Table 19 - 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, 20182020 | Issuer / counterpartyInter-American Development Bank | | Percent11.9 | % | Bank of Nova Scotia | | 11.5 | | Australia and New Zealand Bank | | 17.211.5 | % | Inter-American Development BankCooperatieve Rabobank U.A. | | 14.111.5 |
| PNC Bank N.A. | | 10.3 |
| Citibank N.A. | | 10.1 |
|
Private-Label MBS
Table 20 provides additional information related to our investments in MBS issued by private trusts and ABS backed by home equity loans. The table sets forth the credit ratings and summary credit enhancements associated with our private-label MBS and ABS. Average current credit enhancements as of December 31, 2018, reflect the percentage of subordinated class outstanding balances as of December 31, 2018, to our senior class outstanding balances as of December 31, 2018, weighted by the par value of our respective senior class securities. Average current credit enhancements as of December 31, 2018, are indicative of the ability of subordinated classes to absorb loan collateral lost principal and interest shortfall before senior classes are impacted.
Table 20 - Private-Label Residential MBS and Home Equity ABS (dollars in thousands)
| | | | | | As of December 31, 2018 | | Total | Par value by credit rating | |
| Triple-A | $ | 5,495 |
| Double-A | 22,170 |
| Single-A | 20,217 |
| Triple-B | 22,734 |
| Below Investment Grade | | Double-B | 12,041 |
| Single-B | 23,631 |
| Triple-C | 409,848 |
| Double-C | 275,021 |
| Single-C | 12,059 |
| Single-D | 30,027 |
| Unrated | 83,783 |
| Total par value | $ | 917,026 |
| | | Amortized cost | $ | 688,905 |
| Gross unrealized gains | 106,922 |
| Gross unrealized losses | (4,919 | ) | Fair value | $ | 790,908 |
| | | Weighted average percentage of fair value to par value | 86.25 | % | Original weighted average credit support | 27.72 |
| Weighted average credit support | 7.57 |
| Weighted average collateral delinquency (1) | 17.17 |
|
_______________________
| | (1) | Represents loans that are 60 days or more delinquent. | |
Mortgage Loans
As of December 31, 2018,2020, our mortgage loan investment portfolio totaled $4.3$3.9 billion,, an increase a decrease of $294.7$571.0 million from December 31, 2017.2019. We expect continued competition from Fannie Mae and Freddie Mac, as well as from private mortgage loan acquirers, for loan investment opportunities. In addition, prepayment activity in the year ended December 31, 2020, has been elevated and has outpaced our purchases of mortgage loans. For additional information, see Legislative and Regulatory Developments.
Table 20 - Par Value of Mortgage Loans Held for Portfolio Table 21 - Par Value of Mortgage Loans Held for Portfolio (dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | December 31, | | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 | Mortgage loans outstanding | | | | | | | | | | | Conventional mortgage loans | | | | | | | | | | | MPF Original | | $ | 1,899,446 |
| | $ | 2,105,485 |
| | $ | 2,310,350 |
| | $ | 2,431,320 |
| | $ | 2,309,566 |
| MPF 125 | | 171,550 |
| | 195,870 |
| | 227,098 |
| | 275,737 |
| | 255,169 |
| MPF Plus | | 128,428 |
| | 167,003 |
| | 227,654 |
| | 316,513 |
| | 432,934 |
| MPF 35 | | 1,703,131 |
| | 1,100,115 |
| | 470,733 |
| | 83,845 |
| | — |
| Total conventional mortgage loans | | 3,902,555 |
| | 3,568,473 |
| | 3,235,835 |
| | 3,107,415 |
| | 2,997,669 |
| Government mortgage loans | | 328,651 |
| | 365,231 |
| | 391,127 |
| | 410,960 |
| | 425,663 |
| Total par value outstanding | | $ | 4,231,206 |
| | $ | 3,933,704 |
| | $ | 3,626,962 |
| | $ | 3,518,375 |
| | $ | 3,423,332 |
|
(dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | Conventional mortgage loans | | | | | | | | | | | MPF Original | | $ | 1,235,220 | | | $ | 1,665,708 | | | $ | 1,899,446 | | | $ | 2,105,485 | | | $ | 2,310,350 | | MPF 125 | | 105,916 | | | 146,831 | | | 171,550 | | | 195,870 | | | 227,098 | | MPF Plus | | 74,739 | | | 98,649 | | | 128,428 | | | 167,003 | | | 227,654 | | MPF 35 | | 2,208,682 | | | 2,229,067 | | | 1,703,131 | | | 1,100,115 | | | 470,733 | | Total conventional mortgage loans | | 3,624,557 | | | 4,140,255 | | | 3,902,555 | | | 3,568,473 | | | 3,235,835 | | Government mortgage loans | | 246,150 | | | 292,203 | | | 328,651 | | | 365,231 | | | 391,127 | | Total | | $ | 3,870,707 | | | $ | 4,432,458 | | | $ | 4,231,206 | | | $ | 3,933,704 | | | $ | 3,626,962 | |
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 22.21.
Table 21 - State Concentrations by Outstanding Principal Balance Table 22 - State Concentrations by Outstanding Principal Balance
| | | | Percentage of Total Outstanding Principal Balance of Conventional Mortgage Loans | | | | | | | | | | | | December 31, 2018 | | December 31, 2017 | | Percentage of Total Outstanding Principal Balance of Conventional Mortgage Loans | | |
| | |
| | December 31, 2020 | | December 31, 2019 | Massachusetts | 57 | % | | 56 | % | Massachusetts | 62 | % | | 60 | % | Maine | 10 |
| | 11 |
| Maine | 10 | | | 10 | | Connecticut | 10 |
| | 8 |
| Connecticut | 8 | | | 9 | | Wisconsin | 5 |
| | 7 |
| | New Hampshire | 5 |
| | 6 |
| | | All others | 13 |
| | 12 |
| All others | 20 | | | 21 | | Total | 100 | % | | 100 | % | Total | 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, | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | Total par value of government loans past due 90 days or more and still accruing interest | $ | 5,472 | | | $ | 5,381 | | | $ | 6,433 | | | $ | 4,664 | | | $ | 5,527 | | Nonaccrual loans, par value | 74,348 | | | 11,414 | | | 7,960 | | | 13,450 | | | 16,918 | | Troubled debt restructurings (not included above) | 6,095 | | | 5,887 | | | 7,199 | | | 6,637 | | | 6,846 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 23 - Delinquent Mortgage Loans (dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | December 31, | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 | Total par value of government loans past due 90 days or more and still accruing interest | $ | 6,433 |
| | $ | 4,664 |
| | $ | 5,527 |
| | $ | 5,403 |
| | $ | 7,191 |
| Nonaccrual loans, par value | 7,960 |
| | 13,450 |
| | 16,918 |
| | 22,361 |
| | 38,658 |
| Troubled debt restructurings (not included above) | 7,199 |
| | 6,637 |
| | 6,846 |
| | 7,130 |
| | 3,045 |
|
Although delinquent loans in our portfolio are spread throughout the U.S., delinquent loanconcentrations by state 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 24.23.
Table 23 - State Concentrations of Delinquent Conventional Mortgage Loans Table 24 - State Concentrations of Delinquent Conventional Mortgage Loans
| | | | Percentage of Total Outstanding Principal Balance of Delinquent Conventional Mortgage Loans | | December 31, | | December 31, 2018 | | December 31, 2017 | | | |
| | |
| | Percentage of Outstanding Principal Balance of Delinquent Conventional Mortgage Loans | | Percentage of Outstanding Principal Balance of Delinquent Conventional Mortgage Loans | 2020 | | 2019 | Massachusetts | 40 | % | | 39 | % | Massachusetts | 57 | % | | 44 | % | Connecticut | 16 |
| | 13 |
| Connecticut | 15 | | | 14 | | Maine | 9 |
| | 10 |
| Maine | 8 | | | 4 | | California | 8 |
| | 9 |
| | | All others | 27 |
| | 29 |
| All others | 20 | | | 38 | | Total | 100 | % | | 100 | % | Total | 100 | % | | 100 | % |
Table 24 - Characteristics of Our Investments in Mortgage Loans(1) Table 25 - Characteristics of Our Investments in Mortgage Loans(1)
| | | | | December 31, | | December 31, | | | 2018 | | 2017 | | 2020 | | 2019 | Loan-to-value ratio at origination | | | | | Loan-to-value ratio at origination | | | | | < 60.00% | | 20 | % | | 22 | % | < 60.00% | | 21 | % | | 18 | % | 60.01% to 70.00% | | 15 |
| | 16 |
| 60.01% to 70.00% | | 16 | | | 15 | | 70.01% to 80.00% | | 19 |
| | 19 |
| 70.01% to 80.00% | | 20 | | | 19 | | 80.01% to 90.00% | | 33 |
| | 30 |
| 80.01% to 90.00% | | 31 | | | 35 | | Greater than 90.00% | | 13 |
| | 13 |
| Greater than 90.00% | | 12 | | | 13 | | Total | | 100 | % | | 100 | % | Total | | 100 | % | | 100 | % | Weighted average loan-to-value ratio | | 73 | % | | 72 | % | Weighted average loan-to-value ratio | | 72 | % | | 73 | % | FICO score at origination | | | | | FICO score at origination | | | | | < 620 | | 1 | % | | 1 | % | < 620 | | — | % | | 1 | % | 620 to < 660 | | 4 |
| | 4 |
| 620 to < 660 | | 5 | | | 4 | | 660 to < 700 | | 11 |
| | 10 |
| 660 to < 700 | | 12 | | | 12 | | 700 to < 740 | | 18 |
| | 17 |
| 700 to < 740 | | 19 | | | 18 | | ≥ 740 | | 66 |
| | 68 |
| ≥ 740 | | 64 | | | 65 | | | Total | | 100 | % | | 100 | % | Total | | 100 | % | | 100 | % | Weighted average FICO score | | 754 |
| | 755 |
| Weighted average FICO score | | 752 | | | 751 | |
_______________________ | | (1) | Percentages are calculated based on unpaid principal balance at the end of each period. |
(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).
Higher-Risk Loans. Our portfolio includes certain higher-risk subprime conventional mortgage loans. These include high loan-to-value ratio mortgage loans and subprime mortgage loans. The higher-risk subprime loans represent a relatively small portion of our conventional mortgage loan portfolio (3.6(5.9 percent by outstanding principal balance), but a disproportionately higher portion of the conventional mortgage loan portfolio delinquencies (35.3(17.3 percent by outstanding principal balance).
Table 26 - Summary of Higher-Risk Conventional Mortgage Loans (dollars in thousands)
| | | | | | | | | | | | | | | | | As of December 31, 2018 | 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) | | $ | 139,018 |
| | 4.91 | % | | 2.83 | % | | 1.62 | % |
Table 25 - Summary of Higher-Risk Conventional Mortgage Loans(dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2020 | 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) | | $ | 213,162 | | | 3.54 | % | | 0.91 | % | | 4.97 | % |
_______________________ | | (1) | (1)Subprime loans are loans to borrowers with FICO® credit scores of 660 or lower.
® credit scores of 660 or lower.
|
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 primary mortgage insurance coverage (PMI) on individual loans. As of December 31, 2018,2020, we were the beneficiary of PMI coverage of $135.4$110.8 million on $523.2$424.4 million of conventional mortgage loans. These amounts relate to loans originated with PMI and for which current loan-to-value ratios exceed 78 percent (determined by recalculating the original loan-to-value ratio using the current unpaid principal balance)balance divided by the appraised home value at the time of loan origination).
We have analyzed our potential loss exposure to all of the mortgage insurance companies and do not expect incremental losses based on these exposures at this time.
Deposits
We offer demand and overnight deposits and custodial mortgage accounts, and prior to February 19, 2021, we offered 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, 2018,2020, and December 31, 2017,2019, deposits totaled $474.9 million$1.1 billion and $477.1$674.3 million,, respectively.
Term deposits issued in amountswith a maturity of $100,000three months or greaterless were $800 thousand with a weighted average interest rate of 1.82 percent at December 31, 2018 amounted to a par amount of $800,000, with a maturity date of July 1, 2019, and a weighted average rate of 2.34 percent. There were no term deposits at December 31, 2017.2019.
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 $22.4$161.2 million and $34.8$159.7 million as of December 31, 2018,2020, and December 31, 2017,2019, respectively. Derivative liabilities' net fair value, net of cash collateral and accrued interest, totaled $255.8$24.1 million and $300.5$10.3 million as of December 31, 2018,2020, and December 31, 2017,2019, respectively.
We offset fair-value amounts recognized for derivative instruments with 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 costfair value 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 $50.8$28.4 million and $42.9$49.9 million at December 31, 20182020 and 2017,2019, respectively.
Table 26 - Hedged Item and Hedge-Accounting Treatment Table 27 - Hedged Item and Hedge-Accounting Treatment (dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2018 | | December 31, 2017 | Hedged Item | | Derivative | | Designation(2) | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value | Advances (1) | | Swaps | | Fair value | | $ | 5,343,804 |
| | $ | 5,773 |
| | $ | 7,293,414 |
| | $ | 52,244 |
| | | Swaps | | Economic | | 769,800 |
| | (13,144 | ) | | 974,900 |
| | 1,570 |
| Total associated with advances | | | | | | 6,113,604 |
| | (7,371 | ) | | 8,268,314 |
| | 53,814 |
| Available-for-sale securities | | Swaps | | Fair value | | 611,915 |
| | (228,905 | ) | | 611,915 |
| | (271,182 | ) | Trading securities | | Swaps | | Economic | | 158,000 |
| | (487 | ) | | 192,000 |
| | (4,183 | ) | COs | | Swaps | | Fair value | | 6,024,980 |
| | (54,791 | ) | | 6,213,665 |
| | (45,446 | ) | | | Forward starting swaps | | Cash Flow | | 282,000 |
| | (753 | ) | | 481,200 |
| | (9,807 | ) | Total associated with COs | | | | | | 6,306,980 |
| | (55,544 | ) | | 6,694,865 |
| | (55,253 | ) | Total | | | | | | 13,190,499 |
| | (292,307 | ) | | 15,767,094 |
| | (276,804 | ) | Mortgage delivery commitments | | | | | | 50,773 |
| | 339 |
| | 42,918 |
| | 142 |
| Total derivatives | | | | | | $ | 13,241,272 |
| | (291,968 | ) | | $ | 15,810,012 |
| | (276,662 | ) | Accrued interest | | | | | | |
| | (3,752 | ) | | |
| | (14,452 | ) | Cash collateral, including related accrued interest | | | | | | | | 62,323 |
| | | | 25,450 |
| Net derivatives | | | | | | |
| | $ | (233,397 | ) | | |
| | $ | (265,664 | ) | Derivative asset | | | | | | |
| | $ | 22,403 |
| | |
| | $ | 34,786 |
| Derivative liability | | | | | | |
| | (255,800 | ) | | |
| | (300,450 | ) | Net derivatives | | | | | | |
| | $ | (233,397 | ) | | |
| | $ | (265,664 | ) |
(dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Hedged Item | | Derivative | | Designation(2) | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value | Advances (1) | | Swaps | | Fair value | | $ | 4,532,123 | | | $ | (21,870) | | | $ | 5,065,193 | | | $ | (4,003) | | | | Swaps | | Economic | | 670,300 | | | (44,466) | | | 677,300 | | | (30,080) | | Total associated with advances | | | | | | 5,202,423 | | | (66,336) | | | 5,742,493 | | | (34,083) | | Available-for-sale securities | | Swaps | | Fair value | | 3,735,362 | | | 33,751 | | | 3,735,362 | | | 17,946 | | Trading securities | | Swaps | | Economic | | 3,550,000 | | | 19,669 | | | 2,225,000 | | | (885) | | COs | | Swaps | | Fair value | | 1,692,990 | | | (3,443) | | | 3,327,550 | | | (7,053) | | | | | | | | | | | | | | | | | Forward starting swaps | | Cash Flow | | 17,000 | | | (14) | | | 17,000 | | | 19 | | Total associated with COs | | | | | | 1,709,990 | | | (3,457) | | | 3,344,550 | | | (7,034) | | Balance Sheet | | Swaps | | Economic | | 1,316,522 | | | 29 | | | — | | | — | | Total | | | | | | 15,514,297 | | | (16,344) | | | 15,047,405 | | | (24,056) | | Mortgage delivery commitments | | | | | | 28,386 | | | 220 | | | 49,911 | | | 227 | | Total derivatives | | | | | | $ | 15,542,683 | | | (16,124) | | | $ | 15,097,316 | | | (23,829) | | Accrued interest | | | | | | | | (62,464) | | | | | (4,647) | | Cash collateral, including related accrued interest | | | | | | | | 215,764 | | | | | 177,936 | | Net derivatives | | | | | | | | $ | 137,176 | | | | | $ | 149,460 | | | | | | | | | | | | | | | Derivative asset | | | | | | | | $ | 161,238 | | | | | $ | 159,731 | | Derivative liability | | | | | | | | (24,062) | | | | | (10,271) | | Net derivatives | | | | | | | | $ | 137,176 | | | | | $ | 149,460 | |
_______________________ | | (1) | As of December 31, 2018 and 2017, embedded derivatives separated from the advance contract with notional amounts of $769.8 million and $974.9 million, respectively, and fair values of $13.1 million and $(1.6)(1)As of December 31, 2020 and 2019, embedded derivatives separated from certain advance contracts with notional amounts of $670.3 million and $677.3 million, respectively, and fair values of $44.5 million and $30.0 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. 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. |
(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 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 derivatives 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 28 - Hedging Strategies (dollars in thousands)
| | | | | | | | | | | | | | | | | | | | Notional Amount | Hedged Item / Hedging Instrument | | Hedging Objective | | Hedge Designation | | December 31, 2018 | | December 31, 2017 | Advances | | | | | | | | | Pay fixed, receive floating interest-rate swap (without options) | | Converts the advance's fixed rate to a variable rate index | | Fair value | | $ | 4,472,004 |
| | $ | 6,086,164 |
| | | Economic | | 80,000 |
| | 138,000 |
| 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 | | Fair value | | 791,200 |
| | 1,191,250 |
| | | Economic | | 10,500 |
| | 61,500 |
| 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 | | Fair value | | 26,600 |
| | 16,000 |
| Pay float with embedded features, receive float 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 | | 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 | | Economic | | 679,300 |
| | 775,400 |
| | | | | | | 6,113,604 |
| | 8,268,314 |
| | | | | | | | | | Investments | | | | | | | | | Pay fixed, receive floating interest-rate swap | | Converts the investment's fixed rate to a variable rate index | | Fair value | | 611,915 |
| | 611,915 |
| | | Economic | | 158,000 |
| | 192,000 |
| | | | | | | 769,915 |
| | 803,915 |
| | | | | | | | | | CO Bonds | | | | | | | | | Receive fixed, pay floating interest-rate swap (without options) | | Converts the bond's fixed rate to a variable rate index | | Fair value | | 2,629,980 |
| | 3,153,665 |
| 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 | | Fair value | | 3,395,000 |
| | 3,060,000 |
| Forward-starting interest-rate swap | | To lock in the cost of funding on anticipated issuance of debt | | Cash flow | | 282,000 |
| | 481,200 |
| | | | | | | 6,306,980 |
| | 6,694,865 |
| | | | | | | | | | Stand-Alone Derivatives | | | | | | | | | Mortgage delivery commitments | | N/A | | Economic | | 50,773 |
| | 42,918 |
| Total | | | | | | $ | 13,241,272 |
| | $ | 15,810,012 |
|
Table 27 - Hedging Strategies
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Notional Amount | Hedged Item / Hedging Instrument | | Hedging Objective | | Hedge Designation | | December 31, 2020 | | December 31, 2019 | Advances | | | | | | | | | Pay fixed, receive floating interest-rate swap (without options) | | Converts the advance's fixed rate to a variable rate index | | Fair value | | $ | 3,287,898 | | | $ | 4,326,393 | | | | Economic | | 20,500 | | | 10,000 | | 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 | | Fair value | | 1,225,125 | | | 701,200 | | | | Economic | | 649,800 | | | 648,300 | | 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 | | Fair value | | 19,100 | | | 22,600 | | 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 | | 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 | | Economic | | — | | | 19,000 | | | | | | | | 5,202,423 | | | 5,742,493 | | | | | | | | | | | Investments | | | | | | | | | Pay fixed, receive floating interest-rate swap | | Converts the investment's fixed rate to a variable rate index | | Fair value | | 3,735,362 | | | 3,735,362 | | | | Economic | | 3,550,000 | | | 2,225,000 | | | | | | | | 7,285,362 | | | 5,960,362 | | | | | | | | | | | CO Bonds | | | | | | | | | Receive fixed, pay floating interest-rate swap (without options) | | Converts the bond's fixed rate to a variable rate index | | Fair value | | 1,402,990 | | | 2,029,550 | | 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 | | Fair value | | 290,000 | | | 1,298,000 | | | | | | | | | | | Forward-starting interest-rate swap | | To lock in the cost of funding on anticipated issuance of debt | | Cash flow | | 17,000 | | | 17,000 | | | | | | | | 1,709,990 | | | 3,344,550 | | | | | | | | | | | Balance Sheet | | | | | | | | | Pay float, receive fixed interest-rate swap | | Interest-rate swap not linked to a specific asset, liability or forecasted transaction | | Economic | | 658,261 | | | — | | Pay fixed, receive float interest-rate swap | | Interest-rate swap not linked to a specific asset, liability or forecasted transaction | | Economic | | 658,261 | | | — | | | | | | | | 1,316,522 | | | — | | | | | | | | | | | Stand-Alone Derivatives | | | | | | | | | Mortgage delivery commitments | | N/A | | Economic | | 28,386 | | | 49,911 | | Total | | | | | | $ | 15,542,683 | | | $ | 15,097,316 | |
Tables 2928 and 3029 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 $11.4$6.2 billion,, representing 85.940.1 percent of all derivatives outstanding as of December 31, 2018.2020. Economic hedges and cash-flow hedges are not included within the two tables below.
Table 29 - Fair-Value Hedge Relationships of Advances By Year of Contractual Maturity (dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2018 | | | | | | | | | | Weighted-Average Yield (4) | | 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 | Due in one year or less | $ | 1,412,686 |
| | $ | 10,113 |
| | $ | 1,412,686 |
| | $ | (10,321 | ) | | 1.59 | % | | 2.61 | % | | 1.39 | % | | 2.81 | % | Due after one year through two years | 1,354,290 |
| | 21,602 |
| | 1,354,290 |
| | (21,682 | ) | | 1.84 |
| | 2.58 |
| | 1.57 |
| | 2.85 |
| Due after two years through three years | 1,190,803 |
| | 19,793 |
| | 1,190,803 |
| | (19,852 | ) | | 2.30 |
| | 2.68 |
| | 1.89 |
| | 3.09 |
| Due after three years through four years | 578,075 |
| | 8,371 |
| | 578,075 |
| | (8,392 | ) | | 1.92 |
| | 2.60 |
| | 1.61 |
| | 2.91 |
| Due after four years through five years | 237,200 |
| | (9 | ) | | 237,200 |
| | (49 | ) | | 2.50 |
| | 2.61 |
| | 2.15 |
| | 2.96 |
| Thereafter | 570,750 |
| | 4,158 |
| | 570,750 |
| | (4,229 | ) | | 2.47 |
| | 2.71 |
| | 1.91 |
| | 3.27 |
| Total | $ | 5,343,804 |
| | $ | 64,028 |
| | $ | 5,343,804 |
| | $ | (64,525 | ) | | 1.98 | % | | 2.63 | % | | 1.66 | % | | 2.95 | % |
Table 28 - Fair-Value Hedge Relationships of Advances By Year of Contractual Maturity(dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2020 | | | | | | | | | | Weighted-Average Yield (4) | | 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 | Due in one year or less | $ | 1,762,803 | | | $ | (11,790) | | | $ | 1,762,803 | | | $ | 11,682 | | | 1.60 | % | | 0.19 | % | | 1.17 | % | | 0.62 | % | Due after one year through two years | 702,985 | | | (12,533) | | | 702,985 | | | 12,413 | | | 1.79 | | | 0.14 | | | 1.31 | | | 0.62 | | Due after two years through three years | 353,800 | | | (12,964) | | | 353,800 | | | 12,857 | | | 2.22 | | | 0.18 | | | 1.73 | | | 0.67 | | Due after three years through four years | 422,500 | | | (18,899) | | | 422,500 | | | 18,603 | | | 2.01 | | | 0.09 | | | 1.40 | | | 0.70 | | Due after four years through five years | 943,925 | | | (19,441) | | | 943,925 | | | 19,175 | | | 1.36 | | | 0.10 | | | 0.64 | | | 0.82 | | Thereafter | 346,110 | | | (16,526) | | | 346,110 | | | 16,134 | | | 1.94 | | | 0.12 | | | 1.14 | | | 0.92 | | Total | $ | 4,532,123 | | | $ | (92,153) | | | $ | 4,532,123 | | | $ | 90,864 | | | 1.69 | % | | 0.15 | % | | 1.14 | % | | 0.70 | % |
_______________________ | | (1) | Not included in the fair value is $58.3 million of variation margin received(1) Not included in the fair value is $70.3 million of variation margin, or payments made for changes in the market value of the transaction, paid for daily settled contracts. |
| | (2) | Included in the advances hedged amount are $845.2 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. |
| | (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, 2018.
|
(2) Included in the advances hedged amount are $1.2 billion of putable advances, which would accelerate the termination date of the derivative and the hedged item if the put option is exercised. Table 30 - Fair-Value Hedge Relationships of Consolidated Obligations By Year of Contractual Maturity (dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2018 | | | | | | | | | | Weighted-Average Yield (4) | | 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 | Due in one year or less | $ | 1,476,285 |
| | $ | (6,118 | ) | | $ | 1,476,285 |
| | $ | 6,310 |
| | 1.46 | % | | 1.48 | % | | 2.54 | % | | 2.52 | % | Due after one year through two years | 1,377,705 |
| | (7,168 | ) | | 1,377,705 |
| | 7,174 |
| | 2.14 |
| | 2.18 |
| | 2.49 |
| | 2.45 |
| Due after two years through three years | 1,738,770 |
| | (19,511 | ) | | 1,738,770 |
| | 19,531 |
| | 1.75 |
| | 1.75 |
| | 2.49 |
| | 2.49 |
| Due after three years through four years | 542,220 |
| | (6,409 | ) | | 542,220 |
| | 6,271 |
| | 2.02 |
| | 2.02 |
| | 2.46 |
| | 2.46 |
| Due after four years through five years | 275,000 |
| | (3,691 | ) | | 275,000 |
| | 3,717 |
| | 2.10 |
| | 2.10 |
| | 2.43 |
| | 2.43 |
| Thereafter | 615,000 |
| | (18,023 | ) | | 615,000 |
| | 17,770 |
| | 2.50 |
| | 2.03 |
| | 2.58 |
| | 3.05 |
| Total | $ | 6,024,980 |
| | $ | (60,920 | ) | | $ | 6,024,980 |
| | $ | 60,773 |
| | 1.88 | % | | 1.85 | % | | 2.51 | % | | 2.54 | % |
(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, 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, 2020.
Table 29 - Fair-Value Hedge Relationships of Consolidated Obligations By Year of Contractual Maturity (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2020 | | | | | | | | | | Weighted-Average Yield (4) | | 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 | Due in one year or less | $ | 806,770 | | | $ | 7,207 | | | $ | 806,770 | | | $ | (7,093) | | | 1.75 | % | | 1.71 | % | | 0.09 | % | | 0.13 | % | Due after one year through two years | 192,220 | | | 4,508 | | | 192,220 | | | (4,504) | | | 1.64 | | | 1.60 | | | 0.16 | | | 0.20 | | Due after two years through three years | 60,000 | | | 1,441 | | | 60,000 | | | (1,434) | | | 1.37 | | | 1.19 | | | 0.09 | | | 0.27 | | Due after three years through four years | 80,000 | | | 552 | | | 80,000 | | | (551) | | | 1.82 | | | 1.82 | | | 0.18 | | | 0.18 | | Due after four years through five years | 354,000 | | | (32) | | | 354,000 | | | 25 | | | 0.69 | | | 0.59 | | | 0.10 | | | 0.20 | | Thereafter | 200,000 | | | 7,695 | | | 200,000 | | | (8,956) | | | 3.50 | | | 1.31 | | | 0.09 | | | 2.28 | | Total | $ | 1,692,990 | | | $ | 21,371 | | | $ | 1,692,990 | | | $ | (22,513) | | | 1.71 | % | | 1.40 | % | | 0.10 | % | | 0.41 | % |
_______________________ | | (1) | Not included in the fair value is $6.1 million of variation margin paid for daily settled contracts. |
| | (2) | Included in the CO bonds hedged amount are $3.4 billion of callable CO bonds, which would accelerate the termination date of the derivative and the hedged item if the call option is exercised. |
| | (1) Not included in the fair value is $24.8 million of variation margin, or payments made for changes in the market value of the transaction, received for daily settled contracts. (2) Included in the CO bonds hedged amount are $290.0 million 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, 2020.
| 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, LIBOR, 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, 2018.
|
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 3130 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 currently pledge only cash collateral, including initial and variation margin, for cleared derivatives, but may also pledge securities for initial margin as allowed by the applicable DCO and clearing member.
Table 30 - Credit Exposure to Derivatives Counterparties Table 31 - Credit Exposure to Derivatives Counterparties (dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2018 | 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 | Liability positions with credit exposure: | | | | | | | | | | | Uncleared derivatives | | | | | | | | | | | Single-A | | $ | 3,339,800 |
| | $ | (33,242 | ) | | $ | 27,653 |
| | $ | 6,359 |
| | $ | 770 |
| Triple-B | | 451,000 |
| | (5,766 | ) | | — |
| | 6,215 |
| | 449 |
| Cleared derivatives | | 6,889,444 |
| | (2,073 | ) | | 23,161 |
| | — |
| | 21,088 |
| Total derivative positions with nonmember counterparties to which we had credit exposure | | 10,680,244 |
| | (41,081 | ) | | 50,814 |
| | 12,574 |
| | 22,307 |
| | | | | | | | | | | | Mortgage delivery commitments (2) | | 50,773 |
| | 339 |
| | — |
| | — |
| | 339 |
| Total | | $ | 10,731,017 |
| | $ | (40,742 | ) | | $ | 50,814 |
| | $ | 12,574 |
| | $ | 22,646 |
| | | | | | | | | | | | Derivative positions without credit exposure: (3) | | | | | | | | | | | Double-A | | $ | 157,000 |
| | | | | | | | | Single-A | | 1,422,550 |
| | | | | | | | | Triple-B | | 930,705 |
| | | | | | | | | Total derivative positions without credit exposure | | $ | 2,510,255 |
| |
| | | | | | |
(dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2020 | Credit Rating (1) | | Notional Amount | | Net Derivatives Fair Value Before Collateral | | Cash Collateral Pledged to Counterparty | | | | Net Credit Exposure to Counterparties | Asset positions with credit exposure: | | | | | | | | | | | Uncleared derivatives | | | | | | | | | | | | | | | | | | | | | | Single-A | | $ | 199,000 | | | $ | 22 | | | $ | — | | | | | $ | 22 | | Cleared derivatives | | 6,982,737 | | | 1,313 | | | 89,200 | | | | | 90,513 | | | | | | | | | | | | | Liability positions with credit exposure: | | | | | | | | | | | Uncleared derivatives | | | | | | | | | | | Single-A | | 1,160,800 | | | (36,915) | | | 38,134 | | | | | 1,219 | | | | | | | | | | | | | Cleared derivatives | | 6,109,035 | | | (2,710) | | | 72,899 | | | | | 70,189 | | Total derivative positions with nonmember counterparties to which we had credit exposure | | 14,451,572 | | | (38,290) | | | 200,233 | | | | | 161,943 | | | | | | | | | | | | | Mortgage delivery commitments (2) | | 28,386 | | | 220 | | | — | | | | | 220 | | Total | | $ | 14,479,958 | | | $ | (38,070) | | | $ | 200,233 | | | | | $ | 162,163 | | | | | | | | | | | | | Derivative positions without credit exposure: (3) | | | | | | | | | | | | | | | | | | | | | | Single-A | | $ | 1,052,725 | | | | | | | | | | Triple-B | | 10,000 | | | | | | | | | | Total derivative positions without credit exposure | | $ | 1,062,725 | | | | | | | | | |
_______________________ | | (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) | (1) Uncleared derivatives counterparty ratings are obtained from Moody's, Fitch, and S&P. Each rating classification includes all rating levels within that category. If there is a split rating, the lowest rating is used. In the case where the obligations are unconditionally and irrevocably guaranteed, the rating of the guarantor or the counterparty is used. (2) Total fair-value exposures related to commitments to invest in mortgage loans are offset by certain pair-off fees. Commitments to invest in mortgage loans are reflected as derivatives. We do not collateralize these commitments. However, should the participating financial institution fail to deliver the mortgage loans as agreed, the participating financial institution is charged a fee to compensate us for the nonperformance. (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 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 enterPrior to January 1, 2020, we entered into new uncleared derivatives only with nonmember institutions that havehad long-term senior unsecured NRSRO credit ratings that are at or above single-A (or its equivalent) although risk-reducing trades maycould be approved for counterparties whose ratings havehad 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 128 — 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 deposits. We may also engage in short-term secured reverse repurchase agreements with affiliates of these counterparties. AllSome 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. Our derivatives The Alternative Reference Rates Committee (ARRC), which was established in 2014 by the Federal Reserve and manythe 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.
In assessing our current exposure to LIBOR, benchmarkwe have developed an inventory of financial instruments impacted and identified contracts that may require adding or adjusting the fallback language, the provisions in the financial instrument or contract that specify how LIBOR is to be replaced with an alternative reference rate and related provisions, which may identify the replacement rate. 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 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 continue to assess our operational readiness, including updating processes and information technology systems to support the transition from LIBOR to an alternative reference rate.
The Bank has participated in the FHLBank System’s issuances of SOFR-indexed COs as our funding needs require since the FHLBank System began issuing such COs in November 2018. Market activity in SOFR-indexed financial instruments continues to increase. During the year ended December 31, 2020, we issued $7.8 billion in SOFR-indexed COs. In October
2019, the Bank began to offer a SOFR-based advance. During the year ended December 31, 2020, we issued $1.9 billion in SOFR-indexed advances.
In March 2019, the Bank began to implement OIS based on the federal funds effective rate as an alternative interest rate could adversely affecthedging 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 a 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. Early in 2019, before the issuance of the Supervisory Letter, we limited the maturities of certain advances that are linked to LIBOR to December 31, 2021. In addition, prior to the issuance of the Supervisory Letter, we had ceased purchasing investments that reference LIBOR and mature after December 31, 2021, and we had suspended entering into LIBOR-indexed derivatives that terminate after December 31, 2021. See Legislative and Regulatory Developments for more information on the Supervisory Letter.
On October 16, 2020, the clearing houses CME and LCH transitioned the rate for discounting all U.S. Dollar interest rate cleared swaps from the Effective Fed Funds Rate to SOFR. On October 21, 2020, we adhered to the ISDA 2020 IBOR Fallbacks Protocol, a multilateral mechanism that, effective January 25, 2021, through the IBOR Fallbacks Supplement, amended our business,legacy bilateral, over-the-counter LIBOR-based interest rate swaps to substitute SOFR for LIBOR as the benchmark rate following the cessation of LIBOR or if LIBOR is declared by the FCA to be no longer representative of the underlying market and economic reality that it is intended to measure. See Legislative and Regulatory Developments for additional information.
On November 30, 2020, the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the FDIC issued a joint statement encouraging banks to cease entering into new contracts that use U.S. dollar LIBOR as a reference rate as soon as practicable and no later than December 31, 2021. On March 5, 2021, the FCA announced that LIBOR will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021, or, in the case of some more frequently used U.S. dollar LIBOR settings, immediately after June 30, 2023. Although the FCA does not expect LIBOR to become unrepresentative before the applicable cessation date and intends to consult on requiring the administrator of LIBOR to continue publishing LIBOR of certain currencies and tenors on a non-representative, synthetic basis for a period after the applicable cessation date, there is no assurance that LIBOR, of any particular currency or tenor, will continue to be published or be representative through any particular date.
We have exposures to advances, investment securities and derivatives with interest rates indexed to U.S. dollar LIBOR. All of our LIBOR-indexed financial condition,instruments utilize a LIBOR tenor that will either cease to be published or will no longer be representative after June 30, 2023. Table 31 presents our exposure to LIBOR-indexed advances and resultsinvestment securities, and Table 33 presents our exposure to LIBOR-indexed derivatives, at December 31, 2020.
Table 31 - LIBOR-Indexed Variable Rate Financial Instruments at December 31, 2020 (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | LIBOR Tenors That Cease or Will no Longer be Representative Immediately After June 30, 2023 | | Due in 2021 | | Due in 2022 | | Due in 2023, through June 30 | | Due after June 30, 2023 | | Total | Advances, par amount by redemption term(1) | $ | 19,100 | | | $ | — | | | $ | — | | | $ | — | | | $ | 19,100 | | Investment securities, par amount by contractual maturity | | | | | | | | | | Non-MBS | — | | | — | | | 3,952 | | | 65,210 | | | 69,162 | | MBS(2) | — | | | 16 | | | — | | | 1,028,827 | | | 1,028,843 | | Total investment securities | — | | | 16 | | | 3,952 | | | 1,094,037 | | | 1,098,005 | | Total financial instruments | $ | 19,100 | | | $ | 16 | | | $ | 3,952 | | | $ | 1,094,037 | | | $ | 1,117,105 | |
_______________________ (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 operationsthe underlying loans or securities are subject to a call right or prepayment right, with or without call or prepayment fees.
.
Table 32 - Variable Rate Financial Instruments by Interest-Rate Index
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Par Value of Advances | | Par Value of Non-MBS | | Par Value of MBS | | Par Value of CO Bonds | LIBOR | | $ | 19,100 | | | $ | 69,162 | | | $ | 1,028,843 | | | $ | — | | SOFR | | 697,500 | | | — | | | — | | | 8,549,000 | | FHLBank discount note auction rate | | 1,245,310 | | | — | | | — | | | — | | Constant Maturity Treasury | | — | | | — | | | 60,381 | | | — | | Other | | — | | | — | | | 135 | | | — | | Total | | $ | 1,961,910 | | | $ | 69,162 | | | $ | 1,089,359 | | | $ | 8,549,000 | |
The following table presents our derivatives with LIBOR exposure at December 31, 2020.
Table 33 - Notional Amount of Derivative with LIBOR Exposure by Termination Date (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pay Leg | | Receive Leg | | | Cleared | | Uncleared | | Cleared | | Uncleared | | | | | | | | | | Terminates in 2021 | | $ | 186,770 | | | $ | 190,000 | | | $ | 782,903 | | | $ | 107,600 | | Terminates in 2022 | | 137,220 | | | — | | | 70,625 | | | 221,000 | | Terminates in 2023, through June 30 | | — | | | — | | | 15,000 | | | 546,600 | | Terminates after June 30, 2023 | | — | | | — | | | 42,750 | | | 435,900 | | Total notional amount | | $ | 323,990 | | | $ | 190,000 | | | $ | 911,278 | | | $ | 1,311,100 | |
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. We are able to expand our CO debt issuance in response to our members' increased credit needs
for advances and to increase our acquisitions of mortgage loans. Alternatively, in response to reduced member credit needs, we may allow our COs to mature without replacement, transfer debt to another FHLBank, or repurchase and retire outstanding COs, allowing our balance sheet to shrink.
Sources and Uses of Liquidity. Our primary sources of liquidity are proceeds from the issuance of COs and advance repayments, and maturing short-term investments, as well as cash and investment holdings that are primarily high-quality, short-, and intermediate-term financial instruments.
During the year ended December 31, 2018,2020, we maintained continual access to funding and adapted our debt issuance to meet the needs of our members. DuringAs we entered March 2020, markets were disrupted by uncertainty surrounding the year ended December 31, 2018, ourCOVID-19 pandemic, spurring two FOMC actions to reduce the federal funds target rate by a total of 150 basis points. Our short-term funding was generally driven by increased member demand for advances and was achieved primarily through the issuance of discount notes and short-term CO bonds. Access toWe maintained liquidity through short-term debt markets has been reliable because investors continue to viewinvestments in compliance with guidance from the FHFA. Maintaining liquidity on our short-term debt as an asset of choice, which has led to consistently low funding costs compared to those 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 notbalance sheet, however, can expose us to significant interest rateadditional 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 ourwhich could reduce net interest margin. Accordingly, we have established funding gap limits designed to limit our exposure to refinancing risk. See — Balance Sheet Funding Gap Policy for additional information. Also, we measure and monitorincome when interest rate risk with commonly used methods and metrics, which includerates decline, as was 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.case during the year ended December 31, 2020.
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. We currently conduct daily repurchases of excess capital stock as discussed under Internal Capital Practices and Policies — Repurchases of Excess Stock.
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 in 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 members of the FHLBanks to continue to supply reasonable amounts of funds to the mortgage market, and the ability to supply such funds is substantially impaired because of monetary stringency and a high level of interest rates. There were no such purchases by the U.S. Treasury during the year ended December 31, 2018.2020.
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 below — 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 below — Debt Financing — Consolidated Obligations below.Obligations.
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, 2018.2020.
Table 34 - Liquidity Reserves for Deposits
Table 32 - Liquidity Reserves for Deposits (dollars in thousands)
| | | | | December 31, | | | December 31, | | | 2018 | | 2017 | | | 2020 | | 2019 | Liquid assets(1) | | | | | | Cash and due from banks | | $ | 10,431 |
| | $ | 261,673 |
| Cash and due from banks | | $ | 2,050,028 | | | $ | 69,416 | | Interest-bearing deposits | | 593,199 |
| | 246 |
| Interest-bearing deposits | | 299,149 | | | 1,253,873 | | U.S. Treasury obligations | | U.S. Treasury obligations | | 3,596,718 | | | 2,240,236 | | Advances maturing within five years | | 41,916,398 |
| | 35,835,925 |
| Advances maturing within five years | | 17,759,474 | | | 33,271,576 | | Total liquid assets(1) | | 42,520,028 |
| | 36,097,844 |
| | Total liquid assets | | Total liquid assets | | 23,705,369 | | | 36,835,101 | | Total deposits | | 474,878 |
| | 477,069 |
| Total deposits | | 1,088,987 | | | 674,309 | | Excess liquid assets(1) | | $ | 42,045,150 |
| | $ | 35,620,775 |
| | Excess liquid assets | | Excess liquid assets | | $ | 22,616,382 | | | $ | 36,160,792 | |
________________________
| | (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 projected 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, 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.
|
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 either of these thresholdsthis threshold at any time during the year ended December 31, 2018.
Table 33 - Projected Net Cash Flow and Structural Liquidity (dollars in thousands)
| | | | | | | | | | | | As of December 31, 2018 | | | 5 Business Days | | 21 Days | Uses of funds | | | | | Interest payable | | $ | 10,257 |
| | $ | 34,010 |
| Maturing liabilities | | 2,545,718 |
| | 10,834,500 |
| Committed asset settlements | | 146,500 |
| | 148,891 |
| Capital outflow | | 88,726 |
| | 88,726 |
| MPF delivery commitments | | 50,773 |
| | 50,773 |
| Other | | 319 |
| | 319 |
| Gross uses of funds | | 2,842,293 |
| | 11,157,219 |
| | | | | | Sources of funds | | | | | Interest receivable | | 70,832 |
| | 115,225 |
| Maturing or projected amortization of assets | | 14,370,897 |
| | 21,544,036 |
| Committed liability settlements | | 704,083 |
| | 704,083 |
| Cash and due from banks and interest bearing deposits | | 603,366 |
| | 603,366 |
| Gross sources of funds | | 15,749,178 |
| | 22,966,710 |
| | | | | | Projected net cash flow | | 12,906,885 |
| | $ | 11,809,491 |
| | | | | | Less: Secondary uses of funds | | | | | Deposit runoff | | 396,073 |
| | | Drawdown of standby letters of credit and lines of credit | | 663,989 |
| | | Rollover of all maturing advances | | 7,447,252 |
| | | Projected funding of MPF master commitments | | 191,013 |
| | | Total secondary uses of funds | | 8,698,327 |
| |
| | | | | | Structural liquidity | | $ | 4,208,558 |
| |
|
2020.
Contingency Liquidity.
Table 35 - Projected Net Cash Flow (dollars in thousands) | | | | | | | As of December 31, 2020 | | 21 Days | Uses of funds | | Interest payable | $ | 35,753 | | Maturing liabilities | 6,848,333 | | Committed asset settlements | 42,050 | | Capital outflow | 90,816 | | MPF delivery commitments | 28,387 | | Other | 2,326 | | Gross uses of funds | 7,047,665 | | | | Sources of funds | | Interest receivable | 54,422 | | Maturing or projected amortization of assets | 5,940,117 | | Committed liability settlements | 249,964 | | Cash and due from banks and interest bearing deposits | 2,348,977 | | | | Gross sources of funds | 8,593,480 | | | | Projected net cash flow | $ | 1,545,815 | |
Base Case Liquidity Requirement. The Bank is subject to FHFA regulations require that we hold contingencyguidance on liquidity, in an amountAdvisory Bulletin 2018-07 (Liquidity Guidance AB), which communicates the FHFA’s expectations with respect to the maintenance of sufficient liquidity to enable us to cover our operational requirementsprovide advances and letters of credit for members for a minimum of five business daysspecified time without access to the CO debt markets. capital markets or other unsecured funding sources.
The FHFA defines contingencyLiquidity 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 as projected sources of funds less uses of funds, excluding reliance on access tomeasure, the CO debt markets and including fundingguidance also includes a portion of outstandingseparate provision covering off-balance sheet commitments from 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, 2018. As of December 31, 2018 and 2017, we held a surplus of $17.4 billion and $13.2 billion, respectively, of contingency liquidity for the following five business days, exclusive of access to the proceeds of CO issuance.
Table 34 - Contingency Liquidity (dollars in thousands)
| | | | | | | | As of December 31, 2018 | | | 5 Business Days | Cumulative uses of funds | | | Interest payable | | $ | 10,257 |
| Maturing liabilities | | 2,545,718 |
| Committed asset settlements | | 146,500 |
| Drawdown of standby letters of credit | | 181,841 |
| Other | | 319 |
| Gross uses of funds | | 2,884,635 |
| | | | Cumulative sources of funds | | | Interest receivable | | 70,832 |
| Maturing or amortizing advances | | 7,597,253 |
| Committed liability settlements | | 704,083 |
| Gross sources of funds | | 8,372,168 |
| | | | Plus: sources of contingency liquidity | | | Marketable securities | | 1,249,156 |
| Self-liquidating assets | | 6,750,000 |
| Cash and due from banks and interest bearing deposits | | 603,366 |
| Marketable securities available for repo | | 3,307,164 |
| Total sources of contingency liquidity | | 11,909,686 |
| | | | Net contingency liquidity | | $ | 17,397,219 |
|
Additional Liquidity Requirements. The FHFA requires us to maintain, in the aggregate, qualifying assets free from any lien or pledge in an amount at least equal to the amount of our participation in total COs outstanding.
In addition, certain FHFAthe Liquidity Guidance AB provides guidance requires usrelated to maintain sufficient liquidity through short-term investments in an amount at least equalasset/liability maturity funding gap limits.
Under the Liquidity Guidance AB, FHLBanks are required to our anticipatedhold positive cash outflows under two different scenarios.
The first scenario assumes that we cannot borrow funds from theflow while rolling over maturing advances to all members and assuming no access to capital markets for a period of time between 10 to 20and 30 calendar days, with a specific measurement period set forth in a supervisory letter. The Liquidity Guidance AB also sets forth the initial cash flow assumptions and formula to calculate base case liquidity. With respect to standby letters of credit, the guidance set at 15 business days, andstates 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 forFHLBanks should maintain a periodliquidity reserve of between three to seven days, with initial guidance set at five business days,1 percent and that during that period we will renew maturing and called advances for all members except very large, highly rated members.
20 percent of its outstanding standby letters of credit commitments, as specified in a supervisory letter.
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 36 - Funding Gap Metric Table 35 - Funding Gap Metric
| | | | | | | | | | | | Funding Gap Metric (1) | | Limit | | Management Action Trigger | | Actual as of December 31, 2018 | | Actual as of December 31, 2017 | 3-month Funding Gap | | | | | | | | | No Adjustment for Floating Rate Advances Indexed to Discount Note Auction | | 35% | | 25% | | 12.2 | % | | 8.7 | % | Floating Rate Advances Indexed to Discount Note Auction assumed to have less than three-month maturity | | 20% | | 10% | | (1.4 | )% | | 0.6 | % | | | | | | | | | | 1-year Funding Gap | | | | | | | | | No Adjustment for Floating Rate Advances Indexed to Discount Note Auction | | 35% | | 25% | | 13.9 | % | | 10.9 | % | Floating Rate Advances Indexed to Discount Note Auction assumed to have less than one-year maturity | | 20% | | 10% | | 0.4 | % | | 3.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Funding Gap Metric (1) | | Limit | | Management Action Trigger | | Three-Month Average December 31, 2020 | | Three-Month Average December 31, 2019 | 3-month Funding Gap (2) | | 15% | | 13% | | (0.9) | % | | 10.8 | % | 1-year Funding Gap | | 30% | | 25% | | 9.8 | % | | 12.2 | % | _______________________ _______________________
| | (1) | The funding gap metric is a positive value when maturing liabilities exceed maturing assets, as defined, within the given time period. |
(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(2) The reduction in the three-month average of the three-month funding gap between December 31, 2020 and December 31, 2019, is primarily due to limit the liquidity risk potentially associated with a high volume of short-term debt refinancing, weperiod over period reduction in floating-rate advances which have a funding concentration policy that limitscontractual maturity beyond three months but are funded with borrowings with maturities of three months or less to match the volume of discount notes outstanding as a proportion of total assets. The policy establishes a management action trigger when discount notes (excludingborrower’s option to prepay on 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 55 percent of assets. Finally, discount notes are limited to no more than 65 percent of total assets. We were in compliance with these internal policies during the year ended December 31, 2018.reset date.
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 due with respect to any CO for which issuance proceeds were allocated to us within deadlines established in the agreement, the other FHLBanks will be obligated to fund any shortfall to the extent that any of the other FHLBanks has a net positive settlement balance (that is, the amount by which end-of-day proceeds received by such FHLBank from the sale of COs on that day exceeds payments by such FHLBank on COs on the same day) in its account with the Office of 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, nor have we ever been required to provide funding to another FHLBank under this agreement.
Debt Financing — Consolidated Obligations
Our primary source of liquidity is through CO issuances. At December 31, 2018,2020, and December 31, 2017,2019, outstanding COs for which we are primarily liable, including both CO bonds and CO discount notes, totaled $59.0$34.3 billion and $56.1$51.6 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.
See Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 1410 — Consolidated Obligations for a summary of CO bonds by contractual maturity dates and call dates as of December 31, 2018,2020, and December 31, 2017.2019. CO bonds outstanding for which we are primarily liable at December 31, 2018,2020, and December 31, 2017,2019, include issued callable bonds totaling $5.5$1.7 billion and $4.4$2.9 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 shortshort-term variable coupon repricing intervals. CO discount notes comprised 37.5
percent and 49.453.7 percent of the outstanding COs for which we are primarily liable at December 31, 2018,2020, and December 31, 2017,2019, respectively, but accounted for 95.189.1 percent and 94.193.0 percent of the proceeds from the issuance of such COs during the years endedDecember 31, 20182020 and 2019, respectively. 2017, respectively.
