UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
––––––––––––––––––––––––––––––––––––––––––––––––––––
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 000-51402
FEDERAL HOME LOAN BANK OF BOSTON
(Exact name of registrant as specified in its charter)
Federally chartered corporation | 04-6002575 | |||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification number) | |||||
800 Boylston Street, | Boston | MA | 02199 | |||
(Address of principal executive offices) | (Zip code) |
(617) 292-9600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer | x | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Shares outstanding as of July 31, 2020 | |||
Class A Stock, par value | $100 | 0 | |
Class B Stock, par value | $100 | 14,479,289 |
Federal Home Loan Bank of Boston
Form 10-Q
Table of Contents
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CONDITION (dollars and shares in thousands, except par value) (unaudited) | |||||||
June 30, 2020 | December 31, 2019 | ||||||
ASSETS | |||||||
Cash and due from banks | $ | 247,587 | $ | 69,416 | |||
Interest-bearing deposits | 1,004,210 | 1,253,873 | |||||
Securities purchased under agreements to resell | 1,250,000 | 3,500,000 | |||||
Federal funds sold | 2,015,000 | 860,000 | |||||
Investment securities: | |||||||
Trading securities | 4,445,028 | 2,250,264 | |||||
Available-for-sale securities | 6,950,965 | 7,409,000 | |||||
Held-to-maturity securities, net of allowance for credit losses of $5,566 at June 30, 2020 - includes $92 pledged as collateral at December 31, 2019, that may be repledged (a) | 621,385 | 871,107 | |||||
Total investment securities | 12,017,378 | 10,530,371 | |||||
Advances | 24,827,781 | 34,595,363 | |||||
Mortgage loans held for portfolio, net of allowance for credit losses of $4,602 and $500 at June 30, 2020, and December 31, 2019 | 4,411,053 | 4,501,251 | |||||
Accrued interest receivable | 102,582 | 112,163 | |||||
Derivative assets, net | 204,496 | 159,731 | |||||
Other assets | 81,301 | 80,643 | |||||
Total Assets | $ | 46,161,388 | $ | 55,662,811 | |||
LIABILITIES | |||||||
Deposits | |||||||
Interest-bearing | $ | 1,082,001 | $ | 616,532 | |||
Non-interest-bearing | 109,228 | 57,777 | |||||
Total deposits | 1,191,229 | 674,309 | |||||
Consolidated obligations (COs): | |||||||
Bonds | 24,563,087 | 23,888,493 | |||||
Discount notes | 17,308,802 | 27,681,169 | |||||
Total consolidated obligations | 41,871,889 | 51,569,662 | |||||
Mandatorily redeemable capital stock | 6,135 | 5,806 | |||||
Accrued interest payable | 82,508 | 104,477 | |||||
Affordable Housing Program (AHP) payable | 80,183 | 86,131 | |||||
Derivative liabilities, net | 24,098 | 10,271 | |||||
Other liabilities | 59,718 | 66,843 | |||||
Total liabilities | 43,315,760 | 52,517,499 | |||||
Commitments and contingencies (Note 14) | |||||||
CAPITAL | |||||||
Capital stock – Class B – putable ($100 par value), 15,185 shares and 18,691 shares issued and outstanding at June 30, 2020, and December 31, 2019, respectively | 1,518,515 | 1,869,130 | |||||
Retained earnings: | |||||||
Unrestricted | 1,097,875 | 1,114,337 | |||||
Restricted | 357,709 | 348,817 | |||||
Total retained earnings | 1,455,584 | 1,463,154 | |||||
Accumulated other comprehensive loss | (128,471 | ) | (186,972 | ) | |||
Total capital | 2,845,628 | 3,145,312 | |||||
Total Liabilities and Capital | $ | 46,161,388 | $ | 55,662,811 |
_______________________________________
(a) Fair values of held-to-maturity securities were $698,671 and $1,035,410 at June 30, 2020, and December 31, 2019, respectively.
The accompanying notes are an integral part of these financial statements.
3
FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF OPERATIONS (dollars in thousands) (unaudited) | |||||||||||||||
For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
INTEREST INCOME | |||||||||||||||
Advances | $ | 100,818 | $ | 223,869 | $ | 269,477 | $ | 471,746 | |||||||
Prepayment fees on advances, net | 4,164 | 3,806 | 5,002 | 30,737 | |||||||||||
Interest-bearing deposits | 385 | 5,398 | 5,354 | 9,068 | |||||||||||
Securities purchased under agreements to resell | 213 | 36,210 | 14,574 | 76,071 | |||||||||||
Federal funds sold | 424 | 13,261 | 17,141 | 37,555 | |||||||||||
Investment securities: | |||||||||||||||
Trading securities | 21,799 | 2,502 | 39,379 | 4,247 | |||||||||||
Available-for-sale securities | 17,137 | 21,655 | 29,498 | 42,946 | |||||||||||
Held-to-maturity securities | 6,008 | 17,494 | 16,146 | 35,891 | |||||||||||
Total investment securities | 44,944 | 41,651 | 85,023 | 83,084 | |||||||||||
Mortgage loans held for portfolio | 33,333 | 37,587 | 70,179 | 74,956 | |||||||||||
Other | — | 10 | 47 | 15 | |||||||||||
Total interest income | 184,281 | 361,792 | 466,797 | 783,232 | |||||||||||
INTEREST EXPENSE | |||||||||||||||
Consolidated obligations: | |||||||||||||||
Bonds | 94,256 | 150,715 | 217,803 | 305,532 | |||||||||||
Discount notes | 47,582 | 151,253 | 175,064 | 329,192 | |||||||||||
Total consolidated obligations | 141,838 | 301,968 | 392,867 | 634,724 | |||||||||||
Deposits | 27 | 1,809 | 865 | 3,614 | |||||||||||
Mandatorily redeemable capital stock | 64 | 259 | 138 | 566 | |||||||||||
Other borrowings | 5 | 23 | 229 | 27 | |||||||||||
Total interest expense | 141,934 | 304,059 | 394,099 | 638,931 | |||||||||||
NET INTEREST INCOME | 42,347 | 57,733 | 72,698 | 144,301 | |||||||||||
Provision for credit losses | 2,903 | 12 | 2,219 | 15 | |||||||||||
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | 39,444 | 57,721 | 70,479 | 144,286 | |||||||||||
OTHER INCOME (LOSS) | |||||||||||||||
Loss on early extinguishment of debt | — | — | — | (9,865 | ) | ||||||||||
Service fees | 3,520 | 3,329 | 6,842 | 6,293 | |||||||||||
Net unrealized (losses) gains on trading securities | (18,750 | ) | 1,328 | 27,370 | 1,054 | ||||||||||
Net losses on derivatives and hedging activities | (1,161 | ) | (962 | ) | (53,719 | ) | (414 | ) | |||||||
Realized net gain from sale of held-to-maturity securities | — | — | 40,733 | — | |||||||||||
Other | 214 | (20 | ) | 194 | (129 | ) | |||||||||
Total other (loss) income | (16,177 | ) | 3,675 | 21,420 | (3,061 | ) | |||||||||
OTHER EXPENSE | |||||||||||||||
Compensation and benefits | 9,487 | 9,568 | 21,626 | 20,187 | |||||||||||
Other operating expenses | 6,023 | 6,745 | 12,006 | 12,536 | |||||||||||
Federal Housing Finance Agency (the FHFA) | 947 | 989 | 1,894 | 1,978 | |||||||||||
Office of Finance | 736 | 800 | 1,833 | 1,617 | |||||||||||
Other | 2,953 | 3,687 | 5,128 | 4,758 | |||||||||||
Total other expense | 20,146 | 21,789 | 42,487 | 41,076 | |||||||||||
INCOME BEFORE ASSESSMENTS | 3,121 | 39,607 | 49,412 | 100,149 | |||||||||||
AHP assessments | 319 | 3,987 | 4,955 | 10,072 | |||||||||||
NET INCOME | $ | 2,802 | $ | 35,620 | $ | 44,457 | $ | 90,077 |
The accompanying notes are an integral part of these financial statements.
4
FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF COMPREHENSIVE INCOME (dollars in thousands) (unaudited) | ||||||||||||||||
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income | $ | 2,802 | $ | 35,620 | $ | 44,457 | $ | 90,077 | ||||||||
Other comprehensive income: | ||||||||||||||||
Net unrealized gains on available-for-sale securities | 115,659 | 36,293 | 29,922 | 70,358 | ||||||||||||
Net noncredit portion of other-than-temporary impairment gains on held-to-maturity securities | 2,585 | 6,275 | 25,629 | 12,516 | ||||||||||||
Net unrealized gains (losses) relating to hedging activities | 1,619 | (1,312 | ) | 2,251 | (3,905 | ) | ||||||||||
Pension and postretirement benefits | (97 | ) | 190 | 699 | 351 | |||||||||||
Total other comprehensive income | 119,766 | 41,446 | 58,501 | 79,320 | ||||||||||||
Comprehensive income | $ | 122,568 | $ | 77,066 | $ | 102,958 | $ | 169,397 |
The accompanying notes are an integral part of these financial statements.
5
FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CAPITAL THREE AND SIX MONTHS ENDED JUNE 30, 2020 and 2019 (dollars and shares in thousands) (unaudited) | ||||||||||||||||||||||||||
Capital Stock Class B – Putable | Retained Earnings | Accumulated Other Comprehensive Loss | ||||||||||||||||||||||||
Shares | Par Value | Unrestricted | Restricted | Total | Total Capital | |||||||||||||||||||||
BALANCE, MARCH 31, 2019 | 18,302 | $ | 1,830,240 | $ | 1,090,811 | $ | 321,561 | $ | 1,412,372 | $ | (278,808 | ) | $ | 2,963,804 | ||||||||||||
Comprehensive income | 28,496 | 7,124 | 35,620 | 41,446 | 77,066 | |||||||||||||||||||||
Proceeds from issuance of capital stock | 5,552 | 555,112 | 555,112 | |||||||||||||||||||||||
Repurchase of capital stock | (3,901 | ) | (390,100 | ) | (390,100 | ) | ||||||||||||||||||||
Cash dividends on capital stock | (31,666 | ) | (31,666 | ) | (31,666 | ) | ||||||||||||||||||||
BALANCE, JUNE 30, 2019 | 19,953 | $ | 1,995,252 | $ | 1,087,641 | $ | 328,685 | $ | 1,416,326 | $ | (237,362 | ) | $ | 3,174,216 | ||||||||||||
BALANCE, MARCH 31, 2020 | 22,663 | $ | 2,266,329 | $ | 1,116,001 | $ | 357,148 | $ | 1,473,149 | $ | (248,237 | ) | $ | 3,491,241 | ||||||||||||
Comprehensive income | 2,241 | 561 | 2,802 | 119,766 | 122,568 | |||||||||||||||||||||
Proceeds from issuance of capital stock | 1,097 | 109,691 | 109,691 | |||||||||||||||||||||||
Repurchase of capital stock | (8,574 | ) | (857,376 | ) | (857,376 | ) | ||||||||||||||||||||
Shares reclassified to mandatorily redeemable capital stock | (1 | ) | (129 | ) | (129 | ) | ||||||||||||||||||||
Partial recovery of prior capital distribution to Financing Corporation | 3,726 | 3,726 | 3,726 | |||||||||||||||||||||||
Cash dividends on capital stock | (24,093 | ) | (24,093 | ) | (24,093 | ) | ||||||||||||||||||||
BALANCE, JUNE 30, 2020 | 15,185 | $ | 1,518,515 | $ | 1,097,875 | $ | 357,709 | $ | 1,455,584 | $ | (128,471 | ) | $ | 2,845,628 | ||||||||||||
BALANCE, DECEMBER 31, 2018 | 25,289 | $ | 2,528,854 | $ | 1,084,342 | $ | 310,670 | $ | 1,395,012 | $ | (316,507 | ) | $ | 3,607,359 | ||||||||||||
Cumulative effect of change in accounting principle | 175 | — | 175 | (175 | ) | — | ||||||||||||||||||||
Comprehensive income | 72,062 | 18,015 | 90,077 | 79,320 | 169,397 | |||||||||||||||||||||
Proceeds from issuance of capital stock | 8,365 | 836,504 | 836,504 | |||||||||||||||||||||||
Repurchase of capital stock | (13,701 | ) | (1,370,106 | ) | (1,370,106 | ) | ||||||||||||||||||||
Cash dividends on capital stock | (68,938 | ) | (68,938 | ) | (68,938 | ) | ||||||||||||||||||||
BALANCE, JUNE 30, 2019 | 19,953 | $ | 1,995,252 | $ | 1,087,641 | $ | 328,685 | $ | 1,416,326 | $ | (237,362 | ) | $ | 3,174,216 | ||||||||||||
BLANCE, 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 | ) | — | (7,530 | ) | — | (7,530 | ) | ||||||||||||||||||
Comprehensive income | 35,565 | 8,892 | 44,457 | 58,501 | 102,958 | |||||||||||||||||||||
Proceeds from issuance of capital stock | 15,759 | 1,575,906 | 1,575,906 | |||||||||||||||||||||||
Repurchase of capital stock | (19,261 | ) | (1,926,086 | ) | (1,926,086 | ) | ||||||||||||||||||||
Shares reclassified to mandatorily redeemable capital stock | (4 | ) | (435 | ) | (435 | ) | ||||||||||||||||||||
Partial recovery of prior capital distribution to Financing Corporation | 3,726 | 3,726 | 3,726 | |||||||||||||||||||||||
Cash dividends on capital stock | (48,223 | ) | (48,223 | ) | (48,223 | ) | ||||||||||||||||||||
BALANCE, JUNE 30, 2020 | 15,185 | $ | 1,518,515 | $ | 1,097,875 | $ | 357,709 | $ | 1,455,584 | $ | (128,471 | ) | $ | 2,845,628 |
The accompanying notes are an integral part of these financial statements.
6
FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) | |||||||
For the Six Months Ended June 30, | |||||||
2020 | 2019 | ||||||
OPERATING ACTIVITIES | |||||||
Net income | $ | 44,457 | $ | 90,077 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | (9,098 | ) | 7,892 | ||||
Provision for credit losses | 2,219 | 15 | |||||
Net change in derivatives and hedging activities | (298,567 | ) | (298,252 | ) | |||
Loss on early extinguishment of debt | — | 9,865 | |||||
Other adjustments | 2,233 | 2,705 | |||||
Realized net gain from sale of held-to-maturity securities | (40,733 | ) | — | ||||
Net change in: | |||||||
Market value of trading securities | (27,370 | ) | (1,054 | ) | |||
Accrued interest receivable | 9,581 | (5,042 | ) | ||||
Other assets | 2,589 | (4,406 | ) | ||||
Accrued interest payable | (21,970 | ) | 7,250 | ||||
Other liabilities | (13,185 | ) | 676 | ||||
Total adjustments | (394,301 | ) | (280,351 | ) | |||
Net cash used in operating activities | (349,844 | ) | (190,274 | ) | |||
INVESTING ACTIVITIES | |||||||
Net change in: | |||||||
Interest-bearing deposits | 157,832 | (590,233 | ) | ||||
Securities purchased under agreements to resell | 2,250,000 | 1,499,000 | |||||
Federal funds sold | (1,155,000 | ) | 1,250,000 | ||||
Trading securities: | |||||||
Proceeds | 1,125,687 | 67,576 | |||||
Purchases | (3,293,082 | ) | (1,001,467 | ) | |||
Available-for-sale securities: | |||||||
Proceeds | 838,272 | 924,182 | |||||
Purchases | — | (267,797 | ) | ||||
Held-to-maturity securities: | |||||||
Proceeds | 315,746 | 132,174 | |||||
Advances to members: | |||||||
Repaid | 193,794,847 | 268,055,560 | |||||
Originated | (183,875,145 | ) | (261,863,678 | ) | |||
Mortgage loans held for portfolio: | |||||||
Proceeds | 519,084 | 200,205 | |||||
Purchases | (442,197 | ) | (325,607 | ) | |||
Other investing activities, net | 396 | (25 | ) | ||||
Net cash provided by investing activities | 10,236,440 | 8,079,890 | |||||
FINANCING ACTIVITIES | |||||||
Net change in deposits | 517,328 | 119,900 | |||||
Net payments on derivatives with a financing element | (108,774 | ) | (38,540 | ) | |||
Net proceeds from issuance of consolidated obligations: | |||||||
Discount notes | 58,947,874 | 74,857,450 |
7
Bonds | 7,058,587 | 5,182,056 | |||||
Payments for maturing and retiring consolidated obligations: | |||||||
Discount notes | (69,294,882 | ) | (81,505,625 | ) | |||
Bonds | (6,433,775 | ) | (5,869,248 | ) | |||
Partial recovery of prior capital distribution to Financing Corporation | 3,726 | — | |||||
Proceeds from issuance of capital stock | 1,575,906 | 836,504 | |||||
Payments for repurchase of capital stock | (1,926,086 | ) | (1,370,106 | ) | |||
Payments for redemption of mandatorily redeemable capital stock | (106 | ) | (14,761 | ) | |||
Cash dividends paid | (48,223 | ) | (68,938 | ) | |||
Net cash used in financing activities | (9,708,425 | ) | (7,871,308 | ) | |||
Net increase in cash and due from banks | 178,171 | 18,308 | |||||
Cash and due from banks at beginning of the period | 69,416 | 10,431 | |||||
Cash and due from banks at end of the period | $ | 247,587 | $ | 28,739 | |||
Supplemental disclosures: | |||||||
Interest paid | $ | 457,024 | $ | 637,183 | |||
AHP payments | $ | 9,903 | $ | 6,454 | |||
Noncash transfers of mortgage loans held for portfolio to other assets | $ | 394 | $ | 606 | |||
Lease liabilities arising from obtaining right-of-use assets | $ | — | $ | 11,946 |
The accompanying notes are an integral part of these financial statements.
8
FEDERAL HOME LOAN BANK OF BOSTON
NOTES TO FINANCIAL STATEMENTS
Note 1 — Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. In the opinion of management, all adjustments considered necessary have been included. All such adjustments consist of normal recurring accruals. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2020. These interim financial statements do not include all the information and footnotes required by GAAP for complete annual financial statements and accordingly should be read in conjunction with the Federal Home Loan Bank of Boston's audited financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (the SEC) on March 20, 2020 (the 2019 Annual Report). Unless otherwise indicated or the context requires otherwise, all references in this discussion to “the Bank,” "we," "us," "our," or similar references mean the Federal Home Loan Bank of Boston.
Note 2 — Summary of Significant Accounting Policies
Credit Losses on Financial Instruments
Beginning January 1, 2020, the Bank adopted 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. Key changes as compared to prior accounting guidance are detailed below. Consistent with the modified retrospective method of adoption, the prior period has not been revised to conform to the new basis of accounting. See Part II — Item 8 — Financial Statements and Supplementary Data — Note 2 — Summary of Significant Accounting Policies in the 2019 Annual Report for information on the prior accounting treatment.
Interest-Bearing Deposits, Securities Purchased Under Agreements to Resell, and Federal Funds Sold
Interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold are evaluated quarterly for expected credit losses. If applicable, an allowance for credit losses is recorded with a corresponding adjustment to the provision for credit losses. 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. Accrued interest receivable is recorded separately on the statements of condition.
Investment Securities - Available-for-Sale
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 amount of the unrealized loss 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
9
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).
Investment Securities - Held-to-Maturity
Securities that we classified as held-to-maturity are carried at amortized cost, which is original cost net of periodic principal repayments and amortization of premiums and accretion of discounts, adjusted for other-than-temporary impairment losses recorded prior to January 1, 2020. Accrued interest receivable is recorded separately on the statements of condition.
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 Note 4 — Investments for details on the allowance methodologies relating to available-for-sale and held-to-maturity securities.
Advances
Advances are carried at amortized cost, which is original cost net of periodic principal repayments, amortization of premiums and accretion of discounts, and fair value hedge adjustments. 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. Advances are evaluated quarterly for expected credit losses. If deemed necessary, an allowance for credit losses is recorded with a corresponding adjustment to the provision for credit losses. See Note 5 — Advances for details on the allowance methodology.
Mortgage Loans Held for Portfolio
Mortgage loans held for portfolio are recorded at amortized cost, which is original cost, net of periodic principal repayments and amortization of premiums and accretion of discounts, 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 is 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.
We measure expected credit losses on mortgage loans on a collective basis, pooling loans with similar risk characteristics. If a mortgage loan no longer shares risk characteristics with other loans, it is removed from the pool and evaluated for expected credit losses on an individual basis.
In our assessment, we measure the expected loss over the remaining life of a mortgage loan, which considers the mitigation of expected losses through credit enhancements and any expected recoveries. If a loan is purchased at a discount, the discount does not offset the allowance for credit losses. The allowance excludes uncollectible accrued interest receivable, which is reversed out of interest income when a mortgage loan is placed on nonaccrual status.
See Note 6 — Mortgage Loans Held for Portfolio for details on the allowance methodologies relating to mortgage loans.
Troubled Debt Restructuring Relief
On March 27, 2020, the Coronavirus, Aid, Relief, and Economic Security Act (the CARES Act) providing optional, temporary relief from accounting for certain loan modifications as troubled debt restructurings (TDRs) was signed into law. Under the CARES Act, TDR relief is available to banks for loan modifications related to the adverse effects of Coronavirus Disease 2019
10
(COVID-19) (COVID-related modifications) granted to borrowers that are current as of December 31, 2019. TDR relief applies to COVID-related modifications made from March 1, 2020, until the earlier of December 31, 2020, or 60 days following the termination of the national emergency declared by the President of the United States. 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. COVID-related modifications that do not meet the provisions of the CARES Act will continue to be assessed for TDR classification.
Off-Balance Sheet Credit Exposures
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.
See Note 14 — Commitments and Contingencies for details on the allowance methodologies relating to off-balance sheet credit exposures.
Note 3 — Recently Issued and Adopted Accounting Guidance
Effective January 1, 2020
Facilitation of the Effects of Reference Rate Reform on Financial Reporting. On March 12, 2020, the Financial Accounting Standards Board (FASB) released temporary optional guidance that provides transition relief for reference rate reform. The guidance contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications, hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or a reference rate that is expected to be discontinued as a result of reference rate reform if certain criteria are met.
In addition to the optional expedients for contract modifications and hedging relationships, this update provides a one-time election to sell, transfer, or both sell and transfer debt securities classified as held-to-maturity that reference a rate affected by reference rate reform and that are classified as held-to-maturity before January 1, 2020.
This standard was effective upon issuance and the provisions generally can be applied prospectively as of January 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 16 — Subsequent Events for additional information related to these sales and transfers. We are in the process of evaluating the remaining provisions of this guidance, and the anticipated effects on our financial condition, results of operations, and cash flows have not yet been determined.
Financial Instruments - Credit Losses. On June 16, 2016, the FASB issued amended guidance for the accounting of credit losses on financial instruments. The amendments require entities to measure expected credit losses based on relevant information about past events (including historical experience), current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The new guidance requires a financial asset, or a group of financial assets, measured at amortized cost to be presented at the net amount expected to be collected over the contractual term of the financial asset(s). The guidance also requires, among other things, that we:
• | Reflect in the statement of operations the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period; |
• | Determine the allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost in a similar manner to other financial assets measured at amortized cost. The initial allowance for credit losses is required to be added to the purchase price; |
• | Record credit losses relating to available-for-sale debt securities through an allowance for credit losses. The amendments limit the allowance for credit losses to the amount by which fair value is below amortized cost; and |
• | Further disaggregate the current disclosure of credit quality indicators in relation to the amortized cost of financing receivables by the year of origination. |
11
We adopted this guidance on January 1, 2020, using a modified-retrospective approach. Upon adoption, we recognized an increase in the allowance for credit losses of $7.5 million as a cumulative-effect adjustment to retained earnings.
Note 4 — 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 a credit rating of triple-B or greater (investment grade) by a nationally recognized statistical rating organization. At June 30, 2020, NaN of these investments were with counterparties rated below triple-B.
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 June 30, 2020 and December 31, 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 June 30, 2020. Carrying values of interest-bearing deposits and federal funds sold exclude accrued interest receivable of $37 thousand and $5 thousand, respectively, at June 30, 2020, and $682 thousand and $37 thousand, respectively, at December 31, 2019.
Securities purchased under agreements to resell are short-term and are structured such that they are evaluated regularly 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 equivalent amount of additional securities as collateral or remit an equivalent amount of cash, 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 June 30, 2020. The carrying value of securities purchased under agreements to resell excludes accrued interest receivable of $3 thousand and $348 thousand at June 30, 2020 and December 31, 2019, respectively.
The COVID-19 pandemic effects on the global economies and the 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. Within these investments, we are primarily subject to credit risk related to private-label mortgage-backed securities (MBS) that are supported by underlying mortgage loans. We are prohibited by FHFA regulations from holding 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 and instruments that experienced credit deterioration after their purchase.
Trading Securities
Table 4.1 - Trading Securities by Major Security Type (dollars in thousands) | |||||||
June 30, 2020 | December 31, 2019 | ||||||
Corporate bonds | $ | 5,392 | $ | 5,896 | |||
U.S. Treasury obligations | 4,436,070 | 2,240,236 | |||||
4,441,462 | 2,246,132 | ||||||
MBS | |||||||
U.S. government-guaranteed – single-family | 3,505 | 4,047 | |||||
Government-sponsored enterprise (GSE) – single-family | 61 | 85 | |||||
3,566 | 4,132 | ||||||
Total | $ | 4,445,028 | $ | 2,250,264 |
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For the six months ended June 30, 2020 and 2019, net unrealized gains on trading securities held at period end were $27.3 million and $1.1 million, respectively.
