22,836 |
| | 1,062,284 |
| | 1,085,120 |
| | 27,588 |
| | 1,264,162 |
| | 1,291,750 |
|
| ABS backed by home equity loans | |
| | |
| | |
| | |
| | |
| | |
|
| Subprime | — |
| | 7,864 |
| | 7,864 |
| | — |
| | 13,848 |
| | 13,848 |
|
| Total par value of private-label MBS | $ | 22,836 |
| | $ | 1,070,148 |
| | $ | 1,092,984 |
| | $ | 27,588 |
| | $ | 1,278,010 |
| | $ | 1,305,598 |
|
_______________________
(1) We have instituted litigation related to certain of the private-label MBS in which we invested. Our complaint asserts, among others, claims for untrue or misleading statements in the sale of securities. It is possible that classifications of private-label MBS as provided herein when based on classification at the time of issuance as disclosed by those securities' issuance documents, as well as other statements about the securities, are inaccurate.
| |
(2) | The determination of fixed or variable rate is based upon the contractual coupon type of the security. |
Table 2519 provides additional information related to our investments in MBS issued by private trusts and ABS backed by home equity loans.trusts. The table sets forth the credit ratings and summary credit enhancementscredit-enhancements associated with our private-label MBS and ABS.MBS. Average current credit enhancementscredit-enhancements as of December 31, 20172019, reflect the percentage of subordinated class outstanding balances as of December 31, 20172019, to our senior class outstanding balances as of December 31, 20172019, weighted by the par value of our respective senior class securities. Average current credit enhancementscredit-enhancements as of December 31, 20172019, are indicative of the ability of subordinated classes to absorb loan collateral lost principal and interest shortfall before senior classes are impacted.
Table 25 - Private-Label MBS and ABS Backed by Home Equity (dollars in thousands)
| |
| Table 19 - Private-Label Residential MBS (dollars in thousands)
| | Table 19 - Private-Label Residential MBS (dollars in thousands)
|
| | As of December 31, 2017 | | | |
| | Total | As of December 31, 2019 |
| Par value by credit rating | |
| |
|
| Triple-A | $ | 598 |
| |
| Double-A | 4,678 |
| $ | 1,256 |
|
| Single-A | 14,020 |
| 3,162 |
|
| Triple-B | 58,974 |
| 13,186 |
|
| Below Investment Grade | | |
| Double-B | 25,756 |
| 1,277 |
|
| Single-B | 34,212 |
| 817 |
|
| Triple-C | 482,920 |
| 294,683 |
|
| Double-C | 259,595 |
| 191,012 |
|
| Single-C | 16,029 |
| 4,497 |
|
| Single-D | 175,248 |
| 26,992 |
|
| Unrated | 20,954 |
| 50,466 |
|
| Total par value | $ | 1,092,984 |
| $ | 587,348 |
|
| | | |
| Amortized cost | $ | 842,921 |
| $ | 408,640 |
|
| Gross unrealized gains | 122,391 |
| 87,006 |
|
| Gross unrealized losses | (5,908 | ) | (583 | ) |
| Fair value | $ | 959,404 |
| $ | 495,063 |
|
| | | |
| Weighted average percentage of fair value to par value | 87.78 | % | 84.29 | % |
| Original weighted average credit support | 27.46 |
| 29.13 |
|
| Weighted average credit support | 8.02 |
| 3.90 |
|
Weighted average collateral delinquency (1) | 19.83 |
| 29.91 |
|
_______________________
| |
| (1) | Represents loans that are 60 days or more delinquent. |
Mortgage Loans
As of December 31, 20172019, our mortgage loan investment portfolio totaled $4.04.5 billion, an increase of $310.8201.8 million from December 31, 20162018. We expect continued competition from Fannie Mae and Freddie Mac, as well as from private mortgage loan acquirers, for loan investment opportunities.
Table 26 - Par Value of Mortgage Loans Held for Portfolio (dollars in thousands)
| |
Table 20 - Par Value of Mortgage Loans Held for Portfolio (dollars in thousands)
| | Table 20 - Par Value of Mortgage Loans Held for Portfolio (dollars in thousands)
|
| | | | December 31, | | December 31, |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Mortgage loans outstanding | | | | | | | | | | | | | | | | | | | | |
| Conventional mortgage loans | | | | | | | | | | | | | | | | | | | | |
| MPF Original | | $ | 2,105,485 |
| | $ | 2,310,350 |
| | $ | 2,431,320 |
| | $ | 2,309,566 |
| | $ | 2,088,774 |
| | $ | 1,665,708 |
| | $ | 1,899,446 |
| | $ | 2,105,485 |
| | $ | 2,310,350 |
| | $ | 2,431,320 |
|
| MPF 125 | | 195,870 |
| | 227,098 |
| | 275,737 |
| | 255,169 |
| | 220,690 |
| | 146,831 |
| | 171,550 |
| | 195,870 |
| | 227,098 |
| | 275,737 |
|
| MPF Plus | | 167,003 |
| | 227,654 |
| | 316,513 |
| | 432,934 |
| | 564,471 |
| | 98,649 |
| | 128,428 |
| | 167,003 |
| | 227,654 |
| | 316,513 |
|
| MPF 35 | | 1,100,115 |
| | 470,733 |
| | 83,845 |
| | — |
| | — |
| | 2,229,067 |
| | 1,703,131 |
| | 1,100,115 |
| | 470,733 |
| | 83,845 |
|
| Total conventional mortgage loans | | 3,568,473 |
| | 3,235,835 |
| | 3,107,415 |
| | 2,997,669 |
| | 2,873,935 |
| | 4,140,255 |
| | 3,902,555 |
| | 3,568,473 |
| | 3,235,835 |
| | 3,107,415 |
|
| Government mortgage loans | | 365,231 |
| | 391,127 |
| | 410,960 |
| | 425,663 |
| | 439,357 |
| | 292,203 |
| | 328,651 |
| | 365,231 |
| | 391,127 |
| | 410,960 |
|
| Total par value outstanding | | $ | 3,933,704 |
| | $ | 3,626,962 |
| | $ | 3,518,375 |
| | $ | 3,423,332 |
| | $ | 3,313,292 |
| | $ | 4,432,458 |
| | $ | 4,231,206 |
| | $ | 3,933,704 |
| | $ | 3,626,962 |
| | $ | 3,518,375 |
|
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.
Although our mortgage loan portfolio includes loans throughout the U.S., concentrations of five5 percent or greater of the outstanding principal balance of our conventional mortgage loan portfolio are shown in Table 27:21.
Table 27 - State Concentrations by Outstanding Principal Balance
| |
Table 21 - State Concentrations by Outstanding Principal Balance
| | Table 21 - State Concentrations by Outstanding Principal Balance
|
| | | Percentage of Total Outstanding Principal Balance of Conventional Mortgage Loans | Percentage of Total Outstanding Principal Balance of Conventional Mortgage Loans |
| | December 31, 2017 | | December 31, 2016 | December 31, 2019 | | December 31, 2018 |
| | |
| | |
| |
| | |
|
| Massachusetts | 56 | % | | 51 | % | 60 | % | | 57 | % |
| Maine | 11 |
| | 13 |
| 10 |
| | 10 |
|
| Connecticut | 8 |
| | 7 |
| 9 |
| | 10 |
|
| Wisconsin | 7 |
| | 9 |
| |
| New Hampshire | 6 |
| | 6 |
| |
| All others | 12 |
| | 14 |
| 21 |
| | 23 |
|
| Total | 100 | % | | 100 | % | 100 | % | | 100 | % |
We place conventional mortgage loans on nonaccrual status when the 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.
Table 22 - Delinquent Mortgage Loans (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Total par value of government loans past due 90 days or more and still accruing interest | $ | 5,381 |
| | $ | 6,433 |
| | $ | 4,664 |
| | $ | 5,527 |
| | $ | 5,403 |
|
| Nonaccrual loans, par value | 11,414 |
| | 7,960 |
| | 13,450 |
| | 16,918 |
| | 22,361 |
|
| Troubled debt restructurings (not included above) | 5,887 |
| | 7,199 |
| | 6,637 |
| | 6,846 |
| | 7,130 |
|
Although delinquent loans in our portfolio are spread throughout the U.S., delinquent loan concentrations of five percent or greater of the outstanding principal balance of our total conventional mortgage loans delinquent by more than 30 days are shown in Table 23.
Table 28 - Characteristics of Our Investments in Mortgage Loans(1)
|
| | | | | | |
| | | December 31, |
| | | 2017 |
| 2016 |
| Loan-to-value ratio at origination | | | | |
| < 60.00% | | 22 | % | | 24 | % |
| 60.01% to 70.00% | | 16 |
| | 16 |
|
| 70.01% to 80.00% | | 19 |
| | 20 |
|
| 80.01% to 90.00% | | 30 |
| | 26 |
|
| Greater than 90.00% | | 13 |
| | 14 |
|
| Total | | 100 | % | | 100 | % |
| Weighted average loan-to-value ratio | | 72 | % | | 71 | % |
| FICO score at origination | | | | |
| < 620 | | 1 | % | | 1 | % |
| 620 to < 660 | | 4 |
| | 5 |
|
| 660 to < 700 | | 10 |
| | 11 |
|
| 700 to < 740 | | 17 |
| | 17 |
|
| ≥ 740 | | 68 |
| | 66 |
|
| Total | | 100 | % | | 100 | % |
| Weighted average FICO score | | 755 |
| | 753 |
|
Table 23 - State Concentrations of Delinquent Conventional Mortgage Loans
|
| | | | | |
| | Percentage of Total Outstanding Principal Balance of Delinquent Conventional Mortgage Loans |
| | December 31, 2019 | | December 31, 2018 |
| | |
| | |
|
| Massachusetts | 44 | % | | 40 | % |
| Connecticut | 14 |
| | 16 |
|
| Virginia | 10 |
| | 3 |
|
| All others | 32 |
| | 41 |
|
| Total | 100 | % | | 100 | % |
Table 24 - Characteristics of Our Investments in Mortgage Loans(1)
|
| | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Loan-to-value ratio at origination | | | | |
| < 60.00% | | 18 | % | | 20 | % |
| 60.01% to 70.00% | | 15 |
| | 15 |
|
| 70.01% to 80.00% | | 19 |
| | 19 |
|
| 80.01% to 90.00% | | 35 |
| | 33 |
|
| Greater than 90.00% | | 13 |
| | 13 |
|
| Total | | 100 | % | | 100 | % |
| Weighted average loan-to-value ratio | | 73 | % | | 73 | % |
| FICO score at origination | | | | |
| < 620 | | 1 | % | | 1 | % |
| 620 to < 660 | | 4 |
| | 4 |
|
| 660 to < 700 | | 12 |
| | 11 |
|
| 700 to < 740 | | 18 |
| | 18 |
|
| ≥ 740 | | 65 |
| | 66 |
|
| Total | | 100 | % | | 100 | % |
| Weighted average FICO score | | 751 |
| | 754 |
|
_______________________
| |
| (1) | Percentages are calculated based on unpaid principal balance at the end of each period. |
Government mortgage loans may not exceed the loan-to-value limits set by the applicable federal agency. Conventional mortgage loans with loan-to-value ratios greater than 80 percent require certain amounts of primary mortgage insurance from a mortgage insurance company rated at least triple-B (or equivalent rating).
We place conventional mortgage loans on nonaccrual status when the 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.
Table 29 - Delinquent Mortgage Loans (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Total par value of government loans past due 90 days or more and still accruing interest | $ | 4,664 |
| | $ | 5,527 |
| | $ | 5,403 |
| | $ | 7,191 |
| | $ | 19,450 |
|
| Nonaccrual loans, par value | 13,450 |
| | 16,918 |
| | 22,361 |
| | 38,658 |
| | 46,012 |
|
| Troubled debt restructurings (not included above) | 6,637 |
| | 6,846 |
| | 7,130 |
| | 3,045 |
| | 2,589 |
|
| | | | | | | | | | |
| Nonaccrual loans: | | | | | | | | | |
| Gross amount of interest that would have been recorded based on original terms | $ | 652 |
| | $ | 1,023 |
| | $ | 1,411 |
| | $ | 1,948 |
| | $ | 2,247 |
|
| Interest actually recognized in income during the period | 374 |
| | 773 |
| | 920 |
| | 1,282 |
| | 1,483 |
|
| Shortfall | $ | 278 |
| | $ | 250 |
| | $ | 491 |
| | $ | 666 |
| | $ | 764 |
|
| | | | | | | | | | |
| Allowance for credit losses on mortgage loans, balance at beginning of year | $ | 650 |
| | $ | 1,025 |
| | $ | 2,012 |
| | $ | 2,221 |
| | $ | 4,414 |
|
| Net charge-offs | (54 | ) | | (98 | ) | | (657 | ) | | (270 | ) | | (239 | ) |
| (Reduction of) provision for credit losses | (96 | ) | | (277 | ) | | (330 | ) | | 61 |
| | (1,954 | ) |
| Allowance for credit losses on mortgage loans, balance at end of year | $ | 500 |
| | $ | 650 |
| | $ | 1,025 |
| | $ | 2,012 |
| | $ | 2,221 |
|
Although delinquent loans in our portfolio are spread throughout the U.S., delinquent loan concentrations of five percent or greater of the outstanding principal balance of our total conventional mortgage loans delinquent by more than 30 days are shown in Table 30.
Table 30 - State Concentrations of Delinquent Conventional Mortgage Loans
|
| | | | | |
| | Percentage of Total Outstanding Principal Balance of Delinquent Conventional Mortgage Loans |
| | December 31, 2017 | | December 31, 2016 |
| | |
| | |
|
| Massachusetts | 39 | % | | 36 | % |
| Connecticut | 13 |
| | 17 |
|
| Maine | 10 |
| | 7 |
|
| California | 9 |
| | 11 |
|
| All others | 29 |
| | 29 |
|
| Total | 100 | % | | 100 | % |
Higher-Risk Loans. Our portfolio includes certain higher-risk conventional mortgage loans. These include high loan-to-value ratio mortgage loans and subprime mortgage loans. The higher-risk loans represent a relatively small portion of our conventional mortgage loan portfolio (3.55.3 percent by outstanding principal balance), but a disproportionately higher portion of the conventional mortgage loan portfolio delinquencies (26.330.0 percent by outstanding principal balance).
Table 31 - Summary of Higher-Risk Conventional Mortgage Loans (dollars in thousands)
|
| | | | | | | | | | | | | |
| | | As of December 31, 2017 |
| High-Risk Loan Type | | Total Par Value | | Percent Delinquent 30 Days | | Percent Delinquent 60 Days | | Percent Delinquent 90 Days or More and Nonaccruing |
Subprime loans (1) | | $ | 124,030 |
| | 5.01 | % | | 1.56 | % | | 3.38 | % |
High loan-to-value loans (2) | | — |
| | — |
| | — |
| | — |
|
Subprime and high loan-to-value loans (3) | | 254 |
| | — |
| | — |
| | 100.00 |
|
| Total high-risk loans | | $ | 124,284 |
| | 5.00 | % | | 1.56 | % | | 3.57 | % |
Table 25 - Summary of Higher-Risk Conventional Mortgage Loans (dollars in thousands)
|
| | | | | | | | | | | | | |
| | | As of December 31, 2019 |
| High-Risk Loan Type | | Total Par Value | | Percent Delinquent 30 Days | | Percent Delinquent 60 Days | | Percent Delinquent 90 Days or More and Nonaccruing |
Subprime loans (1) | �� | $ | 220,134 |
| | 3.80 | % | | 1.47 | % | | 1.92 | % |
_______________________
| |
| (1) | Subprime loans are loans to borrowers with FICO® credit scores of 660 or lower. |
| |
(2) | High loan-to-value loans have an estimated current loan-to-value ratio greater than 100 percent based on movements in property values in the core-based statistical areas where the property securing the loan is located. |
| |
(3) | These loans are subprime and also have a current estimated loan-to-value ratio greater than 100 percent. |
Our portfolio of higher-risk loans consists solely of fixed-rate conventionally amortizing first-mortgage loans. The portfolio does not include adjustable-rate mortgage loans, pay-option adjustable-rate mortgage loans, interest-only mortgage loans, junior lien mortgage loans, or loans with initial teaser rates.
Mortgage Insurance Companies. We are exposed to credit risk from supplemental mortgage insurance (SMI) companies that provide credit enhancement in place of the participating financial institution and from primary mortgage insurance coverage (PMI) on individual loans. As of December 31, 2017,2019, we were the beneficiary of PMI coverage of $100.9$146.4 million on $409.3$562.2 million of conventional mortgage loans. These amounts relate to loans originated with PMI and SMI coverage of $15.4 million on mortgage pools with a totalfor which current loan-to-value ratios exceed 78 percent (determined by recalculating the original loan-to-value ratio using the current unpaid principal balance divided by the appraised home value at the time of $101.8 million.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.
Deposits
We offer demand and overnight deposits, custodial mortgage accounts, and term deposits to our members. Deposit programs are intended to provide members a low-risk earning asset that satisfies liquidity requirements. Deposit balances depend on members' needs to place excess liquidity and can fluctuate significantly. Due to the relatively small size of our deposit base and the unpredictable nature of member demand for deposits, we do not rely on deposits as a core component of our funding. At December 31, 20172019, and December 31, 20162018, deposits totaled $477.1674.3 million and $482.2474.9 million, respectively.
Table 26 - Term Deposits Greater Than $100 thousand (dollars in thousands)
|
| | | | | | | | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 |
| Term deposits by maturity | | Amount | | Weighted Average Rate | | Amount | | Weighted Average Rate |
| Three months or less | | $ | 800 |
| | 1.82 | % | | $ | — |
| | — | % |
| Over three months through six months | | — |
| | — |
| | — |
| | — |
|
| Over six months through 12 months | | — |
| | — |
| | 800 |
| | 2.34 |
|
| Greater than 12 months | | — |
| | — |
| | — |
| | — |
|
| Total par value | | $ | 800 |
| | 1.82 | % | | $ | 800 |
| | 2.34 | % |
Consolidated Obligations
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 $34.8159.7 million and $61.622.4 million as of December 31, 20172019, and December 31, 20162018, respectively. Derivative liabilities' net fair
value, net of cash collateral and accrued interest, totaled $300.510.3 million and $357.9255.8 million as of December 31, 20172019, and December 31, 20162018, respectively.
We offset fair-value amounts recognized for derivative instruments andwith fair-value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivatives recognized at fair value executed with the same counterparty under a master-netting arrangement as well as arising from derivatives cleared through a DCO.
We base the estimated fair values of these agreements on the cost of interest-rate-exchange agreements with similar terms or available market prices. Consequently, fair values for these instruments must be estimated using techniques such as discounted cash-flow analysis and comparison with similar instruments. Estimates developed using these methods are subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. We formally establish hedging relationships associated with balance-sheet items and forecasted transactions to obtain desired economic results. These hedge relationships may include fair-value and cash-flow hedges, as well as economic hedges.
All commitments to invest in mortgage loans are recorded at fair value on the statement of condition as derivatives. Upon satisfaction of the commitment, the recorded fair value is then reclassified as a basis adjustment of the purchased mortgage assets. We had commitments for which we were obligated to invest in mortgage loans with par values totaling $42.9$49.9 million and $22.5$50.8 million at December 31, 20172019 and 2016,2018, respectively.
Table 32 - Hedged Item and Hedge-Accounting Treatment (dollars in thousands)
| |
Table 27 - Hedged Item and Hedge-Accounting Treatment (dollars in thousands)
| | Table 27 - Hedged Item and Hedge-Accounting Treatment (dollars in thousands)
|
| | | | | December 31, 2017 | | December 31, 2016 | | December 31, 2019 | | December 31, 2018 |
| Hedged Item | | Derivative | | Designation(2) | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value | | Derivative | | Designation(2) | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
Advances (1) | | Swaps | | Fair value | | $ | 7,293,414 |
| | $ | 52,244 |
| | $ | 9,976,494 |
| | $ | 11,504 |
| | Swaps | | Fair value | | $ | 5,065,193 |
| | $ | (4,003 | ) | | $ | 5,343,804 |
| | $ | 5,773 |
|
| | | Swaps | | Economic | | 974,900 |
| | 1,570 |
| | 857,000 |
| | 136 |
| | Swaps | | Economic | | 677,300 |
| | (30,080 | ) | | 769,800 |
| | (13,144 | ) |
| Total associated with advances | | 8,268,314 |
| | 53,814 |
| | 10,833,494 |
| | 11,640 |
| | 5,742,493 |
| | (34,083 | ) | | 6,113,604 |
| | (7,371 | ) |
| Available-for-sale securities | | Swaps | | Fair value | | 611,915 |
| | (271,182 | ) | | 611,915 |
| | (290,312 | ) | | Swaps | | Fair value | | 3,735,362 |
| | 17,946 |
| | 611,915 |
| | (228,905 | ) |
| Trading securities | | Swaps | | Economic | | 192,000 |
| | (4,183 | ) | | 192,000 |
| | (9,279 | ) | | Swaps | | Economic | | 2,225,000 |
| | (885 | ) | | 158,000 |
| | (487 | ) |
| COs | | Swaps | | Fair value | | 6,213,665 |
| | (45,446 | ) | | 7,627,400 |
| | (60,904 | ) | | Swaps | | Fair value | | 3,327,550 |
| | (7,053 | ) | | 6,024,980 |
| | (54,791 | ) |
| | | Swaps | | Economic | | — |
| | — |
| | 150,000 |
| | (30 | ) | | Forward starting swaps | | Cash Flow | | 17,000 |
| | 19 |
| | 282,000 |
| | (753 | ) |
| | | Forward starting swaps | | Cash Flow | | 481,200 |
| | (9,807 | ) | | 527,800 |
| | (36,250 | ) | |
| Total associated with COs | | 6,694,865 |
| | (55,253 | ) | | 8,305,200 |
| | (97,184 | ) | | 3,344,550 |
| | (7,034 | ) | | 6,306,980 |
| | (55,544 | ) |
| Total | | | | | | 15,767,094 |
| | (276,804 | ) | | 19,942,609 |
| | (385,135 | ) | | | | | | 15,047,405 |
| | (24,056 | ) | | 13,190,499 |
| | (292,307 | ) |
| Mortgage delivery commitments | | | | | | 42,918 |
| | 142 |
| | 22,524 |
| | (101 | ) | | | | | | 49,911 |
| | 227 |
| | 50,773 |
| | 339 |
|
| Total derivatives | | | | | | $ | 15,810,012 |
| | (276,662 | ) | | $ | 19,965,133 |
| | (385,236 | ) | | | | | | $ | 15,097,316 |
| | (23,829 | ) | | $ | 13,241,272 |
| | (291,968 | ) |
| Accrued interest | | | | | | |
| | (14,452 | ) | | |
| | (19,973 | ) | | | | | | |
| | (4,647 | ) | | |
| | (3,752 | ) |
| Netting adjustments, cash collateral, and variation margin for daily settled contracts including related accrued interest | | | | 25,450 |
| | | | 108,931 |
| |
| Cash collateral, including related accrued interest | | | | | 177,936 |
| | | | 62,323 |
|
| Net derivatives | | | | | | |
| | $ | (265,664 | ) | | |
| | $ | (296,278 | ) | | | | | | |
| | $ | 149,460 |
| | |
| | $ | (233,397 | ) |
| | | | | | | | | | |
| Derivative asset | | | | | | |
| | $ | 34,786 |
| | |
| | $ | 61,598 |
| | | | | | |
| | $ | 159,731 |
| | |
| | $ | 22,403 |
|
| Derivative liability | | | | | | |
| | (300,450 | ) | | |
| | (357,876 | ) | | | | | | |
| | (10,271 | ) | | |
| | (255,800 | ) |
| Net derivatives | | | | | | |
| | $ | (265,664 | ) | | |
| | $ | (296,278 | ) | | | | | | |
| | $ | 149,460 |
| | |
| | $ | (233,397 | ) |
_______________________
| |
| (1) | As of December 31, 20172019 and 2016,2018, embedded derivatives separated from the advance contract with notional amounts of $974.9$677.3 million and $857.0$769.8 million, respectively, and fair values of $(1.6)30.0 million and $(153,000),$13.1 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, which is LIBOR.either LIBOR or the OIS rate based on the federal funds effective 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 derivative hedging specific or nonspecific assets, liabilities, or firm commitments that do not qualify or were not designated for fair-value or cash-flow hedge accounting but are acceptable hedging strategies under our risk-management policy. |
Table 33 - Hedging Strategies (dollars in thousands)
| |
| Table 28 - Hedging Strategies (dollars in thousands)
| | Table 28 - Hedging Strategies (dollars in thousands)
|
| | | As of December 31, 2017 | | | | | | | | | |
| | | Notional Amount | | Notional Amount |
| Hedged Item / Hedging Instrument | | Hedging Objective | | Fair Value Hedge Designation | | Economic Hedge Designation | | Cash Flow Hedge Designation | | Hedging Objective | | Hedge Designation | | December 31, 2019 | | December 31, 2018 |
| Advances | | | | | | | | | | |
| Pay fixed, receive floating interest-rate swap (without options) | | Converts the advance's fixed rate to a variable rate index | | $ | 6,086,164 |
| | $ | 138,000 |
| | $ | — |
| | Converts the advance's fixed rate to a variable rate index | | Fair value | | $ | 4,326,393 |
| | $ | 4,472,004 |
|
| Pay fixed, receive floating interest-rate swap (without options) | | | | Economic | | 10,000 |
| | 80,000 |
|
| | Converts the advance's fixed rate to a variable rate index and offsets option risk in the advance | | Fair value | | 701,200 |
| | 791,200 |
|
| Pay fixed, receive floating interest-rate swap (with options) | | Converts the advance's fixed rate to a variable rate index and offsets option risk in the advance | | 1,191,250 |
| | 61,500 |
| | — |
| | | Economic | | 648,300 |
| | 10,500 |
|
| Pay floating with embedded features, receive floating interest-rate swap (noncallable) | | Reduces interest-rate sensitivity and repricing gaps by converting the advance's variable rate to a different variable rate index and/or offsets embedded option risk in the advance | | 16,000 |
| | — |
| | — |
| | Reduces interest-rate sensitivity and repricing gaps by converting the advance's variable rate to a different variable rate index and/or offsets embedded option risk in the advance | | Fair value | | 22,600 |
| | 26,600 |
|
| Pay floating with embedded features, receive floating interest-rate swap (callable) | | | Reduces interest-rate sensitivity and repricing gaps by converting the advance’s variable-rate to a different variable-rate index and/or offsets embedded option risk in the advance. | | Fair value | | 15,000 |
| | 54,000 |
|
| Pay floating, receive floating basis swap | | Reduces interest-rate sensitivity and repricing gaps by converting the advance's variable-rate to a different variable-rate | | — |
| | 775,400 |
| | — |
| | Reduces interest-rate sensitivity and repricing gaps by converting the advance's variable-rate to a different variable-rate | | Economic | | 19,000 |
| | 679,300 |
|
| | | 7,293,414 |
| | 974,900 |
| | — |
| | 5,742,493 |
| | 6,113,604 |
|
| | | | | | | | | | | |
| Investments | | | | | | | | | | |
| Pay fixed, receive floating interest-rate swap | | Converts the investment's fixed rate to a variable rate index | | 611,915 |
| | 192,000 |
| | — |
| | Converts the investment's fixed rate to a variable rate index | | Fair value | | 3,735,362 |
| | 611,915 |
|
| Pay fixed, receive floating interest-rate swap | | | | Economic | | 2,225,000 |
| | 158,000 |
|
| | 5,960,362 |
| | 769,915 |
|
| | | | | | | | | | | |
| CO Bonds | | | | | | | | | | |
| Receive fixed, pay floating interest-rate swap (without options) | | Converts the bond's fixed rate to a variable rate index | | 3,153,665 |
| | — |
| | — |
| | Converts the bond's fixed rate to a variable rate index | | Fair value | | 2,029,550 |
| | 2,629,980 |
|
| Receive fixed, pay floating interest-rate swap (with options) | | Converts the bond's fixed rate to a variable rate index and offsets option risk in the bond | | 3,060,000 |
| | — |
| | — |
| | Converts the bond's fixed rate to a variable rate index and offsets option risk in the bond | | Fair value | | 1,298,000 |
| | 3,395,000 |
|
| Forward-starting interest-rate swap | | To lock in the cost of funding on anticipated issuance of debt | | — |
| | — |
| | 481,200 |
| | To lock in the cost of funding on anticipated issuance of debt | | Cash flow | | 17,000 |
| | 282,000 |
|
| | | 6,213,665 |
| | — |
| | 481,200 |
| | 3,344,550 |
| | 6,306,980 |
|
| | | | | | | | | | | |
| Stand-Alone Derivatives | | | | | | | | | | |
| Mortgage delivery commitments | | N/A | | — |
| | 42,918 |
| | — |
| | N/A | | Economic | | 49,911 |
| | 50,773 |
|
| Total | | $ | 14,118,994 |
| | $ | 1,209,818 |
| | $ | 481,200 |
| | $ | 15,097,316 |
| | $ | 13,241,272 |
|
|
| | | | | | | | | | | | | | |
| | | | | As of December 31, 2016 |
| | | | | Notional Amount |
| Hedged Item / Hedging Instrument | | Hedging Objective | | Fair Value Hedge Designation | | Economic Hedge Designation | | Cash Flow Hedge Designation |
| Advances | | | | | | | | |
| Pay fixed, receive floating interest-rate swap (without options) | | Converts the advance's fixed rate to a variable rate index | | $ | 7,289,444 |
| | $ | 241,000 |
| | $ | — |
|
| Pay fixed, receive floating interest-rate swap (with options) | | Converts the advance's fixed rate to a variable rate index and offsets option risk in the advance | | 2,683,050 |
| | — |
| | — |
|
| Pay floating with embedded features, receive floating interest-rate swap (noncallable) | | Reduces interest-rate sensitivity and repricing gaps by converting the advance's variable rate to a different variable rate index and/or offsets embedded option risk in the advance | | 4,000 |
| | — |
| | — |
|
| Pay floating, receive floating basis swap | | Reduces interest-rate sensitivity and repricing gaps by converting the advance's variable-rate to a different variable-rate | | — |
| | 616,000 |
| | — |
|
| | | | | 9,976,494 |
| | 857,000 |
| | — |
|
| | | | | | | | | |
| Investments | | | | | | | | |
| Pay fixed, receive floating interest-rate swap | | Converts the investment's fixed rate to a variable rate index | | 611,915 |
| | 192,000 |
| | — |
|
| | | | | | | | | |
| CO Bonds | | | | | | | | |
| Receive fixed, pay floating interest-rate swap (without options) | | Converts the bond's fixed rate to a variable rate index | | 3,551,400 |
| | 150,000 |
| | — |
|
| Receive fixed, pay floating interest-rate swap (with options) | | Converts the bond's fixed rate to a variable rate index and offsets option risk in the bond | | 4,076,000 |
| | — |
| | — |
|
| Forward-starting interest-rate swap | | To lock in the cost of funding on anticipated issuance of debt | | — |
| | — |
| | 527,800 |
|
| | | | | 7,627,400 |
| | 150,000 |
| | 527,800 |
|
| | | | | | | | | |
| Stand-Alone Derivatives | | | | | | | | |
| Mortgage delivery commitments | | N/A | | — |
| | 22,524 |
| | — |
|
| Total | | | | $ | 18,215,809 |
| | $ | 1,221,524 |
| | $ | 527,800 |
|
Tables 3429 and 3530 provide a summary of our hedging relationships for fair-value hedges of advances and COs that qualify for hedge accounting by year of contractual maturity. Interest accruals on interest-rate-exchange agreements in qualifying hedge relationships are recorded as interest income on advances and interest expense on COs in the statement of operations. The notional amount of derivatives in qualifying fair-value hedge relationships of advances and COs totals $13.5$8.4 billion,, representing85.4
55.6 percent of all derivatives outstanding as of December 31, 2017.2019. Economic hedges and cash-flow hedges are not included within the two tables below.
Table 34 - Fair-Value Hedge Relationships of Advances By Year of Contractual Maturity (dollars in thousands)
| |
Table 29 - Fair-Value Hedge Relationships of Advances By Year of Contractual Maturity (dollars in thousands)
| | Table 29 - Fair-Value Hedge Relationships of Advances By Year of Contractual Maturity (dollars in thousands)
|
| | | As of December 31, 2017 | As of December 31, 2019 |
| | | | | | | | | | Weighted-Average Yield (4) | | | | | | | | | Weighted-Average Yield (4) |
| | Derivatives | | Advances(2) | | | | Derivatives | | | Derivatives | | Advances(2) | | | | Derivatives | | |
| Maturity | Notional | | Fair Value(1) | | Hedged Amount | | Fair-Value Adjustment(3) | | Advances | | Receive Floating Rate | | Pay Fixed Rate | | Net Receive Result | Notional | | Fair Value(1) | | Hedged Amount | | Fair-Value Adjustment(3) | | Advances | | Receive Floating Rate | | Pay Fixed Rate | | Net Receive Result |
| Due in one year or less | $ | 2,141,860 |
| | $ | 2,359 |
| | $ | 2,141,860 |
| | $ | (2,731 | ) | | 1.82 | % | | 1.47 | % | | 1.60 | % | | 1.69 | % | $ | 1,883,115 |
| | $ | 319 |
| | $ | 1,883,115 |
| | $ | (305 | ) | | 1.99 | % | | 1.83 | % | | 1.69 | % | | 2.13 | % |
| Due after one year through two years | 1,303,486 |
| | 13,685 |
| | 1,303,486 |
| | (13,925 | ) | | 1.53 |
| | 1.45 |
| | 1.31 |
| | 1.67 |
| 1,379,303 |
| | (4,688 | ) | | 1,379,303 |
| | 4,576 |
| | 2.27 |
| | 1.87 |
| | 1.86 |
| | 2.28 |
|
| Due after two years through three years | 1,351,040 |
| | 17,512 |
| | 1,351,040 |
| | (17,673 | ) | | 1.83 |
| | 1.43 |
| | 1.56 |
| | 1.70 |
| 662,575 |
| | (1,957 | ) | | 662,575 |
| | 1,940 |
| | 2.02 |
| | 1.72 |
| | 1.57 |
| | 2.17 |
|
| Due after three years through four years | 1,095,703 |
| | 13,653 |
| | 1,095,703 |
| | (13,961 | ) | | 2.18 |
| | 1.52 |
| | 1.74 |
| | 1.96 |
| 272,200 |
| | (5,094 | ) | | 272,200 |
| | 5,025 |
| | 2.44 |
| | 1.88 |
| | 2.06 |
| | 2.26 |
|
| Due after four years through five years | 593,075 |
| | 6,246 |
| | 593,075 |
| | (6,330 | ) | | 1.91 |
| | 1.44 |
| | 1.60 |
| | 1.75 |
| 442,750 |
| | (2,021 | ) | | 442,750 |
| | 2,016 |
| | 2.10 |
| | 1.55 |
| | 1.48 |
| | 2.17 |
|
| Thereafter | 808,250 |
| | 10,122 |
| | 808,250 |
| | (10,162 | ) | | 1.29 |
| | 1.50 |
| | 0.86 |
| | 1.93 |
| 425,250 |
| | 4,298 |
| | 425,250 |
| | (4,247 | ) | | 2.00 |
| | 1.71 |
| | 1.24 |
| | 2.47 |
|
| Total | $ | 7,293,414 |
| | $ | 63,577 |
| | $ | 7,293,414 |
| | $ | (64,782 | ) | | 1.77 | % | | 1.47 | % | | 1.48 | % | | 1.76 | % | $ | 5,065,193 |
| | $ | (9,143 | ) | | $ | 5,065,193 |
| | $ | 9,005 |
| | 2.10 | % | | 1.79 | % | | 1.68 | % | | 2.21 | % |
_______________________
| |
| (1) | Not included in the fair value is $11.3$5.1 million of variation margin receivedpaid for daily settled contracts. |
| |
| (2) | Included in the advances hedged amount are $1.2 billion$716.2 million of putable advances, which would accelerate the termination date of the derivative and the hedged item if the put option is exercised. |
| |
| (3) | The fair-value adjustment of hedged advances represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR.which is either LIBOR or OIS based on the federal funds effective rate. |
| |
| (4) | The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of December 31, 2017. 2019. |
Table 35 - Fair-Value Hedge Relationships of Consolidated Obligations By Year of Contractual Maturity (dollars in thousands)
| |
Table 30 - Fair-Value Hedge Relationships of Consolidated Obligations By Year of Contractual Maturity (dollars in thousands)
| | Table 30 - Fair-Value Hedge Relationships of Consolidated Obligations By Year of Contractual Maturity (dollars in thousands)
|
| | | As of December 31, 2017 | As of December 31, 2019 |
| | | | | | | | | | Weighted-Average Yield (4) | | | | | | | | | Weighted-Average Yield (4) |
| | Derivatives | | CO Bonds (2) | | | | Derivatives | | | Derivatives | | CO Bonds (2) | | | | Derivatives | | |
| Year of Maturity | Notional | | Fair Value(1) | | Hedged Amount | | Fair-Value Adjustment(3) | | CO Bonds | | Receive Fixed Rate | | Pay Floating Rate | | Net Pay Result | Notional | | Fair Value(1) | | Hedged Amount | | Fair-Value Adjustment(3) | | CO Bonds | | Receive Fixed Rate | | Pay Floating Rate | | Net Pay Result |
| Due in one year or less | $ | 2,151,290 |
| | $ | (7,716 | ) | | $ | 2,151,290 |
| | $ | 8,021 |
| | 1.03 | % | | 0.96 | % | | 1.42 | % | | 1.49 | % | $ | 1,312,705 |
| | $ | 3,020 |
| | $ | 1,312,705 |
| | $ | (3,045 | ) | | 2.16 | % | | 0.92 | % | | 0.80 | % | | 2.04 | % |
| Due after one year through two years | 1,132,285 |
| | (9,461 | ) | | 1,132,285 |
| | 9,543 |
| | 1.18 |
| | 1.21 |
| | 1.33 |
| | 1.30 |
| 1,016,770 |
| | 4,098 |
| | 1,016,770 |
| | (3,900 | ) | | 1.79 |
| | 1.22 |
| | 1.16 |
| | 1.73 |
|
| Due after two years through three years | 559,100 |
| | (3,528 | ) | | 559,100 |
| | 3,465 |
| | 1.71 |
| | 1.71 |
| | 1.44 |
| | 1.44 |
| 242,220 |
| | 1,632 |
| | 242,220 |
| | (1,591 | ) | | 2.23 |
| | 2.23 |
| | 1.91 |
| | 1.91 |
|
| Due after three years through four years | 1,338,770 |
| | (17,138 | ) | | 1,338,770 |
| | 17,095 |
| | 1.38 |
| | 1.38 |
| | 1.29 |
| | 1.29 |
| 80,000 |
| | (67 | ) | | 80,000 |
| | 70 |
| | 1.72 |
| | 1.72 |
| | 1.76 |
| | 1.76 |
|
| Due after four years through five years | 447,220 |
| | (3,204 | ) | | 447,220 |
| | 3,035 |
| | 1.83 |
| | 1.83 |
| | 1.29 |
| | 1.29 |
| 145,000 |
| | (387 | ) | | 145,000 |
| | 371 |
| | 1.81 |
| | 1.81 |
| | 1.73 |
| | 1.73 |
|
| Thereafter | 585,000 |
| | (14,463 | ) | | 585,000 |
| | 14,265 |
| | 1.77 |
| | 1.77 |
| | 1.30 |
| | 1.30 |
| 530,855 |
| | (12,999 | ) | | 530,855 |
| | 12,875 |
| | 2.86 |
| | 1.78 |
| | 1.73 |
| | 2.81 |
|
| Total | $ | 6,213,665 |
| | $ | (55,510 | ) | | $ | 6,213,665 |
| | $ | 55,424 |
| | 1.32 | % | | 1.30 | % | | 1.36 | % | | 1.38 | % | $ | 3,327,550 |
| | $ | (4,703 | ) | | $ | 3,327,550 |
| | $ | 4,780 |
| | 2.14 | % | | 1.30 | % | | 1.20 | % | | 2.04 | % |
_______________________
| |
| (1) | Not included in the fair value is $10.1$2.4 million of variation margin paidreceived for daily settled contracts. |
| |
| (2) | Included in the CO bonds hedged amount are $3.1$1.3 billion of callable CO bonds, which would accelerate the termination date of the derivative and the hedged item if the call option is exercised. |
| |
(3) | The fair-value adjustment of hedged CO bonds represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, which is either LIBOR or OIS based on the federal funds effective rate, plus remaining unamortized premiums or discounts on hedged CO bonds where applicable. |
| |
| (4) | The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of December 31, 2017. 2019. |
We may engage in derivatives directly with affiliates of certain of our members that act as derivatives dealers to us. These derivatives are entered into for our own risk-management purposes and are not related to requests from our members to enter into such contracts.
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 by an amount that exceeds an exposure threshold (if any) defined in our master netting agreement with the counterparty. The resulting net exposure at fair value is reflected in Table 3631 below. 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 by an amount that exceeds an exposure threshold (if any) defined in our master netting agreement with the counterparty.
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 adjusted for any applicable exposure threshold. 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 adjusted for any applicable exposure threshold. We 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 36 - Credit Exposure to Derivatives Counterparties (dollars in thousands)
| |
Table 31 - Credit Exposure to Derivatives Counterparties (dollars in thousands)
| | Table 31 - Credit Exposure to Derivatives Counterparties (dollars in thousands)
|
| | | | As of December 31, 2017 | | As of December 31, 2019 |
Credit Rating (1) | | Notional Amount | | Net Derivatives Fair Value Before Collateral | | Cash Collateral Pledged to Counterparty | | Non-cash Collateral Pledged to Counterparty | | Net Credit Exposure to Counterparties | | Notional Amount | | Net Derivatives Fair Value Before Collateral | | Cash Collateral Pledged to Counterparty | | Non-cash Collateral Pledged to Counterparty | | Net Credit Exposure to Counterparties |
| Asset positions with credit exposure: | | | | | | | | | | | | | | | | | | | | |
| Uncleared derivatives | | | | | | | | | | | | | | | | | | | | |
| Double-A | | $ | 1,095,400 |
| | $ | 1,241 |
| | $ | — |
| | $ | — |
| | $ | 1,241 |
| |
| Single-A | | 2,243,500 |
| | (14,853 | ) | | 15,718 |
| | — |
| | 865 |
| | $ | 217,000 |
| | $ | 1,168 |
| | $ | (40 | ) | | $ | (995 | ) | | $ | 133 |
|
| Cleared derivatives | | 7,921,389 |
| | 28,445 |
| | 4,065 |
| | — |
| | 32,510 |
| | 11,930,515 |
| | 8,546 |
| | 149,527 |
| | — |
| | 158,073 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Liability positions with credit exposure: | | | | | | | | | | | | | | | | | | | | |
| Uncleared derivatives | | | | | | | | | | | | | | | | | | | | |
| Single-A | | 567,250 |
| | (1,474 | ) | | — |
| | 1,585 |
| | 111 |
| | 1,032,100 |
| | (25,193 | ) | | 16,163 |
| | 9,623 |
| | 593 |
|
| Triple-B | | 561,000 |
| | (4,717 | ) | | — |
| | 5,109 |
| | 392 |
| | 130,000 |
| | (82 | ) | | — |
| | 93 |
| | 11 |
|
| Total derivative positions with nonmember counterparties to which we had credit exposure | | 12,388,539 |
| | 8,642 |
| | 19,783 |
| | 6,694 |
| | 35,119 |
| | 13,309,615 |
| | (15,561 | ) | | 165,650 |
| | 8,721 |
| | 158,810 |
|
| | | | | | | | | | | | | | | | | | | | | |
Mortgage delivery commitments (2) | | 42,918 |
| | 169 |
| | — |
| | — |
| | 169 |
| | 49,911 |
| | 227 |
| | — |
| | — |
| | 227 |
|
| Total | | $ | 12,431,457 |
| | $ | 8,811 |
| | $ | 19,783 |
| | $ | 6,694 |
| | $ | 35,288 |
| | $ | 13,359,526 |
| | $ | (15,334 | ) | | $ | 165,650 |
| | $ | 8,721 |
| | $ | 159,037 |
|
| | | | | | | | | | | | | | | | | | | | | |
Derivative positions without credit exposure: (3) | | | | | | | | | | | | | | | | | | | | |
| Double-A | | $ | 386,500 |
| | | | | | | | | |
| Single-A | | 1,518,000 |
| | | | | | | | | | $ | 1,517,000 |
| | | | | | | | |
| Triple-B | | 1,474,055 |
| | | | | | | | | | 220,790 |
| | | | | | | | |
| Total derivative positions without credit exposure | | $ | 3,378,555 |
| |
| | | | | | | | $ | 1,737,790 |
| |
| | | | | | |
_______________________
| |
| (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 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. |
| |
| (3) | Represents derivatives positions with counterparties for which we are in a net liability position and for which we have delivered collateral to the counterparty in an amount equal to or less than the net derivative liability, or derivative positions with counterparties for which we are in a net asset position and for which the counterparty has delivered collateral to us in an amount that exceeds our net derivative asset. |
Uncleared derivatives. The credit risk arising from unsecured credit exposure on derivatives is mitigated by the credit quality of the counterparties and by the early termination ratings triggers contained in all master derivatives agreements. We enter into new uncleared derivatives only with nonmember institutions that have long-term senior unsecured NRSRO credit ratings that are at or above single-A (or its equivalent) although risk-reducing trades may be approved for counterparties whose ratings have fallen below these ratings. Effective January 1, 2020, we have replaced the NRSRO rating minimum with our third highest internal rating minimum. See Part 1 — Item 1 — Business — Business Lines — Investments for additional information. We actively monitor these exposures and the credit quality of our counterparties, using stress testing of counterparty exposures and assessments of each counterparty's financial performance, capital adequacy, sovereign support, and related market signals such as credit default swap spreads. We can reduce or suspend credit limits and/or seek to reduce existing exposures, as appropriate, as a result of these monitoring activities. We do not enter into interest-rate-exchange agreements with other FHLBanks. We use master-netting agreements to reduce our credit exposure from counterparty defaults. The master agreements contain bilateral-collateral-exchange provisions that may require credit exposures beyond a defined amount to be secured by U.S. federal government or GSE securities or cash. Exposures are measured daily, and adjustments to collateral positions are made daily. These agreements may require us to deliver additional collateral to certain of our counterparties if our credit rating is downgraded by an NRSRO, which could increase our exposure to loss in the event of a default by a counterparty to which we were the net creditor at the time of any such default, as further detailed in Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 1112 — Derivatives and Hedging Activities.
We may deposit funds with these counterparties and their affiliates for short-term money-market investments, including overnight federal funds, term federal funds, and interest-bearing certificates of deposit.deposits. We also engage in short-term secured reverse repurchase agreements with affiliates of these counterparties. All of these counterparties have affiliates that buy, sell, and distribute our COs.
Cleared derivatives. The credit risk from unsecured credit exposure on cleared swaps is principally mitigated by the DCO's structural risk protections. Our internal policies require that the DCO must have a rating of at least single-A or the equivalent. We actively monitor these exposures and the credit quality of our DCO counterparties, using stress testing of DCO counterparties exposures and assessments of the DCO's structural risk protections. We can reduce existing exposures to a DCO by unwinding any trade, by entering into an offsetting trade, or by moving trades to another DCO.
Transition from LIBOR to Alternative Reference Rates
In July 2017, the United Kingdom's FCA, the regulator for LIBOR, announced that after 2021 it will no longer persuade or compel the major banks that sustain LIBOR to submit rates for the calculation of LIBOR. The Alternative Reference Rates Committee (ARRC), which was established in 2014 by the Federal Reserve Board of Governors and the Federal Reserve Bank of New York to help ensure a successful transition in the U.S. from LIBOR, recommended SOFR as the alternative reference rate to U.S. Dollar LIBOR. SOFR is based on a broad segment of the overnight U.S. Treasury repurchase market and is intended to be a measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. The Federal Reserve Bank of New York began publishing SOFR in the second quarter of 2018.
Many of our assets and liabilities are indexed to LIBOR, with exposure extending beyond December 31, 2021. We are currently evaluating and planning for the eventual replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement. As a result, we have developed a LIBOR transition plan, which addresses considerations such as LIBOR exposure, contract “fallback” language (which provides for contractual alternatives to the use of LIBOR when LIBOR cannot be determined based on the method provided in the agreement), operational preparedness, and balance sheet management, as well as contingencies for the potential unavailability of the index prior to December 31, 2021.
In assessing our current exposure to LIBOR, we have developed an inventory of financial instruments impacted and identified contracts that may require adding or adjusting the fallback language. We have added or adjusted fallback language to our advances agreements with members, and the FHLBank System has added fallback language to consolidated obligations. We continue to monitor market-wide efforts to address fallbacks related to LIBOR-based derivatives and investment securities as well as fallback language for other financial instruments. We are in the process of assessing our operational readiness, including updating processes and information technology systems to support the transition from LIBOR to an alternative reference rate.
The Bank participated in the FHLBank System’s first issuance of SOFR-indexed COs in November 2018, and we have continued to participate in SOFR-indexed CO issuances throughout 2019 as our funding needs required. Market activity in SOFR-indexed financial instruments continues to increase. During the year ended December 31, 2019, we issued $5.4 billion in SOFR-indexed COs. In October 2019, the Bank began to offer a SOFR-based advance.
In March 2019, the Bank began to implement OIS based on the federal funds effective rate as an alternative interest rate hedging strategy for certain financial instruments, rather than using LIBOR when entering into new derivative transactions. In addition, a SOFR-based derivative market has begun to emerge.
On September 27, 2019, the FHFA issued the Supervisory Letter that limits certain activities of the FHLBanks with respect to new LIBOR referenced financial assets, liabilities, and derivatives with maturities beyond December 31, 2021. See Legislative and Regulatory Developments for more information on the Supervisory Letter.
We have exposures to advances, investment securities, and CO bonds with interest rates indexed to LIBOR. Table 32 presents exposure to LIBOR-indexed advances, investment securities, and CO bonds at December 31, 2019.
Table 32 - LIBOR-Indexed Variable Rate Financial Instruments at December 31, 2019 (dollars in thousands)
|
| | | | | | | | |
| | | Due Prior to December 31, 2021 | | Due After December 31, 2021 |
Advances, par amount by redemption term(1) | | $ | 37,500 |
| | $ | 169,100 |
|
| Investment securities, par amount by contractual maturity | | | | |
| Non-MBS | | 3,090 |
| | 88,404 |
|
MBS(2) | | 10,886 |
| | 2,345,566 |
|
| Total investment securities | | 13,976 |
| | 2,433,970 |
|
| Consolidated bonds, par amount by contractual maturity | | 500,000 |
| | — |
|
| Total financial instruments | | $ | 551,476 |
| | $ | 2,603,070 |
|
_______________________
| |
| (1) | For advances that have a conversion from a floating rate indexed to LIBOR to a fixed rate, the LIBOR exposure is considered to be due by the date which the financial instrument converts to a fixed rate. |
| |
| (2) | Contractual maturity will likely differ from the expected maturity because borrowers of the underlying loans or securities are subject to a call right or prepayment right, with or without call or prepayment fees. |
The following table presents our variable rate advances, investment securities, and consolidated bonds by interest-rate index at December 31, 2019.
Table 33 - Variable Rate Financial Instruments by Interest-Rate Index (dollars in thousands)
|
| | | | | | | | | | | | | | | | |
| | | Par Value of Advances | | Par Value of Non-MBS | | Par Value of MBS | | Par Value of CO Bonds |
| LIBOR | | $ | 206,600 |
| | $ | 91,494 |
| | $ | 2,356,452 |
| | $ | 500,000 |
|
| SOFR | | — |
| | — |
| | — |
| | 5,068,000 |
|
| FHLBank discount note auction rate | | 6,229,495 |
| | — |
| | — |
| | — |
|
| Other | | 41,201 |
| | — |
| | 118,182 |
| | — |
|
| Total | | $ | 6,477,296 |
| | $ | 91,494 |
| | $ | 2,474,634 |
| | $ | 5,568,000 |
|
The following table presents our derivatives with LIBOR exposure at December 31, 2019.
Table 34 - Notional Amount of Derivative with LIBOR Exposure by Termination Date (dollars in thousands)
|
| | | | | | | | | | | | | | | | |
| | | Pay Leg | | Receive Leg |
| | | Cleared | | Uncleared | | Cleared | | Uncleared |
| Terminates in 2020 | | $ | 1,084,705 |
| | $ | 262,000 |
| | $ | 1,245,750 |
| | $ | 128,790 |
|
| Terminates in 2021 | | 186,770 |
| | 725,000 |
| | 995,203 |
| | 159,600 |
|
| Terminates in 2022 and thereafter | | 198,075 |
| | 535,000 |
| | 173,575 |
| | 1,183,500 |
|
| Total notional amount | | $ | 1,469,550 |
| | $ | 1,522,000 |
| | $ | 2,414,528 |
| | $ | 1,471,890 |
|
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. 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 the FHLBank Act, FHFA regulations and guidance, and policies established by our management and board of directors. We seek to be in a position to meet the credit and liquidity needs of our members and to meet all current and future financial commitments by managing liquidity positions to maintain stable, reliable, and cost-effective sources of funds while taking into account market conditions, member demand, and the maturity profile of our assets and liabilities.
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 and 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. Our abilityWe are able to expand our balance sheet and corresponding liquidity requirementsCO debt issuance in response to our members' increased credit needs is correlated to our members' requirements 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, 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, as well as cash and investment holdings that are primarily high-quality, short-, and intermediate-term financial instruments.
During the year ended December 31, 2017,2019, we maintained continual access to funding and adapted our debt issuance to meet the needs of our members. During the year ended December 31, 2017, ourOur short-term funding was generally driven by member demand and was achieved primarily through the issuance of discount notes and short-term CO bonds. Access to short-term debt markets has been reliable because investors driven by increased liquidity preferences and risk aversion, including the effects of money market fund reform, have soughtcontinue to view our short-term debt as an asset of choice, which has led to consistently low cost of fundsfunding costs compared to U.S. Treasury and LIBOR benchmarksthose of other high-quality issuers and increased utilization of debt maturing in one year or less.
We may use a portion of the short-term COs issued to fund both short- and long-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 rates on both the floating-rate assets and liabilities 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. Accordingly, we measure and monitor interest rate risk with commonly used methods and metrics, which include the calculations of market value of equity, duration of equity, duration gap, and earnings at risk. See Item 7A — Quantitative and Qualitative Disclosures About Market Risk for additional information. We have also established funding gap limits designed to limit our exposure to refinancing risk. See — Balance Sheet Funding Gap Policy for additional information.
Our primary uses of liquidity are advance originations and consolidated obligation payments. Other uses of liquidity are mortgage loan and investment purchases, dividend payments, and other contractual payments. We also maintain liquidity to redeem or repurchase excess capital stock, atthrough our discretion,daily excess stock repurchases, upon the request of a member or as required under our capital plan.
Secondary sources of liquidity include payments collected on mortgage loans, proceeds from the issuance of capital stock, and deposits from members. In addition, under the FHLBank Act, the U.S. Treasury may purchase up to $4 billion of COs of the FHLBanks. The terms, conditions, and interest rates arein such a purchase would be determined by the U.S. Treasury. This authority may be exercised at the discretion of the U.S. Treasury with the agreement of the FHFA only if alternative means cannot be effectively employed to permit the FHLBanks to continue to supply reasonable amounts of funds to the mortgage market, and the ability to supply such funds is substantially impaired because of monetary stringency and a high level of interest rates. There were no such purchases by the U.S. Treasury during the year ended December 31, 2017.2019.
Our contingency liquidity plans, as discussed further below, are intended to ensure that we are able to meet our obligations and the liquidity needs of members in the event of operational disruptions at the Bank or the Office of Finance or short-term disruptions of the capital markets.
For information and discussion of our guarantees and other commitments we may have, see — Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations below, and for further information and discussion of the joint and several liability for FHLBank COs, see — Debt Financing — Consolidated Obligations below.
Internal Liquidity Sources / Liquidity Management
Liquidity Reserves for Deposits. Applicable law requires us to hold a total amount of cash, obligations of the U.S., and advances with maturities of less than five years, in an amount not less than the amount of total member deposits with us. We have complied with this requirement during the year ended December 31, 20172019.
Table 37 - Liquidity Reserves for Deposits (dollars in thousands)
| |
Table 35 - Liquidity Reserves for Deposits (dollars in thousands)
| | Table 35 - Liquidity Reserves for Deposits (dollars in thousands)
|
| | | | December 31, | | December 31, |
| | | 2017 | | 2016 | | 2019 | | 2018 |
Liquid assets(1) | | | | | |
| Cash and due from banks | | $ | 261,673 |
| | $ | 520,031 |
| | $ | 69,416 |
| | $ | 10,431 |
|
| Interest-bearing deposits | | 246 |
| | 278 |
| | 1,253,873 |
| | 593,199 |
|
| U.S. Treasury obligations | | — |
| | 399,521 |
| | 2,240,236 |
| | — |
|
| Advances maturing within five years | | 35,835,925 |
| | 36,481,522 |
| | 33,271,576 |
| | 41,916,398 |
|
Total liquid assets(1) | | 36,097,844 |
| | 37,401,352 |
| |
| Total liquid assets | | | 36,835,101 |
| | 42,520,028 |
|
| Total deposits | | 477,069 |
| | 482,163 |
| | 674,309 |
| | 474,878 |
|
Excess liquid assets(1) | | $ | 35,620,775 |
| | $ | 36,919,189 |
| |
| Excess liquid assets | | | $ | 36,160,792 |
| | $ | 42,045,150 |
|
________________________
| |
(1) | For purposes of the regulatory requirement, liquid assets include cash, obligations of the U.S., and advances with maturities of less than five years. |
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.
Projected Net Cash Flow. We define projected net cash flow as projected sources of funds less projected uses of funds based on contractual maturities or expected option exercise periods, and settlement of committed assets and liabilities, as applicable. For mortgage-related cash flows and callable debt, we incorporate projected prepayments and call exercise.
Structural Liquidity.Liquidity Management Action Trigger. We define structuralmaintain a liquidity asmanagement action trigger pertaining to net cash flow: if projected net cash flow (defined above) less assumed secondary uses of funds, for which we assume the following:
all maturing advances are renewed;
member overnight deposits are withdrawn at a rate of 50 percent per day;
outstanding standby letters of credit are drawn down at a rate of 50 percent spread equally over 86 days;
uncommitted lines of credit are drawn upon at a rate of 10 percent of the previous day's balance; and
MPF master commitments are funded at a rate of 10 percent of the previous day's total amount on the first day and at a rate of one percent on each day thereafter.
The above assumptions for secondary uses of funds are in excess of our ordinary experience, and therefore represent a more stressful scenario than we expect to experience. We review these assumptions periodically.
This methodology for measuring projected net cash flow and structural liquidity has been established by management to monitor our liquidity position on a daily basis, and to help ensure that we meet all of our obligations as they come due and to meet our members' potential demand for liquidity from us in all cases. We may adjust the amount of liquidity maintained as market conditions change from time to time using projected net cash flow and structural liquidity measurements.
Liquidity Management Action Triggers. We maintain two liquidity management action triggers:
if structural liquidity is less than negative $1.0 billionfalls below zero on or before the fifth business21st day following the measurement date; and
| |
• | if projected net cash flow falls below zero on or before the 21st day following the measurement date.
|
We did not exceed either of these thresholds at any time during the year ended December 31, 2017. If either of these thresholds is exceeded,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 year ended December 31, 2019.
Table 38 - Projected Net Cash Flow and Structural Liquidity (dollars in thousands)
| |
Table 36 - Projected Net Cash Flow (dollars in thousands)
| | Table 36 - Projected Net Cash Flow (dollars in thousands)
|
| | | | As of December 31, 2017 | | As of December 31, 2019 |
| | | 5 Business Days | | 21 Days | | 21 Days |
| Uses of funds | | | | | | |
| Interest payable | | $ | 11,127 |
| | $ | 34,971 |
| | $ | 41,666 |
|
| Maturing liabilities | | 4,549,180 |
| | 10,316,251 |
| | 3,230,735 |
|
| Committed asset settlements | | 10,390 |
| | 11,140 |
| | 429,757 |
|
| Capital outflow | | 110,702 |
| | 110,702 |
| | 79,713 |
|
| MPF delivery commitments | | 42,918 |
| | 42,918 |
| | 49,911 |
|
| Other | | 449 |
| | 449 |
| |
| Gross uses of funds | | 4,724,766 |
| | 10,516,431 |
| | 3,831,782 |
|
| | | | | | | |
| Sources of funds | | | | | | |
| Interest receivable | | 48,767 |
| | 80,811 |
| | 87,332 |
|
| Maturing or projected amortization of assets | | 11,706,350 |
| | 18,863,482 |
| | 13,538,456 |
|
| Committed liability settlements | | 37,531 |
| | 52,532 |
| | 498,729 |
|
| Cash and due from banks and interest bearing deposits | | 261,609 |
| | 261,609 |
| | 1,321,996 |
|
| Other | | | 9,371 |
|
| Gross sources of funds | | 12,054,257 |
| | 19,258,434 |
| | 15,455,884 |
|
| | | | | | | |
| Projected net cash flow | | 7,329,491 |
| | $ | 8,742,003 |
| | $ | 11,624,102 |
|
| | | | | | |
| Less: Secondary uses of funds | | | | | |
| Deposit runoff | | 416,525 |
| | | |
| Drawdown of standby letters of credit and lines of credit | | 650,846 |
| | | |
| Rollover of all maturing advances | | 3,738,047 |
| | | |
| Projected funding of MPF master commitments | | 202,105 |
| | | |
| Total secondary uses of funds | | 5,007,523 |
| |
| |
| | | | | | |
| Structural liquidity | | $ | 2,321,968 |
| |
| |
Contingency Liquidity. FHFA regulations require that we hold contingency liquidity in an amount sufficient to enable us to cover our operational requirements for a minimum of five business days without access to the CO debt markets. The FHFA defines contingency liquidity as projected sources of funds less uses of funds, excluding reliance on access to the CO debt markets and including funding a portion of outstanding standby letters of credit. For this purpose, outstanding standby letters of credit are assumed to be drawn down at a rate of 50 percent spread equally over 86 days following the measurement date. As defined by FHFA regulations, additional contingent sources of liquidity include the following:
marketable securities with a maturity greater than one week and less than one year that can be sold;
self-liquidating assets with a maturity of seven days or less;
assets that are generally accepted as collateral in the repurchase agreement market, for which we include 50 percent of unencumbered marketable securities with a maturity greater than one year; and
irrevocable lines of credit from financial institutions rated not lower than the second highest rating category by an NRSRO.
We complied with this regulatory requirement at all times during the year ended December 31, 20172019. As of December 31, 20172019 and 2016,2018, we held a surplus of $13.2$14.4 billion and $13.4$17.4 billion, respectively, of contingency liquidity for the following five business days, exclusive of access to the proceeds of CO issuance.
Table 39 - Contingency Liquidity (dollars in thousands)
| |
Table 37 - Contingency Liquidity (dollars in thousands)
| | Table 37 - Contingency Liquidity (dollars in thousands)
|
| | | | As of December 31, 2017 | | As of December 31, 2019 |
| | | 5 Business Days | | 5 Business Days |
| Cumulative uses of funds | | | | |
| Interest payable | | $ | 11,127 |
| | $ | 16,118 |
|
| Maturing liabilities | | 4,549,180 |
| | 22,000 |
|
| Committed asset settlements | | 10,390 |
| | 429,757 |
|
| Drawdown of standby letters of credit | | 152,846 |
| | 223,831 |
|
| Other | | 449 |
| |
| Gross uses of funds | | 4,723,992 |
| | 691,706 |
|
| | | | | |
| Cumulative sources of funds | | | | |
| Interest receivable | | 48,767 |
| | 53,857 |
|
| Maturing or amortizing advances | | 4,238,047 |
| | 3,978,461 |
|
| Committed liability settlements | | 37,531 |
| | 498,729 |
|
| Other | | | 9,371 |
|
| Gross sources of funds | | 4,324,345 |
| | 4,540,418 |
|
| | | | | |
| Plus: sources of contingency liquidity | | | | |
| Marketable securities | | 1,750,431 |
| | 926,079 |
|
| Self-liquidating assets | | 7,449,000 |
| | 4,360,000 |
|
| Cash and due from banks and interest bearing deposits | | 261,609 |
| | 1,321,996 |
|
| Marketable securities available for repo | | 4,170,189 |
| | 3,926,516 |
|
| Total sources of contingency liquidity | | 13,631,229 |
| | 10,534,591 |
|
| | | | | |
| Net contingency liquidity | | $ | 13,231,582 |
| | $ | 14,383,303 |
|
AdditionalBase Case Liquidity Requirements.Requirement. TheOn August 27, 2018, the FHFA requiresissued new 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 maintain, in the aggregate, qualifying assets free from any lien or pledge in an amount at least equalprovide advances and letters of credit for members for a specified time without access to the amountcapital markets or other unsecured funding sources. The Liquidity Guidance AB, which outlines a phased-in compliance approach, rescinded the 2009 liquidity guidance issued by the FHFA. Contemporaneously with the issuance of our participation in total COs outstanding.
In addition, certainthe Liquidity Guidance AB, the FHFA guidance requires us to maintain sufficient liquidity through short-term investments in an amount at least equal to our anticipated cash outflows under two different scenarios. issued a supervisory letter that identifies initial thresholds for measures of liquidity.
The first scenario assumesLiquidity 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, the Liquidity Guidance AB provides guidance related to asset/liability maturity funding gap limits.
With respect to base case liquidity, the FHFA revised previous guidance that we cannot borrow funds fromrequired the FHLBanks to assume a 5-day period without access to capital markets for a periodand rollover of between 10 to 20 days, with initial guidance set at 15 business days, and that during that time we do not renew any maturing, prepaid, and put or called advances.
The second scenario assumes that we cannot raise funds in the capital markets for a period of between three to seven days, with initial guidance set at five business days, and that during that period we will renew maturing and called advances for all members except very large, highly rated members.members due to a change in certain assumptions underlying that guidance. Under the Liquidity Guidance AB, FHLBanks are required to hold positive cash flow while rolling over maturing advances to all members and assuming no access to capital markets for an increased period of between 10 and 30 calendar days, with a specific measurement period set forth in the 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 1 percent and 20 percent of its outstanding standby letters of credit commitments, as specified in the supervisory letter.
We were in compliance with these additional liquidity requirements at all times during the year endedDecember 31, 2017.
We are focused on maintaining a liquidity and funding balance between our financial assets and financial liabilities. The FHLBanks work collectively to manage the System-wide liquidity and funding management, and the FHLBanks jointly monitor the System’s collective risk arising out of an inability to fully access the capital markets to fund our obligations. In managing and monitoring the amounts of assets that require refunding, we consider contractual maturities of our financial assets, as well as certain assumptions regarding expected cash flows (i.e. estimated prepayments and scheduled amortizations) and other factors in our discretion.2019.
Balance Sheet Funding Gap Policy. TheWe 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 due to the fact that over certain time horizons, it has more liabilities than assets maturing. To adequately fund assets the maturing liabilities must be replaced by new liabilities, which may occur at higher cost, putting spread margin at risk. In order to manage the Bank’s refinancing risk, we maintain an appropriate funding balance between financial assets and financial liabilities and 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 and call activity. We measure this difference, or gap, as a percentage of total assets under two alternative formats. One funding gap format effectively assumes that all floating rate advances indexed todifferent measurement horizons - three months and one year. In conformity with the discount note auction rate that both mature beyond the three-month or one-year time horizon and are prepayable without fees on coupon reset dates mature within the three-month or one-year time horizon; this assumption results in an adjustment that reduces the funding gap measurement. (Such advances are not subject to margin compression because the costprovisions of the refinanced debt definesLiquidity Guidance AB, the reset rate on the advance coupon.) The other funding gap format includes no such adjustment. The Bank has instituted a limit and management action trigger framework around these metrics as follows:
Table 38 - Funding Gap Metric
|
| | | | | | | | | | |
Funding Gap Metric (1) | | Limit | | Management Action Trigger | | Three-Month Average
December 31, 2019 | | Three-Month Average
December 31, 2018 |
| 3-month Funding Gap | | 15% | | 13% | | 10.8 | % | | 10.6 | % |
| 1-year Funding Gap | | 30% | | 25% | | 12.2 | % | | 12.9 | % |
Table 40 - Funding Gap Metric
|
| | | | | | | |
Funding Gap Metric (1) | | Limit | | Management Action Trigger | | Actual as of December 31, 2017 |
| 3-month Funding Gap | | | | | | |
| No Adjustment for Floating Rate Advances Indexed to Discount Note Auction | | 35% | | 25% | | 8.7 | % |
| Floating Rate Advances Indexed to Discount Note Auction assumed to have less than three-month maturity | | 20% | | 10% | | 0.6 | % |
| | | | | | | |
| 1-year Funding Gap | | | | | | |
| No Adjustment for Floating Rate Advances Indexed to Discount Note Auction | | 35% | | 25% | | 10.9 | % |
| Floating Rate Advances Indexed to Discount Note Auction assumed to have less than one-year maturity | | 20% | | 10% | | 3.9 | % |
_______________________
| |
| (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. |
Funding Concentration Policy. In an effort to limit the liquidity risk potentially associated with a high volume of short-term debt refinancing, effective March 24, 2017, we adopted a funding concentration policy that limits the volume of discount notes outstanding as a proportion of total assets. The policy establishes a management action trigger when discount notes (excluding the amount of discount notes matched to short-term advances) exceed 40 percent of total assets. In addition, we have adopted a separate management action trigger that is triggered when total discount notes exceed 50 percent of assets. Finally, discount notes are limited to no more than 65 percent of total assets.
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 our principal and interest payments under adue with respect to any CO bywithin deadlines established in the agreement, the other FHLBanks will be obligated to fund any shortfall to the extent that any of the other FHLBanks has a net positive settlement balance (that is, the amount by which end-of-day proceeds received by such FHLBank from the sale of COs on that day exceeds payments by such FHLBank on COs on the same day) in its account with the Office of Finance on the day the shortfall occurs. We would then be required to repay the funding FHLBanks. We have never drawn funding under this agreement.
Debt Financing — Consolidated Obligations
Our primary source of liquidity is through CO issuances. At December 31, 2017,2019, and December 31, 2016,2018, outstanding COs for which we are primarily liable, including both CO bonds and CO discount notes, totaled $56.1$51.6 billion and $57.2$59.0 billion,, respectively. CO bonds are generally issued with either fixed-rate coupon-payment terms or variable-rate coupon-payment terms that use a variety of indices for interest-rate resets. Some of the fixed-rate bonds that we have issued are callable bonds
that may be redeemed at par on one or more dates prior to their maturity date. In addition, to meet our needs and the needs of certain investors in COs, fixed- and variable-rate bonds may also contain certain provisions that may result in complex coupon-payment terms and call or amortization features. When such COs (structured bonds) are issued, we enter into interest-rate-exchange agreements containing offsetting features, which effectively change the characteristics of the bond to those of a simple variable-rate bond.
The Office of Finance has established a methodology for the allocation of the proceeds from the issuance of COs when COs cannot be issued in sufficient amounts to satisfy all FHLBank demand for funding during periods of financial distress and when its existing allocation processes are deemed insufficient. See Part 1 — Item 1 —Business— Business — Consolidated Obligations for additional information on the methodology.
In general, this methodology provides that the proceeds in such circumstances will be allocated among the FHLBanks based on relative FHLBank total regulatory capital, with FHLBanks with greater total regulatory capital in absolute terms receiving greater allocations of issuance proceeds. The Office of Finance will use this method in such periods unless it determines that there is an overwhelming reason to adopt a different allocation method. As is the case during any instance of a disruption in our ability to access the capital markets, market conditions or this allocation could adversely impact our ability to finance our operations, which could adversely impact our financial condition and results of operations.
December 31, 20162018. CO bonds outstanding for which we are primarily liable at December 31, 20172019, and December 31, 20162018, include issued callable bonds totaling $4.42.9 billion and $4.7$5.5 billion, respectively.
CO discount notes are also a significant funding source for us. CO discount notes are short-term instruments with maturities ranging from overnight to one year. We use CO discount notes primarily to fund short-term advances and investments, and longer-term advances and investments with short repricing intervals. CO discount notes comprised 49.453.7 percent and 52.556.1 percent of the outstanding COs for which we are primarily liable at December 31, 20172019, and December 31, 20162018, respectively, but accounted for 94.193.0 percent and 89.995.1 percent of the proceeds from the issuance of such COs during the years ended December 31, 20172019 and 20162018, respectively.
Table 41 - Short-Term Borrowings (dollars in thousands)
| |
Table 39 - Short-Term Borrowings (dollars in thousands)
| | Table 39 - Short-Term Borrowings (dollars in thousands)
|
| | | | CO Discount Notes | | CO Bonds with Original Maturities of One Year or Less | | CO Discount Notes | | CO Bonds with Original Maturities of One Year or Less |
| | | For the Years Ended December 31, | | For the Years Ended December 31, | | For the Years Ended December 31, | | For the Years Ended December 31, |
| | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Outstanding par amount at end of the period | | $ | 27,752,860 |
| | $ | 30,070,103 |
| | $ | 28,487,577 |
| | $ | 3,212,640 |
| | $ | 447,000 |
| | $ | 4,068,050 |
| | $ | 27,733,146 |
| | $ | 33,147,065 |
| | $ | 27,752,860 |
| | $ | 2,705,500 |
| | $ | 3,020,150 |
| | $ | 3,212,640 |
|
| Weighted-average rate at the end of the period | | 1.25 | % | | 0.47 | % | | 0.24 | % | | 1.30 | % | | 0.71 | % | | 0.36 | % | | 1.59 | % | | 2.37 | % | | 1.25 | % | | 1.84 | % | | 2.35 | % | | 1.30 | % |
| Daily-average par amount outstanding for the period | | $ | 26,489,602 |
| | $ | 26,979,622 |
| | $ | 25,243,798 |
| | $ | 2,126,941 |
| | $ | 3,944,741 |
| | $ | 2,784,146 |
| | $ | 25,489,068 |
| | $ | 30,078,903 |
| | $ | 26,489,602 |
| | $ | 3,233,222 |
| | $ | 3,152,989 |
| | $ | 2,126,941 |
|
| Weighted-average rate for the period | | 0.88 | % | | 0.35 | % | | 0.11 | % | | 1.18 | % | | 0.52 | % | | 0.26 | % | | 2.24 | % | | 1.87 | % | | 0.88 | % | | 2.10 | % | | 1.94 | % | | 1.18 | % |
| Highest par amount outstanding at any month-end | | $ | 30,417,341 |
| | $ | 30,495,259 |
| | $ | 28,487,577 |
| | $ | 3,212,640 |
| | $ | 6,758,300 |
| | $ | 4,072,050 |
| | $ | 33,147,065 |
| | $ | 33,501,223 |
| | $ | 30,417,341 |
| | $ | 3,779,300 |
| | $ | 3,760,990 |
| | $ | 3,212,640 |
|
Although we are primarily liable for our portion of COs, that is, those issued on our behalf, we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on COs issued by all of the FHLBanks. The par amounts of the FHLBanks' outstanding COs were $1.0 trillion and $989.3 billion at both December 31, 20172019 and 20162018, respectively. COs are backed only by the combined financial resources of the FHLBanks. We have never repaid the principal or interest on any COs on behalf of another FHLBank.
We have evaluated the financial condition of the other FHLBanks based on known regulatory actions, publicly-available financial information, and individual long-term credit rating downgrades as of each period presented. Based on this evaluation,
as of December 31, 20172019, and through the filing of this report, we do not believe it is likely that we will be required to repay the principal or interest on any CO on behalf of another FHLBank.
Market Conditions for Consolidated Obligations
Overall, we have experienced relatively low COcontinued to experience steady demand for COs among investors and our issuance costs during the period covered by this report were consistent with those of recent years, reflecting continued high demand for all tenors of COs with the strongest demand for short-term COs. We participated in the FHLBank System’s first SOFR-indexed CO in November 2018, and we have continued to participate in SOFR-indexed CO issuances throughout 2019 as our funding needs required. We have been able to issue debt in the amounts and structures required to meet our funding and risk-management needs. We note that capacity among our CO underwriters has been occasionally somewhat constrained as a result of the imposition of higher capital requirements on many of our underwriters. So far, this development has not impeded our ability to meet our funding needs. Throughout 2017,2019, COs were issued at yields that were generally at or below equivalent-maturity U.S. dollar LIBOR interest rate swap yields for debt maturing in less than fivetwo years, while longer-term issues bore funding costs that were typically higher than equivalent maturity LIBOR swap yields. During the period covered by this report,2019, CO yields continued generally movedto move downward with U.S. dollar interest rate swaps and comparable U.S. Treasury yields, though minor spread fluctuations occurred between these series. We believe that the market’s reaction to recent and expected changes in FOMC monetary policies, including recent intervention through two reductions totaling 1.50 percent to the decision to reduce the Federal Reserve’s holdingstarget federal funds rate between March 3 and March 15, 2020, an increase in daily repurchase agreement offerings, announced purchases of U.S. Treasury obligationssecurities and MBS,U.S. Agency mortgage-backed securities, and the establishment of the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Money Market Mutual Fund Liquidity Facility, is a potentially an important factor that could continue to shape investor demand for debt, including COs, in 2018.COs. Moreover, expectedpotential increases in U.S. Treasury security issuance in response to thehigher fiscal policy implications of the Tax Cut and Jobs Act of 2017deficits 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 December 31, 2017,2019, was $3.3$3.1 billion compared with $3.2$3.6 billion at year-end 2016.2018.
Capital stock decreased by $127.6$659.7 million during the year ended December 31, 2017,2019, resulting from capital stock repurchases of $1.2$2.5 billion offset by the issuance of $1.1$1.9 billion of capital stock to support new advances borrowings by members.
Table 42 - Capital Stock Outstanding by Institution Type (dollars in thousands)
| |
Table 40 - Capital Stock Outstanding by Institution Type (dollars in thousands)
| | Table 40 - Capital Stock Outstanding by Institution Type (dollars in thousands)
|
| | | | December 31, 2017 | | December 31, 2019 |
| Commercial banks | | | $ | 733,130 |
|
| Savings institutions | | $ | 913,054 |
| | 650,877 |
|
| Commercial banks | | 845,063 |
| |
| Insurance companies | | | 247,306 |
|
| Credit unions | | 281,037 |
| | 237,437 |
|
| Insurance companies | | 244,414 |
| |
| Community development financial institutions | | 153 |
| | 380 |
|
| Total GAAP capital stock | | 2,283,721 |
| | 1,869,130 |
|
| Mandatorily redeemable capital stock | | 35,923 |
| | 5,806 |
|
| Total regulatory capital stock | | $ | 2,319,644 |
| | $ | 1,874,936 |
|
Capital Rule
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. An FHLBank is adequately capitalized if it has sufficient permanent and total capital to meet or exceed its risk-based and minimum capital requirements. FHLBanks that
are adequately capitalized have no corrective action requirements. FHLBanks that are not adequately capitalized must submit capital restoration plans, are subject to corrective action requirements and are prohibited from paying dividends, redeeming or repurchasing excess stock, and are subject to certain asset growth restrictions. The FHFA may place critically undercapitalized FHLBanks into conservatorship or receivership.
The Director of the FHFA has discretion to add to or modify the corrective action requirements for each capital classification other than adequately capitalized if the Director of the FHFA determines that such action is necessary to ensure the safe and sound operation of the FHLBank and the FHLBank's compliance with its risk-based and minimum capital requirements.
If we became classified into a capital classification other than adequately capitalized, we could be adversely impacted by the corrective action requirements for that capital classification.
The Capital Rule requires the Director of the FHFA to determine on no less than a quarterly basis the capital classification of each FHLBank. By letter dated December 11, 2017,March 19, 2020, the Director of the FHFA notified us that, based on September 30, 2017December 31, 2019 financial information, we met the definition of adequately capitalized under the Capital Rule. We have not yet received our capital classification based on our December 31, 2017 financial information.
Internal Capital Practices and Policies
We also take steps as we believe prudent beyond legal or regulatory requirements in an effort to protect our capital, reflected in our targeted capital ratio operating range, internal minimum capital requirement in excess of regulatory requirements, minimum retained earnings target, and limitations on dividends.
Targeted Capital Ratio Operating Range
We target an operating capital ratio range as required by FHFA regulations. Currently, this range is set at 4.0 percent to 7.5 percent. Our capital ratio was 6.0 percent at December 31, 2017.2019.
Internal Minimum Capital Requirement in Excess of Regulatory Requirements
To provide further 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 four4 percent of our total assets plus an amount we measure as our risk exposure with 99 percent confidence using our economic capital model (together, our internal minimum capital requirement). As of December 31, 2017,2019, this internal minimum capital requirement equaled $3.0$2.8 billion, which was satisfied by our actual regulatory capital of $3.6$3.3 billion.
Reduction of Membership and Activity-Based Stock Investment RequirementRequirements
At the close of business on May 31, 2017, we reduced the activity-based stock investment requirement (ABSIR)ABSIR for advances with original maturities of more than three months from 4.5 percent to 4.0 percent. Effective January 16, 2019, the MSIR was reduced from 0.35 percent to 0.20 percent of the value of certain member assets eligible to secure advances, subject to a minimum balance of $10,000 and a maximum balance of $10.0 million. We reduced both our ABSIR and MSIR in an effort to gain efficiency in our capital structure, as we currently exceed internal and regulatory minimum capital requirements.
Minimum Retained Earnings Target
At December 31, 2017,2019, we had total retained earnings of $1.3$1.5 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.
Our methodology for determining retained earnings adequacy and selection of the minimum retained earnings target incorporates an assessment of the various risks that could adversely impact retained earnings if trigger stress-scenario conditions were to occur. Principal elements are market risk and credit risk. Market risk is represented through the Bank's established limitmanagement action trigger for Value at Risk (VaR) market-risk measurement, which estimates the 99th percentile worst case of potential changes in our market value of equity due to potential shifts in yield curves and volatility surfaces applicable to our assets, liabilities, and off-balance-sheet transactions. Credit risk is represented through incorporation of valuation deterioration due but not limited to actual and potential adverse ratings migrations for our assets and actual and potential defaults.
Our minimum retained earnings target could be superseded by FHFA mandates, either in the form of an order specific to us or by promulgation of new regulations requiring a level of retained earnings that is different from our current target. Moreover, we may, at any time, change our methodology or assumptions for modeling our minimum retained earnings target and will do so
when prudential or other reasons warrant such a change. Either of these events could result in us increasing our minimum retained earnings target and, in turn, reducing or eliminating dividends, as necessary.
Repurchases of Excess Stock
Table 43 - Capital Stock Requirements and Excess Capital Stock (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| | Membership Stock Investment Requirement | | Activity-Based Stock Investment Requirement | | Total Stock Investment Requirement (1) | | Outstanding Class B Capital Stock (2) | | Excess Class B Capital Stock |
| December 31, 2017 | $ | 705,924 |
| | $ | 1,502,996 |
| | $ | 2,208,942 |
| | $ | 2,319,644 |
| | $ | 110,702 |
|
| December 31, 2016 | 670,301 |
| | 1,695,397 |
| | 2,365,720 |
| | 2,443,993 |
| | 78,273 |
|
Table 41 - Capital Stock Requirements and Excess Capital Stock (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| | Membership Stock Investment Requirement | | Activity-Based Stock Investment Requirement | | Total Stock Investment Requirement (1) | | Outstanding Class B Capital Stock (2) | | Excess Class B Capital Stock |
| December 31, 2019 | $ | 406,397 |
| | $ | 1,388,804 |
| | $ | 1,795,223 |
| | $ | 1,874,936 |
| | $ | 79,713 |
|
| December 31, 2018 | 755,723 |
| | 1,716,251 |
| | 2,471,996 |
| | 2,560,722 |
| | 88,726 |
|
_______________________
| |
| (1) | TSIRTotal stock investment requirement is rounded up to the nearest $100 on an individual member basis. |
| |
(2) | Class B capital stock outstanding includes mandatorily redeemable capital stock. |
On April 3, 2017, we conducted a partial repurchase of excess capital stock under the Excess Stock Management Program. This excess stock repurchase transaction was initiated in response to the decline in advances that we experienced during the quarter ending March 31, 2017.
In May 2017, we announced that we would replace our system of making periodic repurchases of excess capital stock when aggregate excess stock balances exceeded $200 million. We began daily repurchases of excess stock asAs discussed under Part I — Item 1 — Business — Capital Resources — Repurchase of Excess Stock. We, we currently repurchaseconduct daily repurchases of excess stock held by any shareholder whose excess stock exceeds the lesser of $10.0 million or 10 percent of the shareholder’s total stock investment requirement, subject to a minimum repurchase of $100,000. Excess stockWe plan to continue with this practice, subject to regulatory requirements and our anticipated capital needs, although continued repurchases for the year ended December 31, 2017 amounted to $1.2 billion.remain at our sole discretion.