Table 37 - Short-Term Borrowings
Table 36 - Short-Term Borrowings (dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | 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, | | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | Outstanding par amount at end of the period | | $ | 33,147,065 |
| | $ | 27,752,860 |
| | $ | 30,070,103 |
| | $ | 3,020,150 |
| | $ | 3,212,640 |
| | $ | 447,000 |
| Weighted-average rate at the end of the period | | 2.37 | % | | 1.25 | % | | 0.47 | % | | 2.35 | % | | 1.30 | % | | 0.71 | % | Daily-average par amount outstanding for the period | | $ | 30,078,903 |
| | $ | 26,489,602 |
| | $ | 26,979,622 |
| | $ | 3,152,989 |
| | $ | 2,126,941 |
| | $ | 3,944,741 |
| Weighted-average rate for the period | | 1.87 | % | | 0.88 | % | | 0.35 | % | | 1.94 | % | | 1.18 | % | | 0.52 | % | Highest par amount outstanding at any month-end | | $ | 33,501,223 |
| | $ | 30,417,341 |
| | $ | 30,495,259 |
| | $ | 3,760,990 |
| | $ | 3,212,640 |
| | $ | 6,758,300 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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, | | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 | Outstanding par amount at end of the period | | $ | 12,879,765 | | | $ | 27,733,146 | | | $ | 33,147,065 | | | $ | 3,761,250 | | | $ | 2,705,500 | | | $ | 3,020,150 | | Weighted-average rate at the end of the period | | 0.10 | % | | 1.59 | % | | 2.37 | % | | 0.33 | % | | 1.84 | % | | 2.35 | % | Daily-average par amount outstanding for the period | | $ | 21,224,879 | | | $ | 25,489,068 | | | $ | 30,078,903 | | | $ | 3,763,736 | | | $ | 3,233,222 | | | $ | 3,152,989 | | Weighted-average rate for the period | | 0.88 | % | | 2.24 | % | | 1.87 | % | | 0.58 | % | | 2.10 | % | | 1.94 | % | Highest par amount outstanding at any month-end | | $ | 39,743,071 | | | $ | 33,147,065 | | | $ | 33,501,223 | | | $ | 4,709,900 | | | $ | 3,779,300 | | | $ | 3,760,990 | |
Although we are primarily liable for our portion of COs, that is, those issued on our behalf,the issuance proceeds allocated to us, 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 $746.8 billion and $1.0 trillion, respectively, at both December 31, 20182020 and 2017, respectively.2019. 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, 2018,2020, 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 continued to experience continuous demand for COs among investors and our issuance costs during the period covered by this report were consistent with those of recent quarters, reflecting continued high demand for all tenors of COs
with the strongest demand for short-term COs.investors. We have been able to issue debt in the amounts and structures required to meet our funding and risk-management needs. Throughout 2018,We continued to issue SOFR-indexed COs continuedas our funding needs required.For most of the period covered by this report, COs were issued at yields that were very competitive versus U.S. Treasury securities. COs continue to be issued at yields that were generallyare at or below equivalent-maturitylower than LIBOR swap yields for debt maturingcomparable short-term maturities, although the relevance of LIBOR in less than five years, while longer-term issues bore funding costsrelation to COs is waning.
The Federal Reserve’s recent signaling that were typically higher than equivalent maturity LIBOR swap yields. During thelow interest rates would last for an extended period covered by this report, CO yieldsand continued generally to move with U.S. dollar interest rate swaps and comparablerepurchase agreement offerings, purchases of U.S. Treasury yields, though minor spread fluctuations occurred between these series. We believesecurities and U.S. Agency mortgage-backed securities, as well as the previous establishment of liquidity facilities, are potentially important factors that the market’s reactioncould continue to recent and expected changes in FOMC monetary policies, including the decision to increase the target rate for Interest on Excess Reserves by less than the increase in the policy range for the target federal funds rate, is potentially an important factor that could shape investor demand for debt, including COs, in 2019.COs. Moreover, potentialexpected increases in U.S. Treasury security issuance in response to higher fiscal deficits following fiscal stimulus programs underlying the fiscal policy implications of the Tax CutCARES Act and Jobs Act of 2017any similar future legislation or any change or roll back of regulations governing money market investorsmay also have an impact on our funding costs.
Capital
Total capital at December 31, 2018,2020, was $3.6$2.8 billion compared with $3.3$3.1 billion at year-end 2017.2019.
Capital stock increaseddecreased by $245.1$602.0 million during the year ended December 31, 2018,2020, resulting from the issuance of $1.8 billion of capital stock to support new advances borrowings by members offset by capital stock repurchases of $1.6 billion.$2.8 billion offset by the issuance of $2.2 billion of capital stock.
Table 37 - Capital Stock Outstanding by Institution Type (dollars in thousands)
| | | | | | | | December 31, 2018 | Commercial banks | | $ | 1,021,913 |
| Savings institutions | | 895,114 |
| Insurance companies | | 309,606 |
| Credit unions | | 301,990 |
| Community development financial institutions | | 231 |
| Total GAAP capital stock | | 2,528,854 |
| Mandatorily redeemable capital stock | | 31,868 |
| Total regulatory capital stock | | $ | 2,560,722 |
|
Table 38 - Capital Stock Outstanding by Institution Type(dollars in thousands) | | | | | | | | | | | December 31, 2020 | Commercial banks | | $ | 286,800 | | Savings institutions | | 506,329 | | Insurance companies | | 281,729 | | Credit unions | | 191,949 | | Community development financial institutions | | 365 | | Total GAAP capital stock | | 1,267,172 | | Mandatorily redeemable capital stock | | 6,282 | | Total regulatory capital stock | | $ | 1,273,454 | |
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 becamebecome 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 13, 2018,11, 2020, the Director of the FHFA notified us that, based on September 30, 20182020 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, 20182020 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 6.2 percent at December 31, 2018.
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, 2018,2020, this internal minimum capital requirement equaled $3.1$2.1 billion, which was satisfied by our actual regulatory capital of $4.0$2.8 billion.
Reduction of Membership and Activity-Based Stock Investment Requirements
At the close of business on May 31, 2017, we reduced the activity-based stock investment requirement (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 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, 2018,2020, we had total retained earnings of $1.4$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 management action trigger for Value at RiskValue-at-Risk (VaR) market-risk measurement, which estimates an average of the 99th percentilefive worst case of potential changes in our market value of equity due to potential shifts in yield curves, option adjusted spreads 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 prudentialprudent or when 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 39 - Capital Stock Requirements and Excess Capital Stock Table 38 - 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, 2018 | $ | 755,723 |
| | $ | 1,716,251 |
| | $ | 2,471,996 |
| | $ | 2,560,722 |
| | $ | 88,726 |
| December 31, 2017 | 705,924 |
| | 1,502,996 |
| | 2,208,942 |
| | 2,319,644 |
| | 110,702 |
|
(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, 2020 | $ | 420,238 | | | $ | 762,379 | | | $ | 1,182,638 | | | $ | 1,273,454 | | | $ | 90,816 | | December 31, 2019 | 406,397 | | | 1,388,804 | | | 1,795,223 | | | 1,874,936 | | | 79,713 | |
_______________________ | | (1) | TSIR is rounded up to the nearest $100 on an individual member basis. |
| | (1)Total 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.
| Class B capital stock outstanding includes mandatorily redeemable capital stock. |
As discussed under Part I — Item 1 — Business — Capital Resources — Repurchase of Excess Stock, we currently conduct 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. We plan to continue with this practice, subject to regulatory requirements and our anticipated liquidity or capital management needs, although continued repurchases remain at our sole discretion, and we retain authority to suspend repurchases of excess stock from any shareholder or all shareholders without prior notice. This discretion would most likely be exercised in one of two scenarios. In the first scenario, discretion would be exercised because the member’s financial condition or collateral position is such that we deem it necessary to retain excess stock to fully secure our exposure to the member. In the second scenario, discretion would be exercised to meet the liquidity or capital management needs of the Bank.
Restricted Retained Earnings and the Joint Capital Agreement
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-valuefair-
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, 2018,2020, our totalrestricted retained earnings amount was $368.4 million, which exceeds the required contribution to the restricted retained earnings account of $354.4 million. Accordingly, no allocation of net income was $574.3 million compared with our totalmade to restricted retained earnings in the fourth quarter of 2020 and no further allocations of net income into restricted retained earnings are required until such time as the contribution on that daterequirement exceeds the balance of restricted retained earnings.
$310.7 million.
The agreementJoint Capital Agreement refers to the period of required contributions to the restricted retained earnings account as the “dividend restriction period.” Additionally, the agreement provides 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; •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; •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 •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 |
• standby letters of credit; • commitments for unused lines-of-credit advances; and • unsettled COs.
Table 40 - Contractual Obligations Table 39 - Contractual Obligations (dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2018 | | | Payment Due By Period | Contractual Obligations | | Total | | Less than one year | | One to three years | | Three to five years | | More than five years | Consolidated obligation bonds(1) | | $ | 25,901,315 |
| | $ | 9,638,270 |
| | $ | 9,240,405 |
| | $ | 3,230,490 |
| | $ | 3,792,150 |
| Estimated interest payments on long-term debt(2) | | 2,406,790 |
| | 548,190 |
| | 651,539 |
| | 346,331 |
| | 860,730 |
| Capital lease obligations | | 63 |
| | 41 |
| | 22 |
| | — |
| | — |
| Operating lease obligations | | 13,311 |
| | 2,681 |
| | 5,374 |
| | 5,256 |
| | — |
| Mandatorily redeemable capital stock | | 31,868 |
| | 31,455 |
| | — |
| | 403 |
| | 10 |
| Commitments to invest in mortgage loans | | 50,773 |
| | 50,773 |
| | — |
| | — |
| | — |
| Pension and post-retirement contributions | | 24,493 |
| | 7,171 |
| | 4,604 |
| | 4,619 |
| | 8,099 |
| Total contractual obligations | | $ | 28,428,613 |
| | $ | 10,278,581 |
| | $ | 9,901,944 |
| | $ | 3,587,099 |
| | $ | 4,660,989 |
|
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2020 | | | Payment Due By Period | Contractual Obligations | | Total | | Less than one year | | One to three years | | Three to five years | | More than five years | Consolidated obligation bonds(1) | | $ | 21,363,585 | | | $ | 10,608,465 | | | $ | 5,525,435 | | | $ | 2,917,530 | | | $ | 2,312,155 | | Estimated interest payments on long-term debt(2) | | 1,435,833 | | | 270,791 | | | 359,626 | | | 224,876 | | | 580,540 | | Capital lease obligations | | 577 | | | 180 | | | 360 | | | 37 | | | — | | Operating lease obligations | | 7,945 | | | 2,689 | | | 5,256 | | | — | | | — | | Mandatorily redeemable capital stock | | 6,282 | | | 5,558 | | | 133 | | | 581 | | | 10 | | Commitments to invest in mortgage loans | | 28,386 | | | 28,386 | | | — | | | — | | | — | | Pension and post-retirement contributions | | 25,701 | | | 3,631 | | | 6,064 | | | 11,621 | | | 4,385 | | Total contractual obligations | | $ | 22,868,309 | | | $ | 10,919,700 | | | $ | 5,896,874 | | | $ | 3,154,645 | | | $ | 2,897,090 | |
_______________________ | | (1) | Includes CO bonds outstanding at December 31, 2018,(1)Includes CO bonds outstanding at December 31, 2020, 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, 2018, has been used to estimate future interest payments. 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, 2020, 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. For additional discussion regarding the application of these and other accounting policies, see Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 2 — Summary of Significant Accounting Policies.
Accounting for Derivatives
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 income (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 the associated 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 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 value that are attributable to changes in the designated benchmark interest rate (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 to also beis recorded in current period earnings.
For derivative transactions to 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, we will continue to carry the derivative on the statement of collateral maintainscondition at fair value, recognize 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, cease to changes in the designated benchmark interest rate, LIBOR. For any such hedging relationship where the valuation 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 of hedge accounting for certain hedge relationships. Loss of hedge accounting for those hedge relationships would lead to increased net income volatility, which could be material. However, through December 31, 2018, 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.
The fair values of the derivatives and hedged items do not have any cumulative economic effect if the derivative andadjust the hedged item for changes in its benchmark fair value and amortize the cumulative 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 for accounting purposes, changes in its fair value are heldrecorded in current earnings without an offsetting change in the benchmark 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 maturity,retain or mutual optional terminationenter into derivatives that are economically effective at par. Since these fair values fluctuate throughoutreducing risk but do not meet the hedge-accounting requirements, either because the cost of the hedge periodwas economically superior to nonderivative hedging alternatives or because no
nonderivative hedging alternative was available, and eventually return to par value on the maturity date, the effect of fair values is normally only a timing issue.
Foravailable hedge strategies did not meet hedge accounting requirements. As required by FHFA regulation and our policy, derivatives and hedged items that meet the requirements described above, we do not anticipate any significant impact on our financial condition or operating performance. qualify as hedging instruments pursuant to GAAP may be used only if we document a nonspeculative purpose.
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, 2018,2020, we held derivatives that are marked to market with no offsetting qualifying hedged item including $927.8 million$5.5 billion notional of interest-rate swaps with a fair value of $(13.6)$(24.8) million that are economically hedging $670.3 million of advances, and $50.8$3.6 billion of trading securities with the remainder hedging the fair value sensitivity impact associated with DCOs' transition from OIS discounting to SOFR discounting. Additionally, as of December 31, 2020, we held $28.4 million notional of mortgage-delivery commitments with a fair value of $339,000.$220 thousand. The following table shows the estimated changes in the fair value of the interest-rate swaps under alternative parallel interest-rate shifts (for example the same change to interest rates on short-, intermediate-, and long-term fixed income maturities):
Table 43 - Estimated Change in Fair Value of Undesignated Derivatives
Table 40 - Estimated Change in Fair Value of Undesignated Derivatives (dollars in thousands)
| | | | | | | | | As of December 31, 2018 | | | | | | As of December 31, 2020 | | | | -200 basis points | | -150 basis points | | -100 basis points | | -50 basis points | | +50 basis points | | +100 basis points | | +150 basis points | | +200 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 | | | | | | | | | | | | | | | | | Change from base case | | | | | | | | | | | | | | Interest-rate swaps | | $ | (50,945 | ) | | $ | (36,217 | ) | | $ | (22,217 | ) | | $ | (9,914 | ) | | $ | 7,352 |
| | $ | 12,350 |
| | $ | 15,504 |
| | $ | 17,466 |
| Interest-rate swaps | | $ | (80,333) | | | $ | (60,017) | | | $ | (39,857) | | | $ | (19,852) | | | $ | 19,669 | | | $ | 39,244 | | | $ | 58,620 | | | $ | 77,751 | |
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. Additionally, certain held-to-maturity securities are measured at fair value on a nonrecurring basis due to the recognition of other-than-temporary impairment.value. 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, OIS rates, SOFR, and the U.S. dollar interest-rate-swap markets to construct discount and forward-yield curves using standard financial market techniques. 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. Additionally, for derivatives, we compare the fair values obtained from our valuation model to clearinghouse valuations (in the case of cleared derivatives) and non-binding
As discussed under — Accounting for Derivatives,dealer estimates (in the OIS curve is usedcase of bilateral derivatives), and may also compare derivative fair values to those of similar instruments, to ensure such fair values are reasonable.
We use an applicable interest-rate index as the discount rate for the valuation of our uncleared derivatives in which the recipient of collateral maintains the right to rehypothecate pledged collateral and forderivatives. For all derivatives cleared through a DCO, while LIBOR continues to be the appropriate discount rate used is SOFR, while for unclearedthe majority of our bilateral, non-cleared interest-rate derivatives the discount rate used is OIS based on the federal funds effective rate. For the valuation of hedged assets or liabilities in whichfair-value hedging relationships where the recipient of collateral has no right to rehypothecate pledged collateral.
The valuation adjustments for our hedged items in which 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) are calculated usingas the same model that calculatesdiscount rate, depending on which interest-rate index was designated as the fair valuesbenchmark rate at inception of the associatedhedge relationship.
Depending upon the spreads between LIBOR, OIS and SOFR rates, the use of the one interest-rate index as the discount rate for valuing our interest-rate exchange agreements and a different interest-rate index (plus or minus a constant spread) as the discount rate for valuing 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 derivatives.relationships. Either of these outcomes could result in increased earnings volatility, which could potentially be material. However, through December 31, 2020, no hedge relationships failed our hedge effectiveness criteria as a result of using different interest-rate indices as the discount rate for the derivative and 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, 2018,2020, 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 those prices. We have conducted reviews of the 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, 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 MBS
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 mortgagesMBS are greater than prevailing market rates for similar mortgagesMBS on the transaction date. The net purchase premiums paid are then amortized using the constant-effective-yield method over the expected lives of the mortgagesMBS 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 mortgagesMBS being lower than prevailing market rates on similar mortgagesMBS on the transaction date, the net discount is accreted in the same manner as the premiums, resulting in an increase in the mortgages'MBS's 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 underlying the MBS 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.factors, as well as the structural design of our security within the overall group of securities backed by the underlying pool of mortgage loans. 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, 2018, 2017,2020, 2019, and 2016,2018, was a net (decrease) increase to income of $(31.6) million, $(6.1) million, and $23.0 million, $10.9 million, and $15.5 million, respectively.
RECENT ACCOUNTING DEVELOPMENTS
LEGISLATIVE AND REGULATORY DEVELOPMENTS
SignificantWe summarize certain significant legislative and regulatory actions and related developments for the period covered by this report are summarized below.
FHFA Final Rule on FHLBank Capital Requirements.Housing Goals Amendments. On February 20, 2019,June 25, 2020, the FHFA published a final rule, effective January 1,August 24, 2020, that adopts, with amendments,amending the regulationsFHLBank housing goals regulation. Enforcement of the Federal Housing Finance Board (predecessor to the FHFA) (the Finance Board) pertaining to the capital requirements for the FHLBanks.final rule will phase in over three years. The final rule carries over mostreplaces the four existing retrospective housing goals with a single prospective mortgage purchase housing goal target in which 20 percent of the prior Finance Board regulations without material change but substantively revises the credit risk componentAcquired Member Asset (AMA) mortgages purchased in a year must be comprised of the risk-based capital requirement, as well as the limitations on extensions of unsecured credit. The main revisions remove requirements that we calculate credit risk capital charges and unsecured credit limits based on ratings issued by an NRSRO, and instead require that we establish and use our own internal rating methodology. The rule imposes a new credit risk capital charge for cleared derivatives.loans to low-income or very low-income families, or to families in low-income areas. The final rule also revisesestablishes a separate small member participation housing goal with a target level in which 50 percent of the percentages usedmembers selling AMA loans in a calendar year must be small members. The final rule provides that an FHLBank may request FHFA approval of alternative target levels for either or both of the regulation’s tables to calculate credit risk capital charges for advances and for non-mortgage assets.goals. The final rule also rescinds certain contingency liquidity requirementsestablishes that were parthousing goals apply to each FHLBank that acquires any AMA mortgages during a year, eliminating the existing $2.5 billion volume threshold that previously triggered the application of the Finance Board regulations, as these requirements are now addressed in an Advisory Bulletin on FHLBank Liquidity Guidance issued by the FHFA in 2018 (see — Advisory Bulletin 2018-07 Federal Home Loan Bank Liquidity Guidance below).housing goals for each FHLBank. We do not expect this rule to materially affectbelieve these changes will have a material effect on our financial condition or results of operations.
FDICFHFA Final Rule on Reciprocal Deposits.Stress Testing. On March 24, 2020, the FHFA published a final rule, effective upon issuance, to amend its stress testing rule, consistent with section 401 of the EGRRCPA. The final rule (i) raises the minimum threshold for entities regulated by the FHFA to conduct periodic stress tests from $10 billion to $250 billion or more in total consolidated assets; (ii) removes the requirements for FHLBanks to conduct stress testing; and (iii) removes the adverse scenario from the list of required scenarios. FHLBanks are currently excluded from this regulation because no FHLBank has total consolidated assets over $250 billion, but the FHFA reserved under its general supervisory powers the discretion to require an FHLBank with total consolidated assets below the $250 billion threshold to conduct stress testing if the FHFA determines it would be useful. These amendments align the FHFA’s stress testing rule with rules adopted by other financial institution regulators that implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) stress testing requirements, as amended by EGRRCPA.
This rule eliminates these stress testing requirements for us, unless the FHFA exercises its discretion to require stress testing in the future. We do not expect this rule to have a material effect on our financial condition or results of operations.
Margin and Capital Requirements for Covered Swap Entities. On July 1, 2020, the OCC, the Federal Reserve, the FDIC, the Farm Credit Administration, and the FHFA (collectively, Prudential Banking Regulators) jointly published a final rule, effective August 31, 2020, amending regulations that established minimum margin and capital requirements for uncleared swaps for covered swap entities under the jurisdiction of the Prudential Banking Regulators (Prudential Margin Rules). In addition to other changes, the final rule: (1) allows swaps entered into by a covered swap entity prior to an applicable
compliance date to retain their legacy status and not become subject to the Prudential Margin Rules in the event that the legacy swaps are amended to replace an interbank offered rate (such as LIBOR) or other discontinued rate, or due to other technical amendments, notional reductions or portfolio compression exercises; (2) introduces a new Phase 6 compliance date for initial margin requirements for covered swap entities and their counterparties with an average daily aggregate notional amount (AANA) of uncleared swaps of at least $8 billion, and (3) clarifies that initial margin trading documentation does not need to be executed prior to the parties becoming obligated to exchange initial margin.
On the same date, the Prudential Banking Regulators published an interim final rule, effective September 1, 2020, extending the initial margin compliance date for Phase 6 counterparties to September 1, 2022. On November 9, 2020, the Commodity Futures Trading Commission (CFTC) published a final rule extending the initial margin compliance date for Phase 6 counterparties to September 1, 2022, thereby aligning with the Prudential Banking Regulators.
Further, on January 5, 2021, the CFTC published a final rule, effective February 4, 2019,2021, that primarily amends the minimum margin and capital requirements for uncleared swaps under the jurisdiction of the CFTC (CFTC Margin Rules) by requiring covered entities to use a revised AANA calculation starting on September 1, 2022. The amendments, among other things, require entities subject to the CFTC’s jurisdiction to calculate the AANA for uncleared swaps during March, April and May of the current year, based on an average of month-end dates, as opposed to the previous requirement which required the calculation of AANA during June, July and August of the prior year, based on daily calculations. Parties would continue to be expected to exchange initial margin based on the AANA totals as of September 1 of the current year. These amendments align with the recommendation of the Basel Committee on Banking Supervision and Board of the International Organization of Securities Commissions. Separately, on January 25, 2021, the CFTC published a final rule, effective February 24, 2021, that amends the CFTC Margin Rules to permit, among other changes, covered swap entities to maintain separate minimum transfer amounts (MTA) for initial margin and variation margin for each swap counterparty, provided the combined MTA does not exceed $500,000.
We donot expect these rules to have a material effect on our financial condition or results of operations.
FDIC Brokered Deposits Restrictions. On January 22, 2021, the FDIC published a final rule, effective March 6, 2019, relatedApril 1, 2021, that amends its brokered deposits regulations that apply to less than well-capitalized insured depository institutions. The FDIC stated that the treatment of “reciprocal deposits” that implements Section 202 ofamendments are intended to modernize and clarify the Economic Growth, Regulatory Relief,FDIC’s brokered deposit regulations and Consumer Protection Act. The final rule exempts,they establish a new framework for certainanalyzing the deposit broker definition, which determines whether deposits placed through deposit placement arrangements qualify as brokered deposits. These deposit placement arrangements include those between insured depository institutions (depositories), certain reciprocaland third parties, such as financial technology companies, for a variety of business purposes, including access to deposits. The amendments to the FDIC’s brokered deposit regulations, among other things, clarify what it means to be engaged in the business of facilitating the placement of deposits (deposits acquired by a depositoryand expand the scope of the primary purpose exception. The rule amendments are expected to have the effect of narrowing the definition of deposit broker and excluding more deposits 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 ontreatment as brokered deposits. Under the rule, well-capitalizedThe amendments also establish an application and well-rated depositories are not required to treat reciprocal deposits as brokered deposits upreporting process with respect to the lesser of twenty percent of their total liabilities or $5 billion. Reciprocal deposits held by depositoriesprimary purpose exception for businesses that are not well-capitalized and well-rated may also be excluded from brokered deposit treatment in certain circumstances.
We continue to evaluate the potential impact of the final rule, but currently do not expectmeet one of several bright-line tests, and they affirm the FDIC’s position that the brokering of certificates of deposit constitutes deposit brokering.
This 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 themay have an effect on member demand for certain advance products.
In late 2018, the FHFA published two final rules on indemnification payments and golden parachute arrangements:
Final Rule on Indemnification Payments. On October 4, 2018, the FHFA published a final rule, effective November 5, 2018, establishing standards for identifying when an indemnification payment by an FHLBank or the Office of Finance to an officer, director, employee, or other affiliated party in connection with an administrative proceeding or civil action instituted by the FHFA is prohibited or permissible. The rule generally prohibits these payments, exceptadvances, but we may pay:
premiums for any commercial insurance or fidelity bonds for directors and officers, tocannot predict the extent that the insurance or fidelity bond covers expenses and restitution, but not a judgment in favor of the FHFA or a civil money penalty imposed by the FHFA;
expenses of defending an action, subject to an agreement to repay those expenses in certain circumstances; and
amounts due under an indemnification agreement entered into with a named affiliated party on or prior to September 20, 2016 (the date the rule was proposed).
The rule also outlines the process the board of directors must undergo prior to making a permitted payment related to expenses of defending an action. We do not expect the rule to materially impact our financial condition or results of operations.
Final Rule on Golden Parachute and Indemnification Payments. On December 20, 2018, the FHFA published a final rule, effective January 22, 2019, on golden parachute and indemnification payments (the Golden Parachute Rule) to better align the Golden Parachute Rule with areas of the FHFA’s supervisory concern and reduce administrative and compliance burdens. The Golden Parachute Rule sets forth the standards the FHFA would take into consideration when limiting or prohibiting golden parachute and indemnification payments by an FHLBank or the Office of Finance to an entity-affiliated party when such entity is in a troubled condition, in conservatorship or receivership, or insolvent. The final rule amendments:
focus the standards on payments to and agreements with executive officers, broad-based plans covering large numbers of employees (such as severance plans), and payments made to non-executive-officer employees who may have engaged in certain types of wrongdoing; and
revise and clarify definitions, exemptions and procedures to implement the FHFA’s supervisory approach.
We do not expect this rule to materially impact our financial condition or results of operations.
Final Rule Amending AHP Regulations. On November 28, 2018, the FHFA published a final rule, effective December 28, 2018, that amends the operating requirements of the FHLBanks’ AHP. The final rule retains a scoring criteria method for awarding competitive AHP subsidies, but allows us to create multiple pools of competitive funds in order to target specific affordable housing needs in our district. The final rule amendments also:
revise the scoring criteria to create different and new scoring priorities;
remove the retention agreement requirement on owner-occupied units using the subsidy solely for rehabilitation;
increase the maximum per-household set-aside grant amount to $22,000 with an annual housing price inflation adjustment (up from the current fixed limit of $15,000);
clarify the requirements for remediating AHP noncompliance;
prohibit our board of directors from delegating approval of AHP strategic policy decisions to a committee; and
further align AHP monitoring with certain federal government funding programs.
The majority of the rule’s provisions take effect January 1, 2021, while the owner-occupied retention agreement requirements take effect January 1, 2020.impact. We do not expect this rule to materially affect our financial condition or results of operations.
FHFA Proposed Rule on Housing Goals. On November 2, 2018, the FHFA published a proposed rule that would amend the existingAdvisory Bulletin 2020-01 Federal Home Loan Bank Housing Goals regulation.Risk Management of AMA Risk Management.On January 31, 2020, the FHFA released guidance on risk management of AMA. The proposed amendments are intendedguidance communicates the FHFA’s expectations with respect to replace existing FHLBank housing goals with a more streamlined setan FHLBank’s funding of goals. Whileits members through the existing housing goals are established retrospectively, the proposed rule would establish the levelspurchase of annual housing goals in advance, thereby eliminating uncertainty about housing goals from year-to-year. If adopted as proposed, the proposed amendments would:
eliminate the $2.5 billion acquired member assets (AMA) mortgage purchase volume threshold that triggers the application of housing goals;
establish a new prospective target level for the AMA mortgage purchase housing goal as follows: of total AMAeligible mortgage loans purchased each calendar year, 20 percentand includes expectations that an FHLBank will have board-established limits on AMA portfolios and management-established thresholds to serve as monitoring tools to manage AMA-related risk exposure. The guidance provides that the board of an FHLBank should be mortgage loans issued to very low-income families, low-income families, or families in low-income areas,ensure that the bank serves as a liquidity source for members, and of those loans, at least 75 percentan FHLBank should be loans to borrowers with incomes at or below 80 percent of the area median income;
establish a goalensure that 50 percent of AMA program users meet the definition of “small members” whose assetsits portfolio limits do not exceedresult in the “community financial institution” asset cap, which under FHFA regulations is currently $1.2 billion; and
allowFHLBank’s acquisition of mortgages from smaller members being “crowded out” by the FHLBanks to request FHFA approvalacquisition of alternative target percentages for mortgage purchase housing goals and small member participation goals.
We submitted a joint comment letter withmortgages from larger members. The advisory bulletin contains the other FHLBanksexpectation that the board of an FHLBank should set limits on the proposed rulesize and growth of portfolios and on January 29, 2019. We continue to evaluateacquisitions from a single participating financial institution. In addition, the proposed rule butguidance 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 do not expect this rule, if adopted as proposed,advisory bulletin to materially affect our financial condition or results of operations.
OfficeU.S. Treasury and Fannie Mae Preferred Stock Purchase Agreement Amendment. On January 14, 2021, the U.S. Treasury and Fannie Mae entered into a letter agreement amending the terms of their Preferred Stock Purchase Agreement (PSPA), which
could impact PFIs that participate in the MPF Program’s MPF Xtra product (where MPF loans acquired are concurrently sold to Fannie Mae). Under the PSPA, the U.S. Treasury provides liquidity to Fannie Mae in exchange for senior preferred stock. Under the recent PSPA amendment, effective January 1, 2022, the FHFA (acting as conservator for Fannie Mae) and the U.S. Treasury agreed to limit the dollar volume of loans Fannie Mae could purchase from a single seller through Fannie Mae’s cash window to $1.5 billion per year. As administrator of the ComptrollerMPF Program, the FHLBank of Chicago purchases MPF Xtra loans from PFIs and sells them to Fannie Mae via the Currency (OCC), Federal Reserve Board (FRB), FDIC, Farm Credit Administration and FHFA Final Rulecash window process. Based on Margin and Capital Requirementsvolumes for Covered Swap Entities. On October 10, 2018, the OCC, FRB, FDIC, Farm Credit Administration, andMPF Xtra product program-wide in 2020, the FHFA publishedPSPA amendment would significantly curtail MPF Xtra cash window sales. Although this would negatively impact the volume of loans sold through the MPF Program unless a final rule, effective November 9, 2018, that amended each agency’s 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 qualified financial contract (QFC) rules. The final rule also clarifies that a legacy swap would not be deemed to be a covered swap under the Swap Margin Rules if itsolution is amended to conform to the QFC rules. The QFC rules previously published by the OCC, FRB and FDIC require their respective regulated entities to amend covered QFCs to limit a regulated entity’s counterparty’s immediate termination or exercise of default rights in the event of bankruptcy or receivership of the regulated entity or its affiliate(s).
Wedeveloped, we do not currently expect this rule to materially affect our financial condition or results of operations.
Advisory Bulletin 2018-07 Federal Home Loan Bank Liquidity Guidance. On August 23, 2018, the FHFA issued an Advisory Bulletin on FHLBank liquidity (the “Liquidity Guidance AB”) that communicates the FHFA’s expectations with respect to the maintenance of sufficient liquidity to enable us to provide advances and letters of credit for members. The Liquidity Guidance AB rescinds the 2009 liquidity guidance previously issued by the FHFA. Contemporaneously with the issuance of the Liquidity Guidance AB, the FHFA issued a supervisory letter that identifies initial thresholds for measures of liquidity within the established ranges set forth in the Liquidity Guidance AB.
The Liquidity Guidance AB provides guidance on the level of on-balance sheet liquid assets related to base case liquidity. As part of the base case liquidity measure, the guidance also includes a separate provision covering off-balance sheet commitments from standby letters of credit. In addition, 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 required us to assume a 5-day period without access to capital markets due to a change in certain assumptions underlying that guidance. Under the Liquidity Guidance AB, we are required to hold positive cash flow assuming no access to capital markets and assuming renewal of all maturing advances for a period of between ten to thirty calendar days. 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 we should maintain a liquidity reserve of between one percent and 20 percent of our outstanding standby letters of credit commitments.
With respect to funding gaps and possible asset and liability mismatches, the Liquidity Guidance AB provides guidance on maintaining appropriate funding gaps for three-month (-10 to -20 percent) and one-year (-25 to -35 percent) maturity horizons. The Liquidity Guidance AB provides for these limits to reduce the liquidity risks associated with a mismatch in asset and liability maturities, including an undue reliance on short-term debt funding.
The Liquidity Guidance AB also addresses liquidity stress testing, contingency funding plans and an adjustment to our core mission achievement calculation. Portions of the Liquidity Guidance AB were implemented on December 31, 2018, with further implementation to take place on March 31, 2019 and full implementation on December 31, 2019. The Liquidity Guidance AB may require us to hold an additional amount of liquid assets to meet the new guidance. These additional liquid assets may be at yields at or below our cost of funds. Further, our cost of funding may increase if we were required to achieve the appropriate funding gap with longer-term funding. We do not expect the changesit to have a material effect on our financial condition or results of operations.
LIBOR Transition Adoption of Single-Counterparty Credit Limits
FHFA Supervisory Letter - Planning for Bank Holding Companies and Foreign Banking Organizations by Board of Governors of the Federal Reserve System.LIBOR Phase-Out. On August 6, 2018,September 27, 2019, the BoardFHFA issued a Supervisory Letter (LIBOR 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 Governors ofLIBOR in a safe and sound manner. The LIBOR Supervisory Letter provided that the Federal Reserve System published a final rule, effective October 5, 2018, establishing single-counterparty credit limits applicable to bank holding companiesFHLBanks should, by March 31, 2020, cease entering into new LIBOR referenced financial assets, liabilities, and foreign banking organizationsderivatives with total consolidated assets of $250 billion or more, including global systemically important bank holding companies (GSIBs) in the United States. These entities are considered to be covered companies under the rule. The FHLBanks are themselves exempt from the limits and reporting requirements contained in this rule. However, credit exposure to individual FHLBanks must be monitored, and reported on as required, by any entity that is a covered company under this rule.
Under the final rule, a covered company and its subsidiariesmay not have aggregate net credit exposure to an FHLBank and (in certain cases) economically interdependent entities in excess of 25 percent of the company’s tier 1 capital. Such credit exposure does not include advances from an FHLBank, but generally includes collateral pledged to an FHLBank in excess of a covered company’s outstanding advances. Also included towards a covered company’s net credit exposure is its investment in FHLBank capital stock and debt instruments, deposits with an FHLBank, FHLBank-issued letters of credit where a covered company is
the named beneficiary, and other obligations to an FHLBank, including repurchase or reverse repurchase transactions net of collateral that create a credit exposure to an FHLBank. Intra-day exposures are exempt from the final rule.
maturities beyond December 31, 2021 for all product types except investments. With respect to investments, the FHLBanks were required, by December 31, 2019, to 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 LIBOR Supervisory Letter also directed 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 were expected to cease entering into LIBOR-indexed financial instruments maturing after December 31, 2021, by the deadlines specified in the LIBOR Supervisory Letter, subject to limited exceptions granted by the FHFA for LIBOR-linked products serving compelling mission, risk mitigating, and/or hedging purposes that do not currently have readily available alternatives. Prior to the issuance of the Supervisory Letter, we had ceased purchasing investments that reference LIBOR and mature after December 31, 2021, and we had suspended entering into LIBOR-indexed derivatives that terminate after December 31, 2021. Also, early in 2019, we had 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.
As a result of the market volatility experienced during 2020 due in part by the COVID-19 pandemic, the FHFA extended the FHLBanks’ consolidated obligations held by a covered company, the company must monitor, and report on as required, its credit exposure for such obligations. It is not clear if the Federal Reserve will require consolidated obligationsauthority to be aggregated with other exposures to an FHLBank or the FHLBank System. The final rule gives major covered companies (i.e., the GSIBs) until January 1,enter into LIBOR-based instruments that mature after December 31, 2021 from March 31, 2020 to comply,June 30, 2020, except for investments and all other covered companies will have until July 1,option embedded products. In addition, the FHFA extended the requirement to update pledged collateral certification reporting requirements from March 31, 2020, to comply. September 30, 2020. Given our prior voluntary cessation of LIBOR activity, these extended deadlines did not impact us.
We do not expect the ruleLIBOR Supervisory Letter to materially affecthave a material impact on our financial condition or results of operations.
LIBOR Transition – ISDA 2020 IBOR Fallbacks Protocol and Supplement to the 2006 ISDA Definitions. On October 23, 2020, the International Swaps and Derivatives Association, Inc. (ISDA), published a Supplement to the 2006 ISDA Definitions (Supplement) and the ISDA 2020 IBOR Fallbacks Protocol (Protocol). Both the Supplement and the Protocol took effect on January 25, 2021. On that date, all legacy bilateral derivative transactions subject to Protocol-covered agreements (including ISDA agreements) that incorporate certain covered ISDA definitional booklets and reference a covered Interbank Offered Rate (IBOR), including U.S. dollar LIBOR, were effectively amended to apply the new ISDA-recommended IBOR fallbacks in the event of the relevant IBOR’s cessation. Both the Bank and our counterparty must have adhered to the Protocol in order to effectively amend legacy derivative contracts, otherwise the parties must bilaterally agree to include amended legacy contracts to address LIBOR fallbacks. The Protocol will remain open for adherence after the effective date. As of January 25, 2021, all new derivative contracts are subject to the relevant IBOR fallbacks set forth in the Supplement.
On October 21, 2020, the FHFA issued a Supervisory Letter to the FHLBanks that required each FHLBank to adhere to the Protocol by December 31, 2020, and to the extent necessary, to amend any bilateral agreements regarding the adoption of the Protocol by December 15, 2020.
We adhered to the Protocol on October 21, 2020, and all of our counterparties with which we have outstanding transactions have adhered to the Protocol. For a discussion of the potential impact of the LIBOR transition, see Executive Summary and Item 1A—Risk Factors.
FCA Announcement. On March 5,2021, the FCA announced that LIBOR will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021, or, in the case of some more frequently used U.S. dollar
LIBOR settings, immediately after June 30, 2023. Although the FCA does not expect LIBOR to become unrepresentative before the applicable cessation date and intends to consult on requiring the administrator of LIBOR to continue publishing LIBOR of certain currencies and tenors on a non-representative, synthetic basis for a period after the applicable cessation date, there is no assurance that LIBOR, of any particular currency or tenor, will continue to be published or be representative through any particular date.
We do not expect the FCA’s announcement to have a material impact on our financial condition or results of operations.
Legislative and Regulatory Developments Related to COVID-19 Pandemic
American Rescue Plan Act of 2021.The American Rescue Plan Act was signed into law on March 11, 2021.The $1.9 trillion package adds to previous relief legislation passed by Congress as described below.The legislation provided the following:
•Support for states, municipalities, and small businesses; •Additional funding for the PPP program and expansion of eligibility to additional types of organizations; •Additional mortgage payment relief; •Direct payments to and tax credits for eligible taxpayers; •Extension of unemployment relief; and •Rental and utility payment assistance.
FHFA Supervisory Letter – PPP Loans as Collateral for FHLBank Advances. On April 23, 2020, the FHFA issued a Supervisory Letter (PPP Supervisory Letter) permitting the FHLBanks to accept PPP loans as collateral for advances as “Agency Securities,” given the SBA’s 100 percent guarantee of the unpaid principal balance. On April 20, 2020, the SBA published its third interim final rule related to PPP loans, which explicitly waived certain regulatory requirements that must be satisfied before a member could pledge PPP loans to the FHLBanks as collateral. The PPP Supervisory Letter establishes a series of conditions under which the FHLBanks may accept PPP loans as collateral, which conditions focus on the financial condition of members, collateral discounts, and pledge dollar limits.
On December 27, 2020, President Trump signed into law an extension of the PPP until March 31, 2021. The PPP Supervisory Letter from the FHFA allowing FHLBanks to accept PPP loans as collateral remains in effect.
CARES Act. The Coronavirus Aid, Relief, and Economic Security Act was signed into law on March 27, 2020. The $2.2 trillion package was the largest stimulus bill in U.S. history. The CARES Act is in addition to previous relief legislation passed by Congress earlier in March 2020. The legislation provided the following:
•Assistance to businesses, states, and municipalities; •Created a loan program for small businesses, non-profits and physician practices that can be forgiven through employee retention incentives; •Provides the Treasury Secretary authority to make loans or loan guarantees to states, municipalities, and eligible businesses and loosens some regulations imposed through the Dodd-Frank Act; •Authorized direct payments to eligible taxpayers and their families; •Expanded eligibility for unemployment insurance and payment amounts; and •Included mortgage forbearance provisions and a foreclosure moratorium.
Funding for the PPP, which was created by the CARES Act, was increased with the enactment of subsequent laws, most recently by the American Rescue Plan Act of 2021 on March 11, 2021. While some provisions of the CARES Act have expired, others have been extended by regulatory and legislative action. Additional phases of the CARES Act, the American Rescue Plan Act, or other COVID-19 pandemic relief legislation may be enacted by Congress. We continue to evaluate the potential impact of such legislation on our business, including its continued impact to the U.S. economy; impacts to mortgages held or serviced by our members and that we accept as collateral;impacts on our MPF program; and impacts on our members’ liquidity through increased deposit levels, and related reduced demand for advances.
Additional COVID-19 Presidential, Legislative and Regulatory Developments. In light of the COVID-19 pandemic, President Biden (and, before him, President Trump), through executive orders, governmental agencies, including the SEC, OCC, Federal Reserve, FDIC, National Credit Union Administration, CFTC and the FHFA, as well as state governments and agencies, have taken, and may continue to take, actions to provide various forms of relief from, and guidance regarding, the financial, operational, credit, market, and other effects of the pandemic, some of which may have a direct or indirect impact on us or our
members. Many of these actions are temporary in nature. We continue to monitor these actions and guidance as they evolve and to evaluate their potential impact on us.
CREDIT RATING AGENCY DEVELOPMENTS
As of February 28, 2019,2021, Moody’s long-andlong- 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, 2019,2021, 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 that began in December 2007 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 includesis 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, 2018,2020, fixed-rate noncallable debt, not hedged by interest-rate swaps, amounted to $14.9$10.0 billion, compared with $15.5$13.4 billion at December 31, 2017,2019.
COs may also be issued with embedded call options to mitigate interest-rate and fixed-rateprepayment risks of our mortgage loans and certain MBS. Fixed-rate callable debt not hedged by interest-rate swaps amounted to $2.1$1.2 billion and $1.2$1.6 billion at December 31, 2018,2020, and December 31, 2017,2019, 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 $5.2 billion, or 27.8 percent of our total outstanding advances at December 31, 2020, compared with $5.7 billion, or 16.6 percent of total outstanding advances, at December 31, 2019.
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 66.9 percent of our total outstanding available-for-sale securities at December 31, 2020, compared with $3.7 billion, or 52.4 percent of total outstanding available-for-sale securities, at December 31, 2019.
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 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 HFAs, U.S. federal agencies, U.S. federal government corporations, and instrumentalities,GSEs, 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, 2018,2020 and December 31, 2017,2019, this portfolio of hedged investments had an amortized costa par value of $839.4 million and $881.4 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 durationlock-out period of the hedged MBS to create synthetic floating-rate assets during the hedged period. At December 31, 2020 and convexity risks arising from these assets.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 $6.0$1.7 billion, or 23.27.9 percent of our total outstanding CO bonds at December 31, 2018,2020, compared with $6.2$3.3 billion, or 21.914.0 percent of total outstanding CO bonds, at December 31, 20172019. .
In addition, derivatives may be used to hedge the interest-rate risk of anticipated future CO debt issuance. At both December 31, 2020 and December 31, 2019, forward starting interest-rate swaps hedging the anticipated future issuance of CO debt was $17.0 million.
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, MVE sensitivity, and the other metrics discussed below.
We use certain quantitative systemsmodels to evaluate our risk position. These systemsmodels 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 the par value of capital stock including mandatorily redeemable capital stock, retained earnings, and accumulated other comprehensive loss.income. At December 31, 2018,2020, our MVE was $3.9$2.7 billion and our BVE was $3.6 billion.$2.8 billion, resulting in a ratio of MVE to BVE of 96 percent. At December 31, 2017,2019, our MVE was $3.6$3.3 billion and our BVE was $3.3 billion. Our$3.2 billion, resulting in a ratio of MVE to BVE was 107 percent at December 31, 2018, compared with 110 percent at December 31, 2017.of 103 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, 2018,2020, and December 31, 2017,2019, that ratio was 152210 percent and 156173 percent, respectively.
Value at Risk. VaR, which measures the potential change in our MVE, to a 99th percent confidence interval, based on a set of stress scenarios (VaR stress scenarios)Stress Scenarios) using historicalhistorically based interest-rate, volatility and volatilityoption-adjusted spread (OAS) movements that have been observed over six-month intervals starting at the most recent month-end and going back monthly to 1992.1998. For risk-based capital purposes and compliance with our internal management action trigger, VaR is reported as the average of the five worst scenarios.
On February 7, 2018, the FHFA issued guidance, Advisory Bulletin 2018-01, which discontinued the use of proportional shocks in VaR modeling in the calculation of market-risk capital requirements. AB 2018-01 was effective as of January 1, 2020, with the implementation of the final rule on FHLBank Capital Requirements published February 20, 2019. AB 2018-01 provides guidance for our determination of market risk scenarios that are incorporated into our internal market risk models.
Under the guidance, the interest-rate and market price scenarios that we incorporate into our internal market risk model are satisfactory if they meet the following criteria: (1) the scenarios are based on historical absolute interest rate changes, as applied to current interest rates; (2) the historical shocks represent changes in interest rates and market conditions observed over 120 business-day periods, and the methodology to apply those shocks to current interest rates incorporates the constraints described in the guidance; (3) the scenarios encompass shocks to interest-rate volatility that reflect the historical relationship between interest rates and volatility; and (4) for assets backed by residential mortgage loans, the scenarios include shocks to OAS. Our VaR model results reported as of December 31, 2020, satisfy all of these requirements by utilizing interest rate, volatility and OAS shocks provided by the FHFA.
The table below presents the historical simulation VaR estimate as of December 31, 2018,2020 and December 31, 2017,2019, and represents the estimates of potential reduction to our MVE from potential future changes in interest rates and other market factors.factors, as described above. Estimated potential market value loss exposures are expressed as a percentage of the current MVE and areMVE. The table is intended to represent a statistically based range of VaR exposures.
Table 44 - Value-at-Risk (dollars in millions) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Value-at-Risk (Gain) Loss Exposure | | | December 31, 2020 | | December 31, 2019(1) | Confidence Level | | % of MVE (2) | | Amount | | % of MVE (2) | | Amount | 50% | | 1.52 | % | | $ | 40.5 | | | 3.75 | % | | $ | 122.1 | | 75% | | 3.17 | | | 84.7 | | | 4.65 | | | 151.1 | | 95% | | 5.31 | | | 141.6 | | | 6.20 | | | 201.4 | | 99% | | 6.94 | | | 185.4 | | | 7.47 | | | 242.9 | | | | | | | | | | | Average of five worst scenarios - as of year end | | 7.64 | | | 204.0 | | | 7.50 | | | 243.9 | | | | | | | | | | | Average of five worst scenarios - average for the year | | | | 165.4 | | | | | 253.2 | |
_____________________________ (1) For comparability, VaR for December 31, 2019, is presented using the VaR methodology that was implemented on the historical relative behaviorJanuary 1, 2020. (2)Loss exposure is expressed as a percentage of interest rates and other market factors over a 6-month time horizon that is measured monthly beginning with the most current month-end and going back to 1992.base MVE. Table 41 - Value-at-Risk (dollars in millions)
| | | | | | | | | | | | | | | | | | Value-at-Risk (Gain) Loss Exposure (1) | | | December 31, 2018 | | December 31, 2017 | Confidence Level | | % of MVE (2) | | Amount | | % of MVE (2) | | Amount | 50% | | 0.16 | % | | $ | 6.4 |
| | 0.17 | % | | $ | 6.1 |
| 75% | | 1.08 |
| | 41.9 |
| | 1.13 |
| | 41.1 |
| 95% | | 3.25 |
| | 126.4 |
| | 3.51 |
| | 127.5 |
| 99% | | 4.81 |
| | 187.2 |
| | 4.69 |
| | 170.1 |
|
_______________________
| | (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 2018 and 2017.
Table 42 - Value-at-Risk 99th Percentile (dollars in millions)
| | | | | | | | | |
| | | 2018 | | 2017 | Year ending December 31 | | $ | 187.2 |
| | $ | 170.1 |
| Average month-end VaR for year ending December 31 | | 229.3 |
| | 159.1 |
| Maximum month-end VaR during the year ending December 31 | | 257.9 |
| | 177.7 |
| Minimum month-end VaR during the year ending December 31 | | 187.2 |
| | 133.0 |
|
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, 2018.2020 and December 31, 2019.
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.
Our duration of equity, as calculated in accordance with guidance from the FHFA which requires we floor interest rates at zero percent, was +5.47 years at December 31, 2020, compared with +1.08 years at December 31, 2019. For purposes of measuring against the management action triggers and limits, management considers an alternative methodology which does not constrain interest rates to a floor of zero percent. Using this methodology duration of equity is +1.61 years as of December 31, 2020, and +1.09 years at December 31, 2019. We complied withdid not exceed our duration of equity limit using this measure at all timesany time during the yearyears ended December 31, 2018.
As of 2020 and December 31, 2018, our duration of equity was -0.32 years, compared with -0.46 years at December 31, 2017.2019.
MVE Sensitivity. We measure MVE sensitivity 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’sdirectors' Risk Committee if the limit is breached. As noted in Table 4345 below, we were in compliance withbelow the limit at each of December 31, 2018,2020, and December 31, 2017.2019.
Using the methodology, which does not constrain interest rates to a floor of zero percent, MVE sensitivity in a down 200 basis point parallel rate shock is +1.8 percent as of December 31, 2020, and (1.7) percent as of December 31, 2019, and MVE sensitivity in an up 200 basis point parallel rate shock is (6.0) percent as of December 31, 2020, and (4.7) percent as of December 31, 2019.
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, as calculated in accordance with guidance from the FHFA which requires we floor interest rates at zero percent, was -0.23+4.49 months at December 31, 2018,2020, compared with -0.33+0.74 months at December 31, 2017.2019.
For purposes of measuring against the management action triggers and limits, management considers an alternative methodology which does not constrain interest rates to a floor of zero percent. Using this methodology duration gap is +1.32 months as of December 31, 2020 and +0.75 months at December 31, 2019.
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 of advances and 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 curveinterest rates and do not reflect potential impacts of credit events, including, but not limited to, potential additional other-than-temporary impairment charges.provision for credit losses. Management has put in place management 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 a 12-month horizon in a variety of assumed interest-rate shock scenarios. The results of this analysis for December 31, 2018,2020, showed that in the base case our RORC was 203122 basis points over three-month LIBOR, and in the worst case tested, our RORC fell 117201 basis points to 8679 basis points overbelow three-month LIBOR in the downup 300 basis point scenario. For December 31, 2017,2019, the results of this analysis showed that in the base case our RORC was 242261 basis points over three-month LIBOR, and in the worst case tested, our RORC fell 10136 basis points to 141225 basis points over three-month LIBOR in the up 300 basis point scenario. In both 2018With the exception of the up 200 and 2017,up 300 basis point scenario as of December 31, 2020 noted above, our RORC spread to three-month LIBOR remained positive in all projected interest rate shock scenarios that were modeled and subject to management action triggers.triggers during 2020 and 2019.
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 1612 — 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 6.1 percent as of December 31, 2018, compared with 6.06.8 percent as of December 31, 2017.2020, compared with 5.7 percent as of December 31, 2019.
