UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
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)
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| Federally chartered corporation of the United States | | 04-6002575 | |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. employer identification number) | |
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| 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:
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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Securities registered pursuant to Section 12(g) of the Act:
Class B Stock, par value $100 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically 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):
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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No x
Registrant's stock is not publicly traded and is only issued to members of the registrant. Such stock is issued and redeemed at par value, $100 per share, subject to certain regulatory and statutory limits. As of February 28, 2022, including mandatorily redeemable capital stock, we had 9,762,692 outstanding shares of Class B stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
FEDERAL HOME LOAN BANK OF BOSTON
2021 Annual Report on Form 10-K
Table of Contents
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| PART II | | | | |
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| PART III | | | | |
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| PART IV | | | | |
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PART I
ITEM 1. BUSINESS
General
The Federal Home Loan Bank of Boston is a federally chartered corporation organized by the United States (the U.S.) Congress in 1932 pursuant to the Federal Home Loan Bank Act of 1932 (as amended, the FHLBank Act) and is a government-sponsored enterprise (GSE). Unless otherwise indicated or unless the context requires otherwise, all references in this discussion to “the Bank,” "we," "us," "our," or similar references mean the Federal Home Loan Bank of Boston. Our primary regulator is the Federal Housing Finance Agency (the FHFA).
We are a privately capitalized cooperative, and our mission is to provide highly reliable wholesale funding, liquidity, and a competitive return on investment to our member shareholders. We develop and deliver competitively priced financial products, services, and expertise that support housing finance, community development, and economic growth, including programs targeted to lower-income households. We serve the residential-mortgage and community-development lending activities of our members and certain nonmember institutions (referred to as housing associates) located in our district. Our district is comprised of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. There are 11 district Federal Home Loan Banks (the FHLBanks or the FHLBank System) located across the U.S., each supporting the lending activities of its members within their districts. Each FHLBank is a separate entity with its own board of directors, management, and employees.
We are exempt from ordinary federal, state, and local taxation except for local real estate tax. However, we are required by statute to set aside funds at a 10 percent rate on our income for our Affordable Housing Program (AHP). For additional information, see — AHP Assessment. We also have voluntarily made an additional contribution to our AHP, and put in place certain subsidized advance, bond purchasing and grant programs, including our Jobs for New England (JNE) program, our Housing Our Workforce (HOW) program and our Helping to House New England (HHNE) program. For additional information, see — Targeted Housing and Community Investment Programs.
We are managed with the primary objectives of enhancing the value of our membership and fulfilling our public purpose. In pursuit of our primary objectives, we have adopted long-term strategic priorities in our strategic business plan, which are to:
•position the Bank to compete effectively in the wholesale funding market and support members' and housing associates’ efforts to address the affordable housing and economic needs of the New England communities they serve;
•maintain an appropriate and efficient capital structure considering our risk profile through proactive capital stock management and dividend strategies;
•advocate stakeholder interests in policy matters, and effectively monitor and respond to pending GSE reform and other legislative and regulatory initiatives;
•acquire, develop and retain the talent required to meet our current and future needs;
•leverage the advantages of a diverse and inclusive organization in all aspects of our organizational efforts; and
•continue to evolve as a strong and agile organization that responds quickly and effectively to emerging risks and opportunities while upholding our commitment to efficient and effective operations.
We combine private capital and public sponsorship in a way that is intended to enable our members and housing associates to assure the flow of credit and other services for housing finance, community development, and economic growth. We serve the public through our members and housing associates by providing these institutions with readily available, low-cost loan products, called advances, as well as other products and services that are intended to support the availability of residential-mortgage and community-investment credit. In addition, we provide liquidity by enabling members to sell mortgage loans to us or to designate third-party investors through a mortgage loan purchase program. Our primary sources of income come from the margin earned on interest-earning assets funded by interest-bearing liabilities and equity capital. We are generally able to borrow funds at favorable rates due to our GSE status. Our debt is not backed by the U.S. government, but it does represent the joint and several obligation of the 11 FHLBanks.
Our members and housing associates are comprised of financial institutions located throughout our district. Institutions eligible for membership include savings institutions (savings banks, savings and loan associations, and cooperative banks), commercial banks, credit unions, qualified community development financial institutions (CDFIs), and insurance companies that meet regulatory requirements, including having a home financing policy that is consistent with the Bank's housing finance mission. We are also authorized to lend to housing associates such as state housing finance agencies located in New England. Members
(but not housing associates) are required to purchase and hold our capital stock as a condition of membership and for advances and certain other business activities transacted with us. Our capital stock is not publicly traded on any stock exchange and can only be transferred at par value of $100 per share. We are capitalized by the capital stock purchased by our members and by retained earnings. Members may receive dividends, which are determined by our board of directors, and may request redemption or, at our sole discretion, repurchase of their capital stock at par value subject to certain conditions, as discussed further in Part II — Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital. The U.S. government does not guarantee either the members' investment in or any dividend on our stock.
Oversight, Compliance with Government Regulations, Examinations, and Audit
Our business is subject to extensive regulation and supervision. The laws and regulations to which we are subject cover all key aspects of our business, and directly and indirectly affect our product and service offerings, pricing, competitive position and strategic plan, relationship with members and third parties, capital structure, cash needs and uses, and information security. As discussed throughout this report, such laws and regulations have a significant effect on key drivers of our results of operations, including, for example, our capital and liquidity, product and service offerings, risk management, and costs of compliance. For more information, see Item 1A — Risk Factors — We are subject to a complex body of laws and regulations, as well as U.S. government monetary policies, which could change in a manner detrimental to our business operations and/or financial condition.
The FHFA issues regulations, advisory bulletins, and supervisory letters that govern, among other things, the permissible activities, powers, investments, risk-management practices, and capital requirements of the FHLBanks, and the authorities and duties of FHLBank directors. The FHFA has broad supervisory authority over the FHLBanks, including, but not limited to, the power to suspend or remove any entity-affiliated party (including any director, officer, or employee) of an FHLBank who violates certain laws or commits certain other acts; to issue and serve a notice of charges upon an FHLBank or any entity-affiliated party; to issue a cease and desist order, or a temporary cease and desist order; to stop or prevent any unsafe or unsound practice or violation of law, order, rule, regulation, or condition imposed in writing; to impose civil money penalties against an FHLBank or an entity-affiliated party; to require an FHLBank to maintain capital levels in excess of usual regulatory requirements; to require an FHLBank to take certain actions, or refrain from certain actions, under the prompt corrective action provisions that authorize or require the FHFA to take certain supervisory actions, including the appointment of a conservator or receiver for an FHLBank under certain conditions; and to require any one or more of the FHLBanks to repay the primary obligations of another FHLBank on outstanding consolidated obligations (COs).
The FHFA conducts an annual examination and other periodic reviews of our operations to assess our safety and soundness as well as our compliance with statutory and regulatory requirements, and requires ongoing reporting of specific information through the issuance of special data requests. In addition, we are required to submit information on our financial condition and results of operations each month to the FHFA, and we are required to report other supplemental information to the FHFA on a periodic basis. We are generally prohibited by FHFA regulations from disclosing the results of the FHFA's examinations and reviews. However, information from those examinations and reviews could become publicly available either through the FHFA or through the FHFA's Office of Inspector General, which can sometimes occur via their reports to Congress.
Our capital stock is registered with the U.S. Securities and Exchange Commission (SEC) under Section 12(g) of the Securities Exchange Act of 1934 and, as a result, we are required to comply with the disclosure and reporting requirements of the Exchange Act. We are not subject to the provisions of the Securities Act of 1933. We are also subject to regulation by the Financial Crimes Enforcement Network (FinCEN), and the Commodity Futures Trading Commission.
The Government Corporations Control Act, to which we are subject, provides that before a government corporation issues and offers obligations to the public, the Secretary of the U.S. Department of the Treasury (U.S. Treasury) shall prescribe the form, denomination, maturity, interest rate, and conditions of the obligations, the method and time issued, and the selling price. The FHLB Act also authorizes the Secretary of the U.S. Treasury discretion to purchase consolidated obligations up to an aggregate principal amount of $4.0 billion.
Our board of directors has an audit committee, and we have an internal audit department. An independent registered public accounting firm audits our annual financial statements. The independent registered public accounting firm conducts these audits in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB) and standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States.
We must submit annual management reports to Congress, the President, the Office of Management and Budget, and the Comptroller General of the United States. These reports include a statement of financial condition, a statement of operations, a statement of cash flows, a statement of internal accounting and administrative control systems, and the report of the independent registered public accounting firm on our financial statements.
The Comptroller General of the United States has authority under the FHLBank Act to audit or examine the FHFA and the Bank and to decide the extent to which they fairly and effectively fulfill the purposes of the FHLBank Act. Furthermore, the Government Corporations Control Act provides that the Comptroller General may review any audit of the financial statements conducted by an independent registered public accounting firm. If the Comptroller General conducts such a review, then the results and any recommendations must be reported to Congress, the Office of Management and Budget, and the FHLBank in question. The Comptroller General may also conduct his or her own audit of any financial statements of an FHLBank.
Office of Finance
The FHLBanks' Office of Finance (the Office of Finance) facilitates the issuing and servicing of FHLBank debt in the form of COs. The FHLBanks, through the Office of Finance as their agent, are the issuers of COs for which they are jointly and severally liable. The Office of Finance also provides the FHLBanks with market data. The Office of Finance publishes annual and quarterly combined financial reports on the financial condition and performance of the FHLBanks and also publishes certain data concerning debt issues and issuance. The FHLBanks are charged for the costs of operating the Office of Finance, as discussed in Part II — Item 8 — Financial Statements and Supplementary Data— Notes to the Financial Statements — Note 2 — Summary of Significant Accounting Policies — Office of Finance Expenses. The Office of Finance is governed by a board of directors that is constituted of all 11 FHLBank presidents and five independent directors.
Available Information
Our website, www.fhlbboston.com, provides a link to the section of the Electronic Data Gathering and Reporting (EDGAR) website, as maintained by the SEC, containing all reports electronically filed, or furnished, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, and our current reports on Form 8-K as well as any amendments to such reports. Specific links to our annual reports on Form 10-K and quarterly reports on Form 10-Q are made available free of charge through our website as soon as reasonably practicable after electronically filing or being furnished to the SEC. In addition, the SEC’s EDGAR website, which contains our periodic and current reports and other information regarding our electronic filings may be accessed directly at http://www.sec.gov. The Bank's and the SEC's website addresses have been included as inactive textual references only. Information on those websites is not part of this report.
Human Capital Resources
Our human capital is a significant contributor to the success of our strategic business objectives. In managing our human capital, we focus on our workforce profile and the various programs and philosophies described below.
Workforce Profile
Our workforce is primarily comprised of corporate employees, with our principal operations in one location. As of December 31, 2021, we had 183 full-time employees and no part-time employees. We employ temporary personnel to supplement our workforce as business needs arise. As of December 31, 2021, approximately 40 percent of our workforce was female, 60 percent male, 72 percent non-minority and 28 percent minority (gender and minority status are based on employee self-identification) and the average tenure of our employees was 12.6 years. Our workforce is leanly staffed, and historically has included a number of longer-tenured employees. We strive to both develop talent from within the organization and supplement with external hires. We believe that developing talent internally results in institutional strength and continuity and promotes loyalty and commitment in our employee base, which furthers our success, while adding new employees contributes to new ideas, continuous improvement, and our goals of having a diverse and inclusive workforce. In 2021, consistent with other employers, we experienced higher staff turnover relative to the past several years driven by a competitive labor market for
quality talent and anticipated retirements of seasoned employees. Our commitment to ensure a compelling employee value proposition served to offset this higher rate of turnover. There are no collective bargaining agreements with our employees.
Total Rewards
We have designed a total rewards structure to attract, retain and motivate a diverse employee population while supporting business and mission objectives throughout all economic cycles. We maintain a competitive and comprehensive total rewards program consisting of base salary, annual incentives, retirement programs, and health and welfare benefits including:
•Cash compensation – Competitive salary and annual incentive plans are designed to align payout opportunities with achievement of our financial, operational, mission and regulatory goals and limit excessive risk-taking while recognizing team results and individual contributions.
•Time away from work – This includes paid time off for vacation, personal, holiday, and volunteer opportunities. This also includes sick time at full pay and salary continuation at 65 percent of base pay for periods of extended illness.
•Culture – We have worked to develop an inclusive environment based on a Bank-wide value of respect. We maintain an employee-staffed Inclusion Council which works on supporting our strategic imperative to leverage diversity and inclusion in all aspects of our business. Additionally, we prioritize initiatives to enhance employee engagement in many aspects of our business operation.
•Development programs and training – We provide educational/tuition assistance programs, internal educational and development opportunities, and fee reimbursement for external educational and development programs.
•Succession planning – Our board and leadership actively engage in succession planning, with a defined plan for management positions as well as other strategically important roles.
For more information on our Total Rewards program, see Part III - Item 11 - Executive Compensation - Compensation Discussion and Analysis. Our approach to performance management includes a collaborative development of annual goals aligned with our strategic business plan, as well as the utilization of a competency model framework with specific behaviors aligned with business priorities, and an annual performance review with formal check-ins during the year. Overall annual ratings are calibrated, and merit and incentive payments are differentiated for our highest performers.
We are committed to the health, safety, and wellness of our employees. In response to the COVID-19 pandemic, we implemented significant operating environment changes, safety protocols, and procedures that we determined were in the best interest of the Bank’s employees and members, and which comply with government regulations and guidelines. This includes working virtually for a majority of our employees since the onset of the COVID-19 pandemic in March 2020.
Diversity, Equity and Inclusion Program
Diversity, equity and inclusion are strategic business priorities for the Bank. The director of the Bank's office of minority and women inclusion is a member of our senior management, reports to the president and chief executive officer, and serves as a liaison to our board of directors. We recognize the correlation between a diverse and inclusive environment and overall performance where valuing the unique perspectives of all employees strengthens innovation, creativity, and our ability to attract and retain employees. We operationalize our commitment through the development and execution of a three-year diversity, equity and inclusion strategic plan that includes quantifiable metrics to measure its success and report regularly on its performance to management and the board of directors. We offer a range of opportunities for our employees to become educated, connect, and grow personally and professionally through different avenues, including the efforts of our Inclusion Council. We consider building awareness and learning to be key elements of our diversity, equity and inclusion strategic plan and regularly offer educational opportunities to our employees that have included the identification of actions aligned with these learning opportunities.
Membership
Table 1 - Number of Members by Institution Type
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| | | December 31, |
| | | 2021 | | 2020 | | 2019 |
| Commercial banks | | 51 | | | 42 | | | 44 | |
| Credit unions | | 159 | | | 161 | | | 162 | |
| Insurance companies | | 68 | | | 70 | | | 63 | |
| Savings institutions | | 141 | | | 156 | | | 162 | |
| CDFI, non-depository institutions | | 4 | | | 4 | | | 4 | |
| Total members | | 423 | | | 433 | | | 435 | |
As of December 31, 2021, 2020, and 2019, 57.0 percent, 60.0 percent, and 66.0 percent, respectively, of our members had outstanding advances with us. These usage rates are calculated excluding housing associates and other nonmember borrowers. While eligible to borrow, housing associates are not members and, as such, cannot hold our capital stock. Other nonmember borrowers consist of institutions that are former members or that have acquired former members and assumed the advances and capital stock held by those former members. These other nonmember borrowers are required to hold capital stock to support outstanding advances with us until those advances either mature or are paid off. In addition, nonmember borrowers are required to deliver all required collateral to us or our safekeeping agent until all outstanding advances either mature or are paid off. Other than housing associates, nonmember borrowers may not request new advances and are not permitted to extend or renew any advances they have assumed.
Our membership includes the vast majority of Federal Deposit Insurance Corporation (FDIC)-insured institutions and National Credit Union Association-insured credit unions with more than $100 million in assets in our district that are eligible to become members. We do not anticipate that a substantial number of additional insured institutions will become members, other than de novo institutions organized in the future. There are other institutions in our district that are eligible for membership, such as insurance companies, smaller credit unions, and CDFIs, and could become members in the future. We note that, for a variety of reasons, including merger of members, we could experience a contraction in our membership that could lower overall demand for our products and services.
Economic Conditions
While our membership is limited to institutions with a principal place of business located in our district, both U.S. national and New England economic conditions, particularly in the housing market, impact our results of operations, financial condition, and future prospects. For example, demand for advances is influenced in part by factors such as the level of our members' deposits, which serve as liquidity alternatives to advances, and demand for residential mortgage loans, which members can generally use as collateral for advances. For information on some of the economic factors that have impacted us in 2021 and are expected to impact us in 2022, see Part II — Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Economic Conditions.
Business Lines
Our business lines include offering credit products, such as advances, access to the Mortgage Partnership Finance® (MPF®) program, deposit and safekeeping services, and access to the AHP. We also maintain a portfolio of investments for liquidity purposes and to supplement earnings.
Advances. We serve as a source of liquidity for and make advances to our members and housing associates secured by mortgage loans and other eligible collateral. We offer an array of fixed- and variable-rate advances products, with repayment terms intended to provide funding alternatives to our members in many interest-rate environments and situations. Principal repayment terms may be structured as 1) interest-only to maturity (sometimes referred to as bullet advances) or to an optional early termination date or series of dates or 2) amortizing advances, which are fixed-rate and term structures with equal monthly payments of interest and principal.
"Mortgage Partnership Finance," "MPF," "eMPF" and "MPF Xtra" are registered trademarks of the Federal Home Loan Bank of Chicago.
We price advances to generate a targeted profit margin above the estimated marginal cost of raising funding with a similar maturity profile as well as associated operating and administrative costs. In accordance with the FHLBank Act and FHFA regulations, we price our advance products in a consistent and nondiscriminatory manner to all members. However, we are permitted to differentially price our products based on the creditworthiness of the member, volume, or other reasonable criteria applied consistently to all members.
Our major competitors are other sources of liquidity, including retail deposits, investment banks, commercial banks, wholesale/brokered deposits, and, in limited instances, other FHLBanks.
Members that have an approved line of credit with us may from time to time overdraw their demand-deposit account. These overdrawn demand-deposit accounts are reported as advances in the statements of condition. These line of credit advances are fully secured by eligible collateral pledged by the member to us. In cases where the member overdraws its demand-deposit account by an amount that exceeds its approved line of credit, we may assess a penalty fee to the member.
In addition to making advances to members, we are permitted under the FHLBank Act to make advances to housing associates that are approved mortgagees under Title II of the National Housing Act. Housing associates must be chartered under law and have succession, be subject to inspection and supervision by a governmental agency, and lend their own funds as their principal activity in the mortgage field. Housing associates are not subject to capital stock investment requirements, however, they are subject to the same underwriting standards as members, but are more limited in the forms of collateral that they may pledge to secure advances.
Our advance products can also help members in their asset-liability management. For example, we offer advances that members can use to match the cash-flow patterns of their mortgage loans. Such advances can reduce a member's interest-rate risk associated with holding long-term, fixed-rate mortgages. We may also offer advances that shift from fixed to floating rates or vice versa after a certain period or upon the occurrence of a certain condition.
Generally, advances may be prepaid at any time. We charge prepayment fees to make us financially indifferent to advance prepayments, except in cases where the prepayment of an advance does not have an adverse financial impact on us or where the pricing of the product compensates us for the value of the option to prepay the advance.
We also offer an advance restructuring program under which the prepayment fee on prepaid advances may be satisfied by the member's agreement to pay an interest rate on a new advance sufficient to amortize the prepayment fee by the maturity date of the new advance, rather than paying the fee in funds immediately available to us.
We have never experienced a credit loss on an advance.
Targeted Housing and Community Investment Programs. We offer several solutions that are targeted to meet the affordable housing and economic development needs of communities that our members serve. These programs include the AHP, the Equity Builder Program (EBP), Community Development Advances (CDAs), the New England Fund (NEF), JNE, HOW, and HHNE.
The AHP is a statutorily mandated program under which we provide subsidies in the form of direct grants or discounted interest rates on advances (AHP advances) to help fund affordable housing projects that are directly sponsored by members. AHP funds are required to be used for homeownership housing for households with incomes at or below 80 percent of the median income for the area, or rental housing in which 20 percent of the units are for households with incomes that do not exceed 50 percent of the median income for the area. Program funds must be used for the direct costs to purchase, construct, or rehabilitate affordable housing.
The EBP offers members grants to provide households with incomes at or below 80 percent of the area median income with down-payment, closing-cost, homebuyer counseling, and rehabilitation assistance. The EBP is funded with a portion of the AHP assessment. For further information about how AHP subsidies are funded, see AHP Assessment below.
CDAs are discounted advances offered at interest rates that are lower than our regular advance products for the purpose of helping our members fund community development efforts, such as supporting the growth of small businesses, and the
development or renovation of roads and schools and expanding affordable housing for individuals with incomes at or below defined percentages of area median income.
NEF advances are targeted to housing initiatives that benefit households with incomes at or below 80 percent of the area median income in support of inclusionary zoning efforts in ownership and rental projects.
JNE provides advances and grants to support small businesses in New England that create and/or retain jobs, or otherwise contribute to overall economic development activities. The JNE program was initially established to provide subsidies used to write down interest rates to a significant discount to market rates on eligible advances that finance qualifying loans to small businesses. The JNE Recovery Grant Program allows members to access funding to make grants to eligible small businesses or nonprofit organizations to assist with COVID-19 related impacts. The JNE Recovery Grant program has been discontinued in 2022. The combined subsidy on JNE advances and grant funds disbursed during the year ended December 31, 2021, amounted to $3.0 million.
The HOW program enables members to provide down payment assistance for households with incomes above 80 percent up to 120 percent of the area median income. For 2021 the Bank contributed $1.3 million for the HOW program.
HHNE provides New England housing finance agencies (HFAs) with subsidies or grants for targeted initiatives serving individuals and families who qualify for loans under the agencies' income guidelines. HHNE program subsidies are used to write down interest rates to a significant discount to market rates on eligible advances to HFAs or to purchase bonds from HFAs at deeply discounted yields for the purpose of expanding affordable rental and homeownership initiatives, or to provide direct grants to HFAs for these purposes. Examples of uses include, but are not limited to, short-term construction lending, workforce housing, deferred loan programs for homeownership, multifamily loan refinance, and rental housing expansion, particularly in areas with job growth that exceeds the supply of rental units. For the year ended December 31, 2021, the subsidy expense for this program was $700 thousand, all of which was provided to HFAs in the form of grants.
Investments. We maintain a portfolio of investments for liquidity purposes and to supplement earnings. To better meet members' potential borrowing needs at times when access to the capital markets is unavailable (either due to requests that follow the end of daily debt issuance activities or due to a market disruption event impacting CO issuance) and in support of certain statutory and regulatory liquidity requirements, as discussed in Part II — Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources, we maintain a portfolio of short-term investments issued by highly-rated institutions, primarily consisting of federal funds, securities purchased under agreements to resell [secured by U.S. Treasury securities, or Government National Mortgage Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae), or Federal Home Loan Mortgage Corporation (Freddie Mac) securities], and interest-bearing deposit accounts at banks. We also purchase U.S. Treasury securities with maturities of up to 10 years to support our liquidity.
We also leverage our capital to enhance our income and further support our contingent liquidity needs and mission by maintaining a longer-term investment portfolio. This portfolio includes debentures issued or guaranteed by the U.S. Treasury, U.S. government agencies and instrumentalities, as well as supranational institutions, and mortgage-backed securities (MBS) that are issued by GSE and U.S. government agencies. In accordance with our policy all securities must be internally rated no lower than FHFA3 on an internal 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 may purchase securities issued by state or local HFAs that meet an internal rating requirement of at least the second-highest internal rating category. The long-term investment portfolio is intended to provide us with higher returns than those available in the short-term money markets. For a discussion of developments and factors that have impacted and could continue to impact the profitability of our investments, particularly our long-term investment portfolio, see Part II — Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Executive Summary.
Under our regulatory authority to purchase MBS, additional investments in MBS and asset-backed securities (ABS) are prohibited if our investments in such securities exceed 300 percent of capital at the time of purchase. Capital for this calculation is defined as capital stock, mandatorily redeemable capital stock, and retained earnings. On December 31, 2021, and 2020, our MBS and ABS holdings represented 276 percent and 192 percent of capital, respectively.
We conduct our investment activities so as to strive to comply with the FHFA’s core mission achievement advisory bulletin, which establishes a ratio by which the FHFA will assess each FHLBank’s core mission achievement. Core mission achievement is determined using a ratio of primary mission assets, which includes advances and acquired member assets (mortgage loans acquired from members), to COs excluding the amount funding U.S. Treasury securities with maturities no greater than 10
years classified as available-for-sale or trading securities. The core mission asset ratio is calculated using annual average par values.
The core mission advisory bulletin provides the FHFA’s expectations about the content of each FHLBank’s strategic plan based on its ratio, as follows:
•when the ratio is at least 70 percent, the strategic plan should include an assessment of the FHLBank’s prospects for maintaining this level;
•when the ratio is at least 55 percent but less than 70 percent, the strategic plan should explain the FHLBank’s plan to increase the ratio; and
•when the ratio is below 55 percent, the strategic plan should include an explanation of the circumstances that caused the ratio to be at that level and detailed plans to increase the ratio. The advisory bulletin provides that if an FHLBank maintains a ratio below 55 percent over the course of several consecutive reviews, the FHLBank’s board of directors should consider possible strategic alternatives.
Our core mission achievement ratio for the years ended December 31, 2021 and 2020 was 71.2 percent and 76.8 percent, respectively.
Mortgage Loan Finance. We participate in the MPF program, which is a secondary mortgage market structure under which we either invest in or, for fees, facilitate third party investors' investment in eligible mortgage loans (referred to as MPF loans) from FHLBank members, referred to as "participating financial institutions." MPF loans are fixed rate, residential mortgage loans that are either conventional (conventional mortgage loans) or insured or guaranteed by the Federal Housing Administration (the FHA), the U.S. Department of Veterans Affairs (the VA), the Rural Housing Service of the U.S. Department of Agriculture (RHS), or the U.S. Department of Housing and Urban Development (HUD) (government mortgage loans) and are secured by one- to four-family residential properties with original maturities ranging from five years to 30 years or participations in such mortgage loans. For information on trends in the size of the program in 2021, see Part II — Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Mortgage Loans.
A variety of MPF loan products have been developed to meet the differing needs of participating financial institutions. We have offered our members MPF Original, MPF 125, MPF Plus, MPF 35, MPF Government, MPF Government MBS and MPF Xtra, each being closed-loan products in which we (or a third party investor in the case of MPF Xtra, or MPF Government MBS) invest in MPF loans that have been acquired or have already been closed by the participating financial institutions with its own funds. The products have different credit-risk-sharing characteristics based upon the different levels for the first loss account and credit-enhancement and the types of credit-enhancement fees (performance-based, fixed amount, or none). In the case of MPF Xtra and MPF Government MBS, each product facilitates the investment in MPF loans by third party investors for which we are paid fees and under which the related credit and market risks are transferred to the investors. There are no first loss account, credit-enhancement, or credit-enhancement fees for MPF Xtra and MPF Government MBS because the loans are sold to third parties that assume the embedded credit risk. For government loans, participating financial institutions provide the required credit-enhancement by delivering loans that are guaranteed or insured by a department or agency of the U.S. government.
The participating financial institution is responsible for all of the traditional retail loan origination functions under all of these MPF loan products. A master commitment provides the terms under which the participating financial institution delivers mortgage loans to us. We continue to offer MPF Original, MPF 35, MPF Government, MPF Government MBS, and MPF Xtra. We do not currently offer our members new master commitments under MPF 125 or MPF Plus.
The FHLBank of Chicago (in this capacity, the MPF Provider) establishes general eligibility standards under which an FHLBank member may become a participating financial institution, the structure of MPF loan products, and the eligibility rules for MPF loans. In addition, the MPF Provider manages the delivery mechanism for MPF loans and the back-office processing of MPF loans as master servicer and master custodian. The FHLBanks that participate in the MPF Program, including the Bank, (the MPF Banks) pay fees to the MPF Provider for these services.
The MPF Provider has engaged a vendor for master servicing and as the primary custodian for the MPF program (referred to herein as the master servicer). The MPF Provider also has contracted with other custodians meeting MPF program eligibility standards at the request of certain participating financial institutions. These other custodians are typically affiliates of participating financial institutions, and in some cases a participating financial institution may act as self-custodian.
The MPF Provider publishes and maintains:
•the MPF Program Guide; and
•a Selling Guide and a Servicing Guide for each of the remaining MPF products we have offered (collectively, the MPF guides), which together detail the requirements participating financial institutions must follow in originating, underwriting, selling and servicing MPF loans.
The MPF Provider also maintains the infrastructure through which MPF Banks may purchase MPF loans through their participating financial institutions.
For conventional mortgage loan products (MPF loan products other than government mortgage loans and products in which we do not invest such as MPF Xtra), participating financial institutions assume or retain a portion of the credit risk on the MPF loans they sell to an MPF Bank by providing credit-enhancement either through a direct liability to pay credit losses up to a specified amount or through a contractual obligation to provide supplemental mortgage guaranty insurance. The FHFA Acquired Member Assets (AMA) rule allows each FHLBank to utilize its own model to determine the credit-enhancement for an AMA asset or pool of loans in lieu of a nationally recognized statistical ratings organization (NRSRO) ratings model. We determined, based on documented analysis, that assets delivered to us were credit enhanced to at least a level at which we have a high degree of confidence that we will not bear material losses beyond the losses absorbed by our first loss account, even under reasonably likely adverse changes to expected economic conditions. Loans are assessed by third party credit models, and a credit-enhancement is calculated based on credit attributes of the loans in each master commitment. Credit losses on a loan may only be absorbed by a credit-enhancement amount stated in the applicable master commitment. The participating financial institution's credit-enhancement covers losses for MPF loans in excess of the MPF Bank's allocated portion of credit losses up to an agreed upon amount, called the first loss account. Participating financial institutions are paid a credit-enhancement fee for providing credit-enhancement and in some instances all or a portion of the credit-enhancement fee may be adjusted based upon the performance of loans purchased by the Bank. Losses that exceed the amount of the participating financial institutions' credit-enhancement obligation are borne by the Bank.
Participating Financial Institution Eligibility
Members and eligible housing associates may apply to become a participating financial institution. All of the participating financial institution's obligations under the applicable agreement are secured in the same manner as the other obligations of the participating financial institution under its advances agreement with us. We have the right to request additional collateral to secure the participating financial institution's obligations.
Repurchases of MPF Loans
When a participating financial institution fails to comply with its representations and warranties concerning its duties and obligations described within applicable agreements, the MPF guides, applicable laws, or terms of mortgage documents, the participating financial institution may be required to repurchase the MPF loans that are impacted by such failure. Reasons that would require a participating financial institution to repurchase an MPF loan may include, but are not limited to, MPF loan ineligibility, failure to deliver documentation to an approved custodian, a servicing breach, fraud, or other misrepresentation. In such instances, we can require that the participating financial institution compensate us for any losses or costs that we incur.
MPF Servicing
The servicer (the participating financial institution, a servicer engaged by the participating financial institution, or a servicer to which the servicing rights were sold) generally retains the right and responsibility for servicing MPF loans it delivers, including loan collections and remittances, default management, loss mitigation, foreclosure, and disposition of the real estate acquired through foreclosure or deed-in-lieu of foreclosure.
If there is a loss on a conventional mortgage loan, the loss is allocated to the master commitment and shared in accordance with the risk-sharing structure for that particular master commitment. The servicer pays any gain on sale of real-estate-owned property (REO) to the related MPF Bank, or in the case of a participation, to us and other MPF Bank(s) based upon their respective interests in the MPF loan. However, the amount of the gain is available to reduce subsequent losses incurred under the master commitment before such losses are allocated between us and the participating financial institution.
Loss Allocation
Credit losses from conventional mortgage loans that are not covered by the borrower's equity in the mortgaged property, property insurance, or primary mortgage insurance are allocated between us and the participating financial institution as follows:
•Credit losses are allocated first to us, up to an agreed-upon amount, called the first loss account determined for the MPF product as follows:
MPF Original. The first loss account starts out at zero on the day the first MPF loan under a master commitment is purchased but increases monthly over the life of the master commitment at a rate that ranges from 0.03 percent to 0.06 percent (three to six basis points) per annum based on the month-end outstanding aggregate principal balance of the master commitment. The first loss account is structured so that over time, it should cover expected losses on a master commitment, though losses early in the life of the master commitment could exceed the first loss account and be charged in part to the participating financial institution's credit-enhancement.
MPF 125. The first loss account is equal to 1.00 percent (100 basis points) of the aggregate principal balance of the MPF loans funded under the master commitment. Once the master commitment is fully funded or expires, the first loss account is expected to cover expected losses on that master commitment, although we may recover a portion of losses allocated to the first loss account by withholding performance credit-enhancement fees payable to the participating financial institution.
MPF Plus. The first loss account is equal to an agreed-upon number of basis points of the aggregate principal balance of the MPF loans funded under the master commitment that is not less than the amount of expected losses on the master commitment. Once the master commitment is fully funded, the first loss account is expected to cover expected losses on that master commitment. We may recover a portion of losses allocated to the first loss account by withholding performance credit-enhancement fees payable to the participating financial institution.
MPF 35. The first loss account is equal to 35 basis points of the aggregate principal balance of the MPF loans funded under the master commitment. We may recover a portion of losses allocated to the first loss account by withholding performance credit-enhancement fees payable to the participating financial institution.
•Credit losses are allocated second to the participating financial institution under its credit-enhancement obligation for losses in excess of the first loss account, if any, up to the amount of such credit-enhancement. The credit-enhancement may consist of a direct liability of the participating financial institution to pay credit losses up to a specified amount, a contractual obligation of the participating financial institution to provide supplemental mortgage guaranty insurance, or a combination of both.
•Third, any remaining unallocated losses are absorbed by us.
We may invest in participation interests in MPF loans together with other MPF Banks. For participation interests, MPF loan losses (other than those allocable to the participating financial institution) are allocated among us and the participating MPF Bank(s) pro rata based upon the respective participation interests in the related master commitment.
Other Banking Activities. We engage in other banking activities including, among others:
•offering standby letters of credit, which are financial instruments we issue for a fee under which we agree to honor payment demands made by a beneficiary in the event the primary obligor cannot fulfill its obligations; and
•acting as a correspondent for deposit, funds transfer, and safekeeping services for which we earn a fee.
Consolidated Obligations
We fund our activities principally through the sale of debt securities known as consolidated obligations, referred to herein as COs. Our ability to access the money and capital markets through the sale of COs using a variety of debt structures and maturities has historically allowed us to manage our balance sheet effectively and efficiently. The FHLBanks are among the world's most active issuers of debt, issuing on a daily basis, including sometimes multiple issuances in a single day. The FHLBanks compete with Fannie Mae, Freddie Mac, and other GSEs for funds raised through the issuance of unsecured debt in the agency debt market.
COs, consisting of bonds and discount notes, represent our primary source of debt to fund advances, mortgage loans, and investments. All COs are issued on behalf of a single FHLBank (as the primary obligor) through the Office of Finance, but all COs are the joint and several obligations of all of the FHLBanks. COs are not obligations of the U.S. government and are not guaranteed by the U.S. government or any government agency. As of February 28, 2022, Moody's Investors Service Inc. (Moody's) rated COs Aaa/P-1, and Standard & Poor’s Financial Services LLC (S&P) rated them AA+/A-1+. The GSE status of the FHLBanks and the ratings of the COs have historically provided the FHLBanks with ready capital market access. For information on the market for COs during the period covered by this report, see Part II — Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity.
CO Bonds. CO bonds may have original maturities of up to 30 years (although there is no statutory or regulatory limit on maturities) and are generally issued to raise intermediate and long-term funds. CO bonds may also contain embedded options that affect the term or yield structure of the bond. Such options include call options under which we can redeem bonds prior to maturity.
CO bonds may be issued with either fixed-rate coupon-payment terms, zero-coupon terms, or variable-rate coupon-payment terms that use a variety of indices for interest-rate resets including the secured overnight financing rate (SOFR), and others. Some CO bonds may contain different coupon characteristics at different points in time.
CO bonds can be issued and distributed through negotiated or competitively bid transactions with approved underwriters or selling group members. We frequently participate in these issuances. Each FHLBank requests funding through the Office of Finance, and the Office of Finance endeavors to issue the requested bonds and allocate proceeds in accordance with each FHLBank's requested funding. In some cases, proceeds from partially fulfilled offerings must be allocated among the requesting FHLBanks in accordance with predefined rules that apply to particular issuance programs. Conversely, under certain programs, proceeds from bond offerings that exceed aggregate FHLBank demand will be allocated to the FHLBanks in accordance with predefined rules that apply to particular issuance programs. The Office of Finance also prorates the amounts of fees paid to dealers in connection with the sale of COs to each FHLBank based upon the percentage of debt issued that is assumed by each FHLBank.
The Office of Finance has established an allocation methodology for the proceeds from the issuance of COs if COs cannot be issued in sufficient amounts to satisfy all FHLBank demand for funding during periods of financial distress and when its existing allocation processes are deemed insufficient. In general, this methodology provides that the proceeds in such circumstances will be allocated among the FHLBanks based on relative FHLBank total regulatory capital, with FHLBanks with greater total regulatory capital in absolute terms receiving greater allocations of issuance proceeds. The Office of Finance will use this method in such periods unless it determines that there is an overwhelming reason to adopt a different allocation method. As is the case during any instance of a disruption in our ability to access the capital markets, market conditions or this allocation could adversely impact our ability to finance our operations, financial condition, and results of operations.
CO Discount Notes. CO discount notes are short-term obligations issued at a discount to par with no coupon. Terms range from overnight up to one year. We generally participate in CO discount note issuance on a daily basis as a means of funding short-term assets and managing our short-term funding gaps. Each FHLBank submits commitments to issue CO discount notes in specific amounts with specific terms to the Office of Finance, which in turn, aggregates these commitments into offerings to securities dealers. Such commitments may specify yield limits that we have specified in our commitment, above which we will not accept funding. CO discount notes are sold either at auction on a scheduled basis or through a direct bidding process on an as-needed basis through a group of dealers known as the selling group, who may turn to other dealers to assist in the ultimate distribution of the securities to investors.
Negative Pledge Requirement. FHFA regulations require that each FHLBank maintain the following types of assets, free from any lien or pledge, in an amount at least equal to the amount of that FHLBank's participation in the total COs outstanding:
•cash;
•obligations of, or fully guaranteed by, the U.S. government;
•secured advances;
•mortgages, which have any guaranty, insurance, or commitment from the U.S. government or any agency of the U.S.; and
•investments described in Section 16(a) of the FHLBank Act, which, among other items, includes securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located.
Table 2 - Ratio of Non-Pledged Assets to Total Consolidated Obligations
(dollars in thousands)
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2021 | | 2020 |
| Cash and due from banks | | $ | 204,993 | | | $ | 2,050,028 | |
| Advances | | 12,340,020 | | | 18,817,002 | |
Investments (1) | | 16,372,499 | | | 13,341,538 | |
| Mortgage loans, net | | 3,120,159 | | | 3,930,252 | |
| Accrued interest receivable | | 68,360 | | | 87,582 | |
| Less: pledged assets | | (27,630) | | | (23,700) | |
| Total non-pledged assets | | $ | 32,078,401 | | | $ | 38,202,702 | |
| Total consolidated obligations | | $ | 28,888,352 | | | $ | 34,349,900 | |
| Ratio of non-pledged assets to consolidated obligations | | 1.11 | | | 1.11 | |
_______________________
(1)Investments include interest-bearing deposits, securities purchased under agreements to resell, federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities.
Joint and Several Liability. Although each FHLBank is primarily liable for the portion of COs corresponding to the proceeds received by that FHLBank, each FHLBank is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all COs. Under FHFA regulations, if the principal or interest on any CO issued on behalf of one of the FHLBanks is not paid in full when due, then the FHLBank primarily responsible for the payment may not pay dividends to, or redeem or repurchase shares of stock from, any member of such FHLBank. The FHFA, in its discretion, may require any FHLBank to make principal or interest payments due on any COs, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation.
To the extent that an FHLBank makes any payment on a CO on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the FHLBank otherwise responsible for the payment. However, if the FHFA determines that an FHLBank is unable to satisfy its obligations, then the FHFA may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank's participation in all COs outstanding, or on any other basis the FHFA may determine.
Neither the FHFA nor any predecessor to it has ever required us to repay obligations in excess of our participation nor have they allocated to us any outstanding liability of any other FHLBank's COs.
Capital Resources
As a cooperative, we are owned by our member institutions, which are required to purchase shares of our capital stock as a condition of membership in us and to support the capital requirements for certain credit products that we provide. All issuances and repurchases/redemptions of our capital stock are effected at a par value of $100 per share. We issue one class of stock, Class B, which shareholders may redeem five years after providing a written redemption request. Our equity capital also includes retained earnings.
Total Stock-Investment Requirement (TSIR). Each member is required to satisfy its TSIR at all times, which is an amount of stock equal to its activity-based stock-investment requirement plus its membership stock-investment requirement rounded up to the nearest whole share. Any stock held by a member in excess of its TSIR is referred to as excess stock. On December 31, 2021, members and nonmembers with capital stock outstanding held excess capital stock totaling $32.6 million, representing approximately 3.4 percent of total capital stock outstanding.
Membership Stock-Investment Requirement (MSIR). The MSIR is equal to 0.05 percent of the value of the member’s total assets measured as of December 31 of the preceding year subject to a current minimum balance of $10,000 and a current maximum balance of $5.0 million. Each member’s MSIR is adjusted annually on or about March 31 to reflect total assets as of December 31 of the preceding year. Prior to December 31, 2021, the MSIR was equal to 0.20 percent of the value of certain member assets eligible to secure advances subject to a minimum balance of $10,000 and a maximum balance of $10.0 million.
Activity-Based Stock-Investment Requirement (ABSIR). Certain activity with us has an associated ABSIR. For example, advances have an ABSIR that varies by term with longer terms typically requiring a higher ABSIR.
Redemption of Excess Stock. Members may submit a written request for redemption of excess stock. The stock subject to the request will be redeemed at par value by us upon expiration of the stock-redemption period, which is five years for Class B stock, provided that the stock is not required to support the member's TSIR. The stock-redemption period also applies (with certain exceptions) to stock held by a member that (1) gives notice of intent to withdraw from membership or (2) becomes a nonmember due to merger or acquisition, charter termination, or involuntary termination of membership. At the end of the stock-redemption period, we must comply with the redemption request unless doing so would cause us to fail to comply with our minimum regulatory capital requirements, cause the member to fail to comply with its TSIR, or violate any other applicable limitation or prohibition.
Repurchase of Excess Stock. Our capital plan provides us with the authority and sole discretion to repurchase excess stock from any shareholder at par value upon 15 days prior written notice to the member, unless a shorter notice period is agreed to in writing with the member, so long as the repurchase will not cause us to fail to meet any of our regulatory capital requirements or violate any other applicable limitation or prohibition. It is our practice to repurchase daily the excess stock held by any shareholder whose excess stock exceeds the lesser of $3.0 million or 3.00 percent of the shareholder’s TSIR, subject to a minimum repurchase of $100,000. We retain authority to suspend repurchases of excess stock from any member or all members without prior notice. In addition to daily repurchases, shareholders may request that we voluntarily repurchase excess stock shares at any time. In either case, we retain sole discretion over any voluntary repurchases of excess stock in accordance with our capital plan. The discretion to suspend repurchases or to decline a member’s repurchase request would most likely be exercised in one of two scenarios. In the first scenario, discretion would be exercised because the member’s financial condition or collateral position is such that we deem it necessary to retain excess stock to fully secure our credit exposure to the member. In the second scenario, discretion would be exercised to meet the liquidity or capital management needs of the Bank. During the year ended December 31, 2021, we repurchased $547.0 million of excess capital stock, of which $3.0 million was mandatorily redeemable capital stock.
Statutory and Regulatory Restrictions on Capital-Stock Redemption and Repurchases. By law our stock is putable by the member. However, there are significant statutory and regulatory restrictions on our obligation to redeem a member's outstanding stock, including the following:
•Our board of directors, or a committee of the board, may decide to suspend redemptions if it reasonably believes that continued redemptions would cause us to fail to meet any of our minimum capital requirements, prevent us from maintaining adequate capital against potential risks that are not adequately reflected in our minimum capital requirements, or otherwise prevent us from operating in a safe and sound manner.
•We may not redeem or repurchase any capital stock without the prior written approval of the FHFA if our board of directors or the FHFA determines that we have incurred or are likely to incur losses that result in or are likely to result in charges against our capital stock while such charges are continuing or expected to continue.
•If, during the period between receipt of a stock-redemption notification from a member and the actual redemption, we become insolvent and are either liquidated or forced to merge with another FHLBank, the redemption value of the stock will be established either through the market-liquidation process or through negotiation with a merger partner. In either case, all senior claims must first be settled, and there are no claims which are subordinated to the rights of FHLBank stockholders.
•We can only redeem stock investments that exceed the members' TSIR.
•If we were liquidated, after payment in full to our creditors, our stockholders would be entitled to receive the par value of their capital stock as well as any retained earnings in an amount proportional to the stockholder's share of the total shares of capital stock. In the event of a merger or consolidation, our board of directors would determine the rights and preferences of our stockholders, subject to any terms and conditions imposed by the FHFA.
Additionally, we cannot redeem or repurchase shares of capital stock from any of our members if:
•following such redemption, we would fail to satisfy our minimum capital requirements;
•we become undercapitalized or our capital would be insufficient to maintain a classification of adequately capitalized after redeeming or repurchasing shares, except, in this latter case, with the permission of the Director of the FHFA;
•the principal or interest due on any CO issued through the Office of Finance on which we are the primary obligor has not been paid in full when due;
•we fail to provide to the FHFA a certain quarterly certification required by the FHFA's regulations prior to declaring or paying dividends for a quarter;
•we fail to certify in writing to the FHFA that we will remain in compliance with our liquidity requirements and will remain capable of making full and timely payment of all of our current obligations;
•we notify the FHFA that we cannot provide the required certification, project we will fail to comply with statutory or regulatory liquidity requirements, or will be unable to timely and fully meet all of our current obligations; or
•we actually fail to comply with statutory or regulatory liquidity requirements or to timely and fully meet all of our current obligations, or negotiate to enter or enter into an agreement with one or more other FHLBanks to obtain financial assistance to meet our current obligations.
Our board of directors also has a statutory obligation to review and adjust member capital stock purchase requirements to comply with our minimum capital requirements, and each member must comply promptly with any such requirement. However, a member may be able to reduce its outstanding business with us as an alternative to purchasing additional capital stock.
Mandatory Purchases of Capital Stock. Our board of directors has a right and an obligation to call for additional capital-stock purchases by our members in accordance with our capital plan, if needed to satisfy statutory and regulatory capital requirements. Our board of directors has never called for any additional capital-stock purchases by members under our capital plan.
As of December 31, 2021, our retained earnings totaled $1.5 billion. Of that amount, $368.4 million is in a restricted retained earnings account and is not available to pay dividends. We are required to allocate 20 percent of net income to the restricted retained earnings account up to a contribution level set forth in our capital plan and a joint capital enhancement agreement (as amended, the Joint Capital Agreement) among the FHLBanks. We are required to allocate 20 percent of net income to this restricted retained earnings account until the total amount in the restricted retained earnings account is at least equal to 1.0 percent of the daily average carrying value of our outstanding total COs (excluding fair-value adjustments) for the calendar quarter. Throughout 2021, the balance in restricted retained earnings exceeded the threshold for the contribution requirement, and as of December 31, 2021 our restricted retained earnings exceeded the required contribution level by $68.9 million. Accordingly, no allocation of net income was made to restricted retained earnings in 2021 and no further allocations of net income into restricted retained earnings are required until such time as the required contribution level exceeds the balance of restricted retained earnings. Any amount of restricted retained earnings that exceeds 150 percent of the contribution requirement may be reclassified to unrestricted retained earnings. For additional information on restricted retained earnings and the Joint Capital Agreement, see Part II — Item 5 — Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Interest-Rate-Exchange Agreements
In general, we use interest-rate-exchange agreements (derivatives) in three ways: 1) as a fair-value hedge of a hedged financial instrument or a firm commitment, 2) as a cash-flow hedge of a hedged financial instrument or a forecasted transaction, or 3) as economic hedges in asset-liability management that are not designated as hedges. In addition to using derivatives to manage mismatches of interest rates between assets and liabilities, we also use derivatives to manage embedded options in assets and liabilities and to hedge the market value of existing assets, liabilities, and anticipated transactions. We may also enter into derivatives concurrently with the issuance of COs to reduce funding costs. We enter into derivatives directly with principal counterparties and also enter into centrally-cleared derivatives where our counterparty is a derivatives clearing organization (DCO). FHFA regulations require the documentation of nonspeculative use of these instruments and the establishment of limits to credit risk arising from these instruments.
AHP Assessment
Annually, the FHLBanks collectively must set aside for the AHP the greater of $100 million or 10 percent of the current year's net income before interest expense associated with mandatorily redeemable capital stock and the assessment for AHP. For the year ended December 31, 2021, our AHP assessment was $7.7 million. In addition to the required assessment, our Board may
elect to make voluntary contributions to the AHP. Our board of directors approved a voluntary contribution of $4.8 million for 2021, resulting in a total combined contribution amount of $12.5 million for the year.
If the result of the aggregate 10 percent calculation described above is less than $100 million for all FHLBanks, then each FHLBank would be required to contribute such prorated sums as may be required to assure that the aggregate contributions of the FHLBanks equals $100 million. The shortfall would be allocated among the FHLBanks based upon the ratio of each FHLBank's income before AHP to the sum of the income before AHP of the FHLBanks combined, except that the required annual AHP contribution for an FHLBank cannot exceed its net earnings for the year. Accordingly, the actual amount of each future AHP assessment is dependent upon both our net income before interest expense associated with mandatorily redeemable capital stock and the income of the other FHLBanks. Thus, future AHP assessments are not determinable.
Risk Management
We have a comprehensive risk-governance structure. We have identified the following major risk categories relevant to business activities:
•Credit risk is the risk to earnings or capital due to an obligor's failure to meet the terms of any contract with us or otherwise perform as agreed;
•Market risk is the risk to earnings or shareholder value due to adverse movements in interest rates, market prices, or interest-rate spreads;
•Liquidity risk is the risk that we may be unable to meet our funding requirements, or meet the credit needs of members, at a reasonable cost and in a timely manner;
•Leverage risk is the risk that our capital is not sufficient to support the level of assets that can result from a deterioration of our capital base, a deterioration of the assets, or from overbooking assets;
•Business risk is the risk to earnings or capital arising from adverse business decisions or improper implementation of those decisions, or from external factors as may occur in both the short- and long-run, including from legislative and regulatory developments;
•Diversity, Equity and Inclusion risk is the risk that the Bank cannot achieve its diversity, equity and inclusion goals and objectives as outlined in the diversity, equity and inclusion strategic plan. Diversity, equity and inclusion risk also has strategic / business risk, compliance risk, and operational risk components;
•Operational risk is the risk of unexpected loss resulting from ineffective people, processes or systems, whether emanating internally or externally. Operational risk also includes model risk (the risk of loss resulting from model errors or the incorrect use or application of model output), compliance risk (the risk of non-compliance with the Bank’s obligations and commitments), cyber risk, and the risk of internal or external fraud; and
•Reputation risk is the risk to earnings or capital arising from negative public opinion, which can affect our ability to establish new business relationships or maintain existing business relationships.
The board of directors provides risk oversight through the review and approval of our risk-management policy and also evaluates and approves risk tolerances and risk limits. The board of directors' Risk Committee provides additional oversight of the Bank's risk governance structure. The board of directors also reviews the results of an annual risk assessment that we perform for our major business processes.
Management establishes a quantifiable connection between our desired risk profile and our risk tolerances and risk limits as expressed in our risk-management policy. Management is responsible for maintaining internal policies consistent with the risk-management policy and maintains various standing committees intended to assess and manage each of the major risk categories relevant to our business activities. Our chief risk officer is responsible for communicating material changes to these internal policies to the board of directors' Risk Committee. Management is also responsible for monitoring, measuring, and reporting risk exposures to the board of directors. Additionally, our Internal Audit department may report to the board's Audit Committee the results of internal audit work on the effectiveness of management's risk management processes and controls.
Business Risk
Management's strategies for mitigating business risk include annual and long-term strategic planning exercises; continually monitoring key economic indicators, projections, competitive threats, and our external environment; and developing contingency plans when appropriate.
Operational Risk
We are subject to operational risk which can result from human error, fraud, vendor or third-party failure, unenforceability of legal contracts, or deficiencies in internal controls or information systems.
We have policies and procedures intended to mitigate operational risks. We train our employees for their roles and maintain written policies and procedures for our key functions. We maintain a system of internal controls designed to adequately segregate responsibilities and appropriately monitor and report on our activities to management and the board of directors. Our Internal Audit department, which reports directly to the Audit Committee of the board of directors, regularly monitors our adherence to established policies and procedures. Some operational risks are beyond our control, and the failure of other parties to adequately address their operational risks could adversely impact us.
Operational risk includes risk arising from breaches of our cybersecurity or other cyber incidents that could result in a failure or interruption of our information technology systems. We have not experienced a disruption in our information systems that has had a material adverse impact on us. However, we rely heavily on our information systems to conduct and manage our business, and any failures or interruptions of these information systems could have a material adverse impact on our financial condition and results of operations. We take many steps to protect our information systems and data, including operational redundancy and supplier diversity, monitored physical and logical security controls, mandatory staff training and testing on cyber risks, and third party facilitated penetration testing.
Additionally, most of our information systems have either been placed with infrastructure-as-a-service (IaaS) providers or have been co-located with a third-party service provider. Both types of environments are designed to host information systems with specialized environmental controls, certain power, heating and cooling system redundancies, 24-hour onsite staffing, and physical security. We rely on these service providers to continue to provide secure locations and stable operating environments for the systems deployed there. Any failure to provide such stability or security by the third-party service provider could result in failures or interruptions in our ability to conduct business. Additionally, there may be an increased risk of cyberattacks as a result of geopolitical conflicts, including recent hostilities between Russia and Ukraine. We take several steps to mitigate the risks of our reliance on these third-party service providers, including physical and/or monitored logical security controls and hosted data along with maintaining redundancy of systems at alternate locations for disaster-recovery and business continuity. Data for critical computer systems is backed up regularly and stored offsite to avoid disruption in the event of a computer failure. Additionally, we review the providers' controls reports annually and monitor and meet with providers on a regular basis. We maintain disaster-recovery sites intended to provide continuity of operations in the event that our primary information systems become unavailable, but there can be no complete assurance that those disaster-recovery sites will work as intended in the event of an actual disruption or failure. Moreover, certain of our application vendors host their applications in either a software-as-a-service framework or a hosted service model, either on their own hardware or with a third-party. When executing contracts with these providers we seek to mitigate our risks based on loss of access or security breaches. Additionally, we monitor and manage these service providers through our vendor management program.
Further, our AHP, MPF, and certain collateral activities rely on the secure processing, storage, and transmission of private borrower information, such as names, residential addresses, social security numbers, credit rating data, and other consumer financial information. We take several steps to protect such data, including information technology and security measures, such as implementing general computing controls governing access to programs and data. Additionally, we review related third-party service organizations' controls reports annually. Despite these steps, this information could be exposed in several ways, including through unauthorized access to our computer systems, computer viruses that attack our computer systems, software or networks, accidental delivery of information to an unauthorized party, and loss of storage media containing this information. Any of these events could result in financial losses, legal and regulatory sanctions, and reputational damage.
We are implementing a continuous strategy to ensure our mission critical applications and supporting infrastructure remain protected against evolving security threats. The pace of change in our information technology increases the risk of failures or interruptions of information systems or other technology, which could have a material adverse impact on our financial condition and results of operations. We have taken steps to mitigate the risks arising from the pace of change by strictly adhering to our information technology-related policies, guidelines, procedures and industry best practices and engaging third party experts to guide and advise on the strategy as a whole and on particular components, and we intend to follow these practices during the remainder of its implementation. Furthermore, our senior management approves and provides oversight of all major information technology-related investments.
Disaster-Recovery/Business Continuity Provisions. We maintain a business continuity site in Massachusetts to provide continuity of operations in the event that our Boston headquarters becomes unavailable. We also have reciprocal back-up agreements in place with the FHLBank of Topeka to provide short-term coverage for a limited set of services in the event that our facilities are inoperable.
Insurance Coverage. We have insurance coverage for employee fraud, forgery, alteration, and embezzlement, computer systems fraud, as well as director and officer liability protection for, among other things, breach of duty, negligence, and acts of omission. Additionally, insurance coverage is currently in place for commercial property and general liability, bankers professional liability, employment practices liability, cyber liability, and fiduciary liability. We maintain additional insurance protection as deemed appropriate, including coverage for liability arising from automobiles, and business-travel accidents. In addition to using an insurance broker to place our insurance coverage, we use the services of an independent insurance consultant who periodically conducts a review of our insurance coverage levels and provides other advice about our insurance program.
Diversity, Equity and Inclusion Risk
The Bank’s commitment to its DE&I program is strong as the program continues to evolve. The Bank has a three-year DE&I strategic plan that contains specific metrics and measures so we can evaluate the program’s effectiveness over the three-year time horizon. The plan is built on a foundation of four pillars: Supplier Diversity, Workforce, Capital Markets, and Governance. The plan aligns objectives, goals, and metrics with these pillars.
Having effective DE&I programs and awareness benefits our organization in a number of ways including:
•Providing differing perspectives and experiences that assist the Bank in meeting its strategic objectives, which occur at the board of directors, management, and staff levels;
•Diversity in the workplace can improve the Bank’s ability to problem solve because differing perspectives produce more potential solutions and ensure all stakeholders are considered and represented in the decision-making process;
•Risk Management will also benefit from more diverse perspectives by anticipating a broader range of scenarios, outcomes, and mitigants;
•Ensuring diverse firms have the opportunity to engage with the Bank, opening up the potential for providing the Bank more value in terms of their (vendors, staff, etc.) perspectives and experience;
•Having a positive impact on the Bank’s reputation, whether from internal stakeholders (staff) and external stakeholders (members, regulators, potential staff); and
•Positive impact on staff retention and growth with a focus on having an inclusive culture.
Reputation Risk
We take several steps to manage reputation risk. We have established a code of ethics and business conduct and operational risk-management procedures intended to ensure ethical behavior among our staff and directors and require all employees annually to certify compliance with our code of ethics. We work to ensure that all communications are presented accurately, consistently, and in a timely manner to multiple audiences and stakeholders. In particular, we regularly conduct outreach efforts with our membership and with housing and economic-development advocacy organizations throughout our district. We also maintain relationships with government officials at the federal, state, and municipal levels; nonprofit housing and community-development organizations; and regional and national trade and business associations to foster awareness of our mission, activities, and value to members. We work with the Council of FHLBanks and the Office of Finance to coordinate communications on a broader scale.
ITEM 1A. RISK FACTORS
The following discussion summarizes some of the most important risks that we face. This discussion is not exhaustive, and there may be other risks that we face, which are not described below. The risks described below, if realized, may result in us being prohibited from paying dividends and/or repurchasing and redeeming our capital stock, and could adversely impact our business operations, financial condition, and future results of operations.
BUSINESS AND REPUTATION RISKS
Sustained low advances balances and/or limited opportunities for loan purchases at our offered pricing could adversely impact results of operations.
Our primary business is providing liquidity to our members by making advances to, and purchasing residential mortgage loans from, our members. Many of our competitors are not subject to the same body of regulation applicable to us. This is one factor among several that may enable our competitors to offer wholesale funding or purchase residential mortgage loans on terms that we are unable to offer and that members deem more desirable than the terms we offer on our advances or purchases of residential mortgage loans.
The availability to our members of different products from alternative sources, with terms more attractive than the terms of products we offer, as can happen from time-to-time, may significantly decrease the demand for our advances and/or loan purchases. Further, any changes we make in the pricing of our advances or for residential mortgage loans in an effort to compete effectively with these competitive funding sources could decrease the profitability of advances and purchased loans, which could reduce earnings. More generally, a decrease in the demand for advances and/or loan purchases, or a decrease in the profitability of advances and/or mortgage loan investments, could adversely impact our financial condition and results of operations. In 2020, 2021 and continuing in 2022, a decrease in the demand for advances resulted from elevated deposit balances reported by our members in connection with U.S. government monetary policy and fiscal stimulus programs in response to the coronavirus pandemic and related economic downturn. This decrease in advances has adversely impacted our financial condition and results of operations, and such adverse impact is likely to continue, or worsen, if advances balances remain at current levels or further decline.
The loss of significant members could result in lower demand for our products and services.
As of December 31, 2021, our five largest stock-holding members held 22.4 percent of our stock. The loss of significant members or a significant reduction in the level of business they conduct with us would likely lower overall demand for our products and services in the future and adversely impact our performance.
Also, consolidations within the financial services industry could reduce the number of current and potential members in our district. Industry consolidation could also cause us to lose multiple members whose business and ownership of our stock are so substantial that their loss could threaten our viability. In turn, we might be forced to consider strategic alternatives, which could include a merger with another FHLBank.
We are subject to a complex body of laws and regulations, as well as U.S. government monetary and fiscal policies, which could change in a manner detrimental to our business operations and/or financial condition.
The FHLBanks are GSEs, organized under the authority of the FHLBank Act, and as such, are governed by federal laws and by regulations promulgated, adopted, and applied by the FHFA, an independent agency in the executive branch of the U.S. government that regulates the FHLBanks, Fannie Mae, and Freddie Mac. Congress may amend the FHLBank Act or other statutes in ways that significantly affect 1) the rights and obligations of the FHLBanks and 2) the manner in which the FHLBanks carry out their mission and business operations. New or modified legislation enacted by Congress or regulations adopted by the FHFA or other financial services regulators could adversely impact our ability to conduct business or the cost of doing business.
For example, we note that, from time to time, the executive branch, Congress, and various independent federal agencies have advanced plans to reform the federal support of U.S. housing finance, specifically targeting Fannie Mae and Freddie Mac. If implemented, these plans are likely to also directly and indirectly impact other GSEs that support the U.S. housing market, including the FHLBanks. In addition, recent tax changes have reduced the tax incentive for home ownership slightly. Any such changes or reforms that are implemented could adversely impact the profitability of the FHLBanks or limit future growth opportunities.
We cannot predict what regulations will be issued or revised or what legislation will be enacted or repealed, and we cannot predict the effect of any such regulations or legislation on our business operations and/or financial condition. Changes in regulatory or statutory requirements could result in, for example, an increase in the FHLBanks' cost of funding, a change in permissible business activities, change in our membership, limitations on advances made to our members, an increase in our mandatory contribution to affordable housing or community development programs, or a decrease in the size, scope, or nature of the FHLBanks' lending, investment, or mortgage-financing activities, any of which could adversely impact our financial condition and results of operations.
The businesses and results of operations of the FHLBanks are significantly affected by the monetary policies of the U.S. government and its agencies, including the Board of Governors of the Federal Reserve System (Federal Reserve). The policies of the Federal Reserve directly and indirectly influence the yield on interest-earning assets and the yield on interest-bearing liabilities and could adversely affect the demand for advances, mortgage loan purchases and for COs. These policies could also adversely affect the FHLBanks through lower yields on our investments, higher yields on our debt, or both, which could then adversely affect our financial condition and results of operations. In addition, the FHLBanks currently play a predominant role as lenders in the federal funds market; therefore, any disruption in the federal funds market or any related regulatory or policy change may adversely affect the FHLBanks’ cash management activities, results of operations, and reputation.
Our dividend practices could decrease demand for our products that require capital stock purchases and/or result in withdrawals from membership.
Historically, our board of directors has varied dividend declarations based on our financial condition, performance, outlook and economic environment. In the first quarter of 2021, our board reduced our dividend from recent levels, and subsequently increased the dividend in the third quarter of 2021, though still below recent levels. If our financial performance or condition were to deteriorate significantly in the future, our board of directors could determine to reduce or eliminate dividends.
A reduction in our dividend, or a determination by our board of directors to suspend or further lower dividend declarations, could result in decreased member demand for our products requiring capital stock purchases, reduced ability to add new members, and/or withdrawals from membership that could adversely impact our business operations and financial condition.
Limiting or ending repurchases of excess stock from members could decrease demand for advance products and increase membership withdrawals.
A period of financial distress could cause the Bank to impose a moratorium on repurchases of excess stock, which could provide an incentive for members to limit certain business with us to avoid associated stock purchase requirements and a disincentive to prospective members from becoming members, either of which could adversely impact our results of operations and financial condition.
An NRSRO's downgrade of the U.S. federal government's credit ratings could adversely impact our funding costs and/or access to the capital markets, and/or adversely impact demand for certain of our products.
Certain NRSROs have indicated that the credit ratings of the FHLBanks are constrained by the credit ratings of the U.S. federal government. Accordingly, a downgrade of the U.S. federal government's credit rating by an NRSRO is likely to be followed by a similar downgrade of the FHLBanks credit rating. Prolonged or repeated shutdowns of the U.S. federal government, such as that experienced in early 2019, among other things, could be followed by a downgrade of the credit ratings of the U.S. federal government. Downgrades of the U.S. federal government's credit rating (and, in turn, the FHLBanks' credit rating) are possible, and any resulting downgrades to our credit ratings could adversely impact our funding costs and/or access to the capital markets. Further, member and housing associate demand for certain of our products, such as letters of credit, is influenced by our credit ratings, and downgrade of our credit ratings could weaken or eliminate demand for such products. To the extent that we cannot access funding when needed on acceptable terms to effectively manage our cost of funds or demand for our products falls, our financial condition and results of operations could be adversely impacted.
Negative information about the FHLBanks or housing GSEs in general could adversely impact our cost and availability of financing, or limit membership growth.
Negative information about us or any other FHLBank, such as material losses or increased risk of losses, could adversely impact our cost of funds. More broadly, negative information about housing GSEs, in general, could adversely impact us. Potential sources of negative information about the FHLBanks include, but are not necessarily limited to, NRSROs, the FHFA, and its Office of Inspector General.
The housing GSEs Fannie Mae, Freddie Mac, and the FHLBanks issue highly rated agency debt to fund their operations. Negative announcements by any of the housing GSEs concerning topics such as accounting problems, risk-management issues, and regulatory enforcement actions may create pressure on debt pricing for all GSEs, as investors have perceived such instruments as bearing increased risk.
Given the FHLBanks’ status as GSEs, the scope, timing, and effect of any regulatory reform affecting the GSEs, including the ultimate resolution to the conservatorship of Fannie Mae and Freddie Mac and resulting changes in the regulation or status of the GSEs, could have a substantial effect on the FHLBank System. While there are significant differences between the
FHLBank System and Fannie Mae and Freddie Mac (including the FHLBanks’ focus on secured lending in the form of advances as opposed to guaranteeing mortgages and the FHLBanks' distinctive cooperative business model), legislation or other regulatory reform affecting GSEs could inadequately account for these differences, which could negatively change the perception of the risks associated with the GSEs and their debt securities. Any such change in the perception of risk could adversely affect the FHLBanks’ funding costs, access to funding, competitive position, and the financial condition and results of operations of an FHLBank and the FHLBanks on a combined basis.
Any negative information or other factors could result in the FHLBanks having to pay a higher rate of interest on COs to make them attractive to investors. If we maintain our existing pricing on our advances products and other services notwithstanding increases in CO interest rates, the spreads we earn would fall and our results of operations would be adversely impacted. If, in response to this decrease in spreads, we change the pricing of our advances, the advances may be less attractive to members, and the amount of new advances and our outstanding advance balances may decrease. In either case, the increased cost of issuing COs could adversely impact our financial condition and results of operations. Moreover, such negative information could deter prospective members from becoming members and could adversely impact our financial condition and results of operations.
We could fail to meet our minimum regulatory capital requirements or maintain a capital classification of "adequately capitalized," or we could be subject to enforcement action, any of which could result in prohibitions on dividends, excess stock repurchases, or capital stock redemptions, additional regulatory prohibitions, and/or could adversely impact our results of operations.
We are required to satisfy certain minimum regulatory capital requirements, including risk-based capital requirements and certain regulatory capital and leverage ratios, and are subject to the FHFA's regulation on FHLBank capital classification and critical capital levels (the Capital Rule), as described in Part II — Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital. Any failure to satisfy these requirements would result in our becoming subject to certain capital restoration requirements and being prohibited from paying dividends and redeeming or repurchasing capital stock without the prior approval of the FHFA, which could adversely affect our members' investment in our capital.
The Capital Rule, among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. An adequately capitalized FHLBank is one that has sufficient permanent and total capital to satisfy its risk-based and minimum capital requirements. We satisfied these requirements on December 31, 2021. However, pursuant to the Capital Rule, the FHFA has discretion to reclassify an FHLBank and modify or add to corrective action requirements for a particular capital classification. If we become classified into a capital classification other than adequately capitalized, we would be subject to the corrective action requirements for that capital classification in addition to being subject to prohibitions on declaring dividends and redeeming or repurchasing capital stock.
Finally, the FHFA is the FHLBank System's safety and soundness regulator and has broad powers, including enforcement powers, to cause us to take or refrain from taking certain actions including, but not limited to, paying dividends, repurchasing excess stock, redeeming capital stock, increasing or decreasing our total assets, and curtailing our investing activities.
We could become primarily liable for all or a portion of the COs of one or more other FHLBanks, which could adversely impact our financial condition and results of operations.
Each of the FHLBanks relies upon the issuance of COs as a primary source of funds. COs are the joint and several obligations of all of the FHLBanks, backed only by the financial resources of the FHLBanks. Accordingly, we are jointly and severally liable with the other FHLBanks for the COs issued by the FHLBanks through the Office of Finance, regardless of whether we receive all or any portion of the proceeds from any particular issuance of COs. The FHFA, at its discretion, may require any FHLBank to make principal or interest payments due on any COs, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. Accordingly, we could incur significant liability beyond our primary obligation under COs due to the failure of other FHLBanks to meet their obligations, which could adversely impact our financial condition and results of operations.
Compliance with regulatory contingency liquidity requirements could adversely impact our results of operations.
volatility. To satisfy this requirement, we maintain balances in shorter-term investments, which could earn lower interest rates than alternative 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 be adversely impacted. Furthermore, any changes in regulatory liquidity requirements could adversely affect our financial condition and results of operations.
Natural or man-made disasters, including health emergencies, such as the COVID-19 (coronavirus) pandemic and variants of the virus that causes COVID-19, could have a material adverse effect on the Bank’s results of operations or financial condition.
The occurrence of natural disasters, war or other international conflict (including the recent outbreak of hostilities between Russia and Ukraine), civil unrest, political protest 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, including emerging variants of the virus that causes COVID-19 (the COVID-19 pandemic), are evolving and unknown. The response to the continued spread of the COVID-19 pandemic 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. The COVID-19 pandemic, and the response of federal, state and local governments, has increased our members' liquidity and has reduced and could continue to reduce demand for our member institutions’ products and services, which has impacted and could continue to impact members’ 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. Price inflation for the labor, goods and services we require to operate could increase our operating expenses without a corresponding increase in revenue, resulting in lower net income. The average balance of advances has decreased and we believe will likely remain for some time at a level that is significantly lower than average balances of the past several years and could decline further. These effects heighten many of the risks we face, as described in this report, and could continue to 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.
Through 2021, the Federal Reserve maintained the federal funds rate to a target range of 0 to 0.25 percent. A prolonged period of very low interest rates could continue to reduce our net interest income and have a material adverse impact on our results of operations or financial condition. Though recent minutes of the Federal Open Market Committee of the Federal Reserve (FOMC) indicate that the targeted federal funds rate may increase during 2022, there remains a possibility that the Federal Reserve may keep interest rates low or even reduce the targeted federal funds rate below zero 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.
The COVID-19 pandemic threatens the health of our employees and their families and could impair our ability to conduct business. With our employees operating in a hybrid work environment, where work is performed on premises and 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 the COVID-19 pandemic 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, or, because of mandatory vaccination imposed by government action or employer policies, face disruptions in their respective workforces. 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 the COVID-19 pandemic. Our other investments could also be negatively affected by extreme price volatility caused by uncertainties stemming from the results of the COVID-19 pandemic. Our financial counterparties could be adversely impacted by the COVID-19 pandemic, and related fiscal stimulus and monetary policies that may affect their profitability, asset quality, and capitalization.
MARKET AND LIQUIDITY RISKS
Changes in interest rates could adversely impact our financial condition and results of operations.
Like many financial institutions, we realize a significant portion of our income from the spread between interest earned on our outstanding loans and investments and interest paid on our borrowings and other liabilities, as measured by our net interest spread. Although we use various methods and procedures to monitor and manage exposures due to changes in interest rates, we could experience instances when either our interest-bearing liabilities will be more sensitive to changes in interest rates than our interest-earning assets, or vice versa. These impacts are 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 could 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, as was the case during 2020, due to the fact that a substantial portion of our mortgage assets were purchased at premium prices.