Available-for-sale Securities
Table 4.2 - Available-for-Sale Securities by Major Security Type (dollars in thousands) | |||||||||||||||
June 30, 2020 | |||||||||||||||
Amounts Recorded in Accumulated Other Comprehensive Loss | |||||||||||||||
Amortized Cost (1) | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
State housing-finance-agency obligations (HFA securities) | $ | 61,720 | $ | — | $ | (2,257 | ) | $ | 59,463 | ||||||
Supranational institutions | 456,465 | — | (19,645 | ) | 436,820 | ||||||||||
U.S. government-owned corporations | 374,533 | — | (51,102 | ) | 323,431 | ||||||||||
GSE | 148,403 | — | (12,342 | ) | 136,061 | ||||||||||
1,041,121 | — | (85,346 | ) | 955,775 | |||||||||||
MBS | |||||||||||||||
U.S. government guaranteed – single-family | 48,173 | 201 | (18 | ) | 48,356 | ||||||||||
U.S. government guaranteed – multifamily | 166,268 | 1,224 | — | 167,492 | |||||||||||
GSE – single-family | 2,027,682 | 34,940 | (171 | ) | 2,062,451 | ||||||||||
GSE – multifamily | 3,711,721 | 31,615 | (26,445 | ) | 3,716,891 | ||||||||||
5,953,844 | 67,980 | (26,634 | ) | 5,995,190 | |||||||||||
Total | $ | 6,994,965 | $ | 67,980 | $ | (111,980 | ) | $ | 6,950,965 |
December 31, 2019 | |||||||||||||||
Amounts Recorded in Accumulated Other Comprehensive Loss | |||||||||||||||
Amortized Cost (1) | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
HFA securities | $ | 69,320 | $ | — | $ | (4,668 | ) | $ | 64,652 | ||||||
Supranational institutions | 429,354 | — | (12,925 | ) | 416,429 | ||||||||||
U.S. government-owned corporations | 323,192 | — | (26,431 | ) | 296,761 | ||||||||||
GSE | 130,935 | — | (7,149 | ) | 123,786 | ||||||||||
952,801 | — | (51,173 | ) | 901,628 | |||||||||||
MBS | |||||||||||||||
U.S. government guaranteed – single-family | 60,003 | — | (2,289 | ) | 57,714 | ||||||||||
U.S. government guaranteed – multifamily | 283,674 | — | (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 $25.9 million and $27.5 million at June 30, 2020, and December 31, 2019. |
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Table 4.3 - Available-for-Sale Securities in a Continuous Unrealized Loss Position (dollars in thousands) | |||||||||||||||||||||||
June 30, 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 | $ | 13,060 | $ | (760 | ) | $ | 46,403 | $ | (1,497 | ) | $ | 59,463 | $ | (2,257 | ) | ||||||||
Supranational institutions | — | — | 436,820 | (19,645 | ) | 436,820 | (19,645 | ) | |||||||||||||||
U.S. government-owned corporations | — | — | 323,431 | (51,102 | ) | 323,431 | (51,102 | ) | |||||||||||||||
GSE | — | — | 136,061 | (12,342 | ) | 136,061 | (12,342 | ) | |||||||||||||||
13,060 | (760 | ) | 942,715 | (84,586 | ) | 955,775 | (85,346 | ) | |||||||||||||||
MBS | |||||||||||||||||||||||
U.S. government guaranteed – single-family | — | — | 8,402 | (18 | ) | 8,402 | (18 | ) | |||||||||||||||
GSE – single-family | 9,698 | (19 | ) | 25,313 | (152 | ) | 35,011 | (171 | ) | ||||||||||||||
GSE – multifamily | 1,647,961 | (25,676 | ) | 252,005 | (769 | ) | 1,899,966 | (26,445 | ) | ||||||||||||||
1,657,659 | (25,695 | ) | 285,720 | (939 | ) | 1,943,379 | (26,634 | ) | |||||||||||||||
Total temporarily impaired | $ | 1,670,719 | $ | (26,455 | ) | $ | 1,228,435 | $ | (85,525 | ) | $ | 2,899,154 | $ | (111,980 | ) |
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 | — | — | 416,429 | (12,925 | ) | 416,429 | (12,925 | ) | |||||||||||||||
U.S. government-owned corporations | — | — | 296,761 | (26,431 | ) | 296,761 | (26,431 | ) | |||||||||||||||
GSE | — | — | 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 | — | — | 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 temporarily impaired | $ | 2,013,102 | $ | (15,802 | ) | $ | 3,047,211 | $ | (66,552 | ) | $ | 5,060,313 | $ | (82,354 | ) |
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Table 4.4 - Available-for-Sale Securities by Contractual Maturity (dollars in thousands) | |||||||||||||||
June 30, 2020 | December 31, 2019 | ||||||||||||||
Year of Maturity | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||
Due in one year or less | $ | — | $ | — | $ | 7,600 | $ | 7,563 | |||||||
Due after one year through five years | 77,813 | 75,350 | 61,720 | 57,089 | |||||||||||
Due after five years through 10 years | 492,192 | 471,220 | 477,232 | 463,465 | |||||||||||
Due after 10 years | 471,116 | 409,205 | 406,249 | 373,511 | |||||||||||
1,041,121 | 955,775 | 952,801 | 901,628 | ||||||||||||
MBS (1) | 5,953,844 | 5,995,190 | 6,530,121 | 6,507,372 | |||||||||||
Total | $ | 6,994,965 | $ | 6,950,965 | $ | 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 4.5 - Held-to-Maturity Securities by Major Security Type (dollars in thousands) | |||||||||||||||||||||||||||
June 30, 2020 | |||||||||||||||||||||||||||
Amortized Cost(1) | Allowance for Credit Losses(2) | Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss(2) | Carrying Value | Gross Unrecognized Holding Gains | Gross Unrecognized Holding Losses | Fair Value | |||||||||||||||||||||
HFA securities | $ | 77,690 | $ | — | $ | — | $ | 77,690 | $ | — | $ | (6,365 | ) | $ | 71,325 | ||||||||||||
MBS | |||||||||||||||||||||||||||
U.S. government guaranteed – single-family | 6,342 | — | — | 6,342 | 114 | — | 6,456 | ||||||||||||||||||||
GSE – single-family | 262,215 | — | — | 262,215 | 5,370 | (174 | ) | 267,411 | |||||||||||||||||||
GSE – multifamily | 77,511 | — | — | 77,511 | 366 | — | 77,877 | ||||||||||||||||||||
Private-label | 253,599 | (5,566 | ) | (50,406 | ) | 197,627 | 78,231 | (256 | ) | 275,602 | |||||||||||||||||
599,667 | (5,566 | ) | (50,406 | ) | 543,695 | 84,081 | (430 | ) | 627,346 | ||||||||||||||||||
Total | $ | 677,357 | $ | (5,566 | ) | $ | (50,406 | ) | $ | 621,385 | $ | 84,081 | $ | (6,795 | ) | $ | 698,671 |
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December 31, 2019 | |||||||||||||||||||||||
Amortized Cost(1) | Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss(2) | Carrying Value | Gross Unrecognized Holding Gains | Gross Unrecognized Holding Losses | Fair Value | ||||||||||||||||||
HFA securities | $ | 87,250 | $ | — | $ | 87,250 | $ | — | $ | (3,845 | ) | $ | 83,405 | ||||||||||
MBS | |||||||||||||||||||||||
U.S. government guaranteed – single-family | 6,987 | — | 6,987 | 129 | — | 7,116 | |||||||||||||||||
GSE – single-family | 303,604 | — | 303,604 | 5,197 | (246 | ) | 308,555 | ||||||||||||||||
GSE – multifamily | 140,661 | — | 140,661 | 612 | (2 | ) | 141,271 | ||||||||||||||||
Private-label | 408,640 | (76,035 | ) | 332,605 | 162,904 | (446 | ) | 495,063 | |||||||||||||||
859,892 | (76,035 | ) | 783,857 | 168,842 | (694 | ) | 952,005 | ||||||||||||||||
Total | $ | 947,142 | $ | (76,035 | ) | $ | 871,107 | $ | 168,842 | $ | (4,539 | ) | $ | 1,035,410 |
_______________________
(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 $1.1 million and $2.0 million at June 30, 2020, and December 31, 2019, respectively. |
(2) | With the adoption of changes to accounting standards on credit impairment on January 1, 2020, the other-than-temporary impairment approach was replaced with an allowance for credit loss; however, other-than-temporary impairment remains for those securities that had credit impairment prior to the adoption date. See Note 2 — Summary of Significant Accounting Policies and Note 3 — Recently Issued and Adopted Accounting Guidance for further information. |
Table 4.6 - Held-to-Maturity Securities by Contractual Maturity (dollars in thousands) | |||||||||||||||||||||||
June 30, 2020 | December 31, 2019 | ||||||||||||||||||||||
Year of Maturity | Amortized Cost | Carrying Value (1) | Fair Value | Amortized Cost | Carrying Value (1) | Fair Value | |||||||||||||||||
Due in one year or less | $ | 3,090 | $ | 3,090 | $ | 3,085 | $ | 3,090 | $ | 3,090 | $ | 3,089 | |||||||||||
Due after one year through five years | — | — | — | — | — | — | |||||||||||||||||
Due after five years through 10 years | 14,640 | 14,640 | 14,422 | 15,405 | 15,405 | 15,270 | |||||||||||||||||
Due after 10 years | 59,960 | 59,960 | 53,818 | 68,755 | 68,755 | 65,046 | |||||||||||||||||
77,690 | 77,690 | 71,325 | 87,250 | 87,250 | 83,405 | ||||||||||||||||||
MBS (2) | 599,667 | 543,695 | 627,346 | 859,892 | 783,857 | 952,005 | |||||||||||||||||
Total | $ | 677,357 | $ | 621,385 | $ | 698,671 | $ | 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 and the allowance for credit losses. |
(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. |
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Table 4.7 - Proceeds from Sale and Gains and Losses on Held-to-Maturity Securities (1) (dollars in thousands) | ||||||||||||||||
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Proceeds from sale of held-to-maturity securities | $ | — | $ | — | $ | 161,743 | $ | — | ||||||||
Amortized cost of held-to-maturity securities | — | — | 121,010 | — | ||||||||||||
Realized net gain from sale of held-to-maturity securities | $ | — | $ | — | $ | 40,733 | $ | — |
_______________________
(1) | The securities sold had less than 15 percent of the acquired principal outstanding at the time of the sale. Such sales are treated as maturities for the purposes of security classification. The sale does not impact our ability and intent to hold the remaining investments classified as held-to-maturity through their stated maturity dates. |
Allowance for Credit Losses on Available-for-Sale Securities and Held-to-Maturity Securities
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 for additional information. See Item 8 — Financial 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. During the three and six months ended June 30, 2020, we recognized a net increase to the allowance for credit losses of $1.8 million and $258,000, respectively, associated with held-to-maturity private-label MBS. Under the previous accounting methodology of security impairment, we recognized net credit losses of $314 thousand and $417 thousand, respectively, during the three and six months ended June 30, 2019. To evaluate investment securities for credit loss at June 30, 2020, we employed the following methodologies, based on the type of security.
Available-for-Sale Securities and Held-to-Maturity Securities (Excluding Private-Label MBS). 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 securities considered investment quality. Excluding private-label MBS investments, at June 30, 2020, all available-for-sale securities and 91.9 percent of held-to-maturity securities, based on amortized cost, were rated single-A, or above, by a nationally recognized statistical ratings organization (NRSRO), based on the lowest long-term credit rating for each security.
We evaluate our individual available-for-sale securities for impairment by comparing the security’s fair value to its amortized cost. Impairment may exist when the fair value of the investment is less than its amortized cost (i.e. in an unrealized loss position). At June 30, 2020, certain available-for-sale securities were in an unrealized loss position. These losses are considered temporary as we expect to recover the entire amortized cost basis on these available-for-sale investment securities and we neither intend to sell these securities nor do 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. Further, we have not experienced any payment defaults on the instruments. In addition, substantially all of these securities carry an implicit or explicit government guarantee. As a result, 0 allowance for credit losses was recorded on these available-for-sale securities at June 30, 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 June 30, 2020, we had not established an allowance for credit loss on any of our HTM securities (excluding private-label MBS) 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.
17
Private-label MBS. We also hold investments in private-label MBS. We have not purchased private-label mortgage-backed securities since the third quarter of 2007. However, many of these securities have subsequently experienced significant credit deterioration. As of June 30, 2020, 1.8 percent of our private-label MBS (based on amortized cost) were rated single-A or above by a NRSRO and the remaining securities were either rated less than single-A or were unrated. To determine whether an allowance for credit losses is necessary on these securities, we use cash flow analyses.
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 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; and |
• | interest-rate assumptions. |
We performed a cash flow analysis using third-party models to assess whether the entire amortized cost basis of our private-label MBS securities will be recovered. The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The projected cash flows, determined based on the model approach, reflect a best estimate scenario and include a base case housing price forecast and a base case housing price recovery path.
Note 5 — Advances
General Terms. At June 30, 2020, and December 31, 2019, we had advances outstanding with interest rates ranging from (0.16) percent to 7.72 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 5.1 - Advances Outstanding by Year of Contractual Maturity (dollars in thousands) | |||||||||||||
June 30, 2020 | December 31, 2019 | ||||||||||||
Amount | Weighted Average Rate | Amount | Weighted Average Rate | ||||||||||
Overdrawn demand-deposit accounts | $ | — | — | % | $ | 5,101 | 2.05 | % | |||||
Due in one year or less | 13,574,364 | 1.04 | 18,972,466 | 1.96 | |||||||||
Due after one year through two years | 3,372,605 | 2.10 | 8,600,922 | 2.16 | |||||||||
Due after two years through three years | 2,600,226 | 2.07 | 2,200,019 | 2.16 | |||||||||
Due after three years through four years | 1,701,726 | 2.03 | 1,766,314 | 2.71 | |||||||||
Due after four years through five years | 2,091,194 | 1.52 | 1,726,754 | 2.15 | |||||||||
Thereafter | 1,323,894 | 2.59 | 1,312,311 | 2.68 | |||||||||
Total par value | 24,664,009 | 1.48 | % | 34,583,887 | 2.10 | % | |||||||
Premiums | 3,064 | 3,397 | |||||||||||
Discounts | (40,383 | ) | (41,744 | ) | |||||||||
Fair value of bifurcated derivatives (1) | 53,828 | 29,983 | |||||||||||
Hedging adjustments | 147,263 | 19,840 | |||||||||||
Total (2) | $ | 24,827,781 | $ | 34,595,363 |
_________________________
(1) | At June 30, 2020, and December 31, 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. |
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(2) | Excludes accrued interest receivable of $31.4 million and $48.1 million at June 30, 2020, and December 31, 2019, respectively. |
Table 5.2 - Advances Outstanding by Year of Contractual Maturity or Next Call Date (dollars in thousands) | |||||||
June 30, 2020 | December 31, 2019 | ||||||
Overdrawn demand-deposit accounts | $ | — | $ | 5,101 | |||
Due in one year or less | 14,804,759 | 25,116,961 | |||||
Due after one year through two years | 3,162,005 | 3,450,922 | |||||
Due after two years through three years | 2,228,706 | 1,949,499 | |||||
Due after three years through four years | 1,256,726 | 1,461,314 | |||||
Due after four years through five years | 1,912,619 | 1,309,679 | |||||
Thereafter | 1,299,194 | 1,290,411 | |||||
Total par value | $ | 24,664,009 | $ | 34,583,887 |
We currently 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 5.3 - Advances Outstanding by Year of Contractual Maturity or Next Put Date (dollars in thousands) | |||||||
June 30, 2020 | December 31, 2019 | ||||||
Overdrawn demand-deposit accounts | $ | — | $ | 5,101 | |||
Due in one year or less | 15,322,039 | 20,240,466 | |||||
Due after one year through two years | 3,476,855 | 8,603,422 | |||||
Due after two years through three years | 1,822,626 | 2,001,019 | |||||
Due after three years through four years | 1,408,326 | 965,814 | |||||
Due after four years through five years | 1,452,769 | 1,598,254 | |||||
Thereafter | 1,181,394 | 1,169,811 | |||||
Total par value | $ | 24,664,009 | $ | 34,583,887 |
Table 5.4 - Advances by Current Interest Rate Terms (dollars in thousands) | |||||||
June 30, 2020 | December 31, 2019 | ||||||
Fixed-rate | $ | 23,060,914 | $ | 28,106,591 | |||
Variable-rate | 1,603,095 | 6,477,296 | |||||
Total par value | $ | 24,664,009 | $ | 34,583,887 |
Credit Risk Exposure and Security Terms. Our advances are concentrated in commercial banks, insurance companies, savings institutions, and credit unions. 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.
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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:
• | fully disbursed, first-mortgage loans on improved residential property (provided that the borrower is not in arrears by two or more payments), or securities representing a whole interest in such mortgages; |
• | securities issued, insured, or guaranteed by the U.S. government or any agency thereof (including without limitation, MBS issued or guaranteed by Freddie Mac, Fannie Mae, and Ginnie Mae); |
• | cash or deposits in a collateral account with us; and |
• | other real-estate-related collateral acceptable to us if such collateral has a readily ascertainable value and we can perfect our security interest in the collateral. |
Residential mortgage loans are the principal form of collateral for advances. 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 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 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. 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 June 30, 2020, and December 31, 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 June 30, 2020, and December 31, 2019, NaN of our advances were past due, on nonaccrual status, or considered impaired. In addition, there were 0 troubled debt restructurings related to advances during the six months ended June 30, 2020, and June 30, 2019.
Based upon the collateral held as security, our credit extension and collateral policies, management's credit analysis, and the repayment history on advances, we have not recorded any allowance for credit losses on our advances at June 30, 2020, and December 31, 2019.
Prepayment Fees.
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Table 5.5 - Advances Prepayment Fees (dollars in thousands) | ||||||||||||||||
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Prepayment fees received from borrowers | $ | 7,065 | $ | 2,669 | $ | 7,903 | $ | 28,855 | ||||||||
Hedging fair-value adjustments on prepaid advances | (2,897 | ) | 1,399 | (2,897 | ) | 1,926 | ||||||||||
Net (premiums) discounts associated with prepaid advances | (4 | ) | (61 | ) | (4 | ) | 157 | |||||||||
Deferred recognition of prepayment fees received from borrowers on advance prepayments deemed to be loan modifications | — | (201 | ) | — | (201 | ) | ||||||||||
Advance prepayment fees recognized in income, net | $ | 4,164 | $ | 3,806 | $ | 5,002 | $ | 30,737 |
Note 6 — Mortgage Loans Held for Portfolio
We invest in mortgage loans through the Mortgage 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.
Table 6.1 - Mortgage Loans Held for Portfolio (dollars in thousands) | |||||||
June 30, 2020 | December 31, 2019 | ||||||
Real estate | |||||||
Fixed-rate 15-year single-family mortgages | $ | 325,947 | $ | 339,042 | |||
Fixed-rate 20- and 30-year single-family mortgages | 4,022,150 | 4,093,416 | |||||
Premiums | 64,909 | 66,776 | |||||
Discounts | (1,385 | ) | (1,607 | ) | |||
Deferred derivative gains, net | 4,034 | 4,124 | |||||
Total mortgage loans held for portfolio(1) | 4,415,655 | 4,501,751 | |||||
Less: allowance for credit losses | (4,602 | ) | (500 | ) | |||
Total mortgage loans, net of allowance for credit losses | $ | 4,411,053 | $ | 4,501,251 |
_________________________
(1) | Excludes accrued interest receivable of $23.8 million and $23.5 million at June 30, 2020, and December 31, 2019. |
Table 6.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (dollars in thousands) | |||||||
June 30, 2020 | December 31, 2019 | ||||||
Conventional mortgage loans | $ | 4,077,082 | $ | 4,140,255 | |||
Government mortgage loans | 271,015 | 292,203 | |||||
Total par value | $ | 4,348,097 | $ | 4,432,458 |
Credit Enhancements. Our allowance for credit losses factors in the credit-enhancements associated with conventional mortgage loans under the MPF program. These credit-enhancements can include primary and/or supplemental mortgage insurance or other kinds of credit enhancement. Potential recoveries from credit enhancements for conventional loans are evaluated at the individual master commitment level to determine the credit-enhancements available to recover losses on loans under each individual master commitment.
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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 6.3 and 6.4 present the payment status for conventional mortgage loans and other delinquency statistics for all mortgage loans at June 30, 2020, and December 31, 2019.
Table 6.3 - Credit Quality Indicator for Conventional Mortgage Loans (dollars in thousands) | ||||||||||||
June 30, 2020 | ||||||||||||
Origination Year | ||||||||||||
Payment Status at Amortized Cost(1) | Prior to 2016 | 2016 to 2020 | Total | |||||||||
Past due 30-59 days delinquent | $ | 26,885 | $ | 41,253 | $ | 68,138 | ||||||
Past due 60-89 days delinquent | 17,323 | 43,582 | 60,905 | |||||||||
Past due 90 days or more delinquent | 8,001 | 6,721 | 14,722 | |||||||||
Total past due | 52,209 | 91,556 | 143,765 | |||||||||
Total current loans | 1,505,864 | 2,489,559 | 3,995,423 | |||||||||
Total mortgage loans | $ | 1,558,073 | $ | 2,581,115 | $ | 4,139,188 |
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 June 30, 2020, excludes accrued interest receivable whereas the recorded investment at December 31, 2019, includes accrued interest receivable. |
Table 6.4 - Other Delinquency Statistics of Mortgage Loans (dollars in thousands) | |||||||||||
June 30, 2020 | |||||||||||
Amortized Cost in Conventional Mortgage Loans | Amortized Cost in Government Mortgage Loans | Total | |||||||||
In process of foreclosure (1) | $ | 5,623 | $ | 1,951 | $ | 7,574 | |||||
Serious delinquency rate (2) | 0.42 | % | 2.57 | % | 0.55 | % | |||||
Past due 90 days or more still accruing interest | $ | — | $ | 7,102 | $ | 7,102 | |||||
Loans on nonaccrual status (3) | $ | 15,815 | $ | — | $ | 15,815 |
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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 | $ | — | $ | 5,570 | $ | 5,570 | |||||
Loans on nonaccrual status (3) | $ | 11,510 | $ | — | $ | 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) | 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. As of June 30, 2020, $6.2 million of these conventional mortgage loans on non-accrual status did not have an associated allowance for credit losses. |
Section 4013 of the CARES Act provides temporary relief from the accounting and reporting requirements for TDRs for certain loan modifications related to COVID-19. Specifically, the CARES Act 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, that occurs during the period beginning on March 1, 2020 and ending on the earlier of December 31, 2020 or the date that is 60 days after the declaration of the national emergency related to the COVID-19 pandemic ends for a loan that was not more than 30 days past due as of December 31, 2019. We have elected to suspend TDR accounting for eligible modifications under Section 4013 of the CARES Act. We had none of these modifications outstanding as of June 30, 2020.
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 June 30, 2020, there were approximately $98.2 million in par value of conventional mortgage loans in a forbearance plan as a result of COVID-19. Of these loans, $7.6 million had a current payment status, $39.5 million were 30 to 59 days past due, $45.5 million were 60 to 89 days past due, and $5.6 million were greater than 90 days past due and in nonaccrual payment status. The $98.2 million of conventional mortgage loans in forbearance represents 2.3 percent of our mortgage loans held for portfolio at June 30, 2020. In addition, we had approximately $16.9 million in par value of government mortgage loans in a forbearance plan as a result of COVID-19.
Allowance for Credit Losses.
See Part II — Item 8 — Financial Statements and Supplementary Data — Note 11 — Allowance for Credit Losses in the 2019 Annual Report for information on the prior methodology for evaluating credit losses, as well as a discussion on classes of financing receivables, our policies for impairing financing receivables, placing them on non-accrual status, and charging them off when necessary.
Conventional Mortgage Loans. 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
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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.
Table 6.5 presents a roll forward of the allowance for credit losses on conventional mortgage loans for the three and six months ended June 30, 2020 and 2019.
Table 6.5 - Allowance for Credit Losses on Conventional Mortgage Loans (dollars in thousands) | |||||||||||||||
For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Allowance for credit losses | |||||||||||||||
Balance, beginning of period | $ | 3,500 | $ | 500 | $ | 500 | $ | 500 | |||||||
Adjustment for cumulative effect of accounting change | — | — | 2,221 | — | |||||||||||
Charge-offs | (3 | ) | (12 | ) | (80 | ) | (15 | ) | |||||||
Provision for credit losses | 1,105 | 12 | 1,961 | 15 | |||||||||||
Balance, end of period | $ | 4,602 | $ | 500 | $ | 4,602 | $ | 500 |
Government Mortgage Loans Held for Portfolio. We invest in government mortgage loans secured by one- to four-family residential properties. Government mortgage loans are mortgage loans insured or guaranteed by the Federal Housing Administration (the FHA), the U.S. Department of Veterans Affairs (the VA), the Rural Housing Service of the U.S. Department of Agriculture (RHS), or by the U.S. Department of Housing and Urban Development (HUD).
The servicer provides and maintains insurance or a guarantee from the applicable government agency. The servicer is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable insurance or guaranty with respect to defaulted government-guaranteed mortgage loans. Any losses incurred on these loans that are not recovered from the insurer or guarantor are absorbed by the related servicer. Therefore, we only have credit risk for these loans if the servicer fails to pay for losses not covered by insurance or guarantees. 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 June 30, 2020, and December 31, 2019. 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.
Note 7 — Derivatives and Hedging Activities
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Table 7.1 - Fair Value of Derivative Instruments (dollars in thousands) | |||||||||||||||||||||||
June 30, 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 | $ | 11,600,880 | $ | 16,689 | $ | (49,831 | ) | $ | 12,128,105 | $ | 14,734 | $ | (12,805 | ) | |||||||||
Forward-start interest-rate swaps | 17,000 | 8 | — | 17,000 | 19 | — | |||||||||||||||||
Total derivatives designated as hedging instruments | 11,617,880 | 16,697 | (49,831 | ) | 12,145,105 | 14,753 | (12,805 | ) | |||||||||||||||
Derivatives not designated as hedging instruments | |||||||||||||||||||||||
Economic hedges: | |||||||||||||||||||||||
Interest-rate swaps | 5,017,300 | 31 | (55,931 | ) | 2,902,300 | 349 | (31,000 | ) | |||||||||||||||
Mortgage-delivery commitments (1) | 20,626 | 107 | — | 49,911 | 227 | — | |||||||||||||||||
Total derivatives not designated as hedging instruments | 5,037,926 | 138 | (55,931 | ) | 2,952,211 | 576 | (31,000 | ) | |||||||||||||||
Total notional amount of derivatives | $ | 16,655,806 | $ | 15,097,316 | |||||||||||||||||||
Total derivatives before netting and collateral adjustments | 16,835 | (105,762 | ) | 15,329 | (43,805 | ) | |||||||||||||||||
Netting adjustments and cash collateral, including related accrued interest (2) | 187,661 | 81,664 | 144,402 | 33,534 | |||||||||||||||||||
Derivative assets and derivative liabilities | $ | 204,496 | $ | (24,098 | ) | $ | 159,731 | $ | (10,271 | ) |
_______________________
(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 $270.3 million and $178.5 million at June 30, 2020, and December 31, 2019, 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 $968 thousand and $561 thousand at June 30, 2020, and December 31, 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.