Our economic capital ratio was not below 4.0 percent at any time during the yearyears ended December 31, 20182020 and December 31, 2019. .
Table 45 - Market and Interest-Rate Risk Metrics
(dollars in millions) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | | Down 300(1) | | Down 200(1) | | Down 100(1) | | Base | | Up 100 | | Up 200 | | Up 300 | MVE | | $2,868 | | $2,878 | | $2,860 | | $2,669 | | $2,603 | | $2,507 | | $2,387 | Percent change in MVE from base | | 7.5% | | 7.8% | | 7.2% | | —% | | (2.5)% | | (6.1)% | | (10.6)% | MVE/BVE | | 103% | | 103% | | 103% | | 96% | | 93% | | 90% | | 86% | MVE/Par Stock | | 225% | | 226% | | 225% | | 210% | | 204% | | 197% | | 187% | Duration of Equity | | -0.22 years | | -0.49 years | | +3.68 years | | +5.47 years | | +3.07 years | | +4.32 years | | +4.86 years | Return on Regulatory Capital less 3-month LIBOR | | 1.22% | | 1.22% | | 1.23% | | 1.22% | | 0.58% | | (0.09)% | | (0.79)% | Net income percent change from base | | (13.15)% | | (13.04)% | | (12.03)% | | —% | | 24.29% | | 46.71% | | 67.07% |
Table 43 - Market and Interest-Rate Risk Metrics (dollars in millions)
| | | | | December 31, 2018 | | 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 | | $3,628 | | $3,661 | | $3,829 | | $3,891 | | $3,869 | | $3,819 | | $3,755 | MVE | | $3,406 | | $3,411 | | $3,246 | | $3,251 | | $3,187 | | $3,094 | | $2,998 | Percent change in MVE from base | | (6.8)% | | (5.9)% | | (1.6)% | | —% | | (0.6)% | | (1.9)% | | (3.5)% | Percent change in MVE from base | | 4.8% | | 4.9% | | (0.2)% | | —% | | (2.0)% | | (4.8)% | | (7.8)% | MVE/BVE | | 100% | | 101% | | 105% | | 107% | | 106% | | 105% | | 103% | MVE/BVE | | 108% | | 108% | | 103% | | 103% | | 101% | | 98% | | 95% | MVE/Par Stock | | 142% | | 143% | | 150% | | 152% | | 151% | | 149% | | 147% | MVE/Par Stock | | 182% | | 182% | | 173% | | 173% | | 170% | | 165% | | 160% | Duration of Equity | | - 0.61 years | | -5.50 years | | -3.03 years | | -0.32 years | | +1.05 years | | +1.50 years | | +1.90 years | Duration of Equity | | -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 | | 0.86% | | 1.01% | | 1.67% | | 2.03% | | 2.13% | | 2.10% | | 2.01% | Return on Regulatory Capital less 3-month LIBOR | | 2.48% | | 2.31% | | 2.43% | | 2.61% | | 2.61% | | 2.43% | | 2.25% | Net income percent change from base | | (82.41)% | | (64.03)% | | (29.11)% | | —% | | 23.63% | | 44.57% | | 64.22% | Net income percent change from base | | (42.76)% | | (46.64)% | | (27.35)% | | —% | | 23.20% | | 42.27% | | 61.28% |
____________________________ | | (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. |
(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, 2017 | | | 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 | Percent change in MVE from base | | (7.3)% | | (7.8)% | | (2.6)% | | —% | | (1.2)% | | (4.0)% | | (7.2)% | MVE/BVE | | 102% | | 101% | | 107% | | 110% | | 109% | | 106% | | 102% | MVE/Par Stock | | 145% | | 144% | | 152% | | 156% | | 155% | | 150% | | 145% | Duration of Equity | | +0.75 years | | -2.58 years | | -4.67 years | | -0.46 years | | +2.26 years | | +3.15 years | | +3.76 years | Return on Regulatory Capital less 3-month LIBOR | | 1.62% | | 1.73% | | 2.17% | | 2.42% | | 2.23% | | 1.87% | | 1.41% | Net income percent change from base | | (63.21)% | | (59.42)% | | (28.50)% | | —% | | 18.56% | | 32.98% | | 44.98% |
____________________________
| | (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, 2018,2020, 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, 2018,2020, 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, 2018,2020, 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 statementsstatement of condition of the Federal Home Loan Bank of Boston (the "FHLBank""Bank") as of December 31, 20182020 and 2017,2019, 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, 2018,2020, including the related notes (collectively referred to as the “financial statements”). We also have audited the FHLBank'sBank's internal control over financial reporting as of December 31, 2018,2020, 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 FHLBankBank as of December 31, 20182020 and 20172019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20182020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the FHLBankBank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The FHLBank'sBank'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’sBank’s financial statements and on the FHLBank'sBank'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) and are required to be independent with respect to the FHLBankBank 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.
PricewaterhouseCoopers LLP, 101 Seaport Boulevard, Suite 500, Boston, Massachusetts 02210 T: (617) 530 5000; F: (617) 530 5001, www.pwc.com/us
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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the financial statements and (ii)involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Interest-Rate Derivatives and Hedged Items
As described in Notes 8 and 15 to the financial statements, the Bank uses derivative instruments to reduce funding costs and/or to manage interest-rate risks. The total notional amount of derivatives as of December 31, 2020 was $15.5 billion, of which 64% were designated as hedging instruments, and the fair value of derivative assets and liabilities as of December 31, 2020 was $161 million and $24 million, respectively. The fair values of interest-rate derivatives and hedged items are determined using standard valuation techniques such as discounted cash-flow analysis and comparisons with similar instruments. The discounted cash-flow model uses market-observable inputs, including discount rate,forward interest rate, and volatility assumptions.
The principal considerations for our determination that performing procedures relating to the valuation of interest-rate derivatives and hedged items is a critical audit matter are the significant audit effort in evaluating the discount rate, forward interest rate, and volatility assumptions used to fair value these derivatives and hedged items, and the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included testing the effectiveness of controls relating to the valuation of interest-rate derivatives and hedged items,including controls over the model, data and assumptions. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent range of prices for a sample of interest-rate derivatives and hedged items and comparison of management’s estimate to the independently developed ranges. Developing the independent range of prices involved testing the completeness and accuracy of data provided by management and independently developing the discount rate, forward interest rate, and volatility assumptions.
Boston, Massachusetts March 22, 2019
19, 2021
We have served as the FHLBank'sBank's auditor since 1990.
| | | | | | | | | FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CONDITION (dollars and shares in thousands, except par value) | | December 31, 2018 | | December 31, 2017 | ASSETS | | | | Cash and due from banks | $ | 10,431 |
| | $ | 261,673 |
| Interest-bearing deposits | 593,199 |
| | 246 |
| Securities purchased under agreements to resell | 6,499,000 |
| | 5,349,000 |
| Federal funds sold | 1,500,000 |
| | 3,450,000 |
| Investment securities: | | | |
| Trading securities | 163,038 |
| | 191,510 |
| Available-for-sale securities - includes $3,025 and $1,414 pledged as collateral at December 31, 2018 and 2017, respectively that may be repledged | 5,849,944 |
| | 7,324,736 |
| Held-to-maturity securities - includes $3,456 and $6,444 pledged as collateral at December 31, 2018 and 2017, respectively that may be repledged (a) | 1,295,023 |
| | 1,626,122 |
| Total investment securities | 7,308,005 |
| | 9,142,368 |
| Advances | 43,192,222 |
| | 37,565,967 |
| Mortgage loans held for portfolio, net of allowance for credit losses of $500 at December 31, 2018 and 2017 | 4,299,402 |
| | 4,004,737 |
| Loans to other FHLBanks | — |
| | 400,000 |
| Accrued interest receivable | 112,751 |
| | 94,100 |
| Derivative assets, net | 22,403 |
| | 34,786 |
| Other assets | 55,904 |
| | 59,069 |
| Total Assets | $ | 63,593,317 |
| | $ | 60,361,946 |
| LIABILITIES | |
| | |
| Deposits | | | | Interest-bearing | $ | 448,247 |
| | $ | 450,922 |
| Non-interest-bearing | 26,631 |
| | 26,147 |
| Total deposits | 474,878 |
| | 477,069 |
| Consolidated obligations (COs): | | | |
| Bonds | 25,912,684 |
| | 28,344,623 |
| Discount notes | 33,065,822 |
| | 27,720,906 |
| Total consolidated obligations | 58,978,506 |
| | 56,065,529 |
| Mandatorily redeemable capital stock | 31,868 |
| | 35,923 |
| Accrued interest payable | 112,043 |
| | 90,626 |
| Affordable Housing Program (AHP) payable | 83,965 |
| | 81,600 |
| Derivative liabilities, net | 255,800 |
| | 300,450 |
| Other liabilities | 48,898 |
| | 45,619 |
| Total liabilities | 59,985,958 |
| | 57,096,816 |
| Commitments and contingencies (Note 20) |
|
| |
|
| CAPITAL | |
| | |
| Capital stock – Class B – putable ($100 par value), 25,289 shares and 22,837 shares issued and outstanding at December 31, 2018 and 2017, respectively | 2,528,854 |
| | 2,283,721 |
| Retained earnings: | | | | Unrestricted | 1,084,342 |
| | 1,041,033 |
| Restricted | 310,670 |
| | 267,316 |
| Total retained earnings | 1,395,012 |
| | 1,308,349 |
| Accumulated other comprehensive loss | (316,507 | ) | | (326,940 | ) | Total capital | 3,607,359 |
| | 3,265,130 |
| Total Liabilities and Capital | $ | 63,593,317 |
| | $ | 60,361,946 |
|
| | | | | | | | | | | | FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CONDITION (dollars and shares in thousands, except par value) | | December 31, 2020 | | December 31, 2019 | ASSETS | | | | Cash and due from banks | $ | 2,050,028 | | | $ | 69,416 | | Interest-bearing deposits | 299,149 | | | 1,253,873 | | Securities purchased under agreements to resell | 750,000 | | | 3,500,000 | | Federal funds sold | 2,260,000 | | | 860,000 | | Investment securities: | | | | Trading securities | 3,605,079 | | | 2,250,264 | | Available-for-sale securities | 6,220,148 | | | 7,409,000 | | Held-to-maturity securities - includes $92 pledged as collateral at December 31, 2019, that may be repledged (a) | 207,162 | | | 871,107 | | Total investment securities | 10,032,389 | | | 10,530,371 | | Advances | 18,817,002 | | | 34,595,363 | | Mortgage loans held for portfolio, net of allowance for credit losses of $3,100 and $500 at December 31, 2020 and 2019, respectively | 3,930,252 | | | 4,501,251 | | | | | | Accrued interest receivable | 87,582 | | | 112,163 | | | | | | Derivative assets, net | 161,238 | | | 159,731 | | Other assets | 73,395 | | | 80,643 | | Total Assets | $ | 38,461,035 | | | $ | 55,662,811 | | LIABILITIES | | | | Deposits | | | | Interest-bearing | $ | 977,994 | | | $ | 616,532 | | Non-interest-bearing | 110,993 | | | 57,777 | | Total deposits | 1,088,987 | | | 674,309 | | Consolidated obligations (COs): | | | | Bonds | 21,471,590 | | | 23,888,493 | | Discount notes | 12,878,310 | | | 27,681,169 | | Total consolidated obligations | 34,349,900 | | | 51,569,662 | | Mandatorily redeemable capital stock | 6,282 | | | 5,806 | | Accrued interest payable | 61,918 | | | 104,477 | | Affordable Housing Program (AHP) payable | 78,640 | | | 86,131 | | Derivative liabilities, net | 24,062 | | | 10,271 | | Other liabilities | 69,293 | | | 66,843 | | Total liabilities | 35,679,082 | | | 52,517,499 | | Commitments and contingencies (Note 16) | 0 | | 0 | CAPITAL | | | | Capital stock – Class B – putable ($100 par value), 12,672 shares and 18,691 shares issued and outstanding at December 31, 2020 and 2019, respectively | 1,267,172 | | | 1,869,130 | | Retained earnings: | | | | Unrestricted | 1,130,222 | | | 1,114,337 | | Restricted | 368,420 | | | 348,817 | | Total retained earnings | 1,498,642 | | | 1,463,154 | | Accumulated other comprehensive income (loss) | 16,139 | | | (186,972) | | Total capital | 2,781,953 | | | 3,145,312 | | Total Liabilities and Capital | $ | 38,461,035 | | | $ | 55,662,811 | |
(a) Fair values of held-to-maturity securities were $1,528,929$211,837 and $1,903,227$1,035,410 at December 31, 20182020 and 2017,2019, 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, | | 2018 | | 2017 | | 2016 | INTEREST INCOME | | | | | | Advances | $ | 867,431 |
| | $ | 515,074 |
| | $ | 340,903 |
| Securities purchased under agreements to resell | 77,718 |
| | 27,486 |
| | 11,474 |
| Federal funds sold | 108,144 |
| | 58,642 |
| | 22,562 |
| Investment securities: | | | | | | Trading securities | 8,789 |
| | 10,604 |
| | 9,194 |
| Available-for-sale securities | 143,952 |
| | 118,270 |
| | 115,854 |
| Held-to-maturity securities | 77,892 |
| | 79,723 |
| | 87,729 |
| Total investment securities | 230,633 |
| | 208,597 |
| | 212,777 |
| Mortgage loans held for portfolio | 136,672 |
| | 125,002 |
| | 119,910 |
| Other | 5,455 |
| | 2,088 |
| | 538 |
| Total interest income | 1,426,053 |
| | 936,889 |
| | 708,164 |
| INTEREST EXPENSE | | | | | | Consolidated obligations: | | | | | | Bonds | 545,228 |
| | 421,622 |
| | 361,006 |
| Discount notes | 561,443 |
| | 233,081 |
| | 93,362 |
| Total consolidated obligations | 1,106,671 |
| | 654,703 |
| | 454,368 |
| Deposits | 5,311 |
| | 3,615 |
| | 679 |
| Mandatorily redeemable capital stock | 1,923 |
| | 1,558 |
| | 1,364 |
| Other borrowings | 38 |
| | 10 |
| | 4 |
| Total interest expense | 1,113,943 |
| | 659,886 |
| | 456,415 |
| NET INTEREST INCOME | 312,110 |
| | 277,003 |
| | 251,749 |
| Reduction of provision for credit losses | (34 | ) | | (96 | ) | | (277 | ) | NET INTEREST INCOME AFTER REDUCTION OF PROVISION FOR CREDIT LOSSES | 312,144 |
| | 277,099 |
| | 252,026 |
| OTHER INCOME (LOSS) | | | | | | Net other-than-temporary impairment losses on investment securities, credit portion | (532 | ) | | (1,454 | ) | | (3,310 | ) | Litigation settlements | 12,769 |
| | 20,761 |
| | 39,211 |
| Service fees | 10,268 |
| | 8,697 |
| | 7,701 |
| Net unrealized losses on trading securities | (4,515 | ) | | (6,078 | ) | | (4,410 | ) | Net gains (losses) on derivatives and hedging activities | 2,336 |
| | 551 |
| | (8,591 | ) | Other | 500 |
| | 435 |
| | (1,277 | ) | Total other income | 20,826 |
| | 22,912 |
| | 29,324 |
| OTHER EXPENSE | | | | | | Compensation and benefits | 47,681 |
| | 46,799 |
| | 45,440 |
| Other operating expenses | 24,243 |
| | 24,342 |
| | 23,008 |
| Federal Housing Finance Agency (the FHFA) | 3,582 |
| | 3,800 |
| | 3,643 |
| Office of Finance | 3,526 |
| | 3,260 |
| | 3,011 |
| Other | 12,870 |
| | 10,300 |
| | 13,644 |
| Total other expense | 91,902 |
| | 88,501 |
| | 88,746 |
| INCOME BEFORE ASSESSMENTS | 241,068 |
| | 211,510 |
| | 192,604 |
| AHP | 24,299 |
| | 21,307 |
| | 19,397 |
| NET INCOME | $ | 216,769 |
| | $ | 190,203 |
| | $ | 173,207 |
|
88
| | | | | | | | | | | | | | | | | | | | FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF OPERATIONS (dollars in thousands) | | | | For the Year Ended December 31, | | | | 2020 | | 2019 | | 2018 | | | INTEREST INCOME | | | | | | | | Advances | $ | 400,286 | | | $ | 854,599 | | | $ | 867,215 | | | | Prepayment fees on advances, net | 24,028 | | | 35,011 | | | 216 | | | | Interest-bearing deposits | 5,749 | | | 22,390 | | | 5,433 | | | | Securities purchased under agreements to resell | 15,049 | | | 123,438 | | | 77,718 | | | | Federal funds sold | 18,009 | | | 58,015 | | | 108,144 | | | | Investment securities: | | | | | | | | Trading securities | 83,627 | | | 22,037 | | | 8,789 | | | | Available-for-sale securities | 63,243 | | | 115,942 | | | 143,952 | | | | Held-to-maturity securities | 18,912 | | | 65,758 | | | 77,892 | | | | Total investment securities | 165,782 | | | 203,737 | | | 230,633 | | | | Mortgage loans held for portfolio | 124,828 | | | 147,885 | | | 136,672 | | | | Other | 48 | | | 25 | | | 22 | | | | Total interest income | 753,779 | | | 1,445,100 | | | 1,426,053 | | | | INTEREST EXPENSE | | | | | | | | Consolidated obligations: | | | | | | | | Bonds | 374,449 | | | 598,585 | | | 545,228 | | | | Discount notes | 187,743 | | | 569,896 | | | 561,443 | | | | Total consolidated obligations | 562,192 | | | 1,168,481 | | | 1,106,671 | | | | Deposits | 919 | | | 6,582 | | | 5,311 | | | | Mandatorily redeemable capital stock | 221 | | | 974 | | | 1,923 | | | | Other borrowings | 239 | | | 37 | | | 38 | | | | Total interest expense | 563,571 | | | 1,176,074 | | | 1,113,943 | | | | NET INTEREST INCOME | 190,208 | | | 269,026 | | | 312,110 | | | | (Reduction of) provision for credit losses | (4,358) | | | 85 | | | (34) | | | | NET INTEREST INCOME AFTER (REDUCTION OF) PROVISION FOR CREDIT LOSSES | 194,566 | | | 268,941 | | | 312,144 | | | | OTHER INCOME (LOSS) | | | | | | | | Litigation settlements | 26,096 | | | 29,361 | | | 12,769 | | | | Loss on early extinguishment of debt | (14,784) | | | (15,238) | | | 0 | | | | Service fees | 13,169 | | | 12,987 | | | 10,268 | | | | Net unrealized (losses) gains on trading securities | (11,936) | | | 1,287 | | | (4,515) | | | | Net (losses) gains on derivatives and hedging activities | (49,674) | | | 1,419 | | | 2,336 | | | | Realized net gain from sale of available-for-sale securities | 30,583 | | | 0 | | | 0 | | | | Realized net gain from sale of held-to-maturity securities | 47,413 | | | 12,031 | | | 0 | | | | Other, net | 60 | | | (863) | | | (32) | | | | Total other income | 40,927 | | | 40,984 | | | 20,826 | | | | OTHER EXPENSE | | | | | | | | Compensation and benefits | 47,800 | | | 47,263 | | | 47,681 | | | | Other operating expenses | 24,286 | | | 25,017 | | | 24,243 | | | | Federal Housing Finance Agency (the FHFA) | 3,797 | | | 3,914 | | | 3,582 | | | | Office of Finance | 3,664 | | | 3,468 | | | 3,526 | | | | Other | 22,310 | | | 18,222 | | | 12,870 | | | | Total other expense | 101,857 | | | 97,884 | | | 91,902 | | | | INCOME BEFORE ASSESSMENTS | 133,636 | | | 212,041 | | | 241,068 | | | | AHP assessments | 13,386 | | | 21,302 | | | 24,299 | | | | | | | | | | | | | | | | | | | | NET INCOME | $ | 120,250 | | | $ | 190,739 | | | $ | 216,769 | | | |
The accompanying notes are an integral part of these financial statements.
| | | | | | | | | | | | | | FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF COMPREHENSIVE INCOME (dollars in thousands)
| | | For the Year Ended December 31, | | | 2018 | | 2017 | | 2016 | Net income | | $ | 216,769 |
| | $ | 190,203 |
| | $ | 173,207 |
| Other comprehensive income: | | | | | | | Net unrealized (losses) gains on available-for-sale securities | | (30,627 | ) | | 14,478 |
| | 909 |
| Net noncredit portion of other-than-temporary impairment recoveries on held-to-maturity securities | | 29,064 |
| | 34,161 |
| | 37,406 |
| Net unrealized gains relating to hedging activities | | 11,317 |
| | 7,751 |
| | 23,050 |
| Pension and postretirement benefits | | 679 |
| | 184 |
| | (2,282 | ) | Total other comprehensive income | | 10,433 |
| | 56,574 |
| | 59,083 |
| Comprehensive income | | $ | 227,202 |
| | $ | 246,777 |
| | $ | 232,290 |
|
| | | | | | | | | | | | | | | | | | | | | | | FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF COMPREHENSIVE INCOME (dollars in thousands)
| | | For the Year Ended December 31, | | | 2020 | | 2019 | | 2018 | | | Net income | | $ | 120,250 | | | $ | 190,739 | | | $ | 216,769 | | | | Other comprehensive income: | | | | | | | | | | | | | | | | | | Net unrealized gains (losses) on available-for-sale securities | | 122,490 | | | 79,036 | | | (30,627) | | | | | | | | | | | | | | | | | | | | | | Net noncredit portion of other-than-temporary impairment gains on held-to-maturity securities | | 76,036 | | | 53,118 | | | 29,064 | | | | Net unrealized gains (losses) relating to hedging activities | | 5,842 | | | (913) | | | 11,317 | | | | Pension and postretirement benefits | | (1,257) | | | (1,531) | | | 679 | | | | Total other comprehensive income | | 203,111 | | | 129,710 | | | 10,433 | | | | Comprehensive income | | $ | 323,361 | | | $ | 320,449 | | | $ | 227,202 | | | |
The accompanying notes are an integral part of these financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CAPITAL YEARS ENDED DECEMBER 31, 2018, 2017, and 2016 (dollars and shares in thousands)
| | | | | | | | | | Capital Stock Class B – Putable | | Retained Earnings | | Accumulated Other Comprehensive Loss | | | | Shares | | Par Value | | Unrestricted | | Restricted | | Total | | | Total Capital | 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 |
| Comprehensive income | | | | | 152,162 |
| | 38,041 |
| | 190,203 |
| | 56,574 |
| | 246,777 |
| Proceeds from sale of capital stock | 10,677 |
| | 1,067,674 |
| | | | | | | | | | 1,067,674 |
| Repurchase of capital stock | (11,866 | ) | | (1,186,589 | ) | | | | | | | | | | (1,186,589 | ) | Shares reclassified to mandatorily redeemable capital stock | (87 | ) | | (8,670 | ) | | | | | | | | | | (8,670 | ) | Cash dividends on capital stock | | | | | (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 |
| 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CAPITAL YEARS ENDED DECEMBER 31, 2020, 2019, and 2018 (dollars and shares in thousands)
| | | | | | | | | | Capital Stock Class B – Putable | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | | | Shares | | Par Value | | Unrestricted | | Restricted | | Total | | | Total Capital | BALANCE, DECEMBER 31, 2017 | 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 issuance 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 | | | 0 | | | 175 | | | (175) | | | 0 | | Comprehensive income | | | | | 152,592 | | | 38,147 | | | 190,739 | | | 129,710 | | | 320,449 | | Proceeds from issuance 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 | | Cumulative effect of change in accounting principle | | | | | (7,530) | | | 0 | | | (7,530) | | | 0 | | | (7,530) | | Comprehensive income | | | | | 100,647 | | | 19,603 | | | 120,250 | | | 203,111 | | | 323,361 | | Proceeds from issuance of capital stock | 21,570 | | | 2,157,029 | | | | | | | | | | | 2,157,029 | | Repurchase of capital stock | (27,584) | | | (2,758,406) | | | | | | | | | | | (2,758,406) | | Shares reclassified to mandatorily redeemable capital stock | (5) | | | (581) | | | | | | | | | | | (581) | | Partial recovery of prior capital distribution to Financing Corporation | | | | | 3,726 | | | | | 3,726 | | | | | 3,726 | | Cash dividends on capital stock | | | | | (80,958) | | | | | (80,958) | | | | | (80,958) | | BALANCE, DECEMBER 31, 2020 | 12,672 | | | $ | 1,267,172 | | | $ | 1,130,222 | | | $ | 368,420 | | | $ | 1,498,642 | | | $ | 16,139 | | | $ | 2,781,953 | |
The accompanying notes are an integral part of these financial statements.
| | | | | | | | | | | | | FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CASH FLOWS (dollars in thousands)
| | For the Year Ended December 31, | | 2018 | | 2017 | | 2016 | OPERATING ACTIVITIES | |
| | |
| | | Net income | $ | 216,769 |
| | $ | 190,203 |
| | $ | 173,207 |
| Adjustments to reconcile net income to net cash provided by operating activities: | |
| | | | | Depreciation and amortization | (1,192 | ) | | (12,892 | ) | | (40,332 | ) | Reduction of provision for credit losses | (34 | ) | | (96 | ) | | (277 | ) | Change in net fair-value adjustments on derivatives and hedging activities | 36,176 |
| | 8,554 |
| | 25,341 |
| Net other-than-temporary impairment losses on investment securities, credit portion | 532 |
| | 1,454 |
| | 3,310 |
| Other adjustments | 6,335 |
| | 4,637 |
| | 9,492 |
| Net change in: | |
| | | | | Market value of trading securities | 4,515 |
| | 6,078 |
| | 4,410 |
| Accrued interest receivable | (18,651 | ) | | (9,452 | ) | | (218 | ) | Other assets | (2,627 | ) | | (3,147 | ) | | (1,444 | ) | Accrued interest payable | 21,417 |
| | 9,804 |
| | (446 | ) | Other liabilities | 7,170 |
| | 5,883 |
| | (7,334 | ) | Total adjustments | 53,641 |
| | 10,823 |
| | (7,498 | ) | Net cash provided by operating activities | 270,410 |
| | 201,026 |
| | 165,709 |
| | | | | | | INVESTING ACTIVITIES | |
| | |
| | | Net change in: | |
| | |
| | | Interest-bearing deposits | (629,887 | ) | | 52,274 |
| | (16,949 | ) | Securities purchased under agreements to resell | (1,150,000 | ) | | 650,000 |
| | 701,000 |
| Federal funds sold | 1,950,000 |
| | (750,000 | ) | | (580,000 | ) | Loans to other FHLBanks | 400,000 |
| | (400,000 | ) | | — |
| Trading securities: | |
| | |
| | | Proceeds | 779,652 |
| | 1,032,652 |
| | 12,692 |
| Purchases | (749,072 | ) | | (618,051 | ) | | (399,155 | ) | Available-for-sale securities: | |
| | |
| | | Proceeds from long-term | 1,409,776 |
| | 1,462,091 |
| | 1,299,593 |
| Purchases of long-term | (12,800 | ) | | (2,222,738 | ) | | (1,618,180 | ) | Held-to-maturity securities: | |
| | |
| | | Proceeds from long-term | 385,610 |
| | 568,279 |
| | 589,470 |
| Advances to members: | |
| | |
| | | Repaid | 652,931,105 |
| | 487,707,464 |
| | 345,626,842 |
| Originated | (658,551,866 | ) | | (486,239,305 | ) | | (348,770,289 | ) | Mortgage loans held for portfolio: | |
| | |
| | | Proceeds | 414,690 |
| | 472,636 |
| | 587,203 |
| Purchases | (719,845 | ) | | (794,914 | ) | | (715,274 | ) | Other investing activities | 1,454 |
| | 748 |
| | 1,694 |
| Net cash (used in) provided by investing activities | (3,541,183 | ) | | 921,136 |
| | (3,281,353 | ) | | | | | | | FINANCING ACTIVITIES | |
| | |
| | | Net change in deposits | (2,071 | ) | | (5,594 | ) | | (339 | ) | Net payments on derivatives with a financing element | — |
| | (4,101 | ) | | (13,268 | ) | Net proceeds from issuance of consolidated obligations: | |
| | |
| | | Discount notes | 198,660,164 |
| | 170,645,541 |
| | 163,426,877 |
|
| | | | | | | | | | | | | | | | | | FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CASH FLOWS (dollars in thousands)
| | For the Year Ended December 31, | | 2020 | | 2019 | | 2018 | OPERATING ACTIVITIES | | | | | | Net income | $ | 120,250 | | | $ | 190,739 | | | $ | 216,769 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | Depreciation and amortization | (14,310) | | | (19,937) | | | (1,192) | | (Reduction of) provision for credit losses | (4,358) | | | 85 | | | (34) | | Change in net fair-value adjustments on derivatives and hedging activities | (206,394) | | | (284,002) | | | 36,176 | | Loss on early extinguishment of debt | 14,784 | | | 15,238 | | | 0 | | Other adjustments, net | 4,399 | | | 10,394 | | | 6,867 | | Realized net gain from sale of available-for-sale securities | (30,583) | | | 0 | | | 0 | | Realized net gain from sale of held-to-maturity securities | (47,413) | | | (12,031) | | | 0 | | Net change in: | | | | | | Market value of trading securities | 11,936 | | | (1,287) | | | 4,515 | | Accrued interest receivable | 24,581 | | | 588 | | | (18,651) | | Other assets | (1,437) | | | (7,510) | | | (2,627) | | Accrued interest payable | (42,560) | | | (7,566) | | | 21,417 | | Other liabilities | (8,658) | | | 6,927 | | | 7,170 | | Total adjustments | (300,013) | | | (299,101) | | | 53,641 | | Net cash (used in) provided by operating activities | (179,763) | | | (108,362) | | | 270,410 | | | | | | | | INVESTING ACTIVITIES | | | | | | Net change in: | | | | | | Interest-bearing deposits | 917,422 | | | (776,421) | | | (629,887) | | Securities purchased under agreements to resell | 2,750,000 | | | 2,999,000 | | | (1,150,000) | | Federal funds sold | (1,400,000) | | | 640,000 | | | 1,950,000 | | Loans to other FHLBanks | 0 | | | 0 | | | 400,000 | | Trading securities: | | | | | | | | | | | | Proceeds | 1,926,330 | | | 177,340 | | | 779,652 | | Purchases | (3,293,082) | | | (2,263,279) | | | (749,072) | | Available-for-sale securities: | | | | | | | | | | | | Proceeds | 1,836,746 | | | 1,714,800 | | | 1,409,776 | | Purchases | 0 | | | (3,206,255) | | | (12,800) | | Held-to-maturity securities: | | | | | | Proceeds | 538,452 | | | 510,590 | | | 385,610 | | | | | | | | Advances to members: | | | | | | Repaid | 250,744,528 | | | 474,957,725 | | | 652,931,105 | | Originated | (234,864,985) | | | (466,272,505) | | | (658,551,866) | | Mortgage loans held for portfolio: | | | | | | Proceeds | 1,310,644 | | | 590,161 | | | 414,690 | | Purchases | (766,089) | | | (803,765) | | | (719,845) | | Other investing activities, net | (756) | | | (430) | | | 1,454 | | Net cash provided by (used in) investing activities | 19,699,210 | | | 8,266,961 | | | (3,541,183) | | | | | | | | FINANCING ACTIVITIES | | | | | | Net change in deposits | 414,118 | | | 199,521 | | | (2,071) | |
| Net payments on derivatives with a financing element | | Net payments on derivatives with a financing element | (76,415) | | | (48,642) | | | 0 | | Net proceeds from issuance of consolidated obligations: | | Net proceeds from issuance of consolidated obligations: | | | | | Discount notes | | Discount notes | 100,524,378 | | | 144,030,097 | | | 198,660,164 | | Bonds | | Bonds | 12,288,286 | | | 10,851,335 | | | 10,188,427 | | | Bonds | 10,188,427 |
| | 10,655,859 |
| | 18,313,281 |
| | Payments for maturing and retiring consolidated obligations: | |
| | |
| | | Payments for maturing and retiring consolidated obligations: | | | | | Discount notes | (193,351,448 | ) | | (172,999,084 | ) | | (161,858,661 | ) | Discount notes | (115,287,723) | | | (149,400,564) | | | (193,351,448) | | Bonds | (12,586,510 | ) | | (9,449,955 | ) | | (16,466,706 | ) | Bonds | (13,716,653) | | | (12,909,970) | | | (12,586,510) | | Bonds transferred to other FHLBanks | | Bonds transferred to other FHLBanks | (1,005,990) | | | (12,697) | | | 0 | | Payment of financing lease | | Payment of financing lease | (122) | | | (136) | | | 0 | | Partial recovery of prior capital distribution to Financing Corporation | | Partial recovery of prior capital distribution to Financing Corporation | 3,726 | | | 0 | | | 0 | | Proceeds from issuance of capital stock | 1,800,880 |
| | 1,067,674 |
| | 455,451 |
| Proceeds from issuance of capital stock | 2,157,029 | | | 1,854,487 | | | 1,800,880 | | Payments for repurchase of capital stock | (1,555,438 | ) | | (1,186,589 | ) | | (380,767 | ) | Payments for repurchase of capital stock | (2,758,406) | | | (2,514,211) | | | (1,555,438) | | Payments for redemption of mandatorily redeemable capital stock | (4,364 | ) | | (5,434 | ) | | (9,342 | ) | Payments for redemption of mandatorily redeemable capital stock | (105) | | | (26,062) | | | (4,364) | | Cash dividends paid | (130,109 | ) | | (98,837 | ) | | (85,069 | ) | Cash dividends paid | (80,958) | | | (122,772) | | | (130,109) | | Net cash provided by (used in) financing activities | 3,019,531 |
| | (1,380,520 | ) | | 3,381,457 |
| | Net (decrease) increase in cash and due from banks | (251,242 | ) | | (258,358 | ) | | 265,813 |
| | Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | (17,538,835) | | | (8,099,614) | | | 3,019,531 | | Net increase (decrease) in cash and due from banks | | Net increase (decrease) in cash and due from banks | 1,980,612 | | | 58,985 | | | (251,242) | | Cash and due from banks at beginning of the year | 261,673 |
| | 520,031 |
| | 254,218 |
| Cash and due from banks at beginning of the year | 69,416 | | | 10,431 | | | 261,673 | | Cash and due from banks at end of the year | $ | 10,431 |
| | $ | 261,673 |
| | $ | 520,031 |
| Cash and due from banks at end of the year | $ | 2,050,028 | | | $ | 69,416 | | | $ | 10,431 | | Supplemental disclosures: | | | | | | Supplemental disclosures: | | | | | | Interest paid | $ | 1,084,131 |
| | $ | 667,629 |
| | $ | 505,267 |
| Interest paid | $ | 677,828 | | | $ | 1,224,032 | | | $ | 1,084,131 | | AHP payments | $ | 17,729 |
| | $ | 18,628 |
| | $ | 18,575 |
| AHP payments | $ | 21,374 | | | $ | 15,723 | | | $ | 17,729 | | | Noncash receipt of trading securities | $ | 6,624 |
| | $ | — |
| | $ | — |
| Noncash receipt of trading securities | $ | 0 | | | $ | 0 | | | $ | 6,624 | | Noncash transfers of mortgage loans held for portfolio to other assets | $ | 1,438 |
| | $ | 2,618 |
| | $ | 3,112 |
| Noncash transfers of mortgage loans held for portfolio to other assets | $ | 606 | | | $ | 2,020 | | | $ | 1,438 | | Noncash lease liabilities arising from obtaining right-of-use assets | | Noncash lease liabilities arising from obtaining right-of-use assets | $ | 173 | | | $ | 12,572 | | | $ | 0 | | Noncash transfer of held-to-maturity securities to available-for-sale securities with the adoption of the reference rate reform guidance (amortized cost) | | Noncash transfer of held-to-maturity securities to available-for-sale securities with the adoption of the reference rate reform guidance (amortized cost) | $ | 254,217 | | | $ | 0 | | | $ | 0 | |
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 eligible 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 and 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, securities-safekeeping, and settlement services.
"Mortgage Partnership Finance", "MPF" and MPF Xtra"MPF Xtra" are registered trademarks of the FHLBank of Chicago.
Note 2 — 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 inhe
rentinherent 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 1915 — 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 128 — Derivatives and Hedging Activities for additional information regarding these agreements.
Securities purchased under agreements to resell are also subject to netting requirements. 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, 2018 and 2017, we had $6.5 billion and $5.3 billion in securities purchased under agreements to resell. There were no offsetting amounts related to these securities at December 31, 20182020 and 2017.2019.
Credit Losses on Financial Instruments
Beginning January 1, 2020, the Bank adopted, on a modified retrospective basis, new accounting guidance pertaining to the measurement of credit losses on financial instruments that requires a financial asset or group of financial assets measured at amortized cost to be presented at the net amount expected to be collected. The new guidance also requires credit losses relating to these financial instruments as well as available-for-sale securities be recorded through the allowance for credit losses. Consistent with the modified retrospective method of adoption, the prior period has not been revised to conform to the new basis of accounting. Key changes to our accounting policies based on this guidance are detailed below.
Interest-Bearing Deposits, Securities Purchased Under Agreements to Resell, and Federal Funds Sold
Interest-bearingWe invest in interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold providesold. Interest-bearing deposits include bank notes not meeting the definition of a security. Securities purchased under agreements to resell are treated as short-term liquidity and are carried at cost.collateralized loans. 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 resellThese investments provide short-term liquidity and are treated as short-term collateralized loans that are classified as assets incarried at cost. Accrued interest receivable is recorded separately on the statementstatements of condition. TheseIf applicable, an allowance for credit losses is recorded with a corresponding adjustment to the provision for credit losses. Interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold 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 optionevaluated quarterly for expected credit losses if not expected to provide additional securities in safekeeping in our name in an amount equalbe repaid according 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.contractual terms. We have not sold or repledged the collateral received on securities purchased under agreements to resell. Securities
Beginning January 1, 2020, we adopted the Financial Instruments - Credit Losses accounting guidance. Under this new guidance, we use the collateral maintenance provision practical expedient for securities purchased under agreements to resell. Consequently, a credit loss would be recognized if there is a collateral shortfall which we do not believe the counterparty will replenish in accordance with its contractual terms. The credit loss would be limited to the difference between the fair value of the collateral and the investment’s amortized cost.
Prior to January 1, 2020, securities purchased under agreements to resell averaged $4.0 billion during 2018 and $3.0 billion during 2017, andwere evaluated for credit losses if there was a collateral shortfall which we did not believe the maximum amount outstanding at any month-end during 2018 and 2017 was $6.5 billion and $5.3 billion, respectively.counterparty would replenish in accordance with the contractual terms.
See Note 5 — Investments for details on the allowance methodologies relating to these investments.
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.
Additionally, beginning January 1, 2020, we adopted the Financial Instruments - Credit Losses accounting guidance. Under this new guidance, for securities classified as available-for-sale, we evaluate an individual security for impairment on a quarterly basis by comparing the security’s fair value to its amortized cost. Accrued interest receivable is recorded separately on the statements of condition and is not included in the amortized cost basis. Impairment exists when the fair value of the investment is less than its amortized cost. In assessing whether a credit loss exists on an impaired security, we consider whether there would be a shortfall in receiving all cash flows contractually due on the investment. When a shortfall is considered possible, we compare the present value of cash flows to be collected from the security with the amortized cost basis of the security. If the present value of cash flows is less than amortized cost, an allowance-for-credit losses is recorded with a corresponding adjustment to the provision for credit losses. The allowance is limited to the difference between the amortized cost and the fair value on the individual security and excludes uncollectible accrued interest receivable, which is measured separately.
If management intends to sell an impaired security classified as available-for-sale, or more likely than not will be required to sell the security before expected recovery of its amortized cost basis, any allowance for credit losses is written off and the amortized cost basis is written down to the security’s fair value at the reporting date with any incremental impairment reported in earnings as net gains (losses) on available-for-sale securities. If management does not intend to sell an impaired security classified as available-for-sale and it is not more likely than not that management will be required to sell the debt security, then the credit portion of the difference is recognized as an allowance for credit losses and any remaining difference between the security’s fair value and amortized cost is recorded to net unrealized gains (losses) on available-for-sale securities within other comprehensive income (loss).
See Investment Securities – Other-than-Temporary Impairment below for the accounting policy relating to credit losses in effect prior to January 1, 2020.
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 amortized cost, adjusted forwhich is original cost net of periodic principal repayments and amortization of premiums and accretion of discounts using the level-yield method adjusted for other-than-temporary impairment losses recorded prior to January 1, 2020. Accrued interest receivable is recorded separately on the statement of condition.
Certain changes in circumstances may cause us to change our intent to hold a security 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 accretionunusual 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 out intent to hold other debt securities to maturity. In addition, sale of a debt security that meets either of the noncreditfollowing two conditions would not be considered inconsistent with the original classification of that security.
•The sale occurs near enough to its maturity date (for example, within three months of maturity), 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 other-than-temporary impairment recognizedthe principal outstanding at acquisition due either to prepayments on the debt security or to scheduled payments on a debt security payable in other comprehensive income (loss).equal installments (both principal and interest) over its term.
Additionally, during the third quarter of 2020 we adopted a provision of the Accounting Standards Update titled Facilitation of the Effects of Reference Rate Reform on Financial Reporting which 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 were classified as held-to-maturity before January 1, 2020.
Beginning January 1, 2020, we adopted the Financial Instruments - Credit Losses accounting guidance. Under this new guidance, held-to-maturity securities are evaluated quarterly for expected credit losses on a pool basis unless an individual assessment is deemed necessary because the securities do not possess similar risk characteristics. An allowance for credit losses is recorded with a corresponding adjustment to the provision for credit losses. The allowance for credit losses excludes uncollectible accrued interest receivable, which is measured separately. Prior to January 1, 2020, credit losses were recorded as a direct write-down of the held-to-maturity security carrying value.
For improvements in expected future cash flows for held-to-maturity securities impaired prior to January 1, 2020, interest income continues to follow the recognition pattern pursuant to the impairment guidance in effect prior to January 1, 2020. Any additional recoveries of amounts previously written off prior to January 1, 2020, are recorded when received. For any improvements in expected future cash flows for held-to-maturity securities with an allowance for credit losses recognized after the adoption of the new guidance, the allowance for credit losses associated with recoveries may be derecognized up to its full amount immediately in the current period.
See Investment Securities – Other-than-Temporary Impairment below for the accounting policy relating to credit losses in effect prior to January 1, 2020.
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 evaluateBeginning January 1, 2020, we adopted the Financial Instruments - Credit Losses accounting guidance. As a result, the accounting guidance related to other-than-temporary impairment accounting for investments was superseded as of that date.
Prior to January 1, 2020, we evaluated our individual available-for-sale and held-to-maturity securities in an unrealized loss position for other-than-temporary impairment each quarter. An investment iswas considered impaired when its fair value iswas less than its amortized cost. We considerconsidered other-than-temporary impairment to have occurred if we:
have•had an intent to sell the investment;
believe•believed it iswas more likely than not that we willwould be required to sell the investment before the recovery of its amortized cost based on available evidence; or
do•did 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 iswas met, we recognizerecognized 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 performperformed an analysis to determine if we willwould recover the entire amortized cost of each of these securities. The present value of the cash flows expected to be collected iswas compared with the amortized cost of the debt security to determine whether a credit loss exists.existed. If the present value of the cash flows expected to be collected iswas less than
the amortized cost of the debt security, the security iswas deemed to be other-than-temporarily impaired and the carrying value of the debt security iswas 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) iswas recognized in earnings, while the amount related to all other factors (that is, the noncredit component) iswas recognized in other comprehensive income (loss). For a security that iswas determined to be other-than-temporarily impaired, in the event that the present value of the cash flows expected to be collected iswas less than the fair value of the security, the credit loss on the security iswas limited to the amount of that security's unrealized losses.
In performing a detailed cash-flow analysis, we estimateestimated the cash flows expected to be collected. If this estimate resultsresulted in a present value of expected cash flows (discounted at the security's effective yield) that iswas less than the amortized cost basis of a security (that is, a credit loss exists), other-than-temporary impairment iswas considered to have occurred. For determining the present value of variable-rate and hybrid private-label residential MBS, we useused 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 iswas 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.
Accounting for Other-than-Temporary Impairment Recognized in Other Comprehensive Income (Loss). 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 iswas no additional other-than-temporary impairment, we adjustadjusted the accretable yield on a prospective basis if there iswas a significant increase in the security's expected
future cash flows. This adjusted yield iswas 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 arewere deemed significant willwould 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) iswas 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 arewere re-evaluated each quarter.
Advances
We report advances at amortized cost. Advances are carried at amortized cost, are reportedwhich is original cost net of premiums/periodic principal repayments, amortization of premiums and accretion of discounts, and any hedgingfair value hedge adjustments, as discussed in Note 96 — 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 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 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. Accrued interest receivable is recorded separately on the statements of condition.
Beginning January 1, 2020, we adopted the Financial Instruments - Credit Losses accounting guidance. Under this new guidance, advances are evaluated quarterly for expected credit losses. Prior to January 1, 2020, we evaluated advances to determine if an allowance for credit losses was necessary if it was probable an impairment occurred in our advances portfolio as of the statement of condition date and the amount of loss could be reasonably estimated.
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 onsection of 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-interestadvance 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 gains (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 advance-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 advance-interestadvance interest income in 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 MPFprogram 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 107 — 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, 2018,2020, all our investments in mortgage loans are held for portfolio. Accordingly, these investmentsMortgage loans held for portfolio are reportedrecorded at their principal amount outstandingamortized cost, which is original cost, net of unamortizedperiodic principal repayments and amortization of premiums and accretion of discounts, unrealized gains and direct write-downs. Accrued interest receivable is recorded separately on the statements of condition. We perform a quarterly assessment of our mortgage loans held for portfolio to estimate expected credit losses. An allowance for credit losses from investments initially classified asis recorded with a corresponding adjustment to the provision for credit losses. We do not purchase mortgage loans with credit deterioration present at the time of purchase.
Beginning January 1, 2020, we adopted the Financial Instruments - Credit Losses accounting guidance. Under this new guidance, quarterly we measure expected credit losses on mortgage loans on a collective basis, pooling loans with similar risk characteristics. If a mortgage loan commitments, direct write-downs,no longer shares risk characteristics with other loans, it is removed from the pool and
evaluated for expected credit losses on an individual basis. When developing the allowance for credit losses, we measure the expected loss over the estimated remaining life of a mortgage loan, which also considers how our credit enhancements mitigate credit losses. If a loan is purchased at a discount, the discount does not offset the allowance for credit losses. We include estimates of expected recoveries within the allowance for credit losses. The allowance excludes uncollectible accrued interest receivable, as we write off accrued interest receivable by reversing interest income if a mortgage loan is placed on nonaccrual status.
Prior to January 1, 2020, we recorded an allowance for credit losses on mortgage loans.loans if it was probable an impairment occurred in our mortgage loans held for portfolio as of the statement of condition date and the amount of loss could be reasonably estimated. A loan was considered impaired when, based on current information and events, it was probable that we would be unable to collect all amounts due according to the contractual terms of the loan agreement.
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 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 11 – 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.due, and we place government mortgage loans on nonaccrual status when the collection of the contractual principal or interest is 90 days or more past due and the borrower has been granted temporary forbearance for the payment of principal and interest. 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, other than government mortgage loans that have been granted temporary forbearance, 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 117 – AllowanceMortgage Loans Held for Credit LossesPortfolio.
Collateral-dependent Loans. An impairedA loan is considered collateral-dependent if repayment is expected to be provided solely by the sale of the underlying property; that is, there is no other available and reliable source of repayment. A loan that is considered collateral-dependent is measured for impairmentcredit loss on an individual basis based on the fair value of the underlying property less estimated selling costs, 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 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. The recorded investment in a loan is the unpaid principal balance of the loan, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts, hedging adjustments, and direct write-downs. 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
Restructurings. We consider a troubled debt restructuring (TDR) 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 restructuringsTDRs as a result of our modification program on nonaccrual when payments are 60 days or more past due.
Section 4013 of the Coronavirus, Aid, Relief, and Economic Security Act (the CARES Act) provides optional temporary relief from the accounting and reporting requirements for TDRs for certain loan modifications related the adverse effects of Coronavirus Disease 2019 (COVID-19). On December 27, 2020, the Consolidated Appropriations Act, 2021, was signed into law amending the CARES Act. Specifically, the CARES Act, as amended, provides that a qualifying financial institution may elect to suspend (1) the requirements under U.S. GAAP for certain loan modifications that would otherwise be categorized as a TDR, and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. Section 4013 of the CARES Act applies to any modification related to an economic hardship as a result of the COVID-19 pandemic, including an interest rate modification, a repayment plan, or any similar arrangement that defers or delays payment of principal or interest, for a loan that was not more than 30 days past due as of December 31, 2019, and that occurs during the period beginning on March 1, 2020, and ending on the earlier of January 1, 2022, or the date that is 60 days following the termination of the national emergency related to the COVID-19 pandemic declared by the President of the United States. Beginning in the second quarter of 2020, we elected to apply the TDR relief provided by the CARES Act.
As such, all COVID-related modifications meeting the provisions of the CARES Act will be excluded from TDR classification and accounting. We consider these loans to have a current payment status as long as payments are being made in accordance with the new terms. Alternatively, COVID-related modifications that do not meet the provisions of the CARES Act will continue to be assessed for TDR classification under our existing accounting policies. Additionally, we continue to apply our delinquency, non-accrual and charge-off policies during the forbearance period. We estimate the allowance for credit losses for COVID-related modifications in the same manner as other mortgage loans held for portfolio.
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, 20182020 and 2017,2019, we had $818,000$273 thousand and $1.8$1.3 million, 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.losses for the difference. 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 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 (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.). Based upon certain amendments, effective January 3, 2017, made by CME Inc. to its rulebook, we began to characterizeAt both DCOs, variation margin payments related to CME Inc. contractsis characterized as daily settlement payments rather than collateral. However, throughout 2017, we continued to characterize our variation margin related to LCH Ltd. contracts as cash collateral. We began to characterize variation margin payments related to LCH Ltd. contracts as daily settlement payments, rather than cash collateral, based upon a change effective January 16, 2018, to LCH Ltd.'s rulebook. At both DCOs,and initial margin has been and continues to beis 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. 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 derivativesthe earnings effect of the hedged item; 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, 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 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.
If 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. 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.
If 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.
If 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 debt, 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 sepa
ratedseparated 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, 2018,2020, and 2017,2019, 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 96 — 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, 2020 and 2019, we included in the statement of condition $8.0 million and $10.3 million, respectively, of lease right-of-use assets in other assets as well as $8.0 million and $10.4 million, respectively, of lease liabilities in other liabilities. We have recognized
operating lease costs in other operating expenses on the statement of operations of $2.6 million for the year ended December 31, 2020 and 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.
Off-Balance Sheet Credit Exposures
Beginning January 1, 2020, we adopted the Financial Instruments - Credit Losses accounting guidance. Under this new guidance, we evaluate our off-balance sheet credit exposures on a quarterly basis for expected credit losses. If deemed necessary, an allowance for expected credit losses on these off-balance sheet exposures is recorded in other liabilities with a corresponding adjustment to the provision for credit losses.
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, provides that each FHLBank towill, on a quarterly basis, contribute 20 percent of its quarterly net income to a separate restricted retained earnings account at that FHLBank until the balance of that account, balancecalculated as of the last day of each calendar quarter, equals at least one1 percent of that FHLBank's average balance of outstanding COs (excluding fair-value adjustments) for the previouscalendar quarter. As of December 31, 2020, the balance in restricted retained earnings exceeds the threshold for the contribution requirement by $14.0 million, primarily the result of the decline in outstanding COs since March 31, 2020. Accordingly, no allocation of net income was made to restricted retained earnings in the fourth quarter of 2020 and no further allocations of net income into restricted retained earnings are required until such time as the contribution requirement exceeds the balance in restricted retained earnings. 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 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 as well as any discretionary 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 1511 — 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, 2020. See Note 2117 — 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 20172019 and 20162018 financial statements have been reclassified to conform to the financial statement presentation for the year ended December 31, 2018.2020.