Any inability or curtailment of our ability to access the capital markets could adversely impact our business operations, financial condition, and results of operations.
Our primary source of funds is the issuance of COs in the capital markets. Our ability to obtain funds through the sale of COs depends in part on prevailing conditions in the capital markets at that time, which are beyond our control. Accordingly, we cannot make any assurance that we will be able to obtain funding on terms acceptable to us, if at all. If we cannot access funding when needed, our ability to support and continue our operations would be adversely impacted, which would thereby adversely impact our financial condition and results of operations.
Changes to and replacement of the LIBOR benchmark interest rate could adversely affect our business, financial condition, and results of operations.
In July 2017, the United Kingdom’s Financial Conduct Authority (FCA), which regulates the London Interbank Offered Rate (LIBOR), announced its intention to stop persuading or compelling the group of major banks that sustains LIBOR to submit rate quotations after 2021. In March 2021, the FCA further announced that LIBOR will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021, or, in the case of some more frequently used U.S. dollar LIBOR settings, including those used by us, immediately after June 30, 2023. Although the FCA does not expect LIBOR to become unrepresentative before the applicable cessation date and intends to consult on requiring the administrator of LIBOR to continue publishing LIBOR of certain currencies and tenors on a non-representative, synthetic basis for a period after the applicable cessation date, there is no assurance that LIBOR, of any particular currency or tenor, will continue to be published or be representative through any particular date. There is no assurance that LIBOR will continue to be accepted or used by the markets generally or by any issuers, investors, or counterparties at any time, even if LIBOR continues to be available.
In September 2019, the FHFA issued a supervisory letter (LIBOR Supervisory Letter) to the FHLBanks relating to their planning for the LIBOR phase-out. Under the LIBOR Supervisory Letter, with limited exceptions, the FHLBanks were required, by December 31, 2019, to stop purchasing investments that reference LIBOR and mature after December 31, 2021, and were required, by March 31, 2020 (later extended by the FHFA to June 30, 2020), to no longer enter into any other new financial assets, liabilities, and derivatives that reference LIBOR and mature after December 31, 2021. As a result of the limitations introduced by the LIBOR Supervisory Letter, we and the other FHLBanks may experience less flexibility in our access to funding, higher funding costs, or lower overall demand or increased costs for advances; which may, in turn, negatively affect the future composition of our balance sheets, capital stock levels, primary mission assets, ratios, and net income. Under the restrictions in the LIBOR Supervisory Letter, we are not permitted to continue to use instruments that
reference LIBOR for hedging and risk-mitigating purposes, which has caused us to have to alter our hedging strategies and interest-rate risk management, which may have a negative effect on our financial condition and results of operations.
In April 2018, the Federal Reserve Bank of New York began publishing SOFR, which the Alternative Reference Rates Committee, a private-market committee convened by the Federal Reserve and the Federal Reserve Bank of New York, recommended as the alternative reference rate to U.S. dollar LIBOR. Since 2018, market activity in SOFR-linked financial instruments has continued to develop. Since November 2018, we have issued SOFR-linked COs. The Bank began to offer a SOFR-linked advance product in October 2019, began to use SOFR-indexed derivatives in May 2020 and began to invest in MBS with SOFR-linked coupons. As noted elsewhere in this report, we have assets and liabilities, including derivative assets and derivative liabilities, and member-pledged collateral indexed to LIBOR. We continue to evaluate the potential impact of the eventual replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement.
Alternatives may or may not be developed with or without additional complications. The market transition away from LIBOR and towards SOFR or other alternative reference rates, which will include the development of term and credit adjustments to accommodate differences between LIBOR and SOFR or other alternative reference rates, is expected to continue to be complicated. Transition in the markets and in our systems could be disruptive.
During the market transition away from LIBOR, LIBOR may experience increased volatility or become less representative, and the overnight U.S. Treasury repurchase market underlying SOFR may also experience disruptions from time to time, which may result in unexpected fluctuations in SOFR. Given the large volume of LIBOR-based mortgages and financial instruments, the basis adjustment to the replacement floating rate will receive extraordinary scrutiny, but whether the net impact is positive or negative cannot yet be ascertained. Risks relating to the effect of changes in legacy contractual interest rate terms on our financial assets and liabilities and the ability to renegotiate contractual terms, as well as risks relating to the market demand for our products and debt, the market value of pledged collateral, and critical vendors being able to adjust systems to properly process and account for an alternative rate are additional examples of the risks. We are not able to predict whether or when LIBOR publication will be discontinued, whether an alternative rate, such as SOFR, will become a widely accepted reference rate in place of LIBOR, or what impact the transition from LIBOR may have on our or our members’ business, financial condition, and results of operations. Additional information is in Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Summary — LIBOR Transition Preparations.
We use derivatives to manage interest-rate risk, however, we could be unable to enter into effective derivative instruments on acceptable terms.
We use derivatives to manage interest-rate risk. If, due to an absence of creditworthy swap dealers or guarantors, or to a decline in our own creditworthiness, we are unable to manage our hedging positions properly, or we are unable to enter into hedging instruments upon acceptable terms, we could be unable to effectively manage our interest-rate and other risks without altering our business strategies, which could adversely impact our financial condition and results of operations. In addition, while we are no longer entering into LIBOR-based derivatives, we do have outstanding derivatives based on LIBOR. Any failure by market participants to successfully transition away from LIBOR to a replacement benchmark interest rate and to implement transitional contractual arrangements for legacy LIBOR-based derivatives could adversely affect the trading or market value of derivatives. If we are unable to manage our hedging positions properly or are unable to enter into hedging instruments upon acceptable terms, the effectiveness of our management of interest-rate and other risks may be adversely affected, or we may be required to change our investment strategies and advance product offerings, which could adversely affect our financial condition and results of operations.
CREDIT RISKS
We are subject to credit-risk exposures related to advances, mortgage loans, derivatives, money-market transactions, investments, credit products, and 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, money-market transactions, investments, and extending other credit products, such as standby letters or credit, and future advance commitments. We are required to fully secure advances and other extensions of credit to our members with collateral. We evaluate the type of collateral pledged by members 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 a 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, including the current period, the number of our members or financial counterparties exhibiting financial stress may increase, which could expose us to additional member or other credit risk. Both the effects of the coronavirus itself, the governmental response, 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 MPF loans held in our portfolio.
Declines in U.S. home prices or in activity in the U.S. housing market or rising delinquency or default rates on mortgage loans could result in credit losses and adversely impact our business operations and/or financial condition.
A deterioration of the U.S. housing market and national decline in home prices could adversely impact the financial condition of a number of our borrowers, particularly those whose businesses are concentrated in the mortgage industry. One or more of our borrowers may default on their obligations to us for a number of reasons, such as changes in financial condition, a reduction in liquidity, operational failures, or insolvency. In addition, the value of residential mortgage loans pledged to us as collateral may decrease. If a borrower defaults, and we are unable to obtain additional collateral to make up for the reduced value of such residential mortgage loan collateral, we could incur losses. A default by a borrower lacking sufficient collateral to cover its obligations to us could result in significant financial losses, which would adversely impact our results of operations and financial condition.
Further, our methodology for determining our allowance for loan losses on our investments in MPF loans considers factors relevant to those investments, including market delinquency rates and trends in the delinquency rates on our investments in conventional mortgage loans. If delinquency or default rates rise for these investments or other factors used in determining the allowance worsen, we may determine to increase our allowance for loan losses, which would adversely impact our results of operations and financial condition.
We have geographic concentrations that could adversely impact our business operations and/or financial condition.
We, by nature of our charter and our business operations, are exposed to credit risk resulting from limited geographic diversity. Our advances business is generally limited to operations within our district. While we employ conservative credit underwriting and collateral practices to limit exposure, a decline in our district's economic conditions could create a credit exposure to our members' advances obligations in excess of collateral held.
OPERATIONAL RISKS
We rely heavily upon information systems and other technology and any disruption, failure, or security breach, including events caused by cyberattacks, of such information systems or other technology could adversely impact our reputation, financial condition, and results of operations.
We rely heavily on our information systems and other technology to conduct and manage our business. We take steps to mitigate the risks of such reliance, as discussed under Item 1 — Business — Risk Management — Operational Risk, however failures or interruptions of these information systems or other technology could have a material adverse impact on our financial condition and results of operations. Additionally, most of our information systems have been co-located with a third-party service provider, or are hosted with IaaS providers, on which we are reliant to provide a secure location and a stable operating environment for these systems. Any failure to provide such stability or security by the third-party service provider, or IaaS providers, could result in failures or interruptions in our ability to conduct business. Further, our AHP, MPF, and certain collateral activities rely on the secure processing, storage, and transmission of private borrower information, such as names,
residential addresses, social security numbers, credit rating data, and other consumer financial information. This information could be exposed in several ways, including through unauthorized access to our computer systems, computer viruses that attack our computer systems, software or networks, accidental delivery of information to an unauthorized party, and loss of encrypted media containing this information. Any of these events could result in financial losses, legal and regulatory sanctions, and reputational damage.
We are implementing a continuous strategy to ensure our mission critical applications and supporting infrastructure remain protected against evolving security threats. The pace of change to our information technology increases the risk of failures or interruptions of information systems or other technology, which could have a material adverse impact on our financial condition and results of operations.
We rely on vendors and other third parties for certain important or critical services and could be adversely impacted by disruptions in those services.
For example, in participating in the MPF program, we rely on the FHLBank of Chicago in its capacity as the MPF Provider. Our investments in mortgage loans through the MPF program account for 9.6 percent of our total assets as of December 31, 2021, and 21.9 percent of interest income for the year ended December 31, 2021. If the FHLBank of Chicago changes, or ceases to operate the MPF program or experiences a failure or interruption in its information systems and other technology in its operation of the MPF program, our mortgage-investment activities could be adversely impacted, and we could experience a related decrease in net interest margin, financial condition, and profitability. In the same way, we could be adversely impacted if any of the FHLBank of Chicago's third-party vendors engaged in the operation of the MPF program were to experience operational or technological difficulties.
As another example, we rely on the Office of Finance for, among other things, the placement of COs, our primary source of funds. A disruption in this service would disrupt our access to these funds, as also discussed under — Market and Liquidity Risks — Any inability or curtailment of our ability to access the capital markets could adversely impact our business operations, financial condition, and results of operations.
We rely on models for many of our business operations and changes in the assumptions used could have a significant effect on our financial position, results of operations, and assessments of risk exposure.
For example, we use models to assist in our determination of the fair values of financial instruments. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market pricing parameters. For financial instruments that are actively traded and have quoted market prices or parameters readily available, there is little to no subjectivity in determining fair value. If market quotes are not available, fair values are based on discounted cash flows using market estimates of interest rates and volatility or on dealer prices or prices of similar instruments. Pricing models and changes in their underlying assumptions are based on our best estimates for discount rates, prepayments, market volatility, and other factors. These assumptions could have a significant effect on the reported fair values of assets and liabilities, including derivatives, the related income and expense, and the expected future behavior of assets and liabilities. While the models we use to value instruments and measure risk exposures are subject to periodic validation by our staff and by independent parties, rapid changes in market conditions in the interim could impact our financial position. The use of different models and assumptions, as well as changes in market conditions, could significantly impact our financial condition and results of operations.
GENERAL RISK FACTORS
The inability to retain key personnel could adversely impact our operations.
We rely on key personnel for many of our functions and have a relatively small workforce, relative to the size and complexity of our business. Our ability to retain such personnel is important for us to conduct our operations and measure and maintain risk and financial controls. Our ability to retain key personnel could be challenged as the U.S., and the Boston area in particular, emerges from the effects of COVID-19, and competition for talent increases relative to pre-pandemic levels.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We occupy approximately 54,000 rentable square feet in the Prudential Tower, 800 Boylston Street, Boston, Massachusetts 02199 that serves as our headquarters. We also maintain 7,461 square feet of leased property for a business continuity site in Massachusetts. We believe our properties are adequate to meet our requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Private-label MBS Complaint
On April 20, 2011, we filed a complaint (subsequently amended) in the Superior Court Department of the Commonwealth of Massachusetts in Suffolk County against various securities dealers, underwriters, control persons, and issuers/depositors (securities defendants) along with certain credit rating agency defendants, based on our investments in certain private-label MBS issued by 115 securitization trusts for which we originally paid approximately $5.8 billion.
Between the date of filing and November 2020, we resolved our claims against all of the securities defendants and certain rating agency defendants. However, we continue to pursue fraud claims against Moody’s Investors Service, Inc. and Moody’s Corporation (collectively referred to as “Moody’s”) with respect to eleven securitization trusts.
Our original Massachusetts complaint was removed by the defendants (including Moody’s) to the United States District Court for the District of Massachusetts (Massachusetts District Court) and was pending there for several years, but in January 2017 the court, upon our motion (following our successful appeal to the United States Court of Appeals for the First Circuit of an earlier adverse ruling dismissing our claims), severed our claims against Moody's and transferred the severed claims to the United States District Court for the Southern District of New York (S.D.N.Y.). Shortly thereafter, based upon the Supreme Court’s Lightfoot v. Cendant Mortgage Corp. decision, the S.D.N.Y. dismissed our claims against Moody’s for lack of federal jurisdiction.
On November 2, 2017, we refiled our complaint against Moody’s in the Supreme Court of New York, and subsequently amended such complaint on February 5, 2018. In that action, on March 26, 2019, an order of the New York Supreme Court was entered granting in part and denying in part the defendants’ motion to dismiss. The defendants appealed, and on October 17, 2019, the New York Supreme Court Appellate Division (Appellate Division) affirmed the order of the New York Supreme Court denying the defendants’ motion to dismiss. On January 30, 2020, the Appellate Division denied defendants’ motion for reargument or for leave to appeal, a ruling that ended the appeal but not the litigation as a whole. Our case against Moody’s continues in the New York Supreme Court with respect to the remaining eleven securitizations.
Other Legal Proceedings
From time to time, we are subject to various legal proceedings arising in the normal course of business. After consultation with legal counsel, we do not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on our financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The par value of our capital stock is $100 per share. Our stock is not publicly traded and can be purchased only by our members at par. As of February 28, 2022, 425 members and 11 nonmembers held a total of 9.8 million shares of our Class B stock. As of December 31, 2021, our capital plan no longer includes the authority to issue Class A capital stock. We have never issued Class A stock.
Subject to regulatory limitations, dividends are solely within the discretion of our board of directors. The board of directors declared dividends during 2021, 2020, and 2019 as set forth in Table 3 below. Dividend rates are quoted in the form of an interest rate, which is then applied to each stockholder's average capital-stock-balance outstanding during the preceding calendar quarter to determine the dollar amount of the dividend that each stockholder will receive. The dividend rate was based upon a spread to average short-term interest rates experienced during the quarter.
Table 3 - Quarterly Dividends Declared
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| Dividends Declared in the Quarter Ending | | Average
Capital Stock (1) during preceding quarter | | Dividend
Amount (2) | | Annualized
Dividend Rate | | Average
Capital Stock (1) during preceding quarter | | Dividend Amount (2) | | Annualized
Dividend Rate | | Average
Capital Stock (1) during preceding quarter | | Dividend Amount (2) | | Annualized
Dividend Rate |
| March 31 | | $ | 1,338,682 | | | $ | 5,351 | | | 1.59 | % | | $ | 1,753,303 | | | $ | 24,129 | | | 5.46 | % | | $ | 2,396,636 | | | $ | 37,272 | | | 6.17 | % |
| June 30 | | 1,219,853 | | | 4,631 | | | 1.54 | | | 1,915,125 | | | 24,094 | | | 5.06 | | | 2,064,694 | | | 31,666 | | | 6.22 | |
| September 30 | | 1,131,903 | | | 4,290 | | | 1.52 | | | 1,839,680 | | | 18,845 | | | 4.12 | | | 1,851,474 | | | 27,881 | | | 6.04 | |
| December 31 | | 1,049,864 | | | 5,425 | | | 2.05 | | | 1,469,693 | | | 13,890 | | | 3.76 | | | 1,796,954 | | | 25,953 | | | 5.73 | |
_________________________
(1) Average capital stock amounts do not include average balances of mandatorily redeemable stock.
(2) The dividend amounts do not include the interest expense on mandatorily redeemable stock.
On February 18, 2022, our board of directors declared a cash dividend that was equivalent to an annual yield of 2.05 percent, the approximate daily average of SOFR rates for the fourth quarter of 2021 plus 200 basis points. The dividend amount, based on average daily balances of Class B shares outstanding for the fourth quarter of 2021 totaled $5.1 million and was paid on March 2, 2022. In declaring the dividend, the board stated that it expects to follow this formula for declaring cash dividends through 2022, though a quarterly loss or a significant adverse event or trend could cause a dividend to be reduced or suspended.
Dividends are declared and paid in accordance with a schedule adopted by the board of directors that enables our board of directors to declare each quarterly dividend after net income is known, rather than basing the dividend on estimated net income. For example, in 2021, quarterly dividends were declared in February, April, July, and October based on the immediately preceding quarter's net income and were paid on the second business day of the month that followed the month of declaration. We expect to continue this approach in 2022.
Dividends may be paid only from current net earnings or previously retained earnings. In accordance with the FHLBank Act and FHFA regulations, we may not declare a dividend if we are not in compliance with our minimum capital requirements or if we would fall below our minimum capital requirements or would not be adequately capitalized as a result of a dividend except, in this latter case, with the Director of the FHFA's permission. Further, we may not pay dividends if the principal and interest due on any CO issued through the Office of Finance on which we are the primary obligor has not been paid in full when due, or under certain circumstances, if we become a noncomplying FHLBank as that term is defined in FHFA regulations as a result of any inability to either comply with regulatory liquidity requirements or satisfy our current obligations.
We maintain a policy providing that if our minimum retained earnings target exceeds the level of our retained earnings, the quarterly dividend payout cannot exceed 40 percent of our net income for the quarter. Our minimum retained earnings target was $700.0 million as of December 31, 2021, compared with $1.5 billion in retained earnings at December 31, 2021.
We may not pay dividends in the form of capital stock or issue new excess stock to members if our excess stock exceeds 1.0 percent of our total assets or if the issuance of excess stock would cause our excess stock to exceed 1.0 percent of our total assets. At December 31, 2021, we had excess stock outstanding totaling $32.6 million or 0.1 percent of our total assets.
We maintain a policy establishing a minimum capital level in excess of regulatory requirements to provide further protection for our capital base. This adopted minimum capital level provides that we will maintain a minimum capital level equal to 4.0 percent of total assets plus an amount we measure as our risk exposure with 99 percent confidence using our economic capital model, an amount equal to $1.8 billion at December 31, 2021. Our permanent capital level was $2.5 billion at December 31, 2021, so we were in excess of this requirement by $750.8 million on that date. If necessary to satisfy this adopted minimum capital level, however, we will take steps to control asset growth and/or maintain capital levels, the latter of which may limit future dividends.
Our capital plan and the Joint Capital Agreement require us to allocate 20 percent of our net income to a separate restricted retained earnings account until the total amount in the restricted retained earnings account is at least equal to 1.0 percent of the daily average carrying value of our outstanding total COs (excluding fair-value adjustments) for the calendar quarter. Throughout 2021, the balance in restricted retained earnings totaled $368.4 million, which exceeded the threshold for the contribution requirement. As of December 31, 2021, our required contribution level was $299.5 million, and therefore the balance of our restricted retained earnings exceeded the required contribution level by $68.9 million, primarily the result of the decrease in outstanding consolidated obligations during 2021 and 2020. Accordingly, no allocation of net income was made to restricted retained earnings in 2021 and no further allocations of net income into restricted retained earnings are required until such time as the required contribution level exceeds the balance of restricted retained earnings. Amounts in the restricted retained earnings account cannot be used to pay dividends. Any amount of restricted retained earnings that exceeds 150 percent of the contribution requirement may be reclassified to unrestricted retained earnings. No reclassification from restricted retained earnings to unrestricted retained earnings occurred during 2021.
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This report includes statements describing anticipated developments, projections, estimates, or predictions of ours that are “forward-looking statements.” These statements may involve matters related to, but not limited to, projections of revenues, income, earnings, capital expenditures, dividends, capital structure, or other financial items; repurchases of excess stock, our minimum retained earnings target, or the interest-rate environment in which we do business; statements of management’s plans or objectives for future operations; expectations of effects or changes in fiscal and monetary policies and our future economic performance; projections or expectations regarding the COVID-19 pandemic or its effects; or statements of assumptions underlying certain of the foregoing types of statements. These statements may use forward-looking terminology such as, but not limited to, “anticipates,” “believes,” "continued" “expects,” “plans,” “intends,” “may,” “could,” “estimates,” “assumes,” “should,” “will,” “likely,” or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements are subject to a number of risks or uncertainties, including the risk factors set forth in Part I — Item 1A — Risk Factors and 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 cessation of the LIBOR benchmark rate, the development of alternative rates, including SOFR, and the adverse consequences these could have for market participants, including the Bank and its members; changes in the
general economy, including changes resulting from U.S. fiscal and monetary policy, actions of the FOMC, or changes in credit ratings of the U.S. federal government; the condition of the mortgage and housing markets on our mortgage-related assets; and the condition of the capital markets on our COs;
•issues and events across 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 pandemics, such as the COVID-19 pandemic, epidemics, or health emergencies and responses to such events, including, among other things, the effect on the Bank resulting from illness or quarantines of employees or business partners on which we rely or from remote work arrangements; negative effects on our members’ businesses and their demands for our products, including demand for advances; and effects on the economy and financial markets from Federal Reserve monetary policy, fiscal stimulus programs (or changes to or cessation of such programs), state and local government restrictions on business activities including, among other things, federal and state vaccine mandates and reactions thereto, or generally;
•our ability to declare and pay dividends consistent with past practices as well as any plans to repurchase excess capital stock, and any amendments to our capital plan;
•competitive forces including, without limitation, other sources of funding available to our members and other entities borrowing funds in the capital markets;
•changes in the value and liquidity of collateral we hold as security for obligations of our members and counterparties;
•the impact of new accounting standards and the application of accounting rules, including the impact of regulatory guidance on our application of such standards and rules;
•changes in the fair value and economic value of, impairments of, and risks, including risks related to changes in or cessation of benchmark interest rates such as LIBOR, overnight index swap (OIS), and SOFR, associated with the Bank’s investments in mortgage loans and MBS or other assets and the related credit-enhancement protections;
•membership conditions and changes, including changes resulting from member failures, mergers or changing financial health, changes due to member eligibility, changes in the principal place of business of members, or the addition of new members;
•external events, such as general economic and financial instabilities, political instability, wars and natural disasters, including disasters caused by significant climate change, which, among other things, could damage our facilities or the facilities of our members, damage or destroy collateral that members have pledged to secure advances or mortgages that we hold for our portfolio, and which could cause us to experience losses or be exposed to a greater risk that pledged collateral would be inadequate in the event of a default;
•the pace of technological change and our ability to develop and support internal controls, information systems, and other operating technologies that effectively manage the risks we face, including but not limited to, failures, interruptions, or security breaches (cyber-attacks), which could increase as a result of the COVID-19 pandemic related changes in our operating environment; and
•our ability to attract and retain skilled employees, including our key personnel.
These risk factors are not exhaustive. New risk factors emerge from time to time. We cannot predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those implied by any forward-looking statements.
EXECUTIVE SUMMARY
Net income for the year ending December 31, 2021, was $69.5 million, compared with net income of $120.3 million for 2020, the result of a decrease of $77.7 million in gains on sales of securities, an increase of $34.4 million in net losses on trading securities, and a $25.6 million decrease in litigation settlement income. These decreases to net income were partially offset by a decrease of $49.1 million in net losses on derivatives, a $17.6 million increase in net interest income after provision for credit losses, and a $13.8 million reduction in operating and other expenses.
For the year ended December 31, 2021, net interest margin was 0.60 percent, an increase of 21 basis points from 2020 and net interest spread was 0.57 percent for the year ended December 31, 2021, an increase of 25 basis points from the same period in 2020. The increase in both net interest spread and net interest margin mainly reflects an improvement in funding costs in 2021 relative to 2020, as well as other improvements in net interest income after provision for credit losses as described in Results of Operations — Net Interest Income. Average total earning assets declined $14.2 billion to $34.9 billion for the year ended December 31, 2021, from $49.1 billion for the same period in 2020.
Our retained earnings grew to $1.5 billion at December 31, 2021, an increase of $49.8 million from December 31, 2020, and equals 4.76 percent of total assets at December 31, 2021. We continue to satisfy all regulatory capital requirements as of December 31, 2021. On February 18, 2022, our board of directors declared a cash dividend that was equivalent to an annual yield of 2.05 percent, the approximate daily average of SOFR for the fourth quarter of 2021 plus 200 basis points.
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. The continued COVID-19 pandemic, which began to affect businesses and the economy in March 2020, and the response of the U.S. government and the Federal Reserve through changes in monetary policy and implementation of unprecedented fiscal stimulus programs, led to interest rates that remain historically low and substantially elevated deposits reported by member depository institutions. The elevated level of deposits at member depository institutions has been the primary cause of the significant and continued decline in advances balances which began in the second quarter of 2020. In addition, agency mortgage-backed security purchases by the Federal Reserve aimed at supporting the housing market through the pandemic have tightened yield spreads we earn on new mortgage acquisitions and have provided an incentive to some of our members to sell loans to Fannie Mae and Freddie Mac rather than to us. This activity has reduced our outstanding balances of mortgage loans. These developments impacted our financial condition as of December 31, 2021, and results of operations for the year ended December 31, 2021.
Generally, investor demand for high credit quality, fixed-income investments, including COs, continued to be strong relative to other investments. Moreover, a declining supply of COs, primarily as a result of lower advances balances throughout the FHLBank System has further increased the relative demand for COs and improved our relative cost of borrowing. Our flexibility in utilizing various funding tools, in combination with a diverse investor base and our status as a government-sponsored enterprise, have helped provide reliable market access and demand for consolidated obligations throughout fluctuating market environments and regulatory changes affecting dealers of and investors in COs. The Bank has continued to meet all funding needs during the year ended December 31, 2021.
Advances Balances
We continue to deliver on our primary mission, supplying liquidity to our members. Advances balances totaled $12.3 billion at December 31, 2021, compared to $18.8 billion at December 31, 2020. The decrease in advances was in both short- and long-term fixed-rate advances and is primarily due to excess liquidity at member institutions.
Net Interest Income, Margin, and Spread
Net interest spread was 0.57 percent for the year ended December 31, 2021, a 25 basis point increase from 2020, and net interest margin was 0.60 percent, a 21 basis point increase from 2020. The increase in both net interest spread and net interest margin results primarily from an improvement in funding costs and a reduction in net premium amortization on mortgage-related assets relative to the same period in 2020. The sharply-reduced interest rate environment in 2020 triggered refinancing incentives on residential mortgage loans, resulting in increases of mortgage prepayment activity that resulted in accelerated net premium amortization of our agency residential MBS as well as our whole mortgage loans. Refinancing activity of mortgage loans remains high but has moderated during 2021.
Other Income and Expense
Net losses on derivatives in other income for the year ended December 31, 2021, totaled $559 thousand, compared with $49.7 million for 2020. The $559 thousand net losses for the current year consisted of $17.2 million unrealized gains from changes in fair value on economic hedges and $17.8 million of interest expense on economic hedges. Additionally, losses on trading securities totaled $46.3 million for the year ended December 31, 2021. Together, these realized and unrealized losses provided an economic offset primarily to interest income from trading securities, which totaled $49.8 million for the year ended December 31, 2021. See below under — Results of Operations — Economically Hedged Trading Securities for additional information.
Legislative and Regulatory Developments
Legislation has been proposed or enacted, and the FHFA and others with authority over the economy, our industry, and our business activities have taken action during 2021 as described in — Legislative and Regulatory Developments. Such developments affect the way we conduct business and could impact how we satisfy our mission as well as the value of our membership.
LIBOR Transition Preparations
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 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.
On October 21, 2020, we adhered to the ISDA 2020 IBOR Fallbacks Protocol, a multilateral mechanism that, effective January 25, 2021, through a Supplement to the ISDA 2006 Definitions, amended our legacy bilateral, over-the-counter LIBOR-based interest rate swaps to substitute SOFR for LIBOR as the benchmark rate following the cessation of LIBOR or if LIBOR is declared by the FCA to be no longer representative of the underlying market and economic reality that it is intended to measure.
On March 5, 2021, the FCA further announced that LIBOR will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021, or, in the case of some more frequently used U.S. dollar LIBOR settings, including those used by us, immediately after June 30, 2023. The FCA’s announcement on March 5, 2021, constitutes an index cessation event under the ISDA 2020 IBOR Fallbacks Protocol and the Supplement, and as a result, the fallbacks spread adjustment for each tenor is fixed as of the date of the announcement.
On July 1, 2021, the FHFA issued a Supervisory Letter regarding its expectations for an FHLBank’s use of alternative rates other than SOFR. The Supervisory Letter provides guidance on considerations, such as volume of underlying transactions, credit sensitivity, modeling risk and others, that an FHLBank should take into account prior to employing an alternative reference rate.
We recognize that the discontinuance of LIBOR as an interest rate benchmark and the transition to alternative reference rates, including SOFR, present risks and challenges that could affect our business. Certain of our collateral pledged to us and investment securities and derivatives are indexed to LIBOR with exposure extending beyond June 30, 2023. We are implementing our transition plan for the eventual replacement of the LIBOR benchmark interest rate, with SOFR as the expected replacement benchmark. The transition plan includes continuing to monitor and address market developments regarding fallbacks related to LIBOR-based derivatives, investment securities, and other financial instruments, and assessing our operational readiness, including updating processes, models, and information technology systems to support the transition from LIBOR to an alternative reference rate.
Market activity in SOFR-indexed financial instruments continues to increase. During the year ended December 31, 2021, we issued $3.2 billion in SOFR-indexed COs and $7.3 billion in SOFR-indexed advances.
ECONOMIC CONDITIONS
Economic Environment
The economy continued to rebound in 2021 from the recessionary effects of the COVID-19 pandemic. Real gross domestic product (GDP) grew at 7.0 percent (annualized) in the fourth quarter and at 5.7 percent for the year. Real GDP growth slowed from above 6 percent (annualized) in the first half of 2021 to approximately 2 percent (annualized) in the third quarter, possibly attributable to a combination of a surge in COVID-19 cases, supply bottlenecks, and waning impact from federal COVID-19 related relief programs. GDP growth rebounded in the fourth quarter as the number of COVID-19 cases declined in the early part of the quarter before rising again in December.
The labor market has also continued to improve in 2021, with job growth averaging 537,000 new jobs per month in 2021. Nonfarm employment increased by 18.8 million since April 2020 but remained down by 3.6 million compared to its pre-pandemic level in February 2020. The labor force participation rate improved from 61.5 percent in February 2021 to 62.3 percent in February 2022. However, the participation rate remains below the February 2020 level of 63.4 percent. The unemployment rate stood at 3.9 percent in December, a decline of 2.8 percentage points from December in 2020. The New England region’s unemployment rate also declined in 2021 and was 4.3 percent in December 2021 compared to 6.9 percent in December 2020.
Supply chain challenges, combined with unusually high demand for goods and increasingly tight labor market conditions, have pushed up inflation. From December 2020 to December 2021, the consumer price index rose 7.0 percent, the fastest rate of inflation in nearly 40 years.
The housing market in 2021 was characterized by a historically low level of homes available for sale, intense competition for homes, and sharply rising home prices. The FHFA reported that house prices rose 17.5 percent nationwide from November 2020 to November 2021. Over the same period, home prices in the New England region increased by 15.4 percent.
Interest-Rate Environment
On March 16, 2022, the FOMC raised the target range for the federal funds rate to 25 to 50 basis points and stated that ongoing increases in the target range will likely be appropriate given elevated rates of inflation. The FOMC also stated that it expects to begin reducing its holdings of Treasury securities, agency debt, and agency mortgage-backed securities at a coming meeting.
Short-term interest rates were close to zero throughout 2021 in keeping with the Federal Reserve’s target range for the federal funds rate of zero to 25 basis points. Long-term interest rates generally followed a rising trend over the course of 2021 as strengthening economic recovery and rising inflation increased expectations that the Federal Reserve would change its interest rate policy to a less accommodative stance.
Table 4 - Key Interest Rates(1)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Ending | | Average | | Ending | | Average | | Ending | | Average |
| SOFR | 0.05% | | 0.04% | | 0.07% | | 0.36% | | 1.55% | | 2.20% |
| Federal funds effective rate | 0.07% | | 0.08% | | 0.09% | | 0.36% | | 1.55% | | 2.16% |
| 3-month LIBOR | 0.21% | | 0.16% | | 0.24% | | 0.65% | | 1.91% | | 2.33% |
| 3-month U.S. Treasury yield | 0.03% | | 0.03% | | 0.06% | | 0.34% | | 1.55% | | 2.08% |
| 2-year U.S. Treasury yield | 0.73% | | 0.26% | | 0.12% | | 0.39% | | 1.57% | | 1.97% |
| 5-year U.S. Treasury yield | 1.26% | | 0.86% | | 0.36% | | 0.53% | | 1.69% | | 1.95% |
| 10-year U.S. Treasury yield | 1.51% | | 1.44% | | 0.91% | | 0.89% | | 1.92% | | 2.14% |
________________(1) Source: Bloomberg
SELECTED FINANCIAL DATA
We derived the selected results of operations for the years ended December 31, 2021, 2020, and 2019, and the selected statement of condition data as of December 31, 2021 and 2020, from financial statements included elsewhere herein. We derived the selected results of operations for the years ended December 31, 2018 and 2017, and the selected statement of condition data as of December 31, 2019, 2018, and 2017, from financial statements not included herein. This selected financial data should be read in conjunction with the financial statements and the related notes appearing in this report.
Table 5 - Selected Financial Data
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
| Statement of Condition | | | | | | | | | | |
| Total assets | | $ | 32,545,292 | | | $ | 38,461,035 | | | $ | 55,662,811 | | | $ | 63,593,317 | | | $ | 60,361,946 | |
Investments(1) | | 16,372,499 | | | 13,341,538 | | | 16,144,244 | | | 15,900,204 | | | 17,941,614 | |
| Advances | | 12,340,020 | | | 18,817,002 | | | 34,595,363 | | | 43,192,222 | | | 37,565,967 | |
Mortgage loans held for portfolio, net(2) | | 3,120,159 | | | 3,930,252 | | | 4,501,251 | | | 4,299,402 | | | 4,004,737 | |
| Deposits and other borrowings | | 884,032 | | | 1,088,987 | | | 674,309 | | | 474,878 | | | 477,069 | |
| Consolidated obligations: | | | | | | | | | | |
| Bonds | | 26,613,032 | | | 21,471,590 | | | 23,888,493 | | | 25,912,684 | | | 28,344,623 | |
| Discount notes | | 2,275,320 | | | 12,878,310 | | | 27,681,169 | | | 33,065,822 | | | 27,720,906 | |
| Total consolidated obligations | | 28,888,352 | | | 34,349,900 | | | 51,569,662 | | | 58,978,506 | | | 56,065,529 | |
| Mandatorily redeemable capital stock | | 13,562 | | | 6,282 | | | 5,806 | | | 31,868 | | | 35,923 | |
Class B capital stock outstanding-putable(3) | | 953,638 | | | 1,267,172 | | | 1,869,130 | | | 2,528,854 | | | 2,283,721 | |
| Unrestricted retained earnings | | 1,179,986 | | | 1,130,222 | | | 1,114,337 | | | 1,084,342 | | | 1,041,033 | |
| Restricted retained earnings | | 368,420 | | | 368,420 | | | 348,817 | | | 310,670 | | | 267,316 | |
| Total retained earnings | | 1,548,406 | | | 1,498,642 | | | 1,463,154 | | | 1,395,012 | | | 1,308,349 | |
| Accumulated other comprehensive income (loss) | | 28,967 | | | 16,139 | | | (186,972) | | | (316,507) | | | (326,940) | |
| Total capital | | 2,531,011 | | | 2,781,953 | | | 3,145,312 | | | 3,607,359 | | | 3,265,130 | |
| Results of Operations | | | | | | | | | | |
| Net interest income after provision for credit losses | | $ | 212,163 | | | $ | 194,566 | | | $ | 268,941 | | | $ | 312,144 | | | $ | 277,099 | |
| Net impairment losses on held-to-maturity securities recognized in earnings | | — | | | — | | | (1,212) | | | (532) | | | (1,454) | |
| Litigation settlements | | 505 | | | 26,096 | | | 29,361 | | | 12,769 | | | 20,761 | |
| Other (loss) income, net | | (47,387) | | | 14,831 | | | 12,835 | | | 8,589 | | | 3,605 | |
| Other expense | | 88,081 | | | 101,857 | | | 97,884 | | | 91,902 | | | 88,501 | |
| AHP assessments | | 7,739 | | | 13,386 | | | 21,302 | | | 24,299 | | | 21,307 | |
| Net income | | $ | 69,461 | | | $ | 120,250 | | | $ | 190,739 | | | $ | 216,769 | | | $ | 190,203 | |
| Other Information | | | | | | | | | | |
| Dividends declared | | $ | 19,697 | | | $ | 80,958 | | | $ | 122,772 | | | $ | 130,106 | | | $ | 98,840 | |
| Dividend payout ratio | | 28.36 | % | | 67.32 | % | | 64.37 | % | | 60.02 | % | | 51.97 | % |
Weighted-average dividend rate(4) | | 1.66 | | | 4.64 | | | 6.05 | | | 5.56 | | | 4.14 | |
Return on average equity(5) | | 2.62 | | | 4.00 | | | 6.29 | | | 6.38 | | | 5.83 | |
| Return on average assets | | 0.19 | | | 0.24 | | | 0.35 | | | 0.35 | | | 0.32 | |
Net interest margin(6) | | 0.60 | | | 0.39 | | | 0.49 | | | 0.51 | | | 0.47 | |
| Average equity to average assets | | 7.43 | | | 6.03 | | | 5.51 | | | 5.49 | | | 5.49 | |
Total regulatory capital ratio(7) | | 7.73 | | | 7.21 | | | 6.00 | | | 6.22 | | | 6.01 | |
_______________________
(1)Investments include available-for-sale securities, held-to-maturity securities, trading securities, interest-bearing deposits, securities purchased under agreements to resell and federal funds sold.
(2)The allowance for credit losses for mortgage loans amounted to $1.7 million, $3.1 million, $500 thousand, $500 thousand, and $500 thousand, as of December 31, 2021, 2020, 2019, 2018, and 2017, respectively.
(5)Return on average equity is net income divided by the total of the average daily balance of outstanding Class B capital stock, accumulated other comprehensive income and total retained earnings.
(6)Net interest margin is net interest income before provision for credit losses as a percentage of average earning assets.
RESULTS OF OPERATIONS
Comparison of the year ended December 31, 2021, versus the year ended December 31, 2020
Net income decreased to $69.5 million for the year ended December 31, 2021, from $120.3 million for the year ended December 31, 2020. The reasons for the decrease are discussed under — Executive Summary.
Net Interest Income
Net interest income after provision for credit losses for the year ending December 31, 2021, was $212.2 million, compared with $194.6 million for 2020. The increase of $17.6 million in net interest income after provision for credit losses is attributable to several favorable factors, including: the absence of margin compression on liquid investments that the Bank experienced during the second quarter of 2020 following the sudden interest-rate cuts by the FOMC in March 2020; a $33.2 million decrease in net amortization of premium on mortgage-backed securities and mortgage loans; a $16.5 million increase in net unrealized gains from fair value hedges; a $10.0 million increase in prepayment income; a $1.5 billion increase in the average balance of U.S. Treasury securities; and a general improvement in funding costs. These factors were partially offset by reductions to net interest income resulting from average balance decreases of $12.4 billion for advances and $840.1 million for mortgage loans, as well as a $9.0 million decrease in accretion of significant improvement in projected cash flows resulting from sales of previously impaired private-label MBS, as all private-label MBS were sold in 2020. In addition, net interest income was negatively affected by lower income from investing our capital, resulting from the near-zero, and substantially lower, average short-term interest rates in 2021 compared to the year prior and the $541.3 million decline in the average balance of outstanding capital stock in 2021 compared to the same period a year prior.
For the year ended December 31, 2021, net interest margin was 0.60 percent, an increase of 21 basis points from 2020 and net interest spread was 0.57 percent for the year ended December 31, 2021, an increase of 25 basis points from the same period in 2020. The increase in both net interest spread and net interest margin mainly reflects an improvement in funding costs in 2021 relative to 2020, as well as the factors affecting the improvements in net interest income after provision for credit losses described above.
Table 6 presents major categories of average balances, related interest income/expense, and average yields/rates for interest-earning assets and interest-bearing liabilities. Our primary source of earnings is net interest income, which is the interest earned on advances, mortgage loans, and investments less interest paid on COs, deposits, and other sources of funds.
Table 6 - Net Interest Spread and Margin
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| | | Average
Balance | | Interest
Income /
Expense | | Average
Yield/Rate | | Average
Balance | | Interest
Income /
Expense | | Average
Yield/Rate | | Average
Balance | | Interest
Income /
Expense | | Average
Yield/Rate |
| Assets | | | | | | | | | | | | | | | | | | |
| Advances | | $ | 15,342,714 | | | $ | 204,022 | | | 1.33 | % | | $ | 27,786,226 | | | $ | 424,314 | | | 1.53 | % | | $ | 33,128,806 | | | $ | 889,610 | | | 2.69 | % |
| Interest-bearing deposits | | 351,973 | | | 147 | | | 0.04 | | | 1,054,009 | | | 5,749 | | | 0.55 | | | 1,033,450 | | | 22,390 | | | 2.17 | |
| Securities purchased under agreements to resell | | 608,376 | | | 452 | | | 0.07 | | | 2,000,831 | | | 15,049 | | | 0.75 | | | 5,491,663 | | | 123,438 | | | 2.25 | |
| Federal funds sold | | 2,783,852 | | | 2,210 | | | 0.08 | | | 2,982,536 | | | 18,009 | | | 0.60 | | | 2,635,165 | | | 58,015 | | | 2.20 | |
Investment securities(1) | | 12,314,146 | | | 125,656 | | | 1.02 | | | 10,959,422 | | | 165,782 | | | 1.51 | | | 8,072,471 | | | 203,737 | | | 2.52 | |
Mortgage loans (1)(2) | | 3,497,996 | | | 93,048 | | | 2.66 | | | 4,338,074 | | | 124,828 | | | 2.88 | | | 4,417,474 | | | 147,885 | | | 3.35 | |
| Other earning assets | | — | | | — | | | — | | | 5,464 | | | 48 | | | 0.88 | | | 1,164 | | | 25 | | | 2.15 | |
| Total interest-earning assets | | 34,899,057 | | | 425,535 | | | 1.22 | | | 49,126,562 | | | 753,779 | | | 1.53 | | | 54,780,193 | | | 1,445,100 | | | 2.64 | |
| Other non-interest-earning assets | | 357,359 | | | | | | | 311,061 | | | | | | | 236,032 | | | | | |
| Fair-value adjustments on investment securities | | 423,350 | | | | | | | 448,420 | | | | | | | 43,176 | | | | | |
| Total assets | | $ | 35,679,766 | | | $ | 425,535 | | | 1.19 | % | | $ | 49,886,043 | | | $ | 753,779 | | | 1.51 | % | | $ | 55,059,401 | | | $ | 1,445,100 | | | 2.62 | % |
| Liabilities and capital | | | | | | | | | | | | | | | | | | |
| Consolidated obligations | | | | | | | | | | | | | | | | | | |
| Discount notes | | $ | 8,522,868 | | | $ | 4,476 | | | 0.05 | % | | $ | 21,224,879 | | | $ | 187,743 | | | 0.88 | % | | $ | 25,489,068 | | | $ | 569,896 | | | 2.24 | % |
| Bonds | | 23,347,122 | | | 210,052 | | | 0.90 | | | 24,384,707 | | | 374,449 | | | 1.54 | | | 25,526,458 | | | 598,585 | | | 2.34 | |
| Other interest-bearing liabilities | | 974,719 | | | 306 | | | 0.03 | | | 949,599 | | | 1,379 | | | 0.15 | | | 583,921 | | | 7,593 | | | 1.30 | |
| Total interest-bearing liabilities | | 32,844,709 | | | 214,834 | | | 0.65 | | | 46,559,185 | | | 563,571 | | | 1.21 | | | 51,599,447 | | | 1,176,074 | | | 2.28 | |
| Other non-interest-bearing liabilities | | 182,421 | | | | | | | 317,352 | | | | | | | 428,082 | | | | | |
| Total capital | | 2,652,636 | | | | | | | 3,009,506 | | | | | | | 3,031,872 | | | | | |
| Total liabilities and capital | | $ | 35,679,766 | | | $ | 214,834 | | | 0.60 | % | | $ | 49,886,043 | | | $ | 563,571 | | | 1.13 | % | | $ | 55,059,401 | | | $ | 1,176,074 | | | 2.14 | % |
| Net interest income | | | | $ | 210,701 | | | | | | | $ | 190,208 | | | | | | | $ | 269,026 | | | |
| Net interest spread | | | | | | 0.57 | % | | | | | | 0.32 | % | | | | | | 0.36 | % |
| Net interest margin | | | | | | 0.60 | % | | | | | | 0.39 | % | | | | | | 0.49 | % |
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_________________________
(1) Average balances are reflected at amortized cost.
(2) Nonaccrual loans are included in the average balances used to determine average yield.
Rate and Volume Analysis
Changes in both average balances (volume) and interest rates influence changes in net interest income and net interest margin. Table 7 summarizes changes in interest income and interest expense for the years ended December 31, 2021 and 2020. Changes in interest income and interest expense that are not identifiable as either volume-related or rate-related, but are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.
Table 7 - Rate and Volume Analysis
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | For the Year Ended
December 31, 2021 vs. 2020 | | For the Year Ended
December 31, 2020 vs. 2019 |
| | | Increase (Decrease) due to | | Increase (Decrease) due to |
| | | Volume | | Rate | | Total | | Volume | | Rate | | Total |
| Interest income | | | | | | | | | | | | |
| Advances | | $ | (170,968) | | | $ | (49,324) | | | $ | (220,292) | | | $ | (126,624) | | | $ | (338,672) | | | $ | (465,296) | |
| Interest-bearing deposits | | (2,347) | | | (3,255) | | | (5,602) | | | 437 | | | (17,078) | | | (16,641) | |
| Securities purchased under agreements to resell | | (6,360) | | | (8,237) | | | (14,597) | | | (52,956) | | | (55,433) | | | (108,389) | |
| Federal funds sold | | (1,125) | | | (14,674) | | | (15,799) | | | 6,794 | | | (46,800) | | | (40,006) | |
| Investment securities | | 18,657 | | | (58,783) | | | (40,126) | | | 59,094 | | | (97,049) | | | (37,955) | |
| Mortgage loans | | (22,859) | | | (8,921) | | | (31,780) | | | (2,616) | | | (20,441) | | | (23,057) | |
| Other earning assets | | (24) | | | (24) | | | (48) | | | 45 | | | (22) | | | 23 | |
| Total interest income | | (185,026) | | | (143,218) | | | (328,244) | | | (115,826) | | | (575,495) | | | (691,321) | |
| Interest expense | | | | | | | | | | | | |
| Consolidated obligations | | | | | | | | | | | | |
| Discount notes | | (71,261) | | | (112,006) | | | (183,267) | | | (82,849) | | | (299,304) | | | (382,153) | |
| Bonds | | (15,318) | | | (149,079) | | | (164,397) | | | (25,713) | | | (198,423) | | | (224,136) | |
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| Other interest-bearing liabilities | | 36 | | | (1,109) | | | (1,073) | | | 2,390 | | | (8,604) | | | (6,214) | |
| Total interest expense | | (86,543) | | | (262,194) | | | (348,737) | | | (106,172) | | | (506,331) | | | (612,503) | |
| Change in net interest income | | $ | (98,483) | | | $ | 118,976 | | | $ | 20,493 | | | $ | (9,654) | | | $ | (69,164) | | | $ | (78,818) | |
Average Balance of Advances Outstanding
The average balance of total advances decreased $12.4 billion, or 44.8 percent, for the year ended December 31, 2021, compared with the same period in 2020 as members paid off advances, in many cases prior to maturity. We believe it is likely that advances balances will remain for some time at a level that is significantly lower than that of the past several years, and could decline further, due to high levels of deposits relative to loans among our members as well as acquisitions of borrowing members by institutions ineligible for membership with the Bank.
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 $2.3 billion, or 38.0 percent, for the year ended December 31, 2021, compared with the same period in 2020, as liquidity needs were sharply lower in 2021 compared to 2020 amid much lower advances borrowing activity. The yield earned on short-term money-market investments is highly correlated to short-term market interest rates. As a result of the FOMC’s continued low target range for the federal funds rate, average yields on overnight federal funds sold decreased from 0.60 percent during the year ended December 31, 2020 to 0.08 percent during the year ended December 31, 2021, while average yields on securities purchased under agreements to resell decreased from 0.75 percent for the year ended December 31, 2020 to 0.07 percent for the year ended December 31, 2021. These investments are used for liquidity management.
Average investment-securities balances increased $1.4 billion, or 12.4 percent for the year ended December 31, 2021, compared with the same period in 2020, an increase consisting primarily of a $1.5 billion increase in U.S. Treasury obligations.
Average Balance of COs
Average CO balances decreased $13.7 billion, or 30.1 percent, for the year ended December 31, 2021, compared with the same period in 2020, resulting from our decreased funding needs principally due to the decrease in our average advances balances. This overall decrease consisted of declines of $12.7 billion in CO discount notes and $1.0 billion in CO bonds.
The average balance of CO discount notes represented approximately 26.7 percent of total average COs during the year ended December 31, 2021, compared with 46.5 percent of total average COs during the year ended December 31, 2020. The average balance of CO bonds represented 73.3 percent and 53.5 percent of total average COs outstanding during the years ended December 31, 2021 and 2020, respectively.
Impact of Derivatives and Hedging Activities
Net interest income includes interest accrued on interest-rate-exchange agreements that are associated with advances, investments, and debt instruments that qualify for hedge accounting. The fair value gains and losses of derivatives and hedged items designated in fair-value hedge relationships are also recognized as interest income or interest expense. We enter into derivatives to manage the interest-rate-risk exposures inherent in otherwise unhedged assets and liabilities and to achieve our risk-management objectives. We generally use derivative instruments that qualify for hedge accounting as interest-rate risk-management tools. These derivatives serve to stabilize net income when interest rates fluctuate. Accordingly, the impact of derivatives on net interest income and net interest margin, as well as other income, should be viewed in the overall context of our risk-management strategy.
Table 8 below provides a summary of the impact of derivatives and hedging activities on our earnings, excluding derivatives that are economically hedging trading securities and not designated in qualifying fair-value hedge relationships. Table 9 below provides a summary of the impact on our earnings from economically hedged trading securities and the associated derivatives.
Table 8 - Effect of Derivative and Hedging Activities
(dollars in thousands)
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| | For the Year Ended December 31, 2021 |
| Net Effect of Derivatives and Hedging Activities | | Advances | | Investments | | Mortgage Loans | | | | CO Bonds | | Other | | Total |
| Net interest income | | | | | | | | | | | | | | |
Amortization / accretion of hedging activities (1) | | $ | (2,064) | | | $ | — | | | $ | (1,317) | | | | | $ | (3,145) | | | $ | — | | | $ | (6,526) | |
| Gains on designated fair-value hedges | | 989 | | | 7,641 | | | — | | | | | 96 | | | — | | | 8,726 | |
Net interest settlements on derivatives(2) | | (60,285) | | | (120,524) | | | — | | | | | 67,028 | | | — | | | (113,781) | |
| Total net interest income | | (61,360) | | | (112,883) | | | (1,317) | | | | | 63,979 | | | — | | | (111,581) | |
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| Net (losses) gains on derivatives and hedging activities | | | | | | | | | | | | | | |
| Losses on derivatives not receiving hedge accounting | | (416) | | | — | | | — | | | | | (1,738) | | | (149) | | | (2,303) | |
| CO bond firm commitments | | — | | | — | | | — | | | | | 1,734 | | | — | | | 1,734 | |
| Mortgage delivery commitments | | — | | | — | | | (118) | | | | | — | | | — | | | (118) | |
| Net losses on derivatives and hedging activities | | (416) | | | — | | | (118) | | | | | (4) | | | (149) | | | (687) | |
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| Total net effect of derivatives and hedging activities | | $ | (61,776) | | | $ | (112,883) | | | $ | (1,435) | | | | | $ | 63,975 | | | $ | (149) | | | $ | (112,268) | |
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| | For the Year Ended December 31, 2020 |
| Net Effect of Derivatives and Hedging Activities | | Advances | | Investments | | Mortgage Loans | | | | CO Bonds | | Other | | Total |
| Net interest income | | | | | | | | | | | | | | |
Amortization / accretion of hedging activities in net interest income (1) | | $ | (1,937) | | | $ | — | | | $ | (1,846) | | | | | $ | (3,707) | | | $ | — | | | $ | (7,490) | |
| Losses on designated fair-value hedges | | (542) | | | (5,448) | | | — | | | | | (1,746) | | | — | | | (7,736) | |
Net interest settlements included in net interest income (2) | | (53,615) | | | (70,317) | | | — | | | | | 23,843 | | | — | | | (100,089) | |
| Total net interest income | | (56,094) | | | (75,765) | | | (1,846) | | | | | 18,390 | | | — | | | (115,315) | |
| | | | | | | | | | | | | | |
| Net (losses) gains on derivatives and hedging activities | | | | | | | | | | | | | | |
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| (Losses) gains on derivatives not receiving hedge accounting | | (719) | | | — | | | — | | | | | — | | | 1,076 | | | 357 | |
| Mortgage delivery commitments | | — | | | — | | | 1,405 | | | | | — | | | — | | | 1,405 | |
| Net (losses) gains on derivatives and hedging activities | | (719) | | | — | | | 1,405 | | | | | — | | | 1,076 | | | 1,762 | |
| | | | | | | | | | | | | | |
| Total net effect of derivatives and hedging activities | | $ | (56,813) | | | $ | (75,765) | | | $ | (441) | | | | | $ | 18,390 | | | $ | 1,076 | | | $ | (113,553) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2019 |
| Net Effect of Derivatives and Hedging Activities | | Advances | | Investments | | Mortgage Loans | | | | CO Bonds | | Other | | Total |
| Net interest income | | | | | | | | | | | | | | |
Amortization / accretion of hedging activities in net interest income (1) | | $ | (1,934) | | | $ | — | | | $ | (752) | | | | | $ | (2,567) | | | $ | — | | | $ | (5,253) | |
| Gains (losses) on designated fair-value hedges | | 2,358 | | | 824 | | | — | | | | | (1,100) | | | — | | | 2,082 | |
Net interest settlements included in net interest income (2) | | 39,085 | | | (22,249) | | | — | | | | | (17,482) | | | — | | | (646) | |
| Total net interest income | | 39,509 | | | (21,425) | | | (752) | | | | | (21,149) | | | — | | | (3,817) | |
| | | | | | | | | | | | | | |
| Net (losses) gains on derivatives and hedging activities | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Losses on derivatives not receiving hedge accounting | | (1,266) | | | — | | | — | | | | | — | | | — | | | (1,266) | |
| Mortgage delivery commitments | | — | | | — | | | 1,945 | | | | | — | | | — | | | 1,945 | |
| Net (losses) gains on derivatives and hedging activities | | (1,266) | | | — | | | 1,945 | | | | | — | | | — | | | 679 | |
| | | | | | | | | | | | | | |
| Total net effect of derivatives and hedging activities | | $ | 38,243 | | | $ | (21,425) | | | $ | 1,193 | | | | | $ | (21,149) | | | $ | — | | | $ | (3,138) | |
________________________
(1) Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive income.
(2) Represents interest income/expense on derivatives included in net interest income.
Economically Hedged Trading Securities
We maintain a portfolio of economically hedged trading securities consisting of U.S Treasury obligations, which averaged $2.4 billion for the year ended December 31, 2021. Because these securities are not designated in qualifying fair-value hedge relationships, the income statement impacts of the economic hedge relationships appear within multiple line items of our income statement. Table 9 presents the net impact to our earnings arising from these economically hedged trading securities.
Table 9 - Economically Hedged Trading Securities (1)
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Interest income | | | | | | |
| Net interest settlements on trading securities | | $ | 49,574 | | | $ | 83,056 | | | $ | 21,376 | |
| | | | | | |
| Net (losses) gains on trading securities | | (46,293) | | | (11,740) | | | 1,074 | |
| | | | | | |
| Net (losses) gains on derivatives and hedging activities: | | | | | | |
| Net interest settlements on derivatives | | (17,724) | | | (34,777) | | | 1,304 | |
| Change in fair value of derivatives | | 17,844 | | | (16,767) | | | (652) | |
Price alignment interest (2) | | 8 | | | 108 | | | 88 | |
| Total net impact of economically hedged trading securities | | $ | 3,409 | | | $ | 19,880 | | | $ | 23,190 | |
________________________
(1) Includes only trading securities that are economically hedged with an associated derivative.
(2) Represents the amount for derivatives for which variation margin, or payments made for the changes in the market value of the transaction, is characterized as a daily settlement amount.
Comparison of the year ended December 31, 2020, versus the year ended December 31, 2019
For discussion and analysis of our results of operations for 2020 compared to 2019, see Results of Operations in the Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2020 Annual Report on Form 10-K.
FINANCIAL CONDITION
Advances
At December 31, 2021, the advances portfolio totaled $12.3 billion, a decrease of $6.5 billion from $18.8 billion at December 31, 2020. The demand for advances experienced further reduction during the year, as member deposit levels continued to be elevated.
Table 10 - Advances Outstanding by Product Type
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| | Par Value | | Percent of Total | | Par Value | | Percent of Total |
| Fixed-rate advances | | | | | | | |
| Long-term | $ | 6,511,706 | | | 52.7 | % | | $ | 9,839,714 | | | 52.6 | % |
| Short-term | 1,531,550 | | | 12.4 | | | 4,180,412 | | | 22.3 | |
| Putable | 1,178,425 | | | 9.6 | | | 1,874,925 | | | 10.0 | |
| Amortizing | 551,163 | | | 4.5 | | | 667,506 | | | 3.6 | |
| Overnight | 225,922 | | | 1.8 | | | 170,045 | | | 0.9 | |
| All other fixed-rate advances | — | | | — | | | 10,000 | | | 0.1 | |
| 9,998,766 | | | 81.0 | | | 16,742,602 | | | 89.5 | |
| | | | | | | |
| Variable-rate advances | | | | | | | |
Simple variable (1) | 2,348,875 | | | 19.0 | | | 1,906,575 | | | 10.2 | |
| | | | | | | |
| All other variable-rate indexed advances | 64 | | | — | | | 55,335 | | | 0.3 | |
| | 2,348,939 | | | 19.0 | | | 1,961,910 | | | 10.5 | |
| Total par value | $ | 12,347,705 | | | 100.0 | % | | $ | 18,704,512 | | | 100.0 | % |
________________________
(1) Includes floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees.
Advances Credit Risk
We endeavor to minimize credit risk on advances by monitoring the financial condition of our borrowers and by holding sufficient collateral to protect the Bank from credit losses. All pledged collateral is subject to collateral discounts, or haircuts, to the market value or unpaid principal balance, 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 monitor the financial condition of all members and housing associates by reviewing available financial data, such as regulatory call reports filed by depository institution members, regulatory financial statements filed with the appropriate state insurance departments by insurance company members, audited financial statements of housing associates, SEC filings, and rating-agency reports to ensure that potentially troubled members are identified as soon as possible. In addition, we have access to most members' regulatory examination reports. We analyze this information on a regular basis.
Our depository members generally experienced improvement in key financial metrics over the 12 months ending September 30, 2021, principally as a result of a significant reduction in provisions for loan losses due to expectations of fewer losses from the pandemic-induced economic downturn. The economic outlook improved materially over the past year due to the various government actions taken to reduce the negative economic impacts of the pandemic, which included stimulus payments, eviction moratoriums, the loan forbearance program, and Paycheck Protection Program (PPP) loans. The approval of three vaccines in early 2021 to protect against COVID-19 also had a positive impact as it allowed for broader re-opening of the economy, though such re-opening was delayed by the onset of variants of COVID-19. Although the balance of loans in forbearance is not publicly available, the Bank has been receiving this data for our members. Aggregate nonperforming assets reported publicly by depository institution members in their regulatory filings decreased during the twelve months ending September 30, 2021, and as a percentage of assets were 0.29 percent at September 30, 2021, compared to 0.49 percent at September 30, 2020. The termination of forbearance programs could result in an increase in reported problem loans at our depository members. The financial condition of our insurance company members was in aggregate stable over the 12 months ending September 30, 2021.
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.
Each credit status category reflects our increasing level of control over the collateral pledged by the borrower.
•Category-1 borrowers retain possession of all mortgage loan collateral pledged to us, provided the borrower executes a written security agreement and agrees to hold such collateral for our benefit. Category-1 borrowers must specifically list with us all mortgage loan collateral other than loans secured by first-mortgage loans on owner-occupied one- to four-family residential property.
•Category-2 borrowers retain possession of eligible mortgage loan collateral, however, we require such borrowers to specifically list all loan collateral pledged to us.
•Category-3 borrowers are required to place physical possession of all pledged eligible collateral with us or an approved safekeeping agent, with which we have a control agreement.
All securities pledged to us by our borrowers must be delivered to us, delivered to an approved safekeeping agent, or held by the borrower's securities corporation in a custodial account with us. We have control agreements with approved safekeeping agents which are intended to give us appropriate control over the related collateral.
To mitigate the credit risk, market risk, liquidity risk, model, and operational risk associated with collateral, we discount the book value or market value of pledged collateral to establish the lending value. Collateral that we have determined to contain a low level of risk, such as U.S. government obligations, is discounted at a lower rate than collateral that carries a higher level of risk, such as commercial real estate mortgage loans. We periodically analyze the discounts applied to all eligible collateral types to verify that current discounts are sufficient to secure us against losses in the event of a borrower default. Our agreements with our borrowers grant us authority, in our sole discretion, to adjust the discounts applied to collateral at any time based on our assessment of the borrower's financial condition, the quality of collateral pledged, or the overall volatility of the value of the collateral.
We generally require our members and housing associates to execute a security agreement that grants us a blanket lien on all unencumbered assets of such borrowers that consist of, among other things: fully disbursed whole first-mortgage loans and deeds of trust constituting first liens against real property; U.S. federal, state, and municipal obligations; GSE securities; corporate debt obligations; commercial paper; funds placed in deposit accounts with us; such other items or property that are offered to us by the borrower as collateral; and all proceeds of all of the foregoing. In the case of insurance companies, housing associates, and CDFIs, in some instances we establish a specific lien instead of a blanket lien subject to additional safeguards including, among other things, larger haircuts on collateral. We protect our security interests in pledged assets by filing a Uniform Commercial Code (UCC) financing statement in the appropriate jurisdiction, or by taking possession or control of such collateral, or by taking other appropriate steps. We conduct reviews of loan collateral pledged by borrowers to determine that the pledged collateral conforms to our eligibility requirements, and to adjust, if warranted, the lendable value of loan collateral pledged. We may conduct collateral reviews at any time.
Our agreements with borrowers allow us, at our sole discretion, to refuse to make extensions of credit against any collateral, restrict the maturity on the extension of credit, require substitution of collateral, or adjust the discounts applied to collateral at any time. We also may require members to pledge additional collateral regardless of whether the collateral would be eligible to originate a new extension of credit. Our agreements with borrowers also afford us the right, at our sole discretion, to declare any borrower to be in default if we deem ourselves to be insecure.
Beyond our practice of taking security interests in collateral, Section 10(e) of the FHLBank Act affords any security interest granted to us by a federally-insured depository institution member or such member's affiliate priority over the claims or rights of any other party, including any receiver, conservator, trustee, or similar entity that has the rights of a lien creditor, unless these claims and rights would be entitled to priority under otherwise applicable law and are held by actual purchasers or by parties that are secured by actual perfected security interests. In this regard, the priority granted to our security interests under Section 10(e) may not apply when lending to insurance company members due to the anti-preemption provision contained in the McCarran-Ferguson Act in which Congress declared that federal law would not preempt state insurance law unless the federal law expressly regulates the business of insurance. Thus, if state law conflicts with Section 10(e) of the FHLBank Act, the protection afforded by this provision may not be available to us.
However, we protect our security interests in the collateral pledged by our borrowers, including insurance company members, by filing UCC financing statements, by taking possession or control of such collateral, or by taking other appropriate steps. We have not experienced any rehabilitation, conservatorship, receivership, liquidation or other insolvency event for an insurance company member and therefore have continuing uncertainty on the potential inapplicability of Section 10(e). Additionally, we note that the relevant state insolvency authority could take actions that could impede our ability to sell collateral that any such insolvent member has pledged to us. To protect ourselves from the potential inapplicability of Section 10(e), we require the delivery of collateral from non-depository members which currently encompass insurance companies, nonmember housing associates and CDFIs.
Table 11 - Advances Outstanding by Borrower Credit Status Category
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| | Number of Borrowers | | Par Value of Advances Outstanding | | Discounted Collateral | | Ratio of Discounted Collateral to Advances |
| Category-1 | 196 | | | $ | 7,949,994 | | | $ | 91,898,362 | | | 1,156.0 | % |
| Category-2 | 14 | | | 308,946 | | | 909,974 | | | 294.5 | |
| Category-3 | 12 | | | 230,537 | | | 410,798 | | | 178.2 | |
| Insurance companies | 25 | | | 3,858,228 | | | 6,001,952 | | | 155.6 | |
| Total | 247 | | | $ | 12,347,705 | | | $ | 99,221,086 | | | 803.6 | % |
The method by which a borrower pledges collateral depends upon the type of borrower (depository vs. non-depository), the category to which the borrower is assigned, and the type of collateral that the borrower pledges. Moreover, borrowers in Category-1 are eligible to specifically list and identify single-family owner-occupied residential mortgage loans at a lower discount than is allowed if the collateral is not specifically listed and identified.
The Bank may adjust the credit status category of a member from time to time based on the financial reviews and other circumstances of the member.
Table 12 - Top Five Advance-Borrowing Institutions
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | |
| Name | | Par Value of Advances | | Percent of Total Par Value of Advances | | Weighted-Average Rate (1) | |
| Massachusetts Mutual Life Insurance Company | | $ | 1,500,000 | | | 12.1 | % | | 1.62 | % | |
| Voya Retirement Insurance and Annuity Company | | 925,000 | | | 7.5 | | | 0.48 | | |
| Hingham Institution for Savings | | 665,000 | | | 5.4 | | | 0.28 | | |
| Salem Five Cents Savings Bank | | 580,392 | | | 4.7 | | | 0.27 | | |
| Peoples United Bank | | 562,750 | | | 4.6 | | | 0.39 | | |
| Total of top five advance-borrowing institutions | | $ | 4,233,142 | | | 34.3 | % | | | |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| Name | | Par Value of Advances | | Percent of Total Par Value of Advances | | Weighted-Average Rate (1) |
| Massachusetts Mutual Life Insurance Company | | $ | 1,680,000 | | | 9.0 | % | | 1.90 | % |
| Voya Retirement Insurance and Annuity Company | | 795,000 | | | 4.3 | | | 0.53 | |
| Metropolitan Property & Casualty Insurance Company | | 700,000 | | | 3.7 | | | 0.38 | |
| Salem Five Cents Savings Bank | | 620,316 | | | 3.3 | | | 0.30 | |
| East Boston Savings Bank | | 610,625 | | | 3.3 | | | 2.33 | |
| Total of top five advance-borrowing institutions | | $ | 4,405,941 | | | 23.6 | % | | |
_______________________(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 December 31, 2021, investment securities and short-term money-market instruments totaled $16.4 billion, an increase of $3.0 billion from $13.3 billion at December 31, 2020.
Short-term money-market investments decreased $480.0 million to $2.8 billion at December 31, 2021, compared with December 31, 2020. The decrease was attributable to declines of $316.0 million in federal funds sold and $214.0 million in interest bearing deposits offset by an increase of $50.0 million in securities purchased under agreements to resell.
Investment securities increased $3.5 billion to $13.5 billion at December 31, 2021, compared with $10.0 billion at December 31, 2020. This was attributable to increases of $2.0 billion in U.S. Treasury obligations and $1.6 billion in MBS.
Held-to-Maturity Securities
Certain investments for which we have both the ability and intent to hold to maturity are classified as held-to-maturity.
Table 13 - Held-to-Maturity Securities
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
| | Due in one year or less | Due after one year through five years | Due after five years through ten years | Due after ten years | Total Carrying Value | | Total Carrying Value | | Total Carrying Value |
| Non-MBS | | | | | | | | | | |
State or local housing-finance-agency obligations (HFA securities) (1) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | | | $ | 87,250 | |
| | | | | | | | | | |
| | | | | | | | | | |
MBS (1) | | | | | | | | | | |
| U.S. government guaranteed - single-family | | — | | 34 | | — | | 4,286 | | 4,320 | | | 5,388 | | | 6,987 | |
| | | | | | | | | | |
| GSEs - single-family | | 3 | | 6,613 | | 2,392 | | 132,164 | | 141,172 | | | 201,774 | | | 303,604 | |
| GSEs - multifamily | | — | | — | | — | | — | | — | | | — | | | 140,661 | |
| Private-label | | — | | — | | — | | — | | — | | | — | | | 332,605 | |
| | | | | | | | | | |
| Total MBS | | 3 | | 6,647 | | 2,392 | | 136,450 | | 145,492 | | | 207,162 | | | 783,857 | |
| Total held-to-maturity securities | | $ | 3 | | $ | 6,647 | | $ | 2,392 | | $ | 136,450 | | $ | 145,492 | | | $ | 207,162 | | | $ | 871,107 | |
Yield on held-to-maturity securities (2) | | 1.65 | % | 1.67 | % | 0.49 | % | 1.36 | % | | | | | |
________________________
(1) Maturity ranges are based on the contractual final maturity of the security.
(2) The weighted average yields are calculated as the sum of each debt security using the period end balances multiplied by the coupon rate adjusted by the effect of amortization and accretion of premiums and discounts, divided by the total debt securities in the applicable portfolio.
Available-for-Sale Securities
We classify certain investment securities as available-for-sale to enable liquidation at a future date or to enable the application of hedge accounting using interest-rate swaps. By classifying investments as available-for-sale, we can consider these securities to be a source of short-term liquidity, if needed. Additionally, we own certain fixed rate available-for-sale securities for which the interest earned is converted to a floating rate basis through the use of interest-rate swaps, a strategy we employ consistent with overall balance sheet management objectives and in alignment with variable rate funding.
Table 14 - Available-for-Sale Securities
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
| | Due in one year or less | Due after one year through five years | Due after five years through ten years | Due after ten years | Total Carrying Value | | Total Carrying Value | | Total Carrying Value |
| Non-MBS | | | | | | | | | | |
| U.S. Treasury obligations | | $ | — | | $ | 1,723,293 | | $ | 3,361,253 | | $ | — | | $ | 5,084,546 | | | $ | — | | | $ | — | |
| HFA securities | | 26,780 | | 23,273 | | 12,212 | | — | | 62,265 | | | 122,549 | | | 64,652 | |
| Supranational institutions | | — | | 151,742 | | 252,023 | | — | | 403,765 | | | 430,069 | | | 416,429 | |
| | | | | | | | | | |
| U.S. government corporations | | — | | — | | — | | 306,864 | | 306,864 | | | 322,061 | | | 296,761 | |
| GSEs | | — | | — | | 46,310 | | 80,162 | | 126,472 | | | 134,992 | | | 123,786 | |
| Total non-MBS | | 26,780 | | 1,898,308 | | 3,671,798 | | 387,026 | | 5,983,912 | | | 1,009,671 | | | 901,628 | |
MBS (1) | | | | | | | | | | |
| U.S. government guaranteed - single-family | | — | | — | | — | | 21,535 | | 21,535 | | | 29,408 | | | 57,714 | |
| U.S. government guaranteed - multifamily | | — | | — | | — | | 541,405 | | 541,405 | | | 47,180 | | | 282,617 | |
| GSEs - single-family | | — | | — | | 83,673 | | 1,020,041 | | 1,103,714 | | | 1,469,048 | | | 2,590,271 | |
| GSEs - multifamily | | — | | 276,428 | | 4,792,775 | | 176,218 | | 5,245,421 | | | 3,664,841 | | | 3,576,770 | |
| Total MBS | | — | | 276,428 | | 4,876,448 | | 1,759,199 | | 6,912,075 | | | 5,210,477 | | | 6,507,372 | |
| Total available-for-sale securities | | $ | 26,780 | | $ | 2,174,736 | | $ | 8,548,246 | | $ | 2,146,225 | | $ | 12,895,987 | | | $ | 6,220,148 | | | $ | 7,409,000 | |
Yield on available-for-sale securities (2) | | — | % | 1.30 | % | 1.78 | % | 2.70 | % | | | | | |
________________________
(1) MBS maturity ranges are based on the contractual final maturity of the security.