Table 7.2 presents the net gains (losses) on qualifying fair-value and cash flow hedging relationships. Gains (losses) on derivatives include unrealized changes in fair value as well as net interest settlements.
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Table 7.2 - Net Gains (Losses) on Hedging Relationships (dollars in thousands) | ||||||||||||
For the Three Months Ended June 30, 2020 | ||||||||||||
Advances | Available-for-sale Securities | CO Bonds | ||||||||||
Total interest income (expense) in the statements of operations | $ | 100,818 | $ | 17,137 | $ | (94,256 | ) | |||||
Gains (losses) on hedging relationships | ||||||||||||
Changes in fair value: | ||||||||||||
Derivatives | $ | (2,232 | ) | $ | (11,397 | ) | $ | (6,103 | ) | |||
Hedged items | 3,377 | 11,665 | 5,233 | |||||||||
Net changes in fair value before price alignment interest | 1,145 | 268 | (870 | ) | ||||||||
Price alignment interest(1) | 25 | 85 | (7 | ) | ||||||||
Net interest settlements on derivatives(2)(3) | (14,683 | ) | (20,459 | ) | 7,040 | |||||||
Net (losses) gains on qualifying hedging relationships | (13,513 | ) | (20,106 | ) | 6,163 | |||||||
Amortization/accretion of discontinued hedging relationships | (493 | ) | — | (947 | ) | |||||||
Net (losses) gains on derivatives and hedging activities recorded in net interest income | $ | (14,006 | ) | $ | (20,106 | ) | $ | 5,216 |
For the Three Months Ended June 30, 2019 | ||||||||||||
Advances | Available-for-sale Securities | CO Bonds | ||||||||||
Total interest income (expense) in the statements of operations | $ | 223,869 | $ | 21,655 | $ | (150,715 | ) | |||||
Gains (losses) on hedging relationships | ||||||||||||
Changes in fair value: | ||||||||||||
Derivatives | $ | (48,814 | ) | $ | (31,525 | ) | $ | 35,686 | ||||
Hedged items | 48,649 | 31,270 | (35,936 | ) | ||||||||
Net changes in fair value before price alignment interest | (165 | ) | (255 | ) | (250 | ) | ||||||
Price alignment interest(1) | (96 | ) | 1,564 | (96 | ) | |||||||
Net interest settlements on derivatives(2)(3) | 12,501 | (5,759 | ) | (6,288 | ) | |||||||
Net gains (losses) on qualifying hedging relationships | 12,240 | (4,450 | ) | (6,634 | ) | |||||||
Amortization/accretion of discontinued hedging relationships | (605 | ) | — | (548 | ) | |||||||
Net gains (losses) on derivatives and hedging activities recorded in net interest income | $ | 11,635 | $ | (4,450 | ) | $ | (7,182 | ) |
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For the Six Months Ended June 30, 2020 | ||||||||||||
Advances | Available-for-sale Securities | CO Bonds | ||||||||||
Total interest income (expense) in the statements of operations | $ | 269,477 | $ | 29,498 | $ | (217,803 | ) | |||||
Gains (losses) on hedging relationships | ||||||||||||
Changes in fair value: | ||||||||||||
Derivatives | $ | (129,800 | ) | $ | (387,891 | ) | $ | 57,633 | ||||
Hedged items | 128,069 | 378,183 | (58,825 | ) | ||||||||
Net changes in fair value before price alignment interest | (1,731 | ) | (9,708 | ) | (1,192 | ) | ||||||
Price alignment interest(1) | 414 | 1,120 | (185 | ) | ||||||||
Net interest settlements on derivatives(2)(3) | (17,308 | ) | (29,557 | ) | 9,996 | |||||||
Net (losses) gains on qualifying hedging relationships | (18,625 | ) | (38,145 | ) | 8,619 | |||||||
Amortization/accretion of discontinued hedging relationships | (830 | ) | — | (1,835 | ) | |||||||
Net (losses) gains on derivatives and hedging activities recorded in net interest income | $ | (19,455 | ) | $ | (38,145 | ) | $ | 6,784 |
For the Six Months Ended June 30, 2019 | ||||||||||||
Advances | Available-for-sale Securities | CO Bonds | ||||||||||
Total interest income (expense) in the statements of operations | $ | 471,746 | $ | 42,946 | $ | (305,532 | ) | |||||
Gains (losses) on hedging relationships | ||||||||||||
Changes in fair value: | ||||||||||||
Derivatives | $ | (73,140 | ) | $ | (54,722 | ) | $ | 69,322 | ||||
Hedged items | 74,322 | 50,385 | (70,569 | ) | ||||||||
Net changes in fair value before price alignment interest | 1,182 | (4,337 | ) | (1,247 | ) | |||||||
Price alignment interest(1) | (382 | ) | 1,572 | (91 | ) | |||||||
Net interest settlements on derivatives(2)(3) | 28,753 | (11,550 | ) | (15,368 | ) | |||||||
Net gains (losses) on qualifying hedging relationships | 29,553 | (14,315 | ) | (16,706 | ) | |||||||
Amortization/accretion of discontinued hedging relationships | (1,050 | ) | — | (623 | ) | |||||||
Net gains (losses) on derivatives and hedging activities recorded in net interest income | $ | 28,503 | $ | (14,315 | ) | $ | (17,329 | ) |
_______________________
(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. |
Tables 7.3 presents the net gains (losses) on qualifying cash flow hedging relationships.
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Table 7.3 - Net Gains (Losses) on Cash Flow Hedging Relationships (dollars in thousands) | ||||||||||||||||
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Forward-start interest rate swaps - CO Bonds | ||||||||||||||||
Losses reclassified from accumulated other comprehensive loss into interest expense | $ | (1,774 | ) | $ | (1,131 | ) | $ | (3,530 | ) | $ | (1,917 | ) | ||||
Losses recognized in other comprehensive income | (154 | ) | (2,443 | ) | (1,279 | ) | (5,822 | ) |
For the six months ended June 30, 2020 and 2019, there were 0 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 June 30, 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.
As of June 30, 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 $6.6 million.
Table 7.4 - Cumulative Basis Adjustments for Fair-Value Hedges (dollars in thousands) | ||||||||||||||||
June 30, 2020 | ||||||||||||||||
Line Item in Statement of Condition of Hedged Item | Amortized Cost of Hedged Asset/ Liability(1) | Basis Adjustments for Active Hedging Relationships Included in Amortized Cost | Basis Adjustments for Discontinued Hedging Relationships Included in Amortized Cost | Cumulative Amount of Fair Value Hedging Basis Adjustments | ||||||||||||
Advances | $ | 6,005,764 | $ | 190,903 | $ | 10,189 | $ | 201,092 | ||||||||
Available-for-sale securities | 4,431,321 | 609,007 | — | 609,007 | ||||||||||||
Consolidated bonds | (2,155,689 | ) | (53,984 | ) | (40,860 | ) | (94,844 | ) |
_______________________
(1) | Includes only the portion of amortized cost representing the hedged items in fair-value hedging relationships. |
Table 7.5 - Net Gains and Losses on Derivatives not Designated as Hedging Instruments (dollars in thousands) | ||||||||||||||||
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Interest-rate swaps | $ | (1,803 | ) | $ | (1,427 | ) | $ | (54,372 | ) | $ | (1,487 | ) | ||||
Mortgage-delivery commitments | 632 | 462 | 570 | 1,070 | ||||||||||||
Price alignment interest(1) | 10 | 3 | 83 | 3 | ||||||||||||
Net losses on derivatives not designated as hedging instruments | $ | (1,161 | ) | $ | (962 | ) | $ | (53,719 | ) | $ | (414 | ) |
______________________
(1) | Relates to derivatives for which variation margin payments are characterized as daily settled contracts. |
Managing Credit Risk on Derivatives. We enter into derivatives that we clear (cleared derivatives) with a derivatives clearing organization (DCO), our counterparty for such derivatives. We also enter into derivatives that are not cleared (uncleared derivatives) under master-netting agreements. 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
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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. 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 June 30, 2020, was $95.4 million for which we had delivered collateral with a post-haircut value of $94.5 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 7.6 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 June 30, 2020.
Table 7.6 - Post Haircut Value of Incremental Collateral to be Delivered as of June 30, 2020 (dollars in thousands) | |||||||
Ratings Downgrade (1) | |||||||
From | To | Incremental Collateral | |||||
AA+ | AA or AA- | $ | 358 | ||||
AA- | A+, A or A- | — | |||||
A- | below A- | 5,821 |
_______________________
(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, Chicago Mercantile Exchange, Inc. (CME Inc.) and LCH Limited (LCH Ltd.). Based upon their rulebooks, we characterize variation margin payments as daily settlement payments, rather than as collateral. At both DCOs, posted initial margin is considered collateral. We post initial margin and exchange variation margin through a clearing member which acts as our agent to the DCO and which 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 U.S. Commodity Futures Trading Commission (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 June 30, 2020.
Impacts on Statement of Cash Flows. Due to declines in market values, from our perspective, of cleared derivatives during the six months ended June 30, 2020, there was an increase in variation margin posted on cleared derivatives to the DCOs totaling $512.3 million. On the statement of cash flows, $404.2 million of the variation margin cash payment is included in net change in derivatives and hedging activities, as an operating activity, while $108.1 million of the variation margin cash payment is included in net payments on derivatives with a financing element, as a financing activity.
During the six months ended June 30, 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, as an operating activity in the statement of cash flows. Simultaneously with the termination of these derivatives, we entered into replacement interest-rate exchange agreements (the replacement derivatives) having the same notional amount of $611.9 million and which are indexed to the OIS rate based on the federal funds effective rate on the floating leg of the swaps. Upon settlement of the replacement derivatives, the Bank received an initial upfront payment of $251.5 million. The replacement derivatives are cleared through a DCO, which called for variation margin to be delivered. Because the replacement derivatives include off-market terms and this large initial upfront
29
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.
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 DCO) upon an event of default (solely in the case of non-cleared derivatives) or the bankruptcy, insolvency or a similar proceeding involving our counterparty (and/or one of our clearing members, in the case of cleared derivatives). For this purpose, "net claim" generally means a single net amount reflecting the aggregation of all amounts owed by us to the relevant counterparty and payable to us from the relevant counterparty.
Table 7.7 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 June 30, 2020, and December 31, 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, but does not include any related non-cash collateral received from or pledged to counterparties.
Table 7.7 - Netting of Derivative Assets and Derivative Liabilities (dollars in thousands) | |||||||||||||||||||||||||
June 30, 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 | $ | 10,118 | $ | (9,839 | ) | $ | 107 | $ | 386 | $ | — | $ | — | $ | 386 | ||||||||||
Cleared | 6,610 | 197,500 | 204,110 | — | — | 204,110 | |||||||||||||||||||
Total | $ | 204,496 | $ | 204,496 | |||||||||||||||||||||
Derivative Liabilities | |||||||||||||||||||||||||
Uncleared | $ | (104,363 | ) | $ | 80,265 | $ | — | $ | (24,098 | ) | $ | 22,915 | $ | — | $ | (1,183 | ) | ||||||||
Cleared | (1,399 | ) | 1,399 | — | — | — | — | ||||||||||||||||||
Total | $ | (24,098 | ) | $ | (1,183 | ) |
_______________________
(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 June 30, 2020, we had additional net credit exposure of $1.1 million due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position. |
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December 31, 2019 | |||||||||||||||||||||||||
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 | $ | 4,950 | $ | (3,519 | ) | $ | 227 | $ | 1,658 | $ | (995 | ) | $ | — | $ | 663 | |||||||||
Cleared | 10,152 | 147,921 | 158,073 | — | — | 158,073 | |||||||||||||||||||
Total | $ | 159,731 | $ | 158,736 | |||||||||||||||||||||
Derivative Liabilities | |||||||||||||||||||||||||
Uncleared | $ | (42,199 | ) | $ | 31,928 | $ | — | $ | (10,271 | ) | $ | 82 | $ | 9,333 | $ | (856 | ) | ||||||||
Cleared | (1,606 | ) | 1,606 | — | — | — | — | ||||||||||||||||||
Total | $ | (10,271 | ) | $ | (856 | ) |
_______________________
(1) | Includes gross amounts of netting adjustments and cash collateral. |
(2) | Includes non-cash collateral at fair value. Any overcollateralization with a counterparty is not included in the determination of the net amount. At December 31, 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 8 — Deposits
We offer demand, overnight and term deposits for members and qualifying nonmembers. 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.
Table 8.1 - Deposits (dollars in thousands) | |||||||
June 30, 2020 | December 31, 2019 | ||||||
Interest-bearing | |||||||
Demand and overnight | $ | 1,078,934 | $ | 613,143 | |||
Term | — | 800 | |||||
Other | 3,067 | 2,589 | |||||
Noninterest-bearing | |||||||
Other | 109,228 | 57,777 | |||||
Total deposits | $ | 1,191,229 | $ | 674,309 |
Note 9 — Consolidated Obligations
CO Bonds. CO bonds for which we have received issuance proceeds and are primarily liable were as follows:
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Table 9.1 - CO Bonds Outstanding by Contractual Maturity (dollars in thousands) | |||||||||||||
June 30, 2020 | December 31, 2019 | ||||||||||||
Amount | Weighted Average Rate (1) | Amount | Weighted Average Rate (1) | ||||||||||
Due in one year or less | $ | 12,682,905 | 0.96 | % | $ | 9,455,725 | 2.03 | % | |||||
Due after one year through two years | 4,081,500 | 1.69 | 6,442,960 | 2.02 | |||||||||
Due after two years through three years | 2,393,600 | 2.03 | 2,154,920 | 2.18 | |||||||||
Due after three years through four years | 1,034,965 | 2.40 | 1,319,915 | 2.45 | |||||||||
Due after four years through five years | 1,445,575 | 2.23 | 1,211,080 | 2.48 | |||||||||
Thereafter | 2,768,285 | 3.53 | 3,220,205 | 3.33 | |||||||||
Total par value | 24,406,830 | 1.61 | % | 23,804,805 | 2.26 | % | |||||||
Premiums | 72,036 | 63,056 | |||||||||||
Discounts | (10,623 | ) | (11,434 | ) | |||||||||
Hedging adjustments | 94,844 | 32,066 | |||||||||||
Total | $ | 24,563,087 | $ | 23,888,493 |
_______________________
(1) | The CO bonds' weighted-average rate excludes concession fees. |
Table 9.2 - CO Bonds Outstanding by Call Feature (dollars in thousands) | |||||||
Par Value of CO bonds | June 30, 2020 | December 31, 2019 | |||||
Noncallable and nonputable | $ | 22,246,830 | $ | 20,954,805 | |||
Callable | 2,160,000 | 2,850,000 | |||||
Total par value | $ | 24,406,830 | $ | 23,804,805 |
Table 9.3 - CO Bonds Outstanding by Contractual Maturity or Next Call Date (dollars in thousands) | ||||||||
June 30, 2020 | December 31, 2019 | |||||||
Due in one year or less | $ | 14,087,905 | $ | 11,297,725 | ||||
Due after one year through two years | 4,461,500 | 6,432,960 | ||||||
Due after two years through three years | 2,293,600 | 2,019,920 | ||||||
Due after three years through four years | 939,965 | 1,332,915 | ||||||
Due after four years through five years | 1,015,575 | 926,080 | ||||||
Thereafter | 1,608,285 | 1,795,205 | ||||||
Total par value | $ | 24,406,830 | $ | 23,804,805 |
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Table 9.4 - CO Bonds by Interest Rate-Payment Type (dollars in thousands) | |||||||
Par Value of CO bonds | June 30, 2020 | December 31, 2019 | |||||
Fixed-rate | $ | 15,537,830 | $ | 17,681,805 | |||
Simple variable-rate | 8,694,000 | 5,568,000 | |||||
Step-up (1) | 175,000 | 555,000 | |||||
Total par value | $ | 24,406,830 | $ | 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. |
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 9.5 - CO Discount Notes Outstanding (dollars in thousands) | ||||||||||
Book Value | Par Value | Weighted Average Rate (1) | ||||||||
June 30, 2020 | $ | 17,308,802 | $ | 17,316,199 | 0.33 | % | ||||
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. |
Note 10 — Affordable Housing Program
Table 10.1 - AHP Liability (dollars in thousands) | |||||||
June 30, 2020 | December 31, 2019 | ||||||
Balance at beginning of year | $ | 86,131 | $ | 83,965 | |||
AHP expense for the period | 4,955 | 21,302 | |||||
AHP direct grant disbursements | (9,903 | ) | (15,723 | ) | |||
AHP subsidy for AHP advance disbursements | (1,026 | ) | (3,450 | ) | |||
Return of previously disbursed grants and subsidies | 26 | 37 | |||||
Balance at end of period | $ | 80,183 | $ | 86,131 |
Note 11 — Capital
We are subject to capital requirements under our capital plan, the FHLBank Act, and FHFA regulations and guidance:
1. | Risk-based capital. We are required to maintain at all times permanent capital, defined as Class B stock, including Class B stock classified as mandatorily redeemable capital stock, and retained earnings, in an amount at least equal to the sum of our credit-risk capital requirement, market-risk capital requirement, and operations-risk capital requirement, calculated in accordance with FHFA rules and regulations, referred to herein as the risk-based capital requirement. Only permanent capital satisfies the risk-based capital requirement. |
2. | Total regulatory capital. We are required to maintain at all times a total capital-to-assets ratio of at least 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. |
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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 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 11.1 - Regulatory Capital Requirements (dollars in thousands) | |||||||
Risk-Based Capital Requirements | June 30, 2020 | December 31, 2019 | |||||
Permanent capital | |||||||
Class B capital stock | $ | 1,518,515 | $ | 1,869,130 | |||
Mandatorily redeemable capital stock | 6,135 | 5,806 | |||||
Retained earnings | 1,455,584 | 1,463,154 | |||||
Total permanent capital | $ | 2,980,234 | $ | 3,338,090 | |||
Risk-based capital requirement | |||||||
Credit-risk capital | $ | 178,755 | $ | 235,213 | |||
Market-risk capital | 153,531 | 207,426 | |||||
Operations-risk capital | 99,686 | 132,792 | |||||
Total risk-based capital requirement | $ | 431,972 | $ | 575,431 | |||
Permanent capital in excess of risk-based capital requirement | $ | 2,548,262 | $ | 2,762,659 |
June 30, 2020 | December 31, 2019 | |||||||||||||||
Required | Actual | Required | Actual | |||||||||||||
Capital Ratio | ||||||||||||||||
Risk-based capital | $ | 431,972 | $ | 2,980,234 | $ | 575,431 | $ | 3,338,090 | ||||||||
Total regulatory capital | $ | 1,846,456 | $ | 2,980,234 | $ | 2,226,512 | $ | 3,338,090 | ||||||||
Total capital-to-asset ratio | 4.0 | % | 6.5 | % | 4.0 | % | 6.0 | % | ||||||||
Leverage Ratio | ||||||||||||||||
Leverage capital | $ | 2,308,069 | $ | 4,470,351 | $ | 2,783,141 | $ | 5,007,135 | ||||||||
Leverage capital-to-assets ratio | 5.0 | % | 9.7 | % | 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 0.20 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 $10.0 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 (collectively, the activity-based stock-investment requirement).
Partial recovery of prior capital distribution 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.
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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. Specifically, our partial recovery of prior capital distribution totaled $3.7 million, which was determined based on our 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 12 — Accumulated Other Comprehensive Loss
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Table 12.1 - 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, March 31, 2019 | $ | (118,893 | ) | $ | (122,913 | ) | $ | (31,887 | ) | $ | (5,115 | ) | $ | (278,808 | ) | |||||
Other comprehensive income (loss) before reclassifications: | ||||||||||||||||||||
Net unrealized gains (losses) | 36,293 | — | (2,443 | ) | — | 33,850 | ||||||||||||||
Noncredit other-than-temporary impairment losses | — | (101 | ) | — | — | (101 | ) | |||||||||||||
Accretion of noncredit loss | — | 6,188 | — | — | 6,188 | |||||||||||||||
Net actuarial gain | — | — | — | 19 | 19 | |||||||||||||||
Reclassifications from other comprehensive income to net income | ||||||||||||||||||||
Noncredit other-than-temporary impairment losses reclassified to credit loss (1) | — | 188 | — | — | 188 | |||||||||||||||
Amortization - hedging activities (2) | — | — | 1,131 | — | 1,131 | |||||||||||||||
Amortization - pension and postretirement benefits (3) | — | — | — | 171 | 171 | |||||||||||||||
Other comprehensive income (loss) | 36,293 | 6,275 | (1,312 | ) | 190 | 41,446 | ||||||||||||||
Balance, June 30, 2019 | $ | (82,600 | ) | $ | (116,638 | ) | $ | (33,199 | ) | $ | (4,925 | ) | $ | (237,362 | ) | |||||
Balance, March 31, 2020 | $ | (159,659 | ) | $ | (52,992 | ) | $ | (29,575 | ) | $ | (6,011 | ) | $ | (248,237 | ) | |||||
Other comprehensive (loss) income before reclassifications: | ||||||||||||||||||||
Net unrealized gains (losses) | 115,659 | — | (154 | ) | — | 115,505 | ||||||||||||||
Accretion of noncredit loss | — | 2,585 | — | — | 2,585 | |||||||||||||||
Net actuarial loss | — | — | — | (389 | ) | (389 | ) | |||||||||||||
Reclassifications from other comprehensive income to net income | ||||||||||||||||||||
Amortization - hedging activities (2) | — | — | 1,773 | — | 1,773 | |||||||||||||||
Amortization - pension and postretirement benefits (3) | — | — | — | 292 | 292 | |||||||||||||||
Other comprehensive income (loss) | 115,659 | 2,585 | 1,619 | (97 | ) | 119,766 | ||||||||||||||
Balance, June 30, 2020 | $ | (44,000 | ) | $ | (50,407 | ) | $ | (27,956 | ) | $ | (6,108 | ) | $ | (128,471 | ) |
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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, 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) | 70,358 | — | (5,822 | ) | — | 64,536 | ||||||||||||||
Noncredit other-than-temporary impairment losses | — | (181 | ) | — | — | (181 | ) | |||||||||||||
Accretion of noncredit loss | — | 12,479 | — | — | 12,479 | |||||||||||||||
Net actuarial gain | — | — | — | 19 | 19 | |||||||||||||||
Reclassifications from other comprehensive income to net income | ||||||||||||||||||||
Noncredit other-than-temporary impairment losses reclassified to credit loss (1) | — | 218 | — | — | 218 | |||||||||||||||
Amortization - hedging activities (2) | — | — | 1,917 | — | 1,917 | |||||||||||||||
Amortization - pension and postretirement benefits (3) | — | — | — | 332 | 332 | |||||||||||||||
Other comprehensive income (loss) | 70,358 | 12,516 | (3,905 | ) | 351 | 79,320 | ||||||||||||||
Balance, June 30, 2019 | $ | (82,600 | ) | $ | (116,638 | ) | $ | (33,199 | ) | $ | (4,925 | ) | $ | (237,362 | ) | |||||
Balance, December 31, 2019 | $ | (73,922 | ) | $ | (76,036 | ) | $ | (30,207 | ) | $ | (6,807 | ) | $ | (186,972 | ) | |||||
Other comprehensive (loss) income before reclassifications: | ||||||||||||||||||||
Net unrealized gains (losses) | 29,922 | — | (1,279 | ) | — | 28,643 | ||||||||||||||
Noncredit losses included in basis of securities sold | — | 20,239 | — | — | 20,239 | |||||||||||||||
Accretion of noncredit loss | — | 5,390 | — | — | 5,390 | |||||||||||||||
Net actuarial gain | — | — | — | 112 | 112 | |||||||||||||||
Reclassifications from other comprehensive income to net income | ||||||||||||||||||||
Amortization - hedging activities (2) | — | — | 3,530 | — | 3,530 | |||||||||||||||
Amortization - pension and postretirement benefits (3) | — | — | — | 587 | 587 | |||||||||||||||
Other comprehensive income | 29,922 | 25,629 | 2,251 | 699 | 58,501 | |||||||||||||||
Balance, June 30, 2020 | $ | (44,000 | ) | $ | (50,407 | ) | $ | (27,956 | ) | $ | (6,108 | ) | $ | (128,471 | ) |
_______________________
(1) | Recorded in other income (loss) in the statement of operations. |
(2) | Recorded in CO bond interest expense. |
(3) | Recorded in other expenses in the statement of operations. |
Note 13 — Fair Values
A fair-value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value. A description of the application of the fair-value hierarchy, valuation techniques, and significant inputs is disclosed in Part II — Item 8 — Financial Statements and Supplementary Data — Note 19 — Fair Values in the 2019 Annual Report. There have been no material changes in the fair-value hierarchy classification of financial assets and liabilities, valuation techniques, or significant inputs during the three months ended June 30, 2020.
Table 13.1 presents the carrying value, fair value, and fair value hierarchy of our financial assets and liabilities at June 30, 2020, and December 31, 2019. We record trading securities, available-for-sale securities, derivative assets, derivative liabilities,
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and certain other assets at fair value on a recurring basis, and 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 13.2 for further details about the financial assets and liabilities held at fair value on either a recurring or non-recurring basis.