Restricted Retained Earnings and the Joint Capital Agreement
At December 31, 2017, our total retained earnings included $267.3 million in restricted retained earnings. Our capital plan and the Joint Capital Agreement require us to allocate a certain percentage of quarterly net income to a restricted retained earnings account, which we refer to as restricted retained earnings. The Joint Capital Agreement, the terms of which are reflected in the capital plans of the 11 FHLBanks, is a voluntary capital initiativecontractual agreement among the FHLBanks, intended to build greater safety and soundness in the FHLBank System. Generally, the agreement requires each FHLBank to allocate a certain amount, generally not less than 20 percent of each of its quarterly net income (net of that FHLBank's obligation to its AHP) and adjustments to prior net income, to a restricted retained earnings account until the total amount in that account is equal to one1 percent of the daily average carrying value of that FHLBank's outstanding total COs (excluding fair-value adjustments) for the calendar quarter (total required contribution). The FHLBanks commenced this obligation with their results at September 30, 2011. The percentage of the required allocation is subject to adjustment when an FHLBank has had an adjustment to a prior calendar quarter's net income. At December 31, 20172019, our total required contribution to the restricted retained earnings account was $548.9502.4 million compared with our total contribution on that date of $267.3348.8 million. The agreement refers to the period of required contributions to the restricted retained earnings account as the “dividend restriction period.” Additionally, the agreement provides:provides that:
that amounts held in an FHLBank's unrestricted retained earnings account may not be transferred into the restricted retained earnings account;
during the dividend restriction period, an FHLBank shall redeem or repurchase capital stock only at par value, and shall only conduct such redemption or repurchase if it would not result in the FHLBank's total regulatory capital falling below its aggregate paid in amount of capital stock;
that any quarterly net losses will be netted against the FHLBank's other quarters' net income during the same calendar year so that the minimum required annual allocation into the FHLBank's restricted retained earnings account is satisfied;
if the FHLBank sustains a net loss for a calendar year, the net loss will be applied to reduce the FHLBank's retained earnings that are not in the FHLBank's restricted retained earnings account to zero prior to application of such net loss to reduce any balance in the FHLBank's restricted retained earnings account;
if the FHLBank incurs net losses for a cumulative year-to-date period resulting in a decline to the balance of its restricted retained earnings account, the FHLBank's required allocation percentage will increase from 20 percent to 50 percent of quarterly net income until its restricted retained earnings account balance is restored to an amount equal to the regular required allocation (net of the amount of the decline);
if the balance in the FHLBank's restricted retained earnings account exceeds 150 percent of its total required contribution to the account, the FHLBank may release such excess from the account;
in the event of the liquidation of the FHLBank, or the taking of the FHLBank's retained earnings by future federal action, such event will not affect the rights of the FHLBank's Class B stockholders under the FHLBank Act in the FHLBank's retained earnings, including those held in the restricted retained earnings account;
for the restriction on the payment of dividends from amounts in the restricted retained earnings account be restricted for at least one year following the termination of the Joint Capital Agreement; and
for
certain procedural mechanisms be followed for determining when an automatic termination event has occurred.
The agreement will terminate upon an affirmative vote of two-thirds of the boards of directors of the then existing FHLBanks, or automatically if a change in the FHLBank Act, FHFA regulations, or other applicable law has the effect of:
creating any new or higher assessment or taxation on the net income or capital of any FHLBank;
requiring the FHLBanks to retain a higher level of restricted retained earnings than what is required under the agreement; or
establishing general restrictions on dividend payments requiring a new or higher mandatory allocation of an FHLBank's net income to any retained earnings account than the amount specified in the agreement, or prohibiting dividend payments from any portion of an FHLBank's retained earnings not held in the restricted retained earnings account.
Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations
Our significant off-balance-sheet arrangements consist of the following:
commitments that obligate us for additional advances;
| |
| • | standby letters of credit; |
| |
| • | commitments for unused lines-of-credit advances; and |
Table 44 - Contractual Obligations (dollars in thousands)
| |
Table 42 - Contractual Obligations (dollars in thousands)
| | Table 42 - Contractual Obligations (dollars in thousands)
|
| | | | As of December 31, 2017 | | As of December 31, 2019 |
| | | Payment Due By Period | | Payment Due By Period |
| Contractual Obligations | | Total | | Less than one year | | One to three years | | Three to five years | | More than five years | | Total | | Less than one year | | One to three years | | Three to five years | | More than five years |
Consolidated obligation bonds(1) | | $ | 28,325,150 |
| | $ | 12,186,510 |
| | $ | 8,416,710 |
| | $ | 4,332,235 |
| | $ | 3,389,695 |
| | $ | 23,804,805 |
| | $ | 9,455,725 |
| | $ | 8,597,880 |
| | $ | 2,530,995 |
| | $ | 3,220,205 |
|
Estimated interest payments on long-term debt(2) | | 1,850,383 |
| | 427,786 |
| | 528,727 |
| | 307,003 |
| | 586,867 |
| | 2,097,086 |
| | 537,363 |
| | 540,879 |
| | 298,944 |
| | 719,900 |
|
| Capital lease obligations | | 104 |
| | 41 |
| | 63 |
| | — |
| | — |
| | 569 |
| | 159 |
| | 273 |
| | 137 |
| | — |
|
| Operating lease obligations | | 15,978 |
| | 2,666 |
| | 5,367 |
| | 5,382 |
| | 2,563 |
| | 10,630 |
| | 2,685 |
| | 5,382 |
| | 2,563 |
| | — |
|
| Mandatorily redeemable capital stock | | 35,923 |
| | 4,438 |
| | 27,433 |
| | 4,022 |
| | 30 |
| | 5,806 |
| | 5,663 |
| | 93 |
| | 40 |
| | 10 |
|
| Commitments to invest in mortgage loans | | 42,918 |
| | 42,918 |
| | — |
| | — |
| | — |
| | 49,911 |
| | 49,911 |
| | — |
| | — |
| | — |
|
| Pension and post-retirement contributions | | 23,076 |
| | 2,089 |
| | 7,894 |
| | 4,014 |
| | 9,079 |
| | 27,260 |
| | 6,829 |
| | 4,399 |
| | 6,596 |
| | 9,436 |
|
| Total contractual obligations | | $ | 30,293,532 |
| | $ | 12,666,448 |
| | $ | 8,986,194 |
| | $ | 4,652,656 |
| | $ | 3,988,234 |
| | $ | 25,996,067 |
| | $ | 10,058,335 |
| | $ | 9,148,906 |
| | $ | 2,839,275 |
| | $ | 3,949,551 |
|
_______________________
| |
| (1) | Includes CO bonds outstanding at December 31, 20172019, at par value, based on the contractual maturity date of the CO bonds. No effect for call dates on callable CO bonds has been considered in determining these amounts. |
| |
| (2) | Includes estimated interest payments for CO bonds. For floating-rate CO bonds, the forward interest-rate curve of the underlying index as of December 31, 20172019, has been used to estimate future interest payments. No effect for call dates on callable CO bonds has been considered in determining these amounts. |
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, liabilities, income and liabilities,expense. To understand the disclosureBank's financial position and results of contingent assets and liabilities (if applicable),operations, it is important to understand the Bank's most significant accounting policies and the reported amounts of income and expenses during the reported periods. Althoughextent to which management believes these judgments,uses judgment, estimates and assumptions to be reasonably accurate, actual results may differ.
We have identified threein applying those policies. The Bank's critical accounting estimates that we believe areinvolve the following:
Derivatives and Hedging Activities;
Estimation of Fair Values; and
Amortization of Premiums and Accretion of Discounts Associated with Prepayable MBS
Management considers these policies to be critical because they require us to make subjective orand complex judgments about matters that are inherently uncertain,uncertain. Management bases its judgment and because ofestimates on current market conditions and industry practices, historical experience, changes in the likelihoodbusiness environment and other factors that it believes to be reasonable under the circumstances. Actual results could differ materially different amounts would be reportedfrom these estimates under different conditions assumptions and/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.conditions. The Audit Committee of our board of directors has reviewed these estimates.
Derivatives are requiredand Hedging Activities
Overview. The Bank enters into interest rate swap, cap, and floor agreements to be carried at fair value onmanage its exposure to changes in interest rates. Through the statementuse of condition. Any change inthese derivatives, the fair valueBank may adjust the effective maturity, repricing index and/or frequency or option characteristics of a derivative is requiredfinancial instruments to be recorded each period in current period earnings or other comprehensive income, depending on the type of hedge transaction.achieve our risk management objectives. All of our derivatives are either 1) derivative contracts structured to offset some or all of the risk exposure inherent in our member-lending, investment, and funding activities, 2) inherent to another activity, such as forward commitments to purchase mortgage loans under the MPF program, or 3) embedded in a host financial instrument, such as an advance or an investment security.
All derivatives are required to be carried on the statement of condition at fair value. Changes in the fair value of all derivatives, excluding those designated as cash-flow hedges, are recorded each period in current earnings, while changes in the fair value of derivatives that are designated and qualify as cash-flow hedges are recorded in accumulated other comprehensive loss (AOCI) until earnings are affected by the variability of the cash flows of the hedged transaction. We are required to recognize unrealized gains and losses on derivative positions whether or not the transaction qualifies for hedge accounting. The judgments and assumptions that are most critical to the application of this accounting policy are those affecting whether a hedging relationship qualifies for hedge accounting under the requirements of GAAP and the estimation of fair values (discussed below), which have a significant impact on the actual results being reported.
Fair-value hedge accounting. If the transaction is designated and qualifies for fair-value hedge accounting, offsetting losses or gains on derivative positions, regardless of whether offsetting gains or losses on the associatedhedged assets or liabilities being hedged are permitted tomay also be recognized each period in a symmetrical manner.current earnings. Therefore, to the extent certain derivative instruments do not qualify for fair-value hedge accounting, or changes in the fair values of derivatives are not exactly offset by changes in fair values of their hedged items, the accounting framework imposed can introduceintroduces the potential for a considerable income variability. Specifically, a mismatch can exist between the timing of income and expense recognition fromfor assets orand liabilities being hedged and the income effects of derivatives positioned to mitigate market-risk and cash-flow variability. Therefore,their associated hedging instruments. As a result, during periods of significant changes in market prices and interest rates, and other market factors, our reported earnings may exhibit considerable variability. We generally employ hedging techniques that are effective under
At inception of each fair-value hedge transaction, the hedge-accounting requirements. However, not all of our hedging relationships meetBank formally documents the hedge-accounting requirements. In some cases, we have elected to retain or enter into derivatives that are economically effective at reducinghedge relationship and its risk but do not meetmanagement objective and strategy for undertaking the hedge-accounting requirements, either because the costhedge, including identification of the hedge was economically superior to nonderivative hedging alternatives or because no nonderivativeinstrument, the hedged item, the nature of the risk being hedged, and how the hedging alternative was available, and available derivatives did not meet hedge accounting requirements. As required by FHFA regulation and our policy, derivatives that do not qualify as hedging instruments pursuant to GAAP may be used only if we document a nonspeculative purpose.
A hedging relationship is created frominstrument's effectiveness in offsetting the designation of a derivative financial instrument as either hedging our exposure to changes in the hedged item's fair value ofattributable to the hedged risk will be assessed. In all cases involving a recognized asset, liability or unrecognized firm commitment, orthe designated risk being hedged is the risk of changes in future variable cash flowsits fair value attributable to a recognized assetchanges in the designated benchmark interest rate, which we have designated as either LIBOR or liability or forecasted transaction. Fair-valueOIS rate based on the federal funds effective rate at the inception of each hedge accounting allowsrelationship. Therefore, for the offsettingthis purpose, changes in the fair value of the hedged riskitem (e.g., advance, investment security, or consolidated obligation) reflect only those changes in the hedged item to also be recorded in current period earnings.
The short-cut method can be used when the assumption can be madevalue that the change in fair value of a hedged item, dueare attributable to changes in the designated benchmark interest rate exactly offsets(hereinafter referred to as "changes in the benchmark fair value").
For hedging relationships that are designated as fair-value hedges and qualify for hedge accounting, the change in the benchmark fair value of the hedged item is recorded in earnings, thereby providing some offset to the change in fair value of the relatedassociated derivative. In many hedging relationships that use the short-cut method, we may designate the hedging relationship upon our commitment to disburse an advance or trade a CO provided that the period of time between the trade date and the settlement date of the hedged item is within established market-settlement conventions for the advances and CO markets. We define these market-settlement conventions to be five business days or less for advances and 30 calendar days or less, using a next business day convention, for COs. In such circumstances, although the advance or CO will not be recognizedThe difference in the financial statements until settlement date, the hedge relationship qualifies for applying the short-cut method. We then record changeschange in the fair value of the derivative and hedgedthe change in the benchmark fair value of the hedge item beginning on the trade date.
Beginning in November 2014, we discontinued the userepresents "hedge ineffectiveness." The majority of short-cutour hedge accounting for new hedge relationships entered into after that date. Short-cut hedge relationships entered into prior to that date will continue as short-cut hedge relationships until they mature or are terminated.
Hedge relationships not treated as short-cut accounting are treated as a long-haul fair-value hedge relationships, where the change in the benchmark fair value of the hedged item attributable to changes in the benchmark interest rate must be measured separately from the derivative and effectiveness testing must be performed with results falling within established tolerances. Ifchange in fair value of the hedge fails its effectiveness test, the hedge no longer qualifies for hedge accounting and the derivative is marked through current-period earnings without any offset related to the hedged item.derivative.
For derivative transactions that potentiallyto qualify for long-haul fair-value hedge-accounting treatment, management must assess how effective the derivatives have been, and are expected to be, in hedging changes in the estimated fair values of the hedged items attributable to the risks being hedged. Hedge-effectivenesshedge effectiveness testing is performed at the inception of theeach hedging relationship to determine whether the hedge is expected to be highly effective in offsetting the identified risk, and on an ongoing basis. at each month-end thereafter to ensure that the hedge relationship has been effective historically and to determine whether the hedge is expected to be highly effective in the future.
We perform testing at hedge inception based on regression analysis of the hypothetical performance of the hedge relationship using historical market data. We then perform regression testing on an ongoing basiseach month thereafter using accumulated actual values in conjunction with hypothetical values. Specifically, eachEach month we use a consistently applied statistical methodology that uses a sample of at least 31 historical interest-rate environments and includes an R-square test, a slope test, and an F-statistic test. These tests measure the degree of correlation of movements in estimated fair values between the derivative and the related hedged item. For the hedging relationship to be considered effective, the R-square must be greater than 0.8, the slope must be between -0.8 and -1.25, and the computed F-statistic test significance must be less than 0.05.
We useIf a hedge fails the overnight-index swap (OIS) curve for valuationeffectiveness test at inception, we do not apply hedge accounting. If the hedge fails the effectiveness test during the life of our interest-rate derivatives in which the recipienttransaction, we discontinue hedge accounting prospectively. In that case, the Bank continues to carry the derivative on its statement of collateral maintainscondition at fair value, recognizes the right to rehypothecate pledged collateral, while LIBOR is used as the discount rate for interest-rate derivatives in which the recipient of collateral has no right to rehypothecate pledged collateral. Additionally, we use the OIS curve as the discount rate for derivatives cleared through a DCO.
We use the LIBOR swap curve to discount cash flows on all associated hedged assets or liabilities in fair-value hedging relationships where the hedged risk is changes in fair value attributableof that derivative in current earnings, ceases to adjust the hedged item for changes in its benchmark fair value and amortizes the designated benchmark interest rate, LIBOR. For any suchcumulative basis adjustment of the formerly hedged item into earnings over its remaining term. Unless and until the derivative is redesignated in a qualifying fair value hedging relationship wherefor accounting purposes, changes in its fair value are recorded in current earnings without an offsetting change in the valuationbenchmark fair value from a hedged item.
Economic hedges. We generally employ hedging techniques that qualify for and are effective under GAAP hedge-accounting requirements. However, not all of our hedging relationships meet these requirements. In some cases, we have elected to retain or enter into derivatives that are economically effective at reducing risk but do not meet the hedge-accounting requirements, either because the cost of the derivative transaction is based on the OIS curve, there could be an increase in hedge ineffectiveness that in turn could result in the loss ofwas economically superior to nonderivative hedging alternatives or because no nonderivative hedging alternative was available, and available derivatives did not meet hedge accounting for certain hedge relationships. Loss of hedge accounting for those hedge relationships would leadrequirements. As required by FHFA regulation and our policy, derivatives that do not qualify as hedging instruments pursuant to increased net income volatility, which couldGAAP may be material. However, through December 31, 2017, no hedge relationships failed our hedge effectiveness criteria asused only if we document a result of using the OIS curve as the discount rate for the derivative and the LIBOR swap curve as the discount rate for the hedged item.nonspeculative purpose.
The fair values of the derivatives and hedged items do not have any cumulative economic effect if the derivative and the hedged item are held to maturity, or mutual optional termination at par. Since these fair values fluctuate throughout the hedge period and eventually return to par value on the maturity date, the effect of fair values is normally only a timing issue.
For derivatives and hedged items that meet the requirements described above, we do not anticipate any significant impact on our financial condition or operating performance. For derivatives where no identified hedged item qualifies for hedge accounting, changes in the marketfair value of the derivative are reflected in current earnings. As of December 31, 20172019, we held derivatives that are marked to market with no offsetting qualifying hedged item including $1.2$2.9 billion notional of interest-rate swaps with a fair value of $(2.6)$(31.0) million that are economically hedging $677.3 million of advances and $42.9$2.2 billion of trading securities, and $49.9 million notional of mortgage-delivery commitments with a fair value of
$142,000. $227 thousand. The following table shows the estimated changes in the fair value of the interest-rate swaps under alternative parallel interest-rate shifts:shifts (for example the same change to interest rates on short-, intermediate-, and long-term fixed income maturities):
Table 45 - Estimated Change in Fair Value of Undesignated Derivatives (dollars in thousands)
| |
Table 43 - Estimated Change in Fair Value of Undesignated Derivatives (dollars in thousands)
| | Table 43 - Estimated Change in Fair Value of Undesignated Derivatives (dollars in thousands)
|
| | | | | | As of December 31, 2017 | | | | | | | | As of December 31, 2019 | | | | |
| | | -150 basis points | | -100 basis points | | -50 basis points | | +50 basis points | | +100 basis points | | +150 basis points | | -200 basis points | | -150 basis points | | -100 basis points | | -50 basis points | | +50 basis points | | +100 basis points | | +150 basis points | | +200 basis points |
| Change from base case | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-rate swaps | | $ | (37,342 | ) | | $ | (20,906 | ) | | $ | (8,114 | ) | | $ | 4,620 |
| | $ | 7,442 |
| | $ | 9,620 |
| | $ | (94,517 | ) | | $ | (70,649 | ) | | $ | (46,644 | ) | | $ | (22,966 | ) | | $ | 21,507 |
| | $ | 41,098 |
| | $ | 58,732 |
| | $ | 74,527 |
|
These derivatives economically hedge certain advances and investment securities, and CO bonds.securities. Although these economic hedges do not qualify or were not designated for hedge accounting, they are an acceptable hedging strategy under our risk-management program. Our projections of changes in fair value of the derivatives have been consistent with actual experience.
Fair-Value EstimatesEstimation of Fair Values
Overview. We measure certainCertain assets and liabilities, including investment securities classified as available-for-sale or trading, as well as all derivatives, and mandatorily redeemable capital stockare presented in the Statements of Condition at fair value on a recurring basis.value. Additionally, certain held-to-maturity securities are measured at fair value on a nonrecurring basis due to the recognition of other-than-temporary impairment. Management also estimates the fair value of some of the collateral that borrowers pledge against advance borrowings to confirm that collateral is sufficient to meet regulatory requirements and to protect against losses. Fair value is defined under GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or
liability. GAAP establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The fair values of the Bank's assets and liabilities that are carried at fair value are estimated based on quoted market prices when available. However, some of these instruments lack an available trading market characterized by frequent transactions between a willing buyer and willing seller engaging in an exchange transaction (for example, derivatives). In these cases, such values are generally estimated using a valuation model and inputs that are observable for the asset or liability, either directly or indirectly. The assumptions and inputs used have a significant effect on the reported carrying values of assets and liabilities and the related income and expense. The use of different assumptions or inputs could result in materially different net income and reported carrying values.
Valuation of Derivatives and Hedged Items. For purposes of estimating the fair value of derivatives and items for which we are hedging the changes in fair value attributable to changes in the designated benchmark interest rate,fair value, we employ a valuation model that uses market data from the Eurodollar futures, cash LIBOR, U.S. Treasury obligations, federal funds rates, overnight indexed swap rates, and the U.S. dollar interest-rate-swap markets to construct discount and forward-yield curves using standard financial market techniques.
As discussed under — Accounting for Derivatives,For the valuation of derivatives, we use OIS curve is usedbased on the federal funds effective rate as the discount rate for valuationthe majority of our unclearedinterest-rate derivatives in which the recipient of collateral maintains the right to rehypothecate pledged collateral, and for all derivatives cleared through a DCO, while LIBOR continues to beis used as the appropriate discount rate for uncleareda small portion of our interest-rate derivatives in which the recipient of collateral has no right to rehypothecate pledged collateral. Additionally, we use OIS based on the federal funds effective rate as the discount rate for derivatives cleared through a DCO. For derivatives, we compare the fair values obtained from our valuation model to clearinghouse valuations (in the case of cleared derivatives) and non-binding dealer estimates (in the case of bilateral derivatives), and may also compare derivative fair values to those of similar instruments, to ensure such fair values are reasonable.
TheFor the valuation adjustments for ourof hedged itemsassets or liabilities in whichfair-value hedging relationships where the designated hedged risk is the risk of changes in fair value attributable to changes in the benchmark interestfair value, we use either LIBOR or OIS based on the federal funds effective rate (LIBOR-based)as the discount rate, depending on which interest-rate index was designated as the benchmark rate at inception of the hedge relationship. These valuations are calculated using the same valuation model that calculates the fair values of the associated hedging derivatives. This valuation model is subject to an external validation approximately every three years. In those years when an external validation is not performed, the valuation model is subject to an internal model validation review. We periodically review and refine, as appropriate, the assumptions and valuation methodologies to reflect market indications as closely as possible.
Depending upon the spreads between LIBOR and OIS rates, the use of the OIS curve to value our interest-rate exchange agreements and the LIBOR swap curve (plus or minus a constant spread) to derive the benchmark fair values of our hedged items can result in increased fair-value hedge ineffectiveness. In addition, while not likely, this valuation methodology has the potential to lead to the loss of hedge accounting for some of these hedging relationships. Either of these outcomes could result in increased earnings volatility, which could potentially be material. However, through December 31, 2019, no hedge relationships failed our hedge effectiveness criteria as a result of using the OIS curve as the discount rate for the derivative and the LIBOR swap curve as the discount rate for the hedged item.
Valuation of Investment Securities. To value our holdings of investment securities, other than HFA floating-rate securities, we obtain prices from three designated third-party pricing vendors when available. The pricing vendors use various proprietary models to price these securities. The inputs to those models are derived from various sources including, but not limited to, benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market-related data. Because many securities do not trade on a daily basis, the pricing vendors use available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all security valuations, which facilitates resolution of potentially erroneous prices identified by the Bank. Recently, we conducted reviews of the three pricing vendors to reconfirm our understanding of the vendors' pricing processes, methodologies and control procedures and were satisfied that those processes, methodologies and control procedures were adequate and appropriate.
As of December 31, 20172019, threemultiple vendor prices were received for substantially all of our investment securities and the final prices for substantially all of those securities were computed by averaging the threethose prices. We have conducted reviews of the three pricing vendors to confirm and further augment our understanding of the vendors' pricing processes, methodologies, and control procedures. To the extent available, we also reviewed the vendors' independent auditors' reports regarding the internal controls over their valuation processes. Based on our review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or,
(or, in those instances in which there were outliers or significant yield variances, our additional analyses), we believe the final prices used are reasonably likely to be exit prices and further that the fair-value measurements are classified appropriately in the fair-value hierarchy.
Deferred Premium/DiscountAmortization of Premiums and Accretion of Discounts Associated with Prepayable Mortgage-Backed SecuritiesMBS
When we purchase MBS, we often pay an amount that is different from the unpaid principal balance. The difference between the purchase price and the contractual note amount is a premium if the purchase price is higher, and a discount if the purchase price is lower. Accounting guidance permits us to incorporate estimates of prepayments when we amortize (or accrete) these premiums (or discounts) in a manner such that the yield recognized on the underlying asset is constant over the asset's estimated life.
We typically pay more than the unpaid principal balances when the interest rates on the purchased mortgages are greater than prevailing market rates for similar mortgages on the transaction date. The net purchase premiums paid are then amortized using the constant-effective-yield method over the expected lives of the mortgages as a reduction in their book yields (that is, interest income). Similarly, if we pay less than the unpaid principal balances due to interest rates on the purchased mortgages being lower than prevailing market rates on similar mortgages on the transaction date, the net discount is accreted in the same manner as the premiums, resulting in an increase in the mortgages' book yields. The constant-effective-yield amortization method is applied using expected cash flows that incorporate prepayment projections that are based on mathematical models that describe the likely rate of consumer refinancing activity in response to incentives created (or removed) by changes in interest rates.rates as well as other factors. While changes in interest rates have the greatest effect on the extent to which mortgages may prepay, in general prepayment behavior can also be affected by factors not contingent on interest rates.
We estimate prepayment speeds on each individual security using the most recent three months of historical constant prepayment rates, as available, or may subscribe to third-party data services that provide prepayment estimates ofused to calculate cash flows, from which we determine expected asset lives. The constant-effective-yield method uses actual historical prepayments received and projected future prepayment speeds, as well as scheduled principal payments, to determine the amount of premium/discount that should be recognized so that the book yield of each MBS is constant for each month until maturity.
In general, lower prevailing interest rates are expected to result in the acceleration of premium and discount amortization and accretion, compared with the effect of higher prevailing interest rates that would tend to decelerate the amortization and accretion of premiums and discounts. Exact trends will depend on the relationship between market interest rates and coupon rates on outstanding mortgage assets, the historical evolution of mortgage interest rates, the age of the mortgage loans, demographic and population trends, and other market factors. Changes in amortization will also be impacted by differences between projected prepayments and actual experience. Prepayment projections are inherently subject to uncertainty because it is difficult to accurately predict future market conditions and the response of borrowing consumers in terms of refinancing activity to future market conditions even if the market conditions were known. However, actual prepayment speeds observed in these rate environments can be influenced by factors such as home price trends and lender credit underwriting standards.
If we determine that an other-than-temporary impairment exists, we account for the investment security as if it had been purchased on the measurement date of the other-than-temporary impairment at an amortized cost basis equal to the previous amortized cost basis reduced by the other-than-temporary impairment recognized in income. The difference between the new amortized cost basis and the cash flows expected to be collected is amortized or accreted into interest income prospectively over the remaining life of the investment security based on the amount and timing of future estimated cash flows.
Upon subsequent evaluation of a debt security where there is no additional other-than-temporary impairment, we adjust the accretable yield on a prospective basis if there is a significant increase in the security's expected cash flows. The new accretable yield is used to calculate the amount to be recognized into income over the remaining life of the security so as to match the amount and timing of future cash flows expected to be collected. The estimated cash flows and accretable yield are re-evaluated on a quarterly basis.
The effect on interest income from the amortization and accretion of premiums and discounts on MBS, including MBS in both the held-to-maturity and available-for-sale portfolios and including accretion associated with a significant increase in a security's expected cash flows, for the years ended December 31, 20172019, 2016,2018, and 2015,2017, was a net (decrease) increase to income of $10.9$(6.1) million, $15.5$23.0 million, and $19.5$10.9 million, respectively.
RECENT ACCOUNTING DEVELOPMENTS
LEGISLATIVE AND REGULATORY DEVELOPMENTS
MinorityWe summarize certain significant regulatory actions and Women Inclusion.developments for the period covered by this report and January of 2020 below.
Advisory Bulletin 2020-01 Federal Home Loan Bank Risk Management of AMA. On January 31, 2020, the FHFA released guidance on risk management of acquired member assets. The guidance communicates the FHFA’s final rule amendingexpectations with respect to an FHLBank’s funding of its Minoritymembers through the purchase of eligible mortgage loans and Women Inclusion regulationsincludes expectations that an FHLBank will have board-established limits on AMA portfolios and management-established thresholds to clarifyserve as monitoring tools to manage AMA-related risk exposure. The guidance provides that the scopeboard of the FHLBanks’ obligation to promote diversity andan FHLBank should ensure inclusion was published on July 25, 2017, and became effective on August 24, 2017. The final rule updates the existing FHFA regulations aimed at promoting diversity and the inclusion and participation of minorities, women, and individuals with disabilities, and the businesses they own (MWDOB) in all FHLBank business and activities, including management, employment, customer outreach and access, MWDOB participation in financial transactions withthat the FHLBank and contracting. The final rule:
requires each FHLBank to develop stand-alone diversity and inclusion strategic plans or incorporate diversity and inclusion into its existing strategic planning processes and adopt strategies for promoting diversity and ensuring inclusion;
encourages each FHLBank to expand contracting opportunities for minorities, women, and individuals with disabilities through subcontracting arrangements;
requires each FHLBank to develop policies that address reasonable accommodations for employees to observe their religious beliefs;
requires each FHLBank to amend its policies on equal opportunity in employment by adding sexual orientation, gender identity, and statusserves as a parentliquidity source for members, and an FHLBank should ensure that its portfolio limits do not result in the FHLBank’s acquisition of mortgages from smaller members being “crowded out” by the acquisition of mortgages from larger members. The advisory bulletin contains the expectation that the board of an FHLBank should set limits on the size and growth of portfolios and on acquisitions from a single participating financial institution. In addition, the guidance provides that the board of an FHLBank should consider concentration risk in the areas of geographic area, high-balance loans, and in third-party loan originations.
We continue to evaluate the listpotential impact of protected classifications;
requires each FHLBank to report data regarding the number of diverse individualsthis advisory bulletin but currently in supervisory or managerial positions and its strategies for promoting the diversity of supervisors and managers;
requires each FHLBank to provide information in its annual reports to the FHFA about its efforts to advance diversity and inclusion through financial transactions, identification of ways in which it might be able to improve MWDOB business with the FHLBank by enhancing customer access by MWDOB businesses, including through its affordable housing and community investment programs and strategies for promoting the diversity of supervisors and managers; and
requires each FHLBank to classify and provide additional data in its annual reports about the number of and amounts paid under its contracts with MWDOB.
We do not expect this final ruleit to materially affect our financial condition or results of operations, but anticipate that it may result in increased compliance costs and substantially increase the amount of data tracking, monitoring, and reporting that will be required of us.operations.
FHLBank Capital Requirements.FHFA Proposed Amendments to Stress Test Rule. On July 3, 2017,December 16, 2019, the FHFA published a proposed rule amending its stress testing rule, consistent with section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (EGRRCPA), to adopt,(i) raise the minimum threshold to conduct periodic stress tests for entities regulated by the FHFA from those with consolidated assets of more than $10 billion to those with consolidated assets of more than $250 billion; (ii) remove the requirements for FHLBanks to conduct stress tests; and (iii) remove the adverse scenario from the list of required scenarios. The proposed rule maintains the FHFA’s discretion to require that an FHLBank with total consolidated assets below the $250 billion threshold conduct stress testing. The proposed amendments align the FHFA’s stress testing rules with rules adopted by other financial institution regulators that implement the Dodd-Frank Wall Street Reform and Consumer Protection Act stress testing requirements, as amended by the EGRRCPA.
The results of our most recent annual severely adverse economic conditions stress test were published to our public website, www.fhlbboston.com, on November 15, 2019. If the rule is adopted as proposed, it will eliminate these stress testing requirements for FHLBanks, unless the FHFA exercises its discretion to require stress testing in the future. We do not expect this rule, if adopted as proposed, to have a material effect on our financial condition or results of operations.
FDIC Brokered Deposits Restrictions. On December 12, 2019, the FDIC issued a proposed rule to amend its brokered deposits restrictions that apply to less than well capitalized insured depository institutions. The FDIC states that the proposed amendments are intended to modernize its brokered deposit regulations and would establish a new framework for analyzing whether deposits placed through deposit placement arrangements qualify as brokered deposits. These deposit placement arrangements include those between insured depository institutions and third parties, such as financial technology companies, for a variety of business purposes, including access to deposits. By creating a new framework for analyzing certain provisions of the “deposit broker” definition, including shortening the list of activities considered “facilitating” and expanding the scope of the “primary purpose” exception, the proposed rule would narrow the definition of “deposit broker” and exclude more deposits from treatment as “brokered deposits.” The proposed rule would also establish an application and reporting process with respect to the primary purpose exception.
If this rule is adopted as proposed, we do not expect it to materially affect our financial condition or results of operations. However, if adopted as proposed, the rule could affect the demand for certain of our advance products, but the extent of the impact is uncertain.
FHFA Supervisory Letter - Planning for LIBOR Phase-Out.On September 27, 2019, the FHFA issued the Supervisory Letter to the FHLBanks that the FHFA stated is designed to ensure the FHLBanks will be able to identify and prudently manage the risks associated with the termination of LIBOR in a safe and sound manner. The Supervisory Letter provides that the FHLBanks should, by March 31, 2020, cease entering into new LIBOR referenced financial assets, liabilities, and derivatives with
maturities beyond December 31, 2021 for all product types except investments. With respect to investments, the FHLBanks must, by December 31, 2019, stop purchasing investments that reference LIBOR and mature after December 31, 2021. These phase-out dates do not apply to collateral accepted by the FHLBanks. The Supervisory Letter also directs the FHLBanks to update their pledged collateral certification reporting requirements by March 31, 2020 in an effort to encourage members to distinguish LIBOR-linked collateral maturing after December 31, 2021. The FHLBanks are expected to cease entering into LIBOR-indexed financial instruments maturing after December 31, 2021 by the deadlines specified in the Supervisory Letter, subject to limited exceptions granted by the FHFA under the Supervisory Letter for LIBOR-linked products serving compelling mission, risk mitigating, and/or hedging purposes that do not currently have readily available alternatives.
On March 16, 2020, in light of market volatility, the FHFA extended to June 30, 2020 the FHLBanks’ ability to enter into LIBOR-based instruments that mature after December 31, 2021, except for investments and option embedded products.
Prior to the issuance of the Supervisory Letter, we had suspended entering into LIBOR-indexed derivatives that terminate after December 31, 2021. We had ceased purchasing investments that reference LIBOR and mature after December 31, 2021 prior to the issuance of the letter, also. Finally, early in 2019, we limited the maturities of certain advances that are linked to LIBOR to December 31, 2021. See Financial Condition — Transition from LIBOR to Alternative Reference Rates for additional information. We do not expect the Supervisory Letter to have a material impact on our financial condition or results of operations.
FHFA Advisory Bulletin 2019-03 - Capital Stock Management. On August 14, 2019, the FHFA issued an advisory bulletin (the AB) providing for each FHLBank to maintain a ratio of at least 2 percent of capital stock to total assets in order to help preserve the cooperative structure incentives that encourage members to remain fully engaged in the oversight of their investment in the Bank. In February 2020, the FHFA began to consider the proportion of capital stock to assets, measured on a daily average basis at month end, when assessing each FHLBank’s capital management practices.
We do not expect the AB to have a material impact on our capital management practices, financial condition, and/or results of operations.
SEC Final Rule on Auditor Independence with Respect to Certain Loans or Debtor-Creditor Relationships. On July 5, 2019, the SEC published a final rule, which became effective on October 3, 2019 (the SEC Final Rule), that adopts amendments to its auditor independence rules to modify the analysis that must be conducted to determine whether an auditor is independent when the auditor has a lending relationship with certain shareholders of an audit client at any time during an audit or professional engagement period. The SEC Final Rule, among other things, focuses the analysis on beneficial ownership rather than on both record and beneficial ownership; replaces the existing 10 percent bright-line shareholder ownership test with a “significant influence” test; and adds a “known through reasonable inquiry” standard with respect to identifying beneficial owners of the audit client’s equity securities.
Under the prior loan rule on debtor-creditor relationships, the independence of an accounting firm generally could be called into question if it or a covered person in the accounting firm received a loan from a lender that is a “record or beneficial owner of more than ten percent of the audit client’s equity securities.” A covered person in the firm includes personnel on the audit engagement team, personnel in the chain of command, partners and managers who provide ten or more hours of non-audit services to the audit client, and partners in the office where the lead engagement partner practices in connection with the client. The SEC Final Rule replaced the existing ten percent bright-line test with a significant influence test similar to that referenced in other SEC rules and based on concepts applied in the Financial Accounting Standards Board ASC Topic 323.
Under the SEC Final Rule, which is now in effect, with certain exceptions, the receipt of loans from the beneficial owners of an audit client’s equity securities where such beneficial owner has significant influence over the audit client would impair the independence of the auditor. The analysis under the SEC Final Rule would be based on the facts and circumstances and would focus on whether the beneficial owners of an audit client’s equity securities have the ability to exercise significant influence over the operating and financial policies of an audit client.
We expect the SEC Final Rule to resolve the matters we discussed in Item 9B — Other Information in the 2018 Annual Report on Form 10-K.
Final Rule on FHLBank Capital Requirements. On February 20, 2019, the FHFA published a final rule, effective January 1, 2020, that adopted, with amendments, the regulations of the Federal Housing Finance Board (predecessor to the FHFA) (the Finance Board) pertaining to the capital requirements for the FHLBanks. The proposedfinal rule would carrycarries over most of the existingprior Finance Board regulations without material change but would substantively reviserevises the credit risk component of the risk-based capital requirement, as well as the limitations on extensions of unsecured credit. The main revisions would remove requirements that the FHLBankswe calculate credit risk capital charges and unsecured credit limits based on ratings issued by a NRSRO. The proposed rule would,an NRSRO, and instead require that the FHLBanks
we establish theirand use our own internal rating methodology to be used in place of the(which may include, but not solely rely on, NRSRO ratings.ratings). The proposedrule imposes a new credit risk capital charge for cleared derivatives. The final rule also would reviserevises the percentages used in the regulation’s tables to calculate credit risk capital charges for advances collateralized mortgage obligations, commercial mortgage-backed securities, and derivatives.for non-mortgage assets. The proposedfinal rule would impose a new credit risk capital charge for cleared derivatives. The FHFA proposes to retain, foralso rescinds certain contingency liquidity requirements that were part of the Finance Board regulations, as these requirements are now the percentages usedaddressed in the tables to calculate capital charges for mortgage-related assets, and to address the methodology for residential mortgage assets at a later date. While a March 2009 regulatory directive pertaining to certain liquidity matters would remain in place,an Advisory Bulletin on FHLB Liquidity Guidance issued by the FHFA also proposes to rescind certain minimum regulatory liquidity requirements for the FHLBanks and address these liquidity requirements in a separate rulemaking or guidance.
We submitted a joint comment letter with the other FHLBanks on August 31, 2017.2018. We do not expect this rule to materially affect our financial condition or results of operations.
FDIC Final Rule on Reciprocal Deposits. On February 4, 2019, the FDIC published a final rule, effective March 6, 2019, related to the treatment of “reciprocal deposits,” which implements Section 202 of the EGRRCPA. The final rule exempts, for certain insured depository institutions (depositories), certain reciprocal deposits (deposits acquired by a depository from a network of participating depositories that enables depositors to receive FDIC insurance coverage for the entire amount of their deposits) from being subject to FDIC restrictions on brokered deposits. Under the rule, well-capitalized and well-rated depositories are not required to treat reciprocal deposits as brokered deposits up to the lesser of twenty percent of their total liabilities or $5 billion. Reciprocal deposits held by depositories that are not well-capitalized and well-rated may also be excluded from brokered deposit treatment in certain circumstances.
We do not expect the rule to materially affect our financial condition or results of operations. The rule could, however, enhance depositories’ liquidity by increasing the attractiveness of deposits that exceed FDIC insurance limits. This could affect the demand for certain advance products.
In 2019 and January of 2020, certain developments applicable to swaps occurred:
Uncertainty Regarding Brexit. In June 2016, the United Kingdom (the UK) voted in favor of leaving the European Union (the EU), and in March 2017, Article 50 of the Lisbon Treaty was invoked, commencing a period of negotiations between the UK and the European Council for the UK’s withdrawal from the EU, which was subsequently extended by the European Council members in agreement with the UK. On January 31, 2020, the UK withdrew from the EU under the European Union (Withdrawal Agreement) Act 2020, with a transition period to last until December 31, 2020, which period may be extended for an additional two years. During this transition period, the UK and the EU will negotiate the details of their future relationship, including what conditions will apply to EU-based entities that want to do business with the UK, and vice versa, after the transition period.
From time to time we may have exposure to UK-based and EU-based counterparties, and we have a UK-based derivatives clearing organization for our cleared derivatives. At this time, it is not possible to predict the date on which the transition period will end or whether any agreement reached between the UK and the EU will have a material adverse effect on the financial instruments we have with these counterparties or on our derivatives cleared in the UK, but we do not expect these matters to have a material adverse impact on our financial condition or results of operations.
CFTC No-action Relief for LIBOR Amendments. On December 17, 2019, three divisions of the U.S. Commodity Futures Trading Commission (the CFTC) issued no-action letters with respect to the transition away from LIBOR and other interbank offered rates (IBORs). Among other forms of relief, the letters, subject to certain limitations:
(i) permit registered swap dealers, major swap participants, security-based swap participants, and major security-based swap participants (covered swap entities) to amend an uncleared swap entered into before the compliance date of the CFTC’s uncleared swap margin requirements (such swap, a legacy swap, and such requirements, the CFTC margin rules) to include LIBOR or other IBOR fallbacks without the legacy swap becoming subject to the CFTC margin rules; and
(ii) provide time-limited relief, until December 31, 2021, for (a) swaps that are not subject to the central clearing requirement because they were executed prior to the relevant compliance date and (b) swaps that are subject to the trade execution requirement to be amended to include LIBOR or other IBOR fallbacks without becoming subject to such clearing or trade execution requirements.
We believe this relief may assist in the market’s and the Bank’s transition away from LIBOR.
Margin and Capital Requirements for Covered Swap Entities. On November 7, 2019, the Office of the Comptroller of the Currency, the Federal Reserve Board, the FDIC, the Farm Credit Administration and the FHFA (collectively, the Agencies) jointly published a proposed rule that would amend the Agencies’ regulations that established minimum margin and capital requirements for uncleared swaps (the prudential margin rules) for covered swap entities under the jurisdiction of one of the Agencies. In addition to other changes, the proposed amendments would permit those uncleared swaps entered into by a covered swap entity before the compliance date of the prudential margin rules to retain their legacy status and not
become subject to the prudential margin rules in the event that such legacy swaps are amended to replace LIBOR or another rate that is reasonably expected to be discontinued or is reasonably determined to have lost its relevance as a reliable benchmark due to a significant impairment. Among other things, the proposed rule would also amend the prudential margin rules to (i) extend the phase-in compliance date of the covered swap entities for initial margin requirements from September 1, 2020 to September 1, 2021 for counterparties with an average daily aggregate notional amount (AANA) of non-cleared swaps between $8 billion and $50 billion, (ii) clarify that a covered swap entity does not have to execute initial margin trading documentation with a counterparty prior to the time that the counterparty is required to collect or post initial margin, and (iii) permit legacy swaps to retain their legacy status and not become subject to the prudential margin rules in the event that they are amended due to certain life-cycle activities, such as reductions of notional amounts or portfolio compression exercises. We do not expect the proposed amendments, if adopted as proposed, to materially affect our financial condition or results of operations. Additionally, to date, the FHFA has not yet formally proposed new liquidity requirements; however, to the extent that new regulations or guidance increase our liquidity requirements in the future, our business activities and operations could be adversely affected.
Information Security Management Advisory Bulletin.On October 24, 2019, the CFTC proposed an amendment to its CFTC margin rules, which among other changes, would similarly extend the phase-in compliance date for initial margin requirements from September 28, 2017,1, 2020 to September 1, 2021 for counterparties with an AANA of non-cleared swaps between $8 billion and $50 billion. On March 18, 2020, the FHFA issued Advisory Bulletin 2017-02, which supersedes previous guidance on an FHLBank’s information security program. The Advisory Bulletin describes three main componentsCFTC announced that it had finalized a one-year extension of an information security program and provides the expectation that each FHLBank will useinitial margin compliance deadline for market participants with the smallest uncleared swaps portfolios, with a risk-based approach to implement its information security program. The Advisory Bulletin contains expectations related to (i) governance, including guidance related to roles and responsibilities, risk assessments, industry standards, and cyber-insurance; (ii) engineering and architecture, including guidance on network security, software security, and security of endpoints; and (iii) operations, including guidance on continuous monitoring, vulnerability management, baseline configuration, asset life cycle, awareness and training, incident response and recovery, user access management, data classification and protection, oversight of third parties, and threat intelligence sharing.
new compliance date in September 2021. We do not expect this advisory bulletinchange to materially affect our financial condition or results of operations.
Other Significant Developments
FRB, FDIC and OCC Final RulesCFTC Advisory on Mandatory Contractual Stay Requirements for Qualified Financial Contracts (QFCs).Initial Margin Documentation Requirements. On September 12, 2017,July 9, 2019, the Federal Reserve Board (FRB) published a final rule, effective November 13, 2017, requiring certain global systemically important banking institutions (GSIBs) regulated byCFTC issued an advisory (the CFTC Advisory) on the FRB to amend their covered QFCs to limit a counterparty’s immediate termination or exercise of default rights under the QFCs in the event of bankruptcy or receivership of the GSIB or an affiliate of the GSIB. Covered QFCs include derivatives, repurchase agreements (known as repos) and reverse repos, and securities lending and borrowing agreements. On September 27, 2017, and on November 29, 2017, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), respectively, adoptedCFTC margin rules substantively identical to the FRB rule, both effective January 1, 2018, with respect to QFCs entered into with certain FDIC-and OCC-supervised institutions.
Although we are not a covered entity under these rules, as a counterparty to covered entities under QFCs, we may be required to amend QFCs entered into with FRB-regulated GSIBs or applicable FDIC- or OCC-supervised institutions. These rules may impact our ability to terminate business relationships with covered entities and could adversely impact the amount we recover in the event of the bankruptcy or receivership of a covered entity. However, we do not expect these final rules to materially affect our financial condition or results of operations.
OCC, FRB, FDIC, Farm Credit Administration, and Finance Agency Proposed Rule on Margin and Capital Requirements for Covered Swap Entities. On February 21, 2018, OCC, FRB, FDIC, Farm Credit Administration, and FHFA published a joint proposed amendment to each agency’s final rule on Margin and Capital Requirements for Covered Swap Entities (Swap Margin Rules) to conform the definition of “eligible master netting agreement” in such rules to the FRB’s, OCC’s, and FDIC’s final QFC rules, and to clarify that a legacy swap willdocumentation governing the posting, collection, and custody of initial margin is not be deemedrequired to be completed until such time as the aggregate unmargined exposure to a counterparty (and its margin affiliates) exceeds an initial margin threshold of $50 million imposed by the regulation. The CFTC Advisory instructs CFTC covered swap underentities to closely monitor initial margin amounts if they are approaching the Swap Margin Rules if it$50 million initial margin threshold with a counterparty and to take appropriate steps to ensure that the required documentation is amended to conform toin place at such time as the QFC Rules.
Comments on the proposed rule are due by April 23, 2018.threshold is reached. We continue to evaluate the proposed rule, but we do not expect this rule, if adopted substantiallycurrently anticipate being subject to initial margin requirements as proposed, to materially affect our financial condition or results of operations.
LIBOR. On July 27, 2017, the United Kingdom’s Financial Conduct Authority (FCA), which regulates LIBOR, announced its intention to stop persuading or compelling the group of major banks that sustains LIBOR to submit rate quotations after 2021. Previously, the FRB had convened the Alternative Reference Rates Committee (ARRC) to identify a set of alternative reference interest rates for possible use as market benchmarks. In June 2017, the ARRC recommended an alternative reference rate, the Secured Overnight Financing Rate, and in December 2017, the FRB announced plans to begin publishing that rate and two other alternative rates beginning in the second quarter of 2018. Other financial services regulators and industry groups are evaluating the possible phase-out of LIBOR and the development of alternative interest rate indices or reference rates. As noted throughout this report, many of our assets and liabilities are indexed to LIBOR. At this time, it is not possible to predict whether LIBOR will cease to be available after 2021 or what the anticipated impact of these developments will be on our business, results of operations and financial condition. Because we routinely engage in transactions involving financial instruments that reference LIBOR, these developments could have a material impact on us. See Item 1A. Risk Factors — Changes to and replacement of the LIBOR benchmark interest rate could adversely affect our business, financial condition, and results of operations.September 1, 2020.
CREDIT RATING AGENCY DEVELOPMENTS
As of February 28, 2018,29, 2020, Moody’s long-and short-term credit ratings for us and the 10 other FHLBanks are Aaa and P-1, with a stable outlook.
As of February 28, 2018,29, 2020, S&P’s long- and short-term credit ratings for us and the 10 other FHLBanks are AA+ and A-1+, with a stable outlook.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Sources and Types of Market and Interest-Rate Risk
Market risk is the risk to earnings or shareholder value due to adverse movements in interest rates, market prices, or interest-rate spreads. Market risk arises in the normal course of business from our investment in mortgage assets, where risk cannot be eliminated; from the fact that assets and liabilities are priced in different markets; and from tactical decisions to, from time to time, assume some risk to generate income.
Our balance sheet is comprised of different portfolios that require different types of market- and interest-rate-risk management strategies. The majority of our balance sheet is comprised of assets that can be funded individually or collectively without imposing significant residual interest-rate risk on ourselves.
However, those assets with embedded options, particularly our mortgage-related assets, including the portfolio of whole loans acquired through the MPF program, our portfolio of MBS, and ABS, and our portfolio of bonds issued by HFAs, represent more complex cash-flow structures and contain more risk of prepayment and/or call options.
Further, unequal moves in the various different yield curves associated with our assets and liabilities create risks that changes in individual portfolio or instrument valuations, or changes in projected income, will not be equally offset by changes in valuations or projected income associated with individual portfolios or instruments on the opposite side of the balance sheet, even if the financial terms of the opposing financial portfolios or instruments are closely matched.
These risks cannot always be profitably managed with a strategy in which each asset is offset by a liability with a substantially identical cash-flow structure. Therefore, we generally view each portfolio as a whole and allocate funding and hedging to these portfolios based on an evaluation of the collective market and interest-rate risks posed by these portfolios. We measure the estimated impact to fair value of these portfolios as well as the potential for income to decline due to movements in interest rates, and make adjustments to the funding and hedge instruments assigned as necessary to keep the portfolios within established risk limits.
We also incur interest-rate risk in the investment of our capital stock and retained earnings in interest-earning assets. Traditionally we have sought to matchinvest our capital againstin liquid short-term money-market assets to maintain liquidity and to provide our members with a money-market-based return on capital that is responsive to changes in prevailing interest rates over time. While this capital investment strategy is comparatively risk-neutral in terms of our market risk, it exposes our interest income to the level and volatility of interest rates in the markets. As the FOMC sought to stimulate the U.S. economy during and after the prolonged economic recession through a low-rate accommodative policy, the net interest income realized on our investments was lower than could have been realized on alternative longer-term investments.
Types of Market and Interest-Rate Risk
Interest-rate and market risk can be divided into several categories, including repricing risk, yield-curve risk, basis risk, and options risk. Repricing risk refers to differences in the average sensitivities of asset and liability yields attributable to differences in the average timing of maturities and/or coupon rate resets between assets and liabilities. Differences in the timing of repricing of assets and liabilities can cause spreads between assets and liabilities to either increase or decline.
Yield-curve risk reflects the sensitivity of net income to changes in the shape or slope of the yield curve that could impact the performance of assets and liabilities differently, even though average sensitivities are the same.
When assets and liabilities are affected by yield changes in different markets, basis risk can result. For example, if we invest in LIBOR-based floating-rate assets and fund those assets with short-term discount notes, potential compression in the spread between LIBOR and discount-note rates could adversely impact our net income.
We also face options risk, particularly in our portfolio of advances, mortgage loans, MBS, and HFA securities. When a borrower prepays an advance, we could suffer lower future income if the principal portion of the prepaid advance is reinvested in lower-yielding assets that continue to be funded by higher-cost debt. For this reason, we are required by regulation to assess a prepayment fee that makes us financially indifferent to the prepayment, or in the case of callable advances, to charge an interest rate that is reflective of the value of the member's option to prepay the advance without a fee. However, in the mortgage loan, MBS, and HFA-bond portfolios, borrowers or issuers often have the right to repay their obligations prior to maturity without penalty, potentially requiring us to reinvest the returned principal at lower yields. If interest rates decline, borrowers may be able to refinance existing mortgage loans at lower interest rates, resulting in the prepayment of these existing mortgages and forcing us to reinvest the proceeds in lower-yielding assets. If interest rates rise, borrowers may avoid refinancing mortgage loans for periods longer than the average term of liabilities funding the mortgage loans, causing us to have to refinance the assets at higher cost. This right of redemption is effectively a call option that we have written to the obligor. Another less prominent form of options risk includes coupon-cap risk, which may be embedded into certain floating-rate MBS and limit the amount by which asset coupon rates may increase.
Strategies to Manage Market and Interest-Rate Risk
General
We use various strategies and techniques in an effort to manage our market and interest-rate risk. Principal among our tools for interest-rate-risk management is the issuance of debt that can be used to match interest-rate-risk exposures of our assets. For example, we can issue a CO with a maturity of five years to fund an investment with a five-year maturity. The debt may be noncallable until maturity or callable on and/or after a certain date.
COs may be issued to fund specific assets or to manage the overall exposurematch interest-rate-risk exposures of a portfolio or the balance sheet.our assets. At December 31, 20172019, fixed-rate noncallable debt, not hedged by interest-rate swaps, amounted to $15.5$13.4 billion, compared with $13.5$14.9 billion at December 31, 2016, and fixed-rate2018.
COs may also be issued with embedded call options to mitigate interest-rate risk of our debt. Fixed-rate callable debt not hedged by interest-rate swaps amounted to $1.2$1.6 billion and $667.0 million$2.1 billion at December 31, 20172019, and December 31, 20162018, respectively.
To achieve certain risk-management objectives, we also use interest-rate derivatives that alter the effective maturities, repricing frequencies, or option-related characteristics of financial instruments. These may include swaps, swaptions, caps, collars, and floors. For example, as an alternative to issuing a fixed-rate bond to fund a fixed-rate advance, we might enter into an interest-rate swap that receives a floating-rate coupon and pays a fixed-rate coupon, thereby effectively converting the fixed-rate advance to a floating-rate advance.
Advances may be issued together with interest-rate swaps that pay a coupon rate that offsets the advance coupon rate and any optionality embedded in the advance, thereby effectively creating a floating-rate asset. Total advances used in conjunction with interest-rate-exchange agreements, including both fair-value hedge relationships and economic hedge relationships, was $5.7 billion, or 16.6 percent of our total outstanding advances at December 31, 2019, compared with $6.1 billion, or 14.1 percent of total outstanding advances, at December 31, 2018.
Available-for-sale securities may be purchased together with interest-rate swaps that pay a coupon rate that offsets the security’s coupon rate, thereby effectively creating a floating-rate asset. Total available-for-sale securities used in conjunction with interest-rate-exchange agreements was $3.7 billion, or 52.4 percent of our total outstanding available-for-sale securities at December 31, 2019, compared with $611.9 million, or 10.7 percent of total outstanding available-for-sale securities, at December 31, 2018.
Because the interest-rate swaps and hedged assets and liabilities trade in different markets, they are subject to basis risk that is reflected in our VaRValue-at-Risk (VaR) calculations and fair-value disclosures, but that is not reflected in hedge ineffectiveness, because these interest-rate swaps are designed to only hedge changes in fair values of the hedged items that are attributable to changes in the benchmark LIBOR interest rate.fair value.
Advances
In addition to the general strategies described above, we use contractual provisions that require borrowers to pay us prepayment fees, which make us financially indifferent if the borrower prepays such advances prior to maturity. These provisions protect against a loss of income under certain interest-rate environments.
Prepayment-fee income can be used to offset the cost of purchasing and retiring high-cost debt to maintain our asset-liability sensitivity profile. In cases where derivatives are used to hedge prepaid advances, prepayment-fee income can be used to offset the cost of terminating the associated hedge.
Investments and Mortgage Loans
We hold certain long-term bonds issued by U.S. federal agencies, U.S. federal government corporations and instrumentalities, and supranational institutions as available-for-sale. To hedge the market and interest-rate risk associated with these assets, we may enter into interest-rate swaps with matching terms to those of the bonds to create synthetic floating-rate assets. At both December 31, 20172019, and December 31, 20162018, this portfolio of hedged investments had an amortized costa par value of $881.4 million and $900.4 million, respectively.$611.9 million.
We also manage the market and interest-rate risk in our MBS portfolio. For MBS classified as held-to-maturity, we use debt that matches the characteristics of the portfolio assets. For commercial MBS that are nonprepayable or prepayable for a fee for an initial period, we may use fixed-rate debt.
We also use For commercial MBS classified as available-for-sale and which are nonprepayable or prepayable for a fee during an initial lock-out period, we may enter into interest-rate swaps to manage the fair-value sensitivityfor a partial term of the portion of our MBS portfolio that is classified as trading securities as an economic offsetequal to or shorter than the duration and convexity risks arising from these assets.lock-out period of the hedged MBS to create synthetic floating-rate assets during the hedged period. At December 31, 2019, this portfolio of hedged MBS had a par value of $3.1 billion.
We manage the interest-rate and prepayment risk associated with mortgage loans through the issuance of both callable and noncallable debt to achieve cash-flow patterns and liability durations similar to those expected on the mortgage loans.
We mitigate our exposure to changes in interest rates by funding a portion of our mortgage portfolio with callable debt. When interest rates change, our option to redeem this debt offsets a large portion of the fair-value change driven by the mortgage-prepayment option. However, because this option is not fully hedged by the callable debt, the combined market value of our mortgage assets and debt will be affected by changes in interest rates.
Swapped Consolidated Obligation Debt
We may also issue bonds together with interest-rate swaps that receive a coupon rate that offsets the bond coupon rate and any optionality embedded in the bond, thereby effectively creating a floating-rate liability. We may employ this strategy to secure
long-term debt that meets funding needs versus relying on short-term CO discount notes. Total CO bond debt used in conjunction with interest-rate-exchange agreements was $6.2$3.3 billion, or 21.914.0 percent of our total outstanding CO bonds at December 31, 20172019, compared with $7.6$6.0 billion, or 28.123.2 percent of total outstanding CO bonds, at December 31, 20162018.
In addition, derivatives may be used to hedge the interest-rate risk of anticipated future CO debt issuance (at December 31, 2019, forward starting interest-rate swaps hedging the anticipated future issuance of CO debt was $17.0 million compared to $282.0 million at December 31, 2018).
Measurement of Market and Interest-Rate Risk and Related Policy Constraints
We measure our exposure to market and interest-rate risk using several techniques applied to the balance sheet and to certain portfolios within the balance sheet. Principal among these measurements as applied to the balance sheet is the potential future change in market value of equity (MVE) and interest income due to potential changes in interest rates, interest-rate volatility, spreads, and market prices. We also measure VaR, duration of equity, convexity,MVE sensitivity, and the other metrics discussed below.
We use certain quantitative systems to evaluate our risk position. These systems are capable of employing various interest-rate term-structure models and valuation techniques to determine the values and sensitivities of complex or option-embedded instruments such as mortgage loans; MBS; callable bonds and swaps; and adjustable-rate instruments with embedded caps and floors, among others. These models require the following:
specification of the contractual and behavioral features of each instrument;
determination and specification of appropriate market data, such as yield curves and implied volatilities;
utilization of appropriate term-structure and prepayment models to reasonably describe the potential evolution of interest rates over time and the expected behavior of financial instruments in response;
for option-free instruments, the expected cash flows are specified in accordance with the term structure of interest rates and discounted using spot rates derived from the same term structure; and
for option-embedded instruments, the models use standardized option pricing methodology to determine the likelihood of embedded options being exercised or not.
We use various measures of market and interest-rate risk, as set forth below in this section. Some measures have associated, prescriptive management action triggers or limits under our policies, as described below, but others do not.
Market Value of Equity Estimation and Market Risk Limit.Estimation. MVE is the net economic value of total assets and liabilities, including any off-balance-sheet items. In contrast to the GAAP-based shareholder's equity account, MVE represents the shareholder's equity account in present-value terms. Specifically, MVE equals the difference between the estimated market value of our assets and the estimated market value of our liabilities.
Market Value of Equity/Book Value of Equity Ratio. MVE, and in particular, the ratio of MVE to the book value of equity (BVE), is a measure of the current value of shareholder investment based on market rates, spreads, prices, and volatility at the reporting date. However, these valuations may not be fully representative of future realized prices. Valuations are based on market curves and prices of individual assets, liabilities, and derivatives, and therefore embed elements of option, credit, and liquidity risk which may not be representative of future net income to be earned from the spread between asset yields and funding costs. Further, MVE does not consider future new business activities, or income or expense derived from sources other than financial assets or liabilities.
For purposes of measuring this ratio, the BVE is equal to our permanent capital, which consists of the par value of capital stock including mandatorily redeemable capital stock, plus retained earnings.earnings, and accumulated other comprehensive loss. At December 31, 2017,2019, our MVE was $3.6$3.3 billion and our BVE was $3.2 billion, resulting in a ratio of MVE to BVE of 103 percent. At December 31, 2018, our MVE was $3.9 billion and our BVE was $3.6 billion. At December 31, 2016, our MVE was $3.6 billion, and our BVE was $3.7 billion. Ourresulting in a ratio of MVE to BVE was 100 percent at December 31, 2017, compared with 98 percent at December 31, 2016.of 107 percent.
Market Value of Equity/Par Stock Ratio. We also measure the ratio of our MVE to the par value of our Class B Stock, which we refer to as our MVE to par stock ratio. We have established an MVE to par stock ratio floor of 125 percent with an associated management action trigger of 130 percent, reflecting our intent to preserve the value of our members' capital investment. As of December 31, 2017,2019, and December 31, 2016,2018, that ratio was 156173 percent and 148152 percent, respectively.
Value at Risk. VaR measures the change in our MVE to a 99th percent confidence interval, based on a set of stress scenarios (VaR stress scenarios) using historical interest-rate and volatility movements that have been observed over six-month intervals starting at the most recent month-end and going back monthly to 1992.
Table 46The table below presents the historical simulation VaR estimate as of December 31, 20172019, and December 31, 20162018, and represents the estimates of potential reduction to our MVE from potential future changes in interest rates and other market
factors. Estimated potential market value loss exposures are expressed as a percentage of the current MVE and are based on the historical relative behavior of interest rates and other market factors over a 120-business-day6-month time horizon that is measured monthly beginning with the most current month-end and going back to 1992.
Table 46 - Value-at-Risk (dollars in millions)
| |
Table 44 - Value-at-Risk (dollars in millions)
| | Table 44 - Value-at-Risk (dollars in millions)
|
| | | | Value-at-Risk (Gain) Loss Exposure (1) | | Value-at-Risk (Gain) Loss Exposure (1) |
| | | December 31, 2017 | | December 31, 2016 | | December 31, 2019 | | December 31, 2018 |
| Confidence Level | | % of MVE (2) | | Amount | | % of MVE (2) | | Amount | | % of MVE (2) | | Amount | | % of MVE (2) | | Amount |
| 50% | | 0.17 | % | | $ | 6.1 |
| | (0.01 | )% | | $ | (0.4 | ) | | (0.13 | )% | | $ | (4.1 | ) | | 0.16 | % | | $ | 6.4 |
|
| 75% | | 1.13 |
| | 41.1 |
| | 0.51 |
| | 18.5 |
| | 0.30 |
| | 9.8 |
| | 1.08 |
| | 41.9 |
|
| 95% | | 3.51 |
| | 127.5 |
| | 1.87 |
| | 67.4 |
| | 1.47 |
| | 47.9 |
| | 3.25 |
| | 126.4 |
|
| 99% | | 4.69 |
| | 170.1 |
| | 3.29 |
| | 118.8 |
| | 6.38 |
| | 207.4 |
| | 4.81 |
| | 187.2 |
|
_______________________
| |
| (1) | To be consistent with FHFA guidance, we have excluded VaR stress scenarios prior to 1992 because market-risk stress conditions are effectively captured in those scenarios beginning in 1992 and therefore properly present our current VaR exposure. |
| |
| (2) | Loss exposure is expressed as a percentage of base MVE. |
The following table outlines our VaR exposure to the 99th percentile, consistent with FHFA regulations, over 2017for 2019 and 2016.2018.
Table 47 - Value-at-Risk 99th Percentile (dollars in millions)
| |
| Table 45 - Value-at-Risk 99th Percentile (dollars in millions)
| | Table 45 - Value-at-Risk 99th Percentile (dollars in millions)
|
|
| | | | | |
| | | 2017 | | 2016 | | 2019 | | 2018 |
| Year ending December 31 | | $ | 170.1 |
| | $ | 118.8 |
| | $ | 207.4 |
| | $ | 187.2 |
|
| Average month-end VaR for year ending December 31 | | 159.1 |
| | 105.6 |
| | 163.8 |
| | 229.3 |
|
| Maximum month-end VaR during the year ending December 31 | | 177.7 |
| | 127.7 |
| | 207.4 |
| | 257.9 |
|
| Minimum month-end VaR during the year ending December 31 | | 133.0 |
| | 80.8 |
| | 124.4 |
| | 187.2 |
|
Our risk-management policy requires thatestablishes a VaR not exceed $350.0 million with an associated management action trigger of $275.0$350.0 million. Should the limitmanagement action trigger be exceeded, the policy requires management to notify the board of directors' Risk Committee of such breach.any action taken or not taken and the rationale for such. We complied withdid not exceed our VaR limitmanagement action trigger at all timesany time during the yearyears ended December 31, 2017.2019 and December 31, 2018.
Duration of Equity. Another measure of risk that we use is duration of equity. Duration of equity is calculated as the estimated percentage change to MVE for a 100 basis point parallel rate shock. A positive duration of equity generally indicates an appreciation in shareholder value in times of falling rates and a depreciation in shareholder value for increasing rate environments. We have established a limit of +/- 4.0 years for duration of equity with an associated management action trigger of +/- 3.5 years based on a balanced consideration of market-value sensitivity and net interest-income sensitivity. Should the limit be exceeded, our policies require us to notify our board of directors' Risk Committee of such breach. We complied withdid not exceed our duration of equity limit at all timesany time during the yearyears ended December 31, 2017.2019 and December 31, 2018.
As of December 31, 20172019, our duration of equity was -0.46+1.08 years, compared with +1.67-0.32 years at December 31, 20162018.
Convexity Management Action Trigger and Limit.MVE Sensitivity. We measure MVE sensitivity (convexity) by using the percent change in MVE from base in an up or down 200 basis point parallel rate shock scenario and have established a management action trigger at a decline of 10 percent and a limit at a decline of 15 percent. Our policies require management to notify the board of director’s Risk Committee if the limit is breached. As noted in Table 4846 below, we were in compliance withbelow the limit at each of December 31, 2017,2019, and December 31, 2016.2018.
Duration Gap. We measure the duration gap of our assets and liabilities, including all related hedging transactions. Duration gap is the difference between the estimated durations (percentage change in market value for a 100 basis point parallel rate
shock) of assets and liabilities (including the effect of related hedges) and reflects the extent to which estimated sensitivities to market changes, including, but not limited to, maturity and repricing cash flows for assets and liabilities, are matched. Higher numbers, whether positive or negative, indicate greater sensitivity in the MVE in response to changing interest rates. A positive duration gap means that our total assets have an aggregate duration, or sensitivity to interest-rate changes, greater than our liabilities, and a negative duration gap means that our total assets have an aggregate duration shorter than our liabilities. Our duration gap was -0.33+0.74 months at December 31, 2017,2019, compared with +1.17-0.23 months at December 31, 2016.2018.
Income Simulation and Repricing Gaps. To provide an additional perspective on market and interest-rate risks, we have an income-simulation model that projects adjusted net income over the ensuing 12-month period using a range of potential interest-rate scenarios, including parallel interest-rate shocks, nonparallel interest-rate shocks, and nonlinear changes to our funding curve and LIBOR. The income simulation metric is based on projections of adjusted net income divided by regulatory capital. Regulatory capital is capital stock (including mandatorily redeemable capital stock) plus total retained earnings. Projections of adjusted net income exclude a) projected prepayment penalties; b) loss on early extinguishment of debt; and c) changes in fair values from hedging activities. Beginning in 2017,The changes in fair values of trading securities are included in the projections of adjusted net income. The simulations are solely based on simulated movements in the swap and the CO curve and do not reflect potential impacts of credit events, including, but not limited to, potential additional other-than-temporary impairment charges. Management has put in place escalation-actionmanagement action triggers whereby senior management is explicitly informed of instances where our projected base case return on regulatory capital (RORC) would fall below the average yield on three-month LIBOR over the followinga 12-month horizon in anya variety of the assumed interest-rate shock scenarios. The results of this analysis for December 31, 2017, and December 31, 2016,2019, showed that in the worst-case scenario,base case our return on regulatory capital falls to 141RORC was 261 basis points over three-month LIBOR, and 207in the worst case tested, our RORC fell 36 basis points respectively, above the average yield onto 225 basis points over three-month LIBOR in anthe up 300 basis point parallelscenario. For December 31, 2018, the results of this analysis showed that in the base case our RORC was 203 basis points over three-month LIBOR, and in the worst case tested, our RORC fell 117 basis points to 86 basis points over three-month LIBOR in the down 300 basis point scenario. In both 2019 and 2018, our RORC spread to three-month LIBOR remained positive in all projected interest rate shock scenario across all yield curves.scenarios that were modeled and subject to management action triggers.
Economic Capital Ratio Limit. We have established a limit of 4.0 percent for the ratio of the MVE to the market value of assets, referred to as the economic capital ratio. FHFA regulations require us to maintain a regulatory capital ratio of book value of regulatory capital to book value of total assets of no less than 4.0 percent, as discussed in Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 1516 — Capital. We seek to ensure that the regulatory capital ratio will not fall below the 4.0 percent threshold at a future time by establishing the economic capital ratio limit at 4.0 percent. We also maintain a management action trigger of 4.5 percent for this ratio. The economic capital ratio serves as a proxy for benchmarking future capital adequacy by discounting our balance sheet and derivatives at current market expectations of future values. Our economic capital ratio was 6.05.7 percent as of December 31, 20172019, compared with 5.86.0 percent as of December 31, 2016.2018.
Our economic capital ratio was not below 4.0 percent at any time during the yearyears ended December 31, 20172019. and December 31, 2018.
Table 48 - Market and Interest-Rate Risk Metrics (dollars in millions)
| |
Table 46 - Market and Interest-Rate Risk Metrics (dollars in millions)
| | Table 46 - Market and Interest-Rate Risk Metrics (dollars in millions)
|
| | | | December 31, 2017 | | December 31, 2019 |
| | | Down 300(1) | | Down 200(1) | | Down 100(1) | | Base | | Up 100 | | Up 200 | | Up 300 | | Down 300(1) | | Down 200(1) | | Down 100(1) | | Base | | Up 100 | | Up 200 | | Up 300 |
| MVE | | $3,362 | | $3,345 | | $3,534 | | $3,628 | | $3,585 | | $3,484 | | $3,365 | | $3,406 | | $3,411 | | $3,246 | | $3,251 | | $3,187 | | $3,094 | | $2,998 |
| Percent change in MVE from base | | (7.3)% | | (7.8)% | | (2.6)% | | —% | | (1.2)% | | (4.0)% | | (7.2)% | | 4.8% | | 4.9% | | (0.2)% | | —% | | (2.0)% | | (4.8)% | | (7.8)% |
| MVE/BVE | | 93% | | 92% | | 97% | | 100% | | 99% | | 96% | | 93% | | 108% | | 108% | | 103% | | 103% | | 101% | | 98% | | 95% |
| MVE/Par Stock | | 145% | | 144% | | 152% | | 156% | | 155% | | 150% | | 145% | | 182% | | 182% | | 173% | | 173% | | 170% | | 165% | | 160% |
| Duration of Equity | | +0.75 years | | -2.58 years | | -4.67 years | | -0.46 years | | +2.26 years | | +3.15 years | | +3.76 years | | -0.24 years | | +5.73 years | | -0.89 years | | +1.08 years | | +2.63 years | | +3.04 years | | +3.15 years |
| Return on Regulatory Capital less 3-month LIBOR | | 1.62% | | 1.73% | | 2.17% | | 2.42% | | 2.23% | | 1.87% | | 1.41% | | 2.48% | | 2.31% | | 2.43% | | 2.61% | | 2.61% | | 2.43% | | 2.25% |
| Net income percent change from base | | (63.21)% | | (59.42)% | | (28.50)% | | —% | | 18.56% | | 32.98% | | 44.98% | | (42.76)% | | (46.64)% | | (27.35)% | | —% | | 23.20% | | 42.27% | | 61.28% |
|
| | | | | | | | | | | | | | |
| | | December 31, 2018 |
| | | Down 300(1) | | Down 200(1) | | Down 100(1) | | Base | | Up 100 | | Up 200 | | Up 300 |
| MVE | | $3,628 | | $3,661 | | $3,829 | | $3,891 | | $3,869 | | $3,819 | | $3,755 |
| Percent change in MVE from base | | (6.8)% | | (5.9)% | | (1.6)% | | —% | | (0.6)% | | (1.9)% | | (3.5)% |
| MVE/BVE | | 100% | | 101% | | 105% | | 107% | | 106% | | 105% | | 103% |
| MVE/Par Stock | | 142% | | 143% | | 150% | | 152% | | 151% | | 149% | | 147% |
| Duration of Equity | | - 0.61 years | | -5.50 years | | -3.03 years | | -0.32 years | | +1.05 years | | +1.50 years | | +1.90 years |
| Return on Regulatory Capital less 3-month LIBOR | | 0.86% | | 1.01% | | 1.67% | | 2.03% | | 2.13% | | 2.10% | | 2.01% |
| Net income percent change from base | | (82.41)% | | (64.03)% | | (29.11)% | | —% | | 23.63% | | 44.57% | | 64.22% |
____________________________
| |
| (1) | In an environment of low interest rates, downward rate shocks are floored as they approach zero, and therefore may not be fully representative of the indicated rate shock. |
|
| | | | | | | | | | | | | | |
| | | December 31, 2016 |
| | | Down 300(1) | | Down 200(1) | | Down 100(1) | | Base | | Up 100 | | Up 200 | | Up 300 |
| MVE | | $3,385 | | $3,485 | | $3,618 | | $3,606 | | $3,506 | | $3,379 | | $3,240 |
| Percent change in MVE from base | | (6.1)% | | (3.3)% | | 0.3% | | —% | | (2.8)% | | (6.3)% | | (10.1)% |
| MVE/BVE | | 92% | | 95% | | 99% | | 99% | | 96% | | 92% | | 89% |
| MVE/Par Stock | | 138% | | 143% | | 148% | | 148% | | 143% | | 138% | | 133% |
| Duration of Equity | | -1.64 years | | -3.35 years | | -1.11 years | | +1.67 years | | +3.39 years | | +3.93 years | | +4.42 years |
| Return on Regulatory Capital less 3-month LIBOR | | 2.40% | | 2.58% | | 2.93% | | 2.86% | | 2.59% | | 2.35% | | 2.07% |
| Net income percent change from base | | (41.60)% | | (37.28)% | | (22.70)% | | —% | | 18.24% | | 37.13% | | 55.24% |
____________________________
| |
(1) | In an environment of low interest rates, downward rate shocks are floored as they approach zero, and therefore may not be fully representative of the indicated rate shock. |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to financial statements and supplementary data:
Management's Report on Internal Control over Financial Reporting
The management of the Federal Home Loan Bank of Boston is responsible for establishing and maintaining adequate internal control over financial reporting.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of internal control over financial reporting as of December 31, 2017,2019, based on the framework established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment, management concluded that, as of December 31, 2017,2019, internal control over financial reporting is effective based on the criteria established in Internal Control – Integrated Framework (2013).
Additionally, our internal control over financial reporting as of December 31, 2017,2019, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of the
Federal Home Loan Bank of Boston
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying statements of condition of the Federal Home Loan Bank of Boston (the "FHLBank") as of December 31, 20172019 and 2016,2018, and the related statements of operations, of comprehensive income, of capital, and of cash flows for each of the three years in the period ended December 31, 2017,2019, including the related notes (collectively referred to as the “financial statements”). We also have audited the FHLBank's internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the FHLBank as of December 31, 20172019 and 20162018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20172019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the CompanyFHLBank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The FHLBank's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting.Reporting appearing under Item 8. Our responsibility is to express opinions on the FHLBank’s financial statements and on the FHLBank's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the FHLBank in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Boston, Massachusetts
March 16, 201820, 2020
We have served as the FHLBank's auditor since 1990.
| | FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CONDITION
(dollars and shares in thousands, except par value) | | | December 31, 2017 | | December 31, 2016 | December 31, 2019 | | December 31, 2018 |
| ASSETS | | | | | | |
| Cash and due from banks | $ | 261,673 |
| | $ | 520,031 |
| $ | 69,416 |
| | $ | 10,431 |
|
| Interest-bearing deposits | 246 |
| | 278 |
| 1,253,873 |
| | 593,199 |
|
| Securities purchased under agreements to resell | 5,349,000 |
| | 5,999,000 |
| 3,500,000 |
| | 6,499,000 |
|
| Federal funds sold | 3,450,000 |
| | 2,700,000 |
| 860,000 |
| | 1,500,000 |
|
| Investment securities: | | | |
| | | |
|
| Trading securities | 191,510 |
| | 612,622 |
| 2,250,264 |
| | 163,038 |
|
| Available-for-sale securities - includes $1,414 and $7,968 pledged as collateral at December 31, 2017 and 2016, respectively that may be repledged | 7,324,736 |
| | 6,588,664 |
| |
| Held-to-maturity securities - includes $6,444 and $23,618 pledged as collateral at December 31, 2017 and 2016, respectively that may be repledged (a) | 1,626,122 |
| | 2,130,767 |
| |
| Available-for-sale securities - includes $3,025 pledged as collateral at December 31, 2018, that may be repledged | | 7,409,000 |
| | 5,849,944 |
|
| Held-to-maturity securities - includes $92 and $3,456 pledged as collateral at December 31, 2019 and 2018, respectively that may be repledged (a) | | 871,107 |
| | 1,295,023 |
|
| Total investment securities | 9,142,368 |
| | 9,332,053 |
| 10,530,371 |
| | 7,308,005 |
|
| Advances | 37,565,967 |
| | 39,099,339 |
| 34,595,363 |
| | 43,192,222 |
|
| Mortgage loans held for portfolio, net of allowance for credit losses of $500 and $650 at December 31, 2017 and 2016, respectively | 4,004,737 |
| | 3,693,894 |
| |
| Loans to other FHLBanks | 400,000 |
| | — |
| |
| Mortgage loans held for portfolio, net of allowance for credit losses of $500 at December 31, 2019 and 2018 | | 4,501,251 |
| | 4,299,402 |
|
| Accrued interest receivable | 94,100 |
| | 84,653 |
| 112,163 |
| | 112,751 |
|
| Premises, software, and equipment, net | 6,388 |
| | 5,211 |
| |
| Derivative assets, net | 34,786 |
| | 61,598 |
| 159,731 |
| | 22,403 |
|
| Other assets | 52,681 |
| | 49,529 |
| 80,643 |
| | 55,904 |
|
| Total Assets | $ | 60,361,946 |
| | $ | 61,545,586 |
| $ | 55,662,811 |
| | $ | 63,593,317 |
|
| LIABILITIES | |
| | |
| |
| | |
|
| Deposits | | | | | | |
| Interest-bearing | $ | 450,922 |
| | $ | 444,897 |
| $ | 616,532 |
| | $ | 448,247 |
|
| Non-interest-bearing | 26,147 |
| | 37,266 |
| 57,777 |
| | 26,631 |
|
| Total deposits | 477,069 |
| | 482,163 |
| 674,309 |
| | 474,878 |
|
| Consolidated obligations (COs): | | | |
| | | |
|
| Bonds | 28,344,623 |
| | 27,171,434 |
| 23,888,493 |
| | 25,912,684 |
|
| Discount notes | 27,720,906 |
| | 30,053,964 |
| 27,681,169 |
| | 33,065,822 |
|
| Total consolidated obligations | 56,065,529 |
| | 57,225,398 |
| 51,569,662 |
| | 58,978,506 |
|
| Mandatorily redeemable capital stock | 35,923 |
| | 32,687 |
| 5,806 |
| | 31,868 |
|
| Accrued interest payable | 90,626 |
| | 80,822 |
| 104,477 |
| | 112,043 |
|
| Affordable Housing Program (AHP) payable | 81,600 |
| | 81,627 |
| 86,131 |
| | 83,965 |
|
| Derivative liabilities, net | 300,450 |
| | 357,876 |
| 10,271 |
| | 255,800 |
|
| Other liabilities | 45,619 |
| | 40,235 |
| 66,843 |
| | 48,898 |
|
| Total liabilities | 57,096,816 |
| | 58,300,808 |
| 52,517,499 |
| | 59,985,958 |
|
| Commitments and contingencies (Note 19) |
|
| |
|
| |
| Commitments and contingencies (Note 20) | |
|
| |
|
|
| CAPITAL | |
| | |
| |
| | |
|
| Capital stock – Class B – putable ($100 par value), 22,837 shares and 24,113 shares issued and outstanding at December 31, 2017 and 2016, respectively | 2,283,721 |
| | 2,411,306 |
| |
| Capital stock – Class B – putable ($100 par value), 18,691 shares and 25,289 shares issued and outstanding at December 31, 2019 and 2018, respectively | | 1,869,130 |
| | 2,528,854 |
|
| Retained earnings: | | | | | | |
| Unrestricted | 1,041,033 |
| | 987,711 |
| 1,114,337 |
| | 1,084,342 |
|
| Restricted | 267,316 |
| | 229,275 |
| 348,817 |
| | 310,670 |
|
| Total retained earnings | 1,308,349 |
| | 1,216,986 |
| 1,463,154 |
| | 1,395,012 |
|
| Accumulated other comprehensive loss | (326,940 | ) | | (383,514 | ) | (186,972 | ) | | (316,507 | ) |
| Total capital | 3,265,130 |
| | 3,244,778 |
| 3,145,312 |
| | 3,607,359 |
|
| Total Liabilities and Capital | $ | 60,361,946 |
| | $ | 61,545,586 |
| $ | 55,662,811 |
| | $ | 63,593,317 |
|
(a) Fair values of held-to-maturity securities were $1,903,2271,035,410 and $2,372,290$1,528,929 at December 31, 20172019 and 2016,2018, respectively.