(2) The weighted average yields are calculated as the sum of each debt security using the period end balances multiplied by the coupon rate adjusted by the effect of amortization and accretion of premiums and discounts, divided by the total debt securities in the applicable portfolio.
Trading Securities
Investments Credit Risk
We are subject to credit risk on unsecured investments consisting primarily of short-term (meaning one year and under to maturity) money-market instruments issued by high-quality financial institutions and long-term (original maturity in excess of one year) debentures issued or guaranteed by U.S. agencies, U.S government-owned corporations, GSEs, and supranational institutions.
We place short-term funds with large, high-quality financial institutions that must be rated in at least the third-highest internal rating category on a rating scale of FHFA1 through FHFA7, reflecting progressively lower credit quality. The internal rating categories of FHFA1 through FHFA4 are considered to be investment quality. As of December 31, 2021, all of these placements either expired within one day or were payable upon demand. See Part 1 — Item 1 — Business — Business Lines — Investments for additional information.
In addition to these unsecured investments, we also make secured investments in the form of securities purchased under agreements to resell secured by U.S. Treasury, U.S. government guaranteed, or agency obligations, with current terms to maturity up to 95 days and in MBS and HFA securities that are directly or indirectly supported by underlying mortgage loans.
We actively monitor our investment credit exposures and the credit quality of our counterparties, including assessments of each counterparty's financial performance, capital adequacy, sovereign support, and collateral quality and performance, as well as related market signals such as securities prices and credit default swap spreads. We may reduce or suspend credit limits and/or seek to reduce existing exposures, as appropriate, as a result of these monitoring activities.
Table 15 - Credit Ratings of Investments at Carrying Value
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 |
| | Long-Term Credit Rating |
| Investment Category | | Triple-A | | Double-A | | Single-A | | | | | | Unrated |
Money-market instruments: (1) | | | | | | | | | | | | |
| Interest-bearing deposits | | $ | — | | | $ | 153 | | | $ | 85,000 | | | | | | | $ | — | |
| Securities purchased under agreements to resell | | — | | | 300,000 | | | 500,000 | | | | | | | — | |
| Federal funds sold | | — | | | 185,000 | | | 1,759,000 | | | | | | | — | |
| | | | | | | | | | | | |
| Total money-market instruments | | — | | | 485,153 | | | 2,344,000 | | | | | | | — | |
| | | | | | | | | | | | |
Investment securities:(2) | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Non-MBS: | | | | | | | | | | | | |
| U.S. Treasury obligations | | — | | | 5,584,971 | | | — | | | | | | | — | |
| Corporate bonds | | — | | | — | | | — | | | | | | | 1,442 | |
| U.S. government-owned corporations | | — | | | 306,864 | | | — | | | | | | | — | |
| GSE | | — | | | 126,472 | | | — | | | | | | | — | |
| Supranational institutions | | 403,765 | | | — | | | — | | | | | | | — | |
| HFA securities | | 34,495 | | | 27,770 | | | — | | | | | | | — | |
| Total non-MBS | | 438,260 | | | 6,046,077 | | | — | | | | | | | 1,442 | |
| | | | | | | | | | | | |
| MBS: | | | | | | | | | | | | |
| U.S. government guaranteed - single-family | | — | | | 25,855 | | | — | | | | | | | — | |
| U.S. government guaranteed - multifamily | | — | | | 541,405 | | | — | | | | | | | — | |
| GSE – single-family | | — | | | 1,244,886 | | | — | | | | | | | — | |
| GSE – multifamily | | — | | | 5,245,421 | | | — | | | | | | | — | |
| | | | | | | | | | | | |
| Total MBS | | — | | | 7,057,567 | | | — | | | | | | | — | |
| | | | | | | | | | | | |
| Total investment securities | | 438,260 | | | 13,103,644 | | | — | | | | | | | 1,442 | |
| | | | | | | | | | | | |
| Total investments | | $ | 438,260 | | | $ | 13,588,797 | | | $ | 2,344,000 | | | | | | | $ | 1,442 | |
_______________________
(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 December 31, 2021. If there is a split rating, the lowest rating is used. In certain instances where a counterparty is unrated, the Bank may assign a deemed rating to the counterparty and that deemed rating is used.
(2) The issue rating is used for investment securities. Issue ratings are obtained from Moody’s, Fitch, and S&P. If there is a split rating, the lowest rating is used.
FHFA regulations include limits on the amount of unsecured credit we may extend to a counterparty or to a group of affiliated counterparties based on a percentage of regulatory capital and an internal credit rating determined by each FHLBank. See Part 1 — Item 1 — Business — Business Lines — Investments for additional information. Under these regulations, the level of regulatory capital is determined as the lesser of our total regulatory capital or the regulatory capital of the counterparty. The applicable regulatory capital is then multiplied by a specified percentage for each counterparty, which product is the maximum amount of unsecured credit exposure we may extend to that counterparty. The percentage that we may offer for extensions of
unsecured credit other than overnight sales of federal funds ranges from one to 15 percent based on the counterparty's credit rating. From time to time, we may establish internal credit limits lower than permitted by regulation for individual counterparties.
FHFA regulations allow additional unsecured credit for sales of overnight federal funds. The specified percentage of regulatory capital used for determining the maximum amount of unsecured credit exposure we may offer to a counterparty for overnight sales of federal funds is twice the amount that we may extend to that counterparty for extensions of credit other than overnight sales of federal funds reduced by the amount of any other unsecured credit exposure attributable to other than overnight sales of federal funds.
We are generally prohibited by FHFA regulations from investing in financial instruments issued by non-U.S. entities, other than those issued by U.S. branches and agency offices of foreign commercial banks. We are also prohibited by FHFA regulations from investing in financial instruments issued by foreign sovereign governments. Our unsecured money-market credit risk to U.S. branches and agency offices of foreign commercial banks includes, among other things, the risk that, as a result of political or economic conditions in a country, the counterparty may be unable to meet its contractual repayment obligations. Notwithstanding the foregoing credit limits based on FHFA regulations, from time to time, we impose internal limits on all or specific individual counterparties that are lower than the maximum credit limits allowed by regulation.
Table 16 - Unsecured Credit Related to Money-Market Instruments and Debentures by Carrying Value
(dollars in thousands)
| | | | | | | | | | | | | | |
| | Carrying Value |
| | December 31, 2021 | | December 31, 2020 |
| Interest bearing deposits | | $ | 85,153 | | | $ | 299,149 | |
| Federal funds sold | | 1,944,000 | | | 2,260,000 | |
| Supranational institutions | | 403,765 | | | 430,069 | |
| U.S. government-owned corporations | | 306,864 | | | 322,061 | |
| GSEs | | 126,472 | | | 134,992 | |
| | | | |
| | | | |
Table 17 - Issuers / Counterparties Representing Greater Than 10 Percent of Total Unsecured Credit Related to Money-Market Instruments and to Debentures
| | | | | | | | |
| Issuer / counterparty | | As of December 31, 2021 |
| Inter-American Development Bank | | 13.3 | % |
| Bank of Nova Scotia | | 12.3 | |
| Australia and New Zealand Bank | | 12.3 | |
| Standard Chartered Bank | | 12.3 | |
| Cooperatieve Rabobank U.A. | | 11.4 | |
| Tennessee Valley Authority | | 10.2 | |
Mortgage Loans
As of December 31, 2021, our mortgage loan investment portfolio totaled $3.1 billion, a decrease of $810.1 million from December 31, 2020. We expect continued competition from Fannie Mae and Freddie Mac, as well as from private mortgage loan acquirers, for loan investment opportunities. In addition, prepayment activity in the year ended December 31, 2021, has been elevated and has outpaced our purchases of mortgage loans, a trend we expect to continue in 2022.
Table 18 - Par Value of Mortgage Loans Held for Portfolio
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
| Conventional mortgage loans | | | | | | | | | | |
| MPF Original | | $ | 860,818 | | | $ | 1,235,220 | | | $ | 1,665,708 | | | $ | 1,899,446 | | | $ | 2,105,485 | |
| MPF 125 | | 70,544 | | | 105,916 | | | 146,831 | | | 171,550 | | | 195,870 | |
| MPF Plus | | 53,486 | | | 74,739 | | | 98,649 | | | 128,428 | | | 167,003 | |
| MPF 35 | | 1,895,506 | | | 2,208,682 | | | 2,229,067 | | | 1,703,131 | | | 1,100,115 | |
| Total conventional mortgage loans | | 2,880,354 | | | 3,624,557 | | | 4,140,255 | | | 3,902,555 | | | 3,568,473 | |
| Government mortgage loans | | 191,721 | | | 246,150 | | | 292,203 | | | 328,651 | | | 365,231 | |
| Total | | $ | 3,072,075 | | | $ | 3,870,707 | | | $ | 4,432,458 | | | $ | 4,231,206 | | | $ | 3,933,704 | |
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.
Table 19 - Mortgage Loans by Contractual Repayment Term
(dollars in thousands)
| | | | | | | | | | | |
| Redemption Term | December 31, 2021 | | December 31, 2020 |
| Due in 1 year or less | $ | 113,052 | | | $ | 132,668 | |
| Due after 1 year through 5 years | 475,667 | | | 566,410 | |
| Due after 5 years through 15 years | 1,222,957 | | | 1,501,087 | |
| Thereafter | 1,260,399 | | | 1,670,542 | |
| Total unpaid principal balance | 3,072,075 | | | 3,870,707 | |
Other adjustments, net (1) | 49,784 | | | 62,645 | |
| Total mortgage loans held for portfolio | 3,121,859 | | | 3,933,352 | |
| Allowance of credit losses on mortgage loans | (1,700) | | | (3,100) | |
| Mortgage loans held for portfolio, net | $ | 3,120,159 | | | $ | 3,930,252 | |
_______________________
(1)Consists of premiums, discounts, and deferred derivative gains, net.
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 20.
Table 20 - State Concentrations by Outstanding Principal Balance
| | | | | | | | | | | |
| Percentage of Total Outstanding Principal Balance of Conventional Mortgage Loans |
| | December 31, 2021 | | December 31, 2020 |
| Massachusetts | 63 | % | | 62 | % |
| Maine | 10 | | | 10 | |
| Connecticut | 8 | | | 8 | |
| Vermont | 5 | | | 3 | |
| | | |
| All others | 14 | | | 17 | |
| Total | 100 | % | | 100 | % |
We place conventional mortgage loans on nonaccrual status when the collection of interest or principal is doubtful or contractual principal or interest is 90 days or more past due. Accrued interest on nonaccrual loans is excluded from interest income. We monitor the delinquency levels of the mortgage loan portfolio on a monthly basis.
Although delinquent loans in our portfolio are spread throughout the U.S., delinquent loan concentrations by state of five percent or greater of the outstanding principal balance of our total conventional mortgage loans delinquent by more than 30 days are shown in Table 21.
Table 21 - State Concentrations of Delinquent Conventional Mortgage Loans
| | | | | | | | | | | |
| December 31, |
| Percentage of Outstanding Principal Balance of Delinquent Conventional Mortgage Loans | 2021 | | 2020 |
| Massachusetts | 48 | % | | 57 | % |
| Connecticut | 20 | | | 15 | |
| Maine | 8 | | | 8 | |
| | | |
| All others | 24 | | | 20 | |
| Total | 100 | % | | 100 | % |
Table 22 - Characteristics of Our Investments in Mortgage Loans(1)
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| Loan-to-value ratio at origination | | | | |
| < 60.00% | | 23 | % | | 21 | % |
| 60.01% to 70.00% | | 17 | | | 16 | |
| 70.01% to 80.00% | | 21 | | | 20 | |
| 80.01% to 90.00% | | 28 | | | 31 | |
| Greater than 90.00% | | 11 | | | 12 | |
| Total | | 100 | % | | 100 | % |
| Weighted average loan-to-value ratio | | 71 | % | | 72 | % |
| FICO score at origination | | | | |
| < 620 | | 1 | % | | — | % |
| 620 to < 660 | | 5 | | | 5 | |
| 660 to < 700 | | 12 | | | 12 | |
| 700 to < 740 | | 18 | | | 19 | |
| ≥ 740 | | 64 | | | 64 | |
| | | | |
| Total | | 100 | % | | 100 | % |
| Weighted average FICO score | | 752 | | | 752 | |
_______________________
(1)Percentages are calculated based on unpaid principal balance at the end of each period.
Table 23 - Mortgage Loans - Risk Elements and Credit Losses
(dollars in thousands)
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Average par value of mortgage loans outstanding during the year ending | $ | 3,441,867 | | | $ | 4,270,932 | |
| Mortgage loans held for portfolio, par value | 3,072,075 | | | 3,870,707 | |
| Nonaccrual loans, par value | 21,384 | | | 74,348 | |
| Allowance for credit losses on mortgage loans | 1,700 | | | 3,100 | |
| Net recoveries (charge-offs) | 62 | | | (207) | |
| | | |
| Net charge-offs to average loans outstanding during the year ending | — | % | | — | % |
| Allowance for credit losses to mortgage loans held for portfolio | 0.06 | | | 0.08 | |
| Nonaccrual loans to mortgage loans held for portfolio | 0.70 | | | 1.92 | |
| Allowance for credit losses to nonaccrual loans | 7.95 | | | 4.17 | |
Government mortgage loans may not exceed the loan-to-value limits set by the applicable federal agency. Conventional mortgage loans with loan-to-value ratios greater than 80 percent require certain amounts of primary mortgage insurance from a mortgage insurance company rated at least triple-B (or equivalent rating).
Higher-Risk Loans. Our portfolio includes certain higher-risk subprime conventional mortgage loans. The higher-risk subprime loans represent a relatively small portion of our conventional mortgage loan portfolio (6.0 percent by outstanding principal balance), but a disproportionately higher portion of the conventional mortgage loan portfolio delinquencies (24.2 percent by outstanding principal balance).
Table 24 - Summary of Higher-Risk Conventional Mortgage Loans
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 |
| High-Risk Loan Type | | Total Par Value | | Percent Delinquent 30 Days | | Percent Delinquent 60 Days | | Percent Delinquent 90 Days or More and Nonaccruing |
Subprime loans (1) | | $ | 174,150 | | | 2.16 | % | | 1.56 | % | | 2.19 | % |
_______________________
(1) Subprime loans are loans to borrowers with FICO® credit scores of 660 or lower.
Our portfolio of higher-risk loans consists solely of fixed-rate conventionally amortizing first-mortgage loans. The portfolio does not include adjustable-rate mortgage loans, pay-option adjustable-rate mortgage loans, interest-only mortgage loans, junior lien mortgage loans, or loans with initial teaser rates.
Mortgage Insurance Companies. We are exposed to credit risk from primary mortgage insurance coverage (PMI) on individual loans. As of December 31, 2021, we were the beneficiary of PMI coverage of $71.0 million on $272.8 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 loan origination).
We have analyzed our potential loss exposure to all of the mortgage insurance companies and do not expect incremental losses based on these exposures at this time.
Deposits
We offer demand and overnight deposits and custodial mortgage accounts, and until February 19, 2021, we offered term deposits to our members. Deposit programs are intended to provide members a low-risk earning asset that satisfies liquidity requirements. Deposit balances depend on members' needs to place excess liquidity and can fluctuate significantly. Due to the relatively small size of our deposit base and the unpredictable nature of member demand for deposits, we do not rely on deposits as a core component of our funding. At December 31, 2021, and December 31, 2020, deposits totaled $884.0 million and $1.1 billion, respectively.
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 $378.5 million and $161.2 million as of December 31, 2021, and December 31, 2020, respectively. Derivative liabilities' net fair value, net of cash collateral and accrued interest, totaled $38.9 million and $24.1 million as of December 31, 2021, and December 31, 2020, respectively.
We offset fair-value amounts recognized for derivative instruments with fair-value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivatives recognized at fair value executed with the same counterparty under a master-netting arrangement as well as arising from derivatives cleared through a DCO.
We base the estimated fair values of these agreements on the fair value of interest-rate-exchange agreements with similar terms or available market prices. Consequently, fair values for these instruments must be estimated using techniques such as discounted cash-flow analysis and comparison with similar instruments. Estimates developed using these methods are subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. We formally establish hedging relationships associated with balance-sheet items and forecasted transactions to obtain desired economic results. These hedge relationships may include fair-value and cash-flow hedges, as well as economic hedges.
All commitments to invest in mortgage loans are recorded at fair value on the statement of condition as derivatives. Upon satisfaction of the commitment, the recorded fair value is then reclassified as a basis adjustment of the purchased mortgage assets. We had commitments for which we were obligated to invest in mortgage loans with par values totaling $3.2 million and $28.4 million at December 31, 2021 and 2020, respectively.
Table 25 - Hedged Item and Hedge-Accounting Treatment
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | December 31, 2021 | | December 31, 2020 |
| Hedged Item | | Derivative | | Designation(2) | | Notional
Amount | | Fair
Value | | Notional
Amount | | Fair
Value |
Advances (1) | | Swaps | | Fair value | | $ | 2,693,195 | | | $ | 1,800 | | | $ | 4,532,123 | | | $ | (21,870) | |
| | | Swaps | | Economic | | 345,425 | | | (11,761) | | | 670,300 | | | (44,466) | |
| Total associated with advances | | | | | | 3,038,620 | | | (9,961) | | | 5,202,423 | | | (66,336) | |
| Available-for-sale securities | | Swaps | | Fair value | | 10,795,541 | | | 56,831 | | | 3,735,362 | | | 33,751 | |
| Trading securities | | Swaps | | Economic | | 500,000 | | | 3,087 | | | 3,550,000 | | | 19,669 | |
| COs | | Swaps | | Fair value | | 13,101,220 | | | (173,243) | | | 1,692,990 | | | (3,443) | |
| | Swaps | | Economic | | 55,000 | | | (24) | | | — | | | — | |
| | Forward starting swaps | | Cash Flow | | 1,391,000 | | | (380) | | | 17,000 | | | (14) | |
| Total associated with COs | | | | | | 14,547,220 | | | (173,647) | | | 1,709,990 | | | (3,457) | |
| Balance Sheet | | Swaps | | Economic | | — | | | — | | | 1,316,522 | | | 29 | |
| Total | | | | | | 28,881,381 | | | (123,690) | | | 15,514,297 | | | (16,344) | |
| CO bond firm commitments | | | | | | 55,000 | | | 24 | | | — | | | — | |
| Mortgage delivery commitments | | | | | | 3,164 | | | 68 | | | 28,386 | | | 220 | |
| Total derivatives | | | | | | $ | 28,939,545 | | | (123,598) | | | $ | 15,542,683 | | | (16,124) | |
| Accrued interest | | | | | | | | (50,008) | | | | | (62,464) | |
| Cash collateral, including related accrued interest | | | | | | | | 513,194 | | | | | 215,764 | |
| Net derivatives | | | | | | | | $ | 339,588 | | | | | $ | 137,176 | |
| | | | | | | | | | | | |
| Derivative asset | | | | | | | | $ | 378,532 | | | | | $ | 161,238 | |
| Derivative liability | | | | | | | | (38,944) | | | | | (24,062) | |
| Net derivatives | | | | | | | | $ | 339,588 | | | | | $ | 137,176 | |
_______________________
(1) As of December 31, 2021 and 2020, embedded derivatives separated from certain advance contracts with notional amounts of $345.4 million and $670.3 million, respectively, and fair values of $11.9 million and $44.5 million, respectively, are not included in the table.
(2) The hedge designation “fair value” represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge changes in fair value attributable to changes in the designated benchmark interest rate. The hedge designation "cash flow" represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge the exposure to variability in expected future cash flows. The hedge designation “economic” represents derivatives hedging specific or nonspecific assets, liabilities, or firm commitments that do not qualify or were not documented as fair-value or cash-flow hedges but are documented as serving a non-speculative use and are hedging strategies under our risk-management policy.
Table 26 - Hedging Strategies
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Notional Amount |
| Hedged Item / Hedging Instrument | | Hedging Objective | | Hedge Designation | | December 31, 2021 | | December 31, 2020 |
| Advances | | | | | | | | |
| Pay fixed, receive floating interest-rate swap (without options) | | Converts the advance's fixed rate to a variable rate index | | Fair value | | $ | 1,844,570 | | | $ | 3,287,898 | |
| | Economic | | 15,625 | | | 20,500 | |
| Pay fixed, receive floating interest-rate swap (with options) | | Converts the advance's fixed rate to a variable rate index and offsets embedded options in the advance | | Fair value | | 848,625 | | | 1,225,125 | |
| | Economic | | 329,800 | | | 649,800 | |
| Pay floating with embedded coupon features, receive floating interest-rate swap (noncallable) | | Reduces interest-rate sensitivity and repricing gaps by converting the advance's variable rate to a different variable rate index and/or offsets embedded coupon features in the advance | | Fair value | | — | | | 19,100 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | 3,038,620 | | | 5,202,423 | |
| | | | | | | | |
| Investments | | | | | | | | |
| Pay fixed, receive floating interest-rate swap | | Converts the investment's fixed rate to a variable rate index | | Fair value | | 10,795,541 | | | 3,735,362 | |
| | Economic | | 500,000 | | | 3,550,000 | |
| | | | | | 11,295,541 | | | 7,285,362 | |
| | | | | | | | |
| CO Bonds | | | | | | | | |
| Receive fixed, pay floating interest-rate swap (without options) | | Converts the bond's fixed rate to a variable rate index | | Fair value | | 715,220 | | | 1,402,990 | |
| Receive fixed, pay floating interest-rate swap (with options) | | Converts the bond's fixed rate to a variable rate index and offsets option risk in the bond | | Fair value | | 12,386,000 | | | 290,000 | |
| | Economic | | 55,000 | | | — | |
| | | | | | | | |
| Forward-starting interest-rate swap | | To lock in the cost of funding on anticipated issuance of debt | | Cash flow | | 1,391,000 | | | 17,000 | |
| | | | | | 14,547,220 | | | 1,709,990 | |
| | | | | | | | |
| Balance Sheet | | | | | | | | |
| Pay float, receive fixed interest-rate swap | | Interest-rate swap not linked to a specific asset, liability or forecasted transaction | | Economic | | — | | | 658,261 | |
| Pay fixed, receive float interest-rate swap | | Interest-rate swap not linked to a specific asset, liability or forecasted transaction | | Economic | | — | | | 658,261 | |
| | | | | | — | | | 1,316,522 | |
| | | | | | | | |
| Stand-Alone Derivatives | | | | | | | | |
| CO bond firm commitments | | N/A | | | | 55,000 | | | — | |
| Mortgage delivery commitments | | N/A | | | | 3,164 | | | 28,386 | |
| Total | | | | | | $ | 28,939,545 | | | $ | 15,542,683 | |
Tables 27 and 28 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 $15.8 billion, representing 54.6 percent of all derivatives outstanding as of December 31, 2021. Economic hedges and cash-flow hedges are not included within the two tables below.
Table 27 - Fair-Value Hedge Relationships of Advances By Year of Contractual Maturity
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| | | | | | | | | | 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 | $ | 444,360 | | | $ | (2,163) | | | $ | 444,360 | | | $ | 2,148 | | | 1.73 | % | | 0.11 | % | | 1.29 | % | | 0.55 | % |
| Due after one year through two years | 266,800 | | | (3,457) | | | 266,800 | | | 3,470 | | | 2.04 | | | 0.11 | | | 1.60 | | | 0.55 | |
| Due after two years through three years | 401,500 | | | (5,682) | | | 401,500 | | | 5,627 | | | 2.02 | | | 0.07 | | | 1.42 | | | 0.67 | |
| Due after three years through four years | 720,425 | | | (127) | | | 720,425 | | | 200 | | | 1.41 | | | 0.07 | | | 0.65 | | | 0.83 | |
| Due after four years through five years | 396,860 | | | 589 | | | 396,860 | | | (607) | | | 1.73 | | | 0.08 | | | 1.00 | | | 0.81 | |
| Thereafter | 463,250 | | | 4,374 | | | 463,250 | | | (4,361) | | | 1.44 | | | 0.08 | | | 0.96 | | | 0.56 | |
| Total | $ | 2,693,195 | | | $ | (6,466) | | | $ | 2,693,195 | | | $ | 6,477 | | | 1.67 | % | | 0.09 | % | | 1.07 | % | | 0.69 | % |
_______________________
(1) Not included in the fair value is $8.3 million of variation margin, or payments made for changes in the market value of the derivatives position, paid or received for daily settled contracts.
(2) Included in the advances hedged amount are $848.6 million of putable advances, which would accelerate the termination date of the derivative and the hedged item if the put option is exercised.
(3) The benchmark 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.
(4) The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of December 31, 2021.
Table 28 - Fair-Value Hedge Relationships of Consolidated Obligations By Year of Contractual Maturity
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| | | | | | | | | | 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 | $ | 192,220 | | | $ | 1,434 | | | $ | 192,220 | | | $ | (1,434) | | | 1.64 | % | | 1.60 | % | | 0.10 | % | | 0.14 | % |
| Due after one year through two years | 404,000 | | | (1,057) | | | 404,000 | | | 1,054 | | | 0.50 | | | 0.49 | | | 0.04 | | | 0.05 | |
| Due after two years through three years | 2,395,000 | | | (24,910) | | | 2,395,000 | | | 24,910 | | | 0.54 | | | 0.54 | | | (0.01) | | | (0.01) | |
| Due after three years through four years | 1,737,000 | | | (23,986) | | | 1,737,000 | | | 23,957 | | | 0.66 | | | 0.64 | | | 0.01 | | | 0.03 | |
| Due after four years through five years | 5,196,000 | | | (64,878) | | | 5,196,000 | | | 64,795 | | | 0.75 | | | 0.75 | | | 0.00 | | | 0.00 | |
| Thereafter | 3,177,000 | | | (61,818) | | | 3,177,000 | | | 61,701 | | | 1.09 | | | 1.09 | | | 0.01 | | | 0.01 | |
| Total | $ | 13,101,220 | | | $ | (175,215) | | | $ | 13,101,220 | | | $ | 174,983 | | | 0.79 | % | | 0.78 | % | | 0.00 | % | | 0.01 | % |
_______________________
(1) Not included in the fair value is $2.0 million of variation margin, or payments made for changes in the market value of the derivatives position, paid or received for daily settled contracts.
(2) Included in the CO bonds hedged amount are $12.4 billion of callable CO bonds, which would accelerate the termination date of the derivative and the hedged item if the call option is exercised.
(3) The benchmark 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, plus remaining unamortized premiums or discounts on hedged CO bonds where applicable.
(4) The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of December 31, 2021.
Derivative Instruments Credit Risk. We are subject to credit risk on derivatives. This risk arises from the risk of counterparty default on the derivative contract. The amount of unsecured credit exposure to derivative counterparty default is the amount by which the replacement cost of the defaulted derivative contract exceeds the value of any collateral held by us (if the counterparty is the net obligor on the derivative contract) or is exceeded by the value of collateral pledged by us to counterparties (if we are the net obligor on the derivative contract). We accept cash and securities collateral in accordance with
the terms of the applicable master netting agreement for uncleared derivatives (principal-to-principal derivatives that are not centrally cleared) from counterparties with whom we are in a current positive fair-value position by an amount that exceeds an exposure threshold (if any) defined in our master netting agreement with the counterparty. The resulting net exposure at fair value is reflected in Table 29 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 29 - Credit Exposure to Derivatives Counterparties
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 |
Credit Rating (1) | | Notional Amount | | Net Derivatives Fair Value Before Collateral | | Cash Collateral Pledged to Counterparty | | | | Net Credit Exposure to Counterparties |
| Asset positions with credit exposure: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Cleared derivatives | | $ | 4,063,846 | | | $ | 1,003 | | | $ | 68,875 | | | | | $ | 69,878 | |
| | | | | | | | | | |
| Liability positions with credit exposure: | | | | | | | | | | |
| Uncleared derivatives | | | | | | | | | | |
| Single-A | | 1,276,200 | | | (13,977) | | | 14,201 | | | | | 224 | |
| | | | | | | | | | |
| Cleared derivatives | | 11,066,610 | | | (3,655) | | | 311,963 | | | | | 308,308 | |
| Total interest-rate swap positions with nonmember counterparties to which we had credit exposure | | 16,406,656 | | | (16,629) | | | 395,039 | | | | | 378,410 | |
| | | | | | | | | | |
| CO Bond firm commitments | | 55,000 | | | 54 | | | — | | | | | 54 | |
Mortgage delivery commitments (2) | | 3,164 | | | 68 | | | — | | | | | 68 | |
| Total | | $ | 16,464,820 | | | $ | (16,507) | | | $ | 395,039 | | | | | $ | 378,532 | |
| | | | | | | | | | |
Derivative positions without credit exposure: (3) | | | | | | | | | | |
| | | | | | | | | | |
| Single-A | | $ | 12,474,725 | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
_______________________
(1) Uncleared derivatives counterparty ratings are obtained from Moody's, Fitch, and S&P. Each rating classification includes all rating levels within that category. If there is a split rating, the lowest rating is used. In the case where the obligations are unconditionally and irrevocably guaranteed, the rating of the guarantor or the counterparty is used.
(2) Total fair-value exposures related to commitments to invest in mortgage loans are offset by certain pair-off fees. Commitments to invest in mortgage loans are reflected as derivatives. We do not collateralize these commitments. However, should the participating financial institution fail to deliver the mortgage loans as agreed, the participating financial institution is charged a fee to compensate us for the nonperformance.
(3) Represents derivatives positions with counterparties for which we are in a net liability position and for which we have delivered collateral to the counterparty in an amount equal to or less than the net derivative liability, or derivative positions with counterparties for which we are in a net asset position and for which the counterparty has delivered collateral to us in an amount that exceeds our net derivative asset.
Uncleared derivatives. The credit risk arising from unsecured credit exposure on derivatives is mitigated by the credit quality of the counterparties and by the early termination ratings triggers contained in all master derivatives agreements. Prior to January 1, 2020, we entered into new uncleared derivatives only with nonmember institutions that had long-term senior unsecured NRSRO credit ratings that are at or above single-A (or its equivalent) although risk-reducing trades could be approved for counterparties whose ratings had fallen below these ratings. Effective January 1, 2020, we replaced the NRSRO rating
minimum with our third highest internal rating minimum. See Part 1 — Item 1 — Business — Business Lines — Investments for additional information on our internal ratings. We actively monitor these exposures and the credit quality of our counterparties, using stress testing of counterparty exposures and assessments of each counterparty's financial performance, capital adequacy, sovereign support, and related market signals such as credit default swap spreads. We can reduce or suspend credit limits and/or seek to reduce existing exposures, as appropriate, as a result of these monitoring activities. We do not enter into interest-rate-exchange agreements with other FHLBanks. We use master-netting agreements to reduce our credit exposure from counterparty defaults. The master agreements contain bilateral-collateral-exchange provisions that require credit exposures to be secured by U.S. federal government, U.S. government guaranteed, or GSE securities or cash. Exposures are measured daily, and adjustments to collateral positions are made daily. These agreements may require us to deliver additional collateral to certain of our counterparties if our credit rating is downgraded by an NRSRO, which could increase our exposure to loss in the event of a default by a counterparty to which we were the net creditor at the time of any such default, as further detailed in Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 8 — Derivatives and Hedging Activities.
We may deposit funds with these counterparties and their affiliates for short-term money-market investments, including overnight federal funds, term federal funds, and interest-bearing deposits. We may also engage in short-term secured reverse repurchase agreements with affiliates of these counterparties. Some of these counterparties have affiliates that buy, sell, and distribute our COs.
Cleared derivatives. The credit risk from unsecured credit exposure on cleared swaps is principally mitigated by the DCO's structural risk protections. We actively monitor these exposures and the credit quality of our DCO counterparties, using stress testing of DCO counterparties exposures and assessments of the DCO's structural risk protections. We can reduce existing exposures to a DCO by unwinding any trade, entering into an offsetting trade, or by moving trades to another DCO.
Transition from LIBOR to Alternative Reference Rates
In July 2017, the United Kingdom's FCA, the regulator for LIBOR, announced that after 2021 it will no longer persuade or compel the major banks that sustain LIBOR to submit rates for the calculation of LIBOR. We have exposures to investment securities and derivatives with interest rates indexed to U.S. dollar LIBOR. All of our LIBOR-indexed financial instruments utilize a LIBOR tenor that will either cease to be published or will no longer be representative after June 30, 2023. Table 30 presents our exposure to LIBOR-indexed investment securities and LIBOR-indexed derivatives, at December 31, 2021.
Table 30 - Financial Instruments with LIBOR Exposure at December 31, 2021
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | Terminates in 2022 | | Due/Terminates in 2023, through June 30 | | Due/Terminates after June 30, 2023 | | Total |
| Assets with LIBOR exposure | | | | | | | | |
| | | | | | | | |
| Investment securities, par amount by contractual maturity | | | | | | | | |
| Non-MBS | | $ | — | | | $ | — | | | $ | 12,210 | | | $ | 12,210 | |
MBS(1) | | 2 | | | — | | | 683,759 | | | 683,761 | |
| Total investment securities | | $ | 2 | | | $ | — | | | $ | 695,969 | | | $ | 695,971 | |
| | | | | | | | |
| LIBOR-indexed interest-rate swaps, notional amount | | | | | | | | |
| Receive leg | | | | | | | | |
| Cleared | | $ | 57,625 | | | $ | 12,000 | | | $ | 25,750 | | | $ | 95,375 | |
| Uncleared | | 155,000 | | | 231,600 | | | 350,900 | | | 737,500 | |
| Total interest-rate swaps, receive leg | | $ | 212,625 | | | $ | 243,600 | | | $ | 376,650 | | | $ | 832,875 | |
| | | | | | | | |
| Pay leg | | | | | | | | |
| Cleared | | $ | 137,220 | | | $ | — | | | $ | — | | | $ | 137,220 | |
| | | | | | | | |
| | | | | | | | |
_______________________
(1)Balances are presented according to contractual maturity date and do not reflect scheduled or unscheduled principal repayments of underlying mortgage loans.
Table 31 - 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 | | $ | — | | | $ | 12,210 | | | $ | 683,761 | | | $ | — | |
| SOFR | | 940,000 | | | — | | | 956,925 | | | 4,803,000 | |
| FHLBank discount note auction rate | | 1,408,939 | | | — | | | — | | | — | |
| Constant Maturity Treasury | | — | | | — | | | 36,836 | | | — | |
| | | | | | | | |
| Total | | $ | 2,348,939 | | | $ | 12,210 | | | $ | 1,677,522 | | | $ | 4,803,000 | |
LIQUIDITY AND CAPITAL RESOURCES
Our financial structure is designed to enable us to expand and contract our assets, liabilities, and capital in response to changes in membership composition and member credit needs. Our primary source of liquidity is our access to the capital markets through CO issuance, which is described in Part I — Item 1 — Business — Consolidated Obligations. Outstanding COs and the condition of the market for COs are discussed below under — Debt Financing — Consolidated Obligations. Our equity capital resources are governed by our capital plan, certain portions of which are described under — Capital below as well as by applicable legal and regulatory requirements.
Liquidity
We are required to maintain liquidity in accordance with the FHLBank Act, FHFA regulations and guidance, and policies established by our management and board of directors. We seek to be in a position to meet the credit and liquidity needs of our members and to meet all current and future financial commitments by managing liquidity positions to maintain stable, reliable,
and cost-effective sources of funds while taking into account market conditions, member demand, and the maturity profile of our assets and liabilities.
We may not be able to predict future trends in member credit needs because they are driven by complex interactions among a number of factors, including members' asset growth or reductions, deposit growth or reductions, and the attractiveness of advances compared to other wholesale borrowing alternatives. We regularly monitor current trends and anticipate future debt issuance needs and maintain a portfolio of highly liquid assets in an effort to be prepared to fund our members' credit needs and our investment opportunities. We are generally able to expand our CO debt issuance in response to our members' increased credit needs for advances and to increase our acquisitions of mortgage loans. Alternatively, in response to reduced member credit needs, we may allow our COs to mature without replacement, transfer debt to another FHLBank, or repurchase and retire outstanding COs, or redeem callable COs on eligible redemption dates, allowing our balance sheet to shrink.
Sources and Uses of Liquidity. Our primary sources of liquidity are proceeds from the issuance of COs and advance repayments, and maturing short-term investments, as well as cash and investment holdings that are primarily high-quality, short- and intermediate-term financial instruments.
During the year ended December 31, 2021, we maintained continual access to funding and adapted our debt issuance to meet the needs of our members. As we entered March 2020 and continued through 2021, 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. We maintained liquidity through short-term investments and U.S. Treasury securities 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 second and third quarters of 2020, during which a substantial amount of short-term debt issued prior to the FOMC’s combined 150 basis point rate cuts in March 2020 remained outstanding through May 2020, resulting in sharp, temporary margin compression.
Our primary uses of liquidity are advance originations and consolidated obligation payments. Other uses of liquidity are mortgage loan and investment purchases, dividend payments, general operating expenses, and other contractual payments. We also maintain liquidity to redeem or repurchase excess capital stock, through our daily excess stock repurchases, upon the request of a member or as required under our capital plan.
Secondary sources of liquidity include payments collected on mortgage loans, proceeds from the issuance of capital stock, and deposits from members. In addition, under the FHLBank Act, the U.S. Treasury may purchase up to $4 billion of COs of the FHLBanks. The terms, conditions, and interest rates in such a purchase would be determined by the U.S. Treasury. This authority may be exercised at the discretion of the U.S. Treasury with the agreement of the FHFA only if alternative means cannot be effectively employed to permit members of the FHLBanks to continue to supply reasonable amounts of funds to the mortgage market, and the ability to supply such funds is substantially impaired because of monetary stringency and a high level of interest rates. There were no such purchases by the U.S. Treasury during the year ended December 31, 2021.
For information and discussion of our guarantees and other commitments we may have, see below — Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations, and for further information and discussion of the joint and several liability for FHLBank COs, see below — Debt Financing — Consolidated Obligations.
Internal Liquidity Sources / Liquidity Management
Liquidity Reserves for Deposits. Applicable law requires us to hold a total amount of cash, obligations of the U.S., and advances with maturities of less than five years, in an amount not less than the amount of total member deposits with us. We have complied with this requirement during the year ended December 31, 2021.
Table 32 - Liquidity Reserves for Deposits
(dollars in thousands)
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2021 | | 2020 |
| Cash and due from banks | | $ | 204,993 | | | $ | 2,050,028 | |
| Interest-bearing deposits | | 85,153 | | | 299,149 | |
| U.S. Treasury obligations | | 5,584,971 | | | 3,596,718 | |
| Advances maturing within five years | | 11,444,422 | | | 17,759,474 | |
| Total liquid assets | | 17,319,539 | | | 23,705,369 | |
| Total deposits | | 884,032 | | | 1,088,987 | |
| Excess liquid assets | | $ | 16,435,507 | | | $ | 22,616,382 | |
We have developed a methodology and policies by which we measure and manage the Bank’s short-term liquidity needs based on projected net cash flow and contingent obligations.
Projected Net Cash Flow. We define projected net cash flow as projected sources of funds less projected uses of funds based on contractual maturities or expected option exercise periods, and settlement of committed assets and liabilities, as applicable. For mortgage-related cash flows and callable debt, we incorporate projected prepayments and call exercise.
Liquidity Management Action Trigger. We maintain a liquidity management action trigger pertaining to projected net cash flow: if projected net cash flow falls below zero on or before the 21st day following the measurement date, then management of the Bank is notified and determines whether any corrective action is necessary. We did not exceed this threshold at any time during the year ended December 31, 2021.
Table 33 - Projected Net Cash Flow
(dollars in thousands)
| | | | | |
| As of December 31, 2021 |
| 21 Days |
| Uses of funds | |
| Interest payable | $ | 29,140 | |
| Maturing liabilities | 995,000 | |
| Committed asset settlements | 15,000 | |
| Capital outflow | 32,562 | |
| MPF delivery commitments | 3,164 | |
| |
| Gross uses of funds | 1,074,866 | |
| |
| Sources of funds | |
| Interest receivable | 33,956 | |
| Maturing or projected amortization of assets | 4,237,261 | |
| Committed liability settlements | 204,903 | |
| Cash and due from banks and interest bearing deposits | 289,940 | |
| Other | 1,842 | |
| Gross sources of funds | 4,767,902 | |
| |
| Projected net cash flow | $ | 3,693,036 | |
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 year ended December 31, 2021.
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 not expose us to significant interest-rate risk because the interest rates on both the floating-rate assets and liabilities typically reset similarly (either through rate resets or re-issuance of the obligations). However, deviations in the cost of our short-term liabilities relative to resetting assets can cause fluctuations in our net interest margin.
Additionally, the Bank is exposed to refinancing risk since, over certain time horizons, it has more liabilities than assets maturing. In order to manage the Bank’s refinancing risk, we maintain a policy that limits the potential difference between the amount of financial assets and the amount of financial liabilities expected to mature within three-month and one-year time horizons inclusive of projected mortgage-related prepayment activity. We measure this difference, or gap, as a percentage of total assets under two different measurement horizons - three months and one year. In conformity with the provisions of the Liquidity Guidance AB, the Bank has instituted a limit and management action trigger framework around these metrics as follows:
Table 34 - Funding Gap Metric
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Funding Gap Metric (1) | | Limit | | Management Action Trigger | | Three-Month Average
December 31, 2021 | | Three-Month Average
December 31, 2020 |
3-month Funding Gap (2) | | 15% | | 13% | | (8.2) | % | | (0.9) | % |
1-year Funding Gap (2) | | 30% | | 25% | | (0.5) | % | | 9.8 | % |
_______________________(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 funding gap metrics from December 31, 2020, to December 31, 2021, is primarily due to increased use of swapped callable CO bonds as a funding alternative to CO discount notes during 2021. Callable debt by regulatory definition is modeled based on final contractual maturity unless a call notice has been issued.
External Sources of Liquidity
Amended and Restated FHLBanks P&I Funding Contingency Plan Agreement. We have a source of emergency external liquidity through the Amended and Restated FHLBanks P&I Funding Contingency Plan Agreement. Under the terms of that agreement, in the event we do not fund principal and interest payments due with respect to any CO for which issuance proceeds were allocated to us within deadlines established in the agreement, the other FHLBanks will be obligated to fund any shortfall to the extent that any of the other FHLBanks has a net positive settlement balance (that is, the amount by which end-of-day proceeds received by such FHLBank from the sale of COs on that day exceeds payments by such FHLBank on COs on the same day) in its account with the Office of Finance on the day the shortfall occurs. We would then be required to repay the funding to the other FHLBanks. We have never drawn funding under this agreement, nor have we ever been required to provide funding to another FHLBank under this agreement.
Debt Financing — Consolidated Obligations
Our primary source of liquidity is through CO issuances. At December 31, 2021, and December 31, 2020, outstanding COs for which we are primarily liable, including both CO bonds and CO discount notes, totaled $28.9 billion and $34.3 billion, respectively. CO bonds are generally issued with either fixed-rate coupon-payment terms or variable-rate coupon-payment terms that use a variety of indices for interest-rate resets. Some of the fixed-rate bonds that we have issued are callable bonds that may be redeemed at par on one or more dates prior to their maturity date. In addition, to meet our needs and the needs of certain investors in COs, fixed- and variable-rate bonds may also contain certain provisions that may result in complex coupon-payment terms and call or amortization features. When such COs (structured bonds) are issued, we enter into interest-rate-exchange agreements containing offsetting features, which effectively change the characteristics of the bond to those of a simple variable-rate bond.
The Office of Finance has established a methodology for the allocation of the proceeds from the issuance of COs when COs cannot be issued in sufficient amounts to satisfy all FHLBank demand for funding during periods of financial distress and when its existing allocation processes are deemed insufficient. See Part 1 — Item 1 — Business — Consolidated Obligations for additional information on the methodology.
CO discount notes are also a significant funding source for us. CO discount notes are short-term instruments with maturities ranging from overnight to one year. We use CO discount notes primarily to fund short-term advances and investments, and longer-term advances and investments with short-term variable coupon repricing intervals. CO discount notes comprised 7.9 percent and 37.5 percent of the outstanding COs for which we are primarily liable at December 31, 2021, and December 31, 2020, respectively, but accounted for 93.2 percent and 89.1 percent of the proceeds from the issuance of such COs during the years ended December 31, 2021 and 2020, respectively.
Although we are primarily liable for our portion of COs, that is, the issuance proceeds allocated to us, we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on COs issued by all of the FHLBanks. The par amounts of the FHLBanks' outstanding COs were $652.9 billion and $746.8 billion, respectively, at December 31, 2021 and 2020. COs are backed only by the combined financial resources of the FHLBanks. We have never repaid the principal or interest on any COs on behalf of another FHLBank.
We have evaluated the financial condition of the other FHLBanks based on known regulatory actions, publicly-available financial information, and individual long-term credit rating downgrades as of each period presented. Based on this evaluation, as of December 31, 2021, 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.
Overall, we continued to experience strong demand for COs among investors. We have been able to issue debt in the amounts and structures required to meet our funding and risk-management needs. For most of the period covered by this report, COs were issued at yields that were historically competitive versus those of comparable-term U.S. Treasury securities. COs continue to be issued at yields that are at or lower than LIBOR and SOFR for comparable short-term maturities, although the relevance of LIBOR in relation to COs is waning. However, periodic threats of Congressional failure to raise the U.S. Treasury debt ceiling raise the potential for defaults on U.S. Treasury debt, which could have impacts on demand for and pricing of CO debt.
The Federal Reserve’s recent signaling of inflation concerns and potential changes to its repurchase agreement offerings, purchases of U.S. Treasury securities and U.S. Agency mortgage-backed securities, as well as the previous establishment of liquidity facilities, are potentially important factors that could continue to shape investor demand for debt, including COs. Moreover, expected increases in U.S. Treasury security issuance in response to higher fiscal deficits following fiscal stimulus programs underlying the CARES Act, American Rescue Plan Act, and any similar future legislation or any change or roll back of regulations governing money market investors may also have an impact on our funding costs.
Capital
Total capital at December 31, 2021, was $2.5 billion compared with $2.8 billion at year-end 2020.
Capital stock decreased by $313.5 million during the year ended December 31, 2021, resulting from capital stock repurchases of $544.0 million offset by the issuance of $240.7 million of capital stock.
Table 35 - Capital Stock Outstanding by Member Institution Type
(dollars in thousands)
| | | | | | | | |
| | | December 31, 2021 |
| Commercial banks | | $ | 184,509 | |
| Savings institutions | | 348,675 | |
| Insurance companies | | 255,673 | |
| Credit unions | | 164,296 | |
| Community development financial institutions | | 485 | |
| Total GAAP capital stock | | 953,638 | |
| Mandatorily redeemable capital stock | | 13,562 | |
| Total regulatory capital stock | | $ | 967,200 | |
Capital Rule
The Capital Rule, among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. An FHLBank is adequately capitalized if it has sufficient permanent and total capital to meet or exceed its risk-based and minimum capital requirements. FHLBanks that are adequately capitalized have no corrective action requirements. FHLBanks that are not adequately capitalized must submit capital restoration plans, are subject to corrective action requirements and are prohibited from paying dividends, redeeming or repurchasing excess stock, and are subject to certain asset growth restrictions. The FHFA may place critically undercapitalized FHLBanks into conservatorship or receivership.
The Director of the FHFA has discretion to add to or modify the corrective action requirements for each capital classification other than adequately capitalized if the Director of the FHFA determines that such action is necessary to ensure the safe and sound operation of the FHLBank and the FHLBank's compliance with its risk-based and minimum capital requirements.
If we become classified into a capital classification other than adequately capitalized, we could be adversely impacted by the corrective action requirements for that capital classification.
The Capital Rule requires the Director of the FHFA to determine on no less than a quarterly basis the capital classification of each FHLBank. By letter dated December 15, 2021, the Director of the FHFA notified us that, based on September 30, 2021 financial information, we met the definition of adequately capitalized under the Capital Rule. We have not yet received our capital classification based on our December 31, 2021 financial information.
Internal Capital Practices and Policies
We also take steps as we believe prudent beyond legal or regulatory requirements in an effort to ensure capital adequacy, reflected in our internal minimum capital requirement, which exceeds regulatory requirements, our minimum retained earnings target, and limitations on our dividends.
Internal Minimum Capital Requirement in Excess of Regulatory Requirements
To provide protection for our capital base, we maintain an internal minimum capital requirement whereby the amount of paid-in capital stock and retained earnings (together, our actual regulatory capital) must be at least equal to the sum of 4 percent of our total assets plus an amount we measure as our risk exposure with 99 percent confidence using our economic capital model
(together, our internal minimum capital requirement). As of December 31, 2021, this internal minimum capital requirement equaled $1.8 billion, which was satisfied by our actual regulatory capital of $2.5 billion.
Minimum Retained Earnings Target
At December 31, 2021, 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 expect to continue to grow our retained earnings modestly even though we exceed the target.
Our methodology for determining retained earnings adequacy and selection of the minimum retained earnings target incorporates an assessment of the various risks that could adversely impact retained earnings if trigger stress-scenario conditions were to occur. Principal elements are market risk and credit risk. Market risk is represented through the Bank's established management action trigger for Value-at-Risk (VaR) market-risk measurement, which estimates an average of the five worst potential changes in our market value of equity due to potential shifts in yield curves, option adjusted spreads and volatility surfaces applicable to our assets, liabilities, and derivative transactions. Credit risk is represented through incorporation of valuation deterioration due but not limited to actual and potential adverse ratings migrations for our assets and actual and potential defaults.
Our minimum retained earnings target could be superseded by FHFA mandates, either in the form of an order specific to us or by promulgation of new regulations requiring a level of retained earnings that is different from our current target. Moreover, we may, at any time, change our methodology or assumptions for modeling our minimum retained earnings target and will do so when prudent or when or other reasons warrant such a change. Either of these events could result in us increasing our minimum retained earnings target and, in turn, reducing or eliminating dividends, as necessary.
Repurchases of Excess Stock
Table 36 - Capital Stock Requirements and Excess Capital Stock
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Membership Stock
Investment
Requirement | | Activity-Based
Stock Investment
Requirement | | Total Stock Investment Requirement (1) | | Outstanding Class B Capital Stock (2) | | Excess Class B
Capital Stock |
| December 31, 2021 | $ | 429,353 | | | $ | 505,264 | | | $ | 934,638 | | | $ | 967,200 | | | $ | 32,562 | |
| December 31, 2020 | 420,238 | | | 762,379 | | | 1,182,638 | | | 1,273,454 | | | 90,816 | |
_______________________
(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.
We initiated daily repurchases of excess capital stock in 2017, in order to facilitate our ability to maintain a prudent level of capitalization and an efficient capital structure, while providing for an equitable allocation of excess stock ownership among members. As discussed under Part I — Item 1 — Business — Capital Resources — Repurchase of Excess Stock, until May 18, 2021, we conducted 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. Beginning with daily excess stock repurchases on May 18, 2021, the calculation of daily stock repurchases changed such that we currently conduct daily repurchases of excess stock from any shareholder whose excess stock exceeds the lesser of $3 million or 3 percent of the shareholder’s total stock investment requirement, subject to the minimum repurchase of $100,000. We plan to continue with this practice, subject to regulatory requirements and our anticipated liquidity or capital management needs, although continued repurchases remain at our sole discretion, and we retain authority to make adjustments to our excess stock repurchase practices subject to notice requirements defined in our Capital Plan, or to suspend repurchases of excess stock from any shareholder or all shareholders without prior notice.
Restricted Retained Earnings and the Joint Capital Agreement
Our capital plan and the Joint Capital Agreement require us to allocate a certain percentage of quarterly net income to a restricted retained earnings account, which we refer to as restricted retained earnings. The Joint Capital Agreement, the terms of which are reflected in the capital plans of the 11 FHLBanks, is a voluntary contractual agreement among the FHLBanks, intended to build greater safety and soundness in the FHLBank System. Generally, the agreement requires each FHLBank to allocate a certain amount, generally not less than 20 percent of each of its quarterly net income (net of that FHLBank's obligation to its AHP) and adjustments to prior net income, to a restricted retained earnings account until the total amount in that account is equal to 1 percent of the daily average carrying value of that FHLBank's outstanding total COs (excluding fair-value adjustments) for the calendar quarter (total required contribution). The FHLBanks commenced this obligation with their results at September 30, 2011. The percentage of the required allocation is subject to adjustment when an FHLBank has had an adjustment to a prior calendar quarter's net income.
At December 31, 2021, our restricted retained earnings amount was $368.4 million, which exceeds the required contribution to the restricted retained earnings account of $299.5 million. No allocation of net income was made to restricted retained earnings in 2021 and no further allocations of net income into restricted retained earnings are required until such time as the contribution requirement exceeds the balance of restricted retained earnings.
The Joint Capital Agreement refers to the period of required contributions to the restricted retained earnings account as the “dividend restriction period.” Additionally, the agreement provides that:
•amounts held in an FHLBank's unrestricted retained earnings account may not be transferred into the restricted retained earnings account;
•during the dividend restriction period, an FHLBank shall redeem or repurchase capital stock only at par value, and shall only conduct such redemption or repurchase if it would not result in the FHLBank's total regulatory capital falling below its aggregate paid in amount of capital stock;
•any quarterly net losses will be netted against the FHLBank's other quarters' net income during the same calendar year so that the minimum required annual allocation into the FHLBank's restricted retained earnings account is satisfied;
•if the FHLBank sustains a net loss for a calendar year, the net loss will be applied to reduce the FHLBank's retained earnings that are not in the FHLBank's restricted retained earnings account to zero prior to application of such net loss to reduce any balance in the FHLBank's restricted retained earnings account;
•if the FHLBank incurs net losses for a cumulative year-to-date period resulting in a decline to the balance of its restricted retained earnings account, the FHLBank's required allocation percentage will increase from 20 percent to 50 percent of quarterly net income until its restricted retained earnings account balance is restored to an amount equal to the regular required allocation (net of the amount of the decline);
•if the balance in the FHLBank's restricted retained earnings account exceeds 150 percent of its total required contribution to the account, the FHLBank may release such excess from the account;
•in the event of the liquidation of the FHLBank, or the taking of the FHLBank's retained earnings by future federal action, such event will not affect the rights of the FHLBank's Class B stockholders under the FHLBank Act in the FHLBank's retained earnings, including those held in the restricted retained earnings account;
•the payment of dividends from amounts in the restricted retained earnings account be restricted for at least one year following the termination of the Joint Capital Agreement; and
•certain procedural mechanisms be followed for determining when an automatic termination event has occurred.
The agreement will terminate upon an affirmative vote of two-thirds of the boards of directors of the then existing FHLBanks, or automatically if a change in the FHLBank Act, FHFA regulations, or other applicable law has the effect of:
•creating any new or higher assessment or taxation on the net income or capital of any FHLBank;
•requiring the FHLBanks to retain a higher level of restricted retained earnings than what is required under the agreement; or
•establishing general restrictions on dividend payments requiring a new or higher mandatory allocation of an FHLBank's net income to any retained earnings account than the amount specified in the agreement, or prohibiting dividend payments from any portion of an FHLBank's retained earnings not held in the restricted retained earnings account.
Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations
Our significant off-balance-sheet arrangements consist of the following:
• commitments that obligate us for additional advances;
• standby letters of credit;
• commitments for unused lines-of-credit advances; and
• unsettled COs.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets, liabilities, income and expense. To understand the Bank's financial position and results of operations, it is important to understand the Bank's most significant accounting policies and the extent to which management uses judgment, estimates and assumptions in applying those policies. The Bank's critical accounting estimates involve the following:
•Derivatives and Hedging Activities;
•Estimation of Fair Values; and
•Amortization of Premiums and Accretion of Discounts Associated with Prepayable MBS
Management considers these policies to be critical because they require us to make subjective and complex judgments about matters that are inherently uncertain. Management bases its judgment and estimates on current market conditions and industry practices, historical experience, changes in the business environment and other factors that it believes to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions and/or conditions. The Audit Committee of our board of directors has reviewed these estimates. For additional discussion regarding the application of these and other accounting policies, see Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 2 — Summary of Significant Accounting Policies.
Derivatives and Hedging Activities
Overview. The Bank enters into interest rate swap, cap, and floor agreements to manage its exposure to changes in interest rates. Through the use of these derivatives, the Bank may adjust the effective maturity, repricing index and/or frequency or option characteristics of financial instruments to achieve our risk management objectives. All of our derivatives are either 1) derivative contracts structured to offset some or all of the risk exposure inherent in our member-lending, investment, and funding activities, 2) inherent to another activity, such as forward commitments to purchase mortgage loans under the MPF program, or 3) embedded in a host financial instrument, such as an advance or an investment security.
All derivatives are required to be carried on the statement of condition at fair value. Changes in the fair value of all derivatives, excluding those designated as cash-flow hedges, are recorded each period in current earnings, while changes in the fair value of derivatives that are designated and qualify as cash-flow hedges are recorded in accumulated other comprehensive income (AOCI) until earnings are affected by the variability of the cash flows of the hedged transaction. We are required to recognize unrealized gains and losses on derivative positions whether or not the transaction qualifies for hedge accounting. The judgments and assumptions that are most critical to the application of this accounting policy are those affecting whether a hedging relationship qualifies for hedge accounting under the requirements of GAAP and the estimation of fair values (discussed below), which have a significant impact on the actual results being reported.
Fair-value hedge accounting. If the transaction is designated and qualifies for fair-value hedge accounting, offsetting losses or gains on the hedged assets or liabilities may also be recognized each period in current earnings. Therefore, to the extent certain derivative instruments do not qualify for fair-value hedge accounting, or changes in the fair values of derivatives are not exactly offset by changes in fair values of the associated hedged items, the accounting framework introduces the potential for a considerable mismatch between the timing of income and expense recognition for assets and liabilities being hedged and their associated hedging instruments. As a result, during periods of significant changes in market prices and interest rates, our reported earnings may exhibit considerable variability.
At inception of each fair-value hedge transaction, the Bank formally documents the hedge relationship and its risk management objective and strategy for undertaking the hedge, including identification of the hedging instrument, the hedged item, the nature of the risk being hedged, and how the hedging instrument's effectiveness in offsetting the exposure to changes in the hedged
item's fair value attributable to the hedged risk will be assessed. In all cases involving a recognized asset, liability or firm commitment, the designated risk being hedged is the risk of changes in its fair value attributable to changes in the designated benchmark interest rate, which we have designated as either LIBOR, SOFR or OIS based on the federal funds effective rate at the inception of each hedge relationship. Therefore, for this purpose, changes in the fair value of the hedged item (e.g., advance, investment security, or consolidated obligation) reflect only those changes in the value that are attributable to changes in the designated benchmark interest rate (hereinafter referred to as "changes in the benchmark fair value").
For hedging relationships that are designated as fair-value hedges and qualify for hedge accounting, the change in the benchmark fair value of the hedged item is recorded in earnings, thereby providing some offset to the change in fair value of the associated derivative. The difference in the change in fair value of the derivative and the change in the benchmark fair value of the hedge item represents "hedge ineffectiveness." All of our fair-value hedge relationships are treated as long-haul fair-value hedge relationships, where the change in the benchmark fair value of the hedged item must be measured separately from the change in fair value of the derivative. See Table 8.2 - Net Gains (Losses) on Fair Value Hedging Relationships in Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 8 — Derivatives and Hedging Activities for a summary of our fair-value hedge ineffectiveness for the three years ended December 31, 2021, 2020 and 2019.
For derivative transactions to qualify for long-haul fair-value hedge-accounting treatment, hedge effectiveness testing is performed at the inception of each hedging relationship to determine whether the hedge is expected to be highly effective in offsetting the identified risk, and at each month-end thereafter to ensure that the hedge relationship has been effective historically and to determine whether the hedge is expected to be highly effective in the future.
We perform testing at hedge inception based on regression analysis of the hypothetical performance of the hedge relationship using historical market data. We then perform regression testing each month thereafter using accumulated actual values in conjunction with hypothetical values. Each month we use a consistently applied statistical methodology that uses a sample of at least 31 historical interest-rate environments and includes an R-square test, a slope test, and an F-statistic test. These tests measure the degree of correlation of movements in estimated fair values between the derivative and the related hedged item. For the hedging relationship to be considered effective, the R-square must be greater than 0.8, the slope must be between -0.8 and -1.25, and the computed F-statistic test significance must be less than 0.05.
If a hedge fails the effectiveness test at inception, we do not apply hedge accounting. If the hedge fails the effectiveness test during the life of the transaction, we discontinue hedge accounting prospectively. In that case, we will continue to carry the derivative on the statement of condition at fair value, recognize the changes in fair value of that derivative in current earnings, cease to adjust the hedged item for changes in its benchmark fair value, and amortize the cumulative basis adjustment of the formerly hedged item into earnings over its remaining term. Unless and until the derivative is redesignated in a qualifying fair value hedging relationship for accounting purposes, changes in its fair value are recorded in current earnings without an offsetting change in the benchmark fair value from a hedged item.
Economic hedges. We generally employ hedging techniques that qualify for and are effective under GAAP hedge-accounting requirements. However, not all of our hedging relationships meet these requirements. In some cases, we have elected to retain or enter into derivatives that are economically effective at reducing risk but do not meet the hedge-accounting requirements, either because the cost of the hedge was economically superior to nonderivative hedging alternatives or because no nonderivative hedging alternative was available, and available hedge strategies did not meet hedge accounting requirements. As required by FHFA regulation and our policy, derivatives that do not qualify as hedging instruments pursuant to GAAP may be used only if we document a nonspeculative purpose.
For derivatives where no identified hedged item qualifies for hedge accounting, changes in the fair value of the derivative are reflected in current earnings. As of December 31, 2021, we held $900.4 million notional of interest-rate swaps with a fair value of $(8.7) million that are economically hedging $345.4 million of advances, $500.0 million of trading securities, and $55.0 million of CO bonds. Additionally, as of December 31, 2021, we held $3.2 million notional of mortgage-delivery commitments with a fair value of $68 thousand and $55.0 million of CO bond firm commitments with a fair value of $24 thousand. The following table shows the estimated changes in the fair value of the interest-rate swaps under alternative parallel interest-rate shifts (for example the same change to interest rates on short-, intermediate-, and long-term fixed income maturities):
Table 37 - Estimated Change in Fair Value of Undesignated Derivatives
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | As of December 31, 2021 | | | | |
| | | -200 basis points | | -150 basis points | | -100 basis points | | -50 basis points | | +50 basis points | | +100 basis points | | +150 basis points | | +200 basis points |
| Change from base case | | | | | | | | | | | | | | | | |
| Interest-rate swaps | | $ | (9,302) | | | $ | (6,882) | | | $ | (4,486) | | | $ | (2,145) | | | $ | 1,784 | | | $ | 3,241 | | | $ | 4,436 | | | $ | 5,317 | |
Although these economic hedges do not qualify or were not designated for hedge accounting, they are an acceptable hedging strategy under our risk-management program. Our projections of changes in fair value of the derivatives have been consistent with actual experience.
Estimation of Fair Values
Overview. Certain assets and liabilities, including investment securities classified as available-for-sale or trading, as well as all derivatives, are presented in the Statements of Condition at fair value. Management also estimates the fair value of some of the collateral that borrowers pledge against advance borrowings to confirm that collateral is sufficient to meet regulatory requirements and to protect against losses. Fair value is defined under GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. GAAP establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The fair values of the Bank's assets and liabilities that are carried at fair value are estimated based on quoted market prices when available. However, some of these instruments lack an available trading market characterized by frequent transactions between a willing buyer and willing seller engaging in an exchange transaction (for example, derivatives). In these cases, such values are generally estimated using a valuation model and inputs that are observable for the asset or liability, either directly or indirectly. The assumptions and inputs used have a significant effect on the reported carrying values of assets and liabilities and the related income and expense. The use of different assumptions or inputs could result in materially different net income and reported carrying values.
Valuation of Derivatives and Hedged Items. For purposes of estimating the fair value of derivatives and items for which we are hedging changes in the benchmark fair value, we employ a valuation model that uses market data from the Eurodollar futures, cash LIBOR, U.S. Treasury obligations, federal funds rates, OIS rates, SOFR, and the U.S. dollar interest-rate-swap markets to construct discount and forward-yield curves using standard financial market techniques. This valuation model is subject to an external validation approximately every three years. In those years when an external validation is not performed, the valuation model is subject to an internal model validation review. We periodically review and refine, as appropriate, the assumptions and valuation methodologies to reflect market indications as closely as possible. Additionally, for derivatives, we compare the fair values obtained from our valuation model to clearinghouse valuations (in the case of cleared derivatives) and non-binding dealer estimates (in the case of bilateral derivatives), and may also compare derivative fair values to those of similar instruments, to ensure such fair values are reasonable.
We use an applicable interest-rate index as the discount rate for the valuation of derivatives. For all derivatives cleared through a DCO, the discount rate used is SOFR, while for the majority of our bilateral, non-cleared interest-rate derivatives the discount rate used is OIS based on the federal funds effective rate. For the valuation of hedged assets or liabilities in fair-value hedging relationships where the hedged risk is changes in the benchmark fair value, we use either LIBOR, SOFR or OIS based on the federal funds effective rate as the discount rate, depending on which interest-rate index was designated as the benchmark rate at inception of the hedge relationship.
Depending upon the spreads between LIBOR, OIS and SOFR rates, the use of the one interest-rate index as the discount rate for valuing our interest-rate exchange agreements and a different interest-rate index (plus or minus a constant spread) as the discount rate for valuing our hedged items can result in increased fair-value hedge ineffectiveness. In addition, while not likely,
this valuation methodology has the potential to lead to the loss of hedge accounting for some of these hedging relationships. Either of these outcomes could result in increased earnings volatility, which could potentially be material. However, through December 31, 2021, no hedge relationships failed our hedge effectiveness criteria as a result of using different interest-rate indices as the discount rate for the derivative and the discount rate for the hedged item.
Valuation of Investment Securities. To value our holdings of investment securities, other than HFA floating-rate securities, we obtain prices from three designated third-party pricing vendors when available. The pricing vendors use various proprietary models to price these securities. The inputs to those models are derived from various sources including, but not limited to, benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market-related data. Because many securities do not trade on a daily basis, the pricing vendors use available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all security valuations, which facilitates resolution of potentially erroneous prices identified by the Bank. Recently, we conducted reviews of the three pricing vendors to reconfirm our understanding of the vendors' pricing processes, methodologies and control procedures and were satisfied that those processes, methodologies and control procedures were adequate and appropriate.
As of December 31, 2021, multiple vendor prices were received for substantially all of our investment securities and the final prices for substantially all of those securities were computed by averaging those prices. Based on our review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers or significant yield variances, our additional analyses), we believe the final prices used are reasonably likely to be exit prices and further that the fair-value measurements are classified appropriately in the fair-value hierarchy.
Amortization of Premiums and Accretion of Discounts Associated with Prepayable MBS
When we purchase MBS, we often pay an amount that is different from the unpaid principal balance. The difference between the purchase price and the contractual note amount is a premium if the purchase price is higher, and a discount if the purchase price is lower. Accounting guidance permits us to incorporate estimates of prepayments when we amortize (or accrete) these premiums (or discounts) in a manner such that the yield recognized on the underlying asset is constant over the asset's estimated life.
We typically pay more than the unpaid principal balances when the interest rates on the purchased MBS are greater than prevailing market yields for similar MBS on the transaction date. The net purchase premiums paid are then amortized using the constant-effective-yield method over the expected lives of the MBS as a reduction in their book yields (that is, interest income). Similarly, if we pay less than the unpaid principal balances due to interest rates on the purchased MBS being lower than prevailing market yields on similar MBS on the transaction date, the net discount is accreted in the same manner as the premiums, resulting in an increase in the MBS's book yields. The constant-effective-yield amortization method is applied using expected cash flows that incorporate prepayment projections that are based on mathematical models that describe the likely rate of consumer refinancing activity in response to incentives created (or removed) by changes in interest rates as well as other factors. While changes in interest rates have the greatest effect on the extent to which mortgages underlying the MBS may prepay, in general prepayment behavior can also be affected by factors not contingent on interest rates. Moreover, many of the MBS that we purchase are part of a multi-tranche securitization through which our exposure to cash flow timing uncertainty is mitigated. In addition, many of the MBS that we purchase are backed by commercial mortgage loans secured by multi-family housing, which may have embedded prepayment penalty fees that serve as a mitigant to prepayment risk.
We estimate prepayment speeds on each individual security using the most recent three months of historical constant prepayment rates, as available, or may subscribe to third-party data services that provide prepayment estimates used to calculate cash flows, from which we determine expected asset lives. The constant-effective-yield method uses actual historical prepayments received and projected future prepayment speeds, as well as scheduled principal payments, to determine the amount of premium/discount that should be recognized so that the book yield of each MBS is constant for each month until maturity.
In general, lower prevailing interest rates are expected to result in the acceleration of premium and discount amortization and accretion, compared with the effect of higher prevailing interest rates that would tend to decelerate the amortization and accretion of premiums and discounts. Exact trends will depend on the relationship between market interest rates and coupon rates on outstanding mortgage assets, the historical evolution of mortgage interest rates, the age of the mortgage loans, demographic and population trends, and other market factors, as well as the structural design of our security within the overall group of securities backed by the underlying pool of mortgage loans. Changes in amortization will also be impacted by differences between projected prepayments and actual experience. Prepayment projections are inherently subject to uncertainty
because it is difficult to accurately predict future market conditions and the response of borrowing consumers in terms of refinancing activity to future market conditions even if the market conditions were known. However, actual prepayment speeds observed in these rate environments can be influenced by factors such as home price trends and lender credit underwriting standards.
The effect on interest income from the amortization and accretion of premiums and discounts on MBS, including MBS in both the held-to-maturity and available-for-sale portfolios, for the years ended December 31, 2021, 2020, and 2019, was a net decrease to income of $6.5 million, $31.6 million, and $6.1 million, respectively.
RECENT ACCOUNTING DEVELOPMENTS
LEGISLATIVE AND REGULATORY DEVELOPMENTS
We summarize certain significant legislative and regulatory actions and related developments for the period covered by this report below.
FHLBank Membership Supervisory Letter. On September 9, 2021, the FHFA published a supervisory letter addressing certain FHLBank membership issues, including (1) requirements for de novo CDFIs, (2) automatic transfer of membership, (3) large non-member institutions merging with small member institutions, (4) membership applicant’s compliance with “financial condition” requirements, and (5) the definition of insurance company.
The supervisory letter expresses the FHFA’s views on these matters, which views include the articulation of certain restrictions on eligibility for membership. The restrictions could result in fewer opportunities for FHLBank membership and/or ineligibility for continued membership by certain entities, most notably CDFIs, insurance companies and large institutions that have acquired small members.
Accordingly, the restrictions could result in reduced opportunities for us to grow our membership and, in turn, fewer opportunities to provide our financial services. We continue to evaluate the supervisory letter and its effect on our membership.
Regulatory Interpretation on Eligibility of Mortgage Participations as Collateral for FHLBank Advances. On October 4, 2021, the FHFA published a regulatory interpretation on eligibility of mortgage loan participations as collateral for FHLBank advances. The regulatory interpretation addresses whether an FHLBank can accept as collateral to secure advances mortgage loan participations that cannot be readily liquidated in the form in which they are to be pledged. The regulatory interpretation concludes that mortgage loan participations must meet the requirements of FHFA regulation 12 CFR 1266.7(a)(4), including the requirement that the collateral can be “liquidated in due course” in order to be eligible to secure FHLBank advances. It further concludes that participations for which there would be a known impediment to liquidation do not meet such requirement and therefore are not eligible collateral for advances. Finally, the regulatory interpretation rescinds prior guidance from FHLBank System regulators that provide mortgage loan participations may be eligible as collateral under regulatory provisions other than 12 CFR 1266.7(a)(4). The regulatory interpretation became effective on December 13, 2021. Although we do not currently expect this regulatory interpretation to have a material impact on our financial condition or results of operations, this restriction may negatively impact future borrowing by certain members.
Fair Housing and Fair Lending Enforcement. On July 9, 2021, the FHFA published a policy statement on fair lending to communicate the FHFA’s general position on monitoring and information gathering, supervisory examinations, and administrative enforcement related to the Equal Credit Opportunity Act, the Fair Housing Act, and the Federal Housing Enterprises Financial Safety and Soundness Act. On August 12, 2021, the FHFA and the U.S. Department of Housing and Urban Development announced they had entered into a memorandum of understanding regarding fair housing and fair lending enforcement. Under the memorandum of understanding, the two agencies will focus on enhancing their enforcement of the Fair Housing Act, and their oversight of Fannie Mae, Freddie Mac, and the FHLBanks. We continue to monitor these actions and guidance as they evolve and to evaluate their potential impact.