Table 13.1 - Fair Value Summary (dollars in thousands) | |||||||||||||||||||||||
June 30, 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 | $ | 247,587 | $ | 247,587 | $ | 247,587 | $ | — | $ | — | $ | — | |||||||||||
Interest-bearing deposits | 1,004,210 | 1,004,210 | 1,004,210 | — | — | — | |||||||||||||||||
Securities purchased under agreements to resell | 1,250,000 | 1,249,998 | — | 1,249,998 | — | — | |||||||||||||||||
Federal funds sold | 2,015,000 | 2,014,996 | — | 2,014,996 | — | — | |||||||||||||||||
Trading securities(1) | 4,445,028 | 4,445,028 | — | 4,445,028 | — | — | |||||||||||||||||
Available-for-sale securities(1) | 6,950,965 | 6,950,965 | — | 6,891,502 | 59,463 | — | |||||||||||||||||
Held-to-maturity securities | 621,385 | 698,671 | — | 351,744 | 346,927 | — | |||||||||||||||||
Advances | 24,827,781 | 25,183,079 | — | 25,183,079 | — | — | |||||||||||||||||
Mortgage loans, net | 4,411,053 | 4,629,024 | — | 4,609,031 | 19,993 | — | |||||||||||||||||
Accrued interest receivable | 102,582 | 102,582 | ��� | 102,582 | — | — | |||||||||||||||||
Derivative assets(1) | 204,496 | 204,496 | — | 16,835 | — | 187,661 | |||||||||||||||||
Other assets (1) | 32,490 | 32,490 | 14,371 | 18,119 | — | — | |||||||||||||||||
Liabilities: | |||||||||||||||||||||||
Deposits | (1,191,229 | ) | (1,191,225 | ) | — | (1,191,225 | ) | — | — | ||||||||||||||
COs: | |||||||||||||||||||||||
Bonds | (24,563,087 | ) | (25,272,555 | ) | — | (25,272,555 | ) | — | — | ||||||||||||||
Discount notes | (17,308,802 | ) | (17,313,461 | ) | — | (17,313,461 | ) | — | — | ||||||||||||||
Mandatorily redeemable capital stock | (6,135 | ) | (6,135 | ) | (6,135 | ) | — | — | — | ||||||||||||||
Accrued interest payable | (82,508 | ) | (82,508 | ) | — | (82,508 | ) | — | — | ||||||||||||||
Derivative liabilities(1) | (24,098 | ) | (24,098 | ) | — | (105,762 | ) | — | 81,664 | ||||||||||||||
Other: | |||||||||||||||||||||||
Commitments to extend credit for advances | — | (1,437 | ) | — | (1,437 | ) | — | — | |||||||||||||||
Standby letters of credit | (1,197 | ) | (1,197 | ) | — | (1,197 | ) | — | — |
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December 31, 2019 | |||||||||||||||||||||||
Carrying Value | Total Fair Value | Level 1 | Level 2 | Level 3 | Netting Adjustments and Cash Collateral(2) | ||||||||||||||||||
Financial instruments | |||||||||||||||||||||||
Assets: | |||||||||||||||||||||||
Cash and due from banks | $ | 69,416 | $ | 69,416 | $ | 69,416 | $ | — | $ | — | $ | — | |||||||||||
Interest-bearing deposits | 1,253,873 | 1,253,873 | 1,253,873 | — | — | — | |||||||||||||||||
Securities purchased under agreements to resell | 3,500,000 | 3,500,003 | — | 3,500,003 | — | — | |||||||||||||||||
Federal funds sold | 860,000 | 859,999 | — | 859,999 | — | — | |||||||||||||||||
Trading securities(1) | 2,250,264 | 2,250,264 | — | 2,250,264 | — | — | |||||||||||||||||
Available-for-sale securities(1) | 7,409,000 | 7,409,000 | — | 7,344,348 | 64,652 | — | |||||||||||||||||
Held-to-maturity securities | 871,107 | 1,035,410 | — | 456,942 | 578,468 | — | |||||||||||||||||
Advances | 34,595,363 | 34,735,775 | — | 34,735,775 | — | — | |||||||||||||||||
Mortgage loans, net | 4,501,251 | 4,634,141 | — | 4,615,737 | 18,404 | — | |||||||||||||||||
Accrued interest receivable | 112,163 | 112,163 | — | 112,163 | — | — | |||||||||||||||||
Derivative assets(1) | 159,731 | 159,731 | — | 15,329 | — | 144,402 | |||||||||||||||||
Other assets(1) | 31,939 | 31,939 | 13,894 | 18,045 | — | — | |||||||||||||||||
Liabilities: | |||||||||||||||||||||||
Deposits | (674,309 | ) | (674,269 | ) | — | (674,269 | ) | — | — | ||||||||||||||
COs: | |||||||||||||||||||||||
Bonds | (23,888,493 | ) | (24,226,123 | ) | — | (24,226,123 | ) | — | — | ||||||||||||||
Discount notes | (27,681,169 | ) | (27,681,470 | ) | — | (27,681,470 | ) | — | — | ||||||||||||||
Mandatorily redeemable capital stock | (5,806 | ) | (5,806 | ) | (5,806 | ) | — | — | — | ||||||||||||||
Accrued interest payable | (104,477 | ) | (104,477 | ) | — | (104,477 | ) | — | — | ||||||||||||||
Derivative liabilities(1) | (10,271 | ) | (10,271 | ) | — | (43,805 | ) | — | 33,534 | ||||||||||||||
Other: | |||||||||||||||||||||||
Commitments to extend credit for advances | — | (3,884 | ) | — | (3,884 | ) | — | — | |||||||||||||||
Standby letters of credit | (1,723 | ) | (1,723 | ) | — | (1,723 | ) | — | — |
_______________________
(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. |
Fair Value Measured on a Recurring and Nonrecurring Basis.
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Table 13.2 - Fair Value of Assets and Liabilities Measured at Fair Value on a Recurring and Nonrecurring Basis (dollars in thousands) | |||||||||||||||||||
June 30, 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 | $ | — | $ | 5,392 | $ | — | $ | — | $ | 5,392 | |||||||||
U.S. Treasury obligations | — | 4,436,070 | — | — | 4,436,070 | ||||||||||||||
U.S. government-guaranteed – single-family MBS | — | 3,505 | — | — | 3,505 | ||||||||||||||
GSE – single-family MBS | — | 61 | — | — | 61 | ||||||||||||||
Total trading securities | — | 4,445,028 | — | — | 4,445,028 | ||||||||||||||
Available-for-sale securities: | |||||||||||||||||||
HFA securities | — | — | 59,463 | — | 59,463 | ||||||||||||||
Supranational institutions | — | 436,820 | — | — | 436,820 | ||||||||||||||
U.S. government-owned corporations | — | 323,431 | — | — | 323,431 | ||||||||||||||
GSE | — | 136,061 | — | — | 136,061 | ||||||||||||||
U.S. government guaranteed – single-family MBS | — | 48,356 | — | — | 48,356 | ||||||||||||||
U.S. government guaranteed – multifamily MBS | — | 167,492 | — | — | 167,492 | ||||||||||||||
GSE – single-family MBS | — | 2,062,451 | — | — | 2,062,451 | ||||||||||||||
GSE – multifamily MBS | — | 3,716,891 | — | — | 3,716,891 | ||||||||||||||
Total available-for-sale securities | — | 6,891,502 | 59,463 | — | 6,950,965 | ||||||||||||||
Derivative assets: | |||||||||||||||||||
Interest-rate-exchange agreements | — | 16,728 | — | 187,661 | 204,389 | ||||||||||||||
Mortgage delivery commitments | — | 107 | — | — | 107 | ||||||||||||||
Total derivative assets | — | 16,835 | — | 187,661 | 204,496 | ||||||||||||||
Other assets | 14,371 | 18,119 | — | — | 32,490 | ||||||||||||||
Total assets carried at fair value on a recurring basis | $ | 14,371 | $ | 11,371,484 | $ | 59,463 | $ | 187,661 | $ | 11,632,979 | |||||||||
Carried at fair value on a nonrecurring basis(2) | |||||||||||||||||||
Mortgage loans held for portfolio | $ | — | $ | — | $ | 1,546 | $ | — | $ | 1,546 | |||||||||
REO | — | — | 608 | — | 608 | ||||||||||||||
Total assets carried at fair value on a nonrecurring basis | $ | — | $ | — | $ | 2,154 | $ | — | $ | 2,154 | |||||||||
Liabilities: | |||||||||||||||||||
Carried at fair value on a recurring basis | |||||||||||||||||||
Derivative liabilities | |||||||||||||||||||
Interest-rate-exchange agreements | $ | — | $ | (105,762 | ) | $ | — | $ | 81,664 | $ | (24,098 | ) | |||||||
Total liabilities carried at fair value on a recurring basis | $ | — | $ | (105,762 | ) | $ | — | $ | 81,664 | $ | (24,098 | ) |
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December 31, 2019 | |||||||||||||||||||
Level 1 | Level 2 | Level 3 | Netting Adjustments and Cash Collateral (1) | Total | |||||||||||||||
Assets: | |||||||||||||||||||
Carried at fair value on a recurring basis | |||||||||||||||||||
Trading securities: | |||||||||||||||||||
Corporate bonds | $ | — | $ | 5,896 | $ | — | $ | — | $ | 5,896 | |||||||||
U.S. Treasury obligations | — | 2,240,236 | — | — | 2,240,236 | ||||||||||||||
U.S. government guaranteed – single-family MBS | — | 4,047 | — | — | 4,047 | ||||||||||||||
GSE – single-family MBS | — | 85 | — | — | 85 | ||||||||||||||
Total trading securities | — | 2,250,264 | — | — | 2,250,264 | ||||||||||||||
Available-for-sale securities: | |||||||||||||||||||
HFA securities | — | — | 64,652 | — | 64,652 | ||||||||||||||
Supranational institutions | — | 416,429 | — | — | 416,429 | ||||||||||||||
U.S. government-owned corporations | — | 296,761 | — | — | 296,761 | ||||||||||||||
GSE | — | 123,786 | — | — | 123,786 | ||||||||||||||
U.S. government guaranteed – single-family MBS | — | 57,714 | — | — | 57,714 | ||||||||||||||
U.S. government guaranteed – multifamily MBS | — | 282,617 | — | — | 282,617 | ||||||||||||||
GSE – single-family MBS | — | 2,590,271 | — | — | 2,590,271 | ||||||||||||||
GSE – multifamily MBS | — | 3,576,770 | — | — | 3,576,770 | ||||||||||||||
Total available-for-sale securities | — | 7,344,348 | 64,652 | — | 7,409,000 | ||||||||||||||
Derivative assets: | |||||||||||||||||||
Interest-rate-exchange agreements | — | 15,102 | — | 144,402 | 159,504 | ||||||||||||||
Mortgage delivery commitments | — | 227 | — | — | 227 | ||||||||||||||
Total derivative assets | — | 15,329 | — | 144,402 | 159,731 | ||||||||||||||
Other assets | 13,894 | 18,045 | — | — | 31,939 | ||||||||||||||
Total assets carried at fair value on a recurring basis | $ | 13,894 | $ | 9,627,986 | $ | 64,652 | $ | 144,402 | $ | 9,850,934 | |||||||||
Carried at fair value on a nonrecurring basis(2) | |||||||||||||||||||
Held-to-maturity securities: | |||||||||||||||||||
Private-label MBS | $ | — | $ | — | $ | 6,856 | $ | — | $ | 6,856 | |||||||||
Mortgage loans held for portfolio | — | — | 1,198 | — | 1,198 | ||||||||||||||
REO | — | — | 78 | — | 78 | ||||||||||||||
Total assets carried at fair value on a nonrecurring basis | $ | — | $ | — | $ | 8,132 | $ | — | $ | 8,132 | |||||||||
Liabilities: | |||||||||||||||||||
Carried at fair value on a recurring basis | |||||||||||||||||||
Derivative liabilities | |||||||||||||||||||
Interest-rate-exchange agreements | $ | — | $ | (43,805 | ) | $ | — | $ | 33,534 | $ | (10,271 | ) | |||||||
Total liabilities carried at fair value on a recurring basis | $ | — | $ | (43,805 | ) | $ | — | $ | 33,534 | $ | (10,271 | ) |
_______________________
(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. |
Table 13.3 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 three and six months ended June 30, 2020 and 2019.
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Table 13.3 - Roll Forward of Level 3 Available-for-Sale Securities (dollars in thousands) | ||||||||||||||||
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Balance at beginning of period | $ | 65,395 | $ | 50,348 | $ | 64,652 | $ | 49,601 | ||||||||
Unrealized gains included in other comprehensive income | 1,668 | 1,212 | 2,411 | 1,959 | ||||||||||||
Maturities | (7,600 | ) | — | (7,600 | ) | — | ||||||||||
Balance at end of period | $ | 59,463 | $ | 51,560 | $ | 59,463 | $ | 51,560 |
Note 14 — 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 June 30, 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 June 30, 2020, and December 31, 2019. The par amounts of other FHLBanks' outstanding COs for which we are jointly and severally liable totaled $874.0 billion and $974.4 billion at June 30, 2020, and December 31, 2019, respectively. See Note 9 — Consolidated Obligations for additional information.
Off-Balance-Sheet Commitments
Table 14.1 - Off-Balance Sheet Commitments(1) (dollars in thousands) | ||||||||||||||||||||||||
June 30, 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) | $ | 7,284,204 | $ | 248,311 | $ | 7,532,515 | $ | 7,484,754 | $ | 215,014 | $ | 7,699,768 | ||||||||||||
Commitments for unused lines of credit - advances (3) | 1,134,447 | — | 1,134,447 | 1,143,828 | — | 1,143,828 | ||||||||||||||||||
Commitments to make additional advances | 97,626 | 61,332 | 158,958 | 434,253 | 88,167 | 522,420 | ||||||||||||||||||
Commitments to invest in mortgage loans | 20,626 | — | 20,626 | 49,911 | — | 49,911 | ||||||||||||||||||
Unsettled CO discount notes, at par | 1,688,000 | — | 1,688,000 | 500,000 | — | 500,000 |
__________________________
(1) | We have deemed it unnecessary to record any liability for credit losses on these agreements. |
(2) | The amount of standby letters of credit outstanding excludes commitments to issue standby letters of credit that expire within one year. At June 30, 2020, and December 31, 2019, these amounts totaled $113.8 million and $27.2 million, |
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respectively. Also excluded are commitments to issue standby letters of credit that expire after one year totaling $1.8 million at December 31, 2019.
(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. |
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 state and local 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. At June 30, 2020, the terms of these standby letters of credit have original expiration periods of up to 20 years, expiring no later than 2027. Currently, we offer new standby letters of credit with terms typically up to 10 years, 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 $1.2 million and $1.7 million at June 30, 2020, and December 31, 2019, respectively.
Commitments to Invest in Mortgage Loans. Commitments to invest in mortgage loans are generally for periods not to exceed 60 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 7 — Derivatives and Hedging Activities for additional information about our pledged collateral and other credit-risk-related contingent features.
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 15 — Transactions with Shareholders
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 15.1 - 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 | |||||||||||||||
June 30, 2020 | $ | 120,901 | 7.9 | % | $ | 1,739,011 | 7.1 | % | $ | 2,105 | 6.7 | % | ||||||||
December 31, 2019 | 112,811 | 6.0 | 2,224,141 | 6.4 | 3,581 | 7.4 |
Note 16 — Subsequent Events
On July 24, 2020, the board of directors declared a cash dividend at an annualized rate of 4.12 percent based on daily average capital stock balances outstanding during the second quarter of 2020. The dividend, including dividends classified as interest on mandatorily redeemable capital stock, amounted to $18.9 million and was paid on August 4, 2020.
43
In the third quarter of 2020, a net gain of $473 thousand was realized on the sale of held-to-maturity private-label mortgage-backed securities, which had an amortized cost of $12.2 million, and of which at least 85 percent of the principal outstanding at acquisition had been collected.
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 mortgage-backed securities which had an amortized cost of $82.3 million and realized a net gain of $6.2 million; and |
• | transferred from held-to-maturity to available-for-sale certain securities which had an amortized cost of $254.2 million and a fair value of $269.6 million on the date of transfer. |
Subsequent to the transfer to available-for-sale, we sold certain available-for-sale private-label mortgage-backed securities which had an amortized cost of $139.5 million and realized a net gain of $25.9 million.
In conjunction with these sales and transfers, we reduced the allowance for credit losses on these securities by $5.3 million. Following the sales of these private-label mortgage-backed securities, the amortized cost of private-label mortgage-backed securities remaining in our available-for-sale portfolio totaled $18.3 million.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Index to Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report includes statements describing anticipated developments, projections, estimates, or predictions of ours that are “forward-looking statements.” These statements may involve matters related to, but not limited to, projections of revenues, income, earnings, capital expenditures, dividends, capital structure, or other financial items; repurchases of excess stock, our minimum retained earnings target, or the interest-rate environment in which we do business; statements of management’s plans or objectives for future operations; expectations of future economic performance; or statements of assumptions underlying certain of the foregoing types of statements. These statements may use forward-looking terminology such as, but not limited to, “anticipates,” “believes,” “expects,” “plans,” “intends,” “may,” “could,” “estimates,” “assumes,” “should,” “will,” “likely,” or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements are subject to a number of risks or uncertainties, including the risk factors set forth in Part I — Item 1A — Risk Factors in the 2019 Annual Report and Part II — Item 1A — Risk Factors of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed with the SEC on May 14, 2020 (2020 First Quarter Report) along with the risks set forth below. Actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, you are cautioned not to place undue reliance on such statements. These forward-looking statements speak only as of the date they are made, and we do not undertake to update any forward-looking statement herein or that may be made from time to time on our behalf.
Some of the risks and uncertainties that could affect our forward-looking statements include the following:
• | the effects of economic, financial, credit, and market conditions on our financial and regulatory condition and results of operations, including changes in economic growth, general liquidity conditions, inflation and deflation, employment rates, interest rates, interest rate spreads, interest rate volatility, mortgage originations, prepayment activity, housing prices, asset delinquencies, members’ deposit flows, liquidity needs, and loan demand; changes in benchmark interest rates, including but not limited to the anticipated cessation of the LIBOR benchmark rate, the development of alternative rates, including the Secured Overnight Financing Rate (SOFR), and the adverse consequences these could have for market participants, including the Bank and its members; changes in the general economy, including changes resulting from changes in U.S. fiscal policy, actions of the Federal Open Market Committee (FOMC), or changes in ratings of the U.S. federal government; the condition of the mortgage and housing markets on our mortgage-related assets, including the level of mortgage prepayments; the condition of the capital markets on our COs; |
• | issues and events across the FHLBank System and in the political arena that may lead to executive branch, legislative, regulatory, judicial, or other developments impacting the scope of our business, investor demand for COs, our financial obligations with respect to COs, our ability to access the capital markets, our members, our counterparties, the manner in which we operate, or the organization and structure of the FHLBank System; |
• | the impact of the coronavirus or other pandemics, epidemics, or health emergencies and responses to such events, including, among other things, the effect on the Bank resulting from illness or quarantines of employees or business partners on which we rely or from remote work arrangements; negative effects on our members’ businesses and their demands for our products; and effects generally on the economy and financial markets; |
• | our ability to declare and pay dividends consistent with past practices as well as any plans to repurchase excess capital stock; |
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• | competitive forces including, without limitation, other sources of funding available to our members and other entities borrowing funds in the capital markets; |
• | changes in the value and liquidity of collateral we hold as security for obligations of our members and counterparties; |
• | the impact of new accounting standards and the application of accounting rules, including the impact of regulatory guidance on our application of such standards and rules; |
• | changes in the fair value and economic value of, impairments of, and risks, including risks related to changes in or cessation of benchmark interest rates, associated with the Bank’s investments in mortgage loans and MBS or other assets and the related credit-enhancement protections; |
• | membership conditions and changes, including changes resulting from member failures, mergers or changing financial health, changes due to member eligibility, changes in the principal place of business of members, or the addition of new members; |
• | external events, such as general economic and financial instabilities, political instability, wars and natural disaster, including disasters caused by significant climate change, which, among other things, could damage our facilities or the facilities of our members, damage or destroy collateral that members have pledged to secure advances or mortgages that we hold for our portfolio, and which could cause us to experience losses or be exposed to a greater risk that pledged collateral would be inadequate in the event of a default; |
• | the pace of technological change and our ability to develop and support internal controls, information systems, and other operating technologies that effectively manage the risks we face, including but not limited to, failures, interruptions, or security breaches (including cyber-attacks), which could increase as a result of COVID-19 related changes in our operating environment; and |
• | our ability to attract and retain skilled employees. |
The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our interim financial statements and notes, which begin on page three, and the 2019 Annual Report.
EXECUTIVE SUMMARY
For the three months ended June 30, 2020, a quarter marked by continued extraordinarily low interest rates as investors and monetary policymakers reacted to a severe economic downturn in response to the COVID-19 pandemic, net income decreased to $2.8 million, from $35.6 million for the three months ended June 30, 2019. The decrease in net income was primarily due to a $20.1 million increase in net unrealized losses on trading securities and a decrease of $18.3 million in net interest income after provision for credit losses. The sharp and rapid drop in interest rates in March 2020 caused us to experience a substantial temporary compression of net interest margin as overnight investments that we held for liquidity management purposes repriced immediately while a significant portion of the short-term COs financing the bulk of these investments matured during the second quarter of 2020. By the end of the second quarter of 2020, this temporary compression of the Bank's net interest margin had subsided as the short-term debt issued in the first quarter of 2020 matured off the Bank's balance sheet.
Net interest income after provision for credit losses for the three months ended June 30, 2020, was $39.4 million, compared with $57.7 million for the same period in 2019. Advances balances totaled $24.8 billion at June 30, 2020, a decrease of 28.2 percent, compared to $34.6 billion at December 31, 2019, and a decrease of 44.9 percent compared to $45.1 billion at March 31, 2020. Our return on average equity was 0.36 percent for the three months ended June 30, 2020, compared with 4.77 percent for the same period in 2019, a decrease of 441 basis points. Our business model is designed to allow for variability in demand for advances and changes in interest rates. While sharply lower interest rates contributed to reduced net income, our financial condition continued to be strong with retained earnings of $1.46 billion at June 30, 2020, a surplus of $755.6 million over our minimum retained earnings target, as we continued to satisfy all regulatory capital requirements as of June 30, 2020. We also provided a dividend spread of 350 basis points over the daily average three-month LIBOR.
While we expect our net income for the remainder of 2020 to improve from that of the quarter ended June 30, 2020, our board of directors intends to reevaluate our dividend strategy during the remainder of 2020, in light of the pending cessation of LIBOR as our current dividend benchmark rate, as well as the ongoing financial challenges resulting from the COVID-19 pandemic and their impact on our current and projected earnings, including near-zero interest rates and significantly lower advances balances. As always, dividends remain at the discretion of our board of directors.
Our overall results of operations are influenced by the economy and financial markets, and in particular, by members’ demand for advances and our ability to maintain sufficient access to funding at relatively favorable costs. Our flexibility in utilizing various funding tools, in combination with a diverse investor base and our status as a government-sponsored enterprise, have helped provide reliable market access and demand for consolidated obligations throughout fluctuating market environments
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and regulatory changes affecting dealers of and investors in COs. The Bank has continued to meet all funding needs in response to demand for advances during the quarter ended June 30, 2020.
Coronavirus Pandemic: COVID-19
The economic effects of the COVID-19 pandemic in the United States are evolving, and the full impact and duration of the virus are unknown. COVID-19 and the resulting shut-down of large parts of the economy in the first half of 2020 have strained and severely taxed healthcare systems, businesses, and economies worldwide and induced a response of unprecedented fiscal and monetary policy support from the federal government. In the first two quarters and continuing, these policies have sharply reduced interest rates and have increased bank and credit union deposits, depressing the demand for wholesale funding. The effects of COVID-19 and the response to the virus have negatively impacted financial markets and overall economic conditions and have resulted in significant changes in interest rates, credit spreads, and asset prices which have had adverse impacts on us. The financial effects of COVID-19 have increased credit risks to our investment portfolios, including private-label MBS, money market investments, and our MPF loans, among others. Decreased interest rates have had a negative impact on our net income, including on our money market assets and through accelerated premium amortization on MBS. Possible additional effects may include, among other things, disruption to our members and counterparties, uncertainties in the credit markets, operational incidents because of a remote work force, and a decline in the fair value of assets. Valuations for Agency MBS began to improve in April and have continued to improve and stabilize, partly as a result of increased investment by the Federal Reserve. Given the recent surge in cases throughout the U.S. and uncertainties around the timing and effectiveness of a vaccine for COVID-19, as well as the depth of the recent economic decline, it is likely that our earnings will remain lower for the next few years than they have been in recent years.
Governmental and public actions taken in response to the COVID-19 pandemic (such as shelter-in-place or similar orders, travel restrictions, and business shutdowns), have significantly reduced economic activity and created substantial uncertainty about the future economic environment. Unemployment insurance claims have increased dramatically as employers lay off workers, though the pace of initial claims has slowed since the initial weeks following the pandemic's declaration. The COVID-19 pandemic and related developments have resulted in substantial disruptions in the financial markets, initially including dramatic increases in market volatility, and have led to concerns that economic effects will lead to a global recession. In response to COVID-19 developments, the Federal Reserve responded with a series of monetary policy adjustments in March 2020, including rapid reductions to the targeted federal funds rate totaling 1.50 percentage points, an increase in its daily repurchase agreement offerings, announced purchases of U.S. Treasury securities and U.S. Agency mortgage-backed securities, and the establishment of multiple liquidity facilities. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law, and funding for the Paycheck Protection Program (PPP), which was created by the CARES Act, was increased on April 24, 2020 with the enactment of the Paycheck Protection Program and Healthcare Enhancement Act. Also in response to COVID-19, the FHFA has taken certain actions to provide various forms of relief and guidance regarding the financial, operational, credit market, and other effects of the pandemic.
Demand for advances increased in March but has since decreased. Among other things, high member deposit balances have limited additional demand for advances in the second quarter. In addition, the Federal Reserve’s lending facility to support the PPP of the CARES Act, which provides loans to businesses, may have decreased demand for advances as members have been able to borrow under that facility at lower rates than are offered for advances.