The accompanying notes are an integral part of these financial statements.
| | FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF OPERATIONS
(dollars in thousands) | | | For the Year Ended December 31, | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| INTEREST INCOME | | | | | | | | | | |
| Advances | $ | 514,176 |
| | $ | 337,150 |
| | $ | 239,365 |
| $ | 854,599 |
| | $ | 867,215 |
| | $ | 514,176 |
|
| Prepayment fees on advances, net | 898 |
| | 3,753 |
| | 7,637 |
| 35,011 |
| | 216 |
| | 898 |
|
| Interest-bearing deposits | | 22,390 |
| | 5,433 |
| | 2,045 |
|
| Securities purchased under agreements to resell | 27,486 |
| | 11,474 |
| | 4,825 |
| 123,438 |
| | 77,718 |
| | 27,486 |
|
| Federal funds sold | 58,642 |
| | 22,562 |
| | 6,481 |
| 58,015 |
| | 108,144 |
| | 58,642 |
|
| Investment securities: | | | | | | | | | | |
| Trading securities | 10,604 |
| | 9,194 |
| | 9,144 |
| 22,037 |
| | 8,789 |
| | 10,604 |
|
| Available-for-sale securities | 118,270 |
| | 115,854 |
| | 97,557 |
| 115,942 |
| | 143,952 |
| | 118,270 |
|
| Held-to-maturity securities | 79,534 |
| | 87,250 |
| | 96,475 |
| 65,758 |
| | 77,892 |
| | 79,723 |
|
| Prepayment fees on investments | 189 |
| | 479 |
| | 661 |
| |
| Total investment securities | 208,597 |
| | 212,777 |
| | 203,837 |
| 203,737 |
| | 230,633 |
| | 208,597 |
|
| Mortgage loans held for portfolio | 125,002 |
| | 119,910 |
| | 122,704 |
| 147,885 |
| | 136,672 |
| | 125,002 |
|
| Other | 2,088 |
| | 538 |
| | 73 |
| 25 |
| | 22 |
| | 43 |
|
| Total interest income | 936,889 |
| | 708,164 |
| | 584,922 |
| 1,445,100 |
| | 1,426,053 |
| | 936,889 |
|
| INTEREST EXPENSE | | | | | | | | | | |
| Consolidated obligations: | | | | | | | | | | |
| Bonds | 421,622 |
| | 361,006 |
| | 329,285 |
| 598,585 |
| | 545,228 |
| | 421,622 |
|
| Discount notes | 233,081 |
| | 93,362 |
| | 28,221 |
| 569,896 |
| | 561,443 |
| | 233,081 |
|
| Total consolidated obligations | 654,703 |
| | 454,368 |
| | 357,506 |
| 1,168,481 |
| | 1,106,671 |
| | 654,703 |
|
| Deposits | 3,615 |
| | 679 |
| | 77 |
| 6,582 |
| | 5,311 |
| | 3,615 |
|
| Mandatorily redeemable capital stock | 1,558 |
| | 1,364 |
| | 1,636 |
| 974 |
| | 1,923 |
| | 1,558 |
|
| Other borrowings | 10 |
| | 4 |
| | 6 |
| 37 |
| | 38 |
| | 10 |
|
| Total interest expense | 659,886 |
| | 456,415 |
| | 359,225 |
| 1,176,074 |
| | 1,113,943 |
| | 659,886 |
|
| NET INTEREST INCOME | 277,003 |
| | 251,749 |
| | 225,697 |
| 269,026 |
| | 312,110 |
| | 277,003 |
|
| Reduction of provision for credit losses | (96 | ) | | (277 | ) | | (330 | ) | |
| NET INTEREST INCOME AFTER REDUCTION OF PROVISION FOR CREDIT LOSSES | 277,099 |
| | 252,026 |
| | 226,027 |
| |
| Provision for (reduction of) credit losses | | 85 |
| | (34 | ) | | (96 | ) |
| NET INTEREST INCOME AFTER PROVISION FOR (REDUCTION OF) CREDIT LOSSES | | 268,941 |
| | 312,144 |
| | 277,099 |
|
| OTHER INCOME (LOSS) | | | | | | | | | | |
| Total other-than-temporary impairment losses on investment securities | (108 | ) | | (1,974 | ) | | (1,284 | ) | |
| Net amount of impairment losses reclassified from accumulated other comprehensive loss | (1,346 | ) | | (1,336 | ) | | (2,775 | ) | |
| Net other-than-temporary impairment losses on investment securities, credit portion | (1,454 | ) | | (3,310 | ) | | (4,059 | ) | (1,212 | ) | | (532 | ) | | (1,454 | ) |
| Litigation settlements | 20,761 |
| | 39,211 |
| | 184,879 |
| 29,361 |
| | 12,769 |
| | 20,761 |
|
| Loss on early extinguishment of debt | | (15,238 | ) | | — |
| | — |
|
| Service fees | 8,697 |
| | 7,701 |
| | 8,050 |
| 12,987 |
| | 10,268 |
| | 8,697 |
|
| Net unrealized losses on trading securities | (6,078 | ) | | (4,410 | ) | | (4,890 | ) | |
| Net gains (losses) on derivatives and hedging activities | 551 |
| | (8,591 | ) | | (11,260 | ) | |
| Net unrealized gains (losses) on trading securities | | 1,287 |
| | (4,515 | ) | | (6,078 | ) |
| Net gains on derivatives and hedging activities | | 1,419 |
| | 2,336 |
| | 551 |
|
| Realized net gain from sale of held-to-maturity securities | | 12,031 |
| | — |
| | — |
|
| Other | 435 |
| | (1,277 | ) | | (719 | ) | 349 |
| | 500 |
| | 435 |
|
| Total other income | 22,912 |
| | 29,324 |
| | 172,001 |
| 40,984 |
| | 20,826 |
| | 22,912 |
|
| OTHER EXPENSE | | | | | | | | | | |
| Compensation and benefits | 48,206 |
| | 47,089 |
| | 46,089 |
| 47,263 |
| | 47,681 |
| | 46,799 |
|
| Other operating expenses | 24,342 |
| | 23,008 |
| | 20,921 |
| 25,017 |
| | 24,243 |
| | 24,342 |
|
| Federal Housing Finance Agency (the FHFA) | 3,800 |
| | 3,643 |
| | 3,791 |
| 3,914 |
| | 3,582 |
| | 3,800 |
|
| Office of Finance | 3,260 |
| | 3,011 |
| | 3,006 |
| 3,468 |
| | 3,526 |
| | 3,260 |
|
| Other | 8,893 |
| | 11,995 |
| | 2,575 |
| 18,222 |
| | 12,870 |
| | 10,300 |
|
| Total other expense | 88,501 |
| | 88,746 |
| | 76,382 |
| 97,884 |
| | 91,902 |
| | 88,501 |
|
| INCOME BEFORE ASSESSMENTS | 211,510 |
| | 192,604 |
| | 321,646 |
| 212,041 |
| | 241,068 |
| | 211,510 |
|
| AHP | 21,307 |
| | 19,397 |
| | 32,328 |
| |
| AHP assessments | | 21,302 |
| | 24,299 |
| | 21,307 |
|
| NET INCOME | $ | 190,203 |
| | $ | 173,207 |
| | $ | 289,318 |
| $ | 190,739 |
| | $ | 216,769 |
| | $ | 190,203 |
|
The accompanying notes are an integral part of these financial statements.
| | FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF COMPREHENSIVE INCOME (dollars in thousands)
| FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF COMPREHENSIVE INCOME (dollars in thousands)
| FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF COMPREHENSIVE INCOME (dollars in thousands)
|
| | | For the Year Ended December 31, | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| Net income | | $ | 190,203 |
| | $ | 173,207 |
| | $ | 289,318 |
| | $ | 190,739 |
| | $ | 216,769 |
| | $ | 190,203 |
|
| Other comprehensive income: | | | | | | | | | | | | |
| Net unrealized gains (losses) on available-for-sale securities | | 14,478 |
| | 909 |
| | (64,095 | ) | | 79,036 |
| | (30,627 | ) | | 14,478 |
|
| Net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities | | 34,161 |
| | 37,406 |
| | 46,157 |
| |
| Net unrealized gains relating to hedging activities | | 7,751 |
| | 23,050 |
| | 10,191 |
| |
| Net noncredit portion of other-than-temporary impairment gains on held-to-maturity securities | | | 53,118 |
| | 29,064 |
| | 34,161 |
|
| Net unrealized (losses) gains relating to hedging activities | | | (913 | ) | | 11,317 |
| | 7,751 |
|
| Pension and postretirement benefits | | 184 |
| | (2,282 | ) | | 2,136 |
| | (1,531 | ) | | 679 |
| | 184 |
|
| Total other comprehensive income (loss) | | 56,574 |
| | 59,083 |
| | (5,611 | ) | |
| Total other comprehensive income | | | 129,710 |
| | 10,433 |
| | 56,574 |
|
| Comprehensive income | | $ | 246,777 |
| | $ | 232,290 |
| | $ | 283,707 |
| | $ | 320,449 |
| | $ | 227,202 |
| | $ | 246,777 |
|
The accompanying notes are an integral part of these financial statements.
| | FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CAPITAL YEARS ENDED DECEMBER 31, 2017, 2016, and 2015 (dollars and shares in thousands)
| |
FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CAPITAL YEARS ENDED DECEMBER 31, 2019, 2018, and 2017 (dollars and shares in thousands)
| | FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CAPITAL YEARS ENDED DECEMBER 31, 2019, 2018, and 2017 (dollars and shares in thousands)
|
| | | | | | | | | | | | | | | |
| | Capital Stock Class B – Putable | | Retained Earnings | | Accumulated Other Comprehensive Loss | | | Capital Stock Class B – Putable | | Retained Earnings | | Accumulated Other Comprehensive Loss | | |
| | Shares | | Par Value | | Unrestricted | | Restricted | | Total | | Total Capital | Shares | | Par Value | | Unrestricted | | Restricted | | Total | | Total Capital |
| BALANCE, DECEMBER 31, 2014 | 24,131 |
| | $ | 2,413,114 |
| | $ | 764,888 |
| | $ | 136,770 |
| | $ | 901,658 |
| | $ | (436,986 | ) | | $ | 2,877,786 |
| |
| Comprehensive income | | | | | 231,454 |
| | 57,864 |
| | 289,318 |
| | (5,611 | ) | | 283,707 |
| |
| Proceeds from sale of capital stock | 2,691 |
| | 269,076 |
| | | | | | | | | | 269,076 |
| |
| Repurchase of capital stock | (3,454 | ) | | (345,474 | ) | | | | | | | | | | (345,474 | ) | |
| Shares reclassified to mandatorily redeemable capital stock | (1 | ) | | (54 | ) | | | | | | | | | | (54 | ) | |
| Cash dividends on capital stock | | | | | (62,128 | ) | | | | (62,128 | ) | | | | (62,128 | ) | |
| BALANCE, DECEMBER 31, 2015 | 23,367 |
| | 2,336,662 |
| | 934,214 |
| | 194,634 |
| | 1,128,848 |
| | (442,597 | ) | | 3,022,913 |
| |
| Comprehensive income | | | | | 138,566 |
| | 34,641 |
| | 173,207 |
| | 59,083 |
| | 232,290 |
| |
| Proceeds from sale of capital stock | 4,554 |
| | 455,451 |
| | | | | | | | | | 455,451 |
| |
| Repurchase of capital stock | (3,808 | ) | | (380,767 | ) | | | | | | | | | | (380,767 | ) | |
| Shares reclassified to mandatorily redeemable capital stock | — |
| | (40 | ) | | | | | | | | | | (40 | ) | |
| Cash dividends on capital stock | | | | | (85,069 | ) | | | | (85,069 | ) | | | | (85,069 | ) | |
| BALANCE, DECEMBER 31, 2016 | 24,113 |
| | 2,411,306 |
| | 987,711 |
| | 229,275 |
| | 1,216,986 |
| | (383,514 | ) | | 3,244,778 |
| 24,113 |
| | $ | 2,411,306 |
| | $ | 987,711 |
| | $ | 229,275 |
| | $ | 1,216,986 |
| | $ | (383,514 | ) | | $ | 3,244,778 |
|
| Comprehensive income | | | | | 152,162 |
| | 38,041 |
| | 190,203 |
| | 56,574 |
| | 246,777 |
| | | | | 152,162 |
| | 38,041 |
| | 190,203 |
| | 56,574 |
| | 246,777 |
|
| Proceeds from sale of capital stock | 10,677 |
| | 1,067,674 |
| | | | | | | | | | 1,067,674 |
| 10,677 |
| | 1,067,674 |
| | | | | | | | | | 1,067,674 |
|
| Repurchase of capital stock | (11,866 | ) | | (1,186,589 | ) | | | | | | | | | | (1,186,589 | ) | (11,866 | ) | | (1,186,589 | ) | | | | | | | | | | (1,186,589 | ) |
| Shares reclassified to mandatorily redeemable capital stock | (87 | ) | | (8,670 | ) | | | | | | | | | | (8,670 | ) | (87 | ) | | (8,670 | ) | | | | | | | | | | (8,670 | ) |
| Cash dividends on capital stock | | | | | (98,840 | ) | | | | (98,840 | ) | | | | (98,840 | ) | | | | | (98,840 | ) | | | | (98,840 | ) | | | | (98,840 | ) |
| BALANCE, DECEMBER 31, 2017 | 22,837 |
| | $ | 2,283,721 |
| | $ | 1,041,033 |
| | $ | 267,316 |
| | $ | 1,308,349 |
| | $ | (326,940 | ) | | $ | 3,265,130 |
| 22,837 |
| | 2,283,721 |
| | 1,041,033 |
| | 267,316 |
| | 1,308,349 |
| | (326,940 | ) | | 3,265,130 |
|
| Comprehensive income | | | | | | 173,415 |
| | 43,354 |
| | 216,769 |
| | 10,433 |
| | 227,202 |
|
| Proceeds from sale of capital stock | | 18,009 |
| | 1,800,880 |
| | | | | | | | | | 1,800,880 |
|
| Repurchase of capital stock | | (15,554 | ) | | (1,555,438 | ) | | | | | | | | | | (1,555,438 | ) |
| Shares reclassified to mandatorily redeemable capital stock | | (3 | ) | | (309 | ) | | | | | | | | | | (309 | ) |
| Cash dividends on capital stock | | | | | | (130,106 | ) | | | | (130,106 | ) | | | | (130,106 | ) |
| BALANCE, DECEMBER 31, 2018 | | 25,289 |
| | 2,528,854 |
| | 1,084,342 |
| | 310,670 |
| | 1,395,012 |
| | (316,507 | ) | | 3,607,359 |
|
| Cumulative effect of change in accounting principle | | | | | | 175 |
| | — |
| | 175 |
| | (175 | ) | | — |
|
| Comprehensive income | | | | | | 152,592 |
| | 38,147 |
| | 190,739 |
| | 129,710 |
| | 320,449 |
|
| Proceeds from sale of capital stock | | 18,544 |
| | 1,854,487 |
| | | | | | | | | | 1,854,487 |
|
| Repurchase of capital stock | | (25,142 | ) | | (2,514,211 | ) | | | | | | | | | | (2,514,211 | ) |
| Cash dividends on capital stock | | | | | | (122,772 | ) | | | | (122,772 | ) | | | | (122,772 | ) |
| BALANCE, DECEMBER 31, 2019 | | 18,691 |
| | $ | 1,869,130 |
| | $ | 1,114,337 |
| | $ | 348,817 |
| | $ | 1,463,154 |
| | $ | (186,972 | ) | | $ | 3,145,312 |
|
The accompanying notes are an integral part of these financial statements.
| | FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CASH FLOWS (dollars in thousands)
| FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CASH FLOWS (dollars in thousands)
| FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CASH FLOWS (dollars in thousands)
|
| | For the Year Ended December 31, | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| OPERATING ACTIVITIES | |
| | |
| | | |
| | |
| | |
| Net income | $ | 190,203 |
| | $ | 173,207 |
| | $ | 289,318 |
| $ | 190,739 |
| | $ | 216,769 |
| | $ | 190,203 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | |
| | | | | |
| | | | |
| Depreciation and amortization | (12,892 | ) | | (40,332 | ) | | (58,337 | ) | (19,937 | ) | | (1,192 | ) | | (12,892 | ) |
| Reduction of provision for credit losses | (96 | ) | | (277 | ) | | (330 | ) | |
| Provision for (reduction of) credit losses | | 85 |
| | (34 | ) | | (96 | ) |
| Change in net fair-value adjustments on derivatives and hedging activities | 8,554 |
| | 25,341 |
| | 26,565 |
| (284,002 | ) | | 36,176 |
| | 8,554 |
|
| Net other-than-temporary impairment losses on investment securities, credit portion | 1,454 |
| | 3,310 |
| | 4,059 |
| 1,212 |
| | 532 |
| | 1,454 |
|
| Loss on early extinguishment of debt | | 15,238 |
| | — |
| | — |
|
| Other adjustments | 4,637 |
| | 9,492 |
| | (233 | ) | 9,182 |
| | 6,335 |
| | 4,637 |
|
| Realized net gain from sale of held-to-maturity securities | | (12,031 | ) | | — |
| | — |
|
| Net change in: | |
| | | | | |
| | | | |
| Market value of trading securities | 6,078 |
| | 4,410 |
| | 4,890 |
| (1,287 | ) | | 4,515 |
| | 6,078 |
|
| Accrued interest receivable | (9,452 | ) | | (218 | ) | | (7,031 | ) | 588 |
| | (18,651 | ) | | (9,452 | ) |
| Other assets | (3,147 | ) | | (1,444 | ) | | (2,022 | ) | (7,510 | ) | | (2,627 | ) | | (3,147 | ) |
| Accrued interest payable | 9,804 |
| | (446 | ) | | (9,956 | ) | (7,566 | ) | | 21,417 |
| | 9,804 |
|
| Other liabilities | 5,883 |
| | (7,334 | ) | | 30,179 |
| 6,927 |
| | 7,170 |
| | 5,883 |
|
| Total adjustments | 10,823 |
| | (7,498 | ) | | (12,216 | ) | (299,101 | ) | | 53,641 |
| | 10,823 |
|
| Net cash provided by operating activities | 201,026 |
| | 165,709 |
| | 277,102 |
| |
| Net cash (used in) provided by operating activities | | (108,362 | ) | | 270,410 |
| | 201,026 |
|
| | | | | | | | | | | |
| INVESTING ACTIVITIES | |
| | |
| | | |
| | |
| | |
| Net change in: | |
| | |
| | | |
| | |
| | |
| Interest-bearing deposits | 52,274 |
| | (16,949 | ) | | (47,431 | ) | (776,421 | ) | | (629,887 | ) | | 52,274 |
|
| Securities purchased under agreements to resell | 650,000 |
| | 701,000 |
| | (1,450,000 | ) | 2,999,000 |
| | (1,150,000 | ) | | 650,000 |
|
| Federal funds sold | (750,000 | ) | | (580,000 | ) | | 430,000 |
| 640,000 |
| | 1,950,000 |
| | (750,000 | ) |
| Premises, software, and equipment | (2,754 | ) | | (3,381 | ) | | (1,155 | ) | |
| Loans to other FHLBanks | (400,000 | ) | | — |
| | — |
| — |
| | 400,000 |
| | (400,000 | ) |
| Trading securities: | |
| | |
| | | |
| | |
| | |
| Proceeds | 1,032,652 |
| | 12,692 |
| | 9,944 |
| 177,340 |
| | 779,652 |
| | 1,032,652 |
|
| Purchases | (618,051 | ) | | (399,155 | ) | | — |
| (2,263,279 | ) | | (749,072 | ) | | (618,051 | ) |
| Available-for-sale securities: | |
| | |
| | | |
| | |
| | |
| Proceeds from long-term | 1,462,091 |
| | 1,299,593 |
| | 963,719 |
| |
| Purchases of long-term | (2,222,738 | ) | | (1,618,180 | ) | | (1,884,234 | ) | |
| Proceeds | | 1,714,800 |
| | 1,409,776 |
| | 1,462,091 |
|
| Purchases | | (3,206,255 | ) | | (12,800 | ) | | (2,222,738 | ) |
| Held-to-maturity securities: | |
| | |
| | | |
| | |
| | |
| Proceeds from long-term | 568,279 |
| | 589,470 |
| | 774,687 |
| |
| Proceeds | | 510,590 |
| | 385,610 |
| | 568,279 |
|
| Advances to members: | |
| | |
| | | |
| | |
| | |
| Repaid | 487,707,464 |
| | 345,626,842 |
| | 343,453,372 |
| 474,957,725 |
| | 652,931,105 |
| | 487,707,464 |
|
| Originated | (486,239,305 | ) | | (348,770,289 | ) | | (346,147,412 | ) | (466,272,505 | ) | | (658,551,866 | ) | | (486,239,305 | ) |
| Mortgage loans held for portfolio: | |
| | |
| | | |
| | |
| | |
| Proceeds | 472,636 |
| | 587,203 |
| | 560,553 |
| 590,161 |
| | 414,690 |
| | 472,636 |
|
| Purchases | (794,914 | ) | | (715,274 | ) | | (677,879 | ) | (803,765 | ) | | (719,845 | ) | | (794,914 | ) |
| Proceeds from sale of foreclosed assets | 3,502 |
| | 5,075 |
| | 7,631 |
| |
| Other investing activities, net | | (430 | ) | | 1,454 |
| | 748 |
|
| Net cash provided by (used in) investing activities | 921,136 |
| | (3,281,353 | ) | | (4,008,205 | ) | 8,266,961 |
| | (3,541,183 | ) | | 921,136 |
|
| | | | | | | | | | | |
| FINANCING ACTIVITIES | |
| | |
| | | |
| | |
| | |
| Net change in deposits | (5,594 | ) | | (339 | ) | | 113,731 |
| 199,521 |
| | (2,071 | ) | | (5,594 | ) |
| Net payments on derivatives with a financing element | (4,101 | ) | | (13,268 | ) | | (17,787 | ) | (48,642 | ) | | — |
| | (4,101 | ) |
| Net proceeds from issuance of consolidated obligations: | |
| | |
| | | |
| | | Net proceeds from issuance of consolidated obligations: | | |
| | |
| | |
| Discount notes | 170,645,541 |
| | 163,426,877 |
| | 142,833,896 |
| 144,030,097 |
| | 198,660,164 |
| | 170,645,541 |
|
| Bonds | 10,655,859 |
| | 18,313,281 |
| | 11,782,583 |
| 10,851,335 |
| | 10,188,427 |
| | 10,655,859 |
|
| Bonds transferred from other Federal Home Loan Banks | — |
| | — |
| | 87,783 |
| |
| Payments for maturing and retiring consolidated obligations: | |
| | |
| | | |
| | |
| | |
| Discount notes | (172,999,084 | ) | | (161,858,661 | ) | | (139,669,947 | ) | (149,400,564 | ) | | (193,351,448 | ) | | (172,999,084 | ) |
| Bonds | (9,449,955 | ) | | (16,466,706 | ) | | (11,874,284 | ) | (12,909,970 | ) | | (12,586,510 | ) | | (9,449,955 | ) |
| Bonds transferred to other FHLBanks | | (12,697 | ) | | — |
| | — |
|
| Repayment of financing lease | | (136 | ) | | — |
| | — |
|
| Proceeds from issuance of capital stock | 1,067,674 |
| | 455,451 |
| | 269,076 |
| 1,854,487 |
| | 1,800,880 |
| | 1,067,674 |
|
| Payments for repurchase of capital stock | (1,186,589 | ) | | (380,767 | ) | | (345,474 | ) | (2,514,211 | ) | | (1,555,438 | ) | | (1,186,589 | ) |
| Payments for redemption of mandatorily redeemable capital stock | (5,434 | ) | | (9,342 | ) | | (256,664 | ) | (26,062 | ) | | (4,364 | ) | | (5,434 | ) |
| Cash dividends paid | (98,837 | ) | | (85,069 | ) | | (62,128 | ) | (122,772 | ) | | (130,109 | ) | | (98,837 | ) |
| Net cash (used in) provided by financing activities | (1,380,520 | ) | | 3,381,457 |
| | 2,860,785 |
| (8,099,614 | ) | | 3,019,531 |
| | (1,380,520 | ) |
| Net (decrease) increase in cash and due from banks | (258,358 | ) | | 265,813 |
| | (870,318 | ) | |
| Net increase (decrease) in cash and due from banks | | 58,985 |
| | (251,242 | ) | | (258,358 | ) |
| Cash and due from banks at beginning of the year | 520,031 |
| | 254,218 |
| | 1,124,536 |
| 10,431 |
| | 261,673 |
| | 520,031 |
|
| Cash and due from banks at end of the year | $ | 261,673 |
| | $ | 520,031 |
| | $ | 254,218 |
| $ | 69,416 |
| | $ | 10,431 |
| | $ | 261,673 |
|
| Supplemental disclosures: | | | | | | | | | | |
| Interest paid | $ | 667,629 |
| | $ | 505,267 |
| | $ | 430,381 |
| $ | 1,224,032 |
| | $ | 1,084,131 |
| | $ | 667,629 |
|
| AHP payments | $ | 18,628 |
| | $ | 18,575 |
| | $ | 16,716 |
| $ | 15,723 |
| | $ | 17,729 |
| | $ | 18,628 |
|
| Noncash receipt of trading securities | | $ | — |
| | $ | 6,624 |
| | $ | — |
|
| Noncash transfers of mortgage loans held for portfolio to other assets | $ | 2,618 |
| | $ | 3,112 |
| | $ | 6,950 |
| $ | 2,020 |
| | $ | 1,438 |
| | $ | 2,618 |
|
| Lease liabilities arising from obtaining right-of-use assets | | $ | 12,572 |
| | $ | — |
| | $ | — |
|
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF BOSTON
NOTES TO FINANCIAL STATEMENTS
Note 1 — Background Information
We are a federally chartered corporation and one of 11 district Federal Home Loan Banks (the FHLBanks or the FHLBank System). The FHLBanks are government-sponsored enterprises (GSEs) that were organized under the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), to serve the public by enhancing the availability of credit for residential mortgages, targeted community development and economic growth. Each FHLBank operates in a specifically defined geographic territory, or district. We provide a readily available, competitively priced source of funds to our members and certain nonmember institutions located within the six6 New England states, which are Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. Certain regulated financial institutions, including community development financial institutions (CDFIs) and insurance companies with their principal places of business in New England and engaged in residential housing finance, may apply for membership. Additionally, certain nonmember institutions (referred to as housing associates) that meet applicable legal criteria may also borrow from us. While eligible to borrow, housing associates are not oureligible to become members and, therefore, are not allowed to hold capital stock. As we are a cooperative, current and former members own all of our outstanding capital stock and may receive dividends on their investment. We do not have any wholly or partially owned subsidiaries, and we do not have an equity position in any partnerships, corporations, or off-balance-sheet special-purpose entities.
All members must purchase our stock as a condition of membership as welland as a condition of engaging in certain business activities with us.
The FHFA, our primary regulator, is the independent federal regulator of the FHLBanks, Federal Home Loan Mortgage Corporation (Freddie Mac), and Federal National Mortgage Association (Fannie Mae). A purpose of the FHFA is to ensure that the FHLBanks operate in a safe and sound manner, including maintenance of adequate capital and internal controls. In addition, the FHFA is responsible for ensuring that 1) the operations and activities of each FHLBank foster liquid, efficient, competitive, and resilient national housing finance markets, 2) each FHLBank complies with the title and the rules, regulations, guidelines, and orders issued under the Housing and Economic Recovery Act (HERA) and the authorizing statutes, 3) each FHLBank carries out its statutory mission through only activities that are authorized under and consistent with HERA and the authorizing statutes, and 4) the activities of each FHLBank and the manner in which such FHLBank is operated is consistent with the public interest. Each FHLBank is a separate legal entity with its own management, employees, and board of directors.
The Office of Finance is the FHLBanks' fiscal agent and is a joint office of the FHLBanks established to facilitate the issuance and servicing of the FHLBanks' COs and to prepare the combined quarterly and annual financial reports of all the FHLBanks. As provided by the FHLBank Act, and applicable regulations, COs are backed only by the financial resources of all the FHLBanks and are our primary source of funds. Deposits, other borrowings, and the issuance of capital stock, which is principally held by our current and former members, provide other funds. We primarily use these funds to provide loans, called advances, to invest in single-family mortgage loans under the Mortgage Partnership Finance® (MPF®) program, and also to fund other investments. In addition, we offer correspondent services, such as wire-transfer, investment-securities-safekeeping,securities-safekeeping, and settlement services.
"Mortgage Partnership Finance", "MPF" and MPF Xtra"MPF Xtra" are registered trademarks of the FHLBank of Chicago.
Note 12 — Summary of Significant Accounting Policies
Use of Estimates
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in accordance with GAAP requires management to make subjective assumptions and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. The most significant of these estimates include but are not limited to, accounting for derivatives fair-value estimates, and deferred premium/hedging activities, estimation of fair values, and amortization of premiums and discounts associated with prepayable assets.mortgage-backed securities. Actual results could differ from these estimates.
Fair Value
We determine the fair-value amounts recorded on the statement of condition and in the note disclosures for the periods presented by using available market and other pertinent information, and reflect our best judgment of appropriate valuation methods. Although we use our best judgment in estimating the fair value of these financial instruments, there are inherinherent
ent limitations in any valuation technique. Therefore, these fair values may not be indicative of the amounts that would have been realized in market transactions at the reporting dates. See Note 1819 — Fair Values for more information.
Financial Instruments Meeting Netting Requirements
We present certain financial instruments on a net basis when they are subject to a legal right of offset and all other requirements for netting are met (collectively referred to as the netting requirements). For these financial instruments, we have elected to offset our asset and liability positions, as well as cash collateral received or pledged, when we have met the netting requirements.
The net exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time when this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. For derivative instruments that meet the requirements for netting, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset. See Note 1112 — Derivatives and Hedging Activities for additional information regarding these agreements.
Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented. At December 31, 20172019 and 2016,2018, we had $5.3$3.5 billion and $6.0$6.5 billion in securities purchased under agreements to resell. There were no offsetting amounts related to these securities at December 31, 20172019 and 2016.2018.
Interest-Bearing Deposits, Securities Purchased Under Agreements to Resell, and Federal Funds Sold
Interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold provide short-term liquidity and are carried at cost. Federal funds sold consist of short-term, unsecured loans transacted with counterparties that we consider to be of investment quality. Securities purchased under agreements to resell are treated as short-term collateralized loans that are classified as assets in the statement of condition. These securities purchased under agreements to resell are held in safekeeping in our name by third-party custodians, which we have approved. If the fair value of the underlying securities decreases below the fair value required as collateral, the counterparty has the option to provide additional securities in safekeeping in our name in an amount equal to the decrease or remit cash in such amount. If the counterparty defaults on this obligation, we will decrease the dollar value of the resale agreement accordingly. We have not sold or repledged the collateral received on securities purchased under agreements to resell. Securities purchased under agreements to resell averaged $3.0$5.5 billion during 20172019 and $3.4$4.0 billion during 2016,2018, and the maximum amount outstanding at any month-end during 20172019 and 20162018 was $5.3$7.0 billion and $7.0$6.5 billion, respectively.
Investment Securities
We classify investments as trading, available-for-sale, or held-to-maturity at the date of acquisition. Purchases and sales of securities are recorded on a trade date basis.
Trading. Securities classified as trading are held for liquidity purposes and carried at fair value. We record changes in the fair value of these investments through other income as net unrealized gains (losses) on trading securities. FHFA regulations prohibit trading in or the speculative use of these instruments and limit the credit risks we have from these instruments.
Available-for-sale. We classify certain investments that are not classified as held-to-maturity or trading as available-for-sale and carry them at fair value. Changes in fair value of available-for-sale securities not being hedged by derivatives, or in an economic hedging relationship, are recorded in other comprehensive income (loss) as net unrealized gains (losses) on available-for-sale securities. For available-for-sale securities that have been hedged under fair-value hedge designations, we record the portion of the change in the fair value of the investment related to the risk being hedged in otheravailable-for-sale interest income as net gains (losses) on derivatives and hedging activities together with the related change in the fair value of the derivative. Prior to January 1, 2019, this amount was recorded in other income as net gains (losses) on derivatives and hedging activities. The remainder of the change in the fair value of the investment is recorded in other comprehensive income (loss) as net unrealized gains (losses) on available-for-sale securities.
Held-to-Maturity. Certain investments for which we have both the ability and intent to hold to maturity are classified as held-to-maturity and are carried at cost, adjusted for periodic principal repayments, amortization of premiums and accretion of discounts using the level-yield method, previous other-than-temporary impairment, and accretion of the noncredit portion of other-than-temporary impairment recognized in other comprehensive income (loss).
Changes in circumstances may cause us to change our intent to hold certain securities to maturity without calling into question our intent to hold other debt securities to maturity in the future. Thus, the sale or transfer of a held-to-maturity security due to certain changes in circumstances, such as evidence of significant deterioration in the issuer's creditworthiness or changes in regulatory requirements, is not considered to be inconsistent with its original classification. Other events that are isolated, nonrecurring, and unusual for us that could not have been reasonably anticipated may cause us to sell or transfer a held-to-maturity security without necessarily calling into question our intent to hold other debt securities to maturity. In addition, sale of a debt security that meets either of the following two conditions would not be considered inconsistent with the original classification of that security:
the sale occurs near enough to its maturity date (or call date if exercise of the call is probable) that interest-rate risk is substantially eliminated as a pricing factor and the changes in market interest rates would not have a significant effect on the security's fair value; or
the sale of a security occurs after we have already collected a substantial portion (at least 85 percent) of the principal outstanding at acquisition due either to prepayments on the debt security or to scheduled payments on a debt security payable in equal installments (both principal and interest) over its term.
Premiums and Discounts. We amortize premiums and accrete discounts on mortgage-backed securities (MBS) using the level-yield method over the estimated lives of the securities. This method requires a retrospective adjustment of the effective yield each time we change the estimated life, based on actual prepayments received and changes in expected prepayments, as if the new estimate had been known since the original acquisition date of the securities. We estimate prepayment speeds on each individual security using the most recent three months of historical constant prepayment rates, as available, or may subscribe to third-party data services that provide estimates of future cash flows, from which we determine expected asset lives. We amortize premiums and accrete discounts on other investments using the level-yield method to the contractual maturity of the securities.
Gains and Losses on Sales. We compute gains and losses on sales of investment securities using the specific identification method and include these gains and losses in other income (loss).
Investment Securities – Other-than-Temporary Impairment
We evaluate our individual available-for-sale and held-to-maturity securities in an unrealized loss position for other-than-temporary impairment each quarter. An investment is considered impaired when its fair value is less than its amortized cost. We consider other-than-temporary impairment to have occurred if we:
have an intent to sell the investment;
believe it is more likely than not that we will be required to sell the investment before the recovery of its amortized cost based on available evidence; or
do not expect to recover the entire amortized cost of the debt security.
Recognition of Other-than-Temporary Impairment. If either of the first two conditions above is met, we recognize an other-than-temporary impairment charge in earnings equal to the entire difference between the security's amortized cost and its fair value as of the statement of condition date.
For securities in an unrealized loss position that meet neither of the first two conditions (excluding agency MBS) and for each of our private-label MBS, we perform an analysis to determine if we will recover the entire amortized cost of each of these securities. The present value of the cash flows expected to be collected is compared with the amortized cost of the debt security to determine whether a credit loss exists. If the present value of the cash flows expected to be collected is less than the amortized cost of the debt security, the security is deemed to be other-than-temporarily impaired and the carrying value of the debt security is adjusted to its fair value. However, rather than recognizing the entire difference between the amortized cost and fair value in earnings, only the amount of the impairment representing the credit loss (that is, the credit component) is recognized in earnings, while the amount related to all other factors (that is, the noncredit component) is recognized in other comprehensive income (loss). For a security that is determined to be other-than-temporarily impaired, in the event that the present value of the cash flows expected to be collected is less than the fair value of the security, the credit loss on the security is limited to the amount of that security's unrealized losses.
In performing a detailed cash-flow analysis, we estimate the cash flows expected to be collected. If this estimate results in a present value of expected cash flows (discounted at the security's effective yield) that is less than the amortized cost basis of a security (that is, a credit loss exists), other-than-temporary impairment is considered to have occurred. For determining the
present value of variable-rate and hybrid private-label residential MBS, we use the effective interest rate derived from a variable-rate index, such as one-month London Interbank Offered Rate (LIBOR), plus the contractual spread, plus or minus a fixed-spread adjustment when there is an existing discount or premium on the security. Because the implied forward yield curve of a selected variable-rate index changes over time, the effective interest rates derived from that index will also change over time and would therefore impact the present value of the subject security.
The total other-than-temporary impairment is presented in the statement of operations with an offset for the amount of the noncredit portion of other-than-temporary impairment that is recognized in other comprehensive income (loss). The remaining amount in the statement of operations represents the credit loss for the period.
Accounting for Other-than-Temporary Impairment Recognized in Other Comprehensive Income. For subsequent accounting of other-than-temporarily impaired securities, we record an additional other-than-temporary impairment if the present value of cash flows expected to be collected is less than the amortized cost of the security. The total amount of this additional other-than-temporary impairment (both credit and non-credit, if any) is determined as the difference between the security's amortized cost less the amount of other-than-temporary impairment recognized in other comprehensive income (loss) prior to the determination of this additional other-than-temporary impairment and its fair value. Any additional credit loss is limited to that security's unrealized losses, or the difference between the security's amortized cost and its fair value as of the statement of condition date. This additional credit loss, up to the amount in other comprehensive income (loss) related to the security, is reclassified out of other comprehensive income (loss) and recognized in earnings. Any credit loss in excess of the amount reclassified out of other comprehensive income (loss) is also recognized in earnings.
Interest Income Recognition. Upon subsequent evaluation of a debt security when there is no additional other-than-temporary impairment, we adjust the accretable yield on a prospective basis if there is a significant increase in the security's expected future cash flows. This adjusted yield is used to calculate the amount to be recognized into income over the remaining life of the security so as to match the amount and timing of future cash flows expected to be collected. Subsequent changes in estimated cash flows that are deemed significant will change the accretable yield on a prospective basis. For debt securities classified as held-to-maturity, the other-than-temporary impairment recognized in other comprehensive income (loss) is accreted to the carrying value of each security on a prospective basis, based on the amount and timing of future estimated cash flows (with no effect on earnings unless the security is subsequently sold or there are additional decreases in cash flows expected to be collected).flows. The estimated cash flows and accretable yield are re-evaluated each quarter.
Advances
We report advances at amortized cost. Advances carried at amortized cost are reported net of premiums/discounts and any hedging adjustments, as discussed in Note 89 — Advances.Advances. We generally record our advances at par. However, we may record premiums or discounts on advances in the following cases:
Advances may be acquired from another FHLBank when one of our members acquires a member of another FHLBank. In these cases, we may purchase the advances from the other FHLBank at a price that results in a fair market yield for the acquired advance.
In the event that a hedge of an advance is discontinued, the cumulative hedging adjustment is recorded as a premium or discount and amortized over the remaining life of the advance.
When the prepayment of an advance is followed by disbursement of a new advance and the transactions effectively represent a modification of the previous advance, the prepayment fee received is deferred, recorded as a discount to the modified advance, and accreted over the life of the new advance.
When an advance is modified under our advance restructuring program and our analysis of the restructuring concludes that the transaction is an extinguishment of the prior loanadvance rather than a modification, the deferred prepayment fee is recognized into income immediately, recorded as premium on the new advance, and amortized over the life of the new advance.
When we make an AHP advance, the present value of the variation in the cash flow caused by the difference in the interest rate between the AHP advance rate and our related cost of funds for comparable maturity funding is charged against the AHP liability and recorded as a discount on the AHP advance.
Advances issued under our Jobs for New England (JNE) and Helping to House New England (HHNE) programs have an interest rate of zero percent.at a significant discount to market rates. Due to the below market interest rate, we record a discount on the advance and an interest rate subsidy expense at the time that we transact the advance. The subsidy expense is recorded in other expense in the statement of operations. We do not charge a prepayment fee for advances issued under the JNE and HHNE programs.
We amortize the premiums and accrete the discounts on advances to interest income using the level-yield method. We record interest on advances to interest income as earned.
Prepayment Fees. We charge borrowers a prepayment fee when they prepay certain advances before the original maturity. We record prepayment fees net of hedging fair-value adjustments included in the carrying value of the advance as prepayment fees on advances net in the interest income section ofon the statement of operations.
Advance Modifications. In cases in which we fund a new advance concurrently with or within a short period of time of the prepayment of an existing advance by the same member, we evaluate whether the new advance meets the accounting criteria to qualify as a modification of the existing advance or whether it constitutes a new advance. We compare the present value of cash flows on the new advance with the present value of cash flows remaining on the existing advance. If there is at least a 10 percent difference in the present value of cash flows or if we conclude the difference between the advances is more than minor based on a qualitative assessment of the modifications made to the advance's original contractual terms, the advance is accounted for as a new advance. In all other instances, the new advance is accounted for as a modification.
If a new advance qualifies as a modification of the existing advance, the net prepayment fee on the prepaid advance is deferred, recorded in the basis of the modified advance, and amortized to interest income over the life of the modified advance using the level-yield method. This amortization is recorded in advance-interest income. If the modified advance is hedged, changes in fair value are recorded after the amortization of the basis adjustment. Thisadjustment in advance interest income. Prior to January 1, 2019, this amortization resultsresulted in offsetting amounts being recorded in net interest income and net lossesgains (losses) on derivatives and hedging activities in other income.
For prepaid advances that were hedged and metmeet the hedge-accounting requirements, we terminate the hedging relationship upon prepayment and record the prepayment fee net of the hedging fair-value adjustment in the basis of the advance as prepayment fees on advances, net in interestadvance-interest income. If we fund a new advance to a member concurrent with or within a short period of time after the prepayment of a previous advance to that member, we evaluate whether the new advance qualifies as a modification of the original hedged advance. If the new advance qualifies as a modification of the original hedged advance, the hedging fair-value adjustment and the prepayment fee are included in the carrying amount of the modified advance and are amortized in interest income over the life of the modified advance using the level-yield method. If the modified advance is also hedged and the hedge meets the hedging criteria, the modified advance is marked to fair value after the modification, and subsequent fair-value changes are recorded in advance interest income. Prior to January 1, 2019, subsequent fair value changes were recorded in other income as net gains (losses) on derivatives and hedging activities.
If a new advance does not qualify as a modification of an existing advance, prepayment of the existing advance is treated as an advance termination and any prepayment fee, net of hedging adjustments, is recorded to prepayment fees on advances, netadvance-interest income in the interest income section of the statement of operations.
Commitment Fees
We record commitment fees for standby letters of credit to members as deferred fee income when received, and amortize these fees on a straight-line basis to service-fees income in other income over the term of the standby letter of credit. Based upon past experience, we believe the likelihood of standby letters of credit being drawn upon is remote.
Mortgage Loans Held for Portfolio
We participate in the MPF program through which we invest in conventional, residential, fixed-rate mortgage loans (conventional mortgage loans) and government-insured or -guaranteed residential fixed-rate mortgage loans (government mortgage loans) that are purchased from participating financial institutions (see Note 910 — Mortgage Loans Held for Portfolio). We classify our investments in mortgage loans for which we have the intent and ability to hold for the foreseeable future or until maturity or payoff as held for portfolio. As of December 31, 2017,2019, all our investments in mortgage loans are held for portfolio. Accordingly, these investments are reported at their principal amount outstanding net of unamortized premiums, discounts, unrealized gains and losses from investments initially classified as mortgage loan commitments, direct write-downs, and the allowance for credit losses on mortgage loans.
Premiums and Discounts. We compute the amortization of mortgage-loan-origination fees (premiums and discounts) as interest income using the level-yield method over the contractual term to maturity of each individual loan, which results in income recognition in a manner that is effectively proportionate to the actual repayment behavior of the underlying assets and reflects the contractual terms of the assets without regard to changes in estimated prepayments based on assumptions about future borrower behavior.
Credit-Enhancement Fees. For conventional mortgage loans, participating financial institutions retain a portion of the credit risk on the loans in which we invest by providing credit-enhancement protection either through a direct liability to pay credit losses up to a specified amount or through a contractual obligation to provide supplemental mortgage insurance. Participating financial institutions are paid a credit-enhancement fee for assuming credit risk and in some instances all or a portion of the credit-enhancement fee may be performance-based. Credit-enhancement fees are paid monthly and are determined based on the remaining unpaid principal balance of the pertinent MPF loans. The required credit-enhancement amount varies depending on the MPF product. Credit-enhancement fees are recorded as an offset to mortgage-loan-interest income. To the extent that losses in the current month exceed performance-based credit-enhancement fees accrued, the remaining losses may be recovered from future performance-based credit-enhancement fees payable to the participating financial institution.
Other Fees. We record other nonorigination fees in connection with our MPF program activities in other income. Such fees include delivery-commitment-extension fees, pair-off fees, price-adjustment fees, and counterparty fees in connection with MPF products under which we facilitate third party investment in loans (non-investment MPF products) such as with
the MPF Xtra® product. Delivery-commitment-extension fees are charged when a participating financial institution requests to extend the period of the delivery commitment beyond the original stated expiration. Pair-off fees represent a make-whole provision; they are received when the amount funded under a delivery commitment is less than a certain threshold (under-delivery) of the delivery-commitment amount. Price-adjustment fees are received when the amount funded is greater than a certain threshold (over-delivery) of the delivery-commitment amount. To the extent that pair-off fees relate to under-deliveries of loans, they are recorded in service fee income. Fees related to over-deliveries represent purchase-price adjustments to the related loans acquired and are recorded as part of the carrying value of the loan. The FHLBank of Chicago pays us a counterparty fee for the costs and expenses of marketing activities for loans originated for sale under non-investment MPF products.
Mortgage-Loan Participations. We may purchase and sell participations in MPF loans from other FHLBanks from time to time. References to our investments in mortgage loans throughout this report include any participation interests we own.
Allowance for Credit Losses
An allowance for credit losses is a valuation allowance separately established for each identified portfolio segment, if necessary, to provide for probable losses inherent in our portfolio as of the statement of condition date.date and the amount of loss can be reasonably estimated. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. To the extent necessary, an allowance for credit losses for off-balance-sheet credit exposure is recorded as a liability.
Portfolio Segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology for determining its allowance for credit losses. We have established an allowance methodology for each of our portfolio segments. See Note 1011 – Allowance for Credit Losses for additional information.
Nonaccrual Loans. We place conventional mortgage loans on nonaccrual status when the collection of the contractual principal or interest is 90 days or more past due. When a conventional mortgage loan is placed on nonaccrual status, accrued but uncollected interest is reversed against interest income in the current period. We generally record cash payments received on nonaccrual loans first as interest income and then as a reduction of principal as specified in the contractual agreement, unless we consider the collection of the remaining principal amount due to be doubtful. If we consider the collection of the remaining principal amount to be doubtful, cash payments received are applied first solely to principal until the remaining principal amount due is expected to be collected and then as a recovery of any charge-off, if applicable, followed by recording interest income. A loan on nonaccrual status may be restored to accrual status when the collection of the contractual principal and interest is less than 90 days past due. We do not place government mortgage loans on nonaccrual status when the collection of the contractual principal or interest is 90 days or more past due because of the U.S. government guarantee of the loan and the contractual obligations of each related servicer, as more fully discussed in Note 1011 – Allowance for Credit Losses.
Impairment Methodology.Collateral-dependent Loans. AAn impaired loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement.
Loans that are on nonaccrual status and that are considered collateral-dependent are measured for impairment based on the fair value of the underlying property less estimated selling costs. Loans are considered collateral-dependent if repayment is expected to be provided solely by the sale of the underlying property,property; that is, there is no other available and reliable source of repayment. Collateral-dependent loans are impaired ifA loan that is considered collateral-dependent is measured for impairment based on the fair value of the underlying collateralproperty less estimated selling costs, is insufficient to recover the unpaid principal balance on the loan.with any shortfall recognized as an allowance for loan loss or charged-off. Interest income on impaired loans is recognized in the same manner as nonaccrual loans as discussed above.non-accrual loans.
Charge-Off Policy. A charge-off is recorded if it is estimated that the recorded investment in a loan will not be recovered. We evaluate whether to record a charge-off on a conventional mortgage loan upon the occurrence of a confirming event. Confirming events include, but are not limited to, the occurrence of foreclosure or notification of a claim against any of the credit enhancements.credit-enhancements. We charge off the portion of outstanding conventional mortgage loan balances in excess of fair value of the underlying property, less cost to sell and adjusted for any available credit enhancementscredit-enhancements for loans that are 180 or more days past due, when the borrower has filed for bankruptcy protection and the loan is at least 30 days past due, or when there is evidence of fraud.
Troubled Debt Restructurings
We consider a troubled debt restructuring of a financing receivable to have occurred when we grant a concession to a borrower that we would not otherwise consider for economic or legal reasons related to the borrower's financial difficulties. We place conventional mortgage loans that are deemed to be troubled debt restructurings as a result of our modification program on nonaccrual when payments are 60 days or more past due.
Real Estate Owned
Real-estate-owned property (REO) includes assets that have been received in satisfaction of debt or as a result of actual foreclosures. REO is recorded as other assets in the statement of condition and is carried at the lower of cost or fair value less estimated selling costs. At December 31, 20172019 and 2016,2018, we had $1.8$1.3 million and $2.2 million,$818 thousand, respectively, in assets classified as REO. Fair value is derived from third-party valuations of the property. If the fair value of the REO less estimated selling costs is less than the recorded investment in the MPF loan at the date of transfer, we recognize a charge-off to the allowance for credit losses. Subsequent realized gains and realized or unrealized losses are included in other income (loss) in the statement of operations.
Derivatives and Hedging Activities
All derivatives are recognized on the statement of condition at fair value and are reported as either derivative assets or derivative liabilities, net of cash collateral including initial and certain variation margin, and accrued interest received from or pledged to clearing members and/or counterparties. We offset fair-value amounts recognized for derivatives and fair-value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivatives recognized at fair value executed with the same clearing member and/or counterparty when the netting requirements have been met. If these netted amounts are positive, they are classified as an asset and, if negative, they are classified as a liability. Derivative assets and derivative liabilities reported on the statement of condition also include net accrued interest. Cash flows associated with derivatives are reflected as cash flows from operating activities in the statement of cash flows unless the derivative meets the criteria to be a financing derivative.
Each derivative is designated as one of the following:
a qualifying hedge of the change in fair value of a recognized asset or liability or an unrecognized firm commitment (a fair value hedge);
a qualifying hedge of a forecasted transaction or the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a cash-flow hedge); or
a nonqualifying hedge of an asset or liability (an economic hedge) for asset-liability-management purposes.
We utilize two derivatives clearing organizations (DCOs), for all cleared derivative transactions, Chicago Mercantile Exchange, Inc. (CME Inc.) and LCH Limited (LCH Ltd.). Effective January 3, 2017, CME Inc. made certain amendments to its rulebook changing the legal characterization ofAt both DCOs, variation margin payments to beis characterized as daily settlement payments rather than collateral transfers. Throughout 2017, we continued to characterize our variation margin related to LCH Ltd. contracts as cash collateral. However, effective January 16, 2018, LCH Ltd. also made certain amendments to its rulebook changing the legal characterization of variation margin payments to be daily settlement payments, rather than collateral transfers. At both DCOs,and initial margin is considered cash collateral.
Accounting for Fair-Value and Cash-Flow Hedges. If hedging relationships meet certain criteria, including, but not limited to, formal documentation of the hedging relationship and an expectation to be highly effective, they qualify for fair-value or cash-flow hedge accounting and the offsetting changes in fair value of the hedged items attributable to the hedged risk are recorded either in earnings in the case of fair-value hedges or other comprehensive income (loss) in the case ofaccounting. For cash-flow hedges. For cash flow hedges, we measure effectiveness using the hypothetical derivative method, which compares the cumulative change
in fair value of the actual derivative designated as the hedging instrument to the cumulative change in fair value of a hypothetical derivative having terms that identically match the critical terms of the hedged forecasted transaction.
Our approaches to hedge accounting are:
long-haul hedge accounting, which generally requires us to formally assess (both at the hedge's inception and at least quarterly) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items or forecasted transaction attributable to the hedged risk and whether those derivatives may be expected to remain highly effective in future periods; and
short-cut hedge accounting, which can be used for transactions for which the assumption can be made that the change in fair value of a hedged item, due to changes in the benchmark rate, exactly offsets the change in fair value of the related derivative. Under the short-cut method, the entire change in fair value of the interest-rate swap is considered to be highly effective at achieving offsetting changes in fair values or cash flows of the hedged asset or liability. Beginning in November 2014, to streamline certain operational processes, we discontinued the use of short-cut hedge accounting for new hedge relationships entered into after that date; short-cut hedge relationships entered into prior to that date will continue as short-cut hedge relationships until they mature or are terminated.
Derivatives that are used in fair-value hedges are typically executed at the same time as the hedged items, and we designate the hedged item in a qualifying hedge relationship as of the trade date. In many hedging relationships that use the short-cut method, we may designate the hedging relationship upon our commitment to disburse an advance or trade a CO that settles within the shortest period of time possible for the type of instrument based on market-settlement conventions. In such circumstances, although the advance or CO will not be recognized in the financial statements until settlement date, the hedge meets the criteria for applying the short-cut method, provided all other short-cut criteria are also met. We then record the changes in fair value of the derivative and the hedged item beginning on the trade date. Beginning January 1, 2019, we adopted new hedge accounting guidance which, among other things, impacts the presentation of gains (losses) on derivatives and hedging activities for qualifying hedges as follows:
Changes in the fair value of a derivative that is designated and qualifies as a fair-value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, (including changes that reflect losses or gains on firm commitments), are recorded in othernet interest income (loss)in the same line as net gains (losses) on derivatives and hedging activities.
Changes in the fair value of a derivative that is designated and qualifies as a cash-flow hedge to the extent that the hedge is highly effective, are recorded in other comprehensive income (loss), a component of capital, until earnings are affected by the variability of the cash flows of the hedged transaction.transaction affects earnings.
ForPrior to January 1, 2019, for both fair-value and cash-flow hedges, any hedge ineffectiveness (which representsrepresented the amount by which the changeschange in the fair value of the derivative differdiffered from the change in the fair value of the hedged item or the variability in the cash flows of the forecasted transaction attributable to the hedged risk) iswas recorded in othernon-interest income (loss) as net gains (losses) on derivatives and hedging activities.
Accounting for Economic Hedges. An economic hedge is defined as a derivative hedging specific or nonspecific assets, liabilities, or firm commitments that does not qualify or was not designated for fair-value or cash-flow hedge accounting, but is an acceptable hedging strategy under our risk-management policy. These economic hedging strategies also comply with FHFA regulatory requirements prohibiting speculative derivative transactions. An economic hedge by definition introduces the potential for earnings variability caused by the changes in fair value of the derivatives that are recorded in income but not offset by corresponding changes in the fair value of the economically hedged assets, liabilities, or firm commitments. As a result, we recognize only the net interest and the change in fair value of these derivatives in other income (loss) as net gains (losses) on derivatives and hedging activities with no offsetting fair-value adjustments for the economically hedged assets, liabilities, or firm commitments.
Accrued Interest Receivable and Payable. The differential between accrual of interest receivable and payable on derivatives designated as a fair-value hedge or as a cash-flow hedge is recognized through adjustments to the interest income or interest expense of the designated hedged investment securities, advances, COs, deposits, or other financial instruments. The differential between accrual of interest receivable and payable on economic hedges is recognized in other income (loss), along with changes in fair value of these derivatives, as net gains (losses) on derivatives and hedging activities.
Discontinuance of Hedge Accounting. We may discontinue hedge accounting prospectively when:
we determine that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item attributable to the hedged risk (including hedged items such as firm commitments or forecasted transactions);
the derivative and/or the hedged item expires or is sold, terminated, or exercised;
it is no longer probable that the forecasted transaction in a cash-flow hedge will occur in the originally expected period;period or within the following two months;
a hedged firm commitment in a fair-value hedge no longer meets the definition of a firm commitment; or
we determine that designating the derivative as a hedging instrument is no longer appropriate.
WhenIf hedge accounting is discontinued because we determine that the derivative no longer qualifies as an effective fair-value hedge of an existing hedged item, we either terminate the derivative or continue to carry the derivative on the statement of condition at its fair value and cease to adjust the hedged asset or liability for changes in fair value, andvalue. We will then begin to amortize the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using the level-yield method.
WhenIf hedge accounting is discontinued because we determine that the derivative no longer qualifies as an effective cash-flow hedge of an existing hedged item, we will continue to carry the derivative on the statement of condition at its fair value and amortize the cumulative other comprehensive loss adjustment to earnings when earnings are affected by the existing hedged item.
If it is no longer probable that a forecasted transaction will occur by the end of the originally expected period or within two months thereafter, we immediately recognize in earnings the gain or loss that was in accumulated other comprehensive loss.
WhenIf hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, we will continue to carry the derivative on the statement of condition at its fair value, removing from the statement of condition any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.
Embedded Derivatives. We may issue debt, make advances, or purchase financial instruments in which a derivative is embedded. Upon execution of these transactions, we assess whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the advance, debt, or other financial instrument (the host contract) and whether a separate, nonembedded instrument with the same terms as the embedded instrument would meet the definition of a derivative. When we determine that (1) the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as a stand-alone derivative instrument. If the entire contract (the host contract and the embedded derivative) is to be measured at fair value, with changes in fair value reported in current earnings (for example, an investment security classified as trading, as well as hybrid financial instruments) or if we cannot reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract is carried on the statement of condition at fair value and no portion of the contract is designated as a hedging instrument. At December 31, 2017,2019, and 2016,2018, we had certain advances with embedded features that met the requirement to be separated from the host contract and designated the embedded features as stand-alone derivatives. The value of the embedded derivatives is included in total advances on the statement of condition. See Note 89 — Advances for the fair value of these embedded derivatives.
Premises, Software, Equipment and EquipmentLeases
We record premises, software, and equipment at cost less accumulated depreciation and amortization and compute depreciation on a straight-line basis over estimated useful lives ranging from three years to 10 years. We amortize leasehold improvements on a straight-line basis over the shorter of the estimated useful life of the improvement or the remaining term of the lease. We capitalize improvements and major renewals but expense ordinary maintenance and repairs when incurred. We include gains and losses on disposal of premises, software, and equipment in other income (loss) on the statement of operations. The cost of purchased software and certain costs incurred in developing computer software for internal use are capitalized and amortized over future periods.
We lease office space and office equipment to run our business operations. For leases with a term of 12 months or less, we have made an accounting policy election to not recognize lease right-of-use assets and lease liabilities. At December 31, 2017, and 2016,2019, we had $4.4included in the statement of condition $10.3 million and $1.8of lease right-of-use assets in other assets as well as $10.4 million respectively,of lease liabilities in unamortized computer software costs.
Accumulated Depreciation and Amortization. Our accumulated depreciation and amortization related to premises, software, and equipment was $16.4other liabilities. We have recognized operating lease costs in other operating expenses on the statement of operations of $2.6 million and $15.8 million at December 31, 2017, and 2016, respectively.
Depreciation and Amortization Expense. Depreciation and amortization expense for premises, software, and equipment was $1.4 million, $1.5 million, and $1.7 million for the years ended December 31, 2017, 2016, and 2015, respectively. These
amounts include $719,000, $640,000, and $820,000 of amortization of computer software costs for the years ended December 31, 2017, 2016, and 2015, respectively.
Disposal of Premises, Software, and Equipment. Net realized losses on disposal of premises, software, and equipment were $178,000 and $65,000 for the years ended December 31, 2017 and December 31, 2015, respectively. There were no realized gains or losses on disposal of premises, software, and equipment for the year ended December 31, 2016.2019.
Consolidated Obligations
We record COs at amortized cost.
Discounts and Premiums. We accrete discounts and amortize premiums on COs to interest expense using the level-yield method over the contractual term to maturity of the CO.
Concessions on COs. We pay concessions to dealers in connection with the issuance of certain COs. The Office of Finance prorates the amounts paid to dealers based upon the percentage of debt issued that we assumed. We record concessions paid on COs as a direct reduction from their carrying amounts, consistent with the presentation of discounts on COs. These dealer concessions are amortized using the level-yield method over the contractual term to maturity of the COs. The amortization of those concessions is included in CO interest expense on the statement of operations.
Mandatorily Redeemable Capital Stock
We reclassify stock subject to redemption from equity to a liability after a member exercises a written redemption request, gives notice of intent to withdraw from membership, or attains nonmember status by merger or acquisition, charter termination, or other involuntary termination from membership, since the shares meet the definition of a mandatorily redeemable financial instrument upon such instances. Member shares meeting this definition are reclassified to a liability at fair value. Dividends declared on mandatorily redeemable capital stock are accrued at the expected dividend rate for Class B stock and reflected as interest expense on the statement of operations. The repayment of these mandatorily redeemable financial instruments is reflected as cash outflows in the financing activities section of the statement of cash flows once settled.
We do not take into consideration our members' right to cancel a redemption request in determining when shares of capital stock should be classified as a liability because such cancellation would be subject to a cancellation fee equal to two percent of the par amount of the shares of Class B stock that is the subject of the redemption notice. If a member cancels its written notice of redemption or notice of withdrawal, we will reclassify mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock will no longer be classified as interest expense.
Restricted Retained Earnings
The joint capital enhancement agreement, as amended (the Joint Capital Agreement) requires each FHLBank to contribute 20 percent of its quarterly net income to a separate restricted retained earnings account at that FHLBank until that account balance equals at least one1 percent of that FHLBank's average balance of outstanding COs (excluding fair-value adjustments) for the previous quarter. Restricted retained earnings are not available to pay dividends, and we present them separate from other retained earnings on the statement of condition.
Litigation Settlements
Litigation settlement gains, net of related legal expenses, are recorded in other income (loss). A litigation settlement gain is considered realized and recorded when we receive cash or assets that are readily convertible to known amounts of cash or claims to cash. In addition, a litigation settlement gain is considered realizable and recorded when we enter into a signed agreement that is not subject to appeal, where the counterparty has the ability to pay, and the amount to be received can be reasonably estimated. Prior to being realized or realizable, we consider potential litigation settlement gains to be gain contingencies, and therefore they are not recorded in the statement of operations. The related legal expenses are contingent-based fees and are only incurred and recorded upon a litigation settlement gain.
FHFA Expenses
We fund a portion of the costs of operating the FHFA. The portion of the FHFA's expenses and working capital fund paid by the FHLBanks is allocated among the FHLBanks based on the pro rata share of the annual assessments based on the ratio
of each FHLBank's minimum required regulatory capital to the aggregate minimum required regulatory capital of every FHLBank. We must pay an amount equal to one-half of our annual assessment twice each year.
Office of Finance Expenses
Each FHLBank's proportionate share of Office of Finance operating and capital expenditures has been calculated using a formula based upon the following components: (1) two-thirds based upon each FHLBank's share of total COs outstanding and (2) one-third divided equally among the FHLBanks.
Assessments
Affordable Housing Program. The FHLBank Act requires us to establish and fund an AHP based on positive annual net earnings, providing grants to members to assist in the purchase, construction, or rehabilitation of housing for very low- to moderate-income households. We charge the required funding for the AHP to earnings and establish a liability, except when annual net earnings are zero or negative, in which case there is no requirement to fund an AHP. We also issue AHP advances at interest rates below the customary interest rate for nonsubsidized advances. A discount on the AHP advance and charge against the AHP liability is recorded for the present value of the variation in the cash flow caused by the difference in the interest rate between the AHP advance rate and our related cost of funds for comparable maturity funding. The discount on AHP advances is accreted to interest income on advances using the level-yield method over the life of the advance. See Note 1415 — Affordable Housing Program for additional information.
Cash Flows
In the statement of cash flows, we consider noninterest bearing cash and due from banks as cash and cash equivalents. Federal funds sold and interest-bearing deposits are not treated as cash equivalents for purposes of the statement of cash flows, but are instead treated as short-term investments and are reflected in the investing activities section of the statement of cash flows.
Related-Party Activities
We define related parties as members who owned 10 percent or more of the voting interests of our outstanding capital stock at any time during the year.December 31, 2019. See Note 2021 — Transactions with Shareholders for additional information.
Segment Reporting
We report on an enterprise-wide basis. The enterprise-wide method of evaluating our financial information reflects the manner in which the chief operating decision-maker manages the business.
Reclassification
Certain amounts in the 20162018 and 20152017 financial statements have been reclassified to conform to the financial statement presentation for the year ended December 31, 2017.2019.
Note 23 — Recently Issued and Adopted Accounting Guidance
Becoming effectiveEffective January 1, 20182019
ImprovingInclusion of the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.Overnight Indexed Swap Rate Based on the Secured Overnight Financing Rate (SOFR) as a Benchmark Interest Rate for Hedge Accounting Purposes. On March 10, 2017,October 25, 2018, the FASB issued amended guidance to improvepermit use of the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments require that employers disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidanceovernight-index swap (OIS) rate based on how to present the service cost component and the other components of net benefit cost in the statement of operations and allow only the service cost component of net benefit cost to be eligibleSOFR as a U.S. benchmark interest rate for capitalization.hedge accounting purposes. This guidance became effective for us for the interim and annual periods beginning on January 1, 2018.2019. Upon adoption, this guidance will be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the statement of operations and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The changes outlined in the guidance will primarily impact the presentation of the statement of operations, but will not impact net income. As such, adoption of this guidance is not expected to have a material effect on our financial condition, results of operations, or cash flows. For the years ended December 31, 2017 and 2016,SOFR became an eligible benchmark interest rate which we recorded $1.4 million and $1.6 million, respectively, of non-service cost components of net benefit cost as
compensation and benefits expense in the statements of operations. Upon adoption of the amended guidance in 2018, these amounts will be reclassified to other non-interest expense in the statements of operations.
Recognition and Measurement of Financial Assets and Financial Liabilities. On January 5, 2016, the FASB issued amended guidance on certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance requires, among other things, that we:
Present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when wemay elect to measure the liability at fair value in accordance with the fair value option for financial instruments.
Present separately financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the statement of condition or the accompanying notesapply to the financial statements.
Discontinue the disclosure of the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the statement of condition.
This guidance became effective for us for the interim and annual periods beginning on January 1, 2018. The adoption of this guidance will affect our disclosures in the future. However, this guidance is not expected to have a material effect on our financial condition, results of operations, and cash flows.
Becoming effective January 1, 2019future hedge relationships.
Targeted Improvements to Accounting for Hedging Activities,Activities. On August 28, 2017, the Financial Accounting Standards Board (FASB)FASB issued amended guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. This guidance requires that, for fair valuefair-value hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness be presented in the same income statement line that is used to present the earnings effect of the hedged item. For cash flowcash-flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness must be recorded in other comprehensive income. In addition, the amendments include certain targeted improvements to the assessment of hedge effectiveness and permit, among other things, the following:
Measurement of the change in fair value of the hedged item on the basis of the benchmark rate component of the contractual coupon cash flows determined at hedge inception;
Measurement of the hedged item in a partial-term fair valuefair-value hedge of interest-rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged;
Consideration of only how changes in the benchmark interest rate alone affect a decision to settle a prepayable instrument before its scheduled maturity in calculating the change in the fair value of the hedged item attributable to interest-rate risk;
For a cash flowcash-flow hedge of interest-rate risk of a variable-rate financial instrument, an entity could designate as the hedged risk the variability in cash flows attributable to the contractually specified interest-rate;interest rate;
For a closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, an entity can designate an amount that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows (the “last-of-layer” method) into a hedging relationship; and
An entity can perform subsequent assessments of hedge effectiveness qualitatively in instances where initial quantitative testing is required; and
For financial instruments eligible to be designated as a hedged item under the last-of-layer method, a one-time reclassification of prepayable financial instruments from held-to-maturity to available-for-sale at the date of adoption is permitted.required.
ThisWe adopted this guidance becomes effective for us for interim and annual periods beginning on January 1, 2019, and while early adoption is permitted, we do not intend to adopt this guidance early.2019. For all cash flowcash-flow hedges existing on the date of adoption, this guidance will bewas applied through a cumulative-effect adjustment to accumulated other comprehensive income with a corresponding adjustment to retained earnings as of the beginning of the year of adoption. The amended presentation and disclosure guidance is required only prospectively. We are in the process of evaluating this guidance, and its anticipated effect on ourwere applied prospectively; prior period comparative financial condition, results of operations, and cash flowsinformation has not yet been determined.
Premium Amortization on Purchased Callable Debt Securities.On March 30, 2017, the FASB issued amended guidancereclassified to shorten the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amendments require the premiumconform to be amortized to the earliest call date.current presentation. The amendments do not require an accounting change for
securities held at a discount; the discount continues to be amortized to maturity. This guidance affects all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). This guidance is effective for us for interim and annual periods beginning on January 1, 2019, and while early adoption is permitted, we do not intend to adopt this guidance early. This guidance will be applied using a modified retrospective method through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We currently do not have a significant amount of assets that are in scope to be evaluated under the updated guidance. As such, adoption of this guidance
isdid not
expected to have a material effect on our financial condition, results of operations, or cash flows.
See Note 2 — Summary of Significant Accounting Policies and Note 12 — Derivatives and Hedging Activities for additional information.
Leases.On February 25, 2016, the FASB issued guidance that requires recognition of lease assets and lease liabilities on the statement of condition and disclosure of key information about leasing arrangements. In particular, this guidance requires a lessee of operating or finance leases to recognize on the statement of condition a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. However, for leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. Under previous GAAP, a lessee was not required to recognize lease assets and lease liabilities arising from operating leases on the statement of condition. The guidance becomesbecame effective for us for the interim and annual periods beginning on January 1, 2019, and while early application is permitted, we do not intent to adopt2019. Upon adoption of the new guidance, early.we recognized right-of-use assets and lease liabilities for our operating leases of approximately $11.9 million and $12.5 million, respectively, on the statement of condition. See Note 2 — Summary of Significant Accounting Policies for additional information.
Effective January 1, 2020
Facilitation of the Effects of Reference Rate Reform on Financial Reporting. On March 12, 2020, the Financial Accounting Standards Board released temporary optional guidance that provides transition relief for reference rate reform. The guidance contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications, hedging relationships, and other transactions that reference LIBOR or a reference rate that is expected to be discontinued as a result of reference rate reform if certain criteria are met.
In addition to the optional expedients for contract modifications and hedging relationships, this update provides a one-time election to sell, transfer, or both sell and transfer debt securities classified as held-to-maturity that reference a rate affected by reference rate reform and that are classified as held-to-maturity before January 1, 2020.
This standard is effective upon issuance and the provisions generally can be applied prospectively as of January 1, 2020 through December 31, 2022. We are in the process of evaluating this guidance, and its anticipated effect on our financial condition, results of operations, and cash flows.
Becoming effective January 1, 2020flows has not yet been determined.
Financial Instruments - Credit Losses. On June 16, 2016, the FASB issued amended guidance for the accounting of credit losses on financial instruments. The amendments require entities to measure expected credit losses based on relevant information about past events (including historical experience), current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The new guidance requires a financial asset, or a group of financial assets, measured at amortized cost to be presented at the net amount expected to be collected over the contractual term of the financial asset(s). The guidance also requires, among other things, that we:
Reflect in the statement of operations the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.
Determine the allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost in a similar manner to other financial assets measured at amortized cost. The initial allowance for credit losses is required to be added to the purchase price.
Record credit losses relating to available-for-sale debt securities through an allowance for credit losses. The amendments limit the allowance for credit losses to the amount by which fair value is below amortized cost.
Further disaggregate the current disclosure of credit quality indicators in relation to the amortized cost of financing receivables by the year of origination.
This guidance is effective for us for interim and annual periods beginning on January 1, 2020. Early application is permitted as of the interim and annual reporting periods beginning after December 15, 2018; however, we do not intend to adopt the new guidance early. This guidance is required to be applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In addition, entities are required to use a prospective transition approach for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination and for debt securities for which an other-than-temporary impairment had been recognized before the effective date. While we are in the process
The adoption of evaluating this guidance we expect the adoption of the guidance will result in an increase in the allowance for credit losses given the requirement to assess losses for the entire estimated life of the financial asset. Thedid not have a material effect on our financial condition, results of operations, andor cash flows will depend upon the composition of our financial assets held at the adoption date as well as the economic conditions and forecasts at that time.flows.
Note 34 — Cash and Due from Banks
Cash and due from banks includes cash on hand, cash items in the process of collection, compensating balances, and amounts due from correspondent banks and the Federal Reserve Bank of Boston.
Compensating Balances. We maintain collected cash balances with a commercial bank in return for certain services. The related agreement contains no legal restrictions on the withdrawal of funds. The average collected cash balance was $45.5$19.3 million and $165.6$16.3 million for the years ended December 31, 20172019 and 2016,2018, respectively.
Note 45 — Trading Securities
Table 4.1 - Trading Securities by Major Security Type (dollars in thousands)
| |
Table 5.1 - Trading Securities by Major Security Type (dollars in thousands)
| | Table 5.1 - Trading Securities by Major Security Type (dollars in thousands)
|
| | | December 31, 2017 | | December 31, 2016 | December 31, 2019 | | December 31, 2018 |
| Corporate bonds | | $ | 5,896 |
| | $ | 6,102 |
|
| U.S. Treasury obligations | $ | — |
| | $ | 399,521 |
| 2,240,236 |
| | — |
|
| | | 2,246,132 |
| | 6,102 |
|
| | | | | | | |
| MBS | |
| | | |
| | |
| U.S. government-guaranteed – single-family | 6,807 |
| | 8,494 |
| 4,047 |
| | 5,344 |
|
| GSEs – single-family | 346 |
| | 768 |
| |
| GSEs – multifamily | 184,357 |
| | 203,839 |
| |
| GSE – single-family | | 85 |
| | 148 |
|
| GSE – multifamily | | — |
| | 151,444 |
|
| | 191,510 |
| | 213,101 |
| 4,132 |
| | 156,936 |
|
| Total | $ | 191,510 |
| | $ | 612,622 |
| $ | 2,250,264 |
| | $ | 163,038 |
|
Net unrealized losses on trading securities for the years ended December 31, 2017, 2016 and 2015, amounted to $6.1 million, $4.4 million and $4.9 million, respectively.Table 5.2 - Unrealized and Realized Gains (Losses) on Trading Securities (dollars in thousands)
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Net unrealized gains (losses) on trading securities held at year end | | $ | 1,379 |
| | $ | (4,515 | ) | | $ | (6,145 | ) |
| Net unrealized and realized gains on trading securities sold or matured during the year | | (92 | ) | | — |
| | 67 |
|
| Net unrealized gains (losses) on trading securities | | $ | 1,287 |
| | $ | (4,515 | ) | | $ | (6,078 | ) |
We do not participate in speculative trading practices and typically hold these investments over a longer time horizon.