Amendments to U.S. Treasury and Fannie Mae Preferred Stock Purchase Agreement. On January 14, 2021, the U.S. Treasury and Fannie Mae entered into a letter agreement amending the terms of their preferred stock purchase agreement, which could impact participating financial institutions (PFIs) that participate in the MPF Program’s MPF Xtra product. Under the preferred stock purchase agreement, the U.S. Treasury provides liquidity to Fannie Mae in exchange for senior preferred stock. Under the preferred stock purchase agreement amendment, which was originally to take effect on January 1, 2022, the Finance Agency (as
conservator for Fannie Mae) and the U.S. Treasury agreed to limit the dollar volume of loans Fannie Mae could purchase from a single seller through Fannie Mae’s cash window to $1.5 billion per year. As administrator of the MPF Program, the FHLBank of Chicago purchases MPF Xtra loans from PFIs and sells them to Fannie Mae via the cash window process. Based on recent volumes for the MPF Xtra product, the preferred stock purchase agreement amendment would significantly curtail MPF Xtra cash window sales. On September 14, 2021, the FHFA and the U.S. Treasury temporarily suspended certain provisions of the Preferred Stock Purchase Agreement, including limits on Fannie Mae’s cash window, until at least September 14, 2022.
Although we do not currently expect the cash window limits to have a material impact on our financial condition or results of operations, when effective, these limits may negatively impact the volume of loans that PFIS are able to sell through the MPF Program.
Amendment to FINRA Rule 4210: Margining of Covered Agency Transactions. The Financial Industries Regulatory Authority (FINRA) amended FINRA Rule 4210 delaying the effectiveness of margining requirements for covered agency transactions until April 26, 2022 (from the original effective date of January 26, 2022). On March 3, 2022, the SEC approved an extension of the implementation date of the amendments to October 26, 2022. Upon the margining requirements becoming effective, we may be required to collateralize our transactions that are covered agency transactions, which include to be announced transactions (TBAs). These collateralization requirements could have the effect of reducing the overall profitability of engaging in covered agency transactions, including TBAs. We do not expect this amended rule to have a material effect on our financial condition or results of operations.
CFTC and Other Derivatives Developments. The Dodd-Frank Act mandated the U.S. federal regulation of the over-the-counter (OTC) derivatives market and granted new joint regulatory authority to the SEC and the U.S. Commodity Futures Trading Commission (CFTC) over OTC derivatives. The SEC and CFTC have completed most of their rules to implement the Dodd-Frank Act’s requirements. Pursuant thereto, certain of our derivatives operations have become subject to, among other things, new recordkeeping, reporting and documentation requirements. In addition, certain non-cleared derivatives entered into as part of our derivatives operations have become subject to two-way variation margin requirements and may become subject to two-way initial margin requirements beginning in 2022. These margining requirements are expected to increase the cost of non-cleared derivatives. Collectively, the Dodd-Frank Act requirements have increased the direct and indirect costs of the Bank's hedging and related activities and will likely increase them further in the future. We do not expect these costs to have a material impact on our financial condition or results of operations.
LIBOR Transition
On March 5, 2021, the United Kingdom's FCA confirmed that the publication of the principal tenors of U.S. dollar LIBOR (i.e., overnight, one-month, three-month, six-month and 12-month LIBOR) will cease immediately following a final publication on June 30, 2023. As of January 1, 2022, the one-week and two-month U.S. dollar LIBOR settings and all non-U.S. dollar LIBOR settings ceased to be provided by any administrator. Although the FCA has indicated that it does not expect the remaining U.S. dollar LIBOR settings to become unrepresentative before the cessation date, there is no assurance that any of them will continue to be published or be representative through any particular date.
On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act was signed into law. This law provides a statutory fallback mechanism and safe harbor that apply on a nationwide basis to replace LIBOR with a benchmark rate, selected by the Federal Reserve Board based on SOFR, for certain contracts that reference LIBOR and contain no or insufficient fallback provisions, including fallback rates that are in any way based on LIBOR.
Given the developments discussed above, however, we have taken and will continue to take steps to remediate our LIBOR-linked financial instruments and contracts. To that end, and consistent with an FHFA supervisory letter sent to the FHLBanks on September 27, 2019, regarding the phase-out of LIBOR, we stopped purchasing investments that reference LIBOR and mature after December 31, 2021. In addition, we have implemented a LIBOR transition plan and will continue to analyze potential risks associated with the LIBOR transition, including, but not limited to, financial, market, accounting, operational, legal, tax, reputational and compliance risks, and will update such plan, to the extent necessary, to address such risks going forward. In accordance with such LIBOR transition plan, we are in the process of amending our financial instruments and contracts that may require adding or adjusting fallback language, including advances, investments and derivatives. In addition, although the state of New York adopted legislation aimed at ensuring legal clarity for legacy instruments governed by New York law during the U.S. dollar LIBOR transition, which may apply to certain of our LIBOR-based financial instruments and contracts, there is no assurance that legislative or regulatory actions will dictate what happens if LIBOR ceases to exist or is no longer available, or what those actions might be. Accordingly, despite the efforts discussed in this paragraph, the contractual consequences of LIBOR cessation for some existing LIBOR-indexed instruments. may not be clear.
Legislative and Regulatory Developments Related to COVID-19 Pandemic
In light of the COVID-19 pandemic, the President of the United States, through executive orders, governmental agencies, including the SEC, Office of the Comptroller of the Currency (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, and Congress has enacted and may continue to enact pandemic relief legislation, 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 us.
Other Legislative Matters
Affordable Housing and Community Investment. As previously disclosed, legislation has been introduced in the U.S. Senate and House of Representatives that, if enacted in its proposed form, would require us to set aside higher percentages of our earnings for our AHP than is currently required by law. Senate bill S. 1684, Federal Home Loan Banks’ Mission Implementation Act, and the related House bill, H.R. 3323, would require the FHLBanks to set aside 20% of net income for their affordable housing program and 10% of net income for a newly created economic development program. As part of the subsequent Congressional budget reconciliation process, a legislative proposal is under consideration for the FHLBanks to set aside 15 percent of net income for their affordable housing program. Increased contributions to our AHP would result in less net income being available for other purposes. We continue to actively monitory any such potential legislation and developments.
CREDIT RATING AGENCY DEVELOPMENTS
As of February 28, 2022, Moody’s long- and short-term credit ratings for us and the 10 other FHLBanks are Aaa and P-1, with a stable outlook.
As of February 28, 2022, S&P’s long- and short-term credit ratings for us and the 10 other FHLBanks are AA+ and A-1+, with a stable outlook.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Sources and Types of Market and Interest-Rate Risk
Market risk is the risk to earnings or shareholder value due to adverse movements in interest rates, market prices, or interest-rate spreads. Market risk arises in the normal course of business from our investment in mortgage assets, where risk cannot be eliminated; from the fact that assets and liabilities are priced in different markets; and from tactical decisions to, from time to time, assume some risk to generate income.
Our balance sheet is comprised of different portfolios that require different types of market- and interest-rate-risk management strategies. The majority of our balance sheet is comprised of assets that can be funded individually or collectively without imposing significant residual interest-rate risk on ourselves.
However, those assets with embedded options, particularly our mortgage-related assets, including the portfolio of whole loans acquired through the MPF program, our portfolio of MBS, and our portfolio of bonds issued by HFAs, represent more complex cash-flow structures and contain more risk of prepayment and/or call options.
Further, unequal moves in the various different yield curves associated with our assets and liabilities create risks that changes in individual portfolio or instrument valuations, or changes in projected income, will not be equally offset by changes in valuations or projected income associated with individual portfolios or instruments on the opposite side of the balance sheet, even if the financial terms of the opposing financial portfolios or instruments are closely matched.
These risks cannot always be profitably managed with a strategy in which each asset is offset by a liability with a substantially identical cash-flow structure. Therefore, we generally view each portfolio as a whole and allocate funding and hedging to these portfolios based on an evaluation of the collective market and interest-rate risks posed by these portfolios. We measure the estimated impact to fair value of these portfolios as well as the potential for income to decline due to movements in interest
rates, and make adjustments to the funding and hedge instruments assigned as necessary to keep the portfolios within established risk limits.
We also incur interest-rate risk in the investment of our capital stock and retained earnings in interest-earning assets. Traditionally, we have sought to invest our capital in liquid short-term money-market assets to maintain liquidity and to provide our members with a money-market-based return on capital that is responsive to changes in prevailing interest rates over time. While this capital investment strategy is comparatively risk-neutral in terms of our market risk, it exposes our interest income to the level and volatility of interest rates in the markets. As the FOMC sought to stimulate the U.S. economy during the COVID-19 pandemic that began in early 2020 through a low-rate accommodative policy, the net interest income realized on our investments was lower than could have been realized on alternative longer-term investments.
Types of Market and Interest-Rate Risk
Interest-rate and market risk can be divided into several categories, including repricing risk, yield-curve risk, basis risk, and options risk. Repricing risk refers to differences in the average sensitivities of asset and liability yields attributable to differences in the average timing of maturities and/or coupon rate resets between assets and liabilities. Differences in the timing of repricing of assets and liabilities can cause spreads between assets and liabilities to either increase or decline.
Yield-curve risk reflects the sensitivity of net income to changes in the shape or slope of the yield curve that could impact the performance of assets and liabilities differently, even though average sensitivities are the same.
When assets and liabilities are affected by yield changes in different markets, basis risk can result. For example, if we invest in LIBOR-based floating-rate assets and fund those assets with short-term discount notes, potential compression in the spread between LIBOR and discount-note rates could adversely impact our net income.
We also face options risk, particularly in our portfolio of advances, mortgage loans, MBS, and HFA securities. When a borrower prepays an advance, we could suffer lower future income if the principal portion of the prepaid advance is reinvested in lower-yielding assets that continue to be funded by higher-cost debt. For this reason, we are required by regulation to assess a prepayment fee that makes us financially indifferent to the prepayment, or in the case of callable advances, to charge an interest rate that is reflective of the value of the member's option to prepay the advance without a fee. However, in the mortgage loan, MBS, and HFA-bond portfolios, borrowers or issuers often have the right to repay their obligations prior to maturity without penalty, potentially requiring us to reinvest the returned principal at lower yields. If interest rates decline, borrowers may be able to refinance existing mortgage loans at lower interest rates, resulting in the prepayment of these existing mortgages and forcing us to reinvest the proceeds in lower-yielding assets. If interest rates rise, borrowers may avoid refinancing mortgage loans for periods longer than the average term of liabilities funding the mortgage loans, causing us to refinance the assets at higher cost. This right of redemption is effectively a call option that we have written to the obligor. Another less prominent form of options risk is coupon-cap risk, which may be embedded into certain floating-rate MBS and limit the amount by which asset coupon rates may increase.
Strategies to Manage Market and Interest-Rate Risk
General
We use various strategies and techniques in an effort to manage our market and interest-rate risk. Principal among our tools for interest-rate-risk management is the issuance of debt that can be used to match interest-rate-risk exposures of our assets. For example, we can issue a CO with a maturity of five years to fund an investment with a five-year maturity. The debt may be noncallable until maturity or callable on and/or after a certain date.
COs may be issued to match interest-rate-risk exposures of our assets. At December 31, 2021, fixed-rate noncallable debt, not hedged by interest-rate swaps, amounted to $8.4 billion, compared with $10.0 billion at December 31, 2020.
COs may also be issued with embedded call options to mitigate interest-rate and prepayment risks of our mortgage loans and certain MBS. Fixed-rate callable debt not hedged by interest-rate swaps amounted to $520.0 million and $1.2 billion at December 31, 2021, and December 31, 2020, respectively.
To achieve certain risk-management objectives, we also use interest-rate derivatives that alter the effective maturities, repricing frequencies, or option-related characteristics of financial instruments. These may include swaps, caps, collars, and floors. For example, as an alternative to issuing a fixed-rate bond to fund a fixed-rate advance, we might enter into an interest-rate swap
that receives a floating-rate coupon and pays a fixed-rate coupon, thereby effectively converting the fixed-rate advance to a floating-rate advance.
Advances may be issued together with interest-rate swaps that pay a coupon rate that offsets the advance coupon rate and any optionality embedded in the advance, thereby effectively creating a floating-rate asset. Total advances used in conjunction with interest-rate-exchange agreements, including both fair-value hedge relationships and economic hedge relationships, was $3.0 billion, or 24.6 percent of our total outstanding advances at December 31, 2021, compared with $5.2 billion, or 27.8 percent of total outstanding advances, at December 31, 2020.
Available-for-sale securities may be purchased together with interest-rate swaps that pay a coupon rate that offsets the security’s coupon rate, thereby effectively creating a floating-rate asset. Total available-for-sale securities used in conjunction with interest-rate-exchange agreements was $10.8 billion, or 85.2 percent of our total outstanding available-for-sale securities at December 31, 2021, compared with $3.7 billion, or 66.9 percent of total outstanding available-for-sale securities, at December 31, 2020.
Because the interest-rate swaps and hedged assets and liabilities trade in different markets, they are subject to basis risk that is reflected in our VaR calculations and fair-value disclosures, but that is not reflected in hedge ineffectiveness, because these interest-rate swaps are designed to only hedge changes in fair values of the hedged items that are attributable to changes in the designated benchmark interest rate.
Advances
In addition to the general strategies described above, we use contractual provisions that require borrowers to pay us prepayment fees, which make us financially indifferent if the borrower prepays such advances prior to maturity. These provisions protect against a loss of income under certain interest-rate environments.
Prepayment-fee income can be used to offset the cost of purchasing and retiring high-cost debt to maintain our asset-liability sensitivity profile. In cases where derivatives are used to hedge prepaid advances, prepayment-fee income can be used to offset the cost of terminating the associated hedge.
Investments and Mortgage Loans
We hold certain U.S. Treasury obligations as well as long-term bonds issued by HFAs, U.S. government corporations, GSEs, and supranational institutions as available-for-sale. To hedge the market and interest-rate risk associated with these assets, we may enter into interest-rate swaps with matching terms to those of the bonds to create synthetic floating-rate assets. At December 31, 2021 and December 31, 2020, respectivley, this portfolio of hedged investments had a par value of $5.9 billion and $611.9 million.
We also manage the market and interest-rate risk in our MBS portfolio. For MBS classified as held-to-maturity, we use debt that matches the characteristics of the portfolio assets. For commercial MBS that are nonprepayable or prepayable for a fee for an initial period, we may use fixed-rate debt. For commercial MBS classified as available-for-sale and which are nonprepayable or prepayable for a fee during an initial lock-out period, we may enter into interest-rate swaps for a partial term of the MBS that is equal to or shorter than the lock-out period of the hedged MBS to create synthetic floating-rate assets during the hedged period. At December 31, 2021 and December 31, 2020, respectively, this portfolio of hedged MBS had a par value of $4.9 billion and $3.1 billion.
We manage the interest-rate and prepayment risk associated with mortgage loans through the issuance of both callable and noncallable debt to achieve cash-flow patterns and liability durations similar to those expected on the mortgage loans.
We mitigate our exposure to changes in interest rates by funding a portion of our mortgage portfolio with callable debt. When interest rates change, our option to redeem this debt offsets a large portion of the fair-value change driven by the mortgage-prepayment option. However, because this option is not fully hedged by the callable debt, the combined market value of our mortgage assets and debt will be affected by changes in interest rates.
Swapped Consolidated Obligation Debt
We may also issue bonds together with interest-rate swaps (either cleared if no optionality or uncleared if containing optionality) that receive a coupon rate that offsets the bond coupon rate and any optionality embedded in the bond, thereby effectively creating a floating-rate liability. We may employ this strategy to secure long-term debt that meets funding needs
versus relying on short-term CO discount notes. Total CO bond debt used in conjunction with interest-rate-exchange agreements was $13.0 billion, or 48.6 percent of our total outstanding CO bonds at December 31, 2021, compared with $1.7 billion, or 7.9 percent of total outstanding CO bonds, at December 31, 2020.
In addition, derivatives may be used to hedge the interest-rate risk of anticipated future CO debt issuance. At December 31, 2021 and December 31, 2020, forward starting interest-rate swaps hedging the anticipated future issuance of CO debt were $1.4 billion and $17.0 million, respectively.
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 change in market value of equity (MVE) and interest income due to potential changes in interest rates, interest-rate volatility, spreads, and market prices. We also measure VaR, duration of equity, MVE sensitivity, and the other metrics discussed below.
We use certain quantitative models to evaluate our risk position. These models are capable of employing various interest-rate term-structure models and valuation techniques to determine the values and sensitivities of complex or option-embedded instruments such as mortgage loans; MBS; callable bonds and swaps; and adjustable-rate instruments with embedded caps and floors, among others. These models require the following:
•specification of the contractual and behavioral features of each instrument;
•determination and specification of appropriate market data, such as yield curves and implied volatilities;
•utilization of appropriate term-structure and prepayment models to reasonably describe the potential evolution of interest rates over time and the expected behavior of financial instruments in response;
•for option-free instruments, the expected cash flows are specified in accordance with the term structure of interest rates and discounted using spot rates derived from the same term structure; and
•for option-embedded instruments, the models use standardized option pricing methodology to determine the likelihood of embedded options being exercised or not.
We use various measures of market and interest-rate risk, as set forth below in this section. Some measures have associated, prescriptive management action triggers or limits under our policies, as described below, but others do not.
Market Value of Equity Estimation. MVE is the net economic value of total assets and liabilities, including any derivative transactions. 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, net of derivative transactions.
Market Value of Equity/Book Value of Equity Ratio. MVE, and in particular, the ratio of MVE to the book value of equity (BVE), is a measure of the current value of shareholder investment based on market rates, spreads, prices, and volatility at the reporting date. However, these valuations may not be fully representative of future realized prices. Valuations are based on market yields 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 income. At December 31, 2021, our MVE was $2.45 billion and our BVE was $2.54 billion, resulting in a ratio of MVE to BVE of 96 percent. At December 31, 2020, our MVE was $2.67 billion and our BVE was $2.79 billion, resulting in a ratio of MVE to BVE of 96 percent.
Market Value of Equity/Par Stock Ratio. We also measure the ratio of our MVE to the par value of our Class B Stock, which we refer to as our MVE to par stock ratio. We have established an MVE to par stock ratio floor of 125 percent with an associated management action trigger of 130 percent, reflecting our intent to preserve the value of our members' capital investment. As of December 31, 2021, and December 31, 2020, that ratio was 253 percent and 210 percent, respectively.
Value at Risk. VaR, which measures the potential change in our MVE, is 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 five worst scenarios.
FHFA Advisory Bulletin 2018-01, which was effective as of January 1, 2020, provides guidance for our determination of market risk scenarios that are incorporated into our internal market risk models.
Our VaR model results reported as of December 31, 2021, utilizes interest rate, volatility and OAS shocks provided by the FHFA.
The table below presents the VaR estimate as of December 31, 2021, and December 31, 2020, and represents the estimates of potential reduction to our MVE from potential future changes in interest rates and other market factors, as 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 38 - Value-at-Risk
(dollars in millions)
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| | | Value-at-Risk
(Gain) Loss Exposure |
| | | December 31, 2021 | | December 31, 2020 |
| Confidence Level | | % of MVE (1) | | Amount | | % of
MVE (1) | | Amount |
| 50% | | 4.11 | % | | $ | 100.7 | | | 1.52 | % | | $ | 40.5 | |
| 75% | | 5.52 | | | 135.3 | | | 3.17 | | | 84.7 | |
| 95% | | 7.67 | | | 188.1 | | | 5.31 | | | 141.6 | |
| 99% | | 8.14 | | | 199.5 | | | 6.94 | | | 185.4 | |
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| Average of five worst scenarios - as of year end | | 8.71 | | | 213.5 | | | 7.64 | | | 204.0 | |
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| Average of five worst scenarios - average for the year | | | | 212.3 | | | | | 165.4 | |
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(1) Loss exposure is expressed as a percentage of base MVE.
In the second quarter of 2021, in order to make the management action trigger for VaR consistent with other management action triggers and align it with our capital levels, the board of directors approved a change in the management action trigger for VaR, at which time we eliminated the prior management action trigger of maintaining VaR below $350 million and replaced it with a new management action trigger of maintaining VaR below 12 percent of MVE. Should the management action trigger be exceeded, the policy requires management to notify the board of directors' Risk Committee of any action taken or not taken and the rationale for such. We did not exceed our VaR management action trigger at any time during the years ended December 31, 2021, and December 31, 2020.
Duration of Equity. Another measure of risk that we use is duration of equity. Duration of equity is calculated as the estimated percentage change to MVE for a 100 basis point parallel rate shock. A positive duration of equity generally indicates an appreciation in shareholder value in times of falling rates and a depreciation in shareholder value for increasing rate environments. We have established a limit of +/- 4.0 years for duration of equity with an associated management action trigger of +/- 3.5 years based on a balanced consideration of market-value sensitivity and net interest-income sensitivity. Should the limit be exceeded, our policies require us to notify our board of directors' Risk Committee of such breach.
Our duration of equity, as calculated in accordance with guidance from the FHFA which requires that we constrain projected future interest rates and discounting yields to a minimum of zero percent, was +1.09 years at December 31, 2021, compared with +5.47 years at December 31, 2020. For purposes of measuring against the management action triggers and limits, management considers an alternative methodology which does not constrain interest rates to a minimum of zero percent. Using this methodology duration of equity is +0.37 years as of December 31, 2021, and +1.61 years at December 31, 2020. We did not exceed our duration of equity limit using this measure at any time during the years ended December 31, 2021 and December 31, 2020.
MVE Sensitivity. We measure MVE sensitivity by using the percent change in MVE from base in an up or down 200 basis point parallel rate shock scenario and have established a management action trigger at a decline of 10 percent and a limit at a decline of 15 percent. Our policies require management to notify the board of directors' Risk Committee if the limit is breached.
Using the methodology which does not constrain interest rates to a minimum of zero percent, MVE sensitivity in a down 200 basis point parallel rate shock is (0.9) percent as of December 31, 2021, and +1.8 percent as of December 31, 2020, and MVE sensitivity in an up 200 basis point parallel rate shock is (4.2) percent as of December 31, 2021, and (6.0) percent as of December 31, 2020. We were below the limit at each of December 31, 2021, and December 31, 2020.
See Table 39 for our MVE sensitivity, as calculated in accordance with guidance from the FHFA which requires that we constrain projected future interest rates and discounting yields to a minimum of zero percent.
Duration Gap. We measure the duration gap of our assets and liabilities, including all related hedging transactions. Duration gap is the difference between the estimated durations (percentage change in market value for a 100 basis point parallel rate shock) of assets and liabilities (including the effect of related hedges) and reflects the extent to which estimated sensitivities to market changes, including, but not limited to, maturity and repricing cash flows for assets and liabilities, are matched. Higher numbers, whether positive or negative, indicate greater sensitivity in the MVE in response to changing interest rates. A positive duration gap means that our total assets have an aggregate duration, or sensitivity to interest-rate changes, greater than our liabilities, and a negative duration gap means that our total assets have an aggregate duration less than our liabilities.
Our duration gap, as calculated in accordance with guidance from the FHFA which requires that we constrain projected future interest rates and discounting yields to a minimum of zero percent, was +0.98 months at December 31, 2021, compared with +4.49 months at December 31, 2020.
For purposes of measuring against the management action triggers and limits, management considers an alternative methodology which does not constrain interest rates to a minimum of zero percent. Using this methodology duration gap is +0.33 months as of December 31, 2021, and +1.32 months at December 31, 2020.
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 in basis risk. The income simulation metric is based on projections of adjusted net income divided by capital stock (including mandatorily redeemable capital stock). Projections of adjusted net income exclude a) projected prepayment of advances and prepayment penalties; b) loss on early extinguishment of debt; c) changes in fair values from hedging activities and d) changes in fair values of trading securities. The simulations are solely based on simulated movements in interest rates and do not reflect potential impacts of credit events, including, but not limited to, potential provision for credit losses.
Management has put in place management action triggers whereby senior management is explicitly informed of instances where our projected return on capital stock (ROCS) falls below the average yield on SOFR plus our dividend spread over a twelve-month horizon in a variety of interest-rate shock scenarios limited to +/- 200 basis points. The results of this analysis for December 31, 2021, showed that in the base case our ROCS was 396 basis points over SOFR, and in the worst case modeled, the down 200 basis points scenario, our ROCS fell 163 basis points to 233 basis points over SOFR. Our ROCS spread to SOFR remained above the management action trigger minimum during 2021.
Prior to the second quarter of 2021, the management action trigger was the projected return on regulatory capital (RORC) measured against the average yield on SOFR over a twelve-month horizon in a variety of interest-rate shock scenarios. Prior to the first quarter of 2021, the management action trigger for RORC was measured against the average yield on three-month LIBOR over a twelve-month horizon in a variety of interest-rate shock scenarios. For December 31, 2020, the results of this analysis showed in the base case our RORC was 122 basis points over three-month LIBOR, and in the worst case modeled, the up 300 basis point scenario, our RORC fell 201 basis points to 79 basis points below three-month LIBOR.
Economic Capital Ratio Limit. We have established a limit of 4.0 percent for the ratio of the MVE to the market value of assets, referred to as the economic capital ratio. FHFA regulations require us to maintain a regulatory capital ratio of book value of regulatory capital to book value of total assets of no less than 4.0 percent, as discussed in Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 12 — Capital. We seek to ensure that the regulatory capital ratio will not fall below the 4.0 percent threshold at a future time by establishing the economic capital ratio limit at 4.0 percent. We also maintain a management action trigger of 4.5 percent for this ratio. The economic capital ratio serves as a proxy for benchmarking future capital adequacy by discounting our balance sheet and derivatives at current market expectations of future
values. Our economic capital ratio was 7.4 percent as of December 31, 2021, compared with 6.8 percent as of December 31, 2020.
Our economic capital ratio was not below 4.0 percent at any time during the years ended December 31, 2021, and December 31, 2020.
Table 39 - Market and Interest-Rate Risk Metrics
(dollars in millions)
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| | December 31, 2021 |
| | Down 300(1) | | Down 200(1) | | Down 100(1) | | Base | | Up 100 | | Up 200 | | Up 300 |
| MVE | | $2,704 | | $2,706 | | $2,488 | | $2,452 | | $2,421 | | $2,349 | | $2,252 |
| Percent change in MVE from base | | 10.3% | | 10.4% | | 1.5% | | —% | | (1.3)% | | (4.2)% | | (8.2)% |
| MVE/BVE | | 106% | | 106% | | 98% | | 96% | | 95% | | 92% | | 89% |
| MVE/Par Stock | | 280% | | 280% | | 257% | | 253% | | 250% | | 243% | | 233% |
| Duration of Equity | | -0.07 years | | +5.37 years | | + 3.78 years | | +1.09 years | | +2.21 years | | +3.58 years | | +4.49 years |
| Return on Capital Stock less SOFR | | 2.33% | | 2.33% | | 2.65% | | 3.96% | | 4.05% | | 3.97% | | 3.68% |
| Net income percent change from base | | (46.68)% | | (46.70)% | | (39.37)% | | —% | | 24.45% | | 44.81% | | 60.66% |
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| | December 31, 2020 |
| | Down 300(1) | | Down 200(1) | | Down 100(1) | | Base | | Up 100 | | Up 200 | | Up 300 |
| MVE | | $2,868 | | $2,878 | | $2,860 | | $2,669 | | $2,603 | | $2,507 | | $2,387 |
| Percent change in MVE from base | | 7.5% | | 7.8% | | 7.2% | | —% | | (2.5)% | | (6.1)% | | (10.6)% |
| MVE/BVE | | 103% | | 103% | | 103% | | 96% | | 93% | | 90% | | 86% |
| MVE/Par Stock | | 225% | | 226% | | 225% | | 210% | | 204% | | 197% | | 187% |
| Duration of Equity | | -0.22 years | | -0.49 years | | +3.68 years | | +5.47 years | | +3.07 years | | +4.32 years | | +4.86 years |
| Return on Regulatory Capital less 3-month LIBOR | | 1.22% | | 1.22% | | 1.23% | | 1.22% | | 0.58% | | (0.09)% | | (0.79)% |
| Net income percent change from base | | (13.15)% | | (13.04)% | | (12.03)% | | —% | | 24.29% | | 46.71% | | 67.07% |
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(1) In an environment of low interest rates, downward rate shocks are floored as they approach zero, and therefore may not be fully representative of the indicated rate shock.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to financial statements and supplementary data:
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Management's Report on Internal Control over Financial Reporting
The management of the Federal Home Loan Bank of Boston is responsible for establishing and maintaining adequate internal control over financial reporting.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of internal control over financial reporting as of December 31, 2021, based on the framework established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment, management concluded that, as of December 31, 2021, internal control over financial reporting is effective based on the criteria established in Internal Control – Integrated Framework (2013).
Additionally, our internal control over financial reporting as of December 31, 2021, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Federal Home Loan Bank of Boston
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying statements of condition of Federal Home Loan Bank of Boston (the "Bank") as of December 31, 2021 and 2020, and the related statements of operations, of comprehensive income, of capital, and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “financial statements”). We also have audited the Bank's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Bank as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Bank's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Bank’s financial statements and on the Bank's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Bank in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
PricewaterhouseCoopers LLP, 101 Seaport Boulevard, Suite 500, Boston, Massachusetts 02210
T: (617) 530 5000; F: (617) 530 5001, www.pwc.com/us
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Interest-Rate Derivatives and Hedged Items
As described in Notes 8 and 15 to the financial statements, the Bank uses derivative instruments to reduce funding costs and/or to manage interest-rate risks. The total notional amount of derivatives as of December 31, 2021 was $28.9 billion, of which 97% were designated as hedging instruments, and the fair value of derivative assets and liabilities as of December 31, 2021 was $378.5 million and $38.9 million, respectively. The fair values of interest-rate derivatives and hedged items are determined using standard valuation techniques such as discounted cash-flow analysis and comparisons with similar instruments. The discounted cash-flow model uses market-observable inputs, including discount rate, forward interest rate, and volatility assumptions.
The principal considerations for our determination that performing procedures relating to the valuation of interest-rate derivatives and hedged items is a critical audit matter are the significant audit effort in evaluating the discount rate, forward interest rate, and volatility assumptions used to fair value these derivatives and hedged items, and the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included testing the effectiveness of controls relating to the valuation of interest-rate derivatives and hedged items, including controls over the model, data and assumptions. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent range of prices for a sample of interest-rate derivatives and hedged items and comparison of management’s estimate to the independently developed ranges. Developing the independent range of prices involved testing the completeness and accuracy of data provided by management and independently developing the discount rate, forward interest rate, and volatility assumptions.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 18, 2022
We have served as the Bank's auditor since 1990.
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FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CONDITION
(dollars and shares in thousands, except par value) |
| | December 31, 2021 | | December 31, 2020 |
| ASSETS | | | |
| Cash and due from banks | $ | 204,993 | | | $ | 2,050,028 | |
| Interest-bearing deposits | 85,153 | | | 299,149 | |
| Securities purchased under agreements to resell | 800,000 | | | 750,000 | |
| Federal funds sold | 1,944,000 | | | 2,260,000 | |
| Investment securities: | | | |
| Trading securities | 501,867 | | | 3,605,079 | |
| Available-for-sale securities | 12,895,987 | | | 6,220,148 | |
| Held-to-maturity securities (a) | 145,492 | | | 207,162 | |
| Total investment securities | 13,543,346 | | | 10,032,389 | |
| Advances | 12,340,020 | | | 18,817,002 | |
| Mortgage loans held for portfolio, net of allowance for credit losses of $1,700 and $3,100 at December 31, 2021 and 2020, respectively | 3,120,159 | | | 3,930,252 | |
| | | |
| Accrued interest receivable | 68,360 | | | 87,582 | |
| | | |
| Derivative assets, net | 378,532 | | | 161,238 | |
| Other assets | 60,729 | | | 73,395 | |
| Total Assets | $ | 32,545,292 | | | $ | 38,461,035 | |
| LIABILITIES | | | |
| Deposits | | | |
| Interest-bearing | $ | 833,007 | | | $ | 977,994 | |
| Non-interest-bearing | 51,025 | | | 110,993 | |
| Total deposits | 884,032 | | | 1,088,987 | |
| Consolidated obligations (COs): | | | |
| Bonds | 26,613,032 | | | 21,471,590 | |
| Discount notes | 2,275,320 | | | 12,878,310 | |
| Total consolidated obligations | 28,888,352 | | | 34,349,900 | |
| Mandatorily redeemable capital stock | 13,562 | | | 6,282 | |
| Accrued interest payable | 60,968 | | | 61,918 | |
| Affordable Housing Program (AHP) payable | 70,503 | | | 78,640 | |
| Derivative liabilities, net | 38,944 | | | 24,062 | |
| Other liabilities | 57,920 | | | 69,293 | |
| Total liabilities | 30,014,281 | | | 35,679,082 | |
Commitments and contingencies (Note 16) | 0 | | 0 |
| CAPITAL | | | |
| Capital stock – Class B – putable ($100 par value), 9,536 shares and 12,672 shares issued and outstanding at December 31, 2021 and 2020, respectively | 953,638 | | | 1,267,172 | |
| Retained earnings: | | | |
| Unrestricted | 1,179,986 | | | 1,130,222 | |
| Restricted | 368,420 | | | 368,420 | |
| Total retained earnings | 1,548,406 | | | 1,498,642 | |
| Accumulated other comprehensive income | 28,967 | | | 16,139 | |
| Total capital | 2,531,011 | | | 2,781,953 | |
| Total Liabilities and Capital | $ | 32,545,292 | | | $ | 38,461,035 | |
_______________________________________
(a) Fair values of held-to-maturity securities were $148,068 and $211,837 at December 31, 2021 and 2020, respectively.
The accompanying notes are an integral part of these financial statements.
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FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF OPERATIONS
(dollars in thousands) | | |
| For the Year Ended December 31, | | |
| 2021 | | 2020 | | 2019 | | |
| INTEREST INCOME | | | | | | | |
| Advances | $ | 170,003 | | | $ | 400,286 | | | $ | 854,599 | | | |
| Prepayment fees on advances, net | 34,019 | | | 24,028 | | | 35,011 | | | |
| Interest-bearing deposits | 147 | | | 5,749 | | | 22,390 | | | |
| Securities purchased under agreements to resell | 452 | | | 15,049 | | | 123,438 | | | |
| Federal funds sold | 2,210 | | | 18,009 | | | 58,015 | | | |
| Investment securities: | | | | | | | |
| Trading securities | 49,809 | | | 83,627 | | | 22,037 | | | |
| Available-for-sale securities | 73,314 | | | 63,243 | | | 115,942 | | | |
| Held-to-maturity securities | 2,533 | | | 18,912 | | | 65,758 | | | |
| Total investment securities | 125,656 | | | 165,782 | | | 203,737 | | | |
| Mortgage loans held for portfolio | 93,048 | | | 124,828 | | | 147,885 | | | |
| Other | — | | | 48 | | | 25 | | | |
| Total interest income | 425,535 | | | 753,779 | | | 1,445,100 | | | |
| INTEREST EXPENSE | | | | | | | |
| Consolidated obligations: | | | | | | | |
| Bonds | 210,052 | | | 374,449 | | | 598,585 | | | |
| Discount notes | 4,476 | | | 187,743 | | | 569,896 | | | |
| Total consolidated obligations | 214,528 | | | 562,192 | | | 1,168,481 | | | |
| Deposits | 98 | | | 919 | | | 6,582 | | | |
| Mandatorily redeemable capital stock | 192 | | | 221 | | | 974 | | | |
| Other borrowings | 16 | | | 239 | | | 37 | | | |
| Total interest expense | 214,834 | | | 563,571 | | | 1,176,074 | | | |
| NET INTEREST INCOME | 210,701 | | | 190,208 | | | 269,026 | | | |
| (Reduction of) provision for credit losses | (1,462) | | | (4,358) | | | 85 | | | |
| NET INTEREST INCOME AFTER (REDUCTION OF) PROVISION FOR CREDIT LOSSES | 212,163 | | | 194,566 | | | 268,941 | | | |
| OTHER INCOME (LOSS) | | | | | | | |
| Litigation settlements | 505 | | | 26,096 | | | 29,361 | | | |
| Loss on early extinguishment of debt | (11,903) | | | (14,784) | | | (15,238) | | | |
| Service fees | 10,430 | | | 13,169 | | | 12,987 | | | |
| Net (losses) gains on trading securities | (46,341) | | | (11,936) | | | 1,287 | | | |
| Net (losses) gains on derivatives | (559) | | | (49,674) | | | 1,419 | | | |
| Realized net gain from sale of available-for-sale securities | — | | | 30,583 | | | — | | | |
| Realized net gain from sale of held-to-maturity securities | 283 | | | 47,413 | | | 12,031 | | | |
| Other, net | 703 | | | 60 | | | (863) | | | |
| Total other (loss) income | (46,882) | | | 40,927 | | | 40,984 | | | |
| OTHER EXPENSE | | | | | | | |
| Compensation and benefits | 41,804 | | | 47,800 | | | 47,263 | | | |
| Other operating expenses | 24,229 | | | 24,286 | | | 25,017 | | | |
| Federal Housing Finance Agency (the FHFA) | 3,960 | | | 3,797 | | | 3,914 | | | |
| Office of Finance | 3,693 | | | 3,664 | | | 3,468 | | | |
| AHP voluntary contribution | 4,761 | | | 1,614 | | | — | | | |
| Other | 9,634 | | | 20,696 | | | 18,222 | | | |
| Total other expense | 88,081 | | | 101,857 | | | 97,884 | | | |
| INCOME BEFORE ASSESSMENTS | 77,200 | | | 133,636 | | | 212,041 | | | |
| AHP assessments | 7,739 | | | 13,386 | | | 21,302 | | | |
| | | | | | | |
| | | | | | | |
| NET INCOME | $ | 69,461 | | | $ | 120,250 | | | $ | 190,739 | | | |
The accompanying notes are an integral part of these financial statements.
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FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
|
| | For the Year Ended December 31, |
| | 2021 | | 2020 | | 2019 | | |
| Net income | | $ | 69,461 | | | $ | 120,250 | | | $ | 190,739 | | | |
| Other comprehensive income: | | | | | | | | |
| | | | | | | | |
| Net unrealized gains on available-for-sale securities | | 9,445 | | | 122,490 | | | 79,036 | | | |
| | | | | | | | |
| | | | | | | | |
| Net noncredit portion of other-than-temporary impairment gains on held-to-maturity securities | | — | | | 76,036 | | | 53,118 | | | |
| Net unrealized (losses) gains relating to hedging activities | | (1,926) | | | 5,842 | | | (913) | | | |
| Pension and postretirement benefits | | 5,309 | | | (1,257) | | | (1,531) | | | |
| Total other comprehensive income | | 12,828 | | | 203,111 | | | 129,710 | | | |
| Comprehensive income | | $ | 82,289 | | | $ | 323,361 | | | $ | 320,449 | | | |
The accompanying notes are an integral part of these financial statements.
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FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CAPITAL
YEARS ENDED DECEMBER 31, 2021, 2020, and 2019
(dollars and shares in thousands)
|
| | | | | | | |
| | Capital Stock Class B – Putable | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | |
| | Shares | | Par Value | | Unrestricted | | Restricted | | Total | | | Total
Capital |
| BALANCE, DECEMBER 31, 2018 | 25,289 | | | $ | 2,528,854 | | | $ | 1,084,342 | | | $ | 310,670 | | | $ | 1,395,012 | | | $ | (316,507) | | | $ | 3,607,359 | |
| Cumulative effect of change in accounting principle | | | | | 175 | | | — | | | 175 | | | (175) | | | — | |
| Comprehensive income | | | | | 152,592 | | | 38,147 | | | 190,739 | | | 129,710 | | | 320,449 | |
| Proceeds from issuance of capital stock | 18,544 | | | 1,854,487 | | | | | | | | | | | 1,854,487 | |
| Repurchase of capital stock | (25,142) | | | (2,514,211) | | | | | | | | | | | (2,514,211) | |
| | | | | | | | | | | | | |
| Cash dividends on capital stock | | | | | (122,772) | | | | | (122,772) | | | | | (122,772) | |
| BALANCE, DECEMBER 31, 2019 | 18,691 | | | 1,869,130 | | | 1,114,337 | | | 348,817 | | | 1,463,154 | | | (186,972) | | | 3,145,312 | |
| Cumulative effect of change in accounting principle | | | | | (7,530) | | | — | | | (7,530) | | | — | | | (7,530) | |
| Comprehensive income | | | | | 100,647 | | | 19,603 | | | 120,250 | | | 203,111 | | | 323,361 | |
| Proceeds from issuance of capital stock | 21,570 | | | 2,157,029 | | | | | | | | | | | 2,157,029 | |
| Repurchase of capital stock | (27,584) | | | (2,758,406) | | | | | | | | | | | (2,758,406) | |
| Shares reclassified to mandatorily redeemable capital stock | (5) | | | (581) | | | | | | | | | | | (581) | |
| Partial recovery of prior capital distribution to Financing Corporation | | | | | 3,726 | | | | | 3,726 | | | | | 3,726 | |
| Cash dividends on capital stock | | | | | (80,958) | | | | | (80,958) | | | | | (80,958) | |
| BALANCE, DECEMBER 31, 2020 | 12,672 | | | 1,267,172 | | | 1,130,222 | | | 368,420 | | | 1,498,642 | | | 16,139 | | | 2,781,953 | |
| Comprehensive income | | | | | 69,461 | | | — | | | 69,461 | | | 12,828 | | | 82,289 | |
| Proceeds from issuance of capital stock | 2,407 | | | 240,730 | | | | | | | | | | | 240,730 | |
| Repurchase of capital stock | (5,440) | | | (543,999) | | | | | | | | | | | (543,999) | |
| Shares reclassified to mandatorily redeemable capital stock | (103) | | | (10,265) | | | | | | | | | | | (10,265) | |
| Cash dividends on capital stock | | | | | (19,697) | | | | | (19,697) | | | | | (19,697) | |
| BALANCE, DECEMBER 31, 2021 | 9,536 | | | $ | 953,638 | | | $ | 1,179,986 | | | $ | 368,420 | | | $ | 1,548,406 | | | $ | 28,967 | | | $ | 2,531,011 | |
The accompanying notes are an integral part of these financial statements.
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FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CASH FLOWS (dollars in thousands)
|
| For the Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| OPERATING ACTIVITIES | | | | | |
| Net income | $ | 69,461 | | | $ | 120,250 | | | $ | 190,739 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization/(accretion) | (10,076) | | | (14,310) | | | (19,937) | |
| (Reduction of) provision for credit losses | (1,462) | | | (4,358) | | | 85 | |
| Change in net fair-value adjustments on derivatives and hedging activities | 255,243 | | | (206,394) | | | (284,002) | |
| Loss on early extinguishment of debt | 11,903 | | | 14,784 | | | 15,238 | |
| Other adjustments, net | 3,061 | | | 4,399 | | | 10,394 | |
| Realized net gain from sale of available-for-sale securities | — | | | (30,583) | | | — | |
| Realized net gain from sale of held-to-maturity securities | (283) | | | (47,413) | | | (12,031) | |
| Net change in: | | | | | |
| Market value of trading securities | 46,341 | | | 11,936 | | | (1,287) | |
| Accrued interest receivable | 19,222 | | | 24,581 | | | 588 | |
| Other assets | 1,845 | | | (1,437) | | | (7,510) | |
| Accrued interest payable | (949) | | | (42,560) | | | (7,566) | |
| Other liabilities | (13,662) | | | (8,658) | | | 6,927 | |
| Total adjustments | 311,183 | | | (300,013) | | | (299,101) | |
| Net cash provided by (used in) operating activities | 380,644 | | | (179,763) | | | (108,362) | |
| | | | | |
| INVESTING ACTIVITIES | | | | | |
| Net change in: | | | | | |
| Interest-bearing deposits | (83,429) | | | 917,422 | | | (776,421) | |
| Securities purchased under agreements to resell | (50,000) | | | 2,750,000 | | | 2,999,000 | |
| Federal funds sold | 316,000 | | | (1,400,000) | | | 640,000 | |
| | | | | |
| Trading securities: | | | | | |
| | | | | |
| Proceeds | 3,056,871 | | | 1,926,330 | | | 177,340 | |
| Purchases | — | | | (3,293,082) | | | (2,263,279) | |
| Available-for-sale securities: | | | | | |
| | | | | |
| Proceeds | 946,710 | | | 1,836,746 | | | 1,714,800 | |
| Purchases | (7,879,275) | | | — | | | (3,206,255) | |
| Held-to-maturity securities: | | | | | |
| Proceeds | 62,083 | | | 538,452 | | | 510,590 | |
| | | | | |
| Advances to members: | | | | | |
| Repaid | 41,915,962 | | | 250,744,528 | | | 474,957,725 | |
| Originated | (35,555,659) | | | (234,864,985) | | | (466,272,505) | |
| Mortgage loans held for portfolio: | | | | | |
| Proceeds | 1,222,784 | | | 1,310,644 | | | 590,161 | |
| Purchases | (432,918) | | | (766,089) | | | (803,765) | |
| Other investing activities, net | (922) | | | (756) | | | (430) | |
| Net cash provided by investing activities | 3,518,207 | | | 19,699,210 | | | 8,266,961 | |
| | | | | |
| | | | | | | | | | | | | | | | | |
FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CASH FLOWS — (Continued) (dollars in thousands)
|
| For the Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| FINANCING ACTIVITIES | | | | | |
| Net change in deposits | (204,955) | | | 414,118 | | | 199,521 | |
| Net payments on derivatives with a financing element | 31,794 | | | (76,415) | | | (48,642) | |
| Net proceeds from issuance of consolidated obligations: | | | | | |
| Discount notes | 262,647,281 | | | 100,524,378 | | | 144,030,097 | |
| Bonds | 19,102,211 | | | 12,288,286 | | | 10,851,335 | |
| | | | | |
| Payments for maturing and retiring consolidated obligations: | | | | | |
| Discount notes | (273,248,389) | | | (115,287,723) | | | (149,400,564) | |
| Bonds | (13,571,731) | | | (13,716,653) | | | (12,909,970) | |
| Bonds transferred to other FHLBanks | (173,984) | | | (1,005,990) | | | (12,697) | |
| Payment of financing lease | (162) | | | (122) | | | (136) | |
| Partial recovery of prior capital distribution to Financing Corporation | — | | | 3,726 | | | — | |
| Proceeds from issuance of capital stock | 240,730 | | | 2,157,029 | | | 1,854,487 | |
| Payments for repurchase of capital stock | (543,999) | | | (2,758,406) | | | (2,514,211) | |
| Payments for redemption of mandatorily redeemable capital stock | (2,985) | | | (105) | | | (26,062) | |
| Cash dividends paid | (19,697) | | | (80,958) | | | (122,772) | |
| Net cash used in financing activities | (5,743,886) | | | (17,538,835) | | | (8,099,614) | |
| Net (decrease) increase in cash and due from banks | (1,845,035) | | | 1,980,612 | | | 58,985 | |
| Cash and due from banks at beginning of the year | 2,050,028 | | | 69,416 | | | 10,431 | |
| Cash and due from banks at end of the year | $ | 204,993 | | | $ | 2,050,028 | | | $ | 69,416 | |
| Supplemental disclosures: | | | | | |
| Interest paid | $ | 258,113 | | | $ | 677,828 | | | $ | 1,224,032 | |
| AHP payments | $ | 17,980 | | | $ | 21,374 | | | $ | 15,723 | |
| | | | | |
| | | | | |
| Noncash transfers of mortgage loans held for portfolio to other assets | $ | 368 | | | $ | 606 | | | $ | 2,020 | |
| Noncash lease liabilities arising from obtaining right-of-use assets | $ | — | | | $ | 173 | | | $ | 12,572 | |
| Noncash transfer of held-to-maturity securities to available-for-sale securities with the adoption of the reference rate reform guidance (amortized cost) | $ | — | | | $ | 254,217 | | | $ | — | |
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF BOSTON
NOTES TO FINANCIAL STATEMENTS
Note 1 — Background Information
We are a federally-chartered corporation and one of 11 district Federal Home Loan Banks (the FHLBanks or the FHLBank System). The FHLBanks are government-sponsored enterprises (GSEs) that were organized under the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), to serve the public by enhancing the availability of credit for residential mortgages, targeted community development and economic growth. Each FHLBank operates in a specifically defined geographic territory, or district. We provide a readily available, competitively priced source of funds to our members and certain nonmember institutions located within the 6 New England states, which are Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. Certain regulated financial institutions, including community development financial institutions (CDFIs) and insurance companies with their principal places of business in New England and engaged in residential housing finance, may apply for membership. Additionally, certain nonmember institutions (referred to as housing associates) that meet applicable legal criteria may also borrow from us. While eligible to borrow, housing associates are not eligible to become members and, therefore, are not allowed to hold capital stock. As we are a cooperative, current and former members own all of our outstanding capital stock and may receive dividends on their investment. We do not have any wholly or partially owned subsidiaries, and we do not have an equity position in any partnerships, corporations, or off-balance-sheet special-purpose entities.
All members must purchase our stock as a condition of membership and as a condition of engaging in certain business activities with us.
The FHFA, our primary regulator, an independent agency in the executive branch of the U.S. government, supervises and regulates the FHLBanks, Federal Home Loan Mortgage Corporation (Freddie Mac), and Federal National Mortgage Association (Fannie Mae). A purpose of the FHFA is to ensure the FHLBanks fulfill their mission by operating in a safe and sound manner, including maintenance of adequate capital and internal controls. In addition, the FHFA is responsible for ensuring that: 1) the operations and activities of each FHLBank foster liquid, efficient, competitive, and resilient national housing finance markets; 2) each FHLBank complies with the title and the rules, regulations, guidelines, and orders issued under the Housing and Economic Recovery Act (HERA) and the authorizing statutes; 3) each FHLBank carries out its statutory mission through only activities that are authorized under and consistent with HERA and the authorizing statutes, and; 4) the activities of each FHLBank and the manner in which such FHLBank is operated is consistent with the public interest. Each FHLBank is a separate legal entity with its own management, employees, and board of directors.
The Office of Finance is the FHLBanks' fiscal agent and is a joint office of the FHLBanks established to facilitate the issuance and servicing of the FHLBanks' COs and to prepare the combined quarterly and annual financial reports of all the FHLBanks. As provided by the FHLBank Act, and applicable regulations, COs are backed only by the financial resources of all the FHLBanks and are our primary source of funds. Deposits, other borrowings, and the issuance of capital stock, which is principally held by our current and former members, provide other funds. We primarily use these funds to provide loans, called advances, to invest in single-family mortgage loans under the Mortgage Partnership Finance® (MPF®) program, and also to fund other investments. In addition, we offer correspondent services, such as wire-transfer, securities-safekeeping, and settlement services.
"Mortgage Partnership Finance", "MPF" and "MPF Xtra" are registered trademarks of the FHLBank of Chicago.
Note 2 — Summary of Significant Accounting Policies
Use of Estimates
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in accordance with GAAP requires management to make subjective assumptions and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. The most significant of these estimates include but are not limited to, accounting for derivatives and hedging activities, estimation of fair values, and amortization of premiums and discounts associated with prepayable mortgage-backed securities. Actual results could differ from these estimates.
Fair Value
We determine the fair-value amounts recorded on the statement of condition and in the note disclosures for the periods presented by using available market and other pertinent information, and reflect our best judgment of appropriate valuation methods. Although we use our best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any valuation technique. Therefore, these fair values may not be indicative of the amounts that would have been realized in market transactions at the reporting dates. See Note 15 — Fair Values for more information.
Financial Instruments Meeting Netting Requirements
We present certain financial instruments on a net basis when they are subject to a legal right of offset and all other requirements for netting are met (collectively referred to as the netting requirements). For these financial instruments, we have elected to offset our asset and liability positions, as well as cash collateral received or pledged, when we have met the netting requirements.
The net exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time when this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. For derivative instruments that meet the requirements for netting, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset. See Note 8 — Derivatives and Hedging Activities for additional information regarding these agreements.
Securities purchased under agreements to resell are also subject to netting requirements. Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented. There were no offsetting amounts related to these securities at December 31, 2021 and 2020.
Credit Losses on Financial Instruments
Beginning January 1, 2020, the Bank adopted, on a modified retrospective basis, new accounting guidance pertaining to the measurement of credit losses on financial instruments that requires a financial asset or group of financial assets measured at amortized cost to be presented at the net amount expected to be collected. The new guidance also requires credit losses relating to these financial instruments as well as available-for-sale securities be recorded through the allowance for credit losses. Consistent with the modified retrospective method of adoption, the prior period has not been revised to conform to the new basis of accounting. Key changes to our accounting policies based on this guidance are detailed below.
Interest-Bearing Deposits, Securities Purchased Under Agreements to Resell, and Federal Funds Sold
We invest in interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold. Interest-bearing deposits include bank notes not meeting the definition of a security. Securities purchased under agreements to resell are treated as short-term collateralized loans. Federal funds sold consist of short-term, unsecured loans transacted with counterparties that we consider to be of investment quality. These investments provide short-term liquidity and are carried at cost. Accrued interest receivable is recorded separately on the statements of condition. If applicable, an allowance for credit losses is recorded with a corresponding adjustment to the provision for credit losses. Interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold are evaluated quarterly for expected credit losses if not expected to be repaid according to the contractual terms. We have not sold or repledged the collateral received on securities purchased under agreements to resell.
Beginning January 1, 2020, we adopted the Financial Instruments - Credit Losses accounting guidance. Under this new guidance, we use the collateral maintenance provision practical expedient for securities purchased under agreements to resell. Consequently, a credit loss would be recognized if there is a collateral shortfall which we do not believe the counterparty will replenish in accordance with its contractual terms. The credit loss would be limited to the difference between the fair value of the collateral and the investment’s amortized cost.
Prior to January 1, 2020, securities purchased under agreements to resell were evaluated for credit losses if there was a collateral shortfall which we did not believe the counterparty would replenish in accordance with the contractual terms.
Investment Securities
We classify investments as trading, available-for-sale, or held-to-maturity at the date of acquisition. Purchases and sales of securities are recorded on a trade date basis.
Trading. Securities classified as trading are held for liquidity purposes and carried at fair value. We record changes in the fair value of these investments through other income as net unrealized (losses) gains on trading securities. FHFA regulations prohibit trading in or the speculative use of these instruments and limit the credit risks we have from these instruments.
Available-for-sale. We classify certain investments that are not classified as held-to-maturity or trading as available-for-sale and carry them at fair value. Changes in fair value of available-for-sale securities not being hedged by derivatives, or in an economic hedging relationship, are recorded in other comprehensive income. For available-for-sale securities that have been hedged under fair-value hedge designations, we record the portion of the change in the fair value of the investment related to the risk being hedged in available-for-sale interest income together with the related change in the fair value of the derivative.
Beginning January 1, 2020, we adopted the Financial Instruments - Credit Losses accounting guidance. Under this new guidance, for securities classified as available-for-sale, we evaluate individual securities for impairment on a quarterly basis by comparing the security’s fair value to its amortized cost. Accrued interest receivable is recorded separately on the statements of condition and is not included in the amortized cost basis. Impairment exists when the fair value of the investment is less than its amortized cost. In assessing whether a credit loss exists on an impaired security, we consider whether there would be a shortfall in receiving all cash flows contractually due on the investment. When a shortfall is considered possible, we compare the present value of cash flows to be collected from the security with the amortized cost basis of the security. If the present value of cash flows is less than amortized cost, an allowance-for-credit losses is recorded with a corresponding adjustment to the provision for credit losses. The allowance is limited to the difference between the amortized cost and the fair value on the individual security and excludes uncollectible accrued interest receivable, which is measured separately.
If management intends to sell an impaired security classified as available-for-sale, or more likely than not will be required to sell the security before expected recovery of its amortized cost basis, any allowance for credit losses is written off and the amortized cost basis is written down to the security’s fair value at the reporting date with any incremental impairment reported in earnings as net gains on available-for-sale securities. If management does not intend to sell an impaired security classified as available-for-sale and it is not more likely than not that management will be required to sell the debt security, then the credit portion of the difference is recognized as an allowance for credit losses and any remaining difference between the security’s fair value and amortized cost is recorded to net unrealized gains (losses) on available-for-sale securities within other comprehensive income.
See Investment Securities – Other-than-Temporary Impairment below for the accounting policy relating to credit losses in effect prior to January 1, 2020.
Held-to-Maturity. Certain investments for which we have both the ability and intent to hold to maturity are classified as held-to-maturity and are carried at amortized cost, which is original cost net of periodic principal repayments and amortization of premiums and accretion of discounts using the level-yield method adjusted for other-than-temporary impairment losses recorded prior to January 1, 2020. Accrued interest receivable is recorded separately on the statement of condition.
Certain changes in circumstances may cause us to change our intent to hold a security to maturity without calling into question our intent to hold other debt securities to maturity in the future. Thus, the sale or transfer of a held-to-maturity security due to certain changes in circumstances, such as evidence of significant deterioration in the issuer's creditworthiness or changes in regulatory requirements, is not considered to be inconsistent with its original classification. Other events that are isolated, nonrecurring, and unusual for us that could not have been reasonably anticipated may cause us to sell or transfer a held-to-maturity security without necessarily calling into question our intent to hold other debt securities to maturity. In addition, sale of a debt security that meets either of the following two conditions would not be considered inconsistent with the original classification of that security.
•The sale occurs near enough to its maturity date (for example, within three months of maturity), or call date if exercise of the call is probable, that interest-rate risk is substantially eliminated as a pricing factor and the changes in market interest rates would not have a significant effect on the security's fair value; or
•The sale of a security occurs after we have already collected a substantial portion (at least 85 percent) of the principal outstanding at acquisition due either to prepayments on the debt security or to scheduled payments on a debt security payable in equal installments (both principal and interest) over its term.
Additionally, during the third quarter of 2020 we adopted a provision of the Accounting Standards Update titled Facilitation of the Effects of Reference Rate Reform on Financial Reporting which provides a one-time election to sell, transfer, or both sell and transfer debt securities classified as held-to-maturity that reference a rate affected by reference rate reform and that were classified as held-to-maturity before January 1, 2020.
Beginning January 1, 2020, we adopted the Financial Instruments - Credit Losses accounting guidance. Under this new guidance, held-to-maturity securities are evaluated quarterly for expected credit losses on a pool basis unless an individual assessment is deemed necessary because the securities do not possess similar risk characteristics. An allowance for credit losses is recorded with a corresponding adjustment to the provision for credit losses. The allowance for credit losses excludes uncollectible accrued interest receivable, which is measured separately. Prior to January 1, 2020, credit losses were recorded as a direct write-down of the held-to-maturity security carrying value.
For improvements in expected future cash flows for held-to-maturity securities impaired prior to January 1, 2020, interest income continues to follow the recognition pattern pursuant to the impairment guidance in effect prior to January 1, 2020. Any additional recoveries of amounts previously written off prior to January 1, 2020, are recorded when received. For any improvements in expected future cash flows for held-to-maturity securities with an allowance for credit losses recognized after the adoption of the new guidance, the allowance for credit losses associated with recoveries may be derecognized up to its full amount immediately in the current period.
See Investment Securities – Other-than-Temporary Impairment below for the accounting policy relating to credit losses in effect prior to January 1, 2020.
Premiums and Discounts. We amortize premiums and accrete discounts on mortgage-backed securities (MBS) using the level-yield method over the estimated lives of the securities. This method requires a retrospective adjustment of the effective yield each time we change the estimated life, based on actual prepayments received and changes in expected prepayments, as if the new estimate had been known since the original acquisition date of the securities. We estimate prepayment speeds on each individual security using the most recent three months of historical constant prepayment rates, as available, or may subscribe to third-party data services that provide estimates of future cash flows, from which we determine expected asset lives. We amortize premiums and accrete discounts on other investments using the level-yield method to the contractual maturity of the securities.
Gains and Losses on Sales. We compute gains and losses on sales of investment securities using the specific identification method and include these gains and losses in other income (loss).
Investment Securities – Other-than-Temporary Impairment
Beginning January 1, 2020, we adopted the Financial Instruments - Credit Losses accounting guidance. As a result, the accounting guidance related to other-than-temporary impairment accounting for investments was superseded as of that date.
Prior to January 1, 2020, we evaluated individual available-for-sale and held-to-maturity securities that were in an unrealized loss position for other-than-temporary impairment each quarter. An investment was considered impaired when its fair value was less than its amortized cost. We considered other-than-temporary impairment to have occurred if we:
•had an intent to sell the investment;
•believed it was more likely than not that we would be required to sell the investment before the recovery of its amortized cost based on available evidence; or
•did not expect to recover the entire amortized cost of the debt security.
Recognition of Other-than-Temporary Impairment. If either of the first two conditions above was met, we recognized an other-than-temporary impairment charge in earnings equal to the entire difference between the security's amortized cost and its fair value as of the statement of condition date.
For securities in an unrealized loss position that meet neither of the first two conditions (excluding agency MBS) and for each of our private-label MBS, we performed an analysis to determine if we would recover the entire amortized cost of each of these securities. The present value of the cash flows expected to be collected was compared with the amortized cost of the debt security to determine whether a credit loss existed. If the present value of the cash flows expected to be collected was less than the amortized cost of the debt security, the security was deemed to be other-than-temporarily impaired and the carrying value of the debt security was adjusted to its fair value. However, rather than recognizing the entire difference between the amortized cost and fair value in earnings, only the amount of the impairment representing the credit loss (that is, the credit component) was recognized in earnings, while the amount related to all other factors (that is, the noncredit component) was recognized in
other comprehensive income. For a security that was determined to be other-than-temporarily impaired, in the event that the present value of the cash flows expected to be collected was less than the fair value of the security, the credit loss on the security was limited to the amount of that security's unrealized losses.
In performing a detailed cash-flow analysis, we estimated the cash flows expected to be collected. If this estimate resulted in a present value of expected cash flows (discounted at the security's effective yield) that was less than the amortized cost basis of a security (that is, a credit loss exists), other-than-temporary impairment was considered to have occurred. For determining the present value of variable-rate and hybrid private-label residential MBS, we used the effective interest rate derived from a variable-rate index, such as one-month London Interbank Offered Rate (LIBOR), plus the contractual spread, plus or minus a fixed-spread adjustment when there was an existing discount or premium on the security. Because the implied forward yield curve of a selected variable-rate index changes over time, the effective interest rates derived from that index will also change over time and would therefore impact the present value of the subject security.
Interest Income Recognition. Upon subsequent evaluation of a debt security when there was no additional other-than-temporary impairment, we adjusted the accretable yield on a prospective basis if there was a significant increase in the security's expected future cash flows. This adjusted yield was used to calculate the amount to be recognized into income over the remaining life of the security so as to match the amount and timing of future cash flows expected to be collected. Subsequent changes in estimated cash flows that were deemed significant would change the accretable yield on a prospective basis. For debt securities classified as held-to-maturity, the other-than-temporary impairment recognized in other comprehensive income (loss) was accreted to the carrying value of each security on a prospective basis, based on the amount and timing of future estimated cash flows. The estimated cash flows and accretable yield were re-evaluated each quarter.
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, as discussed in Note 6 — Advances. We generally record our advances at par. However, we may record premiums or discounts on advances in the following cases:
•Advances may be acquired from another FHLBank when one of our members acquires a member of another FHLBank. In these cases, we may purchase the advances from the other FHLBank at a price that results in a fair market yield for the acquired advance.
•When the prepayment of an advance is followed by disbursement of a new advance and the transactions effectively represent a modification of the previous advance, the prepayment fee received is deferred and recorded as a discount to the modified advance.
•When an advance is modified under our advance restructuring program and our analysis of the restructuring concludes that the transaction is an extinguishment of the prior advance rather than a modification, the deferred prepayment fee is recognized into income immediately and recorded as a premium on the new advance.
•When we make an AHP advance, the present value of the variation in the cash flow caused by the difference in the interest rate between the AHP advance rate and our related cost of funds for comparable maturity funding is charged against the AHP liability and recorded as a discount on the AHP advance.
•Advances issued under our Jobs for New England (JNE) and Helping to House New England (HHNE) programs have an interest rate at a significant discount to market rates. Due to the below market interest rate, we record a discount on the advance and an interest rate subsidy expense at the time that we transact the advance. The subsidy expense is recorded in other expense in the statement of operations.
We amortize the premiums and accrete the discounts on advances to interest income using the level-yield method. We record interest on advances to interest income as earned. Accrued interest receivable is recorded separately on the statements of condition.
Beginning January 1, 2020, we adopted the Financial Instruments - Credit Losses accounting guidance. Under this new guidance, advances are evaluated quarterly for expected credit losses. Prior to January 1, 2020, we evaluated advances to determine if an allowance for credit losses was necessary if it was probable an impairment occurred in our advances portfolio as of the statement of condition date and the amount of loss could be reasonably estimated.
Prepayment Fees. We charge borrowers a prepayment fee when they prepay certain advances before the original maturity. We record prepayment fees net of hedging fair-value adjustments included in the carrying value of the advance as prepayment fees on advances, net in the interest income section of the statement of operations.
Advance Modifications. In cases in which we fund a new advance concurrently with or within a short period of time of the prepayment of an existing advance by the same member, we evaluate whether the new advance meets the accounting criteria to qualify as a modification of the existing advance or whether it constitutes a new advance. We compare the present value of cash flows on the new advance with the present value of cash flows remaining on the existing advance. If there is at least a 10 percent difference in the present value of cash flows or if we conclude the difference between the advances is more than minor based on a qualitative assessment of the modifications made to the advance's original contractual terms, the advance is accounted for as a new advance. In all other instances, the new advance is accounted for as a modification.
If a new advance qualifies as a modification of the existing advance, the net prepayment fee on the prepaid advance is deferred, recorded in the basis of the modified advance, and amortized to interest income over the life of the modified advance using the level-yield method. This amortization is recorded in advance interest income. If the modified advance is hedged, changes in fair value are recorded after the amortization of the basis adjustment in advance interest income.
For prepaid advances that were hedged and meet the hedge-accounting requirements, we terminate the hedging relationship upon prepayment and record the prepayment fee net of the hedging fair-value adjustment in the basis of the advance as advance interest income. If we fund a new advance to a member concurrent with or within a short period of time after the prepayment of a previous advance to that member, we evaluate whether the new advance qualifies as a modification of the original hedged advance. If the new advance qualifies as a modification of the original hedged advance, the hedging fair-value adjustment and the prepayment fee are included in the carrying amount of the modified advance and are amortized in interest income over the life of the modified advance using the level-yield method. If the modified advance is also hedged and the hedge meets the hedging criteria, the modified advance is marked to fair value after the modification, and subsequent fair-value changes are recorded in advance interest income.
If a new advance does not qualify as a modification of an existing advance, prepayment of the existing advance is treated as an advance termination and any prepayment fee, net of hedging adjustments, is recorded to advance interest income in the statement of operations.
Commitment Fees
We record commitment fees for standby letters of credit to members as deferred fee income when received, and amortize these fees on a straight-line basis to service-fees income in other income over the term of the standby letter of credit. Based upon past experience, we believe the likelihood of standby letters of credit being drawn upon is remote.
Mortgage Loans Held for Portfolio
We participate in the MPF program through which we invest in conventional, residential, fixed-rate mortgage loans (conventional mortgage loans) and government-insured or -guaranteed residential fixed-rate mortgage loans (government mortgage loans) that are purchased from participating financial institutions (see Note 7 — Mortgage Loans Held for Portfolio). We classify our investments in mortgage loans for which we have the intent and ability to hold for the foreseeable future or until maturity or payoff as held for portfolio. As of December 31, 2021, all our investments in mortgage loans are 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.
Beginning January 1, 2020, we adopted the Financial Instruments - Credit Losses accounting guidance. Under this new guidance, quarterly we measure expected credit losses on mortgage loans on a collective basis, pooling loans with similar risk characteristics. If a mortgage loan no longer shares risk characteristics with other loans, it is removed from the pool and evaluated for expected credit losses on an individual basis. When developing the allowance for credit losses, we measure the expected loss over the estimated remaining life of a mortgage loan, which also considers how our credit enhancements mitigate credit losses. If a loan is purchased at a discount, the discount does not offset the allowance for credit losses. We include estimates of expected recoveries within the allowance for credit losses.
The allowance excludes uncollectible accrued interest receivable, as we write off accrued interest receivable by reversing interest income if a mortgage loan is placed on nonaccrual status.
Prior to January 1, 2020, we recorded an allowance for credit losses on mortgage loans if it was probable an impairment had occurred in our mortgage loans held for portfolio as of the statement of condition date and the amount of loss could be
reasonably estimated. A loan was considered impaired when, based on current information and events, it was probable that we would be unable to collect all amounts due according to the contractual terms of the loan agreement.
Premiums and Discounts. We compute the amortization of mortgage-loan-origination fees (premiums and discounts) as interest income using the level-yield method over the contractual term to maturity of each individual loan, which results in income recognition in a manner that is effectively proportionate to the actual repayment behavior of the underlying assets and reflects the contractual terms of the assets without regard to changes in estimated prepayments based on assumptions about future borrower behavior.
Credit-Enhancement Fees. For conventional mortgage loans, participating financial institutions retain a portion of the credit risk on the loans in which we invest by providing credit-enhancement protection either through a direct liability to pay credit losses up to a specified amount or through a contractual obligation to provide supplemental mortgage insurance. Participating financial institutions are paid a credit-enhancement fee for assuming credit risk and in some instances all or a portion of the credit-enhancement fee may be performance-based. Credit-enhancement fees are paid monthly and are determined based on the remaining unpaid principal balance of the pertinent MPF loans. The required credit-enhancement amount varies depending on the MPF product. Credit-enhancement fees are recorded as an offset to mortgage-loan-interest income. To the extent that losses in the current month exceed performance-based credit-enhancement fees accrued, the remaining losses may be recovered from future performance-based credit-enhancement fees payable to the participating financial institution.
Other Fees. We record other nonorigination fees in connection with our MPF program activities in other income. Such fees include delivery-commitment-extension fees, pair-off fees, price-adjustment fees, and counterparty fees in connection with MPF products under which we facilitate third party investment in loans (non-investment MPF products) such as with the MPF Xtra® product. Delivery-commitment-extension fees are charged when a participating financial institution requests to extend the period of the delivery commitment beyond the original stated expiration. Pair-off fees represent a make-whole provision; they are received when the amount funded under a delivery commitment is less than a certain threshold (under-delivery) of the delivery-commitment amount. Price-adjustment fees are received when the amount funded is greater than a certain threshold (over-delivery) of the delivery-commitment amount. To the extent that pair-off fees relate to under-deliveries of loans, they are recorded in service fee income. Fees related to over-deliveries represent purchase-price adjustments to the related loans acquired and are recorded as part of the carrying value of the loan. The FHLBank of Chicago pays us a counterparty fee for the costs and expenses of marketing activities for loans originated for sale under non-investment MPF products.
Mortgage-Loan Participations. We may purchase and sell participations in MPF loans from other FHLBanks from time to time. References to our investments in mortgage loans throughout this report include any participation interests we own.
Nonaccrual Loans. We place conventional mortgage loans on nonaccrual status when the collection of interest or principal is doubtful or contractual principal or interest is 90 days or more past due. When a conventional mortgage loan is placed on nonaccrual status, accrued but uncollected interest is reversed against interest income in the current period. We generally record cash payments received on nonaccrual loans first as interest income and then as a reduction of principal as specified in the contractual agreement unless we consider the collection of the remaining principal amount due to be doubtful. If we consider the collection of the remaining principal amount to be doubtful, cash payments received are applied first solely to principal until the remaining principal amount due is expected to be collected and then as a recovery of any charge-off, if applicable, followed by recording interest income. A loan on nonaccrual status may be restored to accrual status when the collection of the contractual principal and interest is less than 90 days past due. We do not place government mortgage loans on nonaccrual status when the collection of the contractual principal or interest is 90 days or more past due because of the U.S. government guarantee of the loan and the contractual obligations of each related servicer, as more fully discussed in Note 7 – Mortgage Loans Held for Portfolio.
Collateral-dependent Loans. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be substantially through the sale of the underlying collateral. A loan that is considered collateral-dependent is measured for credit loss on an individual basis based on the fair value of the underlying property less estimated selling costs, with any shortfall recognized as an allowance for credit losses or charged-off.
Charge-Off Policy. A charge-off is recorded if it is estimated that the recorded investment in a loan will not be recovered. The recorded investment in a loan is the unpaid principal balance of the loan, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts, hedging adjustments, and direct write-downs. We evaluate whether to record a charge-off on a conventional mortgage loan upon the occurrence of a confirming event. Confirming events include, but are not limited to, the occurrence of foreclosure or notification of a claim against any of the credit-enhancements. We charge off the portion of outstanding conventional mortgage loan balances in excess of fair value of the underlying property less estimated
selling costs, and adjusted for any available credit-enhancements for loans that are 180 or more days past due, when the borrower has filed for bankruptcy protection and the loan is at least 30 days past due, or when there is evidence of fraud.