The risk of credit losses has increased, but we have not seen a significant impact at this time. We are continuing to monitor credit and collateral conditions and make adjustments as needed. The CARES Act contains mortgage loan forbearance for borrowers. The continued inability of borrowers to make payments on mortgage loans post-forbearance may affect our results of operations through an increase in delinquency and loss performance in our MPF loan portfolio, and we have increased our allowance for credit losses from $3.5 million in the first quarter to $4.6 million in the second quarter.
We continue to help our members support small business customers through low interest-rate funding. Our Jobs for New England (JNE) Working Capital Lending Program provides zero-interest advances to our members to enable them to make working capital loans at low rates to their eligible small business customers.
On March 12, 2020, the Bank asked employees who were not operationally critical to work remotely, and except for specific, limited needs of short duration, all staff (including operationally critical employees) worked remotely from late March 2020 until mid-July 2020, when a small number of employees began working in our Boston offices. Following the implementation of our Business Continuity Plan, we have remained fully operational with minimal impact on services to our members and other counterparties. At this time, we cannot predict when our full employee base will be permitted to return to work in our offices. We could experience significant operational difficulties or disruptions, which could impair our ability to conduct and manage our business effectively. While we have deployed modern, secure virtual private network and remote terminal solutions, a
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remote workforce can be more vulnerable to operational disruption than a workforce on a closed, closely monitored corporate network. Our reliance on operationally critical vendors increases risk because those vendors may themselves, because of remote work requirements, be operating in a less secure manner. For further details of the potential impact of these events on the Bank, see the risk factors set forth in Part II — Item 1A — Risk Factors of our 2020 First Quarter Report. Additional information is provided in Economic Conditions.
Net Interest Margin
For the three months ended June 30, 2020, net interest margin was 0.31 percent, a decrease of 12 basis points from the same period in 2019. The decrease in net interest margin mainly reflects the negative impact of sharply lower interest rates on overnight investments funded by capital stock and short-term debt. We experienced substantial temporary net interest margin compression as a result of two unscheduled FOMC actions in March 2020 to reduce the targeted federal funds rate a total of 1.50 percentage points. The FOMC’s actions came shortly after we funded a significant volume of overnight and short-term advances by issuing term discount notes that we were required to issue in order to meet liquidity requirements. This net interest margin compression extended through May 2020 and had an adverse impact on net interest income in the second quarter of 2020. In addition, the low interest rate environment has triggered refinancing incentives on residential mortgage loans, resulting in anticipated and actual increases of mortgage prepayment activity that accelerated net premium amortization of our Agency residential MBS as well as our whole mortgage loans.
Advances Balances
During the six months ended June 30, 2020, advances decreased $9.8 billion, or 28.2 percent, to $24.8 billion, compared with $34.6 billion at year-end 2019 and $45.1 billion at March 31, 2020. The decrease in advances was concentrated in short-term fixed-rate and variable-rate advances and is primarily due to excess liquidity at member institutions.
Accretable yields from investments in private-label MBS
For the three months ended June 30, 2020 and 2019, we recognized $3.3 million and $7.0 million, respectively, in interest income resulting from the increased accretable yields of certain private-label MBS for which we had previously recognized credit losses. For a discussion of this accounting treatment, see Part II — Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 2 — Summary of Significant Accounting Policies — Investment Securities — Other-than-Temporary Impairment — Interest Income Recognition in the 2019 Annual Report.
The amortized cost of our total investments in private-label MBS declined to $253.6 million at June 30, 2020. The allowance for credit losses for our private-label MBS was $5.6 million at June 30, 2020.
Legislative and Regulatory Developments
During and after the second quarter, legislation has been enacted, and the FHFA and other regulators with authority over us or our way of doing business have issued or proposed regulations and issued guidance as described in — Legislative and Regulatory Developments. Such developments affect the way we conduct business and could impact the way we satisfy our mission as well as the value of our membership.
LIBOR Transition Preparations
In July 2017, the United Kingdom’s FCA, which regulates LIBOR, announced its intention to stop persuading or compelling the major banks that sustain LIBOR to submit rate quotations after 2021. We recognize that the discontinuance of LIBOR as an interest rate benchmark and the transition to alternative reference rates, including SOFR, present significant risks and challenges that could affect our business. Many of our assets and liabilities are indexed to LIBOR, and we continue to assess legacy contracts across products and monitor risks to determine the effect of LIBOR discontinuance. Under a steering committee comprised of members of senior management and a working group of representatives from departments across the Bank, we have developed and continue to implement a multi-year plan and initiative to transition from LIBOR. We are also working with the other FHLBanks and the Office of Finance as we transition our floating-rate note issuance from LIBOR. In October 2019 we began to offer a SOFR-based advance. We are updating our operational processes and models to support new alternative reference rate activity. For further details see the following Risk Factors in the 2019 Annual Report: Part I — Item 1A — Risk Factors — Market and Liquidity Risks — Changes to and replacement of the LIBOR benchmark interest rate could adversely affect our business, financial condition, and results of operations; and Operational Risks — We use derivatives to manage interest-rate risk, however, we could be unable to enter into effective derivative instruments on acceptable terms.
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Additional information is provided in — Legislative and Regulatory Developments as well as in Financial Condition — Transition from LIBOR to Alternative Reference Rates.
ECONOMIC CONDITIONS
Economic Environment
The coronavirus pandemic and the public health measures taken to prevent its spread have led to a severe contraction of economic activity. The current economic outlook is highly uncertain as it continues to depend on the path of the virus.
Output contracted sharply during the first half of the year. Gross domestic product fell by 5.0 percent and 32.9 percent at an annualized rate during the first and second quarters of 2020, respectively, driven by precipitous declines in consumer spending on healthcare, travel, and retail, as well as industrial production.
The labor market was severely disrupted by the unfolding health crisis. Over 21 million jobs were lost in March and April. Consequently, the unemployment rate peaked at 14.7 percent in April, a level not seen since the Great Depression. These losses were partially offset by gains of 2.7 million jobs in May and 4.8 million jobs in June. As a result, the unemployment rate declined in June to 11.1 percent, still a highly elevated level.
The unemployment rate in New England sharply rose in April to 14.0 percent, stood at 14.0 percent in May, and declined slightly to 13.4 percent in June. In June 2020, among the six New England states, Massachusetts had the highest unemployment rate at 17.4 percent and Maine had the lowest unemployment rate at 6.6 percent.
To stem job losses and mitigate the economic disruption, Congress passed the CARES Act in March 2020, providing $2.2 trillion in various measures to alleviate the adverse economic impact on households and businesses. Further economic relief and stimulus legislations are currently under consideration in Congress.
Interest-Rate Environment
In response to the unfolding health crisis, the FOMC cut the federal funds rate from a target range of 1.5 percent to 1.75 percent at the beginning of 2020 to a range of 0 percent to 0.25 percent in March and has maintained this effective lower bound since. According to FOMC member projections released following its June meeting, a near zero federal funds rate target may be maintained through 2022. Federal Reserve Chair Powell noted in a June press conference that both FOMC member projections and private forecasts reflect “a long spell with rates at the effective lower bound.” After falling substantially in March, Treasury yields have remained low, with two-year Treasury rates trading within the 0 percent to 0.25 percent target range of the federal funds rate, suggesting that investors expect the federal funds rate to stay at the lower bound for an extended period.
Investor demand for high credit quality, fixed-income investments, including the FHLBanks' consolidated obligations, remains strong. The spreads of the FHLBanks' consolidated obligations relative to U.S. Treasury securities narrowed to more typical levels by quarter end after widening substantially in March and April.
Table 1 - Key Interest Rates | |||||||||||
Three Month Average | Six Month Average | Ending Rate | |||||||||
June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | June 30, 2020 | December 31, 2019 | ||||||
Federal funds effective rate | 0.06% | 2.40% | 0.64% | 2.40% | 0.08% | 1.55% | |||||
3-month LIBOR | 0.60% | 2.51% | 1.07% | 2.60% | 0.30% | 1.91% | |||||
3-month U.S. Treasury yield | 0.12% | 2.34% | 0.60% | 2.38% | 0.13% | 1.55% | |||||
2-year U.S. Treasury yield | 0.19% | 2.13% | 0.64% | 2.31% | 0.15% | 1.57% | |||||
5-year U.S. Treasury yield | 0.36% | 2.12% | 0.76% | 2.29% | 0.29% | 1.69% | |||||
10-year U.S. Treasury yield | 0.68% | 2.34% | 1.03% | 2.49% | 0.66% | 1.92% |
Source: Bloomberg
SELECTED FINANCIAL DATA
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The following financial highlights for the statement of condition and statement of operations for December 31, 2019, have been derived from our audited financial statements. Financial highlights for the quarter-ends have been derived from our unaudited financial statements.
Table 2 - Selected Financial Data (dollars in thousands) | ||||||||||||||||||||
June 30, 2020 | March 31, 2020 | December 31, 2019 | September 30, 2019 | June 30, 2019 | ||||||||||||||||
Statement of Condition | ||||||||||||||||||||
Total assets | $ | 46,161,388 | $ | 68,900,865 | $ | 55,662,811 | $ | 56,923,960 | $ | 55,779,532 | ||||||||||
Investments, net(1) | 16,286,588 | 18,072,153 | 16,144,244 | 13,593,020 | 13,963,431 | |||||||||||||||
Advances | 24,827,781 | 45,076,223 | 34,595,363 | 38,539,591 | 37,096,797 | |||||||||||||||
Mortgage loans held for portfolio, net(2) | 4,411,053 | 4,528,474 | 4,501,251 | 4,459,120 | 4,421,028 | |||||||||||||||
Deposits and other borrowings | 1,191,229 | 859,816 | 674,309 | 625,873 | 594,848 | |||||||||||||||
Consolidated obligations: | ||||||||||||||||||||
Bonds | 24,563,087 | 24,576,586 | 23,888,493 | 25,864,142 | 25,292,490 | |||||||||||||||
Discount notes | 17,308,802 | 39,692,253 | 27,681,169 | 26,896,215 | 26,424,978 | |||||||||||||||
Total consolidated obligations | 41,871,889 | 64,268,839 | 51,569,662 | 52,760,357 | 51,717,468 | |||||||||||||||
Mandatorily redeemable capital stock | 6,135 | 6,112 | 5,806 | 17,107 | 17,107 | |||||||||||||||
Class B capital stock outstanding-putable(3) | 1,518,515 | 2,266,329 | 1,869,130 | 2,031,651 | 1,995,252 | |||||||||||||||
Unrestricted retained earnings | 1,097,875 | 1,116,001 | 1,114,337 | 1,085,463 | 1,087,641 | |||||||||||||||
Restricted retained earnings | 357,709 | 357,148 | 348,817 | 335,110 | 328,685 | |||||||||||||||
Total retained earnings | 1,455,584 | 1,473,149 | 1,463,154 | 1,420,573 | 1,416,326 | |||||||||||||||
Accumulated other comprehensive loss | (128,471 | ) | (248,237 | ) | (186,972 | ) | (215,797 | ) | (237,362 | ) | ||||||||||
Total capital | 2,845,628 | 3,491,241 | 3,145,312 | 3,236,427 | 3,174,216 | |||||||||||||||
Results of Operations | ||||||||||||||||||||
Net interest income after provision for credit losses | $ | 39,444 | $ | 31,035 | $ | 68,329 | $ | 56,326 | $ | 57,721 | ||||||||||
Litigation settlements | 98 | — | 29,358 | 3 | — | |||||||||||||||
Other (loss) income, net | (16,275 | ) | 37,597 | 12,617 | 2,067 | 3,675 | ||||||||||||||
Other expense | 20,146 | 22,341 | 34,137 | 22,671 | 21,789 | |||||||||||||||
AHP assessments | 319 | 4,636 | 7,633 | 3,597 | 3,987 | |||||||||||||||
Net income | $ | 2,802 | $ | 41,655 | $ | 68,534 | $ | 32,128 | $ | 35,620 | ||||||||||
Other Information | ||||||||||||||||||||
Dividends declared | $ | 24,094 | $ | 24,129 | $ | 25,953 | $ | 27,881 | $ | 31,666 | ||||||||||
Dividend payout ratio | 859.89 | % | 57.93 | % | 37.87 | % | 86.78 | % | 88.90 | % | ||||||||||
Weighted-average dividend rate(4) | 5.06 | 5.46 | 5.73 | 6.04 | 6.22 | |||||||||||||||
Return on average equity(5) | 0.36 | 5.15 | 9.13 | 4.28 | 4.77 | |||||||||||||||
Return on average assets | 0.02 | 0.27 | 0.50 | 0.24 | 0.27 | |||||||||||||||
Net interest margin(6) | 0.31 | 0.20 | 0.50 | 0.43 | 0.43 | |||||||||||||||
Average equity to average assets | 5.59 | 5.27 | 5.49 | 5.66 | 5.57 | |||||||||||||||
Total regulatory capital ratio(7) | 6.46 | 5.44 | 6.00 | 6.09 | 6.15 |
_______________________
(1) | Investments include available-for-sale securities, held-to-maturity securities, trading securities, interest-bearing deposits, securities purchased under agreements to resell and federal funds sold. The allowance for credit losses for held-to-maturity private-label MBS amounted to $5.6 million and $3.8 million as of June 30, 2020 and March 31, 2020. |
(2) | The allowance for credit losses for mortgage loans amounted to $4.6 million as of June 30, 2020, $3.5 million as of March 31, 2020, and $500 thousand for each of the periods ending December 31, 2019, September 30, 2019, and June 30, 2019, respectively. |
(3) | Capital stock is putable at the option of a member upon five years' written notice, subject to applicable restrictions. |
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(4) | Weighted-average dividend rate is the dividend amount declared divided by the average daily balance of capital stock eligible for dividends. |
(5) | Return on average equity is net income divided by the total of the average daily balance of outstanding Class B capital stock, accumulated other comprehensive loss and total retained earnings. |
(6) | Net interest margin is net interest income before provision for credit losses as a percentage of average earning assets. |
(7) | Total regulatory capital ratio is capital stock (including mandatorily redeemable capital stock) plus total retained earnings as a percentage of total assets. See Item 1 — Notes to Financial Statements — Note 11 — Capital. |
RESULTS OF OPERATIONS
Net Income
Second Quarter of 2020 Compared with Second Quarter of 2019
Net income decreased to $2.8 million for the three months ended June 30, 2020, from $35.6 million. The reasons for the decrease are discussed under — Executive Summary.
Six Months Ended June 30, 2020 Compared with Six Months Ended June 30, 2019
For the six months ended June 30, 2020, a period marked by extraordinary market volatility, fiscal and monetary policy interventions, and interest rate declines as investors reacted to a severe economic downturn in response to the COVID-19 pandemic, net income decreased to $44.5 million, from $90.1 million for the six months ended June 30, 2019. The decrease in net income was primarily due to a decrease of $73.8 million in net interest income after provision for credit losses as well as an increase of $53.3 million in net losses on derivatives and hedging activities, partially offset by a $40.7 million gain on sale of held-to-maturity securities and a $26.3 million increase in unrealized gains on trading securities.
Net Interest Income
Second Quarter of 2020 Compared with Second Quarter of 2019
Net interest income after provision for credit losses for the three months ended June 30, 2020, was $39.4 million, compared with $57.7 million for the same period in 2019. The $18.3 million decrease in net interest income after provision for credit losses was due to several factors, including the following: lower returns from investing the Bank’s capital and liquidity due to sharply reduced interest rates; a substantial temporary compression of the Bank's net interest margin earned on short-term debt we held for liquidity management purposes (discussed in Executive Summary and Coronavirus Pandemic: COVID-19); a $3.7 million decrease in accretion of significant improvement in projected cash flows resulting from sales of previously impaired private label mortgage-backed securities in the fourth quarter of 2019 and first quarter of 2020; and a $2.9 million increase in the provision for credit losses relating to mortgage loans and private-label mortgage-backed securities. The increase in the provision for credit losses reflects changes in the economic outlook after the COVID-19 pandemic. For additional information see — Rate and Volume Analysis.
Net interest spread was 0.26 percent for the three months ended June 30, 2020, a three basis point decrease from the same period in 2019, and net interest margin was 0.31 percent, a 12 basis point decrease from 2019. The decrease in net interest spread reflects a 135 basis point decrease in the average yield on earning assets and a 132 basis point decrease in the average yield on interest-bearing liabilities.
Six Months Ended June 30, 2020 Compared with Six Months Ended June 30, 2019
Net interest income after provision for credit losses for the six months ended June 30, 2020, was $70.5 million, compared with $144.3 million for the same period in 2019. The $73.8 million decrease in net interest income after provision for credit losses was due to several factors, including the following: lower returns from investing the Bank’s capital in a sharply reduced interest rate environment; accelerated net premium amortization on Agency MBS and mortgage loans held due to higher projected and actual mortgage refinancing activity; a $25.7 million decline in prepayment fees on advances; a substantial temporary compression of the Bank's net interest margin earned on overnight investments funded by short-term debt issued prior to FOMC's March rate cuts that we held for liquidity management purposes; a $5.7 million decrease in accretion of significant improvement in projected cash flows resulting from sales of previously impaired private label mortgage-backed securities in the fourth quarter of 2019 and first quarter of this year; and a $2.2 million increase in the provision for credit losses relating to mortgage loans and private-label mortgage-backed securities.
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Net interest spread was 0.18 percent for the six months ended June 30, 2020, a 19 basis point decrease from the same period in 2019, and net interest margin was 0.25 percent, a 27 basis point decrease from 2019. The decrease in net interest spread reflects a 118 basis point decrease in the average yield on earning assets and a 99 basis point decrease in the average yield on interest-bearing liabilities. The decreases in both net interest spread and net interest margin mainly reflect the negative impact of sharply lower interest rates on overnight investments funded by capital stock and short-term debt. In particular, the sharp and rapid drop in interest rates in March 2020 caused a substantial temporary compression of net interest margin the Bank earned on short-term debt we held for liquidity management purposes during the six months ended June 30, 2020. This reduction in net interest income resulting from maintaining on-balance-sheet liquidity continued into May 2020 and then began to improve.
Table 3 presents major categories of average balances, related interest income/expense, and average yields for interest-earning assets and interest-bearing liabilities. Our primary source of earnings is net interest income, which is the interest earned on advances, mortgage loans, and investments less interest paid on COs, deposits, and other sources of funds.
Table 3 - Net Interest Spread and Margin (dollars in thousands) | ||||||||||||||||||||||
For the Three Months Ended June 30, | ||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||
Average Balance | Interest Income / Expense | Average Yield(1) | Average Balance | Interest Income / Expense | Average Yield(1) | |||||||||||||||||
Assets | ||||||||||||||||||||||
Advances | $ | 32,362,615 | $ | 104,982 | 1.30 | % | $ | 33,207,902 | $ | 227,675 | 2.75 | % | ||||||||||
Interest-bearing deposits | 1,351,418 | 385 | 0.11 | 883,817 | 5,398 | 2.45 | ||||||||||||||||
Securities purchased under agreements to resell | 1,569,231 | 213 | 0.05 | 5,927,505 | 36,210 | 2.45 | ||||||||||||||||
Federal funds sold | 3,006,857 | 424 | 0.06 | 2,186,462 | 13,261 | 2.43 | ||||||||||||||||
Investment securities(2) | 11,781,608 | 44,944 | 1.53 | 6,891,737 | 41,651 | 2.42 | ||||||||||||||||
Mortgage loans(2) | 4,504,857 | 33,333 | 2.98 | 4,399,155 | 37,587 | 3.43 | ||||||||||||||||
Other earning assets | — | — | — | 1,649 | 10 | 2.43 | ||||||||||||||||
Total interest-earning assets | 54,576,586 | 184,281 | 1.36 | 53,498,227 | 361,792 | 2.71 | ||||||||||||||||
Other non-interest-earning assets | 345,664 | 273,421 | ||||||||||||||||||||
Fair-value adjustments on investment securities | 438,037 | (354 | ) | |||||||||||||||||||
Total assets | $ | 55,360,287 | $ | 184,281 | 1.34 | % | $ | 53,771,294 | $ | 361,792 | 2.70 | % | ||||||||||
Liabilities and capital | ||||||||||||||||||||||
Consolidated obligations | ||||||||||||||||||||||
Discount notes | $ | 25,234,744 | $ | 47,582 | 0.76 | % | $ | 24,872,932 | $ | 151,253 | 2.44 | % | ||||||||||
Bonds | 25,777,748 | 94,256 | 1.47 | 24,985,939 | 150,715 | 2.42 | ||||||||||||||||
Deposits | 901,339 | 27 | 0.01 | 502,811 | 1,809 | 1.44 | ||||||||||||||||
Mandatorily redeemable capital stock | 6,198 | 64 | 4.15 | 17,238 | 259 | 6.03 | ||||||||||||||||
Other borrowings | 281 | 5 | 7.16 | 3,713 | 23 | 2.48 | ||||||||||||||||
Total interest-bearing liabilities | 51,920,310 | 141,934 | 1.10 | 50,382,633 | 304,059 | 2.42 | ||||||||||||||||
Other non-interest-bearing liabilities | 347,615 | 394,337 | ||||||||||||||||||||
Total capital | 3,092,362 | 2,994,324 | ||||||||||||||||||||
Total liabilities and capital | $ | 55,360,287 | $ | 141,934 | 1.03 | % | $ | 53,771,294 | $ | 304,059 | 2.27 | % | ||||||||||
Net interest income | $ | 42,347 | $ | 57,733 | ||||||||||||||||||
Net interest spread | 0.26 | % | 0.29 | % | ||||||||||||||||||
Net interest margin | 0.31 | % | 0.43 | % | ||||||||||||||||||
For the Six Months Ended June 30, | ||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||
Average Balance | Interest Income / Expense | Average Yield(1) | Average Balance | Interest Income / Expense | Average Yield(1) |
52
Table 3 - Net Interest Spread and Margin (dollars in thousands) | ||||||||||||||||||||||
Assets | ||||||||||||||||||||||
Advances | $ | 33,662,386 | $ | 274,479 | 1.64 | % | $ | 34,971,075 | $ | 502,483 | 2.90 | % | ||||||||||
Interest-bearing deposits | 1,396,329 | 5,354 | 0.77 | 743,680 | 9,068 | 2.46 | ||||||||||||||||
Securities purchased under agreements to resell | 2,901,385 | 14,574 | 1.01 | 6,248,039 | 76,071 | 2.46 | ||||||||||||||||
Federal funds sold | 4,030,874 | 17,141 | 0.86 | 3,115,431 | 37,555 | 2.43 | ||||||||||||||||
Investment securities(2) | 11,393,989 | 85,023 | 1.50 | 7,025,001 | 83,084 | 2.38 | ||||||||||||||||
Mortgage loans | 4,512,644 | 70,179 | 3.13 | 4,370,564 | 74,956 | 3.46 | ||||||||||||||||
Other earning assets | 8,242 | 47 | 1.15 | 1,243 | 15 | 2.43 | ||||||||||||||||
Total interest-earning assets | 57,905,849 | 466,797 | 1.62 | % | 56,475,033 | 783,232 | 2.80 | % | ||||||||||||||
Other non-interest-earning assets | 300,577 | 275,978 | ||||||||||||||||||||
Fair-value adjustments on investment securities | 340,320 | (33,622 | ) | |||||||||||||||||||
Total assets | $ | 58,546,746 | $ | 466,797 | 1.60 | % | $ | 56,717,389 | $ | 783,232 | 2.78 | % | ||||||||||
Liabilities and capital | ||||||||||||||||||||||
Consolidated obligations | ||||||||||||||||||||||
Discount notes | $ | 29,216,769 | $ | 175,064 | 1.20 | % | $ | 27,175,464 | $ | 329,192 | 2.44 | % | ||||||||||
Bonds | 25,015,034 | 217,803 | 1.75 | 25,418,209 | 305,532 | 2.42 | ||||||||||||||||
Deposits | 813,412 | 865 | 0.21 | 496,490 | 3,614 | 1.47 | ||||||||||||||||
Mandatorily redeemable capital stock | 6,059 | 138 | 4.58 | 18,620 | 566 | 6.13 | ||||||||||||||||
Other borrowings | 27,339 | 229 | 1.68 | 2,200 | 27 | 2.47 | ||||||||||||||||
Total interest-bearing liabilities | 55,078,613 | 394,099 | 1.44 | % | 53,110,983 | 638,931 | 2.43 | % | ||||||||||||||
Other non-interest-bearing liabilities | 296,171 | 519,461 | ||||||||||||||||||||
Total capital | 3,171,962 | 3,086,945 | ||||||||||||||||||||
Total liabilities and capital | $ | 58,546,746 | $ | 394,099 | 1.35 | % | $ | 56,717,389 | $ | 638,931 | 2.27 | % | ||||||||||
Net interest income | $ | 72,698 | $ | 144,301 | ||||||||||||||||||
Net interest spread | 0.18 | % | 0.37 | % | ||||||||||||||||||
Net interest margin | 0.25 | % | 0.52 | % |
_________________________
(1) | Yields are annualized. |
(2) | The average balances are reflected at amortized cost. |
Rate and Volume Analysis
Changes in both average balances (volume) and interest rates influence changes in net interest income and net interest margin. Table 4 summarizes changes in interest income and interest expense for the three and six months ended June 30, 2020 and 2019. Changes in interest income and interest expense that are not identifiable as either volume-related or rate-related but are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.