Note 56 — Available-for-Sale Securities
Table 5.1 - Available-for-Sale Securities by Major Security Type (dollars in thousands)
| |
Table 6.1 - Available-for-Sale Securities by Major Security Type (dollars in thousands)
| | Table 6.1 - Available-for-Sale Securities by Major Security Type (dollars in thousands)
|
| | | December 31, 2017 | December 31, 2019 |
| | | | Amounts Recorded in Accumulated Other Comprehensive Loss | | | | | Amounts Recorded in Accumulated Other Comprehensive Loss | | |
| | Amortized Cost (1) | | Unrealized Gains | | Unrealized Losses | | Fair Value | Amortized Cost (1) | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| State or local housing-finance-agency obligations (HFA securities) | $ | 42,700 |
| | $ | — |
| | $ | (5,017 | ) | | $ | 37,683 |
| |
| State housing-finance-agency obligations (HFA securities) | | $ | 69,320 |
| | $ | — |
| | $ | (4,668 | ) | | $ | 64,652 |
|
| Supranational institutions | 438,667 |
| | — |
| | (20,382 | ) | | 418,285 |
| 429,354 |
| | — |
| | (12,925 | ) | | 416,429 |
|
| U.S. government-owned corporations | 313,985 |
| | — |
| | (21,908 | ) | | 292,077 |
| 323,192 |
| | — |
| | (26,431 | ) | | 296,761 |
|
| GSEs | 128,744 |
| | — |
| | (7,401 | ) | | 121,343 |
| |
| GSE | | 130,935 |
| | — |
| | (7,149 | ) | | 123,786 |
|
| | 924,096 |
| | — |
| | (54,708 | ) | | 869,388 |
| 952,801 |
| | — |
| | (51,173 | ) | | 901,628 |
|
| MBS | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| U.S. government guaranteed – single-family | 98,720 |
| | 55 |
| | (2,998 | ) | | 95,777 |
| 60,003 |
| | — |
| | (2,289 | ) | | 57,714 |
|
| U.S. government guaranteed – multifamily | 447,975 |
| | — |
| | (4,602 | ) | | 443,373 |
| 283,674 |
| | — |
| | (1,057 | ) | | 282,617 |
|
| GSEs – single-family | 4,625,333 |
| | 1,194 |
| | (63,535 | ) | | 4,562,992 |
| |
| GSEs – multifamily | 1,350,943 |
| | 2,263 |
| | — |
| | 1,353,206 |
| |
| GSE – single-family | | 2,598,325 |
| | 5,323 |
| | (13,377 | ) | | 2,590,271 |
|
| GSE – multifamily | | 3,588,119 |
| | 3,109 |
| | (14,458 | ) | | 3,576,770 |
|
| | 6,522,971 |
| | 3,512 |
| | (71,135 | ) | | 6,455,348 |
| 6,530,121 |
| | 8,432 |
| | (31,181 | ) | | 6,507,372 |
|
| Total | $ | 7,447,067 |
| | $ | 3,512 |
| | $ | (125,843 | ) | | $ | 7,324,736 |
| $ | 7,482,922 |
| | $ | 8,432 |
| | $ | (82,354 | ) | | $ | 7,409,000 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | | | Amounts Recorded in Accumulated Other Comprehensive Loss | | |
| | Amortized Cost (1) | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| HFA securities | $ | 55,500 |
| | $ | — |
| | $ | (5,899 | ) | | $ | 49,601 |
|
| Supranational institutions | 419,222 |
| | — |
| | (14,067 | ) | | 405,155 |
|
| U.S. government-owned corporations | 297,729 |
| | — |
| | (24,560 | ) | | 273,169 |
|
| GSE | 122,423 |
| | — |
| | (6,796 | ) | | 115,627 |
|
| | 894,874 |
| | — |
| | (51,322 | ) | | 843,552 |
|
| MBS | |
| | |
| | |
| | |
|
| U.S. government guaranteed – single-family | 79,075 |
| | 20 |
| | (3,437 | ) | | 75,658 |
|
| U.S. government guaranteed – multifamily | 368,103 |
| | — |
| | (6,969 | ) | | 361,134 |
|
| GSE – single-family | 3,649,964 |
| | 681 |
| | (88,486 | ) | | 3,562,159 |
|
| GSE – multifamily | 1,010,886 |
| | 168 |
| | (3,613 | ) | | 1,007,441 |
|
| | 5,108,028 |
| | 869 |
| | (102,505 | ) | | 5,006,392 |
|
| Total | $ | 6,002,902 |
| | $ | 869 |
| | $ | (153,827 | ) | | $ | 5,849,944 |
|
_______________________
| |
| (1) | Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and fair-value hedge accounting adjustments. |
|
| | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | | | Amounts Recorded in Accumulated Other Comprehensive Loss | | |
| | Amortized Cost (1) | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| HFA securities | $ | 9,350 |
| | $ | — |
| | $ | (1,204 | ) | | $ | 8,146 |
|
| Supranational institutions | 452,021 |
| | — |
| | (29,401 | ) | | 422,620 |
|
| U.S. government-owned corporations | 317,588 |
| | — |
| | (45,631 | ) | | 271,957 |
|
| GSEs | 130,798 |
| | — |
| | (13,330 | ) | | 117,468 |
|
| | 909,757 |
| | — |
| | (89,566 | ) | | 820,191 |
|
| MBS | |
| | |
| | |
| | |
|
| U.S. government guaranteed – single-family | 127,032 |
| | 16 |
| | (2,321 | ) | | 124,727 |
|
| U.S. government guaranteed – multifamily | 565,593 |
| | 45 |
| | (2,277 | ) | | 563,361 |
|
| GSEs – single-family | 4,447,803 |
| | 1,765 |
| | (45,713 | ) | | 4,403,855 |
|
| GSEs – multifamily | 675,288 |
| | 1,242 |
| | — |
| | 676,530 |
|
| | 5,815,716 |
| | 3,068 |
| | (50,311 | ) | | 5,768,473 |
|
| Total | $ | 6,725,473 |
| | $ | 3,068 |
| | $ | (139,877 | ) | | $ | 6,588,664 |
|
_______________________
| |
(1) | Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and fair-value hedge accounting adjustments. |
Table 5.2 - Available-for-Sale Securities in a Continuous Unrealized Loss Position (dollars in thousands)
| |
Table 6.2 - Available-for-Sale Securities in a Continuous Unrealized Loss Position (dollars in thousands)
| | Table 6.2 - Available-for-Sale Securities in a Continuous Unrealized Loss Position (dollars in thousands)
|
| | | December 31, 2017 | December 31, 2019 |
| | Continuous Unrealized Loss Less than 12 Months | | Continuous Unrealized Loss 12 Months or More | | Total | Continuous Unrealized Loss Less than 12 Months | | Continuous Unrealized Loss 12 Months or More | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| HFA securities | $ | 29,345 |
| | $ | (4,005 | ) | | $ | 8,338 |
| | $ | (1,012 | ) | | $ | 37,683 |
| | $ | (5,017 | ) | $ | 12,229 |
| | $ | (1,591 | ) | | $ | 52,423 |
| | $ | (3,077 | ) | | $ | 64,652 |
| | $ | (4,668 | ) |
| Supranational institutions | — |
| | — |
| | 418,285 |
| | (20,382 | ) | | 418,285 |
| | (20,382 | ) | — |
| | — |
| | 416,429 |
| | (12,925 | ) | | 416,429 |
| | (12,925 | ) |
| U.S. government-owned corporations | — |
| | — |
| | 292,077 |
| | (21,908 | ) | | 292,077 |
| | (21,908 | ) | — |
| | — |
| | 296,761 |
| | (26,431 | ) | | 296,761 |
| | (26,431 | ) |
| GSEs | — |
| | — |
| | 121,343 |
| | (7,401 | ) | | 121,343 |
| | (7,401 | ) | |
| GSE | | — |
| | — |
| | 123,786 |
| | (7,149 | ) | | 123,786 |
| | (7,149 | ) |
| | 29,345 |
| | (4,005 | ) | | 840,043 |
| | (50,703 | ) | | 869,388 |
| | (54,708 | ) | 12,229 |
| | (1,591 | ) | | 889,399 |
| | (49,582 | ) | | 901,628 |
| | (51,173 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| MBS | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
| U.S. government guaranteed – single-family | — |
| | — |
| | 70,877 |
| | (2,998 | ) | | 70,877 |
| | (2,998 | ) | 10,885 |
| | (1 | ) | | 45,490 |
| | (2,288 | ) | | 56,375 |
| | (2,289 | ) |
| U.S. government guaranteed – multifamily | 64,219 |
| | (571 | ) | | 379,154 |
| | (4,031 | ) | | 443,373 |
| | (4,602 | ) | — |
| | — |
| | 282,617 |
| | (1,057 | ) | | 282,617 |
| | (1,057 | ) |
| GSEs – single-family | 1,853,323 |
| | (12,661 | ) | | 2,540,006 |
| | (50,874 | ) | | 4,393,329 |
| | (63,535 | ) | |
| GSE – single-family | | 189,402 |
| | (968 | ) | | 1,423,927 |
| | (12,409 | ) | | 1,613,329 |
| | (13,377 | ) |
| GSE – multifamily | | 1,800,586 |
| | (13,242 | ) | | 405,778 |
| | (1,216 | ) | | 2,206,364 |
| | (14,458 | ) |
| | 1,917,542 |
| | (13,232 | ) | | 2,990,037 |
| | (57,903 | ) | | 4,907,579 |
| | (71,135 | ) | 2,000,873 |
| | (14,211 | ) | | 2,157,812 |
| | (16,970 | ) | | 4,158,685 |
| | (31,181 | ) |
| Total temporarily impaired | $ | 1,946,887 |
| | $ | (17,237 | ) | | $ | 3,830,080 |
|
| $ | (108,606 | ) |
| $ | 5,776,967 |
|
| $ | (125,843 | ) | $ | 2,013,102 |
| | $ | (15,802 | ) | | $ | 3,047,211 |
|
| $ | (66,552 | ) |
| $ | 5,060,313 |
|
| $ | (82,354 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Continuous Unrealized Loss Less than 12 Months | | Continuous Unrealized Loss 12 Months or More | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| HFA securities | $ | 11,118 |
| | $ | (1,682 | ) | | $ | 38,483 |
| | $ | (4,217 | ) | | $ | 49,601 |
| | $ | (5,899 | ) |
| Supranational institutions | — |
| | — |
| | 405,155 |
| | (14,067 | ) | | 405,155 |
| | (14,067 | ) |
| U.S. government-owned corporations | — |
| | — |
| | 273,169 |
| | (24,560 | ) | | 273,169 |
| | (24,560 | ) |
| GSE | — |
| | — |
| | 115,627 |
| | (6,796 | ) | | 115,627 |
| | (6,796 | ) |
| | 11,118 |
| | (1,682 | ) | | 832,434 |
| | (49,640 | ) | | 843,552 |
| | (51,322 | ) |
| MBS | |
| | |
| | |
| | |
| | |
| | |
|
| U.S. government guaranteed – single-family | — |
| | — |
| | 57,679 |
| | (3,437 | ) | | 57,679 |
| | (3,437 | ) |
| U.S. government guaranteed – multifamily | — |
| | — |
| | 361,134 |
| | (6,969 | ) | | 361,134 |
| | (6,969 | ) |
| GSE – single-family | 53,122 |
| | (388 | ) | | 3,417,076 |
| | (88,098 | ) | | 3,470,198 |
| | (88,486 | ) |
| GSE – multifamily | 902,850 |
| | (3,613 | ) | | — |
| | — |
| | 902,850 |
| | (3,613 | ) |
| | 955,972 |
| | (4,001 | ) | | 3,835,889 |
| | (98,504 | ) | | 4,791,861 |
| | (102,505 | ) |
| Total temporarily impaired | $ | 967,090 |
| | $ | (5,683 | ) | | $ | 4,668,323 |
| | $ | (148,144 | ) | | $ | 5,635,413 |
| | $ | (153,827 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Continuous Unrealized Loss Less than 12 Months | | Continuous Unrealized Loss 12 Months or More | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| HFA securities | $ | 8,146 |
| | $ | (1,204 | ) | | $ | — |
| | $ | — |
| | $ | 8,146 |
| | $ | (1,204 | ) |
| Supranational institutions | — |
| | — |
| | 422,620 |
| | (29,401 | ) | | 422,620 |
| | (29,401 | ) |
| U.S. government-owned corporations | — |
| | — |
| | 271,957 |
| | (45,631 | ) | | 271,957 |
| | (45,631 | ) |
| GSEs | — |
| | — |
| | 117,468 |
| | (13,330 | ) | | 117,468 |
| | (13,330 | ) |
| | 8,146 |
| | (1,204 | ) | | 812,045 |
| | (88,362 | ) | | 820,191 |
| | (89,566 | ) |
| MBS | |
| | |
| | |
| | |
| | |
| | |
|
| U.S. government guaranteed – single-family | 31,606 |
| | (4 | ) | | 90,854 |
| | (2,317 | ) | | 122,460 |
| | (2,321 | ) |
| U.S. government guaranteed – multifamily | 326,126 |
| | (1,261 | ) | | 165,246 |
| | (1,016 | ) | | 491,372 |
| | (2,277 | ) |
| GSEs – single-family | 3,517,094 |
| | (39,181 | ) | | 351,331 |
| | (6,532 | ) | | 3,868,425 |
| | (45,713 | ) |
| | 3,874,826 |
| | (40,446 | ) | | 607,431 |
| | (9,865 | ) | | 4,482,257 |
| | (50,311 | ) |
| Total temporarily impaired | $ | 3,882,972 |
| | $ | (41,650 | ) | | $ | 1,419,476 |
| | $ | (98,227 | ) | | $ | 5,302,448 |
| | $ | (139,877 | ) |
Table 5.3 - Available-for-Sale Securities by Contractual Maturity (dollars in thousands) | |
Table 6.3 - Available-for-Sale Securities by Contractual Maturity (dollars in thousands) | | Table 6.3 - Available-for-Sale Securities by Contractual Maturity (dollars in thousands) |
| | | December 31, 2017 | | December 31, 2016 | December 31, 2019 | | December 31, 2018 |
| Year of Maturity | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| Due in one year or less | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | 7,600 |
| | $ | 7,563 |
| | $ | — |
| | $ | — |
|
| Due after one year through five years | 42,700 |
| | 37,683 |
| | 9,350 |
| | 8,146 |
| 61,720 |
| | 57,089 |
| | 55,500 |
| | 49,601 |
|
| Due after five years through 10 years | 438,667 |
| | 418,285 |
| | 171,589 |
| | 161,746 |
| 477,232 |
| | 463,465 |
| | 465,248 |
| | 450,102 |
|
| Due after 10 years | 442,729 |
| | 413,420 |
| | 728,818 |
| | 650,299 |
| 406,249 |
| | 373,511 |
| | 374,126 |
| | 343,849 |
|
| | 924,096 |
| | 869,388 |
| | 909,757 |
| | 820,191 |
| 952,801 |
| | 901,628 |
| | 894,874 |
| | 843,552 |
|
MBS (1) | 6,522,971 |
| | 6,455,348 |
| | 5,815,716 |
| | 5,768,473 |
| 6,530,121 |
| | 6,507,372 |
| | 5,108,028 |
| | 5,006,392 |
|
| Total | $ | 7,447,067 |
| | $ | 7,324,736 |
| | $ | 6,725,473 |
| | $ | 6,588,664 |
| $ | 7,482,922 |
| | $ | 7,409,000 |
| | $ | 6,002,902 |
| | $ | 5,849,944 |
|
_______________________
| |
| (1) | MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay obligations with or without call or prepayment fees. |
Note 67 — Held-to-Maturity Securities
Table 7.1 - Held-to-Maturity Securities by Major Security Type (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | Amortized Cost | | Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss | | Carrying Value | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding Losses | | Fair Value |
| HFA securities | $ | 87,250 |
| | $ | — |
| | $ | 87,250 |
| | $ | — |
| | $ | (3,845 | ) | | $ | 83,405 |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| MBS | |
| | |
| | |
| | |
| | |
| | |
|
| U.S. government guaranteed – single-family | 6,987 |
| | — |
| | 6,987 |
| | 129 |
| | — |
| | 7,116 |
|
| GSE – single-family | 303,604 |
| | — |
| | 303,604 |
| | 5,197 |
| | (246 | ) | | 308,555 |
|
| GSE – multifamily | 140,661 |
| | — |
| | 140,661 |
| | 612 |
| | (2 | ) | | 141,271 |
|
| Private-label | 408,640 |
| | (76,035 | ) | | 332,605 |
| | 162,904 |
| | (446 | ) | | 495,063 |
|
| | 859,892 |
| | (76,035 | ) | | 783,857 |
| | 168,842 |
| | (694 | ) | | 952,005 |
|
| Total | $ | 947,142 |
| | $ | (76,035 | ) | | $ | 871,107 |
| | $ | 168,842 |
| | $ | (4,539 | ) | | $ | 1,035,410 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Amortized Cost | | Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss | | Carrying Value | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding Losses | | Fair Value |
| U.S. agency obligations | $ | 208 |
| | $ | — |
| | $ | 208 |
| | $ | — |
| | $ | — |
| | $ | 208 |
|
| HFA securities | 104,465 |
| | — |
| | 104,465 |
| | 4 |
| | (4,612 | ) | | 99,857 |
|
| | 104,673 |
| | — |
| | 104,673 |
| | 4 |
| | (4,612 | ) | | 100,065 |
|
| MBS | | | | | | | | | | | |
| U.S. government guaranteed – single-family | 8,173 |
| | — |
| | 8,173 |
| | 158 |
| | — |
| | 8,331 |
|
| GSE – single-family | 412,639 |
| | — |
| | 412,639 |
| | 6,861 |
| | (1,389 | ) | | 418,111 |
|
| GSE – multifamily | 209,786 |
| | — |
| | 209,786 |
| | 1,728 |
| | — |
| | 211,514 |
|
| Private-label | 688,905 |
| | (129,153 | ) | | 559,752 |
| | 234,083 |
| | (2,927 | ) | | 790,908 |
|
| | 1,319,503 |
| | (129,153 | ) | | 1,190,350 |
| | 242,830 |
| | (4,316 | ) | | 1,428,864 |
|
| Total | $ | 1,424,176 |
| | $ | (129,153 | ) | | $ | 1,295,023 |
| | $ | 242,834 |
| | $ | (8,928 | ) | | $ | 1,528,929 |
|
Table 7.2 - Held-to-Maturity Securities in a Continuous Unrealized Loss Position (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | Continuous Unrealized Loss Less than 12 Months | | Continuous Unrealized Loss 12 Months or More | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| HFA securities | $ | 3,089 |
| | $ | (1 | ) | | $ | 80,316 |
| | $ | (3,844 | ) | | $ | 83,405 |
| | $ | (3,845 | ) |
| | | | | | | | | | | | |
| MBS | | | | | | | | | |
| | |
|
| GSE – single-family | 32,335 |
| | (101 | ) | | 16,465 |
| | (145 | ) | | 48,800 |
| | (246 | ) |
| GSEs – multifamily | 949 |
| | (2 | ) | | — |
| | — |
| | 949 |
| | (2 | ) |
| Private-label | 913 |
| | (9 | ) | | 23,999 |
| | (574 | ) | | 24,912 |
| | (583 | ) |
| | 34,197 |
| | (112 | ) | | 40,464 |
| | (719 | ) | | 74,661 |
| | (831 | ) |
| Total | $ | 37,286 |
| | $ | (113 | ) | | $ | 120,780 |
| | $ | (4,563 | ) | | $ | 158,066 |
| | $ | (4,676 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Continuous Unrealized Loss Less than 12 Months | | Continuous Unrealized Loss 12 Months or More | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| HFA securities | $ | 6,196 |
| | $ | (9 | ) | | $ | 92,822 |
| | $ | (4,603 | ) | | $ | 99,018 |
| | $ | (4,612 | ) |
| | | | | | | | | | | | |
| MBS | | | | | | | | | |
| | |
|
| GSE – single-family | 69,377 |
| | (580 | ) | | 52,237 |
| | (809 | ) | | 121,614 |
| | (1,389 | ) |
| Private-label | 25,680 |
| | (331 | ) | | 114,937 |
| | (4,587 | ) | | 140,617 |
| | (4,918 | ) |
| | 95,057 |
| | (911 | ) | | 167,174 |
| | (5,396 | ) | | 262,231 |
| | (6,307 | ) |
| Total | $ | 101,253 |
| | $ | (920 | ) | | $ | 259,996 |
| | $ | (9,999 | ) | | $ | 361,249 |
| | $ | (10,919 | ) |
Table 6.1 - Held-to-Maturity Securities by Major Security Type (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Amortized Cost | | Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss | | Carrying Value | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding Losses | | Fair Value |
| U.S. agency obligations | $ | 1,042 |
| | $ | — |
| | $ | 1,042 |
| | $ | 10 |
| | $ | — |
| | $ | 1,052 |
|
| HFA securities | 146,410 |
| | — |
| | 146,410 |
| | 26 |
| | (14,372 | ) | | 132,064 |
|
| | 147,452 |
| | — |
| | 147,452 |
| | 36 |
| | (14,372 | ) | | 133,116 |
|
| MBS | |
| | |
| | |
| | |
| | |
| | |
|
| U.S. government guaranteed – single-family | 10,097 |
| | — |
| | 10,097 |
| | 190 |
| | — |
| | 10,287 |
|
| U.S. government guaranteed – multifamily | 280 |
| | — |
| | 280 |
| | — |
| | — |
| | 280 |
|
| GSEs – single-family | 568,948 |
| | — |
| | 568,948 |
| | 10,410 |
| | (310 | ) | | 579,048 |
|
| GSEs – multifamily | 214,641 |
| | — |
| | 214,641 |
| | 6,451 |
| | — |
| | 221,092 |
|
| Private-label – residential | 835,070 |
| | (158,194 | ) | | 676,876 |
| | 278,217 |
| | (3,195 | ) | | 951,898 |
|
| Asset-backed securities (ABS) backed by home equity loans | 7,851 |
| | (23 | ) | | 7,828 |
| | 27 |
| | (349 | ) | | 7,506 |
|
| | 1,636,887 |
| | (158,217 | ) | | 1,478,670 |
| | 295,295 |
| | (3,854 | ) | | 1,770,111 |
|
| Total | $ | 1,784,339 |
| | $ | (158,217 | ) | | $ | 1,626,122 |
| | $ | 295,331 |
| | $ | (18,226 | ) | | $ | 1,903,227 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Amortized Cost | | Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss | | Carrying Value | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding Losses | | Fair Value |
| U.S. agency obligations | $ | 2,159 |
| | $ | — |
| | $ | 2,159 |
| | $ | 56 |
| | $ | — |
| | $ | 2,215 |
|
| HFA securities | 162,568 |
| | — |
| | 162,568 |
| | 11 |
| | (19,291 | ) | | 143,288 |
|
| | 164,727 |
| | — |
| | 164,727 |
| | 67 |
| | (19,291 | ) | | 145,503 |
|
| MBS | | | | | | | | | | | |
| U.S. government guaranteed – single-family | 12,719 |
| | — |
| | 12,719 |
| | 246 |
| | — |
| | 12,965 |
|
| U.S. government guaranteed – multifamily | 1,532 |
| | — |
| | 1,532 |
| | — |
| | — |
| | 1,532 |
|
| GSEs – single-family | 812,836 |
| | — |
| | 812,836 |
| | 16,881 |
| | (519 | ) | | 829,198 |
|
| GSEs – multifamily | 318,667 |
| | — |
| | 318,667 |
| | 11,692 |
| | — |
| | 330,359 |
|
| Private-label – residential | 999,149 |
| | (191,804 | ) | | 807,345 |
| | 240,818 |
| | (8,373 | ) | | 1,039,790 |
|
| ABS backed by home equity loans | 13,515 |
| | (574 | ) | | 12,941 |
| | 602 |
| | (600 | ) | | 12,943 |
|
| | 2,158,418 |
| | (192,378 | ) | | 1,966,040 |
| | 270,239 |
| | (9,492 | ) | | 2,226,787 |
|
| Total | $ | 2,323,145 |
| | $ | (192,378 | ) | | $ | 2,130,767 |
| | $ | 270,306 |
| | $ | (28,783 | ) | | $ | 2,372,290 |
|
Table 6.2 - Held-to-Maturity Securities in a Continuous Unrealized Loss Position (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Continuous Unrealized Loss Less than 12 Months | | Continuous Unrealized Loss 12 Months or More | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| HFA securities | $ | — |
| | $ | — |
| | $ | 121,203 |
| | $ | (14,372 | ) | | $ | 121,203 |
| | $ | (14,372 | ) |
| | | | | | | | | | | | |
| MBS | | | | | | | | | |
| | |
|
| GSEs – single-family | 44,759 |
| | (52 | ) | | 28,771 |
| | (258 | ) | | 73,530 |
| | (310 | ) |
| Private-label – residential | — |
| | — |
| | 158,963 |
| | (5,558 | ) | | 158,963 |
| | (5,558 | ) |
| ABS backed by home equity loans | — |
| | — |
| | 7,371 |
| | (350 | ) | | 7,371 |
| | (350 | ) |
| | 44,759 |
| | (52 | ) | | 195,105 |
| | (6,166 | ) | | 239,864 |
| | (6,218 | ) |
| Total | $ | 44,759 |
| | $ | (52 | ) | | $ | 316,308 |
| | $ | (20,538 | ) | | $ | 361,067 |
| | $ | (20,590 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Continuous Unrealized Loss Less than 12 Months | | Continuous Unrealized Loss 12 Months or More | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| HFA securities | $ | — |
| | $ | — |
| | $ | 140,959 |
| | $ | (19,291 | ) | | $ | 140,959 |
| | $ | (19,291 | ) |
| | | | | | | | | | | | |
| MBS | | | | | | | | | |
| | |
|
| GSEs – single-family | 83,291 |
| | (393 | ) | | 13,405 |
| | (126 | ) | | 96,696 |
| | (519 | ) |
| Private-label – residential | 16,915 |
| | (128 | ) | | 397,407 |
| | (28,781 | ) | | 414,322 |
| | (28,909 | ) |
| ABS backed by home equity loans | — |
| | — |
| | 11,898 |
| | (720 | ) | | 11,898 |
| | (720 | ) |
| | 100,206 |
| | (521 | ) | | 422,710 |
| | (29,627 | ) | | 522,916 |
| | (30,148 | ) |
| Total | $ | 100,206 |
| | $ | (521 | ) | | $ | 563,669 |
| | $ | (48,918 | ) | | $ | 663,875 |
| | $ | (49,439 | ) |
Table 6.3 - Held-to-Maturity Securities by Contractual Maturity (dollars in thousands)
| |
Table 7.3 - Held-to-Maturity Securities by Contractual Maturity (dollars in thousands)
| | Table 7.3 - Held-to-Maturity Securities by Contractual Maturity (dollars in thousands)
|
| | | December 31, 2017 | | December 31, 2016 | December 31, 2019 | | December 31, 2018 |
| Year of Maturity | Amortized Cost | | Carrying Value (1) | | Fair Value | | Amortized Cost | | Carrying Value (1) | | Fair Value | Amortized Cost | | Carrying Value (1) | | Fair Value | | Amortized Cost | | Carrying Value (1) | | Fair Value |
| Due in one year or less | $ | 264 |
| | $ | 264 |
| | $ | 267 |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | 3,090 |
| | $ | 3,090 |
| | $ | 3,089 |
| | $ | 1,043 |
| | $ | 1,043 |
| | $ | 1,047 |
|
| Due after one year through five years | 11,613 |
| | 11,613 |
| | 11,645 |
| | 16,637 |
| | 16,637 |
| | 16,663 |
| — |
| | — |
| | — |
| | 6,205 |
| | 6,205 |
| | 6,196 |
|
| Due after five years through 10 years | 18,245 |
| | 18,245 |
| | 18,226 |
| | — |
| | — |
| | — |
| 15,405 |
| | 15,405 |
| | 15,270 |
| | 16,865 |
| | 16,865 |
| | 16,639 |
|
| Due after 10 years | 117,330 |
| | 117,330 |
| | 102,978 |
| | 148,090 |
| | 148,090 |
| | 128,840 |
| 68,755 |
| | 68,755 |
| | 65,046 |
| | 80,560 |
| | 80,560 |
| | 76,183 |
|
| | 147,452 |
| | 147,452 |
| | 133,116 |
| | 164,727 |
| | 164,727 |
| | 145,503 |
| 87,250 |
| | 87,250 |
| | 83,405 |
| | 104,673 |
| | 104,673 |
| | 100,065 |
|
MBS (2) | 1,636,887 |
| | 1,478,670 |
| | 1,770,111 |
| | 2,158,418 |
| | 1,966,040 |
| | 2,226,787 |
| 859,892 |
| | 783,857 |
| | 952,005 |
| | 1,319,503 |
| | 1,190,350 |
| | 1,428,864 |
|
| Total | $ | 1,784,339 |
| | $ | 1,626,122 |
| | $ | 1,903,227 |
| | $ | 2,323,145 |
| | $ | 2,130,767 |
| | $ | 2,372,290 |
| $ | 947,142 |
| | $ | 871,107 |
| | $ | 1,035,410 |
| | $ | 1,424,176 |
| | $ | 1,295,023 |
| | $ | 1,528,929 |
|
_______________________
| |
| (1) | Carrying value of held-to-maturity securities represents the sum of amortized cost and the amount of noncredit-related other-than-temporary impairment recognized in accumulated other comprehensive loss. |
| |
| (2) | MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay their obligations with or without call or prepayment fees. |
Table 7.4 - Proceeds from Sale and Gains and Losses on Held-to-Maturity Securities (1) (dollars in thousands)
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Proceeds from sale of held-to-maturity securities | | $ | 185,177 |
| | $ | — |
| | $ | — |
|
| Amortized cost of held-to-maturity securities | | 173,146 |
| | — |
| | — |
|
| Realized net gain from sale of held-to-maturity securities | | $ | 12,031 |
| | $ | — |
| | $ | — |
|
_______________________
| |
| (1) | The securities sold had less than 15 percent of the acquired principal outstanding at the time of the sale. Such sales are treated as maturities for the purposes of security classification. The sale does not impact our ability and intent to hold the remaining investments classified as held-to-maturity through their stated maturity dates. |
Note 78 — Other-Than-Temporary Impairment
We evaluate our individual available-for-sale and held-to-maturity securities for other-than-temporary impairment each quarter.
Available-for-Sale Securities
We determined that none of our available-for-sale securities were other-than-temporarily impaired at December 31, 20172019. At December 31, 20172019, we held certain available-for-sale securities in an unrealized loss position. These unrealized losses reflect the impact of normal yield and spread fluctuations attendant with security markets. We consider these unrealized losses temporary because we expect to recover the entire amortized cost basis on these available-for-sale securities in an unrealized loss position and neither intend to sell these securities nor is it more likely than not that we will be required to sell these securities before the anticipated recovery of each security's remaining amortized cost basis. Additionally, there have been no shortfalls of principal or interest on any available-for-sale security.
Held-to-Maturity Securities
HFA Securities and Agency MBS. We have reviewed our investments in HFA securities and agency MBS and have determined that all unrealized losses are temporary. We do not intend to sell the investments nor is it more likely than not that we will be required to sell the investments before recovery of the amortized cost basis, and we do not consider these investments to be other-than-temporarily impaired at December 31, 2017.2019.
Private-Label Residential MBS and ABS Backed by Home Equity Loans.MBS. To ensure consistency in determination of the other-than-temporary impairment for private-label residential MBS and certain home equity loan investments (including home equity ABS) among all FHLBanks, the FHLBanks use an FHLBank System governance committee (the OTTI Governance Committee) and a formal process to ensure consistency in key other-than-temporary impairment modeling assumptions used for purposes of their cash-flow analyses for the majority of these securities. We use the FHLBanks' uniform framework and approved assumptions for purposes of our other-than-temporary impairment cash-flow analyses of our private-label residential MBS and certain home equity loan investments. For certain private-label residential MBS and home equity loan investments where underlying collateral data is not available, we have used alternative procedures to assess these securities for other-than-temporary impairment.MBS. We are responsible for making our own determination of impairment and the reasonableness of assumptions, inputs, and methodologies used and for performing the required present value calculations using appropriate historical cost bases and yields.
Our evaluation includes estimating the projected cash flows that we are likely to collect based on an assessment of available information, including the structure of the applicable security and certain assumptions to determine whether we will recover the entire amortized cost basis of the security, such as:
the remaining payment terms for the security;
prepayment speeds;
default rates;
loss severity on the collateral supporting each security based on underlying loan-level borrower and loan characteristics;
expected housing price changes, with projections ranging from a decrease of 5.04.0 percent to an increase of 12.08.0 percent over the 12-month period beginning October 1, 2017.2019. For the vast majority of markets, the projected short-term housing price changes range from an increase of 2.0 percent to an increase of 6.0 percent. Thereafter, we have projected a unique long-term forecast for each relevant geographic area based on an internally developed framework derived from historical data; and
interest-rate assumptions.
To assess whether the entire amortized cost basis of private-label residential MBS will be recovered, cash-flow analyses for each of our private-label residential MBS were performed.
For those securities for which a credit loss was recognized during the year ended December 31, 20172019, Table 7.18.1 presents a summary of the average projected values over the remaining lives of the securities for the significant inputs used to measure the
amount of the credit loss recognized in earnings, as well as related current credit enhancement. Credit enhancementcredit-enhancement. Credit-enhancement is defined as the percentage of subordinated tranches, over-collateralization, and other credit enhancement,credit-enhancement, if any, in a security structure that will generally absorb losses before we will experience a credit loss on the security. The calculated averages represent the dollar-weighted average of Alt-A other-than-temporarily impaired private-label residential MBS.
Table 7.1 - Significant Inputs and Current Credit Enhancement for Securities with a Credit Loss (dollars in thousands)
|
| | | | | | | | | | | | | | | | |
| | | | | Weighted Average of Significant Inputs | | Weighted Average Current Credit Enhancement |
| Private-label MBS by Classification | | Par Value | | Projected Prepayment Rates | | Projected Default Rates | | Projected Loss Severities | |
Alt-A - Private-label residential MBS (1) | | $ | 64,357 |
| | 8.6 | % | | 29.1 | % | | 35.9 | % | | 10.4 | % |
Table 8.1 - Significant Inputs and Current Credit Enhancement for Securities with a Credit Loss in 2019 (dollars in thousands)
|
| | | | | | | | | | | | | | | | |
| | | | | Weighted Average of Significant Inputs | | Weighted Average Current Credit Enhancement |
| Private-label MBS by Classification | | Par Value | | Projected Prepayment Rates | | Projected Default Rates | | Projected Loss Severities | |
Private-label residential MBS - Alt-A (1) | | $ | 39,989 |
| | 12.3 | % | | 22.9 | % | | 55.1 | % | | 5.7 | % |
_______________________
| |
| (1) | Securities are classified based upon the current performance characteristics of the underlying loan pool and therefore the manner in which the loan pool backing the security has been modeled (as prime, Alt-A, or subprime), rather than their classification of the security at the time of issuance. |
Table 7.2 - Total MBS Other-than-Temporarily Impaired During the Life of the Security (dollars in thousands)
| |
Table 8.2 - Total MBS Other-than-Temporarily Impaired During the Life of the Security (dollars in thousands)
| | Table 8.2 - Total MBS Other-than-Temporarily Impaired During the Life of the Security (dollars in thousands)
|
| | | December 31, 2017 | December 31, 2019 |
Other-Than-Temporarily Impaired Investment (1) | Par Value | | Amortized Cost | | Carrying Value | | Fair Value | Par Value | | Amortized Cost | | Carrying Value | | Fair Value |
| Private-label residential MBS – Prime | $ | 30,123 |
| | $ | 25,716 |
| | $ | 20,028 |
| | $ | 28,245 |
| $ | 3,796 |
| | $ | 3,474 |
| | $ | 2,510 |
| | $ | 3,590 |
|
| Private-label residential MBS – Alt-A | 941,221 |
| | 695,598 |
| | 543,092 |
| | 812,925 |
| 561,825 |
| | 383,439 |
| | 308,368 |
| | 470,192 |
|
| ABS backed by home equity loans – Subprime | 187 |
| | 174 |
| | 151 |
| | 178 |
| |
| Total other-than-temporarily impaired securities | $ | 971,531 |
| | $ | 721,488 |
| | $ | 563,271 |
| | $ | 841,348 |
| $ | 565,621 |
| | $ | 386,913 |
| | $ | 310,878 |
| | $ | 473,782 |
|
_______________________
| |
| (1) | Securities are classified based on the classifications of their classificationsunderlying loan composition at the time of issuance.We haveissuance. We instituted and are continuing litigation related to certain of the private-label MBS in which we invested. Our complaint asserts, among others, claims for untrue or misleading statements in the sale of securities. It is possible that classifications of private-label MBS as provided herein when based on classification at the time of issuance as disclosed by those securities' issuance documents, as well as other statements about the securities, are inaccurate. |
Table 7.3 presents a roll forward of the amounts related to credit losses recognized in earnings. The roll forward is the amount of credit losses on investment securities for which we recognized a portion of other-than-temporary impairment charges into accumulated other comprehensive loss.Table 8.3 - Roll Forward of the Amounts Related to Credit Loss Recognized into Earnings (dollars in thousands)
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Balance at beginning of year | $ | 422,035 |
| | $ | 452,523 |
| | $ | 490,404 |
|
| Additions: | | | | | |
| Credit losses for which other-than-temporary impairment was not previously recognized | 128 |
| | — |
| | — |
|
| Additional credit losses for which an other-than-temporary impairment charge was previously recognized | 1,084 |
| | 532 |
| | 1,454 |
|
| Reductions: | | | | | |
| Securities sold or matured during the year | (56,710 | ) | | — |
| | (5,600 | ) |
| Portion of increase in cash flows expected to be collected over the remaining life of the security that are recognized in the current period as interest income | (26,907 | ) | | (31,020 | ) | | (33,735 | ) |
| Balance at end of year | $ | 339,630 |
| | $ | 422,035 |
| | $ | 452,523 |
|
Table 7.3 - Roll Forward of the Amounts Related to Credit Loss Recognized into Earnings (dollars in thousands)
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Balance at beginning of year | $ | 490,404 |
| | $ | 533,888 |
| | $ | 568,653 |
|
| Additions: | | | | | |
| Credit losses for which other-than-temporary impairment was not previously recognized | — |
| | 15 |
| | — |
|
Additional credit losses for which an other-than-temporary impairment charge was previously recognized(1) | 1,454 |
| | 3,295 |
| | 4,059 |
|
| Reductions: | | | | | |
Securities matured during the year(2) | (5,600 | ) | | (8,778 | ) | | — |
|
Increase in cash flows expected to be collected which are recognized over the remaining life of the security(3) | (33,735 | ) | | (38,016 | ) | | (38,824 | ) |
| Balance at end of year | $ | 452,523 |
| | $ | 490,404 |
| | $ | 533,888 |
|
_______________________
| |
(1) | For the years ended December 31, 2017, 2016, and 2015, additional credit losses for which an other-than-temporary impairment charge was previously recognized relate to securities that were also previously impaired prior to January 1, 2017, 2016, and 2015.
|
| |
(2) | Represents reductions related to securities having reached final maturity during the period and, therefore, are no longer held by us at the end of the period. |
| |
(3) | Represents amounts accreted as interest income during the current period. |
Note 89 — Advances
General Terms. We offer a wide range of fixed- and variable-rate advance products with different maturities, interest rates, payment characteristics, and optionality. Advances have maturities ranging from one day to 30 years or even longer with the approval of our credit committee. At both December 31, 20172019 and 2016,2018, we had advances outstanding with interest rates ranging from zero(0.35) percent to 7.72 percent and 0.00 percent to 7.72 percent. Advances with negative interest rates contain embedded interest-rate features that have met the requirements to be separated from the host contract and are recorded as stand-alone derivatives, and which we economically hedge with derivatives containing offsetting interest-rate features.
Table 8.1 - Advances Outstanding by Year of Contractual Maturity (dollars in thousands)
| |
Table 9.1 - Advances Outstanding by Year of Contractual Maturity (dollars in thousands)
| | Table 9.1 - Advances Outstanding by Year of Contractual Maturity (dollars in thousands)
|
| | | December 31, 2017 | | December 31, 2016 | December 31, 2019 | | December 31, 2018 |
| | Amount | | Weighted Average Rate | | Amount | | Weighted Average Rate | Amount | | Weighted Average Rate | | Amount | | Weighted Average Rate |
| Overdrawn demand-deposit accounts | $ | 5,698 |
| | 1.70 | % | | $ | 3,780 |
| | 0.92 | % | $ | 5,101 |
| | 2.05 | % | | $ | 12,332 |
| | 2.88 | % |
| Due in one year or less | 21,501,397 |
| | 1.56 |
| | 18,783,802 |
| | 1.05 |
| 18,972,466 |
| | 1.96 |
| | 24,029,592 |
| | 2.48 |
|
| Due after one year through two years | 7,462,785 |
| | 1.65 |
| | 10,966,780 |
| | 1.15 |
| 8,600,922 |
| | 2.16 |
| | 11,413,640 |
| | 2.55 |
|
| Due after two years through three years | 2,709,951 |
| | 1.85 |
| | 2,508,459 |
| | 1.67 |
| 2,200,019 |
| | 2.16 |
| | 2,832,290 |
| | 2.47 |
|
| Due after three years through four years | 2,084,105 |
| | 2.03 |
| | 2,177,432 |
| | 1.64 |
| 1,766,314 |
| | 2.71 |
| | 1,648,076 |
| | 2.37 |
|
| Due after four years through five years | 2,071,989 |
| | 1.56 |
| | 2,041,269 |
| | 1.80 |
| 1,726,754 |
| | 2.15 |
| | 1,980,468 |
| | 2.24 |
|
| Thereafter | 1,811,241 |
| | 2.23 |
| | 2,633,333 |
| | 1.70 |
| 1,312,311 |
| | 2.68 |
| | 1,351,987 |
| | 2.99 |
|
| Total par value | 37,647,166 |
| | 1.66 | % | | 39,114,855 |
| | 1.23 | % | 34,583,887 |
| | 2.10 | % | | 43,268,385 |
| | 2.50 | % |
| Premiums | 17,931 |
| | |
| | 22,633 |
| | |
| 3,397 |
| | |
| | 3,935 |
| | |
|
| Discounts | (32,757 | ) | | |
| | (25,847 | ) | | |
| (41,744 | ) | | |
| | (36,528 | ) | | |
|
Fair value of bifurcated derivatives (1) | (1,591 | ) | | | | (153 | ) | | | 29,983 |
| | | | 13,051 |
| | |
| Hedging adjustments | (64,782 | ) | | |
| | (12,149 | ) | | |
| 19,840 |
| | |
| | (56,621 | ) | | |
|
| Total | $ | 37,565,967 |
| | |
| | $ | 39,099,339 |
| | |
| $ | 34,595,363 |
| | |
| | $ | 43,192,222 |
| | |
|
_________________________
| |
| (1) | At December 31, 20172019 and 2016,2018, we had certain advances with embedded features that met the requirements to be separated from the host contract and designated as stand-alone derivatives. |
We offer advances to members and eligible nonmembers that provide the borrower the right, based upon predetermined option exercise dates, to repay the advance prior to maturity without incurring prepayment or termination fees (callable advances). We also offer certain floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees. Other advances may only be prepaid by paying a fee (prepayment fee) that makes us financially indifferent to the prepayment of the advance.
Table 9.2 - Advances Outstanding by Year of Contractual Maturity or Next Call Date (dollars in thousands)
|
| | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| Overdrawn demand-deposit accounts | $ | 5,101 |
| | $ | 12,332 |
|
| Due in one year or less | 25,116,961 |
| | 32,748,467 |
|
| Due after one year through two years | 3,450,922 |
| | 3,913,640 |
|
| Due after two years through three years | 1,949,499 |
| | 2,672,290 |
|
| Due after three years through four years | 1,461,314 |
| | 1,261,176 |
|
| Due after four years through five years | 1,309,679 |
| | 1,362,468 |
|
| Thereafter | 1,290,411 |
| | 1,298,012 |
|
| Total par value | $ | 34,583,887 |
| | $ | 43,268,385 |
|
Table 8.2 - Advances Outstanding by Year of Contractual Maturity or Next Call Date (1) (dollars in thousands)
|
| | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| Overdrawn demand-deposit accounts | $ | 5,698 |
| | $ | 3,780 |
|
| Due in one year or less | 25,842,572 |
| | 26,447,977 |
|
| Due after one year through two years | 3,722,785 |
| | 3,693,780 |
|
| Due after two years through three years | 2,709,951 |
| | 2,508,459 |
|
| Due after three years through four years | 1,924,105 |
| | 2,002,232 |
|
| Due after four years through five years | 1,684,789 |
| | 1,891,269 |
|
| Thereafter | 1,757,266 |
| | 2,567,358 |
|
| Total par value | $ | 37,647,166 |
| | $ | 39,114,855 |
|
_______________________
| |
(1) | Also includes certain floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees. |
We offer putable advances that provide us with the right to require repayment prior to maturity of the advance (and thereby extinguish the advance) on predetermined exercise dates (put dates). Generally, we would exercise the put options when interest rates increase relative to contractual rates.
Table 8.3 - Advances Outstanding by Year of Contractual Maturity or Next Put Date (dollars in thousands)
| |
Table 9.3 - Advances Outstanding by Year of Contractual Maturity or Next Put Date (dollars in thousands)
| | Table 9.3 - Advances Outstanding by Year of Contractual Maturity or Next Put Date (dollars in thousands)
|
| | Year of Contractual Maturity or Next Put Date, Par Value | December 31, 2017 | | December 31, 2016 | December 31, 2019 | | December 31, 2018 |
| Overdrawn demand-deposit accounts | $ | 5,698 |
| | $ | 3,780 |
| $ | 5,101 |
| | $ | 12,332 |
|
| Due in one year or less | 22,828,547 |
| | 20,788,552 |
| 20,240,466 |
| | 25,199,892 |
|
| Due after one year through two years | 7,921,035 |
| | 10,946,530 |
| 8,603,422 |
| | 11,652,840 |
|
| Due after two years through three years | 2,686,951 |
| | 2,455,709 |
| 2,001,019 |
| | 2,834,790 |
|
| Due after three years through four years | 1,984,705 |
| | 1,974,932 |
| 965,814 |
| | 1,367,576 |
|
| Due after four years through five years | 1,216,989 |
| | 1,736,769 |
| 1,598,254 |
| | 1,152,468 |
|
| Thereafter | 1,003,241 |
| | 1,208,583 |
| 1,169,811 |
| | 1,048,487 |
|
| Total par value | $ | 37,647,166 |
| | $ | 39,114,855 |
| $ | 34,583,887 |
| | $ | 43,268,385 |
|
Table 8.4 - Advances by Current Interest Rate Terms (dollars in thousands)
| |
Table 9.4 - Advances by Current Interest Rate Terms (dollars in thousands)
| | Table 9.4 - Advances by Current Interest Rate Terms (dollars in thousands)
|
| | Par value of advances | December 31, 2017 | | December 31, 2016 | December 31, 2019 | | December 31, 2018 |
| Fixed-rate | | | | | | |
| Due in one year or less | $ | 20,674,897 |
| | $ | 18,511,194 |
| $ | 18,733,966 |
| | $ | 23,822,091 |
|
| Due after one year | 10,983,396 |
| | 12,014,998 |
| 9,372,625 |
| | 9,748,187 |
|
| Total fixed-rate | 31,658,293 |
| | 30,526,192 |
| 28,106,591 |
| | 33,570,278 |
|
| | | | | | | |
| Variable-rate | | | | | | |
| Due in one year or less | 832,198 |
| | 276,388 |
| 243,601 |
| | 219,832 |
|
| Due after one year | 5,156,675 |
| | 8,312,275 |
| 6,233,695 |
| | 9,478,275 |
|
| Total variable-rate | 5,988,873 |
| | 8,588,663 |
| 6,477,296 |
| | 9,698,107 |
|
| Total par value | $ | 37,647,166 |
| | $ | 39,114,855 |
| $ | 34,583,887 |
| | $ | 43,268,385 |
|
Credit-Risk Exposure and Security TermsAdvance Concentrations. Our potential credit risk from advances isare principally concentrated in commercial banks, insurance companies, savings institutions, and credit unions. At December 31, 20172019 and 2016,2018, we had $12.1$12.3 billion and $16.216.4 billion, respectively, of advances issued to members with at least $1.0 billion of advances outstanding. These advances were made to six5 borrowers and 6 borrowers at both December 31, 20172019 and 20162018, representing 32.335.6 percent and 41.537.9 percent, respectively, of total par value of outstanding advances. For information related to our credit risk on advances and allowance for credit losses, see Note 1011 — Allowance for Credit Losses.
Prepayment Fees. We record prepayment fees received from borrowers on certain prepaid advances net of any associated basis adjustments related to hedging activities on those advances and net of deferred prepayment fees on advance prepayments considered to be loan modifications. Additionally, for certain advances products, the prepayment-fee provisions of the advance agreement could result in either a payment from the borrower or to the borrower when such an advance is prepaid, based upon market conditions at the time of prepayment (referred to as a symmetrical prepayment fee). Advances with a symmetrical prepayment fee provision are hedged with derivatives containing offsetting terms, so that we are financially indifferent to the borrower's decision to prepay such advances. The net amount of prepayment fees is reflected as interest income in the statement of operations.
We also offer an advance restructuring program under which the prepayment fee on prepaid advances may be satisfied by the borrower's agreement to pay an interest rate on a new advance sufficient to amortize the prepayment fee by the maturity date of the new advance, rather than paying the fee in immediately available funds to us. If we conclude an advance restructuring is an extinguishment of the prior loan rather than a modification, the deferred prepayment fee is recognized into income immediately.
Table 8.5 - Advances Prepayment Fees (dollars in thousands)
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Prepayment fees received from borrowers | | $ | 1,568 |
| | $ | 11,078 |
| | $ | 22,325 |
|
| Less: hedging fair-value adjustments on prepaid advances | | (218 | ) | | (3,664 | ) | | (15,620 | ) |
| Less: net premiums associated with prepaid advances | | (137 | ) | | (2,238 | ) | | (727 | ) |
| Less: deferred recognition of prepayment fees received from borrowers on advance prepayments deemed to be loan modifications | | (315 | ) | | (3,100 | ) | | (1,443 | ) |
| Prepayment fees recognized in income on advance restructurings deemed to be extinguishments | | — |
| | 1,677 |
| | 3,102 |
|
| Net prepayment fees recognized in income | | $ | 898 |
| | $ | 3,753 |
| | $ | 7,637 |
|
Table 9.5 - Advances Prepayment Fees (dollars in thousands)
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Prepayment fees received from borrowers | | $ | 33,809 |
| | $ | 409 |
| | $ | 1,568 |
|
| Hedging fair-value adjustments on prepaid advances | | 1,923 |
| | 264 |
| | (218 | ) |
| Net discounts (premiums) associated with prepaid advances | | 157 |
| | (159 | ) | | (137 | ) |
| Deferred recognition of prepayment fees received from borrowers on advance prepayments deemed to be loan modifications | | (1,793 | ) | | (298 | ) | | (315 | ) |
| Prepayment fees recognized in income on advance restructurings deemed to be extinguishments | | 915 |
| | — |
| | — |
|
| Advance prepayment fees recognized in income, net | | $ | 35,011 |
| | $ | 216 |
| | $ | 898 |
|
Note 910 — Mortgage Loans Held for Portfolio
We invest in mortgage loans through the MPF program. These mortgage loans are either guaranteed or insured by federal agencies, as is the case with government mortgage loans, or are credit-enhanced, directly or indirectly, by the related entity that sold the loan (a participating financial institution), as is the case with conventional mortgage loans. All such investments are held for portfolio. The mortgage loans are typically originated and credit-enhanced by the related participating financial institution. The majority of these loans are serviced by the originating institution or an affiliate thereof. However, a portion of these loans are sold servicing-released by the participating financial institution and serviced by a third-party servicer.
Table 9.1 - Mortgage Loans Held for Portfolio (dollars in thousands)
| |
Table 10.1 - Mortgage Loans Held for Portfolio (dollars in thousands)
| | Table 10.1 - Mortgage Loans Held for Portfolio (dollars in thousands)
|
| | | December 31, 2017 | | December 31, 2016 | December 31, 2019 | | December 31, 2018 |
| Real estate | |
| | |
| |
| | |
|
| Fixed-rate 15-year single-family mortgages | $ | 466,952 |
| | $ | 528,486 |
| $ | 339,042 |
| | $ | 392,128 |
|
| Fixed-rate 20- and 30-year single-family mortgages | 3,466,752 |
| | 3,098,476 |
| 4,093,416 |
| | 3,839,078 |
|
| Premiums | 70,074 |
| | 67,523 |
| 66,776 |
| | 67,671 |
|
| Discounts | (1,541 | ) | | (1,696 | ) | (1,607 | ) | | (1,800 | ) |
| Deferred derivative gains, net | 3,000 |
| | 1,755 |
| 4,124 |
| | 2,825 |
|
| Total mortgage loans held for portfolio | 4,005,237 |
| | 3,694,544 |
| 4,501,751 |
| | 4,299,902 |
|
| Less: allowance for credit losses | (500 | ) | | (650 | ) | (500 | ) | | (500 | ) |
| Total mortgage loans, net of allowance for credit losses | $ | 4,004,737 |
| | $ | 3,693,894 |
| $ | 4,501,251 |
| | $ | 4,299,402 |
|
Table 9.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (dollars in thousands)
| |
Table 10.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (dollars in thousands)
| | Table 10.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (dollars in thousands)
|
| | | December 31, 2017 | | December 31, 2016 | December 31, 2019 | | December 31, 2018 |
| Conventional mortgage loans | $ | 3,568,473 |
| | $ | 3,235,835 |
| $ | 4,140,255 |
| | $ | 3,902,555 |
|
| Government mortgage loans | 365,231 |
| | 391,127 |
| 292,203 |
| | 328,651 |
|
| Total par value | $ | 3,933,704 |
| | $ | 3,626,962 |
| $ | 4,432,458 |
| | $ | 4,231,206 |
|
Note 1011 — Allowance for Credit Losses
An allowance for credit losses is a valuation allowance separately established for each identified portfolio segment, if necessary, to provide for probable losses inherent in our portfolio as of the statement of condition date. To the extent necessary, an allowance for credit losses for off-balance-sheet credit exposure is recorded as a liability.
Portfolio Segments. We have established an allowance methodology for each of our portfolio segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. We have developed and documented a systematic methodology for determining an allowance for credit losses for our:
secured member credit products, such as our advances and letters of credit;
investments in government mortgage loans held for portfolio;
investments in conventional mortgage loans held for portfolio;
investments via term securities purchased under agreements to resell; and
investments via term federal funds sold.
Classes of Financing Receivables. Classes of financing receivables generally are a disaggregation of a portfolio segment to the extent that is needed to understand the exposure to credit risk arising from these financing receivables. We determined that no
further disaggregation of portfolio segments identified above is needed as we assessed and measured the credit risk arising from these financing receivables at the portfolio segment level.
Secured Member Credit Products
We manage our credit exposure to secured member credit products through an integrated approach that generally includes establishing a credit limit for each borrower. This approach includes an ongoing review of each borrower's financial condition, and collateral and lending policies that are intended to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, we lend to eligible borrowers in accordance with the FHLBank Act, FHFA regulations, and other applicable laws.laws and guidance. We are required to obtain sufficient collateral to secure our credit products. The estimated value of the collateral pledged to secure each borrower's credit products is calculated by applying collateral discounts, or haircuts, to the market value or unpaid principal balance of the collateral, as applicable. We accept certain investment securities, residential mortgage loans, deposits, and other assets as collateral. We require all borrowers that pledge securities collateral to place physical possession of such securities collateral with our safekeeping agent, the borrower's approved designated agent, or the borrower's securities corporation, subject to a control agreement giving us appropriate control over such collateral. In addition, community financial institutions are eligible to use expanded statutory collateral provisions for small-business and agriculture loans. Members also pledge their Bank capital stock as collateral. Collateral arrangements may vary depending upon borrower credit quality, financial condition, performance, borrowing capacity, and our overall credit exposure to the borrower. We can call for additional or substitute collateral to further safeguard our security interest. We believe our policies appropriately manage our credit risks arising from our credit products.
We either allow the borrower to retain possession of loan collateral pledged to us while agreeing to hold such collateral for our benefit or require the borrower to specifically assign or place physical possession of such loan collateral with us or a third-party custodian that we approve.
We are provided an additional safeguard for our security interests by Section 10(e) of the FHLBank Act, which generally affords any security interest granted by a borrower to the Bank priority over the claims and rights of any other party. The exceptions to this prioritization are limited to claims that would be entitled to priority under otherwise applicable law and are held by bona fide purchasers for value or by secured parties with higher priority perfected security interests. The priority granted to our security interests under Section 10(e) of the FHLBank Act may not apply when lending to insurance company members. This is due to the anti-preemption provision contained in the McCarran-Ferguson Act, which provides that federal law does not preempt state insurance law unless the federal law expressly regulates the business of insurance. Thus, if state law conflicts with Section 10(e) of the FHLBank Act, the protection afforded by this provision may not be available to us. However, we perfect our security interests in the collateral pledged by our members, including insurance company members, by filing UCC-1Uniform Commercial Code (UCC)-1 financing statements, taking possession or control of such collateral, or taking other appropriate steps.
Using a risk-based approach and taking into consideration each borrower's financial strength, we consider the types and level of collateral to be the primary indicator of credit quality on our credit products. At December 31, 20172019, and 20162018, we had rights to collateral, on a borrower-by-borrower basis, with an estimated value in excess of our outstanding extensions of credit.
We continue to evaluate and make changes to our collateral guidelines based on market conditions. At December 31, 20172019, and 20162018, none of our secured member credit products outstanding were past due, on nonaccrual status, or considered impaired. In
addition, there were no troubled debt restructurings related to credit products during the years ended December 31, 20172019, and 20162018.
Based upon the collateral held as security, our credit extension and collateral policies, management's credit analysis, and the repayment history on secured member credit products, we have not recorded any allowance for credit losses on our secured member credit products at December 31, 20172019 and 20162018. At December 31, 20172019 and 20162018, no liability to reflect an allowance for credit losses for off-balance-sheet credit exposures was recorded. See Note 1920 — Commitments and Contingencies for additional information on our off-balance-sheet credit exposure.
Government Mortgage Loans Held for Portfolio
We invest in government mortgage loans secured by one- to four-family residential properties. Government mortgage loans are mortgage loans insured or guaranteed by the Federal Housing Administration (the FHA), the U.S. Department of Veterans Affairs (the VA), the Rural Housing Service of the U.S. Department of Agriculture (RHS), or by the U.S. Department of Housing and Urban Development (HUD).
The servicer provides and maintains insurance or a guarantee from the applicable government agency. The servicer is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable insurance or guaranty with respect to defaulted government-guaranteed mortgage loans. Any losses incurred on these loans that are not recovered from the insurer or guarantor are absorbed by the related servicer. Therefore, we only have credit risk for these loans if the servicer fails to pay for losses not covered by insurance or guarantees. BasedDue to government guarantees or insurance on our assessment of our servicers for our government loans, there is no allowance for credit losses for the government mortgage loan portfolio as of December 31, 20172019 and 20162018. In addition,Additionally, these mortgage loans are not placed on nonaccrual status due to the government guarantee or insurance on these loans and the contractual obligation of the loan servicers to repurchase their related loans when certain criteria are met.
Conventional Mortgage Loans Held for Portfolio
Our methodology for determining our loan loss reserve consists of estimating loan loss severity using a third-party model incorporating delinquency to default transition performance of the loans, relevant market conditions affecting the performance of the loans, and portfolio level credit protection, particularly credit enhancements,credit-enhancements, as discussed below under — Credit Enhancements.Credit-Enhancements. Our inputs to the third-party model consist of loan-related characteristics, such as credit scores, occupancy statuses, loan-to-value ratios, property types, and locations. We update our view of the loan transition performance and market conditions quarterly and periodically adjust our methodology to reflect the changes in the loans’ performances and the market.
Individually Evaluated Mortgage Loans. Certain conventional mortgage loans, primarily impaired mortgage loans that are considered collateral-dependent, may be specifically identified for purposes of calculating the allowance for credit losses. A mortgage loan is considered collateral-dependent if repayment is expected to be provided by the sale of the underlying property, that is, if it is considered likely that the borrower will default and there is no credit enhancement from a participating financial institution to offset losses under the master commitment.default. The estimated credit losses on impaired collateral-dependent loans may be separately determined because sufficient information exists to make a reasonable estimate of the inherent loss on these loans on an individual loan basis. Loans that are considered collateral-dependent are measured for impairment based on the fair value of the underlying property less estimated selling costs. The incurred loss of an individually evaluated mortgage loan is equal to the difference between the carrying value of the loan and the estimated fair value of the collateral, less estimated selling costs, and may include expected proceeds from primary mortgage insurance and other applicable credit enhancements.credit-enhancements. Additionally, for our investments in loans modified under our temporary loan modification plan, on the effective date of a loan modification we measure the present value of expected future cash flows discounted at the loan's effective interest rate and reduce the carrying value of the loan accordingly.
Collectively Evaluated Mortgage Loans. We evaluate the credit risk of our investments in conventional mortgage loans for impairment on a collective basis that considers loan-pool-specific attribute data at the master commitment pool level including(including historical delinquency migration,migration), applies estimated loss severities, and incorporates available credit enhancementscredit-enhancements to establish our best estimate of probable incurred losses at the reporting date. Migration analysis is a methodology for estimating the rate of default experienced on pools of similar loans based on our historical experience. We apply migration analysis to conventional loans that are currently not past due, loans that are 30 to 59 days past due, 60 to 89 days past due, and 90 to 179 days past due. We then estimate the dollar amount of loans in these categories that we believe are likely to migrate to a realized loss position and apply a loss severity factor to estimate losses that would be incurred at the statement of condition date. The losses are then reduced by the probable cash flows resulting from available credit enhancement. Credit enhancementcredit-enhancement. Credit-enhancement cash flows that are projected and assessed as not probable of receipt are not considered in reducing estimated losses.
Estimating a Margin of Imprecision. We also assess a factor for the margin of imprecision to the estimation of credit losses for the homogeneous population. The margin of imprecision is a factor in the allowance for credit losses that recognizes the imprecise nature of the measurement process and is included as part of the mortgage loan allowance for credit loss. This amount represents a subjective management judgment based on facts and circumstances that exist as of the reporting date that is unallocated to any specific measurable economic or credit event and is intended to cover other inherent losses that may not be captured in our methodology. The actual loss that may occur on homogeneous populations of mortgage loans may differ from the estimated loss.
Credit Quality Indicators.Indicator and Other Delinquency Statistics. KeyThe key credit quality indicatorsindicator for mortgage loans include the migration of past due loans, nonaccrual loans, loans in process of foreclosure, and impaired loans.is payment status. Table 10.111.1 sets forth certain key credit quality indicatorsthe payment status for our investments in mortgage loans based on recorded investment as well as other delinquency statistics at December 31, 20172019 and 2016 (dollars in thousands)2018:
Table 11.1 - Credit Quality Indicator and Other Delinquency Statistics (dollars in thousands)
|
| | | | | | | | | | | |
| | December 31, 2019 |
| | Recorded Investment in Conventional Mortgage Loans | | Recorded Investment in Government Mortgage Loans | | Total |
| Past due 30-59 days delinquent | $ | 36,336 |
| | $ | 11,630 |
| | $ | 47,966 |
|
| Past due 60-89 days delinquent | 6,911 |
| | 3,471 |
| | 10,382 |
|
| Past due 90 days or more delinquent | 10,696 |
| | 5,570 |
| | 16,266 |
|
| Total past due | 53,943 |
| | 20,671 |
| | 74,614 |
|
| Total current loans | 4,171,676 |
| | 278,924 |
| | 4,450,600 |
|
| Total mortgage loans | $ | 4,225,619 |
| | $ | 299,595 |
| | $ | 4,525,214 |
|
| Other delinquency statistics | | | | | |
In process of foreclosure, included above (1) | $ | 2,813 |
| | $ | 2,222 |
| | $ | 5,035 |
|
Serious delinquency rate (2) | 0.26 | % | | 1.86 | % | | 0.36 | % |
| Past due 90 days or more still accruing interest | $ | — |
| | $ | 5,570 |
| | $ | 5,570 |
|
Loans on nonaccrual status (3) | $ | 11,510 |
| | $ | — |
| | $ | 11,510 |
|
Table 10.1 - Recorded Investment in Delinquent Mortgage Loans (dollars in thousands)
|
| | | | | | | | | | | |
| | December 31, 2017 |
| | Recorded Investment in Conventional Mortgage Loans | | Recorded Investment in Government Mortgage Loans | | Total |
| Past due 30-59 days delinquent | $ | 28,622 |
| | $ | 13,862 |
| | $ | 42,484 |
|
| Past due 60-89 days delinquent | 6,617 |
| | 4,142 |
| | 10,759 |
|
| Past due 90 days or more delinquent | 13,310 |
| | 4,831 |
| | 18,141 |
|
| Total past due | 48,549 |
| | 22,835 |
| | 71,384 |
|
| Total current loans | 3,601,952 |
| | 352,249 |
| | 3,954,201 |
|
| Total mortgage loans | $ | 3,650,501 |
| | $ | 375,084 |
| | $ | 4,025,585 |
|
| Other delinquency statistics | | | | | |
In process of foreclosure, included above (1) | $ | 6,389 |
| | $ | 1,306 |
| | $ | 7,695 |
|
Serious delinquency rate (2) | 0.38 | % | | 1.29 | % | | 0.46 | % |
| Past due 90 days or more still accruing interest | $ | — |
| | $ | 4,831 |
| | $ | 4,831 |
|
Loans on nonaccrual status (3) | $ | 13,598 |
| | $ | — |
| | $ | 13,598 |
|
_______________________
| |
(1) | Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported. |
| |
(2) | Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the recorded investment in the total loan portfolio class. |
| |
(3) | Includes conventional mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest as well as loans modified within the previous six months under our temporary loan modification plan.
|
| | | | December 31, 2016 | December 31, 2018 |
| | Recorded Investment in Conventional Mortgage Loans | | Recorded Investment in Government Mortgage Loans | | Total | Recorded Investment in Conventional Mortgage Loans | | Recorded Investment in Government Mortgage Loans | | Total |
| Past due 30-59 days delinquent | $ | 26,757 |
| | $ | 14,878 |
| | $ | 41,635 |
| $ | 23,045 |
| | $ | 10,884 |
| | $ | 33,929 |
|
| Past due 60-89 days delinquent | 5,508 |
| | 3,846 |
| | 9,354 |
| 7,019 |
| | 3,344 |
| | 10,363 |
|
| Past due 90 days or more delinquent | 16,379 |
| | 5,807 |
| | 22,186 |
| 7,384 |
| | 6,670 |
| | 14,054 |
|
| Total past due | 48,644 |
| | 24,531 |
| | 73,175 |
| 37,448 |
| | 20,898 |
| | 58,346 |
|
| Total current loans | 3,262,671 |
| | 377,438 |
| | 3,640,109 |
| 3,947,096 |
| | 316,285 |
| | 4,263,381 |
|
| Total mortgage loans | $ | 3,311,315 |
| | $ | 401,969 |
| | $ | 3,713,284 |
| $ | 3,984,544 |
| | $ | 337,183 |
| | $ | 4,321,727 |
|
| Other delinquency statistics | | | | | | | | | | |
In process of foreclosure, included above (1) | $ | 7,495 |
| | $ | 1,502 |
| | $ | 8,997 |
| $ | 3,467 |
| | $ | 2,086 |
| | $ | 5,553 |
|
Serious delinquency rate (2) | 0.53 | % | | 1.44 | % | | 0.63 | % | 0.20 | % | | 1.98 | % | | 0.34 | % |
| Past due 90 days or more still accruing interest | $ | — |
| | $ | 5,807 |
| | $ | 5,807 |
| $ | — |
| | $ | 6,670 |
| | $ | 6,670 |
|
Loans on nonaccrual status (3) | $ | 16,940 |
| | $ | — |
| | $ | 16,940 |
| $ | 7,975 |
| | $ | — |
| | $ | 7,975 |
|
_______________________
| |
| (1) | Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported. |
| |
| (2) | Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the recorded investment in the total loan portfolio class. |
| |
| (3) | Includes conventional mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest as well as loans modified within the previous six months under our temporary loan modification plan. |
Individually Evaluated Impaired Loans.
Table 10.2 - Individually Impaired Conventional Mortgage Loans (dollars in thousands)
|
| | | | | | | | | | | | | | | | |
| | | December 31, 2017 | | December 31, 2016 |
| | | Recorded Investment | | Par Value | | Recorded Investment | | Par Value |
| Individually evaluated impaired mortgage loans with no related allowance | | $ | 17,668 |
| | $ | 17,630 |
| | $ | 22,945 |
| | $ | 22,905 |
|
Table 10.3 - Average Recorded Investment of Individually Impaired Mortgage Loans and Related Interest Income (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
| Individually evaluated impaired mortgage loans with no related allowance | | $ | 19,095 |
| | $ | 409 |
| | $ | 24,193 |
| | $ | 396 |
| | $ | 30,834 |
| | $ | 461 |
|
Credit Enhancements.Credit-Enhancements. Our allowance for credit losses factors in the credit enhancementscredit-enhancements associated with conventional mortgage loans under the MPF program. These credit enhancementscredit-enhancements apply after the homeowner's equity is exhausted and can include primary and/or supplemental mortgage insurance or other kinds of credit-enhancement. The credit enhancement.risk analysis of our conventional loans is performed at the individual master commitment level to determine the credit-enhancements available to recover losses on loans under each individual master commitment. The credit-enhancement amounts estimated to protect us against credit losses are determined through the use of a model. Any incurred losses that would be recovered from the credit enhancementscredit-enhancements are not reserved as part of our allowance for loan losses. In such cases, a receivable is generally established to reflect the expected recovery from credit-enhancement arrangements.
Previously, conventional mortgage loans were required to be credit enhanced so that the risk of loss was limited to the losses equivalent to an investment in a double-A rated MBS at the time of purchase. The FHFA final rule on acquired member assets (AMA) went into effect on January 18, 2017, allowing each FHLBank to utilize its own model to determine the credit enhancementcredit-enhancement for AMA loan assets and pool loans in lieu of a nationally recognized statistical ratings organization (NRSRO) ratings model. Upon effectiveness of the final AMA rule, we determined that assets delivered to us must be credit enhanced at our determined “AMA investment grade” of a double-A rated MBS. In March 2017, we determined that assets delivered to us must be credit enhanced at our revised determination of “AMA investment grade” of a single-A-minus rated MBS. This revision had no impact on the December 31, 2017, allowance for credit losses. We share the risk of credit losses on our investments in mortgage loans with the related participating financial institution by structuring potential losses on these investments into layers with respect to each master commitment. We analyze the risk characteristics of our mortgage loans using a third-party model to determine the credit enhancementcredit-enhancement amount at the time of purchase. This credit-enhancement amount is broken into atwo parts: the Bank's first-loss account and athe participating financial institution's credit-enhancement obligation, of each participating financial institution, which may be calculated based on the risk analysis to equal the difference between the amounts needed for the master commitment to have a rating equivalent to a single-A-minus rated MBS and our initial first-loss account exposure.
The first-loss account represents the first layer or portion of credit losses that we absorb with respect to our investments in mortgage loans after considering the borrower's equity and primary mortgage insurance. The participating financial institution is required to cover the next layer of losses up to an agreed-upon credit-enhancement obligation amount, which may consist of a direct liability of the participating financial institution to pay credit losses up to a specified amount, a contractual obligation of a participating financial institution to provide supplemental mortgage insurance, or a combination of both. We absorb any remaining unallocated losses.
The aggregate amount of the first-loss account is documented and tracked but is neither recorded nor reported as an allowance for loan losses in our financial statements. As credit and special hazard losses are realized that are not covered by the liquidation value of the real property or primary mortgage insurance, they are first charged to us, with a corresponding reduction of the first-loss account for that master commitment up to the amount in the first-loss account at that time. Over time, the first-loss account may cover the expected credit losses on a master commitment, although losses that are greater than
expected or that occur early in the life of a master commitment could exceed the amount in the first-loss account. In that case, the excess losses would be charged to the participating financial institution's credit-enhancement amount, then to us after the participating financial institution's credit-enhancement amount has been exhausted.
For loans in which we buy or sell participations from or to other FHLBanks that participate in the MPF program (MPF Banks), the amount of the first-loss account remaining to absorb losses for loans that we own is partly dependent on the percentage of our participation in such loans. Assuming losses occur on a proportional basis between loans that we own and loans owned by other MPF Banks, at December 31, 20172019 and 20162018, the amount of first-loss account remaining for losses allocable to us was $22.2$28.5 million and $19.4$25.3 million, respectively.
Participating financial institutions are paid a credit-enhancement fee for assuming credit risk and in some instances all or a portion of the credit-enhancement fee may be performance based. For certain MPF products, our losses incurred under the first-loss account can be mitigated by withholding future performance-based credit-enhancement fees that would otherwise be payable to the participating financial institutions. We record credit-enhancement fees paid to participating financial institutions as a reduction to mortgage-loan-interest income.
Withheld performance-based credit-enhancement fees can mitigate losses from our investments in mortgage loans and therefore we consider our expectations for each master commitment for such withheld fees in determining the allowance for loan losses. More specifically, we determine the amount of credit-enhancement fees available to mitigate losses as follows: accrued credit-enhancement fees to be paid to participating financial institutions; plus projected credit-enhancement fees to be paid to the
participating financial institutions using the weighted average life of the loans within each relevant master commitment; minus any losses incurred or expected to be incurred.
Roll-Forward of Allowance for Credit Losses on Mortgage Loans. Table 10.411.2 presents a roll forward of the allowance for credit losses on conventional mortgage loans for the years ended December 31, 2017,2019, 20162018, and 2015,2017, as well as the recorded investment in mortgage loans by impairment methodology at December 31, 2017,2019, 20162018, and 2015.2017. The recorded investment in a loan is the par amount of the loan, adjusted for accrued interest, unamortized premiums or discounts, deferred derivative gains and losses, and direct write-downs. The recorded investment is net of any valuation allowance.
Table 10.4 - Allowance for Credit Losses on Conventional Mortgage Loans (dollars in thousands)
| |
Table 11.2 - Allowance for Credit Losses on Conventional Mortgage Loans (dollars in thousands)
| | Table 11.2 - Allowance for Credit Losses on Conventional Mortgage Loans (dollars in thousands)
|
| | | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| Allowance for credit losses | | | | | | | | | | |
| Balance, beginning of year | $ | 650 |
| | $ | 1,025 |
| | $ | 2,012 |
| $ | 500 |
| | $ | 500 |
| | $ | 650 |
|
| Charge-offs, net of recoveries | (54 | ) | | (98 | ) | | (657 | ) | |
| Reduction of provision for credit losses | (96 | ) | | (277 | ) | | (330 | ) | |
| (Charge-offs) recoveries | | (85 | ) | | 34 |
| | (54 | ) |
| Provision for (reduction of) credit losses | | 85 |
| | (34 | ) | | (96 | ) |
| Balance, end of year | $ | 500 |
| | $ | 650 |
| | $ | 1,025 |
| $ | 500 |
| | $ | 500 |
| | $ | 500 |
|
| Ending balance, individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
|
| Ending balance, collectively evaluated for impairment | $ | 500 |
| | $ | 650 |
| | $ | 1,025 |
| $ | 500 |
| | $ | 500 |
| | $ | 500 |
|
Recorded investment, end of year (1) | | | | | | | | | | |
| Individually evaluated for impairment | $ | 17,668 |
| | $ | 22,945 |
| | $ | 26,668 |
| $ | 13,395 |
| | $ | 15,402 |
| | $ | 17,668 |
|
| Collectively evaluated for impairment | $ | 3,632,833 |
| | $ | 3,288,370 |
| | $ | 3,152,102 |
| $ | 4,212,224 |
| | $ | 3,969,142 |
| | $ | 3,632,833 |
|
_________________________
| |
| (1) | These amounts exclude government mortgage loans because we make no allowance for credit losses based on our investments in government mortgage loans, as discussed above under — Government Mortgage Loans Held for Portfolio. |
Troubled Debt Restructurings. We consider a troubled debt restructuring of a financing receivable to have occurred when we grant a concession to a borrower that we would not otherwise consider for economic or legal reasons related to the borrower's financial difficulties. We have granted a concession when we do not expect to collect all amounts due to us under the original contract as a result of the restructuring.
A mortgage loan considered to be a troubled debt restructuring is individually evaluated for impairment when determining its related allowance for credit losses. When a loan first becomes a troubled debt restructuring, we compare the carrying value of the loan at the time of modification with the present value of the revised cash flows discounted at the original effective yi
eldyield on the loan. Credit loss islosses are measured by estimating the loss severity rate incurred as of the reporting date as well as the economic loss attributable to delaying the original contractual principal and interest due dates, if applicable. At December 31, 20172019 and 2016,2018, the recorded investment of mortgage loans classified as troubled debt restructurings were $8.4$7.2 million and $8.6$8.5 million, respectively.
Federal Funds Sold and Securities Purchased Under Agreements to Resell.
Term federal funds sold and term securities purchased under agreements to resell are all short term (less than three months), and they are generally transacted with counterparties that we consider to be of investment quality. We invest in federal funds sold on an unsecured basis and we evaluate these investments for purposes of an allowance for credit losses only if the investment is not paid when due. All investments in federal funds sold as of December 31, 20172019 and 20162018, were repaid according to their contractual terms. Securities purchased under agreements to resell are considered collateralized financing arrangements and effectively represent short-term loans. The terms of these loans are structured such that if the market value of the underlying securities decreases below the market value required as collateral, the counterparty must provide additional securities as collateral in an amount equal to the decrease or remit cash in such amount. If we determine that an agreement to resell is impaired, the difference between the fair value of the collateral and the amortized cost of the agreement is charged to earnings. Based upon the collateral held as security, we determined that no allowance for credit losses was needed for the securities purchased under agreements to resell at December 31, 20172019 and 20162018.
Note 1112 — Derivatives and Hedging Activities
Nature of Business Activity
We are exposed to interest-rate risk primarily from the effects of interest-rate changes on interest-earning assets and interest-bearing liabilities that finance these assets. The goal of our interest-rate risk-management strategy is to manage interest-rate risk within appropriate limits. As part of our effort to mitigate the risk of loss, we have established policies and procedures, which include guidelines on the amount of exposure to interest-rate changes we will accept. In addition, we monitor the risk to our interest income, net interest margin, and average maturity of interest-earning assets and interest-bearing liabilities.
Consistent with FHFA regulations, we enter into derivatives to manage the interest-rate-risk exposures inherent in otherwise unhedged assets and liabilities and achieve our risk-management objectives. FHFA regulation prohibits us from the speculative use of these derivative instruments. The use of derivatives is an integral part of our financial and risk management strategy. We may enter into derivatives that do not necessarily qualify for hedge accounting.
We reevaluate our hedging strategies from time to timeperiodically and may change the hedging techniques we use or may adopt new strategies. The most common ways in which we use derivatives are to:
effectively change the coupon repricing characteristics of assets and liabilities from fixed-rate to floating-rate;
hedge the mark-to-market sensitivity of existing assets or liabilities;
offset or neutralize embedded options in assets and liabilities; and
hedge the potential yield variability of anticipated asset or liability transactions.
Application of Derivatives
We formally document at inception all relationships between derivatives designated as hedging instruments and hedged items, as well as our risk-management objectives and strategies for undertaking various hedge transactions and our method of assessing hedge effectiveness. This process includes linking all derivatives that are designated as fair-value or cash-flow hedges to specific assets or liabilities on the statement of condition;condition, firm commitments;commitments, or forecasted transactions.
We may use derivatives to adjust the effective maturity, repricing frequency, or option characteristics of our financial instruments, including our advances products, investments, and COs to achieve risk-management objectives. Derivative instruments are designated by us as:
a qualifying fair-value hedge of a non-derivative financial instrument or a cash-flow hedge of a forecasted transaction; and
a non-qualifying economic hedge in general asset-liability management where derivatives serve a documented risk-mitigation purpose but do not qualify for hedge accounting. These hedges are primarily used to manage certain mismatches between the coupon features of our assets and liabilities.
We transact all of our derivatives with counterparties who are major banks or, in a few instances, with their affiliates with unconditional guarantees provided by the respective major banks. Some of these derivative counterparties and their affiliates buy, sell, and distribute COs, and may be affiliates of members of the Bank. Derivative transactions may be either over-the-counter with a counterparty (uncleared derivatives) or cleared through a futures commission merchant (clearing member) with a DCO as the counterparty (cleared derivatives).
Once a derivative transaction has been accepted for clearing by a DCO, the executing counterparty is replaced with the DCO. We are not a derivatives dealer and do not trade derivatives for short-term profit.
Types of Derivatives
We primarily use the following derivatives instruments to reduce funding costs and/or to manage our interest-rate risks.
| |
| • | Interest-Rate Swaps. An interest-rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be exchanged and the manner in which the cash flows will be calculated. One of the simplest forms of an interest-rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional amount at a predetermined fixed rate for a given period of time to the counterparty. In return for this promise, this party receives cash flows equivalent to the interest on the same notional amount at a variable-rate index for the same period of time from the counterparty. The variable-rate indexindices we utilize in most of our derivative transactions is LIBOR.are LIBOR and the overnight-index swap (OIS) rate based on the federal funds effective rate. |
| |
| • | Optional Termination Interest-Rate Swaps. In an optional termination interest-rate swap, one counterparty has the right, but not the obligation, to terminate the interest-rate swap prior to its stated maturity date. We use optional termination interest-rate swaps to hedge callable CO bonds and putable advances. In most cases, we own an option to terminate the hedged item, that is, redeem a callable bond or demand repayment of a putable advance on specified dates, and the counterparty to the optional termination interest-rate swap owns the option to terminate the interest-rate swap on those same dates. |
| |
| • | Forward-Start Interest-Rate Swaps. A forward-start interest-rate swap is an interest-rate swap (as described above) with a deferred effective date. We designate forward-start interest-rate swaps as cash-flow hedges of expected debt issuances. |
| |
| • | Swaptions. A swaption is an option on an interest-rate swap that gives the buyer the right to enter into a specified interest-rate swap at a certain time in the future. When used as a hedge, a swaption can protect us if we are planning to lend or borrow funds in the future against future interest-rate changes. We may enter into both payer swaptions and receiver swaptions. A payer swaption is the option to make pre-determined fixed interest payments at a later date and a receiver swaption is the option to receive pre-determined fixed interest payments at a later date.
|
| |
• | Interest-Rate Cap and Floor Agreements. In an interest-rate cap agreement, a cash flow is generated if the price or rate of an underlying variable rises above a certain threshold or cap price. In an interest-rate floor agreement, a cash flow is generated if the price or rate of an underlying variable falls below a certain threshold or floor price. These agreements are intended to serve as protection against the interest rate on a variable-rate asset or liability falling below or rising above a certain level. |
Types of Assets and Liabilities Hedged
Investments. We use derivatives to manage the interest-rate and prepayment risk associated with certain investment securities that are classified either as available-for-sale or as trading securities.
For available-for-sale securities to which a qualifying fair-value hedge relationship has been designated, we record the portion of the change in fair value related to the risk being hedged in other income as net gains (losses) on derivatives and hedging activities together with the related change in fair value of the derivative, and the remainder of the change in fair value is recorded in other comprehensive loss as net unrealized gains (losses) on available-for-sale securities.
We may also manage the risk arising from changing market prices or cash flows of certain investment securities classified as trading by entering into economic hedges that offset the changes in fair value or cash flows of the securities. These economic hedges are not specifically designated as hedges of individual assets, but rather are collectively managed to provide an offset to the changes in the fair values of the assets. The market-value changes of trading securities are included in net unrealized lossesgains (losses) on trading securities in the statement of operations, while the changes in fair value of the associated derivatives are included in other income as net gains (losses) on derivatives and hedging activities.
Advances. We offer a wide range of fixed- and variable-rate advance products with different maturities, interest rates, payment characteristics and optionality. We may use interest-rate swaps to manage the repricing and/or options characteristics of advances to more closely match the characteristics of our funding liabilities. Typically, we hedge the fair value of fixed-rate
advances with interest-rate swaps where we pay a fixed-rate coupon and receive a variable-rate coupon, effectively converting the advance to a floating-rate advance. We also hedge the fair value of certain floating-rate advances that contain either an interest-rate cap or floor, or both a cap and a floor with a derivative containing an offsetting cap and/or floor.
With each issuance of a putable advance, we effectively purchase from the borrower an embedded put option that enables us to terminate a fixed-rate advance on predetermined put dates, and offer, subject to certain conditions, replacement funding at then-current advances rates. We may hedge a putable advance by entering into a derivative that is cancelable by the derivative counterparty, where we pay a fixed-rate coupon and receive a variable-rate coupon. This type of hedge is treated as a fair-value hedge. The swap counterparty would normally exercise its option to cancel the derivative at par on any defined exercise date if interest rates had risen, and at that time, we could, at our option, require immediate repayment of the advance.
Additionally, the borrower's ability to prepay an advance can create interest-rate risk. When a borrower prepays an advance, we could suffer lower future income if the principal portion of the prepaid advance were invested in lower-yielding assets that continue to be funded by higher-cost debt. To protect against this risk, we generally charge a prepayment fee that makes us financially indifferent to a borrower's decision to prepay an advance. If the advance is hedged with a derivative instrument, the prepayment fee will generally offset the cost of terminating the designated hedge. When we offer advances (other than short-term advances) that a borrower may prepay without a prepayment fee, we usually finance such advances with callable debt with an interest-rate swap cancellable by us.
COs. We may enter into derivatives to hedge (or partially hedge, depending on the risk strategy) the interest-rate risk associated with our specific debt issuances, including using derivatives to change the effective interest-rate sensitivity of debt to better match the characteristics of funded assets. We endeavor to manage the risk arising from changing market prices and volatility of a CO by matching the cash inflow on the derivative with the cash outflow on the CO.
As an example of such a hedging strategy, when fixed-rate COs are issued, we may simultaneously enter into a matching derivative in which we receive a fixed-interest cash flows designed to mirror in timing and amount the interest cash outflows we pay on the CO. At the same time, we may pay variable cash flows that closely match the interest payments we receive on short-term or variable-rate assets. In some cases, the hedged CO may have a nonstatic coupon that is subject to fair-value risk and that is matched by the receivable coupon on the hedging interest-rate swap. These transactions are treated as fair-value hedges.
In a typical cash-flow hedge of anticipated CO issuance, we may enter into interest-rate swaps for the anticipated issuance of fixed-rate CO bonds to lock in a spread between an earning asset and the cost of funding. The interest-rate swap is terminated upon issuance of the fixed-rate CO bond. Changes in fair value of the hedging derivative, to the extent that the hedge is effective, will be recorded in accumulated other comprehensive loss and reclassified into earnings in the period or periods during which the cash flows of the fixed-rate CO bond affects earnings (beginning upon issuance and continuing over the life of the CO bond).
Firm Commitments. Mortgage loan purchase commitments are considered derivatives. We may hedge these commitments by selling MBS TBA or other derivatives for forward settlement. These hedges do not qualify for hedge accounting treatment. The mortgage loan purchase commitment and the TBA used in the economic hedging strategy are treated as an economic hedge and are marked-to-market through earnings. When the mortgage loan purchase commitment derivative settles, the current market value of the commitment is included with the basis of the mortgage loan. The basis adjustments on the resulting performing loans are then amortized into net interest income over the life of the loans.
We may also hedge a firm commitment for a forward-starting advance through the use of an interest-rate swap. In this case, the interest-rate swap functions as the hedging instrument for both the firm commitment and the subsequent advance and is treated as a fair value hedge. The fair-value change associated with the firm commitment is recorded as a basis adjustment of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment is then amortized into interest income over the life of the advance.
Financial Statement Impact and Additional Financial Information. The notional amount of derivatives is a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount of derivatives reflects our involvement in the various classes of financial instruments and represents neither the actual amounts exchanged nor our overall exposure to credit and market risk; the overall risk is much smaller. The risks of derivatives can be measured meaningfully on a portfolio basis that takes into account the counterparties, the types of derivatives, the tenor of the derivatives, the items being hedged, and any offsets between the derivatives and the items being hedged.
Table 11.1 - Fair Value of Derivative Instruments (dollars in thousands)
| |
Table 12.1 - Fair Value of Derivative Instruments (dollars in thousands)
| | Table 12.1 - Fair Value of Derivative Instruments (dollars in thousands)
|
| | | December 31, 2017 | | December 31, 2016 | December 31, 2019 | | December 31, 2018 |
| | Notional Amount of Derivatives | | Derivative Assets | | Derivative Liabilities | | Notional
Amount of
Derivatives | | Derivative
Assets | | Derivative
Liabilities | Notional Amount of Derivatives | | Derivative Assets | | Derivative Liabilities | | Notional
Amount of
Derivatives | | Derivative
Assets | | Derivative
Liabilities |
| Derivatives designated as hedging instruments | |
| | |
| | |
| | | | | | | |
| | |
| | |
| | | | | | |
| Interest-rate swaps | $ | 14,118,994 |
| | $ | 52,557 |
| | $ | (332,830 | ) | | $ | 18,215,809 |
| | $ | 52,715 |
| | $ | (413,026 | ) | $ | 12,128,105 |
| | $ | 14,734 |
| | $ | (12,805 | ) | | $ | 11,980,699 |
| | $ | 12,811 |
| | $ | (296,324 | ) |
| Forward-start interest-rate swaps | 481,200 |
| | — |
| | (9,807 | ) | | 527,800 |
| | — |
| | (36,250 | ) | 17,000 |
| | 19 |
| | — |
| | 282,000 |
| | — |
| | (753 | ) |
| Total derivatives designated as hedging instruments | 14,600,194 |
| | 52,557 |
| | (342,637 | ) | | 18,743,609 |
| | 52,715 |
| | (449,276 | ) | 12,145,105 |
| | 14,753 |
| | (12,805 | ) | | 12,262,699 |
| | 12,811 |
| | (297,077 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | | | | | | | |
| Economic hedges: | | | | | | | | | | | | | | | | | | | | | | |
| Interest-rate swaps | 1,166,900 |
| | 3,512 |
| | (4,688 | ) | | 1,199,000 |
| | 2,293 |
| | (10,840 | ) | 2,902,300 |
| | 349 |
| | (31,000 | ) | | 927,800 |
| | 682 |
| | (12,475 | ) |
Mortgage-delivery commitments (1) | 42,918 |
| | 169 |
| | (27 | ) | | 22,524 |
| | 70 |
| | (171 | ) | 49,911 |
| | 227 |
| | — |
| | 50,773 |
| | 339 |
| | — |
|
| Total derivatives not designated as hedging instruments | 1,209,818 |
| | 3,681 |
| | (4,715 | ) | | 1,221,524 |
| | 2,363 |
| | (11,011 | ) | 2,952,211 |
| | 576 |
| | (31,000 | ) | | 978,573 |
| | 1,021 |
| | (12,475 | ) |
| Total notional amount of derivatives | $ | 15,810,012 |
| | |
| | |
| | $ | 19,965,133 |
| | |
| | |
| $ | 15,097,316 |
| | |
| | |
| | $ | 13,241,272 |
| | |
| | |
|
| Total derivatives before netting and collateral adjustments | |
| | 56,238 |
| | (347,352 | ) | | | | 55,078 |
| | (460,287 | ) | |
| | 15,329 |
| | (43,805 | ) | | | | 13,832 |
| | (309,552 | ) |
Netting adjustments and cash collateral, including related accrued interest (2) | |
| | (21,452 | ) | | 46,902 |
| | | | 6,520 |
| | 102,411 |
| |
| | 144,402 |
| | 33,534 |
| | | | 8,571 |
| | 53,752 |
|
| Derivative assets and derivative liabilities | |
| | $ | 34,786 |
| | $ | (300,450 | ) | | | | $ | 61,598 |
| | $ | (357,876 | ) | |
| | $ | 159,731 |
| | $ | (10,271 | ) | | | | $ | 22,403 |
| | $ | (255,800 | ) |
_______________________
| |
| (1) | Mortgage-delivery commitments are classified as derivatives with changes in fair value recorded in other income. |
| |
| (2) | Amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions with the same counterparty. Cash collateral and related accrued interest posted was $25.8$178.5 million and $109.8$62.8 million at December 31, 20172019, and 20162018, respectively. The change in cash collateral posted is included in the net change in interest-bearing deposits in the statement of cash flows. Cash collateral and related accrued interest received was $350,000561 thousand and $850,000$471 thousand at December 31, 20172019 and 20162018. |
Beginning on January 1, 2019, changes in fair value of the derivative hedging instrument and the hedged item attributable to the hedged risk for designated fair-value hedges are recorded in net interest income in the same line as the earnings effect of the hedged item. For designated cash-flow hedges, the entire change in the fair value of the hedging instrument (assuming it is included in the assessment of hedge effectiveness) is reported in other comprehensive income until the hedged transaction affects earnings. At that time, this amount is reclassified from other comprehensive income and recorded in net interest income in the same line as the earnings effect of the hedged item. Prior to January 1, 2019, for both fair value and cash-flow hedges, any hedge ineffectiveness (which represented the amount by which the change in the fair value of the derivative differed from the change in the fair value of the hedged item or the variability in the cash flows of the forecasted transaction attributable to the hedged risk) was recorded in noninterest income as net gains on derivatives and hedging activities.
Table 11.2 - Net Gains and Losses on Derivatives and Hedging Activities (dollars in thousands)
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Derivatives designated as hedging instruments | | | | | | |
| Interest-rate swaps | | $ | (2,238 | ) | | $ | (6,998 | ) | | $ | (7,189 | ) |
| Forward-start interest-rate swaps | | 587 |
| | 29 |
| | (127 | ) |
| Total net losses related to derivatives designated as hedging instruments | | (1,651 | ) | | (6,969 | ) | | (7,316 | ) |
| | | | | | | |
| Derivatives not designated as hedging instruments: | | | | | | |
| Economic hedges: | | | | | | |
| Interest-rate swaps | | 434 |
| | (1,352 | ) | | (4,170 | ) |
| Mortgage-delivery commitments | | 1,768 |
| | (270 | ) | | 226 |
|
| Total net gains (losses) related to derivatives not designated as hedging instruments | | 2,202 |
| | (1,622 | ) | | (3,944 | ) |
| | | | | | | |
| Net gains (losses) on derivatives and hedging activities | | $ | 551 |
| | $ | (8,591 | ) | | $ | (11,260 | ) |
Table 11.3 - Effect of Fair Value Hedge Relationships (dollars in thousands)
|
| | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2017 |
| | Gain on Derivative | | Gain/(Loss) on Hedged Item | | Net Fair-Value Hedge Ineffectiveness | | Effect of Derivatives on Net Interest Income (1) |
| Hedged Item: | |
| | |
| | |
| | |
|
| Advances | $ | 52,064 |
| | $ | (52,633 | ) | | $ | (569 | ) | | $ | (24,663 | ) |
| Investments | 20,748 |
| | (19,011 | ) | | 1,737 |
| | (32,053 | ) |
| COs – bonds | 4,670 |
| | (8,076 | ) | | (3,406 | ) | | 6,694 |
|
| Total | $ | 77,482 |
| | $ | (79,720 | ) | | $ | (2,238 | ) | | $ | (50,022 | ) |
| | | | | | | | |
| | For the Year Ended December 31, 2016 |
| | Gain/(Loss) on Derivative | | Gain/(Loss) on Hedged Item | | Net Fair-Value Hedge Ineffectiveness | | Effect of Derivatives on Net Interest Income (1) |
| Hedged Item: | |
| | |
| | |
| | |
|
| Advances | $ | 114,139 |
| | $ | (112,547 | ) | | $ | 1,592 |
| | $ | (96,079 | ) |
| Investments | 25,784 |
| | (23,965 | ) | | 1,819 |
| | (35,203 | ) |
| COs – bonds | (65,653 | ) | | 55,244 |
| | (10,409 | ) | | 27,182 |
|
| Total | $ | 74,270 |
| | $ | (81,268 | ) | | $ | (6,998 | ) | | $ | (104,100 | ) |
Table 12.2 - Net Gains (Losses) on Fair Value Hedging Relationships (dollars in thousands)
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, 2019 |
| | | Advances | | Available-for-sale Securities | | CO Bonds |
| Total interest income (expense) in the statements of operations | | $ | 854,599 |
| | $ | 115,942 |
| | $ | (598,585 | ) |
| | | | | | | |
| Gains (losses) on fair value hedging relationships | | | | | | |
| Changes in fair value: | | | | | | |
| Derivatives | | $ | (72,488 | ) | | $ | (24,274 | ) | | $ | 55,777 |
|
| Hedged items | | 73,530 |
| | 21,329 |
| | (56,091 | ) |
| Net changes in fair value before price alignment interest | | 1,042 |
| | (2,945 | ) | | (314 | ) |
Price alignment interest(1) | | 1,316 |
| | 3,769 |
| | (786 | ) |
Net interest settlements on derivatives(2)(3) | | 39,085 |
| | (22,249 | ) | | (17,482 | ) |
| Net gains (losses) on qualifying fair-value hedging relationships | | 41,443 |
| | (21,425 | ) | | (18,582 | ) |
| Amortization/accretion of discontinued fair-value hedging relationships | | (1,934 | ) | | — |
| | (2,567 | ) |
| Net gains (losses) on derivatives and hedging activities recorded in net interest income | | $ | 39,509 |
| | $ | (21,425 | ) | | $ | (21,149 | ) |
|
| | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2015 |
| | Gain/(Loss) on Derivative | | Gain/(Loss) on Hedged Item | | Net Fair-Value Hedge Ineffectiveness | | Effect of Derivatives on Net Interest Income (1) |
| Hedged Item: | |
| | |
| | |
| | |
|
| Advances | $ | 90,766 |
| | $ | (91,157 | ) | | $ | (391 | ) | | $ | (131,019 | ) |
| Investments | 5,762 |
| | (4,252 | ) | | 1,510 |
| | (37,657 | ) |
| COs – bonds | (14,010 | ) | | 5,702 |
| | (8,308 | ) | | 63,390 |
|
| Total | $ | 82,518 |
| | $ | (89,707 | ) | | $ | (7,189 | ) | | $ | (105,286 | ) |
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, 2018 |
| | | Advances | | Available-for-sale Securities | | CO Bonds |
| Total income (expense) in the statements of operations | | $ | 867,215 |
| | $ | 143,952 |
| | $ | (545,228 | ) |
| | | | | | | |
| Gains (losses) on fair value hedging relationships | | | | | | |
| Changes in fair value: | | | | | | |
| Derivatives | | $ | 447 |
| | $ | 43,771 |
| | $ | (5,680 | ) |
| Hedged items | | 257 |
| | (42,022 | ) | | 5,254 |
|
| Net changes in fair value | | 704 |
| | 1,749 |
| | (426 | ) |
Net interest settlements on derivatives(2)(3) | | 51,522 |
| | (26,040 | ) | | (27,895 | ) |
| Net gains (losses) on qualifying fair-value hedging relationships | | 52,226 |
| | (24,291 | ) | | (28,321 | ) |
| Amortization/accretion of discontinued fair-value hedging relationships | | (1,475 | ) | | — |
| | 945 |
|
Less: net changes in fair value(4) | | (704 | ) | | (1,749 | ) | | 426 |
|
| Net gains (losses) on derivatives and hedging activities recorded in net interest income | | $ | 50,047 |
| | $ | (26,040 | ) | | $ | (26,950 | ) |
______________
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, 2017 |
| | | Advances | | Available-for-sale Securities | | CO Bonds |
| Total income (expense) in the statements of operations | | $ | 514,176 |
| | $ | 118,270 |
| | $ | (421,622 | ) |
| | | | | | | |
| Gains (losses) on fair value hedging relationships | | | | | | |
| Changes in fair value: | | | | | | |
| Derivatives | | $ | 52,055 |
| | $ | 20,747 |
| | $ | 4,611 |
|
| Hedged items | | (52,633 | ) | | (19,011 | ) | | (8,077 | ) |
| Net changes in fair value | | (578 | ) | | 1,736 |
| | (3,466 | ) |
Net interest settlements on derivatives(2)(3) | | (24,663 | ) | | (32,053 | ) | | 6,694 |
|
| Net (losses) gains on qualifying fair-value hedging relationships | | (25,241 | ) | | (30,317 | ) | | 3,228 |
|
| Amortization/accretion of discontinued fair-value hedging relationships | | (2,176 | ) | | — |
| | 1,903 |
|
Less: net changes in fair value(4) | | 578 |
| | (1,736 | ) | | 3,466 |
|
| Net (losses) gains on derivatives and hedging activities recorded in net interest income | | $ | (26,839 | ) | | $ | (32,053 | ) | | $ | 8,597 |
|
_______________________
| |
| (1) | The netRelates to derivatives for which variation margin payments are characterized as daily settled contracts. |
| |
| (2) | Represents interest income/expense on derivatives in qualifying fair-value hedgehedging relationships. Net interest settlements on derivatives that are not in qualifying fair-value hedging relationships is presentedare reported in other income. |
| |
| (3) | Excludes the statement of operations as interest income or interest income/expense of the respective hedged item.items recorded in net interest income. |
| |
| (4) | In 2018 and 2017, net changes in fair value were recorded in net gains on derivatives and hedging activities in other income. |
Table 11.4 - Effect of Cash Flow Hedge Relationships (dollars in thousands)
|
| | | | | | | | | | | | | | |
| Derivatives and Hedged Items in Cash Flow Hedging Relationships | | Losses Recognized in Other Comprehensive Loss on Derivatives (Effective Portion) | | Location of Losses Reclassified from Accumulated Other Comprehensive Loss into Net Income (Effective Portion) | | Losses Reclassified from Accumulated Other Comprehensive Loss into Net Income (Effective Portion) | | Gains (Losses) Recognized in Net Losses on Derivatives and Hedging Activities (Ineffective Portion) |
| Forward-start Interest-rate swaps - CO bonds | | | | | | | | |
| For the Year Ended December 31, 2017 | | $ | (2,838 | ) | | Interest expense | | $ | (10,575 | ) | | $ | 587 |
|
| For the Year Ended December 31, 2016 | | (732 | ) | | Interest expense | | (23,767 | ) | | 29 |
|
| For the Year Ended December 31, 2015 | | (13,671 | ) | | Interest expense | | (23,848 | ) | | (127 | ) |
Table 12.3 - Net Gains (Losses) on Cash Flow Hedging Relationships (dollars in thousands)
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Forward-start interest rate swaps - CO Bonds | | | | | | |
| Losses reclassified from accumulated other comprehensive loss into interest expense | | $ | (5,218 | ) | | $ | (3,171 | ) | | $ | (10,575 | ) |
| (Losses) gains recognized in other comprehensive income | | (6,131 | ) | | 7,907 |
| | (2,838 | ) |
| Gains recognized in net gains on derivatives and hedging activities | | | | 227 |
| | 280 |
|
For the years ended December 31, 20172019, 20162018, and 2015,2017, there were no0 reclassifications from accumulated other comprehensive loss into earnings as a result of the discontinuance of cash-flow hedges because the original forecasted transactions were not expected to occur by the end of the originally specified time period or within a two-month period thereafter. As of December 31, 20172019, the maximum length of time over which we are hedging our exposure to the variability in future cash flows for forecasted transactions is seventwo years.