Note 3 — Recently Issued and Adopted Accounting Guidance
Effective January 1, 2018
2020
Improving
Facilitation of the PresentationEffects of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Reference Rate Reform on Financial Reporting. On March 10, 2017,12, 2020, the Financial Accounting Standards Board (FASB) issued amendedreleased 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 improvecontract 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 presentation of net periodic pension costoptional expedients for contract modifications and net periodic postretirement benefit cost. The amendments requirehedging relationships, this update provides a one-time election to sell, transfer, or both sell and transfer debt securities classified as held-to-maturity that employers disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost componentreference a rate affected by reference rate reform and that are classified as held-to-maturity before January 1, 2020.
This standard was effective upon issuance and the other componentsprovisions generally can be applied prospectively as of net benefit costJanuary 1, 2020 through December 31, 2022. In the third quarter of 2020, we adopted the provision of this guidance which allows a one-time election to sell, transfer, or both sell and transfer debt securities classified as held-to-maturity. See Note 5 — Investments for additional information related to these sales and transfers. We are in the income statementprocess of evaluating the remaining provisions of this guidance, and allow only the service cost component of net benefit cost to be eligible for capitalization. This guidance resulted in the reclassification of $1.4 million and $1.6 million, respectively, of non-service cost components of net benefit cost from compensation and benefits expense to other non-interest expense in the statements of operations for the years ended December 31, 2017 and 2016.
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 we 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 notes 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 did not have any effectanticipated effects on our financial condition, results of operations, orand cash flows. In accordance with the updated guidance, weflows have made insignificant revisions to Note 19 — Fair Values to specify the measurement category for each form of financial asset (that is, securities or loans and receivables).not yet been determined.
Effective January 1, 2019
InclusionIn the fourth quarter of 2020, we retrospectively elected to adopt the Secured Overnight Financingprovision of Reference Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.Reform On October 25, 2018,guidance issued by the FASB issued amended guidance to permit use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. This guidance became effective for us onin January 1, 2019. Upon adoption, SOFR became an eligible benchmark interest rate which we may elect to apply to future hedge relationships.
Targeted Improvements to Accounting for Hedging Activities. On August 28, 2017, the 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 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 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 improvements2021 specific to the assessmentmodification of hedge effectiveness and permit, among other things,interest rates used for the following:
Measurementdiscounting 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 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 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 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;
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;
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.
derivative instruments. This guidance became effective for us on January 1, 2019. For all cash flow hedges existing on the date of adoption, this guidance will be 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 have evaluated this guidance and it is not expected to affect our application of hedge accounting for existing hedge strategies, with the exception of designation of a fallback long-haul effectiveness testing method for our short-cut hedge strategies. Upon adoption, this guidance will prospectively affect our presentation of fair value hedge relationships on the statement of operations and will require certain new disclosures. We will continue to assess the new strategies and opportunities enabled by this guidance to expand our risk management strategies. The adoption of this guidance did not have a material effect on our financial condition, results of operations, or cash flows.
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 became effective for us on January 1, 2019. Upon adoption of the new guidance, 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.
Becoming effective January 1, 2020
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.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.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.cost; and •Further disaggregate the current disclosure of credit quality indicators in relation to the amortized cost of financing receivables by the year of origination.
ThisWe adopted 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 applied2020, 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 beenapproach. Upon adoption, we recognized before the effective date. We are currently evaluating the effect this guidance may have on our financial condition, results of operations and cash flows. A preliminary assessment of the anticipated impacts on our financial condition for certain asset classes is the following:
No allowance for credit losses will be required for advances, U.S. government or agency securities, U.S. government-owned corporations, U.S. government-guaranteed securities and securities issued by government sponsored enterprises on the basis of the zero-loss expectations;
We do not expect to recognize an allowance for credit losses for short-term investments (including federal funds sold and interest-bearing deposits), securities purchased under agreements to resell, securities issued by supranational institutions, or state or local housing-finance agency obligations; and
We do not expect a significant change in methodology for modeling credit losses for private-label MBS.
Although we are still evaluating the expected impact on our financial condition for mortgage loans held for portfolio, we expect the adoption of the guidance will result in an increase in the allowance for credit losses given the requirementof $7.5 million as a cumulative-effect adjustment to assess losses for the entire estimated life of the financial asset.retained earnings.
The overall effect on our financial condition, results of operations, and cash flows will depend upon the composition of our financial assets held at the date of adoption as well as the economic conditions and forecasts at that time.
Note 4 — 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 $16.3$176.3 million and $45.5$19.3 million for the years ended December 31, 20182020 and 2017,2019, respectively.
Note 5 — Investments
Interest-Bearing Deposits, Securities Purchased under Agreements to Resell, and Federal Funds Sold
We invest in interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold to provide short-term liquidity. These investments are generally transacted with counterparties that have received, or whose guarantors have received, a credit rating of triple-B or greater (investment grade) by a nationally recognized statistical rating organization (NRSRO), or the equivalent. At December 31, 2020, NaN of these investments were made to counterparties or, if applicable, guaranteed by entities rated below triple-B.
Securities purchased under agreements to resell are short-term and are structured such that they are evaluated daily to determine if the market value of the underlying securities decreases below the market value required as collateral (i.e. subject to collateral maintenance provisions). If so, the counterparty must place an amount of additional securities as collateral or remit an
equivalent amount of cash sufficient to comply with collateral maintenance provisions, generally by the next business day. Based upon the collateral held as security and collateral maintenance provisions with our counterparties, we determined that 0 allowance for credit losses was needed for our securities purchased under agreements to resell at December 31, 2020. The carrying value of securities purchased under agreements to resell excludes accrued interest receivable of $1 thousand and $348 thousand at December 31, 2020 and 2019, respectively.
Federal funds sold are unsecured loans that are generally transacted on an overnight term. FHFA regulations include a limit on the amount of unsecured credit we may extend to a counterparty. At December 31, 2020 and 2019, all investments in interest-bearing deposits and federal funds sold were repaid according to the contractual terms. NaN allowance for credit losses was recorded for these assets at December 31, 2020. Carrying values of interest-bearing deposits and federal funds sold exclude accrued interest receivable of $31 thousand and $5 thousand, respectively, at December 31, 2020, and $682 thousand and $37 thousand, respectively, at December 31, 2019.
The effects of the COVID-19 pandemic on the global economy and financial markets are expected to put pressure on our bank counterparties’ profitability, asset quality, and in some cases, capitalization. We continually monitor the creditworthiness of our counterparties and may reduce or suspend individual credit lines as conditions warrant.
Debt Securities
We invest in debt securities, which are classified as either trading, available-for-sale, or held-to-maturity. We are prohibited by FHFA regulations from investing in certain higher-risk securities, such as equity securities and debt instruments that are not investment quality, other than certain investments targeted at low-income persons or communities, but we are not required to divest instruments that experienced credit deterioration after their purchase.
Trading Securities Table 5.1 - Trading Securities by Major Security Type Table 5.1 - Trading Securities by Major Security Type (dollars in thousands)
| | | | | | | | | | December 31, 2018 | | December 31, 2017 | Corporate bonds | $ | 6,102 |
| | $ | — |
| | | | | MBS | |
| | | U.S. government-guaranteed – single-family | 5,344 |
| | 6,807 |
| GSEs – single-family | 148 |
| | 346 |
| GSEs – multifamily | 151,444 |
| | 184,357 |
| | 156,936 |
| | 191,510 |
| Total | $ | 163,038 |
| | $ | 191,510 |
|
(dollars in thousands) | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Corporate bonds | $ | 5,422 | | | $ | 5,896 | | U.S. Treasury obligations | 3,596,718 | | | 2,240,236 | | | 3,602,140 | | | 2,246,132 | | | | | | MBS | | | | U.S. government-guaranteed – single-family | 2,884 | | | 4,047 | | GSE – single-family | 55 | | | 85 | | | | | | | 2,939 | | | 4,132 | | Total | $ | 3,605,079 | | | $ | 2,250,264 | |
Table 5.2 - Unrealized and Realized Gains (Losses) on Trading Securities
Net unrealized losses on trading securities for the years ended December 31, 2018, 2017 and 2016, amounted to $4.5 million, $6.1 million and $4.4 million, respectively.(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | | | | 2020 | | 2019 | | 2018 | | | | | | | Net unrealized (losses) gains on trading securities held at year end | | $ | (8,392) | | | $ | 1,379 | | | $ | (4,515) | | | | | | | | | | | | | | Net unrealized and realized losses on trading securities sold or matured during the year | | (3,544) | | | (92) | | | 0 | | | | | | | | | | | Net unrealized (losses) gains on trading securities | | $ | (11,936) | | | $ | 1,287 | | | $ | (4,515) | | | | | | | | | | | | | |
We do not participate in speculative trading practices and typically hold these investments over a longer time horizon.
Available-for-sale Securities
Table 5.3 - Available-for-Sale Securities by Major Security Type (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | | | Amounts Recorded in Accumulated Other Comprehensive Loss | | | | Amortized Cost (1) | | Unrealized Gains | | Unrealized Losses | | Fair Value | State housing-finance-agency obligations (HFA securities) | $ | 126,930 | | | $ | 0 | | | $ | (4,381) | | | $ | 122,549 | | Supranational institutions | 442,225 | | | 0 | | | (12,156) | | | 430,069 | | | | | | | | | | U.S. government-owned corporations | 350,052 | | | 0 | | | (27,991) | | | 322,061 | | GSE | 140,136 | | | 0 | | | (5,144) | | | 134,992 | | | 1,059,343 | | | 0 | | | (49,672) | | | 1,009,671 | | MBS | | | | | | | | U.S. government guaranteed – single-family | 29,148 | | | 260 | | | 0 | | | 29,408 | | U.S. government guaranteed – multifamily | 46,829 | | | 351 | | | 0 | | | 47,180 | | GSE – single-family | 1,442,282 | | | 26,790 | | | (24) | | | 1,469,048 | | GSE – multifamily | 3,593,978 | | | 70,863 | | | 0 | | | 3,664,841 | | | 5,112,237 | | | 98,264 | | | (24) | | | 5,210,477 | | Total | $ | 6,171,580 | | | $ | 98,264 | | | $ | (49,696) | | | $ | 6,220,148 | |
| | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | | | Amounts Recorded in Accumulated Other Comprehensive Loss | | | | Amortized Cost (1) | | Unrealized Gains | | Unrealized Losses | | Fair Value | HFA securities | $ | 69,320 | | | $ | 0 | | | $ | (4,668) | | | $ | 64,652 | | Supranational institutions | 429,354 | | | 0 | | | (12,925) | | | 416,429 | | U.S. government-owned corporations | 323,192 | | | 0 | | | (26,431) | | | 296,761 | | GSE | 130,935 | | | 0 | | | (7,149) | | | 123,786 | | | 952,801 | | | 0 | | | (51,173) | | | 901,628 | | MBS | | | | | | | | U.S. government guaranteed – single-family | 60,003 | | | 0 | | | (2,289) | | | 57,714 | | U.S. government guaranteed – multifamily | 283,674 | | | 0 | | | (1,057) | | | 282,617 | | 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 | | | 6,530,121 | | | 8,432 | | | (31,181) | | | 6,507,372 | | Total | $ | 7,482,922 | | | $ | 8,432 | | | $ | (82,354) | | | $ | 7,409,000 | |
_______________________ (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. Amortized cost excludes accrued interest receivable of $24.0 million and $27.5 million at December 31, 2020 and 2019.
Table 5.4 - Available-for-Sale Securities in a Continuous Unrealized Loss Position (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | 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 | $ | 0 | | | $ | 0 | | | $ | 109,780 | | | $ | (4,381) | | | $ | 109,780 | | | $ | (4,381) | | Supranational institutions | 0 | | | 0 | | | 430,069 | | | (12,156) | | | 430,069 | | | (12,156) | | U.S. government-owned corporations | 0 | | | 0 | | | 322,061 | | | (27,991) | | | 322,061 | | | (27,991) | | GSE | 0 | | | 0 | | | 134,992 | | | (5,144) | | | 134,992 | | | (5,144) | | | 0 | | | 0 | | | 996,902 | | | (49,672) | | | 996,902 | | | (49,672) | | | | | | | | | | | | | | MBS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | GSE – single-family | 0 | | | 0 | | | 10,271 | | | (24) | | | 10,271 | | | (24) | | | | | | | | | | | | | | | | | | | | | | | | | | Total | $ | 0 | | | $ | 0 | | | $ | 1,007,173 | | | $ | (49,696) | | | $ | 1,007,173 | | | $ | (49,696) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | $ | 12,229 | | | $ | (1,591) | | | $ | 52,423 | | | $ | (3,077) | | | $ | 64,652 | | | $ | (4,668) | | Supranational institutions | 0 | | | 0 | | | 416,429 | | | (12,925) | | | 416,429 | | | (12,925) | | U.S. government-owned corporations | 0 | | | 0 | | | 296,761 | | | (26,431) | | | 296,761 | | | (26,431) | | GSE | 0 | | | 0 | | | 123,786 | | | (7,149) | | | 123,786 | | | (7,149) | | | 12,229 | | | (1,591) | | | 889,399 | | | (49,582) | | | 901,628 | | | (51,173) | | MBS | | | | | | | | | | | | U.S. government guaranteed – single-family | 10,885 | | | (1) | | | 45,490 | | | (2,288) | | | 56,375 | | | (2,289) | | U.S. government guaranteed – multifamily | 0 | | | 0 | | | 282,617 | | | (1,057) | | | 282,617 | | | (1,057) | | 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) | | | 2,000,873 | | | (14,211) | | | 2,157,812 | | | (16,970) | | | 4,158,685 | | | (31,181) | | Total | $ | 2,013,102 | | | $ | (15,802) | | | $ | 3,047,211 | | | $ | (66,552) | | | $ | 5,060,313 | | | $ | (82,354) | |
Table 5.5 - Available-for-Sale Securities by Contractual Maturity (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Year of Maturity | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | Due in one year or less | $ | 10,600 | | | $ | 10,524 | | | $ | 7,600 | | | $ | 7,563 | | Due after one year through five years | 169,570 | | | 166,813 | | | 61,720 | | | 57,089 | | Due after five years through 10 years | 400,477 | | | 389,753 | | | 477,232 | | | 463,465 | | Due after 10 years | 478,696 | | | 442,581 | | | 406,249 | | | 373,511 | | | 1,059,343 | | | 1,009,671 | | | 952,801 | | | 901,628 | | MBS (1) | 5,112,237 | | | 5,210,477 | | | 6,530,121 | | | 6,507,372 | | Total | $ | 6,171,580 | | | $ | 6,220,148 | | | $ | 7,482,922 | | | $ | 7,409,000 | |
_______________________
(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.
Held-to-Maturity Securities
Table 5.6 - Held-to-Maturity Securities by Major Security Type (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | Amortized Cost(1) | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding Losses | | Fair Value | | | | | | | | | MBS | | | | | | | | U.S. government guaranteed – single-family | $ | 5,388 | | | $ | 103 | | | $ | 0 | | | $ | 5,491 | | | | | | | | | | GSE – single-family | 201,774 | | | 4,681 | | | (109) | | | 206,346 | | | | | | | | | | Total | $ | 207,162 | | | $ | 4,784 | | | $ | (109) | | | $ | 211,837 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | Amortized Cost(1) | | 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 | | | $ | 0 | | | $ | 87,250 | | | $ | 0 | | | $ | (3,845) | | | $ | 83,405 | | | | | | | | | | | | | | | | | | | | | | | | | | MBS | | | | | | | | | | | | U.S. government guaranteed – single-family | 6,987 | | | 0 | | | 6,987 | | | 129 | | | 0 | | | 7,116 | | | | | | | | | | | | | | GSE – single-family | 303,604 | | | 0 | | | 303,604 | | | 5,197 | | | (246) | | | 308,555 | | GSE – multifamily | 140,661 | | | 0 | | | 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 | |
_______________________ (1)Amortized cost of held-to-maturity securities includes adjustments made to the cost basis of an investment for accretion, amortization, and collection of cash. Amortized cost excludes accrued interest receivable of $368 thousand and $2.0 million at December 31, 2020 and 2019, respectively.
As required prior to the adoption of the Financial Instrument - Credit Loss accounting standard, table 5.7 presents the held-to-maturity securities with unrealized losses as of December 31, 2019.
Table 5.7 - 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) | | GSE – multifamily | 949 | | | (2) | | | 0 | | | 0 | | | 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) | |
Table 5.8 - Held-to-Maturity Securities by Contractual Maturity (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Year of Maturity | Amortized Cost | | Fair Value | | Amortized Cost | | Carrying Value (1) | | Fair Value | Due in one year or less | $ | 0 | | | $ | 0 | | | $ | 3,090 | | | $ | 3,090 | | | $ | 3,089 | | Due after one year through five years | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | Due after five years through 10 years | 0 | | | 0 | | | 15,405 | | | 15,405 | | | 15,270 | | Due after 10 years | 0 | | | 0 | | | 68,755 | | | 68,755 | | | 65,046 | | | 0 | | | 0 | | | 87,250 | | | 87,250 | | | 83,405 | | MBS (2) | 207,162 | | | 211,837 | | | 859,892 | | | 783,857 | | | 952,005 | | Total | $ | 207,162 | | | $ | 211,837 | | | $ | 947,142 | | | $ | 871,107 | | | $ | 1,035,410 | |
_______________________ (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.
Transfers and Sales of Available-for-Sale Securities and Held-to-Maturity Securities
During the years ended December 31, 2020 and 2019, we sold held-to-maturity private-label MBS that 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. These sales were as follows:
•In the fourth quarter of 2019, we sold securities with an amortized cost of $173.2 million and realized a gain of $12.0 million. •In the first quarter of 2020, we sold securities with an amortized cost of $121.0 million and realized a gain of $40.7 million. •In the third quarter of 2020, we sold securities with an amortized cost of $12.2 million and realized a gain of $473 thousand.
Additionally, during the third quarter of 2020 we adopted a provision of the Accounting Standards Update titled Facilitation of the Effects of Reference Rate Reform on Financial Reporting which 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 were classified as held-to-maturity before January 1, 2020. Upon adopting this provision, we:
•sold certain held-to-maturity private-label MBS which had an amortized cost of $82.2 million and realized a net gain of $6.2 million; and •transferred from held-to-maturity to available-for-sale certain securities which, on the date of transfer, were comprised of the following:
Table 5.9 - Transfer of Held-to-Maturity Securities to Available-for-Sale Securities
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortized Cost | | Allowance for Credit Losses | | Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss | | Carrying Value | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding Losses | | Fair Value | HFA securities | $ | 77,470 | | | $ | 0 | | | $ | 0 | | | $ | 77,470 | | | $ | 0 | | | $ | (6,230) | | | $ | 71,240 | | MBS GSE – single-family | 17,802 | | | 0 | | | 0 | | | 17,802 | | | 89 | | | 0 | | | 17,891 | | MBS - Private-label | 158,945 | | | (634) | | | (31,502) | | | 126,809 | | | 53,953 | | | (248) | | | 180,514 | | Total | $ | 254,217 | | | $ | (634) | | | $ | (31,502) | | | $ | 222,081 | | | $ | 54,042 | | | $ | (6,478) | | | $ | 269,645 | |
Table 6.1 - Available-for-Sale Securities by Major Security Type (dollars in thousands)
| | | | | | | | | | | | | | | | | | December 31, 2018 | | | | Amounts Recorded in Accumulated Other Comprehensive Loss | | | | Amortized Cost (1) | | Unrealized Gains | | Unrealized Losses | | Fair Value | State or local housing-finance-agency obligations (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 |
| GSEs | 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 |
| GSEs – single-family | 3,649,964 |
| | 681 |
| | (88,486 | ) | | 3,562,159 |
| GSEs – 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, 2017 | | | | Amounts Recorded in Accumulated Other Comprehensive Loss | | | | Amortized Cost (1) | | Unrealized Gains | | Unrealized Losses | | Fair Value | HFA securities | $ | 42,700 |
| | $ | — |
| | $ | (5,017 | ) | | $ | 37,683 |
| Supranational institutions | 438,667 |
| | — |
| | (20,382 | ) | | 418,285 |
| U.S. government-owned corporations | 313,985 |
| | — |
| | (21,908 | ) | | 292,077 |
| GSEs | 128,744 |
| | — |
| | (7,401 | ) | | 121,343 |
| | 924,096 |
| | — |
| | (54,708 | ) | | 869,388 |
| MBS | |
| | |
| | |
| | |
| U.S. government guaranteed – single-family | 98,720 |
| | 55 |
| | (2,998 | ) | | 95,777 |
| U.S. government guaranteed – multifamily | 447,975 |
| | — |
| | (4,602 | ) | | 443,373 |
| GSEs – single-family | 4,625,333 |
| | 1,194 |
| | (63,535 | ) | | 4,562,992 |
| GSEs – multifamily | 1,350,943 |
| | 2,263 |
| | — |
| | 1,353,206 |
| | 6,522,971 |
| | 3,512 |
| | (71,135 | ) | | 6,455,348 |
| Total | $ | 7,447,067 |
| | $ | 3,512 |
| | $ | (125,843 | ) | | $ | 7,324,736 |
|
_______________________
| | (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 6.2 - Available-for-Sale Securities in a Continuous Unrealized Loss Position (dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | 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 | ) | GSEs | — |
| | — |
| | 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 | ) | GSEs – single-family | 53,122 |
| | (388 | ) | | 3,417,076 |
| | (88,098 | ) | | 3,470,198 |
| | (88,486 | ) | GSEs – 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, 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 | $ | 29,345 |
| | $ | (4,005 | ) | | $ | 8,338 |
| | $ | (1,012 | ) | | $ | 37,683 |
| | $ | (5,017 | ) | Supranational institutions | — |
| | — |
| | 418,285 |
| | (20,382 | ) | | 418,285 |
| | (20,382 | ) | U.S. government-owned corporations | — |
| | — |
| | 292,077 |
| | (21,908 | ) | | 292,077 |
| | (21,908 | ) | GSEs | — |
| | — |
| | 121,343 |
| | (7,401 | ) | | 121,343 |
| | (7,401 | ) | | 29,345 |
| | (4,005 | ) | | 840,043 |
| | (50,703 | ) | | 869,388 |
| | (54,708 | ) | MBS | |
| | |
| | |
| | |
| | |
| | |
| U.S. government guaranteed – single-family | — |
| | — |
| | 70,877 |
| | (2,998 | ) | | 70,877 |
| | (2,998 | ) | U.S. government guaranteed – multifamily | 64,219 |
| | (571 | ) | | 379,154 |
| | (4,031 | ) | | 443,373 |
| | (4,602 | ) | GSEs – single-family | 1,853,323 |
| | (12,661 | ) | | 2,540,006 |
| | (50,874 | ) | | 4,393,329 |
| | (63,535 | ) | | 1,917,542 |
| | (13,232 | ) | | 2,990,037 |
| | (57,903 | ) | | 4,907,579 |
| | (71,135 | ) | Total temporarily impaired | $ | 1,946,887 |
| | $ | (17,237 | ) | | $ | 3,830,080 |
| | $ | (108,606 | ) | | $ | 5,776,967 |
| | $ | (125,843 | ) |
Subsequent to the transfer of securities to available-for-sale, we sold certain available-for-sale private-label MBS which had an amortized cost of $157.1 million and realized a net gain of $30.6 million.
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). The following table summarizes the proceeds from sale and gains and losses on sales of securities for the years ended December 31, 2020, 2019, and 2018. Table 6.3 - Available-for-Sale Securities by Contractual Maturity (dollars in thousands) | | | | | | | | | | | | | | | | | | December 31, 2018 | | December 31, 2017 | Year of Maturity | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | Due in one year or less | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| Due after one year through five years | 55,500 |
| | 49,601 |
| | 42,700 |
| | 37,683 |
| Due after five years through 10 years | 465,248 |
| | 450,102 |
| | 438,667 |
| | 418,285 |
| Due after 10 years | 374,126 |
| | 343,849 |
| | 442,729 |
| | 413,420 |
| | 894,874 |
| | 843,552 |
| | 924,096 |
| | 869,388 |
| MBS (1) | 5,108,028 |
| | 5,006,392 |
| | 6,522,971 |
| | 6,455,348 |
| Total | $ | 6,002,902 |
| | $ | 5,849,944 |
| | $ | 7,447,067 |
| | $ | 7,324,736 |
|
_______________________
| | (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. |
Table 5.10 - Proceeds and Gains (Losses) from Sales of Investment Securities
Note 7 — | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2020 | | 2019 | | 2018 | Available-for-Sale Securities | | | | | | | Proceeds from sale | | $ | 187,366 | | | $ | 0 | | | $ | 0 | | Amortized cost, net of allowance for credit losses | | 156,783 | | | 0 | | | 0 | | | | | | | | | Gross realized gains from sale | | $ | 30,948 | | | $ | 0 | | | $ | 0 | | Gross realized losses from sale | | (365) | | | 0 | | | 0 | | Realized net gain from sale | | $ | 30,583 | | | $ | 0 | | | $ | 0 | | | | | | | | | Held-to-Maturity Securities | | | | | | | Proceeds from sale | | $ | 262,850 | | | $ | 185,177 | | | $ | 0 | | Carrying value | | 176,293 | | | 143,629 | | | 0 | | Noncredit losses recorded in accumulated other comprehensive income | | 39,144 | | | 29,517 | | | 0 | | Realized net gain from sale | | $ | 47,413 | | | $ | 12,031 | | | $ | 0 | |
Allowance for Credit Losses on Available-for-Sale Securities and Held-to-Maturity Securities
Table 7.1 - Held-to-Maturity Securities by Major Security Type (dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | 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 |
| GSEs – single-family | 412,639 |
| | — |
| | 412,639 |
| | 6,861 |
| | (1,389 | ) | | 418,111 |
| GSEs – multifamily | 209,786 |
| | — |
| | 209,786 |
| | 1,728 |
| | — |
| | 211,514 |
| Private-label – residential | 682,124 |
| | (129,135 | ) | | 552,989 |
| | 234,063 |
| | (2,671 | ) | | 784,381 |
| Asset-backed securities (ABS) backed by home equity loans | 6,781 |
| | (18 | ) | | 6,763 |
| | 20 |
| | (256 | ) | | 6,527 |
| | 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | 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 |
| 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 |
|
Table 7.2 - Held-to-Maturity Securities in a Continuous Unrealized Loss Position (dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | |
| | |
| GSEs – single-family | 69,377 |
| | (580 | ) | | 52,237 |
| | (809 | ) | | 121,614 |
| | (1,389 | ) | Private-label – residential | 24,921 |
| | (326 | ) | | 109,296 |
| | (4,336 | ) | | 134,217 |
| | (4,662 | ) | ABS backed by home equity loans | 759 |
| | (5 | ) | | 5,641 |
| | (251 | ) | | 6,400 |
| | (256 | ) | | 95,057 |
| | (911 | ) | | 167,174 |
| | (5,396 | ) | | 262,231 |
| | (6,307 | ) | Total | $ | 101,253 |
| | $ | (920 | ) | | $ | 259,996 |
| | $ | (9,999 | ) | | $ | 361,249 |
| | $ | (10,919 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | 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 | ) |
Table 7.3 - Held-to-Maturity Securities by Contractual Maturity (dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2018 | | December 31, 2017 | Year of Maturity | Amortized Cost | | Carrying Value (1) | | Fair Value | | Amortized Cost | | Carrying Value (1) | | Fair Value | Due in one year or less | $ | 1,043 |
| | $ | 1,043 |
| | $ | 1,047 |
| | $ | 264 |
| | $ | 264 |
| | $ | 267 |
| Due after one year through five years | 6,205 |
| | 6,205 |
| | 6,196 |
| | 11,613 |
| | 11,613 |
| | 11,645 |
| Due after five years through 10 years | 16,865 |
| | 16,865 |
| | 16,639 |
| | 18,245 |
| | 18,245 |
| | 18,226 |
| Due after 10 years | 80,560 |
| | 80,560 |
| | 76,183 |
| | 117,330 |
| | 117,330 |
| | 102,978 |
| | 104,673 |
| | 104,673 |
| | 100,065 |
| | 147,452 |
| | 147,452 |
| | 133,116 |
| MBS (2) | 1,319,503 |
| | 1,190,350 |
| | 1,428,864 |
| | 1,636,887 |
| | 1,478,670 |
| | 1,770,111 |
| Total | $ | 1,424,176 |
| | $ | 1,295,023 |
| | $ | 1,528,929 |
| | $ | 1,784,339 |
| | $ | 1,626,122 |
| | $ | 1,903,227 |
|
_______________________
| | (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. |
We evaluate available-for-sale and held-to-maturity investment securities for credit losses on a quarterly basis. We adopted new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020. See Note 3 — Recently Issued and Adopted Accounting Guidance Notefor additional information. See Item 8 — Other-Than-TemporaryFinancial Statements and Supplementary Data — Notes to Financial Statements — Note 2 — Summary of Significant Accounting Policies — Investment Securities – Other-than-Temporary Impairment in the 2019 Annual Report, for information on the prior methodology for evaluating credit losses.
Upon adoption of new accounting guidance for credit impairment, on January 1, 2020, we recorded through a cumulative effect adjustment to retained earnings an increase in the allowance for credit losses associated with held-to-maturity private-label MBS totaling $5.3 million. Under the previous accounting methodology of security impairment, we recognized net credit losses of $1.2 million and $532 thousand, respectively, during the years ended December 31, 2019 and 2018.
Table 5.11 - Allowance for Credit Losses on Debt Securities (dollars in thousands) | | | | | | | | | | | | | | | | For the Year Ended December 31, 2020 | | | Available-for-Sale | | Held-to-Maturity | Balance at beginning of year | | $ | 0 | | | $ | 0 | | Adjustments for cumulative effect of change in accounting principle | | 0 | | | 5,308 | | Transfers | | 634 | | | (634) | | Reduction of provision for credit losses due to sales of securities | | (126) | | | (3,205) | | Reduction of provision for credit losses | | (143) | | | (1,469) | | Charge-offs | | (365) | | | 0 | | Balance at end of year | | $ | 0 | | | $ | 0 | |
To evaluate investment securities for credit loss at December 31, 2020, we employed the following methodologies, based on the type of security.
Available-for-Sale Securities and Held-to-Maturity Securities. Our available-for-sale and held-to-maturity securities are principally GSE and U.S. government-owned corporations, supranational institutions, state or local housing finance agency obligations, and MBS issued by Ginnie Mae, Freddie Mac, and Fannie Mae that are backed by single-family or multifamily mortgage loans. We only purchase investment-grade securities. At December 31, 2020, 99.4 percent of available-for-sale securities and all held-to-maturity securities, based on amortized cost, were rated single-A, or above, by a NRSRO, based on the lowest long-term credit rating for each security.
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 noneby comparing the security’s fair value to its amortized cost. Impairment may exist when the fair value of ourthe investment is less than its amortized cost (i.e. in an unrealized loss position). At December 31, 2020, certain available-for-sale securities were other-than-temporarily impaired at December 31, 2018. At December 31, 2018, 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 lossesare considered temporary becauseas we expect to recover the entire amortized cost basis on these available-for-sale investment securities in an unrealized loss position and we neither intend to sell these securities nor isdo we consider 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, thereFurther, we have been no shortfallsnot experienced any payment defaults on the instruments. In addition, substantially all of principalthese securities carry an implicit or interestexplicit government guarantee. As a result, 0 allowance for credit losses was recorded on these available-for-sale securities at December 31, 2020.
We evaluate our held-to-maturity securities for impairment on a collective or pooled basis unless an individual assessment is deemed necessary because the securities do not possess similar risk characteristics. As of December 31, 2020, we had 0t established an allowance for credit loss on any available-for-sale security.of our held-to-maturity securities because the securities: (1) were all highly-rated and/or had short remaining terms to maturity, (2) had not experienced, nor did we expect, any payment default on the instruments, and (3) in the case of U.S., GSE, or other agency obligations, carry an implicit or explicit government guarantee such that we consider the risk of nonpayment to be zero.
Held-to-Maturity Securities
HFA Securities and AgencyPrivate-label MBS. We have reviewed ourAs of December 31, 2020, we no longer held any 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 recoveryprivate-label MBS. Table 5.12 presents a roll forward of the amortized cost basis, and we do not consider these investmentsamount of credit losses recognized in earnings prior to be other-than-temporarily impaired at December 31, 2018.
Private-Label Residential MBS and ABS Backed by Home Equity Loans. 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. 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 7.0 percent to an increase of 14.0 percent over the 12-month period beginning OctoberJanuary 1, 2018. For the vast majority of markets, the projected short-term housing price changes range from an increase of 3.0 percent to an increase of 7.0 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 securities2020, for which a credit lossportion of other-than-temporary impairment was recognized during the in other comprehensive income.
year ended
December 31, 2018
Table 5.12 - Roll Forward of the average projected values over the remaining lives of the securities for the significant inputs usedAmounts Related to measure the amount of the credit loss recognizedCredit Loss Recognized into Earnings (dollars in earnings, as well as related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches, over-collateralization, and other 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.thousands)
| | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | | | 2020 | | 2019 | | 2018 | | | Balance at beginning of year | $ | 339,630 | | | $ | 422,035 | | | $ | 452,523 | | | | Additions: | | | | | | | | Credit losses for which other-than-temporary impairment was not previously recognized | 0 | | | 128 | | | 0 | | | | Additional credit losses for which an other-than-temporary impairment charge was previously recognized | 0 | | | 1,084 | | | 532 | | | | Reductions: | | | | | | | | Securities sold or matured during the year | (332,290) | | | (56,710) | | | 0 | | | | 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 | (7,340) | | | (26,907) | | | (31,020) | | | | Balance at end of year | $ | 0 | | | $ | 339,630 | | | $ | 422,035 | | | |
Table 8.1 - Significant Inputs and Current Credit Enhancement for Securities with a Credit Loss in 2018 (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) | | $ | 27,702 |
| | 10.9 | % | | 26.4 | % | | 32.7 | % | | 8.1 | % |
_______________________
| | (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 8.2 - Total MBS Other-than-Temporarily Impaired During the Life of the Security (dollars in thousands)
| | | | | | | | | | | | | | | | | | December 31, 2018 | Other-Than-Temporarily Impaired Investment (1) | Par Value | | Amortized Cost | | Carrying Value | | Fair Value | Private-label residential MBS – Prime | $ | 24,498 |
| | $ | 20,890 |
| | $ | 16,452 |
| | $ | 22,712 |
| Private-label residential MBS – Alt-A | 798,625 |
| | 574,138 |
| | 449,440 |
| | 677,180 |
| ABS backed by home equity loans – Subprime | 154 |
| | 144 |
| | 127 |
| | 146 |
| Total other-than-temporarily impaired securities | $ | 823,277 |
| | $ | 595,172 |
| | $ | 466,019 |
| | $ | 700,038 |
|
_______________________
| | (1) | Securities are classified based on their classifications at the time of issuance.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. |
Table 8.3 - Roll Forward of the Amounts Related to Credit Loss Recognized into Earnings (dollars in thousands)
| | | | | | | | | | | | | | For the Year Ended December 31, | | 2018 | | 2017 | | 2016 | Balance at beginning of year | $ | 452,523 |
| | $ | 490,404 |
| | $ | 533,888 |
| 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 | 532 |
| | 1,454 |
| | 3,295 |
| Reductions: | | | | | | Securities matured during the year | — |
| | (5,600 | ) | | (8,778 | ) | 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(1) | (31,020 | ) | | (33,735 | ) | | (38,016 | ) | Balance at end of year | $ | 422,035 |
| | $ | 452,523 |
| | $ | 490,404 |
|
_______________________
| | (1)
| For the year ended December 31, 2018, the amount excludes an additional $1.4 million for bonds previously paid off. |
Note 96 — 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, 20182020 and 2017,2019, we had advances outstanding with interest rates ranging from zero0.00 percent to 7.72 percent.percent and (0.35) percent to 7.72 percent, respectively. 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 9.1 - Advances Outstanding by Year of Contractual Maturity (dollars in thousands)
| | | | | | | | | | | | | | | | December 31, 2018 | | December 31, 2017 | | Amount | | Weighted Average Rate | | Amount | | Weighted Average Rate | Overdrawn demand-deposit accounts | $ | 12,332 |
| | 2.88 | % | | $ | 5,698 |
| | 1.70 | % | Due in one year or less | 24,029,592 |
| | 2.48 |
| | 21,501,397 |
| | 1.56 |
| Due after one year through two years | 11,413,640 |
| | 2.55 |
| | 7,462,785 |
| | 1.65 |
| Due after two years through three years | 2,832,290 |
| | 2.47 |
| | 2,709,951 |
| | 1.85 |
| Due after three years through four years | 1,648,076 |
| | 2.37 |
| | 2,084,105 |
| | 2.03 |
| Due after four years through five years | 1,980,468 |
| | 2.24 |
| | 2,071,989 |
| | 1.56 |
| Thereafter | 1,351,987 |
| | 2.99 |
| | 1,811,241 |
| | 2.23 |
| Total par value | 43,268,385 |
| | 2.50 | % | | 37,647,166 |
| | 1.66 | % | Premiums | 13,347 |
| | |
| | 17,931 |
| | |
| Discounts | (38,036 | ) | | |
| | (32,757 | ) | | |
| Fair value of bifurcated derivatives (1) | 13,051 |
| | | | (1,591 | ) | | | Hedging adjustments | (64,525 | ) | | |
| | (64,782 | ) | | |
| Total | $ | 43,192,222 |
| | |
| | $ | 37,565,967 |
| | |
|
Table 6.1 - Advances Outstanding by Year of Contractual Maturity (dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | | Amount | | Weighted Average Rate | | Amount | | Weighted Average Rate | Overdrawn demand-deposit accounts | $ | 135 | | | 0.62 | % | | $ | 5,101 | | | 2.05 | % | Due in one year or less | 9,090,900 | | | 1.00 | | | 18,972,466 | | | 1.96 | | Due after one year through two years | 2,281,047 | | | 1.78 | | | 8,600,922 | | | 2.16 | | Due after two years through three years | 2,014,880 | | | 2.37 | | | 2,200,019 | | | 2.16 | | Due after three years through four years | 1,685,056 | | | 1.79 | | | 1,766,314 | | | 2.71 | | Due after four years through five years | 2,687,456 | | | 1.34 | | | 1,726,754 | | | 2.15 | | Thereafter | 945,038 | | | 2.38 | | | 1,312,311 | | | 2.68 | | Total par value | 18,704,512 | | | 1.43 | % | | 34,583,887 | | | 2.10 | % | Premiums | 2,248 | | | | | 3,397 | | | | Discounts | (37,592) | | | | | (41,744) | | | | Fair value of bifurcated derivatives (1) | 44,534 | | | | | 29,983 | | | | Hedging adjustments | 103,300 | | | | | 19,840 | | | | Total (2) | $ | 18,817,002 | | | | | $ | 34,595,363 | | | |
_________________________ | | (1) | At December 31, 2018 and 2017,(1) At December 31, 2020 and 2019, we had certain advances with embedded features that met the requirements to be separated from the host contract and designated as stand-alone derivatives. (2) Excludes accrued interest receivable of $25.8 million and $48.1 million at December 31, 2020 and 2019, respectively.
|
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 6.2 - Advances Outstanding by Year of Contractual Maturity or Next Call Date Table 9.2 - Advances Outstanding by Year of Contractual Maturity or Next Call Date (1) (dollars in thousands)
| | | | | | | | | | December 31, 2018 | | December 31, 2017 | Overdrawn demand-deposit accounts | $ | 12,332 |
| | $ | 5,698 |
| Due in one year or less | 32,748,467 |
| | 25,842,572 |
| Due after one year through two years | 3,913,640 |
| | 3,722,785 |
| Due after two years through three years | 2,672,290 |
| | 2,709,951 |
| Due after three years through four years | 1,261,176 |
| | 1,924,105 |
| Due after four years through five years | 1,362,468 |
| | 1,684,789 |
| Thereafter | 1,298,012 |
| | 1,757,266 |
| Total par value | $ | 43,268,385 |
| | $ | 37,647,166 |
|
(dollars in thousands)_______________________ | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Overdrawn demand-deposit accounts | $ | 135 | | | $ | 5,101 | | Due in one year or less | 10,149,975 | | | 25,116,961 | | Due after one year through two years | 2,095,247 | | | 3,450,922 | | Due after two years through three years | 1,809,880 | | | 1,949,499 | | Due after three years through four years | 1,392,981 | | | 1,461,314 | | Due after four years through five years | 2,335,956 | | | 1,309,679 | | Thereafter | 920,338 | | | 1,290,411 | | Total par value | $ | 18,704,512 | | | $ | 34,583,887 | |
| | (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 offercurrently hold 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 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, 2018 | | December 31, 2017 | Overdrawn demand-deposit accounts | $ | 12,332 |
| | $ | 5,698 |
| Due in one year or less | 25,199,892 |
| | 22,828,547 |
| Due after one year through two years | 11,652,840 |
| | 7,921,035 |
| Due after two years through three years | 2,834,790 |
| | 2,686,951 |
| Due after three years through four years | 1,367,576 |
| | 1,984,705 |
| Due after four years through five years | 1,152,468 |
| | 1,216,989 |
| Thereafter | 1,048,487 |
| | 1,003,241 |
| Total par value | $ | 43,268,385 |
| | $ | 37,647,166 |
|
Table 6.3 - Advances Outstanding by Year of Contractual Maturity or Next Put Date
(dollars in thousands) Table 9.4 - Advances by Current Interest Rate Terms (dollars in thousands)
| | | | | | | | | Par value of advances | December 31, 2018 | | December 31, 2017 | Fixed-rate | | | | Due in one year or less | $ | 23,822,091 |
| | $ | 20,674,897 |
| Due after one year | 9,748,187 |
| | 10,983,396 |
| Total fixed-rate | 33,570,278 |
| | 31,658,293 |
| | | | | Variable-rate | | | | Due in one year or less | 219,832 |
| | 832,198 |
| Due after one year | 9,478,275 |
| | 5,156,675 |
| Total variable-rate | 9,698,107 |
| | 5,988,873 |
| Total par value | $ | 43,268,385 |
| | $ | 37,647,166 |
|
| | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Overdrawn demand-deposit accounts | $ | 135 | | | $ | 5,101 | | Due in one year or less | 10,755,575 | | | 20,240,466 | | Due after one year through two years | 2,201,797 | | | 8,603,422 | | Due after two years through three years | 1,224,380 | | | 2,001,019 | | Due after three years through four years | 1,593,056 | | | 965,814 | | Due after four years through five years | 2,059,531 | | | 1,598,254 | | Thereafter | 870,038 | | | 1,169,811 | | Total par value | $ | 18,704,512 | | | $ | 34,583,887 | |
Table 6.4 - Advances by Current Interest Rate Terms
(dollars in thousands) | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Fixed-rate | | | | Due in one year or less | $ | 8,224,435 | | | $ | 18,733,966 | | Due after one year | 8,518,167 | | | 9,372,625 | | Total fixed-rate | 16,742,602 | | | 28,106,591 | | | | | | Variable-rate | | | | Due in one year or less | 866,600 | | | 243,601 | | Due after one year | 1,095,310 | | | 6,233,695 | | Total variable-rate | 1,961,910 | | | 6,477,296 | | Total par value | $ | 18,704,512 | | | $ | 34,583,887 | |
Credit-Risk
Credit Risk Exposure and Security TermsTerms.. Our potential credit risk from advances is principally concentrated inare primarily made to member financial institutions, including commercial banks, insurance companies, savings institutions, and credit unions. At 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 federal law and FHFA regulations. Specifically, we are required to obtain sufficient collateral to fully secure credit products up to the counterparty’s total outstanding credit obligations plus unused credit lines. Collateral eligible to secure new or renewed advances includes:
•December 31, 2018fully 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 2017,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 had $16.4 billioncan 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.
$12.1 billion, respectively,
Residential mortgage loans are the principal form of advances issued to members with at least $1.0 billion of advances outstanding. These advances were made to six borrowers at both December 31, 2018 and 2017, representing 37.9 percent and 32.3 percent, respectively, of total parcollateral for advances. The estimated value of outstanding advances. For information relatedthe 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 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. The Bank has a lien on and holds the stock of a member in the Bank as further collateral security for all indebtedness of the member to the Bank. 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 also have policies and procedures for validating the reasonableness of our collateral valuations. In addition, we perform collateral verifications based on the risk profile of the borrower and other considerations. Management believes that these policies effectively manage our credit risk from advances.
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 under a tri-party collateral control agreement 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 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 Uniform 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, 2020 and 2019, 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, 2020 and 2019, NaN of our advances were past due, on non accrual status, or considered impaired. In addition, there were 0 troubled debt restructurings related to advances during the years December 31, 2020 and 2019.
Based upon the collateral held as security, our credit extension and collateral policies, management's credit analysis, and the repayment history on advances, andwe have 0t recorded any allowance for credit losses see Note 11 — Allowance for Credit Losses.on our advances at December 31, 2020, and 2019.
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 9.5 - Advances Prepayment Fees (dollars in thousands)
| | | | | | | | | | | | | | | | For the Year Ended December 31, | | | 2018 | | 2017 | | 2016 | Prepayment fees received from borrowers | | $ | 409 |
| | $ | 1,568 |
| | $ | 11,078 |
| Hedging fair-value adjustments on prepaid advances | | 264 |
| | (218 | ) | | (3,664 | ) | Net premiums associated with prepaid advances | | (159 | ) | | (137 | ) | | (2,238 | ) | Deferred recognition of prepayment fees received from borrowers on advance prepayments deemed to be loan modifications | | (298 | ) | | (315 | ) | | (3,100 | ) | Prepayment fees recognized in income on advance restructurings deemed to be extinguishments | | — |
| | — |
| | 1,677 |
| Advance prepayment fees recognized in income, net | | $ | 216 |
| | $ | 898 |
| | $ | 3,753 |
|
Table 6.5 - Advances Prepayment Fees
| | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | | | | 2020 | | 2019 | | 2018 | | | Prepayment fees received from borrowers | | $ | 32,340 | | | $ | 33,809 | | | $ | 409 | | | | Hedging fair-value adjustments on prepaid advances | | (8,013) | | | 1,923 | | | 264 | | | | Net (premiums) discounts associated with prepaid advances | | (299) | | | 157 | | | (159) | | | | Deferred recognition of prepayment fees received from borrowers on advance prepayments deemed to be loan modifications | | 0 | | | (1,793) | | | (298) | | | | Prepayment fees recognized in income on advance restructurings deemed to be extinguishments | | 0 | | | 915 | | | 0 | | | | Advance prepayment fees recognized in income, net | | $ | 24,028 | | | $ | 35,011 | | | $ | 216 | | | |
Note 107 — Mortgage Loans Held for Portfolio
We invest in mortgage loans through the MPFMortgage Partnership Finance® (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 10.1 - Mortgage Loans Held for Portfolio (dollars in thousands)
| | | | | | | | | | December 31, 2018 | | December 31, 2017 | Real estate | |
| | |
| Fixed-rate 15-year single-family mortgages | $ | 392,128 |
| | $ | 466,952 |
| Fixed-rate 20- and 30-year single-family mortgages | 3,839,078 |
| | 3,466,752 |
| Premiums | 67,671 |
| | 70,074 |
| Discounts | (1,800 | ) | | (1,541 | ) | Deferred derivative gains, net | 2,825 |
| | 3,000 |
| Total mortgage loans held for portfolio | 4,299,902 |
| | 4,005,237 |
| Less: allowance for credit losses | (500 | ) | | (500 | ) | Total mortgage loans, net of allowance for credit losses | $ | 4,299,402 |
| | $ | 4,004,737 |
|
Table 10.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (dollars in thousands)
| | | | | | | | | | December 31, 2018 | | December 31, 2017 | Conventional mortgage loans | $ | 3,902,555 |
| | $ | 3,568,473 |
| Government mortgage loans | 328,651 |
| | 365,231 |
| Total par value | $ | 4,231,206 |
| | $ | 3,933,704 |
|
Note 11 — 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. 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 Uniform 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, 2018, and 2017, 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, 2018, and 2017, 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 endedDecember 31, 2018, and 2017.
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, 2018 and 2017. At December 31, 2018 and 2017, no liability to reflect an allowance for credit losses for off-balance-sheet credit exposures was recorded. See Note 20 — Commitments and Contingencies for additional information on our off-balance-sheet credit exposure.
Government MortgageLoans 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. Due to government guarantees or insurance on our government loans, there is no allowance for credit losses for the government mortgage loan portfolio as of December 31, 2018 and 2017. 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.
ConventionalTable 7.1 - Mortgage Loans Held for Portfolio
(dollars in thousands)
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, as discussed below under — 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.
| | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Real estate | | | | Fixed-rate 15-year single-family mortgages | $ | 322,713 | | | $ | 339,042 | | Fixed-rate 20- and 30-year single-family mortgages | 3,547,994 | | | 4,093,416 | | Premiums | 60,050 | | | 66,776 | | Discounts | (1,094) | | | (1,607) | | Deferred derivative gains, net | 3,689 | | | 4,124 | | Total mortgage loans held for portfolio(1) | 3,933,352 | | | 4,501,751 | | Less: allowance for credit losses | (3,100) | | | (500) | | Total mortgage loans, net of allowance for credit losses | $ | 3,930,252 | | | $ | 4,501,251 | |
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. 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. 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(1) Excludes accrued interest receivable 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 historical delinquency migration), applies estimated loss severities,$19.3 million and incorporates available credit 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 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. Key credit quality indicators for mortgage loans include past due loans, nonaccrual loans, loans in process of foreclosure, and impaired loans. Table 11.1 sets forth certain key credit quality indicators for our investments in mortgage loans$23.5 million at December 31, 20182020 and 2019, respectively.
2017 (dollars
Table 7.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (dollars in thousands): | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Conventional mortgage loans | $ | 3,624,557 | | | $ | 4,140,255 | | Government mortgage loans | 246,150 | | | 292,203 | | Total par value | $ | 3,870,707 | | | $ | 4,432,458 | |
Table 11.1 - Recorded Investment in Delinquent Mortgage Loans (dollars in thousands)
| | | | | | | | | | | | | | December 31, 2018 | | Recorded Investment in Conventional Mortgage Loans | | Recorded Investment in Government Mortgage Loans | | Total | Past due 30-59 days delinquent | $ | 23,045 |
| | $ | 10,884 |
| | $ | 33,929 |
| Past due 60-89 days delinquent | 7,019 |
| | 3,344 |
| | 10,363 |
| Past due 90 days or more delinquent | 7,384 |
| | 6,670 |
| | 14,054 |
| Total past due | 37,448 |
| | 20,898 |
| | 58,346 |
| Total current loans | 3,947,096 |
| | 316,285 |
| | 4,263,381 |
| Total mortgage loans | $ | 3,984,544 |
| | $ | 337,183 |
| | $ | 4,321,727 |
| Other delinquency statistics | | | | | | In process of foreclosure, included above (1) | $ | 3,467 |
| | $ | 2,086 |
| | $ | 5,553 |
| Serious delinquency rate (2) | 0.20 | % | | 1.98 | % | | 0.34 | % | Past due 90 days or more still accruing interest | $ | — |
| | $ | 6,670 |
| | $ | 6,670 |
| Loans on nonaccrual status (3) | $ | 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.
|
| | | | | | | | | | | | | | 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.
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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.credit-enhancement. The credit risk analysis of our conventional loans is performed at the individual master commitment level to determine the credit enhancementscredit-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.
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 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 assetsAssets 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”an equivalent of a single-A-minus rated MBS. This revision had no impact on the 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, 20182020 and 2017,2019, the amount of first-loss account remaining for losses allocable to us was $25.3$30.4 million and $22.2$28.5 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.