53
Table 4 - Rate and Volume Analysis (dollars in thousands) | ||||||||||||||||||||||||
For the Three Months Ended June 30, 2020 vs. 2019 | For the Six Months Ended June 30, 2020 vs. 2019 | |||||||||||||||||||||||
Increase (Decrease) due to | Increase (Decrease) due to | |||||||||||||||||||||||
Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
Interest income | ||||||||||||||||||||||||
Advances | $ | (5,655 | ) | $ | (117,038 | ) | $ | (122,693 | ) | $ | (18,157 | ) | $ | (209,847 | ) | $ | (228,004 | ) | ||||||
Interest-bearing deposits | 1,884 | (6,897 | ) | (5,013 | ) | 4,895 | (8,609 | ) | (3,714 | ) | ||||||||||||||
Securities purchased under agreements to resell | (15,450 | ) | (20,547 | ) | (35,997 | ) | (29,330 | ) | (32,167 | ) | (61,497 | ) | ||||||||||||
Federal funds sold | 3,627 | (16,464 | ) | (12,837 | ) | 8,805 | (29,219 | ) | (20,414 | ) | ||||||||||||||
Investment securities | 22,381 | (19,088 | ) | 3,293 | 39,704 | (37,765 | ) | 1,939 | ||||||||||||||||
Mortgage loans | 885 | (5,139 | ) | (4,254 | ) | 2,378 | (7,155 | ) | (4,777 | ) | ||||||||||||||
Other earning assets | (5 | ) | (5 | ) | (10 | ) | 44 | (12 | ) | 32 | ||||||||||||||
Total interest income | 7,667 | (185,178 | ) | (177,511 | ) | 8,339 | (324,774 | ) | (316,435 | ) | ||||||||||||||
Interest expense | ||||||||||||||||||||||||
Consolidated obligations | ||||||||||||||||||||||||
Discount notes | 2,169 | (105,840 | ) | (103,671 | ) | 23,111 | (177,239 | ) | (154,128 | ) | ||||||||||||||
Bonds | 4,636 | (61,095 | ) | (56,459 | ) | (4,774 | ) | (82,955 | ) | (87,729 | ) | |||||||||||||
Deposits | 802 | (2,584 | ) | (1,782 | ) | 1,464 | (4,213 | ) | (2,749 | ) | ||||||||||||||
Mandatorily redeemable capital stock | (131 | ) | (64 | ) | (195 | ) | (312 | ) | (116 | ) | (428 | ) | ||||||||||||
Other borrowings | (34 | ) | 16 | (18 | ) | 213 | (11 | ) | 202 | |||||||||||||||
Total interest expense | 7,442 | (169,567 | ) | (162,125 | ) | 19,702 | (264,534 | ) | (244,832 | ) | ||||||||||||||
Change in net interest income | $ | 225 | $ | (15,611 | ) | $ | (15,386 | ) | $ | (11,363 | ) | $ | (60,240 | ) | $ | (71,603 | ) |
Average Balance of Advances Outstanding
The average balance of total advances decreased $1.3 billion, or 3.7 percent, for the six months ended June 30, 2020, compared with the same period in 2019. We cannot predict whether this trend will continue.
For the six months ended June 30, 2020 and 2019, net prepayment fees on advances were $5.0 million and $30.7 million, respectively. Prepayment-fee income is unpredictable and inconsistent from period to period, occurring only when advances and investments are prepaid prior to the scheduled maturity or repricing dates, and generally when prevailing reinvestment yields are lower than those of the prepaid advances. For additional information see Part II — Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 2 — Summary of Significant Accounting Policies — Advances in the 2019 Annual Report.
Average Balance of Investments
Average short-term money-market investments, consisting of interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold, decreased $1.8 billion, or 17.5 percent, for the six months ended June 30, 2020, compared with the same period in 2019. The yield earned on short-term money-market investments is highly correlated to short-term market interest rates. As a result of the sharp decrease in the FOMC’s target range for the federal funds rate, average yields on overnight federal funds sold decreased from 2.43 percent during the six months ended June 30, 2019 to 0.86 percent during the six months ended June 30, 2020, while average yields on securities purchased under agreements to resell decreased from 2.46 percent for the six months ended June 30, 2019 to 1.0 percent for the six months ended June 30, 2020. These investments are used for liquidity management.
Average investment-securities balances increased $4.4 billion, or 62.2 percent for the six months ended June 30, 2020, compared with the same period in 2019, an increase consisting primarily of a $3.7 billion increase in U.S. Treasury obligations and a $674.7 million increase in MBS.
Average Balance of COs
54
Average CO balances increased $1.6 billion, or 3.1 percent, for the six months ended June 30, 2020, compared with the same period in 2019, principally due to the increase in our average investment securities balances. This overall increase consisted of a $2.0 billion increase in CO discount notes offset by a decrease of $403.2 million in CO bonds.
The average balance of CO discount notes represented approximately 53.9 percent of total average COs during the six months ended June 30, 2020, compared with 51.7 percent of total average COs during the six months ended June 30, 2019. The average balance of CO bonds represented 46.1 percent and 48.3 percent of total average COs outstanding during the six months ended June 30, 2020 and 2019, respectively.
Impact of Derivatives and Hedging Activities
Net interest income includes interest accrued on interest-rate-exchange agreements that are documented and qualify as hedges of advances, investments, and debt instruments. The fair value gains and losses of derivatives and hedged items designated in fair-value hedge relationships are also recognized as interest income or interest expense. We enter into derivatives to manage the interest-rate-risk exposures inherent in otherwise unhedged assets and liabilities and to achieve our risk-management objectives. We generally use derivative instruments that qualify for hedge accounting as interest-rate risk-management tools. These derivatives serve to stabilize net interest income and net interest margin when interest rates fluctuate. Accordingly, the impact of derivatives on net interest income and net interest margin should be viewed in the overall context of our risk-management strategy.
Table 5 - Effect of Derivative and Hedging Activities (dollars in thousands) | ||||||||||||||||||||||||
For the Three Months Ended June 30, 2020 | ||||||||||||||||||||||||
Net Effect of Derivatives and Hedging Activities | Advances | Investments | Mortgage Loans | CO Bonds | Other | Total | ||||||||||||||||||
Net interest income | ||||||||||||||||||||||||
Amortization / accretion of hedging activities (1) | $ | (493 | ) | $ | — | $ | (504 | ) | $ | (947 | ) | $ | — | $ | (1,944 | ) | ||||||||
Gains (losses) on designated fair-value hedges | 1,170 | 353 | — | (877 | ) | — | 646 | |||||||||||||||||
Net interest settlements on derivatives(2) | (14,683 | ) | (20,459 | ) | — | 7,040 | — | (28,102 | ) | |||||||||||||||
Total net interest income | (14,006 | ) | (20,106 | ) | (504 | ) | 5,216 | — | (29,400 | ) | ||||||||||||||
Net gains (losses) on derivatives and hedging activities | ||||||||||||||||||||||||
Gains (losses) on derivatives not receiving hedge accounting | 140 | (1,943 | ) | — | — | — | (1,803 | ) | ||||||||||||||||
Mortgage delivery commitments | — | — | 632 | — | — | 632 | ||||||||||||||||||
Price alignment amount(3) | — | — | — | — | 10 | 10 | ||||||||||||||||||
Net gains (losses) on derivatives and hedging activities | 140 | (1,943 | ) | 632 | — | 10 | (1,161 | ) | ||||||||||||||||
Subtotal | (13,866 | ) | (22,049 | ) | 128 | 5,216 | 10 | (30,561 | ) | |||||||||||||||
Net losses on trading securities(4) | — | (18,861 | ) | — | — | — | (18,861 | ) | ||||||||||||||||
Total net effect of derivatives and hedging activities | $ | (13,866 | ) | $ | (40,910 | ) | $ | 128 | $ | 5,216 | $ | 10 | $ | (49,422 | ) |
55
For the Three Months Ended June 30, 2019 | ||||||||||||||||||||||||
Net Effect of Derivatives and Hedging Activities | Advances | Investments | Mortgage Loans | CO Bonds | Other | Total | ||||||||||||||||||
Net interest income | ||||||||||||||||||||||||
Amortization / accretion of hedging activities (1) | $ | (605 | ) | $ | — | $ | (168 | ) | $ | (548 | ) | $ | — | $ | (1,321 | ) | ||||||||
(Losses) gains on designated fair-value hedges | (261 | ) | 1,309 | — | (346 | ) | — | 702 | ||||||||||||||||
Net interest settlements on derivatives(2) | 12,501 | (5,759 | ) | — | (6,288 | ) | — | 454 | ||||||||||||||||
Total net interest income | 11,635 | (4,450 | ) | (168 | ) | (7,182 | ) | — | (165 | ) | ||||||||||||||
Net gains (losses) on derivatives and hedging activities | ||||||||||||||||||||||||
Losses on derivatives not receiving hedge accounting | (28 | ) | (1,399 | ) | — | — | — | (1,427 | ) | |||||||||||||||
Mortgage delivery commitments | — | — | 462 | — | — | 462 | ||||||||||||||||||
Price alignment amount(3) | — | — | — | — | 3 | 3 | ||||||||||||||||||
Net (losses) gains on derivatives and hedging activities | (28 | ) | (1,399 | ) | 462 | — | 3 | (962 | ) | |||||||||||||||
Subtotal | 11,607 | (5,849 | ) | 294 | (7,182 | ) | 3 | (1,127 | ) | |||||||||||||||
Net losses on trading securities(4) | — | (365 | ) | — | — | — | (365 | ) | ||||||||||||||||
Total net effect of derivatives and hedging activities | $ | 11,607 | $ | (6,214 | ) | $ | 294 | $ | (7,182 | ) | $ | 3 | $ | (1,492 | ) |
For the Six Months Ended June 30, 2020 | ||||||||||||||||||||||||
Net Effect of Derivatives and Hedging Activities | Advances | Investments | Mortgage Loans | CO Bonds | Other | Total | ||||||||||||||||||
Net interest income | ||||||||||||||||||||||||
Amortization / accretion of hedging activities (1) | $ | (830 | ) | $ | — | $ | (780 | ) | $ | (1,835 | ) | $ | — | $ | (3,445 | ) | ||||||||
Losses on designated fair-value hedges | (1,317 | ) | (8,588 | ) | — | (1,377 | ) | — | (11,282 | ) | ||||||||||||||
Net interest settlements on derivatives(2) | (17,308 | ) | (29,557 | ) | — | 9,996 | — | (36,869 | ) | |||||||||||||||
Total net interest income | (19,455 | ) | (38,145 | ) | (780 | ) | 6,784 | — | (51,596 | ) | ||||||||||||||
Net gains (losses) on derivatives and hedging activities | ||||||||||||||||||||||||
Losses on derivatives not receiving hedge accounting | (64 | ) | (54,308 | ) | — | — | — | (54,372 | ) | |||||||||||||||
Mortgage delivery commitments | — | — | 570 | — | — | 570 | ||||||||||||||||||
Price alignment amount(3) | — | — | — | — | 83 | 83 | ||||||||||||||||||
Net (losses) gains on derivatives and hedging activities | (64 | ) | (54,308 | ) | 570 | — | 83 | (53,719 | ) | |||||||||||||||
Subtotal | (19,519 | ) | (92,453 | ) | (210 | ) | 6,784 | 83 | (105,315 | ) | ||||||||||||||
Net gains on trading securities(4) | — | 27,612 | — | — | — | 27,612 | ||||||||||||||||||
Total net effect of derivatives and hedging activities | $ | (19,519 | ) | $ | (64,841 | ) | $ | (210 | ) | $ | 6,784 | $ | 83 | $ | (77,703 | ) |
56
For the Six Months Ended June 30, 2019 | ||||||||||||||||||||||||
Net Effect of Derivatives and Hedging Activities | Advances | Investments | Mortgage Loans | CO Bonds | Other | Total | ||||||||||||||||||
Net interest income | ||||||||||||||||||||||||
Amortization / accretion of hedging activities (1) | $ | (1,050 | ) | $ | — | $ | (264 | ) | $ | (623 | ) | $ | — | $ | (1,937 | ) | ||||||||
Gains (losses) on designated fair-value hedges | 800 | (2,765 | ) | — | (1,338 | ) | — | (3,303 | ) | |||||||||||||||
Net interest settlements on derivatives(2) | 28,753 | (11,550 | ) | — | (15,368 | ) | — | 1,835 | ||||||||||||||||
Total net interest income | 28,503 | (14,315 | ) | (264 | ) | (17,329 | ) | — | (3,405 | ) | ||||||||||||||
Net gains (losses) on derivatives and hedging activities | ||||||||||||||||||||||||
Losses on derivatives not receiving hedge accounting | (58 | ) | (1,429 | ) | — | — | — | (1,487 | ) | |||||||||||||||
Mortgage delivery commitments | — | — | 1,070 | — | — | 1,070 | ||||||||||||||||||
Price alignment amount(3) | — | — | — | — | 3 | 3 | ||||||||||||||||||
Net (losses) gains on derivatives and hedging activities | (58 | ) | (1,429 | ) | 1,070 | — | 3 | (414 | ) | |||||||||||||||
Subtotal | 28,445 | (15,744 | ) | 806 | (17,329 | ) | 3 | (3,819 | ) | |||||||||||||||
Net losses on trading securities(4) | — | (752 | ) | — | — | — | (752 | ) | ||||||||||||||||
Total net effect of derivatives and hedging activities | $ | 28,445 | $ | (16,496 | ) | $ | 806 | $ | (17,329 | ) | $ | 3 | $ | (4,571 | ) |
_____________________
(1) | Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss. |
(2) | Represents interest income/expense on derivatives included in net interest income. |
(3) | Represents the amount for derivatives for which variation margin is characterized as a daily settlement amount. |
(4) | Includes only those gains (losses) on trading securities that have an assigned economic derivative. |
FINANCIAL CONDITION
Advances
At June 30, 2020, the advances portfolio totaled $24.8 billion, a decrease of $9.8 billion compared with $34.6 billion at December 31, 2019. Advances increased during the month of March, as members sought on-balance-sheet liquidity as a result of market volatility and projected additional loan demand. During the second quarter, however, demand for advances declined, as member deposit levels increased significantly and the Federal Reserve encouraged depository institutions to borrow through the discount window.
57
Table 6 - Advances Outstanding by Product Type (dollars in thousands) | |||||||||||||
June 30, 2020 | December 31, 2019 | ||||||||||||
Par Value | Percent of Total | Par Value | Percent of Total | ||||||||||
Fixed-rate advances | |||||||||||||
Long-term | $ | 11,421,388 | 46.3 | % | $ | 12,428,285 | 35.9 | % | |||||
Short-term | 8,410,632 | 34.1 | 12,126,389 | 35.1 | |||||||||
Putable | 1,910,425 | 7.8 | 1,349,500 | 3.9 | |||||||||
Amortizing | 812,590 | 3.3 | 783,400 | 2.3 | |||||||||
Overnight | 495,879 | 2.0 | 1,409,017 | 4.1 | |||||||||
All other fixed-rate advances | 10,000 | — | 10,000 | — | |||||||||
23,060,914 | 93.5 | 28,106,591 | 81.3 | ||||||||||
Variable-rate advances | |||||||||||||
Simple variable (1) | 1,420,395 | 5.8 | 6,379,495 | 18.4 | |||||||||
All other variable-rate indexed advances | 172,700 | 0.7 | 63,801 | 0.2 | |||||||||
Putable | 10,000 | — | 34,000 | 0.1 | |||||||||
1,603,095 | 6.5 | 6,477,296 | 18.7 | ||||||||||
Total par value | $ | 24,664,009 | 100.0 | % | $ | 34,583,887 | 100.0 | % |
_____________________
(1) | Includes floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees. |
See Item 1 — Notes to the Financial Statements — Note 5 — Advances for disclosures relating to redemption terms of the advances portfolio.
Advances Credit Risk
We endeavor to minimize credit risk on advances by monitoring the financial condition of our borrowers and by holding sufficient collateral to protect the Bank from credit losses. All pledged collateral is subject to collateral discounts, or haircuts, to the market value or unpaid principal balance, as applicable, based on our opinion of the risk that such collateral presents. We are prohibited by Section 10(a) of the FHLBank Act from making advances without sufficient collateral. We have never experienced a credit loss on an advance.
We assign each non-insurance company borrower to one of the following three credit status categories based on our assessment of the borrower's overall financial condition and other factors:
• | Category-1: members that are generally in satisfactory financial condition; |
• | Category-2: members that show financial weakness or weakening financial trends in key financial indices and/or regulatory findings; and |
• | Category-3: members with financial weaknesses that present an elevated level of concern. |
We monitor the financial condition of our insurance company members quarterly. We lend to them based on our assessment of their financial condition and their pledge of sufficient amounts of eligible collateral.
58
Table 7 - Advances Outstanding by Borrower Credit Status Category (dollars in thousands) | |||||||||||||
June 30, 2020 | |||||||||||||
Number of Borrowers | Par Value of Advances Outstanding | Discounted Collateral | Ratio of Discounted Collateral to Advances | ||||||||||
Category-1 | 234 | $ | 19,700,551 | $ | 98,005,105 | 497.5 | % | ||||||
Category-2 | 13 | 345,242 | 828,649 | 240.0 | |||||||||
Category-3 | 16 | 451,885 | 625,847 | 138.5 | |||||||||
Insurance companies | 26 | 4,166,331 | 5,777,887 | 138.7 | |||||||||
Total | 289 | $ | 24,664,009 | $ | 105,237,488 | 426.7 | % |
The method by which a borrower pledges collateral is dependent upon the type of borrower (depository vs. non-depository), the category to which the borrower is assigned, and on the type of collateral that the borrower pledges. Moreover, borrowers in Category-1 are eligible to specifically list and identify single-family owner-occupied residential mortgage loans at a lower discount than is allowed if the collateral is not specifically listed and identified.
The Bank may adjust the credit status category of a member from time to time based on the financial reviews and other circumstances of the members. The Bank requires Category-3 members (as well as all non-depository members) to deliver collateral to the Bank or its custodian, and all securities collateral is delivered, regardless of category.
We have implemented certain relief measures to help members serve customers affected by the COVID-19 pandemic, such as accommodating forbearance and modifications to pledged loan collateral and allowing electronic signatures on related documentation in certain circumstances, which could lead to credit losses if we are unable to liquidate the collateral for the discounted value assigned to it in the event of a payment default or failure of a member.
We have not recorded any allowance for credit losses on advances at June 30, 2020, and December 31, 2019, for the reasons discussed in Item 1 — Notes to the Financial Statements — Note 5 — Advances.
Table 8 - Top Five Advance-Borrowing Institutions (dollars in thousands) | ||||||||||
June 30, 2020 | ||||||||||
Name | Par Value of Advances | Percent of Total Par Value of Advances | Weighted-Average Rate (1) | |||||||
People's United Bank, N.A. | $ | 1,290,120 | 5.2 | % | 0.47 | % | ||||
Massachusetts Mutual Life Insurance Co. | 1,100,000 | 4.5 | 2.51 | |||||||
Washington Trust Company | 1,005,051 | 4.1 | 1.38 | |||||||
Brookline Bank | 925,861 | 3.7 | 1.20 | |||||||
Voya Retirement Insurance and Annuity Co. | 835,000 | 3.4 | 0.59 | |||||||
Total of top five advance-borrowing institutions | $ | 5,156,032 | 20.9 | % |
59
December 31, 2019 | ||||||||||
Name | Par Value of Advances | Percent of Total Par Value of Advances | Weighted-Average Rate (1) | |||||||
Citizens Bank, N.A. | $ | 5,005,773 | 14.5 | % | 2.01 | % | ||||
People's United Bank, N.A. | 3,111,088 | 9.0 | 1.79 | |||||||
Webster Bank, N.A. | 1,948,476 | 5.6 | 1.87 | |||||||
Washington Trust Company | 1,141,464 | 3.3 | 2.17 | |||||||
Massachusetts Mutual Life Insurance Company | 1,100,000 | 3.2 | 2.51 | |||||||
Total of top five advance-borrowing institutions | $ | 12,306,801 | 35.6 | % |
_______________________
(1) | Weighted-average rates are based on the contract rate of each advance without taking into consideration the effects of interest-rate-exchange agreements that we may use as hedging instruments. |
Investments
At June 30, 2020, investment securities and short-term money-market instruments totaled $16.3 billion, an increase from $16.1 billion at December 31, 2019.
Short-term money-market investments decreased $1.3 billion to $4.3 billion at June 30, 2020, compared with December 31, 2019. The decrease was attributable to a $2.3 billion decrease in securities purchased under agreements to resell and a $249.7 million decrease in interest bearing deposits offset by an increase of $1.2 billion in federal funds sold.
Investment securities increased $1.5 billion to $12.0 billion at June 30, 2020, compared with December 31, 2019. This was attributable to an increase of $2.2 billion in U.S. Treasury obligations offset by a $752.9 million decrease in MBS.
Investments Credit Risk
We are subject to credit risk on unsecured investments consisting primarily of short-term (meaning one year and under to maturity and currently only consisting of overnight risk) money-market instruments issued by high-credit-quality financial institutions and long-term (original maturity in excess of one year) debentures issued or guaranteed by U.S. agencies, U.S government-owned corporations, GSEs, and supranational institutions. Currently we place short-term funds with large, high-quality financial institutions with NRSRO long-term credit ratings no lower than single-A (or equivalent) on an unsecured basis. All of these placements currently either expire within one day or are payable upon demand.
Prior to January 1, 2020, the applicable regulation required that all securities purchased must be rated in at least the third highest rating category from a NRSRO as of the date of purchase. Effective January 1, 2020, this requirement was replaced by an internal rating requirement. Such securities purchases starting on January 1, 2020 must be internally rated in at least the third highest internal rating category on a rating scale of FHFA1 through FHFA7, reflecting progressively lower credit quality. The internal rating categories of FHFA1 through FHFA4 are considered to be investment quality. We also purchase securities issued by state or local HFAs that are rated in at least the second-highest rating category from an NRSRO as of the date of purchase. Effective January 1, 2020, this NRSRO rating requirement was also changed to an internal rating requirement in at least the second highest internal rating category.
In addition to these unsecured investments, we also make secured investments in the form of securities purchased under agreements to resell secured by U.S. Treasury and agency obligations, whose terms to maturity are up to 35 days and in MBS and HFA securities that are directly or indirectly supported by underlying mortgage loans.
We actively monitor our investments' credit exposures and the credit quality of our counterparties, including assessments of each counterparty's financial performance, capital adequacy, sovereign support, and collateral quality and performance, as well as related market signals such as securities prices and credit default swap spreads. We may reduce or suspend credit limits and/or seek to reduce existing exposures, as appropriate, as a result of these monitoring activities.
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Table 9 - Credit Ratings of Investments at Carrying Value (dollars in thousands) | ||||||||||||||||||||||||
June 30, 2020 | ||||||||||||||||||||||||
Long-Term Credit Rating | ||||||||||||||||||||||||
Investment Category | Triple-A | Double-A | Single-A | Triple-B | Below Triple-B | Unrated | ||||||||||||||||||
Money-market instruments: (1) | ||||||||||||||||||||||||
Interest-bearing deposits | $ | — | $ | 146 | $ | 1,004,064 | $ | — | $ | — | $ | — | ||||||||||||
Securities purchased under agreements to resell | — | — | 1,250,000 | — | — | — | ||||||||||||||||||
Federal funds sold | — | 465,000 | 1,550,000 | — | — | — | ||||||||||||||||||
Total money-market instruments | — | 465,146 | 3,804,064 | — | — | — | ||||||||||||||||||
Investment securities:(2) | ||||||||||||||||||||||||
Non-MBS: | ||||||||||||||||||||||||
U.S. Treasury obligations | — | 4,436,070 | — | — | — | — | ||||||||||||||||||
Corporate bonds | — | — | — | — | — | 5,392 | ||||||||||||||||||
U.S. government-owned corporations | — | 323,431 | — | — | — | — | ||||||||||||||||||
GSE | — | 136,061 | — | — | — | — | ||||||||||||||||||
Supranational institutions | 436,820 | — | — | — | — | — | ||||||||||||||||||
HFA securities | 45,759 | 52,589 | 4,505 | 34,300 | — | — | ||||||||||||||||||
Total non-MBS | 482,579 | 4,948,151 | 4,505 | 34,300 | — | 5,392 | ||||||||||||||||||
MBS: | ||||||||||||||||||||||||
U.S. government guaranteed - single-family | — | 58,203 | — | — | — | — | ||||||||||||||||||
U.S. government guaranteed - multifamily | — | 167,492 | — | — | — | — | ||||||||||||||||||
GSE – single-family | — | 2,324,727 | — | — | — | — | ||||||||||||||||||
GSE – multifamily | — | 3,794,402 | — | — | — | — | ||||||||||||||||||
Private-label | — | — | 4,556 | — | 174,529 | 18,542 | ||||||||||||||||||
Total MBS | — | 6,344,824 | 4,556 | — | 174,529 | 18,542 | ||||||||||||||||||
Total investment securities | 482,579 | 11,292,975 | 9,061 | 34,300 | 174,529 | 23,934 | ||||||||||||||||||
Total investments | $ | 482,579 | $ | 11,758,121 | $ | 3,813,125 | $ | 34,300 | $ | 174,529 | $ | 23,934 |
_______________________
(1) | The counterparty NRSRO rating is used for money-market instruments. Counterparty ratings are obtained from Moody's, Fitch, Inc. (Fitch), and S&P and are each as of June 30, 2020. If there is a split rating, the lowest rating is used. In certain instances where a counterparty is unrated, the Bank may assign a deemed rating to the counterparty and that deemed rating is used. |
(2) | The issue rating is used for investment securities. Issue ratings are obtained from Moody’s, Fitch, and S&P. If there is a split rating, the lowest rating is used. |
FHFA regulations include limits on the amount of unsecured credit we may extend to a counterparty or to a group of affiliated counterparties. Prior to January 1, 2020, this limit was based on a percentage of regulatory capital and the counterparty's long-term unsecured NRSRO credit rating. Effective January 1, 2020, the applicable FHFA regulation replaced this reference to NRSRO ratings with a reference to internal ratings determined by each FHLBank. Under these regulations, the level of
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regulatory capital is determined as the lesser of our total regulatory capital or the regulatory capital of the counterparty. The applicable regulatory capital is then multiplied by a specified percentage for each counterparty, which product is the maximum amount of unsecured credit exposure we may extend to that counterparty. The percentage that we may offer for extensions of unsecured credit other than overnight sales of federal funds ranges from one to 15 percent based on the counterparty's internal credit rating.
Table 10 - Unsecured Credit Related to Money-Market Instruments and Debentures by Carrying Value (dollars in thousands) | ||||||||
Carrying Value | ||||||||
June 30, 2020 | December 31, 2019 | |||||||
Federal funds sold | $ | 2,015,000 | $ | 860,000 | ||||
Interest bearing deposits | 1,004,210 | 1,253,873 | ||||||
Supranational institutions | 436,820 | 416,429 | ||||||
U.S. government-owned corporations | 323,431 | 296,761 | ||||||
GSEs | 136,061 | 123,786 |
Mortgage Loans
We invest in mortgages through the MPF program. The MPF program is further described under — Mortgage Loans Credit Risk and in Part I — Item 1 — Business — Business Lines — Mortgage Loan Finance in the 2019 Annual Report.