Troubled Debt Restructurings. We consider a troubled debt restructuring (TDR) of a financing receivable to have occurred when we grant a concession to a borrower that we would not otherwise consider for economic or legal reasons related to the borrower's financial difficulties. We place conventional mortgage loans that are deemed to be TDRs as a result of our modification program on nonaccrual when payments are 60 days or more past due.
Section 4013 of the Coronavirus, Aid, Relief, and Economic Security Act (the CARES Act) provided optional temporary relief from the accounting and reporting requirements for TDRs for certain loan modifications related the adverse effects of Coronavirus Disease 2019 (COVID-19). On December 27, 2020, the Consolidated Appropriations Act, 2021, was signed into law amending the CARES Act. Specifically, the CARES Act, as amended, provided 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 applied to any modification related to an economic hardship as a result of the COVID-19 pandemic, including an interest rate modification, a repayment plan, or any similar arrangement that defers or delays payment of principal or interest, for a loan that was not more than 30 days past due as of December 31, 2019, and that occurs during the period beginning on March 1, 2020, and ending on the earlier of January 1, 2022, or the date that is 60 days following the termination of the national emergency related to the COVID-19 pandemic declared by the President of the United States. Beginning in the second quarter of 2020, we elected to apply the TDR relief provided by the CARES Act.
As such, all COVID-related modifications meeting the provisions of the CARES Act were excluded from TDR classification and accounting. We consider these loans to have a current payment status as long as payments are being made in accordance with the new terms. Alternatively, COVID-related modifications that did not meet the provisions of the CARES Act continued to be assessed for TDR classification under our existing accounting policies. Additionally, we continue to apply our delinquency, nonaccrual and charge-off policies during the forbearance period. We estimate the allowance for credit losses for COVID-related modifications in the same manner as other mortgage loans held for portfolio.
Derivatives and Hedging Activities
All derivatives are recognized on the statement of condition at fair value and are reported as either derivative assets or derivative liabilities, net of cash collateral and accrued interest received from or pledged to clearing members and/or counterparties. We offset fair-value amounts recognized for derivatives and fair-value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivatives recognized at fair value executed with the same clearing member and/or counterparty when the netting requirements have been met. If these netted amounts are positive, they are classified as an asset and, if negative, they are classified as a liability. Derivative assets and derivative liabilities reported on the statement of condition also include net accrued interest. Cash flows associated with derivatives are reflected as cash flows from operating activities in the statement of cash flows unless the derivative meets the criteria to be a financing derivative.
Each derivative is designated as one of the following:
•a qualifying hedge of the change in fair value of a recognized asset or liability or an unrecognized firm commitment (a fair value hedge);
•a qualifying hedge of a forecasted transaction (a cash-flow hedge); or
•a nonqualifying hedge of an asset or liability (an economic hedge) for asset-liability-management purposes.
We utilize two derivatives clearing organizations (DCOs), for all cleared derivative transactions, Chicago Mercantile Exchange, Inc. (CME Inc.) and LCH Limited (LCH Ltd.). At both DCOs, variation margin is characterized as daily settlement payments and initial margin is considered collateral.
Accounting for Fair-Value and Cash-Flow Hedges. If hedging relationships meet certain criteria, including, but not limited to, formal documentation of the hedging relationship and an expectation to be highly effective, they qualify for fair-value or cash-flow hedge accounting. For cash-flow hedges, we measure effectiveness using the hypothetical derivative method, which compares the cumulative change in fair value of the actual derivative designated as the hedging instrument to the cumulative
change in fair value of a hypothetical derivative having terms that identically match the critical terms of the hedged forecasted transaction.
Derivatives that are used in fair-value hedges are typically executed at the same time as the hedged items, and we designate the hedged item in a qualifying hedging relationship as of the trade date. We then record the changes in fair value of the derivative and the hedged item beginning on the trade date.
Changes in the fair value of a derivative that is designated and qualifies as a fair-value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, are recorded in net interest income in the same line as the earnings effect of the hedged item. Changes in the fair value of a derivative that is designated and qualifies as a cash-flow hedge are recorded in other comprehensive income, a component of capital, until the hedged transaction affects earnings.
Accounting for Economic Hedges. An economic hedge is defined as a derivative hedging specific or nonspecific assets, liabilities, or firm commitments that does not qualify or was not designated for fair-value or cash-flow hedge accounting, but is an acceptable hedging strategy under our risk-management policy. These economic hedging strategies also comply with FHFA regulatory requirements prohibiting speculative derivative transactions. An economic hedge introduces the potential for earnings variability caused by the changes in fair value of the derivatives that are recorded in income but not offset by corresponding changes in the fair value of the economically hedged assets, liabilities, or firm commitments. As a result, we recognize only the net interest and the change in fair value of these derivatives in other income (loss) as net gains (losses) on derivatives with no offsetting fair-value adjustments for the economically hedged assets, liabilities, or firm commitments.
Accrued Interest Receivable and Payable. The differential between accrual of interest receivable and payable on derivatives designated as a fair-value hedge or as a cash-flow hedge is recognized through adjustments to the interest income or interest expense of the designated hedged investment securities, advances, COs, or other financial instruments. The differential between accrual of interest receivable and payable on economic hedges is recognized in other income (loss), along with changes in fair value of these derivatives, as net gains (losses) on derivatives.
Discontinuance of Hedge Accounting. We may discontinue hedge accounting prospectively when:
•we determine that the derivative is no longer highly effective in offsetting changes in the fair value or cash flows of a hedged item attributable to the hedged risk (including hedged items such as firm commitments or forecasted transactions);
•the derivative and/or the hedged item expires or is sold, terminated, or exercised;
•it is no longer probable that the forecasted transaction in a cash-flow hedge will occur in the originally expected period or within the following two months;
•a hedged firm commitment in a fair-value hedge no longer meets the definition of a firm commitment; or
•we determine that designating the derivative as a hedging instrument is no longer appropriate.
If hedge accounting is discontinued because we determine that the derivative no longer qualifies as an effective fair-value hedge of an existing hedged item, we either terminate the derivative or continue to carry the derivative on the statement of condition at its fair value and cease to adjust the hedged asset or liability for changes in fair value. We will then begin to amortize the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using the level-yield method.
If hedge accounting is discontinued because we determine that the derivative no longer qualifies as an effective cash-flow hedge of an existing hedged item, we will continue to carry the derivative on the statement of condition at its fair value and amortize the cumulative other comprehensive income adjustment to earnings when earnings are affected by the existing hedged item.
If it is no longer probable that a forecasted transaction will occur by the end of the originally expected period or within two months thereafter, we immediately recognize in earnings the gain or loss that was in accumulated other comprehensive income.
If hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, we will continue to carry the derivative on the statement of condition at its fair value, removing from the statement of condition any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.
Embedded Derivatives. We may issue debt, make advances, or purchase financial instruments in which a derivative is embedded. Upon execution of these transactions, we assess whether the economic characteristics of the embedded derivative
are clearly and closely related to the economic characteristics of the remaining component of the debt, advance, or other financial instrument (the host contract) and whether a separate, nonembedded instrument with the same terms as the embedded instrument would meet the definition of a derivative. When we determine that (1) the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as a stand-alone derivative instrument. If the entire contract (the host contract and the embedded derivative) is to be measured at fair value, with changes in fair value reported in current earnings (for example, an investment security classified as trading, as well as hybrid financial instruments) or if we cannot reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract is carried on the statement of condition at fair value and no portion of the contract is designated as a hedging instrument. At December 31, 2021, and 2020, we had certain advances with embedded features that met the requirement to be separated from the host contract and designated the embedded features as stand-alone derivatives. The value of the embedded derivatives is included in total advances on the statement of condition. See Note 6 — Advances for the fair value of these embedded derivatives.
Premises, Software, Equipment and Leases
We record premises, software, and equipment at cost less accumulated depreciation and amortization and compute depreciation on a straight-line basis over estimated useful lives ranging from three years to 10 years. We amortize leasehold improvements on a straight-line basis over the shorter of the estimated useful life of the improvement or the remaining term of the lease. We capitalize improvements and major renewals but expense ordinary maintenance and repairs when incurred. We include gains and losses on disposal of premises, software, and equipment in other income (loss) on the statement of operations. The cost of purchased software and certain costs incurred in developing computer software for internal use are capitalized and amortized over future periods.
We lease office space and office equipment to run our business operations. For leases with a term of 12 months or less, we have made an accounting policy election to not recognize lease right-of-use assets and lease liabilities. At December 31, 2021 and 2020, we included in the statement of condition $5.4 million and $8.0 million, respectively, of lease right-of-use assets in other assets as well as $5.3 million and $8.0 million, respectively, of lease liabilities in other liabilities. We have recognized operating lease costs in other operating expenses on the statement of operations of $2.6 million for each of the years ended December 31, 2021 and 2020.
Consolidated Obligations
We record COs at amortized cost.
Discounts and Premiums. We accrete discounts and amortize premiums on COs to interest expense using the level-yield method over the contractual term to maturity of the CO.
Concessions on COs. We pay concessions to dealers in connection with the issuance of certain COs. The Office of Finance prorates the amounts paid to dealers based upon the percentage of debt issued that we assumed. We record concessions paid on COs as a direct reduction from their carrying amounts, consistent with the presentation of discounts on COs. These dealer concessions are amortized using the level-yield method over the contractual term to maturity of the COs. The amortization of those concessions is included in CO interest expense on the statement of operations.
Off-Balance Sheet Credit Exposures
Beginning January 1, 2020, we adopted the Financial Instruments - Credit Losses accounting guidance. Under this new guidance, we evaluate our off-balance sheet credit exposures on a quarterly basis for expected credit losses. If deemed necessary, an allowance for expected credit losses on these off-balance sheet exposures is recorded in other liabilities with a corresponding adjustment to the provision for credit losses.
Mandatorily Redeemable Capital Stock
We reclassify stock subject to redemption from equity to a liability after a member exercises a written redemption request, gives notice of intent to withdraw from membership, or attains nonmember status by merger or acquisition, charter termination, or other involuntary termination from membership, since the shares meet the definition of a mandatorily redeemable financial instrument upon such instances. Member shares meeting this definition are reclassified to a liability at fair value. Dividends declared on mandatorily redeemable capital stock are accrued at the expected dividend rate for Class B stock and reflected as
interest expense on the statement of operations. The repayment of these mandatorily redeemable financial instruments is reflected as cash outflows in the financing activities section of the statement of cash flows once settled.
We do not take into consideration our members' right to cancel a redemption request in determining when shares of capital stock should be classified as a liability because such cancellation would be subject to a cancellation fee equal to two percent of the par amount of the shares of Class B stock that is the subject of the redemption notice. If a member cancels its written notice of redemption or notice of withdrawal, we will reclassify mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock will no longer be classified as interest expense.
Restricted Retained Earnings
The joint capital enhancement agreement, as amended (the Joint Capital Agreement), provides that each FHLBank will, on a quarterly basis, contribute 20 percent of its net income to a separate restricted retained earnings account until the balance of that account, calculated as of the last day of each calendar quarter, equals at least 1 percent of that FHLBank's average balance of outstanding COs (excluding fair-value adjustments) for the calendar quarter. Throughout 2021, the balance in restricted retained earnings exceeded the threshold for the contribution requirement. Accordingly, no allocation of net income was made to restricted retained earnings during 2021 and no additional allocations of net income into restricted retained earnings is required until such time as the contribution requirement exceeds the balance in restricted retained earnings. Restricted retained earnings are not available to pay dividends, and we present them separate from other retained earnings on the statement of condition. Any amount of restricted retained earnings that exceeds 150 percent of the contribution requirement may be reclassified to unrestricted retained earnings. No reclassification from restricted retained earnings to unrestricted retained earnings occurred during 2021.
Litigation Settlements
Litigation settlement gains, net of related legal expenses, are recorded in other income (loss). A litigation settlement gain is considered realized and recorded when we receive cash or assets that are readily convertible to known amounts of cash or claims to cash. In addition, a litigation settlement gain is considered realizable and recorded when we enter into a signed agreement that is not subject to appeal, where the counterparty has the ability to pay, and the amount to be received can be reasonably estimated. Prior to being realized or realizable, we consider potential litigation settlement gains to be gain contingencies, and therefore they are not recorded in the statement of operations. The related legal expenses are contingent-based fees and are only incurred and recorded upon a litigation settlement gain.
FHFA Expenses
We fund a portion of the costs of operating the FHFA. The portion of the FHFA's expenses and working capital fund paid by the FHLBanks is allocated among the FHLBanks based on the ratio of each FHLBank's minimum required regulatory capital to the aggregate minimum required regulatory capital of every FHLBank. We must pay an amount equal to one-half of our annual assessment twice each year.
Office of Finance Expenses
Each FHLBank's proportionate share of Office of Finance operating and capital expenditures has been calculated using a formula based upon the following components: (1) two-thirds based upon each FHLBank's share of total COs outstanding and (2) one-third divided equally among the FHLBanks.
Assessments
Affordable Housing Program. The FHLBank Act requires us to establish and fund an AHP based on positive annual net earnings, providing grants to members to assist in the purchase, construction, or rehabilitation of housing for very low and low- or moderate-income households. We charge the required funding as well as any discretionary funding for the AHP to earnings and establish a liability, except when annual net earnings are zero or negative, in which case there is no requirement to fund an AHP. We also issue AHP advances at interest rates below the customary interest rate for nonsubsidized advances. A discount on the AHP advance and charge against the AHP liability is recorded for the present value of the variation in the cash flow caused by the difference in the interest rate between the AHP advance rate and our related cost of funds for comparable maturity funding. The discount on AHP advances is accreted to interest income on advances using the level-yield method over the life of the advance. See Note 11 — Affordable Housing Program for additional information.
Cash Flows
In the statement of cash flows, we consider noninterest bearing cash and due from banks as cash and cash equivalents. Federal funds sold and interest-bearing deposits are not treated as cash equivalents for purposes of the statement of cash flows, but are instead treated as short-term investments and are reflected in the investing activities section of the statement of cash flows.
Related-Party Activities
We define related parties as members who owned 10 percent or more of the voting interests of our outstanding capital stock at December 31, 2021. See Note 17 — Transactions with Shareholders for additional information.
Segment Reporting
We report on an enterprise-wide basis. The enterprise-wide method of evaluating our financial information reflects the manner in which the chief operating decision-maker manages the business.
Reclassification
Certain amounts in the 2020 and 2019 financial statements have been reclassified to conform to the financial statement presentation for the year ended December 31, 2021.
Note 3 — Recently Issued and Adopted Accounting Guidance
Effective Beginning in 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 GAAP to contract modifications, hedging relationships, and other transactions that reference LIBOR or a reference rate that is expected to be discontinued as a result of reference rate reform if certain criteria are met. This standard was effective upon issuance and the provisions generally can be applied prospectively as of January 1, 2020, through December 31, 2022.
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 were classified as held-to-maturity before January 1, 2020. In the third quarter of 2020, we adopted the provision of this guidance which allows a one-time election to sell, transfer, or both sell and transfer debt securities classified as held-to-maturity. See Note 5 — Investments for additional information related to these sales and transfers.
In the fourth quarter of 2020, we retrospectively elected to adopt the provision of this guidance specific to the modification of interest rates used for the discounting of derivative instruments. This did not have a material effect on our financial condition, results of operations, or cash flows.
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.
Note 4 — Cash and Due from Banks
Cash and due from banks includes cash on hand, cash items in the process of collection, compensating balances, and amounts due from correspondent banks and the Federal Reserve Bank of Boston.
Compensating Balances. We maintain collected cash balances with a commercial bank in return for certain services. The related agreement contains no legal restrictions on the withdrawal of funds. The average collected cash balance was $200.7 million and $176.3 million for the years ended December 31, 2021 and 2020, respectively.
Note 5 — Investments
Interest-Bearing Deposits, Securities Purchased under Agreements to Resell, and Federal Funds Sold
We invest in interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold to provide short-term liquidity. These investments are generally transacted with counterparties that have received, or whose guarantors have
received, a credit rating of triple-B or greater (investment grade) by a nationally recognized statistical rating organization (NRSRO), or the equivalent. At December 31, 2021 and 2020, none of these investments were made to counterparties or, if applicable, guaranteed by entities rated below single-A.
Securities purchased under agreements to resell are short-term and are structured such that they are evaluated daily to determine if the market value of the underlying securities decreases below the market value required as collateral (i.e. subject to collateral maintenance provisions). If so, the counterparty must place an amount of additional securities as collateral or remit an equivalent amount of cash sufficient to comply with collateral maintenance provisions, generally by the next business day. Based upon the collateral held as security and collateral maintenance provisions with our counterparties, we determined that no allowance for credit losses was needed for our securities purchased under agreements to resell at December 31, 2021 and 2020.
Federal funds sold are unsecured loans that are transacted on an overnight term or short-term basis. FHFA regulations include a limit on the amount of unsecured credit we may extend to a counterparty. All investments in interest-bearing deposits and federal funds sold outstanding as of December 31, 2021 and 2020, have been repaid according to the contractual terms. No allowance for credit losses was recorded for these assets at December 31, 2021 and 2020.
Debt Securities
We invest in debt securities, which are classified as either trading, available-for-sale, or held-to-maturity. We are prohibited by FHFA regulations from investing in certain higher-risk securities, such as equity securities and debt instruments that are not investment quality, other than certain investments targeted at low-income persons or communities, but we are not required to divest instruments that experience credit deterioration after their purchase.
Trading Securities
Table 5.1 - Trading Securities by Major Security Type
(dollars in thousands)
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Corporate bonds | $ | 1,442 | | | $ | 5,422 | |
| U.S. Treasury obligations | 500,425 | | | 3,596,718 | |
| 501,867 | | | 3,602,140 | |
| | | |
| MBS | | | |
| U.S. government-guaranteed – single-family | — | | | 2,884 | |
| GSE – single-family | — | | | 55 | |
| | | |
| — | | | 2,939 | |
| Total | $ | 501,867 | | | $ | 3,605,079 | |
Table 5.2 - Unrealized and Realized Gains (Losses) on Trading Securities
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, | | |
| | | 2021 | | 2020 | | 2019 | | | | | | |
| Net unrealized (losses) gains on trading securities held at year end | | $ | (9,049) | | | $ | (8,392) | | | $ | 1,379 | | | | | | | | | | | | | |
| Net unrealized and realized losses on trading securities sold or matured during the year | | (37,292) | | | (3,544) | | | (92) | | | | | | | | | | |
| Net (losses) gains on trading securities | | $ | (46,341) | | | $ | (11,936) | | | $ | 1,287 | | | | | | | | | | | | | |
We do not participate in speculative trading practices and typically hold these investments over a longer time horizon.
Available-for-sale Securities
Table 5.3 - Available-for-Sale Securities by Major Security Type
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | | | Amounts Recorded in Accumulated Other Comprehensive Income | | |
| | Amortized Cost (1) | | Unrealized
Gains | | Unrealized
Losses | | Fair
Value |
| U.S. Treasury obligations | $ | 5,081,536 | | | $ | 3,380 | | | $ | (370) | | | $ | 5,084,546 | |
| State housing-finance-agency obligations (HFA securities) | 63,330 | | | 2 | | | (1,067) | | | 62,265 | |
| Supranational institutions | 409,337 | | | 96 | | | (5,668) | | | 403,765 | |
| | | | | | | |
| U.S. government-owned corporations | 325,567 | | | — | | | (18,703) | | | 306,864 | |
| GSE | 130,143 | | | — | | | (3,671) | | | 126,472 | |
| | 6,009,913 | | | 3,478 | | | (29,479) | | | 5,983,912 | |
| MBS | | | | | | | |
| U.S. government guaranteed – single-family | 21,435 | | | 100 | | | — | | | 21,535 | |
| U.S. government guaranteed – multifamily | 541,238 | | | 219 | | | (52) | | | 541,405 | |
| GSE – single-family | 1,093,890 | | | 9,945 | | | (121) | | | 1,103,714 | |
| GSE – multifamily | 5,171,498 | | | 99,119 | | | (25,196) | | | 5,245,421 | |
| | 6,828,061 | | | 109,383 | | | (25,369) | | | 6,912,075 | |
| Total | $ | 12,837,974 | | | $ | 112,861 | | | $ | (54,848) | | | $ | 12,895,987 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| | | | Amounts Recorded in Accumulated Other Comprehensive Income | | |
| | Amortized Cost (1) | | Unrealized
Gains | | Unrealized
Losses | | Fair
Value |
| HFA securities | $ | 126,930 | | | $ | — | | | $ | (4,381) | | | $ | 122,549 | |
| Supranational institutions | 442,225 | | | — | | | (12,156) | | | 430,069 | |
| U.S. government-owned corporations | 350,052 | | | — | | | (27,991) | | | 322,061 | |
| GSE | 140,136 | | | — | | | (5,144) | | | 134,992 | |
| | 1,059,343 | | | — | | | (49,672) | | | 1,009,671 | |
| MBS | | | | | | | |
| U.S. government guaranteed – single-family | 29,148 | | | 260 | | | — | | | 29,408 | |
| U.S. government guaranteed – multifamily | 46,829 | | | 351 | | | — | | | 47,180 | |
| GSE – single-family | 1,442,282 | | | 26,790 | | | (24) | | | 1,469,048 | |
| GSE – multifamily | 3,593,978 | | | 70,863 | | | — | | | 3,664,841 | |
| | 5,112,237 | | | 98,264 | | | (24) | | | 5,210,477 | |
| Total | $ | 6,171,580 | | | $ | 98,264 | | | $ | (49,696) | | | $ | 6,220,148 | |
_______________________
(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 $31.6 million and $24.0 million at December 31, 2021 and 2020, respectively.
Table 5.4 - Available-for-Sale Securities in a Continuous Unrealized Loss Position
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | 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 |
| U.S. Treasury obligations | $ | 1,212,443 | | | $ | (370) | | | $ | — | | | $ | — | | | $ | 1,212,443 | | | $ | (370) | |
| HFA securities | — | | | — | | | 50,053 | | | (1,067) | | | 50,053 | | | (1,067) | |
| Supranational institutions | — | | | — | | | 389,180 | | | (5,668) | | | 389,180 | | | (5,668) | |
| U.S. government-owned corporations | — | | | — | | | 306,864 | | | (18,703) | | | 306,864 | | | (18,703) | |
| GSE | — | | | — | | | 126,472 | | | (3,671) | | | 126,472 | | | (3,671) | |
| 1,212,443 | | | (370) | | | 872,569 | | | (29,109) | | | 2,085,012 | | | (29,479) | |
| | | | | | | | | | | |
| MBS | | | | | | | | | | | |
| | | | | | | | | | | |
| U.S. government guaranteed – multifamily | 187,437 | | | (52) | | | — | | | — | | | 187,437 | | | (52) | |
| GSE – single-family | 93,020 | | | (121) | | | — | | | — | | | 93,020 | | | (121) | |
| GSE – multifamily | 1,507,051 | | | (25,196) | | | — | | | — | | | 1,507,051 | | | (25,196) | |
| 1,787,508 | | | (25,369) | | | — | | | — | | | 1,787,508 | | | (25,369) | |
| Total | $ | 2,999,951 | | | $ | (25,739) | | | $ | 872,569 | | | $ | (29,109) | | | $ | 3,872,520 | | | $ | (54,848) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| | Continuous Unrealized Loss Less than 12 Months | | Continuous Unrealized Loss 12 Months or More | | Total |
| | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses |
| HFA securities | $ | — | | | $ | — | | | $ | 109,780 | | | $ | (4,381) | | | $ | 109,780 | | | $ | (4,381) | |
| Supranational institutions | — | | | — | | | 430,069 | | | (12,156) | | | 430,069 | | | (12,156) | |
| U.S. government-owned corporations | — | | | — | | | 322,061 | | | (27,991) | | | 322,061 | | | (27,991) | |
| GSE | — | | | — | | | 134,992 | | | (5,144) | | | 134,992 | | | (5,144) | |
| | — | | | — | | | 996,902 | | | (49,672) | | | 996,902 | | | (49,672) | |
| MBS | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| GSE – single-family | — | | | — | | | 10,271 | | | (24) | | | 10,271 | | | (24) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total | $ | — | | | $ | — | | | $ | 1,007,173 | | | $ | (49,696) | | | $ | 1,007,173 | | | $ | (49,696) | |
Table 5.5 - Available-for-Sale Securities by Contractual Maturity
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Year of Maturity | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value |
| Due in one year or less | $ | 27,000 | | | $ | 26,780 | | | $ | 10,600 | | | $ | 10,524 | |
| Due after one year through five years | 1,898,894 | | | 1,898,308 | | | 169,570 | | | 166,813 | |
| Due after five years through 10 years | 3,674,762 | | | 3,671,798 | | | 400,477 | | | 389,753 | |
| Due after 10 years | 409,257 | | | 387,026 | | | 478,696 | | | 442,581 | |
| | 6,009,913 | | | 5,983,912 | | | 1,059,343 | | | 1,009,671 | |
MBS (1) | 6,828,061 | | | 6,912,075 | | | 5,112,237 | | | 5,210,477 | |
| Total | $ | 12,837,974 | | | $ | 12,895,987 | | | $ | 6,171,580 | | | $ | 6,220,148 | |
_______________________
(1) MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay obligations with or without call or prepayment fees.
Held-to-Maturity Securities
Table 5.6 - Held-to-Maturity Securities by Major Security Type
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | Amortized Cost(1) | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding Losses | | Fair Value |
| | | | | | | |
| MBS | | | | | | | |
| U.S. government guaranteed – single-family | $ | 4,320 | | | $ | 88 | | | $ | — | | | $ | 4,408 | |
| | | | | | | |
| GSE – single-family | 141,172 | | | 2,605 | | | (117) | | | 143,660 | |
| | | | | | | |
| Total | $ | 145,492 | | | $ | 2,693 | | | $ | (117) | | | $ | 148,068 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| | Amortized Cost(1) | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding Losses | | Fair Value |
| | | | | | | |
| MBS | | | | | | | |
| U.S. government guaranteed – single-family | $ | 5,388 | | | $ | 103 | | | $ | — | | | $ | 5,491 | |
| | | | | | | |
| GSE – single-family | 201,774 | | | 4,681 | | | (109) | | | 206,346 | |
| | | | | | | |
| Total | $ | 207,162 | | | $ | 4,784 | | | $ | (109) | | | $ | 211,837 | |
_______________________
(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 $200 thousand and $368 thousand at December 31, 2021 and 2020, respectively.
Transfers and Sales of Available-for-Sale Securities and Held-to-Maturity Securities
During the years ended December 31, 2021, 2020, and 2019, we sold held-to-maturity MBS that had less than 15 percent of the acquired principal outstanding at the time of the sale. Such sales are treated as maturities for the purposes of security classification. These sales do not impact our ability and intent to hold the remaining investments classified as held-to-maturity through their stated maturity dates. These sales were as follows:
•In 2021, we sold securities with an amortized cost of $5.6 million and a realized gain of $283 thousand.
•In 2020, we sold securities with an amortized cost of $133.2 million and realized a gain of $41.2 million.
•In 2019, we sold securities with an amortized cost of $173.2 million and realized a gain of $12.0 million.
As discussed in Note 3 - Recently Issued and Adopted Accounting Guidance, during 2020 we adopted a provision of the Accounting Standards Update titled Facilitation of the Effects of Reference Rate Reform on Financial Reporting which provides a one-time election to sell, transfer, or both sell and transfer debt securities classified as held-to-maturity that reference a rate affected by reference rate reform and that were classified as held-to-maturity before January 1, 2020. Upon adopting this provision, we:
•sold certain held-to-maturity private-label MBS which had an amortized cost of $82.2 million and realized a net gain of $6.2 million; and
•transferred from held-to-maturity to available-for-sale certain securities which, on the date of transfer, were comprised of the following:
Table 5.7 - Transfer of Held-to-Maturity Securities to Available-for-Sale Securities in 2020
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost | | Allowance for Credit Losses | | Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Income | | Carrying Value | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding Losses | | Fair Value |
| HFA securities | $ | 77,470 | | | $ | — | | | $ | — | | | $ | 77,470 | | | $ | — | | | $ | (6,230) | | | $ | 71,240 | |
| MBS GSE – single-family | 17,802 | | | — | | | — | | | 17,802 | | | 89 | | | — | | | 17,891 | |
| MBS - Private-label | 158,945 | | | (634) | | | (31,502) | | | 126,809 | | | 53,953 | | | (248) | | | 180,514 | |
| Total | $ | 254,217 | | | $ | (634) | | | $ | (31,502) | | | $ | 222,081 | | | $ | 54,042 | | | $ | (6,478) | | | $ | 269,645 | |
Gains and Losses on Sales. We compute gains and losses on sales of investment securities using the specific identification method and include these gains and losses in other income (loss). The following table summarizes the proceeds from sale and gains and losses on sales of securities for the years ended December 31, 2021, 2020, and 2019.
Table 5.8 - Proceeds and Gains (Losses) from Sales of Investment Securities
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Available-for-Sale Securities | | | | | | |
| Proceeds from sale | | $ | — | | | $ | 187,366 | | | $ | — | |
| Amortized cost, net of allowance for credit losses | | — | | | 156,783 | | | — | |
| | | | | | |
| Gross realized gains from sale | | $ | — | | | $ | 30,948 | | | $ | — | |
| Gross realized losses from sale | | — | | | (365) | | | — | |
| Realized net gain from sale | | $ | — | | | $ | 30,583 | | | $ | — | |
| | | | | | |
| Held-to-Maturity Securities | | | | | | |
| Proceeds from sale | | $ | 5,883 | | | $ | 262,850 | | | $ | 185,177 | |
| Carrying value | | 5,600 | | | 176,293 | | | 143,629 | |
| Noncredit losses recorded in accumulated other comprehensive income | | — | | | 39,144 | | | 29,517 | |
| Realized net gain from sale | | $ | 283 | | | $ | 47,413 | | | $ | 12,031 | |
Allowance for Credit Losses on Available-for-Sale Securities and Held-to-Maturity Securities
Table 5.9 - Allowance for Credit Losses on Debt Securities
(dollars in thousands)
| | | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2020 |
| | Available-for-Sale | | Held-to-Maturity |
| Balance at beginning of year | | $ | — | | | $ | — | |
Adjustments for cumulative effect of change in accounting principle(1) | | — | | | 5,308 | |
| Transfers | | 634 | | | (634) | |
| Reduction of provision for credit losses due to sales of securities | | (126) | | | (3,205) | |
| Reduction of provision for credit losses | | (143) | | | (1,469) | |
| Charge-offs | | (365) | | | — | |
| Balance at end of year | | $ | — | | | $ | — | |
_________________________
(1) We adopted new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020. Upon adoption 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.
To evaluate investment securities for credit loss at December 31, 2021, we employed the following methodologies, based on the type of security.
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. Our available-for-sale and held-to-maturity securities are principally debt securities of GSE or U.S. government-owned corporations, supranational institutions, and state or local housing finance agency obligations, and MBS issued by Ginnie Mae, Freddie Mac, and Fannie Mae that are backed by single-family or multifamily mortgage loans. We only purchase investment-grade securities. At December 31, 2021 and 2020, all available-for-sale securities and held-to-maturity securities were rated triple-B, or above, by an NRSRO, based on the lowest long-term credit rating for each security.
We evaluate 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 December 31, 2021, 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 material payment defaults on the instruments. In addition, substantially all of these securities carry an implicit or explicit government guarantee. As a result, no allowance for credit losses was recorded on available-for-sale securities at December 31, 2021. See Table 5.9 for the allowance for credit losses on available-for-sale securities at December 31, 2020.
We evaluate held-to-maturity securities for impairment on a collective or pooled basis unless an individual assessment is deemed necessary because the securities do not possess similar risk characteristics. As of December 31, 2021, we had not established an allowance for credit losses on any of our held-to-maturity securities because the securities: (1) were all highly-rated and/or had short remaining terms to maturity, (2) had not experienced, nor do we expect to experience, any payment default on the instruments, and (3) in the case of U.S. or GSE obligations, carry an implicit or explicit government guarantee such that we consider the risk of nonpayment to be zero.
Table 5.10 presents a roll forward of the amount of credit losses recognized in earnings prior to January 1, 2020, for which a portion of other-than-temporary impairment was recognized in other comprehensive income.
Table 5.10 - Roll Forward of the Amounts Related to Credit Loss Recognized into Earnings
(dollars in thousands)
| | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | |
| | | 2020 | | 2019 | | |
| Balance at beginning of year | | $ | 339,630 | | | $ | 422,035 | | | |
| Additions: | | | | | | |
| Credit losses for which other-than-temporary impairment was not previously recognized | | — | | | 128 | | | |
| Additional credit losses for which an other-than-temporary impairment charge was previously recognized | | — | | | 1,084 | | | |
| Reductions: | | | | | | |
| Securities sold or matured during the year | | (332,290) | | | (56,710) | | | |
| Portion of increase in cash flows expected to be collected over the remaining life of the security that are recognized in the current period as interest income | | (7,340) | | | (26,907) | | | |
| Balance at end of year | | $ | — | | | $ | 339,630 | | | |
Note 6 — Advances
General Terms. We offer a wide range of fixed- and variable-rate advance products with different maturities, interest rates, payment characteristics, and optionality. Advances have maturities ranging from one day to 30 years or longer with the approval of our credit committee. At both December 31, 2021 and 2020, we had advances outstanding with interest rates
ranging from 0.00 percent to 7.72 percent. Additionally, certain advances 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 6.1 - Advances Outstanding by Year of Contractual Maturity
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Amount | | Weighted
Average
Rate | | Amount | | Weighted
Average
Rate |
| Overdrawn demand-deposit accounts | $ | 64 | | | 0.60 | % | | $ | 135 | | | 0.62 | % |
| Due in one year or less | 5,064,776 | | | 0.76 | | | 9,090,900 | | | 1.00 | |
| Due after one year through two years | 1,354,297 | | | 2.26 | | | 2,281,047 | | | 1.78 | |
| Due after two years through three years | 1,541,076 | | | 1.64 | | | 2,014,880 | | | 2.37 | |
| Due after three years through four years | 2,173,238 | | | 1.43 | | | 1,685,056 | | | 1.79 | |
| Due after four years through five years | 1,310,971 | | | 1.07 | | | 2,687,456 | | | 1.34 | |
| Due after five years through fifteen years | 871,692 | | | 2.11 | | | 924,498 | | | 2.40 | |
| Thereafter | 31,591 | | | 1.33 | | | 20,540 | | | 1.46 | |
| Total par value | 12,347,705 | | | 1.28 | % | | 18,704,512 | | | 1.43 | % |
| Premiums | — | | | | | 2,248 | | | |
| Discounts | (34,926) | | | | | (37,592) | | | |
Fair value of bifurcated derivatives (1) | 11,890 | | | | | 44,534 | | | |
| Hedging adjustments | 15,351 | | | | | 103,300 | | | |
Total (2) | $ | 12,340,020 | | | | | $ | 18,817,002 | | | |
_________________________
(1) At December 31, 2021 and 2020, we had certain advances with embedded features that met the requirements to be separated from the host contract and designated as stand-alone derivatives.
(2) Excludes accrued interest receivable of $16.3 million and $25.8 million at December 31, 2021 and 2020, respectively.
We offer advances to members and eligible nonmembers that provide the borrower the right, based upon predetermined option exercise dates, to repay the advance prior to maturity without incurring prepayment or termination fees (callable advances). We also offer certain floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees. Other advances may only be prepaid by paying a fee (prepayment fee) that makes us financially indifferent to the prepayment of the advance.
Table 6.2 - Advances Outstanding by Year of Contractual Maturity or Next Call Date
(dollars in thousands)
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Overdrawn demand-deposit accounts | $ | 64 | | | $ | 135 | |
| Due in one year or less | 6,116,251 | | | 10,149,975 | |
| Due after one year through two years | 1,354,297 | | | 2,095,247 | |
| Due after two years through three years | 1,249,001 | | | 1,809,880 | |
| Due after three years through four years | 2,106,238 | | | 1,392,981 | |
| Due after four years through five years | 632,271 | | | 2,335,956 | |
| Due after five years through fifteen years | 857,992 | | | 899,798 | |
| Thereafter | 31,591 | | | 20,540 | |
| Total par value | $ | 12,347,705 | | | $ | 18,704,512 | |
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 6.3 - Advances Outstanding by Year of Contractual Maturity or Next Put Date
(dollars in thousands)
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Overdrawn demand-deposit accounts | $ | 64 | | | $ | 135 | |
| Due in one year or less | 6,088,201 | | | 10,755,575 | |
| Due after one year through two years | 908,797 | | | 2,201,797 | |
| Due after two years through three years | 1,497,076 | | | 1,224,380 | |
| Due after three years through four years | 1,709,313 | | | 1,593,056 | |
| Due after four years through five years | 1,277,471 | | | 2,059,531 | |
| Due after five years through fifteen years | 835,192 | | | 849,498 | |
| Thereafter | 31,591 | | | 20,540 | |
| Total par value | $ | 12,347,705 | | | $ | 18,704,512 | |
Table 6.4 - Advances by Current Interest Rate Terms
(dollars in thousands)
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Fixed-rate | | | |
| Due in one year or less | $ | 3,803,476 | | | $ | 8,224,435 | |
| Due after one year | 6,195,290 | | | 8,518,167 | |
| Total fixed-rate | 9,998,766 | | | 16,742,602 | |
| | | |
| Variable-rate | | | |
| Due in one year or less | 1,261,364 | | | 866,600 | |
| Due after one year | 1,087,575 | | | 1,095,310 | |
| Total variable-rate | 2,348,939 | | | 1,961,910 | |
| Total par value | $ | 12,347,705 | | | $ | 18,704,512 | |
Credit Risk Exposure and Security Terms. Our advances are primarily made to member financial institutions, including 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.
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.
In addition, in the case of any community financial institution, as defined in accordance with the FHLBank Act, we may accept as collateral secured loans for small-business and agriculture, or securities representing a whole interest in such secured loans.
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. The Bank has a lien on and holds the stock of a member in the Bank as further collateral security for all indebtedness of the member to the Bank. Collateral arrangements may vary depending upon borrower credit quality, financial condition, performance, borrowing capacity, and our overall credit exposure to the borrower. We can call for additional or substitute collateral to further safeguard our security interest. We also have policies and procedures for validating the reasonableness of our collateral valuations. In addition, we perform collateral verifications based on the risk profile of the borrower and other considerations. Management believes that these policies effectively manage our credit risk from advances.
We either allow the borrower to retain possession of loan collateral pledged to us while agreeing to hold such collateral for our benefit or require the borrower to specifically assign or place physical possession of such loan collateral with us or a third-party custodian under a tri-party collateral control agreement that we approve.
We are provided an additional safeguard for our security interests by Section 10(e) of the FHLBank Act, which generally affords any security interest granted by a borrower to the Bank priority over the claims and rights of any other party. The exceptions to this prioritization are limited to claims that would be entitled to priority under otherwise applicable law and are held by bona fide purchasers for value or by secured parties with higher priority perfected security interests. The priority granted to our security interests under Section 10(e) of the FHLBank Act may not apply when lending to insurance company members due to the anti-preemption provision contained in the McCarran-Ferguson Act, which provides that federal law does not preempt state insurance law unless the federal law expressly regulates the business of insurance. Thus, if state law conflicts with Section 10(e) of the FHLBank Act, the protection afforded by this provision may not be available to us. However, we perfect our security interests in the collateral pledged by our members, including insurance company members, by filing Uniform Commercial Code (UCC)-1 financing statements, taking possession or control of such collateral, or taking other appropriate steps.
Using a risk-based approach and taking into consideration each borrower's financial strength, we consider the types and level of collateral to be the primary indicator of credit quality on our credit products. At December 31, 2021 and 2020, we had rights to collateral, on a borrower-by-borrower basis, with an estimated value in excess of our outstanding extensions of credit.
We continue to evaluate and make changes to our collateral guidelines based on market conditions. At December 31, 2021 and 2020, none of our advances were past due, on nonaccrual status, or considered impaired. In addition, there were no troubled debt restructurings related to advances during the years ended December 31, 2021 and 2020.
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 December 31, 2021, and 2020.
Prepayment Fees. We record prepayment fees received from borrowers on certain prepaid advances net of any associated basis adjustments related to hedging activities on those advances and net of deferred prepayment fees on advance prepayments considered to be loan modifications. Additionally, for certain advances products, the prepayment-fee provisions of the advance agreement could result in either a payment from the borrower or to the borrower when such an advance is prepaid, based upon market conditions at the time of prepayment (referred to as a symmetrical prepayment fee). Advances with a symmetrical prepayment fee provision are hedged with derivatives containing offsetting terms, so that we are financially indifferent to the borrower's decision to prepay such advances. The net amount of prepayment fees is reflected as interest income in the statement of operations.
We also offer an advance restructuring program under which the prepayment fee on prepaid advances may be satisfied by the borrower's agreement to pay an interest rate on a new advance sufficient to amortize the prepayment fee by the maturity date of the new advance, rather than paying the fee in immediately available funds to us. If we conclude an advance restructuring is an extinguishment of the prior loan rather than a modification, the deferred prepayment fee is recognized into income immediately.
Table 6.5 - Advances Prepayment Fees
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, | | |
| | | 2021 | | 2020 | | 2019 | | |
| Prepayment fees received from borrowers | | $ | 54,537 | | | $ | 32,340 | | | $ | 33,809 | | | |
| Hedging fair-value adjustments on prepaid advances | | (6,356) | | | (8,013) | | | 1,923 | | | |
| Net (premiums) discounts associated with prepaid advances | | (14,162) | | | (299) | | | 157 | | | |
| Deferred recognition of prepayment fees received from borrowers on advance prepayments deemed to be loan modifications | | — | | | — | | | (1,793) | | | |
| Prepayment fees recognized in income on advance restructurings deemed to be extinguishments | | — | | | — | | | 915 | | | |
| Advance prepayment fees recognized in income, net | | $ | 34,019 | | | $ | 24,028 | | | $ | 35,011 | | | |
Note 7 — 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. The mortgage loans are typically originated and credit-enhanced by the related participating financial institution. The majority of these loans are serviced by the originating institution or an affiliate thereof. However, a portion of these loans are sold servicing-released by the participating financial institution and serviced by a third-party servicer.
Table 7.1 - Mortgage Loans Held for Portfolio
(dollars in thousands)
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Real estate | | | |
| Fixed-rate 15-year single-family mortgages | $ | 278,393 | | | $ | 322,713 | |
| Fixed-rate 20- and 30-year single-family mortgages | 2,793,682 | | | 3,547,994 | |
| Premiums | 48,043 | | | 60,050 | |
| Discounts | (671) | | | (1,094) | |
| Deferred derivative gains, net | 2,412 | | | 3,689 | |
Total mortgage loans held for portfolio(1) | 3,121,859 | | | 3,933,352 | |
| Less: allowance for credit losses | (1,700) | | | (3,100) | |
| Total mortgage loans, net of allowance for credit losses | $ | 3,120,159 | | | $ | 3,930,252 | |
________________________(1) Excludes accrued interest receivable of $15.7 million and $19.3 million at December 31, 2021 and 2020, respectively.
Table 7.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type
(dollars in thousands)
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Conventional mortgage loans | $ | 2,880,354 | | | $ | 3,624,557 | |
| Government mortgage loans | 191,721 | | | 246,150 | |
| Total par value | $ | 3,072,075 | | | $ | 3,870,707 | |
Credit-Enhancements. Our allowance for credit losses factors in the credit-enhancements associated with conventional mortgage loans under the MPF program. These credit-enhancements apply after the homeowner's equity is exhausted and can include primary and/or supplemental mortgage insurance or other kinds of credit-enhancement. The credit risk analysis of our conventional loans is performed at the individual master commitment level to determine the credit-enhancements available to recover losses on loans under each individual master commitment. The credit-enhancement amounts estimated to protect us against credit losses are determined through the use of a model. Any incurred losses that would be recovered from the credit-
enhancements are not reserved as part of our allowance for loan losses. In such cases, a receivable is generally established to reflect the expected recovery from credit-enhancement arrangements.
Assets delivered to us must be credit enhanced to an equivalent of a single-A-minus rated MBS. We share the risk of credit losses on our investments in mortgage loans with the related participating financial institution by structuring potential losses on these investments into layers with respect to each master commitment. We analyze the risk characteristics of our mortgage loans using a third-party model to determine the credit-enhancement amount at the time of purchase. This credit-enhancement amount is broken into two parts: the Bank's first-loss account and the participating financial institution's credit-enhancement obligation, which may be calculated based on the risk analysis to equal the difference between the amounts needed for the master commitment to have a rating equivalent to a single-A-minus rated MBS and our initial first-loss account exposure.
The first-loss account represents the first layer or portion of credit losses that we absorb with respect to our investments in mortgage loans after considering the borrower's equity and primary mortgage insurance. The participating financial institution is required to cover the next layer of losses up to an agreed-upon credit-enhancement obligation amount, which may consist of a direct liability of the participating financial institution to pay credit losses up to a specified amount, a contractual obligation of a participating financial institution to provide supplemental mortgage insurance, or a combination of both. We absorb any remaining unallocated losses.
Credit and special hazard losses that are not covered by the liquidation value of the real property or primary mortgage insurance are first charged to us, with a corresponding reduction of the first-loss account for that master commitment up to the amount in the first-loss account at that time. Over time, the first-loss account may cover the credit losses on a master commitment, although excessive losses might not be so covered. In that case, the excess losses would be charged to the participating financial institution's credit-enhancement amount, then to us after the participating financial institution's credit-enhancement amount has been exhausted.
For loans in which we buy or sell participations from or to other FHLBanks that participate in the MPF program (MPF Banks), the amount of the first-loss account remaining to absorb losses for loans that we own is partly dependent on the percentage of our participation in such loans. Assuming losses occur on a proportional basis between loans that we own and loans owned by other MPF Banks, at December 31, 2021 and 2020, the amount of first-loss account remaining for losses allocable to us was $31.9 million and $30.4 million, respectively.
Participating financial institutions are paid a credit-enhancement fee for assuming credit risk and in some instances all or a portion of the credit-enhancement fee may be performance based. For certain MPF products, our losses incurred under the first-loss account can be mitigated by withholding future performance-based credit-enhancement fees that would otherwise be payable to the participating financial institutions. We record credit-enhancement fees paid to participating financial institutions as a reduction to mortgage-loan-interest income.
Withheld performance-based credit-enhancement fees can mitigate losses from our investments in mortgage loans and therefore we consider our expectations for each master commitment for such withheld fees in determining the allowance for loan losses. More specifically, we determine the amount of credit-enhancement fees available to mitigate losses as follows: accrued credit-enhancement fees to be paid to participating financial institutions; plus projected credit-enhancement fees to be paid to the participating financial institutions using the weighted average life of the loans within each relevant master commitment; minus any losses incurred or expected to be incurred.
Relief to Borrowers During the COVID-19 Pandemic. We have elected to apply Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to our loan modifications that qualify under the CARES Act. As a result, we have elected to suspend troubled debt restructuring accounting for eligible modifications under Section 4013 of the CARES Act. As of December 31, 2021, we had $37.1 million of these modifications outstanding. See Note 2 — Summary of Significant Accounting Policies for additional information.
Servicers of our mortgage loans granted a forbearance period to eligible borrowers who have requested forbearance based on COVID-19 related difficulties so long as the loan is current or no more than 31 days delinquent at the time of the request. We continue to apply our accounting policy for past due loans and charge-offs to loans during the forbearance period unless there is a legal modification made to update the terms of the mortgage loan contract. The accrual status for loans under forbearance will be driven by the past due status of the loan based on its contractual terms.
As of December 31, 2021, we held approximately $15.7 million in par value of conventional mortgage loans that were in a forbearance plan as a result of COVID-19. Of these loans, $2.5 million had a current payment status, $1.1 million were 30 to 59 days past due, $1.1 million were 60 to 89 days past due, and $11.0 million were greater than 90 days past due and in nonaccrual
status. The $15.7 million of conventional mortgage loans in forbearance represents 0.5 percent of our mortgage loans held for portfolio at December 31, 2021. In addition, we had approximately $2.2 million in par value of government mortgage loans in a forbearance plan as a result of COVID-19.
Payment Status of Mortgage Loans. Payment status is a key credit quality indicator for conventional mortgage loans and allows us to monitor borrower performance. A past due loan is one where the borrower has failed to make a full payment of principal and interest within 30 days of its due date. Other delinquency statistics include nonaccrual loans and loans in process of foreclosure. Tables 7.3 and 7.4 present the payment status for conventional mortgage loans and other delinquency statistics for all mortgage loans at December 31, 2021 and 2020.
Table 7.3 - Credit Quality Indicator for Conventional Mortgage Loans
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Year of Origination | | |
Payment Status at Amortized Cost(1) | | Prior to 2017 | | 2017 to 2021 | | Total |
| Past due 30-59 days delinquent | | $ | 7,719 | | | $ | 8,053 | | | $ | 15,772 | |
| Past due 60-89 days delinquent | | 3,312 | | | 2,660 | | | 5,972 | |
| Past due 90 days or more delinquent | | 11,932 | | | 9,196 | | | 21,128 | |
| Total past due | | 22,963 | | | 19,909 | | | 42,872 | |
| Total current loans | | 1,153,115 | | | 1,730,438 | | | 2,883,553 | |
| Total conventional mortgage loans | | $ | 1,176,078 | | | $ | 1,750,347 | | | $ | 2,926,425 | |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Year of Origination | | |
Payment Status at Amortized Cost(1) | | Prior to 2016 | | 2016 to 2020 | | Total |
| Past due 30-59 days delinquent | | $ | 11,743 | | | $ | 25,058 | | | $ | 36,801 | |
| Past due 60-89 days delinquent | | 5,263 | | | 11,178 | | | 16,441 | |
| Past due 90 days or more delinquent | | 20,894 | | | 43,529 | | | 64,423 | |
| Total past due | | 37,900 | | | 79,765 | | | 117,665 | |
| Total current loans | | 1,246,691 | | | 2,317,975 | | | 3,564,666 | |
| Total conventional mortgage loans | | $ | 1,284,591 | | | $ | 2,397,740 | | | $ | 3,682,331 | |
_________________________(1) Amortized cost excludes accrued interest receivable.
Table 7.4 - Other Delinquency Statistics of Mortgage Loans
(dollars in thousands)
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Amortized Cost in Conventional Mortgage Loans | | Amortized Cost in Government Mortgage Loans | | Total |
In process of foreclosure (1) | $ | 786 | | | $ | 935 | | | $ | 1,721 | |
Serious delinquency rate (2) | 0.74 | % | | 2.24 | % | | 0.83 | % |
| Past due 90 days or more still accruing interest | $ | — | | | $ | 4,383 | | | $ | 4,383 | |
Loans on nonaccrual status (3) | $ | 21,529 | | | $ | — | | | $ | 21,529 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Amortized Cost in Conventional Mortgage Loans | | Amortized Cost in Government Mortgage Loans | | Total |
In process of foreclosure (1) | $ | 1,762 | | | $ | 1,041 | | | $ | 2,803 | |
Serious delinquency rate (2) | 1.75 | % | | 6.04 | % | | 2.02 | % |
| Past due 90 days or more still accruing interest | $ | — | | | $ | 5,592 | | | $ | 5,592 | |
Loans on nonaccrual status (4) | $ | 65,039 | | | $ | 10,101 | | | $ | 75,140 | |
_______________________(1) Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported. There were foreclosure moratoriums enacted in many areas during 2020 that expired on July 31, 2021, but an eviction moratorium was extended by the FHFA to September 30, 2021.
(2) Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the recorded investment in the total loan portfolio class.
(3) As of December 31, 2021, $11.8 million of conventional mortgage loans on nonaccrual status did not have an associated allowance for credit losses because these loans were either charged off or the fair value of the underlying collateral, including any credit enhancements, is greater than the amortized cost of the loans.
(4) As of December 31, 2020, $31.8 million of conventional mortgage loans on nonaccrual status did not have an associated allowance for credit losses because these loans were either charged off or the fair value of the underlying collateral, including any credit enhancements, is greater than the amortized cost of the loans. As of December 31, 2020, $10.1 million of government nonaccrual loans did not have an associated allowance due to government guarantees or insurance.
Allowance for Credit Losses for Mortgage Loans.
Conventional Mortgage Loans. Conventional loans are evaluated collectively when similar risk characteristics exist. Conventional loans that do not share risk characteristics with other loans are evaluated for expected credit losses on an individual basis. We determine our allowance for credit losses on conventional loans through analyses that include consideration of various loan portfolio and collateral-related characteristics, such as past performance, current conditions, and reasonable and supportable forecasts of expected economic conditions. We use a discounted cash flow model to project our expected losses. We use a third-party model to project cash flows to estimate the expected credit losses over the life of the loans. The model relies on a number of inputs, such as both current and forecasted property values and interest rates as well as historical borrower behavior. We incorporate associated credit enhancements and expected recoveries, if any, to determine our estimate of expected credit losses.
Certain conventional loans may be evaluated for credit losses by using the practical expedient for collateral dependent assets. A mortgage loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be substantially through the sale of the underlying collateral. 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 7.5 presents a roll forward of the allowance for credit losses on conventional mortgage loans for the years ended December 31, 2021, 2020, and 2019. As required by prior accounting guidance for determining the allowance for credit losses on mortgage loans, Table 7.5 also presents the recorded investment in mortgage loans by impairment methodology at December 31, 2019. The recorded investment in a loan is the par amount of the loan, adjusted for accrued interest, unamortized
premiums or discounts, deferred derivative gains and losses, and direct write-downs. The recorded investment is net of any valuation allowance.
Table 7.5 - Allowance for Credit Losses on Conventional Mortgage Loans
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019(1) | | |
Allowance for credit losses (2) | | | | | | | |
| Balance, beginning of year | $ | 3,100 | | | $ | 500 | | | $ | 500 | | | |
| Adjustment for cumulative effect of change in accounting principle | — | | | 2,221 | | | — | | | |
| Recoveries (charge-offs) | 62 | | | (207) | | | (85) | | | |
| | | | | | | |
| (Reduction of) provision for credit losses | (1,462) | | | 586 | | | 85 | | | |
| Balance, end of year | $ | 1,700 | | | $ | 3,100 | | | $ | 500 | | | |
| Ending balance, individually evaluated for impairment | | | | | $ | — | | | |
| Ending balance, collectively evaluated for impairment | | | | | $ | 500 | | | |
| Recorded investment, end of year | | | | | | | |
| Individually evaluated for impairment | | | | | $ | 13,395 | | | |
| Collectively evaluated for impairment | | | | | $ | 4,212,224 | | | |
_________________________
(1) Prior to the adoption of the Financial Instruments - Credit Loss accounting guidance, our allowance for credit losses on mortgage loans consisted of an estimate of incurred losses for individually evaluated mortgage loans, including collateral dependent mortgage loans; and an estimate additional credit losses on mortgage loans.
(2) These amounts exclude government mortgage loans because we make no allowance for credit losses based on our investments in government mortgage loans, as discussed below under — Government Mortgage Loans Held for Portfolio.
Government 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, but in such instances we would have recourse against the servicer for such failure. Due to government guarantees or insurance on our government loans, there is no allowance for credit losses for the government mortgage loan portfolio as of December 31, 2021 and 2020. Additionally, government 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.
Troubled Debt Restructurings. Excluding loans subject to forbearance under the CARES Act, we consider a troubled debt restructuring of a financing receivable to have occurred when we grant a concession to a borrower that we would not otherwise consider for economic or legal reasons related to the borrower's financial difficulties, except for troubled debt restructurings meeting the provisions of the CARES Act as described in Note 2 – Summary of Significant Accounting Policies. We have granted a concession when we do not expect to collect all amounts due to us under the original contract as a result of the restructuring.
A mortgage loan considered to be a troubled debt restructuring is individually evaluated for impairment when determining its related allowance for credit losses. At December 31, 2021 and 2020, the recorded investment of mortgage loans classified as troubled debt restructurings were $8.0 million and $7.7 million, respectively.
Note 8 — Derivatives and Hedging Activities
Nature of Business Activity
We are exposed to interest-rate risk primarily from the effects of interest-rate changes on interest-earning assets and interest-bearing liabilities that finance these assets. The goal of our interest-rate risk-management strategy is to manage interest-rate risk within appropriate limits. As part of our effort to mitigate the risk of loss, we have established policies and procedures, which include guidelines on the amount of exposure to interest-rate changes we will accept. In addition, we monitor the risk to our interest income, net interest margin, and average maturity of interest-earning assets and interest-bearing liabilities.
Consistent with FHFA regulations, we enter into derivatives to manage the interest-rate-risk exposures inherent in otherwise unhedged assets and liabilities and achieve our risk-management objectives. FHFA regulation prohibits us from the speculative use of these derivative instruments. The use of derivatives is an integral part of our financial and risk management strategy. We may enter into derivatives that do not qualify for hedge accounting provided that we document a non-speculative use.
We reevaluate our hedging strategies periodically and may change the hedging techniques we use or may adopt new strategies. The most common ways in which we use derivatives are to:
•effectively change the coupon repricing characteristics of assets and liabilities from fixed-rate to floating-rate;
•hedge the mark-to-market sensitivity of existing assets or liabilities;
•offset or neutralize embedded options in assets and liabilities; and
•hedge the potential yield variability of anticipated asset or liability transactions.
Application of Derivatives
We formally document at inception all relationships between derivatives designated as hedging instruments and hedged items, as well as our risk-management objectives and strategies for undertaking various hedge transactions and our method of assessing hedge effectiveness. This process includes linking all derivatives that are designated as fair-value or cash-flow hedges to specific assets or liabilities on the statement of condition, firm commitments, or forecasted transactions.
We may use derivatives to adjust the effective maturity, repricing frequency, or option characteristics of our financial instruments, including our advances products, investments, and COs to achieve risk-management objectives. Derivative instruments are designated by us as:
•a qualifying fair-value hedge of a non-derivative financial instrument or a cash-flow hedge of a forecasted transaction; and
•a non-qualifying economic hedge in general asset-liability management where derivatives serve a documented risk-mitigation purpose but do not qualify for hedge accounting. These hedges are primarily used to manage certain mismatches between the coupon features of our assets and liabilities.
We transact all of our derivatives with counterparties who are major banks or securities firms, and in a few instances, with their affiliates with unconditional guarantees provided by the respective major bank or securities firm. Some of these derivative counterparties and their affiliates buy, sell, and distribute COs, and may be affiliates of members of the Bank. Derivative transactions may be either over-the-counter with a counterparty (uncleared derivatives) or cleared through a futures commission merchant (clearing member) with a DCO as the counterparty (cleared derivatives).
Once a derivative transaction has been accepted for clearing by a DCO, the executing counterparty is replaced with the DCO. We are not a derivatives dealer and do not trade derivatives for short-term profit.
Types of Derivatives
We primarily use the following derivatives instruments to reduce funding costs and/or to manage our interest-rate risks:
•Interest-Rate Swaps. An interest-rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be exchanged and the manner in which the cash flows will be calculated. One of the simplest forms of an interest-rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional amount at a predetermined fixed rate for a given period of time to the counterparty. In return for this promise, this party receives cash flows equivalent to the interest on the same notional amount at a variable-rate index for the same period of time from the counterparty. The variable-rate indices we utilize in our derivative transactions are LIBOR, the overnight-index swap (OIS) rate based on the federal funds effective rate, and the Secured Overnight Financing Rate (SOFR).
•Optional Termination Interest-Rate Swaps. In an optional termination interest-rate swap, one counterparty has the right, but not the obligation, to terminate the interest-rate swap prior to its stated maturity date. We use optional termination interest-rate swaps to hedge callable CO bonds and putable advances. In most cases, we own an option to terminate the hedged item, that is, redeem a callable bond or demand repayment of a putable advance on specified dates, and the counterparty to the optional termination interest-rate swap owns the option to terminate the interest-rate swap on those same dates.
•Forward-Start Interest-Rate Swaps. A forward-start interest-rate swap is an interest-rate swap (as described above) with a deferred effective date. We designate forward-start interest-rate swaps as cash-flow hedges of expected debt issuances.
•Interest-Rate Cap and Floor Agreements. In an interest-rate cap agreement, a cash flow is generated if the price or rate of an underlying variable rises above a certain threshold or cap price. In an interest-rate floor agreement, a cash flow is generated if the price or rate of an underlying variable falls below a certain threshold or floor price. These agreements are intended to serve as protection against the interest rate on a variable-rate asset or liability falling below or rising above a certain level.
Types of Assets and Liabilities Hedged
Investments. We use derivatives to manage the interest-rate and prepayment risk associated with certain investment securities that are classified either as available-for-sale or as trading securities.
We may also manage the risk arising from changing market prices or cash flows of certain investment securities classified as trading securities by entering into economic hedges that offset the changes in fair value or cash flows of the securities. These economic hedges are not specifically designated as hedges of individual assets, but rather are collectively managed to provide an offset to the changes in the fair values of the assets. The market-value changes of trading securities are included in net unrealized (losses) gains on trading securities in the statement of operations, while the changes in fair value of the associated derivatives are included in other income as net (losses) gains on derivatives.
Advances. We offer a wide range of fixed- and variable-rate advance products with different maturities, interest rates, payment characteristics and optionality. We may use interest-rate swaps to manage the repricing and/or options characteristics of advances to more closely match the characteristics of our funding liabilities. Typically, we hedge the fair value of fixed-rate advances with interest-rate swaps where we pay a fixed-rate coupon and receive a variable-rate coupon, effectively converting the advance to a floating-rate advance. We also hedge the fair value of certain floating-rate advances that contain either an interest-rate cap or floor, or both a cap and a floor, with a derivative containing an offsetting cap and/or floor.
With each issuance of a putable advance, we effectively purchase from the borrower an embedded put option that enables us to terminate a fixed-rate advance on predetermined put dates, and offer, subject to certain conditions, replacement funding at then-current advances rates. We may hedge a putable advance by entering into a derivative that is cancelable by the derivative counterparty, where we pay a fixed-rate coupon and receive a variable-rate coupon. This type of hedge is treated as a fair-value hedge. The swap counterparty would normally exercise its option to cancel the derivative at par on any defined exercise date if interest rates had risen, and at that time, we could, at our option, require immediate repayment of the advance.
Additionally, the borrower's option to prepay an advance can create interest-rate risk. When a borrower prepays an advance, we could suffer lower future income if the principal portion of the prepaid advance were invested in lower-yielding assets that continue to be funded by higher-cost debt. To protect against this risk, we generally charge a prepayment fee that makes us financially indifferent to a borrower's decision to prepay an advance. If the advance is hedged with a derivative instrument, the prepayment fee will generally offset the cost of terminating the designated hedge. When we offer advances (other than short-term advances) that a borrower may prepay without a prepayment fee, we usually finance such advances with callable debt with an interest-rate swap cancellable by us.
COs. We may enter into derivatives to hedge (or partially hedge, depending on the risk strategy) the interest-rate risk associated with our specific debt issuances, including using derivatives to change the effective interest-rate sensitivity of debt to better match the characteristics of funded assets. We endeavor to manage the risk arising from changing market prices and volatility of a CO by matching the cash inflow on the derivative with the cash outflow on the CO.
As an example of such a hedging strategy, when fixed-rate COs are issued, we may simultaneously enter into a matching derivative in which we receive a fixed-interest cash flows designed to mirror in timing and amount the interest cash outflows we pay on the CO. At the same time, we may pay variable cash flows that closely match the interest payments we receive on short-term or variable-rate assets. In some cases, the hedged CO may have a nonstatic coupon that is subject to fair-value risk and that is matched by the receivable coupon on the hedging interest-rate swap. These transactions are treated as fair-value hedges.
In a typical cash-flow hedge of anticipated CO issuance, we may enter into interest-rate swaps to hedge the cost of anticipated future issuance of fixed-rate CO bonds against potential rising interest rates. The interest-rate swap is terminated upon issuance of the fixed-rate CO bond. Changes in fair value of the hedging derivative, to the extent that the hedge is effective, will be recorded in accumulated other comprehensive income and reclassified into earnings in the period or periods during which the cash flows of the fixed-rate CO bond affects earnings (beginning upon issuance and continuing over the life of the CO bond).
Firm Commitments. Mortgage loan purchase commitments are considered derivatives. When the mortgage loan purchase commitment derivative settles, the current market value of the commitment is included in the basis of the mortgage loan. The basis adjustments on the resulting performing loans are then amortized into net interest income over the life of the loans.
We may also hedge a firm commitment for a forward-starting advance through the use of an interest-rate swap. In this case, the interest-rate swap functions as the hedging instrument for both the firm commitment and the subsequent advance and is treated as a fair value hedge. The fair-value change associated with the firm commitment is recorded as a basis adjustment of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment is then amortized into interest income over the life of the advance.
Financial Statement Impact and Additional Financial Information. The notional amount of derivatives is a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount of derivatives reflects our involvement in the various classes of financial instruments and represents neither the actual amounts exchanged nor our overall exposure to credit and market risk; the overall risk is much smaller. The risks of derivatives can be measured meaningfully on a portfolio basis that takes into account the counterparties, the types of derivatives, the tenor of the derivatives, the items being hedged, and any offsets between the derivatives and the items being hedged.
Table 8.1 - Fair Value of Derivative Instruments
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| | Notional
Amount of
Derivatives | | Derivative
Assets | | Derivative
Liabilities | | Notional
Amount of
Derivatives | | Derivative
Assets | | Derivative
Liabilities |
| Derivatives designated as hedging instruments | | | | | | | | | | | |
| Interest-rate swaps | $ | 26,589,956 | | | $ | 362 | | | $ | (163,457) | | | $ | 9,960,475 | | | $ | 6,044 | | | $ | (41,000) | |
| Forward-start interest-rate swaps | 1,391,000 | | | 48 | | | (428) | | | 17,000 | | | — | | | (14) | |
| Total derivatives designated as hedging instruments | 27,980,956 | | | 410 | | | (163,885) | | | 9,977,475 | | | 6,044 | | | (41,014) | |
| | | | | | | | | | | |
| Derivatives not designated as hedging instruments | | | | | | | | | | | |
| Interest-rate swaps | 900,425 | | | 3,440 | | | (13,663) | | | 5,536,822 | | | 3,918 | | | (47,756) | |
| CO bond firm commitments | 55,000 | | | 54 | | | (30) | | | — | | | — | | | — | |
| | | | | | | | | | | |
Mortgage-delivery commitments (1) | 3,164 | | | 68 | | | — | | | 28,386 | | | 220 | | | — | |
| Total derivatives not designated as hedging instruments | 958,589 | | | 3,562 | | | (13,693) | | | 5,565,208 | | | 4,138 | | | (47,756) | |
| Total notional amount of derivatives | $ | 28,939,545 | | | | | | | $ | 15,542,683 | | | | | |
| Total derivatives before netting and collateral adjustments | | | 3,972 | | | (177,578) | | | | | 10,182 | | | (88,770) | |
Netting adjustments and cash collateral, including related accrued interest (2) | | | 374,560 | | | 138,634 | | | | | 151,056 | | | 64,708 | |
| Derivative assets and derivative liabilities | | | $ | 378,532 | | | $ | (38,944) | | | | | $ | 161,238 | | | $ | (24,062) | |
_______________________
(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 posted, including accrued interest, was $513.2 million and $215.8 million at
December 31, 2021, and 2020, respectively. The change in cash collateral posted is included in the net change in interest-bearing deposits in the statement of cash flows.
Tables 8.2 presents the net gains (losses) on qualifying fair-value hedging relationships. Gains (losses) on derivatives include unrealized changes in fair value as well as net interest settlements.
Table 8.2 - Net Gains (Losses) on Fair Value Hedging Relationships
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2021 |
| | Advances | | Available-for-sale Securities | | CO Bonds |
| Total interest income (expense) in the statements of operations | | $ | 170,003 | | | $ | 73,314 | | | $ | (210,052) | |
| | | | | | |
| Gains (losses) on hedging relationships | | | | | | |
| Changes in fair value: | | | | | | |
| Derivatives | | $ | 85,265 | | | $ | 280,707 | | | $ | (197,016) | |
| Hedged items | | (84,296) | | | (273,132) | | | 197,116 | |
| Net changes in fair value before price alignment interest | | 969 | | | 7,575 | | | 100 | |
Price alignment interest(1) | | 20 | | | 66 | | | (4) | |
Net interest settlements on derivatives(2)(3) | | (60,285) | | | (120,524) | | | 67,028 | |
| Net (losses) gains on qualifying hedging relationships | | (59,296) | | | (112,883) | | | 67,124 | |
| Amortization/accretion of discontinued hedging relationships | | (2,064) | | | — | | | (3,145) | |
| Net (losses) gains on derivatives and hedging activities recorded in net interest income | | $ | (61,360) | | | $ | (112,883) | | | $ | 63,979 | |
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2020 |
| | Advances | | Available-for-sale Securities | | CO Bonds |
| Total income (expense) in the statements of operations | | $ | 400,286 | | | $ | 63,243 | | | $ | (374,449) | |
| | | | | | |
| Gains (losses) on hedging relationships | | | | | | |
| Changes in fair value: | | | | | | |
| Derivatives | | $ | (82,885) | | | $ | (270,047) | | | $ | 25,811 | |
| Hedged items | | 81,859 | | | 263,226 | | | (27,353) | |
| Net changes in fair value before price alignment interest | | (1,026) | | | (6,821) | | | (1,542) | |
Price alignment interest(1) | | 484 | | | 1,373 | | | (204) | |
Net interest settlements on derivatives(2)(3) | | (53,615) | | | (70,317) | | | 23,843 | |
| Net (losses) gains on qualifying hedging relationships | | (54,157) | | | (75,765) | | | 22,097 | |
| Amortization/accretion of discontinued hedging relationships | | (1,937) | | | — | | | (3,707) | |
| Net (losses) gains on derivatives and hedging activities recorded in net interest income | | $ | (56,094) | | | $ | (75,765) | | | $ | 18,390 | |
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2019 |
| | Advances | | Available-for-sale Securities | | CO Bonds |
| Total income (expense) in the statements of operations | | $ | 854,599 | | | $ | 115,942 | | | $ | (598,585) | |
| | | | | | |
| Gains (losses) on hedging relationships | | | | | | |
| Changes in fair value: | | | | | | |
| Derivatives | | $ | (72,488) | | | $ | (24,274) | | | $ | 55,777 | |
| Hedged items | | 73,530 | | | 21,329 | | | (56,091) | |
| Net changes in fair value before price alignment interest | | 1,042 | | | (2,945) | | | (314) | |
Price alignment interest(1) | | 1,316 | | | 3,769 | | | (786) | |
Net interest settlements on derivatives(2)(3) | | 39,085 | | | (22,249) | | | (17,482) | |
| | | | | | |
| Net gains (losses) on qualifying hedging relationships | | 41,443 | | | (21,425) | | | (18,582) | |
| Amortization/accretion of discontinued hedging relationships | | (1,934) | | | — | | | (2,567) | |
| Net gains (losses) on derivatives and hedging activities recorded in net interest income | | $ | 39,509 | | | $ | (21,425) | | | $ | (21,149) | |
_______________________(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 8.3 presents the net gains (losses) on qualifying cash flow hedging relationships.
Table 8.3 - Net Gains (Losses) on Cash Flow Hedging Relationships
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Forward-start interest rate swaps - CO Bonds | | | | | | |
| Losses reclassified from accumulated other comprehensive loss into interest expense | | $ | (5,949) | | | $ | (7,029) | | | $ | (5,218) | |
| Losses recognized in other comprehensive income | | (7,875) | | | (1,187) | | | (6,131) | |
For the years ended December 31, 2021, 2020, and 2019, there were no reclassifications from accumulated other comprehensive income into earnings as a result of the discontinuance of cash-flow hedges because the original forecasted transactions were not expected to occur by the end of the originally specified time period or within a two-month period thereafter. As of December 31, 2021, the maximum length of time over which we are hedging our exposure to the variability in future cash flows for forecasted transactions is nine years.
As of December 31, 2021, the amount of deferred net losses on derivatives accumulated in other comprehensive income related to cash flow hedges expected to be reclassified to earnings during the next 12 months is $5.5 million.
Table 8.4 - Cumulative Basis Adjustments for Fair-Value Hedges
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| Line Item in Statement of Condition | | Amortized Cost of Hedged Asset/ Liability(1) | | Basis Adjustments for Active Hedging Relationships Included in Amortized Cost | | Basis Adjustments for Discontinued Hedging Relationships Included in Amortized Cost | | Cumulative Amount of Fair Value Hedging Basis Adjustments |
| Advances | | $ | 2,708,546 | | | $ | 6,477 | | | $ | 8,874 | | | $ | 15,351 | |
| Available-for-sale securities | | 10,953,242 | | | 220,621 | | | — | | | 220,621 | |
| Consolidated obligation bonds | | 12,957,832 | | | (174,983) | | | 31,595 | | | (143,388) | |
_______________________
(1) Includes only the amortized cost of hedged items in fair-value hedging relationships.