Relief to Borrowers During the COVID-19 Pandemic. We have elected to apply Section 4013 of the CARES Act to our loan modifications that qualify under the CARES Act. As a result, we have elected to suspend TDR accounting for eligible modifications under Section 4013 of the CARES Act. As of December 31, 2020, we had $1.3 million of these modifications outstanding. See Note 2 — Summary of Significant Accounting Policies for additional information.
Our Servicers may grant a forbearance period to borrowers who have requested forbearance based on COVID-19 related difficulties regardless of the status of the loan at the time of the request. We continue to apply our accounting policy for past due loans and charge-offs to loans during the forbearance period unless there is a legal modification made to update the terms of the mortgage loan contract. The accrual status for loans under forbearance will be driven by the past due status of the loan based on its contractual terms.
As of December 31, 2020, we held approximately $62.8 million in par value of conventional mortgage loans that were in a forbearance plan as a result of COVID-19. Of these loans, $4.1 million had a current payment status, $2.5 million were 30 to 59 days past due, $8.6 million were 60 to 89 days past due, and $47.6 million were greater than 90 days past due and in nonaccrual status. The $62.8 million of conventional mortgage loans in forbearance represents 1.6 percent of our mortgage loans held for portfolio at December 31, 2020. In addition, we had approximately $12.5 million in par value of government mortgage loans in a forbearance plan as a result of COVID-19.
Payment Status of Mortgage Loans. Payment status is a key credit quality indicator for conventional mortgage loans and allows us to monitor the migration of past due loans. Past due loans are those where the borrower has failed to make timely payments of principal and/or interest in accordance with the terms of the loan. Other delinquency statistics include non-accrual loans and loans in process of foreclosure. Tables 7.3 and 7.4 present the payment status for conventional mortgage loans and other delinquency statistics for all mortgage loans at December 31, 2020 and 2019.
Table 7.3 - Credit Quality Indicator for Conventional Mortgage Loans (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | | Year of Origination | | | Payment Status at Amortized Cost(1) | | Prior to 2016 | | 2016 to 2020 | | Total | Past due 30-59 days delinquent | | $ | 11,743 | | | $ | 25,058 | | | $ | 36,801 | | Past due 60-89 days delinquent | | 5,263 | | | 11,178 | | | 16,441 | | Past due 90 days or more delinquent | | 20,894 | | | 43,529 | | | 64,423 | | Total past due | | 37,900 | | | 79,765 | | | 117,665 | | Total current loans | | 1,246,691 | | | 2,317,975 | | | 3,564,666 | | Total mortgage loans | | $ | 1,284,591 | | | $ | 2,397,740 | | | $ | 3,682,331 | |
| | | | | | | December 31, 2019 | Payment Status at Recorded Investment(1) | Conventional Mortgage Loans | Past due 30-59 days delinquent | $ | 36,336 | | Past due 60-89 days delinquent | 6,911 | | Past due 90 days or more delinquent | 10,696 | | Total past due | 53,943 | | Total current loans | 4,171,676 | | Total mortgage loans | $ | 4,225,619 | | _________________________(1) The amortized cost at December 31, 2020, excludes accrued interest receivable whereas the recorded investment at December 31, 2019, includes accrued interest receivable.
Table 7.4 - Other Delinquency Statistics of Mortgage Loans (dollars in thousands) | | | | | | | | | | | | | | | | | | | December 31, 2020 | | Amortized Cost in Conventional Mortgage Loans | | Amortized Cost in Government Mortgage Loans | | Total | In process of foreclosure (1) | $ | 1,762 | | | $ | 1,041 | | | $ | 2,803 | | Serious delinquency rate (2) | 1.75 | % | | 6.04 | % | | 2.02 | % | Past due 90 days or more still accruing interest | $ | 0 | | | $ | 5,592 | | | $ | 5,592 | | Loans on nonaccrual status (3) | $ | 65,039 | | | $ | 10,101 | | | $ | 75,140 | |
| | | | | | | | | | | | | | | | | | | December 31, 2019 | | Recorded Investment in Conventional Mortgage Loans | | Recorded Investment in Government Mortgage Loans | | Total | In process of foreclosure (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 | $ | 0 | | | $ | 5,570 | | | $ | 5,570 | | Loans on nonaccrual status | $ | 11,510 | | | $ | 0 | | | $ | 11,510 | | _______________________(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) As of December 31, 2020, the conventional and government mortgage loans on non-accrual status that did not have an associated allowance for credit losses amounted to $31.8 million and $10.1 million, respectively.
Allowance for Credit Losses onfor Mortgage Loans.
Conventional Mortgage Loans.Table 11.2Using Financial Instruments - Credit Losses accounting guidance, conventional loans are evaluated collectively when similar risk characteristics exist. Conventional loans that do not share risk characteristics with other pools are evaluated for expected credit losses on an individual basis. We determine our allowance for credit losses on conventional loans through analyses that include consideration of various loan portfolio and collateral-related characteristics, such as past performance, current conditions, and reasonable and supportable forecasts of expected economic conditions. We use a discounted cash flow model to project our expected losses. We use a third-party model to project cash flows to estimate the expected credit losses over the life of the loans. The model relies on a number of inputs, such as both current and forecasted property values and interest rates as well as historical borrower behavior. We incorporate associated credit enhancements and expected recoveries, if any, to determine our estimate of expected credit losses.
Certain conventional loans may be evaluated for credit losses by using the practical expedient for collateral dependent assets. 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. We estimate the fair value of this collateral by using a third-party property valuation model. The expected credit loss of a collateral dependent mortgage loan is equal to the difference between the amortized cost of the loan and the estimated fair value of the collateral, less estimated selling costs. We will reserve for these estimated losses or record a direct charge-off of the loan balance if certain triggering criteria are met.
Prior to the adoption of the Financial Instruments - Credit Loss accounting guidance, our allowance for mortgage loans consisted of an estimate of incurred losses from individually evaluated mortgage loans, including collateral dependent loans; collectively evaluated mortgage loans; and an estimate of additional credit losses on mortgage loans. The incurred loss of an individually evaluated mortgage loan was 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 have included expected proceeds from primary mortgage insurance and other applicable credit enhancements. Certain conventional mortgage loans, primarily impaired mortgage loans that were considered collateral dependent, were specifically identified for purposes of calculating the allowance for credit losses. The credit risk analysis of conventional loans evaluated collectively for impairment considered loan pool specific attribute data at the master commitment pool level (including historical delinquency migration) applies estimated loss severities, and incorporated available credit enhancements to establish our best estimate of probable incurred losses at the reporting date. We then estimated how many loans in each payment status category may migrate to a realized loss position and then applied a loss severity factor to estimate losses incurred at the statement of condition date. The losses were then reduced by the probable cash flows resulting from available credit enhancements. We also assessed a factor for the margin of imprecision to the estimation of credit losses for the homogeneous loan population. This amount represented 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 was intended to cover other inherent losses that may not have been captured in our methodology.
0Table 7.5 presents a roll forward of the allowance for credit losses on conventional mortgage loans for the years ended December 31, 2018, 2017,2020, 2019, and 2016, as well as2018. As required by prior accounting guidance for determining the allowance for credit losses on mortgage loans, table 7.5 also presents the recorded investment in mortgage loans by impairment methodology at December 31, 2018, 2017,2019 and 2016.2018. 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 11.2 - Allowance for Credit Losses on Conventional Mortgage Loans (dollars in thousands)
| | | | | | | | | | | | | | 2018 | | 2017 | | 2016 | Allowance for credit losses | | | | | | Balance, beginning of year | $ | 500 |
| | $ | 650 |
| | $ | 1,025 |
| Recoveries (charge-offs) | 34 |
| | (54 | ) | | (98 | ) | Reduction of provision for credit losses | (34 | ) | | (96 | ) | | (277 | ) | Balance, end of year | $ | 500 |
| | $ | 500 |
| | $ | 650 |
| Ending balance, individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
| Ending balance, collectively evaluated for impairment | $ | 500 |
| | $ | 500 |
| | $ | 650 |
| Recorded investment, end of year (1) | | | | | | Individually evaluated for impairment | $ | 15,402 |
| | $ | 17,668 |
| | $ | 22,945 |
| Collectively evaluated for impairment | $ | 3,969,142 |
| | $ | 3,632,833 |
| | $ | 3,288,370 |
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Table 7.5 - Allowance for Credit Losses on Conventional Mortgage Loans(dollars in thousands) | | | | | | | | | | | | | | | | | | | | | 2020 | | 2019 | | 2018 | | | Allowance for credit losses | | | | | | | | Balance, beginning of year | $ | 500 | | | $ | 500 | | | $ | 500 | | | | Adjustment for cumulative effect of change in accounting principle | 2,221 | | | 0 | | | 0 | | | | (Charge-offs) recoveries | (207) | | | (85) | | | 34 | | | | | | | | | | | | Provision for (reduction of) credit losses | 586 | | | 85 | | | (34) | | | | Balance, end of year | $ | 3,100 | | | $ | 500 | | | $ | 500 | | | | Ending balance, individually evaluated for impairment | | | $ | 0 | | | $ | 0 | | | | Ending balance, collectively evaluated for impairment | | | $ | 500 | | | $ | 500 | | | | Recorded investment, end of year (1) | | | | | | | | Individually evaluated for impairment | | | $ | 13,395 | | | $ | 15,402 | | | | Collectively evaluated for impairment | | | $ | 4,212,224 | | | $ | 3,969,142 | | | |
_________________________ | | (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. |
(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 below under — Government Mortgage Loans Held for Portfolio.
Government MortgageLoans 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. Due to government guarantees or insurance on our government loans, there is 0 allowance for credit losses for the government mortgage loan portfolio as of December 31, 2020 and 2019. Additionally, government mortgage loans, other than government mortgage loans that have been granted temporary forbearance, 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.
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.difficulties, except for troubled debt restructurings meeting the provisions of the CARES Act as described in Note 2 – Summary of Significant Accounting Policies. 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 yield 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, 20182020 and 2017,2019, the recorded investment of mortgage loans classified as troubled debt restructurings were $8.5$7.7 million and $8.4$7.2 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, 2018 and 2017, 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, 2018 and 2017.
Note 128 — 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.accounting provided that we document a non-speculative use.
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, firm 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 securities firms, and in a few instances, with their affiliates with unconditional guarantees provided by the respective major banks.bank or securities firm. 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 indices we utilize in our derivative transactions are LIBOR, the overnight-index swap (OIS) rate based on the federal funds effective rate, and the Secured Overnight Financing Rate (SOFR). •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. •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.
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 index we utilize in most of our derivative transactions is LIBOR.
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| | • | 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.
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| | • | 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.
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| | • | 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.
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| | • | 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.
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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 (losses) gains 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 securities 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 losses(losses) gains 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 (losses) 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 abilityoption 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 forto hedge the cost of anticipated future issuance of fixed-rate CO bonds to lock in a spread between an earning asset and the cost of funding.against potential rising interest rates. 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 within 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 12.1 - Fair Value of Derivative Instruments (dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2018 | | December 31, 2017 | | Notional Amount of Derivatives | | Derivative Assets | | Derivative Liabilities | | Notional Amount of Derivatives | | Derivative Assets | | Derivative Liabilities | Derivatives designated as hedging instruments | |
| | |
| | |
| | | | | | | Interest-rate swaps | $ | 11,980,699 |
| | $ | 12,811 |
| | $ | (296,324 | ) | | $ | 14,118,994 |
| | $ | 52,557 |
| | $ | (332,830 | ) | Forward-start interest-rate swaps | 282,000 |
| | — |
| | (753 | ) | | 481,200 |
| | — |
| | (9,807 | ) | Total derivatives designated as hedging instruments | 12,262,699 |
| | 12,811 |
| | (297,077 | ) | | 14,600,194 |
| | 52,557 |
| | (342,637 | ) | | | | | | | | | | | | | Derivatives not designated as hedging instruments | | | | | | | | | | | | Economic hedges: | | | | | | | | | | | | Interest-rate swaps | 927,800 |
| | 682 |
| | (12,475 | ) | | 1,166,900 |
| | 3,512 |
| | (4,688 | ) | Mortgage-delivery commitments (1) | 50,773 |
| | 339 |
| | — |
| | 42,918 |
| | 169 |
| | (27 | ) | Total derivatives not designated as hedging instruments | 978,573 |
| | 1,021 |
| | (12,475 | ) | | 1,209,818 |
| | 3,681 |
| | (4,715 | ) | Total notional amount of derivatives | $ | 13,241,272 |
| | |
| | |
| | $ | 15,810,012 |
| | |
| | |
| Total derivatives before netting and collateral adjustments | |
| | 13,832 |
| | (309,552 | ) | | | | 56,238 |
| | (347,352 | ) | Netting adjustments and cash collateral, including related accrued interest (2) | |
| | 8,571 |
| | 53,752 |
| | | | (21,452 | ) | | 46,902 |
| Derivative assets and derivative liabilities | |
| | $ | 22,403 |
| | $ | (255,800 | ) | | | | $ | 34,786 |
| | $ | (300,450 | ) |
_______________________
| | (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 $62.8 million and $25.8 million at December 31, 2018, and 2017, 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 $471,000 and $350,000 at December 31, 2018 and 2017.
|
Table 12.2 - Net Gains and Losses on Derivatives and Hedging Activities (dollars in thousands)
| | | | | | | | | | | | | | | | For the Year Ended December 31, | | | 2018 | | 2017 | | 2016 | Derivatives designated as hedging instruments | | | | | | | Interest-rate swaps | | $ | 2,027 |
| | $ | (2,308 | ) | | $ | (6,998 | ) | Forward-start interest-rate swaps | | 227 |
| | 280 |
| | 29 |
| Total net gains (losses) related to derivatives designated as hedging instruments | | 2,254 |
| | (2,028 | ) | | (6,969 | ) | | | | | | | | Derivatives not designated as hedging instruments: | | | | | | | Economic hedges: | | | | | | | Interest-rate swaps | | 682 |
| | 434 |
| | (1,352 | ) | Mortgage-delivery commitments | | 421 |
| | 1,768 |
| | (270 | ) | Total net gains (losses) related to derivatives not designated as hedging instruments | | 1,103 |
| | 2,202 |
| | (1,622 | ) | | | | | | | | Price alignment amount(1) | | (1,021 | ) | | 377 |
| | — |
| | | | | | | | Net gains (losses) on derivatives and hedging activities | | $ | 2,336 |
| | $ | 551 |
| | $ | (8,591 | ) |
Table 8.1 - Fair Value of Derivative Instruments (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | | Notional Amount of Derivatives | | Derivative Assets | | Derivative Liabilities | | Notional Amount of Derivatives | | Derivative Assets | | Derivative Liabilities | Derivatives designated as hedging instruments | | | | | | | | | | | | Interest-rate swaps | $ | 9,960,475 | | | $ | 6,044 | | | $ | (41,000) | | | $ | 12,128,105 | | | $ | 14,734 | | | $ | (12,805) | | Forward-start interest-rate swaps | 17,000 | | | 0 | | | (14) | | | 17,000 | | | 19 | | | 0 | | Total derivatives designated as hedging instruments | 9,977,475 | | | 6,044 | | | (41,014) | | | 12,145,105 | | | 14,753 | | | (12,805) | | | | | | | | | | | | | | Derivatives not designated as hedging instruments | | | | | | | | | | | | Interest-rate swaps | 5,536,822 | | | 3,918 | | | (47,756) | | | 2,902,300 | | | 349 | | | (31,000) | | | | | | | | | | | | | | Mortgage-delivery commitments (1) | 28,386 | | | 220 | | | 0 | | | 49,911 | | | 227 | | | 0 | | Total derivatives not designated as hedging instruments | 5,565,208 | | | 4,138 | | | (47,756) | | | 2,952,211 | | | 576 | | | (31,000) | | Total notional amount of derivatives | $ | 15,542,683 | | | | | | | $ | 15,097,316 | | | | | | Total derivatives before netting and collateral adjustments | | | 10,182 | | | (88,770) | | | | | 15,329 | | | (43,805) | | Netting adjustments and cash collateral, including related accrued interest (2) | | | 151,056 | | | 64,708 | | | | | 144,402 | | | 33,534 | | Derivative assets and derivative liabilities | | | $ | 161,238 | | | $ | (24,062) | | | | | $ | 159,731 | | | $ | (10,271) | |
_______________________ | | (1) | Represents the amount for derivatives for which variation margin is characterized as a daily settlement amount. |
(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 including accrued interest posted was $215.8 million and $178.5 million at December 31, 2020, and 2019, respectively. The change in cash collateral posted is included in the net change in interest-bearing deposits in the statement of cash flows. There was 0 cash collateral and related accrued interest received at December 31, 2020. Cash collateral including accrued interest received was $561 thousand at December 31, 2019. Table 12.3 - Effect of Fair Value Hedge Relationships (dollars in thousands)
| | | | | | | | | | | | | | | | | | For the Year Ended December 31, 2018 | | 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 | $ | 447 |
| | $ | 257 |
| | $ | 704 |
| | $ | 51,522 |
| Investments | 43,771 |
| | (42,022 | ) | | 1,749 |
| | (26,040 | ) | COs – bonds | (5,680 | ) | | 5,254 |
| | (426 | ) | | (27,895 | ) | Total | $ | 38,538 |
| | $ | (36,511 | ) | | $ | 2,027 |
| | $ | (2,413 | ) | | | | | | | | | | For the Year Ended December 31, 2017 | | 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 | $ | 52,054 |
| | $ | (52,633 | ) | | $ | (579 | ) | | $ | (24,663 | ) | Investments | 20,748 |
| | (19,011 | ) | | 1,737 |
| | (32,053 | ) | COs – bonds | 4,610 |
| | (8,076 | ) | | (3,466 | ) | | 6,694 |
| Total | $ | 77,412 |
| | $ | (79,720 | ) | | $ | (2,308 | ) | | $ | (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 | ) |
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.______________
| | (1) | The net interest on derivatives in fair-value hedge relationships is presented in the statement of operations as interest income or interest expense of the respective hedged item. |
Table 12.4 - Effect of Cash Flow Hedge Relationships (dollars in thousands)
| | | | | | | | | | | | | | | | Derivatives and Hedged Items in Cash Flow Hedging Relationships | | Gain (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 Recognized in Net Losses on Derivatives and Hedging Activities (Ineffective Portion) | Forward-start Interest-rate swaps - CO bonds | | | | | | | | | For the Year Ended December 31, 2018 | | $ | 7,907 |
| | Interest expense | | $ | (3,171 | ) | | $ | 227 |
| For the Year Ended December 31, 2017 | | (2,838 | ) | | Interest expense | | (10,575 | ) | | 280 |
| For the Year Ended December 31, 2016 | | (732 | ) | | Interest expense | | (23,767 | ) | | 29 |
|
Tables 8.2 presents the net gains (losses) on qualifying fair-value hedging relationships. Beginning on January 1, 2019, gains (losses) on derivatives include unrealized changes in fair value as well as net interest settlements.
Table 8.2 - Net Gains (Losses) on Fair Value Hedging Relationships (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, 2020 | | | Advances | | Available-for-sale Securities | | CO Bonds | Total interest income (expense) in the statements of operations | | $ | 400,286 | | | $ | 63,243 | | | $ | (374,449) | | | | | | | | | Gains (losses) on hedging relationships | | | | | | | Changes in fair value: | | | | | | | Derivatives | | $ | (82,885) | | | $ | (270,047) | | | $ | 25,811 | | Hedged items | | 81,859 | | | 263,226 | | | (27,353) | | Net changes in fair value before price alignment interest | | (1,026) | | | (6,821) | | | (1,542) | | Price alignment interest(1) | | 484 | | | 1,373 | | | (204) | | Net interest settlements on derivatives(2)(3) | | (53,615) | | | (70,317) | | | 23,843 | | Net (losses) gains on qualifying hedging relationships | | (54,157) | | | (75,765) | | | 22,097 | | Amortization/accretion of discontinued hedging relationships | | (1,937) | | | 0 | | | (3,707) | | Net gains (losses) on derivatives and hedging activities recorded in net interest income | | $ | (56,094) | | | $ | (75,765) | | | $ | 18,390 | |
| | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, 2019 | | | Advances | | Available-for-sale Securities | | CO Bonds | Total income (expense) in the statements of operations | | $ | 854,599 | | | $ | 115,942 | | | $ | (598,585) | | | | | | | | | Gains (losses) on 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 hedging relationships | | 41,443 | | | (21,425) | | | (18,582) | | Amortization/accretion of discontinued hedging relationships | | (1,934) | | | 0 | | | (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, 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 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 hedging relationships | | 52,226 | | | (24,291) | | | (28,321) | | Amortization/accretion of discontinued hedging relationships | | (1,475) | | | 0 | | | 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) | |
_______________________ (1) Relates to derivatives for which variation margin payments are characterized as daily settled contracts. (2) Represents interest income/expense on derivatives in qualifying fair-value hedging relationships. Net interest settlements on derivatives that are not in qualifying fair-value hedging relationships are reported in other income. (3) Excludes the interest income/expense of the respective hedged items recorded in net interest income. (4) In 2018, net changes in fair value were recorded in net gains on derivatives and hedging activities in other income.
Tables 8.3 presents the net gains (losses) on qualifying cash flow hedging relationships.
Table 8.3 - Net Gains (Losses) on Cash Flow Hedging Relationships (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | | 2020 | | 2019 | | 2018 | Forward-start interest rate swaps - CO Bonds | | | | | | | Losses reclassified from accumulated other comprehensive loss into interest expense | | $ | (7,029) | | | $ | (5,218) | | | $ | (3,171) | | (Losses) gains recognized in other comprehensive income | | (1,187) | | | (6,131) | | | 7,907 | | Gains recognized in net gains on derivatives and hedging activities | | | | | | 227 | |
For the years endedDecember 31, 2018, 2017,2020, 2019, and 2016,2018, 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, 2018,2020, the maximum length of time over which we are hedging our exposure to the variability in future cash flows for forecasted transactions is one year. three years.
As of December 31, 2018,2020, 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 $6.0 million.
Table 8.4 - Cumulative Basis Adjustments for Fair-Value Hedges (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | Line Item in Statement of Condition | | 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 | | $ | 4,679,957 | | | $ | 135,397 | | | $ | 12,437 | | | $ | 147,834 | | Available-for-sale securities | | 4,316,364 | | | 498,597 | | | 0 | | | 498,597 | | Consolidated obligation bonds | | 1,754,736 | | | 22,513 | | | 39,233 | | | 61,746 | |
_______________________ (1) Includes only the portion of amortized cost representing the hedged items in fair-value hedging relationships.
Table 8.5 - Net Gains and Losses on Derivatives and Hedging Activities (dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | | 2020 | | 2019 | | 2018 | Derivatives designated as hedging instruments: | | | | | | | Total net gains related to fair-value hedges(1) | | | | | | $ | 2,027 | | Total net gains related to cash-flow hedges(2) | | | | | | 227 | | Total net gains related to derivatives designated as hedging instruments | | | | | | 2,254 | | | | | | | | | Derivatives not designated as hedging instruments: | | | | | | | Economic hedges: | | | | | | | Interest-rate swaps | | $ | (51,187) | | | $ | (614) | | | 682 | | Mortgage-delivery commitments | | 1,405 | | | 1,945 | | | 421 | | Total net (losses) gains related to derivatives not designated as hedging instruments | | (49,782) | | | 1,331 | | | 1,103 | | | | | | | | | Other(3) | | 108 | | | 88 | | | (1,021) | | | | | | | | | Net (losses) gains on derivatives and hedging activities | | $ | (49,674) | | | $ | 1,419 | | | $ | 2,336 | |
______________________ (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.
Impacts on Statement of Cash Flows. Due to declines in market values, from our perspective, of cleared derivatives during the year ended December 31, 2020, there was an increase in variation margin posted on cleared derivatives to the DCOs totaling $375.7 million. On the statement of cash flows, $321.9 million of the variation margin cash payment is included in net change in derivatives and hedging activities, as an operating activity, while $53.8 million of the variation margin cash payment is included in net payments on derivatives with a financing element, as a financing activity.
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 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, 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 1410 — 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, 2018,2020, was $294.6$77.4 million for which we had delivered collateral with a post-haircut value of $271.4$76.7 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 12.58.6 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, 20182020. .
Table 8.6 - Post Haircut Value of Incremental Collateral to be Delivered as of December 31, 2020
Table 12.5 - Post Haircut Value of Incremental Collateral to be Delivered as of December 31, 2018 (dollars in thousands)
| | | | | | | | Ratings Downgrade (1) | | | From | | To | | Incremental Collateral | AA+ | | AA or AA- | | $ | 622 |
| AA- | | A+, A or A- | | 15,000 |
| A- | | below A- | | 13,578 |
|
_______________________
| | | | | | | | | | | | | | | | | | Ratings Downgrade(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. | | | From | | To | | Incremental Collateral | | AA+ | | AA or AA- | | $ | 244 | | | AA- | | A+, A or A- | | 0 | | | A- | | below A- | | 6,331 | | |
_______________________ (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. Based upon certain amendments, effective January 3, 2017, made by CME Inc. to its rulebook,their rulebooks, we began to characterize variation margin payments related to CME Inc. contracts as daily settlement payments, rather than collateral. However, throughout 2017, we continued to characterize our variation margin related to LCH Ltd. contracts as cash collateral. On January 16, 2018, based on a change to LCH Ltd.'s rulebook, we began to characterize variation margin payments related to LCH Ltd. contracts as daily settlement payments, rather than cash collateral. At both DCOs, posted initial margin has been, and continues to be,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 or any other considerations at December 31, 2018.2020.
Offsetting of Certain Derivatives. We present derivatives, any related cash collateral 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 12.68.7 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, 20182020 and 2017,2019, and the fair value of derivatives that are not subject to such netting. Derivatives subject to netting include any related cash collateral received from or pledged to counterparties.
Table 8.7 - Netting of Derivative Assets and Derivative Liabilities
Table 12.6 - Netting of Derivative Assets and Derivative Liabilities (dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2018 | | 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 | Derivative Assets | | | | | | | | | | | | Uncleared | $ | 12,861 |
| $ | (11,885 | ) | | $ | 339 |
| | $ | 1,315 |
| | $ | (396 | ) | $ | — |
| | $ | 919 |
| Cleared | 631 |
| 20,457 |
| | | | 21,088 |
| | — |
| — |
| | 21,088 |
| Total | | | | | | $ | 22,403 |
| | | | | $ | 22,007 |
| | | | | | | | | | | | | Derivative Liabilities | | | | | | | | | | | | Uncleared | $ | (306,848 | ) | $ | 51,048 |
| | $ | — |
| | $ | (255,800 | ) | | $ | 6,104 |
| $ | 237,054 |
| | $ | (12,642 | ) | Cleared | (2,704 | ) | 2,704 |
| | | | — |
| | — |
| — |
| | — |
| Total | | | | | | $ | (255,800 | ) | | | | | $ | (12,642 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | 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 | Derivative Assets | | | | | | | | | | | | Uncleared | $ | 5,215 | | $ | (4,899) | | | $ | 220 | | | $ | 536 | | | $ | 0 | | $ | 0 | | | $ | 536 | | Cleared | 4,747 | | 155,955 | | | | | 160,702 | | | 0 | | 0 | | | 160,702 | | Total | | | | | | $ | 161,238 | | | | | | $ | 161,238 | | | | | | | | | | | | | | Derivative Liabilities | | | | | | | | | | | | Uncleared | $ | (82,625) | | $ | 58,563 | | | $ | 0 | | | $ | (24,062) | | | $ | 0 | | $ | 23,087 | | | $ | (975) | | Cleared | (6,145) | | 6,145 | | | | | 0 | | | 0 | | 0 | | | 0 | | Total | | | | | | $ | (24,062) | | | | | | $ | (975) | |
_______________________ | | (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, 2018, we had additional net credit exposure of $639,000 due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position. |
(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, 2020, we had additional net credit exposure of $925 thousand due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position.
| | | 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 | | | | | | | | | | Derivative Assets | | | | | | | | | | Uncleared | $ | 15,587 |
| $ | (13,481 | ) | | $ | 169 |
| | $ | 2,275 |
| | $ | — |
| $ | — |
| | $ | 2,275 |
| Uncleared | $ | 4,950 | | $ | (3,519) | | | $ | 227 | | | $ | 1,658 | | | $ | (995) | | $ | 0 | | | $ | 663 | | Cleared | 40,482 |
| (7,971 | ) | | | | 32,511 |
| | — |
| — |
| | 32,511 |
| Cleared | 10,152 | | 147,921 | | | 158,073 | | | 0 | | 0 | | | 158,073 | | Total | | | | | $ | 34,786 |
| | | | $ | 34,786 |
| Total | | $ | 159,731 | | | $ | 158,736 | | | | | | | | | | | | | | | | Derivative Liabilities | | | | | | | | | | Derivative Liabilities | | Uncleared | $ | (335,289 | ) | $ | 34,866 |
| | $ | (27 | ) | | $ | (300,450 | ) | | $ | 7,627 |
| $ | 280,486 |
| | $ | (12,337 | ) | Uncleared | $ | (42,199) | | $ | 31,928 | | | $ | 0 | | | $ | (10,271) | | | $ | 82 | | $ | 9,333 | | | $ | (856) | | Cleared | (12,036 | ) | 12,036 |
| | | | — |
| | — |
| — |
| | — |
| Cleared | (1,606) | | 1,606 | | | 0 | | | 0 | | 0 | | | 0 | | Total | | | | | $ | (300,450 | ) | | | | $ | (12,337 | ) | Total | | $ | (10,271) | | | $ | (856) | |
_______________________ | | (1) | (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, we had additional net credit exposure of $502,000 due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position. |
(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, 2019, we had additional net credit exposure of $300 thousand due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position.
Note 139 — Deposits
We offer demand overnight and termovernight deposits for members and qualifying nonmembers.nonmembers, and prior to February 19, 2021, we offered term deposits to our 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, which we classify 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 rate paid on average deposits during 20182020 and 20172019 was 1.070.10 percent and 0.761.16 percent, respectively.
Table 13.1 - Deposits (dollars in thousands)
| | | | | | | | | | December 31, 2018 | | December 31, 2017 | Interest-bearing | |
| | | Demand and overnight | $ | 444,486 |
| | $ | 447,700 |
| Term | 800 |
| | — |
| Other | 2,961 |
| | 3,222 |
| Noninterest-bearing | |
| | |
| Other | 26,631 |
| | 26,147 |
| Total deposits | $ | 474,878 |
| | $ | 477,069 |
|
Table 9.1 - Deposits
| | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Interest-bearing | | | | Demand and overnight | $ | 975,469 | | | $ | 613,143 | | Term | 0 | | | 800 | | Other | 2,525 | | | 2,589 | | Noninterest-bearing | | | | Other | 110,993 | | | 57,777 | | Total deposits | $ | 1,088,987 | | | $ | 674,309 | |
Note 1410 — 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 2016 – 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 $746.8 billion and $1.0 trillion at both December 31, 20182020 and 2017,2019, respectively. 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;Mac; 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.
CO Bonds.
Table 10.1 - CO Bonds Outstanding by Contractual Maturity
(dollars in thousands)
Table 14.1 - CO Bonds Outstanding by Contractual Maturity (dollars in thousands)
| | | | December 31, 2018 | | December 31, 2017 | | December 31, 2020 | | December 31, 2019 | 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 | $ | 9,638,270 |
| | 2.01 | % | | $ | 12,186,510 |
| | 1.35 | % | Due in one year or less | $ | 10,608,465 | | | 0.81 | % | | $ | 9,455,725 | | | 2.03 | % | Due after one year through two years | 5,375,845 |
| | 2.24 |
| | 5,288,470 |
| | 1.63 |
| Due after one year through two years | 3,956,120 | | | 1.35 | | | 6,442,960 | | | 2.02 | | Due after two years through three years | 3,864,560 |
| | 2.17 |
| | 3,128,240 |
| | 1.81 |
| Due after two years through three years | 1,569,315 | | | 2.20 | | | 2,154,920 | | | 2.18 | | Due after three years through four years | 1,891,975 |
| | 2.20 |
| | 2,759,460 |
| | 1.74 |
| Due after three years through four years | 1,141,430 | | | 2.43 | | | 1,319,915 | | | 2.45 | | Due after four years through five years | 1,338,515 |
| | 2.39 |
| | 1,572,775 |
| | 2.00 |
| Due after four years through five years | 1,776,100 | | | 1.12 | | | 1,211,080 | | | 2.48 | | Thereafter | 3,792,150 |
| | 3.25 |
| | 3,389,695 |
| | 2.76 |
| Thereafter | 2,312,155 | | | 3.58 | | | 3,220,205 | | | 3.33 | | Total par value | 25,901,315 |
| | 2.30 | % | | 28,325,150 |
| | 1.70 | % | Total par value | 21,363,585 | | | 1.42 | % | | 23,804,805 | | | 2.26 | % | Premiums | 88,434 |
| | |
| | 90,836 |
| | |
| Premiums | 58,537 | | | | | 63,056 | | | | Discounts | (16,133 | ) | | |
| | (15,685 | ) | | |
| Discounts | (12,278) | | | | | (11,434) | | | | Hedging adjustments | (60,932 | ) | | |
| | (55,678 | ) | | |
| Hedging adjustments | 61,746 | | | | | 32,066 | | | | | $ | 25,912,684 |
| | |
| | $ | 28,344,623 |
| | |
| | Total | | Total | $ | 21,471,590 | | | | | $ | 23,888,493 | | | |
_______________________ | | (1) | The CO bonds' weighted-average rate excludes concession fees. |
(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 LIBORSOFR and SOFR.LIBOR. 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 14.2 - CO Bonds Outstanding by Call Feature (dollars in thousands)
| | | | | | | | | Par Value of CO bonds | December 31, 2018 | | December 31, 2017 | Noncallable and nonputable | $ | 20,419,315 |
| | $ | 23,931,150 |
| Callable | 5,482,000 |
| | 4,394,000 |
| Total par value | $ | 25,901,315 |
| | $ | 28,325,150 |
|
Table 10.2 - CO Bonds Outstanding by Call Feature
(dollars in thousands) | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Noncallable and nonputable | $ | 19,668,585 | | | $ | 20,954,805 | | Callable | 1,695,000 | | | 2,850,000 | | Total par value | $ | 21,363,585 | | | $ | 23,804,805 | |
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, 2018 | | December 31, 2017 | Due in one year or less | | $ | 13,435,270 |
| | $ | 15,309,510 |
| Due after one year through two years | | 5,602,845 |
| | 5,580,470 |
| Due after two years through three years | | 2,802,560 |
| | 3,020,240 |
| Due after three years through four years | | 1,366,975 |
| | 1,542,460 |
| Due after four years through five years | | 1,156,515 |
| | 1,107,775 |
| Thereafter | | 1,537,150 |
| | 1,764,695 |
| Total par value | | $ | 25,901,315 |
| | $ | 28,325,150 |
|
132
Table 10.3 - CO Bonds Outstanding by Contractual Maturity or Next Call Date
CO bonds, beyond having fixed-rate or variable-rate interest-rate payment terms, may also have the following interest-rate payment terms:(dollars in thousands)
| | | | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Due in one year or less | | $ | 11,728,465 | | | $ | 11,297,725 | | Due after one year through two years | | 4,046,120 | | | 6,432,960 | | Due after two years through three years | | 1,629,315 | | | 2,019,920 | | Due after three years through four years | | 1,011,430 | | | 1,332,915 | | Due after four years through five years | | 1,501,100 | | | 926,080 | | Thereafter | | 1,447,155 | | | 1,795,205 | | Total par value | | $ | 21,363,585 | | | $ | 23,804,805 | |
Step-Up
Table 10.4 - CO Bonds by Interest Rate-Payment Type (dollars in thousands) | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Fixed-rate | $ | 12,524,585 | | | $ | 17,681,805 | | Simple variable-rate | 8,549,000 | | | 5,568,000 | | Step-up (1) | 290,000 | | | 555,000 | | Total par value | $ | 21,363,585 | | | $ | 23,804,805 | |
_______________________ (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.
Table 14.4 - CO Bonds by Interest Rate-Payment Type (dollars in thousands)
| | | | | | | | | Par Value of CO bonds | December 31, 2018 | | December 31, 2017 | Fixed-rate | $ | 21,216,315 |
| | $ | 21,416,150 |
| Simple variable-rate | 2,853,000 |
| | 5,432,000 |
| Step-up | 1,832,000 |
| | 1,477,000 |
| Total par value | $ | 25,901,315 |
| | $ | 28,325,150 |
|
CO Discount Notes. Outstanding CO discount notes for which we were primarily liable, all of which are due within one year, were as follows: Table 14.5 - CO Discount Notes Outstanding (dollars in thousands)
| | | | | | | | | | | | | Book Value | | Par Value | | Weighted Average Rate (1) | December 31, 2018 | $ | 33,065,822 |
| | $ | 33,147,065 |
| | 2.37 | % | December 31, 2017 | $ | 27,720,906 |
| | $ | 27,752,860 |
| | 1.25 | % |
Table 10.5 - CO Discount Notes Outstanding(dollars in thousands) | | | | | | | | | | | | | | | | | | | Book Value | | Par Value | | Weighted Average Rate (1) | December 31, 2020 | $ | 12,878,310 | | | $ | 12,879,765 | | | 0.10 | % | December 31, 2019 | $ | 27,681,169 | | | $ | 27,733,146 | | | 1.59 | % |
_______________________ | | (1) | The CO discount notes' weighted-average rate represents a yield to maturity excluding concession fees. |
(1)The CO discount notes' weighted-average rate represents a yield to maturity excluding concession fees.
Note 1511 — 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. Each FHLBank is required to contribute to its AHP the greater of 10 percent of its previous year's net income before interest expense associated with mandatorily redeemable capital stock and the assessment for 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 AHP earnings, and the accruals are accumulated into our AHP payable account. We may elect to voluntarily contribute amounts in addition to the required accruals. 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.
If we experience a net loss during a quarter, but still have AHP earnings for the year, our obligation to the AHP would be calculated based on our AHP earnings for that calendar year. In annual periods where our AHP earnings are zero or less, our required AHP assessment is zero since our required annual contribution is limited to our annual AHP earnings. If the result of the aggregate 10 percent calculation described above is less than $100 million for all the FHLBanks, then each FHLBank would be required to contribute such prorated sums as may be required to ensure that the aggregate contributions by 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 AHP earnings for the year pursuant to an FHFA regulation. Each FHLBank's required annual AHP contribution is limited to its annual net earnings. Our required AHP expense for 2020, 2019, and 2018 2017, and 2016 was $24.3$13.4 million, $21.3 million, and $19.4$24.3 million, respectively. Additionally, in 2020 we voluntarily contributed $1.6 million to our AHP, resulting in a total combined contribution amount of $15.0 million for the year.
There was no shortfall, as described above, in 2018, 2017,2020, 2019, or 2016.2018. 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 2018, 2017,2020, 2019, or 2016.2018.
Table 15.1 - AHP Liability (dollars in thousands)
| | | | | | | | | | 2018 | | 2017 | Balance at beginning of year | $ | 81,600 |
| | $ | 81,627 |
| AHP expense for the period | 24,299 |
| | 21,307 |
| AHP direct grant disbursements | (17,729 | ) | | (18,628 | ) | AHP subsidy for AHP advance disbursements | (4,360 | ) | | (2,782 | ) | Return of previously disbursed grants and subsidies | 155 |
| | 76 |
| Balance at end of year | $ | 83,965 |
| | $ | 81,600 |
|
Table 11.1 - AHP Liability
| | | | | | | | | | | | | 2020 | | 2019 | Balance at beginning of year | $ | 86,131 | | | $ | 83,965 | | AHP expense for the period | 13,386 | | | 21,302 | | AHP voluntary contribution(1) | 1,614 | | | 0 | | AHP direct grant disbursements | (21,374) | | | (15,723) | | AHP subsidy for AHP advance disbursements | (1,216) | | | (3,450) | | Return of previously disbursed grants and subsidies | 99 | | | 37 | | Balance at end of year | $ | 78,640 | | | $ | 86,131 | | _______________________(1) Recorded in other expenses in the statement of operations.
Note 1612 — Capital
We are subject to capital requirements under our capital plan, the FHLBank Act, and FHFA regulations:regulations and guidance:
| | 1. | 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 4 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 5 percent. Leverage capital is calculated by multiplying permanent capital by 1.5 and adding to this product all other components of total 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 four 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 five 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 has authority to require us to maintain a greater amount of permanent capital than is required as defined by the risk-based capital requirements.
Table 16.1 - Regulatory Capital Requirements (dollars in thousands)
| | | | | | | | | Risk-Based Capital Requirements | December 31, 2018 | | December 31, 2017 | | | | | Permanent capital | |
| | |
| Class B capital stock | $ | 2,528,854 |
| | $ | 2,283,721 |
| Mandatorily redeemable capital stock | 31,868 |
| | 35,923 |
| Retained earnings | 1,395,012 |
| | 1,308,349 |
| Total permanent capital | $ | 3,955,734 |
| | $ | 3,627,993 |
| Risk-based capital requirement | |
| | |
| Credit-risk capital | $ | 289,080 |
| | $ | 328,557 |
| Market-risk capital | 187,183 |
| | 170,102 |
| Operations-risk capital | 142,879 |
| | 149,598 |
| Total risk-based capital requirement | $ | 619,142 |
| | $ | 648,257 |
| Permanent capital in excess of risk-based capital requirement | $ | 3,336,592 |
| | $ | 2,979,736 |
|
| | | | | | | | | | | | | | | | | | | | December 31, 2018 | | December 31, 2017 | | | Required | | Actual | | Required | | Actual | Capital Ratio | | | | | | | | | Risk-based capital | | $ | 619,142 |
| | $ | 3,955,734 |
| | $ | 648,257 |
| | $ | 3,627,993 |
| Total regulatory capital | | $ | 2,543,733 |
| | $ | 3,955,734 |
| | $ | 2,414,478 |
| | $ | 3,627,993 |
| Total capital-to-asset ratio | | 4.0 | % | | 6.2 | % | | 4.0 | % | | 6.0 | % | | | | | | | | | | Leverage Ratio | | | | | | | | | Leverage capital | | $ | 3,179,666 |
| | $ | 5,933,601 |
| | $ | 3,018,097 |
| | $ | 5,441,990 |
| Leverage capital-to-assets ratio | | 5.0 | % | | 9.3 | % | | 5.0 | % | | 9.0 | % |
Table 12.1 - Regulatory Capital Requirements (dollars in thousands) | | | | | | | | | | | | Risk-Based Capital Requirements | December 31, 2020 | | December 31, 2019 | | | | | Permanent capital | | | | Class B capital stock | $ | 1,267,172 | | | $ | 1,869,130 | | Mandatorily redeemable capital stock | 6,282 | | | 5,806 | | Retained earnings | 1,498,642 | | | 1,463,154 | | Total permanent capital | $ | 2,772,096 | | | $ | 3,338,090 | | Risk-based capital requirement | | | | Credit-risk capital | $ | 96,143 | | | $ | 235,213 | | Market-risk capital | 204,028 | | | 207,426 | | Operations-risk capital | 90,052 | | | 132,792 | | Total risk-based capital requirement | $ | 390,223 | | | $ | 575,431 | | Permanent capital in excess of risk-based capital requirement | $ | 2,381,873 | | | $ | 2,762,659 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | | | Required | | Actual | | Required | | Actual | Capital Ratio | | | | | | | | | Risk-based capital | | $ | 390,223 | | | $ | 2,772,096 | | | $ | 575,431 | | | $ | 3,338,090 | | Total regulatory capital | | $ | 1,538,441 | | | $ | 2,772,096 | | | $ | 2,226,512 | | | $ | 3,338,090 | | Total capital-to-asset ratio | | 4.0 | % | | 7.2 | % | | 4.0 | % | | 6.0 | % | | | | | | | | | | Leverage Ratio | | | | | | | | | Leverage capital | | $ | 1,923,052 | | | $ | 4,158,144 | | | $ | 2,783,141 | | | $ | 5,007,135 | | Leverage capital-to-assets ratio | | 5.0 | % | | 10.8 | % | | 5.0 | % | | 9.0 | % |
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 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, provided that this amount is not less than $10 thousand nor more than $10 million (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, and 4.50 percent of the unpaid principal balance of certain mortgage we purchased through the MPF program (collectively, the activity-based stock-investment requirement). The sum of the membership stock investment requirement and the activity-based stock investment requirement, rounded up to the nearest whole share, represents the total stock investment requirement.
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 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 could 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, 2018,2020, our total contribution requirement totaled $574.3 million. As of December 31, 2018 and 2017, restricted retained earnings totaled $310.7$368.4 million and $267.3 million, respectively. These restrictedexceeded the contribution requirement of $354.4 million. 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, 2018, 2017,2020, 2019, and 2016,2018, dividends on mandatorily redeemable capital stock of $1.9 million, $1.6 million,$221 thousand, $974 thousand, and $1.4$1.9 million, respectively, were recorded as interest expense.
Table 16.2 - Mandatorily Redeemable Capital Stock (dollars in thousands)
| | | | | | | | | | | | | | | | 2018 | | 2017 | | 2016 | Balance at beginning of year | | $ | 35,923 |
| | $ | 32,687 |
| | $ | 41,989 |
| Capital stock subject to mandatory redemption reclassified from capital | | 309 |
| | 8,670 |
| | 40 |
| Redemption/repurchase of mandatorily redeemable capital stock | | (4,364 | ) | | (5,434 | ) | | (9,342 | ) | Balance at end of year | | $ | 31,868 |
| | $ | 35,923 |
| | $ | 32,687 |
|
Table 12.2 - Mandatorily Redeemable Capital Stock
(dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | 2020 | | 2019 | | 2018 | Balance at beginning of year | | $ | 5,806 | | | $ | 31,868 | | | $ | 35,923 | | Capital stock subject to mandatory redemption reclassified from capital | | 581 | | | 0 | | | 309 | | | | | | | | | Redemption/repurchase of mandatorily redeemable capital stock | | (105) | | | (26,062) | | | (4,364) | | Balance at end of year | | $ | 6,282 | | | $ | 5,806 | | | $ | 31,868 | |
The number of stockholders holding mandatorily redeemable capital stock was ten, nine,12, 9, and nine10 at December 31, 2018, 2017,2020, 2019, and 2016,2018, respectively.
Consistent with our capital plan, we are not required to redeem membership stock until the expirationTable 12.3 - Mandatorily Redeemable Capital Stock by Expiry 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 theRedemption Notice Period
(dollars in thousands) | | | | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Past redemption date (1) | | $ | 5,558 | | | $ | 5,663 | | Due in one year or less | | 0 | | | 0 | | Due after one year through two years | | 93 | | | 0 | | Due after two years through three years | | 40 | | | 93 | | Due after three years through four years | | 0 | | | 40 | | Due after four years through five years | | 581 | | | 0 | | Thereafter (2) | | 10 | | | 10 | | Total | | $ | 6,282 | | | $ | 5,806 | |
_______________________ (1)Amount represents mandatorily redeemable 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 representsthat has reached the end of the redemption-notice period. However, as discussed above, if activity to which the capital stock relates remains outstanding beyond thefive-year redemption-notice period but the activity-basedmember-related activity (for example, advances) remains outstanding. Accordingly, these shares of stock associated with this activity will remain outstandingnot be redeemed until the activity is no longer remains 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, had their memberships terminated on February 19, 2021.
Table 16.3 - Mandatorily Redeemable Capital Stock by Expiry of Redemption Notice Period (dollars in thousands)
| | | | | | | | | | | | December 31, 2018 | | December 31, 2017 | Past redemption date (1) | | $ | 4,076 |
| | $ | 420 |
| Due in one year or less | | 27,379 |
| | 4,018 |
| Due after one year through two years | | — |
| | 27,379 |
| Due after two years through three years | | — |
| | 54 |
| Due after three years through four years | | 363 |
| | — |
| Due after four years through five years | | 40 |
| | 4,022 |
| Thereafter (2) | | 10 |
| | 30 |
| Total | | $ | 31,868 |
| | $ | 35,923 |
|
_______________________
| | (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. |
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.Stock Repurchases. Our capital plan provides us with the sole discretion to repurchase capital stock from a member at par value if that stock is notin excess of the amount required by the member to meet itsthe member's 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 minimumWe generally 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. We plan to continue with this practice, subject to regulatory requirements and our anticipated liquidity or capital management needs, although continued repurchases remain at our sole discretion, and we retain authority to suspend repurchases of excess stock from any shareholder or all shareholders without prior notice. In addition to these daily repurchases, subject to our sole discretion 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, 20182020 and 2017,2019, members and nonmembers with capital stock outstanding held excess capital stock totaling $88.7$90.8 million and $110.7$79.7 million, respectively, representing approximately 3.57.1 percent and 4.84.3 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, 2018,2020, we had excess capital stock outstanding totaling 0.10.2 percent of our total assets. For the year ended December 31, 2018,2020, 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, 2018.2020. 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 13, 2018,11, 2020, the Director of the FHFA notified us that, based on September 30, 20182020 financial information, we met the definition of adequately capitalized under the Capital Rule. We have not yet received our
Partial recovery of prior capital classificationdistribution to Financing Corporation. The Competitive Equality Banking Act of 1987 was enacted in August 1987, and, among other things, provided for the recapitalization of the Federal Savings and Loan Insurance Corporation through a newly-chartered entity, the Financing Corporation (FICO). The capitalization of FICO was provided by capital distributions from the FHLBanks to FICO in exchange for FICO nonvoting capital stock. Capital distributions were made by the FHLBanks in 1987, 1988 and 1989 that aggregated to $680 million. Upon passage of Financial Institutions Reform, Recovery and Enforcement Act of 1989, the FHLBanks’ previous investment in capital stock of FICO was determined to be non-redeemable and the FHLBanks charged-off their prior capital distributions to FICO directly against retained earnings.
Upon the dissolution of FICO in July 2020, FICO determined that excess funds aggregating to $200 million were available for distribution to its stockholders, the FHLBanks. FICO distributed these funds to the FHLBanks in June 2020. Our partial recovery of prior capital distribution totaled $3.7 million, which was determined based on our December 31, 2018 financial information.share of the $680 million originally contributed by the FHLBanks. We have treated the receipt of these funds as a return of our investment in FICO capital stock, and therefore as a partial recovery of the prior capital distributions made by the Bank to FICO in 1987, 1988, and 1989. These funds have been credited to unrestricted retained earnings.