As of June 30, 2020, our mortgage loan investment portfolio totaled $4.4 billion, a decrease of $90.2 million from December 31, 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 quarter ended June 30, 2020 has been elevated and higher than our purchases of mortgage loans, and, accordingly, we expect mortgage loan portfolio balances to decline over the remainder of the year.
Mortgage Loans Credit Risk
We are subject to credit risk from the mortgage loans in which we invest due to our exposure to the credit risk of the underlying borrowers and the credit risk of the participating financial institutions when the participating financial institutions retain credit-enhancement and/or servicing obligations. For additional information on the credit risks arising from our participation in the MPF program, see Part II — Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Mortgage Loans — Mortgage Loans Credit Risk in the 2019 Annual Report. For information on the credit performance of our mortgage loan portfolio as of June 30, 2020, see Item I — Financial Statements — Note 6 — Mortgage Loans Held for Portfolio in this report.
Although our mortgage loan portfolio includes loans throughout the U.S., concentrations of 5 percent or greater of the outstanding principal balance of our conventional mortgage loan portfolio are shown in Table 11.
Table 11 - Mortgage Loans Concentrations by State | |||||
Percentage of Total Outstanding Principal Balance of Conventional Mortgage Loans | |||||
June 30, 2020 | December 31, 2019 | ||||
Massachusetts | 62 | % | 60 | % | |
Maine | 10 | 10 | |||
Connecticut | 9 | 9 | |||
All others | 19 | 21 | |||
Total | 100 | % | 100 | % |
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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 12 - Delinquent Mortgage Loans (dollars in thousands) | |||||||
June 30, 2020 | December 31, 2019 | ||||||
Total par value of government loans past due 90 days or more and still accruing interest | $ | 6,964 | $ | 5,381 | |||
Nonaccrual loans, par value | 15,735 | 11,414 | |||||
Troubled debt restructurings (not included above) | 4,581 | 5,887 |
Mortgage Insurance Companies. We are exposed to credit risk from primary mortgage insurance coverage (PMI) on individual loans. As of June 30, 2020, we were the beneficiary of PMI coverage of $136.8 million on $524.6 million of conventional mortgage loans. These amounts relate to loans originated with PMI and for which current loan-to-value ratios exceed 78 percent (determined by recalculating the original loan-to-value ratio using the current unpaid principal balance divided by the appraised home value at the time of 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
At June 30, 2020, and December 31, 2019, deposits totaled $1.2 billion and $674.3 million, respectively. As of December 31, 2019 we had $800 thousand of term deposits greater than $100,000 with a maturity of three months or less and a weighted average rate of 1.82 percent. There were no term deposits at June 30, 2020.
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 $204.5 million and $159.7 million as of June 30, 2020, and December 31, 2019, respectively. Derivative liabilities' net fair value, net of cash collateral and accrued interest, totaled $24.1 million and $10.3 million as of June 30, 2020, and December 31, 2019, respectively.
The following table presents a summary of the notional amounts and estimated fair values of our outstanding derivatives, excluding accrued interest, and related hedged item by product and type of accounting treatment as of June 30, 2020, and December 31, 2019. The notional amount represents the hypothetical principal basis used to determine periodic interest payments received and paid. However, the notional amount does not represent an actual amount exchanged or our overall exposure to credit and market risk.
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Table 13 - Hedged Item and Hedge-Accounting Treatment (dollars in thousands) | ||||||||||||||||||||
June 30, 2020 | December 31, 2019 | |||||||||||||||||||
Hedged Item | Derivative | Designation(2) | Notional Amount | Fair Value | Notional Amount | Fair Value | ||||||||||||||
Advances (1) | Swaps | Fair value | $ | 5,804,673 | $ | (37,076 | ) | $ | 5,065,193 | $ | (4,003 | ) | ||||||||
Swaps | Economic | 667,300 | (53,983 | ) | 677,300 | (30,080 | ) | |||||||||||||
Total associated with advances | 6,471,973 | (91,059 | ) | 5,742,493 | (34,083 | ) | ||||||||||||||
Available-for-sale securities | Swaps | Fair value | 3,735,362 | 36,843 | 3,735,362 | 17,946 | ||||||||||||||
Trading securities | Swaps | Economic | 4,350,000 | 12,406 | 2,225,000 | (885 | ) | |||||||||||||
COs | Swaps | Fair value | 2,060,845 | 558 | 3,327,550 | (7,053 | ) | |||||||||||||
Forward starting swaps | Cash Flow | 17,000 | 8 | 17,000 | 19 | |||||||||||||||
Total associated with COs | 2,077,845 | 566 | 3,344,550 | (7,034 | ) | |||||||||||||||
Total | 16,635,180 | (41,244 | ) | 15,047,405 | (24,056 | ) | ||||||||||||||
Mortgage delivery commitments | 20,626 | 107 | 49,911 | 227 | ||||||||||||||||
Total derivatives | $ | 16,655,806 | (41,137 | ) | $ | 15,097,316 | (23,829 | ) | ||||||||||||
Accrued interest | (47,790 | ) | (4,647 | ) | ||||||||||||||||
Cash collateral, including related accrued interest | 269,325 | 177,936 | ||||||||||||||||||
Net derivatives | $ | 180,398 | $ | 149,460 | ||||||||||||||||
Derivative asset | $ | 204,496 | $ | 159,731 | ||||||||||||||||
Derivative liability | (24,098 | ) | (10,271 | ) | ||||||||||||||||
Net derivatives | $ | 180,398 | $ | 149,460 |
_______________________
(1) | As of June 30, 2020 and 2019, embedded derivatives separated from the advance contract with notional amounts of $667.3 million and $677.3 million, respectively, and fair values of $53.8 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 either LIBOR or the OIS rate based on the federal funds effective rate. The hedge designation "cash flow" represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge the exposure to variability in expected future cash flows. The hedge designation “economic” represents derivative hedging specific or nonspecific assets, liabilities, or firm commitments that do not qualify or were not designated for fair-value or cash-flow hedge accounting but are acceptable hedging strategies under our risk-management policy. |
Tables 14 and 15 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 $7.9 billion, representing 47.2 percent of all derivatives outstanding as of June 30, 2020. Economic hedges and cash-flow hedges are not included within the two tables below.
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Table 14 - Fair-Value Hedge Relationships of Advances By Year of Contractual Maturity (dollars in thousands) | |||||||||||||||||||||||||||
June 30, 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 | $ | 1,955,763 | $ | (7,915 | ) | $ | 1,955,763 | $ | 8,054 | 1.52 | % | 0.39 | % | 1.14 | % | 0.77 | % | ||||||||||
Due after one year through two years | 1,360,965 | (28,652 | ) | 1,360,965 | 28,429 | 2.08 | 0.32 | 1.59 | 0.81 | ||||||||||||||||||
Due after two years through three years | 656,260 | (23,215 | ) | 656,260 | 23,042 | 1.98 | 0.36 | 1.54 | 0.80 | ||||||||||||||||||
Due after three years through four years | 337,650 | (20,635 | ) | 337,650 | 20,291 | 2.22 | 0.22 | 1.64 | 0.80 | ||||||||||||||||||
Due after four years through five years | 1,054,425 | (31,059 | ) | 1,054,425 | 30,537 | 1.40 | 0.08 | 0.67 | 0.81 | ||||||||||||||||||
Thereafter | 439,610 | (27,444 | ) | 439,610 | 26,721 | 1.97 | 0.26 | 1.21 | 1.02 | ||||||||||||||||||
Total | $ | 5,804,673 | $ | (138,920 | ) | $ | 5,804,673 | $ | 137,074 | 1.76 | % | 0.29 | % | 1.24 | % | 0.81 | % |
_______________________
(1) | Not included in the fair value is $101.8 million of variation margin paid for daily settled contracts. |
(2) | Included in the advances hedged amount are $1.3 billion 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, 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 June 30, 2020. |
Table 15 - Fair-Value Hedge Relationships of Consolidated Obligations By Year of Contractual Maturity (dollars in thousands) | |||||||||||||||||||||||||||
June 30, 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 | $ | 836,180 | $ | 4,872 | $ | 836,180 | $ | (4,679 | ) | 1.94 | % | 1.94 | % | 0.65 | % | 0.65 | % | ||||||||||
Due after one year through two years | 562,445 | 11,595 | 562,445 | (11,742 | ) | 1.99 | 1.96 | 0.66 | 0.69 | ||||||||||||||||||
Due after two years through three years | 237,220 | 8,073 | 237,220 | (7,966 | ) | 1.87 | 1.80 | 0.69 | 0.76 | ||||||||||||||||||
Due after three years through four years | 35,000 | 502 | 35,000 | (502 | ) | 1.85 | 1.85 | 0.21 | 0.21 | ||||||||||||||||||
Due after four years through five years | 190,000 | 2,231 | 190,000 | (2,226 | ) | 1.82 | 1.82 | 0.12 | 0.12 | ||||||||||||||||||
Thereafter | 200,000 | 25,919 | 200,000 | (26,881 | ) | 3.50 | 1.31 | 0.08 | 2.27 | ||||||||||||||||||
Total | $ | 2,060,845 | $ | 53,192 | $ | 2,060,845 | $ | (53,996 | ) | 2.08 | % | 1.85 | % | 0.54 | % | 0.77 | % |
_______________________
(1) | Not included in the fair value is $52.6 million of variation margin received for daily settled contracts. |
(2) | Included in the CO bonds hedged amount are $345.0 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 June 30, 2020. |
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
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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 18 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 16 - Credit Exposure to Derivatives Counterparties (dollars in thousands) | ||||||||||||||||||||
June 30, 2020 | ||||||||||||||||||||
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 | |||||||||||||||
Asset positions with credit exposure: | ||||||||||||||||||||
Uncleared derivatives | ||||||||||||||||||||
Single-A | $ | 164,000 | $ | 1,125 | $ | (968 | ) | $ | — | $ | 157 | |||||||||
Cleared derivatives | 14,034,655 | 5,211 | 198,898 | — | 204,109 | |||||||||||||||
Liability positions with credit exposure: | ||||||||||||||||||||
Uncleared derivatives | ||||||||||||||||||||
Single-A | 1,505,400 | (63,366 | ) | 40,573 | 24,041 | 1,248 | ||||||||||||||
Total derivative positions with nonmember counterparties to which we had credit exposure | 15,704,055 | (57,030 | ) | 238,503 | 24,041 | 205,514 | ||||||||||||||
Mortgage delivery commitments (2) | 20,626 | 107 | — | — | 107 | |||||||||||||||
Total | $ | 15,724,681 | $ | (56,923 | ) | $ | 238,503 | $ | 24,041 | $ | 205,621 | |||||||||
Derivative positions without credit exposure: (3) | ||||||||||||||||||||
Single-A | $ | 921,125 | ||||||||||||||||||
Triple-B | 10,000 | |||||||||||||||||||
Total derivative positions without credit exposure | $ | 931,125 |
_______________________
(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 counterpary 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. |
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(3) | Represents derivatives positions with counterparties for which we are in a net liability position and for which we have delivered collateral to the counterparty in an amount equal to or less than the net derivative liability, or derivative positions with counterparties for which we are in a net asset position and for which the counterparty has delivered collateral to us in an amount that exceeds our net derivative asset. |
For information on our approach to the credit risks arising from our use of derivatives, see Part II — Item 7 — Management’s Discussion and Analysis and Results of Operations — Financial Condition — Derivative Instruments — Derivative Instruments Credit Risk in the 2019 Annual Report.
Transition from LIBOR to Alternative Reference Rates
In July 2017, the United Kingdom's FCA, the regulator for LIBOR, announced that after 2021 it will no longer persuade or compel the major banks that sustain LIBOR to submit rates for the calculation of LIBOR. The Alternative Reference Rates Committee (ARRC), which was established in 2014 by the Federal Reserve Board of Governors and the Federal Reserve Bank of New York to help ensure a successful transition in the U.S. from LIBOR, recommended SOFR as the alternative reference rate to U.S. Dollar LIBOR. SOFR is based on a broad segment of the overnight U.S. Treasury repurchase market and is intended to be a measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. The Federal Reserve Bank of New York began publishing SOFR in the second quarter of 2018.
Many of our assets and liabilities are indexed to LIBOR, with exposure extending beyond December 31, 2021. We are currently evaluating and planning for the eventual replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement. As a result, we have developed a LIBOR transition plan, which addresses considerations such as LIBOR exposure, contract “fallback” language (which provides for contractual alternatives to the use of LIBOR when LIBOR cannot be determined based on the method provided in the agreement), operational preparedness, and balance sheet management, as well as contingencies for the potential unavailability of the index prior to December 31, 2021.
In assessing our current exposure to LIBOR, we have developed an inventory of financial instruments impacted and identified contracts that may require adding or adjusting the fallback language, 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 continue to monitor market-wide efforts to address fallbacks related to LIBOR-based derivatives and investment securities as well as fallback language for other financial instruments. We 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 participated in the FHLBank System’s first issuance of SOFR-indexed COs in November 2018, and we have continued to participate in SOFR-indexed CO issuances as our funding needs required. Market activity in SOFR-indexed financial instruments continues to increase. During the six months ended June 30, 2020, we issued $4.4 billion in SOFR-indexed COs. In October 2019, the Bank began to offer a SOFR-based advance. During the six months ended June 30, 2020, we issued $114.0 million 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 hedging strategy for certain financial instruments, rather than using LIBOR when entering into new derivative transactions. In addition, a SOFR-based derivative market has begun to emerge.
On September 27, 2019, the FHFA issued 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, 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 March 25, 2020, as effects of the COVID-19 pandemic were beginning to unfold, the FCA released a statement confirming that firms should not rely on LIBOR being published after the end of 2021 and that that date should remain the target date for replacement of LIBOR.
We have exposures to advances, investment securities, and CO bonds with interest rates indexed to LIBOR. Table 17 presents exposure to LIBOR-indexed advances, investment securities, and CO bonds at June 30, 2020.
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Table 17 - LIBOR-Indexed Variable Rate Financial Instruments at June 30, 2020 (dollars in thousands) | ||||||||
Due Prior to December 31, 2021 | Due After December 31, 2021 | |||||||
Advances, par amount by redemption term(1) | $ | 182,600 | $ | — | ||||
Investment securities, par amount by contractual maturity | ||||||||
Non-MBS | 3,090 | 78,595 | ||||||
MBS(2) | 8,420 | 1,690,942 | ||||||
Total investment securities | 11,510 | 1,769,537 | ||||||
Total financial instruments | $ | 194,110 | $ | 1,769,537 |
_______________________
(1) | For advances that have a conversion from a floating rate indexed to LIBOR to a fixed rate, the LIBOR exposure is considered to be due by the date which the financial instrument converts to a fixed rate. |
(2) | Contractual maturity will likely differ from the expected maturity because borrowers of the underlying loans or securities are subject to a call right or prepayment right, with or without call or prepayment fees. |
The following table presents our variable-rate advances, investment securities, and consolidated bonds by interest-rate index at June 30, 2020.
Table 18 - Variable-Rate Financial Instruments by Interest-Rate Index (dollars in thousands) | ||||||||||||||||
Par Value of Advances | Par Value of Non-MBS | Par Value of MBS | Par Value of CO Bonds | |||||||||||||
LIBOR | $ | 182,600 | $ | 81,685 | $ | 1,699,362 | $ | — | ||||||||
SOFR | 114,000 | — | — | 8,694,000 | ||||||||||||
FHLBank discount note auction rate | 1,270,395 | — | — | — | ||||||||||||
Constant Maturity Treasury | — | — | 78,547 | — | ||||||||||||
Other | 36,100 | — | 170 | — | ||||||||||||
Total | $ | 1,603,095 | $ | 81,685 | $ | 1,778,079 | $ | 8,694,000 |
The following table presents our derivatives with LIBOR exposure at June 30, 2020.
Table 19 - Notional Amount of Derivative with LIBOR Exposure by Termination Date (dollars in thousands) | ||||||||||||||||
Pay Leg | Receive Leg | |||||||||||||||
Cleared | Uncleared | Cleared | Uncleared | |||||||||||||
Terminates in 2020 | $ | 461,855 | $ | 35,000 | $ | 608,575 | $ | 26,000 | ||||||||
Terminates in 2021 | 186,770 | 240,000 | 898,203 | 157,600 | ||||||||||||
Terminates in 2022 and thereafter | 137,220 | 15,000 | 173,575 | 1,207,500 | ||||||||||||
Total notional amount | $ | 785,845 | $ | 290,000 | $ | 1,680,353 | $ | 1,391,100 |
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 of the 2019 Annual Report. Outstanding COs and the condition of the market for COs are discussed below under — Debt Financing —
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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, as well as cash and investment holdings that are primarily high-quality short- and intermediate-term financial instruments.
During the six months ended June 30, 2020, we maintained continual access to funding and adapted our debt issuance to meet the needs of our members. As we entered March 2020, markets were disrupted by uncertainty surrounding the COVID-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. We maintained liquidity through short-term investments in compliance with guidance from the FHFA. Maintaining liquidity on our balance sheet, however, can expose us to additional interest-rate risk, which could reduce net interest income when interest rates decline, as was the case during the six months ended June 30, 2020.
Access to short-term debt markets has been reliable because investors continue to view 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.
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, through our daily excess stock repurchases, upon the request of a member or as required under our capital plan.
Secondary sources of liquidity include payments collected on mortgage loans, proceeds from the issuance of capital stock, and deposits from members. In addition, under 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 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 six months ended June 30, 2020.
For information and discussion of our guarantees and other commitments we may have, see — Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations below, and for further information and discussion of the joint and several liability for FHLBank COs, see — Debt Financing — Consolidated Obligations below.
Internal Liquidity Sources / Liquidity Management
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.
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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.
Liquidity Management Action Trigger. We maintain a liquidity management action trigger pertaining to net cash flow: if projected net cash flow falls below zero on or before the 21st day following the measurement date, then management of the Bank is notified and determines whether any corrective action is necessary. We did not exceed this threshold at any time during the six months ended June 30, 2020.
Table 20 - Projected Net Cash Flow (dollars in thousands) | ||||
June 30, 2020 | ||||
21 Days | ||||
Uses of funds | ||||
Interest payable | $ | 26,765 | ||
Maturing liabilities | 7,638,445 | |||
Committed asset settlements | 76,500 | |||
Capital outflow | 104,765 | |||
MPF delivery commitments | 20,626 | |||
Gross uses of funds | 7,867,101 | |||
Sources of funds | ||||
Interest receivable | 62,643 | |||
Maturing or projected amortization of assets | 7,740,880 | |||
Committed liability settlements | 1,687,597 | |||
Cash and due from banks and interest bearing deposits | 1,251,522 | |||
Other | 7,185 | |||
Gross sources of funds | 10,749,827 | |||
Projected net cash flow | $ | 2,882,726 |
Base Case Liquidity Requirement. The Bank is subject to FHFA guidance on liquidity, Advisory Bulletin 2018-07 (Liquidity Guidance AB), which communicates the FHFA’s expectations with respect to the maintenance of sufficient liquidity to enable us to provide advances and letters of credit for members for a specified time without access to the capital markets or other unsecured funding sources.
The Liquidity Guidance AB provides guidance on the level of on-balance sheet liquid assets related to base case liquidity. As part of the base case liquidity measure, the guidance also includes a separate provision covering off-balance sheet commitments from standby letters of credit. In addition, the Liquidity Guidance AB provides guidance related to asset/liability maturity funding gap limits.
Under the Liquidity Guidance AB, FHLBanks are required to hold positive cash flow while rolling over maturing advances to all members and assuming no access to capital markets for a period of time between 10 and 30 calendar days, with a specific measurement period set forth in a supervisory letter. The Liquidity Guidance AB also sets forth the initial cash flow assumptions and formula to calculate base case liquidity. With respect to standby letters of credit, the guidance states that FHLBanks should maintain a liquidity reserve of between 1 percent and 20 percent of its outstanding standby letters of credit commitments, as specified in a supervisory letter.
We were in compliance with these additional liquidity requirements at all times during the six months ended June 30, 2020.
Balance Sheet Funding Gap Policy. We may use a portion of the short-term COs issued to fund assets with longer terms, including longer-term floating-rate assets. Funding longer-term floating-rate assets with shorter-term liabilities generally does
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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. In order to manage the Bank’s refinancing risk, we maintain a policy that limits the potential difference between the amount of financial assets and the amount of financial liabilities expected to mature within three-month and one-year time horizons inclusive of projected mortgage-related prepayment activity. We measure this difference, or gap, as a percentage of total assets under two different measurement horizons - three months and one year. In conformity with the provisions of the Liquidity Guidance AB, the Bank has instituted a limit and management action trigger framework around these metrics as follows:
Table 21 - Funding Gap Metric | ||||||||
Funding Gap Metric (1) | Limit | Management Action Trigger | Three-Month Average June 30, 2020 | Three-Month Average December 31, 2019 | ||||
3-month Funding Gap (2) | 15% | 13% | 1.6% | 10.8% | ||||
1-year Funding Gap | 30% | 25% | 9.9% | 12.2% |
(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. |
(2) | The reduction in the three-month average of the three-month funding gap between December 31, 2019 and June 30, 2020, is primarily due to the period over period reduction in floating-rate advances which have a contractual maturity beyond three months however are funded at three months or less to match the borrower’s option to prepay on the 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 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.
Debt Financing — Consolidated Obligations
At June 30, 2020, and December 31, 2019, outstanding COs for which we are primarily liable, including both CO bonds and CO discount notes, totaled $41.9 billion and $51.6 billion, respectively. CO bonds outstanding for which we are primarily liable at June 30, 2020, and December 31, 2019, include issued callable bonds totaling $2.2 billion and $2.9 billion, respectively.
CO discount notes comprised 41.3 percent and 53.7 percent of the outstanding COs for which we are primarily liable at June 30, 2020, and December 31, 2019, respectively, but accounted for 89.3 percent and 93.5 percent of the proceeds from the issuance of such COs during the six months ended June 30, 2020 and 2019, respectively.
Overall, we continued to experience demand for COs among investors. We continued to issue SOFR-indexed COs as our funding needs required. We have been able to issue debt in the amounts and structures required to meet our funding and risk-management needs. For most of the period covered by this report, COs were issued at yields that were generally at or below equivalent-maturity U.S. dollar LIBOR interest rate swap yields for debt maturing in less than two years.
An increase in the Federal Reserve’s daily repurchase agreement offerings, announced purchases of U.S. Treasury securities and U.S. Agency mortgage-backed securities, and the establishment of the liquidity facilities, are potentially important factors that could continue to shape investor demand for debt, including COs. Moreover, expected increases in U.S. Treasury security issuance in response to higher fiscal deficits following fiscal stimulus programs underlying the CARES Act and any similar
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future legislation or any change or roll back of regulations governing money market investors may also have an impact on our funding costs.
Capital
Total capital at June 30, 2020, was $2.8 billion compared with $3.1 billion at December 31, 2019.
Capital stock decreased by $350.6 million during the six months ended June 30, 2020, resulting from capital stock repurchases of $1.9 billion offset by the issuance of $1.6 billion of capital stock to support new advances borrowings by members.
The FHLBank Act and FHFA regulations specify that each FHLBank is required to satisfy certain minimum regulatory capital requirements. We were in compliance with these requirements at June 30, 2020, as discussed in Item 1 — Notes to Financial Statements — Note 11 — Capital.
Subject to applicable law, following the expiry of the stock redemption period (which is five years for Class B stock), we redeem capital stock for any member that requests redemption of its excess stock, gives notice of intent to withdraw from membership, or becomes a nonmember due to merger, acquisition, charter termination, or involuntary termination of membership. Capital stock subject to a stock redemption period is reclassified to mandatorily redeemable capital stock in the liability section of the statement of condition. For additional information on the redemption of our capital stock, see Part I — Item 1 — Business — Capital Resources — Redemption of Excess Stock and Part II — Item 8 — Financial Statements and Supplementary Data — Notes to Financial Statements — Note 2 — Summary of Significant Accounting Policies — Mandatorily Redeemable Capital Stock in the 2019 Annual Report.
Table 22 - Mandatorily Redeemable Capital Stock by Expiry of Redemption Notice Period (dollars in thousands) | ||||||||
June 30, 2020 | December 31, 2019 | |||||||
Past redemption date (1) | $ | 5,558 | $ | 5,663 | ||||
Due in one year or less | — | — | ||||||
Due after one year through two years | 92 | — | ||||||
Due after two years through three years | 30 | 93 | ||||||
Due after three years through four years | 10 | 40 | ||||||
Due after four years through five years | 435 | — | ||||||
Thereafter (2) | 10 | 10 | ||||||
Total | $ | 6,135 | $ | 5,806 |
_______________________
(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. |
Capital Rule
The FHFA’s regulation on FHLBank capital classification and critical capital levels (the Capital Rule), among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. The Capital Rule requires the Director of the FHFA to determine on no less than a quarterly basis the capital classification of each FHLBank. By letter dated June 24, 2020, the Director of the FHFA notified us that, based on March 31, 2020 financial information, we met the definition of adequately capitalized under the Capital Rule.
Internal Capital Practices and Policies
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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 6.5 percent at June 30, 2020.
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 4 percent of our total assets plus an amount we measure as our risk exposure with 99 percent confidence using our economic capital model (together, our internal minimum capital requirement). As of June 30, 2020, this internal minimum capital requirement equaled $2.4 billion, which was satisfied by our actual regulatory capital of $3.0 billion.
Minimum Retained Earnings Target
At June 30, 2020, we had total retained earnings of $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, over the long term, expect to continue to grow our retained earnings modestly even though we exceed the target.
For information on limitations on dividends, including limitations when we are under our minimum retained earnings target, see Part II — Item 5 — Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in the 2019 Annual Report.