As of December 31, 20172019, the amount of deferred net losses on derivatives accumulated in other comprehensive loss related to cash flow hedges expected to be reclassified to earnings during the next 12 months is $3.57.0 million.
Table 12.4 - Cumulative Basis Adjustments for Fair-Value Hedges (dollars in thousands)
|
| | | | | | | | | | | | | | | | |
| | | December 31, 2019 |
| Line Item in Statement of Condition of Hedged Item | | Amortized Cost of Hedged Asset/ Liability(1) | | Basis Adjustments for Active Hedging Relationships Included in Amortized Cost | | Basis Adjustments for Discontinued Hedging Relationships Included in Amortized Cost | | Cumulative Amount of Fair Value Hedging Basis Adjustments |
| Advances | | $ | 5,115,016 |
| | $ | 38,988 |
| | $ | 10,835 |
| | $ | 49,823 |
|
| Available-for-sale securities | | 4,053,138 |
| | 226,346 |
| | — |
| | 226,346 |
|
| Consolidated bonds | | 3,359,616 |
| | (4,840 | ) | | 36,906 |
| | 32,066 |
|
_______________________
| |
| (1) | Includes only the portion of amortized cost representing the hedged items in fair-value hedging relationships. |
Table 12.5 - Net Gains and Losses on Derivatives and Hedging Activities (dollars in thousands)
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Derivatives designated as hedging instruments: | | | | | | |
Total net gains (losses) related to fair-value hedges(1) | | | | $ | 2,027 |
| | $ | (2,308 | ) |
Total net gains related to cash-flow hedges(2) | | | | 227 |
| | 280 |
|
| Total net gains (losses) related to derivatives designated as hedging instruments | | | | 2,254 |
| | (2,028 | ) |
| | | | | | | |
| Derivatives not designated as hedging instruments: | | | | | | |
| Economic hedges: | | | | | | |
| Interest-rate swaps | | $ | (614 | ) | | 682 |
| | 434 |
|
| Mortgage-delivery commitments | | 1,945 |
| | 421 |
| | 1,768 |
|
| Total net gains related to derivatives not designated as hedging instruments | | 1,331 |
| | 1,103 |
| | 2,202 |
|
| | | | | | | |
Other(3) | | 88 |
| | (1,021 | ) | | 377 |
|
| | | | | | | |
| Net gains on derivatives and hedging activities | | $ | 1,419 |
| | $ | 2,336 |
| | $ | 551 |
|
______________________
| |
| (1) | Consists of interest-rate swaps. |
| |
| (2) | Consists of forward-start interest-rate swaps. |
| |
| (3) | Consists of price alignment amount on derivatives for which variation margin is characterized as a daily settlement amount. |
Termination of Derivatives and Impact on Statement of Cash Flows. During the year ended December 31, 2019, we terminated certain uncleared interest-rate exchange agreements with a total notional amount of $611.9 million which were indexed to three-month LIBOR on the floating leg of the swaps. The net fair value of these derivative transactions, from our perspective, was $(251.5) million, which was transferred to the bilateral counterparty upon termination, and securities collateral that we had pledged against this obligation was returned to us. This cash payment is included in net change in derivatives and hedging activities, within the operating activities section of the statement of cash flows for the year ended December 31, 2019.
Simultaneously with the termination of these derivatives, we entered into replacement interest-rate exchange agreements (the replacement derivatives) having the same notional amount of $611.9 million and which are indexed to the OIS rate based on the federal funds effective rate on the floating leg of the swaps. Upon settlement of the replacement derivatives, the Bank received an initial upfront payment of $251.5 million. The replacement derivatives are cleared through a derivatives clearing organization (DCO), which called for variation margin to be delivered. Because the replacement derivatives include off-market terms and this large initial upfront payment, all payments for the replacement derivatives are classified as net payments on derivative contracts with a financing element, within the financing activities section of the statement of cash flows.
Managing Credit Risk on Derivatives. We are subject to credit risk on our hedging activities due to the risk of nonperformance by nonmember counterparties (including DCOs and their clearing members acting as agent to the DCOs as well as uncleared counterparties) to the derivative agreements. We manage credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in our policies, U.S. Commodity Futures Trading Commission (the CFTC) regulations, and FHFA regulations.
Uncleared Derivatives. All counterparties must execute master-netting agreements prior to entering into any uncleared derivative with us. Our master-netting agreements for uncleared derivatives contain bilateral-collateral exchange agreements that require that credit exposure beyond a defined threshold amount (which may be zero) be secured by readily marketable, U.S. Treasury, U.S. Government Guaranteed,Government-guaranteed, or GSE securities, or cash. The level of these collateral threshold amounts (when applicable) varies according to the counterparty's Standard & Poor's Rating Service (S&P) or Moody's Investors Services (Moody's) long-term credit ratings. Credit exposures are then measured daily and adjustments to collateral positions are made in accordance with the terms of the master-netting agreements. These master-netting agreements also contain bilateral ratings-tied termination events permitting us to terminate all outstanding derivatives transactions with a counterparty in the event of a
specified rating downgrade by Moody's or S&P. Based on credit analyses and collateral requirements, we do not anticipate any credit losses on our derivative agreements.
We execute uncleared derivatives with nonmember counterparties with long-term ratings of single-A (or equivalent) or better by the major NRSROs at the time of the transaction, although risk-reducing trades may be permitted for counterparties whose
ratings have fallen below these ratings. Some of these counterparties or their affiliates buy, sell, and distribute COs. See Note 1314 — Consolidated Obligations for additional information.
Certain of our uncleared derivatives master-netting agreements contain provisions that require us to post additional collateral with our uncleared derivatives counterparties if our credit ratings are lowered. Under the terms that govern such agreements, if our credit rating is lowered by Moody's or S&P to a certain level, we are required to deliver additional collateral on uncleared derivatives in a net liability position, unless the collateral delivery threshold is set to zero. In the event of a split between such credit ratings, the lower rating governs. The aggregate fair value of all uncleared derivatives with these provisions that were in a net-liability position (before cash collateral and related accrued interest) at December 31, 20172019, was $322.138.7 million for which we had delivered collateral with a post-haircut value of $296.038.6 million in accordance with the terms of the master-netting agreements. Securities collateral is subject to valuation haircuts in accordance with the terms of the master-netting arrangements. Table 11.512.6 sets forth the post-haircut value of incremental collateral that certain uncleared derivatives counterparties could have required us to deliver based on incremental credit rating downgrades at December 31, 20172019.
Table 11.5 - Post Haircut Value of Incremental Collateral to be Delivered as of December 31, 2017 (dollars in thousands)
| |
Table 12.6 - Post Haircut Value of Incremental Collateral to be Delivered as of December 31, 2019 (dollars in thousands)
| | Table 12.6 - Post Haircut Value of Incremental Collateral to be Delivered as of December 31, 2019 (dollars in thousands)
|
| Ratings Downgrade (1) | Ratings Downgrade (1) | | | Ratings Downgrade (1) | | |
| From | | To | | Incremental Collateral | | To | | Incremental Collateral |
| AA+ | | AA or AA- | | $ | 6,080 |
| | AA or AA- | | $ | 302 |
|
| AA- | | A+, A or A- | | 14,612 |
| | A+, A or A- | | — |
|
| A- | | below A- | | 23,457 |
| | below A- | | 5,801 |
|
_______________________
| |
| (1) | Ratings are expressed in this table according to S&P's conventions but include the equivalent of such rating by Moody's. If there is a split rating, the lower rating is used. |
Cleared Derivatives. For cleared derivatives, the DCO is our counterparty. The DCO notifies the clearing member of the required initial and variation margin and our agent (clearing member) in turn notifies us. We utilize two DCOs, for all cleared derivative transactions, CME Inc. and LCH Ltd. Effective January 3, 2017, CME Inc. made certain amendments to its rulebook, changing the legal characterization ofBased upon their rulebooks, we characterize variation margin payments to beas daily settlement payments, rather than collateral. Throughout 2017, we characterized our variation margin related to LCH Ltd. contracts as cash collateral. At both DCOs, posted initial margin is considered cash collateral. We post initial margin and exchange variation margin through a clearing member whowhich acts as our agent to the DCO and whowhich guarantees our performance to the DCO, subject to the terms of relevant agreements. These arrangements expose us to credit risk in the event that one of our clearing members or one of the DCOs fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because the DCO, which is fully secured at all times through margin received from its clearing members, is substituted for the credit risk exposure of individual counterparties in uncleared derivatives, and collateral is posted at least once daily for changes in the fair value of cleared derivatives through a clearing member.
For cleared derivatives, the DCO determines initial margin requirements. We clear our trades via clearing members of the DCOs. These clearing members who act as our agent to the DCOs are CFTC-registered futures commission merchants. Our clearing members may require us to post margin in excess of DCO requirements based on our credit or other considerations, including but not limited to, credit rating downgrades. We were not required to post any such excess margin by our clearing members based on credit considerations at December 31, 2017.2019.
Offsetting of Certain Derivatives. We present derivatives, any related cash collateral including initial and certain variation margin, received or pledged, and associated accrued interest, on a net basis by counterparty.
We have analyzed the rights, rules, and regulations governing our cleared and non-cleared derivatives and determined that those rights, rules, and regulations should result in a net claim with each of our counterparties (which, in the context of cleared derivatives is through each of our clearing members with the related DCODCO) upon an event of default including a(solely in the case of non-
cleared derivatives) or the bankruptcy, insolvency or a similar proceeding involving the DCO our counterparty (and/or one of our clearing members, or both.in the case of cleared derivatives). For this purpose, net claim"net claim" generally means a single net amount reflecting the aggregation of all amounts indirectly owed by us to the relevant DCOcounterparty and indirectly payable to us from the relevant DCO.counterparty.
Table 11.612.7 presents separately the fair value of derivatives that are subject to netting due to a legal right of offset based on the terms of our master netting arrangements or similar agreements as of December 31, 20172019 and 2016,2018, and the fair value of derivatives that are not subject to such netting. SuchDerivatives subject to netting includesinclude any related cash collateral received from or pledged to counterparties.
Table 11.6 - Netting of Derivative Assets and Derivative Liabilities (dollars in thousands)
| |
Table 12.7 - Netting of Derivative Assets and Derivative Liabilities (dollars in thousands)
| | Table 12.7 - Netting of Derivative Assets and Derivative Liabilities (dollars in thousands)
|
| | | December 31, 2017 | December 31, 2019 |
| | Derivative Instruments Meeting Netting Requirements | | | | | | Non-cash Collateral Received or Pledged Not Offset(2) | | | Derivative Instruments Meeting Netting Requirements | | | | | | Non-cash Collateral (Received) or Pledged Not Offset(2) | | |
| | Gross Recognized Amount | Gross Amounts of Netting Adjustments (1) | | Mortgage Delivery Commitments | | Total Derivative Assets and Total Derivative Liabilities | | Can Be Sold or Repledged | Cannot Be Sold or Repledged | | Net Amount | Gross Recognized Amount | Gross Amounts of Netting Adjustments (1) | | Mortgage Delivery Commitments | | Total Derivative Assets and Total Derivative Liabilities | | Can Be Sold or Repledged | Cannot Be Sold or Repledged | | Net Amount |
| Derivative Assets | | | | | | | | | | | | | | | | | | |
| Uncleared | $ | 15,587 |
| $ | (13,481 | ) | | $ | 169 |
| | $ | 2,275 |
| | $ | — |
| $ | — |
| | $ | 2,275 |
| $ | 4,950 |
| $ | (3,519 | ) | | $ | 227 |
| | $ | 1,658 |
| | $ | (995 | ) | $ | — |
| | $ | 663 |
|
| Cleared | 40,482 |
| (7,971 | ) | | | | 32,511 |
| | — |
| — |
| | 32,511 |
| 10,152 |
| 147,921 |
| | | | 158,073 |
| | — |
| — |
| | 158,073 |
|
| Total | | | | | $ | 34,786 |
| | | | $ | 34,786 |
| | | | | $ | 159,731 |
| | | | $ | 158,736 |
|
| | | | | | | | | | | | | | | | | | | |
| Derivative Liabilities | | | | | | | | | | | | | | | | | | |
| Uncleared | $ | (335,289 | ) | $ | 34,866 |
| | $ | (27 | ) | | $ | (300,450 | ) | | $ | 7,627 |
| $ | 280,486 |
| | $ | (12,337 | ) | $ | (42,199 | ) | $ | 31,928 |
| | $ | — |
| | $ | (10,271 | ) | | $ | 82 |
| $ | 9,333 |
| | $ | (856 | ) |
| Cleared | (12,036 | ) | 12,036 |
| | | | — |
| | — |
| — |
| | — |
| (1,606 | ) | 1,606 |
| | | | — |
| | — |
| — |
| | — |
|
| Total | | | | | $ | (300,450 | ) | | | | $ | (12,337 | ) | | | | | $ | (10,271 | ) | | | | $ | (856 | ) |
_______________________
| |
| (1) | Includes gross amounts of netting adjustments and cash collateral. |
| |
| (2) | Includes non-cash collateral at fair value. Any overcollateralization with a counterparty is not included in the determination of the net amount. At December 31, 2017,2019, we had additional net credit exposure of $502,000$300 thousand due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position. |
| | | | December 31, 2016 | December 31, 2018 |
| | Derivative Instruments Meeting Netting Requirements | | | | | | Non-cash Collateral Received or Pledged Not Offset(2) | | | Derivative Instruments Meeting Netting Requirements | | | | | | Non-cash Collateral (Received) or Pledged Not Offset(2) | | |
| | Gross Recognized Amount | Gross Amounts of Netting Adjustments (1) | | Mortgage Delivery Commitments | | Total Derivative Assets and Total Derivative Liabilities | | Can Be Sold or Repledged | Cannot Be Sold or Repledged | | Net Amount | Gross Recognized Amount | Gross Amounts of Netting Adjustments (1) | | Mortgage Delivery Commitments | | Total Derivative Assets and Total Derivative Liabilities | | Can Be Sold or Repledged | Cannot Be Sold or Repledged | | Net Amount |
| Derivative Assets | | | | | | | | | | | | | | | | | | |
| Uncleared | $ | 12,594 |
| $ | (12,028 | ) | | $ | 70 |
| | $ | 636 |
| | $ | — |
| $ | — |
| | $ | 636 |
| $ | 12,862 |
| $ | (11,886 | ) | | $ | 339 |
| | $ | 1,315 |
| | $ | (396 | ) | $ | — |
| | $ | 919 |
|
| Cleared | 42,414 |
| 18,548 |
| | | | 60,962 |
| | — |
| — |
| | 60,962 |
| 631 |
| 20,457 |
| | | | 21,088 |
| | — |
| — |
| | 21,088 |
|
| Total | | | | | $ | 61,598 |
| | | | $ | 61,598 |
| | | | | $ | 22,403 |
| | | | $ | 22,007 |
|
| | | | | | | | | | | | | | | | | | | |
| Derivative Liabilities | | | | | | | | | | | | | | | | | | |
| Uncleared | $ | (405,310 | ) | $ | 47,605 |
| | $ | (171 | ) | | $ | (357,876 | ) | | $ | 30,306 |
| $ | 290,444 |
| | $ | (37,126 | ) | $ | (306,848 | ) | $ | 51,048 |
| | $ | — |
| | $ | (255,800 | ) | | $ | 6,104 |
| $ | 237,054 |
| | $ | (12,642 | ) |
| Cleared | (54,806 | ) | 54,806 |
| | | | — |
| | — |
| — |
| | — |
| (2,704 | ) | 2,704 |
| | | | — |
| | — |
| — |
| | — |
|
| Total | | | | | $ | (357,876 | ) | | | | $ | (37,126 | ) | | | | | $ | (255,800 | ) | | | | $ | (12,642 | ) |
_______________________
| |
| (1) | Includes gross amounts of netting adjustments and cash collateral. |
| |
| (2) | Includes non-cash collateral at fair value. Any overcollateralization with a counterparty is not included in the determination of the net amount. At December 31, 2016,2018, we had additional net credit exposure of $2.0 million$639 thousand due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position. |
Note 1213 — Deposits
We offer demand, overnight and overnightterm deposits for members and qualifying nonmembers. In addition, we offer short-term interest-bearing deposit programs to members. Members that service mortgage loans may deposit funds collected in connection with mortgage loans pending disbursement of such funds to the owners of the mortgage loans. Weloans, which we classify these items as "other" in the following table.
Deposits classified as demand, overnight, and other pay interest based on a daily interest rate. Term deposits pay interest based on a fixed rate determined at the issuance of the deposit. The average interest ratesrate paid on average deposits during 20172019 and 20162018 was 0.761.16 percent and 0.141.07 percent, respectively.
Table 12.1 - Deposits (dollars in thousands)
| |
Table 13.1 - Deposits (dollars in thousands)
| | Table 13.1 - Deposits (dollars in thousands)
|
| | | December 31, 2017 | | December 31, 2016 | December 31, 2019 | | December 31, 2018 |
| Interest-bearing | |
| | | |
| | |
| Demand and overnight | $ | 447,700 |
| | $ | 440,731 |
| $ | 613,143 |
| | $ | 444,486 |
|
| Term | | 800 |
| | 800 |
|
| Other | 3,222 |
| | 4,166 |
| 2,589 |
| | 2,961 |
|
| Noninterest-bearing | |
| | |
| |
| | |
|
| Other | 26,147 |
| | 37,266 |
| 57,777 |
| | 26,631 |
|
| Total deposits | $ | 477,069 |
| | $ | 482,163 |
| $ | 674,309 |
| | $ | 474,878 |
|
Note 1314 — Consolidated Obligations
COs consist of CO bonds and CO discount notes. CO bonds may be issued to raise short-, intermediate-, and long-term funds and are not subject to any statutory or regulatory limits on maturity. CO discount notes are issued to raise short-term funds and have original maturities of up to one year. These notes sell at less than their face amount and are redeemed at par value when they mature.
Although we are primarily liable for the portion of COs issued for which we received issuance proceeds, we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all COs. The FHFA, at its discretion, may require any FHLBank to make principal or interest payments due on any CO whether or not the CO represents a primary liability of such FHLBank. Although an FHLBank has never paid the principal or interest payments due on a CO on behalf of another FHLBank, if that event should occur, FHFA regulations provide that the paying FHLBank is entitled to reimbursement from the noncomplying FHLBank for any payments made on its behalf and other associated costs, including interest to be determined by the FHFA. If, however, the FHFA determines that the noncomplying FHLBank is unable to satisfy its repayment obligations, the FHFA may allocate the outstanding liabilities of the noncomplying FHLBank among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank's participation in all COs outstanding or in any other manner it may determine to ensure that the FHLBanks operate in a safe and sound manner. See Note 1920 – Commitments and Contingencies for additional information regarding the FHLBanks' joint and several liability.
The par values of the FHLBanks' outstanding COs, including COs on which other FHLBanks are primarily liable, were approximately $1.0 trillion and $989.3 billion at both December 31, 20172019 and 2016, respectively.2018. Regulations require each FHLBank to maintain unpledged qualifying assets equal to outstanding COs for which it is primarily liable. Such qualifying assets include cash; secured advances; obligations of or fully guaranteed by the U.S.; obligations, participations, or other instruments of or issued by Fannie Mae or Ginnie Mae; mortgages, obligations, or other securities which are or ever have been sold by Freddie Mac under the FHLBank Act; and such securities as fiduciary and trust funds may invest in under the laws of the state in which the FHLBank is located. Any assets subject to a lien or pledge for the benefit of holders of any issues of COs are treated as if they were free from lien or pledge for purposes of compliance with these regulations.
CO Bonds.
Table 13.1 - CO Bonds Outstanding by Contractual Maturity (dollars in thousands)
| |
Table 14.1 - CO Bonds Outstanding by Contractual Maturity (dollars in thousands)
| | Table 14.1 - CO Bonds Outstanding by Contractual Maturity (dollars in thousands)
|
| | | December 31, 2017 | | December 31, 2016 | December 31, 2019 | | December 31, 2018 |
| Year of Contractual Maturity | Amount | | Weighted Average Rate (1) | | Amount | | Weighted Average Rate (1) | Amount | | Weighted Average Rate (1) | | Amount | | Weighted Average Rate (1) |
| Due in one year or less | $ | 12,186,510 |
| | 1.35 | % | | $ | 8,734,955 |
| | 1.43 | % | $ | 9,455,725 |
| | 2.03 | % | | $ | 9,638,270 |
| | 2.01 | % |
| Due after one year through two years | 5,288,470 |
| | 1.63 |
| | 7,752,420 |
| | 1.19 |
| 6,442,960 |
| | 2.02 |
| | 5,375,845 |
| | 2.24 |
|
| Due after two years through three years | 3,128,240 |
| | 1.81 |
| | 3,297,120 |
| | 1.63 |
| 2,154,920 |
| | 2.18 |
| | 3,864,560 |
| | 2.17 |
|
| Due after three years through four years | 2,759,460 |
| | 1.74 |
| | 1,637,335 |
| | 1.87 |
| 1,319,915 |
| | 2.45 |
| | 1,891,975 |
| | 2.20 |
|
| Due after four years through five years | 1,572,775 |
| | 2.00 |
| | 2,574,375 |
| | 1.65 |
| 1,211,080 |
| | 2.48 |
| | 1,338,515 |
| | 2.39 |
|
| Thereafter | 3,389,695 |
| | 2.76 |
| | 3,135,745 |
| | 2.70 |
| 3,220,205 |
| | 3.33 |
| | 3,792,150 |
| | 3.25 |
|
| Total par value | 28,325,150 |
| | 1.70 | % | | 27,131,950 |
| | 1.58 | % | 23,804,805 |
| | 2.26 | % | | 25,901,315 |
| | 2.30 | % |
| Premiums | 90,836 |
| | |
| | 118,145 |
| | |
| 63,056 |
| | |
| | 49,118 |
| | |
|
| Discounts | (15,685 | ) | | |
| | (14,906 | ) | | |
| (11,434 | ) | | |
| | (15,222 | ) | | |
|
| Hedging adjustments | (55,678 | ) | | |
| | (63,755 | ) | | |
| 32,066 |
| | |
| | (22,527 | ) | | |
|
| | $ | 28,344,623 |
| | |
| | $ | 27,171,434 |
| | |
| |
| Total | | $ | 23,888,493 |
| | |
| | $ | 25,912,684 |
| | |
|
_______________________
| |
| (1) | The CO bonds' weighted-average rate excludes concession fees. |
CO bonds outstanding were issued with either fixed-rate coupon-payment terms or variable-rate coupon-payment terms that may use a variety of indices for interest-rate resets, such as LIBOR.LIBOR and the Secured Overnight Financing Rate (SOFR). To meet the expected specific needs of certain investors in CO bonds, both fixed-rate CO bonds and variable-rate CO bonds may contain features which may result in complex coupon-payment terms and call options. When these CO bonds are issued, we may enter into derivatives containing features that offset the terms and embedded options, if any, of the CO bonds.
Table 13.2 - CO Bonds Outstanding by Call Feature (dollars in thousands)
| |
Table 14.2 - CO Bonds Outstanding by Call Feature (dollars in thousands)
| | Table 14.2 - CO Bonds Outstanding by Call Feature (dollars in thousands)
|
| | Par Value of CO bonds | December 31, 2017 | | December 31, 2016 | December 31, 2019 | | December 31, 2018 |
| Noncallable and nonputable | $ | 23,931,150 |
| | $ | 22,388,950 |
| $ | 20,954,805 |
| | $ | 20,419,315 |
|
| Callable | 4,394,000 |
| | 4,743,000 |
| 2,850,000 |
| | 5,482,000 |
|
| Total par value | $ | 28,325,150 |
| | $ | 27,131,950 |
| $ | 23,804,805 |
| | $ | 25,901,315 |
|
Table 13.3 - CO Bonds Outstanding by Contractual Maturity or Next Call Date (dollars in thousands)
| |
Table 14.3 - CO Bonds Outstanding by Contractual Maturity or Next Call Date (dollars in thousands)
| | Table 14.3 - CO Bonds Outstanding by Contractual Maturity or Next Call Date (dollars in thousands)
|
| | Year of Contractual Maturity or Next Call Date | | December 31, 2017 | | December 31, 2016 | | December 31, 2019 | | December 31, 2018 |
| Due in one year or less | | $ | 15,309,510 |
| | $ | 12,858,955 |
| | $ | 11,297,725 |
| | $ | 13,435,270 |
|
| Due after one year through two years | | 5,580,470 |
| | 7,013,420 |
| | 6,432,960 |
| | 5,602,845 |
|
| Due after two years through three years | | 3,020,240 |
| | 2,904,120 |
| | 2,019,920 |
| | 2,802,560 |
|
| Due after three years through four years | | 1,542,460 |
| | 1,289,335 |
| | 1,332,915 |
| | 1,366,975 |
|
| Due after four years through five years | | 1,107,775 |
| | 1,242,375 |
| | 926,080 |
| | 1,156,515 |
|
| Thereafter | | 1,764,695 |
| | 1,823,745 |
| | 1,795,205 |
| | 1,537,150 |
|
| Total par value | | $ | 28,325,150 |
| | $ | 27,131,950 |
| | $ | 23,804,805 |
| | $ | 25,901,315 |
|
CO bonds, beyond having fixed-rate or variable-rate interest-rate payment terms, may also have the following interest-rate payment terms:
Step-Up bonds pay interest at increasing fixed rates for specified intervals over the life of the CO bond and can be called at our option on the step-up dates.
Table 13.4 - CO Bonds by Interest Rate-Payment Type (dollars in thousands)
| |
Table 14.4 - CO Bonds by Interest Rate-Payment Type (dollars in thousands)
| | Table 14.4 - CO Bonds by Interest Rate-Payment Type (dollars in thousands)
|
| | Par Value of CO bonds | December 31, 2017 | | December 31, 2016 | December 31, 2019 | | December 31, 2018 |
| Fixed-rate | $ | 21,416,150 |
| | $ | 20,289,950 |
| $ | 17,681,805 |
| | $ | 21,216,315 |
|
| Simple variable-rate | 5,432,000 |
| | 5,300,000 |
| 5,568,000 |
| | 2,853,000 |
|
Step-up | 1,477,000 |
| | 1,542,000 |
| 555,000 |
| | 1,832,000 |
|
| Total par value | $ | 28,325,150 |
| | $ | 27,131,950 |
| $ | 23,804,805 |
| | $ | 25,901,315 |
|
_______________________
| |
| (1) | Step-up bonds pay interest at increasing fixed rates for specified intervals over the life of the CO bond and can be called at our option on the step-up dates. |
CO Discount Notes. Outstanding CO discount notes for which we were primarily liable, all of which are due within one year, were as follows (dollars in thousands):follows:
Table 13.5 - CO Discount Notes Outstanding (dollars in thousands)
|
| | | | | | | | | | |
| | Book Value | | Par Value | | Weighted Average Rate (1) |
| December 31, 2017 | $ | 27,720,906 |
| | $ | 27,752,860 |
| | 1.25 | % |
| December 31, 2016 | $ | 30,053,964 |
| | $ | 30,070,103 |
| | 0.47 | % |
Table 14.5 - CO Discount Notes Outstanding (dollars in thousands)
|
| | | | | | | | | | |
| | Book Value | | Par Value | | Weighted Average Rate (1) |
| December 31, 2019 | $ | 27,681,169 |
| | $ | 27,733,146 |
| | 1.59 | % |
| December 31, 2018 | $ | 33,065,822 |
| | $ | 33,147,065 |
| | 2.37 | % |
_______________________
| |
| (1) | The CO discount notes' weighted-average rate represents a yield to maturity excluding concession fees. |
Note 1415 — Affordable Housing Program
The FHLBank Act requires each FHLBank to establish and maintain an AHP to provide subsidies in the form of direct grants and below-market interest-rate advances (AHP advances). These funds are intended to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Annually, the FHLBanks must set aside for the Each FHLBank is required to contribute to its
AHP the greater of $100 million or 10 percent of its previous year's net income before interest expense associated with mandatorily redeemable capital stock and the assessment for AHP.AHP (AHP earnings), or the prorated sum required to ensure the aggregate contribution by the FHLBanks is no less than $100 million for each year. We accrue this expense monthly based on our netAHP earnings, and the accruals are accumulated into our AHP payable account. We reduce our AHP payable account as we disburse the funds either in the form of direct grants to member institutions or as a discount on below-market-rate AHP advances. We had outstanding principal in AHP advances of $107.9 million and $102.2 million at December 31, 2017 and 2016, respectively.
If we experience a net loss during a quarter, but still have netAHP earnings for the year, our obligation to the AHP would be calculated based on our netAHP earnings for that calendar year. In annual periods where our netAHP earnings are zero or less, our AHP assessment is zero since our required annual contribution is limited to our annual netAHP earnings. If the result of the aggregate 10 percent calculation described above wereis less than $100 million for all the FHLBanks, then each FHLBank would be required to contribute such prorated sums as may be required to assureensure that the aggregate contributions ofby the FHLBanks equals $100 million. The proration would be made on the basis of the income of the FHLBanks for the year, except that the required annual AHP contribution for an FHLBank cannot exceed its netAHP earnings for the year pursuant to an FHFA regulation. Each FHLBank's required annual AHP contribution is limited to its annual net earnings. Our AHP expense for 2017, 2016,2019, 2018, and 20152017 was $21.3 million, $19.4$24.3 million, and $32.3$21.3 million, respectively.
There was no shortfall, as described above, in 2017, 2016,2019, 2018, or 2015.2017. If an FHLBank is experiencing financial instability and finds that its required AHP contributions are contributing to the financial instability, the FHLBank may apply to the FHFA for a temporary suspension of its contributions. We did not make such an application in 2017, 2016,2019, 2018, or 2015.2017.
Table 14.1 - AHP Liability (dollars in thousands)
| |
Table 15.1 - AHP Liability (dollars in thousands)
| | Table 15.1 - AHP Liability (dollars in thousands)
|
| | | 2017 | | 2016 | 2019 | | 2018 |
| Balance at beginning of year | $ | 81,627 |
| | $ | 82,081 |
| $ | 83,965 |
| | $ | 81,600 |
|
| AHP expense for the period | 21,307 |
| | 19,397 |
| 21,302 |
| | 24,299 |
|
| AHP direct grant disbursements | (18,628 | ) | | (18,575 | ) | (15,723 | ) | | (17,729 | ) |
| AHP subsidy for AHP advance disbursements | (2,782 | ) | | (1,378 | ) | (3,450 | ) | | (4,360 | ) |
| Return of previously disbursed grants and subsidies | 76 |
| | 102 |
| 37 |
| | 155 |
|
| Balance at end of year | $ | 81,600 |
| | $ | 81,627 |
| $ | 86,131 |
| | $ | 83,965 |
|
Note 1516 — Capital
We are subject to capital requirements under our capital plan, the FHLBank Act, and FHFA regulations:regulations and guidance:
| |
| 1. | Risk-based capital. We are required to maintain at all times permanent capital, defined as Class B stock, including Class B stock classified as mandatorily redeemable capital stock, and retained earnings, in an amount at least equal to the sum of our credit-risk capital requirement, market-risk capital requirement, and operations-risk capital requirement, calculated in accordance with FHFA rules and regulations, referred to herein as the risk-based capital requirement. Only permanent capital satisfies the risk-based capital requirement. |
| |
| 2. | Total regulatory capital. We are required to maintain at all times a total capital-to-assets ratio of at least four4 percent. Total regulatory capital is the sum of permanent capital, the amount paid-in for Class A stock, the amount of any general loss allowance if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the FHFA as available to absorb losses. We have never issued Class A stock. |
| |
| 3. | Leverage capital. We are required to maintain at all times a leverage capital-to-assets ratio of at least five5 percent. Leverage capital is defined as the sum of permanent capital weighted 1.5 times and all other capital without a weighting factor. |
The FHFA mayhas authority to require us to maintain a greater amount of permanent capital than is required as defined by the risk-based capital requirements.
Table 15.1 - Regulatory Capital Requirements (dollars in thousands)
| |
Table 16.1 - Regulatory Capital Requirements (dollars in thousands)
| | Table 16.1 - Regulatory Capital Requirements (dollars in thousands)
|
| | Risk-Based Capital Requirements | December 31,
2017 | | December 31,
2016 | December 31,
2019 | | December 31,
2018 |
| | | | | | | |
| Permanent capital | |
| | |
| |
| | |
|
| Class B capital stock | $ | 2,283,721 |
| | $ | 2,411,306 |
| $ | 1,869,130 |
| | $ | 2,528,854 |
|
| Mandatorily redeemable capital stock | 35,923 |
| | 32,687 |
| 5,806 |
| | 31,868 |
|
| Retained earnings | 1,308,349 |
| | 1,216,986 |
| 1,463,154 |
| | 1,395,012 |
|
| Total permanent capital | $ | 3,627,993 |
| | $ | 3,660,979 |
| $ | 3,338,090 |
| | $ | 3,955,734 |
|
| Risk-based capital requirement | |
| | |
| |
| | |
|
| Credit-risk capital | $ | 328,557 |
| | $ | 355,182 |
| $ | 235,213 |
| | $ | 289,080 |
|
| Market-risk capital | 170,102 |
| | 118,765 |
| 207,426 |
| | 187,183 |
|
| Operations-risk capital | 149,598 |
| | 142,184 |
| 132,792 |
| | 142,879 |
|
| Total risk-based capital requirement | $ | 648,257 |
| | $ | 616,131 |
| $ | 575,431 |
| | $ | 619,142 |
|
| Permanent capital in excess of risk-based capital requirement | $ | 2,979,736 |
| | $ | 3,044,848 |
| $ | 2,762,659 |
| | $ | 3,336,592 |
|
| | | | | December 31, 2017 | | December 31, 2016 | | December 31, 2019 | | December 31, 2018 |
| | | Required | | Actual | | Required | | Actual | | Required | | Actual | | Required | | Actual |
| Capital Ratio | | | | | | | | | | | | | | | | |
| Risk-based capital | | $ | 648,257 |
| | $ | 3,627,993 |
| | $ | 616,131 |
| | $ | 3,660,979 |
| | $ | 575,431 |
| | $ | 3,338,090 |
| | $ | 619,142 |
| | $ | 3,955,734 |
|
| Total regulatory capital | | $ | 2,414,478 |
| | $ | 3,627,993 |
| | $ | 2,461,823 |
| | $ | 3,660,979 |
| | $ | 2,226,512 |
| | $ | 3,338,090 |
| | $ | 2,543,733 |
| | $ | 3,955,734 |
|
| Total capital-to-asset ratio | | 4.0 | % | | 6.0 | % | | 4.0 | % | | 5.9 | % | | 4.0 | % | | 6.0 | % | | 4.0 | % | | 6.2 | % |
| | | | | | | | | | | | | | | | | |
| Leverage Ratio | | | | | | | | | | | | | | | | |
| Leverage capital | | $ | 3,018,097 |
| | $ | 5,441,990 |
| | $ | 3,077,279 |
| | $ | 5,491,469 |
| | $ | 2,783,141 |
| | $ | 5,007,135 |
| | $ | 3,179,666 |
| | $ | 5,933,601 |
|
| Leverage capital-to-assets ratio | | 5.0 | % | | 9.0 | % | | 5.0 | % | | 8.9 | % | | 5.0 | % | | 9.0 | % | | 5.0 | % | | 9.3 | % |
We are a cooperative whose members own most of our capital stock. Former members (including certain nonmembers that own our capital stock as a result of merger or acquisition, relocation, or involuntary termination of a member)membership) own the remaining capital stock to support business transactions still carried on our statement of condition. Shares of capital stock cannot be purchased or sold except between us and our members at $100 per share par value. We have only issued Class B stock and each member is required to purchase Class B stock equal to the sum of 0.350.20 percent of certain member assets eligible to secure advances under the FHLBank Act (the membership stock investment requirement), and 3.00 percent for overnight advances, 4.00 percent for all other advances, and 0.25 percent for outstanding letters of credit.credit (collectively, the activity-based stock-investment requirement). Prior to January 16, 2019, the membership stock investment requirement was equal to 0.35 percent of certain member assets eligible to secure advances under the FHLBank Act.
Members may redeem Class B stock after no sooner than five years' notice provided in accordance with our capital plan (the redemption-notice period). The effective date of termination of membership for any member that voluntarily withdraws from membership is the end of the redemption-notice period, at which time any stock that is held as a condition of membership shall be divested, subject to any other applicable restrictions at that time.restrictions. At that time, any stock held pursuant to activity-based stock investment requirements shall remain outstanding until such requirements are eliminated by disposition of the related business activity. Any member that withdraws from membership may not be readmitted to membership in any FHLBank until five years from the divestiture date for all capital stock that is held as a condition of membership. This restriction does not apply if the member is transferring its membership from one FHLBank to another on an uninterrupted basis.
The redemption-notice period can also be triggered by the involuntary termination of membership of a member by our board of directors or by the FHFA, the merger or acquisition of a member into a nonmember institution, or the relocation of a member to a principal location outside our district. At the end of the redemption-notice period, if the former member's activity-based stock
investment requirement is greater than zero, we may require the associated remaining obligations to us to be satisfied in full prior to allowing the member to redeem the remaining shares.
Because our Class B stock is subject to redemption in certain instances, we can experience a reduction in our capital, particularly due to membership terminations due to merger and acquisition activity. However, there are several mitigants to this risk, including, but not limited to, the following:
the activity-based portion of the stock-investment requirement allows us to retain stock beyond the redemption-notice period if the associated member-related activity is still outstanding, until the obligations are paid in full;
the redemption notice period allows for a significant period in which we can restructure our balance sheet to accommodate a reduction in capital;
our board of directors may modify the membership stock-investment requirement (MSIR) or the activity-based stock-investment requirement (ABSIR), or both, to address expected shortfalls in capitalization due to membership termination;
our board of directors or the FHFA may suspend redemptions in the event that such redemptions would cause us not to meet our minimum regulatory capital requirements; and
the growth in our retained earnings, which are included in our equity capital, helps offset the risk that our capital willcould be reduced by redemptions.
Our board of directors may declare and pay dividends in either cash or capital stock, subject to limitations in applicable law and our capital plan.
Restricted Retained Earnings. At December 31, 20172019, our total contribution requirement totaled $548.9502.4 million. As of December 31, 20172019 and 2016,2018, restricted retained earnings totaled $267.3$348.8 million and $229.3$310.7 million, respectively. These restricted retained earnings are not available to pay dividends.
Mandatorily Redeemable Capital Stock. We will reclassify capital stock subject to redemption from equity to liability once a member exercises a written notice of redemption, gives notice of intent to withdraw from membership, or attains nonmember status by merger or acquisition, charter termination, or involuntary termination from membership. Dividends related to capital stock classified as a liability are accrued at the expected dividend rate and reported as interest expense in the statement of operations. If a member cancels its written notice of redemption or notice of withdrawal, we will reclassify mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock would no longer be classified as interest expense.
Redemption of capital stock is subject to the redemption-notice period and our satisfaction of applicable minimum capital requirements. For the years ended December 31, 20172019, 2016,2018, and 2015,2017, dividends on mandatorily redeemable capital stock of $1.6 million, $1.4$974 thousand, $1.9 million, and $1.6 million, respectively, were recorded as interest expense.
Table 15.2 - Mandatorily Redeemable Capital Stock (dollars in thousands)
| |
Table 16.2 - Mandatorily Redeemable Capital Stock (dollars in thousands)
| | Table 16.2 - Mandatorily Redeemable Capital Stock (dollars in thousands)
|
| | | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| Balance at beginning of year | | $ | 32,687 |
| | $ | 41,989 |
| | $ | 298,599 |
| | $ | 31,868 |
| | $ | 35,923 |
| | $ | 32,687 |
|
| Capital stock subject to mandatory redemption reclassified from capital | | 8,670 |
| | 40 |
| | 54 |
| | — |
| | 309 |
| | 8,670 |
|
| Redemption/repurchase of mandatorily redeemable capital stock | | (5,434 | ) | | (9,342 | ) | | (256,664 | ) | | (26,062 | ) | | (4,364 | ) | | (5,434 | ) |
| Balance at end of year | | $ | 35,923 |
| | $ | 32,687 |
| | $ | 41,989 |
| | $ | 5,806 |
| | $ | 31,868 |
| | $ | 35,923 |
|
The number of stockholders holding mandatorily redeemable capital stock was nine, nine,9, 10, and five9 at December 31, 20172019, 2016,2018, and 2015,2017, respectively.
Consistent with our capital plan, we are not required to redeem membership stock until the expiration of the redemption-notice period. Furthermore, we are not required to redeem activity-based stock until the later of the expiration of the redemption-notice period or the activity to which the capital stock relates no longer remains outstanding. If activity-based stock becomes excess stock as a result of an activity-based asset no longer outstanding, we may repurchase such shares, in our sole discretion, subject to the statutory and regulatory restrictions on excess capital-stock redemption. The year of redemption in the following table represents the end of the redemption-notice period. However, as discussed above, if activity to which the capital stock
relates remains outstanding beyond the redemption-notice period, the activity-based stock associated with this activity will remain outstanding until the activity no longer remains outstanding.
Table 15.3 - Mandatorily Redeemable Capital Stock by Expiry of Redemption Notice Period (dollars in thousands)
| |
Table 16.3 - Mandatorily Redeemable Capital Stock by Expiry of Redemption Notice Period (dollars in thousands)
| | Table 16.3 - Mandatorily Redeemable Capital Stock by Expiry of Redemption Notice Period (dollars in thousands)
|
| | | | December 31, 2017 | | December 31, 2016 | | December 31, 2019 | | December 31, 2018 |
Past redemption date (1) | | $ | 420 |
| | $ | 528 |
| | $ | 5,663 |
| | $ | 4,076 |
|
| Due in one year or less | | 4,018 |
| | — |
| | — |
| | 27,379 |
|
| Due after one year through two years | | 27,379 |
| | 4,687 |
| | — |
| | — |
|
| Due after two years through three years | | 54 |
| | 27,378 |
| | 93 |
| | — |
|
| Due after three years through four years | | — |
| | 54 |
| | 40 |
| | 363 |
|
| Due after four years through five years | | 4,022 |
| | — |
| | — |
| | 40 |
|
Thereafter (2) | | 30 |
| | 40 |
| | 10 |
| | 10 |
|
| Total | | $ | 35,923 |
| | $ | 32,687 |
| | $ | 5,806 |
| | $ | 31,868 |
|
_______________________
| |
| (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. |
| |
| (2) | Amount represents reclassifications to mandatorily redeemable capital stock resulting from an FHFA rule effective February 19, 2016, that makes captive insurance companies ineligible for membership. Captive insurance company members that were admitted as members prior to September 12, 2014, will have their memberships terminated no later than February 19, 2021. Captive insurance company members that were admitted as members on or after September 12, 2014, had their memberships terminated prior to February 19, 2017. |
A member may cancel or revoke its written notice of redemption or its notice of withdrawal from membership prior to the end of the redemption-notice period. Our capital plan provides that we will charge the member a cancellation fee in the amount of 2.0 percent of the par amount of the shares of Class B stock that is the subject of the redemption notice. We will assess a redemption-cancellation fee unless the board of directors decides that it has a bona fide business purpose for waiving the imposition of the fee, and such a waiver is consistent with the FHLBank Act.
Excess Capital Stock. Our capital plan provides us with the discretion to repurchase capital stock from a member at par value if that stock is not required by the member to meet its total stock investment requirement (excess capital stock) subject to all applicable limitations. In conducting any repurchases, we repurchase any shares that are the subject of an outstanding redemption notice from the member from whom we are repurchasing prior to repurchasing any other shares that are in excess of the member's total stock-investment requirement (TSIR). On June 1, 2017, we began daily repurchases of excess stock held by any shareholder whose excess stock exceeds the lesser of $10.0 million or 25 percent of the shareholder's total stock investment requirement, subject to a minimum repurchase of $100,000. On August 11, 2017, we began repurchasing excess stock held by any shareholder whose excess stock exceeds the lesser of $10.0 million or 10 percent of the shareholder’s total stock investment requirement, subject to a minimum repurchase of $100,000. In addition to these daily repurchases, shareholders may request that we voluntarily repurchase excess stock shares at any time. We may also allow the member to sell the excess capital stock at par value to another one of our members.
At December 31, 20172019 and 2016,2018, members and nonmembers with capital stock outstanding held excess capital stock totaling $110.7$79.7 million and $78.3$88.7 million, respectively, representing approximately 4.84.3 percent and 3.23.5 percent, respectively, of total capital stock outstanding. FHFA rules limit our ability to create member excess capital stock under certain circumstances. We may not pay dividends in the form of capital stock or issue new excess capital stock to members if our excess capital stock exceeds one percent of our total assets or if the issuance of excess capital stock would cause our excess capital stock to exceed one percent of our total assets. At December 31, 20172019, we had excess capital stock outstanding totaling 0.20.1 percent of our total assets. For the year ended December 31, 20172019, we complied with the FHFA's excess capital stock rule.
Capital Classification Determination. We are subject to the FHFA's regulation on FHLBank capital classification and critical capital levels (the Capital Rule). The Capital Rule, among other things, defines criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. An adequately capitalized FHLBank is one that has sufficient permanent and total capital to satisfy its risk-based and minimum capital requirements. We satisfied these requirements at December 31, 20172019. However, pursuant to the Capital Rule, the FHFA has discretion to reclassify an FHLBank and modify or add to corrective action requirements for a particular capital
classification. If we become classified into a capital classification other than adequately capitalized, we will be subject to the corrective action requirements for that capital classification in addition to being subject to prohibitions on declaring dividends and redeeming or repurchasing capital stock. By letter dated December 11, 2017,March 19, 2020, the Director of the FHFA notified us that, based on September 30, 2017December 31, 2019 financial information, we met the definition of adequately capitalized under the Capital Rule. We have not yet received our capital classification based on our December 31, 2017 financial information.
Note 1617 — Accumulated Other Comprehensive Loss
Table 16.1 - Accumulated Other Comprehensive Loss (dollars in thousands) | |
Table 17.1 - Accumulated Other Comprehensive Loss (dollars in thousands) | | Table 17.1 - Accumulated Other Comprehensive Loss (dollars in thousands) |
| | | | Net Unrealized Loss on Available-for-sale Securities | | Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities | | Net Unrealized Loss Relating to Hedging Activities | | Pension and Postretirement Benefits | | Total Accumulated Other Comprehensive Loss | | Net Unrealized Loss on Available-for-sale Securities | | Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities | | Net Unrealized Loss Relating to Hedging Activities | | Pension and Postretirement Benefits | | Total |
| Balance, December 31, 2014 | | $ | (73,623 | ) | | $ | (275,942 | ) | | $ | (81,428 | ) | | $ | (5,993 | ) | | $ | (436,986 | ) | |
| Other comprehensive income (loss) before reclassifications: | | | | | | | | | | | |
| Net unrealized losses | | (64,095 | ) | | — |
| | (13,671 | ) | | — |
| | (77,766 | ) | |
| Noncredit other-than-temporary impairment losses | | — |
| | (172 | ) | | — |
| | — |
| | (172 | ) | |
| Accretion of noncredit loss | | — |
| | 43,382 |
| | — |
| | — |
| | 43,382 |
| |
| Net actuarial gain | | — |
| | — |
| | — |
| | 1,475 |
| | 1,475 |
| |
| Reclassifications from other comprehensive income to net income | | | | | | | | | | | |
Noncredit other-than-temporary impairment losses reclassified to credit loss (1) | | — |
| | 2,947 |
| | — |
| | — |
| | 2,947 |
| |
Amortization - hedging activities (2) | | — |
| | — |
| | 23,862 |
| | — |
| | 23,862 |
| |
Amortization - pension and postretirement benefits (3) | | — |
| | — |
| | — |
| | 661 |
| | 661 |
| |
| Other comprehensive (loss) income | | (64,095 | ) | | 46,157 |
| | 10,191 |
| | 2,136 |
| | (5,611 | ) | |
| Balance, December 31, 2015 | | (137,718 | ) | | (229,785 | ) | | (71,237 | ) | | (3,857 | ) | | (442,597 | ) | |
| Other comprehensive income (loss) before reclassifications: | | | | | | | | | | | |
| Net unrealized gains (losses) | | 909 |
| | — |
| | (732 | ) | | — |
| | 177 |
| |
| Noncredit other-than-temporary impairment losses | | — |
| | (1,142 | ) | | — |
| | — |
| | (1,142 | ) | |
| Accretion of noncredit loss | | — |
| | 36,070 |
| | — |
| | — |
| | 36,070 |
| |
| Net actuarial loss | | — |
| | — |
| | — |
| | (3,242 | ) | | (3,242 | ) | |
| Reclassifications from other comprehensive income to net income | | | | | | | | | | | |
Noncredit other-than-temporary impairment losses reclassified to credit loss (1) | | — |
| | 2,478 |
| | — |
| | — |
| | 2,478 |
| |
Amortization - hedging activities (4) | | — |
| | — |
| | 23,782 |
| | — |
| | 23,782 |
| |
Amortization - pension and postretirement benefits (3) | | — |
| | — |
| | — |
| | 960 |
| | 960 |
| |
| Other comprehensive income (loss) | | 909 |
| | 37,406 |
| | 23,050 |
| | (2,282 | ) | | 59,083 |
| |
| Balance, December 31, 2016 | | (136,809 | ) | | (192,379 | ) | | (48,187 | ) | | (6,139 | ) | | (383,514 | ) | | $ | (136,809 | ) | | $ | (192,379 | ) | | $ | (48,187 | ) | | $ | (6,139 | ) | | $ | (383,514 | ) |
| Other comprehensive income (loss) before reclassifications: | | | | | | | | | | | | | | | | | | | | |
| Net unrealized gains (losses) | | 14,478 |
| | — |
| | (2,838 | ) | | — |
| | 11,640 |
| | 14,478 |
| | — |
| | (2,838 | ) | | — |
| | 11,640 |
|
| Accretion of noncredit loss | | — |
| | 32,815 |
| | — |
| | — |
| | 32,815 |
| | — |
| | 32,815 |
| | — |
| | — |
| | 32,815 |
|
| Net actuarial loss | | — |
| | — |
| | — |
| | (586 | ) | | (586 | ) | | — |
| | — |
| | — |
| | (586 | ) | | (586 | ) |
| Reclassifications from other comprehensive income to net income | | | | | | | | | | | | | | | | | | | | |
Noncredit other-than-temporary impairment losses reclassified to credit loss (1) | | — |
| | 1,346 |
| | — |
| | — |
| | 1,346 |
| | — |
| | 1,346 |
| | — |
| | — |
| | 1,346 |
|
Amortization - hedging activities (5) | | — |
| | — |
| | 10,589 |
| | — |
| | 10,589 |
| |
Amortization - hedging activities (2) | | | — |
| | — |
| | 10,589 |
| | — |
| | 10,589 |
|
Amortization - pension and postretirement benefits (3) | | — |
| | — |
| | — |
| | 770 |
| | 770 |
| | — |
| | — |
| | — |
| | 770 |
| | 770 |
|
| Other comprehensive income | | 14,478 |
| | 34,161 |
| | 7,751 |
| | 184 |
| | 56,574 |
| | 14,478 |
| | 34,161 |
| | 7,751 |
| | 184 |
| | 56,574 |
|
| Balance, December 31, 2017 | | $ | (122,331 | ) | | $ | (158,218 | ) | | $ | (40,436 | ) | | $ | (5,955 | ) | | $ | (326,940 | ) | | (122,331 | ) | | (158,218 | ) | | (40,436 | ) | | (5,955 | ) | | (326,940 | ) |
| Other comprehensive income (loss) before reclassifications: | | | | | | | | | | | |
| Net unrealized (losses) gains | | | (30,627 | ) | | — |
| | 7,907 |
| | — |
| | (22,720 | ) |
| Accretion of noncredit loss | | | — |
| | 28,834 |
| | — |
| | — |
| | 28,834 |
|
| Net actuarial loss | | | — |
| | — |
| | — |
| | (670 | ) | | (670 | ) |
| Reclassifications from other comprehensive income to net income | | | | | | | | | | | |
Noncredit other-than-temporary impairment losses reclassified to credit loss (1) | | | — |
| | 230 |
| | — |
| | — |
| | 230 |
|
Amortization - hedging activities (4) | | | — |
| | — |
| | 3,410 |
| | — |
| | 3,410 |
|
Amortization - pension and postretirement benefits (3) | | | — |
| | — |
| | — |
| | 1,349 |
| | 1,349 |
|
| Other comprehensive (loss) income | | | (30,627 | ) | | 29,064 |
| | 11,317 |
| | 679 |
| | 10,433 |
|
| Balance, December 31, 2018 | | | (152,958 | ) | | (129,154 | ) | | (29,119 | ) | | (5,276 | ) | | (316,507 | ) |
| Cumulative effect of change in accounting principle | | | — |
| | — |
| | (175 | ) | | — |
| | (175 | ) |
| Other comprehensive income (loss) before reclassifications: | | | | | | | | | | | |
| Net unrealized gains (losses) | | | 79,036 |
| | — |
| | (6,131 | ) | | — |
| | 72,905 |
|
| Noncredit other-than-temporary impairment losses | | | — |
| | (181 | ) | | — |
| | — |
| | (181 | ) |
| Noncredit losses included in basis of securities sold | | | — |
| | 29,517 |
| | — |
| | — |
| | 29,517 |
|
| Accretion of noncredit loss | | | — |
| | 22,806 |
| | — |
| | — |
| | 22,806 |
|
| Net actuarial loss | | | — |
| | — |
| | — |
| | (2,195 | ) | | (2,195 | ) |
| Reclassifications from other comprehensive income to net income | | | | | | | | | | | |
Noncredit other-than-temporary impairment losses reclassified to credit loss (1) | | | — |
| | 976 |
| | — |
| | — |
| | 976 |
|
Amortization - hedging activities (5) | | | — |
| | — |
| | 5,218 |
| | — |
| | 5,218 |
|
Amortization - pension and postretirement benefits (3) | | | — |
| | — |
| | — |
| | 664 |
| | 664 |
|
Table 17.1 - Accumulated Other Comprehensive Loss (dollars in thousands) |
| | | | | | | | | | | | | | | | | | | | |
| Other comprehensive income (loss) | | 79,036 |
| | 53,118 |
| | (913 | ) | | (1,531 | ) | | 129,710 |
|
| Balance, December 31, 2019 | | $ | (73,922 | ) | | $ | (76,036 | ) | | $ | (30,207 | ) | | $ | (6,807 | ) | | $ | (186,972 | ) |
_______________________
| |
| (1) | Recorded in net amount ofother-than-temporary impairment losses reclassified to (from) accumulated other comprehensive losson investment securities, credit portion in the statement of operations. |
| |
| (2) | Amortization of hedging activities includes $23.8$10.6 million recorded in CO bond interest expense and $14,000$14 thousand recorded in net lossesgains on derivatives and hedging activities in the statement of operations. |
| |
| (3) | Recorded in other operating expenses in the statement of operations. |
| |
| (4) | Amortization of hedging activities includes $23.8$3.2 million recorded in CO bond interest expense and $14,000$239 thousand recorded in net lossesgains on derivatives and hedging activities in the statement of operations. |
| |
| (5) | Amortization of hedging activities includes $10.6 million recordedRecorded in CO bond interest expense and $14,000 recorded in net losses on derivatives and hedging activities in the statement of operations.expense. |
Note 1718 — Employee Retirement Plans
Qualified Defined Benefit Multiemployer Plan. We participate in the Pentegra Defined Benefit Plan for Financial Institutions (the Pentegra Defined Benefit Plan), a funded, tax-qualified, noncontributory defined-benefit pension plan. The Pentegra Defined Benefit Plan is treated as a multiemployer plan for accounting purposes, but operates as a multiple-employer plan under the Employee Retirement Income Security Act of 1974, as amended (ERISA), and the Internal Revenue Code. Accordingly, certain multiemployer plan disclosures are not applicable to the Pentegra Defined Benefit Plan. Under the Pentegra Defined Benefit Plan, contributions made by a participating employer may be used to provide benefits to employees of other participating employers since assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. Also, in the event a participating employer is unable to meet its contribution requirements, the required contributions for the other participating employers could increase proportionately. The plan covers substantially all of our employees. For the years ended December 31, 2017, 20162019, 2018 and 2015,2017, in addition to our required contribution, we made voluntary contributions of $6.2$6.0 million, $5.0$6.0 million and $7.0$6.2 million, respectively, to the Pentegra Defined Benefit Plan. We were not required to nor did we pay a funding improvement surcharge to the plan for the years ended December 31, 2017, 2016,2019, 2018, and 2015.2017.
The Pentegra Defined Benefit Plan operates on a fiscal year from July 1 through June 30. The Pentegra Defined Benefit Plan files one Form 5500 on behalf of all employers who participate in the plan. The Employer Identification Number is 13-5645888 and the three-digit plan number is 333. We do not have any collective bargaining agreements in place.
The Pentegra Defined Benefit Plan's annual valuation process includes calculating the plan's funded status and separately calculating the funded status of each participating employer. The funded status is defined as the market value of assets divided by the funding target (100 percent of the present value of all benefit liabilities accrued at that date). As permitted by ERISA, the Pentegra Defined Benefit Plan accepts contributions for the prior plan year up to eight and a half months after the asset valuation date. Accordingly, the market value of assets at the valuation date (July 1) will increase by any subsequent contributions designated for the immediately preceding plan year ended June 30.
The most recent Form 5500 available for the Pentegra Defined Benefit Plan is for the plan year ended June 30, 2016.2018. For the Pentegra Defined Benefit Plan plan years ended June 30, 20162017 and 2015,2016, our contributions did not represent more than five percent of the total contributions to the Pentegra Defined Benefit Plan.
Table 17.1 - Pentegra Defined Benefit Plan Net Pension Cost and Funded Status (dollars in thousands)
| |
Table 18.1 - Pentegra Defined Benefit Plan Net Pension Cost and Funded Status (dollars in thousands)
| | Table 18.1 - Pentegra Defined Benefit Plan Net Pension Cost and Funded Status (dollars in thousands)
|
| | | For the Year Ended December 31, | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| Net pension cost | $ | 6,727 |
| | $ | 5,526 |
| | $ | 7,465 |
| $ | 6,559 |
| | $ | 6,472 |
| | $ | 6,727 |
|
Pentegra Defined Benefit Plan funded status as of July 1(1) | 111.3 | % | (2) | 104.7 | % | (3) | 107.0 | % | 108.6 | % | (2) | 111.0 | % | (3) | 111.8 | % |
Our funded status as of July 1(1) | 122.9 | % | | 108.6 | % | | 117.1 | % | 113.9 | % | | 123.1 | % | | 122.9 | % |
______________________
| |
| (1) | The funded status is calculated in accordance with a provision contained in the Highway and Transportation Funding Act of 2014 (HATFA), which was signed into law on August 8, 2014, and which modifies the interest rates that had been set by the Moving Ahead for Progress in the 21st Century Act (MAP-21). MAP-21, signed into law in 2012, changed the calculation of the discount rate used in measuring the pension plan liability. MAP-21 allows plan sponsors to measure ththe pension plan liability using a 25-year average of interest rates plus or minus a corridor. Prior to MAP-21, the discount rate used in measuring the pension plan liability was based on the 24-month average of interest rates. HATFA amended MAP-21 by extending the time period and reducing the rate at which the 25-year corridors widen. Over time, the pension funding stabilization effect of MAP-21 will decline because the 24-month smoothed segment rates and the amended 25-year corridors are likely to converge. |
e pension plan liability using a 25-year average of interest rates plus or minus a corridor. Prior to MAP-21, the discount rate used in measuring the pension plan liability was based on the 24-month average of interest rates. HATFA amended MAP-21 by extending the time period and reducing the rate at which the 25-year corridors widen. Over time, the pension funding stabilization effect of MAP-21 will decline because the 24-month smoothed segment rates and the amended 25-year corridors are likely to converge.
| |
| (2) | The funded status as of July 1, 2017,2019, is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 2017,2019, through March 15, 2018.2020. Contributions made on or before March 15, 2018,2020, and designated for the plan year ended June 30, 2017,2019, will be included in the final valuation as of July 1, 2017.2019. The final funded status as of July 1, 2017,2019, will not be available until the Form 5500 for the plan year July 1, 2017,2019, through June 30, 20182020 is filed. This Form 5500 is due to be filed no later than April 2019.2021. |
| |
| (3) | The funded status as of July 1, 2016,2018, is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 2016,2018, through March 15, 2017.2019. Contributions made on or before March 15, 2017,2019, and designated for the plan year ended June 30, 2016,2018, will be included in the final valuation as of July 1, 2016.2018. The final funded status as of July 1, 2016,2018, will not be available until the Form 5500 for the plan year July 1, 2016,2018, through June 30, 20172019 is filed. This Form 5500 is due to be filed no later than April 2018.2020. |
Qualified Defined Contribution Plan. We also participate in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified defined contribution plan. The plan covers substantially all of our employees. We contribute a percentage of the participants' compensation by making a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. Our matching contributions are charged to compensation and benefits expense.expense and are not considered to be material.
Nonqualified Defined Contribution Plan. We also maintain the Thrift Benefit Equalization Plan, a nonqualified, unfunded deferred compensation plan covering certain of our senior officers and directors. The plan's liability consists of the accumulated compensation deferrals and the accumulated earnings on these deferrals. Our obligation from this plan was $9.512.6 million and $7.69.7 million at December 31, 20172019 and 2016,2018, respectively, which is recorded in other liabilities on the statement of condition. We maintain a rabbi trust, which is recorded in other assets on the statement of condition, intended to satisfy future benefit obligations.
Table 17.2 - Defined Contribution Plan Expenses (dollars in thousands)
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Qualified Defined Contribution Plan - Pentegra Defined Contribution Plan | $ | 1,177 |
| | $ | 1,115 |
| | $ | 1,032 |
|
| Nonqualified Defined Contribution Plan - Thrift Benefit Equalization Plan | 222 |
| | 215 |
| | 159 |
|
Nonqualified Supplemental Defined Benefit Retirement Plan. We also maintain a nonqualified, single-employer unfunded defined-benefit plan covering certain senior officers, for which our obligation is detailed below. We maintain a rabbi trust which is recorded in other assets on the statement of condition, intended to satisfy future benefit obligations.
Postretirement Benefits. We sponsor a fully insured postretirement benefit program that includes life insurance benefits for eligible retirees. We provide life insurance to all employees who retire on or after age 55 after completing six years of service. No contributions are required from the retirees. There are no funded plan assets that have been designated to provide postretirement benefits.
Table 17.3 - Pension and Postretirement Benefit Obligation, Fair Value of Plan Assets, and Funded Status (dollars in thousands)
| |
Table 18.2 - Pension and Postretirement Benefit Obligation, Fair Value of Plan Assets, and Funded Status (dollars in thousands)
| | Table 18.2 - Pension and Postretirement Benefit Obligation, Fair Value of Plan Assets, and Funded Status (dollars in thousands)
|
| | | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement Benefits | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement Benefits |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2017 | | December 31, 2016 | December 31, 2019 | | December 31, 2018 | | December 31, 2019 | | December 31, 2018 |
Change in benefit obligation (1) | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Benefit obligation at beginning of year | $ | 17,132 |
| | $ | 12,321 |
| | $ | 878 |
| | $ | 765 |
| $ | 22,321 |
| | $ | 19,366 |
| | $ | 955 |
| | $ | 1,056 |
|
| Service cost | 1,179 |
| | 1,053 |
| | 38 |
| | 34 |
| 1,235 |
| | 1,490 |
| | 38 |
| | 45 |
|
| Interest cost | 600 |
| | 655 |
| | 36 |
| | 34 |
| 699 |
| | 654 |
| | 42 |
| | 37 |
|
| Actuarial loss | 459 |
| | 2,682 |
| | 127 |
| | 68 |
| 1,874 |
| | 831 |
| | 321 |
| | (161 | ) |
| Benefits paid | (4 | ) | | (4 | ) | | (23 | ) | | (23 | ) | (6 | ) | | (5 | ) | | (17 | ) | | (22 | ) |
| Plan amendments | — |
| | 492 |
| | — |
| | — |
| |
| Settlements | — |
| | (67 | ) | | — |
| | — |
| — |
| | (15 | ) | | — |
| | — |
|
| Benefit obligation at end of year | 19,366 |
| | 17,132 |
| | 1,056 |
| | 878 |
| 26,123 |
| | 22,321 |
| | 1,339 |
| | 955 |
|
| | | | | | | | | | | | | | | |
| Change in plan assets | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Fair value of plan assets at beginning of year | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
| Employer contribution | 4 |
| | 71 |
| | 23 |
| | 23 |
| 6 |
| | 20 |
| | 17 |
| | 22 |
|
| Benefits paid | (4 | ) | | (4 | ) | | (23 | ) | | (23 | ) | (6 | ) | | (5 | ) | | (17 | ) | | (22 | ) |
| Settlements | — |
| | (67 | ) | | — |
| | — |
| — |
| | (15 | ) | | — |
| | — |
|
| Fair value of plan assets at end of year | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
| Funded status at end of year | $ | (19,366 | ) | | $ | (17,132 | ) | | $ | (1,056 | ) | | $ | (878 | ) | $ | (26,123 | ) | | $ | (22,321 | ) | | $ | (1,339 | ) | | $ | (955 | ) |
______________________
| |
| (1) | Represents the projected benefit obligation for the nonqualified supplemental defined benefit retirement plan and the accumulated postretirement benefit obligation for postretirement benefits. |
Amounts recognized in other liabilities on the statement of condition for our nonqualified supplemental defined benefit retirement plan and postretirement benefits at December 31, 2017 and 2016, were $20.4 million and $18.0 million, respectively.
Table 17.4 - Pension and Postretirement Benefits Recognized in Accumulated Other Comprehensive Loss (dollars in thousands)
| |
Table 18.3 - Pension and Postretirement Benefits Recognized in Accumulated Other Comprehensive Loss (dollars in thousands)
| | Table 18.3 - Pension and Postretirement Benefits Recognized in Accumulated Other Comprehensive Loss (dollars in thousands)
|
| | | | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement Benefits | | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement Benefits |
| | | December 31, 2017 | | December 31, 2016 | | December 31, 2017 | | December 31, 2016 | | December 31, 2019 | | December 31, 2018 | | December 31, 2019 | | December 31, 2018 |
| Net actuarial loss | | $ | 5,337 |
| | $ | 5,553 |
| | $ | 299 |
| | $ | 180 |
| | $ | 6,223 |
| | $ | 4,920 |
| | $ | 437 |
| | $ | 123 |
|
| Prior service cost | | 319 |
| | 406 |
| | — |
| | — |
| | 148 |
| | 234 |
| | — |
| | — |
|
| Total | | $ | 5,656 |
| | $ | 5,959 |
| | $ | 299 |
| | $ | 180 |
| | $ | 6,371 |
| | $ | 5,154 |
| | $ | 437 |
| | $ | 123 |
|
The accumulated benefit obligation for the nonqualified supplemental defined benefit retirement plan was $15.4$22.7 million and $12.6$18.3 million at December 31, 20172019 and 2016,2018, respectively.
Table 17.5 - Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income (dollars in thousands)
| |
Table 18.4 - Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income (dollars in thousands)
| | Table 18.4 - Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income (dollars in thousands)
|
| | | | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement Benefits | | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement Benefits |
| | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Net Periodic Benefit Cost | | | | | | | | | | | | | | | | | | | | | | | | |
| Service cost | | $ | 1,179 |
| | $ | 1,053 |
| | $ | 686 |
| | $ | 38 |
| | $ | 34 |
| | $ | 37 |
| | $ | 1,235 |
| | $ | 1,490 |
| | $ | 1,179 |
| | $ | 38 |
| | $ | 45 |
| | $ | 38 |
|
| Interest cost | | 600 |
| | 655 |
| | 483 |
| | 36 |
| | 34 |
| | 31 |
| | 699 |
| | 654 |
| | 600 |
| | 42 |
| | 37 |
| | 36 |
|
| Amortization of prior service cost | | 86 |
| | 86 |
| | — |
| | — |
| | — |
| | — |
| | 86 |
| | 86 |
| | 86 |
| | — |
| | — |
| | — |
|
| Amortization of net actuarial loss | | 676 |
| | 870 |
| | 653 |
| | 8 |
| | 4 |
| | 8 |
| | 571 |
| | 1,248 |
| | 676 |
| | 7 |
| | 15 |
| | 8 |
|
| Net periodic benefit cost | | 2,541 |
| | 2,664 |
| | 1,822 |
| | 82 |
| | 72 |
| | 76 |
| | 2,591 |
| | 3,478 |
| | 2,541 |
| | 87 |
| | 97 |
| | 82 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Changes in Benefit Obligations Recognized in Accumulated Other Comprehensive Loss | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortization of prior service cost | | (86 | ) | | (86 | ) | | — |
| | — |
| | — |
| | — |
| | (86 | ) | | (86 | ) | | (86 | ) | | — |
| | — |
| | — |
|
| Amortization of net actuarial loss | | (676 | ) | | (870 | ) | | (653 | ) | | (8 | ) | | (4 | ) | | (8 | ) | | (571 | ) | | (1,248 | ) | | (676 | ) | | (7 | ) | | (15 | ) | | (8 | ) |
| Prior service cost | | — |
| | 492 |
| | — |
| | — |
| | — |
| | — |
| |
| Net actuarial loss (gain) | | 459 |
| | 2,682 |
| | (1,453 | ) | | 127 |
| | 68 |
| | (22 | ) | | 1,874 |
| | 831 |
| | 459 |
| | 321 |
| | (161 | ) | | 127 |
|
| Total amount recognized in other comprehensive income | | (303 | ) | | 2,218 |
| | (2,106 | ) | | 119 |
| | 64 |
| | (30 | ) | | 1,217 |
| | (503 | ) | | (303 | ) | | 314 |
| | (176 | ) | | 119 |
|
| Total amount recognized in net periodic benefit cost and other comprehensive income | | $ | 2,238 |
| | $ | 4,882 |
| | $ | (284 | ) | | $ | 201 |
| | $ | 136 |
| | $ | 46 |
| | $ | 3,808 |
| | $ | 2,975 |
| | $ | 2,238 |
| | $ | 401 |
| | $ | (79 | ) | | $ | 201 |
|
The estimated net actuarial loss and prior service cost that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during 20182020 is $719,000$811 thousand for our nonqualified supplemental defined benefit retirement plan and $19,000$27 thousand for our postretirement benefits.
Table 17.6 - Pension and Postretirement Benefit Plan Key Assumptions (dollars in thousands)
| |
Table 18.5 - Pension and Postretirement Benefit Plan Key Assumptions
| | Table 18.5 - Pension and Postretirement Benefit Plan Key Assumptions
|
| | | | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement Benefits | | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement Benefits |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2019 | | 2018 | | 2019 | | 2018 |
| Benefit obligation | | | | | | | | | | | | | | | | |
| Discount rate | | 3.09 | % | | 3.98 | % | | 3.64 | % | | 4.22 | % | | 2.68 | % | | 3.81 | % | | 3.25 | % | | 4.25 | % |
| Salary increases | | 5.50 | % | | 5.50 | % | | — |
| | — |
| | 5.50 | % | | 5.50 | % | | — |
| | — |
|
| | | | | | | | | | | | | | | | | |
| Net periodic benefit cost | | | | | | | | | | | | | | | | |
| Discount rate | | 3.98 | % | | 4.17 | % | | 4.22 | % | | 4.44 | % | | 3.81 | % | | 3.09 | % | | 4.25 | % | | 3.64 | % |
| Salary increases | | 5.50 | % | | 5.50 | % | | — |
| | — |
| | 5.50 | % | | 5.50 | % | | — |
| | — |
|
The discount rate for the nonqualified supplemental defined benefit retirement plan as of December 31, 2017, was determined by using a discounted cash-flow analysis which incorporatesusing the timing of each expected future benefit payment. The estimate of the future benefit payments is based on the plan's census data, benefit formula and provisions, and valuation assumptions reflecting the probability of decrement and survival. The present value of the future benefit payments is then determined by using duration-based interest-rate yields from the CitiFTSE Pension Discount Curve as of December 31, 20172019, and solving for the single discount rate that produces the same present value..
Our nonqualified supplemental defined benefit retirement plan and postretirement benefits are not funded; therefore, no contributions will be made in 20182020 other than the payment of benefits.
Table 17.7 - Estimated Future Benefit Payments (dollars in thousands)
|
| | | | | | | | |
| | | Estimated Future Payments |
| | | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement Benefits |
| 2018 | | $ | 2,070 |
| | $ | 19 |
|
| 2019 | | 6,161 |
| | 18 |
|
| 2020 | | 1,695 |
| | 20 |
|
| 2021 | | 2,076 |
| | 18 |
|
| 2022 | | 1,900 |
| | 20 |
|
| 2023-2027 | | 8,944 |
| | 135 |
|
Table 18.6 - Estimated Future Benefit Payments (dollars in thousands)
|
| | | | | | | | |
| | | Estimated Future Payments |
| | | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement Benefits |
| 2020 | | $ | 6,066 |
| | $ | 18 |
|
| 2021 | | 2,459 |
| | 19 |
|
| 2022 | | 1,900 |
| | 21 |
|
| 2023 | | 2,464 |
| | 23 |
|
| 2024 | | 4,083 |
| | 26 |
|
| 2025-2029 | | 9,268 |
| | 168 |
|
Note 1819 — Fair Values
Table 18.1 - Fair Value Summary (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Carrying Value | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral(2) |
| Financial instruments | |
| | |
| | | | | | | | |
| Assets: | |
| | |
| | | | | | | | |
| Cash and due from banks | $ | 261,673 |
| | $ | 261,673 |
| | $ | 261,673 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Interest-bearing deposits | 246 |
| | 246 |
| | 246 |
| | — |
| | — |
| | — |
|
| Securities purchased under agreements to resell | 5,349,000 |
| | 5,348,898 |
| | — |
| | 5,348,898 |
| | — |
| | — |
|
| Federal funds sold | 3,450,000 |
| | 3,449,981 |
| | — |
| | 3,449,981 |
| | — |
| | — |
|
Trading securities(1) | 191,510 |
| | 191,510 |
| | — |
| | 191,510 |
| | — |
| | — |
|
Available-for-sale securities(1) | 7,324,736 |
| | 7,324,736 |
| | — |
| | 7,287,053 |
| | 37,683 |
| | — |
|
| Held-to-maturity securities | 1,626,122 |
| | 1,903,227 |
| | — |
| | 811,759 |
| | 1,091,468 |
| | — |
|
| Advances | 37,565,967 |
| | 37,591,048 |
| | — |
| | 37,591,048 |
| | — |
| | — |
|
| Mortgage loans, net | 4,004,737 |
| | 4,035,928 |
| | — |
| | 4,013,704 |
| | 22,224 |
| | — |
|
| Accrued interest receivable | 94,100 |
| | 94,100 |
| | — |
| | 94,100 |
| | — |
| | — |
|
Derivative assets(1) | 34,786 |
| | 34,786 |
| | — |
| | 56,238 |
| | — |
| | (21,452 | ) |
Other assets (1) | 22,351 |
| | 22,351 |
| | 9,726 |
| | 12,625 |
| | — |
| | — |
|
| Liabilities: |
|
| | |
| | | | | | | | |
| Deposits | (477,069 | ) | | (477,060 | ) | | — |
| | (477,060 | ) | | — |
| | — |
|
| COs: |
|
| | | | | | | | | | |
| Bonds | (28,344,623 | ) | | (28,353,945 | ) | | — |
| | (28,353,945 | ) | | — |
| | — |
|
| Discount notes | (27,720,906 | ) | | (27,719,598 | ) | | — |
| | (27,719,598 | ) | | — |
| | — |
|
| Mandatorily redeemable capital stock | (35,923 | ) | | (35,923 | ) | | (35,923 | ) | | — |
| | — |
| | — |
|
| Accrued interest payable | (90,626 | ) | | (90,626 | ) | | — |
| | (90,626 | ) | | — |
| | — |
|
Derivative liabilities(1) | (300,450 | ) | | (300,450 | ) | | — |
| | (347,352 | ) | | — |
| | 46,902 |
|
| Other: |
|
| | | | | | | | | | |
| Commitments to extend credit for advances | — |
| | (3,817 | ) | | — |
| | (3,817 | ) | | — |
| | — |
|
| Standby letters of credit | (1,100 | ) | | (1,100 | ) | | — |
| | (1,100 | ) | | — |
| | — |
|
_______________________
| |
(1) | Carried at fair value on a recurring basis. |
| |
(2) | These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Carrying Value | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral(2) |
| Financial instruments | |
| | |
| | | | | | | | |
| Assets: | |
| | |
| | | | | | | | |
| Cash and due from banks | $ | 520,031 |
| | $ | 520,031 |
| | $ | 520,031 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Interest-bearing deposits | 278 |
| | 278 |
| | 278 |
| | — |
| | — |
| | — |
|
| Securities purchased under agreements to resell | 5,999,000 |
| | 5,998,799 |
| | — |
| | 5,998,799 |
| | — |
| | — |
|
| Federal funds sold | 2,700,000 |
| | 2,699,949 |
| | — |
| | 2,699,949 |
| | — |
| | — |
|
Trading securities(1) | 612,622 |
| | 612,622 |
| | — |
| | 612,622 |
| | — |
| | — |
|
Available-for-sale securities(1) | 6,588,664 |
| | 6,588,664 |
| | — |
| | 6,580,518 |
| | 8,146 |
| | — |
|
| Held-to-maturity securities | 2,130,767 |
| | 2,372,290 |
| | — |
| | 1,176,269 |
| | 1,196,021 |
| | — |
|
| Advances | 39,099,339 |
| | 39,273,044 |
| | — |
| | 39,273,044 |
| | — |
| | — |
|
| Mortgage loans, net | 3,693,894 |
| | 3,736,548 |
| | — |
| | 3,708,123 |
| | 28,425 |
| | — |
|
| Accrued interest receivable | 84,653 |
| | 84,653 |
| | — |
| | 84,653 |
| | — |
| | — |
|
Derivative assets(1) | 61,598 |
| | 61,598 |
| | — |
| | 55,078 |
| | — |
| | 6,520 |
|
Other assets(1) | 17,779 |
| | 17,779 |
| | 8,394 |
| | 9,385 |
| | — |
| | — |
|
| Liabilities: | |
| | |
| | | | | | | | |
| Deposits | (482,163 | ) | | (482,158 | ) | | — |
| | (482,158 | ) | | — |
| | — |
|
| COs: | | | | | | | | | | | |
| Bonds | (27,171,434 | ) | | (27,298,499 | ) | | — |
| | (27,298,499 | ) | | — |
| | — |
|
| Discount notes | (30,053,964 | ) | | (30,054,085 | ) | | — |
| | (30,054,085 | ) | | — |
| | — |
|
| Mandatorily redeemable capital stock | (32,687 | ) | | (32,687 | ) | | (32,687 | ) | | — |
| | — |
| | — |
|
| Accrued interest payable | (80,822 | ) | | (80,822 | ) | | — |
| | (80,822 | ) | | — |
| | — |
|
Derivative liabilities(1) | (357,876 | ) | | (357,876 | ) | | — |
| | (460,287 | ) | | — |
| | 102,411 |
|
| Other: | | | | | | | | | | | |
| Commitments to extend credit for advances | — |
| | (4,412 | ) | | — |
| | (4,412 | ) | | — |
| | — |
|
| Standby letters of credit | (1,064 | ) | | (1,064 | ) | | — |
| | (1,064 | ) | | — |
| | — |
|
_______________________
| |
(1) | Carried at fair value on a recurring basis. |
| |
(2) | These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty. |
Fair-Value Methodologies and Techniques
We have determined the fair-value amounts abovebelow using available market and other pertinent information and our best judgment of appropriate valuation methods. Fair value is the price in an orderly transaction between market participants to sell an asset or transfer a liability in the principal (or advantageous) market for the asset or liability at the measurement date (an exit price). Although we use our best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of our financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect our judgment of how a market participant would estimate the fair values.
Fair-Value Hierarchy. Fair Additionally, these values do not represent an estimate of the overall market value isof the price in an orderly transaction between market participants to sell an asset or transferBank as a liability ingoing concern, which would take into account, among other things, future business opportunities and the principal (or advantageous) market for the asset or liability at the measurement date (an exit price).net profitability of assets and liabilities.
Fair-Value Hierarchy.
We record trading securities, available-for-sale securities, derivative assets, derivative liabilities, and certain other assets at fair value on a recurring basis, and on occasion certain private-label MBS, certain mortgage loans, and certain other assets on a non-recurring basis.
GAAP establishes a fair-value hierarchy and requires an entity to maximize the use of significant observable inputs and minimize the use of significant unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the fair-value measurement is determined. This overall level is an indication of market observability of the fair-value measurement for the asset or liability. An entity must disclose the level within the fair value hierarchy in which the measurements are classified.
The fair-value hierarchy prioritizes the inputs used to measure fair value into three broad levels:
| |
| Level 1 | Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date. An active market for the asset or liability is a market in which the transaction for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
| |
| Level 2 | Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified or contractual term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, volatilities, and prepayment speeds); and (4) inputs that are derived principally from or corroborated by observable market data (e.g., implied spreads). |
| |
| Level 3 | Unobservable inputs for the asset or liability. |
We review the fair-value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. These reclassifications arewould be reported as transfers in/out as of the beginning of the quarter in which the changes occur. There were no such transfers during the years ended December 31, 20172019 and 2016.2018.
Table 19.1 presents the carrying value, fair value, and fair value hierarchy of our financial assets and liabilities at December 31, 2019 and 2018. We record trading securities, available-for-sale securities, derivative assets, derivative liabilities, and certain other assets at fair value on a recurring basis, and on occasion certain private-label MBS, certain mortgage loans, and certain other assets on a non-recurring basis. We record all other financial assets and liabilities at amortized cost. Refer to Table 19.2 for further details about the financial assets and liabilities held at fair value on either a recurring or non-recurring basis.