Note 1713 — Accumulated Other Comprehensive Loss Income (Loss)
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 | 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 (2) | | — |
| | — |
| | 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 | ) | Other comprehensive income (loss) before reclassifications: | | | | | | | | | | | Net unrealized gains (losses) | | 14,478 |
| | — |
| | (2,838 | ) | | — |
| | 11,640 |
| Accretion of noncredit loss | | — |
| | 32,815 |
| | — |
| | — |
| | 32,815 |
| Net actuarial loss | | — |
| | — |
| | — |
| | (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 |
| Amortization - hedging activities (4) | | — |
| | — |
| | 10,589 |
| | — |
| | 10,589 |
| Amortization - pension and postretirement benefits (3) | | — |
| | — |
| | — |
| | 770 |
| | 770 |
| Other comprehensive income | | 14,478 |
| | 34,161 |
| | 7,751 |
| | 184 |
| | 56,574 |
| Balance, December 31, 2017 | | (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 (5) | | — |
| | — |
| | 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 | ) |
Table 13.1 - Accumulated Other Comprehensive Income (Loss) (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net Unrealized Gain (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, 2017 | | $ | (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 (2) | | — | | | — | | | 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 (4) | | — | | | — | | | 5,218 | | | — | | | 5,218 | | Amortization - pension and postretirement benefits (3) | | — | | | — | | | — | | | 664 | | | 664 | | 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) | | | | | | | | | | | | | | | | | | | | | | | | Other comprehensive income (loss) before reclassifications: | | | | | | | | | | | Adjustment for transfer of securities from held-to-maturity to available-for-sale | | 16,062 | | | 31,502 | | | — | | | — | | | 47,564�� | | Net unrealized gains (losses) | | 137,011 | | | — | | | (1,187) | | | — | | | 135,824 | | Noncredit losses included in basis of securities sold | | — | | | 39,144 | | | — | | | — | | | 39,144 | | Accretion of noncredit loss | | — | | | 5,390 | | | — | | | — | | | 5,390 | | Net actuarial loss | | — | | | — | | | — | | | (2,386) | | | (2,386) | | Reclassifications from other comprehensive income to net income | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reclassification of realized net gains included in net income | | (30,583) | | | — | | | — | | | — | | | (30,583) | | Amortization - hedging activities (4) | | — | | | — | | | 7,029 | | | — | | | 7,029 | | Amortization - pension and postretirement benefits (3) | | — | | | — | | | — | | | 1,129 | | | 1,129 | | Other comprehensive income (loss) | | 122,490 | | | 76,036 | | | 5,842 | | | (1,257) | | | 203,111 | | Balance, December 31, 2020 | | $ | 48,568 | | | $ | 0 | | | $ | (24,365) | | | $ | (8,064) | | | $ | 16,139 | |
_______________________
| | (1) | Recorded in net other-than-temporary impairment losses in investment securities, credit portion(1) Recorded in other income (loss) in the statement of operations. |
| | (2) | Amortization of hedging activities includes $23.8 million recorded in CO bond interest expense and $14,000 recorded in net gains (losses) 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 $10.6 million recorded in CO bond interest expense and $14,000 recorded in net gains (losses) on derivatives and hedging activities in the statement of operations. |
| | (5) | Amortization of hedging activities includes $3.2 million recorded in CO bond interest expense and $239,000 recorded in net gains (losses) on derivatives and hedging activities in the statement of operations. |
(2) Amortization of hedging activities includes $3.2 million recorded in CO bond interest expense and $239 thousand recorded in net gains on derivatives and hedging activities in the statement of operations. (3) Recorded in other expenses in the statement of operations. (4) Recorded in CO bond interest expense.
Note 1814 — 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 each of the years ended December 31, 2018, 20172020, 2019 and 2016,2018, in addition to our required contribution, we made voluntary contributions of $6.0 million $6.2 million and $5.0 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, 2018, 2017,2020, 2019, and 2016.2018.
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, 2017.2019. For the Pentegra Defined Benefit Plan plan years ended June 30, 20172018 and 2016,2017, our contributions did not represent more than five percent of the total contributions to the Pentegra Defined Benefit Plan.
Table 18.1 - Pentegra Defined Benefit Plan Net Pension Cost and Funded Status (dollars in thousands)
| | | | | | | | | | | | | | For the Year Ended December 31, | | 2018 | | 2017 | | 2016 | Net pension cost | $ | 6,472 |
| | $ | 6,727 |
| | $ | 5,526 |
| Pentegra Defined Benefit Plan funded status as of July 1(1) | 109.9 | % | (2) | 111.8 | % | (3) | 104.7 | % | Our funded status as of July 1(1) | 123.1 | % | | 122.9 | % | | 108.6 | % |
On November 30, 2020, the board of directors elected to freeze the Pentegra Defined Benefit Plan. The Pentegra Defined Benefit Plan will be frozen to employees hired on or after January 1, 2021, and on January 1, 2024, future benefit accruals under the plan will cease for all employees that were hired before January 1, 2021.
Table 14.1 - Pentegra Defined Benefit Plan Net Pension Cost and Funded Status (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | 2020 | | 2019 | | 2018 | | | Net pension cost | $ | 6,843 | | | $ | 6,559 | | | $ | 6,472 | | | | Pentegra Defined Benefit Plan funded status as of July 1(1) | 108.2 | % | (2) | 108.6 | % | (3) | 111.0 | % | | | Our funded status as of July 1(1) | 110.2 | % | | 113.9 | % | | 123.1 | % | | |
______________________ | | (1) | (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 the 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. MAP-21 allows plan sponsors to measure the pension plan liability using a 25-year average of interest rates plus or minus a corridor. Prior to MAP-21, the discount ra |
te 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, 2018, is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 2018, through March 15, 2019. Contributions made on or before March 15, 2019, and designated for the plan year ended June 30, 2018, will be included in the final valuation as of July 1, 2018. The final funded status as of July 1, 2018, will not be available until the Form 5500 for the plan year July 1, 2018, through June 30, 2019 is filed. This Form 5500 is due to be filed no later than April 2020. |
| | (3) | The funded status as of July 1, 2017, is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 2017, through March 15, 2018. Contributions made on or before March 15, 2018, and designated for the plan year ended June 30, 2017, will be included in the final valuation as of July 1, 2017. The final funded status as of July 1, 2017, will not be available until the Form 5500 for the plan year July 1, 2017, through June 30, 2018 is filed. This Form 5500 is due to be filed no later than April 2019. |
(2) The funded status as of July 1, 2020, is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 2020, through March 15, 2021. Contributions made on or before March 15, 2021, and designated for the plan year ended June 30, 2020, will be included in the final valuation as of July 1, 2020. The final funded status as of July 1, 2020, will not be available until the Form 5500 for the plan year July 1, 2020, through June 30, 2021 is filed. This Form 5500 is due to be filed no later than April 2022. (3) The funded status as of July 1, 2019, is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 2019, through March 15, 2020. Contributions made on or before March 15, 2020, and designated for the plan year ended June 30, 2019, will be included in the final valuation as of July 1, 2020. The final funded status as of July 1, 2019, will not be available until the Form 5500 for the plan year July 1, 2019, through June 30, 2020 is filed. This Form 5500 is due to be filed no later than April 2021.
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 and are not considered to be material.
On November 30, 2020, the board of directors adopted changes to the Pentegra Defined Contribution Plan to add, subject to certain limitations of the Internal Revenue Code, a non-elective, non-matching contribution from the Bank of six percent of each eligible employee’s salary for employees who are ineligible to accrue benefits under the Pentegra Defined Benefit Plan, either because they were hired on or after January 1, 2021, or because benefit accruals have ceased on January 1, 2024.
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 $9.7$14.1 million and $9.5$12.6 million at December 31, 20182020 and 2017,2019, 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. Our matching contributions are charged to compensation and benefits expense and are not considered to be material.
On November 30, 2020, the board of directors adopted changes to the Thrift Benefit Equalization Plan to add, subject to certain limitations of the Internal Revenue Code, a non-elective, non-matching contribution from the Bank of six percent of each eligible executive participant's salary for certain senior officers who are ineligible to accrue benefits under the Nonqualified Supplemental Defined Benefit Retirement Plan, either because they were hired on or after January 1, 2021, or because benefit accruals have ceased on January 1, 2024.
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.
On November 30, 2020, the board of directors elected to freeze this plan. The plan will be frozen to senior officers hired on or after January 1, 2021, and on January 1, 2024, future benefit accruals under the plan will cease for all senior officers.
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 14.2 - Pension and Postretirement Benefit Obligation, Fair Value of Plan Assets, and Funded Status
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, 2018 | | December 31, 2017 | | December 31, 2018 | | December 31, 2017 | | December 31, 2020 | | December 31, 2019 | | December 31, 2020 | | December 31, 2019 | Change in benefit obligation (1) | |
| | |
| | |
| | |
| Change in benefit obligation (1) | | | | | | | | Benefit obligation at beginning of year | $ | 19,366 |
| | $ | 17,132 |
| | $ | 1,056 |
| | $ | 878 |
| Benefit obligation at beginning of year | $ | 26,123 | | | $ | 22,321 | | | $ | 1,339 | | | $ | 955 | | Service cost | 1,490 |
| | 1,179 |
| | 45 |
| | 38 |
| Service cost | 1,487 | | | 1,235 | | | 44 | | | 38 | | Interest cost | 654 |
| | 600 |
| | 37 |
| | 36 |
| Interest cost | 551 | | | 699 | | | 44 | | | 42 | | Actuarial loss | 831 |
| | 459 |
| | (161 | ) | | 127 |
| Actuarial loss | 3,048 | | | 1,874 | | | 282 | | | 321 | | Benefits paid | (5 | ) | | (4 | ) | | (22 | ) | | (23 | ) | Benefits paid | (138) | | | (6) | | | (19) | | | (17) | | Plan amendments | — |
| | — |
| | — |
| | — |
| | | Settlements | (15 | ) | | — |
| | — |
| | — |
| Settlements | (3,043) | | | 0 | | | 0 | | | 0 | | Benefit obligation at end of year | 22,321 |
| | 19,366 |
| | 955 |
| | 1,056 |
| Benefit obligation at end of year | 28,028 | | | 26,123 | | | 1,690 | | | 1,339 | | | | | | | | | | | Change in plan assets | |
| | |
| | |
| | |
| Change in plan assets | | | | | | | | Fair value of plan assets at beginning of year | — |
| | — |
| | — |
| | — |
| Fair value of plan assets at beginning of year | 0 | | | 0 | | | 0 | | | 0 | | Employer contribution | 20 |
| | 4 |
| | 22 |
| | 23 |
| Employer contribution | 3,181 | | | 6 | | | 19 | | | 17 | | Benefits paid | (5 | ) | | (4 | ) | | (22 | ) | | (23 | ) | Benefits paid | (138) | | | (6) | | | (19) | | | (17) | | Settlements | (15 | ) | | — |
| | — |
| | — |
| Settlements | (3,043) | | | 0 | | | 0 | | | 0 | | Fair value of plan assets at end of year | — |
| | — |
| | — |
| | — |
| Fair value of plan assets at end of year | 0 | | | 0 | | | 0 | | | 0 | | Funded status at end of year | $ | (22,321 | ) | | $ | (19,366 | ) | | $ | (955 | ) | | $ | (1,056 | ) | Funded status at end of year | $ | (28,028) | | | $ | (26,123) | | | $ | (1,690) | | | $ | (1,339) | |
______________________ | | (1) | (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 the accumulated postretirement benefits at December 31, 2018 and 2017, were $23.3 million and $20.4 million, respectively.benefit obligation for postretirement benefits.
Table 18.3 - Pension and Postretirement Benefits Recognized in Accumulated Other Comprehensive Loss (dollars in thousands)
| | | | | | | | | | | | | | | | | | | | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement Benefits | | | December 31, 2018 | | December 31, 2017 | | December 31, 2018 | | December 31, 2017 | Net actuarial loss | | $ | 4,920 |
| | $ | 5,337 |
| | $ | 123 |
| | $ | 299 |
| Prior service cost | | 234 |
| | 319 |
| | — |
| | — |
| Total | | $ | 5,154 |
| | $ | 5,656 |
| | $ | 123 |
| | $ | 299 |
|
Table 14.3 - Pension and Postretirement Benefits Recognized in Accumulated Other Comprehensive Loss
(dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement Benefits | | | December 31, 2020 | | December 31, 2019 | | December 31, 2020 | | December 31, 2019 | Net actuarial loss | | $ | 7,375 | | | $ | 6,223 | | | $ | 689 | | | $ | 437 | | Prior service cost | | 0 | | | 148 | | | 0 | | | 0 | | Total | | $ | 7,375 | | | $ | 6,371 | | | $ | 689 | | | $ | 437 | |
The accumulated benefit obligation for the nonqualified supplemental defined benefit retirement plan was $18.3$25.3 million and $15.4$22.7 million at December 31, 20182020 and 2017,2019, respectively.
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 | | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | Net Periodic Benefit Cost | | | | | | | | | | | | | Service cost | | $ | 1,490 |
| | $ | 1,179 |
| | $ | 1,053 |
| | $ | 45 |
| | $ | 38 |
| | $ | 34 |
| Interest cost | | 654 |
| | 600 |
| | 655 |
| | 37 |
| | 36 |
| | 34 |
| Amortization of prior service cost | | 86 |
| | 86 |
| | 86 |
| | — |
| | — |
| | — |
| Amortization of net actuarial loss | | 1,248 |
| | 676 |
| | 870 |
| | 15 |
| | 8 |
| | 4 |
| Net periodic benefit cost | | 3,478 |
| | 2,541 |
| | 2,664 |
| | 97 |
| | 82 |
| | 72 |
| | | | | | | | | | | | | | Other Changes in Benefit Obligations Recognized in Accumulated Other Comprehensive Loss | | | | | | | | | | | | | Amortization of prior service cost | | (86 | ) | | (86 | ) | | (86 | ) | | — |
| | — |
| | — |
| Amortization of net actuarial loss | | (1,248 | ) | | (676 | ) | | (870 | ) | | (15 | ) | | (8 | ) | | (4 | ) | Prior service cost | | — |
| | — |
| | 492 |
| | — |
| | — |
| | — |
| Net actuarial loss (gain) | | 831 |
| | 459 |
| | 2,682 |
| | (161 | ) | | 127 |
| | 68 |
| Total amount recognized in other comprehensive income | | (503 | ) | | (303 | ) | | 2,218 |
| | (176 | ) | | 119 |
| | 64 |
| Total amount recognized in net periodic benefit cost and other comprehensive income | | $ | 2,975 |
| | $ | 2,238 |
| | $ | 4,882 |
| | $ | (79 | ) | | $ | 201 |
| | $ | 136 |
|
The estimated net actuarial lossTable 14.4 - Net Periodic Benefit Cost and prior service cost that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during 2019 is $640,000 for our nonqualified supplemental defined benefit retirement plan and $2,000 for our postretirement benefits.Other Amounts Recognized in Other Comprehensive Income
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement Benefits | | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 | Net Periodic Benefit Cost | | | | | | | | | | | | | Service cost | | $ | 1,487 | | | $ | 1,235 | | | $ | 1,490 | | | $ | 44 | | | $ | 38 | | | $ | 45 | | Interest cost | | 551 | | | 699 | | | 654 | | | 44 | | | 42 | | | 37 | | Amortization of prior service cost | | 79 | | | 86 | | | 86 | | | 0 | | | 0 | | | 0 | | Amortization of net actuarial loss | | 1,020 | | | 571 | | | 1,248 | | | 30 | | | 7 | | | 15 | | Curtailment charge | | 69 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | Settlement charge | | 875 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | Net periodic benefit cost | | 4,081 | | | 2,591 | | | 3,478 | | | 118 | | | 87 | | | 97 | | | | | | | | | | | | | | | Other Changes in Benefit Obligations Recognized in Accumulated Other Comprehensive Income (Loss) | | | | | | | | | | | | | Amortization of prior service cost | | (79) | | | (86) | | | (86) | | | 0 | | | 0 | | | 0 | | Amortization of net actuarial loss | | (1,020) | | | (571) | | | (1,248) | | | (30) | | | (7) | | | (15) | | | | | | | | | | | | | | | Net actuarial loss (gain) | | 3,048 | | | 1,874 | | | 831 | | | 282 | | | 321 | | | (161) | | Curtailment charge | | (69) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | Settlement charge | | (875) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | Total amount recognized in other comprehensive income | | 1,005 | | | 1,217 | | | (503) | | | 252 | | | 314 | | | (176) | | Total amount recognized in net periodic benefit cost and other comprehensive income | | $ | 5,086 | | | $ | 3,808 | | | $ | 2,975 | | | $ | 370 | | | $ | 401 | | | $ | (79) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 18.5 - Pension and Postretirement Benefit Plan Key Assumptions
| | | | | | | | | | | | | | | | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement Benefits | | | 2018 | | 2017 | | 2018 | | 2017 | Benefit obligation | | | | | | | | | Discount rate | | 3.81 | % | | 3.09 | % | | 4.25 | % | | 3.64 | % | Salary increases | | 5.50 | % | | 5.50 | % | | — |
| | — |
| | | | | | | | | | Net periodic benefit cost | | | | | | | | | Discount rate | | 3.09 | % | | 3.98 | % | | 3.64 | % | | 4.22 | % | Salary increases | | 5.50 | % | | 5.50 | % | | — |
| | — |
|
Table 14.5 - Pension and Postretirement Benefit Plan Key Assumptions
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement Benefits | | | 2020 | | 2019 | | 2020 | | 2019 | Benefit obligation | | | | | | | | | Discount rate | | 1.73 | % | | 2.68 | % | | 2.55 | % | | 3.25 | % | Salary increases | | 5.50 | % | | 5.50 | % | | 0 | | | 0 | | | | | | | | | | | Net periodic benefit cost | | | | | | | | | Discount rate | | 1.74 | % | | 3.81 | % | | 3.25 | % | | 4.25 | % | Salary increases | | 5.50 | % | | 5.50 | % | | 0 | | | 0 | |
The discount rate for the nonqualified supplemental defined benefit retirement plan was determined by using a discounted cash-flow analysis using the FTSE Pension Discount Curve as of December 31, 2018.2020.
Our nonqualified supplemental defined benefit retirement plan and postretirement benefits are not funded; therefore, no contributions will be made in 20192021 other than the payment of benefits.
Table 18.6 - Estimated Future Benefit Payments (dollars in thousands)
| | | | | | | | | | | | Estimated Future Payments | | | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement Benefits | 2019 | | $ | 6,615 |
| | $ | 18 |
| 2020 | | 1,917 |
| | 20 |
| 2021 | | 2,383 |
| | 16 |
| 2022 | | 2,200 |
| | 18 |
| 2023 | | 2,382 |
| | 19 |
| 2024-2028 | | 7,961 |
| | 138 |
|
Table 14.6 - Estimated Future Benefit Payments (dollars in thousands) | | | | | | | | | | | | | | | | | Estimated Future Payments | | | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement Benefits | 2021 | | $ | 3,146 | | | $ | 21 | | 2022 | | 2,422 | | | 23 | | 2023 | | 3,131 | | | 24 | | 2024 | | 5,082 | | | 27 | | 2025 | | 6,483 | | | 29 | | 2026-2030 | | 4,199 | | | 186 | |
Note 1915 — Fair Values
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. Additionally, these values do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account, among other things, future business opportunities and the net profitability of assets and liabilities.
Fair-Value Hierarchy.
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. |
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 occurs 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 2Inputs 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. |
Level 3Unobservable 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 would be reported as transfers in/out as of the
beginning of the quarter in which the changes occur. There were no such transfers into or out of Level 3 of the fair value hierarchy during the years ended December 31, 20182020 and 2017.2019.
Table 19.115.1 presents the carrying value, fair value, and fair value hierarchy of our financial assets and liabilities at December 31, 20182020 and 2017.2019. 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 at fair value on a non-recurring basis. We record all other financial assets and liabilities at amortized cost. Refer to Table 19.215.2 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, 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. |
| | | | | | | | | | | | | | | | | | | | | | | | | | 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 |
| | — |
| Loans to other FHLBanks | 400,000 |
| | 399,997 |
| | — |
| | 399,997 |
| | — |
| | — |
| 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 | ) | | — |
| | — |
|
Table 15.1 - Fair Value Summary (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | 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 | $ | 2,050,028 | | | $ | 2,050,028 | | | $ | 2,050,028 | | | $ | 0 | | | $ | 0 | | | $ | — | | Interest-bearing deposits | 299,149 | | | 299,149 | | | 299,149 | | | 0 | | | 0 | | | — | | Securities purchased under agreements to resell | 750,000 | | | 749,995 | | | 0 | | | 749,995 | | | 0 | | | — | | Federal funds sold | 2,260,000 | | | 2,259,988 | | | 0 | | | 2,259,988 | | | 0 | | | — | | Trading securities(1) | 3,605,079 | | | 3,605,079 | | | 0 | | | 3,605,079 | | | 0 | | | — | | Available-for-sale securities(1) | 6,220,148 | | | 6,220,148 | | | 0 | | | 6,097,599 | | | 122,549 | | | — | | Held-to-maturity securities | 207,162 | | | 211,837 | | | 0 | | | 211,837 | | | 0 | | | — | | Advances | 18,817,002 | | | 19,119,220 | | | 0 | | | 19,119,220 | | | 0 | | | — | | Mortgage loans, net | 3,930,252 | | | 4,136,004 | | | 0 | | | 4,086,757 | | | 49,247 | | | — | | Accrued interest receivable | 87,582 | | | 87,582 | | | 0 | | | 87,582 | | | 0 | | | — | | Derivative assets(1) | 161,238 | | | 161,238 | | | 0 | | | 10,182 | | | 0 | | | 151,056 | | Other assets (1) | 34,360 | | | 34,360 | | | 14,296 | | | 20,064 | | | 0 | | | — | | Liabilities: | | | | | | | | | | | | Deposits | (1,088,987) | | | (1,088,981) | | | 0 | | | (1,088,981) | | | 0 | | | — | | COs: | | | | | | | | | | | | Bonds | (21,471,590) | | | (22,062,476) | | | 0 | | | (22,062,476) | | | 0 | | | — | | Discount notes | (12,878,310) | | | (12,878,918) | | | 0 | | | (12,878,918) | | | 0 | | | — | | Mandatorily redeemable capital stock | (6,282) | | | (6,282) | | | (6,282) | | | 0 | | | 0 | | | — | | Accrued interest payable | (61,918) | | | (61,918) | | | 0 | | | (61,918) | | | 0 | | | — | | Derivative liabilities(1) | (24,062) | | | (24,062) | | | 0 | | | (88,770) | | | 0 | | | 64,708 | | Other: | | | | | | | | | | | | Commitments to extend credit for advances | 0 | | | (5,306) | | | 0 | | | (5,306) | | | 0 | | | — | | | | | | | | | | | | | | Standby letters of credit | (1,303) | | | (1,303) | | | 0 | | | (1,303) | | | 0 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | $ | 0 | | | $ | 0 | | | $ | — | | Interest-bearing deposits | 1,253,873 | | | 1,253,873 | | | 1,253,873 | | | 0 | | | 0 | | | — | | Securities purchased under agreements to resell | 3,500,000 | | | 3,500,003 | | | 0 | | | 3,500,003 | | | 0 | | | — | | Federal funds sold | 860,000 | | | 859,999 | | | 0 | | | 859,999 | | | 0 | | | — | | Trading securities(1) | 2,250,264 | | | 2,250,264 | | | 0 | | | 2,250,264 | | | 0 | | | — | | Available-for-sale securities(1) | 7,409,000 | | | 7,409,000 | | | 0 | | | 7,344,348 | | | 64,652 | | | — | | Held-to-maturity securities | 871,107 | | | 1,035,410 | | | 0 | | | 456,942 | | | 578,468 | | | — | | Advances | 34,595,363 | | | 34,735,775 | | | 0 | | | 34,735,775 | | | 0 | | | — | | Mortgage loans, net | 4,501,251 | | | 4,634,141 | | | 0 | | | 4,615,737 | | | 18,404 | | | — | | | | | | | | | | | | | | Accrued interest receivable | 112,163 | | | 112,163 | | | 0 | | | 112,163 | | | 0 | | | — | | Derivative assets(1) | 159,731 | | | 159,731 | | | 0 | | | 15,329 | | | 0 | | | 144,402 | | Other assets(1) | 31,939 | | | 31,939 | | | 13,894 | | | 18,045 | | | 0 | | | — | | Liabilities: | | | | | | | | | | | | Deposits | (674,309) | | | (674,269) | | | 0 | | | (674,269) | | | 0 | | | — | | COs: | | | | | | | | | | | | Bonds | (23,888,493) | | | (24,226,123) | | | 0 | | | (24,226,123) | | | 0 | | | — | | Discount notes | (27,681,169) | | | (27,681,470) | | | 0 | | | (27,681,470) | | | 0 | | | — | | Mandatorily redeemable capital stock | (5,806) | | | (5,806) | | | (5,806) | | | 0 | | | 0 | | | — | | Accrued interest payable | (104,477) | | | (104,477) | | | 0 | | | (104,477) | | | 0 | | | — | | Derivative liabilities(1) | (10,271) | | | (10,271) | | | 0 | | | (43,805) | | | 0 | | | 33,534 | | Other: | | | | | | | | | | | | Commitments to extend credit for advances | 0 | | | (3,884) | | | 0 | | | (3,884) | | | 0 | | | — | | | | | | | | | | | | | | Standby letters of credit | (1,723) | | | (1,723) | | | 0 | | | (1,723) | | | 0 | | | — | |
_______________________ | | (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. |
(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
The valuation methodologies and primary inputs used to develop the measurement of fair value for assets and liabilities that are measured at fair value on a recurring or nonrecurring basis in the Statement of Condition are listed below. The fair values and level within the fair value hierarchy of these assets and liabilities are reported in Table 19.2.15.2.
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, 2018,2020, 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, 2018during 2020 and 2017,2019 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 fall within Level 3 of the fair-value hierarchy due to the current lack of market activity for these bonds.
Mortgage Loans. 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. 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. For all derivatives cleared through a DCO, at December 31, 2020, the discount rate used is SOFR, and at December 31, 2019, the discount rate used was the OIS rate based on the federal funds effective rate. For our bilateral, non-cleared interest-rate derivatives the discount rate used is either the OIS rate based on the federal funds effective rate curve or the LIBOR swap curve depending on the terms of the International Swaps and Derivatives Association (ISDA) agreement we have with each derivative counterparty. •Forward interest-rate assumption. LIBOR swap 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.
. At December 31, 2018 and 2017, we used either the overnight-index swap (OIS) curve or the LIBOR swap curve depending on the terms of the International Swaps and Derivatives Association (ISDA) agreement we have with each derivative counterparty.
|
| | • | Forward interest-rate assumption. LIBOR swap curve.
|
| | • | 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.
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 15.2 - Fair Value of Assets and Liabilities Measured at Fair Value on a Recurring and Nonrecurring Basis
(dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | 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 | $ | 0 | | | $ | 5,422 | | | $ | 0 | | | $ | — | | | $ | 5,422 | | U.S. Treasury obligations | 0 | | | 3,596,718 | | | 0 | | | — | | | 3,596,718 | | U.S. government-guaranteed – single-family MBS | 0 | | | 2,884 | | | 0 | | | — | | | 2,884 | | GSE – single-family MBS | 0 | | | 55 | | | 0 | | | — | | | 55 | | | | | | | | | | | | Total trading securities | 0 | | | 3,605,079 | | | 0 | | | — | | | 3,605,079 | | Available-for-sale securities: | | | | | | | | | | HFA securities | 0 | | | 0 | | | 122,549 | | | — | | | 122,549 | | Supranational institutions | 0 | | | 430,069 | | | — | | | — | | | 430,069 | | | | | | | | | | | | U.S. government-owned corporations | 0 | | | 322,061 | | | 0 | | | — | | | 322,061 | | GSE | 0 | | | 134,992 | | | 0 | | | — | | | 134,992 | | U.S. government guaranteed – single-family MBS | 0 | | | 29,408 | | | 0 | | | — | | | 29,408 | | U.S. government guaranteed – multifamily MBS | 0 | | | 47,180 | | | 0 | | | — | | | 47,180 | | GSE – single-family MBS | 0 | | | 1,469,048 | | | 0 | | | — | | | 1,469,048 | | GSE – multifamily MBS | 0 | | | 3,664,841 | | | 0 | | | — | | | 3,664,841 | | Total available-for-sale securities | 0 | | | 6,097,599 | | | 122,549 | | | — | | | 6,220,148 | | Derivative assets: | | | | | | | | | | Interest-rate-exchange agreements | 0 | | | 9,962 | | | 0 | | | 151,056 | | | 161,018 | | Mortgage delivery commitments | 0 | | | 220 | | | 0 | | | — | | | 220 | | Total derivative assets | 0 | | | 10,182 | | | 0 | | | 151,056 | | | 161,238 | | Other assets | 14,296 | | | 20,064 | | | 0 | | | — | | | 34,360 | | Total assets carried at fair value on a recurring basis | $ | 14,296 | | | $ | 9,732,924 | | | $ | 122,549 | | | $ | 151,056 | | | $ | 10,020,825 | | Carried at fair value on a nonrecurring basis(2) | | | | | | | | | | Mortgage loans held for portfolio | $ | 0 | | | $ | 0 | | | $ | 10,782 | | | $ | — | | | $ | 10,782 | | REO | 0 | | | 0 | | | 245 | | | — | | | 245 | | Total assets carried at fair value on a nonrecurring basis | $ | 0 | | | $ | 0 | | | $ | 11,027 | | | $ | — | | | $ | 11,027 | | Liabilities: | | | | | | | | | | Carried at fair value on a recurring basis | | | | | | | | | | Derivative liabilities | | | | | | | | | | Interest-rate-exchange agreements | $ | 0 | | | $ | (88,770) | | | $ | 0 | | | $ | 64,708 | | | $ | (24,062) | | | | | | | | | | | | Total liabilities carried at fair value on a recurring basis | $ | 0 | | | $ | (88,770) | | | $ | 0 | | | $ | 64,708 | | | $ | (24,062) | |
Table 19.2 - Fair Value of Assets and Liabilities Measured at Fair Value on a Recurring and Nonrecurring Basis (dollars in thousands)
| | | | December 31, 2018 | | December 31, 2019 | | 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: | |
| | |
| | |
| | |
| | |
| Assets: | | | | | | | | | | Carried at fair value on a recurring basis | | | | | | | | | | Carried at fair value on a recurring basis | | Trading securities: | | | | | | | | | | Trading securities: | | Corporate bonds | $ | — |
| | $ | 6,102 |
| | $ | — |
| | $ | — |
| | $ | 6,102 |
| Corporate bonds | $ | 0 | | | $ | 5,896 | | | $ | 0 | | | $ | — | | | $ | 5,896 | | U.S. Treasury obligations | | U.S. Treasury obligations | 0 | | | 2,240,236 | | | 0 | | | — | | | 2,240,236 | | U.S. government-guaranteed – single-family MBS | — |
| | 5,344 |
| | — |
| | — |
| | 5,344 |
| U.S. government-guaranteed – single-family MBS | 0 | | | 4,047 | | | 0 | | | — | | | 4,047 | | GSEs – single-family MBS | — |
| | 148 |
| | — |
| | — |
| | 148 |
| | GSEs – multifamily MBS | — |
| | 151,444 |
| | — |
| | — |
| | 151,444 |
| | GSE – single-family MBS | | GSE – single-family MBS | 0 | | | 85 | | | 0 | | | — | | | 85 | | | Total trading securities | — |
| | 163,038 |
| | — |
| | — |
| | 163,038 |
| Total trading securities | 0 | | | 2,250,264 | | | 0 | | | — | | | 2,250,264 | | Available-for-sale securities: | |
| | |
| | |
| | |
| | |
| Available-for-sale securities: | | | | | | | | | | State or local HFA securities | — |
| | — |
| | 49,601 |
| | — |
| | 49,601 |
| | HFA securities | | HFA securities | 0 | | | 0 | | | 64,652 | | | — | | | 64,652 | | Supranational institutions | — |
| | 405,155 |
| | — |
| | — |
| | 405,155 |
| Supranational institutions | 0 | | | 416,429 | | | 0 | | | — | | | 416,429 | | U.S. government-owned corporations | — |
| | 273,169 |
| | — |
| | — |
| | 273,169 |
| U.S. government-owned corporations | 0 | | | 296,761 | | | 0 | | | — | | | 296,761 | | GSEs | — |
| | 115,627 |
| | — |
| | — |
| | 115,627 |
| | GSE | | GSE | 0 | | | 123,786 | | | 0 | | | — | | | 123,786 | | U.S. government guaranteed – single-family MBS | — |
| | 75,658 |
| | — |
| | — |
| | 75,658 |
| U.S. government guaranteed – single-family MBS | 0 | | | 57,714 | | | 0 | | | — | | | 57,714 | | U.S. government guaranteed – multifamily MBS | — |
| | 361,134 |
| | — |
| | — |
| | 361,134 |
| U.S. government guaranteed – multifamily MBS | 0 | | | 282,617 | | | 0 | | | — | | | 282,617 | | GSEs – single-family MBS | — |
| | 3,562,159 |
| | — |
| | — |
| | 3,562,159 |
| | GSEs – multifamily | — |
| | 1,007,441 |
| | — |
| | — |
| | 1,007,441 |
| | GSE – single-family MBS | | GSE – single-family MBS | 0 | | | 2,590,271 | | | 0 | | | — | | | 2,590,271 | | GSE – multifamily MBS | | GSE – multifamily MBS | 0 | | | 3,576,770 | | | 0 | | | — | | | 3,576,770 | | Total available-for-sale securities | — |
| | 5,800,343 |
| | 49,601 |
| | — |
| | 5,849,944 |
| Total available-for-sale securities | 0 | | | 7,344,348 | | | 64,652 | | | — | | | 7,409,000 | | Derivative assets: | |
| | |
| | |
| | |
| | |
| Derivative assets: | | | | | | | | | | Interest-rate-exchange agreements | — |
| | 13,493 |
| | — |
| | 8,571 |
| | 22,064 |
| Interest-rate-exchange agreements | 0 | | | 15,102 | | | 0 | | | 144,402 | | | 159,504 | | Mortgage delivery commitments | — |
| | 339 |
| | — |
| | — |
| | 339 |
| Mortgage delivery commitments | 0 | | | 227 | | | 0 | | | — | | | 227 | | Total derivative assets | — |
| | 13,832 |
| | — |
| | 8,571 |
| | 22,403 |
| Total derivative assets | 0 | | | 15,329 | | | 0 | | | 144,402 | | | 159,731 | | Other assets | 9,988 |
| | 15,071 |
| | — |
| | — |
| | 25,059 |
| Other assets | 13,894 | | | 18,045 | | | 0 | | | — | | | 31,939 | | Total assets carried at fair value on a recurring basis | $ | 9,988 |
| | $ | 5,992,284 |
| | $ | 49,601 |
| | $ | 8,571 |
| | $ | 6,060,444 |
| 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) | | | | | | | | | | Carried at fair value on a nonrecurring basis(2) | | | | | | | | | | Held-to-maturity securities: | | | | | | | | | | Held-to-maturity securities: | | Private-label residential MBS | $ | — |
| | $ | — |
| | $ | 1,668 |
| | $ | — |
| | $ | 1,668 |
| | Private-label MBS | | Private-label MBS | $ | 0 | | | $ | 0 | | | $ | 6,856 | | | $ | — | | | $ | 6,856 | | Mortgage loans held for portfolio | — |
| | — |
| | 1,144 |
| | — |
| | 1,144 |
| Mortgage loans held for portfolio | 0 | | | 0 | | | 1,198 | | | — | | | 1,198 | | REO | — |
| | — |
| | 361 |
| | — |
| | 361 |
| REO | 0 | | | 0 | | | 78 | | | — | | | 78 | | Total assets carried at fair value on a nonrecurring basis | — |
| | — |
| | 3,173 |
| | — |
| | 3,173 |
| Total assets carried at fair value on a nonrecurring basis | $ | 0 | | | $ | 0 | | | $ | 8,132 | | | $ | — | | | $ | 8,132 | | Liabilities: | |
| | |
| | |
| | |
| | |
| Liabilities: | | | | | | | | | | Carried at fair value on a recurring basis | | | | | | | | | | Carried at fair value on a recurring basis | | Derivative liabilities | |
| | |
| | |
| | |
| | |
| Derivative liabilities | | | | | | | | | | Interest-rate-exchange agreements | $ | — |
| | $ | (309,552 | ) | | $ | — |
| | $ | 53,752 |
| | $ | (255,800 | ) | Interest-rate-exchange agreements | $ | 0 | | | $ | (43,805) | | | $ | 0 | | | $ | 33,534 | | | $ | (10,271) | | | Total liabilities carried at fair value on a recurring basis | $ | — |
| | $ | (309,552 | ) | | $ | — |
| | $ | 53,752 |
| | $ | (255,800 | ) | Total liabilities carried at fair value on a recurring basis | $ | 0 | | | $ | (43,805) | | | $ | 0 | | | $ | 33,534 | | | $ | (10,271) | |
_______________________ | | (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. |
| | (2) | 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). The fair values presented are as of the date the fair value adjustment was recorded. |
(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.
(2) 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. The fair values presented are as of the date the fair value adjustment was recorded.
| | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral (1) | | Total | Assets: | |
| | |
| | |
| | |
| | |
| Carried at fair value on a recurring basis | | | | | | | | | | Trading securities: | | | | | | | | | | U.S. government-guaranteed – single-family MBS | $ | — |
| | $ | 6,807 |
| | $ | — |
| | $ | — |
| | $ | 6,807 |
| GSEs – single-family MBS | — |
| | 346 |
| | — |
| | — |
| | 346 |
| GSEs – multifamily MBS | — |
| | 184,357 |
| | — |
| | — |
| | 184,357 |
| Total trading securities | — |
| | 191,510 |
| | — |
| | — |
| | 191,510 |
| Available-for-sale securities: | |
| | |
| | |
| | |
| | |
| State or local HFA securities | — |
| | — |
| | 37,683 |
| | — |
| | 37,683 |
| Supranational institutions | — |
| | 418,285 |
| | — |
| | — |
| | 418,285 |
| U.S. government-owned corporations | — |
| | 292,077 |
| | — |
| | — |
| | 292,077 |
| GSEs | — |
| | 121,343 |
| | — |
| | — |
| | 121,343 |
| U.S. government guaranteed – single-family MBS | — |
| | 95,777 |
| | — |
| | — |
| | 95,777 |
| U.S. government guaranteed – multifamily MBS | — |
| | 443,373 |
| | — |
| | — |
| | 443,373 |
| GSEs – single-family MBS | — |
| | 4,562,992 |
| | — |
| | — |
| | 4,562,992 |
| GSEs – multifamily MBS | — |
| | 1,353,206 |
| | — |
| | — |
| | 1,353,206 |
| Total available-for-sale securities | — |
| | 7,287,053 |
| | 37,683 |
| | — |
| | 7,324,736 |
| Derivative assets: | |
| | |
| | |
| | |
| | |
| Interest-rate-exchange agreements | — |
| | 56,069 |
| | — |
| | (21,452 | ) | | 34,617 |
| Mortgage delivery commitments | — |
| | 169 |
| | — |
| | — |
| | 169 |
| Total derivative assets | — |
| | 56,238 |
| | — |
| | (21,452 | ) | | 34,786 |
| Other assets | 9,726 |
| | 12,625 |
| | — |
| | — |
| | 22,351 |
| Total assets carried at fair value on a recurring basis | $ | 9,726 |
| | $ | 7,547,426 |
| | $ | 37,683 |
| | $ | (21,452 | ) | | $ | 7,573,383 |
| Carried at fair value on a nonrecurring basis(2) | | | | | | | | | | 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 carried at fair value on a nonrecurring basis | $ | — |
| | $ | — |
| | $ | 7,362 |
| | $ | — |
| | $ | 7,362 |
| Liabilities: | |
| | |
| | |
| | |
| | |
| Carried at fair value on a recurring basis | | | | | | | | | | Derivative liabilities | |
| | |
| | |
| | |
| | |
| Interest-rate-exchange agreements | $ | — |
| | $ | (347,325 | ) | | $ | — |
| | $ | 46,902 |
| | $ | (300,423 | ) | Mortgage delivery commitments | — |
| | (27 | ) | | — |
| | — |
| | (27 | ) | Total liabilities carried at fair value on a recurring basis | $ | — |
| | $ | (347,352 | ) | | $ | — |
| | $ | 46,902 |
| | $ | (300,450 | ) |
_______________________
| | (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. |
| | (2) | 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). The fair values presented are as of the date the fair value adjustment was recorded. |
Table 19.315.3 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, 2018, 2017,2020, 2019, and 2016.2018.
Table 19.3 - Roll Forward of Level 3 Available-for-Sale Securities (dollars in thousands)
| | | | | | | | | | | | | | | | For the Year Ended December 31, | | | 2018 | | 2017 | | 2016 | Balance at beginning of year | | $ | 37,683 |
| | $ | 8,146 |
| | $ | — |
| Purchases | | 12,800 |
| | 33,350 |
| | 9,350 |
| Unrealized losses included in other comprehensive income | | (882 | ) | | (3,813 | ) | | (1,204 | ) | Balance at end of year | | $ | 49,601 |
| | $ | 37,683 |
| | $ | 8,146 |
|
Table 15.3 - Roll Forward of Level 3 Available-for-Sale Securities (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year ended December 31, | | | 2020 | | 2019 | | 2018 | | | HFA Securities | | Private-label MBS | | HFA Securities | | HFA Securities | Balance at beginning of year | | $ | 64,652 | | | $ | 0 | | | $ | 49,601 | | | $ | 37,683 | | Transfer of securities from held-to-maturity to available-for-sale | | 71,240 | | | 180,514 | | | 0 | | | 0 | | Total gains included in earnings | | | | | | | | | Net gains on sale | | 0 | | | 30,583 | | | 0 | | | 0 | | Reduction of provision for credit losses | | 0 | | | 269 | | | 0 | | | 0 | | Accretion | | 0 | | | 353 | | | 0 | | | 0 | | Total gains (losses) included in other comprehensive income | | | | | | | | | Net unrealized gains (losses) | | 6,517 | | | (22,203) | | | 1,231 | | | (882) | | Purchases | | 0 | | | 0 | | | 13,820 | | | 12,800 | | Sales, maturities, and settlements | | | | | | | | | Sales | | 0 | | | (187,366) | | | 0 | | | 0 | | Maturities | | (18,685) | | | 0 | | | 0 | | | 0 | | Settlements | | (1,175) | | | (2,150) | | | 0 | | | 0 | | Balance at end of year | | $ | 122,549 | | | $ | 0 | | | $ | 64,652 | | | $ | 49,601 | | | | | | | | | | | Total amount of unrealized gains (losses) for the period included in other comprehensive income relating to securities held at period end | | $ | 5,823 | | | $ | 0 | | | $ | 1,231 | | | $ | (882) | | | | | | | | | | |
Note 2016 — 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, 2018,2020, 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.
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, 20182020 and 2017.2019. The par amounts of other FHLBanks' outstanding COs for which we are jointly and severally liable totaled $972.6$712.5 billion and $978.2$974.4 billion at December 31, 20182020 and 2017,2019, respectively. See Note 1410 — Consolidated Obligations for additional information.
Off-Balance-Sheet Commitments
Table 20.1 - Off-Balance Sheet Commitments (dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2018 | | December 31, 2017 | | | Expire within one year | | Expire after one year | | Total | | Expire within one year | | Expire after one year | | Total | Standby letters of credit outstanding (1) | | $ | 6,028,851 |
| | $ | 226,438 |
| | $ | 6,255,289 |
| | $ | 5,034,725 |
| | $ | 223,167 |
| | $ | 5,257,892 |
| Commitments for unused lines of credit - advances (2) | | 1,177,377 |
| | — |
| | 1,177,377 |
| | 1,216,592 |
| | — |
| | 1,216,592 |
| Commitments to make additional advances | | 159,401 |
| | 59,894 |
| | 219,295 |
| | 18,851 |
| | 63,488 |
| | 82,339 |
| Commitments to invest in mortgage loans | | 50,773 |
| | — |
| | 50,773 |
| | 42,918 |
| | — |
| | 42,918 |
| Unsettled CO bonds, at par | | 105,400 |
| | — |
| | 105,400 |
| | 52,550 |
| | — |
| | 52,550 |
| Unsettled CO discount notes, at par | | 600,000 |
| | — |
| | 600,000 |
| | — |
| | — |
| | — |
|
Table 16.1 - Off-Balance Sheet Commitments (1)(dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | | | Expire within one year | | Expire after one year | | Total | | Expire within one year | | Expire after one year | | Total | Standby letters of credit outstanding (2) | | $ | 6,190,479 | | | $ | 233,771 | | | $ | 6,424,250 | | | $ | 7,484,754 | | | $ | 215,014 | | | $ | 7,699,768 | | | | | | | | | | | | | | | Commitments for unused lines of credit - advances (3) | | 1,127,432 | | | 0 | | | 1,127,432 | | | 1,143,828 | | | 0 | | | 1,143,828 | | Commitments to make additional advances | | 69,684 | | | 93,465 | | | 163,149 | | | 434,253 | | | 88,167 | | | 522,420 | | Commitments to invest in mortgage loans | | 28,386 | | | 0 | | | 28,386 | | | 49,911 | | | 0 | | | 49,911 | | | | | | | | | | | | | | | Unsettled CO discount notes, at par | | 250,000 | | | 0 | | | 250,000 | | | 500,000 | | | 0 | | | 500,000 | |
__________________________ | | (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, 2018 and 2017, these amounts totaled $32.6 million and $1.4 million, respectively. A
|
(1) We have determined that it is unnecessary to record any liability for credit losses on these agreements.
lso(2) The amount of standby letters of credit outstanding excludes commitments to issue standby letters of credit that expire within one year. At December 31, 2020 and 2019, these amounts totaled $37.1 million and $27.2 million, respectively. Also excluded are commitments to issue standby letters of credit that expire after one year totaling $675,000$25 thousand and $543,000$1.8 million at December 31, 20182020 and 2017,2019, respectively.
| | (2) | (3) 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.
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. Historically, standby letters of credit usually expire without being drawn upon. The originalAt December 31, 2020, the terms of these standby letters of credit have original expiration periods of up to 20 years,, currently expiring no later than 2027.2030. Currently, we offer new standby letters of credit with expiration periods ofterms typically up to 10 years. Our unearnedyears, while terms greater than 10 years may be available on an exception basis. Unearned fees for the value of the guarantees related to standby letters of credit are recorded in other liabilities and totaled $1.3$1.3 million and $1.1$1.7 million at December 31, 20182020 and 2017,2019, 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 4560 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 128 — 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 $3.0 million, $2.9 million, and $2.9 million for the years ended December 31, 2018, 2017, and 2016, respectively.
Table 20.2 - Future Minimum Lease Payments (dollars in thousands)
| | | | | | | | | | | | Equipment | | Premises | | | Capital Leases | | Operating Leases | 2019 | | $ | 41 |
| | $ | 2,681 |
| 2020 | | 22 |
| | 2,685 |
| 2021 | | — |
| | 2,689 |
| 2022 | | — |
| | 2,693 |
| 2023 | | — |
| | 2,563 |
| Total minimum lease payments | | $ | 63 |
| | $ | 13,311 |
|
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 2117 — 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��December 31, 20182020 and 2017,2019, 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, 2020 and 2019. At December 31, 2020, no shareholder has more than 10 percent of total capital stock outstanding. 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, 2018 | | | | | | | | | | | | Citizens Bank, N.A. | $ | 339,003 |
| | 13.2 | % | | $ | 7,656,146 |
| | 17.7 | % | | $ | 5,005 |
| | 8.3 | % | | | | | | | | | | | | | As of December 31, 2017 | | | | | | | | | | | | Citizens Bank, N.A. | $ | 227,287 |
| | 9.8 | % | | $ | 4,858,592 |
| | 12.9 | % | | $ | 2,558 |
| | 6.0 | % |
Table 17.1 - 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 | % |
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 21.2 - Shareholder Concentrations, Income Statement (dollars in thousands)
| | | | | | | | | | | | | | | | For the Year Ended December 31, | Citizens Bank, N.A. | | 2018 | | 2017 | | 2016 | Interest income on advances | | $ | 134,753 |
| | $ | 63,568 |
| | $ | 34,276 |
| Fees on letters of credit | | 4,415 |
| | 3,368 |
| | 3,059 |
|
We received prepayment fees of $298,000 and $368,000 from Citizens Bank, N.A. and the corresponding principal amount prepaid to us was $3.2 million and $2.0 million during 2018 and 2016, respectively. During 2017, we did not receive any prepayment fees from Citizens Bank, N.A.
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 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, 2018 | $ | 113,337 |
| | 4.4 | % | | $ | 2,147,602 |
| | 5.0 | % | | $ | 3,576 |
| | 6.0 | % | As of December 31, 2017 | 114,498 |
| | 4.9 |
| | 2,133,374 |
| | 5.7 |
| | 2,466 |
| | 5.8 |
|
Table 17.2 - 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 | December 31, 2020 | $ | 60,624 | | | 4.8 | % | | $ | 582,765 | | | 3.1 | % | | $ | 651 | | | 2.5 | % | December 31, 2019 | 112,811 | | | 6.0 | | | 2,224,141 | | | 6.4 | | | 3,581 | | | 7.4 | |
Note 2218 — 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 $21,000, $43,000$48 thousand, $25 thousand and $3,000$21 thousand for the years ended December 31, 2018, 2017,2020, 2019, and 2016,2018, respectively. Interest expense for loans from other FHLBanks was $36,000, $6,000,$218 thousand, $20 thousand, and $1,000$36 thousand for the years ended December 31, 2018, 2017,2020, 2019, and 2016,2018, 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. The transaction-services 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, 2018, 2017,2020, 2019, and 2016,2018, we recorded $2.5$2.9 million, $2.2$2.8 million, and $2.0$2.5 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 is paid quarterly and has been recorded in the statement of operations as an operating expense. The membership fee paid was $600,000expense, and totaled $600 thousand for each of the years ended December 31, 2018, 20172020, 2019, and 2016.2018. In addition, beginning in 2020, we receive an MPF performance fee from the FHLBank of Chicago. The MPF performance fee for the year ended December 31, 2020 amounted to $50 thousand and was recorded in the statement of operations as other income.
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 years ended December 31, 2020 and 2019, we transferred debt obligations with par amounts of $985.1 million and $10.0 million, respectively, and fair values of approximately $1.0 billion and $12.7 million, respectively, on the day they were transferred. During the year ended December 31, 2018, there were 0 transfers of COs between us and other FHLBanks.
Note 2319 — Subsequent Events
On February 14, 2019,19, 2021, the board of directors declared a cash dividend at an annualized rate of 6.171.59 percent based on daily average capital stock balances outstanding during the fourth quarter of 2018.2020. The dividend, including dividends classified as interest on mandatorily redeemable capital stock, amounted to $37.8$5.4 million and was paid on March 4, 2019.2, 2021.