Repurchases of Excess Stock
We have the authority, but are not obliged, to repurchase excess stock, as discussed under Part I — Item 1 — Business — Capital Resources — Repurchase of Excess Stock in the 2019 Annual Report as well as below.
Table 23 - 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 | |||||||||||||||
June 30, 2020 | $ | 419,294 | $ | 1,000,571 | $ | 1,419,886 | $ | 1,524,650 | $ | 104,764 | |||||||||
December 31, 2019 | 406,397 | 1,388,804 | 1,795,223 | 1,874,936 | 79,713 |
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(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. |
As discussed under Part I — Item 1 — Business — Capital Resources — Repurchase of Excess Stock in the 2019 Annual Report, 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 capital needs, although continued repurchases remain at our sole discretion.
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; |
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• | commitments for unused lines-of-credit advances; and |
• | unsettled COs. |
Off-balance-sheet arrangements are more fully discussed in Part II — Item 8 — Financial Statements and Supplementary Data — Notes to Financial Statements — Note 20 — Commitments and Contingencies in the 2019 Annual Report.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the reported amounts of income and expenses during the reported periods. Although management believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ.
We have identified three accounting estimates that we believe are critical because they require us to make subjective or complex judgments about matters that are inherently uncertain, and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These estimates include accounting for derivatives, the use of fair-value estimates, and accounting for deferred premiums and discounts on prepayable assets. The Audit Committee of our board of directors has reviewed these estimates. The assumptions involved in applying these policies are discussed in Part II — Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates in the 2019 Annual Report.
As of June 30, 2020, we have not made any significant changes to the estimates and assumptions used in applying our critical accounting policies and estimates from those used to prepare our audited financial statements.
RECENT ACCOUNTING DEVELOPMENTS
See Item 1 — Notes to Financial Statements — Note 3 — Recently Issued and Adopted Accounting Guidance for a discussion
of recent accounting developments impacting or that could impact us.
LEGISLATIVE AND REGULATORY DEVELOPMENTS
We summarize certain significant regulatory actions and developments for the period covered by this report below.
Margin and Capital Requirements for Covered Swap Entities. On July 1, 2020, the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), the Farm Credit Administration, and 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 such as 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 from $8 billion to $50 billion, and limits Phase 5 to counterparties with an AANA of uncleared swaps from $50 billion to $750 billion; and (3) clarifies that initial margin trading documentation does not need to be executed prior to a counterparty reaching the initial margin threshold.
On the same date, the Prudential Banking Regulators issued an interim final rule, effective September 1, 2020, extending the initial margin compliance date for Phase 5 counterparties to September 1, 2021 and extending the initial margin compliance date for Phase 6 counterparties to September 1, 2022. On July 10, 2020, the Commodity Futures Trading Commission (CFTC) issued a final rule and a proposed rule which collectively, among other things, extend the initial margin compliance date for Phase 5 counterparties to September 1, 2021 and extend the initial margin compliance date for Phase 6 counterparties to September 1, 2022, thereby aligning with the Prudential Banking Regulators.
We do not expect these final rules or the proposed rule, if adopted as proposed, to have a material effect on our financial condition or results of operations.
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FHFA Final Rule on FHLBank Housing Goals Amendments. On June 3, 2020, the FHFA issued a final rule, effective August 24, 2020, amending the FHLBank housing goals regulation. Enforcement of the final rule will phase in over three years. The final rule replaces the four existing retrospective housing goals with a single prospective mortgage purchase housing goal target in which 20 percent of Acquired Member Asset (AMA) mortgages purchased in a year must be comprised of loans to low-income or very low-income families, or to families in low-income areas. The final rule also establishes a separate small member participation housing goal with a target level in which 50 percent of the members 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 goals. The final rule also establishes that housing 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 housing goals for each FHLBank.
While we are still analyzing the impact of the final rule, we do not believe these changes will have a material effect on our financial condition or results of operations.
Legislative and Regulatory Developments Related to COVID-19 Pandemic
FHFA Supervisory Letter - Paycheck Protection Program (PPP) Loans as Collateral for FHLBank Advances. On July 1, 2020, Congress approved an extension of the Paycheck Protection Program until August 8, 2020. The April 23, 2020 Supervisory Letter from the FHFA allowing FHLBanks to accept PPP loans as collateral remains in effect.
Federal Reserve Lending Facilities. The Federal Reserve announced on July 28, 2020 that its lending facilities scheduled to expire on or around September 30, 2020 would be extended through December 31, 2020.
Coronavirus Aid, Relief, and Economic Security Act. The CARES Act provisions will begin to expire in July 2020, but some have been extended by regulatory action.
• | Additional federal unemployment funds expired July 31, 2020; |
• | Statutory eviction freeze for federally-backed properties expired July 25, 2020; and |
• | Foreclosure moratorium on federally-backed properties and on evictions was extended by the FHFA on June 17, 2020 to until “at least” August 31, 2020. |
Additional phases of the CARES Act or other COVID-19 pandemic relief legislation may be enacted by Congress. We continue to evaluate the potential impact of the CARES Act 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; and the impacts on the Bank’s MPF program.
Additional COVID-19 Presidential, Legislative and Regulatory Developments. In light of the COVID-19 pandemic, the President, through executive orders, governmental agencies, including the Securities and Exchange Commission, 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 the Bank or its 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 the Bank.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Sources and Types of Market and Interest-Rate Risk
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. Sources and types of market and interest-rate risk are described in Part II — Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Sources and Types of Market and Interest-Rate Risk in the 2019 Annual Report.
Strategies to Manage Market and Interest-Rate Risk
General
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We use various strategies and techniques in an effort to manage our market and interest-rate risk including the following and combinations of the following:
• | the issuance of COs that can be used to match interest-rate-risk exposures of our assets (at June 30, 2020, fixed-rate noncallable debt, not hedged by interest-rate swaps, amounted to $11.8 billion, compared with $13.4 billion at December 31, 2019); |
• | the issuance of COs with embedded call options to mitigate interest-rate and prepayment risks of our mortgage loans and certain MBS (at June 30, 2020, and December 31, 2019 fixed-rate callable debt not hedged by interest-rate swaps amounted to $1.8 billion and $1.6 billion, respectively); |
• | the issuance of CO 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 (total CO bond debt used in conjunction with interest-rate-exchange agreements was $2.1 billion, or 8.4 percent of our total outstanding CO bonds at June 30, 2020, compared with $3.3 billion, or 14.0 percent of total outstanding CO bonds, at December 31, 2019); |
• | the issuance of advances 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 $6.5 billion, or 26.2 percent of our total outstanding advances at June 30, 2020, compared with $5.7 billion, or 16.6 percent of total outstanding advances, at December 31, 2019); |
• | the purchase of available-for-sale securities 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 59.4 percent of our total outstanding available-for-sale securities at June 30, 2020, compared with $3.7 billion, or 52.4 percent of total outstanding available-for-sale securities, at December 31, 2019); |
• | contractual provisions for certain advances that require borrowers to pay us prepayment fees, to make us financially indifferent if the borrower prepays such advances prior to maturity; and |
• | the use of derivatives to hedge the interest-rate risk of anticipated future CO debt issuance (at both June 30, 2020, and December 31, 2019 forward starting interest-rate swaps hedging the anticipated future issuance of CO debt was $17.0 million). |
Our strategies and techniques are more fully discussed under Part II — Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Strategies to Manage Market and Interest-Rate Risk in the 2019 Annual Report.
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 Value at Risk (VaR), duration of equity, MVE sensitivity, and the other metrics discussed below.
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.
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.
We measure our exposure to market and interest-rate risk using several metrics, including:
• | the ratio of MVE to BVE; |
• | the ratio of MVE to the par value of our Class B Stock (Par Stock), which we refer to as the MVE to Par Stock ratio; |
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• | the ratio of MVE to the market value of assets, which we refer to as the economic capital ratio; |
• | VaR, which measures the potential change in our MVE, based on a set of stress scenarios (VaR Stress Scenarios) using historically based interest-rate, volatility and Option Adjusted Spread (OAS) movements starting at the most recent month-end and going back monthly to 1998. For risk-based capital purposes and compliance with our internal management action trigger, VaR is reported as the average of the 5 worst scenarios. See additional information below for a description of a change in our VaR methodology that we implemented on January 1, 2020; |
• | duration of equity, which is calculated as the estimated percentage change to MVE for a 100 basis point parallel shift in rates; |
• | MVE sensitivity, which is the estimated percent change in MVE in various shocked interest rate scenarios versus base case MVE; |
• | the duration gap of our assets and liabilities, which is the difference between the estimated durations (percentage change in market value for a 100 basis point shift in rates) 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; and |
• | the use of an income-simulation model that projects net interest income over a range of potential interest-rate scenarios, including parallel interest-rate shocks, nonparallel interest-rate shocks, and basis changes to our funding curve and LIBOR. |
We maintain limits and management action triggers in connection with some of the foregoing metrics. Those limits, management action triggers, and the foregoing market and interest-rate risk metrics are more fully discussed under Part II — Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Measurement of Market and Interest-Rate Risk and Related Policy Constraints in the 2019 Annual Report.
Table 26 - Interest-Rate / Market-Rate Risk Metrics | ||||||
Interest/Market-Rate Risk Metric | June 30, 2020 | December 31, 2019 | Target, Limit or Management Action Trigger | |||
MVE | $2.8 billion | $3.3 billion | None | |||
MVE/BVE | 98% | 103% | None | |||
MVE/Par Stock | 183% | 173% | Maintain above 130% (management action trigger) with a floor of 125% | |||
Economic Capital Ratio | 6.0% | 5.7% | Maintain above 4.5% (management action trigger) and 4.0% (limit) | |||
VaR | $153.5 million | $207.4 million | Maintain below $350.0 million (management action trigger) | |||
Duration of Equity (1)(2) | +4.92 years | +1.08 years | Maintain between +/- 3.5 years (management action trigger) and +/- 4.0 years (limit) | |||
MVE Sensitivity: (1)(3) | ||||||
��Down 200 basis point parallel rate shock | 6.5% | 4.9% | Maintain above -10% (management action trigger) and -15% (limit) | |||
Up 200 basis point parallel rate shock | (4.0)% | (4.8)% | ||||
Duration Gap (1)(4) | +3.53 months | +0.74 months | None |
_______________________
(1) | Metrics are calculated in accordance with guidance from the FHFA, which requires that we floor interest rates at zero percent. 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. |
(2) | Using the methodology which does not constrain interest rates to a floor of zero percent, duration of equity is +0.41 years as of June 30, 2020, and +1.09 years as of December 31, 2019. |
(3) | 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 (0.5) percent as of June 30, 2020, and (1.7) percent as of December 31, 2019, and MVE sensitivity in an up 200 basis point parallel rate shock is (4.1) percent as of June 30, 2020, and (4.7) percent as of December 31, 2019. |
(4) | Using the methodology which does not constrain interest rates to a floor of zero percent, duration gap is +0.29 months as of June 30, 2020, and +0.75 months as of December 31, 2019. |
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Value at Risk. 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 option-adjusted spreads. Our VaR model results reported as of June 30, 2020 satisfy all of these requirements by utilizing interest rate, volatility and option-adjusted spread shocks provided by the FHFA.
Our VaR results as of December 31, 2019, were prepared utilizing the proportional shock methodology, which measured the change in our MVE to a 99th percent confidence interval, based on a set of VaR Stress Scenarios using historical interest-rate and volatility movements observed over six-month intervals starting at the most recent month-end and going back monthly to 1992. The proportional shock method used for VaR results as of December 31, 2019, which is described above, used different historical data sets from the VaR measurement method we used as of June 30, 2020. In addition, as defined, the proportional shock methodology did not incorporate shocks to OAS for assets backed by mortgage loans, which are used in the current method as required by the new guidance. Finally, also as distinguished from the proportional shock methodology where VaR was reported at the 99th percent confidence interval, VaR as measured as of June 30, 2020, is reported as the average of the five worst scenarios.
The table below presents the VaR estimate as of June 30, 2020, and December 31, 2019, and represents the estimates of potential reduction to our MVE from potential future changes in interest rates and other market factors, as described above. The VaR estimate for December 31, 2019, is presented in the table below for both the previously reported VaR estimate based on the proportional shock methodology as well as the pro forma VaR estimate using the updated VaR methodology described above. Estimated potential market value loss exposures are expressed as a percentage of the current MVE. The table is intended to represent a statistically based range of VaR exposures.
Table 27 - Value-at-Risk (dollars in millions) | |||||||||||||||||||||
Value-at-Risk (Gain) Loss Exposure | |||||||||||||||||||||
June 30, 2020 | December 31, 2019 Pro Forma (1) | December 31, 2019 As Previously Reported | |||||||||||||||||||
Confidence Level | % of MVE (2) | Amount | % of MVE (2) | Amount | % of MVE (2) | Amount | |||||||||||||||
50% | 1.75 | % | $ | 49.0 | 3.75 | % | $ | 122.1 | (0.13 | )% | $ | (4.1 | ) | ||||||||
75% | 3.10 | 86.8 | 4.65 | 151.1 | 0.30 | 9.8 | |||||||||||||||
95% | 4.72 | 132.0 | 6.20 | 201.4 | 1.47 | 47.9 | |||||||||||||||
99% | 5.31 | 148.6 | 7.47 | 242.9 | 6.38 | 207.4 | |||||||||||||||
Average of five worst scenarios | 5.49 | 153.5 | 7.50 | 243.9 |
_______________________
(1) | The pro forma VaR estimate for December 31, 2019, is based on the updated VaR methodology that was implemented on January 1, 2020, in accordance with FHFA guidance. |
(2) | Loss exposure is expressed as a percentage of base MVE. |
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 changes to our funding curve and LIBOR. The income simulation metric is based on projections of adjusted net income divided by regulatory capital.
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Regulatory capital is capital stock (including mandatorily redeemable capital stock) plus total retained earnings. Projections of adjusted net income exclude a) projected prepayment penalties; b) loss on early extinguishment of debt; and c) changes in fair values from hedging activities. The changes in fair values of trading securities are included in the projections of adjusted net income. The simulations are solely based on simulated movements in the swap and the CO curve and do not reflect potential impacts of credit events, including, but not limited to, potential additional other-than-temporary impairment charges. Management has put in place 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 as described above. The results of this analysis for June 30, 2020, showed that in the base case our RORC was 195 basis points over three-month LIBOR, and in the worst case tested, our RORC fell 54 basis points to 141 basis points over three-month LIBOR in the up 300 basis point scenario. For December 31, 2019, the results of this analysis showed that in the base case our RORC was 261 basis points over three-month LIBOR, and in the worst case tested, our RORC fell 36 basis points to 225 basis points over three-month LIBOR in the up 300 basis point scenario. In both the six months ended June 30, 2020 and 2019, 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.
Certain Market and Interest-Rate Risk Metrics under Potential Interest-Rate Scenarios
We also monitor the sensitivities of MVE and the duration of equity to potential interest-rate scenarios. The following table presents certain market and interest-rate risk metrics under different interest-rate scenarios.
Table 28 - Market and Interest-Rate Risk Metrics (dollars in millions) | ||||||||||||||
June 30, 2020 | ||||||||||||||
Down 300(1) | Down 200(1) | Down 100(1) | Base | Up 100 | Up 200 | Up 300 | ||||||||
MVE | $2,965 | $2,979 | $3,007 | $2,797 | $2,763 | $2,684 | $2,577 | |||||||
Percent change in MVE from base | 6.0% | 6.5% | 7.5% | —% | (1.2)% | (4.0)% | (7.9)% | |||||||
MVE/BVE | 104% | 104% | 105% | 98% | 97% | 94% | 90% | |||||||
MVE/Par Stock | 194% | 195% | 197% | 183% | 181% | 176% | 169% | |||||||
Duration of Equity | -0.23 years | -0.62 years | +2.41 years | +4.92 years | +1.98 years | +3.47 years | +4.20 years | |||||||
Return on Regulatory Capital less 3-month LIBOR | 2.08% | 2.08% | 2.07% | 1.95% | 1.68% | 1.54% | 1.41% | |||||||
Net income percent change from base | (4.84)% | (4.77)% | (5.30)% | —% | 32.99% | 71.80% | 111.19% |
December 31, 2019 | ||||||||||||||
Down 300(1) | Down 200(1) | Down 100(1) | Base | Up 100 | Up 200 | Up 300 | ||||||||
MVE | $3,406 | $3,411 | $3,246 | $3,251 | $3,187 | $3,094 | $2,998 | |||||||
Percent change in MVE from base | 4.8% | 4.9% | (0.2)% | —% | (2.0)% | (4.8)% | (7.8)% | |||||||
MVE/BVE | 108% | 108% | 103% | 103% | 101% | 98% | 95% | |||||||
MVE/Par Stock | 182% | 182% | 173% | 173% | 170% | 165% | 160% | |||||||
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 | 2.48% | 2.31% | 2.43% | 2.61% | 2.61% | 2.43% | 2.25% | |||||||
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. |
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Item 4. 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.
Our 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 June 30, 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 June 30, 2020.
Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We describe our private-label MBS litigation in Part I — Item 3 — Legal Proceedings in the 2019 Annual Report. We continue our private-label MBS litigation in the Massachusetts Superior Court against Credit Suisse (USA), Inc. and certain of its affiliates. In addition, we continue to pursue related litigation against Moody’s Investors Service, Inc. and Moody’s Corporation in the New York Supreme Court.
From time to time, we are subject to various pending legal proceedings arising in the normal course of business. After consultation with legal counsel, we do not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on our financial condition or results of operations.
ITEM 1A. RISK FACTORS
In addition to the risk factors provided below and other risk factors described herein, readers should carefully consider the risk factors set forth in the 2019 Annual Report. All of these risk factors could materially affect our business, financial condition, or future results. The risks described below, elsewhere in this report, and in the 2019 Annual Report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also materially impact us.
Natural or man-made disasters, including health emergencies related to the COVID-19 (coronavirus) pandemic, could have a material adverse effect on the Bank’s results of operations or financial condition.
The occurrence of natural disasters, political unrest or instability, acts of terrorism, and health emergencies, including the spread of infectious diseases or a pandemic, the effects of climate change, or other unexpected or disastrous conditions, events, or emergencies could adversely affect our business, including demand for the Bank’s products and services and the value of our assets and member-pledged collateral. The effects of disasters or emergencies could disrupt general economic conditions and financial markets and interfere with our employees, our workplace, our vendors and service providers, the businesses of our members, and our counterparties and thus could impair our ability to manage our business, as well as our results of operations and financial condition.
The full effects of the COVID-19 pandemic are evolving and unknown. The substantial slowdown in economic activity caused by the effects of the COVID-19 pandemic could reduce demand at our member institutions, which could impact members’
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demand for our products and services. Devaluation of our assets and/or the collateral pledged by our members to secure advances and other extensions of credit could lead to reduced business volumes, reduced income or credit losses and could have an adverse impact on our financial condition and results of operations. This could heighten many of the risks we face, as described in the Risk Factors section of the 2019 Annual Report, and adversely affect our business, financial condition and results of operations.
Our ability to obtain funds through the issuance of COs depends in part on prevailing conditions in the capital markets (including investor demand), such as the effects of any reduced liquidity in financial markets, which are beyond our control. Volatility in the capital markets caused by the COVID-19 pandemic can affect demand for and cost of our debt, which could impact our liquidity and profitability.
In March 2020 the Federal Reserve lowered the target range for the federal funds rate from 1.50 to 1.75 percent to a target range from 0 to 0.25 percent. A prolonged period of very low interest rates could reduce our net interest income and have a material adverse impact on our results of operations or financial condition. Some substantial temporary net interest margin compression that began in March 2020 continued through May 2020, and the outlook for the remainder of 2020 is uncertain. There is a possibility that the Federal Reserve may keep interest rates low or even use negative interest rates if economic conditions warrant, each of which could affect the success of our asset and liability management activities and negatively affect our financial condition and results of operations.
COVID-19 threatens the health of our employees and their families and could impair our ability to conduct business. With our employees working remotely, we could face operational difficulties or disruptions that could impair our ability to conduct and manage our business effectively. Counterparties, vendors and other third parties upon which we rely to conduct our business could be adversely impacted by effects of COVID-19, and these impacts could lead to operational challenges for us. A remote workforce can be more vulnerable to operational disruption than a workforce on a closed, closely monitored corporate network. Our reliance on operationally critical vendors increases risk because those vendors may themselves, because of remote work requirements, be operating in a less secure manner. An extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business.
Significant borrower defaults on loans made by our members could occur as a result of reduced economic activity and these defaults could cause members to fail. We could be adversely impacted by the reduction in business volume that would arise from the failure of one or more of our members. Our investments in mortgages and MBS could be negatively affected by delays or failures of borrowers to make payments of principal and interest when due or delays in foreclosures resulting from the economic effects of COVID-19. Our other investments could also be negatively affected by extreme price volatility caused by uncertainties stemming from the results of COVID-19.
We participate in the Pentegra Defined Benefit Plan for Financial Institutions (Pension Plan), a tax qualified defined benefit pension plan, and the Pension Benefit Equalization Plan (Pension BEP), a nonqualified, unfunded defined benefit plan. A prolonged negative impact on the value of stocks and other asset classes in the Pension Plan due to the COVID-19 pandemic may result in a significant reduction to Pension Plan asset values and persistently low or further declines of interest rates could result in increased pension liability for the Pension Plan and the Pension BEP, requiring us to incur higher expense associated with these plans, which could negatively impact our profitability.
The response to the rapid and diffuse spread of COVID-19 has had severe negative impacts on, among other things, financial markets, liquidity, economic conditions, commercial contracts, and trade and could continue to do so or could worsen these and other conditions for an unknown period of time, which could have a material adverse impact on our results of operations or financial condition.
Compliance with regulatory liquidity requirements could adversely impact our results of operations.
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, as discussed in Part I — Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources. The requirement is designed to enhance our protection against temporary disruptions in access to the capital markets resulting from a rise in capital markets volatility. To satisfy this requirement, we maintain balances in shorter-term investments, which could earn lower interest rates than alternate investment options and could, in turn, adversely impact net interest income. In certain circumstances, we fund overnight or shorter-term advances with short-term discount notes that have maturities beyond the maturities of the related advances, thus increasing our short-term advance pricing or reducing net income through lower net interest spread. To the extent these increased prices make our advances less competitive, advance levels and, therefore, our net interest income could
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be adversely impacted. We experienced substantial temporary net interest margin compression beginning in March 2020 as a result of FOMC reductions in interest rates when we funded a significant volume of overnight and short-term advances by issuing discount notes that we were required to continue to carry in order to meet liquidity requirements, and this compression extended through May 2020 and continued to have an adverse impact on net interest income in the second quarter of 2020. Furthermore, any changes in regulatory liquidity requirements could adversely affect our financial condition and results of operations.
We are subject to credit-risk exposures related to advances, mortgage loans, derivatives, investments, credit products, or member failures. Increased delinquency rates and credit losses beyond those currently expected could adversely impact the yield on or value of investments.
We are exposed to secured and unsecured credit risk as part of our normal business operations through funding advances, purchasing mortgage loans, derivatives, investments, and extending other credit products, such as standby letters or credit, and future advance commitments. We require advances and other extensions of credit to our members to be fully secured with collateral. We evaluate the type of collateral pledged by the member and assign a borrowing capacity to the collateral, based on the risk associated with that type of collateral. If we have insufficient collateral before or after an event of payment default or failure of the member or we are unable to liquidate the collateral for the value assigned to it in the event of a payment default or failure of a member, we could experience a credit loss on advances or standby letters of credit, which could adversely affect our financial condition or results of operations. In addition, we extend short-dated unsecured credit risk and secured credit risk to U.S. and global financial institution counterparties. Failures by these counterparties to perform on their obligations to us could have an adverse effect on our financial condition, results of operations, or ability to pay dividends or redeem or repurchase capital stock.
During economic downturns or periods of significant economic and financial uncertainties, the number of our members or financial counterparties exhibiting financial stress may increase, which could expose us to additional member or other credit risk. Due to the recent turmoil in the financial markets associated with the coronavirus pandemic, many individuals and some financial institutions have experienced financial difficulties. Both the effects of the coronavirus itself and forbearance granted in connection with the coronavirus may result in an increase in the level of delayed payments of principal and interest for both federal government-backed and conventional mortgage loans held in our portfolio. Potential defaults on mortgage loans beyond what we have currently forecasted could cause an increase in our allowance for credit losses on mortgage loans. In addition, the effects of the coronavirus pandemic have generally increased credit risks in our investment portfolios, including private-label MBS, MPF loans held in our portfolio, and money market investments.
Changes in interest rates could adversely impact our financial condition and results of operations.
Like many financial institutions, we realize a significant portion of our income from the spread between interest earned on our outstanding loans and investments and interest paid on our borrowings and other liabilities, as measured by our net interest spread. Although we use various methods and procedures to monitor and manage exposures due to changes in interest rates, we could experience instances when either our interest-bearing liabilities will be more sensitive to changes in interest rates than our interest-earning assets, or vice versa. These impacts could be exacerbated by prepayment risk, which is the risk that mortgage-related assets will be refinanced and prepaid in low interest-rate environments. The realization of such risk could require us to reinvest the proceeds of prepaid assets at lower, and possibly negative, spreads, or such assets will remain outstanding at below-market yields when interest rates increase. Moreover, accelerated prepayments in a low interest-rate environment could result in elevated levels of premium expense recognition due to the fact that a substantial portion of our mortgage assets were purchased at premium prices. The severe decline in interest rates that occurred beginning in March 2020 and is continuing has reduced net interest spread and has had a negative impact on our results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Number | Exhibit Description | Reference | |
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-Q | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed within this Form 10-Q | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | Filed within this Form 10-Q | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | Filed within this Form 10-Q | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | Filed within this Form 10-Q | |
104 | The cover page of the Bank’s Quarterly report on Form 10-Q, formatted in Inline XBRL | Included within the Exhibit 101 attachments |
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) | |||||
August 13, 2020 | By: | /s/ | Edward A. Hjerpe III | |||
Edward A. Hjerpe III President and Chief Executive Officer | ||||||
August 13, 2020 | By: | /s/ | Frank Nitkiewicz | |||
Frank Nitkiewicz Executive Vice President and Chief Financial Officer |
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