Table 19.1 - Fair Value Summary (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | Carrying Value | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral(2) |
| Financial instruments | |
| | |
| | | | | | | | |
| Assets: | |
| | |
| | | | | | | | |
| Cash and due from banks | $ | 69,416 |
| | $ | 69,416 |
| | $ | 69,416 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Interest-bearing deposits | 1,253,873 |
| | 1,253,873 |
| | 1,253,873 |
| | — |
| | — |
| | — |
|
| Securities purchased under agreements to resell | 3,500,000 |
| | 3,500,003 |
| | — |
| | 3,500,003 |
| | — |
| | — |
|
| Federal funds sold | 860,000 |
| | 859,999 |
| | — |
| | 859,999 |
| | — |
| | — |
|
Trading securities(1) | 2,250,264 |
| | 2,250,264 |
| | — |
| | 2,250,264 |
| | — |
| | — |
|
Available-for-sale securities(1) | 7,409,000 |
| | 7,409,000 |
| | — |
| | 7,344,348 |
| | 64,652 |
| | — |
|
| Held-to-maturity securities | 871,107 |
| | 1,035,410 |
| | — |
| | 456,942 |
| | 578,468 |
| | — |
|
| Advances | 34,595,363 |
| | 34,735,775 |
| | — |
| | 34,735,775 |
| | — |
| | — |
|
| Mortgage loans, net | 4,501,251 |
| | 4,634,141 |
| | — |
| | 4,615,737 |
| | 18,404 |
| | — |
|
| Accrued interest receivable | 112,163 |
| | 112,163 |
| | — |
| | 112,163 |
| | — |
| | — |
|
Derivative assets(1) | 159,731 |
| | 159,731 |
| | — |
| | 15,329 |
| | — |
| | 144,402 |
|
Other assets (1) | 31,939 |
| | 31,939 |
| | 13,894 |
| | 18,045 |
| | — |
| | — |
|
| Liabilities: |
|
| | |
| | | | | | | | |
| Deposits | (674,309 | ) | | (674,269 | ) | | — |
| | (674,269 | ) | | — |
| | — |
|
| COs: |
|
| | | | | | | | | | |
| Bonds | (23,888,493 | ) | | (24,226,123 | ) | | — |
| | (24,226,123 | ) | | — |
| | — |
|
| Discount notes | (27,681,169 | ) | | (27,681,470 | ) | | — |
| | (27,681,470 | ) | | — |
| | — |
|
| Mandatorily redeemable capital stock | (5,806 | ) | | (5,806 | ) | | (5,806 | ) | | — |
| | — |
| | — |
|
| Accrued interest payable | (104,477 | ) | | (104,477 | ) | | — |
| | (104,477 | ) | | — |
| | — |
|
Derivative liabilities(1) | (10,271 | ) | | (10,271 | ) | | — |
| | (43,805 | ) | | — |
| | 33,534 |
|
| Other: |
|
| | | | | | | | | | |
| Commitments to extend credit for advances | — |
| | (3,884 | ) | | — |
| | (3,884 | ) | | — |
| | — |
|
| Standby letters of credit | (1,723 | ) | | (1,723 | ) | | — |
| | (1,723 | ) | | — |
| | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Carrying Value | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral(2) |
| Financial instruments | |
| | |
| | | | | | | | |
| Assets: | |
| | |
| | | | | | | | |
| Cash and due from banks | $ | 10,431 |
| | $ | 10,431 |
| | $ | 10,431 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Interest-bearing deposits | 593,199 |
| | 593,199 |
| | 593,199 |
| | — |
| | — |
| | — |
|
| Securities purchased under agreements to resell | 6,499,000 |
| | 6,499,078 |
| | — |
| | 6,499,078 |
| | — |
| | — |
|
| Federal funds sold | 1,500,000 |
| | 1,500,002 |
| | — |
| | 1,500,002 |
| | — |
| | — |
|
Trading securities(1) | 163,038 |
| | 163,038 |
| | — |
| | 163,038 |
| | — |
| | — |
|
Available-for-sale securities(1) | 5,849,944 |
| | 5,849,944 |
| | — |
| | 5,800,343 |
| | 49,601 |
| | — |
|
| Held-to-maturity securities | 1,295,023 |
| | 1,528,929 |
| | — |
| | 638,164 |
| | 890,765 |
| | — |
|
| Advances | 43,192,222 |
| | 43,167,700 |
| | — |
| | 43,167,700 |
| | — |
| | — |
|
| Mortgage loans, net | 4,299,402 |
| | 4,238,087 |
| | — |
| | 4,217,487 |
| | 20,600 |
| | — |
|
| Accrued interest receivable | 112,751 |
| | 112,751 |
| | — |
| | 112,751 |
| | — |
| | — |
|
Derivative assets(1) | 22,403 |
| | 22,403 |
| | — |
| | 13,832 |
| | — |
| | 8,571 |
|
Other assets(1) | 25,059 |
| | 25,059 |
| | 9,988 |
| | 15,071 |
| | — |
| | — |
|
| Liabilities: | |
| | |
| | | | | | | | |
| Deposits | (474,878 | ) | | (474,848 | ) | | — |
| | (474,848 | ) | | — |
| | — |
|
| COs: | | | | | | | | | | | |
| Bonds | (25,912,684 | ) | | (25,843,163 | ) | | — |
| | (25,843,163 | ) | | — |
| | — |
|
| Discount notes | (33,065,822 | ) | | (33,062,585 | ) | | — |
| | (33,062,585 | ) | | — |
| | — |
|
| Mandatorily redeemable capital stock | (31,868 | ) | | (31,868 | ) | | (31,868 | ) | | — |
| | — |
| | — |
|
| Accrued interest payable | (112,043 | ) | | (112,043 | ) | | — |
| | (112,043 | ) | | — |
| | — |
|
Derivative liabilities(1) | (255,800 | ) | | (255,800 | ) | | — |
| | (309,552 | ) | | — |
| | 53,752 |
|
| Other: | | | | | | | | | | | |
| Commitments to extend credit for advances | — |
| | (4,164 | ) | | — |
| | (4,164 | ) | | — |
| | — |
|
| Standby letters of credit | (1,257 | ) | | (1,257 | ) | | — |
| | (1,257 | ) | | — |
| | — |
|
_______________________
| |
| (1) | Carried at fair value and measured on a recurring basis. |
| |
| (2) | These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty. |
Summary of Valuation Methodologies and Primary Inputs
CashThe valuation methodologies and Due from Banks primary inputs used to develop the measurement of fair value for assets and Interest-Bearing Deposits. liabilities that are measured at fair value on a recurring or nonrecurring basis in the Statement of Condition are listed below. The fair value approximatesvalues and level within the recorded carrying value.
Securities Purchased under Agreements to Resell. The fair value is determined by calculating the present valuehierarchy of expected future cash flows. The discount rates usedthese assets and liabilities are reported in these calculations are the rates for securities with similar terms.
Federal Funds Sold. The fair value is determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for federal funds with similar terms.Table 19.2.
Investment Securities. We determine the fair values of our investment securities, other than HFA floating-rate securities, based on prices obtained for each of these securities that we request from multiple designated third-party pricing vendors. The fair value of each such security is the average of such vendor prices that are within a cluster pricing tolerance range. A cluster is defined as a group of available vendor prices for a given security that is within a defined price tolerance range of the median vendor price depending on the security type. An outlier is any vendor price that is outside of the defined cluster and is evaluated for reasonableness. The use of the average of available vendor prices within a cluster and the evaluation of reasonableness of outlier prices does not discard available information. In addition, the fair values produced by this method are reviewed for reasonableness.
We request prices on each of our securities subject to this fair-value method from multiple third-party vendors, when available. These pricing vendors use methods that generally employ, but are not limited to, benchmark yields, recent trades, dealer estimates, valuation models, benchmarking of like securities, sector groupings, and/or matrix pricing. We then establish a median price for each security. All prices that are within a specified tolerance threshold of the median price are included in the cluster of prices that are averaged to compute a default price.
Vendor prices that are outside of a defined cluster are identified as outliers and are subject to additional review including, but not limited to, comparison to prices provided by an additional third-party valuation vendor, prices for similar securities, and/or nonbinding dealer estimates, or the use of internal model prices, which we believe reflect the facts and circumstances that a market participant would consider. We also perform this analysis in those limited instances
where no third-party vendor price or
only one third-party vendor price is available to determine fair value. If the analysis indicates that an outlier (or outliers) is (are) not representative of fair value and that the average of the vendor prices within the tolerance threshold of the median price is the best estimate, then we use the average of the vendor prices within the tolerance threshold of the median price as the final price. If, on the other hand, we determine that an outlier (or some other price identified in the analysis) is a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price. In all cases, the final price is used to determine the fair value of the security.
As of December 31, 2017,2019, multiple vendor prices were received for substantially all of our investment securities and the final prices for substantially all of those securities were computed by averaging the prices received. The relative proximity of the prices received supports our conclusion that the final computed prices are reasonable estimates of fair value. Based on the current low level of market activity for private-label residential MBS, the nonrecurring fair-value measurements for such securities as of December 31, 20172019 and 2016,2018, fell within Level 3 of the fair-value hierarchy. Our fixed-rate HFA securities fall within Level 3 of the fair-value hierarchy due to the current lack of market activities for these bonds.
Investment Securities – HFA Floating Rate Securities. The fair value is determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for securities with similar terms. Our floating rate HFA securities also fall within Level 3 of the fair-value hierarchy due to the current lack of market activity for these bonds.
Advances. We determine the fair value of advances by calculating the present value of expected future cash flows from the advances and excluding the amount of accrued interest receivable. The discount rates used in these calculations are the current replacement rates for advances with similar terms. We calculate our replacement advance rates at a spread to our cost of funds. Our cost of funds approximates the CO curve. See — COs within this note for a discussion of the CO curve. We use market-based expectations of future interest-rate volatility implied from current market prices for similar options to estimate the fair values of advances with optionality. In accordance with the FHFA's advances regulations, advances with a maturity or repricing period greater than six months require a prepayment fee sufficient to make us financially indifferent to the borrower's decision to prepay the advances. Therefore, we do not assume prepayment risk when we determine the fair value of advances. Additionally, we believe that credit risk is negligible as a component of value in determining the fair value of our advances due to the strong credit protections that mitigate the credit risk associated with advances. Collateral requirements for advances provide surety for the repayment such that the probability of credit losses on advances is very low. We have the ability to establish a blanket lien on all financial assets of most members, and in the case of federally insured depository institutions, our lien has a statutory priority over all other creditors with respect to collateral that has not been perfected by other parties. All of these factors serve to mitigate credit risk on advances.
Mortgage Loans. The fair values for mortgage loans are determined based on quoted market prices of similar mortgage loans adjusted for credit and liquidity risk.
The fair value of impaired conventional mortgage loans is based on the lower of the carrying value of the loans or fair value of the collateral less estimated costs to sell. The fair value of impaired government mortgage loans is equal to the unpaid principal balance.
REO. Fair value is derived from third-party valuations of the property, which fall within Level 3 of the fair-value hierarchy.
Accrued Interest Receivable and Payable. The fair value approximates the recorded carrying value.
Derivative Assets/Liabilities - Interest-Rate-Exchange Agreements. We base the fair values of interest-rate-exchange agreements on available market prices of derivatives having similar terms, including accrued interest receivable and payable. The fair-value methodology uses standard valuation techniques for derivatives such as discounted cash-flow analysis and comparisons with similar instruments.
The fair values of all interest-rate-exchange agreements are netted by clearing member and/or by counterparty, including cash collateral received from or delivered to the counterparty. If these netted amounts are positive, they are classified as an asset, and if negative, they are classified as a liability. We generally use a midmarket pricing convention based on the bid-ask spread as a practical expedient for fair-value measurements. Because these estimates are made at a specific point in time, they are susceptible to material near-term changes. We have evaluated the potential for the fair value of the instruments to be affected by counterparty risk and our own credit risk and have determined that no adjustments were significant to the overall fair-value measurements.
The discounted cash-flow model uses market-observable inputs (inputs that are actively quoted and can be validated to external sources), including the following:
| |
| • | Discount rate assumption. At December 31, 20172019 and 2016,2018, we used either the overnight-index swap (OIS)OIS rate based on the federal funds effective rate curve or the LIBOR swap curve depending on the terms of the ISDAInternational Swaps and Derivatives Association (ISDA) agreement we have with each derivative counterparty. |
| |
| • | Forward interest-rate assumption. LIBOR swap curve.curve or OIS based on the federal funds effective rate. |
| |
| • | Volatility assumption. Market-based expectations of future interest-rate volatility implied from current market prices for similar options. |
Derivative Assets/Liabilities – Commitments to Invest in Mortgage Loans. Commitments to invest in mortgage loans are recorded as derivatives in the statement of condition. The fair values of such commitments are based on the end-of-day delivery commitment prices provided by the FHLBank of Chicago and a spread, derived from MBS TBA delivery commitment prices with adjustment for the contractual features of the MPF program, such as servicing and credit-enhancement features.
Deposits. We determine the fair values of term deposits by calculating the present value of expected future cash flows from the deposits and reducing this amount by any accrued interest payable. The discount rates used in these calculations are the rates of currently issued deposits with similar terms.
COs. We estimate fair values based on the cost of issuing comparable term debt, excluding non-interest selling costs. Fair values of COs without embedded options are determined based on internal valuation models that use market-based yield curve inputs obtained from the Office of Finance. The Office of Finance constructs an internal yield curve, referred to as the CO curve, using the U.S. Treasury curve as a base yield curve that is then adjusted by adding indicative spreads obtained from market observable sources. These market indications are generally derived from pricing indications from dealers, historical pricing relationships, recent GSE debt trades, and secondary market activity.
We determine the estimated fair value of callable CO bonds by using prices received from designated third-party pricing vendors. The pricing vendors we used apply various proprietary models to price CO bonds. The inputs to those models are derived from various sources including, but not limited to, benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many CO bonds do not trade on a daily basis, the pricing vendors use available information, as applicable, such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual CO bonds. Each pricing vendor has an established challenge process in place for all valuations, which facilitates resolution of potentially erroneous prices identified by us.
When pricing vendors are used, we use the same valuation technique as described above for Investment Securities.
Multiple vendor prices were received for substantially all of our callable CO bonds and the final prices for those bonds were computed by averaging the prices received. Based on our review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, we believe our final prices result in reasonable estimates of fair value and that the fair value measurements are classified appropriately in the fair value hierarchy.
We have conducted reviews of our pricing vendors to confirm and further augment our understanding of the vendors' pricing processes, methodologies and control procedures for callable CO bonds.
Adjustments may be necessary to reflect the 11 FHLBanks' credit quality when valuing COs measured at fair value. Due to the joint and several liability for COs, we monitor our own creditworthiness and the creditworthiness of the other FHLBanks to determine whether any credit adjustments are necessary in our fair value measurement of COs. No adjustments were considered necessary at December 31, 2017 or 2016.
Mandatorily Redeemable Capital Stock. The fair value of capital stock subject to mandatory redemption is generally equal to its par as indicated by contemporaneous member purchases and sales at par value. Capital stock can only be acquired by our members at par value and redeemed at par value. Our capital stock is not traded and no market mechanism exists for the exchange of capital stock outside of our cooperative structure.
Subjectivity of Estimates. Estimates of the fair value of financial assets and liabilities using the methodologies described above are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest-rate volatility, possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. The use of different assumptions could have a material effect on the fair-value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes.
Fair Value Measured on a Recurring and Nonrecurring Basis.
Table 19.2 - Fair Value of Assets and Liabilities Measured at Fair Value on a Recurring and Nonrecurring Basis (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral (1) | | Total |
| Assets: | |
| | |
| | |
| | |
| | |
|
| Carried at fair value on a recurring basis | | | | | | | | | |
| Trading securities: | | | | | | | | | |
| Corporate bonds | $ | — |
| | $ | 5,896 |
| | $ | — |
| | $ | — |
| | $ | 5,896 |
|
| U.S. Treasury obligations | | | 2,240,236 |
| | | | | | 2,240,236 |
|
| U.S. government-guaranteed – single-family MBS | — |
| | 4,047 |
| | — |
| | — |
| | 4,047 |
|
| GSE – single-family MBS | — |
| | 85 |
| | — |
| | — |
| | 85 |
|
| Total trading securities | — |
| | 2,250,264 |
| | — |
| | — |
| | 2,250,264 |
|
| Available-for-sale securities: | |
| | |
| | |
| | |
| | |
|
| HFA securities | — |
| | — |
| | 64,652 |
| | — |
| | 64,652 |
|
| Supranational institutions | — |
| | 416,429 |
| | — |
| | — |
| | 416,429 |
|
| U.S. government-owned corporations | — |
| | 296,761 |
| | — |
| | — |
| | 296,761 |
|
| GSE | — |
| | 123,786 |
| | — |
| | — |
| | 123,786 |
|
| U.S. government guaranteed – single-family MBS | — |
| | 57,714 |
| | — |
| | — |
| | 57,714 |
|
| U.S. government guaranteed – multifamily MBS | — |
| | 282,617 |
| | — |
| | — |
| | 282,617 |
|
| GSE – single-family MBS | — |
| | 2,590,271 |
| | — |
| | — |
| | 2,590,271 |
|
| GSE – multifamily MBS | — |
| | 3,576,770 |
| | — |
| | — |
| | 3,576,770 |
|
| Total available-for-sale securities | — |
| | 7,344,348 |
| | 64,652 |
| | — |
| | 7,409,000 |
|
| Derivative assets: | |
| | |
| | |
| | |
| | |
|
| Interest-rate-exchange agreements | — |
| | 15,102 |
| | — |
| | 144,402 |
| | 159,504 |
|
| Mortgage delivery commitments | — |
| | 227 |
| | — |
| | — |
| | 227 |
|
| Total derivative assets | — |
| | 15,329 |
| | — |
| | 144,402 |
| | 159,731 |
|
| Other assets | 13,894 |
| | 18,045 |
| | — |
| | — |
| | 31,939 |
|
| Total assets carried at fair value on a recurring basis | $ | 13,894 |
| | $ | 9,627,986 |
| | $ | 64,652 |
| | $ | 144,402 |
| | $ | 9,850,934 |
|
Carried at fair value on a nonrecurring basis(2) | | | | | | | | | |
| Held-to-maturity securities: | | | | | | | | | |
| Private-label MBS | $ | — |
| | $ | — |
| | $ | 6,856 |
| | $ | — |
| | $ | 6,856 |
|
| Mortgage loans held for portfolio | — |
| | — |
| | 1,198 |
| | — |
| | 1,198 |
|
| REO | — |
| | — |
| | 78 |
| | — |
| | 78 |
|
| Total assets carried at fair value on a nonrecurring basis | $ | — |
| | $ | — |
| | $ | 8,132 |
| | $ | — |
| | $ | 8,132 |
|
| Liabilities: | |
| | |
| | |
| | |
| | |
|
| Carried at fair value on a recurring basis | | | | | | | | | |
| Derivative liabilities | |
| | |
| | |
| | |
| | |
|
| Interest-rate-exchange agreements | $ | — |
| | $ | (43,805 | ) | | $ | — |
| | $ | 33,534 |
| | $ | (10,271 | ) |
| Total liabilities carried at fair value on a recurring basis | $ | — |
| | $ | (43,805 | ) | | $ | — |
| | $ | 33,534 |
| | $ | (10,271 | ) |
Table 18.2 - Fair Value of Assets and Liabilities Measured at Fair Value on a Recurring Basis (dollars in thousands)
| |
| | | | December 31, 2017 | December 31, 2018 |
| | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral (1) | | Total | Level 1 | | Level 2 | | Level 3 | | Netting
Adjustments and Cash Collateral (1) | | Total |
| Assets: | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
|
| Carried at fair value on a recurring basis | | | | | | | | | | |
| Trading securities: | | | | | | | | | | | | | | | | | | |
| Corporate bonds | | $ | — |
| | $ | 6,102 |
| | $ | — |
| | $ | — |
| | $ | 6,102 |
|
| U.S. government-guaranteed – single-family MBS | $ | — |
| | $ | 6,807 |
| | $ | — |
| | $ | — |
| | $ | 6,807 |
| — |
| | 5,344 |
| | — |
| | — |
| | 5,344 |
|
| GSEs – single-family MBS | — |
| | 346 |
| | — |
| | — |
| | 346 |
| |
| GSEs – multifamily MBS | — |
| | 184,357 |
| | — |
| | — |
| | 184,357 |
| |
| GSE – single-family MBS | | — |
| | 148 |
| | — |
| | — |
| | 148 |
|
| GSE – multifamily MBS | | — |
| | 151,444 |
| | — |
| | — |
| | 151,444 |
|
| Total trading securities | — |
| | 191,510 |
| | — |
| | — |
| | 191,510 |
| — |
| | 163,038 |
| | — |
| | — |
| | 163,038 |
|
| Available-for-sale securities: | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
|
| State or local HFA securities | — |
| | — |
| | 37,683 |
| | — |
| | 37,683 |
| |
| HFA securities | | — |
| | — |
| | 49,601 |
| | — |
| | 49,601 |
|
| Supranational institutions | — |
| | 418,285 |
| | — |
| | — |
| | 418,285 |
| — |
| | 405,155 |
| | — |
| | — |
| | 405,155 |
|
| U.S. government-owned corporations | — |
| | 292,077 |
| | — |
| | — |
| | 292,077 |
| — |
| | 273,169 |
| | — |
| | — |
| | 273,169 |
|
| GSEs | — |
| | 121,343 |
| | — |
| | — |
| | 121,343 |
| |
| GSE | | — |
| | 115,627 |
| | — |
| | — |
| | 115,627 |
|
| U.S. government guaranteed – single-family MBS | — |
| | 95,777 |
| | — |
| | — |
| | 95,777 |
| — |
| | 75,658 |
| | — |
| | — |
| | 75,658 |
|
| U.S. government guaranteed – multifamily MBS | — |
| | 443,373 |
| | — |
| | — |
| | 443,373 |
| — |
| | 361,134 |
| | — |
| | — |
| | 361,134 |
|
| GSEs – single-family MBS | — |
| | 4,562,992 |
| | — |
| | — |
| | 4,562,992 |
| |
| GSEs – multifamily | — |
| | 1,353,206 |
| | — |
| | — |
| | 1,353,206 |
| |
| GSE – single-family MBS | | — |
| | 3,562,159 |
| | — |
| | — |
| | 3,562,159 |
|
| GSE – multifamily MBS | | — |
| | 1,007,441 |
| | — |
| | — |
| | 1,007,441 |
|
| Total available-for-sale securities | — |
| | 7,287,053 |
| | 37,683 |
| | — |
| | 7,324,736 |
| — |
| | 5,800,343 |
| | 49,601 |
| | — |
| | 5,849,944 |
|
| Derivative assets: | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
|
| Interest-rate-exchange agreements | — |
| | 56,069 |
| | — |
| | (21,452 | ) | | 34,617 |
| — |
| | 13,493 |
| | — |
| | 8,571 |
| | 22,064 |
|
| Mortgage delivery commitments | — |
| | 169 |
| | — |
| | — |
| | 169 |
| — |
| | 339 |
| | — |
| | — |
| | 339 |
|
| Total derivative assets | — |
| | 56,238 |
| | — |
| | (21,452 | ) | | 34,786 |
| — |
| | 13,832 |
| | — |
| | 8,571 |
| | 22,403 |
|
| Other assets | 9,726 |
| | 12,625 |
| | — |
| | — |
| | 22,351 |
| 9,988 |
| | 15,071 |
| | — |
| | — |
| | 25,059 |
|
| Total assets at fair value | $ | 9,726 |
| | $ | 7,547,426 |
| | $ | 37,683 |
| | $ | (21,452 | ) | | $ | 7,573,383 |
| |
| Total assets carried at fair value on a recurring basis | | $ | 9,988 |
| | $ | 5,992,284 |
| | $ | 49,601 |
| | $ | 8,571 |
| | $ | 6,060,444 |
|
Carried at fair value on a nonrecurring basis(2) | | | | | | | | | | |
| Held-to-maturity securities: | | | | | | | | | | |
| Private-label MBS | | $ | — |
| | $ | — |
| | $ | 1,668 |
| | $ | — |
| | $ | 1,668 |
|
| Mortgage loans held for portfolio | | — |
| | — |
| | 1,144 |
| | — |
| | 1,144 |
|
| REO | | — |
| | — |
| | 361 |
| | — |
| | 361 |
|
| Total assets carried at fair value on a nonrecurring basis | | $ | — |
| | $ | — |
| | $ | 3,173 |
| | $ | — |
| | $ | 3,173 |
|
| Liabilities: | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
|
| Carried at fair value on a recurring basis | | | | | | | | | | |
| Derivative liabilities | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
|
| Interest-rate-exchange agreements | $ | — |
| | $ | (347,325 | ) | | $ | — |
| | $ | 46,902 |
| | $ | (300,423 | ) | $ | — |
| | $ | (309,552 | ) | | $ | — |
| | $ | 53,752 |
| | $ | (255,800 | ) |
| Mortgage delivery commitments | — |
| | (27 | ) | | — |
| | — |
| | (27 | ) | |
| Total liabilities at fair value | $ | — |
| | $ | (347,352 | ) | | $ | — |
| | $ | 46,902 |
| | $ | (300,450 | ) | |
| Total liabilities carried at fair value on a recurring basis | | $ | — |
| | $ | (309,552 | ) | | $ | — |
| | $ | 53,752 |
| | $ | (255,800 | ) |
_______________________
| |
| (1) | These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty. |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Level 1 | | Level 2 | | Level 3 | | Netting
Adjustments and Cash Collateral (1) | | Total |
| Assets: | |
| | |
| | |
| | |
| | |
|
| Trading securities: | | | | | | | | | |
| U.S. Treasury obligations | $ | — |
| | $ | 399,521 |
| | $ | — |
| | $ | — |
| | $ | 399,521 |
|
| U.S. government-guaranteed – single-family MBS | — |
| | 8,494 |
| | — |
| | — |
| | 8,494 |
|
| GSEs – single-family MBS | — |
| | 768 |
| | — |
| | — |
| | 768 |
|
| GSEs – multifamily MBS | — |
| | 203,839 |
| | — |
| | — |
| | 203,839 |
|
| Total trading securities | — |
| | 612,622 |
| | — |
| | — |
| | 612,622 |
|
| Available-for-sale securities: | |
| | |
| | |
| | |
| | |
|
| State or local HFA securities | — |
| | — |
| | 8,146 |
| | — |
| | 8,146 |
|
| Supranational institutions | — |
| | 422,620 |
| | — |
| | — |
| | 422,620 |
|
| U.S. government-owned corporations | — |
| | 271,957 |
| | — |
| | — |
| | 271,957 |
|
| GSEs | — |
| | 117,468 |
| | — |
| | — |
| | 117,468 |
|
| U.S. government guaranteed – single-family MBS | — |
| | 124,727 |
| | — |
| | — |
| | 124,727 |
|
| U.S. government guaranteed – multifamily MBS | — |
| | 563,361 |
| | — |
| | — |
| | 563,361 |
|
| GSEs – single-family MBS | — |
| | 4,403,855 |
| | — |
| | — |
| | 4,403,855 |
|
| GSEs – multifamily MBS | — |
| | 676,530 |
| | — |
| | — |
| | 676,530 |
|
| Total available-for-sale securities | — |
| | 6,580,518 |
| | 8,146 |
| | — |
| | 6,588,664 |
|
| Derivative assets: | |
| | |
| | |
| | |
| | |
|
| Interest-rate-exchange agreements | — |
| | 55,008 |
| | — |
| | 6,520 |
| | 61,528 |
|
| Mortgage delivery commitments | — |
| | 70 |
| | — |
| | — |
| | 70 |
|
| Total derivative assets | — |
| | 55,078 |
| | — |
| | 6,520 |
| | 61,598 |
|
| Other assets | 8,394 |
| | 9,385 |
| | — |
| | — |
| | 17,779 |
|
| Total assets at fair value | $ | 8,394 |
| | $ | 7,257,603 |
| | $ | 8,146 |
| | $ | 6,520 |
| | $ | 7,280,663 |
|
| Liabilities: | |
| | |
| | |
| | |
| | |
|
| Derivative liabilities | |
| | |
| | |
| | |
| | |
|
| Interest-rate-exchange agreements | $ | — |
| | $ | (460,116 | ) | | $ | — |
| | $ | 102,411 |
| | $ | (357,705 | ) |
| Mortgage delivery commitments | — |
| | (171 | ) | | — |
| | — |
| | (171 | ) |
| Total liabilities at fair value | $ | — |
| | $ | (460,287 | ) | | $ | — |
| | $ | 102,411 |
| | $ | (357,876 | ) |
_______________________
| |
(1)(2) | These amounts represent the effect of master-netting agreements intendedWe measure certain held-to-maturity investment securities, mortgage loans held for portfolio, and REO at fair value on a nonrecurring basis, that is, they are not measured at fair value on an ongoing basis but are subject to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty. |
Table 18.3 presents a reconciliation of available-for-sale securities that are measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) during the years ended December 31, 2017 and 2016. There were no Level 3 available-for-sale securities during the year ended December 31, 2015.
Table 18.3 - Roll Forward of Level 3 Available-for-Sale Securities (dollars in thousands)
|
| | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 |
| Balance at beginning of year | | $ | 8,146 |
| | $ | — |
|
| Purchases | | 33,350 |
| | 9,350 |
|
| Unrealized losses included in other comprehensive income | | (3,813 | ) | | (1,204 | ) |
| Balance at end of year | | $ | 37,683 |
| | $ | 8,146 |
|
Fair Value on a Nonrecurring Basis
We measure certain held-to-maturity investment securities, mortgage loans held for portfolio, and REO at fair value on a nonrecurring basis, that is, they are not measured at fair value on an ongoing basis but are subject to fair-value adjustments only in certain circumstances (for example, upon recognizing an other-than-temporary impairment on a held-to-maturity security).
Table 18.4 - Fair Value of Assets Measured at Fair Value on a Nonrecurring Basis (1) (dollars in thousands)
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Held-to-maturity securities: | | | | | | | |
| Private-label residential MBS | $ | — |
| | $ | — |
| | $ | 1,970 |
| | $ | 1,970 |
|
| Mortgage loans held for portfolio | — |
| | — |
| | 4,608 |
| | 4,608 |
|
| REO | — |
| | — |
| | 784 |
| | 784 |
|
| | | | | | | | |
| Total assets recorded at fair value on a nonrecurring basis | $ | — |
| | $ | — |
| | $ | 7,362 |
| | $ | 7,362 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Held-to-maturity securities: | | | | | | | |
| Private-label residential MBS | $ | — |
| | $ | — |
| | $ | 8,498 |
| | $ | 8,498 |
|
| Mortgage loans held for portfolio | — |
| | — |
| | 5,618 |
| | 5,618 |
|
| REO | — |
| | — |
| | 786 |
| | 786 |
|
| | | | | | | | |
| Total assets recorded at fair value on a nonrecurring basis | $ | — |
| | $ | — |
| | $ | 14,902 |
| | $ | 14,902 |
|
_______________________
| |
(1) | fair-value adjustments only in certain circumstances (for example, upon recognizing an other-than-temporary impairment on a held-to-maturity security). The fair values presented are as of the date the fair value adjustment was recorded. |
Table 19.3 presents a reconciliation of available-for-sale securities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2019, 2018, and 2017.
Table 19.3 - Roll Forward of Level 3 Available-for-Sale Securities (dollars in thousands)
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Balance at beginning of year | | $ | 49,601 |
| | $ | 37,683 |
| | $ | 8,146 |
|
| Purchases | | 13,820 |
| | 12,800 |
| | 33,350 |
|
| Unrealized gains (losses) included in other comprehensive income | | 1,231 |
| | (882 | ) | | (3,813 | ) |
| Balance at end of year | | $ | 64,652 |
| | $ | 49,601 |
| | $ | 37,683 |
|
Note 1920 — Commitments and Contingencies
Joint and Several Liability. COs are backed by the financial resources of the FHLBanks. The FHFA has authority to require any FHLBank to repay all or a portion of the principal and interest on COs for which another FHLBank is the primary obligor. No FHLBank has ever been asked or required to repay the principal or interest on any CO on behalf of another FHLBank. We evaluate the financial condition of the other FHLBanks primarily based on known regulatory actions, publicly available financial information, and individual long-term credit-rating action as of each period-end presented. Based on this evaluation, as of December 31, 20172019, and through the filing of this report, we do not believe thereit is only a remote likelihoodlikely that we will be required to repay the principal or interest on any CO on behalf of another FHLBank.
We have considered applicable FASB guidance and determined it is not necessary to recognize a liability for the fair value of our joint and several liability for all of the COs. The joint and several obligation is mandated by the FHLBank Act, as implemented by FHFA regulations, and is not the result of an arms-length transaction among the FHLBanks. The FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several obligation. Because the FHLBanks are subject to the authority of the FHFA as it relates to decisions involving the allocation of the joint and several liability for the FHLBanks' COs, the FHLBanks' joint and several obligation is excluded from the initial recognition and measurement provisions. Accordingly, we have not recognized a liability for our joint and several obligation related to other FHLBanks' COs at December 31, 20172019 and 2016.2018. The par amounts of other FHLBanks' outstanding COs for which we are jointly and severally liable totaled $978.2974.4 billion and $932.1972.6 billion at December 31, 20172019 and 2016,2018, respectively. See Note 1314 — Consolidated Obligations for additional information.
Off-Balance-Sheet Commitments
Table 19.1 - Off-Balance Sheet Commitments (dollars in thousands)
| |
Table 20.1 - Off-Balance Sheet Commitments (dollars in thousands)
| | Table 20.1 - Off-Balance Sheet Commitments (dollars in thousands)
|
| | | | December 31, 2017 | | December 31, 2016 | | December 31, 2019 | | December 31, 2018 |
| | | Expire within one year | | Expire after one year | | Total | | Expire within one year | | Expire after one year | | Total | | Expire within one year | | Expire after one year | | Total | | Expire within one year | | Expire after one year | | Total |
Standby letters of credit outstanding (1) | | $ | 5,034,725 |
| | $ | 223,167 |
| | $ | 5,257,892 |
| | $ | 4,050,447 |
| | $ | 179,632 |
| | $ | 4,230,079 |
| | $ | 7,484,754 |
| | $ | 215,014 |
| | $ | 7,699,768 |
| | $ | 6,028,851 |
| | $ | 226,438 |
| | $ | 6,255,289 |
|
Commitments for unused lines of credit - advances (2) | | 1,216,592 |
| | — |
| | 1,216,592 |
| | 1,255,140 |
| | — |
| | 1,255,140 |
| | 1,143,828 |
| | — |
| | 1,143,828 |
| | 1,177,377 |
| | — |
| | 1,177,377 |
|
| Commitments to make additional advances | | 18,851 |
| | 63,488 |
| | 82,339 |
| | 44,865 |
| | 65,972 |
| | 110,837 |
| | 434,253 |
| | 88,167 |
| | 522,420 |
| | 159,401 |
| | 59,894 |
| | 219,295 |
|
| Commitments to invest in mortgage loans | | 42,918 |
| | — |
| | 42,918 |
| | 22,524 |
| | — |
| | 22,524 |
| | 49,911 |
| | — |
| | 49,911 |
| | 50,773 |
| | — |
| | 50,773 |
|
| Unsettled CO bonds, at par | | 52,550 |
| | — |
| | 52,550 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 105,400 |
| | — |
| | 105,400 |
|
| Unsettled CO discount notes, at par | | | 500,000 |
| | — |
| | 500,000 |
| | 600,000 |
| | — |
| | 600,000 |
|
__________________________
| |
| (1) | The amount of standby letters of credit outstanding excludes commitments to issue standby letters of credit that expire within one year. At December 31, 20172019 and 2016,2018, these amounts totaled $1.427.2 million and $2.732.6 million, respectively. Also excluded are commitments to issue standby letters of credit that expire after one year totaling $543,000 and $285,000 at December 31, 2017 and 2016, respectively. |
excluded are commitments to issue standby letters of credit that expire after one year totaling $1.8 million and $675 thousand at December 31, 2019 and 2018, respectively.
| |
| (2) | Commitments for unused line-of-credit advances are generally for periods of up to 12 months. Since many of these commitments are not expected to be drawn upon, the total commitment amount does not necessarily indicate future liquidity requirements. |
Standby Letters of Credit. We issue standby letters of credit on behalf of our members to support certain obligations of the members to third-party beneficiaries. These standby letters of credit are subject to the same collateralization and borrowing limits that are applicable to advances. Standby letters of credit may be offered to assist members in facilitating residential housing finance, community lending, and asset-liability management, and to provide liquidity. In particular, members often use standby letters of credit as collateral for deposits from federalstate and statelocal government agencies. Standby letters of credit are executed for members for a fee. If we are required to make payment for a beneficiary's draw, our strategy is to take prompt action to recover the funds paid to the third-party beneficiary, including converting the payment amount into a collateralized advance to the primary obligor, withdrawing the payment amount from the primary obligor's demand deposit account with us, or selling collateral pledged by the primary obligor in a commercially reasonable manner to offset the payment amount. However,Historically, standby letters of credit usually expire without being drawn upon. The originalAt December 31, 2019, the terms of these standby letters of credit have original expiration periods of up to 20 years, currently expiring no later than 2027. Currently, we offer new standby letters of credit with expiration periods of up to 10 years. Our unearnedUnearned fees for the value of the guarantees related to standby letters of credit are recorded in other liabilities and totaled $1.11.7 million and $1.3 million at December 31, 20172019 and 2016.2018, respectively.
We monitor the creditworthiness of our members and housing associates that have standby letter of credit agreements outstanding based on our evaluations of the financial condition of the member or housing associate. We review available financial data, which can include regulatory call reports filed by depository institution members, regulatory financial statements filed with the appropriate state insurance department by insurance company members, audited financial statements of housing
associates, SEC filings, and rating-agency reports to ensure that potentially troubled members are identified as soon as possible. In addition, we have access to most members' regulatory examination reports. We analyze this information on a regular basis.
Standby letters of credit are fully collateralized at the time of issuance. Based on our credit analyses and collateral requirements, we have not deemed it necessary to record any additional liability on these commitments.
Commitments to Invest in Mortgage Loans. Commitments to invest in mortgage loans are generally for periods not to exceed 45 business days. Such commitments are recorded as derivatives at their fair values on the statement of condition.
Pledged Collateral. We have pledged securities as collateral related to derivatives. See Note 1112 — Derivatives and Hedging Activities for additional information about our pledged collateral and other credit-risk-related contingent features.
Lease Commitments. We charged to operating expense net rental costs of approximately $2.9 millionfor the years ended December 31, 2017, 2016, and 2015.
Table 19.2 - Future Minimum Lease Payments (dollars in thousands)
|
| | | | | | | | |
| | | Equipment | | Premises |
| | | Capital Leases | | Operating Leases |
| 2018 | | $ | 41 |
| | $ | 2,666 |
|
| 2019 | | 41 |
| | 2,682 |
|
| 2020 | | 22 |
| | 2,685 |
|
| 2021 | | — |
| | 2,689 |
|
| 2022 | | — |
| | 2,693 |
|
| Thereafter | | — |
| | 2,563 |
|
| Total minimum lease payments | | $ | 104 |
| | $ | 15,978 |
|
Lease agreements for our premises generally provide for increases in the basic rentals resulting from increases in property taxes and maintenance expenses. We do not expect any such increases to have a material effect on us.
Legal Proceedings. We are subject to various legal proceedings arising in the normal course of business from time to time. We would record an accrual for a loss contingency when it is probable that a loss has been incurred and the amount can be reasonably estimated. Management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on our financial condition, results of operations, or cash flows.
Note 2021 — Transactions with Shareholders
We are a cooperative whose members own our capital stock and may receive dividends on their investment in our capital stock. In addition, certain former members and nonmembers that still have outstanding transactions with us are also required to maintain their investment in our capital stock until the transactions mature or are paid off. All advances are issued to members or housing associates, and mortgage loans held for portfolio are generally acquired from our members or housing associates. We also maintain demand-deposit accounts for members and housing associates primarily to facilitate settlement activities that are directly related to advances, mortgage-loan purchases, and other transactions between us and the member or housing associate. In instances where the member has an officer or director who serves as a director of the Bank, those transactions are subject to the same eligibility and credit criteria, as well as the same terms and conditions, as transactions with all other members.
Related Parties. We define related parties as members who owned 10 percent or more of the voting interests of our capital stock outstanding at any time during the year. Under the FHLBank Act and FHFA regulations, each member directorship is designated to one of the six states in our district.year end. Each member eligible to vote is entitled to cast by ballot one vote for each share of stock that it was required to hold as of the record date, which is December 31, of the year prior to each election,
subject to the limitation that no member may cast more votes than the average number of shares of our stock that is required to be held by all members located in such member's state. Under the FHLBank Act and FHFA regulations, each member directorship is designated to one of the six states in our district. Eligible members are permitted to vote all their eligible shares for one candidate for each open member directorship in the state in which the member is located and for each open independent directorship. A nonmember stockholder is not entitled to cast votes for the election of directors unless it was a member as of the record date. At December 31, 20172019 and 2016,2018, no shareholder owned more than 10 percent of the total voting interests due to statutory limits on members' voting rights, therefore, we did not have any related parties.
Shareholder Concentrations. We consider shareholder concentrations as members or nonmembers whose capital stock holdings (including mandatorily redeemable capital stock) are in excess of 10 percent of total capital stock outstanding at any time during the year.December 31, 2019.
Table 20.1 - Shareholder Concentrations, Balance Sheet (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | |
| | Capital Stock Outstanding | | Percent of Total | | Par Value of Advances | | Percent of Total Par Value of Advances | | Total Accrued Interest Receivable | | Percent of Total Accrued Interest Receivable on Advances |
| As of December 31, 2017 | | | | | | | | | | | |
| Citizens Bank, N.A. | $ | 227,287 |
| | 9.8 | % | | $ | 4,858,592 |
| | 12.9 | % | | $ | 2,558 |
| | 6.0 | % |
| | | | | | | | | | | | |
| As of December 31, 2016 | | | | | | | | | | | |
| Citizens Bank, N.A. | $ | 357,508 |
| | 14.6 | % | | $ | 7,260,446 |
| | 18.6 | % | | $ | 2,625 |
| | 7.3 | % |
Table 21.1 - Shareholder Concentrations, Balance Sheet (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | |
| | Capital Stock Outstanding | | Percent of Total Capital Stock | | Par Value of Advances | | Percent of Total Par Value of Advances | | Total Accrued Interest Receivable | | Percent of Total Accrued Interest Receivable on Advances |
| As of December 31, 2019 | | | | | | | | | | | |
| Citizens Bank, N.A. | $ | 222,684 |
| | 11.9 | % | | $ | 5,005,773 |
| | 14.5 | % | | $ | 1,678 |
| | 3.5 | % |
| | | | | | | | | | | | |
| As of December 31, 2018 | | | | | | | | | | | |
| Citizens Bank, N.A. | $ | 339,003 |
| | 13.2 | % | | $ | 7,656,146 |
| | 17.7 | % | | $ | 5,005 |
| | 8.3 | % |
We held sufficient collateral to support the advances to the above institution such that we do not expect to incur any credit losses on these advances.
Table 20.2 - Shareholder Concentrations, Income Statement (dollars in thousands)
| |
Table 21.2 - Shareholder Concentrations, Income Statement (dollars in thousands)
| | Table 21.2 - Shareholder Concentrations, Income Statement (dollars in thousands)
|
| | | | | | | | | | For the Year Ended December 31, |
| | | For the Year Ended December 31, | | 2019 | | 2018 | | 2017 |
| Citizens Bank, N.A. | | 2017 | | 2016 | | 2015 | | | | | | |
| Interest income on advances | | $ | 63,568 |
| | $ | 34,276 |
| | $ | 14,745 |
| | $ | 95,692 |
| | $ | 134,753 |
| | $ | 63,568 |
|
| Fees on letters of credit | | 3,368 |
| | 3,059 |
| | 3,768 |
| | 6,489 |
| | 4,415 |
| | 3,368 |
|
WeDuring 2019 and 2017, we did not receive any prepayment fees from Citizens Bank, N.A. during 2017 and 2015. During 2016, weWe received prepayment fees of $368,000$298,000 from Citizens Bank, N.A. and the corresponding principal amount prepaid to us was $2.0 million.$3.2 million during 2018.
Transactions with Directors' Institutions. We provide, in the ordinary course of business, products and services to members whose officers or directors serve on our board of directors. In accordance with FHFA regulations, transactions with directors' institutions are conducted on the same terms as those with any other member.
Table 20.3 - Transactions with Directors' Institutions (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | |
| | Capital Stock Outstanding | | Percent of Total | | Par Value of Advances | | Percent of Total Par Value of Advances | | Total Accrued Interest Receivable | | Percent of Total Accrued Interest Receivable on Advances |
| As of December 31, 2017 | $ | 114,498 |
| | 4.9 | % | | $ | 2,133,374 |
| | 5.7 | % | | $ | 2,466 |
| | 5.8 | % |
| As of December 31, 2016 | 91,374 |
| | 3.7 |
| | 1,554,753 |
| | 4.0 |
| | 1,631 |
| | 4.5 |
|
Table 21.3 - Transactions with Directors' Institutions (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | |
| | Capital Stock Outstanding | | Percent of Total Capital Stock | | Par Value of Advances | | Percent of Total Par Value of Advances | | Total Accrued Interest Receivable | | Percent of Total Accrued Interest Receivable on Advances |
| As of December 31, 2019 | $ | 112,811 |
| | 6.0 | % | | $ | 2,224,141 |
| | 6.4 | % | | $ | 3,581 |
| | 7.4 | % |
| As of December 31, 2018 | 113,337 |
| | 4.4 |
| | 2,147,602 |
| | 5.0 |
| | 3,576 |
| | 6.0 |
|
Note 2122 — Transactions with Other FHLBanks
We may occasionally enter into transactions with other FHLBanks. These transactions are summarized below.
Overnight Funds. We may borrow or lend unsecured overnight funds from or to other FHLBanks. All such transactions are at current market rates. Interest income and interest expense related to these transactions with other FHLBanks are included within other interest income and interest expense from other borrowings in the statement of operations. We had a loan outstanding to another FHLBank for $400.0 million as of December 31, 2017. Interest income on loans to other FHLBanks was $43,000, $3,000$25 thousand, $21 thousand and $5,000$43 thousand for the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, respectively. Interest expense for loans from other FHLBanks was $6,000, $1,000,$20 thousand, $36 thousand, and $5,000$6 thousand for the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, respectively.
MPF Mortgage Loans. We pay a transaction-services fee and a membership fee to the FHLBank of Chicago for our participation in the MPF program. This fee is assessed monthly, and is based upon the amount of mortgage loans which we invested in after January 1, 2004, and which remain outstanding on our statement of condition. For the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, we recorded $2.2$2.8 million, $2.0$2.5 million, and $1.8$2.2 million, respectively in MPF transaction-services fee expense to the FHLBank of Chicago which has been recorded in the statement of operations as other expense. The membership fee has been recorded in the statement of operations as an operating expense, and totaled $600 thousand for each of the years ended December 31, 2019, 2018 and 2017.
COs. From time to time, one FHLBank may transfer to another FHLBank the COs for which the transferring FHLBank was originally the primary obligor but upon transfer the assuming FHLBank becomes the primary obligor. During the year ended December 31, 2015,2019, we assumedtransferred debt obligations with a par amount of $80.0$10.0 million and a fair value of approximately $87.8$12.7 million on the day they were assumed, which had beentransferred. During the obligationsyears ended December 31, 2018 and 2017, there were 0 transfers of another FHLBank.COs between us and other FHLBanks.
Note 2223 — Subsequent Events
On February 15, 201813, 2020, the board of directors declared a cash dividend at an annualized rate of 4.995.46 percent based on capital stock balances outstanding during the fourth quarter of 2017.2019. The dividend, including dividends classified as interest on mandatorily redeemable capital stock, amounted to $28.3$24.3 million and was paid on March 2, 2018.3, 2020.
Supplementary Financial Data
Supplementary financial data for the years ended December 31, 20172019 and 2016,2018, are included in the following tables. The following unaudited results of operations include, in the opinion of management, all adjustments necessary for a fair statement of the results of operations for each quarterly period presented below.
2017 Quarterly Results of Operations – Unaudited (dollars in thousands) | |
2019 Quarterly Results of Operations – Unaudited (dollars in thousands) | | 2019 Quarterly Results of Operations – Unaudited (dollars in thousands) |
| | | | 2017 – Quarter Ended | | 2019 – Quarter Ended |
| | | December 31 | | September 30 | | June 30 | | March 31 | | December 31 | | September 30 | | June 30 | | March 31 |
| Total interest income | | $ | 266,747 |
| | $ | 246,824 |
| | $ | 224,227 |
| | $ | 199,091 |
| | $ | 324,329 |
| | $ | 337,539 |
| | $ | 361,792 |
| | $ | 421,440 |
|
| Total interest expense | | 187,177 |
| | 175,715 |
| | 160,407 |
| | 136,587 |
| | 255,978 |
| | 281,165 |
| | 304,059 |
| | 334,872 |
|
| Net interest income before provision for credit losses | | 79,570 |
| | 71,109 |
| | 63,820 |
| | 62,504 |
| | 68,351 |
| | 56,374 |
| | 57,733 |
| | 86,568 |
|
| Provision for (reduction of) credit losses | | 52 |
| | 28 |
| | (125 | ) | | (51 | ) | |
| Net interest income after provision for (reduction of) credit losses | | 79,518 |
| | 71,081 |
| | 63,945 |
| | 62,555 |
| |
| Provision for credit losses | | | 22 |
| | 48 |
| | 12 |
| | 3 |
|
| Net interest income after provision for credit losses | | | 68,329 |
| | 56,326 |
| | 57,721 |
| | 86,565 |
|
| Net impairment losses on investment securities recognized in income | | (36 | ) | | (432 | ) | | (568 | ) | | (418 | ) | | (384 | ) | | (411 | ) | | (314 | ) | | (103 | ) |
| Litigation settlements | | 20,761 |
| | — |
| | — |
| | — |
| | 29,358 |
| | 3 |
| | — |
| | — |
|
| Other income | | 1,130 |
| | 1,028 |
| | 1,020 |
| | 427 |
| | 13,001 |
| | 2,478 |
| | 3,989 |
| | (6,633 | ) |
| Non-interest expense | | 25,958 |
| | 20,972 |
| | 20,597 |
| | 20,974 |
| | 34,137 |
| | 22,671 |
| | 21,789 |
| | 19,287 |
|
| Income before assessments | | 75,415 |
| | 50,705 |
| | 43,800 |
| | 41,590 |
| | 76,167 |
| | 35,725 |
| | 39,607 |
| | 60,542 |
|
| AHP assessments | | 7,587 |
| | 5,110 |
| | 4,418 |
| | 4,192 |
| | 7,633 |
| | 3,597 |
| | 3,987 |
| | 6,085 |
|
| Net income | | $ | 67,828 |
| | $ | 45,595 |
| | $ | 39,382 |
| | $ | 37,398 |
| | $ | 68,534 |
| | $ | 32,128 |
| | $ | 35,620 |
| | $ | 54,457 |
|
2016 Quarterly Results of Operations – Unaudited (dollars in thousands) | |
2018 Quarterly Results of Operations – Unaudited (dollars in thousands) | | 2018 Quarterly Results of Operations – Unaudited (dollars in thousands) |
| | | | 2016 – Quarter Ended | | 2018 – Quarter Ended |
| | | December 31 | | September 30 | | June 30 | | March 31 | | December 31 | | September 30 | | June 30 | | March 31 |
| Total interest income | | $ | 195,725 |
| | $ | 174,879 |
| | $ | 167,404 |
| | $ | 170,156 |
| | $ | 401,212 |
| | $ | 368,818 |
| | $ | 350,090 |
| | $ | 305,933 |
|
| Total interest expense | | 119,438 |
| | 110,100 |
| | 112,825 |
| | 114,052 |
| | 325,231 |
| | 291,358 |
| | 271,332 |
| | 226,022 |
|
| Net interest income before provision for credit losses | | 76,287 |
| | 64,779 |
| | 54,579 |
| | 56,104 |
| | 75,981 |
| | 77,460 |
| | 78,758 |
| | 79,911 |
|
| (Reduction of) provision for credit losses | | (83 | ) | | (94 | ) | | (111 | ) | | 11 |
| | (40 | ) | | — |
| | (3 | ) | | 9 |
|
| Net interest income after (reduction of) provision for credit losses | | 76,370 |
| | 64,873 |
| | 54,690 |
| | 56,093 |
| | 76,021 |
| | 77,460 |
| | 78,761 |
| | 79,902 |
|
| Net impairment losses on investment securities recognized in income | | (589 | ) | | (371 | ) | | (1,003 | ) | | (1,347 | ) | | (125 | ) | | (71 | ) | | (257 | ) | | (79 | ) |
| Litigation settlements | | 19,627 |
| | — |
| | 19,584 |
| | — |
| | — |
| | 12,769 |
| | — |
| | — |
|
| Other income (loss) | | 1,272 |
| | (3,072 | ) | | (1,787 | ) | | (2,990 | ) | |
| Other income | | | 2,328 |
| | 2,410 |
| | 1,978 |
| | 1,873 |
|
| Non-interest expense | | 30,351 |
| | 20,773 |
| | 18,688 |
| | 18,934 |
| | 29,604 |
| | 20,658 |
| | 21,172 |
| | 20,468 |
|
| Income before assessments | | 66,329 |
| | 40,657 |
| | 52,796 |
| | 32,822 |
| | 48,620 |
| | 71,910 |
| | 59,310 |
| | 61,228 |
|
| AHP assessments | | 6,666 |
| | 4,099 |
| | 5,312 |
| | 3,320 |
| | 4,912 |
| | 7,238 |
| | 5,978 |
| | 6,171 |
|
| Net income | | $ | 59,663 |
| | $ | 36,558 |
| | $ | 47,484 |
| | $ | 29,502 |
| | $ | 43,708 |
| | $ | 64,672 |
| | $ | 53,332 |
| | $ | 55,057 |
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.
We haveOur management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures, with the participation of the president and chief executive officer and chief financial officer, as of the end of the period covered by this report.December 31, 2019. Based on that evaluation, our president and chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of the end of the fiscal year covered by this report.December 31, 2019.
Management's Report on Internal Control over Financial Reporting
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2017,2019, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. OTHER INFORMATION
PricewaterhouseCoopers LLP (PwC) servesOn March 17, 2020, Andrew J. Calamare, who had served as thean independent registered public accounting firm for the Bank. Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the Loan Rule) prohibits an accounting firm, such as PwC, from having certain financial relationships with its audit clients and affiliated entities. Specifically, the Loan Rule provides, in relevant part, that an accounting firm generally would not be independent if it or a covered person in the firm receives a loan from a lender that is a “record or beneficial owner of more than ten percentdirector of the audit client’s equity securities.” A covered person in the firm includes personnel on the audit engagement team, personnel in the chain of command, partnersBank since March 30, 2007, left our board when he became president and managers who provide ten or more hours of non-audit services to the audit client, and partners in the office where the lead engagement partner practices in connection with the client.
PwC has advised the Bank by letter dated February 23, 2018, that PwC covered persons had borrowing relationships with a Bank member (referred to below as the “Lender”) which owned more than ten percentchief executive officer of the Bank’s capital stock based on PwC’s assessment conducted using shareholder informationDepositors Insurance Fund (DIF), a member, upon the merger of Mr. Calamare’s employer, The Co-operative Central Bank, into the DIF. Upon the merger of the institutions, Mr. Calamare became an officer of a member, which made him ineligible to continue to serve as of each quarterly period ended in 2017. Under the Loan Rule, these borrowing relationships could call into question PwC’s independence with respect to the Bank. The Bank is providing this disclosure to explain the facts and circumstances, as well as PwC’s and the Audit Committee’s conclusions, concerning PwC’s objectivity and impartiality with respect to the auditan independent director of the Bank.
PwC advised the Audit CommitteeJohn F. Treanor, who has served as a member director of the Bank that it believes that basedsince January 1, 2011, will leave our board on its analysis, PwC remains objective and impartial despite matters that may ultimatelyApril 28, 2020, when he will no longer be determined to be inconsistent witha director of The Washington Trust Company, a member. On April 28, 2020, the criteria set out in the rules and regulationsdate of the SEC relatedannual meeting of The Washington Trust Company, Mr. Treanor will no longer be a director of that member institution, and he will become ineligible to the Loan Rule, and therefore believe that it can continue to serve as the Bank’s independent registered public accounting firm. PwC also advised the Audit Committee that it believes that in light of its analysis, a reasonable investor possessing all the facts regarding the lending relationships described above and PwC audit relationships would conclude that PwC is able to exhibit the requisite objectivity and impartiality to report on the financial statements of the Bank as the independent registered public accounting firm. PwC has advised the Audit Committee their views and conclusions are based in part on the following considerations:
the covered persons do not play an active role in the conduct of the audit;
the lead audit partner has no reason to believe that the Lender has made any attempt to influence the conduct of the Bank’s audit or the objectivity and impartiality of any member of PwC’s audit engagement team; and
PwC professionals are required to disclose any relationships that may raise issues about objectivity, confidentiality, independence, conflicts of interest or favoritism.
In addition, PwC identified no aspects of the lending relationships involving the covered persons that would impact PwC’s objectivity and impartiality.
The Audit Committee of the Bank assessed PwC’s ability to perform an objective and impartial audit, including consideration of the ownership structure of the Bank, the limited voting rights of the Bank’s members and the composition of the board of directors. In addition to the above listed considerations, the Audit Committee considered the following:
as of December 31, 2017, and as of the date of the filing of this Form 10-K, no officer or director of the Lender served on the board of directors of the Bank;
the Lender will be eligible to vote only in the at-large independent directorship election for 2018; and
the Lender is subject to the same terms and conditions for conducting business with the Bank as any other member.
Based on the Audit Committee’s evaluation, the Audit Committee has concluded that PwC’s ability to exercise objective and impartial judgment on all issues encompassed within PwC’s audit engagement has not been impaired.
If in the future, however, PwC is ultimately determined under the Loan Rule not to be independent with respect to the Bank, or permanent relief regarding this matter is not granted by the SEC, the Bank may need to take other actions and incur other costs in order for the Bank’s previously filed Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q to be deemed compliant with applicable securities laws. Such actions may include, among other things, obtaining a new audit and review of our historical financial statements by another independent registered public accounting firm. Any of the foregoing could have an adverse impact on the Bank.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our board of directors is constituted of a combination of member directors (each of whom must be a director or officer of a member) nominated and elected by our members on a state-by-state basis and independent directors nominated by our board and elected by a plurality of all our members. Our board of directors is currently constituted of nine member directorsdirectorships and eight independent directors.directorships. Two of the independent directorsdirectorships are designated as public interest directors.interest.
An FHFA regulation (the Election Regulation) regarding FHLBank board of director elections and director eligibility gives the Director of the FHFA the annual responsibility to determine the size of each FHLBank's board of directors. Further, for each FHLBank, the Election Regulation requires the Director of the FHFA to allocate:
the directorships between member directorships and independent directorships, subject to the requirement that a majority, but no more than 60 percent, of the directorships be member directorships; and
the member directorships among the states in each FHLBank's district based on the number of shares of FHLBank stock required to be held by members in each state, with each state entitled to one directorship, subject to any state statutory minimum. For us, the only state statutory minimum is for Massachusetts, which is entitled to three member directorships.
If, during a director's term of office, the Director of the FHFA eliminates the directorship to which he or she has been elected or, for member directorships, redesignates such directorship to another state, the director's term will end as of December 31 of the year in which the Director of the FHFA takes such action. In 2019, the Director of the FHFA eliminated a directorship in Connecticut and redesignated the directorship to Rhode Island beginning in 2020. As a result of the redesignation, the term of the Connecticut directorship held by Gregory R. Shook ended on December 31, 2019 rather than December 31, 2020. In addition, the Bank held an election in the fall of 2019 to fill the one-year position created by the redesignation of the directorship from Connecticut to Rhode Island, and Dwight M. Davidsen was elected in Rhode Island.
If a member director ceases to be a director or officer of a member, that director loses eligibility as a member director and must leave the board. If an independent director becomes an officer or director of a member, that director loses eligibility as an independent director and must leave the board. On March 17, 2020, Andrew J. Calamare, who had served as a director of the Bank since March 30, 2007, became ineligible to be an independent director and left our board when he became president and chief executive officer of the Depositors Insurance Fund (DIF), a Bank member, upon the merger of Mr. Calamare’s employer, The Co-operative Central Bank, into the DIF. Our board currently has only seven independent directors and, therefore, has an open independent directorship. In addition, John F. Treanor’s service as a director of the Bank, which began on January 1, 2011, will end on April 28, 2020. On April 28, 2020, the date of the annual meeting of Mr. Treanor’s member institution, The Washington Trust Company, Mr. Treanor will no longer be a director of that institution, and he will become ineligible to continue to serve as a member director of the Bank. See Part II — Item 9B — Other Information.
Based on the requirements of the Election Regulation, the Director of the FHFA allocated our member directorships among the six New England states that comprise our district for each of 20172019 and 20182020 as follows:
Table 49 - Member Directorships by State
|
| | |
| | Member Directorships |
Connecticut | | 2 |
Maine | | 1 |
Massachusetts | | 3 |
New Hampshire | | 1 |
Rhode Island | | 1 |
Vermont | | 1 |
Total | | 9 |
Table 47 - Member Directorships by State
|
| | | | |
| | | 2020 Member Directorships | | 2019 Member Directorships |
| Connecticut | | 1 | | 2 |
| Maine | | 1 | | 1 |
| Massachusetts | | 3 | | 3 |
| New Hampshire | | 1 | | 1 |
| Rhode Island | | 2 | | 1 |
| Vermont | | 1 | | 1 |
| Total | | 9 | | 9 |
Our annual election was completed in the fourth quarter of 20172019 and involved elections for twoone Maine member directorship, one Massachusetts member directorships,directorship, one ConnecticutRhode Island member directorship, and onetwo independent directorship.directorships. See — Annual Director Elections below for additional information on the election.
Director Requirements
Board of director elections are conducted in accordance with applicable law, including the Election Regulation, and our governance documents. Accordingly:
each director is required to be a U.S. citizen;
no director may be a member of our management;
each director is elected for a four-year term (unless the Director of the FHFA designates a shorter term for staggering of the expiration dates of the terms); and
no director can be elected to more than three consecutive full terms.
Additional requirements are applicable to member directors, independent directors, and nominees for each as set forth in the following two sections. Apart from such additional requirements, however, FHLBanks are not permitted to establish additional eligibility criteria for directorships.
The Election Regulation provides for members to elect directors by ballot, rather than by voting at a meeting. As a result, we do not solicit proxies, and members are not permitted to solicit or use proxies to cast their votes in the election. A member may not split its votes among multiple nominees for a single directorship. There are no family relationships between any current director (or any of the nominees from the most recent election), any executive officer, and any proposed executive officer. No director or executive officer has an involvement in any legal proceeding required to be disclosed pursuant to Item 401(f) of Regulation S-K.
Member Director and Member Director Nominee Requirements and Nominations
Candidates for member directorships in a particular state are nominated by members in that state. Each member that is required to hold stock as of the record date, which is December 31 of the year prior to each election (the record date), may nominate and vote for representatives from members in its respective state for open member directorships. FHLBank boards of directors are not permitted to nominate or elect member directors, although they may elect a director to fill a vacant member directorship. Further, the Election Regulation provides that no director, officer, employee, attorney, or agent, other than in a personal capacity, may support the nomination or election of a particular individual for a member directorship. In addition to the requirements applicable to all directors, each member director and each nominee for member directorships must be an officer or director of a member that is in compliance with the minimum capital requirements established by its regulator.
Because of the foregoing requirements for member director nominations and elections, we do not know what factors our members considered in nominating candidates for member directorships or in voting to elect our member directors. However, when our board of directors has a vacancy in a member directorship, FHFA regulations require the remaining directors to elect a director to fill the vacancy and, in those instances, we can know what was considered in electing such directors. In 2014, the board elected a candidate, Director Michael R. Tuttle, to fill the Vermont member directorship effective January 1, 2015, because our nomination process in Vermont did not result in a candidate to stand for election by the members. The board elected Director Tuttle following a robust process of inviting all Vermont members to put forward a candidate, conducting telephonic interviews with six interested officers of Vermont members, and conducting in-person interviews with three. The board selected Director Tuttle due to his industry knowledge and broad experience with a complex financial institution, including business management, finance and accounting, strategic planning, and credit and risk management.
Independent Director and Independent Director Nominee Requirements and Nominations
Candidates for independent directorships are nominated by our board of directors. In addition to the requirements applicable to all directors, each independent director is required to be a bona fide resident of our district, and no independent director may serve as an officer, employee, or director of any of our members or other recipient of advances from us and may not be an officer of any FHLBank. At least two of the independent directors must be public interest directors. Public interest directors, as defined by FHFA regulations, are independent directors who have at least four years of experience representing consumer or community interests in banking services, credit needs, housing, or consumer financial protection. Pursuant to FHFA regulations, each independent director must either satisfy the requirements to be a public interest director or have knowledge or experience in one or more of the following areas: auditing and accounting, derivatives, financial management, organizational management, project development, risk-management practices, and the law.
Our members are permitted to (and we ask them to) identify candidates to be considered for inclusion on the nominee slate for independent directorship, but to be considered for nomination, an individual must submit an application to us. We are required to submit information about nominees for independent directorships to the FHFA for review prior to announcing such nominations. In addition, our board of directors is required by FHFA regulations to consult with the Advisory Council (a council that reviews and advises on our AHP program) in establishing the independent director nominee slate. Before nominating any individual for an independent directorship, other than for a public interest directorship, our board of directors
must determine that the nominee's knowledge or experience is commensurate with that needed to oversee a financial institution with a size and complexity that is comparable to ours. Our bylaws and the charter for our board of directors' Governance Committee, which has responsibility for recommending candidates for nomination for independent directorships to the board of directors, include skills, experience, and diversity among the factors that the committee and the board of directors may take into consideration when nominating candidates for independent directorships. In addition, at the commencement of elections for both independent and member directors, we include a statement in the relevant publicity that our board of directors seeks to promote diversity in its composition and encourages nominations from eligible diverse candidates. The Election Regulation permits our directors, officers, attorneys, employees, agents, and Advisory Council to support the candidacy of the board of director nominees for independent directorships.
In determining whom to nominate for independent directorships, the board of directors selected:
Cornelius K. Hurley in 2017, based on his legal and banking experience, having served as general counsel of a large regional bank, as director of the Center for Finance, Law and Policy at Boston University School of Law, and as Professor of the Practice of Banking Law at Boston University;
Andrew J. Calamare in 2016, based on his significant experience in business; organizational management; legal, bank regulatory, and insurance company matters; as well as involvement in multiple boards of directors that represent consumer or community interests;
Antoinette C. Lazarus in 2016, based on her significant experience in compliance, regulatory matters and accounting; valuable understanding of the fund management and insurance industries; and involvement in multiple boards of directors of charitable organizations;
Jay F. Malcynsky in 2016, based on his significant experience in law, government-relations and political consulting as well as his involvement in multiple boards of directors of charitable organizations;
Eric Chatman in 2015,2019, based on his affordable housing experience, particularly through his prior role as president and executive officer of the Connecticut Housing Finance Authority; his prior FHLBank System experience as treasurer of the FHLBankFederal Home Loan Bank of Des Moines; his private banking experience; and his significant capital markets experience;
Emil J. Ragones in 2015,2019, based on his experience as a former partner at Ernst & Young specializing in information technology audit and controls and related experience in implementing business strategies for financial systems, incorporating or improving information technology and financial controls, addressing regulatory examination findings surrounding information technology and financial controls, and reviewing governance matters applicable to information technology;
Joan Carty in 2014,2018, to serve as a public interest director, based on her experience serving as president and chief executive officer of Housing Development Fund, a Stamford, Connecticut-based CDFI that finances multifamily housing, lends directly to low- and moderate-income households for first-time purchases, and provides homeownership counseling, homebuyer education, and foreclosure-intervention counseling; and
Patrick E. Clancy in 2014,2018, to serve as a public interest director, based on his experience as a developer of affordable housing, particularly through his previous role as president and chief executive officer of The Community Builders, a Boston, Massachusetts-based nonprofit corporation that has developed more thanor redeveloped approximately 25,000 affordable housing units over the past 40 years.years;
Cornelius K. Hurley in 2017, based on his legal and banking experience, having served as general counsel of a large regional bank, as director of the Center for Finance, Law & Policy at Boston University School of Law, and as Professor of the Practice of Banking Law at Boston University;
Antoinette C. Lazarus in 2016, based on her significant experience in compliance, regulatory matters and accounting; valuable understanding of the fund management and insurance industries; and involvement in multiple boards of directors of charitable organizations; and
Jay F. Malcynsky in 2016, based on his significant experience in law, government-relations and political consulting as well as his involvement in multiple boards of directors of charitable organizations.
Further, with the exception of director Antoinette C. Lazarus, all of the independent directors have been independent directors of the Bank prior to their most recent nominations, and our board of directors considered their experience gained from serving on our board in selecting them for their most recent nominations.
Additional information on the backgrounds of our directors, including these independent directors, is available under — Information Regarding Current Directors.
Annual Director Elections
For the election of both member and independent directors, each member eligible to vote is entitled to cast by ballot one vote for each share of stock that it was required to hold as of the record date, subject to the limitation that no member may cast more votes than the average number of shares of our stock that are required to be held by all members located in such member's state. Eligible members are permitted to vote all their eligible shares for one candidate for each open member directorship in the state in which the member is located and for each open independent directorship. For independent directors, unless the board of directors nominates more persons than there are independent directorships to be filled in an election, the candidates must receive at least 20 percent of the number of votes eligible to be cast in the election in order to be elected. If no nominee receives at least 20 percent of the eligible votes, the Election Regulation requires us to identify additional nominees and conduct additional elections until the directorship is filled.
As contemplated by the Election Regulation, no in-person meeting of the members was held in connection with the election. Information about the results of the election was reported to the members via email and on current reports on Form 8-K filed with the SEC on September 8, 20179, 2019 and October 27, 2017,25, 2019, as supplemented by a Form 8-K/A filed with the SEC on December 19, 2017.January 22, 2020.
Information Regarding Current Directors
The term for each director position is four years unless a shorter term is assigned to a director position by the FHFA to implement staggering of the expiration dates of the terms. None of our directors serve as an executive officer of the Bank.
Member Directors
The member directors currently serving on the board of directors provided the information set forth below regarding their principal occupation, business experience, and other matters.
Donna L. Boulanger(vice chair), age 64,66, has served as president, chief executive officer and trustee of North Brookfield Savings Bank, located in North Brookfield, Massachusetts, since February 2008. Ms. Boulanger also currently serves on the boardsboard of directors of the Massachusetts Bankers Association and the Massachusetts Bankers Association Charitable Foundation.Depositors Insurance Fund, a Bank member. Ms. Boulanger began serving as a director of the Bank on January 1, 2014, and her current term will conclude on December 31, 2021.
Stephen G. Crowe Dwight M. Davidsen(vice chair), age 67,52, has served as the community engagement officersenior vice president of MountainOneCitizens Bank, N.A., located in Providence, Rhode Island, since April 2016.November 2013. Mr. Crowe served as a directorDavidsen has more than 20 years of MountainOne Bankexperience managing funding and a trustee of MountainOne Financial, its holding company, from 2002 to April 2016, and as president and chief executive officer of MountainOne Bank from 2002 to 2012.liquidity at large regional banks. Mr. Crowe also served as president and chief executive officer of Williamstown Savings Bank from 1994 to 2009 and of Hoosac Bank from 2002 to 2009. Mr. Crowe is also a former director of The Savings Bank Life Insurance Company of Massachusetts, a Bank member. He was a Massachusetts certified public accountant from 1976 to June 2016. Mr. Crowe served as a treasurer of the American Bankers Association in 2011 and 2012. Mr. Crowe's serviceDavidsen began serving as a director of the Bank began on January 1, 2012,2020, and his current term will conclude on December 31, 2019.2020.
Martin J. Geitz(chair), age 61,63, has served as executive regional director of Liberty Bank in Middletown, Connecticut, since October 2019. Until they were both acquired by Liberty Bank in October 2019, Mr. Geitz had served as president and chief executive officer of The Simsbury Bank & Trust Company, located in Simsbury, Connecticut, since October 2004, and of its holding company, SBT Bancorp, Inc., since its formation in 2005. Mr. Geitz iswas also a member of the board of directors of The Simsbury Bank & Trust Company and SBT Bancorp, Inc. until they were acquired. Mr. Geitz began serving as a director of the Bank on January 1, 2014, and his current term will conclude on December 31, 2021.
Edward F. Manzi, Jr., age 60, has served as president and chief executive officer of Fidelity Co-Operative Bank, located in central Massachusetts, since July 1997, and has served there also as chairman since August 2010. Mr. Manzi is also a certified public accountant. Mr. Manzi began serving as a director of the Bank on January 1, 2020, and his current term will conclude on December 31, 2023.
John W. McGeorge, age 73,75, has served as chairman of the board of Needham Bank, of Needham, Massachusetts, since April 2006. Mr. McGeorge also served as chief executive officer of Needham Bank from April 2006 until May 2015, and as president of Needham Bank from April 2006 through April 2012. Mr. McGeorge began serving as a director of the Bank on January 1, 2014, and his current term will conclude on December 31, 2021.
Gregory R. Shook, age 67, has served as president, chief executive officer and a director of Essex Savings Bank, located in Essex, Connecticut, since July 22, 1999. Mr. Shook also serves on the board of directors of Essex Financial Services, Inc. a subsidiary of Essex Savings Bank. Additionally, Mr. Shook served from 2011 to 2013 on the initial Federal Reserve Bank of Boston, First District, Community Depository Institutions Advisory Council. Mr. Shook began serving as a director of the Bank on January 1, 2015, and his current term will conclude on December 31, 2020.
Stephen R. Theroux, age 68, was appointed vice president in January 2017 and elected a director in February 2017 of American European Insurance Company, a New Hampshire-domiciled insurance company headquartered in Cherry Hill, New Jersey. Also in January 2017, Mr. Theroux retired from Lake Sunapee Bank, FSB, and its holding company, Lake Sunapee Bank Group, located in Newport, New Hampshire, both of which he had served as president and as chief executive officer, commencing in 2007 and 2012, respectively. He also held various other positions with Lake Sunapee Bank dating back to 1987. Mr. Theroux’s retirement coincided with the January 2017 merger of Lake Sunapee Bank Group with Bar Harbor Bankshares, located in Bar Harbor, Maine, and the simultaneous merger of their subsidiary banks. In connection with those mergers, Mr. Theroux’s positions as director and vice-chair of Lake Sunapee Bank, FSB and Lake Sunapee Bank Group ceased, and he became a director of Bar Harbor Bank & Trust, a Maine bank member, and its holding company, Bar Harbor Bankshares. Mr. Theroux began serving as a director of the Bank on January 1, 2015, and his current term will conclude on December 31, 2018.
John F. Treanor, age 70,72, has served as a director of The Washington Trust Company, located in Westerly, Rhode Island, since 2001. Mr. Treanor also served as president and chief operating officer at The Washington Trust Company for 10 years prior to his retirement in October 2009. Prior positions included executive vice president, chief financial officer, and chief operating officer of Springfield Institution for Savings in Springfield, Massachusetts (1994 to 1999); executive vice president, treasurer, and chief financial officer of Sterling Bancshares Corporation in Waltham, Massachusetts (1991 to 1994); and various senior management positions at Shawmut National Corporation in Boston, Massachusetts and Hartford, Connecticut (1969-1991). Mr. Treanor has served as a director of the Bank since January 1, 2011, and his2011. While Mr. Treanor’s current term willas a director is scheduled to conclude on December 31, 2020, his service as a director of the Bank will end on April 28, 2020. On April 28, 2020, the date of the annual meeting of The Washington Trust Company, Mr. Treanor will no longer be a director of that member institution, and he will become ineligible to continue to serve as a member director of the Bank.
Michael R. Tuttle, age 62, 65, has served as a voting directorsenior policy officer with Northfield Savings Bank in Berlin, Vermont, since December 2019. He served as chief credit officer of Opportunities Credit Union, located in Winooski, Vermont, sincefrom February to December 2019. He served as a director of Opportunities Credit Union from May 2017 and served there as an ex-officio director, functioning solely as a nonvoting observer, beginning in December 2016.
Until the acquisition in May 2017 by Community Bank System, Inc. of Merchants Bancshares, Inc., parent company of Merchants Bank (the Merchants Acquisition),until February 2019. Mr. Tuttle had served as a director of Merchants Bank sincefrom 2006 to May 2017 and as a director of Merchants Bancshares, Inc., located in South Burlington, Vermont since 2007.from 2007 to May 2017. Mr. Tuttle is also the former president and chief executive officer of each ofboth Merchants Bancshares Inc. (from 2007 through 2015) and Merchants Bank (from 2006 through 2014). He has served on the board of the Vermont Economic Development Authority since October 2016. Mr. Tuttle began serving as a director of the Bank on January 1, 2015, and his current term will conclude on December 31, 2018.2022.
John C. Witherspoon, age 61, 63, has served as president and chief executive officera director of Skowhegan Savings Bank in Skowhegan, Maine since November 2007.2007 and served there also as president and chief executive officer from November 2007 until December 2019. Prior positions included serving as chief executive officer of the Finance Authority of Maine between 2004 and 2007, and as president and chief executive officer of United Kingfield Bank and its predecessor, Kingfield Savings Bank, from 1984 until 2004. Mr. Witherspoon began serving as a director of the Bank on January 1, 2016, and his current term will conclude on December 31, 2019.2023.
Richard E. Wyman, Jr., age 64, is president and a director of Meredith Village Savings Bank (MVSB), Meredith, New Hampshire, a position he has held since January 1, 2016. Since 2013 he has also served as executive vice president (and from 2013 to January 1, 2016 served as chief financial officer) of New Hampshire Mutual Bancorp, the holding company that was formed in 2013 from the affiliation of MVSB and Merrimack County Savings Bank, a Bank member. New Hampshire Mutual Bancorp is also the holding company for Savings Bank of Walpole, a Bank member. Mr. Wyman joined MVSB in August 2001 as chief financial officer and was promoted to executive vice president and chief financial officer of MVSB in 2009, prior to assuming the role of president. Prior to joining MVSB, Mr. Wyman held senior leadership roles for several Maine-based banks, ranging from local community mutual banks to a publicly traded multi-bank holding company. Mr. Wyman began serving as a director of the Bank on January 1, 2019, and his current term will conclude on December 31, 2022.
Independent Directors
The independent directors currently serving on the board of directors provided the following information about their principal occupation, business experience, and other matters.
Andrew J. Calamare(chair), age 62, has served as president and chief executive officer of The Co-operative Central Bank, located in Boston, Massachusetts, since March 2015, and served as executive vice president of The Co-operative Central Bank from January 2011 to March 2015. Prior to that position, Mr. Calamare served as president and chief executive officer of the Life Insurance Association of Massachusetts since 2000. Previously, Mr. Calamare served as of counsel with the law firm Quinn and Morris, as special counsel to the Rhode Island General Assembly, and as Commissioner of Banks for the Commonwealth of Massachusetts. Mr. Calamare has served as a director of the Bank since March 30, 2007, and his current term will conclude on December 31, 2020.
Joan Carty, age 66,68, has served as president and chief executive officer of Housing Development Fund in Stamford, Connecticut, since 1994. She previously served as executive director of Bridgeport Neighborhood Fund, of Bridgeport, Connecticut; Neighborhood Preservation Program, of Stamford, Connecticut; and Neighborhood Housing Services, of Brooklyn, New York. Ms. Carty has served as a director of the Bank since January 1, 2008, and her current (and final) term will conclude on December 31, 2018.2022.
Eric Chatman, age 57,59, has served as the executive vice president and chief financial officer of Housing Partnership Network, a network of affordable housing and community development nonprofits, since July 2017. Mr. Chatman founded and was president of The Chatman Group, LLC, a consulting and advisory firm focused on affordable housing and financial advisory services for non-profits, housing finance authorities, and financial institutions from June 2015 to July 2017. Mr. Chatman served as president and executive director of the Connecticut Housing Finance Authority from May 2012 until March 2015 and, in that capacity, was responsible for the policy development, strategic planning and execution of the Connecticut Housing Finance Authority affordable housing finance mission. Prior to serving in that role, Mr. Chatman served as deputy director and chief financial officer of the Iowa Finance Authority from 2008 to 2012. Mr. Chatman has also held various corporate finance, treasury, and capital markets roles, both domestic and international, including treasurer of the Federal Home Loan Bank of Des Moines and division manager, treasury department, at the African Development Bank. Mr. Chatman has served as a director of the Bank since June 16, 2014, and his current term will conclude on December 31, 2019.2023.
Patrick E. Clancy, age 71,73, served from 1977 through 2011 as president and chief executive officer of The Community Builders, a Boston-basedBoston, Massachusetts-based nonprofit corporation that has developed or redeveloped approximately 25,000 units of affordable and mixed-income housing. He continues to engage in the field as an independent consultant and developer.developer as principal of The Clancy Company. Mr. Clancy has served as director of the Bank since March 30, 2007, and his current (and final) term will conclude on December 31, 2018.2022.
Cornelius K. Hurley, age 72,74, has served as executive director of the Online Lending Policy Institute, Inc. since February 2017. He has also served as Professor of the Practice of Banking Law at Boston University since 2005, and was director of the Boston University Center for Finance, Law & Policy from 2005 to June 2017. Prof. Hurley also serves as a director of Computershare Trust Company, N.A., located in Canton, Massachusetts, a wholly owned subsidiary of Computershare, Ltd. Previous roles include serving as managing director of The Secura Group (1990 to 1997); as general counsel and director of human resources of Shawmut National Corporation and its predecessor companies (1981 to 1990); and as assistant general counsel to the Board of Governors of the Federal Reserve System. Prof. Hurley was appointed as a director of the Bank on
March 30, 2007, for a term that expired on December 31, 2008. Prof. Hurley was reappointed as a director of the Bank on April 16, 2009, to fill an open vacancy on the board, and has served on the board of directors continuously since that date. His current (and final) term will conclude on December 31, 2021.
Antoinette C. Lazarus, age 54,56, has served as chief compliance and risk officer and as privacy and anti-money laundering officers for Landmark Partners, a Simsbury, Connecticut-based registeredSEC-registered investment adviser since 2006. Since November 2018 and December 2019, Ms. Lazarus has also served as the vice president of the board of directors for the Hartford Community Loan Fund, and director of Housing Development Fund, respectively, each a community development financial institution based in Connecticut. Prior to her work at Landmark Partners, Ms. Lazarus served from 2004 to 2006 as vice president of compliance for Prudential Financial, Inc., a Hartford, Connecticut-based financial products and services company and from 2001 to 2004 as director of fund accounting for CIGNA Retirement and Investment Services, a Hartford-based retirement services business that was acquired in 2004 by Prudential Financial, Inc. From 1988 to 2001, Ms. Lazarus served in multiple fund accounting, reporting and valuation roles at Aetna Financial Services, a financial services company based in Hartford that was acquired by ING in 2000. Ms. Lazarus has served as a director of the Bank since January 1, 2017, and her current term will conclude on December 31, 2020.
Jay F. Malcynsky, age 64,66, has served as president and managing partner of Gaffney, Bennett and Associates, Inc., a Connecticut-based corporation specializing in government relations and political consulting, since 1984. Mr. Malcynsky is also a practicing lawyer in Connecticut and Washington, D.C., specializing in administrative law and regulatory compliance. Mr. Malcynsky previously served as a director of the Bank from 2002 to 2004. Mr. Malcynsky was reappointed as a director on March 30, 2007, and his current (and final) term will conclude on December 31, 2020.
Emil J. Ragones, age 71,73, is an adjunct professor at the Boston College Carroll School of Management in the Masters of Science in Accounting Program, a position he has held since January 2013. He served as executive in residence at Accounting Management Solutions, Inc., located in Waltham, Massachusetts, from 2008 through April 2015, providing accounting and financial management advisory services. Mr. Ragones previously worked at Ernst & Young for 39 years, including 24 years of service as an audit partner. In addition to performing financial statement audits, Mr. Ragones specialized in providing information technology auditing, as well as advisory and consulting services to clients in a variety of industries, including financial services. Prior to his retirement from Ernst & Young in 2007, Mr. Ragones spent seven years in the firm's National Professional Practice office for assurance and advisory business services, focusing on reviewing and reporting on financial and information technology controls and Sarbanes-Oxley Act Section 404 compliance and reporting. Mr. Ragones has served as a director of the Bank since September 24, 2010, and his current (and final) term will conclude on December 31, 2019.2023.
Audit Committee Financial Expert
Our board of directors has a standing Audit Committee that satisfies the "Audit Committee" definition under Section 3(a)(58)(A) of the Securities Exchange Act of 1934. Our board of directors' Audit Committee Charter is available in full on our website at the following location: http://www.fhlbboston.com/downloads/aboutus/Audit_Committee_Charter.pdf.
The board has determined that Director ChatmanLazarus is the "audit committee financial expert" within the meaning of the SEC rules. Mr. ChatmanMs. Lazarus is not an auditor or accountant for us, does not perform fieldwork, and is not a Bank employee. In accordance with the SEC's safe harbor relating to Audit Committee financial experts, a person designated or identified as an Audit Committee financial expert will not be deemed an "expert" for purposes of federal securities laws. In addition, such a designation or identification does not impose on any such person any duties, obligations, or liabilities that are greater than those imposed on such persons as a member of the Audit Committee and board of directors in the absence of such designation or identification and does not affect the duties, obligations, or liabilities of any other member of the Audit Committee or board of directors. See Item 13 — Certain Relationships and Related Transactions, and Director Independence for additional information regarding Mr. Chatman’sMs. Lazarus's independence.