Supplementary Financial Data
Supplementary financial data for the years ended December 31, 20182020 and 2017,2019, 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. 2018 Quarterly Results of Operations – Unaudited (dollars in thousands) | | | | | | | | | | | | | | | | | | | | 2018 – Quarter Ended | | | December 31 | | September 30 | | June 30 | | March 31 | Total interest income | | $ | 401,212 |
| | $ | 368,818 |
| | $ | 350,090 |
| | $ | 305,933 |
| Total interest expense | | 325,231 |
| | 291,358 |
| | 271,332 |
| | 226,022 |
| Net interest income before provision for credit losses | | 75,981 |
| | 77,460 |
| | 78,758 |
| | 79,911 |
| (Reduction of) provision for credit losses | | (40 | ) | | — |
| | (3 | ) | | 9 |
| Net interest income after (reduction of) provision for credit losses | | 76,021 |
| | 77,460 |
| | 78,761 |
| | 79,902 |
| Net impairment losses on investment securities recognized in income | | (125 | ) | | (71 | ) | | (257 | ) | | (79 | ) | Litigation settlements | | — |
| | 12,769 |
| | — |
| | — |
| Other income | | 2,328 |
| | 2,410 |
| | 1,978 |
| | 1,873 |
| Non-interest expense | | 29,604 |
| | 20,658 |
| | 21,172 |
| | 20,468 |
| Income before assessments | | 48,620 |
| | 71,910 |
| | 59,310 |
| | 61,228 |
| AHP assessments | | 4,912 |
| | 7,238 |
| | 5,978 |
| | 6,171 |
| Net income | | $ | 43,708 |
| | $ | 64,672 |
| | $ | 53,332 |
| | $ | 55,057 |
|
2020 Quarterly Results of Operations – Unaudited
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2020 – Quarter Ended | | | December 31 | | September 30 | | June 30 | | March 31 | Total interest income | | $ | 138,084 | | | $ | 148,898 | | | $ | 184,281 | | | $ | 282,516 | | Total interest expense | | 77,692 | | | 91,780 | | | 141,934 | | | 252,165 | | Net interest income before provision for credit losses | | 60,392 | | | 57,118 | | | 42,347 | | | 30,351 | | (Reduction of) provision for credit losses | | (1,434) | | | (5,143) | | | 2,903 | | | (684) | | Net interest income after (reduction of) provision for credit losses | | 61,826 | | | 62,261 | | | 39,444 | | | 31,035 | | Litigation settlements | | 25,998 | | | — | | | 98 | | | — | | Loss on early extinguishment of debt | | (14,784) | | | — | | | — | | | — | | Net unrealized (losses) gains on trading securities | | (19,703) | | | (19,603) | | | (18,750) | | | 46,120 | | Net gains (losses) on derivatives and hedging activities | | 2,421 | | | 1,624 | | | (1,161) | | | (52,558) | | Realized net gain from sale of available-for-sale securities | | 4,373 | | | 26,210 | | | — | | | — | | Realized net gain from sale of held-to-maturity securities | | — | | | 6,680 | | | — | | | 40,733 | | Other income | | 3,092 | | | 3,199 | | | 3,636 | | | 3,302 | | Non-interest expense | | 38,512 | | | 20,858 | | | 20,146 | | | 22,341 | | Income before assessments | | 24,711 | | | 59,513 | | | 3,121 | | | 46,291 | | AHP assessments | | 2,474 | | | 5,957 | | | 319 | | | 4,636 | | Net income | | $ | 22,237 | | | $ | 53,556 | | | $ | 2,802 | | | $ | 41,655 | |
2017 Quarterly Results of Operations – Unaudited (dollars in thousands) | | | | | | | | | | | | | | | | | | | | 2017 – Quarter Ended | | | December 31 | | September 30 | | June 30 | | March 31 | Total interest income | | $ | 266,747 |
| | $ | 246,824 |
| | $ | 224,227 |
| | $ | 199,091 |
| Total interest expense | | 187,177 |
| | 175,715 |
| | 160,407 |
| | 136,587 |
| Net interest income before provision for credit losses | | 79,570 |
| | 71,109 |
| | 63,820 |
| | 62,504 |
| 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 |
| Net impairment losses on investment securities recognized in income | | (36 | ) | | (432 | ) | | (568 | ) | | (418 | ) | Litigation settlements | | 20,761 |
| | — |
| | — |
| | — |
| Other income | | 1,130 |
| | 1,028 |
| | 1,020 |
| | 427 |
| Non-interest expense | | 25,958 |
| | 20,972 |
| | 20,597 |
| | 20,974 |
| Income before assessments | | 75,415 |
| | 50,705 |
| | 43,800 |
| | 41,590 |
| AHP assessments | | 7,587 |
| | 5,110 |
| | 4,418 |
| | 4,192 |
| Net income | | $ | 67,828 |
| | $ | 45,595 |
| | $ | 39,382 |
| | $ | 37,398 |
|
2019 Quarterly Results of Operations – Unaudited
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2019 – Quarter Ended | | | December 31 | | September 30 | | June 30 | | March 31 | Total interest income | | $ | 324,329 | | | $ | 337,539 | | | $ | 361,792 | | | $ | 421,440 | | Total interest expense | | 255,978 | | | 281,165 | | | 304,059 | | | 334,872 | | Net interest income before provision for credit losses | | 68,351 | | | 56,374 | | | 57,733 | | | 86,568 | | 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 | | (384) | | | (411) | | | (314) | | | (103) | | Litigation settlements | | 29,358 | | | 3 | | | — | | | — | | Other income (loss) | | 13,001 | | | 2,478 | | | 3,989 | | | (6,633) | | Non-interest expense | | 34,137 | | | 22,671 | | | 21,789 | | | 19,287 | | Income before assessments | | 76,167 | | | 35,725 | | | 39,607 | | | 60,542 | | AHP assessments | | 7,633 | | | 3,597 | | | 3,987 | | | 6,085 | | Net income | | $ | 68,534 | | | $ | 32,128 | | | $ | 35,620 | | | $ | 54,457 | |
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, 2020. 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, 2020.
Management's Report on Internal Control over Financial Reporting
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2018,2020, 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) serves as the 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 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.
PwC has advised the Bank by letter dated February 22, 2019, that PwC covered persons had borrowing relationships with a Bank member (referred to below as the “Lender”) which owned more than ten percent of the Bank’s capital stock based on PwC’s assessment conducted using shareholder information as of each quarterly period ended in 2018. 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 audit of the Bank.
PwC advised the Audit Committee of the Bank that it believes that based on its analysis, PwC remains objective and impartial despite matters that may ultimately be determined to be inconsistent with the criteria set out in the rules and regulations of the SEC related 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, 2018, 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 2019; 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.
None
For a discussion
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 nineeight member directorsdirectorships and eightseven 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 as of December 31 of the prior year, 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.
If a member director ceases to be a director or officer of a member in the state from which the director was elected, 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.
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 20182020 and 20192021 as follows:
Table 46 - Member Directorships by State Table 44 - Member Directorships by State
| | | | | | Member Directorships | Connecticut | | 2 | Maine | | 1 | Massachusetts | | 3 | New Hampshire | | 1 | Rhode Island | | 1 | Vermont | | 1 | Total | | 9 |
| | | | | | | | | | | | | | | | | 2021 Member Directorships | | 2020 Member Directorships | Connecticut | | 1 | | 1 | Maine | | 1 | | 1 | Massachusetts | | 3 | | 3 | New Hampshire | | 1 | | 1 | Rhode Island | | 1 | | 2 | Vermont | | 1 | | 1 | Total | | 8 | | 9 |
Our annual election was completed in the fourth quarter of 20182020 and involved elections for one Vermont member directorship, one New HampshireRhode Island member directorship and two 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 a member directorshipsdirectorship 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.
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 us 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
Since 2013, the Bank’s bylaws have included diversity of the board as a factor that may be considered in making independent director nominations, and the charter for our governance committee, whichGovernance Committee of the board (which has responsibility for recommending candidates for nomination for independent directorships to the board, include skills, experience, and diversity among the factors that the committeedirectorships) and the board have considered this factor in each of directors may take into consideration when nominating candidates for independent directorships.their nomination decisions since then. In 2020, in response to an Advisory Bulletin on Board Diversity issued by the FHFA, the Governance Committee and the board also began considering competency in matters of diversity and inclusion as an additional factor in their nomination decisions. 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 of and applications 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:
Joan Carty
•Thomas J. Curry in 2018, to serve as a public interest director,2020, based on herhis prior experience serving as president and chief executive officerthe Comptroller 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;
Patrick E. Clancy in 2018, to servethe Currency of the United States, 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 than 25,000 affordable housing units over the past 40 years;
Cornelius K. Hurley in 2017, based on his legal and banking experience, having served as general counsel of a large regional bank, as directormember of the Center for Finance, Law and Policy at Boston University SchoolFederal Deposit Insurance Corporation’s board of Law,directors, and as ProfessorCommissioner of Banks for the PracticeCommonwealth of Banking Law at Boston University;Massachusetts;
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 2016,2020, based on her significant experience in compliance, risk management, 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, particularlyincluding through his prior role as president and executive officer of the Connecticut Housing Finance Authority;Authority and his current role as the executive vice president and chief financial officer of Housing Partnership Network; 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; and •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.technology; •Joan Carty in 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; •Patrick E. Clancy in 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 or redeveloped approximately 25,000 affordable housing units over the past 40 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.
Further, with the exception of director Antoinette C. Lazarus,Thomas J. Curry, 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 7, 201810, 2020 and October 19, 2018,30, 2020, as supplemented by a Form 8-K/A filed with the SEC on December 17, 2018.January 14, 2021.
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 serves 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 65,67, 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, the Massachusetts Bankers Association Charitable Foundation, and the 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 68,53, has served as the community engagement officersenior vice president of MountainOneCitizens Bank, N.A., located in North Adams, Massachusetts,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, 2019.2024.
Martin J. Geitz(chair), age 62,64, 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 61, 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 74,76, 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 68, 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.
John F. Treanor, age 71, 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 his current term will conclude on December 31, 2020.
Michael R. Tuttle, age 64, 66, has served as senior 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 voting director of Opportunities Credit Union from May 2017 until February 2019, 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),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, 2022.
John C. Witherspoon, age 62, 64, 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 63,65, 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 63, 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 67,69, 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, 2022.
Eric Chatman, age 58,60, 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 72,74, 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 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, 2022.
Thomas J. Curry, age 64, has been a partner at the law firm Nutter McClennen & Fish LLP in Boston, Massachusetts since November 2017. Mr. Curry served as Comptroller of the Currency of the United States from April 2012 to May 2017, as a member of the Federal Deposit Insurance Corporation’s board of directors from 2003 to May 2017, and as Commissioner of Banks for the Commonwealth of Massachusetts from 1990 to 1991 and from 1995 to 2003. Mr. Curry has served as a director of the Bank since January 1, 2021, and his current term will conclude on December 31, 2024.
Cornelius K. Hurley, age 73,74, 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. HurleyHe 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 55,57, 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 Hartford, 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, 2020.2024.
Jay F. Malcynsky, age 65, 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 term will conclude on December 31, 2020.
Emil J. Ragones, age 72,74, 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,now part of CliftonLarsenAllen LLP,, 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 Chief 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 cooperatecollaborate in selecting, setting the compensation of, 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: | | ◦ | PwC audit partner and audit team rotation, |
| | ◦ | PwC’s tenure as the Bank’s and the FHLBank System’s independent auditor, |
| | ◦ | PwC’s depth of understanding of our business, operations, and accounting policies and practices, and |
| | ◦ | disruption and risks associated with changing the Bank’s auditor; |
◦PwC engagement audit partner, engagement quality review partner, and audit team rotation, ◦PwC’s tenure as the Bank’s and the FHLBank System’s independent auditor,
◦benefits associated with engaging a different firm as independent auditor, ◦potential disruption and risks associated with changing the Bank’s auditor; and ◦PwC’s depth of understanding of our business, operations, and accounting policies and practices; •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; andfirms, as well as metrics indicative of audit quality; •the appropriateness of PwC’s fees, on both an absolute basis and as compared to its peer firms.firms; and •the diversity of PwC's ownership and staff assigned to the engagement.
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. Our current engagement partner began serving in this role in 2020.
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 2019.2021.
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:
•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, 2018,2020, 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 C. Lazarus
JayEdward F. Malcynsky
John F. TreanorManzi, Jr.
Richard E. Wyman Andrew Calamare,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 45Table 47 - Executive Officers
| | | | | | | | | Name (1) | Title | Age | Edward A. Hjerpe III | President and Chief Executive Officer | 6062 | Timothy J. Barrett | Executive Vice President and Treasurer | 6062 | George H. Collins | Executive Vice President and Chief Risk Officer | 59 | M. Susan Elliott | Executive Vice President and Chief Business Officer | 64 | Frank Nitkiewicz | Executive Vice President and Chief Financial Officer | 5759 | Carol Hempfling Pratt | Executive Vice President, General Counsel, and Corporate Secretary | 6062 | Brian G. Donahue | Senior Vice President, Controller and Chief Accounting Officer | 5254 | Ana C. Dyer | Senior Vice President, Member Services | 53 | Barry F. Gale | Senior Vice President and Chief Human Resources Officer | 5961 | Sean R. McRae | Senior Vice President and Chief Information Officer | 5456 | Edward A. Schultze | Senior Vice President and Chief Risk Officer | 61 |
_________________________ | | (1) | Each of the executive officers listed serves on our Management Committee, with the exception of Mr. Donahue. |
(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.
Timothy J. Barrett has served as executive vice president and treasurer since January 2019, and previously 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
(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.
George H. Collins
has served as executive vice president and chief risk officer since January 2015 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. She joined us in 1981. She 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.
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 director of the Bank’s office of minority and women inclusion since January 2019, and previously as senior vice president, executive director of human resources and directorApril 2013. Mr. Gale also joined the board of the Bank’s office of minority and women inclusion since April 2013.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.
Edward A. Schultze has served as senior vice president and chief risk officer since January 2020, and previously as first vice president, director of market risk management since 2013. Prior to assuming that position, Mr. Schultze served as vice president, director of capital market risks since joining the Bank in 2010. Mr. Schultze’s financial services career began in 1983 and includes various roles at Guaranty Bank, FIRSTFED AMERICA BANCORP, Inc., and First Institutional Liquidity Corp. Mr. Schultze holds a B.B.A. in Banking and Finance and an M.B.A. in Finance from 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:(https://www.fhlbboston.com/downloads/aboutus/code_of_ethics.pdf)fhlbank-boston/governance#/). 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, 2018,2020, the named executive officers were: | | | | | | | | | 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 | | Executive Vice President, General Counsel and Corporate Secretary; and | Timothy J. Barrett | | Executive Vice President and Treasurer.Treasurer; and | Sean R. McRae | | Senior Vice President and Chief Information Officer |
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 2018.2020. 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, 2019.2020. Additionally, we adopted an executive incentive plan (an EIP) on February 7, 2018March 18, 2020 (the 20182020 EIP). Cash incentives awarded under EIPs in 2018for 2020 were generally determined based on the criteria set forth in the 20182020 EIP for short-term awards and the 2016 EIP.2018 executive incentive plan (2018 EIP) for long-term awards.
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,approves 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, 2018.2020.
The members of the Compensation Committee are:
John W. McGeorge, Chair Michael R. Tuttle, Vice Chair Joan Carty MartinThomas J. GeitzCurry
Dwight M. Davidsen Antoinette C. Lazarus Gregory R. ShookRichard E. Wyman, Jr.
AndrewMartin J. Calamare (ex officio).Geitz, 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 2014,2019, 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 aan updated comprehensive total rewards study. A major outcome of the study was the adoption in 2020 of an updated "TotalTotal Rewards Philosophy," the principles of which have been the basis for determining total compensation for the named executive officers since that time.officers.
The 2020 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 packagerewards structure for employees, including the named executive officers, that:
that attracts, retains and motivates a diverse employee population while supporting business and mission objectives throughout economic cycles. The Total Rewards Philosophy is tailoreddesigned 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 individualdeliver a total rewards program that provides more certainty for the Bank through higher fixed compensation, competitive annual incentives, distinctive benefits and lower employment volatility reinforcing our lower overall risk appetite and emphasis on maintaining safe and sound operations. Annual incentive plans are designed to align payout opportunities towith achievement of our financial, operational, mission, and annualregulatory goals and long-term business and financial strategieslimit excessive risk-taking while also considering business unit/recognizing team results and individual performance;contributions. Incentive plans for staff engaged in risk management, compliance, and audit functions are designed to ensure that conflicts of interest are managed, and independence is maintained. The deferral of a portion of the annual incentive for executives and senior management is designed to align with regulatory guidance, emphasize safe and sound operations, and discourage excessive risk-taking activities.
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 2020 EIP and 2018 EIP, to ensure these plans do not promote or reward imprudent risk taking. Additionally, the 20182020 EIP includes long-term incentive opportunities based on the average core return on capital stock over the three-year period starting January 1, 2018,2020, and ending December 31, 2020,2022, and targeted regulatory results at December 31, 2020,2022, with associated deferred payouts of 50 percent of the 20182020 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 20182020 short-term awards, which are intended to further reduce the risk of imprudent risk-taking.
Further, our chief risk officer and our chief 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 2019,February 2021, 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 conflicts of interest 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, Mr. Collins's goals, as chief risk officer, differ somewhat and have different weightings under the 2018 EIP from the goals of the other named executive officers. These differences are intended to align his incentives with appropriately managing our risk profile. Likewise, all participantsParticipants in the 20182020 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 20182020 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 commercial banks and financial services firms including commercialwith capital markets, investment, risk, and wholesale lending capabilities, and publicly traded banks in a defined asset range. We may also consider other FHLBanks, other GSEs,peer groups, such as Fannie Maelocal market peers and Freddie Mac,information-technology-specific peers for unique and other financial institutions, including those in the private sector.hard-to-fill positions. 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 uniquesimilarity in structure, responsibilities, mission, mix-of-pay and total rewards within a cooperative, structure.government-sponsored-enterprise structure; and
•The commercial banks GSEs and diversified financial firm peersservices firms as the primarya broader peer group with the specialized talent that we often compete for competitive positioning for total rewards for all levels ofwhen recruiting and retaining key employees in our positions that require financial services experience.geographic location. For executive officers,level positions, we may consider the scale and scope of the role in making a market comparison, often considering division heads of large peers that are smaller in assets or adjust the levelas appropriate market benchmarks, rather than an overall head of a matched position versus larger asset peers to establish reasonable market benchmarks.function or business area.
Both peerPeer 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 primarya 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 2018,2020, 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 primarycommercial banks and financial services firms peer group commercial 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 bank and financial services firms peer group focuses on large and mid-sized commercial 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 bank and financial services firms peer group consists mostly of banks with multiple product lines/offerings and significant assets. The most significant difference between us and the commercial bank and financial services firms 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. In addition to the above peer groups, in certain limited cases, publicly traded banks are considered as peers. Only publicly traded banks of a limited asset size are used as peers for this purpose, in order to account for the broader scope of activities and scale of this peer group.
We worked with McLagan to match several of the positions held by the named executive officers to comparable positions in the commercial banks and financial services firms peer group of McLagan's proprietary 20182020 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 20182020 Financial Services - FHLB Custom Survey, including the commercial banks and financial services firms peer group, the Federal 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 46Table 48 - List of Survey Participants
| | | | | | | | | AIB National Australia BankABN AMRO | Federal Home Loan Bank of Cincinnati | MUFG SecuritiesMacquarie Bank | Ally Financial Inc.Acadian Asset Management | Federal Home Loan Bank of Dallas | NatixisManulife | Australia & New Zealand Banking GroupAccenture | Federal Home Loan Bank of Des Moines | New York Community BankMFS Investment Management | Banc of California IncAegon | Federal Home Loan Bank of Indianapolis | Nord/LBMitsubishi UFJ Trust | Banco Bilbao Vizcaya ArgentariaAIB | Federal Home Loan Bank of New York | NordeaMUFG Bank, Ltd. | Banco Itau UnibancoAlly Financial Inc. | Federal Home Loan Bank of Pittsburgh | NorinchukinNational Australia Bank New York Branch | BancorpSouth BankAmundi Pioneer | Federal Home Loan Bank of San Francisco | Northern Trust CorporationNatixis | Arvest Bank Hapoalim | Federal Home Loan Bank of Topeka | Old National BancorpNatixis Corporate & Investment Banking | Associated Bank of America Merrill Lynch | Federal Reserve Bank of Atlanta | People's UnitedNew York Community Bank National Assoc. | Bank of Hawaii Corp.Australia & New Zealand Banking Group | Federal Reserve Bank of Boston | PNC BankNomura Securities | Bank of New York MellonBain Capital | Federal Reserve Bank of ClevelandChicago | Popular Community BankNord/LB | Bank of Nova ScotiaBanco Bilbao Vizcaya Argentaria | Federal Reserve Bank of Kansas City | PricewaterhouseCoopersNordea Bank | Bank of the WestABC | Federal Reserve Bank of Minneapolis | Putnam InvestmentsNorthern Trust Corporation | Bayerische LandesbankBank Hapoalim | Federal Reserve Bank of New York | Rabobank |
Table 46 - List of Survey Participants
OCBC Bank | Bank of America | | | BBVA Compass | Federal Reserve Bank of Richmond | RegionsOneMain Financial Corporation | Berkshire Hills Bancorp Inc.Bank of Ireland | Federal Reserve Bank of San Francisco | Royal People's United Financial, Inc. | Bank of Canada | BMO Financial GroupNew York Mellon | Federal Reserve Bank of St Louis | PNC Bank | Bank of Nova Scotia | Fidelity Investments | Putnam Investments | Bank of the West | Fifth Third Bank | PwC | Baupost Group, The | First Citizens Bank - NC | Regions Financial Corporation | Bayerische Landesbank | First National Bank of Omaha | Royal Bank of Canada | BBVA | First Republic Bank | Royal Bank of Scotland Group | BNP ParibasBBVA Compass | Fidelity Investments | Santander Bank, N.A. | BOK Financial Corporation | Fifth Third Bank | Signature Bank - NY | Branch Banking & Trust Co. | First Citizens Bank | Simmons First National Corp. | Brown Brothers Harriman | First Interstate BancSystem | Societe Generale | Capital One | First Midwest Bancorp Inc. | South State Corporation | Cathay General Bancorp | First Republic Bank | Standard Chartered Bank | Charles Schwab & Co. | First Tennessee Bank/ First Horizon | Sallie Mae | BMO Financial Group | Flagstar Bank | Santander Bank, N.A. | BNP Paribas | Freddie Mac | Siemens Financial Services | BOK Financial Corporation | Frost Bank | Signature Bank – NY | BrightSphere Investment Group plc | GE Capital | Societe Generale | Brown Brothers Harriman | Geode Capital Management | Standard Chartered Bank | Capital One | Global Atlantic Financial Group | State Street Corporation | Chemical Financial Corp.CBRE Global Investors | FNB OmahaGMO | Sterling National Bank | China Construction Bank | Freddie Mac | Sumitomo Mitsui Banking Corporation | CIBC World Markets | GE CapitalHancock Whitney Bank | Sumitomo Mitsui Trust Bank | CIT Group Inc. | GMOHarbourVest | SunTrust Banks | Citigroup | Great Western Bancorp | SVB Financial Group | Citigroup | Harvard Management Company | Synovus Financial Corporation | Citizens Financial Group | Hancock BankHSBC | Synchrony FinancialTD Securities | City National Bank | Hilltop HoldingsHuntington Bancshares, Inc. | Synovus | Columbia Banking System Inc. | Home BancShares Inc. | TD Ameritrade | Comerica | Hope Bancorp, Inc. | TD Securities | Commerzbank | HSBC | Texas Capital Bank | Comerica | ICE | TIAA | Commerce Bank | IHS Markit | Truist | Commerzbank | ING | U.S. Bancorp | Commonwealth Bank of Australia | Huntington Bancshares, Inc.Intesa Sanpaolo | The PrivateBankUMB Financial Corporation | CommunityCrédit Agricole CIB | Investec Bank System Inc. | ICBC Financial Services | TIAAUniCredit Bank AG | Credit Agricole CIB | ING | Trustmark Corp. | Credit Industriel et Commercial -– N.Y. | International Bancshares Corp. | U.S. Bancorp | Cullen Frost Bankers, Inc. | Intesa Sanpaolo | UMB Financial Corporation | DBS Bank | Investors Bancorp, Inc. | UniCredit Bank AGValley National Bancorp | Depository Trust & Clearing CorporationEaton Vance Management | JP Morgan Chase | United Bankshares Inc.Webster Bank | DZ BankFactSet | KBC Bank | United Community Banks Inc. | East West Bancorp | KeyCorp | Valley National Bank | Eaton Vance Investment Managers | Landesbank Baden-Wuerttemberg | Washington Federal Inc. | Ernst & Young | Lloyds Banking Group | Webster Bank | Fannie Mae | M&T Bank Corporation | Wellington Management Company | FCB Financial Holdings Inc.Fannie Mae | Macquarie BankKeyCorp | Wells Fargo Bank | Federal Home Loan Bank of Atlanta | MBLloyds Banking Group | Wintrust Financial Bank | Westpac Banking Corporation | Federal Home Loan Bank of Boston | MFS Investment ManagementLoomis, Sayles & Company | Zions Bancorporation | Federal Home Loan Bank of Chicago | MUFGM&T Bank Ltd.Corporation | |
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 bank and financial services firms 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.incentives. 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 2018, these goals and objectives were developedofficer 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 recommendsapproves an appropriate total compensation and benefits package to the board of directors for approval.package. 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.compensation. 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 directorsCompensation Committee awarded the named executive officers an increase in base salary on January 9, 2019,10, 2021, with retroactive application to January 1, 2019.2021. In determining the amount of the increases, the Compensation Committee considered market data from the McLagan 20182020 Financial Services - FHLB Custom Survey, discussed under — Overview of the Labor Market for Senior Managers above.above and the economic environment. 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. The percentage increases in base salary were generally consistent with merit and adjustment increases granted to staff. In determining Ms. Pratt’s and Mr. Barrett’s increases in base salary, Mr. Hjerpe and the board of directors considered their leadership and strong performances, which led to the promotion of each from senior vice president to executive vice president.
The following table sets forth the base salary increases:
Table 47 - Named Executive Officer Salaries
| | | | | | | | Name and Principal Position | | Pre-Adjustment Annual Base Salary | | Post-Adjustment Annual Base Salary | | Percent Increase | Edward A. Hjerpe III | | $859,430 | | $889,510 | | 3.50% | President and Chief Executive Officer | | | | | | | | | | | | | | Frank Nitkiewicz | | $393,280 | | $405,880 | | 3.20% | Executive Vice President and Chief Financial Officer | | | | | | | | | | | | | | M. Susan Elliott | | $393,080 | | $405,680 | | 3.21% | Executive Vice President and Chief Business Officer | | | | | | | | | | | | | | George H. Collins | | $361,070 | | $371,070 | | 2.77% | Executive Vice President and Chief Risk Officer | | | | | | | | | | | | | | Carol Hempfling Pratt | | $346,400 | | $377,600 | | 9.01% | Executive Vice President, General Counsel and Corporate Secretary | | | | | | | | | | | | | | Timothy J. Barrett | | $346,400 | | $377,600 | | 9.01% | Executive Vice President and Treasurer | | | | | | |
Table 49 - Named Executive Officer Salaries | | | | | | | | | | | | | | | | | | | | | Name and Principal Position | | Pre-Adjustment Annual Base Salary | | Post-Adjustment Annual Base Salary | | Percent Increase | Edward A. Hjerpe III | | $923,311 | | $941,777 | | 2.00% | President and Chief Executive Officer | | | | | | | | | | | | | | Frank Nitkiewicz | | $420,086 | | $428,488 | | 2.00% | Executive Vice President and Chief Financial Officer | | | | | | | | | | | | | | Carol Hempfling Pratt | | $390,816 | | $398,633 | | 2.00% | Executive Vice President, General Counsel and Corporate Secretary | | | | | | | | | | | | | | Timothy J. Barrett | | $390,816 | | $398,633 | | 2.00% | Executive Vice President and Treasurer | | | | | | | | | | | | | | Sean R. McRae | | $324,333 | | $330,820 | | 2.00% | Senior Vice President and Chief Information Officer | | | | | | |
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 Compensation Committee or the board of directors on an annual basis. While EIPs are not necessarily adopted every year.year, in recent years we have adopted them annually. 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, 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 20182020 EIP
The 20182020 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 annual 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.
2018
2020 EIP Plan Design
The design of the 20182020 EIP was guided by principles intended to:
•promote achievement of our financial plan and strategic objectives in our annual 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.officers, a select group of management, and highly compensated employees.
Incentive Goals
The 20182020 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. The 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 20182020 EIP does not contain individual performance award opportunities for the named executive officers. To mitigate unnecessary or excessive risk-taking, the 20182020 EIP contains measures for overall performance that are achieved through BankwideBank-wide collaboration of activity but cannot be individually attained or altered by participants in the 20182020 EIP. Additionally, the 20182020 EIP includes long-term incentive opportunities based on the average core return on capital stock over the three-year period starting January 1, 2018,2020, and ending December 31, 2020,2022, and targeted regulatory results at December 31, 2020,2022, which are intended to align management's interests with our long-term financial performance and condition. Further, Mr. Collins's goals, as chief risk officer, differ somewhat and have different weightings from the goals and weightings of the other named executive officers, and are 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. As described in greater detail under — Determination of Awards under the 20182020 EIP, the Compensation Committee and the board of directors maintained authority over all awards under the 20182020 EIP, however, the 20182020 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 20182020 EIP includesincluded 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 2018•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 2020 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 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. |
HHNE Initiative (HHNE initiative)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, provision for credit losses on private-label MBS, gains from the accretion of prior 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. In addition, with the approval of the board of directors, we also adjusted the calculation of core return on capital stock by including the imputed amortization of net premiums on investments classified as trading securities. 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.•Insurance advances disbursements (the insurance advances goal): This goal is measured by the launchamount of new advances originated in 2020 (any type and maturity of advance) to eachinsurance company members. •Insurance membership (the insurance membership goal): This goal is measured by the number of insurance companies approved for membership in 2020. •Core mission goal: This goal is measured by our core mission asset ratio, a ratio by which the six New England housing finance agencies andFHFA assesses our core mission achievement. •HHNE Initiative (HHNE Initiative): This goal is measured by the disbursement of the allocated subsidy in our HHNE initiative.Initiative to the six New England HFAs and disbursement of a subsidy to members in the form of down payment assistance through the Housing Our Workforce program. •JNE initiative (JNE initiative)Initiative): This goal is measured by the launch of two disbursement periods, disbursement of the subsidy in our JNE initiative, and by the introductioninitiative.
•Operational Efficiency (the operational efficiency goal): This goal is measured by whether and to what degree our core operating expenses, which are defined as our normal expenses associated with enabling the Bank to conduct business
operations, and which exclude significant discretionary expenses approved by our board in an amount not to exceed judgment or settlement income associated with our ongoing private-label MBS litigation, stay within and do not exceed the operating expense budget approved by our board. Core operating expenses are measured as a percentage of the annual operating expense budget for 2018.2020.
The 2018 EIP includes the following short-term incentive goals for the named executive officers, except for Mr. Collins:
New business and mission goal (the new business goal): This goal is measured by the total amount of advances with maturities of greater than or equal to one year in term (and not pre-payable without fee) originated during 2018 to depository institution members, including advances restructurings that result in extension of the advance in maturity of one year or longer, but excluding certain AHP, CDA, NEF, JNE and HHNE advances and advances to insurance company members.
Insurance advances disbursements (the insurance advances goal): This goal is measured by the amount of new advances originated in 2018 (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 2018.
As chief risk officer, Mr. Collins's short-term incentive goals differ somewhat and have different weightings from the goals and weightings of the other named executive officers. These differences are intended to align Mr. Collins’s incentives with appropriately managing our risk profile and are intended to be independent of the financial performance of the individual business areas that ERM monitors. Under the 2018 EIP, Mr. Collins's short-term incentive goals include the core return goal, HHNE initiative, JNE initiative, and the operational efficiency goal but exclude the new business goal, insurance advances goal, and insurance membership goal. Mr. Collins's short-term goals also include:
Bankwide ERM initiatives (the ERM goals): These goals are described and measured as set forth in Table 49. Mr. Collins's achievement of these goals was evaluated by Mr. Hjerpe in his capacity as Mr. Collins's manager.
Remediation of 2017 Report of Examination Findings (the remediation goal): This goal is measured by the clearance rate of recommendations and matters requiring attention identified during our 2017 FHFA examination.
Table 4850 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 goals which are set forth in Table 49 for the year ended December 31, 2018.2020.
Table 50 - Short-Term Goals
Table 48 - Short-Term Goals
| | | | | | | | | | | | | | | Weighting | | | | | | | | | Goal | | Named Executive Officers other than Chief Risk Officer | Chief Risk Officer | | Threshold | | Target | | Excess | | Actual Achievement | Core Return | | 25% | 20% | | 7.13 percent (1) | | 7.90 percent (1) | | 9.43 percent (1) | | Between target and excess | New Business | | 20% | NA | | $3.0 billion | | $4.0 billion | | $5.0 billion | | $4.4 billion | Insurance Advances | | 15% | NA | | $2.5 billion | | $3.5 billion | | $4.5 billion | | $6.35 billion | Insurance Membership | | 10% | NA | | 3 new members | | 5 new members | | 7 new members | | 7 new members | HHNE Initiative | | 10% | 10% | | N/A | | Launch and disburse 80% of subsidy by December 31, 2018 | | Disburse 100% of subsidy by December 31, 2018 | | Excess | JNE Initiative | | 10% | 10% | | N/A | | Launch and disburse first disbursement of $3.0 million by June 30, 2018 and launch second disbursement period ($2.0 million) by 7/1/18; plus add 8 new users | | Disburse $5.0 million in subsidy by December 1, 2018; plus add 15 new users | | Between target and excess | Operational Efficiency | | 10% | 10% | | 2018 core operating expenses do not exceed the 2018 operating expense budget approved by the board of directors | | 2018 core operating expenses do not exceed 97% of the 2018 operating expense budget approved by the board of directors | | 2018 core operating expenses do not exceed 93% of the 2018 operating expense budget approved by the board of directors | | Between threshold and target | Remediation | | NA | 15% | | Clear all matters requiring board attention and 85% of recommendations | | Clear all matters requiring board attention and all recommendations | | Target criteria plus receive an upgrade in the 2018 regulatory examination | | Threshold(2) | ERM | | NA | 35% | | See Table 49 | | See Table 49 | | See Table 49 | | See Table 49 |
___________________________
| | (1) | These performance levels were adjusted from the amounts originally established in the 2018 EIP. The 2018 EIP provides that the originally established performance levels were to be adjusted up or down by 1.2 basis points for every basis point by which the average daily federal funds rate deviated from the 1.66 percent assumed in our strategic business plan. In 2018, the average daily federal funds rate deviation was 20 basis points, resulting in a 24 basis point increase to each of the performance levels. |
| | (2) | Following a review of the criteria for this goal, which are listed in this table, and a discussion of achievement, payment was approved for all ERM employees at the threshold level for this goal. The payment was recommended by the president and chief executive officer and approved by the Compensation Committee to recognize ERM remediation outcomes. The Bank received nonobjection from the FHFA on the plan to pay at the threshold level. |
The following table 49 sets forth the ERM Goals, weightings and the actual achievement for the year ended December 31, 2018.
Table 49 - ERM Goals and Actual Achievement
| | | | | | | | | | | | | | | | | | | | | | | | | | | GoalsGoal | | ThresholdWeighting | | TargetThreshold | | ExcessTarget | | Excess | | Actual Achievement | ContributeCore Return | | 30% | | 5.34 percent (1) | | 6.17 percent (1) | | 7.84 percent (1) | | Below threshold | Insurance Advances | | 15% | | $4.0 billion | | $5.0 billion | | $6.0 billion | | $5.73 billion | Insurance Membership | | 15% | | 3 new members | | 4 new members | | 6 new members | | 5 new members | Core Mission | | 10% | | CMA Ratio = 73.98 percent | | CMA Ratio = 74.48 percent | | CMA Ratio = 74.98 percent | | 76.84 percent | JNE Initiative | | 10% | | Disburse $6.0 million in subsidy by December 31, 2020 | | Disburse $6.5 million in subsidy by December 31, 2020. | | Disburse $7.5 million in subsidy by December 31, 2020. | | $7.5 million | HHNE Initiative | | 10% | | Disburse $6.0 million in combined subsidy to the Bank activities for 2018 via active participation with key constituents co-ledHFA program and Housing our Workforce program by ERMDecember 31, 2020. | | Disburse $6.5 million in combined subsidy to the HFA program and business unit management. This goal was weighted 40 percent.Housing our Workforce program by December 31, 2020 | | Satisfactorily meet 75 percentDisburse $7.5 million in combined subsidy to the HFA program and Housing our Workforce program by December 31, 2020 | | $7.5 million | Operational Efficiency | | 10% | | 2020 core operating expenses do not exceed the 2020 operating expense budget approved by the board of ongoing initiatives.directors. | | Threshold criteria plus 100 percent2020 core operating expenses do not exceed 97.0% of key initiatives.the 2020 operating expense budget approved by the board of directors | | Satisfactorily meet 100 percent2020 core operating expenses do not exceed 93.0% of ongoing and key initiatives.the 2020 operating expense budget approved by the board of directors | | Between target and excess | Evaluate and assess the state of the Bank’s ERM department by conducting a maturity assessment and presenting the report to executive management and the Risk Committee of the board of directors. This goal was weighted 20 percent. | | Achieve by September 30, 2018. | | Achieve by July 31, 2018. | | Achieve by June 30, 2018. | | Excess | Conduct a review of the Bank’s risk limit structure including both market value and earnings at risk-based exposures. Present final report to Risk Committee of the board of directors. This goal was weighted 40 percent. | | Achieve by December 2018. | | Achieve by October 2018. | | Achieve by September 2018. | | Excess |
___________________________ (1)These performance levels were adjusted from the amounts originally established in the 2020 EIP. The 2020 EIP provides that the originally established performance levels were to be adjusted up or down by 1.9 basis points for every basis point by which the average daily federal funds rate deviated from the 1.51 percent assumed in our strategic business plan. In 2020, the average daily federal funds rate deviation was -113.8 basis points, resulting in a 216 basis point decrease to each of the performance levels.
Long-Term Incentive Goals
In addition, the 20182020 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, 2018,2020, and ending December 31, 2020.2022. The 20182020 EIP provides that the performance levels for this goal will be adjusted up or down by 1.21.6 basis points for every basis point by which the average daily federal funds rate deviates from the 1.861.40 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 50Table 51 - Average Core Return on Capital Stock
| | | | | | | | | Long-Term Goal | | Average Core Return on Capital Stock from January 1, 20182020 to December 31, 20202022 | Threshold | | 5.94%5.66% | Target | | 7.43%7.07% | Excess | | 8.92%8.49% |
The second long-term incentive goal will be measured by the achievement of certain targeted regulatory goals by December 31, 2020.2022. This goal is weighted at 33 percent of the total long-term opportunity.
Incentive Opportunities under the 20182020 EIP
Incentive opportunities under the 20182020 EIP are based on each named executive officer's base salary at December 31, 20182020 (referred to as 20182020 incentive salaries).
Table 5152 sets forth the combined shortshort- and long-term incentive opportunities under the 20182020 EIP, in each case expressed as percentages of the named executive officers' 20182020 incentive salaries:
Table 52 - Combined Short- and Long-Term Incentive Opportunity Table 51 - 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% | President | 50.00% | | 75.00% | | 100.00% | All Other Named Executive Officers | 30.00% | | 50.00% | | 70.00% | All Other Named Executive Officers | 30.00% | | 50.00% | | 70.00% |
___________________________ | | (1) | The combined short- and long-term incentive paid under the 2018 EIP will not exceed 100 percent of the average of the named executive officer’s base salary for 2018, 2019 and 2020. |
(1)The combined short- and long-term incentive paid under the 2020 EIP will not exceed 100 percent of the plan year base salary.
At the conclusion of 2018,2020, individual awards were calculated based on actual goal achievement as of December 31, 2018.2020. Participants were eligible to receive 50 percent of such award in a cash payment in March 2019,2021, following non-objection by the FHFA and approval of the board of directors.Compensation Committee. Table 52 below53 sets forth the incentive opportunities for the short-term incentive opportunity that were payable in March 2019,2021, in each case expressed as percentages of the named executive officers' 20182020 incentive salaries:
Table 53 - Short-Term Incentive Opportunity Table 52 - 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% | President | 25.00% | | 37.50% | | 50.00% | All Other Named Executive Officers | 15.00% | | 25.00% | | 35.00% | All Other Named Executive Officers | 15.00% | | 25.00% | | 35.00% |
The remaining 50 percent of the combined award, calculated at the end of 2018,2020, 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 53 below.54.
Table 53Table 54 - 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 20182020 EIP
Awards for the short-term goals other than the ERM goals under the 20182020 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 48)50) | X | Incentive Opportunity for Level of Achievement (Table 51) 52) | X | 2018
2020 Incentive Salary |
If the result for the goal wereis less than the threshold level of achievement (Table 48)50), the award for that goal would have beenis zero absent an act of discretion. One goal did not achieve the threshold level of achievement (Table 50), and there was no payout on that goal. For goals achieved above the excess level of achievement, (Table 48), there were no incremental payouts for achievements above excess per plan design. The remaining annual goals were achieved at a level between the thresholdtarget 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 48)50) | X | Incentive Opportunity (Table 51)52) Interpolated for Actual Level of Achievement
| X | 20182020 Incentive Salary |
Our staff calculated the named executive officers' awards under the 20182020 EIP's short-term goals, in accordance with actual year-end results and the foregoing formulas. Mr. Hjerpe reviewed the results for Mr. Collins under the ERM goals, and made award recommendations to the Compensation Committee for the Compensation Committee's consideration. The Compensation Committee discussed recommendations from Mr. Hjerpe and adopted Mr. Hjerpe’sthe recommendations and the staff calculations.
Based on those calculations and recommendations, the combined incentive awards were calculated, by goal, as follows:
Table 55 - 2020 Combined Short-and Long-Term Awards as Calculated by Goal Table 54 - 2018 Combined Short-and Long-Term Awards as Calculated by Goal
| | | Participant | Core Return | New Business | Insurance Advances | Insurance Member-ship | HHNE | JNE | Remediation | Operational Efficiency | ERM | Total Combined Award | Participant | Core Return | Core Mission | Insurance Advances | Insurance Member-ship | HHNE | JNE | Operational Efficiency | Total Combined Award | Mr. Hjerpe | $ | 194,144 |
| $ | 146,103 |
| $ | 128,915 |
| $ | 85,943 |
| $ | 85,943 |
| $ | 76,735 |
| N/A |
| $ | 54,430 |
| N/A |
| $ | 772,213 |
| Mr. Hjerpe | $ | — | | $ | 92,331 | | $ | 129,148 | | $ | 121,185 | | $ | 92,331 | | $ | 92,331 | | $ | 83,098 | | $ | 610,424 | | Mr. Nitkiewicz | 61,241 |
| 45,620 |
| 41,294 |
| 27,530 |
| 27,530 |
| 24,159 |
| N/A |
| 15,993 |
| N/A |
| 243,367 |
| Mr. Nitkiewicz | — | | 29,406 | | 40,706 | | 37,808 | | 29,406 | | 29,406 | | 26,045 | | 192,777 | | Ms. Elliott | 61,210 |
| 45,597 |
| 41,273 |
| 27,516 |
| 27,516 |
| 24,146 |
| N/A |
| 15,985 |
| N/A |
| 243,243 |
| | Mr. Collins | 44,980 |
| N/A |
| N/A |
| N/A |
| 25,275 |
| 22,180 |
| $ | 16,248 |
| 14,684 |
| $ | 86,777 |
| 210,144 |
| | Ms. Pratt | 53,941 |
| 40,182 |
| 36,372 |
| 24,248 |
| 24,248 |
| 21,279 |
| N/A |
| 14,087 |
| N/A |
| 214,357 |
| Ms. Pratt | — | | 27,357 | | 37,870 | | 35,173 | | 27,357 | | 27,357 | | 24,231 | | 179,345 | | Mr. Barrett | 53,941 |
| 40,182 |
| 36,372 |
| 24,248 |
| 24,248 |
| 21,279 |
| N/A |
| 14,087 |
| N/A |
| 214,357 |
| Mr. Barrett | — | | 27,357 | | 37,870 | | 35,173 | | 27,357 | | 27,357 | | 24,231 | | 179,345 | | Mr. McRae | | Mr. McRae | — | | 22,703 | | 31,428 | | 29,190 | | 22,703 | | 22,703 | | 20,109 | | 148,836 | |
In addition to the foregoing awards, Mr. McRae was paid an additional $200,000 in 2021 pursuant to a performance award agreement dated January 2018 as discussed in footnote 8 to Table 58 - Summary Compensation for 2020, 2019 and 2018.
The named executive officers were eligible to receive 50 percent of the combined award illustrated above in a cash payment in March 2019,2021, following non-objection by the FHFA and approval of the board of directors.Compensation Committee. The column “short-term award” in Table 55 below56 sets forth the short-term incentive award paid to the named executive officers in March 20192021 and the remaining 50 percent which then becomes the target level of achievement for the long-term incentive opportunity.
Table 56 - 2020 Combined Short-and Long-Term Awards, Short-Term Awards and Long-Term Incentive Opportunity at Target Level of Achievement Table 55 - 2018 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 | Participant | | Combined Short and Long Term Award | | Short-Term Award | | Long-Term Opportunity at Target | Mr. Hjerpe | | $ | 772,213 |
| | $ | 386,107 |
| | $ | 386,106 |
| Mr. Hjerpe | | $ | 610,424 | | | $ | 305,212 | | | $ | 305,212 | | Mr. Nitkiewicz | | 243,367 |
| | 121,684 |
| | 121,683 |
| Mr. Nitkiewicz | | 192,777 | | | 96,389 | | | 96,388 | | Ms. Elliott | | 243,243 |
| | 121,622 |
| | 121,621 |
| | Mr. Collins | | 210,144 |
| | 105,072 |
| | 105,072 |
| | Ms. Pratt | | 214,357 |
| | 107,179 |
| | 107,178 |
| Ms. Pratt | | 179,345 | | | 89,673 | | | 89,672 | | Mr. Barrett | | 214,357 |
| | 107,179 |
| | 107,178 |
| Mr. Barrett | | 179,345 | | | 89,673 | | | 89,672 | | Mr. McRae | | Mr. McRae | | 148,836 | | | 74,418 | | | 74,418 | |
Final awards under the 20182020 EIP's long-term incentive opportunities cannot be determined until after December 31, 2020,2022, since they are based on average core return on capital stock over the three-year period starting January 1, 2018,2020, and ending December 31, 2020,2022, and targeted regulatory results as of December 31, 2020.2022. Based on the Bank's levels of achievement as of December 31, 2018,2020, the named executive officers are eligible for long-term incentive opportunities, payable in March 2021,2023, as follows:
Table 56 - Long-Term Incentive Opportunity at Threshold, Target, and Excess
| | | | | | | | | | | | | | | | Long-Term Incentive Opportunity at Threshold, Target, and Excess | Participant | | Threshold | | Target | | Excess | Mr. Hjerpe | | $ | 193,053 |
| | $ | 386,106 |
| | $ | 579,159 |
| Mr. Nitkiewicz | | 60,842 |
| | 121,683 |
| | 182,525 |
| Ms. Elliott | | 60,811 |
| | 121,621 |
| | 182,432 |
| Mr. Collins | | 52,536 |
| | 105,072 |
| | 157,608 |
| Ms. Pratt | | 53,589 |
| | 107,178 |
| | 160,767 |
| Mr. Barrett | | 53,589 |
| | 107,178 |
| | 160,767 |
|
Table 57 - Long-Term Incentive Opportunity at Threshold, Target, and Excess | | | | | | | | | | | | | | | | | | | | | | | Long-Term Incentive Opportunity at Threshold, Target, and Excess | Participant | | Threshold | | Target | | Excess | Mr. Hjerpe | | $ | 152,606 | | | $ | 305,212 | | | $ | 457,818 | | Mr. Nitkiewicz | | 48,194 | | | 96,388 | | | 144,582 | | Ms. Pratt | | 44,836 | | | 89,672 | | | 134,508 | | Mr. Barrett | | 44,836 | | | 89,672 | | | 134,508 | | Mr. McRae | | 37,209 | | | 74,418 | | | 111,627 | |
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 20212023 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 20182020 EIP. •Subject to the discretion of the board of directors,Compensation Committee, 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 20192021 and/or 2020,2022, any of the following occurs such that if it had occurred prior to the year-end 20182020 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 2018 financial results, information submitted to the FHFA, or data used to determine the combined award at year-end 2018; |
| | ◦ | 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 2020 financial results, information submitted to the FHFA, or data used to determine the combined award at year-end 2020; ◦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 directorsCompensation Committee 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 are implementing changes to our retirement plans, as described below, to reduce financial risk and volatility associated with managing a defined benefit plan. We currently 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.
TheWe are implementing changes to our retirement and deferred compensation plans that the Compensation Committee believes that the Thrift BEP, together with the Pension BEP, provide retirement benefits that are necessary forwill continue to keep our total rewards package to remain competitive, particularly compared with labor market competitorscompetitors. The Pentegra Defined Benefit Plan was frozen to newly hired employees as of January 1, 2021, and on January 1, 2024, future benefit accruals under the plan will cease for all employees, including the named executive officers. The Pension BEP was also frozen to newly hired employees as of January 1, 2021, and further benefit accruals will cease on January 1, 2024 for all
employees, including the named executive officers. The Pentegra Defined Contribution Plan was amended to add, subject to certain limitations of the Internal Revenue Code, a non-elective, non-matching contribution from the Bank of six percent of each eligible employee’s salary for employees who are ineligible to accrue benefits under the Pentegra Defined Benefit Plan, either because they were hired on or after January 1, 2021, or because benefit accruals under that may offer equity-based compensation.plan have ceased on January 1, 2024. The Thrift BEP was also amended to provide for a new non-elective contribution to the Thrift BEP from the Bank for eligible executive participants. The non-elective contribution will be made initially under the Thrift BEP to any eligible executive participants who are hired on or after January 1, 2021, and are thus ineligible to participate in the Pentegra Defined Benefit Plan. The Bank will begin making non-elective contributions to the Thrift BEP for all eligible executive participants commencing January 1, 2024, the date on which benefit accruals will be frozen under the Pentegra Defined Benefit Plan. Under the amendments, for each executive participant in the Thrift BEP eligible for non-elective contributions in a plan year, the Bank will contribute an amount equal to (a) six percent (6%) of the eligible executive’s compensation and incentive compensation, prior to reduction for any elective deferrals under the Thrift BEP, determined without regard to limitations of the Internal Revenue Code, minus (b) the non-elective, non-matching Bank contribution applicable to that executive under the terms of the Pentegra Defined Contribution Plan with respect to the same period. 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. The change-in-control agreement is discussed below under Post-termination Payments.
Employment Status and Severance Policy
Pursuant to the FHLBank Act, our employees, including the named executive officers as of December 31, 2018,2020, 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 benefits under the severance 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. Payments under the severance policy are discussed below under Post-termination Payments.
Executive Change in Control Severance Plan
In 2018, the Board adoptedThe Bank maintains 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 and to facilitate hiring and retention of senior management by providing them with certain protections and benefits in the 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 participant. 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 impact benefits to a participant would require the consent of that participant. The Executive Severance Plan is discussed below under 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 other guidance and 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, review protocols, and/or review protocolsadditional guidance 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, 2018, 2017,2020, 2019, and 2016,2018, by our named executive officers.