Table 8.5 - Net Gains and Losses on Derivatives and Hedging Activities
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Derivatives not designated as hedging instruments: | | | | | | |
| Economic hedges: | | | | | | |
| Interest-rate swaps | | $ | (2,183) | | | $ | (51,187) | | | $ | (614) | |
| CO Bond firm commitments | | 1,734 | | | — | | | — | |
| Mortgage-delivery commitments | | (118) | | | 1,405 | | | 1,945 | |
| Total net (losses) gains related to derivatives not designated as hedging instruments | | (567) | | | (49,782) | | | 1,331 | |
| | | | | | |
Other(1) | | 8 | | | 108 | | | 88 | |
| | | | | | |
| Net (losses) gains on derivatives and hedging activities | | $ | (559) | | | $ | (49,674) | | | $ | 1,419 | |
______________________
(1) Consists of price alignment amount on derivatives for which variation margin is characterized as a daily settlement amount.
Impacts on Statement of Cash Flows. Cash paid or received for cleared derivatives variation margin is included on the statement of cash flows in either net change in derivatives and hedging activities as an operating activity or net payments on derivatives with a financing element, as a financing activity. The table below shows the impact of variation margin for cleared derivatives on the statement of cash flows:
Table 8.6 - Impact of Variation Margin for Cleared Derivatives on the Statement of Cash Flows
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Increase (decrease) on Cash Flow Statement |
| | For the Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Operating activity - net change in derivatives and hedging activities | | $ | 257,727 | | | $ | (321,862) | | | $ | (274,542) | |
| Financing activity - net payments on derivatives with a financing element | | 69,021 | | | (53,832) | | | (41,152) | |
| Total variation margin received (posted) on cleared derivatives | | $ | 326,748 | | | $ | (375,694) | | | $ | (315,694) | |
Managing Credit Risk on Derivatives. We are subject to credit risk on our hedging activities due to the risk of nonperformance by nonmember counterparties (including DCOs and their clearing members acting as agent to the DCOs as well as uncleared counterparties) to the derivative agreements. We manage credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in our policies, U.S. Commodity Futures Trading Commission (the CFTC) regulations, and FHFA regulations.
Uncleared Derivatives. All counterparties must execute master-netting agreements prior to entering into any uncleared derivative with us. Our master-netting agreements for uncleared derivatives contain bilateral-collateral exchange agreements that require that credit exposure be secured by readily marketable, U.S. Treasury, U.S. Government-guaranteed, or GSE securities, or cash. Credit exposures are measured daily and adjustments to collateral positions are made in accordance with the terms of the master-netting agreements. These master-netting agreements also contain bilateral ratings-tied termination events permitting us to terminate all outstanding derivatives transactions with a counterparty in the event of a specified rating downgrade by Moody's or S&P. Based on credit analyses and collateral requirements, we do not anticipate any credit losses on our derivative agreements.
We execute uncleared derivatives with nonmember counterparties rated in at least the third-highest internal rating category on a scale of FHFA-1 through FHFA-7 at the time of the transaction, although risk-reducing trades may be permitted for counterparties whose ratings have fallen below these ratings. The internal rating scale of FHFA-1 through FHFA-7 reflects progressively lower credit quality, with FHFA-1 through FHFA-4 considered to be investment quality. Some of these counterparties or their affiliates buy, sell, and distribute COs. See Note 10 — Consolidated Obligations for additional information.
Currently derivatives that contain any optionality are not eligible for clearing. Accordingly, such derivatives, including the derivatives used to hedge issuance of callable CO bonds, are executed with our uncleared derivatives counterparties. Certain of our uncleared derivatives master-netting agreements contain provisions that require us to post additional collateral with our uncleared derivatives counterparties if our credit ratings are lowered. Under the terms that govern such agreements, if our credit rating is lowered by Moody's or S&P to a certain level, we are required to deliver additional collateral on uncleared derivatives. In the event of a split between such credit ratings, the lower rating governs. The aggregate fair value of all uncleared derivatives with these provisions that were in a net-liability position (before cash collateral and related accrued interest) at December 31, 2021, was $171.0 million for which we had delivered collateral with a post-haircut value of $159.3 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 8.7 sets forth the post-haircut value of incremental collateral that certain uncleared derivatives counterparties could have required us to deliver based on incremental credit rating downgrades at December 31, 2021.
Table 8.7 - Post Haircut Value of Incremental Collateral to be Delivered as of December 31, 2021
(dollars in thousands)
| | | | | | | | | | | | | | | | | |
Ratings Downgrade (1) | | | |
| From | | To | | Incremental Collateral | |
| AA+ | | AA or AA- | | $ | — | | |
| AA- | | A+, A or A- | | — | | |
| A- | | below A- | | 29,440 | | |
_______________________
(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 one of two DCOs, for each cleared derivative transaction, CME Inc. or 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 of the DCO which clears our trades, acts as our agent to the DCO and 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. Our clearing members, which are CFTC-registered futures commission merchants, may require us to post margin in excess of DCO requirements based on our credit or other considerations, including but not limited to, credit rating downgrades. We were not required to post any such excess margin by our clearing members based on credit or any other considerations at December 31, 2021.
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 uncleared 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 of our counterparty (solely in the case of uncleared 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 8.8 presents separately the fair value of derivatives that are subject to netting due to a legal right of offset based on the terms of our master netting arrangements or similar agreements as of December 31, 2021 and 2020, and the fair value of derivatives that are not subject to such netting. Derivatives subject to netting include any related cash collateral received from or pledged to counterparties.
Table 8.8 - Netting of Derivative Assets and Derivative Liabilities
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Derivative Instruments Meeting Netting Requirements | | | | | | | | | |
| Gross Recognized Amount | Gross Amounts of Netting Adjustments (1) | | Derivative Instruments Not Meeting Netting Requirements | | Total Derivative Assets and Total Derivative Liabilities | | | Non-cash Collateral (Received) or Pledged Not Offset(2) | Net Amount |
| Derivative Assets | | | | | | | | | | | |
| Interest-rate swaps | | | | | | | | | | | |
| Uncleared | $ | 327 | | $ | (103) | | | | | $ | 224 | | | | $ | — | | | $ | 224 | |
| Cleared | 3,523 | | 374,663 | | | | | 378,186 | | | | — | | | 378,186 | |
| CO bond firm commitments | | | | $ | 54 | | | 54 | | | | | | 54 | |
| Mortgage delivery commitments | | | | 68 | | | 68 | | | | | | 68 | |
| Total | | | | | | $ | 378,532 | | | | | | $ | 378,532 | |
| | | | | | | | | | | |
| Derivative Liabilities | | | | | | | | | | | |
| Interest-rate swaps | | | | | | | | | | | |
| Uncleared | $ | (171,374) | | $ | 132,460 | | | | | $ | (38,914) | | | | $ | 28,374 | | | $ | (10,540) | |
| Cleared | (6,175) | | 6,175 | | | | | — | | | | — | | | — | |
| CO bond firm commitments | | | | $ | (30) | | | (30) | | | | | | (30) | |
| Total | | | | | | $ | (38,944) | | | | | | $ | (10,570) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Derivative Instruments Meeting Netting Requirements | | | | | | | | | |
| Gross Recognized Amount | Gross Amounts of Netting Adjustments (1) | | Derivative Instruments Not Meeting Netting Requirements | | Total Derivative Assets and Total Derivative Liabilities | | | Non-cash Collateral (Received) or Pledged Not Offset(2) | Net Amount |
| Derivative Assets | | | | | | | | | | | |
| Interest-rate swaps | | | | | | | | | | | |
| Uncleared | $ | 5,215 | | $ | (4,899) | | | | | $ | 316 | | | | $ | — | | | $ | 316 | |
| Cleared | 4,747 | | 155,955 | | | | | 160,702 | | | | — | | | 160,702 | |
| Mortgage delivery commitment | | | | $ | 220 | | | 220 | | | | | | 220 | |
| Total | | | | | | $ | 161,238 | | | | | | $ | 161,238 | |
| | | | | | | | | | | |
| Derivative Liabilities | | | | | | | | | | | |
| Interest-rate swaps | | | | | | | | | | | |
| Uncleared | $ | (82,625) | | $ | 58,563 | | | | | $ | (24,062) | | | | $ | 23,087 | | | $ | (975) | |
| Cleared | (6,145) | | 6,145 | | | | | — | | | | — | | | — | |
| Total | | | | | | $ | (24,062) | | | | | | $ | (975) | |
_______________________
(1) Includes gross amounts of netting adjustments and cash collateral.
(2) Includes non-cash collateral at fair value that cannot be sold or repledged by the counterparty. Additionally, any overcollateralization with a counterparty is not included in the determination of the net amount. At December 31, 2020, we had additional net credit exposure of $925 thousand due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position. There was no overcollateralization at December 31, 2021.
Note 9 — Deposits
We offer demand and overnight 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.
Deposits classified as demand, overnight, and other pay interest based on a daily interest rate. The average interest rate paid on average deposits during 2021 and 2020 was 0.01 percent and 0.10 percent, respectively.
Table 9.1 - Deposits
(dollars in thousands)
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Interest-bearing | | | |
| Demand and overnight | $ | 831,009 | | | $ | 975,469 | |
| Other | 1,998 | | | 2,525 | |
| Noninterest-bearing | | | |
| Other | 51,025 | | | 110,993 | |
| Total deposits | $ | 884,032 | | | $ | 1,088,987 | |
Note 10 — Consolidated Obligations
COs consist of CO bonds and CO discount notes. CO bonds may be issued to raise short-, intermediate-, and long-term funds and are not subject to any statutory or regulatory limits on maturity. CO discount notes are issued to raise short-term funds and have original maturities of up to one year. These notes sell at less than their face amount and are redeemed at par value when they mature.
Although we are primarily liable for the portion of COs issued for which we received issuance proceeds, we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all COs. The FHFA, at its discretion, may require any FHLBank to make principal or interest payments due on any CO whether or not the CO represents a primary liability of such FHLBank. Although an FHLBank has never paid the principal or interest payments due on a CO on behalf of another FHLBank, if that event should occur, FHFA regulations provide that the paying FHLBank is entitled to reimbursement from the noncomplying FHLBank for any payments made on its behalf and other associated costs, including interest to be determined by the FHFA. If, however, the FHFA determines that the noncomplying FHLBank is unable to satisfy its repayment obligations, the FHFA may allocate the outstanding liabilities of the noncomplying FHLBank among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank's participation in all COs outstanding or in any other manner it may determine to ensure that the FHLBanks operate in a safe and sound manner. See Note 16 – Commitments and Contingencies for additional information regarding the FHLBanks' joint and several liability.
The par values of the FHLBanks' outstanding COs, including COs on which other FHLBanks are primarily liable, were $652.9 billion and $746.8 billion at December 31, 2021 and 2020, respectively. Regulations require each FHLBank to maintain unpledged qualifying assets equal to outstanding COs for which it is primarily liable. Such qualifying assets include cash; secured advances; obligations of or fully guaranteed by the U.S.; obligations, participations, or other instruments of or issued by Fannie Mae or Ginnie Mae; mortgages, obligations, or other securities which are or ever have been sold by Freddie Mac; and such securities as fiduciary and trust funds may invest in under the laws of the state in which the FHLBank is located. Any assets subject to a lien or pledge for the benefit of holders of any issues of COs are treated as if they were free from lien or pledge for purposes of compliance with these regulations.
CO Bonds.
Table 10.1 - CO Bonds Outstanding by Contractual Maturity
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Amount | | Weighted Average Rate (1) | | Amount | | Weighted Average Rate (1) |
| Due in one year or less | $ | 6,919,220 | | | 0.79 | % | | $ | 10,608,465 | | | 0.81 | % |
| Due after one year through two years | 3,069,155 | | | 1.18 | | | 3,956,120 | | | 1.35 | |
| Due after two years through three years | 3,514,735 | | | 1.09 | | | 1,569,315 | | | 2.20 | |
| Due after three years through four years | 3,029,600 | | | 0.88 | | | 1,141,430 | | | 2.43 | |
| Due after four years through five years | 5,735,605 | | | 0.91 | | | 1,776,100 | | | 1.12 | |
| Thereafter | 4,456,865 | | | 1.91 | | | 2,312,155 | | | 3.58 | |
| Total par value | 26,725,180 | | | 1.10 | % | | 21,363,585 | | | 1.42 | % |
| Premiums | 40,251 | | | | | 58,537 | | | |
| Discounts | (9,011) | | | | | (12,278) | | | |
| Hedging adjustments | (143,388) | | | | | 61,746 | | | |
| Total | $ | 26,613,032 | | | | | $ | 21,471,590 | | | |
_______________________
(1) The CO bonds' weighted-average rate excludes concession fees.
CO bonds outstanding were issued with either fixed-rate coupon-payment terms or variable-rate coupon-payment terms that may use a variety of indices for interest-rate resets, such as SOFR. To meet the expected specific needs of certain investors in CO bonds, both fixed-rate CO bonds and variable-rate CO bonds may contain features which may result in complex coupon-payment terms and call options. When these CO bonds are issued, we may enter into derivatives containing features that offset the terms and embedded options, if any, of the CO bonds.
Table 10.2 - CO Bonds Outstanding by Call Feature
(dollars in thousands)
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Noncallable and nonputable | $ | 13,924,180 | | | $ | 19,668,585 | |
| Callable | 12,801,000 | | | 1,695,000 | |
| Total par value | $ | 26,725,180 | | | $ | 21,363,585 | |
Table 10.3 - CO Bonds Outstanding by Contractual Maturity or Next Call Date
(dollars in thousands)
| | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Due in one year or less | | $ | 19,150,220 | | | $ | 11,728,465 | |
| Due after one year through two years | | 3,461,155 | | | 4,046,120 | |
| Due after two years through three years | | 1,044,735 | | | 1,629,315 | |
| Due after three years through four years | | 1,544,600 | | | 1,011,430 | |
| Due after four years through five years | | 539,605 | | | 1,501,100 | |
| Thereafter | | 984,865 | | | 1,447,155 | |
| Total par value | | $ | 26,725,180 | | | $ | 21,363,585 | |
Table 10.4 - CO Bonds by Interest Rate-Payment Type
(dollars in thousands)
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Fixed-rate | $ | 17,707,180 | | | $ | 12,524,585 | |
| Simple variable-rate | 4,803,000 | | | 8,549,000 | |
Step-up (1) | 4,215,000 | | | 290,000 | |
| Total par value | $ | 26,725,180 | | | $ | 21,363,585 | |
_______________________
(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 10.5 - CO Discount Notes Outstanding
(dollars in thousands)
| | | | | | | | | | | | | | | | | |
| | Book Value | | Par Value | | Weighted Average Rate (1) |
| December 31, 2021 | $ | 2,275,320 | | | $ | 2,275,519 | | | 0.05 | % |
| December 31, 2020 | $ | 12,878,310 | | | $ | 12,879,765 | | | 0.10 | % |
_______________________
(1) CO discount notes' weighted-average rate represents a yield to maturity excluding concession fees.
Note 11 — Affordable Housing Program
The FHLBank Act requires each FHLBank to establish and maintain an AHP to provide subsidies in the form of direct grants or below-market interest-rate advances (AHP advances). These funds are intended to assist in the purchase, construction, or rehabilitation of housing for very low and low- or moderate-income households. Each FHLBank is required to contribute to its AHP the greater of 10 percent of its previous year's net income before interest expense associated with mandatorily redeemable capital stock and the assessment for AHP (AHP earnings), or the prorated sum required to ensure the aggregate contribution by the FHLBanks is no less than $100 million for each year. We accrue this expense monthly based on our AHP earnings, and the accruals are accumulated into our AHP payable account. We may elect to voluntarily contribute amounts in addition to the
required accruals. We reduce our AHP payable account as we disburse the funds either in the form of direct grants to member institutions or as a discount on below-market-rate AHP advances.
If we experience a net loss during a quarter, but still have AHP earnings for the year, our obligation to the AHP would be calculated based on our AHP earnings for that calendar year. In annual periods where our AHP earnings are zero or less, our required AHP assessment is zero since our required annual contribution is limited to our annual AHP earnings. If the result of the aggregate 10 percent calculation described above is less than $100 million for all the FHLBanks, then each FHLBank would be required to contribute such prorated sums as may be required to ensure that the aggregate contributions by the FHLBanks equals $100 million. The proration would be made on the basis of the income of the FHLBanks for the year, except that the required annual AHP contribution for an FHLBank cannot exceed its AHP earnings for the year pursuant to an FHFA regulation. Each FHLBank's required annual AHP contribution is limited to its annual net earnings. Our required AHP expense for 2021, 2020, and 2019 was $7.7 million, $13.4 million, and $21.3 million, respectively. Additionally, in 2021 and 2020 we voluntarily contributed $4.8 million and $1.6 million, respectively, to our AHP, resulting in total combined contribution amounts of $12.5 million for 2021 and $15.0 million for 2020.
There was no shortfall, as described above, in 2021, 2020, or 2019. If an FHLBank is experiencing financial instability and finds that its required AHP contributions are contributing to the financial instability, the FHLBank may apply to the FHFA for a temporary suspension of its contributions. We did not make such an application in 2021, 2020, or 2019.
Table 11.1 - AHP Liability
(dollars in thousands)
| | | | | | | | | | | |
| 2021 | | 2020 |
| Balance at beginning of year | $ | 78,640 | | | $ | 86,131 | |
| AHP expense for the period | 7,739 | | | 13,386 | |
| AHP voluntary contribution | 4,761 | | | 1,614 | |
| AHP direct grant disbursements | (17,980) | | | (21,374) | |
| AHP subsidy for AHP advance disbursements | (5,806) | | | (1,216) | |
| Return of previously disbursed grants and subsidies | 3,149 | | | 99 | |
| Balance at end of year | $ | 70,503 | | | $ | 78,640 | |
Note 12 — 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 operational-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 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.
3. Leverage capital. We are required to maintain at all times a leverage capital-to-assets ratio of at least 5 percent. Leverage capital is calculated by multiplying permanent capital by 1.5 and adding to this product all other components of total capital.
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 12.1 - Regulatory Capital Requirements
(dollars in thousands)
| | | | | | | | | | | |
| Risk-Based Capital Requirements | December 31,
2021 | | December 31,
2020 |
| | | |
| Permanent capital | | | |
| Class B capital stock | $ | 953,638 | | | $ | 1,267,172 | |
| Mandatorily redeemable capital stock | 13,562 | | | 6,282 | |
| Retained earnings | 1,548,406 | | | 1,498,642 | |
| Total permanent capital | $ | 2,515,606 | | | $ | 2,772,096 | |
| Risk-based capital requirement | | | |
| Credit-risk capital | $ | 84,301 | | | $ | 96,143 | |
| Market-risk capital | 213,467 | | | 204,028 | |
| Operations-risk capital | 89,330 | | | 90,052 | |
| Total risk-based capital requirement | $ | 387,098 | | | $ | 390,223 | |
| Permanent capital in excess of risk-based capital requirement | $ | 2,128,508 | | | $ | 2,381,873 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 | | December 31, 2020 |
| | | Required | | Actual | | Required | | Actual |
| Capital Ratio | | | | | | | | |
| Risk-based capital | | $ | 387,098 | | | $ | 2,515,606 | | | $ | 390,223 | | | $ | 2,772,096 | |
| Total regulatory capital | | $ | 1,301,812 | | | $ | 2,515,606 | | | $ | 1,538,441 | | | $ | 2,772,096 | |
| Total capital-to-asset ratio | | 4.0 | % | | 7.7 | % | | 4.0 | % | | 7.2 | % |
| | | | | | | | |
| Leverage Ratio | | | | | | | | |
| Leverage capital | | $ | 1,627,265 | | | $ | 3,773,409 | | | $ | 1,923,052 | | | $ | 4,158,144 | |
| Leverage capital-to-assets ratio | | 5.0 | % | | 11.6 | % | | 5.0 | % | | 10.8 | % |
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 or, for a small amount of capital stock held by former members, until the five-year redemption period applicable to their membership stock is complete. Shares of capital stock cannot be purchased or sold except between us and our members at $100 per share par value. For the periods presented in these financial statements, 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 neither less than $10 thousand nor more than $10 million (the membership stock investment requirement), and 3.00 percent for overnight advances, 4.00 percent for all other advances, 0.25 percent for outstanding letters of credit, and 4.50 percent of the unpaid principal balance of certain mortgage we purchased through the MPF program (collectively, the activity-based stock-investment requirement). The sum of the membership stock investment requirement and the activity-based stock investment requirement, rounded up to the nearest whole share, represents the total stock investment requirement.
Members may redeem Class B stock after no sooner than five years' notice provided in accordance with our capital plan (the redemption-notice period). The effective date of termination of membership for any member that voluntarily withdraws from membership is the end of the redemption-notice period, at which time any stock that is held as a condition of membership shall be divested, subject to any other applicable restrictions. At that time, any stock held pursuant to activity-based stock investment requirements shall remain outstanding until such requirements are eliminated by disposition of the related business activity. Any member that withdraws from membership, or otherwise has had its membership terminated, may not be readmitted to membership in any FHLBank until five years from the divestiture date for all capital stock that is held as a condition of membership. This restriction does not apply if the member is transferring its membership from one FHLBank to another on an uninterrupted basis.
The redemption-notice period can also be triggered by the involuntary termination of membership of a member by our board of directors or by the FHFA, the merger or acquisition of a member into a nonmember institution, or the relocation of a member to
a principal location outside our district. At the end of the redemption-notice period, if the former member's activity-based stock investment requirement is greater than zero, we may require the associated remaining obligations to us to be satisfied in full prior to allowing the member to redeem the remaining shares.
Because our Class B stock is subject to redemption in certain instances, we can experience a reduction in our capital, particularly due to membership terminations due to merger and acquisition activity. However, there are several mitigants to this risk, including, but not limited to, the following:
•the activity-based stock-investment requirement allows us to retain stock beyond the redemption-notice period if the associated member-related activity is still outstanding, until the obligations are paid in full;
•the redemption notice period allows for a significant period in which we can restructure our balance sheet to accommodate a reduction in capital;
•our board of directors may modify the membership stock-investment requirement (MSIR) or the activity-based stock-investment requirement (ABSIR), or both, to address expected shortfalls in capitalization due to membership termination;
•our board of directors or the FHFA may suspend redemptions in the event that such redemptions would cause us not to meet our minimum regulatory capital requirements; and
•the growth in our retained earnings, which are included in our equity capital, helps offset the risk that our capital could be reduced by redemptions.
Our board of directors may declare and pay dividends in either cash or capital stock, subject to limitations in applicable law and our capital plan.
Restricted Retained Earnings. At December 31, 2021, our restricted retained earnings totaled $368.4 million and exceeded the contribution requirement of $299.5 million. Restricted retained earnings are not available to pay dividends.
Mandatorily Redeemable Capital Stock. We will reclassify capital stock subject to redemption from equity to liability once a member exercises a written notice of redemption, gives notice of intent to withdraw from membership, or attains nonmember status by merger or acquisition, charter termination, or involuntary termination from membership. Dividends related to capital stock classified as a liability are accrued at the expected dividend rate and reported as interest expense in the statement of operations. If a member cancels its written notice of redemption or notice of withdrawal, we will reclassify mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock would no longer be classified as interest expense.
Redemption of capital stock is subject to the redemption-notice period and our satisfaction of applicable minimum capital requirements. For the years ended December 31, 2021, 2020, and 2019, dividends on mandatorily redeemable capital stock of $192 thousand, $221 thousand, and $974 thousand, respectively, were recorded as interest expense.
Table 12.2 - Mandatorily Redeemable Capital Stock
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 | | 2019 |
| Balance at beginning of year | | $ | 6,282 | | | $ | 5,806 | | | $ | 31,868 | |
| Capital stock subject to mandatory redemption reclassified from capital | | 10,265 | | | 581 | | | — | |
| | | | | | |
| Redemption/repurchase of mandatorily redeemable capital stock | | (2,985) | | | (105) | | | (26,062) | |
| Balance at end of year | | $ | 13,562 | | | $ | 6,282 | | | $ | 5,806 | |
The number of stockholders holding mandatorily redeemable capital stock was 14, 12, and 9 at December 31, 2021, 2020, and 2019, respectively.
Table 12.3 - Mandatorily Redeemable Capital Stock by Expiry of Redemption Notice Period
(dollars in thousands)
| | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
Past redemption date (1) | | $ | 3,138 | | | $ | 5,558 | |
| Due in one year or less | | 92 | | | — | |
| Due after one year through two years | | 30 | | | 93 | |
| Due after two years through three years | | — | | | 40 | |
| Due after three years through four years | | 581 | | | — | |
| Due after four years through five years | | 9,721 | | | 581 | |
Thereafter (2) | | — | | | 10 | |
| Total | | $ | 13,562 | | | $ | 6,282 | |
_______________________
(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) The December 31, 2020 amount represents reclassifications to mandatorily redeemable capital stock resulting from an FHFA rule effective February 19, 2016, that makes captive insurance companies ineligible for membership. Captive insurance company members that were admitted as members prior to September 12, 2014, had their memberships terminated on February 19, 2021.
A member may cancel or revoke its written notice of redemption or its notice of withdrawal from membership prior to the end of the redemption-notice period. Our capital plan provides that we will charge the member a cancellation fee in the amount of 2.0 percent of the par amount of the shares of Class B stock that is the subject of the redemption notice. We will assess a redemption-cancellation fee unless the board of directors decides that it has a bona fide business purpose for waiving the imposition of the fee, and such a waiver is consistent with the FHLBank Act.
Excess Capital Stock Repurchases. Our capital plan provides us with the sole discretion to repurchase capital stock from a member at par value that is in excess of the amount required to meet the member's total stock investment requirement (excess capital stock) subject to all applicable limitations. In conducting any repurchases, we repurchase any shares that are the subject of an outstanding redemption notice from the member from whom we are repurchasing prior to repurchasing any other shares that are in excess of the member's total stock-investment requirement (TSIR). We generally repurchase excess stock held by any shareholder whose excess stock exceeds the lesser of $3.0 million or 3.00 percent of the shareholder’s total stock investment requirement, subject to a minimum repurchase of $100,000. We plan to continue with this practice, subject to regulatory requirements and our anticipated liquidity or capital management needs, although continued repurchases remain at our sole discretion, and we retain authority to suspend repurchases of excess stock from any shareholder or all shareholders without prior notice. In addition to these daily repurchases, subject to our sole discretion shareholders may request that we voluntarily repurchase excess stock shares at any time. We may also allow the member to sell the excess capital stock at par value to another one of our members.
At December 31, 2021 and 2020, members and nonmembers with capital stock outstanding held excess capital stock totaling $32.6 million and $90.8 million, respectively, representing approximately 3.4 percent and 7.1 percent, respectively, of total capital stock outstanding. FHFA rules limit our ability to create member excess capital stock under certain circumstances. We may not pay dividends in the form of capital stock or issue new excess capital stock to members if our excess capital stock exceeds one percent of our total assets or if the issuance of excess capital stock would cause our excess capital stock to exceed one percent of our total assets. At December 31, 2021, we had excess capital stock outstanding totaling 0.1 percent of our total assets. For the year ended December 31, 2021, we complied with the FHFA's excess capital stock rule.
Capital Classification Determination. We are subject to the FHFA's regulation on FHLBank capital classification and critical capital levels (the Capital Rule). The Capital Rule, among other things, defines criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. An adequately capitalized FHLBank is one that has sufficient permanent and total capital to satisfy its risk-based and minimum capital requirements. We satisfied these requirements at December 31, 2021. However, pursuant to the Capital Rule, the FHFA has discretion to reclassify an FHLBank and modify or add to corrective action requirements for a particular capital classification. If we become classified into a capital classification other than adequately capitalized, we will be subject to the corrective action requirements for that capital classification in addition to being subject to prohibitions on declaring dividends
and redeeming or repurchasing capital stock. By letter dated December 15, 2021, the Director of the FHFA notified us that, based on September 30, 2021 financial information, we met the definition of adequately capitalized under the Capital Rule.
Note 13 — Accumulated Other Comprehensive Income (Loss)
Table 13.1 - Accumulated Other Comprehensive Income (Loss)
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | Net Unrealized Gain (Loss) on Available-for-sale Securities | | Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities | | Net Unrealized Loss Relating to Hedging Activities | | Pension and Postretirement Benefits | | Total |
| Balance, December 31, 2018 | | $ | (152,958) | | | $ | (129,154) | | | $ | (29,119) | | | $ | (5,276) | | | $ | (316,507) | |
| Cumulative effect of change in accounting principle | | — | | | — | | | (175) | | | — | | | (175) | |
| Other comprehensive income (loss) before reclassifications: | | | | | | | | | | |
| Net unrealized gains (losses) | | 79,036 | | | — | | | (6,131) | | | — | | | 72,905 | |
| Noncredit other-than-temporary impairment losses | | — | | (181) | | | — | | | — | | | (181) | |
| Noncredit losses included in basis of securities sold | | — | | | 29,517 | | | — | | | — | | | 29,517 | |
| Accretion of noncredit loss | | — | | | 22,806 | | | — | | | — | | | 22,806 | |
| Net actuarial loss | | — | | | — | | | — | | | (2,195) | | | (2,195) | |
| Reclassifications from other comprehensive income to net income | | | | | | | | | | |
| | | | | | | | | | |
Noncredit other-than-temporary impairment losses reclassified to credit loss (1) | | — | | | 976 | | | — | | | — | | | 976 | |
Amortization - hedging activities (2) | | — | | | — | | | 5,218 | | | — | | | 5,218 | |
Amortization - pension and postretirement benefits (3) | | — | | | — | | | — | | | 664 | | | 664 | |
| Other comprehensive income (loss) | | 79,036 | | | 53,118 | | | (913) | | | (1,531) | | | 129,710 | |
| Balance, December 31, 2019 | | (73,922) | | | (76,036) | | | (30,207) | | | (6,807) | | | (186,972) | |
| | | | | | | | | | |
| Other comprehensive income (loss) before reclassifications: | | | | | | | | | | |
| Adjustment for transfer of securities from held-to-maturity to available-for-sale | | 16,062 | | | 31,502 | | | — | | | — | | | 47,564 | |
| Net unrealized gains (losses) | | 137,011 | | | — | | | (1,187) | | | — | | | 135,824 | |
| | | | | | | | | | |
| Noncredit losses included in basis of securities sold | | — | | | 39,144 | | | — | | | — | | | 39,144 | |
| Accretion of noncredit loss | | — | | | 5,390 | | | — | | | — | | | 5,390 | |
| Net actuarial loss | | — | | | — | | | — | | | (2,386) | | | (2,386) | |
| Reclassifications from other comprehensive income to net income | | | | | | | | | | |
| | | | | | | | | | |
| Reclassification of realized net gains included in net income | | (30,583) | | | — | | | — | | | — | | | (30,583) | |
Amortization - hedging activities (2) | | — | | | — | | | 7,029 | | | — | | | 7,029 | |
Amortization - pension and postretirement benefits (3) | | — | | | — | | | — | | | 1,129 | | | 1,129 | |
| Other comprehensive income (loss) | | 122,490 | | | 76,036 | | | 5,842 | | | (1,257) | | | 203,111 | |
| Balance, December 31, 2020 | | 48,568 | | | — | | | (24,365) | | | (8,064) | | | 16,139 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Other comprehensive income (loss) before reclassifications: | | | | | | | | | | |
| Net unrealized gains (losses) | | 9,445 | | | — | | | (7,875) | | | — | | | 1,570 | |
| Net actuarial gain | | — | | | — | | | — | | | 4,059 | | | 4,059 | |
| Reclassifications from other comprehensive income to net income | | | | | | | | | | |
| | | | | | | | | | |
Amortization - hedging activities (2) | | — | | | — | | | 5,949 | | | — | | | 5,949 | |
Amortization - pension and postretirement benefits (3) | | — | | | — | | | — | | | 1,250 | | | 1,250 | |
| Other comprehensive income (loss) | | 9,445 | | | — | | | (1,926) | | | 5,309 | | | 12,828 | |
| Balance, December 31, 2021 | | $ | 58,013 | | | $ | — | | | $ | (26,291) | | | $ | (2,755) | | | $ | 28,967 | |
_______________________
(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 14 — Employee Retirement Plans
Qualified Defined Benefit Multiemployer Plan. We participate in the Pentegra Defined Benefit Plan for Financial Institutions (the Pentegra Defined Benefit Plan), a funded, tax-qualified, noncontributory defined-benefit pension plan. The Pentegra Defined Benefit Plan is treated as a multiemployer plan for accounting purposes, but operates as a multiple-employer plan under the Employee Retirement Income Security Act of 1974, as amended (ERISA), and the Internal Revenue Code. Accordingly, certain multiemployer plan disclosures are not applicable to the Pentegra Defined Benefit Plan. Under the Pentegra Defined Benefit Plan, contributions made by a participating employer may be used to provide benefits to employees of other participating employers since assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. Also, in the event a participating employer is unable to meet its contribution requirements, the required contributions for the other participating employers could increase proportionately. The plan covers substantially all of our employees. For each of the years ended December 31, 2020 and 2019, in addition to our required contribution, we made voluntary contributions of $6.0 million to the Pentegra Defined Benefit Plan. For the year ended December 31, 2021, we did not make a voluntary contribution. We were not required to nor did we pay a funding improvement surcharge to the plan for the years ended December 31, 2021, 2020, and 2019.
The Pentegra Defined Benefit Plan operates on a fiscal year from July 1 through June 30. The Pentegra Defined Benefit Plan files one Form 5500 on behalf of all employers who participate in the plan. The Employer Identification Number is 13-5645888 and the three-digit plan number is 333. We do not have any collective bargaining agreements in place.
The Pentegra Defined Benefit Plan's annual valuation process includes calculating the plan's funded status and separately calculating the funded status of each participating employer. The funded status is defined as the market value of assets divided by the funding target (100 percent of the present value of all benefit liabilities accrued at that date). As permitted by ERISA, the Pentegra Defined Benefit Plan accepts contributions for the prior plan year up to eight and a half months after the asset valuation date. Accordingly, the market value of assets at the valuation date (July 1) will increase by any subsequent contributions designated for the immediately preceding plan year ended June 30.
The most recent Form 5500 available for the Pentegra Defined Benefit Plan is for the plan year ended June 30, 2020. For the Pentegra Defined Benefit Plan plan years ended June 30, 2019 and 2018, our contributions did not represent more than five percent of the total contributions to the Pentegra Defined Benefit Plan.
On November 30, 2020, the board of directors elected to freeze the Pentegra Defined Benefit Plan. The Pentegra Defined Benefit Plan will be frozen to employees hired on or after January 1, 2021, and on January 1, 2024, future benefit accruals under the plan will cease for all employees that were hired before January 1, 2021.
Table 14.1 - Pentegra Defined Benefit Plan Net Pension Cost and Funded Status
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | |
| 2021 | | 2020 | | 2019 | | |
| Net pension cost | $ | 883 | | | $ | 6,843 | | | $ | 6,559 | | | |
Pentegra Defined Benefit Plan funded status as of July 1(1) | 129.6 | % | (2) | 108.5 | % | (3) | 108.6 | % | | |
Our funded status as of July 1(1) | 136.4 | % | | 110.2 | % | | 113.9 | % | | |
______________________
(1) The funded status is calculated in accordance with a provision contained in the Highway and Transportation Funding Act of 2014 (HATFA), which was signed into law on August 8, 2014, and which modifies the interest rates that had been set by the Moving Ahead for Progress in the 21st Century Act (MAP-21). MAP-21, signed into law in 2012, changed the calculation of the discount rate used in measuring the pension plan liability. MAP-21 allows plan sponsors to measure the pension plan liability using a 25-year average of interest rates plus or minus a corridor. Prior to MAP-21, the discount rate used in measuring the pension plan liability was based on the 24-month average of interest rates. HATFA amended MAP-21 by extending the time period and reducing the rate at which the 25-year corridors widen. Over time, the pension funding stabilization effect of MAP-21 will decline because the 24-month smoothed segment rates and the amended 25-year corridors are likely to converge.
(2) The funded status as of July 1, 2021, is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 2021, through March 15, 2022. Contributions made on or before
March 15, 2022, and designated for the plan year ended June 30, 2021, will be included in the final valuation as of July 1, 2021. The final funded status as of July 1, 2021, will not be available until the Form 5500 for the plan year July 1, 2021, through June 30, 2022 is filed. This Form 5500 is due to be filed no later than April 2023.
(3) The funded status as of July 1, 2020, is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 2020, through March 15, 2021. Contributions made on or before March 15, 2021, and designated for the plan year ended June 30, 2020, will be included in the final valuation as of July 1, 2020. The final funded status as of July 1, 2020, will not be available until the Form 5500 for the plan year July 1, 2020, through June 30, 2021 is filed. This Form 5500 is due to be filed no later than April 2022.
Qualified Defined Contribution Plan. We also participate in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified defined contribution plan. The plan covers substantially all of our employees. We contribute a percentage of the participants' compensation by making a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. Our matching contributions are charged to compensation and benefits expense and are not considered to be material.
On November 30, 2020, the board of directors adopted changes to the Pentegra Defined Contribution Plan to add, subject to certain limitations of the Internal Revenue Code, a non-elective, non-matching contribution from the Bank of six percent of each eligible employee’s salary for employees who are ineligible to accrue benefits under the Pentegra Defined Benefit Plan, either because they were hired on or after January 1, 2021, or because benefit accruals have ceased on January 1, 2024.
Nonqualified Defined Contribution Plan. We also maintain the Thrift Benefit Equalization Plan, a nonqualified, unfunded deferred compensation plan covering certain of our senior officers and directors. The plan's liability consists of the accumulated compensation deferrals and the accumulated earnings on these deferrals. Our obligation from this plan was $13.5 million and $14.1 million at December 31, 2021 and 2020, respectively, which is recorded in other liabilities on the statement of condition. We maintain a rabbi trust, which is recorded in other assets on the statement of condition, intended to satisfy future benefit obligations. Our matching contributions are charged to compensation and benefits expense and are not considered to be material.
On November 30, 2020, the board of directors adopted changes to the Thrift Benefit Equalization Plan to add, subject to certain limitations of the Internal Revenue Code, a non-elective, non-matching contribution from the Bank of six percent of each eligible executive participant's salary for certain senior officers who are ineligible to accrue benefits under the Nonqualified Supplemental Defined Benefit Retirement Plan, either because they were hired on or after January 1, 2021, or because benefit accruals have ceased on January 1, 2024.
Nonqualified Supplemental Defined Benefit Retirement Plan. We also maintain a nonqualified, single-employer unfunded defined-benefit plan covering certain senior officers, for which our obligation is detailed below. We maintain a rabbi trust which is recorded in other assets on the statement of condition, intended to satisfy future benefit obligations.
On November 30, 2020, the board of directors elected to freeze this plan. The plan will be frozen to senior officers hired on or after January 1, 2021, and on January 1, 2024, future benefit accruals under the plan will cease for all senior officers.
Postretirement Benefits. We sponsor a fully insured postretirement benefit program that includes life insurance benefits for eligible retirees. We provide life insurance to all employees who retire on or after age 55 after completing six years of service. No contributions are required from the retirees. There are no funded plan assets that have been designated to provide postretirement benefits.
Table 14.2 - Pension and Postretirement Benefit Obligation, Fair Value of Plan Assets, and Funded Status
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement Benefits |
| | December 31, 2021 | | December 31, 2020 | | December 31, 2021 | | December 31, 2020 |
Change in benefit obligation (1) | | | | | | | |
| Benefit obligation at beginning of year | $ | 28,028 | | | $ | 26,123 | | | $ | 1,690 | | | $ | 1,339 | |
| Service cost | 1,347 | | | 1,487 | | | 45 | | | 44 | |
| Interest cost | 407 | | | 551 | | | 43 | | | 44 | |
| Actuarial (gain) loss | (3,960) | | | 3,048 | | | (99) | | | 282 | |
| Benefits paid | (137) | | | (138) | | | (21) | | | (19) | |
| | | | | | | |
| Settlements | (5,857) | | | (3,043) | | | — | | | — | |
| Benefit obligation at end of year | 19,828 | | | 28,028 | | | 1,658 | | | 1,690 | |
| | | | | | | |
| Change in plan assets | | | | | | | |
| Fair value of plan assets at beginning of year | — | | | — | | | — | | | — | |
| Employer contribution | 5,994 | | | 3,181 | | | 21 | | | 19 | |
| Benefits paid | (137) | | | (138) | | | (21) | | | (19) | |
| Settlements | (5,857) | | | (3,043) | | | — | | | — | |
| Fair value of plan assets at end of year | — | | | — | | | — | | | — | |
| Funded status at end of year | $ | (19,828) | | | $ | (28,028) | | | $ | (1,658) | | | $ | (1,690) | |
______________________
(1) Represents the projected benefit obligation for the nonqualified supplemental defined benefit retirement plan and the accumulated postretirement benefit obligation for postretirement benefits.
Table 14.3 - Pension and Postretirement Benefits Recognized in Accumulated Other Comprehensive Income
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement
Benefits |
| | | December 31, 2021 | | December 31, 2020 | | December 31, 2021 | | December 31, 2020 |
| Net actuarial loss | | $ | 2,218 | | | $ | 7,375 | | | $ | 537 | | | $ | 689 | |
| | | | | | | | |
| | | | | | | | |
The accumulated benefit obligation for the nonqualified supplemental defined benefit retirement plan was $19.7 million and $25.3 million at December 31, 2021 and 2020, respectively.
Table 14.4 - Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement Benefits |
| | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Net Periodic Benefit Cost | | | | | | | | | | | | |
| Service cost | | $ | 1,347 | | | $ | 1,487 | | | $ | 1,235 | | | $ | 45 | | | $ | 44 | | | $ | 38 | |
| Interest cost | | 407 | | | 551 | | | 699 | | | 43 | | | 44 | | | 42 | |
| Amortization of prior service cost | | — | | | 79 | | | 86 | | | — | | | — | | | — | |
| Amortization of net actuarial loss | | 543 | | | 1,020 | | | 571 | | | 52 | | | 30 | | | 7 | |
| Curtailment charge | | — | | | 69 | | | — | | | — | | | — | | | — | |
| Settlement charge | | 655 | | | 875 | | | — | | | — | | | — | | | — | |
| Net periodic benefit cost | | 2,952 | | | 4,081 | | | 2,591 | | | 140 | | | 118 | | | 87 | |
| | | | | | | | | | | | |
| Other Changes in Benefit Obligations Recognized in Accumulated Other Comprehensive Income (Loss) | | | | | | | | | | | | |
| Amortization of prior service cost | | — | | | (79) | | | (86) | | | — | | | — | | | — | |
| Amortization of net actuarial loss | | (543) | | | (1,020) | | | (571) | | | (52) | | | (30) | | | (7) | |
| | | | | | | | | | | | |
| Net actuarial (gain) loss | | (3,960) | | | 3,048 | | | 1,874 | | | (99) | | | 282 | | | 321 | |
| Curtailment charge | | — | | | (69) | | | — | | | — | | | — | | | — | |
| Settlement charge | | (655) | | | (875) | | | — | | | — | | | — | | | — | |
| Total amount recognized in other comprehensive income | | (5,158) | | | 1,005 | | | 1,217 | | | (151) | | | 252 | | | 314 | |
| Total amount recognized in net periodic benefit cost and other comprehensive income | | $ | (2,206) | | | $ | 5,086 | | | $ | 3,808 | | | $ | (11) | | | $ | 370 | | | $ | 401 | |
| | | | | | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Table 14.5 - Pension and Postretirement Benefit Plan Key Assumptions
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Nonqualified Supplemental Defined Benefit Retirement Plan | | Postretirement
Benefits |
| | | 2021 | | 2020 | | 2021 | | 2020 |
| Benefit obligation | | | | | | | | |
| Discount rate | | 2.32 | % | | 1.73 | % | | 2.85 | % | | 2.55 | % |
| Salary increases | | 5.50 | % | | 5.50 | % | | — | | | — | |
| | | | | | | | |
| Net periodic benefit cost | | | | | | | | |
| Discount rate | | 1.73 | % | | 1.74 | % | | 2.55 | % | | 3.25 | % |
| Salary increases | | 5.50 | % | | 5.50 | % | | — | | | — | |
The discount rate for the nonqualified supplemental defined benefit retirement plan was determined by using a discounted cash-flow analysis using the FTSE Pension Discount Curve as of December 31, 2021.
Our nonqualified supplemental defined benefit retirement plan and postretirement benefits are not funded; therefore, no contributions will be made in 2022 other than the payment of benefits.
Table 14.6 - Estimated Future Benefit Payments
(dollars in thousands)
| | | | | | | | | | | | | | |
| | Estimated Future Payments |
| | Nonqualified Supplemental Defined Benefit
Retirement Plan | | Postretirement
Benefits |
| 2022 | | $ | 1,639 | | | $ | 23 | |
| 2023 | | 2,615 | | | 25 | |
| 2024 | | 1,572 | | | 28 | |
| 2025 | | 5,675 | | | 30 | |
| 2026 | | 2,595 | | | 32 | |
| 2027-2031 | | 1,762 | | | 202 | |
Note 15 — Fair Values
Fair-Value Methodologies and Techniques
We have determined the fair-value amounts below using available market and other pertinent information and our best judgment of appropriate valuation methods. Fair value is the price in an orderly transaction between market participants to sell an asset or transfer a liability in the principal (or advantageous) market for the asset or liability at the measurement date (an exit price). Although we use our best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of our financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect our judgment of how a market participant would estimate the fair values. Additionally, these values do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account, among other things, future business opportunities and the net profitability of assets and liabilities.
Fair-Value Hierarchy.
GAAP establishes a fair-value hierarchy and requires an entity to maximize the use of significant observable inputs and minimize the use of significant unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the fair-value measurement is determined. This overall level is an indication of market observability of the fair-value measurement for the asset or liability. An entity must disclose the level within the fair value hierarchy in which the measurements are classified.
The fair-value hierarchy prioritizes the inputs used to measure fair value into three broad levels:
Level 1 Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date. An active market for the asset or liability is a market in which the transaction for the asset or liability occurs with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified or contractual term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, volatilities, and prepayment speeds); and (4) inputs that are derived principally from or corroborated by observable market data (e.g., implied spreads).
Level 3 Unobservable inputs for the asset or liability. Valuations are derived from techniques that use significant assumptions not observable in the market, which include pricing models, discounted cash flow models, or similar techniques.
We review the fair-value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. There were no such transfers into or out of Level 3 of the fair value hierarchy during the years ended December 31, 2021 and 2020.
Table 15.1 presents the carrying value, fair value, and fair value hierarchy of our financial assets and liabilities at December 31, 2021 and 2020. We record trading securities, available-for-sale securities, derivative assets, derivative liabilities, 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 15.2 for further details about the financial assets and liabilities held at fair value on either a recurring or non-recurring basis.
Table 15.1 - Fair Value Summary
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | 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 | $ | 204,993 | | | $ | 204,993 | | | $ | 204,993 | | | $ | — | | | $ | — | | | $ | — | |
| Interest-bearing deposits | 85,153 | | | 85,153 | | | 85,153 | | | — | | | — | | | — | |
| Securities purchased under agreements to resell | 800,000 | | | 799,998 | | | — | | | 799,998 | | | — | | | — | |
| Federal funds sold | 1,944,000 | | | 1,943,998 | | | — | | | 1,943,998 | | | — | | | — | |
Trading securities(1) | 501,867 | | | 501,867 | | | — | | | 501,867 | | | — | | | — | |
Available-for-sale securities(1) | 12,895,987 | | | 12,895,987 | | | — | | | 12,833,722 | | | 62,265 | | | — | |
| Held-to-maturity securities | 145,492 | | | 148,068 | | | — | | | 148,068 | | | — | | | — | |
| Advances | 12,340,020 | | | 12,440,985 | | | — | | | 12,440,985 | | | — | | | — | |
| Mortgage loans, net | 3,120,159 | | | 3,234,829 | | | — | | | 3,204,222 | | | 30,607 | | | — | |
| Accrued interest receivable | 68,360 | | | 68,360 | | | — | | | 68,360 | | | — | | | — | |
Derivative assets(1) | 378,532 | | | 378,532 | | | — | | | 3,972 | | | — | | | 374,560 | |
Other assets (1) | 32,570 | | | 32,570 | | | 13,937 | | | 18,633 | | | — | | | — | |
| Liabilities: | | | | | | | | | | | |
| Deposits | (884,032) | | | (884,029) | | | — | | | (884,029) | | | — | | | — | |
| COs: | | | | | | | | | | | |
| Bonds | (26,613,032) | | | (26,882,036) | | | — | | | (26,882,036) | | | — | | | — | |
| Discount notes | (2,275,320) | | | (2,275,276) | | | — | | | (2,275,276) | | | — | | | — | |
| Mandatorily redeemable capital stock | (13,562) | | | (13,562) | | | (13,562) | | | — | | | — | | | — | |
| Accrued interest payable | (60,968) | | | (60,968) | | | — | | | (60,968) | | | — | | | — | |
Derivative liabilities(1) | (38,944) | | | (38,944) | | | — | | | (177,578) | | | — | | | 138,634 | |
| Other: | | | | | | | | | | | |
| Commitments to extend credit for advances | — | | | (6,196) | | | — | | | (6,196) | | | — | | | — | |
| | | | | | | | | | | |
| Standby letters of credit | (1,146) | | | (1,146) | | | — | | | (1,146) | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| | Carrying
Value | | Total Fair
Value | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral(2) |
| Financial instruments | | | | | | | | | | | |
| Assets: | | | | | | | | | | | |
| Cash and due from banks | $ | 2,050,028 | | | $ | 2,050,028 | | | $ | 2,050,028 | | | $ | — | | | $ | — | | | $ | — | |
| Interest-bearing deposits | 299,149 | | | 299,149 | | | 299,149 | | | — | | | — | | | — | |
| Securities purchased under agreements to resell | 750,000 | | | 749,995 | | | — | | | 749,995 | | | — | | | — | |
| Federal funds sold | 2,260,000 | | | 2,259,988 | | | — | | | 2,259,988 | | | — | | | — | |
Trading securities(1) | 3,605,079 | | | 3,605,079 | | | — | | | 3,605,079 | | | — | | | — | |
Available-for-sale securities(1) | 6,220,148 | | | 6,220,148 | | | — | | | 6,097,599 | | | 122,549 | | | — | |
| Held-to-maturity securities | 207,162 | | | 211,837 | | | — | | | 211,837 | | | — | | | — | |
| Advances | 18,817,002 | | | 19,119,220 | | | — | | | 19,119,220 | | | — | | | — | |
| Mortgage loans, net | 3,930,252 | | | 4,136,004 | | | — | | | 4,086,757 | | | 49,247 | | | — | |
| | | | | | | | | | | |
| Accrued interest receivable | 87,582 | | | 87,582 | | | — | | | 87,582 | | | — | | | — | |
Derivative assets(1) | 161,238 | | | 161,238 | | | — | | | 10,182 | | | — | | | 151,056 | |
Other assets(1) | 34,360 | | | 34,360 | | | 14,296 | | | 20,064 | | | — | | | — | |
| Liabilities: | | | | | | | | | | | |
| Deposits | (1,088,987) | | | (1,088,981) | | | — | | | (1,088,981) | | | — | | | — | |
| COs: | | | | | | | | | | | |
| Bonds | (21,471,590) | | | (22,062,476) | | | — | | | (22,062,476) | | | — | | | — | |
| Discount notes | (12,878,310) | | | (12,878,918) | | | — | | | (12,878,918) | | | — | | | — | |
| Mandatorily redeemable capital stock | (6,282) | | | (6,282) | | | (6,282) | | | — | | | — | | | — | |
| Accrued interest payable | (61,918) | | | (61,918) | | | — | | | (61,918) | | | — | | | — | |
Derivative liabilities(1) | (24,062) | | | (24,062) | | | — | | | (88,770) | | | — | | | 64,708 | |
| Other: | | | | | | | | | | | |
| Commitments to extend credit for advances | — | | | (5,306) | | | — | | | (5,306) | | | — | | | — | |
| | | | | | | | | | | |
| Standby letters of credit | (1,303) | | | (1,303) | | | — | | | (1,303) | | | — | | | — | |
_______________________
(1)Carried at fair value and measured on a recurring basis.
(2)These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.
Summary of Valuation Methodologies and Primary Inputs
The valuation methodologies and primary inputs used to develop the measurement of fair value for assets and liabilities that are measured at fair value on a recurring or nonrecurring basis in the Statement of Condition are listed below. The fair values and level within the fair value hierarchy of these assets and liabilities are reported in Table 15.2.
Investment Securities. We determine the fair values of our investment securities, other than HFA floating-rate securities, based on prices obtained for each of these securities that we request from multiple designated third-party pricing vendors. The fair value of each such security is the average of such vendor prices that are within a cluster pricing tolerance range. A cluster is defined as a group of available vendor prices for a given security that is within a defined price tolerance range of the median vendor price depending on the security type. An outlier is any vendor price that is outside of the defined cluster and is evaluated for reasonableness.
All prices that are within a specified tolerance threshold of the median price are included in the cluster of prices that are averaged to compute a default price. Vendor prices that are outside of a defined cluster are identified as outliers and are subject to additional review including, but not limited to, comparison to prices provided by an additional third-party valuation vendor, prices for similar securities, and/or nonbinding dealer estimates, or the use of internal model prices, which we believe reflect the
facts and circumstances that a market participant would consider. We also perform this analysis in those limited instances where no third-party vendor price or only one third-party vendor price is available to determine fair value. If the analysis indicates that an outlier is not representative of fair value and that the average of the vendor prices within the tolerance threshold of the median price is the best estimate, then we use the average of the vendor prices within the tolerance threshold of the median price as the final price. If, on the other hand, we determine that an outlier (or some other price identified in the analysis) is a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price. In all cases, the final price is used to determine the fair value of the security.
As of December 31, 2021, multiple vendor prices were received for substantially all of our investment securities and the final prices for substantially all of those securities were computed by averaging the prices received. The relative proximity of the prices received supports our conclusion that the final computed prices are reasonable estimates of fair value. Based on the current low level of market activity for private-label residential MBS, the nonrecurring fair-value measurements for such securities during 2020 fell within Level 3 of the fair-value hierarchy. Our fixed-rate HFA securities fall within Level 3 of the fair-value hierarchy due to the current lack of market activities for these bonds.
Investment Securities – HFA Floating Rate Securities. The fair value is determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for securities with similar terms. Our floating rate HFA securities fall within Level 3 of the fair-value hierarchy due to the current lack of market activity for these bonds.
Mortgage Loans. The fair value of impaired conventional mortgage loans is based on the lower of the carrying value of the loans or fair value of the collateral less estimated costs to sell. The fair value of impaired government mortgage loans is equal to the unpaid principal balance.
REO. Fair value is derived from third-party valuations of the property, which fall within Level 3 of the fair-value hierarchy.
Derivative Assets/Liabilities - Interest-Rate-Exchange Agreements. We base the fair values of interest-rate-exchange agreements on available market prices of derivatives having similar terms, including accrued interest receivable and payable. The fair-value methodology uses standard valuation techniques for derivatives such as discounted cash-flow analysis and comparisons with similar instruments.
The fair values of all interest-rate-exchange agreements are netted by clearing member and/or by counterparty, including cash collateral received from or delivered to the counterparty. If these netted amounts are positive, they are classified as an asset, and if negative, they are classified as a liability. We generally use a midmarket pricing convention based on the bid-ask spread as a practical expedient for fair-value measurements. Because these estimates are made at a specific point in time, they are susceptible to material near-term changes. We have evaluated the potential for the fair value of the instruments to be affected by counterparty risk and our own credit risk and have determined that no adjustments were significant to the overall fair-value measurements.
The discounted cash-flow model uses market-observable inputs (inputs that are actively quoted and can be validated to external sources), including the following:
•Discount rate assumption. For all derivatives cleared through a DCO the discount rate used is SOFR. For our bilateral, non-cleared interest-rate derivatives the discount rate used is either SOFR, the OIS rate based on the federal funds effective rate curve or the LIBOR swap curve depending on the terms of the International Swaps and Derivatives Association (ISDA) agreement we have with each derivative counterparty.
•Forward interest-rate assumption. Forward rates implied by the LIBOR swap curve, forward federal funds rates based on the OIS swap curve or forward rates implied by the SOFR swap curve.
•Volatility assumption. Market-based expectations of future interest-rate volatility implied from current market prices for similar options.
Derivative Assets/Liabilities – Commitments to Invest in Mortgage Loans. Commitments to invest in mortgage loans are recorded as derivatives in the statement of condition. The fair values of such commitments are based on the end-of-day delivery commitment prices provided by the FHLBank of Chicago and a spread, derived from MBS TBA delivery commitment prices with adjustment for the contractual features of the MPF program, such as servicing and credit-enhancement features.
Subjectivity of Estimates. Estimates of the fair value of financial assets and liabilities using the methodologies described above are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows,
prepayment speed assumptions, expected interest-rate volatility, possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. The use of different assumptions could have a material effect on the fair-value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes.
Fair Value Measured on a Recurring and Nonrecurring Basis.
Table 15.2 - Fair Value of Assets and Liabilities Measured at Fair Value on a Recurring and Nonrecurring Basis
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | 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 | $ | — | | | $ | 1,442 | | | $ | — | | | $ | — | | | $ | 1,442 | |
| U.S. Treasury obligations | — | | | 500,425 | | | — | | | — | | | 500,425 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total trading securities | — | | | 501,867 | | | — | | | — | | | 501,867 | |
| Available-for-sale securities: | | | | | | | | | |
| HFA securities | — | | | — | | | 62,265 | | | — | | | 62,265 | |
| U.S. Treasury obligations | — | | | 5,084,546 | | | — | | | — | | | 5,084,546 | |
| Supranational institutions | — | | | 403,765 | | | — | | | — | | | 403,765 | |
| | | | | | | | | |
| U.S. government-owned corporations | — | | | 306,864 | | | — | | | — | | | 306,864 | |
| GSE | — | | | 126,472 | | | — | | | — | | | 126,472 | |
| U.S. government guaranteed – single-family MBS | — | | | 21,535 | | | — | | | — | | | 21,535 | |
| U.S. government guaranteed – multifamily MBS | — | | | 541,405 | | | — | | | — | | | 541,405 | |
| GSE – single-family MBS | — | | | 1,103,714 | | | — | | | — | | | 1,103,714 | |
| GSE – multifamily MBS | — | | | 5,245,421 | | | — | | | — | | | 5,245,421 | |
| Total available-for-sale securities | — | | | 12,833,722 | | | 62,265 | | | — | | | 12,895,987 | |
| Derivative assets: | | | | | | | | | |
| Interest-rate-exchange agreements | — | | | 3,850 | | | — | | | 374,560 | | | 378,410 | |
| CO Bond firm commitments | — | | | 54 | | | — | | | — | | | 54 | |
| Mortgage delivery commitments | — | | | 68 | | | — | | | — | | | 68 | |
| Total derivative assets | — | | | 3,972 | | | — | | | 374,560 | | | 378,532 | |
| Other assets | 13,937 | | | 18,633 | | | — | | | — | | | 32,570 | |
| Total assets carried at fair value on a recurring basis | $ | 13,937 | | | $ | 13,358,194 | | | $ | 62,265 | | | $ | 374,560 | | | $ | 13,808,956 | |
Carried at fair value on a nonrecurring basis(2) | | | | | | | | | |
| Mortgage loans held for portfolio | $ | — | | | $ | — | | | $ | 3,860 | | | $ | — | | | $ | 3,860 | |
| REO | — | | | — | | | 59 | | | — | | | 59 | |
| Total assets carried at fair value on a nonrecurring basis | $ | — | | | $ | — | | | $ | 3,919 | | | $ | — | | | $ | 3,919 | |
| Liabilities: | | | | | | | | | |
| Carried at fair value on a recurring basis | | | | | | | | | |
| Derivative liabilities | | | | | | | | | |
| Interest-rate-exchange agreements | $ | — | | | $ | (177,548) | | | $ | — | | | $ | 138,634 | | | $ | (38,914) | |
| CO Bond firm commitments | — | | | (30) | | | — | | | — | | | (30) | |
| Total liabilities carried at fair value on a recurring basis | $ | — | | | $ | (177,578) | | | $ | — | | | $ | 138,634 | | | $ | (38,944) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| | Level 1 | | Level 2 | | Level 3 | | Netting
Adjustments and Cash Collateral(1) | | Total |
| Assets: | | | | | | | | | |
| Carried at fair value on a recurring basis | | | | | | | | | |
| Trading securities: | | | | | | | | | |
| Corporate bonds | $ | — | | | $ | 5,422 | | | $ | — | | | $ | — | | | $ | 5,422 | |
| U.S. Treasury obligations | — | | | 3,596,718 | | | — | | | — | | | 3,596,718 | |
| U.S. government-guaranteed – single-family MBS | — | | | 2,884 | | | ��� | | | — | | | 2,884 | |
| GSE – single-family MBS | — | | | 55 | | | — | | | — | | | 55 | |
| | | | | | | | | |
| Total trading securities | — | | | 3,605,079 | | | — | | | — | | | 3,605,079 | |
| Available-for-sale securities: | | | | | | | | | |
| HFA securities | — | | | — | | | 122,549 | | | — | | | 122,549 | |
| Supranational institutions | — | | | 430,069 | | | — | | | — | | | 430,069 | |
| U.S. government-owned corporations | — | | | 322,061 | | | — | | | — | | | 322,061 | |
| GSE | — | | | 134,992 | | | — | | | — | | | 134,992 | |
| U.S. government guaranteed – single-family MBS | — | | | 29,408 | | | — | | | — | | | 29,408 | |
| U.S. government guaranteed – multifamily MBS | — | | | 47,180 | | | — | | | — | | | 47,180 | |
| GSE – single-family MBS | — | | | 1,469,048 | | | — | | | — | | | 1,469,048 | |
| GSE – multifamily MBS | — | | | 3,664,841 | | | — | | | — | | | 3,664,841 | |
| Total available-for-sale securities | — | | | 6,097,599 | | | 122,549 | | | — | | | 6,220,148 | |
| Derivative assets: | | | | | | | | | |
| Interest-rate-exchange agreements | — | | | 9,962 | | | — | | | 151,056 | | | 161,018 | |
| Mortgage delivery commitments | — | | | 220 | | | — | | | — | | | 220 | |
| Total derivative assets | — | | | 10,182 | | | — | | | 151,056 | | | 161,238 | |
| Other assets | 14,296 | | | 20,064 | | | — | | | — | | | 34,360 | |
| Total assets carried at fair value on a recurring basis | $ | 14,296 | | | $ | 9,732,924 | | | $ | 122,549 | | | $ | 151,056 | | | $ | 10,020,825 | |
Carried at fair value on a nonrecurring basis(2) | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Mortgage loans held for portfolio | — | | | — | | | 10,782 | | | — | | | 10,782 | |
| REO | — | | | — | | | 245 | | | — | | | 245 | |
| Total assets carried at fair value on a nonrecurring basis | $ | — | | | $ | — | | | $ | 11,027 | | | $ | — | | | $ | 11,027 | |
| Liabilities: | | | | | | | | | |
| Carried at fair value on a recurring basis | | | | | | | | | |
| Derivative liabilities | | | | | | | | | |
| Interest-rate-exchange agreements | $ | — | | | $ | (88,770) | | | $ | — | | | $ | 64,708 | | | $ | (24,062) | |
| | | | | | | | | |
| Total liabilities carried at fair value on a recurring basis | $ | — | | | $ | (88,770) | | | $ | — | | | $ | 64,708 | | | $ | (24,062) | |
_______________________
(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 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 15.3 presents a reconciliation of available-for-sale securities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2021, 2020, and 2019.
Table 15.3 - Roll Forward of Level 3 Available-for-Sale Securities
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | HFA Securities | | HFA Securities | | Private-label MBS | | HFA Securities |
| Balance at beginning of year | | $ | 122,549 | | | $ | 64,652 | | | $ | — | | | $ | 49,601 | |
| Transfer of securities from held-to-maturity to available-for-sale | | — | | | 71,240 | | | 180,514 | | | — | |
| Total gains included in earnings | | | | | | | | |
| Net gains on sale | | — | | | — | | | 30,583 | | | — | |
| Reduction of provision for credit losses | | — | | | — | | | 269 | | | — | |
| Accretion | | — | | | — | | | 353 | | | — | |
| Total gains (losses) included in other comprehensive income | | | | | | | | |
| Net unrealized gains (losses) | | 3,316 | | | 6,517 | | | (22,203) | | | 1,231 | |
| Purchases | | — | | | — | | | — | | | 13,820 | |
| Sales, maturities, and settlements | | | | | | | | |
| Sales | | — | | | — | | | (187,366) | | | — | |
| Maturities | | (61,320) | | | (18,685) | | | — | | | — | |
| Settlements | | (2,280) | | | (1,175) | | | (2,150) | | | — | |
| Balance at end of year | | $ | 62,265 | | | $ | 122,549 | | | $ | — | | | $ | 64,652 | |
| | | | | | | | |
| Total amount of unrealized gains (losses) for the period included in other comprehensive income relating to securities held at period end | | $ | 124 | | | $ | 5,823 | | | $ | — | | | $ | 1,231 | |
| | | | | | | | |
Note 16 — Commitments and Contingencies
Joint and Several Liability. COs are backed by the financial resources of the FHLBanks. The FHFA has authority to require any FHLBank to repay all or a portion of the principal and interest on COs for which another FHLBank is the primary obligor. No FHLBank has ever been asked or required to repay the principal or interest on any CO on behalf of another FHLBank. We evaluate the financial condition of the other FHLBanks primarily based on known regulatory actions, publicly available financial information, and individual long-term credit-rating action as of each period-end presented. Based on this evaluation, as of December 31, 2021, and through the filing of this report, we do not believe it is likely that we will be required to repay the principal or interest on any CO on behalf of another FHLBank.
We have considered applicable FASB guidance and determined it is not necessary to recognize a liability for the fair value of our joint and several liability for all of the COs. The joint and several obligation is mandated by the FHLBank Act, as implemented by FHFA regulations, and is not the result of an arms-length transaction among the FHLBanks. The FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several obligation. Because the FHLBanks are subject to the authority of the FHFA as it relates to decisions involving the allocation of the joint and several liability for the FHLBanks' COs, the FHLBanks' joint and several obligation is excluded from the initial recognition and measurement provisions. Accordingly, we have not recognized a liability for our joint and several obligation related to other FHLBanks' COs at December 31, 2021 and 2020. The par amounts of other FHLBanks' outstanding COs for which we are jointly and severally liable totaled $623.9 billion and $712.5 billion at December 31, 2021 and 2020, respectively. See Note 10 — Consolidated Obligations for additional information.
Off-Balance-Sheet Commitments
Table 16.1 - Off-Balance Sheet Commitments (1)
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| | Expire within one year | | Expire after one year | | Total | | Expire within one year | | Expire after one year | | Total |
Standby letters of credit outstanding (2) | | $ | 5,369,701 | | | $ | 132,096 | | | $ | 5,501,797 | | | $ | 6,190,479 | | | $ | 233,771 | | | $ | 6,424,250 | |
| | | | | | | | | | | | |
Commitments for unused lines of credit - advances (3) | | 1,095,844 | | | — | | | 1,095,844 | | | 1,127,432 | | | — | | | 1,127,432 | |
| Commitments to make additional advances | | 40,917 | | | 66,318 | | | 107,235 | | | 69,684 | | | 93,465 | | | 163,149 | |
| Commitments to invest in mortgage loans | | 3,164 | | | — | | | 3,164 | | | 28,386 | | | — | | | 28,386 | |
| Unsettled CO bonds, at par | | 260,000 | | | — | | | 260,000 | | | — | | | — | | | — | |
| Unsettled CO discount notes, at par | | — | | | — | | | — | | | 250,000 | | | — | | | 250,000 | |
__________________________
(1) We have determined that it is 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 December 31, 2021 and 2020, these amounts totaled $16.1 million and $37.1 million, respectively. Also excluded are commitments to issue standby letters of credit that expire after one year totaling $125 thousand and $25 thousand at December 31, 2021 and 2020, respectively.
(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 generally subject to the same collateralization and borrowing limits that are applicable to advances. Standby letters of credit may be offered to assist members and nonmember housing associates 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 December 31, 2021, the terms of these standby letters of credit have original expiration periods of up to 20 years, expiring no later than 2031. 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 $1.1 million and $1.3 million at December 31, 2021 and 2020, respectively.
We monitor the creditworthiness of our members and housing associates that have standby letter of credit agreements outstanding based on our evaluations of the financial condition of the member or housing associate. We review available financial data, which can include regulatory call reports filed by depository institution members, regulatory financial statements filed with the appropriate state insurance department by insurance company members, audited financial statements of housing associates, SEC filings, and rating-agency reports to ensure that potentially troubled members are identified as soon as possible. In addition, we have access to most members' regulatory examination reports. We analyze this information on a regular basis.
Standby letters of credit are fully collateralized at the time of issuance. Based on our credit analyses and collateral requirements, we have not deemed it necessary to record any additional liability on these commitments.
Commitments to Invest in Mortgage Loans. Commitments to invest in mortgage loans are generally for periods not to exceed 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 8 — 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 17 — Transactions with Shareholders
We are a cooperative whose members own our capital stock and may receive dividends on their investment in our capital stock. In addition, certain former members and nonmembers that still have outstanding transactions with us are required to maintain their investment in our capital stock until the transactions mature or are paid off. All advances are issued to members or housing associates, and mortgage loans held for portfolio are generally acquired from our members or housing associates. We also maintain demand-deposit accounts for members and housing associates primarily to facilitate settlement activities that are directly related to advances, mortgage-loan purchases, and other transactions between us and the member or housing associate. In instances where the member has an officer or director who serves as a director of the Bank, those transactions are subject to the same eligibility and credit criteria, as well as the same terms and conditions, as transactions with all other members.
Related Parties. We define related parties as members who owned 10 percent or more of the voting interests of our capital stock outstanding at year end. Each member eligible to vote is entitled to cast by ballot one vote for each share of stock that it was required to hold as of the record date, which is December 31, of the year prior to each election, subject to the limitation that no member may cast more votes than the average number of shares of our stock that is required to be held by all members located in such member's state. Under the FHLBank Act and FHFA regulations, each member directorship is designated to one of the six states in our district. Eligible members are permitted to vote all their eligible shares for one candidate for each open member directorship in the state in which the member is located and for each open independent directorship. A nonmember stockholder is not entitled to cast votes for the election of directors unless it was a member as of the record date. At December 31, 2021 and 2020, no shareholder owned more than 10 percent of the total voting interests due to statutory limits on members' voting rights, therefore, we did not have any related parties.
Shareholder Concentrations. We consider shareholder concentrations as members or nonmembers whose capital stock holdings (including mandatorily redeemable capital stock) are in excess of 10 percent of total capital stock outstanding at December 31, 2021 and 2020. At December 31, 2021 and 2020, no shareholder has more than 10 percent of total capital stock outstanding.
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 17.1 - 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 |
| December 31, 2021 | $ | 48,104 | | | 5.0 | % | | $ | 416,542 | | | 3.4 | % | | $ | 466 | | | 2.8 | % |
| December 31, 2020 | 60,624 | | | 4.8 | | | 582,765 | | | 3.1 | | | 651 | | | 2.5 | |
Note 18 — Transactions with Other FHLBanks
We may occasionally enter into transactions with other FHLBanks. These transactions are summarized below.
Overnight Funds. We may borrow or lend unsecured overnight funds from or to other FHLBanks. All such transactions are at current market rates. Interest income and interest expense related to these transactions with other FHLBanks are included within other interest income and interest expense from other borrowings in the statement of operations. During the year ended
December 31, 2021, there were no interest income nor interest expense on/for loans to/from other FHLBanks. Interest income on loans to other FHLBanks was $48 thousand and $25 thousand for the years ended December 31, 2020 and 2019, respectively. Interest expense for loans from other FHLBanks was $218 thousand and $20 thousand for the years ended December 31, 2020 and 2019, respectively.
MPF Mortgage Loans. We pay a transaction-services fee and a membership fee to the FHLBank of Chicago for our participation in the MPF program. For the years ended December 31, 2021, 2020, and 2019, we recorded $2.4 million, $2.9 million, and $2.8 million, respectively in MPF transaction-services fee expense to the FHLBank of Chicago which has been recorded in the statement of operations as other expense. The membership fee has been recorded in the statement of operations as an operating expense, and totaled $600 thousand for each of the years ended December 31, 2021, 2020, and 2019. In addition, beginning in 2020, we receive an MPF performance fee from the FHLBank of Chicago. The MPF performance fee for the years ended December 31, 2021 and 2020 amounted to $125 thousand and $50 thousand, respectively, and was recorded in the statement of operations as other income.