Report of the Audit Committee
The Audit Committee assists the board in fulfilling its oversight responsibilities for (1) the integrity of our financial reporting, (2) the establishment of an adequate administrative, operating, and internal accounting control system, (3) our compliance with legal and regulatory requirements, (4) the independent registered public accounting firm's independence, qualifications, and performance, (5) the independence and performance of our internal audit function, and (6) our compliance with internal policies and procedures. The Audit Committee appoints, compensates, retains and oversees the work of the independent registered public accounting firm. The Audit Committee has adopted, and annually reviews, a charter outlining the practices it follows.
Management is responsible for the Bank's internal controls and the financial reporting process. PwC, our independent registered public accounting firm, is responsible for performing an independent audit of the financial statements and the effectiveness of internal control over financial reporting in accordance with auditing standards promulgated by the Public Company Accounting Oversight Board (PCAOB). Our internal auditors are responsible for preparing an annual audit plan and
conducting internal audits under the direction of the Director of InternalChief Audit Officer, who is accountable to the Audit Committee. The Audit Committee acts in an oversight role with the responsibility to monitor and oversee these processes.
The Bank is one of eleven11 FHLBanks that, together with the Office of Finance, comprise the FHLBank System. The Office of Finance has responsibility for the issuance of COs on behalf of the FHLBanks and for compiling a combined financial report of the FHLBanks. Accordingly, the FHLBank System has determined that it is beneficial to have a single independent registered public accounting firm responsible for the audit of the FHLBank System and each FHLBank. The FHLBanks and Office of Finance cooperate in selecting and evaluating the independent registered public accounting firm, but the responsibility for appointing the independent registered public accounting firm for each FHLBank remains solely with the audit committee of each individual FHLBank and the Office of Finance.
PwC has been the independent auditor for the Bank and the FHLBank System since 1990. The Bank’s Audit Committee engages in rigorous evaluations each year before appointing an independent registered public accounting firm. In connection with the appointment of the Bank’s independent registered public accounting firm, the Audit Committee’s evaluation included consultation with the audit committees of the other FHLBanks and the Office of Finance. Specific considerations included:
an analysis of the risks and benefits of re-engaging the independent auditor versus engaging a different firm, including consideration of:
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| ◦ | PwC audit partner and audit team rotation, |
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| ◦ | PwC’s tenure as the Bank’s and the FHLBank System’s independent auditor, |
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| ◦ | PwC’s depth of understanding of our business, operations, and accounting policies and practices, and |
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| ◦ | disruption and risks associated with changing the Bank’s auditor; |
PwC’s historical and recent performance on the Bank’s audit, including the results of an internal survey of PwC’s service and quality;
an analysis of PwC’s known legal risks and significant proceedings;
external data relating to audit quality and performance, including recent PCAOB reports on PwC and its peer firms; and
the appropriateness of PwC’s fees, on both an absolute basis and as compared to its peer firms.
Audit Fees represent fees for professional services provided in connection with the audit of the Bank’s annual financial statements and internal control over financial reporting and reviews of the Bank’s quarterly financial statements, regulatory filings, consents and other SEC matters.
The Audit Committee has reviewed and approved the fees paid to the independent registered public accounting firm for audit, audit related and other services. The Audit Committee has determined that PwC does not provide any non-audit services that would impair PwC’s independence.
In accordance with SEC rules, audit partners are subject to rotation requirements to limit the number of consecutive years an individual partner may provide service to the Bank. For lead and concurring audit partners, the maximum number of consecutive years of service in that capacity is five years. The process for selection of the Bank’s lead audit partner pursuant to this rotation policy involves a meeting between the Chair of the Audit Committee and the candidate for the role, as well as discussion by the full Audit Committee and with management.
Based on its reviews discussed above, the Audit Committee recommended to the Boardboard of Directorsdirectors the reappointment of PwC as the Bank's independent registered public accounting firm for 2018.2020.
The Audit Committee discussed with our internal auditors and PwC the overall scope and plans for their respective audits. The Audit Committee meets with the internal auditors and PwC, with and without management present, to discuss the results of their audits, their evaluations of the Bank's internal controls, and the overall quality of the Bank's financial reporting.
The Audit Committee has reviewed and discussed the audited financial statements with management, including a discussion of the quality, not just the acceptability, of the accounting principles used, the reasonableness of significant accounting judgments and estimates, and the clarity of disclosures in the financial statements. In addressing the quality of management's accounting judgments, members of the Audit Committee asked for representations and reviewed certifications prepared by the chief executive officer and chief financial officer that the audited financial statements present, in all material respects, the financial condition and results of operations, and have expressed to both management and PwC their general preference for conservative
policies when a range of accounting options is available. In meeting with PwC, the Audit Committee asked them to address and discuss their responses to several questions that the Audit Committee believes are particularly relevant to its oversight. These questions include:
Are there significant judgments or estimates made by management in preparing the financial statements that would have been made differently had PwC themselves prepared and been responsible for the financial statements?
Based on PwC's experience, and their knowledge of the Bank, do the financial statements present fairly, with clarity and completeness, the Bank's financial position and performance for the reporting period in accordance with GAAP and SEC disclosure requirements?
Based on PwC's experience, and their knowledge of the Bank, has the Bank implemented internal controls and internal audit procedures that are appropriate for the Bank?
The Audit Committee believes that by focusing its discussions with PwC, it promotes a meaningful discussion that provides a basis for its oversight judgments.
The Audit Committee has discussed with PwCthe independent auditors the matters required to be discussed by the applicable requirements of the PCAOB Auditing Standard 1301, Communications with Audit Committees.and the SEC. The Audit Committee has received from PwC the written disclosures and the letter required by PCAOB Rule 3526, Communication with Audit Committees Concerning Independence, and the Audit Committee has discussed with PwC their independence.
In reliance on these reviews and discussions, and the report of the independent registered public accounting firm, the Audit Committee has recommended to the board of directors, and the board of directors has approved, that the audited financial statements be included in the Bank's annual report on Form 10-K for the year ended December 31, 2017,2019, for filing with the SEC.
As of the date of filing this annual report on Form 10-K, the members of the Audit Committee are:
Emil J. Ragones, chairChair
Stephen G. Crowe, vice chairAntoinette C. Lazarus, Vice Chair
Joan Carty
Eric Chatman
Antoinette LazarusJay F. Malcynsky
Jay MalcynskyEdward F. Manzi, Jr.
John F. Treanor
Andrew Calamare,Richard E. Wyman
Martin J. Geitz, ex officio
Information about our Executive Officers
The following table sets forth the names, titles, and ages of our executive officers:
Table 5048 - Executive Officers
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Name (1) | Title | Age |
| Edward A. Hjerpe III | President and Chief Executive Officer | 5961 |
George H. CollinsTimothy J. Barrett | Executive Vice President and Chief Risk OfficerTreasurer | 58 |
M. Susan Elliott | Executive Vice President and Chief Business Officer | 6361 |
| Frank Nitkiewicz | Executive Vice President and Chief Financial Officer | 5658 |
Timothy J. BarrettCarol Hempfling Pratt | SeniorExecutive Vice President, General Counsel, and TreasurerCorporate Secretary | 5961 |
| Brian G. Donahue | Senior Vice President, Controller and Chief Accounting Officer | 5153 |
| Ana C. Dyer | Senior Vice President, Member Services | 52 |
| Barry F. Gale | Senior Vice President and Executive Director ofChief Human Resources Officer | 5860 |
| Sean R. McRae | Senior Vice President and Chief Information Officer | 5355 |
Carol Hempfling PrattEdward A. Schultze | Senior Vice President General Counsel, and Corporate SecretaryChief Risk Officer | 5960 |
_________________________
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| (1) | Each of the executive officers listed serves on our Management Committee, with the exception of Mr. Donahue. |
Edward A. Hjerpe III has served as president and chief executive officer since July 2009. Mr. Hjerpe joined us from Strata Bank and Service Bancorp, Inc., where he was interim chief executive officer from September 2008 until joining us. Mr. Hjerpe
was a financial, strategy, and management consultant from August 2007 to September 2008. He was both president and chief operating officer of the Massachusetts/Rhode Island Region of Webster Bank and senior vice president of Webster Financial Corporation from May 2004 to June 2007. Prior to those roles, Mr. Hjerpe served as executive vice president, chief operating officer, and chief financial officer at FIRSTFED AMERICA BANCORP, Inc. from July 1997 to May 2004. Mr. Hjerpe also worked with us from 1988 to 1997, first as vice president and director of financial analysis and economic research, and ultimately as executive vice president and chief financial officer. Mr. Hjerpe has been involved in numerous community, civic, industry, and nonprofit organizations over the course of his career. He currently serves as a member of the board of directors of the Office of Finance, as a member of the FHLBank Presidents Conference, and as a member of the board of directors of the Pentegra Defined Benefit Plan for Financial Institutions. He is also a former member and past chair of the board of Dental Services of Massachusetts, as well as a former member and past chair of the board of trustees of St. Anselm College in Manchester, New Hampshire. Mr. Hjerpe earned a B.A. in business and economics from St. Anselm College, and an M.A. and Ph.D. in economics from the University of Notre Dame.
George H. CollinsTimothy J. Barrett has served as executive vice president and chief risk officertreasurer since January 20152019, and is also our chief compliance officer. Mr. Collins previously served as senior vice president and chief risk officer, a position he held since November 2006. Prior to assuming that position, Mr. Collins served as first vice president, director of market risk management from 2005 to 2006. Mr. Collins joined us in July 2000 as vice president and assistant treasurer. He holds a B.S. in applied mathematics and economics from the State University of New York at Stony Brook.
M. Susan Elliott has served as executive vice president and chief business officer since October 2009. Prior to assuming that position, Ms. Elliott served as executive vice president of member services since January 1994. She previously served as senior vice president and director of marketing from August 1992 to January 1994. Ms. Elliott joined us in 1981. Ms. Elliott holds a B.S. from the University of New Hampshire and an M.B.A. from Babson College.
Frank Nitkiewicz has served as executive vice president and chief financial officer since January 2006. Prior to assuming that position, Mr. Nitkiewicz served as senior vice president, chief financial officer, and treasurer from August 1999 until December 31, 2005, and senior vice president and treasurer from October 1997 to August 1999. Mr. Nitkiewicz joined us in 1991. He holds a B.S. and a B.A. from the University of Maryland and an M.B.A. from the Kellogg Graduate School of Management at Northwestern University.
Timothy J. Barrett has served as senior vice president and treasurer since November 2010. Prior to employment with us, Mr. Barrett served as assistant treasurer at FMR LLC, the parent company of Fidelity Investments from September 2008 to October 2010; as treasurer and chief investment officer at Fidelity Personal Bank & Trust from August 2007 to September 2008; as managing director, global treasury at Investors Bank & Trust from September 2004 to July 2007; in various senior roles in treasury at FleetBoston Financial (including merged entities) from 1985 to 2004; and as an investment manager for Citibank, NA from 1981 to 1985. Mr. Barrett received his B.A. from St. Anselm College and his M.B.A. from Rensselaer Polytechnic Institute.
Frank Nitkiewicz has served as executive vice president and chief financial officer since January 2006. Prior to assuming that position, Mr. Nitkiewicz served as senior vice president, chief financial officer, and treasurer from August 1999 until December 31, 2005, and senior vice president and treasurer from October 1997 to August 1999. Mr. Nitkiewicz joined us in 1991. He holds a B.S. and a B.A. from the University of Maryland and an M.B.A. from the Kellogg Graduate School of Management at Northwestern University.
Carol Hempfling Pratt has served as executive vice president, general counsel and corporate secretary since January 2019, and previously as senior vice president, general counsel and corporate secretary since June 2010. She also serves as our ethics officer. Prior to employment with us, Ms. Pratt spent over 25 years specializing in corporate and banking law at the Boston law firm of Foley Hoag LLP, where she was a partner from 1992 to 2010. Ms. Pratt holds a B.A. and a J.D. from Northwestern University.
Brian G. Donahue has served as senior vice president, controller, and chief accounting officer since January 2013, and previously as first vice president, controller and chief accounting officer since February 2010. Prior to assuming that position, Mr. Donahue served as first vice president and controller since 2007, vice president and controller from 2004 to 2007, assistant vice president and assistant controller from 2001 to 2004, and in progressively responsible positions from 1992 to 1999, when he served as assistant controller. Mr. Donahue worked for two years as assistant vice president and division controller for State Street Bank and Trust Company, from 1999 to 2001. Prior to joining us in 1992, Mr. Donahue was an associate with Price Waterhouse. Mr. Donahue earned his B.B.A. from James Madison University and his M.B.A. from Boston University, and is a certified public accountant.
Ana C. Dyer has served as senior vice president, member services since January 2020, and previously as first vice president and director of sales and business development since joining the Bank in 2012 from Webster Bank, where she served as senior vice president, regional manager in their Business and Professional Banking division. Ms. Dyer’s career in financial services began in 1989 at Fleet National Bank and included positions at Shawmut Bank, Bank of Boston, and Bank of America prior to joining Webster Bank in 2005. Ms. Dyer earned her B.A. from Harvard University.
Barry F. Gale has served as senior vice president, chief human resources officer and executive director of human resourcesthe Bank’s office of minority and women inclusion since April 2013. Mr. Gale also joined the board of the Northeast Human Resources Association in 2019. Prior to employment with us, Mr. Gale served as senior director of human resources at Thomson Reuters, where he spent 16 years in progressively senior roles. Prior to that position, Mr. Gale served in human resources roles at Citizens Financial Group and The Colonial Group. Mr. Gale holds a B.S. in business management from The University of Massachusetts, Boston.
Sean R. McRae has served as senior vice president and chief information officer since April 2014. Prior to employment with us, Mr. McRae worked for Thomson Reuters for 19 years in a variety of technology leadership roles, the most recent of which was serving as chief technology officer of their global emerging markets business. Prior to Thomson Reuters, Mr. McRae served as software engineer, application architect, network engineer, business analyst, and project manager at John Hancock in Boston. Mr. McRae holds a B.S. in Computer Science from Bridgewater State College.
Carol Hempfling Pratt Edward A. Schultzehas served as senior vice president general counsel and corporate secretarychief risk officer since June 2010.January 2020, and previously as first vice president, director of market risk management since 2013. Prior to employment with us, Ms. Pratt spent over 25 years specializingassuming that position, Mr. Schultze served as vice president, director of capital market risks since joining the Bank in corporate2010. Mr. Schultze’s financial services career began in 1983 and banking lawincludes various roles at the Boston law firm of Foley Hoag LLP, where she was a partner from 1992 to 2010. Ms. PrattGuaranty Bank, FIRSTFED AMERICA BANCORP, Inc., and First Institutional Liquidity Corp. Mr. Schultze holds a B.A.B.B.A. in Banking and a J.D.Finance and an M.B.A. in Finance from Northwestern University.the University of North Texas.
Code of Ethics and Business Conduct
We have adopted a Code of Ethics and Business Conduct that sets forth the guiding principles and rules of behavior by which we operate and conduct our daily business with our customers, vendors, shareholders, and with our employees. The Code of Ethics and Business Conduct applies to all directors and employees, including the chief executive officer, chief financial officer, and chief accounting officer, and all other professionals serving in a finance, accounting, treasury, or investor-relations role. The purpose of the Code of Ethics and Business Conduct is to avoid conflicts of interest and to promote honest and ethical conduct and compliance with the law, particularly as related to the maintenance of our financial books and records and the preparation of our financial statements. The Code of Ethics and Business Conduct can be found on our website (http://www.fhlbboston.com/downloads/aboutus/code_of_ethics.pdf). All future amendments to, or waivers from, the Code of Ethics and Business Conduct will be posted on our website. The information contained within or connected to our website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this or any report filed with the SEC.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Executive Summary
We attract, reward, and retain senior managers, including our president, chief financial officer, and other most highly compensated executive officers (the named executive officers) by offering a total rewards package that includes base salary, cash incentive opportunities, qualified and nonqualified retirement plans, and certain perquisites.
For the year ended December 31, 2017,2019, the named executive officers were:
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| | |
| Edward A. Hjerpe III | | President and Chief Executive Officer; |
| Frank Nitkiewicz | | Executive Vice President and Chief Financial Officer; |
| M. Susan Elliott | | Executive Vice President and Chief Business Officer; |
| George H. Collins | | Executive Vice President and Chief Risk Officer; |
| Carol Hempfling Pratt | | SeniorExecutive Vice President, General Counsel and Corporate Secretary; and |
| Timothy J. Barrett | | SeniorExecutive Vice President and Treasurer. |
Ms. Elliott and Mr. Collins each retired from the Bank as of December 31, 2019.
Compensation program objectives are set forth in our Total Rewards Philosophy, which was used in determining the total rewards packages for the named executive officers for 2017.2019. Total rewards packages, including base salary, cash incentive opportunities, and retirement plans, were set based on each named executive officer's performance, tenure, experience, and complexity of position and to be competitive in the labor market for senior managers in which we compete. Overall, the named executive officers were awarded increases in base salary based on our Total Rewards Philosophy (defined below) reflecting performance and market conditions, effective January 1, 2018.2019. Additionally, we adopted an executive incentive plan (an EIP) in 2017on February 5, 2019 (the 20172019 EIP). Cash incentives awarded under EIPs in 20172019 were generally determined based on the criteria set forth in the 20172019 EIP and the 20152017 EIP.
Compensation Committee
Pursuant to a charter approved by the board of directors, the Human Resources and Compensation Committee (the Compensation Committee) assists the board of directors in developing and maintaining human resources and compensation policies that support our business objectives. The Compensation Committee develops and recommends the compensation philosophy for the board of directors' review and approval. The Compensation Committee reviews and recommends to the
board of directors, for its approval, human resources policies and plans applicable to the compensation philosophy, such as compensation, benefits, and incentive plans in which the named executive officers may participate.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee has at any time been an officer or employee with us. None of our executive officers has served or is serving on our board of directors or the compensation committee of any entity whose executive officers served on the Compensation Committee orof our board of directors.
Compensation Committee Report
The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K. Based on the Compensation Committee's review and discussion, they recommended to the board of directors that the Compensation Discussion and Analysis be included in the annual report on the Form 10-K for the year ending December 31, 2017.2019.
The members of the Compensation Committee are:
John W. McGeorge, Chair
Jay F. Malcynsky,Michael R. Tuttle, Vice Chair
Joan Carty
Dwight M. Davidsen
Antoinette C. Lazarus
Richard E. Wyman, Jr.
Martin J. Geitz,
Michael R. Tuttle; and
Andrew J. Calamare (ex officio). ex officio.
Shareholder Advisory Vote on Executive Compensation
We are governed and directors are elected as described under Item 10 — Directors, Executive Officers and Corporate Governance. As such, we do not engage in a proxy process and have not otherwise engaged in any activity that would require a consent solicitation of our members. Accordingly, there is no shareholder advisory vote on executive compensation in determining our compensation policies and decisions.
Objectives of our Compensation Program and What it is Designed to Reward
We are committed to providing a compensation package that enables us to attract, retain, motivate, and reward highly skilled executive officers, including the named executive officers, who contribute significantly to the achievement of our mission, goals, and objectives. The FHFA reviews FHLBank compensation of the named executive officers, as described under — FHFA Oversight of Executive Compensation.
In 2014, the Compensation Committee retained McLagan Partners (McLagan), a compensation consulting firm specializing in the financial services industry and a part of Aon plc, to assist with a comprehensive total rewards study. A major outcome of the study was the adoption of an updated "Total Rewards Philosophy," the principles of which have been the basis for determining total compensation for the named executive officers since that time. In 2019, we contracted with McLagan to assist with an updated total rewards study. The Bank is in the process of reviewing and evaluating the results from that study.
The 2014 Total Rewards Philosophy defines compensation goals, competitive market and peer groups, components and comparability of the total rewards package, performance evaluation and compensation, and responsibility for administration and oversight of compensation and benefits programs. The Compensation Committee and board of directors are responsible for periodically reviewing the Total Rewards Philosophy to ensure consistency with our overall business objectives, the competitive market, and our financial condition.
The Total Rewards Philosophy provides for a total compensation and benefits package for employees, including the named executive officers, that:
is tailored to our unique cooperative structure;
is reasonable, comparable, and competitive in the marketplace in which we compete and therefore enables us to attract, retain, motivate, and reward talent;
is aligned with prudent risk-management practices;
directly links individual total rewards opportunities to our mission and annual and long-term business and financial strategies while also considering business unit/team, and individual performance; and
capitalizes on the perceived value of compensation and benefits to employees while optimizing the efficiency of employee-related expenses.
Risk and Bank Compensation Practices and Policies
Our chief risk officer reviews the design of our compensation plans and policies, including the 2019 EIP and 2017 EIP, to ensure these plans do not promote or reward imprudent risk taking. Additionally, the 20172019 EIP includes long-term incentive opportunities based on the average core return on capital stock over the three-year period starting January 1, 2017,2019, and ending December 31, 2019,2021, and targeted regulatory results at December 31, 2019,2021, with associated deferred payouts of 50 percent of the 20172019 EIP's awards, which are intended to align management's interests with risk-management objectives.
Further, as described under — Executive Incentive Plan — Additional Conditions on Long-Term Awards, the long-term incentive opportunities are subject to reduction or elimination in certain cases including in the case of certain material revisions to our financial results or to data used to determine the 20172019 short-term awards, which are intended to further reduce the risk of imprudent risk-taking.
Further, our chief risk officer and our executive director ofchief human resources officer jointly engage in periodic reviews of our compensation practices and policies in an effort to ensure that such practices or policies do not result in risks that are reasonably likely to have a material adverse effect. They report on the results of these reviews to the Compensation Committee at least annually. In developing that report, compensation policies and practices are reviewed first on a stand-alone basis, then in combination with enterprise-wide risk-management controls that constrain risk-taking, and finally in conjunction with procedural risk controls at the business department level that are intended to further mitigate risk-taking activities. In January 2018,2020, the Compensation Committee concluded that none of the compensation policies or plans in effect are reasonably likely to have a material adverse effect on the Bank based on the report and related discussions.
Compensation plans and policies for staff engaged in risk-management and compliance functions are designed to manage any conflictconflicts of interestsinterest and promote independence in risk management in a manner independent of the financial performance of the business areas these personnel monitor. For example, as discussed under — Executive Incentive Plan — Incentive Goals, the goals for Mr. Collins's goals, asCollins, our former chief risk officer, differdiffered somewhat and havehad different weightings under the 20172019 EIP from the goals of the other named executive officers. These differences arewere intended to align his incentives with appropriately managing our risk profile. Likewise, all participants in the 20172019 EIP working in our enterprise risk-management (ERM) department have somewhat different goals and weightings from their peers in other departments. Additionally, the review of the chief risk officer includes input by the board of directors’ Risk Committee.
In addition to our internal processes, the FHFA has oversight authority over our executive compensation. In the exercise of this authority, the FHFA has issued certain compensation principles, one of which is that executive compensation should be consistent with sound risk management and preservation of the par value of FHLBank stock. Also, the FHFA reviews all executive compensation, including the 20172019 EIP, relative to these principles and such other factors as the FHFA determines to be appropriate, prior to their effectiveness. For additional information on this oversight, see — FHFA Oversight of Executive Compensation.
Overview of the Labor Market for Senior Managers
The labor market in which we compete for senior managers, including the named executive officers, is across a broad group of organizations representing different industries. In particular, we experience a greater frequency of competition for talent with financial services firms, including commercial banks, other FHLBanks, other GSEs, such as Fannie Mae and Freddie Mac, and other financial institutions, including those in the private sector. We also recognize that a “one-size-fits-all” approach to compensation may need to be adjusted at times to attract employees who may have critical skills (e.g., technology staff) and to attract and retain the most qualified and highly sought-after staff. The local financial services labor market is dominated by asset-management firms that are considered labor market competitors even though they are not business competitors. As a result, we may, at times, have to expand recruiting efforts to a regional or national basis to recruit named executive officers and other senior executives with the specialized skills needed to manage the complex risks of a wholesale lending and mortgage loan investment operation. For these reasons, we must be positioned to offer comparable compensation packages to attract, retain, motivate, and reward top talent. When setting compensation levels, we also consider the cost of living in the Boston area.
Our competitive peer groups for our named executive officers include:
The other FHLBanks, particularly for determining mix of pay within the total rewards package due to the FHLBank System’s unique cooperative structure.structure; and
The commercial/regionalcommercial banks, GSEs and diversified financial firm peers as the primary peer group for competitive positioning for total rewards for all levels of our positions that require financial services experience. For executive officers,
we may consider peers that are smaller in assets or adjust the level of a matched position versus larger asset peers to establish reasonable market benchmarks.
Both peer groups are considered in setting the total rewards package. However, no specific target among the peer groups is selected for named executive officer compensation. Rather, the data is used generally to ensure the total rewards packages remain competitive as determined by the Compensation Committee relative to those peer groups.
The first competitive peer group consists of the other FHLBanks that serve as the primary peer group for determining the proportionate mix of pay and benefits. While all of the FHLBanks share the same mission, they may differ in their relative mix of products and services and location among urban and smaller-city locations, both of which impact labor-market competition and compensation by individual FHLBank.FHLBanks. However, due to the FHLBank System's unique cooperative structure, all FHLBanks generally must rely on a similarly structured total rewards package for the named executive officers, including base salary, cash incentives, and benefits, since none can offer equity-based compensation opportunities such as those offered at their non-FHLBank competitors. In 2017,2019, we participated in, and used the results of, the annual McLagan FHLBank System survey of key positions to determine whether the total rewards packages for the named executive officers, as well as the proportionate mix of pay and benefits, are competitive for each matched position as discussed below in more detail.
The second primary peer group, commercial/regionalcommercial banks, serves as a relevant comparator group for competitive positioning of the total rewards package for those positions requiring financial services experience, including the named executive officers. The commercial/regionalcommercial bank peer group focuses on large and mid-sized commercial/regionalcommercial banks and financial services firms but excludes large global investment banks. Both the Bank and commercial banks engage in wholesale lending and share similarities in several functional areas, particularly middle-office and support areas. The commercial/regionalcommercial bank peer group consists mostly of banks with multiple product lines/offerings and significant assets. The most significant difference between us and the commercial/regionalcommercial bank peer group is that we are focused on wholesale banking activities while the peer group generally engages in both wholesale and retail activities. The market analysis focuses on the wholesale activities and excludes retail-focused positions.
We worked with McLagan to match several of the positions held by the named executive officers to comparable positions in the commercial/regionalcommercial banks peer group of McLagan's proprietary 20172019 Financial Services - FHLB Custom Survey. Named executive officer positions were matched to those survey positions that represented realistic job opportunities based on scope, similarity of positions, experience, complexity, and responsibilities. Realistic job opportunities included positions for which the named executive officers would be qualified at the external firms as well as positions at the firm that we would consider when recruiting for experienced executives.
The following is a list of survey participants that were included by McLagan in the commercial/regional2019 Financial Services - FHLB Survey, including the commercial banks peer group, in the 2017 FHLB Custom Survey as well asFederal Home Loan Banks, and proxy data from smaller public peers with assets between $10 billion and $20 billion. Not all participants reported positions that matched the data set for the named executive officers.
Table 5149 - List of Survey Participants
|
| | |
| ABN AMRO | Federal Home Loan Bank of DallasAtlanta | MUFG SecuritiesBank, Ltd. |
Agricultural Bank of ChinaAcadian Asset Management | Federal Home Loan Bank of Des MoinesBoston | National Australia BankNasdaq |
| AIB | Federal Home Loan Bank of IndianapolisChicago | NatixisNational Australia Bank |
| Ally Financial Inc. | Federal Home Loan Bank of New YorkCincinnati | Natixis |
| Arrowstreet Capital | Federal Home Loan Bank of Dallas | Natixis Corporate & Investment Banking |
| Associated Bank | Federal Home Loan Bank of Des Moines | New York Community Bank |
| Atlantic Union Bkshs Corp. | Federal Home Loan Bank of Indianapolis | Nomura Securities |
| Australia & New Zealand Banking Group | Federal Home Loan Bank of PittsburghNew York | Nord/LB |
| Banc of California Inc. | Federal Home Loan Bank of San FranciscoPittsburgh | Nordea Bank |
Table 49 - List of Survey Participants
|
| | |
| Banco Bilbao Vizcaya Argentaria | Federal Home Loan Bank of Topeka | Norinchukin Bank, New York Branch |
Banco Itaú Unibanco | Federal Reserve Bank of AtlantaSan Francisco | Northern Trust Corporation |
BancorpSouth Inc.Bank | Federal Home Loan Bank of Topeka | OCBC Bank |
| Bank ABC | Federal Reserve Bank of BostonAtlanta | Old National Bancorp |
| Bank Hapoalim | Federal Reserve Bank of ChicagoBoston | People's United Bank, N.A.Pacific Premier Bancorp |
Bank of America Merrill Lynch | Federal Reserve Bank of ClevelandChicago | Pinnacle Financial PartnersPacWest Bancorp |
| Bank of Hawaii Corp. | Federal Reserve Bank of Cleveland | People's United Financial, Inc. |
| Bank of Ireland | Federal Reserve Bank of Kansas City | PNC BankPinnacle Financial Partners, Inc. |
| Bank of New York Mellon | Federal Reserve Bank of Minneapolis | Putnam InvestmentsPNC Bank |
| Bank of Nova Scotia | Federal Reserve Bank of New York | RabobankPricewaterhouseCoopers |
Bank of the Ozarks Inc.West | Federal Reserve Bank of Richmond | Rabobank |
| Bank OZK | Federal Reserve Bank of San Francisco | Regions Financial Corporation |
| Banner Corp. | Federal Reserve Bank of St Louis | Royal Bank of Canada |
| Baupost Group, The | Fidelity Investments | Royal Bank of Scotland Group |
| Bayerische Landesbank | Fifth Third Bank | Sallie Mae |
| BBVA | First BanCorp. | Santander Bank, NA |
| BBVA Compass | First Citizens Bank - NC | Siemens Financial Services |
| Berkshire Hills Bancorp Inc. | First Hawaiian Bank | Signature Bank – NY |
| BMO Financial Group | First Interstate BancSystem | Simmons First National Corp. |
| BNP Paribas Group | First Midwest Bancorp Inc. | Societe Generale |
| BOK Financial Corporation | First National Bank of Omaha | South State Corporation |
| Branch Banking & Trust Co. | First Republic Bank | Standard Chartered Bank |
| Brown Brothers Harriman | Flagstar Bancorp Inc. | State Street Corporation |
| Cadence Bancorp. | Freddie Mac | Sterling National Bank |
| Capital One | Frost Bank | Sumitomo |
| Cathay General Bancorp | FTI Consulting | SunTrust Banks |
| CenterState Bank Corp. | Glacier Bancorp Inc. | SVB Financial Group |
| Charles Schwab & Co. | GMO | Synovus Financial Corporation |
| China Merchants Bank | Great Western Bancorp | TCF National Bank |
| CIBC World Markets | Hancock Whitney Bank | TD Ameritrade |
| CIT Group Inc. | Heartland Financial USA Inc. | TD Securities |
| Citigroup | Hilltop Holdings Inc. | Texas Capital Bank |
| Citizens Financial Group | Home BancShares Inc. | TIAA |
| City National Bank | Hope Bancorp, Inc. | TowneBank |
| Columbia Banking System Inc. | HSBC | Trustmark Corp. |
| Comerica | Huntington Bancshares, Inc. | U.S. Bancorp |
| Commerce Bank | IBERIABANK Corporation | UMB Financial Corporation |
| Commerzbank | ING | Umpqua Bank |
| Commonwealth Bank of Australia | International Bancshares Corp. | UniCredit Bank AG |
| Community Bank System Inc. | Intesa Sanpaolo | United Bankshares Inc. |
| Crédit Agricole CIB | Investors Bancorp, Inc. | United Community Banks Inc. |
| Credit Industriel et Commercial – N.Y. | JPMorgan Chase | United Overseas Bank Group |
| CVB Financial Corp. | KBC Bank | Valley National Bancorp |
| Depository Trust & Clearing | KeyCorp | Washington Federal Inc. |
| DNB Bank | Lloyds Banking Group | Webster Bank |
| DZ Bank | M&T Bank Corporation | Wellington Management Company |
| East West Bancorp, Inc. | Macquarie Bank | Wells Fargo Bank |
| Eaton Vance Management | MFS Investment Management | WesBanco Inc. |
| Ernst & Young | Mitsubishi UFJ Trust | Western Alliance Bancorporation |
Table 5149 - List of Survey Participants
|
| | |
Bank of the WestFactSet | Federal Reserve Bank of San Francisco | Royal Bank of Canada |
Bank of Tokyo - Mitsubishi UFJ | Federal Reserve Bank of St Louis | Royal Bank of Scotland Group |
Bayerische Landesbank | Flagstar Bancorp Inc. | Santander Bank, NA |
BBVA Compass | Fidelity Investments | Societe Generale |
BMO Financial Group | Fifth Third Bank | Standard Chartered Bank |
BNP Paribas | First Citizens Bank | State Street Corporation |
BOK Financial Corporation | First Midwest Bancorp Inc. | Sterling Bancorp |
Branch Banking & Trust Co. | First Republic Bank | Sumitomo Mitsui Banking Corporation |
Brown Brothers Harriman & Co. | FNB Omaha | Sumitomo Mitsui Trust Bank |
Capital One | Freddie Mac | SunTrust Banks |
Cathay General Bancorp | Fulton Financial Corp. | SVB Financial Group |
Charles Schwab & Co. | GE Capital | Synchrony Financial |
Chemical Financial Corp. | Great Western Bancorp | Synovus |
China Construction Bank | Hancock Bank | TCF National Bank |
CIBC World Markets | Hilltop Holdings Inc. | TD Ameritrade |
CIT Group | HSBC | TD Securities |
Citi Global Consumer Group | Huntington Bancshares, Inc. | Texas Capital Bank |
Citigroup | Industrial and Commercial Bank of China | The PrivateBank |
Citizens Financial Group | ING | TIAA |
City National Bank | International Bancshares Corp. | Trustmark Corp. |
Comerica | Intesa Sanpaolo | U.S. Bancorp |
Commerzbank | Investors Bancorp, Inc | UMB Financial Corporation |
Commonwealth Bank of Australia | JP Morgan | Umpqua Holding Corporation |
Crédit Agricole CIB | KBC Bank | United Bankshares Inc. |
Credit Industriel et Commercial - N.Y. | KeyCorp | United Community Banks Inc. |
Cullen Frost Bankers, Inc. | Landesbank Baden-Wuerttemberg | UniCredit Bank AG |
DBS Bank | Lloyds Banking Group | Valley National Bank |
Depository Trust & Clearing Corporation | MB Financial Inc. | Washington Federal Inc. |
DnB Bank | M&T Bank Corporation | Webster Bank |
DZ Bank | Macquarie Bank | Wellington Management Company |
Eaton Vance Investment Managers | MFS Investment Management | Wells Fargo Bank |
Fannie Mae | Mizuho Bank | Western Alliance Bancorp |
Federal Home Loan Bank of Atlanta | Mizuho Capital Markets | Westpac Banking Corporation |
Federal Home Loan Bank of Chicago | Mizuho Trust & Banking Co. (USA)MSCI | Zions Bancorporation |
Federal Home Loan Bank of CincinnatiFannie Mae | | |
Data from international banks contained results from their U.S. operations only.
Elements of our Compensation Plan and Why Each Element is Selected
We compensate the named executive officers principally based on their performance, skills, experience, the criticality of the role, and tenure through a package that consists of a mix of base salary, annual and deferred cash-incentive opportunities, qualified and nonqualified retirement plans, and various other health and welfare benefits, that is, total rewards. From time to time, we will also award special cash bonuses outside of an EIP to compensate a named executive officer based on unusual or exemplary circumstances. Each compensation element is discussed in greater detail below. Due to our cooperative structure, we cannot offer equity-based compensation programs, so we may offer higher base salaries, in addition to cash-incentive opportunities, and certain retirement benefits to keep our compensation packages competitive relative to the market and to replace some of the value of compensation that competitors might offer through equity-based compensation programs. The named executive officers may also be provided with certain additional perquisites. Although we do not engage in benchmarking, the Total Rewards Philosophy provides that our total rewards package, including that for named executive
officers, should be comparable with the total rewards package for matched positions in the two primary peer groups, as discussed under — Overview of the Labor Market for Senior Managers above. Historically, the Compensation Committee has set total rewards packages for each of the named executive officers so that their total rewards package of base salary, cash incentives, and retirement plans would be comparable with the total rewards packages at the commercial/regionalcommercial bank peer group, including base salary and short- and long-term incentives, and so that their total cash compensation, that is, base salary plus cash incentives, would be competitive with total cash compensation of the named executive officer's peers at other FHLBanks. The Compensation Committee has also considered total cash compensation at the other FHLBanks as the comparator since it includes base salaries and cash incentives, but does not consider the value of retirement plans since they are generally of similar value across the FHLBank System. The Compensation Committee has been informed by the same data in setting current total rewards packages.
How we Determine the Amount for Each Element of our Compensation Plan
The board of directors sets annual goals and objectives for the chief executive officer. In 2017,2019, these goals and objectives were developed to align with our strategic business plan. At the end of the year, the chief executive officer provides the Compensation Committee with a self-assessment of his corporate and individual achievements. Based on the Compensation Committee's evaluation of his performance and review of competitive market data for the defined peer groups, the Compensation Committee determines and recommends an appropriate total compensation and benefits package to the board of directors for approval. In the case of other named executive officers, the chief executive officer reviews individual performance and submits market data and recommendations to the Compensation Committee regarding appropriate compensation, although the board of director’s Risk Committee provides input on the evaluation of the chief risk officer. The Compensation Committee reviews these recommendations and submits its recommendations to the full board of directors. The board of directors reviews the recommendations and approves the compensation it considers appropriate, giving consideration to the Total Rewards Philosophy.
The Compensation Committee does not set specific, predetermined targets for the allocation of total rewards between base salary, cash incentives, and benefits, including retirement and other health and welfare plans and perquisites. Rather, the Compensation Committee considers the value and mix of the total rewards package offered to each named executive officer compared with the total rewards package for positions of comparable scope, responsibility, and complexity of position at the two defined peer groups, the incumbent's performance, experience and tenure, and internal equity.
Base Salary
Base salary adjustments for all named executive officers are considered at least annually as part of the year-end annual performance review process and more often if considered necessary by the Compensation Committee during the year, such as in recognition of a promotion or to ensure internal equity.
After review and nonobjection by the FHFA, the board of directors awarded the named executive officers an increase in base salary on January 17, 2018,8, 2020, with retroactive application to January 1, 2018.2020. In determining the amount of the increases, the
Compensation Committee considered market data from the McLagan 20172019 Financial Services - FHLB Custom Survey, discussed under — Overview of the Labor Market for Senior Managers above. Additionally, the Compensation Committee considered the recommendations of Mr. Hjerpe for the other named executive officers based on individual performance, tenure, experience, and complexity of the named executive officer's position and internal equity. Mr. Hjerpe recommended, and the board of directors awarded at the recommendation of the Compensation Committee, increases in base salary for each of the named executive officers.officers other than Ms. Elliott, our former Executive Vice President and Chief Business Officer, and Mr. Collins, our former Executive Vice President and Chief Risk Officer, each of whom retired from the Bank as of December 31, 2019. The percentage increases in base salary were generally consistent with merit and adjustment increases granted to staff. In determining Mr. Hjerpe's increase in base salary, the board of directors considered compensation survey data for FHLBank System chief executive officers, comparative external market data, Mr. Hjerpe's leadership and his consistently strong performance.
The following table sets forth the base salary increases:
| Table 50 - Named Executive Officer Salaries
| | Table 50 - Named Executive Officer Salaries
|
| | Name and Principal Position | | Pre-Adjustment Annual Base Salary | | Post-Adjustment Annual Base Salary | | Percent Increase | | Pre-Adjustment Annual Base Salary | | Post-Adjustment Annual Base Salary | | Percent Increase |
| Edward A. Hjerpe III | | $781,300 | | $859,430 | | 10.00% | | $889,510 | | $923,311 | | 3.80% |
| President and Chief Executive Officer | | |
| | | |
| Frank Nitkiewicz | | $380,880 | | $393,280 | | 3.26% | | $405,880 | | $420,086 | | 3.50% |
| Executive Vice President and Chief Financial Officer | | |
| | | |
| M. Susan Elliott | | $380,680 | | $393,080 | | 3.26% | |
| Executive Vice President and Chief Business Officer | | |
| | | |
| George H. Collins | | $350,070 | | $361,070 | | 3.14% | |
Executive Vice President and Chief Risk Officer | | |
| | | |
| Carol Hempfling Pratt | | $334,700 | | $346,400 | | 3.50% | | $377,600 | | $390,816 | | 3.50% |
| Senior Vice President, General Counsel and Corporate Secretary | | |
| Executive Vice President, General Counsel and Corporate Secretary | | |
| | | |
| Timothy J. Barrett | | $334,700 | | $346,400 | | 3.50% | | $377,600 | | $390,816 | | 3.50% |
| Senior Vice President and Treasurer | | |
| Executive Vice President and Treasurer | | |
Executive Incentive Plan
General Overview of EIPs
EIPs are cash incentive plans which are reviewed by the Compensation Committee and may be adopted by the board of directors on an annual basis. EIPs are not necessarily adopted every year. Generally, EIPs are used to promote achievement of strategic objectives by aligning cash incentive opportunities for corporate officers or other members of management or highly compensated employees, including the named executive officers, with our short- and long-term financial performance and strategic direction. These incentive opportunities are also designed to facilitate retention and commitment of key officers. EIPs generally include specific goals, such as goals based on profitability, business growth, regulatory examination results and remediation, and operational goals for each of the corporate officers or other members of management or highly compensated employees, including the named executive officers.
The Compensation Committee reviews each component of the EIP's plan design, including eligible participants, goals, goal weighting, achievement levels, and payout opportunities. The Compensation Committee administers the EIP and has full power and binding authority to construe, interpret, and administer and adjust the EIP during or at the end of the plan year for extraordinary circumstances. Extraordinary circumstances may include changes in, among other things, business strategy, termination or commencement of business lines, significant growth or consolidation of the membership base, impact of severe economic fluctuations, or significant regulatory or other changes impacting us or the FHLBank System. The Committee may not make adjustments for extraordinary circumstances that include changes to goals, weights, or levels of achievement without resubmission to the FHFA.
Purpose of the 20172019 EIP
The 20172019 EIP is intended to:
reflect a reasonable assessment of our financial situation and prospects while rewarding achievement of our financial plan and strategic objectives in our strategic business plan;
reinforce and reward our commitment to conservative, prudent, sound risk-management practices and preservation of the par value of our capital stock;
tie a significant percentage of incentive awards to our long-term financial condition and performance; and
recognize the importance of individual performance through metrics linked to our strategic goals and/or objectives of the participant’s principal functions and independent of the areas that they monitor.
20172019 EIP Plan Design
The design of the 20172019 EIP was guided by principles intended to:
promote achievement of our financial plan and strategic objectives in our strategic business plan;
provide a total rewards package that is competitive with other financial institutions in the labor markets in which we compete; and
facilitate the retention and commitment of our corporate officers.
Incentive Goals
The 20172019 EIP's short-term financial and nonfinancial goals were derived from, or are consistent with, our strategic business plan and objectives and were generally weighted based on desired business outcomes. Where possible, theThe goal achievement levels have generally been set so that the target achievement level is consistent with projections in our strategic business plan. For certain nonfinancial EIP goals for which there is no direct reference in the strategic business plan, the goals and goal achievement levels are established consistent with our strategic objectives and the impact of achievement of the objectives. The 2019 EIP does not contain individual performance award opportunities for the named executive officers. To mitigate unnecessary or excessive risk-taking, the 20172019 EIP contains measures for overall performance that are achieved through Bankwide collaboration of activity but cannot be individually attained or altered by participants in the 20172019 EIP. Additionally, the 20172019 EIP includes long-term incentive opportunities based on the average core return on capital stock over the three-year period starting January 1, 2017,2019, and ending December 31, 2019,2021, and targeted regulatory results at December 31, 2019,2021, which are intended to align management's interests with our long-term financial performance and condition. Further, the goals of Mr. Collins's goals, asCollins, our former chief risk officer, differdiffered somewhat and havehad different weightings from the goals and weightings of the other named executive officers, and arewere intended both to align his incentives with appropriately managing our risk profile and to be independent of the financial performance of the individual business areas that ERM monitors. Further, asAs described in greater detail under — Determination of Awards under the 20172019 EIP, the Compensation Committee and the board of directors maintained authority over all awards under the 20172019 EIP, however, the 20172019 EIP prohibits award payouts to participants that do not receive a performance rating of “meets expectations” or better.
Short-Term Incentive Goals and Actual Achievement
The 20172019 EIP includes the following short-term incentive goals for the named executive officers:
| |
| • | Pre-assessment, core return on capital stock (the core return goal): Pre-assessment, core return on capital stock (as such term is defined in the 2017 EIP and referred to in this report as core return on capital stock) is a measure of return on capital stock that excludes or adjusts the timing of recognition of the impact of AHP expenses, expenses of the HHNE and JNE initiatives, gains (losses) on debt retirement, net prepayment fees, net unrealized gains (or losses) attributable to hedges, other-than-temporary-impairment credit losses on private-label MBS, gains from the accretion of prior other-than-temporary-impairment credit losses due to improvements in projected private-label MBS performance, private-label MBS litigation settlement income, and unbudgeted voluntary pension contributions. The difference between GAAP return on capital stock and this measure of return on capital stock is that GAAP return on capital stock does not provide for the adjustments described above, and core return on capital stock includes shares classified as mandatorily redeemable capital stock. Achievement of this goal was subject to compliance with our VaR and duration of equity limits for at least 10 of the 12 months of the year. We complied with these limits for 12 months. These limits are described under Item 7A — Quantitative and Qualitative Disclosures about Market Risk — Measurement of Market and Interest-Rate Risk and Related Policy Constraints. Implement the 2019 EIP and referred to in this report as core return on capital stock) is a measure of return on capital stock that excludes or adjusts the timing of recognition of the impact of AHP expenses, expenses of the HHNE and JNE initiatives, interest expense on mandatorily redeemable capital stock, gains (losses) on debt retirement, net prepayment fees, net unrealized gains (or losses) attributable to changes in fair value, other-than-temporary-impairment credit losses on private-label MBS, gains from the accretion of prior other-than-temporary-impairment credit losses due to improvements in projected private-label MBS performance, net gains on sales of private-label MBS, private-label MBS litigation settlement income, and unbudgeted voluntary pension contributions. The difference between GAAP return on capital stock and this measure of return on capital stock is that GAAP return on capital stock does not provide for the adjustments described above, and core return on capital stock includes shares classified as mandatorily redeemable capital stock. Achievement of this goal was subject to compliance with our VaR and duration of equity limits for at least 10 of the 12 months of the year. We complied with these limits for 12 months. These limits are described under Part II — Item 7A — Quantitative and Qualitative Disclosures about Market Risk — Measurement of Market and Interest-Rate Risk and Related Policy Constraints. |
HHNE Initiative (HHNE initiative)Initiative): This goal is measured by completion of an analysis of alternatives to providing advances as a method to deliver the HHNE subsidy to New England HFAs and by the launch and disbursement of the allocated subsidy in our HHNE initiative.Initiative to the six New England housing finance agencies and members.
Implement the
JNE initiative (JNE initiative)Initiative): This goal is measured by the launch and disbursement earlier in the year of the subsidy in our JNE initiativeInitiative, the introduction of a JNE pilot for and by thedisbursement to one or more economic development initiatives, and introduction of the JNE program to 15 members that did not apply and take down a JNE advance in 2016.the years 2016 to 2018.
Individual, Bankwide, or department-specific initiatives goalOperational Efficiency (the individualoperational efficiency goal): Unlike the other short-term goals, thisThis goal is measured accordingby whether and to each individual EIP participant's successful contributions towardwhat degree our core operating expenses, which are defined as our normal expenses associated with enabling the achievement of Bankwide strategic goalsBank to conduct business operations, and which exclude significant discretionary expenses approved by our board in an amount not to exceed judgment or completion of department-specific initiatives. Individual goals for all plan participantssettlement income associated with our ongoing private-label MBS litigation, HHNE and JNE subsidies, stay within and do not exceed the operating expense budget approved by our board. Core operating expenses are established at the beginningmeasured as a percentage of the plan year but can be modified throughout the year on a case-by-case basis with the written approval of the chief executive officer, exceptoperating expense budget for the named executive officers. Revisions to individual goals for
the named executive officers must be recommended by the chief executive officer and approved by the Compensation Committee. Each EIP participant, including the named executive officers, establishes an individual goal comprised of two to four initiatives that are evaluated by that participant's manager, except in the case of Mr. Hjerpe who, in his role as president and chief executive officer, establishes his goal and initiatives in concert with the Compensation Committee. Achievement of Mr. Hjerpe's individual goal is evaluated by the Compensation Committee at the end of the year and the Compensation Committee, in turn, makes a recommendation to the board of directors. Initiatives within each participant's individual goal may be weighted equally or may have different weights based on the criticality of the initiative and the participant's ability to influence the outcome.2019.
The 20172019 EIP includes the following short-term incentive goals for the named executive officers, except for Mr. Collins:Collins, our former chief risk officer:
New business andCore mission goal (the new business goal):goal: This goal is measured by our core mission asset ratio, a ratio by which the total amount of advances originated during 2017 to depository institution members with maturities of greater than or equal to one year in term (and not pre-payable without fee), including advances restructurings that result in extension of the advance in maturity of one year or longer, but excluding certain AHP-related, JNE and HHNE advances and advances to insurance company members.FHFA assesses our core mission achievement.
Insurance advances disbursements (the insurance advances goal): This goal is measured by the amount of new advances originated in 20172019 (any type and maturity of advance) to insurance company members.
Insurance membership (the insurance membership goal): This goal is measured by the number of insurance companies approved for membership by the president and chief executive officer in 2017.2019.
As chief risk officer, Mr. Collins's short-term incentive goals differdiffered somewhat and havehad different weightings from the goals and weightings of the other named executive officers. These differences arewere intended to align Mr. Collins’s incentives with appropriately managing our risk profile and arewere intended to be independent of the financial performance of the individual business areas that ERM monitors. Under the 20172019 EIP, Mr. Collins's short-term incentive goals includeincluded the core return goal, HHNE initiative, JNE initiative, and individualthe operational efficiency goal but exclude the new businesscore mission goal, insurance advances goal, and insurance membership goal. Mr. Collins's short-term goals also include:included:
Bankwide ERM initiatives (the ERM goals): These goals are described and measured as set forth in Table 53.52. Mr. Collins's achievement of these goals was evaluated by Mr. Hjerpe in his capacity as Mr. Collins's manager.
Remediation of 20162018 Report of Examination Findings (the remediation goal): This goal is measured by the clearance rate of recommendations and matters requiring attention identified during our 20162018 FHFA examination.
Table 5251 sets forth the named executive officers' short-term goals and the related weight for all goals and the levels of achievement, and the actual achievement for each of those goals, other than ERM and individual goals which are set forth in Tables 53 and 54, respectively,Table 52 for the year ended December 31, 2017.2019.
Table 52 - Short-Term Goals
| |
Table 51 - Short-Term Goals
| | Table 51 - Short-Term Goals
|
| | | | Weighting | | | Weighting | |
| Goal | | Named Executive Officers other than Chief Risk Officer | Chief Risk Officer | | Threshold | | Target | | Excess | | Actual Achievement | | Named Executive Officers other than Chief Risk Officer | Chief Risk Officer | | Threshold | | Target | | Excess | | Actual Achievement |
| Core Return | | 25% | 20% | | 6.12 percent (1) | | 6.78 percent (1) | | 8.10 percent (1) | | Between target and excess | | 30% | 20% | | 7.43 percent (1) | | 8.32 percent (1) | | 10.10 percent (1) | | 7.83 percent |
| New Business | | 20% | NA | | $2.0 billion | | $3.50 billion | | $5.00 billion | | $5.21 billion | |
| Insurance Advances | | 15% | NA | | $1.25 billion | | $2.25 billion | | $3.25 billion | | $5.44 billion | | 15% | NA | | $4.0 billion | | $5.0 billion | | $6.0 billion | | $5.49 billion |
| Insurance Membership | | 10% | NA | | 3 new members | | 5 new members | | 7 new members | | 7 new members | | 15% | NA | | 3 new members | | 5 new members | | 7 new members | | 4 new members |
| Core Mission | | | 10% | NA | | CMA Ratio = 73.41 percent | | CMA Ratio = 73.91 percent | | CMA Ratio = 74.41 percent | | Excess |
| JNE Initiative | | | 10% | | N/A | | Disburse $7.5 million in subsidy by December 31, 2019. Introduce new JNE pilot initiative for economic development initiatives. Fund one or more of the pilot economic development initiatives. | | Target, plus a disbursement of any size to an economic development initiative and 15 new JNE users. | | Excess |
| HHNE Initiative | | 10% | | Establish a cross-functional team to perform an analysis of alternative advances as a method to deliver HHNE subsidy to the New England HFAs. Deadline is March 31, 2017 for launch of 2017 HHNE. | | Threshold criteria plus disburse 80% of allocated subsidy by December 31, 2017. | | Target criteria plus
disburse 100% of allocated subsidy by December 31, 2017. | | Excess | | 10% | | N/A | | Disburse $7.5 million in subsidy by December 31, 2019. By June 30, 2019, announce to the HFAs and members part 3 of HHNE. | | Disburse the total allocated subsidy of $7.5 million, with full funding of $5 million to the six New England HFAs, $2 million to an EBP-like set- aside and $500,000 to HFAs and/or members. | | Excess |
| JNE Initiative | | 10% | | Launch the 2017 JNE in January 2017 and disburse 50% of the subsidy by June 30, 2017. | | Threshold criteria plus disburse 70% of the subsidy by June 30, 2017 with three new member users. | | Target criteria plus
disburse 100% of the subsidy by October 31, 2017 with 10 new member users of JNE. | | Excess | |
| Operational Efficiency | | | 10% | | 2019 core operating expenses do not exceed the 2019 operating expense budget approved by the board of directors. | | 2019 core operating expenses do not exceed 97.0% of the 2019 operating expense budget approved by the board of directors | | 2019 core operating expenses do not exceed 93.0% of the 2019 operating expense budget approved by the board of directors | | 96.0 percent |
| Remediation | | NA | 15% | | Clear all matters requiring board attention and 83.3% of the recommendations. | | Clear all matters requiring board attention and all recommendations. | | Target criteria plus receive an upgrade in the 2017 regulatory examination. | | Target | | NA | 15% | | Clear all matters requiring board attention and 71% of recommendations | | Clear all matters requiring board attention and all recommendations | | Target criteria plus receive an upgrade in at least one component of the 2019 regulatory examination | | Excess |
| ERM | | NA | 35% | | See Table 53 | | See Table 53 | | See Table 53 | | See Table 53 | | NA | 35% | | See Table 52 | | See Table 52 | | See Table 52 | | See Table 52 |
| Individual | | 10% | | See Table 54 | | See Table 54 | | See Table 54 | | See Table 54 | |
___________________________
| |
| (1) | These performance levels were adjusted from the amounts originally established in the 20172019 EIP. The 20172019 EIP provides that the originally established performance levels were to be adjusted up or down by one2.2 basis pointpoints for every basis point by which the average daily federal funds rate deviated from the 0.832.42 percent assumed in our strategic business plan. In 2017,2019, the average daily federal funds rate deviation and therefore, the adjustmentwas -26.3 basis points, resulting in a 58 basis point decrease to each of the performance levels, was 19 basis points.levels. |
The following table 5352 sets forth the ERM Goals, weightings within the 35 percent assigned to the ERM Goals, and the actual achievement for the year ended December 31, 2017.2019.
Table 5352 - ERM Goals and Actual Achievement
|
| | | | | | | | |
| Goals | | Threshold | | Target | | Excess | | Actual Achievement |
ContributeCollaborate with business units to the Bank activitiesconduct a cyber risk quantification exercise and develop a Cyber Risk Appetite Statement for 2017 via active participation with key constituents co-led by ERMpresentation to and business unit management. This goal was weighted 40 percent. | | Of the targeted and key action plans supporting business unit objectives agreed upon quarterly by leadership of ERM, Member Services, Treasury and Information Technology/ Information Security, satisfactorily meet 75% of targeted action plans. | | Threshold criteria plus satisfactorily meet 100% of key action plans. | | Satisfactorily meet 100% of targeted and key action plans. | | Excess |
Evaluate and assess the impactapproval of the FHFA’s risk-based capital methodologies for market and credit risk and make presentations to management and the board of directors’ Risk Committee by the following dates based on guidance received as of May 31, 2017. This goal was weighted 20 percent.*
| | By December 31, 2017. | | By October 31, 2017. | | By August 31, 2017. | | Threshold |
Increase awareness of our risk management framework by conducting sessions open to all bank staff on targeted topics and by providing a synopsis presentation to the board of directors’board’s Risk Committee. This goal was weighted 4015 percent. | | Conduct a session on one topicComplete all by December 31, 2019 | | Complete all by October 30, 2017.31, 2019 | | Conduct sessions on two topicsComplete all by OctoberSeptember 30, 2017. | | Conduct sessions on three topics by October 30, 2017. | | Excess |
___________________________
| |
* | As this goal was originally drafted, it did not appear that it would be achievable, because the regulatory guidance required to complete the goal was not received from the FHFA within the originally expected timeframe. The timing of achievement levels was revised in order to permit ERM to achieve this goal in 2017 notwithstanding the revised regulatory timeframe. In addition, to compensate for the effects of the later than anticipated regulatory releases on the ability to complete this goal, the original equal weighting of the three ERM goals was changed to a weighting of 20 percent for this goal and 40 percent for each of the other two ERM goals. Adjustments in the originally drafted goal were approved by the President and Chief Executive Officer. Despite the timing pressures, ERM met the originally drafted achievement level for this goal of Target. The Compensation Committee approved the payout to Mr. Collins at the revised achievement level of Threshold, and the Bank received a non-objection response from the FHFA on the payout at Threshold. |
The following Table 54 sets forth the named executive officers' individual, Bankwide or department specific goals, levels of achievement, and actual results. Each component of each named executive officer’s individual, Bankwide or department specific goals was weighted equally unless otherwise stated below.
Table 54 - Individual, Bankwide or Department-Specific Goals by each Named Executive Officer
|
| | | | | | | | |
|
Mr. Hjerpe | | | | | | | | |
Goals2019 | | Threshold |
| TargetCollaborate with business units to recommend and implement best practice enhancements for our OAS risk modeling with approval by the model risk management committee and review by the asset and liability committee. This goal was weighted 15 percent. | | ExcessComplete all by December 31, 2019 | | Actual Achievement |
Table 54 - Individual, Bankwide or Department-Specific GoalsComplete all by each Named Executive Officer
|
| | | | | | | | |
Maintain financial capacity to pay a dividend at a specified minimum level for four quarters.October 31, 2019 | | Dividends in an amount at or above a specified minimum level paid for four quarters and achieve a core mission asset ratio of 65% or higher for 2017. | | Dividends in an amount at or above a specified minimum level paid for four quarters and achieve a core mission asset ratio of 70% or higher for 2017. | | Achieve target criteria, plus exceed “target” on the pre-assessment, core return on capital stock goal as defined in the 2017 EIP.Complete all by September 30, 2019 | | Excess |
Meet with and make presentations on the financial condition and other important aspectsCompletion of the Bank to member trade associationsnext iteration of market risk goals. Introduce, monitor, and other industry groups. | | Attendcomplete ERM assessments of potential new market risk management action triggers and present at five such meetings. | | Attend and present at seven such meetings, including at least one insurance company focused meeting. | | Attend and present at nine such meetings including at least one insurance company. | | Target |
| | | | | | | | |
Mr. Nitkiewicz | | | | | | | | |
Goals | | Threshold | | Target | | Excess | | Actual Achievement |
Maintainlimits as consistent with an efficient capital structure - excess stock management. Milestones:
1) Maintain excess stock within excess stock target range for 240 days in 2017.
2) Maintain excess stock within excess stock target range for 300 days in 2017.
3) Create detailed functional requirements document for self-service excess stock repurchase functionality in member online banking service. | | Achieve Milestone 1. | | Achieve Milestone 2 OR achieve Milestones 1 and 3. | | Achieve Milestones 2 and 3. | | 36.7 percent between Threshold and Target |
Make the Bank more agile and efficient: Workday planning module. | | Developinternal review and present to Bank technology governance committee (BTG) a business case to implement Workday planning module.the Board’s Risk Committee. This goal was weighted 30 percent. | | Achieve threshold criteria, plus secure BTG approval for Workday planning module implementation project.Complete by December 31, 2019. | | Achieve target criteria, plus complete detailed Workday planning module functional design and implementation plan documentation. | | Target |
| | | | | | | | |
Ms. Elliott | | | | | | | | |
Goals | | Threshold | | Target | | Excess | | Actual Achievement |
Deliver JNE to the Bank membership in 2017. | | Launch the 2017 JNE in January 2017 and disburse 50% of subsidy by June 30, 2017. | | Disburse 70% of the 2017 JNE subsidy by June 30, 2017 with three new member users.*
*New member user is defined as a member that did not apply for JNE subsidy in 2016. | | Disburse 100% of the subsidyComplete by October 31, 2017 with ten new member users of JNE.2019. | | Complete by September 30, 2019. | | Excess |
Deliver HHNEComprehensive review of next generation credit models. This goal is weighted 20 percent. Present the following components to the HFAs in 2017.model risk management committee: | | Work with treasury and legal departments, president and others to develop a plan to deliver HHNE toBy June 30, 2019, document credit risk model usage in the HFAs by March 31, 2017.Bank as the foundation for analyzing potential replacement. | | Disburse 80% ofBy October 31, 2019, achieve threshold plus assess at least five models to determine best fit for the HHNE subsidy byBank. | | By December 31, 2017. | | Disburse 100% of the HHNE subsidy by December 31, 2017. | | Excess |
Table 54 - Individual, Bankwide or Department-Specific Goals by each Named Executive Officer
|
| | | | | | | | |
Conduct member and regulator outreach*, including a minimum of 5 insurance company meetings and 2 regulator meetings, to promote use and understanding of the Bank’s Business Solutions.
*Member visits will be individual member meetings, most often attended by a relationship manager. Regulator meetings will be visits with state or federal regulator and may include examiner training sessions. | | 15 visits. | | 20 visits. | | 30 visits. | | 90.0 percent between Target and Excess |
| | | | | | | | |
Mr. Collins | | | | | | | | |
Goals | | Threshold | | Target | | Excess | | Actual Achievement |
PolyPaths Implementation. | | Successfully implement PolyPaths by December 31, 2017. | | Complete two parallel runs2019, achieve target plus select final candidates for market valuationreview in PolyPaths by August 31, 2017. | | Complete two parallel runs for income simulation in PolyPaths by October 31, 2017.2020. | | Excess |
Develop management’s risk appetite statement. | | Present final appetite statement to management committee by June 30, 2017. | | Present risk appetite statement to Bank leaders by August 31, 2017. | | Present high-level overview of risk appetite to all Bank staff by September 30, 2017. | | No Payout(1)
|
| | | | | | | | |
Ms. Pratt | | | | | | | | |
Goals | | Threshold | | Target | | Excess | | Actual Achievement |
Improve corporate governance related communications. | | Design and present “Know your Bank” session to educate Bank staff about the board of directors and other corporate governance topics. | | Achieve threshold criteria, plus plan and implement improvements to the organization and contentImplement phase 1 of the boardnew collateral system as the system of directors’ electronic corporate governance resource center, and establish procedures for maintaining such content. | | Achieve target criteria, plus research potential improvements to corporate governance organization and content of the Bank’s external website, and work with corporate communications group to implement agreed-upon improvements. | | Excess |
Develop statement of “Mission, Vision and Values” for legal department. | | Working with all members of the legal department, create a departmental charter that includes a statement of the department’s mission, vision and values (MVV); present it to management committee. | | Achieve threshold criteria, plus work with each member of the department to create a brief individualized statement expressing how the MVV applies to his or her role. | | Achieve target criteria, plus (i) include a discussion of how we are exemplifying our MVV as a standing agenda item in each departmental staff meeting after threshold is achieved, and (ii) include a review of the individualized statements with each department member at least every other month after target is achieved. | | Target |
| | | | | | | | |
Mr. Barrett | | | | | | | | |
Goals | | Threshold | | Target | | Excess | | Actual Achievement |
Table 54 - Individual, Bankwide or Department-Specific Goals by each Named Executive Officer
|
| | | | | | | | |
Develop FHLB System debt distribution strategy alternatives in collaboration with the Office of Finance and FHLBanks.record. This goal is weighted 6020 percent. | | Identify and document key challenges to current distribution platform; identify, analyze and document alternatives to mitigate challenges.Complete by December 31, 2019. | | Achieve threshold criteria, plus select alternative strategy and discuss with FHLBank CFOs for consideration, make recommendation and gain approval of the Office of Finance board.Complete by October 31, 2019. | | Achieve target criteria, plus present strategy recommendation to Office of Finance board for consideration and approvalComplete by fourth quarter of 2017. | | Target |
Process and straight-through-processing (STP) improvements. This goal is weighted 40 percent. | | Develop business case on new advance pricing matrix to meet member and Bank needs, integrating with core banking project, second quarter of 2017. | | Achieve threshold criteria, plus develop business requirements to use bilateral repo for liquidity, including upgrading Summit trade entry and automated collateral management, third quarter of 2017. | | Achieve target criteria, plus submit bilateral repo business case to BTG for funding by fourth quarter of 2017.September 30, 2019. | | Threshold |
___________________________
(1) The Bank’s risk appetite statement is a work in progress being pursued through a review of risk limits in 2017 and 2018.
Long-Term Incentive Goals
In addition, the 20172019 EIP includes two long-term incentive goals. The first, weighted at 67 percent of the total long-term opportunity, is based on our average core return on capital stock over the three-year period starting January 1, 2017,2019, and ending December 31, 2019.2021. The 20172019 EIP provides that the performance levels for this goal will be adjusted up or down by 1.01.9 basis points for every basis point by which the average daily federal funds rate deviates from the 1.222.28 percent that we have forecast.
For information on how core return on capital stock is determined, see — Short-Term Incentive Goals and Actual Achievement.
Table 5553 - Average Core Return on Capital Stock
|
| | |
| Long-Term Goal | | Average Core Return on Capital Stock from January 1, 20172019 to December 31, 20192021 |
| Threshold | | 5.01%6.82% |
| Target | | 6.26%8.53% |
| Excess | | 7.51%10.24% |
The second long-term incentive goal will be measured by the achievement of certain targeted regulatory goals by December 31, 2019.2021. This goal is weighted at 33 percent of the total long-term opportunity.
Incentive Opportunities under the 20172019 EIP
Incentive opportunities under the 20172019 EIP are based on each named executive officer's base salary at December 31, 20172019 (referred to as 20172019 incentive salaries).
Table 5654 sets forth the combined shortshort- and long-term incentive opportunities under the 20172019 EIP, in each case expressed as percentages of the named executive officers' 20172019 incentive salaries:
Table 56 - Combined Short- and Long-Term Incentive Opportunity
| |
Table 54 - Combined Short- and Long-Term Incentive Opportunity
| | Table 54 - Combined Short- and Long-Term Incentive Opportunity
|
| | | Combined Short- and Long-Term Incentive Opportunity(1) | Combined Short- and Long-Term Incentive Opportunity(1) |
| | Threshold | | Target | | Excess | Threshold | | Target | | Excess |
| President | 50.00% | | 75.00% | | 100.00% | 50.00% | | 75.00% | | 100.00% |
| All Other Named Executive Officers | 30.00% | | 50.00% | | 70.00% | 30.00% | | 50.00% | | 70.00% |
___________________________
| |
| (1) | The combined short- and long-term incentive paid under the 20172019 EIP will not exceed 100 percent of the average of the named executive officer’splan year base salary for 2017, 2018 and 2019.salary. |
At the conclusion of 2017,2019, individual awards were calculated based on actual goal achievement as of December 31, 2017.2019. Participants were eligible to receive 50 percent of such award in a cash payment in March 2018,2020, following non-objection by the FHFA and approval of the board of directors. Table 57 below55 sets forth the incentive opportunities for the short-term incentive opportunity that were payable in March 2018,2020, in each case expressed as percentages of the named executive officers' 20172019 incentive salaries:
Table 57 - Short-Term Incentive Opportunity
| |
Table 55 - Short-Term Incentive Opportunity
| | Table 55 - Short-Term Incentive Opportunity
|
| | | Short -Term Incentive Opportunity | Short -Term Incentive Opportunity |
| | Threshold | | Target | | Excess | Threshold | | Target | | Excess |
| President | 25.00% | | 37.50% | | 50.00% | 25.00% | | 37.50% | | 50.00% |
| All Other Named Executive Officers | 15.00% | | 25.00% | | 35.00% | 15.00% | | 25.00% | | 35.00% |
The remaining 50 percent of the combined award, calculated at the end of 2017,2019, then becomes the target long-term incentive opportunity, with threshold and excess incentive opportunities tied to threshold and excess levels of achievement of the long-term goals, as set forth in Table 58 below.56.
Table 5856 - Long-Term Incentive Opportunity
|
| | | | | |
| | Long-Term Incentive Opportunity |
| | Threshold | | Target | | Excess |
| All Named Executive Officers | 50% of the remaining 50% of the combined short- and long-term incentive opportunity | | 100% of the remaining 50% of the combined short- and long-term incentive opportunity | | 150% of the remaining 50% of the combined short- and long-term incentive opportunity |
Determination of Awards under the 20172019 EIP
Awards for the short-term goals, other than the ERM and individual goals under the 20172019 EIP, were based on actual goal achievement determined objectively at the conclusion of the year. Results for each goal were measured and the award for each goal was then calculated independently based on the following formula:
|
| | | | | | |
| Award for Each Goal | = | Goal Weight (Table 52)51) | X | Incentive Opportunity for Level of Achievement (Table 56)54) | X | 20172019
Incentive Salary |
If the result for the goal were less than the threshold level of achievement (Table 52)51), the award for that goal would have been zero absent an act of discretion. For goals achieved above the excess level of achievement (Table 52)51), there were no
incremental payouts for achievements above excess per plan design. The remaining annual goals were achieved at a level between the threshold and excess levels of achievement. In administering the EIP, as with prior EIPs, the Compensation Committee determined that participants would receive an interpolated award for having exceeded threshold or target levels. In such instance, the award for each goal would be calculated according to the following formula:
|
| | | | | | |
| Award for Each Goal | = | Goal Weight (Table 52)51) | X | Incentive Opportunity (Table 56)54) Interpolated for Actual Level of Achievement | X | 2017
2019
Incentive Salary |
Our staff calculated the named executive officers' awards under the 20172019 EIP's short-term goals, in accordance with actual year-end results and the foregoing formulas. Mr. Hjerpe reviewed the results of each of the other named executive officer's level of achievement under that named executive officer's individual goal, and for Mr. Collins alsounder the ERM goals, and made award
recommendations to the Compensation Committee for the Compensation Committee's consideration. The Compensation Committee discussed and adopted those recommendations. The Compensation Committee determined Mr. Hjerpe's incentive award for his individual goal following the Compensation Committee's review of the level of achievement for this goal as provided by Mr. HjerpeHjerpe’s recommendations and the Compensation Committee's assessment of Mr. Hjerpe's achievement of this goal. The Compensation Committee and board of directors determined that Mr. Hjerpe achieved one of his goals at excess and one at target, as set forth in Table 54.staff calculations.
Based on those calculations and determinations,recommendations, the combined incentive awards were calculated, by goal, as follows:
Table 59 - 2017 Combined Short-and Long-Term Awards as Calculated by Goal
| |
Table 57 - 2019 Combined Short-and Long-Term Awards as Calculated by Goal
| | Table 57 - 2019 Combined Short-and Long-Term Awards as Calculated by Goal
|
| | Participant | Core Return | New Business | Insurance Advances | Insurance Membership | HHNE | JNE | Remediation | ERM | Individual | Total Combined Award | Core Return | Core Mission | Insurance Advances | Insurance Member-ship | HHNE | JNE | Remediation | Operational Efficiency | ERM | Total Combined Award |
| Mr. Hjerpe | $ | 164,621 |
| $ | 156,260 |
| $ | 117,195 |
| $ | 78,130 |
| $ | 78,130 |
| $ | 78,130 |
| N/A |
| N/A |
| $ | 68,363 |
| $ | 740,829 |
| $ | 163,410 |
| $ | 88,951 |
| $ | 116,415 |
| $ | 83,392 |
| $ | 88,951 |
| $ | 88,951 |
| N/A |
| $ | 72,272 |
| N/A |
| $ | 702,342 |
|
| Mr. Nitkiewicz | 54,679 |
| 53,323 |
| 39,992 |
| 26,662 |
| 26,662 |
| 26,662 |
| N/A |
| N/A |
| 16,633 |
| 244,613 |
| 47,474 |
| 28,412 |
| 36,407 |
| 24,353 |
| 28,412 |
| 28,412 |
| N/A |
| 22,323 |
| N/A |
| 215,793 |
|
| Ms. Elliott | 54,651 |
| 53,295 |
| 39,971 |
| 26,648 |
| 26,648 |
| 26,648 |
| N/A |
| N/A |
| 26,392 |
| 254,253 |
| 47,451 |
| 28,398 |
| 36,389 |
| 24,341 |
| 28,398 |
| 28,398 |
| N/A |
| 22,311 |
| N/A |
| 215,686 |
|
| Mr. Collins | 40,205 |
| N/A |
| N/A |
| N/A |
| 24,505 |
| 24,505 |
| $ | 26,255 |
| $ | 75,965 |
| 12,253 |
| 203,688 |
| 28,935 |
| N/A |
| N/A |
| N/A |
| 25,975 |
| 25,975 |
| $ | 38,962 |
| 20,409 |
| $ | 72,730 |
| 212,986 |
|
| Ms. Pratt | 48,050 |
| 46,858 |
| 35,144 |
| 23,429 |
| 23,429 |
| 23,429 |
| N/A |
| N/A |
| 20,081 |
| 220,420 |
| 44,166 |
| 26,432 |
| 33,871 |
| 22,656 |
| 26,432 |
| 26,432 |
| N/A |
| 20,768 |
| N/A |
| 200,757 |
|
| Mr. Barrett | 48,050 |
| 46,858 |
| 35,144 |
| 23,429 |
| 23,429 |
| 23,429 |
| N/A |
| N/A |
| 14,057 |
| 214,396 |
| 44,166 |
| 26,432 |
| 33,871 |
| 22,656 |
| 26,432 |
| 26,432 |
| N/A |
| 20,768 |
| N/A |
| 200,757 |
|
The named executive officers were eligible to receive 50 percent of the combined award illustrated above in a cash payment in March 2018,2020, following non-objection by the FHFA and approval of the board of directors. The column “short-term award” in Table 60 below58 sets forth the short-term incentive award paid to the named executive officers in March 20182020 and the remaining 50 percent which then becomes the target level of achievement for the long-term incentive opportunity.
Table 60 - 2017 Combined Short-and Long-Term Awards, Short-Term Awards and Long-Term Incentive Opportunity at Target Level of Achievement
| |
Table 58 - 2019 Combined Short-and Long-Term Awards, Short-Term Awards and Long-Term Incentive Opportunity at Target Level of Achievement
| | Table 58 - 2019 Combined Short-and Long-Term Awards, Short-Term Awards and Long-Term Incentive Opportunity at Target Level of Achievement
|
| | Participant | | Combined Short and Long Term Award | | Short-Term Award | | Long-Term Opportunity at Target | | Combined Short and Long Term Award | | Short-Term Award | | Long-Term Opportunity at Target |
| Mr. Hjerpe | | $ | 740,829 |
| | $ | 370,415 |
| | $ | 370,414 |
| | $ | 702,342 |
| | $ | 351,171 |
| | $ | 351,171 |
|
| Mr. Nitkiewicz | | 244,613 |
| | 122,307 |
| | 122,306 |
| | 215,793 |
| | 107,897 |
| | 107,896 |
|
| Ms. Elliott | | 254,253 |
| | 127,127 |
| | 127,126 |
| | 215,686 |
| | 107,843 |
| | 107,843 |
|
| Mr. Collins | | 203,688 |
| | 101,844 |
| | 101,844 |
| | 212,986 |
| | 106,493 |
| | 106,493 |
|
| Ms. Pratt | | 220,420 |
| | 110,210 |
| | 110,210 |
| | 200,757 |
| | 100,379 |
| | 100,378 |
|
| Mr. Barrett | | 214,396 |
| | 107,198 |
| | 107,198 |
| | 200,757 |
| | 100,379 |
| | 100,378 |
|
Final awards under the 20172019 EIP's long-term incentive opportunities cannot be determined until after December 31, 2019,2021, since they are based on average core return on capital stock over the three-year period starting January 1, 2017,2019, and ending December 31, 2019,2021, and targeted regulatory results as of December 31, 2019.2021. Based on the Bank's and individual levels of achievement as of December 31, 2017,2019, the named executive officers are eligible for long-term incentive opportunities, payable in March 2020,2022, as follows:
Table 61 - Long-Term Incentive Opportunity at Threshold, Target, and Excess
| |
Table 59 - Long-Term Incentive Opportunity at Threshold, Target, and Excess
| | Table 59 - Long-Term Incentive Opportunity at Threshold, Target, and Excess
|
| | | | Long-Term Incentive Opportunity at Threshold, Target, and Excess | | Long-Term Incentive Opportunity at Threshold, Target, and Excess |
| Participant | | Threshold | | Target | | Excess | | Threshold | | Target | | Excess |
| Mr. Hjerpe | | $ | 185,207 |
| | $ | 370,414 |
| | $ | 555,621 |
| | $ | 175,586 |
| | $ | 351,171 |
| | $ | 526,757 |
|
| Mr. Nitkiewicz | | 61,153 |
| | 122,306 |
| | 183,459 |
| | 53,948 |
| | 107,896 |
| | 161,844 |
|
| Ms. Elliott | | 63,563 |
| | 127,126 |
| | 190,689 |
| | 53,922 |
| | 107,843 |
| | 161,765 |
|
| Mr. Collins | | 50,922 |
| | 101,844 |
| | 152,766 |
| | 53,247 |
| | 106,493 |
| | 159,740 |
|
| Ms. Pratt | | 55,105 |
| | 110,210 |
| | 165,315 |
| | 50,189 |
| | 100,378 |
| | 150,567 |
|
| Mr. Barrett | | 53,599 |
| | 107,198 |
| | 160,797 |
| | 50,189 |
| | 100,378 |
| | 150,567 |
|
Additional Conditions on Long-Term Awards
Long-term awards are subject to the following additional conditions:
Participants must be employed by us on the payment date in March 20202022 to receive the long-term award, although participants that terminate employment by reason of death or disability or who are eligible to retire prior to that date may receive payment of the award in certain instances, as detailed in the 20172019 EIP. Ms. Elliott and Mr. Collins, who each retired as of December 31, 2019, are each eligible to receive the long-term award.
Subject to the discretion of the board of directors, the calculated long-term award may be reduced or eliminated (but not to a number that is less than zero) for some or all participants, as applicable, if, during calendar years 20182020 and/or 2019,2021, any of the following occurs such that if it had occurred prior to the year-end 20172019 calculations, it would have negatively impacted the goal results and reduced the associated payout calculation:
| |
◦ | operational errors or omissions result in material revisions to our 2017 financial results, information submitted to the FHFA, or data used to determine the combined award at year-end 2017; |
| |
◦ | significant information to the SEC, Office of Finance, and/or FHFA is submitted materially beyond any deadline or applicable grace period, other than late submissions that are caused by acts of God or other events beyond the reasonable control of the participants; or |
| |
◦ | we fail to make sufficient progress, as determined by the FHFA, in the timely remediation of examination and other supervisory findings relevant to the goal results or payout calculation. |
operational errors or omissions result in material revisions to our 2019 financial results, information submitted to the FHFA, or data used to determine the combined award at year-end 2019;
significant information to the SEC, Office of Finance, and/or FHFA is submitted materially beyond any deadline or applicable grace period, other than late submissions that are caused by acts of God or other events beyond the reasonable control of the participants; or
we fail to make sufficient progress, as determined by the FHFA, in the timely remediation of examination and other supervisory findings relevant to the goal results or payout calculation.
The actual payment of the long-term award is subject to the final approval of the board of directors and review and non-objection by the FHFA (to the extent required by the FHFA).
Retirement and Deferred Compensation Plans
We offer participation in qualified and nonqualified retirement plans to the named executive officers as key elements of our total rewards package. The benefits received under these plans are intended to enhance the competitiveness of our total compensation and benefits relative to the market by complementing the named executive officers' base salary and cash incentive opportunities. We maintain four retirement plans in which the named executive officers participate, including:
Pentegra Defined Benefit Plan for Financial Institutions (the Pentegra Defined Benefit Plan), a funded, tax-qualified, noncontributory plan that provides retirement benefits for all eligible employees;
Pension Benefit Equalization Plan (the Pension BEP), a nonqualified, unfunded defined benefit plan covering certain senior officers, as defined in the plan, which includes the named executive officers and other personnel as determined by the board of directors;
Pentegra Defined Contribution Plan for Financial Institutions (the Pentegra Defined Contribution Plan), a 401(k) plan, under which we match employee contributions for all eligible employees; and
Thrift Benefit Equalization Plan (the Thrift BEP), a nonqualified, unfunded defined contribution plan with a deferred compensation feature, which is available to the named executive officers, directors, and such other personnel as determined by the board of directors.
The Compensation Committee believes that the Thrift BEP, together with the Pension BEP, provide retirement benefits that are necessary for our total rewards package to remain competitive, particularly compared with labor market competitors that may offer equity-based compensation. Additional information regarding these plans can be found with the Pension Benefits and Nonqualified Deferred Compensation tables below.
All benefits payable under the Pension BEP and Thrift BEP are paid solely out of our general assets, or from assets set aside in rabbi trusts subject to the claims of our creditors in the event of our insolvency.
Perquisites
Perquisites for the named executive officers may include supplemental life insurance (Mr. Nitkiewicz and Ms. Elliott only), travel memberships and subscriptions, spouse travel duringfor certain business events, parking, or a 100 percent mass transportation subsidy. Mr. Hjerpe is also eligible for the personal use of an automobile. The Compensation Committee believes that the perquisites offered to the named executive officers are reasonable and necessary for the total compensation package to remain competitive in recruiting and retaining them.
Potential Payments upon Termination or Change in Control
Change-in-Control Agreement with Mr. Hjerpe
We have a change-in-control agreement with Mr. Hjerpe. The board of directors had determined that having the change in control agreement in place would be an effective recruitment and retention tool since the events under which we provide payment to Mr. Hjerpe would provide a measure of protection to Mr. Hjerpe in the instance of our relocation in excess of 50 miles or his termination of employment or material diminution in duties or base compensation resulting from merger, consolidation, reorganization, sale of all or substantially all of our assets, or our liquidation or dissolution. Under the terms of the change of control agreement, in the event that either:
Mr. Hjerpe terminates his employment with us for a Good Reason (as defined in the change in control agreement) that is not remedied within certain cure periods by us; or
we (or our successor in the event of a reorganization) terminate Mr. Hjerpe's employment without Cause (as defined by the change in control agreement).
We have agreed to pay Mr. Hjerpe an amount equal to his annualized base salary at the time of such termination to be paid in equal installments over the following 12 months according to our regular payroll cycle during such period. Notwithstanding the foregoing, our obligation to pay Mr. Hjerpe such amount will be subject to Mr. Hjerpe's execution of our standard release of claims agreement and our compliance with applicable statutory and regulatory requirements at the time such payment would otherwise be made. Payments to Mr. Hjerpe under theThe change-in-control agreement are in lieu of any severance payments that would otherwise be payable to him.is discussed below under Post-termination Payments.
Employment Status and Severance BenefitsPolicy
Pursuant to the FHLBank Act, our employees, including the named executive officers as of December 31, 2017,2019, are "at will" employees. Each may resign his or her employment at any time, and we may terminate his or her employment at any time for any reason or no reason, with or without cause, and with or without notice. Under our severance policy, all regular full- and part-time employees who work at least 1,000 hours per year whose employment is terminated involuntarily for reasons other than "cause," (as determined by us at our sole discretion), are provided with severance packages reflecting their status in the organization and tenure. Severance packages for employees leaving by mutual agreement or terminated for cause is at our sole discretion, provided that such severance shall not exceed that paid to employees terminated involuntarily for reasons other than cause. The severance policy does not constitute a contractual relationship between the Bank and the named executive officers, and we reserve the right to modify, revoke, suspend, terminate, or change the severance policy at any time without notice.
To receive thisbenefits under the severance benefit,policy, individuals must agree to execute our standard release of claims agreement. In addition and at our sole discretion, we may provide outplacement and/or such other services as may assist in ensuring a smooth career transition.
As chief executive officer, Mr. Hjerpe is eligible for 12 months of base pay Payments under the severance policy unless he has received paymentsare discussed below under Post-termination Payments.
Executive Change in Control Severance Plan
In 2018, the Board adopted an Executive Change in Control Severance Plan (Executive Severance Plan). The purpose of the Executive Severance Plan is to provide stability to the Bank in the event of a change in control agreementand to facilitate hiring and retention of senior management by providing them with certain protections and benefits in lieuthe event of a qualifying termination following a change in control of the Bank. Outside of a change in control period (as defined in the Executive Severance Plan), we have the right to revise, modify or terminate the plan in whole or in part at any time without the consent of any severanceparticipant. During a change in control period (or such longer period until all payments and benefits, if any, which become due under the plan have been paid), however, any revision, modification, or termination that would otherwise be payableimpact benefits to him by us. Based on their statuses as executive officers, Mr. Nitkiewicz, Ms. Elliott, Mr. Collins, Ms. Pratt, and Mr. Barrett are eligible for a minimumparticipant would require the consent of six months and a maximum of 12 months of base paythat participant. The Executive Severance Plan is discussed below under the severance policy, depending on their tenure of employment. All severance packages for executive officers, including the named executive officers, must have the approval of the chief executive officer and the Compensation Committee prior to making any award under the severance policy.Post-termination Payments.