Table 58 - Summary Compensation for 2020, 2019 and 2018
Table 57 - Summary Compensation for 2018, 2017 and 2016
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | 2018 |
| | $ | 859,430 |
| | $ | — |
| | $ | 386,107 |
| | $ | 473,323 |
| (7) | $ | 498,000 |
| | $ | 118,999 |
| | $ | 2,335,859 |
| President and | | 2017 |
| | 781,300 |
| | — |
| | 370,415 |
| | 386,685 |
| (8) | 981,000 |
| | 106,684 |
| | 2,626,084 |
| Chief Executive Officer | | 2016 |
| | 756,700 |
| | — |
| | 364,162 |
| | 289,987 |
| | 692,000 |
| | 103,149 |
| | 2,205,998 |
| | | | | | | | | | | | | | | | | | Frank Nitkiewicz | | 2018 |
| | 393,280 |
| | — |
| | 121,684 |
| | 164,658 |
| | 244,000 |
| | 46,779 |
| | 970,401 |
| Executive Vice President | | 2017 |
| | 380,880 |
| | — |
| | 122,307 |
| | 170,888 |
| | 1,022,000 |
| | 41,424 |
| | 1,737,499 |
| and Chief Financial Officer | | 2016 |
| | 369,280 |
| | 1,495 |
| | 123,340 |
| | 102,329 |
| | 691,000 |
| | 40,551 |
| | 1,327,995 |
| | | | | | | | | | | | | | | | | | M. Susan Elliott | | 2018 |
| | 393,080 |
| | — |
| | 121,622 |
| | 167,288 |
| | 422,000 |
| | 53,012 |
| | 1,157,002 |
| Executive Vice President | | 2017 |
| | 380,680 |
| | — |
| | 127,127 |
| | 175,075 |
| | 979,000 |
| | 46,414 |
| | 1,708,296 |
| and Chief Business Officer | | 2016 |
| | 369,280 |
| | 2,961 |
| | 125,310 |
| | 103,371 |
| | 788,000 |
| | 44,704 |
| | 1,433,626 |
| | | | | | | | | | | | | | | | | | George H. Collins | | 2018 |
| | 361,070 |
| | | | 105,072 |
| | 125,940 |
| | 236,000 |
| | 36,086 |
| | 864,168 |
| Executive Vice President | | 2017 |
| | 350,070 |
| | 1,450 |
| | 101,844 |
| | 138,578 |
| | 708,000 |
| | 31,108 |
| | 1,331,050 |
| and Chief Risk Officer | | 2016 |
| | 339,570 |
| | — |
| | 94,337 |
| | 74,106 |
| | 516,000 |
| | 32,040 |
| | 1,056,053 |
| | | | | | | | | | | | | | | | | | Carol Hempfling Pratt | | 2018 |
| | 346,400 |
| | — |
| | 107,179 |
| | 142,958 |
| | 218,000 |
| | 35,990 |
| | 850,527 |
| Executive Vice President | | 2017 |
| | 334,700 |
| | — |
| | 110,210 |
| | 143,220 |
| | 288,000 |
| | 31,588 |
| | 907,718 |
| General Counsel and Corporate Secretary | | 2016 |
| | 324,500 |
| | — |
| | 107,085 |
| | 84,691 |
| | 216,000 |
| | 31,073 |
| | 763,349 |
| | | | | | | | | | | | | | | | | | Timothy J. Barrett | | 2018 |
| | 346,400 |
| | — |
| | 107,179 |
| | 142,958 |
| | 198,000 |
| | 31,253 |
| | 825,790 |
| Executive Vice President | | 2017 |
| | 334,700 |
| | — |
| | 107,198 |
| | 138,690 |
| | 270,000 |
| | 27,707 |
| | 878,295 |
| and Treasurer | | 2016 |
| | 324,500 |
| | — |
| | 107,085 |
| | 84,691 |
| | 205,000 |
| | 27,413 |
| | 748,689 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | 2020 | | | $ | 923,311 | | | $ | — | | | $ | 305,212 | | | $ | 383,502 | | | $ | 1,883,000 | | | $ | 110,028 | | | $ | 3,605,053 | | President and Chief Executive Officer | | 2019 | | | 889,510 | | | — | | | 351,171 | | | 524,069 | | | 1,693,000 | | | 116,859 | | | 3,574,609 | | | 2018 | | | 859,430 | | | — | | | 386,107 | | | 473,323 | | 7 | 498,000 | | | 118,999 | | | 2,335,859 | | | | | | | | | | | | | | | | | | | Frank Nitkiewicz | | 2020 | | | 420,086 | | | — | | | 96,389 | | | 120,862 | | | 1,567,000 | | | 49,539 | | | 2,253,876 | | Executive Vice President and Chief Financial Officer | | 2019 | | | 405,880 | | | — | | | 107,897 | | | 173,041 | | | 1,662,000 | | | 47,616 | | | 2,396,434 | | | 2018 | | | 393,280 | | | — | | | 121,684 | | | 164,658 | | | 244,000 | | | 46,779 | | | 970,401 | | | | | | | | | | | | | | | | | | | Carol Hempfling Pratt | | 2020 | | | 390,816 | | | 711 | | | 89,673 | | | 106,455 | | | 578,000 | | | 39,723 | | | 1,205,378 | | Executive Vice President, General Counsel and Corporate Secretary | | 2019 | | | 377,600 | | | — | | | 100,379 | | | 155,927 | | | 502,000 | | | 37,657 | | | 1,173,563 | | | 2018 | | | 346,400 | | | — | | | 107,179 | | | 142,958 | | | 218,000 | | | 35,990 | | | 850,527 | | | | | | | | | | | | | | | | | | | Timothy J. Barrett | | 2020 | | | 390,816 | | | 713 | | | 89,673 | | | 106,455 | | | 534,000 | | | 39,354 | | | 1,161,011 | | Executive Vice President and Treasurer | | 2019 | | | 377,600 | | | — | | | 100,379 | | | 151,666 | | | 469,000 | | | 31,808 | | | 1,130,453 | | | 2018 | | | 346,400 | | | — | | | 107,179 | | | 142,958 | | | 198,000 | | | 31,253 | | | 825,790 | | | | | | | | | | | | | | | | | | | Sean R. McRae | | 2020 | | | 324,333 | | | — | | | 74,418 | | | 293,045 | | 8 | 401,000 | | | 33,369 | | | 1,126,165 | | Senior Vice President and Chief Information Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
_______________________ | | (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 bonus of $1,495 as a cash award for 25 years of service, and Ms. Elliott received an additional bonus of $2,961 as a cash award for 35 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 and 2016. |
| | (3) | (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 2020 Ms. Pratt and Mr. Barrett received an additional bonus of $711 and $713, respectively, as a cash award for 10 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. (3) Represents amounts paid under the 2020 EIP during 2021 in respect of service performed in 2020, under the 2019 EIP during 2020 in respect of service performed in 2019, and under the 2018 EIP during 2019 in respect of service performed in 2018. (4) Represents amounts earned under the 2018 EIP for satisfying a level of achievement between threshold and target at December 31, 2020, a long-term goal based on our pre-assessment core return on capital stock (as such term is defined in the 2018 EIP and referred to in this report as the 2018 EIP during 2019 in respect of service performed in 2018, under the 2017 EIP during 2018 in respect of service performed in 2017, and under the 2016 EIP during 2017 in respect of service performed in 2016. |
| | (4) | Represents amounts earned under the 2016 EIP for satisfying at the excess level of achievement at December 31, 2018, a 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; amounts earned under the 2015 EIP for satisfying at the excess level of achievement at December 31, 2017, a long-term goal based on our pre-assessment, pre-other-than-temporary-impairment core return on capital stock (as such term is defined in the 2015 EIP and referred to in this report as the 2015 EIP core return on capital stock), which is explained further below in this footnote; and amounts earned under the 2014 EIP for satisfying at the achievement level between target and excess long-term goals based on our retained earnings (as adjusted as explained in this footnote) at December 31, 2016. |
Retained earnings were adjusted for payouts under the 2014 EIP 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 formula for the payouts under the 2014 EIP to exclude from net income unbudgeted voluntary pension contributions and the expense associated with JNE and HHNE, programs which were not contemplated at the time the 2014 EIP was established. The difference between GAAP retained earnings and this measure of adjusted retained earnings is that GAAP retained earnings does not provide for the adjustments described above.
The 2015 EIP core return on capital stockstock), which is explained further below in this footnote; amounts earned under the 2017 EIP for satisfying a measurelevel of returnachievement between target and excess at December 31, 2019, a long-term goal based 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, 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, 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, andour pre-assessment core return on capital stock includes shares classified(as such term is defined in the 2017 EIP and referred to in this report as mandatorily redeemable capital stock. With the approval of the board of directors, the 20152017 EIP core return on capital stock was adjusted fromstock), which is explained further below in this footnote; and amounts earned under the formula set out in the 20152016 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 contemplatedfor satisfying at the time the 2015 EIP was established. The difference between GAAPexcess level of achievement at December 31, 2018, a 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 measure of return on capital stock is that GAAP return on capital stock does not provide forreport as the adjustments described under Short-Term Incentive Goals and Actual Achievement, and the 20152016 EIP core return on capital stock includes shares classified as mandatorily redeemable capital stock. Achievement ofstock), which is explained further below in 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 Item 7A —Quantitative and Qualitative Disclosures about Market Risk — Measurement of Market and Interest-Rate Risk and Related Policy Constraints.footnote.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, other-than-temporary-impairmentchanges in fair value, other-than-temporary impairment credit losses on private-label MBS, gains from the accretion of prior other-than-temporary-impairmentother-than-temporary impairment 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 The 2018 EIP core return on capital stock was calculated as described above for the 2017 EIP core return on capital stock, except that the 2018 EIP core return on capital stock was also adjusted for interest expense on mandatorily redeemable capital stock and Qualitative Disclosures about Market Risk — Measurementprovision for credit losses on private-label MBS, and, with approval of Market and Interest-Rate Risk and Related Policy Constraints. the board of directors, was also adjusted to include imputed amortization of net premiums on investments classified as trading securities. The amounts paid under the 2016, 20152018, 2017, and 20142016 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 58 - 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) | (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 59 - 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 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, cappingwhich 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. |
(8) The 2020 non-equity incentive plan compensation long-term amount reflects the sum of Mr. McRae’s long-term award of $93,045 and additional award of $200,000. We had a performance award agreement with Mr. McRae that we entered in January 2018, for which he was paid an additional $200,000 in 2021 for performance in the years 2018 to 2020. Our board of directors had determined that having the performance award agreement in place would be an incentive tool for Mr. McRae to ensure the effective and timely execution of key Bank technology strategic initiatives. The agreement provided us continuity of leadership and Mr. McRae’s expertise in, among other things, completing prioritized initiatives for the modernization and development of a strategic technology plan for implementation following the completion of the initial
Table 58 - Other Compensation
| | | | | | | | | | | | | | | | | | | | Name | | Year | | Contributions to Defined Contribution Plans(1) | | Insurance Premiums | | Perquisites(2) | | Total | Edward A. Hjerpe III | | 2018 | | $ | 96,992 |
| | $ | — |
| | $ | 22,007 |
| | $ | 118,999 |
| | | 2017 | | 86,127 |
| | — |
| | 20,557 |
| | 106,684 |
| | | 2016 | | 85,882 |
| | — |
| | 17,267 |
| | 103,149 |
| | | | | | | | | | | | Frank Nitkiewicz | | 2018 | | 41,189 |
| | 5,590 |
| | — |
| | 46,779 |
| | | 2017 | | 36,393 |
| | 5,031 |
| | — |
| | 41,424 |
| | | 2016 | | 36,090 |
| | 4,461 |
| | — |
| | 40,551 |
| | | | | | | | | | | | M. Susan Elliott | | 2018 | | 41,717 |
| | 11,295 |
| | — |
| | 53,012 |
| | | 2017 | | 36,562 |
| | 9,852 |
| | — |
| | 46,414 |
| | | 2016 | | 36,068 |
| | 8,636 |
| | — |
| | 44,704 |
| | | | | | | | | | | | George H. Collins | | 2018 | | 36,086 |
| | — |
| | — |
| | 36,086 |
| | | 2017 | | 31,108 |
| | — |
| | — |
| | 31,108 |
| | | 2016 | | 32,040 |
| | — |
| | — |
| | 32,040 |
| | | | | | | | | | | | Carol Hempfling Pratt | | 2018 | | 35,990 |
| | — |
| | — |
| | 35,990 |
| | | 2017 | | 31,588 |
| | — |
| | — |
| | 31,588 |
| | | 2016 | | 31,073 |
| | — |
| | — |
| | 31,073 |
| | | | | | | | | | | | Timothy J. Barrett | | 2018 | | 31,253 |
| | — |
| | — |
| | 31,253 |
| | | 2017 | | 27,707 |
| | — |
| | — |
| | 27,707 |
| | | 2016 | | 27,413 |
| | — |
| | — |
| | 27,413 |
|
multi-year strategy. Payment was subject to the president’s discretion and approval of the board of directors, which was received. It was also conditioned on Mr. McRae’s being an active employee through the payment date in March 2021.
Table 59 - Other Compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Name | | Year | | Contributions to Defined Contribution Plans(1) | | Insurance Premiums | | Perquisites(2) | | Total | Edward A. Hjerpe III | | 2020 | | $ | 110,028 | | | $ | — | | | $ | — | | | $ | 110,028 | | | | 2019 | | 104,930 | | | — | | | 11,929 | | | 116,859 | | | | 2018 | | 96,992 | | | — | | | 22,007 | | | 118,999 | | | | | | | | | | | | | Frank Nitkiewicz | | 2020 | | 43,024 | | | 6,515 | | | — | | | 49,539 | | | | 2019 | | 41,531 | | | 6,085 | | | — | | | 47,616 | | | | 2018 | | 41,189 | | | 5,590 | | | — | | | 46,779 | | | | | | | | | | | | | Carol Hempfling Pratt | | 2020 | | 39,723 | | | — | | | — | | | 39,723 | | | | 2019 | | 37,657 | | | — | | | — | | | 37,657 | | | | 2018 | | 35,990 | | | — | | | — | | | 35,990 | | | | | | | | | | | | | Timothy J. Barrett | | 2020 | | 39,354 | | | — | | | — | | | 39,354 | | | | 2019 | | 31,808 | | | — | | | — | | | 31,808 | | | | 2018 | | 31,253 | | | — | | | — | | | 31,253 | | | | | | | | | | | | | Sean R. McRae | | 2020 | | 33,369 | | | — | | | — | | | 33,369 | |
_______________________ | | (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. |
(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 Table 62 - Nonqualified Deferred Compensation below. The Pentegra Defined Contribution Plan, a 401(k) plan, excludes hourly, flex staff, and short-term employees from participation, but includes 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 2018,2020, the maximum elective deferral amount was $18,500$19,500 (or $24,500$26,000 per year for participants who attain or exceed age 50 in 2018)2020), and the maximum
matching contribution under the terms of the Pentegra Defined Contribution Plan was $16,500 (three$17,100 (3 percent multiplied by two multiplied by the $275,000$285,000 IRC compensation limit). A description of the Thrift BEP follows theTable 62 - Nonqualified Deferred Compensation. See Retirement and Deferred Compensation Table.Plans above for a description of changes we are making to the Pentegra Defined Contribution Plan and the Thrift BEP. | | (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. |
(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 20182020 EIP, for our named executive officers:
Table 59 - Grants of Plan-Based Awards for Fiscal Year 2018
| | | | | | | | | | | | | | | | Estimated Possible Payouts Under Non-equity Incentive Plan Awards (1) | Short-Term Component: | | Threshold | | Target | | Excess | Mr. Hjerpe | | $ | 214,858 |
| | $ | 322,286 |
| | $ | 429,715 |
| Mr. Nitkiewicz | | 58,992 |
| | 98,320 |
| | 137,648 |
| Ms. Elliott | | 58,962 |
| | 98,270 |
| | 137,578 |
| Mr. Collins | | 54,161 |
| | 90,268 |
| | 126,375 |
| Ms. Pratt | | 51,960 |
| | 86,600 |
| | 121,240 |
| Mr. Barrett | | 51,960 |
| | 86,600 |
| | 121,240 |
| | | | | | | | Long-Term Component: | | | | | | | Mr. Hjerpe | | | | | | | If short-term component results in: | | Threshold | | Target | | Excess | Threshold | | $ | 107,429 |
| | $ | 214,858 |
| | $ | 322,286 |
| Target | | 161,143 |
| | 322,286 |
| | 483,429 |
| Excess | | 214,858 |
| | 429,715 |
| | 644,573 |
| | | | | | | | Mr. Nitkiewicz | | | | | | | If short-term component results in: | | Threshold | | Target | | Excess | Threshold | | $ | 29,496 |
| | $ | 58,992 |
| | $ | 88,488 |
| Target | | 49,160 |
| | 98,320 |
| | 147,480 |
| Excess | | 68,824 |
| | 137,648 |
| | 206,472 |
| | | | | | | | Ms. Elliott | | | | | | | If short-term component results in: | | Threshold | | Target | | Excess | Threshold | | $ | 29,481 |
| | $ | 58,962 |
| | $ | 88,443 |
| Target | | 49,135 |
| | 98,270 |
| | 147,405 |
| Excess | | 68,789 |
| | 137,578 |
| | 206,367 |
| | | | | | | | Mr. Collins | | | | | | | If short-term component results in: | | Threshold | | Target | | Excess | Threshold | | $ | 27,080 |
| | $ | 54,161 |
| | $ | 81,241 |
| Target | | 45,134 |
| | 90,268 |
| | 135,401 |
| Excess | | 63,187 |
| | 126,375 |
| | 189,562 |
| | | | | | | | Mr. Barrett and Ms. Pratt | | | | | | | If short-term component results in: | | Threshold | | Target | | Excess | Threshold | | $ | 25,980 |
| | $ | 51,960 |
| | $ | 77,940 |
| Target | | 43,300 |
| | 86,600 |
| | 129,900 |
| Excess | | 60,620 |
| | 121,240 |
| | 181,860 |
|
Table 60 - Grants of Plan-Based Awards for Fiscal Year 2020 | | | | | | | | | | | | | | | | | | | | | | | Estimated Possible Payouts Under Non-equity Incentive Plan Awards (1) | Short-Term Component: | | Threshold | | Target | | Excess | Mr. Hjerpe | | $ | 230,828 | | | $ | 346,242 | | | $ | 461,656 | | Mr. Nitkiewicz | | 63,013 | | | 105,022 | | | 147,030 | | Ms. Pratt | | 58,622 | | | 97,704 | | | 136,786 | | Mr. Barrett | | 58,622 | | | 97,704 | | | 136,786 | | Mr. McRae | | 48,650 | | | 81,083 | | | 113,517 | | | | | | | | | Long-Term Component: | | | | | | | Mr. Hjerpe | | | | | | | If short-term component results in: | | Threshold | | Target | | Excess | Threshold | | $ | 115,414 | | | $ | 230,828 | | | $ | 346,242 | | Target | | 173,121 | | | 346,242 | | | 519,363 | | Excess | | 230,828 | | | 461,656 | | | 692,484 | | | | | | | | | Mr. Nitkiewicz | | | | | | | If short-term component results in: | | Threshold | | Target | | Excess | Threshold | | $ | 31,507 | | | $ | 63,013 | | | $ | 94,520 | | Target | | 52,511 | | | 105,022 | | | 157,533 | | Excess | | 73,515 | | | 147,030 | | | 220,545 | | | | | | | | | Mr. Barrett and Ms. Pratt | | | | | | | If short-term component results in: | | Threshold | | Target | | Excess | Threshold | | $ | 29,311 | | | $ | 58,622 | | | $ | 87,933 | | Target | | 48,852 | | | 97,704 | | | 146,556 | | Excess | | 68,393 | | | 136,786 | | | 205,179 | | | | | | | | | Mr. McRae | | | | | | | If short-term component results in: | | Threshold | | Target | | Excess | Threshold | | $ | 24,325 | | | $ | 48,650 | | | $ | 72,975 | | Target | | 40,542 | | | 81,083 | | | 121,625 | | Excess | | 56,759 | | | 113,517 | | | 170,276 | |
______________________ | | (1) | Amounts represent potential awards under the 2018 EIP; actual amounts awarded are reflected in Table 57 - Summary Compensation. See Executive Incentive Plans above for further discussion of performance goals and plan payouts. |
(1) Amounts represent potential awards under the 2020 EIP; actual amounts awarded are reflected in Table 58 - Summary Compensation for 2020, 2019 and 2018. See Executive Incentive Plans above for further discussion of performance goals and plan payouts.
Retirement Plans
Table 60 - Pension Benefits
| | | | | | | | | | | | | | | | Name | | Plan Name | | No. of Years of Credited Service(1) | | | Present Value of Accumulated Benefit(2) | | Payments During Year Ended December 31, 2018 | Edward A. Hjerpe III | | Pentegra Defined Benefit Plan | | 26.67 |
| (3) | | $ | 1,759,000 |
| | $ | — |
| | | Pension BEP | | 9.50 |
| | | 2,535,000 |
| | — |
| Frank Nitkiewicz | | Pentegra Defined Benefit Plan | | 26.83 |
| | | 1,701,000 |
| | — |
| | | Pension BEP | | 27.83 |
| | | 3,340,000 |
| | — |
| M. Susan Elliott | | Pentegra Defined Benefit Plan | | 36.58 |
| | | 2,792,000 |
| | — |
| | | Pension BEP | | 37.08 |
| | | 4,431,000 |
| | — |
| George H. Collins | | Pentegra Defined Benefit Plan | | 20.83 |
| (4) | | 1,392,000 |
| | — |
| | | Pension BEP | | 21.33 |
| (5) | | 2,151,000 |
| | — |
| Carol Hempfling Pratt | | Pentegra Defined Benefit Plan | | 7.50 |
| | | 462,000 |
| | — |
| | | Pension BEP | | 8.50 |
| | | 621,000 |
| | — |
| Timothy J. Barrett | | Pentegra Defined Benefit Plan | | 7.17 |
| | | 425,000 |
| | — |
| | | Pension BEP | | 8.17 |
| | | 560,000 |
| | — |
|
Table 61 - Pension Benefits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Name | | Plan Name | | No. of Years of Credited Service(1) | | | Present Value of Accumulated Benefit(2) | | Payments During Year Ended December 31, 2020 | Edward A. Hjerpe III | | Pentegra Defined Benefit Plan | | 28.67 | | (3) | | $ | 2,667,000 | | | $ | — | | | | Pension BEP | | 11.50 | | | | 5,203,000 | | | — | | Frank Nitkiewicz | | Pentegra Defined Benefit Plan | | 28.83 | | | | 2,655,000 | | | — | | | | Pension BEP | | 29.83 | | | | 5,615,000 | | | — | | Carol Hempfling Pratt | | Pentegra Defined Benefit Plan | | 9.50 | | | | 848,000 | | | — | | | | Pension BEP | | 10.50 | | | | 1,315,000 | | | — | | Timothy J. Barrett | | Pentegra Defined Benefit Plan | | 9.17 | | | | 792,000 | | | — | | | | Pension BEP | | 10.17 | | | | 1,196,000 | | | — | | Sean R. McRae | | Pentegra Defined Benefit Plan | | 5.67 | | | | 469,000 | | | — | | | | Pension BEP | | 6.67 | | | | 693,000 | | | — | |
_______________________ | | (1) | Equals number of years of credited service as of December 31, 2018. |
| | (3) | Number of years of credited service for the Pentegra Defined Benefit Plan includes 19.59 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. |
(3) Number of years of credited service for the Pentegra Defined Benefit Plan includes 21.59 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.
Although we are in the process of making changes to our retirement benefits, we have participated in the Pentegra Defined Benefit Plan to provide retirement benefits for eligible employees, including the named executive officers. As discussed in — Retirement and Deferred Compensation Plans, the Pentegra Defined Benefit Plan was frozen to newly hired employees as of January 1, 2021, and on January 1, 2024, future benefit accruals under the plan will cease for all employees, including named executive officers. Employees have 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 ($275,000285,000 for 2018)2020). 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.
As discussed in Retirement and Deferred Compensation Plans, the Pension BEP was also frozen to newly hired employees as of January 1, 2021, and further benefit accruals will cease on January 1, 2024, for all employees, including the named executive officers. 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, Mr. Collins, Ms. Pratt, and Mr. Barrett, 70 percent as executive vice presidents. Our only named executive officer that has reached the maximum annual benefit amount is Ms. Elliott.presidents; and Mr. McRae, 65 percent as senior vice president. 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.See — Retirement and Deferred Compensation Plans for a description of changes we are making to the Pentegra Defined Benefit Plan and the Pension BEP.
Nonqualified Deferred Compensation Table 62 - Nonqualified Deferred Compensation Table 61 - Nonqualified Deferred Compensation
| | | Name | | Executive Contributions in Year Ended December 31, 2018(1) | | Our Contributions in Year Ended December 31, 2018(2) | | Aggregate Earnings in Year Ended December 31, 2018 | | Aggregate Withdrawals/ Distributions | | Aggregate Balance at December 31, 2018 | Name | | Executive Contributions in Year Ended December 31, 2020(1) | | Our Contributions in Year Ended December 31, 2020(2) | | Aggregate Earnings in Year Ended December 31, 2020 | | Aggregate Withdrawals/ Distributions | | Aggregate Balance at December 31, 2020 | Edward A. Hjerpe III | | $ | 48,496 |
| | $ | 80,492 |
| | $ | (48,192 | ) | | $ | — |
| | $ | 983,096 |
| Edward A. Hjerpe III | | $ | 55,014 | | | $ | 92,928 | | | $ | 237,037 | | | $ | — | | | $ | 1,754,622 | | Frank Nitkiewicz | | 20,594 |
| | 24,688 |
| | (32,164 | ) | | — |
| | 416,962 |
| Frank Nitkiewicz | | 25,874 | | | 25,924 | | | 140,050 | | | — | | | 775,408 | | M. Susan Elliott | | 82,241 |
| | 25,217 |
| | (69,687 | ) | | — |
| | 773,075 |
| | George H. Collins | | 10,823 |
| | 19,586 |
| | (14,971 | ) | | — |
| | 115,497 |
| | Carol Hempfling Pratt | | 59,983 |
| | 19,489 |
| | (39,156 | ) | | — |
| | 560,499 |
| Carol Hempfling Pratt | | 66,205 | | | 22,623 | | | 139,810 | | | — | | | 1,002,109 | | Timothy J. Barrett | | 7,377 |
| | 14,753 |
| | (6,847 | ) | | — |
| | 143,056 |
| Timothy J. Barrett | | 11,619 | | | 22,253 | | | 8,290 | | | — | | | 256,583 | | Sean R. McRae | | Sean R. McRae | | 9,955 | | | 16,269 | | | 15,668 | | | — | | | 106,622 | |
_______________________ | | (1) | Amounts are also reported as salary in Table 57 - Summary Compensation. |
| | (2) | Amounts are also reported as contributions to defined contribution plans in Table 58 - Other Compensation. |
(1)Amounts are also reported as salary in Table 58 — Summary Compensation for 2020, 2019 and 2018. (2)Amounts are also reported as contributions to defined contribution plans in Table 59 — 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 matching under 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). 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. See — Retirement and Deferred Compensation Plans for a description of changes we are making to the Thrift BEP.
Post-termination Payments
The following is a discussion of the policies 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 2018,2020, all named executive officers were covered by the Bank’s severance policy and beginning on November 7, 2018, 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. Elliott,Pratt, Mr. Collins, Ms. Pratt,Barrett, and Mr. BarrettMcRae are 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, must have the approval of 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 his change in control agreement) and based on status in the organization and tenure, for Mr. Hjerpe Mr. Nitkiewicz, Ms. Elliott and Mr. Collins,Nitkiewicz, the payment amount is equal to 12 months' base salary, and for Ms. Pratt and Mr. Barrett, the payment amount is equal to approximately eightten months' base salary, and for Mr. McRae, the payment amount is equal to approximately six months’ base salary, all based on annual salary in effect on December 31, 2018.2020.
Change in Control Agreement with Mr. Hjerpe
Under the terms of the change ofin 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 theWe maintain an 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,Pratt, Mr. Collins, Ms. Pratt,Barrett, and Mr. Barrett,McRae, in addition to certain other executive officers, as participants in the Executive Severance Plan and these officers all have 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 longlong- and short-term incentive awards, calculated at target, 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 longlong- and short-term incentive awards, calculated at target, 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 U.S. Internal Revenue CodeIRC 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 U.S. Internal Revenue Code,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 2016, 20172018, 2019, and 20182020 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 20182020 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 20182020 short-term award if they completed six months of service during 2018,2020, (ii) a 20162018 and
2017 2019 long-term award, and (iii) a 20182020 long-term award (assuming their employment terminated upon close of business on December 31, 2018)2020), 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 Federal Home Loan Bank system)FHLBank System) under the Pentegra Defined Benefit Plan.
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, 20182020, 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 theTable 61 - Pension Benefits Table.Benefits. Account balances for the Thrift BEP may be found in theTable 62 - Nonqualified Deferred Compensation Table.Compensation.
Table 63 - Cash Payments on Termination
Table 62 - Cash Payments on Termination
| | | | Severance | | Incentive Compensation(4)(5) | | All Other Compensation(6) | | Total Post Termination Payment & Benefit Value | | Severance | | Incentive Compensation(4)(5) | | All Other Compensation(6) | | Total Post Termination Payment & Benefit Value | Edward A. Hjerpe III | | | | | | | | Edward A. Hjerpe III | | | | | | | | Bank initiated (not for cause) termination of employee without a change in control(1) | $ | 859,430 |
| | $ | 1,823,376 |
| | $ | — |
| | $ | 2,682,806 |
| Bank initiated (not for cause) termination of employee without a change in control(1) | $ | 923,311 | | | $ | 1,202,855 | | | $ | — | | | $ | 2,126,166 | | Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(2)(3) | 3,569,979 |
| | 1,823,376 |
| | 64,831 |
| | 5,458,186 |
| Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(2)(3) | 4,267,410 | | | 1,202,855 | | | 64,035 | | | 5,534,300 | | Retirement | — |
| | 1,823,376 |
| | — |
| | 1,823,376 |
| Retirement | — | | | 1,202,855 | | | — | | | 1,202,855 | | Death and Disability | — |
| | 1,823,376 |
| | — |
| | 1,823,376 |
| Death and Disability | — | | | 1,202,855 | | | — | | | 1,202,855 | | Frank Nitkiewicz | | | | | | | | Frank Nitkiewicz | | Bank initiated (not for cause) termination of employee without a change in control(1) | 393,280 |
| | 597,568 |
| | — |
| | 990,848 |
| | Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3) | 1,179,840 |
| | 597,568 |
| | 44,329 |
| | 1,821,737 |
| | Retirement | — |
| | 597,568 |
| | — |
| | 597,568 |
| | Death and Disability | — |
| | 597,568 |
| | — |
| | 597,568 |
| | M. Susan Elliott | | | | | | | | | Bank initiated (not for cause) termination of employee without a change in control(1) | 393,080 |
| | 606,495 |
| | — |
| | 999,575 |
| | Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3) | 1,179,240 |
| | 606,495 |
| | 15,908 |
| | 1,801,643 |
| | Retirement | — |
| | 606,495 |
| | — |
| | 606,495 |
| | Death and Disability | — |
| | 606,495 |
| | — |
| | 606,495 |
| | George H. Collins | | | | | | | | | Bank initiated (not for cause) termination of employee without a change in control(1) | 361,070 |
| | 494,725 |
| | — |
| | 855,795 |
| Bank initiated (not for cause) termination of employee without a change in control(1) | 420,086 | | | 376,879 | | | — | | | 796,965 | | Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3) | 1,083,210 |
| | 494,725 |
| | 51,407 |
| | 1,629,342 |
| Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3) | 1,260,258 | | | 376,879 | | | 44,276 | | | 1,681,413 | | Retirement | — |
| | 494,725 |
| | — |
| | 494,725 |
| Retirement | — | | | 376,879 | | | — | | | 376,879 | | Death and Disability | — |
| | 494,725 |
| | — |
| | 494,725 |
| Death and Disability | — | | | 376,879 | | | — | | | 376,879 | | Carol Hempfling Pratt | | | | | | | | Carol Hempfling Pratt | | Bank initiated (not for cause) termination of employee without a change in control(1) | 239,815 |
| | — |
| | — |
| | 239,815 |
| Bank initiated (not for cause) termination of employee without a change in control(1) | 330,690 | | | 344,633 | | | — | | | 675,323 | | Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3) | 1,039,200 |
| | 107,179 |
| | 46,720 |
| | 1,193,099 |
| Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3) | 1,172,448 | | | 344,633 | | | 46,645 | | | 1,563,726 | | Retirement | — |
| | — |
| | — |
| | — |
| Retirement | — | | | 344,633 | | | — | | | 344,633 | | Death and Disability | — |
| | 527,578 |
| | — |
| | 527,578 |
| Death and Disability | — | | | 344,633 | | | — | | | 344,633 | | Timothy J. Barrett | | | | | | | | Timothy J. Barrett | | Bank initiated (not for cause) termination of employee without a change in control(1) | 231,022 |
| | — |
| | — |
| | 231,022 |
| Bank initiated (not for cause) termination of employee without a change in control(1) | 320,770 | | | 344,633 | | | — | | | 665,403 | | Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3) | 1,039,200 |
| | 107,179 |
| | 44,330 |
| | 1,190,709 |
| Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3) | 1,172,448 | | | 344,633 | | | 44,276 | | | 1,561,357 | | Retirement | — |
| | — |
| | — |
| | — |
| Retirement | — | | | 344,633 | | | — | | | 344,633 | | Death and Disability | — |
| | 523,557 |
| | — |
| | 523,557 |
| Death and Disability | — | | | 344,633 | | | — | | | 344,633 | | Sean R. McRae | | Sean R. McRae | | Bank initiated (not for cause) termination of employee without a change in control(1) | | Bank initiated (not for cause) termination of employee without a change in control(1) | 155,929 | | | — | | | — | | | 155,929 | | Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3) | | Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3) | 972,999 | | | 74,418 | | | 44,799 | | | 1,092,216 | | Retirement | | Retirement | — | | | — | | | — | | | — | | Death and Disability | | Death and Disability | — | | | 290,706 | | | — | | | 290,706 | |
_______________________ | | (1) | (1) Under our severance policy and based on status in the organization and tenure for Mr. Hjerpe and Mr. Nitkiewicz the “Severance” amount payable is equal to 12 months' base salary, for Ms. Pratt and Mr. Barrett the amount payable is equal
to approximately ten months' base salary, and for Mr. McRae the organization and tenure for Mr. Hjerpe, Mr. Nitkiewicz, Ms. Elliott and Mr. Collins, 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 eight months'six months’ base salary, all based on annual salary in effect on December 31, 2018.2020. | | (2) | The aggregate amount due to Mr. Hjerpe under his change in control agreement and the Executive Severance Plan, assuming a December 31, 2018, termination would have been subject to the change in control excise tax under Section 4999 of the 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 Internal Revenue Code, the total amount of severance paid to Mr. Hjerpe would be $4,496,967 rather than $3,569,979. |
| | (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, 2018 and (ii) target long and short-term incentive awards under our 2018 Executive Incentive Plan. Mr. Nitkiewicz, Ms. Elliott, Mr. Collins, Ms. Pratt and Mr. Barrett would not have been subject to the change in control excise tax under Section 4999 of the Internal Revenue Code. In no event would tax gross-up payments apply. |
| | (4) | Because Mr. Hjerpe, Mr. Nitkiewicz, Ms. Elliott and Mr. Collins were retirement-eligible as of December 31, 2018, amounts shown for incentive compensation payable to them under each of the termination scenarios in the table includes such officers’ actual 2018 annual short-term incentive compensation award as well as their long-term incentive compensation awards under the 2016, 2017 and 2018 Executive Incentive Plans. All of such short- and long-term awards are also included in the row entitled “Death and Disability” for Ms. Pratt and Mr. Barrett. However, because Ms. Pratt and Mr. Barrett were not retirement-eligible as of December 31, 2018, they 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, they would have been entitled to incentive compensation only equal to their actual 2018 annual short-term incentive compensation award, and not any long-term award under the 2016, 2017 or 2018 Executive Incentive Plans. |
| | (5) | Long-term incentive awards under the 2016 Executive Incentive Plan are the actual awards that were paid in March 2019. Long-term incentive awards under the 2017 and 2018 Executive Incentive Plans, which will be payable in March 2020 and March 2021, respectively, are based on currently estimated performance as of December 31, 2018 for the core return on capital stock goal, and a current estimate by the Bank’s chief risk officer for the regulatory goal. |
| | (6) | “All Other Compensation” includes the following amounts payable under the Executive Severance Plan: (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 $25,000 for Mr. Hjerpe and $15,000 for the other named executive officers. |
(2) The aggregate amount due to Mr. Hjerpe under his change in control agreement and the Executive Severance Plan, assuming a December 31, 2020, termination would have been subject to the change in control excise tax under Section 4999 of the 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 $4,831,225 rather than $4,267,410. (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, 2020 and (ii) target long- and short-term incentive awards under our 2020 Executive Incentive Plan. Mr. Nitkiewicz, Ms. Pratt, Mr. Barrett and Mr. McRae 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) Because Mr. Hjerpe, Mr. Nitkiewicz, Ms. Pratt, and Mr. Barrett were retirement-eligible as of December 31, 2020, amounts shown for incentive compensation payable to them under each of the applicable termination scenarios in the table includes such officers’ actual 2020 annual short-term incentive compensation award as well as their long-term incentive compensation awards under the 2018, 2019, and 2020 Executive Incentive Plans. All of such short- and long-term awards are also included in the row entitled “Death and Disability” for Mr. McRae. However, because Mr. McRae was not retirement-eligible as of December 31, 2020, 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, Mr. McRae would have been entitled to incentive compensation only equal to his actual 2020 annual short-term incentive compensation award, and not any long-term award under the 2018, 2019 or 2020 Executive Incentive Plans. (5) Long-term incentive awards under the 2018 Executive Incentive Plan are the actual awards that were paid in March 2021. Long-term incentive awards under the 2019 and 2020 Executive Incentive Plans, which will be payable in March 2022 and March 2023, respectively, are based on currently estimated performance as of December 31, 2020, for the core return on capital stock goal, and a current estimate by the Bank’s chief risk officer for the regulatory goal. (6) “All Other Compensation” includes the following amounts payable under the Executive Severance Plan to named executive officers: (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 $25,000 for Mr. Hjerpe and $15,000 for the other named executive officers.
Pay Ratio
For the year ended December 31, 2018,2020, 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 15:16:1. To determine this ratio, total compensation of the Median Employee for 20182020 was calculated in the same manner as total compensation of our chief executive officer for 20182020 as presented in Table 5758 — Summary Compensation.Compensation for 2020, 2019 and 2018. 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 2020, 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 2018,2020, the total annual compensation of the Median Employee was $156,768,$221,222, and the total annual compensation of the chief executive officer, as reported in Table 5758 — Summary Compensation Table,for 2020, 2019 and 2018, was $2,335,859.$3,605,053 .
The Bank is using the same Median Employee in its pay ratio calculation in this report that it identified inis the pay ratio calculation inemployee whose compensation is the median of the annual total compensation of all our 2017 Annual Report on Form 10-K because there have been no changes to our employee population or employee compensation arrangements that we believe would result in a significant change of our pay distribution to our employee population and significantly affectemployees other than the pay ratio disclosure. chief executive officer.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, 2017,2020 (there were no part-time employees on this date), excluding the chief executive officer, the sum of (i) the 20172020 salary of each employee as of October 1, 20172020 and (ii) the 20162019 incentive compensation paid to that employee in March 2017,2020, and ranking the sums for all such employees (a list of 201195 employees as of October 1, 2017)2020) 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 2018 and 2017,2020, 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 20192020 and 2021 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, 2019, 2018,2021 and 2017,2020 along with the annual maximum compensation amounts are detailed in the following table:
Table 64 - Director Compensation Table 63 - Director Compensation
| | | | | 2019 | | 2018 | | 2017 | | | 2021 | | 2020 | | Fee per board meeting: | | | | | | | Fee per board meeting: | | | | | | Chair of the board | | $ | 11,500 |
| | $ | 11,500 |
| | $ | 11,000 |
| Chair of the board | | $ | 11,500 | | | $ | 11,500 | | | Vice chair of the board and committee chairs | | 9,500 |
| | 9,500 |
| | 9,000 |
| Vice chair of the board and committee chairs | | 9,500 | | | 9,500 | | | All other board members | | 8,500 |
| | 8,500 |
| | 8,000 |
| All other board members | | 8,500 | | | 8,500 | | | Fee per committee meeting | | 2,500 |
| | 2,500 |
| | 2,250 |
| Fee per committee meeting | | 2,500 | | | 2,500 | | | Fee per telephonic conference call | | 1,500 |
| | 1,500 |
| | 1,500 |
| | Fee for telephonic attendance | | Fee for telephonic attendance | | 1,500 | | | 1,500 | | | | | | | | | | | | Quarterly Retainer Fees | | | | | | | Quarterly Retainer Fees | | | Chair of the board | | 10,250 |
| | 10,250 |
| | 10,000 |
| Chair of the board | | 11,250 | | | 11,250 | | | Vice chair of the board and committee chairs | | 9,000 |
| | 9,000 |
| | 8,750 |
| Vice chair of the board and committee chairs | | 10,000 | | | 10,000 | | | All other board members | | 7,750 |
| | 7,750 |
| | 7,500 |
| All other board members | | 8,750 | | | 8,750 | | | | | | | | | | | | Annual maximum compensation amounts: | | | | | | | Annual maximum compensation amounts: | | | Chair of the board | | 132,500 |
| | 132,500 |
| | 125,000 |
| Chair of the board | | 137,500 | | | 137,500 | | | Vice chair of the board and committee chairs | | 112,500 |
| | 112,500 |
| | 105,000 |
| Vice chair of the board and committee chairs | | 117,500 | | | 117,500 | | | All other board members | | 102,500 |
| | 102,500 |
| | 95,000 |
| All other board members | | 107,500 | | | 107,500 | | |
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 20182020 are detailed in the following table:
Table 64 - 2018 Director Compensation
| | | | | | Fees Earned or Paid in Cash | Andrew J. Calamare, Chair | $ | 132,500 |
| Stephen G. Crowe, Vice Chair | 112,500 |
| Donna L. Boulanger | 102,500 |
| Joan Carty | 112,500 |
| Eric Chatman | 102,500 |
| Patrick E. Clancy | 102,500 |
| Martin J. Geitz | 112,500 |
| Cornelius K. Hurley | 112,500 |
| Antoinette Lazarus | 102,500 |
| Jay F. Malcynsky | 112,500 |
| John W. McGeorge | 112,500 |
| Emil J. Ragones | 112,500 |
| Gregory R. Shook | 102,500 |
| Stephen R. Theroux | 102,500 |
| John F. Treanor | 112,500 |
| Michael R. Tuttle | 102,500 |
| John C. Witherspoon | 102,500 |
| | $ | 1,852,500 |
|
Table 65 - 2020 Director Compensation | | | | | | | Fees Earned or Paid in Cash | Martin J. Geitz, Chair in 2020 | $ | 137,500 | | Donna L. Boulanger, Vice Chair in 2020 | 117,500 | | Andrew Calamare | 25,250 | | Joan Carty | 117,500 | | Eric Chatman | 117,500 | | Patrick E. Clancy | 107,500 | | Dwight M. Davidsen | 107,500 | | Cornelius K. Hurley | 117,500 | | Antoinette C. Lazarus | 107,500 | | Jay F. Malcynsky | 117,500 | | Edward F. Manzi, Jr. | 107,500 | | John W. McGeorge | 117,500 | | Emil J. Ragones | 117,500 | | John F. Treanor | 61,442 | | Michael R. Tuttle | 117,500 | | John C. Witherspoon | 107,500 | | Richard E. Wyman, Jr. | 107,500 | | | $ | 1,809,192 | |
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 $181,000$6 thousand for the year ended December 31, 2018.2020.
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. In 2018, Director Jay F. Malcynsky was one of only two directors who served on four committees (compared to two or three committees for each of the other directors), and his heavy load of committee meetings resulted in a drop in his attendance in 2018 to 71 percent of all the regular and special meetings of the Board and the committees on which he served. The Board considered that Mr. Malcynsky had actually attended more meetings (22) than five other directors who had lighter committee responsibilities. The Board also considered that if only Mr. Malcynsky’s standing committees (as opposed to the ad hoc committee) were included in the calculation, his attendance would have exceeded 75 percent. The Board determined that, under the circumstances, it would not be appropriate to reduce Mr. Malcynsky’s retainer payment.
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, 2019,2021, are noted in Table 65.66.
Table 65 - Stockholders Holding Five Percent or More of Outstanding Capital Stock (dollars in thousands)
| | | | | | | | | | | Capital Stock | | Percent of Total Capital Stock | Citizens Bank, N.A. | | $ | 242,175 |
| | 12.21 | % | One Citizens Plaza | | | | | Providence, RI 02903 | | | | |
Table 66 - Stockholders Holding Five Percent or More of Outstanding Capital Stock(dollars in thousands) | | | | | | | | | | | | | | | | | | | | | Member Name | | Address | | Capital Stock | | Percent of Total Capital Stock | Massachusetts Mutual Life Insurance Company | | 1295 State Street, Springfield, MA 01111 | | $ | 97,720 | | | 8.00 | % |
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 6667 provides capital stock outstanding as of February 28, 20192021, to members whose officers or directors serve as our directors.
Table 67 - Capital Stock Outstanding to Members whose Officers or Directors serve on our Board of Directors Table 66 - 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 | | $ | 47,427 |
| | 2.39 | % | 23 Broad Street | | | | | Westerly, RI 02891 | | | | | | | | | | Needham Bank | | 17,155 |
| | 0.87 |
| 1063 Great Plain Avenue | | | | | Needham, MA 02492 | | | | | | | | | | Meredith Village Savings Bank | | 5,047 |
| | 0.25 |
| 24 State Route 25 | | | | | Meredith, NH 03253 | | | | | | | | | | MountainOne Bank | | 4,789 |
| | 0.24 |
| 93 Main Street | | | | | North Adams, MA 01247 | | | | | | | | | | Merrimack County Savings Bank | | 4,017 |
| | 0.20 |
| 89 North Main Street | | | | | Concord, NH 03301 | | | | | | | | | | North Brookfield Savings Bank | | 1,784 |
| | 0.09 |
| 35 Summer Street | | | | | North Brookfield, MA 01535 | | | | | | | | | | Skowhegan Savings Bank | | 765 |
| | 0.04 |
| 13 Elm Street | | | | | Skowhegan, ME 04976 | | | | | | | | | | Depositors Insurance Fund | | 690 |
| | 0.03 |
|
(dollars in thousands) | | | | | | | | | | | | | | | | | | | | | Member Name | | City, State | | Capital Stock | | Percent of Total Capital Stock | Liberty Bank | | Middletown, CT | | $ | 22,169 | | | 1.81 | % | Citizens Bank, N.A. | | Providence, RI | | 18,513 | | | 1.52 | | Needham Bank | | Needham, MA | | 7,672 | | | 0.63 | | Northfield Savings Bank | | Berlin, VT | | 1,767 | | | 0.14 | | Meredith Village Savings Bank | | Meredith, NH | | 1,758 | | | 0.14 | | Merrimack County Savings Bank | | Concord, NH | | 1,487 | | | 0.12 | | Skowhegan Savings Bank | | Skowhegan, ME | | 1,457 | | | 0.12 | | Fidelity Co-Operative Bank | | Fitchburg, MA | | 1,437 | | | 0.12 | | North Brookfield Savings Bank | | North Brookfield, MA | | 960 | | | 0.08 | | Depositors Insurance Fund | | Woburn, MA | | 690 | | | 0.06 | | Savings Bank of Walpole | | Walpole, NH | | 513 | | | 0.04 | | Total stock ownership by members whose officers or directors serve as directors of the Bank | | | | $ | 58,423 | | | 4.78 | % |
Table 66 - Capital Stock Outstanding to Members whose Officers or Directors serve on our Board of Directors (dollars in thousands)
| | | | | | | | | One Linscott Road | | | | | Woburn, MA 01801 | | | | | | | | | | The Simsbury Bank & Trust Company | | 575 |
| | 0.03 |
| 981 Hopmeadow Street | | | | | Simsbury, CT 06070 | | | | | | | | | | Essex Savings Bank | | 550 |
| | 0.03 |
| 35 Plains Road | | | | | Essex, CT 06426 | | | | | | | | | | Savings Bank of Walpole | | 513 |
| | 0.03 |
| 68 Ames Plaza Lane | | | | | Walpole, NH 03608 | | | | | | | | | | Opportunities Credit Union | | 214 |
| | 0.01 |
| 25 Winooski Falls Way | | | | | Winooski, VT 05404 | | | | | Total stock ownership by members whose officers or directors serve as directors of the Bank | | $ | 83,526 |
| | 4.21 | % |
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, 2018,2020, 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 a member or its holding company, or a 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, executive 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 nineeight 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 22, 2019,19, 2021, 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 22, 2019,19, 2021, all of our independent (that is, nonmember) directors are independent, including Directors Calamare, Carty, Chatman, Clancy, Curry, 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, Shook, Treanor, Tuttle, and 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, Curry, 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 22, 2019,19, 2021, 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 22, 2019,19, 2021, 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 20182020 and 2017,2019, as well as the fees billed by PwC for audit-related and other services rendered by PwC to us during 20182020 and 2017.2019.
Table 68 - Principal Accounting Fees and Services Table 67 - Principal Accounting Fees and Services (dollars in thousands)
| | | | | | | | | | | | Year Ended December 31, | | | 2018 | | 2017 | Audit fees(1) | | $ | 891 |
| | $ | 858 |
| Audit-related fees(2) | | 95 |
| | 68 |
| All other fees | | 3 |
| | 2 |
| Tax fees | | — |
| | — |
| Total | | $ | 989 |
| | $ | 928 |
|
(dollars in thousands) | | | | | | | | | | | | | | | | | Year Ended December 31, | | | 2020 | | 2019 | Audit fees(1) | | $ | 933 | | | $ | 925 | | Audit-related fees(2) | | 58 | | | 48 | | All other fees | | 3 | | | 3 | | Tax fees | | — | | | — | | Total | | $ | 994 | | | $ | 976 | |
_______________________ | | (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. |
(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.
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 | | 10.14.2 | 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 * | | 10.2.110.1.4 | | Fourth Amendment to the Federal Home Loan Bank of Boston Pension Benefit Equalization Plan effective January 1, 2021 * | | 10.2.1 | The Federal Home Loan Bank of Boston Thrift Benefit Equalization Plan (as amended and restated effective January 1, 2017) * | | 10.3.110.2.2 | The | First Amendment to the Federal Home Loan Bank of Boston 2016 Executive IncentiveThrift Benefit Equalization Plan effective January 1, 2021 * | | 10.3.210.3.1 | The Federal Home Loan Bank of Boston 2017 Executive Incentive Plan * + | | 10.3.3 | The Federal Home Loan Bank of Boston 2018 Executive Incentive Plan * + | | 10.3.4 | The Federal Home Loan Bank of Boston 2019 Executive Incentive Plan * ∞+ | | 10.410.3.2 | | The Federal Home Loan Bank of Boston 2020 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 | | 10.8.110.8 | 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 | |
| | | | | | | | | | | | 10.9.110.9 | The Federal Home Loan Bank of Boston 20182020 Director Compensation Policy * | | 10.9.210.9.1 | The Federal Home Loan Bank of Boston 20192021 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 TerminationPerformance Award Agreement between M. Susan Elliott and the Federal Home Loan Bank of Boston and Sean R. McRae dated May 24, 2005as of January 2018 * | | 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 | | | | 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 granted as to portions of this exhibit. ∞ Confidential treatment has been requested 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 22, 201919, 2021 | | By: | /s/ | Edward A. Hjerpe III | | | | | | Edward A. Hjerpe III President and Chief Executive Officer | March 22, 201919, 2021 | | By: | /s/ | Frank Nitkiewicz | | | | | | Frank Nitkiewicz Executive Vice President and Chief Financial Officer | March 22, 201919, 2021 | | 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 22, 201919, 2021 | | By: | /s/ | Donna L. Boulanger | | | | | Donna L. Boulanger Director | March 22, 201919, 2021 | | By: | /s/ | Andrew J. CalamareJoan Carty | | | | | Andrew J. Calamare
Director
| March 22, 2019 | | By: | /s/ | Joan Carty | | | | | Joan Carty Director | March 22, 201919, 2021 | | By: | /s/ | Eric Chatman | | | | | Eric Chatman Director | March 22, 201919, 2021 | | By: | /s/ | Patrick E. Clancy | | | | | Patrick E. Clancy Director | March 22, 201919, 2021 | | By: | /s/ | Stephen G. CroweThomas J. Curry | | | | | Stephen G. CroweThomas J.Curry
Director | March 22, 201919, 2021 | | By: | /s/ | Dwight M. Davidsen | | | | | Dwight M. Davidsen Director | March 19, 2021 | | By: | /s/ | Martin J. Geitz | | | | | Martin J. Geitz Director | March 19, 2021 | | By: | /s/ | Cornelius K. Hurley | | | | | Cornelius K. Hurley Director | | | | | |
| | | | | | | | | | | | | | | March 22, 201919, 2021 | | By: | /s/ | Antoinette C. Lazarus | | | | | Antoinette C. Lazarus Director |
March 19, 2021 | | By: | /s/ | Edward F. Manzi, Jr. | | | | | | March 22, 2019 | | By: | /s/ | JayEdward F. Malcynsky
| | | | | Jay F. MalcynskyManzi, Jr. Director
| March 22, 201919, 2021 | | By: | /s/ | John W. McGeorge
| | | | | John W. McGeorge Director | March 22, 201919, 2021 | | By: | /s/ | Emil J. Ragones | | | | | Emil J. Ragones Director | March 22, 201919, 2021 | | By: | /s/ | Gregory R. Shook | | | | | Gregory R. Shook
Director
| March 22, 2019 | | By: | /s/ | John F. Treanor | | | | | John F. Treanor
Director
| March 22, 2019 | | By: | /s/ | Michael R. Tuttle | | | | | Michael R. Tuttle Director | March 22, 201919, 2021 | | By: | /s/ | John C. Witherspoon | | | | | John C. Witherspoon Director | March 22, 201919, 2021 | | By: | /s/ | Richard E. Wyman, Jr. | | | | | Richard E. Wyman, Jr. Director |
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