COs. From time to time, one FHLBank may transfer to another FHLBank the COs for which the transferring FHLBank was originally the primary obligor but upon transfer the assuming FHLBank becomes the primary obligor. During the years ended December 31, 2021, 2020 and 2019, we transferred debt obligations with par amounts of $171.2 million, $985.1 million, and $10.0 million, respectively, and fair values of approximately $174.0 million, $1.0 billion, and $12.7 million, respectively, on the day they were transferred.
Note 19 — Subsequent Events
On February 18, 2022, the board of directors declared a cash dividend at an annualized rate of 2.05 percent based on daily average capital stock balances outstanding during the fourth quarter of 2021. The dividend, including dividends classified as interest on mandatorily redeemable capital stock, amounted to $5.2 million and was paid on March 2, 2022.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.
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 December 31, 2021. 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 December 31, 2021.
Management's Report on Internal Control over Financial Reporting
The Bank's independent registered public accounting firm, PricewaterhouseCoopers LLP, has also issued a report regarding the effectiveness of the Bank's internal control over financial reporting as of December 31, 2021, which is included in Item 8 —
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2021, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. OTHER INFORMATION
None
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our board of directors is constituted of a combination of member directors (each of whom must be a director or officer of a member) nominated and elected by our members on a state-by-state basis and independent directors nominated by our board and elected by a plurality of all our members. Our board of directors is currently constituted of eight member directorships and seven independent directorships. Two of the independent directorships are designated as "public interest" as required by law.
An FHFA regulation (the Election Regulation) regarding FHLBank board of director elections and director eligibility gives the Director of the FHFA the annual responsibility to determine the size of each FHLBank's board of directors. Further, for each FHLBank, the Election Regulation requires the Director of the FHFA to allocate:
•the directorships between member directorships and independent directorships, subject to the requirement that a majority, but no more than 60 percent, of the directorships be member directorships; and
•the member directorships among the states in each FHLBank's district based on the number of shares of FHLBank stock required to be held by members in each state as of December 31 of the prior year, with each state entitled to one directorship, subject to any state statutory minimum. For us, the only state statutory minimum is for Massachusetts, which is entitled to three member directorships.
If, during a director's term of office, the Director of the FHFA eliminates the directorship to which he or she has been elected or, for member directorships, redesignates such directorship to another state, the director's term will end as of December 31 of the year in which the Director of the FHFA takes such action.
If a member director ceases to be a director or officer of a member in the state from which the director was elected, that director loses eligibility as a member director and must leave the board. If an independent director becomes an officer or director of a member, or ceases to be a bona fide resident of the Bank's district, that director loses eligibility as an independent director and must leave the board.
Based on the requirements of the Election Regulation, the Director of the FHFA allocated our member directorships among the six New England states that comprise our district for each of 2021 and 2022 as follows:
Table 40 - Member Directorships by State
| | | | | | | | |
| | Member Directorships |
| Connecticut | | 1 |
| Maine | | 1 |
| Massachusetts | | 3 |
| New Hampshire | | 1 |
| Rhode Island | | 1 |
| Vermont | | 1 |
| Total | | 8 |
Our annual election was completed in the fourth quarter of 2021 and involved elections for two Massachusetts directorships, one Connecticut directorship and one independent directorship. See — Annual Director Elections below for additional information on the election.
Director Requirements
Board of director elections are conducted in accordance with applicable law, including the Election Regulation, and our governance documents. Accordingly:
•each director is required to be a U.S. citizen;
•no director may be a member of our management;
•each director is elected for a four-year term (unless the Director of the FHFA designates a shorter term for staggering of the expiration dates of the terms); and
•no director can be elected to more than three consecutive full terms.
Additional requirements are applicable to member directors, independent directors, and nominees for each as set forth in the following two sections. Apart from such additional requirements, however, FHLBanks are not permitted to establish additional eligibility criteria for directorships.
The Election Regulation provides for members to elect directors by ballot, rather than by voting at a meeting. As a result, we do not solicit proxies, and members are not permitted to solicit or use proxies to cast their votes in the election. A member may not split its votes among multiple nominees for a single directorship. There are no family relationships between any current director (or any of the nominees from the most recent election), any executive officer, and any proposed executive officer. No director or executive officer has an involvement in any legal proceeding required to be disclosed pursuant to Item 401(f) of Regulation S-K.
Member Director and Member Director Nominee Requirements and Nominations
Candidates for member directorships in a particular state are nominated by members in that state. Each member that is required to hold stock as of the record date, which is December 31 of the year prior to each election (the record date), may nominate and vote for representatives from members in its respective state for open member directorships. FHLBank boards of directors are not permitted to nominate or elect member directors, although they may elect a director to fill a vacant member directorship. Further, the Election Regulation provides that no director, officer, employee, attorney, or agent of the Bank, other than in a personal capacity, may support the nomination or election of a particular individual for a member directorship. In addition to the requirements applicable to all directors, each member director and each nominee for a member directorship must be an officer or director of a member that is in compliance with the minimum capital requirements established by its regulator.
Because of the foregoing requirements for member director nominations and elections, we do not know what factors our members considered in nominating candidates for member directorships or in voting to elect our member directors.
Independent Director and Independent Director Nominee Requirements and Nominations
Candidates for independent directorships are nominated by our board of directors. In addition to the requirements applicable to all directors, each independent director is required to be a bona fide resident of our district, and no independent director may serve as an officer, employee, or director of any of our members or other recipient of advances from us and may not be an officer of any FHLBank. At least two of the independent directors must be public interest directors. Public interest directors, as defined by FHFA regulations, are independent directors who have at least four years of experience representing consumer or community interests in banking services, credit needs, housing, or consumer financial protection. Pursuant to FHFA regulations, each independent director must either satisfy the requirements to be a public interest director or have knowledge or experience in one or more of the following areas: auditing and accounting, derivatives, financial management, organizational management, project development, risk-management practices, and the law.
Our members are permitted to (and we ask them to) identify candidates to be considered for inclusion on the nominee slate for independent directorship, but to be considered for nomination, an individual must submit an application to us. We are required to submit information about nominees for independent directorships to the FHFA for review prior to announcing such nominations. In addition, our board of directors is required by FHFA regulations to consult with the Advisory Council (a council that reviews and advises us on our AHP program) in establishing the independent director nominee slate. Before nominating any individual for an independent directorship, other than for a public interest directorship, our board of directors must determine that the nominee's knowledge or experience is commensurate with that needed to oversee a financial institution with a size and complexity that is comparable to ours.
Since 2013, the Bank’s bylaws have included diversity of the board as a factor that may be considered in making independent director nominations, and the Governance Committee of the board (which has responsibility for recommending candidates for nomination for independent directorships) and the board have considered this factor in each of their nomination decisions since then. In 2020, in response to an Advisory Bulletin on Board Diversity issued by the FHFA, the Governance Committee and the board also began considering competency in matters of diversity and inclusion as an additional factor in their nomination decisions. In addition, at the commencement of elections for both independent and member directors, we include a statement in the relevant publicity that our board of directors seeks to promote diversity in its composition and encourages nominations of
and applications from eligible diverse candidates. The Election Regulation permits our directors, officers, attorneys, employees, agents, and Advisory Council to support the candidacy of the board of director nominees for independent directorships.
In determining whom to nominate for independent directorships, the board of directors selected:
•E. Macey Russell in 2021, based on his experience as a partner at Choate, Halle & Stewart, LLP, advising on complex commercial litigation and representing financial institutions, banks, business, and corporations in disputes involving a variety of matters and his significant expertise in matters of diversity, equity and inclusion in the legal profession;
•Thomas J. Curry in 2020, based on his prior experience serving as the Comptroller of the Currency of the United States, as a member of the Federal Deposit Insurance Corporation’s board of directors, and as Commissioner of Banks for the Commonwealth of Massachusetts;
•Antoinette C. Lazarus in 2020, based on her significant experience in compliance, risk management, regulatory matters and accounting; valuable understanding of the fund management and insurance industries; and involvement in multiple boards of directors of charitable organizations;
•Eric Chatman (vice chairman) in 2019, based on his affordable housing experience, including through his prior role as president and executive officer of the Connecticut Housing Finance Authority and his current role as the executive vice president and chief financial officer of Housing Partnership Network; his prior FHLBank System experience as treasurer of the Federal Home Loan Bank of Des Moines; his private banking experience; and his significant capital markets experience;
•Emil J. Ragones in 2019, based on his experience as a former partner at Ernst & Young specializing in information technology audit and controls and related experience in implementing business strategies for financial systems, incorporating or improving information technology and financial controls, addressing regulatory examination findings surrounding information technology and financial controls, and reviewing governance matters applicable to information technology;
•Joan Carty in 2018, to serve as a public interest director, based on her experience serving as president and chief executive officer of Housing Development Fund, a Stamford, Connecticut-based CDFI that finances multifamily housing, lends directly to low- and moderate-income households for first-time purchases, and provides homeownership counseling, homebuyer education, and foreclosure-intervention counseling;
•Patrick E. Clancy in 2018, to serve as a public interest director, based on his experience as a developer of affordable housing, particularly through his previous role as president and chief executive officer of The Community Builders, a Boston, Massachusetts-based nonprofit corporation that has developed or redeveloped approximately 25,000 affordable housing units over the past 40 years.
Further, with the exception of directors Thomas J. Curry and E. Macey Russell, all of the independent directors have been independent directors of the Bank prior to their most recent nominations, and our board of directors considered their experience gained from serving on our board in selecting them for their most recent nominations.
Additional information on the backgrounds of our directors, including these independent directors, is available under — Information Regarding Current Directors.
Annual Director Elections
For the election of both member and independent directors, each member eligible to vote is entitled to cast by ballot one vote for each share of stock that it was required to hold as of the record date, subject to the limitation that no member may cast more votes than the average number of shares of our stock that are required to be held by all members located in such member's state. Eligible members are permitted to vote all their eligible shares for one candidate for each open member directorship in the state in which the member is located and for each open independent directorship. For independent directors, unless the board of directors nominates more persons than there are independent directorships to be filled in an election, the candidates must receive at least 20 percent of the number of votes eligible to be cast in the election in order to be elected. If no nominee receives at least 20 percent of the eligible votes, the Election Regulation requires us to identify additional nominees and conduct additional elections until the directorship is filled.
As contemplated by the Election Regulation, no in-person meeting of the members was held in connection with the election. Information about the results of the election was reported to the members via email and on current report on Form 8-K filed with the SEC on October 19, 2021, as supplemented by a Form 8-K/A filed with the SEC on January 25, 2022.
Information Regarding Current Directors
Member Directors
The member directors currently serving on the board of directors provided the information set forth below regarding their principal occupation, business experience, and other matters.
Donna L. Boulanger (chair), age 68, has served as chief executive officer and director (formerly trustee) of North Brookfield Savings Bank, located in North Brookfield, Massachusetts, since February 2008, and also served as its president from February 2008 through April 5, 2021. Since January 2022, she has also served as a director and trustee, respectively, of its holding companies, TruNorth Bancorp, Inc. and TruNorth Bancorp, MHC. Ms. Boulanger also currently serves on the board of directors of the Depositors Insurance Fund, a Bank member. Ms. Boulanger began serving as a director of the Bank on January 1, 2014, and her current term will conclude on December 31, 2025.
Dwight M. Davidsen, age 54, has served as senior vice president of Citizens Bank, N.A., located in Providence, Rhode Island, since November 2013. Mr. Davidsen has more than 20 years of experience managing funding and liquidity at large regional banks. Mr. Davidsen began serving as a director of the Bank on January 1, 2020, and his current term will conclude on December 31, 2024.
Edward F. Manzi, Jr., age 62, has served as president and chief executive officer of Fidelity Co-Operative Bank, located in central Massachusetts, since July 1997, and has served there also as chairman since August 2010. Mr. Manzi is also a certified public accountant. Mr. Manzi began serving as a director of the Bank on January 1, 2020, and his current term will conclude on December 31, 2023.
William M. Parent, age 60, has served as president and chief executive officer and director of Envision Bank in Quincy, Massachusetts, and its parent, Randolph Bancorp, since April 2020. From June 2010 through April 2019 Mr. Parent served as president, chief executive officer and director of Blue Hills Bank and Blue Hills Bancorp, Inc. in Norwood, Massachusetts, and from April 2019 through February 2020 he served as a director of Rockland Trust Company and Independent Bancorp, Inc. of Rockland, Massachusetts, following its acquisition of Blue Hills Bank. Mr. Parent’s 30-plus years of experience in the financial services industry also includes 16 years at Bank of Boston and its affiliates, and its successor companies, FleetBoston and Bank of America and their affiliates, where he held senior executive roles in Finance, Mergers & Acquisitions, Bank Management and Private Equity Investing. Mr. Parent started his career at KPMG between 1984 and 1990 and is a non-practicing certified public accountant. Mr. Parent began serving as a director of the Bank on January 1, 2022, and his current term will conclude on December 31, 2025.
David J. Rotatori, age 50, has served as president and a director of Ion Bank in Naugatuck, Connecticut, and its parent, Ion Financial MHC, since July 2017, and also as chief executive officer since January 2019. Before his promotion to president of Ion Bank, he was chief risk officer there since September 2009, chief financial officer since June 2012, and also served as corporate secretary for several years. He also worked at Ion Bank for five years early in his career as a staff accountant and internal auditor. Mr. Rotatori’s previous experience includes senior financial roles at People’s United Bank (one year) and Webster Bank (ten years), both in Connecticut, and as a senior accountant at KPMG (three years). Mr. Rotatori began serving as a director of the Bank on January 1, 2022, and his current term will conclude on December 31, 2025.
Michael R. Tuttle, age 67, has served as senior policy officer with Northfield Savings Bank in Berlin, Vermont, since December 2019. He served as chief credit officer of Opportunities Credit Union, located in Winooski, Vermont, from February to December 2019 and was a director of Opportunities Credit Union from May 2017 until February 2019. Mr. Tuttle was a director of Merchants Bank from 2006 to May 2017 and a director of Merchants Bancshares, Inc., located in South Burlington, Vermont from 2007 to May 2017. Mr. Tuttle is also the former president and chief executive officer of both Merchants Bancshares Inc. (from 2007 through 2015) and Merchants Bank (from 2006 through 2014). He has served on the board of the Vermont Economic Development Authority from October 2016 to December 2021. Mr. Tuttle began serving as a director of the Bank on January 1, 2015, and his current term will conclude on December 31, 2022.
John C. Witherspoon, age 65, has served as a director of Skowhegan Savings Bank in Skowhegan, Maine since November 2007 and served there also as president and chief executive officer from November 2007 until December 2019. Prior positions included serving as chief executive officer of the Finance Authority of Maine between 2004 and 2007, and as president and chief executive officer of United Kingfield Bank and its predecessor, Kingfield Savings Bank, from 1984 until 2004. Mr. Witherspoon began serving as a director of the Bank on January 1, 2016, and his current term will conclude on December 31, 2023.
Richard E. Wyman, Jr., age 66, is president and a director of Meredith Village Savings Bank (MVSB), Meredith, New Hampshire, a position he has held since January 1, 2016. Since 2013 he has also served as executive vice president (and from 2013 to January 1, 2016 as chief financial officer) of New Hampshire Mutual Bancorp, the holding company that was formed in 2013 from the affiliation of MVSB and Merrimack County Savings Bank, a Bank member. New Hampshire Mutual Bancorp is also the holding company for Savings Bank of Walpole, a Bank member. Mr. Wyman joined MVSB in August 2001 as chief financial officer and was promoted to executive vice president and chief financial officer of MVSB in 2009, prior to assuming the role of president. Prior to joining MVSB, Mr. Wyman held senior leadership roles for several Maine-based banks, ranging from local community mutual banks to a publicly traded multi-bank holding company. Mr. Wyman began serving as a director of the Bank on January 1, 2019, and his current term will conclude on December 31, 2022.
Independent Directors
The independent directors currently serving on the board of directors provided the following information about their principal occupation, business experience, and other matters.
Joan Carty, age 70, has served as president and chief executive officer of Housing Development Fund in Stamford, Connecticut, since 1994. She previously served as executive director of Bridgeport Neighborhood Fund, of Bridgeport, Connecticut; Neighborhood Preservation Program, of Stamford, Connecticut; and Neighborhood Housing Services, of Brooklyn, New York. Ms. Carty has served as a director of the Bank since January 1, 2008, and her current (and final) term will conclude on December 31, 2022.
Eric Chatman, (vice chairman) age 61, has served as the executive vice president and chief financial officer of Housing Partnership Network, a network of affordable housing and community development nonprofits, since July 2017. He founded and was president of The Chatman Group, LLC, a consulting and advisory firm focused on affordable housing and financial advisory services for non-profits, housing finance authorities, and financial institutions from June 2015 to July 2017. Mr. Chatman served as president and executive director of the Connecticut Housing Finance Authority from May 2012 until March 2015 and, in that capacity, was responsible for the policy development, strategic planning and execution of the Connecticut Housing Finance Authority affordable housing finance mission. Prior to serving in that role, Mr. Chatman served as deputy director and chief financial officer of the Iowa Finance Authority from 2008 to 2012. Mr. Chatman has also held various corporate finance, treasury, and capital markets roles, both domestic and international, including treasurer of the Federal Home Loan Bank of Des Moines and division manager, treasury department, at the African Development Bank. Mr. Chatman has served as a director of the Bank since June 16, 2014, and his current term will conclude on December 31, 2023.
Patrick E. Clancy, age 75, served from 1977 through 2011 as president and chief executive officer of The Community Builders, a Boston, Massachusetts-based nonprofit corporation that has developed or redeveloped approximately 25,000 units of affordable and mixed-income housing. He continues to engage in the field as an independent consultant and developer as principal of The Clancy Company. Mr. Clancy has served as director of the Bank since March 30, 2007, and his current (and final) term will conclude on December 31, 2022.
Thomas J. Curry, age 65, has been a partner at the law firm Nutter McClennen & Fish LLP in Boston, Massachusetts since November 2017. Mr. Curry served as Comptroller of the Currency of the United States from April 2012 to May 2017, as a member of the Federal Deposit Insurance Corporation’s board of directors from 2003 to May 2017, and as Commissioner of Banks for the Commonwealth of Massachusetts from 1990 to 1991 and from 1995 to 2003. Mr. Curry has served as a director of the Bank since January 1, 2021, and his current term will conclude on December 31, 2024.
Antoinette C. Lazarus, age 58, has served as managing director, head of compliance, secondaries, for Ares Management Corporation, a Los Angeles-headquartered investment management firm with offices in Simsbury, Connecticut, since June 2021. Prior to its acquisition by Ares, she was chief compliance and risk officer and as privacy and anti-money laundering officers for Landmark Partners, a Simsbury, Connecticut-based SEC-registered investment adviser since 2006. Since November 2018 and December 2019, Ms. Lazarus has also served as the vice president of the board of directors for the Hartford Community Loan Fund, and director of Housing Development Fund, respectively, each a community development financial institution based in Connecticut. Prior to her work at Landmark Partners, Ms. Lazarus served from 2004 to 2006 as vice president of compliance for Prudential Financial, Inc., a Hartford, Connecticut-based financial products and services company and from 2001 to 2004 as director of fund accounting for CIGNA Retirement and Investment Services, a Hartford-based retirement services business that was acquired in 2004 by Prudential Financial, Inc. from 1988 to 2001, Ms. Lazarus served in multiple fund accounting, reporting and valuation roles at Aetna Financial Services, a financial services company based in Hartford that was acquired by ING in 2000. Ms. Lazarus has served as a director of the Bank since January 1, 2017, and her current term will conclude on December 31, 2024.
Emil J. Ragones, age 75, is an adjunct professor at the Boston College Carroll School of Management in the Masters of Science in Accounting Program, a position he has held since January 2013. He served as executive in residence at Accounting Management Solutions, Inc., now part of CliftonLarsenAllen LLP, from 2008 through April 2015, providing accounting and financial management advisory services. Mr. Ragones previously worked at Ernst & Young for 39 years, including 24 years of service as an audit partner. In addition to performing financial statement audits, Mr. Ragones specialized in providing information technology auditing, as well as advisory and consulting services to clients in a variety of industries, including financial services. Prior to his retirement from Ernst & Young in 2007, Mr. Ragones spent seven years in the firm's National Professional Practice office for assurance and advisory business services, focusing on reviewing and reporting on financial and information technology controls and Sarbanes-Oxley Act Section 404 compliance and reporting. Mr. Ragones has served as a director of the Bank since September 24, 2010, and his current (and final) term will conclude on December 31, 2023.
E. Macey Russell, age 64, has been a partner at the Boston law firm of Choate, Hall & Stewart since May 2002, where he practices in the area of complex commercial litigation, representing financial institutions, banks, businesses, and corporations in disputes involving a variety of matters, and has developed a national reputation as an expert on diversity, equity and inclusion in the legal profession. Previously, he was a partner at the Boston law firm Peabody & Arnold (seven years), an associate and a partner at the Boston law firm Riemer & Braunstein (nine years), and started his career as a law clerk for the Massachusetts Superior Court. Mr. Russell also serves on the Board of Trustees of Suffolk University and on the Board of Overseers of Beth Israel Deaconess Medical Center, and is Chairman and President of the Augustus A. White III Institute for Healthcare Equity. Mr. Russell has served as a director of the Bank since January 1, 2022, and his current term will conclude on December 31, 2025.
Audit Committee Financial Expert
Our board of directors has a standing Audit Committee that satisfies the "Audit Committee" definition under Section 3(a)(58)(A) of the Securities Exchange Act of 1934. Our board of directors' Audit Committee Charter is available in full on our website at the following location: https://www.fhlbboston.com/fhlbank-boston/governance.
The board has determined that Director Lazarus is the "audit committee financial expert" within the meaning of the SEC rules. Ms. Lazarus is not an auditor or accountant for us, does not perform fieldwork, and is not a Bank employee. In accordance with the SEC's safe harbor relating to Audit Committee financial experts, a person designated or identified as an Audit Committee financial expert will not be deemed an "expert" for purposes of federal securities laws. In addition, such a designation or identification does not impose on any such person any duties, obligations, or liabilities that are greater than those imposed on such persons as a member of the Audit Committee and board of directors in the absence of such designation or identification and does not affect the duties, obligations, or liabilities of any other member of the Audit Committee or board of directors. See Item 13 — Certain Relationships and Related Transactions, and Director Independence for additional information regarding Ms. Lazarus's independence.
Report of the Audit Committee
The Audit Committee assists the board in fulfilling its oversight responsibilities for (1) the integrity of our financial reporting, (2) the establishment of an adequate administrative, operating, and internal accounting control system, (3) our compliance with legal and regulatory requirements, (4) the independent registered public accounting firm's independence, qualifications, and performance, (5) the independence and performance of our internal audit function, and (6) our compliance with internal policies and procedures. The Audit Committee appoints, compensates, retains and oversees the work of the independent registered public accounting firm. The Audit Committee has adopted, and annually reviews, a charter outlining the practices it follows.
Management is responsible for the Bank's internal controls and the financial reporting process. PwC, our independent registered public accounting firm, is responsible for performing an independent audit of the financial statements and the effectiveness of internal control over financial reporting in accordance with auditing standards promulgated by the Public Company Accounting Oversight Board (PCAOB). Our internal auditors are responsible for preparing an annual audit plan and conducting internal audits under the direction of the Chief Audit Officer, who is accountable to the Audit Committee. The Audit Committee acts in an oversight role with the responsibility to monitor and oversee these processes.
The Bank is one of 11 FHLBanks that, together with the Office of Finance, comprise the FHLBank System. The Office of Finance has responsibility for the issuance of COs on behalf of the FHLBanks and for compiling a combined financial report of the FHLBanks. Accordingly, the FHLBank System has determined that it is beneficial to have a single independent registered public accounting firm responsible for the audit of the FHLBank System and each FHLBank. The FHLBanks and Office of Finance collaborate in selecting, setting the compensation of, and evaluating the independent registered public accounting firm,
but the responsibility for appointing the independent registered public accounting firm for each FHLBank remains solely with the audit committee of each individual FHLBank and the Office of Finance.
PwC has been the independent auditor for the Bank and the FHLBank System since 1990. The Bank’s Audit Committee engages in rigorous evaluations each year before appointing an independent registered public accounting firm. In connection with the appointment of the Bank’s independent registered public accounting firm, the Audit Committee’s evaluation included consultation with the audit committees of the other FHLBanks and the Office of Finance. Specific considerations included:
•an analysis of the risks and benefits of re-engaging the independent auditor versus engaging a different firm, including consideration of:
◦PwC engagement audit partner, engagement quality review partner, and audit team rotation,
◦PwC’s tenure as the Bank’s and the FHLBank System’s independent auditor,
◦benefits associated with engaging a different firm as independent auditor,
◦potential disruption and risks associated with changing the Bank’s auditor; and
◦PwC’s depth of understanding of our business, operations, and accounting policies and practices;
•PwC’s historical and recent performance on the Bank’s audit, including the results of an internal survey of PwC’s service and quality;
•an analysis of PwC’s known legal risks and significant proceedings;
•external data relating to audit quality and performance, including recent PCAOB reports on PwC and its peer firms, as well as metrics indicative of audit quality;
•the appropriateness of PwC’s fees, on both an absolute basis and as compared to its peer firms; and
•the diversity of PwC's ownership and staff assigned to the engagement.
Audit Fees represent fees for professional services provided in connection with the audit of the Bank’s annual financial statements and internal control over financial reporting and reviews of the Bank’s quarterly financial statements, regulatory filings, consents and other SEC matters.
The Audit Committee has reviewed and approved the fees paid to the independent registered public accounting firm for audit, audit related and other services. The Audit Committee has determined that PwC does not provide any non-audit services that would impair PwC’s independence.
In accordance with SEC rules, audit partners are subject to rotation requirements to limit the number of consecutive years an individual partner may provide service to the Bank. For lead and concurring audit partners, the maximum number of consecutive years of service in that capacity is five years. The process for selection of the Bank’s lead audit partner pursuant to this rotation policy involves a meeting between the Chair of the Audit Committee and the candidate for the role, as well as discussion by the full Audit Committee and with management. Our current engagement partner began serving in this role in 2020.
Based on its reviews discussed above, the Audit Committee recommended to the board of directors the reappointment of PwC as the Bank's independent registered public accounting firm for 2022.
The Audit Committee discussed with our internal auditors and PwC the overall scope and plans for their respective audits. The Audit Committee meets with the internal auditors and PwC, with and without management present, to discuss the results of their audits, their evaluations of the Bank's internal controls, and the overall quality of the Bank's financial reporting.
The Audit Committee has reviewed and discussed the audited financial statements with management, including a discussion of the quality, not just the acceptability, of the accounting principles used, the reasonableness of significant accounting judgments and estimates, and the clarity of disclosures in the financial statements. In addressing the quality of management's accounting judgments, members of the Audit Committee asked for representations and reviewed certifications prepared by the chief executive officer and chief financial officer that the audited financial statements present, in all material respects, the financial condition and results of operations, and have expressed to both management and PwC their general preference for conservative policies when a range of accounting options is available. In meeting with PwC, the Audit Committee asked them to address and discuss their responses to several questions that the Audit Committee believes are particularly relevant to its oversight. These questions include:
•Based on PwC's experience, and their knowledge of the Bank, do the financial statements present fairly, with clarity and completeness, the Bank's financial position and performance for the reporting period in accordance with GAAP and SEC disclosure requirements?
•Based on PwC's experience, and their knowledge of the Bank, has the Bank implemented internal controls and internal audit procedures that are appropriate for the Bank?
The Audit Committee believes that by focusing its discussions with PwC, it promotes a meaningful discussion that provides a basis for its oversight judgments.
The Audit Committee has discussed with the independent auditors the matters required to be discussed by the applicable requirements of the PCAOB and the SEC. The Audit Committee has received from PwC the written disclosures and the letter required by PCAOB Rule 3526, Communication with Audit Committees Concerning Independence, and the Audit Committee has discussed with PwC their independence.
In reliance on these reviews and discussions, and the report of the independent registered public accounting firm, the Audit Committee has recommended to the board of directors, and the board of directors has approved, that the audited financial statements be included in the Bank's annual report on Form 10-K for the year ended December 31, 2021, for filing with the SEC.
As of the date of filing this annual report on Form 10-K, the members of the Audit Committee are:
Emil J. Ragones, Chair
Antoinette C. Lazarus, Vice Chair
Edward F. Manzi, Jr.
William M. Parent
E. Macey Russell
Richard E. Wyman
Donna L. Boulanger, ex officio
Information about our Executive Officers
The following table sets forth the names, titles, and ages of our executive officers:
Table 41 - Executive Officers
| | | | | | | | |
Name (1) | Title | Age |
| Timothy J. Barrett | President and Chief Executive Officer | 63 |
| Frank Nitkiewicz | Executive Vice President, Chief Operating Officer, and Chief Financial Officer | 60 |
| Carol Hempfling Pratt | Executive Vice President, General Counsel, and Corporate Secretary | 63 |
| Brian G. Donahue | Senior Vice President, Controller and Chief Accounting Officer | 55 |
| Ana C. Dyer | Senior Vice President and Chief Business Officer | 54 |
| Barry F. Gale | Senior Vice President and Chief Human Resources Officer | 62 |
| Sean R. McRae | Senior Vice President and Chief Information Officer | 57 |
| Edward A. Schultze | Senior Vice President and Chief Risk Officer | 62 |
_________________________
(1) Each of the executive officers listed serves on our Management Committee, with the exception of Mr. Donahue.
Timothy J. Barrett has served as president and chief executive officer since December 2021. Prior to assuming that position, Mr. Barrett served as executive vice president and treasurer from January 2019 until November 2021, and senior vice president and treasurer from November 2010 until December 2018. Prior to joining the Bank, he was assistant treasurer at FMR LLC, the parent company of Fidelity Investments from September 2008 to October 2010; as treasurer and chief investment officer at Fidelity Personal Bank & Trust from August 2007 to September 2008; as managing director, global treasury at Investors Bank & Trust from September 2004 to July 2007; in various senior roles in treasury at FleetBoston Financial (including merged entities) from 1985 to 2004; and as an investment manager for Citibank, NA from 1981 to 1985. He currently serves as a member of the board of the directors of the Office of Finance. He earned his B.A. from St. Anselm College and his M.B.A. from Rensselaer Polytechnic Institute.
Frank Nitkiewicz has served as executive vice president, chief operating officer, and chief financial officer since January 2022. Prior to assuming that position, Mr. Nitkiewicz served as executive vice president and chief financial officer since January 2006, senior vice president, chief financial officer, and treasurer from August 1999 until December 31, 2005, and senior vice president and treasurer from October 1997 to August 1999. Mr. Nitkiewicz joined us in 1991. He holds a B.S. and a B.A. from the University of Maryland and an M.B.A. from the Kellogg Graduate School of Management at Northwestern University.
Carol Hempfling Pratt has served as executive vice president, general counsel and corporate secretary since January 2019, and previously as senior vice president, general counsel and corporate secretary since June 2010. She also serves as our ethics officer. Prior to employment with us, Ms. Pratt spent over 25 years specializing in corporate and banking law at the Boston law firm of Foley Hoag LLP, where she started her legal career in 1984 and was a partner from 1992 to 2010. Ms. Pratt holds a B.A. and a J.D. from Northwestern University.
Brian G. Donahue has served as senior vice president, controller, and chief accounting officer since January 2013, and previously as first vice president, controller and chief accounting officer since February 2010. Prior to assuming that position, Mr. Donahue served as first vice president and controller since 2007, vice president and controller from 2004 to 2007, assistant vice president and assistant controller from 2001 to 2004, and in progressively responsible positions from 1992 to 1999, when he served as assistant controller. Mr. Donahue worked for two years as assistant vice president and division controller for State Street Bank and Trust Company, from 1999 to 2001. Prior to joining us in 1992, Mr. Donahue was an associate with Price Waterhouse. Mr. Donahue earned a B.B.A. from James Madison University and an M.B.A. from Boston University, and is a certified public accountant.
Ana C. Dyer has served as senior vice president, chief business officer since January 2022, and previously as senior vice president, member services since January 2020, and first vice president and director of sales and business development since joining the Bank in 2012 from Webster Bank, where she served as senior vice president, regional manager in their Business and Professional Banking division. Ms. Dyer’s career in financial services began in 1989 at Fleet National Bank and included positions at Shawmut Bank, Bank of Boston, and Bank of America prior to joining Webster Bank in 2005. Ms. Dyer earned her B.A. from Harvard University.
Barry F. Gale has served as senior vice president, chief human resources officer and director of the Bank’s office of minority and women inclusion since April 2013. Mr. Gale also joined the board of the Northeast Human Resources Association in 2019. Prior to employment with us, Mr. Gale served as senior director of human resources at Thomson Reuters, where he spent 16 years in progressively senior roles. Prior to that position, Mr. Gale served in human resources roles at Citizens Financial Group and The Colonial Group. Mr. Gale holds a B.S. in business management from The University of Massachusetts, Boston.
Sean R. McRae has served as senior vice president and chief information officer since April 2014. Prior to employment with us, Mr. McRae worked for Thomson Reuters for 19 years in a variety of technology leadership roles, the most recent of which was serving as chief technology officer of their global emerging markets business. Prior to Thomson Reuters, Mr. McRae served as software engineer, application architect, network engineer, business analyst, and project manager at John Hancock in Boston. Mr. McRae holds a B.S. in Computer Science from Bridgewater State College.
Edward A. Schultze has served as senior vice president and chief risk officer since January 2020, and previously as first vice president, director of market risk management since 2013. Prior to assuming that position, Mr. Schultze served as vice president, director of capital market risks since joining the Bank in 2010. Mr. Schultze’s financial services career began in 1983 and includes various roles at Guaranty Bank, FIRSTFED AMERICA BANCORP, Inc., and First Institutional Liquidity Corp. Mr. Schultze holds a B.B.A. in Banking and Finance and an M.B.A. in Finance from the University of North Texas.
Code of Ethics and Business Conduct
We have adopted a Code of Ethics and Business Conduct that sets forth the guiding principles and rules of behavior by which we operate and conduct our daily business with our customers, vendors, shareholders, and with our employees. The Code of Ethics and Business Conduct applies to all directors and employees, including the chief executive officer, chief financial officer, and chief accounting officer, and all other professionals serving in a finance, accounting, treasury, or investor-relations role. The purpose of the Code of Ethics and Business Conduct is to avoid conflicts of interest and to promote honest and ethical conduct and compliance with the law, particularly as related to the maintenance of our financial books and records and the preparation of our financial statements. The Code of Ethics and Business Conduct can be found on our website (https://www.fhlbboston.com/fhlbank-boston/governance). All future amendments to, or waivers from, the Code of Ethics and Business Conduct will be posted on our website. The information contained within or connected to our website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this or any report filed with the SEC.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Executive Summary
We attract, reward, and retain senior managers, including our president, chief operating and chief financial officer, and other most highly compensated executive officers (the named executive officers) by offering a total rewards package that includes base salary, cash incentive opportunities, qualified and nonqualified retirement plans, and certain perquisites.
For the year ended December 31, 2021, the named executive officers were:
| | | | | | | | |
| Timothy J. Barrett | | President and Chief Executive Officer; |
| Edward A. Hjerpe III | | Former President and Chief Executive Officer; |
| Frank Nitkiewicz | | Executive Vice President, Chief Operating Officer, and Chief Financial Officer; |
| Carol Hempfling Pratt | | Executive Vice President, General Counsel and Corporate Secretary; |
| Sean R. McRae | | Senior Vice President and Chief Information Officer |
| Barry F. Gale | | Senior Vice President, Chief Human Resources Officer and Office of Minority and Women Inclusion Director |
Mr. Hjerpe retired from the Bank as of November 30, 2021.
Compensation program objectives are set forth in our Total Rewards Philosophy (defined below), which was used in determining the total rewards packages for the named executive officers for 2021. Total rewards packages, including base salary, cash incentive opportunities, and retirement plans, were set based on each named executive officer's performance, tenure, experience, and complexity of position and to be competitive in the labor market for senior managers in which we compete. Overall, the named executive officers were awarded increases in base salary based on our Total Rewards Philosophy reflecting performance and market conditions, effective January 1, 2021. Additionally, we adopted an executive incentive plan (an EIP) on April 15, 2021 (the 2021 EIP). Cash incentives awarded under EIPs for 2021 were generally determined based on the criteria set forth in the 2021 EIP and the 2019 executive incentive plan (2019 EIP) for long-term awards.
Compensation Committee
Pursuant to a charter approved by the board of directors, the Human Resources and Compensation Committee (the Compensation Committee) assists the board of directors in developing and maintaining human resources and compensation policies that support our business objectives. The Compensation Committee develops and recommends the compensation philosophy for the board of directors' review and approval. The Compensation Committee reviews and approves human resources policies and plans applicable to the compensation philosophy, such as compensation, benefits, and incentive plans in which the named executive officers may participate.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee has at any time been an officer or employee with us. None of our executive officers has served or is serving on our board of directors or the compensation committee of any entity whose executive officers served on the Compensation Committee of our board of directors.
Compensation Committee Report
The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K. Based on the Compensation Committee's review and discussion, they recommended to the board of directors that the Compensation Discussion and Analysis be included in the annual report on Form 10-K for the year ending December 31, 2021.
The members of the Compensation Committee are:
Michael R. Tuttle, Chair
Thomas J. Curry, Vice Chair
Dwight M. Davidsen
Antoinette C. Lazarus
John C. Witherspoon
Richard E. Wyman, Jr.
Donna L. Boulanger, ex officio
Shareholder Advisory Vote on Executive Compensation
We are governed and directors are elected as described under Item 10 — Directors, Executive Officers and Corporate Governance. As such, we do not engage in a proxy process and have not otherwise engaged in any activity that would require a consent solicitation of our members. Accordingly, there is no shareholder advisory vote on executive compensation in determining our compensation policies and decisions.
Objectives of our Compensation Program and What it is Designed to Reward
We are committed to providing a compensation package that enables us to attract, retain, motivate, and reward highly skilled executive officers, including the named executive officers, who contribute significantly to the achievement of our mission, goals, and objectives. The FHFA reviews compensation of the named executive officers, as described under — FHFA Oversight of Executive Compensation.
In 2019, the Compensation Committee retained McLagan Partners (McLagan), a compensation consulting firm specializing in the financial services industry and a part of Aon plc, to assist with an updated comprehensive total rewards study. A major outcome of the study was the adoption in 2020 of an updated Total Rewards Philosophy, the principles of which have been the basis for determining total compensation for the named executive officers.
The Total Rewards Philosophy defines compensation goals, competitive market and peer groups, components and comparability of the total rewards package, performance evaluation and compensation, and responsibility for administration and oversight of compensation and benefits programs. The Compensation Committee and board of directors are responsible for periodically reviewing the Total Rewards Philosophy to ensure consistency with our overall business objectives, the competitive market, and our financial condition.
The Total Rewards Philosophy provides for a total rewards structure for employees, including the named executive officers, that attracts, retains and motivates a diverse employee population while supporting business and mission objectives throughout economic cycles. The Total Rewards Philosophy is designed to deliver a total rewards program that provides more certainty for the Bank through higher fixed compensation, competitive annual incentives, distinctive benefits and lower employment volatility reinforcing our lower overall risk appetite and emphasis on maintaining safe and sound operations. Annual incentive award plans are designed to align payout opportunities with achievement of our financial, operational, and mission goals and limit excessive risk-taking while recognizing team results and individual contributions. Incentive plans for staff engaged in risk management, compliance, and audit functions are designed to ensure that conflicts of interest are managed, and independence is maintained. The deferral of a portion of the annual incentive award for executives and senior management is designed to align with regulatory guidance, emphasize safe and sound operations, and discourage excessive risk-taking activities.
Risk and Bank Compensation Practices and Policies
Our chief risk officer reviews the design of our compensation plans and policies, including the 2021 EIP and 2019 EIP, to ensure these plans do not promote or reward imprudent risk taking. Additionally, under the 2021 EIP, 50 percent of the total 2021 award amount is deferred and will be paid after year-end 2023, which deferral is intended to align management's interests with risk-management objectives. As described under — Executive Incentive Plan — Additional Conditions to Deferred Awards, the deferred awards are subject to reduction or elimination in certain cases including in the case of certain material revisions to our financial results or to data used to determine the total 2021 award amount, which are intended to further reduce the risk of imprudent risk-taking.
The actual payment of the deferred awards are subject to the final approval of the Compensation Committee and review and non-objection by the FHFA (to the extent required by the FHFA).
Further, our chief risk officer and our chief human resources officer jointly engage in periodic reviews of our compensation practices and policies in an effort to ensure that such practices or policies do not result in risks that are reasonably likely to have a material adverse effect on the Bank. They report on the results of these reviews to the Compensation Committee at least annually. In developing that report, compensation policies and practices are reviewed first on a stand-alone basis, then in
combination with enterprise-wide risk-management controls that constrain risk-taking, and finally in conjunction with procedural risk controls at the business department level that are intended to further mitigate risk-taking activities. In February 2022, the Compensation Committee concluded that none of the compensation policies or plans in effect are reasonably likely to have a material adverse effect on the Bank based on the report and related discussions.
Compensation plans and policies for staff engaged in risk-management and compliance functions are designed to manage any conflicts of interest and promote independence in risk management in a manner independent of the financial performance of the business areas these personnel monitor. Participants in the 2021 EIP working in our enterprise risk-management (ERM) department have somewhat different goals and weightings from their peers in other departments.
In addition to our internal processes, the FHFA has oversight authority over our executive compensation. In the exercise of this authority, the FHFA has issued certain compensation principles, one of which is that executive compensation should be consistent with sound risk management and preservation of the par value of FHLBank stock. Also, the FHFA reviews all executive compensation, including the 2021 EIP, relative to these principles and such other factors as the FHFA determines to be appropriate, prior to their effectiveness. For additional information on this oversight, see — FHFA Oversight of Executive Compensation.
Overview of the Labor Market for Senior Managers
The labor market in which we compete for senior managers, including the named executive officers, is across a broad group of organizations representing different industries. In particular, we experience a greater frequency of competition for talent with commercial banks and financial services firms with capital markets, investment, risk, and wholesale lending capabilities, and publicly traded banks in a defined asset range. We may also consider other peer groups, such as local market peers and information-technology-specific peers for unique and hard-to-fill positions. We also recognize that a “one-size-fits-all” approach to compensation may need to be adjusted at times to attract employees who may have critical skills (e.g., technology staff) and to attract and retain the most qualified and highly sought-after staff. The local financial services labor market is dominated by asset-management firms that are considered labor market competitors even though they are not business competitors. As a result, we may, at times, have to expand recruiting efforts to a regional or national basis to recruit named executive officers and other senior executives with the specialized skills needed to manage the complex risks of a wholesale lending and mortgage loan investment operation. For these reasons, we must be positioned to offer comparable compensation packages to attract, retain, motivate, and reward top talent. When setting compensation levels, we also consider the cost of living in the Boston area.
Our competitive peer groups for our named executive officers include:
•The other FHLBanks, particularly for determining mix of pay within the total rewards package due to the similarity in structure, responsibilities, mission, mix-of-pay and total rewards within a cooperative, government-sponsored-enterprise structure; and
•The commercial banks and financial services firms as a broader peer group with the specialized talent that we often compete for when recruiting and retaining key employees in our geographic location. For executive level positions, we may consider the scale and scope of the role in making a market comparison, often considering division heads of large peers as appropriate market benchmarks, rather than an overall head of a function or business area.
Peer groups are considered in setting the total rewards package. However, no specific target among the peer groups is selected for named executive officer compensation. Rather, the data is used generally to ensure the total rewards packages remain competitive as determined by the Compensation Committee relative to those peer groups.
The other FHLBanks serve as a peer group for determining the proportionate mix of pay and benefits. While all of the FHLBanks share the same mission, they may differ in their relative mix of products and services and location among urban and smaller-city locations, both of which impact labor-market competition and compensation by individual FHLBanks. However, due to the FHLBank System's unique cooperative structure, all FHLBanks generally rely on a similarly structured total rewards package for the named executive officers, including base salary, cash incentives, and benefits, since none can offer equity-based compensation opportunities such as those offered at their non-FHLBank competitors. In 2021, we participated in, and used the results of, the annual McLagan FHLBank System survey of key positions to determine whether the total rewards packages for the named executive officers, as well as the proportionate mix of pay and benefits, are competitive for each matched position as discussed below in more detail.
The commercial banks and financial services firms peer group serves as a relevant comparator group for competitive positioning of the total rewards package for those positions requiring financial services experience, including the named executive officers. The commercial bank and financial services firms peer group focuses on large and mid-sized commercial banks and financial services firms but excludes large global investment banks. Both the Bank and commercial banks engage in wholesale lending and share similarities in several functional areas, particularly middle-office and support areas. The commercial bank and financial services firms peer group consists mostly of banks with multiple product lines/offerings and significant assets. The most significant difference between us and the commercial bank and financial services firms peer group is that we are focused on wholesale banking activities while the peer group generally engages in both wholesale and retail activities. The market analysis focuses on the wholesale activities and excludes retail-focused positions. In addition to the above peer groups, in certain limited cases, publicly traded banks are considered as peers. Only publicly traded banks of a limited asset size are used as peers for this purpose, in order to account for the broader scope of activities and scale of this peer group.
We worked with McLagan to match several of the positions held by the named executive officers to comparable positions in the commercial banks and financial services firms peer group of McLagan's proprietary 2021 Financial Services - FHLB Survey. Named executive officer positions were matched to those survey positions that represented realistic job opportunities based on scope, similarity of positions, experience, complexity, and responsibilities. Realistic job opportunities included positions for which the named executive officers would be qualified at the external firms as well as positions at the firm that we would consider when recruiting for experienced executives.
The following is a list of survey participants that were included by McLagan in the 2021 Financial Services - FHLB Survey, including the commercial banks and financial services firms peer group, the Federal Home Loan Banks, and proxy data from public peers with assets between $10 billion and $20 billion. Not all participants reported positions that matched the data set for the named executive officers.
Table 42 - List of Survey Participants
| | | | | | | | |
| ABN AMRO | Federal Home Loan Bank of Boston | Manulife |
| AIB | Federal Home Loan Bank of Chicago | Mechanics Bank |
| Ally Financial Inc. | Federal Home Loan Bank of Cincinnati | MUFG Bank, Ltd. |
| Ameriprise Financial | Federal Home Loan Bank of Dallas | National Australia Bank |
| Ameris Bank | Federal Home Loan Bank of Des Moines | Natixis Corporate & Investment Banking |
| Amundi Pioneer | Federal Home Loan Bank of Indianapolis | NatWest |
| Apple Financial Holdings | Federal Home Loan Bank of New York | NBT Bancorp Inc. |
| Arvest Bank | Federal Home Loan Bank of Pittsburgh | New York Community Bank |
| Associated Bank | Federal Home Loan Bank of San Francisco | Nomura Securities |
| Atlantic Union Bank | Federal Home Loan Bank of Topeka | Nord/LB |
| Australia & New Zealand Banking Group | Federal Reserve Bank of Atlanta | Northern Trust Corporation |
| Banco Bilbao Vizcaya Argentaria | Federal Reserve Bank of Boston | Northwest Bank – PA |
| Bank ABC | Federal Reserve Bank of Chicago | OCBC Bank |
| Bank of America | Federal Reserve Bank of Kansas City | OceanFirst Bank |
| Bank of New York Mellon | Federal Reserve Bank of Minneapolis | OneMain Financial |
| Bank of Nova Scotia | Federal Reserve Bank of New York | Pacific Premier Bank |
| Bank of the West | Federal Reserve Bank of Richmond | People's United Financial, Inc. |
| Banner Bank | Federal Reserve Bank of San Francisco | PlainsCapital Bank |
| Baupost Group, The | Federal Reserve Bank of St Louis | Plymouth Rock Assurance Corporation |
| BBVA Compass | Fidelity Investments | PNC Bank |
| BMO Financial Group | Fifth Third Bank | PrimeLending |
| BNP Paribas | First BanCorp – PR | PwC |
| BNP Paribas CIB | First Citizens Bank - NC | Rabobank |
| BOK Financial Corporation | First Financial Bancorp - OH | Regions Financial Corporation |
| Bremer Financial Corporation | First Interstate BancSystem, Inc. | Renasant Corporation |
| Brown Brothers Harriman | First Merchants Bank | Royal Bank of Canada |
| Cadence Bank | First National Bank of Omaha | Sallie Mae |
| Capital One | First Republic Bank | Sandy Spring Bank |
| | | | | | | | |
| Cathay General Bancorp | First Tennessee Bank/ First Horizon | Santander Bank, N.A. |
| Charles Schwab & Co. | First United Bank - OK | ServisFirst Bank |
| CIBC World Markets | Freddie Mac | Siemens Financial Services |
| CIT Group Inc. | Frost Bank | Sig |
| Citigroup | Glacier Bank | Sumitomo Mitsui Banking Corporation |
| Citizens Financial Group | GMO | Sumitomo Mitsui Trust Bank |
| City National Bank | Great Western Bank | SVB Financial Group |
| City National Bank of Florida | Hancock Whitney Bank | Synovus Financial Corporation |
| Comerica | Heartland Financial USA, Inc | TD Securities |
| Commerce Bank | HSBC | Texas Capital Bank |
| Commerzbank | Huntington Bancshares, Inc. | TowneBank |
| Commonwealth Bank of Australia | Independent Bank - TX | Truist |
| Community Bank System, Inc. | ING | U.S. Bancorp |
| Computershare | Intesa Sanpaolo | UMB Financial Corporation |
| Crédit Agricole CIB | Investec Bank | UniCredit Bank AG |
| Credit Industriel et Commercial – N.Y. | Investors Bancorp, Inc. | United Community Banks |
| Depository Trust & Clearing Corporation | JP Morgan Chase | United Overseas Bank Group |
| DNB Bank | KBC Bank | Valley National Bancorp |
| Eagle Bancorp Inc. - MD | KeyCorp | Voya Financial |
| East West Bancorp, Inc. | Lincoln Financial Group | Webster Bank |
| Eastern Bank | Lloyds Banking Group | Wellington Management Company |
| Fannie Mae | Loomis, Sayles & Company | Wells Fargo Bank |
| FB Financial Corporation | M&T Bank Corporation | Zions Bancorporation |
| Federal Home Loan Bank of Atlanta | Macquarie Bank | |
Data from international banks contained results from their U.S. operations only.
Elements of our Compensation Plan and Why Each Element is Selected
We compensate the named executive officers principally based on their performance, skills, experience, the criticality of the role, and tenure through a package that consists of a mix of base salary, annual and deferred cash-incentive opportunities, qualified and nonqualified retirement plans, and various other health and welfare benefits, that is, total rewards. From time to time, we will also award special cash bonuses outside of an EIP to compensate a named executive officer based on unusual or exemplary circumstances. Each compensation element is discussed in greater detail below. Due to our cooperative structure, we cannot offer equity-based compensation programs, so we may offer higher base salaries, in addition to cash-incentive opportunities, and certain retirement benefits to keep our compensation packages competitive relative to the market and to replace some of the value of compensation that competitors might offer through equity-based compensation programs. The named executive officers may also be provided with certain additional perquisites. Although we do not engage in benchmarking, the Total Rewards Philosophy provides that our total rewards package, including that for named executive officers, should be comparable with the total rewards package for matched positions in the two primary peer groups, as discussed under — Overview of the Labor Market for Senior Managers above. Historically, the Compensation Committee has set total rewards packages for each of the named executive officers so that their total rewards package of base salary, cash incentives, and retirement plans would be comparable with the total rewards packages at the commercial bank and financial services firms peer group, including base salary and incentives, and so that their total cash compensation, that is, base salary plus cash incentives, would be competitive with total cash compensation of the named executive officer's peers at other FHLBanks. The Compensation Committee has been informed by the same data in setting current total rewards packages.
How we Determine the Amount for Each Element of our Compensation Plan
The board sets annual goals and objectives for the chief executive officer to align with our strategic business plan. In general, at the end of each year, the chief executive officer provides the Compensation Committee with a self-assessment of his corporate and individual achievements. Based on the Compensation Committee's evaluation of his performance and review of competitive market data for the defined peer groups, the Compensation Committee determines and approves an appropriate total
compensation package. For 2021, the board of directors, as informed by a market analysis for competitive compensation developed by McLagan, determined and approved a competitive offer for Mr. Barrett as the Bank’s chief executive officer effective December 1, 2021. In the case of other named executive officers, the chief executive officer reviews individual performance and submits market data and recommendations to the Compensation Committee regarding appropriate compensation. The Compensation Committee reviews these recommendations and submits its recommendations to the full board of directors. The board of directors reviews the recommendations and approves the compensation it considers appropriate, giving consideration to the Total Rewards Philosophy.
The Compensation Committee does not set specific, predetermined targets for the allocation of total rewards between base salary, cash incentives, and benefits, including retirement and other health and welfare plans and perquisites. Rather, the Compensation Committee considers the value and mix of the total rewards package offered to each named executive officer compared with the total rewards package for positions of comparable scope, responsibility, and complexity of position at the two defined peer groups, the incumbent's performance, experience and tenure, and internal equity.
Base Salary
Base salary adjustments for all named executive officers are considered at least annually as part of the year-end annual performance review process and more often if considered necessary by the Compensation Committee during the year, such as in recognition of a promotion or to ensure internal equity.
After review and nonobjection by the FHFA, the Compensation Committee awarded the named executive officers, an increase in base salary on January 19, 2022, with retroactive application to January 1, 2022, except of Mr. Barrett, whose salary established on December 1, 2021 remained unchanged. In determining the amount of the increases, the Compensation Committee considered market data from the McLagan 2021 Financial Services - FHLB Survey, discussed under — Overview of the Labor Market for Senior Managers above, the economic and employment environments. Additionally, the Compensation Committee considered the recommendations of Mr. Barrett for the other named executive officers based on individual performance, tenure, experience, and complexity of the named executive officer's position and internal equity. Mr. Barrett recommended, and the board of directors awarded at the recommendation of the Compensation Committee, increases in base salary for each of the named executive officers. The percentage increases in base salary were generally consistent with merit and adjustment increases granted to staff.
The following table sets forth the base salary increases:
Table 43 - Named Executive Officer Salaries
| | | | | | | | | | | | | | | | | | | | |
| Name and Principal Position | | Pre-Adjustment Annual Base Salary | | Post-Adjustment Annual Base Salary | | Percent Increase |
| Timothy J. Barrett | | $870,000 | | $870,000 | | —% |
| President and Chief Executive Officer | | | | | | |
| | | | | | |
| Frank Nitkiewicz | | $428,488 | | $454,198 | | 6.00% |
| Executive Vice President, Chief Operating Officer and Chief Financial Officer | | | | | | |
| | | | | | |
| Carol Hempfling Pratt | | $398,633 | | $410,193 | | 2.90% |
| Executive Vice President, General Counsel and Corporate Secretary | | | | | | |
| | | | | | |
| Sean R. McRae | | $330,820 | | $340,745 | | 3.00% |
| Senior Vice President and Chief Information Officer | | | | | | |
| | | | | | |
| Barry F. Gale | | $294,671 | | $312,351 | | 6.00% |
| Senior Vice President, Chief Human Resources Officer and Office of Minority and Women Inclusion Director | | | | | | |
Executive Incentive Plan
General Overview of EIPs
EIPs are cash incentive plans which are reviewed and may be adopted by the Compensation Committee or the board on an annual basis. While EIPs are not necessarily adopted every year, in recent years we have adopted them annually. Generally, EIPs are used to promote achievement of strategic objectives by aligning cash incentive opportunities for corporate officers or other members of management or highly compensated employees, including the named executive officers, with our financial performance and strategic priorities. These incentive opportunities are also designed to facilitate retention and commitment of key officers. EIPs generally include specific goals, such as goals based on profitability, business growth, regulatory examination results and remediation, and operational goals for each of the corporate officers or other members of management or highly compensated employees, including the named executive officers.
The Compensation Committee reviews each component of the EIP's plan design, including eligible participants, goals, goal weighting, achievement levels, and payout opportunities. The Compensation Committee administers the EIP and has full power and binding authority to construe, interpret and administer the EIP, and adjust it for extraordinary circumstances. Extraordinary circumstances may include changes in business strategy, termination or commencement of business lines, impact of severe economic fluctuations, significant growth or consolidation of the membership base, or significant regulatory or other changes impacting us or the FHLBank System. The Committee may not make adjustments for extraordinary circumstances that include changes to goals, weights, or levels of achievement without resubmission to the FHFA.
Purpose of the 2021 EIP
The 2021 EIP is intended to:
•reflect a reasonable assessment of our financial situation and prospects while rewarding achievement of our financial plan and strategic objectives in our annual strategic business plan;
•reinforce and reward our commitment to conservative, prudent, sound risk-management practices and preservation of the par value of our capital stock;
•tie a significant percentage of incentive awards to our long-term financial condition and performance; and
•recognize the importance of individual performance through metrics linked to our strategic goals and/or objectives of the participant’s principal functions and independent of the areas that they monitor.
2021 EIP Plan Design
The design of the 2021 EIP was guided by principles intended to:
•promote achievement of our financial plan and strategic objectives in our annual strategic business plan;
•provide a total rewards package that is competitive with other financial institutions in the labor markets in which we compete; and
•facilitate the retention and commitment of our corporate officers, a select group of management, and highly compensated employees.
Incentive Goals
The 2021 EIP's goals were derived from, or are consistent with, our strategic business plan and objectives and were generally weighted based on desired business outcomes. The goal achievement levels have generally been set so that the target achievement level is consistent with projections in our strategic business plan. For certain nonfinancial EIP goals for which there is no direct reference in the strategic business plan, the goals and goal achievement levels are established consistent with our strategic objectives and the impact of achievement of the objectives. The 2021 EIP does not contain individual performance award opportunities for the named executive officers. To mitigate unnecessary or excessive risk-taking, the 2021 EIP contains measures for overall performance that are achieved through Bank-wide collaboration of activity but cannot be individually attained or altered by participants in the 2021 EIP.
The 2021 EIP has a 50 percent deferral component in lieu of the 50 percent long-term incentive component of the Bank’s prior EIPs. Under the 2021 EIP, each named executive officer received, in March 2022, 50 percent of the total incentive award earned as of December 31, 2021, and the remainder of the award was deferred and will be paid after year-end 2023, in an amount equal to 50 percent of the total 2021 award multiplied by 1 plus the Bank’s cumulative three-year pre-assessment core
return on capital stock (as defined in the 2021 EIP) as measured between January 1, 2021 and December 31, 2023 (the Deferred Award), subject to certain qualifications as explained in Additional Conditions to Deferred Award. As described in greater detail under Determination of Awards under the 2021 EIP, the Compensation Committee maintains authority over all awards under the 2021 EIP, however, the 2021 EIP prohibits award payouts to participants that do not receive a performance rating of “meets expectations” or better.
Incentive Goals and Actual Achievement
The 2021 EIP included the following incentive goals for the named executive officers:
•Pre-assessment, core return on capital stock (the core return goal): Pre-assessment, core return on capital stock (as such term is defined in the 2021 EIP and referred to in this report as core return on capital stock) is a measure of return on capital stock that excludes or adjusts the timing of recognition of the impact of AHP expenses, expenses of the HHNE and JNE initiatives, interest expense on mandatorily redeemable capital stock, gains (losses) on debt retirement, net prepayment fees, net unrealized gains (or losses) attributable to changes in fair value, and imputed amortization of net premiums on investments classified as trading securities. The difference between GAAP return on capital stock and this measure of return on capital stock is that GAAP return on capital stock does not provide for the adjustments described above, and core return on capital stock includes shares classified as mandatorily redeemable capital stock. Achievement of this goal was subject to compliance with our market value of equity to par stock ratio and internal unfloored duration of equity limits for at least 10 of the 12 months of the year. We complied with these limits for 12 months. These limits are described under Part II — Item 7A — Quantitative and Qualitative Disclosures about Market Risk — Measurement of Market and Interest-Rate Risk and Related Policy Constraints.
•Insurance member advances outstanding (the insurance advances goal): This goal is defined as the average daily balance of all advances to insurance members in 2021.
•Insurance membership (the insurance membership goal): Insurance companies approved for membership in 2021 qualify toward the achievement of this goal if the member’s asset size is greater than $200 million as of December 31, 2020, or at any quarter-end period in 2021. Applications from insurance companies that are affiliated and submitted within a 90-day period will count as separate memberships if each applicant’s net admitted assets are greater than $200 million.
•Core mission goal: This goal is measured by our core mission asset ratio, a ratio by which the FHFA assesses our core mission achievement.
•Voluntary subsidy goal: This goal is measured by the total amounts disbursed under the various voluntary subsidy programs, including the Jobs for New England and Helping to House New England programs.
•Operational efficiency (the operational efficiency goal): This goal is measured by whether and to what degree our core operating expenses, which are defined as our normal expenses associated with enabling the Bank to conduct business operations, and which exclude significant discretionary expenses approved by the board of directors in an amount not to exceed judgment or settlement income associated with our ongoing private-label MBS litigation, stay within and do not exceed the operating expense budget approved by the board of directors. Core operating expenses are measured as a percentage of the operating expense budget for 2021.
Table 44 sets forth the named executive officers' goals and the related weight for all goals and the levels of achievement, and the actual achievement for each of those goals for the year ended December 31, 2021.
Table 44 - Short-Term Goals
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Goal | | Weighting | | Threshold | | Target | | Excess | | Actual
Achievement |
| Core Return | | 30% | | 3.95 percent (1) | | 4.39 percent (1) | | 5.27 percent (1) | | Excess |
| Insurance Member Advances Outstanding | | 10% | | $4.25 billion | | $4.40 billion | | $4.55 billion | | $4.43 billion |
| Insurance Membership | | 10% | | 3 new members | | 4 new members | | 6 new members | | 2 new members |
| Core Mission | | 20% | | CMA Ratio = 65.87 percent | | CMA Ratio = 70.87 percent | | CMA Ratio = 75.87 percent | | CMA Ratio = 71.20 percent |
| Voluntary Subsidy Programs | | 10% | | Disburse $4.0 million in subsidy by December 31, 2021 | | Disburse $4.5 million in subsidy by December 31, 2021. | | Disburse $5.0 million in subsidy by December 31, 2021. | | $5.0 million |
| Operational Efficiency | | 20% | | 2021 core operating expenses do not exceed the 2021 operating expense budget approved by the board of directors. | | 2021 core operating expenses do not exceed 97.0% of the 2021 operating expense budget approved by the board of directors | | 2021 core operating expenses do not exceed 93.0% of the 2021 operating expense budget approved by the board of directors | | Between target and excess |
___________________________
(1)These performance levels were adjusted from the amounts originally established in the 2021 EIP. The 2021 EIP provides that the originally established performance levels were to be adjusted up or down by 1.2 basis points for every basis point by which the average daily federal funds rate deviated from the 0.06 percent assumed in our strategic business plan. In 2021, the average daily federal funds rate deviation was 1.9 basis points, resulting in a 2 basis point increase to each of the performance levels.
Incentive Opportunities under the 2021 EIP
Incentive opportunities under the 2021 EIP are based on each named executive officer's base salary at December 31, 2021 (referred to as 2021 incentive salaries).
At the conclusion of 2021, individual awards were calculated based on actual goal achievement as of December 31, 2021. Participants received 50 percent of such award in a cash payment in March 2022, following non-objection by the FHFA and approval of the Compensation Committee, and the remainder is to be paid as the Deferred Award after year-end 2023. Table 45 sets forth the total incentive opportunities available under the 2021 EIP, including both the payment made in March 2022 and the amount deferred until after year-end 2023, expressed as percentages of the named executive officers' 2021 incentive salaries:
Table 45 - Total Incentive Opportunity
| | | | | | | | | | | | | | | | | |
| Incentive Opportunity |
| Threshold | | Target | | Excess |
| President | 50.00% | | 75.00% | | 100.00% |
| All Other Named Executive Officers | 30.00% | | 50.00% | | 70.00% |
Determination of Awards under the 2021 EIP
Awards for the goals under the 2021 EIP were based on actual goal achievement determined objectively at the conclusion of the year. Results for each goal were measured and the award for each goal was then calculated independently based on the following formula:
| | | | | | | | | | | | | | | | | | | | |
| Award for Each Goal | = | Goal Weight (Table 44) | X | Incentive Opportunity for Level of Achievement
(Table 45) | X | 2021
Incentive Salary |
If the result for the goal is less than the threshold level of achievement (Table 44), the award for that goal is zero absent an act of discretion. One goal did not achieve the threshold level of achievement (Table 44), and there was no payout on that goal. For
the two goals that achieved above or at the excess level of achievement, there were no incremental payouts for achievements above excess per plan design. The remaining annual goals were achieved at a level between the target and excess levels of achievement. In administering the EIP, as with prior EIPs, the Compensation Committee determined that participants would receive an interpolated award for having exceeded target levels. In such instance, the award for each goal would be calculated according to the following formula:
| | | | | | | | | | | | | | | | | | | | |
| Award for Each Goal | = | Goal Weight (Table 44) | X | Incentive Opportunity
(Table 45) Interpolated for Actual Level of Achievement | X | 2021
Incentive Salary |
Our staff calculated the named executive officers' awards under the 2021 EIP's short-term goals, in accordance with actual year-end results and the foregoing formulas. The Compensation Committee discussed recommendations from Mr. Barrett and adopted the recommendations and staff calculations.
Based on those calculations and recommendations, the combined incentive awards were calculated, by goal, as follows:
Table 46 - Total 2021 Incentive Awards as Calculated by Goal
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Participant | Core Return | Core Mission | Insurance Advances | Insurance Member-ship | Voluntary Subsidy | Operational Efficiency | Total Award | Deferred Amount |
Mr. Barrett(1) | $142,970 | $71,818 | $37,595 | $— | $47,657 | $71,416 | $371,456 | $185,728 |
Mr. Hjerpe(2) | 258,537 | 132,113 | 68,943 | — | 86,179 | 131,423 | 677,195 | 338,597 |
| Mr. Nitkiewicz | 89,983 | 43,980 | 23,138 | — | 29,994 | 43,706 | 230,801 | 115,400 |
| Ms. Pratt | 83,713 | 40,916 | 21,526 | — | 27,904 | 40,661 | 214,720 | 107,360 |
| Mr. McRae | 69,473 | 33,955 | 17,864 | — | 23,157 | 33,744 | 178,193 | 89,096 |
| Mr. Gale | 61,882 | 30,245 | 15,912 | — | 20,627 | 30,056 | 158,722 | 79,361 |
___________________________
(1)Reflecting his efforts in the leadership transition following the board of director’s August 2021 selection of Mr. Barrett as the Bank’s next president and chief executive officer, the Compensation Committee awarded Mr. Barrett a prorated 2021 incentive award based on (a) his salary and award opportunity as executive vice president and treasurer through August 31, 2021, and (b) his salary and award opportunity as if his tenure as president and chief executive officer had commenced on September 1, 2021, through December 31, 2021.
(2)The Compensation Committee approved a pro-rata payment under the 2021 EIP for Mr. Hjerpe, who retired on November 30, 2021.
The named executive officers received 50 percent of the total 2021 EIP award (i.e. 50 percent of the “total award” in Table 46 in a cash payment in March 2022, following approval of the Compensation Committee and non-objection by the FHFA. The remainder of the total award (i.e. the “deferred amount” in Table 46) was deferred and will be paid after year-end 2023, in an amount equal to the Deferred Award, subject to certain forfeiture provisions as explained in Additional Conditions to Deferred Awards.
Additional Conditions to Deferred Awards
Deferred Awards are subject to the following conditions:
•Participants must be employed by us on the payment date in 2024 to receive the Deferred Awards, although participants that terminate employment by reason of death or disability or who are eligible to retire prior to that date may receive payment of the award in certain instances, as detailed in the 2021 EIP.
•Subject to the discretion of the Compensation Committee, the Deferred Awards may be reduced (but not to a number that is less than zero) for some or all participants, as applicable, if, during calendar years 2022 and/or 2023, any of the following occurs such that if it had occurred prior to the year-end 2021 calculations, it would have negatively impacted the goal results and reduced the associated payout calculation:
▪operational errors or omissions result in material revisions to our 2021 financial results, information submitted to the FHFA, or data used to determine the total award at year-end 2021;
▪significant information to the SEC, Office of Finance, and/or FHFA is submitted materially beyond any deadline or applicable grace period, other than late submissions that are caused by acts of God or other events beyond the reasonable control of the participants; or
▪we fail to make sufficient progress, as determined by the FHFA, in the timely remediation of examination and other supervisory findings relevant to the goal results or payout calculation.
•Payment of the Deferred Awards is subject to the final approval of the Compensation Committee and review and non-objection by the FHFA (to the extent required by the FHFA).
Retirement and Deferred Compensation Plans
We offer participation in qualified and nonqualified retirement plans to the named executive officers as key elements of our total rewards package. The benefits received under these plans are intended to enhance the competitiveness of our total compensation and benefits relative to the market by complementing the named executive officers' base salary and cash incentive opportunities. We are implementing changes to our retirement plans, as described below, to reduce financial risk and volatility associated with managing a defined benefit plan. We currently maintain four retirement plans, in which the named executive officers participate, including:
•Pentegra Defined Benefit Plan for Financial Institutions (the Pentegra Defined Benefit Plan), a funded, tax-qualified, noncontributory plan that provides retirement benefits for all eligible employees;
•Pension Benefit Equalization Plan (the Pension BEP), a nonqualified, unfunded defined benefit plan covering certain senior officers, as defined in the plan, which includes the named executive officers and other personnel as determined by the board of directors;
•Pentegra Defined Contribution Plan for Financial Institutions (the Pentegra Defined Contribution Plan), a 401(k) plan, under which we match employee contributions for all eligible employees; and
•Thrift Benefit Equalization Plan (the Thrift BEP), a nonqualified, unfunded defined contribution plan with a deferred compensation feature, which is available to the named executive officers, directors, and such other personnel as determined by the board of directors.
We are implementing changes to our retirement and deferred compensation plans that the Compensation Committee believes will continue to keep our total rewards package competitive, particularly compared with labor market competitors. The Pentegra Defined Benefit Plan was frozen to newly hired employees as of January 1, 2021, and on January 1, 2024, future benefit accruals under the plan will cease for all employees, including the named executive officers. The Pension BEP was also frozen to newly hired employees as of January 1, 2021, and further benefit accruals will cease on January 1, 2024 for all employees, including the named executive officers. The Pentegra Defined Contribution Plan was amended to add, subject to certain limitations of the Internal Revenue Code, a non-elective, non-matching contribution from the Bank of six percent (6%) of each eligible employee’s salary for employees who are ineligible to accrue benefits under the Pentegra Defined Benefit Plan, either because they were hired on or after January 1, 2021, or because benefit accruals under that plan have ceased on January 1, 2024.
The Thrift BEP was also amended to provide for a new non-elective contribution to the Thrift BEP from the Bank for eligible executive participants. The non-elective contribution will be made initially under the Thrift BEP to any eligible executive participants who are hired on or after January 1, 2021, and are thus ineligible to participate in the Pentegra Defined Benefit Plan. The Bank will begin making non-elective contributions to the Thrift BEP for all eligible executive participants commencing January 1, 2024, the date on which benefit accruals will be frozen under the Pentegra Defined Benefit Plan and the Pension BEP. Under the amendments, for each executive participant in the Thrift BEP eligible for non-elective contributions in a plan year, the Bank will contribute an amount equal to (a) six percent (6%) of the eligible executive’s compensation and incentive compensation, prior to reduction for any elective deferrals under the Thrift BEP, determined without regard to limitations of the Internal Revenue Code, minus (b) the non-elective, non-matching Bank contribution applicable to that executive under the terms of the Pentegra Defined Contribution Plan with respect to the same period. Additional information regarding these plans can be found with the Pension Benefits and Nonqualified Deferred Compensation tables below.
All benefits payable under the Pension BEP and Thrift BEP are paid solely out of our general assets, or from assets set aside in rabbi trusts subject to the claims of our creditors in the event of our insolvency.
Perquisites
Perquisites for the named executive officers may include supplemental life insurance (Mr. Nitkiewicz only), travel memberships and subscriptions, spouse travel for certain business events, parking, or a 100 percent mass transportation subsidy. Mr. Barrett is also eligible to use a Bank-owned or -leased vehicle and a parking space convenient to the Bank’s headquarters. The Compensation Committee believes that the perquisites offered to the named executive officers are reasonable and necessary for the total compensation package to remain competitive in recruiting and retaining them.