FHFA Oversight of Executive Compensation
The FHFA provides certain oversight of FHLBank executive officer compensation. Section 1113 of HERAthe Housing and Economic Recovery Act (HERA) requires that the Director of the FHFA prohibit an FHLBank from paying compensation to its executive officers that is not reasonable and comparable to that paid for employment in similar businesses involving similar duties and responsibilities. In connection with this responsibility, the FHFA has issued final rules on executive compensation and golden parachute payments, which provide for oversight of such compensation and payments. In addition to those rules, the FHFA has issued an advisory bulletin on principles for FHLBank executive compensation together with certain protocols for the review of proposed FHLBank compensation actions. We await express non-objection from the FHFA to any proposed award of
compensation to our named executive officers prior to making any such award. The FHFA could issue additional rules, advisory bulletins, and/or review protocols that could further impact named executive officer compensation.
Compensation Tables
The following table sets forth all compensation received from the Bank for the years ended December 31, 2017,2019, 20162018, and 2015,2017, by our named executive officers.
Table 62 - Summary Compensation for 2017, 2016 and 2015
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name and Principal Position | | Year | | Salary(1) | | Bonus(2) | | Non-equity
Incentive Plan
Compensation Short-Term(3) | | Non-equity Incentive Plan Compensation Long-Term(4) | | Change in Pension Value and Nonqualified Deferred Compensation Earnings(5) | | All Other Compensation(6) | | Total |
| Edward A. Hjerpe III | | 2017 |
| | $ | 781,300 |
| | $ | — |
| | $ | 370,415 |
| | $ | 386,685 |
| (7) | $ | 981,000 |
| | $ | 106,684 |
| | $ | 2,626,084 |
|
| President and | | 2016 |
| | 756,700 |
| | — |
| | 364,162 |
| | 289,987 |
| | 692,000 |
| | 103,149 |
| | 2,205,998 |
|
| Chief Executive Officer | | 2015 |
| | 733,300 |
| | 29,332 |
| | 362,067 |
| | 312,420 |
| | 244,000 |
| | 90,530 |
| | 1,771,649 |
|
| | | | | | | | | | | | | | | | | |
| Frank Nitkiewicz | | 2017 |
| | 380,880 |
| | — |
| | 122,307 |
| | 170,888 |
| | 1,022,000 |
| | 41,424 |
| | 1,737,499 |
|
| Executive Vice President | | 2016 |
| | 369,280 |
| | 1,495 |
| | 123,340 |
| | 102,329 |
| | 691,000 |
| | 40,551 |
| | 1,327,995 |
|
| and Chief Financial Officer | | 2015 |
| | 358,000 |
| | 14,320 |
| | 120,557 |
| | 111,620 |
| | 239,000 |
| | 35,428 |
| | 878,925 |
|
| | | | | | | | | | | | | | | | | |
| M. Susan Elliott | | 2017 |
| | 380,680 |
| | — |
| | 127,127 |
| | 175,075 |
| | 979,000 |
| | 46,414 |
| | 1,708,296 |
|
| Executive Vice President | | 2016 |
| | 369,280 |
| | 2,961 |
| | 125,310 |
| | 103,371 |
| | 788,000 |
| | 44,704 |
| | 1,433,626 |
|
| and Chief Business Officer | | 2015 |
| | 358,000 |
| | 14,320 |
| | 123,510 |
| | 108,291 |
| | 301,000 |
| | 39,488 |
| | 944,609 |
|
| | | | | | | | | | | | | | | | | |
| George H. Collins | | 2017 |
| | 350,070 |
| | 1,450 |
| | 101,844 |
| | 138,578 |
| | 708,000 |
| | 31,108 |
| | 1,331,050 |
|
| Executive Vice President | | 2016 |
| | 339,570 |
| | — |
| | 94,337 |
| | 74,106 |
| | 516,000 |
| | 32,040 |
| | 1,056,053 |
|
| and Chief Risk Officer | | 2015 |
| | 330,000 |
| | 13,200 |
| | 97,763 |
| | 98,372 |
| | 244,000 |
| | 23,275 |
| | 806,610 |
|
| | | | | | | | | | | | | | | | | |
| Carol Hempfling Pratt | | 2017 |
| | 334,700 |
| | — |
| | 110,210 |
| | 143,220 |
| | 288,000 |
| | 31,588 |
| | 907,718 |
|
| Senior Vice President and | | 2016 |
| | 324,500 |
| | — |
| | 107,085 |
| | 84,691 |
| | 216,000 |
| | 31,073 |
| | 763,349 |
|
| General Counsel | | 2015 |
| | 295,000 |
| | 12,144 |
| | 101,038 |
| | 92,223 |
| | 78,000 |
| | 26,835 |
| | 605,240 |
|
| | | | | | | | | | | | | | | | | |
| Timothy J. Barrett | | 2017 |
| | 334,700 |
| | — |
| | 107,198 |
| | 138,690 |
| | 270,000 |
| | 27,707 |
| | 878,295 |
|
| Senior Vice President and | | 2016 |
| | 324,500 |
| | — |
| | 107,085 |
| | 84,691 |
| | 205,000 |
| | 27,413 |
| | 748,689 |
|
| Treasurer | | 2015 |
| | 295,000 |
| | 12,144 |
| | 97,841 |
| | 94,038 |
| | 68,000 |
| | 18,433 |
| | 585,456 |
|
Table 60 - Summary Compensation for 2019, 2018 and 2017
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name and Principal Position | | Year | | Salary(1) | | Bonus(2) | | Non-equity
Incentive Plan
Compensation Short-Term(3) | | Non-equity Incentive Plan Compensation Long-Term(4) | | Change in Pension Value and Nonqualified Deferred Compensation Earnings(5) | | All Other Compensation(6) | | Total |
| Edward A. Hjerpe III | | 2019 |
| | $ | 889,510 |
| | $ | — |
| | $ | 351,171 |
| | $ | 524,069 |
| | $ | 1,693,000 |
| | $ | 116,859 |
| | $ | 3,574,609 |
|
| President and Chief Executive Officer | | 2018 |
| | 859,430 |
| | — |
| | 386,107 |
| | 473,323 |
| (7) | 498,000 |
| | 118,999 |
| | 2,335,859 |
|
| | 2017 |
| | 781,300 |
| | — |
| | 370,415 |
| | 386,685 |
| (8) | 981,000 |
| | 106,684 |
| | 2,626,084 |
|
| | | | | | | | | | | | | | | | | |
| Frank Nitkiewicz | | 2019 |
| | 405,880 |
| | — |
| | 107,897 |
| | 173,041 |
| | 1,662,000 |
| | 47,616 |
| | 2,396,434 |
|
| Executive Vice President and Chief Financial Officer | | 2018 |
| | 393,280 |
| | — |
| | 121,684 |
| | 164,658 |
| | 244,000 |
| | 46,779 |
| | 970,401 |
|
| | 2017 |
| | 380,880 |
| | — |
| | 122,307 |
| | 170,888 |
| | 1,022,000 |
| | 41,424 |
| | 1,737,499 |
|
| | | | | | | | | | | | | | | | | |
| M. Susan Elliott | | 2019 |
| | 405,680 |
| | — |
| | 107,843 |
| | 179,860 |
| | 1,301,000 |
| | 54,584 |
| | 2,048,967 |
|
| Executive Vice President and Chief Business Officer | | 2018 |
| | 393,080 |
| | — |
| | 121,622 |
| | 167,288 |
| | 422,000 |
| | 53,012 |
| | 1,157,002 |
|
| | 2017 |
| | 380,680 |
| | — |
| | 127,127 |
| | 175,075 |
| | 979,000 |
| | 46,414 |
| | 1,708,296 |
|
| | | | | | | | | | | | | | | | | |
| Carol Hempfling Pratt | | 2019 |
| | 377,600 |
| | — |
| | 100,379 |
| | 155,927 |
| | 502,000 |
| | 37,657 |
| | 1,173,563 |
|
| Executive Vice President, General Counsel and Corporate Secretary | | 2018 |
| | 346,400 |
| | — |
| | 107,179 |
| | 142,958 |
| | 218,000 |
| | 35,990 |
| | 850,527 |
|
| | 2017 |
| | 334,700 |
| | — |
| | 110,210 |
| | 143,220 |
| | 288,000 |
| | 31,588 |
| | 907,718 |
|
| | | | | | | | | | | | | | | | | |
| Timothy J. Barrett | | 2019 |
| | 377,600 |
| | — |
| | 100,379 |
| | 151,666 |
| | 469,000 |
| | 31,808 |
| | 1,130,453 |
|
| Executive Vice President and Treasurer | | 2018 |
| | 346,400 |
| | — |
| | 107,179 |
| | 142,958 |
| | 198,000 |
| | 31,253 |
| | 825,790 |
|
| | 2017 |
| | 334,700 |
| | — |
| | 107,198 |
| | 138,690 |
| | 270,000 |
| | 27,707 |
| | 878,295 |
|
| | | | | | | | | | | | | | | | | |
| George H. Collins | | 2019 |
| | 371,070 |
| | | | 106,493 |
| | 144,091 |
| | 1,110,000 |
| | 36,233 |
| | 1,767,887 |
|
| Executive Vice President and Chief Risk Officer | | 2018 |
| | 361,070 |
| | | | 105,072 |
| | 125,940 |
| | 236,000 |
| | 36,086 |
| | 864,168 |
|
| | 2017 |
| | 350,070 |
| | 1,450 |
| | 101,844 |
| | 138,578 |
| | 708,000 |
| | 31,108 |
| | 1,331,050 |
|
_______________________
| |
| (1) | Amounts shown are not reduced to reflect the named executive officers' elections, if any, to defer receipt of salary into the Pentegra Defined Contribution Plan or the Thrift BEP. |
| |
| (2) | In 2017 Mr. Collins received an additional bonus of $1,450 as a cash award for 20 years of service. In 2016 Mr. Nitkiewicz received an additional bonusThe amount of $1,495this service award is the same as a cash award for 25would have been paid to any employee who completed the same number of years of service and Ms. Elliott received an additionalin 2017. |
bonus of $2,961 as a cash award for 35 years of service. In 2015 Ms. Pratt and Mr. Barrett received an additional bonus of $344 as a cash award for their five years of service. The amount of these service awards is the same as would have been paid to any employee who completed the same number of years of service in 2017, 2016 or 2015. In 2015, all Bank employees, including the named executive officers, were awarded a special cash bonus equal to 4 percent of base salary as of December 1, 2015, in recognition of our success for the year ended December 31, 2015, reflected in our record net income for the year as well as a number of measures that are indicators of our success against meaningful criteria for the past several years.
| |
| (3) | Represents amounts paid under the 2019 EIP during 2020 in respect of service performed in 2019, under the 2018 EIP during 2019 in respect of service performed in 2018, and under the 2017 EIP during 2018 in respect of service performed in 2017, under the 2016 EIP during 2017 in respect of service performed in 2016, and under the 2015 EIP during 2016 in respect of service performed in 2015.2017. |
| |
| (4) | Represents amounts paidearned under the 20152017 EIP for satisfying a level of achievement between target and excess at December 31, 2017 for satisfying at the excess level of achievement2019, a long-term goal based on our average pre-assessment pre-other-than-temporary-impairment core return on capital stock (as such term is defined in the 20152017 EIP and referred to in this report as the 20152017 EIP core return on capital stock), which is explained further below in this paragraph; andfootnote; amounts paidearned under the 2014 and 2013 EIPs2016 EIP for satisfying at the achievementexcess level between target and excess long-term goals based on our retained earnings (as adjusted as explained in this footnote)of achievement at December 31, 2016, and December 31, 2015, respectively.2018, a |
Retained earnings were adjusted for payouts
long-term goal based on our pre-assessment core return on capital stock (as such term is defined in the 2016 EIP and referred to in this report as the 2016 EIP core return on capital stock), which is explained further below in this footnote; and amounts earned under the 2014 and 2013 EIPs from the amounts determined in accordance with GAAP to net out the impacts of prepayment fee income, private-label MBS litigation settlement income, and debt retirement expense. With the approval of the board of directors, retained earnings was additionally adjusted from this formula2015 EIP for the payouts under the 2014 EIP to exclude from net income unbudgeted voluntary pension contributions and also to exclude the expense associated with JNE and HHNE, programs which were not contemplatedsatisfying at the timeexcess level of achievement at December 31, 2017, a long-term goal based on our pre-assessment, pre-OTTI core return on capital stock (as such term is defined in the 20142015 EIP was established. The difference between GAAP retained earnings and referred to in this measure of adjusted retained earningsreport as the 2015 EIP core return on capital stock), which is that GAAP retained earnings does not provide for the adjustments described above.explained further below in this footnote.
The 2015 EIP core return on capital stock was calculated as wasis a measure of return on capital stock that excludes or adjusts the timing of recognition of the impact of AHP expenses, gains (losses) on debt retirement, net prepayment fees, net unrealized gains (or losses) attributable to hedges, OTTI credit losses on private-label MBS, gains from the accretion of prior OTTI credit losses due to improvements in projected private-label MBS performance, and private-label MBS litigation settlement income. The difference between GAAP return on capital stock and this measure of return on capital stock is that GAAP return on capital stock does not provide for the exclusions described in the immediately prior sentence, and core return on capital stock includes shares classified as described under Short-Term Incentive Goals and Actual Achievement.mandatorily redeemable capital stock. With the approval of the board of directors, the 2015 EIP core return on capital stock was adjusted from the formula set out in the 2015 EIP to exclude from net income unbudgeted voluntary pension contributions and also to exclude the expense associated with JNE and HHNE, programs which were not contemplated at the time the 2015 EIP was established. The difference between GAAP return on capital stock and this measure of return on capital stock is that GAAP return on capital stock does not provide for the adjustments described under Short-Term Incentive Goals and Actual Achievement, and the 2015 EIP core return on capital stock includes shares classified as mandatorily redeemable capital stock. Achievement of this goal was subject to compliance with our VaR and duration of equity limits for at least 10 of the 12 months of each year. We complied with these limits. These limits are described under Part II — Item 7A — Quantitative and Qualitative Disclosures about Market Risk — Measurement of Market and Interest-Rate Risk and Related Policy Constraints. The 2016 EIP core return on capital stock is a measure of return on capital stock that excludes or adjusts the timing of recognition of the impact of AHP expenses, expenses of the HHNE and JNE initiatives, gains (losses) on debt retirement, net prepayment fees, net unrealized gains (or losses) attributable to hedges, OTTI credit losses on private-label MBS, gains from the accretion of prior OTTI credit losses due to improvements in projected private-label MBS performance, and private-label MBS litigation settlement income. In addition, with the approval of the board of directors, we also adjusted the calculation of core return on capital stock by including unbudgeted voluntary pension contributions to the extent funded by current period litigation income. The difference between GAAP return on capital stock and this measure of return on capital stock is that GAAP return on capital stock does not provide for the adjustments described above, and core return on capital stock includes shares classified as mandatorily redeemable capital stock. Achievement of this goal was subject to compliance with our VaR and duration of equity limits for at least 10 of the 12 months of the year. We complied with these limits. These limits are described under Part II — Item 7A — Quantitative and Qualitative Disclosures about Market Risk — Measurement of Market and Interest-Rate Risk and Related Policy Constraints. The 2017 EIP core return on capital stock is calculated as described for pre-assessment, core return on capital stock for the 2019 EIP (see “Short Term Incentive Goals and Actual Achievements” above), except that the 2017 EIP core return on capital stock amount is not adjusted for interest expense on mandatorily redeemable capital stock. The amounts paid under the 2015, 20142017, 2016, and 20132015 EIPs also reflect a payout based on the results of the long-term regulatory goal of those plans.
| |
| (5) | The amounts shown reflect the actuarial increase/decrease in the present value of the named executive officer's benefits under all pension plans established by us determined using interest-rate and mortality-rate assumptions consistent with those used in our financial statements. No amount of above market earnings on nonqualified deferred compensation is reported because above market rates are not possible under the Thrift BEP, the only such plan that we offer. |
| |
| (6) | See Table 6361 - Other Compensation for amounts, which include our match on employee contributions to the Thrift BEP and the Pentegra Defined Contribution Plan, insurance premiums paid by us with respect to supplemental life insurance, and perquisites. |
| |
| (7) | The amount Mr. Hjerpe earned under the 2016 EIP at December 31, 2018, based on the formula in the plan, was $486,156. This amount was reduced to $473,323, however, to cap the combined short- and long-term incentive paid under the plan to no greater than 100 percent of Mr. Hjerpe’s salary for 2018. The board of directors exercised discretion to raise the cap from the provision in the plan, which had capped the combined short- and long-term incentive paid under the plan to no greater than 100 percent of the average of the participant’s salary for 2016, 2017, and 2018. The Bank received nonobjection from the FHFA on the revision of the cap. |
| |
| (8) | The amount Mr. Hjerpe earned under the 2015 EIP at December 31, 2017, based on the formula in the plan, was $513,230. This amount was reduced to $386,685, however, to comply with a provision capping combined short- and long-term incentive paid under the plan to no greater than 100 percent of the average of the participant’s salary for 2015, 2016, and 2017. |
Table 63 - Other Compensation
| |
Table 61 - Other Compensation
| | Table 61 - Other Compensation
|
| | Name | | Year | | Contributions to Defined Contribution Plans(1) | | Insurance Premiums | | Perquisites(2) | | Total | | Year | | Contributions to Defined Contribution Plans(1) | | Insurance Premiums | | Perquisites(2) | | Total |
| Edward A. Hjerpe III | | 2017 | | $ | 86,127 |
| | $ | — |
| | $ | 20,557 |
| | $ | 106,684 |
| | 2019 | | $ | 104,930 |
| | $ | — |
| | $ | 11,929 |
| | $ | 116,859 |
|
| | | 2016 | | 85,882 |
| | — |
| | 17,267 |
| | 103,149 |
| | 2018 | | 96,992 |
| | — |
| | 22,007 |
| | 118,999 |
|
| | | 2015 | | 72,643 |
| | — |
| | 17,887 |
| | 90,530 |
| | 2017 | | 86,127 |
| | — |
| | 20,557 |
| | 106,684 |
|
| | | | | | | | | | | | | | | | | |
| Frank Nitkiewicz | | 2017 | | 36,393 |
| | 5,031 |
| | — |
| | 41,424 |
| | 2019 | | 41,531 |
| | 6,085 |
| | — |
| | 47,616 |
|
| | | 2016 | | 36,090 |
| | 4,461 |
| | — |
| | 40,551 |
| | 2018 | | 41,189 |
| | 5,590 |
| | — |
| | 46,779 |
|
| | | 2015 | | 31,504 |
| | 3,924 |
| | — |
| | 35,428 |
| | 2017 | | 36,393 |
| | 5,031 |
| | — |
| | 41,424 |
|
| | | | | | | | | | | | | | | | | |
| M. Susan Elliott | | 2017 | | 36,562 |
| | 9,852 |
| | — |
| | 46,414 |
| | 2019 | | 41,672 |
| | 12,912 |
| | — |
| | 54,584 |
|
| | | 2016 | | 36,068 |
| | 8,636 |
| | — |
| | 44,704 |
| | 2018 | | 41,717 |
| | 11,295 |
| | — |
| | 53,012 |
|
| | | 2015 | | 31,774 |
| | 7,714 |
| | — |
| | 39,488 |
| | 2017 | | 36,562 |
| | 9,852 |
| | — |
| | 46,414 |
|
| | | | | | | | | | | | | | | | | |
| George H. Collins | | 2017 | | 31,108 |
| | — |
| | — |
| | 31,108 |
| |
| | | 2016 | | 32,040 |
| | — |
| | — |
| | 32,040 |
| |
| | | 2015 | | 23,275 |
| | — |
| | — |
| | 23,275 |
| |
| | | | | | | | | | |
| Carol Hempfling Pratt | | 2017 | | 31,588 |
| | — |
| | — |
| | 31,588 |
| | 2019 | | 37,657 |
| | — |
| | — |
| | 37,657 |
|
| | | 2016 | | 31,073 |
| | — |
| | — |
| | 31,073 |
| | 2018 | | 35,990 |
| | — |
| | — |
| | 35,990 |
|
| | | 2015 | | 26,835 |
| | — |
| | — |
| | 26,835 |
| | 2017 | | 31,588 |
| | — |
| | — |
| | 31,588 |
|
| | | | | | | | | | | | | | | | | |
| Timothy J. Barrett | | 2017 | | 27,707 |
| | — |
| | — |
| | 27,707 |
| | 2019 | | 31,808 |
| | — |
| | — |
| | 31,808 |
|
| | | 2016 | | 27,413 |
| | — |
| | — |
| | 27,413 |
| | 2018 | | 31,253 |
| | — |
| | — |
| | 31,253 |
|
| | | 2015 | | 18,433 |
| | — |
| | — |
| | 18,433 |
| | 2017 | | 27,707 |
| | — |
| | — |
| | 27,707 |
|
| | | | | | | | | | |
| George H. Collins | | | 2019 | | 36,233 |
| | — |
| | — |
| | 36,233 |
|
| | | | 2018 | | 36,086 |
| | — |
| | — |
| | 36,086 |
|
| | | | 2017 | | 31,108 |
| | — |
| | — |
| | 31,108 |
|
_______________________
| |
| (1) | Amounts include our contributions to the Pentegra Defined Contribution Plan, as well as contributions to the Thrift BEP. Contributions to the Thrift BEP are also shown in the Nonqualified Deferred Compensation Table below. |
The Pentegra Defined Contribution Plan, a 401(k) plan, excludes hourly, flex staff, and short-term employees from participation, but continues to includeincludes all other employees. Employees may elect to defer one percent to 50 percent of their plan salary, as defined in the plan document. We make contributions based on the amount the employee contributes, up to the first three3 percent of plan salary, multiplied by the following factors:
100 percent during the second and third years of employment.
150 percent during the fourth and fifth years of employment.
200 percent following completion of five or more years of employment.
Participant deferrals are limited on an annual basis by Internal Revenue Code (IRC) rules. For 2017,2019, the maximum elective deferral amount was $18,000$19,000 (or $24,000$25,000 per year for participants who attain or exceed age 50 in 2017)2019), and the maximum matching contribution under the terms of the Pentegra Defined Contribution Plan was $16,200 (three$16,800 (3 percent multiplied by two multiplied by the $270,000$280,000 IRC compensation limit).
A description of the Thrift BEP follows the Nonqualified Deferred Compensation Table.
| |
| (2) | Amount for Mr. Hjerpe includes the following perquisites: personal use of a Bank-owned vehicle, parking, reimbursement for mass transportation, spousal travel expenses, and travel memberships and subscriptions. |
The following table shows the potential payouts for our non-equity incentive plan awards under the 20172019 EIP, for our named executive officers:
Table 64 - Grants of Plan-Based Awards for Fiscal Year 2017
| |
Table 62 - Grants of Plan-Based Awards for Fiscal Year 2019
| | Table 62 - Grants of Plan-Based Awards for Fiscal Year 2019
|
| | | | Estimated Possible Payouts Under Non-equity Incentive Plan Awards (1) | | Estimated Possible Payouts Under Non-equity Incentive Plan Awards (1) |
| Short-Term Component: | | Threshold | | Target | | Excess | | Threshold | | Target | | Excess |
| Mr. Hjerpe | | $ | 195,325 |
| | $ | 292,988 |
| | $ | 390,650 |
| | $ | 222,378 |
| | $ | 333,566 |
| | $ | 444,755 |
|
| Mr. Nitkiewicz | | 57,132 |
| | 95,220 |
| | 133,308 |
| | 60,882 |
| | 101,470 |
| | 142,058 |
|
| Ms. Elliott | | 57,102 |
| | 95,170 |
| | 133,238 |
| | 60,852 |
| | 101,420 |
| | 141,988 |
|
| Mr. Collins | | 52,511 |
| | 87,518 |
| | 122,525 |
| |
| Ms. Pratt | | 50,205 |
| | 83,675 |
| | 117,145 |
| | 56,640 |
| | 94,400 |
| | 132,160 |
|
| Mr. Barrett | | 50,205 |
| | 83,675 |
| | 117,145 |
| | 56,640 |
| | 94,400 |
| | 132,160 |
|
| Mr. Collins | | | 55,661 |
| | 92,768 |
| | 129,875 |
|
| | | | | | | | | | | | | |
| Long-Term Component: | | | | | | | | | | | | |
| Mr. Hjerpe | | | | | | | | | | | | |
| If short-term component results in: | | Threshold | | Target | | Excess | | Threshold | | Target | | Excess |
| Threshold | | $ | 97,663 |
| | $ | 195,325 |
| | $ | 292,988 |
| | $ | 111,189 |
| | $ | 222,378 |
| | $ | 333,566 |
|
| Target | | 146,494 |
| | 292,988 |
| | 439,481 |
| | 166,783 |
| | 333,566 |
| | 500,349 |
|
| Excess | | 195,325 |
| | 390,650 |
| | 585,975 |
| | 222,378 |
| | 444,755 |
| | 667,134 |
|
| | | | | | | | | | | | | |
| Mr. Nitkiewicz | | | | | | | | | | | | |
| If short-term component results in: | | Threshold | | Target | | Excess | | Threshold | | Target | | Excess |
| Threshold | | $ | 28,566 |
| | $ | 57,132 |
| | $ | 85,698 |
| | $ | 30,441 |
| | $ | 60,882 |
| | $ | 91,323 |
|
| Target | | 47,610 |
| | 95,220 |
| | 142,830 |
| | 50,735 |
| | 101,470 |
| | 152,205 |
|
| Excess | | 66,654 |
| | 133,308 |
| | 199,962 |
| | 71,029 |
| | 142,058 |
| | 213,087 |
|
| | | | | | | | | | | | | |
| Ms. Elliott | | | | | | | | | | | | |
| If short-term component results in: | | Threshold | | Target | | Excess | | Threshold | | Target | | Excess |
| Threshold | | $ | 28,551 |
| | $ | 57,102 |
| | $ | 85,653 |
| | $ | 30,426 |
| | $ | 60,852 |
| | $ | 91,278 |
|
| Target | | 47,585 |
| | 95,170 |
| | 142,755 |
| | 50,710 |
| | 101,420 |
| | 152,130 |
|
| Excess | | 66,619 |
| | 133,238 |
| | 199,857 |
| | 70,994 |
| | 141,988 |
| | 212,982 |
|
| | | | | | | | | | | | | |
| Mr. Barrett and Ms. Pratt | | | | | | | |
| If short-term component results in: | | | Threshold | | Target | | Excess |
| Threshold | | | $ | 28,320 |
| | $ | 56,640 |
| | $ | 84,960 |
|
| Target | | | 47,200 |
| | 94,400 |
| | 141,600 |
|
| Excess | | | 66,080 |
| | 132,160 |
| | 198,240 |
|
| | | | | | | | |
| Mr. Collins | | | | | | | | | | | | |
| If short-term component results in: | | Threshold | | Target | | Excess | | Threshold | | Target | | Excess |
| Threshold | | $ | 26,255 |
| | $ | 52,511 |
| | $ | 78,766 |
| | $ | 27,830 |
| | $ | 55,661 |
| | $ | 83,490 |
|
| Target | | 43,759 |
| | 87,518 |
| | 131,276 |
| | 46,384 |
| | 92,768 |
| | 139,152 |
|
| Excess | | 61,262 |
| | 122,525 |
| | 183,787 |
| | 64,937 |
| | 129,875 |
| | 194,811 |
|
| | | | | | | | |
| Mr. Barrett and Ms. Pratt | | | | | | | |
| If short-term component results in: | | Threshold | | Target | | Excess | |
| Threshold | | $ | 25,103 |
| | $ | 50,205 |
| | $ | 75,308 |
| |
| Target | | 41,838 |
| | 83,675 |
| | 125,513 |
| |
| �� Excess | | 58,573 |
| | 117,145 |
| | 175,718 |
| |
______________________
| |
| (1) | Amounts represent potential awards under the 20172019 EIP; actual amounts awarded are reflected in Table 6260 - Summary Compensation. See Executive Incentive Plans above for further discussion of performance goals and plan payouts. |
Retirement Plans
Table 65 - Pension Benefits
| |
Table 63 - Pension Benefits
| | Table 63 - Pension Benefits
|
| | Name | | Plan Name | | No. of Years of Credited Service(1) | | Present Value of Accumulated Benefit(2) | | Payments During Year Ended December 31, 2017 | | Plan Name | | No. of Years of Credited Service(1) | | Present Value of Accumulated Benefit(2) | | Payments During Year Ended December 31, 2019 |
| Edward A. Hjerpe III | | Pentegra Defined Benefit Plan | | 25.67 |
| (3) | | $ | 1,745,000 |
| | $ | — |
| | Pentegra Defined Benefit Plan | | 27.67 |
| (3) | | $ | 2,229,000 |
| | $ | — |
|
| | | Pension BEP | | 8.50 |
| | 2,051,000 |
| | — |
| | Pension BEP | | 10.50 |
| | 3,758,000 |
| | — |
|
| Frank Nitkiewicz | | Pentegra Defined Benefit Plan | | 25.83 |
| | 1,713,000 |
| | — |
| | Pentegra Defined Benefit Plan | | 27.83 |
| | 2,193,000 |
| | — |
|
| | | Pension BEP | | 26.83 |
| | 3,084,000 |
| | — |
| | Pension BEP | | 28.83 |
| | 4,510,000 |
| | — |
|
| M. Susan Elliott | | Pentegra Defined Benefit Plan | | 35.58 |
| | 2,722,000 |
| | — |
| | Pentegra Defined Benefit Plan | | 37.58 |
| | 3,139,000 |
| | — |
|
| | | Pension BEP | | 36.08 |
| | 4,079,000 |
| | — |
| | Pension BEP | | 38.08 |
| | 5,385,000 |
| | — |
|
| George H. Collins | | Pentegra Defined Benefit Plan | | 19.83 |
| (4) | | 1,373,000 |
| | — |
| |
| | | Pension BEP | | 20.33 |
| (5) | | 1,934,000 |
| | — |
| |
| Carol Hempfling Pratt | | Pentegra Defined Benefit Plan | | 6.50 |
| | 400,000 |
| | — |
| | Pentegra Defined Benefit Plan | | 8.50 |
| | 649,000 |
| | — |
|
| | | Pension BEP | | 7.50 |
| | 465,000 |
| | — |
| | Pension BEP | | 9.50 |
| | 936,000 |
| | — |
|
| Timothy J. Barrett | | Pentegra Defined Benefit Plan | | 6.17 |
| | 366,000 |
| | — |
| | Pentegra Defined Benefit Plan | | 8.17 |
| | 603,000 |
| | — |
|
| | | Pension BEP | | 7.17 |
| | 421,000 |
| | — |
| | Pension BEP | | 9.17 |
| | 851,000 |
| | — |
|
| George H. Collins | | | Pentegra Defined Benefit Plan | | 21.83 |
| (4) | | 1,788,000 |
| | — |
|
| | | | Pension BEP | | 22.33 |
| (5) | | 2,865,000 |
| | — |
|
_______________________
| |
| (1) | Equals number of years of credited service as of December 31, 2017.2019. |
| |
| (3) | Number of years of credited service for the Pentegra Defined Benefit Plan includes 18.5920.59 years of service at the Bank and 7.08 years of service at FIRSTFED AMERICA BANCORP, Inc., which entities are both participants in the Pentegra Defined Benefit Plan. |
| |
| (4) | Number of years of credited service for the Pentegra Defined Benefit Plan includes 2.33 years of service at the FHLBank of Pittsburgh. |
| |
| (5) | Number of years of credited service for the Pension BEP includes recognition of 2.83 years of service at the FHLBank of Pittsburgh. |
We participate in the Pentegra Defined Benefit Plan to provide retirement benefits for eligible employees, including the named executive officers. Employees become eligible to participate in the Pentegra Defined Benefit Plan the first day of the month following satisfaction of our waiting period, which is one year of service with us. The Pentegra Defined Benefit Plan excludes hourly paid employees, flex staff, and short-term employees from participation. Participants are 20 percent vested in their retirement benefit after the completion of two years of employment and vest at an additional 20 percent per year thereafter until they are fully vested after the completion of six years of employment. Participants who have reached age 65 are automatically 100 percent vested, regardless of completed years of employment. All of the named executive officers are participants in the Pentegra Defined Benefit Plan and are 100 percent vested in their benefits pursuant to the plan's provisions.
Benefits under the Pentegra Defined Benefit Plan are based on the participant's years of service and earnings, defined as base salary excluding the participant's voluntary contribution to the Thrift BEP, subject to the applicable U.S. IRC limits on annual earnings ($270,000280,000 for 2017)2019). In general, participants' benefits are calculated as 2.00 percent multiplied by the participant's years of benefit service multiplied by the high three-year average salary. Annual benefits provided under the plan are subject to IRC limits, which vary by age and benefit option selected. The regular form of benefit is a straight life annuity with a 12 times initial death benefit feature. Lump sum and other additional payout options are also available. Participants are eligible for a lump sum option beginning at age 45. Benefits are payable in the event of retirement, death, disability, or termination of employment if vested. Normal retirement is age 65, but a participant may elect early retirement as early as age 45. However, if a participant elects early retirement, the normal retirement benefit is reduced by an early retirement factor based on the participant's age when beginning early retirement. If the sum of the participant's age and vesting service at the time of termination of employment is at least 70, that is, the "Rule of 70," the benefit is reduced by an early retirement factor of one and a half percent per year for each year that payments commence before age 65. If age and vesting service do not equal at least 70, the benefit is reduced by a higher early retirement factor.
The amount of pension benefits payable from the Pension BEP to a named executive officer is the amount that would be payable to the executive under the Pentegra Defined Benefit Plan:
ignoring the limits on benefit levels imposed by the IRC (including the limit on annual compensation discussed above);
including in the definition of salary any amounts deferred by a participant under the Thrift BEP in the year deferred and any incentive compensation in the year paid;
recognizing the participant's full tenure with us or any other employer participating in the Pentegra Defined Benefit Plan from initial date of employment to the date of membership in the Pentegra Defined Benefit Plan, for each named executive officer who was a participant before January 1, 2009, and for all other participants, recognizing only the participant's years of service with us from initial date of employment with us, but disregarding prior service of participants who were re-employed by us and received a full distribution of the Pension BEP benefit at the time of termination;
applying an increased benefit accrual rate of 2.375 percent of the participant's highest three-year average salary, multiplied by the participant's total benefit service, for those whose most recent date of hire by the Bank is prior to January 9, 2006, and who have continuously been an “Executive Officer” (as such term is defined by the plan) since January 1, 2008, and, for all other participants, applying the same accrual rate and average salary as the participant is eligible to receive under the Pentegra Defined Benefit Plan; and
reducing the result by the participant's actual accrued benefit from the Pentegra Defined Benefit Plan.
Total benefits payable under both the Pentegra Defined Benefit Plan and the Pension BEP are subject to an overall maximum annual benefit amount not to exceed a specified percentage of high three-year average salary as applicable as follows: Mr. Hjerpe, 80 percent as president; and Mr. Nitkiewicz, Ms. Elliott, and Mr. Collins, 70 percent as executive vice presidents; and Ms. Pratt, and Mr. Barrett, 6570 percent as seniorexecutive vice presidents. Our only named executive officer that has reached the maximum annual benefit amount is Ms. Elliott.Elliott, and she retired from the Bank as of December 31, 2019. All benefits payable under the Pension BEP are paid solely from either our general assets or from assets held in a rabbi trust subject to the claims of our creditors in the event of the Bank's insolvency. The Pension BEP requires that we contribute at least annually to any rabbi trust so established an amount to fund participant benefits on a plan termination basis and anticipated administrative, trust and investment advisory expenses that may be paid by the trust over the next 12 months. Retirement benefits from the Pentegra Defined Benefit Plan and the Pension BEP are not subject to any offset provision for Social Security benefits.
Nonqualified Deferred Compensation
Table 66 - Nonqualified Deferred Compensation
| |
Table 64 - Nonqualified Deferred Compensation
| | Table 64 - Nonqualified Deferred Compensation
|
| | Name | | Executive Contributions in Year Ended
December 31,
2017(1) | | Our Contributions in Year Ended December 31, 2017(2) | | Aggregate Earnings in Year Ended December 31, 2017 | | Aggregate Withdrawals/ Distributions | | Aggregate Balance at December 31, 2017 | | Executive Contributions in Year Ended
December 31,
2019(1) | | Our Contributions in Year Ended December 31, 2019(2) | | Aggregate Earnings in Year Ended December 31, 2019 | | Aggregate Withdrawals/ Distributions | | Aggregate Balance at December 31, 2019 |
| Edward A. Hjerpe III | | $ | 43,063 |
| | $ | 69,927 |
| | $ | 109,006 |
| | $ | — |
| | $ | 902,300 |
| | $ | 52,465 |
| | $ | 88,130 |
| | $ | 245,952 |
| | $ | — |
| | $ | 1,369,643 |
|
| Frank Nitkiewicz | | 18,197 |
| | 20,193 |
| | 55,893 |
| | — |
| | 403,843 |
| | 24,824 |
| | 24,730 |
| | 117,046 |
| | — |
| | 583,561 |
|
| M. Susan Elliott | | 60,936 |
| | 20,361 |
| | 133,788 |
| | — |
| | 735,304 |
| | 81,616 |
| | 24,872 |
| | 251,596 |
| | — |
| | 1,131,160 |
|
| George H. Collins | | 8,554 |
| | 14,908 |
| | 15,162 |
| | — |
| | 100,059 |
| |
| Carol Hempfling Pratt | | 52,648 |
| | 15,388 |
| | 73,543 |
| | — |
| | 520,182 |
| | 62,762 |
| | 20,857 |
| | 129,354 |
| | — |
| | 773,471 |
|
| Timothy J. Barrett | | 5,753 |
| | 11,507 |
| | 21,753 |
| | — |
| | 127,773 |
| | 7,504 |
| | 15,008 |
| | 48,852 |
| | — |
| | 214,421 |
|
| George H. Collins | | | 10,641 |
| | 19,433 |
| | 30,933 |
| | — |
| | 176,503 |
|
| |
| (1) | Amounts are also reported as salary in Table 62 -60 — Summary Compensation. |
| |
| (2) | Amounts are also reported as contributions to defined contribution plans in Table 63 -61 — Other Compensation. |
Thrift BEP participants may elect to defer receipt of up to 100 percent of base salary and/or incentive compensation into the Thrift BEP. We match participant contributions based on the amount the employee contributes, typically, up to the first three3 percent of compensation beginning with the initial date of membership in the Thrift BEP, and then according to the same schedule as the Pentegra Defined Contribution Plan after the first year of service. However, the Compensation Committee has the flexibility to modify our matching contribution rate in an offer letter, employment agreement, or other writing approved by the Compensation Committee so long as our maximum matching contribution rate does not exceed the maximum matching contribution rate available to any participant under the Pentegra Defined Contribution Plan (the Contribution Limit). The Compensation Committee granted such a modification to Ms. Pratt upon her hiring in June 2010, permitting her matching contribution rate to be at the Contribution Limit irrespective of her tenure at the Bank. In June 2015, when Ms. Pratt completed five years of employment with us, her tenure made her eligible for the Contribution Limit, and the modification from the Compensation Committee no longer applied. Our matching contribution is immediately vested at 100 percent, as in the
Pentegra Defined Contribution Plan. Participants may defer their contributions into one or more investment funds as elected by the participant. Participants may elect to receive distributions in a lump sum or in semi-annual installments over a period that does not exceed 11 years. Participants may
withdraw contributions under the plan's hardship provisions and may also begin to receive distributions while still employed through scheduled distribution accounts.
The Thrift BEP provides participants an opportunity to defer taxation on income and to make up for benefits that would have been provided under the Pentegra Defined Contribution Plan except for IRC limitations on annual contributions under 401(k) plans. It also provides participants with an opportunity for incentive compensation to be deferred and matched. The Compensation Committee and board of directors approve participation in the Thrift BEP. All of the named executive officers are current participants. All benefits payable under the Thrift BEP are paid solely from our general assets or from assets held in a rabbi trust subject to the claims of our creditors in the event of ourthe Bank's insolvency. The Thrift BEP requires us to contribute at least quarterly to any rabbi trust established for the Thrift BEP an amount to fund participant benefits on a plan termination basis. A rabbi trust was established for the Thrift BEP effective January 1, 2010.
Post-Termination PaymentPost-termination Payments
The following table representsis a discussion of the amount that would bepolicies and arrangements to which a named executive officer becomes subject upon certain termination events, with or without a change in control of the Bank. During 2019, all named executive officers were covered by the Bank’s severance policy and the Federal Home Loan Bank of Boston Executive Change in Control Severance Plan (Executive Severance Plan). In addition, Mr. Hjerpe is covered by a change in control agreement. The severance policy, Executive Severance Plan and Mr. Hjerpe’s change in control agreement are also discussed above in “Potential Payments upon Termination or Change in Control.” The Bank’s Executive Incentive Plans provide for payment to executives who are employed on the payment date and, subject to recommendation by our president and chief executive officer and review and approval by the Compensation Committee and the FHFA, whose employment has terminated prior to the payment date for death, disability or retirement. The terms cause, change in control, good reason, disability, retirement, and qualifying termination are defined in the respective policy, plan or agreement, as applicable.
Severance Policy
As chief executive officer, Mr. Hjerpe is eligible for 12 months of base pay under the severance policy. As executive officers, Mr. Nitkiewicz, Ms. Pratt, and Mr. Barrett are and Ms. Elliott and Mr. Collins were eligible for a minimum of six months and a maximum of 12 months of base pay under the severance policy, depending on their tenure of employment. Severance payable to the executives in connection with a change in control is discussed in the Executive Severance Plan section below. All severance packages under the severance policy for executive officers, including the named executive officers, asmust have the approval of December 31, 2017, had their employment been terminated involuntarily for reasons other than "cause" on that date. the chief executive officer and the Compensation Committee, and may also require the approval of the FHFA, prior to making any award under the severance policy.
Under our severance policy (and for Mr. Hjerpe, under thehis change in control agreement) and based on status in the organization and tenure for Mr. Hjerpe and Mr. Nitkiewicz, the payment amount is equal to, and for Ms. Elliott and Mr. Collins the amount iswas equal to, 12 months' base salary, and for Ms. Pratt and Mr. Barrett, the payment amount is equal to approximately sevennine months' base salary, all based on annual salary in effect on December 31, 2017.2019.
Change in Control Agreement with Mr. Hjerpe
Under the terms of the change in control agreement with Mr. Hjerpe, in the event that, within a specified period following the Bank’s entry into a definitive reorganization agreement (i.e. relating to a merger or consolidation where the Bank is not the survivor, a sale or transfer of substantially all of the Bank’s assets, or a liquidation or dissolution of the Bank), either:
Mr. Hjerpe terminates his employment with us for a good reason (in connection with a reorganization) that is not remedied within certain cure periods by us; or
We (or our successor in the event of a reorganization) terminate Mr. Hjerpe's employment without cause,
we have agreed to pay Mr. Hjerpe an amount equal to his annualized base salary at the time of such termination to be paid in equal installments over the following 12 months. As a condition to payment, Mr. Hjerpe must agree to execute our standard release of claims agreement. Any payments to Mr. Hjerpe under the change-in-control agreement are in lieu of any severance payments that would otherwise be payable to him and may also require the approval of the FHFA.
Executive Severance Plan
In 2018, the Board adopted the Executive Severance Plan that provides certain payments and benefits in the event of a qualifying termination following a change in control. The Executive Severance Plan applies to employees or officers who are designated by the Bank’s board of directors as participants and who execute a participation agreement in which the participants agree to certain protective covenants including a non-solicitation agreement. The Bank’s board designated Mr. Hjerpe, Mr. Nitkiewicz, Ms. Elliott, Mr. Collins, Ms. Pratt, and Mr. Barrett, in addition to certain other executive officers, as participants in the Executive Severance Plan and these officers all executed participation agreements. If a participant is eligible for severance benefits under the Executive Severance Plan and also for similar benefits under any other Bank plan, program, arrangement or agreement, the severance benefits under the Executive Severance Plan will be reduced on a dollar for dollar basis for the severance benefits available under such other plan, program, arrangement or agreement.
Under the terms of the Executive Severance Plan, if there is a qualifying termination during the period beginning on the earliest of 180 days prior to the date a definitive agreement or order for a change in control has been entered into, or the effective date of a change in control as prescribed by the FHFA, and ending 24 months following the effective date of the change in control, the participant becomes entitled to certain severance payments and benefits. The Executive Severance Plan defines a qualifying termination as a termination of the participant’s employment with the Bank, (i) by the Bank, other than for cause; or (ii) by the participant, for good reason but does not include a termination resulting from the participant’s death, disability or retirement.
The severance payments and benefits to which the participant would be entitled include:
Mr. Hjerpe would receive a cash payment equal to 2.99 times the sum of (i) the greater of his annual base salary determined at the time of the qualifying termination or 180 days prior to the change in control, and (ii) his target long- and short-term incentive awards for the year in which the qualifying termination of employment occurs.
The other named executive officers would receive a cash payment equal to 2.00 times the sum of (i) the greater of their annual base salary determined at the time of the qualifying termination or 180 days prior to the change in control, and (ii) their target long- and short-term incentive awards for the year in which the qualifying termination of employment occurs.
The named executive officers would receive a lump sum cash payment equal to the amount that would have been payable pursuant to their annual incentive compensation award for the year in which the date of a qualifying termination occurs based on actual Bank performance, prorated based on the number of days the participant was employed that year.
Participants would receive a lump sum cash payment for outplacement assistance in the amount of $25,000 for Mr. Hjerpe and $15,000 for the other named executive officers.
Mr. Hjerpe would receive a lump sum cash payment equivalent to the Bank’s cost to maintain his health insurance coverage for 24 months, and the other named executive officers would each receive a lump sum cash payment equivalent to the Bank’s cost to maintain their health insurance coverage for 18 months.
The payments described above are payable in a lump sum within 60 days following the participant’s employment termination date, except the prorated incentive compensation award, which is payable at the time such incentive compensation awards are paid to other senior executives, but no later than March 15 of the year following the executive’s qualifying termination. Any amounts that constitute non-qualified deferred compensation subject to Section 409A of the IRC are payable on the 75th day after the participant’s qualifying termination.
All payments and benefits are conditioned upon the executive having delivered an irrevocable general release of claims against the Bank before payment occurs. In addition, all payments and benefits remain subject to the Bank’s compliance with any applicable statutory and regulatory requirements relating to the payment of amounts under the Executive Severance Plan.
If the aggregate amount of pay and benefits payable to an executive under the Executive Severance Plan would constitute a “parachute payment” subject to excise tax under Section 4999 of the IRC, their aggregate pay and benefits will be reduced to the extent necessary to avoid being subject to the excise tax imposed by Section 4999, unless payment of the unreduced benefit would provide the participant with a higher net after-tax benefit after payment of such excise tax.
Executive Incentive Plan
Under the 2017, 2018 and 2019 Executive Incentive Plans, the named executive officers must be employed by the Bank on the payment date of an incentive award in order to be paid such award. Subject to recommendation of our president and chief executive officer, approval of the Compensation Committee, and review of the FHFA, if required, if a named executive officer’s employment had terminated in 2019 for death or disability or after becoming retirement-eligible and providing a minimum of six months' advance notice to the Bank, such officer may be paid: (i) a pro-rata portion of the 2019 short-term award if they completed six months of service during 2019, (ii) a 2017 and 2018 long-term award, and (iii) a 2019 long-term award (assuming their employment terminated upon close of business on December 31, 2019), with such awards to be paid at
the same time they would have been paid if the executive’s employment had not terminated. To be retirement-eligible, a named executive officer must be either eligible for normal retirement or satisfy the Rule of 70 (counting only service earned with the FHLBank System) under the Pentegra Defined Benefit Plan. Former EVPs Collins and Elliott, who were retirement-eligible, retired on December 31, 2019 after providing six months’ advance notice to the Bank. Pursuant to this provision of the 2019 and 2017 Executive Incentive Plans, they were paid a 2019 short-term award and a 2017 long-term award, as set forth in the “Summary Compensation Table” above.
Potential Payments Upon Termination
The table below shows amounts triggered upon the termination events identified below for the named executive officers assuming a termination of employment and, as applicable, a change in control as of the close of business on December 31, 2019, and does not include amounts that are not payable or otherwise forfeited upon a for cause termination or certain non-retirement terminations. In these circumstances, other than legally required amounts such as accrued salary, no additional amounts would be payable and rights to incentive or deferred compensation would be forfeited. The amounts listed below also do not include payments from the Thrift BEP or the Pension BEP. Amounts payable from the Pension BEP may be found in the Pension Benefits Table. Account balances for the Thrift BEP may be found in the Nonqualified Deferred Compensation Table.
Table 67 - Cash Severance
| |
Table 65 - Cash Payments on Termination
| | Table 65 - Cash Payments on Termination
|
| | Name | Cash Severance(1) | |
| | | Severance | | Incentive Compensation(5)(6) | | All Other Compensation(7) | | Total Post Termination Payment & Benefit Value |
Edward A. Hjerpe III(2) | $ | 781,300 |
| | | | | | | |
Bank initiated (not for cause) termination of employee without a change in control(1) | | $ | 889,510 |
| | $ | 1,699,017 |
| | $ | — |
| | $ | 2,588,527 |
|
Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(2)(3) | | 3,916,210 |
| | 1,699,017 |
| | 64,832 |
| | 5,680,059 |
|
| Retirement | | — |
| | 1,699,017 |
| | — |
| | 1,699,017 |
|
| Death and Disability | | — |
| | 1,699,017 |
| | — |
| | 1,699,017 |
|
| Frank Nitkiewicz | 380,880 |
| | | | | | | |
| M. Susan Elliott | 380,680 |
| |
| George H. Collins | 350,070 |
| |
Bank initiated (not for cause) termination of employee without a change in control(1) | | 405,880 |
| | 537,505 |
| | — |
| | 943,385 |
|
Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3) | | 1,217,640 |
| | 537,505 |
| | 44,330 |
| | 1,799,475 |
|
| Retirement | | — |
| | 537,505 |
| | — |
| | 537,505 |
|
| Death and Disability | | — |
| | 537,505 |
| | — |
| | 537,505 |
|
M. Susan Elliott(4) | | | | | | | | |
| Retirement | | — |
| | 544,141 |
| | — |
| | 544,141 |
|
| Carol Hempfling Pratt | 205,969 |
| | | | | | | |
Bank initiated (not for cause) termination of employee without a change in control(1) | | 290,462 |
| | 487,846 |
| | — |
| | 778,308 |
|
Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3) | | 1,132,800 |
| | 487,846 |
| | 46,720 |
| | 1,667,366 |
|
| Retirement | | — |
| | 487,846 |
| | — |
| | 487,846 |
|
| Death and Disability | | — |
| | 487,846 |
| | — |
| | 487,846 |
|
| Timothy J. Barrett | 197,473 |
| | | | | | | |
Bank initiated (not for cause) termination of employee without a change in control(1) | | 280,876 |
| | — |
| | — |
| | 280,876 |
|
Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3) | | 1,132,800 |
| | 100,379 |
| | 44,330 |
| | 1,277,509 |
|
| Retirement | | — |
| | — |
| | — |
| | — |
|
| Death and Disability | | — |
| | 483,585 |
| | — |
| | 483,585 |
|
George H. Collins(4) | | | | | | | | |
| Retirement | | — |
| | 480,521 |
| | — |
| | 480,521 |
|
_______________________
| |
| (1) | Severance payments do not resultUnder our severance policy and based on status in an acceleration of retirement or other benefit plans as described above.the organization and tenure for Mr. Hjerpe and Mr. Nitkiewicz the “Severance” amount payable is equal to 12 months' base salary, and for Ms. Pratt and Mr. Barrett the amount payable is equal to approximately nine months' base salary, all based on annual salary in effect on December 31, 2019. |
| |
| (2) | Severance paymentsThe aggregate amount due to Mr. Hjerpe may consistunder his change in control agreement and the Executive Severance Plan, assuming a December 31, 2019, termination would have been subject to the change in control excise tax under Section 4999 of eitherthe Code. Therefore, the amount actually payable to Mr. Hjerpe would have been limited to the 280G safe harbor level, as doing so would result in a higher after-tax payment. The amounts shown in the “Severance” column have been reduced accordingly. No tax gross-up payments apply. If all payments are determined not to be parachute payments under Section 280G of the IRC, the total amount of severance paid to Mr. Hjerpe would be $4,654,361 rather than $3,916,210. |
| |
| (3) | “Severance” payments for involuntary termination without cause due to a change in control or for a resignation for good reason due to a change in control that are made under our Executive Severance Plan are in lieu of, not in addition to, the severance benefit payments under our severance policy or, for Mr. Hjerpe, his change-in-control agreement. Amounts shown for “Severance” payable under the Executive Severance Plan are a multiple, 2.99 for Mr. Hjerpe and 2.00 for the |
other named executive officers, of the total of (i) base salary in effect on December 31, 2019 and (ii) target long- and short-term incentive awards under our 2019 Executive Incentive Plan. Mr. Nitkiewicz, Ms. Pratt and Mr. Barrett would not have been subject to the change in control excise tax under Section 4999 of the IRC. In no event would tax gross-up payments apply.
| |
| (4) | As described in Compensation Discussion and Analysis, Ms. Elliott and Mr. Collins each retired from the Bank as of December 31, 2019. The amounts shown for Ms. Elliott and Mr. Collins are only for retirement from the Bank and not for the other scenarios. |
| |
| (5) | Because Mr. Hjerpe, Mr. Nitkiewicz, Ms. Elliott, Mr. Collins, and Ms. Pratt were retirement-eligible as of December 31, 2019, amounts shown for incentive compensation payable to them under each of the applicable termination scenarios in the table includes such officers’ actual 2019 annual short-term incentive compensation award as well as their long-term incentive compensation awards under the 2017, 2018 and 2019 Executive Incentive Plans. All of such short- and long-term awards are also included in the row entitled “Death and Disability” for Mr. Barrett. However, because Mr. Barrett was not retirement-eligible as of December 31, 2019, he would not have been entitled to any incentive compensation upon retirement, or upon a Bank-initiated (not for cause) termination without a change in control. Upon a Bank-initiated (not for cause) termination or good reason termination by employee due to change in control, agreement butMr. Barrett would have been entitled to incentive compensation only equal to his actual 2019 annual short-term incentive compensation award, and not both. Each, however, providesany long-term award under the 2017, 2018 or 2019 Executive Incentive Plans. |
| |
| (6) | Long-term incentive awards under the 2017 Executive Incentive Plan are the actual awards that were paid in March 2020. Long-term incentive awards under the 2018 and 2019 Executive Incentive Plans, which will be payable in March 2021 and March 2022, respectively, are based on currently estimated performance as of December 31, 2019 for 12the core return on capital stock goal, and a current estimate by the Bank’s chief risk officer for the regulatory goal. |
| |
| (7) | “All Other Compensation” includes the following amounts payable under the Executive Severance Plan to named executive officers other than Ms. Elliott and Mr. Collins: (i) a payment to each officer equivalent to what it would have cost the Bank to maintain such officer’s health insurance coverage for a number of months, 24 months for Mr. Hjerpe and 18 months for the other named executive officers, and (ii) a payment for outplacement services of base salary.$25,000 for Mr. Hjerpe and $15,000 for the other named executive officers. |
Pay Ratio
For the year ended December 31, 2017,2019, the ratio of the annual total compensation of our median employee (the Median Employee, identified in the manner described below) to the annual total compensation of our chief executive officer is 14:16:1. To determine this ratio, total compensation of the Median Employee for 20172019 was calculated in the same manner as total compensation of our chief executive officer for 20172019 as presented in Table 62 -60 — Summary Compensation. In both cases, compensation includes, among other things, amounts attributable to the change in pension value, which varies based on an employee's age, tenure at the Bank, and salary increases and can fluctuate greatly from year to year as a result of a change in interest rates, as occurred in 2019, and the employer match on employee contributions to the Pentegra Defined Contribution Plan (401(k) match)plan), which amounts vary among employeesvaries based upon theiron an employee's contributions to the 401(k) plan and an employee's tenure at the Bank and, for the 401(k) match, based upon the employee’s contributions.Bank. For 2017,2019, the total annual compensation of the Median Employee was $187,472,$227,340, and the total annual compensation of the chief executive officer, as reported in Table 62 -60 — Summary Compensation, Table, was $2,626,084.$3,574,609.
The Bank is using the same Median Employee isin its pay ratio calculation in this report that it identified in the pay ratio calculation in our 2018 and 2017 Annual Reports on Form 10-K because there have been no changes to our employee whosepopulation or employee compensation isarrangements that we believe would result in a significant change of our pay distribution to our employee population and significantly affect the median of the annual total compensation of all our employees other than the chief executive officer.pay ratio disclosure. We identified the Median Employee by computing for each of the full-time and part-time employees who were employed by the Bank on October 1, 2017, excluding the chief executive officer, the sum of (i) the 2017 salary of each employee as of October 1, 2017 and (ii) the 2016 incentive compensation paid to that employee in March 2017, and ranking the sums for all such employees (a list of 201 employees)employees as of October 1, 2017) from lowest to highest. The Bank identified the Median Employee using this compensation measure, which was applied consistently to all our employees included in the calculation.
Director Compensation
In 2017 and 2016,2019, we paid members of the board of directors fees for each board and committee meeting that they attendattended and a quarterly retainer fee. FHFA regulations permit the payment of reasonable director compensation, and such compensation is subject to the FHFA's oversight. We are a cooperative and our capital stock may only be held by current and former members, so we do not provide compensation to our directors in the form of stock or stock options. The 20182019 and 2020 Director Compensation Policy providesPolicies provide payments for attendance at board and committee meetings and retainers paid in arrears at the
end of each quarter. The policy providespolicies provide for maximums on total director compensation and potential reduction based on attendance and performance.
The amounts to be paid or paid to the members of the board of directors for attendance at board and committee meetings and for quarterly retainers for the years ended December 31, 2018, 2017,2020 and 2016,2019 along with the annual maximum compensation amounts are detailed in the following table:
Table 68 - Director Compensation
| |
Table 66 - Director Compensation
| | Table 66 - Director Compensation
|
| | | | 2018 | | 2017 | | 2016 | | 2020 | | 2019 |
| Fee per board meeting: | | | | | | | | | | |
| Chair of the board | | $ | 11,500 |
| | $ | 11,000 |
| | $ | 9,000 |
| | $ | 11,500 |
| | $ | 11,500 |
|
| Vice chair of the board and committee chairs | | 9,500 |
| | 9,000 |
| | 7,000 |
| | 9,500 |
| | 9,500 |
|
| All other board members | | 8,500 |
| | 8,000 |
| | 6,000 |
| | 8,500 |
| | 8,500 |
|
| Fee per committee meeting | | 2,500 |
| | 2,250 |
| | 2,250 |
| | 2,500 |
| | 2,500 |
|
| Fee per telephonic conference call | | 1,500 |
| | 1,500 |
| | 1,500 |
| | 1,500 |
| | 1,500 |
|
| | | | | | | | | | | |
| Quarterly Retainer Fees | | | | | | | | | | |
| Chair of the board | | 10,250 |
| | 10,000 |
| | 8,750 |
| | 11,250 |
| | 10,250 |
|
| Vice chair of the board and committee chairs | | 9,000 |
| | 8,750 |
| | 7,500 |
| | 10,000 |
| | 9,000 |
|
| All other board members | | 7,750 |
| | 7,500 |
| | 6,750 |
| | 8,750 |
| | 7,750 |
|
| | | | | | | | | | | |
| Annual maximum compensation amounts: | | | | | | | | | | |
| Chair of the board | | 132,500 |
| | 125,000 |
| | 105,000 |
| | 137,500 |
| | 132,500 |
|
| Vice chair of the board and committee chairs | | 112,500 |
| | 105,000 |
| | 88,750 |
| | 117,500 |
| | 112,500 |
|
| All other board members | | 102,500 |
| | 95,000 |
| | 80,000 |
| | 107,500 |
| | 102,500 |
|
The Bank will also pay or reimburse directors for expenses related to the directors’ attendance at board meetings.
The aggregate amounts earned or paid to individual members of the board of directors for attendance at board and committee meetings and quarterly retainer fees during 20172019 are detailed in the following table:
Table 69 - 2017 Director Compensation
| |
Table 67 - 2019 Director Compensation
| | Table 67 - 2019 Director Compensation
|
| | | Fees Earned or Paid in Cash | Fees Earned or Paid in Cash |
| Andrew J. Calamare, Chair | $ | 125,000 |
| |
| Stephen G. Crowe, Vice Chair | 105,000 |
| |
| Andrew J. Calamare, Chair in 2019 | | $ | 132,500 |
|
| Stephen G. Crowe, Vice Chair in 2019 | | 112,500 |
|
| Donna L. Boulanger | 95,000 |
| 102,500 |
|
| Joan Carty | 105,000 |
| 112,500 |
|
| Eric Chatman | 95,000 |
| 102,500 |
|
| Patrick E. Clancy | 95,000 |
| 102,500 |
|
| Martin J. Geitz | 105,000 |
| 112,500 |
|
| Cornelius K. Hurley | 105,000 |
| 112,500 |
|
| Antoinette Lazarus | 95,000 |
| |
| Antoinette C. Lazarus | | 102,500 |
|
| Jay F. Malcynsky | 105,000 |
| 112,500 |
|
| John W. McGeorge | 105,000 |
| 112,500 |
|
| Emil J. Ragones | 105,000 |
| 112,500 |
|
| Gregory R. Shook | 95,000 |
| 102,500 |
|
| Stephen R. Theroux | 95,000 |
| |
| John F. Treanor | 105,000 |
| 112,500 |
|
| Michael R. Tuttle | 95,000 |
| 102,500 |
|
| John C. Witherspoon | 95,000 |
| 102,500 |
|
| Richard E. Wyman, Jr. | | 102,500 |
|
| | $ | 1,725,000 |
| $ | 1,852,500 |
|
Directors may elect to defer the receipt of meeting fees (including all compensation payable under the Director Compensation Policy) pursuant to the Thrift BEP, although there is no Bank-matching contribution for such deferred fees. For additional information on the Thrift BEP, see — Retirement and Deferred Compensation Plans above. FHFA regulations permit the payment or reimbursement of reasonable expenses incurred by directors in performing their duties, and in accordance with those regulations, we have adopted a policy governing such payment and reimbursement of expenses. Such paid and reimbursed board of director expenses aggregated to $190,000$144 thousand for the year ended December 31, 2017.2019.
Reduction in Compensation Based on Attendance and Performance
The board may vote to reduce or eliminate a director’s final quarterly retainer payment if (i) the director has not attended at least 75 percent of all regular and special meetings of the Board and the committees on which the director served during the year, or (ii) the board determines the director has consistently demonstrated a lack of engagement and participation in meetings attended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
We are a cooperative, our members or former members own all of our outstanding capital stock, and our directors are elected by and a majority are from our membership. Each member is eligible to vote for the open member directorships in the state in which its principal place of business is located and for each open independent directorship. See Item 10 — Directors, Executive Officers and Corporate Governance for additional information on the election of our directors. Membership is voluntary, and members must give notice of their intent to withdraw from membership. Members that withdraw from membership may not be readmitted to membership for five years.
We do not offer any compensation plan under which our equity securities are authorized for issuance. Members, former members, and successors to former members, including affiliated institutions under common control of a single holding company, holding five percent or more of our outstanding capital stock as of February 28, 2018,29, 2020, are noted in Table 70.68.
Table 70 - Stockholders Holding Five Percent or More of Outstanding Capital Stock (dollars in thousands)
|
| | | | | | | |
| | | Capital Stock | | Percent of Total Capital Stock |
| Citizens Bank, N.A. | | $ | 338,094 |
| | 13.64 | % |
| One Citizens Plaza | | | | |
| Providence, RI 02903 | | | | |
Table 68 - Stockholders Holding Five Percent or More of Outstanding Capital Stock (dollars in thousands)
|
| | | | | | | | | |
| Member Name | | Address | | Capital Stock | | Percent of Total Capital Stock |
| State Street Bank and Trust Company | | One Lincoln Street, Boston, MA 02111 | | $ | 310,000 |
| | 14.93 | % |
| Citizens Bank, N.A. | | One Citizens Plaza, Providence, RI 02903 | | 202,479 |
| | 9.75 |
|
Additionally, due to the fact that a majority of our board of directors is elected from our membership, these member directors serve as officers or directors of members that own our capital stock. Table 7169 provides capital stock outstanding as of February 29, 2020 to members whose officers or directors were servingserve as our directors as of February 28, 2018.directors.
Table 71 - Capital Stock Outstanding to Members whose Officers or Directors serve on our Board of Directors (dollars in thousands)
|
| | | | | | | |
| | | Capital Stock | | Percent of Total Capital Stock |
| The Washington Trust Company | | $ | 41,127 |
| | 1.66 | % |
| 23 Broad Street | | | | |
| Westerly, RI 02891 | | | | |
| | | | | |
| Bar Harbor Bank & Trust | | 38,105 |
| | 1.54 |
|
| 82 Main Street | | | | |
| Bar Harbor, ME 04609 | | | | |
| | | | | |
| Needham Bank | | 22,619 |
| | 0.91 |
|
| 1063 Great Plain Avenue | | | | |
| Needham, MA 02492 | | | | |
| | | | | |
| MountainOne Bank | | 7,130 |
| | 0.29 |
|
| 93 Main Street | | | | |
| North Adams, MA 01247 | | | | |
| | | | | |
| Skowhegan Savings Bank | | 2,612 |
| | 0.11 |
|
| 13 Elm Street | | | | |
| Skowhegan, ME 04976 | | | | |
| | | | | |
| North Brookfield Savings Bank | | 1,807 |
| | 0.07 |
|
| 35 Summer Street | | | | |
| North Brookfield, MA 01535 | | | | |
| | | | | |
| The Simsbury Bank & Trust Company | | 903 |
| | 0.04 |
|
| 981 Hopmeadow Street | | | | |
| Simsbury, CT 06070 | | | | |
| | | | | |
| Essex Savings Bank | | 734 |
| | 0.03 |
|
| 35 Plains Road | | | | |
| Essex, CT 06426 | | | | |
| | | | | |
| American European Insurance Company | | 519 |
| | 0.02 |
|
| One Eagle Square | | | | |
| Concord, NH 03301 | | | | |
| | | | | |
| Opportunities Credit Union | | 149 |
| | 0.01 |
|
| 25 Winooski Falls Way | | | | |
| Winooski, VT 05404 | | | | |
| Total stock ownership by members whose officers or directors serve as directors of the Bank | | $ | 115,705 |
| | 4.68 | % |
Table 69 - Capital Stock Outstanding to Members whose Officers or Directors serve on our Board of Directors (dollars in thousands)
|
| | | | | | | | | |
| Member Name | | City, State | | Capital Stock | | Percent of Total Capital Stock |
| Citizens Bank, N.A. | | Providence, RI | | $ | 202,479 |
| | 9.75 | % |
| The Washington Trust Company | | Westerly, RI | | 52,271 |
| | 2.52 |
|
| Liberty Bank | | Middletown, CT | | 22,807 |
| | 1.10 |
|
| Needham Bank | | Needham, MA | | 13,575 |
| | 0.66 |
|
| Meredith Village Savings Bank | | Meredith, NH | | 4,621 |
| | 0.22 |
|
| Merrimack County Savings Bank | | Concord, NH | | 4,277 |
| | 0.21 |
|
| Northfield Savings Bank | | Berlin, VT | | 3,730 |
| | 0.18 |
|
| Fidelity Co-Operative Bank | | Fitchburg, MA | | 2,103 |
| | 0.10 |
|
| North Brookfield Savings Bank | | North Brookfield, MA | | 1,450 |
| | 0.07 |
|
| Skowhegan Savings Bank | | Skowhegan, ME | | 1,442 |
| | 0.07 |
|
| Depositors Insurance Fund | | Woburn, MA | | 691 |
| | 0.03 |
|
| Savings Bank of Walpole | | Walpole, NH | | 513 |
| | 0.02 |
|
| Total stock ownership by members whose officers or directors serve as directors of the Bank | | | | $ | 309,959 |
| | 14.93 | % |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
We have a cooperative ownership structure. As such, capital stock ownership in the Bank is a prerequisite to transacting any member business with us. Our members and certain former members or their successors own all of our stock, the majority of our directors are elected by and from the membership, and we conduct our advances and mortgage loan business almost exclusively with members. Grants under the AHP and AHP advances are also made in partnership or in connection with our members. Therefore, in the normal course of business, we extend credit and offer services and AHP benefits to members whose officers and directors may serve as our directors, as well as to entities that hold five percent or more of our capital stock. It is our policy that extensions of credit, all other Bank products and services, and AHP benefits are offered on terms and conditions that are no more favorable to such members than the terms and conditions of comparable transactions with other members.
In addition, we may purchase short-term investments, federal funds, and MBS from, and enter into interest-rate-exchange agreements with, members or their affiliates whose officers or directors serve as directors of the Bank, as well as from members or their affiliates who hold five percent or more of our capital stock. All such purchase transactions are effected at the then-current market rate and all MBS are purchased through securities brokers or dealers, also at the then-current market rate.
For the year ended December 31, 2017,2019, the review and approval of transactions with related persons was governed by our Conflict of Interest Policy for Bank Directors (the Conflict Policy), our Code of Ethics and Business Conduct and our Related Persons Transaction Policy, each of which are in writing. Under the Conflict Policy, each director is required to disclose to the board of directors all actual or potential conflicts of interest, including any personal financial interest that he or she has, as well as such interests of any immediate family member or business associate of the director known to the director, in any matter to
be considered by the board of directors or in which another person does, or proposes to do, business with the Bank. Following such disclosure, the board is empowered to determine whether an actual conflict exists. In the event the board determines the existence of a conflict with respect to any matter, the affected director is required to be recused from all further considerations relating to that matter. The Conflict Policy is administered by the Governance Committee of the board of directors.
The Code of Ethics and Business Conduct requires that all directors and executive officers (as well as all other employees) avoid conflicts of interest, or the appearance of conflicts of interest. In particular, subject to limited exceptions for interests arising through ownership of mutual funds and certain financial interests acquired prior to employment by the Bank, no employee may have a financial interest in or financial relationship with any of our members that is not transacted in the ordinary course of the member's business or, in the case of an extension of credit, involves more than the normal risk of repayment or of loss to the member. Employees are required to disclose annually all financial interests and non-ordinary-course financial relationships with members. These disclosures are reviewed by our ethics officer, who is principally responsible for enforcing the Code of Ethics and Business Conduct on a day-to-day basis. The ethics officer is charged with attempting to resolve any apparent conflict involving an employee other than our president and chief executive officer and, if an apparent conflict has not been resolved within 60 days, to report it to our president and chief executive officer for resolution. The ethics officer is charged with reporting any apparent conflict involving a director or our president and chief executive officer to the Governance Committee of the board of directors for resolution. Our ethics officer is Carol Hempfling Pratt, seniorexecutive vice president, general counsel and corporate secretary of the Bank.
The Related Persons Transaction Policy provides for the board of director’sdirectors' Governance Committee’s review of certain transactions not in the ordinary course of our business that would be with related persons to determine whether such transactions would be in the best interests, or not be inconsistent with the best interests, of the Bank and our members.
Director Independence
General
The board of directors is required to evaluate and report on the independence of the directors of the Bank under two distinct director independence standards. First, FHFA regulations establish independence criteria for directors who serve as members of the board of directors' Audit Committee. Second, SEC rules require that our board of directors apply the independence criteria of a national securities exchange or automated quotation system in assessing the independence of our directors. Rule 10A-3 promulgated under the Exchange Act sets forth additional independence criteria of directors serving on the Audit Committee.
As of the date of this report, our board of directors is constituted of nine member directors and eightseven independent directors, as discussed in Item 10 — Directors, Executive Officers and Corporate Governance. None of our directors is an "inside" director. That is, none of our directors is a Bank employee or officer. Further, our directors are prohibited from personally owning stock or stock options in the Bank, as our stock may only be held by our members, former members, or their successors in interest. Each of the member directors, however, is an officer, director, or trustee of an institution that is a member of the Bank that is encouraged to engage in transactions with us on a regular basis, and some of the independent directors also engage in transactions either directly or indirectly with us from time to time in the ordinary course of the Bank's business.
FHFA Regulations Regarding Independence
The FHFA regulations on director independence standards prohibit an individual from serving as a member of the board of directors' Audit Committee if he or she has one or more disqualifying relationships with us or our management that would interfere with the exercise of that individual's independent judgment. Disqualifying relationships considered by the board are: employment with the Bank at any time during the last five years; acceptance of compensation from us other than for service as a director; being a consultant, advisor, promoter, underwriter, or legal counsel for the Bank at any time within the last five years; and being an immediate family member of an individual who is or who has been within the past five years, a Bank executive officer. The board assesses the independence of each director who serves on the Audit Committee under the FHFA's regulations on these independence standards. As of March 16, 2018,20, 2020, all of our directors serving on the board of directors' Audit Committee were independent under these criteria.
SEC Rule Regarding Independence
SEC rules require our board of directors to adopt a standard of independence to evaluate the independence of its directors. Pursuant thereto, the board adopted the independence standards of the New York Stock Exchange (the NYSE) to determine which of its directors are independent, which members of its Audit Committee are not independent, and whether the board of directors' Audit Committee financial expert is independent.
After applying the NYSE independence standards, the board determined that, as of March 16, 2018,20, 2020, all of our independent (that is, nonmember) directors are independent, including Directors Calamare, Carty, Chatman, Clancy, Hurley, Lazarus, Malcynsky, and Ragones. Based upon the fact that each member director is an officer or director of an institution that is a member of the Bank (and thus is an equity holder in the Bank), that each such institution routinely engages in transactions with us, and that such transactions occur frequently and are encouraged, the board of directors has determined that for the present time it would conclude that none of the member directors meets the independence criteria under the NYSE independence standards.
It is possible that under a strict reading of the NYSE objective criteria for independence (particularly the criterion regarding the amount of business conducted with us by the director's institution), a member director could meet the independence standard on a particular day. However, because the amount of business conducted by a member director's institution may change frequently, and because we generally desire to increase the amount of business we conduct with each member, the directors deemed it inappropriate to draw distinctions among the member directors based upon the amount of business conducted with us by any director's institution at a specific time.
The board of directors has a standing Audit Committee and a standing Compensation Committee. For the reasons noted above, the board of directors determined that none of the current member directors on these committees, including Directors Crowe,Davidsen, Geitz (ex-officio), Manzi, McGeorge, Treanor, Tuttle, and Tuttle,Wyman, are independent under the NYSE standards for these committees. The board determined that all of the independent directors on these committees, including Directors Calamare (ex-officio), Carty, Chatman, Lazarus, Malcynsky and Ragones, are independent under the NYSE independence standards for these committees. The board of directors also determined that Director ChatmanLazarus is the "Audit Committee financial expert" within the meaning of the SEC rules, and further determined that as of March 16, 2018,20, 2020, is independent under NYSE standards. As stated above, the board of directors determined that each director on the Audit Committee is independent under the FHFA's regulations applicable to the board of director'sdirectors' Audit Committee. In addition, the board of directors also assessed the independence of the members of its Audit Committee under Rule 10A-3. In order to be considered independent under Rule 10A-3, a member of the Audit Committee may not, other than in his or her capacity as a member of the Board or any other Board Committee (i) accept any consulting, advisory, or other compensation from us or (ii) be an affiliated person of the Bank. As of March 16, 2018,20, 2020, all members of our Audit Committee were independent under these criteria.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees billed by PwC for professional services rendered in connection with the audit of our financial statements for 20172019 and 2016,2018, as well as the fees billed by PwC for audit-related and other services rendered by PwC to us during 20172019 and 2016.2018.
Table 72 - Principal Accounting Fees and Services (dollars in thousands)
| |
Table 71 - Principal Accounting Fees and Services (dollars in thousands)
| | Table 71 - Principal Accounting Fees and Services (dollars in thousands)
|
| | | | Year Ended December 31, | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2019 | | 2018 |
Audit fees(1) | | $ | 858 |
| | $ | 795 |
| | $ | 925 |
| | $ | 891 |
|
Audit-related fees(2) | | 68 |
| | 126 |
| | 48 |
| | 95 |
|
All other fees(3) | | — |
| | 6 |
| | 3 |
| | 3 |
|
| Tax fees | | — |
| | — |
| | — |
| | — |
|
| Total | | $ | 926 |
| | $ | 927 |
| | $ | 976 |
| | $ | 989 |
|
_______________________
| |
| (1) | Audit fees consist of fees incurred in connection with the audit of our financial statements, including audit of internal control over financial reporting, review of quarterly or annual management's discussion and analysis, and review of financial information filed with the SEC. |
| |
| (2) | Audit-related fees consist of fees related to accounting research and consultations, operations reviews of new products and supporting processes, and fees related to participation in and presentations at conferences. |
| |
(3) | All other fees consist of fees related to research regarding healthcare initiatives amongst the FHLBanks. |
The Audit Committee selects our independent registered public accounting firm and preapproves all audit services to be provided by it to us. The Audit Committee also reviews and preapproves all audit-related and nonaudit-related services rendered by the independent registered public accounting firm in accordance with the Audit Committee's charter. In its review
of these services and related fees and terms, the Audit Committee considers, among other things, the possible effect of the performance of such services on the independence of our independent registered public accounting firm.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
a) Financial Statements
b) Financial Statement Schedule
None.
c) Exhibits
|
| | | |
| Number | Exhibit Description | Reference |
| 3.1 | Restated Organization Certificate of the Federal Home Loan Bank of Boston | |
| 3.2 | By-laws of the Federal Home Loan Bank of Boston | |
44.1 | Amended and Restated Capital Plan of the Federal Home Loan Bank of Boston | |
| 4.2 | Description of Capital Stock | |
| 10.1 | The Federal Home Loan Bank of Boston Pension Benefit Equalization Plan effective January 1, 2009, as amended on April 15, 2009 * | |
| 10.1.1 | First Amendment to the Federal Home Loan Bank of Boston Pension Benefit Equalization Plan effective September 1, 2009 * | |
| 10.1.2 | Second Amendment to the Federal Home Loan Bank of Boston Pension Benefit Equalization Plan effective December 21, 2012 * | |
| 10.1.3 | Third Amendment to the Federal Home Loan Bank of Boston Pension Benefit Equalization Plan effective June 30, 2014*2014 * | |
| 10.2.1 | The Federal Home Loan Bank of Boston Thrift Benefit Equalization Plan as(as amended and restated on December 30, 2008, effective January 1, 20092017) * | |
10.2.2 | First Amendment to the Federal Home Loan Bank of Boston Thrift Benefit Equalization Plan effective September 1, 2009 * | |
10.2.3 | Second Amendment to the Federal Home Loan Bank of Boston Thrift Benefit Equalization Plan effective July 1, 2010 * | |
10.2.4 | Third Amendment to the Federal Home Loan Bank of Boston Thrift Benefit Equalization Plan effective December 21, 2012 * | |
10.2.5 | Fourth Amendment to the Federal Home Loan Bank of Boston Thrift Benefit Equalization Plan effective June 30, 2014* | |
10.2.6 | The Federal Home Loan Bank of Boston Thrift Benefit Equalization Plan (as amended and restated effective January 1, 2017) | |
| 10.3.1 | The Federal Home Loan Bank of Boston 2015 Executive Incentive Plan * | |
|
| | | |
10.3.2 | The Federal Home Loan Bank of Boston 2016 Executive Incentive Plan * | |
10.3.3 | The Federal Home Loan Bank of Boston 2017 Executive Incentive Plan * + | |
10.3.4 | The Federal Home Loan Bank of Boston 2018 Executive Incentive Plan * + | |
| 10.3.2 | The Federal Home Loan Bank of Boston 2019 Executive Incentive Plan * + | |
| 10.4 | MPF Consolidated Interbank Agreement dated as of July 22, 2016 | |
| 10.5 | Executive Change in Control Severance Plan, effective November 7, 2018 * | |
| 10.6 | Lease between the Federal Home Loan Bank of Boston and BP Prucenter Acquisition LLC | |
| 10.7 | Mortgage Partnership Finance Services Agreement dated August 15, 2007 between the Federal Home Loan Bank of Boston and the Federal Home Loan Bank of Chicago | |
| 10.8 | Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, effective as of July 20, 2006, by and among the Office of Finance and each of the Federal Home Loan Banks | |
10.8.1 | Amended and Restated Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, effective as of January 1, 2017, by and among the Office of Finance and each of the Federal Home Loan Banks | |
10.9.1 |
| | | |
| 10.9 | The Federal Home Loan Bank of Boston 20172020 Director Compensation Policy * | |
10.9.2 | The Federal Home Loan Bank of Boston 2018 Director Compensation Policy * | |
| 10.10 | Offer Letter for Edward A. Hjerpe III, dated May 18, 2009 * | |
| 10.10.1 | Amendment to Offer Letter for Edward A. Hjerpe III, dated July 3, 2009 * | |
| 10.11 | | Change in Control Agreement between the Federal Home Loan Bank of Boston and Edward A. Hjerpe III, dated as of May 18, 2009 * | |
| 10.12 | | Joint Capital Enhancement Agreement, among the Federal Home Loan Banks as amended August 5, 2011 | |
| 10.13 | | Severance Policy, as adopted March 23, 2012 and as amended as of October 19, 2018 * | |
| 10.14 | | The Federal Home Loan Bank of Boston Split-Dollar Insurance Termination Agreement between Frank Nitkiewicz and the Federal Home Loan Bank of Boston dated May 24, 2005 * | |
10.15 | | The Federal Home Loan Bank of Boston Split-Dollar Insurance Termination Agreement between M. Susan Elliott and the Federal Home Loan Bank of Boston dated May 24, 2005 * | |
12 | | Computation of ratio of earnings to fixed charges | |
| 31.1 | | Certification of the president and chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | | Certification of the chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
|
| | | |
| 32.1 | | Certification of the president and chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | | Certification of the chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | | XBRL Instance Document | The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | Filed within this Form 10-K |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed within this Form 10-K |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | Filed within this Form 10-K |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | Filed within this Form 10-K |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | Filed within this Form 10-K |
| 104 | | The cover page of the Bank’s Annual report on Form 10-K, formatted in Inline XBRL | Included within the exhibit 101 attachments |
* Management contract or compensatory plan.
+ Confidential treatment has been requestedgranted as to portions of this exhibit.
ITEM 16. FORM 10-K SUMMARY
Not applicable
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | | | |
| Date | | FEDERAL HOME LOAN BANK OF BOSTON (Registrant) |
March 16, 201820, 2020 | | By: | /s/ | Edward A. Hjerpe III | |
| | | | | Edward A. Hjerpe III President and Chief Executive Officer |
March 16, 201820, 2020 | | By: | /s/ | Frank Nitkiewicz | |
| | | | | Frank Nitkiewicz Executive Vice President and Chief Financial Officer |
March 16, 201820, 2020 | | By: | /s/ | Brian G. Donahue | |
| | | | | Brian G. Donahue Senior Vice President, Controller and Chief Accounting Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
March 16, 201820, 2020 | | By: | /s/ | Donna L. Boulanger |
| | | | | Donna L. Boulanger Director |
March 16, 2018 | | By: | /s/ | Andrew J. Calamare |
| | | | Andrew J. Calamare
Director
|
March 16, 201820, 2020 | | By: | /s/ | Joan Carty |
| | | | | Joan Carty Director |
March 16, 201820, 2020 | | By: | /s/ | Eric Chatman |
| | | | | Eric Chatman Director |
March 16, 201820, 2020 | | By: | /s/ | Patrick E. Clancy |
| | | | | Patrick E. Clancy Director |
March 16, 201820, 2020 | | By: | /s/ | Stephen G. CroweDwight M. Davidsen |
| | | | | Stephen G. CroweDwight M. Davidsen
Director |
March 16, 201820, 2020 | | By: | /s/ | Martin J. Geitz |
| | | | | Martin J. Geitz Director |
March 16, 201820, 2020 | | By: | /s/ | Cornelius K. Hurley |
|
| | | | |
| | | | | Cornelius K. Hurley Director |
March 16, 201820, 2020 | | By: | /s/ | Antoinette C. Lazarus
|
| | | | | Antoinette C. Lazarus
Director |
|
| | | | |
March 16, 201820, 2020 | | By: | /s/ | Jay F. Malcynsky |
| | | | Jay F. Malcynsky
Director |
| March 20, 2020 | | By: | /s/ | Edward F. Manzi, Jr. |
| | | | Edward F. Manzi, Jr.
Director |
| March 20, 2020 | | By: | /s/ | John W. McGeorge
|
| | | | John W. McGeorge
Director |
| March 20, 2020 | | By: | /s/ | Emil J. Ragones |
| | | | | Emil J. Ragones Director |
March 16, 2018 | | By: | /s/ | Gregory R. Shook |
| | | | Gregory R. Shook
Director
|
March 16, 2018 | | By: | /s/ | Stephen R. Theroux |
| | | | Stephen R. Theroux
Director
|
March 16, 201820, 2020 | | By: | /s/ | John F. Treanor |
| | | | | John F. Treanor Director |
March 16, 201820, 2020 | | By: | /s/ | Michael R. Tuttle |
| | | | | Michael R. Tuttle Director |
March 16, 201820, 2020 | | By: | /s/ | John C. WitherspoonRichard E. Wyman, Jr. |
| | | | | John C. WitherspoonRichard E. Wyman, Jr.
Director |