Potential Payments upon Termination or Change in Control
Employment Agreement with Mr. Barrett
We entered into an employment agreement with Mr. Barrett, effective as of December 1, 2021 (the Employment Agreement). The board of directors determined that having the employment agreement in place would be an effective tool to recruit and retain Mr. Barrett as the president and chief executive officer. The Employment Agreement has an initial term of three years and subsequently renews for one-year periods unless either party elects to not renew. Under the Employment Agreement, Mr. Barrett is provided access to a Bank-owned or -leased vehicle at a cost not to exceed $900 per month and a reserved parking space at a location convenient to the Bank’s headquarters. In January 2022, the Bank entered into a three-year lease for a vehicle for Mr. Barrett’s use, with such lease including an approximately $16,500 down payment, plus taxes and fees, and $865 monthly payments. Also, under the Employment Agreement, Mr. Barrett is entitled to participate in all incentive, savings, and retirement plans and programs available to senior executives at the Bank. Also, under the Employment Agreement, Mr. Barrett’s employment may be terminated by the Bank with or without “cause”, as therein defined, or by Mr. Barrett with or without “good reason” as therein defined with severance payable to Mr. Barrett upon termination by the Bank without “cause” or resignation by Mr. Barrett with “good reason.” These severance benefits for Mr. Barrett are discussed below under Post-termination Payments.
Employment Status and Severance Policy
Pursuant to the FHLBank Act, our employees, including the named executive officers as of December 31, 2021, are "at will" employees. Each may resign his or her employment at any time, and we may terminate his or her employment at any time for any reason or no reason, with or without cause, and with or without notice. Under our severance policy, all regular full- and part-time employees who work at least 1,000 hours per year whose employment is terminated involuntarily for reasons other than "cause," (as determined by us at our sole discretion), are provided with severance packages reflecting their status in the organization and tenure. Severance packages for employees leaving by mutual agreement or terminated for cause is at our sole discretion, provided that such severance shall not exceed that paid to employees terminated involuntarily for reasons other than cause. The severance policy does not constitute a contractual relationship between the Bank and the named executive officers, and we reserve the right to modify, revoke, suspend, terminate, or change the severance policy at any time without notice.
To receive benefits under the severance policy, individuals must agree to execute our standard release of claims agreement. In addition, and at our sole discretion, we may provide outplacement and/or such other services as may assist in ensuring a smooth career transition. Payments under the severance policy are discussed below under Post-termination Payments.
Executive Change in Control Severance Plan
The Bank maintains an Executive Change in Control Severance Plan (Executive Severance Plan). The purpose of the Executive Severance Plan is to provide stability to the Bank in the event of a change in control and to facilitate hiring and retention of senior management by providing them with certain protections and benefits in the event of a qualifying termination following a change in control of the Bank. Outside of a change in control period (as defined in the Executive Severance Plan), we have the right to revise, modify or terminate the plan in whole or in part at any time without the consent of any participant. During a change in control period (or such longer period until all payments and benefits, if any, which become due under the plan have been paid), however, any revision, modification, or termination that would impact benefits to a participant would require the consent of that participant. The Executive Severance Plan is discussed below under Post-termination Payments.
FHFA Oversight of Executive Compensation
The FHFA provides certain oversight of FHLBank executive officer compensation. Section 1113 of the Housing and Economic Recovery Act (HERA) requires that the Director of the FHFA prohibit an FHLBank from paying compensation to its executive officers that is not reasonable and comparable to that paid for employment in similar businesses involving similar duties and responsibilities. In connection with this responsibility, the FHFA has issued final rules on executive compensation and golden parachute payments, which provide for oversight of such compensation and payments. In addition to those rules, the FHFA has issued an advisory bulletin on principles for FHLBank executive compensation together with other guidance and certain
protocols for the review of proposed FHLBank compensation actions. We await express non-objection from the FHFA to any proposed award of compensation to our named executive officers prior to making any such award. The FHFA could issue additional rules, advisory bulletins, review protocols, and/or additional guidance that could further impact named executive officer compensation.
Compensation Tables
The following table and accompanying footnotes set forth all compensation attributed to our named executive officers for the years ended December 31, 2021, 2020, and 2019, which for the year ended 2021 includes the total 2021 EIP incentive award, including deferred amounts. For the 2021 EIP, the Bank replaced long term goals and related long term awards, as included in the 2020 EIP and 2019 EIP, with a deferred award whereby participants, including the named executive officers, received 50 percent of the award in March 2022 and the remainder is deferred and is to be paid in an amount equal to the Deferred Award after year end 2023. Unlike long term awards under the 2020 EIP and 2019 EIP, the deferred portion of the 2021 award is recognized in Table 47 as part of the “non-equity incentive plan compensation short term,” although this amount has not yet been paid to the named executive officers. The effect of this deferred amount on named executive officer compensation disclosed in the following table is more fully described in footnote 1 to Table 47.
Table 47 - Summary Compensation for 2021, 2020 and 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name and Principal Position (1) | | Year | | Salary(2) | | Bonus(3) | | Non-equity
Incentive Plan
Compensation Short-Term(4)(5) | | Non-equity Incentive Plan Compensation Long-Term(5)(6) | | Change in Pension Value and Nonqualified Deferred Compensation Earnings(7) | | All Other Compensation(8) | | Total |
| Timothy J. Barrett | | 2021 | | | $ | 441,864 | | 9 | $ | — | | | $ | 371,456 | | 10 | $ | 96,642 | | | $ | 175,000 | | | $ | 38,740 | | | $ | 1,123,702 | |
| President and Chief Executive Officer | | 2020 | | | 393,822 | | | 713 | | | 89,673 | | | 106,455 | | | 534,000 | | | 39,354 | | | 1,164,017 | |
| 2019 | | | 379,052 | | | — | | | 100,379 | | | 151,666 | | | 469,000 | | | 31,808 | | | 1,131,905 | |
| | | | | | | | | | | | | | | | |
Edward A. Hjerpe III(11) | | 2021 | | | 862,088 | | | — | | | 677,195 | | | 338,100 | | | 718,247 | | | 199,765 | | | 2,795,395 | |
| Former President and Chief Executive Officer | | 2020 | | | 930,413 | | | — | | | 305,212 | | | 383,502 | | | 1,883,000 | | | 110,028 | | | 3,612,155 | |
| 2019 | | | 892,931 | | | — | | | 351,171 | | | 524,069 | | | 1,693,000 | | | 116,859 | | | 3,578,030 | |
| | | | | | | | | | | | | | | | |
| Frank Nitkiewicz | | 2021 | | | 430,136 | | | 2,111 | | | 230,801 | | | 103,880 | | | — | | 12 | 45,754 | | | 812,682 | |
| Executive Vice President and Chief Financial Officer | | 2020 | | | 423,317 | | | — | | | 96,389 | | | 120,862 | | | 1,567,000 | | | 49,539 | | | 2,257,107 | |
| 2019 | | | 407,441 | | | — | | | 107,897 | | | 173,041 | | | 1,662,000 | | | 47,616 | | | 2,397,995 | |
| | | | | | | | | | | | | | | | |
| Carol Hempfling Pratt | | 2021 | | | 400,166 | | | — | | | 214,720 | | | 96,642 | | | 183,000 | | | 35,696 | | | 930,224 | |
| Executive Vice President, General Counsel and Corporate Secretary | | 2020 | | | 393,822 | | | 711 | | | 89,673 | | | 106,455 | | | 578,000 | | | 39,723 | | | 1,208,384 | |
| 2019 | | | 379,052 | | | — | | | 100,379 | | | 155,927 | | | 502,000 | | | 37,657 | | | 1,175,015 | |
| | | | | | | | | | | | | | | | |
| Sean R. McRae | | 2021 | | | 332,092 | | | — | | | 178,193 | | | 80,202 | | | 89,000 | | | 30,020 | | | 709,507 | |
| Senior Vice President and Chief Information Officer | | 2020 | | | 326,828 | | | — | | | 74,418 | | | 293,045 | | 13 | 401,000 | | | 33,369 | | | 1,128,660 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Barry F. Gale | | 2021 | | | 295,804 | | | — | | | 158,722 | | | 67,217 | | | 122,000 | | | 26,166 | | | 669,909 | |
| Senior Vice President, Chief Human Resources Officer and Office of Minority and Women Inclusion Director | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
_______________________
(1)With the approval of the Compensation Committee and the non-objection of the FHFA, the Bank implemented the 2021 EIP, which provides for a current payment of 50 percent and deferral of 50 percent of the incentive compensation earned, rather than splitting the incentive compensation earned into a short-term award paid currently (50 percent) and a long-term award (50 percent) that was subject to the achievement of separate long-term goals, as provided in the 2020 EIP and 2019 EIP. Although the Deferred Award under the 2021 EIP is not payable to the named executive officers until after year end 2023, the amount deferred under the 2021 EIP is reported as non-equity incentive compensation (short term) in 2021. At the same time, the long-term award under the 2019 EIP is reported as non-equity incentive compensation (long term) in 2021, because it was paid in March 2022 and was not previously required to be reported in 2019, because it was subject to the achievement of long-term goals. The impact of the deferred amount under the 2021 EIP on the named executive officers’ “total compensation”, which our Compensation Committee determined was a meaningful analysis, in the above table is set forth in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Salary | | Bonus | | Non-equity
Incentive Plan
Compensation Short-Term | | Non-equity Incentive Plan Compensation Long-Term | | Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings | | All Other
Compensation | | Total |
| Timothy J. Barrett | | | | | | | | | | | | | | |
| Excluding deferred amount | | $ | 441,864 | | | $ | — | | | $ | 185,728 | | | $ | 96,642 | | | $ | 175,000 | | | $ | 38,740 | | | $ | 937,974 | |
| Impact of deferred amount | | — | | | — | | | 185,728 | | | — | | | — | | | — | | | 185,728 | |
| Total | | $ | 441,864 | | | $ | — | | | $ | 371,456 | | | $ | 96,642 | | | $ | 175,000 | | | $ | 38,740 | | | $ | 1,123,702 | |
| | | | | | | | | | | | | | |
Edward A. Hjerpe III(11) | | | | | | | | | | | | | | |
| Excluding deferred amount | | $ | 862,088 | | | $ | — | | | $ | 338,598 | | | $ | 338,100 | | | $ | 718,247 | | | $ | 199,765 | | | $ | 2,456,798 | |
| Impact of deferred amount | | — | | | — | | | 338,597 | | | — | | | — | | | — | | | 338,597 | |
| Total | | $ | 862,088 | | | $ | — | | | $ | 677,195 | | | $ | 338,100 | | | $ | 718,247 | | | $ | 199,765 | | | $ | 2,795,395 | |
| | | | | | | | | | | | | | |
| Frank Nitkiewicz | | | | | | | | | | | | | | |
| Excluding deferred amount | | $ | 430,136 | | | $ | 2,111 | | | $ | 115,401 | | | $ | 103,880 | | | $ | — | | | $ | 45,754 | | | $ | 697,282 | |
| Impact of deferred amount | | — | | | — | | | 115,400 | | | — | | | — | | | — | | | 115,400 | |
| Total | | $ | 430,136 | | | $ | 2,111 | | | $ | 230,801 | | | $ | 103,880 | | | $ | — | | | $ | 45,754 | | | $ | 812,682 | |
| | | | | | | | | | | | | | |
| Carol Hempfling Pratt | | | | | | | | | | | | | | |
| Excluding deferred amount | | $ | 400,166 | | | $ | — | | | $ | 107,360 | | | $ | 96,642 | | | $ | 183,000 | | | $ | 35,696 | | | $ | 822,864 | |
| Impact of deferred amount | | — | | | — | | | 107,360 | | | — | | | — | | | — | | | 107,360 | |
| Total | | $ | 400,166 | | | $ | — | | | $ | 214,720 | | | $ | 96,642 | | | $ | 183,000 | | | $ | 35,696 | | | $ | 930,224 | |
| | | | | | | | | | | | | | |
| Sean R. McRae | | | | | | | | | | | | | | |
| Excluding deferred amount | | $ | 332,092 | | | $ | — | | | $ | 89,097 | | | $ | 80,202 | | | $ | 89,000 | | | $ | 30,020 | | | $ | 620,411 | |
| Impact of deferred amount | | — | | | — | | | 89,096 | | | — | | | — | | | — | | | 89,096 | |
| Total | | $ | 332,092 | | | $ | — | | | $ | 178,193 | | | $ | 80,202 | | | $ | 89,000 | | | $ | 30,020 | | | $ | 709,507 | |
| | | | | | | | | | | | | | |
| Barry F. Gale | | | | | | | | | | | | | | |
| Excluding deferred amount | | $ | 295,804 | | | $ | — | | | $ | 79,361 | | | $ | 67,217 | | | $ | 122,000 | | | $ | 26,166 | | | $ | 590,548 | |
| Impact of deferred amount | | — | | | — | | | 79,361 | | | — | | | — | | | — | | | 79,361 | |
| Total | | $ | 295,804 | | | $ | — | | | $ | 158,722 | | | $ | 67,217 | | | $ | 122,000 | | | $ | 26,166 | | | $ | 669,909 | |
(2)Amounts shown are not reduced to reflect the named executive officers' elections, if any, to defer receipt of salary into the Pentegra Defined Contribution Plan or the Thrift BEP. Amounts reflect adjustments to annual base salaries resulting from
our biweekly payroll schedule in which employees, including the named executive officers, earn additional days of salary if the actual number of business days in the year exceeds 260.
(3)In 2021 Mr. Nitkiewicz received an additional bonus of $2,111 as a cash award for 30 years of service. In 2020, Mr. Barrett and Ms. Pratt received an additional bonus of $713 and $711, respectively, as a cash award for 10 years of service. The amount of these service awards is the same as would have been paid to any employee who completed the same number of years of service.
(4) The amounts for 2021 reflect the total awards paid or deferred under the 2021 EIP for services performed during the year ended December 31, 2021, with 50 percent of that award paid in March 2022, and the remainder to be paid after year-end 2023 in an amount equal to the Deferred Award, subject to satisfaction of certain qualifiers detailed in Additional Conditions to Deferred Awards. The amounts for 2020 and 2019 represent the short-term awards paid under the 2020 EIP during 2021 in respect of service performed in 2020, and under the 2019 EIP during 2020 in respect of service performed in 2019. Both the 2020 EIP and the 2019 EIP included long-term awards (subject to achievement of long-term goals) in lieu of a Deferred Award.
(5) In accordance with FHFA guidance, maximum total incentive opportunity, inclusive of annual and long-term awards, to be paid in a plan year cannot exceed 100% of the plan year’s base salary.
(6) Represents amounts earned under the 2019 EIP for satisfying a level of achievement between threshold and target at December 31, 2021, a long-term goal based on our pre-assessment core return on capital stock (as such term is defined in the 2019 EIP and referred to in this report as the 2019 EIP core return on capital stock), which is explained further below in this footnote; amounts earned under the 2018 EIP for satisfying a level of achievement between threshold and target at December 31, 2020, a long-term goal based on our pre-assessment core return on capital stock (as such term is defined in the 2018 EIP and referred to in this report as the 2018 EIP core return on capital stock), which is explained further below in this footnote; and amounts earned under the 2017 EIP for satisfying at a level of achievement between target and excess level of achievement at December 31, 2019, a long-term goal based on our pre-assessment core return on capital stock (as such term is defined in the 2017 EIP and referred to in this report as the 2017 EIP core return on capital stock), which is explained further below in this footnote.
The 2017 EIP core return on capital stock is a measure of return on capital stock that excludes or adjusts the timing of recognition of the impact of AHP expenses, expenses of the HHNE and JNE initiatives, gains (losses) on debt retirement, net prepayment fees, net unrealized gains (or losses) attributable to changes in fair value, other-than-temporary impairment credit losses on private-label MBS, gains from the accretion of prior other-than-temporary impairment credit losses due to improvements in projected private-label MBS performance, and private-label MBS litigation settlement income. In addition, with the approval of the board of directors, we also adjusted the calculation of core return on capital stock by including unbudgeted voluntary pension contributions to the extent funded by current period litigation income and by excluding net gains on sales of private-label MBS. The difference between GAAP return on capital stock and this measure of return on capital stock is that GAAP return on capital stock does not provide for the adjustments described above, and core return on capital stock includes shares classified as mandatorily redeemable capital stock. Achievement of this goal was subject to compliance with our VaR and duration of equity limits for at least 10 of the 12 months of the year. We complied with these limits.
The 2018 EIP core return on capital stock was calculated as described above for the 2017 EIP core return on capital stock, except that the 2018 EIP core return on capital stock was also adjusted for interest expense on mandatorily redeemable capital stock and provision for credit losses on private-label MBS, and, with the approval of the board of directors, was also adjusted to include imputed amortization of net premiums on investments classified as trading securities.
The 2019 EIP core return on capital stock was calculated as described above for the 2018 EIP core return on capital stock.
The amounts paid under the 2019, 2018, and 2017 EIPs also reflect a payout based on the results of the long-term regulatory goal of those plans.
(7) The amounts shown reflect the actuarial increase/decrease in the present value of the named executive officer's benefits under all pension plans established by us determined using interest-rate and mortality-rate assumptions consistent with those used in our financial statements. No amount of above market earnings on nonqualified deferred compensation is reported because above market rates are not possible under the Thrift BEP, the only such plan that we offer.
(8) See Table 48 - Other Compensation for amounts, which include our match on employee contributions to the Thrift BEP and the Pentegra Defined Contribution Plan, insurance premiums paid by us with respect to supplemental life insurance, perquisites and, for Mr. Hjerpe payment of accrued but unused vacation time and payment for performance under separate agreement after his retirement.
(9) Mr. Barrett’s base salary reflects his service as the Bank’s executive vice president and treasurer through November 30, 2021, at the base salary of $398,633, and his service as the Bank’s president and chief executive officer as of December 1, 2021, at the base salary of $870,000.
(10) Reflecting his efforts in the leadership transition following the board of directors' August 2021 selection of Mr. Barrett as the Bank’s next president and chief executive officer, the Compensation Committee awarded Mr. Barrett a prorated 2021 incentive award based on (a) his salary and award opportunity as executive vice president and treasurer through August 31, 2021, and (b) his salary and award opportunity as if his tenure as president and chief executive officer had commenced on September 1, 2021, through December 31, 2021.
(11) Mr. Hjerpe retired as the Bank’s president and chief executive officer effective November 30, 2021.
(12) The change in pension values under the Pentegra Defined Benefit Plan and Pension BEP for Mr. Nitkiewicz decreased by $281,000 during 2021. In accordance with SEC guidance, the amount reported in the table is $0.
(13) The 2020 non-equity incentive plan compensation long-term amount reflects the sum of Mr. McRae’s long-term award of $93,045 and additional award of $200,000. We had a performance award agreement with Mr. McRae that we entered in January 2018, for which he was paid an additional $200,000 in March 2021 for performance in the years 2018 to 2020. Our board of directors had determined that having the performance award agreement in place would be an incentive tool for Mr. McRae to ensure the effective and timely execution of key Bank technology strategic initiatives. The agreement provided us continuity of leadership and Mr. McRae’s expertise in, among other things, completing prioritized initiatives for the modernization and development of a strategic technology plan for implementation following the completion of the initial multi-year strategy. Payment was subject to the president’s discretion and approval of the board of directors, which was received. It was also conditioned on Mr. McRae’s being an active employee through the payment date in March 2021.
Table 48 - Other Compensation
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Year | | Contributions to Defined Contribution Plans(1) | | Insurance
Premiums | | Perquisites(2) | | Other(3) | | Total |
| Timothy J. Barrett | | 2021 | | $ | 38,740 | | | $ | — | | | $ | — | | | $ | — | | | $ | 38,740 | |
| | 2020 | | 39,354 | | | — | | | — | | | — | | | 39,354 | |
| | 2019 | | 31,808 | | | — | | | — | | | — | | | 31,808 | |
| | | | | | | | | | | | |
| Edward A. Hjerpe III | | 2021 | | 91,770 | | | — | | | 11,043 | | | 96,952 | | | 199,765 | |
| | 2020 | | 110,028 | | | — | | | — | | | — | | | 110,028 | |
| | 2019 | | 104,930 | | | — | | | 11,929 | | | — | | | 116,859 | |
| | | | | | | | | | | | |
| Frank Nitkiewicz | | 2021 | | 38,756 | | | 6,998 | | | — | | | — | | | 45,754 | |
| | 2020 | | 43,024 | | | 6,515 | | | — | | | — | | | 49,539 | |
| | 2019 | | 41,531 | | | 6,085 | | | — | | | — | | | 47,616 | |
| | | | | | | | | | | | |
| Carol Hempfling Pratt | | 2021 | | 35,696 | | | — | | | — | | | — | | | 35,696 | |
| | 2020 | | 39,723 | | | — | | | — | | | — | | | 39,723 | |
| | 2019 | | 37,657 | | | — | | | — | | | — | | | 37,657 | |
| | | | | | | | | | | | |
| Sean R. McRae | | 2021 | | 30,020 | | | — | | | — | | | — | | | 30,020 | |
| | 2020 | | 33,369 | | | — | | | — | | | — | | | 33,369 | |
| | | | | | | | | | | | |
| Barry F. Gale | | 2021 | | 26,166 | | | — | | | — | | | — | | | 26,166 | |
_______________________
(1) Amounts include our contributions to the Pentegra Defined Contribution Plan, as well as contributions to the Thrift BEP. Contributions to the Thrift BEP are also shown in Table 51 - Nonqualified Deferred Compensation below.
The Pentegra Defined Contribution Plan, a 401(k) plan, excludes hourly, flex staff, and short-term employees from participation, but includes all other employees. Employees may elect to defer one percent to 50 percent of their plan salary, as defined in the plan document. We make contributions based on the amount the employee contributes, up to the first 3 percent of plan salary, multiplied by the following factors:
•100 percent during the second and third years of employment.
•150 percent during the fourth and fifth years of employment.
•200 percent following completion of five or more years of employment.
Participant deferrals are limited on an annual basis by Internal Revenue Code (IRC) rules. For 2021, the maximum elective deferral amount was $19,500 (or $26,000 per year for participants who attain or exceed age 50 in 2021), and the maximum matching contribution under the terms of the Pentegra Defined Contribution Plan was $17,400 (3 percent multiplied by two multiplied by the $290,000 IRC compensation limit).
A description of the Thrift BEP follows Table 51 - Nonqualified Deferred Compensation.
See Retirement and Deferred Compensation Plans above for a description of changes we are making to the Pentegra Defined Contribution Plan and the Thrift BEP.
(2) Amounts for Mr. Hjerpe include the following perquisites: personal use of a Bank-owned vehicle, parking, reimbursement for mass transportation, spousal travel expenses, and travel memberships and subscriptions.
(3) Amount for Mr. Hjerpe includes $79,452 paid for accrued but unused vacation time and $17,500 paid for performance under the Consulting Agreement between the Bank and Mr. Hjerpe dated December 1, 2021.
The following table shows the potential payouts for our non-equity incentive plan awards under the 2021 EIP, for our named executive officers:
Table 49 - Grants of Plan-Based Awards for Fiscal Year 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Estimated Possible Payouts Under Non-equity Incentive Plan Awards (1) |
| Name | | 2021 EIP Award | | Payout Date | | Threshold | | Target | | Excess |
Mr. Barrett(2) | | Year-end Award | | March 2022 | | $ | 217,500 | | | $ | 326,250 | | | $ | 435,000 | |
| | Deferred Amount | | After December 31, 2023 | | 217,500 | | | 326,250 | | | 435,000 | |
Mr. Hjerpe(3) | | Year-end Award | | March 2022 | | 215,448 | | | 323,172 | | | 430,896 | |
| | Deferred Amount | | After December 31, 2023 | | 215,448 | | | 323,172 | | | 430,896 | |
| Mr. Nitkiewicz | | Year-end Award | | March 2022 | | 64,273 | | | 107,122 | | | 149,971 | |
| | Deferred Amount | | After December 31, 2023 | | 64,273 | | | 107,122 | | | 149,971 | |
| Ms. Pratt | | Year-end Award | | March 2022 | | 59,795 | | | 99,658 | | | 139,522 | |
| | Deferred Amount | | After December 31, 2023 | | 59,795 | | | 99,658 | | | 139,522 | |
| Mr. McRae | | Year-end Award | | March 2022 | | 49,623 | | | 82,705 | | | 115,787 | |
| | Deferred Amount | | After December 31, 2023 | | 49,623 | | | 82,705 | | | 115,787 | |
| Mr. Gale | | Year-end Award | | March 2022 | | 44,201 | | | 73,668 | | | 103,135 | |
| | Deferred Amount | | After December 31, 2023 | | 44,201 | | | 73,668 | | | 103,135 | |
______________________
(1) The estimated payouts for the Year-end Award and Deferred Amount each represent 50 percent of the total awards under the 2021 EIP that could have been earned by the respective named executive officer for 2021. The actual amounts awarded are reflected in Table 47 - Summary Compensation for 2021, 2020 and 2019. See Executive Incentive Plans above for further discussion of performance goals and plan payouts.
(2) Reflecting his efforts in the leadership transition following the board of directors’s August 2021 selection of Mr. Barrett as the Bank’s next president chief executive officer, the Compensation Committee awarded Mr. Barrett a prorated 2021 incentive award based on (a) his salary and award opportunity as executive vice president and treasurer through August 31, 2021, and (b) his salary and award opportunity as if his tenure as president and chief executive officer had commenced on September 1, 2021, through December 31, 2021.
(3) The Compensation Committee approved a pro-rata payment under the 2021 EIP for Mr. Hjerpe, who retired on November 30, 2021.
Retirement Plans
Table 50 - Pension Benefits
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Plan Name | | No. of Years of Credited Service(1) | | Present Value of Accumulated Benefit(2) | | Payments During Year Ended December 31, 2021 |
| Timothy J. Barrett | | Pentegra Defined Benefit Plan | | 10.17 | | | $ | 894,000 | | | $ | — | |
| | Pension BEP | | 11.17 | | | 1,269,000 | | | — | |
| Edward A. Hjerpe III | | Pentegra Defined Benefit Plan | | 29.75 | | (3) | 2,731,000 | | | — | |
| | Pension BEP | | 12.58 | | | — | | | (5,857,247) | |
| Frank Nitkiewicz | | Pentegra Defined Benefit Plan | | 29.83 | | | 2,737,000 | | | — | |
| | Pension BEP | | 30.83 | | | 5,252,000 | | | — | |
| Carol Hempfling Pratt | | Pentegra Defined Benefit Plan | | 10.50 | | | 955,000 | | | — | |
| | Pension BEP | | 11.50 | | | 1,391,000 | | | — | |
| Sean R. McRae | | Pentegra Defined Benefit Plan | | 6.67 | | | 536,000 | | | — | |
| | Pension BEP | | 7.67 | | | 715,000 | | | — | |
| Barry F. Gale | | Pentegra Defined Benefit Plan | | 7.67 | | | 682,000 | | | — | |
| | Pension BEP | | 8.67 | | | 577,000 | | | — | |
_______________________
(1)Equals number of years of credited service as of December 31, 2021.
(3) Number of years of credited service for the Pentegra Defined Benefit Plan includes 22.67 years of service at the Bank and 7.08 years of service at FIRSTFED AMERICA BANCORP, Inc., which entities are both participants in the Pentegra Defined Benefit Plan.
Although we are in the process of making changes to our retirement benefits, we have participated in the Pentegra Defined Benefit Plan to provide retirement benefits for eligible employees, including the named executive officers. As discussed in — Retirement and Deferred Compensation Plans, the Pentegra Defined Benefit Plan was frozen to newly hired employees as of January 1, 2021, and on January 1, 2024, future benefit accruals under the plan will cease for all employees, including named executive officers. Employees have become eligible to participate in the Pentegra Defined Benefit Plan the first day of the month following satisfaction of our waiting period, which is one year of service with us. The Pentegra Defined Benefit Plan excludes hourly paid employees, flex staff, and short-term employees from participation. Participants are 20 percent vested in their retirement benefit after the completion of two years of employment and vest at an additional 20 percent per year thereafter until they are fully vested after the completion of six years of employment. Participants who have reached age 65 are automatically 100 percent vested, regardless of completed years of employment. All of the named executive officers are participants in the Pentegra Defined Benefit Plan and are 100 percent vested in their benefits pursuant to the plan's provisions.
Benefits under the Pentegra Defined Benefit Plan are based on the participant's years of service and earnings, defined as base salary excluding the participant's voluntary contribution to the Thrift BEP, subject to the applicable U.S. IRC limits on annual earnings ($290,000 for 2021). In general, participants' benefits are calculated as 2.00 percent multiplied by the participant's years of benefit service multiplied by the high three-year average salary. Annual benefits provided under the plan are subject to IRC limits, which vary by age and benefit option selected. The regular form of benefit is a straight life annuity with a 12 times initial death benefit feature. Lump sum and other additional payout options are also available. Participants are eligible for a lump sum option beginning at age 45. Benefits are payable in the event of retirement, death, disability, or termination of employment if vested. Normal retirement is age 65, but a participant may elect early retirement as early as age 45. However, if a participant elects early retirement, the normal retirement benefit is reduced by an early retirement factor based on the participant's age when beginning early retirement. If the sum of the participant's age and vesting service at the time of termination of employment is at least 70, that is, the "Rule of 70," the benefit is reduced by an early retirement factor of one and a half percent per year for each year that payments commence before age 65. If age and vesting service do not equal at least 70, the benefit is reduced by a higher early retirement factor.
The amount of pension benefits payable from the Pension BEP to a named executive officer is the amount that would be payable to the executive under the Pentegra Defined Benefit Plan:
•ignoring the limits on benefit levels imposed by the IRC (including the limit on annual compensation discussed above);
•including in the definition of salary any amounts deferred by a participant under the Thrift BEP in the year deferred and any incentive compensation in the year paid;
•recognizing the participant's full tenure with us or any other employer participating in the Pentegra Defined Benefit Plan from initial date of employment to the date of membership in the Pentegra Defined Benefit Plan, for each named executive officer who was a participant before January 1, 2009, and for all other participants, recognizing only the participant's years of service with us from initial date of employment with us, but disregarding prior service of participants who were re-employed by us and received a full distribution of the Pension BEP benefit at the time of termination;
•applying an increased benefit accrual rate of 2.375 percent of the participant's highest three-year average salary, multiplied by the participant's total benefit service, for those whose most recent date of hire by the Bank is prior to January 9, 2006, and who have continuously been an “Executive Officer” (as such term is defined by the plan) since January 1, 2008, and, for all other participants, applying the same accrual rate and average salary as the participant is eligible to receive under the Pentegra Defined Benefit Plan; and
•reducing the result by the participant's actual accrued benefit from the Pentegra Defined Benefit Plan.
As discussed in Retirement and Deferred Compensation Plans, the Pension BEP was also frozen to newly hired employees as of January 1, 2021, and further benefit accruals will cease on January 1, 2024, for all employees, including the named executive officers. Total benefits payable under both the Pentegra Defined Benefit Plan and the Pension BEP are subject to an overall maximum annual benefit amount not to exceed a specified percentage of high three-year average salary as applicable as follows: Mr. Hjerpe and Mr. Barrett, 80 percent as presidents; Mr. Nitkiewicz and Ms. Pratt, 70 percent as executive vice presidents; and Mr. McRae and Mr. Gale, 65 percent as senior vice presidents. Our only named executive officer that has reached the maximum annual benefit amount is Mr. Nitkiewicz. All benefits payable under the Pension BEP are paid solely from either our general assets or from assets held in a rabbi trust subject to the claims of our creditors in the event of the Bank's insolvency. The Pension BEP requires that we contribute at least annually to any rabbi trust so established an amount to fund participant benefits on a plan termination basis and anticipated administrative, trust and investment advisory expenses that may be paid by the trust over the next 12 months. Retirement benefits from the Pentegra Defined Benefit Plan and the Pension BEP are not subject to any offset provision for Social Security benefits. See — Retirement and Deferred Compensation Plans for a description of changes we are making to the Pentegra Defined Benefit Plan and the Pension BEP.
Nonqualified Deferred Compensation
Table 51 - Nonqualified Deferred Compensation
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Executive Contributions in Year Ended
December 31,
2021(1) | | Our Contributions in Year Ended December 31, 2021(2) | | Aggregate Earnings
in Year Ended
December 31, 2021 | | Aggregate
Withdrawals/
Distributions | | Aggregate Balance
at December 31,
2021 |
| Timothy J. Barrett | | $ | 10,380 | | | $ | 21,340 | | | $ | 7,483 | | | $ | — | | | $ | 295,785 | |
| Edward A. Hjerpe III | | 45,885 | | | 74,370 | | | 243,534 | | | (2,118,411) | | | — | |
| Frank Nitkiewicz | | 23,665 | | | 21,356 | | | 151,259 | | | — | | | 971,688 | |
| Carol Hempfling Pratt | | 31,577 | | | 18,296 | | | 221,997 | | | — | | | 1,273,980 | |
| Sean R. McRae | | 104,315 | | | 16,119 | | | 20,708 | | | — | | | 247,764 | |
| Barry F. Gale | | 4,328 | | | 8,766 | | | 17,524 | | | — | | | 152,312 | |
_______________________(1)Amounts are also reported as salary in Table 47 — Summary Compensation for 2021, 2020 and 2019.
(2)Amounts are also reported as contributions to defined contribution plans in Table 48 — Other Compensation.
Thrift BEP participants may elect to defer receipt of up to 100 percent of base salary and/or incentive compensation into the Thrift BEP. We match participant contributions based on the amount the employee contributes, typically, up to the first 3 percent of compensation beginning with the initial date of membership in the Thrift BEP, and then according to the same schedule as the matching under the Pentegra Defined Contribution Plan after the first year of service. However, the Compensation Committee has the flexibility to modify our matching contribution rate in an offer letter, employment agreement, or other writing approved by the Compensation Committee so long as our maximum matching contribution rate does not exceed the maximum matching contribution rate available to any participant under the Pentegra Defined Contribution Plan (the Contribution Limit). Our matching contribution is immediately vested at 100 percent, as in the Pentegra Defined Contribution Plan. Participants may defer their contributions into one or more investment funds as elected by the participant. Participants may elect to receive distributions in a lump sum or in semi-annual installments over a period that does not exceed 11 years.
Participants may withdraw contributions under the plan's hardship provisions and may also begin to receive distributions while still employed through scheduled distribution accounts.
The Thrift BEP provides participants an opportunity to defer taxation on income and to make up for benefits that would have been provided under the Pentegra Defined Contribution Plan except for IRC limitations on annual contributions under 401(k) plans. It also provides participants with an opportunity for incentive compensation to be deferred and matched. The Compensation Committee and board of directors approve participation in the Thrift BEP. All of the named executive officers are current participants. All benefits payable under the Thrift BEP are paid solely from our general assets or from assets held in a rabbi trust subject to the claims of our creditors in the event of the Bank's insolvency. The Thrift BEP requires us to contribute at least quarterly to any rabbi trust established for the Thrift BEP an amount to fund participant benefits on a plan termination basis. A rabbi trust was established for the Thrift BEP effective January 1, 2010. See — Retirement and Deferred Compensation Plans for a description of changes we are making to the Thrift BEP.
Post-termination Payments
The following is a discussion of the policies and arrangements to which a named executive officer becomes subject upon certain termination events, with or without a change in control of the Bank. During 2021, all named executive officers were covered by the Bank’s severance policy and the Federal Home Loan Bank of Boston Executive Change in Control Severance Plan (Executive Severance Plan). In addition, Mr. Barrett is covered by an employment agreement. The severance policy, Executive Severance Plan and Mr. Barrett’s employment agreement are also discussed above in “Potential Payments upon Termination or Change in Control.” The Bank’s Executive Incentive Plans provide for payment to executives who are employed on the payment date and, subject to recommendation by our president and chief executive officer and review and approval by the Compensation Committee and the FHFA, whose employment has terminated prior to the payment date for death, disability or retirement. The terms cause, change in control, good reason, disability, retirement, and qualifying termination are defined in the respective policy, plan or agreement, as applicable.
Severance Policy
As chief executive officer, Mr. Barrett is eligible for 12 months of base pay under the severance policy. As executive officers, Mr. Nitkiewicz, Ms. Pratt, Mr. McRae, and Mr. Gale are eligible for a minimum of six months and a maximum of 12 months of base pay under the severance policy, depending on their tenure of employment. Severance payable to the executives in connection with a change in control is discussed in the Executive Severance Plan section below. All severance packages under the severance policy for executive officers, including the named executive officers, must have the approval of the chief executive officer and the Compensation Committee, and may also require the approval of the FHFA, prior to making any award under the severance policy.
Under our severance policy and based on status in the organization and tenure, for Mr. Barrett and Mr. Nitkiewicz, the payment amount is equal to 12 months' base salary, for Ms. Pratt, the payment amount is equal to approximately eleven months' base salary, for Mr. Gale, the payment is equal to approximately eight months’ base salary. and for Mr. McRae, the payment amount is equal to approximately seven months’ base salary, all based on annual salary in effect on December 31, 2021.
Employment Agreement with Mr. Barrett
Under the terms of the Employment Agreement with Mr. Barrett, in the event that the Bank terminates Mr. Barrett’s employment for any reason other than “cause” or “disability” as both are defined in the Employment Agreement, or upon Mr. Barrett’s termination of his employment for “good reason” as defined in the Employment Agreement, we have agreed to pay Mr. Barrett (a) one year of salary continuation paid pursuant to the Bank’s normal payroll schedule, (b) a pro rata payment of the short-term and deferred incentive opportunity at the “President” tier under the executive incentive plan in effect in the year of termination, calculated and payable under such plan as if he had met all employment-related requirements for payment as a retiree, (c) a payment of then-unpaid deferred incentive awards under prior executive incentive plans, calculated and payable under such plans at the time he would have received payment if he had remained employed by the Bank, and (d) certain healthcare replacement costs for a period of twelve months and other amounts required to be paid or provided under any other Bank plan, program, policy or practice or contract or agreement. As a condition to payment, Mr. Barrett must agree to execute a general release of claims. Any payments to Mr. Barrett under the employment agreement are in lieu of any severance payments that would otherwise be payable to him and may also require the approval of the FHFA.
Under the Employment Agreement, “cause” is defined as Mr. Barrett’s (a) failure to perform substantially his duties; (b) engaging in illegal or willful misconduct that is injurious to the Bank; (c) material violation of law or regulation applicable to the Bank or violation of the Bank’s written policies or guidelines; (d) engaging in any activity that results in a written request
from the FHFA (or any other regulatory agency) requesting the Bank terminate Mr. Barrett’s employment; (e) indictment or conviction of, plea of guilty or nolo contendere, in connection with a felony or any type of crime involving fraud, theft, misappropriation, embezzlement, dishonesty, breach of trust, money laundering, or any form of moral turpitude; (f) receipt of written notice under 12 U.S.C. Section 4636a seeking removal or suspension of Mr. Barrett; (g) breach of fiduciary duty; (h) refusal to comply with a lawful directive from the board of directors; or (i) any material breach of the Employment Agreement.
Under the Employment Agreement, “good reason” is defined as, without the consent of Mr. Barrett, (a) a material diminution in salary; (b) a material diminution in title or authority; (c) relocation of the Bank’s headquarters more than 50 miles from its current location; or (d) the Bank’s material breach of the Employment Agreement.
Executive Severance Plan
We maintain an Executive Severance Plan that provides certain payments and benefits in the event of a qualifying termination following a change in control. The Executive Severance Plan applies to employees or officers who are designated by the Bank’s board of directors as participants and who execute a participation agreement in which the participants agree to certain protective covenants including a non-solicitation agreement. The Bank’s board designated Mr. Barrett, Mr. Nitkiewicz, Ms. Pratt, Mr. McRae, and Mr. Gale, in addition to certain other executive officers, as participants in the Executive Severance Plan and these officers all executed participation agreements. If a participant is eligible for severance benefits under the Executive Severance Plan and also for similar benefits under any other Bank plan, program, arrangement or agreement, the severance benefits under the Executive Severance Plan will be reduced on a dollar for dollar basis for the severance benefits available under such other plan, program, arrangement or agreement.
Under the terms of the Executive Severance Plan, if there is a qualifying termination during the period beginning on the earliest of 180 days prior to the date a definitive agreement or order for a change in control has been entered into, or the effective date of a change in control as prescribed by the FHFA, and ending 24 months following the effective date of the change in control, the participant becomes entitled to certain severance payments and benefits. The Executive Severance Plan defines a qualifying termination as a termination of the participant’s employment with the Bank, (i) by the Bank, other than for cause; or (ii) by the participant, for good reason but does not include a termination resulting from the participant’s death, disability or retirement.
The severance payments and benefits to which the participant would be entitled include:
•Mr. Barrett would receive a cash payment equal to 2.99 times the sum of (i) the greater of his annual base salary determined at the time of the qualifying termination or 180 days prior to the change in control, and (ii) his long- and short-term incentive awards, calculated at target, for the year in which the qualifying termination of employment occurs.
•The other named executive officers would receive a cash payment equal to 2.00 times the sum of (i) the greater of their annual base salary determined at the time of the qualifying termination or 180 days prior to the change in control, and (ii) their long- and short-term incentive awards, calculated at target, for the year in which the qualifying termination of employment occurs.
•The named executive officers would receive a lump sum cash payment equal to the amount that would have been payable pursuant to their annual incentive compensation award for the year in which the date of a qualifying termination occurs based on actual Bank performance, prorated based on the number of days the participant was employed that year.
•Participants would receive a lump sum cash payment for outplacement assistance in the amount of $25,000 for Mr. Barrett and $15,000 for the other named executive officers.
•Mr. Barrett would receive a lump sum cash payment equivalent to the Bank’s cost to maintain his health insurance coverage for 24 months, and the other named executive officers would each receive a lump sum cash payment equivalent to the Bank’s cost to maintain their health insurance coverage for 18 months.
The payments described above are payable in a lump sum within 60 days following the participant’s employment termination date, except the prorated incentive compensation award, which is payable at the time such incentive compensation awards are paid to other senior executives, but no later than March 15 of the year following the executive’s qualifying termination. Any amounts that constitute non-qualified deferred compensation subject to Section 409A of the IRC are payable on the 75th day after the participant’s qualifying termination.
All payments and benefits are conditioned upon the executive having delivered an irrevocable general release of claims against the Bank before payment occurs. In addition, all payments and benefits remain subject to the Bank’s compliance with any applicable statutory and regulatory requirements relating to the payment of amounts under the Executive Severance Plan.
If the aggregate amount of pay and benefits payable to an executive under the Executive Severance Plan would constitute a “parachute payment” subject to excise tax under Section 4999 of the IRC, their aggregate pay and benefits will be reduced to the extent necessary to avoid being subject to the excise tax imposed by Section 4999, unless payment of the unreduced benefit would provide the participant with a higher net after-tax benefit after payment of such excise tax.
Executive Incentive Plan
Under the 2021, 2020, and 2019 Executive Incentive Plans, the named executive officers must be employed by the Bank on the payment date of an incentive award in order to be paid such award. Subject to recommendation of our president and chief executive officer, approval of the Compensation Committee, and review of the FHFA, if required, if a named executive officer’s employment had terminated in 2021 for death or disability or after becoming retirement-eligible and providing a minimum of six months' advance notice to the Bank, such officer may be paid: (i) a pro-rata portion of the 2021 short-term award if they completed six months of service during 2021, and (ii) a 2020 and 2019 long-term award, with such awards to be paid at the same time they would have been paid if the executive’s employment had not terminated. To be retirement-eligible, a named executive officer must be either eligible for normal retirement or satisfy the Rule of 70 (counting only service earned with the FHLBank System) under the Pentegra Defined Benefit Plan.
Potential Payments Upon Termination
The table below shows amounts triggered upon the termination events identified below for the named executive officers assuming a termination of employment and, as applicable, a change in control as of the close of business on December 31, 2021, and does not include amounts that are not payable or otherwise forfeited upon a for cause termination or certain non-retirement terminations. In these circumstances, other than legally required amounts such as accrued salary, no additional amounts would be payable and rights to incentive or deferred compensation would be forfeited. The amounts listed below also do not include payments from the Thrift BEP or the Pension BEP. Amounts payable from the Pension BEP may be found in Table 50 - Pension Benefits. Account balances for the Thrift BEP may be found in Table 51 - Nonqualified Deferred Compensation.
Table 52 - Cash Payments on Termination
| | | | | | | | | | | | | | | | | | | | | | | |
| | Severance | | Incentive Compensation(4)(5) | | All Other Compensation(6) | | Total Post
Termination
Payment & Benefit Value |
| Timothy J. Barrett | | | | | | | |
Bank initiated (not for cause) termination of employee without a change in control(1) | $ | 870,000 | | | $ | 581,280 | | | $ | 19,977 | | | $ | 1,471,257 | |
Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(2)(3) | 4,552,275 | | | 581,280 | | | 64,953 | | | 5,198,508 | |
| Retirement | — | | | 581,280 | | | — | | | 581,280 | |
| Death and Disability | — | | | 581,280 | | | — | | | 581,280 | |
| Frank Nitkiewicz | | | | | | | |
Bank initiated (not for cause) termination of employee without a change in control(1) | 428,488 | | | 440,639 | | | — | | | 869,127 | |
Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3) | 1,285,464 | | | 440,639 | | | 44,965 | | | 1,771,068 | |
| Retirement | — | | | 440,639 | | | — | | | 440,639 | |
| Death and Disability | — | | | 440,639 | | | — | | | 440,639 | |
| Carol Hempfling Pratt | | | | | | | |
Bank initiated (not for cause) termination of employee without a change in control(1) | 330,690 | | | 409,937 | | | — | | | 740,627 | |
Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3) | 1,195,899 | | | 409,937 | | | 47,328 | | | 1,653,164 | |
| Retirement | — | | | 409,937 | | | — | | | 409,937 | |
| Death and Disability | — | | | 409,937 | | | — | | | 409,937 | |
| Sean R. McRae | | | | | | | |
Bank initiated (not for cause) termination of employee without a change in control(1) | 155,929 | | | — | | | — | | | 155,929 | |
Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3) | 992,460 | | | 89,097 | | | 53,159 | | | 1,134,716 | |
| Retirement | — | | | — | | | — | | | — | |
| Death and Disability | — | | | 340,202 | | | — | | | 340,202 | |
| Barry F. Gale | | | | | | | |
Bank initiated (not for cause) termination of employee without a change in control(1) | 185,869 | | | 298,806 | | | — | | | 484,675 | |
Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3) | 884,013 | | | 298,806 | | | 44,965 | | | 1,227,784 | |
| Retirement | — | | | 298,806 | | | — | | | 298,806 | |
| Death and Disability | — | | | 298,806 | | | — | | | 298,806 | |
_______________________
(1) Under our severance policy and based on status in the organization and tenure for Mr. Barrett and Mr. Nitkiewicz the “Severance” amount payable is equal to 12 months' base salary, for Ms. Pratt the amount payable is equal to approximately eleven months' base salary, and for Mr. McRae the amount payable is equal to approximately seven months’ base salary, for Mr. Gale the amount payable is equal to approximately eight months’ base salary all based on annual salary in effect on December 31, 2021.
(2) The aggregate amount due to Mr. Barrett under his Employment Agreement and the Executive Severance Plan, assuming a December 31, 2021 termination, would have been subject to the change in control excise tax under Section 4999 of the Code. However, the amount actually payable to Mr. Barrett would not have been limited to the 280G safe harbor level, as doing so would not have resulted in a higher after-tax payment. No tax gross-up payments would apply.
(3) “Severance” payments for involuntary termination without cause due to a change in control or for a resignation for good reason due to a change in control that are made under our Executive Severance Plan are in lieu of, not in addition to, the severance benefit payments under our severance policy or, for Mr. Barrett, his employment agreement. Amounts shown for “Severance” payable under the Executive Severance Plan are a multiple, 2.99 for Mr. Barrett and 2.00 for the other named executive officers, of the total of (i) base salary in effect on December 31, 2021 and (ii) target incentive awards under our
2021 EIP. Mr. Nitkiewicz, Ms. Pratt, Mr. McRae, and Mr. Gale would not have been subject to the change in control excise tax under Section 4999 of the IRC. In no event would tax gross-up payments apply.
(4) Because Mr. Barrett, Mr. Nitkiewicz, Ms. Pratt, and Mr. Gale were retirement-eligible as of December 31, 2021, amounts shown for incentive compensation payable to them under each of the applicable termination scenarios in the table includes such officers’ actual 2021 annual incentive compensation award as well as their 2021 Deferred Award and long-term incentive compensation awards under the 2020, and 2019 Executive Incentive Plans. All of such awards are also included in the row entitled “Death and Disability” for Mr. McRae. However, because Mr. McRae was not retirement-eligible as of December 31, 2021, he would not have been entitled to any incentive compensation upon retirement, or upon a Bank-initiated (not for cause) termination without a change in control. Upon a Bank-initiated (not for cause) termination or good reason termination by employee due to change in control, Mr. McRae would have been entitled to incentive compensation only equal to his actual 2021 annual incentive compensation award, and not any long-term award under the 2020 or 2019 Executive Incentive Plans.
(5) Long-term incentive awards under the 2019 EIP are the actual awards that were paid in March 2022. Long-term incentive awards under the 2020 EIP, which will be payable in March 2023, are based on currently estimated performance as of December 31, 2021, for the core return on capital stock goal, and a current estimate by the Bank’s chief risk officer for the regulatory goal.
(6) “All Other Compensation” includes the following amounts payable under the Executive Severance Plan to named executive officers: (i) a payment to each officer equivalent to what it would have cost the Bank to maintain such officer’s health insurance coverage for a number of months, 24 months for Mr. Barrett and 18 months for the other named executive officers, and (ii) a payment for outplacement services of $25,000 for Mr. Barrett and $15,000 for the other named executive officers.
Pay Ratio
For the year ended December 31, 2021, the ratio of the annual total compensation of our median employee (the Median Employee, identified in the manner described below) to the annual total compensation of our chief executive officer is 18:1. To determine this ratio, total compensation of the Median Employee for 2021 was calculated in the same manner as total compensation of our chief executive officer as of October 1, 2021 (Mr. Hjerpe) as presented in Table 47 — Summary Compensation for 2021, 2020, and 2019. For 2021, this includes both (i) the entire award under the 2021 EIP, although 50 percent of that award is deferred and will not be paid until after year end 2023, and (ii) the long term award under the 2019 EIP, which was paid in March 2022.
As noted in footnote 1 to Table 47 — Summary Compensation for 2021, 2020, and 2019, our Compensation Committee believes it is also helpful to view 2021 compensation of our named executive officers excluding the amount deferred under the 2021 EIP. Under this approach, the ratio of the annual total compensation of the Median Employee to our chief executive officer would be 16:1. We believe that this ratio is more comparable to the ratios we have disclosed in prior years, because previously, only the long-term award under a prior year’s EIP was included in the president and chief executive officer’s compensation. The change in the 2021 EIP from the prior structure resulted in the inclusion in 2021 compensation of both the long-term award under the 2019 EIP (which was subject to additional goals and therefore was not reported as compensation in 2019) and a deferred award in 2021, which is included as compensation in the year earned rather than the year paid.
For both the Median Employee and chief executive officer, compensation includes, among other things, amounts attributable to the change in pension value, which varies based on an employee's age, tenure at the Bank, and salary increases and can fluctuate greatly from year to year as a result of a change in interest rates, as occurred in 2021, and the employer match on employee contributions to the Pentegra Defined Contribution Plan (401(k) plan), which varies based on an employee's contributions to the 401(k) plan and an employee's tenure at the Bank. For 2021, the total annual compensation of the Median Employee was $161,901 and the annualized total compensation of the chief executive officer at the time of the calculation was $2,878,706. With respect to calculating the annual total compensation for our chief executive officer for a year in which the Bank had multiple chief executive officers, the Bank annualized the amount reported as total compensation in Table 47 – Summary Compensation for 2021, 2020, and 2019 for the chief executive officer as of the date of the October 1, 2021 calculation (Mr. Hjerpe).
The Median Employee is the employee whose compensation is the median of the annual total compensation of all our employees other than the chief executive officer. We identified the Median Employee by computing for each of the full-time and part-time employees who were employed by the Bank on October 1, 2021, excluding the chief executive officer, the sum of (i) the 2021 salary of each employee as of October 1, 2021 and (ii) the 2020 incentive compensation paid to that employee in March 2021, and ranking the sums for all such employees (a list of 183 employees as of October 1, 2021) from lowest to
highest. The Bank identified the Median Employee using this compensation measure, which was applied consistently to all our employees included in the calculation.
Director Compensation
In 2021, we paid members of the board of directors fees for each board and committee meeting that they attended and a quarterly retainer fee. FHFA regulations permit the payment of reasonable director compensation, and such compensation is subject to the FHFA's oversight. We are a cooperative and our capital stock may only be held by current and former members, so we do not provide compensation to our directors in the form of stock or stock options. The 2020 and 2021 Director Compensation Policies provide payments for attendance at board and committee meetings and retainers paid in arrears at the end of each quarter. The policies provide for maximums on total director compensation and potential reduction based on attendance and performance.
The amounts to be paid or paid to the members of the board of directors for attendance at board and committee meetings and for quarterly retainers for the years ended December 31, 2022 and 2021, along with the annual maximum compensation amounts are detailed in the following table:
Table 53 - Director Compensation
| | | | | | | | | | | | | | | | |
| | | 2022 | | 2021 | | |
| Fee per board meeting: | | | | | | |
| Chair of the board | | $ | 11,500 | | | $ | 11,500 | | | |
| Vice chair of the board and committee chairs | | 9,500 | | | 9,500 | | | |
| All other board members | | 8,500 | | | 8,500 | | | |
| Fee per committee meeting | | 2,500 | | | 2,500 | | | |
| Fee for telephonic attendance | | 1,500 | | | 1,500 | | | |
| | | | | | |
| Quarterly Retainer Fees | | | | | | |
| Chair of the board | | 11,250 | | | 11,250 | | | |
| Vice chair of the board and committee chairs | | 10,000 | | | 10,000 | | | |
| All other board members | | 8,750 | | | 8,750 | | | |
| | | | | | |
| Annual maximum compensation amounts: | | | | | | |
| Chair of the board | | 137,500 | | | 137,500 | | | |
| Vice chair of the board and committee chairs | | 117,500 | | | 117,500 | | | |
| All other board members | | 107,500 | | | 107,500 | | | |
The Bank will also pay or reimburse directors for expenses related to the directors’ attendance at board meetings.
The aggregate amounts earned or paid to individual members of the board of directors for attendance at board and committee meetings and quarterly retainer fees during 2021 are detailed in the following table:
Table 54 - 2021 Director Compensation
| | | | | |
| | Fees Earned or
Paid in Cash |
| Martin J. Geitz, Chairman in 2021 | $ | 137,500 | |
| Donna L. Boulanger, Vice Chairwoman in 2021 | 117,500 | |
| Joan Carty | 117,500 | |
| Eric Chatman | 117,500 | |
| Patrick E. Clancy | 107,500 | |
| Thomas J. Curry | 107,500 | |
| Dwight M. Davidsen | 107,500 | |
| Cornelius K. Hurley | 117,500 | |
| Antoinette C. Lazarus | 107,500 | |
| Edward F. Manzi, Jr. | 107,500 | |
| John W. McGeorge | 117,500 | |
| Emil J. Ragones | 117,500 | |
| Michael R. Tuttle | 117,500 | |
| John C. Witherspoon | 117,500 | |
| Richard E. Wyman, Jr. | 107,500 | |
| $ | 1,722,500 | |
Directors may elect to defer the receipt of meeting fees (including all compensation payable under the Director Compensation Policy) pursuant to the Thrift BEP, although there is no Bank-matching contribution for such deferred fees. For additional information on the Thrift BEP, see — Retirement and Deferred Compensation Plans above. FHFA regulations permit the payment or reimbursement of reasonable expenses incurred by directors in performing their duties, and in accordance with those regulations, we have adopted a policy governing such payment and reimbursement of expenses. Such paid and reimbursed board of director expenses aggregated to $95 thousand for the year ended December 31, 2021.
Reduction in Compensation Based on Attendance and Performance
The board may vote to reduce or eliminate a director’s final quarterly retainer payment if (i) the director has not attended at least 75 percent of all regular and special meetings of the Board and the committees on which the director served during the year, or (ii) the board determines the director has consistently demonstrated a lack of engagement and participation in meetings attended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
We are a cooperative, our members or former members own all of our outstanding capital stock, and our directors are elected by and a majority are from our membership. Each member is eligible to vote for the open member directorships in the state in which its principal place of business is located and for each open independent directorship. See Item 10 — Directors, Executive Officers and Corporate Governance for additional information on the election of our directors. Membership is voluntary, and members must give notice of their intent to withdraw from membership. Members that withdraw from membership may not be readmitted to membership for five years.
We do not offer any compensation plan under which our equity securities are authorized for issuance. Members, former members, and successors to former members, including affiliated institutions under common control of a single holding company, holding five percent or more of our outstanding capital stock as of February 28, 2022, are noted in Table 55.
Table 55 - Stockholders Holding Five Percent or More of Outstanding Capital Stock
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | |
| Member Name | | Address | | Capital
Stock | | Percent of Total
Capital Stock |
| Massachusetts Mutual Life Insurance Company | | 1295 State Street, Springfield, MA 01111 | | $ | 95,500 | | | 9.78 | % |
Additionally, due to the fact that a majority of our board of directors is elected from our membership, these member directors serve as officers or directors of members that own our capital stock. Table 56 provides capital stock outstanding as of February 28, 2022, to members whose officers or directors serve as our directors.
Table 56 - Capital Stock Outstanding to Members whose Officers or Directors serve on our Board of Directors
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | |
| Member Name | | City, State | | Capital
Stock | | Percent of Total
Capital Stock |
| Citizens Bank, N.A. | | Providence, RI | | $ | 18,226 | | | 1.87 | % |
| Envision Bank | | Quincy, MA | | 2,940 | | | 0.30 | |
| Northfield Savings Bank | | Berlin, VT | | 2,540 | | | 0.26 | |
| Ion Bank | | Naugatuck, CT | | 2,068 | | | 0.21 | |
| Meredith Village Savings Bank | | Meredith, NH | | 1,823 | | | 0.19 | |
| Merrimack County Savings Bank | | Concord, NH | | 1,329 | | | 0.14 | |
| Skowhegan Savings Bank | | Skowhegan, ME | | 1,107 | | | 0.11 | |
| Fidelity Co-Operative Bank | | Fitchburg, MA | | 914 | | | 0.09 | |
| Depositors Insurance Fund | | Woburn, MA | | 782 | | | 0.08 | |
| Savings Bank of Walpole | | Walpole, NH | | 614 | | | 0.06 | |
| North Brookfield Savings Bank | | North Brookfield, MA | | 542 | | | 0.06 | |
| Total stock ownership by members whose officers or directors serve as directors of the Bank | | | | $ | 32,885 | | | 3.37 | % |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
We have a cooperative ownership structure. As such, capital stock ownership in the Bank is a prerequisite to transacting any member business with us. Our members and certain former members or their successors own all of our stock, the majority of our directors are elected by and from the membership, and we conduct our advances and mortgage loan business almost exclusively with members. Grants under the AHP and AHP advances are also made in partnership or in connection with our members. Therefore, in the normal course of business, we extend credit and offer services and AHP benefits to members whose officers and directors may serve as our directors, as well as to entities that hold five percent or more of our capital stock. It is our policy that extensions of credit, all other Bank products and services, and AHP benefits are offered on terms and conditions that are no more favorable to such members than the terms and conditions of comparable transactions with other members.
In addition, we may purchase short-term investments, federal funds, and MBS from, and enter into interest-rate-exchange agreements with, members or their affiliates whose officers or directors serve as directors of the Bank, as well as from members or their affiliates who hold five percent or more of our capital stock. All such purchase transactions are effected at the then-current market rate and all MBS are purchased through securities brokers or dealers, also at the then-current market rate.
For the year ended December 31, 2021, the review and approval of transactions with related persons was governed by our Conflict of Interest Policy for Bank Directors (the Conflict Policy), our Code of Ethics and Business Conduct and our Related Persons Transaction Policy, each of which are in writing. Under the Conflict Policy, each director is required to disclose to the board of directors all actual or potential conflicts of interest, including any personal financial interest that he or she has, as well as such interests of any immediate family member or business associate of the director known to the director, in any matter to be considered by the board of directors or in which another person does, or proposes to do, business with the Bank. Following such disclosure, the board is empowered to determine whether an actual conflict exists. In the event the board determines the existence of a conflict with respect to any matter, the affected director is required to be recused from all further considerations relating to that matter. The Conflict Policy is administered by the Governance Committee of the board of directors.
The Code of Ethics and Business Conduct requires that all directors and executive officers (as well as all other employees) avoid conflicts of interest, or the appearance of conflicts of interest. In particular, subject to limited exceptions for interests arising through ownership of mutual funds and certain financial interests acquired prior to employment by the Bank, no employee may have a financial interest in a member or its holding company, or a financial relationship with any of our members that is not transacted in the ordinary course of the member's business or, in the case of an extension of credit, involves
more than the normal risk of repayment or of loss to the member. Employees are required to disclose annually all financial interests and non-ordinary-course financial relationships with members. These disclosures are reviewed by our ethics officer, who is principally responsible for enforcing the Code of Ethics and Business Conduct on a day-to-day basis. The ethics officer is charged with attempting to resolve any apparent conflict involving an employee other than our president and chief executive officer and, if an apparent conflict has not been resolved within 60 days, to report it to our president and chief executive officer for resolution. The ethics officer is charged with reporting any apparent conflict involving a director or our president and chief executive officer to the Governance Committee of the board of directors for resolution. Our ethics officer is Carol Hempfling Pratt, executive vice president, general counsel and corporate secretary of the Bank.
The Related Persons Transaction Policy provides for the board of directors' Governance Committee’s review of certain transactions not in the ordinary course of our business that would be with related persons to determine whether such transactions would be in the best interests, or not be inconsistent with the best interests, of the Bank and our members.
Director Independence
General
The board of directors is required to evaluate and report on the independence of the directors of the Bank under two distinct director independence standards. First, FHFA regulations establish independence criteria for directors who serve as members of the board of directors' Audit Committee. Second, SEC rules require that our board of directors apply the independence criteria of a national securities exchange or automated quotation system in assessing the independence of our directors. Rule 10A-3 promulgated under the Exchange Act sets forth additional independence criteria of directors serving on the Audit Committee.
As of the date of this report, our board of directors is constituted of eight member directors and seven independent directors, as discussed in Item 10 — Directors, Executive Officers and Corporate Governance. None of our directors is an "inside" director. That is, none of our directors is a Bank employee or officer. Further, our directors are prohibited from personally owning stock or stock options in the Bank, as our stock may only be held by our members, former members, or their successors in interest. Each of the member directors, however, is an officer, director, or trustee of an institution that is a member of the Bank that is encouraged to engage in transactions with us on a regular basis, and some of the independent directors also engage in transactions either directly or indirectly with us from time to time in the ordinary course of the Bank's business.
FHFA Regulations Regarding Independence
The FHFA regulations on director independence standards prohibit an individual from serving as a member of the board of directors' Audit Committee if he or she has one or more disqualifying relationships with us or our management that would interfere with the exercise of that individual's independent judgment. Disqualifying relationships considered by the board are: employment with the Bank at any time during the last five years; acceptance of compensation from us other than for service as a director; being a consultant, advisor, promoter, underwriter, or legal counsel for the Bank at any time within the last five years; and being an immediate family member of an individual who is or who has been within the past five years, a Bank executive officer. The board assesses the independence of each director who serves on the Audit Committee under the FHFA's regulations on these independence standards. As of March 18, 2022, all of our directors serving on the board of directors' Audit Committee were independent under these criteria.
SEC Rule Regarding Independence
SEC rules require our board of directors to adopt a standard of independence to evaluate the independence of its directors. Pursuant thereto, the board adopted the independence standards of the New York Stock Exchange (the NYSE) to determine which of its directors are independent, which members of its Audit Committee are not independent, and whether the board of directors' Audit Committee financial expert is independent.
After applying the NYSE independence standards, the board determined that, as of March 18, 2022, all of our independent (that is, nonmember) directors are independent, including Directors Carty, Chatman, Clancy, Curry, Lazarus, Ragones, and Russell. Based upon the fact that each member director is an officer or director of an institution that is a member of the Bank (and thus is an equity holder in the Bank), that each such institution routinely engages in transactions with us, and that such transactions occur frequently and are encouraged, the board of directors has determined that for the present time it would conclude that none of the member directors meets the independence criteria under the NYSE independence standards.
It is possible that under a strict reading of the NYSE objective criteria for independence (particularly the criterion regarding the amount of business conducted with us by the director's institution), a member director could meet the independence standard on
a particular day. However, because the amount of business conducted by a member director's institution may change frequently, and because we generally desire to increase the amount of business we conduct with each member, the directors deemed it inappropriate to draw distinctions among the member directors based upon the amount of business conducted with us by any director's institution at a specific time.
The board of directors has a standing Audit Committee and a standing Compensation Committee. For the reasons noted above, the board of directors determined that none of the current member directors on these committees, including Directors Boulanger (ex officio), Davidsen, Manzi, Parent, Tuttle, Witherspoon, and Wyman, are independent under the NYSE standards for these committees. The board determined that all of the independent directors on these committees, including Directors Curry, Lazarus, Ragones, and Russell, are independent under the NYSE independence standards for these committees.
The board of directors also determined that Director Lazarus is the "Audit Committee financial expert" within the meaning of the SEC rules, and further determined that as of March 18, 2022, is independent under NYSE standards. As stated above, the board of directors determined that each director on the Audit Committee is independent under the FHFA's regulations applicable to the board of directors' Audit Committee. In addition, the board of directors also assessed the independence of the members of its Audit Committee under Rule 10A-3. In order to be considered independent under Rule 10A-3, a member of the Audit Committee may not, other than in his or her capacity as a member of the Board or any other Board Committee (i) accept any consulting, advisory, or other compensation from us or (ii) be an affiliated person of the Bank. As of March 18, 2022, all members of our Audit Committee were independent under these criteria.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees billed by PwC for professional services rendered in connection with the audit of our financial statements for 2021 and 2020, as well as the fees billed by PwC for audit-related and other services rendered by PwC to us during 2021 and 2020.
Table 57 - Principal Accounting Fees and Services
(dollars in thousands)
| | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2021 | | 2020 |
Audit fees(1) | | $ | 965 | | | $ | 933 | |
Audit-related fees(2) | | 61 | | | 58 | |
| All other fees | | 2 | | | 3 | |
| Tax fees | | — | | | — | |
| Total | | $ | 1,028 | | | $ | 994 | |
_______________________
(1)Audit fees consist of fees incurred in connection with the audit of our financial statements, including audit of internal control over financial reporting, review of quarterly or annual management's discussion and analysis, and review of financial information filed with the SEC.
(2)Audit-related fees consist of fees related to accounting research and consultations, operations reviews of new products and supporting processes, and fees related to participation in and presentations at conferences.
The Audit Committee selects our independent registered public accounting firm and preapproves all audit services to be provided by it to us. The Audit Committee also reviews and preapproves all audit-related and non-audit-related services rendered by the independent registered public accounting firm in accordance with the Audit Committee's charter. In its review of these services and related fees and terms, the Audit Committee considers, among other things, the possible effect of the performance of such services on the independence of our independent registered public accounting firm.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
a) Financial Statements
b) Financial Statement Schedule
None.
c) Exhibits
| | | | | | | | | | | |
| Number | Exhibit Description | Reference |
| 3.1 | Restated Organization Certificate of the Federal Home Loan Bank of Boston | |
| 3.2 | By-laws of the Federal Home Loan Bank of Boston | |
| 4.1 | Amended and Restated Capital Plan of the Federal Home Loan Bank of Boston | |
| 4.2 | Description of Capital Stock | |
| 10.1 | The Federal Home Loan Bank of Boston Pension Benefit Equalization Plan effective January 1, 2009, as amended on April 15, 2009 * | |
| 10.1.1 | First Amendment to the Federal Home Loan Bank of Boston Pension Benefit Equalization Plan effective September 1, 2009 * | |
| 10.1.2 | Second Amendment to the Federal Home Loan Bank of Boston Pension Benefit Equalization Plan effective December 21, 2012 * | |
| 10.1.3 | Third Amendment to the Federal Home Loan Bank of Boston Pension Benefit Equalization Plan effective June 30, 2014 * | |
| 10.1.4 | | Fourth Amendment to the Federal Home Loan Bank of Boston Pension Benefit Equalization Plan effective January 1, 2021 * | |
| 10.2.1 | The Federal Home Loan Bank of Boston Thrift Benefit Equalization Plan (as amended and restated effective January 1, 2017) * | |
| 10.2.2 | | First Amendment to the Federal Home Loan Bank of Boston Thrift Benefit Equalization Plan effective January 1, 2021 * | |
| 10.3.1 | The Federal Home Loan Bank of Boston 2020 Executive Incentive Plan * + | |
| 10.3.2 | | The Federal Home Loan Bank of Boston 2021 Executive Incentive Plan * ∝ | |
| 10.4 | MPF Consolidated Interbank Agreement dated as of July 22, 2016 | |
| 10.5 | Executive Change in Control Severance Plan, effective November 7, 2018 * | |
| 10.6 | Lease between the Federal Home Loan Bank of Boston and BP Prucenter Acquisition LLC | |
| 10.7 | Mortgage Partnership Finance Services Agreement dated August 15, 2007 between the Federal Home Loan Bank of Boston and the Federal Home Loan Bank of Chicago | |
| 10.8 | Amended and Restated Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, effective as of January 1, 2017, by and among the Office of Finance and each of the Federal Home Loan Banks | |
| | | | | | | | | | | |
| 10.9 | The Federal Home Loan Bank of Boston 2021 Director Compensation Policy * | |
| 10.9.1 | The Federal Home Loan Bank of Boston 2022 Director Compensation Policy * | |
| 10.10 | | Joint Capital Enhancement Agreement, among the Federal Home Loan Banks as amended August 5, 2011 | |
| 10.11 | | Severance Policy, as adopted March 23, 2012 and as amended as of October 19, 2018 * | |
| 10.12 | | The Federal Home Loan Bank of Boston Split-Dollar Insurance Termination Agreement between Frank Nitkiewicz and the Federal Home Loan Bank of Boston dated May 24, 2005 * | |
| 10.14 | | Employment Agreement between Federal Home Loan Bank of Boston and Timothy J. Barrett, dated October 21, 2021 | |
| 31.1 | | Certification of the president and chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | | Certification of the chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | | Certification of the president and chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | | Certification of the chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | | XBRL Instance Document | The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | Filed within this Form 10-K |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed within this Form 10-K |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | Filed within this Form 10-K |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | Filed within this Form 10-K |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | Filed within this Form 10-K |
| 104 | | The cover page of the Bank’s Annual report on Form 10-K, formatted in Inline XBRL | Included within the exhibit 101 attachments |
* Management contract or compensatory plan.
+ Confidential treatment has been granted as to portions of this exhibit.
∝ Portions of this exhibit have been omitted.
ITEM 16. FORM 10-K SUMMARY
Not applicable
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | | | | | | | | | | |
| Date | | FEDERAL HOME LOAN BANK OF BOSTON (Registrant) |
| March 18, 2022 | | By: | /s/ | Timothy J. Barrett | |
| | | | Timothy J. Barrett President and Chief Executive Officer |
| March 18, 2022 | | By: | /s/ | Frank Nitkiewicz | |
| | | | Frank Nitkiewicz Executive Vice President, Chief Operating Officer and Chief Financial Officer |
| March 18, 2022 | | By: | /s/ | Brian G. Donahue | |
| | | | Brian G. Donahue Senior Vice President, Controller and Chief Accounting Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| March 18, 2022 | | By: | /s/ | Donna L. Boulanger |
| | | | Donna L. Boulanger Director |
| March 18, 2022 | | By: | /s/ | Joan Carty |
| | | | Joan Carty Director |
| March 18, 2022 | | By: | /s/ | Eric Chatman |
| | | | Eric Chatman Director |
| March 18, 2022 | | By: | /s/ | Patrick E. Clancy |
| | | | Patrick E. Clancy Director |
| March 18, 2022 | | By: | /s/ | Thomas J. Curry |
| | | | Thomas J. Curry Director |
| March 18, 2022 | | By: | /s/ | Dwight M. Davidsen |
| | | | Dwight M. Davidsen Director |
| March 18, 2022 | | By: | /s/ | Antoinette C. Lazarus |
| | | | Antoinette C. Lazarus
Director |
| March 18, 2022 | | By: | /s/ | Edward F. Manzi, Jr. |
| | | | Edward F. Manzi, Jr.
Director |
| | | | |
| | | | | | | | | | | | | | |
| March 18, 2022 | | By: | /s/ | William M. Parent |
| | | | William M. Parent
Director |
| March 18, 2022 | | By: | /s/ | Emil J. Ragones |
| | | | Emil J. Ragones Director |
| March 18, 2022 | | By: | /s/ | David J. Rotatori |
| | | | David J. Rotatori Director |
| March 18, 2022 | | By: | /s/ | E. Macey Russell |
| | | | E. Macey Russell Director |
| March 18, 2022 | | By: | /s/ | Michael R. Tuttle |
| | | | Michael R. Tuttle Director |
| March 18, 2022 | | | /s/ | John C. Witherspoon |
| | | | John C. Witherspoon Director |
| March 18, 2022 | | By: | /s/ | Richard E. Wyman, Jr. |
| | | | Richard E. Wyman, Jr. Director |
